|
New
York
Menlo
Park
Washington
DC
London
Paris
|
Madrid
Tokyo
Beijing
Hong
Kong
|
|
Davis Polk & Wardwell LLP
450 Lexington
Avenue
New York, NY
10017
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|
June 21,
2010
U.S. Securities and
Exchange Commission
Division of
Investment Management
Office of
Disclosure and Review
100 F Street,
N.E.
Washington, D.C.
20549
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Re:
|
GSC
Investment Corp.
Amended
and Restated Preliminary Proxy Statement on Schedule 14A
Filed
on June 9, 2010
File
No. 814-00732/10885374
|
Dear Mr.
Minore:
On behalf of GSC Investment Corp. (the
“Company”), and in connection with the Amended and Restated Preliminary Proxy
Statement on Schedule 14A (the “Preliminary Proxy Statement”) filed by the
Company with the Securities and Exchange Commission (the “Commission”), we write
in response to the telephonic discussions with the Staff of the Commission (the
“Staff”) held on June 18, 2010, and comments received therein (the “Staff
Comments”). For your convenience, we have restated each of your
comments in bold-face type below, followed by our response thereto.
Amended and Restated
Preliminary Proxy Statement on Schedule 14A
1. Please indicate the Company’s plans,
with respect to seeking alternative transactions, in the event that the
requisite stockholder approvals are not obtained.
Response: In
response to the Staff’s comment, the Company has included in the proxy statement
the following disclosure relating to the continuation of the Company’s current
Investment Adviser in the event that the stockholder approvals are not obtained
(at page 3 of the Preliminary Proxy Statement, added language in
italics): “If either proposal is not approved by the stockholders,
the transactions contemplated by the Stock Purchase Agreement will not be
consummated, the Company’s existing investment adviser will continue as the
Company’s investment adviser and administrator under the existing agreements
pursuant to the terms currently in place and the Company will seek an
alternative solution to cure the existing default under the DB Credit Facility
(as defined herein).”
|
Dominic J.
Minore
|
2
|
June 21,
2010
|
2. Please revise the disclosure in
Proposal 1 relating to ‘The Parties’ to indicate that neither Saratoga
Investment Advisors, LLC nor Saratoga Partners has any previous experience in
the managing or operating a business development company.
Response: In
response to the Staff’s comment, the Company has revised the disclosure in the
proxy statement relating to the description of both Saratoga Investment
Advisors, LLC’s and Saratoga Partners’ lack of previous experience managing or
operating a business development company (at page 5 of the Preliminary Proxy
Statement): “Neither Saratoga Partners nor Saratoga has experience
operating or managing a business development company as described in further
detail herein under the heading “Post-Transaction Company May Not
Succeed” on page 19 of this proxy statement.”
3. Please include the specific voting
percentage to be obtained by Saratoga in the discussion of why the Company’s
board of directors believes this transaction constitutes a change of
control.
Response: In
response to the Staff’s comment, the Company has included in the proxy statement
the following disclosure relating to the specific voting percentage obtained (at
page 6 of the Preliminary Proxy Statement, added language in
italics): “Our directors believe that this transaction will be
considered a change of control based on the specific facts and circumstances of
the transaction as further described herein, but principally due to the
following: (i) Saratoga will become the new investment adviser, thereby
obtaining control of the day-to-day management of the Company and its
operations, (ii) the Board will elect two individuals affiliated with Saratoga
as directors of the Company and (iii) the aggregate number of shares of our
common stock being issued will provide Saratoga and its affiliates with a voting percentage of
approximately 36.8%, thereby increasing the likelihood that future
proposals supported by Saratoga will have a greater chance of being
passed.”
4. Under the heading “1940 Act
Stockholder Approval Requirement,” please consider inserting a cross reference
to the section of the proxy statement discussing the dilutive impact of the
shares to be issued in connection with the Saratoga Transaction on net asset
value per share.
Response: In
response to the Staff’s comment, the Company has included in the proxy statement
the following disclosure relating to the dilutive impact of the issuance of
shares on the net asset value per share (at page 6 of the Preliminary Proxy
Statement): “The estimated dilutive impact of the Saratoga
Transaction on the net asset value per share of our common stock is discussed in
further detail herein under the heading “Dilutive Impact on NAV Per Share
and Market Price” on page 16 of this proxy statement.”
5. Under the heading “Background and Purpose of the
Transaction,” please
insert a reference to the Form 8-K/A under which the Stock Purchase Agreement
was disclosed.
Response: In
response to the Staff’s comment, the Company has included in the proxy statement
the following disclosure relating to the Form 8-K/A (at page 6 of the
Preliminary Proxy Statement, added language in italics): “The
discussion in this proxy statement, which includes the material terms of the
proposed transaction, is subject to, and is qualified in its entirety by
reference to, the Stock Purchase Agreement, a copy of which was attached as an
exhibit to our
|
Dominic J.
Minore
|
3
|
June 21,
2010
|
Form 8-K/A filed with the SEC on
June 4, 2010 and is incorporated by reference in this proxy
statement.”
6. Please include an estimate of the
costs the Company will bear in connection with registering the shares issued in
connection with the transaction pursuant to the Registration Rights
Agreement.
Response: In
response to the Staff’s comment, the Company has included in the proxy statement
the following disclosure (at page 7 of the Preliminary Proxy Statement, added
language in italics): “Pursuant to the registration rights agreement,
the Company has agreed to bear all of the costs incurred in connection with the
registration of the shares of our common stock sold in connection with the
Saratoga Transaction, and the
Company estimates that the aggregate costs of which could be as much as, or in
excess of, $300,000.”
7. Please indicate the per share
dilutive impact on the net asset value per share, and the corresponding
percentage, and the potential dilution to market price per share resulting from
the registration of the shares post-closing and Saratoga’s ability to sell
two-thirds of such shares immediately following
registration.
Response: In
response to the Staff’s comment, the Company has included in the proxy statement
the following disclosure (at page 16 of the Preliminary Proxy Statement, added
language in italics): “Based upon the November 30, 2009 NAV per
share, pro forma NAV per share as adjusted for the impact of the Saratoga
Transaction is approximately $2.99, which reflects a dilutive impact
of $0.81 per share or 21.3%. … In addition, upon the exercise of
Saratoga’s registration rights under the registration rights agreement,
two-thirds of the Shares will be immediately available for re-sale and any sale
of such shares could potentially dilute the market price of the Company’s common
stock.”
8. Please indicate the dollar amount of
the fees received, or to be received, by the Company’s financial advisor in
connection with the transaction.
Response: In
response to the Staff’s comment, the Company has included in the proxy statement
the following disclosure relating to the fees received or to be received by the
financial advisor (at page 27 of the Preliminary Proxy
Statement): “In addition, Stifel Nicolaus will receive an advisory
fee of $350,000 for its services that is contingent upon the consummation of the
Investment and also received a fee of $200,000 upon the delivery of its
opinion.”
9. Please confirm that all material
aspects of the Voting Agreement have been disclosed in the proxy
statement.
Response: In
response to the Staff’s comment, the Company has included in the proxy statement
all material elements of the Voting Agreement, the full text of which has also
been made publicly available under the Company’s Form 8-K/A filed with the SEC
on June 4, 2010.
10. In the discussion of the differences
in fee terms under the current Investment Advisory and Management Agreement and
the proposed agreement to be entered into with Saratoga Investment Advisors,
LLC, please quantify the aggregate unrealized depreciation under the existing
agreement to be ‘reset’ under the new agreement.
|
Dominic J.
Minore
|
4
|
June 21,
2010
|
Response: In
response to the Staff’s comment, the Company has included in the proxy statement
the following disclosure (at page 38 of the Preliminary Proxy
Statement): “On a net basis, the Company has incurred $12.4 million
of realized losses and $57.6 million of unrealized depreciation on its
investments and derivatives since March 21, 2007.”
11. Under the section “Fee Information”
of Proposal 2, please clarify whether any of the current percentages reflect
estimates or if estimates are limited to the pro forma column of the table
presentation. In addition, please provide a brief explanation of the
increase in Incentive Fees Payable between the current and pro forma
amounts.
Response: In
response to the Staff’s comment, the Company has included in the proxy statement
the following disclosure (at page 43 of the Preliminary Proxy Statement, added
language in italics): “We caution you that the pro forma percentages
indicated in the table below are estimates and may vary.”
In footnote 3 to the table presentation, the
following disclosure has been added (at page 43 of the Preliminary Proxy
Statement, added language in italics): “Incentive fees for the pro
forma column include the effect of the “catch up” provision, pursuant to which
100% of the Company’s pre-incentive fee net investment income with respect to
that portion of such pre-incentive fee net investment income that exceeds 7.5%
annualized, but is less than or equal to 9.376% is payable to the
Adviser. This will enable the Adviser to receive 20% of all net
investment income as such amount approaches 9.376%, and the Adviser will receive
20% of any additional net investment income. The effect of the catch-up provision
results in approximately $232,500 in additional fees paid to the
Adviser.”
|
Dominic J.
Minore
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5
|
June 21,
2010
|
As requested in the Staff Comments, the Company
acknowledges that:
|
·
|
the Company
is responsible for the adequacy and accuracy of the disclosure in the
filing;
|
|
·
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Staff
comments or changes to disclosure in response to Staff comments do not
foreclose the Commission from taking any action with respect to the
filing; and
|
|
·
|
the Company
may not assert Staff comments as a defense in any proceeding initiated by
the Commission or any person under the federal securities laws of the
United States.
|
We believe that the foregoing
response fully addresses the Staff’s concerns. For your convenience, we
have attached to this correspondence to facilitate your review a blackline of
the current version of the Preliminary Proxy Statement marked against the
version submitted to the Staff on June 9, 2010. Please do not hesitate to
contact either one of us with any questions you may have with respect to the
foregoing, our respective contact information is set forth below.
|
/s/ John J.
McCarthy, Jr.
|
|
(212)
450-4334 (tel)
(212)
701-5334 (fax)
john.mccarthy@davispolk.com
David M.
Hutchins
(212)
450-4715 (tel)
(212)
701-5715 (fax)
david.hutchins@davispolk.com
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
SCHEDULE
14A
Proxy
Statement Pursuant to Section 14(a) of the
Securities
Exchange Act of 1934
Filed by
a Party other than the Registrant o
Check the
appropriate box:
o Preliminary Proxy
Statement
o Confidential, for Use of the
Commission Only (as permitted by Rule 14a-6(e)(2))
o Definitive Proxy
Statement
o Definitive Additional
Materials
o Soliciting Material
Pursuant to §240.14a-12
GSC
Investment Corp.
(Name of
Registrant as Specified in its Charter)
(Name of
Person(s) Filing Proxy Statement, if other than the Registrant)
Payment
of Filing Fee (Check the appropriate box):
o No fee
required.
o Fee computed on
table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title
of each class of securities to which transaction applies:
(2) Aggregate
number of securities to which transaction applies:
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(3)
|
Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was
determined):
|
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(4)
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Proposed
maximum aggregate value of
transaction:
|
|
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(5)
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Total
fee paid:
|
o Fee paid
previously with preliminary materials.
|
o
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Check
box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its
filing.
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(1)
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Amount
Previously Paid:
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(2)
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Form,
Schedule or Registration Statement
No.:
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|
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(3)
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Filing
Party:
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|
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(4)
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Date
Filed:
|
GSC
Investment Corp.
500
Campus Drive, Suite 220
Florham
Park, New Jersey 07932
SPECIAL
MEETING OF STOCKHOLDERS
[•],
2010
To the
Stockholders of GSC Investment Corp.:
You are
cordially invited to attend a special meeting of stockholders of GSC Investment
Corp., to be held at the offices of [•]Davis Polk
& Wardwell LLP, located at [•],450
Lexington Avenue, New York, NY 10017, on [•], 2010, at [•] a.m., local
time. Only stockholders of record at the close of business on May 31,
2010 are entitled to notice of, and to vote at, the meeting, including any
adjournment or postponement thereof.
THE
PROPOSALS IN THIS SPECIAL MEETING PROXY STATEMENT DIFFER FROM THE PROPOSALS IN
THE ANNUAL MEETING PROXY STATEMENT, WHICH YOU MAY HAVE RECEIVED UNDER SEPARATE
COVER.
Your vote
at the special meeting is especially important because it affects the future of
your company and your investment. Details of the business to
be conducted at the meeting are given in the accompanying Notice of Special
Meeting of Stockholders and Proxy Statement.
Whether
or not you expect to attend the special meeting, please complete, date, sign and
promptly return the accompanying proxy in the enclosed postage-paid envelope so
that your shares may be represented at the meeting. Most stockholders
will also have the ability to provide voting instructions by telephone or via
the Internet. Returning the proxy does not deprive you of your right
to attend the meeting and to vote your shares in person. Your vote is
important regardless of the number of shares that you own.
We look
forward to seeing you at the meeting.
Sincerely,
Seth
M. Katzenstein, Chief Executive Officer
If you
have any questions or need assistance authorizing a proxy, please
call:
Morrow
& Co., LLC
470 West
Avenue
Stamford,
CT 06902
Stockholders
Call Toll-Free at: (800) 607-0088
Brokers
Call Collect at: (203) 658-9400
Email: GSC@morrowco.com
Notice
of Special Meeting of Stockholders
will
be held at the offices of [•]Davis Polk
& Wardwell LLP
[•],
2010, [•] a.m., local time
[•],
2010
To the
Stockholders of GSC Investment Corp.:
A special
meeting of stockholders of GSC Investment Corp., a Maryland corporation, will be
held at the offices of [•]Davis Polk
& Wardwell LLP, located at [•],450
Lexington Avenue, New York, NY 10017, on [•], 2010, at [·] a.m., local
time. At the special meeting, our stockholders will consider and vote
on proposals to:
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|
1.
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approve
the issuance of 9,868,422 shares of our common stock for an aggregate
purchase price of approximately $15,000,000 at a price per share below the
current net asset value per share of such stock, on the terms and subject
to the conditions set forth in the Stock Purchase Agreement among GSC
Investment Corp., Saratoga Investment Advisors, LLC and CLO Partners LLC,
as amended, as more fully described in the enclosed proxy
statement;
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|
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2.
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approve
the Investment Advisory and Management Agreement, pursuant to which
Saratoga Investment Advisors, LLC would be appointed as the new investment
adviser of GSC Investment Corp., as more fully described in the enclosed
proxy statement; and
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3.
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approve
any motion properly brought before the special meeting to adjourn the
special meeting, if necessary, to solicit additional votes in favor of
either or both of the above
proposals.
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The
effectuation of the Saratoga Transaction, as more fully described in the
enclosed proxy statement, is conditioned on the approval of Proposals 1 and
2. The Saratoga Transaction will not be completed, even if all of the
other conditions in the Stock Purchase Agreement (as defined herein) are
satisfied or waived, if the requisite stockholder approval of both Proposals 1
and 2 is not received.
Holders
of record of our common stock as of the close of business on May 31, 2010, the
record date for the special meeting, are entitled to notice of, and to vote at,
the special meeting.
Our Board
of Directors unanimously recommends that you vote “FOR” the proposal to approve
the issuance of 9,868,422 shares of our common stock for an aggregate purchase
price of approximately $15,000,000 at a price per share below the current net
asset value per share of such stock, “FOR” the proposal to approve
the Investment Advisory and Management Agreement, pursuant to which Saratoga
Investment Advisors, LLC would be appointed as the new investment adviser of GSC
Investment Corp., and “FOR” the proposal to approve
any motion properly brought before the special meeting to adjourn the special
meeting, if necessary, to solicit additional votes in favor of either or both of
the preceding proposals.
Enclosed
is our proxy statement and a proxy card. Your vote is
important. Please complete, sign, date and return the proxy card in
the enclosed self-addressed envelope. You may change your vote by
delivering a later-dated proxy or by attending the special meeting and voting in
person. Thank you for your support of GSC Investment
Corp.
Very
truly yours,
Eric
P. Rubenfeld, Vice President & Secretary
TABLE
OF CONTENTS
Page
|
Special
Meeting Information
|
1
|
|
Date and
LocationandLocation
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1
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|
Admission
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1
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|
Voting
Information
|
1
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|
Record Date
and Quorum
|
1
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|
Submitting
Voting Instructions for Shares Held
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1
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|
Through a
Broker
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|
|
Authorizing a
Proxy for Shares Held in Your Name
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1
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|
Revoking Your
Proxy
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2
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|
Votes
Required to Adopt the Proposals
|
2
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|
Abstentions
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3
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|
Householding
of Proxy Statement Materials
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3
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|
Beneficial
Ownership of Common Stock
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4
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|
Proposal 1 –
To Approve the Issuance of Shares of Common Stock
at a Price Per Share Below the Current Net Asset
Value Per Share of Such Stock Pursuant to the Stock
Purchase Agreement
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5
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|
The
Parties
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5
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|
NYSE
Stockholder Approval Requirement
|
5
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1940 Act
Stockholder Approval Requirement
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6
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|
Background
and Purpose of the Transaction
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6
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|
General
Description of the Transaction
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6
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Background of
the Transaction
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7
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|
Consideration
of Specific Proposals
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12
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|
Reasons for
the Transaction
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16
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Events Subsequent to April 14,
2010
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20
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|
Recommendation
of the Board of Directors
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2022
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|
Opinion of
GNV’s Financial Advisor
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2022
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Summary of
the Stock Purchase Agreement
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2627
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Summary of
the Replacement Facility
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3233
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|
Recommendation
of the Board of Directors
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3637
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|
Proposal 2 –
To Approve the Investment Advisory and Management
Agreement
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3738
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|
General
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3738
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Reasons for
the Proposed Investment Advisory and Management
Agreement
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3738
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Current
Agreement and Proposed Investment Advisory and
Management Agreement
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3738
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Fee
Information
|
4143
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|
About
Saratoga
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4344
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Considerations
of the Board of Directors
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4546
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Recommendation
of the Board of Directors
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4647
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Proposal 3 –
To Approve Any Motion Properly Brought
Before the Special Meeting to Adjourn the Special
Meeting, if Necessary, to Solicit Additional Votes in
Favor of the Preceding Proposals
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4748
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Recommendation of the Board of
Directors
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4748
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Other
Matters
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4849
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Stockholder
Proposals
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4849
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Other
Business
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4849
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Annual
Reports
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4849
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Solicitation
Expenses
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4849
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Exhibit
A: Fairness Opinion of
Stifel Nicolaus & Company, Incorporated
Exhibit
B: Investment
Advisory and Management Agreement
Exhibit
C: Administration
Agreement
GSC
Investment Corp.
(“GNV”)
500
Campus Drive, Suite 220
Florham
Park, New Jersey 07932
[•],
2010
Proxy
Statement
We are
sending you this proxy statement in connection with the solicitation of proxies
by our Board of Directors to be voted at a special meeting of
stockholders. We are mailing this proxy statement and the
accompanying form of proxy to stockholders on or about [•], 2010. In
this proxy statement, we refer to GSC Investment Corp., a Maryland corporation,
as the “Company,” “GNV,” “we,” “our” or “us” and our Board of Directors as the
“Board.”
SPECIAL
MEETING INFORMATION
Date
and Location
We will
hold the special meeting on [•], 2010 at [•] a.m., local time, at the offices of
[•]Davis Polk
& Wardwell LLP, located at [•].450
Lexington Avenue, New York, NY 10017.
Admission
Only
record or beneficial owners of GNV common stock as of the close of business on
May 31, 2010 or their proxies may attend the special
meeting. Beneficial owners must also provide evidence of stock
holdings, such as a recent brokerage account or bank statement.
VOTING
INFORMATION
Record
Date and Quorum
The
record date for the special meeting is the close of business on May 31, 2010
(the “Record Date”). You may cast one vote for each share of common
stock that you own as of the Record Date. On the Record Date,
16,940,109 shares of common stock were outstanding. A quorum is
necessary to hold a valid meeting. The presence, in person or by
proxy, of stockholders entitled to cast a majority of the votes entitled to be
cast at the special meeting will constitute a quorum at the special
meeting. Abstentions are counted as present for purposes of
establishing a quorum.
Submitting
Voting Instructions for Shares Held Through a Broker
If you
hold shares of common stock through a broker, bank or other nominee, you must
follow the voting instructions you receive from your broker, bank or
nominee. If you hold shares of common stock through a broker, bank or
other nominee and you want to vote in person at the special meeting, you must
obtain a legal proxy from the record holder of your shares and present it at the
special meeting. If you do not submit voting instructions to your
broker, bank or other nominee, your broker, bank or other nominee is not
permitted to vote your shares on any proposal considered at the
meeting.
Authorizing
a Proxy for Shares Held in Your Name
If you
are a record holder of shares of common stock, you may authorize a proxy to vote
on your behalf by mail, as described on the enclosed proxy
card. Authorizing a proxy will not limit your right to vote in person
at the special meeting. A properly completed, executed and submitted
proxy will be voted in accordance with your instructions, unless you
subsequently revoke the proxy. If you authorize a proxy without
indicating your voting instructions, the proxyholder will vote your shares
according to the Board’s recommendations.
1
Revoking
Your Proxy
If you
are a stockholder of record, you can revoke your proxy by (1) delivering a
written revocation notice prior to the special meeting to our Secretary, Eric P.
Rubenfeld, at 500 Campus Drive, Suite 220, Florham Park, New Jersey 07932; (2)
delivering a later-dated proxy that we receive no later than the opening of the
polls at the special meeting; or (3) voting in person at the special
meeting. If you hold shares of common stock through a broker, bank or
other nominee, you must follow the instructions you receive from your nominee in
order to revoke your voting instructions. Attending the special
meeting does not revoke your proxy unless you also vote in person at the special
meeting.
Votes
Required to Adopt the Proposals
Approval
of Proposal 1, to approve the issuance of 9,868,422 shares of our common stock
for an aggregate purchase price of approximately $15,000,000 at a price per
share below the current net asset value per share of such stock, on the terms
and subject to the conditions set forth in the Stock Purchase Agreement, dated
April 14, 2010, among the Company, Saratoga Investment Advisors, LLC and CLO
Partners LLC, as amended on May 13, 2010 (the “Stock Purchase Agreement” and,
together with the transactions contemplated thereby, the “Saratoga
Transaction”), requires approval under both the New York Stock Exchange (“NYSE”)
Listed Company Manual and the Investment Company Act of 1940 (as amended, the
“1940 Act”).
The NYSE
imposes special requirements that must be met for GNV’s stockholders to approve
Proposal 1. The “vote cast quorum requirement,” as described herein,
requires that a total number of votes cast on the proposal must represent over
50% in interest of our common stock entitled to vote as of the Record
Date. The failure of a stockholder to deliver a proxy by mail or to
vote in person at the special meeting will result in that stockholder’s vote not
being “cast,” making it less likely that the vote cast quorum requirement will
be met. If a stockholder affirmatively indicates a desire to abstain
from voting, this will be treated as a vote cast on the proposal, making it more
likely that the vote cast quorum requirement will be met. Assuming
that the vote cast quorum requirement is met, the share issuance proposal will
pass only if a majority of the votes cast are in favor of the
proposal. If a stockholder affirmatively indicates he or she is
abstaining from voting, this will be treated as a vote cast on the proposal and
will have the same effect as a vote against the proposal, making it less likely
that the required majority will be achieved.
The 1940
Act requires a stockholder vote to allow the Company to sell shares of our
common stock at a price below the current net asset value per share of such
stock. More specifically, approval of Proposal 1 may be obtained in
either of two ways: (1) Section 63 requires the affirmative vote of the holders
of (i) a majority of the outstanding voting securities entitled to vote at the
special meeting; and (ii) a majority of the outstanding voting securities
entitled to vote at the special meeting that are not held by affiliated persons
of the Company, which includes directors, officers, employees, and 5%
stockholders of the Company or (2) Section 23(b) requires the affirmative vote
of a majority of the beneficial owners of the Company’s common stock entitled to
vote at the special meeting, without regard to whether a majority of such shares
are voted in favor of Proposal 1.
Approval
of Proposal 2, to approve the new Investment Advisory and Management Agreement,
pursuant to which Saratoga Investment Advisors, LLC would be appointed as the
Company’s new investment adviser, requires the affirmative vote of the holders
of a majority of the outstanding voting securities entitled to vote at the
special meeting.
For
purposes of the approval of Proposal 1 under Section 63 of the 1940 Act and the
approval of Proposal 2, the 1940 Act defines “a majority of the outstanding
voting securities” as: (1) 67% or more of the voting securities present at the
special meeting if the holders of more than 50% of the outstanding voting
securities of the Company are present or represented by proxy at the special
meeting or (2) 50% of the outstanding voting securities of the Company,
whichever is the lesser.
