As filed with the Securities and Exchange Commission on
January 18, 2007
Securities Act Registration
No. 333-136923
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form N-2
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o
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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PRE-EFFECTIVE AMENDMENT NO. 3
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POST-EFFECTIVE AMENDMENT NO.
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Tortoise Capital Resources
Corporation
10801 Mastin Boulevard, Suite 222
Overland Park, Kansas 66210
(913) 981-1020
AGENT FOR SERVICE
David J. Schulte
10801 Mastin Boulevard, Suite 222
Overland Park, Kansas 66210
Copies of Communications to:
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Steven F. Carman, Esq.
Blackwell Sanders Peper Martin LLP
4801 Main Street, Suite 1000
Kansas City, MO 64112
(816) 983-8000
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Cynthia M. Krus, Esq.
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, NW
Washington, DC 20004-2415
(202) 383-0100
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Valerie Ford
Jacob, Esq.
Fried, Frank, Harris, Shriver & Jacobson LLP
One New York Plaza
New York, NY 10004-1980
(212) 859-8000
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Approximate Date of Proposed Public
Offering: As soon as practicable after the
effective date of this Registration Statement.
If any of the 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, other than
securities offered in connection with a dividend reinvestment
plan, check the following
box. o
It is proposed that this filing will become effective (check
appropriate box):
o when declared
effective pursuant to Section 8(c).
CALCULATION
OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Proposed Maximum
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Title of Securities
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Aggregate
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Amount of
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Being Registered
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Offering Price(1)
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Registration Fee(2)
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Common Stock
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$119,000,000
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$12,733
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(1) |
Estimated solely for the purpose of calculating the registration
fee.
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(2) |
$12,305 previously paid.
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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 or until the Registration
Statement shall become effective on such dates as the Securities
and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
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 it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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Subject to Completion
Preliminary Prospectus dated
January 18, 2007
PROSPECTUS
6,451,613 Shares
Tortoise Capital Resources
Corporation
Common Stock
We are a non-diversified closed-end management investment
company focused on the U.S. energy infrastructure sector. We
invest primarily in privately-held and micro-cap public energy
companies operating in the midstream and downstream segments,
and to a lesser extent the upstream segment. Our goal is to
provide our stockholders with a high level of total return, with
an emphasis on dividends and dividend growth. We invest
primarily in the equity securities of companies that we expect
to pay us distributions on a current basis and provide us
distribution growth. Since our inception, we have made
investments totalling $72.1 million in six portfolio
companies. We will elect to be regulated as a business
development company under the Investment Company Act of 1940.
We are externally managed by Tortoise Capital Advisors, L.L.C.,
a registered investment advisor specializing in the energy
infrastructure sector that had approximately $2.0 billion
of assets under management on November 30, 2006, including
the assets of three publicly traded closed-end management
investment companies.
We expect the public offering price of our common shares to be
between $15.00 and $16.00 per share. Our common shares have been
approved for listing on the New York Stock Exchange under the
symbol TTO.
Investing in our common shares involves risks, including the
risk of leverage, that are described in the Risk
Factors section of this prospectus beginning on
page 18.
Currently, no public market exists for our common shares.
Shares of closed-end investment companies have in the past
frequently traded at a discount to their net asset value. If our
common shares trade at a discount to net asset value, it may
increase the risk of loss for purchasers in this offering.
Purchasers in this offering will experience immediate dilution.
See Dilution.
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Per Share
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Total
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Public offering price
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$
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$
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Sales load
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$
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$
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Proceeds, before expenses, to us(1)
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$
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$
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(1)
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Before deducting expenses payable
by us related to this offering, estimated at $600,000
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The underwriters may also purchase up to an additional 967,741
common shares from us at the public offering price, less the
sales load, within 30 days from the date of this prospectus
to cover overallotments. If the underwriters exercise this
option in full, the total public offering price will be
$ , the total sales load paid by us
will be $ , and total proceeds,
before expenses, to us will be $ .
Please read this prospectus before investing, and keep it for
future reference. The prospectus contains important information
about us that a prospective investor should know before
investing in our common shares.
After the completion of this offering, we will be required to
file annual, quarterly and current reports, proxy statements and
other information about us with the Securities and Exchange
Commission. This information will be available free of charge by
contacting us at 10801 Mastin Boulevard, Suite 222,
Overland Park, Kansas 66210 or by telephone at 1-866-362-9331 or
on our website at www.tortoiseadvisors.com/tcrc.cfm. The
Securities and Exchange Commission also maintains a website at
www.sec.gov that contains such information.
Neither the Securities and Exchange Commission nor any state
securities commission have approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The underwriters expect that our common shares will be ready for
delivery to purchasers on or
about ,
2007.
Merrill Lynch &
Co.
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Stifel
Nicolaus |
Wachovia
Securities |
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Oppenheimer
& Co. |
Ferris,
Baker Watts |
Incorporated
The date of this prospectus
is ,
2007.
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different
information or to make any representations not contained in this
prospectus. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not,
and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information contained in
this prospectus is accurate only as of the date on the front
cover of this prospectus. Our business, financial condition,
results of operations and prospects may have changed since that
date. We will update the information in this prospectus to
reflect any material changes occurring prior to the completion
of this offering.
i
PROSPECTUS
SUMMARY
This summary may not contain all of the information that you
may want to consider. You should read carefully the information
set forth under Risk Factors and other information
included in this prospectus. The following summary is qualified
by the more detailed information and financial statements
appearing elsewhere in this prospectus. Except where the context
suggests otherwise, the terms we, us,
our, the Company and Tortoise
Capital refer to Tortoise Capital Resources Corporation
and its subsidiaries; Tortoise Capital Advisors and
the Advisor refers to Tortoise Capital Advisors,
L.L.C. Throughout this prospectus we have assumed the sale of
6,451,613 common shares at the mid-point of the range of the
public offering price of our common shares indicated on the
front cover of this prospectus.
The
Company
We invest primarily in privately-held and micro-cap public
energy companies focused on the midstream and downstream
segments, and to a lesser extent the upstream segment. We
believe companies in the energy infrastructure sector generally
produce stable cash flows as a result of their fee-based
revenues and limited direct commodity price risk. Our goal is to
provide our stockholders with a high level of total return, with
an emphasis on dividends and dividend growth. We invest
primarily in the equity securities of companies that we expect
to pay us distributions on a current basis and provide us
distribution growth. These securities will generally be limited
partner interests, including interests in master limited
partnerships (MLPs), and limited liability company
interests, and may also include, among others, general partner
interests, common and preferred stock, convertible securities,
warrants and depository receipts of companies that are organized
as corporations, limited partnerships or limited liability
companies.
Companies in the midstream segment of the energy infrastructure
sector engage in the business of transporting, processing or
storing natural gas, natural gas liquids, coal, crude oil,
refined petroleum products and renewable energy resources.
Companies in the downstream segment of the energy infrastructure
sector engage in distributing or marketing such commodities and
companies in the upstream segment of the energy infrastructure
sector engage in exploring, developing, managing or producing
such commodities. Under normal conditions, we intend to invest
at least 90% of our total assets (including assets obtained
through leverage) in companies in the energy infrastructure
sector. Companies in the energy infrastructure sector include
(i) companies that derive a majority of their revenues from
activities within the downstream, midstream and upstream
segments of the energy infrastructure sector, and
(ii) companies that derive a majority of their revenues
from providing products or services to such companies. Our
investments are expected to range between $5.0 million and
$20.0 million per investment, although investment sizes may
be smaller or larger than this targeted range.
We raised approximately $46.3 million of gross proceeds
($42.5 million of net proceeds) through sales of
3,088,596 common shares and 772,124 warrants, the last
of which occurred on January 9, 2006. On December 13,
2006, we entered into a $15.0 million secured revolving
credit facility with U.S. Bank N.A. (U.S. Bank). On
January 17, 2007, the credit facility was amended to permit
us to borrow up to $20.0 million. As of January 17,
2007, we have borrowed approximately $11.5 million under
the credit facility. We raised an additional $18.4 million
of net proceeds for investment purposes in December 2006 in
a bridge financing in which we issued shares of Series A
redeemable preferred stock and warrants to purchase common
shares.
As of January 17, 2007, we have invested a total of
$72.1 million in six portfolio companies in the
U.S. energy infrastructure sector. Of the
$72.1 million, we have invested $67.6 million in the
midstream and downstream segments of the U.S. energy
infrastructure sector and $4.5 million in the upstream
segment of the U.S. energy infrastructure sector.
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The following table summarizes our investments in portfolio
companies as of January 17, 2007. All of our investment
securities were purchased directly from the portfolio company.
Both Eagle Rock Energy Partners, L.P. and Legacy Reserves LP are
publicly-traded.
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Expected
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Current
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Company (Segment)
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Principal Business
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Funded Investment
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Yield
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Eagle Rock Energy Partners, L.P.
(Midstream)
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Parent holding company of Eagle
Rock Pipeline, L.P., a gatherer and processor of natural gas in
north and east Texas
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$8.6 million in unregistered
LP Interests
$3.5 million in registered LP Interests
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8.0
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%(1)
7.6%(1)
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High Sierra Energy, LP (Midstream)
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Diversified midstream operations
primarily in Colorado, Wyoming and Florida
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$14.8 million in LP
Interests
$0.2 million in GP Option(2)
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9.9
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%(1)
n/a
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Quest Midstream Partners, LP
(Midstream)
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Operator of natural gas gathering
pipeline network
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$17.5 million in LP Interests
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9.2
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%(1)
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Millennium Midstream Partners, LP
(Midstream)
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Gatherer and processor of natural
gas in Texas, Louisiana and offshore Gulf of Mexico
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$17.5 million in LP Interests and
Incentive Distribution Rights
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8.5
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%(1)
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Mowood, LLC (Downstream)
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Natural gas distribution
in central Missouri
with Department of
Defense contract
through 2014
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$1.0 million in LLC Units
$4.5 million in unsecured subordinated debt
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10.0
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12.0%
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Legacy Reserves LP (Upstream)
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Oil and natural gas exploitation
and development in the Permian Basin
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$4.5 million in registered LP
Interests
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9.6
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%(1)
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Total Investments
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$72.1 million
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(1)
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The expected current yield has been calculated by annualizing
the most recent or anticipated recurring distribution and
dividing by the amount invested in the underlying security.
Actual distributions to us are based on each companys
available cash flow. Distributions may be above or below the
expected current yield and are subject to change.
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(2)
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In addition to our purchase of LP Interests, we also obtained an
option to buy 3% of the general partner of High Sierra Energy,
LP, High Sierra Energy GP, LLC. The option may be exercised
anytime prior to May 2, 2007.
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(3)
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Represents an equity distribution on our invested capital. We
expect that, pending cash availability, such equity
distributions will recur on an annual basis at or above such
yield.
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As of January 17, 2007 we have entered into a term sheet
with a prospective new portfolio company for a $15.0 million
equity investment (of which we expect to identify one or more
other investors to invest up to $7.0 million) in the downstream
segment of the energy infrastructure sector. In addition, our
Advisors investment committee has approved an additional
$0.5 million equity investment and an additional
$2.5 million debt investment in Mowood, LLC. We currently
expect to fund these investments using our credit facility and
the proceeds of this offering. The consummation of each
investment will depend upon satisfactory completion of our due
diligence investigation of the prospective portfolio company,
our confirmation and acceptance of
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the investment terms, structure and financial covenants, the
execution and delivery of final binding agreements in a form
mutually satisfactory to the parties, the absence of any
material adverse change and the receipt of any necessary
consents. At this time, the final forms of our investments
remain subject to additional negotiations with these companies.
Accordingly, we cannot assure you that such investments will be
completed.
We are an externally managed, non-diversified closed-end
management investment company that will elect to be regulated as
a business development company (a BDC) under the
Investment Company Act of 1940 (the 1940 Act). As a
BDC, we will be subject to numerous regulations and restrictions.
Our
Advisor
We are managed by Tortoise Capital Advisors, a registered
investment advisor specializing in the energy infrastructure
sector that had approximately $2.0 billion of assets under
management on November 30, 2006, including the assets of
three publicly traded closed-end management investment companies
focused on the energy infrastructure sector. Our Advisors
aggregate managed capital is among the largest of investment
advisors managing closed-end management investment companies
focused on the energy infrastructure sector. Our Advisor created
the first publicly traded closed-end management investment
company focused primarily on investing in MLPs in the energy
infrastructure sector, Tortoise Energy Infrastructure
Corporation (TYG). Our Advisor also manages Tortoise
Energy Capital Corporation (TYY), a publicly traded
closed-end management investment company focused primarily on
investing in MLPs and their affiliates in the energy
infrastructure sector, and Tortoise North American Energy
Corporation (TYN), a publicly traded closed-end
management investment company focused primarily on energy
infrastructure investments in public companies in the United
States and in Canada. Our Advisor has no prior experience
managing a BDC, which will be subject to different regulations
than the other closed-end management investment companies
managed by our Advisor.
Our Advisor has 20 full time employees. Four of our
Advisors senior investment professionals are responsible
for the origination, negotiation, structuring and managing of
our investments. These four senior investment professionals have
over 70 years of combined experience in energy, leveraged
finance and private equity investing. Each of our Advisors
investment decisions will be reviewed and approved by its
investment committee, which also acts as the investment
committee for TYG, TYY and TYN. TYG, TYY and TYN generally
target investments in publicly traded companies with market
capitalizations in excess of $250 million. We generally
target investments in companies that are privately-held or have
market capitalizations of less than $250 million, and that
are earlier in their stage of development. If TYG, TYY or TYN
were ever to target investment opportunities similar to ours,
our Advisor intends to allocate investment opportunities in a
fair and equitable manner consistent with our investment
objective and strategies and in accordance with written
allocation policies and procedures of our Advisor, so that we
will not be disadvantaged in relation to any other client. See
Risk Factors Risks Related to Our
Operations.
Our Advisor has retained Kenmont Investments Management, L.P.
(Kenmont) as a sub-advisor. Kenmont is a Houston,
Texas based registered investment advisor with experience
investing in privately-held and public companies in the
U.S. energy and power sectors. Kenmont provides additional
contacts to us and enhances our number and range of potential
investment opportunities. The principals of Kenmont have
collectively created and managed private equity portfolios in
excess of $1.5 billion and have over 50 years of
experience working for investment banks, commercial banks,
accounting firms, operating companies and money management
firms. Kenmont has no prior experience managing a BDC. Our
Advisor compensates Kenmont for the services it provides to us.
Our Advisor also indemnifies and holds us harmless from any
obligation to pay or reimburse Kenmont for any fees or expenses
incurred by Kenmont in providing such services to us. An
affiliate of Kenmont is expected to own approximately 7.0% of
the Companys outstanding common shares upon completion of
this offering and warrants to purchase an additional 247,166 of
our common shares. In addition, an affiliate of Kenmont owns
$8.05 million, or 536,666 shares, of our Series A
redeemable preferred stock. We intend to redeem all of our
outstanding preferred stock with the proceeds of this offering.
3
U.S. Energy
Infrastructure Sector Focus
We pursue our investment objective by investing principally in a
portfolio of privately-held and micro-cap public companies in
the energy infrastructure sector. We focus our investments in
the midstream and downstream segments, and to a lesser extent in
the upstream segment, of the energy infrastructure sector. We
also intend to allocate our investments among asset types and
geographic regions within the United States.
We believe that the midstream and downstream segments of the
energy infrastructure sector will provide attractive investment
opportunities as a result of the following factors:
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Strong Supply and Demand Fundamentals. The
U.S. is the largest consumer of crude oil and natural gas
products, the third largest producer of crude oil and the second
largest producer of natural gas products in the world. The
United States Department of Energys Energy Information
Administration, or EIA, projects that domestic natural gas and
refined petroleum products consumption will increase annually by
0.8% and 1.1%, respectively, through 2030.
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Substantial Capital Requirements. We believe,
based on industry sources, that approximately $20 billion
of capital was invested by the midstream segment of the
U.S. energy infrastructure sector during 2006 and that
additional capital expenditures will occur in the future. We
also believe that existing downstream infrastructure will
require new capital investment to maintain an aging asset base,
as well as to upgrade the asset base to respond to the evolution
of supply and environmental regulations.
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Substantial Asset Ownership Realignment. We
believe that in the midstream and downstream segments of the
U.S. energy infrastructure sector, the acquisition and
divestiture market has averaged approximately $34 billion
of annual transactions between 2001 and 2006 and that such
activity, particularly in the midstream segment, will continue.
We also believe that the substantial number of domestic
companies in the downstream segment of the U.S. energy
infrastructure sector provides for attractive consolidation
opportunities.
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Renewable Energy Resources Opportunities. We
believe that the demand for project financing relating to
renewable energy resources is expected to be significant and
will provide investment opportunities consistent with our
investment objective.
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Although not part of our core focus, we believe the upstream
segment of the energy infrastructure sector will benefit from
strong long-term demand fundamentals and will provide attractive
investment opportunities as a result of the following factors:
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Substantial Asset Ownership Realignment. We
believe that in the upstream segment of the U.S. energy
infrastructure sector, the property acquisition and divestiture
market has averaged approximately $38 billion of annual
transactions between 2001 and 2006 and that the level of
activity will remain consistent with historical levels for the
foreseeable future.
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Substantial Number of Small and Middle Market
Companies. We believe that there are more than
900 private domestic exploration and production businesses and
more than 140 publicly-listed domestic exploration and
production companies.
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Increasing Importance of MLP Market for Upstream Energy
Companies. We believe that there will continue to
be an increasing number of MLPs operating in the upstream
segment of the energy infrastructure sector. We believe that
attractive investment opportunities exist in those upstream MLPs
whose cash distributions allow them to reserve funds to be used
for the replacement of depleted assets. We also believe that the
ratio of subordinated units to common units in a typical MLP
structure helps mitigate the commodity exposure of upstream MLPs
for their common unit investors.
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4
Market
Opportunity
We believe the environment for investing in privately-held and
micro-cap public companies in the energy infrastructure sector
is attractive for the following reasons:
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Increased Demand Among Small and Middle Market Private
Companies for Capital. We believe many private
and micro-cap public companies have faced increased difficulty
accessing the capital markets due to a continuing preference by
investors for issuances in larger companies with more liquid
securities. Such difficulties have been magnified in
asset-focused and capital intensive industries such as the
energy infrastructure sector. We believe that the
U.S. energy infrastructure sectors high level of
projected capital expenditures and continuing acquisition and
divestiture activity will provide us with numerous attractive
investment opportunities.
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Investment Activity of Private Equity Capital
Sponsors. We believe there is a large pool of
uninvested private equity capital available for private and
micro-cap public companies, including those involved in the
U.S. energy infrastructure sector. Given the anticipated
positive long-term supply and demand dynamics of the energy
industry and the current and expected public market valuations
for companies involved in certain sectors of the energy
industry, private equity capital has been increasingly attracted
to the U.S. energy infrastructure sector. In particular, we
believe that the public market valuations of many MLPs will
cause private equity firms to invest and aggregate smaller
U.S. energy infrastructure assets. We also expect those
private equity firms to combine their capital with equity or
mezzanine debt investors such as ourselves.
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Finance Market for Small and Middle Market Energy Companies
is Underserved by Many Capital Providers. We
believe that many lenders have, in recent years, de-emphasized
their service and product offerings to small and middle market
energy companies in favor of lending to large corporate clients
and managing capital markets transactions. We believe, in
addition, that many capital providers lack the necessary
technical expertise to evaluate the quality of the underlying
assets of small and middle market private companies and
micro-cap public companies in the energy infrastructure sector
and lack a network of relationships with such companies.
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Attractive Companies with Limited Access to Other
Capital. We believe there are, and will continue
to be, attractive companies that will benefit from private
equity investments prior to a public offering of their equity,
whether as an MLP or otherwise. We also believe that there are a
number of companies in the midstream and downstream segments of
the U.S. energy infrastructure sector with the same stable
cash flow characteristics as those being acquired by MLPs or
funded by private equity capital in anticipation of contribution
to an MLP. We believe that many such companies are not being
acquired by MLPs or attracting private equity capital because
they do not produce income that qualifies for inclusion in an
MLP pursuant to the applicable U.S. Federal income tax laws, are
perceived by such investors as too small, or are in areas of the
midstream energy infrastructure segment in which most MLPs do
not have specific expertise. We believe that these companies
represent attractive investment candidates for us.
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Competitive
Advantages
We believe that we are well positioned to meet the financing
needs of companies within the U.S. energy infrastructure
sector for the following reasons:
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Existing Investment Platform and Focus on the Energy
Infrastructure Sector. We believe that our
Advisors current investment platform provides us with
significant advantages in sourcing, evaluating, executing and
managing investments. Our Advisor specializes in the energy
infrastructure sector and had approximately $2.0 billion of
assets under management on November 30, 2006, including the
assets of three publicly traded closed-end management investment
companies focused on the energy infrastructure sector. Our
Advisor created the first publicly traded closed-end management
investment company focused primarily on investing in MLPs
involved in the energy infrastructure sector, and its aggregate
managed capital is among
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the largest of those closed-end management company advisors
focused on the energy infrastructure sector.
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Experienced Management Team. The members of
our Advisors investment committee have an average of over
20 years of financial investment experience. Our
Advisors four senior investment professionals are
responsible for the negotiation, structuring and managing of our
investments and have over 70 years of combined experience
in energy, leveraged finance and private equity investing. We
believe that the members of our Advisors investment
committee and the Advisors senior investment professionals
have developed strong reputations in the capital markets,
particularly in the energy infrastructure sector, that we
believe affords us a competitive advantage in identifying and
investing in energy infrastructure companies.
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Disciplined Investment Philosophy. In making
its investment decisions, our Advisor intends to continue the
disciplined investment approach that it has used since its
founding. That investment approach emphasizes current income
with the potential for enhanced returns through dividend growth,
capital appreciation, low volatility and minimization of
downside risk. Our Advisors investment process involves an
assessment of the overall attractiveness of the specific
subsector of the energy infrastructure sector in which a
prospective portfolio company is involved; such companys
specific competitive position within that subsector; potential
commodity price, supply and demand and regulatory concerns; the
stability and potential growth of the prospective portfolio
companys cash flows; the prospective portfolio
companys management track record and incentive structure
and our Advisors ability to structure an attractive
investment.
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Flexible Transaction Structuring. We are not
subject to many of the regulatory limitations that govern
traditional lending institutions such as commercial banks. As a
result, we can be flexible in structuring investments and
selecting the types of securities in which we invest. Our
Advisors senior investment professionals have substantial
experience in structuring investments that balance the needs of
energy infrastructure companies with appropriate risk control.
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Extended Investment Horizon. Unlike private
equity and venture capital funds, we are not subject to standard
periodic capital return requirements. These provisions often
force private equity and venture capital funds to seek quicker
returns on their investments through mergers, public equity
offerings or other liquidity events than may otherwise be
desirable, potentially resulting in both a lower overall return
to investors and an adverse impact on their portfolio companies.
We believe our flexibility to make investments with a long-term
view and without the capital return requirements of traditional
private investment funds enhances our ability to generate
attractive returns on invested capital.
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Targeted
Investment Characteristics
We anticipate that our targeted investments will have the
following characteristics:
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Long-Life Assets with Stable Cash Flows and Limited Commodity
Price Sensitivity. We anticipate that most of our
investments will be made in companies with assets having the
potential to generate stable cash flows over long periods of
time. We intend to invest a portion of our assets in companies
that own and operate assets with long useful lives and that
generate cash flows by providing critical services primarily to
the producers or end-users of energy. We expect to limit the
direct exposure to energy commodity price risk in our portfolio.
We intend to target companies that have a majority of their cash
flows generated by contractual obligations.
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Experienced Management Teams with Energy Infrastructure
Focus. We target investments in companies with
management teams that have a track record of success and that
often have substantial knowledge and focus in particular
segments of the energy infrastructure sector or with certain
types of assets. We expect that our management teams
extensive experience and network of business relationships in
the energy infrastructure sector will allow us to identify and
attract portfolio company management teams that meet these
criteria.
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Fixed Asset-Intensive Investments. We
anticipate that most of our investments will be made in
companies with a relatively significant base of fixed assets
that we believe will provide for reduced downside risk compared
to making investments in companies with lower relative fixed
asset levels. As fixed asset-intensive companies typically have
less variable cost requirements, we expect they will generate
attractive cash flow growth even with limited demand-driven or
supply-driven growth.
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Limited Technological Risk. We do not intend
to target investment opportunities involving the application of
new technologies or significant geological, drilling or
development risk.
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Exit Opportunities. We focus our investments
on prospective portfolio companies that we believe will generate
a steady stream of cash flow to generate returns on our
investments as well as allow such companies to reinvest in their
respective businesses. We expect that such internally generated
cash flow will lead to distributions or the repayment of the
principal of our investments in portfolio companies and will be
a key means by which we monetize our investments over time. In
addition, we seek to invest in companies whose business models
and expected future cash flows offer attractive exit
possibilities. These companies include candidates for strategic
acquisition by other industry participants and companies that
may repay, or provide liquidity for, our investments through an
initial public offering of common stock or other capital markets
transactions. We believe our Advisors investment
experience will help us identify such companies.
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Corporate
Information
Our offices are located at 10801 Mastin Boulevard,
Suite 222, Overland Park, Kansas 66210, our telephone
number is
(913) 981-1020
and our website is www.tortoiseadvisors.com/tcrc.cfm.
Information posted to our website should not be considered part
of this prospectus.
7
THE
OFFERING
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Common shares offered by us |
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6,451,613 of our common shares, excluding 967,741 of our common
shares issuable pursuant to the overallotment option granted to
the underwriters. |
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Common shares outstanding after this offering |
|
9,540,209 of our common shares, excluding 967,741 of our common
shares issuable pursuant to the overallotment option granted to
the underwriters and 957,130 shares issuable pursuant to
outstanding warrants. See Description of Capital
Stock. |
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Use of proceeds |
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We intend to use approximately $18.9 million of the net
proceeds of this offering to redeem the preferred stock issued
in our bridge financing, $11.5 million of the net proceeds
of this offering to repay the outstanding balance of our credit
facility, and the remainder of the net proceeds of this offering
to fund investments in prospective portfolio companies in
accordance with our investment objective and strategies
described in this prospectus and for temporary working capital
needs. We expect to invest the proceeds of this offering within
six to nine months; however, it could take a longer time to
invest substantially all of the net proceeds, depending on the
availability of appropriate investment opportunities and market
conditions. Pending such investments, we expect to invest the
net proceeds primarily in cash, cash equivalents,
U.S. government securities and other high-quality debt
investments that mature in one year or less from the date of
investment and will pay our Advisor a fee pursuant to our
investment advisory agreement. See Use of
Proceeds and Advisor Investment Advisory
Agreement. |
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Regulatory status |
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We will elect to be regulated as a BDC under the 1940 Act, and
have, since the completion of our private placement in January
2006, been making investments as if we were a BDC. See
Election to Be Regulated as a Business Development
Company. |
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Distributions |
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We intend, subject to adjustment at the discretion of our board
of directors, each quarter to pay out substantially all of the
amounts we receive as recurring cash or
paid-in-kind
distributions on equity securities we own and interest payments
on debt securities we own, less current or anticipated operating
expenses, current income taxes on our income and our leverage
costs. We anticipate making, for our first fiscal quarter this
year, a distribution of $0.10 per common share to our current
stockholders immediately following the completion of this
offering. We anticipate that our next declared quarterly
distribution following this offering will be paid on or about
May 31, 2007. See Distributions and
Managements Discussion and Analysis of Financial
Condition and Results of Operation Determining
Distributions to Stockholders. |
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Taxation |
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Unlike most investment companies, we have not elected, and do
not intend to elect, to be treated as a regulated investment
company (RIC) under the Internal Revenue Code of
1986, as amended (the Code). Therefore, we are, and
intend to continue to be, obligated to pay federal and
applicable state corporate income taxes on our |
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taxable income. As a result of not electing to be treated as a
RIC, we are not subject to the Codes diversification rules
limiting the assets in which a RIC can invest. In addition, we
are not subject to the Codes restrictions on the types of
income that a RIC can recognize without adversely affecting its
election to be treated as a RIC, allowing us the ability to
invest in operating entities treated as partnerships under the
Code, which we believe provide attractive investment
opportunities. Finally, unlike RICs, we are not effectively
required by the Code to distribute substantially all of our
income and capital gains. Distributions on the common shares
will be treated first as taxable dividend income to the extent
of our current or accumulated earnings and profits, then as a
tax free return of capital to the extent of a stockholders
tax basis in the common shares, and last as capital gain. We
anticipate that the distributed cash from our portfolio
investments in entities treated as partnerships for tax purposes
will exceed our share of taxable income from those portfolio
investments. Thus, we anticipate that only a portion of
distributions we make on the common shares will be treated as
taxable dividend income to our stockholders. If you are an
individual citizen or resident of the United States or a United
States estate or trust for U.S. federal income tax purposes and
meet certain holding period and other applicable requirements,
the portion of such distributions treated as taxable dividend
income will be qualified dividend income currently
subject to a maximum 15% U.S. federal income tax rate. See
Certain U.S. Federal Income Tax
Considerations Taxation of U.S.
Stockholders. |
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Investment advisor |
|
Tortoise Capital Advisors, a Delaware limited liability company
and registered investment advisor, serves as our investment
advisor. See Portfolio Management,
Management and Advisor. |
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Fees |
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Pursuant to our investment advisory agreement, we pay our
Advisor a fee consisting of two components a base
management fee and an incentive fee. The base management fee
commenced on December 8, 2005, is paid quarterly in
arrears, and is equal to 0.375% (1.5% annualized) of our average
monthly Managed Assets (our total assets, including any assets
purchased with or attributable to any borrowed funds, minus
accrued liabilities other than (1) deferred taxes and
(2) debt entered into for the purpose of leverage). |
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The incentive fee consists of two parts. The first part, the
investment income fee, is calculated and payable quarterly in
arrears and will equal 15% of the excess, if any, of our net
investment income for the quarter over a quarterly hurdle rate
equal to 2% (8% annualized) of our average monthly net assets.
No investment income fee was paid or earned prior to
December 8, 2006. |
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The second part of the incentive fee, the capital gains fee,
will be determined and payable in arrears as of the end of each
fiscal year (or, upon termination of the investment advisory
agreement, as of the termination date), and will equal
(i) 15% of (a) our net realized capital gains on a
cumulative basis from the commencement of our operations on
December 8, 2005 to the end of each fiscal year, less
(b) any unrealized capital depreciation at the end of such
fiscal year, less (ii) the aggregate amount of all capital
gains fees paid to |
9
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our Advisor in prior years. Our Advisor will use at least 25%
of any capital gains fees received from us at any time on or
prior to December 8, 2007 to purchase our common shares in
the open market. There can be no assurance that our Advisor will
earn any capital gains fee and, as a result, there can be no
assurance that our Advisor will make any such purchases. No
capital gains fee was paid or earned prior to January 17,
2007. See Advisor Investment Advisory
Agreement, which also contains a discussion of our
expenses. |
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Sub-advisor |
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Kenmont Investment Management, L.P. serves as our sub-advisor.
Kenmont is a Houston, Texas based registered investment advisor
with experience investing in privately-held and public companies
in the U.S. energy and power sectors. Pursuant to the
sub-advisory agreement between Kenmont and our Advisor, our
Advisor pays Kenmont a portion of the fee it receives from us.
See Advisor
Sub-Advisor
Arrangement. |
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Leverage |
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We have and may borrow funds to make investments, and we have
and may grant a security interest in our assets in connection
with such borrowings, including any borrowings by any of our
subsidiaries. We use this practice, which is known as
leverage, to attempt to increase returns to our
stockholders. However, leverage involves significant risks and
the costs of any leverage transactions will be borne by our
stockholders. See Risk Factors. With certain limited
exceptions, we are only allowed to borrow amounts such that our
asset coverage, as defined in the 1940 Act, equals at least 200%
after such borrowing. The amount of leverage that we may employ
will depend on our assessment of market conditions and other
factors at the time of any proposed borrowing. |
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On December 13, 2006, we entered into a $15.0 million
secured revolving credit facility with U.S. Bank. On
January 17, 2007, the credit facility was amended to permit
us to borrow up to $20.0 million. As of January 17,
2007, we had borrowed approximately $11.5 million under the
credit facility. We intend to repay all outstanding indebtedness
under the credit facility immediately following the receipt of
the proceeds of this offering. We raised an additional
$18.4 million of net proceeds for investment purposes in
December 2006 in a bridge financing in which we issued
1,233,333 shares of Series A redeemable preferred
stock and 185,006 warrants to purchase common shares. We
intend to redeem the preferred stock immediately following the
receipt of the proceeds of this offering. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources and Managements Discussion
and Analysis of Financial Conditions and Result of
Operations Borrowings and
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Senior Securities. |
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Dividend reinvestment plan |
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We intend to have a dividend reinvestment plan for our
stockholders that will be effective after completion of this
offering. Our plan will be an opt out dividend
reinvestment plan. As a result, if we declare a distribution
after the plan is effective, stockholders cash
distributions will be automatically reinvested in additional
common |
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shares, unless they specifically opt out of the
dividend reinvestment plan so as to receive cash distributions.
Stockholders who receive distributions in the form of common
shares will generally be subject to the same federal, state and
local tax consequences as stockholders who elect to receive
their distributions in cash. See Dividend Reinvestment
Plan and Certain U.S. Federal Income Tax
Considerations Taxation of
U.S. Stockholders. |
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Trading at a discount |
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Shares of closed-end investment companies frequently trade at a
discount to their net asset value. The possibility 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. Our net asset value immediately following
this offering will reflect reductions resulting from the sales
load (underwriting discount) and the amount of the offering
expenses paid. This risk may have a greater effect on investors
expecting to sell their shares soon after completion of this
offering. We generally may not issue additional common shares at
a price below our net asset value (net of any sales load
(underwriting discount)) without first obtaining approval of our
stockholders and board of directors. Our stockholders granted us
the authority to sell our common shares below net asset value,
subject to certain conditions. This authority extends through
our 2008 annual meeting, currently expected to occur in April
2008. We cannot predict whether our shares will trade above, at,
or below net asset value. |
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Anti-takeover provisions |
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Our board of directors is divided into three classes of
directors serving staggered three-year terms. This structure is
intended to provide us with a greater likelihood of continuity
of management, which may be necessary for us to realize the full
value of our investments. A staggered board of directors also
may deter hostile takeovers or proxy contests, as may certain
provisions of Maryland law, our Charter or Bylaws or other
measures adopted by us. These provisions or measures also may
limit the ability of our stockholders to sell their shares at a
premium over then-current market prices by discouraging a third
party from seeking to obtain control of us. See Certain
Provisions of Our Charter and Bylaws and the Maryland General
Corporation Law. |
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Risk factors |
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Investing in our common shares involves certain risks relating
to our structure and our investment objective that you should
consider before deciding whether to invest in our common shares.
In addition, we expect that our portfolio will consist primarily
of securities issued by privately-held energy infrastructure
companies. These investments may involve a high degree of
business and financial risk, and they are generally illiquid.
Our portfolio companies typically will require additional
outside capital beyond our investment in order to succeed. A
large number of entities compete for the same kind of investment
opportunities as we seek. We borrow funds to make our
investments in portfolio companies. As a result, we are and will
be exposed to the risks of leverage, which may be considered a
speculative investment technique. Borrowings magnify the
potential for gain and loss on amounts invested and, therefore,
increase the risks associated with investing in our common
shares. |
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Also, we are subject to certain risks associated with valuing
our portfolio, changing interest rates, accessing additional
capital, fluctuating quarterly results and operating in a
regulated environment. See Risk Factors for a
discussion of factors you should carefully consider before
deciding whether to invest in our common shares. |
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Available information |
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We have filed with the Securities and Exchange Commission, or
SEC, a registration statement on
Form N-2,
including any amendments thereto and related exhibits, under the
Securities Act of 1933, which we refer to as the Securities Act,
with respect to our common shares offered by this prospectus.
The registration statement contains additional information about
us and our common shares being offered by this prospectus. |
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After completion of this offering, our common shares will be
registered under the Securities Exchange Act of 1934, which we
refer to as the Exchange Act, and we will be required to file
reports, proxy statements and other information with the SEC.
This information will be available at the SECs public
reference room at 100 F Street, N.E., Washington, D.C.
20549. You may obtain information about the operation of the
SECs public reference room by calling the SEC at
1-800-SEC-0330.
In addition, the SEC maintains an Internet website, at
http://www.sec.gov, that contains reports, proxy and information
statements, and other information regarding issuers, including
us, that file documents electronically with the SEC. |
12
FEES AND
EXPENSES
The following table is intended to assist you in understanding
the various costs and expenses that an investor in this offering
will bear directly or indirectly. We caution you that the
percentages in the table below indicating annual expenses are
estimates and may vary.
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Stockholder transaction
expenses (as a percentage of offering price):
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Sales load
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7.00
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%(1)
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Offering expenses
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0.60
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%(2)
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Dividend reinvestment plan expenses
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0.00
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%(3)
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Total stockholder transaction
expenses paid
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7.60
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%
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Annual expenses following this
offering (as a percentage of net assets attributable to common
shares) (4):
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Management fee payable under
investment advisory agreement
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2.00
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%(5)
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Incentive fees payable under
investment advisory agreement
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0.00
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%(6)
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Interest payments on borrowed funds
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2.34
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%(7)
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Other expenses
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0.39
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%(8)
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Total annual expenses
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4.73
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%
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Example
The following example demonstrates the projected dollar amount
of total cumulative expenses that would be incurred over various
periods with respect to a hypothetical investment in our common
shares. These amounts are based upon payment of an assumed 7.0%
sales load (the sales load paid with respect to our common
shares sold in this offering), assumed offering expenses of 0.6%
and our payment of annual operating expenses at the levels set
forth in the table above.
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1 Year
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3 Years
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5 Years
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10 Years
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You would pay the following
expenses on a $1,000 investment, assuming a 5% annual return
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$
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44
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$
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132
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$
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220
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$
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443
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The example and the expenses in the tables above should not
be considered a representation of our future expenses, and
actual expenses may be greater or less than those shown.
Moreover, while the example assumes, as required by the
applicable rules of the SEC, a 5% annual return, our performance
will vary and may result in a return greater or less than 5%. A
5% annual return will not require payment of an incentive fee to
our Advisor based on Net Investment Income and may not require
payment of an incentive fee based on capital gains. Accordingly,
no incentive fee is included in this example. See Advisor
Examples of Quarterly Incentive Fee Calculation for
additional information concerning incentive fee calculations. In
addition, while the example assumes reinvestment of all
distributions at net asset value, participants in our dividend
reinvestment plan may receive common shares valued at the market
price in effect at that time. This price may be at, above or
below net asset value. See Dividend Reinvestment
Plan for additional information regarding our dividend
reinvestment plan.
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(1) |
The sales load (underwriting discount) for shares sold in this
offering, which is a one-time fee paid to the underwriters, is
the only sales load (underwriting discount) paid in this
offering.
