N-2/A
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As filed with the Securities and Exchange Commission on April 30, 2021

Securities Act File No. 333-253525

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM N-2

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933       
Pre-Effective Amendment No. 1     
Post-Effective Amendment No.     

 

 

FIDUS INVESTMENT CORPORATION

(Exact Name of Registrant as Specified in Charter)

 

 

1603 Orrington Avenue, Suite 1005

Evanston, Illinois 60201

(Address of Principal Executive Offices)

(847) 859-3940

(Registrant’s Telephone Number, Including Area Code)

 

 

Edward H. Ross

Chief Executive Officer

1603 Orrington Avenue, Suite 1005

Evanston, Illinois 60201

(Name and Address of Agent for Service)

 

 

COPIES TO:

Steven B. Boehm, Esq.

Payam Siadatpour, Esq.

Eversheds Sutherland (US) LLP

700 Sixth Street, NW, Suite 700

Washington, D.C. 20001-3980

(202) 383-0100

 

 

Approximate Date of Commencement of Proposed Public Offering: From time to time after the effective date of the Registration Statement.

 

Check box if the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans.


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Check box if any securities being registered on this Form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933 (“Securities Act”), other than securities offered in connection with a dividend reinvestment plan.

 

Check box if this Form is a registration statement pursuant to General Instruction A.2 or a post-effective amendment thereto.

 

Check box if this Form is a registration statement pursuant to General Instruction B or a post-effective amendment thereto that will become effective upon filing with the Commission pursuant to Rule 462(e) under the Securities Act.

 

Check box if this Form is a post-effective amendment to a registration statement filed pursuant to General Instruction B to register additional securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act.

It is proposed that this filing will become effective (check appropriate box):

 

when declared effective pursuant to Section 8(c) of the Securities Act.

If appropriate, check the following box:

 

This [post-effective] amendment designates a new effective date for a previously filed [post-effective amendment] [registration statement].

 

This Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, and the Securities Act registration statement number of the earlier effective registration statement for the same offering is: _______.

 

This Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, and the Securities Act registration statement number of the earlier effective registration statement for the same offering is:_______.

 

This Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, and the Securities Act registration statement number of the earlier effective registration statement for the same offering is:_______.

Check each box that appropriately characterizes the Registrant:

 

Registered Closed-End Fund (closed-end company that is registered under the Investment Company Act of 1940 (“Investment Company Act”)).

 

Business Development Company (closed-end company that intends or has elected to be regulated as a business development company under the Investment Company Act).

 

Interval Fund (Registered Closed-End Fund or a Business Development Company that makes periodic repurchase offers under Rule 23c-3 under the Investment Company Act).

 

A.2 Qualified (qualified to register securities pursuant to General Instruction A.2 of this Form).

 

Well-Known Seasoned Issuer (as defined by Rule 405 under the Securities Act).

 

Emerging Growth Company (as defined by Rule 12b-2 under the Securities Exchange Act of 1934 (“Exchange Act”).

 

If an Emerging Growth Company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of Securities Act.


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New Registrant (registered or regulated under the Investment Company Act for less than 12 calendar months preceding this filing).

 

 

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

 

 

Title of Securities Being Registered   Amount Being
Registered
  Proposed Maximum
Offering Price Per
Unit
  Proposed Maximum
Aggregate Offering
Price(1)
  Amount of
Registration Fee(2)

Common Stock, par value $0.001 per share(3)

               

Preferred Stock(3)

               

Subscription Rights(3)

               

Debt Securities(4)

               

Warrants(5)

               

Total

          $300,000,000(6)   $28,066

 

 

 

(1)

Estimated solely for the purpose of calculating the registration fee. Pursuant to Rule 457(o) of the rules and regulations under the Securities Act of 1933, as amended (the “Securities Act”), which permits the registration fee to be calculated on the basis of the maximum offering price of all the securities listed, the table does not specify by each class information as to the amount to be registered, proposed maximum offering price per unit or proposed maximum aggregate offering price.

(2)

Pursuant to Rule 415(a)(6) under the Securities Act, the Registrant is carrying forward to this Registration Statement $42,750,000 in aggregate offering price of unsold securities that the Registrant previously registered on its registration statement on Form N-2 (File No. 333-223350) (the “Prior Registration Statement”), which was initially filed by the Registrant on March 1, 2018. Pursuant to Rule 415(a)(6) under the Securities Act, the filing fee previously paid with respect to such unsold securities will continue to be applied to such unsold securities. The amount of the registration fee in the “Calculation of Registration Fee Under the Securities Act of 1933” table relates to the additional $257,250,000 in aggregate offering price of securities being registered hereunder. As a result, a filing fee of $28,066 is being paid herewith. If the Registrant sells any of such unsold securities pursuant to the Prior Registration Statement after the date of the initial filing and prior to the date of effectiveness of this Registration Statement, the Registrant will file a pre-effective amendment to this Registration Statement which will reduce the number of such unsold securities included on this Registration Statement. Pursuant to Rule 415(a)(6) under the Securities Act, the offering of unsold securities under the Prior Registration Statement will be deemed terminated as of the date of effectiveness of this Registration Statement.

(3)

Subject to Note 6 below, there is being registered hereunder an indeterminate principal amount of common stock, preferred stock, or subscription rights, from time to time.

(4)

Subject to Note 6 below, there is being registered hereunder an indeterminate principal amount of debt securities as may be sold, from time to time. If any debt securities are issued at an original issue discount, then the offering price shall be in such greater principal amount as shall result in an aggregate price to investors not to exceed $300,000,000.

(5)

Subject to Note 6 below, there is being registered hereunder an indeterminate principal amount of warrants as may be sold, from time to time, representing rights to purchase common stock, preferred stock or debt securities.

(6)

In no event will the aggregate offering price of all securities issued from time to time pursuant to this Registration Statement exceed $300,000,000.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject To Completion, Dated April 30, 2021

PROSPECTUS

$300,000,000

 

LOGO

Common Stock

Preferred Stock

Subscription Rights

Debt Securities

Warrants

 

 

We may offer, from time to time, in one or more offerings or series, together or separately, up to $300,000,000 of our common stock, preferred stock, subscription rights, debt securities, or warrants representing rights to purchase shares of our common stock, preferred stock, or debt securities, which we refer to collectively as the “securities.” We may sell our common stock through underwriters or dealers, “at-the-market” to or through a market maker into an existing trading market or otherwise directly to one or more purchasers or through agents or through a combination of methods of sale. The identities of such underwriters, dealers, market makers or agents, as the case may be, will be described in one or more supplements to this prospectus. The securities may be offered at prices and on terms to be described in one or more supplements to this prospectus.

We may offer shares of common stock at a discount to net asset value per share in certain circumstances. On June 4, 2020, our common stockholders voted to allow us to sell or otherwise issue common stock at a price below net asset value per share for a period of one year ending on the earlier of June 4, 2021 or the date of our 2021 Annual Meeting of Stockholders. We expect to present to our stockholders a similar proposal at our 2021 Annual Meeting of Stockholders. Sales of common stock at prices below net asset value per share dilute the interests of existing stockholders, have the effect of reducing our net asset value per share and may reduce our market price per share. In addition, continuous sales of common stock below net asset value may have a negative impact on total returns and could have a negative impact on the market price of our shares of common stock. See “Risk Factors” in Part I, Item 1A in our most recent Annual Report on Form 10-K and in Part II, Item 1A of our most recent Quarterly Report on Form 10-Q for more information.

Our stockholders specified that the cumulative number of shares sold in each offering during the one-year period ending on the earlier of June 4, 2021 or the date of our 2021 Annual Meeting of Stockholders may not exceed 25.0% of our outstanding common stock immediately prior to such sale. In addition, we cannot issue shares of our common stock below net asset value unless our board of directors determines that it would be in our and our stockholders’ best interests to do so. Shares of closed-end investment companies such as us frequently trade at a discount to their net asset value. This risk is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether our common stock will trade above, at or below net asset value. You should read this prospectus and the applicable prospectus supplement carefully before you invest in our common stock.


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We provide customized 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 are an externally managed, closed-end, non-diversified management investment company that has elected 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 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. Although we are classified as a non-diversified investment company within the meaning of the 1940 Act, we maintain the flexibility to operate as a diversified investment company and have done so for an extended period of time. 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.

We generally invest in securities that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as “high yield” or “junk,” have speculative characteristics with respect to our capacity to pay interest and repay principal. See “Risk Factors” in Part I, Item 1A in our most recent Annual Report on Form 10-K and in Part II, Item 1A of our most recent Quarterly Report on Form 10-Q for more information.

Our common stock is listed on the Nasdaq Global Select Market under the symbol “FDUS.” On April 26, 2021, the last reported sale price of our common stock on the Nasdaq Global Select Market was $16.76 per share.

Fidus Investment Advisors, LLC serves as our investment advisor and as our administrator.

This prospectus describes some of the general terms that may apply to an offering of our securities. We will provide the specific terms of these offerings and securities in one or more supplements to this prospectus. We may also authorize one or more free writing prospectuses to be provided to you in connection with these offerings. The prospectus supplement and any related free writing prospectus may also add, update, or change information contained in this prospectus. You should carefully read this prospectus, the applicable prospectus supplement, and any related free writing prospectus, and the documents incorporated by reference, before buying any of the securities being offered. We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, which is available free of charge upon written or oral request by contacting us by mail at 1603 Orrington Avenue, Suite 1005, Evanston, Illinois 60201, Attention: Investor Relations, by accessing our website at http://www.fdus.com, by calling us collect at (847) 859-3940 or by sending an e-mail to us at investorrelations@fdus.com. The Securities and Exchange Commission also maintains a website at http://www.sec.gov that contains such information, including the documents incorporated by reference into this prospectus. Information contained on our website is not incorporated by reference into this prospectus or any supplements to this prospectus, and you should not consider that information to be part of this prospectus or any supplements to this prospectus. The contact information provided above may be used by you to make investor inquiries. This prospectus should be retained for future reference.

An investment in our securities is very risky and highly speculative. Shares of closed-end investment companies, including BDCs, frequently trade at a discount to their net asset value. In addition, the companies in which we invest are subject to special risks. See “Risk Factors” beginning on page 10 of this prospectus, in Part I, Item 1A of our most recent Annual Report on Form 10-K, in Part II, Item 1A of our most recent Quarterly Report on Form 10-Q and in, or incorporated by reference into, the applicable prospectus supplement and in any free writing prospectuses we may authorize for use in connection with a specific offering, and under similar headings in the other documents that are incorporated by reference into this prospectus, to read about factors you should consider, including the risk of leverage, before investing in our securities.

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.

 

 

This prospectus may not be used to consummate sales of securities unless accompanied by a prospectus supplement.

The date of this prospectus is                , 2021


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TABLE OF CONTENTS

 

Prospectus Summary

     1  

The Offering

     3  

Fees and Expenses

     7  

Risk Factors

     10  

Special Note Regarding Forward-Looking Statements

     11  

Use of Proceeds

     13  

Price Range of Common Stock and Distributions

     14  

Financial Highlights

     17  

Selected Consolidated Financial Data

     19  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     21  

Senior Securities

     22  

The Company

     23  

Portfolio Companies

     24  

Portfolio Management

     27  

Management

     28  

Management and Other Agreements

     29  

Certain Relationships and Related Transactions

     30  

Control Persons and Principal Stockholders

     31  

Sales of Common Stock Below Net Asset Value

     32  

Dividend Reinvestment Plan

     36  

Certain U.S. Federal Income Tax Considerations

     38  

Description of Our Capital Stock

     47  

Description of Our Preferred Stock

     54  

Description of Our Subscription Rights

     56  

Description of Our Debt Securities

     58  

Description of Our Warrants

     73  

Regulation

     75  

Plan of Distribution

     76  

Custodian, Transfer and Dividend Paying Agent and Registrar

     78  

Brokerage Allocation and Other Practices

     79  

Legal Matters

     80  

Independent Registered Public Accounting Firm

     81  

Available Information

     82  

Incorporation of Certain Information by Reference

     83  

 

 

 


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ABOUT THIS PROSPECTUS

This prospectus is part of a registration statement that we have filed with the SEC, using the “shelf” registration process. Under this shelf registration statement, we may offer, from time to time, in one or more offerings, up to $300,000,000 of our common stock, preferred stock, subscription rights to purchase shares of our common stock, debt securities or warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, on terms to be determined at the time of the offering. Our securities may be offered at prices and on terms described in one or more supplements to this prospectus. This prospectus provides you with a general description of our securities and the offerings thereof that we may make pursuant to this prospectus. Each time we use this prospectus to offer our securities, we will provide a prospectus supplement that will contain specific information about the terms of that offering. We may also authorize one or more free writing prospectuses to be provided to you that may contain material information relating to such offerings. In a prospectus supplement or free writing prospectus, we may also add, update or change any of the information contained in this prospectus or in the documents we have incorporated by reference into this prospectus. This prospectus, together with the applicable prospectus supplement, any related free writing prospectus, and the documents incorporated by reference into this prospectus and the applicable prospectus supplement, will include all material information relating to the applicable offering. Before buying any of the securities being offered, you should carefully read both this prospectus and the applicable prospectus supplement and any related free writing prospectus, together with any exhibits and the additional information described in the sections titled “Available Information,” “Incorporation of Certain Information by Reference,” “Summary” and “Risk Factors” in this prospectus.

This prospectus may contain estimates and information concerning our industry, including market size and growth rates of the markets in which we participate, that are based on industry publications and reports. This information involves many assumptions and limitations, and you are cautioned not to give undue weight to these estimates. We have not independently verified the accuracy or completeness of the data contained in these industry publications and reports. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors” in this prospectus, in Part I, Item 1A our most recent Annual Report on Form 10-K and in Part II, Item 1A of our most recent Quarterly Report on Form 10-Q, that could cause results to differ materially from those expressed in these publications and reports.

This prospectus includes summaries of certain provisions contained in some of the documents described in this prospectus, but reference is made to the actual documents for complete information. All of the summaries are qualified in their entirety by the actual documents. Copies of some of the documents referred to herein have been filed, will be filed, or will be incorporated by reference as exhibits to the registration statement of which this prospectus is a part, and you may obtain copies of those documents as described in the section titled “Available Information” in this prospectus.

You should rely only on the information included or incorporated by reference in this prospectus, any prospectus supplement or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We have not authorized any dealer, salesperson or other person to provide you with different information or to make representations as to matters not stated in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus, any applicable prospectus supplement and any free writing prospectus prepared by or on behalf of us or to which we have referred you do not constitute an offer to sell, or a solicitation of an offer to buy, any securities by any person in any jurisdiction where it is unlawful for that person to make such an offer or solicitation or to any person in any jurisdiction to whom it is unlawful to make such an offer or solicitation. You should not assume that the information included or incorporated by reference in this prospectus or any prospectus supplement or in any such free writing prospectus is accurate as of any date other than their respective dates.


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PROSPECTUS SUMMARY

The following summary contains basic information about offerings pursuant to this prospectus. It may not contain all the information that is important to you. For a more complete understanding of offerings pursuant to this prospectus, we encourage you to read this entire prospectus and the documents to which we have referred in this prospectus, together with any accompanying prospectus supplements or free writing prospectuses, including the risks set forth under the caption “Risk Factors” in Part I, Item 1A of our most recent Annual Report on Form 10-K, in Part II, Item 1A of our most recent Quarterly Report on Form 10-Q, in this prospectus, the applicable prospectus supplement and any related free writing prospectus, and under similar headings in any other documents that are incorporated by reference into this prospectus and the applicable prospectus supplement, and the information set forth under the caption “Available Information” in this prospectus.

Fidus Investment Corporation (“FIC”), a Maryland Corporation, operates as an externally managed business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). FIC completed its initial public offering, or IPO, in June 2011. In addition, FIC has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As of December 31, 2020, our shares were listed on the NASDAQ Global Select Market under the symbol “FDUS.”

FIC may make investments directly or through its two wholly-owned investment company subsidiaries, Fidus Mezzanine Capital II, L.P. (“Fund II”) and Fidus Mezzanine Capital III, L.P. (“Fund III”)(collectively Fund II and Fund III are referred to as the “Funds”). Fidus Investment GP, LLC, the general partner of the Funds, is also a wholly owned subsidiary of FIC. The Funds are licensed by the U.S. Small Business Administration (the “SBA”) as small business investment companies (“SBICs”). The Funds utilize the proceeds of the issuance of SBA-guaranteed debentures to enhance returns to our stockholders. We believe that utilizing both FIC and the Funds as investment vehicles provides us with access to a broader array of investment opportunities. Given our access to lower cost capital through the SBA’s SBIC debenture program, we expect that we will continue to make investments through the Funds until the Funds reach their borrowing limit under the program. For three or more SBICs under common control, the maximum amount of outstanding SBA debentures cannot exceed $350.0 million.

Unless otherwise noted in this prospectus, the terms “we,” “us,” “our,” the “Company,” “Fidus” and “FIC” refer to Fidus Investment Corporation and its consolidated subsidiaries.

As used in this prospectus, the term “our investment advisor” refers to Fidus Investment Advisors, LLC.

Fidus Investment Corporation

We provide customized 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. 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. Although we are classified as a non-diversified investment company within the meaning of the 1940 Act, we maintain the flexibility to operate as a diversified investment company and have done so for an extended period of time. 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.

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 $5.0 million and $30.0 million; however, we may from time to time opportunistically make investments in larger or smaller companies. Our investments typically range between $5.0 million and $35.0 million per portfolio company.