Approval
of Proposal 3, to approve any motion properly brought before the special meeting
to adjourn the special meeting, if necessary, to solicit additional votes in
favor of either or both of the preceding proposals, requires the affirmative
vote of a majority of the votes cast on the proposal at the
meeting.
There are
no dissenters’ rights of appraisal in connection with any proposal set forth in
this proxy statement.
In order
to effectuate the transactions contemplated by the Stock Purchase Agreement,
both Proposals 1 and 2 must be approved by the stockholders. If
either proposal is not approved by the stockholders, the transactions
contemplated by the Stock Purchase Agreement will not be consummated
and, the
Company’s existing investment adviser will continue as the Company’s investment
adviser and administrator under the existing agreements pursuant
2
to the
terms currently in place and the
Company will seek an alternative solution to cure the existing default under the
DB Credit Facility (as defined herein).
Abstentions
You may
instruct your proxy to “abstain” from voting on any
proposal. Stockholders who instruct their proxies to “abstain” from
voting on any proposal will be counted as present at the special meeting for
purposes of determining the presence of a quorum but will have the effect of a
vote against Proposals 1 and 2, and will have no effect on Proposal 3, and the
shares held by stockholders who instruct their proxies to “abstain” from voting
on Proposal 1 will not be counted toward the NYSE’s vote cast quorum requirement
described above.
Householding
of Proxy Statement Materials
The SEC
has adopted rules that permit companies and intermediaries (e.g., brokers) to
satisfy the delivery requirements for proxy statements and annual reports with
respect to two or more stockholders sharing the same address by delivering a
single proxy statement and annual report addressed to those
stockholders. This process, which is commonly referred to as
“householding,” potentially means extra convenience for stockholders and cost
savings for companies.
A number
of brokerages and other institutional holders of record have implemented
householding. A single proxy statement will be delivered to multiple
stockholders sharing an address unless contrary instructions have been received
from the affected stockholders. If you have received notice from your
broker that it will be householding communications to your address, householding
will continue until you are notified otherwise or until you revoke your
consent. If, at any time, you no longer wish to participate in
householding and would prefer to receive a separate proxy statement, please
notify your broker. Stockholders who currently receive multiple
copies of the proxy statement at their addresses and would like to request
information about householding of their communications should contact their
brokers or other intermediary holder of record.
3
BENEFICIAL
OWNERSHIP OF COMMON STOCK
The
following table presents information as to the beneficial ownership of our
common stock as of April 14, 2010 by:
|
|
·
|
each
of our current directors;
|
|
|
·
|
each
of our “Named Executive Officers,” as such term is defined under the rules
of the Securities and Exchange Commission (the “SEC”) who owns
shares;
|
|
|
·
|
all
current directors and executive officers as a group;
and
|
|
|
·
|
each
stockholder known by us to be the beneficial owner of more than 5% of our
common stock.
|
In fiscal
year 2010, our Named Executive Officers were Seth M. Katzenstein, Richard T.
Allorto, Jr. and Eric P. Rubenfeld.
The
percentage ownership is based on 16,940,109 shares of common stock outstanding
as of April 14, 2010. Shares of common stock that are subject to warrants or
other convertible securities currently exercisable or exercisable within 60 days
thereof, are deemed outstanding for the purposes of computing the percentage
ownership of the person holding these options or convertible securities, but are
not deemed outstanding for computing the percentage ownership of any other
person. Beneficial ownership is determined under the rules of the SEC
and generally includes voting or investment power with respect to
securities. To our knowledge, unless otherwise indicated in the
footnotes to this table, the persons and entities named in the table have sole
voting and sole investment power with respect to all shares beneficially owned,
subject to community property laws where applicable. Unless otherwise
indicated by footnote, the address for each listed individual is GSC Investment
Corp., 500 Campus Drive, Suite 220, Florham Park, New Jersey 07932.
|
Name
of Beneficial Owners
|
Shares
of GNV Common Stock Beneficially Owned as of April 14,
2010
|
Percent
of Class
|
||||||
|
Directors
|
||||||||
|
Robert
F. Cummings, Jr.
|
48,006 | * | ||||||
|
Richard
M. Hayden
|
32,621 | * | ||||||
|
Steven
M. Looney
|
2,875 | * | ||||||
|
Charles
S. Whitman III
|
4,417 | * | ||||||
|
G.
Cabell Williams
|
44,911 | * | ||||||
|
Named
Executive Officers
|
||||||||
|
Seth
M. Katzenstein
|
18,917 | * | ||||||
|
Richard
T. Allorto, Jr.
|
19,358 | * | ||||||
|
All
Directors and Executive Officers as a Group
|
171,105 | 1 | % | |||||
|
Owners
of 5% or more of our common stock
|
||||||||
|
GSC
CDO III, LLC(1)
|
1,928,006 | 11.6 | % | |||||
|
(1)
|
Includes
common stock held by affiliates of GSC Group as follows: 133 shares of
common stock held by GSC Secondary Interest Fund, LLC, a Delaware limited
liability company, 116,059 shares of common stock held by Greenwich Street
Capital Partners II, L.P., a Delaware limited partnership, and 1,811,814
shares of common stock, held by GSC CDO III, L.L.C., a Delaware limited
liability company.
|
|
*
|
Less
than 1%
|
4
PROPOSAL
1 – TO APPROVE THE ISSUANCE OF SHARES OF COMMON STOCK AT A PRICE PER SHARE BELOW
THE CURRENT NET ASSET VALUE PER SHARE OF SUCH STOCK PURSUANT TO THE STOCK
PURCHASE AGREEMENT
We are
asking our stockholders to consider and vote on a proposal to approve the
issuance of 9,868,422 shares of our common stock for an aggregate purchase price
of approximately $15,000,000 at a price per share below the current net asset
value per share of such stock, on the terms and subject to the conditions set
forth in the Stock Purchase Agreement. We would note that the
9,868,422 shares of our common stock are also being issued at a price per share
below the current market price of such stock in an unregistered private offering
that is exempt from registration under Section 4(2) of the Securities Act of
1933 and Regulation D thereunder.
The
Parties
The
Company is a specialty finance company that invests primarily in leveraged loans
and mezzanine debt issued by U.S. middle-market companies, high yield bonds and
collateralized loan obligations. It has elected to be treated as a
business development company under the 1940 Act and has elected and qualified to
be treated as a registered investment company under subchapter M of the Internal
Revenue Code of 1986 (as amended, the “Code”). The Company may also
opportunistically invest in distressed debt, debt issued by non-middle market
companies, and equity securities issued by middle and non-middle market
companies. The Company is traded on the NYSE under the symbol
“GNV.”
Saratoga
Investment Advisors, LLC, a Delaware limited liability company (“Saratoga”), is
an affiliate of Saratoga Partners and was formed in connection with the Saratoga
Transaction. Saratoga is a newly-formed entity and is
newly-registered with the SEC as an investment adviser pursuant to the
Investment Advisers Act of 1940 (as amended, the “Advisers
Act”). Saratoga Partners was established in 1984 to be the
middle-market private investment arm of Dillon Read & Co. Inc. and has been
independent of Dillon Read & Co. Inc. since 1998. Saratoga
Partners has a 25-year history of private investments in middle market companies
and focuses on public and private equity, preferred stock, mezzanine
investments, and senior and subordinated debt. Neither Saratoga
Partners nor Saratoga has extensive
experience operating or managing a business development company as
described in further detail herein under the heading “Post-Transaction Company May Not
Succeed” on page 19 of this proxy statement.
Christian
L. Oberbeck is the Managing Partner of Saratoga Partners and has been a member
of its investment committee for 15 years. Mr. Oberbeck has over 23
years of experience in leveraged finance for middle market businesses, from
distressed debt to private equity, and has been involved in originating,
structuring, negotiating, consummating, managing and monitoring investments in
such businesses. Mr. Oberbeck is the primary investor in Saratoga,
and CLO Partners LLC is an entity wholly-owned by Mr. Oberbeck. Prior
to or at the closing of the Saratoga Transaction, the obligation to acquire
certain of the shares of the Company’s common stock under the Stock Purchase
Agreement will be assumed by certain individuals affiliated with Saratoga or
Saratoga Partners.
NYSE
Stockholder Approval Requirement
Because
our common stock is listed on the NYSE, we are subject to NYSE rules and
regulations. Among other things, NYSE rules (specifically, NYSE
Listed Company Manual Section 312.03(c)) require stockholder approval prior to
the issuance or sale of shares of our common stock in any transaction or series
of transactions if (1) the shares of common stock will have upon issuance voting
power equal to 20% or more of the voting power outstanding before the issuance
of the shares or (2) the number of shares of common stock to be issued will upon
issuance equal 20% or more of the number of shares of common stock outstanding
before the issuance of the shares. In addition, NYSE Listed Company
Manual Section 312.03(d) requires stockholder approval prior to the issuance or
sale of securities that will result in a change of control of the
issuer.
Our
directors believe that this transaction will be considered a change of control
based on the specific facts and circumstances of the transaction as further
described herein, but principally due to the following: (i) Saratoga will become
the new investment adviser, thereby obtaining control of the day-to-day
management of the Company and its operations, (ii) the Board will elect two
individuals affiliated with Saratoga as directors of the Company and (iii) the
aggregate number of shares of our common stock being issued will provide
Saratoga and its affiliates with a not
insubstantial voting percentage of
approximately 36.8%, thereby increasing the likelihood that future
proposals supported by Saratoga will have a greater chance of being
passed.
5
Because
the 9,868,422 shares of common stock (the “Shares”) to be issued by the Company
under the Stock Purchase Agreement will exceed the 20% threshold, described
above, and because our directors also believe that this transaction will be
considered a change of control based on the specific facts and circumstances of
the transaction as further described herein, we are required to obtain
stockholder approval prior to issuance of the Shares pursuant to the Saratoga
Transaction.
1940
Act Stockholder Approval Requirement
The
Company is an externally managed, non-diversified closed-end investment company
that has elected to be regulated as a business development company or “BDC”
under the 1940 Act. The 1940 Act prohibits a BDC such as the Company
from selling shares of its common stock at a price below the current net asset
value per share of such stock unless its stockholders approve such a sale in
accordance with either Section 23(b) or Section 63 of the 1940
Act. As of February 28, 2010, the net asset value per share of our
common stock was $3.27.
In
connection with the Stock Purchase Agreement, the Company will issue the Shares
at a price per share of $1.52. Because the per-share sale price of
the Shares is below the current net asset value per share of our common stock,
we are required under the 1940 Act to seek stockholder approval prior to
issuance. Approval of the issuance of the Shares either (1) pursuant
to Section 63 of the 1940 Act, by the affirmative vote of (i) the holders of a
majority of the outstanding voting securities entitled to vote at the special
meeting and (ii) the holders of a majority of the outstanding voting securities
entitled to vote at the special meeting that are not held by affiliated persons
of the Company, which includes directors, officers and 5% stockholders of the
Company or (2) pursuant to Section 23(b) of the 1940 Act, by the affirmative
vote of a majority of the beneficial owners of the Company’s common stock
entitled to vote at the special meeting, each as described in the preceding
section of this proxy statement, fulfills the requirements of the 1940 Act. The
estimated dilutive impact of the Saratoga Transaction on the net asset value per
share of our common stock is discussed in further detail herein under the
heading “Dilutive
Impact on NAV Per Share and Market Price” on page 16
of this proxy statement.
Background
and Purpose of the Transaction
The
discussion in this proxy statement, which includes the material terms of the
proposed transaction, is subject to, and is qualified in its entirety by
reference to, the Stock Purchase Agreement, a copy of which iswas attached
as an exhibit to our Form 8-K/A filed with the SEC, on June 4,
2010 and is incorporated by reference in this proxy
statement.
General
Description of the Transaction
On April
14, 2010, we entered into the Stock Purchase Agreement with Saratoga and CLO
Partners LLC (together with Saratoga, the “Investors”) and an assignment,
assumption and novation agreement (the “Assignment Agreement”) with Saratoga,
pursuant to which we assumed certain rights and obligations of Saratoga under
the debt commitment letter (the “Madison Commitment Letter”) Saratoga received
from Madison Capital Funding LLC (“Madison”), indicating Madison’s willingness
to provide the Company with a $40 million senior secured revolving credit
facility (the “Replacement Facility”), subject to the satisfaction of certain
terms and conditions. Madison is not affiliated with any of the
parties involved in the Saratoga Transaction.
If the
conditions to closing under the Stock Purchase Agreement are satisfied, pursuant
to the Stock Purchase Agreement, we will issue and sell to the Investors
9,868,422 shares of our common stock for an aggregate purchase price of
approximately $15,000,000 at a price of $1.52 per share, in a private
transaction that is exempt from registration under Section 4(2) of the
Securities Act of 1933 and Regulation D thereunder. Concurrently with
the closing of the Saratoga Transaction and pursuant to the terms of the Stock
Purchase Agreement, we will (i) enter into the Replacement Facility with
Madison; (ii) enter into a registration rights agreement with the Investors regarding
the registration of the Shares after the closing; (iii) enter into a
trademark license agreement with Saratoga or one of its affiliates; and (iv)
replace GSCP (NJ), L.P. as the Company’s investment adviser with Saratoga
Investment Advisors, LLC, by executing the Investment Advisory and Management
Agreement, subject to stockholder approval of Proposal 2 as described in this
proxy statement, and as the Company’s administrator with an affiliate of
Saratoga by executing an Administration Agreement. The Company and
its current investment adviser, GSCP (NJ), L.P., have entered into a Termination
and Release Agreement, to be effective as of the closing, pursuant to which GSCP
(NJ), L.P., among other things, has agreed to waive any and all accrued and
unpaid deferred incentive management fees up to and as of the closing of the
Saratoga Transaction but will continue to receive the base management fees
earned through the date
6
of the
closing. Pursuant to the registration rights agreement, the Company
has agreed to bear all of the costs incurred in connection with the registration
of the shares of our common stock sold in connection with the Saratoga
Transaction., and the
Company estimates that the aggregate costs of which could be as much as, or in
excess of, $300,000.
In
addition, as a condition to closing of the Saratoga Transaction and in each case
to be effective as of the closing, the Company is required to procure the
resignations of Robert F. Cummings, Jr. and Richard M. Hayden, both of whom are
affiliates of GSCP (NJ) L.P., as members of the Board and to elect Christian L.
Oberbeck and Richard A. Petrocelli, both of whom are affiliates of Saratoga, as
members of the Board (the “Saratoga Directors”). The Saratoga
Directors will be elected by the Board to fill the vacancies created by the
resignations described above and the Saratoga Directors will be appointed to the
class of directors as determined by the Board in accordance with the Company’s
organizational documents. The Company’s stockholders will have the
opportunity to vote for each of the Saratoga Directors when his class of
directors is up for reelection. In addition, all officers of the
Company will resign at closing and the Board will appoint Mr. Oberbeck as the
Company’s Chief Executive Officer and Mr. Petrocelli as the Company’s Chief
Financial Officer and Chief Compliance Officer.
Promptly
after closing of the Saratoga Transaction, the Company will change its name from
“GSC Investment Corp.” to “Saratoga Investment Corp.” and the Company intends to
undertake a one-for-ten reverse stock split, pursuant to which each stockholder
will receive one share of our common stock in exchange for every ten shares
owned at that time. After giving effect to the shares of common stock
issued in connection with the Saratoga Transaction and the one-for-ten reverse
stock split, the total number of shares of our common stock outstanding will be
approximately 2.7 million.
The
Company will use the net proceeds from the Saratoga Transaction and a portion of
the funds available to it under the Replacement Facility to pay the full amount
of principal and accrued interest, including default interest, outstanding under
the Company’s existing securitized credit facility with Deutsche Bank AG, New
York Branch, (“Deutsche Bank,” and, as amended, the “DB Credit Facility”) due
and payable as of the date of closing.
Following
completion of the transactions contemplated by the Stock Purchase Agreement, the
Investors and certain individuals affiliated with Saratoga and Saratoga
Partners, including Messrs. Oberbeck and Petrocelli, will hold approximately
36.8% of the outstanding shares of common stock of the
Company. Christian L. Oberbeck, personally and through other entities
directly or indirectly controlled by him after giving effect to the transactions
contemplated by the Stock Purchase Agreement, will own approximately
[·]%as much as
32.6%, but not less than 28.5%, of the outstanding shares of the
Company’s common stock, and accordingly, pursuant to the provisions of the 1940
Act, the Company will be deemed to be controlled by Mr. Oberbeck following
consummation of the Saratoga Transaction. Based on information
currently available to the Company, no other entity or individual will obtain
5.0% or more of the outstanding shares of the Company’s common stock in
connection with the Saratoga Transaction. As previously described in
this proxy statement, Mr. Oberbeck is the Managing Partner of Saratoga Partners,
an affiliate of Saratoga, and has been a member of its investment committee for
15 years. Mr. Oberbeck is the primary investor in Saratoga, and CLO
Partners LLC is an entity wholly-owned by Mr. Oberbeck. Saratoga
Partners has also provided Saratoga with an equity commitment letter, pursuant
to which Saratoga Partners has agreed to fulfill and satisfy solely the payment
obligations of Saratoga and CLO Partners under the Stock Purchase Agreement,
subject to the satisfaction of certain terms and conditions, including the
closing conditions described herein. Saratoga Partners may also
benefit from the consummation of the Saratoga Transaction as a result of
increasing the aggregate amount of assets under its management.
Background
of the Transaction
In
October 2008, despite being in compliance with the terms and conditions of the
DB Credit Facility, the Company became increasingly concerned that the decline
in value of, and downgrades of certain public ratings and private credit
estimates on, its pledged collateral could result in a default under its credit
facility. Accordingly, GNV commenced discussions with Deutsche Bank
regarding an amendment to the DB Credit Facility. Deutsche Bank
informed the Company that any amendment to the DB Credit Facility would require
significant changes to the material terms of the facility, including but not
limited to its duration, the commitment amount and interest rate.
Concurrently,
management held meetings with investment banks to receive advice on the outlook
for the business development company industry and ways to enhance stockholder
value. Management then held discussions with multiple investment
banks regarding a potential engagement to identify and evaluate strategic and
financial
7
alternatives. During
this period, management contacted over 20 financial institutions to evaluate
their interest and ability to refinance the DB Credit Facility.
By
December 2008, management became increasingly concerned that the continuing
market unrest, declining valuations, and a generally hostile refinancing market
would prevent it from refinancing the DB Credit Facility to avoid an event of
default. At that time in the overall market, middle-market loan
values continued to experience significant declines in value as evidenced by the
decline of the S&P/LSTA U.S. Leveraged Loan 100 index, which declined from a
weighted average bid price of 81.7 on September 30, 2008 to a low of 59.2 at
December 17, 2008. Due to these unprecedented market conditions and a
lack of refinancing alternatives, the Company began to focus on alternatives to
refinancing the DB Credit Facility that would maximize shareholder
value. Because a subsidiary of the Company, GSC Investment Funding
LLC, a bankruptcy remote, special purpose vehicle, is the borrower under the DB
Credit Facility and not the Company directly, our management and directors
determined that the Company would be unable to utilize the bankruptcy process to
realize portfolio value for shareholders. Accordingly, the Board
concluded that it was in the Company’s best interest to simultaneously pursue an
amendment of the DB Credit Facility and consider strategic transaction
alternatives that might be available to the Company.
On
December 9, 2008, the Board held a special meeting to discuss the negotiations
for a fifth amendment to the DB Credit Facility and written expressions of
interest and preliminary discussions regarding strategic transactions with third
parties. At this time, two companies, Company Y and Company Z, had
provided written expressions of interest in pursuing a strategic transaction
with GNV. The Board also discussed management’s recommendation that
the Company engage a financial advisor to identify and evaluate strategic and
financial alternatives. The Board considered the various advantages
and disadvantages of potential financial advisors. On December 19,
2008, the Company formally engaged Stifel, Nicolaus & Company, Incorporated
(“Stifel Nicolaus”) to advise on strategic alternatives, including a possible
sale of the Company.
On
January 8, 2009, the Board met and discussed further changes to the proposed
terms of an amendment to the DB Credit Facility. Management
recommended to the Board that the Company voluntarily terminate the revolving
period under the DB Credit Facility in anticipation of a financial covenant
violation. Venable LLP, Maryland counsel to the Company (“Venable”),
advised the Board on the duties and obligations of directors of Maryland
corporations under Maryland law in connection with considering strategic
alternatives. Stifel Nicolaus presented its findings on third party
proposals and other strategic alternatives. The Board determined that
the Company’s top priority should be amending the DB Credit Facility, but that
the Company should also continue to review strategic alternatives on a
non-exclusive basis. The Board created a Special Committee comprised
of all of its independent directors to consider potential strategic
alternatives.
On March
3, 2009, the Board held a special meeting to discuss, among other ongoing
business matters, the amendment of the DB Credit Facility and the status of the
strategic alternatives. The Board was informed that the Company had
terminated preliminary discussions with Company Y and that negotiations had
commenced with another possible bidder, Company Z. Management also
advised the Board that the downgrade of certain public ratings and private
credit estimates of the pledged collateral continued to pressure the Company’s
financial covenants under the DB Credit Facility. The Board affirmed
that the completion of an amendment of the DB Credit Facility should precede any
discussion with Deutsche Bank regarding a strategic alternative.
On March
23, 2009, GNV amended its DB Credit Facility to decrease the minimum required
collateralization and increase the portion of the portfolio that could be
invested in “CCC” rated investments in return for an increased interest rate and
shortened maturity. This amendment did not provide the Company with
the long term relief that it desired, as the Company’s borrowing base could
continue to be negatively effected by further declines in the value of, and
downgrades of public ratings and private credit estimates on, the pledged
collateral.
The Board
met on April 2, 2009, to discuss the status of possible strategic
alternatives. The Board was told by management that the Company and
Company Z had met with Deutsche Bank to discuss terms of a possible strategic
transaction. The Board was also informed by management that the
Company had been contacted by other companies regarding their interest in a
strategic transaction with GNV, but that no formal proposals had been received
at that time.
On April
13, 2009, the Special Committee of the Board met and was advised by management
that the Company had received a draft non-binding letter of intent from Company
Z and that Deutsche Bank had informally indicated its willingness to waive any
change of control provisions under the DB Credit Facility in connection with a
possible
8
transaction
between the Company and Company Z. Company Z had informed the Company
that it would not participate in an auction process, and the Special Committee
concluded that an auction would not maximize stockholder value in the current
circumstances and authorized the Company to execute the letter of intent as
presented, if necessary, but not before engaging in further negotiations
relating to the proposed merger consideration in order to account for the
recently higher trading price of the Company’s stock.
Following
this meeting, the Company’s stock price continued to appreciate, and the Company
received one preliminary proposal and several indications of interests from
other third parties regarding a strategic transaction. Management
informed the Special Committee of these developments and suggested that the
Special Committee revisit the issue of whether the Company should commence an
auction process.
On April
28, 2009, the Special Committee again met to discuss the status of possible
strategic alternatives. Venable again advised the Special Committee
regarding the duties of directors under Maryland law when considering strategic
alternatives. Stifel Nicolaus advised the Special Committee regarding
its view of the relative merits of the different strategic proposals before the
Company. The Special Committee determined that Company Z’s proposal
still offered the greatest potential value to the Company’s stockholders as
compared to the other alternatives. The Special Committee directed
the officers of the Company to execute the letter of intent with Company
Z. The Company subsequently executed the letter of intent, which
included a 30-day exclusivity period.
On May
21, 2009, the Board determined, as a result of changes to Company Z’s proposal
made subsequent to executing the letter of intent, including a reduction in the
exchange ratio, that the offer, as revised, should be rejected and that other
strategic alternatives explored.
On May
28, 2009, the Company filed its Form 10-K for the period ended February 28,
2009. In its Form 10-K, the Company disclosed that it had amended the
DB Credit Facility to decrease the minimum required collateralization and
increase the portion of the portfolio that can be invested in “CCC” rated
investments in return for an increased interest rate and shortened
maturity. The Company also disclosed that if it was not able to
obtain new sources of financing, it expected that its portfolio would gradually
de-lever as principal payments were received, which could negatively impact net
investment income and the Company’s ability to pay dividends. In this
filing the Company disclosed that it would not pay a dividend in the first
quarter of 2010. The Form 10-K also disclosed that, at this same
time, GNV’s investment adviser, GSCP (NJ) L.P., had failed to make a scheduled
principal amortization payment under its credit facility (the “GSC Group
Facility”), resulting in a default thereunder (the “GSC Group
Default”). The Company stated that it was not directly affected by
the GSC Group Default, although a material adverse change in the business,
condition (financial or otherwise), operations or performance of its investment
adviser could constitute a default under the DB Credit Facility.
