pos8c
As
filed with the Securities and Exchange Commission on December 18, 2007
Registration No. 333-147039
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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PRE-EFFECTIVE AMENDMENT NO. |
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POST-EFFECTIVE AMENDMENT NO. 1 |
MVC CAPITAL, INC.
(Exact Name of Registrant as Specified in Charter)
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
(Address of Principal Executive Offices)
Registrants telephone number, including Area Code: (914) 701-0310
Michael T. Tokarz, Chairman
MVC Capital, Inc.
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
(Name and Address of Agent for Service)
Copies of information to:
George M. Silfen, Esq.
Schulte Roth & Zabel LLP
919 Third Avenue
New York, NY 10022
(212) 756-2000
Approximate date of proposed public offering: From time to time after the effective date of
this Registration Statement.
If any securities being registered on this form will be offered on a delayed or continuous
basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in
connection with a distribution reinvestment plan, check the following box. þ
It is proposed that this filing will become effective (check appropriate box):
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when declared effective pursuant to section 8(c). |
If appropriate, check the following box:
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This [post-effective amendment] designates a new effective date for a previously filed
[post-effective amendment] [registration statement]. |
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This form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act and the Securities Act registration statement number of the
earlier effective registration statement for the same offering is . |
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Proposed Maximum |
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Proposed Maximum |
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Amount of |
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Amount Being |
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Offering |
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Aggregate |
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Registration |
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Title of Securities Being Registered |
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Registered |
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Price per Unit |
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Offering Price |
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Fee |
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Common Stock, $0.01 par value per share(2) |
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Preferred Stock(2) |
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Warrants(3) |
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Debt Securities(4) |
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Total |
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$250,000,000(5) |
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$7,675(1) |
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(1) |
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Estimated pursuant to Rule 457 solely for the purpose of determining the registration fee.
The proposed maximum offering price per security will be determined, from time to time, by the
Registrant in connection with the sale by the Registrant of the securities registered under
this registration statement. $7,675 was previously paid. |
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Subject to Note 5 below, there is being registered hereunder an indeterminate principal
amount of common stock or preferred stock as may be sold, from time to time. |
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Subject to Note 5 below, there is being registered hereunder an indeterminate principal
amount of warrants as may be sold, from time to time, representing rights to purchase common
stock, preferred stock or debt securities. |
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Subject to Note 5 below, there is being registered hereunder an indeterminate principal
amount of debt securities as may be sold, from time to time. If any debt securities are issued
at an original issue discount, then the offering price shall be in such greater principal
amount as shall result in an aggregate price to investors not to exceed $250,000,000. |
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In no event will the aggregate offering price of all securities issued from time to time
pursuant to this registration statement exceed $250,000,000. |
The Registrant hereby amends this Registration Statement on such date or dates as may be
necessary to delay its effective date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration
Statement shall become effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer and sale is not
permitted.
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SUBJECT
TO COMPLETION
PRELIMINARY PROSPECTUS
$250,000,000
Common Stock
Preferred Stock
Warrants
Debt Securities
MVC Capital, Inc. is a closed-end management investment company
that has elected to be regulated as a business development
company under the Investment Company Act of 1940, as amended
(the 1940 Act). Our investment objective is to seek
to maximize total return from capital appreciation
and/or
income. We seek to achieve our investment objective primarily by
providing equity and debt financing to small and middle-market
companies that are, for the most part, privately owned. No
assurances can be given that we will achieve our objective.
We are managed by The Tokarz Group Advisers LLC, a registered
investment adviser.
We may offer, from time to time, in one or more offerings or
series, together or separately, up to $250,000,000 of our common
stock, preferred stock, debt securities or warrants representing
rights to purchase shares of our common stock, preferred stock
or debt securities, which we refer to, collectively, as the
securities. The securities may be offered at prices
and on terms to be described in one or more supplements to this
prospectus.
Our common stock is traded on the New York Stock Exchange under
the symbol MVC.
This prospectus, and the accompanying prospectus supplement, if
any, sets forth information about us that a prospective investor
should know before investing. It includes the information
required to be included in a prospectus and statement of
additional information. Please read it before you invest and
keep it for future reference. You may request a free copy of
this prospectus, and the accompanying prospectus supplement, if
any, annual and quarterly reports, and other information about
us, and make shareholder inquiries by calling
(914) 510-9400,
by writing to us or from our website at www.mvccapital.com.
Additional information about us has been filed with the
Securities and Exchange Commission and is available on the
Securities and Exchange Commissions website at www.sec.gov.
Investing in our securities involves a high degree of risk.
Before buying any securities, you should read the discussion of
the material risks of investing in our securities, including the
risk of leverage, in Risk Factors beginning on
page 13 of this prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
This prospectus may not be used to consummate sales of
securities unless accompanied by a prospectus supplement.
December 18, 2007
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus and the accompanying prospectus supplement, if any.
We have not authorized anyone to provide you with additional
information, or information different from that contained in
this prospectus and the accompanying prospectus supplement, if
any. If anyone provides you with different or additional
information, you should not rely on it. We are offering to sell,
and seeking offers to buy, securities only in jurisdictions
where offers and sales are permitted. The information contained
in or incorporated by reference in this prospectus and the
accompanying prospectus supplement, if any, is accurate only as
of the date of this prospectus or such prospectus supplement;
however, the prospectus and such supplement will be updated to
reflect any material changes. Our business, financial condition,
results of operations and prospects may have changed since then.
ABOUT
THIS PROSPECTUS
This prospectus is part of a registration statement that we have
filed with the Securities and Exchange Commission, or SEC, using
the shelf registration process. Under the shelf
registration process, we may offer, from time to time, up to an
aggregate of $250,000,000 of our common stock, preferred stock,
debt securities or warrants representing rights to purchase
shares of our common stock, preferred stock or debt securities
on the terms to be determined at the time of the offering. The
securities may be offered at prices and on terms described in
one or more supplements to this prospectus. This prospectus
provides you with a general description of the securities that
we may offer. Each time we use this prospectus to offer
securities, we will provide a prospectus supplement that will
contain specific information about the terms of that offering.
The prospectus supplement may also add, update or change
information contained in this prospectus. Please carefully read
this prospectus and any prospectus supplement together with any
exhibits and the additional information described under the
heading Where You Can Find Additional Information
and the section under the heading Risk Factors
before you make an investment decision.
The following summary highlights some of the information in
this prospectus. It is not complete and may not contain all the
information that you may want to consider. We encourage you to
read this entire document and the documents to which we have
referred.
In this prospectus and any accompanying prospectus
supplement, unless otherwise indicated, MVC Capital,
we, us, our or the
Company refer to MVC Capital, Inc. and its
subsidiary, MVC Financial Services, Inc. (MVCFS),
and TTG Advisers or the Adviser refers
to The Tokarz Group Advisers LLC. Unless the context dictates
otherwise, we also refers to TTG Advisers acting on
behalf of MVC Capital.
THE
COMPANY
MVC Capital is an externally managed, non-diversified,
closed-end management investment company that has elected to be
regulated as a business development company under the 1940 Act.
MVC Capital provides equity and debt investment capital to fund
growth, acquisitions and recapitalizations of small and
middle-market companies in a variety of industries primarily
located in the United States. Our investments can take the form
of common and preferred stock and warrants or rights to acquire
equity interests, senior and subordinated loans, or convertible
securities. Our common stock is traded on the New York Stock
Exchange (NYSE) under the symbol MVC.
Although the Company has been in operation since 2000, the year
2003 marked a new beginning for the Company. In February 2003,
shareholders elected an entirely new board of directors. The
board of directors developed a new long-term strategy for the
Company. In September 2003, upon the recommendation of the board
of directors, shareholders voted to adopt a new investment
objective for the Company of seeking to maximize total return
from capital appreciation
and/or
income. The Companys prior objective had been limited to
seeking long-term capital appreciation from venture capital
investments in information technology industries. Consistent
with our broader objective, we adopted a more flexible
investment strategy of providing equity and debt financing to
small and middle-market companies in a variety of industries.
With the recommendation of the board of directors, shareholders
also voted to appoint Michael Tokarz as Chairman and Portfolio
Manager to lead the implementation of our new objective and
strategy and to stabilize the existing portfolio. Prior to the
arrival of Mr. Tokarz and his new management team in
November 2003, the Company had experienced significant valuation
declines from investments made by the former management team.
After only three quarters of operations under the new management
team, the Company posted a profitable third quarter for fiscal
year 2004, reversing a trend of 12 consecutive quarters of net
investment losses and earned a profit for the entire fiscal
year. The Company has continued its growth. As of
October 31, 2007, the Companys net assets were
approximately $369.1 million compared with net assets of
approximately $363.5 million at July 31, 2007 and
$237.0 million at October 31, 2006. This increase
represents the 16th consecutive quarter of net asset growth
for the Company. The Companys net change in net assets
resulting from operations for the fiscal year 2007 was
approximately $65.7 million. This $65.7 million from
operations represents an approximate 38.8% change over the net
change in net assets from operations reported in fiscal year
2006. During the fiscal year 2007, the Company earned
approximately $22.8 million in interest and dividend income
and approximately $4.1 million in fee and other income,
representing an increase of approximately $8.4 million or
45.6% in total income as compared to fiscal year 2006. The
Companys fiscal year 2007 net operating income was
approximately $2.1 million and net realized and unrealized
gains were $63.6 million. The preceding information
relating to the 2007 fiscal year is based on our financial
statements which have not yet been audited by our independent
registered public accounting firm.
On September 7, 2006, the shareholders of the Company
approved the Investment Advisory and Management Agreement, dated
October 31, 2006 (the Advisory Agreement) (with
over 92% of the votes cast on the agreement voting in its
favor), which provided for the Company to be externally managed
by The Tokarz Group Advisers LLC (TTG Advisers). The
agreement took effect on November 1, 2006. TTG Advisers was
organized to provide investment advisory and management services
to the Company and other investment vehicles. TTG Advisers is a
registered investment adviser that is controlled by
Mr. Tokarz. All of the individuals (including the
Companys investment professionals) who had been previously
employed by the Company as of the fiscal year ended
October 31, 2006 became employed by TTG Advisers. The
Companys investment strategy and selection process has
remained the same under the externalized management structure.
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ABOUT MVC
CAPITAL
The Company is managed by TTG Advisers, the Companys
investment adviser. The investment team of TTG Advisers is
headed by Michael Tokarz, who has over 30 years of lending
and investment experience. TTG Advisers has a dedicated
originations and transaction development investment team with
significant experience in private equity, leveraged finance,
investment banking, distressed debt transactions and business
operations. The members of the investment team have invested in
and managed businesses during both recessionary and expansionary
periods, through interest rate cycles and a variety of financial
market conditions. TTG Advisers has nine full-time investment
professionals and three part-time investment professionals, the
majority of whom were previously employed by the Company. TTG
Advisers also uses the services of other investment
professionals with whom it has developed long-term
relationships, on an as-needed basis. In addition, TTG Advisers
employs three other full-time professionals and two part-time
professionals who manage the operations of the Company and
provide investment support functions both directly and
indirectly to our portfolio companies. As TTG Advisers grows, it
expects to hire, train, supervise and manage new employees at
various levels, many of whom would be expected to provide
services to the Company.
The fiscal year 2006 represented another positive year for the
Company. The Company made 16 new investments and eight follow-on
investments. The Company committed a total of
$166.3 million of capital in the fiscal year 2006, compared
to $53.8 million and $60.7 million in the fiscal years
2005 and 2004, respectively. The fiscal year 2006 new
investments included: Turf Products LLC (Turf),
Strategic Outsourcing, Inc. (SOI), Henry Company,
SIA BM Auto (BM Auto), Storage Canada, LLC
(Storage Canada), Phoenix Coal Corporation
(Phoenix Coal), Harmony Pharmacy & Health
Center, Inc. (Harmony Pharmacy), Total Safety U.S.,
Inc. (Total Safety), PreVisor, Inc.
(PreVisor), Marine Exhibition Corporation
(Marine), BP Clothing, LLC (BP),
Velocitius B.V. (Velocitius), Summit Research Labs,
Inc. (Summit), Octagon Credit Investors, LLC
(Octagon), Auto MOTOL BENI (BENI), and
Innovative Brands LLC (Innovative Brands). The
fiscal year 2006 follow-on investments included: Dakota Growers
Pasta Company, Inc. (Dakota Growers), Baltic Motors
Corporation (Baltic Motors), SGDA
Sanierungsgesellschaft fur Deponien und Altlasten mbH
(SGDA), Amersham Corporation (Amersham),
Timberland Machines & Irrigation, Inc.
(Timberland), SP Industries, Inc. (SP),
Harmony Pharmacy, and Velocitius.
During the nine month period ended July 31, 2007, the
Company made eight new investments and 14 follow-on investments.
The Company committed a total of approximately
$100.7 million of capital to these investments. These
investments included HuaMei Capital Company, Inc.
(HuaMei), WBS Carbons Acquisition Corp.
(WBS), Levlad Arbonne International LLC
(Levlad), MVC Partners LLC (MVC
Partners), Total Safety, Genevac U.S. Holdings, Inc.
(Genevac), SIA Tekers Invest (Tekers),
U.S. Gas & Electric, Inc.
(U.S. Gas), SGDA, Vitality Foodservice, Inc.
(Vitality), Turf, Harmony Pharmacy, Velocitius, BP,
BENI and SP.
In addition, on July 24, 2007, the Company closed the sale
of two of its portfolio companies, Baltic Motors and BM Auto,
for a combined total enterprise value exceeding
$120.0 million. The combined realized gain to the Company
of $66.5 million represents a 108.2% IRR including fees
earned throughout the life of both investments. The
Companys investment in Baltic Motors was one of the first
commitments made under the Companys current management
team and signifies the first full maturation of a portfolio
company over the investment life cycle.
We continue to perform due diligence and seek new investments
that are consistent with our objective of maximizing total
return from capital appreciation
and/or
income. We believe that we have extensive relationships with
private equity firms, investment banks, business brokers,
commercial banks, accounting firms, law firms, hedge funds,
other investment firms, industry professionals and management
teams of several companies, which can continue to provide us
with investment opportunities.
We are currently working on an active pipeline of potential new
investment opportunities. We expect that our equity and loan
investments will generally range between $3 million and
$25 million each, although we may occasionally invest
smaller or greater amounts of capital depending upon the
particular investment. While the Company does not adhere to a
specific equity and debt asset allocation mix, no more than 25%
of the value of our total assets may be invested in the
securities of one issuer (other than U.S. government
securities), or of two or more issuers that are controlled by us
and are engaged in the same or similar or related trades or
businesses, determined as of the close of each quarter. Our
portfolio company investments are typically illiquid and are
made through privately
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negotiated transactions. We generally target companies with
annual revenues of between $10.0 million and
$150.0 million and annual EBITDA of between
$3.0 million and $25.0 million. We generally seek to
invest in companies with a history of strong, predictable,
positive EBITDA (net income before net interest expense, income
tax expense, depreciation and amortization).
Our portfolio company investments currently consist of common
and preferred stock, other forms of equity interest and warrants
or rights to acquire equity interests, senior and subordinated
loans, and convertible securities. At October 31, 2007, the
value of all investments in portfolio companies was
approximately $379.2 million and our gross assets were
approximately $470.5 million. The preceding information
relating to the 2007 fiscal year is based on our financial
statements which have not yet been audited by our independent
registered public accounting firm.
We expect that our investments in senior loans and subordinated
debt will generally have stated terms of three to ten years.
However, there is no limit on the maturity or duration of any
security in our portfolio. Our debt investments are not, and
typically will not be, rated by any rating agency, but we
believe that if such investments were rated, they would be below
investment grade (rated lower than Baa3 by
Moodys or lower than BBB- by
Standard & Poors). We may invest without limit
in debt of any rating and debt that has not been rated by any
nationally recognized statistical rating organization.
Our board of directors has the authority to change any of the
strategies described in this prospectus without seeking the
approval of our shareholders. However, the 1940 Act prohibits us
from altering or changing our investment objective, strategies
or policies such that we cease to be a business development
company and prohibits us from voluntarily withdrawing our
election to be regulated as a business development company,
without the approval of the holders of a majority,
as defined in the 1940 Act, of our outstanding voting securities.
COMPETITIVE
ADVANTAGES
We believe that the following capabilities provide us with a
competitive advantage over various other capital providers to
small- and middle-market companies:
Our Teams Experience and Expertise. The
investment team of TTG Advisers is headed by Michael Tokarz, who
has over 30 years of lending and investment experience, 17
of which were with Kohlberg Kravis Roberts & Co., and
Warren Holtsberg who has extensive investment experience,
including several years as the head of Motorola Ventures, the
venture capital arm of Motorola, Inc. TTG Advisers has a
dedicated originations and underwriting team comprised of nine
investment professionals with over 15 years average
experience in private equity, leveraged finance, investment
banking, distressed debt transactions and business operations.
The members of the investment team have experience managing
investments and businesses during both recessionary and
expansionary periods, through interest rate cycles and a variety
of financial market conditions. TTG Advisers also retains the
services of other investment and industry professionals with
whom it has developed long-term relationships, on an as-needed
basis. In addition, TTG Advisers employs three other
professionals who manage our operations and provide investment
support functions both directly and indirectly to our portfolio
companies.
Proprietary Deal Flow. We have relationships
with various private equity firms, investment banks, business
brokers, commercial banks, accounting firms, law firms, hedge
funds, other investment firms, industry professionals and
management teams of several companies, all of which provide us
with access to a variety of investment opportunities. Because of
these relationships, we often have the first or exclusive
opportunity to provide investment capital and thus may be able
to avoid competitive situations.
Creative and Extensive Transaction
Structuring. We are flexible in the types of
securities in which we invest and their structures, and can
invest across a companys capital structure. We believe
that the investment teams creativity and flexibility in
structuring investments, coupled with our ability to invest in
companies across various industries, gives us the ability to
identify investment opportunities and provides us with the
opportunity to be a one-stop capital provider to
small- and mid-sized companies.
Efficient Organizational Structure. In
contrast to traditional private equity and mezzanine funds,
which typically have a limited life, the perpetual nature of our
corporate structure provides us with a permanent
3
capital base and ensures that we are not exposed to the
investor withdrawals and fund liquidations those other funds
sometimes encounter. We believe this greater flexibility with
respect to our investment horizon affords us greater investment
opportunities and is also attractive to our investors, as our
structure enables us to be a long-term partner for our portfolio
companies.
Counsel to Portfolio Companies. We provide
valuable support to our portfolio companies in different ways
including: offering advice to senior management on strategies
for realizing their objectives, advising or participating on
their boards of directors, offering ideas to help increase
sales, offering advice on improving margins and operating more
efficiently, helping to augment the management team, and
providing access to external resources (e.g., financial,
legal, accounting, or technology).
Existing Investment Platform: As of
July 31, 2007, we had approximately $436.5 million in
gross assets under management. During the nine month period
ended July 31, 2007, the Company made eight new investments
and 14 follow-on investments pursuant to its strategy of
maximizing capital appreciation
and/or
income. We believe that our current investment platform provides
us with the ability to, among other things, identify investment
opportunities and conduct marketing activities and extensive due
diligence for potential investments.
Oversight: The public nature of the Company
allows for oversight not normally found in a typical private
equity firm. This oversight is provided by the SEC, the NYSE,
the Companys board of directors and, most importantly, the
Companys shareholders. The Company, through its periodic
filings with the SEC, provides transparency into its investment
portfolio and operations thus allowing shareholders access to
information about the Company on a regular basis.
Diverse Industry Knowledge: We provide
financing to companies in a variety of industries. We generally
look at companies with secure market niches and a history of
predictable or dependable cash flows in which members of the
investment team have prior investment experience. We believe
that the ability to invest in portfolio companies in various
industries has the potential to give our portfolio greater
diversity.
Disciplined and Opportunistic Investment
Philosophy: Our investment philosophy and method
of portfolio construction involves an assessment of the overall
macroeconomic environment, financial markets and
company-specific research and analysis. While the composition of
our portfolio may change based on our opportunistic investment
philosophy, we continue to seek to provide long-term equity and
debt investment capital to small and middle-market companies
that we believe will provide us strong returns on our
investments while taking into consideration the overall risk
profile of the specific investment.
Tax Status and Capital Loss Carryforwards: The
Company has elected to be taxed as a regulated investment
company (RIC) under Subchapter M of the
Internal Revenue Code of 1986, as amended (the
Code). It is the policy of the Company to continue
to meet the requirements for RIC status. As a RIC, the Company
is not subject to federal income tax to the extent that it
distributes all of its investment company taxable income and net
realized capital gains for its taxable year (see Federal
Income Tax Matters). This allows us to attract different
kinds of investors than other publicly held corporations. The
Company is also exempt from excise tax if it distributes at
least 98% of its ordinary income and capital gains during each
calendar year. As of October 31, 2006, the Company had a
net capital loss carryforward of $73,524,707, of which
$28,213,867 will expire in the year 2010, $4,220,380 will expire
in the year 2011, $37,794,910 will expire in the year 2012 and
$3,295,550 will expire in the year 2013. To the extent future
capital gains are offset by capital loss carryforwards, such
gains are not subject to the distribution provisions described
under Federal Income Tax Matters.
Capital loss carryforwards may be subject to additional
limitations. As of October 31, 2006, the Company also had
net unrealized capital losses of approximately
$11.6 million.
4
OPERATING
AND REGULATORY STRUCTURE
Our tax status generally allows us to pass-through
our income to our shareholders as dividends without the
imposition of corporate level taxation, if certain requirements
are met. See Federal Income Tax Matters.
As a business development company, we are required to meet
certain regulatory tests, the most significant relating to our
investments and borrowings. We are required to have at least 70%
of the value of our total assets invested in eligible
portfolio companies or cash or cash equivalents.
Generally,
U.S.-based,
privately held or thinly-traded public companies are deemed
eligible portfolio companies under the 1940 Act. A
business development company must also maintain a coverage ratio
of assets to borrowings of at least 200%. See Certain
Government Regulations.
As a business development company, we must make available
significant managerial assistance to our portfolio companies. We
provide support for our portfolio companies in several different
ways including: offering advice to senior management on
strategies for realizing their objectives, advising or
participating on their boards of directors, offering ideas to
help increase sales, reviewing monthly/quarterly financial
statements, offering advice on improving margins and saving
costs, helping to augment the management team, and providing
access to external resources (e.g., financial, legal,
accounting, or technology). We may receive fees for these
services.
PLAN OF
DISTRIBUTION
We may offer, from time to time, up to $250,000,000 of our
common stock, preferred stock, debt securities or warrants
representing rights to purchase shares of our common stock,
preferred stock or debt securities, on terms to be determined at
the time of the offering.
Securities may be offered at prices and on terms described in
one or more supplements to this prospectus directly to one or
more purchasers, through agents designated from time to time by
us, or to or through underwriters or dealers. The supplement to
this prospectus relating to the offering will identify any
agents or underwriters involved in the sale of our securities,
and will set forth any applicable purchase price, fee and
commission or discount arrangement or the basis upon which such
amount may be calculated.
We may not sell securities pursuant to this prospectus without
delivering a prospectus supplement describing the method and
terms of the offering of such securities. See Plan of
Distribution.
USE OF
PROCEEDS
We intend to use the net proceeds from the sale of our
securities for general corporate purposes, including, for
example, investing in portfolio companies in accordance with our
investment objective and strategy, repaying debt and funding our
subsidiaries activities. Pending such uses, we will hold
the net proceeds from the sale of our securities in cash or
invest all or a portion of such net proceeds in short term,
highly liquid investments. The supplement to this prospectus
relating to an offering will more fully identify the use of the
proceeds from such offering.
DETERMINATION
OF COMPANYS NET ASSET VALUE
Pursuant to the requirements of the 1940 Act, we value our
portfolio securities at their current market value or, if market
quotations are not readily available, at their estimates of fair
values. Because our portfolio company investments generally do
not have readily ascertainable market values, we record these
investments at fair value in accordance with valuation
procedures adopted by our board of directors (the
Valuation Procedures). As permitted by the SEC, the
board of directors has delegated the responsibility of making
fair value determinations to the Valuation Committee (as defined
below), subject to the board of directors supervision and
pursuant to the Valuation Procedures. Our board of directors may
also elect in the future to hire independent consultants to
review the Valuation Procedures or to conduct an independent
valuation of one or more of our portfolio investments.
At July 31, 2007, approximately 72.6% of our total assets
represented portfolio investments recorded at fair value.
Pursuant to our Valuation Procedures, our Valuation Committee
(Valuation Committee) (which is currently comprised
of three Independent Directors (as defined below)) determines
fair valuations of our portfolio companies
5
on a quarterly basis (or more frequently, if deemed appropriate
under the circumstances). Any changes in valuation are recorded
in the statements of operations as Net unrealized gain
(loss) on investments.
There is no one methodology to determine fair value and, in
fact, for any portfolio security, fair value may be expressed as
a range of values, from which we derive a single estimate of
fair value. We specifically value each individual investment and
record unrealized depreciation for an investment that we believe
has become impaired, including where collection of a loan or
realization of an equity security is doubtful or diminished.
Conversely, we will record unrealized appreciation if we have an
indication (based on a significant development) that the
underlying portfolio company has appreciated in value and,
therefore, our equity security has also appreciated in value,
where appropriate. Without a readily ascertainable market value
and because of the inherent uncertainty of fair valuation, the
fair value of our investments may differ significantly from the
values that would have been used had a ready market existed for
the investments, and the differences could be material.
DISTRIBUTIONS
Currently, the Company has a policy of seeking to pay quarterly
dividends to shareholders. Our quarterly dividends, if any, will
be determined by our board of directors. Most recently, on
July 13, 2007, our board of directors declared a regular
quarterly dividend of $0.12 per share which was paid on
July 31, 2007 to shareholders of record on July 24,
2007.
We intend to continue to qualify for treatment as a RIC under
Subchapter M of the Code. In order to permit us to deduct from
our taxable income dividends we distribute to our shareholders,
in addition to meeting other requirements, we must distribute
for each taxable year at least 90% of (i) our investment
company taxable income (consisting generally of net investment
income from interest and dividends and net realized short term
capital gains) and (ii) our net tax-exempt interest, if
any. See Federal Income Tax Matters.
DIVIDEND
REINVESTMENT PLAN
All of our shareholders who hold shares of common stock in their
own name will automatically be enrolled in our dividend
reinvestment plan (the Plan). All such shareholders
will have any cash dividends and distributions automatically
reinvested by Computershare Ltd. (the Plan Agent) in
additional shares of our common stock. Any shareholder may, of
course, elect to receive his or her dividends and distributions
in cash. Currently, the Company has a policy of seeking to pay
quarterly dividends to shareholders. For any of our shares that
are held by banks, brokers or other entities that hold our
shares as nominees for individual shareholders, the Plan Agent
will administer the Plan on the basis of the number of shares
certified by any nominee as being registered for shareholders
that have not elected to receive dividends and distributions in
cash. To receive your dividends and distributions in cash, you
must notify the Plan Agent.
The Plan Agent serves as agent for the shareholders in
administering the Plan. If we declare a dividend or distribution
payable in cash or in additional shares of our common stock,
those shareholders participating in the Plan will receive their
dividend or distribution in additional shares of our common
stock. Such shares will be either newly issued by us or
purchased in the open market by the Plan Agent. If the market
value of a share of our common stock on the payment date for
such dividend or distribution equals or exceeds the net asset
value per share on that date, we will issue new shares at the
net asset value. If the net asset value exceeds the market price
of our common stock, the Plan Agent will purchase in the open
market such number of shares as is necessary to complete the
distribution.
CORPORATE
INFORMATION
Our principal executive office is located at 287 Bowman Avenue,
2nd Floor, Purchase, New York 10577 and our telephone
number is
(914) 701-0310.
Our Internet website address is
http://www.mvccapital.com.
Information contained on our website is not incorporated by
reference into this prospectus and you should not consider
information contained on our website to be part of this
prospectus unless otherwise indicated.
6
RISK
FACTORS
An investment in MVC Capital involves certain significant risks
relating to our business and investment objective. We have
identified below a summary of these risks. For a more complete
description of the risk factors impacting an investment in our
securities, we urge you to read the Risk Factors
section. There can be no assurance that we will achieve our
investment objective and an investment in the Company should not
constitute a complete investment program for an investor.
BUSINESS
RISKS
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We depend on key personnel of TTG Advisers, especially
Mr. Tokarz, in seeking to achieve our investment
objective.
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|
Our investment adviser, TTG Advisers, is a recently-formed
entity.
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Our returns may be substantially lower than the average
returns historically realized by the private equity industry as
a whole.
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Substantially all of our portfolio investments are recorded
at fair value and, as a result, there is a degree of
uncertainty regarding the carrying values of our portfolio
investments.
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Economic recessions or downturns could impair our portfolio
companies and harm our operating results.
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We may not realize gains from our equity investments.
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The market for private equity investments can be highly
competitive. In some cases, our status as a regulated business
development company may hinder our ability to participate in
certain investment opportunities.
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Our ability to use our capital loss carryforwards may be
subject to limitations.
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Loss of pass-through tax treatment would substantially reduce
net assets and income available for dividends.
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Complying with the RIC requirements may cause us to forego
otherwise attractive opportunities.
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Regulations governing our operation as a business development
company affect our ability to, and the way in which we, raise
additional capital.
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Any failure on our part to maintain our status as a business
development company would reduce our operating flexibility.
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Changes in the law or regulations that govern us could have a
material impact on our business.
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Results may fluctuate and may not be indicative of future
performance.
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Our common stock price can be volatile.
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We are subject to market discount risk.
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We have not established a minimum dividend payment level and
we cannot assure you of our ability to make distributions to our
shareholders in the future.
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We have borrowed and may continue to borrow money, which
magnifies the potential for gain or loss on amounts invested and
may increase the risk of investing in us.
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Changes in interest rates may affect our cost of capital and
net operating income and our ability to obtain additional
financing.
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We may be unable to meet our covenant obligations under our
credit facility which could adversely affect our business.
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A portion of our existing investment portfolio was not
selected by the investment team of TTG Advisers.
|
7
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|
Under the Advisory Agreement, TTG Advisers is entitled to
compensation based on our portfolios performance. This
arrangement may result in riskier or more speculative
investments in an effort to maximize incentive compensation.
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There are potential conflicts of interest that could impact
our investment returns.
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Our relationship with MVC Acquisition Corp. could give rise
to conflicts of interest with respect to the allocation of
investment opportunities between us on the one hand and MVC
Acquisition Corp. on the other hand.
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The war with Iraq, terrorist attacks and other acts of
violence or war may affect any market for our common stock,
impact the businesses in which we invest and harm our operations
and our profitability.
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|
Our financial condition and results of operations will depend
on our ability to effectively manage our future growth.
|
INVESTMENT
RISKS
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Investing in private companies involves a high degree of
risk.
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Our investments in portfolio companies are generally
illiquid.
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|
Our investments in small and middle-market privately-held
companies are extremely risky and the Company could lose its
entire investment.
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Our borrowers may default on their payments, which may have
an effect on our financial performance.
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Our investments in mezzanine and other debt securities may
involve significant risks.
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When we are a debt or minority equity investor in a portfolio
company, we may not be in a position to control the entity, and
management of the company may make decisions that could decrease
the value of our portfolio holdings.
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We may choose to waive or defer enforcement of covenants in
the debt securities held in our portfolio, which may cause us to
lose all or part of our investment in these companies.
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|
Our portfolio companies may incur obligations that rank
equally with, or senior to, our investments in such companies.
As a result, the holders of such obligations may be entitled to
payments of principal or interest prior to us, preventing us
from obtaining the full value of our investment in the event of
an insolvency, liquidation, dissolution, reorganization,
acquisition, merger or bankruptcy of the relevant portfolio
company.
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|
Our portfolio investments may be concentrated in a limited
number of portfolio companies, which would magnify the effect if
one of those companies were to suffer a significant loss. This
could negatively impact our ability to pay dividends and cause
you to lose all or part of your investment.
|
|
|
|
Investments in foreign debt or equity may involve significant
risks in addition to the risks inherent in
U.S. investments.
|
OFFERING
RISKS
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|
Our common stock price can be volatile.
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Investing in our securities may involve a high degree of
risk.
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|
We may allocate the net proceeds from this offering in ways
with which you may not agree.
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|
Sales of substantial amounts of our securities may have an
adverse effect on the market price of our securities.
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|
Future offerings of debt securities, which would be senior to
our common stock upon liquidation, or equity securities, which
could dilute our existing shareholders and be senior to our
common stock for the purposes of distributions, may harm the
value of our common stock.
|
8
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission (the
SEC) a registration statement on
Form N-2
together with all amendments and related exhibits under the
Securities Act of 1933, as amended (the Securities
Act). The registration statement contains additional
information about us and the common stock being offered by this
prospectus. You may inspect the registration statement and the
exhibits without charge at the SEC at 100 F Street,
NE, Washington, DC 20549. You may obtain copies from the SEC at
prescribed rates.
We file annual, quarterly and current reports, proxy statements
and other information with the SEC. You can inspect our SEC
filings, without charge, at the public reference facilities of
the SEC at 100 F Street, NE, Washington, DC 20549. The
SEC also maintains a web site at
http://www.sec.gov
that contains our SEC filings. You can also obtain copies of
these materials from the public reference section of the SEC at
100 F Street, NE, Washington, DC 20549, at prescribed
rates. Please call the SEC at 1-202-551-8090 for further
information on the public reference room. Copies may also be
obtained, after paying a duplicating fee, by electronic request
to publicinfo@sec.gov or by written request to Public Reference
Section, Washington, DC
20549-0102.
You can also inspect reports and other information we file at
the offices of the NYSE, and you are able to inspect those at
20 Broad Street, New York, NY 10005.
This table describes the various costs and expenses that an
investor in our common stock will bear directly or indirectly.
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Shareholder Transaction Expenses
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Sales load
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%(1)
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Offering expenses borne by us (as a percentage of offering price)
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%(2)
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Total shareholder transaction expenses (as a percentage of
offering price)
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%(3)
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Estimated Annual Expenses (as a percentage of consolidated
net assets attributable to common stock)(4)
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|
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|
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Management fees
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2.17
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%(5)
|
Incentive fees payable under Advisory Agreement (20% of net
realized capital gains (on investments made after
November 1, 2003) and 20% of pre-incentive fee net
operating income)
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3.87
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%(5)
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Other expenses
|
|
|
0.83
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%(6)
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Interest payments on borrowed funds
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|
|
1.56
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%(7)
|
Total annual expenses
|
|
|
8.43
|
%(8)
|
Example
The following example, required by the SEC, demonstrates the
projected dollar amount of total cumulative expenses that would
be incurred over various periods with respect to a hypothetical
investment in us. In calculating the following expense amounts,
we assumed we would have no leverage and that our operating
expenses would remain at the levels set forth in the table above.
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1 Year
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3 Years
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5 Years
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10 Years
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|
You would pay the following cumulative expenses on a $1,000
investment, assuming a 5.0% annual return
|
|
$
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83
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|
$
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240
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|
$
|
387
|
|
|
$
|
712
|
|
Although the example assumes (as required by the SEC) a 5.0%
annual return, our performance will vary and may result in a
return of greater or less than 5.0%. In addition, while the
example assumes reinvestment of all dividends and distributions
at net asset value, participants in the dividend reinvestment
plan may receive shares of common stock that we issue at net
asset value or are purchased by the administrator of the
dividend reinvestment plan, at the market price in effect at the
time, which may be at or below net asset value. See
Dividend Reinvestment Plan.
9
The example should not be considered a representation of
future expenses, and the actual expenses may be greater or less
than those shown.
|
|
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(1) |
|
In the event that the securities to which this prospectus
relates are sold to or through underwriters, a corresponding
prospectus supplement will disclose the applicable sales load. |
|
(2) |
|
The related prospectus supplement will disclose the estimated
amount of offering expenses, the offering price and the offering
expenses borne by us as a percentage of the offering price. |
|
(3) |
|
The related prospectus supplement will disclose the offering
price and the total shareholder transaction expenses as a
percentage of the offering price. |
|
(4) |
|
Consolidated net assets attributable to common stock
equals net assets (i.e., total consolidated assets less
total consolidated liabilities) at July 31, 2007. |
|
|
|
(5) |
|
Pursuant to the Advisory Agreement, the Company pays TTG
Advisers a management fee and an incentive fee. The management
fee is calculated at an annual rate of 2% of our total assets
(excluding cash and the value of any investment by the Company
not made in a portfolio company (Non-Eligible
Assets) but including assets purchased with borrowed funds
that are not Non-Eligible Assets). The incentive fee payable to
TTG Advisers is based on our performance, may not be paid unless
we achieve certain goals and remains unpaid until certain
realization events occur. The incentive fee percentage reflects
the reserve for incentive compensation as of July 31, 2007,
including the estimated payment obligations as a result of the
sale of Baltic Motors and BM Auto in July 2007. For a more
complete description of the management and incentive fees,
please see Advisory Agreement on page 91 below. |
|
|
|
(6) |
|
Other expenses are based on actual expenses incurred
for the nine month period ended July 31, 2007 and estimated
expenses for the remainder of the fiscal year. |
|
(7) |
|
The estimate is based on borrowings outstanding as of
July 31, 2007 and our assumption is that our borrowings and
interest costs for the remainder of the fiscal year and after an
offering will remain similar to the amounts outstanding as of
that date. We had outstanding borrowings of $50.0 million
at July 31, 2007. See Risk Factors
Business Risks We have borrowed and may continue to
borrow money, which magnifies the potential for gain or loss on
amounts invested and may increase the risk of investing in
us and Managements Discussion and Analysis of
Financial Condition and Results of Operations. |
|
|
|
(8) |
|
TTG Advisers has agreed to an expense cap for the fiscal year
2008 pursuant to which it will absorb or reimburse operating
expenses of the Company (promptly following the completion of
such year), to the extent necessary to limit the Companys
expense ratio (the consolidated expenses of the Company,
including any amounts payable to TTG Advisers under the base
management fee, but excluding the amount of any interest and
other direct borrowing costs, taxes, incentive compensation and
extraordinary expenses taken as a percentage of the
Companys average net assets) for such year to 3.25%. The
expense cap is described further in Advisory
Agreement on page 91 below. |
10
SELECTED
CONSOLIDATED FINANCIAL DATA
You should read the condensed consolidated financial information
below with the Consolidated Financial Statements and Notes
thereto included in this prospectus. Financial information for
the fiscal years ended October 31, 2006, 2005, 2004 and
2003 are derived from the consolidated financial statements,
which have been audited by Ernst & Young LLP, the
Companys current independent registered public accounting
firm. The following selected financial data for the fiscal year
ended October 31, 2002 is derived from the financial
statements, which were audited by the Companys former
independent public accounting firm. Quarterly financial
information is derived from unaudited financial data, but in the
opinion of management, reflects all adjustments (consisting only
of normal recurring adjustments), which are necessary to present
fairly the results for such interim periods. Interim results at
and for the nine months ended July 31, 2007 are not
necessarily indicative of the results that may be expected for
the year ended October 31, 2007. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations on page 26 for
more information.
Selected
Consolidated Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Month
|
|
|
|
|
|
|
Period Ended
|
|
|
|
|
|
|
July 31,
|
|
|
Year Ended October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands ($), except per share data)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and related portfolio income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
$
|
15,982
|
|
|
$
|
9,282
|
|
|
$
|
13,909
|
|
|
$
|
9,457
|
|
|
$
|
2,996
|
|
|
$
|
2,833
|
|
|
$
|
3,740
|
|
Fee income
|
|
|
2,278
|
|
|
|
2,666
|
|
|
|
3,828
|
|
|
|
1,809
|
|
|
|
926
|
|
|
|
62
|
|
|
|
|
|
Other income
|
|
|
252
|
|
|
|
456
|
|
|
|
771
|
|
|
|
933
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
18,512
|
|
|
|
12,404
|
|
|
|
18,508
|
|
|
|
12,199
|
|
|
|
3,986
|
|
|
|
2,895
|
|
|
|
3,740
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
|
|
|
|
2,242
|
|
|
|
3,499
|
|
|
|
2,336
|
|
|
|
1,366
|
|
|
|
2,476
|
|
|
|
696
|
|
Incentive compensation (Note 9)
|
|
|
10,042
|
|
|
|
4,717
|
|
|
|
6,055
|
|
|
|
1,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
|
|
|
1,929
|
|
|
|
2,560
|
|
|
|
3,420
|
|
|
|
3,021
|
|
|
|
2,891
|
|
|
|
8,911
|
|
|
|
2,573
|
|
Interest, fees and other borrowing costs
|
|
|
3,636
|
|
|
|
684
|
|
|
|
1,594
|
|
|
|
31
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Management fee
|
|
|
5,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,712
|
|
|
|
10,203
|
|
|
|
14,568
|
|
|
|
6,505
|
|
|
|
4,259
|
|
|
|
11,387
|
|
|
|
6,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation recovery of management fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
Net operating income (loss) before taxes
|
|
|
(2,200
|
)
|
|
|
2,201
|
|
|
|
3,940
|
|
|
|
5,694
|
|
|
|
97
|
|
|
|
(8,492
|
)
|
|
|
(3,122
|
)
|
Tax expense (benefit), net
|
|
|
(452
|
)
|
|
|
143
|
|
|
|
159
|
|
|
|
(101
|
)
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
|
(1,748
|
)
|
|
|
2,058
|
|
|
|
3,781
|
|
|
|
5,795
|
|
|
|
18
|
|
|
|
(8,492
|
)
|
|
|
(3,122
|
)
|
Net realized and unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
|
|
|
65,850
|
|
|
|
3,016
|
|
|
|
5,221
|
|
|
|
(3,295
|
)
|
|
|
(37,795
|
)
|
|
|
(4,220
|
)
|
|
|
(33,469
|
)
|
Net change in unrealized appreciation (depreciation)
|
|
|
(6,914
|
)
|
|
|
26,396
|
|
|
|
38,334
|
|
|
|
23,768
|
|
|
|
49,382
|
|
|
|
(42,771
|
)
|
|
|
(21,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gains on investments
|
|
|
58,936
|
|
|
|
29,412
|
|
|
|
43,555
|
|
|
|
20,473
|
|
|
|
11,587
|
|
|
|
(46,991
|
)
|
|
|
(55,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
57,188
|
|
|
$
|
31,470
|
|
|
$
|
47,336
|
|
|
$
|
26,268
|
|
|
$
|
11,605
|
|
|
$
|
(55,483
|
)
|
|
$
|
(58,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Month
|
|
|
|
|
|
|
Period Ended
|
|
|
|
|
|
|
July 31,
|
|
|
Year Ended October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands ($), except per share data)
|
|
|
Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets per share resulting from
operations
|
|
$
|
2.57
|
|
|
$
|
1.65
|
|
|
$
|
2.48
|
|
|
$
|
1.45
|
|
|
$
|
0.91
|
|
|
$
|
(3.42
|
)
|
|
$
|
(3.54
|
)
|
Dividends per share
|
|
$
|
0.42
|
|
|
$
|
0.36
|
|
|
$
|
0.48
|
|
|
$
|
0.24
|
|
|
$
|
0.12
|
|
|
$
|
|
|
|
$
|
0.04
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio at value
|
|
$
|
316,867
|
|
|
$
|
212,203
|
|
|
$
|
275,892
|
|
|
$
|
122,298
|
|
|
$
|
78,520
|
|
|
$
|
24,071
|
|
|
$
|
54,194
|
|
Portfolio at cost
|
|
|
334,740
|
|
|
|
235,101
|
|
|
|
286,851
|
|
|
|
171,591
|
|
|
|
151,582
|
|
|
|
146,515
|
|
|
|
133,864
|
|
Total assets(1)
|
|
|
436,549
|
|
|
|
306,050
|
|
|
|
347,047
|
|
|
|
201,379
|
|
|
|
126,577
|
|
|
|
137,880
|
|
|
|
196,511
|
|
Shareholders equity
|
|
|
363,453
|
|
|
|
223,396
|
|
|
|
236,993
|
|
|
|
198,707
|
|
|
|
115,567
|
|
|
|
137,008
|
|
|
|
195,386
|
|
Shareholders equity per share (net asset value)
|
|
$
|
14.98
|
|
|
$
|
11.70
|
|
|
$
|
12.41
|
|
|
$
|
10.41
|
|
|
$
|
9.40
|
|
|
$
|
8.48
|
|
|
$
|
11.84
|
|
Common shares outstanding at period end
|
|
|
24,262
|
|
|
|
19,092
|
|
|
|
19,094
|
|
|
|
19,087
|
|
|
|
12,293
|
|
|
|
16,153
|
|
|
|
16,500
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Investments funded in period
|
|
|
22
|
|
|
|
18
|
|
|
|
24
|
|
|
|
9
|
|
|
|
7
|
|
|
|
5
|
|
|
|
10
|
|
Investments funded ($) in period
|
|
$
|
100,700
|
|
|
$
|
101,400
|
|
|
$
|
166,300
|
|
|
$
|
53,836
|
|
|
$
|
60,710
|
|
|
$
|
21,955
|
|
|
$
|
26,577
|
|
|
|
|
(1) |
|
See Senior Securities for more information regarding
our level of indebtedness. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Qtr 3
|
|
|
Qtr 2
|
|
|
Qtr 1
|
|
|
Qtr 4
|
|
|
Qtr 3
|
|
|
Qtr 2
|
|
|
Qtr 1
|
|
|
Qtr 4
|
|
|
Qtr 3
|
|
|
Qtr 2
|
|
|
Qtr 1
|
|
|
|
(In thousands ($), except per share data)
|
|
|
Quarterly Data (Unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
7,030
|
|
|
|
6,073
|
|
|
|
5,409
|
|
|
|
6,104
|
|
|
|
4,607
|
|
|
|
3,915
|
|
|
|
3,882
|
|
|
|
3,361
|
|
|
|
4,404
|
|
|
|
2,439
|
|
|
|
1,995
|
|
Incentive compensation
|
|
|
1,618
|
|
|
|
4,898
|
|
|
|
3,526
|
|
|
|
1,338
|
|
|
|
1,161
|
|
|
|
2,005
|
|
|
|
1,551
|
|
|
|
320
|
|
|
|
402
|
|
|
|
395
|
|
|
|
|
|
Interest, fees and other borrowing costs
|
|
|
1,252
|
|
|
|
1,256
|
|
|
|
1,128
|
|
|
|
910
|
|
|
|
636
|
|
|
|
39
|
|
|
|
9
|
|
|
|
11
|
|
|
|
8
|
|
|
|
|
|
|
|
12
|
|
Management fee
|
|
|
1,616
|
|
|
|
1,854
|
|
|
|
1,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
608
|
|
|
|
652
|
|
|
|
669
|
|
|
|
2,117
|
|
|
|
1,676
|
|
|
|
1,739
|
|
|
|
1,387
|
|
|
|
1,450
|
|
|
|
1,440
|
|
|
|
1,331
|
|
|
|
1,136
|
|
Tax Expense (Benefit)
|
|
|
(78
|
)
|
|
|
(394
|
)
|
|
|
20
|
|
|
|
16
|
|
|
|
62
|
|
|
|
(24
|
)
|
|
|
105
|
|
|
|
(32
|
)
|
|
|
74
|
|
|
|
(108
|
)
|
|
|
(35
|
)
|
Net operating income (loss) before net realized and unrealized
gains
|
|
|
2,014
|
|
|
|
(2,193
|
)
|
|
|
(1,569
|
)
|
|
|
1,723
|
|
|
|
1,072
|
|
|
|
156
|
|
|
|
830
|
|
|
|
1,612
|
|
|
|
2,480
|
|
|
|
821
|
|
|
|
882
|
|
Net increase (decrease) in net assets resulting from operations
|
|
|
13,788
|
|
|
|
24,323
|
|
|
|
19,077
|
|
|
|
15,866
|
|
|
|
8,046
|
|
|
|
11,117
|
|
|
|
12,307
|
|
|
|
8,933
|
|
|
|
10,310
|
|
|
|
4,360
|
|
|
|
2,665
|
|
Net increase (decrease) in net assets resulting from operations
per share
|
|
|
0.57
|
|
|
|
1.00
|
|
|
|
1.00
|
|
|
|
0.83
|
|
|
|
0.42
|
|
|
|
0.58
|
|
|
|
0.65
|
|
|
|
0.46
|
|
|
|
0.58
|
|
|
|
0.23
|
|
|
|
0.18
|
|
Net asset value per share
|
|
|
14.98
|
|
|
|
14.53
|
|
|
|
13.23
|
|
|
|
12.41
|
|
|
|
11.70
|
|
|
|
11.40
|
|
|
|
10.94
|
|
|
|
10.41
|
|
|
|
10.06
|
|
|
|
9.64
|
|
|
|
9.41
|
|
12
Investing in MVC Capital involves a number of significant
risks relating to our business and investment objective. As a
result, there can be no assurance that we will achieve our
investment objective. In addition to the other information
contained in this prospectus, you should consider carefully the
following information before making an investment in our common
stock. The Companys risk factors include those directly
related to the Companys business, its investments, and
potential offerings.
BUSINESS
RISKS
Business
risks are risks that are associated with general business
conditions, the economy, and the operations of the Company.
Business risks are not risks associated with our specific
investments or an offering of our securities.
We
depend on key personnel of TTG Advisers, especially
Mr. Tokarz, in seeking to achieve our investment
objective.
We depend on the continued services of Mr. Tokarz and
certain other key management personnel of TTG Advisers. If we
were to lose access to any of these personnel, particularly
Mr. Tokarz, it could negatively impact our operations and
we could lose business opportunities. Mr. Tokarz has
entered into an agreement with TTG Advisers pursuant to which he
has agreed to serve as the Companys Portfolio Manager for
the full twenty-four calendar months following November 1,
2006, absent the occurrence of certain extraordinary events.
Furthermore, the Advisory Agreement may not be terminated by TTG
Advisers during the initial two-year term of the Advisory
Agreement except, upon 60 days written notice:
(i) in the event a majority of the current directors who
are not interested persons of the Company, as
defined by the 1940 Act (Independent Directors)
cease to serve as directors or (ii) the Company undergoes a
change in control (as defined by
Section 2(a)(9) of the 1940 Act) not caused by TTG
Advisers. However, there is still a risk that
Mr. Tokarzs expertise may be unavailable to the
Company, which could significantly impact the Companys
ability to achieve its investment objective.
Our
investment adviser, TTG Advisers, is a recently-formed
entity.
Our future success depends to a significant extent on the
services of our investment adviser. We are dependent for the
selection, structuring, closing, and monitoring of our
investment on the diligence and skill of our recently-formed
investment adviser. TTG Advisers identifies, evaluates,
structures, monitors and disposes of our investments, and the
services it provides significantly impact our results of
operations. Because TTG Advisers is recently formed, it has a
limited operating history and limited equity capital. However,
Mr. Tokarz and the investment and operations professionals
that had been employed by the Company, as of the fiscal year
ended October 31, 2006, became employed by TTG Advisers.
Our
returns may be substantially lower than the average returns
historically realized by the private equity industry as a
whole.
Past performance of the private equity industry is not
necessarily indicative of that sectors future performance,
nor is it necessarily a good proxy for predicting the returns of
the Company. We cannot guarantee that we will meet or exceed the
rates of return historically realized by the private equity
industry as a whole. Additionally, our overall returns are
impacted by certain factors related to our structure as a
publicly-traded business development company, including:
|
|
|
|
|
the lower return we are likely to realize on short-term liquid
investments during the period in which we are identifying
potential investments, and
|
|
|
|
the periodic disclosure required of business development
companies, which could result in the Company being less
attractive as an investor to certain potential portfolio
companies.
|
13
Substantially
all of our portfolio investments are recorded at fair
value and, as a result, there is a degree of uncertainty
regarding the carrying values of our portfolio
investments.
Pursuant to the requirements of the 1940 Act, because our
portfolio company investments do not have readily ascertainable
market values, we record these investments at fair value in
accordance with our Valuation Procedures adopted by our board of
directors. As permitted by the SEC, the board of directors has
delegated the responsibility of making fair value determinations
to the Valuation Committee, subject to the board of
directors supervision and pursuant to the Valuation
Procedures.
At July 31, 2007, approximately 72.6% of our total assets
represented portfolio investments recorded at fair value.
There is no single standard for determining fair value in good
faith. As a result, determining fair value requires that
judgment be applied to the specific facts and circumstances of
each portfolio investment while employing a consistently applied
valuation process for the types of investments we make. In
determining the fair value of a portfolio investment, the
Valuation Committee analyzes, among other factors, the portfolio
companys financial results and projections and publicly
traded comparables when available, which may be dependent on
general economic conditions. We specifically value each
individual investment and record unrealized depreciation for an
investment that we believe has become impaired, including where
collection of a loan or realization of an equity security is
doubtful. Conversely, we will record unrealized appreciation if
we have an indication (based on a significant development) that
the underlying portfolio company has appreciated in value and,
therefore, our equity security has also appreciated in value,
where appropriate. Without a readily ascertainable market value
and because of the inherent uncertainty of fair valuation, fair
value of our investments may differ significantly from the
values that would have been used had a ready market existed for
the investments, and the differences could be material.
Pursuant to our Valuation Procedures, our Valuation Committee
(which is currently comprised of three Independent Directors)
reviews, considers and determines fair valuations on a quarterly
basis (or more frequently, if deemed appropriate under the
circumstances). Any changes in valuation are recorded in the
statements of operations as Net change in unrealized
appreciation (depreciation) on investments.
Economic
recessions or downturns could impair our portfolio companies and
harm our operating results.
Many of the companies in which we have made or will make
investments may be susceptible to economic slowdowns or
recessions. An economic slowdown may affect the ability of a
company to engage in a liquidity event. These conditions could
lead to financial losses in our portfolio and a decrease in our
revenues, net income and assets.
Our overall business of making private equity investments may be
affected by current and future market conditions. The absence of
an active mezzanine lending or private equity environment may
slow the amount of private equity investment activity generally.
As a result, the pace of our investment activity may slow, which
could impact our ability to achieve our investment objective. In
addition, significant changes in the capital markets could have
an effect on the valuations of private companies and on the
potential for liquidity events involving such companies. This
could affect the amount and timing of any gains realized on our
investments.
We may
not realize gains from our equity investments.
When we invest in mezzanine and senior debt securities, we may
acquire warrants or other equity securities as well. We may also
invest directly in various equity securities. Our goal is
ultimately to dispose of such equity interests and realize gains
upon our disposition of such interests. However, the equity
interests we receive or invest in may not appreciate in value
and, in fact, may decline in value. In addition, the equity
securities we receive or invest in may be subject to
restrictions on resale during periods in which it would be
advantageous to resell. Accordingly, we may not be able to
realize gains from our equity interests, and any gains that we
do realize on the disposition of any equity interests may not be
sufficient to offset any other losses we experience.
14
The
market for private equity investments can be highly competitive.
In some cases, our status as a regulated business development
company may hinder our ability to participate in certain
investment opportunities.
We face competition in our investing activities from private
equity funds, other business development companies, investment
banks, investment affiliates of large industrial, technology,
service and financial companies, small business investment
companies, wealthy individuals and foreign investors. As a
regulated business development company, we are required to
disclose quarterly the name and business description of
portfolio companies and the value of any portfolio securities.
Many of our competitors are not subject to this disclosure
requirement. Our obligation to disclose this information could
hinder our ability to invest in certain portfolio companies.
Additionally, other regulations, current and future, may make us
less attractive as a potential investor to a given portfolio
company than a private equity fund not subject to the same
regulations. Furthermore, some of our competitors have greater
resources than we do. Increased competition would make it more
difficult for us to purchase or originate investments at
attractive prices. As a result of this competition, sometimes we
may be precluded from making certain investments.
Our
ability to use our capital loss carryforwards may be subject to
limitations.
If we experience a shift in the ownership of our common stock
(e.g., if a shareholder who acquires 5% or more of our
outstanding shares of common stock, or if a shareholder who owns
5% or more of our outstanding shares of common stock
significantly increases or decreases its investment in the
Company), our ability to utilize our capital loss carryforwards
to offset future capital gains may be severely limited. In this
regard, we may seek to address this matter by implementing
restrictions on the ownership of our common stock which, if
implemented, would generally prevent investors from acquiring 5%
or more of the outstanding shares of our common stock. Further,
in the event that we are deemed to have failed to meet the
requirements to qualify as a RIC, our ability to use our capital
loss carryforwards could be adversely affected.
Loss
of pass-through tax treatment would substantially reduce net
assets and income available for dividends.
We have operated to qualify as a RIC. If we meet source of
income, diversification and distribution requirements, we will
qualify for effective pass-through tax treatment. We would cease
to qualify for such pass-through tax treatment if we were unable
to comply with these requirements. We may have difficulty
meeting the requirement to make distributions to our
shareholders because in certain cases we may recognize income
before or without receiving cash representing such income. In
addition, we may have to sell some of our investments at times
we would not consider advantageous, raise additional debt or
equity capital or reduce new investments to meet these
distribution requirements. If we fail to qualify as a RIC, we
will have to pay corporate-level taxes on all of our income
whether or not we distribute it, which would substantially
reduce the amount of income available for distribution to our
shareholders. Even if we qualify as a RIC, we generally will be
subject to a corporate-level income tax on the income we do not
distribute. Moreover, if we do not distribute at least 98% of
our income, we generally will be subject to a 4% federal excise
tax on certain undistributed amounts.
Complying
with the RIC requirements may cause us to forego otherwise
attractive opportunities.
In order to qualify as a RIC for U.S. federal income tax
purposes, we must satisfy tests concerning the sources of our
income, the nature and diversification of our assets and the
amounts we distribute to our shareholders. We may be unable to
pursue investments that would otherwise be advantageous to us in
order to satisfy the source of income or asset diversification
requirements for qualification as a RIC. In particular, to
qualify as a RIC, at least 50% of our assets must be in the form
of cash and cash items, Government securities, securities of
other RICs, and other securities that represent not more than 5%
of our total assets and not more than 10% of the outstanding
voting securities of the issuer. We have from time to time held
a significant portion of our assets in the form of securities
that exceed 5% of our total assets or more than 10% of the
outstanding securities of the issuer, and compliance with the
RIC requirements may adversely affect our ability to make
additional investments that represent more than 5% of our total
assets or more than 10% of the outstanding voting securities of
the issuer. Thus, compliance with the RIC requirements may
hinder our ability to take advantage of attractive investment
opportunities.
15
Regulations
governing our operation as a business development company affect
our ability to, and the way in which we, raise additional
capital.
We are not generally able to issue and sell our common stock at
a price below net asset value per share. We may, however, sell
our common stock or warrants at a price below the then-current
net asset value per share of our common stock if our board of
directors determines that such sale is in the best interests of
the Company and its stockholders, and our stockholders approve
such sale. In any such case, the price at which our securities
are to be issued and sold may not be less than a price that, in
the determination of our board of directors, closely
approximates the market value of such securities (less any
distributing commission or discount). If we raise additional
funds by issuing more common stock or senior securities
convertible into, or exchangeable for, our common stock, then
the percentage ownership of our stockholders at that time will
decrease, and you might experience dilution.
Any
failure on our part to maintain our status as a business
development company would reduce our operating
flexibility.
We intend to continue to qualify as a business development
company (BDC) under the 1940 Act. The 1940 Act
imposes numerous constraints on the operations of BDCs. For
example, BDCs are required to invest at least 70% of their total
assets in specified types of securities, primarily in private
companies or thinly-traded U.S. public companies, cash,
cash equivalents, U.S. government securities and other high
quality debt investments that mature in one year or less.
Furthermore, any failure to comply with the requirements imposed
on BDCs by the 1940 Act could cause the SEC to bring an
enforcement action against us
and/or
expose us to claims of private litigants. In addition, upon
approval of a majority of our stockholders, we may elect to
withdraw our status as a business development company. If we
decide to withdraw our election, or if we otherwise fail to
qualify as a business development company, we may be subject to
the substantially greater regulation under the 1940 Act as a
closed-end investment company. Compliance with such regulations
would significantly decrease our operating flexibility, and
could significantly increase our costs of doing business.
Changes
in the law or regulations that govern us could have a material
impact on our business.
We are regulated by the SEC. Changes in the laws or regulations
that govern business development companies and RICs may
significantly affect our business.
Results
may fluctuate and may not be indicative of future
performance.
Our operating results will fluctuate and, therefore, you should
not rely on current or historical period results to be
indicative of our performance in future reporting periods. In
addition to many of the above-cited risk factors, other factors
could cause operating results to fluctuate including, among
others, variations in the investment origination volume and fee
income earned, variation in timing of prepayments, variations in
and the timing of the recognition of realized and unrealized
gains or losses, the degree to which we encounter competition in
our markets and general economic conditions.
Our
common stock price can be volatile.
The trading price of our common stock may fluctuate
substantially. The price of the common stock may be higher or
lower than the price you pay for your shares, depending on many
factors, some of which are beyond our control and may not be
directly related to our operating performance. These factors
include the following:
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price and volume fluctuations in the overall stock market from
time to time;
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significant volatility in the market price and trading volume of
securities of business development companies or other financial
services companies;
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volatility resulting from trading in derivative securities
related to our common stock including puts, calls, long-term
equity participation securities, or LEAPs, or short trading
positions;
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changes in regulatory policies or tax guidelines with respect to
business development companies or RICs;
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16
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actual or anticipated changes in our earnings or fluctuations in
our operating results or changes in the expectations of
securities analysts;
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general economic conditions and trends;
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loss of a major funding source; or
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departures of key personnel of TTG Advisers.
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We are
subject to market discount risk.
As with any stock, the price of our shares will fluctuate with
market conditions and other factors. If shares are sold, the
price received may be more or less than the original investment.
Whether investors will realize gains or losses upon the sale of
our shares will not depend directly upon our net asset value,
but will depend upon the market price of the shares at the time
of sale. Since the market price of our shares will be affected
by such factors as the relative demand for and supply of the
shares in the market, general market and economic conditions and
other factors beyond our control, we cannot predict whether the
shares will trade at, below or above our net asset value.
Although our shares have recently traded at a premium to our net
asset value, historically, our shares, as well as those of other
closed-end investment companies, have frequently traded at a
discount to their net asset value, which discount often
fluctuates over time.
We
have not established a minimum dividend payment level and we
cannot assure you of our ability to make distributions to our
shareholders in the future.