As of December 31, 2020, we had debt and equity investments in 69 portfolio companies with an aggregate fair value of $742.9 million. The weighted average yield on our debt investments as of December 31, 2020 was 12.2%. The weighted average yield of our debt investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of all of our fees and expenses. The weighted average yield was computed using the effective interest rates for debt investments at cost as of December 31, 2020, including accretion of original issue discount (“OID”) and loan origination fees, but excluding investments on non-accrual status, if any. There can be no assurance that the weighted average yield will remain at its current level. For the year ended December 31, 2020, our total return based on net asset value per share was 7.6% and our total return based on market value was 1.0%. For the year ended December 31, 2019, our total return based on NAV was 12.0% and our total return based on market value was 37.6%. Total return based on net asset value per share equals the change in net asset value per share during the period, plus dividends paid per share during the period, less other non-operating changes during the period, and divided by beginning net asset value per share for the period. Non-operating changes include any items that affect net asset value per share other than increase from investment operations, such as the effects of share issuances and repurchases and other miscellaneous items. Total return based on market value equals the change in the market value of our common stock per share during the period divided by the market value per share at the beginning of the period, and assumes reinvestment of dividends at prices obtained by our dividend reinvestment plan during the period. While these two figures reflect fund expenses, they do not reflect any sales load that may be paid by investors.



 

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See “Business” in Part I, Item 1 in our most recent Annual Report on Form 10-K for additional information about us.

Risk Associated with Our Business

Our business is subject to numerous risks, as described in the section titled “Risk Factors” in the applicable prospectus supplement and in any free writing prospectuses we have authorized for use in connection with a specific offering, and under similar headings in the documents that are incorporated by reference into this prospectus, including the section titled “Risk Factors” included in our most recent Annual Report on Form 10-K, in our most recent Quarterly Report on Form 10-Q, as well as in any of our subsequent SEC filings.

Corporate Information

Our principal executive offices are located at 1603 Orrington Avenue, Suite 1005, Evanston, Illinois 60201, and our telephone number is (847) 859-3940. Our corporate website is located at http://www.fdus.com. Information contained on our website is not incorporated by reference into this prospectus or any supplements to this prospectus, and you should not consider that information to be part of this prospectus or any supplements to this prospectus.



 

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THE OFFERING

We may offer, from time to time, up to $300,000,000 of our common stock, preferred stock, subscription rights to purchase shares of our common stock, debt securities, or warrants representing rights to purchase shares of our common stock, preferred stock or debt securities on terms to be determined at the time of each offering and set forth in one or more supplements to this prospectus. Our securities may be offered at prices and on terms to be disclosed in one or more supplements to this prospectus and any related free writing prospectus.

We may sell or otherwise issue shares of common stock at a discount to net asset value per share at prices approximating market value less selling expenses upon approval, in certain circumstances, of our board of directors, including a majority of our directors that are not “interested persons” of the Company, as defined in the 1940 Act. On June 4, 2020, our stockholders voted to allow us to issue common stock at a price below net asset value per share for a period of one year ended on the earlier of June 4, 2021 or the date of our 2021 Annual Meeting of Stockholders. We expect to present to our stockholders a similar proposal at our 2021 Annual Meeting of Stockholders. Sales or other issuances of common stock at prices below net asset value per share dilute the interests of existing stockholders, have the effect of reducing our net asset value per share and may reduce our market price per share. See “Sales of Common Stock Below Net Asset Value” in this prospectus and in any accompanying prospectus supplement, if applicable.

Our stockholders did not specify a maximum discount below net asset value at which we are able to sell or otherwise issue our common stock; however, we do not intend to sell or otherwise issue shares of our common stock below net asset value unless our board of directors determines that it would be in our stockholders’ best interest to do so. The level of net asset value dilution that could result from such an offering is not limited.

Our securities may be offered directly to one or more purchasers, including to existing stockholders in a rights offering, by us or through agents designated from time to time by us, or to or through underwriters or dealers. The prospectus supplement relating to an offering and any free writing prospectus will disclose the terms of such offering, including the name or names of any agents or underwriters involved in the sale of our securities by us, the purchase price, and any fee, commission or discount arrangement between us and our agents or underwriters or among our underwriters or the basis upon which such amount may be calculated. See “Plan of Distribution” in this prospectus. We may not sell any of our securities through agents, underwriters or dealers without delivery of this prospectus and a prospectus supplement describing the method and terms of the offering of our securities.

 

The Nasdaq Global Select Market Symbol

   “FDUS”

Use of Proceeds

   We intend to use the net proceeds from selling our securities to make investments in lower middle-market companies in accordance with our investment objective and strategies and for working capital and general corporate purposes. See “Use of Proceeds.”

Dividends and Distributions

  

We pay quarterly distributions to our stockholders out of assets legally available for distribution. Our distributions, if any, will be determined by our board of directors. Our ability to declare distributions depends on our earnings, our overall financial condition (including our liquidity position), qualification for or maintenance of our RIC status and such other factors as our board of directors may deem relevant from time to time.

 

When we make distributions, we will be required to determine the extent to which such distributions are paid out of current or accumulated earnings, recognized capital gains or capital. To the extent there is a return of capital, investors will be required to reduce their basis in our stock for U.S. federal income tax purposes. In the future, our distributions may include a return of capital.



 

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Dividend Reinvestment Plan

   We have adopted a dividend reinvestment plan for our common stockholders, which is an “opt out” dividend reinvestment plan. Under this plan, if we declare a cash 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 distributions. Stockholders who receive distributions in the form of shares of common stock generally are subject to the same U.S. federal income tax consequences as stockholders who elect to receive their distributions in cash; however, since their cash distributions will be reinvested, such stockholders will not receive cash with which to pay any applicable taxes on reinvested distributions. See “Dividend Reinvestment Plan.”

Taxation

   We have elected to be treated as a RIC for U.S. federal income tax purposes. Accordingly, we generally will not pay corporate-level U.S. federal income taxes on any net ordinary income or capital gains that we timely distribute to our stockholders. To maintain our tax treatment as a RIC and the associated tax benefits, we must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our realized net ordinary income and realized net short-term capital gains, if any, in excess of our net long-term capital losses. In order to maintain our tax treatment as a RIC, we have established several Taxable Subsidiaries, as defined below, to hold certain assets and investments. Such Taxable Subsidiaries are generally subject to corporate-level U.S. federal income tax and other applicable taxes. See “Price Range of Common Stock and Distributions” and “Certain U.S. Federal Income Tax Considerations - Taxation as a RIC.”

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. 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.”

Sales of Common Stock Below Net Asset Value

   Generally, the offering price per share of our common stock, exclusive of any underwriting commissions or discounts, may not be less than the net asset value per share of our common stock at the time we make the offering except (1) in connection with a rights offering to our existing stockholders, (2) with the consent of the majority of our common stockholders and approval of our board of directors, or (3) under such circumstances as the SEC may permit. On June 4,


 

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   2020, our common stockholders voted to allow us to sell or otherwise issue common stock at a price below net asset value per share for a period of one year ending on the earlier of June 4, 2021 or our 2021 Annual Meeting of Stockholders. We expect to present to our stockholders a similar proposal at our 2021 Annual Meeting of Stockholders. Sales or other issuances by us of our common stock at a discount from our net asset value pose potential risks for our existing stockholders whether or not they participate in the offering, as well as for new investors who participate in the offering. See “Sales of Common Stock Below Net Asset Value” in this prospectus and in the prospectus supplement, if applicable.
Leverage   

We borrow funds to make additional investments. We use this practice, which is known as “leverage,” to attempt to increase returns to our stockholders, but it involves significant risks. See “Risk Factors,” “Senior Securities,” and “Regulation” below. We are currently allowed to borrow amounts such that our asset coverage, as calculated pursuant to the 1940 Act, equals at least 150% after such borrowing (i.e., we are able to borrow up to two dollars for every dollar we have in assets less all liabilities and indebtedness not represented by senior securities issued by us). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part 2, Item 7 our most recent Annual Report on Form 10-K.

 

The amount of leverage that we employ at any particular time will depend on our investment advisor’s investment committee’s and our board of directors’ assessment of market and other factors at the time of any proposed borrowing. In addition, 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 SBIC’s regulatory capital or $175.0 million, whichever is less. For three or more SBICs under common control, the maximum amount of outstanding SBA debentures cannot exceed $350.0 million.

 

For more information, see “Risk Factors” in Part I, Item 1A of our most recent Annual Report on Form 10-K and “Business—Regulation” in Part I, Item 1 in our most recent Annual Report on Form 10-K.

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. This registration statement contains additional information about us and the securities being offered by this prospectus. We are also required to file periodic reports, current reports, proxy statements and other information with the SEC. This information is available on the SEC’s website at http://www.sec.gov.


 

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   We maintain a website at www.fdus.com and make all of our periodic and current reports, proxy statements and other information available, free of charge, on or through our website. Information contained on our website is not incorporated by reference into this prospectus or any supplements to this prospectus, and you should not consider that information to be part of this prospectus or any supplements to this prospectus. You may also obtain such information free of charge by contacting us by mail at 1603 Orrington Avenue, Suite 1005, Evanston, Illinois 60201, Attention: Investor Relations, by calling us collect at (847) 859-3940 or by sending an e-mail to us at investorrelations@fdus.com.

Incorporation of Certain Information by Reference

   This prospectus is part of a registration statement that we have filed with the SEC. We may “incorporate by reference” the information that we file with the SEC, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to comprise a part of this prospectus from the date we file that information. Any reports filed by us with the SEC subsequent to the date of this prospectus until we have sold all of the securities offered by this prospectus or the offering is otherwise terminated will automatically update and, where applicable, supersede any information contained in this prospectus or incorporated by reference in this prospectus. See “Incorporation of Certain Information by Reference” in this prospectus.


 

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FEES AND EXPENSES

The following table is intended to assist you in understanding the costs and expenses that an investor in an offering will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. The following table should not be considered a representation of our future expenses. Actual expenses may be greater or less than shown. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by “you,” “us,” “the Company” or “Fidus,” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in us, however, your responsibility for such fees or expenses is limited to your investment in Fidus. The fee table and example below include all fees and expenses of our consolidated subsidiaries.

 

Stockholder Transaction Expenses:

    

Sales load (as a percentage of offering price)

         (1) 

Offering expenses borne by us (as a percentage of offering price)

         (2) 

Dividend reinvestment plan expenses

         (3) 

Total stockholder transaction expenses paid by us (as a percentage of offering price)

         (4) 
 

Annual Expenses (as a percentage of net assets attributable to common stock)(5):

Base management fee payable under Investment Advisory Agreement

     3.29   (6) 

Total income incentive fees payable under the Investment Advisory Agreement

     2.28   (7) 

Interest payments on borrowed funds

     5.76   (8) 

Other expenses

     1.53   (9) 
  

 

 

   

Total annual expenses

     12.86   (10) 
  

 

 

   

 

(1)

In the event that securities to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will disclose the applicable sales load.

 

(2)

In the event that we conduct an offering of any of our securities, a corresponding prospectus supplement will disclose the estimated offering expenses because they will be ultimately borne by us.

 

(3)

The expenses of administering our dividend reinvestment plan are included in other expenses. For additional information, see “Dividend Reinvestment Plan” in this prospectus.

 

(4)

Total stockholder transaction expenses may include a sales load and will be disclosed in a future prospectus supplement, if any.

 

(5)

Net assets attributable to common stock equals average net assets, which is calculated as the average of the net assets balances as of each quarter end during the year ended December 31, 2020 and the prior year end.

 

(6)

Our base management fee is 1.75% of the average value of our total assets (other than cash and cash equivalents but including assets purchased with borrowed amounts). This item represents actual base management fees incurred for the year ended December 31, 2020. 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 3.29% reflected in the table is calculated on our net assets (rather than our total assets). See “Business—Management and Other Agreements—Investment Advisory Agreement” in Part I, Item 1 in our most recent Annual Report on Form 10-K.

 

(7)

This item represents the total actual fees incurred on pre-incentive fee net investment income for the year ended December 31, 2020. As of December 31, 2020, there was no capital gains incentive fee payable in cash.

The incentive fee consists of two parts:

The first, payable quarterly in arrears, equals 20.0% of our pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets, (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

 

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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 net of realized capital losses and unrealized capital depreciation, if any, on a cumulative basis from inception through the end of the fiscal year (or upon the termination of the Investment Advisory Agreement, as of the termination date), less the aggregate amount of any previously paid capital gain incentive fees. We accrue, but do not pay, a capital gains incentive fee in connection with any net unrealized capital appreciation, as appropriate. For the year ended December 31, 2020, we accrued capital gains incentive fees (reversal) of ($1.7) million in accordance with generally accepted accounting principles.

See “Business—Management and Other Agreements—Investment Advisory Agreement” in Part I, Item 1 in our most recent Annual Report on Form 10-K.

 

(8)

As of December 31, 2020, we had outstanding SBA debentures of $147.0 million, and unfunded commitments from the SBA to purchase up to an additional of $161.5 million SBA debentures; we had $307.3 million outstanding of our (i) 5.875% Notes due 2023 (the “2023 Notes”); (ii) 6.000% Notes due 2024 (the “February 2024 Notes”); (iii) 5.375% Notes due 2024 (the “November 2024 Notes,” together with the 2023 Notes and the February 2024 Notes, the “Public Notes”); and (iv) 4.75% notes due 2026 (the “2026 Notes,” collectively with the Public Notes, the “Notes”); we had no outstanding borrowings under our senior secured revolving credit agreement with certain lenders party thereto and ING Capital, LLC, as administrative agent, collateral agent, and lender (the “Credit Facility”), which has total commitment of $100.0 million. Interest payments on borrowed funds is based on estimated annual interest and fee expenses on outstanding SBA debentures, Notes and borrowings under the Credit Facility as of December 31, 2020 with a weighted average stated interest rate of 4.680%. We have estimated the annual interest expense on borrowed funds and caution you that our actual interest expense will depend on prevailing interest rates and our rate of borrowing, which may be substantially higher than the estimate provided in this table.

 

(9)

Other expenses represent our estimated annual operating expenses, as a percentage of net assets attributable to common shares estimated for the current year, including professional fees, directors’ fees, insurance costs, expenses of our dividend reinvestment plan and payments under the Administration Agreement based on our allocable portion of overhead and other expenses incurred by our administrator. See “Business—Management and Other Agreements—Administration Agreement” in Part I, Item 1 in our most recent Annual Report on Form 10-K. Other expenses exclude interest payments on borrowed funds, income tax (provision) benefit from realized gains on investments, and for issuances of debt securities or preferred stock, interest payments on debt securities and distributions with respect to preferred stock. “Other expenses” are based on actual other expenses for the year ended December 31, 2020.

 

(10)

“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 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 average consolidated total assets, our “total annual expenses” would be 6.27% of average 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 us. 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.

 

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     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(1)

   $ 124      $ 342      $ 528      $ 879  

You would pay the following expenses on a $1,000 investment, assuming a 5.0% annual return resulting entirely from net realized capital gains (all of which is subject to our incentive fee on capital gains)(2)

   $ 132      $ 363      $ 555      $ 904  

 

 

(1)

Assumes that we will not realize any capital gains computed net of all realized capital losses and unrealized capital depreciation.

(2)

Assumes no unrealized capital depreciation and a 5% annual return resulting entirely from net realized capital gains and not otherwise deferrable under the terms of the Investment Advisory Agreement and therefore subject to the capital gains incentive fee.

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%. Assuming a 5.0% annual return, the capital gains incentive fee under the Investment Advisory Agreement would either not be payable or have an insignificant impact on the expense amounts shown above. If we achieve sufficient returns on our investments, including through the realization of capital gains, 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 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 distribution 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 distribution. 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.

 

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RISK FACTORS

Investing in our securities involves a high degree of risk. Before deciding whether to invest in our securities, you should carefully consider the risks and uncertainties described in the section titled “Risk Factors” in the applicable prospectus supplement and any related free writing prospectus, and discussed in the section titled “Risk Factors” in Part I, Item 1A of our most recent Annual Report on Form 10-K and any subsequent filings we have made with the SEC that are incorporated by reference into this prospectus or any prospectus supplement, together with other information in this prospectus, the documents incorporated by reference in this prospectus or any prospectus supplement, and any free writing prospectus that we may authorize for use in connection with this offering. The risks described in these documents are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. Past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. If any of these risks actually occurs, our business, reputation, financial condition, results of operations, revenue, and future prospects could be seriously harmed. This could cause our net asset value and the trading price of our securities to decline, resulting in a loss of all or part of your investment. Please also read carefully the section titled “Special Note Regarding Forward-Looking Statements” in this prospectus.

 

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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,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “should,” “targets,” “projects” and variations of these words and similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this report involve risks and uncertainties, including statements as to:

 

   

our future operating results and the impact of the COVID-19 pandemic thereon;

 

   

our business prospects and the prospects of our portfolio companies, including our and their ability to achieve our respective objectives as a result of the current COVID-19 pandemic;

 

   

the impact of investments that we expect to make;

 

   

pandemics or other serious public health events, such as the recent global outbreak of COVID-19;

 

   

our contractual arrangements and relationships with third parties;

 

   

the dependence of our future success on the general economy and its impact on the industries in which we invest and the impact of the COVID-19 pandemic thereon;

 

   

the ability of our portfolio companies to achieve their objectives;

 

   

our expected financing and investments;

 

   

the adequacy of our cash resources and working capital;

 

   

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

 

   

the impact of increased competition;

 

   

the ability of our investment advisor to identify suitable investments for us and to monitor and administer our investments and the impacts of the COVID-19 pandemic thereon;

 

   

the ability of our investment advisor to attract and retain highly talented professionals;

 

   

our regulatory structure and tax status;

 

   

our ability to operate as a BDC, a SBIC and a RIC;

 

   

the adequacy of our cash resources and working capital;

 

   

the timing of cash flows, if any, from the operations of our portfolio companies and the impact of the COVID-19 pandemic thereon;

 

   

the timing, form and amount of any dividend distributions;

 

   

the impact of fluctuations in interest rates on our business;

 

   

the valuation of any investments in portfolio companies, particularly those having no liquid trading market; and

 

   

our ability to recover unrealized losses.