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(2) |
The percentage reflects estimated offering expenses of
approximately $600,000 and is based on the assumption that we
sell 6,451,613 shares in this offering (based on the
mid-point of the range of the offering price of our common
shares on the front cover of this prospectus and excluding
shares issuable pursuant to the overallotment option granted to
the underwriters).
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(3) |
The expenses associated with the administration of our dividend
reinvestment plan are included in Other expenses.
The participants in our dividend reinvestment plan will pay a
pro rata share of brokerage commissions incurred with respect to
open market purchases, if any, made by the Plan Agent under the
Plan. For more details about the plan, see Dividend
Reinvestment Plan.
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(4) |
Net assets attributable to common shares equals net
assets (i.e., total assets less total liabilities and the
aggregate liquidation preference of any outstanding shares of
preferred stock) of (i) approximately $42.3 million at
November 30, 2006, plus (ii) our $17.5 million
investment in Quest Midstream Partners, LP (valued at its
purchase price), plus (iii) our $17.5 million
investment in Millennium Midstream Partners, L.P. (valued at its
purchase price), plus (iv) the anticipated net proceeds
from this offering, and (v) reflecting the leverage of
approximately $45.0 million determined using the
assumptions set forth in footnote (7) below.
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(5) |
Although our management fee is 1.5% (annualized) of our average
monthly Managed Assets, the table above reflects expenses as a
percentage of net assets. Managed Assets means total assets
(including any assets purchased with any borrowed funds) minus
accrued liabilities other than (1) deferred taxes and
(2) debt entered into for the purpose of leverage. Net
assets is Managed Assets minus deferred taxes, debt entered into
for the purposes of leverage and the aggregate liquidation
preference of outstanding preferred shares. See
Advisor Investment Advisory
Agreement Management Fee.
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(6) |
We pay our Advisor a fee consisting of two
components a base management fee and an incentive
fee. The base management fee is paid quarterly in arrears and is
equal to 0.375% (1.5% annualized) of our average monthly Managed
Assets for such quarter. The incentive fee consists of two
parts. The first part, the investment income fee, is calculated
and payable quarterly in arrears and will equal 15% of the
excess, if any, of our Net Investment Income for the fiscal
quarter over a quarterly hurdle rate equal to 2% (8% annualized)
of our average monthly Net Assets for the quarter. For purposes
of calculating the investment income fee, Net Investment
Income means interest income (including accrued interest
that we have not yet received in cash), dividend and
distribution income from equity investments (but excluding that
portion of cash distributions that are treated as return of
capital), and any other income (including any fees such as
commitment, origination, syndication, structuring, diligence,
monitoring, and consulting fees or other fees that we receive
from portfolio companies) accrued during the fiscal quarter,
minus our operating expenses for the quarter (including the base
management fee, expenses payable by us, any interest expense,
any accrued income taxes related to Net Investment Income and
dividends paid on issued and outstanding preferred stock, if
any, but excluding the incentive fees payable to our Advisor).
No investment income fee was paid or earned prior to
December 8, 2006. The second part of the incentive fee, the
capital gains fee, will be determined and payable in arrears as
of the end of each fiscal year (or upon termination of the
investment advisory agreement, as of the termination date), and
will equal (i) 15% of (a) our net realized capital
gains, excluding the impact of current and deferred income
taxes, on a cumulative basis from the commencement of our
operations on December 8, 2005 to the end of each fiscal
year, less (b) any unrealized capital depreciation,
excluding the impact of deferred income taxes, at the end of
such calendar year, less (ii) the aggregate amount of all
capital gains fees paid to our Advisor in prior years. Upon
completion of this offering, our Advisor will use at least 25%
of any capital gains fee, if any, received on or prior to
December 8, 2007 to purchase our common shares in the open
market. There can be no assurance that our Advisor will earn any
capital gains fee and, as a result, there can be no assurance
that our Advisor will make any such purchases. No capital gains
fee was paid or earned prior to January 17, 2007. We may
have capital gains and interest income that could result in the
payment of an incentive fee to our Advisor in the first year
after completion of this offering. However, as we cannot predict
whether we will meet the necessary performance targets, we have
assumed a base incentive fee of 0% in this table.
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(7) |
We intend to borrow funds to make investments to the extent we
determine that additional capital would allow us to take
advantage of additional investment opportunities or if the
market for debt financing presents attractively priced debt
financing opportunities, and, in either case, if our board of
directors determines that leveraging our portfolio would be in
our best interests and the best interests of our stockholders.
On December 13, 2006, we entered into a $15.0 million
secured revolving credit facility with U.S. Bank. On
January 17, 2007, the credit facility was amended to permit
us to borrow up to $20.0 million. As of January 17,
2007, we had borrowed approximately $11.5 million under the
credit facility. In December 2006, we also sold
$18.5 million of our Series A redeemable preferred
stock which accrues interest at a specified rate. As we intend
to redeem all our outstanding Series A redeemable preferred
stock with the proceeds of this offering, such amounts have not
been included in the table. We also intend to repay all
outstanding indebtedness under the credit facility immediately
following the receipt of the proceeds of this offering. The
table above assumes we borrow for investment purposes an amount
equal to 25.0% of our total assets (including such borrowed
funds) and that the annual interest rate on the amount borrowed
is 7.0%. The table presented above estimates what our annual
expenses would be, stated as a percentage of our net assets
attributable to our common shares. The table presented below,
unlike the table presented above, assumes we do not use any form
of leverage and, as a result, our estimated total annual
expenses would be as follows:
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Management fee
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1.50
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%
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Incentive fees payable under our
Investment Advisory Agreement
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0.00
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%
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Other expenses
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0.36
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%
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Total annual expenses
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1.86
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%
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(8) |
Other expenses includes our estimated overhead
expenses, including payments to our transfer agent, our
administrative agent and legal and accounting expenses and
excludes income tax expense. The holders of our common shares
indirectly bear the cost associated with such other expenses.
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15
SELECTED
FINANCIAL DATA
The selected financial data set forth below should be read in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations,
Senior Securities and the financial statements and
related notes included in this prospectus. Financial information
presented below for the fiscal quarters ended February 28,
2006, May 31, 2006, August 31, 2006 and
November 30, 2006 is unaudited. Financial information
presented below for the period from December 8, 2005 to
November 30, 2006, and as of November 30, 2006, has
been derived from our financial statements audited by
Ernst & Young LLP, an independent registered
public accounting firm, which are included herein. The
historical data is not necessarily indicative of results to be
expected for any future period.
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Period from
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December 8, 2005
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Fiscal Quarter Ended
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to November 30,
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February 28,
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May 31,
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August 31,
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November 30,
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2006(1)
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2006(2)
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2006
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|
2006
|
|
|
2006
|
|
|
Statement of operations
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
$
|
2,119,843
|
|
|
$
|
403,505
|
|
|
$
|
347,496
|
|
|
$
|
448,124
|
|
|
$
|
920,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisory fees
|
|
|
634,989
|
|
|
|
136,796
|
|
|
|
169,367
|
|
|
|
163,364
|
|
|
|
165,462
|
|
All other expenses
|
|
|
360,156
|
|
|
|
97,925
|
|
|
|
81,930
|
|
|
|
87,010
|
|
|
|
93,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
995,145
|
|
|
$
|
234,721
|
|
|
$
|
251,297
|
|
|
$
|
250,374
|
|
|
$
|
258,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current and deferred tax expense,
net
|
|
|
516,055
|
|
|
|
61,100
|
|
|
|
34,855
|
|
|
|
163,679
|
|
|
|
256,421
|
|
Net realized loss on investments
before current tax benefit
|
|
|
1,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,462
|
|
Unrealized gain on investments
before deferred tax expense
|
|
|
328,858
|
|
|
|
|
|
|
|
|
|
|
|
297,054
|
|
|
|
31,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in net assets resulting
from operations
|
|
$
|
936,039
|
|
|
$
|
107,684
|
|
|
|
$61,344
|
|
|
$
|
331,125
|
|
|
$
|
435,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
February 28,
|
|
|
May 31,
|
|
|
August 31,
|
|
|
November 30,
|
|
|
|
2006(2)
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
Statement of assets and
liabilities data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$42,845,831
|
|
|
$
|
25,758,402
|
|
|
$
|
20,649,152
|
|
|
$
|
5,431,414
|
|
Investments
|
|
|
0
|
|
|
|
16,999,991
|
|
|
|
22,549,991
|
|
|
|
37,144,100
|
|
Other assets
|
|
|
160,044
|
|
|
|
124,730
|
|
|
|
233,569
|
|
|
|
357,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$43,005,875
|
|
|
$
|
42,883,123
|
|
|
$
|
43,432,712
|
|
|
$
|
42,933,012
|
|
Total liabilities
|
|
|
494,720
|
|
|
|
271,608
|
|
|
|
922,476
|
|
|
|
604,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets
|
|
|
$42,511,155
|
|
|
$
|
42,611,515
|
|
|
$
|
42,510,236
|
|
|
$
|
42,328,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value per share
|
|
|
$13.76
|
|
|
|
$13.80
|
|
|
$
|
13.76
|
|
|
$
|
13.70
|
|
|
|
(1)
|
We were incorporated on September 8, 2005, but did not
commence operations until December 8, 2005.
|
|
(2)
|
We did not commence operations until December 8, 2005. As a
result, the fiscal quarter ended February 28, 2006 was not
a full fiscal quarter.
|
16
FORWARD-LOOKING
STATEMENTS
The matters discussed in this prospectus, as well as in future
oral and written statements by our management, that are
forward-looking statements are based on current management
expectations that involve substantial risks and uncertainties
that could cause actual results to differ materially from the
results expressed in, or implied by, these forward-looking
statements. Forward-looking statements relate to future events
or our future financial performance. We generally identify
forward-looking statements by terminology such as
may, will, should,
expects, plans, anticipates,
could, intends, target,
projects, contemplates,
believes, estimates,
predicts, potential, or
continue or the negative of these terms or other
similar words. Important assumptions include our ability to
originate new investments, achieve certain levels of return, the
availability of additional capital, and the ability to maintain
certain debt to asset ratios. 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 or objectives will be
achieved. The forward-looking statements contained in this
prospectus include statements as to:
|
|
|
|
|
our future operating results;
|
|
|
|
our business prospects and the prospects of our existing and
prospective portfolio companies;
|
|
|
|
the impact of investments that we expect to make;
|
|
|
|
our informal relationships with third parties;
|
|
|
|
the dependence of our future success on the general economy and
the domestic energy infrastructure sector;
|
|
|
|
the ability of our portfolio companies to achieve their
objectives;
|
|
|
|
our ability to make investments consistent with our investment
objective, including with respect to the size, nature and terms
of our investments;
|
|
|
|
our expected financings;
|
|
|
|
our regulatory structure;
|
|
|
|
our ability to operate as a business development company;
|
|
|
|
the adequacy of our cash resources and working capital and our
anticipated use of proceeds;
|
|
|
|
the timing of cash flows, if any, from the operations of our
portfolio companies;
|
|
|
|
our ability to cause a subsidiary to become a licensed Small
Business Investment Company; and
|
|
|
|
the size or growth prospects of the energy infrastructure sector
or any category thereof.
|
For a discussion of factors that could cause our actual results
to differ from forward-looking statements contained in this
prospectus, please see the discussion under Risk
Factors. You should not place undue reliance on these
forward-looking statements. The forward-looking statements made
in this prospectus relate only to events as of the date on which
the statements are made. We undertake no obligation to update
any forward-looking statement to reflect events or circumstances
occurring after the date of this prospectus. The forward-looking
statements contained in this prospectus and any accompanying
prospectus supplement are excluded from the safe harbor
protection provided by Section 27A of the Securities Act of
1933.
17
RISK
FACTORS
An investment in our common shares should not constitute a
complete investment program for any investor and involves a high
degree of risk. Due to the uncertainty in our investments, there
can be no assurance that we will achieve our investment
objective. You should carefully consider the risks described
below before making an investment decision.
Risks
Related to Our Operations
We are
a new company with limited operating history.
We were incorporated in Maryland on September 8, 2005. We
are subject to all of the business risks and uncertainties
associated with any new business, including the risk that we
will not achieve our investment objective and that the value of
an investment in our common shares could decline substantially.
Our
Advisor has a limited operating history and will serve as
investment advisor to other funds, which may create conflicts of
interest not in the best interest of us or our stockholders.
Our Advisor was formed in October 2002 to provide portfolio
management services to institutional and high-net worth
investors seeking professional management of their energy
infrastructure investments. Our Advisor has been managing
investments in portfolios of MLPs and other issuers in the
energy infrastructure sector since that time, including
management of the investments of TYG since February 27,
2004, TYY since May 31, 2005 and TYN since October 31,
2005. From time to time the Advisor may pursue areas of
investments in which the Advisor has more limited experience.
We, TYG, TYY and TYN have the same investment advisor, rely on
some of the same personnel and will use the same investment
committee. Our Advisors services under the investment
advisory agreement are not exclusive, and it is free to furnish
the same or similar services to other entities, including
businesses that may directly or indirectly compete with us so
long as its services to us are not impaired by the provision of
such services to others. In addition, the publicly traded funds
and private accounts managed by our Advisor may make investments
similar to investments that we may pursue, although these
entities generally target investments in publicly traded
companies with market capitalizations in excess of $250 million,
while we generally target investments in companies that are
privately-held or have market capitalizations of less than
$250 million, and that are earlier in their stage of
development. This may change in the future, however.
Accordingly, our Advisor and the members of its investment
committee may have obligations to other investors, the
fulfillment of which might not be in the best interests of us or
our stockholders, and it is possible that our Advisor might
allocate investment opportunities to other entities, and thus
might divert attractive investment opportunities away from us.
However, our Advisor intends to allocate investment
opportunities in a fair and equitable manner consistent with our
investment objectives and strategies, and in accordance with
written allocation policies and procedures of our Advisor, so
that we will not be disadvantaged in relation to any other
client.
In addition, three of the five members of our investment
committee are affiliates of, but not employees of, our Advisor,
and each has other significant responsibilities with Fountain
Capital Management, L.L.C. (Fountain Capital), which
conducts businesses and activities of its own in which our
Advisor has no economic interest. If these separate activities
become significantly greater or have greater profit potential
than our Advisors activities, there could be material
competition for the efforts of these members of the investment
committee.
We are
dependent upon our Advisors key personnel for our future
success.
We depend on the diligence, expertise and business relationships
of the senior management of our Advisor. The Advisors
senior investment professionals and senior management will
evaluate, negotiate, structure, close and monitor our
investments. Our future success will depend on the continued
service of the senior management team of our Advisor. The
departure of one or more senior investment professionals of our
Advisor, and particularly Terry Matlack, Abel Mojica III,
Ed Russell or David Schulte could have a material
18
adverse effect on our ability to achieve our investment
objective and on the value of our common shares and warrants. We
will rely on certain employees of the Advisor, especially
Messrs. Matlack and Schulte, who will be devoting
significant amounts of their time to non-Company related
activities of the Advisor. To the extent Messrs. Matlack or
Schulte and other employees of the Advisor who are not committed
exclusively to us are unable to, or do not, devote sufficient
amounts of their time and energy to our affairs, our performance
may suffer.
The
incentive fee payable to our Advisor may create conflicting
incentives.
The incentive fee payable by us to our Advisor may create an
incentive for our Advisor to make investments on our behalf that
are riskier or more speculative than would be the case in the
absence of such a compensation arrangement. Because a portion of
the incentive fee payable to our Advisor is calculated as a
percentage of the amount of our net investment income that
exceeds a hurdle rate, our Advisor may imprudently use leverage
to increase the return on our investments. Under some
circumstances, the use of leverage may increase the likelihood
of default, which would disfavor the holders of our common
shares. In addition, our Advisor will receive an incentive fee
based, in part, upon net realized capital gains on our
investments. Unlike the portion of the incentive fee based on
net investment income, there is no hurdle rate applicable to the
portion of the incentive fee based on net capital gains. As a
result, our Advisor may have an incentive to pursue investments
that are likely to result in capital gains as compared to income
producing securities. Such a practice could result in our
investing in more speculative or long term securities than would
otherwise be the case, which could result in higher investment
losses, particularly during economic downturns or longer return
cycles.
We may be required to pay an incentive fee even in a fiscal
quarter in which we have incurred a loss. For example, if we
have
pre-incentive
fee net investment income above the hurdle rate and realized
capital losses, we will be required to pay the investment income
portion of the incentive fee.
The investment income portion of the incentive fee payable by us
will be computed and paid on income that may include interest
that has been accrued but not yet received in cash, and the
collection of which is uncertain or deferred. If a portfolio
company defaults on a loan that is structured to provide accrued
interest, it is possible that accrued interest previously used
in the calculation of the investment income portion of the
incentive fee will become uncollectible. Our Advisor will not be
required to reimburse us for any such incentive fee payments.
Our
Advisor has no experience in managing a BDC.
Our Advisor has no experience in establishing, managing or
serving as investment advisor to a BDC. Additionally, the time
required to maintain a BDC could distract our Advisor from its
other duties. See Regulation.
If we
distribute substantially all of our income to our stockholders,
we will continue to need additional capital to finance our
growth. If additional funds are unavailable or not available on
favorable terms, our ability to grow and execute our business
plan will be impaired.
Our business will require a substantial amount of capital in
addition to the proceeds of this offering if we distribute
substantially all of our income to our stockholders and we are
to grow. We have entered into a secured revolving credit
facility and intend to use a portion of the proceeds of this
offering to repay the outstanding balance of that credit
facility. The credit facility will not be available to us for
future borrowings for a period of 120 days following the
completion of this offering unless the lender waives the terms
of the credit facility. We may acquire additional capital from
the issuance of securities senior to our common shares,
including additional borrowings or other indebtedness or the
issuance of additional securities. We may also acquire
additional capital through the issuance of additional equity.
However, we may not be able to raise additional capital in the
future on favorable terms or at all. Our credit facility
contains a covenant precluding us from incurring additional
debt. We may issue debt securities, other instruments of
indebtedness or preferred stock, and we intend to borrow money
from banks or other financial institutions, which we refer to
collectively as senior securities, up to the maximum
amount permitted by the 1940 Act. The 1940 Act permits us to
19
issue senior securities in amounts such that our asset coverage,
as defined in the 1940 Act, equals at least 200% after each
issuance of senior securities. Our ability to pay distributions
or issue additional senior securities is restricted if our asset
coverage ratio is not at least 200%, or put another way, the
value of our assets (less all liabilities and indebtedness not
represented by senior securities) must be at least twice that of
any outstanding senior securities (plus the aggregate
involuntary liquidation preference of any preferred stock). If
the value of our assets declines, we may be unable to satisfy
this test. If that happens, we may be required to liquidate a
portion of our investments and repay a portion of our
indebtedness at a time when such sales may be disadvantageous.
As a result of issuing senior securities, we will also be
exposed to typical risks associated with leverage, including
increased risk of loss. If we issue preferred securities which
will rank senior to our common shares in our capital
structure, the holders of such preferred securities may have
separate voting rights and other rights, preferences or
privileges more favorable than those of our common shares, and
the issuance of such preferred securities could have the effect
of delaying, deferring or preventing a transaction or a change
of control that might involve a premium price for
securityholders or otherwise be in our best interest.
To the extent our ability to issue debt or other senior
securities is constrained, we will depend on issuances of
additional common shares to finance our operations. As a BDC, we
generally will not be able to issue additional common shares at
a price below net asset value (net of any sales load
(underwriting discount)) without first obtaining required
approvals of our stockholders and our independent directors
which could constrain our ability to issue additional equity.
Our stockholders granted us the authority to sell our common
shares below net asset value, subject to certain conditions.
This authority extends through our 2008 annual meeting,
currently expected to occur in April 2008. If we raise
additional funds by issuing more of our common shares or senior
securities convertible into, or exchangeable for, our common
shares, the percentage ownership of our stockholders at that
time would decrease, and you may experience dilution.
As a
BDC, we will be subject to limitations on our ability to engage
in certain transactions with affiliates.
As a BDC, we will be prohibited under the 1940 Act from
knowingly participating in certain transactions with our
affiliates without the prior approval of our independent
directors or the SEC. Any person that owns, directly or
indirectly, 5% or more of our outstanding voting securities is
our affiliate for purposes of the 1940 Act and we are generally
prohibited from buying or selling any security from or to such
affiliate, absent the prior approval of our independent
directors. The 1940 Act also prohibits joint
transactions with an affiliate, which could include investments
in the same portfolio company (whether at the same or different
times), without prior approval of our independent directors. If
a person acquires more than 25% of our voting securities, we
will be prohibited from buying or selling any security from or
to such person, or entering into joint transactions with such
person, absent the prior approval of the SEC. Our Advisor and
TYG have previously applied to the SEC for exemptive relief to
permit TYG, TYY, TYN and other clients of our Advisor, including
us, to co-invest in negotiated private placements of securities.
Unless and until such an exemptive order is obtained, we will
not co-invest with affiliates in negotiated private placement
transactions.
If our
investments are deemed not to be qualifying assets, we could
lose our status as a BDC or be precluded from investing
according to our current business plan.
As a BDC, we must not acquire any assets other than
qualifying assets unless, at the time of and after
giving effect to such acquisition, at least 70% of our total
assets are qualifying assets. If our investments are deemed not
to be qualifying assets, our status as a BDC may be jeopardized
or we may be precluded from investing in the manner described in
this prospectus, either of which would have a material adverse
effect on our business, financial condition and results of
operations. We also may be required to dispose of investments,
which could have a material adverse effect on us and our
stockholders, because even if we were successful in finding a
buyer, we may have difficulty in finding a buyer to purchase
such investments on favorable terms or in a sufficient time
frame. As of January 16, 2006, approximately
$16.6 million, or approximately 23%, of our investments are
not qualifying assets.
20
We may
choose to invest a portion of our portfolio in investments that
may be considered highly speculative and that could negatively
impact our ability to pay distributions and cause you to lose
part of your investment.
The 1940 Act permits a BDC to invest up to 30% of its assets in
investments that do not meet the test for qualifying
assets. Such investments may be made by us with the
expectation of achieving a higher rate of return or increased
cash flow with a portion of our portfolio and may fall outside
of our targeted investment criteria. These investments may be
made even though they may expose us to greater risks than our
other investments and may consequently expose our portfolio to
more significant losses than may arise from our other
investments. We may invest up to 30% of our total assets in
assets that are non qualifying assets in among other things,
high yield bonds, bridge loans, distressed debt, commercial
loans, private equity, securities of public companies or
secondary market purchases of securities of target portfolio
companies. Such investments could impact negatively our ability
to pay you distributions and cause you to lose part of your
investment.
Our
debt increases the risk of investing in us.
On December 13, 2006, we entered into a $15.0 million
secured revolving credit facility with U.S. Bank. On
January 17, 2007, the credit facility was amended to permit
us to borrow up to $20.0 million. As of January 17,
2007, we had borrowed approximately $11.5 million under the
credit facility. Our credit facility currently precludes us from
incurring additional debt and we may face liquidity constraints
as a result. We may in the future incur incremental debt to
increase our ability to make investments. Lenders from whom we
may borrow money or holders of our debt securities will have
fixed dollar claims on our assets that are superior to the
claims of our stockholders, and we have and may grant a security
interest in our assets in connection with our debt. In the case
of a liquidation event, those lenders or note holders would
receive proceeds before our stockholders. In addition, debt,
also known as leverage, magnifies the potential for gain or loss
on amounts invested and, therefore, increases the risks
associated with investing in our securities. Leverage is
generally considered a speculative investment technique and the
costs of any leverage transactions will be borne by our
stockholders. In addition, because the base management fee we
pay to our Advisor is based on Managed Assets (which includes
any assets purchased with borrowed funds), our Advisor may
imprudently borrow funds in an attempt to increase our managed
assets and in conflict with our or our stockholders best
interests. If the value of our assets increases, then leveraging
would cause the net asset value attributable to our common
shares to increase more than it otherwise would have had we not
leveraged. Conversely, if the value of our assets decreases,
leveraging would cause the net asset value attributable to our
common shares to decline more than it otherwise would have had
we not leveraged. Similarly, any increase in our revenue in
excess of interest expense on our borrowed funds would cause our
net income to increase more than it would without the leverage.
Any decrease in our revenue would cause our net income to
decline more than it would have had we not borrowed funds and
could negatively affect our ability to make distributions on our
common shares. Our ability to service any debt that we incur
will depend largely on our financial performance and the
performance of our portfolio companies and will be subject to
prevailing economic conditions and competitive pressures.
Illustration. The following table illustrates
the effect of leverage on returns from an investment in our
common shares assuming various annual returns, net of expenses.
The calculations in the table below are hypothetical and actual
returns may be higher or lower than those appearing in the table
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Return on our Portfolio
|
|
|
|
(net of expenses)
|
|
|
|
-10%
|
|
|
-5%
|
|
|
0%
|
|
|
5%
|
|
|
10%
|
|
|
Corresponding return to
stockholder(1)
|
|
|
(16.5
|
)%
|
|
|
(10.4
|
)%
|
|
|
(4.3
|
)%
|
|
|
1.8
|
%
|
|
|
7.9
|
%
|
|
|
|
(1) |
|
Assumes $179,801,352 in total assets, $44,950,338 in debt
outstanding, $134,429,564 in stockholders equity and an
average cost of funds of 7.0%. Actual interest payments may be
different. |
21
We
operate in a highly competitive market for investment
opportunities.
We compete with public and private funds, commercial and
investment banks and commercial financing companies to make the
types of investments that we plan to make in the U.S. energy
infrastructure sector. Many of our competitors are substantially
larger and have considerably greater financial, technical and
marketing resources than us. For example, some competitors may
have a lower cost of funds and access to funding sources that
are not available to us. In addition, some of our competitors
may have higher risk tolerances or different risk assessments,
allowing them to consider a wider variety of investments and
establish more relationships than us. Furthermore, many of our
competitors are not subject to the regulatory restrictions that
the 1940 Act would impose on us as a result of our election to
be regulated as a BDC.
We may
not be able to invest the proceeds of this offering as quickly
as expected in the energy infrastructure sector, and our interim
investments will generate lower rates of return.
We anticipate that it may take six to nine months to invest
substantially all of the net proceeds of this offering in
securities meeting our investment objective. Pending investment,
we expect the proceeds of this offering will be invested in
cash, cash equivalents, U.S. government securities and
other high quality debt instruments that mature within one year
or less from the date of investment. As our temporary
investments may generate lower projected returns than our core
investment strategy, we may experience lower returns during this
period and may not be able to pay distributions during this
period comparable to the distributions that we may be able to
pay when the net proceeds of this offering are fully invested in
securities meeting our investment objective. See Use of
Proceeds.
We may
allocate the net proceeds from this offering in ways with which
you may not agree.
We will have significant flexibility in investing the net
proceeds of this offering and may use the net proceeds from this
offering in ways with which investors may not agree or for
purposes other than those contemplated at the time of this
offering or that are not consistent with our targeted investment
characteristics.
We
have not identified specific investments in which to invest all
of the proceeds of this offering.
As of the date of this prospectus, we have not entered into
definitive agreements for any specific investments in which to
invest the net proceeds of this offering; however, we intend to
use the proceeds of this offering to redeem the preferred stock
issued in our bridge financing and to repay the outstanding
balance of our credit facility. As a result, you will not be
able to evaluate the economic merits of investments we make with
the net proceeds of this offering prior to your purchase of
common shares in this offering.
Our
quarterly results may fluctuate.
We could experience fluctuations in our quarterly operating
results due to a number of factors, including the return on our
equity investments, the interest rates payable on our debt
investments, the default rates on such investments, the level of
our expenses, variations in and the timing of the recognition of
realized and unrealized gains or losses, the degree to which we
encounter competition in our markets and general economic
conditions. As a result of these factors, results for any period
should not be relied upon as being indicative of performance in
future periods.
Our
portfolio may be concentrated in a limited number of portfolio
companies.
We currently have investments in a limited number of portfolio
companies. One or two of our portfolio companies may constitute
a significant percentage of our total portfolio. An inherent
risk associated with this investment concentration is that we
may be adversely affected if one or two of our investments
perform poorly or if we need to write down the value of any one
investment. Financial difficulty on the part of any single
portfolio company will expose us to a greater risk of loss than
would be the case if we were a diversified company
holding numerous investments.
22
Our
anticipated investments in privately-held companies present
certain challenges, including the lack of available information
about these companies and a greater inability to liquidate our
investments in an advantageous manner.
We primarily make investments in privately-held companies.
Generally, little public information will exist about these
companies, and we will be required to rely on the ability of our
Advisor to obtain adequate information to evaluate the potential
risks and returns involved in investing in these companies. If
our Advisor is unable to obtain all material information about
these companies, including with respect to operational,
regulatory, environmental, litigation and managerial risks, our
Advisor may not make a fully-informed investment decision, and
we may lose some or all of the money invested in these
companies. In addition, our Advisor may inappropriately value
the prospects of an investment, causing us to overpay for such
investment and fail to receive an expected or projected return
on its investment. Substantially all of these securities will be
subject to legal and other restrictions on resale or will
otherwise be less liquid than publicly traded securities. The
illiquidity of these investments may make it difficult for us to
sell such investments at advantageous times and prices or in a
timely manner. In addition, if we are required to liquidate all
or a portion of our portfolio quickly, we may realize
significantly less than the value at which we previously have
recorded our investments. We also may face other restrictions on
our ability to liquidate an investment in a portfolio company to
the extent that we or one of our affiliates have material
non-public information regarding such portfolio company.
Most
of our portfolio investments are and will continue to be
recorded at fair value as determined in good faith by our board
of directors. As a result, there is and will continue to be
uncertainty as to the value of our portfolio
investments.
Most of our investments are and will be in the form of
securities or loans that are not publicly traded. The fair value
of these investments may not be readily determinable. We will
value these investments quarterly at fair value as determined in
good faith by our board of directors. Our board of directors has
retained Duff & Phelps, LLC, an independent valuation firm,
to provide valuation assistance to the board of directors, if
they so request, in connection with assessing whether the fair
value determinations made by the investment committee of our
Advisor are unreasonable. The types of factors that may be
considered in fair value pricing of an investment include the
nature and realizable value of any collateral, the portfolio
companys earnings and ability to make payments, the
markets in which the portfolio company does business, comparison
to publicly traded companies, discounted cash flow and other
relevant factors. Because such valuations are inherently
uncertain, our determinations of fair value may differ
materially from the values that would have been used if a ready
market for these securities existed. As a result, we may not be
able to dispose of our holdings at a price equal to or greater
than the determined fair value, which could have a negative
impact our net asset value.
Our
equity investments may decline in value.
The equity securities in which we invest may not appreciate or
may decline in value. We may thus not be able to realize gains
from our equity securities, and any gains that we do realize on
the disposition of any equity securities may not be sufficient
to offset any other losses we experience. As a result, the
equity securities in which we invest may decline in value, which
may negatively impact our ability to pay distributions and cause
you to lose all or part of your investment.
Unrealized
decreases in the value of debt investments in our portfolio may
impact the value of our common shares and may reduce our income
for distribution.
As a BDC, we will be required to carry our investments at market
value or, if no market value is ascertainable, at the fair value
as determined in good faith by our board of directors. Decreases
in the market values or fair values of our debt investments will
be recorded as unrealized depreciation. Any unrealized
depreciation in our investment portfolio could be an indication
of a portfolio companys inability to meet its obligations
to us with respect to the loans whose market values or fair
values decreased. This could result in
23
realized losses in the future and ultimately in reductions of
our income available for distribution in future periods.
When
we are a minority equity or a debt investor investor in a
portfolio company, we may not be in a position to control that
portfolio company.
When we make minority equity investments or invest in debt, we
will be subject to the risk that a portfolio company may make
business decisions with which we may disagree, and that the
stockholders and management of such company may take risks or
otherwise act in ways that do not serve our interests. As a
result, a portfolio company may make decisions that could
decrease the value of our investments.
Our
portfolio companies may incur debt that ranks equally with, or
senior to, our investments in such companies.
Portfolio companies in which we intend to invest usually will
have, or may be permitted to incur, debt that ranks senior to,
or equally with, our investments, including debt investments. As
a result, payments on such securities may have to be made before
we receive any payments on our investments. For example, these
debt instruments may provide that the holders are entitled to
receive payment of interest or principal on or before the dates
on which we are entitled to receive payments with respect to our
investments. These debt instruments will usually prohibit the
portfolio companies from paying interest on or repaying our
investments in the event and during the continuance of a default
under such debt. In the event of insolvency, liquidation,
dissolution, reorganization or bankruptcy of a portfolio
company, holders of debt instruments ranking senior to our
investment in that portfolio company would typically be entitled
to receive payment in full before we receive any distribution in
respect of our investment. After repaying its senior creditors,
a portfolio company may not have any remaining assets to use to
repay its obligation to us or provide a full or even partial
return of capital on an equity investment made by us. In the
case of debt ranking equally with our investments, we would have
to share on an equal basis any distributions with other
creditors holding such debt in the event of an insolvency,
liquidation, dissolution, reorganization or bankruptcy of the
relevant portfolio company.
If our
investments do not meet our performance expectations, you may
not receive distributions.
We intend to make distributions on a quarterly basis to our
stockholders out of assets legally available for distribution.
We may not be able to achieve operating results that will allow
us to make distributions at a specific level or to increase the
amount of these distributions from time to time. In addition,
due to the asset coverage test applicable to us as a BDC, we may
be limited in our ability to make distributions. See
Regulation. Also, restrictions and provisions in any
future credit facilities and debt securities may limit our
ability to make distributions. We cannot assure you that you
will receive distributions at a particular level or at all.
The
lack of liquidity in our investments may adversely affect our
business, and if we need to sell any of our investments, we may
not be able to do so at a favorable price. As a result, we may
suffer losses.
We generally expect to invest in the equity of companies whose
securities are not publicly traded, and whose securities will be
subject to legal and other restrictions on resale or will
otherwise be less liquid than publicly-traded securities. We
also expect to invest in debt securities with terms of five to
ten years and hold such investments until maturity. The
illiquidity of these investments may make it difficult for us to
sell these investments when desired. In addition, if we are
required to liquidate all or a portion of our portfolio quickly,
we may realize significantly less than the value at which we had
previously recorded these investments. As a result, we do not
expect to achieve liquidity in our investments in the near-term.
However, to maintain our status as a BDC, we may have to dispose
of investments if we do not satisfy one or more of the
applicable criteria under the regulatory framework. Our
investments are usually subject to contractual or legal
restrictions on resale or are otherwise illiquid because there
is usually no established trading market for such investments.
The illiquidity of most of our investments may make it difficult
for us to dispose of them at a favorable price, and, as a
result, we may suffer losses.
24
We
will be exposed to risks associated with changes in interest
rates.
Equity securities may be particularly sensitive to rising
interest rates, which generally increase borrowing costs and the
cost of capital and may reduce the ability of portfolio
companies in which we own equity securities to both execute
acquisitions or expansion projects in a cost-effective manner or
provide us liquidity by completing an initial public offering or
completing a sale. Fluctuations in interest rates will also
impact any debt investments we make. Changes in interest rates
may also negatively impact the costs of our outstanding
borrowings, if any.
We may
not have the funds to make additional investments in our
portfolio companies.
After our initial investment in a portfolio company, we may be
called upon from time to time to provide additional funds to
such company or have the opportunity to increase our investment
through the exercise of a warrant to purchase common stock.
There is no assurance that we will make, or will have sufficient
funds to make, follow-on investments. Any decisions not to make
a follow-on investment or any inability on our part to make such
an investment may have a negative impact on a portfolio company
in need of such an investment, may result in a missed
opportunity for us to increase our participation in a successful
operation or may reduce the expected yield on the investment.
If a
wholly-owned subsidiary of ours becomes licensed by the U.S.
Small Business Administration, we, and that subsidiary, will be
subject to SBA regulations.
We are currently seeking qualification as a small business
investment company (SBIC) for a to-be-formed
wholly-owned subsidiary which will be regulated by the U.S.
Small Business Administration (SBA). To the extent
we or one of our subsidiaries receives such qualification, we
will become subject to SBA regulations that may constrain our
activities or the activities of one of our subsidiaries. We may
need to make allowances in our investment activity or the
investment activity of our subsidiaries to comply with SBA
regulations. Failure to comply with the SBA regulations could
result in the loss of the SBIC license and the resulting
inability to participate in the SBA-sponsored debenture program.
The SBA also imposes a limit on the maximum amount that may be
borrowed by any single SBIC. The SBA prohibits, without prior
SBA approval, a change of control of a SBIC or
transfers that would result in any person (or a group of persons
acting in concert) owning 10% or more of a class of capital
stock of a licensed SBIC.
Changes
in laws or regulations or in the interpretations of laws or
regulations could significantly affect our operations and cost
of doing business.
We are subject to federal, state and local laws and regulations
and are subject to judicial and administrative decisions that
affect our operations, including loan originations, maximum
interest rates, fees and other charges, disclosures to portfolio
companies, the terms of secured transactions, collection and
foreclosure procedures and other trade practices. If these laws,
regulations or decisions change, we may have to incur
significant expenses in order to comply, or we may have to
restrict our operations. In addition, if we do not comply with
applicable laws, regulations and decisions, or fail to obtain
licenses that may become necessary for the conduct of our
business, we may be subject to civil fines and criminal
penalties, any of which could have a material adverse effect
upon our business, results of operations or financial condition.
Our
internal controls over financial reporting may not be adequate,
and our independent auditors may not be able to certify as to
their adequacy, which could have a significant and adverse
effect on our business and reputation.
We are evaluating our internal controls over financial
reporting. We plan to design enhanced processes and controls to
address any issues that might be identified. As a result, we
expect to incur significant additional expenses in the near
term, which will negatively impact our financial performance and
our ability to make distributions. This process also will result
in a diversion of managements time and attention. We
cannot be certain as to the timing of completion of our
evaluation, testing and remediation actions or the impact of the
same on our operations and may not be able to ensure that the
process is effective or that the internal
25
controls are or will be effective in a timely manner. Beginning
with our annual report for our fiscal year ended
November 30, 2008, our management will be required to
report on our internal controls over financial reporting
pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
and rules and regulations of the SEC thereunder. We will be
required to review on an annual basis our internal controls over
financial reporting, and to disclose on a quarterly basis
changes that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial
reporting. There can be no assurance that we will successfully
identify and resolve all issues required to be disclosed prior
to becoming a public company or that our quarterly reviews will
not identify additional material weaknesses.
Risks
Related to an Investment in the U.S. Energy Infrastructure
Sector
Our
portfolio is and will continue to be concentrated in the energy
infrastructure sector, which will subject us to more risks than
if we were broadly diversified.