We cannot assure that we will achieve investment results that
will allow us to make cash distributions or year-to-year
increases in cash distributions. Our ability to make
distributions is impacted by, among other things, the risk
factors described in this report. In addition, the asset
coverage test applicable to us as a business development company
can limit our ability to make distributions. Any distributions
will be made at the discretion of our board of directors and
will depend on our earnings, our financial condition,
maintenance of our RIC status and such other factors as our
board of directors may deem relevant from time to time. We
cannot assure you of our ability to make distributions to our
shareholders.
We
have borrowed and may continue to borrow money, which magnifies
the potential for gain or loss on amounts invested and may
increase the risk of investing in us.
We have borrowed and may continue to borrow money (subject to
the 1940 Act limits) in seeking to achieve our investment
objective going forward. Borrowings, also known as leverage,
magnify the potential for gain or loss on amounts invested and,
therefore, can increase the risks associated with investing in
our securities.
Under the provisions of the 1940 Act, we are permitted, as a
business development company, to borrow money or issue
senior securities only in amounts such that our asset
coverage, as defined in the 1940 Act, equals at least 200% after
each issuance of senior securities. If the value of our assets
declines, we may be unable to satisfy this test. If that
happens, we may be required to sell a portion of our investments
and, depending on the nature of our leverage, repay a portion of
our indebtedness at a time when such sales may be
disadvantageous.
We may borrow from, and issue senior debt securities to, banks,
insurance companies and other lenders. Lenders of these senior
securities have fixed dollar claims on our assets that are
superior to the claims of our common shareholders. If the value
of our assets increases, then leveraging would cause the net
asset value attributable to our common stock to increase more
sharply than it would have had we not leveraged. Conversely, if
the value of our assets decreases, leveraging would cause net
asset value to decline more sharply than it otherwise would have
had we not leveraged. Similarly, any increase in our
consolidated income in excess of interest payable on the
borrowed funds would cause our net operating income to increase
more than it would without the leverage, while any decrease in
our consolidated income would cause net operating income to
decline more sharply than it would have had we not borrowed.
Such a decline could negatively affect our ability to make
common stock dividend payments. Leverage is generally considered
a speculative investment technique.
17
At July 31, 2007, we had $50.0 million of outstanding
indebtedness. We may incur additional debt in the future. If our
portfolio of investments fails to produce adequate returns, we
may be unable to make interest or principal payments on our
indebtedness when they are due. The following table is designed
to illustrate the effect on return to a holder of our common
stock of the leverage created by our use of borrowing, at the
weighted average interest rate 7.38% for the nine month period
ended July 31, 2007, and assuming hypothetical annual
returns on our portfolio of minus 20 to plus 20 percent. As
shown in the table, leverage generally increases the return to
stockholders when the portfolio return is positive and decreases
the return to stockholders when the portfolio return is
negative. Actual returns to stockholders may be greater or less
than those appearing in the table.
Assumed
Return on Our Portfolio
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Assumed Return on Portfolio (net of expenses)(1)
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−20
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%
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−10
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%
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−5
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%
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0
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5
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%
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10
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Corresponding Return to Common Stockholders(2)
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−30.94
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%
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−16.30
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%
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−8.98
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%
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−1.65
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%
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5.67
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%
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12.99
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%
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27.64
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%
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The assumed portfolio return is required by regulation of the
SEC and is not a prediction of, and does not represent, our
projected or actual performance. |
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In order to compute the Corresponding Return to Common
Stockholders, the Assumed Return on Portfolio
is multiplied by the total value of our assets at the beginning
of the period to obtain an assumed return to us. From this
amount, all interest expense accrued during the period is
subtracted to determine the return available to stockholders.
The return available to stockholders is then divided by the
total value of our net assets as of the beginning of the period
to determine the Corresponding Return to Common
Stockholders. |
Changes
in interest rates may affect our cost of capital and net
operating income and our ability to obtain additional
financing.
Because we have borrowed and may continue to borrow money to
make investments, our net operating income before net realized
and unrealized gains or losses, or net operating income, may be
dependent upon the difference between the rate at which we
borrow funds and the rate at which we invest these funds. As a
result, there can be no assurance that a significant change in
market interest rates would not have a material adverse effect
on our net operating income. In periods of declining interest
rates, we may have difficulty investing our borrowed capital
into investments that offer an appropriate return. In periods of
sharply rising interest rates, our cost of funds would increase,
which could reduce our net operating income. We may use a
combination of long-term and short-term borrowings and equity
capital to finance our investing activities. We may utilize our
short-term credit facilities as a means to bridge to long-term
financing. We may use interest rate risk management techniques
in an effort to limit our exposure to interest rate
fluctuations. Such techniques may include various interest rate
hedging activities to the extent permitted by the 1940 Act.
Additionally, we cannot assure you that financing will be
available on acceptable terms, if at all. Recent turmoil in the
credit markets has greatly reduced the availability of debt
financing. Deterioration in the credit markets, which could
delay our ability to sell certain of our loan investments in a
timely manner, could also negatively impact our cash flows.
We may
be unable to meet our covenant obligations under our credit
facility which could adversely affect our
business.
On April 27, 2006, the Company and MVCFS, as co-borrowers
entered into a four-year, $100 million credit facility (the
Credit Facility) with Guggenheim Corporate Funding,
LLC (Guggenheim) as administrative agent for the
lenders. At October 31, 2006, there was $50.0 million
in term debt and $50.0 million on the revolving credit
facility outstanding. During the nine month period ended
July 31, 2007, the Companys net repayments on the
Credit Facility were $50.0 million. As of July 31,
2007, there was $50.0 million in term debt and no amount
outstanding on the revolving credit facility outstanding. The
Credit Facility will expire on April 27, 2010, at which
time all outstanding amounts under the Credit Facility will be
due and payable. The Credit Facility contains certain covenants
that if we were unable to meet would result in an event of
default, which could result in payment of the applicable
indebtedness being accelerated. In addition, if we require
working capital greater than that provided by the Credit
Facility, we may be required either to (i) seek to increase
the availability under the Credit Facility or (ii) obtain
other sources of financing.
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A
portion of our existing investment portfolio was not selected by
the investment team of TTG Advisers.
As of July 31, 2007, 3.8% of the Companys assets
consisted of investments made by the Companys former
management team (the Legacy Investments) based on
the fair values assigned to these investments by our Valuation
Committee. These investments were made pursuant to the
Companys prior investment objective of seeking long-term
capital appreciation from venture capital investments in
information technology companies. Generally, a cash return may
not be received on these investments until a liquidity
event, i.e., a sale, public offering or merger,
occurs. Until then, these Legacy Investments remain in the
Companys portfolio. We are managing them to try and
realize maximum returns. Nevertheless, because they were not
made in accordance with the Companys current investment
strategy, their future performance may impact our ability to
achieve our current objective.
Under
the Advisory Agreement, TTG Advisers is entitled to compensation
based on our portfolios performance. This arrangement may
result in riskier or more speculative investments in an effort
to maximize incentive compensation.
The way in which the compensation payable to TTG Advisers is
determined may encourage the investment team to recommend
riskier or more speculative investments and to use leverage to
increase the return on our investments. Under certain
circumstances, the use of leverage may increase the likelihood
of default, which would adversely affect our shareholders,
including investors in this offering. In addition, key criteria
related to determining appropriate investments and investment
strategies, including the preservation of capital, might be
under-weighted if the investment team focuses exclusively or
disproportionately on maximizing returns.
There
are potential conflicts of interest that could impact our
investment returns.
Our officers and directors, and members of the TTG Advisers
investment team, may serve other entities, including those that
operate in the same or similar lines of business as we do.
Accordingly, they may have obligations to those entities, the
fulfillment of which might not be in the best interests of us or
our shareholders. It is possible that new investment
opportunities that meet our investment objective may come to the
attention of one of the management team members or our officers
or directors in his or her role as an officer or director of
another entity or as an investment professional associated with
that entity, and, if so, such opportunity might not be offered,
or otherwise made available, to us.
Additionally, as an investment adviser, TTG Advisers has a
fiduciary obligation to act in the best interests of its
clients, including us. To that end, if TTG Advisers manages any
additional investment vehicles or client accounts in the future,
TTG Advisers will endeavor to allocate investment opportunities
in a fair and equitable manner. If TTG Advisers chooses to
manage another investment fund in the future, when the
investment professionals of TTG Advisers identify an investment,
they will have to choose which investment fund should make the
investment. As a result, there may be times when the investment
team of TTG Advisers has interests that differ from those of our
shareholders, giving rise to a conflict. In an effort to
mitigate situations that give rise to such conflicts, TTG
Advisers adheres to a policy (which was approved by our Board)
relating to allocation of investment opportunities, which
generally requires, among other things, that TTG Advisers
continue to offer the Company investment opportunities in
mezzanine and debt securities as well as non-control equity
investments in small and middle market U.S. companies. For
a further discussion of this allocation policy, please see
About MVC Capital Our Investment
Strategy Allocation of Investment
Opportunities below.
Our
relationship with MVC Acquisition Corp. could give rise to
conflicts of interest with respect to the allocation of
investment opportunities between us on the one hand and MVC
Acquisition Corp. on the other hand.
We have agreed to serve as the corporate sponsor of MVC
Acquisition Corp., a newly-formed blank check company organized
for the purpose of effecting a merger, capital stock exchange,
asset acquisition or other similar business combination with an
operating business. We hold our investment in MVC Acquisition
Corp. through our wholly-owned portfolio company, MVC Partners
LLC. Michael Tokarz, our Chairman and Portfolio Manager and the
Manager of TTG Advisers, and Peter Seidenberg, our Chief
Financial Officer, who serves in a similar capacity for TTG
Advisers, currently serve as Chairman of the Board and Chief
Financial Officer, respectively, for MVC Acquisition Corp. As a
result of their respective positions with MVC Acquisition Corp.,
Messrs. Tokarz and Seidenberg may face conflicts of
interest with respect to allocation of investment opportunities
between us on the
19
one hand and MVC Acquisition Corp. on the other hand. We cannot
assure you that these conflicts will be resolved in our favor.
In addition, we anticipate the execution of a letter agreement
with MVC Acquisition Corp., which would provide MVC Acquisition
Corp. with a right of first review with respect to target
businesses with a fair market value in excess of
$250 million that we become aware of through TTG Advisers.
As a result, certain investment opportunities that might
otherwise be made available to us would first be submitted for
review by MVC Acquisition Corp., and we may therefore be unable
to make an investment that may otherwise be attractive to us.
The
war with Iraq, terrorist attacks and other acts of violence or
war may affect any market for our common stock, impact the
businesses in which we invest and harm our operations and our
profitability.
The war with Iraq, its aftermath and the continuing occupation
of Iraq are likely to have a substantial impact on the
U.S. and world economies and securities markets. The
nature, scope and duration of the war and occupation cannot be
predicted with any certainty. Furthermore, terrorist attacks may
harm our results of operations and your investment. We cannot
assure you that there will not be further terrorist attacks
against the United States or U.S. businesses. Such attacks
and armed conflicts in the United States or elsewhere may impact
the businesses in which we invest directly or indirectly, by
undermining economic conditions in the United States. Losses
resulting from terrorist events are generally uninsurable.
Our
financial condition and results of operations will depend on our
ability to effectively manage our future growth.
Our ability to achieve our investment objective can depend on
our ability to sustain continued growth. Accomplishing this
result on a cost-effective basis is largely a function of our
marketing capabilities, our management of the investment
process, our ability to provide competent, attentive and
efficient services and our access to financing sources on
acceptable terms. Failure to effectively manage our future
growth could have a material adverse effect on our business,
financial condition and results of operations.
INVESTMENT
RISKS
Investment
risks are risks associated with our determination to execute on
our business objective. These risks are not risks associated
with general business conditions or those relating to an
offering of our securities.
Investing
in private companies involves a high degree of
risk.
Our investment portfolio generally consists of loans to, and
investments in, private companies. Investments in private
businesses involve a high degree of business and financial risk,
which can result in substantial losses and accordingly should be
considered speculative. There is generally very little publicly
available information about the companies in which we invest,
and we rely significantly on the due diligence of the members of
the investment team to obtain information in connection with our
investment decisions.
Our
investments in portfolio companies are generally
illiquid.
We generally acquire our investments directly from the issuer in
privately negotiated transactions. Most of the investments in
our portfolio (other than cash or cash equivalents) are
typically subject to restrictions on resale or otherwise have no
established trading market. We may exit our investments when the
portfolio company has a liquidity event, such as a sale,
recapitalization or initial public offering. The illiquidity of
our investments may adversely affect our ability to dispose of
equity and debt securities at times when it may be otherwise
advantageous for us to liquidate such investments. In addition,
if we were forced to immediately liquidate some or all of the
investments in the portfolio, the proceeds of such liquidation
could be significantly less than the current value of such
investments.
20
Our
investments in small and middle-market privately-held companies
are extremely risky and the Company could lose its entire
investment.
Investments in small and middle-market privately-held companies
are subject to a number of significant risks including the
following:
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Small and middle-market companies may have limited financial
resources and may not be able to repay the loans we make to
them. Our strategy includes providing financing
to companies that typically do not have capital sources readily
available to them. While we believe that this provides an
attractive opportunity for us to generate profits, this may make
it difficult for the borrowers to repay their loans to us upon
maturity.
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Small and middle-market companies typically have narrower
product lines and smaller market shares than large
companies. Because our target companies are
smaller businesses, they may be more vulnerable to
competitors actions and market conditions, as well as
general economic downturns. In addition, smaller companies may
face intense competition, including competition from companies
with greater financial resources, more extensive development,
manufacturing, marketing and other capabilities, and a larger
number of qualified managerial and technical personnel.
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There is generally little or no publicly available
information about these privately-held
companies. There is generally little or no
publicly available operating and financial information about
them. As a result, we rely on our investment professionals to
perform due diligence investigations of these privately-held
companies, their operations and their prospects. We may not
learn all of the material information we need to know regarding
these companies through our investigations.
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Small and middle-market companies generally have less
predictable operating results. We expect that our
portfolio companies may have significant variations in their
operating results, may from time to time be parties to
litigation, may be engaged in rapidly changing businesses with
products subject to a substantial risk of obsolescence, may
require substantial additional capital to support their
operations, finance expansion or maintain their competitive
position, may otherwise have a weak financial position or may be
adversely affected by changes in the business cycle. Our
portfolio companies may not meet net income, cash flow and other
coverage tests typically imposed by their senior lenders.
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Small and middle-market businesses are more likely to be
dependent on one or two persons. Typically, the
success of a small or middle-market company also depends on the
management talents and efforts of one or two persons or a small
group of persons. The death, disability or resignation of one or
more of these persons could have a material adverse impact on
our portfolio company and, in turn, on us.
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Small and middle-market companies are likely to have greater
exposure to economic downturns than larger
companies. We expect that our portfolio companies
will have fewer resources than larger businesses and an economic
downturn may thus more likely have a material adverse effect on
them.
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Small and middle-market companies may have limited operating
histories. We may make debt or equity investments
in new companies that meet our investment criteria. Portfolio
companies with limited operating histories are exposed to the
operating risks that new businesses face and may be particularly
susceptible to, among other risks, market downturns, competitive
pressures and the departure of key executive officers.
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Our
borrowers may default on their payments, which may have an
effect on our financial performance.
We may make long-term unsecured, subordinated loans, which may
involve a higher degree of repayment risk than conventional
secured loans. We primarily invest in companies that may have
limited financial resources and that may be unable to obtain
financing from traditional sources. In addition, numerous
factors may adversely affect a portfolio companys ability
to repay a loan we make to it, including the failure to meet a
business plan, a downturn in its industry or operating results,
or negative economic conditions. Deterioration in a
borrowers financial condition and prospects may be
accompanied by deterioration in any related collateral.
Our
investments in mezzanine and other debt securities may involve
significant risks.
Our investment strategy contemplates investments in mezzanine
and other debt securities of privately held companies.
Mezzanine investments typically are structured as
subordinated loans (with or without warrants) that carry a fixed
rate of interest. We may also make senior secured and other
types of loans or debt investments. Our
21
debt investments are not, and typically will not be, rated by
any rating agency, but we believe that if such investments were
rated, they would be below investment grade quality (rated lower
than Baa3 by Moodys or lower than
BBB- by Standard & Poors, commonly
referred to as junk bonds). Loans of below
investment grade quality have predominantly speculative
characteristics with respect to the borrowers capacity to
pay interest and repay principal. Our debt investments in
portfolio companies may thus result in a high level of risk and
volatility
and/or loss
of principal.
When
we are a debt or minority equity investor in a portfolio
company, we may not be in a position to control the entity, and
management of the company may make decisions that could decrease
the value of our portfolio holdings.
We anticipate making debt and minority equity investments;
therefore, we will be subject to the risk that a portfolio
company may make business decisions with which we disagree, and
the shareholders and management of such company may take risks
or otherwise act in ways that do not serve our interests. Due to
the lack of liquidity in the markets for our investments in
privately held companies, we may not be able to dispose of our
interests in our portfolio companies as readily as we would
like. As a result, a portfolio company may make decisions that
could decrease the value of our portfolio holdings.
We may
choose to waive or defer enforcement of covenants in the debt
securities held in our portfolio, which may cause us to lose all
or part of our investment in these companies.
Some of our loans to our portfolio companies may be structured
to include customary business and financial covenants placing
affirmative and negative obligations on the operation of each
companys business and its financial condition. However,
from time to time, we may elect to waive breaches of these
covenants, including our right to payment, or waive or defer
enforcement of remedies, such as acceleration of obligations or
foreclosure on collateral, depending upon the financial
condition and prospects of the particular portfolio company.
These actions may reduce the likelihood of our receiving the
full amount of future payments of interest or principal and be
accompanied by a deterioration in the value of the underlying
collateral as many of these companies may have limited financial
resources, may be unable to meet future obligations and may go
bankrupt. This could negatively impact our ability to pay
dividends and cause you to lose all or part of your investment.
Our
portfolio companies may incur obligations that rank equally
with, or senior to, our investments in such companies. As a
result, the holders of such obligations may be entitled to
payments of principal or interest prior to us, preventing us
from obtaining the full value of our investment in the event of
an insolvency, liquidation, dissolution, reorganization,
acquisition, merger or bankruptcy of the relevant portfolio
company.
Our portfolio companies may have other obligations that rank
equally with, or senior to, the securities in which we invest.
By their terms, such other securities may provide that the
holders are entitled to receive payment of interest or principal
on or before the dates on which we are entitled to receive
payments in respect of the securities in which we invest. Also,
in the event of insolvency, liquidation, dissolution,
reorganization or bankruptcy of a portfolio company, holders of
securities ranking senior to our investment in the relevant
portfolio company would typically be entitled to receive payment
in full before we receive any distribution in respect of our
investment. After repaying investors that are more senior than
us, the portfolio company may not have any remaining assets to
use for repaying its obligation to us. In the case of other
securities ranking equally with securities in which we invest,
we would have to share on an equal basis any distributions with
other investors holding such securities in the event of an
insolvency, liquidation, dissolution, reorganization or
bankruptcy of the relevant portfolio company. As a result, we
may be prevented from obtaining the full value of our investment
in the event of an insolvency, liquidation, dissolution,
reorganization or bankruptcy of the relevant portfolio company.
Our
portfolio investments may be concentrated in a limited number of
portfolio companies, which would magnify the effect if one of
those companies were to suffer a significant loss. This could
negatively impact our ability to pay dividends and cause you to
lose all or part of your investment.
While we aim to have a broad mix of investments in portfolio
companies, our investments, at any time, may be concentrated in
a limited number of companies. A consequence of this
concentration is that the aggregate returns we
22
seek to realize may be adversely affected if a small number of
our investments perform poorly or if we need to write down the
value of any one such investment. Beyond the applicable federal
income tax diversification requirements, we do not have fixed
guidelines for diversification, and our investments could be
concentrated in relatively few portfolio companies. These
factors could negatively impact our ability to pay dividends and
cause you to lose all or part of your investment.
Investments
in foreign debt or equity may involve significant risks in
addition to the risks inherent in U.S.
investments.
Our investment strategy has resulted in some investments in debt
or equity of foreign companies (subject to applicable limits
prescribed by the 1940 Act). Investing in foreign companies can
expose us to additional risks not typically associated with
investing in U.S. companies. These risks include exchange
rates, changes in exchange control regulations, political and
social instability, expropriation, imposition of foreign taxes,
less liquid markets and less available information than is
generally the case in the United States, higher transaction
costs, less government supervision of exchanges, brokers and
issuers, less developed bankruptcy laws, difficulty in enforcing
contractual obligations, lack of uniform accounting and auditing
standards and greater price volatility.
OFFERING
RISKS
Offering
risks are risks that are associated with an offering of our
securities.
Our
common stock price can be volatile.
The trading price of our common stock may fluctuate
substantially. The price of the common stock may be higher or
lower than the price you pay for your shares, depending on many
factors, some of which are beyond our control and may not be
directly related to our operating performance. These factors
include the following:
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price and volume fluctuations in the overall stock market from
time to time;
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significant volatility in the market price and trading volume of
securities of business development companies or other financial
services companies;
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volatility resulting from trading in derivative securities
related to our common stock including puts, calls, long-term
equity participation securities, or LEAPs, or short trading
positions;
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changes in regulatory policies or tax guidelines with respect to
business development companies or RICs;
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actual or anticipated changes in our earnings or fluctuations in
our operating results or changes in the expectations of
securities analysts;
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general economic conditions and trends;
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loss of a major funding source; or
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departures of key personnel of TTG Advisers.
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Investing
in our securities may involve a high degree of
risk.
The investments we make in accordance with our investment
objective may result in a higher amount of risk than alternative
investment options and volatility or loss of principal. Our
investments in portfolio companies may be highly speculative and
aggressive, and therefore, an investment in our securities may
not be suitable for someone with a low risk tolerance.
We may
allocate the net proceeds from this offering in ways with which
you may not agree.
We have significant flexibility in investing the net proceeds of
an offering of our securities and may use the net proceeds from
the offering in ways with which you may not agree or for
purposes other than those contemplated at the time of the
offering.
23
Sales
of substantial amounts of our securities may have an adverse
effect on the market price of our securities.
Sales of substantial amounts of our securities, or the
availability of such securities for sale, could adversely affect
the prevailing market prices for our securities. If this occurs
and continues, it could impair our ability to raise additional
capital through the sale of securities should we desire to do so.
Future
offerings of debt securities, which would be senior to our
common stock upon liquidation, or equity securities, which could
dilute our existing shareholders and be senior to our common
stock for the purposes of distributions, may harm the value of
our common stock.
In the future, we may attempt to increase our capital resources
by making additional offerings of equity or debt securities,
including medium-term notes, senior or subordinated notes and
classes of preferred stock or common stock. Upon the liquidation
of our Company, holders of our debt securities and shares of
preferred stock and lenders with respect to other borrowings
will receive a distribution of our available assets prior to the
holders of our common stock. Additional equity offerings by us
may dilute the holdings of our existing shareholders or reduce
the value of our common stock, or both. Any preferred stock we
may issue would have a preference on distributions that could
limit our ability to make distributions to the holders of our
common stock. Because our decision to issue securities in any
future offering will depend on market conditions and other
factors beyond our control, we cannot predict or estimate the
amount, timing or nature of our future offerings. Thus, our
shareholders bear the risk of our future offerings reducing the
market price of our common stock and diluting their stock
holdings in us.
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
Information contained in this prospectus may contain
forward-looking statements which can be identified
by the use of forward-looking terminology such as
may, will, expect,
intend, anticipate, estimate
or continue or the negative thereof or other
variations or similar words or phrases. The matters described in
Risk Factors and certain other factors noted
throughout this prospectus and in any exhibits to the
registration statement of which this prospectus is a part,
constitute cautionary statements identifying important factors
with respect to any such forward-looking statements, including
certain risks and uncertainties, that could cause actual results
to differ materially from those in such forward-looking
statements.
Although we believe that the assumptions on which these
forward-looking statements are based are reasonable, any of
those assumptions could prove to be inaccurate, and as a result,
the forward-looking statements based on those assumptions also
could be incorrect. Important assumptions include our ability to
originate new investments, maintain certain margins and levels
of profitability, access the capital markets for equity and debt
capital, the ability to meet regulatory requirements and the
ability to maintain certain debt to asset ratios. In light of
these and other uncertainties, the inclusion of a projection or
forward-looking statement in this prospectus should not be
regarded as a representation by us that our plans and objectives
will be achieved. These risks and uncertainties include those
described in Risk Factors and elsewhere in this
prospectus and any exhibits of the registration statement of
which this prospectus is a part. You should not place undue
reliance on these forward-looking statements, which apply only
as of the date of this prospectus. The forward-looking
statements contained in this prospectus and any accompanying
prospectus supplement are excluded from the safe harbor
protection provided by Section 27A of the Securities
Act.
We intend to use the net proceeds from the sale of our
securities for general corporate purposes, including, for
example, investing in portfolio companies in accordance with our
investment objective and strategy, repaying debt and funding our
subsidiaries activities. Pending such uses, we will hold
the net proceeds from the sale of our securities in cash or
invest all or a portion of such net proceeds in short term,
highly liquid investments. The supplement to this prospectus
relating to an offering will more fully identify the use of the
proceeds from such offering.
24
PRICE
RANGE OF COMMON STOCK AND DISTRIBUTIONS
Our common stock is traded on the NYSE under the symbol
MVC. The following table lists the high and low
closing sales prices for our common stock, and the closing sales
price as a percentage of NAV. On December 11, 2007, the
last reported sale price on the NYSE for our common stock was
$16.14 and on November 30, 2007, the Companys NAV per
share was $15.27. To view the Companys latest NAV per
share, visit the Companys Internet website address at
http://www.mvccapital.com.
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Closing
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Premium/Discount
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Premium/Discount
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Sale Price
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of High Sale
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of Low Sale
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Declared
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NAV(1)
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High
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Low
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Price to NAV
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Price to NAV
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Dividends
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Year ending October 31, 2005
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First Quarter
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$
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9.41
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$
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9.55
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$
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8.95
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1.49
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%
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(4.89
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)%
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Second Quarter
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9.64
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9.50
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9.17
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(1.45
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(4.88
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Third Quarter
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10.06
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11.34
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9.41
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12.61
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(6.55
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$
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0.12
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Fourth Quarter
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10.41
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12.22
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10.30
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17.39
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1.06
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0.12
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Year ending October 31, 2006
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First Quarter
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$
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10.94
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$
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12.22
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$
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10.50
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11.70
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%
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(4.02
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$
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0.12
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Second Quarter
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11.40
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12.75
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11.66
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11.84
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2.28
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0.12
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Third Quarter
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11.70
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13.49
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11.98
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15.30
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2.39
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0.12
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Fourth Quarter
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12.41
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13.87
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12.61
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11.67
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1.61
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0.12
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Year ending October 31, 2007
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First Quarter
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$
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13.23
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$
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15.26
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$
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13.11
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15.34
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(0.91
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$
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0.18
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Second Quarter
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14.53
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17.89
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15.38
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23.12
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5.85
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0.12
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Third Quarter
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14.98
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19.93
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15.83
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33.04
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5.67
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0.12
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Fourth Quarter
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15.21
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19.01
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15.70
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24.98
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3.22
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0.12
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Year ending October 31, 2008
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First Quarter (through December 11, 2007)
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$
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15.27
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$
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17.44
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$
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15.87
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14.21
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%(3)
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3.93
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Net asset value is currently calculated and published on a
monthly basis. The net asset value shown is as of the last day
in the relevant quarter and therefore may not reflect the net
asset value per share; on the date of the high and low sales
prices. The net asset values shown are based on shares
outstanding at the end of each period. |
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(2) |
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Net asset value has not yet been calculated for the quarter
ending January 31, 2008. However, net asset value as of
November 30, 2007 has been calculated and is $15.27. |
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These percentages are derived by comparing our high and low
sales prices through December 11, 2007 to our net asset
value as of November 30, 2007. |
At times, our common stock price per share has traded at a
discount to our net asset value per share. We cannot predict
whether our shares of common stock will trade at a premium or
discount to net asset value in the future.
Currently, the Company has a policy of seeking to pay quarterly
dividends to shareholders. Our quarterly dividends, if any, will
be determined by our board of directors. Most recently, on
October 15, 2007, our board of directors declared a regular
quarterly dividend of $0.12 per share, which was paid on
October 31, 2007 to shareholders of record on
October 24, 2007.
We maintain a dividend reinvestment plan for our registered
shareholders. As a result, if our board of directors declares a
dividend or distribution, certain shareholders can have any cash
dividends and distributions automatically reinvested in
additional shares of our common stock. See Dividend
Reinvestment Plan.
25
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is an externally managed, non-diversified,
closed-end management investment company that has elected to be
regulated as a business development company under the 1940 Act.
The Companys investment objective is to seek to maximize
total return from capital appreciation
and/or
income.
On November 6, 2003, Mr. Tokarz assumed his positions
as Chairman and Portfolio Manager of the Company. He and the
Companys investment professionals (who, effective
November 1, 2006, provide their services to the Company
through the Companys investment adviser, TTG Advisers) are
seeking to implement our investment objective (i.e., to
maximize total return from capital appreciation
and/or
income) through making a broad range of private investments in a
variety of industries.
The investments can include senior or subordinated loans,
convertible debt and convertible preferred securities, common or
preferred stock, equity interests, warrants or rights to acquire
equity interests, and other private equity transactions. In
addition, during the year ended October 31, 2006, we made
sixteen new investments and eight additional investments in
existing portfolio companies, committing capital totaling
approximately $166.3 million. During the nine month period
ended July 31, 2007, the Company made eight new investments
and 14 follow-on investments in existing portfolio companies,
committing capital totaling approximately $100.7 million.
Prior to the adoption of our current investment objective, the
Companys investment objective had been to achieve
long-term capital appreciation from venture capital investments
in information technology companies. The Companys
investments had thus previously focused on investments in equity
and debt securities of information technology companies. As of
July 31, 2007, 3.8% of the fair value of our assets
consisted of Legacy Investments. We are, however, seeking to
manage these Legacy Investments to try and realize maximum
returns. We generally seek to capitalize on opportunities to
realize cash returns on these investments when presented with a
potential liquidity event, i.e., a sale,
public offering, merger or other reorganization.
Our new portfolio investments are made pursuant to our new
investment objective and strategy. We are concentrating our
investment efforts on small and middle-market companies that, in
our view, provide opportunities to maximize total return from
capital appreciation
and/or
income. Under our investment approach, we are permitted to
invest, without limit, in any one portfolio company, subject to
any diversification limits required in order for us to continue
to qualify as a RIC.
We participate in the private equity business generally by
providing privately negotiated long-term equity
and/or debt
investment capital to small and middle-market companies. Our
financing is generally used to fund growth, buyouts,
acquisitions, recapitalizations, note purchases,
and/or
bridge financings. We generally invest in private companies,
although, from time to time, we may invest in public companies
that may lack adequate access to public capital.
We may also seek to achieve our investment objective by
establishing a subsidiary or subsidiaries that would serve as a
general partner or a managing member to a private investment
vehicle(s). In fact, during 2006, we established MVC Partners,
LLC (MVC Partners) for this purpose. Additionally,
we may also acquire a portfolio of existing private equity or
debt investments held by financial institutions or other
investment funds should such opportunities arise.
Operating
Income
For the Nine Month Periods Ended July 31, 2007 and
2006. Total operating income was
$18.5 million for the nine month period ended July 31,
2007 and $12.4 million for the nine month period ended
July 31, 2006, an increase of $6.1 million.
26
For
the Nine Month Period Ended July 31, 2007
Total operating income was $18.5 million for the nine month
period ended July 31, 2007. The increase in operating
income over the same period last year was primarily due to the
increase in the number of investments that provide the Company
with current income. The main components of investment income
were the interest and dividend income earned on loans to
portfolio companies and the receipt of closing and monitoring
fees from certain portfolio companies by the Company and MVCFS.
The Company earned approximately $15.5 million in interest
and dividend income from investments in portfolio companies. Of
the $15.5 million recorded in interest/dividend income,
approximately $2.4 million was payment in kind
interest/dividends. The payment in kind
interest/dividends are computed at the contractual rate
specified in each investment agreement and added to the
principal balance of each investment. The Companys debt
investments yielded rates from 0% to 27%. Also, the Company
earned approximately $508,000 in interest income on its cash
equivalents and short-term investments. The Company received fee
income and other income from portfolio companies and other
entities totaling approximately $2.3 million and $252,000,
respectively.
For
the Nine Month Period Ended July 31, 2006
Total operating income was $12.4 million for the nine month
period ended July 31, 2006. The increase in operating
income over the same nine month period last year was primarily
due to the increase in the number of investments that provide
the Company with current income. For the nine month periods
ended July 31, 2006 and 2005, the Company made 18 and nine
investments in portfolio companies, respectively. The main
components of investment income were the interest and dividend
income earned on loans to portfolio companies and the receipt of
closing and monitoring fees from certain portfolio companies by
the Company and MVCFS. The Company earned approximately
$7.3 million in interest and dividend income from
investments in portfolio companies. Of the $7.3 million
recorded in interest/dividend income, approximately
$1.4 million was payment in kind
interest/dividends. The payment in kind
interest/dividends are computed at the contractual rate
specified in each investment agreement and added to the
principal balance of each investment. During the nine month
period ended July 31, 2006, the Company reclassified
dividend income received from Vitality Foodservice, Inc.
(Vitality) totaling approximately $900,000 to return
of capital. The reclassification occurred due to the
determination that Vitality will not have taxable earnings and
profits for their fiscal year 2006. This reclassification to
return of capital had no impact on the Companys net asset
value. The Companys investments yielded rates from 7% to
17%. Also, the Company earned approximately $2.0 million in
interest income on its cash equivalents and short-term
investments. The Company received fee income and other income
from portfolio companies and other entities totaling
approximately $2.7 million and $456,000, respectively.
Included in other income is flow through income from limited
liability companies and cash received from the Mentor Graphics
Corp. (Mentor Graphics) multi-year earnout. Please
see the Companys 2005 Annual Report on
Form 10-K
for more information regarding the Mentor Graphics earnout.
For
the Year Ended October 31, 2006
Total operating income was $18.5 million for the year ended
October 31, 2006. The increase in operating income over
last year was primarily due to the increase in the number of
investments that provide the Company with current income. For
the years ended October 31, 2006 and 2005, the Company made
24 and 9 investments in portfolio companies, respectively. The
main components of operating income were the interest and
dividend income earned on loans to portfolio companies and the
receipt of closing and monitoring fees from certain portfolio
companies by the Company and MVCFS. During 2006, the Company
earned approximately $13.9 million in interest and dividend
income from investments in portfolio companies. Of the
$13.9 million recorded in interest/dividend income,
approximately $2.2 million was payment in kind
interest/dividends. The payment in kind interest/dividends are
computed at the contractual rate specified in each investment
agreement and added to the principal balance of each investment.
During the year ended October 31, 2006, the Company
reclassified dividend income received from Vitality totaling
approximately $900,000 to return of capital. The
reclassification occurred due to the determination that Vitality
did not have sufficient taxable earnings and profits for their
fiscal year 2006. This reclassification to return of capital had
limited impact on the Companys net asset value. The
Companys investments yielded rates from 7% to 17%. Also,
the Company earned approximately $2.3 million in interest
27
income on its cash equivalents and short-term investments. The
Company received fee income and other income from portfolio
companies and other entities totaling approximately
$3.8 million and $771,405, respectively. Included in other
income is flow through income from limited liability companies
and cash received from the Mentor Graphics multi-year earnout.
For
the Year Ended October 31, 2005
Total operating income was $12.2 million for the year ended
October 31, 2005. The increase in operating income over
2004 was primarily due to the increase in the number of
investments that provide the Company with current income. The
main components of investment income were the interest and
dividend income earned on loans to portfolio companies and the
receipt of closing and monitoring fees from certain portfolio
companies by the Company and MVCFS. The Company earned
approximately $7.53 million in interest and dividend income
from investments in portfolio companies. Of the
$7.53 million recorded in interest/dividend income,
approximately $1.37 million was payment in kind
interest/dividends. The payment in kind
interest/dividends are computed at the contractual rate
specified in each investment agreement and added to the
principal balance of each investment. The Companys
yielding investments were paying interest to the Company at
various rates from 7% to 17%. Also, the Company earned
approximately $1.93 million in interest income on its cash
equivalents and short-term investments. The Company received fee
income and other income from portfolio companies and other
entities totaling approximately $1.81 million and $900,000
respectively. Included in other income is flow through income
from limited liability companies, cash received from the Mentor
Graphics multi-year earnout and a legal settlement of $473,968.
For more information, please see Note 12 of our
consolidated financial statements, Legal
Proceedings. Without the receipt of this settlement, other
income earned for the year ended October 31, 2005, would
have been $428,855.
For
the Year Ended October 31, 2004
Total operating income was $4.0 million for the year ended
October 31, 2004. The main components of operating income
were the interest income earned on loans to portfolio companies
and the receipt of closing and monitoring fees from certain
portfolio companies by the Company and MVCFS. The Company earned
approximately $2.3 million in interest income from
investments in portfolio companies. Of the $2.3 million
recorded in interest income, approximately $100,000 was
payment in kind interest. The payment in
kind interest is computed at the contractual rate
specified in each investment agreement and added to the
principal balance of each investment. The Companys
yielding investments were paying interest to the Company at
various rates from 10% to 17%. Also, the Company earned
approximately $700,000 in interest income on its cash
equivalents and short-term investments. The Company received fee
income and other income from portfolio companies totaling
approximately $900,000 and $64,000 respectively.
Operating
Expenses
For the Nine Month Periods Ended July 31, 2007 and
2006. Operating expenses were $20.7 million
for the nine month period ended July 31, 2007 and
$10.2 million for the nine month period ended July 31,
2006, an increase of $10.5 million.
For
the Nine Month Period Ended July 31, 2007
Operating expenses were $20.7 million or 9.05% of the
Companys average net assets, when annualized, for the nine
month period ended July 31, 2007. Significant components of
operating expenses for the nine month period ended July 31,
2007, included the estimated provision for incentive
compensation expense of approximately $10.0 million,
management fee of $5.1 million, and interest expense and
other borrowing costs of $3.6 million. The estimated
provision for incentive compensation expense is a non-cash, not
yet payable, provisional expense relating to the Investment
Advisory and Management Agreement between the Company and TTG
Advisers (the Advisory Agreement).
The $10.5 million increase in the Companys operating
expenses in the nine month period ended July 31, 2007
compared to the nine month period ended July 31, 2006, was
primarily due to the $5.3 million increase in the provision
for estimated incentive compensation, the $2.9 million
increase in the Companys interest expense and
28
other borrowings, and the $2.3 million increase in the
management fee expense compared to the facilities and employee
compensation and benefits expense incurred when the Company was
internally managed. It should be noted, in this regard, that the
Advisory Agreement provides for an expense cap pursuant to which
TTG Advisers will absorb or reimburse operating expenses of the
Company to the extent necessary to limit the Companys
expense ratio (the consolidated expenses of the Company,
including any amounts payable to TTG Advisers under the base
management fee, but excluding the amount of any interest and
other direct borrowing costs, taxes, incentive compensation and
extraordinary expenses taken as a percentage of the
Companys average net assets) to 3.25% in a given fiscal
year. In fiscal year 2006, when the Company was still internally
managed and not subject to the expense cap, the expense ratio
was 3.22% (taking into account the same carve outs as those
applicable to the expense cap). For the nine month period ended
July 31, 2007, the expense ratio was 3.07% (taking into
account the same carve outs as those applicable to the expense
cap).
Pursuant to the terms of the Advisory Agreement, during the nine
month period ended July 31, 2007, the provision for
incentive compensation was increased by a net amount of
$9,931,942 to $17,104,294. The increase in the provision for
incentive compensation during the nine month period ended
July 31, 2007 primarily resulted from the sale of Baltic
Motors Corporation (Baltic Motors) and SIA BM Auto
(BM Auto) for a combined realized gain of
$65.5 million, which was a $52.3 million increase from
the combined carrying values at October 31, 2006. The
Companys Valuation Committee (the Valuation
Committee) also determined to increase the fair values of
five of the Companys portfolio investments (Dakota Growers
Pasta Company, Inc. (Dakota Growers), Octagon Credit
Investors, LLC (Octagon), SGDA
Sanierungsgesellschaft fur Deponien und Altlasten mbH
(SGDA), PreVisor, Inc. (PreVisor) and
Vitality) by a total of $5.8 million and decrease the fair
value of Ohio Medical Corporation (Ohio Medical) by
$9.0 million. During the year ended October 31, 2006,
Mr. Tokarz was paid no cash or other compensation. However,
on October 2, 2006, the Company realized a gain of $551,092
from the sale of a portion of the Companys LLC membership
interest in Octagon. This transaction triggered an incentive
compensation payment obligation of $110,218 to Mr. Tokarz,
which was paid on January 12, 2007. After the increase in
the provision due to the sale of Baltic Motors and BM Auto and
the decrease in the provision due to the Valuation
Committees determinations and payment made to
Mr. Tokarz, the reserve balance at July 31, 2007 was
$17,104,294. This reserve balance of $17,104,294 will remain
unpaid until net capital gains are realized, if ever, by the
Company. Pursuant to the Advisory Agreement, incentive
compensation payments will be made only upon the occurrence of a
realization event (such as the sale of Baltic Motors and BM
Auto). Without this reserve for incentive compensation,
operating expenses would have been approximately
$10.7 million or 4.47% of average net assets when
annualized as compared to 8.86%, which is reported on the
Consolidated Per Share Data and Ratios, for the nine month
period ended July 31, 2007. During the nine month period
ended July 31, 2007, there was no provision recorded for
the net operating income portion of the incentive fee as
pre-incentive fee net operating income did not exceed the hurdle
rate. For more information, please see Note 5 of our
consolidated financial statements, Incentive
Compensation.
For
the Nine Month Period Ended July 31, 2006
Operating expenses were $10.2 million or 6.48% of the
Companys average net assets, when annualized, for the nine
month period ended July 31, 2006. Significant components of
operating expenses for the nine month period ended July 31,
2006, included the estimated provision for incentive
compensation expense of approximately $4.7 million,
salaries and benefits of approximately $2.2 million,
insurance premium expenses of $354,211, interest expense and
other borrowing costs of $683,590, legal fees of $438,669 and
facilities-related expenses of $486,302. The estimated provision
for incentive compensation expense is a non-cash, not yet
payable, provisional expense relating to Mr. Tokarzs
agreement with the Company.
The $5.5 million increase in the Companys operating
expenses in the nine month period ended July 31, 2006
compared to the nine month period ended July 31, 2005, was
primarily due to the $3.9 million increase in the provision
for estimated incentive compensation. An increase in the number
of employees needed to service the larger portfolio resulted in
an increase of $622,767 in salaries and benefits. Also, the
Companys rent and other facility related expenses
increased approximately $175,540 primarily due to the
Companys procurement of larger office space to accommodate
the Companys increased number of employees. For more
information, please see Note 10 of our consolidated
financial statements, Commitments and Contingencies.
29
The increase of approximately $662,175 in the Companys
interest expense and other borrowing costs in the nine month
period ended July 31, 2006, was due to additional
borrowings under the Credit Facility.
Pursuant to the terms of the Companys agreement with
Mr. Tokarz, during the nine month period ended
July 31, 2006, the provision for estimated incentive
compensation was increased by $4,717,061. The increase in the
provision for incentive compensation resulted from the
determination of the Valuation Committee to increase the fair
value of five of the Companys portfolio investments:
Baltic Motors, Dakota Growers, Ohio Medical, Octagon, and
Vitality which are subject to the Companys agreement with
Mr. Tokarz, by a total of $22,546,929. This reserve balance
of $5,834,389 will remain unpaid until net capital gains are
realized, if ever, by the Company. Pursuant to
Mr. Tokarzs agreement with the Company, only after a
realization event, may the incentive compensation be paid to
him. Mr. Tokarz has determined to allocate a portion of his
incentive compensation to certain employees of the Company.
During the year ended October 31, 2005 and the nine month
period ended July 31, 2006, Mr. Tokarz was paid no
cash or other compensation. Without this reserve for incentive
compensation, operating expenses would have been approximately
$5.49 million or 3.57% of average net assets when
annualized as compared to 6.48% which is reported on the
Consolidated Per Share Data and Ratios, for the nine month
period ended July 31, 2006. For more information, please
see Note 5 Incentive Compensation.
In February 2006, the Company renewed its Directors &
Officers/Professional Liability Insurance policies at an expense
of approximately $459,000 which is amortized over the
12-month
life of the policy. The prior policy premium was $517,000.
For
the Year Ended October 31, 2006
Operating expenses were $14.6 million or 6.78% of the
Companys average net assets for the year ended
October 31, 2006. Significant components of operating
expenses for the year ended October 31, 2006, included an
estimated provision for incentive compensation expense of
approximately $6.1 million, salaries and benefits of
approximately $3.5 million, interest and other borrowing
costs of $1.6 million, legal fees of $685,396,
facilities-related expenses of $603,328, and insurance premium
expenses of $471,711. The estimated provision for incentive
compensation expense is a non-cash, not yet payable, provisional
expense relating to Mr. Tokarzs employment agreement
with the Company.
The $8.1 million increase in the Companys operating
expenses for the year ended October 31, 2006 compared to
the year ended October 31, 2005, was primarily due to: the
$4.9 million increase in the provision for estimated
incentive compensation; an increase in the number of employees
needed to service the larger portfolio, which resulted in an
increase of $1.2 million in salaries and benefits; and the
Companys rent and other facility related expenses
increased approximately $118,908 primarily due to the
Companys procurement of larger office space to accommodate
the Companys increased number of employees. For more
information, please see Note 10 of our consolidated
financial statements, Commitments and Contingencies.
Finally, the increase of approximately $1.6 million
compared to the year ended October 31, 2005 in the
Companys interest expense and other borrowing costs was
due to borrowings under the Credit Facility.
In February 2006, the Company renewed its Directors &
Officers/Professional Liability Insurance policies at an expense
of approximately $459,000 which is amortized over the
12-month
life of the policy. The prior policy premium was $517,000.
Pursuant to the terms of the Companys employment agreement
with Mr. Tokarz, during the year ended October 31,
2006, the provision for estimated incentive compensation was
increased by $6,055,024. The increase in the provision for
incentive compensation resulted from the determination of the
Valuation Committee to increase the fair value of six of the
Companys portfolio investments: Baltic Motors, Dakota
Growers, Ohio Medical, Octagon, Turf Products LLC
(Turf), and Vitality, which are subject to the
Companys employment agreement with Mr. Tokarz, by a
total of $30,275,120. This reserve balance of $7,172,352 will
remain unpaid until net capital gains are realized, if ever, by
the Company. Without this reserve for incentive compensation,
operating expenses would have been approximately
$8.51 million or 3.96% of average net assets when
annualized as compared to 6.78% which is reported on the
Consolidated Per Share Data and Ratios, for the year ended
October 31, 2006. Pursuant to Mr. Tokarzs
employment agreement with the Company, only after a realization
event, may the incentive compensation be paid to him.
Mr. Tokarz has determined to allocate a portion of his
incentive
30
compensation to certain employees of the Company. During the
years ended October 31, 2006 and October 31, 2005,
Mr. Tokarz was paid no cash or other compensation. However,
on October 2, 2006 and as discussed in Realized Gains
and Losses on Portfolio Securities, the Company realized a
gain of $551,092 from the sale of a portion of the
Companys LLC member interest in Octagon. This transaction
triggered an incentive compensation payment obligation to
Mr. Tokarz, which payment is not required to be made until
the precise amount of the payment obligation is confirmed based
on the Companys completed audited financials for the
fiscal year 2006. Subject to confirmation following the audit,
the payment obligation to Mr. Tokarz from this transaction
is approximately $110,000 (which is expected to be paid during
the first quarter of the Companys fiscal year 2007). For
more information, please see Note 5 of our consolidated
financial statements, Incentive Compensation.
For
the Year Ended October 31, 2005
Operating expenses were $6.5 million or 3.75% of average
net assets for the year ended October 31, 2005. Significant
components of operating expenses for the year ended
October 31, 2005 included salaries and benefits of
$2,336,242, estimated incentive compensation expense of
$1,117,328, insurance premium expenses of $590,493, legal fees
of $529,541 and facilities related expenses of $484,420.
Estimated incentive compensation expense is a non-cash, not yet
payable, provisional expense relating to Mr. Tokarzs
compensation arrangement with the Company.
The increase in the Companys operating expenses in 2005
compared to 2004 was primarily due to an increase in employees
needed to service the larger portfolio and work to continue to
grow the Company. Also, the Companys rent and other
facility related expenses increased primarily due to the
Companys procurement of larger office space to accommodate
the Companys increased number of employees. For more
information, please see Note 10 of our consolidated
financial statements, Commitments and Contingencies.
Pursuant to the terms of the Companys agreement with
Mr. Tokarz, during the year ended October 31, 2005,
the Company created a provision for $1,117,328 of incentive
compensation. This provision for incentive compensation resulted
from the determination of the Valuation Committee to increase
the fair value of five of the Companys portfolio
investments: Baltic Motors, Dakota Growers, Octagon, Vestal
Manufacturing Enterprises, Inc. (Vestal) and
Vitality which are subject to the Companys agreement with
Mr. Tokarz, by an aggregate amount of $5,586,638. This
reserve balance of $1,117,328 will remain unpaid and not finally
determined until net capital gains are realized, if ever, by the
Company. Pursuant to Mr. Tokarzs agreement with the
Company, only after a realization event, will the incentive
compensation be paid to him. Mr. Tokarz has determined to
allocate a portion of his incentive compensation to certain
employees of the Company. During the year ended October 31,
2005, Mr. Tokarz was paid no cash or other compensation.
Without this reserve for incentive compensation, operating
expenses would have been approximately $5.4 million or
3.10% of average net assets. For more information, please see
Note 5 of our consolidated financial statements,
Incentive Compensation.
In February 2005, the Company renewed its Directors &
Officers/Professional Liability Insurance policies at an expense
of approximately $517,000 which is amortized over the
12-month
life of the policy. The prior policy premium was $719,000.
During the year ended October 31, 2005, the Company paid or
accrued $529,541 in legal fees. This amount includes legal fees
of $47,171 which were incurred while pursuing a claim against
Federal Insurance Company. For more information, please see
Note 12 of our consolidated financial statements,
Legal Proceedings. The Company received $473,964
from the settlement of the legal action which was recorded as
other income. After fees and expenses the cash
received from the settlement was $426,797. Without the legal
fees related to the legal action, the Company would have paid or
accrued $482,370 in legal fees.
For
the Year Ended October 31, 2004
Operating expenses were $4.3 million or 3.68% of average
net assets for the year ended October 31, 2004. Significant
components of operating expenses for the year ended
October 31, 2004 included insurance premium expenses of
$959,570, salaries and benefits of $1,365,913, legal fees of
$810,848, and facilities expense of $90,828.
31
In February 2003, the former management of the Company
(Former Management) entered into new
Directors & Officers/Professional Liability Insurance
policies with total premiums of approximately $1.4 million.
The cost was amortized over the life of the policy, through
February 2004, at which time at new policy was entered into with
a premium of approximately $719,000. For the year ended
October 31, 2004, the Company expensed $959,570 in
insurance premiums.
During the year ended October 31, 2004, the Company paid or
accrued $810,848 in legal fees (compared to $1.5 million in
2003). Legal expenses included fees of $124,787 incurred while
pursuing action against the Companys former advisor, meVC
Advisers, Inc. (the Former Adviser) for the
reimbursement of management fees which were alleged to be
excessive. For more information, please see Note 12 of our
consolidated financial statements, Legal
Proceedings. The Company received $370,000 from the
settlement of the legal action which was recorded as other
income. After fees and expenses the cash received from the
settlement was $245,213. Without the legal fees related to this
litigation, the Company would have paid or accrued $686,061 in
legal fees. The legal expenses for the year ended
October 31, 2004, were reflective of a decreased need for
legal counsel due to the redefinition of the Companys
direction by management.
On January 21, 2004, the Company reached an agreement with
the property manager at 3000 Sand Hill Road, Menlo Park,
California to terminate its lease at such location. Under the
terms of the agreement, the Company bought-out its lease
directly from the property manager, for an amount equal to
$232,835. As a result, the Company recovered approximately
$250,000 of the remaining reserve established at
October 31, 2003. Without the recovery of the reserve, the
gross facilities expense for the year ended October 31,
2004 would have been approximately $340,828.
Realized
Gains And Losses On Portfolio Securities
For the Nine Month Periods Ended July 31, 2007 and
2006. Net realized gains for the nine month
period ended July 31, 2007 were $65.8 million and
$3.0 million for the nine month period ended July 31,
2006, an increase of approximately $62.8 million.
For
the Nine Month Period Ended July 31, 2007
Net realized gains for the nine month period ended July 31,
2007 were $65.8 million. The Companys net realized
gains for the nine month period ended July 31, 2007 was
primarily due to the gain on the sale of Baltic Motors and BM
Auto. On July 24, 2007, the Company sold the common stock
of Baltic Motors and BM Auto. The amount received from the sale
of the 60,684 common shares of Baltic Motors was approximately
$62.0 million, net of closing and other transaction costs,
working capital adjustments and a reserve established by the
Company to satisfy certain post-closing conditions requiring
capital and other expenditures. Baltic Motors repaid all debt
from the Company in full including all accrued interest. Total
amount received from the repayment of the debt was approximately
$10.2 million including all accrued interest. The remaining
$51.8 million less the $8.0 million cost basis of
Baltic Motors resulted in $43.8 million recorded as
realized gain. The difference between the $51.8 million
received from the Baltic Motors equity and the carrying value at
October 31, 2006 is $30.6 million and the amount of
the increase in net assets attributable to fiscal year 2007. The
portion of the capital gain related to the equity investment
made on June 24, 2004 ($40.9 million), will be treated
as long-term capital gain and the portion related to the equity
investment made on September 28, 2006 ($2.9 million)
will be treated as a short-term capital gain. The amount
received from the sale of the 47,300 common shares of BM Auto
was approximately $29.7 million, net of closing and other
transaction costs, working capital adjustments and a reserve
established by the Company to satisfy certain post-closing
conditions requiring capital and other expenditures. The
$29.7 million less the $8.0 million cost basis of BM
Auto resulted in $21.7 million recorded as a long term
capital gain. The difference between the $29.7 million
received from the BM Auto equity and the carrying value at
October 31, 2006 is $21.7 million and the amount of
the increase in net assets attributable to fiscal year 2007.
As mentioned above, a reserve account of approximately
$3.0 million was created for post closing conditions that
are required of the seller as a part of the purchase agreement.
The cash held in the reserve account is held in Euros. At
July 31, 2007, the balance of the reserve account was
approximately $2.9 million. Expenses such as finishing a
road to a dealership and Latvian tax withholding payments, among
other things, have been estimated by
32
management and will be paid from this account. This reserve
account is owned and controlled by the Company. The Company has
recorded the cash in the reserve account to its books
denominated as foreign currency. It has also recorded a
liability for the same amount so there is no impact to net asset
value until all post closing conditions are met. The remaining
cash, if any, after satisfying all reserve liabilities and
contingencies, will be converted to U.S. dollars and
recorded as a long term capital gain. We do not anticipate any
post closing conditions in excess of the reserve, however, if
they occur it would reduce the capital gain that has already
been recorded. Any difference recorded due to changes in
exchange rates since the Euros were received will be recorded as
currency gain (loss). During the interim, at each month end, the
Euros will be valued based on that days exchange rate and
the liability will be adjusted to match the U.S. dollars
equivalent. Management believes all post closing conditions will
be met before October 31, 2007.
On June 14, 2007, the Company received approximately
$451,000 as a final disbursement from the sale of ProcessClaims
Inc. (ProcessClaims). This amount was deposited into
a reserve account at the time of sale. Due to the contingencies
associated with the escrow, the Company placed no value on the
proceeds deposited in escrow. The disbursement was recorded as a
long term capital gain.
The Company also realized a loss from the prepayment from Levlad
Arbonne International LLC (Levlad) on the second
lien loan, which was purchased at a premium and thus resulted in
a realized loss of approximately $121,000.
For
the Nine Month Period Ended July 31, 2006
Net realized gains for the nine month period ended July 31,
2006 were $3.0 million. The significant component of the
Companys net realized gain for the nine month period ended
July 31, 2006 was primarily due to the gain on the sale of
ProcessClaims.
During the nine month period ended July 31, 2006, the
Company sold its investment in ProcessClaims and realized a gain
of approximately $5.5 million. The Company was entitled to
receive approximately $8.3 million in gross proceeds, of
which approximately $400,000 or 5% of the proceeds was deposited
into a reserve account for one year. Due to the contingencies
associated with the escrow, the Company had not presently placed
any value on the proceeds deposited in escrow and has therefore
not factored such proceeds into the Companys increased NAV.
The Company received notification of the final dissolution of
Yaga Inc. (Yaga). The Company received no proceeds
from the dissolution of this company and the investment has been
removed from the Companys books. The Company realized a
loss of $2.3 million as a result of this dissolution. The
fair value of Yaga was previously written down to zero and
therefore, the net effect of the removal of Yaga from the
Companys books on the Companys consolidated
statement of operations and NAV was zero.
On April 7, 2006, the Company sold its investment in Lumeta
Corporation (Lumeta) for its carrying value of
$200,000. The Company realized a loss on Lumeta of approximately
$200,000. However, the Valuation Committee previously decreased
the fair value of the Companys investment in this company
to $200,000 and as a result, the realized loss was offset by a
reduction in unrealized losses. Therefore, the net effect of the
Companys sale of its investment in Lumeta on the
Companys consolidated statement of operations and NAV was
zero.
The Company also received a payout related to a former portfolio
company, Annuncio Software, Inc. (Annuncio), of
approximately $70,000.
For
the Year Ended October 31, 2006
Net realized gains for the year ended October 31, 2006 were
$5.2 million. The significant component of the
Companys net realized gain for the year ended
October 31, 2006 was primarily due to the gain on the sale
of ProcessClaims, the escrow distribution from Sygate
Technologies, Inc. (Sygate), and the sale of a
portion of the Octagon equity interest, an investment made
during Mr. Tokarzs tenure as portfolio manager.
During the year ended October 31, 2006, the Company sold
its investment in ProcessClaims and realized a gain of
approximately $5.5 million. The Company was entitled to
receive approximately $8.3 million in gross proceeds, of
which approximately $400,000 or 5% of the proceeds will be
deposited into a reserve account for one year. Due to
33
the contingencies associated with the escrow, the Company has
not presently placed any value on the proceeds deposited in
escrow and has therefore not factored such proceeds into the
Companys increased NAV. The Company received net proceeds
of approximately $7.9 million.
On October 2, 2006, Octagon bought back a total of 15%
equity interest from non-service members. This resulted in a
sale of a portion of the Companys LLC member interest to
Octagon for proceeds of $1,020,018. The Company realized a gain
of $551,092 from this sale.
On October 17, 2006, the Company received a
$1.6 million escrow disbursement from the sale of Sygate on
October 10, 2005. Due to the contingencies associated with
the escrow, the Company had not placed any value on the proceeds
deposited in escrow. This resulted in an increase in NAV of
$1.6 million.
The Company received notification of the final dissolution of
Yaga. The Company received no proceeds from the dissolution of
this company and the investment has been removed from the
Companys books. The Company realized a loss of
$2.3 million as a result of this dissolution. The fair
value of Yaga was previously written down to zero and therefore,
the net effect of the removal of Yaga from the Companys
books on the Companys consolidated statement of operations
and NAV was zero.
On April 7, 2006, the Company sold its investment in Lumeta
for its then carrying value of $200,000. The Company realized a
loss on Lumeta of approximately $200,000. However, the Valuation
Committee previously decreased the fair value of the
Companys investment in this company to $200,000 and as a
result, the realized loss was offset by a reduction in
unrealized losses. Therefore, the net effect of the
Companys sale of its investment in Lumeta on the
Companys consolidated statement of operations and NAV was
zero.
The Company also received a payout related to a former portfolio
company, Annuncio, of approximately $70,000.
For
the Year Ended October 31, 2005
Net realized losses for the year ended October 31, 2005
were $3.3 million. The significant components of the
Companys net realized loss for the year ended
October 31, 2005 were realized gains on the Companys
investments in Sygate, Mentor Graphics and BlueStar Solutions,
Inc. (BlueStar) which were offset by realized losses
on CBCA, Inc. (CBCA), Phosistor Technologies, Inc.
(Phosistor) and ShopEaze Systems, Inc.
(ShopEaze).
During the year ended October 31, 2005, the Company sold
its entire investment in Sygate and received net proceeds of
$14.4 million. In addition, approximately $1.6 million
or 10% of proceeds from the sale were deposited in an escrow
account for approximately one year. Due to the contingencies
associated with the escrow, the Company did not place any value
on the proceeds deposited in escrow and did not factor such
proceeds into the Companys NAV. The realized gain from the
$14.4 million in net proceeds received was
$10.4 million. The Company also sold 685,679 shares of
Mentor Graphics receiving net proceeds of approximately
$9.0 million and a realized gain on the shares sold of
approximately $5.0 million. The Company also received
approximately $300,000 from the release of money held in escrow
in connection with the Companys sale of its investment in
BlueStar in 2004 (see below).
The Company realized losses on CBCA of approximately
$12.0 million, Phosistor of approximately $1.0 million
and ShopEaze of approximately $6.0 million. The Company
received no proceeds from these companies and they have been
removed from the Companys portfolio. The Valuation
Committee previously decreased the fair value of the
Companys investment in these companies to zero and as a
result, the realized losses were offset by reductions in
unrealized losses. Therefore, the net effect of the transactions
on the Companys consolidated statement of operations and
NAV was zero for the fiscal year ended October 31, 2005.
For
the Year Ended October 31, 2004
Net realized losses for the year ended October 31, 2004
were $37.8 million. The significant components of the
Companys realized losses for the year ended
October 31, 2004 were transactions with PTS Messaging, Inc.
(PTS Messaging), Ishoni Networks, Inc.
(Ishoni), Synhrgy HR Technologies, Inc.
(Synhrgy), BlueStar and DataPlay, Inc.
(DataPlay).
34
The Company had a return of capital from PTS Messaging with
proceeds totaling approximately $102,000 from the initial and
final disbursement of assets and a realized loss totaling
approximately $11.6 million. As of October 31, 2004
the Company no longer held an investment in PTS Messaging. The
Valuation Committee previously decreased the fair value of the
Companys investment in PTS Messaging to zero.
The Company also realized a loss on Ishoni of approximately
$10.0 million. The Company received no proceeds from the
dissolution of this company and the investment has been removed
from the Companys portfolio. The Valuation Committee
previously decreased the fair value of the Companys
investment in Ishoni to zero.