These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

 

   

an economic downturn, including as a result of the current COVID-19 pandemic, could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of value in of some or all of our investments in such portfolio companies;

 

   

a contraction of available credit and/or an inability to access the equity markets, including as a result of the COVID-19 pandemic, could impair our lending and investment activities;

 

   

interest rate volatility could adversely affect our results, particularly because we use leverage as part of our investment strategy;

 

   

currency fluctuations could adversely affect the results of our investments in portfolio companies with foreign operations; and,

 

   

the risks, uncertainties and other factors we identify in the section titled “Risk Factors” in this prospectus and in Part I, Item 1A of our most recent Annual Report on Form 10-K, in Part II, Item 1A of our most recent Quarterly Report on Form 10-Q, and those discussed in other documents we file with the SEC.

 

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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. Important assumptions include our ability to originate new debt investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this 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” in Part I, Item 1A of our most recent Annual Report on Form 10-K, in Part II, Item 1A of our most recent Quarterly Report on Form 10-Q, and elsewhere in this prospectus, any applicable prospectus supplement or free writing prospectus, including the documents we incorporate by reference. You should not place undue reliance on these forward-looking statements, which are based on information available to us as of the applicable date of this prospectus, any applicable prospectus supplement or free writing prospectus, including any documents incorporated by reference, and while we believe such information forms, or will form, a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely on these statements.

 

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USE OF PROCEEDS

Unless otherwise specified in any prospectus supplement accompanying this prospectus, we intend to use the net proceeds from the sale of our securities to invest in lower middle-market companies in accordance with our investment objective and strategies, to repay the outstanding indebtedness under our Credit Facility and/or our unsecured debt, if any, and for working capital and general corporate purposes. We will also pay operating expenses, including management, incentive and administrative fees, and may pay other expenses, from the net proceeds of any offering. We plan to raise new equity when we have attractive investment opportunities available. Pending such use, we will invest the net proceeds of any offering primarily in short-term securities consistent with our BDC election and our election to be taxed as a RIC. See “Business—Regulation—Temporary Investments” in Part I, Item 1 in our most recent Annual Report on Form 10-K for additional information about temporary investments we may make while waiting to make longer-term investments in pursuit of our investment objective.

Pending such use, we will invest the net proceeds of this offering primarily in cash, cash equivalents, U.S. Government securities and other high-quality debt instruments that mature in one year or less, or “temporary investments,” as appropriate. These securities may have lower yields than our other investments and accordingly result in lower distributions, if any, by us during such period. See “Business—Regulation—Temporary Investments” in Part I, Item 1 in our most recent Annual Report on Form 10-K. Our ability to achieve our investment objective may be limited to the extent that the net proceeds from the offering, pending full investment, are held in interest bearing deposits or other short-term instruments that produce income at a rate less than our cost of capital.

 

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PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

Our common stock began trading on June 21, 2011 on the NASDAQ Global Market under the symbol “FDUS.” Effective January 3, 2012, our common stock was included in the Nasdaq Global Select Market. The following table lists the high and low closing sale price for our common stock, and the closing sale price as a percentage of net asset value, or NAV, and the cash distributions per share that we have declared on our common stock for each fiscal quarter during the last two most recently completed fiscal years.

 

Period

   NAV (1)      High
Closing
Sales
Price
     Low
Closing
Sales
Price
     Premium /
(Discount) of
High Sales
Price to NAV
(2)
    Premium /
(Discount) of
Low Sales
Price to NAV
(2)
    Distributions
Per Share (3)
 

Year ended December 31, 2021

   $ *      $ 15.67      $ 12.78        *     *   $ *  

First Quarter

     *        17.11        15.70        *       *       *  

Second Quarter (through April 26, 2021)

               

Year ended December 31, 2020

               

First Quarter

     15.37        15.55        4.72        1.2       (69.3     0.39  

Second Quarter

     15.39        11.02        5.36        (28.4     (65.2     0.30  

Third Quarter

     15.94        10.72        8.49        (32.7     (46.7     0.30  

Fourth Quarter

     16.81        14.31        10.00        (14.9     (40.5     0.34  

Year ended December 31, 2019

               

First Quarter

     16.55        15.68        11.90        (5.3     (28.1     0.39  

Second Quarter

     16.29        16.47        15.33        1.1       (5.9     0.39  

Third Quarter

     16.47        16.33        14.49        (0.9     (12.0     0.39  

Fourth Quarter

     16.85        16.06        14.17        (4.7     (15.9     0.43  

 

(1)

Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low sales prices. The net asset values shown are based on outstanding shares at the end of each period.

(2)

Calculated as the difference between the respective high or low closing sales price and the quarter end net asset value divided by the quarter end net asset value.

(3)

Represents the regular and special, if applicable, distribution declared in the specified quarter. We have adopted an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution, stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash distributions. See “Dividend Reinvestment Plan.”

On April 26, 2021, the last reported sales price of our common stock was $16.76 per share. As of April 26, 2021, we had approximately 20 stockholders of record.

Shares of BDCs may trade at a market price that is less than the net asset value of those shares. The possibilities that our shares of common stock will trade at a discount from net asset value or at premiums that are unsustainable over the long term are separate and distinct from the risk that our net asset value will decrease. It is not possible to predict whether any common stock offered pursuant to this prospectus supplement will trade at, above, or below net asset value. As of April 26, 2021, our shares of common stock traded at a discount equal to approximately .30% of the net assets attributable to those shares based upon our $16.81 net asset value per share as of December 31, 2020. It is not possible to predict whether the shares offered hereby will trade at, above, or below net asset value.

We intend to continue to pay quarterly distributions to our stockholders. Our quarterly distributions, if any, are determined by our board of directors. We have elected to be taxed as a RIC under Subchapter M of the Code. As long as we qualify for tax treatment as a RIC, we will not be taxed on our investment company taxable income or net capital gain, to the extent that such income or gain is distributed, or deemed to be distributed, to stockholders on a timely basis.

 

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There were no deemed distributions during the years 2020, 2019 or 2018.

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our tax treatment as a RIC. We cannot assure stockholders that they will receive any distributions at a particular level.

We have adopted a dividend reinvestment plan that provides for reinvestment of our distributions on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our board of directors authorizes, and we declare, a cash 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. Under the terms of our dividend reinvestment plan, dividends will primarily be paid in newly issued shares of common stock. However, we reserve the right to purchase shares in the open market in connection with the implementation of the plan. This feature of the plan means that, under certain circumstances, we may issue shares of our common stock at a price below net asset value per share, which could cause our stockholders to experience dilution.

To maintain our qualification as a RIC, we must, among other things, distribute at least 90.0% of our net ordinary income and our net short-term capital gains in excess of our net long-term capital losses, if any. In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal to the sum of (1) 98.0% of our net ordinary income for the calendar year, (2) 98.2% of our capital gain net income for the calendar year and (3) any net ordinary income and capital gain net income that we recognized for preceding years, but were not distributed during such years, and on which we paid no U.S. federal income tax. We may retain for investment some or all of our net capital gain (i.e., net long-term capital gains in excess of net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, you will be treated as if you received an actual distribution of the capital gain we retain and then reinvested the net after-tax proceeds in our common stock. You also may 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 capital gain deemed distributed to you. Please refer to “Certain U.S. Federal Income Tax Considerations” for further information regarding the consequences of our retention of net capital gain. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. See “Regulation” and “Certain U.S. Federal Income Tax Considerations.”

We may make distributions that are payable in cash or shares of our common stock at the election of each stockholder. In accordance with Treasury regulations and published guidance issued by the Internal Revenue Service, a publicly offered RIC may treat distributions of its own stock as counting towards its RIC distribution requirements if each stockholder may elect to receive his, her, or its entire distribution in either cash or stock of the RIC. This published guidance indicates that the rule will apply where the aggregate amount of cash to be distributed to all stockholders is not less than 20% of the aggregate declared distribution. Under the published guidance, if too many stockholders elect to receive their distributions in cash, the cash available for distribution must be allocated among the stockholders electing to receive cash (with the balance of the distribution paid in stock). If we decide to make any distributions that are payable in part in shares of our stock, U.S. stockholders receiving such distributions generally will be required to include the full amount of the distribution (whether received in cash, shares of our stock, or a combination thereof) as ordinary income (or as long-term capital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profits. As a result, a U.S. stockholder may be required to pay tax with respect to such distributions in excess of any cash received. If a U.S. stockholder sells the stock it receives in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, 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 distributions, including in respect of all or a portion of such distributions that are payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on such distributions, it may put downward pressure on the trading price of shares of our stock.

 

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Distributions in excess of our current and accumulated profits and earnings would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. The determination of the tax attributes of our distributions will be made annually as of the end of our fiscal year based upon our taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of our distributions for a full year. Each year, a statement on Form 1099-DIV identifying the source of the distribution will be sent to our U.S. stockholders of record. Our board of directors presently intends to declare and pay quarterly dividends. Our ability to pay dividends could be affected by future business performance, liquidity, capital needs, alternative investment opportunities and loan covenants.

 

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FINANCIAL HIGHLIGHTS

The following table of financial highlights is intended to help a prospective investor understand the Company’s financial performance for the periods shown. The financial data set forth in the following table as of and for the years ended December 31, 2020 to 2011 are derived from our consolidated financial statements, which have been audited by RSM US LLP, an independent registered public accounting firm whose reports thereon are incorporated by reference in this prospectus, certain documents incorporated by reference in this prospectus or the accompanying prospectus supplement, or our Annual Reports on Form 10-K filed with the SEC, which may be obtained from www.sec.gov or upon request. In addition, the financial highlights table under the caption “Note 10. Financial Highlights” in our most recent Annual Report on Form 10-K is incorporated herein by reference. You should read these financial highlights in conjunction with our consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this prospectus, any documents incorporated by reference in this prospectus or the accompanying prospectus supplement, or our Annual Reports on Form 10-K filed with the SEC.

 

     Years Ended December 31,  
     2020     2019     2018     2017     2016  

Per share data:

          

Net asset value at beginning of period

   $ 16.85     $ 16.47     $ 16.05     $ 15.76     $ 15.17  

Net investment income (1)

     1.62       1.31       1.43       1.44       1.45  

Net realized gain (loss) on investments, net of tax (provision) (1)

     (0.06     (0.05     (0.45     0.67       (0.77

Net unrealized appreciation (depreciation) on investments (1)

     (0.27     0.74       1.05       (0.23     1.59  

Realized losses on extinguishment of debt (1)

     (0.01     (0.02     (0.01     (0.01     -  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total increase from investment operations (1)

     1.28       1.98       2.02       1.87       2.27  

Capital contributions from partners

     -       -       -       -       -  

Capital distributions to partners

     -       -       -       -       -  

Accretive (dilutive) effect of share issuances and repurchases

     0.01       -       0.01       0.02       (0.05

Distributions from net investment income

     (1.33     (1.60     (1.60     (1.60     (1.60

Distributions from capital gains

     -       -       -       -       -  

Taxes paid on deemed distributions

     -       -       -       -       -  

Other (2)

     -       -       (0.01     -       (0.03
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value at end of period

   $ 16.81     $ 16.85     $ 16.47     $ 16.05     $ 15.76  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Market value at end of period

   $ 13.10     $ 14.84     $ 11.69     $ 15.18     $ 15.73  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total return based on market value (3)

     1.0     37.6     (15.8 %)      3.2     23.8

Total return based on net asset value (7)

     7.6     12.0     12.6     11.9     15.0

Shares outstanding at end of period

     24,437,400       24,463,119       24,463,119       24,507,940       22,446,076  

Weighted average shares outstanding during the period

     24,442,431       24,463,119       24,471,730       23,527,188       18,283,715  

Ratios/Supplemental Data:

          

Net assets at end of period

   $ 410,760     $ 412,310     $ 402,985     $ 393,273     $ 353,785  

Average net assets (6)

   $ 392,866     $ 404,284     $ 398,440     $ 376,292     $ 289,453  

Total expenses (4)

     11.4     11.0     10.2     9.2     11.5

Net investment income (5)

     10.1     7.9     8.8     9.0     9.2

Portfolio turnover ratio (3)

     25.8     17.2     29.5     29.5     29.3

 

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     Years Ended December 31,  
     2015     2014     2013     2012     2011  

Per share data:

          

Net asset value at beginning of period

   $ 15.16     $ 15.35     $ 15.32     $ 14.90     $ 13.33  

Net investment income (1)

     1.64       1.62       1.43       1.54       1.22  

Net realized gain (loss) on investments, net of tax (provision) (1)

     0.58       (1.18     2.22       0.19       (1.31

Net unrealized appreciation (depreciation) on investments (1)

     (0.62     0.92       (1.64     0.18       1.72  

Realized losses on extinguishment of debt (1)

     -       -       -       -       -  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total increase from investment operations (1)

     1.60       1.36       2.01       1.91       1.63  

Capital contributions from partners

     -       -       -       -       0.74  

Capital distributions to partners

     -       -       -       -       (0.16

Accretive (dilutive) effect of share issuances and repurchases

     0.02       0.19       0.18       0.03       -  

Distributions from net investment income

     (1.60     (0.97     (1.21     (1.46     (0.64

Distributions from capital gains

     -       (0.75     (0.73     -       -  

Taxes paid on deemed distributions

     -       -       (0.21     -       -  

Other (2)

     (0.01     (0.02     (0.01     (0.06     -  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value at end of period

   $ 15.17     $ 15.16     $ 15.35     $ 15.32     $ 14.90  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Market value at end of period

   $ 13.69     $ 14.85     $ 21.74     $ 16.45     $ 12.97  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total return based on market value (3)

     2.4     (23.8 %)      44.0     38.1     (9.3 %) 

Total return based on net asset value (7)

     10.6     8.9     13.1     12.8     12.2

Shares outstanding at end of period

     16,300,732       16,051,037       13,755,232       11,953,847       9,427,021  

Weighted average shares outstanding during the period

     16,201,449       14,346,438       13,524,368       10,185,627       9,427,021  

Ratios/Supplemental Data:

          

Net assets at end of period

   $ 247,362     $ 243,263     $ 211,125     $ 183,091     $ 140,482  

Average net assets (6)

   $ 245,706     $ 222,737     $ 209,136     $ 157,618     $ 121,346  

Total expenses (4)

     11.1     10.1     10.6     11.5     8.7

Net investment income (5)

     10.8     10.5     9.2     10.0     8.5

Portfolio turnover ratio (3)

     22.5     18.9     44.9     10.7     14.0

 

(1)

Weighted average per share data.

(2)

Represents the impact of different share amounts used in calculating per share data as a result of calculating certain per share data based on weighted average shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date, or other rounding.

(3)

Total return based on market value equals the change in the market value of the Company’s common stock per share during the period divided by the market value per share at the beginning of the period, and assumes reinvestment of dividends at prices obtained by our dividend reinvestment plan during the period. The return does not reflect any sales load that may be paid by an investor.

(4)

The total expenses to average net assets ratio is calculated using the total expenses, net of income incentive fee waiver caption as presented on the consolidated statements of operations, which includes incentive fee and excludes the income tax provision.

(5)

The net investment income to average net assets ratio is calculated using the net investment income caption as presented on the consolidated statements of operations, which includes incentive fee.

(6)

Average net assets is calculated as the average of the net asset balances as of each quarter end during the fiscal year and the prior year end.

(7)

Total return based on net asset value per share equals the change in net asset value per share during the period, plus dividends paid per share during the period, less other non-operating changes during the period, and divided by beginning net asset value per share for the period. Non-operating changes include any items that affect net asset value per share other than increase from investment operations, such as the effects of share issuances and repurchases and other miscellaneous items.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data of FIC and its subsidiaries, including the Funds, as of and for the years ended December 31, 2020, 2019, 2018, 2017 and 2016, is derived from the consolidated financial statements that have been audited by RSM US LLP, an independent registered public accounting firm.

The selected consolidated financial information and other data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our most recent Annual Report on Form 10-K and our consolidated financial statements and the related notes thereto and other financial information incorporated by reference in this prospectus.

The selected financial data in this section is not intended to replace the consolidated financial statements and is qualified in its entirety by our consolidated financial statements and related notes incorporated by reference in this prospectus to the consolidated financial statements in our most recent Annual Report on Form 10-K.

Information under “Selected Consolidated Financial Data” in Part II, Item 6 in our most recent subsequently filed Annual Report on Form 10-K is incorporated herein by reference. Such information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 in such subsequently filed Annual Report on Form 10-K.