We invest primarily in privately-held and micro-cap public
energy companies. Because we are specifically focused on the
energy infrastructure sector, investments in our common shares
may present more risks than if we were broadly diversified over
numerous sectors of the economy. Therefore, a downturn in the
U.S. energy infrastructure sector would have a larger
impact on us than on an investment company that does not
concentrate in one sector of the economy. The energy
infrastructure sector can be significantly affected by the
supply of and demand for specific products and services; the
supply and demand for crude oil, natural gas, and other energy
commodities; the price of crude oil, natural gas, and other
energy commodities; exploration, production and other capital
expenditures; government regulation; world and regional events
and economic conditions. At times, the performance of securities
of companies in the energy infrastructure sector may lag the
performance of securities of companies in other sectors or the
broader market as a whole.
The
portfolio companies in which we invest are subject to variations
in the supply and demand of various energy
commodities.
A decrease in the production of natural gas, natural gas
liquids, crude oil, coal, refined petroleum products or other
energy commodities, or a decrease in the volume of such
commodities available for transportation, mining, processing,
storage or distribution, may adversely impact the financial
performance of companies in the energy infrastructure sector.
Production declines and volume decreases could be caused by
various factors, including catastrophic events affecting
production, depletion of resources, labor difficulties,
political events, OPEC actions, environmental proceedings,
increased regulations, equipment failures and unexpected
maintenance problems, failure to obtain necessary permits,
unscheduled outages, unanticipated expenses, inability to
successfully carry out new construction or acquisitions, import
supply disruption, increased competition from alternative energy
sources or related commodity prices. Alternatively, a sustained
decline in demand for such commodities could also adversely
affect the financial performance of companies in the energy
infrastructure sector. Factors that could lead to a decline in
demand include economic recession or other adverse economic
conditions, higher fuel taxes or governmental regulations,
increases in fuel economy, consumer shifts to the use of
alternative fuel sources, changes in commodity prices or weather.
Many
companies in the energy infrastructure sector are subject to the
risk that they, or their customers, will be unable to replace
depleted reserves of energy commodities.
Many companies in the energy infrastructure sector are either
engaged in the production of natural gas, natural gas liquids,
crude oil, refined petroleum products or coal, or are engaged in
transporting, storing, distributing and processing these items
on behalf of producers. To maintain or grow their revenues, many
customers of these companies need to maintain or expand their
reserves through exploration of new sources of supply, through
the development of existing sources, through acquisitions, or
through long-term contracts to acquire reserves. The financial
performance of companies in the energy infrastructure sector may
be adversely affected if the companies to which they provide
service are unable to cost-effectively acquire additional
reserves sufficient to replace the natural decline.
26
Our
portfolio companies are and will be subject to extensive
regulation because of their participation in the energy
infrastructure sector.
Companies in the energy infrastructure sector are subject to
significant federal, state and local government regulation in
virtually every aspect of their operations, including how
facilities are constructed, maintained and operated,
environmental and safety controls, and the prices they may
charge for the products and services they provide. Various
governmental authorities have the power to enforce compliance
with these regulations and the permits issued under them, and
violators are subject to administrative, civil and criminal
penalties, including civil fines, injunctions or both. Stricter
laws, regulations or enforcement policies could be enacted in
the future that likely would increase compliance costs and may
adversely affect the financial performance of companies in the
energy infrastructure sector and the value of our investments in
those companies.
Our
portfolio companies are and will be subject to the risk of
fluctuations in commodity prices.
The operations and financial performance of companies in the
energy infrastructure sector may be directly affected by energy
commodity prices, especially those companies in the energy
infrastructure sector owning the underlying energy commodity.
Commodity prices fluctuate for several reasons, including
changes in market and economic conditions, the impact of weather
on demand or supply, levels of domestic production and imported
commodities, energy conservation, domestic and foreign
governmental regulation and taxation and the availability of
local, intrastate and interstate transportation systems.
Volatility of commodity prices, which may lead to a reduction in
production or supply, may also negatively impact the performance
of companies in the energy infrastructure sector that are solely
involved in the transportation, processing, storing,
distribution or marketing of commodities. Volatility of
commodity prices may also make it more difficult for companies
in the energy infrastructure sector to raise capital to the
extent the market perceives that their performance may be tied
directly or indirectly to commodity prices. Historically, energy
commodity prices have been cyclical and exhibited significant
volatility.
Our
portfolio companies are and will be subject to the risk of
extreme weather patterns.
Extreme weather patterns, such as hurricane Ivan in 2004 and
hurricanes Katrina and Rita in 2005, could result in significant
volatility in the supply of energy and power. This volatility
may create fluctuations in commodity prices and earnings of
companies in the energy infrastructure sector. Moreover, any
extreme weather patterns, such as hurricanes Katrina and Rita,
could adversely impact the assets and valuation of our portfolio
companies.
Acts
of terrorism may adversely affect us.
The value of our common shares and our investments could be
significantly and negatively impacted as a result of terrorist
activities, such as the terrorist attacks on the World Trade
Center on September 11, 2001; war, such as the war in Iraq
and its aftermath; and other geopolitical events, including
upheaval in the Middle East or other energy producing regions.
The U.S. government has issued warnings that energy assets,
specifically those related to pipeline infrastructure,
production facilities and transmission and distribution
facilities, might be specific targets of terrorist activity.
Such events have led, and in the future may lead, to short-term
market volatility and may have long-term effects on the
U.S. economy and markets. Such events may also adversely
affect our business and financial condition.
Risks
Related to this Offering
The
price of our common shares may be volatile and may decrease
substantially.
The trading price of our common shares following this offering
may fluctuate substantially. The price of the common shares that
will prevail in the market after this offering may be higher or
lower than the price you pay and the liquidity of our common
shares may be limited, in each case depending on many factors,
27
some of which are beyond our control and may not be directly
related to our operating performance. These factors include the
following:
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changes in the value of our portfolio of investments;
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price and volume fluctuations in the overall stock market from
time to time;
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significant volatility in the market price and trading volume of
securities of BDCs or other financial services companies;
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our dependence on the domestic energy infrastructure sector;
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our inability to deploy or invest our capital;
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fluctuations in interest rates;
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increases in the taxable portion of distributions we receive on
our equity investments;
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any shortfall in revenue or net income or any increase in losses
from levels expected by investors or securities analysts;
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operating performance of companies comparable to us;
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changes in regulatory policies with respect to BDCs;
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our ability to borrow money or obtain additional capital;
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losing BDC status;
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actual or anticipated changes in our earnings or fluctuations in
our operating results or changes in the expectations of
securities analysts;
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general economic conditions and trends; or
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departures of key personnel.
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Investing
in our common shares may involve an above average degree of
risk.
The investments we make may result in a higher amount of risk,
volatility or loss of principal than alternative investment
options. Our investments in portfolio companies may be highly
speculative and aggressive, and therefore, an investment in our
common shares may not be suitable for investors with lower risk
tolerance.
Prior
to this offering, there has been no public market for our common
shares, and we cannot assure you that the market price of our
common shares will not decline following the
offering.
Before this offering, there was no public trading market for our
common shares, and we cannot assure you that one will develop or
be sustained after this offering. We cannot predict the prices
at which our common shares will trade. The initial public
offering price for our common shares will be determined through
our negotiations with the underwriters and may not bear any
relationship to the market price at which it will trade after
this offering or to any other established criteria of our value.
Shares of companies offered in an initial public offering often
trade at a discount to the initial offering price due to sales
load (underwriting discount) and related offering expenses. In
addition, shares of closed-end investment companies have in the
past frequently traded at discounts to their net asset values
and our stock may also be discounted in the market. This
characteristic of closed-end investment companies is separate
and distinct from the risk that our net asset value per share
may decline. We cannot predict whether our common shares will
trade above, at or below our net asset value. The risk of loss
associated with this characteristic of closed-end investment
companies may be greater for investors expecting to sell common
shares purchased in this offering soon after the offering. In
addition, if our common shares trade below their net asset
value, we will generally not be able to issue additional common
shares at their market price without first obtaining the
approval of our stockholder and our independent directors to
such issuance.
28
Provisions
of the Maryland General Corporation Law and our charter and
bylaws could deter takeover attempts and have an adverse impact
on the price of our common shares.
The Maryland General Corporation Law and our charter and bylaws
contain provisions that may have the effect of discouraging,
delaying or making difficult a change in control of our company
or the removal of our incumbent directors. We will be covered by
the Business Combination Act of the Maryland General Corporation
Law to the extent that such statute is not superseded by
applicable requirements of the 1940 Act. However, our board of
directors has adopted a resolution exempting us from the
Business Combination Act for any business combination between us
and any person to the extent that such business combination
receives the prior approval of our board, including a majority
of our directors who are not interested persons as defined in
the 1940 Act.
Under our charter, our board of directors is divided into three
classes serving staggered terms, which will make it more
difficult for a hostile bidder to acquire control of us. In
addition, our board of directors may, without stockholder
action, authorize the issuance of shares of stock in one or more
classes or series, including preferred stock. See
Description of Capital Stock. Subject to compliance
with the 1940 Act, our board of directors may, without
stockholder action, amend our charter to increase the number of
shares of stock of any class or series that we have authority to
issue. The existence of these provisions, among others, may have
a negative impact on the price of our common shares and may
discourage third party bids for ownership of our company. These
provisions may prevent any premiums being offered to you for our
common shares.
If a
substantial number of our common shares becomes available for
sale and is sold in a short period of time, the market price of
our common shares could decline.
If our stockholders sell substantial amounts of our common
shares in the public market following this offering, the market
price of our common shares could decrease. Upon completion of
this offering we will have 9,540,209 common shares
outstanding. Of these shares, the shares sold in this offering
will be freely tradeable. We and our executive officers and
directors will be subject to agreements with the underwriters
that restrict our and their ability to transfer our stock for a
period of 180 days from the date of this prospectus. The
180-day
restricted period will be automatically extended if
(1) during the last 17 days of the
180-day
restricted period the Company issues an earning release to
material news or a material event relating to the Company occurs
or (2) prior to the expiration of the
180-day
restricted period, the Company announces that it will release
earnings results or becomes aware that material news or a
material event will occur during the
16-day
period beginning on the last day of the
180-day
restricted period, in which case the restrictions described
above will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event. Our other
current stockholders, other than holders of recently issued
warrants exercisable into 185,006 of our common shares, will be
subject to agreements that restrict their ability to transfer
our stock for a period of 90 days from the date of this
offering, subject to limited exceptions. See
Shares Eligible for Future Resale and
Underwriting. After the
lock-up
agreements expire, an aggregate of 2,398,586 additional
common shares will be eligible for sale in the public market in
accordance with Rule 144 under the Securities Act. See
Shares Eligible for Future Sale.
If you
purchase our common shares in this offering, you will experience
immediate dilution.
If you purchase our common shares in this offering, you will
experience immediate dilution of $1.41 per share because
the price that you pay will be greater than the pro forma net
asset value per share of the shares you acquire. This dilution
is in large part due to the expenses incurred by us in
connection with the consummation of this offering and the fact
that our earlier investors paid, on average, less than the
initial public offering price per share when they purchased
their shares.
29
There
will be dilution of the value of our common shares when the
warrants are exercised or if we issue common shares below our
net asset value.
As a result of our private placement completed in January 2006
and our bridge financing completed in December
2006, warrants were issued permitting the holders thereof
to acquire 957,130 of our common shares upon payment of the
exercise price. The warrants we have issued represent the right
to purchase, in the aggregate, approximately 10.0% of our common
shares upon completion of this offering. These warrants will
become exercisable upon the completion of this offering of our
common shares. The issuance of additional common shares upon the
exercise of the warrants, if the warrants are exercised at a
time when the exercise price is less than the net asset value
per share of our common shares, will have a dilutive effect on
the value of our common shares sold in this offering. In
addition, if we sell our common shares below net asset value,
our net asset value will decrease immediately following such
issuance. Our stockholders granted us authority to sell our
common shares below net asset value, subject to certain
conditions. This authority extends through our 2008 annual
meeting, currently expected to occur in April 2008.
30
ELECTION
TO BE REGULATED AS A BUSINESS DEVELOPMENT COMPANY
We will elect to be regulated as a BDC under the 1940 Act and
have, since the completion of our private placement in January
2006, been investing as if we were a BDC. There can be no
assurance that we will be successful in maintaining our status
as a BDC.
Our intended election to be regulated as a BDC will require
certain actions and effect a number of changes to our activities
and policies.
Investment
Reporting
In accordance with the requirements of Article 6 of
Regulation S-X,
we will report all of our investments, including loans, at
market value or, for investments that do not have a readily
available market value, their fair value as
determined in good faith by our board of directors. Subsequent
changes in these values will be reported through our statement
of operations under the caption of unrealized appreciation
(depreciation) on investments. See Determination of
Net Asset Value.
Distributions
Policy
We intend, subject to adjustment in the discretion of our board
of directors, to pay out substantially all of the amounts we
receive as cash or
paid-in-kind
distributions on equity securities we own and interest payments
on debt securities we own, less current or anticipated operating
expenses, current income taxes on our income and our leverage
costs. On August 4, 2006, our board of directors declared a
$0.05 per common share special distribution and a
$0.09 per common share quarterly distribution. Both
distributions were paid to stockholders on September 1,
2006. On November 30, 2006, our board of directors declared
and paid a $0.20 per common share quarterly distribution.
We anticipate making, for our first fiscal quarter this year, a
distribution of $0.10 per common share to our current
stockholders immediately following the completion of this
offering. We anticipate that our next declared quarterly
distribution following this offering will be paid on or about
May 31, 2007.
See Distributions and Managements
Discussion and Analysis of Financial Condition and Results of
Operation Determining Distributions to
Stockholders.
Warrants
Our outstanding warrants are exercisable upon the completion of
this offering, subject to a
lock-up
period with respect to common shares received upon exercise of
warrants of 90 calendar days immediately following this
offering. Each warrant will entitle the holder thereof to
purchase one common share at the exercise price per common share
of the greater of (i) $15.00 per common share or
(ii) the net asset value of our common shares on the date
of our election to become a BDC. All warrants will expire on the
day before the sixth anniversary of this offering. No fractional
warrant shares will be issued upon exercise of the warrants. We
will pay to the holder of the warrant at the time of exercise an
amount in cash equal to the current market value of any such
fractional warrant shares. Our stockholders ratified the
warrants issued in connection with our bridge financing and
granted us the authority to issue additional warrants to
purchase common shares, subject to certain conditions, at a
special meeting held on January 4, 2007.
Exemptive
Relief
Our Advisor and TYG have applied to the SEC for exemptive relief
to permit TYG, TYY, TYN, us and our and their respective
affiliates to take certain actions that otherwise would be
prohibited by the 1940 Act. Unless and until we obtain an
exemptive order, we will not co-invest with our affiliates in
negotiated private placement transactions. We cannot guarantee
that the requested relief will be granted by the SEC. Unless and
until we obtain an exemptive order, our Advisor will not
co-invest its proprietary accounts or other clients assets
in negotiated private transactions in which we invest. Until we
receive exemptive relief, our Advisor will observe a policy for
allocating opportunities among its clients that takes into
account the amount of each clients available cash and its
investment objectives. As a result of one or more of these
situations, we may not be able to invest as much as we otherwise
would in certain investments or may not be able to liquidate a
position as quickly.
31
USE OF
PROCEEDS
The net proceeds of this offering (assuming the mid-point of the
range on the front cover of this prospectus) will be
approximately $92.4 million after deducting both the sales
load (underwriting discount) and estimated offering expenses,
totalling $7.6 million, paid by us. We will use
approximately $18.9 million of the net proceeds to redeem
the preferred stock issued in our bridge financing, as required
by its terms, approximately $11.5 million of the net
proceeds to repay the outstanding balance of our secured
revolving credit facility with U.S. Bank, and the remainder of
the net proceeds to make investments in accordance with our
investment objective and for temporary working capital needs.
The funds we borrow under the credit facility accrue interest at
a rate equal to 1.75% plus the one month LIBOR quoted by
U.S. Bank from Telerate Page 3750, which interest rate
was 7.08% as of January 17, 2007. The credit facility
expires on December 12, 2007. We anticipate that
substantially all of the net proceeds of this offering will be
used, as described above, within six to nine months; however, it
could take a longer time to invest substantially all of the net
proceeds. We have not allocated any portion of the net proceeds
of this offering to any particular investment.
Pending investment, we expect the net proceeds of this offering
will initially be invested in cash, cash equivalents,
U.S. government securities and other high-quality debt
investments that mature in one year or less from the date of
investment.
DISTRIBUTIONS
On August 4, 2006, our board of directors declared a
$0.05 per common share special distribution and a
$0.09 per common share quarterly distribution. The special
distribution was declared for the period from our inception
through our second fiscal quarter and the quarterly distribution
was declared for our third fiscal quarter. Both distributions
were paid to stockholders on September 1, 2006. On
November 30, 2006, our board of directors declared and paid
a $0.20 per common share quarterly distribution. We anticipate
making, for our first fiscal quarter this year, a distribution
of $0.10 per common share to our current stockholders
immediately following the completion of this offering. We
anticipate that our next declared quarterly distribution
following this offering, will be paid on or about May 31,
2007.
We intend, subject to adjustment in the discretion of our board
of directors, to pay out substantially all of the amounts we
receive as recurring cash or
paid-in-kind
distributions on equity securities we own and interest payments
on debt securities we own, less current or anticipated operating
expenses, current income taxes on our income and our leverage
costs.
We intend to have an opt out dividend reinvestment
plan following the completion of this offering. As a result,
after the plan is effective, unless a stockholder opts out,
distributions will be reinvested in our common shares pursuant
to our dividend reinvestment plan. See Certain
U.S. Federal Income Tax Considerations and
Dividend Reinvestment Plan. We anticipate that only
a portion of distributions we make on the common shares will be
treated as taxable dividend income to our stockholders. If you
are an individual citizen or resident of the United States or a
United States estate or trust for U.S. federal income tax
purposes and meet certain holding period and other applicable
requirements, the portion of such distributions treated as
taxable dividend income will be qualified dividend
income currently subject to a maximum 15% U.S. federal
income tax rate. See Certain U.S. Federal Income Tax
Considerations Taxation of U.S.
Stockholders.
As a BDC, we will be prohibited from paying distributions if
doing so would cause us to fail to maintain the asset coverage
ratios stipulated by the 1940 Act. Distributions also may be
limited by the terms of any of our borrowings. It is our
objective to invest our assets and structure our borrowings so
as to permit stable and consistently growing distributions.
However, there can be no assurances that we will achieve that
objective or that our results will permit the payment of any
cash distributions. For a more detailed discussion, see
Regulation. See also Certain U.S. Federal
Income Tax Considerations.
32
CAPITALIZATION
The following table sets forth (i) our actual
capitalization as of November 30, 2006, (ii) our
capitalization as adjusted to reflect our investments in Quest
Midstream Partners, LP and Millenium Midstream Partners, LP,
$11.5 million outstanding under our secured revolving credit
facility and the issuance of our Series A redeemable
preferred stock, and (iii) our capitalization as further
adjusted to reflect the effects of the sale of our common shares
in this offering at an assumed public offering price of $15.50
per share (the mid-point of the range of the public offering
price of our common shares on the front cover of this
prospectus), less the sales load (underwriting discounts) and
offering expenses payable by us, repayment of the outstanding
balance of our credit facility, and the redemption of our
Series A redeemable preferred stock. You should read this
table together with Use of Proceeds and our
statement of assets and liabilities included elsewhere in this
prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
As adjusted
|
|
|
As further adjusted
|
|
|
Short-term investments
|
|
$
|
5,431,414
|
|
|
$
|
431,409
|
|
|
$
|
62,349,416
|
|
Investments
|
|
|
37,144,100
|
|
|
|
72,144,100
|
(2)
|
|
|
72,144,100
|
(2)
|
Short-Term Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured line of credit facility
|
|
|
|
|
|
|
11,500,000
|
(3)
|
|
|
|
|
Preferred Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares, $0.001 par
value, 10,000,000 shares authorized; 0 shares issued
and outstanding actual; 1,233,333 issued and outstanding as
adjusted; 0 shares issued and outstanding as further
adjusted
|
|
|
|
|
|
|
18,499,995
|
(4)
|
|
|
|
|
Net Assets Applicable to Common
Stockholders Consist of
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants, no par value, 5,000,000
authorized; 772,124 issued and outstanding actual; 957,130
issued and outstanding as adjusted; 957,130 issued and
outstanding as further adjusted
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Capital Stock, $0.001 par
value, 100,000,000 shares authorized; 3,088,596 shares
issued and outstanding actual; 3,088,596 shares issued and
outstanding as adjusted; 9,540,209 shares issued and
outstanding as further adjusted(1)
|
|
|
3,089
|
|
|
|
3,089
|
|
|
|
9,541
|
|
Additional paid-in capital
|
|
|
42,122,550
|
|
|
|
42,122,550
|
|
|
|
134,516,100
|
|
Accumulated net investment loss,
net of income tax benefit
|
|
|
|
|
|
|
|
|
|
|
(298,840
|
)(5)
|
Accumulated realized loss, net of
income tax benefit
|
|
|
(906
|
)
|
|
|
(906
|
)
|
|
|
(906
|
)
|
Net unrealized gain on
investments, net of deferred tax expense
|
|
|
203,669
|
|
|
|
203,669
|
|
|
|
203,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to common
stockholders
|
|
$
|
42,328,402
|
|
|
$
|
42,328,402
|
|
|
$
|
134,429,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes common shares that may be issued pursuant to
underwriters overallotment option and that are issuable
upon the exercise of outstanding warrants.
|
|
(2)
|
Represents a $17,500,000 investment in Quest Midstream Partners,
LP and a $17,500,000 investment in Millennium Midstream
Partners, LP., each valued at its purchase price.
|
|
|
(3) |
Represents approximate amount outstanding as of January 17,
2007.
|
|
|
(4) |
Represents issuance of 1,233,333 Series A redeemable
preferred shares in our bridge financing completed in December
2006.
|
|
|
(5) |
Represents the after tax impact of the 2% redemption premium on
our Series A redeemable preferred stock and the costs of
the issuance of our Series A redeemable preferred stock.
|
33
DILUTION
Our net asset value as of November 30, 2006 was
approximately $42.3 million, or $13.70 per common
share. Net asset value per share represents the amount of our
total assets minus our total liabilities, divided by the
3,088,596 common shares that were outstanding on
November 30, 2006, excluding the effect of any warrants.
After giving effect to the sale of 6,451,613 common shares in
this offering at an assumed initial public offering price of
$15.50 per share (the mid-point of the range on the front cover
of this prospectus), deducting the sales load (underwriting
discount) and estimated offering expenses payable by us,
repayment of the outstanding balance of our credit facility, and
the redemption of our Series A redeemable preferred stock,
our net assets as of November 30, 2006 would have been
approximately $134.4 million, or $14.09 per share.
This represents an immediate increase in net asset value of
$0.39 per share to our existing stockholders and an immediate
dilution of $1.41 per share to new investors who purchase
common shares in the offering at the assumed initial public
offering price. The following table shows this immediate per
share dilution:
|
|
|
|
|
Assumed initial public offering
price per common share
|
|
$
|
15.50
|
|
Net asset value per common share
as of November 30, 2006, before giving effect to this
offering
|
|
$
|
13.70
|
|
Increase in net asset value per
common share attributable to investors in this offering
|
|
$
|
0.39
|
|
Net asset value per common share
after this offering
|
|
$
|
14.09
|
|
Dilution per common share to new
investors
|
|
$
|
1.41
|
|
|
|
|
|
|
The following table summarizes, as of November 30, 2006,
the number of common shares purchased, the total consideration
paid and the average price per share paid by existing
stockholders and to be paid by new investors purchasing common
shares in this offering, at an assumed initial public offering
price of $15.50 per share and before deducting the sales load
and estimated offering expenses payable by us. This table does
not assume the exercise of any outstanding warrants or the
exercise of the underwriters overallotment option.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Per Share
|
|
|
Existing stockholders
|
|
|
3,088,596
|
|
|
|
32
|
%
|
|
$
|
46,305,915
|
|
|
|
32
|
%
|
|
$
|
14.99
|
|
New investors
|
|
|
6,451,613
|
|
|
|
68
|
|
|
|
100,000,002
|
|
|
|
68
|
|
|
$
|
15.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,540,209
|
|
|
|
100
|
%
|
|
$
|
146,305,917
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To the extent the underwriters overallotment option is
exercised, or any outstanding warrants are exercised, there will
be further reduction in the percentage of our common shares held
by new investors.
The following table summarizes, as of November 30, 2006,
the same information set forth in the table above, except, that
the table below assumes the exercise of all outstanding warrants
at the price of $15.00 per share and the full exercise of
the underwriters overallotment option.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Per Share
|
|
|
Existing stockholders
|
|
|
4,045,726
|
|
|
|
35
|
%
|
|
$
|
60,662,865
|
|
|
|
35
|
%
|
|
$
|
14.99
|
|
New investors
|
|
|
7,419,354
|
|
|
|
65
|
|
|
|
114,999,988
|
|
|
|
65
|
|
|
$
|
15.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,465,080
|
|
|
|
100
|
%
|
|
$
|
175,662,853
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
our financial statements and related notes and other financial
information appearing elsewhere in this prospectus. In addition
to historical information, the following discussion and other
parts of this prospectus contain forward-looking information
that involves risks and uncertainties. Our actual results could
differ materially from those anticipated by such forward-looking
information due to the factors discussed under Risk
Factors, Forward-Looking Statements and
elsewhere in this prospectus.
Overview
We invest primarily in privately-held and micro-cap public
energy companies focused on the midstream and downstream
segments, and to a lesser extent the upstream segment. We
believe companies in the energy infrastructure sector generally
produce stable cash flows as a result of their fee-based
revenues and have limited direct commodity price risk. Our goal
is to provide our stockholders with a high level of total
return, with an emphasis on dividends and dividend growth. We
invest primarily in the equity securities of companies that we
expect to pay us distributions on a current basis and provide us
distribution growth.
We will elect to be regulated as a BDC under the 1940 Act. As a
BDC, we will be subject to numerous regulations and
restrictions. Unlike most investment companies, we are, and
intend to continue to be, taxed as a general business
corporation under the Code. See Certain U.S. Federal
Income Tax Considerations Federal Income
Taxation of the Company.
Critical
Accounting Policies
The financial statements included in this prospectus are based
on the selection and application of critical accounting
policies, which require management to make significant estimates
and assumptions. Critical accounting policies are those that are
both important to the presentation of our financial condition
and results of operations and require managements most
difficult, complex or subjective judgments. While our critical
accounting policies are discussed below, Note 2 in the
notes to our financial statements included in this prospectus
provides more detailed disclosure of all of our significant
accounting policies.
Valuation
of Portfolio Investments
We intend to invest primarily in illiquid securities that
generally will be subject to restrictions on resale, will have
no established trading market and will be valued on a quarterly
basis. Fair value is intended to be the amount for which an
investment could be exchanged in an orderly disposition over a
reasonable period of time between willing parties other than in
a forced liquidation or sale. Because of the inherent
uncertainty of valuation, the fair values of such investments,
which will be determined in accordance with procedures approved
by our board of directors, may differ materially from the values
that would have been used had a ready market existed for the
investments. See Determination of Net Asset Value.
Interest
and Fee Income Recognition
Interest income will be recorded on an accrual basis to the
extent that such amounts are expected to be collected. When
investing in instruments with an original issue discount or
payment-in-kind
interest, we will accrue interest income during the life of the
investment, even though we will not necessarily be receiving
cash as the interest is accrued. Commitment and facility fees
generally will be recognized as income over the life of the
underlying loan, whereas due diligence, structuring, transaction
service, consulting and management service fees for services
rendered to portfolio companies generally will be recognized as
income when services are rendered.
35
Security
Transactions and Investment Income Recognition
Security transactions will be accounted for on the date the
securities are purchased or sold (trade date). Realized gains
and losses will be reported on an identified cost basis.
Distributions received from our investments in limited
partnerships generally are comprised of ordinary income, capital
gains and return of capital from the limited partnerships. We
record investment income and return of capital based on
estimates made at the time such distributions are received. Such
estimates are based on information available from each limited
partnership and/or other industry sources. These estimates may
subsequently be revised based on information received from the
limited partnerships after their tax reporting periods are
concluded, as the actual character of these distributions are
not known until after our fiscal year-end.
Federal
and State Income Taxation
We, as a corporation, are obligated to pay federal and state
income tax on our taxable income. Our tax expense or benefit
will be included in the Statement of Operations based on the
component of income or gains (losses) to which such expense or
benefit relates. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
Portfolio
and Investment Activity
We were formed as a Maryland corporation on September 8,
2005, commenced business operations December 8, 2005,
completed a private placement of common shares and warrants on
January 9, 2006 and completed a private placement of our
Series A redeemable preferred stock and warrants in
December 2006. As of January 17, 2007, our investment
portfolio totaled $72.1 million, including equity
investments in six portfolio companies representing
approximately $67.6 million and a subordinated debt
investment in one portfolio company representing
$4.5 million.
In addition, as of January 17, 2007, we have entered into a
term sheet with a prospective new portfolio company for a
$15.0 million equity investment (of which we expect to
identify one or more other investors to invest up to
$7.0 million) in the midstream segment of the energy
infrastructure sector. In addition, our Advisors
investment committee has approved an additional
$0.5 million equity investment and an additional
$2.5 million debt investment in Mowood, LLC. These
investments are subject to finalization of our due diligence and
approval process, as well as negotiation of definitive
agreements with each prospective portfolio company and, as a
result, may not result in completed investments. See
Portfolio Companies.
Our investments are expected to range between $5.0 million
and $20.0 million per investment, although investment sizes
may be smaller or larger than this targeted range. We currently
expect our debt investments generally to have a term of five to
ten years and to bear interest at either a fixed or floating
rate.
Results
of Operations
Distributions
Received from Investments
We generate revenues in the form of capital gains and
distributions on distribution-paying equity securities,
warrants, options, or other equity interests that we have
acquired in our portfolio companies, and in the form of interest
payable on the debt investments that we hold. We intend to
acquire equity securities that pay cash distributions on a
recurring or customized basis. In some cases we may structure
equity investments to provide that distributions are not payable
in cash, or entirely in cash, but are instead payable in
securities of the issuer. We intend to structure any debt
investments to provide for quarterly interest payments. In
addition to the cash yields received on any loans we make, in
some instances such loans may also include any of the following:
end of term payments, exit fees, balloon payment fees or
prepayment fees, any of which may be required to be included in
our taxable income prior to receipt. In some cases we may
structure debt investments to provide that interest is not
payable in cash, or not entirely in cash, but is instead payable
in securities of the issuer or is added to the principal of the
debt. The amortization of principal on our debt
36
investments may be deferred until maturity. We also expect to
generate revenue in the form of commitment, origination,
structuring or diligence fees, fees for providing managerial
assistance and possibly consulting fees.
After our formation on September 8, 2005, we completed our
initial financing through a private placement of common shares
and warrants on January 9, 2006. As a result, there is no
period with which to compare our results of operations for the
period from September 8, 2005 through November 30,
2005 or the fiscal quarters ended February 28, 2006,
May 31, 2006, August 31, 2006 and November 30,
2006, or the fiscal year ended November 30, 2006.
Total investment income for the period from commencement of our
operations through November 30, 2006 was $2,119,843. Of
this amount, $1,210,120 was received from short term investments
and $909,723 was received as interest income, fee income and
gross distributions from portfolio company investments. We
expect to generate additional investment income as we invest the
net proceeds of this offering in U.S. energy infrastructure
companies.
Expenses
As an externally managed investment company, our operating
expenses consist primarily of the advisory fee, other
administrative operating expenses and income taxes. Expenses
during the period from December 8, 2005 through
November 30, 2006 totaled $995,145. This amount consisted
mainly of advisory fees of $634,989, professional fees of
$205,018, directors fees of $69,550 and other general and
administrative expenses. The net current and deferred tax
expense during the period from December 8, 2005 through
November 30, 2006 totaled $516,055.
Determining
Distributions to Stockholders
Our portfolio generates cash flow to us in the form of interest,
distributions, and gain, loss and return of capital. When our
board of directors determines the amount of any distribution we
expect to pay our stockholders, it will review amounts generated
by our investments, less our total expenses. The total amounts
generated by our investments consists of both total income and
return of capital, as we expect to invest in some entities
generating distributions to us that include a return of capital
component for accounting and tax purposes on our books. The
total income received from our investments includes the amount
received by us as cash distributions from equity investments,
paid-in-kind
distributions, and dividend and interest payments. Our total
expenses includes current or anticipated operating expenses, and
total leverage costs, if any.
On August 4, 2006, our board of directors declared a
$0.05 per common share special distribution and a
$0.09 per common share quarterly distribution. The special
distribution was declared for the period from our inception
through our second fiscal quarter and the quarterly distribution
was declared for our third fiscal quarter. Both distributions
were paid to stockholders on September 1, 2006. On
November 30, 2006, our board of directors declared and paid
a $0.20 per common share quarterly distribution. We anticipate
making, for our first full fiscal quarter this year, a
distribution of $0.10 per common share to our current
stockholders immediately following the completion of this
offering. We anticipate that our next declared quarterly
distribution following this offering, will be paid on or about
May 31, 2007. Our board of directors will review the
distribution rate quarterly, and may adjust the quarterly
distribution throughout the year. See Distributions.
Taxation
of our Distributions
We have invested, and intend to invest, primarily in
partnerships and limited liability companies treated as
partnerships for tax purposes, which generally have larger
distributions of cash than the taxable income which they
generate. Accordingly, we anticipate that the distributions we
receive typically will include a return of capital component for
accounting and tax purposes. Distributions declared and paid by
us in any year generally will differ from our taxable income for
that year, as such distributions may include the distribution of
current year taxable income and returns of capital. See
Certain U.S. Federal Income Tax Considerations
Federal Income Taxation of the Company.
37
Unlike most investment companies, we have not elected, and do
not intend to elect, to be treated as a RIC under the Code.
Therefore, we are, and intend to continue to be, obligated to
pay federal and applicable state corporate income taxes on our
taxable income. On the other hand, we are not subject to the
Codes diversification rules limiting the assets in which a
RIC can invest. In addition, we are not subject to the
Codes restrictions on the types of income that a RIC can
recognize without adversely affecting its election to be treated
as a RIC, allowing us the ability to invest in operating
entities treated as partnerships for tax purposes, which we
believe provide attractive investment opportunities. Finally,
unlike a RIC, we are not effectively required by the Code to
distribute substantially all of our income and capital gains.
See Certain U.S. Federal Income Tax
Considerations. Unless a stockholder elects otherwise,
following completion of this offering, our distributions will be
reinvested in additional common shares through our dividend
reinvestment plan. See Dividend Reinvestment Plan.
We believe that reinvesting gains inside our company will enable
us to grow our distributions to our stockholders, which will
offer them an opportunity for an attractive total return. We
may, in the future, make actual distributions to our
stockholders of some or all of such net long-term capital gains.
See Certain U.S. Federal Income Tax
Considerations.
Liquidity
and Capital Resources
We raised approximately $46.3 million of gross proceeds
($42.5 million of net proceeds) through sales of 3,088,596
common shares and 772,124 warrants, the last of which occurred
on January 9, 2006. On December 13, 2006, we entered
into a $15.0 million secured revolving credit facility with
U.S. Bank. On January 17, 2007, the credit facility was
amended to permit us to borrow up to $20.0 million. As of
January 17, 2007, we had borrowed approximately
$11.5 million under the credit facility. We raised an
additional $18.4 million of net proceeds for investment
purposes in December 2006 in a bridge financing in which we
issued 1,233,333 shares of Series A redeemable preferred
stock and warrants to purchase 185,006 of our common shares.
We must redeem the preferred stock upon completion of this
offering. The price at which each share of preferred stock is to
be redeemed is equal to the original issue price ($15.00) plus
(i) all accrued and unpaid dividends, and (ii) a
redemption premium equal to 2% of the original issue price.
As of January 17, 2007, we have invested a total of
$72.1 million in six portfolio companies. In addition, as
of January 17, 2007, we have entered into a term sheet with
a prospective new portfolio company for a $15.0 million
equity investment (of which we expect to identify one or more
other investors to invest up to $7.0 million) in the
midstream segment of the energy infrastructure sector. Our
Advisors investment committee has also approved an
additional $0.5 million equity investment and an additional
$2.5 million debt investment in Mowood, LLC. These
investments are subject to finalization of our due diligence and
approval process, as well as negotiation of definitive
agreements with each prospective portfolio company and, as a
result, may not result in completed investments. See
Portfolio Companies.
We expect to raise additional capital to support our future
growth through future equity offerings, issuances of senior
securities or future borrowings, to the extent permitted by the
1940 Act and our current credit facility. We generally may not
issue additional common shares at a price below our net asset
value (net of any sales load (underwriting discount)) without
first obtaining approval of our stockholders and board of
directors. Our stockholders granted us the authority to sell our
common shares below net asset value, subject to certain
conditions. This authority extends through our 2008 annual
meeting, currently expected to occur in April 2008. We are
restricted in our ability to incur additional debt by the terms
of our credit facility.
Borrowings
On December 13, 2006, we entered into a $15.0 million
secured revolving credit facility with U.S. Bank. On
January 17, 2007, the credit facility was amended to permit
us to borrow up to $20.0 million. As of January 17,
2007, we had borrowed approximately $11.5 million under the
credit facility. Our obligation to repay U.S. Bank for any
amounts borrowed under the credit facility is secured by a lien
on all of our assets. We intend to repay all outstanding
indebtedness under the credit facility immediately following the
receipt of
38
the proceeds of this offering, as required pursuant to the
terms of the credit facility. For 120 days following such
repayment, U.S. Bank is not obligated to allow us to draw on the
credit facility. The funds we borrow under the credit facility
accrue interest at a rate equal to 1.75% plus the one month
LIBOR quoted by U.S. Bank from Telerate Page 3750,
which interest rate was 7.08% as of January 17, 2007. The
credit facility expires on December 12, 2007 and contains a
covenant precluding us from incurring additional debt.
In the future we may fund additional investments through
borrowings from banks or other lenders, issuing debt securities,
or by creating a wholly-owned subsidiary that issues debentures
to the SBA through an SBA program. On March 31, 2006, an
application to be licensed by the SBA as a SBIC under
Section 301(c) of the Small Business Investment Company Act
of 1958 was filed on behalf of our to-be-formed wholly-owned
subsidiary. If we are able to obtain financing under such
program, we will be subject to regulation and oversight by the
SBA, including requirements that we maintain certain minimum
financial ratios, that our subsidiary invest in portfolio
companies that do not exceed certain average net income or net
worth guidelines established by the SBA, and other covenants
imposed by the SBA. There can be no assurances that we will be
able to incur debt on terms acceptable to us, obtain a SBIC
license or be able to participate in the SBA-sponsored debenture
program. See Risk Factors Risks Related to Our
Operations If a wholly-owned subsidiary of ours
becomes licensed by the U.S. Small Business Administration, we,
and that subsidiary, will be subject to SBA regulations.