Due to an
anticipated default by the Company under the DB Credit Facility, throughout the
spring and summer of 2009 the Company engaged in negotiations on multiple
occasions with Deutsche Bank to obtain a forbearance and/or further amendments
to the DB Credit Facility. As these negotiations proved unsuccessful,
the Company and the Board authorized Stifel Nicolaus to initiate an auction
process for the Company.
On July
8, 2009, the Board met to review the results for the quarter ended May 31, 2009
and to discuss the status of the auction process. Management advised
the Board that as of June 30, 2009 the Company had a borrowing base deficiency
that it did not expect to have the ability to cure without a waiver from
Deutsche Bank. Management advised the Board that the borrowing base
deficiency would become a matured event of default under the DB Credit Facility
if not cured within 30 days. Stifel Nicolaus advised the Board that
it had contacted 36 parties on behalf of the Company to determine interest in a
strategic transaction, 17 parties had executed a non-disclosure agreement and
conducted due diligence via access to an electronic data room, and nine parties
had submitted bids. Stifel Nicolaus summarized certain terms of each
of the bids (including but not limited to form of consideration, purchase price,
financing sources, timing and conditions), financial information for the public
bidders, and answered questions from the Board regarding the bids and the
bidding process. After discussion with its advisors, the Board
directed Stifel Nicolaus and management to proceed with a second round of
bidding with six of the leading prospects.
On July
10, 2009, the Company filed its Form 10-Q for the period ended May 31,
2009. The Company disclosed that it had violated covenants in the DB
Credit Facility as a result of the decline in the value of, and the downgrade of
certain public ratings or private credit estimates on, the pledged
collateral. The Company stated that it was discussing a waiver of the
borrowing base covenant violation with Deutsche Bank, but that there was no
guarantee that it would
9
be
granted such a waiver or amendment or that any such amendment or waiver would be
on terms favorable to the Company.
Between
July 23, 2009 and July 28, 2009, the Company’s management met with five second
round participants in face-to-face due diligence meetings and had one diligence
meeting via teleconference. Both during and after these diligence
sessions, the Company responded to diligence requests and made available
additional information.
On July
30, 2009, the aforementioned covenant violations became an event of default, as
a result of which, Deutsche Bank had the right to accelerate repayment of the
outstanding indebtedness under the DB Credit Facility and to foreclose on and
liquidate the pledged collateral.
On August
11, 2009, the Board met to discuss the Company’s event of default under the DB
Credit Facility and the progress of the auction process. Management
stated that Deutsche Bank had delivered a reservation of rights letter to the
Company dated August 3, 2009 but that Deutsche Bank had informally agreed to
forbear from exercising remedies during the auction process and was being kept
informed of the status of the auction process. Stifel Nicolaus
advised the Board that the Company had invited six bidders to participate in the
second round of bidding and that four had chosen to submit updated bids after
completing additional due diligence. Stifel Nicolaus summarized
certain terms of each of the bids, including form of consideration, financing
and conditionality, and answered questions from the Board regarding the bids and
the bidding process. Stifel Nicolaus advised that it believed the bid
from Company A was more attractive than the other bids and that the Company
should consider entering into further negotiations with Company
A. Company A’s offer included a full repayment of the amounts
outstanding under the DB Credit Facility and represented a premium to the
then-current market price of the Company’s shares. Furthermore,
Company A’s bid structure would not require the approval of Company A’s
stockholders. Stifel Nicolaus then reviewed with the Board in detail
each of the other bids in comparison to the Company A proposal.
In
response to questions from the Board, Stifel Nicolaus reviewed Company A’s
business and prospects and reviewed execution risks of a transaction with
Company A. Stifel Nicolaus stated that additional due diligence would
be conducted after the Board determined which, if any, bid to pursue and that
Company A believed that a merger agreement could be executed by the end of
August 2009. After reviewing the available materials, and after
discussion with GNV management and its advisors, the Board directed management
and its advisors to pursue, on a non-exclusive basis subject to satisfactory
progress on certain elements of Company A’s bid, an agreement with Company A on
the basis of the bid submitted, but to maintain communications with other
bidders unless and until an exclusivity agreement was executed.
Upon
satisfactory progress in negotiations with Company A, the Board authorized the
Company to enter into an exclusivity agreement with Company A for a period of 30
days, which was executed on August 31, 2009. The Company subsequently
extended the exclusivity period for an additional 15 days.
On
September 14, 2009, the Special Committee held a meeting to discuss the status
of the negotiations with Company A and other alternatives, including
liquidation. The Board was informed that, on September 11, 2009,
Company A had reduced its bid as a result of deterioration in the Company’s
portfolio.
In order
for the Special Committee to assess all of its viable alternatives, it reviewed
a liquidation analysis prepared by the Company’s management that repaid the DB
Credit Facility by December 31, 2009. The Special Committee discussed
with management and its advisors the execution risk associated with a
liquidation, and particularly the increased risk that is associated with
liquidating a portfolio primarily comprised of illiquid
investments. The Special Committee also considered the fact that the
Company had no assurance Deutsche Bank would not foreclose on the Company’s
assets before any liquidation was complete. Management also refreshed
its analysis regarding the inability of the Company, and more broadly, BDCs in
general, to obtain refinancing or other financing alternatives and reviewed the
history of its discussions with Deutsche Bank regarding a forbearance agreement
with respect to the Company’s ongoing event of default. The Special
Committee directed management and the Company’s advisors to expand the
liquidation analysis to include an orderly liquidation over a longer period of
time, extending repayment of amounts outstanding under the DB Credit Facility
with the goal of determining the highest net asset value that could be realized
for stockholders. Management also reported that the Company had
received no indication from Deutsche Bank that Deutsche Bank would agree to
forbear during any of the liquidation scenarios evaluated by the
Company.
10
On
September 18, 2009, the Special Committee met to discuss Company A’s bid and
other strategic alternatives with its advisor, management and the Company’s
advisors. The Special Committee reviewed a recent bid letter from
Company A proposing two alternate transaction structures. The Special
Committee considered that the Company A proposal offered the highest
consideration and the least contingency as compared to the other proposals
received, in addition to the support of Deutsche Bank. The Special
Committee questioned Stifel Nicolaus and management on the availability and
relative attractiveness of other strategic alternatives, including
liquidation. The Special Committee, in order to allow it to complete
its analysis of the Company A proposal and liquidation alternatives, directed
management and its advisors to expand the liquidation analysis and continue
negotiations with Company A.
On
September 21, 2009, the Special Committee held a meeting to discuss Company A’s
bid and other strategic alternatives. The committee members asked
Stifel Nicolaus to review the alternative bids proposed by Company
A. Stifel Nicolaus stated that Company A had agreed to increase the
per share consideration if the Company authorized the payment of the accrued and
unpaid deferred incentive management fees to the Company’s current investment
adviser in the form of Company A stock in lieu of cash. The Special
Committee received guidance from the Company’s legal advisors concerning the
Company’s obligations under the Investment Advisory and Management Agreement to
pay certain fees in connection with the proposed transaction, including the
deferred incentive management fee, and the Company’s ability to pay such fees in
stock. The Special Committee then reviewed with management its
updated liquidation analysis. After reviewing the available
materials, and after extensive discussion with management and advisors, the
Special Committee determined that pursuing a transaction with Company A was
preferable to any of the liquidation scenarios presented. The Special
Committee directed management and the Company’s advisors to pursue the Company A
bid and to negotiate a forbearance with Deutsche Bank during the pendency of a
merger with Company A.
On
September 24, 2009, as a result of ongoing negotiations between the Company and
Deutsche Bank, the Company executed a forbearance agreement with Deutsche
Bank. Under the terms of the forbearance agreement, Deutsche Bank
agreed to forbear its right to take action against the collateral securing the
DB Credit Facility in order to remedy any existing or ongoing events of default;
provided that a transaction with Company A was closed on or prior to December
30, 2009, subject to the satisfaction of certain milestones leading up to such
date.
On
October 13, 2009, the Board met and received an update from management and its
advisors on the progress of negotiations with Company A, and on October 15,
2009, the Company filed its Form 10-Q for the period ended August 31,
2009. In its Form 10-Q, the Company stated that any acceleration of
the outstanding indebtedness and/or liquidation of the collateral as a result of
ongoing event of default would have a material adverse effect on the Company’s
liquidity, financial condition and operations. The Company disclosed
that, as a result of the ongoing event of default, it might be forced to sell
its investments to raise funds to repay outstanding amounts and such forced
sales might result in values that could be less than the carrying values
reported in the financial statements as filed. The Company further
stated that deleveraging might significantly impair the Company’s ability to
effectively operate. The Company also stated that, to date, Deutsche
Bank had not accelerated the debt with respect to this event of default, but had
reserved the right to do so, and that the Company would continue to discuss
possible solutions to remedy the event of default with Deutsche
Bank.
On
October 30, 2009, Company A verbally notified management and its advisors that
it was no longer interested in pursuing a transaction with the Company at that
time. On November 2, 2009, Stifel Nicolaus recommenced the marketing
process to solicit new or revised bids.
On
November 12, 2009, the Board met and was advised by Stifel Nicolaus that it had
contacted over 40 potential counterparties, 11 of whom had executed, and eight
of whom were currently reviewing, non-disclosure agreements with the
Company. Stifel Nicolaus and management also reported that they had
been regularly updating Deutsche Bank about the status of the strategic
transaction. On November 23, 2009, the Board met and was advised by
Stifel Nicolaus that it had contacted over 40 potential counterparties, 15 of
whom had executed non-disclosure agreements with the Company, five of whom
submitted a bid for a potential transaction. Stifel Nicolaus stated
that additional bids were expected and reviewed the bids received
to-date. The Board directed management and Stifel Nicolaus to
continue to pursue and explore all offers. Management also reviewed
potential portfolio liquidation scenarios with the Board. Based on
the potential strategic prospects as compared to the reduced value to
stockholders under a liquidation scenario, the Board determined not to pursue a
liquidation at that time.
11
Throughout
the month of December 2009, Stifel Nicolaus and the Company had ongoing
conversations with a number of interested parties. Management
responded to numerous diligence requests, held conference calls with interested
parties and made available additional information regarding GNV.
On
December 23, 2009, in written correspondence with the Board, Stifel Nicolaus
recommended that the Company continue discussions with selected bidders from the
second auction process that began in November 2009. The Board
determined to proceed in accordance with Stifel Nicolaus’ recommendation,
including not granting exclusivity to any party at that time.
On
December 31, 2009, GNV paid its previously announced dividend of $1.825 per
share in a combination of cash and stock, resulting in an additional 8,648,725
shares of common stock issued, or 104% of GNV’s outstanding shares immediately
prior to the dividend.
Consideration
of Specific Proposals
On
January 20, 2010, the Board was given a presentation by Stifel Nicolaus
summarizing the results of the second auction process. Stifel
Nicolaus stated that, since November 2009, 51 potential counterparties had been
contacted by Stifel Nicolaus regarding a possible strategic transaction with GNV
and 27 counterparties had executed confidentiality agreements and conducted due
diligence. Of those 27, ten counterparties had submitted non-binding
letters of intent. At that time, three counterparties had submitted a
purchase agreement mark-up for the Board’s consideration. The Board
reviewed and discussed with the assistance of the Company’s legal and financial
advisors the proposals submitted by the potential bidders and authorized its
advisors to continue to negotiate certain terms of the proposals with the
bidders.
On
January 27, 2010, the Board held a meeting to review the bids of Company 1,
Company 2, Company 3 and Saratoga Partners. Company 1 and Saratoga
Partners were invited to, and did, make management presentations to the
Board. The Board did not invite Company 2 to make a management
presentation because the Board was already very familiar with its operations and
Company 2 had significant amounts of publicly available
information. Because Company 3’s bid was received on the eve of the
January 27 meeting, the Board was unable to meet with Company 3.
Company 1
submitted a bid to execute a merger of the Company into a newly-formed BDC
merger subsidiary. Company 1 would contribute approximately $80
million of assets at fair value into the new entity for 75% of the equity value
of the combined entity. The implied per share price of the shares to
be issued was $1.57. Company 1 provided for the full repayment at par
of the amount outstanding under the DB Credit Facility at
closing. Company 1 indicated repayment of the credit facility would
be funded through cash on hand and through a small credit
facility. Company 1 did not submit a commitment letter for the credit
facility it planned to put into place, but indicated confidence in its ability
to obtain such facility. Company 1 also proposed to pay any accrued
and unpaid deferred incentive management fees in an amount not to exceed $4
million.
Company 2
submitted a bid to enter into a stock-for-stock merger with a fixed exchange
ratio of 0.09 shares of Company 2 stock for each share of GNV common stock,
before adjusting for any final company dividend. The equity valuation
per share was $1.10. Company 2’s bid included the full repayment at
par of the amounts outstanding under the DB Credit Facility, as well as a full
payment of the accrued and unpaid deferred incentive management
fees. Company 2 represented that it had adequate funds available
under its existing credit facility and existing financial resources available to
finance the proposed transaction.
Saratoga
Partners submitted a bid proposing a purchase of $15 million worth of GNV common
stock for a minority investment of approximately 38% of the post-transaction GNV
equity value. The equity valuation per share of this bid was
$1.47. Saratoga Partners’ bid included the full repayment at par of
the amounts outstanding under the DB Credit Facility. Saratoga
Partners had a commitment letter from Madison indicating its willingness to
provide the Company with a $40 million credit facility, which was expandable to
$100 million, in connection with the transaction. The payment of
accrued and unpaid deferred incentive management fees was to be
negotiated.
Company 3
submitted a bid proposing a $20 million equity investment for approximately 33%
of the shares of GNV. Company 3 did not provide formal documentation
of its per share price determination, and stated that it required additional due
diligence before submitting a formal offer. Company 3’s bid purported
to include a full repayment of the amounts outstanding under the DB Credit
Facility; however, Company 3 did not have a credit facility committed for
financing the proposed transaction. However, Company 3 did express
confidence in its ability to obtain
12
a
commitment for a credit facility. Company 3’s bid provided for the
full payment, in stock, of any accrued and unpaid deferred incentive management
fees.
Subsequent
to the January 27 board meeting, the Board instructed GNV management and its
advisors to address several deal considerations relating to the Saratoga
Partners proposal. As a result of these discussions, Saratoga
Partners agreed to increase the purchase price per share of its offer from $1.47
per share to $1.52 per share. The Board was satisfied with the
progress of the discussions relating to certain deal terms with Saratoga
Partners, including the price increase, and authorized the Company to enter into
an exclusivity agreement with Saratoga Partners, which was executed on January
29, 2010. This exclusivity agreement lasted for a period of 30 days
and has subsequently been extended through the date immediately preceding the
execution date of the Stock Purchase Agreement.
In
evaluating the four proposals presented to the Board and authorizing the Company
to enter into an exclusivity agreement with Saratoga Partners, the Board
considered the following factors to be material, although not exhaustive, in
differentiating among the bids and evaluated each proposal in light of these
factors, namely, value to Company stockholders, certainty of closing, repayment
of the DB Credit Facility, equity dilution of Company stockholders, stockholder
approval and tax benefits, each of which is discussed below.
Value to Company
Stockholders. The Board considered which proposal would
provide the most value to the existing GNV stockholders, not simply the proposal
representing the highest per-share valuation but reflecting other economic
considerations as well. Although the Company 1 bid offered the
highest per-share valuation at $1.57 per share and the Saratoga Partners bid
only the second highest valuation at $1.52 per share, the Board felt that the
Saratoga Partners bid maximized stockholder value when the bids were evaluated
as a whole. The Board believes that the Company is currently
undervalued and its stock price is depressed as a result of the general economic
climate, and the Board focused on the fact that both Saratoga Partners’ and
Company 3’s proposals allow stockholders the greatest opportunity to participate
in the Company’s economic recovery following the closing of either transaction,
as the existing Company stockholders would collectively hold over 60% of the
outstanding shares of GNV common stock under either proposal and would have a
proportionally larger opportunity to benefit from a recovery in the value of the
Company when compared to the bids of Company 1 and Company 2.
Certainty of
Closing. The Board also considered which proposal provided the
most certainty of closing. The proposed transaction with Company 1
posed the most regulatory concerns as it would require multiple filings and
registrations with different governmental and regulatory agencies, particularly:
registration of the new entity with the SEC as a BDC under the 1940 Act,
registration of its shares with the SEC under the Exchange Act of 1934 and
listing of its shares on either the NASDAQ or NYSE prior to
closing. A transaction with Company 2 would pose the fewest
regulatory concerns as its business model is the closest to that of
GNV. The transaction with Saratoga Partners would pose few regulatory
concerns, requiring only Saratoga’s registration as an investment adviser under
the Advisers Act. In addition, Saratoga Partners indicated that it
already had an established relationship with Madison, the replacement lender,
that was willing to provide the Company with a new credit
facility. Similarly, Company 3’s bid posed few regulatory concerns;
however, Company 3’s bid appeared less certain than Saratoga Partners’ with
respect to financing the repayment of the DB Credit Facility.
Resolution of the DB Credit
Facility. Because of the ongoing default under the DB Credit
Facility, a resolution of the defaulted facility was of primary importance to
the Board in evaluating the proposed transactions. As of January 27,
2010, all of the bids included repayment of the amounts owed under the DB Credit
Facility, however, not all of the bidders had proposed this
initially. Company 1 had originally included an initial lump-sum
payment to be made at closing with a year-long amortization schedule to be
established thereafter. Although Company 3’s bid purported to include
the full payment of the DB Credit Facility, Company 3 did not have a specified
lender engaged or committed for the proposed transaction. The
Saratoga Partners bid included the full repayment at par of the amounts
outstanding under the DB Credit Facility and included a letter from Madison, a
replacement lender with whom Saratoga already had an established relationship,
indicating its willingness, subject to final due diligence, to provide the
Company with a new credit facility to facilitate such repayment.
13
Equity Dilution of Company
Stockholders. The Board considered the resulting equity
dilution of the existing GNV stockholders under each of the proposed transaction
structures and the possibility of GNV stockholders participating in any
resulting recovery in asset values following any such
transaction. Under Company 1’s bid, Company 1 would own 75% of the
equity in the newly-formed combined entity and the existing GNV stockholders
would hold the remaining 25%. Company 2’s bid would be extremely
dilutive of the existing GNV stockholders given the fixed exchange ratio of 0.09
shares of Company 2 stock for every share of GNV common stock. Under
Company 3’s proposal, Company 3 would make a minority investment, acquiring
approximately 33% of the post-transaction equity of the Company and allowing the
existing Company stockholders to collectively retain a majority of the
post-transaction equity. Similarly, under Saratoga Partners’ proposed
transaction, Saratoga would purchase a minority investment of approximately 37%
of the Company’s post-transaction equity and the existing GNV stockholders would
retain over 60% of the equity value following the transaction.
Stockholder
Approval. The Board considered whether the proposed
transactions would require stockholder approval by the bidder’s
stockholders. If stockholder approval would be required due to the
structure of the proposed transaction, this would add potential delay and an
element of uncertainty to the consummation of any transaction. The
Company received assurances from all of the bidders that approval by their
respective stockholders would not be required; however, it was unclear whether
the bid from Company 1 would require approval of Company 1’s
stockholders. The Board was confident that neither the Saratoga
Partners minority investment transaction nor the Company 3 minority investment
transaction would require the approval of either bidder’s stockholders, thereby
lending more certainty to the ability to close either of these proposed
transactions.
Tax Benefits. The
Board also considered the tax implications for GNV of each of the proposed
transactions. Both the Saratoga Partners proposal and the Company 3
proposal would allow GNV to continue to benefit from its net unrealized losses
as it would not result in a change of control under the applicable provisions of
the Code. GNV would be allowed, subject to ongoing compliance with
the applicable provisions of the Code, to continue to carry forward any
unrealized losses after completing either of the transactions proposed by
Saratoga Partners and Company 3. The other proposals, although
structured in compliance with the applicable provisions of the Code to be
treated as mergers that would be tax-free to the Company’s stockholders, would
result in a change of control, thereby immediately subjecting the GNV losses to
an annual limitation amount following the completion of either of the
transactions proposed by Company 1 or Company 2.
On
February 25, 2010, the Company received a second reservation of rights letter
from Deutsche Bank, which made reference to the existing and ongoing events of
default dating back to July 2009. As a result of receipt of this
letter, the Company engaged Deutsche Bank on the issue of entering into another
forbearance agreement, particularly in consideration of the existing transaction
proposals the Company was considering at that time. The forbearance
agreement negotiations spanned the months leading up to the date of the Stock
Purchase Agreement and the Company executed the second forbearance agreement
with Deutsche Bank on April 13, 2010. Under the terms of this
forbearance agreement, Deutsche Bank agreed to forbear from taking action
against the collateral securing the DB Credit Facility in order to remedy any
existing or ongoing events of default; provided, however, that a transaction
with Saratoga was closed on or prior to August 12, 2010, subject to the
satisfaction of certain milestones leading up to such date.
Throughout
the month of March 2010, the Company continued to explore Deutsche Bank’s
willingness to negotiate alternative solutions to the Saratoga Transaction in
order to address the ongoing event of default, including liquidation of the
Company’s portfolio under distressed and orderly scenarios. Deutsche
Bank continued to reiterate its desire to be repaid in full as promptly as
possible. The Board held meetings on March 24 and March 31 to discuss
the status of negotiations with Deutsche Bank and to receive updates on the
progress of the negotiations with Saratoga Partners on the Stock Purchase
Agreement and with Madison on the Replacement Credit Facility.
Prior to
the March 31, 2010 meeting, the Chairman of the Board and the Chairman of the
Special Committee met with representatives of Deutsche Bank to explore, once
again, the willingness of Deutsche Bank to consider repayment alternatives to
the Saratoga Transaction. Representatives of Deutsche Bank once more
confirmed
14
Deutsche
Bank’s desire to be repaid in full and indicated that Deutsche Bank would
explore all of its options on an expedited basis if a definitive agreement was
not reached with a bidder in a reasonable period of time.
As a
result of the foregoing, on April 9, 2010, the Board, including all of its
independent directors, unanimously authorized the Company to enter into a
definitive agreement with Saratoga, subject to satisfactory resolution of
remaining drafting issues concerning the debt and equity commitment
letters. Due to the fact that the contemplated transaction structure
provided for the Company to enter into the Assignment Agreement with Saratoga,
pursuant to which the Company would effectively assume the rights and
obligations of Saratoga under the Madison Commitment Letter concerning Madison’s
willingness to provide the Company with a Replacement Facility, the Board
instructed Company management and its advisors to renegotiate the terms of the
Madison Commitment Letter. Concurrently therewith, the Board also
instructed Company management and its advisors to negotiate the terms of an
equity commitment letter with Saratoga Partners in consideration of the fact
that Saratoga is a newly-formed entity and that CLO Partners did not have
adequate capital to satisfy the obligations of both parties under the Stock
Purchase Agreement. Upon satisfactory resolution of such negotiations
with Madison and Saratoga concerning the debt and equity commitment letters, the
Board authorized the Company to execute the relevant transaction
documents. On April 14, 2010, the Company, Saratoga and CLO Partners
entered into a definitive Stock Purchase Agreement for the issuance and sale of
the Company’s common stock and the other transactions contemplated
thereby.