There was a gain of $39,630 representing proceeds received from
the cashless exercise of the Companys warrants of Synhrgy
in conjunction with the early repayment by Synhrgy of the
balance of Synhrgys credit facility.
On August 26, 2004, Affiliated Computer Services, Inc.
(ACS) acquired the Companys portfolio company
BlueStar in a cash transaction. The Company received
approximately $4.5 million for its investment in BlueStar.
The amount received included up to $459,000 in contingent
payments that were held in escrow. The carrying value of the
BlueStar investment was $3.0 million. The Company realized
a loss of approximately $8.8 million, which was offset by a
decrease in unrealized loss by the same amount. The effect of
the transaction on the Company was an increase in assets by
$1.1 million. After the sale, the Company no longer held an
investment in BlueStar.
On August 29, 2004, the Company entered into a transaction
pursuant to which it received 602,131
Series A-1
preferred shares of DPHI, Inc. (DPHI), which
purchased the assets of DataPlay out of bankruptcy in late 2003.
The Companys legal fees in connection with the transaction
were approximately $20,000. The shares of DPHI were received in
exchange for the Companys seven promissory notes in
DataPlay. The 2,500,000 shares of DataPlay Series D
Preferred Stock were removed from the books of the Company for a
realized loss of $7.5 million. The unrealized loss had
previously been recorded; therefore, the net effect of the
transaction was zero.
Unrealized
Appreciation and Depreciation of Portfolio Securities
For the Nine Month Periods Ended July 31, 2007 and
2006. The Company had a net change in unrealized
depreciation on portfolio investments of $6.9 million for
the nine month period ended July 31, 2007. The Company had
a net change in unrealized appreciation on portfolio investments
of $26.4 million for the nine month period ended
July 31, 2006.
For
the Nine Month Period Ended July 31, 2007
The Company had a net change in unrealized depreciation on
portfolio investments of $6.9 million for the nine month
period ended July 31, 2007. The net change in unrealized
depreciation on investment transactions, for the nine month
period ended July 31, 2007, primarily resulted from the
sale of Baltic Motors and BM Auto for a combined realized gain
of $65.5 million, which was a $52.3 million increase
from the combined carrying values at October 31, 2006. The
Valuation Committees decision to increase the fair values
of the Companys investments in Dakota Growers common stock
by $1.9 million, Octagons membership interest by
approximately $1.6 million, SGDAs preferred equity by
$350,000 and common equity by approximately $276,000, PreVisor
common stock by $1.7 million, Vendio Services, Inc.
(Vendio) preferred stock by $6.1 million and
common stock by $15,000, Foliofn, Inc.
(Foliofn) preferred stock by
$2.1 million, and Vitality preferred stock by approximately
$1.1 million and a decrease in the fair value of Ohio
Medical common stock by $9.0 million, resulted in a net
unrealized appreciation of $6.1 million. The net increase
of $6.1 million in the fair values of the Companys
investments determined by the Valuation Committee and the sale
of Baltic Motors and BM Auto, with a $52.3 million increase
from the carrying value at October 31, 2006, was offset by
the unrealized depreciation reclassification from unrealized to
realized, caused by the sale of Baltic Motors and BM Auto, of
$65.5 million. These were the primary components for the
unrealized depreciation of $6.9 million for the nine month
period ended July 31, 2007.
For
the Nine Month Period Ended July 31, 2006
The Company had a net change in unrealized appreciation on
portfolio investments of $26.4 million for the nine month
period ended July 31, 2006. The change in unrealized
appreciation on investment transactions for the nine month
period ended July 31, 2006 primarily resulted from the
Valuation Committees decision to increase the
35
fair values of the Companys investments in Baltic Motors
common stock by $7.8 million, Dakota Growers common stock
by approximately $1.1 million, Octagons membership
interest by approximately $562,000, Ohio Medical common stock by
$9.2 million, ProcessClaims preferred stock by
$4.8 million and Vitality common stock and warrants by
$3.5 million and $400,000, respectively. Other key
components of the net change in unrealized appreciation were the
$2.5 million depreciation reclassification from unrealized
to realized caused by the removal of Yaga and Lumeta and the
$4.8 million appreciation reclassification from the sale of
ProcessClaims from the Companys books.
For
the Year Ended October 31, 2006
The Company had a net change in unrealized appreciation on
portfolio investments of $38.3 million for the year ended
October 31, 2006. The change in unrealized appreciation on
investment transactions for the year ended October 31, 2006
primarily resulted from the Valuation Committees decision
to increase the fair value of the Companys investments in
Baltic Motors common stock by $11.6 million, Dakota Growers
common stock by approximately $2.6 million, Turfs
membership interest by approximately $2.0 million,
Octagons membership interest by approximately $562,000,
Ohio Medical common stock by $9.2 million, ProcessClaims
preferred stock by $4.8 million, Foliofn preferred
stock by $5.0 million, Vendio preferred stock by $700,000,
and Vitality common stock and warrants by $3.5 million and
$400,000, respectively. The Valuation Committee also decided to
decrease the fair value of the Companys investment in
Timberland Machines & Irrigation, Inc.
(Timberland) common stock by $1.0 million.
Other key components of the net change in unrealized
appreciation were the $2.5 million depreciation
reclassification from unrealized to realized caused by the
removal of Yaga and Lumeta and the $4.8 million
appreciation reclassification from the sale of ProcessClaims
from the Companys books.
For
the Year Ended October 31, 2005
The Company had a net change in unrealized appreciation on
portfolio investments of $23.8 million for the year ended
October 31, 2005. The change in unrealized appreciation on
investment transactions for the year ended October 31, 2005
primarily resulted from the Valuation Committees
determinations to increase the fair value of the Companys
investments in Baltic Motors by $1.5 million, Dakota
Growers by $514,000, Octagon by $1,022,638, Sygate by
$7.5 million, Vendio by $1,565,999, Vestal by
$1.85 million and Vitality by $700,000. The increase in the
fair value of these portfolio investments resulted in a change
in unrealized appreciation of approximately $14.7 million.
Other key components were the realization of a
$10.4 million gain on the sale of the Companys
investment in Sygate, a $5.0 million gain on the sale of
the Companys investment in Mentor Graphics, the
$19.0 million depreciation reclassification from unrealized
to realized caused by the removal of CBCA, Phosistor and
ShopEaze from the Companys books and the $500,000 decrease
in unrealized caused by repayment in full of the Arcot Systems,
Inc. (Arcot) loan which was being carried below cost.
For
the Year Ended October 31, 2004
Net change in unrealized appreciation for the year ended
October 31, 2004 was approximately $49.4 million. The
net change in unrealized appreciation on investment transactions
for the year ended October 31, 2004 resulted mainly from
the $37.8 million reclassification from unrealized
depreciation to realized loss caused by the sale or disbursement
of assets from PTS Messaging, Ishoni, Synhrgy, BlueStar and
DataPlay (See Realized Gains and Losses on Portfolio
Securities). This net decrease also resulted from the
determinations of the Valuation Committee to (i) increase
the fair value of the Companys investments in 0-In Design
Automation, Inc. (0-In) by $5 million, Sygate
by $1.5 million, BlueStar by $1.5 million, Vendio by
$634,000 and Integral Development Corp. (Integral)
by $989,000 and (ii) decrease the fair value of the
Companys investments in Actelis Networks, Inc.
(Actelis) by $1,000,000, CBCA by $500,000, and
Sonexis, Inc. (Sonexis) by $500,000.
The Company also sold its investment in 0-In for
685,679 shares of Mentor Graphics in a tax-free exchange.
Of these shares, 603,396 are freely tradable and valued daily at
market price. As of October 31, 2004 these shares had an
unrealized gain of approximately $3.0 million above the
Companys cost basis in 0-In and $6.0 million above
0-Ins carrying value at October 31, 2003.
36
Portfolio
Investments
For the Nine Month Period Ended July 31, 2007 and the
Year Ended October 31, 2006. The cost of the
portfolio investments held by the Company at July 31, 2007
and at October 31, 2006 was $334.7 million and
$286.9 million, respectively, an increase of
$47.8 million. The aggregate fair value of portfolio
investments at July 31, 2007 and at October 31, 2006
was $316.9 million and $275.9 million, respectively,
an increase of $41.0 million. The cost and aggregate fair
value of cash and cash equivalents held by the Company at
July 31, 2007 and at October 31, 2006 was
$112.8 million and $66.2, respectively, an increase of
approximately $46.6 million.
For
the Nine Month Period Ended July 31, 2007
During the nine month period ended July 31, 2007, the
Company made eight new investments, committing capital totaling
approximately $53.3 million. The investments were made in
U.S. Gas & Electric, Inc.
(U.S. Gas) ($18.9 million), Genevac
U.S. Holdings, Inc. (Genevac)
($14.0 million), Levlad ($10.1 million), Total Safety
($4.5 million), WBS Carbons Acquisition Corp.
(WBS) ($3.2 million), SIA Tekers Invest
(Tekers) ($2.3 million), HuaMei Capital
Company, Inc. (HuaMei) ($200,000) and MVC Partners
($71,000).
The Company also made 14 follow-on investments in existing
portfolio companies committing capital totaling approximately
$47.4 million. On November 7, 2006, the Company
invested $100,000 in SGDA by purchasing an additional common
equity interest. On December 22, 2006, the Company
purchased an additional 56,472 shares of common stock in
Vitality at a cost of approximately $565,000. On January 9,
2007, the Company extended to Turf a $1.0 million junior
revolving note. Turf immediately borrowed $1.0 million from
the note. On January 11, 2007, the Company provided Harmony
Pharmacy & Health Center, Inc. (Harmony
Pharmacy) a $4.0 million revolving credit facility.
Harmony Pharmacy immediately borrowed $1.75 million from
the credit facility. On February 16, 2007, the Company
invested $1.8 million in HuaMei purchasing 450 shares
of common stock. At the same time, the previously issued
$200,000 convertible promissory note was exchanged for
50 shares of HuaMei common stock at the same price. On
February 19, 2007, the Company invested an additional
$8.4 million of common equity interest in Velocitius B.V.
(Velocitius). On February 21, 2007 and
May 4, 2007, the Company provided BP Clothing, LLC
(BP) a $5.0 million and a $2.5 million
second lien loan, respectively. On March 26, 2007, the
Company extended a $1.0 million bridge loan to Auto MOTOL
BENI (BENI). On March 30, 2007, the Company
invested an additional $5.0 million in SP Industries, Inc.
(SP) in the form of a subordinated term loan B. On
May 1, 2007, the Company extended to Velocitius a $650,000
revolving line of credit (Line II). Velocitius
immediately borrowed approximately $547,000. On May 8,
2007, the Company provided Baltic Motors a $5.5 million
bridge loan. On May 9, 2007, the Company purchased one
million shares of Dakota Growers preferred stock at a cost of
$10.0 million. At that time, 65,000 shares of Dakota
Growers common stock were converted to 65,000 shares of
convertible preferred stock. On July 30, 2007, the Company
provided Ohio Medical a $2.0 million convertible unsecured
promissory note.
At the beginning of the 2007 fiscal year, the junior revolving
note provided to Timberland had a balance outstanding of
approximately $2.8 million. On November 27, 2006, the
amount available on the revolving note was increased by $750,000
to $4.0 million. Net repayments during for the nine month
period ended July 31, 2007 were $300,000 resulting in a
balance as of July 31, 2007 of $2.5 million.
At October 31, 2006, the balance of the revolving credit
facility provided to Octagon was $3.3 million. Net
borrowings during the nine month period ended July 31, 2007
were $2.8 million resulting in a balance outstanding of
approximately $6.1 million.
At October 31, 2006, the balance of Line I (as defined
below) was approximately $144,000. Net repayments during the
nine month period ended July 31, 2007 were approximately
$10,000. As of July 31, 2007, the balance of Line I was
approximately $134,000.
On December 1, 2006, the Company received a principal
payment of approximately $100,000 from Vestal on its senior
subordinated debt. As of July 31, 2007, the balance of the
loan was $700,000.
On December, 8, 2006, Total Safety U.S., Inc. (Total
Safety) repaid term loan A and term loan B in full
including all accrued interest and prepayment fees. The total
amount received for term loan A was $5,043,775 and for term loan
B was $1,009,628.
37
On December 29, 2006, March 30, 2007, and
June 29, 2007, the Company received quarterly principal
payments from BP on term loan A of $90,000.
On January 1, 2007, April 2, 2007, and July 2,
2007, the Company received principal payments of $37,500 on the
term loan provided to Innovative Brands LLC (Innovative
Brands).
On January 2, 2007 and March 1, 2007, the Company
received principal payments of approximately $96,000 and
$1.0 million, respectively, on term loan A from Henry
Company.
On January 5, 2007, Baltic Motors repaid the bridge loan in
full including all accrued interest. The total amount received
from the repayment was $1,033,000.
On January 19, 2007, Storage Canada, LLC (Storage
Canada) borrowed an additional $705,000 under its credit
facility. The borrowing bears annual interest of 8.75% and has a
maturity date of January 19, 2014.
On February 16, 2007, the Company exchanged the $200,000
convertible promissory note due from HuaMei for 50 shares
of its common stock.
On March 8, 2007, Levlad repaid its loan in full including
all accrued interest and a prepayment fee. The total amount
received from the prepayment was approximately
$10.4 million.
On March 30, 2007 and June 29, 2007, Total Safety made
principal payments of $2,500 on its first lien loan.
On April 12, 2007 and April 18, 2007, BENI made
principal payments of $200,000 and $500,000, respectively, on
its bridge loan.
On April 16, 2007, the assets and liabilities of SafeStone
Technologies PLC were transferred to two new companies,
Lockorder Limited (Lockorder) and SafeStone
Technologies Limited (SafeStone Limited). The
Company received 21,064 shares of SafeStone Limited and
21,064 shares of Lockorder as a result of this corporate
action. On a combined basis, there was no change in the cost
basis or fair value of these portfolio companies due to this
transaction.
On May 1, 2007, Turf repaid its secured junior revolving
note in full, including accrued interest. The total amount
received from the prepayment was approximately
$1.0 million. There were no borrowings outstanding on the
revolving note as of July 31, 2007.
On May 1, 2007, June 1, 2007, and July 1, 2007,
the Company received $111,111 on each payment date as principal
payments from SP on Term Loan B.
On June 1, 2007 and July 5, 2007, Harmony Pharmacy
borrowed $600,000 and $1.0 million, respectively, from the
credit facility. Net borrowings during the nine month period
ended July 31, 2007 were $3.4 million, resulting in a
balance outstanding of approximately $3.4 million.
On June 19, 2007, the Company increased the bridge loan to
BENI to $2.0 million. The remaining available amount of
$1.7 million was immediately drawn.
On July 24, 2007, the Company sold the common stock of
Baltic Motors and BM Auto. The amount received from the sale of
the 60,684 common shares of Baltic Motors was approximately
$62.0 million, net of closing and other transaction costs,
working capital adjustments and a reserve established by the
Company to satisfy certain post-closing conditions requiring
capital and other expenditures. Baltic Motors repaid all debt
from the Company in full including all accrued interest. Total
amount received from the repayment of the debt was approximately
$10.2 million including all accrued interest. The remaining
$51.8 million less the $8.0 million cost basis of
Baltic Motors resulted in $43.8 million recorded as
realized gain. The difference between the $51.8 million
received from the Baltic Motors equity and the carrying value at
October 31, 2006 is $30.6 million and the amount of
the increase in net assets attributable to fiscal year 2007. The
portion of the capital gain related to the equity investment
made on June 24, 2004 ($40.9 million), will be treated
as long-term capital gain and the portion related to the equity
investment made on September 28, 2006 ($2.9 million)
will be treated as a short-term capital gain. The amount
received from the sale of the 47,300 common shares of BM Auto
was approximately $29.7 million, net of closing and other
transaction costs, working capital adjustments and a reserve
established by the Company to satisfy certain post-closing
conditions requiring capital and other expenditures. The
$29.7 million less the $8.0 million cost basis
38
of BM Auto resulted in $21.7 million recorded as a long
term capital gain. The difference between the $29.7 million
received from the BM Auto equity and the carrying value at
October 31, 2006 is $21.7 million and the amount of
the increase in net assets attributable to fiscal year 2007.
As mentioned above, a reserve account of approximately
$3.0 million was created for post closing conditions that
are required of the seller as a part of the purchase agreement.
The cash held in the reserve account is held in Euros. At
July 31, 2007, the balance of the reserve account was
approximately $2.9 million. Expenses such as finishing a
road to a dealership and Latvian tax withholding payments, among
other things, have been estimated by management and will be paid
from this account. This reserve account is owned and controlled
by the Company. The Company has recorded the cash in the reserve
account to its books denominated as foreign currency. It has
also recorded a liability for the same amount so there is no
impact to net asset value until all post closing conditions are
met. The remaining cash, if any, after satisfying all reserve
liabilities and contingencies, will be converted to
U.S. dollars and recorded as long term capital gain. We do
not anticipate any post closing conditions in excess of the
reserve, however, if they occur it would reduce the capital gain
that has already been recorded. Any difference recorded due to
changes in exchange rates since the Euros were received will be
recorded as currency gain (loss). During the interim, at each
month end, the Euros will be valued based on that days
exchange rate and the liability will be adjusted to match the
U.S. dollars equivalent. Management believes all post
closing conditions will be met before October 31, 2007.
On July 27, 2007, U.S. Gas repaid its bridge loan in
full including accrued interest. The total amount received was
approximately $908,000.
During the nine month period ended July 31, 2007, the
Valuation Committee increased the fair value of the
Companys investments in Dakota Growers common stock by
approximately $1.9 million, Octagons membership
interest by approximately $1.6 million, SGDA common equity
interest by approximately $276,000 and preferred equity interest
by $350,000, PreVisor common stock by $1.7 million,
Foliofn preferred stock by $2.1 million, Vendio
preferred stock by $6.1 million, and Vendio common stock by
approximately $15,000. In addition, increases in the cost basis
and fair value of the loans to Impact Confections, Inc.
(Impact), JDC Lighting, LLC (JDC), SP,
Timberland, Amersham Corporation (Amersham), Marine
Exhibition Corporation (Marine), Phoenix Coal
Corporation (Phoenix Coal), BP, Turf, Summit
Research Labs, Inc. (Summit), and the Vitality and
Marine preferred stock were due to the capitalization of payment
in kind (PIK) interest/dividends totaling $2,418,638. Also,
during the nine month period ended July 31, 2007, the
undistributed allocation of flow through income from the
Companys equity investment in Octagon increased the cost
basis and fair value of the Companys investment by
$140,084. The Valuation Committee also decreased the fair value
of the Companys investment in Ohio Medical during the nine
month period ended July 31, 2007 by $9.0 million.
At July 31, 2007, the fair value of all portfolio
investments was $316.9 million with a cost basis of
$334.7 million. At July 31, 2007, the fair value and
cost basis of the Legacy Investments was $16.6 million and
$55.9 million, respectively, and the fair value and cost
basis of portfolio investments made by the Companys
current management team was $300.3 million and
$278.8 million, respectively. At October 31, 2006, the
fair value of all portfolio investments was $275.9 million
with a cost basis of $286.9 million. At October 31,
2006, the fair value and cost basis of Legacy Investments was
$8.4 million and $55.9 million, respectively, and the
fair value and cost basis of portfolio investments made by the
Companys current management team was $267.5 million
and $231.0 million, respectively.
For
the Year Ended October 31, 2006
During the year ended October 31, 2006, the Company made
sixteen new investments, committing capital totaling
approximately $142.1 million. The investments were made in
Turf ($11.6 million), Strategic Outsourcing, Inc.
(SOI) ($5.0 million), Henry Company
($5.0 million), BM Auto ($15.0 million), Storage
Canada ($6.0 million), Phoenix Coal ($8.0 million),
Harmony Pharmacy ($200,000), Total Safety ($6.0 million),
PreVisor ($6.0 million), Marine ($14.0 million), BP
($15.0 million), Velocitius ($66,290), Summit
($16.2 million), Octagon ($17.0 million), BENI
($2.0 million) and Innovative Brands ($15.0 million).
The Company also made eight follow-on investments in existing
portfolio companies committing capital totaling approximately
$24.2 million. During the year ended October 31, 2006,
the Company invested
39
approximately $879,000 in Dakota Growers by purchasing an
additional 172,104 shares of common stock at an average
price of $5.11 per share. On December 22, 2005, the Company
made a follow-on investment in Baltic Motors in the form of a
$1.8 million revolving bridge note. Baltic Motors
immediately drew down $1.5 million from the note. On
January 12, 2006, Baltic Motors repaid the amount drawn
from the note in full including all unpaid interest. The note
matured on January 31, 2006 and has been removed from the
Companys books. On January 12, 2006, the Company
provided SGDA a $300,000 bridge loan. On March 28, 2006,
the Company provided Baltic Motors a $2.0 million revolving
bridge note. Baltic Motors immediately drew down
$2.0 million from the note. On April 5, 2006, Baltic
Motors repaid the amount drawn from the note in full including
all unpaid interest. The note matured on April 30, 2006 and
has been removed from the Companys books. On April 6,
2006, the Company invested an additional $2.0 million in
SGDA in the form of a preferred equity security. On
April 25, 2006, the Company purchased an additional common
equity security in SGDA for $23,000. On June 30, 2006, the
Company invested $2.5 million in Amersham in the form of a
second lien loan. On August 4, 2006, the Company invested
$750,000 in Harmony Pharmacy in the form of common stock. On
September 28, 2006, the Company made another follow-on
investment in Baltic Motors in the form of a $1.0 million
bridge loan and a $2.0 million equity investment. On
October 13, 2006, the Company made a $10.0 million
follow-on investment in SP. The $10 million was invested in
the form of an additional $4.0 million in term loan B and a
$6.0 million in a mezzanine loan. On October 20, 2006,
the Company then assigned $5.0 million of SPs
$8.0 million term loan B to Citigroup Global Markets Realty
Corp. On October 24, 2006, the Company invested an
additional $3.0 million in SGDA in the form of a preferred
equity security. On October 26, 2006, the Company invested
an additional $2.9 million in Velocitius in the form of
common equity. The Company also provided Velocitius a $260,000
revolving note on October 31, 2006. Velocitius immediately
drew down $143,614 from the note.
At the beginning of the 2006 fiscal year, the revolving credit
facility provided to SGDA had an outstanding balance of
approximately $1.2 million. During December 2005, SGDA drew
down an additional $70,600 from the credit facility. On
April 28, 2006, the Company increased the availability
under the revolving credit facility by $300,000. The balance of
the bridge loan mentioned above, which would have matured on
April 30, 2006, was added to the revolving credit facility
and the bridge loan was eliminated from the Companys books
as a part of the refinancing.
On December 21, 2005, Integral prepaid its senior credit
facility from the Company in full. The Company received
approximately $850,000 from the prepayment. This amount included
all outstanding principal and accrued interest. The Company
recorded no gain or loss as a result of the prepayment. Under
the terms of the prepayment, the Company returned its warrants
to Integral for no consideration.
Effective December 27, 2005, the Company exchanged $286,200
of the $3.25 million outstanding on the Timberland junior
revolving line of credit into 28.62 shares of common stock
at a price of $10,000 per share. As a result, as of
July 31, 2006, the Company owned 478.62 common shares of
Timberland and the funded debt under the junior revolving line
of credit was reduced from $3.25 million to approximately
$2.96 million.
Effective December 31, 2005, the Company received
373,362 shares of Series E preferred stock of
ProcessClaims, in exchange for its rights under a warrant issued
by ProcessClaims that has been held by the Company since May
2002. On January 5, 2006, the Valuation Committee increased
the fair value of the Companys entire investment in
ProcessClaims by $3.3 million to $5.7 million. Please
see the paragraph below for more information on ProcessClaims.
On January 3, 2006, the Company exercised its warrant
ownership in Octagon which increased its existing membership
interest. As a result, Octagon is now considered an affiliate of
the Company.
Due to the dissolution of Yaga, one of the Companys Legacy
Investments, the Company realized losses on its investment in
Yaga totaling $2.3 million during the year ended
October 31, 2006. The Company received no proceeds from the
dissolution of Yaga and the Companys investment in Yaga
has been removed from the Companys books. The Valuation
Committee previously decreased the fair value of the
Companys investment in Yaga to zero and as a result, the
Companys realized losses were offset by reductions in
unrealized losses. Therefore, the net effect of the removal of
Yaga from the Companys books on the Companys
consolidated statement of operations and NAV at October 31,
2006, was zero.
40
On February 24, 2006, BP repaid its second lien loan from
the Company in full. The amount of the proceeds received from
the prepayment was approximately $8.7 million. This amount
included all outstanding principal, accrued interest, accrued
monitoring fees and an early prepayment fee. The Company
recorded no gain or loss as a result of the repayment.
On April 7, 2006, the Company sold its investment in Lumeta
for its then carrying value of $200,000. The Company realized a
loss on Lumeta of approximately $200,000. However, the Valuation
Committee previously decreased the fair value of the
Companys investment in Lumeta to $200,000 and, as a
result, the realized loss was offset by a reduction in
unrealized losses. Therefore, the net effect of the
Companys sale of its investment in Lumeta on the
Companys consolidated statement of operations and NAV was
zero.
On April 21, 2006, BM Auto repaid its bridge loan from the
Company in full. The amount of the proceeds received from the
repayment was approximately $7.2 million. This amount
included all outstanding principal, accrued interest and was net
of foreign taxes withheld. The Company recorded no gain or loss
as a result of the repayment.
On May 4, 2006, the Company received a working capital
adjustment of approximately $250,000 related to the
Companys purchase of a membership interest in Turf. As a
result, the Companys cost basis in the investment was
reduced.
On May 30, 2006, ProcessClaims, one of the Companys
Legacy Investments, entered into a definitive agreement to be
acquired by CCC Information Services Inc. (CCC). The
acquisition by CCC closed on June 9, 2006. As of
June 9, 2006, the Company received net proceeds of
approximately $7.9 million. The gross proceeds were
approximately $8.3 million of which approximately $400,000
or 5% of the gross proceeds were deposited into a reserve
account for one year. Due to the contingencies associated with
the escrow, the Company has not presently placed any value on
the proceeds deposited in escrow and has therefore not factored
such proceeds into the Companys increased NAV. The
Companys total investment in ProcessClaims was
$2.4 million which resulted in a capital gain of
approximately $5.5 million.
On July 27, 2006, SOI repaid its loan from the Company in
full. The amount of the proceeds received from the prepayment
was approximately $4.5 million. This amount included all
outstanding principal, accrued interest, and an early prepayment
fee. The Company recorded no gain or loss as a result of the
prepayment.
On August 25, 2006, Harmony Pharmacy repaid its loan from
the Company in full. The amount of the proceeds received from
the prepayment was $207,444. This amount included all
outstanding principal and accrued interest. The Company recorded
no gain or loss as a result of the prepayment.
On August 25, 2006, SGDAs revolving credit facility
was added to the term loan, increasing the balance of the term
loan by $1.6 million. The revolving credit facility was
eliminated from the Companys books as a result of this
refinancing.
Effective September 12, 2006, the Company exchanged
$409,091 of the $2.96 million outstanding on the Timberland
junior revolving line of credit into 40.91 shares of common
stock at a price of $10,000 per share.
Effective September 22, 2006, the Company exchanged
$225,000 of the $2.55 million outstanding on the Timberland
junior revolving line of credit into 22.5 shares of common
stock at a price of $10,000 per share. On September 22,
2006, Timberland drew down $500,000 from the junior revolving
line of credit. As a result of these transactions, as of
October 31, 2006, the Company owned 542.03 common shares of
Timberland and the funded debt under the junior revolving line
of credit was reduced from $2.96 million to approximately
$2.83 million.
On October 2, 2006, Octagon bought-back a total of 15%
equity interest from non-service members. This resulted in a
sale of a portion of the Companys LLC member interest to
Octagon for proceeds of $1,020,018. The Company realized a gain
of $551,092 from this sale.
On October 2, 2006, Octagon repaid its loan and revolving
credit facility from the Company in full. The amount of the
proceeds received from the prepayment of the loan was
approximately $5.4 million. This amount included all
outstanding principal, accrued interest, and an unused fee on
the revolving credit facility. The Company
41
recorded a gain as a result of these prepayments of
approximately $429,000 from the acceleration of amortization of
original issue discount.
On October 20, 2006, the Company assigned $5.0 million
of SPs $8.0 million term loan B to Citigroup Global
Markets Realty Corp.
On October 30, 2006, JDC repaid $160,116 of principal on
the senior subordinated debt.
During the year ended October 31, 2006, the Valuation
Committee increased the fair value of the Companys
investments in Baltic Motors common stock by $11.6 million,
Dakota Growers common stock by approximately $2.6 million,
Turfs membership interest by $2.0 million,
Octagons membership interest by approximately $562,000,
Ohio Medical common stock by $9.2 million, Foliofn
preferred stock by $5.0 million, Vendio preferred stock by
$700,000, ProcessClaims preferred stock by $4.8 million and
Vitality common stock and warrants by $3.5 million and
$400,000, respectively. In addition, increases recorded to the
cost basis and fair value of the loans to Amersham, BP, Impact,
JDC, Phoenix Coal, SP, Timberland, Turf, Marine, Summit and the
Vitality and Marine preferred stock were due to the receipt of
payment in kind interest/dividends totaling approximately
$2.2 million. Also during the year ended October 31,
2006, the undistributed allocation of flow through income from
the Companys equity investment in Octagon increased the
cost basis and fair value of the Companys investment by
approximately $279,000. During the year ended October 31,
2006, the Valuation Committee also decreased the fair value of
the Companys equity investment in Timberland by
$1.0 million. The increase in fair value from payment in
kind interest/dividends and flow through income has been
approved by the Valuation Committee.
At October 31, 2006, the fair value of all portfolio
investments, exclusive of short-term securities, was
$275.9 million with a cost basis of $286.9 million. At
October 31, 2005, the fair value of all portfolio
investments, exclusive of short-term securities, was
$122.3 million with a cost basis of $171.6 million.
For
the Year Ended October 31, 2005
During the year ended October 31, 2005, the Company made
six new investments, committing capital totaling approximately
$48.8 million. The investments were made in JDC, SGDA, SP,
BP, Ohio Medical and Amersham. The amounts invested were
$3.0 million, $5.8 million, $10.5 million,
$10 million, $17 million and $2.5 million
respectively.
The Company also made three follow-on investments in existing
portfolio companies committing capital totaling approximately
$5.0 million. In December 2004 and January 2005, the
Company invested a total of $1.25 million in Timberland in
the form of subordinated bridge notes. On April 15, 2005,
the Company re-issued 146,750 shares of its treasury stock
at the Companys NAV per share of $9.54 in exchange for
40,500 shares of common stock of Vestal. On July 8,
2005 the Company extended Timberland a $3.25 million junior
revolving note. According to the terms of the note, Timberland
immediately drew $1.3 million from the revolving note and
used the proceeds to repay the subordinated bridge notes in
full. The repayment included all outstanding principal and
accrued interest. On July 29, 2005, the Company invested an
additional $325,000 in Impact in the form of a secured
promissory note.
In April 2005, Octagon drew $1.5 million from the senior
secured credit facility provided to it by the Company and repaid
it in full during June 2005.
During 2005, SGDA drew approximately $1.2 million from the
revolving credit facility provided to it by the Company. As of
October 31, 2005, all amounts drawn from the facility
remained outstanding.
On July 14, 2005 and September 28, 2005, Timberland
drew an additional $1.5 million and $425,000, respectively,
from the revolving note mentioned above. As of October 31,
2005, the note was drawn in full and the balance of
$3.25 million remained outstanding.
Also, during the year ended October 31, 2005, the Company
sold its entire investment in Sygate and received
$14.4 million in net proceeds. In addition, approximately
$1.6 million or 10% of proceeds from the sale were
deposited in an escrow account for approximately one year. Due
to the contingencies associated with the escrow, the Company did
not place any value on the proceeds deposited in escrow and did
not factor such proceeds into the Companys NAV. The
realized gain from the $14.4 million in net proceeds
received was $10.4 million. The
42
Company also sold 685,679 shares of Mentor Graphics
receiving net proceeds of approximately $9.0 million and a
realized gain on the shares sold of approximately
$5.0 million. The Company also received approximately
$300,000 from the escrow related to the 2004 sale of BlueStar.
The Company realized losses on CBCA of approximately
$12.0 million, Phosistor of approximately $1.0 million
and ShopEaze of approximately $6.0 million. The Company
received no proceeds from these companies and they have been
removed from the Companys portfolio. The Valuation
Committee previously decreased the fair value of the
Companys investments in these companies to zero.
Therefore, the net effect of the transactions on the
Companys consolidated statement of operations and NAV for
the fiscal year ended October 31, 2005, was zero.
On December 21, 2004, Determine Software, Inc.
(Determine) prepaid its senior credit facility from
the Company in full. The amount of proceeds the Company received
from the repayment was approximately $1.64 million. This
amount included all outstanding principal and accrued interest.
Under the terms of the early repayment, the Company returned its
2,229,955 Series C warrants for no consideration.
On July 5, 2005, Arcot prepaid its senior credit facility
from the Company in full. The amount of proceeds the Company
received from the repayment was approximately
$2.55 million. This amount included all outstanding
principal and accrued interest. Under the terms of the early
repayment, the Company returned its warrants to Arcot for no
consideration.
The Company continued to receive principal repayments on the
debt securities of Integral and BP. Integral made payments
during the year ended October 31, 2005, according to its
credit facility agreement totaling $1,683,336. BP made two
quarterly payments during the year ended totaling $833,333.
Also, the Company received a one time, early repayment on
Vestals debt securities totaling $100,000.
During the year ended October 31, 2005, the Valuation
Committee increased the fair value of the Companys
investments in Baltic Motors by $1.5 million, Dakota
Growers by $514,000, Octagon by $1,022,638, Sygate by
$7.5 million (which was later realized), Vendio by
$1,565,999, Vestal by $1,850,000 and Vitality by $700,000. In
addition, increases in the cost basis and fair value of the
Octagon loan, Impact loan, Timberland loan, Vitality
Series A preferred stock, JDC loan and SP loans were due to
the receipt of payment in kind interest/dividends
totaling $1,370,777. Also during the year ended October 31,
2005, the undistributed allocation of flow through income from
the Companys equity investment in Octagon increased the
cost basis and fair value of the investment by $114,845.
At October 31, 2005, the fair value of all portfolio
investments, exclusive of short-term securities, was
$122.3 million with a cost of $171.6 million. At
October 31, 2004, the fair value of all portfolio
investments, exclusive of short-term securities, was
$78.5 million with a cost of $151.6 million.
Portfolio
Companies
During the nine month period ended July 31, 2007, the
Company had investments in the following portfolio companies:
Actelis
Networks, Inc.
Actelis, Fremont, California, a Legacy Investment, provides
authentication and access control solutions designed to secure
the integrity of
e-business
in Internet-scale and wireless environments.
At October 31, 2006 and July 31, 2007, the
Companys investment in Actelis consisted of
150,602 shares of Series C preferred stock at a cost
of $5.0 million. The investment has been assigned a fair
value of $0.
Amersham
Corp.
Amersham, Louisville, Colorado, is a manufacturer of precision
machined components for the automotive, furniture, security and
medical device markets.
43
At October 31, 2006, the Companys investment in
Amersham consisted of a $2.5 million note, bearing annual
interest at 10%. The note has a maturity date of June 29,
2010. The note had a principal face amount and cost basis of
$2.5 million. The Companys investment also included
an additional $2.6 million note bearing annual interest at
16% from June 30, 2006 to June 30, 2008. The interest
rate then steps down to 14% for the period July 1, 2008 to
June 30, 2010, steps down to 13% for the period
July 1, 2010 to June 30, 2012 and steps down again to
12% for the period July 1, 2012 to June 30, 2013. The
note has a maturity date of June 30, 2013. The note had a
principal face amount and cost basis of $2.6 million.
At October 31, 2006, the notes had a combined outstanding
balance, cost, and fair value of $5.1 million. The increase
in the outstanding balance, cost and fair value of the loan, is
due to the capitalization of payment in kind
interest. These increases were approved by the Valuation
Committee.
Effective January 1, 2007, the interest rate on the
$2.6 million note bearing annual interest at 16% was
increased to 19% due to Amersham violating a technical financial
covenant. The Valuation Committee believes that Amersham is not
a credit risk and will become compliant.
At July 31, 2007, the notes had a combined outstanding
balance, cost, and fair value of $5.5 million.
Auto
MOTOL BENI
BENI consists of two leased Ford sales and service dealerships
located in the western side of Prague, in the Czech Republic.
On October 10, 2006 the Company made an investment in BENI
by purchasing 200 shares of common stock at a cost of
$2.0 million. The Company also agreed to guarantee a
375,000 Euro inventory financing facility.
At October 31, 2006, the Companys investment in BENI
was assigned a cost and fair value of $2.0 million.
On March 26, 2007, the Company extended a $1.0 million
bridge loan to BENI with an annual interest rate of 12% and
maturity date of June 25, 2007.
On April 12, 2007 and April 18, 2007, the Company
received principal payments of $200,000 and $500,000,
respectively, on the bridge loan from BENI.
On June 19, 2007, the Company increased the bridge loan to
$2.0 million and funded the remaining $1.7 million.
At July 31, 2007, the Companys investment in BENI
consisted of 200 shares of common stock with a cost of
$2.0 million and was assigned a fair value of
$2.0 million. The bridge loan had a balance of
$2.0 million with a cost and fair value of
$2.0 million. The guarantee was equivalent to approximately
$514,000 at July 31, 2007, for BENI.
Christopher Sullivan, a representative of the Company, serves as
a director for BENI.
Baltic
Motors Corporation
Baltic Motors, Purchase, New York, is a U.S. company
focused on the importation and sale of Ford and Land Rover
vehicles and parts throughout Latvia, a member of the European
Union.
At October 31, 2006, the Companys investment in
Baltic Motors consisted of 60,684 shares of common stock at
a cost of $8.0 million, a mezzanine loan with a cost basis
of $4.5 million, and a bridge loan with a cost basis of
$1.0 million. The mezzanine loan has a maturity date of
June 24, 2007 and earns interest at 10% per annum. The
bridge loan had a maturity date of December 22, 2006 and
earned interest at 12% per annum. The investment in Baltic
Motors was assigned a fair value of $26.7 million as of
October 31, 2006.
On December 18, 2006, the Company extended the maturity
date on the bridge loan to January 5, 2007.
On January 5, 2007, Baltic Motors repaid the bridge loan in
full including all accrued interest. The total amount received
was $1,033,000.
On May 8, 2007, the Company provided Baltic Motors with a
$5.5 million bridge loan with an annual interest rate of
12% and maturity date of August 6, 2007.
44
On July 24, 2007, the Company sold the common stock of
Baltic Motors. The amount received from the sale of the 60,684
common shares of Baltic Motors was approximately
$62.0 million, net of closing and other transaction costs,
working capital adjustments and a reserve established by the
Company to satisfy certain post-closing conditions requiring
capital and other expenditures. Baltic Motors repaid all debt
from the Company in full including all accrued interest. Total
amount received from the repayment of the debt was approximately
$10.2 million including all accrued interest. The remaining
$51.8 million less the $8.0 million cost basis of
Baltic Motors resulted in $43.8 million recorded as
realized gain. The difference between the $51.8 million
received from the Baltic Motors equity and the carrying value at
October 31, 2006 is $30.6 million and the amount of
the increase in net assets attributable to fiscal year 2007. The
portion of the capital gain related to the equity investment
made on June 24, 2004 ($40.9 million), will be treated
as long-term capital gain and the portion related to the equity
investment made on September 28, 2006 ($2.9 million)
will be treated as a short-term capital gain. As mentioned
above, a reserve account of approximately $3.0 million was
created for post closing conditions that are required of the
seller as a part of the purchase agreement. The cash held in the
reserve account is held in Euros. At July 31, 2007, the
balance of the reserve account from the sale of Baltic Motors
and BM Auto was approximately $2.9 million. Expenses such
as finishing a road to a dealership and Latvian tax withholding
payments, among other things, have been estimated by management
and will be paid from this account. This reserve account is
owned and controlled by the Company. The Company has recorded
the cash in the reserve account to its books denominated as
foreign currency. It has also recorded a liability for the same
amount so there is no impact to net asset value until all post
closing conditions are met. The remaining cash, if any, after
satisfying all reserve liabilities and contingencies, will be
converted to U.S. dollars and recorded as a long term
capital gain. We do not anticipate any post closing conditions
in excess of the reserve, however, if they occur it would reduce
the capital gain that has already been recorded. Any difference
recorded due to changes in exchange rates since the Euros were
received will be recorded as currency gain (loss). During the
interim, at each month end, the Euros will be valued based on
that days exchange rate and the liability will be adjusted
to match the U.S. dollars equivalent. Management believes
all post closing conditions will be met before October 31,
2007.
At July 31, 2007, the Company no longer held an investment
in Baltic Motors.
BP
Clothing, LLC
BP, Pico Rivera, California, is a company which designs,
manufactures, markets and distributes, Baby
Phat®,
a line of womens clothing.
At October 31, 2006, the Companys investment in BP
consisted of a $10.0 million second lien loan,
$2.9 million term loan A, and $2.0 million term loan
B. The second lien loan bears annual interest at 14%. The second
lien loan has a $10.0 million principal face amount and was
issued at a cost basis of $10.0 million. The second lien
loans cost basis was subsequently discounted to reflect
loan origination fees received. The maturity date of the second
lien loan is July 18, 2012. The principal balance is due
upon maturity. The $2.9 million term loan A bears annual
interest at LIBOR plus 4.25% or prime rate plus 3.25%. The
$2.0 million term loan B bears annual interest at LIBOR
plus 6.40% or prime rate plus 5.40%. The interest rate option on
each of term loan A and term loan B is at the borrowers
discretion. Each of term loan A and term loan B mature on
July 18, 2011. The combined cost basis and fair value of
the investments at October 31, 2006 was $14.7 million
and $14.9 million, respectively.
On December 29, 2006 and March 30, 2007, the Company
received quarterly principal payments for term loan A of $90,000
on each payment date.
On February 21, 2007, the Company provided BP an additional
$5.0 million on the same second lien loan, which bears
annual interest at 14% and matures on July 18, 2012.
On May 4, 2007, the Company provided BP an additional
$2.5 million on the same second lien loan.
On June 29, 2007, the Company received a quarterly
principal payment for term loan A of $90,000.
At July 31, 2007, the loans had a combined cost basis and
fair value of $22.0 million and $22.3 million
respectively. The increases in the outstanding balance, cost and
fair value of the loans are due to the amortization of loan
origination fees and the capitalization of payment in
kind interest. These increases were approved by the
Valuation Committee.
45
Dakota
Growers Pasta Company, Inc.
Dakota Growers, Carrington, North Dakota, is the third largest
manufacturer of dry pasta in North America and a market leader
in private label sales. Dakota Growers and its partners in DNA
Dreamfields Company, LLC introduced a new process that is
designed to reduce the number of digestible carbohydrates found
in traditional pasta products.
At October 31, 2006, the Companys investment in
Dakota Growers consisted of 1,081,195 shares of common
stock with a cost of $5.9 million and assigned fair value
of $8.9 million.
On May 9, 2007, the Company purchased one million shares of
Dakota Growers convertible preferred stock at a cost of
$10.0 million. At that time, the 65,000 shares of
common stock were converted to 65,000 shares of convertible
preferred stock.
During the nine month period ended July 31, 2007, the
Valuation Committee increased the fair value of the common stock
by $1.9 million.
At July 31, 2007, the Companys investment in Dakota
Growers consisted of 1,016,195 shares of common stock with
a cost of $5.5 million and an assigned fair value of
$10.2 million and 1,065,000 shares of convertible
preferred stock with a cost of $10.4 million and an
assigned fair value of $10.7 million.
Michael Tokarz, Chairman of the Company, serves as a director of
Dakota Growers.
DPHI,
Inc. (formerly DataPlay, Inc.)
DPHI, Boulder, Colorado, a Legacy Investment, is trying to
develop new ways of enabling consumers to record and play
digital content.
At October 31, 2006 and July 31, 2007, the
Companys investment in DPHI consisted of
602,131 shares of
Series A-1
preferred stock with a cost of $4.5 million. This
investment has been assigned a fair value of $0.
Endymion
Systems, Inc.
Endymion Systems, Inc. (Endymion), Oakland,
California, a Legacy Investment, is a single source supplier for
strategic, web-enabled, end-to-end business solutions designed
to help its customers leverage Internet technologies to drive
growth and increase productivity.
At October 31, 2006 and July 31, 2007, the
Companys investment in Endymion consisted of
7,156,760 shares of Series A preferred stock with a
cost of $7.0 million. The investment has been assigned a
fair value of $0.
Foliofn,
Inc.
Foliofn, Vienna, Virginia, a Legacy Investment, is a
financial services technology company that offers investment
solutions to financial services firms and investors.
At October 31, 2006, the Companys investment in
Foliofn consisted of 5,802,259 shares of
Series C preferred stock with a cost of $15.0 million
and fair value of $5.0 million.
During the nine month period ended July 31, 2007, the
Valuation Committee increased the fair value of the investment
by $2.1 million.
The fair value of the Companys equity investment at
July 31, 2007 was $7.1 million.
Bruce Shewmaker, an officer of the Company, serves as a director
of Foliofn.
Genevac
U.S. Holdings, Inc.
Genevac, Ipswich, United Kingdom, produces solvent evaporation
systems for drug recovery, molecular biology, and life science
research markets.
46
On April 3, 2007, the Company invested $14.0 million
in Genevac in the form of a $13.0 million senior secured
loan, which bears annual interest at 12.5% and matures on
January 3, 2008, and 140 shares of common stock with a
cost of $1.0 million. The dividend rate on the common stock
is 12% per annum.
At July 31, 2007, the Companys investment in Genevac
consisted of 140 shares of common stock with a cost of
$1.1 million and was assigned a fair value of
$1.1 million. The increase in the cost and fair value of
the common stock is due to the capitalization of payment
in kind dividends. These increases were approved by the
Valuation Committee. The senior secured loan had a cost and fair
value of $13.0 million.
Harmony
Pharmacy & Health Center, Inc.
Harmony Pharmacy, Purchase, New York, operates pharmacy and
healthcare centers primarily in airports in the United States.
Harmony Pharmacy opened their first store in Newark
International Airport in March of 2007.
At October 31, 2006, the Companys investment in
Harmony Pharmacy consisted of 2 million shares of common
stock at a cost basis and fair value of $750,000.
On January 11, 2007, the Company provided Harmony Pharmacy
a $4.0 million revolving credit facility. The credit
facility bears annual interest at 10%, matures on
December 1, 2009 and has a 0.50% unused fee per annum. Net
borrowings during the nine month period ended July 31, 2007
were $3.4 million on the revolving credit facility.
At July 31, 2007, the Companys investment in Harmony
Pharmacy consisted of 2 million shares of common stock with
a cost of $750,000 and was assigned a fair value of $750,000.
The revolving credit facility had an outstanding balance of
$3.4 million with a cost and fair value of
$3.4 million.
Michael Tokarz, Chairman of the Company, serves as a director of
Harmony Pharmacy.
Henry
Company
Henry Company, Huntington Park, California, is a manufacturer
and distributor of building products and specialty chemicals.
At October 31, 2006, the Companys investment in Henry
Company consisted of $5.0 million in loan assignments. The
$3.0 million term loan A bears annual interest at LIBOR
plus 3.5% and matures on April 6, 2011. The
$2.0 million term loan B bears annual interest at LIBOR
plus 7.75% and also matures on April 6, 2011.
On January 2, 2007 and March 1, 2007, the Company
received principal payments of approximately $96,000 and
$1.0 million, respectively, on term loan A from Henry
Company.
At July 31, 2007, the loans had a combined outstanding
balance, cost basis, and fair value of $3.9 million.
HuaMei
Capital Company, Inc.
HuaMei, Chicago, Illinois, is a Chinese American cross border
investment bank and advisory company.
During the quarter ended January 31, 2007, the Company
invested $200,000 in HuaMei in the form of a convertible
promissory note. The note bears annual interest at 0% and
matured on May 22, 2007. The note converts into
50 shares of common stock.
On February 16, 2007, the Company invested an addition
$1.8 million in HuaMei by purchasing 450 shares of
common stock. The $200,000 convertible promissory note was
converted to 50 shares of common stock at the same price
during this transaction.
At July 31, 2007, the Companys investment in HuaMei
consisted of 500 shares of common stock with a cost and
fair value $2.0 million.
Michael Tokarz, Chairman of the Company, serves as a director of
HuaMei.
Impact
Confections, Inc.
Impact, Roswell, New Mexico founded in 1981, is a manufacturer
and distributor of childrens candies.
47
At October 31, 2006, the Companys investment in
Impact consisted of 252 shares of common stock at a cost of
$2.7 million, a senior subordinated note with an
outstanding balance of $5.5 million and a secured
promissory note with a balance of $325,000. The senior
subordinated note bears annual interest at 17.0% and matures on
July 30, 2009. The promissory note bears annual interest at
LIBOR plus 4.0% and matures on July 29, 2008. The cost
basis of the loan and promissory note at October 31, 2006
were approximately $5.39 million and $321,000 respectively.
At October 31, 2006, the equity investment, loan and
secured promissory note were assigned fair values of
$2.7 million, $5.5 million and $325,000, respectively.
At July 31, 2007, the Companys investment in Impact
consisted of 252 shares of common stock at a cost of
$2.7 million, a senior subordinated note with an
outstanding balance of $5.7 million and the secured
promissory note with a cost of approximately $323,000. At
July 31, 2007, the equity investment, loan and secured
promissory note were assigned fair values of $2.7 million,
$5.7 million and $325,000, respectively. The increase in
the outstanding balance, cost and fair value of the loan is due
to the amortization of loan origination fees and the
capitalization of payment in kind interest. These
increases were approved by the Valuation Committee.
Puneet Sanan and Shivani Khurana, representatives of the
Company, serve as directors of Impact.
Innovative
Brands, LLC
Innovative Brands, Phoenix, Arizona, is a consumer product
company that manufactures and distributes personal care products.
At October 31, 2006, the Companys investment in
Innovative Brands consisted of a $15.0 million loan
assignment.The $15.0 million term loan bears annual
interest at 11.125% and matures on September 25, 2011. The
loan had a cost basis and fair value of $15.0 million as of
October 31, 2006.
On each of January 1, 2007, April 2, 2007, and
July 2, 2007, the Company received principal payments of
$37,500 on the term loan provided from Innovative Brands.
At July 31, 2007, the loan had an outstanding balance, cost
basis, and was assigned a fair value of approximately
$14.9 million.
JDC
Lighting, LLC
JDC, New York, New York, is a distributor of commercial lighting
and electrical products.
At October 31, 2006, the Companys investment in JDC
consisted of a $3.0 million senior subordinated loan,
bearing annual interest at 17% with a maturity date of
January 31, 2009. The loan had a principal face amount, an
outstanding balance, and a cost basis of $3.0 million. The
loan was assigned a fair value of $3.0 million.
At July 31, 2007, the loan had an outstanding balance and
cost of $3.1 million. The loan was assigned a fair value of
$3.1 million. The increase in the outstanding balance, cost
and fair value of the loan, is due to the amortization of loan
origination fees and the capitalization of payment in
kind interest. These increases were approved by the
Valuation Committee.
Levlad
Arbonne International LLC
Levlad, Irvine, California, is a marketer of personal care
products.
On December 12, 2006, the Company invested
$10.1 million in Levlad in the form of a $10.0 million
second lien loan. The loan bears annual interest at LIBOR plus
6.5% and will mature on December 19, 2013.
On March 8, 2007, Levlad repaid their loan in full
including all accrued interest and prepayment fee. The total
amount received from the repayment was approximately
$10.4 million.
At July 31, 2007, the Company no longer held an investment
in Levlad.
48
Lockorder
Limited (formerly SafeStone Technologies PLC)
Lockorder, Old Amersham, United Kingdom, a Legacy Investment,
provides organizations with technology designed to secure access
controls, enforcing compliance with security policies and
enabling effective management of corporate IT and
e-business
infrastructure.
On April 16, 2007, the assets and liabilities of SafeStone
Technologies PLC were transferred into two new companies,
Lockorder and SafeStone Limited. Lockorder operates the
companys AxcessIT business. The Company received
21,064 shares of Lockorder with a cost of $2.0 million
as a result of this corporate action.
At July 31, 2007, the Companys investment in
Lockorder consisted of 21,064 shares of common stock with a
cost of $2.0 million. The investment has been assigned a
fair value of $0 by the Valuation Committee.
Mainstream
Data, Inc.
Mainstream Data, Inc. (Mainstream), Salt Lake City,
Utah, a Legacy Investment, builds and operates satellite,
internet, and wireless broadcast networks for information
companies. Mainstream networks deliver text news, streaming
stock quotations, and digital images to subscribers around the
world.
At October 31, 2006 and July 31, 2007, the
Companys investment in Mainstream consisted of
5,786 shares of common stock with a cost of
$3.75 million. The investment has been assigned a fair
value of $0.
Marine
Exhibition Corporation
Marine, Miami, Florida, owns and operates the Miami Seaquarium.
The Miami Seaquarium is a family-oriented entertainment park.
At October 31, 2006, the Companys investment in
Marine consisted of a senior secured loan, a secured revolving
note, and 2,000 shares of preferred stock. The senior
secured loan had an outstanding balance of $10.1 million
and a cost of $9.9 million. The senior secured loan bears
annual interest at 11% and matures on June 30, 2013. The
senior secured loan was assigned a fair value of
$10.1 million. The secured revolving note was not drawn
upon. The secured revolving note bears interest at LIBOR plus
1%, has an unused fee of 0.50% per annum and matures on
June 30, 2013. The preferred stock had been assigned a fair
value of $2.0 million. The dividend rate on the preferred
stock is 12% per annum.
At July 31, 2007, the Companys senior secured loan
had an outstanding balance of $10.4 million with a cost of
$10.2 million. The senior secured loan was assigned a fair
value of $10.4 million. The secured revolving note was not
drawn upon. The preferred stock had been assigned a fair value
of $2.2 million. The increase in the outstanding balance,
cost and fair value of the loan and preferred stock, is due to
the amortization of loan origination fees and the capitalization
of payment in kind interest/dividends. These
increases were approved by the Valuation Committee.
MVC
Partners LLC
MVC Partners, Purchase, New York, a wholly-owned portfolio
company, is a private equity firm established to serve as the
general partner or managing member of private investment
vehicles or other portfolios.
On November 21, 2006, the Company invested approximately
$71,000 in MVC Partners in the form of a limited liability
company interest.
On December 6, 2006, MVC Partners wholly-owned
subsidiary, MVC Europe LLC, entered into an agreement to co-own
BPE Management Ltd. (BPE) with Parex Asset
Management IPAS, a Baltic investment management company and
subsidiary of the Parex Bank. BPE will pursue investments in
businesses throughout the Baltic region. It is contemplated that
MVC Partners may be spun off in the future. The Companys
board has not yet approved the specific terms of any spin-off,
and there can be no assurance that the board of directors will
determine to proceed with any spin-off.
At July 31, 2007, the Companys equity investment in
MVC Partners had a cost basis and fair value of approximately
$71,000.
49
Octagon
Credit Investors, LLC
Octagon is a New York-based asset management company that
manages leveraged loans and high yield bonds through
collateralized debt obligations (CDO) funds.
At October 31, 2006, the Companys investment in
Octagon consisted of a term loan with an outstanding balance of
$5.0 million with a cost of $4.9 million, a revolving
line of credit with an outstanding balance of $3.25 million
with a cost of $3.25 million, and an equity investment with
a cost basis of approximately $900,000. The combined fair value
of the investment at October 31, 2006 was
$10.2 million. The term loan bears annual interest at LIBOR
plus 4.25% and matures on December 31, 2011. The revolving
line of credit bears annual interest at LIBOR plus 4.25%,
matures on December 31, 2011 and has an unused fee of 0.50%
per annum.
Net borrowings during the nine month period ended July 31,
2007 were $2.8 million resulting in a balance outstanding
of approximately $6.1 million on the revolving credit
facility.
During the nine month period ended July 31, 2007, the
Valuation Committee increased the fair value of the
Companys equity investment in Octagon by
$1.6 million. The Company also was allocated approximately
$247,000 in flow-through income. Of this amount, approximately
$107,000 was received in cash and $140,000 was undistributed and
therefore increased the cost of the investment.
At July 31, 2007, the term loan had an outstanding balance
of $5.0 million with a cost of $4.9 million. The loan
was assigned a fair value of $5.0 million. The revolving
line of credit had an outstanding balance of $6.1 million
with a cost and fair value of $6.1 million.
At July 31, 2007, the equity investment had a cost basis of
approximately $1.0 million and was assigned a fair value of
$3.7 million.
Ohio
Medical Corporation
Ohio Medical, Gurnee, Illinois, is a manufacturer and supplier
of suction and oxygen therapy products, as well as medical gas
equipment.
As of October 31, 2006 the Companys investment in
Ohio Medical consisted of 5,620 shares of common stock with
cost basis and fair value of the Companys investment in
Ohio Medical was $17.0 million and $26.2 million,
respectively.
On July 30, 2007, the Company provided Ohio Medical a
$2.0 million convertible unsecured promissory note. The
note bears annual interest at LIBOR plus 12% and matures on
July 30, 2008.
During the nine month period ended July 31, 2007, the
Valuation Committee decreased the fair value of the
Companys equity investment in Ohio Medical by
$9.0 million resulting in a fair value of
$17.2 million, $200,000 above the cost basis.
At July 31, 2007 the Companys investment in Ohio
Medical consisted of 5,620 shares of common stock with a
cost basis and fair value of $17.0 million and
$17.2 million, respectively, and the promissory note, which
had an outstanding balance of $2.0 million with a cost and
fair value of $2.0 million.
Michael Tokarz, Chairman of the Company, Peter Seidenberg, Chief
Financial Officer of the Company, and David Hadani, a
representative of the Company, serve as directors of Ohio
Medical.
Phoenix
Coal Corporation
Phoenix Coal, Madisonville, Kentucky, is engaged in the
acquisition, development, production and sale of bituminous coal
reserves and resources located primarily in the Illinois Basin.
With offices in Madisonville, Kentucky and Champaign, Illinois,
the company is focused on consolidating small and medium-sized
coal mining projects and applying proprietary technology to
increase efficiency and enhance profit margins.
At October 31, 2006, the Companys investment in
Phoenix Coal consisted of a second lien loan and
1,666,667 shares of common stock. The second lien loan had
an outstanding balance of $7.1 million with a cost of
$7.0 million. The second lien loan bears annual interest at
15% and matures on June 8, 2011. The loan was assigned
50
a fair value of $7.1 million. The equity investment had a
cost basis of approximately $1.0 million and was assigned a
fair value of $1.0 million.
At July 31, 2007, the second lien loan had an outstanding
balance of $7.4 million with a cost of $7.3 million.
The loan was assigned a fair value of $7.4 million. The
increase in cost and fair value of the loan is due to the
amortization of loan origination fees and the capitalization of
payment in kind interest. These increases were
approved by the Valuation Committee.
At July 31, 2007, the equity investment had a cost basis of
approximately $1.0 million and was assigned a fair value of
$1.0 million.
Forrest Mertens, a representative of the Company, serves as a
director of Phoenix Coal.
PreVisor,
Inc.
PreVisor, Roswell, Georgia, provides pre-employment testing and
assessment solutions and related professional consulting
services.
On May 31, 2006, the Company invested $6.0 million in
PreVisor in the form of common stock. Mr. Tokarz, our
Chairman and Portfolio Manager, is a minority non-controlling
shareholder of PreVisor. Our board of directors, including all
of our Independent Directors, approved the transaction
(Mr. Tokarz recused himself from making a determination or
recommendation on this matter).
At October 31, 2006, the common stock had been assigned a
fair value of $6.0 million.
During the nine month period ended July 31, 2007, the
Valuation Committee increased the fair value of the
Companys investment in PreVisor by $1.7 million.
At July 31, 2007, the common stock had a cost basis and had
been assigned a fair value of $6.0 million and
$7.7 million, respectively.
SafeStone
Technologies Limited (formerly SafeStone Technologies
PLC)
SafeStone Limited, Old Amersham, United Kingdom, a Legacy
Investment, provides organizations with technology designed to
secure access controls across the extended enterprise, enforcing
compliance with security policies and enabling effective
management of the corporate IT and
e-business
infrastructure.
On April 16, 2007, the assets and liabilities of SafeStone
Technologies PLC were transferred into two new companies,
Lockorder and SafeStone Limited. SafeStone Limited operates the
companys DetectIT business. The Company received
21,064 shares of SafeStone Limited with a cost of
$2.0 million as a result of this corporate action.
At July 31, 2007, the Companys investment in
SafeStone Limited consisted of 21,064 shares of common
stock with a cost of $2.0 million. The investment has been
assigned a fair value of $0 by the Valuation Committee.
SGDA
Sanierungsgesellschaft fur Deponien und Altlasten
mbH
SGDA, Zella-Mehlis, Germany, is a company that is in the
business of landfill remediation and revitalization of
contaminated soil.
At October 31, 2006, the Companys investment in SGDA
consisted of a term loan, common equity interest, and preferred
equity interest. The term loan had an outstanding balance of
$6.2 million with a cost of $6.0 million. The term
loan bears annual interest at 7.0% and matures on
August 25, 2009. The term loan was assigned a fair value of
$6 million. The common equity interest in SGDA had been
assigned a fair value of $338,551 which was its cost basis. The
preferred equity interest had been assigned a fair value of
$5.0 million which was its cost basis.
On November 7, 2006, the Company invested an additional
$100,000 in SGDA by purchasing an additional equity interest.
During the nine month period ended July 31, 2007, the
Valuation Committee increased the fair value of the
Companys common equity interest by approximately $121,000
and preferred equity interest by $475,000.
51
At July 31, 2007, the term loan had an outstanding balance
of $6.2 million with a cost of $6.0 million. The term
loan was assigned a fair value of $6.0 million. The
increase in the cost and fair value of the loan is due to the
accretion of the market discount of the term loan. These
increases were approved by the Valuation Committee. The common
equity interest in SGDA has been assigned a fair value of
$560,000 with a cost basis of $438,551. The preferred equity
interest has been assigned a fair value of $5.5 million
with a cost basis of $5.0 million.
SIA BM
Auto
BM Auto, Riga, Latvia, is a company focused on the importation
and sale of BMW vehicles and parts throughout Latvia, a member
of the European Union.