Contractual
Obligations
We have entered into an investment advisory agreement with our
Advisor pursuant to which our Advisor has agreed to:
(i) serve as our investment advisor in exchange for the
consideration set forth therein; (ii) furnish us with the
facilities and administrative services necessary to conduct our
day-to-day
operations and to provide on our behalf managerial assistance to
certain of our portfolio companies; and (iii) grant us a
non-exclusive royalty-free license to use the
Tortoise name and other intellectual property. See
Advisor Investment Advisory Agreement.
Payments under the investment advisory agreement in future
periods will consist of: (i) a base management fee based on
a percentage of the value of our Managed Assets, and
(ii) an incentive fee, based on our investment income and
our net capital gains. Our Advisor waived the portion of the
incentive fee based on investment income until December 8,
2006. Our Advisor, and not us, pays the compensation and
allocable routine overhead expenses of all investment
professionals of its staff. Pursuant to the investment advisory
agreement, we also pay our Advisor an amount equal to our
allocable portion of overhead and certain other expenses
incurred by our Advisor in performing its obligations under the
investment advisory agreement. No payments are due with respect
to the license granted to us under the investment advisory
agreement. See Advisor Investment Advisory
Agreement Management Fees.
The investment advisory agreement may be
terminated: (i) by us without penalty upon not more
than 60 days written notice to the Advisor, or (ii) by
the Advisor without penalty upon not less than 60 days
written notice to us.
Our Advisor has also entered into a sub-advisory agreement with
Kenmont. Kenmont is an investment advisor with experience
investing in privately-held and public companies in the
U.S. energy and power sectors. Kenmont provides additional
contacts and enhances the number and range of potential
investment opportunities in which we have the opportunity to
invest. Kenmont Special Opportunities Master Fund LP
purchased 666,666 of our common shares and 166,666 of our
warrants in our private placement completed in January 2006 and
purchased $8.05 million, or 536,666 shares, of our Series A
redeemable preferred stock and 80,500 of our warrants to
purchase common shares in our bridge financing completed in
December 2006. Pursuant to the sub-advisory agreement with
Kenmont, Kenmont (i) assists in identifying potential
investment opportunities, subject to the right of Kenmont to
first show investment opportunities that it identifies to other
funds or accounts for which Kenmont is the primary advisor,
(ii) assists, as requested by our Advisor but subject to a
limit of 20 hours per month, in the analysis of investment
opportunities, and (iii) if requested by our Advisor, will
assist in hiring an additional investment professional for the
Advisor who will be located in Houston, Texas and for whom
Kenmont will make office space available. Kenmont does not make
any investment
39
decisions on our behalf, but will recommend potential
investments to, and assist in the investment analysis undertaken
by, our Advisor. Our Advisor compensates Kenmont for the
services it provides to us. Our Advisor indemnifies and holds us
harmless from any obligation to pay or reimburse Kenmont for any
fees or expenses incurred by Kenmont in providing such services
to us. Kenmont will be indemnified by the Advisor for certain
claims related to the services it provides and obligations
assumed under the sub-advisory agreement. In addition to any
termination rights we may have under the 1940 Act, the
sub-advisory agreement between the Advisor and Kenmont may be
terminated by our Advisor in limited circumstances.
We have also entered into an administration agreement with our
Advisor pursuant to which our Advisor will act as our
administrator and perform (or oversee or arrange for the
performance of) the administrative services necessary for our
operation, including, without limitation, providing us with
equipment, clerical, book-keeping and record-keeping services.
For these services we pay our Advisor a fee equal to 0.07% of
our aggregate average daily managed assets up to and including
$150 million, 0.06% of our aggregate average daily managed
assets on the next $100 million, 0.05% of our aggregate average
daily managed assets on the next $250 million and 0.02% on the
balance of our aggregate average daily managed assets. This
administration agreement was unanimously approved by our board
of directors, including our independent directors, on
November 13, 2006.
The following table summarizes our significant contractual
payment obligations as of January 17, 2007.
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Payments Due by Year
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After
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($ in millions)
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Total
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2007
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2008
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2009
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2010
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2011
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2011
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|
Secured revolving credit
facility(1)
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$
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11.5
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$
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11.5
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Series A redeemable preferred
stock(2)
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$
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18.9
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$
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18.9
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Total contractual obligations
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$
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30.4
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$
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30.4
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(1) |
At January 17, 2007, the outstanding balance under the
credit facility was $11.5 million. The credit facility
expires on December 12, 2007.
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(2) |
We must redeem the preferred stock upon the completion of this
offering, at which time we will pay a 2% redemption premium and
$15.00 per share.
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Other than the investment advisory agreement and the
administration agreement with our Advisor, we do not have any
off-balance sheet arrangement that has or is reasonably likely
to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures, or capital
resources.
Quantitative
and Qualitative Disclosure About Market Risk
Our business activities contain elements of market risk. We
consider changes in interest rates and the effect such changes
can have on the valuations of distribution-paying equity
securities and fixed rate debt securities to be our
principal market risk. We consider the management of risk
essential to conducting our businesses. Accordingly, our risk
management systems and procedures are designed to identify and
analyze our risks, to set appropriate policies and limits and to
continually monitor these risks and limits by means of reliable
administrative and information systems and other policies and
programs. Our investment income is affected by changes in
various interest rates, including LIBOR and prime rates.
40
SENIOR
SECURITIES
The following table sets forth information about our outstanding
senior securities as of January 17, 2007, based on our
total assets as of November 30, 2006 plus the value, at
cost, of the investments made since that time. The
indicates information which is not
required to be disclosed for certain types of senior securities.
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Involuntary
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Total Amount
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Liquidation
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Outstanding Exclusive
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Asset Coverage
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Preference
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Average Market
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Title of Securities
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of Treasury Securities
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per Unit(1)
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per Unit(2)
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Value per Unit(3)
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Series A Redeemable Preferred
Stock(4)
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$
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18,499,995
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$
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38.66
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$
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15.00 (5
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)
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n/a
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Secured Revolving Credit
Facility(6)
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$
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11,500,000
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$
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6,724
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$
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n/a
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(1) |
The asset coverage ratio for a class of senior securities
representing indebtedness is calculated as our total assets,
less all liabilities and indebtedness not represented by senior
securities, divided by senior securities representing
indebtedness. This asset coverage ratio is multiplied by $1,000
to determine the Asset Coverage per Unit. The asset coverage
ratio for a class of senior securities that is preferred stock
is calculated as our total assets, less all liabilities and
indebtedness not represented by senior securities, divided by
senior securities representing indebtedness, plus the
involuntary liquidation preference of the preferred stock (see
footnotes 2 and 5). The Asset Coverage per Unit for our
Series A redeemable preferred stock is expressed in terms
of dollar amount per share and is calculated by multiplying the
coverage ratio by the $15.00 per share liquidation preference.
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(2)
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The amount to which such class of senior security would be
entitled upon the involuntary liquidation of the issuer in
preference to any security junior to it.
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(3)
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Not applicable, as senior securities are not registered for
public trading.
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(4) |
In December 2006 we issued 1,233,333 shares of
Series A redeemable preferred stock in a bridge financing.
We intend to redeem the outstanding preferred stock immediately
following the receipt of the proceeds of this offering.
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(5) |
In the event of our liquidation, either voluntary or
involuntary, the holders of Series A redeemable preferred
stock are entitled to receive, prior and in preference to any
distribution of any of our assets to the holders of common
shares or any other class or series of our capital stock by
reason of their ownership thereof, an amount per share equal to
$15.00, plus all accrued and unpaid cumulative dividends thereon
to the date of liquidation.
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(6) |
On December 13, 2006, we entered into a $15.0 million
secured revolving credit facility with U.S. Bank. On
January 17, 2007, the credit facility was amended to permit
us to borrow up to $20.0 million. We intend to repay all
outstanding indebtedness under the credit facility immediately
following the receipt of the proceeds of this offering.
|
41
THE
COMPANY
We invest primarily in privately-held and micro-cap public
energy companies focused on the midstream and downstream
segments, and to a lesser extent the upstream segment. We
believe companies in the energy infrastructure generally produce
stable cash flows as a result of their fee-based revenue and
limited direct commodity price risk. Our goal is to provide our
stockholders with a high level of total return, with an emphasis
on dividends and dividend growth. We invest primarily in the
equity securities of companies that we expect to pay us
distributions on a current basis and provide us distribution
growth. Under normal conditions, we intend to invest at least
90% of our total assets (including assets obtained through
leverage) in companies in the energy infrastructure sector.
Companies in the energy infrastructure sector include
(i) companies that derive a majority of their revenues from
activities within the downstream, midstream and upstream
segments of the energy infrastructure sector, and
(ii) companies that derive a majority of their revenues
from providing products or services to such companies.
Companies in the midstream segment of the energy infrastructure
sector engage in the business of transporting, processing or
storing natural gas, natural gas liquids, coal, crude oil,
refined petroleum products and renewable energy resources.
Companies in the downstream segment of the energy infrastructure
sector engage in distributing or marketing such commodities and
companies in the upstream segment of the energy infrastructure
sector engage in exploring, developing, managing, or producing
such commodities. Our investments are expected to range between
$5.0 million and $20.0 million per investment,
although investment sizes may be smaller or larger than this
targeted range.
We raised approximately $46.3 million of gross proceeds
($42.5 million of net proceeds) through sales of 3,088,596
common shares and 772,124 warrants, the last of which occurred
on January 9, 2006. On December 13, 2006, we entered
into a $15.0 million secured revolving credit facility with
U.S. Bank. On January 17, 2007, the credit facility was
amended to permit us to borrow up to $20.0 million. As of
January 17, 2007, we had borrowed approximately
$11.5 million under the credit facility. We raised an
additional $18.4 million of net proceeds for investment
purposes in December 2006 in a bridge financing in which we
issued 1,233,333 shares of Series A redeemable
preferred stock and warrants to purchase 185,006 of our
common shares. As of January 17, 2007, we have invested a
total of $72.1 million in six companies in the
U.S. energy infrastructure sector. Of the
$72.1 million, we have invested $67.6 million in the
midstream and downstream segments of the U.S. energy
infrastructure sector and $4.5 million in the upstream
segment of the U.S. energy infrastructure sector.
42
The following table summarizes our investments in portfolio
companies as of January 17, 2007. All of our investment
securities were purchased directly from the portfolio company.
Both Eagle Rock Energy Partners, L.P. and Legacy Reserves LP are
publicly-traded.
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Expected
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Current
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Company (Segment)
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Principal Business
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Funded Investment
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Yield
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Eagle Rock Energy Partners, L.P.
(Midstream)
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Parent holding company of Eagle
Rock Pipeline, L.P., a gatherer and processor of natural gas in
north and east Texas
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$8.6 million in unregistered
LP Interests(1)
$3.5 million in registered LP Interests(1)
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|
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8.0
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%(2)
7.6%(2)
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High Sierra Energy, LP Midstream)
|
|
Diversified midstream operations
primarily in Colorado, Wyoming and Florida
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$14.8 million in LP Interests
$0.2 million in GP option(3)
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|
|
9.9
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%(2)
n/a
|
Quest Midstream Partners, LP
(Midstream)
|
|
Operator of natural gas gathering
pipeline network
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$17.5 million in LP Interests
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|
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9.2
|
%(2)
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Millennium Midstream Partners, LP
(Midstream)
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|
Gatherer and processor of natural
gas in Texas, Louisiana and offshore Gulf of Mexico
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$17.5 million in LP Interests and
incentive distribution rights
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8.5
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%(2)
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Mowood, LLC (Downstream)
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Natural gas distribution with in
central Missouri Department of Defense contract through 2014
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$1.0 million in LLC Units
$4.5 million in unsecured subordinated debt
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10.0
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%(4)
12.0%
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Legacy Reserves LP (Upstream)
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Oil and natural gas exploitation
and development in the Permian Basin
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$4.5 million in registered LP
Interests(5)
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9.6
|
%(2)
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Total Investments
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|
$72.1 million
|
|
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(1) |
|
On March 27, 2006 we purchased $12.5 million in LP
Interests in Eagle Rock Pipeline, L.P. (Eagle Rock
Pipeline). In connection with the initial public offering
on October 24, 2006 of Eagle Rock Energy Partners, L.P.
(Eagle Rock Energy), the parent of Eagle Rock
Pipeline, 100% of our LP Interests in Eagle Rock Pipeline were
converted into 498,847 unregistered common units
representing LP Interests in Eagle Rock Energy. At the time of
the initial public offering of Eagle Rock Energy, we also
received a distribution of approximately $3.4 million in
cash on our LP Interest in Eagle Rock Pipeline and purchased,
for approximately $3.5 million, 185,000 freely tradable
common units from Eagle Rock Energy. On November 21, 2006,
the underwriters of Eagle Rock Energys initial public
offering partially exercised their option to purchase additional
common units. Eagle Rock Energy used a portion of the proceeds
of that sale to redeem 24,776 of our unregistered common units,
resulting in a distribution to us of approximately
$0.5 million. |
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|
(2) |
|
The expected current yield has been calculated by annualizing
the most recent or anticipated recurring distribution and
dividing by the amount invested in the underlying security.
Actual distributions to us are based on each companys
available cash flow. Distributions may be above or below the
expected current yield. |
|
(3) |
|
In addition to our purchase of LP Interests, we also obtained an
option to buy 3% of the general partner of High Sierra Energy,
LP, High Sierra Energy GP, LLC. The option may be exercised
anytime prior to May 2, 2007. |
|
(4) |
|
Represents an equity distribution on our invested capital. We
expect that, subject to cash availability, such equity
distributions will recur on an annual basis at or above such
yield. |
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|
|
(5) |
|
Our LP Interests have been registered for re-sale and will be
freely transferable on March 28, 2007. |
43
As of January 17, 2007, we have entered into a term sheet
with a prospective new portfolio company for a
$15.0 million equity investment (of which we expect to
identify one or more other investors to invest up to
$7.0 million) in the midstream segment of the energy
infrastructure sector. In addition, our Advisors
investment committee has approved an additional
$0.5 million equity investment and an additional
$2.5 million debt investment in Mowood, LLC. We currently
expect to fund these investments from our credit facility and
the proceeds of this offering. The consummation of each
investment will depend upon satisfactory completion of our due
diligence investigation of the prospective portfolio company,
our confirmation and acceptance of the investment terms,
structure and financial covenants, the execution and delivery of
final binding agreements in a form mutually satisfactory to the
parties, the absence of any material adverse change and the
receipt of any necessary consents. At this time, the final forms
of our investments remain subject to additional negotiations
with these companies. Accordingly, we cannot assure you that
such investments will be completed.
We are an externally managed, non-diversified closed end
investment company that intends to elect to be regulated as a
BDC under the 1940 Act. Following our intended election to be
regulated as a BDC, we will be subject to numerous regulations
and restrictions.
Our
Advisor
We are managed by Tortoise Capital Advisors, a registered
investment advisor specializing in the energy infrastructure
sector that had approximately $2.0 billion of assets under
management on November 30, 2006, including the assets of
three publicly traded closed-end management investment companies
focused on the energy infrastructure sector. Our Advisors
aggregate managed capital is among the largest of investment
advisors managing closed-end management companies focused on the
energy infrastructure sector. Our Advisor created TYG, the first
publicly traded closed-end management company focused primarily
on investing in MLPs in the energy infrastructure sector. Our
Advisor also manages TYY, a publicly traded closed-end
management company focused primarily on investing in MLPs and
their affiliates in the energy infrastructure sector, and TYN, a
publicly traded closed-end management company focused primarily
on energy infrastructure investments in public companies in the
United States and in Canada. Our Advisor has no prior experience
managing a BDC, which will be subject to different regulations
than the other closed-end management investment companies
managed by our Advisor. The members of our Advisors
investment committee have an average of 20 years of
financial investment experience.
Our Advisor is controlled by Kansas City Equity Partners, L.C.
(KCEP) and Fountain Capital.
Our Advisor has 20 full time employees. Four of our
Advisors senior investment professionals are responsible
for the origination, negotiation, structuring and managing of
our investments. These four senior investment professionals have
over 70 years of combined experience in energy, leveraged
finance and private equity investing. Each of our Advisors
investment decisions will be reviewed and approved by its
investment committee, which also acts as the investment
committee for TYG, TYY and TYN. TYG, TTY and TYN generally
target investments in publicly traded companies with market
capitalizations in excess of $250 million. We generally
target investments in companies that are
privately-held
or have market capitalizations of less than $250 million,
and that are earlier in their state of development. If TYG, TYY
or TYN were ever to target investment opportunities similar to
ours, our Advisor intends to allocate investment opportunities
in a fair and equitable manner consistent with our investment
objective and strategies and in accordance with written
allocation policies of our Advisor, so that we will not be
disadvantaged in relation to any other client. See Risk
Factors Risks Related to Our Operations.
Our Advisor has retained Kenmont as a sub-advisor. Kenmont is a
Houston,
Texas-based
registered investment advisor with experience investing in
privately-held and public companies in the U.S. energy and
power sectors. Kenmont provides additional contacts to us and
enhances our number and range of potential investment
opportunities. The principals of Kenmont have collectively
created and managed private equity portfolios in excess of
$1.5 billion and have over 50 years of experience
working for investment banks, commercial banks, accounting
firms, operating companies and money management firms. Kenmont
has no prior experience managing a BDC. Our Advisor compensates
Kenmont for the services it provides to us. Our Advisor also
indemnifies and holds us harmless from any obligation to pay or
reimburse Kenmont for any fees
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or expenses incurred by Kenmont in providing such services to
us. An affiliate of Kenmont is expected to own approximately
7.0% of the Companys outstanding common shares upon
completion of this offering and warrants to purchase an
additional 247,166 common shares. In addition, an affiliate of
Kenmont owns $8.05 million, or 536,666 shares, of our Series A
redeemable preferred stock. We intend to redeem all of our
outstanding preferred stock with the proceeds of this offering.
See Advisor Sub-Advisor Arrangement.
U.S. Energy
Infrastructure Sector Focus
We pursue our investment objective by investing principally in a
portfolio of privately-held and micro-cap public companies in
the U.S. energy infrastructure sector. The energy
infrastructure sector can be broadly categorized as follows:
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Midstream the gathering, processing, storing
and transmission of energy resources and their byproducts in a
form that is usable by wholesale power generation, utility,
petrochemical, industrial and gasoline customers, including
pipelines, gas processing plants, liquefied natural gas
facilities and other energy infrastructure.
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Downstream the refining, marketing and
distribution of refined energy sources, such as customer-ready
natural gas, natural gas liquids, propane and gasoline, to
end-user customers, and customers engaged in the generation,
transmission and distribution of power and electricity.
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Upstream the development and extraction of
energy resources, including natural gas, crude oil and coal from
onshore and offshore geological reservoirs as well as from
renewable sources, including agricultural, thermal, solar, wind
and biomass.
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We focus our investments in the midstream and downstream
segments, and to a lesser extent the upstream segment, of the
U.S. energy infrastructure sector. We also intend to
allocate our investments among asset types and geographic
regions within the U.S. energy infrastructure sector.
We believe that the midstream segment of the U.S. energy
infrastructure sector will provide attractive investment
opportunities as a result of the following factors:
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Strong Supply and Demand Fundamentals. The
U.S. is the largest consumer of crude oil and natural gas
products, the third largest producer of crude oil and the second
largest producer of natural gas products in the world. The
United States Department of Energys Energy Information
Administration, or EIA, annually projects that domestic natural
gas and refined petroleum products consumption will increase by
0.8% and 1.1%, respectively, through 2030. The midstream energy
infrastructure segment provides the critical link between the
suppliers of crude oil, natural gas, refined products and other
forms of energy, whether domestically-sourced or imported, and
the end-user. Midstream energy infrastructure companies are
typically asset-intensive, with minimal variable cost
requirements, providing operating leverage that allows them to
generate attractive cash flow growth even with limited
demand-driven or supply-driven growth.
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Substantial Capital Requirements. We believe,
based on industry sources, that approximately $20 billion
of capital was invested in the midstream segment of the
U.S. energy infrastructure sector during 2006. We believe
that additional capital expenditures in the U.S. energy
infrastructure sector will result from the signing of the Energy
Policy Act of 2005 on August 8, 2005, which incorporates a
number of incentives for additional investments in the energy
infrastructure sector including business investment tax credits
and accelerated tax depreciation.
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Substantial Asset Ownership Realignment. We
believe that in the midstream and downstream segments of the
U.S. energy infrastructure sector, the acquisition and
divestiture market has averaged approximately $34 billion
of annual transactions between 2001 and 2006. We believe that
such activity, particularly in the midstream segment, will
continue as: larger integrated companies with high cost
structures continue to divest energy infrastructure assets to
smaller, more entrepreneurial companies; MLPs continue to pursue
acquisitions to drive distribution growth; and private equity
firms seek to aggregate midstream U.S. energy
infrastructure assets for contribution to existing or
newly-formed MLPs or other public or private entities.
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We believe the downstream segment of the U.S. energy
infrastructure sector also will provide attractive investment
opportunities as a result of the following factors:
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Strong Demand Fundamentals. We believe that
long-term projected growth in demand for the natural gas and
refined petroleum products delivered to end-users by the
downstream segment of the U.S. energy infrastructure
sector, combined with the 1.5% annual growth in domestic power
consumption projected by the EIA through 2030, will result in
continued capital expenditures and investment opportunities in
the downstream segment of the U.S. energy infrastructure
sector.
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Requirements to Develop New Downstream
Infrastructure. With the trend towards increased
heavy crude supply, high light-heavy crude oil
pricing differentials and the impact of recent domestic
capital-intensive environmental mandates, we believe that
existing downstream infrastructure will require new capital
investment to maintain an aging asset base as well as to upgrade
the asset base to respond to the evolution of supply and
environmental regulations.
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Substantial Number of Downstream
Companies. There are numerous domestic companies
in the downstream segment of the U.S. energy infrastructure
sector. For example, it is estimated by industry sources that
over 8,000 retail propane companies operate in the U.S., and the
EIA reports there are 114 domestic natural gas local
distribution companies. We believe the substantial number of
domestic companies in the downstream segment of the
U.S. energy infrastructure sector provides consolidation
opportunities, particularly among propane distributors.
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Renewable Energy Resources Opportunities. The
increasing domestic demand for energy, recently passed energy
legislation and the rising cost of carbon-based energy supplies
have all encouraged a renewed and growing interest in renewable
energy resources. We believe that downstream renewable energy
resource assets will be brought on-line, particularly for
producing and processing ethanol. The demand for related project
financing is expected to be significant and we believe will
provide investment opportunities consistent with our investment
objective.
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Although not part of our core focus, we believe the upstream
segment of the U.S. energy infrastructure sector will
benefit from strong long-term demand fundamentals and will
provide attractive investment opportunities as a result of the
following factors:
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Substantial Asset Ownership Realignment. We
believe that in the upstream segment of the U.S. energy
infrastructure sector, the property acquisition and divestiture
market has averaged $38 billion of annual transactions
between 2001 and 2006. During such period, of those transactions
for which values have been reported, more than 78% have a value
of less than $100 million. We believe this activity has
been largely independent of commodity price fluctuations, and
instead, has been driven by a combination of strategic business
decisions and the desire to efficiently deploy capital. We
believe that the fundamental factors that drive the upstream
segment of the U.S. energy infrastructure sector
acquisition and divestiture market will cause the level of
activity to remain consistent with historical levels for the
foreseeable future.
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Substantial Number of Small and Middle Market
Companies. We believe that there are more than
900 private domestic exploration and production businesses and
more than 140 publicly-listed domestic exploration and
production companies. Small and middle market exploration and
production companies play an important role in the upstream
segment of the U.S. energy infrastructure sector, with a
significant share of all domestic natural gas production and
crude oil and natural gas drilling activity.
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Increasing Importance of MLP Market for Upstream Energy
Companies. We believe that there will continue to
be an increasing number of MLPs operating in the upstream
segment of the energy infrastructure sector. We believe that
attractive investment opportunities exist in those upstream MLPs
whose cash distributions allow them to reserve funds to be used
for the replacement of depleted assets. We also believe that the
ratio of subordinated units to common units in a typical MLP
structure helps mitigate the commodity exposure of the upstream
MLPs for their common unit investors.
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Market
Opportunity
We believe the environment for investing in privately-held and
micro-cap public companies in the energy infrastructure sector
is attractive for the following reasons:
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Increased Demand Among Small and Middle Market Private
Companies for Capital. We believe many private
and micro-cap public companies have faced increased difficulty
accessing the capital markets due to a continuing preference by
investors for issuances in larger companies with more liquid
securities. Such difficulties have been magnified in
asset-focused and capital intensive industries such as the
U.S. energy infrastructure sector. We believe that the
energy infrastructure sectors high level of projected
capital expenditures and continuing acquisition and divestiture
activity will provide us with numerous attractive investment
opportunities.
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Investment Activity Private Equity Capital
Sponsors. We believe there is a large pool of
uninvested private equity capital available for private and
micro-cap public companies, including those involved in the
energy infrastructure sector. Given the anticipated positive
long-term supply and demand dynamics of the energy industry and
the current and expected public market valuations for companies
involved in certain sectors of the energy industry, private
equity capital has been increasingly attracted to the energy
infrastructure sector. In particular, we believe that the public
market valuations of many MLPs will cause private equity firms
to invest in and aggregate smaller energy infrastructure assets.
We also expect those private equity firms to combine their
capital with equity or mezzanine debt investors sources such as
ourselves.
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Finance Market for Small and Middle Market Energy Companies
is Underserved by Many Capital Providers. We
believe that many lenders have, in recent years, de-emphasized
their service and product offerings to small and middle market
energy companies in favor of lending to large corporate clients
and managing capital markets transactions. We believe, in
addition, that many capital providers lack the necessary
technical expertise to evaluate the quality of the underlying
assets of small and middle market private companies and
micro-cap public companies in the energy infrastructure sector
and lack a network of relationships with such companies.
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Attractive Companies with Limited Access to Other
Capital. We believe there are, and will continue
to be, attractive companies that will benefit from private
equity investments prior to a public offering of their equity,
whether as an MLP or otherwise. We also believe that there are a
number of companies in the midstream and downstream segments of
the U.S. energy infrastructure sector with the same stable
cash flow characteristics as those being acquired by MLPs or
funded by private equity capital in anticipation of contribution
to an MLP. We believe that many such companies are not being
acquired by MLPs or attracting private equity capital because
they do not produce income that qualifies for inclusion in an
MLP pursuant to the applicable U.S. Federal income tax laws, are
perceived by such investors as too small, or are in areas of the
midstream energy infrastructure segment in which most MLPs do
not have specific expertise. We believe that these companies
represent attractive investment candidates for us.
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Competitive
Advantages
We believe that we are well positioned to meet the financing
needs of the U.S. energy infrastructure sector for the
following reasons:
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Existing Investment Platform with Experience and Focus on the
Energy Infrastructure Sector. We believe that our
Advisors current investment platform provides us with
significant advantages in sourcing, evaluating, executing and
managing investments. On November 30, 2006, our Advisor
managed investments of approximately $2.0 billion in the
energy infrastructure sector, including the assets of three
publicly traded closed-end management investment companies
focused on the energy infrastructure sector. Our Advisor created
the first publicly traded closed-end management investment
company focused primarily on investing in MLPs involved in the
energy infrastructure sector, and its aggregate managed capital
is among the largest of those closed-end management investment
company advisors focused on the energy infrastructure sector.
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Experienced Management Team. The members of
our Advisors investment committee have an average of over
20 years of financial investment experience. Our
Advisors four senior investment professionals are
responsible for the negotiation, structuring and managing of our
investments and have over 70 years of combined experience
in energy, leveraged finance and private equity investing. We
believe that as a result of this extensive experience, the
members of our Advisors investment committee and the
Advisors senior investment professionals have developed
strong reputations in the capital markets, particularly in the
energy infrastructure sector, that we believe affords us a
competitive advantage in identifying and investing in energy
infrastructure companies.
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Disciplined Investment Philosophy. In making
its investment decisions, our Advisor intends to continue the
disciplined investment approach that it has utilized since its
founding. That investment approach emphasizes significant
current income with the potential for enhanced returns through
dividend growth, capital appreciation, low volatility and
minimization of downside risk. Our Advisors investment
process involves an assessment of the overall attractiveness of
the specific subsector of the energy infrastructure segment in
which a prospective portfolio company is involved; such
companys specific competitive position within that
subsector; potential commodity price, supply and demand and
regulatory concerns; the stability and potential growth of the
prospective portfolio companys cash flows; the prospective
portfolio companys management track record and incentive
structure and our Advisors ability to structure an
attractive investment.
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Flexible Transaction Structuring. We are not
subject to many of the regulatory limitations that govern
traditional lending institutions such as commercial banks. As a
result, we can be flexible in structuring investments and
selecting the types of securities in which we invest. Our
Advisors senior investment professionals have substantial
experience in structuring investments that balance the needs of
energy infrastructure companies with appropriate risk control.
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Extended Investment Horizon. Unlike private
equity and venture capital funds, we are not subject to standard
periodic capital return requirements. These provisions often
force private equity and venture capital funds to seek quicker
returns on their investments through mergers, public equity
offerings or other liquidity events than may otherwise be
desirable, potentially resulting in both a lower overall return
to investors and an adverse impact on their portfolio companies.
We believe our flexibility to make investments with a long-term
view and without the capital return requirements of traditional
private investment funds enhances our ability to generate
attractive returns on invested capital.
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Targeted
Investment Characteristics
We anticipate that our targeted investments will have the
following characteristics:
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Long-Life Assets with Stable Cash Flows and Limited Commodity
Price Sensitivity. We anticipate that most of our
investments will be made in companies with assets having the
potential to generate stable cash flows over long periods of
time. We intend to invest a portion of our assets in companies
that own and operate assets with long useful lives and that
generate cash flows by providing critical services primarily to
the producers or end-users of energy. We expect to limit the
direct exposure to commodity price risk in our portfolio. We
intend to target companies that have a majority of their cash
flows generated by contractual obligations.
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Experienced Management Teams with Energy Infrastructure
Focus. We intend to make investments in companies
with management teams that have a track record of success and
who often have substantial knowledge and focus in particular
segments of the energy infrastructure sector or with certain
types of assets. We expect that our management teams
extensive experience and network of business relationships in
the energy infrastructure sector will allow us to identify and
attract portfolio company management teams that meet these
criteria.
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Fixed Asset-Intensive. We anticipate that most
of our investments will be made in companies with a relatively
significant base of fixed assets that we believe will provide
for reduced
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downside risk compared to making investments in companies with
lower relative fixed asset levels. As fixed asset-intensive
companies typically have less variable cost requirements, we
expect they will generate attractive cash flow growth even with
limited demand-driven or supply-driven growth.
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Limited Technological Risk. We do not intend
to target investment opportunities involving the application of
new technologies or significant geological, drilling or
development risk.
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Exit Opportunities. We focus our investments
on prospective portfolio companies that we believe will generate
a steady stream of cash flow to generate returns on our
investments, as well as allow such companies to reinvest in
their respective businesses. We expect that such internally
generated cash flow will lead to distributions or the repayment
of the principal of our investments in portfolio companies and
will be a key means by which we monetize our investments over
time. In addition, we seek to invest in companies whose business
models and expected future cash flows offer attractive exit
possibilities. These companies include candidates for strategic
acquisition by other industry participants and companies that
may repay, or provide liquidity for, our investments through an
initial public offering of common MLP units, common stock or
other capital markets transactions. We believe our
Advisors investment experience will help us identify such
companies.
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Investment
Overview
Our portfolio primarily is, and we expect it to continue to be,
comprised of equity and debt securities acquired through
individual investments of approximately $5.0 million to
$20.0 million in privately-held and micro-cap public
companies in the U.S. energy infrastructure sector. It is
anticipated that any publicly traded companies in which we
invest will have a market capitalization of less than
$250 million.
Investment
Selection
Our Advisor uses an investment selection process modeled after
the investment selection process utilized by our Advisor in
connection with the publicly traded closed-end funds it manages,
TYG, TYY and TYN. Four of our Advisors senior investment
professionals, Messrs. Matlack, Mojica, Russell and
Schulte, will be responsible for the negotiation, structuring
and managing of our investments, and will operate under the
oversight of our Advisors investment committee.
Target
Portfolio Company Characteristics
We have identified several quantitative, qualitative and
relative value criteria that we believe are important in
identifying and investing in prospective portfolio companies.
While these criteria provide general guidelines for our
investment decisions, we caution you that not all of these
criteria may be met by each prospective portfolio company in
which we choose to invest. Generally, we intend to utilize our
access to information generated by our Advisors investment
professionals to identify prospective portfolio companies and to
structure investments efficiently and effectively.
Midstream
and Downstream Segment Focus
We focus on prospective companies in the midstream and
downstream segments, and to a lesser extent the upstream
segment, of the U.S. energy infrastructure sector.
Qualified
Management Team
We generally require that our portfolio companies have an
experienced management team with a verifiable track record in
the relevant product or service industry. We will seek companies
with management teams having strong technical, financial,
managerial and operational capabilities, established appropriate
governance policies, and proper incentives to induce management
to succeed and act in concert with our interests as investors,
including having meaningful equity investments.
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Current
Yield Plus Growth Potential
We focus on prospective portfolio companies with a distinct
value orientation in which we can invest at relatively low
multiples of operating cash flow, that generate a current cash
return at the time of investment and that possess good prospects
for growth. Typically, we would not expect to invest in
start-up
companies or companies having speculative business plans.
Distributions
Received from Investments
We generate revenues in the form of capital gains and
distributions on dividend-paying equity securities, warrants,
options, or other equity interests that we have acquired in our
portfolio companies and in the form of interest payable on the
debt investments that we hold. We intend to acquire equity
securities that pay cash distributions on a recurring or
customized basis. We currently intend to structure our debt
investments to provide for quarterly or other periodic interest
payments. In addition to the cash yields received on our
investments, in some instances, our investments may also include
any of the following: end of term payments, exit fees, balloon
payment fees or prepayment fees, any of which may be required to
be included in income prior to receipt. In some cases we may
structure debt investments to provide that interest is not
payable in cash, or not entirely in cash, but is instead payable
in securities of the issuer or is added to the principal of the
debt. The amortization of principal on our debt investments may
be deferred until maturity. We also expect to generate revenue
in the form of commitment, origination, structuring, or
diligence fees, fees for providing managerial assistance, and
possibly consulting fees.
Strong
Competitive Position
We focus on prospective portfolio companies that have developed
strong market positions within their respective markets and that
are well positioned to capitalize on growth opportunities. We
seek to invest in companies that demonstrate competitive
advantages that should help to protect their market position and
profitability.
Sensitivity
Analyses
We generally perform sensitivity analyses to determine the
effects of changes in market conditions on any proposed
investment. These sensitivity analyses may include, among other
things, simulations of changes in energy commodity prices,
changes in interest rates, changes in economic activity and
other events that would affect the performance of our
investment. In general, we will not commit to any proposed
investment that will not provide at least a minimum return under
any of these analyses and, in particular, the sensitivity
analysis relating to changes in energy commodity prices.
Investment
Process and Due Diligence
In conducting due diligence, our Advisor uses available public
information and information obtained from its relationships with
former and current management teams, vendors and suppliers to
prospective portfolio companies, investment bankers, consultants
and other advisors. Although our Advisor uses research provided
by third parties when available, primary emphasis is placed on
proprietary analysis and valuation models conducted and
maintained by our Advisors in-house investment
professionals.
The due diligence process followed by our Advisors
investment professionals is highly detailed and structured. Our
Advisor exercises discipline with respect to company valuation
and institutes appropriate structural protections in our
investment agreements. After our Advisors investment
professionals undertake initial due diligence of a prospective
portfolio company, our Advisors investment committee will
approve the initiation of more extensive due diligence by our
Advisors investment professionals. At the conclusion of
the diligence process, our Advisors investment committee
is informed of critical findings and conclusions. The due
diligence process typically includes:
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review of historical and prospective financial information;
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review and analysis of financial models and projections;
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for many midstream and upstream investments, review of third
party engineering reserve reports and internal engineering
reviews;
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on-site
visits;
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legal reviews of the status of the potential portfolio
companys title to any assets serving as collateral and
liens on such assets;
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environmental diligence and assessments;
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interviews with management, employees, customers and vendors of
the prospective portfolio company;
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research relating to the prospective portfolio companys
industry, regulatory environment, products and services and
competitors;
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review of financial, accounting and operating systems;
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review of relevant corporate, partnership and other loan
documents; and
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research relating to the prospective portfolio companys
management and contingent liabilities, including background and
reference checks using our Advisors industry contact base
and commercial data bases and other investigative sources.
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Additional due diligence with respect to any investment may be
conducted on our behalf by our legal counsel and accountants, as
well as by other outside advisors and consultants, as
appropriate.
Upon the conclusion of the due diligence process, our
Advisors investment professionals present a detailed
investment proposal to our Advisors investment committee.
The Advisors four senior investment professionals have
over 70 years of combined experience in energy, leveraged
finance and private equity investing. The members of our
Advisors investment committee have an average of over
20 years of financial investment experience. All decisions
to invest in a portfolio company must be approved by the
unanimous decision of our Advisors investment committee.
Investment
Structure and Types of Investments
Once our Advisors investment committee has determined that
a prospective portfolio company is suitable for investment, we
work with the management of that company and its other capital
providers, including other senior and junior debt and equity
capital providers, if any, to structure an investment. We
negotiate among these parties to agree on how our investment is
expected to perform relative to the other capital in the
portfolio companys capital structure. We may invest up to
30% of our total assets in assets that are non qualifying assets
in among other things, high yield bonds, bridge loans,
distressed debt, commercial loans, private equity, securities of
public companies or secondary market purchases of securities of
target portfolio companies.
The types of securities in which we may invest include, but are
not limited to, the following:
Equity
Investments
We expect our equity investments will likely consist of common
or preferred equity (generally limited partner interests,
including interests in MLPs, and limited liability company
interests) that is expected to pay distributions on a current
basis. Preferred equity generally has a preference over common
equity as to distributions on liquidation and distributions. In
general, we expect that our equity investments will not be
control-oriented investments and we may acquire equity
securities as part of a group of private equity investors in
which we are not the lead investor. In many cases, we also may
obtain registration rights in connection with these equity
interests, which may include demand and piggyback
registration rights.
In addition to limited partner interests and limited liability
company interests, we may also purchase, among others, general
partner interests, and common and preferred stock, convertible
securities, warrants and
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depository receipts of companies that are organized as
corporations, limited partnerships or limited liability
companies.
Debt
Investments
Our debt investments may be secured or unsecured. In general,
our debt investments will not be control-oriented investments
and we may acquire debt securities as a part of a group of
investors in which we are not the lead investor. We anticipate
structuring a significant amount of our debt investments as
mezzanine loans. Mezzanine loans typically are unsecured, and
usually rank subordinate in priority of payment to senior debt,
such as senior bank debt, but senior to common and preferred
equity, in a borrowers capital structure. We expect to
invest in a range of debt investments generally having a term of
five to ten years and bearing interest at either a fixed or
floating rate. These loans typically will have interest-only
payments in the early years, with amortization of principal
deferred to the later years of the term of the loan.