 

     Years Ended December 31,  
     2020     2019     2018     2017     2016  
     (Dollars in Thousands, Except Per Share Data)  

Statement of operations data:

          

Total investment income

   $ 85,123     $ 77,106     $ 76,425     $ 68,615     $ 60,229

Interest and financing expenses

     19,678       17,072       12,659       9,803       10,594

Base management fee

     12,932       12,399       11,365       9,788       8,254

Incentive fee - income

     8,952       7,445       9,413       8,913       7,375

Incentive fee - capital gains

     (1,684     3,299       2,938       2,055       2,294

All other expenses

     5,158       4,422       4,272       4,069       3,986
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses before income incentive fee waiver

     45,036       44,637       40,647       34,628       32,503

Incentive fee waiver - income

     (423     -       -       -       -
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses, net of income incentive fee waiver

     44,613       44,637       40,647       34,628       32,503
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before income taxes

     40,510       32,469       35,778       33,987       27,726

Income tax provision (benefit)

     862       500       720       220       425
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     39,648       31,969       35,058       33,767       27,301

Net realized gains (losses)

     (968     (1,171     (10,269     17,904       (13,835 )

Net change in unrealized appreciation (depreciation)

     (6,578     18,188       25,718       (5,426     29,009

Income tax (provision) benefit from realized gains on investments

     (577     (121     (758     (2,204     (205 )

Realized losses on extinguishment of debt

     (299     (399     (297     (90     —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 31,226     $ 48,466     $ 49,452     $ 43,951     $ 42,270
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per share data:

          

Net asset value (at end of period)

   $ 16.81     $ 16.85     $ 16.47     $ 16.05     $ 15.76

Net investment income

   $ 1.62     $ 1.31     $ 1.43     $ 1.44     $ 1.45

Net gain (loss) on investments

   $ (0.33   $ 0.69     $ 0.60     $ 0.44     $ 0.82

Realized losses on extinguishment of debt

   $ (0.01   $ (0.02   $ (0.01   $ (0.01   $ —  

Net increase in net assets resulting from operations

   $ 1.28     $ 1.98     $ 2.02     $ 1.87     $ 2.27

Dividends

   $ 1.33     $ 1.60     $ 1.60     $ 1.60     $ 1.60

Other data:

          

Weighted average annual yield on debt investments (1)

     12.2     12.0     12.6     13.0     13.1 %

Number of portfolio companies at year end

     69       64       63       63       57

Expense ratios (as percentage of average net assets (2)):

          

Operating expenses

     6.4     6.8     7.0     6.6     7.8 %

Interest expense

     5.0     4.2     3.2     2.6     3.7 %

Total return based on market value (3)

     1.0     37.6     (15.8 %)      3.2     23.8 %

Total return based on net asset value (4)

     7.6     12.0     12.6     11.9     15.0 %

 

(1)

Weighted average yields are computed using the effective interest rates for debt investments at cost as of the period end date, including accretion of original issue discount and loan origination fees, but excluding investments on non-accrual status, if any. The weighted average yield of our debt investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of all of our and our subsidiaries’ fees and expenses.

(2)

Average net assets is calculated as the average of the net asset balances as of each quarter end during the fiscal year and the prior year end.

(3)

Total return based on market value equals the change in the market value of our common stock per share during the period divided by the market value per share at the beginning of the period, and assumes reinvestment of dividends at prices obtained by our dividend reinvestment plan during the period. The return does not reflect any sales load that may be paid by an investor.

(4)

Total return based on net asset value per share equals the change in net asset value per share during the period, plus dividends paid per share during the period, less other non-operating changes during the period, and divided by beginning net asset value per share for the period. Non-operating changes include any items that affect net asset value per share other than increase from investment operations, such as the effects of share issuances and repurchases and other miscellaneous items.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information included under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our most recent Annual Report on Form 10-K is incorporated herein by reference.

 

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SENIOR SECURITIES

Information about our senior securities as of the fiscal years ended December 31, 2020 to 2011 is located in the notes to our consolidated financial statements under the caption “Note 6. Debt” in our most recent Annual Report on Form 10-K, and is incorporated by reference into the registration statement of which this prospectus is a part. The report of our independent registered public accounting firm on the senior securities table as of December 31, 2020 is included in our most recent Annual Report on Form 10-K, filed on February 25, 2021, and is incorporated by reference into the registration statement of which this prospectus is a part.

 

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THE COMPANY

The information in the sections entitled “Business” in Part I, Item 1 and “Properties” in Part I, Item 2 of our most recent Annual Report on Form 10-K and in the section entitled “Legal Proceedings” in Part I, Item 3 in our most recent Annual Report on Form 10-K is incorporated herein by reference.

 

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PORTFOLIO COMPANIES

The following table sets forth certain information as of December 31, 2020 regarding each portfolio company in which we had a debt or equity investment, as well as a brief description of each portfolio company in which we have made an investment that represents greater than 5.0% of our total assets as of December 31, 2020. The general terms of our expected investments are described in “Part I, Item 1 — Business — Investments” in our most recent Annual Report on Form 10-K. Other than these investments, our only formal relationships with our portfolio companies will be the managerial assistance we may provide upon request and the board observer or participation rights we may receive in connection with our investment.

 

Portfolio Company
Address of Portfolio
Company

 

Investment Type

 

Industry

  Percentage of
Class Held (a)
    Variable Index
Spread / Floor
    Rate
Cash/PIK
    Maturity     Principal
Amount
    Cost     Fair
Value
 

Control Investments (c)

                 

FDS Avionics Corp. (dba Flight Display Systems)

   

Aerospace & Defense Manufacturing

             

6435 Shiloh Road, Suite D

 

Second Lien Debt

          6.00%/9.00     12/31/2021     $ 4,836     $ 4,836     $ 4,836  

Alpharetta, GA 30005

 

Revolving Loan ($30 unfunded commitment)

          6.00%/9.00     12/31/2021       286       286       286  
 

Common Equity (7,478 shares)

      64.5             748       —    
 

Preferred Equity (2,550 shares)

      0.0             2,550       2,269  
               

 

 

   

 

 

 
                  8,420       7,391  

US GreenFiber, LLC

   

Building Products Manufacturing

             

5500 77 Center Drive, Suite 100

 

Second Lien Debt

          8.00%/5.00 %     8/30/2024       15,382       15,378       13,078  

Charlotte, NC 28217

 

Second Lien Debt

          8.50%/6.50     8/30/2024       5,028       5,028       5,183  
 

Second Lien Debt

          8.50%/6.50     8/30/2024       2,533       2,533       2,601  
 

Common Equity (2,522 units) (e)

      0.0             586       —    
 

Common Equity (425,508 units) (e)

      47.9             1       —    
 

Common Equity (1,022,813 units) (f)

      65.3             1,023       —    
               

 

 

   

 

 

 
                  24,549       20,862  
               

 

 

   

 

 

 

Total Control Investments

                $ 32,969     $ 28,253  
               

 

 

   

 

 

 

Affiliate Investments (b)

                 

FAR Research Inc.

   

Specialty Chemicals

             

2210 Wilhelmina Ct, NE

 

Common Equity (1,396 units)

      13.9           $ —       $ 28  

Palm Bay, FL 32905

                 

Fiber Materials, Inc.

   

Aerospace & Defense Manufacturing

             

5 Morin Street

 

Common Equity (10 units)

      9.8             —         41  

Biddeford, ME 04005

                 

Medsurant Holdings, LLC

   

Healthcare Services

             

100 Front Street, Suite 280

 

Second Lien Debt

          14.00%/0.00     3/10/2022       8,031       8,028       8,091  

West Conshohocken, PA 19428

 

Preferred Equity (63,331 units)

      1.7             673       620  
 

Warrant (252,588 units)

      6.9             2,258       2,249  
               

 

 

   

 

 

 
                  10,959       10,960  

Mirage Trailers LLC

   

Utility Equipment Manufacturing

             

2212 Industrial Road

 

Second Lien Debt

       
(L + 10.00%)
/ (1.00%)
 
 
    11.00%/5.00     11/25/2021       6,410       6,483       6,410  

Nampa, ID 83687

 

Common Equity (2,500,000 shares)

      20.8             2,188       84  
               

 

 

   

 

 

 
                  8,671       6,494  

Pfanstiehl, Inc.

   

Healthcare Products

             

1219 Glen Rock Avenue

 

Common Equity (4,250 units)

      9.5             425       33,505  

Waukegan, IL 60085

                 

Pinnergy, Ltd.

   

Oil & Gas Services

             

111 Congress Ave. Suite 2020

 

Common Equity - Class A-2 (42,500 units)

      41.7             3,000       20,589  

Austin, TX 78701

                 

Steward Holding LLC (dba Steward Advanced Materials)

   

Aerospace & Defense Manufacturing

             

1245 E 38th St.

 

Second Lien Debt

          12.00%/1.50     10/31/2021       7,783       7,781       7,783  

Chattanooga, TN 37407

 

Common Equity (1,000,000 units)

      5.8             1,000       1,994  
               

 

 

   

 

 

 
                  8,781       9,777  
               

 

 

   

 

 

 

Total Affiliate Investments

                $ 31,836     $ 81,394  
               

 

 

   

 

 

 

Non-control/Non-affiliate Investments

                 

Frontline Food Services, LLC
(f/k/a Accent Food Services, LLC)

   

Vending Equipment Manufacturing

             

16209 Central Commerce Parkway

 

Preferred Equity (Class A Units) (46 units)

      0.0           $ 2,000     $ 2,000  

Pflugerville, TX 68660

 

Common Equity (Class B Units) (124 units)

      11.2             —         —    
 

Preferred Equity (Class C Units) (100 units)

      0.0             —         —    
               

 

 

   

 

 

 
                  2,000       2,000  

Allied 100 Group, Inc.

   

Healthcare Products

             

222 W Washington Ave, Suite 470

 

Subordinated Debt

          11.25%/0.00     5/26/2023       21,500       21,432       21,500  

Madison, WI 53703

 

Common Equity (625,000 units)

      1.1             625       1,087  
               

 

 

   

 

 

 
                  22,057       22,587  

Allredi, LLC (fka Marco Group International OpCo, LLC)

   

Industrial Cleaning & Coatings

             

3009 Pasadena Freeway Frontage Rd, #100

 

Second Lien Debt

          10.50%/1.75     9/2/2026       10,080       9,993       7,761  

Pasadena, TX 77503

 

Common Equity (570,636 units)

      0.8             637       275  
               

 

 

   

 

 

 
                  10,630       8,036  

Alzheimer’s Research and Treatment Center, LLC

   

Healthcare Services

             

2767 S. State Road 7, Suite 300

 

First Lien Debt

       
(L + 5.75%)
/ (2.00%)
 
 
    7.75%/0.00     10/23/2023       6,500       6,471       6,584  

Wellington, FL 33414

 

Common Equity (500 units)

      1.2             500       766  
               

 

 

   

 

 

 
                  6,971       7,350  

American AllWaste LLC (dba WasteWater Transport Services)

   

Environmental Industries

             

12141 Wickchester Ln., Suite 325

 

Second Lien Debt

       
(L + 11.00%)
/ (2.00%)
 
 
    13.00%/0.00     11/30/2023       17,503       17,434       17,503  

Houston, TX 77079

 

Preferred Equity (500 units)

      0.7             500       241  
 

Preferred Equity (207 units)

      0.3             250       226  
 

Preferred Equity (141 units)

      0.2             171       171  
               

 

 

   

 

 

 
                  18,355       18,141  

Applied Data Corporation

   

Information Technology Services

             

401 E Jackson Street

 

First Lien Debt

       
(L + 6.25%)
/ (1.50%)
 
 
    7.75%/0.00     11/6/2025       8,000       7,949       7,949  

Tampa, FL 33602

 

Common Equity (22 units)

      0.0             —         —    
 

Preferred Equity (1,070,614 units)

      1.8             1,071       1,071  
               

 

 

   

 

 

 
                  9,020       9,020  

Argo Turboserve Corporation

   

Business Services

             

681 Fifth Avenue, 11th Floor

 

Second Lien Debt

       
(L + 10.75%)
/ (2.00%)
 
 
    12.75%/0.00     6/28/2023       13,031       12,990       13,031  

New York, NY 10022

                 

AVC Investors, LLC (dba Auveco)

   

Specialty Distribution

             

100 Homan Drive

 

Second Lien Debt

          11.50%/0.00     7/3/2023       22,500       22,448       22,500  

Cold Spring, KY 41076

 

Common Equity (5,000 units)

      0.8             487       464  
               

 

 

   

 

 

 
                  22,935       22,964  

B&B Roadway and Security Solutions, LLC

   

Component Manufacturing

             

5900 S. Lake Forest Dr., Suite 290

 

Second Lien Debt

          11.25%/4.00     1/1/2022       10,910       10,890       10,782  

McKinney, TX 75070

 

Common Equity (50,000 units)

      2.7             497       —    
               

 

 

   

 

 

 
                  11,387       10,782  

Bandon Fitness (Texas), Inc.

   

Retail

             

3500 Jefferson Street Suite 322

 

First Lien Debt

       
(L + 6.50%)
/ (2.25%)
 
 
    8.75%/0.25     8/9/2024       14,680       14,289       15,591  

Austin, TX 78731

 

Common Equity (545,810 units)

      3.1             931       554  
               

 

 

   

 

 

 
                  15,220       16,145  

BCM One Group Holdings, Inc.

   

Information Technology Services

             

295 Madison Avenue, 5th Floor

 

Subordinated Debt

          11.00%/0.00     7/3/2024       30,000       29,887       30,000  

New York, NY 10017

 

Common Equity (1,281 shares)

      0.7             48       458  
 

Preferred Equity (74 shares)

      0.0             736       737  
               

 

 

   

 

 

 
                  30,671       31,195  

Bedford Precision Parts LLC

   

Specialty Distribution

             

290 Adams St.

 

First Lien Debt

       
(L + 6.25%)
/ (2.00%)
 
 
    8.25%/0.00     3/12/2024       4,531       4,507       4,531  

Bedford Hills, NY 10507

 

Common Equity (500,000 units)

      4.6             500       263  
               

 

 

   

 

 

 
                  5,007       4,794  

Cardboard Box LLC (dba Anthony’s Coal Fired Pizza)

   

Restaurants

             

200 W. Cypress Creek Road, Suite 220

 

Common Equity (521,021 units)

      0.2             521       —    

Fort Lauderdale, FL 33309

 

Preferred Equity (1,043,133 units)

      0.2             96       34  
               

 

 

   

 

 

 
                  617       34  

Combined Systems, Inc.

   

Aerospace & Defense Manufacturing

             

388 Kinsman Rd

 

First Lien Debt

       
(L + 10.00%)
/ (2.00%)
 
 
    12.00%/0.00     1/31/2025       7,600       7,553       7,600  

Jamestown, PA 16134

 

Revolving Loan ($1,050 unfunded commitment)

       
(L + 9.00%)
/ (2.00%)
 
 
    11.00%/0.00     1/31/2025       2,950       2,930       2,950  
               

 

 

   

 

 

 
                  10,483       10,550  

Comply365, LLC

   

Aerospace & Defense Manufacturing

             

655 Third Street, Suite 365

 

First Lien Debt

       
(L + 8.00%)
/ (1.00%)
 
 
    9.00%/0.00     12/11/2025       10,000       9,855       9,855  

Beloit, WI 53511

 

Common Equity (1,000,000 units)

      1.6             1,000       1,000  
               

 

 

   

 

 

 

    

                  10,855       10,855  

 

-24-


Table of Contents

Portfolio Company
Address of Portfolio
Company

 

Investment Type

 

Industry

  Percentage of
Class Held (a)
    Variable Index
Spread / Floor
    Rate
Cash/PIK
    Maturity     Principal
Amount
    Cost     Fair
Value
 

CRS Solutions Holdings, LLC (dba CRS Texas)

   

Business Services

             

1315 West Sam Houston Pkwy North, Suite 100

 

Second Lien Debt

         
10.50%/
1.50

    4/30/2024       11,305       11,270       11,305  

Houston, TX 77043

 

Common Equity (450,382 units)

      0.5             488       321  
               

 

 

   

 

 

 
                  11,758       11,626  

Dataguise, Inc.

   

Information Technology Services

             

39650 Liberty St Suite 400

 

First Lien Debt

         
11.00%/
0.00

    12/31/2023       20,000       19,900       19,900  

Fremont, CA 94538

 

Common Equity (909 shares)

      0.8             1,500       1,500  
               

 

 

   

 

 

 
                  21,400       21,400  

Diversified Search LLC

   

Business Services

             

2005 Market St.

 

First Lien Debt

       
(L + 8.00%)
/ (1.75%)
 
 
    9.75%/0.00     2/7/2024       17,355       17,159       17,355  

Philadelphia, PA 19103

 

Common Equity (573 units)

      1.4             593       494  
               

 

 

   

 

 

 
                  17,752       17,849  

EBL, LLC (EbLens)

   

Retail

             

299 Industrial Lane

 

Second Lien Debt (d)

          12.00%/1.00     1/13/2023       9,253       9,214       5,454  

Torrington, CT 06790

 

Common Equity (75,000 units)

      1.0             750       —    
               

 

 

   

 

 

 
                  9,964       5,454  

ECM Industries, LLC

   

Component Manufacturing

             

16250 W Woods Edge Rd.

 

Subordinated Debt

         
11.50%/
0.00

    5/23/2026       11,500       11,295       11,500  

New Berlin, WI 53151

 

Common Equity (1,000,000 units)

      0.5             1,000       1,562  
               

 

 

   

 

 

 
                  12,295       13,062  

Elements Brands, LLC

   

Consumer Products

             

4444 South Blvd

 

First Lien Debt

         
12.25%/
0.00

    12/31/2025       6,000       5,967       5,967  

Charlotte, NC 28209

 

Revolving Loan ($838 unfunded commitment)

         
12.25%/
0.00

    12/31/2025       2,162       2,146       2,146  
               

 

 

   

 

 

 
                  8,113       8,113  

French Transit, LLC

   

Consumer Products

             

1301 Courtesy Road

 

First Lien Debt

       
(L + 10.00%)
/ (2.25%)
 
 
   
12.25%/
0.00

    6/21/2024       4,116       4,088       4,116  

Louisville, CO 80027

                 

Global Plasma Solutions, Inc.