At October 31, 2006 the Companys investment in BM
Auto consisted of 47,300 shares of common stock at a cost
and fair value of $8.0 million.
On July 24, 2007, the Company sold the common stock of BM
Auto. The amount received from the sale of the 47,300 common
shares of BM Auto was approximately $29.7 million, net of
closing and other transaction costs, working capital adjustments
and a reserve established by the Company to satisfy certain
post-closing conditions requiring capital and other
expenditures. The $29.7 million less the $8.0 million
cost basis of BM Auto resulted in $21.7 million recorded as
a long term capital gain. The difference between the
$29.7 million received from the BM Auto equity and the
carrying value at October 31, 2006 is $21.7 million
and the amount of the increase in net assets attributable to
fiscal year 2007. As mentioned above, a reserve account of
approximately $3.0 million was created for post closing
conditions that are required of the seller as a part of the
purchase agreement. The cash held in the reserve account is held
in Euros. At July 31, 2007, the balance of the reserve
account from the sale of Baltic Motors and BM Auto was
approximately $2.9 million. Expenses such as finishing a
road to a dealership and Latvian tax withholding payments, among
other things, have been estimated by management and will be paid
from this account. This reserve account is owned and controlled
by the Company. The Company has recorded the cash in the reserve
account to its books denominated as foreign currency. It has
also recorded a liability for the same amount so there is no
impact to net asset value until all post closing conditions are
met. The remaining cash, if any, after satisfying all reserve
liabilities and contingencies, will be converted to
U.S. dollars and recorded as a long term capital gain. We
do not anticipate any post closing conditions in excess of the
reserve, however, if they occur it would reduce the capital gain
that has already been recorded. Any difference recorded due to
changes in exchange rates since the Euros were received will be
recorded as currency gain (loss). During the interim, at each
month end, the Euros will be valued based on that days
exchange rate and the liability will be adjusted to match the
U.S. dollars equivalent. Management believes all post
closing conditions will be met before October 31, 2007.
At July 31, 2007, the Company no longer held an investment
in BM Auto.
SIA
Tekers Invest
Tekers, Riga, Latvia, is a port facility used for the storage
and servicing of vehicles.
On July 9, 2007, the Company invested $2.3 million in
Tekers by purchasing 68,800 shares of common stock.
On July 19, 2007, the Company agreed to guarantee a
1.4 million Euro mortgage for Tekers, equivalent to
approximately $1.9 million at July 31, 2007.
At July 31, 2007, the Companys investment in Tekers
was assigned a fair value of $2.3 million.
Sonexis,
Inc.
Sonexis, Tewksbury, Massachusetts, a Legacy Investment, is the
developer of a new kind of conferencing solution
Sonexis ConferenceManager a modular platform that is
designed to support a breadth of audio and web conferencing
functionality to deliver rich media conferencing.
At October 31, 2006 and July 31, 2007, the
Companys investment in Sonexis consisted of
131,615 shares of common stock with a cost of
$10.0 million. The investment has been assigned a fair
value of $0.
52
SP
Industries, Inc.
SP, Warminster, Pennsylvania, is a designer, manufacturer,
and marketer of laboratory research and process equipment,
glassware and precision glass components, and
configured-to-order manufacturing equipment.
At October 31, 2006, the Companys investment in SP
consisted of a mezzanine loan and a term loan that had
outstanding balances of $12.9 million and
$3.1 million, respectively, with a cost basis of
$12.7 million and $3.0 million, respectively. The
mezzanine loan bears annual interest at 16% and matures on
March 31, 2012. The term loan bears annual interest at
LIBOR plus 8% and matures on March 31, 2011. The mezzanine
loan and term loan were assigned fair values of
$12.9 million and $3.1 million, respectively.
On March 30, 2007, the Company invested an additional
$5.0 million in SP in term loan B. The term loan bears
annual interest at LIBOR plus 8% and matures on March 31,
2011.
During the nine month period ended July 31, 2007, the
Company received principal payments totaling $333,333 on the
term loan.
At July 31, 2007, the mezzanine loan and the term loan had
outstanding balances of $13.3 million and
$7.7 million, respectively, with a cost basis of
$13.1 million and $7.7 million, respectively. The
mezzanine loan and term loan were assigned fair values of
$13.3 million and $7.7 million, respectively. The
increase in the outstanding balance, cost and fair value of the
loan, is due to the amortization of loan origination fees and
the capitalization of payment in kind interest.
These increases were approved by the Valuation Committee.
Storage
Canada, LLC
Storage Canada, Omaha, Nebraska, is a real estate company that
owns and develops self-storage facilities throughout the
U.S. and Canada.
At October 31, 2006, the Companys investment in
Storage Canada consisted of a term loan with an outstanding
balance of $1.9 million and a cost basis of
$2.0 million and was assigned a fair value of
$1.9 million. The borrowing bears annual interest at 8.75%.
On March 30, 2013, $1.3 million of the term loan
matures and on October 6, 2013, the remaining $600,000
matures.
On January 19, 2007, Storage Canada borrowed $705,000. The
borrowing bears annual interest at 8.75% and has a maturity date
of January 19, 2014.
At July 31, 2007, the Companys investment in Storage
Canada had an outstanding balance of $2.7 million and a
cost basis and fair value of $2.7 million.
Summit
Research Labs, Inc.
Summit, Huguenot, New York, is a specialty chemical company that
manufactures antiperspirant actives.
At October 31, 2006, the Companys investment in
Summit consisted of a second lien loan and 800 shares of
preferred stock. The second lien loan had an outstanding balance
of $5.0 million with a cost of $5.0 million. The
second lien loan was assigned a fair value of $5.0 million.
The preferred stock had been assigned a fair value of
$11.2 million.
At July 31, 2007, the Companys second lien loan had
an outstanding balance of $5.3 million with a cost of
$5.2 million. The second lien loan was assigned a fair
value of $5.3 million. The preferred stock had been
assigned a fair value of $11.2 million. The increase in
cost and fair value of the loan is due to the amortization of
loan origination fees and the capitalization of payment in
kind interest. These increases were approved by the
Valuation Committee.
Michael Tokarz, Chairman of the Company, and Puneet Sanan and
Shivani Khurana, representatives of the Company, serve as
directors of Summit.
53
Timberland
Machines & Irrigation, Inc.
Timberland, Enfield, Connecticut, is a distributor of
landscaping outdoor power equipment and irrigation products.
Timberland has a floor plan financing program administered by
Transamerica Commercial Finance Corporation
(Transamerica). As is typical in Timberlands
industry, under the terms of the dealer financing arrangement,
Timberland guarantees the repurchase of product from
Transamerica, if a dealer defaults on payment and the underlying
assets are repossessed. The Company has agreed to be a
co-guarantor of this repurchase commitment, but its maximum
potential exposure as a result of the guarantee is contractually
limited to $500,000.
At October 31, 2006, the Companys investment in
Timberland consisted of a mezzanine loan, junior revolving note,
542 shares of common stock, and warrants. The mezzanine
loan had an outstanding balance of $6.6 million with a cost
of $6.6 million. The mezzanine loan bore annual interest at
14.43% and matures on August 4, 2009. The mezzanine loan
was assigned a fair value of $6.6 million. The junior
revolving note had a cost of $2.8 million and was assigned
a fair value of $2.8 million. The junior revolving note
bears annual interest at 12.5% and matures on July 7, 2007.
The common stock was assigned a fair value of $4.4 million.
The warrant was assigned a fair value of $0.
At the beginning of the 2007 fiscal year, the junior revolving
note provided to Timberland had a balance outstanding of
approximately $2.8 million. On November 27, 2006, the
amount available on the revolving note was increased by $750,000
to $4.0 million. Net repayments during for the nine month
period ended July 31, 2007 were $300,000 resulting in a
balance as of July 31, 2007 of $2.5 million.
On November 1, 2006, the Company reduced the interest rate
on the mezzanine loan from 14.43% to 12%.
On July 1, 2007, the Company increased the interest rate on
the mezzanine loan from 12% to 14.55%.
At July 31, 2007, the Companys mezzanine loan had an
outstanding balance of $6.8 million with a cost of
$6.7 million. The mezzanine loan was assigned a fair value
of $6.8 million. The junior revolving note was assigned a
fair value of $2.5 million. The increase in the outstanding
balance, cost and fair value of the loan is due to the
amortization of loan origination fees and the capitalization of
payment in kind interest. These increases were
approved by the Valuation Committee. The common stock was
assigned a fair value of $4.4 million. The warrant was
assigned a fair value of $0.
Michael Tokarz, Chairman of the Company, and Puneet Sanan, a
representative of the Company, serve as directors of Timberland.
Total
Safety U.S., Inc.
Total Safety, Houston, Texas, is the leading provider of safety
equipment and related services to the refining, petrochemical,
and oil exploration and production industries.
At October 31, 2006, the Companys investment in Total
Safety consisted of a $4.9 million term loan A bearing
annual interest at LIBOR plus 4.5% and a $981,651 term loan B
bearing annual interest at LIBOR plus 8.5%. The loans had a
combined outstanding balance and cost basis of
$5.9 million. The loan assignments were assigned a fair
value of $5.9 million.
On December, 8, 2006, Total Safety repaid term loan A and term
loan B in full including all accrued interest and fees. The
total amount received for term loan A was $5,043,775 and for
term loan B was $1,009,628.
On December 13, 2006, the Company purchased
$4.5 million of loan assignments in Total Safety. The
$1.0 million first lien loan bears annual interest at LIBOR
plus 3.0% and matures on December 8, 2012. The
$3.5 million second lien loan bears annual interest at
LIBOR plus 6.5% and matures on December 8, 2013.
On each of March 30, 2007 and June 29, 2007, the
Company received principal payments of $2,500 on the first lien
loan.
At July 31, 2007, the loans had a combined outstanding
balance and cost basis of $4.5 million. The loan
assignments were assigned a fair value of $4.5 million.
54
Turf
Products, LLC
Turf, Enfield, Connecticut, is a wholesale distributor of golf
course and commercial turf maintenance equipment, golf course
irrigation systems and consumer outdoor power equipment. At
October 31, 2006, the Companys investment in Turf
consisted of a senior subordinated loan, bearing interest at 15%
per annum with a maturity date of November 30, 2010, LLC
membership interest, and warrants. The senior subordinated loan
had an outstanding balance of $7.7 million with a cost of
$7.6 million. The loan was assigned a fair value of
$7.7 million. The membership interest had a cost of
$3.8 million and had been assigned a fair value of
$5.8 million. The warrants had a cost of $0 and were
assigned a fair value of $0.
On January 9, 2007, the Company extended to Turf a
$1.0 million junior revolving note. Turf immediately
borrowed $1.0 million from the note. The note bears annual
interest at 12.5% and matures on May 1, 2008.
On May 1, 2007, Turf repaid the junior revolving note in
full including accrued interest. As a result, there was no
amount outstanding on the revolving note as of July 31,
2007.
At July 31, 2007, the mezzanine loan had an outstanding
balance of $7.7 million with a cost of $7.6 million.
The loan was assigned a fair value of $7.7 million. The
increase in the outstanding balance, cost and fair value of the
loan is due to the amortization of loan origination fees and the
capitalization of payment in kind interest. These
increases were approved by the Valuation Committee. There was no
amount outstanding on the junior revolving note. The membership
interest has been assigned a fair value of $5.8 million.
The option was assigned a fair value of $0.
Michael Tokarz, Chairman of the Company, and Puneet Sanan and
Shivani Khurana, representatives of the Company, serve as
directors of Turf.
U.S.
Gas & Electric, Inc.
U.S. Gas, North Miami Beach, FL, is a licensed Energy
Service Company (ESCO) that markets and distributes
natural gas to small commercial and residential retail customers
in the state of New York.
On July 26, 2007, the Company invested $6.0 million in
U.S. Gas in the form of a $5.5 million second lien
loan and 41,950 shares of convertible preferred stock at a
cost of $500,000. The second lien loans cost basis was
subsequently discounted to reflect loan origination fees
received. The Company also committed an additional
$12.0 million, in the form of a $10.0 million senior
credit facility and a $2.0 million junior revolver. The
second lien loan bears annual interest at 14% and matures on
July 25, 2012. The senior credit facility bears annual
interest at LIBOR plus 6% and matures on July 25, 2010. The
junior revolver bears annual interest at 14%, matures on
July 25, 2010 and has an unused fee of 0.50% per annum.
At July 31, 2007, the second lien loan had an outstanding
balance of $5.5 million with a cost of $5.3 million
and a fair value of $5.5 million. There was no amount
outstanding on the senior credit facility or the junior
revolver. The convertible preferred stock was assigned a fair
value equal to the cost of $500,000.
Puneet Sanan and Shivani Khurana, representatives of the
Company, serve as directors of U.S. Gas.
Velocitius
B.V.
Velocitius, a Netherlands based company, manages wind farms
based in Germany through operating subsidiaries.
On May 10, 2006, the Company made an equity investment of
approximately $66,290 in Velocitius.
On October 26, 2006, the Company made an additional equity
investment of approximately $2.9 million which was used to
purchase a wind farm in Germany.
At October 31, 2006, the Companys investments in
Velocitius consisted of a $260,000 revolving line of credit
(Line I) and common equity interest. Line I expires
on October 31, 2009. The note bears annual interest at 8%.
The equity investment in Velocitius had a cost and was assigned
a fair value of $3.0 million. Line I had a cost and was
assigned a fair value of $143,614.
55
At October 31, 2006, the balance of Line I was
approximately $144,000. Net repayments during the nine month
period ended July 31, 2007 were approximately $10,000. At
July 31, 2007, there was approximately $134,000 outstanding.
On February 19, 2007, the Company invested an additional
$8.4 million of common equity interest in Velocitius to
purchase an additional wind farm in Germany.
On May 1, 2007, the Company provided Line II to
Velocitius. Velocitius immediately borrowed $547,392.
Line II expires on April 30, 2010. Line II bears
annual interest at 8%. At July 31, 2007, there was
approximately $547,000 outstanding.
At July 31, 2007, the equity investment in Velocitius had a
cost and was assigned a fair value of $11.4 million. Line I
had a cost and was assigned a fair value of $133,844 and
Line II had a cost and was assigned a fair value of
$547,392.
Bruce Shewmaker, an officer of the Company, serves as a director
of Velocitius.
Vendio
Services, Inc.
Vendio, San Bruno, California, a Legacy Investment, offers
small businesses and entrepreneurs resources to build Internet
sales channels by providing software solutions designed to help
these merchants efficiently market, sell and distribute their
products.
At October 31, 2006, the Companys investments in
Vendio consisted of 10,476 shares of common stock and
6,443,188 shares of Series A preferred stock at a
total cost of $6.6 million. The investments were assigned a
fair value of $3.4 million, $0 for the common stock and
$3.4 million for the Series A preferred stock.
During the nine month period ended July 31, 2007, the
Valuation Committee increased the fair values of the common
stock by $15,421 and the preferred stock by approximately
$6.1 million.
At July 31, 2007, the Companys investments in Vendio
consisted of 10,476 shares of common stock and
6,443,188 shares of Series A preferred stock at a
total cost of $6.6 million. The investments were assigned a
fair value of $9.5 million, $15,421 for the common stock
and approximately $9.5 million for the Series A
preferred stock.
Bruce Shewmaker, an officer of the Company, serves as a director
of Vendio.
Vestal
Manufacturing Enterprises, Inc.
Vestal, Sweetwater, Tennessee, is a market leader for steel
fabricated products to brick and masonry segments of the
construction industry. Vestal manufactures and sells both cast
iron and fabricated steel specialty products used in the
construction of single-family homes.
At October 31, 2006, the Companys investment in
Vestal consisted of a senior subordinated promissory note, that
had an outstanding balance, cost, and fair value of $800,000,
and 81,000 shares of common stock that had a cost basis of
$1.9 million and were assigned a fair value of
$3.7 million.
On December 1, 2006, the Company received a principal
payment of $100,000.
At July 31, 2007, the senior subordinated promissory note
had an outstanding balance, cost, and fair value of $700,000.
The 81,000 shares of common stock of Vestal that had a cost
basis of $1.9 million were assigned a fair value of
$3.7 million.
David Hadani and Ben Harris, representatives of the Company,
serve as directors of Vestal.
Vitality
Foodservice, Inc.
Vitality, Tampa, Florida, is a market leader in the processing
and marketing of dispensed and non-dispensed juices and frozen
concentrate liquid coffee to the foodservice industry. With an
installed base of over 42,000
56
dispensers worldwide, Vitality sells its frozen concentrate
through a network of over 350 distributors to such market niches
as institutional foodservice, including schools, hospitals,
cruise ships, hotels and restaurants.
At October 31, 2006, the Companys investment in
Vitality consisted of 500,000 shares of common stock at a
cost of $5.0 million and 1,000,000 shares of
Series A convertible preferred stock at a cost of
$9.7 million. The common stock, Series A convertible
preferred stock and warrants were assigned fair values of
$8.5 million, $11.1 million and $1.1 million,
respectively.
On December 22, 2006, the Company purchased an additional
56,472 shares of common stock in Vitality at a cost of
approximately $565,000.
At July 31, 2007, the investment in Vitality consisted of
556,472 shares of common stock at a cost of
$5.6 million and 1,000,000 shares of Series A
convertible preferred stock at a cost of $9.7 million. The
common stock, Series A convertible preferred stock and
warrants were assigned fair values of $9.1 million,
$12.2 million and $1.1 million, respectively. The
increase in the cost and fair value of the Series A
convertible preferred stock is due to the capitalization of
payment in kind dividends. These increases were
approved by the Valuation Committee.
David Hadani, a representative of the Company, serves as a
director of Vitality.
WBS
Carbons Acquisitions Corp.
WBS, Middletown, New York, is a manufacturer of antiperspirant
actives and water treatment chemicals.
On November 22, 2006, the Company invested
$3.2 million in WBS consisting of a $1.6 million
bridge loan and 400 shares of common stock at a cost of
$1.6 million. The bridge loan bears annual interest at 5%
and matures on November 22, 2011.
At July 31, 2007, the bridge loan had an outstanding
balance, cost, and fair value of $1.6 million. The
400 shares of common stock of WBS had a cost basis of
$1.6 million were assigned a fair value of
$1.6 million.
Puneet Sanan and Shivani Khurana, representatives of the
Company, serve as directors of WBS.
Liquidity
and Capital Resources
At July 31, 2007, the Company had investments in portfolio
companies totaling $316.9 million. Also, at July 31,
2007, the Company had investments in cash and cash equivalents
totaling approximately $112.8 million. The Company
considers all money market and other cash investments purchased
with an original maturity of less than three months to be cash
equivalents. U.S. government securities and cash
equivalents are highly liquid.
During the nine month period ended July 31, 2007, the
Company made eight new investments, committing capital totaling
approximately $53.3 million. The investments were made in
U.S. Gas ($18.9 million), Genevac
($14.0 million), Levlad ($10.1 million), Total Safety
($4.5 million), WBS ($3.2 million), Tekers
($2.3 million), HuaMei ($200,000) and MVC Partners
($71,000).
The Company also made 14 follow-on investments in existing
portfolio companies committing capital totaling approximately
$47.4 million. On November 7, 2006, the Company
invested $100,000 in SGDA by purchasing an additional common
equity interest. On December 22, 2006, the Company
purchased an additional 56,472 shares of common stock in
Vitality at a cost of approximately $565,000. On January 9,
2007, the Company extended to Turf a $1.0 million junior
revolving note. Turf immediately borrowed $1.0 million from
the note. On January 11, 2007, the Company provided Harmony
Pharmacy a $4.0 million revolving credit facility. Harmony
Pharmacy immediately borrowed $1.75 million from the credit
facility. On February 16, 2007, the Company invested
$1.8 million in HuaMei purchasing 450 shares of common
stock. At the same time, the previously issued $200,000
convertible promissory note was exchanged for 50 shares of
HuaMei common stock at the same price. On February 19,
2007, the Company invested an additional $8.4 million of
common equity interest in Velocitius. On February 21, 2007
and May 4, 2007, the Company provided BP a
$5.0 million and a $2.5 million second lien loan,
respectively. On March 26, 2007, the Company extended a
$1.0 million bridge loan to BENI. On March 30, 2007,
the Company invested an additional $5.0 million in SP in
the form of a subordinated term loan B. On May 1, 2007, the
Company extended Line II to Velocitius. Velocitius
immediately borrowed approximately $547,000. On May 8,
2007, the
57
Company provided Baltic Motors a $5.5 million bridge loan.
On May 9, 2007, the Company purchased one million shares of
Dakota Growers preferred stock at a cost of $10.0 million.
At that time, 65,000 shares of Dakota Growers common stock
were converted to 65,000 shares of convertible preferred
stock. On July 30, 2007, the Company provided Ohio Medical
a $2.0 million convertible unsecured promissory note.
Issuances
of Equity Securities by the Issuer:
On February 28, 2007, the Company completed its public
offering of 5,000,000 shares of the Companys common
stock at a price of $16.25 per share. On March 28, 2007,
pursuant to the
30-day
over-allotment option granted by the Company to the underwriters
in connection with the offering, the underwriters purchased an
additional 158,500 shares of common stock at the purchase
price of $16.25 per share. The Company raised approximately
$78.4 million in net proceeds after deducting the
underwriting discount and commissions and estimated offering
expenses.
Current balance sheet resources, which include the additional
cash resources from the Credit Facility, are believed to be
sufficient to finance current commitments. Current commitments
include:
Commitments
to/for Portfolio Companies:
At July 31, 2007, the Companys existing commitments
to portfolio companies consisted of the following:
Commitments
of MVC Capital, Inc.
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Amount Funded
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Portfolio Company
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Amount Committed
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|
at July 31, 2007
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Timberland
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$
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4.0 million
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|
$
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2.5 million
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Storage Canada
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|
$
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6.0 million
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$
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2.7 million
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Marine
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$
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2.0 million
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BENI
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$
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514,000
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Octagon
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$
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12.0 million
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$
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6.1 million
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Turf
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$
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1.0 million
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Harmony Pharmacy
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$
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4.0 million
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$
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3.4 million
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Velocitius
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$
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260,000
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$
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134,000
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Velocitius
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$
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650,000
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$
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547,392
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Tekers
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$
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1.9 million
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U.S. Gas
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$
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10.0 million
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U.S. Gas
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$
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2.0 million
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Total
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$
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44.3 million
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$
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15.4 million
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On June 30, 2005, the Company pledged its common stock of
Ohio Medical to Guggenheim to collateralize a loan made by
Guggenheim to Ohio Medical.
On July 8, 2005 the Company extended to Timberland a
$3.25 million junior revolving note that bears interest at
12.5% per annum and expires on July 7, 2007. The Company
also receives a fee of 0.25% on the unused portion of the note.
As of October 31, 2005, the total amount outstanding on the
note was $3.25 million. On December 27, 2005, the
Company exchanged $286,200 of the Timberland junior revolving
line of credit for 28.62 shares of common stock at a price
of $10,000 per share. As of January 31, 2006, the Company
owned 478.62 common shares and the funded debt under the junior
revolving line of credit has been reduced from
$3.25 million to approximately $3.0 million. On
September 12, 2006, the Company converted $409,091 of the
Timberland junior revolving line of credit into
40.91 shares of common stock at a price of $10,000 per
share. Effective September 22, 2006, the Company converted
$225,000 of the Timberland junior revolving line of credit into
22.50 shares of common stock at a price of $10,000 per
share. As of October 31, 2006 the Company owned 542.03
common shares and the funded debt under the junior revolving
line of credit was $2.8 million. On November 27, 2006,
the amount available on the
58
revolving note was increased by $750,000 to $4.0 million.
Net repayments during the nine month period ended July 31,
2007 were $300,000 resulting in a balance at such date of
$2.5 million.
On March 30, 2006, the Company provided a $6.0 million
loan commitment to Storage Canada. The commitment expires after
one year, but may be renewed with the consent of both parties.
The initial borrowing on the loan bears annual interest at 8.75%
and has a maturity date of March 30, 2013. Any additional
borrowings will mature seven years from the date of the
subsequent borrowing. The Company also receives a fee of 0.25%
on the unused portion of the loan. As of October 31, 2006,
the outstanding balance of the loan commitment was
$2.0 million. Net borrowing during the nine month period
ended July 31, 2007 were $705,000 resulting in a balance of
$2.7 million at such date.
On July 11, 2006, the Company provided Marine a
$2.0 million secured revolving loan facility. The revolving
loan facility bears annual interest at LIBOR plus 1%. The
Company also receives a fee of 0.50% of the unused portion of
the revolving loan facility. There was no amount outstanding on
the revolving loan facility as of July 31, 2007.
On October 10, 2006, the Company agreed to guarantee a
375,000 Euro inventory financing facility for BENI, equivalent
to approximately $514,000 at July 31, 2007.
On October 12, 2006, the Company provided a
$12.0 million revolving credit facility to Octagon in
replacement of the senior secured credit facility provided on
May 7, 2004. This credit facility expires on
December 31, 2011. The credit facility bears annual
interest at LIBOR plus 4.25%. The Company receives a 0.50%
unused facility fee on an annual basis and a 0.25% servicing fee
on an annual basis for maintaining the credit facility. At
October 31, 2006 the outstanding balance of the revolving
credit facility provided to Octagon was $3.3 million. Net
borrowings during the nine month period ended July 31, 2007
were $2.8 million resulting in a balance outstanding of
$6.1 million at such date.
On October 30, 2006, the Company provided Line I to
Velocitius, on which Velocitius immediately borrowed $143,614.
Line I expires on October 31, 2009. The line bears annual
interest at 8%. At October 31, 2006, the balance of Line I
was approximately $144,000. Net repayments during the nine month
period ended July 31, 2007 were approximately $10,000. At
July 31, 2007, there was approximately $134,000 outstanding.
On January 9, 2007, the Company extended to Turf a
$1.0 million secured junior revolving note. Turf
immediately borrowed $1.0 million on the note. The note
bears annual interest at 12.5% and expires on May 1, 2008.
The Company also receives a fee of 0.25% of the unused portion
of the note. On May 1, 2007, Turf repaid the secured junior
revolving note in full including accrued interest. There was no
amount outstanding on the revolving note as of July 31,
2007.
On January 11, 2007, the Company provided a
$4.0 million revolving credit facility to Harmony Pharmacy.
The credit facility bears annual interest at 10%. The Company
also receives a fee of 0.50% on the unused portion of the loan.
The revolving credit facility expires on December 1, 2009.
Net borrowings during the nine month period ended July 31,
2007 were $3.4 million resulting in a balance outstanding
of $3.4 million at such date.
On May 1, 2007, the Company provided Line II to
Velocitius. Velocitius immediately borrowed $547,392.
Line II expires on April 30, 2010. The line bears
annual interest at 8%. At July 31, 2007, there was $547,392
outstanding under the line.
On July 19, 2007, the Company agreed to guarantee a
1.4 million Euro mortgage for Tekers, equivalent to
approximately $1.9 million at July 31, 2007.
On July 26, 2007, the Company provided a $10.0 million
revolving credit facility and a $2.0 million junior
revolver to U.S. Gas. The credit facility bears annual
interest at LIBOR plus 6% and the revolver bears annual interest
at 14%. The Company receives a fee of 0.50% on the unused
portion of the credit facility and the revolver. The revolving
credit facility and junior revolver expire on July 26,
2010. There was no amount outstanding on the credit facility or
junior revolver as of July 31, 2007.
Timberland also has a floor plan financing program administered
by Transamerica. As is typical in Timberlands industry,
under the terms of the dealer financing arrangement, Timberland
guarantees the repurchase
59
of product from Transamerica, if a dealer defaults on payment
and the underlying assets are repossessed. The Company has
agreed to be a limited co-guarantor for up to $500,000 on this
repurchase commitment.
Commitments
of the Company:
On February 16, 2005, the Company entered into a sublease
(the Sublease) for a larger space in the building in
which the Companys current executive offices are located,
which expired on February 28, 2007. Effective
November 1, 2006, under the terms of the Advisory
Agreement, TTG Advisers is responsible for providing office
space to the Company and for the costs associated with providing
such office space. The Companys offices continue to be
located on the second floor of 287 Bowman Avenue.
On April 27, 2006, the Company and MVCFS, as co-borrowers,
entered into the Credit Facility with Guggenheim as
administrative agent for the lenders. At October 31, 2006,
there was $50.0 million in term debt and $50.0 million
on the revolving credit facility outstanding. During the nine
months ended July 31, 2007, the Companys net
repayments on the Credit Facility were $50.0 million. As of
July 31, 2007, there was $50.0 million in term debt
and no amount outstanding on the revolving credit facility. The
proceeds from borrowings made under the Credit Facility are used
to fund new and existing portfolio investments, pay fees and
expenses related to obtaining financing and for general
corporate purposes. The Credit Facility will expire on
April 27, 2010, at which time all outstanding amounts under
the Credit Facility will be due and payable. Borrowings under
the Credit Facility will bear interest, at the Companys
option, at a floating rate equal to either (i) the LIBOR
rate (for one, two, three or six months), plus a spread of 2.00%
per annum, or (ii) the prime rate in effect from time to
time, plus a spread of 1.00% per annum. The Company paid a
closing fee, legal and other costs associated with this
transaction. These costs will be amortized evenly over the life
of the facility. The prepaid expenses on the Balance Sheet
include the unamortized portion of these costs. Borrowings under
the Credit Facility will be secured, by among other things,
cash, cash equivalents, debt investments, accounts receivable,
equipment, instruments, general intangibles, the capital stock
of MVCFS, and any proceeds from all the aforementioned items, as
well as all other property except for equity investments made by
the Company.
The Company enters into contracts with portfolio companies and
other parties that contain a variety of indemnifications. The
Companys maximum exposure under these arrangements is
unknown. However, the Company has not experienced claims or
losses pursuant to these contracts and believes the risk of loss
related to indemnifications to be remote.
A summary of our contractual payment obligations as of
October 31, 2006 is as follows:
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Payments Due by Period
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Less Than
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After
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Total
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1 Year
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1-3 Years
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4-5 Years
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5 Years
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Term Debt Portion of Credit Facility
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$
|
50,000,000
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|
|
|
N/A
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|
|
|
N/A
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|
|
$
|
50,000,000
|
|
|
|
N/A
|
|
|
|
|
|
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Total Debt
|
|
$
|
50,000,000
|
|
|
|
N/A
|
|
|
|
N/A
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|
|
$
|
50,000,000
|
|
|
|
N/A
|
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Subsequent
Events
Since July 31, 2007, net borrowings on Timberlandss
revolving credit facility were $1.5 million.
Since July 31, 2007, net repayments on Octagons
revolving credit facility were $1.95 million.
On August 1, 2007, Phoenix Coal repaid its second lien loan
in full including all accrued interest and fees. The total
amount received from the repayment was approximately
$8.4 million.
On August 10, 2007, Forrest Mertens, a representative of
the Company, resigned from the board of Phoenix Coal. The
Company still has board observance rights.
On August 15, 2007, Velocitius borrowed approximately
$57,000 on Line I and $65,000 from Line II.
60
On August 20, 2007, the Company contributed an additional
$45,000 to MVC Partners, increasing its limited liability
company interest.
On September 18 and 19, 2007 the Company invested
$24.0 million in Custom Alloy Corporation in the form of a
$14.0 million loan bearing annual interest at 14% and
$10.0 million in convertible preferred stock, respectively.
On September 20, 2007, the Company invested
$40.0 million in MVC Automotive Group BV in the form of a
$19.1 million bridge loan bearing annual interest at 10%
and $20.9 in common stock.
On, September 27, 2007, the Company made an additional
investment in Ohio Medical by extending $1.25 million of
convertible unsecured subordinated promissory note.
On September 28, 2007, Henry Company repaid approximately
$63,000 on term loan A.
On September 28, 2007, BP repaid $90,000 on term loan A.
On September 28, 2007, Henry Company repaid $2,500 on its
first lien loan.
On October 1, 2007, Innovative Brands repaid $37,500 on its
term loan.
On October 2, 2007, Harmony Pharmacy borrowed $650,000 from
its revolving credit facility.
On October 15, 2007, our board of directors declared a
regular quarterly dividend of $0.12 per share, which was paid on
October 31, 2007 to shareholders of record on
October 24, 2007.
On October 17, 2007, all post-closing conditions from the
acquisition of Baltic Motors and BM Auto were satisfied. Of the
$3.0 million held in reserve, $1.1 million was not
needed to satisfy the post-closing conditions and as a result
will be added to the Companys gain on this sale.
On October 18, 2007, the Valuation Committee determined to
adjust the fair values of the following portfolio companies, as
of October 31, 2007: BENI, Foliofn, SGDA, PreVisor,
Tekers, Summit, Timberland, and Vitality. These adjustments
resulted in an aggregate net increase of approximately
$3.3 million.
On October 19, 2007, U.S. Gas borrowed approximately
$141,000 from its revolving credit facility.
On October 24, 2007, Octagon repaid $150,000 on its
revolving credit facility.
Since October 31, 2007, additional net borrowings on
U.S. Gass revolving credit facility were
approximately $1.5 million.
Since October 31, 2007, net repayments on the Octagon revolving
credit facility were $650,000.
On November 6, 2007, the Company invested $750,000 in SGDA
Europe BV in the form of common equity interest.
On November 14 and November 21, 2007, the Company made
additional investments of approximately $200,000 and $17,000,
respectively, in MVC Partners. In connection with these
investments, MVC Partners has made an investment in MVC
Acquisition Corp., a newly-formed blank check company organized
for the purpose of effecting a merger, capital stock exchange,
asset acquisition or other similar business combination with an
operating business. We have agreed to serve as the corporate
sponsor of MVC Acquisition Corp. Michael Tokarz, our Chairman
and Portfolio Manager and the Manager of TTG Advisers, and Peter
Seidenberg, our Chief Financial Officer, who serves in a similar
capacity for TTG Advisers, currently serve as Chairman of the
Board and Chief Financial Officer, respectively, for MVC
Acquisition Corp. In connection with our sponsorship of MVC
Acquisition Corp., we have agreed to purchase, through MVC
Partners, an aggregate of $5,000,000 of warrants from MVC
Acquisition Corp. concurrent with the consummation of its
initial public offering. In addition, we anticipate the
execution of a letter agreement with MVC Acquisition Corp.,
providing MVC Acquisition Corp. with a right of first review
with respect to target businesses with a fair market value in
excess of $250 million.
On November 26, 2007, the Company made an additional
investment in Harmony Pharmacy in the form of a $500,000 demand
note.
61
On November 30, 2007, the Company invested an additional
$40.0 million in Ohio Medical in the form of a
$10.0 million senior subordinated note and
$30.0 million in convertible preferred stock.
On December 13, 2007, the Company assigned the Ohio Medical
$10.0 million senior subordinated note to AEA Investors LLC.
Dividends
and Distributions
In accordance with the Companys quarterly dividend
program, we have declared and paid ten straight $0.12 quarterly
dividends, most recently on October 31, 2007, as well as a
$0.06 special dividend in December 2006.
As a RIC, the Company is required to distribute to its
shareholders, in a timely manner, at least 90% of its investment
company taxable and tax-exempt income each year. If the Company
distributes, in a calendar year, at least 98% of its ordinary
income for such calendar year and its capital gain net income
for the
12-month
period ending on October 31 of such calendar year (as well as
any portion of the respective 2% balances not distributed in the
previous year), it will not be subject to the 4% non-deductible
federal excise tax on certain undistributed income of RICs.
Dividends and capital gain distributions, if any, are recorded
on the ex-dividend date. Dividends and capital gain
distributions are generally declared and paid quarterly
according to the Companys policy established on
July 11, 2005. An additional distribution may be paid by
the Company to avoid imposition of federal income tax on any
remaining undistributed net investment income and capital gains.
Distributions can be made payable by the Company either in the
form of a cash distribution or a stock dividend. The amount and
character of income and capital gain distributions are
determined in accordance with income tax regulations which may
differ from accounting principles generally accepted in the
United States of America. These differences are due primarily to
differing treatments of income and gain on various investment
securities held by the Company, timing differences and differing
characterizations of distributions made by the Company.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications and may affect
the allocation between net operating income, net realized gain
(loss) and paid in capital.
Significant
Accounting Policies
The following is a summary of significant accounting policies
followed by the Company in the preparation of its consolidated
financial statements:
The preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts and disclosures
in the consolidated financial statements. Actual results could
differ from those estimates.
Valuation of Portfolio Securities
Pursuant to the requirements of the 1940 Act, we value our
portfolio securities at their current market values or, if
market quotations are not readily available, at their estimates
of fair values. Because our portfolio company investments
generally do not have readily ascertainable market values, we
record these investments at fair value in accordance with our
Valuation Procedures adopted by the board of directors. As
permitted by the SEC, the board of directors has delegated the
responsibility of making fair value determinations to the
Valuation Committee, subject to the board of directors
supervision and pursuant to our Valuation Procedures. Our board
of directors may also elect in the future to hire independent
consultants to review the Valuation Procedures or to conduct an
independent valuation of one or more of our portfolio
investments.
Pursuant to our Valuation Procedures, the Valuation Committee
(which is currently comprised of three Independent Directors)
determines fair valuations of portfolio company investments on a
quarterly basis (or more frequently, if deemed appropriate under
the circumstances). Any changes in valuation are recorded in the
statements of operations as Net unrealized gain (loss) on
investments. Currently, our NAV per share is calculated
and published on a monthly basis. The fair values determined as
of the most recent quarter end are reflected, in the next
calculated NAV per share. (If the Valuation Committee determines
to fair value an investment more frequently than quarterly, the
most recently determined fair value would be reflected in the
published NAV per share.)
62
The Company calculates our NAV per share by subtracting all
liabilities from the total value of our portfolio securities and
other assets and dividing the result by the total number of
outstanding shares of our common stock on the date of valuation.
At October 31, 2006 and July 31, 2007, approximately
79.5% and 72.6%, respectively, of our total assets represented
portfolio investments recorded at fair value (Fair Value
Investments).
Initially, Fair Value Investments held by the Company are valued
at cost (absent the existence of circumstances warranting, in
managements and the Valuation Committees view, a
different initial value). During the period that a Fair Value
Investment is held by the Company, its original cost may cease
to represent an appropriate valuation, and other factors must be
considered. No pre-determined formula can be applied to
determine fair values. Rather, the Valuation Committee makes
fair value assessments based upon the value at which the
securities of the portfolio company could be sold in an orderly
disposition over a reasonable period of time between willing
parties, other than in a forced or liquidation sale. The
liquidity event whereby the Company exits an investment is
generally the sale, the merger, the recapitalization or, in some
cases, the initial public offering of the portfolio company.
There is no one methodology to determine fair value and, in
fact, for any portfolio security, fair value may be expressed as
a range of values, from which the Company derives a single
estimate of fair value. To determine the fair value of a
portfolio security, the Valuation Committee analyzes the
portfolio companys financial results and projections,
publicly traded comparables when available, precedent exit
transactions in the market when available, as well as other
factors. The Company generally requires, where practicable,
portfolio companies to provide annual audited and more regular
unaudited financial statements,
and/or
annual projections for the upcoming fiscal year.
The fair value of our portfolio securities is inherently
subjective. Because of the inherent uncertainty of fair
valuation of portfolio securities that do not have readily
ascertainable market values, our estimate of fair value may
significantly differ from the fair market value that would have
been used had a ready market existed for the securities. Such
values also do not reflect brokers fees or other selling
costs which might become payable on disposition of such
investments.
The Companys equity interests in portfolio companies for
which there is no liquid public market are valued at fair value.
The Valuation Committees analysis of fair value may
include various factors, such as multiples of EBITDA, cash
flow(s), net income, revenues or in limited instances book value
or liquidation value. All of these factors may be subject to
adjustments based upon the particular circumstances of a
portfolio company or the Companys actual investment
position. For example, adjustments to EBITDA may take into
account compensation to previous owners or acquisition,
recapitalization, or restructuring or related items.
The Valuation Committee may look to private merger and
acquisition statistics, public trading multiples discounted for
illiquidity and other factors, or industry practices in
determining fair value. The Valuation Committee may also
consider the size and scope of a portfolio company and its
specific strengths and weaknesses, as well as any other factors
it deems relevant in assessing the value. The determined fair
values may be discounted to account for restrictions on resale
and minority positions.
Generally, the value of our equity interests in public companies
for which market quotations are readily available is based upon
the most recent closing public market price. Portfolio
securities that carry certain restrictions on sale are typically
valued at a discount from the public market value of the
security.
For loans and debt securities, fair value generally approximates
cost unless there is a reduced value or overall financial
condition of the portfolio company or other factors indicate a
lower fair value for the loan or debt security.
Generally, in arriving at a fair value for a debt security or a
loan, the Valuation Committee focuses on the portfolio
companys ability to service and repay the debt and
considers its underlying assets. With respect to a convertible
debt security, the Valuation Committee also analyzes the excess
of the value of the underlying security over the conversion
price as if the security was converted when the conversion
feature is in the money (appropriately discounted if
restricted). If the security is not currently convertible, the
use of an appropriate discount in valuing the underlying
security is typically considered. If the value of the underlying
security is less than the conversion price, the Valuation
Committee focuses on the portfolio companys ability to
service and repay the debt.
63
When the Company receives nominal cost warrants or free equity
securities (nominal cost equity) with a debt
security, the Company allocates its cost basis in the investment
between debt securities and nominal cost equity at the time of
origination.
Interest income is recorded on an accrual basis to the extent
that such amounts are expected to be collected. Origination
and/or
closing fees associated with investments in portfolio companies
are accreted into income over the respective terms of the
applicable loans. Upon the prepayment of a loan or debt
security, any prepayment penalties and unamortized loan
origination, closing and commitment fees are recorded as income.
Prepayment premiums are recorded on loans when received.
For loans, debt securities, and preferred securities with
contractual
payment-in-kind
interest or dividends, which represent contractual
interest/dividends accrued and added to the loan balance or
liquidation preference that generally becomes due at maturity,
the Company will not accrue
payment-in-kind
interest/dividends if the portfolio company valuation indicates
that the
payment-in-kind
interest is not collectible. However, the Company may accrue
payment-in-kind
interest if the health of the portfolio company and the
underlying securities are not in question. All
payment-in-kind
interest that has been added to the principal balance or
capitalized is subject to ratification by the Valuation
Committee.
Escrows from the sale of a portfolio company are generally
valued at an amount which may be expected to be received from
the buyer under the escrows various conditions discounted
for both risk and time.
Investment Classification As required
by the 1940 Act, we classify our investments by level of
control. As defined in the 1940 Act, Control
Investments are investments in those companies that we are
deemed to Control. Affiliate Investments
are investments in those companies that are Affiliated
Companies of us, as defined in the 1940 Act, other than
Control Investments. Non-Control/Non-Affiliate
Investments are those that are neither Control Investments
nor Affiliate Investments. Generally, under the 1940 Act, we are
deemed to control a company in which we have invested if we own
25% or more of the voting securities of such company or have
greater than 50% representation on its board. We are deemed to
be an affiliate of a company in which we have invested if we own
5% or more and less than 25% of the voting securities of such
company.
Investment Transactions and Related Operating
Income Investment transactions and related
revenues and expenses are accounted for on the trade date (the
date the order to buy or sell is executed). The cost of
securities sold is determined on a
first-in,
first-out basis, unless otherwise specified. Dividend income and
distributions on investment securities is recorded on the
ex-dividend date. The tax characteristics of such distributions
received from our portfolio companies will be determined by
whether or not the distribution was made from the
investments current taxable earnings and profits or
accumulated taxable earnings and profits from prior years.
Interest income, which includes accretion of discount and
amortization of premium, if applicable, is recorded on the
accrual basis to the extent that such amounts are expected to be
collected. Fee income includes fees for guarantees and services
rendered by the Company or its wholly-owned subsidiary to
portfolio companies and other third parties such as due
diligence, structuring, transaction services, monitoring
services, and investment advisory services. Guaranty fees are
recognized as income over the related period of the guaranty.
Due diligence, structuring, and transaction services fees are
generally recognized as income when services are rendered or
when the related transactions are completed. Monitoring and
investment advisory services fees are generally recognized as
income as the services are rendered. Any fee income determined
to be loan origination fees, original issue discount, and market
discount are capitalized and then amortized into income using
the effective interest method. Upon the prepayment of a loan or
debt security, any unamortized loan origination fees are
recorded as income and any unamortized original issue discount
or market discount is recorded as a realized gain. For
investments with
payment-in-kind
(PIK) interest and dividends, we base income and
dividend accrual on the valuation of the PIK notes or securities
received from the borrower. If the portfolio company indicates a
value of the PIK notes or securities that is not sufficient to
cover the contractual interest or dividend, we will not accrue
interest or dividend income on the notes or securities.
Cash Equivalents For the purpose of
the Consolidated Balance Sheets and Consolidated Statements of
Cash Flows, the Company considers all money market and all
highly liquid temporary cash investments purchased with an
original maturity of less than three months to be cash
equivalents.
64
Restricted Securities The Company
will invest in privately placed restricted securities. These
securities may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming
negotiations and expense, and a prompt sale at an acceptable
price may be difficult.
Distributions to Shareholders
Distributions to shareholder are recorded on the ex-dividend
date.
Income Taxes It is the policy of the
Company to meet the requirements for qualification as a
regulated investment company (RIC) under Subchapter
M of the Internal Revenue Code of 1986, as amended (the
Code). As a RIC, the Company is not subject to
income tax to the extent that it distributes all of its
investment company taxable income and net realized capital gains
for its taxable year. The Company is also exempt from excise tax
if it distributes at least 98% of its ordinary income and
capital gains during each calendar year.
Our consolidated operating subsidiary, MVCFS, is subject to
federal and state income tax. We use the liability method in
accounting for income taxes. Deferred tax assets and liabilities
are recorded for temporary differences between the tax basis of
assets and liabilities and their reported amounts in the
financial statements, using statutory tax rates in effect for
the year in which the differences are expected to reverse. A
valuation allowance is provided against deferred tax assets when
it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
Reclassifications Certain amounts from
prior years have had to be reclassified to conform to the
current year presentation.
Recent Accounting Pronouncements In
June 2006, the Financial Accounting Standard Board
(FASB) issued FASB Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109, which clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial
statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. This Interpretation prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure, and transition. This Statement shall be
effective as of the beginning of an entitys first fiscal
year that begins after December 15, 2006. We will adopt
this Interpretation during the first quarter of 2008 as
required. The effect of adoption of FIN No. 48 is not
expected to have a material impact on our consolidated financial
statements.
In September 2006, the FASB issued Statement No. 157, Fair
Value Measurements. FASB Statement No. 157 provides
enhanced guidance for using fair value to measure assets and
liabilities. FASB Statement No. 157 also provides guidance
regarding the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair
value, and the effect of fair value measurements on earnings.
FASB Statement No. 157 applies whenever other standards
require (or permit) assets or liabilities to be measured at fair
value but does not expand the use of fair value in any new
circumstances. FASB Statement No. 157 is effective for
fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years, with early adoption
permitted. FASB Statement No. 157 is not expected to have a
material impact on our consolidated financial statements.
65
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has procedures in place for the review, approval and
monitoring of transactions involving the Company and certain
persons related to the Company. For example, the Company has a
code of ethics that generally prohibits, among others, any
officer or director of the Company from engaging in any
transaction where there is a conflict between such
individuals personal interest and the interests of the
Company. As a business development company, the 1940 Act also
imposes regulatory restrictions on the Companys ability to
engage in certain related party transactions. However, the
Company is permitted to co-invest in certain portfolio companies
with its affiliates to the extent consistent with applicable law
or regulation and, if necessary, subject to specified conditions
set forth in an exemptive order obtained from the SEC. During
the past four fiscal years, no transactions were effected
pursuant to the exemptive order. As a matter of policy, our
board of directors has required that any related-party
transaction (as defined in Item 404 of
Regulation S-K)
must be subject to the advance consideration and approval of the
Independent Directors, in accordance with applicable procedures
set forth in Section 57(f) of the 1940 Act.
The principal equity owner of TTG Advisers is Mr. Tokarz,
our Chairman. Our senior officers and Mr. Holtsberg have
other financial interests in TTG Advisers (i.e., based on
TTG Advisers performance). In addition, our officers and
the officers and employees of TTG Advisers may serve as
officers, directors or principals of entities that operate in
the same or related line of business as we do or of investment
funds managed by TTG Advisers or our affiliates. However, TTG
Advisers intends to allocate investment opportunities in a fair
and equitable manner. Our board of directors has approved a
specific policy in this regard which is set forth in our
Form 10-K
filed on January 10, 2007.
Information about our senior securities is shown in the
following table as of each fiscal year ended October 31 since
the Company commenced operations, unless otherwise noted. The
report of the Companys current independent registered
public accounting firm on the senior securities table as of
October 31, 2006, is attached as an exhibit to the
Registration Statement of which this prospectus is a part. The
indicates information which the SEC
expressly does not require to be disclosed for certain types of
senior securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
|
Exclusive of
|
|
|
Asset
|
|
|
Liquidating
|
|
|
Average
|
|
|
|
Treasury
|
|
|
Coverage
|
|
|
Preference
|
|
|
Market Value
|
|
Class and Year
|
|
Securities(1)
|
|
|
per Unit(2)
|
|
|
per Unit(3)
|
|
|
per Unit(4)
|
|
|
Lines of Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
N/A
|
|
2001
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
N/A
|
|
2002
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
N/A
|
|
2003
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
N/A
|
|
2004
|
|
$
|
10,025,000
|
|
|
$
|
11,531.18
|
|
|
$
|
|
|
|
|
N/A
|
|
2005
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
N/A
|
|
2006
|
|
$
|
100,000,000
|
|
|
$
|
3,369.93
|
|
|
$
|
|
|
|
|
N/A
|
|
|
|
|
(1) |
|
Total amount of each class of senior securities outstanding at
the end of the period presented. |
|
(2) |
|
The asset coverage ratio for a class of senior securities
representing indebtedness is calculated as our consolidated
total assets, less all liabilities and indebtedness not
represented by senior securities, divided by senior securities
representing indebtedness. This asset coverage ratio is
multiplied by $1,000 to determine the Asset Coverage Per Unit. |
|
(3) |
|
The amount to which such class of senior security would be
entitled upon the involuntary liquidation of the issuer in
preference to any security junior to it. |
|
(4) |
|
Not applicable, as senior securities are not registered for
public trading. |
66
MVC Capital is an externally managed, non-diversified,
closed-end management investment company that has elected to be
regulated as a business development company under the 1940 Act.
MVC Capital provides equity and debt investment capital to fund
growth, acquisitions and recapitalizations of small and
middle-market companies in a variety of industries primarily
located in the United States. Our investments can take the form
of common and preferred stock and warrants or rights to acquire
equity interests, senior and subordinated loans, or convertible
securities. Our common stock is traded on the NYSE under the
symbol MVC.
Although the Company has been in operation since 2000, the year
2003 marked a new beginning for the Company. In February 2003,
shareholders elected an entirely new board of directors. The
board of directors developed a new long-term strategy for the
Company. In September 2003, upon the recommendation of the board
of directors, shareholders voted to adopt a new investment
objective for the Company of seeking to maximize total return
from capital appreciation
and/or
income. The Companys prior objective had been limited to
seeking long-term capital appreciation from venture capital
investments in the information technology industries. Consistent
with our broader objective, we adopted a more flexible
investment strategy of providing equity and debt financing to
small and middle-market companies in a variety of industries.
With the recommendation of the board of directors, shareholders
also voted to appoint Michael Tokarz as Chairman and Portfolio
Manager to lead the implementation of our new objective and
strategy and to stabilize the existing portfolio. Prior to the
arrival of Mr. Tokarz and his new management team in
November 2003, the Company had experienced significant valuation
declines from investments made by the former management team.
After only three quarters of operations under the new management
team, the Company posted a profitable third quarter for fiscal
year 2004, reversing a trend of 12 consecutive quarters of net
investment losses and earned a profit for the entire fiscal
year. The Company has continued its growth. As of
October 31, 2007, the Companys net assets were
approximately $369.1 million compared with net assets of
approximately $363.5 million at July 31, 2007 and
$237.0 million at October 31, 2006. This increase
represents the 16th consecutive quarter of net asset growth
for the Company. The Companys net change in net assets
resulting from operations for the fiscal year 2007 was
approximately $65.7 million. This $65.7 million from
operations represents an approximate 38.8% change over the net
change in net assets from operations reported in fiscal year
2006. During the fiscal year 2007, the Company earned
approximately $22.8 million in interest and dividend income
and approximately $4.1 million in fee and other income,
representing an increase of approximately $8.4 million or
45.6% in total income as compared to fiscal year 2006. The
Companys fiscal year 2007 net operating income was
approximately $2.1 million and net realized and unrealized
gains were $63.6 million. The preceding information
relating to the 2007 fiscal year is based on our financial
statements which have not yet been audited by our independent
registered public accounting firm.
On September 7, 2006, the shareholders of the Company
approved the Advisory Agreement (with over 92% of the votes cast
on the agreement voting in its favor) that provided for the
Company to be externally managed by TTG Advisers. The agreement
took effect on November 1, 2006. TTG Advisers was organized
to provide investment advisory and management services to the
Company and other investment vehicles. TTG Advisers is a
registered investment adviser that is controlled by
Mr. Tokarz. All of the individuals (including the
Companys investment professionals) who had been previously
employed by the Company as of the fiscal year ended
October 31, 2006 became employed by TTG Advisers. The
Companys investment strategy and selection process has
remained the same under the externalized management structure.
The Company is managed by TTG Advisers, the Companys
investment adviser. The investment team of TTG Advisers is
headed by Michael Tokarz, who has over 30 years of lending
and investment experience. TTG Advisers has a dedicated
originations and transaction development investment team with
significant experience in private equity, leveraged finance,
investment banking, distressed debt transactions and business
operations. The members of the investment team have invested in
and managed businesses during both recessionary and expansionary
periods and through full interest rate cycles and financial
market conditions. TTG Advisers has nine full-time investment
professionals and three part-time investment professionals, the
majority of whom were previously employed by the Company. TTG
Advisers also uses the services of other investment
professionals with whom it has developed long-
67
term relationships, on an as-needed basis. In addition, TTG
Advisers employs three other full-time professionals and two
part-time professionals who manage the operations of the Company
and provide investment support functions both directly and
indirectly to our portfolio companies. As TTG Advisers grows, it
expects to hire, train, supervise and manage new employees at
various levels, many of which would be expected to provide
services to the Company.
The fiscal year 2006 represented another positive year for the
Company. The Company made 16 new investments and eight follow-on
investments in the fiscal year 2006, which is an increase from
six new investments and three follow-on investments in the
fiscal year 2005 and seven new investments in the fiscal year
2004. The Company committed a total of $166.3 million of
capital in the fiscal year 2006, compared to $53.8 million
and $60.7 million in the fiscal year 2005 and 2004,
respectively. The fiscal year 2006 new investments included:
Turf, SOI, Henry Company, BM Auto, Storage Canada, Phoenix Coal,
Harmony Pharmacy, Total Safety, PreVisor, Marine, BP,
Velocitius, Summit, Octagon, BENI and Innovative Brands. The
fiscal year 2006 follow-on investments included: Dakota Growers,
Baltic Motors, SGDA, Amersham, Timberland, SP, Harmony Pharmacy
and Velocitius.
During the nine month period ended July 31, 2007, the
Company made eight new investments and 14 follow-on investments.
The Company committed a total of approximately
$100.7 million of capital to these investments. These
investments included HuaMei, WBS, Levlad, MVC Partners, Total
Safety, Genevac, Tekers, U.S. Gas, SGDA, Vitality, Turf,
Harmony Pharmacy, Velocitius, BP, BENI and SP.
In addition, on July 24, 2007, the Company closed the sale
of two of its portfolio companies, Baltic Motors and BM Auto,
for a combined total enterprise value exceeding
$120.0 million. The combined realized gain to the Company
of $66.5 million represents a 108.2% IRR including fees
earned throughout the life of both investments. The
Companys investment in Baltic Motors was one of the first
commitments made under the Companys current management
team and signifies the first full maturation of a portfolio
company over the investment life cycle.
We continue to perform due diligence and seek new investments
that are consistent with our objective of maximizing total
return from capital appreciation
and/or
income. We believe that we have extensive relationships with
private equity firms, investment banks, business brokers,
commercial banks, accounting firms, law firms, hedge funds,
other investment firms, industry professionals and management
teams of several companies, which can continue to provide us
with investment opportunities.
We are currently working on an active pipeline of potential new
investment opportunities. We expect that our equity and loan
investments will generally range between $3 million and
$25 million each, although we may occasionally invest
smaller or greater amounts of capital depending upon the
particular investment. While the Company does not adhere to a
specific equity and debt asset allocation mix, no more than 25%
of the value of our total assets may be invested in the
securities of one issuer (other than U.S. government
securities), or of two or more issuers that are controlled by us
and are engaged in the same or similar or related trades or
businesses, determined as of the close of each quarter. Our
portfolio company investments are typically illiquid and are
made through privately negotiated transactions. We generally
target companies with annual revenues of between
$10.0 million and $150.0 million and annual EBITDA of
between $3.0 million and $25.0 million. We generally
seek to invest in companies with a history of strong,
predictable, positive EBITDA (net income before net interest
expense, income tax expense, depreciation and amortization).
Our portfolio company investments currently consist of common
and preferred stock, other forms of equity interest and warrants
or rights to acquire equity interests, senior and subordinated
loans, and convertible securities. At October 31, 2007, the
value of all investments in portfolio companies was
approximately $379.2 million and our gross assets were
approximately $470.5 million. The preceding information
relating to the 2007 fiscal year is based on our financial
statements which have not yet been audited by our independent
registered public accounting firm.
We expect that our investments in senior loans and subordinated
debt will generally have stated terms of three to ten years.
However, there is no limit on the maturity or duration of any
security in our portfolio. Our debt investments are not, and
typically will not be, rated by any rating agency, but we
believe that if such investments were rated, they would be below
investment grade (rated lower than Baa3 by
Moodys or lower than BBB- by
68
Standard & Poors). We may invest without limit
in debt of any rating and debt that has not been rated by any
nationally recognized statistical rating organization.
On July 16, 2004, the Company formed a wholly-owned
subsidiary, MVCFS. MVCFS is incorporated in Delaware and its
principal purpose is to provide advisory, administrative and
other services to the Company and the Companys portfolio
companies. The Company does not hold MVCFS for investment
purposes. The results of MVCFS are consolidated into the Company
and all inter-company accounts have been eliminated in
consolidation.
Our board of directors has the authority to change any of the
strategies described in this prospectus without seeking the
approval of our shareholders. However, the 1940 Act prohibits us
from altering or changing our investment objective, strategies
or policies such that we cease to be a business development
company and prohibits us from voluntarily withdrawing our
election to be regulated as a business development company,
without the approval of the holders of a majority,
as defined in the 1940 Act, of our outstanding voting securities.
Corporate
History and Offices
The Company was organized on December 2, 1999. Prior to
July 2004, our name was meVC Draper Fisher Jurvetson
Fund I, Inc. On March 31, 2000, the Company raised
$330.0 million in an initial public offering whereupon it
commenced operations as a closed-end investment company. On
December 4, 2002, the Company announced it had commenced
doing business under the name MVC Capital. We are a Delaware
corporation and a non-diversified closed-end management
investment company that has elected to be regulated as a
business development company under the 1940 Act. On
July 16, 2004, the Company formed MVCFS.
All but one of the independent members of the current board of
directors were first elected at the February 28, 2003
Annual Meeting of the shareholders, replacing the previous board
of directors in its entirety. The new board of directors then
worked on developing a new long-term strategy for the Company.
Then, in September 2003, upon the recommendation of the board of
directors, shareholders voted to adopt our new investment
objective. With the recommendation of the board of directors,
shareholders also voted to appoint Mr. Tokarz as Chairman
and Portfolio Manager to lead the implementation of our new
objective and strategy and to stabilize the existing portfolio.
Mr. Tokarz and his team managed the Company under an
internal structure through October 31, 2006. On
September 7, 2006, the shareholders of the Company approved
the Advisory Agreement (with over 92% of the votes cast on the
agreement voting in its favor) that provided for the Company to
be externally managed by TTG Advisers. The agreement took effect
on November 1, 2006. TTG Advisers is a registered
investment adviser that is controlled by Mr. Tokarz. All of
the individuals (including the Companys investment
professionals) who had been previously employed by the Company
as of the fiscal year ended October 31, 2006 became
employed by TTG Advisers.
Our principal executive office is located at 287 Bowman Avenue,
Purchase, New York 10577 and our telephone number is
(914) 701-0310.
Our website address is www.mvccapital.com.
Our
Investment Strategy
On November 6, 2003, Mr. Tokarz assumed his position
as Chairman and Portfolio Manager. We seek to implement our
investment objective (i.e., to maximize total return from
capital appreciation
and/or
income) through making a broad range of private investments in a
variety of industries. The investments can include common and
preferred stock, other forms of equity interests and warrants or
rights to acquire equity interests, senior and subordinated
loans, or convertible securities. During the nine month period
ended July 31, 2007, we made eight new investments and 14
follow-on investments, committing a total of $100.7 million
of capital to these investments.
Prior to the adoption of our current investment objective, the
Companys investment objective had been to achieve
long-term capital appreciation from venture capital investments
in information technology companies. The Companys
investments had thus previously focused on investments in equity
and debt securities of information technology companies. As of
July 31, 2007, 3.8% of the fair value of our assets
consisted of Legacy Investments. We are, however, seeking to
manage these Legacy Investments to try and realize maximum
returns. We generally seek to capitalize on opportunities to
realize cash returns on these investments when presented with a
potential liquidity event, i.e., a sale,
public offering, merger or other reorganization.
69
Our new portfolio investments are made pursuant to our new
investment objective and strategy. We are concentrating our
investment efforts on small and middle-market companies that, in
our view, provide opportunities to maximize total return from
capital appreciation
and/or
income. Under our investment approach, we have the authority to
invest, without limit, in any one portfolio company, subject to
any diversification limits that may be required in order for us
to continue to qualify as a RIC under Subchapter M of the Code.
We participate in the private equity business generally by
providing negotiated equity
and/or
long-term debt investment capital. Our financing is generally
used to fund growth, buyouts, acquisitions, recapitalizations,
note purchases,
and/or
bridge financings. We may or may not be a lead investor in such
transactions and may also provide equity and debt financing to
companies led by private equity firms. We generally invest in
private companies, although, from time to time, we may invest in
small public companies that may lack adequate access to public
capital. We may also seek to achieve our investment objective by
establishing a subsidiary or subsidiaries that would serve as a
general partner or a managing member to a private investment
vehicle(s). Additionally, we may also acquire a portfolio of
existing private equity or debt investments held by financial
institutions or other investment funds should such opportunities
arise.