Price
Range and NAV
of Common Stock
Set forth
below are the net asset value per share of our common stock and the range of
high and low closing sales prices for our common stock for each full quarterly
period for the years ended February 28, 2009 and 2010.
|
|
|
|
|
|
Price
Range
|
|
||||||
|
Fiscal
2009
|
|
NAV(1)
|
|
|
High
|
|
|
Low
|
|
|||
|
First
Quarter
|
|
$
|
11.75
|
|
|
$
|
10.67
|
|
|
$
|
9.30
|
|
|
Second
Quarter
|
|
$
|
11.05
|
|
|
$
|
11.05
|
|
|
$
|
9.16
|
|
|
Third
Quarter
|
|
$
|
10.14
|
|
|
$
|
10.86
|
|
|
$
|
1.10
|
|
|
Fourth
Quarter
|
|
$
|
8.20
|
|
|
$
|
3.15
|
|
|
$
|
1.55
|
|
|
Fiscal
2010
|
|
NAV(1)
|
|
|
High
|
|
|
Low
|
|
|||
|
First
Quarter
|
|
$
|
8.85
|
|
|
$
|
3.95
|
|
|
$
|
1.50
|
|
|
Second
Quarter
|
|
$
|
6.91
|
|
|
$
|
3.49
|
|
|
$
|
2.09
|
|
|
Third
Quarter
|
|
$
|
3.80
|
|
|
$
|
3.71
|
|
|
$
|
1.70
|
|
|
Fourth
Quarter
|
|
$
|
3.27
|
|
|
$
|
2.09
|
|
|
$
|
1.42
|
|
|
(1)
|
Net
asset value per share is determined as of the last day in the relevant
quarter and therefore may not reflect the net asset value per share on the
date of the high and low closing sales prices. The net asset
values shown are based on outstanding shares at the end of each
period.
|
Dilutive Impact on NAV Per
Share and Market Price
The
market price per share of GNV’s common stock as of April 14, 2010, the date of
the Stock Purchase Agreement, was $2.53, and the most recently published NAV per
share was $3.80, as of November 30, 2009, both amounts higher than the $1.52 per
share purchase price under the Stock Purchase Agreement. Based upon
the November 30, 2009 NAV per share, pro forma NAV per share as adjusted for the
impact of the Saratoga Transaction is approximately $2.99.2.99, which
reflects a dilutive impact of $0.81 per share or
21.3%. Assuming a one-for-ten reverse stock split is effected
after closing, pro forma NAV per share would be further adjusted to
$29.89. This calculation of pro forma NAV includes the impact of a
$15 million common equity investment at $1.52 per share, $25 million of new debt
drawn on the Replacement Facility, the payoff of approximately $44 million of
outstanding debt under the DB Credit Facility at November 30, 2009 and the
elimination of approximately $2.6 million in accrued and unpaid incentive
management fees. In
addition, upon the exercise of Saratoga’s registration rights under the
registration rights agreement, two-thirds of the Shares will be immediately
available for re-sale and any sale of such Shares could potentially dilute the
market price of the Company’s common stock.
15
Reasons
for the Transaction
In light
of the unprecedented instability in the financial markets and the severe
downturn in the overall economy, the Company does not have adequate liquidity,
including access to the debt and equity capital markets, to operate its
business. In this regard, in July of 2009 an event of default
occurred under the DB Credit Facility due to the violation of certain financial
covenants by the Company. Among other things, the terms of the DB
Credit Facility require that all principal, interest and fees collected from the
debt investments securing the facility must be used to pay down amounts
outstanding thereunder until all such amounts have been
repaid. Substantially all of the Company’s debt investments, other
than the Company’s subordinated debt investment in GSC Investment Corp. CLO
2007, Limited, are secured as collateral under the DB Credit
Facility. As a result of an event of default under the DB Credit
Facility, the facility also permits Deutsche Bank, upon notice to the Company,
to accelerate amounts outstanding under the facility and exercise other rights
and remedies provided by the facility, including the right to sell the
collateral securing the facility.
Although
GNV has engaged in active discussions with Deutsche Bank to seek relief from or
to restructure certain terms of the DB Credit Facility, it has been unable to
obtain adequate or meaningful relief from any terms of the facility in order to
continue operating its business. In light of the foregoing, our Board
evaluated other financing and strategic alternatives, including possible debt or
equity financing, acquisition or disposition of assets, and other strategic
transactions.
Our Board
also considered the possible implications that may result from the GSC Group
Default under the GSC Group Facility and that any action taken by the GSC
Group’s lender would have a direct impact on the Company’s current investment
adviser, an affiliate of GSC Group. Our Board considered the
uncertainty surrounding the Company’s current investment adviser’s ability to
continue performing as the Company’s investment adviser and the uncertainty
about the ability of the Company to identify and retain a suitable replacement
investment adviser in a timely manner and on terms that would be as favorable to
the Company as under the existing Investment Advisory and Management Agreement
as additional factors in determining whether to consummate a transaction that
addressed the outstanding DB Credit Facility. Such uncertainty
surrounding the GSC Group Default also raised added concerns for the Board with
respect to any action Deutsche Bank may take pursuant to its rights under the DB
Credit Facility.
In
evaluating the transaction proposal from Saratoga Partners, our Board considered
numerous factors, including those described below, and, as a result, determined
that the proposed transaction was in the Company’s best
interests. The following discussion of the information and factors
considered by our Board, including its independent directors, is not intended to
be exhaustive, but includes material factors considered by our Board in
evaluating the Saratoga Transaction.
Lack of Liquidity; Potential Impact
on Tax Status. Because GNV can no longer borrow amounts under
the DB Credit Facility, and because all principal, interest and fees collected
from the debt investments securing the facility must be used to repay amounts
outstanding under the facility, GNV has limited liquidity and there is no
assurance that GNV will have sufficient cash and liquid assets to fund its
operations and dividend distributions to its stockholders, which failure could,
among other things, result in adverse tax consequences, including possible
failure to qualify as a registered investment company under Subchapter M of the
Code which would subject the Company to entity-level taxation.
Potential Actions by Deutsche
Bank. Substantially all of GNV’s investments, other than its
subordinated debt investment in GSC Investment Corp. CLO 2007, Limited, are
pledged under the DB Credit Facility. As a result of the occurrence
of an event of default under the DB Credit Facility, Deutsche Bank may, upon
notice to GNV, accelerate amounts outstanding under the facility and exercise
other rights and remedies provided by the facility, including the right to sell
the collateral pledged thereunder. In such event, forced sales of
assets may be completed at distressed sale prices, thereby diminishing or
potentially eliminating the amount of cash available to distribute to
stockholders after repayment of the amounts outstanding under the DB Credit
Facility.
Thorough Review of Strategic
Alternatives. The Company engaged in a thorough review of the
strategic alternatives available to GNV, including, among other things,
negotiations with Deutsche Bank regarding the DB Credit Facility, a stock or
cash merger, a significant equity investment, bankruptcy, liquidation of the
Company’s assets under various scenarios, a refinancing of GNV’s
16
debt and
a sale of GNV’s assets. In furtherance of the evaluation and proposal
solicitation process, GNV publicly announced that it was actively evaluating
strategic alternatives (thereby putting potential strategic partners on notice
that GNV was open to discussing such alternatives with interested parties), and,
at GNV’s request, Stifel Nicolaus contacted numerous potential strategic
partners, including business development companies, commercial finance
companies, banks, private equity funds, hedge funds and other potential
strategic and financial partners, to assess their interest in pursuing a
strategic transaction with GNV. Of the 64 potential strategic and
financial partners contacted during two separate processes, 37 executed
non-disclosure agreements with GNV and received confidential information
concerning GNV’s business, management, assets, liabilities, financial condition
and results of operations. Of those 37 potential strategic and
financial partners, 16 submitted indications of interest and bids (including
three parties which submitted bids in both processes). Based on this
lengthy and thorough process, the Board believes it has explored all
alternatives reasonably available to GNV.
Best Alternative Reasonably
Available to GNV. Because GNV had publicly announced that it
was actively evaluating strategic alternatives, and had contacted such a large
number of potential purchasers and strategic partners to determine their level
of interest in a transaction involving GNV, the Board strongly believes that, of
all possible alternatives, and based on the proposed transactions submitted by
potential strategic and financial partners, the transaction with Saratoga
Partners represents the best alternative that is reasonably available to
GNV. In making this determination, the Board considered:
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the
existing event of default under the DB Credit
Facility;
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the
lack of meaningful progress in negotiations with Deutsche Bank relating to
the DB Credit Facility;
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the
likelihood that Deutsche Bank would foreclose on its collateral before the
Company could complete an orderly liquidation of its
assets;
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the
ongoing GSC Group Default and the implications thereof on the Company’s
investment adviser, including the uncertainty of Deutsche Bank’s actions
in relation thereto;
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the
uncertainty of the value to be obtained by the Company for the sale of its
assets in any liquidation scenario;
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the
current financial condition of GNV, particularly the liquidity needed to
fund its operations and make required distributions to
stockholders;
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the
distinct possibility that GNV could run out of available cash in the near
future;
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the
overall decline in the trading price of GNV’s common stock over the period
discussed herein;
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the
other alternatives reasonably available to
GNV;
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the
terms of the other proposals submitted, including the proposed economic
terms, the conditions to closing, the expected timing of such
transactions, and the likelihood of
consummation;
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the
financial terms of the Saratoga Partners proposal, including the Company’s
ability to repay the full amount of principal and interest outstanding
under the DB Credit Facility after giving effect to the
transaction;
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the
preservation of the tax benefits relating to GNV’s net unrealized built-in
losses based on the structure of the
transaction;
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the
fact that GNV stockholders will continue as stockholders of the
Company;
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the
business and legal due diligence review conducted on Saratoga Partners by
GNV and its legal and financial advisors;
and
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the
absence of a requirement for stockholder approval by Saratoga’s
stockholders.
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Business Prospects of
GNV. As noted above, the unprecedented economic conditions
that have impacted companies in the financial services industry, coupled with
the event of default under the DB Credit Facility, has made it impossible for
GNV to continue to operate its business consistent with past
practice. The proposed strategic combination with Saratoga will
eliminate the uncertainty created by the default under the DB Credit Facility,
and will allow GNV stockholders to participate in our operations following the
transaction.
Strategic and Business
Considerations. Because the GNV stockholders will continue as
our stockholders following the transaction, GNV stockholders can participate in
the future growth and prospects of the post-transaction company, without the
limitations currently restricting the operations of GNV. Despite not
having prior experience in the business of BDCs, Saratoga Partners is an
established company with a strong capital position and performance history in
its investments in middle-market companies.
Opinion of Financial
Advisor. The written opinion of Stifel Nicolaus, dated April
14, 2010 with respect to the fairness of the per share consideration to be
received by the Company in connection with the terms set forth in the Stock
Purchase Agreement, together with the financial analysis provided by
representatives of Stifel Nicolaus, support the Board’s determination that it is
in the best interests of the Company to consummate the Saratoga
Transaction.
Repayment of DB Credit
Facility. As part of the Saratoga Transaction, and subject to
the satisfaction of the closing conditions found in the Stock Purchase
Agreement, the Madison Commitment Letter and in the Replacement Facility, the
Company will enter into the Replacement Facility and immediately draw down
sufficient funds, when added to the funds to be received by us in accordance
with the terms of the Stock Purchase Agreement, to repay all principal and
interest, including default interest, outstanding under the DB Credit Facility,
which amounted to approximately $34 million as of April 30, 2010.
Our Board
considered the following negative factors relating to the Saratoga
Transaction:
Net Asset
Value. The net asset value per share of GNV’s common stock, as
of February 28, 2010, was $3.27, an amount higher than the per share purchase
price under the Stock Purchase Agreement. Any sale of common stock at
a price below the current net asset value per share of such stock will result in
an immediate dilution to existing common stockholders. This dilution
will include reduction in the net asset value per share as a result of the
issuance of shares at a price below the net asset value per share and a
proportionately greater decrease in a stockholder’s interest in the earnings and
assets of the Company and voting interest in the Company than the increase in
the assets of the Company resulting from such issuance. The 1940 Act
establishes a connection between common stock sale price and net asset value
because, when stock is sold at a sale price below net asset value per share, the
resulting increase in the number of outstanding shares is not accompanied by a
proportionate increase in the net assets of the issuer.
Market Price. The
market price per share of GNV’s common stock as of April 14, 2010, the date of
the Stock Purchase Agreement, was $2.53, an amount higher than the per share
purchase price under the Stock Purchase Agreement. In determining
whether to recommend the issuance of shares of the Company’s common stock at a
price below the current market price, the Board considered many factors,
including, but not limited to, the results of two robust auction processes, the
type of securities – both the fact that the shares will not be registered at the
time of issuance and that one-third of the shares being issued will be subject
to transfer restrictions for one year – being issued, the range of trading
prices for shares of the Company’s common stock over the time period discussed
herein, and the cumulative elements of the Saratoga Transaction as a whole,
including the ability to replace the DB Credit Facility and the Company’s
investment adviser.
Replacement
Facility. The Company has not yet executed the Replacement
Facility and Madison’s obligation to enter into the Replacement Facility is
subject to the conditions found in the Stock Purchase Agreement, the Madison
Commitment Letter and those additional conditions found in the
18
Replacement
Facility. In addition, the terms and conditions of the Replacement
Facility, as further described in this proxy statement, are significantly tied
to Saratoga’s ongoing participation in the post-transaction Company, including
serving as its investment adviser and maintaining a specified level of equity
investment in the post-transaction Company.
Restrictions on Ability to Solicit
Alternative Offers. The restrictive non-solicitation
provisions contained in the Stock Purchase Agreement prohibit GNV from
soliciting alternative offers from third parties, and permit GNV to consider
bona fide alternative proposals from third parties only in certain limited
circumstances. While these limitations are typical in change of
control transactions such as the Saratoga Transaction and ensure that only
someone who is committed to making a Superior Proposal (as defined below) will
attempt to re-open the evaluation process, these limitations may discourage
third parties from making superior offers to acquire GNV because of the
increased price that such third party would have to pay. In addition,
the fees and expense reimbursements payable to Saratoga and Madison in the event
of a termination of the Stock Purchase Agreement and the transactions
contemplated thereby in such a scenario provide an additional limitation to a
potential topping bid.
Post-Transaction Company May Not
Succeed. Certain of GNV’s stockholders may view the
post-transaction company as a different and less desirable investment vehicle
for their capital, and sales of shares of our common stock by such stockholders
could depress the share price of GNV’s common stock. In addition,
there can be no assurance that the post-transaction company will
succeed. Saratoga, the entity to become the Company’s investment
adviser if approved by the vote of the Company’s stockholders pursuant to
Proposal 2 hereof and as a condition to the closing of the Saratoga Transaction,
is a newly-formed entity and is newly-registered with the SEC as an investment
adviser pursuant to the Advisers Act. As a new entity, Saratoga does
not have a proven track-record in managing corporate debt investments and
collateralized loan obligation funds. Despite the 25-year history of
Saratoga Partners, an affiliate of Saratoga, with a track record in private
investments in middle market companies, Saratoga Partners does not have
experience operating or managing a BDC and there is no guarantee that Saratoga
Partners’ past performance record will translate into future
success. Moreover, Saratoga intends to supplement its capabilities in
the management of the Company’s investments by recruiting and hiring additional
professionals with experience in the management of debt investments and
collateralized loan obligations and to dedicate such individuals to the
management of the Company. Although Saratoga has represented that it
has had discussions with a number of qualified individuals, and the Company’s
independent directors have discussed with Saratoga their interviewing criteria
and processes, including the caliber of individuals being considered for such
positions, and have vetted such processes to their satisfaction and in
consideration of their statutory duties to the Company, there is no guarantee
that Saratoga will hire or will have hired a sufficient number of professionals
with adequate experience in the Company’s line of business as of or after the
closing of the Saratoga Transaction. Notwithstanding the foregoing,
Saratoga’s ability to supplement its management team is not a condition to the
closing of the Saratoga Transaction, and GNV does not have the right to
terminate the Stock Purchase Agreement should Saratoga fail to adequately
supplement its management team.
Our Board
also considered the following material factors relating to the proposed
transaction:
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the
review and analysis of each of GNV’s and Saratoga’s business, financial
condition, earnings, risks and
prospects;
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the
historical market prices and trading information with respect to the
common stock of GNV;
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the
values and prospects of the portfolio company investments held by
GNV;
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the
comparisons of historical financial measures for GNV and Saratoga
Partners, including earnings, return on capital and cash flow, and
comparisons of historical operational measures;
and
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the
current industry, economic and market conditions and how such conditions
are expected to impact GNV’s ability to conduct its
operations.
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19
This
discussion of the information and factors that our Board considered in making
its decision is not intended to be exhaustive. In view of the wide
variety of factors considered in connection with its evaluation of the Saratoga
Transaction and the complexity of those matters, our Board did not find it
useful to, and did not attempt to quantify, rank or otherwise assign relative
weights to these factors. In addition, the individual members of our
Board may have given different weights to different factors.
Our Board
believes that, overall, the positive factors of the Saratoga Transaction to the
Company and its stockholders substantially outweigh the risks related thereto,
and, therefore, unanimously approved the Stock Purchase Agreement and the
transactions contemplated thereby, including the issuance of 9,868,422 shares of
our common stock for an aggregate purchase price of approximately $15,000,000 at
a price per share below the current net asset value per share of such stock and
the execution of the Investment Advisory and Management Agreement, pursuant to
which Saratoga would be appointed as the new investment adviser.
Events Subsequent to April
14, 2010
On May 28, 2010, the Company
filed its annual proxy statement for the election of directors and ratification
of its independent public accounting firm, as well as its annual report on Form
10-K for the fiscal year ended February 28, 2010, each of which is available on
the SEC website and is incorporated herein by reference. In its Form
10-K, the Company indicated that GSC Group, the parent of our investment
adviser, has been in negotiations with its secured lenders regarding a
restructuring of its credit facility since defaulting on its credit facility in
April 2009 and that, as a result of which, a combination of planned reductions
and attrition has resulted in a decrease in the number of GSC Group employees
from 85 at the end of fiscal year 2009 to 45 at the end of fiscal year
2010. The Company further disclosed that on May 25, 2010, its Chief
Financial Officer, Richard T. Allorto, Jr., who is an employee of GSC Group,
announced his resignation effective July 15, 2010.
While the we do not believe
that these staffing changes have adversely affected our operations to date,
additional attrition has the potential to adversely affect our operations in the
future, as we rely on GSC Group’s employees to conduct our
operations. In order to avoid a negative impact on our operations,
GSC Group is preparing an appropriate succession plan for Mr. Allorto and
securing alternative resources, including third party service providers, to
insure adequate resources are available in the event of future
attrition. We refer you to our Form 10-K under the risk factor “Risks
related to our Investment Advisors” for additional
discussion.
In addition, our Form 10-K
disclosed that on May 25, 2010 our independent registered public accountants
identified a material weakness in our internal control over financial
reporting. See Item 9A. “Controls and Procedures” of the Form 10-K
for more information. In order to remediate the material weakness, we
have requested that GSC Group provide us with additional support in order to
improve our internal control over financial reporting.
Subsequent to the Company’s
announcement of the Saratoga Transaction in its Form 8-K filed with the SEC on
April 14, 2010, and as amended on Form 8-K/A on June 4, 2010, the Company
received an unsolicited acquisition proposal from each of three third-party
bidders. Consistent with its duties under Maryland law and in
compliance with its contractual obligations under the Stock Purchase Agreement,
the Board carefully considered and evaluated the terms and conditions of each
acquisition proposal, and any subsequent revisions thereto, in consultation with the
Company’s management and financial and legal advisors. The Board
and/or the Special Committee convened a total of five meetings over the course
of the months of May and June to discuss the merits of the acquisition
proposals, and any subsequent revisions thereto, received.
Several key factors and
considerations influenced the Board’s evaluation of the acquisition proposals
received, from a financial point of view or otherwise, including, but not
limited to: (i) the adequacy of price, including the fact that the per share
price of each such acquisition proposal was greater than the per share price of
the Saratoga Transaction, and the financial impact of the break-up costs
involved in terminating the Saratoga Transaction, (ii) the dilutive effect of
the proposed issuance of a number of shares of Company common stock or preferred
stock convertible into Company common stock in excess of the number of shares
being issued in connection with the Saratoga Transaction, (iii) uncertainty
relating to the bidder’s ability to secure a definitive commitment, and/or the
terms thereof, for the financing of any proposed refinancing or repayment of the
DB Credit Facility, including the significant delays for time required by the
potential lender to perform due diligence on the Company’s investment portfolio,
to conduct internal credit approval processes and to negotiate definitive
financing documentation, (iv) certain considerations under the 1940 Act as it
relates to the structuring of certain bidders’ investments in the Company and
lending arrangements between affiliates, (v) the conditionality and high degree
of uncertainty of the
20
proposal, including the fact
that it was non-binding, the price offered was not firm or that, due to being
subject to diligence and the negotiation of definitive legal documentation,
there was substantial risk that the transaction contemplated by such proposal
would not be completed as proposed, (vi) the significant time delays imposed by
required periods for due diligence and negotiation of definitive legal
documentation, (vii) the uncertainty regarding Deutsche Bank’s willingness to
continue its forebearance in connection with any of the acquisition proposals
and (viii) the acquisition of greater than 50% of the Company’s common stock
would constitute an ‘ownership change’ under the applicable provisions of the
Code and would thereby eliminate the tax benefits described on page 14 of this
proxy statement.
Several acquisition
proposals involved the acquisition of a significantly greater percentage of the
Company than is being acquired in the Saratoga Transaction. In
addition to the Board’s determination that such proposals did not include a
sufficient premium to provide adequate value to the Company’s stockholders in
comparison to the advantages and value for Company stockholders presented by the
Saratoga Transaction, as previously stated in this proxy statement, the Board
believes that the Company is currently undervalued and its stock price is
depressed as a result of the general economic climate, and the Board believes
that Saratoga Partners’ proposal will allow existing Company stockholders the
greatest opportunity to participate in any future appreciation in the Company’s
value following the closing of a strategic transaction, as the existing Company
stockholders would collectively hold over 60% of the outstanding shares of the
Company’s common stock and would have a proportionally larger opportunity to
benefit from any recovery in the value of the Company.
At the conclusion of the
evaluation period and as a result of the various meetings conducted, including,
but not limited to, the factors outlined above, the Board did not determine that
any acquisition proposal received constituted, or was reasonably likely to lead
to, a “Superior Proposal” within the meaning of the Stock Purchase
Agreement. The Board authorized Stifel Nicolaus to communicate its
failure to make such determinations to each of the bidders.
Recommendation
of the Board of Directors
After
careful consideration of the information and factors noted above, our Board,
including its independent directors, unanimously concluded that the Stock
Purchase Agreement and the transactions contemplated thereby are in the best
interest of the Company and unanimously recommends that stockholders vote “FOR” approval of the issuance
of shares of GNV’s common stock at a price per share below the current net asset
value per share of such stock, pursuant to the terms of the Stock Purchase
Agreement.
Opinion
of GNV’s Financial Advisor
Stifel,
Nicolaus & Company, Incorporated acted as the Company’s financial advisor in
connection with the minority equity investment to be made by the Investors
pursuant to the Stock Purchase Agreement (the “Investment”). Stifel
Nicolaus is a nationally recognized investment banking and securities firm with
membership on all the principal United States’ securities exchanges and
substantial expertise in transactions similar to the Investment. As
part of its investment banking activities, Stifel Nicolaus is regularly engaged
in the independent valuation of businesses and securities in connection with
mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes.
On April
14, 2010, Stifel Nicolaus rendered its written opinion to the Board of Directors
of the Company that, as of such date, the per share consideration to be received
by the Company pursuant to the Stock Purchase Agreement was fair to the Company,
from a financial point of view.
The full
text of Stifel Nicolaus’ written opinion dated April 14, 2010, which sets forth
the assumptions made, matters considered and limitations of the review
undertaken in connection with the opinion, is attached as Exhibit A to this
proxy statement and is incorporated herein by reference. Stifel
Nicolaus has provided its written consent to the reproduction of the Stifel
Nicolaus opinion in this proxy statement. Holders of the Company’s
common stock are urged to, and should, read this opinion carefully and in its
entirety in connection with this proxy statement. The summary of the
opinion of Stifel Nicolaus set forth in this proxy statement is qualified in its
entirety by reference to the full text of such opinion. The opinion
of Stifel Nicolaus will not reflect any developments that may occur or may have
occurred after the date of the opinion and prior to the completion of the
Investment.
No
limitations were imposed by the Company on the scope of Stifel Nicolaus’
investigation or the procedures to be followed by Stifel Nicolaus in rendering
its opinion. Stifel Nicolaus’ opinion was directed solely to the
Company’s
21
Board of
Directors for its information and assistance in connection with its evaluation
of the financial terms of the Investment. Stifel Nicolaus’ opinion
addressed only the fairness of the per share consideration to the Company from a
financial point of view and did not address any other aspect of the
Investment. Stifel Nicolaus’ opinion was not intended to be and does
not constitute a recommendation to the Company’s Board of Directors, the Special
Committee of the Board of Directors (the “Special Committee”) or any shareholder
of the Company as to how the Board, the Special Committee or any such
shareholder should vote with respect to the Investment or any aspect thereof or
whether or not to take any other action in connection with the Investment or any
aspect thereof. In addition, Stifel Nicolaus was not requested to
opine as to, and its opinion does not compare, the relative merits of the
Investment with any other alternative transaction or business strategy which may
have been available to the Company and does not address the underlying business
decision of the Board of Directors, the Special Committee or the Company to
proceed with or effect the Investment.