   

Component Manufacturing

             

3101 Yorkmont Road, Suite 400

 

Common Equity (947 shares)

      0.9             —         9,995  

Charlotte, NC 28208

                 

Gurobi Optimization, LLC

   

Information Technology Services

             

9450 SW Gemini Dr. #90729

 

Common Equity (3 shares)

      0.7             592       1,660  

Beaverton, OR 97008-7105

                 

Haematologic Technologies, Inc.

   

Healthcare Services

             

57 River Raod

 

First Lien Debt

       
(L + 8.25%)
/ (2.00%)
 
 
   
10.25%/
0.00

    10/11/2024       5,500       5,469       5,500  

Essex Junction, VT 05452

 

Common Equity (549 units)

      3.8             549       255  
               

 

 

   

 

 

 
                  6,018       5,755  

Hallmark Health Care Solutions, Inc.

   

Healthcare Services

             

200 Motor Parkway, Suite D-26

 

First Lien Debt

       
(L + 7.25%)
/ (1.50%)
 
 
   
8.75%/
0.00

    12/4/2025       8,500       8,437       8,437  

Hauppauge, NY 11788

 

Common Equity (750,000 units)

      1.3             750       750  
               

 

 

   

 

 

 
                  9,187       9,187  

Healthfuse, LLC

   

Healthcare Services

             

324 E. Wisconsin Ave, Suite 1300

 

First Lien Debt

       
(L + 7.25%)
/ (1.00%)
 
 
   
8.25%/
0.00

    11/13/2025       6,000       5,960       5,960  

Milwaukee, WI 53202

 

Preferred Equity (197,980 units)

      2.0             750       750  
               

 

 

   

 

 

 
                  6,710       6,710  

Hilco Plastics Holdings, LLC (dba Hilco Technologies)

   

Component Manufacturing

             

4172 Danvers Court SE

 

Second Lien Debt

         
11.50%/
1.50

    12/31/2019       10,301       10,301       8,878  

Grand Rapids, MI 49512

 

Revolving Loan

       
(L + 6.50%)
/ (0.00%)
 
 
   
6.65%/
0.00

    12/15/2019       5,962       5,962       5,962  
 

First Lien Debt

       
(L + 6.95%)
/ (0.00%)
 
 
   
7.10%/
0.00

    12/15/2019       5,092       5,092       5,092  
 

Preferred Equity (1,000,000 units)

      0.0             1,000       —    
 

Common Equity (72,507 units)

      2.9             473       —    
               

 

 

   

 

 

 
                  22,828       19,932  

Hub Acquisition Sub, LLC (dba Hub Pen)

   

Promotional products

             

1525 Washington Street

 

Second Lien Debt

         
13.00%/
0.00

    3/31/2023       25,000       24,976       24,106  

Braintree, MA 02184

 

Common Equity (3,750 units)

      0.5             131       283  
 

Preferred Equity (868 units)

      0.1             154       158  
               

 

 

   

 

 

 
                  25,261       24,547  

IBH Holdings, LLC (fka Inflexxion, Inc.)

   

Business Services

             

3070 Bristol ST #350

 

Common Equity (150,000 units)

      1.5             —         235  

Costa Mesa, CA 92626

                 

Ipro Tech, LLC

   

Information Technology Services

             

1700 N. Desert Drive, Suite 101

 

First Lien Debt

       
(L + 8.50%)
/ (2.00%)
 
 
   
10.50%/
0.00

    6/30/2025       2,469       1,923       2,469  

Tempe, AZ 85281

                 

K2 Merger Agreement Agent, LLC (fka K2 Industrial Services, Inc.)

   

Industrial Cleaning & Coatings

             

3838 N. Sam Houston Parkway E, Suite 285

 

Second Lien Debt

         
0.00%/
10.00

    1/28/2021       2,140       2,140       2,140  

Houston, TX 77032

                 

The Kyjen Company, LLC (dba Outward Hound)

   

Consumer Products

             

7337 S Revere Parkway

 

Second Lien Debt

         
12.00%/
0.00

    6/8/2024       15,000       14,960       15,000  

Centennial, CO 80112

 

Common Equity (765 shares)

      1.3             765       841  
               

 

 

   

 

 

 
                  15,725       15,841  

LNG Indy, LLC (dba Kinetrex Energy)

   

Oil & Gas Distribution

             

129 E. Market St., Suite 100

 

Second Lien Debt

         
11.50%/
1.50

    11/12/2021       10,127       10,108       10,127  

Indianapolis, IN 46204

 

Common Equity (500 units)

      2.2             500       959  
               

 

 

   

 

 

 
                  10,608       11,086  

Mesa Line Services, LLC

   

Utilities: Services

             

440 Louisiana Street, Suite 825

 

Second Lien Debt

         
10.50%/
0.50

    8/1/2024       17,511       17,442       17,511  

Houston, TX 77002

 

Common Equity (981 shares)

      1.7             1,148       1,076  
               

 

 

   

 

 

 
                  18,590       18,587  

Midwest Transit Equipment, Inc.

   

Transportation services

             

146 W. Issert Drive

 

Warrant (7,192 shares)

      3.7             180       118  

Kankakee, IL 60901

 

Warrant (4.79% of Junior Subordinated Notes)

      0.0             190       248  
               

 

 

   

 

 

 
                  370       366  

NGT Acquisition Holdings, LLC (dba Techniks Industries)

   

Component Manufacturing

             

9930 E 56th Street

 

Common Equity (378 units)

      0.6             500       227  

Indianapolis, IN 46236

                 

OMC Investors, LLC (dba Ohio Medical Corporation)

   

Healthcare Products

             

1111 Lakeside Drive

 

Second Lien Debt

         
12.00%/
0.00

    6/30/2022       10,000       9,985       10,000  

Gurnee, IL 60031

 

Common Equity (5,000 units)

      1.2             462       869  
               

 

 

   

 

 

 
                  10,447       10,869  

Palisade Company, LLC

   

Information Technology Services

             

130 East Seneca Street, Suite 505

 

Common Equity (50 shares)

      1.7             500       630  

Ithaca, NY 14850

                 

Palmetto Moon, LLC

   

Retail

             

1950 Hanahan Road

 

First Lien Debt

         
11.50%/
2.50

    10/31/2021       4,779       4,773       4,779  

North Charleston, SC 29406

 

Common Equity (499 units)

      1.9             494       159  
               

 

 

   

 

 

 
                  5,267       4,938  

Pool & Electrical Products, LLC

   

Specialty Distribution

             

5069 Savarese Circle

 

Second Lien Debt

         
11.75%/
0.00

    4/28/2027       12,000       11,883       11,883  

Tampa, FL 33634

 

Common Equity (15,000 units)

      1.5             1,500       1,500  
               

 

 

   

 

 

 
                  13,383       13,383  

Power Grid Components, Inc.

   

Specialty Distribution

             

5551 Parkwest Drive, Suite 115

 

Second Lien Debt

         
11.00%/
1.00

    12/2/2025       22,433       22,357       22,433  

Bessemer, AL 35022

 

Preferred Equity (392 shares)

      0.0             392       509  
 

Preferred Equity (48 shares)

      0.0             48       63  
 

Common Equity (10,622 shares)

      2.2             462       740  
               

 

 

   

 

 

 

    

                  23,259       23,745  

 

-25-


Table of Contents

Portfolio Company
Address of Portfolio
Company

 

Investment Type

 

Industry

  Percentage of
Class Held (a)
    Variable Index
Spread / Floor
    Rate
Cash/PIK
    Maturity     Principal
Amount
    Cost     Fair
Value
 

Prime AE Group, Inc.

    Business Services              

5521 Research Park Drive, Suite 300

  First Lien Debt        
(L + 6.25%)
/(2.00%)
 
 
    8.25%/0.00     11/25/2024       6,833       6,683       6,833  

Baltimore, MD 21228

  Preferred Equity (500,000 shares)       1.2             500       566  
 

 

 

   

 

 

 
                  7,183       7,399  

Revenue Management Solutions, LLC

    Information Technology Services              

9020 North May Avenue, Suite 140

  Common Equity (113 shares)       2.0             1,125       3,081  

Oklahoma City, OK 73120

                 

Rhino Assembly Company, LLC

    Specialty Distribution              

7575 Westwinds Blvd., Suite A

  Second Lien Debt          
12.00%/
1.50%

 
    2/11/2023       10,682       10,655       10,682  

Concord, NC 28027

  Delayed Draw Commitment ($875 commitment)          
12.00%/
1.00%

 
    5/17/2022       —         —         —    
  Common Equity (Class A Units) (8,864 units)       4.0             944       629  
  Preferred Equity (Units N/A)       0.0             136       137  
  Common Equity (Class F Units) (355 units)       0.2             —         —    
 

 

 

   

 

 

 
                  11,735       11,448  

Road Safety Services, Inc.

    Business Services              

11620 Arbor Street, Suite 101

  Second Lien Debt          
11.25%/
1.50%

 
    3/18/2024       10,379       10,351       10,379  

Omaha, NE 68144

  Common Equity (655 units)       1.5             621       882  
 

 

 

   

 

 

 
                  10,972       11,261  

Rohrer Corporation

    Packaging              

717 Seville Road, P.O. Box 1009

  Subordinated Debt          
10.50%/
1.00%

 
    4/1/2024       14,017       13,976       14,017  

Wadsworth, OH 44282

  Common Equity (400 shares)       1.0             780       1,591  
 

 

 

   

 

 

 
                  14,756       15,608  

Routeware, Inc.

    Information Technology Services              

16525 SW 72nd Ave.

  First Lien Debt        
(L + 7.00%)
/ (1.75%)
 
 
    8.75%/0.00     2/7/2025       14,888       14,814       14,888  

Portland, OR 97224

                 

SES Investors, LLC (dba SES Foam)

    Building Products Manufacturing              

2400 Spring Stuebner Rd.

  Second Lien Debt          
13.00%/
0.00%

 
    12/29/2022       1,000       997       1,000  

Spring, TX 77389

  Common Equity (6,000 units)       4.2             537       1,869  
 

 

 

   

 

 

 
                  1,534       2,869  

Software Technology, LLC

    Information Technology Services              

1621 Cushman Drive

  Subordinated Debt          
11.00%/
0.00%

 
    6/23/2023       10,000       9,980       10,000  

Lincoln, NE 68512

  Common Equity (6 shares)       1.0             646       942  
 

 

 

   

 

 

 
                  10,626       10,942  

Specialized Elevator Services Holdings, LLC

    Business Services              

14320 Iseli Rd.

  First Lien Debt        
(L + 5.25%)
/(2.00%)
 
 
    7.25%/0.00%       5/3/2024       12,889       12,782       12,889  

Santa Fe Springs, CA 90670

  Common Equity (596 units)       1.1             596       647  
 

 

 

   

 

 

 
                  13,378       13,536  

SpendMend LLC

    Business Services              

2680 Horizon Drive SE

  Common Equity (1,000,000 units)       2.2             972       1,915  

Grand Rapids, MI 49546

                 

TransGo, LLC

    Component Manufacturing              

2621 Merced Avenue

  Common Equity (500 units)       1.6             474       996  

El Monte, CA 91733

                 

The Tranzonic Companies

    Specialty Distribution              

26301 Curtiss-Wright Parkway

  Subordinated Debt          
10.00%/
1.00%

 
    3/27/2025       7,001       6,959       7,001  

Cleveland, OH 44143

  Preferred Equity (5,653 units)       0.0             565       730  
  Common Equity (1 units)       0.7             —         683  
 

 

 

   

 

 

 
                  7,524       8,414  

UBEO, LLC

    Business Services              

401 East Sonterra Blvd, Suite 350

  Subordinated Debt          
11.00%/
0.00%

 
    10/3/2024       13,893       13,814       13,893  

San Antonio, TX 78258

  Common Equity (705,000 units)       0.9             668       661  
 

 

 

   

 

 

 
                  14,482       14,554  

United Biologics, LLC

    Healthcare Services              

70 NE Loop 410, Suite 600

  Preferred Equity (98,377 units)       1.1             1,008       —    

San Antonio, TX 78216

  Warrant (57,469 units)       0.6             566       —    
 

 

 

   

 

 

 
                  1,574       —    

Virginia Tile Company, LLC

    Specialty Distribution              

28320 Plymouth Road

  Second Lien Debt          
12.25%/
0.00%

 
    4/7/2022       12,000       11,998       12,000  

Livonia, MI 48150

  Common Equity (17 units)       1.4             342       521  
 

 

 

   

 

 

 
                  12,340       12,521  

Western’s Smokehouse, LLC

    Consumer Products              

1978 Western Drive

  First Lien Debt        
(L + 6.50%)
/ (1.25%)
 
 
    7.75%/0.00     12/23/2024       10,000       9,876       10,000  

Greentop, MO 63546

                 

Wheel Pros, Inc.

    Specialty Distribution              

5347 S Valentia Way Suite 200

  Second Lien Debt        
(L + 9.00%)
/(1.00%)
 
 
   
10.00%/
0.00%

 
    11/10/2028       20,000       19,411       19,411  

Greenwood Village, CO 80111

  Preferred Equity (347,222 units)       0.2             301       1,031  
 

 

 

   

 

 

 
                  19,712       20,442  

Worldwide Express Operations, LLC

    Transportation services              

2323 Victory Ave, Suite 1600

  Second Lien Debt        
(L + 8.00%)
/ (1.00%)
 
 
    9.00%/0.00%       2/3/2025       20,000       19,791       20,000  

Dallas, TX 75219

  Common Equity (2,000 units)       0.3             1,478       1,942  
 

 

 

   

 

 

 
                  21,269       21,942  
 

 

 

   

 

 

 

Total Non-control/Non-affiliate Investments

                $ 622,222     $ 633,222  
 

 

 

   

 

 

 
               

 

 

   

 

 

 

Total Investments

                $ 687,027     $ 742,869  
 

 

 

   

 

 

 

 

(a)

Percentage of class held refers only to equity held, if any, calculated on a fully diluted basis.

(b)

As defined in the 1940 Act, the Company is deemed to be an “Affiliated Person” of this portfolio company because it owns 5% or more of the portfolio company’s outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company. Transactions in which the issuer was an Affiliated Person are detailed in Note 3 to the consolidated financial statements of our most recent Annual Report on Form 10-K.

(c)

As defined in the 1940 Act, the Company is deemed to be both an “Affiliated Person” of and “Control” this portfolio company because it owns 25% or more of the portfolio company’s outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company. Transactions in which the issuer was both an Affiliated Person and a portfolio company that the Company is deemed to Control are detailed in Note 3 to the consolidated financial statements of our most recent Annual Report on Form 10-K.

(d)

Investment was on PIK only non-accrual status as of December 31, 2020, meaning the Company has ceased recognizing PIK interest income on the investment.

(e)

Common equity investment in GF Investors, LLC.

(f)

Common equity investment in Greenfiber Holdings, LLC.

 

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Table of Contents

PORTFOLIO MANAGEMENT

The information in the sections entitled “Investment Committee,” “Senior Origination Professionals” and “Portfolio Management” in our most recent Definitive Proxy Statement on Schedule 14A is incorporated herein by reference.

 

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Table of Contents

MANAGEMENT

The information in the section entitled “Directors, Executive Officers and Corporate Governance” in Part III, Item 10 of our most recent Annual Report on Form 10-K is incorporated herein by reference.

 

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MANAGEMENT AND OTHER AGREEMENTS

The information in the section entitled “Business—Management and Other Agreements” in Part I, Item 1 of our most recent Annual Report on Form 10-K and in the notes to our consolidated financial statements under the caption “Note 5. Related Party Transactions” in our most recent Annual Report on Form 10-K is incorporated herein by reference.

 

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Table of Contents

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information in the section entitled “Certain Relationships and Related Transactions, and Director Independence” in Part III, Item 13 of our most recent Annual Report on Form 10-K is incorporated herein by reference.

 

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Table of Contents

CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS

The information in the section entitled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in Part III, Item 12 of our most recent Annual Report on Form 10-K is incorporated herein by reference.

 

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Table of Contents

SALES OF COMMON STOCK BELOW NET ASSET VALUE

On June 4, 2020, our stockholders approved our ability to sell or otherwise issue shares of our common stock at a discount from net asset value per share for a period of one year ending on the earlier of June 4, 2021 or the date of our 2021 Annual Meeting of Stockholders. We expect to present to our stockholders a similar proposal at our 2021 Annual meeting of Stockholders. In order to sell shares pursuant to this authorization, a majority of our directors who have no financial interest in the sale or issuance and a majority of our independent directors must (a) find that the sale or issuance is in our best interests and in the best interests of our stockholders, and (b) in consultation with any underwriter or underwriters of the offering, make a good faith determination as of a time either immediately prior to the first solicitation by us or on our behalf of firm commitments to purchase such shares, or immediately prior to the issuance of such shares, that the price at which such shares are to be sold or otherwise issued is not less than a price which closely approximates the market value of such shares, less any distributing commission or discount. It should be noted that the maximum number of shares issuable below net asset value pursuant to this authority that could result in such dilution is limited to 25% of the Company’s then outstanding common stock immediately prior to each such sale. Any offering of common stock below net asset value per share will be designed to raise capital for investment in accordance with our investment objective.