As of July 31, 2007, October 31, 2006 and
October 31, 2005, the fair value of the invested portion
(excluding cash and short-term securities) as a percentage of
our net assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as a Percentage of Our Net Assets
|
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
|
July 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
Type of Investment
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Senior/Subordinated Loans and credit facilities
|
|
|
46.72
|
%
|
|
|
55.98
|
%
|
|
|
28.81
|
%
|
Common Stock
|
|
|
18.07
|
%
|
|
|
39.40
|
%
|
|
|
23.10
|
%
|
Warrants
|
|
|
0.30
|
%
|
|
|
0.46
|
%
|
|
|
0.89
|
%
|
Preferred Stock
|
|
|
14.66
|
%
|
|
|
13.79
|
%
|
|
|
7.96
|
%
|
Other Equity Investments
|
|
|
7.43
|
%
|
|
|
6.77
|
%
|
|
|
0.78
|
%
|
Other Rights
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Substantially all amounts not invested in securities of
portfolio companies are invested in short-term, highly liquid
money market investments or held in cash in an interest bearing
account. As of July 31, 2007, these investments were valued
at approximately $112.8 million or 31.04% of net assets.
Our current portfolio includes investments in a wide variety of
industries, including food and food service, energy, value-added
distribution, industrial manufacturing, financial services and
information technology.
Market. We have developed and maintain
relationships with intermediaries, including investment banks,
financial services companies and private mezzanine and equity
sponsors, through which we source investment opportunities.
Through these relationships, we have been able to strengthen our
position as an investor. For the transactions in which we may
provide debt capital, an equity sponsor can provide a source of
additional equity capital if a portfolio company requires
additional financing. Private equity sponsors also assist us in
confirming due diligence findings when assessing a new
investment opportunity, and they may provide assistance and
leadership to the portfolio companys management throughout
our investment period.
Investment Criteria. Prospective investments
are evaluated by TTG Advisers investment team based upon
criteria that may be modified from time to time. The criteria
currently being used by management in determining whether to
make an investment in a prospective portfolio company include,
but are not limited to, managements view of:
|
|
|
|
|
Businesses with secure market niches and predictable profit
margins;
|
|
|
|
The presence or availability of highly qualified management
teams;
|
|
|
|
The line of products or services offered and their market
potential;
|
|
|
|
The presence of a sustainable competitive advantage;
|
70
|
|
|
|
|
Favorable industry and competitive dynamics; and
|
|
|
|
Stable free cash flow of the business.
|
Due diligence includes a thorough review and analysis of the
business plan and operations of a potential portfolio company.
We generally perform financial and operational due diligence,
study the industry and competitive landscape, and meet with
current and former employees, customers, suppliers
and/or
competitors. In addition, as applicable, we engage attorneys,
independent accountants and other consultants to assist with
legal, environmental, tax, accounting and marketing due
diligence.
Investment Sourcing. Mr. Tokarz and the
other investment professionals have established an extensive
network of investment referral relationships. Our network of
relationships with investors, lenders and intermediaries
includes:
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private mezzanine and equity investors;
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investment banks;
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business brokers;
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merger and acquisition advisors;
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financial services companies; and
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banks, law firms and accountants.
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Allocation of Investment Opportunities. In
allocating investment opportunities, TTG Advisers adheres to the
following policy, which was approved by the board of directors
on October 31, 2006: (1) absent the consent of the
board of directors, TTG Advisers will allocate to the Company
all investment opportunities in (i) mezzanine and debt
securities or (ii) equity or other non-debt
investments that are (a) expected to be equal to or less
than the lesser of 10% of the Companys net assets or
$25 million; and (b) issued by U.S. companies
with less than $150 million in revenues (Targeted
Investments); (2) notwithstanding Item 1 any
private fund managed or co-managed by TTG Advisers and a person
or entity not affiliated with TTG Advisers or MVC Partners, a
subsidiary of the Company, is permitted to make an investment,
without regard to the Company, if such investment is sourced by
a person or entity not affiliated with TTG Advisers and MVC
Partners; and (3) notwithstanding Item 1, TTG Advisers
shall not have an obligation to seek the consent of the board of
directors nor be required to allocate to the Company any equity
investment where the investor would hold a majority of the
outstanding voting securities (as defined by the
1940 Act) of the relevant company, provided that such investment
is allocated, in its entirety, to MVC Partners. In connection
with our investment in MVC Acquisition Corp., through our
wholly-owned portfolio company, MVC Partners LLC, we anticipate
the execution of a letter agreement with MVC Acquisition Corp.,
which would provide MVC Acquisition Corp. with a right of first
review with respect to target businesses with a fair market
value in excess of $250 million that we become aware of
through TTG Advisers. As a result, certain investment
opportunities that might otherwise be made available to us would
first be submitted for review by MVC Acquisition Corp., and we
may therefore be unable to make an investment that may otherwise
be attractive to us.
Co-Investments. The Company is permitted to
co-invest in certain portfolio companies with its affiliates,
subject to specified conditions set forth in an exemptive order
obtained from the SEC dated July 11, 2000. Under the terms
of the exemptive order, portfolio companies purchased by the
Company and its affiliates are required to be approved by the
Independent Directors and are required to satisfy certain other
conditions established by the SEC.
Investment Structure. Portfolio company
investments typically will be negotiated directly with the
prospective portfolio company or its affiliates. The investment
professionals will structure the terms of a proposed investment,
including the purchase price, the type of security to be
purchased or financing to be provided and the future involvement
of the Company and affiliates in the portfolio companys
business (including potential representation on its board of
directors). TTG Advisers will seek to structure the terms of the
investment as to provide for the capital needs of the portfolio
company and at the same time seek to maximize the Companys
total return.
71
Once we have determined that a prospective portfolio company is
suitable for investment, we work with the management and, in
certain cases, other capital providers, such as senior, junior
and/or
equity capital providers, to structure an investment. We
negotiate on how our investment is expected to relate relative
to the other capital in the portfolio companys capital
structure.
We make preferred and common equity investments in companies as
a part of our investing activities, particularly when we see an
opportunity to profit from the growth of a company and the
potential to enhance our returns. At times, we may invest in
companies that are undergoing a restructuring but have several
of the above attributes and a management team that we believe
has the potential to achieve a successful turnaround. Preferred
equity investments may be structured with a dividend yield,
which may provide us with a current return, if earned and
received by the Company.
Our senior, subordinated and mezzanine debt investments are
tailored to the facts and circumstances of the deal. The
specific structure is negotiated over a period of several weeks
and is designed to seek to protect our rights and manage our
risk in the transaction. We may structure the debt instrument to
require restrictive affirmative and negative covenants, default
penalties, lien protection, equity calls, take control
provisions and board observation. Our debt investments are not,
and typically will not be, rated by any rating agency, but we
believe that if such investments were rated, they would be below
investment grade quality (rated lower than Baa3 by
Moodys or lower than BBB- by
Standard & Poors, commonly referred to as
junk bonds).
Our mezzanine debt investments are typically structured as
subordinated loans (with or without warrants) that carry a fixed
rate of interest. The loans may have interest-only payments in
the early years and payments of both principal and interest in
the later years, with maturities of three to ten years, although
debt maturities and principal amortization schedules vary.
Our mezzanine debt investments may include equity features, such
as warrants or options to buy a minority interest in a portfolio
company. Any warrants or other rights we receive with our debt
securities generally require only a nominal cost to exercise,
and thus, as the portfolio company appreciates in value, we may
achieve additional investment return from this equity interest.
We may structure the warrants to provide minority rights
provisions and event-driven puts. We may seek to achieve
additional investment return from the appreciation and sale of
our warrants.
Under certain circumstances, we may acquire more than 50% of the
common stock of a company in a control buyout transaction. In
addition to our common equity investment, we may also provide
additional capital to the controlled portfolio company in the
form of senior loans, subordinated debt or preferred stock.
We fund new investments using cash, the reinvestment of accrued
interest and dividends in debt and equity securities, or the
current reinvestment of interest and dividend income through the
receipt of a debt or equity security
(payment-in-kind
income). From time to time, we may also opt to reinvest accrued
interest receivable in a new debt or equity security, in lieu of
receiving such interest in cash and funding a subsequent
investment. We may also acquire investments through the issuance
of common or preferred stock, debt, or warrants representing
rights to purchase shares of our common or preferred stock. The
issuance of our stock as consideration may provide us with the
benefit of raising equity without having to access the public
capital markets in an underwritten offering, including the added
benefit of the elimination of any commissions payable to
underwriters.
Providing Management Assistance. As a business
development company, we are required to make significant
managerial assistance available to the companies in our
investment portfolio. In addition to the interest and dividends
received from our investments, we often generate additional fee
income for the structuring, diligence, transaction,
administration, and management services and financial guarantees
we provide to our portfolio companies through the Company or our
wholly-owned subsidiary MVCFS. In some cases, officers,
directors and employees of the Company may serve as members of
the board of directors of portfolio companies or fill officer
roles within portfolio companies. The Company may provide
guidance and management assistance to portfolio companies with
respect to such matters as budgets, profit goals, business and
financing strategies, management additions or replacements and
plans for liquidity events for portfolio company investors such
as a merger or initial public offering. MVCFS may also generate
additional fee income for providing administrative and other
72
management services to other entities, including private equity
firms or other business development companies (as it currently
does for Brantley Capital Corporation).
Portfolio Company Monitoring. We monitor our
portfolio companies closely to determine whether or not they
continue to be attractive candidates for further investment.
Specifically, we monitor their ongoing performance and
operations and provide guidance and assistance where
appropriate. We would decline additional investments in
portfolio companies that, in TTG Advisers view, do not
continue to show promise. However, we may make follow on
investments in portfolio companies that we believe may perform
well in the future.
TTG Advisers follows established procedures for monitoring the
Companys equity and loan investments. The investment
professionals have developed a multi-dimensional flexible rating
system for all of the Companys portfolio investments. The
rating grids are updated regularly and reviewed by the Portfolio
Manager, together with the investment team. Additionally, the
Valuation Committee meets at least quarterly, to review a
written valuation memorandum for each portfolio company and to
discuss business updates. Furthermore, the Companys Chief
Compliance Officer administers the Companys compliance
policies and procedures, specifically as they relate to the
Companys investments in portfolio companies.
We exit our investments generally when a liquidity event takes
place, such as the sale, recapitalization or initial public
offering of a portfolio company. Our equity holdings, including
shares underlying warrants, after the exercise of such warrants,
typically include registration rights which would allow us to
sell the securities if the portfolio company completes a public
offering.
Investment Approval Procedures. Generally,
prior to approving any new investment, we follow the process
outlined below. We usually conduct one to four months of due
diligence and structuring before an investment is considered for
approval. However, depending on the type of investment being
contemplated, this process may be longer or shorter.
The typical key steps in our investment approval process are:
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Initial investment screening by deal person or investment team;
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Investment professionals present an investment proposal
containing key terms and understandings (verbal and written) to
the entire investment team;
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Our Chief Compliance Officer reviews the proposed investment for
compliance with the 1940 Act, the Code and all other relevant
rules and regulations;
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Investment professionals are provided with authorization to
commence due diligence;
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Any investment professional can call a meeting, as deemed
necessary, to: (i) review the due diligence reports;
(ii) review the investment structure and terms; or
(iii) to obtain any other information deemed relevant;
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Once all due diligence is completed, the proposed investment is
rated using a rating system which tests several factors
including, but not limited to, cash flow, EBITDA growth,
management and business stability. We use this rating system as
the base line for tracking the investment in the future;
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Our Chief Compliance Officer confirms that the proposed
investment will not cause us to violate the 1940 Act, the Code
or any other applicable rule or regulation;
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Mr. Tokarz approves the transaction; and
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The investment is funded.
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The
Investment Team
Mr. Tokarz is responsible for the day-to-day management of
the Companys portfolio. Mr. Tokarz draws upon the
experience of the nine full-time investment professionals and
three part-time investment professionals of TTG Advisers, a
majority of whom were previously employed by the Company. TTG
Advisers also uses the services of other investment
professionals, with whom it has developed long-term
relationships, on an as-needed basis. TTG
73
Advisers looks to benefit from the combined resources and
investment experience of all of its investment professionals. In
addition, TTG Advisers employs three other full-time
professionals and two part-time professionals who manage the
operations of the Company and provide investment support
functions both directly and indirectly to our portfolio
companies. As the Company grows, TTG Advisers expects to hire,
train, supervise and manage new employees at various levels,
many of which would be expected to provide services to the
Company. The following information contains biographical
information for key personnel of TTG Advisers (including their
titles with TTG Advisers).
Michael Tokarz, Manager. Mr. Tokarz is a
senior investment professional with over 30 years of
lending and investment experience. Mr. Tokarz serves as
Manager of TTG Advisers and as Chairman and Portfolio Manager of
the Company. Prior to assuming his position as Chairman and
Portfolio Manager of the Company, and prior to founding The
Tokarz Group (in 2002), a private merchant bank of which he is
Chairman, Mr. Tokarz was a General Partner with Kohlberg
Kravis Roberts & Co. (KKR), one of the
worlds most experienced private equity firms. During his
17-year
tenure at KKR, he participated in diverse leveraged buyouts,
financings, restructurings and dispositions. Mr. Tokarz
currently serves on numerous corporate boards including MVC
Acquisition Corp., Walter Industries, Inc., Stonewater Control
Systems, Lomonsov, Athleta, Inc. and Apertio Ltd. In addition,
Mr. Tokarz is on the Board of Managers of Illinois
Ventures, a University of Illinois focused venture capital seed
fund and high technology incubator, and is Chairman of a related
private equity follow on investment fund. Mr. Tokarz also
serves on the Board of the University of Illinois Foundation and
its Investment and Executive Committees, as well as Chairman of
the Budget and Finance Committees. Prior to his tenure at KKR,
Mr. Tokarz was a commercial banker at Continental Illinois
where he was renowned for innovation and buyout financings.
Mr. Tokarz rose to run the East Coast operation of
Continental Illinois from New York. He is also active on the
Endowment Committee and Board of Directors of the National
Wildlife Federation. He received his undergraduate degree with
High Distinction in Economics and MBA in Finance from the
University of Illinois and is a Certified Public Accountant.
Warren Holtsberg, Co-Head of Portfolio
Management. Mr. Holtsberg serves as Co-Head
of Portfolio Management at TTG Advisers and is a member of the
Board of Directors of the Company. Mr. Holtsberg, who
joined TTG Advisers in 2007, sources and executes new
investments and helps manage the Companys global portfolio
of private equity, venture, and small and mid cap debt and
equity investments across a broad range of industries including
technology, consumer/retail, energy and finance. He also heads
the Chicago Office of TTG Advisers. Previously,
Mr. Holtsberg founded Motorola Ventures, the venture
capital investment arm for Motorola, Inc. (NYSE:MOT) where he
led the worldwide fund for eight years. Before Motorola,
Mr. Holtsberg spent two decades with the
U.S. Government where he held a number of senior executive
positions in the Aviation, Defense and Intelligence communities.
Mr. Holtsberg is also a member of the Board of Directors of
the Illinois Venture Capital Association, the Chicagoland
Entrepreneurship Center, and Illinois Ventures, the venture
investment arm for the University of Illinois.
Mr. Holtsberg is a graduate of the University of Illinois
and the Kellogg Management Institute at Northwestern University
J.L. Kellogg Graduate School of Management.
Bruce Shewmaker, Managing
Director. Mr. Shewmaker serves as Managing
Director of both TTG Advisers and the Company.
Mr. Shewmaker is a senior investment professional with over
30 years of private equity and investment banking
experience. Prior to becoming a Managing Director of the Company
in November 2003, Mr. Shewmaker served as a member of the
board of the Company from March 2003 to March 2004.
Mr. Shewmaker was a co-founder of Merrill Lynch Venture
Capital Inc. where he initiated several private equity
investment partnerships, including three business development
companies. During his ten year career at Merrill Lynch, he
participated in sourcing, negotiating and monitoring over 40
private equity transactions including leveraged buyouts and
venture capital investments, of which seven companies completed
initial public offerings. More recently, Mr. Shewmaker
served as President and CEO of The US Russia Investment Fund,
with committed capital of $440 million, where he managed a
staff of 60 people, including eight private equity
professionals, in seven offices across the Russian Federation.
As a Managing Director of E*OFFERING Corp., he helped this
investment banking firm participate in underwriting more than 50
initial public offerings of domestic companies and was
responsible for organizing a global investment banking network.
While Mr. Shewmaker has spent the majority of his career
with registered investment companies or investment management
divisions of NYSE listed firms (e.g., divisions of The
Chase Manhattan Bank and Time Inc.), in the late 1990s
Mr. Shewmaker co-founded Crossbow Ventures, a
74
regionally focused private equity partnership located in
Florida. He earned his undergraduate degree in Finance from The
Ohio State University and has passed the Series 7 and 63
NASD qualifying examinations.
Amy Francetic, Investment
Professional. Ms. Francetic joined the
Chicago office of TTG Advisers in 2007, where she sources,
executes, and manages investments for the firm. She brings over
17 years of operational and executive management experience
from the high technology sector with specialties in wireless,
consumer, and security technologies. Immediately prior to
joining TTG Advisers, Ms. Francetic led the
commercialization of R&D for Stanford Research Institute
and produced the prestigious wireless product launch event,
DEMOmobile, for IDG Publishing. Ms. Francetic recently
served on the Board of Directors of Glu Mobile (NASDAQ:GLUU), a
wireless games publishing company. She was Co-Founder and CEO of
Zowie Intertainment (Zowie), a high-tech toy company
funded by Vulcan Ventures, and she successfully sold Zowie to
Lego Systems in 2000. In addition, Ms. Francetic produced
consumer software products for Hasbro Interactive and Electronic
Arts. Ms. Francetic was recognized as one of the Top
100 Young Innovators in Technology by MITs
Technology Review in 1999 for her work in the fields of video
games and high-tech toys. She holds a Bachelors of Arts in
Psychology and Political Science from Stanford University.
David Hadani, Investment
Professional. Mr. Hadani joined MVC Capital
in April of 2005. He previously served as the CEO of Nebraska
Heavy Industries (NHI), a firm he co-founded.
Mr. Hadani has more than 15 years of operational and
investment experience including senior operational and general
management positions at Philips Electronics and at AlliedSignal,
where he held various roles in operations, mergers and
acquisitions and finance. He also worked for four years in
commercial banking and has international business experience in
Asia and Eastern Europe. Mr. Hadani received his bachelors
degree from Washington University and his MBA from Duke
University.
Mark Kaltenbacher, Investment
Professional. Mr. Kaltenbacher has ten years
of experience working with SMEs around the world both as an
Investor and Operations Manager. Prior to joining TTG Advisers,
Mr. Kaltenbacher was a Managing Partner at HKK Private
Equity Partners in Vienna, where he sourced, conducted due
diligence, negotiated terms and closed various private equity
deals in the automotive, specialty chemicals, building
materials, transportation, food and beverage, media and
manufacturing industries. He served as interim CEO of a
turn-around Slovakian automotive component manufacturer,
ultimately successfully selling the business to a strategic
investor. Mr. Kaltenbacher held previous positions at
Merrill Lynch as an Equity Analyst and at Seton Company. He
received his MBA from Columbia Business School after receiving
his Bachelors of Arts in Economics from the University of
California, Santa Cruz. Mr. Kaltenbacher has also taken
course work in Managerial Accounting & Finance from
The London School of Economics. Mr. Kaltenbacher is
responsible for sourcing and evaluating potential investments in
Europe for new deals and for bolt-on acquisition opportunities
to existing portfolio companies for the Company.
Shivani Khurana, Investment
Professional. Ms. Khurana joined MVC Capital
in March 2004 and serves as a Vice President of MVCFS with
responsibilities for sourcing, executing and monitoring of
investments. Before joining MVC Capital, Ms. Khurana worked
at Cadigan Investment Partners, a middle-market leveraged buyout
firm where she was involved in originating, structuring,
financing and negotiating leveraged and management buyout, and
recapitalization transactions. Previously, Ms. Khurana
worked in the leveraged finance group of Wachovia Securities
where she specialized in restructuring advisory, distressed debt
investing and turnaround financing, and the investment banking
group of Merrill Lynch. Ms. Khuranas prior experience
also includes independently managing $20 million in
diversified U.S. and European equities at Al-Ahlia
Investment Company. Ms. Khurana received a Bachelor of
Commerce with Accounting honors from Panjab University, India;
an MBA in Finance from University of Sheffield, UK; and an M.S.
in Finance from the University of Rochester, New York.
Forrest Mertens, Investment
Professional. Mr. Mertens joined MVC Capital
in January of 2003 and is responsible for the sourcing,
executing and monitoring of investments. He also serves as TTG
Advisers Technology Officer. Before joining MVC Capital,
Mr. Mertens worked at Next Level Communications, a
telecommunications solutions provider, where he managed the
firms Enclosures and Backplanes product line, which
generated approximately $20 million in annual revenue.
Previously, Mr. Mertens worked as a Research Analyst for
Beacon Investment Management, an asset management firm in
Boston, MA. Mr. Mertens earned a Bachelors of Science in
Business Administration from Boston University School of
Management where he graduated summa cum laude and is currently
attending The Kellogg School of Management at Northwestern
University.
75
Puneet Sanan, Investment
Professional. Mr. Sanan joined MVC Capital
in March 2004 and serves as a Vice President of MVCFS with
responsibilities for sourcing, executing and monitoring of
investments. Before joining MVC Capital, Mr. Sanan worked
at Cadigan Investment Partners, a leveraged buyout firm and was
involved in originating, developing, analyzing, structuring,
financing and negotiating leveraged and management buyouts,
recapitalizations and growth capital financing for middle-market
companies. Previously, Mr. Sanan was a Vice President and
managed the Investment Banking Division of Fano Securities where
he received international recognition for his financial advisory
work in alternative energy technology. Prior to joining Fano,
Mr. Sanan was an Associate Director at UBS Warburgs
Leveraged Finance/ Financial Sponsors group where he advised
leading private equity firms on leveraged buyouts, mergers and
acquisitions and private equity investments. Mr. Sanan has
held various corporate finance and industry positions at
PaineWebber, Legg Mason, Royal Dutch/ Shell Group and Gist
Brocades (now DSM N.V.). Mr. Sanan received a Bachelors of
Engineering (Honors) in Chemical Engineering from Panjab
University, India and an MBA in Finance from The University of
Texas at Austin.
Christopher Sullivan, Investment
Professional. Mr. Sullivan first joined MVC
Capital in June 2004 as an Associate on a part-time basis and
then permanently joined the Company in June of 2005.
Mr. Sullivan is responsible for the sourcing, executing and
monitoring of investments. Prior to joining MVC Capital,
Mr. Sullivan worked as an Associate for Credit Suisse First
Boston, in Equity Capital Markets, where he worked with numerous
issuers and financial sponsors. Before working at Credit Suisse
First Boston, Mr. Sullivan worked as an Analyst in Equity
Capital Markets for CIBC World Markets. Mr. Sullivan
received his MBA, with a concentration in Finance, from the
Carroll School of Management at Boston College in May of 2005.
Mr. Sullivan holds a BA in History from Dartmouth College.
Portfolio
Support and Operations Management
Scott Schuenke, CPA, Chief Compliance
Officer. Mr. Schuenke joined MVC Capital in
June 2004 and holds various positions with the Company.
Mr. Schuenke serves as the Companys Corporate
Controller a role in which he is responsible for overseeing the
financial operations of the Company and its wholly-owned
subsidiaries, providing financial expertise and monitoring to
various portfolio companies and assisting investment
professionals in deal sourcing, due-diligence, modeling and
closing activities. As of October 4, 2004, he serves as the
Companys Chief Compliance Officer. In this role,
Mr. Schuenke is responsible for administering the
Companys compliance program, as required by
Rule 38a-1
under the 1940 Act. Before Mr. Schuenke joined MVC Capital,
he was a compliance officer with U.S. Bancorp
Fund Services, LLC, where he was responsible for financial
reporting and compliance oversight of more than fifteen open and
closed-end registered investment companies. Previously,
Mr. Schuenke worked in the audit and assurance services
area with PricewaterhouseCoopers, LLP (PWC). While
with PWC, he performed audit and review services for financial
services clients including several large mutual fund complexes.
Mr. Schuenke received his Bachelors of Business
Administration from the University of Wisconsin-Milwaukee. Mr.
Schuenke also holds his Masters of Professional Accountancy from
the University of Wisconsin-Whitewater. Mr. Schuenke is a
Certified Public Accountant licensed in the State of Wisconsin.
Peter Seidenberg, Chief Financial
Officer. Mr. Seidenberg currently serves as
Chief Financial Officer of the Company and TTG Advisers, where
he provides financial expertise and monitoring to various
portfolio companies, in addition to deal sourcing,
due-diligence, modeling and closing activities.
Mr. Seidenberg also serves as Chief Financial Officer of
MVC Acquisition Corp. In October 2005, Mr. Seidenberg
became the Chief Financial Officer of the Company. Prior to
joining MVC Capital in April 2005, Mr. Seidenberg served as
a Principal of NHI, where he worked on various engagements,
including serving as CFO of Commerce One, Inc.
Mr. Seidenberg has over 10 years of experience in
corporate finance, operations and general management. Prior to
his tenure at NHI, Mr. Seidenberg served as the Director of
Finance and Business Development and as Corporate Controller for
Plumtree Software, Inc. where he was responsible for driving
strategic initiatives and managing the finance and accounting
staff. Mr. Seidenberg has also worked at AlliedSignal and
several small manufacturing companies, where he held roles in
finance and operations. Mr. Seidenberg received his
bachelors degree and MBA from Cornell University.
Jaclyn Shapiro, Vice-President and
Secretary. Ms. Shapiro currently serves as
Vice President and Secretary of the Company and as Vice
President and Secretary of TTG Advisers. Ms. Shapiro joined
MVC Capital in June of 2002 and is responsible for board and
shareholder matters and as the Head of Portfolio
Development & Fund Administration, responsible
for monitoring the Companys legacy portfolio and directing
the Companys
76
operations. Prior to joining MVC Capital, Ms. Shapiro was
an Associate and Business Manager with Draper Fisher Jurvetson
meVC Management Co. LLC, the former sub-advisor of the Company.
Before joining the Companys former sub-advisor,
Ms. Shapiro was an Associate at The Bank Companies
(acquired by Newmark & Co. Real Estate), where she was
responsible for analyzing the various real estate trends in the
Washington, DC greater metropolitan area. Previously,
Ms. Shapiro worked as a Research Analyst to a Senior
Portfolio Manager at Gruntal & Co. and began her
business career as a Marketing Consultant at Archstone-Smith
formerly known as Charles E. Smith & Co.
Ms. Shapiro received her Bachelors of Business
Administration degrees in Entrepreneurship and Small Business
Management from the George Washington University in Washington,
DC.
Other
Accounts Managed
Mr. Tokarz, our Portfolio Manager, is not primarily
responsible for the day-to-day management of the portfolio of
any other pooled account, apart from the Company.
Compensation
of the Portfolio Manager
Mr. Tokarz does not receive compensation from TTG Advisers
in the form of salary, bonus, deferred compensation or pension
and retirement plans. However, as the sole controlling equity
owner of TTG Advisers, he has a significant equity interest in
the profits generated by TTG Advisers from its management of the
Company.
Company
Ownership
Mr. Tokarz owns, as of the date of this prospectus, over
$1,000,000 worth of our common shares. Mr. Tokarz purchased
each share on his own behalf. The Company did not grant any
shares to him or any other member of the team.
Portfolio
Diversity
Our portfolio is not currently concentrated and we currently do
not have a policy with respect to concentrating
(i.e., investing 25% or more of our total assets) in any
industry or group of industries and currently our portfolio is
not concentrated. We may or may not concentrate in any industry
or group of industries in the future.
77
The following is a listing of our portfolio companies in which
we had an investment at July 31, 2007. The portfolio
companies are presented in three categories
companies more than 25% owned which represent portfolio
companies where we directly or indirectly own more than 25% of
the outstanding voting securities of such portfolio company and,
therefore, are deemed controlled by us under the 1940 Act;
companies owned 5% to 25% which represent portfolio companies
where we directly or indirectly own 5% to 25% of the outstanding
voting securities of such portfolio company and, therefore, are
deemed to be an affiliated person under the 1940 Act; and
companies less than 5% owned which represent portfolio companies
where we directly or indirectly own less than 5% of the
outstanding voting securities of such portfolio company.
We make available significant managerial assistance to our
portfolio companies. We generally receive rights to observe the
meetings of our portfolio companies board of directors,
and may have one or more voting seats on their boards.
For further information relating to the amount and nature of our
investments in portfolio companies, see our Consolidated
Schedule of Investments for each of July 31, 2007
(unaudited) and October 31, 2006, on pages F-3 to F-5 and
F-6 to F-8, respectively.
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Percentage
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Nature of its
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Title of Securities
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of Class
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Name and Address of Portfolio Company
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Principal Business
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Held by the Company
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Held(1)
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Companies More Than 25% Owned
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Auto Motol Beni
Plzenska 130
Prague
Praha 5
150 00 Czech Republic
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Automotive Dealership
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Common Stock
Bridge Loan, 12/31/2007
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100%
N/A
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Harmony Pharmacy & Health Center, Inc.
287 Bowman Avenue
2nd
Floor
Purchase, NY 10577
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Healthcare Retail
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Common Stock
Revolving Credit
Facility, 12/01/09
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33.3%
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MVC Partners, LLC
287 Bowman Avenue
2nd
Floor
Purchase, New York 10577
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Private Equity Firm
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LLC Interest
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100%
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Ohio Medical Corporation
1111 Lakeside Drive
Gurnee, Ill 60606
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Medical Device Manufacturer
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Common Stock
Convertible Unsecured
Subordinated
Promissory Note,
07/30/2008
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|
56.26%
N/A
|
SIA Tekers Invest
Atlantijas Street
Riga City Latvia
|
|
Port Facilities
|
|
Common Stock
|
|
100%
|
SGDA Sanierungsgesellschaft
Fur Deponien und Altlasten
98544 Zella Mehlis,
Bahnhofsstrabe 66
|
|
Soil Remediation
|
|
Term Loan, 08/25/2009
Common Equity
Preferred Equity
|
|
N/A
70%
100%
|
Summit Research Labs, Inc.
15 Big Pond Road
Huguenot, NY 12746
|
|
Specialty Chemicals
|
|
Second Lien Loan
14.0000%, 08/15/2012
Preferred Stock
(800 shares)
|
|
N/A
80%
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Nature of its
|
|
Title of Securities
|
|
of Class
|
Name and Address of Portfolio Company
|
|
Principal Business
|
|
Held by the Company
|
|
Held(1)
|
|
Timberland Machines & Irrigation, Inc.(3)
One Niblick Road
PO Box 1190
Enfield, CT 06083
|
|
Distributor Landscaping
And Irrigation Equipment
|
|
Senior Subordinated
Debt, 08/04/2009
Junior Revolving Line
Of Credit, 7/7/2009
Common Stock
Warrants
|
|
N/A
N/A
45%
100%
|
Turf Products, LLC
157 Moody Road, PO Box 1200
Enfield, CT 06083
|
|
Distributor Landscaping
And Irrigation Equipment
|
|
Senior Subordinated
Debt, 11/30/2010
Junior Revolving Line
Of Credit 5/1/2008
LLC Interest
Warrants
|
|
N/A
N/A
45%
100%
|
U.S. Gas & Electric
290 NW 165th Street PH 5
N. Miami Beach, FL 33169
|
|
Energy Services
|
|
Second Lien Loan, 07/26/2012
Second Credit Facility, 07/25/2010
Junior Credit Facility, 07/25/2010
Convertible Preferred Stock B
Convertible Preferred Stock C
Convertible Preferred Stock F
|
|
N/A
N/A
N/A
60%
15.2%
2.9%
|
Velocitius B.V.
Telestone 8 Teleport
Naritaweg 165
P.O. Box 7241
1007 JE, Amsterdam
|
|
Renewable Energy
|
|
Revolving Credit
Facility 1, 10/31/2009
Revolving Credit
Facility II, 04/30/2010
Common Equity
|
|
N/A
N/A
100%
|
Vendio Services, Inc.(3)
2800 Campus Drive, Suite 150
San Mateo, CA 94403
|
|
Online Auction Enabler
|
|
Common Stock
Preferred Stock
|
|
0.4%
37.8%
|
Vestal Manufacturing Enterprises(3)
176 Industrial Park Road
Sweetwater, TN 37874
|
|
Iron Foundries
|
|
Senior Subordinated
Debt, 04/29/2011
Common Stock
|
|
N/A
90%
|
WBS Carbons Acquisitions Corp.
46 Tower Drive
Middletown, NY 10941
|
|
Specialty Chemicals
|
|
Bridge Loan, 11/22/2011
Common Stock
|
|
N/A
80%
|
Companies 5% to 25% Owned
|
|
|
|
|
|
|
Dakota Growers Pasta Company, Inc.(3)
One Pasta Avenue
Carrington, ND 58421
|
|
Manufacturer of Packaged Foods
|
|
Common Stock
Convertible Preferred
Stock
|
|
9.97%
100%
|
Endymion Systems, Inc
80 Swan Way, #250
Oakland, CA 94621
|
|
Software Applications
|
|
Preferred Stock
|
|
23.12%
|
Genevac U.S. Holdings, Inc.
707 Executive Boulevard, Suite D
Valley Cottage, NY 10989
|
|
Laboratory Research Equipment
|
|
Senior Subordinated
Debt, 01/03/2008
Common Stock A
Commons Stock B
|
|
N/A
9.9%
100%
|
HuaMei Capital Company, Inc.
71 S. Wacker Drive
Suite 2760
Chicago, IL 60606
|
|
Financial Services
|
|
Common Stock
|
|
20%
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Nature of its
|
|
Title of Securities
|
|
of Class
|
Name and Address of Portfolio Company
|
|
Principal Business
|
|
Held by the Company
|
|
Held(1)
|
|
Impact Confections, Inc.(3)
888 Garden of the Gods Road,
# 200
Colorado Springs, CO 80907
|
|
Confections, Manufacturing and Distribution
|
|
Senior Subordinated
Debt, 07/30/2009
Senior Subordinated
Debt, 07/29/2008
Common Stock A
Common Stock B
|
|
N/A
N/A
9.96%
100%
|
Marine Exhibition Corporation
4400 Rickenbacker Causeway
Miami, FL
33149-1095
|
|
Theme Park
|
|
Senior Subordinated
Debt, 06/30/2013
Convertible Preferred Stock
Revolving Line of Credit
Facility I, 6/30/2013
|
|
N/A
100%
N/A
|
Octagon Credit Investors, LLC(2)
52 Vanderbilt Avenue, 18th Floor
New York, NY 10017
|
|
Financial Services
|
|
Term Loan 12/31/2011
Revolving Line of
Credit, 12/31/2011
LLC Interest
|
|
N/A
N/A
6.24%
|
PreVisor, Inc.
1805 Old Alabama Road, Suite 150
Roswell, GA 30076
|
|
Human Capital Management
|
|
Common Stock
|
|
8.87%
|
Vitality Foodservice Holding Corp.(3)
400 North Tampa St., Suite 2000
Tampa, FL 33602
|
|
Non-Alcoholic Beverages
|
|
Common Stock
Preferred Stock
Warrants
|
|
11.28%
100.00%
39.00%
|
Companies Less Than 5% Owned
|
|
|
|
|
|
|
Actelis Networks, Inc
6150 Stevenson Blvd.
Fremont, CA 94538
|
|
Telecommunications
|
|
Preferred Stock
|
|
10.81%
|
Amersham Corporation
1797 Boxelder Street
Louisville, CO 80027
|
|
Manufacturer of Precision Machined Components
|
|
Second Lien Seller Note,
06/29/2010
Second Lien Seller Note,
06/30/2013
|
|
N/A
N/A
|
BP Clothing, LLC
8700 Rex Road
Pico Rivera, CA 90660
|
|
Apparel
|
|
Second Lien Loan, 07/18/2012
Term Loan A, 07/18/2011
Term Loan B, 7/18/2011
|
|
N/A
N/A
N/A
|
DPHI, Inc
1900 Pike Road Suite F
Longmont, CO 80501
|
|
Digital Media
|
|
Preferred Stock
|
|
20.12%
|
Foliofn, Inc.(3)
8000 Towers Crescent Drive
Suite 1500
Vienna, VA 22182
|
|
Financial Services Technology
|
|
Preferred Stock
|
|
49.36%
|
Henry Company
2911 Slauson Avenue
Huntington Park, CA 90255
|
|
Building Products/ Specialty Chemicals
|
|
Term Loan A 4/6/2011
Term Loan B 4/6/2011
|
|
N/A
N/A
|
Innovative Brands
4729 East Union Hills Drive
Suite 103
Phoenix, AZ 85050
|
|
Consumer Products
|
|
Term Loan, 9/25/2011
|
|
N/A
|
JDC Lighting, LLC
45 West 36th Street, 5th Floor
New York, NY 10018
|
|
Electrical Distribution
|
|
Senior Subordinated
Debt, 1/31/2009
|
|
N/A
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Nature of its
|
|
Title of Securities
|
|
of Class
|
Name and Address of Portfolio Company
|
|
Principal Business
|
|
Held by the Company
|
|
Held(1)
|
|
Lockorder Limited
Unit 3A Wycombe
3 Boundary Road
Loudwater Bucks HP109PN (UK)
|
|
Enterprise Security Software
|
|
Common Stock
|
|
2.90%
|
MainStream Data, Inc
375 Chipeta Way, Suite B
Salt Lake City, UT 84108
|
|
Satellite & Broadcast Communications
|
|
Common Stock
|
|
2.83%
|
Phoenix Coal Corporation
1215 Nebo Road Ste A
Madisonville, KY 42431
|
|
Coal Processing and Production
|
|
Second Lien Note, 6/8/2011
Common Stock
|
|
N/A
4.2%
|
SafeStone Technologies PLC
Unit 3A Wycombe
3 Boundary Road
Loudwater Bucks HP10 9PN (UK)
|
|
Enterprise Security Software
|
|
Common Stock
|
|
2.90%
|
Sonexis, Inc
400 Network Center Drive, Suite 210
Tewksbury, MA 01876
|
|
Web Conferencing
|
|
Common Stock
|
|
13.16%
|
SP Industries, Inc
935 Mearns Road
Warminster, PA 18974
|
|
Laboratory Research Equipment
|
|
Term Loan B, 3/31/2011
Subordinated Debt, 03/31/2012
|
|
N/A
N/A
|
Storage Canada LLC
101 N 38th Avenue
Omaha, NE 68131
|
|
Self Storage
|
|
Term Loan, 1/19/2014
|
|
N/A
|
Total Safety U.S., Inc.
11111 Wilcrest Green Drive
Suite 300
Houston, TX 77042
|
|
Engineering Services
|
|
First Lien Seller Note, 12/08/2012
Second Lien Seller Note, 12/08/2013
|
|
N/A
N/A
|
|
|
|
(1) |
|
Percentages shown for securities held by us represent percentage
of the class owned and do not necessarily represent voting
ownership. Percentages shown for equity securities other than
warrants or options represent the actual percentage of the class
of security held before dilution. Percentages shown for warrants
and options held represent the percentage of class of security
we may own, on a fully diluted basis, assuming we exercise our
warrants or options. |
|
(2) |
|
We directly or indirectly own more than 50% of the voting
securities of the company, or control the board of directors, or
are the controlling member. |
|
(3) |
|
The portfolio company is deemed to be an affiliated person under
the 1940 Act because we hold one or more seats on the portfolio
companys board of directors, are the general partner, or
are the managing member. |
For companies held by the Company at July 31, 2007, please
reference pages 43 to 57 for a brief description of each
portfolio companys business. With respect to portfolio
companies in which we invested since that date, please see
pages 60 to 62 for a brief description of those
investments. In addition, we have provided below a more detailed
description for each portfolio company which represented more
than 5% of our assets as of July 31, 2007.
BP
Clothing, LLC
BP is a company that designs, manufactures, markets and
distributes Baby
Phat®,
a line of womens clothing. BP operates within the
womens urban apparel market. The urban apparel market is
highly fragmented with a small number of prominent, nationally
recognized brands and a large number of small niche players.
Baby Phat is a recognized urban apparel brand in the
womens category.
At October 31, 2006, the Companys investment in BP
consisted of a $10.0 million second lien loan,
$2.9 million term loan A, and $2.0 million term loan
B. The second lien loan bears annual interest at 14%. The
81
second lien loan has a $10.0 million principal face amount
and was issued at a cost basis of $10.0 million. The second
lien loans cost basis was subsequently discounted to
reflect loan origination fees received. The maturity date of the
second lien loan is July 18, 2012. The principal balance is
due upon maturity. The $2.9 million term loan A bears
annual interest at LIBOR plus 4.25% or prime rate plus 3.25%.
The $2.0 million term loan B bears annual interest at LIBOR
plus 6.40% or prime rate plus 5.40%. The interest rate option on
each of term loan A and term loan B is at the borrowers
discretion. Each of term loan A and term loan B mature on
July 18, 2011. The combined cost basis and fair value of
the investments at October 31, 2006 was $14.7 million
and $14.9 million respectively.
On February 21, 2007, the Company provided BP an additional
$5.0 million on the same second lien loan, which bears
annual interest at 14% and matures on July 18, 2012.
On May 4, 2007, the Company provided BP an additional
$2.5 million on the same second lien loan.
At July 31, 2007, the loans had a combined cost basis and
fair value of $22.0 million and $22.3 million,
respectively. The increases in the outstanding balance, cost and
fair value of the loans are due to the amortization of loan
origination fees and the capitalization of payment in
kind interest. These increases were approved by the
Valuation Committee.
Vitality
Foodservice, Inc.
Vitality is a market leader in the processing and marketing of
dispensed and non-dispensed juices and frozen concentrate liquid
coffee to the foodservice industry. With an installed base of
over 42,000 dispensers worldwide, Vitality sells its frozen
concentrate through a network of over 350 distributors to such
market niches as institutional foodservice, including schools,
hospitals, cruise ships, hotels and restaurants.
At July 31, 2007, the investment in Vitality consisted of
556,472 shares of common stock at a cost of
$5.6 million and 1,000,000 shares of Series A
convertible preferred stock at a cost of $9.7 million. The
common stock, Series A convertible preferred stock and
warrants were assigned fair values of $9.1 million,
$12.2 million and $1.1 million, respectively.
DETERMINATION
OF COMPANYS NET ASSET VALUE
Pursuant to the requirements of the 1940 Act, the Company values
its portfolio securities at their current market values or, if
market quotations are not readily available, at their estimates
of fair values. Because the Companys portfolio company
investments generally do not have readily ascertainable market
values, the Company records these investments at fair value in
accordance with our Valuation Procedures adopted by our board of
directors. As permitted by the SEC, the board of directors has
delegated the responsibility of making fair value determinations
to the Valuation Committee, subject to the board of
directors supervision and pursuant to the Valuation
Procedures. The Companys board of directors may also elect
in the future to hire independent consultants to review the
Valuation Procedures or to conduct an independent valuation of
one or more of its portfolio investments.
Pursuant to our Valuation Procedures, the Valuation Committee
determines fair valuations of portfolio company investments on a
quarterly basis (or more frequently, if deemed appropriate under
the circumstances). Any changes in valuation are recorded in the
statements of operations as Net unrealized gain (loss) on
investments. Currently, the Companys net asset value
per share is calculated and published on a monthly basis. The
fair values determined as of the most recent quarter end are
reflected, in the next calculated net asset value per share. (If
the Valuation Committee determines to fair value an investment
more frequently than quarterly, the most recently determined
fair value would be reflected in the published net asset value
per share.) In addition, in connection with each offering of
shares of our common stock, the board of directors or a
committee thereof is required to make the determination that we
are not selling shares of our common stock at a price below our
then current net asset value at the time at which the sale is
made. Importantly, this determination does not require that we
calculate net asset value in connection with each offering of
shares of our common stock, but instead it involves the
determination by the board of directors or a committee thereof
that we are not selling shares of our common stock at a price
below the then current net asset value at the time at which the
sale is made.
82
The Company calculates its net asset value per share by
subtracting all liabilities from the total value of its
portfolio securities and other assets and dividing the result by
the total number of outstanding shares of its common stock on
the date of valuation.
At July 31, 2007, approximately 72.6% of the Companys
total assets represented portfolio investments recorded at fair
value.
Initially, portfolio securities for which a reliable market
value cannot be determined are valued at cost (absent the
existence of circumstances warranting, in managements and
the Valuation Committees view, a different initial value).
During the period that such a portfolio security is held by the
Company, its original cost may cease to represent an appropriate
valuation, and other factors must be considered. No
pre-determined formula can be applied to determine fair values.
Rather, the Valuation Committee makes fair value assessments
based upon the estimated value at which the securities of the
portfolio company could be sold in an orderly disposition over a
reasonable period of time between willing parties (other than in
a forced or liquidation sale). The liquidity event whereby the
Company exits an investment is generally a sale, merger,
recapitalization or, in some cases, the initial public offering
of the portfolio company.
Valuation
Methodology
There is no one methodology to determine fair value and, in
fact, for any portfolio security, fair value may be expressed as
a range of values, from which the Company derives a single
estimate of fair value. To determine the fair value of a
portfolio security, the Valuation Committee analyzes the
portfolio companys financial results and projections,
publicly traded comparables when available, precedent exit
transactions in the market when available, as well as other
factors. The Company generally requires, where practicable,
portfolio companies to provide annual audited and more regular
unaudited financial statements,
and/or
annual projections for the upcoming fiscal year.
The fair value of the Companys portfolio securities is
inherently subjective. Because of the inherent uncertainty of
fair valuation of portfolio securities that do not have readily
ascertainable market values, the Companys estimate of fair
value may significantly differ from the fair market value that
would have been used had a ready market existed for the
securities. Such values also do not reflect brokers fees
or other selling costs which might become payable on disposition
of such investments.
Equity
Securities
The Companys equity interests in portfolio companies for
which there is no liquid public market are valued at fair value.
The Valuation Committees analysis of fair value may
include various factors, such as multiples of EBITDA, cash
flow(s), net income, revenues or in limited instances book value
or liquidation value. All of these factors may be subject to
adjustments based upon the particular circumstances of a
portfolio company or the Companys actual investment
position. For example, adjustments to EBITDA may take into
account compensation to previous owners or acquisition,
recapitalization, or restructuring or related items.
The Valuation Committee may look to private merger and
acquisition statistics, public trading multiples discounted for
illiquidity and other factors, or industry practices in
determining fair value. The Valuation Committee may also
consider the size and scope of a portfolio company and its
specific strengths and weaknesses, as well as any other factors
it deems relevant in assessing the value. The determined fair
values may be discounted to account for restrictions on resale
and minority positions. Generally, the value of the
Companys equity interests in public companies for which
market quotations are readily available is based upon the most
recent closing public market price. Portfolio securities that
carry certain restrictions on sale are typically valued at a
discount from the public market value of the security.
Loans and
Debt Securities
For loans and debt securities, fair value generally approximates
cost unless there is a reduced value or overall financial
condition of the portfolio company or other factors indicate a
lower fair value for the loan or debt security.
Generally, in arriving at a fair value for a debt security or a
loan, the Valuation Committee focuses on the portfolio
companys ability to service and repay the debt and
considers its underlying assets. With respect to a
83
convertible debt security, the Valuation Committee also analyzes
the excess of the value of the underlying security over the
conversion price as if the security was converted when the
conversion feature is in the money (appropriately
discounted if restricted). If the security is not currently
convertible, the use of an appropriate discount in valuing the
underlying security is typically considered. If the value of the
underlying security is less than the conversion price, the
Valuation Committee focuses on the portfolio companys
ability to service and repay the debt.
When the Company receives nominal cost warrants or free equity
securities (nominal cost equity) with a debt
security, the Company allocates its cost basis in the investment
between debt securities and nominal cost equity at the time of
origination.
Interest income is recorded on an accrual basis to the extent
that such amounts are expected to be collected. Origination,
closing
and/or
closing fees associated with investments in portfolio companies
are accreted into income over the respective terms of the
applicable loans. Upon the prepayment of a loan or debt
security, any prepayment penalties and unamortized loan
origination, closing and commitment fees are recorded as income.
Prepayment premiums are recorded on loans when received.
For loans, debt securities, and preferred securities with
contractual
payment-in-kind
interest or dividends, which represent contractual
interest/dividends accrued and added to the loan balance or
liquidation preference that generally becomes due at maturity,
the Company will not accrue
payment-in-kind
interest/dividends if the portfolio company valuation indicates
that the
payment-in-kind
interest is not collectible. However, the Company may accrue
payment-in-kind
interest if the health of the portfolio company and the
underlying securities are not in question. All
payment-in-kind
interest that has been added to the principal balance or
capitalized is subject to ratification by the Valuation
Committee.
The overall responsibility for oversight of the Company rests
with the Companys board of directors. The day-to-day
operations of the Company are delegated to TTG Advisers, subject
to the supervision of our board of directors.
The board of directors currently has six members. The board of
directors maintains an Audit Committee, a Valuation Committee, a
Compensation Committee, and a Nominating/Corporate
Governance/Strategy Committee, and may establish additional
committees in the future.
The Company is externally managed by TTG Advisers pursuant to
the Advisory Agreement. TTG Advisers was organized to provide
investment advisory and management services to the Company and
other investment vehicles.
These investment professionals collectively have extensive
experience in managing investments in private businesses in a
variety of industries, and are familiar with the Companys
approach of lending and investing. Because the Company is
externally managed, it pays a base management fee and an
incentive fee. The Advisory Agreement and fees paid by the
Company to TTG Advisers pursuant to the Advisory Agreement are
described under Advisory Agreement below.
84
Information regarding the directors and the key executive
officers of MVC Capital, including brief biographical
information, as of December 18, 2007, is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
(2)
|
|
(3)
|
|
(4)
|
|
Portfolios in
|
|
(6)
|
|
|
Positions(s)
|
|
Term of Office/
|
|
Principal
|
|
Fund Complex
|
|
Other
|
(1)
|
|
Held with the
|
|
Length of Time
|
|
Occupation(s)
|
|
Overseen by
|
|
Directorships
|
Name, Address and Age
|
|
Company
|
|
Served
|
|
During Past 5 Years
|
|
Director
|
|
Held by Director
|
|
Independent Directors
|
|
|
|
|
|
|
|
|
|
|
Emilio Dominianni
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 76
|
|
Director
|
|
1 year/4 years, 9 months
|
|
Mr. Dominianni is a retired Partner of, and was Special Counsel
to Coudert Brothers LLP, a law firm. He is currently a Director
of Stamm International Corporation, Powrmatic Inc., and
Powrmatic of Canada Ltd., manufacturers and distributors of
heating, ventilating, and air conditioning equipment. He was a
Director of American Air Liquide Inc., Air Liquide International
Corporation, and a Consultant to Air Liquide America Corp., all
manufacturers and distributors of industrial gases, and Mouli
Manufacturing Corp., a distributor of kitchen and household
products.
|
|
None(1)
|
|
See column 4
|
Gerald Hellerman
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 70
|
|
Director
|
|
1 year/4 years, 9 months
|
|
Mr. Hellerman owns and has served as Managing Director of
Hellerman Associates, a financial and corporate consulting firm,
since the firms inception in 1993. Mr. Hellerman currently
serves as a director, chief financial officer and chief
compliance officer for The Mexico Equity and Income Fund, Inc.,
a director of the Old Mutual Absolute Return and Emerging
Managers fund complex (consisting of six funds), and a director
of Brantley Capital Corporation.
|
|
None(1)
|
|
See column 4
|
Robert Knapp
Ironsides Partners LLC
100 Summer Street
27th Floor
Boston, MA 02108
Age: 40
|
|
Director
|
|
1 year/4 years, 9 months
|
|
Mr. Knapp is Managing Director of Ironsides Partners LLC, which
was formed in January 2007 to manage an account for Millennium
Partners LP (Millennium), his former employer from
1996-2006. Mr. Knapp specializes in mis-priced assets,
turnaround situations, and closed end fund arbitrage. He served
as a founding director of the Vietnam Opportunity Fund, a Cayman
Islands private equity fund listed on the London Stock Exchange,
for which Millennium acted as seed investor. He also served as a
director for the First Hungary Fund, a Channel Islands private
equity fund, and as a Director of the Vietnam Frontier Fund, a
Cayman Islands investment company.
|
|
None(1)
|
|
See column 4
|
William Taylor
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 65
|
|
Director
|
|
1 year/1 year, 9 months
|
|
Mr. Taylor is a Certified Public Accountant and is currently a
Director of Northern Illinois University Foundation and a
Trustee of Writers Theatre. From 1976 through May, 2005, Mr.
Taylor was a Partner at Deloitte & Touche. From 1997 to
2001 Mr. Taylor was a Director of Deloitte & Touche USA and
from 1999 to 2003 Mr. Taylor was a Director of Deloitte Touche
Tohmatsu.
|
|
None(1)
|
|
See column 4
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
(2)
|
|
(3)
|
|
(4)
|
|
Portfolios in
|
|
(6)
|
|
|
Positions(s)
|
|
Term of Office/
|
|
Principal
|
|
Fund Complex
|
|
Other
|
(1)
|
|
Held with the
|
|
Length of Time
|
|
Occupation(s)
|
|
Overseen by
|
|
Directorships
|
Name, Address and Age
|
|
Company
|
|
Served
|
|
During Past 5 Years
|
|
Director
|
|
Held by Director
|
|
Interested Directors
|
|
|
|
|
|
|
|
|
|
|
Warren Holtsberg(2)
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 57
|
|
Director
|
|
1 year/8 months
|
|
Mr. Holtsberg currently serves as Co-Head Portfolio Management
of TTGA. Mr. Holtsberg founded Motorola Ventures, the venture
capital investment arm for Motorola, Inc. where he led the
worldwide fund for eight years. He was also Corporate Vice
President and Director of Equity Investments at Motorola. Mr.
Holtsberg currently serves as a member of the Board of Directors
of the Illinois Venture Capital Association, the Chicagoland
Entrepreneurship Center, and Illinois Ventures, the venture
investment arm for the University of Illinois.
|
|
None(1)
|
|
See column 4
|
Michael Tokarz(3)
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 58
|
|
Director, Chairman, and Portfolio Manager
|
|
1 year/4 years, 1 month
|
|
Mr. Tokarz currently serves as Chairman and Portfolio Manager of
the Company and as Manager of The Tokarz Group Advisers LLC, the
investment adviser to the Company. Mr. Tokarz also is Chairman
of The Tokarz Group, a private merchant bank, since 2002. Prior
to this, Mr. Tokarz was a senior General Partner and
Administrative Partner at Kohlberg Kravis Roberts & Co., a
private equity firm specializing in management buyouts. He also
currently serves on the corporate boards of MVC Acquisition
Corp., Conseco, Inc., Walter Industries, Inc. (Chairman of the
board), Mueller Water Products, Inc., IDEX Corporation,
Stonewater Control Systems, Lomonosov, Athleta, Inc. and Apertio
Ltd. Mr. Tokarz is an active member of the endowment committee
and Board of Trustees of YMCA in Westchester County. He is also
a member of the Board of the Warwick Business School in England.
He is Chairman elect and is a member of the Board of the
University of Illinois Foundation, and serves on its executive
committee, investment policy committee and is Chairman of the
budget and finance committee; he is also a member of the Venture
Capital Subcommittee and serves as a member of the Board of
Managers for Illinois Ventures, LLC. Mr. Tokarz also serves as
the Chairman of the Illinois Emerging Technology Fund LLC. Mr.
Tokarz serves as a director for the following portfolio
companies of the Company: Custom Alloy Corporation, Dakota
Growers Pasta Company, Ohio Medical Corporation, Timberland
Machines & Irrigation, Inc., Harmony Pharmacy & Health
Centers, Inc.
|
|
None(1)
|
|
See column 4
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
(2)
|
|
(3)
|
|
(4)
|
|
Portfolios in
|
|
(6)
|
|
|
Positions(s)
|
|
Term of Office/
|
|
Principal
|
|
Fund Complex
|
|
Other
|
(1)
|
|
Held with the
|
|
Length of Time
|
|
Occupation(s)
|
|
Overseen by
|
|
Directorships
|
Name, Address and Age
|
|
Company
|
|
Served
|
|
During Past 5 Years
|
|
Director
|
|
Held by Director
|
|
Executive Officers
|
|
|
|
|
|
|
|
|
|
|
Bruce Shewmaker
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 61
|
|
Managing Director
|
|
Indefinite term/4 years, 1 month
|
|
Mr. Shewmaker currently serves as Managing Director of TTGA and
the Company. Mr. Shewmaker worked directly for the Company from
November 2003 through October 2006. Until June 2003, Mr.
Shewmaker served as Managing Director of Crossbow Ventures Inc.,
and as a Vice President of Crossbow Venture Partners Corp., the
general partner of Crossbow Venture Partners LP, a licensed
small business investment company. Mr. Shewmaker also is a
co-founder and Director of Infrared Imaging Systems, Inc., a
medical devices company. From 1999 to 2001, he was a Managing
Director of E*OFFERING Corp., an investment banking firm which
merged into Wit SoundView Group in 2000. Mr. Shewmaker served as
a director for the following portfolio companies of the Company:
Baltic Motors Corporation and Vestal Manufacturing Enterprises,
Inc. from April 2004 until July 2005 and currently serves on the
Boards of Foliofn, Inc., MVC Partners LLC, Vendio
Services, Inc., Phoenix Coal Corporation, and Velocitius B.V.
Mr. Shewmaker also serves on the Board of VIANY.
|
|
None
|
|
See column 4
|
Peter Seidenberg
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 38
|
|
Chief Financial Officer
|
|
Indefinite
term/2 years, 2 months
|
|
Mr. Seidenberg currently serves as Chief Financial Officer of
TTGA, in addition to his service as Chief Financial Officer of
the Company. Mr. Seidenberg joined the Company in April 2005
after having previously served as a Principal of Nebraska Heavy
Industries, where he worked on engagements including serving as
the Chief Financial Officer of Commerce One, Inc. Prior to that,
Mr. Seidenberg served as the Director of Finance and
Business Development and as Corporate Controller for Plumtree
Software, Inc. Mr. Seidenberg has also worked at AlliedSignal
and several small manufacturing companies, where he held roles
in finance and operations. Mr. Seidenberg, on behalf of the
Company, sits on the board of Ohio Medical Corp and serves as
its Corporate Secretary. Mr. Seidenberg also serves on the
Board of MVC Partners LLC and serves as Chief Financial Officer
of MVC Acquisition Corp.
|
|
None
|
|
None
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
(2)
|
|
(3)
|
|
(4)
|
|
Portfolios in
|
|
(6)
|
|
|
Positions(s)
|
|
Term of Office/
|
|
Principal
|
|
Fund Complex
|
|
Other
|
(1)
|
|
Held with the
|
|
Length of Time
|
|
Occupation(s)
|
|
Overseen by
|
|
Directorships
|
Name, Address and Age
|
|
Company
|
|
Served
|
|
During Past 5 Years
|
|
Director
|
|
Held by Director
|
|
Scott Schuenke
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 28
|
|
Chief Compliance Officer
|
|
Indefinite term/3 years, 2 months
|
|
Mr. Schuenke currently serves as the Controller and Chief
Compliance Officer of TTGA. Prior to joining the Company in June
2004, Mr. Schuenke served as a Compliance Officer with U.S.
Bancorp Fund Services, LLC, from 2002 until he joined MVC
Capital, Inc. in 2004. Mr. Schuenke also served as the
Secretary of The Mexico Equity & Income Fund, Inc. and
Assistant Secretary of Tortoise Energy Infrastructure
Corporation during his tenure at U.S. Bancorp Fund Services,
LLC. Mr. Schuenke is a Certified Public Accountant.
|
|
None
|
|
None
|
Jaclyn Shapiro
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 29
|
|
Vice President/ Secretary
|
|
Indefinite term/3 years, 1 month;
Indefinite term/3 years, 11 months
|
|
Ms. Shapiro currently serves as Vice President and Secretary of
TTGA, in addition to her service as Vice President and Secretary
of the Company. Prior to joining the Company in June 2002, she
was an Associate and Business Manager with Draper Fisher
Jurvetson meVC Management Co. LLC, the former investment
sub-adviser to the Company, and an Associate at The Bank
Companies (acquired by Newmark & Co. Real Estate), a
commercial real estate company. Ms. Shapiro serves on the Board
of MVC Partners LLC.
|
|
None
|
|
None
|
|
|
|
(1) |
|
Other than the Company. |
|
(2) |
|
Mr. Holtsberg is an interested person, as
defined in the 1940 Act, of the Company (an Interested
Director) because of his employment with the Adviser. |
|
(3) |
|
Mr. Tokarz is an Interested Director because he serves as
an officer of the Company. |
Board
Meetings and Committees
The Board currently has an Audit Committee, a Valuation
Committee, a Nominating/Corporate Governance/Strategy Committee
and a Compensation Committee. The Board has adopted a written
charter for the Audit Committee, a copy of which is currently
available on the Companys website at
http://www.mvccapital.com.
The current members of the Audit Committee are
Messrs. Dominianni, Hellerman and Taylor, each of whom is
an independent audit committee member, as defined in
Sections 303.01(B)(2)(a) and (3) of the NYSEs
listing standards, and an Independent Director.
Mr. Hellerman is the Chairman of the Audit Committee. The
Audit Committees primary purposes are:
|
|
|
|
|
oversight responsibility with respect to: (a) the adequacy
of the Companys accounting and financial reporting
processes, policies and practices; (b) the integrity of the
Companys financial statements and the independent audit
thereof; (c) the adequacy of the Companys overall
system of internal controls and, as appropriate, the internal
controls of certain service providers; (d) the
Companys compliance with certain legal and regulatory
requirements; (e) determining the qualification and
independence of the Companys independent auditors; and
(f) the Companys internal audit function, if
any; and
|
|
|
|
oversight of the preparation of any report required to be
prepared by the Audit Committee pursuant to the rules of the SEC
for inclusion in the Companys annual proxy statement with
respect to the election of directors.
|
88
The most recent fiscal year of the Company ended on
October 31, 2007. During that fiscal year, the Audit
Committee held four (4) meetings.