In addition to bearing fixed or variable rates of interest,
mezzanine loans also may provide an opportunity to participate
in the capital appreciation of a borrower through an equity
interest. We expect this equity interest will typically be in
the form of a warrant. Due to the relatively higher risk profile
and often less restrictive covenants, as compared to senior
loans, mezzanine loans generally earn a higher return than
senior loans. The warrants associated with mezzanine loans are
typically detachable, which allows lenders to receive repayment
of principal while retaining their equity interest in the
borrower. In some cases, we anticipate that mezzanine loans may
be collateralized by a subordinated lien on some or all of the
assets of the borrower.
In some cases, our debt investments may provide for a portion of
the interest payable to be
payment-in-kind
interest. To the extent interest is
payment-in-kind,
it will likely be payable through the increase of the principal
amount of the loan by the amount of interest due on the
then-outstanding aggregate principal amount of such loan.
We tailor the terms of our debt investments to the facts and
circumstances of the transaction and the prospective portfolio
company, negotiating a structure that aims to protect our rights
and manage risk while creating incentives for the portfolio
company to achieve its business plan and improve its
profitability. For example, in addition to seeking a position
senior to common and preferred equity in the capital structure
of our portfolio companies, we will seek, where appropriate, to
limit the downside potential of our debt investments by:
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requiring a total return on our investments (including both
interest and potential equity appreciation) that compensates us
for our credit risk;
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incorporating put rights and call protection into
the investment structure; and
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negotiating covenants in connection with our investments that
afford portfolio companies as much flexibility in managing their
businesses as possible, consistent with preservation of our
capital. Such restrictions may include affirmative and negative
covenants, default penalties, lien protection, change of control
provisions and board rights, including either observation or
participation rights.
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Warrants
Our investments may include warrants or options to establish or
increase an equity interest in the portfolio company. Warrants
we receive in connection with an investment may require only a
nominal cost to exercise, and thus, as a portfolio company
appreciates in value, we may achieve additional investment
return from this equity interest. We may structure the warrants
to provide provisions protecting our rights as a
minority-interest holder, as well as puts, or rights to sell
such securities back to the portfolio company, upon the
occurrence of specified events. In certain cases, we also may
obtain registration rights in connection with these equity
interests, which may include demand and piggyback
registration rights.
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Investments
We believe that our Advisors expertise in investing in
small and middle market companies in the midstream and
downstream segments of the U.S. energy infrastructure
sector, and our Advisors experience as an investment
advisor in the energy infrastructure sector, positions our
Advisor to identify and capitalize on desirable investment
opportunities. In addition, we believe that our Advisors
regular contact with companies in the energy infrastructure
sector, investment bankers engaged in financing and merger and
acquisition advisory work, and other professionals providing
services to growth companies in the energy infrastructure
sector, will contribute to the number of quality investment
opportunities that we can evaluate.
We have invested approximately $72.1 million in six
portfolio companies in the energy infrastructure sector through
the acquisition of limited liability company units, limited
partnership interests, incentive distribution rights, an option
to purchase a general partner interest and a debenture. For a
more detailed description of these investments, see
Portfolio Companies.
Ongoing
Relationships with Portfolio Companies
Monitoring
The investment professionals of our Advisor monitor each
portfolio company to determine progress relative to meeting the
companys business plan and to assess the appropriate
strategic and tactical courses of action for the company. This
monitoring may be accomplished by attendance at board of
directors meetings, the review of periodic operating reports and
financial reports, an analysis of relevant reserve information
and capital expenditure plans, and periodic consultations with
engineers, geologists, and other experts. The performance of
each portfolio company is also periodically compared to
performance of similarly sized companies with comparable assets
and businesses to assess performance relative to peers. Our
Advisors monitoring activities are expected to provide it
with the necessary access to monitor compliance with existing
covenants, to enhance its ability to make qualified valuation
decisions, and to assist its evaluation of the nature of the
risks involved in each individual investment. In addition, these
monitoring activities should permit our Advisor to diagnose and
manage the common risk factors held by our total portfolio, such
as sector concentration, exposure to a single financial sponsor,
or sensitivity to a particular geography.
As part of the monitoring process, our Advisor continually
assesses the risk profile of each of our investments and rates
them on a scale of 1 to 3 based on the following categories:
|
|
|
|
(1)
|
The portfolio company is performing at or above expectations and
the trends and risk factors are generally favorable to neutral.
|
|
|
(2)
|
The portfolio company is performing below expectations and the
investments risk has increased materially since
origination. The portfolio company is generally out of
compliance with various covenants; however, payments are
generally not more than 120 days past due.
|
|
|
(3)
|
The portfolio company is performing materially below
expectations and the investment risk has substantially increased
since origination. Most or all of the covenants are out of
compliance and payments are substantially delinquent. Investment
is not expected to provide a full repayment of the amount
invested.
|
As of the date of this prospectus, all of our portfolio
companies have a rating of (1).
Managerial
Assistance
The investment professionals of our Advisor make available, and
will provide upon request, significant managerial assistance to
our portfolio companies. This assistance may involve, among
other things, monitoring the operations of our portfolio
companies, participating in board and management meetings,
consulting with and advising the management teams of our
portfolio companies, assisting in the formulation of their
strategic plans, and providing other operational, organizational
and financial consultation. Involvement with each portfolio
company will vary based on a number of factors.
53
Valuation
Process
We value our portfolio in accordance with U.S. generally
accepted accounting principles and will rely on multiple
valuation techniques, reviewed on a quarterly basis by our board
of directors. As most of our investments are not expected to
have market quotations, our board of directors will undertake a
multi-step valuation process each quarter, as described below:
|
|
|
|
|
Investment Team Valuation. Each portfolio
company or investment will initially be valued by the investment
professionals of the Advisor responsible for the portfolio
investment. As a part of this process, materials will be
prepared containing their supporting analysis.
|
|
|
|
Investment Committee Valuation. The investment
committee of our Advisor will review the investment team
valuation report and determine valuations to be considered by
the board of directors.
|
|
|
|
Independent Valuation Firm Activity. Our board
of directors has retained an independent valuation firm,
Duff & Phelps, LLC, to review, as requested from time
to time by the independent directors, the valuation report
provided by our Advisors investment committee and to
provide valuation assistance in reviewing if the valuations are
unreasonable.
|
|
|
|
Final Valuation Determination. Our board of
directors will consider the investment committee valuations,
including supporting documentation, and analysis of
Duff & Phelps, LLC, if applicable, and determine the
fair value of each investment in our portfolio in good faith.
|
Competition
We compete with public and private funds, commercial and
investment banks and commercial financing companies to make the
types of investments that we plan to make in the U.S. energy
infrastructure sector. Many of our competitors are substantially
larger and have considerably greater financial, technical and
marketing resources than us. For example, some competitors may
have a lower cost of funds and access to funding sources that
are not available to us. In addition, some of our competitors
may have higher risk tolerances or different risk assessments,
allowing them to consider a wider variety of investments and
establish more relationships than us. Furthermore, many of our
competitors are not subject to the regulatory restrictions that
the 1940 Act would impose on us as a result of our election to
be regulated as a BDC. These competitive conditions may
adversely affect our ability to make investments in the energy
infrastructure sector and could adversely affect our
distributions to stockholders.
Brokerage
Allocation and Other Practices
Since we will generally acquire and dispose of our investments
in privately negotiated transactions, we infrequently will use
brokers in the normal course of our business. Subject to
policies established by our board of directors, we do not expect
to execute transactions through any particular broker or dealer,
but will seek to obtain the best net results for us, taking into
account such factors as price (including the applicable
brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities of the firm
and the firms risk and skill in positioning blocks of
securities. While we will generally seek reasonably competitive
trade execution costs, we will not necessarily pay the lowest
spread or commission available. Subject to applicable legal
requirements, we may select a broker based partly on brokerage
or research services provided to us. In return for such
services, we may pay a higher commission than other brokers
would charge if it determines in good faith that such commission
is reasonable in relation to the services provided.
Proxy
Voting Policies
We, along with our Advisor have adopted proxy voting policies
and procedures (Proxy Policy), that we believe are
reasonably designed to ensure that proxies are voted in our best
interests and the best interests of our stockholders. Subject to
its oversight, the board of directors has delegated
responsibility for implementing the Proxy Policy to our Advisor.
54
In the event requests for proxies are received with respect to
the voting of equity securities, on routine matters, such as
election of directors or approval of auditors, the proxies
usually will be voted with management unless our Advisor
determines it has a conflict or our Advisor determines there are
other reasons not to vote with management. On non-routine
matters, such as amendments to governing instruments, proposals
relating to compensation and stock option and equity
compensation plans, corporate governance proposals and
stockholder proposals, our Advisor will vote, or abstain from
voting if deemed appropriate, on a case by case basis in a
manner it believes to be in the best economic interest of our
stockholders. In the event requests for proxies are received
with respect to debt securities, our Advisor will vote on a case
by case basis in a manner it believes to be in the best economic
interest of our stockholders.
Our Chief Executive Officer is responsible for monitoring our
actions and ensuring that (i) proxies are received and
forwarded to the appropriate decision makers, and
(ii) proxies are voted in a timely manner upon receipt of
voting instructions. We are not responsible for voting proxies
we do not receive, but will make reasonable efforts to obtain
missing proxies. Our Chief Executive Officer will implement
procedures to identify and monitor potential conflicts of
interest that could affect the proxy voting process, including
(i) significant client relationships, (ii) other
potential material business relationships, and
(iii) material personal and family relationships. All
decisions regarding proxy voting will be determined by our
Advisors investment committee and will be executed by our
Chief Executive Officer. Every effort will be made to consult
with the portfolio manager and/or analyst covering the security.
We may determine not to vote a particular proxy, if the costs
and burdens exceed the benefits of voting (e.g., when securities
are subject to loan or to share blocking restrictions).
If a request for proxy presents a conflict of interest between
our stockholders on one hand, and our Advisor, the principal
underwriters, or any affiliated persons of ours, on the other
hand, our management may (i) disclose the potential
conflict to the board of directors and obtain consent, or
(ii) establish an ethical wall or other informational
barrier between the persons involved in the conflict and the
persons making the voting decisions.
Staffing
We do not currently have or expect to have any employees.
Services necessary for our business will be provided by
individuals who are employees of our Advisor, pursuant to the
terms of the investment advisory agreement and the
administrative services agreement. Each of our executive
officers described under Management is an employee
of our Advisor or Fountain Capital.
Properties
Our office is located at 10801 Mastin Boulevard, Suite 222,
Overland Park, Kansas 66210.
Legal
Proceedings
Neither we nor our Advisor are currently subject to any material
legal proceedings.
55
PORTFOLIO
COMPANIES
As of January 17, 2007, we had invested a total of
$72.1 million in six portfolio companies in the
U.S. energy infrastructure sector. The following table sets
forth a brief description of each portfolio company and a
description of the investment we have made in each such company.
We may on occasion hold seats on the board of directors of a
portfolio company and endeavor to obtain board observation
rights with respect to our portfolio companies. For additional
information regarding our portfolio companies see our Schedule
of Investments included in this prospectus. Both Eagle Rock
Energy Partners, L.P. and Legacy Reserves LP are publicly-traded.
|
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|
|
|
|
|
|
|
|
|
Name of Portfolio
|
|
Nature of its
|
|
Title of Securities
|
|
Percentage of
|
|
Funded
|
Company (Segment)
|
|
Principal Business
|
|
Held by Us
|
|
Class Held
|
|
Investment
|
|
Eagle Rock Energy
Partners, L.P.
|
|
|
|
|
|
|
|
|
|
|
(Midstream)
|
|
Parent holding company of Eagle
Rock Pipeline, L.P., a gatherer and processor of natural gas
|
|
Unregistered
LP Interests(1)
Registered LP Interests(1)
|
|
|
*
*
|
|
|
$8.6 million
$3.5 million
|
High Sierra Energy, LP
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|
|
|
|
|
|
|
|
|
|
(Midstream)
|
|
Diversified midstream operations
primarily in Colorado, Wyoming and Florida
|
|
LP Interests
GP Option(2)
|
|
|
9.6%
n/a
|
|
|
$14.8 million
$0.2 million
|
Quest Midstream
Partners, LP
|
|
|
|
|
|
|
|
|
|
|
(Midstream)
|
|
Operator of natural gas gathering
pipeline network
|
|
LP Interests
|
|
|
9.5%
|
|
|
$17.5 million
|
Millennium Midstream
Partners, LP
|
|
|
|
|
|
|
|
|
|
|
(Midstream)
|
|
Gatherer and processor of natural
gas in Texas, Louisiana and offshore Gulf of Mexico
|
|
LP Interests
Incentive Distribution Rights
|
|
|
14.3%
7.8%
|
|
|
$17.5 million
|
Mowood, LLC(3)
|
|
|
|
|
|
|
|
|
|
|
(Downstream)
|
|
Natural gas distribution in
central Missouri
|
|
LLC Units
Subordinated Debt
|
|
|
100%
100%
|
|
|
$1.0 million
$4.5 million
|
Legacy Reserves LP
|
|
|
|
|
|
|
|
|
|
|
(Upstream)
|
|
Oil and natural gas exploitation
and development
|
|
Registered LP Interests(4)
|
|
|
*
|
|
|
$4.5 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
|
|
|
|
|
$72.1 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On March 27, 2006 we purchased $12.5 million in LP
Interests in Eagle Rock Pipeline, L.P. (Eagle Rock
Pipeline). In connection with the initial public offering
on October 24, 2006 of Eagle Rock Energy Partners, L.P.
(Eagle Rock Energy), the parent of Eagle Rock
Pipeline, 100% of our LP Interests in Eagle Rock Pipeline were
converted into 498,847 unregistered common units
representing LP Interests in Eagle Rock Energy. We have shelf
and piggyback registration rights for these unregistered common
units. At the time of the initial public offering of Eagle Rock
Energy, we also received a distribution of approximately
$3.4 million in cash on our LP Interest in Eagle Rock
Pipeline and purchased, for approximately $3.5 million,
185,000 freely tradable common units from Eagle Rock
Energy. On November 21, 2006, the underwriters of Eagle
Rock Energys initial public offering partially exercised
their option to purchase additional common |
56
|
|
|
|
|
units. Eagle Rock Energy used a portion of the proceeds of that
sale to redeem 24,776 of our unregistered common units,
resulting in a distribution to us of approximately
$0.5 million. |
|
(2) |
|
In addition to our purchase of LP Interests, we also obtained an
option to buy 3% of the general partner of High Sierra Energy,
LP, High Sierra Energy GP, LLC. The option may be exercised
anytime prior to May 2, 2007. |
|
(3) |
|
We currently have the right to appoint both members of the
Management Committee of Mowood. |
|
|
|
(4) |
|
Our LP Interests have been registered for re-sale and will be
freely transferable on March 28, 2007. |
Portfolio
Company Descriptions
Eagle
Rock Energy Partners, L.P. (Eagle Rock
Energy)
Eagle Rock Energy was formed by a management team with
significant midstream operating experience in companies such as
Enbridge Inc. and Dynegy Inc. and funded by their equity
sponsor, Natural Gas Partners, LLC. The company conducts its
operations through Eagle Rock Pipeline, L.P. (Eagle Rock
Pipeline), which identifies, purchases and improves
under-performing gathering and processing assets. We purchased
$12.5 million of LP Interests in Eagle Rock Pipeline on
March 27, 2006. On October 24, 2006, Eagle Rock Energy
completed the initial public offering of its common units
representing limited partner interests (Common
Units). In connection with that initial public offering,
our LP Interests in Eagle Rock Pipeline were converted into
498,847 unregistered Common Units of Eagle Rock Energy. We
have shelf and piggyback registration rights for these
unregistered Common Units. In connection with the initial public
offering of Eagle Rock Energy, we also received a distribution
of approximately $3.4 million in cash on our LP Interests
and purchased, for approximately $3.5 million, 185,000
freely tradable Common Units of Eagle Rock Energy. On
November 21, 2006, the underwriters of Eagle Rock
Energys initial public offering partially exercised their
option to purchase additional Common Units. Eagle Rock Energy
used a portion of the proceeds of that sale to redeem 24,776 of
our unregistered Common Units, resulting in a distribution to us
of approximately $0.5 million. Eagle Rock Energys
principal office is located at 14950 Heathrow Forest Pkwy.,
Suite 111, Houston, TX 77032.
High
Sierra Energy, LP (High Sierra)
High Sierra is a holding company with diversified midstream
energy assets focused on the processing, transportation and
marketing of hydrocarbons. The management team of High Sierra
includes former executives and founders of midstream private and
public companies focused on acquiring attractive assets at
reasonable multiples. To date, the companys purchased
assets include a natural gas liquids logistics and
transportation business in Colorado, natural gas gathering and
processing operations in Louisiana, a natural gas storage
facility in Mississippi, an ethanol terminal in Nevada, crude
and natural gas liquids trucking businesses in Kansas and
Colorado, a well water processing facility in Wyoming and two
asphalt processing, packaging and distribution terminals in
Florida. The company has raised in excess of $100 million
in equity. On November 2, 2006, we invested
$14.8 million in LP Units of High Sierra and
$0.2 million in an option to purchase a 3% general partner
interest in High Sierra Energy GP, LLC, the general partner of
High Sierra. High Sierras principal offices are located at
3773 Cherry Creek Drive North, Suite 655, Denver, CO 80209.
Quest
Midstream Partners, LP (Quest)
Quest was formed by the spin-off of Quest Resource
Corporations midstream coal bed methane natural gas
gathering assets. Quest Resource Corporation is an independent
publicly traded energy company with an emphasis on the
acquisition, production, exploration and development of coal bed
methane in southeastern Kansas and northeastern Oklahoma. Quest
operates a natural gas gathering pipeline network of
approximately 1,500 miles which primarily services Quest
Resource Corporation. We purchased $17.5 million
57
of LP Interests in Quest on December 22, 2006. Quests
principal office is located at 9520 North May Street
Suite 300 Oklahoma City, Oklahoma 73120.
Millennium
Midstream Partners, LP (Millennium)
Millennium is a natural gas gathering and processing company
with assets in Texas, Louisiana and offshore in the Gulf of
Mexico. Millenniums gathering business consists of over
500 miles of pipelines and its processing business consists of
interests in six plants. On December 28, 2006, we purchased
LP Interests and incentive distribution rights in Millennium for
$17.5 million. Millenniums principal office is
located at 10077 Grogans Mill Rd., Suite 200, The
Woodlands, TX 77380.
Mowood,
LLC (Mowood)
We purchased 100% ownership in Mowood, a holding company whose
sole asset is a wholly-owned operating company, Omega Pipeline,
LLC (Omega). Omega is a natural gas local
distribution company located on Fort Leonard Wood in
southwest Missouri. Omega is in the second year of a ten-year
contract with the Department of Defense pursuant to which it
provides natural gas to Fort Leonard Wood. We invested
$1.0 million in LLC units and purchased a $4.5 million
subordinated debenture on June 1, 2006. Mowoods
principal office is located at P.O. Box 2861, Ordinance
Street, Building 2570, Fort Leonard Wood, MO 65473.
Legacy
Reserves LP (Legacy)
Legacy has purchased, and expects to continue to purchase,
mature properties in the Permian Basin in Western Texas that
generate stable volumes of oil and natural gas with low rates of
decline. Legacy focuses on the exploitation of proved developed
reserves, instead of the more risky exploration of undeveloped
reserves and has hedged over 60% of production volumes expected
over the next five years. We purchased $4.5 million of LP
Interests in Legacy on March 6, 2006. Legacy completed the
initial public offering of its LP Interests on January 11,
2007. Our LP Interests have been registered for re-sale and will
be freely transferable on March 28, 2007. Legacys
principal office is located at 303 West Wall,
Suite 1500, Midland, TX 79701.
58
PORTFOLIO
MANAGEMENT
Our board of directors provides the overall supervision and
review of our affairs. Management of our portfolio is the
responsibility of our Advisors investment committee. Our
Advisors investment committee is composed of five senior
investment professionals, all of whom are managers of our
Advisor. Our Advisor has four senior investment professionals
who are responsible for the negotiation, structuring and
managing of our investments. Those senior investment
professionals are Messrs. Matlack, Mojica, Russell and
Schulte, of whom Messrs. Mojica and Russell are exclusively
dedicated to our activities. The Advisors four senior
investment professionals have over 70 years of combined
experience in energy, leveraged finance and private equity
investing. For biographical information about our Advisors
investment professionals, see Advisor.
Investment
Committee
Management of our portfolio will be the responsibility of our
Advisors investment committee. Our Advisors
investment committee is comprised of its five Managing
Directors: H. Kevin Birzer, Zachary A. Hamel, Kenneth P. Malvey,
Terry C. Matlack and David J. Schulte. All decisions to invest
in a portfolio company must be approved by the unanimous
decision of our Advisors investment committee and any one
member of our Advisors investment committee can require
our Advisor to sell a security. Biographical information about
each member of our Advisors investment committee is set
forth under Management Directors and
Officers, below. Information regarding the amount of our
securities owned by each member of our Advisors investment
committee is set forth under the heading Control Persons
and Principal Stockholders.
The following table provides information about the other
accounts managed on a
day-to-day
basis by each member of our Advisors investment committee
as of November 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Total Assets
|
|
|
|
|
|
|
Accounts
|
|
of Accounts
|
|
|
|
|
Total
|
|
Paying a
|
|
Paying a
|
|
|
Number of
|
|
Assets of
|
|
Performance
|
|
Performance
|
Name of Manager
|
|
Accounts
|
|
Accounts
|
|
Fee
|
|
Fee
|
|
H. Kevin Birzer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies
|
|
|
3
|
|
|
$
|
1,808,064,478
|
|
|
|
0
|
|
|
|
|
|
Other pooled investment vehicles
|
|
|
4
|
|
|
$
|
1,885,590,555
|
|
|
|
0
|
|
|
|
|
|
Other accounts
|
|
|
182
|
|
|
$
|
1,965,319,994
|
|
|
|
0
|
|
|
|
|
|
Zachary A. Hamel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies
|
|
|
3
|
|
|
$
|
1,808,064,478
|
|
|
|
0
|
|
|
|
|
|
Other pooled investment vehicles
|
|
|
4
|
|
|
$
|
1,885,590,555
|
|
|
|
0
|
|
|
|
|
|
Other accounts
|
|
|
182
|
|
|
$
|
1,965,319,994
|
|
|
|
0
|
|
|
|
|
|
Kenneth P. Malvey
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies
|
|
|
3
|
|
|
$
|
1,808,064,478
|
|
|
|
0
|
|
|
|
|
|
Other pooled investment vehicles
|
|
|
4
|
|
|
$
|
1,885,590,555
|
|
|
|
0
|
|
|
|
|
|
Other accounts
|
|
|
182
|
|
|
$
|
1,965,319,994
|
|
|
|
0
|
|
|
|
|
|
Terry C. Matlack
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies
|
|
|
3
|
|
|
$
|
1,808,064,478
|
|
|
|
0
|
|
|
|
|
|
Other pooled investment vehicles
|
|
|
1
|
|
|
$
|
27,000,000
|
|
|
|
1
|
|
|
$
|
27,000,000
|
|
Other accounts
|
|
|
160
|
|
|
$
|
185,779,727
|
|
|
|
0
|
|
|
|
|
|
David J. Schulte
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies
|
|
|
3
|
|
|
$
|
1,808,064,478
|
|
|
|
0
|
|
|
|
|
|
Other pooled investment vehicles
|
|
|
1
|
|
|
$
|
27,000,000
|
|
|
|
1
|
|
|
$
|
27,000,000
|
|
Other accounts
|
|
|
160
|
|
|
$
|
185,779,727
|
|
|
|
0
|
|
|
|
|
|
None of Messrs. Birzer, Hamel, Malvey, Matlack or Schulte
receives any direct compensation from the Company or any other
of the managed accounts reflected in the table above. All such
accounts are managed by the Advisor, Fountain Capital or KCEP.
Messrs. Schulte and Matlack are full-time employees of the
Advisor and receive a fixed salary for the services they
provide. Fountain Capital is paid a fixed monthly fee, subject
to adjustment, for the services of Messrs. Birzer, Hamel or
Malvey. Each of Messrs. Birzer, Hamel, Malvey, Matlack and
Schulte own an equity interest in either KCEP or Fountain
Capital, the two entities that control the Advisor, and each
thus benefits from increases in the net income of the Advisor,
KCEP or Fountain Capital.
59
MANAGEMENT
Directors
and Officers
Our business and affairs are managed under the direction of our
board of directors. Accordingly, our board of directors provides
broad supervision over our affairs, including supervision of the
duties performed by our Advisor. Certain employees of our
Advisor are responsible for our
day-to-day
operations. The names, ages and addresses of our directors and
officers and specified employees of our Advisor, together with
their principal occupations and other affiliations during the
past five years, are set forth below. Each director and officer
will hold office for the term to which he is elected and until
his successor is duly elected and qualifies, or until he resigns
or is removed in the manner provided by law. Unless otherwise
indicated, the address of each director and officer is 10801
Mastin Boulevard, Suite 222, Overland Park, Kansas 66210.
Our board of directors consists of a majority of directors who
are not interested persons (as defined in the 1940
Act) of our Advisor or its affiliates. The directors who are
interested persons (as defined in the 1940 Act) are
referred to as Interested Directors. Under our
Charter, the board is divided into three classes. Each class of
directors will hold office for a three year term. However, the
initial members of the three classes have initial terms of one,
two and three years, respectively. At each annual meeting of our
stockholders, the successors to the class of directors whose
terms expire at such meeting will be elected to hold office for
a term expiring at the annual meeting of stockholders held in
the third year following the year of their election and until
their successors are duly elected and qualify. In addition, so
long as shares of our Series A redeemable preferred stock
remain outstanding, holders of those shares are entitled to
elect two of our directors. Messers. Matlack and Graham have
initially been designated as those two directors.
The directors and officers of the Company and their principal
occupations and other affiliations during the past five years
are set forth below. Each director and officer will hold office
until his successor is duly elected and qualified, or until he
resigns or is removed in the manner provided by law. The address
of each director and officer is 10801 Mastin Boulevard,
Suite 222, Overland Park, Kansas 66210.
|
|
|
|
|
|
|
|
|
|
|
Position(s) Held
|
|
|
|
Number of
|
|
|
|
|
with Company,
|
|
|
|
Portfolios in
|
|
|
|
|
Term of Office
|
|
|
|
Fund Complex
|
|
Other Board
|
|
|
and Length of
|
|
Principal Occupation
|
|
Overseen by
|
|
Positions
|
Name and Age
|
|
Time Served
|
|
During Past Five Years
|
|
Director(1)
|
|
Held by Director
|
|
Independent Directors
|
|
|
|
|
|
|
|
|
Conrad S. Ciccotello, 46
|
|
Class III Director
since 2005
|
|
Tenured Associate Professor of Risk
Management and Insurance, Robinson College of Business, Georgia
State University (faculty member since 1999); Director of
Graduate Personal Financial Planning Programs; Editor,
Financial Services Review, (an academic journal
dedicated to the study of individual financial management);
formerly, faculty member, Pennsylvania State University.
|
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4
|
|
None
|
60
|
|
|
|
|
|
|
|
|
|
|
Position(s) Held
|
|
|
|
Number of
|
|
|
|
|
with Company,
|
|
|
|
Portfolios in
|
|
|
|
|
Term of Office
|
|
|
|
Fund Complex
|
|
Other Board
|
|
|
and Length of
|
|
Principal Occupation
|
|
Overseen by
|
|
Positions
|
Name and Age
|
|
Time Served
|
|
During Past Five Years
|
|
Director(1)
|
|
Held by Director
|
|
Independent Directors
(continued)
|
|
|
|
|
|
|
|
|
John R. Graham, 61
|
|
Class II Director
since 2005
|
|
Executive-in-Residence
and Professor of Finance, College of Business Administration,
Kansas State University (has served as a professor or adjunct
professor since 1970); Chairman of the Board, President and CEO,
Graham Capital Management, Inc., primarily a real estate
development and investment company and a venture capital
company; Owner of Graham Ventures, a business services and
venture capital firm; formerly, CEO, Kansas Farm Bureau
Financial Services, including seven affiliated insurance or
financial service companies (1979-2000).
|
|
4
|
|
Erie Indemnity
Company;
Kansas State
Bank
|
Charles E. Heath, 64
|
|
Class I Director
since 2005
|
|
Retired in 1999. Formerly, Chief
Investment Officer, GE Capitals Employers Reinsurance
Corporation (1989-1999). Chartered Financial Analyst
(CFA) since 1974.
|
|
4
|
|
None
|
Interested Directors and
Officers(2)
|
|
|
|
|
|
|
|
|
H. Kevin Birzer, 47
|
|
Class II Director
and Chairman of
the Board since
2005
|
|
Managing Director of the Advisor
since 2002; Partner, Fountain Capital (1990-present); Vice
President, Corporate Finance Department, Drexel Burnham Lambert
(1986-1989); formerly, Vice President, F. Martin
Koenig & Co., an investment management firm
(1983-1986).
|
|
4
|
|
None
|
Terry C. Matlack, 50
|
|
Class I Director
and Chief Financial
Officer since 2005
|
|
Managing Director of the Advisor
since 2002; Managing Director, KCEP (2001-present); formerly,
President, GreenStreet Capital, a private investment firm
(1998-2001).
|
|
4
|
|
None
|
David J. Schulte, 45
|
|
President and Chief
Executive Officer
since 2005
|
|
Managing Director of the Advisor
since 2002; Managing Director, KCEP (1993-present); CFA since
1992.
|
|
N/A
|
|
None
|
Zachary A. Hamel, 41
|
|
Senior Vice
President and
Secretary since
2005
|
|
Managing Director of the Advisor
since 2002; Partner with Fountain Capital (1997-present).
|
|
N/A
|
|
None
|
61
|
|
|
|
|
|
|
|
|
|
|
Position(s) Held
|
|
|
|
Number of
|
|
|
|
|
with Company,
|
|
|
|
Portfolios in
|
|
|
|
|
Term of Office
|
|
|
|
Fund Complex
|
|
Other Board
|
|
|
and Length of
|
|
Principal Occupation
|
|
Overseen by
|
|
Positions
|
Name and Age
|
|
Time Served
|
|
During Past Five Years
|
|
Director(1)
|
|
Held by Director
|
|
Interested Directors and
Officers (2)
(continued)
|
|
|
|
|
|
|
|
|
Kenneth P. Malvey, 41
|
|
Senior Vice
President and
Treasurer since
November 2005
|
|
Managing Director of the Advisor
since 2002; Partner, Fountain Capital Management (2002-present);
formerly, Investment Risk Manager and member of the Global
Office of Investments, GE Capitals
Employers Reinsurance Corporation
(1996-2002).
|
|
N/A
|
|
None
|
|
|
|
(1) |
|
This number includes TYG, TYY, TYN and us. Our Advisor also
serves as the investment advisor to TYG, TYY and TYN. |
|
(2) |
|
As a result of their respective positions held with the Advisor
or is affiliates, these individuals are considered
interested persons within the meaning of the 1940
Act. |
Audit and
Valuation Committee
Our board of directors has a standing Audit and Valuation
Committee that consists of three directors of the Company who
are not interested persons (within the meaning of
the 1940 Act) (Independent Directors). The Audit and
Valuation Committees function is to select independent
registered public accounting firm to conduct the annual audit of
our financial statements, review with the independent registered
public accounting firm the outline, scope and results of this
annual audit, review the portfolio company valuations proposed
by our Advisors investment committee and review the
performance and approval of all fees charged by the independent
registered public accounting firm for audit, audit-related and
other professional services. In addition, the Audit and
Valuation Committee meets with the independent registered public
accounting firm and representatives of management to review
accounting activities and areas of financial reporting and
control. For purposes of the Sarbanes-Oxley Act, the Audit and
Valuation Committee has at least one member who is deemed to be
a financial expert. The Audit Committee operates under a written
charter approved by the Board of Directors. The Audit and
Valuation Committee meets periodically, as necessary and held
one meeting during fiscal 2006. The Audit and Valuation
Committee members are Mr. Ciccotello (Chairman),
Mr. Graham, and Mr. Heath.
Nominating,
Corporate Governance and Compensation Committee
We have a Nominating, Corporate Governance and Compensation
Committee (the Committee) that consists exclusively
of three Independent Directors. The Committees function
is: (1) to identify individuals qualified to become Board
members, consistent with criteria approved by the Board, and to
recommend to the Board the director nominees for the next annual
meeting of stockholders and to fill any vacancies; (2) to
monitor the structure and membership of Board committees;
(3) to recommend to the Board director nominees for each
committee; (4) review issues and developments related to
corporate governance issues and develop and recommend to the
Board corporate governance guidelines and procedures;
(5) evaluate and make recommendations to the Board
regarding director compensation; and (6) oversee the
evaluation of the Board and management. The Committee will
consider stockholder recommendations for nominees for membership
to the Board so long as such recommendations are made in
accordance with our Bylaws. The members of the Committee are
Conrad S. Cicotello, John R. Graham (Chairman) and Charles E.
Heath. The Committee meets periodically as necessary and did not
meet during fiscal 2006.
62
Compensation
Table
Our directors and officers who are interested persons receive no
salary or fees from us. Each Independent Director receives from
us an annual retainer of $8,000 and a fee of $2,000 (and
reimbursement for related expenses) for each meeting of the
Board or Audit and Valuation Committee he or she attends in
person (or $1,000 for each Board or Audit and Valuation
Committee meeting attended telephonically, or for each Audit and
Valuation Committee meeting attended in person that is held on
the same day as a Board meeting). Independent Directors also
receive $1,000 for each other committee meeting attended in
person or telephonically (other than Audit and Valuation
Committee meetings). The Chairman of the Audit and Valuation
Committee receives an additional annual retainer of $4,000.
The table below sets forth the compensation paid to our board of
directors during fiscal 2006. We do not compensate our officers.
No director or officer is entitled to receive pension or
retirement benefits from us and no director received any
compensation from us other than in cash.
Director
Compensation
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
|
or Paid
|
|
|
|
|
Name and Position with the Company
|
|
in Cash
|
|
|
Total
|
|
|
Independent Directors
|
|
|
|
|
|
|
|
|
Conrad S. Ciccotello
|
|
$
|
25,030
|
|
|
$
|
25,030
|
|
John R. Graham
|
|
$
|
22,030
|
|
|
$
|
22,030
|
|
Charles E. Heath
|
|
$
|
21,030
|
|
|
$
|
21,030
|
|
|
|
|
|
|
|
|
|
|
Interested Directors
|
|
|
|
|
|
|
|
|
H. Kevin Birzer
|
|
|
$0
|
|
|
|
$0
|
|
Terry C. Matlack
|
|
|
$0
|
|
|
|
$0
|
|
63
ADVISOR
Tortoise Capital Advisors, a registered investment advisor, will
serve as our investment advisor. Our Advisor was formed in
October 2002 and has been managing investments in portfolios of
MLPs in the energy infrastructure sector since that time. Our
Advisor also manages the investments of TYG, TYY and TYN. TYG is
a non-diversified, closed-end management investment company that
was created to invest principally in MLPs in the energy
infrastructure sector. TYY is a non-diversified, closed-end
management investment company that was created to invest
primarily in MLPs and their affiliates in the energy
infrastructure sector. TYN is a non-diversified, closed-end
management investment company that was created to invest
primarily in energy infrastructure investments in public
companies in the United States and Canada. As of
November 30, 2006, our Advisor had client assets under
management of approximately $2.0 billion.
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
Inception
|
|
Targeted
|
|
Total Assets
|
Name
|
|
Ticker/Private
|
|
Date
|
|
Investments
|
|
($ in millions)
|
|
Tortoise Capital Resources
Corp.
|
|
NYSE: TTO
|
|
Dec. 2005
|
|
Privately-Held and Micro-Cap
U.S. Energy Infrastructure
|
|
$
|
42.9
|
Tortoise Energy Infrastructure
Corp.
|
|
NYSE: TYG
|
|
Feb. 2004
|
|
U.S. Energy Infrastructure,
Primarily in MLPs
|
|
$
|
928.4
|
Tortoise Energy Capital Corp.
|
|
NYSE: TYY
|
|
May 2005
|
|
U.S. Energy Infrastructure,
Primarily in MLPs
|
|
$
|
706.6
|
Tortoise North America Energy
Corp.
|
|
NYSE: TYN
|
|
Oct. 2005
|
|
Canadian and U.S. Energy
Infrastructure, Diversified
|
|
$
|
173.2
|
Separately Managed Accounts and
Private Partnerships
|
|
Private
|
|
Nov. 2002
|
|
U.S. Energy Infrastructure
|
|
$
|
185.8
|
Our Advisor is controlled equally by KCEP and Fountain Capital.
|
|
|
|
|
KCEP was formed in 1993 and until recently, managed KCEP
Ventures II, L.P. (KCEP II), a private equity
fund with committed capital of $55 million invested in a
variety of companies in diverse industries, including a private
financing for a propane retail and wholesale company, Inergy,
L.P. KCEP II wound up its operations in late 2006, has no
remaining portfolio investments and has distributed proceeds to
its partners. KCEP Ventures I, L.P. (KCEP I), a
start-up and
early-stage venture capital fund launched in 1994 and previously
managed by KCEP, also recently completed the process of winding
down. As a part of that process, KCEP I entered into a
consensual order of receivership, which was necessary to allow
KCEP I to distribute its remaining $1.3 million of assets
to creditors and the SBA. The consensual order acknowledged a
capital impairment condition and the resulting nonperformance by
KCEP I of its agreement with the SBA, both of which were
violations of the provisions requiring repayment of capital
under the Small Business Investment Act of 1958 and the
regulations thereunder. We do not currently expect the
consensual order or the performance of KCEP I to prevent the
wholly-owned subsidiary we may create from becoming licensed by
the SBA as a SBIC or prevent its participation in the
SBA-sponsored debenture program.
|
|
|
|
|
|
Fountain Capital was formed in 1990 and focuses primarily on
providing investment advisory services to institutional
investors with respect to below investment grade debt. Fountain
Capital had approximately $1.7 billion of client assets
under management as of November 30, 2006, of which
approximately $237 million was invested in 17 energy
companies.
|
|
|
|
|
|
Our Advisor was formed by KCEP and Fountain Capital to provide
portfolio management services in the energy infrastructure
sector in advance of an investment of client funds in
|
64
|
|
|
|
|
Markwest Energy Partners, L.P., a micro-cap public natural gas
processing and pipeline company in the midstream segment of the
energy infrastructure sector.
|
Our Advisor currently has four senior investment professionals
who are responsible for the origination, negotiation,
structuring and managing of our investments. Two of those senior
investment professionals are Messrs. Matlack and Schulte,
who are also Managing Directors of KCEP. The other two senior
investment professionals are Messrs. Mojica and Russell,
both of whom are dedicated to our activities. The Advisors
four senior investment professionals have over 70 years of
combined experience in energy, leveraged finance and private
equity investing. Their biographical information is set forth
below.
|
|
|
|
|
Terry Matlack Mr. Matlack was a founder
of, and is a Managing Director of, our Advisor. Since 2001,
Mr. Matlack has been a Managing Director of KCEP. Prior to
joining KCEP, Mr. Matlack was President of GreenStreet
Capital and its affiliates, which invested primarily in the
telecommunications service industry. Prior to 1995, he was
Executive Vice President and a member of the board of directors
of W. K. Communications, Inc., a cable television acquisition
company, and Chief Operating Officer of W. K. Cellular, a rural
cellular service area operator. Mr. Matlack also serves on
the board of directors of Kansas Venture Capital, an SBIC.
|
|
|
|
Abel Mojica III Prior to joining our
Advisor in 2005 and since 1999, Mr. Mojica was a Principal
of KCEP. While at KCEP, Mr. Mojica, together with
Mr. Schulte, led KCEPs investment in the private
company predecessor to Inergy, L.P., from an early stage of
development through its initial public offering and was also
involved in the structuring of an investment in MarkWest Energy
Partners, L.P. Mr. Mojica has been in the private equity
and finance industry since 1996. Mr. Mojica represented the
interests of KCEP by serving on the boards of directors of three
portfolio companies. Prior to joining KCEP in 1999,
Mr. Mojica worked in investment banking at First Chicago
Capital Markets (now J.P. Morgan Chase) and in commercial
banking at Citicorp (now Citigroup).
|
|
|
|
|
|
Edward Russell Prior to joining our Advisor
in March of 2006, Mr. Russell was a Managing Director in
the investment banking department of Stifel, Nicolaus &
Company, Incorporated (Stifel Nicolaus) since 1999.