In making a determination that an offering below net asset value per share is in our and our stockholders’ best interests, our board of directors considers a variety of factors, including:

 

   

The effect that an offering below net asset value per share would have on our stockholders, including the potential dilution they would experience as a result of the offering;

 

   

The amount per share by which the offering price per share and the net proceeds per share are less than the most recently determined net asset value per share;

 

   

The relationship of recent market prices of our common stock to net asset value per share and the potential impact of the offering on the market price per share of our common stock;

 

   

Whether the estimated offering price would closely approximate the market value of our shares;

 

   

The potential market impact of being able to raise capital during the current financial market difficulties;

 

   

The nature of any new investors anticipated to acquire shares of our common stock in the offering;

 

   

The anticipated rate of return on and quality, type and availability of investments; and

 

   

The leverage available to us.

Sales or other issuances by us of our common stock at a discount from the net asset value per share pose potential risks for our existing stockholders whether or not they participate in the offering, as well as for new investors who participate in the offering.

The following three headings and accompanying tables will explain and provide hypothetical examples on the impact of an offering at a price less than the net asset value per share on three different sets of investors:

 

   

existing stockholders who do not purchase any shares in the offering;

 

   

existing stockholders who purchase a relatively small amount of shares of our common stock in the offering or a relatively large amount of shares of our common stock in the offering; and

 

   

new investors who become stockholders by purchasing shares of our common stock in the offering.

The tables below provide hypothetical examples of the impact that an offering at a price less than net asset value per share may have on the net asset value per share of stockholders and investors who do and do not participate in such an offering. However, the tables below do not show, nor are they intended to show, any potential changes in market price that may occur from an offering at a price less than net asset value per share and it is not possible to predict any potential market price change that may occur from such an offering.

 

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Impact on Existing Stockholders Who Do Not Participate in an Offering of Our Common Stock

Our existing stockholders who do not participate in an offering below net asset value per share or who do not buy additional shares in the secondary market at the same or lower price we obtain in the offering (after expenses and commissions) face the greatest potential risk of an immediate decrease (often called dilution) in the net asset value of the shares they hold and their net asset value per share. These stockholders will also experience a disproportionately greater decrease in their participation in our earnings and assets and their voting power than the increase we will experience in our assets, potential earning power and voting interests due to the offering. These stockholders may also experience a decline in the market price of their shares, which often reflects to some degree announced or potential increases and decreases in net asset value per share. This decrease could be more pronounced as the size of the offering and level of discounts increases.

The following table illustrates the level of net asset value dilution that would be experienced by a nonparticipating stockholder in three different hypothetical offerings of different sizes and levels of discount from net asset value per share, although it is not possible to predict the level of market price decline that may occur. Actual sales prices and discounts may differ from the presentation below.

The examples assume that Company XYZ has 1,000,000 shares of common stock outstanding, $15,000,000 in total assets and $5,000,000 in total liabilities. The current net asset value and net asset value per share are thus $10,000,000 and $10.00. The table illustrates the dilutive effect on nonparticipating Stockholder A of (1) an offering of 50,000 shares (5.0% of the outstanding shares) at $9.50 per share after offering expenses and commission (a 5.0% discount from net asset value), (2) an offering of 100,000 shares (10.0% of the outstanding shares) at $9.00 per share after offering expenses and commissions (a 10.0% discount from net asset value) and (3) an offering of 200,000 shares (20.0% of the outstanding shares) at $8.00 per share after offering expenses and commissions (a 20.0% discount from net asset value). The acronym “NAV” stands for “net asset value.”

 

           Example 1
5.0% Offering
At 5.0% Discount
    Example 2
10.0% Offering
At 10.0% Discount
    Example 3
20.0% Offering
At 20.0% Discount
 

Period

   Prior to Sale
Below NAV
    Following
Sale
    % Change     Following
Sale
    % Change     Following
Sale
    % Change  

Offering Price

              

Price per Share to Public

     —       $ 10.00       —       $ 9.47       —       $ 8.42       —    
Net Proceeds per Share to Issuer      —       $ 9.50       —       $ 9.00       —       $ 8.00       —    

Increase (Decrease) to NAV

              

Total Shares Outstanding

     1,000,000       1,050,000       5.00     1,100,000       10.00     1,200,000       20.00

NAV per Share

   $ 10.00     $ 9.98       (0.24 )%    $ 9.91       (0.91 )%    $ 9.67       (3.33 )% 
(Dilution) Accretion to Stockholder               

Shares Held by Stockholder A

     10,000       10,000       —         10,000       —         10,000       —    
Percentage Held by Stockholder A      1.0     0.95     (4.76 )%      0.91     (9.09 )%      0.83     (16.67 )% 

Total Asset Values

              

Total NAV Held by Stockholder A

   $ 100,000     $ 99,762       (0.24 )%    $ 99,091       (0.91 )%    $ 96,667       (3.33 )% 

Total Investment by Stockholder A (Assumed to Be $10.00 per Share)

   $ 100,000     $ 100,000       —       $ 100,000       —       $ 100,000       —    

Total (Dilution) Accretion to Stockholder A (Total NAV Less Total Investment)

     —       $ (238     —       $ (909     —       $ (3,333     —    

Per Share Amounts

              

NAV per Share Held by Stockholder A

     —       $ 9.98       —       $ 9.91       —       $ 9.67       —    

Investment per Share Held by Stockholder A (Assumed to be $10.00 per Share)

   $ 10.00     $ 10.00       —       $ 10.00       —       $ 10.00       —    

(Dilution) Accretion per Share Held by Stockholder A (NAV per Share Less Investment per Share)

     —       $ (0.02     —       $ (0.09     —       $ (0.33     —    

Percentage (Dilution) Accretion to Stockholder A (Dilution per Share Divided by Investment per Share)

     —         —         (0.24 )%      —         (0.91 )%      —         (3.33 )% 

 

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Table of Contents

Impact on Existing Stockholders Who Do Participate in an Offering of Our Common Stock

Our existing stockholders who participate in an offering below net asset value per share or who buy additional shares in the secondary market at the same or lower price as we obtain in the offering (after expenses and commissions) will experience the same types of net asset value dilution as the nonparticipating stockholders, albeit at a lower level, to the extent they purchase less than the same percentage of the discounted offering as their interest in our shares immediately prior to the offering. The level of net asset value dilution will decrease as the number of shares such stockholders purchase increases. Existing stockholders who buy more than such percentage will experience net asset value dilution on their existing shares but will, in contrast to existing stockholders who purchase less than their proportionate share of the offering, experience an increase (often called accretion) in average net asset value per share over their investment per share and will also experience a disproportionately greater increase in their participation in our earnings and assets and their voting power than our increase in assets, potential earning power and voting interests due to the offering. The level of accretion will increase as the excess number of shares such stockholder purchases increases. Even a stockholder who over participates will, however, be subject to the risk that we may make additional discounted offerings in which such stockholder does not participate, in which case such a stockholder will experience net asset value dilution as described above in such subsequent offerings. These stockholders may also experience a decline in the market price of their shares, which often reflects to some degree announced or potential decreases in net asset value per share. This decrease could be more pronounced as the size of the offering and the level of discounts increases.

The following table illustrates the level of dilution and accretion in the hypothetical 20.0% discount offering from the prior table (Example 3) for a stockholder that acquires shares equal to (1) 50.0% of its proportionate share of the offering (i.e., 1,000 shares, which is 0.5% of an offering of 200,000 shares) rather than its 1.0% proportionate share and (2) 150% of such percentage (i.e. 3,000 shares, which is 1.5% of an offering of 200,000 shares rather than its 1.0% proportionate share). The prospectus supplement pursuant to which any discounted offering is made will include a table for these examples based on the actual number of shares in such offering and the actual discount from the most recently determined net asset value per share. It is not possible to predict the level of market price decline that may occur. Actual sales prices and discounts may differ from the presentation below.

 

           50.0% Participation     150.0% Participation  

Period

   Prior to Sale
Below NAV
    Following
Sale
    %
Change
    Following
Sale
    %
Change
 

Offering Price

          

Price per Share to Public

     —       $ 8.42       —       $ 8.42       —    

Net Proceeds per Share to Issuer

     —       $ 8.00       —       $ 8.00       —    

Increase (Decrease) to NAV

          

Total Shares Outstanding

     1,000,000       1,200,000       20.00     1,200,000       20.00

NAV per Share

   $ 10.00     $ 9.67       (3.33 )%    $ 9.67       (3.33 )% 

(Dilution) Accretion to Stockholder

          

Shares Held by Stockholder A

     10,000       11,000       10.00     13,000       30.00  

Percentage Held by Stockholder A

     1.0     0.92     (8.33 )%      1.08     8.33

Total Asset Values

          

Total NAV Held by Stockholder A

   $ 100,000     $ 106,333       6.33   $ 125,667       25.67

Total Investment by Stockholder A (Assumed to Be $10.00 per Share)

   $ 100,000     $ 108,421       —       $ 125,263       —    

Total (Dilution) Accretion to Stockholder A (Total NAV Less Total Investment)

     —       $ (2,088     —       $ 404       —    

Per Share Amounts

          

NAV per Share Held by Stockholder A

     —       $ 9.67       —       $ 9.67       —    

Investment per Share Held by Stockholder A (Assumed to be $10.00 per Share)

   $ 10.00     $ 9.86       —       $ 9.64       —    

(Dilution) Accretion per Share Held by Stockholder A (NAV per Share Less Investment per Share)

     —       $ (0.19     —       $ 0.03       —    

Percentage (Dilution) Accretion to Stockholder A (Dilution per Share Divided by Investment per Share)

     —         —         (1.93 )%      —         0.32

 

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Table of Contents

Impact on New Investors of Our Common Stock

Investors who are not currently stockholders and who participate in an offering of our common stock below net asset value but whose investment per share is greater than the resulting net asset value per share due to selling compensation and expenses paid by the issuer will experience an immediate decrease, albeit small, in the net asset value of their shares of common stock and their net asset value per share compared to the price they pay for their shares of common stock. Investors who are not currently stockholders and who participate in an offering below net asset value per share and whose investment per share is also less than the resulting net asset value per share due to selling compensation and expenses paid by the issuer being significantly less than the discount per share will experience an immediate increase in the net asset value of their shares of common stock and their net asset value per share compared to the price they pay for their shares of common stock. These investors will experience a disproportionately greater participation in our earnings and assets and their voting power than our increase in assets, potential earning power and voting interests. These investors will, however, be subject to the risk that we may make additional discounted offerings in which such new stockholder does not participate, in which case such new stockholder will experience dilution as described above in such subsequent offerings. These investors may also experience a decline in the market price of their shares of common stock, which often reflects to some degree announced or potential increases and decreases in net asset value per share. This decrease could be more pronounced as the size of the offering and level of discounts increases.

The following table illustrates the level of dilution or accretion for new investors that would be experienced by a new investor in the same hypothetical 5.0%, 10.0% and 20.0% discounted offerings as described in the first table above. The illustration is for a new investor who purchases the same percentage (1.0%) of the shares in the offering as Stockholder A in the prior examples held immediately prior to the offering. The prospectus supplement pursuant to which any discounted offering is made will include a table for these examples based on the actual number of shares in such offering and the actual discount from the most recently determined net asset value per share. It is not possible to predict the level of market price decline that may occur. Actual sales prices and discounts may differ from the presentation below.

 

           Example 1
5.0% Offering
At 5.0% Discount
    Example 2
10.0% Offering
At 10.0% Discount
    Example 3
20.0% Offering
At 20.0% Discount
 

Period

   Prior to Sale
Below NAV
    Following
Sale
    % Change     Following
Sale
    % Change     Following
Sale
    % Change  

Offering Price

              

Price per Share to Public

     —       $ 10.00       —       $ 9.47       —       $ 8.42       —    

Net Proceeds per Share to Issuer

     —       $ 9.50       —       $ 9.00       —       $ 8.00       —    

(Decrease) Increase to NAV

              

Total Shares Outstanding

     1,000,000       1,050,000       5.00     1,100,000       10.00     1,200,000       20.00

NAV per Share

   $ 10.00     $ 9.98       (0.24 )%    $ 9.91       (0.91 )%    $ 9.67       (3.33 )% 

(Dilution) Accretion to Stockholder

              

Shares Held by Investor A

     —         500       —         1,000       —         2,000       —    

Percentage Held by Investor A

     —       0.05     —       0.09     —       0.17     —  

Total Asset Values

              

Total NAV Held by Investor A

   $ —       $ 4,988       —     $ 9,909       —     $ 19,333       —  

Total Investment by Investor A

(At Price to Public)

   $ —       $ 5,000       —       $ 9,474       —       $ 16,842       —    

Total (Dilution) Accretion to Investor A (Total NAV Less Total Investment)

     —       $ (12     —       $ 435       —       $ 2,491       —    

Per Share Amounts

              

NAV per Share Held by Investor A

     —       $ 9.98       —       $ 9.91       —       $ 9.67       —    

Investment per Share Held by Investor A

   $ —       $ 10.00       —       $ 9.47       —       $ 8.42       —    

(Dilution) Accretion per Share Held by Investor A (NAV per Share Less Investment per Share)

     —       $ (0.02     —       $ 0.44       —       $ 1.25       —    

Percentage (Dilution) Accretion to Investor A (Dilution per Share Divided by Investment per Share)

     —         —         (0.24 )%      —         4.60     —         14.79

 

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DIVIDEND REINVESTMENT PLAN

We have adopted a dividend reinvestment plan that provides for reinvestment of our 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 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 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 Company, 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 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 participant’s account, issue a certificate registered in the participant’s 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 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 Select 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 Select 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 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 administrator’s 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 participant’s 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 commission from the proceeds.

Stockholders who receive 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 distributions will be reinvested, such stockholders will not receive cash with which to pay any applicable taxes on reinvested distributions. A stockholder’s basis for determining gain or loss upon the sale of stock received in a distribution from us will be equal to the total dollar amount of the distribution payable to the stockholder. Any stock received in a 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. stockholder’s 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 American Stock Transfer & Trust Company, LLC, Post Office Box 922, Wall Street Station, New York, New York 10269-0560 or by calling the plan administrator’s Interactive Voice Response System at 1-877-573-4005.

 

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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 distribution by us. All correspondence concerning the plan should be directed to the plan administrator by mail or phone at the address and phone number noted above.

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 adjustment for any fractional shares 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 distribution reinvestment may be effected on different terms than those described above. Consult your financial advisor for more information.

 

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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following discussion is a general summary of certain U.S. federal income tax considerations applicable to us and to an investment in shares of our common stock. This summary does not purport to be a complete description of the income tax considerations applicable to us or to investors in such an investment. For example, we have not described tax consequences that we assume to be generally known by investors or 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 our shares and persons who hold our shares as part of a “straddle,” “hedge” or “conversion” transaction. This summary assumes that investors hold shares of our common stock as capital assets (within the meaning of the Code). The discussion is based upon the Code, U.S. Department of Treasury regulations, (“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 do not intend to seek any ruling from the Internal Revenue Service, or the IRS, regarding any offer and sale of our securities under this prospectus. 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 our discussion, a “U.S. stockholder” means a beneficial owner of shares of our common stock that is for U.S. federal income tax purposes:

 

   

a citizen or individual resident of the United States;

 

   

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;

 

   

an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

 

   

a trust if (1) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) it has a valid election in place to be treated as a U.S. person.

For purposes of our discussion, a “Non-U.S. stockholder” means a beneficial owner of shares of our common stock that is neither a U.S. stockholder nor a partnership (including an entity treated as a partnership for U.S. federal income tax purposes).

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 or member of the partnership will generally depend upon the status of the partner and the activities of the partnership. Each partner in a partnership that is considering acquiring shares of our common stock should consult his, her or 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 will depend on the facts of his, her or its particular situation. We encourage 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.

Taxation in Connection with Holding Securities other than our Common Stock

We intend to describe in any prospectus supplement related to the offering of preferred stock, subscription rights, debt securities, or warrants to purchase our common stock, preferred stock or debt securities, the U.S. federal income tax considerations applicable to such securities as will be sold by us pursuant to that prospectus supplement, including the taxation of any debt securities that will be sold at an original issue discount, and the tax treatment of sales, exchanges or retirements of our debt securities.

 

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Election to be Taxed as a RIC

We have elected to be treated as a RIC under Subchapter M of the Code. As a RIC, we generally will not be subject to corporate-level U.S. federal income taxes on any income that we timely distribute to our stockholders. To maintain our tax status as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, in order to maintain our tax treatment as a RIC, 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, if any, of realized net short-term capital gain over realized net long-term capital loss, or the Annual Distribution Requirement. Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4.0% nondeductible U.S. federal excise tax on such income. In such case, we must distribute any such carryover taxable income through a distribution declared prior to filing the final tax return for the year in which we generated such taxable income. Even if we maintain our status as a RIC, we generally will be subject to corporate-level U.S. federal income tax on our undistributed taxable income and could be subject to U.S. federal excise, state, local and foreign taxes.

Taxation as a RIC

Provided that we maintain our status as a RIC and satisfy the Annual Distribution Requirement, we will not be subject to U.S. federal income tax on the portion of our investment company taxable income and net capital gain (which is defined as net long-term capital gain in excess of net short-term capital loss) that we timely distribute to stockholders as dividends. We will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gain not distributed (or deemed distributed) to our stockholders.