In
connection with its opinion, Stifel Nicolaus, among other things:
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Reviewed
a draft copy of the Stock Purchase Agreement dated April 8,
2010;
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Reviewed
a draft copy of the Credit Agreement with Madison Capital Funding
LLC;
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Reviewed
the audited consolidated financial statements of the Company as of
February 28, 2009, February 29, 2008 and February 28, 2007 and the related
audited consolidated financial statements for each of such fiscal years
contained in the Company’s Annual Report on Form 10-K for the year ended
February 28, 2009; together with the Company’s Quarterly Report on Form
10-Q for the fiscal quarter ended November 30,
2009;
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Reviewed
certain other publicly available business and financial information
concerning the Company;
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Reviewed
certain non-publicly available information regarding the Company’s
business plan and other internal financial statements and
analyses;
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Discussed
with the Company’s management the history and past and current operations
of the Company, the Company’s financial performance and the Company’s
outlook and future prospects, including the Company’s inability to pay
cash dividends, estimates by the Company’s management as to the Company’s
liquidity, the Company’s current access to, and ability in the future to
obtain, debt or equity financing and the Company’s ability to continue to
operate as a going concern;
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Discussed
with the Company’s management the Company’s existing default under its
Credit Facility (with aggregate borrowings of $36.3 million as of March
19, 2010), and the rights and remedies of the lender thereunder as a
result thereof;
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Took
into account Stifel Nicolaus’ assessment of general economic, market and
financial conditions and its experience in other transactions, as well as
its experience in securities valuations and its knowledge of the banking
industry generally;
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Analyzed
the Company’s publicly reported historical common stock price and trading
activity;
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Reviewed
the pro forma impact of the Investment on the
Company;
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Reviewed
and analyzed certain publicly available financial and stock market data
relating to selected public companies that Stifel Nicolaus deemed relevant
to its analysis; and
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Conducted
such other financial studies, analyses and investigations and considered
such other information as Stifel Nicolaus deemed necessary or appropriate
for purposes of its opinion.
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In
connection with its review and analysis, Stifel Nicolaus relied upon and
assumed, without independent verification, the accuracy and completeness of all
financial and other information that was publicly available or made available,
supplied or otherwise communicated to Stifel Nicolaus by or on behalf of the
Company and by or on behalf of Saratoga. Stifel Nicolaus further
relied upon the assurances of the respective managements of the Company and
Saratoga that they are unaware of any facts that would make such information
incomplete or misleading. Stifel
22
Nicolaus
assumed, with the consent of management of the Company, that any material
liabilities (contingent or otherwise, known or unknown) of the Company are set
forth in its financial statements. Stifel Nicolaus also assumed that
there were no material changes in the assets, liabilities, financial condition,
results of operations, business or prospects of the Company since the date of
the last financial statements made available to Stifel Nicolaus.
Stifel
Nicolaus has also relied upon the respective managements of the Company and
Saratoga as to the reasonableness and achievability of the financial forecasts
and projections (and the assumptions and bases therein) provided to Stifel
Nicolaus by the Company and Saratoga, and has assumed such forecasts and
projections were reasonably prepared on bases reflecting the best currently
available estimates and judgments of management as to the future operating
performance of the Company. Such forecasts and projections were not
prepared with the expectation of public disclosure. All such
forecasts and projections were based on numerous variables and assumptions that
are inherently uncertain, including, without limitation, factors related to
general economic, business and competitive conditions. Accordingly,
actual results could vary significantly from those set forth in such forecasts
and projections. Stifel Nicolaus relied on these forecasts and
projections without independent verification or analyses and did not in any
respect assume any responsibility for the accuracy or completeness
thereof.
Stifel
Nicolaus’ opinion was necessarily based upon financial, economic, market and
other conditions and circumstances existing and disclosed to it on the date of
its opinion. Subsequent developments may affect the conclusions
reached in the opinion, and Stifel Nicolaus does not have any obligation to
update, revise or reaffirm the opinion. Stifel Nicolaus also assumed
that the Investment would be consummated on the terms and conditions set forth
in the Stock Purchase Agreement, without any waiver of material terms or
conditions by the Company or any other party to the Stock Purchase Agreement,
and that obtaining any necessary regulatory approvals or satisfying any other
conditions for consummation of the Investment would not have an adverse effect
on the Company or its shareholders. Stifel Nicolaus also expressed no
opinion as to the likelihood that the closing conditions set forth in the Stock
Purchase Agreement would be satisfied, and it noted that several of these
conditions are beyond the control of the Company. In addition, Stifel
Nicolaus assumed that the Stock Purchase Agreement would not differ materially
from the draft it reviewed.
Stifel
Nicolaus was not requested to make, and did not make, an independent evaluation,
physical inspection or appraisal of the assets, properties, facilities, or
liabilities (contingent or otherwise) of the Company, the collateral securing
any such assets or liabilities, or the collectability of any such
assets. Estimates of values of companies and assets do not purport to
be appraisals or necessarily reflect the prices at which companies and assets
may actually be sold. Because such estimates are inherently subject
to uncertainty, Stifel Nicolaus assumes no responsibility for their
accuracy. Additionally, Stifel did not estimate, and expressed no
opinion regarding, the liquidation value of any entity.
Stifel
Nicolaus’ opinion is limited to whether the per share consideration to be
received by the Company in connection with the Investment pursuant to the Stock
Purchase Agreement is fair to the Company, from a financial point of
view. Stifel Nicolaus’ opinion did not consider, include or address:
(i) any other strategic alternatives currently (or which have been or may be)
contemplated by the Company’s Board of Directors, the Special Committee or the
Company; (ii) the legal, tax or accounting consequences of the Investment (or
any aspect thereof) on the Company, the Company’s shareholders or the Investors;
(iii) the fairness of the amount or nature of any compensation to any of the
Company’s officers, directors or employees, or class of such persons, relative
to the compensation to the holders of the Company’s securities; (iv) the capital
structure or solvency of the Company; (v) any advice or opinions provided by any
other advisor to the Board, the Special Committee or the Company; (vi) the
effect of the Investment on, or fairness (whether from a financial point of view
or otherwise) of the Investment to, the holders of any class of securities,
creditors or other constituencies of the Company; (vii) whether the Investors
have sufficient cash, available lines of credit or other sources of funds to
enable it to pay the aggregate consideration; (viii) the terms of the
Replacement Facility, as defined in the Stock Purchase Agreement, or any
transaction contemplated thereby; (ix) the terms of the Replacement Management
Agreements, as defined in the Stock Purchase Agreement; or (x) any other term of
the Stock Purchase Agreement or the form or structure of the Investment or the
likelihood, or timeframe in which, the Investment will be
consummated. In addition, Stifel Nicolaus did not express any opinion
herein as to the prices, trading range or volume at which the Company’s
securities would trade following public announcement or consummation of the
Investment or any aspect thereof.
Stifel
Nicolaus is not a legal, tax, regulatory or bankruptcy
advisor. Stifel Nicolaus did not consider any potential legislative
or regulatory changes currently being considered by the United States Congress,
the various federal banking agencies, the Securities and Exchange Commission
(the “SEC”), or any other regulatory bodies, or any
23
changes
in accounting methods or generally accepted accounting principles that may be
adopted by the SEC or the Financial Accounting Standards Board, or any changes
in regulatory accounting principles that may be adopted by any or all of the
federal banking agencies. Stifel Nicolaus’ opinion is not a solvency
opinion and does not in any way address the solvency or financial condition of
the Company.
The
preparation of a fairness opinion is a complex process involving subjective
judgments and is not necessarily susceptible to partial analysis or summary
description. In arriving at its opinion, Stifel Nicolaus considered
the results of all of its analyses as a whole and did not attribute any
particular weight to any analyses or factors considered by it. In
addition to the assumptions described elsewhere in this discussion, in its
analyses, Stifel Nicolaus made numerous other assumptions with respect to
industry performance, business and economic conditions, and other matters, many
of which are beyond the control of the Company. Any estimates
contained in Stifel Nicolaus’ analyses are not necessarily indicative of actual
future values or results, which may be significantly more or less favorable than
suggested by such estimates. Estimates of values of companies do not
purport to be appraisals or necessarily reflect the actual prices at which
companies or their securities actually may be sold. No company or
transaction utilized in Stifel Nicolaus’ analyses was identical to the Company
or the Investment. Accordingly, an analysis of the results described
below is not mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other facts that could affect the public trading value of the
companies to which they are being compared. None of the analyses
performed by Stifel Nicolaus was assigned a greater significance by Stifel
Nicolaus than any other, nor does the order of analyses described represent
relative importance or weight given to those analyses by Stifel
Nicolaus. The analyses described below do not purport to be
indicative of actual future results, or to reflect the prices at which the
Company’s common stock may trade in the public markets, which may vary depending
upon various factors, including changes in interest rates, dividend rates,
market conditions, economic conditions and other factors that influence the
price of securities.
The
following is a summary of the material financial analyses that Stifel Nicolaus
performed in rendering its opinion on April 14, 2010. The summary
does not constitute a complete description of Stifel Nicolaus’ financial
analyses, including the methodologies and assumptions underlying the analyses,
and if viewed in isolation could create a misleading or incomplete view of the
financial analyses performed by Stifel Nicolaus. The summary data set
forth below do not represent and should not be viewed by anyone as constituting
conclusions reached by Stifel Nicolaus with respect to any of the analyses
performed by it in connection with its opinion. Rather, Stifel
Nicolaus made its determination as to the fairness to the Company, from a
financial point of view, of the per share consideration to be received by the
Company pursuant to the Stock Purchase Agreement on the basis of its experience
and professional judgment after considering the results of all of the analyses
performed and subject to the various assumptions and limitations set forth in
the opinion, as well as the circumstances facing the Company as described herein
and in the opinion. Accordingly, the data included in the summary
tables should be considered as a whole and in the context of the full narrative
description of all of the financial analyses set forth in the following pages,
including the assumptions underlying these analyses. Considering the
data included in the summary tables without considering the full narrative
description of all of the financial analyses, including the assumptions
underlying these analyses, could create a misleading or incomplete view of the
financial analyses performed by Stifel Nicolaus.
Certain
Situational Factors Impacting GNV. Stifel Nicolaus was made
aware of a number of situational factors impacting the Company, including, but
not limited to the following:
|
|
·
|
Credit facility
default. Since July of 2009, the Company had been in
default under its existing facility and received multiple letters from its
lender, Deutsche Bank A.G., New York Branch, reserving the lender’s right
to seek remedies for the existing event of default, including foreclosing
on the collateral securing the existing credit
facility.
|
|
|
·
|
Liquidity and
dividends. If the event of default continued under the
Company’s credit facility, and/or distributions from GSCIC CLO were
deferred, the Company could find itself with insufficient working capital
to fund its operating expenses and/or pay dividends sufficient to comply
with distribution requirements as a registered investment company under
the Code.
|
|
|
·
|
Credit
quality. A substantial portion of the Company’s
portfolio was non-performing and an even larger portion was on the
Company’s internal watch list.
|
24
|
|
·
|
Limited access to
capital. The Company had been unable to secure
additional or replacement debt financing as a standalone company and does
not have shareholder approval to issue common stock below net asset value
(“NAV”).
|
Pro Forma Impact
of the Investment. Stifel Nicolaus reviewed certain estimated
future operating and financial information developed by the respective
management teams of GNV and Saratoga, including Saratoga’s estimates of the
future operating performance of the Company as a result of the Investment, which
estimates are shown in the table below. Based on this analysis, on a
pro forma basis, the Investment is forecasted to be accretive to GNV’s net
investment income for the 12-month periods ending February 28, 2012 and February
28, 2013 and accretive to cash dividends per share for each of the 12-month
periods ending February 28, 2011, February 28, 2012 and February 28,
2013. In particular, the Investment and the related transactions
described in this proxy statement are forecasted to be accretive to the
Company’s cash dividends per share because the Company will have less debt
outstanding subsequent to the consummation of these transactions and, therefore,
a lower debt service burden that should consequently result in a greater amount
of investment and fee income from the Company’s investment portfolio being
available for distribution to the Company’s stockholders. In
addition, as a result
of curing the existing default under the DB Credit Facility, the Company
would no longer be prohibited pursuant
to the terms of the DB Facility from paying cash dividends to its
stockholders, as such a
prohibition has been in effect pursuant to the terms of the DB Credit Facility
since the Company’s event of default thereunder. The estimates
prepared by the respective management teams are as follows:
|
Standalone
|
Pro
Forma
|
|||||||
|
Net
Investment Income Per Share :
|
||||||||
|
Fiscal
Year 2011
|
$0.31 | $0.29 | ||||||
|
Fiscal
Year 2012
|
0.29 | 0.30 | ||||||
|
Fiscal
Year 2013
|
0.27 | 0.33 | ||||||
|
Cash
Dividends Per Share (1)
|
||||||||
|
Fiscal
Year 2011
|
$0.03 | $0.29 | ||||||
|
Fiscal
Year 2012
|
0.03 | 0.30 | ||||||
|
Fiscal
Year 2013
|
0.27 | 0.33 | ||||||
|
Ownership:
|
||||||||
|
Existing
Shareholders
|
100.0 | % | 63.2 | % | ||||
|
Net
Asset Value:
|
||||||||
|
11/30/09
|
$3.80 | $2.99 | ||||||
(1)
Assumes GAAP net investment income per share approximates taxable
income. Further assumes in the standalone scenario that the Company
distributes 10% of income via cash and 90% via stock.
Common Stock
Trading History. Stifel Nicolaus reviewed the history of the
reported trading prices and volume of GNV common stock since its initial public
offering in March 2007. Stifel Nicolaus observed that during that
period, shares of GNV common stock traded at a high of $15.02 and a low of
$0.89, and that on April 8, 2010, the closing price of GNV common stock was
$2.39. For the period since its initial public offering through April
8, 2010, the market price of shares of GNV common stock experienced a decrease
of approximately 84%, whereas, by comparison, the per share market price for a
group of 25 publicly traded BDC peers, chosen by Stifel Nicolaus and weighted by
equity market capitalization, experienced an average decrease of approximately
60% over that same period.
Discounted
Dividend Analysis. Stifel Nicolaus conducted a dividend
discount analysis for the purpose of determining the equity value per share of
the Company’s common stock. Stifel Nicolaus calculated the cash
dividends the Company is expected to generate during fiscal years 2011 through
2013 both on a stand-alone basis, based upon forecasts prepared by the
management of GSC Investment Corp., and on a pro forma basis, based upon
forecasts prepared by Saratoga management. Based on a range of exit
P/NAV ratios between 0.40x and 1.15x and a range of discount rates between 11%
and 27%, the dividend discount analysis indicated equity values per share of the
Company’s common stock of $0.91 to $3.17 per share on a stand-alone basis (i.e.
without the Investment) and of $1.11 to $3.79 per share on a pro forma
basis.
Analysis of
Selected Precedent Financing Transactions. Stifel Nicolaus
reviewed publicly available information regarding 81 completed transactions
involving companies that completed delayed registration PIPEs (private
investments in public equity) since January 2008. Stifel Nicolaus
analyzed the common stock trading discount from the time of the announcement to
the offer price per share in these precedent transactions as compared
to
25
the 36.4%
discount implied by the Investment at $1.52 per share as of April 8,
2010. Stifel Nicolaus noted the discount implied by the Investment
was within the range of observations:
|
10th
Percentile
|
Median
|
Average
|
90th
Percentile
|
|||
|
(72.8%)
|
(16.8%)
|
(24.4%)
|
(3.6%)
|
Note:
Delayed registration PIPEs are private placements of securities issued in
reliance upon certain transaction exemptions pertaining to resale registration
provided under the Securities Act of 1933, as amended - Section 4(2), Regulation
D, Regulation S and other miscellaneous exemptions.
Stifel
Nicolaus also reviewed publicly available information regarding 7 completed
rights offerings by business development companies since January
2005. Stifel Nicolaus analyzed the common stock trading discount from
the time of the announcement to the subscription price as compared to the
discount of 36.4% implied by the Investment at $1.52 per share as of April 8,
2010. Stifel Nicolaus noted the discount implied by the Investment
was within the range of observations:
|
Maximum
|
Median
|
Average
|
Minimum
|
|||
|
(41.7%)
|
(11.9%)
|
(18.0%)
|
(6.5%)
|
In
rendering its opinion, Stifel Nicolaus concluded that due to the extraordinary
situational factors facing the Company described previously, certain traditional
financial analyses that would be customarily performed in connection with a
fairness opinion were not relevant. These were: (1) precedent M&A
transactions; (2) comparable public company analysis; and (3) liquidation
analysis.
As
described above, Stifel Nicolaus’ opinion was one of the many factors taken into
consideration by the Company’s Board of Directors in making its determination to
approve the Investment by Saratoga.
Stifel
Nicolaus has acted as financial advisor to the Company in connection with the
Investment and related matters and received an initial retainer fee of $25,000
upon execution of its engagement letter agreement. In
addition, Stifel Nicolaus will receive an advisory fee of $350,000
for its services that is contingent upon the consummation of the
Investment and also received a fee of $200,000
upon the delivery of thisits
opinion. Other than the initial retainer fee, the opinion fee and the
contingent advisory fee, Stifel Nicolaus did not and will not receive any other
compensation in connection with the Investment. In addition, the
Company has agreed to indemnify Stifel Nicolaus for certain liabilities arising
out of its engagement. In addition to the foregoing, Stifel Nicolaus
may seek to provide other investment banking services to the Company or its
affiliates and Saratoga or its affiliates in the future, for which Stifel
Nicolaus would seek customary compensation. In the ordinary course of
business, Stifel Nicolaus makes a market in the Company’s common stock and
accordingly it and/or its customers may at any time hold a long or short
position in such securities. Additionally, Stifel Nicolaus acted as
an underwriter on the Company’s 2007 initial public offering and a member of
Stifel Nicolaus’ investment banking transaction team holds a long position in
GNV common stock. Other than the foregoing, there are no other
material relationships that existed during the two years prior to the date of
this opinion or that are mutually understood to be contemplated in which any
compensation was received or is intended to be received as a result of the
relationship between Stifel Nicolaus and the Company or Saratoga.
Summary
of the Stock Purchase Agreement
The terms
and conditions of the Company’s issuance of shares of its common stock are set
forth in the Stock Purchase Agreement. We have summarized the
material provisions of the Stock Purchase Agreement below. This
summary is qualified by reference to the complete text of the Stock Purchase
Agreement which was attached as an exhibit to our Form 8-K/A filed with the SEC
on June 4, 2010 and is incorporated herein by reference.
Investment; Transfer Prior to or at
Closing. The Investors will purchase 9,868,422 shares at a
purchase price of $1.52 per share, which will result in an aggregate investment
of approximately $15,000,000. Prior to or at the closing of the
Saratoga Transaction, the Investors will assign the obligation to acquire
approximately 84% of the Shares to certain individuals affiliated with Saratoga
or Saratoga Partners. The majority of the Shares purchased will be
held by Mr. Oberbeck. Such individuals, as a condition to closing,
shall agree in writing to be bound by the terms of the Stock Purchase Agreement
by executing joinder agreements prior to any such transfer.
26
Closing. The
closing of the transaction will take place as soon as reasonably practicable,
but in any event no later than two business days following either the
satisfaction or waiver of all conditions to closing set forth in the Stock
Purchase Agreement, or at such other time as Saratoga and the Company mutually
agree in writing.
Name Change. The
Company has agreed, as a condition to closing of the Saratoga Transaction, to
change its name from GSC Investment Corp. to Saratoga Investment
Corp. The Company has also agreed, subject to requisite approval of
the NYSE, to change the stock or ticker symbol for its common stock from “GNV”
to a stock or ticker symbol that is reasonably acceptable to
Saratoga.
Stockholder Special
Meeting. We have agreed to cause a meeting of our stockholders
to be called and held as soon as practicable (but in no event later than 45 days
after the date of the first mailing of this proxy statement) for the purpose of
voting on the approval of the issuance of shares of our common stock at a price
per share below the current net asset value pursuant to the Stock Purchase
Agreement in accordance with NYSE rules and the 1940 Act and the approval of the
Investment Advisory and Management Agreement with Saratoga in accordance with
Section 15 of the 1940 Act, and to solicit proxies from our stockholders to
obtain the requisite vote on these matters. We have also agreed that,
subject to our Board’s right to make an “Adverse Recommendation Change,” as
discussed below, our Board will recommend to our stockholders the approval of
the issuance of shares at a price per share below the current net asset value
and the approval of the Investment Advisory and Management Agreement with
Saratoga.
Restriction on
Transfers. Each Investor agrees that it will not transfer
one-third of the shares of GNV common stock it acquires as part of this
transaction until the first anniversary of the closing of the Saratoga
Transaction; provided that each Investor will be permitted to transfer such
shares to one or more of its permitted transferees (the “Permitted Transferees”)
in accordance with Section 3.02 of the Stock Purchase Agreement. Each
Investor understands that the shares to be issued pursuant to the Stock Purchase
Agreement are restricted securities within the meaning of Rule 144 under the
Securities Act of 1933; and that the shares are not registered and must be held
indefinitely unless they are subsequently registered or an exemption from such
registration is available. Certain affiliates of GSC Group and
directors of the Company have entered into an agreement not to sell or otherwise
transfer one-third of the shares of GNV common stock that such stockholder owns
as of April 14, 2010 until the first anniversary of the closing of the Saratoga
Transaction.
Stock
Split. Promptly after closing of the Saratoga Transaction, the
Company intends to accomplish a one-for-ten reverse stock split pursuant to
which each stockholder will receive one share of our common stock in exchange
for every ten shares owned at that time. After giving effect to the
shares of our common stock to be issued in connection with the Saratoga
Transaction and the one-for-ten reverse stock split, the total number of shares
of our common stock outstanding will be approximately 2.7 million.
No Solicitation by the
Company. The Company will not, and will not authorize or
permit any of its representatives to, (i) solicit, initiate or take any action
to facilitate or encourage the submission of any acquisition proposal from a
third party, (ii) enter into or participate in any discussions or negotiations
with, furnish any information relating to the Company or any of its subsidiaries
or afford access to, or otherwise cooperate in any way with, or knowingly
assist, participate in, facilitate or encourage any effort by, any third party
that is seeking to make, or has made, an acquisition proposal, (iii) fail to
make, withdraw or modify in a manner adverse to the Investors the Board’s
recommendation that the Company’s stockholders approve the issuance of the
Shares and the new Investment Advisory and Management Agreement (or recommend an
acquisition proposal or take any action or make any statement inconsistent with
the Board’s recommendation) (any of the foregoing, an “Adverse Recommendation
Change”), (iv) grant any waiver or release under, or fail to enforce the terms
of, any confidentiality, standstill or similar agreements or arrangements with
respect to any class of equity or the assets of the Company, or (v) enter into
any agreement in principle, term sheet, letter of intent, merger agreement,
acquisition agreement, or other similar instrument relating to an acquisition
proposal by a third party.
Notwithstanding
the foregoing, at any time prior to receipt of the approval of the Company
stockholders:
(i) the
Company may (A) engage in negotiations or discussions with any third party and
its representatives or financing sources that has made after the date of the
Stock Purchase Agreement a bona fide, written
acquisition proposal that the Board reasonably believes will lead to a Superior
Proposal, (B) furnish to such third party or its representatives or financing
sources non-public information relating to the Company pursuant to a
confidentiality agreement with terms no less favorable than the terms of the
confidentiality agreement with Saratoga (a copy of which must be
27
provided
to Saratoga); provided
that all such information is provided or made available to Saratoga prior to or
concurrently with the time it is provided to such third party and (C) take any
nonappealable, final action that any court of competent jurisdiction orders the
Company to take; and
(ii) the
Board may make an Adverse Recommendation Change;
in each
case referred to in the foregoing clauses (i) and (ii) only if (A) such
acquisition proposal was not solicited in violation of the Company’s obligations
not to solicit third party acquisition proposals discussed above, (B) the
acquisition proposal was from a third party that is financially and legally
qualified to make such proposal, (C) such acquisition proposal was not made by
the third party in violation of any confidentiality, standstill or similar
agreement or arrangement between the Company and such third party (or their
respective representatives and affiliates) or to which, to the best knowledge of
the Company (based on a written certification from such third party), such third
party is a party or otherwise bound, (D) the Board determines in good faith,
after consultation with outside legal counsel, that the failure to take such
action would be inconsistent with the duties of the Board under Maryland law,
and (E) simultaneous with the delivery of such acquisition proposal intended by
such third party to be binding on such third party and to constitute a Superior
Proposal, and the Board is prepared to recognize such acquisition proposal as a
Superior Proposal, the third party deposits with the Company a cash deposit in
an amount equal to the Termination Fee (as described below).