During the fiscal year ended October 31, 2007, the Board
held ten (10) meetings. During that year, each of the
Directors then serving attended 100% of the aggregate number of
meetings of the Board and any committee of the Board on which
such Director served. Currently, a majority of the Directors are
Independent Directors.
The Valuation Committee, the principal purpose of which is to
determine the fair values of securities in the Companys
portfolio for which market quotations are not readily available,
is currently comprised of Messrs. Dominianni, Hellerman and
Knapp. The Valuation Committee held six (6) meetings during
the fiscal year ended October 31, 2007.
The Nominating/Corporate Governance/Strategy Committee (the
Nominating Committee), the principal purposes of
which are to consider and nominate persons to serve as
Independent Directors and oversee the composition and governance
of the Board and its committees, is currently comprised of
Messrs. Dominianni, Hellerman, and Knapp, each of whom is
an Independent Director. The Nominating Committee was
established in January 2004. The Board has adopted a written
charter for the Nominating Committee, a copy of which is
available on the Companys website at
http://www.mvccapital.com.
The Nominating Committee considers director candidates nominated
by shareholders in accordance with procedures set forth in the
Companys By-Laws. The Companys By-Laws provide that
nominations may be made by any shareholder of record of the
Company entitled to vote for the election of directors at a
meeting, provided that such nominations are made pursuant to
timely notice in writing to the Secretary. The Nominating
Committee then determines the eligibility of any nominated
candidate based on criteria described below. To be timely, a
shareholders notice must be received at the principal
executive offices of the Company not less than 60 days nor
more than 90 days prior to the scheduled date of a meeting.
A shareholders notice to the Secretary shall set forth:
(a) as to each shareholder-proposed nominee, (i) the
name, age, business address and residence address of the
nominee, (ii) the principal occupation or employment of the
nominee, (iii) the class, series and number of shares of
capital stock of the Company that are owned beneficially by the
nominee, (iv) a statement as to the nominees
citizenship, and (v) any other information relating to the
person that is required to be disclosed in solicitations for
proxies for election of directors pursuant to Section 14 of
the Securities Exchange Act of 1934, as amended (the
1934 Act), and the rules and regulations
promulgated thereunder; and (b) as to the shareholder
giving the notice, (i) the name and record address of the
shareholder and (ii) the class, series and number of shares
of capital stock of the corporation that are owned beneficially
by the shareholder. The Company or the Nominating Committee may
require a shareholder who proposes a nominee to furnish any such
other information as may reasonably be required by the Company
to determine the eligibility of the proposed nominee to serve as
director of the Company. The Nominating Committee held two
(2) meetings during the fiscal year ended October 31,
2007.
The Compensation Committee, the principal purpose of which is to
oversee the compensation of the Independent Directors, is
currently comprised of Messrs. Hellerman and Knapp. The
Compensation Committee was established in March 2003. There was
one (1) formal meeting of the Compensation Committee held
during the fiscal year ended October 31, 2007. The Board
has adopted a written charter for the Compensation Committee, a
copy of which is available on the Companys website at
http://www.mvccapital.com.
89
COMPENSATION
OF EXECUTIVE OFFICERS AND DIRECTORS
Director
and Executive Officer Compensation
The following table sets forth compensation paid by us in all
capacities during the fiscal year ended October 31, 2007 to
all of our Directors and our executive officers. Our Directors
have been divided into two groups -Interested Directors and
Independent Directors. The Interested Directors are
interested persons, as defined in the 1940 Act, of
the Company. No compensation is paid to the Interested
Directors. (The Company is not part of any Fund Complex.)
Compensation
Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
|
|
All Other
|
|
|
Name of Person, Position
|
|
Paid in Cash
|
|
Stock Awards
|
|
Compensation(1)
|
|
Total
|
|
Interested Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warren Holtsberg, Director(2)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Michael Tokarz, Chairman and Portfolio Manager(3)
|
|
$
|
110,218
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Independent Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emilio Dominianni, Director
|
|
$
|
56,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
56,000
|
|
Gerald Hellerman, Director
|
|
$
|
61,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
61,000
|
|
Robert Knapp, Director
|
|
$
|
55,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
55,000
|
|
William Taylor, Director
|
|
$
|
50,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
50,000
|
|
Executive Officers (who are not directors)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Seidenberg, Chief Financial Officer
|
|
$
|
61,679.19
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
61,679.19
|
|
Scott Schuenke, Chief Compliance Officer
|
|
$
|
12,085.44
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
12,085.44
|
|
Jaclyn Shapiro, Vice President and Secretary
|
|
$
|
26,235.36
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
26,235.36
|
|
Bruce Shewmaker, Managing Director
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
(1) |
|
Directors do not receive any pension or retirement benefits from
the Company. |
|
(2) |
|
Mr. Holtsberg was appointed to the Board on April 3,
2007. |
|
(3) |
|
During the 2006 fiscal year, Mr. Tokarz had entered into a
compensation arrangement with the Company, which terminated upon
the effectiveness of the Advisory Agreement on November 1,
2006. Mr. Tokarz, Chairman and Portfolio Manager of the
Company, received no cash compensation from the Company during
the 2006 fiscal year. However, on October 2, 2006, the
Company realized a gain of $551,092 from the sale of a portion
of the Companys LLC membership interest in Octagon. This
transaction triggered an incentive compensation payment
obligation, under his employment agreement with the Company, of
$110,218 to Mr. Tokarz, which was paid on January 12,
2007. Mr. Tokarz has determined to allocate a portion of
this incentive compensation to certain employees of TTG Advisers. |
|
(4) |
|
Pursuant to the Advisory Agreement, the Company reimburses TTG
Advisers for its allocable portion of the compensation payable
to the Companys Chief Financial Officer, Chief Compliance
Officer and Secretary in an amount not to exceed $100,000 per
year, in the aggregate. |
At a meeting of the Board held on January 31, 2006, the
Board along with the Compensation Committee changed the fees
payable to Independent Directors and the fees payable to the
Chairman of the Audit Committee, Valuation Committee, and
Nominating Committee as follows. Each Independent Director is
now paid: an annual retainer of $50,000 ($60,000 for the
Chairman of the Audit Committee and $55,000 for the Chairman of
each of the Valuation Committee and Nominating Committee) for up
to five in-person board meetings and committee meetings per
year. In the event that more than five board meetings and
committee meetings occur, each Director will be paid an
additional $1,000 for an in-person meeting and $0 for a
telephonic meeting. Each Independent Director is also reimbursed
by the Company for reasonable out-of-pocket expenses. The
Directors do not receive any pension or retirement benefits from
the Company.
90
Director
Equity Ownership
The following table sets forth, as of the date of this
prospectus, with respect to each Director, certain information
regarding the dollar range of equity securities beneficially
owned in the Company. The Company does not belong to a family of
investment companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
|
|
|
|
Aggregate Dollar Range of Equity
|
|
|
(2)
|
|
Securities of All Funds Overseen
|
(1)
|
|
Dollar Range of Equity
|
|
or to be Overseen by Director in
|
Name of Director
|
|
Securities in the Company
|
|
Family of Investment Companies
|
|
Independent Directors
|
|
|
|
|
|
|
|
|
Emilio Dominianni
|
|
|
Over$100,000
|
|
|
|
Over $100,000
|
|
Gerald Hellerman
|
|
|
Over $100,000
|
|
|
|
Over $100,000
|
|
Robert Knapp
|
|
|
Over $100,000
|
(1)
|
|
|
Over $100,000
|
(1)
|
William Taylor
|
|
|
Over $100,000
|
|
|
|
Over $100,000
|
|
Interested Directors
|
|
|
|
|
|
|
|
|
Warren Holtsberg(2)
|
|
|
$50,000 - $100,000
|
|
|
|
$50,000 - $100,000
|
|
Michael Tokarz(3)
|
|
|
Over$100,000
|
|
|
|
Over$100,000
|
|
|
|
|
(1) |
|
These shares are owned by Mr. Knapp directly. |
|
(2) |
|
Mr. Holtsberg was appointed to the Board on April 3,
2007 and is an Interested Director of the Company because of his
employment with the Adviser. |
|
(3) |
|
Mr. Tokarz is an Interested Director of the Company because
he serves as an officer of the Company. |
Under the terms of the Advisory Agreement, TTG Advisers
determines the composition of our portfolio, the nature and
timing of the changes to our portfolio and the manner of
implementing such changes, identifies, evaluates and negotiates
the structure of the investments we make (including performing
due diligence on our prospective portfolio companies), closes
and monitors the investments we make, determines the securities
and other assets that we purchase, retain or sell and oversees
the administration, recordkeeping and compliance functions of
the Company
and/or third
parties performing such functions for the Company. TTG
Advisers services under the Advisory Agreement are not
exclusive, and it may furnish similar services to other entities.
Pursuant to the Advisory Agreement, the Company pays TTG
Advisers a fee for investment advisory and management services
consisting of two components-a base management fee and an
incentive fee.
The base management fee is calculated at an annual rate of 2% of
our total assets (excluding Non-Eligible Assets, but including
assets purchased with borrowed funds that are not Non-Eligible
Assets) (the Base Management Fee). The Base
Management Fee is payable quarterly in arrears. The Base
Management Fee is calculated based on the value of our total
assets (excluding Non-Eligible Assets, but including assets
purchased with borrowed funds that are not Non-Eligible Assets)
at the end of the most recently completed fiscal quarter. Base
Management Fees for any partial month or quarter will be
appropriately pro rated.
The incentive fee is comprised of the following two parts:
One part is calculated and payable quarterly in arrears based on
our pre-incentive fee net operating income. Pre-incentive fee
net operating income means interest income, dividend income and
any other income (including any other fees to the Company and
MVCFS, such as directors, commitment, origination,
structuring, diligence and consulting fees or other fees that we
receive from portfolio companies) accrued during the fiscal
quarter, minus the Companys and MVCFS operating
expenses for the quarter (including the Base Management Fee and
any interest expense and dividends paid on any outstanding
preferred stock, but excluding the incentive fee (whether paid
or accrued)). Pre-incentive fee net operating income includes,
in the case of investments with a deferred interest feature
(such as market discount, debt instruments with
payment-in-kind
interest, preferred stock with
payment-in-kind
dividends and zero coupon securities), accrued income that we
have not yet received in cash. TTG Advisers
91
is not under any obligation to reimburse us for any part of the
incentive fee it received that was based on accrued income that
we never receive as a result of a default by an entity on the
obligation that resulted in the accrual of such income.
Pre-incentive fee net operating income does not include any
realized capital gains, realized capital losses or unrealized
capital appreciation or depreciation. Because of the structure
of the incentive fee, it is possible that we may pay an
incentive fee in a quarter where we incur a loss. For example,
if we receive pre-incentive fee net operating income in excess
of the hurdle rate (explained below) for a quarter, we will pay
the applicable incentive fee even if we have incurred a loss in
that quarter due to realized and unrealized capital losses.
Pre-incentive fee net operating income, expressed as a rate of
return on the value of our net assets at the end of the
immediately preceding fiscal quarter, is compared to a fixed
hurdle rate of 1.75% per fiscal quarter. If market
interest rates rise, we may be able to invest our funds in debt
instruments that provide for a higher return, which would
increase our pre-incentive fee net operating income and make it
easier for TTG Advisers to surpass the fixed hurdle rate and
receive an incentive fee based on such net operating income. Our
pre-incentive fee net operating income used to calculate this
part of the incentive fee is also included in the amount of our
total assets (excluding Non-Eligible Assets, but including
assets purchased with borrowed funds that are not Non-Eligible
Assets) used to calculate the 2% Base Management Fee.
Under the Advisory Agreement, we pay TTG Advisers an incentive
fee with respect to our pre-incentive fee net operating income
in each fiscal quarter as follows:
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no incentive fee in any fiscal quarter in which our
pre-incentive fee net operating income does not exceed the
hurdle rate;
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100% of our pre-incentive fee net operating income with respect
to that portion of such pre-incentive fee net operating income,
if any, that exceeds the hurdle rate but is less than 2.1875% in
any fiscal quarter. We refer to this portion of our
pre-incentive fee net operating income (which exceeds the hurdle
rate but is less than 2.1875%) as the
catch-up.
The
catch-up
is meant to provide our investment adviser with 20% of our
pre-incentive fee net operating income as if a hurdle rate did
not apply if this net operating income exceeds 2.1875% in any
fiscal quarter; and
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20% of the amount of our pre-incentive fee net operating income,
if any, that exceeds 2.1875% in any fiscal quarter.
|
These calculations are appropriately pro rated for any period of
less than three months and adjusted for any share issuances or
repurchases during the current quarter.
The second part of the incentive fee (the Capital Gains
Fee) is determined and payable in arrears as of the end of
each fiscal year (or upon termination of the Advisory Agreement,
as of the termination date), commencing with the fiscal year
ending on October 31, 2007, and equals 20% of: (i) the
Companys aggregate net realized capital gains, during such
fiscal year, on the Companys investments made after
November 1, 2003 (the Companys New
Portfolio) (exclusive of any realized gains subject to an
SPV Incentive Allocation, as defined below); minus (ii) the
cumulative aggregate unrealized capital depreciation of the
Companys New Portfolio calculated from November 1,
2003. For purposes of this calculation, neither the
Companys contribution of an investment to MVC Partners nor
the Companys distribution of an investment to the
Companys stockholders shall be deemed to be a realization
event.
In addition, the Company has authorized TTG Advisers to create
or arrange for the creation of one or more special purpose
vehicles for which it may serve as the general partner or
managing member for purposes of making investments on behalf of
the Company (each, an SPV). It is proposed that TTG
Advisers, in its role as the general partner or managing member
of an SPV, receive an incentive allocation equal to 20% of the
net profits of the SPV (the SPV Incentive
Allocation). In no event would any SPV Incentive
Allocation received by TTG Advisers cause the total compensation
received by TTG Advisers under the Advisory Agreement to exceed
the limits imposed by the Investment Advisers Act of 1940, as
amended.
92
Notwithstanding the foregoing, in no event shall the sum of the
Capital Gains Fee and the SPV Incentive Allocation, if any, for
any fiscal year exceed:
(i) 20% of (a) the Companys cumulative realized
capital gains on the Companys investments (the
Companys Total Portfolio) (including any
realized gains attributable to an SPV Incentive Allocation),
minus (b) the sum of the Companys cumulative realized
capital losses on, and aggregate unrealized capital depreciation
of, the Companys Total Portfolio; minus (ii) the
aggregate amount of Capital Gains Fees paid and the value of SPV
Incentive Allocations made in all prior years (the
Cap). For purposes of calculating the Cap:
(i) the initial value of any investment held by the Company
on November 1, 2003 shall equal the fair value of such
investment on November 1, 2003; and (ii) the initial
value of any investment made by the Company after
November 1, 2003 shall equal the accreted or amortized cost
basis of such investment. Furthermore, in the event that the
Capital Gains Fee for any fiscal year exceeds the Cap
(Uncollected Capital Gains Fees), all or a portion
of such amount shall be accrued and payable to TTG Advisers
following any subsequent fiscal year in which the Advisory
Agreement is in effect, but only to the extent the
Capital Gains Fee, plus the amount of Uncollected Capital Gains
Fees, each calculated as of the end of such subsequent fiscal
year, do not exceed the Cap. Any remaining Uncollected Capital
Gains Fees shall be paid following subsequent fiscal years in
accordance with the same process, provided the Advisory
Agreement is in effect during such fiscal year.
Examples
of Incentive Fee Calculations
Example
1: Income Related Portion of Incentive Fee(1):
Assumptions
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Hurdle rate(2) = 1.75%
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Management fee(3) = 2.00%
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Other expenses (legal, accounting, custodian, transfer agent,
etc.)(4) = maximum value of 3.25% of the Companys average
net asset value including management fee
|
Alternative
1
Additional
Assumptions
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Operating income (including interest, dividends, fees, etc.) =
4.00%
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Pre-incentive fee net operating income
(operating income − (management fee + other expenses)) =
.075%
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Pre-incentive fee net operating income does not exceed hurdle
rate, therefore there is no incentive fee.
Alternative
2
Additional
Assumptions
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Operating income (including interest, dividends, fees, etc.) =
5.25%
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Pre-incentive fee net operating income
(operating income − (management fee + other expenses)) =
2.00%
|
Pre-incentive fee net operating income exceeds hurdle rate,
therefore there is an incentive fee.
|
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Incentive Fee
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=
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100% ×
Catch-Up
+ the greater of 0% AND (20% × (pre-incentive fee
net operating income − 2.1875)%
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=
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(100% × (2.00% − 1.75%)) + 0%
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=
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0.25%
|
93
Alternative
3
Additional
Assumptions
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Operating income (including interest, dividends, fees, etc.) =
6.00%
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Pre-incentive fee net operating income
(operating income − (management fee + other expenses)) =
2.75%
|
Pre-incentive fee net operating income exceeds hurdle rate,
therefore there is an incentive fee.
|
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Incentive Fee
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=
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100% ×
Catch-Up
+ the greater of 0% AND (20% × (pre-incentive fee
net operating income − 2.1875)%
|
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=
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(100% × (2.1875% − 1.75%)) + (20% × (2.75%
− 2.1875%))
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=
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0.4375% + (20% × 0.5625)%
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=
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0.4375% + 0.1125%
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=
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0.55%
|
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|
(1) |
|
The hypothetical amount of pre-incentive fee net operating
income shown is based on a percentage of total net assets. |
|
(2) |
|
Represents 1.75% annualized hurdle rate. |
|
(3) |
|
Represents 2.00% annualized management fee. |
|
(4) |
|
Excludes offering expenses. |
Example
2: Capital Gains Portion of Incentive Fee
Assumptions
Year 1 of the Advisory Agreement:
$20 million investment made in Company A (Investment
A), and $30 million investment made in Company B
(Investment B).
Legacy Investment I (Legacy I) is assumed from prior
management and has a cost basis of $5 million, and had a
fair market value (FMV) of $2 million at
November 1, 2003.
Legacy Investment II (Legacy II) is assumed
from prior management and has a cost basis of $3 million,
and had a FMV of $0 at November 1, 2003.
Year 2 of the Advisory Agreement:
Investment A is sold for $50 million, FMV of Investment B
is $32 million, FMV of Legacy I is $0 and FMV of
Legacy II is $2 million.
Year 3 of the Advisory Agreement:
FMV of Investment B is $32 million, Legacy I is written off
for no proceeds and a $5 million loss is realized and FMV
of Legacy II is $2 million.
Year 4 of the Advisory Agreement:
Investment B is sold for $32 million and Legacy II is
sold for $5 million.
94
|
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Compensation Calculation (20% of: net realized capital
gains, during the fiscal year, on the Companys New
Portfolio minus the aggregate unrealized capital
depreciation on the Companys New Portfolio calculated from
November 1, 2003)
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|
|
Cap Calculation ((a) 20% of (i) cumulative net realized
capital gains, calculated based on the FMV of investments on
November 1, 2003 for investments made prior to that date and on
accreted/amortized cost for those investments made after
November 1, 2003, on the Companys Total Portfolio
minus (ii) the cumulative unrealized capital depreciation
on the Companys Total Portfolio calculated based on the
FMV of investments on November 1, 2003 for investments made
prior to that date and on accreted/amortized cost for those
investments made after November 1, 2003; minus, (b) the
aggregate amount of Capital Gains Fees paid in all prior years)
|
|
|
Actual Payout (the Compensation Calculation plus any
uncollected fees to the extent they do not exceed the Cap
Calculation)
|
|
Year 1
|
|
|
20% of: ($0 realized capital gains on the Companys New
Portfolio minus $0 realized losses on the Companys New
Portfolio) minus ($0 aggregate unrealized capital
depreciation on the Companys New Portfolio) = $0
|
|
|
(a) 20% of (i) ($0 cumulative net realized capital gains on the
Companys Total Portfolio), minus (ii) ($2 million
cumulative unrealized capital depreciation (based on Legacy
Is FMV value at 11/1/03) on the Companys Total
Portfolio); minus, (b) ($0 in Capital Gains Fees paid in
all prior years) = $(2 million)
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$0
|
|
Year 2
|
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|
20% of: ($30 million realized capital gains on the
Companys New Portfolio minus $0 realized losses on the
Companys New Portfolio) minus ($0 aggregate
unrealized capital depreciation on the Companys New
Portfolio) = $6 million
|
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(a) 20% of (i) ($30 million cumulative net realized capital
gains on the Companys Total Portfolio) minus (ii)
($2 million cumulative unrealized capital depreciation (based on
Legacy Is FMV value at 11/1/03) on the Companys
Total Portfolio); minus, (b) ($0 in Capital Gains Fees
paid in all prior years) = $5.6 million
|
|
|
$5.6 million ($400,000 (i.e., the
Compensation Calculation minus the Cap Calculation) is
uncollected)
|
|
95
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|
|
|
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|
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|
Year 3
|
|
|
20% of: ($0 realized capital gains on the Companys New
Portfolio minus $0 realized losses on the Companys New
Portfolio) minus ($0 aggregate unrealized capital
depreciation on the Companys New Portfolio) = $0
|
|
|
(a) 20% of (i) ($28 million cumulative net realized capital
gains on the Companys Total Portfolio ($30 million on
Investment A and a realized loss of $2 million on Legacy I based
on the FMV on 11/1/2003)) minus (ii) ($0 cumulative
unrealized capital depreciation on the Companys Total
Portfolio); minus, (b) ($5.6 million in Capital Gains
Fees paid in all prior years) = $0
|
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|
$0 ($400,000 earned in Year 2 remains uncollected)
|
|
Year 4
|
|
|
20% of: ($2 million realized capital gains on the Companys
New Portfolio minus $0 realized losses on the Companys New
Portfolio) minus ($0 aggregate unrealized capital
depreciation on the Companys New Portfolio) =
$400,000
|
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|
(a) 20% of (i) ($35 million cumulative net realized capital
gains on the Companys Total Portfolio ($30 million on
Investment A, a $2 million realized gain on Investment B, a $5
million realized gain on Legacy II based on the FMV on
11/1/2003 and a realized loss of $2 million on Legacy I based on
the FMV on 11/1/2003)) minus (ii) ($0 cumulative
unrealized capital depreciation on the Companys Total
Portfolio); minus, (b) ($5.6 million in Capital Gains
Fees paid in all prior years) = $1.4 million
|
|
|
$800,000 ($400,000 earned in Year 4 and the $400,000 that
was uncollected in Year 2 is paid out.)
|
|
Payment
of our expenses
Pursuant to the Advisory Agreement, all investment professionals
of TTG Advisers and its staff, when and to the extent engaged in
providing services required to be provided by TTG Advisers under
the Advisory Agreement, and the compensation and routine
overhead expenses of such personnel allocable to such services,
are provided and paid for by TTG Advisers and not by the
Company, except that costs or expenses relating to the following
items are borne by the Company: (i) the cost and expenses
of any independent valuation firm; (ii) expenses incurred
by TTG Advisers payable to third parties, including agents,
consultants or other advisors, in monitoring financial and legal
affairs for the Company and in monitoring the Companys
investments and performing due diligence on its prospective
portfolio companies, provided, however, the retention by
TTG Advisers of any third party to perform such services shall
require the advance approval of the Board (which approval shall
not be unreasonably withheld) if the fees for such services are
expected to exceed $30,000; once the third party is approved,
any expenditure to such third party will not require additional
approval from the Board; (iii) interest payable on debt and
other direct borrowing costs, if any, incurred to finance the
Companys investments or to maintain its tax status;
(iv) offerings of the Companys common stock and other
securities; (v) investment advisory and management fees;
(vi) fees and payments due under any administration
agreement between the Company and its administrator;
(vii) transfer agent and custodial fees;
(viii) federal and state registration fees; (ix) all
costs of registration and listing the Companys shares on
any securities exchange; (x) federal, state and local
taxes; (xi) Independent Directors fees and expenses;
(xii) costs of preparing and filing reports or other
documents required by governmental bodies (including the SEC);
(xiii) costs of any reports, proxy statements or other
notices to stockholders, including printing and mailing costs;
(xiv) the cost of the Companys fidelity bond,
directors and officers/errors and omissions liability insurance,
and any
96
other insurance premiums; (xv) direct costs and expenses of
administration, including printing, mailing, long distance
telephone, copying, independent auditors and outside legal
costs; (xvi) the costs and expenses associated with the
establishment of an SPV; (xvii) the allocable portion of
the cost (excluding office space) of the Companys Chief
Financial Officer, Chief Compliance Officer and Secretary in an
amount not to exceed $100,000, per year, in the aggregate;
(xviii) subject to a cap of $150,000 in any fiscal year of
the Company, fifty percent of the unreimbursed travel and other
related (e.g., meals) out-of-pocket expenses (subject to
item (ii) above) incurred by TTG Advisers in sourcing
investments for the Company; provided that, if the
investment is sourced for multiple clients of TTG Advisers, then
the Company shall only reimburse fifty percent of its allocable
pro rata portion of such expenses; and (xix) all other
expenses incurred by the Company in connection with
administering the Companys business (including travel and
other out-of-pocket expenses (subject to item (ii) above)
incurred in providing significant managerial assistance to a
portfolio company). Notwithstanding the foregoing, absent the
consent of the Board, any fees or income earned, on the
Companys behalf, by any officer, director, employee or
agent of TTG Advisers in connection with the monitoring or
closing of an investment or disposition by the Company or for
providing managerial assistance to a portfolio company
(e.g., serving on the board of directors of a portfolio
company) shall inure to the Company.
The
Expense Cap
In addition, for each of the next two full fiscal years
(i.e., fiscal years 2007 and 2008), TTG Advisers has
agreed to absorb or reimburse operating expenses of the Company
(promptly following the completion of such year), to the extent
necessary to limit the Companys Expense Ratio for such
year to 3.25% (the Expense Cap); provided
however, if, on October 31, 2007, the Companys
net assets have not increased by at least 5% from
October 31, 2006, the dollar value of the Expense Cap shall
increase by 5% for fiscal year 2008. For purposes of this
paragraph, the Companys Expense Ratio is
calculated as of October 31 of any such year and mean:
(i) the consolidated expenses of the Company (which
expenses include any amounts payable to TTG Advisers under the
Base Management Fee, but exclude the amount of any interest,
taxes, incentive compensation, and extraordinary expenses
(including, but not limited to, any legal claims and liabilities
and litigation costs and any indemnification related thereto,
and the costs of any spin-off or other similar type transaction
contemplated by the Advisory Agreement)), as a percentage of
(ii) the average net assets of the Company (i.e.,
average consolidated assets less average consolidated
liabilities) during such fiscal year as set forth in the
Companys financial statements contained in the
Companys annual report on
Form 10-K.
Indemnification
The Advisory Agreement provides that, absent willful
misfeasance, bad faith or gross negligence in the performance of
its duties or by reason of the reckless disregard of its duties
and obligations, TTG Advisers, its members and their respective
officers, managers, partners, agents, employees, controlling
persons, members and any other person or entity affiliated with
it (collectively, the Indemnified Parties) are
entitled to indemnification from the Company for any damages,
liabilities, costs and expenses (including reasonable
attorneys fees and amounts reasonably paid in settlement)
arising from the rendering of TTG Advisers services under
the Advisory Agreement or otherwise as an investment adviser of
the Company. In addition, TTG Advisers has agreed to indemnify
the Company for losses or damages arising out of the willful
misfeasance, bad faith or gross negligence in the performance of
an Indemnified Partys duties or by reason of the reckless
disregard of its duties and obligations under the Advisory
Agreement.
The
Spin-Off of a Subsidiary and Opportunities to Manage Other
Entities
As consideration for the Company entering into the Advisory
Agreement, TTG Advisers has acknowledged the parties
objective of having the Companys stockholders participate
in a portion of the revenues generated by private investment
funds managed by TTG Advisers. The Advisory Agreement provides
for the pursuit of a spin-off of MVC Partners to all of our
shareholders (on a pro-rata basis) (the Spin-Off).
It is contemplated that, after the Spin-Off, MVC Partners would,
together with TTG Advisers, own (directly or indirectly) the
manager
and/or
general partner (or managing member) of private investment
vehicles (a Private Fund General Partner). As a
result, our stockholders, as stockholders of the spun-off MVC
Partners, may have the opportunity to participate in a
97
portion of the management fees and incentive compensation
generated by these vehicles. Further, the Advisory Agreement
provides that a Private Fund General Partner would be a
general partner (or managing member) of any private investment
fund or other pooled investment vehicle formed by TTG Advisers
that has an investment objective of investing in Targeted
Investments.
The illustrations below depict the proposed structure of the
Company before and after the Spin-Off:
Before
Spin-Off
98
Aftre
Spin-Off
Under this structure, Private Fund General Partners would
be entitled to the entire portion of incentive allocations made
by the investment funds they serve (provided that, a portion of
the allocation may be allocated to third parties not affiliated
with, and independent of, TTG Advisers). It has not yet been
determined the extent to which MVC Partners would share the
revenues generated from any Private Fund General Partner
and this percentage may vary depending on the nature and size of
the vehicles to be managed, among other factors. Furthermore,
the Board recognizes that following the Spin-Off, MVC Partners
may offer its shares to investors other than the Companys
stockholders which could potentially have the effect of diluting
our stockholders participation in the revenue generated by
Private Fund General Partners.
Following the Spin-Off, MVC Partners would be expected to
operate as a public company subject to the oversight and control
of a board of directors, a majority of whose members would be
independent of TTG Advisers. Details regarding the Spin-Off are
in the process of being considered and its specific terms will
be subject to the due diligence of, and the consideration and
approval by, the Board. It is expected that the material terms
will be disclosed in a registration statement filed with the
SEC. However, there can be no assurance that the Board will
approve the specific terms of the Spin-Off. As a result, it is
possible that the Board may determine not to proceed with the
Spin-Off and there can be no assurance when, or if, the Spin-Off
will occur.
99
Principal
Executive Officers
The following individual is the principal executive officer of
TTG Advisers. The principal business address of such person is
287 Bowman Avenue, Purchase, New York 10577.
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|
|
|
|
Name
|
|
Position
|
|
Principal Occupation
|
|
Michael Tokarz
|
|
Manager
|
|
The principal occupations of Mr.
Tokarz is set forth under
Management above.
|
Duration
and Termination of Agreement
The Advisory Agreement was unanimously approved by the
Independent Directors on May 30, 2006 and by shareholders
at the annual meeting of shareholders on September 7, 2006.
It remains in effect for two years after the Effective Date, and
thereafter shall continue automatically for successive annual
periods, provided that such continuance is specifically 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 Companys directors who are not parties to
the Advisory Agreement and are not interested
persons (as such term is defined in Section 2(a)(19)
of the 1940 Act) of either the Company or TTG Advisers, in
accordance with the requirements of the 1940 Act. The Advisory
Agreement may be terminated at any time, without the payment of
any penalty, upon 60 days written notice, by:
(i) TTG Advisers in the event (a) a majority of the
current Independent Directors cease to serve as Directors of the
Company or (b) the Company undergoes a change in
control (as such term is defined by
Section 2(a)(9) of the 1940 Act) not caused by TTG
Advisers; (ii) TTG Advisers, following the initial two year
term of the Advisory Agreement; (iii) by the vote of the
stockholders holding a majority of the outstanding voting
securities of the Company (as such term is defined by
Section 2(a)(42) of the 1940 Act); or (iv) by the
action of the Companys Directors. Furthermore, the
Advisory Agreement shall automatically terminate in the event of
its assignment (as such term is defined for purposes
of Section 15(a)(4) of the 1940 Act).
Mr. Tokarzs
Commitment to the Company
TTG Advisers has entered into an agreement with Mr. Tokarz
pursuant to which Mr. Tokarz agreed to serve as the
portfolio manager primarily responsible for the day-to-day
management of the Companys portfolio for the full
twenty-four calendar months following the Effective Date, absent
the occurrence of certain extraordinary events. In addition, the
Company and TTG Advisers have acknowledged that Mr. Tokarz
is the current Portfolio Manager of the Company and TTG Advisers
has covenanted that throughout the term of the Advisory
Agreement it will not undertake any action that would cause
Mr. Tokarz to cease to serve as the Companys primary
Portfolio Manager, including, without limitation, transferring
any controlling interest in TTG Advisers to another entity or
person.
100
CONTROL
PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of October 31, 2007, there were no persons that owned
25% or more of our outstanding voting securities, and no person
would be deemed to control us, as such term is defined in the
1940 Act.
The following table sets forth, as of October 31, 2007,
information with respect to the beneficial ownership of our
common stock by the shareholders who own more than 5% of our
outstanding shares of common stock. Unless otherwise indicated,
we believe that each beneficial owner set forth in the table has
sole voting and investment power. Beneficial ownership is
determined in accordance with the rules of the SEC and includes
voting or investment power with respect to the securities.
Ownership information for those persons who beneficially own 5%
or more of our shares of common stock is based upon schedules
filed by such persons with the SEC.
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
Percentage of
|
|
Shareholder Name and Address
|
|
Shares Owned
|
|
|
Company Held
|
|
|
The Anegada Master Fund Ltd
The Cuttyhunk Fund Limited
Tonga Partners, L.P.
TE Cannell Portfolio, Ltd.
c/o Cannell
Capital LLC
P.O. Box 3459
240 E. Deloney Ave
Jackson, WY 83001
|
|
|
3,111,800(1
|
)
|
|
|
12.82
|
%
|
Western Investment, LLC
Western Investment Hedged Partners LP
Western Investment Institutional Partners LLC
Western Investment Activism Partners LLC
Western Investment Total Return Master Fund Ltd. and
Arthur D. Lipson
c/o Western
Investment LLC
7050 S. Union Park Center
Suite 590
Midvale, UT 84047
|
|
|
1,375,900(3
|
)
|
|
|
5.67
|
%
|
Millenco, L.P.
Millennium Global Estate, L.P.
Millennium USA, L.P.
Millennium Partners, L.P. and
Millennium International, Ltd.
c/o Millennium
Management, LLC
666 Fifth Avenue, 8th Floor
New York, NY 10103
|
|
|
1,469,770(4
|
)
|
|
|
6.06
|
%
|
Wynnefield Partners Small Cap Value, L.P.
Wynnefield Partners Small Cap Value, L.P. I
Wynnefield Small Cap Value Offshore Fund, Ltd.
Channel Partnership II, L.P.
Wynnefield Capital, Inc. Profit Sharing and Money Purchase
Plans
Wynnefield Capital Management, LLC
Wynnefield Capital, Inc.
Nelson Obus
c/o Wynnefield
Capital Management LLC
450 Seventh Avenue
Suite 509
New York, NY 10123
|
|
|
1,280,200(5
|
)
|
|
|
5.28
|
%
|
Interested Directors
|
|
|
|
|
|
|
|
|
Warren Holtsberg
|
|
|
3,500
|
|
|
|
*
|
|
Michael Tokarz
|
|
|
452,525
|
|
|
|
1.86
|
%
|
101
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
Percentage of
|
|
Shareholder Name and Address
|
|
Shares Owned
|
|
|
Company Held
|
|
|
Independent Directors
|
|
|
|
|
|
|
|
|
Emilio Dominianni
|
|
|
15,641.594
|
|
|
|
*
|
|
Gerald Hellerman
|
|
|
31,219.2657
|
|
|
|
*
|
|
Robert Knapp(6)
|
|
|
1,678,711
|
|
|
|
6.92
|
%
|
William Taylor
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|
|
26,235.9138
|
|
|
|
|
|
Executive Officers
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|
|
|
|
|
|
|
|
Bruce Shewmaker
|
|
|
5751.3308
|
|
|
|
*
|
|
Peter Seidenberg
|
|
|
2291.7862
|
|
|
|
*
|
|
Scott Schuenke
|
|
|
646.1231
|
|
|
|
*
|
|
Jaclyn Shapiro
|
|
|
1,150
|
|
|
|
*
|
|
All directors and executive officers as a group (9 in
total)
|
|
|
2,217,671.67
|
|
|
|
9.14
|
%
|
|
|
|
* |
|
Less than 1%. |
|
(1) |
|
Based upon information contained in Form 4 filed with the
SEC on March 13, 2007. |
|
(2) |
|
Based upon information contained in Schedule 13G filed with
the SEC on June 27, 2007. |
|
(3) |
|
Based upon information contained in Schedule 13G/A filed
with the SEC on February 13, 2007. |
|
(4) |
|
Based upon information provided by Millennium Partners, L.P. |
|
(5) |
|
Based upon information contained in Schedule 13G/A filed
with the SEC on February 14, 2007. |
|
(6) |
|
1,469,770 shares are owned by Millennium Partners, L.P.
and/or its affiliates (Millennium). Mr. Knapp
is Managing Director of Ironsides Partners LLC, which manages a
securities account for Millennium. Mr. Knapp has disclaimed
all beneficial ownership in these shares to the extent permitted
under applicable law. |
FEDERAL
INCOME TAX MATTERS
This summary of certain aspects of the federal income tax
treatment of the Company and its shareholders is based upon the
Code, judicial decisions, Treasury Regulations and rulings in
existence on the date hereof, all of which are subject to
change. This summary does not discuss the impact of various
proposals to amend the Code which could change certain of the
tax consequences of an investment in shares of our common stock.
You should consult your own tax adviser with respect to the tax
considerations applicable to the holding of shares of our common
stock. This discussion does not address all aspects of federal
income taxation relevant to holders of our common stock in light
of their personal circumstances, or to certain types of holders
subject to special treatment under federal income tax laws,
including foreign taxpayers. This discussion does not address
any aspects of foreign, state or local tax laws. The Company is
actively managed and its investment strategies may be employed
without regard to the tax consequences of the Companys
transactions on the Companys shareholders.
We intend to continue to qualify for treatment as a RIC under
Subchapter M of the Code and for the favorable tax treatment
accorded RICs. In order to permit us to deduct from our taxable
income dividends we distribute to our shareholders, in addition
to meeting other requirements, we must distribute for each
taxable year at least 90% of (i) our investment company
taxable income (consisting generally of net investment income
from interest and dividends and net realized short term capital
gains) and (ii) our net tax-exempt interest, if any. We
must also meet several additional requirements, including:
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At least 90% of our gross income for each taxable year must be
from dividends, interest, payments with respect to securities
loans, gains from sales or other dispositions of stock,
securities or foreign currencies, other income derived with
respect to our business of investing in such stock, securities
or currencies, or net income derived from an interest in a
qualified publicly traded partnership (generally, a
publicly traded partnership other than one where at least 90% of
its gross income is gross income that would otherwise be
qualifying gross income for a RIC),
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102
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As diversification requirements, as of the close of each quarter
of our taxable year:
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at least 50% of the value of our assets must consist of cash,
cash items, U.S. government securities, the securities of
other RICs and other securities to the extent that (1) we
do not hold more than 10% of the outstanding voting securities
of an issuer of such other securities and (2) such other
securities of any one issuer do not represent more than 5% of
our total assets, and
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no more than 25% of the value of our total assets may be
invested in the securities of one issuer (other than
U.S. government securities or the securities of other
RICs), of two or more issuers that are controlled by us and are
engaged in the same or similar or related trades or businesses,
or of one or more qualified publicly traded partnerships.
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If we were unable to qualify for treatment as a RIC, we would be
subject to tax on our ordinary income and realized capital gains
(including gains realized on the distribution of appreciated
property) at regular corporate rates. We would not be able to
deduct distributions to shareholders, nor would they be required
to be made. Distributions would be taxable to our shareholders
as ordinary dividend income to the extent of our current and
accumulated earnings and profits. Subject to certain limitations
under the Code, corporate distributees would be eligible for the
dividends received deduction and individual distributees would
qualify for the reduced tax rates applicable to qualified
dividends under the Code. Distributions in excess of
current and accumulated earnings and profits would be treated
first as a return of capital to the extent of the
shareholders tax basis, and any remaining distributions
would be treated as a gain realized from the sale or exchange of
property. If the Company fails to meet the requirements of
Subchapter M for more than two consecutive taxable years and
then seeks to requalify under Subchapter M, it may be required
to recognize gain to the extent of any unrealized appreciation
on its assets. In that case, any gain recognized by the Company
likely would be distributed to shareholders as a taxable
distribution.
If we qualify as a RIC and distribute to shareholders each year
in a timely manner the sum of (i) at least 90% of our
investment company taxable income as defined in the
Code and (ii) at least 90% of our net tax-exempt interest,
if any, we will not be subject to federal income tax on the
portion of our taxable income and gains we distribute to
shareholders. In addition, if we distribute in a timely manner
the sum of (i) 98% of our ordinary income for each calendar
year, (ii) 98% of our capital gain net income for the
one-year period ending October 31 in that calendar year and
(iii) any untaxed income or gains not distributed in prior
years, we will not be subject to the 4% nondeductible federal
excise tax on certain undistributed income of RICs. We will be
subject to regular corporate income tax (currently at rates up
to 35%) on any undistributed net investment income and any
undistributed net capital gain. We will also be subject to
alternative minimum tax, but any tax preference items would be
apportioned between us and our shareholders in the same
proportion that dividends (other than capital gain dividends)
paid to each shareholder bear to our taxable income determined
without regard to the dividends paid deduction.
The Companys net realized capital gains from securities
transactions will be distributed only after reducing such gains
by the amount of any available capital loss carryforwards.
Capital losses may be carried forward to offset any capital
gains for eight years, after which any undeducted capital loss
remaining is lost as a deduction. As of October 31, 2006,
the Company had a net capital loss carryforward of $73,524,707
of which $28,213,867 will expire in the year 2010, $4,220,380
will expire in the year 2011, $37,794,910 will expire in the
year 2012 and $3,295,550 will expire in the year 2013. To the
extent future capital gains are offset by capital loss
carryforwards, such gains are not subject to the distribution
provisions described above. Capital loss carryforwards may be
subject to additional limitations. As of October 31, 2006,
the Company also had net unrealized capital losses of
approximately $11.6 million. The deductibility of such
losses upon realization may be subject to limitations as a
result of the capital share activity.
If we acquire debt obligations that were originally issued at a
discount, or that bear interest at rates that are not fixed (or
are not certain qualified variable rates) or that is
not payable, or payable at regular intervals over the life of
the obligation, we will be required to include in taxable income
each year a portion of the original issue discount
that accrues over the life of the obligation, regardless of
whether the income is received by us, and may be required to
make distributions in order to continue to qualify for favorable
RIC tax treatment or to avoid the 4% federal excise tax on
certain undistributed income. In this event, we may be required
to sell temporary investments or other assets to meet the
distribution requirements.
103
For any period during which we qualify for treatment as a RIC
for federal income tax purposes, distributions to shareholders
attributable to our ordinary income (including dividends,
interest and original issue discount) and net realized
short-term capital gains generally will be taxable as ordinary
income to shareholders to the extent of our current or
accumulated earnings and profits, except to the extent the we
receive qualified dividends and designate such
amounts for individual shareholders as qualified
dividends. The lower tax rate for qualified
dividends (currently a maximum rate of 15%) will apply
only if the individual shareholder holds shares in the Company,
and the Company holds shares in the dividend-paying corporation,
at least 61 days during a prescribed period. The prescribed
period is the
121-day
period beginning 60 days before the date on which the
shareholder or the Company, as the case may be, becomes entitled
to receive the dividend. In determining the holding period for
this purpose, any period during which the recipients risk
of loss is offset by means of options, short sales or similar
transactions is not counted. Additionally, an individual
shareholder would not benefit to the extent it is obligated
(e.g., pursuant to a short sale) to make related payments
with respect to positions in substantially similar or related
property.
Corporate shareholders are generally eligible for the 70%
dividends-received deduction with respect to ordinary income
(but not capital gain) dividends to the extent such amount
designated by us does not exceed the dividends received by us
from domestic corporations. A corporate shareholders
dividends-received deduction will be disallowed unless it holds
shares in the Company, and the Company holds shares in the
dividend-paying corporation, at least 46 days during the
91-day
period beginning 45 days before the date on which the
shareholder or the Company, as the case may be, becomes entitled
to receive the dividend. In determining the holding period for
this purpose, any period during which the recipients risk
of loss is offset by means of options, short sales or similar
transactions is not counted. Additionally, a corporate
shareholder would not benefit to the extent it is obligated
(e.g., pursuant to a short sale) to make related
payments with respect to positions in substantially similar or
related property. Furthermore, the dividends-received deduction
will be disallowed to the extent a corporate shareholders
investment in shares of the Company, or the Companys
investment in the shares of the dividend-paying corporation, is
financed with indebtedness.
Distributions in excess of our earnings and profits will first
be treated as a return of capital which reduces the
shareholders adjusted basis in his or her shares of common
stock and then as gain from the sale of shares of our common
stock. Distributions of our net realized long-term capital gains
(designated by us as capital gain dividends) will be taxable to
shareholders as long-term capital gains regardless of the
shareholders holding period in his or her common stock.
Any dividend declared by us in October, November or December of
any calendar year, payable to shareholders of record on a
specified date in such a month and actually paid during January
of the following year, will be treated as if it were paid by us
and received by the shareholders on December 31 of the year in
which it was declared. In addition, we may elect to relate a
dividend back to the prior taxable year if we (i) declare
such dividend prior to the due date (including extensions) for
filing our return for that taxable year, (ii) make the
election in that return, and (iii) distribute the amount in
the 12-month
period following the close of the taxable year but not later
than the first regular dividend payment following the
declaration. Any such election will not alter the general rule
that a shareholder will be treated as receiving a dividend in
the taxable year in which the distribution is made (subject to
the October, November, December rule described above).
To the extent that we retain any capital gains, we may designate
them as deemed distributions and pay a tax thereon
for the benefit of our shareholders. In that event, the
shareholders must report their share of retained realized
long-term capital gains on their individual tax returns as if
the share had been received, and may report a credit on such
returns for the tax paid thereon by us. The amount of the deemed
distribution net of such tax is then added to the
shareholders cost basis for his or her common stock. Since
we expect to pay tax on capital gains at regular corporate tax
rates and the maximum rate payable by individuals on such gains
can currently be as low as 15%, the amount of credit that
individual shareholders may report is expected to exceed the
amount of tax that they would be required to pay on the deemed
distributions. Shareholders who are not subject to federal
income tax or are unable to utilize fully the tax credit
attributable to the deemed distribution should be able to file a
return on the appropriate form and claim a refund for the excess
credit.
Section 1202 of the Code permits the exclusion, for federal
income tax purposes, of 50% of any gain (subject to certain
limitations) realized upon the sale or exchange of
qualified small business stock held for more than
five
104
years. Generally, qualified small business stock is stock of a
small business corporation acquired directly from the issuing
corporation, which must (i) at the time of issuance and
immediately thereafter have assets of not more than
$50 million and (ii) throughout substantially all of
the holders holding period for the stock be actively
engaged in the conduct of a trade or business not excluded by
law. If we acquire qualified small business stock, hold such
stock for five years and dispose of such stock at a profit, a
noncorporate shareholder who held shares of our common stock at
the time we purchased the qualified small business stock and at
all times thereafter until we disposed of the stock would be
entitled to exclude from such shareholders taxable income
50% of such shareholders share of such gain. Seven percent
(7%) of any amount so excluded would currently be treated as a
preference item for alternative minimum tax purposes. Comparable
rules apply under the qualified small business stock
rollover provisions of section 1045 of the
Code, under which gain otherwise reportable by individuals with
respect to sales by us of qualified small business stock held
for more than six months can be deferred if we reinvest the
sales proceeds within 60 days in other qualified small
business stock.
A shareholder may recognize taxable gain or loss if the
shareholder sells or exchanges such shareholders shares of
common stock. Any gain arising from the sale or exchange of
common stock generally will be treated as capital gain or loss
if the common stock is held as a capital asset, and will be
treated as long-term capital gain or loss if the shareholder has
held his or her shares of common stock for more than one year.
However, any capital loss arising from a sale or exchange of
shares of common stock held for six months or less will be
treated as a long-term capital loss to the extent of the amount
of long-term capital gain distributions received (or deemed to
be received) with respect to such shares of common stock.
Pursuant to recently issued Treasury Regulations directed at tax
shelter activity, taxpayers are required to disclose to the
Internal Revenue Service (the IRS) certain
information on Form 8886 if they participate in a
reportable transaction. A transaction may be a
reportable transaction based upon any of several
indicia with respect to a shareholder, including the existence
of significant book-tax differences or the recognition of a loss
in excess of certain thresholds. Under new legislation a
significant penalty is imposed on taxpayers who participate in a
reportable transaction and fail to make the required
disclosure. Investors should consult their own tax advisors
concerning any possible federal, state or local disclosure
obligations with respect to their investment in shares of the
Company.
We may be required to withhold U.S. federal income tax at
the rate of 28% of all taxable distributions payable to
shareholders who fail to provide us with their correct taxpayer
identification number or a certificate that the shareholder is
exempt from backup withholding, or if the IRS notifies us that
the shareholder is subject to backup withholding. Any amounts
withheld may be credited against a shareholders
U.S. federal income tax liability.
There is generally no withholding tax to a shareholder who is
not a U.S. person within the meaning of the Code
(Non-U.S. Person)
(i) on the portion of the Companys distributions that
consist of long-term capital gains realized by the Company, and
(ii) for the Companys taxable years beginning after
December 31, 2004 and before January 1, 2008, on the
portion of the Companys distributions that we designate as
short-term capital gain dividends or interest-related
dividends (generally, dividends attributable to net
interest income from U.S. sources that would not result in
U.S. withholding taxes if earned directly by the
shareholder), in all cases provided that such distributions are
not effectively connected with the conduct of a trade or
business in the U.S. by such
Non-U.S. Person.
However, the remaining distributions to
Non-U.S. Persons
are generally subject to a 30% withholding tax, unless reduced
or eliminated by treaty. Other rules may apply to
Non-U.S. Persons
(i) whose income from the Company is effectively connected
with the conduct of a U.S. trade or business by such
Non-U.S. Person
or (ii) to the extent the Company is a qualified investment
entity under Section 897(h) of the Code and makes
distributions if such distributions are attributable to
dispositions of United States real property interests
(e.g., investments in certain real estate investment
trusts); such investors should consult with their own advisers
regarding those rules.
If we distribute our net capital gains in the form of deemed
rather than actual distributions, a
Non-U.S. Person
will be entitled to a U.S. federal income tax credit or tax
refund equal to the shareholders allocable share of the
corporate-level tax we pay on the capital gains deemed to have
been distributed; however, in order to obtain the refund, the
Non-U.S. Person
must obtain a U.S. taxpayer identification number and file
a U.S. federal income tax return even if the
Non-U.S. Person
would not otherwise be required to obtain a U.S. taxpayer
identification number or file a U.S. federal income tax
return.
105
A tax-exempt U.S. person investing in the Company will not
realize unrelated business taxable income with respect to an
unleveraged investment in shares. Tax-exempt U.S. persons
are urged to consult their own tax advisors concerning the
U.S. tax consequences of an investment in the Company.
From time to time, the Company may be considered under the Code
to be a nonpublicly offered regulated investment company. Under
Temporary Regulations, certain expenses of nonpublicly offered
regulated investment companies, including advisory fees, may not
be deductible by certain shareholders, generally including
individuals and entities that compute their taxable income in
the same manner as an individual (thus, for example, a qualified
pension plan is not subject to this rule). Such a
shareholders pro rata portion of the affected expenses,
including the management fee and incentive fee payable to the
manager, will be treated as an additional dividend to the
shareholder and will be deductible by such shareholder, subject
to the 2% floor on miscellaneous itemized deductions
and other limitations on itemized deductions set forth in the
Code. A nonpublicly offered regulated investment
company is a RIC whose shares are neither
(i) continuously offered pursuant to a public offering,
(ii) regularly traded on an established securities market
nor (iii) held by at least 500 persons at all times
during the taxable year.
Unless an exception applies, we will mail to each shareholder,
as promptly as possible after the end of each fiscal year, a
notice detailing, on a per distribution basis, the amounts
includible in such shareholders taxable income for such
year as net investment income, as net realized capital gains (if
applicable) and as deemed distributions of capital
gains, including taxes paid by us with respect thereto. In
addition, absent an exemption, the federal tax status of each
years distributions will be reported to the IRS.
Distributions may also be subject to additional state, local and
foreign taxes depending on each shareholders particular
situation. Shareholders should consult their own tax advisers
with respect to the particular tax consequences to them of an
investment in us.
Under our Plan, all cash distributions to shareholders will be
automatically reinvested in additional whole and fractional
shares of our common stock unless you elect to receive cash. For
federal income tax purposes, however, you will be deemed to have
constructively received cash and such amounts should be included
in your income to the extent such constructive distribution
otherwise represents a taxable dividend for the year in which
such distribution is credited to your account. The amount of the
distribution is the value of the shares of common stock acquired
through the dividend reinvestment plan.
CERTAIN
GOVERNMENT REGULATIONS
We operate in a highly regulated environment. The following
discussion generally summarizes certain government regulations.
Business Development Company. A business
development company is defined and subject to the regulations of
the 1940 Act. A business development company must be organized
in the United States for the purpose of investing in or lending
to primarily private companies and making managerial assistance
available to them. A business development company may use
capital provided by public shareholders and from other sources
to invest in long-term, private investments in businesses.
As a business development company, we may not acquire any asset
other than qualifying assets unless, at the time we
make the acquisition, the value of our qualifying assets
represent at least 70% of the value of our total assets. The
principal categories of qualifying assets relevant to our
business are:
(1) Securities purchased in transactions not involving any
public offering from the issuer of such securities, which issuer
(subject to certain limited exceptions) is an eligible portfolio
company, or from any person who is, or has been during the
preceding 13 months, an affiliated person of an eligible
portfolio company, or from any other person, subject to such
rules as may be prescribed by the SEC. An eligible
portfolio company is defined in the 1940 Act as any issuer
which:
(a) is organized under the laws of, and has its principal
place of business in, the United States;
(b) is not an investment company (other than a small
business investment company wholly owned by the business
development company) or a company that would be an investment
company but for certain exclusions under the 1940 Act; and
106
(c) satisfies any of the following:
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does not have any class of securities with respect to which a
broker or dealer may extend margin credit;
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is controlled by a business development company or a group of
companies including a business development company and the
business development company has an affiliated person who is a
director of the eligible portfolio company; or
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is a small and solvent company having total assets of not more
than $4 million and capital and surplus of not less than
$2 million.
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The SEC recently adopted
Rules 2a-46
and 55a-1
under the 1940 Act, which together expand the foregoing
definition of eligible portfolio company to include,
among others, U.S. operating companies that do not have a
class of securities listed on a national exchange.
(2) Securities of any eligible portfolio company which we
control.
(3) Securities purchased in a private transaction from a
U.S. issuer that is not an investment company or from an
affiliated person of the issuer, or in transactions incident
thereto, if the issuer is in bankruptcy and subject to
reorganization or if the issuer, immediately prior to the
purchase of its securities was unable to meet its obligations as
they came due without material assistance other than
conventional lending or financing arrangements.
(4) Securities of an eligible portfolio company purchased
from any person in a private transaction if there is no ready
market for such securities and we already own 60% of the
outstanding equity of the eligible portfolio company.
(5) Securities received in exchange for or distributed on
or with respect to securities described in (1) through
(4) above, or pursuant to the exercise of warrants or
rights relating to such securities.
(6) Cash, cash equivalents, U.S. Government securities
or high-quality debt maturing in one year or less from the time
of investment.
To include certain securities described above as qualifying
assets for the purpose of the 70% test, a business development
company must make available to the issuer of those securities
significant managerial assistance such as providing significant
guidance and counsel concerning the management, operations, or
business objectives and policies of a portfolio company, or
making loans to a portfolio company. We offer to provide
managerial assistance to each of our portfolio companies.
As a business development company, we are entitled to issue
senior securities in the form of stock or senior securities
representing indebtedness, including debt securities and
preferred stock, as long as each class of senior security has an
asset coverage ratio of at least 200% immediately after each
such issuance. See Risk Factors. We may also be
prohibited under the 1940 Act from knowingly participating in
certain transactions with our affiliates without the prior
approval of our Independent Directors and, in some cases, prior
approval by the SEC. On July 11, 2000, the SEC granted us
an exemptive order permitting us to make co-investments with
certain of our affiliates in portfolio companies, subject to
various conditions. During the last completed fiscal year, the
Company did not engage in any transactions pursuant to this
order.
As with other companies subject to regulations of the 1940 Act,
a business development company must adhere to certain other
substantive ongoing regulatory requirements. A majority of our
directors must be persons who are not interested
persons, as that term is defined in the 1940 Act.
Additionally, we are required to provide and maintain a bond
issued by a reputable fidelity insurance company to protect the
business development company. Furthermore, as a business
development company, we are prohibited from protecting any
director or officer against any liability to the company or our
shareholders arising from willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of such persons office.
We and TTG Advisers maintain a code of ethics that establishes
procedures for personal investment and restricts certain
transactions by our personnel. The code of ethics generally does
not permit investment by our
107
employees in securities that may be purchased or held by us. You
may read and copy the code of ethics at the SECs Public
Reference Room in Washington, D.C. You may obtain
information on operations of the Public Reference Room by
calling the SEC at
(202) 942-8090.
In addition, the code of ethics is available on the EDGAR
Database on the SEC Internet site at
http://www.sec.gov.
You may obtain copies of the code of ethics, after paying a
duplicating fee, by electronic request at the following email
address: publicinfo@sec.gov, or by writing to the SECs
Public Reference Section, 100 F Street, NE,
Washington, D.C. 20549.
We may not change the nature of our business so as to cease to
be, or withdraw our election as, a business development company
unless authorized by vote of a majority of the outstanding
voting securities, as defined in the 1940 Act, of our
shares. A majority of the outstanding voting securities of a
company is defined by the 1940 Act as the lesser of:
(i) 67% or more of such companys shares present at a
meeting if more than 50% of the outstanding shares of such
company are present and represented by proxy, or (ii) more
than 50% of the outstanding shares of such company.
We are periodically examined by the SEC for compliance with the
1940 Act.
DIVIDEND
REINVESTMENT PLAN
All of our shareholders who hold shares of common stock in their
own name will automatically be enrolled in our dividend
reinvestment plan (the Plan). All such shareholders
will have any cash dividends and distributions automatically
reinvested by Computershare Ltd. (the Plan Agent),
in additional shares of our common stock. Any shareholder may,
of course, elect to receive his or her dividends and
distributions in cash. Currently, the Company has a policy of
seeking to pay quarterly dividends to shareholders. For any of
our shares that are held by banks, brokers or other entities
that hold our shares as nominees for individual shareholders,
the Plan Agent will administer the Plan on the basis of the
number of shares certified by any nominee as being registered
for shareholders that have not elected to receive dividends and
distributions in cash. To receive your dividends and
distributions in cash, you must notify the Plan Agent.
The Plan Agent serves as agent for the shareholders in
administering the Plan. When we declare a dividend or
distribution payable in cash or in additional shares of our
common stock, those shareholders participating in the dividend
reinvestment plan will receive their dividend or distribution in
additional shares of our common stock. Such shares will be
either newly issued by us or purchased in the open market by the
Plan Agent. If the market value of a share of our common stock
on the payment date for such dividend or distribution equals or
exceeds the net asset value per share on that date, we will
issue new shares at the net asset value. If the net asset value
exceeds the market price of our common stock, the Plan Agent
will purchase in the open market such number of shares of our
common stock as is necessary to complete the distribution.
The Plan Agent will maintain all shareholder accounts in the
Plan and furnish written confirmation of all transactions.
Shares of our common stock in the Plan will be held in the name
of the Plan Agent or its nominee and such shareholder will be
considered the beneficial owner of such shares for all purposes.
There is no charge to shareholders for participating in the Plan
or for the reinvestment of dividends and distributions. We will
not incur brokerage fees with respect to newly issued shares
issued in connection with the Plan. Shareholders will, however,
be charged a pro rata share of any brokerage fee charged for
open market purchases in connection with the Plan.
We may terminate the Plan upon providing written notice to each
shareholder participating in the Plan at least 60 days
prior to the effective date of such termination. We may also
materially amend the Plan at any time upon providing written
notice to shareholders participating in the Plan at least
30 days prior to such amendment (except when necessary or
appropriate to comply with applicable law or rules and policies
of the SEC or other regulatory authority). You may withdraw from
the Plan upon providing notice to the Plan Agent. You may obtain
additional information about the Plan from the Plan Agent.
108
DESCRIPTION
OF SECURITIES
The following summary of our capital stock and other securities
does not purport to be complete and is subject to, and qualified
in its entirety by, our Certificate of Incorporation.
Our authorized capital stock is 150,000,000 shares,
$0.01 par value.
Common
Stock
At July 31, 2007, there were 24,262,566 shares of
common stock outstanding and 4,041,883 shares of common
stock in our treasury. To date, no other classes of stock have
been issued.
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(4)
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(3)
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Amount
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Amount Held
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Outstanding
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(2)
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by Us
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Exclusive of
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(1)
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Amount
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or for Our
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Amounts
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Title of Class
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Authorized
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Account
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Shown Under(3)
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MVC Capital, Inc.
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Common Stock
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150,000,000
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4,041,883
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24,262,566
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All shares of common stock have equal rights as to earnings,
assets, dividends and voting privileges and all outstanding
shares of common stock are fully paid and non-assessable.
Distributions may be paid to the holders of common stock if and
when declared by our board of directors out of funds legally
available therefore. Our common stock has no preemptive,
conversion or redemption rights and is freely transferable. In
the event of liquidation, each share of common stock is entitled
to share ratably in all of our assets that are legally available
for distributions after payment of all debts and liabilities and
subject to any prior rights of holders of preferred stock, if
any, then outstanding. Each share of common stock is entitled to
one vote and does not have cumulative voting rights, which means
that holders of a majority of the shares, if they so choose,
could elect all of the directors, and holders of less than a
majority of the shares would, in that case, be unable to elect
any director. All shares of common stock offered hereby will be,
when issued and paid for, fully paid and non-assessable.
Preferred
Stock
In order to issue preferred stock, it will be necessary for our
board of directors and shareholders to approve an amendment to
our certificate of incorporation providing for such issuance.
The board of directors may then authorize the issuance of
preferred stock with such preferences, powers, rights and
privileges as the board deems appropriate; except that, such an
issuance must adhere to the requirements of the 1940 Act. The
1940 Act requires, among other things, that (i) immediately
after issuance and before any distribution is made with respect
to common stock, the preferred stock, together with all other
senior securities, must not exceed an amount equal to 50% of our
total assets; and (ii) the holders of shares of preferred
stock, if any are issued, must be entitled as a class to elect
two directors at all times and to elect a majority of the
directors if dividends on the preferred stock are in arrears by
two years or more. We believe the availability of such stock
will provide us with increased flexibility in structuring future
financings and acquisitions. If we offer preferred stock under
this prospectus, we will issue an appropriate prospectus
supplement. You should read that prospectus supplement for a
description of the preferred stock, including, but not limited
to, whether there will be an arrearage in the payment of
dividends or sinking fund installments, if any, restrictions
with respect to the declaration of dividends, requirements in
connection with the maintenance of any ratio or assets, or
creation or maintenance of reserves, or provisions for
permitting or restricting the issuance of additional securities.