While a Managing Director at Stifel Nicolaus, Mr. Russell
was responsible for all of the energy and power transactions,
including all of the debt and equity transactions for the three
closed-end public funds managed by our Advisor, starting with
the first public equity offering in February of 2004. Prior to
joining Stifel Nicolaus, Mr. Russell worked in commercial
banking for over 10 years as a lender with Magna Group and
South Side National Bank.
|
|
|
|
|
|
David J. Schulte Mr. Schulte was a
founder of, and is a Managing Director of, our Advisor. Since
1994, Mr. Schulte has been a Managing Director of KCEP.
While a partner at KCEP, Mr. Schulte led private financings
for two growth MLPs in the energy infrastructure sector, Inergy,
L.P., where he served as a director, and MarkWest Energy
Partners, L.P., where he was a board observer. Prior to joining
KCEP, Mr. Schulte had over five years of experience
completing acquisition and public equity financings as an
investment banker at the predecessor of Oppenheimer &
Co., Inc. Mr. Schulte also serves on the investment
committee of Diamond State Ventures, an SBIC. Mr. Schulte
is a past President of the Midwest Region of SBICs and a former
director of the National Association of SBICs.
|
Our Advisor has 20 full time employees, but also relies to
a significant degree on the officers, employees, and resources
of Fountain Capital. Three of the five members of the investment
committee of our Advisor are affiliates of, but not employees
of, our Advisor, and each has other significant responsibilities
with Fountain Capital, which conducts businesses and activities
of its own in which our Advisor has no economic interest. If
these separate activities are significantly greater than our
Advisors activities, there could be material competition
for the efforts of key personnel.
Each of our Advisors investment decisions will be reviewed
and approved for us by its investment committee, which also acts
as the investment committee for TYG, TYY and TYN. Our
Advisors investment
65
committee is comprised of its five Managing Directors: H. Kevin
Birzer, Zachary A. Hamel, Kenneth P. Malvey, Terry C. Matlack
and David J. Schulte. Messrs. Birzer, Hamel and Malvey are
each Partners/Senior Analysts with Fountain Capital. The members
of our Advisors investment committee have an average of
over 20 years of financial investment experience.
Conflicts
of Interests
Our senior professionals have a conflict of interest in
allocating potentially more favorable investment opportunities
to us and other funds and clients that pay our Advisor an
incentive or performance fee. Performance and incentive fees
also create the incentive to allocate potentially riskier, but
potentially better performing, investments to us in an effort to
increase the incentive fee. Our Advisor may also have an
incentive to make investments by one fund, having the effect of
increasing the value of a security in the same issuer held by
another fund, which in turn may result in an incentive fee being
paid to our Advisor by that other fund. Our Advisor may also
have an incentive to allocate potentially more favorable
investments to us because pursuant to the Administration
Agreement between us and our Advisor, we pay our Advisor a fee
based on our average daily Managed Assets. However, senior
professionals of our Advisor manage potential conflicts of
interest by allocating investment opportunities in a fair and
equitable manner consistent with our investment objectives and
strategies, and in accordance with written allocation policies
and procedures of our Advisor so that we will not be
disadvantaged in relation to any other client.
Investment
Advisory Agreement
Management
Services
Pursuant to an investment advisory agreement, our Advisor will
be subject to the overall supervision and review of our board of
directors, provide us with investment research, advice and
supervision and will furnish us continuously with an investment
program, consistent with our investment objective and policies.
Our Advisor also will determine from time to time what
securities we shall purchase, and what securities shall be held
or sold, what portions of our assets shall be held uninvested as
cash, short duration high yield securities or in other liquid
assets, will maintain books and records with respect to all of
our transactions, and will report to our board of directors on
our investments and performance.
Our Advisors services to us under the investment advisory
agreement will not be exclusive, and our Advisor is free to
furnish the same or similar services to other entities,
including businesses which may directly or indirectly compete
with us, so long as our Advisors services to us are not
impaired by the provision of such services to others. Under the
investment advisory agreement and to the extent permitted by the
1940 Act, our Advisor will also provide on our behalf
significant managerial assistance to portfolio companies to
which we are required to provide such assistance under the 1940
Act and who require such assistance from us.
Administration
Services
Pursuant to the investment advisory agreement, our Advisor also
furnishes us with office facilities and clerical and
administrative services necessary for our operation (other than
services provided by our custodian, accounting agent,
administrator, dividend and interest paying agent and other
service providers). Our Advisor is authorized to cause us to
enter into agreements with third parties to provide such
services. To the extent we request, our Advisor will
(i) oversee the performance and payment of the fees of our
service providers and make such reports and recommendations to
the board of directors concerning such matters as the parties
deem desirable, (ii) respond to inquiries and otherwise
assist such service providers in the preparation and filing of
regulatory reports, proxy statements, and stockholder
communications, and the preparation of materials and reports for
the board of directors; (iii) establish and oversee the
implementation of borrowing facilities or other forms of
leverage authorized by the board of directors and
(iv) supervise any other aspect of our administration as
may be agreed upon by us and our Advisor. We have agreed,
pursuant to the investment advisory agreement, to reimburse our
Advisor or its affiliate for all
out-of-pocket
expenses incurred in providing the foregoing services.
66
Management
Fee
Pursuant to the investment advisory agreement, we will pay our
Advisor a fee consisting of two components a base
management fee and an incentive fee in return for the management
and administration services described above. For a discussion
regarding the basis for our board of directors approval of
the investment advisory agreement, see Board Approval of
the Investment Advisory Agreement below. This discussion
will also be available in our annual report to stockholders.
The base management fee is 0.375% (1.5% annualized) of our
average monthly Managed Assets, calculated and paid quarterly in
arrears within 30 days of the end of each fiscal quarter.
The term Managed Assets as used in the calculation
of the management fee means our total assets (including any
assets purchased with or attributable to borrowed funds) minus
accrued liabilities other than (1) deferred taxes and
(2) debt entered into for the purpose of leverage. The base
management fee for any partial quarter will be appropriately
prorated.
The incentive fee consists of two parts. The first part, the
investment income fee, is calculated and payable quarterly in
arrears and will equal 15% of the excess, if any, of our Net
Investment Income for the quarter over a quarterly hurdle rate
equal to 2% (8% annualized) of our average monthly Net Assets
for the quarter (defined as Managed Assets minus deferred taxes,
debt entered into for the purposes of leverage and the aggregate
liquidation preference of outstanding preferred shares). For
purposes of calculating the investment income fee, Net
Investment Income shall mean interest income (including
accrued interest that we have not yet received in cash),
dividend and distribution income from equity investments (but
excluding that portion of cash distributions that are treated as
return of capital), and any other income (including any fees
such as commitment, origination, syndication, structuring,
diligence, monitoring, and consulting fees or other fees that we
are entitled to receive from portfolio companies) accrued during
the fiscal quarter, minus our operating expenses for the quarter
(including the base management fee, expenses payable by us, any
interest expense, any accrued income taxes related to Net
Investment Income and dividends paid on issued and outstanding
preferred stock, if any, but excluding the incentive fees
payable to our Advisor). Accordingly, we may pay an incentive
fee based partly on accrued interest, the collection of which is
uncertain or deferred. Net Investment Income also includes, in
the case of investments with a deferred interest or income
feature (such as original issue discount, debt or equity
instruments with a
payment-in-kind
feature, and zero coupon securities), accrued income that we
have not yet received in cash. Net Investment Income does not
include any realized capital gains, realized capital losses, or
unrealized capital appreciation or depreciation. The investment
income fee is payable within thirty days of the end of each
fiscal quarter but no investment income fee was paid or earned
prior to December 8, 2006. The investment income fee for
any partial quarter will be appropriately prorated.
The second part of the incentive fee payable to our Advisor, the
capital gains fee, is calculated and payable in arrears as of
the end of each fiscal year (or upon termination of the
investment advisory agreement, as of the termination date), and
equals: (i) 15% of (a) our net realized capital gains,
excluding the impact of current and deferred income taxes
(realized capital gains less realized capital losses), on a
cumulative basis from the commencement of our operations on
December 8, 2005 to the end of each fiscal year, less
(b) any unrealized capital depreciation, excluding the
impact of deferred income taxes, at the end of such fiscal year,
less (ii) the aggregate amount of all capital gains fees
paid to our Advisor in prior fiscal years. The calculation of
the capital gains fee will include any capital gains that result
from the cash distributions that are treated as a return of
capital. In that regard, any such return of capital will be
treated as a decrease in our cost basis of an investment for
purposes of calculating the capital gains fee. Realized capital
gains on a security will be calculated as the excess of the net
amount realized from the sale or other disposition of such
security over the adjusted cost basis for that security.
Realized capital losses on a security will be calculated as the
amount by which the net amount realized from the sale or other
disposition of such security is less than the adjusted cost
basis of such security. Unrealized capital depreciation on a
security will be calculated as the amount by which our adjusted
cost basis of such security exceeds the fair value of such
security at the end of a fiscal year. Our Advisor will use at
least 25% of any capital gains fees received from us at any time
on or prior to December 8, 2007 to purchase our common
shares. There can be no assurance that our Advisor will earn any
capital gains fee and, as a result, there can be no assurance
that our Advisor will make any such purchases. We will
67
determine all fiscal year-end valuations in accordance with
generally accepted accounting principles, the 1940 Act, and our
policies and procedures to the extent consistent therewith. In
the event the investment advisory agreement is terminated, the
capital gains fee calculation will be undertaken as of, and any
resulting capital gains fee will be paid within fifteen days of,
the date of termination.
The payment of the investment income fee portion of the
incentive compensation on a quarterly basis may lead our Advisor
to accelerate or defer interest payable by our portfolio
companies in a manner that could result in fluctuations in the
timing and amount of distributions.
The following examples are intended to assist in an
understanding of the two components of the incentive fee. These
examples are not intended as an indication of our expected
performance.
Examples
of Quarterly Incentive Fee Calculation
Example
1: Income Related Portion of Incentive Fee(1):
Assumptions
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The following calculations only apply from December 8,
2006, as our Advisor is not entitled to any income-related
portion of the incentive fee in any earlier period
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Management fee(3) = 0.375%
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Other expenses (legal, accounting, custodian, transfer agent,
etc.)(4) = 0.20%
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Alternative
1
Additional
Assumptions
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Investment income (including interest, dividends, fees, etc.) =
1.25%
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Pre-incentive fee net investment income (investment
income (management fee + other expenses)) = 0.675%
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Pre-incentive fee net investment income does not exceed hurdle
rate, therefore there is no incentive fee.
Alternative
2
Additional
Assumptions
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Investment income (including interest, dividends, fees, etc.) =
3.50%
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Pre-incentive fee net investment income (investment
income (management fee + other expenses)) = 2.925%
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(1) The hypothetical amount of pre-incentive fee net
investment income shown is based on a percentage of our net
assets.
(2) Represents 8.0% annualized hurdle rate.
(3) Represents 1.5% annualized management fee. For the
purposes of this example, we have assumed that we have not
incurred any indebtedness and that we maintain no cash or cash
equivalents.
(4) Excludes organizational, offering expenses and income
tax.
68
Pre-incentive fee net investment income exceeds hurdle rate,
therefore there is an incentive fee.
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Incentive
Fee
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=
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15% x (pre-incentive fee net investment income
2.00%)
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=
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15% x (2.925% 2.00%)
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=
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15% x 0.925%
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=
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0.13875%
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Example
2: Capital Gains Portion of Incentive Fee:
Alternative
1
Assumptions
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Year 1: $20 million investment made and
November 30 fair market value (FMV) of
investment determined to be $20 million
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Year 2: November 30 FMV of investment
determined to be $22 million
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Year 3: November 30 FMV of investment
determined to be $17 million
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Year 4: Investment sold for $21 million
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The impact, if any, on the capital gains portion of the
incentive fee would be:
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Year 1: No impact
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Year 2: No impact
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Year 3: Reduce base amount on which the
capital gains portion of the incentive fee is calculated by
$3 million
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Year 4: Increase base amount on which the
capital gains portion of the incentive fee is calculated by
$4 million (less the amount, if any, of the unrealized
capital depreciation from Year 3 that did not actually reduce
the capital gains portion of the incentive fee that would
otherwise have been payable to our Advisor in Year 3)
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Alternative
2
Assumptions
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Year 1: $20 million investment made and
November 30 FMV of investment determined to be
$20 million
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Year 2: November 30 FMV of investment
determined to be $17 million
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Year 3: November 30 FMV of investment
determined to be $17 million
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Year 4: November 30 FMV of investment
determined to be $21 million
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Year 5: November 30 FMV of investment
determined to be $18 million
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Year 6: Investment sold for $15 million
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The impact, if any, on the capital gains portion of the
incentive fee would be:
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Year 1: No impact
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Year 2: Reduce base amount on which the second
part of the incentive fee is calculated by $3 million
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Year 3: No impact
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Year 4: No impact
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Year 5: No impact
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69
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Year 6: Reduce base amount on which the second
part of the incentive fee is calculated by $2 million (plus
the amount, if any, of the unrealized capital depreciation from
Year 2 that did not actually reduce the second part of the
incentive fee that would otherwise have been payable to our
Advisor in prior years)
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Alternative
3
Assumptions
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Year 1: $20 million investment made in
company A (Investment A), and $20 million
investment made in company B (Investment B) and
November 30 FMV of each investment determined to be
$20 million
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Year 2: November 30 FMV of Investment A
is determined to be $21 million, and Investment B is sold
for $18 million
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Year 3: Investment A is sold for
$23 million
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The impact, if any, on the capital gains portion of the
incentive fee would be:
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Year 1: No impact
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Year 2: Reduce base amount on which the
capital gains portion of the incentive fee is calculated by
$2 million (realized capital loss on Investment B)
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Year 3: Increase base amount on which the
capital gains portion of the incentive fee is calculated by
$3 million (realized capital gain on Investment A)
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Alternative
4
Assumptions
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Year 1: $20 million investment made in
company A (Investment A), and $20 million
investment made in company B (Investment B) and
November 30 FMV of each investment determined to be
$20 million
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Year 2: November 30 FMV of Investment A
is determined to be $21 million and FMV of Investment B is
determined to be $17 million
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Year 3: November 30 FMV of Investment A
is determined to be $18 million and FMV of Investment B is
determined to be $18 million
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Year 4: November 30 FMV of Investment A
is determined to be $19 million and FMV of Investment B is
determined to be $21 million
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Year 5: Investment A is sold for
$17 million and Investment B is sold for $23 million
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The impact, if any, on the capital gains portion of the
incentive fee would be:
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Year 1: No impact
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Year 2: Reduce base amount on which the
capital gains portion of the incentive fee is calculated by
$3 million (unrealized capital depreciation on Investment B)
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Year 3: Reduce base amount on which the
capital gains portion of the incentive fee is calculated by
$2 million (unrealized capital depreciation on Investment A)
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Year 4: No impact
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Year 5: Increase base amount on which the
second part of the incentive fee is calculated by
$5 million ($6 million of realized capital gain on
Investment B partially offset by $1 million of realized
capital loss on Investment A) (less the amount, if any, of the
unrealized capital depreciation on Investment A from Year 3 and
the unrealized capital depreciation on
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70
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Investment B from Year 2 that did not actually reduce the
capital gains portion of incentive fees that would otherwise
have been payable to our Advisor in prior years)
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Payment
of Our Expenses
We will bear all expenses not specifically assumed by our
Advisor and incurred in our operations, we have borne the
expenses related to the private placement of our common shares,
preferred shares and warrants and we will bear the expenses
related to this offering. The compensation and allocable routine
overhead expenses of all investment professionals of our Advisor
and its staff, when and to the extent engaged in providing us
investment advisory services, is provided and paid for by our
Advisor and not us. The compensation and expenses borne by us
include, but are not limited to, the following:
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other than as provided in the paragraph above, expenses of
maintaining and continuing our existence and related overhead,
including, to the extent such services are provided by personnel
of our Advisor or its affiliates, office space and facilities
and personnel compensation, training and benefits,
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commissions, spreads, fees and other expenses connected with the
acquisition, holding and disposition of securities and other
investments including placement and similar fees in connection
with direct placements entered into on our behalf,
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auditing, accounting and legal expenses (including costs
associated with the implementation of our Sarbanes-Oxley
internal controls and procedures over financial reporting),
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taxes and interest,
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governmental fees,
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expenses of listing our shares with a stock exchange, and
expenses of issue, sale, repurchase and redemption (if any) of
our interests, including expenses of conducting tender offers
for the purpose of repurchasing our securities,
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expenses of registering and qualifying us and our securities
under federal and state securities laws and of preparing and
filing registration statements and amendments for such purposes,
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expenses of communicating with stockholders, including website
expenses and the expenses of preparing, printing and mailing
press releases, reports and other notices to stockholders and of
meetings of stockholders and proxy solicitations therefor,
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expenses of reports to governmental officers and commissions,
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insurance expenses,
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association membership dues,
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fees, expenses and disbursements of custodians and subcustodians
for all services to us (including without limitation safekeeping
of funds, securities and other investments, keeping of books,
accounts and records, and determination of net asset values),
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fees, expenses and disbursements of transfer agents, dividend
and interest paying agents, stockholder servicing agents,
registrars and administrator for all services to us,
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compensation and expenses of our directors who are not members
of our Advisors organization,
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pricing, valuation and other consulting or analytical services
employed in considering and valuing our actual or prospective
investments,
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all expenses incurred in leveraging of our assets through a line
of credit or other indebtedness or issuing and maintaining
preferred shares,
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71
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all expenses incurred in connection with our organization and
any offering of our common shares, including our private
placement and this offering, and
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such non-recurring items as may arise, including expenses
incurred in litigation, proceedings and claims and our
obligation to indemnify our directors, officers and stockholders
with respect thereto.
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Duration
and Termination
The investment advisory agreement was most recently approved by
our board of directors on November 13, 2006 and by our
stockholders at a special meeting held on December 21,
2006. Unless terminated earlier as described below, it will
continue in effect for a period of one year from its effective
date of January 1, 2007. It will remain in effect from year
to year thereafter if approved annually by our board of
directors or by the affirmative vote of the holders of a
majority of our outstanding voting securities, and, in either
case, upon approval by a majority of our directors who are not
interested persons or parties to the investment advisory
agreement. The investment advisory agreement will automatically
terminate in the event of its assignment. The investment
advisory agreement may be terminated by us without penalty upon
not more than 60 days written notice to our Advisor.
The investment advisory agreement may also be terminated by our
Advisor without penalty upon not less than 60 days
written notice to us.
Liability
of Advisor
The investment advisory agreement provides that our Advisor will
not be liable to us in any way for any default, failure or
defect in any of the securities comprising our portfolio if it
has satisfied the duties and the standard of care, diligence and
skill set forth in the investment advisory agreement. However,
our Advisor will be liable to us for any loss, damage, claim,
cost, charge, expense or liability resulting from our
Advisors willful misconduct, bad faith or gross negligence
or disregard by our Advisor of its duties or standard of care,
diligence and skill set forth in the investment advisory
agreement or a material breach or default of our Advisors
obligations under that agreement.
Board
Approval of the Investment Advisory Agreement
Our board of directors, including a majority of the independent
directors, most recently reviewed and approved the investment
advisory agreement on November 13, 2006. In addition, the
investment advisory agreement was most recently approved by our
stockholders at a special meeting held on December 21, 2006.
In considering the approval of the investment advisory
agreement, our board of directors evaluated information provided
by our Advisor and their legal counsel and considered various
factors, including the following:
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Services. Our board of directors reviewed the
nature, extent and quality of the investment advisory and
administrative services previously provided and proposed to be
provided to us by our Advisor and found them sufficient to
encompass the range of services necessary for our operation.
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Comparison of Management Fee to Other
Firms. Our board of directors reviewed and
considered to the extent publicly available, the management fee
arrangements of companies with similar business models,
including business development companies.
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Experience of Management Team and
Personnel. Our board of directors considered the
extensive experience of the members of our Advisors
investment committee with respect to the specific types of
investments we propose to make, and their past experience with
similar kinds of investments. Our board of directors discussed
numerous aspects of the investment strategy with members of our
Advisors investment committee and also considered the
potential flow of investment opportunities resulting from the
numerous relationships of our Advisors investment
committee and investment professionals within the investment
community.
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72
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Provisions of Investment Advisory
Agreement. Our board of directors considered the
extent to which the provisions of the investment advisory
agreement (other than the fee structure which is discussed
above) were comparable to the investment advisory agreements and
administration agreements of companies with similar business
models, including, peer group business development companies,
and concluded that its terms were satisfactory and in line with
market norms. In addition, our board of directors concluded that
the services to be provided under the investment advisory
agreement were reasonably necessary for our operations, the
services to be provided were at least equal to the nature and
quality of those provided by others, and the payment terms were
fair and reasonable in light of usual and customary charges.
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Payment of Expenses. Our board of directors
considered the manner in which our Advisor would be reimbursed
for its expenses at cost and the other expenses for which it
would be reimbursed under the investment advisory agreement. The
board of directors discussed how this structure was comparable
to that of companies with similar business models, including
existing business development companies.
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Based on the information reviewed and the discussions among the
members of our board of directors, our board of directors,
including all of our independent directors, approved the
investment advisory agreement and concluded that the management
fee rates were reasonable in relation to the services to be
provided.
License
Agreement
Pursuant to the investment advisory agreement, our Advisor has
consented to our use on a non-exclusive, royalty-free basis, of
the name Tortoise in our name. We will have the
right to use the Tortoise name so long as our
Advisor or one of its approved affiliates remains our investment
advisor. Other than with respect to this limited right, we will
have no legal right to the Tortoise name. This right
will remain in effect for so long as the investment advisory
agreement with our Advisor is in effect and will automatically
terminate if the investment advisory agreement were to terminate
for any reason, including upon its assignment.
Sub-Advisor
Arrangement
The investment advisory agreement authorizes our Advisor to
delegate any or all of its rights, duties and obligations to one
or more sub-advisors upon receipt of approval of such
sub-advisor by our board of directors and stockholders (unless
such approval is not required by the relevant statutes, rules,
regulations, interpretations, orders, or similar relief). Our
Advisor has entered into a sub-advisory agreement with Kenmont
pursuant to which our Advisor has agreed to pay Kenmont
(i) 10% of the base management fee our Advisor receives
from us once our total assets (including any assets purchased
with borrowed funds) initially exceed $75 million, and
(ii) 20% of any incentive fee our Advisor receives from us.
Kenmont is a Houston, Texas based registered investment advisor
with experience investing in privately-held and public companies
in the U.S. energy and power sectors. Kenmont provides
additional contacts and enhances the number and range of
potential investment opportunities in which we have the
opportunity to invest. Kenmont Special Opportunities Master
Fund LP purchased 666,666 of our common shares and 166,666
of our warrants in the initial closing of our offering of common
shares and warrants on December 8, 2005 and purchased
536,666, or $8.05 million, of our Series A redeemable
preferred stock and 80,500 of our warrants to purchase common
shares in our bridge financing completed in December 2006.
Pursuant to the sub-advisory agreement with Kenmont, Kenmont
(i) assists in identifying potential investment
opportunities, subject to the right of Kenmont to first show
investment opportunities that it identifies to other funds or
accounts for which Kenmont is the primary advisor,
(ii) assists, as requested but subject to a limit of
20 hours per month, in the analysis of investment
opportunities as requested by our Advisor, and (iii) if
requested by our Advisor, assists in hiring an additional
investment professional for the Advisor who will be located in
Houston, Texas and for whom Kenmont will make office space
available. Kenmont will not make any investment decisions on our
behalf, but will recommend potential investments to, and assist
in the investment analysis undertaken by, our Advisor. Our
Advisor compensates Kenmont for the services it provides to us.
Our Advisor indemnifies and holds us harmless from any
obligation to pay or reimburse Kenmont for
73
any fees or expenses incurred by Kenmont in providing such
services to us. Kenmont will be indemnified by us for certain
claims related to the services it provides. In addition to any
termination rights we may have under the 1940 Act, the
sub-advisory agreement between the Advisor and Kenmont may be
terminated by our Advisor in limited circumstances.
Kenmont is a Texas limited partnership that serves as investment
advisor to pooled investment vehicles and managed accounts. The
principals of Kenmont have collectively created and managed
private equity portfolios in excess of $1.5 billion and
have over 50 years of experience working for investment
banks, commercial banks, accounting firms, operating companies
and money management firms.
The sub-advisory agreement was most recently reviewed and
approved by our board of directors, including a majority of the
independent directors, on November 13, 2006, and was most
recently approved by our stockholders at a special meeting held
on December 21, 2006. In considering the approval of the
sub-advisory
agreement, our board of directors evaluated information provided
by our Advisor and their legal counsel and considered various
factors, including the following:
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Services. Our board of directors reviewed the
nature, extent and quality of the investment advisory services
proposed to be provided to our Advisor by Kenmont and found them
to be consistent with the services provided to us by our Advisor.
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Experience of Management Team and
Personnel. Our board of directors considered the
extensive experience of Kenmont with respect to the specific
types of investments we propose to make and concluded that
Kenmont would provide valuable assistance to our Advisor in
providing potential investment opportunities to us.
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Provisions of
Sub-Advisory
Agreement. Our board of directors considered the
extent to which the provisions of the
sub-advisory
agreement could potentially expose us to liability and concluded
that its terms adequately protected us from such risk.
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74
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into the investment advisory agreement with our
Advisor, an entity in which certain of our officers and
directors have ownership and financial interests. Our
Advisors services under the investment advisory agreement
will not be exclusive, and it is free to furnish the same or
similar services to other entities, including businesses that
may directly or indirectly compete with us so long as its
services to us are not impaired by the provision of such
services to others. In addition, the publicly traded funds and
private accounts managed by our Advisor may make investments
similar to investments that we may pursue. We currently are not
generally targeting similar investment opportunities as other
entities advised by our Advisor, which generally target
investments in publicly traded companies with market
capitalizations in excess of $250 million, because we
generally target investments in companies that are
privately-held,
have market capitalizations of less than $250 million and
are earlier in their stage of development. This may change in
the future, however. It is thus possible that our Advisor might
allocate investment opportunities to other entities, and thus
might divert attractive investment opportunities away from us.
However, our Advisor intends to allocate investment
opportunities in a fair and equitable manner consistent with our
investment objectives and strategies, so that we will not be
disadvantaged in relation to any other client. We have also
entered into an Administration Agreement with our Advisor
pursuant to which our Advisor will act as our administrator and
perform (or oversee or arrange for the performance of) the
administrative services necessary for our operation, including
without limitation providing us with equipment, clerical, book
keeping and record keeping services. For these services we pay
our Advisor a fee equal to equal to 0.07% of our aggregate
average daily Managed Assets up to and including
$150 million, 0.06% of our aggregate average daily Managed
Assets on the next $100 million, 0.05% of our aggregate
average daily Managed Assets on the next $250 million and
0.02% on the balance of our aggregate average daily Managed
Assets. The administration agreement was reviewed and approved
by our board of directors, including our independent directors,
on November 13, 2006.
Our independent directors will review any investment decisions
that may present potential conflicts of interest among our
Advisor and its affiliates and us in accordance with specific
procedures and policies adopted by our board of directors. Our
board of directors, including our independent directors, have
retained Duff & Phelps, LLC, an independent valuation
firm, to provide valuation assistance to the board, if they so
request, in connection with assessing whether the fair value
determinations made by the investment committee of our Advisor
are unreasonable. At the time of their retention, our board of
directors was aware that both Duff & Phelps, LLC and
Atlantic Asset Management LLC (Atlantic) were
minority investments of Lovell Minnick Partners LLC. Atlantic is
a minority owner of Fountain Capital and holds a non-voting
Class B economic interest in our Advisor.
Pursuant to the investment advisory agreement, our Advisor has
consented to our use on a non-exclusive, royalty-free basis, of
the name Tortoise in our name. We will have the
right to use the Tortoise name so long as our
Advisor or one of its approved affiliates remains our investment
advisor. Other than with respect to this limited right, we will
have no legal right to the Tortoise name. This right
will remain in effect for so long as the investment advisory
agreement with our Advisor is in effect and will automatically
terminate if the investment advisory agreement were to terminate
for any reason, including upon its assignment.
Our Advisor has entered into a sub-advisory agreement with
Kenmont. Kenmont is a registered investment advisor with
experience investing in privately-held and public companies in
the U.S. energy and power sectors. Kenmont provides
additional contacts and enhances the number and range of
potential investment opportunities in which we have the
opportunity to invest. Our Advisor compensates Kenmont for the
services it provides to us. Our Advisor also indemnifies and
holds us harmless from any obligation to pay or reimburse
Kenmont for any fees or expenses incurred by Kenmont in
providing such services to us. Kenmont will be indemnified by
the Advisor for certain claims related to the services it
provides and obligations assumed under the sub-advisory
agreement. Kenmont Special Opportunities Master Fund LP, an
affiliate of Kenmont, purchased 666,666 of our common shares and
166,666 of our warrants in the initial closing of our offering
of common shares and warrants on December 8, 2005 and
purchased 536,666, or $8.05 million, of our Series A
redeemable preferred stock and 80,500 of our warrants to
purchase common shares in our bridge financing completed in
December 2006.
75
CONTROL
PERSONS AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain beneficial ownership
information with respect to our common shares for those persons
who directly or indirectly own, control or hold with the power
to vote, 5% or more of our common shares prior to this offering
and all our officers and directors and the managing directors of
our Advisor, as a group. One of the beneficial owners of more
than 5% of our common shares is Kenmont Special Opportunities
Master Fund LP, an affiliate of our sub-advisor Kenmont.
Except as otherwise noted, the address for all stockholders in
the table below is c/o Tortoise Capital Advisors, 10801
Mastin Boulevard, Suite 222, Overland Park, Kansas 66210.
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Percentage of
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Percentage of
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Common Shares
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Common Shares
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Common Shares
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Warrants
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Outstanding Before
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Outstanding After
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Name
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Owned
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Owned
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Offering(1)
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Offering(2)
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Beneficial Owners of more than
5%
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Kenmont Special Opportunities
Master Fund, L.P.(3)
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666,666
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247,166
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27.4
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%
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9.3
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%
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Rockbay Capital Management, L.P.(4)
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466,666
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116,666
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18.2
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%
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6.0
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%
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Delta Onshore, LP(5)
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182,466
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45,616
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7.3
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%
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2.4
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%
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Directors and Executive
Officers:
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Interested
Directors
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H. Kevin Birzer(6)
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5,300
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1,325
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*
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*
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Terry Matlack(7)
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2,467
|
|
|
|
616
|
|
|
|
|
*
|
|
|
|
*
|
Independent
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conrad S. Ciccotello(8)
|
|
|
1,000
|
|
|
|
250
|
|
|
|
|
*
|
|
|
|
*
|
John R. Graham(9)
|
|
|
4,000
|
|
|
|
1,000
|
|
|
|
|
*
|
|
|
|
*
|
Charles E. Heath(10)
|
|
|
3,000
|
|
|
|
750
|
|
|
|
|
*
|
|
|
|
*
|
Executive
Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David J. Schulte
|
|
|
4,517
|
|
|
|
1,128
|
|
|
|
|
*
|
|
|
|
*
|
Zachary A. Hamel
|
|
|
1,667
|
|
|
|
416
|
|
|
|
|
*
|
|
|
|
*
|
Kenneth P. Malvey
|
|
|
1,392
|
|
|
|
347
|
|
|
|
|
*
|
|
|
|
*
|
Directors and Executive
Officers as a Group (8 persons)
|
|
|
23,343
|
|
|
|
5,832
|
|
|
|
|
*
|
|
|
|
*
|
|
|
|
* |
|
Indicates less than 1%. |
|
|
|
(1) |
|
Based on 3,088,596 common shares outstanding. Each persons
percentage includes all warrants owned by such person, which
warrants become exercisable upon the completion of this offering. |
|
|
|
(2) |
|
Based on 9,540,209 common shares outstanding. Each persons
percentage includes all warrants owned by such person, which
warrants become exercisable upon the completion of this offering. |
|
|
|
(3) |
|
The address of Kenmont Special Opportunities Master Fund, L.P.
is 711 Louisiana, Suite 1750, Houston, TX 77002. Kenmont
Special Opportunities Master Fund, L.P. also owns 536,666.66
shares of our Series A redeemable preferred stock. |
|
(4) |
|
Rockbay Capital Management, L.P. is the investment manager for
Rockbay Capital Institutional Fund, LLC, Rockbay Capital
Offshore Fund, Ltd. and Rockbay Capital Fund, LLC. Rockbay
Capital Management, L.P. shares voting and dispositive power
with these entities with respect to these securities and, as a
result, beneficially owns these securities. The address of
Rockbay Capital Management, L.P. is 600 Fifth Avenue,
24th Floor, New York, NY 10020. Rockbay Capital Management,
L.P. is controlled by Atul Khanna and Jonathan Baron. |
|
(5) |
|
The address of Delta Onshore, LP is 900 Third Avenue,
5th Floor, New York, NY 10022. |
|
(6) |
|
Of the total number of shares and warrants shown,
Mr. Birzer holds 3,600 shares and 900 warrants jointly
with his wife, Michele Birzer. |
76
|
|
|
(7) |
|
These shares and warrants are held of record by the Matlack
Living Trust dtd 12/30/2004, Terry Matlack, Trustee. |
|
(8) |
|
Mr. Ciccotello holds these shares and warrants jointly with
his wife, Elizabeth Ciccotello. |
|
(9) |
|
These shares and warrants are held of record by the John R.
Graham Trust U/A dtd 1/3/92, John R. Graham, Trustee. |
|
(10) |
|
These shares are held of record by the Charles E. Heath
Trust No. 1 dtd U/A 2/1/92, Charles E. Heath and
Kathleen M. Heath, Trustees. |
The following table sets forth the dollar range of equity
securities beneficially owned by each of our directors as of
November 30, 2006. None of our directors owns any shares of
our Series A redeemable preferred stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Dollar Range of
|
|
|
|
|
Equity Securities in All
|
|
|
Aggregate Dollar Range of
|
|
Registered Investment Companies
|
|
|
Company Securities Beneficially
|
|
Overseen by Director in Family of
|
Name of Director
|
|
Owned by Director(1)
|
|
Investment Companies(2)
|
|
Independent Directors
|
|
|
|
|
|
|
|
|
Conrad S. Ciccotello
|
|
$
|
10,001 $50,000
|
|
|
|
Over $100,000
|
|
John R. Graham
|
|
$
|
50,001 $100,000
|
|
|
|
Over $100,000
|
|
Charles E. Heath
|
|
$
|
10,001 $50,000
|
|
|
|
Over $100,000
|
|
Interested Directors
|
|
|
|
|
|
|
|
|
H. Kevin Birzer
|
|
$
|
50,001 $100,000
|
|
|
|
Over $100,000
|
|
Terry C. Matlack
|
|
$
|
10,001 $50,000
|
|
|
|
Over $100,000
|
|
|
|
|
(1) |
|
The value of the securities is determined by reference to the
net asset value of our common shares on November 30, 2006
($13.70 per common share), and includes the net value of
all warrants to purchase common shares held by each director. |
|
|
|
(2) |
|
Includes TYG, TYY and TYN and us. Amounts based on the
calculation for us referenced in footnote (1) above and the
closing price of the common shares of TYG, TYY and TYN on the
NYSE on November 30, 2006. |
The following table sets forth the dollar range of equity
securities of the Company beneficially owned by each member of
our Advisors investment committee as of November 30,
2006. The value of the securities is determined by reference to
the net asset value of our common shares on November 30,
2006 ($13.70 per common share), and includes the net value of
all warrants to purchase common shares held by members of our
Advisors investment committee. None of the members of our
Advisors investment committee owns any shares of our
Series A redeemable preferred stock.
|
|
|
|
|
|
|
Aggregate Dollar Range
|
|
|
of Company Securities
|
Name
|
|
Beneficially Owned by Manager
|
|
H. Kevin Birzer
|
|
$
|
50,001 $100,000
|
|
Zachary A. Hamel
|
|
$
|
10,001 $50,000
|
|
Kenneth P. Malvey
|
|
$
|
10,001 $50,000
|
|
Terry C. Matlack
|
|
$
|
10,001 $50,000
|
|
David J. Schulte
|
|
$
|
50,001 $100,000
|
|
77
DIVIDEND
REINVESTMENT PLAN
If a stockholders shares are registered directly with us
or with a brokerage firm that participates in our Automatic
Dividend Reinvestment Plan (Plan) through the
facilities of DTC and such stockholders account is coded
dividend reinvestment by such brokerage firm, all distributions
are automatically reinvested for stockholders by the Plan Agent,
Computershare Trust Company, Inc., in additional common shares
(unless a stockholder is ineligible or elects otherwise). If a
stockholders shares are registered with a brokerage firm
that participates in the Plan through the facilities of DTC, but
such stockholders account is not coded dividend
reinvestment by such brokerage firm or if a stockholders
shares are registered with a brokerage firm that does not
participate in the Plan through the facilities of DTC, a
stockholder will need to ask their investment executive to
determine what arrangements can be made to set up their account
to participate in the Plan. In either case, until such
arrangements are made, a stockholder will receive distributions
in cash.
Stockholders who elect not to participate in the Plan will
receive all distributions payable in cash paid by check mailed
directly to the stockholder of record (or, if the shares are
held in street or other nominee name, then to such nominee) by
Computershare Trust Company, Inc., as dividend paying agent.