We will be subject to a 4.0% nondeductible U.S. federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98.0% of our investment company taxable income for each calendar year, (2) 98.2% of our capital gain net income for the one-year period ending October 31 in that calendar year (or, if we so elect, for that calendar year) and (3) any net ordinary income and capital gains net income that we recognized in preceding years, but were not distributed during such years, and on which we paid no U.S. federal income tax.

In order to maintain our status as a RIC for U.S. federal income tax purposes, we must, among other things:

 

   

continue to qualify as a BDC or be registered as a management investment company under the 1940 Act at all times during each taxable year;

 

   

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 or other disposition of stock or other securities or foreign currencies, other income derived with respect to our business of investing in such stock, securities or currencies and net income derived from an interest in a “qualified publicly traded partnership” (as defined in Subchapter M of the Code), or the 90% Income Test; and

 

   

diversify our holdings so that at the end of each quarter of the taxable year:

 

   

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

 

   

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, (i) of one issuer (ii) 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 (iii) of one or more “qualified publicly traded partnerships,” or 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 the 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 which 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.

In order to meet the 90% Income Test, we have established several special purpose corporations, and in the future may establish additional such corporations, to hold assets from which we do not anticipate earning dividends, interest or other qualifying income under the 90% Income Test (the “Taxable Subsidiaries”). The Taxable Subsidiaries are generally subject to corporate-level U.S. federal income tax and other applicable taxes. Any investments held through the Taxable Subsidiaries are generally subject to U.S. federal income and other taxes, and therefore we can expect to achieve a reduced after-tax yield on such investments.

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 instruments that are treated under applicable tax rules as having OID or debt instruments with PIK interest, we must include in income each year a portion of the OID that accrues over the life of the instrument and PIK interest, regardless of whether cash representing such income is received by us in the same taxable year. We may also have to include in 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 our income may constitute OID or other income required to be included in taxable income prior to our receipt of cash.

Because any OID 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 would 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 U.S. federal income tax.

Furthermore, a portfolio company in which we invest may face financial difficulty that requires us to work-out, modify or otherwise restructure our investment in the portfolio company. Any such restructuring may result in unusable capital losses and future non-cash income. Any restructuring may also result in our recognition of a substantial amount of non-qualifying income for purposes of the 90% Income Test, such as cancellation of indebtedness income in connection with the work-out of a leveraged investment (which, while not free from doubt, may be treated as non-qualifying income) or the receipt of other non-qualifying income.

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.

Investments by us in non-U.S. securities may be subject to non-U.S. income, withholding and other taxes, and therefore, our yield on any such securities may be reduced by such non-U.S. taxes. Stockholders will generally not be entitled to claim a credit or deduction with respect to non-U.S. taxes paid by us.

Although we do not presently expect to do so, we are authorized to borrow funds and to sell assets in order to satisfy the Annual Distribution Requirement and to avoid corporate-level U.S. federal income tax and the 4.0% U.S. 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. See “Regulation — Qualifying Assets” and “Regulation — Senior Securities.” Moreover, our ability to dispose of assets to satisfy the Annual Distribution Requirement and to avoid corporate-level U.S. federal income tax and the 4.0% U.S. federal excise tax may be limited by (1) the illiquid nature of our portfolio and (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% U.S. federal excise tax, we may make such dispositions at times that, from an investment standpoint, are not advantageous.

 

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If we fail to satisfy the Annual Distribution Requirement or otherwise fail to qualify as a RIC in any taxable year, unless certain cure provisions apply, 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” below.

As a RIC, we are not 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 its 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 its 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. However, future transactions in which we may engage could cause our ability to use any capital loss carryforwards, and unrealized losses once realized, to be limited under Section 382 of the Code.

Certain of our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things, (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (ii) convert lower taxed long-term capital gain and qualified dividend income into higher taxed short-term capital gain or ordinary income, (iii) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited), (iv) cause us to recognize income or gain without a corresponding receipt of cash, (v) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (vi) adversely alter the characterization of certain complex financial transactions, and (vii) produce income that will not be qualifying income for purposes of the 90% Income Test. We will monitor our transactions and may make certain tax elections in order to mitigate the effect of these provisions.

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 Subchapter M of 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 equity securities of entities that are treated as partnerships for U.S. federal income tax purposes to prevent our disqualification as a RIC.

We may invest in preferred securities or other securities the U.S. federal income tax treatment of which may not be clear or may be subject to recharacterization by the IRS. To the extent the tax treatment of such securities or the income from such securities differs from the expected tax treatment, it could affect the timing or character of income recognized, requiring us to purchase or sell securities, or otherwise change our portfolio, to comply with the tax rules applicable to RICs under Subchapter M of the Code.

We may make distributions that are payable in cash or shares of our stock at the election of each stockholder. In accordance with Treasury regulations and published guidance issued by the Internal Revenue Service, a publicly offered RIC may treat distributions of its own stock as counting towards its RIC distribution requirements if each stockholder may elect to receive his, her, or its entire distribution in either cash or stock of the RIC. The Internal Revenue Service has published guidance indicating that this rule will apply where the aggregate amount of cash to be distributed to all stockholders is not less than 20% of the aggregate declared distribution. Under the published guidance, if too many stockholders elect to receive their distributions in cash, the cash available for distribution must be allocated among the stockholders electing to receive cash (with the balance of the distribution paid in stock). If we decide to make any distributions that are payable in part in shares of our stock, U.S. stockholders receiving such distributions will be required to include the full amount of the distribution (whether received in cash, shares of our stock, or a combination thereof) as ordinary income (or as long-term capital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profits. As a result, a U.S. stockholder may be required to pay tax with respect to such distributions in excess of any cash received. If a U.S. stockholder sells the stock it receives in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, 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 distributions, including in respect of all or a portion of such distributions that are payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on such distributions, it may put downward pressure on the trading price of shares of our stock.

 

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We may decide to retain some or all of our long-term capital gains in excess of the amount required to satisfy the Annual Distribution Requirement, but designate the retained amount as a “deemed distribution.” In that case, among other consequences, we will pay tax on the retained amount on behalf of the stockholders. Each U.S. stockholder will be required to include his, her or its share of the deemed distribution in income as if it had been actually distributed to the U.S. stockholder, and the stockholder will be entitled to claim a credit equal to his, her or its allocable share of the tax paid thereon by us. Since non-U.S. stockholders generally would not have U.S. tax liability with respect to the deemed capital gain distribution, they would not be entitled to credit the tax paid by us for U.S. tax purposes. Whether non-U.S. stockholders could claim a credit with respect to their non-U.S. tax liability will depend on the foreign tax credit rules of the country in which they are a resident. 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.”

Failure To Obtain RIC Tax Treatment

If we fail to satisfy the 90% Income Test or the Diversification Tests for any taxable year, we may nevertheless continue to qualify as a RIC for such year if certain relief provisions are applicable (which may, among other things, require us to pay certain corporate-level U.S. federal taxes or to dispose of certain assets).

If we were unable to maintain our tax 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 distributions be compulsory. Distributions would generally be taxable to our stockholders as dividend income to the extent of our current and accumulated earnings and profits (in the case of noncorporate U.S. stockholders, at a maximum U.S. federal income tax rate applicable to qualified dividend income of 20.0%). Subject to certain limitations under Subchapter M of 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 stockholder’s tax basis, and any remaining distributions would be treated as a capital gain.

If we fail to qualify as a RIC for two or more 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 five years.

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 person’s 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. Prospective investors 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 gain. Distributions of our “investment company taxable income” (which is, generally, our ordinary income excluding net capital gain) 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 common stock. To the extent such distributions paid by us to noncorporate U.S. stockholders (including individuals) are attributable to dividends from U.S. corporations and certain qualified foreign corporations, such distributions generally will be eligible for taxation at rates applicable to “qualifying dividends” (at a maximum tax rate of 20.0%) provided that we properly report such distribution as “qualified dividend income” in a written statement furnished to our stockholders and certain holding period and other requirements are satisfied. In this regard, it is not anticipated that a significant portion of distributions paid by us will be attributable to qualifying dividends; therefore, our distributions generally will not qualify for the preferential rates applicable to qualified dividend income. Distributions of our net capital gain (which is generally our net long-term capital gain in excess of net short-term capital loss) properly designated by us as “capital gain dividends” will be taxable to a U.S. stockholder as long-term capital gain (at a maximum rate of 20.0% in the case of individuals, trusts or estates), regardless of the U.S. stockholder’s 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 current and accumulated earnings and profits first will reduce a U.S. stockholder’s adjusted tax basis in such stockholder’s common stock and, after the adjusted basis is reduced to zero, will constitute capital gain to such U.S. stockholder.

 

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In order to satisfy the Annual Distribution Requirement we intend to distribute any long-term capital gain at least annually; however, we may in the future decide to retain some or all of our long-term capital gain, 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 his, her or its proportionate share of the deemed distribution in income as if it had been actually distributed to the U.S. stockholder, and the U.S. stockholder will be entitled to claim a credit equal to his, her or its allocable share of the tax paid thereon by us. The amount of the deemed distribution net of such tax will be added to the U.S. stockholder’s tax basis for his, her or its common stock. Since we expect to pay tax on any retained capital gain at our regular corporate tax rate, and since that rate is in excess of the maximum rate currently payable by individuals on net capital gain, the amount of tax that individual stockholders will be treated as having paid and for which they will receive a credit will exceed the tax they owe on the retained net capital gain. Such excess generally may be claimed as a credit against the U.S. stockholder’s other U.S. federal income tax obligations or may be refunded to the extent it exceeds a stockholder’s 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 (1) whether the Annual Distribution Requirement is satisfied for any year and (2) 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 any such 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.

If an investor purchases shares of our common stock shortly before the record date of a distribution, the price of the shares will include the value of the distribution, and the investor will be subject to tax on the distribution even though it represents a return of his, her or its investment.

A U.S. stockholder generally will recognize taxable gain or loss if the stockholder sells or otherwise disposes of his, her or its shares of our common stock. The amount of gain or loss will be measured by the difference between such stockholder’s adjusted tax basis in the common stock sold and the amount of the proceeds received in exchange. Any gain arising from such sale or disposition generally will be treated as long-term capital gain or loss if the stockholder has held his, her or its shares for more than one year. Otherwise, it will be classified as short-term capital gain or loss. However, any capital loss arising from the sale or disposition of shares of our common stock held for six months or less will be treated as long-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain deemed received, with respect to such shares. In addition, all or a portion of any loss recognized upon a disposition of shares of our common stock may be disallowed if other substantially identical shares are purchased (whether through reinvestment of distributions or otherwise) within 30 days before or after the disposition. The ability to otherwise deduct capital loss may be subject to other limitations under the Code.

 

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In general, noncorporate U.S. stockholders, including individuals, trusts and estates, are subject to U.S. federal income tax (at a maximum rate of 20.0%) on their net capital gain, or the excess of realized net long-term capital gain over realized net short-term capital loss for a taxable year, including a long-term capital gain derived from an investment in our shares. Such rate is lower than the maximum rate on ordinary income currently payable by individuals. Corporate U.S. stockholders currently are subject to U.S. federal income tax on net capital gain at the maximum 35.0% rate also applied to ordinary income. Noncorporate stockholders with net capital loss for a year (which we define as capital loss in excess of capital gain) generally may deduct up to $3,000 of such losses against their ordinary income each year; any net capital loss of a noncorporate stockholder in excess of $3,000 generally may be carried forward and used in subsequent years as provided in the Code. Corporate stockholders generally may not deduct any net capital loss for a year, but may carry forward such losses for five years.

Certain U.S. stockholders who are individuals, estates or trusts generally will be subject to a 3.8% Medicare tax on, among other things, dividends on, and capital gain from the sale or other disposition of shares, of our common stock.

A “publicly offered” RIC is a RIC whose shares are either (i) continuously offered pursuant to a public offering, (ii) regularly traded on an established securities market or (iii) held by at least 500 persons at all times during the taxable year. If we are not a publicly offered RIC for any period, a noncorporate stockholder’s pro rata portion of our affected expenses, including our management fees, will be treated as an additional distribution to the stockholder and will be deductible by such stockholder only to the extent permitted under the limitations described below. For noncorporate stockholders, including individuals, trusts, and estates, significant limitations generally apply to the deductibility of certain expenses of a nonpublicly offered RIC, including advisory fees. In particular, these expenses, referred to as miscellaneous itemized deductions, are deductible only to individuals to the extent they exceed 2.0% of such a stockholder’s adjusted gross income, and are not deductible for AMT purposes. Because we anticipate that shares of our common stock will continue to be regularly traded on an established securities market, we believe that we will continue to qualify as a publicly offered RIC.

We will send to each of our U.S. stockholders, as promptly as possible after the end of each calendar year, a written statement detailing, on a per share and per distribution basis, the amounts includible in such U.S. stockholder’s taxable income for such year as ordinary income and as long-term capital gain. In addition, the U.S. federal income tax status of each year’s distributions generally will be reported to the IRS (including the amount of dividends, if any, eligible for the current 20.0% maximum rate). Distributions paid by us generally will not be eligible for the dividends-received deduction or the preferential tax rate applicable to qualifying dividends. Distributions may also be subject to additional state, local and foreign taxes depending on a U.S. stockholder’s particular situation.

We may be required to withhold U.S. federal income tax, or backup withholding, from all taxable distributions to any noncorporate U.S. stockholder (1) who fails to furnish us with a correct taxpayer identification number or a certificate that such stockholder is exempt from backup withholding or (2) with respect to whom the IRS notifies us that such stockholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. An individual’s taxpayer identification number is his or her social security number. Backup withholding tax is not an additional tax, and any amount withheld may be refunded or credited against the U.S. stockholder’s U.S. federal income tax liability, provided that proper information is timely provided to the IRS.

Under applicable Treasury Regulations, if a stockholder recognizes a loss with respect to shares of our stock of $2 million or more for an individual, S corporation, trust, or a partnership with at least one noncorporate partner or $10 million or more for a stockholder that is either a corporation or a partnership with only corporate partners in any single taxable year (or a greater loss over a combination of years), the stockholder must file with the IRS a disclosure statement on IRS Form 8886 (or successor form). Direct stockholders of portfolio securities in many cases are excepted from this reporting requirement, but under current guidance, stockholders of a RIC are not excepted. Future guidance may extend the current exception from this reporting requirement to stockholders of most or all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Significant monetary penalties apply to a failure to comply with this reporting requirement. States may also have a similar reporting requirement. Stockholders should consult their own tax advisors to determine the applicability of these regulations in light of their individual circumstances.

 

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Taxation of Non-U.S. Stockholders

Whether an investment in the shares is appropriate for a Non-U.S. stockholder will depend upon that person’s particular circumstances. An investment in the shares by a Non-U.S. stockholder may have adverse tax consequences. Non-U.S. stockholders should consult their tax advisers before investing in our common stock.

Distributions of our “investment company taxable income” to Non-U.S. stockholders that are not “effectively connected” with a U.S. trade or business carried on by the Non-U.S. stockholder, generally will be subject to withholding of U.S. federal income tax at a rate of 30.0% (or lower rate provided by an applicable treaty) to the extent of our current and accumulated earnings and profits, unless an applicable exception applies.

Properly reported dividends received by a Non-U.S. stockholder generally are exempt from U.S. federal withholding tax when they (a) are paid in respect of our “qualified net interest income” (generally, our U.S. source interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which we are at least a 10.0% stockholder, reduced by expenses that are allocable to such income), or (b) paid in connection with our “qualified short-term capital gains” (generally, the excess of our net short-term capital gain over our long-term capital loss for such taxable year). We may report all, some or none of our potentially eligible dividends as such qualified net interest income or as qualified short-term capital gains, or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this exemption from withholding, a Non-U.S. stockholder must comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN, IRS Form W-8BEN-E or an acceptable substitute or successor form). In the case of shares held through an intermediary, the intermediary could withhold tax even if we properly report the payment as qualified net interest income or qualified short-term capital gain. Non-U.S. stockholders should contact their intermediaries with respect to the application of these rules to their accounts.

Actual or deemed distributions of our net capital gain to a Non-U.S. stockholder, and gain realized by a Non-U.S. stockholder upon the sale of our common stock, that are not effectively connected with a U.S. trade or business carried on by the Non-U.S. stockholder, will generally not be subject to U.S. federal withholding tax and generally will not be subject to U.S. federal income tax unless the Non-U.S. stockholder is a nonresident alien individual and is physically present in the United States for more than 182 days during the taxable year and meets certain other requirements. However, withholding of U.S. federal income tax at a rate of 30.0% on the capital gain of nonresident alien individuals who are physically present in the United States for more than the 182 day period only applies in exceptional cases because any individual present in the United States for more than 182 days during the taxable year is generally treated as a resident for U.S. income tax purposes; in that case, he or she would be subject to U.S. income tax on his or her worldwide income at the graduated rates applicable to U.S. citizens, rather than the 30.0% U.S. federal withholding tax.

If we distribute our net capital gain in the form of deemed rather than actual distributions (which we may do in the future), a Non-U.S. stockholder will be entitled to a U.S. federal income tax credit or tax refund equal to the stockholder’s allocable share of the tax we pay on the capital gain deemed to have been distributed. In order to obtain the refund, the Non-U.S. stockholder must obtain a U.S. taxpayer identification number and file a U.S. federal income tax return even if the Non-U.S. stockholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a U.S. federal income tax return. Accordingly, investment in the shares may not be appropriate for a Non-U.S. stockholder.