Warrants
We may issue warrants to purchase shares of our common stock.
Such warrants may be issued independently or together with
shares of common stock and may be attached or separate from such
shares of common stock. We will issue each series of warrants
under a separate warrant agreement to be entered into between us
and a warrant agent. The warrant agent will act solely as our
agent and will not assume any obligation or relationship of
agency for or with holders or beneficial owners of warrants.
Particular terms of any warrants we offer will be described in
the prospectus supplement relating to such warrants.
109
Under the 1940 Act, we may generally only offer warrants
provided that (i) the warrants expire by their terms within
ten years; (ii) the exercise or conversion price is not
less than the current market value at the date of issuance;
(iii) our shareholders authorize the proposal to issue such
warrants, and our board of directors approves such issuance on
the basis that the issuance is in the best interests of MVC
Capital and its shareholders; and (iv) if the warrants are
accompanied by other securities, the warrants are not separately
transferable unless no class of such warrants and the securities
accompanying them has been publicly distributed. The 1940 Act
also generally provides that the amount of our voting securities
that would result from the exercise of all outstanding warrants
at the time of issuance may not exceed 25% of our outstanding
voting securities.
Debt
Securities
We may issue debt securities that may be senior or subordinated
in priority of payment. We will provide a prospectus supplement
that describes the ranking, whether senior or subordinated, the
specific designation, the aggregate principal amount, the
purchase price, the maturity, the redemption terms, the interest
rate or manner of calculating the interest rate, the time of
payment of interest, if any, the terms for any conversion or
exchange, including the terms relating to the adjustment of any
conversion or exchange mechanism, the listing, if any, on a
securities exchange, the name and address of the trustee and any
other specific terms of the debt securities.
Limitation
on Liability of Directors
We have adopted provisions in our certificate of incorporation
limiting the liability of our directors for monetary damages.
The effect of these provisions in the certificate of
incorporation is to eliminate the rights of MVC Capital and its
shareholders (through shareholders derivative suits on our
behalf) to recover monetary damages against a director for
breach of the fiduciary duty of care as a director or officer
(including breaches resulting from negligent behavior) except in
certain limited situations. These provisions do not limit or
eliminate the rights of MVC Capital or any shareholder to seek
non-monetary relief such as an injunction or rescission in the
event of a breach of a directors or officers duty of
care. These provisions will not alter the liability of directors
or officers under federal securities laws.
Delaware
Law and Certain Charter And Bylaw Provisions; Anti-Takeover
Measures
We are subject to the provisions of Section 203 of the
General Corporation Law of Delaware. In general, the statute
prohibits a publicly held Delaware corporation from engaging in
a business combination with interested
stockholders for a period of three years after the date of
the transaction in which the person became an interested
stockholder, unless the business combination is approved in a
prescribed manner. A business combination includes
certain mergers, asset sales and other transactions resulting in
a financial benefit to the interested stockholder. Subject to
exceptions, an interested stockholder is a person
who, together with his affiliates and associates, owns, or
within three years did own, 15% or more of the
corporations voting stock. Our certificate of
incorporation and fifth amended and restated bylaws provide that:
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directors may be removed only for cause by the affirmative vote
of the holders of at least seventy-five percent of the shares
then entitled to vote; and
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any vacancy on the board of directors, however the vacancy
occurs, including a vacancy due to an enlargement of the board,
may only be filled by vote of the directors then in office.
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The limitations on removal of directors and filling of vacancies
could have the effect of making it more difficult for a third
party to acquire us, or of discouraging a third party from
acquiring us.
Our certificate of incorporation and fifth amended and restated
bylaws also provide that:
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any action required or permitted to be taken by the stockholders
at an annual meeting or special meeting of stockholders may only
be taken if it is properly brought before such meeting; and
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special meetings of the stockholders may only be called by a
majority of our board of directors, Chairman, Vice Chairman,
Chief Executive Officer, President, Secretary and any Vice
President.
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110
Our fifth amended and restated bylaws provide that, in order for
any matter to be considered properly brought before
a meeting, a stockholder must comply with requirements regarding
advance notice to us. These provisions could delay until the
next stockholders meeting stockholder actions which are
favored by the holders of a majority of our outstanding voting
securities.
Delawares corporation law provides generally that the
affirmative vote of a majority of the shares entitled to vote on
any matter is required to amend a corporations certificate
of incorporation or bylaws, unless a corporations
certificate of incorporation or bylaws requires a greater
percentage. Our certificate of incorporation permits our board
of directors to amend or repeal our bylaws. Our bylaws generally
can be amended with the approval of at least sixty-six and
two-thirds percent
(662/3%)
of the total number of authorized directors subject to certain
exceptions, which provisions will require the vote of
seventy-five percent (75%) of the total number of authorized
directors to be amended. The affirmative vote of the holders of
at least sixty-six and two-thirds percent
(662/3%)
of the voting power of all of the then outstanding shares of
stock entitled to vote is required to amend or repeal any of the
provisions of our fifth amended and restated bylaws. Generally
our certificate of incorporation may be amended by holders of a
majority of the shares of our stock issued and outstanding and
entitled to vote. However, the vote of at least sixty-six and
two-thirds percent
(662/3%)
of the shares of our stock entitled to vote is required to amend
or repeal any provision pertaining to the board of directors,
limitation of liability, indemnification or stockholder action.
We may sell the securities in any of three ways (or in any
combination): (i) through underwriters or dealers;
(ii) directly to a limited number of purchasers or to a
single purchaser; or (iii) through agents. The securities
may be sold at-the-market to or through a market
maker or into an existing trading market for the securities, on
an exchange or otherwise. The prospectus supplement will set
forth the terms of the offering of such securities, including:
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the name or names of any underwriters, dealers or agents and the
amounts of securities underwritten or purchased by each of them;
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the offering price of the securities and the proceeds to us and
any discounts, commissions or concessions allowed or reallowed
or paid to dealers; and
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any securities exchanges on which the securities may be listed.
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Any offering price and any discounts or concessions allowed or
reallowed or paid to dealers may be changed from time to time.
If underwriters are used in the sale of any securities, the
securities will be acquired by the underwriters for their own
account and may be resold from time to time in one or more
transactions, including negotiated transactions, at a fixed
public offering price or at varying prices determined at the
time of sale. The securities may be either offered to the public
through underwriting syndicates represented by managing
underwriters, or directly by underwriters. Generally, the
underwriters obligations to purchase the securities will
be subject to certain conditions precedent.
The offering of securities by the Company pursuant to this
prospectus will be reviewed by the NASD under Rule 2810.
The maximum commission or discount to be received by any member
of the National Association of Securities Dealers, Inc. or
broker-dealer will not be greater than 10% for the sale of any
securities being registered and 0.5% for due diligence.
We may sell the securities through agents from time to time. The
prospectus supplement will name any agent involved in the offer
or sale of the securities and any commissions we pay to them.
Generally, any agent will be acting on a best efforts basis for
the period of its appointment.
We may authorize underwriters, dealers or agents to solicit
offers by certain purchasers to purchase the securities from us
at the public offering price set forth in the prospectus
supplement pursuant to delayed delivery contracts providing for
payment and delivery on a specified date in the future. The
contracts will be subject only to those conditions set forth in
the prospectus supplement, and the prospectus supplement will
set forth any commissions we pay for soliciting these contracts.
111
Agents and underwriters may be entitled to indemnification by us
against certain civil liabilities, including liabilities under
the Securities Act or to contribution with respect to payments
which the agents or underwriters may be required to make in
respect thereof. Agents and underwriters may be customers of,
engage in transactions with, or perform services for us in the
ordinary course of business.
We may enter into derivative transactions with third parties, or
sell securities not covered by this prospectus to third parties
in privately negotiated transactions. If the applicable
prospectus supplement indicates, in connection with those
derivatives, the third parties may sell securities covered by
this prospectus and the applicable prospectus supplement,
including in short sale transactions. If so, the third party may
use securities pledged by us or borrowed from us or others to
settle those sales or to close out any related open borrowings
of stock, and may use securities received from us in settlement
of those derivatives to close out any related open borrowings of
stock. The third party in such sale transactions will be an
underwriter identified in the applicable prospectus supplement.
We may loan or pledge securities to a financial institution or
other third party that in turn may sell the securities using
this prospectus. Such financial institution or third party may
transfer its short position to investors in our securities or in
connection with a simultaneous offering of other securities
offered by this prospectus or otherwise.
Schulte Roth & Zabel LLP, 919 Third Avenue, New York,
New York 10022, acts as legal counsel to the Company.
SAFEKEEPING,
TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR
Pursuant to an agreement with the Company, US Bank National
Association acts as the Companys custodian with respect to
the safekeeping of its securities. The principal business office
of the custodian is 1555 North River Center Drive,
Suite 302, Milwaukee, WI 53212.
The Company employs Computershare Ltd. as its transfer agent to
record transfers of the shares, maintain proxy records and to
process distributions. Computershares principal business
office is 250 Royall Street, Canton, Massachusetts 02021.
BROKERAGE
ALLOCATION AND OTHER PRACTICES
Since we generally acquire and dispose of our investments in
privately negotiated transactions, we infrequently use brokers
in the normal course of business.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The audited financial statements and schedules included in this
prospectus and elsewhere in the registration statement to the
extent and for the periods indicated in their reports have been
audited by Ernst & Young LLP, for the years ended
October 31, 2006, October 31, 2005, October 31,
2004 and October 31, 2003, as set forth in its reports
thereon and included elsewhere herein and are included in
reliance upon such reports given on the authority of said firm
as experts in accounting and auditing.
112
MVC
CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
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Page
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F-2
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F-3
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F-9
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F-10
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F-12
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F-13
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F-14
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F-40
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F-41
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F-1
CONSOLIDATED FINANCIAL STATEMENTS
MVC
Capital, Inc.
Consolidated
Balance Sheets
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July 31,
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October 31,
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October 31,
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2007
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2006
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2005
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(Unaudited)
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ASSETS
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Assets
|
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Cash and cash equivalents
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$
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112,833,085
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$
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66,217,123
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$
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77,324,092
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Investments at fair value (cost $334,739,98, $286,850,759 and
$171,591,242)
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Non-control/Non-affiliated investments (cost $119,586,309,
$108,557,066 and $74,495,549)
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85,023,815
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71,848,976
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33,685,925
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Affiliate investments (cost $101,424,084, $71,672,386 and
$40,370,059)
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111,215,266
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75,248,140
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32,385,810
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Control investments (cost $113,729,588, $106,621,307 and
$56,725,634)
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120,627,554
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128,794,436
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56,225,944
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Total investments at fair value
|
|
|
316,866,635
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|
|
|
275,891,552
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|
|
|
122,297,679
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Dividends, interest and fees receivable
|
|
|
2,689,072
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|
|
|
1,617,511
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|
|
|
902,498
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|
Prepaid expenses
|
|
|
2,579,035
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|
|
|
2,597,547
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364,780
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Prepaid taxes
|
|
|
385,138
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|
|
|
|
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98,374
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|
Deferred tax
|
|
|
724,006
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|
|
548,120
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|
|
|
303,255
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Deposits
|
|
|
442,129
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|
|
120,000
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Other assets
|
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29,443
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|
|
54,796
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88,600
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|
Total assets
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|
$
|
436,548,543
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|
$
|
347,046,961
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$
|
201,379,278
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LIABILITIES AND SHAREHOLDERS EQUITY
|
Liabilities
|
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Term loan
|
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$
|
50,000,000
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|
|
$
|
50,000,000
|
|
|
$
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|
|
Revolving credit facility
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50,000,000
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Provision for incentive compensation (Note 9)
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17,104,294
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7,172,352
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1,117,328
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Management fee payable
|
|
|
1,616,021
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Employee compensation and benefits
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|
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|
1,635,600
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807,000
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Reserve for closing conditions
|
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|
2,869,711
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Other accrued expenses and liabilities
|
|
|
985,469
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|
|
|
774,048
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|
|
|
353,606
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|
Professional fees
|
|
|
438,487
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|
|
|
402,133
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|
|
|
276,621
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|
Payable for investment purchased
|
|
|
|
|
|
|
|
|
|
|
79,708
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|
Consulting fees
|
|
|
81,302
|
|
|
|
70,999
|
|
|
|
3,117
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|
Directors fees
|
|
|
|
|
|
|
(35,312
|
)
|
|
|
2,898
|
|
Taxes payable
|
|
|
|
|
|
|
33,455
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|
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|
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|
|
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|
|
Total liabilities
|
|
|
73,095,284
|
|
|
|
110,053,587
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|
|
|
2,640,278
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|
Shareholders equity
|
|
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|
|
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Common stock, $0.01 par value; 150,000,000 shares
authorized; 24,262,566, 19,093,929 and 19,086,566 shares
outstanding, respectively
|
|
|
283,044
|
|
|
|
231,459
|
|
|
|
231,459
|
|
Additional
paid-in-capital
|
|
|
431,875,809
|
|
|
|
353,479,871
|
|
|
|
358,571,795
|
|
Accumulated earnings
|
|
|
20,278,590
|
|
|
|
22,026,261
|
|
|
|
13,528,526
|
|
Dividends paid to stockholders
|
|
|
(30,852,794
|
)
|
|
|
(21,592,946
|
)
|
|
|
(12,429,181
|
)
|
Accumulated net realized loss
|
|
|
(7,167,014
|
)
|
|
|
(73,016,601
|
)
|
|
|
(78,633,248
|
)
|
Net unrealized depreciation
|
|
|
(17,873,346
|
)
|
|
|
(10,959,207
|
)
|
|
|
(49,293,563
|
)
|
Treasury stock, at cost, 4,041,883, 4,052,019 and
4,059,382 shares held, respectively
|
|
|
(33,091,030
|
)
|
|
|
(33,175,463
|
)
|
|
|
(33,236,788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
363,453,259
|
|
|
|
236,993,374
|
|
|
|
198,739,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
436,548,543
|
|
|
$
|
347,046,961
|
|
|
$
|
201,379,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value per share
|
|
$
|
14.98
|
|
|
$
|
12.41
|
|
|
$
|
10.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
Consolidated
Schedule of Investments
July 31, 2007
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Non-Control/Non-Affiliated Investments 23.39% (a,
c, f, g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actelis Networks, Inc.
|
|
Technology Investments
|
|
Preferred Stock (150,602 shares)(d)
|
|
|
|
|
|
$
|
5,000,003
|
|
|
$
|
|
|
Amersham Corp.
|
|
Manufacturer of Precision - Machined Components
|
|
Second Lien Seller Note 10.0000%, 06/29/2010(h)
|
|
$
|
2,473,521
|
|
|
|
2,473,521
|
|
|
|
2,473,521
|
|
|
|
|
|
Second Lien Seller Note 19.0000%, 06/30/2013(b, h)
|
|
|
2,998,406
|
|
|
|
2,998,403
|
|
|
|
2,998,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,471,924
|
|
|
|
5,471,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BP Clothing, LLC
|
|
Apparel
|
|
Second Lien Loan 14.0000%, 07/18/2012(b, h)
|
|
|
17,738,760
|
|
|
|
17,444,106
|
|
|
|
17,738,760
|
|
|
|
|
|
Term Loan A 9.5700%, 07/18/2011(h)
|
|
|
2,640,000
|
|
|
|
2,600,587
|
|
|
|
2,600,587
|
|
|
|
|
|
Term Loan B 11.7200%, 07/18/2011(h)
|
|
|
2,000,000
|
|
|
|
1,970,336
|
|
|
|
1,970,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,015,029
|
|
|
|
22,309,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DPHI, Inc.
|
|
Technology Investments
|
|
Preferred Stock (602,131 shares)(d)
|
|
|
|
|
|
|
4,520,350
|
|
|
|
|
|
FOLIOfn, Inc.
|
|
Technology Investments
|
|
Preferred Stock (5,802,259 shares)(d)
|
|
|
|
|
|
|
15,000,000
|
|
|
|
7,100,000
|
|
Henry Company
|
|
Building Products / Specialty Chemicals
|
|
Term Loan A 8.8200%, 04/06/2011(h)
|
|
|
1,900,367
|
|
|
|
1,900,367
|
|
|
|
1,900,367
|
|
|
|
|
|
Term Loan B 13.0700%, 04/06/2011(h)
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,900,367
|
|
|
|
3,900,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innovative Brands, LLC
|
|
Consumer Products
|
|
Term Loan 11.1250%, 09/25/2011(h)
|
|
|
14,887,500
|
|
|
|
14,887,500
|
|
|
|
14,887,500
|
|
JDC Lighting, LLC
|
|
Electrical Distribution
|
|
Senior Subordinated Debt 17.0000%, 01/31/2009 (b, h)
|
|
|
3,139,758
|
|
|
|
3,107,393
|
|
|
|
3,139,758
|
|
Lockorder Limited
|
|
Technology Investments
|
|
Common Stock (21,064 shares) (d, e)
|
|
|
|
|
|
|
2,007,701
|
|
|
|
|
|
MainStream Data, Inc.
|
|
Technology Investments
|
|
Common Stock (5,786 shares)(d)
|
|
|
|
|
|
|
3,750,000
|
|
|
|
|
|
SafeStone Technologies Limited
|
|
Technology Investments
|
|
Common Stock (21,064 shares) (d, e)
|
|
|
|
|
|
|
2,007,701
|
|
|
|
|
|
Sonexis, Inc.
|
|
Technology Investments
|
|
Common Stock (131,615 shares)(d)
|
|
|
|
|
|
|
10,000,000
|
|
|
|
|
|
SP Industries, Inc.
|
|
Laboratory Research Equipment
|
|
Term Loan B 13.3200%, 03/31/2011(h)
|
|
|
7,725,967
|
|
|
|
7,687,660
|
|
|
|
7,725,967
|
|
|
|
|
|
Senior Subordinated Debt 16.0000%, 03/31/2012(b, h)
|
|
|
13,349,113
|
|
|
|
13,085,375
|
|
|
|
13,349,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,773,035
|
|
|
|
21,075,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Storage Canada, LLC
|
|
Self Storage
|
|
Term Loan 8.7500%, 03/30/2013(h)
|
|
|
1,320,500
|
|
|
|
1,326,306
|
|
|
|
1,320,500
|
|
|
|
|
|
Term Loan 8.7500%, 10/06/2013(h)
|
|
|
619,000
|
|
|
|
619,000
|
|
|
|
619,000
|
|
|
|
|
|
Term Loan 8.7500%, 01/19/2014(h)
|
|
|
705,000
|
|
|
|
705,000
|
|
|
|
705,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,650,306
|
|
|
|
2,644,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Safety U.S., Inc.
|
|
Engineering Services
|
|
First Lien Seller Note 8.3400%, 12/08/2012(h)
|
|
|
995,000
|
|
|
|
995,000
|
|
|
|
995,000
|
|
|
|
|
|
Second Lien Seller Note 11.8600%, 12/08/2013(h)
|
|
|
3,500,000
|
|
|
|
3,500,000
|
|
|
|
3,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,495,000
|
|
|
|
4,495,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub Total Non-Control/Non-Affiliated Investments
30.60% (a, c, f, g)
|
|
|
|
|
|
|
|
|
|
|
119,586,309
|
|
|
|
85,023,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dakota Growers Pasta Company, Inc
|
|
Manufacturer of Packaged Foods
|
|
Common Stock (1,016,195 shares)
|
|
|
|
|
|
|
5,521,742
|
|
|
|
10,161,950
|
|
|
|
|
|
Convertible Preferred Stock (1,065,000)(d)
|
|
|
|
|
|
|
10,357,500
|
|
|
|
10,650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,879,242
|
|
|
|
20,811,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endymion Systems, Inc.
|
|
Technology Investments
|
|
Preferred Stock (7,156,760 shares)(d)
|
|
|
|
|
|
|
7,000,000
|
|
|
|
|
|
Genevac U.S. Holdings, Inc.
|
|
Laboratory Research Equipment
|
|
Senior Subordinated Debt 12.5000%, 01/03/2008(e, h)
|
|
|
12,962,963
|
|
|
|
12,962,963
|
|
|
|
12,962,963
|
|
|
|
|
|
Common Stock (140 shares)(b, e)
|
|
|
|
|
|
|
1,068,967
|
|
|
|
1,068,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,031,930
|
|
|
|
14,031,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HuaMei Capital Company, Inc.
|
|
Financial Services
|
|
Common Stock (500 shares)(d)
|
|
|
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
Impact Confections, Inc.
|
|
Confections Manufacturing and Distribution
|
|
Senior Subordinated Debt 17.0000%, 07/30/2009(b, h)
|
|
|
5,654,239
|
|
|
|
5,595,656
|
|
|
|
5,654,239
|
|
|
|
|
|
Senior Subordinated Debt 9.3200%, 07/29/2008(h)
|
|
|
325,000
|
|
|
|
322,841
|
|
|
|
325,000
|
|
|
|
|
|
Common Stock (252 shares)(d)
|
|
|
|
|
|
|
2,700,000
|
|
|
|
2,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,618,497
|
|
|
|
8,679,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine Exhibition Corporation
|
|
Theme Park
|
|
Senior Subordinated Debt 11.0000%, 06/30/2013(b, h)
|
|
|
10,400,313
|
|
|
|
10,230,635
|
|
|
|
10,400,313
|
|
|
|
|
|
Convertible Preferred Stock (20,000(b)
|
|
|
|
|
|
|
2,160,250
|
|
|
|
2,160,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,390,885
|
|
|
|
12,560,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-3
MVC
Capital, Inc.
Consolidated
Schedule of Investments (Continued)
July 31, 2007
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Octagon Credit Investors, LLC
|
|
Financial Services
|
|
Term Loan 9.5700%, 12/31/2011(h)
|
|
|
5,000,000
|
|
|
|
4,941,070
|
|
|
|
5,000,000
|
|
|
|
|
|
Revolving Line of Credit 9.5700%, 12/31/2011(h)
|
|
|
6,050,000
|
|
|
|
6,050,000
|
|
|
|
6,050,000
|
|
|
|
|
|
Limited Liability Company Interest
|
|
|
|
|
|
|
1,034,179
|
|
|
|
3,689,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,025,249
|
|
|
|
14,739,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phoenix Coal Corporation
|
|
Coal Processing and Production
|
|
Second Lien Note 15.0000%, 06/08/2011(b, h)
|
|
$
|
7,360,803
|
|
|
$
|
7,252,928
|
|
|
$
|
7,360,803
|
|
|
|
|
|
Common Stock (1,666,667 shares)(d)
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,252,928
|
|
|
|
8,360,803
|
|
PreVisor, Inc.
|
|
Human Capital Management
|
|
Common Stock (9 shares)(d)
|
|
|
|
|
|
|
6,000,000
|
|
|
|
7,700,000
|
|
Vitality Foodservice, Inc.
|
|
Non-Alcoholic Beverages
|
|
Common Stock (556,472 shares)(d)
|
|
|
|
|
|
|
5,564,716
|
|
|
|
9,064,716
|
|
|
|
|
|
Preferred Stock (1,000,000 shares)(b, h)
|
|
|
|
|
|
|
9,660,637
|
|
|
|
12,166,981
|
|
|
|
|
|
Warrants(d)
|
|
|
|
|
|
|
|
|
|
|
1,100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,225,353
|
|
|
|
22,331,697
|
|
Sub Total Affiliate Investments
|
|
|
|
|
|
|
|
|
|
|
101,424,084
|
|
|
|
111,215,266
|
|
Control Investments 33.19% (a, c, f, g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto MOTOL BENI
|
|
Automotive Dealership
|
|
Bridge Loan 12.0000%, 12/31/2007(e, h)
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
|
|
Common Stock (200 shares)(d, e)
|
|
|
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000,000
|
|
|
|
4,000,000
|
|
Harmony Pharmacy & Health Center, Inc.
|
|
Healthcare Retail
|
|
Revolving Credit Facility 10.0000%, 12/01/09(h)
|
|
|
3,350,000
|
|
|
|
3,350,000
|
|
|
|
3,350,000
|
|
|
|
|
|
Common Stock (2,000,000 shares)(d)
|
|
|
|
|
|
|
750,000
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,100,000
|
|
|
|
4,100,000
|
|
MVC Partners, LLC
|
|
Private Equity Firm
|
|
Limited Liability Company Interest(d)
|
|
|
|
|
|
|
70,898
|
|
|
|
70,898
|
|
Ohio Medical Corporation
|
|
Medical Device Manufacturer
|
|
Common Stock (5,620 shares)(d)
|
|
|
|
|
|
|
17,000,000
|
|
|
|
17,200,000
|
|
|
|
|
|
Convertible Unsecured Subordinated Promissory Note 17.3200%,
07/30/2008(h)
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,000,000
|
|
|
|
19,200,000
|
|
SIA Tekers Invest
|
|
Port Facilities
|
|
Common Stock (68,800 shares)(d, e)
|
|
|
|
|
|
|
2,300,000
|
|
|
|
2,300,000
|
|
SGDA Sanierungsgesellschaft
|
|
Soil Remediation
|
|
Term Loan 7.0000%, 08/25/2009(e, h)
|
|
|
6,187,350
|
|
|
|
6,041,892
|
|
|
|
6,041,892
|
|
fur Deponien und Altlasten
|
|
|
|
Common Equity Interest(d, e)
|
|
|
|
|
|
|
438,551
|
|
|
|
560,000
|
|
|
|
|
|
Preferred Equity Interest(d, e)
|
|
|
|
|
|
|
5,000,000
|
|
|
|
5,475,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,480,443
|
|
|
|
12,076,892
|
|
Summit Research Labs, Inc.
|
|
Specialty Chemicals
|
|
Second Lien Loan 14.0000%, 08/15/2012(b, h)
|
|
|
5,319,013
|
|
|
|
5,234,987
|
|
|
|
5,319,013
|
|
|
|
|
|
Preferred Stock (800 shares)(d)
|
|
|
|
|
|
|
11,200,000
|
|
|
|
11,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,434,987
|
|
|
|
16,519,013
|
|
Timberland Machines & Irrigation, Inc.
|
|
Distributor Landscaping and Irrigation Equipment
|
|
Senior Subordinated Debt 14.5500%, 08/04/2009(b, h)
|
|
|
6,765,785
|
|
|
|
6,724,639
|
|
|
|
6,765,785
|
|
|
|
|
|
Junior Revolving Line of Credit 12.5000%, 07/07/2009(h)
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
|
|
|
Common Stock (542 shares) (d)
|
|
|
|
|
|
|
5,420,291
|
|
|
|
4,420,291
|
|
|
|
|
|
Warrants(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,644,930
|
|
|
|
13,686,076
|
|
Turf Products, LLC
|
|
Distributor Landscaping and Irrigation Equipment
|
|
Senior Subordinated Debt 15.0000%, 11/30/2010(b, h)
|
|
|
7,676,330
|
|
|
|
7,635,261
|
|
|
|
7,676,330
|
|
|
|
|
|
Limited Liability Company Interest(d)
|
|
|
|
|
|
|
3,821,794
|
|
|
|
5,821,794
|
|
|
|
|
|
Warrants(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,457,055
|
|
|
|
13,498,124
|
|
U.S. Gas & Electric, Inc.
|
|
Energy Services
|
|
Second Lien Loan 14.0000%, 07/26/2012(b, h)
|
|
|
5,500,000
|
|
|
|
5,280,723
|
|
|
|
5,500,000
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock (32,200 shares)(d)
|
|
|
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
Convertible Preferred Stock (8,216 shares)(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Preferred Stock (1,535 shares)(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,780,723
|
|
|
|
6,000,000
|
|
Velocitius B.V
|
|
Renewable Energy
|
|
Revolving Credit Facility I, 8.0000%, 10/31/2009(e, h)
|
|
|
133,844
|
|
|
|
133,844
|
|
|
|
133,844
|
|
|
|
|
|
Revolving Credit Facility II, 8.0000%, 04/30/2010(e, h)
|
|
|
547,392
|
|
|
|
547,392
|
|
|
|
547,392
|
|
|
|
|
|
Common Equity Interest(d, e)
|
|
|
|
|
|
|
11,395,315
|
|
|
|
11,395,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,076,551
|
|
|
|
12,076,551
|
|
F-4
MVC
Capital, Inc.
Consolidated
Schedule of Investments (Continued)
July 31, 2007
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Vendio Services, Inc.
|
|
Technology Investments
|
|
Common Stock (10,476 shares)(d)
|
|
|
|
|
|
|
5,500,000
|
|
|
|
15,421
|
|
|
|
|
|
Preferred Stock (6,443,188 shares)(d)
|
|
|
|
|
|
|
1,134,001
|
|
|
|
9,484,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,634,001
|
|
|
|
9,500,000
|
|
Vestal Manufacturing Enterprises, Inc.
|
|
Iron Foundries
|
|
Senior Subordinated Debt 12.0000%, 04/29/2011(h)
|
|
|
700,000
|
|
|
|
700,000
|
|
|
|
700,000
|
|
|
|
|
|
Common Stock (81,000 shares)(d)
|
|
|
|
|
|
|
1,850,000
|
|
|
|
3,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,550,000
|
|
|
|
4,400,000
|
|
WBS Carbons Acquistions Corp.
|
|
Specialty Chemicals
|
|
Bridge Loan 5.0000%, 11/22/2011(b, h)
|
|
|
1,600,000
|
|
|
|
1,600,000
|
|
|
|
1,600,000
|
|
|
|
|
|
Common Stock (400 shares)(d)
|
|
|
|
|
|
|
1,600,000
|
|
|
|
1,600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,200,000
|
|
|
|
3,200,000
|
|
Sub Total Control Investments
|
|
|
|
|
|
|
|
|
|
|
113,729,588
|
|
|
|
120,627,554
|
|
TOTAL INVESTMENT ASSETS 87.18%(f)
|
|
|
|
|
|
|
|
|
|
$
|
334,739,981
|
|
|
$
|
316,866,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
These securities are restricted from public sale without prior
registration under the Securities Act of 1933. The Company
negotiates certain aspects of the method and timing of the
disposition of these investments, including registration rights
and related costs. |
|
(b) |
|
These securities accrue a portion of their interest/dividends in
payment in kind interest/dividends which is
capitalized to the investment. |
|
|
|
(c) |
|
All of the Companys equity and debt investments are issued
by eligible portfolio companies, as defined in the Investment
Company Act of 1940, except Auto MOTOL BENI, Genevac U.S.
Holdings, Inc., Lockorder Limited, SafeStone Technologies
Limited, SGDA Sanierungsgesellschaft fur Deponien und Altlasten,
SIA Tekers Invest and Velocitius B.V. The Company makes
available significant managerial assistance to all of the
portfolio companies in which it has invested. |
|
|
|
(d) |
|
Non-income producing assets. |
|
(e) |
|
The principal operations of these portfolio companies are
located outside of the United States. |
|
(f) |
|
Percentages are based on net assets of $363,453,259 as of
July 31, 2007. |
|
(g) |
|
See Note 3 for further information regarding
Investment Classification. |
|
(h) |
|
All or a portion of these securities have been committed as
collateral for the Guggenheim Corporate Funding, LLC Credit
Facility. |
|
|
|
Denotes zero Cost/fair value. |
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
MVC
Capital, Inc.
Consolidated Schedule of Investments
October 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Non-Control/Non-Affiliated Investments 30.32% (a,
c, g, f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actelis Networks, Inc.
|
|
Technology Investments
|
|
Preferred Stock (150,602 shares)(d)
|
|
|
|
|
|
$
|
5,000,003
|
|
|
$
|
|
|
Amersham Corp.
|
|
Manufacturer of Precision- Machined Components
|
|
Second Lien Seller Note 10.0000%, 06/29/2010(h)
|
|
$
|
2,473,521
|
|
|
|
2,473,521
|
|
|
|
2,473,521
|
|
|
|
|
|
Second Lien Seller Note 16.0000%, 06/30/2013(b, h)
|
|
|
2,627,538
|
|
|
|
2,627,538
|
|
|
|
2,627,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,101,059
|
|
|
|
5,101,059
|
|
BP Clothing, LLC
|
|
Apparel
|
|
Second Lien Loan 14.0000%, 07/18/2012(b, h)
|
|
|
10,041,165
|
|
|
|
9,862,650
|
|
|
|
10,041,165
|
|
|
|
|
|
Term Loan A 9.6500%, 07/18/2011(h)
|
|
|
2,910,000
|
|
|
|
2,858,549
|
|
|
|
2,858,549
|
|
|
|
|
|
Term Loan B 11.8000%, 07/18/2011(h)
|
|
|
2,000,000
|
|
|
|
1,964,638
|
|
|
|
1,964,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,685,837
|
|
|
|
14,864,352
|
|
DPHI, Inc.
|
|
Technology Investments
|
|
Preferred Stock (602,131 shares)(d)
|
|
|
|
|
|
|
4,520,350
|
|
|
|
|
|
FOLIOfn, Inc.
|
|
Technology Investments
|
|
Preferred Stock (5,802,259 shares)(d)
|
|
|
|
|
|
|
15,000,000
|
|
|
|
5,000,000
|
|
Henry Company
|
|
Building Products / Specialty Chemicals
|
|
Term Loan A 8.8244%, 04/06/2011(h)
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
|
|
|
|
Term Loan B 13.0744%, 04/06/2011(h)
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
Innovative Brands, LLC
|
|
Consumer Products
|
|
Term Loan 11.1250%, 09/22/2011(h)
|
|
|
15,000,000
|
|
|
|
15,000,000
|
|
|
|
15,000,000
|
|
JDC Lighting, LLC
|
|
Electrical Distribution
|
|
Senior Subordinated Debt 17.0000%, 01/31/2009(b, h)
|
|
|
3,035,844
|
|
|
|
2,988,002
|
|
|
|
3,035,844
|
|
MainStream Data
|
|
Technology Investments
|
|
Common Stock (5,786 shares)(d)
|
|
|
|
|
|
|
3,750,000
|
|
|
|
|
|
SafeStone Technologies PLC
|
|
Technology Investments
|
|
Preferred Stock (2,106,378 shares) (d, e)
|
|
|
|
|
|
|
4,015,402
|
|
|
|
|
|
Sonexis, Inc.
|
|
Technology Investments
|
|
Common Stock (131,615 shares)(d)
|
|
|
|
|
|
|
10,000,000
|
|
|
|
|
|
SP Industries, Inc.
|
|
Laboratory Research Equipment
|
|
Term Loan B 13.3244%, 03/31/2011(h)
|
|
|
3,059,300
|
|
|
|
3,007,411
|
|
|
|
3,059,300
|
|
|
|
|
|
Senior Subordinated Debt 16.0000%, 03/31/2012(b, h)
|
|
|
12,959,013
|
|
|
|
12,653,021
|
|
|
|
12,959,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,660,432
|
|
|
|
16,018,313
|
|
Storage Canada, LLC
|
|
Self Storage
|
|
Term Loan 8.7500%, 03/30/2013(h)
|
|
|
1,320,500
|
|
|
|
1,327,073
|
|
|
|
1,320,500
|
|
|
|
|
|
Term Loan 8.7500%, 10/06/2013(h)
|
|
|
619,000
|
|
|
|
619,000
|
|
|
|
619,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,946,073
|
|
|
|
1,939,500
|
|
Total Safety U.S., Inc.
|
|
Engineering Services
|
|
Term Loan A 9.8300%,
12/31/2010(h)
|
|
|
4,908,257
|
|
|
|
4,908,257
|
|
|
|
4,908,257
|
|
|
|
|
|
Term Loan B 13.8300%, 12/31/2010(h)
|
|
|
981,651
|
|
|
|
981,651
|
|
|
|
981,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,889,908
|
|
|
|
5,889,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub Total Non-Control/ Non-Affiliated Investments
|
|
|
|
|
|
|
|
|
|
|
108,557,066
|
|
|
|
71,848,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate investments 31.75% (a, c, g, f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dakota Growers Pasta Company, Inc.
|
|
Manufacturer of Packaged Foods
|
|
Common Stock (1,081,195 shares)
|
|
|
|
|
|
|
5,879,242
|
|
|
|
8,957,880
|
|
Endymion Systems, Inc.
|
|
Technology Investments
|
|
Preferred Stock (7,156,760 shares)(d)
|
|
|
|
|
|
|
7,000,000
|
|
|
|
|
|
Harmony Pharmacy & Health Center,
|
|
Healthcare-Retail Inc.
|
|
Common Stock (2,000,000 shares)(d)
|
|
|
|
|
|
|
750,000
|
|
|
|
750,000
|
|
F-6
MVC
Capital, Inc.
Consolidated Schedule of
Investments (Continued)
October 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Impact Confections, Inc.
|
|
Confections Manufacturing and Distribution
|
|
Senior Subordinated Debt 17.0000%, 07/30/2009(b, h)
|
|
|
5,468,123
|
|
|
|
5,390,649
|
|
|
|
5,468,123
|
|
|
|
|
|
Senior Subordinated Debt 9.3244%, 07/29/2008(h)
|
|
|
325,000
|
|
|
|
321,218
|
|
|
|
325,000
|
|
|
|
|
|
Common Stock (252 shares)(d)
|
|
|
|
|
|
|
2,700,000
|
|
|
|
2,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,411,867
|
|
|
|
8,493,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine Exhibition Corporation
|
|
Theme Park
|
|
Senior Subordinated Debt 11.0000%, 06/30/2013(b, h)
|
|
|
10,091,111
|
|
|
|
9,899,988
|
|
|
|
10,091,111
|
|
|
|
|
|
Convertible Preferred Stock (20,000 shares)(b)
|
|
|
|
|
|
|
2,035,652
|
|
|
|
2,035,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,935,640
|
|
|
|
12,126,763
|
|
Octagon Credit Investors, LLC
|
|
Financial Services
|
|
Term Loan 9.5744%, 12/31/2011(h)
|
|
|
5,000,000
|
|
|
|
4,931,096
|
|
|
|
5,000,000
|
|
|
|
|
|
Revolving Line of Credit 9.5744%, 12/31/2011(h)
|
|
|
3,250,000
|
|
|
|
3,250,000
|
|
|
|
3,250,000
|
|
|
|
|
|
Limited Liability Company Interest
|
|
|
|
|
|
|
894,095
|
|
|
|
1,927,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,075,191
|
|
|
|
10,177,932
|
|
Phoenix Coal Corporation
|
|
Coal Processing and Production
|
|
Common Stock (1,666,667)(d)
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
Second Lien Note 15.0000%,
06/08/2011(b, h)
|
|
|
7,088,615
|
|
|
|
6,959,809
|
|
|
|
7,088,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,959,809
|
|
|
|
8,088,615
|
|
PreVisor, Inc.
|
|
Human Capital Management
|
|
Common Stock (9 shares)(d)
|
|
|
|
|
|
|
6,000,000
|
|
|
|
6,000,000
|
|
Vitality Foodservice, Inc.
|
|
Non-Alcoholic Beverages
|
|
Common Stock (500,000 shares)(d)
|
|
|
|
|
|
|
5,000,000
|
|
|
|
8,500,000
|
|
|
|
|
|
Preferred Stock (1,000,000 shares)(b, h)
|
|
|
|
|
|
|
9,660,637
|
|
|
|
11,053,827
|
|
|
|
|
|
Warrants(d)
|
|
|
|
|
|
|
|
|
|
|
1,100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,660,637
|
|
|
|
20,653,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub Total Affiliate investments
|
|
|
|
|
|
|
|
|
|
|
71,672,386
|
|
|
|
75,248,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control investments 54.34% (a, c, f, g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto MOTOL BENI
|
|
Automotive Dealership
|
|
Common Stock (200 shares)(d, e)
|
|
|
|
|
|
$
|
2,000,000
|
|
|
$
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baltic Motors Corporation
|
|
Automotive Dealership
|
|
Senior Subordinated Debt 10.0000%, 06/24/2007(e, h)
|
|
$
|
4,500,000
|
|
|
|
4,500,000
|
|
|
|
4,500,000
|
|
|
|
|
|
Bridge Loan 12.0000%, 12/22/2006(e, h)
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
Common Stock (60,684 shares)(d, e)
|
|
|
|
|
|
|
8,000,000
|
|
|
|
21,155,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,500,000
|
|
|
|
26,655,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio Medical Corporation
|
|
Medical Device Manufacturer
|
|
Common Stock (5,620 shares)(d)
|
|
|
|
|
|
|
17,000,000
|
|
|
|
26,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SGDA Sanierungsgesellschaft
|
|
Soil Remediation
|
|
Term Loan 7.0000%,
08/25/2009(e, h)
|
|
|
6,187,350
|
|
|
|
5,989,710
|
|
|
|
5,989,710
|
|
fur Deponien und Altlasten
|
|
|
|
Common Equity Interest(d, e)
|
|
|
|
|
|
|
338,551
|
|
|
|
338,551
|
|
|
|
|
|
Preferred Equity Interest(d, e)
|
|
|
|
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,328,261
|
|
|
|
11,328,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIA BM Auto
|
|
Automotive Dealership
|
|
Common Stock (47,300 shares)(d, e)
|
|
|
|
|
|
|
8,000,000
|
|
|
|
8,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit Research Labs, Inc.
|
|
Specialty Chemicals
|
|
Second Lien Loan 14.0000%, 08/15/2012(b, h)
|
|
|
5,044,813
|
|
|
|
4,948,327
|
|
|
|
5,044,813
|
|
|
|
|
|
Preferred Stock (800 shares)(d)
|
|
|
|
|
|
|
11,200,000
|
|
|
|
11,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,148,327
|
|
|
|
16,244,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
MVC
Capital, Inc.
Consolidated Schedule of
Investments (Continued)
October 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Timberland Machines & Irrigation, Inc.
|
|
Distributor Landscaping and
|
|
Senior Subordinated Debt 14.4260%, 08/04/2009(b, h)
|
|
|
6,607,859
|
|
|
|
6,551,408
|
|
|
|
6,607,859
|
|
|
|
Irrigation Equipment
|
|
Junior Revolving Line of Credit 12.5000%, 07/07/2007(h)
|
|
|
2,829,709
|
|
|
|
2,829,709
|
|
|
|
2,829,709
|
|
|
|
|
|
Common Stock (542 shares) (d)
|
|
|
|
|
|
|
5,420,291
|
|
|
|
4,420,291
|
|
|
|
|
|
Warrants(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,801,408
|
|
|
|
13,857,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turf Products, LLC
|
|
Distributor Landscaping and
|
|
Senior Subordinated Debt 15.0000%, 11/30/2010(b, h)
|
|
|
7,676,330
|
|
|
|
7,627,137
|
|
|
|
7,676,330
|
|
|
|
Irrigation Equipment
|
|
Limited Liability Company Interest(d)
|
|
|
|
|
|
|
3,821,794
|
|
|
|
5,821,794
|
|
|
|
|
|
Warrants(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,448,931
|
|
|
|
13,498,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Velocitius B.V.
|
|
Renewable Energy
|
|
Common Equity Interest(d, e)
|
|
|
|
|
|
|
2,966,765
|
|
|
|
2,966,765
|
|
|
|
|
|
Revolving Line of Credit 8.0000%, 10/31/2009(e, h)
|
|
|
143,614
|
|
|
|
143,614
|
|
|
|
143,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,110,379
|
|
|
|
3,110,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendio Services, Inc.
|
|
Technology Investments
|
|
Common Stock (10,476 shares)(d)
|
|
|
|
|
|
|
5,500,000
|
|
|
|
|
|
|
|
|
|
Preferred Stock (6,443,188 shares)(d)
|
|
|
|
|
|
|
1,134,001
|
|
|
|
3,400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,634,001
|
|
|
|
3,400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vestal Manufacturing Enterprises, Inc.
|
|
Iron Foundries
|
|
Senior Subordinated Debt 12.0000%, 04/29/2011(h)
|
|
|
800,000
|
|
|
|
800,000
|
|
|
|
800,000
|
|
|
|
|
|
Common Stock (81,000 shares)
|
|
|
|
|
|
|
1,850,000
|
|
|
|
3,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,650,000
|
|
|
|
4,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub Total Control Investments
|
|
|
|
|
|
|
|
|
|
|
106,621,307
|
|
|
|
128,794,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTMENT ASSETS 116.41%(f)
|
|
|
|
|
|
$
|
286,850,759
|
|
|
$
|
275,891,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
These securities are restricted
from public sale without prior registration under the Securities
Act of 1933. The Company negotiates certain aspects of the
method and timing of the disposition of these investments,
including registration rights and related costs.
|
|
(b)
|
|
These securities accrue a portion
of their interest/dividends in payment in kind
interest/dividends which is capitalized to the investment.
|
|
|
|
(c)
|
|
All of the Companys equity
and debt investments are issued by eligible portfolio companies,
as defined in the Investment Company Act of 1940, except Auto
MOTOL BENI, Baltic Motors Corporation, SafeStone Technologies
PLC, SGDA Sanierungsgesellschaft fur Deponien und Altlasten,SIA
BM Auto and Velocitius B.V. The Company makes available
significant managerial assistance to all of the portfolio
companies in which it has invested.
|
|
|
|
(d)
|
|
Non-income producing assets.
|
|
(e)
|
|
The principal operations of these
portfolio companies are located outside of the United States.
|
|
(f)
|
|
Percentages are based on net assets
of $236,993,374 as of October 31, 2006.
|
|
(g)
|
|
See Note 3 for further
information regarding Investment Classification.
|
|
(h)
|
|
All or a portion of these
securities have been committed as collateral for the Guggenheim
Corporate Funding, LLC Credit Facility.
|
|
|
|
Denotes zero cost/fair value.
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
MVC
Capital, Inc.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended
|
|
|
Period Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
|
November 1,
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
|
2006 to
|
|
|
2005 to
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate investments
|
|
$
|
370,195
|
|
|
$
|
36,364
|
|
|
$
|
89,842
|
|
|
$
|
1,346,760
|
|
|
$
|
|
|
Control investments
|
|
|
|
|
|
|
88,525
|
|
|
|
132,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividend income
|
|
|
370,195
|
|
|
|
124,889
|
|
|
|
222,387
|
|
|
|
1,346,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-control/Non-affiliated investments
|
|
|
8,494,153
|
|
|
|
4,940,336
|
|
|
|
6,930,733
|
|
|
|
5,134,907
|
|
|
|
2,308,502
|
|
Affiliate investments
|
|
|
3,563,392
|
|
|
|
1,448,213
|
|
|
|
2,922,372
|
|
|
|
874,041
|
|
|
|
218,904
|
|
Control investments
|
|
|
3,554,022
|
|
|
|
2,768,553
|
|
|
|
3,833,499
|
|
|
|
2,101,808
|
|
|
|
469,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
15,611,567
|
|
|
|
9,157,102
|
|
|
|
13,686,604
|
|
|
|
8,110,756
|
|
|
|
2,996,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-control/Non-affiliated investments
|
|
|
754,253
|
|
|
|
992,473
|
|
|
|
1,187,954
|
|
|
|
398,520
|
|
|
|
109,538
|
|
Affiliate investments
|
|
|
678,372
|
|
|
|
291,982
|
|
|
|
470,530
|
|
|
|
232,256
|
|
|
|
727,595
|
|
Control investments
|
|
|
845,640
|
|
|
|
1,381,625
|
|
|
|
2,169,236
|
|
|
|
1,178,331
|
|
|
|
88,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
2,278,265
|
|
|
|
2,666,080
|
|
|
|
3,827,720
|
|
|
|
1,809,107
|
|
|
|
925,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
252,237
|
|
|
|
455,713
|
|
|
|
771,405
|
|
|
|
932,761
|
|
|
|
64,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
18,512,264
|
|
|
|
12,403,784
|
|
|
|
18,508,116
|
|
|
|
12,199,384
|
|
|
|
3,986,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive compensation (Note 9)
|
|
|
10,042,160
|
|
|
|
4,717,061
|
|
|
|
6,055,024
|
|
|
|
1,117,328
|
|
|
|
1,365,913
|
|
Management fee
|
|
|
5,105,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, fees and other borrowing costs
|
|
|
3,636,241
|
|
|
|
683,590
|
|
|
|
1,594,009
|
|
|
|
30,771
|
|
|
|
2,472
|
|
Legal fees
|
|
|
398,000
|
|
|
|
438,669
|
|
|
|
685,396
|
|
|
|
529,541
|
|
|
|
810,848
|
|
Other expenses
|
|
|
360,370
|
|
|
|
285,458
|
|
|
|
334,212
|
|
|
|
461,769
|
|
|
|
369,085
|
|
Insurance
|
|
|
312,606
|
|
|
|
354,211
|
|
|
|
471,711
|
|
|
|
590,493
|
|
|
|
959,570
|
|
Audit fees
|
|
|
237,000
|
|
|
|
286,788
|
|
|
|
381,944
|
|
|
|
287,797
|
|
|
|
154,938
|
|
Administration
|
|
|
208,522
|
|
|
|
140,342
|
|
|
|
194,826
|
|
|
|
137,191
|
|
|
|
102,593
|
|
Directors fees
|
|
|
180,000
|
|
|
|
156,501
|
|
|
|
205,071
|
|
|
|
148,875
|
|
|
|
175,956
|
|
Consulting fees
|
|
|
99,500
|
|
|
|
282,641
|
|
|
|
344,576
|
|
|
|
192,255
|
|
|
|
|
|
Printing and postage
|
|
|
74,700
|
|
|
|
67,325
|
|
|
|
129,438
|
|
|
|
71,785
|
|
|
|
80,278
|
|
Public relations fees
|
|
|
58,201
|
|
|
|
61,600
|
|
|
|
70,316
|
|
|
|
116,482
|
|
|
|
146,509
|
|
Facilities
|
|
|
|
|
|
|
486,302
|
|
|
|
603,328
|
|
|
|
484,420
|
|
|
|
90,828
|
|
Employee compensation and benefits
|
|
|
|
|
|
|
2,242,005
|
|
|
|
3,498,571
|
|
|
|
2,336,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,712,329
|
|
|
|
10,202,493
|
|
|
|
14,568,422
|
|
|
|
6,504,949
|
|
|
|
4,258,990
|
|
Litigation recovery of management fee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370,000
|
|
Net operating income (loss) before taxes
|
|
|
(2,200,065
|
)
|
|
|
2,201,291
|
|
|
|
3,939,694
|
|
|
|
5,694,435
|
|
|
|
97,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax (Benefit) Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax expense
|
|
|
(175,886
|
)
|
|
|
(132,329
|
)
|
|
|
(244,865
|
)
|
|
|
(215,977
|
)
|
|
|
(87,278
|
)
|
Current tax (benefit) expense
|
|
|
(276,508
|
)
|
|
|
274,962
|
|
|
|
403,937
|
|
|
|
115,044
|
|
|
|
166,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax (benefit) expense
|
|
|
(452,394
|
)
|
|
|
142,633
|
|
|
|
159,072
|
|
|
|
(100,933
|
)
|
|
|
78,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
|
(1,747,671
|
)
|
|
|
2,058,658
|
|
|
|
3,780,622
|
|
|
|
5,795,368
|
|
|
|
18,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized and Unrealized Gain (Loss) on Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-control/Non-affiliated investments
|
|
|
376,329
|
|
|
|
(147,640
|
)
|
|
|
(151,877
|
)
|
|
|
(6,684,320
|
)
|
|
|
(17,465,808
|
)
|
Affiliate investments
|
|
|
|
|
|
|
3,163,722
|
|
|
|
5,373,267
|
|
|
|
3,407,457
|
|
|
|
(20,329,102
|
)
|
Control investments
|
|
|
65,473,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized loss on investments
|
|
|
65,849,587
|
|
|
|
3,016,082
|
|
|
|
5,221,390
|
|
|
|
(3,295,550
|
)
|
|
|
(37,794,910
|
)
|
Net change in unrealized appreciation on investments
|
|
|
(6,914,139
|
)
|
|
|
26,395,490
|
|
|
|
38,334,356
|
|
|
|
23,768,366
|
|
|
|
49,381,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gain on investments
|
|
|
58,935,448
|
|
|
|
29,411,572
|
|
|
|
43,555,746
|
|
|
|
20,472,816
|
|
|
|
11,587,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
57,187,777
|
|
|
$
|
31,470,230
|
|
|
$
|
47,336,368
|
|
|
$
|
26,268,184
|
|
|
$
|
11,605,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets per share resulting from
operations
|
|
$
|
2.57
|
|
|
$
|
1.65
|
|
|
$
|
2.48
|
|
|
$
|
1.45
|
|
|
$
|
0.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
0.42
|
|
|
$
|
0.36
|
|
|
$
|
0.48
|
|
|
$
|
0.24
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
MVC
Capital, Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended
|
|
|
Period Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
|
November 1,
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
|
2006 to
|
|
|
2005 to
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
57,187,777
|
|
|
$
|
31,470,230
|
|
|
$
|
47,336,368
|
|
|
$
|
26,268,184
|
|
|
$
|
11,605,531
|
|
Adjustments to reconcile net increase in net assets resulting
from operations to net cash provided (used) by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized (gain) loss
|
|
|
(65,849,587
|
)
|
|
|
(3,016,082
|
)
|
|
|
(5,221,390
|
)
|
|
|
3,295,550
|
|
|
|
37,794,910
|
|
Net change in unrealized appreciation (depreciation)
|
|
|
6,914,139
|
|
|
|
(26,395,490
|
)
|
|
|
(38,334,356
|
)
|
|
|
(23,768,366
|
)
|
|
|
(49,381,974
|
)
|
Amortization of discounts and fees
|
|
|
(69,917
|
)
|
|
|
(166,926
|
)
|
|
|
(505,428
|
)
|
|
|
(235,428
|
)
|
|
|
|
|
Increase in accrued
payment-in-kind
dividends and interest
|
|
|
(2,418,638
|
)
|
|
|
(1,375,226
|
)
|
|
|
(2,183,786
|
)
|
|
|
(1,370,777
|
)
|
|
|
(101,861
|
)
|
Increase in allocation of flow through income
|
|
|
(140,084
|
)
|
|
|
(200,038
|
)
|
|
|
(279,422
|
)
|
|
|
(114,845
|
)
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends, interest and fees receivable
|
|
|
(1,071,561
|
)
|
|
|
(156,521
|
)
|
|
|
(715,013
|
)
|
|
|
(474,207
|
)
|
|
|
(275,661
|
)
|
Prepaid expenses
|
|
|
53,824
|
|
|
|
(1,995,432
|
)
|
|
|
(2,232,767
|
)
|
|
|
(130,977
|
)
|
|
|
178,200
|
|
Prepaid taxes
|
|
|
(385,138
|
)
|
|
|
56,854
|
|
|
|
98,374
|
|
|
|
(98,374
|
)
|
|
|
|
|
Deferred tax
|
|
|
(175,886
|
)
|
|
|
(132,329
|
)
|
|
|
(244,865
|
)
|
|
|
(215,977
|
)
|
|
|
(87,278
|
)
|
Deposits
|
|
|
(322,129
|
)
|
|
|
(205,000
|
)
|
|
|
(120,000
|
)
|
|
|
|
|
|
|
(45,445
|
)
|
Other assets
|
|
|
25,353
|
|
|
|
25,353
|
|
|
|
33,804
|
|
|
|
(43,155
|
)
|
|
|
|
|
Payable for investment purchased
|
|
|
|
|
|
|
(79,708
|
)
|
|
|
(79,708
|
)
|
|
|
79,708
|
|
|
|
|
|
Incentive Compensation
|
|
|
9,931,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,361
|
|
Liabilities
|
|
|
3,074,755
|
|
|
|
5,092,954
|
|
|
|
7,492,705
|
|
|
|
1,576,079
|
|
|
|
(34,210,000
|
)
|
Purchases of equity investments
|
|
|
(26,401,201
|
)
|
|
|
(24,043,834
|
)
|
|
|
(45,913,914
|
)
|
|
|
(17,315,000
|
)
|
|
|
(20,848,139
|
)
|
Purchases of debt instruments
|
|
|
(66,922,366
|
)
|
|
|
(70,593,329
|
)
|
|
|
(111,105,943
|
)
|
|
|
(37,950,271
|
)
|
|
|
(398,988,675
|
)
|
Purchases of short term investments
|
|
|
|
|
|
|
(361,234,430
|
)
|
|
|
(406,066,963
|
)
|
|
|
(313,505,406
|
)
|
|
|
(550,000
|
)
|
Proceeds from equity instruments
|
|
|
81,971,300
|
|
|
|
8,316,719
|
|
|
|
10,593,459
|
|
|
|
23,396,719
|
|
|
|
4,309,991
|
|
Proceeds from debt instruments
|
|
|
31,941,271
|
|
|
|
26,413,284
|
|
|
|
37,895,884
|
|
|
|
10,796,111
|
|
|
|
8,478,894
|
|
Sales/maturities of short term investments
|
|
|
|
|
|
|
334,203,912
|
|
|
|
458,554,888
|
|
|
|
297,482,209
|
|
|
|
478,170,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by operating activities
|
|
|
27,343,854
|
|
|
|
(84,015,039
|
)
|
|
|
(50,998,073
|
)
|
|
|
(32,328,223
|
)
|
|
|
36,161,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
83,825,625
|
|
|
|
|
|
|
|
|
|
|
|
60,478,127
|
|
|
|
|
|
Offering expenses
|
|
|
(5,431,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,571,184
|
)
|
Distributions to shareholders paid
|
|
|
(9,122,426
|
)
|
|
|
(6,812,963
|
)
|
|
|
(9,081,994
|
)
|
|
|
(4,572,359
|
)
|
|
|
(1,475,165
|
)
|
Net borrowings under term loan
|
|
|
|
|
|
|
30,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings under revolving credit facility
|
|
|
(50,000,000
|
)
|
|
|
45,000,000
|
|
|
|
100,000,000
|
|
|
|
(10,427,296
|
)
|
|
|
10,025,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from financing activities
|
|
|
19,272,108
|
|
|
|
68,187,037
|
|
|
|
90,918,006
|
|
|
|
45,478,472
|
|
|
|
(23,021,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents for the period
|
|
|
46,615,962
|
|
|
|
(15,828,002
|
)
|
|
|
39,919,933
|
|
|
|
13,150,249
|
|
|
|
13,140,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
66,217,123
|
|
|
|
26,297,190
|
|
|
|
26,297,190
|
|
|
|
13,146,941
|
|
|
|
6,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
112,833,085
|
|
|
$
|
10,469,188
|
|
|
$
|
66,217,123
|
|
|
$
|
26,297,190
|
|
|
$
|
13,146,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-10
During the nine months ended July 31, 2007 and 2006, MVC
Capital, Inc. paid $3,536,606, and $359,487 in interest,
respectively.
During the nine months ended July 31, 2007 and 2006, MVC
Capital, Inc. paid $144,016, and $217,204 in income taxes,
respectively.
Non-cash
activity:
During the nine months ended July 31, 2007 and 2006, MVC
Capital, Inc. recorded payment in kind (pik) dividend and
interest of $2,418,638, and $1,375,226, respectively. This
amount was added to the principal balance of the investments and
recorded as interest/dividend income.
During the nine months ended July 31, 2007 and 2006, MVC
Capital, Inc. was allocated $246,672, and $348,320,
respectively, in flow-through income from its equity investment
in Octagon Credit Investors, LLC. Of this amount, $106,588, and
$148,282, respectively, was received in cash and the balance of
$140,084, and $200,038, respectively, was undistributed and
therefore increased the cost
and/or fair
value or carrying value of the investment.
On November 2, 2005, MVC Capital, Inc. re-issued
1,904 shares of treasury stock, in lieu of a cash
distribution totaling $19,818, in accordance with the
Companys dividend reinvestment plan.
On December 27, 2005, MVC Capital, Inc. exchanged $286,200
from the Timberland Machines & Irrigation, Inc.s
junior revolving line of credit for 29 shares of its
common stock.
On December 31, 2005, MVC Capital, Inc. exercised its
ProcessClaims, Inc. warrants for 373,362 shares of
preferred stock.
On January 3, 2006, MVC Capital, Inc. exercised its warrant
in Octagon Credit Investors, LLC. After the warrant was
exercised, MVC Capital Inc.s ownership increased. As a
result, Octagon is now considered an affiliate as defined in the
Investment Company Act of 1940. See Note 3 to the
consolidated financial statements for further information
regarding Investment Classification.
On February 1, 2006, MVC Capital, Inc. re-issued
1,824 shares of treasury stock, in lieu of a cash
distribution totaling $19,953, in accordance with the
Companys dividend reinvestment plan.
On April 28, 2006, MVC Capital, Inc. increased the
availability under the SGDA Sanierungsgesellschaft fur Deponien
und Altlasten (SGDA) revolving credit facility by
$300,000. The SGDA bridge note for $300,000 was added to the
revolving credit facility and the bridge loan was removed from
MVC Capital Inc.s books as apart of the refinancing.
On November 1, 2006, MVC Capital, Inc. re-issued
2,326 shares of treasury stock, in lieu of a cash
distribution totaling $28,871, in accordance with the
Companys dividend reinvestment plan.
On January 2, 2007, MVC Capital, Inc. re-issued
3,684 shares of treasury stock, in lieu of a cash
distribution totaling $48,641, in accordance with the
Companys dividend reinvestment plan.
On February 16, 2007, MVC Capital, Inc. exchanged the
$200,000 HuaMei Capital Company convertible promissory note for
50 shares of its common stock.
On May 1, 2007, MVC Capital, Inc. re-issued
4,126 shares of treasury stock, in lieu of a cash
distribution totaling $59,910, in accordance with the
Companys dividend reinvestment plan.
On May 9, 2007, MVC Capital Inc. exchanged
65,000 shares of Dakota Growers Pasta Company, Inc. Common
Stock for 65,000 shares of Convertible Preferred Stock.
The accompanying notes are an integral part of these
consolidated financial statements.
F-11
MVC
Capital, Inc.