Participation in the Plan is completely voluntary and may be
terminated or resumed at any time without penalty by giving
notice in writing to, or by calling, the Plan Agent; such
termination will be effective with respect to a particular
distribution if notice is received prior to the record date for
the next dividend.
Whenever we declare a distribution payable either in common
shares or in cash, non-participants in the Plan will receive
cash, and participants in the Plan will receive the equivalent
in common shares. The shares are acquired by the Plan Agent for
the participants account, depending upon the circumstances
described below, either (i) through receipt of additional
common shares from us or (ii) by purchase of outstanding
common shares on the open market (open-market
purchases) on the NYSE or elsewhere. If, on the payment
date, the net asset value per share of the common shares is
equal to or less than the market price per common share plus
estimated brokerage commissions (such condition being referred
to herein as market premium), the Plan Agent will
receive additional common shares from the Company for each
participants account. The number of additional common
shares to be credited to the participants account will be
determined by dividing the dollar amount of the dividend or
distribution by the greater of (i) the net asset value per
common share on the payment date, or (ii) 95% of the market
price per common share on the payment date.
If, on the payment date, the net asset value per common share
exceeds the market price plus estimated brokerage commissions
(such condition being referred to herein as market
discount), the Plan Agent has until 30 days after the
payment date (last purchase date) to invest the
distribution amount in shares acquired in open-market purchases.
It is contemplated that we will declare and pay quarterly
distributions. Therefore, the period during which open-market
purchases can be made will exist only for 30 days from the
payment date on the distribution. The weighted average price
(including brokerage commissions) of all common shares purchased
by the Plan Agent as Plan Agent will be the price per common
share allocable to each participant. If, before the Plan Agent
has completed its open-market purchases, the market price of a
common share plus estimated brokerage commissions exceeds the
net asset value per share, the average per share purchase price
paid by the Plan Agent may exceed the net asset value of our
common shares, resulting in the acquisition of fewer common
shares than if the distribution had been paid in additional
common shares issued by us on the payment date. Because of the
foregoing difficulty with respect to open-market purchases, the
Plan provides that if the Plan Agent is unable to invest the
full dividend amount in open-market purchases during the
purchase period or if the market discount shifts to a market
premium during the purchase period, the Plan Agent will cease
making open-market purchases and will invest the uninvested
portion of the distribution amount in Additional common shares
at the close of business on the last purchase date.
The Plan Agent maintains all stockholders accounts in the
Plan and furnishes written confirmation of each acquisition made
for the participants account as soon as practicable, but
in no event later than 60 days after the date thereof.
Shares in the account of each Plan participant will be held by
the Plan Agent in non-certificated form in the Plan Agents
name or that of its nominee, and each stockholders proxy
will include
78
those shares purchased or received pursuant to the Plan. The
Plan Agent will forward all proxy solicitation materials to
participants and vote proxies for shares held pursuant to the
Plan first in accordance with the instructions of the
participants then with respect to any proxies not returned by
such participant, in the same proportion as the Plan Agent votes
the proxies returned by the participants.
There will be no brokerage charges with respect to shares issued
directly by us as a result of distributions payable either in
shares or in cash. However, each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan
Agents open-market purchases in connection with the
reinvestment of distributions. If a participant elects to have
the Plan Agent sell part or all of his or her common shares and
remit the proceeds, such participant will be charged his or her
pro rata share of brokerage commissions on the shares sold plus
a $15.00 transaction fee. The automatic reinvestment of
distributions will not relieve participants of any federal,
state or local income tax that may be payable (or required to be
withheld) on such distributions. See Certain U.S. Federal
Income Tax Considerations.
Stockholders participating in the Plan may receive benefits not
available to stockholders not participating in the Plan. If the
market price plus commissions of our common shares is higher
than the net asset value, participants in the Plan will receive
common shares at less than they could otherwise purchase such
shares and will have shares with a cash value greater than the
value of any cash distribution they would have received on their
shares. If the market price plus commissions is below the net
asset value, participants will receive distributions of common
shares with a net asset value greater than the value of any cash
distribution they would have received on their shares. However,
there may be insufficient shares available in the market to make
distributions in shares at prices below the net asset value.
Also, because we do not redeem our common shares, the price on
resale may be more or less than the net asset value. See
Certain U.S. Federal Income Tax Considerations for a
discussion of tax consequences of the Plan.
Experience under the Plan may indicate that changes are
desirable. Accordingly, we reserve the right to amend or
terminate the Plan if in the judgment of the Board of Directors
such a change is warranted. The Plan may be terminated by the
Plan Agent or us upon notice in writing mailed to each
participant at least 60 days prior to the effective date of
the termination. Upon any termination, the Plan Agent will cause
a certificate or certificates to be issued for the full shares
held by each participant under the Plan and cash adjustment for
any fraction of a common share at the then current market value
of the common shares to be delivered to him or her. If
preferred, a participant may request the sale of all of the
common shares held by the Plan Agent in his or her Plan account
in order to terminate participation in the Plan. If such
participant elects in advance of such termination to have the
Plan Agent sell part or all of his or her shares, the Plan Agent
is authorized to deduct from the proceeds a $15.00 fee plus the
brokerage commissions incurred for the transaction. If a
participant has terminated his or her participation in the Plan
but continues to have common shares registered in his or her
name, he or she may re-enroll in the Plan at any time by
notifying the Plan Agent in writing at the address below. The
terms and conditions of the Plan may be amended by the Plan
Agent or us at any time, except when necessary or appropriate to
comply with applicable law or the rules or policies of the SEC
or any other regulatory authority, only by mailing to each
participant appropriate written notice at least 30 days
prior to the effective date thereof. The amendment shall be
deemed to be accepted by each participant unless, prior to the
effective date thereof, the Plan Agent receives notice of the
termination of the participants account under the Plan.
Any such amendment may include an appointment by the Plan Agent
of a successor Plan Agent, subject to the prior written approval
of the successor Plan Agent by us.
All correspondence concerning the Plan should be directed to
Computershare Trust Company, Inc. at 250 Royal Street,
MS 3B, Canton, Massachusetts 02021 or
1-800-727-0254.
79
DETERMINATION
OF NET ASSET VALUE
We will determine our net asset value per common share on a
quarterly basis. For purposes of determining the net asset value
of our common shares, we will calculate the net asset value,
which will equal the value of our total assets (the value of the
securities we hold plus cash or other assets, including interest
accrued but not yet received) less all of our liabilities,
including but not limited to (i) accrued and unpaid
interest on any outstanding indebtedness, (ii) the
aggregate principal amount of any outstanding indebtedness,
(iii) any distributions payable on our common
shares, and (iv) current and deferred taxes. Our net
asset value per common share will equal our net asset value
divided by the number of outstanding common shares.
We will use the 1940 Acts definition of value in
calculating the value of our total assets. The 1940 Act
defines value as (i) the market price for those securities
for which a market quotation is readily available and
(ii) for all other securities and assets, fair value as
determined in good faith by our board of directors.
Valuation
Methodology Public Finance
Our process for determining the market price of an investment
will be as follows. For equity securities, we will first use
readily available market quotations and will obtain direct
written broker-dealer quotations if a security is not traded on
an exchange or quotations are not available from an approved
pricing service. For fixed income securities, we will use
readily available market quotations based upon the last updated
sale price or market value from a pricing service or by
obtaining a direct written broker-dealer quotation from a dealer
who has made a market in the security. If no sales are reported
on any exchange or OTC market, we will use the calculated mean
based on bid and asked prices obtained from the primary exchange
or OTC market. Other assets will be valued at market value
pursuant to written valuation procedures.
Valuation
Methodology Private Finance
Because we expect to invest principally in private companies,
there generally will not be a readily available market price for
these investments. Therefore, we will value substantially all of
our investments at fair value in good faith. There is no single
standard for determining fair value in good faith. As a result,
determining fair value requires that judgment be applied to the
specific facts and circumstances of each investment while
employing a consistently applied valuation process for the types
of investments we make. Unlike banks, we are not permitted to
provide a general reserve for anticipated loan losses. Instead,
we will specifically value each individual investment on a
quarterly basis. We will record unrealized depreciation on
investments when we believe that an investment has become
impaired, including where collection of a loan or realization of
an equity security is doubtful, or when our estimate of the
enterprise value of an investment does not currently support the
cost of our debt or equity investment. We will record unrealized
appreciation if we believe that the underlying company has
appreciated in value and, therefore, our equity security also
has appreciated in value. Changes in fair value are recorded in
our statement of operations as net change in unrealized
appreciation or depreciation.
We expect our investments to include many terms governing
interest rate, repayment terms, prepayment penalties, financial
covenants, operating covenants, ownership parameters, dilution
parameters, liquidation preferences, voting rights, and put or
call rights. Our investments are generally subject to
restrictions on resale and generally have no established trading
market. Because of the type of investments that we make and the
nature of our business, our valuation process requires an
analysis of various factors. Our fair value methodology includes
the examination of, among other things, the underlying
investment performance, financial condition, and market changing
events that impact valuation.
Our process for determining the fair value of a security of a
private investment will begin with determining the enterprise
value of the company that issued the security. The fair value of
our investment will be based on the enterprise value at which a
company could be sold in an orderly disposition over a
reasonable period of time between willing parties other than in
a forced or liquidation sale.
80
There is no one methodology to determine enterprise value and,
in fact, for any one company, enterprise value may best be
expressed as a range of fair values, from which we will derive a
single estimate of enterprise value. To determine the enterprise
value of a company, we will analyze its historical and projected
financial results. We will generally require companies in which
we invest to provide us with annual audited, and quarterly and
monthly unaudited, financial statements, as well as annual
projections for the upcoming fiscal year. We expect to value
companies on discounted cash flow analysis and multiples of
EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization), cash flow, net income, revenues or, in some
instances, book value. We expect to use financial measures such
as EBITDA or EBITDAM (Earnings Before Interest, Taxes,
Depreciation, Amortization and, in some instances, management
fees) in order to assess a portfolio companys financial
performance and to value a portfolio company. EBITDA and EBITDAM
are not intended to represent cash flow from operations as
defined by U.S. generally accepted accounting principles
and such information should not be considered as an alternative
to net income, cash flow from operations, or any other measure
of performance prescribed by U.S. generally accepted
accounting principles. When using EBITDA to determine enterprise
value, we may adjust EBITDA for non-recurring items. Such
adjustments are intended to normalize EBITDA to reflect a
portfolio companys earning power. Adjustments to EBITDA
may include acquisition, recapitalization, or restructuring
related items or one-time non-recurring income or expense items.
In determining a multiple to use for valuation purposes, we will
look to private merger and acquisition statistics, discounted
public trading multiples or industry practice. In estimating a
reasonable multiple, we will consider not only the fact that the
portfolio company may be a private company relative to a peer
group of public companies, but we also will consider the size
and scope of the company and its specific strengths and
weaknesses. If a company is distressed, a liquidation analysis
may provide the best indication of enterprise value.
If the portfolio company has an adequate enterprise value to
support the repayment of our debt, the fair value of our loan or
debt security normally corresponds to cost unless the portfolio
companys condition or other factors lead to a
determination of fair value at a different amount. When we
receive nominal cost warrants or free equity securities
(nominal cost equity), we will allocate our cost
basis in our investment between debt securities and nominal cost
equity at the time of origination. At that time, the original
issue discount basis of the nominal cost equity is recorded by
increasing the cost basis in the equity and decreasing the cost
basis in the related debt securities. The fair value of equity
interests in portfolio companies is determined based on various
factors, including the enterprise value remaining for equity
holders after the repayment of our debt and other preference
capital, and other pertinent factors such as recent offers to
purchase a company, recent transactions involving the purchase
or sale of the equity securities of the company, or other
liquidation events. The determined equity values are generally
discounted when we have a minority position, are subject to
restrictions on resale, have specific concerns about the
receptivity of the capital markets to a specific company at a
certain time, or other comparable factors exist.
|
|
|
|
|
Investment Team Valuation. Each portfolio
company or investment will initially be valued by the investment
professionals of the Advisor responsible for the portfolio
investment. As a part of this process, materials will be
prepared containing their supporting analysis.
|
|
|
|
Investment Committee Valuation. The investment
committee of our Advisor will review the investment team
valuation report and determine valuations to be considered by
the board of directors.
|
|
|
|
Independent Valuation Firm Activity. Our board
of directors has retained an independent valuation firm,
Duff & Phelps, LLC, to review, as requested from time
to time by the independent directors, the valuation report
provided by our Advisors investment committee and to
provide valuation assistance in reviewing if the valuations are
unreasonable.
|
|
|
|
Final Valuation Determination. Our board of
directors will consider the investment committee valuations,
including supporting documentation, and analysis of
Duff & Phelps, LLC, if applicable, and determine the
fair value of each investment in our portfolio in good faith.
|
81
There will typically be no readily available market value for
our investments. Because of the inherent uncertainty in
determining the fair value of investments that do not have a
readily available market value, the fair value of our
investments determined in good faith by our board of directors
may be materially different from the values that would have been
used had a ready market existed for the investments.
Determination of fair value involves subjective judgments and
estimates not susceptible to substantiation by auditing
procedures. Accordingly, under current auditing standards, the
notes to our financial statements will refer to the uncertainty
with respect to the possible effect of such valuations, and any
change in such valuations, on our financial statements.
Determinations
in Connection with Offerings
In connection with each offering of our common shares, our board
of directors (or a committee thereof) is required to make the
determination that we are not selling our common shares at a
price below the then current net asset value of our common
shares at the time at which the sale is made. Our board of
directors considers the following factors, among others, in
making such determination:
|
|
|
|
|
the net asset value of our common shares disclosed in the most
recent periodic report we filed with the SEC;
|
|
|
|
our managements assessment of whether any material change
in the net asset value of our common shares has occurred
(including through the realization of gains on the sale of our
portfolio securities) from the period beginning on the date of
the most recently disclosed net asset value of our common shares
to the period ending two days prior to the date of the sale of
our common shares; and
|
|
|
|
the magnitude of the difference between the net asset value of
our common shares disclosed in the most recent periodic report
we filed with the SEC and our managements assessment of
any material change in the net asset value of our common shares
since the date of the most recently disclosed net asset value of
our common shares, and the offering price of our common shares
in the proposed offering.
|
Importantly, this determination does not require that we
calculate the net asset value of our common shares in connection
with each offering of common shares, but instead it involves the
determination by our board of directors (or a committee thereof)
that we are not selling common shares at a price below the then
current net asset value of our common shares at the time at
which the sale is made.
Our stockholders granted us the right to sell our common shares
below net asset value at a special meeting held on
December 21, 2006. This authority extends through our 2008
annual meeting, currently expected to occur in April 2008. We
may seek the authority to sell our common shares below net asset
value in the future. To the extent we issue shares below the
then current net asset value of our common shares, the price per
share will be the fair market value as determined by the board
of directors. In addition, we will only sell common shares below
our then current net asset value if all of the following
conditions are met:
|
|
|
|
|
the per share offering price, before deduction of underwriting
fees, commissions and offering expenses, will not be less than
the net asset value per common share, as determined at any time
within two business days of pricing of the common shares to be
sold in the offering;
|
|
|
|
immediately following the offering, after deducting offering
expenses and underwriting fees and commissions, the net asset
value per common share, as determined at any time within two
business days of pricing of the common shares to be sold, would
not have been diluted by greater than a total of 4% of the net
asset value per share of all outstanding common shares. We will
not be subject to a maximum number of shares that can be sold or
a defined minimum sales price per share in any offering so long
as the aggregate number of shares offered and the price at which
such shares are sold together would not result in dilution of
the net asset value per common share in excess of the 4%
limitation; and
|
82
|
|
|
|
|
a majority of our independent directors makes a determination,
based on information and a recommendation from our Advisor, that
they reasonably expect that the investment(s) to be made with
the net proceeds of such issuance will lead to long-term
distribution growth.
|
These processes and procedures are part of our compliance
policies and procedures. Records will be made contemporaneously
with all determinations described in this section and these
records will be maintained with other records we are required to
maintain under the 1940 Act.
83
CERTAIN
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the material
U.S. federal income tax considerations that are applicable
to us and to an investment in our common shares. This summary
does not purport to be a complete description of the income tax
considerations applicable to such an investment. For example,
the following discussion does not describe income tax
consequences that are assumed to be generally known by a
U.S. stockholder (as defined below) or certain
considerations that may be relevant to certain types of
U.S. stockholders subject to special treatment under
U.S. federal income tax laws, including tax-exempt
organizations, insurance companies, dealers in securities,
pension plans and trusts and financial institutions. This
summary assumes that you hold our common shares as capital
assets (within the meaning of the Code). The discussion is based
upon the Code, Treasury regulations, and administrative and
judicial interpretations, each as of the date of this prospectus
and all of which are subject to change, possibly retroactively,
which could affect the continuing validity of this discussion.
We have not and will not seek any ruling from the Internal
Revenue Service (the Service) regarding any of the
tax considerations discussed herein. Except as discussed below,
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.
A U.S. stockholder generally is a beneficial
owner of our common shares that is, for U.S. federal income
tax purposes, any one of the following:
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a citizen or resident of the United States;
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a corporation, partnership or other entity created in or
organized under the laws of the United States or any political
subdivision thereof;
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an estate, the income of which is subject to U.S. federal
income taxation regardless of its source; or
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a trust subject to the supervision of a court within the United
States and the control of a United States person.
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A
Non-U.S. stockholder
is a beneficial owner of our common shares that is not a
U.S. stockholder.
If a partnership (including an entity or arrangement treated as
a partnership for U.S. federal income tax purposes) holds
our common shares, the tax treatment of a partner in the
partnership will generally depend upon the status of the partner
and the activities of the partnership. A prospective stockholder
that is a partnership holding our common shares or a partner of
such a partnership should consult his, her or its own tax
advisor with respect to the purchase, ownership and disposition
of our common shares.
Tax matters are very complicated and the tax consequences to a
U.S. stockholder or a Non-U.S. stockholder of an investment
in our common 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 federal, state, local and foreign tax laws and
the effect of any possible changes in the tax laws.
Federal
Income Taxation of the Company
We have been formed as a corporation under Maryland law. We
currently are, have been, and intend to continue to be, treated
as a general business corporation for U.S. federal income
tax purposes. Thus, we are, and intend to continue to be,
obligated to pay federal and applicable state income tax on our
taxable income. We intend to invest our assets primarily in
entities treated as partnerships for U.S. federal income tax
purposes. As a partner in a partnership, we will have to report
our allocable share of the partnerships taxable income in
computing our taxable income. Based upon our review of the
historic results of the type of entity in which we intend to
invest, we expect that the cash distributions received by us
with respect to our investments in partnerships will exceed the
taxable income allocated to us from such investments. There is
no assurance that our expectation regarding distributions from
the partnerships exceeding allocated taxable income from the
partnerships will be realized. If this expectation is not
realized, there will be greater taxes paid by us and less cash
available to distribute to our stockholders. In addition, we
will take into account in computing our taxable
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income amounts of gain or loss recognized by us on the
disposition of our investments. Currently, the maximum marginal
regular federal income tax rate for a corporation is 35%. We may
be subject to a 20% federal alternative minimum tax on our
federal alternative minimum taxable income to the extent that
our alternative minimum tax exceeds our regular federal income
tax.
We do not intend to elect to be treated as a RIC under the Code.
The Code generally provides that a RIC does not pay an entity
level income tax, provided that it distributes all or
substantially all of its income. The RIC taxation rules
currently do not, and are not intended in the future to, have
any application to us or to our stockholders.
Taxation
of U.S. Stockholders
A distribution by us on your common shares will be treated as a
taxable dividend to you to the extent of your share of our
current or accumulated earnings and profits. If the distribution
exceeds your share of our earnings and profits, the distribution
will be treated as a return of capital to the extent of your
basis in our common shares, and then as capital gain. You will
receive a Form 1099 from us and will recognize dividend
income only to the extent of your share of our current or
accumulated earnings and profits.
Generally, our earnings and profits are computed based upon
taxable income, with certain specified adjustments. As explained
above, we anticipate that the distributed cash from our
portfolio investments in entities treated as partnerships for
tax purposes will exceed our share of taxable income from those
portfolio investments. Thus, we anticipate that only a portion
of distributions we make on the common shares will be treated as
dividend income to our stockholders.
The federal income tax law generally provides that qualifying
dividend income paid to non-corporate U.S. stockholders is
subject to federal income tax at the rate applicable to
long-term capital gains, which is generally a maximum rate of
15%. The portion of our distributions on our common shares
treated as dividends for federal income tax purposes will be
treated as qualifying dividends for federal income tax purposes
provided that you satisfy certain holding period and other
applicable requirements. This rate of tax on dividends is
currently scheduled to increase back to ordinary income rates
after December 31, 2010. If we are taxed as a general
business corporation, a corporate U.S. stockholder generally
will be eligible for the dividends-received deduction generally
allowed U.S. corporations in respect of dividends received from
U.S. corporations provided that the corporate
U.S. stockholder satisfies certain holding period and other
applicable requirements.
If a U.S. stockholder participates in our automatic dividend
reinvestment plan, such U.S. stockholder will be taxed upon the
amount of distributions as if such amount had been received by
the participating U.S. stockholder and the U.S. stockholder
reinvested such amount in additional common shares.
Upon a sale or exchange of our common shares, a
U.S. stockholder will recognize a taxable gain or loss
depending upon his, her or its basis in our common shares. Such
gain or loss will be treated as long-term capital gain or loss
if our common shares have been held for more than one year.
Subject to limited exceptions, capital losses cannot be used to
offset ordinary income. In the case of a non-corporate U.S.
stockholder, long-term capital gain generally is subject to a
maximum tax rate of 15%, which maximum tax rate is currently
scheduled to increase to 20% for dispositions occurring during
taxable years beginning on or after January 1, 2011.
We may be required to withhold U.S. federal income tax
(backup withholding) at a 28%-rate from all taxable
distributions to any non-corporate U.S. stockholder
(i) who fails to furnish a correct taxpayer identification
number or a certificate that such stockholder is exempt from
backup withholding, or (ii) with respect to whom the
Service has notified us that such stockholder has failed to
properly report certain interest and dividend income to the
Service and to respond to notices to that effect. An
individuals taxpayer identification number is his or her
social security number. Any amount withheld under backup
withholding is allowed as a credit against the
U.S. stockholders U.S. federal income tax
liability, provided that proper information is timely provided
to the Service.
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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 on that persons 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 advisors before investing in our common
shares.
In general, dividend distributions paid by us to a
Non-U.S. stockholder
are subject to withholding of U.S. federal income tax at a
rate of 30% (or lower applicable treaty rate). If the
distributions are effectively connected with a U.S. trade
or business of the
Non-U.S. stockholder
(and, if required by an applicable income tax treaty, are
attributable to a permanent establishment maintained by the
Non-U.S. stockholder
in the United States), we will not be required to withhold
federal income tax if the
Non-U.S. stockholder
complies with applicable certification and disclosure
requirements, although the distributions will be subject to
federal income tax at the rates applicable to
U.S. stockholders. Any such effectively connected dividends
may, under certain circumstances, be subject to an additional
branch profits tax at a 30% rate or such lower rate
as may be specified by an applicable income tax treaty. (Special
certification requirements apply to a
Non-U.S. stockholder
that is a foreign partnership or a foreign trust, and such
entities are urged to consult their own tax advisors.)
A
Non-U.S. stockholder
generally will not be taxed on any gain recognized on a
disposition of our common stock unless:
the gain is effectively connected with the
Non-U.S. stockholders
conduct of a trade or business in the United States and, if
required by an applicable income tax treaty, is attributable to
a permanent establishment maintained by the
Non-U.S. stockholder
in the United States; in these cases, the gain will be taxed on
a net income basis at the regular graduated rates and in the
manner applicable to U.S. stockholders (unless an
applicable income tax treaty provides otherwise) and, under
certain circumstances, the branch profits tax
described above may also apply;
the
Non-U.S. stockholder
is an individual who holds our common stock as a capital asset,
is present in the United States for more then 182 days in
the taxable year of the disposition and meets other requirements
(in which case, except as otherwise provided by an applicable
income tax treaty, the gain, which may be offset by
U.S. source capital losses, generally will be subject to a
flat 30% U.S. federal income tax, even though the
Non-U.S. stockholder
is not considered a resident alien under the Code); or
we are or have been a U.S. real
property holding corporation for U.S. federal income
tax purposes at any time during the shorter of the five-year
period ending on the date of disposition or the period that the
Non-U.S. stockholder
held our common stock.
Generally, a corporation is a U.S. real property
holding corporation if the fair market value of its
U.S. real property interests equals or exceeds
50% of the sum of the fair market value of its worldwide real
property interests plus its other assets used or held for use in
a trade or business. For this purpose, we generally will be
treated as owning our proportionate share of the assets of a
partnership in which we own an equity interest. The
determination of whether we are a U.S. real property holding
corporation at any given time will depend on the mix of our
assets and their fair market values at such time, which is
difficult to predict, and it is possible that we will be a U.S.
real property holding corporation. However, the tax relating to
stock in a U.S. real property holding corporation generally
will not apply to a
Non-U.S. stockholder
whose holdings, direct and indirect, at all times during the
applicable period, constituted 5% or less of our common shares
(a Non-5% holder), provided that our common shares
were regularly traded on an established securities market at any
time during the calendar year of the disposition. Our common
shares have been approved for listing on the NYSE. Although not
free from doubt, our common shares should be considered to be
regularly traded on an established securities market for any
calendar quarter during which they are regularly quoted on the
NYSE by brokers or dealers that hold themselves out to buy or
sell our common shares at the quoted price. If our common shares
were not considered to be regularly traded on the NYSE at any
time during the applicable calendar year, then a Non-5% holder
would be taxed for U.S. federal income tax purposes on any gain
realized on the disposition of our common shares on a net income
basis as if the gain
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were effectively connected with the conduct of a U.S. trade or
business by the Non-5% holder during the taxable year and, in
such case, the person acquiring our common shares from a Non-5%
holder generally would have to withhold 10% of the amount of the
proceeds of the disposition. Such withholding may be reduced or
eliminated pursuant to a withholding certificate issued by the
Service in accordance with applicable U.S. Treasury regulations.
We urge all Non-U.S. stockholders to consult their own tax
advisors regarding the application of these rules to them.
A
Non-U.S. stockholder
who is a non-resident alien individual, and who is otherwise
subject to withholding of federal income tax, may be subject to
information reporting and backup withholding of federal income
tax on dividends unless the
Non-U.S. stockholder
provides us or the dividend paying agent with an IRS
Form W-8BEN
(or an acceptable substitute or successor 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.
Our common shares that are owned or treated as owned by an
individual who is not a U.S. citizen or resident of the
United States (as specially defined for U.S. federal estate
tax purposes) at the time of death will be included in the
individuals gross estate for U.S. federal estate tax
purposes, unless an applicable estate tax or other treaty
provides otherwise and, therefore, may be subject to
U.S. federal estate tax.
Non-U.S. persons
should consult their own tax advisors with respect to the United
States federal income tax and withholding tax, and state, local
and foreign tax consequences of an investment in the shares.
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REGULATION
We intend to elect to be regulated as a BDC under the 1940 Act.
We cannot provide any assurances as to when we will become a
BDC. Upon our election to be regulated as a BDC, we will be
subject to the regulations and restrictions described below.
A BDC is a unique kind of investment company that primarily
focuses on investing in or lending to private companies and
providing managerial assistance to them. A BDC generally
provides stockholders with the ability to retain the liquidity
of a publicly traded security, while sharing in the possible
benefits of investing in privately-held or thinly traded public
and privately-owned companies. The 1940 Act contains
prohibitions and restrictions relating to transactions between
business development companies and their directors and officers
and principal underwriters and certain other related persons,
and the 1940 Act requires that a majority of the directors be
persons other than interested persons as defined
under the 1940 Act.
Qualifying
Assets
Under the 1940 Act, we may not acquire any asset other than
assets of the type listed in Section 55(a) of the 1940 Act,
or qualifying assets, unless at the time the
acquisition is made qualifying assets represent at least 70% of
our total assets. The principal categories of qualifying assets
relevant to our proposed businesses are the following:
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Securities purchased in transactions not involving any public
offering from the issuer of the securities, which issuer
(subject to certain limited exceptions) is an eligible portfolio
company, or from any person who is, or has been during the
preceding 13 months, an affiliated person of an eligible
portfolio company. An eligible portfolio company is
currently defined in the 1940 Act as any issuer that:
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is organized under the laws of, and has its principal place of
business in, the United States; and
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is not an investment company (other than a SBIC wholly owned by
the BDC) or a company that would be an investment company but
for certain exceptions under the 1940 Act; and
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satisfies any of the following:
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does not have any class of securities with respect to which a
broker or dealer may extend margin credit;
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is controlled by a BDC or a group of companies including a BDC,
and the BDC has an affiliated person who is a director of the
eligible portfolio company; or
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is a small and solvent company having total assets of not more
than $4 million and capital and surplus of not less than
$2 million; or
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does not have any class of securities listed on a national
securities exchange.
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Securities of any eligible portfolio company that we control.
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Securities purchased in a private transaction from a
U.S. issuer that is not an investment company and is in
bankruptcy and subject to reorganization.
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Securities of an eligible portfolio company purchased from any
person in a private transaction if there is no ready market for
such securities and we already own 60% of the outstanding equity
of the eligible portfolio company.
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Securities received in exchange for, or distributed on or with
respect to, securities described above, or pursuant to the
exercise of warrants or rights relating to such securities.
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Cash, cash equivalents, U.S. government securities or
high-quality debt securities maturing in one year or less from
the time of investment.
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Securities purchased in transactions not involving any public
offering from an issuer, or from any person who is an officer or
employee of the issuer, if (A) the issuer (i) is
organized under the laws of, and has its principal place of
business in, the United States, (ii) is not an investment
company (other than a SBIC wholly owned by the BDC) or a company
that would not be an investment company bur for certain
exceptions under the 1940 Act), and (iii) is not an
eligible portfolio company because it has a class of securities
listed on a national securities exchange, and (B) at the
time of such purchase we own at least (i) 50% of the
greatest number of equity securities of such issuer and
securities convertible into or exchangeable for such securities
and 50% of the greatest amount of debt securities of such issuer
held by us any point in time during the period when such issuer
was an eligible portfolio company, and (ii) we are one of
the 20 largest holders of record of such issuers outstanding
voting securities.
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We may invest up to 30% of our total assets in assets that are
non-qualifying assets and are not subject to the limitations
referenced above. These investments may include, among other
things, investments in high yield bonds, bridge loans,
distressed debt, commercial loans, private equity, securities of
public companies or secondary market purchases of otherwise
qualifying assets. If the value of non-qualifying assets should
at any time exceed 30% of our total assets, we will be precluded
from acquiring any additional non-qualifying assets until such
time as the value of our qualifying assets again equals at least
70% of our total assets. We expect that all but two of our
investments will be qualifying assets at the time we elect to be
regulated as a BDC and that qualifying assets will represent
more than 70% of our total assets. See Risk
Factors If our investments are deemed not to be
qualifying assets, we could lose our status as a BDC or be
precluded from investing according to our current business
plan.
Significant
Managerial Assistance
A BDC must be organized and have its principal place of business
in the United States and must be operated for the purpose of
making investments in the types of securities described above.
However, in order to count portfolio securities as qualifying
assets for the purpose of the 70% test, a BDC must either
control the issuer of the securities or must offer to make
available to the issuer of the securities (other than small and
solvent companies described above) significant managerial
assistance. Making available significant managerial assistance
means, among other things, any arrangement whereby a BDC,
through its directors, officers or employees, offers to provide,
and, if accepted, does so provide, significant guidance and
counsel concerning the management, operations or business
objectives and policies of a portfolio company through
monitoring or portfolio company operations, selective
participation in board and management meetings, consulting with
and advising a portfolio companys officers, or other
organizational or financial guidance. Although not required to
do so at this time, we anticipate offering to provide
significant managerial assistance to each of our portfolio
companies. In addition, although we are not currently doing so,
we may in the future charge for providing managerial assistance.
Temporary
Investments
Pending investments in other types of qualifying assets, as
described above, a BDCs investments may consist of cash,
cash equivalents, U.S. government securities or high
quality debt securities maturing in one year or less from the
time of investment. There is no other percentage restriction on
the proportion of our assets that may be so invested.
Determination
of Net Asset Value
The net asset value per share of our outstanding common stock
will be determined quarterly, as soon as practicable after, and
as of the end of, each calendar quarter. The net asset value per
common share will be equal to the value of our total assets
minus liabilities and any preferred securities outstanding
divided by the total number of common shares outstanding at the
date as of which such determination is made. Fair value will be
determined in good faith by our board of directors pursuant to a
valuation policy. See Determination of Net Asset
Value.
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Senior
Securities; Coverage Ratio
We are permitted, only under specified conditions, to issue
multiple classes of indebtedness and one class of security
senior to our common securities if our asset coverage, as
defined in the 1940 Act, is at least equal to 200% immediately
after each such issuance. In addition, while any senior
securities remain outstanding, we must make provisions to
prohibit any distribution to our stockholders or the repurchase
of such securities unless we meet the applicable asset coverage
ratios at the time of the distribution or repurchase. For a
discussion of the risks associated with the resulting leverage,
see Risk Factors Risks Related to Our
Operations.
Derivative
Securities
The 1940 Act limits the amount of derivative securities that we
may issue and the terms of such securities. Apart from our
957,130 warrants issued as part of our private placement
and bridge financing, we do not have, and do not anticipate
having, outstanding derivative securities relating to our common
shares.
Code of
Ethics
We are required to maintain a code of ethics pursuant to
Rule 17j-1
under the 1940 Act that establishes procedures for personal
investments and restricts certain personal securities
transactions. Personnel subject to the code of ethics may invest
in securities for their personal investment accounts, including
securities that may be purchased or held by us, so long as such
investments are made in accordance with the code of ethics.
Privacy
Principles
We are committed to maintaining the privacy of our stockholders
and safeguarding their non-public personal information. The
following information is provided to help you understand what
personal information we collect, how we protect that information
and why, in certain cases, we may share information with select
other parties.
Generally, we do not receive any non-public personal information
relating to our stockholders, although certain non-public
personal information of our stockholders may become available to
us. We do not disclose any non-public personal information about
our stockholders or former stockholders to anyone, except as
required by law or as is necessary in order to service
stockholder accounts (for example, to a transfer agent).
We restrict access to non-public personal information about our
stockholders to employees of our Advisor with a legitimate
business need for the information. We maintain physical,
electronic and procedural safeguards designed to protect the
non-public personal information of our stockholders.
Affiliate
Transactions
Under the 1940 Act, we and our affiliates may be precluded from
co-investing in private placements of securities. Our Advisor
and TYG have applied to the SEC for exemptive relief to permit
TYG, TYY, TYN, us and our and their respective affiliates to
make such investments. Unless and until we obtain an exemptive
order, we will not co-invest with our affiliates in negotiated
private placement transactions. We cannot guarantee that the
requested relief will be granted by the SEC. Unless and until we
obtain an exemptive order, our Advisor will not co-invest its
proprietary accounts or other clients assets in negotiated
private transactions in which we invest. Until we receive
exemptive relief, our Advisor will observe a policy for
allocating opportunities among its clients that takes into
account the amount of each clients available cash and its
investment objectives. As a result of one or more of these
situations, we may not be able to invest as much as we otherwise
would in certain investments or may not be able to liquidate a
position as quickly.
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Compliance
Policies and Procedures
We have written policies and procedures reasonably designed to
prevent violation of the federal securities laws, and are
required to review these compliance policies and procedures
annually for adequacy and effective implementation and to
designate a Chief Compliance Officer to be responsible for
administering the policies and procedures.
Securities
Exchange Act Compliance
Following this offering we will be subject to the reporting and
disclosure requirements of the Securities Exchange Act of 1934
(the Exchange Act), including the filing of
quarterly, annual and current reports, proxy statements and
other required items. In addition, beginning with our annual
report for our fiscal year ended November 30, 2008, we will
be subject to the provisions of the Sarbanes-Oxley Act of 2002,
requiring reports on Section 404 internal controls over
financial reporting.
Sarbanes-Oxley
Act of 2002
The Sarbanes-Oxley Act of 2002 imposes a wide variety of new
regulatory requirements on publicly-held companies and their
insiders. For example:
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pursuant to Rule 13a-14 of the 1934 Act, our Chief
Executive Officer and Chief Financial Officer must certify the
accuracy of the financial statements contained in our periodic
reports;
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pursuant to Item 307 of Regulation S-K, our periodic
reports must disclose our conclusions about the effectiveness of
our disclosure controls and procedures;
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pursuant to Rule 13a-15 of the 1934 Act, our management
must prepare a report regarding its assessment of our internal
control over financial reporting, which must be audited by our
independent registered public accounting firm; and
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pursuant to Item 308 of Regulation S-K and Rule 13a-15 of
the 1934 Act, our periodic reports must disclose whether there
were significant changes in our internal controls or in other
factors that could significantly affect these controls
subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
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The Sarbanes-Oxley Act requires us to review our current
policies and procedures to determine whether we comply with the
Sarbanes-Oxley Act and the regulations promulgated thereunder.
We will continue to monitor our compliance with all regulations
that are adopted under the Sarbanes-Oxley Act and will take
actions necessary to ensure that we are in compliance therewith.
Withdrawal
Following our intended election to be regulated as a BDC, we may
not change the nature of our business so as to cease to be, or
withdraw our election as, a BDC unless authorized by vote of a
majority of the outstanding voting securities, as
defined in the 1940 Act. The 1940 Act defines a majority
of the outstanding voting securities as the lesser of
(i) 67% or more of the voting securities present at such
meeting if the holders of more than 50% of our outstanding
voting securities are present or represented by proxy, or
(ii) 50% of our voting securities.
Other
Following our intended election to be regulated as a BDC, we
will be periodically examined by the SEC for compliance with the
1940 Act.
We maintain a bond issued by a reputable fidelity insurance
company to protect us against larceny and embezzlement. We will
not protect any director or officer against any liability to our
stockholders arising from willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of such persons office.
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Small
Business Administration Regulations
We have filed an application to have a to-be-formed wholly owned
subsidiary be licensed by the SBA as a SBIC under
Section 301(c) of the Small Business Investment Act of
1958. The SBA regulations currently limit the amount that is
available to borrow by any SBIC controlled by our Advisor to
$124.4 million.
SBICs are designed to stimulate the flow of private equity
capital to eligible small businesses. Under present regulations,
eligible small businesses include businesses that have a
tangible net worth not exceeding $18 million and have
average annual fully taxed net income not exceeding
$6 million for the two most recent fiscal years. In
addition, a SBIC must devote 20% of its investment activity to
smaller concerns as defined by the SBA. A smaller
concern is one that has a tangible net worth not exceeding
$6 million and has average annual fully taxed net income
not exceeding $2 million for the two most recent fiscal
years. SBA regulations also provide alternative size standard
criteria to determine eligibility, which depend on the industry
in which the business is engaged and are based on such factors
as the number of employees and gross sales. According to SBA
regulations, SBICs may make long-term loans to small businesses,
invest in the equity securities of such businesses and provide
them with consulting and advisory services. Through our
to-be-formed wholly-owned subsidiary, we anticipate providing
long-term loans to qualifying small businesses and make related
equity investments.