In
addition, nothing contained in the Stock Purchase Agreement will prevent the
Board from complying with Rule 14e-2(a) under the Securities Exchange Act of
1934 with regard to an acquisition proposal by a third party so long as any
action taken or statement made to so comply is consistent with the terms of the
Stock Purchase Agreement; provided that any such action
taken or statement made that relates to an acquisition proposal will be deemed
to be an Adverse Recommendation Change unless the Board reaffirms the Board’s
recommendation of the Saratoga Transaction in such statement or in connection
with such action.
For
purposes of the Stock Purchase Agreement, “Superior Proposal” is defined as a
bona fide, unsolicited written acquisition proposal that (a) relates to (i) any
acquisition or purchase, direct or indirect, of 35% or more of the consolidated
assets of the Company or 35% or more of any class of equity or voting securities
of the Company, (ii) any tender offer or exchange offer that, if consummated,
would result in such third party beneficially owning 35% or more of any class of
equity or voting securities of the Company, or (iii) a merger, consolidation,
share exchange, business combination, sale of all or substantially all of the
assets, reorganization, recapitalization, liquidation, dissolution or other
similar transaction involving the Company, (b) is legally binding on the third
party but not on the Company; (c) is fully financed, includes an obligation to
pay in full all amounts outstanding under the DB Credit Facility and contains no
financing contingency or obligation to obtain consent from a lender or equity
source (other than any consents of Deutsche Bank required in connection with the
DB Credit Facility); (d) contains no condition to closing materially more
burdensome on the Company, or, in the reasonable and good faith judgment of the
Board, by a majority vote (after consultation with a financial advisor of
nationally recognized reputation and outside legal counsel), making it less
likely that the conditions to the closing of such transaction would be satisfied
than, the conditions to closing set forth in the Stock Purchase Agreement (with,
for the avoidance of doubt, a condition for a vote of the third party’s
equityholders on any matter being materially more burdensome and making it
materially less likely that all conditions to such acquisition proposal will be
satisfied); (e) which is otherwise on terms which the Board determines in its
reasonable good faith judgment (after consultation with its financial advisor of
nationally recognized reputation and outside legal counsel), taking into
account, among other things, all legal, financial, regulatory and other aspects
of the acquisition proposal and the third party making the acquisition proposal,
as well as any termination fees, expense reimbursement provisions, limitations
on tax benefits, conditions to consummation and related matters, that the
acquisition proposal, (A) if consummated would result in a transaction that is
more favorable, from a financial point of view, to the Company and its
stockholders than the Saratoga Transaction and (B) is reasonably certain of
being completed.
Before
the Company or its representatives may enter into negotiations or discussions
with a party who provides an unsolicited acquisition proposal that the Board
reasonably believes could lead to a Superior Proposal, and before the Board may
make an Adverse Recommendation Change, certain procedures must be
followed. In particular, prior to making an Adverse Recommendation
Change, for a period of 5 business days, the Company and its advisors must
negotiate in good faith with the Investors to make adjustments to the terms and
conditions of the Stock Purchase Agreement such that the acquisition proposal in
question would no longer constitute a Superior Proposal.
28
Nominees to Board of
Directors. Saratoga will be entitled to designate two nominees
to serve on the Board to be elected as directors effective as of the closing
date. The size of the Company’s board of directors will not change;
two current members of the Board will resign effective at closing of the
Saratoga Transaction.
Conduct of the
Company. The Company has agreed to customary operating
covenants to govern the conduct of the business between signing of the Stock
Purchase Agreement and closing of the Saratoga Transaction.
Representations and
Warranties. We provided Saratoga with representations and
warranties in the Stock Purchase Agreement customary for public company
transactions of this size and nature, including representations and warranties
addressing: due organization, valid existence and good standing; authorization
to enter into the Stock Purchase Agreement and required approval by GNV
stockholders to complete the transaction; required governmental consents; no
breach of organizational documents or material agreements as a result of the
Stock Purchase Agreement or the completion of the transaction; absence of
material defaults under certain contracts; capitalization; compliance with SEC
reporting requirements; accuracy of information contained in the documents to be
filed with the SEC; financial statements, internal controls and disclosure
controls and procedures; absence of certain changes since November 30, 2009 that
would have a material adverse effect; no material undisclosed liabilities;
compliance with laws; no material legal proceedings; ownership of intellectual
property rights reasonably necessary to conduct its business; taxes and tax
returns; tax treatment of the proposed transaction; related party transactions;
registered investment company tax status; anti-money laundering; finder’s fees;
inapplicability of state takeover laws; environmental matters; insurance;
investment securities; and CDO and CLO activities.
Conditions to
Closing. The parties’ respective obligations to consummate the
transaction are subject to the satisfaction or waiver of the following
conditions:
|
|
·
|
our
stockholders’ (i) approval of the issuance of the Shares at a price per
share below the current net asset value in accordance with the NYSE Listed
Company Manual and the 1940 Act and (ii) approval of the new Investment
Advisory and Management Agreement in accordance with the 1940
Act;
|
|
|
·
|
no
applicable law prohibits the consummation of the Saratoga Transaction and
the other transactions contemplated
hereby;
|
|
|
·
|
no
action has been instituted or pending by any Governmental Authority and no
law, rule or regulation shall have been enacted that would prohibit,
restrain or delay the consummation of the Saratoga
Transaction;
|
|
|
·
|
the
Company shall have entered into a Replacement Credit Facility with Madison
and has the right to immediately draw down the necessary amount, when
added to the funds received in connection with the equity investment
pursuant to the Stock Purchase Agreement, to fully repay the amounts
outstanding under the DB Credit Facility;
and
|
|
|
·
|
all
actions by or in respect of, or filings with, any Governmental Authority,
required to permit the consummation of the transaction have been taken,
made or obtained.
|
The
obligations of the Investors to consummate the transaction are subject to the
satisfaction or waiver of the following conditions:
|
|
·
|
our
performance of all obligations under the Stock Purchase Agreement required
to be performed at or prior to closing of the Saratoga
Transaction;
|
|
|
·
|
the
representations and warranties of GNV contained in the Stock Purchase
Agreement shall have been true as of signing and shall be true at and as
of the closing of the Saratoga Transaction (subject in certain cases to
materiality qualifications);
|
|
|
·
|
delivery
of the pay-off letter by Deutsche Bank agreeing to terminate the DB Credit
Facility and release any and all liens on the assets pledged under the DB
Credit Facility promptly following receipt of
payment;
|
|
|
·
|
receipt
by GNV of the written resignations of Robert F. Cummings, Jr. and Richard
M. Hayden as members of the Board, effective as of the closing of the
Saratoga Transaction;
|
29
|
|
·
|
election
of Christian L. Oberbeck and Richard A. Petrocelli as members of the Board
by the Board to fill the vacancies created by the resignations submitted
in connection with the Saratoga Transaction, effective as of the closing
of the Saratoga Transaction;
|
|
|
·
|
entry
by GNV into the Investment Advisory and Management Agreement, the
Administration Agreement, the Trademark License Agreement, and the
Registration Rights Agreement, in each case, with Saratoga or one of its
affiliates;
|
|
|
·
|
the
preparation of an amendment to GNV’s charter with the State of Maryland
changing its name from “GSC Investment Corp.” to “Saratoga Investment
Corp.” or a derivation thereof, to be filed after the closing of the
Saratoga Transaction; and
|
|
|
·
|
the
Company’s BDC election being in full force and
effect.
|
Our
obligations to consummate the Saratoga Transaction are subject to the
satisfaction or waiver of the following conditions:
|
|
·
|
performance
by the Investors of all obligations under the Stock Purchase Agreement
required to be performed at or prior to closing of the Saratoga
Transaction;
|
|
|
·
|
Saratoga
shall have obtained executed joinder agreements from all Permitted
Transferees to whom it intends to the Shares prior to or at the closing of
the Saratoga Transaction;
|
|
|
·
|
the
representations and warranties of the Investors contained in the Stock
Purchase Agreement shall have been accurate at signing and shall be true
at and as of the closing of the Saratoga Transaction;
and
|
|
|
·
|
Saratoga
is in compliance in all material respects with its obligations under the
Advisers Act as of the date of closing of the Saratoga
Transaction.
|
Termination. The
Stock Purchase Agreement may be terminated by mutual written consent of GNV and
Saratoga and in certain other instances.
Either we
or Saratoga may terminate the Stock Purchase Agreement if:
|
|
·
|
the
transaction has not been consummated on or before September 30, 2010 (the
“End Date”); provided, however, that if the
Company wishes to terminate the Stock Purchase Agreement because the
transaction has not been consummated on or before the End Date and
Saratoga wishes to terminate the Stock Purchase Agreement because the
stockholder meeting has not been held prior to the End Date, Saratoga’s
termination right will prevail;
|
|
|
·
|
any
applicable law makes consummation of the transaction illegal or otherwise
prohibited or enjoins the Company or Saratoga from consummating the
transaction and such injunction has become final and nonappealable;
or
|
|
|
·
|
the
GNV stockholders do not approve both of the required
proposals.
|
Saratoga
may terminate the Stock Purchase Agreement if:
|
|
·
|
the
Board makes an Adverse Recommendation Change or fails to reaffirm its
recommendation of the transaction as promptly as practicable (and no later
than 5 business days) after receipt or public announcement of an
acquisition proposal;
|
|
|
·
|
a
breach of any representation or warranty or failure to perform any
covenant or agreement on the part of the Company required as a condition
to closing shall have occurred, and such condition is incapable of being
satisfied by the End Date;
|
|
|
·
|
the
stockholder meeting has not been held prior to the End Date; provided, however, that
Saratoga must not be in material breach of the Stock Purchase Agreement on
the date of such termination and must, if
requested
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30
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by
the Company, extend the End Date for a period of 30 calendar days to
permit the Company to hold the company stockholder meeting;
or
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·
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there
has been a material breach by the Company or its representatives of its
obligations (i) to convene the company stockholder meeting to approve the
requisite elements of the Saratoga Transaction or (ii) relating to the
non-solicitation covenants.
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We may
terminate the Stock Purchase Agreement if:
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·
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prior
to the stockholder meeting, the Board has made an Adverse Recommendation
Change in compliance with the terms of the Stock Purchase Agreement in
order to enter into a definitive, written agreement concerning a Superior
Proposal; provided, however, that such
termination will not take effect until the Company has paid Saratoga the
full amount of the Termination Fee;
or
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·
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a
breach of any representation or warranty or failure to perform any
covenant or agreement on the part of the Investors required as a condition
to closing of the Saratoga Transaction has occurred, and such condition is
incapable of being satisfied by the End
Date.
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Termination Fee and Expense
Reimbursement. In the event that the Stock Purchase Agreement
is terminated pursuant to an Adverse Recommendation Change by the Board or due
to a material breach of the Company’s non-solicitation or stockholder meeting
obligations, GNV will pay to Saratoga an amount in immediately available funds
equal to $1,250,000 as liquidated damages. In the event that the
Stock Purchase Agreement is terminated (i) by Saratoga pursuant to a breach of a
representation or warranty by the Company or (ii) by the Company for failure to
consummate the transaction by the End Date coupled with the Company’s
unwillingness to agree to a one-time good faith extension of the End Date for an
additional 30 calendar days, GNV will pay to Saratoga an amount in immediately
available funds equal to the aggregate amount of all documented, out-of-pocket
costs and expenses, including the reasonable fees and expenses of lawyers and
accountants, incurred by Saratoga and/or its affiliates in connection with the
transaction, up to an amount not to exceed $500,000. In the event
that the GNV stockholders fail to approve Proposals 1 and 2 or the Company has
failed to convene a stockholder meeting to approve the proposals prior to the
End Date (but is not otherwise in breach of its obligations relating thereto),
GNV will pay to Saratoga an amount in immediately available funds equal to the
aggregate amount of all documented, out-of-pocket costs and expenses, including
the reasonable fees and expenses of lawyers and accountants, incurred by
Saratoga and/or its affiliates in connection with the transaction, up to an
amount not to exceed $350,000. If, at any time within 9 months after
termination of the Stock Purchase Agreement under one of the scenarios outlined
above pursuant to which the Company is obligated to pay to Saratoga an expense
reimbursement, we enter into a definitive agreement with a third party that
would otherwise have constituted a Superior Proposal, we will have to pay to
Saratoga an amount equal to the termination fee of $1,250,000 minus the amounts
already paid to Saratoga as an expense reimbursement.
Waiver and Amendment of the Stock
Purchase Agreement. Any provision of the Stock Purchase
Agreement may be amended or waived prior to the closing of the Saratoga
Transaction if such amendment or waiver is in writing and signed by each party
to the Stock Purchase Agreement in the case of an amendment or, in the case of a
waiver, by each party against whom the waiver is to be effective; provided that after the
approval of the GNV stockholders has been obtained there may be no amendment or
waiver that would require the further approval of the stockholders of the
Company under Maryland law or the 1940 Act without such approval having first
been obtained.
Expenses. Except
as otherwise provided in the Stock Purchase Agreement and outlined in the
preceding section entitled “Termination Fee and Expense Reimbursement,” all
costs and expenses incurred in connection with the Stock Purchase Agreement will
be paid by the party incurring such cost or expense. Notwithstanding
the foregoing, solely in the case whereupon the parties have successfully
consummated the closing of the transactions contemplated by the Stock Purchase
Agreement, the Company will pay to Saratoga the aggregate amount of all
documented, out-of-pocket costs and expenses, including the reasonable fees and
expenses of lawyers and accountants, incurred by Saratoga as of the closing in
connection with the entering into of the Stock Purchase Agreement and the
carrying out of any and all acts contemplated thereunder.
Director and Officer Indemnification
by Saratoga. For six years after the closing of the Saratoga
Transaction, the Company is obligated to, and neither GNV nor Saratoga may take
any action, including any action with respect to the voting of its shares, that
will prevent or otherwise impair GNV’s ability to maintain the Company’s
existing directors’ and officers’ liability insurance policies at coverage
levels equal to or greater than $20 million and indemnify and hold
31
harmless
the present and former officers and directors of GNV or a member of GNV’s
investment committee or disclosure committee for acts or omissions occurring at
or prior to the closing of the Saratoga Transaction to the fullest extent
permitted by Maryland Law or any other applicable law or provided under GNV’s
charter and bylaws in effect on the date hereof; provided that such
indemnification will be subject to any limitation imposed from time to time
under applicable law.
Registration
Rights. The Company has agreed to enter into a Registration
Rights Agreement with the Investors pursuant to which the Company has agreed to
prepare and file with the SEC a registration statement on Form N-2 pursuant to
Rule 415 (the “Mandatory Registration Statement”) to register the resale of the
Shares by the Investors or their permitted assigns under the Securities Act of
1933. Under the terms and conditions of the Registration Rights
Agreement, the Company will use its commercially reasonable efforts to file with
the SEC within 30 days after the date of the closing of the Saratoga Transaction
the Mandatory Registration Statement. The Company will also use its
commercially reasonable efforts to cause such Mandatory Registration Statement
to be declared effective by the SEC within 90 days after the date of the
Registration Rights Agreement. The Registration Rights Agreement also
grants each Investor an opportunity for resale of their Shares in a public
offering by the Company should a Mandatory Registration Statement for the Shares
not be effective at that time.
Voting
Agreement. As a condition to the closing of the Saratoga
Transaction, certain affiliates of the GSC Group and the officers and directors
of the Company have entered into a Voting and Support Agreement (the “Voting
Agreement”). Pursuant to the Voting Agreement, the persons subject to
the Voting Agreement have agreed, among other things, to vote all of the shares
of the Company’s common stock owned by such stockholders in favor of the
approval of the proposals contained herein. As of April 14, 2010, the
date of the Voting Agreement, the
persons subject to voting
agreementsthe Voting
Agreement collectively exercised voting control over approximately 11.6%
of the Company’s outstanding shares. Any additional shares of common
stock acquired by persons subject to the Voting Agreement following the Record
Date will automatically become subject to such Voting Agreement. The
obligation to vote in favor of the closing of the Saratoga Transaction exists
until the earlier of (i) the closing of the Saratoga Transaction, (ii) the
termination of the Stock Purchase Agreement, (iii) two months following
September 30, 2010 or (iv) as mutually agreed upon by the
parties. During the term of the Voting Agreement, persons subject to
the Voting Agreement may not transfer their common stock, unless the transferee
agrees to be bound by the applicable provisions of the Voting
Agreement. This summary is qualified by reference to the complete
text of the Voting Agreement which was attached as an exhibit to our Form 8-K/A
filed with the SEC on June 4, 2010 and is incorporated herein by
reference.
Summary
of the Replacement Facility
We have
summarized below certain material terms of the Credit Agreement between Madison
(as administrative agent) and the Company, either directly or through one of its
subsidiaries (the “Borrower”), that establishes the Replacement
Facility. This summary is subject to definitive documentation of the
Replacement Facility, which is to be executed and made publicly available upon
the closing of the transactions contemplated hereby.
Availability. The
Borrower can draw up to the lesser of (i) $40 million (the “Facility Amount”)
and (ii) the product of the applicable advance rate (which varies from 50% to
75% depending on the type of loan asset) and the value, determined in accordance
with the Replacement Facility (the “Adjusted Borrowing Value”), of certain
“eligible” loan assets pledged as security for the loan (the “Borrowing Base”),
in each case less (a) the amount of any undrawn funding commitments the Borrower
has under any loan asset and which are not covered by amounts in the Unfunded
Exposure Account referred to below (the “Unfunded Exposure Amount”) and (b)
outstanding borrowings. Each loan asset held by the Borrower as of
the date on which the Replacement Facility is closed will be valued as of that
date and each loan asset that the Borrower acquires after such date will be
valued at the lowest of its fair value, its face value (excluding accrued
interest) and the purchase price paid for such loan
asset. Adjustments to the value of a loan asset will be made to
reflect, among other things, changes in its fair value, a default by the obligor
on the loan asset, insolvency of the obligor, acceleration of the loan asset,
and certain modifications to the terms of the loan asset.
The
Replacement Facility contains limitations on the type of loan assets that are
“eligible” to be included in the Borrowing Base and as to the concentration
level of certain categories of loan assets in the Borrowing Base such as
restrictions on geographic and industry concentrations, asset size and quality,
payment frequency, status and terms, average life, and collateral
interests. In addition, if an asset is to remain an “eligible” loan
asset, the Borrower may not make changes to the payment, amortization,
collateral and certain other terms of the loan assets without the consent of the
administrative agent that will either result in subordination of the loan asset
or be materially adverse to the lenders.
32
At any
time prior to the second anniversary of the closing of the Replacement Facility
and subject to certain conditions, the Borrower may request an increase in the
Facility Amount of up to $60 million for a combined aggregate Facility Amount of
$100 million.
Collateral. Consistent
with the existing DB Credit Facility, the Replacement Facility will be secured
by substantially all of the assets of the Borrower. However, under
the Replacement Facility, the collateral pool will be expanded to include the
subordinated notes (“CLO Notes”) issued by GSC Investment Corp. CLO 2007 Ltd
(“GSCIC CLO”) and GNV’s rights under the CLO Management Agreement (as defined
below), not currently secured under the DB Credit Facility.
Interest Rate and
Fees. Under the Replacement Facility, funds are borrowed from
or through certain lenders at the greater of the prevailing LIBOR rate and 2.00%
, plus an applicable margin of 5.50%. At the Borrower’s option, funds
may be borrowed based on an alternative base rate, which in no event will be
less than 3.00%, and the applicable margin over such alternative base rate is
4.50%. In addition, the Borrower will pay the lenders a commitment
fee of 0.75% per year on the unused amount of the Replacement Credit Facility
for the duration of the Revolving Period (defined below). Accrued
interest and commitment fees are payable monthly. The Borrower is
also obligated to pay certain other fees to the lenders in connection with the
closing of the Replacement Facility.
Revolving Period and Maturity
Date. The Borrower may make and repay borrowings under the
Replacement Facility for a period of three years following the closing of the
Replacement Facility (the “Revolving Period”). The Revolving Period
may be terminated at an earlier time by the Borrower or, upon the occurrence of
an event of default, by action of the lenders or automatically. All
borrowings and other amounts payable under the Replacement Facility are due and
payable in full five years after the end of the Revolving Period.
Collateral
Tests. It is a condition precedent to any borrowing under the
Replacement Facility that the principal amount outstanding under the Replacement
Facility, after giving effect to the proposed borrowings, not exceed the lesser
of the Borrowing Base or the Facility Amount (the “Borrowing Base
Test”). In addition to satisfying the Borrowing Base Test, the
following tests must also be satisfied (together with Borrowing Base Test, the
“Collateral Tests”):
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·
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Interest Coverage
Ratio. The ratio (expressed as a percentage) of interest
collections with respect to pledged loan assets, less certain fees and
expenses relating to the Replacement Facility, to accrued interest and
commitment fees and any breakage costs payable to the lenders under the
Replacement Facility for the last 6 payment periods must equal at least
175%.
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·
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Overcollateralization
Ratio. The ratio (expressed as a percentage) of the
aggregate Adjusted Borrowing Value of “eligible” pledged loan
assets plus the fair value of certain ineligible pledged loan assets and
the CLO Notes (in each case, subject to certain adjustments) to
outstanding borrowings under the Replacement Facility plus the Unfunded
Exposure Amount must equal at least
200%.
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·
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Weighted Average FMV
Test. The aggregate adjusted or weighted value of
“eligible” pledged loan assets as a percentage of the aggregate
outstanding principal balance of “eligible” pledged loan assets must be
equal to or greater than 72% and 80% during the one-year periods prior to
the first and second anniversary of the closing date, respectively, and
85% at all times thereafter.
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The
Replacement Facility also requires payment of outstanding borrowings or
replacement of pledged loan assets upon the Borrower’s breach of its
representation and warranty that pledged loan assets included in the Borrowing
Base are “eligible” loan assets. Such payments or replacements must
equal the lower of the amount by which the Borrowing Base is overstated as a
result of such breach or any deficiency under the Collateral Tests at the time
of repayment or replacement. Compliance with the Collateral Tests is
also a condition to the discretionary sale of pledged loan assets by the
Borrower.
Priority of
Payments. During the Revolving Period, the priority of
payments provisions of the Replacement Facility require, after payment of
specified fees and expenses and any necessary funding of the Unfunded Exposure
Account, that collections of principal from the loan assets and, to the extent
that these are insufficient, collections of interest from the loan assets, be
applied on each payment date to payment of outstanding borrowings if the
Borrowing Base Test, the Overcollateralization Ratio and the Interest Coverage
Ratio would not otherwise be met. Similarly, following termination of
the Revolving Period, collections of interest are required to be applied, after
payment of
33
certain
fees and expenses, to cure any deficiencies in the Borrowing Base Test, the
Interest Coverage Ratio and the Overcollateralization Ratio as of the relevant
payment date.
Reserve
Account. The Replacement Facility requires the Borrower to set
aside an amount equal to the sum of accrued interest, commitment fees and
administrative agent fees due and payable on the next succeeding three payment
dates (or corresponding to three payment periods). If for any monthly
period during which fees and other payments accrue, the aggregate Adjusted
Borrowing Value of “eligible” pledged loan assets which do not pay cash interest
at least quarterly exceeds 15% of the aggregate Adjusted Borrowing Value of
“eligible” pledged loan assets, the Borrower is required to set aside such
interest and fees due and payable on the next succeeding six payment
dates. Amounts in the reserve account can be applied solely to the
payment of administrative agent fees, commitment fees, accrued and unpaid
interest and any breakage costs payable to the lenders.
Unfunded Exposure
Account. With respect to revolver or delayed draw loan assets,
the Borrower is required to set aside in a designated account (the “Unfunded
Exposure Account”) 100% of its outstanding and undrawn funding commitments with
respect to such loan assets. The Unfunded Exposure Account is funded
at the time the Borrower acquires a revolver or delayed draw loan asset and
requests a related borrowing under the Replacement Facility. The
Unfunded Exposure Account is funded through a combination of proceeds of the
requested borrowing and other Borrower funds, and if for any reason such amounts
are insufficient, through application of the priority of payment provisions
described above.