Distributions of our “investment company taxable income” and net capital gain (including deemed distributions) to Non-U.S. stockholders, and gain realized by Non-U.S. stockholders upon the sale of our common stock that is “effectively connected” with a U.S. trade or business carried on by the Non-U.S. stockholder (or if an income tax treaty applies, attributable to a “permanent establishment” in the United States), will be subject to U.S. federal income tax at the graduated rates applicable to U.S. citizens, residents and domestic corporations. Corporate Non-U.S. stockholders may also be subject to an additional branch profits tax at a rate of 30.0% imposed by the Code (or lower rate provided by an applicable treaty). In the case of a non-corporate Non-U.S. stockholder, we may be required to withhold U.S. federal income tax from distributions that are otherwise exempt from withholding tax (or taxable at a reduced rate) unless the Non-U.S. stockholder certifies his or her foreign status under penalties of perjury or otherwise establishes an exemption.

 

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The tax consequences to a Non-U.S. stockholder entitled to claim the benefits of an applicable tax treaty may differ from those described herein. Non-U.S. stockholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in our shares.

A Non-U.S. stockholder who is a nonresident alien individual may be subject to information reporting and backup withholding of U.S. federal income tax on dividends unless the Non-U.S. stockholder provides us or the dividend paying agent with an IRS Form W-8BEN, IRS Form W-8BEN-E (or an acceptable substitute form) or otherwise meets documentary evidence requirements for establishing that it is a Non-U.S. stockholder or otherwise establishes an exemption from backup withholding.

Non-U.S. persons should consult their own tax advisors with respect to the U.S. federal income tax and withholding tax, and state, local and foreign tax consequences of an investment in the shares.

Foreign Account Tax Compliance Act

Legislation commonly referred to as the “Foreign Account Tax Compliance Act,” or “FATCA,” generally imposes a 30% withholding tax on payments of certain types of income to foreign financial institutions (“FFIs”) unless such FFIs either (i) enter into an agreement with the U.S. Treasury to report certain required information with respect to accounts held by U.S. persons (or held by foreign entities that have U.S. persons as substantial owners) or (ii) reside in a jurisdiction that has entered into an intergovernmental agreement (“IGA”) with the United States to collect and share such information and are in compliance with the terms of such IGA and any enabling legislation or regulations. The types of income subject to the tax include U.S. source interest and dividends. While existing Treasury Regulations would also require withholding on payments of the gross proceeds from the sale of any property that could produce U.S. source interest or dividends, the U.S. Treasury Department has indicated its intent to eliminate this requirement in subsequent proposed regulations, which state that taxpayers may rely on the proposed regulations until final regulations are issued. The information required to be reported includes the identity and taxpayer identification number of each account holder that is a U.S. person and transaction activity within the holder’s account. In addition, subject to certain exceptions, this legislation also imposes a 30% withholding on payments to foreign entities that are not FFIs unless the foreign entity certifies that it does not have a greater than 10% U.S. owner or provides the withholding agent with identifying information on each greater than 10% U.S. owner. Depending on the status of a Non-U.S. stockholder and the status of the intermediaries through which they hold their shares, Non-U.S. stockholder could be subject to this 30% withholding tax with respect to distributions on their common stock and potentially proceeds from the sale of their common stock. Under certain circumstances, a non-U.S. stockholder might be eligible for refunds or credits of such taxes.

Possible Legislative or Other Actions Affecting Tax Considerations

Prospective investors should recognize that the present U.S. federal income tax treatment of an investment in our stock may be modified by legislative, judicial or administrative action at any time, and that any such action may affect investments and commitments previously made. The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process any by the IRS and the U.S. Treasury Department, resulting in revisions of regulations and revised interpretations of established concepts as well as statutory changes. Revisions in U.S. federal tax laws and interpretations thereof could adversely affect the tax consequences of an investment in our stock. See Risk Related to Our Business and Structure – Recent tax legislation could have a negative effect on the Company.

The discussion set forth herein does not constitute tax advice, and potential investors should consult their own tax advisors concerning the tax considerations relevant to their particular situation.

 

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DESCRIPTION OF OUR CAPITAL STOCK

The following description is based on relevant portions of the Maryland General Corporation Law and on our charter and bylaws. This summary is not necessarily complete, and we refer you to the Maryland General Corporation Law and our charter and bylaws for a more detailed description of the provisions summarized below.

Capital Stock

Our authorized capital stock consists of 100,000,000 shares of common stock, par value $0.001 per share, of which 24,437,400 were outstanding as of April 26, 2021. Our common stock trades on the Nasdaq Global Select Market under the ticker symbol “FDUS.” There are no outstanding options or warrants to purchase our stock. No stock has been authorized for issuance under any equity compensation plan. Under Maryland law, our stockholders generally are not personally liable for our debts or obligations.

Under our charter, our board of directors is authorized to classify and reclassify any unissued shares of stock into other classes or series of stock without obtaining stockholder approval. As permitted by the Maryland General Corporation Law, our charter provides that the board of directors, without any action by our stockholders, may amend the charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue.

Common Stock

All shares of our common stock have equal rights as to earnings, assets, voting, and distributions and, when they are issued, will be duly authorized, validly issued, fully paid and nonassessable. Distributions may be paid to the holders of our common stock if, as and when authorized by our board of directors and declared by us out of assets legally available therefor. Shares of our common stock have no preemptive, conversion or redemption rights and are freely transferable, except where their transfer is restricted by federal and state securities laws or by contract. In the event of our liquidation, dissolution or winding up, each share of our common stock would be entitled to share ratably in all of our assets that are legally available for distribution after we pay all debts and other liabilities and subject to any preferential rights of holders of our preferred stock, if any preferred stock is outstanding at such time. Each share of our common stock is entitled to one vote on all matters submitted to a vote of stockholders, including the election of directors. Except as provided with respect to any other class or series of stock, the holders of our common stock will possess exclusive voting power. There is no cumulative voting in the election of directors, which means that holders of a majority of the outstanding shares of common stock can elect all of our directors, and holders of less than a majority of such shares will be unable to elect any director.

Long-Term Debt

The SBA debentures issued by the Funds 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 SBA debentures is not required to be paid before maturity but may be pre-paid at any time. As of December 31, 2020, Fund II and Fund III had $133.5 million and $13.5 million of outstanding SBA debentures, respectively. Subject to SBA regulatory requirements and approval, Fund III may access up to $161.5 million of additional SBA debentures under the SBIC debenture program.

Credit Facility

In June 16, 2014, we entered into a senior secured revolving credit agreement (the “Credit Facility”) with ING Capital, LLC, as the administrative agent, collateral agent, and lender. The Credit Facility is secured by certain portfolio investments held by the Company, but portfolio investments held by the Funds are not collateral for the Credit Facility. On April 24, 2019, the Company entered into an Amended & Restated Senior Secured Revolving Credit Agreement (the “Amended Credit Agreement”) among the Company, as borrower, the lenders party thereto, and ING Capital LLC, as administrative agent. The Amended Credit Agreement amends, restates, and replaces the Credit Facility. On June 26, 2020, the Company amended the Amended Credit Agreement, however the material terms were unchanged. Among other revisions, the amendment to the Amended Credit Agreement modifies certain

 

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covenants therein, including to amend the minimum consolidated interest coverage ratio to be 2.25 to 1.00 for the four quarter period ending on June 30, 2020, 2.00 to 1.00 for the four quarter periods ending on each of September 30, 2020 and December 31, 2020, and 1.75 to 1.00 for each four quarter period ending at the end of each quarter thereafter.

Under the Amended Credit Agreement, (i) revolving commitments by lenders were increased from $90.0 million to $100.0 million, with an accordion feature that allows for an increase in total commitments up to $250.0 million, subject to satisfaction of certain conditions at the time of any such future increase, (ii) the maturity date of the Credit Facility was extended from June 16, 2019 to April 24, 2023, and (iii) borrowings under the credit facility bear interest, at our election, at a rate per annum equal to (a) 3.00% (or 2.75% if certain conditions are satisfied, including if (x) no equity interests are included in the borrowing base, (y) the contribution to the borrowing base of eligible portfolio investments that are performing first lien bank loans is greater than or equal to 35%, and (z) the contribution to the borrowing base of eligible portfolio investments that are performing first lien bank loans, performing last out loans, or performing second lien loans is greater than or equal to 60%) plus the one, two, three or six month LIBOR rate, as applicable, or (b) 2.00% (or 1.75% if the above conditions are satisfied) plus the highest of (A) a prime rate, (B) the Federal Funds rate plus 0.5%, (C) three month LIBOR plus 1.0%, and (D) zero. The Company pays a commitment fee that varies depending on the size of the unused portion of the Credit Facility: 3.00% per annum on the unused portion of the credit facility at or below 35% of the commitments and 0.50% per annum on any remaining unused portion of the Credit Facility between the total commitments and the 35% minimum utilization. The Amended Credit Agreement also modifies certain covenants in the credit facility, including to provide for a minimum asset coverage ratio of 2.00 to 1. The Credit Facility is secured by a first priority security interest in all of our assets, excluding the assets of our SBIC subsidiaries.

Amounts available to borrow under the Credit Facility are subject to a minimum borrowing/collateral base that applies an advance rate to certain investments held by the Company, excluding investments held by the Funds. The Company is subject to limitations with respect to the investments securing the Credit Facility, including, but not limited to, restrictions on sector concentrations, loan size, payment frequency and status and collateral interests, as well as restrictions on portfolio company leverage, which may also affect the borrowing base and therefore amounts available to borrow.

The Company has made customary representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar credit facilities. These covenants are subject to important limitations and exceptions that are described in the documents governing the Credit Facility. As of December 31, 2020, the Company was in compliance in all material respect with the terms of the Credit Facility.

Outstanding Securities

The following table shows our outstanding classes of securities as of December 31, 2020:

 

(a) Title of Class

   (b) Amount
Authorized
    (c) Amount
Held by
us or for
Our Account
     (d) Amount
Outstanding
Exclusive of Amounts
Shown Under (c)
 

Common Stock

     100,000,000       —          24,437,400  

SBA Debentures

   $ 325.0 million  (1)      —        $ 147.0 million  

Credit Facility

   $ 100.0 million       —        $ —    

Notes

   $ 307.3 million        $ 307.3 million  

 

(1) 

For more information regarding our limitations as to SBA debenture issuances, see “Regulation — Small Business Administration Regulations” in our most recent Annual Report on Form 10-K.

Limitation on Liability of Directors and Officers; Indemnification and Advance of Expenses

Maryland law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. Our charter contains such a provision which eliminates directors’ and officers’ liability to the maximum extent permitted by Maryland law, subject to the requirements of the 1940 Act.

 

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Our charter authorizes us, to the maximum extent permitted by Maryland law and subject to the requirements of the 1940 Act, to indemnify any present or former director or officer or any individual who, while serving as our director or officer and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner or trustee, from and against any claim or liability to which that person may become subject or which that person may incur by reason of his or her service in any such capacity and to pay or reimburse their reasonable expenses in advance of final disposition of a proceeding. Our bylaws obligate us, to the maximum extent permitted by Maryland law and subject to the requirements of the 1940 Act, to indemnify any present or former director or officer or any individual who, while serving as our director or officer and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner or trustee and who is made, or threatened to be made, a party to the proceeding by reason of his or her service in that capacity from and against any claim or liability to which that person may become subject or which that person may incur by reason of his or her service in any such capacity and to pay or reimburse his or her reasonable expenses in advance of final disposition of a proceeding. The charter and bylaws also permit us to indemnify and advance expenses to any person who served a predecessor of us in any of the capacities described above and any of our employees or agents or any employees or agents of our predecessor. In accordance with the 1940 Act, we will not indemnify any person for any liability to which such person would be subject by reason of such person’s willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.

Maryland law requires a corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service in that capacity. Maryland law permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made, or threatened to be made, a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, under Maryland law, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that a personal benefit was improperly received unless, in either case, a court orders indemnification, and then only for expenses. In addition, Maryland law permits a corporation to advance reasonable expenses to a director or officer in advance of final disposition of a proceeding upon the corporation’s receipt of (a) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.

We have entered into indemnification agreements with our directors. The indemnification agreements provide our directors the maximum indemnification permitted under Maryland law and the 1940 Act.

We have purchased directors’ and officers’ insurance policies covering our directors and officers and us for any acts and omissions committed, attempted or allegedly committed by any director or officer during the policy period. The policy is subject to customary exclusions.

Certain Provisions of the Maryland General Corporation Law and Our Charter and Bylaws

The Maryland General Corporation Law and our charter and bylaws contain provisions that could make it more difficult for a potential acquiror to acquire us by means of a tender offer, proxy contest or otherwise. These provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals may improve their terms.

 

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Classified Board of Directors

Our board of directors is divided into three classes of directors serving staggered three-year terms. The terms of the first, second and third classes expire in 2021, 2022 and 2023, respectively, and in each case, those directors will serve until their successors are elected and qualify. Directors of each class will be elected to serve for three-year terms and until their successors are duly elected and qualify and each year one class of directors will be elected by the stockholders. A classified board may render a change in control of us or removal of our incumbent management more difficult. We believe, however, that the longer time required to elect a majority of a classified board of directors will help to ensure the continuity and stability of our management and policies.

Election of Directors

Our charter and bylaws provide that the affirmative vote of the holders of a plurality of the outstanding shares of stock entitled to vote in the election of directors cast at a meeting of stockholders duly called and at which a quorum is present is required to elect a director. Pursuant to our bylaws our board of directors may amend the bylaws to alter the vote required to elect directors.

Number of Directors; Vacancies; Removal

Our charter provides that the number of directors will be set only by the board of directors in accordance with our bylaws. Our bylaws provide that a majority of our entire board of directors may at any time increase or decrease the number of directors. However, unless our bylaws are amended, the number of directors may never be less than one nor more than eight. Except as may be provided by the board of directors in setting the terms of any class or series of preferred stock, any and all vacancies on the board of directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies, subject to any applicable requirements of the 1940 Act.

Our charter provides that a director may be removed only for cause, as defined in our charter, and then only by the affirmative vote of at least two-thirds of the votes entitled to be cast in the election of directors.

Action by Stockholders

Under the Maryland General Corporation Law, stockholder action can be taken only at an annual or special meeting of stockholders or (unless the charter provides for stockholder action by less than unanimous written consent, which our charter does not) by unanimous written consent in lieu of a meeting. These provisions, combined with the requirements of our bylaws regarding the calling of a stockholder-requested special meeting of stockholders discussed below, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.

Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals

Our bylaws provide that with respect to an annual meeting of stockholders, nominations of persons for election to the board of directors and the proposal of business to be considered by stockholders may be made only (a) pursuant to our notice of the meeting, (b) by or at the direction of the board of directors or (c) by a stockholder who was a stockholder of record both at the time of giving notice and at the time of the annual meeting and who is entitled to vote at the meeting and who has complied with the advance notice procedures of our bylaws. With respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of persons for election to the board of directors at a special meeting may be made only (a) pursuant to our notice of the meeting, (b) by or at the direction of the board of directors or (c) provided that the board of directors has determined that directors will be elected at the meeting, by a stockholder who was a stockholder of record both at the time of giving notice and at the time of the special meeting and who is entitled to vote at the meeting and who has complied with the advance notice procedures of our bylaws.

 

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The purpose of requiring stockholders to give us advance notice of nominations and other business is to afford our board of directors a meaningful opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed business and, to the extent deemed necessary or desirable by our board of directors, to inform stockholders and make recommendations about such qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our board of directors any power to disapprove stockholder nominations for the election of directors or proposals recommending certain action, they may have the effect of (a) precluding a contest for the election of directors or the consideration of stockholder proposals if proper procedures are not followed and (b) discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or proposals might be harmful or beneficial to us and our stockholders.

Calling of Special Meetings of Stockholders

Our bylaws provide that special meetings of stockholders may be called by the chairman of our board of directors, our President or our board of directors. Additionally, our bylaws provide that, subject to the satisfaction of certain procedural and informational requirements by the stockholders requesting the special meeting, a special meeting of stockholders will be called by the secretary of the corporation upon the written request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting.

Approval of Extraordinary Corporate Action; Amendment of Charter and Bylaws

Under Maryland law, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. However, a Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Our charter provides that certain charter amendments, any proposal for our conversion, whether by charter amendment, merger or otherwise, from a closed-end company to an open-end company and any proposal for our liquidation or dissolution requires the approval of the stockholders entitled to cast at least 80.0% of the votes entitled to be cast on the matter. However, if such amendment or proposal is approved by a majority of our continuing directors (in addition to approval by our board of directors), such amendment or proposal may be approved by a majority of the votes entitled to be cast on such a matter. The “continuing directors” are defined in our charter as (a) our current directors, (b) those directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of our current directors then on the board of directors or (c) any successor directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of the continuing directors or the successor continuing directors, who are on the board of directors at the time of the nomination or election, as applicable.

Our charter and bylaws provide that the board of directors has the exclusive power to make, alter, amend or repeal any provision of our bylaws.

No Appraisal Rights

Except with respect to appraisal rights arising in connection with the Control Share Act discussed below, as permitted by the Maryland General Corporation Law, our charter provides that stockholders will not be entitled to exercise appraisal rights unless a majority of the board of directors shall determine such rights apply.

Control Share Acquisitions

The Maryland General Corporation Law provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter (the “Control Share Act”). Shares owned by the acquiror, by officers or by directors who are employees of the corporation are excluded from shares entitled to vote on the matter. Control shares are voting shares of stock which, if aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power:

 

   

one-tenth or more but less than one-third;

 

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