If our to-be-formed subsidiary receives a SBIC license, it will
be periodically examined and audited by the SBAs staff to
determine its compliance with SBIC regulations. In addition, it
will be subject to any other regulations and restrictions
applicable to a SBIC. The SBA prohibits, without prior SBA
approval, a change of control of a SBIC or transfers
that would result in any person (or a group of persons acting in
concert) owning 10% or more of a class of capital stock of a
licensed SBIC.
Although we cannot provide any assurance that we will receive
any exemptive relief, we expect to request that the SEC allow us
to exclude any indebtedness issued to the SBA by a to-be-formed
wholly-owned subsidiary for which we are seeking qualification
as a SBIC, from the 200% asset coverage requirements applicable
to us as a BDC.
DESCRIPTION
OF CAPITAL STOCK
We are authorized to issue up to 100,000,000 shares of
common stock, $.001 par value per share, and up to
10,000,000 shares of preferred stock, $.001 par value per
share. We currently have 3,088,596 of our common
shares, warrants to purchase 957,130 of our common shares,
and 1,233,333 shares of Series A redeemable preferred
stock issued and outstanding. Our board of directors may,
without any action by our stockholders, amend our 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. Additionally, our
Charter authorizes our board of directors, without any action by
our stockholders, to classify and reclassify any unissued common
shares and preferred shares into other classes or series of
stock from time to time by setting or changing the preferences,
conversion or other rights, voting powers, restrictions,
limitations as to dividends and other distributions,
qualifications and terms or conditions of redemption for each
class or series. Although there is no present intention of doing
so, we could issue a class or series of stock that could delay,
defer or prevent a transaction or a change in control that might
otherwise be in our stockholders best interests. Under
Maryland law, our stockholders generally are not liable for our
debts or obligations.
The following table provides information about our outstanding
capital stock as the date of this prospectus:
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Amount
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Held by the
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Amount
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Company or for
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Amount
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Title of Class
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Authorized
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its Account
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Outstanding
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Common Stock
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100,000,000
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0
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3,088,596
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Preferred Stock
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10,000,000
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Series A Redeemable Preferred
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1,333,334
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0
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1,233,333
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Common
Shares
All common shares offered by this prospectus will be duly
authorized, fully paid and nonassessable. Our stockholders are
entitled to receive dividends if and when authorized by our
board of directors and declared by us out of assets legally
available for the payment of dividends. Our stockholders are
also entitled to share ratably in the assets legally available
for distribution to our stockholders in the event of
liquidation, dissolution or winding up, after payment of or
adequate provision for all known debts and liabilities. These
rights are subject to the preferential rights of any other class
or series of our capital stock.
In the event that we have preferred shares outstanding, and so
long as we remain subject to the 1940 Act, holders of our
common shares will not be entitled to receive any net income of
or other distributions from us unless all accumulated dividends
on preferred shares have been paid and the asset coverage (as
defined in the 1940 Act) with respect to preferred shares and
any outstanding debt is at least 200% after giving effect to
such distributions.
Each outstanding common share entitles the holder to one vote on
all matters submitted to a vote of our stockholders, including
the election of directors. The presence of the holders of shares
of our stock entitled to cast a majority of the votes entitled
to be cast shall constitute a quorum at a meeting of our
stockholders. Our Charter provides that, except as otherwise
provided in our Bylaws, each director shall be elected by the
affirmative vote of the holders of a majority of the shares of
stock outstanding and entitled to vote thereon. Our Bylaws
provide that each director shall be elected by a plurality of
all the votes cast at a meeting of stockholders duly called and
at which a quorum is present. There is no cumulative voting in
the election of directors. Consequently, at each annual meeting
of our stockholders, the holders of a majority of the
outstanding shares of capital stock entitled to vote will be
able to elect all of the successors of the class of directors
whose terms expire at that meeting. Pursuant to our Charter and
Bylaws, our board of directors may amend the Bylaws to alter the
vote required to elect directors.
Holders of our common shares have no preference, conversion,
exchange, sinking fund, redemption or appraisal rights and have
no preemptive rights to subscribe for any of our securities. All
of our common shares will have equal dividend, liquidation and
other rights.
If we offer additional common shares, the offering will require
approval of our board of directors and, so long as we remain
subject to the 1940 Act, the offering will be subject to the
requirement that shares may not be sold at a price below the
then-current net asset value, exclusive of underwriting
discounts and commissions, except in limited circumstances,
including in connection with an offering to our existing
stockholders.
Preferred
Shares
We issued 1,233,333 shares of Series A redeemable
preferred stock in the bridge financing we completed in December
2006. So long as we remain subject to the 1940 Act, we will
be subject to restrictions that currently limit the aggregate
liquidation preference of all outstanding preferred stock to 50%
of the value of our total assets less our liabilities and
indebtedness and permit us to issue only one class of security
senior to our common shares.
The holders of the preferred stock shall have the right to one
vote for each share of preferred stock held and with respect to
such vote, shall have full voting rights and powers equal to the
voting rights and powers of the holders of our common shares. So
long as we remain subject to the 1940 Act, the holders of the
preferred stock, voting separately as a single class, will have
the right to elect at least two directors at all times.
Messers. Graham and Matlack have initially been designated
as these two directors. The remaining directors will be elected
by holders of common shares and preferred stock, voting together
as a single class. In addition, the holders of the preferred
stock will have the right to elect a majority of the directors
at any time accumulated dividends on the preferred stock have
not been paid for at least two years. The 1940 Act also requires
that, in addition to any approval by stockholders that might
otherwise be required, the approval of the holders of a majority
of the preferred stock, voting separately as a class, will be
required to adopt any plan of reorganization that would
adversely affect the preferred stock. See Certain
Provisions of Our Charter and
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Bylaws and the Maryland General Corporation Law. As a
result of these voting rights, our ability to take any such
actions may be impeded while the preferred stock is outstanding.
We intend to redeem the preferred stock immediately following
the receipt of the proceeds of this offering.
The affirmative vote of the holders of a majority of the
outstanding preferred stock, voting as a separate class, will be
required to amend, alter or repeal any of the preferences,
rights or powers of holders of the preferred stock so as to
affect materially and adversely such preferences, rights or
powers. The class vote of holders of preferred stock described
above will in each case be in addition to any other vote
required to authorize the action in question.
The terms of the preferred stock, provide that the holders of
the preferred stock are entitled to receive cumulative cash
dividends, when and as declared by the board of directors and to
the extent that funds are legally available for distribution, at
the rate of 10% per annum of their original issue price ($15.00)
on each outstanding share of preferred stock (as adjusted for
any stock dividends, combinations, splits, recapitalizations and
the like with respect to such shares). The payment rights of the
preferred stock are in preference to the holders of our common
shares and any other class or series of our capital stock. If
the preferred stock is not redeemed in full prior to
September 26, 2007, no dividends may thereafter be paid to
the holders of our common shares until the preferred stock is
redeemed in full.
In the event of our liquidation, dissolution or winding up,
either voluntarily or involuntarily, the holders of the
preferred stock are entitled to receive, prior and in preference
to any distribution of any of our assets to the holders of our
common shares or any other class or series of our capital stock
by reason of their ownership thereof, an amount per share equal
to their original issue price, subject to adjustment,
plus all accrued and unpaid cumulative dividends thereon
to the date of liquidation.
We may redeem some or all of the outstanding preferred stock at
any time funds are legally available for such redemption. We
must redeem the preferred stock upon completion of this
offering. The price at which each share of preferred stock is to
be redeemed is equal to the original issue price ($15.00)
plus (i) all accrued and unpaid dividends, and
(ii) a redemption premium equal to 2% of the original issue
price.
Following the redemption of the preferred stock, we may, but are
not required to, issue additional preferred shares. The terms of
the additional preferred shares, if issued, are expected to
provide that (i) they are redeemable in whole or in part at
the original purchase price per share plus accrued dividends per
share, (ii) we may tender for or repurchase the preferred
shares and (iii) we may subsequently resell any shares so
tendered for or repurchased by us. Any redemption or purchase of
our preferred shares will reduce the leverage applicable to our
common shares, while any resale of our shares will increase that
leverage.
If our board of directors determines to proceed with such an
additional offering of preferred shares following the redemption
of our outstanding preferred stock, the terms of our preferred
shares may be the same as, or different from, the terms
described above, subject to applicable law and our Charter. Our
board of directors, without the approval of the holders of our
common shares, may authorize an offering of preferred shares or
may determine not to authorize such an offering, and may fix the
terms of our preferred shares to be offered.
The information contained under this heading is subject to the
provisions contained in our Charter, Articles Supplementary,
Bylaws, the 1940 Act and the laws of the State of Maryland.
Warrants
We have 957,130 warrants issued and outstanding. Each
warrant entitles the holder thereof to purchase one common share
at the exercise price per common share of the greater of
(i) $15.00 per common share or (ii) the net asset
value of our common shares on the date of our intended election
to be regulated as a BDC. Warrants are exercisable upon the
completion of this offering, subject to a
lock-up
period with respect to common shares received upon exercise of
warrants of 90 calendar days immediately following this
offering. All warrants expire on the day before the sixth
anniversary of this offering. No fractional warrant shares will
be issued upon exercise of the warrants. We will pay to the
holder of the warrant at the time of exercise an amount in cash
equal to the current market value of any such fractional warrant
shares.
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The warrants are afforded standard anti-dilution protection. As
a part of that protection, the number of common shares issuable
upon exercise of the warrants (or any shares of stock or other
securities at the time issuable upon exercise of such warrants)
and the warrant exercise price shall be appropriately adjusted
to reflect any and all stock dividends (other than cash
dividends), stock splits, combinations of shares,
reclassifications, recapitalizations or other similar events
affecting the number of outstanding common shares (or such other
stock or securities) so as to cause the holder thereafter
exercising warrants to receive the number of common shares or
other capital stock such holder would have received if such
warrant had been exercised immediately prior to such event.
If we make an extraordinary dividend on the outstanding common
shares, each holder will be entitled to receive the
extraordinary dividend made on the outstanding common shares the
holder would have received if such warrant had been exercised
immediately prior to such extraordinary dividend.
In addition, if the common shares issuable upon the exercise of
the warrants shall be changed into the same or different number
of shares of any class or classes of common shares, whether by
capital reorganization, reclassification or otherwise (other
than a reorganization, merger, consolidation or sale of assets),
then, in and as a condition to the effectiveness of each such
event, the holder of a warrant has the right thereafter to
exercise such warrant for the kind and amount of common shares
and other securities and property receivable upon such
reorganization, reclassification or other change by the holder
of the number of common shares for which such warrant might have
been exercised immediately prior to such reorganization,
reclassification or change.
In the case of a dividend or distribution paid pursuant to a
plan of consolidation or merger by us with another person (other
than a merger or consolidation in which we are the continuing
person and the common shares are not exchanged for securities,
property or assets issued, delivered or paid by another person),
or in case of any lease, sale or conveyance to another person
(other than a wholly-owned subsidiary) of all or substantially
all of our property or assets, warrants shall thereafter (until
the end of the exercise period) evidence the right to receive,
upon exercise, in lieu of common shares, deliverable upon such
exercise immediately prior to such consolidation, merger, lease,
sale or conveyance, the kind and amount of shares
and/or other
securities and/or property and assets and/or cash that a holder
would have been entitled to receive upon such consolidation,
merger, lease, sale or conveyance had the holder exercised its
warrants immediately prior to such consolidation, merger, lease,
sale or conveyance, provided that to the extent a stockholder
would have had an opportunity to elect the form of
consideration, any holder not exercising its warrants shall be
entitled to the same consideration that a holder of such common
shares failing to make any such election would have been
entitled to receive upon such transaction.
Our warrants are separate instruments from our common shares and
are permitted to be transferred independently from our common
shares, subject to certain transfer restrictions. The warrants
have no voting rights and the common shares underlying the
unexercised warrants will have no voting rights until such
common shares are received upon exercise of warrants. Our
stockholders ratified the warrants issued in connection with our
bridge financing and granted us the authority to issue
additional warrants to purchase common shares, subject to
certain conditions, at a special meeting held on January 4, 2007.
CERTAIN
PROVISIONS OF OUR CHARTER AND BYLAWS AND
THE MARYLAND GENERAL CORPORATION LAW
The following description of certain provisions of our Charter
and Bylaws is only a summary. For a complete description, please
refer to our Charter and Bylaws, a copy of which are obtainable
upon request.
Our Charter and Bylaws include provisions that could delay,
defer or prevent other entities or persons from acquiring
control of us, causing us to engage in certain transactions or
modifying our structure. These provisions, all of which are
summarized below, may be regarded as anti-takeover
provisions. Such provisions could limit the ability of
stockholders to sell their shares at a premium over the
then-current market prices by discouraging a third party from
seeking to obtain control of us. In addition to these
provisions, we are incorporated in Maryland and therefore expect
to be subject to the Maryland Control Share Acquisition Act and
the Maryland General Corporation Law. Also, certain provisions
of the 1940 Act may serve to discourage a third party from
seeking to obtain control of us.
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Number
and Classification of our Board of Directors; Election of
Directors
Our Charter and Bylaws provide that the number of directors may
be established only by our board of directors pursuant to the
Bylaws, but may not be less than one. Our Bylaws provide that
the number of directors may not be greater than nine. Pursuant
to our Charter, our board of directors is divided into three
classes: Class I, Class II and Class III. The
term of each class of directors expires in a different
successive year. Upon the expiration of their term, directors of
each class are elected to serve for three-year terms and until
their successors are duly elected and qualify. Each year, only
one class of directors is elected by the stockholders. The
classification of our board of directors should help to assure
the continuity and stability of our strategies and policies as
determined by our board of directors.
Our classified board provision could have the effect of making
the replacement of incumbent directors more time-consuming and
difficult. At least two annual meetings of our stockholders,
instead of one, will generally be required to effect a change in
a majority of our board of directors. Thus, the classification
of our board of directors could increase the likelihood that
incumbent directors will retain their positions and may delay,
defer or prevent a change in control of the board of directors,
even though a change in control might be in the best interests
of our stockholders.
Vacancies
on Board of Directors; Removal of Directors
Our Charter provides that we have elected to be subject to the
provision of Subtitle 8 of Title 3 of the Maryland
General Corporation Law regarding the filling of vacancies on
the board of directors. Accordingly, except as may be provided
by the board of directors in setting the terms of any class or
series of preferred shares, 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 shall 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.
The Charter provides that, subject to the rights of holders of
one or more classes of our preferred stock, a director may be
removed only for cause and only by the affirmative vote of at
least two-thirds of the votes entitled to be cast in the
election of our directors. This provision, when coupled with the
provisions in our Charter and Bylaws regarding the filling of
vacancies on the board of directors, precludes our stockholders
from removing incumbent directors, except for cause and by a
substantial affirmative vote, and filling the vacancies created
by the removal with nominees of our stockholders.
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 generally provides for approval
of Charter amendments and extraordinary transactions by the
stockholders entitled to cast at least a majority of the votes
entitled to be cast on the matter.
Our Charter and Bylaws provide that the board of directors will
have the exclusive power to make, alter, amend or repeal any
provision of our Bylaws.
Advance
Notice of Director Nominations and New Business
Our Bylaws provide that with respect to an annual meeting of our
stockholders, nominations of persons for election to our board
of directors and the proposal of business to be considered by
our stockholders may be made only (i) pursuant to our
notice of the meeting, (ii) by or at the direction of our
board of directors or (iii) by a stockholder who is
entitled to vote at the meeting and who has complied with the
advance notice procedures of the Bylaws. With respect to special
meetings of our stockholders, only the business specified in our
notice of the meeting may be brought before the meeting.
Nominations of persons for election to our
96
board of directors at a special meeting may be made only
(i) pursuant to our notice of the meeting, (ii) by or
at the direction of our board of directors, or (iii) by a
stockholder who is entitled to vote at the meeting and who has
complied with the advance notice provisions of our Bylaws,
provided that our board of directors has determined that
directors will be elected at the meeting.
Limitation
of 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 (i) actual
receipt of an improper benefit or profit in money, property or
services or (ii) 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.
Our Charter authorizes us, and 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 a 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 any such 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 their reasonable
expenses in advance of final disposition of a proceeding. Our
obligation to indemnify any director, officer or other
individual, however, is limited by the 1940 Act and Investment
Company Act Release No. 11330, which, among other things,
prohibit us from indemnifying any director, officer or other
individual from any liability resulting directly from the
willful misconduct, bad faith, gross negligence in the
performance of duties or reckless disregard of applicable
obligations and duties of the directors, officers or other
individuals and require us to set forth reasonable and fair
means for determining whether indemnification shall be made.
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 (i) 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, (ii) the
director or officer actually received an improper personal
benefit in money, property or services or (iii) 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 upon the
corporations receipt of (i) 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 (ii) 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.
These provisions do not limit or eliminate our rights or the
rights of any of our stockholders to seek nonmonetary relief
such as an injunction or rescission in the event any of our
directors or officers breaches his or her duties. These
provisions will not alter the liability of our directors or
officers under federal securities laws.
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Control
Share Acquisitions
Following this offering we will be covered by the Maryland
Control Share Acquisition Act (the Control Share
Act), which 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.
Shares owned by the acquiror, and 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:
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one-tenth or more but less than one-third;
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one-third or more but less than a majority; or
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a majority or more of all voting power.
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The requisite stockholder approval must be obtained each time an
acquiror crosses one of the thresholds of voting power set forth
above. Control shares do not include shares the acquiring person
is then entitled to vote as a result of having previously
obtained stockholder approval. A control share acquisition means
the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share
acquisition may compel the board of directors of the corporation
to call a special meeting of stockholders to be held within
50 days of demand to consider the voting rights of the
shares. The right to compel the calling of a special meeting is
subject to the satisfaction of certain conditions, including an
undertaking to pay the expenses of the meeting. If no request
for a meeting is made, the corporation may present the question
at any stockholders meeting.
If voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person statement
as required by the statute, then the corporation may repurchase
for fair value any or all of the control shares, except those
for which voting rights have previously been approved. The right
to repurchase control shares is subject to certain conditions
and limitations. Fair value is determined, without regard to the
absence of voting rights for the control shares, as of the date
of the last control share acquisition by the acquiror or of any
meeting of stockholders at which the voting rights of the shares
are considered and not approved. If voting rights for control
shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to
vote, all other stockholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of appraisal
rights may not be less than the highest price per share paid by
the acquiror in the control share acquisition.
The Control Share Act does not apply (i) to shares acquired
in a merger, consolidation or share exchange if we are a party
to the transaction or (ii) to acquisitions approved or
exempted by our Charter or Bylaws.
Our Bylaws contain a provision exempting from the Control Share
Act any and all acquisitions by any person of our shares of
stock. There can be no assurance that such provision will not be
otherwise amended or eliminated at any time in the future.
However, we will amend our Bylaws to be subject to the Control
Share Act only if our board of directors determines that it
would be in our best interests and if the staff of the SEC does
not object to our determination that our being subject to the
Control Share Act does not conflict with the 1940 Act.
Business
Combinations
Following this offering we will be covered by the Maryland
Business Combination Act (the Business Combination
Act), which provides that business
combinations between a Maryland corporation and an
interested stockholder or an affiliate of an interested
stockholder are prohibited for five years after the most recent
date on which the interested stockholder becomes an interested
stockholder. These business
98
combinations include a merger, consolidation, share exchange or,
in circumstances specified in the statute, an asset transfer or
issuance or reclassification of equity securities. An interested
stockholder is defined as:
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any person who beneficially owns 10% or more of the voting power
of the corporations shares; or
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an affiliate or associate of the corporation who, at any time
within the two-year period prior to the date in question, was
the beneficial owner of 10% or more of the voting power of the
then outstanding voting stock of the corporation.
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A person is not an interested stockholder under this statute if
the board of directors approved in advance the transaction by
which such stockholder otherwise would have become an interested
stockholder. However, in approving a transaction, the board of
directors may provide that its approval is subject to
compliance, at or after the time of approval, with any terms and
conditions determined by the board.
After the five-year prohibition, any business combination
between the Maryland corporation and an interested stockholder
generally must be recommended by the board of directors of the
corporation and approved by the affirmative vote of at least:
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80% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation; and
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two-thirds of the votes entitled to be cast by holders of voting
stock of the corporation other than shares held by the
interested stockholder with whom or with whose affiliate the
business combination is to be effected or held by an affiliate
or associate of the interested stockholder.
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These super-majority vote requirements do not apply if the
corporations common stockholders receive a minimum price,
as defined under Maryland law, for their shares in the form of
cash or other consideration in the same form as previously paid
by the interested stockholder for its shares.
The statute permits various exemptions from its provisions,
including business combinations that are exempted by the board
of directors before the time that the interested stockholder
becomes an interested stockholder. Our board of directors has
adopted a resolution exempting any business combination between
us and any other person from the provisions of the Business
Combination Act, provided that the business combination is first
approved by our board of directors, including a majority of the
directors who are not interested persons as defined in the 1940
Act. This resolution, however, may be altered or repealed in
whole or in part at any time. If this resolution is repealed, or
our board of directors does not otherwise approve a business
combination, the statute may discourage others from trying to
acquire control of us and increase the difficulty of
consummating any offer.
SHARES
ELIGIBLE FOR FUTURE SALE
Prior to the completion of this offering, there has been no
public market for our common shares. Future sales of a
substantial amount of our common shares in the public market, or
the perception that such sales may occur, could adversely affect
the market price of our common shares and could impair our
future ability to raise capital through the sale of our equity
securities.
Upon the completion of this offering, as a result of the
issuance of 6,451,613 common shares, we will have 9,540,209
common shares outstanding, of which 3,088,596 shares will
be restricted securities under the meaning of
Rule 144 promulgated under the Securities Act and may not
be sold in the absence of registration under the Securities Act
unless an exemption from registration is available, including
exemptions contained in Rule 144. After the lock-up
agreements discussed below expire, an aggregate of 2,398,586 of
the 3,088,596 shares will be eligible for sale in the
public market in accordance with Rule 144. We have agreed,
and are permitted pursuant to the terms of the
lock-up
agreements described below, to file a registration statement
covering all of our common shares outstanding prior to this
offering and all of the common shares underlying the warrants
issued in our January 2006 private placement on or prior to
June 8, 2007. We have also committed to enter into a
registration rights agreement covering all of the common shares
underlying the warrants issued in our December 2006 bridge
financing on or prior to June 8, 2007. See
Registration Rights below.
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In general, under Rule 144, if one year has elapsed since
the date of acquisition of restricted securities from us or any
of our affiliates, the holder of such restricted securities can
sell such securities; provided that the number of securities
sold by such person within any three-month period cannot exceed
the greater of:
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|
|
1% of the total number of securities then outstanding, or
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|
the average weekly trading volume of our securities during the
four calendar weeks preceding the date on which notice of the
sale is filed with the SEC.
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Sales under Rule 144 also are subject to certain manner of
sale provisions, notice requirements and the availability of
current public information about us. If two years have elapsed
since the date of acquisition of restricted securities from us
or any of our affiliates and the holder is not one of our
affiliates at any time during the three months preceding the
proposed sale, such person can sell such securities in the
public market under Rule 144(k) without regard to the
volume limitations, manner of sale provisions, public
information requirements or notice requirements. No assurance
can be given as to (1) the likelihood that an active market
for our common shares will develop, (2) the liquidity of
any such market, (3) the ability of our stockholders to
sell our securities or (4) the prices that stockholders may
obtain for any of our securities. No prediction can be made as
to the effect, if any, that future sales of securities, or the
availability of securities for future sale, will have on the
market price prevailing from time to time. Sales of substantial
amounts of our securities, or the perception that such sales
could occur, may affect adversely prevailing market prices of
our common shares. See Risk Factors Risks
Related to this Offering.
Lock-Up
Agreements
Our directors and executive officers and each member of our
Advisors investment committee have agreed with the
underwriters not to sell any common shares they own for a period
of 180 days from the date of this offering, subject to
extension in certain circumstances. This agreement, referred to
as a
lock-up
agreement, may be waived by Merrill Lynch as
representative of the underwriters. In addition, our current
stockholders (other than warrant holders who purchased warrants
in our December 2006 private placement) have separately agreed
not to sell any common shares for a period of 90 days from
the date of this offering. The
lock-up
agreements provide that these persons will not offer, sell,
contract to sell, pledge (other than to us), hedge or otherwise
dispose of our common shares or any securities convertible into
or exchangeable for our common shares, owned by them for a
period specified in the agreement without the prior written
consent of our underwriters. The filing of the registration
statements described above pursuant to the registration rights
agreements will be an exception to our
lock-up
agreement, although certain stockholders whose shares are
registered in the registration statement may still be subject to
lock-up
agreements.
Registration
Rights
We have entered into registration rights agreements with each of
the current holders of our common shares. The registration
rights agreements provide, among other things, that, after we
consummate this offering, we will use our best efforts to file
with the SEC on or prior to June 8, 2007, a shelf
registration statement to cover resales of our common shares
held by our current stockholders, including our common shares
into which the warrants are exercisable, and to use our best
efforts to keep such registration statement effective until all
securities covered thereby have been sold pursuant to such
registration statement, the date on which the securities covered
thereby are no longer held by the parties thereto or the date on
which such securities are no longer required to be registered.
We have agreed to use commercially reasonable efforts to enter
into a registration rights agreement with the holders of our
Series A redeemable preferred stock that relates
exclusively to the warrants received at the time of the purchase
of the preferred stock. The registration rights will be similar
to those granted to the current holders of our common shares;
provided, however, that such rights will be subordinate to the
piggyback registration rights of the current holders of our
common shares. Pursuant to the registration rights agreement, we
will be required to register the common shares underlying the
warrants held by the holders of our preferred stock on or prior
to June 8, 2007.
100
UNDERWRITING
We intend to offer the common shares through the underwriters
named below. Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Stifel, Nicolaus & Company, Incorporated
and Wachovia Capital Markets, LLC are acting as representatives
of the underwriters. Subject to the terms and conditions
described in a purchase agreement among us and the underwriters,
we have agreed to sell to the underwriters, and the underwriters
severally have agreed to purchase from us, the number of common
shares listed opposite their names below.
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Number
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Underwriter
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of Shares
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Merrill Lynch, Pierce, Fenner
& Smith
Incorporated
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Stifel, Nicolaus &
Company, Incorporated
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Wachovia Capital Markets, LLC
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Oppenheimer & Co. Inc.
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Ferris, Baker Watts, Incorporated
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|
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Total
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The underwriters have agreed that they must purchase all of the
common shares sold under the purchase agreement if they purchase
any of them. However, the underwriters are not required to take
or pay for the shares covered by the underwriters
overallotment option described below. If an underwriter
defaults, the purchase agreement provides that the purchase
commitments of the nondefaulting underwriters may be increased
or the purchase agreement may be terminated.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to
make in respect of those liabilities.
The underwriters are offering the common shares, subject to
prior sale, when, as and if issued to and accepted by them,
subject to approval of legal matters by their counsel, including
the validity of the common shares, and other conditions
contained in the purchase agreement, such as the receipt by the
underwriters of officers certificates and legal opinions.
The underwriters reserve the right to withdraw, cancel or modify
offers to the public and to reject orders in whole or in part.
Commissions
and Discounts
The representatives have advised us that the underwriters
propose initially to offer the common shares to the public at
the public offering price on the cover page of this prospectus
and to dealers at that price less a concession not in excess of
$ per share. The underwriters may
allow, and the dealers may reallow, a discount not in excess of
$ per share to other dealers.
After the public offering, the public offering price, concession
and discount may be changed.
The following table shows the per share and total underwriting
discounts and commissions we will pay to the underwriters
assuming both no exercise and full exercise of the
underwriters overallotment option to purchase up to an
additional 967,741 shares.
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|
|
|
|
|
|
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Per Share
|
|
Without Option
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|
With Option
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|
Public offering price
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|
$
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|
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|
$
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|
|
$
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Sales load (underwriting discount)
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|
$
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|
$
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|
$
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Proceeds, before expenses, to us
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|
$
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|
|
|
$
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|
$
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|
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We estimate that the total expenses of the offering payable by
us, not including sales load (underwriting discount) and
commissions, will be approximately $600,000.
101
Overallotment
Option
We have granted an option to the underwriters to purchase up to
967,741 additional common shares at the public offering price
less the underwriting discount. The underwriters may exercise
this option for 30 days from the date of this prospectus
solely to cover any overallotments. If the underwriters exercise
this option, each will be obligated, subject to conditions
contained in the purchase agreement, to purchase a number of
additional common shares proportionate to that
underwriters initial amount reflected in the above table.
Reserved
Shares
At our request, the Underwriters have reserved for sale, at the
initial public offering price, up to two percent of the common
shares offered hereby to be sold to certain directors, officers
and persons having relationships with us. The number of common
shares available for sale to the general public will be reduced
to the extent such persons purchase such reserved shares. Any
reserved common shares which are not so purchased will be
offered by the Underwriters to the general public on the same
terms as the other common shares offered hereby.
No Sales
of Similar Securities
We, our executive officers and directors, our Advisor and our
Advisors senior investment professionals have agreed, with
exceptions, not to sell or transfer any common shares for
180 days after the date of this prospectus without first
obtaining the written consent of Merrill Lynch. Specifically, we
and these other individuals and entities have agreed not to
directly or indirectly:
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offer, pledge, sell or contract to sell any common shares;
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sell any option or contract to purchase any common shares;
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purchase any option or contract to sell any common shares;
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grant any option, right or warrant for the sale of any common
shares other than pursuant to our contractual requirements under
our existing registration rights agreements;
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lend or otherwise dispose of or transfer any common shares;
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request or demand that we file a registration statement related
to the common shares; or
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enter into any swap or other agreement that transfers, in whole
or in part, the economic consequence of ownership of any common
shares whether any such swap or transaction is to be settled by
delivery of shares or other securities, in cash or otherwise.
|
The 180-day
restricted period will be automatically extended if
(1) during the last 17 days of the
180-day
restricted period the Company issues an earning release to
material news or a material event relating to the Company occurs
or (2) prior to the expiration of the
180-day
restricted period, the Company announces that it will release
earnings results or becomes aware that material news or a
material event will occur during the
16-day
period beginning on the last day of the
180-day
restricted period, in which case the restrictions described
above will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
occurrence of the material news or material event.
This lockup provision applies to common shares and to securities
convertible into or exchangeable or exercisable for or repayable
with common shares. It also applies to common shares owned now
or acquired later by the person executing the agreement or for
which the person executing the agreement later acquires the
power of disposition.
New York
Stock Exchange Listing
Our common shares have been approved for listing on the New York
Stock Exchange under the symbol TTO. In order to
meet the requirements for listing on that exchange, the
underwriters have
102
undertaken to sell a minimum number of shares to a minimum
number of beneficial owners as required by that exchange.
Before this offering, there has been no public market for our
common shares. The initial public offering price will be
determined through negotiations among us and the
representatives. In addition to prevailing market conditions,
the factors to be considering in determining the initial public
offering price are
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the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us,
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our financial information,
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the history of, and the prospects for, our company and the
industry in which we compete,
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an assessment of our management, its past and present
operations, and the prospects form and timing of, our future
revenues,
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the present state of our development, and
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the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours.
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An active trading market for the shares may not develop. It is
also possible that after the offering the shares will not trade
in the public market at or above the initial public offering
price.
The underwriters do not expect to sell more than 5% of the
common shares in the aggregate to accounts over which they
exercise discretionary authority.
Price
Stabilization and Short Positions
Until the distribution of the common shares is completed, SEC
rules may limit underwriters and selling group members from
bidding for and purchasing our common shares. However, the
representatives may engage in transactions that stabilize the
price of the common shares, such as bids or purchases to peg,
fix or maintain that price.
If the underwriters create a short position in our common shares
in connection with the offering, i.e., if they sell more common
shares than are listed on the cover of this prospectus, the
representatives may reduce that short position by purchasing
common shares in the open market. The representatives may also
elect to reduce any short position by exercising all of part of
the overallotment option described above. Purchases of the
common shares to stabilize price or to reduce a short position
may cause the price of our common shares to be higher than it
might be in the absence of such purchases.
Neither we nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
our common shares. In addition, neither we nor any of the
representatives makes any representation that the
representatives will engage in these transactions or that these
transactions, once commenced, will not be discontinued without
notice.
Electronic
Distribution
Merrill Lynch will be facilitating electronic distribution for
this offering to certain of its Internet subscription customers.
Merrill Lynch intends to allocate a limited number of shares for
sale to its online brokerage customers. An electronic prospectus
is available on a web site maintained by Merrill Lynch. Other
than the prospectus in electronic format, the information on the
Merrill Lynch website is not part of this prospectus.
Other
Relationships
Certain of the underwriters and their affiliates have provided
in the past and may provide from time to time in the future in
the ordinary course of their business, certain commercial
banking, financial advisory, investment banking and other
services to our Advisor, Tortoise Capital or our portfolio
companies for which
103
they will be entitled to receive separate fees. In particular,
the underwriters or their affiliates may execute transactions
with Tortoise Capital or on behalf of Tortoise Capital or any of
our portfolio companies.
The underwriters or their respective affiliates may also trade
in our securities, securities of our portfolio companies or
other financial instruments related thereto for their own
accounts or for the account of others and may extend loans or
financing directly or through derivative transactions to
Tortoise Capital or any of our portfolio companies.
We may purchase securities of third parties from some of the
underwriters or their respective affiliates after the offering.
However, we have not entered into any agreement or arrangement
regarding the acquisition of any such securities, and we may not
purchase any such securities. We would only purchase any such
securities if among other things we
identified securities that satisfied our investment needs and
completed our due diligence review of such securities.
After the date of this prospectus, the underwriters and their
affiliates may from time to time obtain information regarding
specific portfolio companies or us that may not be available to
the general public. Any such information is obtained by these
underwriters and their respective affiliates in the ordinary
course of their business and not in connection with the offering
of our common shares. In addition, after the offering period for
the sale of our common shares, the underwriters or their
affiliates may develop analyses or opinions related to Tortoise
Capital or our portfolio companies and buy or sell interests in
one or more of our portfolio companies on behalf of their
proprietary or client accounts and may engage in competitive
activities. There is no obligation on behalf of these parties to
disclose their respective analyses, opinions or purchase and
sale activities regarding any portfolio company or regarding
Tortoise Capital to our stockholders.
The principal business address of Merrill Lynch, Pierce,
Fenner & Smith Incorporated is 4 World Financial
Center, New York, New York 10080.
The principal business address of Stifel, Nicolaus &
Company, Incorporated is 501 North Broadway,
St. Louis, Missouri 63102.
The principal business address of Wachovia Capital Markets, LLC
is 301 South College Street, Charlotte, North Carolina
28288.
The principal business address of Oppenheimer & Co. Inc., is
125 Broad Street, New York, New York 10004.
The principal business address of Ferris, Baker Watts,
Incorporated is 100 Light Street, 8th Floor,
Baltimore, Maryland 21202.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, 1200 Main Street, Kansas City,
Missouri 64105, serves as our independent registered public
accounting firm. Ernst & Young LLP will provide audit
and audit-related services, tax return preparation and
assistance and consultation in connection with review of our
filings with the SEC.
ADMINISTRATOR,
CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND
REGISTRAR
Pursuant to an Administration Agreement between us and our
Advisor, we have engaged our Advisor to perform (or oversee or
arrange for the performance of) the administrative services
necessary for our operation, including without limitation
providing us with equipment, clerical, book keeping and record
keeping services. For these services we pay our Advisor a fee
equal to equal to 0.07% of our aggregate average daily Managed
Assets up to and including $150 million, 0.06% of our
aggregate average daily Managed Assets on the next
$100 million, 0.05% of our aggregate average daily Managed
Assets on the next $250 million and 0.02% on the balance of
our aggregate average daily Managed Assets. The address of the
administrator is 10801 Mastin Boulevard, Suite 222 Overland
Park, Kansas 66210. Our securities and other assets are held
under a custody agreement with U.S. Bank National
Association, 1555 North Rivercenter Drive, Suite 302, Milwaukee,
WI 53212. The transfer agent and registrar for our common shares
is Computershare Investor
104
Services, LLC, 250 Royal Street, MS 3B, Canton, MA 02021.
Computershare Trust Company, Inc., 250 Royal Street, MS 3B,
Canton, MA 02021, serves as our dividend paying agent and Plan
Agent for our Dividend Reinvestment Plan.
LEGAL
MATTERS
Certain legal matters in connection with the securities offered
hereby will be passed upon for us by Blackwell Sanders Peper
Martin LLP, Kansas City, Missouri. Certain legal matters in
connection with the offering will be passed upon for the
underwriters by Fried, Frank, Harris, Shriver &
Jacobson LLP, New York, New York. Certain matters of Maryland
law will be passed upon by Venable LLP.
AVAILABLE
INFORMATION
We have filed with the SEC a registration statement on
Form N-2,
together with all amendments and related exhibits, under the
Securities Act, with respect to our common shares offered by
this prospectus. The registration statement contains additional
information about us and our common shares being offered by this
prospectus.
Upon completion of this offering, we will file with or submit to
the SEC annual, quarterly and current periodic reports, proxy
statements and other information meeting the informational
requirements of the Securities Exchange Act. You may inspect and
copy these reports, proxy statements and other information, as
well as the registration statement of which this prospectus
forms a part and the related exhibits and schedules, at the
Public Reference Room of the SEC at 100 F. Street, N.E.,
Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet website that contains reports,
proxy and information statements and other information filed
electronically by us with the SEC which are available on the
SECs Internet website at
http://www.sec.gov.
Copies of these reports, proxy and information statements and
other information may be obtained, after paying a duplicating
fee, by electronic request at the following
E-mail
address: publicinfo@sec.gov, or by writing the SECs Public
Reference Section, Washington, D.C.
20549-0102.
105
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
Report of Independent Registered
Public Accounting Firm dated January 16, 2007
|
|
|
F-16
|
|
F-1
SCHEDULE OF
INVESTMENTS
|
|
|
|
|
|
|
|
|
|
|
November 30, 2006
|
|
|
|
Shares
|
|
|
Value
|
|
|
Limited Partnerships and
Limited Liability Companies
76.6%(1)
|
|
|
|
|
|
|
|
|
Natural Gas
Gathering/Processing
28.4%(1)
|
|
|
|
|
|
|
|
|
Eagle Rock Pipeline,
L.P.(2)
|
|
|
474,071
|
|
|
$
|
8,533,278
|
|
Eagle Rock Pipeline, L.P.
|
|
|
185,000
|
|
|
|
3,494,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,027,928
|
|
|
|
|
|
|
|
|
|
|
Natural Gas and Oil
Exploitation
10.8%(1)
|
|
|
|
|
|
|
|