Operating
Expenses. The priority of payments provision of the
Replacement Facility provides for the payment of certain operating expenses of
the Borrower out of collections on principal and interest during the Revolving
Period and out of collections on interest following the termination of the
Revolving Period in accordance with the priority established in such
provision. The operating expenses payable pursuant to the priority of
payment provisions is limited to $350,000 for each monthly payment date or $2.5
million for the immediately preceding period of twelve consecutive monthly
payment dates. This ceiling can be increased by the lesser of 5% or
the percentage increase in the fair market value of all the Borrower’s assets
only on the first monthly payment date to occur after each one-year anniversary
following the closing of the Replacement Facility. Upon the
occurrence of a Manager Event (described below), the consent of the
administrative agent is required in order to pay operating expenses through the
priority of payments provision.
Events of
Default. The Replacement Facility contains certain negative
covenants, customary representations and warranties and affirmative covenants
and events of default. The Replacement Facility does not contain
grace periods for breach by the Borrower of certain covenants, including,
without limitation, preservation of existence, negative pledge, change of name
or jurisdiction and separate legal entity status of the Borrower covenants and
certain other customary covenants. In addition to certain events of
default that were contained in the existing DB Credit Facility, other events of
default under Replacement Facility include, among other things, the
following:
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an
Interest Coverage Ratio of less than
150%;
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·
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an
Overcollateralization Ratio of less than
175%;
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·
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the
removal of any independent director of the Borrower without “cause” or
without giving prior written notice to the administrative agent, or the
appointment of an independent director of the Borrower who is not provided
by a nationally recognized service reasonably acceptable to the
administrative agent without the consent of the administrative
agent;
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·
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the
filing of certain ERISA or tax
liens;
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·
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failure
of GNV to own and control, directly or indirectly, 100% of the equity
interests of the Borrower (if a subsidiary of the Company);
and
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·
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the
occurrence of certain “Manager Events” such
as:
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·
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failure
by Saratoga and its affiliates to maintain collectively, directly or
indirectly, a cash equity investment in GNV in an amount equal to at least
$5,000,000 at any time prior to the third anniversary of the closing
date;
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34
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·
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failure
of the management agreement between Saratoga and GNV to be in full force
and effect;
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·
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indictment
or conviction of Saratoga or any “key person” for a felony offense, or any
fraud, embezzlement or misappropriation of funds by Saratoga or any “key
person” and, in the case of “key persons,” without a reputable,
experienced individual reasonably satisfactory to Madison appointed to
replace such key person within 30
days;
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resignation,
termination, disability or death of a “key person” or failure of any “key
person” to provide active participation in Saratoga’s daily activities,
all without a reputable, experienced individual reasonably satisfactory to
Madison appointed within 30 days;
or
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·
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occurrence
of any event constituting “cause” under the Collateral Management
Agreement between GNV and GSCIC CLO (the “CLO Management Agreement”),
delivery of a notice under Section 12(c) of the CLO Management Agreement
with respect to the removal of GNV as collateral manager or GNV ceases to
act as collateral manager under the CLO Management
Agreement
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Conditions to Acquisitions and
Pledges of Loan Assets. The Replacement Facility imposes
certain additional conditions to the acquisition and pledge of additional loan
assets. Among other things, the Borrower may not acquire additional
loan assets without the prior written consent of the administrative agent until
such time that the administrative agent indicates in writing its satisfaction
with Saratoga’s policies, personnel and processes relating to the loan
assets.
Conditions to Closing of the
Replacement Facility. The closing of the Replacement Facility
and the funding of any borrowing requests by the Borrower on the closing date is
subject to the satisfaction or waiver of the following conditions on or prior to
the closing date of the Replacement Facility:
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negotiation
and delivery of a fully-executed Credit Agreement and such other documents
and legal opinions reasonably requested by Madison in form and substance
reasonably satisfactory to Madison;
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payment
by the Borrower of all requisite fees and expenses payable on or prior to
the closing date and reimbursement by the Borrower of all reasonable fees,
costs and expenses incurred by Madison in connection with the Replacement
Facility;
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·
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there
being no event, occurrence, development or state of circumstances or facts
that has had or would reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect (as defined in the Stock Purchase
Agreement) since November 30, 2009;
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·
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there
being no material adverse change (in the reasonable opinion of Madison) in
the portfolio of collateral securing the Replacement Facility since
November 30, 2009;
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·
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payment
on a current basis of all senior and subordinated collateral management
fees owing under the CLO Management
Agreement;
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·
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after
giving effect to all borrowings on the closing date and payment of all
requisite fees and expenses payable on such date, availability under the
Replacement Facility shall equal at least
$3,000,000;
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·
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the
occurrence of the recapitalization of GNV as contemplated by the Stock
Purchase Agreement;
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·
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the
Borrower’s certification in the relevant borrowing notice (a) that certain
representations and warranties set forth in the Credit Agreement are true
and correct on and as of such date (or an earlier date if so specified)
before and after giving effect to the requested borrowings and (b) that no
event has occurred or would result from the requested borrowings that
constitutes an Event of Default or a
default;
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·
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a
“termination date” (pursuant to which, among other things, the commitments
under the Replacement Facility would be terminated) shall not have
occurred under the Replacement
Facility;
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·
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the
satisfaction of the Collateral Tests before and after giving effect to the
requested borrowings; and
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35
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·
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the
sum of the outstanding borrowings and the Unfunded Exposure Amount after
giving effect to the requested borrowings shall not exceed the Facility
Amount.
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Fees and
Expenses. Upon the closing of the Replacement Facility, the
Company will be obligated to pay to Madison certain fees and to reimburse
Madison for the aggregate amount of all documented, out-of-pocket costs and
expenses, including the reasonable fees and expenses of lawyers, incurred by
Madison in connection with the Replacement Facility and the carrying out of any
and all acts contemplated thereunder up to and as of the date of
closing. In the event that the transactions contemplated by the Stock
Purchase Agreement are not consummated and the Replacement Facility is not
closed, for any reason, the Company and Saratoga have agreed to share equally in
the cost of a deferred commitment fee in the amount of $500,000 payable to
Madison in such a scenario and to share equally in the reimbursement of the
aggregate amount of all documented, out-of-pocket costs and expenses, including
the reasonable fees and expenses of lawyers, incurred by Madison in connection
with the Replacement Facility as of the date of such termination or abandonment
of the Saratoga Transaction.
Recommendation
of the Board of Directors
Our Board of Directors has unanimously
approved the issuance of the Shares, at a price per share below the current net
asset value per share of the common stock, pursuant to the Stock Purchase
Agreement and determined that the Stock Purchase Agreement and the transactions
contemplated by the Stock Purchase Agreement are in the best interests of the
Company and recommends that you vote FOR Proposal 1.
36
PROPOSAL
2 – TO APPROVE THE INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
General
Stockholders
of the Company are being asked to consider and vote on a proposal to approve the
Investment Advisory and Management Agreement between the Company and Saratoga
Investment Advisors, LLC (“Saratoga” or the “Adviser”). The
Investment Advisory and Management Agreement is attached as Exhibit B to this
proxy statement. The Company will also enter into an Administration
Agreement, attached as Exhibit C to this
proxy statement, with Saratoga or one of its affiliates at
closing. At a meeting of the Board held on April 9, 2010, the Board,
including all of the directors who are not “interested persons” of the Company
as defined in the 1940 Act, unanimously voted to approve the Investment Advisory
and Management Agreement and determined that the Investment Advisory and
Management Agreement is in the best interests of the Company and its
stockholders. The Board then recommended that the stockholders of the
Company vote to approve the Investment Advisory and Management
Agreement.
Reasons
for the Proposed Investment Advisory and Management Agreement
Currently,
the Company has an Investment Advisory and Management Agreement, dated as of
March 21, 2007, and as amended as of May 23, 2007, between GSCP (NJ), L.P.
(“GSCP”) and the Company (the “Current Agreement”). The Current
Agreement was renewed by the Board in March 2010. Subject to the
overall supervision of the Board, GSCP manages the day-to-day operations of, and
provides investment advisory and management services to, the
Company. In conjunction with the Saratoga Transaction described
above, GSCP will waive certain accrued fees and terminate the Current Agreement
with the Company. As a result, we are seeking stockholder approval to
enter into the Investment Advisory and Management Agreement with the Adviser so
that the Adviser will take the place of GSCP on substantially the same terms,
except as described below, and provide substantially the same services to the
Company.
Current
Agreement and Proposed Investment Advisory and Management Agreement
The Board
has unanimously approved, and recommends to the stockholders of the Company that
they approve, an advisory agreement between the Company and
Saratoga. You should refer to the form of the proposed Investment
Advisory and Management Agreement attached hereto as Exhibit B for its
complete terms.
The
Investment Advisory and Management Agreement is substantially similar to the
Current Agreement, except for the following material distinctions in the fee
terms
that are included in the Investment Advisory and Management
Agreement:
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1.
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The
capital gains portion of the Incentive Fee (as defined below) will be
reset with respect to gains and losses from May 31, 2010, and therefore
losses and gains incurred prior to such time will not be taken into
account when calculating the capital gains fee, and the Adviser will be
entitled to 20% of gains that arise after May 31, 2010. In
addition, the cost basis for computing realized losses on investment held
by the Company as of May 31, 2010 will equal the fair value of such
investment as of such date. Under the Current Agreement, the
capital gains fee is calculated from March 21, 2007, and the gains are
substantially outweighed by losses. On
a net basis, the Company has incurred $12.4 million of realized losses and
$57.6 million of unrealized depreciation on its investments and
derivatives since March 21,
2007.
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2.
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Under
the “catch up” provision, 100% of the Company’s pre-incentive fee net
investment income with respect to that portion of such pre-incentive fee
net investment income that exceeds 1.875% (7.5% annualized) but is less
than or equal to 2.344% in any fiscal quarter is payable to the
Adviser. This will enable the Adviser to receive 20% of all net
investment income as such amount approaches 2.344% in any quarter, and the
Adviser will receive 20% of any additional net investment
income. Under the Current Agreement, GSCP only receives 20% of
the excess net investment income over
1.875%.
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3.
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The
Company will no longer have Deferral Rights (as defined below) regarding
Incentive Fees in the event that the distributions to stockholders and
change in net assets is less than 7.5% for the preceding four fiscal
quarters.
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Fees. Under the
Investment Advisory and Management Agreement, the Company will pay Saratoga a
fee consisting of two components – a base management fee (the “Base Management
Fee”) and an incentive fee (the
37
“Incentive
Fee”). The Base Management Fee will be paid quarterly in arrears, and
be equal to 1.75% per annum of the Company’s gross assets (other than cash or
cash equivalents but including assets purchased with borrowed funds) and be
calculated at the end of each fiscal quarter based on the average value of the
Company’s gross assets (other than cash or cash equivalents but including assets
purchased with borrowed funds) as of the end of such fiscal quarter and the end
of the immediate prior fiscal quarter. Base Management Fees for any
partial month or quarter will be appropriately pro-rated.
The
Incentive Fee will have the following two parts:
The first
part will be calculated and payable quarterly in arrears based on the Company’s
pre-incentive fee net investment income for the immediately preceding fiscal
quarter. Pre-incentive fee net investment income means interest
income, dividend income and any other income (including any other fees such as
commitment, origination, structuring, diligence, managerial and consulting fees
or other fees that the Company receives from portfolio companies) accrued during
the fiscal quarter, minus the Company’s operating expenses for the quarter
(including the Base Management Fee, expenses payable under the administration
agreement, and any interest expense and dividends paid on any issued and
outstanding preferred stock, but excluding the Incentive
Fee). Pre-incentive fee net investment income includes, in the case
of investments with a deferred interest feature (such as market discount, debt
instruments with payment-in-kind interest, preferred stock with payment-in-kind
dividends and zero coupon securities), accrued income that the Company has not
yet received in cash. Pre-incentive fee net investment income does
not include any realized capital gains, realized capital losses or unrealized
capital appreciation or depreciation. Pre-incentive fee net investment income,
expressed as a rate of return on the value of the Company’s net assets (defined
as total assets less liabilities) at the end of the immediately preceding fiscal
quarter, will be compared to a “hurdle rate” of 1.875% per quarter (7.5%
annualized), subject to a “catch up” provision. The Base Management
Fee is calculated prior to giving effect to the payment of any Incentive
Fees.
The
Company will pay the Adviser an Incentive Fee with respect to the Company’s
pre-incentive fee net investment income in each fiscal quarter as follows: (A)
no Incentive Fee in any fiscal quarter in which the Company’s pre-incentive fee
net investment income does not exceed the hurdle rate; or (B) (i) 100% of the
Company’s pre-incentive fee net investment income with respect to that portion
of such pre-incentive fee net investment income, if any, that exceeds the hurdle
rate but is less than or equal to 2.344% in any fiscal quarter (9.376%
annualized) is payable to the Adviser; and (ii) 20% of the amount of the
Company’s pre-incentive fee net investment income, if any, that exceeds 2.344%
in any fiscal quarter (9.376% annualized). The Company refers to the
amount specified in clause (B)(i) as the “catch-up.” Notwithstanding
the foregoing, with respect to any period ending on or prior to December 31,
2010, the Adviser shall be entitled to 20% of the amount of the Company’s
pre-incentive fee net investment income, if any, that exceeds 1.875% in any
fiscal quarter (7.5% annualized) without any catch-up provision.
These
calculations will be appropriately pro-rated when such calculations are
applicable for any period of less than three months.
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 and Management Agreement), and will be calculated at the
end of each applicable year by subtracting (1) the sum of the Company’s
cumulative aggregate realized capital losses and aggregate unrealized capital
depreciation from (2) the Company’s cumulative aggregate realized capital gains,
in each case calculated from May 31, 2010. If such amount is positive
at the end of such year, then the capital gains fee for such year is equal to
20% of such amount, less the cumulative aggregate amount of capital gains fees
paid in all prior years. If such amount is negative, then there is no
capital gains fee for such year.
Under the
Investment Advisory and Management Agreement, the capital gains portion of the
Incentive Fee will be reset based on realized gains and realized and unrealized
losses from May 31, 2010 because the Company’s realized gains and realized and
unrealized losses will be calculated from such date. Therefore,
realized and unrealized losses incurred prior to such time will not be taken
into account when calculating the capital gains portion of the Incentive Fee,
and the Adviser will be entitled to 20% of net capital gains that arise after
May 31, 2010. In addition, the cost basis for Company realized gains
and losses on investments held by the Company as of May 31, 2010 will equal the
fair value of such investments as of such date.
Under the
Current Agreement, GSCP receives the same Base Management Fee.
38
Under the
Current Agreement, GSCP receives the same Incentive Fee, but the Incentive Fee
is not subject to a “catch up” provision. In addition, under the
Current Agreement, the payment of any Incentive Fee otherwise earned by GSCP is
deferred (the “Deferral Right”) if, during the most recent four full fiscal
quarter period ending on or prior to the date such payment is to be made, the
sum of (a) the Company’s aggregate distributions to its stockholders and (b) the
change in the Company’s net assets (before taking into account any Incentive
Fees payable during that period) is less than 7.5% of the Company’s net assets
at the beginning of such period. These calculations are appropriately
pro-rated for the first three fiscal quarters after the date of the Current
Agreement and adjusted for any share issuances or repurchases during the
relevant period. Pursuant to the Deferral Right, such Incentive Fees
become payable on the next date on which such test has been satisfied for the
most recent four full fiscal quarters.
Investment Management
Services. Both the Investment Advisory and Management Agreement and the
Current Agreement provide that the Adviser and GSCP, respectively, will manage
the investment and reinvestment of the assets of the Company, subject to the
supervision of the Board, and, in connection with such management, will (i)
determine the composition of the portfolio of the Company, the nature and timing
of the changes therein and the manner of implementing such changes; (ii)
identify, evaluate and negotiate the structure of the investments made by the
Company; (iii) close and monitor the Company’s investments; (iv) determine the
securities and other assets that the Company will purchase, retain, or sell; (v)
perform due diligence on prospective portfolio companies; and (vi) provide the
Company with such other investment advisory, research and related services as
the Company may, from time to time, reasonably require for the investment of its
funds.
Delegation of
Responsibilities. The Investment Advisory and Management
Agreement does not expressly permit delegation to sub-advisers.
The
Current Agreement provides that GSCP may, in its discretion delegate
responsibilities under the agreement to one or more sub-advisers. The
separate costs of employing any sub-adviser are borne by GSCP, not by the
Company. The Company and GSCP retain oversight over any such
sub-adviser.
Expenses. The
Investment Advisory and Management Agreement provides that all investment
professionals of the Adviser and its staff, when and to the extent engaged in
providing investment advisory services required to be provided by the Adviser,
and the compensation and routine overhead expenses of such personnel allocable
to such services, will be provided and paid for by the Adviser and not by the
Company.
The
Company will bear all costs and expenses of its operations and transactions,
including those relating to: the Company’s organization; calculating the
Company’s net asset value (including the cost and expenses of any independent
valuation firm); expenses incurred by the Adviser payable to third parties,
including agents, consultants or other advisors, in monitoring financial and
legal affairs for the Company and in monitoring the Company’s investments and
performing due diligence on its prospective portfolio companies; interest
payable on debt, if any, incurred to finance the Company’s investments;
offerings of the Company’s common stock and other securities; investment
advisory and management fees; fees payable to third parties, including agents,
consultants or other advisors, relating to, or associated with, evaluating and
making investments; transfer agent and custodial fees; federal and state
registration fees; all costs of registration and listing the Company’s common
stock on any securities exchange; federal, state and local taxes; independent
directors’ fees and expenses; costs of preparing and filing reports or other
documents required by governmental bodies (including the SEC); costs of any
reports, proxy statements or other notices to common stockholders including
printing costs; the Company’s fidelity bond, directors and officers/errors and
omissions liability insurance, and any other insurance premiums; direct costs
and expenses of administration, including printing, mailing, long distance
telephone, copying, secretarial and other staff, independent auditors and
outside legal costs; and administration fees and all other expenses incurred by
the Company or, if applicable, the administrator in connection with
administering the Company’s business (including payments under the
administration agreement based upon the Company’s allocable portion of the
administrator’s overhead in performing its obligations under an administration
agreement, including rent and the allocable portion of the cost of the Company’s
officers and their respective staffs (including travel expenses)).
The
Current Agreement contains similar expense and reimbursement
provisions.
Term and
Termination. If approved by stockholders, the Investment
Advisory and Management Agreement will become effective upon the closing of the
Saratoga Transaction and will remain in effect continuously, unless terminated
under the termination provisions of the agreement. The Investment
Advisory and Management Agreement provides that it may be terminated at any
time, without the payment of any penalty, upon 60 days’ written notice,
by
39
the vote
of stockholders holding a majority of the outstanding voting securities of the
Company, or by the vote of the Company’s directors or by the
Adviser. The proposed new advisory agreement will also terminate
automatically in the event of its “assignment.”
The
Investment Advisory and Management Agreement will, unless terminated as
described above, continue until the second anniversary of its effective date and
will continue in effect from year to year thereafter so long as it is approved
at least annually by (i) the vote of the Board, or by the vote of stockholders
holding a majority of the outstanding voting securities of the Company, and (ii)
the vote of a majority of the Company’s directors who are not parties to the
Investment Advisory and Management Agreement or “interested persons” (as such
term is defined in Section 2(a)(19) of the 1940 Act) of any party to the
Investment Advisory and Management Agreement, in accordance with the
requirements of the 1940 Act.
The
Current Agreement has similar provisions for its term and
termination.
Limitation of Liability and
Indemnity. Under the Investment Advisory and Management
Agreement, Saratoga and certain of its affiliates would not be liable to the
Company for any action taken or omitted to be taken by the Adviser in connection
with the performance of any of its duties or obligations under the agreement or
otherwise as an investment adviser of the Company, except to the extent
specified in Section 36(b) of the 1940 Act concerning loss resulting from a
breach of fiduciary duty (as the same is finally determined by judicial
proceedings) with respect to the receipt of compensation for services and except
to the extent such action or omission constitutes gross negligence, willful
misfeasance, bad faith or reckless disregard of its duties and obligations under
the agreement.
The
Company would also provide indemnification to the Adviser and certain of its
affiliates for damages, liabilities, costs and expenses incurred by them in or
by reason of any pending, threatened or completed action, suit, investigation or
other proceeding arising out of or otherwise based upon the performance of any
of the Adviser’s duties or obligations under the agreement or otherwise as an
investment adviser of the Company. However, the Company would not
provide indemnification against any liability to the Company or its security
holders to which the Adviser or such affiliates would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the performance
of any such person’s duties or by reason of the reckless disregard of the
Adviser’s duties and obligations under the agreement.
The
Current Agreement has similar provisions with respect to liability and
indemnification.
Amendments. Both
the Investment Advisory and Management Agreement and Current Agreement may only
be amended in writing, and any amendments must be approved in a manner
consistent with the 1940 Act.
Administration
Agreement. The Administration Agreement, attached as Exhibit C to this
proxy statement, to be entered into by the Company and Saratoga or one of
Saratoga’s affiliates in connection with the Saratoga Transaction is
substantially similar to the Company’s existing Administration Agreement with
GSCP, except that:
|
|
(1)
|
the
new Administration Agreement will have an initial two year
term;
|
|
|
(2)
|
administration
fees will be capped at $1.0 million for the first year of the term;
and
|
|
|
(3)
|
the
existence of a cap, and the determination of a proper cap amount, in the
second year of the term will be determined by the mutual agreement of the
independent directors, on behalf of the Company, and the replacement
administrator.
|
The
Company’s existing agreement is renewed annually and the fees paid thereunder
are capped such that the amounts payable by the Company, together with all of
the Company’s other operating expenses, do not exceed an amount representing
1.5% per annum of the Company’s net assets attributable to the Company’s common
stock.
In
addition, GSCP has waived, and continues to waive, the Company's reimbursement
obligation under the administration agreement until such time as the Company's
total assets exceed $500 million. Saratoga has not agreed to such a
waiver.
Portfolio
Management. New individuals, as listed under the section
“About Saratoga” would manage the portfolio under the Investment Advisory and
Management Agreement. Under the Current Agreement, the following
individuals at GSCP manage the portfolio:
40
Peter
R. Frank – President and Senior Managing Director
Mr.
Frank joined GSC Group in 2001. From 2005 until 2008, he served as
the Senior Operating Executive for GSC’s Recovery funds. In addition,
Mr. Frank is a member of the investment committees for Recovery Funds, U.S.
Corporate Debt, European Corporate Debt and European Mezzanine
funds. Prior to 2001, Mr. Frank was the CEO of Ten Hoeve Bros., Inc.
and was an investment banker at Goldman, Sachs & Co. He is
Chairman of the Board of Precision Partners, Inc., Scovill Fasteners, Inc., and
Worldtex, Inc., and a director of Color Spot Nurseries, Inc., Kolmar Labs Group,
Inc., Oreck Corporation and Viasystems, Inc. Mr. Frank graduated from
the University of Michigan with a B.S.E.E. degree and from the Harvard Graduate
School of Business Administration, with a M.B.A. degree.
Philip
Raygorodetsky – Senior Managing Director, Recovery Funds
Mr.
Raygorodetsky joined GSC Group at its inception in 1999. He is
responsible for sourcing, evaluating and executing control distressed debt
investments. He is also a member of the investment committee for the
Recovery Funds, U.S. Corporate Debt, and European Mezzanine funds. He
was previously with Greenwich Street Capital Partners from 1997 to
1999. Prior to that, Mr. Raygorodetsky was with Salomon Smith Barney
Inc. in the Investment Banking Division's health care group, where he worked on
public and private financing and advisory transactions. Previously,
he worked at Andersen Consulting. Mr. Raygorodetsky is Chairman of
the Board of USI Senior Holdings, Inc. and a director of Axia Acquisition
Holding Corporation, Dukes Place Holdings Limited, Seaton Insurance Company,
Stonewall Insurance Company and Wrightline, LLC. Mr. Raygorodetsky
graduated from the Walter A. Haas School of Business at the University of
California at Berkeley with a degree in Economic Analysis and Policy and
Finance.
Alexander
B. Wright - Chief Financial Officer, Chief Administrative Officer, and Senior
Managing Director
Mr.
Wright joined GSC Group in 2002 and is the Chief Administrative Officer and
Chief Financial Officer of GSC Group, Inc. Mr. Wright was previously
the head of the U.S. Corporate Debt business. He is a member of the
U.S. Corporate Debt, European Corporate Debt, and GSC Investment Corp.
investment committees. From 2003 to 2007, Mr. Wright served as head
of origination for the U.S. Corporate Debt business. Prior to that,
Mr. Wright was with IBJ Whitehall Bank & Trust Corporation and Chemical
Banking Corporation. Mr. Wright graduated from Rutgers College with a
B.A. degree in Political Science and a minor in Economics, and from Fordham
University with a M.B.A. degree.
Seth
M. Katzenstein - Senior Managing Director and Head of U.S. and European Lending
Businesses
Mr.
Katzenstein joined GSC Group at its inception in 1999 and is the Head of the
U.S. and European lending divisions with portfolio-management responsibility for
the U.S. Corporate Debt business. Prior to his current duties, the
Mr. Katzenstein served as the Head of Credit and Portfolio Management for the
U.S. Corporate Debt business from 2008 to 2009. From 2005 to 2008,
Mr. Katzenstein served as a Portfolio Manager for the U.S. Corporate Debt
business. Mr. Katzenstein served as the Senior Trader for the U.S.
Corporate Debt business from 2003 to 2005 and as a Portfolio Analyst in the
Control Distressed Debt business from 1998 to 2003. Prior to joining
GSC Group in 1999, Mr. Katzenstein was with Greenwich Street Capital Partners
from 1998 to 1999. Prior to that, Mr. Katzenstein worked as an
Analyst in the Financial Institutions Group at Salomon Smith Barney Inc. from
1996 to 1998 where he solicited, evaluated, and executed financing and advisory
transactions for financial institutions. He has a B.B.A. from the
University of Michigan.
Fee
Information
For the
fiscal year ended February 28, 2010, the Company owes to GSCP $2.3 million in
fees for services provided to the Company for the 2010 fiscal year; as of April
30, 2010, $2.3 million remained unpaid, with $446,000 to be paid on or about May
28, 2010 and the remaining $1.9 million has been waived and permanently
discharged. These services will no longer be provided by GSCP if the
Investment Advisory and Management Agreement is approved. If the
Investment Advisory and Management Agreement had been in effect for the 2010
fiscal year, it is estimated that the Company would have paid $2.6 million in
fees to the Adviser, which is a difference of 15%. GSCP did not
receive any incremental benefit for the transaction, other than the payment of
fees described herein, or as a result of the agreement to waive a portion of its
fees.
41
Below
is a table (unaudited) estimating the Company’s annual expenses stated as
percentages of net assets attributable to common stock. We caution
you that some of
the pro
forma percentages indicated in the table below are estimates and may
vary.
|
Current
(5)
|
Pro
Forma (5)
|
|||||||
|
Stockholder
transaction expenses (as a percentage of offering price):
|
||||||||
|
Sales
load paid
|
None
|
(1) |
None
|
(1) | ||||
|
Offering
expenses
|
None
|
(1) |
None
|
(1)
|
||||
|
Dividend
reinvestment plan expenses
|
None
|
(1) |
None
|
(1) | ||||
|
Total
stockholder transaction expenses paid
|
None
|
(1) |
None
|
(1) | ||||
|
Annual
expenses (as a percentage of net assets attributable to common
stock):
|
||||||||
|
Management
fees (2)
|
3.54 | % | 3.54 | % | ||||
|
Incentive
fees payable under the investment advisory and management agreement (20%
of adjusted net investment income, in excess of hurdle rate and 20% of
realized capital gains) (3)
|
0.62 | % | 1.24 | % | ||||
|
Interest
payments on borrowed funds (4)
|
7.38 | % | 6.88 | % | ||||
|
Other
expenses
|
6.31 | % | 8.11 | % | ||||
|
Total
annual expenses
|
17.85 | % | 19.77 | % | ||||
|
1.
|
Purchases
of shares of common stock on the secondary market are not subject to sales
charges but may be subject to brokerage commissions or other
charges. The table does not include any sales load
(underwriting discount or commission) that shareholders may have paid in
connection with the purchase of shares of GNV common
stock.
|
|
2.
|
Current
and pro forma management fees are based upon average quarterly assets of
$118.8 million during the fiscal year ended February 28,
2010.
|
|
3.
|
Incentive
fees for the pro forma column include the effect of the “catch
up” provision, pursuant to which 100% of the Company’s pre-incentive fee
net investment income with respect to that portion of such pre-incentive
fee net investment income that exceeds 7.5% annualized, but is less than
or equal to 9.376% is payable to the Adviser. This will enable
the Adviser to receive 20% of all net investment income as such amount
approaches 9.376%, and the Adviser will receive 20% of any additional net
investment income. The
effect of the catch-up provision results in approximately $232,500 in
additional fees paid to the
Adviser.
|
|
4.
|
Current
interest expense is based upon an average debt balance of $48.0 million
and a weighted average annual interest rate of 8.5% for the fiscal year
ended February 28, 2010. The pro forma column is based upon an
average debt balance of $48.0 million and a weighted average annual
interest rate of 8.0% (including the amortization of fees related to the
Facility).
|
|
5.
|
Current
and pro forma expenses are computed as a percentage of net assets
attributable to common stock as of February 28, 2010. No
adjustments to net asset value have been made to give effect to the
Investment in the pro forma column.
|
Example
The
following example demonstrates the projected dollar amount of total cumulative
expenses over various periods with respect to a hypothetical investment in our
common stock. In calculating the following expense amounts, we have
assumed that our annual operating expenses would remain at the levels set forth
in the table above. You would pay the following expenses on a $1,000
investment, assuming a 5% annual return.
|
1
Year
|
3
Years
|
5
Years
|
10
Years
|
|||||||||||||
|
Current
|
$172 | $456 | $675 | $1,027 | ||||||||||||
|
Pro
Forma
|
$185 | $465 | $681 | $1,027 | ||||||||||||
While the
example assumes, as required by the SEC, a 5% annual return, our performance
will vary and may result in a return greater or less than
5%. Assuming a 5% annual return, the incentive fee under the
investment
42
advisory
and management agreement may not be earned or payable and therefore its impact
is not included in the above example. This illustration assumes that
we will not realize any capital gains computed net of all realized capital
losses and gross unrealized capital depreciation in any of the indicated time
periods. If we achieve sufficient returns on our investments,
including through the realization of capital gains, to trigger an incentive fee
of a material amount, our expenses, and returns to our investors, would be
higher.
About
Saratoga
Christian
L. Oberbeck owns substantially all of the outstanding equity interests of the
Adviser.
The
principal business address of Mr. Oberbeck is 535 Madison Avenue, New York, New
York 10022.
The
following individuals are the principal executive officers of
the Adviser. The principal business address of each such person and
the Adviser is 535 Madison Avenue, New York, New York 10022.
Mr.
Oberbeck is the Chief Executive Officer of Saratoga and the Managing Partner of
Saratoga Partners.
Richard
A. Petrocelli is the Chief Financial Officer and Chief Compliance Officer of
Saratoga and a Managing Director of Saratoga Partners.
The
following investment managers would manage the portfolio under the Investment
Advisory and Management Agreement:
Christian
L. Oberbeck
Mr.
Oberbeck has over 23 years of experience in leveraged finance, from distressed
debt to private equity, and has been involved in originating, structuring,
negotiating, consummating, managing and monitoring investments in these
businesses. Mr. Oberbeck is the Managing Partner of Saratoga Partners
and has served on its investment committee since 1995. Mr. Oberbeck
is also the Chief Executive Officer of Saratoga.
Prior to
assuming management responsibility for Saratoga Partners in 2008, Mr. Oberbeck
has co-managed Saratoga Partners since 1995, when he joined Dillon Read and
Saratoga Partners from Castle Harlan, Inc., a corporate buyout
firm. Mr. Oberbeck had joined Castle Harlan at its founding in 1987
and was a Managing Director, leading successful investments in manufacturing and
financial services companies. Prior to joining Castle Harlan, he
worked in the Corporate Development Group of Arthur Young and in corporate
finance at Blyth Eastman Paine Webber. Mr. Oberbeck has been a
director of numerous middle market companies while at Saratoga Partners and
Castle Harlan.
Mr.
Oberbeck graduated from Brown University in 1982 with a BS in Physics and a BA
in Mathematics. In 1985, he earned an MBA from Columbia
University.
Richard
A. Petrocelli
Mr.
Petrocelli has over 12 years of experience including private equity and
corporate reorganizations. Mr. Petrocelli is a Managing Director and
Chief Financial Officer at Saratoga Partners and has been involved in
originating, structuring, negotiating, consummating, managing and monitoring
middle market investments. Mr. Petrocelli is the Chief Financial
Officer and Chief Compliance Officer of Saratoga. Mr. Petrocelli
began his career as an accountant before transitioning to alternative assets at
Gabelli Asset Management Company in 1993.
Mr.
Petrocelli’s background brings financial expertise to the diligence and
oversight processes, which is critically important when dealing in complex
transactions. In addition to his involvement in originating,
structuring, negotiating, consummating, managing and monitoring investments at
Saratoga, Mr. Petrocelli is currently the Chief Financial Officer of Saratoga
Partners and is responsible for reporting and compliance. Mr.
Petrocelli joined Saratoga Partners in 1998 from Gabelli. At Gabelli,
Mr. Petrocelli was a Vice President in the corporate finance department with a
primary focus on the Company’s alternative investment business. Prior
to that, he was a senior accountant at BDO Siedman. Mr. Petrocelli
has served as a director of a number of Saratoga Partners’ portfolio
companies.
43
Mr.
Petrocelli graduated with a BSBA from Georgetown University in 1990 and earned
an MBA from New York University’s Stern School of Business in
1999. He is a Certified Public Accountant.
Charles
G. Phillips IV
Mr.
Phillips has over 13 years of experience including private equity and leveraged
finance. Mr. Phillips is a Managing Director at Saratoga Partners and
has been involved in originating, structuring, negotiating, consummating,
managing and monitoring middle market investments.
Mr.
Phillips has extensive experience investing in middle-market manufacturing and
service companies and currently focuses on originating and developing new
investment opportunities for the firm. Mr. Phillips also has extensive
experience in dealing with public financings and sales through his work with
several Saratoga portfolio companies. Prior corporate finance
experience includes mergers & acquisitions and capital markets experience in
a variety of industries, including packaged foods, consumer products, cable
television, energy and education. Mr. Phillips, joined Saratoga
Partners from Harvard Business School. Prior to that, from 1993 to
1995, Mr. Phillips worked in Dillon Read’s corporate finance department, where
he was involved in mergers and acquisitions and advisory assignments in a
variety of industries. Prior experience includes McCown De Leeuw
& Co., a corporate buyout firm. Mr. Phillips has served as a
director of a number of Saratoga Partners’ portfolio companies.
Mr.
Phillips graduated with an AB from Harvard College in 1993 and earned an MBA
from Harvard Business School in 1997.
John
F. MacMurray
Mr.
MacMurray has over 8 years of experience including private equity and investment
banking. Mr. MacMurray has been involved in all phases of the
investment process, including sourcing, structuring, negotiating and managing
investments in middle market companies, and has deep experience in executing
add-on investments.
Prior to
joining Saratoga Partners, Mr. MacMurray was at EuroConsult, Inc., an
independent investment banking firm, where he was involved in mergers &
acquisitions and advisory assignments throughout North America and Europe in a
wide variety of industries. Mr. MacMurray joined Saratoga Partners
from Columbia Business School in 2006.
Mr.
MacMurray’s principal portfolio responsibilities include oversight of several of
Saratoga Partners’ portfolio companies.
Mr.
MacMurray graduated with an A.B. from Princeton University in 1998 and earned an
M.B.A. from Columbia Business School in 2006.
Maria
F. Costanzo
Ms.
Costanzo has over 10 years of experience including accounting, taxation and fund
administration. Ms. Costanzo is Controller of Saratoga Partners with
responsibilities including the financial management of the Saratoga funds, due
diligence, financial supervision of portfolio companies, and limited partner
relations.
Ms.
Costanzo joined Saratoga Partners from the Compass Global Group and prior to
that served as Controller and Director of Human Resources while at Gabelli Asset
Management Inc. from 1993 through 2001. Ms. Costanzo also spent two
years as a tax consultant at Arthur Andersen and graduated with a BS from Iona
College in 1991.
As
mentioned under Proposal 1, Saratoga will be entitled to designate two nominee
directors to serve on the Board to be elected effective as of the closing date
of the Saratoga Transaction. The size of the Board will not change;
two current members of the Board will resign effective at closing of the
Saratoga Transaction.
44
Considerations
of the Board of Directors
At a
meeting of the board of directors of the Company held on April 9, 2010, the
Board, including all of the directors who are not “interested persons” of the
Company as defined in the 1940 Act, unanimously voted to approve the Investment
Advisory and Management Agreement with the Adviser. The independent
directors had the opportunity to consult in executive session with counsel to
the Company regarding the approval of the Agreement. In reaching a
decision to approve the Investment Advisory and Management Agreement, the Board
reviewed a significant amount of information and considered, among other
things:
|
|
i.
|
the
nature, extent and quality of the advisory and other services to be
provided to the Company by the
Adviser;
|
|
|
ii.
|
the
investment performance of the Company and the
Adviser;
|
|
|
iii.
|
the
expected costs of the services to be provided by the Adviser (including
management fees, advisory fees and expense ratios) and the profits
expected to be realized by the
Adviser;
|
|
|
iv.
|
the
limited potential for economies of scale in investment management
associated with managing us;
|
|
|
v.
|
the
Adviser’s estimated pro forma profitability with respect to managing us;
and
|
|
|
vi.
|
various
other matters.
|
In
approving the Investment Advisory and Management Agreement, the entire board of
directors, including all of the directors who are not “interested persons”
considered the following:
Nature, Extent and Quality of
Services. The Board considered the nature, extent and quality
of the investment selection process to be employed by the Adviser, including the
potential flow of transaction opportunities resulting from Saratoga’s investment
professionals’ significant financial expertise, the employment of Saratoga’s
investment philosophy, diligence procedures, credit recommendation process,
investment structuring, and ongoing relationships with and monitoring of
portfolio companies, in light of the investment objectives of the
Company. The Board also considered the Adviser’s personnel and their
prior experience in connection with the types of investments proposed to be made
by us, including such personnel’s network of relationships with intermediaries
focused on middle market companies. In addition, the Board considered
the other terms and conditions of the Investment Advisory and Management
Agreement. The Board concluded that the substantive terms of the
Investment Advisory Agreement and Management, including the services to be
provided, are generally the same as those of comparable business development
companies described in the market data then available and that it would be
difficult to obtain similar services from other third party services providers
or through an internally managed structure. In addition, the Board
considered the fact that we have the ability to terminate the Investment
Advisory and Management Agreement without penalty upon 60 days’ written notice
to the Adviser.
Investment
Performance. The Board reviewed the long-term and short-term
investment performance of the Company, as well as comparative data with respect
to the long-term and short-term investment performance of other business
development companies and their externally managed investment
advisers. Although Saratoga will be newly formed at the time this
transaction closes, the Board believes that based on the experience of the
Adviser’s professionals, the Adviser can add the investment objectives of the
Company and that the Company’s investment performance could be comparable to
that of similar business development companies.
Costs of the Services Provided to
the Company and the Profits Realized by the Adviser. The Board
considered comparative data based on publicly available information with respect
to services rendered and the advisory fees (including the management fees and
incentive fees) of other business development companies with similar investment
objectives, our projected operating expenses and expense ratio compared to other
business development companies with similar investment objectives, as well as
the administrative services that our administrator, an affiliate of Saratoga,
will provide to us. Based upon its review, the Board believes that
the fees to be paid under the Investment Advisory and Management Agreement would
be generally comparable to those payable under agreements of comparable business
development companies described in the market data then available.
Economies of
Scale. The Board considered information about the potential of
stockholders to experience economies of scale as the Company grows in
size. The Board considered that because there are no break points in
the
45
Adviser’s
fees, any benefits resulting from the growth in the Company’s assets where the
Company’s fixed costs did not increase proportionately, would not inure to the
benefit of the stockholders.
Additional Benefits Derived by
Investment Adviser. The Board believes that there is limited
potential for additional benefits, such as soft dollar arrangements with
brokers, to be derived by the Adviser and its affiliates as a result of our
relationship with the Adviser.
Conclusions. In
view of the wide variety of factors that our Board considered in connection with
its evaluation of the Investment Advisory and Management Agreement, it is not
practical to quantify, rank or otherwise assign relative weights to the specific
factors it considered in reaching its decision. The Board did not
undertake to make any specific determination as to whether any particular
factor, or any aspect of any particular factor, was favorable or unfavorable to
the ultimate determination of the Board. Rather, our Board based its
approval on the totality of information presented to, and the investigation
conducted by, it. In considering the factors discussed above,
individual directors may have given different weights to different factors.
Based on its review of the above-mentioned factors and discussion of the
Investment Advisory and Management Agreement, the Board approved the Investment
Advisory and Management Agreement as being in the best interests of the Company
and its stockholders. The Board then directed that the Investment
Advisory and Management Agreement be submitted to stockholders for approval with
the Board’s recommendation that stockholders of the Company vote to approve the
Investment Advisory and Management Agreement.
Recommendation
of the Board of Directors
Our
Board of Directors has unanimously approved the Investment Advisory and
Management Agreement and the appointment of Saratoga Investment Advisors, LLC as
investment adviser and determined that the Investment Advisory and Management
Agreement is advisable and in the best interests of the Company and its
stockholders and recommends that you vote FOR Proposal 2.
46
PROPOSAL
3 – TO APPROVE ANY MOTION PROPERLY BROUGHT BEFORE THE SPECIAL MEETING TO ADJOURN
THE SPECIAL MEETING, IF NECESSARY, TO SOLICIT ADDITIONAL VOTES IN FAVOR OF THE
PRECEDING PROPOSALS
At the
special meeting, we may ask stockholders to vote to adjourn the special meeting
to solicit additional proxies in favor of the approval of either or both of the
preceding proposals if we have not obtained sufficient votes to approve each of
the proposals. Approval of a motion to adjourn the special meeting
requires a majority of the votes cast on the matter.
Recommendation
of the Board of Directors
Our
Board of Directors recommends a vote “FOR” any motion properly brought before
the special meeting to adjourn the special meeting to solicit additional proxies
in favor of either or both of the preceding proposals.
47
OTHER
MATTERS
Stockholder
Proposals
For a
stockholder nomination to the Board or other proposal to be considered at our
calendar year 2011 annual meeting the stockholder must have given timely notice
thereof in writing to the principal executive offices of GNV. No
stockholder nominations to the Board or other proposals were received in
connection with the calendar year 2011 annual meeting.
To be
timely for the calendar year 2011 annual meeting, our bylaws currently require
that a stockholder’s notice be delivered or mailed and received by the Company
at its principal executive offices not later than the close of business on
January 28, 2011 and not earlier than December 29, 2010 (based on a date of May
28, 2010 for the Company’s proxy statement for its 2010 annual meeting of
stockholders). A stockholder’s notice must set forth as to each
matter the stockholder proposes to bring before the annual meeting the
information required by the Company’s bylaws.
Other
Business
The Board
of Directors does not presently intend to bring any other business before the
special meeting or any adjournment or postponement thereof, and, other than
procedural matters relating to the proposals, no matters may properly be brought
before the special meeting except as specified in the Notice of the Special
Meeting. If any such procedural matters properly come before the
special meeting or any adjournment or postponement thereof, however, proxies, in
the form enclosed, will be voted in respect thereof in accordance with the
discretion of the proxyholders.
Annual
Reports
A copy of
our Annual Report on Form 10-K for the period ended February 28, 2010, which
includes financial statements, is available on the SEC website and is
incorporated herein by reference. The information that we have filed
with the SEC is available to stockholders free of charge by contacting us at 500
Campus Drive, Suite 220, Florham Park, NJ 07932 or by telephone at (973)
593-5438 or on our website at www.gscinvestmentcorp.com. Information
contained on our website is not incorporated into this document and you should
not consider such information to be a part of this document.
Solicitation
Expenses
We will
pay the expense of preparing, assembling, printing and mailing the proxy form
and the form of material used in solicitation of proxies. Our
directors or employees may solicit proxies by telephone, facsimile and personal
solicitation, in addition to the use of the mail. The Company has also retained Morrow & Co.,
LLC to assist in the solicitation of proxies for a
fee of approximately $12,500, plus
out-of-pocket expenses. The Company estimates that an aggregate
amount of $[·] additional solicitation expenses will also be incurred
by it in connection herewith.
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By
Order of the Board of Directors
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|||
|
By:
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/s/
Seth M. Katzenstein
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|
|
|
Name:
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Seth
M. Katzenstein
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||
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Title:
|
Chief
Executive Officer
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||
Whether
or not you expect to attend the meeting, please complete, date, sign and
promptly return the accompanying proxy in the enclosed postage paid envelope so
that you may be represented at the meeting.
48
PROXY
GSC
INVESTMENT CORP.
Special
Meeting of Stockholders – [•], 2010
THIS
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The
undersigned hereby appoints Eric P. Rubenfeld and
Richard T. Allorto, Jr., and each of them, as proxiesas
proxy of the undersigned, with full power of substitution in each
of them, to attend the Special Meeting of Stockholders of GSC Investment
Corp, a Maryland Corporation (the “Company”), to be held at the offices of [•]Davis Polk
& Wardwell LLP, located at [•],450
Lexington Avenue, New York, NY 10017, on [•], 2010, at [•] a.m., local
time, and any adjournment or postponement thereof, to cast on behalf of the
undersigned all votes that the undersigned is entitled to cast and to otherwise
represent the undersigned with all powers that the undersigned would possess if
personally present at the meeting. The undersigned hereby
acknowledges receipt of the Notice of the Special Meeting of Stockholders of the
Company and the accompanying proxy statement, the terms of each of which are
incorporated by reference, and revokes any proxy heretofore given with respect
to such meeting.
UNLESS
A CONTRARY DIRECTION IS INDICATED, VOTES ENTITLED TO BE CAST BY THE UNDERSIGNED
WILL BE CAST FOR
PROPOSALS 1, 2 AND 3, AS DESCRIBED IN THE ACCOMPANYING PROXY
STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICATED, VOTES ENTITLED TO
BE CAST BY THE UNDERSIGNED WILL BE CAST IN ACCORDANCE THEREWITH. THE
VOTES ENTITLED TO BE CAST BY THE UNDERSIGNED WILL BE CAST IN THE DISCRETION OF
THE PROXYHOLDERSPROXYHOLDER
ON ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE MEETING.
VOTING
INSTRUCTIONS:
Complete,
sign, date and promptly return this proxy card in the postage-paid envelope
provided.
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1.
|
PROPOSAL
1:
|
To
approve the issuance of 9,868,422 shares of our common stock for an
aggregate purchase price of approximately $15,000,000 at a price per share
below the current net asset value per share of such stock, on the terms
and subject to the conditions set forth in the Stock Purchase Agreement
among the Company, Saratoga Investment Advisors, LLC and CLO Partners LLC,
as amended.
|
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 2.
|
PROPOSAL
2:
|
To
approve the Investment Advisory and Management Agreement, pursuant to
which Saratoga Investment Advisors, LLC would be appointed as the
Company’s new investment adviser.
|
|
o FOR
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o AGAINST
|
o ABSTAIN
|
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 3.
|
PROPOSAL
3:
|
To
approve any motion properly brought before the special meeting to adjourn
the special meeting, if necessary, to solicit additional votes in favor of
either or both of Proposals 1 and/or
2.
|
|
o FOR
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o AGAINST
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o ABSTAIN
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(Continued
from other side)
|
DATED:
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||||
|
SIGNATURES(S)
|
||||
|
Please
sign exactly as your name appears hereon and date. If the stock
is registered in the names of two or more persons, each should
sign. Executors, administrators, trustees, guardians and
attorneys-in-fact should add their titles. If signer is a
corporation, please give full corporate name and have a duly authorized
officer sign, stating title. If signer is a partnership, please
sign in partnership name by authorized
person.
|
Please
sign, date and promptly return this proxy in the enclosed return envelope which
is postage prepaid if mailed in the United States.
EXHIBIT
A
FAIRNESS
OPINION OF STIFEL NICOLAUS & COMPANY, INCORPORATED
EXHIBIT
B
INVESTMENT
ADVISORY AND MANAGEMENT AGREEMENT
EXHIBIT
C
ADMINISTRATION
AGREEMENT