Consolidated Statements of Changes in Net
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
|
November 1,
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
|
2006 to
|
|
|
2005 to
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
$
|
(1,747,671.47
|
)
|
|
$
|
2,058,658.00
|
|
|
$
|
3,780,622
|
|
|
$
|
5,795,368
|
|
|
$
|
18,467
|
|
Net realized gain
|
|
|
65,849,587
|
|
|
|
3,016,082
|
|
|
|
5,221,390
|
|
|
|
(3,295,550
|
)
|
|
|
(37,794,910
|
)
|
Net change in unrealized appreciation (depreciation)
|
|
|
(6,914,139
|
)
|
|
|
26,395,490
|
|
|
|
38,334,356
|
|
|
|
23,768,366
|
|
|
|
49,381,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets from operations
|
|
|
57,187,777
|
|
|
|
31,470,230
|
|
|
|
47,336,368
|
|
|
|
26,268,184
|
|
|
|
11,605,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder Distributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to shareholders
|
|
|
(9,259,848
|
)
|
|
|
(6,872,494
|
)
|
|
|
(9,163,765
|
)
|
|
|
(4,580,676
|
)
|
|
|
(10,072
|
)
|
Return of capital distributions to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,465,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets from shareholder distributions
|
|
|
(9,259,848
|
)
|
|
|
(6,872,494
|
)
|
|
|
(9,163,765
|
)
|
|
|
(4,580,676
|
)
|
|
|
(1,475,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Share Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
83,825,625
|
|
|
|
|
|
|
|
|
|
|
|
60,478,127
|
|
|
|
|
|
Reissuance of treasury stock to purchase investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,400,000
|
|
|
|
|
|
Offering expenses
|
|
|
(5,431,091
|
)
|
|
|
|
|
|
|
|
|
|
|
(402,296
|
)
|
|
|
|
|
Reissuance of treasury stock in lieu of cash dividend
|
|
|
137,422
|
|
|
|
59,531
|
|
|
|
81,771
|
|
|
|
8,317
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,571,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets from capital share transactions
|
|
|
78,531,956
|
|
|
|
59,531
|
|
|
|
81,771
|
|
|
|
61,484,148
|
|
|
|
(31,571,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in net assets
|
|
|
126,459,885
|
|
|
|
24,657,267
|
|
|
|
38,254,374
|
|
|
|
83,171,656
|
|
|
|
(21,440,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, beginning of period
|
|
|
236,993,374
|
|
|
|
198,739,000
|
|
|
|
198,739,000
|
|
|
|
115,567,344
|
|
|
|
137,008,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period
|
|
$
|
363,453,259
|
|
|
$
|
223,396,267
|
|
|
$
|
236,993,374
|
|
|
$
|
198,739,000
|
|
|
$
|
115,567,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding, end of period
|
|
|
24,262,566
|
|
|
|
19,092,028
|
|
|
|
19,093,929
|
|
|
|
19,086,566
|
|
|
|
12,293,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-12
MVC
Capital, Inc.
Consolidated Selected Per Share Data and
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended
|
|
|
Period Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1,
|
|
|
November 1,
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
|
2006 to
|
|
|
2005 to
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
12.41
|
|
|
$
|
10.41
|
|
|
$
|
10.41
|
|
|
$
|
9.40
|
|
|
$
|
8.48
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
|
(0.04
|
)
|
|
|
0.11
|
|
|
|
0.20
|
|
|
|
0.32
|
|
|
|
|
|
Net realized and unrealized gain on investments
|
|
|
2.61
|
|
|
|
1.54
|
|
|
|
2.28
|
|
|
|
1.13
|
|
|
|
0.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets from operations
|
|
|
2.57
|
|
|
|
1.65
|
|
|
|
2.48
|
|
|
|
1.45
|
|
|
|
0.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder Distributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(0.42
|
)
|
|
|
(0.36
|
)
|
|
|
(0.48
|
)
|
|
|
(0.24
|
)
|
|
|
|
|
Return of capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets from shareholder distributions
|
|
|
(0.42
|
)
|
|
|
(0.36
|
)
|
|
|
(0.48
|
)
|
|
|
(0.24
|
)
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital share transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive effect of share issuance
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.13
|
|
Dilutive effect of share issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets from capital share transactions
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
(0.20
|
)
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
14.98
|
|
|
$
|
11.70
|
|
|
$
|
12.41
|
|
|
$
|
10.41
|
|
|
$
|
9.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of period
|
|
$
|
16.17
|
|
|
$
|
13.22
|
|
|
$
|
13.08
|
|
|
$
|
11.25
|
|
|
$
|
9.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market premium (discount)
|
|
|
7.94
|
%
|
|
|
12.99
|
%
|
|
|
5.40
|
%
|
|
|
8.07
|
%
|
|
|
(1.70
|
)%
|
Total Return At NAV(a)
|
|
|
24.48
|
%
|
|
|
16.00
|
%
|
|
|
24.23
|
%
|
|
|
13.36
|
%
|
|
|
12.26
|
%
|
Total Return At Market(a)
|
|
|
27.08
|
%
|
|
|
20.93
|
%
|
|
|
20.75
|
%
|
|
|
24.38
|
%
|
|
|
15.56
|
%
|
Ratios and Supplemental Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (in thousands)
|
|
$
|
363,453.26
|
|
|
$
|
223,396
|
|
|
$
|
236,993
|
|
|
$
|
198,739
|
|
|
$
|
115,567
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
8.86
|
%(b)
|
|
|
6.57
|
%(b)
|
|
|
6.85
|
%
|
|
|
3.69
|
%
|
|
|
3.74
|
%(c)
|
Expenses excluding tax expense (benefit)
|
|
|
9.05
|
%(b)
|
|
|
6.48
|
%(b)
|
|
|
6.78
|
%
|
|
|
3.75
|
%
|
|
|
3.68
|
%(c)
|
Expenses excluding incentive compensation
|
|
|
4.47
|
%(b)
|
|
|
3.57
|
%(b)
|
|
|
4.03
|
%
|
|
|
3.05
|
%
|
|
|
3.74
|
%(c)
|
Expenses excluding incentive compensation, interest and other
borrowing costs
|
|
|
2.88
|
%(b)
|
|
|
3.14
|
%(b)
|
|
|
3.29
|
%
|
|
|
3.03
|
%
|
|
|
3.74
|
%(c)
|
Net operating income (loss)
|
|
|
(0.76
|
)%(b)
|
|
|
1.31
|
%(b)
|
|
|
1.76
|
%
|
|
|
3.34
|
%
|
|
|
0.02
|
%
|
Net operating income (loss) before tax expense (benefit)
|
|
|
(0.96
|
)%(b)
|
|
|
1.40
|
%(b)
|
|
|
1.83
|
%
|
|
|
3.28
|
%
|
|
|
0.08
|
%
|
Net operating income before incentive compensation
|
|
|
3.63
|
%(b)
|
|
|
4.30
|
%(b)
|
|
|
4.58
|
%
|
|
|
3.98
|
%
|
|
|
0.02
|
%
|
Net operating income before incentive compensation, interest and
other borrowing costs
|
|
|
5.22
|
%(b)
|
|
|
4.73
|
%(b)
|
|
|
5.32
|
%
|
|
|
4.00
|
%
|
|
|
0.02
|
%
|
|
|
|
(a) |
|
Total annual return is historical and assumes changes in share
price, reinvestments of all dividends and distributions, and no
sales charge for the period. |
|
(b) |
|
Annualized |
|
(c) |
|
The expense ratio for the year ended October 31, 2004,
included a one-time expense recovery of approximately $250,000.
For the year ended October 31, 2004, without this one-time
recovery, the expense ratio, excluding and including tax expense
would have been 3.89% and 3.95%, respectively. |
The accompanying notes are an integral part of these
consolidated financial statements.
F-13
MVC
Capital, Inc.
Notes to Consolidated Financial Statements
(Information at July 31, 2007 and 2006 and for the nine
months ended July 31, 2007 and 2006 is unaudited)
|
|
1.
|
Organization
and Business Purpose
|
MVC Capital, Inc., formerly known as meVC Draper Fisher
Jurvetson Fund I, Inc. (the Company), is a
Delaware corporation organized on December 2, 1999 which
commenced operations on March 31, 2000. On December 2,
2002 the Company announced that it would begin doing business
under the name MVC Capital. The Companys investment
objective is to seek to maximize total return from capital
appreciation
and/or
income. The Company seeks to achieve its investment objective by
providing equity and debt financing to companies that are, for
the most part, privately owned. The Companys current
investments in Portfolio Companies consist principally of senior
and subordinated loans, venture capital, mezzanine and preferred
instruments and private equity investments.
The Company has elected to be treated as a business development
company under the Investment Company Act of 1940, as amended
(the 1940 Act). The shares of the Company commenced
trading on the New York Stock Exchange, Inc. (the
NYSE) under the symbol MVC on June 26, 2000.
The Company had entered into an advisory agreement with meVC
Advisers, Inc. (the Former Advisor) which had
entered into a sub-advisory agreement with Draper Fisher
Jurvetson MeVC Management Co., LLC (the Former
Sub-Advisor). On June 19, 2002, the Former Advisor
resigned without prior notice to the Company as the
Companys investment advisor. This resignation resulted in
the automatic termination of the agreement between the Former
Advisor and the Former Sub-Advisor to the Company. As a result,
the Companys board internalized the Companys
operations, including management of the Companys
investments.
At the February 28, 2003 Annual Meeting of Shareholders, a
new board of directors replaced the former board of directors of
the Company (the Former Board) in its entirety. On
March 6, 2003, the results of the election were certified
by the Inspector of Elections, whereupon the Board terminated
John M. Grillos, the Companys previous CEO. Shortly
thereafter, other members of the Companys senior
management team, who had previously reported to
Mr. Grillos, resigned. With these significant changes in
the Board and management of the Company, the Company operated in
a transition mode and, as a result, no portfolio investments
were made from early March 2003 through the end of October 2003
(the end of the Fiscal Year). During this period, the Board
explored various alternatives for a long-term management plan
for the Company. Accordingly, at the September 16, 2003
Special Meeting of Shareholders, the Board voted and approved
the Companys business plan.
On November 6, 2003, Michael Tokarz assumed his position as
Chairman, Portfolio Manager and Director of the Company.
Mr. Tokarz is compensated by the Company based upon his
positive performance as the Portfolio Manager.
On March 29, 2004 at the Annual Shareholders meeting, the
shareholders approved the election of Emilio Dominianni, Robert
S. Everett, Gerald Hellerman, Robert C. Knapp and Michael Tokarz
to serve as members of the Board of Directors of the Company and
adopted an amendment to the Companys Certificate of
Incorporation authorizing the changing of the name of the
Company from meVC Draper Fisher Jurvetson Fund I,
Inc. to MVC Capital, Inc.
On July 7, 2004 the Companys name change from
meVC Draper Fisher Jurvetson Fund I, Inc. to
MVC Capital, Inc. became effective.
On July 16, 2004 the Company commenced the operations of
MVC Financial Services, Inc.
On September 7, 2006, the stockholders of MVC Capital
approved the adoption of an investment advisory and management
agreement with a 92% shareholder approval. The approved
investment advisory and management agreement, which was entered
into on October 31, 2006, provides for external management
of the Company by The Tokarz Group Advisers LLC (TTG
Advisers) (the Advisory Agreement), which is
led by Michael Tokarz. The agreement took effect on
November 1, 2006. Upon the effectiveness of the Advisory
Agreement on November 1, 2006, Mr. Tokarzs
employment agreement with the Company terminated. All of the
individuals (including the Companys investment
professionals) who had been previously employed by the Company
as of the fiscal year
F-14
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
ended October 31, 2006 became employed by TTG Advisers and
are expected to continue to provide services to the Company.
On July 16, 2004, the Company formed a wholly-owned
subsidiary, MVC Financial Services, Inc. (MVCFS).
MVCFS is incorporated in Delaware and its principal purpose is
to provide advisory, administrative and other services to the
Company, the Companys portfolio companies and other
entities. MVCFS had opening equity of $1 (100 shares at
$0.01 per share). The Company does not hold MVCFS for investment
purposes and does not intend to sell MVCFS. In the
consolidation, all intercompany accounts have been eliminated.
|
|
3.
|
Significant
Accounting Policies
|
The following is a summary of significant accounting policies
followed by the Company in the preparation of its consolidated
financial statements:
The preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts and disclosures
in the consolidated financial statements. Actual results could
differ from those estimates.
Valuation of Portfolio Securities
Pursuant to the requirements of the 1940 Act, we value our
portfolio securities at their current market values or, if
market quotations are not readily available, at their estimates
of fair values. Because our portfolio company investments
generally do not have readily ascertainable market values, we
record these investments at fair value in accordance with our
Valuation Procedures adopted by the board of directors. As
permitted by the SEC, the board of directors has delegated the
responsibility of making fair value determinations to the
Valuation Committee, subject to the board of directors
supervision and pursuant to our Valuation Procedures. Our board
of directors may also elect in the future to hire independent
consultants to review the Valuation Procedures or to conduct an
independent valuation of one or more of our portfolio
investments.
Pursuant to our Valuation Procedures, the Valuation Committee
(which is currently comprised of three Independent Directors)
determines fair valuations of portfolio company investments on a
quarterly basis (or more frequently, if deemed appropriate under
the circumstances). Any changes in valuation are recorded in the
statements of operations as Net unrealized gain (loss) on
investments. Currently, our net asset value
(NAV) per share is calculated and published on a
monthly basis. The fair values determined as of the most recent
quarter end are reflected, in the next calculated NAV per share.
(If the Valuation Committee determines to fair value an
investment more frequently than quarterly, the most recently
determined fair value would be reflected in the published NAV
per share.)
The Company calculates our NAV per share by subtracting all
liabilities from the total value of our portfolio securities and
other assets and dividing the result by the total number of
outstanding shares of our common stock on the date of valuation.
At October 31, 2006 and July 31, 2007, approximately
79.5% and 72.6%, respectively, of our total assets represented
portfolio investments recorded at fair value (Fair Value
Investments).
Initially, Fair Value Investments held by the Company are valued
at cost (absent the existence of circumstances warranting, in
managements and the Valuation Committees view, a
different initial value). During the period that a Fair Value
Investment is held by the Company, its original cost may cease
to represent an appropriate valuation, and other factors must be
considered. No pre-determined formula can be applied to
determine fair values. Rather, the Valuation Committee makes
fair value assessments based upon the value at which the
securities of the portfolio company could be sold in an orderly
disposition over a reasonable period of time between willing
parties, other than
F-15
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
in a forced or liquidation sale. The liquidity event whereby the
Company exits an investment is generally the sale, the merger,
the recapitalization or, in some cases, the initial public
offering of the portfolio company.
There is no one methodology to determine fair value and, in
fact, for any portfolio security, fair value may be expressed as
a range of values, from which the Company derives a single
estimate of fair value. To determine the fair value of a
portfolio security, the Valuation Committee analyzes the
portfolio companys financial results and projections,
publicly traded comparables when available, precedent exit
transactions in the market when available, as well as other
factors. The Company generally requires, where practicable,
portfolio companies to provide annual audited and more regular
unaudited financial statements,
and/or
annual projections for the upcoming fiscal year.
The fair value of our portfolio securities is inherently
subjective. Because of the inherent uncertainty of fair
valuation of portfolio securities that do not have readily
ascertainable market values, our estimate of fair value may
significantly differ from the fair market value that would have
been used had a ready market existed for the securities. Such
values also do not reflect brokers fees or other selling
costs which might become payable on disposition of such
investments.
The Companys equity interests in portfolio companies for
which there is no liquid public market are valued at fair value.
The Valuation Committees analysis of fair value may
include various factors, such as multiples of EBITDA, cash
flow(s), net income, revenues or in limited instances book value
or liquidation value. All of these factors may be subject to
adjustments based upon the particular circumstances of a
portfolio company or the Companys actual investment
position. For example, adjustments to EBITDA may take into
account compensation to previous owners or acquisition,
recapitalization, or restructuring or related items.
The Valuation Committee may look to private merger and
acquisition statistics, public trading multiples discounted for
illiquidity and other factors, or industry practices in
determining fair value. The Valuation Committee may also
consider the size and scope of a portfolio company and its
specific strengths and weaknesses, as well as any other factors
it deems relevant in assessing the value. The determined fair
values may be discounted to account for restrictions on resale
and minority positions.
Generally, the value of our equity interests in public companies
for which market quotations are readily available is based upon
the most recent closing public market price. Portfolio
securities that carry certain restrictions on sale are typically
valued at a discount from the public market value of the
security.
For loans and debt securities, fair value generally approximates
cost unless there is a reduced value or overall financial
condition of the portfolio company or other factors indicate a
lower fair value for the loan or debt security.
Generally, in arriving at a fair value for a debt security or a
loan, the Valuation Committee focuses on the portfolio
companys ability to service and repay the debt and
considers its underlying assets. With respect to a convertible
debt security, the Valuation Committee also analyzes the excess
of the value of the underlying security over the conversion
price as if the security was converted when the conversion
feature is in the money (appropriately discounted if
restricted). If the security is not currently convertible, the
use of an appropriate discount in valuing the underlying
security is typically considered. If the value of the underlying
security is less than the conversion price, the Valuation
Committee focuses on the portfolio companys ability to
service and repay the debt.
When the Company receives nominal cost warrants or free equity
securities (nominal cost equity) with a debt
security, the Company allocates its cost basis in the investment
between debt securities and nominal cost equity at the time of
origination.
Interest income is recorded on an accrual basis to the extent
that such amounts are expected to be collected. Origination,
closing
and/or
closing fees associated with investments in portfolio companies
are accreted into income over the respective terms of the
applicable loans. Upon the prepayment of a loan or debt
security, any prepayment penalties and unamortized loan
origination, closing and commitment fees are recorded as income.
Prepayment premiums are recorded on loans when received.
F-16
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
For loans, debt securities, and preferred securities with
contractual
payment-in-kind
interest or dividends, which represent contractual
interest/dividends accrued and added to the loan balance or
liquidation preference that generally becomes due at maturity,
the Company will not accrue
payment-in-kind
interest/dividends if the portfolio company valuation indicates
that the
payment-in-kind
interest is not collectible. However, the Company may accrue
payment-in-kind
interest if the health of the portfolio company and the
underlying securities are not in question. All
payment-in-kind
interest that has been added to the principal balance or
capitalized is subject to ratification by the Valuation
Committee.
Escrows from the sale of a portfolio company are generally
valued at an amount which may be expected to be received from
the buyer under the escrows various conditions discounted
for both risk and time.
Investment Classification As required
by the 1940 Act, we classify our investments by level of
control. As defined in the 1940 Act, Control
Investments are investments in those companies that we are
deemed to Control. Affiliate Investments
are investments in those companies that are Affiliated
Companies of us, as defined in the 1940 Act, other than
Control Investments. Non-Control/Non-Affiliate
Investments are those that are neither Control Investments
nor Affiliate Investments. Generally, under the 1940 Act, we are
deemed to control a company in which we have invested if we own
25% or more of the voting securities of such company or have
greater than 50% representation on its board. We are deemed to
be an affiliate of a company in which we have invested if we own
5% or more and less than 25% of the voting securities of such
company.
Investment Transactions and Related Operating
Income Investment transactions and related
revenues and expenses are accounted for on the trade date (the
date the order to buy or sell is executed). The cost of
securities sold is determined on a
first-in,
first-out basis, unless otherwise specified. Dividend income and
distributions on investment securities is recorded on the
ex-dividend date. The tax characteristics of such distributions
received from our portfolio companies will be determined by
whether or not the distribution was made from the
investments current taxable earnings and profits or
accumulated taxable earnings and profits from prior years.
Interest income, which includes accretion of discount and
amortization of premium, if applicable, is recorded on the
accrual basis to the extent that such amounts are expected to be
collected. Fee income includes fees for guarantees and services
rendered by the Company or its wholly-owned subsidiary to
portfolio companies and other third parties such as due
diligence, structuring, transaction services, monitoring
services, and investment advisory services. Guaranty fees are
recognized as income over the related period of the guaranty.
Due diligence, structuring, and transaction services fees are
generally recognized as income when services are rendered or
when the related transactions are completed. Monitoring and
investment advisory services fees are generally recognized as
income as the services are rendered. Any fee income determined
to be loan origination fees, original issue discount, and market
discount are capitalized and then amortized into income using
the effective interest method. Upon the prepayment of a loan or
debt security, any unamortized loan origination fees are
recorded as income and any unamortized original issue discount
or market discount is recorded as a realized gain. For
investments with
payment-in-kind
(PIK) interest and dividends, we base income and
dividend accrual on the valuation of the PIK notes or securities
received from the borrower. If the portfolio company indicates a
value of the PIK notes or securities that is not sufficient to
cover the contractual interest or dividend, we will not accrue
interest or dividend income on the notes or securities.
Cash Equivalents For the purpose of
the Consolidated Balance Sheets and Consolidated Statements of
Cash Flows, the Company considers all money market and all
highly liquid temporary cash investments purchased with an
original maturity of less than three months to be cash
equivalents.
Restricted Securities The Company will
invest in privately placed restricted securities. These
securities may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming
negotiations and expense, and a prompt sale at an acceptable
price may be difficult.
Distributions to Shareholders
Distributions to shareholder are recorded on the ex-dividend
date.
F-17
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
Income Taxes It is the policy of the
Company to meet the requirements for qualification as a
regulated investment company (RIC) under
Subchapter M of the Internal Revenue Code of 1986, as amended.
As a RIC, the Company is not subject to income tax to the extent
that it distributes all of its investment company taxable income
and net realized capital gains for its taxable year. The Company
is also exempt from excise tax if it distributes at least 98% of
its ordinary income and capital gains during each calendar year.
Our consolidated operating subsidiary, MVCFS, is subject to
federal and state income tax. We use the liability method in
accounting for income taxes. Deferred tax assets and liabilities
are recorded for temporary differences between the tax basis of
assets and liabilities and their reported amounts in the
financial statements, using statutory tax rates in effect for
the year in which the differences are expected to reverse. A
valuation allowance is provided against deferred tax assets when
it is more likely than not that some portion or all of the
deferred tax asst will not be realized.
Reclassifications Certain amounts from
prior years have had to be reclassified to conform to the
current year presentation.
On November 6, 2003, Michael Tokarz assumed his positions
as Chairman, Portfolio Manager and Director of the Company.
Under internal management, Mr. Tokarz was entitled to
compensation pursuant to his agreement with the Company, under
which the Company was required to pay Mr. Tokarz incentive
compensation in an amount equal to the lesser of (a) 20% of
the net income of the Company for the fiscal year; or
(b) the sum of (i) 20% of the net capital gains
realized by the Company in respect of the investments made
during his tenure as Portfolio Manager; and (ii) the
amount, if any, by which the Companys total expenses for a
fiscal year were less than two percent of the Companys net
assets (determined as of the last day of the period).
Mr. Tokarz has determined to allocate a portion of the
incentive compensation to certain employees of the Company. For
the year ended October 31, 2006, Mr. Tokarz received
no cash or other compensation from the Company pursuant to his
contract. Please see Note 5 Incentive
Compensation for more information.
On February 20, 2006, Robert Everett resigned from the
Companys board of directors. Mr. Everetts
resignation did not involve a disagreement with the Company on
any matter.
On February 23, 2006, in accordance with the recommendation
of the Nominating/Corporate Governance/Strategy Committee of the
Companys board of directors, Mr. William E. Taylor
was appointed to serve on the Companys board of directors.
Mr. Taylor was also appointed to serve on the Audit
Committee and Nominating/Corporate Governance/Strategy Committee
of the Companys board of directors.
On May 30, 2006, the Companys board of directors,
including all of the Independent Directors (Mr. Tokarz
recused himself from making a determination on this matter),
unanimously approved the Advisory Agreement, which provides for
the Company to be managed externally by TTG Advisers, which is
controlled exclusively by Mr. Tokarz. On September 7,
2006, shareholders approved the Advisory Agreement at the annual
meeting of shareholders.
On November 1, 2006, Mr. Tokarzs agreement with
the Company was terminated when the Advisory Agreement became
effective as of that date. Under the terms of the Advisory
Agreement, TTG Advisers determines, consistent with the
Companys investment strategy, the composition of the
Companys portfolio, the nature and timing of the changes
to the Companys portfolio and the manner of implementing
such changes. TTG Advisers also identifies, and negotiates the
structure of the Companys investments (including
performing due diligence on prospective portfolio companies),
closes and monitors the Companys investments, determines
the securities and other assets purchased, retains or sells and
oversees the administration, recordkeeping and compliance
functions of the Company
and/or third
parties performing such functions for the Company. TTG
Advisers services under the Advisory Agreement are not
exclusive, and it may furnish similar services to other
entities. Pursuant to the Advisory Agreement, the Company is
required to pay TTG Advisers a fee for investment advisory and
management services
F-18
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
consisting of two components a base management fee
and an incentive fee. The base management fee is calculated at
2.0% per annum of the Companys total assets excluding cash
and the value of any investment by the Company not made in
portfolio companies (Non-Eligible Assets) but
including assets purchased with borrowed funds that are not
Non-Eligible Assets. The incentive fee consists of two parts:
(i) one part is based on our pre-incentive fee net
operating income; and (ii) the other part is based on the
capital gains realized on our portfolio of securities acquired
after November 1, 2003. The Advisory Agreement provides for
an expense cap pursuant to which TTG Advisers will absorb or
reimburse operating expenses of the Company to the extent
necessary to limit the Companys expense ratio (the
consolidated expenses of the Company, including any amounts
payable to TTG Advisers under the base management fee, but
excluding the amount of any interest and other direct borrowing
costs, taxes, incentive compensation and extraordinary expenses
taken as a percentage of the Companys average net assets)
to 3.25% in a given fiscal year. Please see Note 5
Incentive Compensation for more information.
On April 4, 2007, in accordance with the recommendation of
the Nominating/Corporate Governance/Strategy Committee of the
Companys board of directors, Mr. Warren E. Holtsberg
was appointed to serve on the Companys board of directors.
On June 28, 2007, all of the Companys directors were
re-elected to serve on the Board until the next annual meeting
of stockholders.
|
|
5.
|
Incentive
Compensation
|
Effective November 1, 2006, Mr. Tokarzs
employment agreement with the Company terminated and the
obligations under Mr. Tokarzs agreement were
superseded by those under the Advisory Agreement entered into
with TTG Advisers. Pursuant to the Advisory Agreement, the
Company pays an incentive fee to TTG Advisers which is
generally: (i) 20% of pre-incentive fee net operating
income and (ii) 20% of net realized capital gains (on our
portfolio securities acquired after November 1, 2003). TTG
Advisers is entitled to an incentive fee with respect to our
pre-incentive fee net operating income in each fiscal quarter as
follows: no incentive fee in any fiscal quarter in which our
pre-incentive fee net operating income does not exceed the
hurdle rate of 1.75% of net assets, 100% of our pre-incentive
fee net operating income with respect to that portion of such
pre-incentive fee net operating income, if any, that exceeds the
hurdle rate but is less than 2.1875% of net assets in any fiscal
quarter and 20% of the amount of our pre-incentive fee net
operating income, if any, that exceeds 2.1875% of net assets in
any fiscal quarter. Under the Advisory Agreement, the accrual of
the provision for incentive compensation for net realized
capital gains is consistent with the accrual that was required
under the employment agreement with Mr. Tokarz.
Under internal management, Mr. Tokarz was entitled to
compensation pursuant to his agreement with the Company, under
which the Company was required to pay Mr. Tokarz incentive
compensation in an amount equal to the lesser of (a) 20% of
the net income of the Company for the fiscal year; or
(b) the sum of (i) 20% of the net capital gains
realized by the Company in respect of the investments made
during his tenure as Portfolio Manager; and (ii) the
amount, if any, by which the Companys total expenses for a
fiscal year were less than two percent of the Companys net
assets (determined as of the last day of the period).
At October 31, 2006, the provision for estimated incentive
compensation was $7,172,352. During the nine month period ended
July 31, 2007, this provision was increased by a net amount
of $9,931,942 to $17,104,294. The increase in the provision for
incentive compensation during the nine month period ended
July 31, 2007 was primarily a result of the sale of Baltic
Motors and BM Auto for a combined realized gain of
$65.5 million, which was a $52.3 million increase from
the carrying value at October 31, 2006. The amount of the
provision also reflects the Valuation Committees
determination to increase the fair values of five of the
Companys portfolio investments (Dakota Growers Pasta
Company, Inc. (Dakota Growers), Octagon, SGDA,
PreVisor and Vitality) by a total of $5.8 million and
decrease the fair value of Ohio Medical Corporation (Ohio
Medical) by $9.0 million. During the year ended
October 31, 2006, Mr. Tokarz was paid no cash or other
compensation. However, on October 2, 2006, the Company
realized a gain of $551,092 from the sale of a portion of the
Companys LLC membership interest in Octagon. This
transaction triggered an incentive compensation payment
obligation of $110,218 to Mr. Tokarz, which was paid on
January 12, 2007. After the increase in the provision due
to the sale of Baltic Motors and BM
F-19
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
Auto and the decrease in the provision due to the overall impact
of the Valuation Committees determinations and payment
made to Mr. Tokarz, the balance of the incentive
compensation provision, at July 31, 2007, was $17,104,294.
Pursuant to the Advisory Agreement, only after a realization
event (as is defined under such agreement) and an audit of the
financials for the relevant fiscal year is completed, may the
incentive compensation be paid to TTG Advisers. In this regard,
even though the Company has experienced a realization event as
to Baltic Motors and BM Auto, the Companys incentive
compensation payment obligation will only be triggered to the
extent the Company has net realized capital gains for the fiscal
year (in excess of any unrealized capital depreciation). During
the nine month period ended July 31, 2007, there was no
provision recorded for the net operating income portion of the
incentive fee as pre-incentive fee net operating income did not
exceed the hurdle rate.
|
|
6.
|
Dividends
and Distributions to Shareholders
|
As a RIC, the Company is required to distribute to its
shareholders, in a timely manner, at least 90% of its investment
company taxable and tax-exempt income each year. If the Company
distributes, in a calendar year, at least 98% of its ordinary
income for such calendar year and its capital gain net income
for the
12-month
period ending on October 31 of such calendar year (as well as
any portion of the respective 2% balances not distributed in the
previous year), it will not be subject to the 4% non-deductible
federal excise tax on certain undistributed income of RICs.
Dividends and capital gain distributions, if any, are recorded
on the ex-dividend date. Dividends and capital gain
distributions are generally declared and paid quarterly
according to the Companys policy established on
July 11, 2005. An additional distribution may be paid by
the Company to avoid imposition of federal income tax on any
remaining undistributed net investment income and capital gains.
Distributions can be made payable by the Company either in the
form of a cash distribution or a stock dividend. The amount and
character of income and capital gain distributions are
determined in accordance with income tax regulations which may
differ from accounting principles generally accepted in the
United States of America. These differences are due primarily to
differing treatments of income and gain on various investment
securities held by the Company, timing differences and differing
characterizations of distributions made by the Company.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications and may affect
the allocation between net operating income, net realized gain
(loss) and paid in capital.
For
the Quarter Ended July 31, 2007
On July 13, 2007, the Companys board of directors
declared a dividend of $.12 per share. The dividend was payable
on July 31, 2007 to shareholders of record on July 24,
2007. The ex-dividend date was July 20, 2007. The total
distribution amounted to $2,911,507, including distributions
reinvested. In accordance with the Companys dividend
reinvestment plan (the Plan), Computershare Ltd.,
the Plan Agent, re-issued 2,769 shares of common stock from
the Companys treasury to shareholders participating in the
Plan.
For
the Quarter Ended April 30, 2007
On April 13, 2007, the Companys board of directors
declared a dividend of $.12 per share. The dividend was payable
on April 30, 2007 to shareholders of record on
April 23, 2007. The ex-dividend date was April 19,
2007. The total distribution amounted to $2,911,013, including
distributions reinvested. In accordance with the Plan, the Plan
Agent re-issued 4,127 shares of common stock from the
Companys treasury to shareholders participating in the
Plan.
For
the Quarter Ended January 31, 2007
On December 14, 2006, the Companys board of directors
declared a dividend of $.12 per share and an additional dividend
of $.06 per share. Both dividends were payable on
January 5, 2007 to shareholders of record on
F-20
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
December 28, 2006. The ex-dividend date was
December 26, 2006. The total distribution amounted to
$3,437,326, including distributions reinvested. In accordance
with the Plan, the Plan Agent re-issued 3,682 shares of
common stock from the Companys treasury to shareholders
participating in the Plan.
For
the Year Ended October 31, 2006
On July 11, 2005, the Companys board of directors
announced that it has approved the Companys establishment
of a policy seeking to pay quarterly dividends to shareholders.
On December 20, 2005, the Companys board of directors
declared a dividend of $.12 per share payable on
January 31, 2006 to shareholders of record on
December 30, 2005. The ex-dividend date was
December 28, 2005. The total distribution amounted to
$2,290,616, including distributions reinvested. In accordance
with the Plan, the Plan Agent re-issued 1,824 shares of
common stock from the Companys treasury to shareholders
participating in the Plan.
On April 11, 2006, the Companys board of directors
declared a dividend of $.12 per share payable on April 28,
2006 to shareholders of record on April 21, 2006. The
ex-dividend date was April 19, 2006. The total distribution
amounted to $2,290,835, including distributions reinvested. In
accordance with the Plan, the Plan Agent re-issued
1,734 shares of common stock from the Companys
treasury to shareholders participating in the Plan.
On July 14, 2006, the Companys board of directors
declared a dividend of $.12 per share payable on July 31,
2006 to shareholders of record on July 24, 2006. The
ex-dividend date was July 20, 2006. The total distribution
amounted to $2,291,043, including distributions reinvested. In
accordance with the Plan, the Plan Agent re-issued
1,901 shares of common stock from the Companys
treasury to shareholders participating in the Plan.
On October 13, 2006, the Companys board of directors
declared a dividend of $.12 per share payable on
October 31, 2006 to shareholders of record on
October 24, 2006. The ex-dividend date was October 20,
2006. The total distribution amounted to $2,291,271, including
distributions reinvested. In accordance with the Plan, the Plan
Agent re-issued 2,327 shares of common stock from the
Companys treasury to shareholders participating in the
Plan.
For
the Year Ended October 31, 2005
On July 11, 2005, the Companys board of directors
announced that it has approved the Companys establishment
of a policy seeking to pay quarterly dividends to shareholders.
For the quarter, the board of directors declared a dividend of
$.12 per share payable on July 29, 2005 to shareholders of
record on July 22, 2005. The ex-dividend date was
July 20, 2005. The total distribution amounted to
$2,290,289. In accordance with the Plan, the Plan Agent
re-issued 826 shares of common stock from the
Companys treasury to shareholders participating in the
Plan.
On October 10, 2005, the Companys board of directors
declared a dividend of $.12 per share payable on
October 31, 2005 to shareholders of record on
October 21, 2005. The ex-dividend date was October 19,
2005. The total distribution amounted to $2,290,387. In
accordance with the Plan, the Plan Agent re-issued
1,904 shares of common stock from the Companys
treasury to shareholders participating in the Plan.
For
the Year Ended October 31, 2004
On October 14, 2004, the Companys Board of Directors
declared a nonrecurring dividend of $.12 per share payable to
shareholders of record on October 22, 2004 and payable on
October 29, 2004. In accordance with the Plan, the Plan
Agent purchased shares on the open market of the NYSE for
shareholders participating in the Plan. The total distribution
amounted to $1,475,165.
F-21
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
|
|
7.
|
Transactions
with Other Parties
|
The Company is permitted to co-invest in certain Portfolio
Companies with its affiliates subject to specified conditions
set forth in an exemptive order obtained from the SEC. Under the
terms of the order, Portfolio Companies purchased by the Company
and its affiliates are required to be approved by the
Independent Directors and are required to satisfy certain
conditions established by the SEC. During 2004, 2005, and 2006
no transactions were effected pursuant to the exemptive order.
The Company has sub-leased property at 287 Bowman Avenue,
Purchase, NY, 10577, a building which is owned by Phoenix
Capital Partners, LLC, which is 97% owned by Mr. Tokarz.
The sublease expired on February 28, 2007. Effective
November 1, 2006, under the terms of the Advisory
Agreement, TTG Advisers is responsible for providing office
space to the Company and for the costs associated with providing
such office space. The Companys offices continue to be
located on the second floor of 287 Bowman Avenue.
In connection with the Companys investment in Velocitius,
we have entered into consulting services arrangements with
Jasper Energy, LLC (Jasper). Under the terms of the
arrangements, Jasper provides management consulting services
relating to Velocitius acquisition of certain wind farms
and is to be paid an ongoing monthly service fee of
approximately 8,000 euros ($10,000), a fee equal to 9% of the
profit distributions attributable to the wind farm projects and
a one-time fee equal to 2% of the equity purchase price of the
wind farms (estimated currently at 175,000 euros ($220,000)).
Mr. Tokarz, our Chairman and Portfolio Manager, has a
minority ownership interest in Jasper. Our board of directors,
including all of our Independent Directors (Mr. Tokarz
recused himself from making a determination on this matter),
approved each of the arrangements with Jasper.
|
|
8.
|
Concentration
of Market and Credit Risk
|
Financial instruments that subjected the Company to
concentrations of market risk consisted principally of equity
investments, subordinated notes, and debt instruments (other
than cash equivalents), which represent approximately 79.50% and
72.58% of the Companys total assets at October 31,
2006 and July 31, 2007, respectively. As discussed in
Note 3, these investments consist of securities in
companies with no readily determinable market values and as such
are valued in accordance with the Companys fair value
policies and procedures. The Companys investment strategy
represents a high degree of business and financial risk due to
the fact that the investments (other than cash equivalents) are
generally illiquid, in small and middle market companies, and
include entities with little operating history or entities that
possess operations in new or developing industries. These
investments, should they become publicly traded, would generally
be (i) subject to restrictions on resale, if they were
acquired from the issuer in private placement transactions; and
(ii) susceptible to market risk. At this time, the
Companys investments in short-term securities are in
90-day
Treasury Bills, which are federally guaranteed securities, or
other high quality, highly liquid investments. The
Companys cash balances, if not large enough to be invested
in 90-day
Treasury Bills or other high quality, highly liquid investments,
are swept into designated money market accounts.
For
the Nine Month Period Ended July 31, 2007
During the nine month period ended July 31, 2007, the
Company made eight new investments, committing capital totaling
approximately $53.3 million. The investments were made in
WBS Carbons Acquisition Corp. (WBS)
($3.2 million), Huamei Capital Company, Inc.
(HuaMei) ($200,000), Levlad Arbonne International
LLC (Levlad) ($10.1 million), Total Safety
U.S., Inc. (Total Safety) ($4.5 million), MVC
Partners LLC (MVC Partners) ($71,000), Genevac
U.S. Holdings, Inc. (Genevac)
($14.0 million), SIA Tekers Invest (Tekers)
($2.3 million), and U.S. Gas & Electric,
Inc. (U.S. Gas) ($18.9 million).
The Company also made fourteen follow-on investments in existing
portfolio companies committing capital totaling approximately
$47.4 million. On November 7, 2006, the Company
invested $100,000 in SGDA
F-22
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
Sanierungsgesellschaft fur Deponien und Altasten mbH
(SGDA) by purchasing an additional common equity
interest. On December 22, 2006, the Company purchased an
additional 56,472 shares of common stock in Vitality
Foodservice, Inc. (Vitality) at a cost of
approximately $565,000. On January 9, 2007, the Company
extended to Turf Products LLC (Turf) a
$1.0 million junior revolving note. Turf immediately
borrowed $1.0 million from the note. On January 11,
2007, the Company provided Harmony Pharmacy & Health
Center, Inc. (Harmony Pharmacy) a $4.0 million
revolving credit facility. Harmony Pharmacy immediately borrowed
$1.75 million from the credit facility. On
February 16, 2007, the Company invested $1.8 million
in HuaMei purchasing 450 shares of common stock. At the
same time, the previously issued $200,000 convertible promissory
note was exchanged for 50 shares of HuaMei common stock at
the same price. On February 19, 2007, the Company invested
an additional $8.4 million of common equity interest in
Velocitius B.V. (Velocitius). On February 21,
2007 and May 4, 2007, the Company provided BP Clothing, LLC
(BP) a $5.0 million and a $2.5 million
second lien loan, respectively. On March 26, 2007, the
Company extended a $1.0 million bridge loan to Auto MOTOL
BENI (BENI). On March 30, 2007, the Company
invested an additional $5.0 million in SP Industries, Inc.
(SP) in the form of a subordinated term loan B. On
May 1, 2007, the Company extended to Velocitius a $650,000
revolving line of credit. Velocitius immediately borrowed
approximately $547,000. On May 8, 2007, the Company
provided Baltic Motors Corporation (Baltic Motors) a
$5.5 million bridge loan. On May 9, 2007, the Company
purchased 1.0 million shares of Dakota Growers preferred
stock at a cost of $10.0 million. At that time,
65,000 shares of Dakota Growers common stock were converted
to 65,000 shares of convertible preferred stock. On
July 30, 2007, the Company provided Ohio Medical a
$2.0 million convertible unsecured promissory note.
At the beginning of the 2007 fiscal year, the junior revolving
note provided to Timberland Machines & Irrigation,
Inc. (Timberland) had a balance outstanding of
approximately $2.8 million. On November 27, 2006, the
amount available on the revolving note was increased by $750,000
to $4.0 million. Net repayments during for the nine month
period ended July 31, 2007 were $300,000 resulting in a
balance as of July 31, 2007 of $2.5 million.
At October 31, 2006, the balance of the revolving credit
facility provided to Octagon Credit Investors, LLC
(Octagon) was $3.3 million. Net borrowings
during the nine month period ended July 31, 2007 were
$2.8 million resulting in a balance outstanding of
approximately $6.1 million.
At October 31, 2006, the balance of the revolving line of
credit provided to Velocitius was approximately $144,000. Net
repayments during the nine month period ended July 31, 2007
were approximately $10,000. As of July 31, 2007, the
balance of the revolving line of credit was approximately
$134,000.
On December 1, 2006, the Company received a principal
payment of approximately $100,000 from Vestal Manufacturing
Enterprises, Inc. (Vestal) on its senior
subordinated debt. As of July 31, 2007, the balance of the
loan was $700,000.
On December, 8, 2006, Total Safety repaid term loan A and term
loan B in full, including all accrued interest and prepayment
fees. The total amount received for term loan A was $5,043,775
and for term loan B was $1,009,628.
On December 29, 2006, March 30, 2007, and
June 29, 2007, the Company received quarterly principal
payments from BP on term loan A of $90,000 on each payment date.
On January 1, 2007, April 2, 2007, and July 2,
2007, the Company received principal payments of $37,500 on the
term loan provided to Innovative Brands, LLC (Innovative
Brands).
On January 2, 2007 and March 1, 2007, the Company
received principal payments of approximately $96,000 and
$1.0 million, respectively, on term loan A from Henry
Company.
On January 5, 2007, Baltic Motors repaid the bridge loan in
full including all accrued interest. The total amount received
from the repayment was $1,033,000.
F-23
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
On January 19, 2007, Storage Canada LLC (Storage
Canada) borrowed an additional $705,000 under their credit
facility. The borrowing bears annual interest of 8.75% and has a
maturity date of January 19, 2014.
On February 16, 2007, the Company exchanged the $200,000
convertible promissory note due from HuaMei for 50 shares
of its common stock.
On March 8, 2007, Levlad repaid their loan in full
including all accrued interest and a prepayment fee. The total
amount received from the prepayment was approximately
$10.4 million.
On March 30, 2007 and June 29, 2007, Total Safety made
principal payments of $2,500 on its first lien loan.
On April 12, 2007 and April 18, 2007, BENI made
principal payments of $200,000 and $500,000, respectively, on
its bridge loan.
On April 16, 2007, the assets and liabilities of SafeStone
Technologies PLC were transferred to two new companies,
Lockorder Limited (Lockorder) and SafeStone
Technologies Limited (SafeStone Limited). The
Company received 21,064 shares of SafeStone Limited and
21,064 shares of Lockorder as a result of this corporate
action. On a combined basis, there was no change in the combined
cost basis or fair value due to this transaction.
On May 1, 2007, Turf repaid its secured junior revolving
note in full, including accrued interest. The total amount
received from the prepayment was approximately
$1.0 million. There were no borrowings outstanding on the
revolving note as of July 31, 2007.
On May 1, 2007, June 1, 2007, and July 1, 2007,
the Company received $111,111 on each payment date as principal
payments from SP on Term Loan B.
On June 1, 2007 and July 5, 2007, Harmony Pharmacy
borrowed $600,000 and $1.0 million, respectively, from the
credit facility. Net borrowings during the nine month period
ended July 31, 2007 were $3.4 million, resulting in a
balance outstanding of approximately $3.4 million.
On June 19, 2007, the Company increased the bridge loan to
BENI to $2.0 million. The remaining available amount of
$1.7 million was immediately drawn.
On July 24, 2007, the Company sold the common stock of
Baltic Motors and BM Auto. The amount received from the sale of
the 60,684 common shares of Baltic Motors was approximately
$62.0 million, net of closing and other transaction costs,
working capital adjustments and a reserve established by the
Company to satisfy certain post-closing conditions requiring
capital and other expenditures. Baltic Motors repaid all debt
from the Company in full including all accrued interest. Total
amount received from the repayment of the debt was approximately
$10.2 million including all accrued interest. The remaining
$51.8 million less the $8.0 million cost basis of
Baltic resulted in $43.8 million recorded as realized gain.
The difference between the $51.8 million received from the
Baltic equity and the carrying value at October 31, 2006 is
$30.6 million and the amount of the increase in net assets
attributable to fiscal year 2007. The portion of the capital
gain related to the equity investment made on June 24, 2004
($40.9 million), will be treated as long-term capital gain
and the portion related to the equity investment made on
September 28, 2006 ($2.9 million) will be treated as a
short-term capital gain. The amount received from the sale of
the 47,300 common shares of BM Auto was approximately
$29.7 million, net of closing and other transaction costs,
working capital adjustments and a reserve established by the
Company to satisfy certain post-closing conditions requiring
capital and other expenditures. The $29.7 million less the
$8.0 million cost basis of BM Auto resulted in
$21.7 million recorded as a long term capital gain. The
difference between the $29.7 million received from the BM
Auto equity and the carrying value at October 31, 2006 is
$21.7 million and the amount of the increase in net assets
attributable to fiscal year 2007.
As mentioned above, a reserve account of approximately
$3.0 million was created for post closing conditions that
are required of the seller as a part of the purchase agreement.
The cash held in the reserve account is held in Euros. At
July 31, 2007, the balance of the reserve account was
approximately $2.9 million. Expenses such as finishing a
road to a dealership and Latvian tax withholding payments, among
other things have been estimated by
F-24
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
management and will be paid from this account. This reserve
account is owned and controlled by the Company. The Company has
recorded the cash in the reserve account to its books
denominated as foreign currency. It has also recorded a
liability for the same amount so there is no impact to net asset
value until all post closing conditions are met. The remaining
cash, if any, after satisfying all reserve liabilities and
contingencies, will be converted to USD and recorded as long
term capital gain. We do not anticipate any post closing
conditions in excess of the reserve; however, if they occur it
would reduce the capital gain that has already been recorded.
Any difference recorded due to changes in exchange rates since
the Euros were received will be recorded as currency gain
(loss). During the interim, at each month end, the Euros will be
valued based on that days exchange rate and the liability
will be adjusted to match the USD equivalent. Management
believes all post closing conditions will be met before
October 31, 2007.
On July 27, 2007, U.S. Gas repaid its bridge loan in
full including accrued interest. The total amount received was
approximately $908,000.
During the nine month period ended July 31, 2007, the
Valuation Committee increased the fair value of the
Companys investments in Dakota Growers common stock by
approximately $1.9 million, Octagons membership
interest by approximately $1.6 million, SGDA common equity
interest by approximately $276,000 and preferred equity interest
by $350,000, PreVisor Inc. (PreVisor) common stock
by $1.7 million, Foliofn, Inc. (Foliofn)
preferred stock by $2.1 million, Vendio Services, Inc.
(Vendio) preferred stock by $6.1 million, and
Vendio common stock by approximately $15,000. In addition,
increases in the cost basis and fair value of the loans to
Impact Confections, Inc. (Impact), JDC Lighting, LLC
(JDC), SP, Timberland, Amersham Corporation
(Amersham), Marine Exhibition Corporation
(Marine), Phoenix Coal Corporation (Phoenix
Coal), BP, Turf, Summit Research Labs, Inc.
(Summit), and the Vitality and Marine preferred
stock were due to the capitalization of payment in kind (PIK)
interest/dividends totaling $2,418,638. Also, during the nine
month period ended July 31, 2007, the undistributed
allocation of flow through income from the Companys equity
investment in Octagon increased the cost basis and fair value of
the Companys investment by $140,084. The Valuation
Committee also decreased the fair value of the Companys
investment in Ohio Medical during the nine month period ended
July 31, 2007 by $9.0 million.
At July 31, 2007, the fair value of all portfolio
investments was $316.9 million with a cost basis of
$334.7 million. At July 31, 2007, the fair value and
cost basis of portfolio investments made by the Companys
former management team pursuant to the prior investment
objective (Legacy Investments) was
$16.6 million and $55.9 million, respectively, and the
fair value and cost basis of portfolio investments made by the
Companys current management team was $300.3 million
and $278.8 million, respectively. At October 31, 2006,
the fair value of all portfolio investments was
$275.9 million with a cost basis of $286.9 million. At
October 31, 2006, the fair value and cost basis of Legacy
Investments was $8.4 million and $55.9 million,
respectively, and the fair value and cost basis of portfolio
investments made by the Companys current management team
was $267.5 million and $231.0 million, respectively.
For
the Year Ended October 31, 2006
During the year ended October 31, 2006, the Company made
sixteen new investments, committing capital totaling
approximately $142.1 million. The investments were made in
Turf ($11.6 million), SOI ($5.0 million), Henry
Company ($5.0 million), BM Auto ($15.0 million),
Storage Canada ($6.0 million), Phoenix Coal
($8.0 million), Harmony Pharmacy ($200,000), Total Safety
($6.0 million), PreVisor ($6.0 million), Marine
($14.0 million), BP ($15.0 million), Velocitius
($66,290), Summit ($16.2 million), Octagon
($17.0 million), BENI ($2.0 million), and Innovative
Brands ($15.0 million).
The Company also made eight follow-on investments in existing
portfolio companies committing capital totaling approximately
$24.2 million. During the year ended October 31, 2006,
the Company invested approximately $879,000 in Dakota Growers by
purchasing an additional 172,104 shares of common stock at
an average price of $5.11 per share. On December 22, 2005,
the Company made a follow-on investment in Baltic in the form of
F-25
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
a $1.8 million revolving bridge note. Baltic immediately
drew down $1.5 million from the note. On January 12,
2006, Baltic repaid the amount drawn from the note in full
including all unpaid interest. The note matured on
January 31, 2006 and has been removed from the
Companys books. On January 12, 2006, the Company
provided SGDA a $300,000 bridge loan. On March 28, 2006,
the Company provided Baltic a $2.0 million revolving bridge
note. Baltic immediately drew down $2.0 million from the
note. On April 5, 2006, Baltic repaid the amount drawn from
the note in full including all unpaid interest. The note matured
on April 30, 2006 and has been removed from the
Companys books. On April 6, 2006, the Company
invested an additional $2.0 million in SGDA in the form of
a preferred equity security. On April 25, 2006, the Company
purchased an additional common equity security in SGDA for
$23,000. On June 30, 2006, the Company invested
$2.5 million in Amersham in the form of a second lien loan.
On August 4, 2006, the Company invested $750,000 in Harmony
Pharmacy in the form of common stock. On September 28,
2006, the Company made another follow-on investment in Baltic in
the form of a $1.0 million bridge loan and
$2.0 million equity investment. On October 13, 2006,
the Company made a $10 million follow-on investment in SP.
The $10 million was invested in the form of an additional
$4.0 million in term loan B and $6.0 million in a
mezzanine loan. On October 20, 2006, the Company then
assigned $5.0 million of SPs $8.0 million term
loan B to Citigroup Global Markets Realty Corp. On
October 24, 2006, the Company invested an additional
$3.0 million in SGDA in the form of a preferred equity
security. On October 26, 2006, the Company invested an
additional $2.9 million in Velocitius in the form of common
equity. The Company also provided Velocitius a $260,000
revolving note on October 31, 2006. Velocitius immediately
drew down $143,614 from the note.
At the beginning of the 2006 fiscal year, the revolving credit
facility provided to SGDA had an outstanding balance of
approximately $1.2 million. During December 2005, SGDA drew
down an additional $70,600 from the credit facility. On
April 28, 2006, the Company increased the availability
under the revolving credit facility by $300,000. The balance of
the bridge loan mentioned above, which would have matured on
April 30, 2006, was added to the revolving credit facility
and the bridge loan was eliminated from the Companys books
as a part of the refinancing.
On December 21, 2005, Integral prepaid its senior credit
facility from the Company in full. The Company received
approximately $850,000 from the prepayment. This amount included
all outstanding principal and accrued interest. The Company
recorded no gain or loss as a result of the prepayment. Under
the terms of the prepayment, the Company returned its warrants
to Integral for no consideration.
Effective December 27, 2005, the Company exchanged $286,200
of the $3.25 million outstanding on the Timberland junior
revolving line of credit into 28.62 shares of common stock
at a price of $10,000 per share. As a result, as of
July 31, 2006, the Company owned 478.62 common shares of
Timberland and the funded debt under the junior revolving line
of credit was reduced from $3.25 million to approximately
$2.96 million.
Effective December 31, 2005, the Company received
373,362 shares of Series E preferred stock of
ProcessClaims, Inc. (ProcessClaims) in exchange for
its rights under a warrant issued by ProcessClaims that has been
held by the Company since May 2002. On January 5, 2006, the
Valuation Committee increased the fair value of the
Companys entire investment in ProcessClaims by
$3.3 million to $5.7 million. Please see the paragraph
below for more information on ProcessClaims.
On January 3, 2006, the Company exercised its warrant
ownership in Octagon which increased its existing membership
interest. As a result, Octagon is now considered an affiliate of
the Company.
Due to the dissolution of Yaga Inc. (Yaga), one of
the Companys Legacy Investments, the Company realized
losses on its investment in Yaga totaling $2.3 million
during the nine month period ended July 31, 2006. The
Company received no proceeds from the dissolution of Yaga and
the Companys investment in Yaga has been removed from the
Companys books. The Valuation Committee previously
decreased the fair value of the Companys investment in
Yaga to zero and as a result, the Companys realized losses
were offset by reductions in unrealized losses. Therefore, the
net effect of the removal of Yaga from the Companys books
on the Companys consolidated statement of operations and
NAV at October 31, 2006, was zero.
F-26
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
On February 24, 2006, BP repaid its second lien loan from
the Company in full. The amount of the proceeds received from
the prepayment was approximately $8.7 million. This amount
included all outstanding principal, accrued interest, accrued
monitoring fees and an early prepayment fee. The Company
recorded no gain or loss as a result of the repayment.
On April 7, 2006, the Company sold its investment in Lumeta
Corporation (Lumeta) for its carrying value of
$200,000. The Company realized a loss on Lumeta of approximately
$200,000. However, the Valuation Committee previously decreased
the fair value of the Companys investment in Lumeta to
$200,000 and, as a result, the realized loss was offset by a
reduction in unrealized losses. Therefore, the net effect of the
Companys sale of its investment in Lumeta on the
Companys consolidated statement of operations and NAV was
zero.
On April 21, 2006, BM Auto repaid its bridge loan from the
Company in full. The amount of the proceeds received from the
repayment was approximately $7.2 million. This amount
included all outstanding principal, accrued interest and was net
of foreign taxes withheld. The Company recorded no gain or loss
as a result of the repayment.
On May 4, 2006, the Company received a working capital
adjustment of approximately $250,000 related to the
Companys purchase of a membership interest in Turf. As a
result, the Companys cost basis in the investment was
reduced.
On May 30, 2006, ProcessClaims, one of the Companys
Legacy Investments, entered into a definitive agreement to be
acquired by CCC Information Services Inc. (CCC). The
acquisition by CCC closed on June 9, 2006. As of
June 9, 2006, the Company received net proceeds of
approximately $7.9 million. The gross proceeds were
approximately $8.3 million of which approximately $400,000
or 5% of the gross proceeds were deposited into a reserve
account for one year. Due to the contingencies associated with
the escrow, the Company has not presently placed any value on
the proceeds deposited in escrow and has therefore not factored
such proceeds into the Companys increased NAV. The
Companys total investment in ProcessClaims was
$2.4 million which resulted in a capital gain of
approximately $5.5 million.
On July 27, 2006, SOI repaid their loan from the Company in
full. The amount of the proceeds received from the prepayment
was approximately $4.5 million. This amount included all
outstanding principal, accrued interest, and an early prepayment
fee. The Company recorded no gain or loss as a result of the
prepayment.
On August 25, 2006, Harmony Pharmacy repaid their loan from
the Company in full. The amount of the proceeds received from
the prepayment was $207,444. This amount included all
outstanding principal and accrued interest. The Company recorded
no gain or loss as a result of the prepayment.
On August 25, 2006, SGDAs revolving credit facility
was added to the term loan, increasing the balance of the term
loan by $1.6 million. The revolving credit facility was
eliminated from the Companys books as a result of this
refinancing.
Effective September 12, 2006, the Company exchanged
$409,091 of the $2.96 million outstanding on the Timberland
junior revolving line of credit into 40.91 shares of common
stock at a price of $10,000 per share. Effective
September 22, 2006, the Company exchanged $225,000 of the
$2.55 million outstanding on the Timberland junior
revolving line of credit into 22.5 shares of common stock
at a price of $10,000 per share. On September 22, 2006,
Timberland drew down $500,000 from the junior revolving line of
credit. As a result of these transactions, as of
October 31, 2006, the Company owned 542.03 common shares of
Timberland and the funded debt under the junior revolving line
of credit was reduced from $2.96 million to approximately
$2.83 million.
On October 2, 2006, Octagon bought back a total of 15%
equity interest from non-service members. This resulted in a
sale of a portion of the Companys LLC member interest to
Octagon for proceeds of $1,020,018. The Company realized a gain
of $551,092 from this sale.
F-27
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
On October 2, 2006, Octagon repaid their loan and revolving
credit facility from the Company in full. The amount of the
proceeds received from the prepayment of the loan was
approximately $5.4 million. This amount included all
outstanding principal, accrued interest, and an unused fee on
the revolving credit facility. The Company recorded a gain as a
result of these prepayments of approximately $429,000 from the
acceleration of amortization of original issue discount.
On October 20, 2006, the Company assigned $5.0 million
of SPs $8.0 million term loan B to Citigroup Global
Markets Realty Corp.
On October 30, 2006, JDC repaid $160,116 of principal on
the senior subordinated debt.
During the year ended October 31, 2006, the Valuation
Committee increased the fair value of the Companys
investments in Baltic common stock by $11.6 million, Dakota
Growers common stock by approximately $2.6 million,
Turfs membership interest by $2.0 million,
Octagons membership interest by approximately $562,000,
Ohio Medical common stock by $9.2 million, Foliofn
preferred stock by $5.0 million, Vendio preferred stock
by $700,000, ProcessClaims preferred stock by $4.8 million
and Vitality common stock and warrants by $3.5 million and
$400,000, respectively. In addition, increases recorded to the
cost basis and fair value of the loans to Amersham, BP, Impact,
JDC, Phoenix Coal, SP, Timberland, Turf, Marine, Summit and the
Vitality and Marine preferred stock were due to the receipt of
payment in kind interest/dividends totaling approximately
$2.2 million. Also during the year ended October 31,
2006, the undistributed allocation of flow through income from
the Companys equity investment in Octagon increased the
cost basis and fair value of the Companys investment by
approximately $279,000. During the year ended October 31,
2006, the Valuation Committee also decreased the fair value of
the Companys equity investment in Timberland by
$1 million. The increase in fair value from payment in kind
interest/dividends and flow through income has been approved by
the Valuation Committee.
At October 31, 2006, the fair value of all portfolio
investments, exclusive of short-term securities, was
$275.9 million with a cost basis of $286.9 million. At
October 31, 2005, the fair value of all portfolio
investments, exclusive of short-term securities, was
$122.3 million with a cost basis of $171.6 million.
For
the Year Ended October 31, 2005
During the year ended October 31, 2005, the Company made
six new investments, committing capital totaling approximately
$48.8 million. The investments were made in JDC, SGDA, SP,
BP, Ohio Medical and Amersham. The amounts invested were
$3.0 million, $5.8 million, $10.5 million,
$10 million, $17 million and $2.5 million,
respectively.
The Company also made three follow-on investments in existing
portfolio companies committing capital totaling approximately
$5.0 million. In December 2004 and January 2005, the
Company invested a total of $1.25 million in Timberland in
the form of subordinated bridge notes. On April 15, 2005,
the Company re-issued 146,750 shares of its treasury stock
at the Companys NAV per share of $9.54 in exchange for
40,500 shares of common stock of Vestal. On July 8,
2005 the Company extended Timberland a $3.25 million junior
revolving note. In accordance with the terms of the note,
Timberland immediately drew $1.3 million from the revolving
note and used the proceeds to repay the subordinated bridge
notes in full. The repayment included all outstanding principal
and accrued interest. On July 29, 2005, the Company
invested an additional $325,000 in Impact in the form of a
secured promissory note.
In April 2005, Octagon drew $1.5 million from the senior
secured credit facility provided to it by the Company and repaid
it in full during June 2005.
During 2005, SGDA drew approximately $1.2 million from the
revolving credit facility provided to it by the Company. As of
October 31, 2005, the entire $1.2 million drawn from
the facility remained outstanding.
F-28
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
On July 14, 2005 and September 28, 2005, Timberland
drew an additional $1.5 million and $425,000, from the
revolving note mentioned above, respectively. As of
October 31, 2005, the note was drawn in full and the
balance of $3.25 million remained outstanding.
Also, during the year ended October 31, 2005, the Company
sold its entire investment in Sygate and received
$14.4 million in net proceeds. In addition, approximately
$1.6 million or 10% of proceeds from the sale were
deposited in an escrow account for approximately one year. Due
to the contingencies associated with the escrow, the Company has
not presently placed any value on the proceeds deposited in
escrow and has therefore not factored such proceeds into the
Companys increased NAV. The realized gain from the
$14.4 million in net proceeds received was
$10.4 million. The Company also sold 685,679 shares of
Mentor Graphics Corp. (Mentor Graphics) receiving
net proceeds of approximately $9.0 million and realized a
gain on the shares sold of approximately $5.0 million. The
Company also received approximately $300,000 from the escrow
related to the 2004 sale of BlueStar Solutions, Inc.
(BlueStar).
The Company realized losses on CBCA, Inc. (CBCA) of
approximately $12.0 million, Phosistor Technologies, Inc.
(Phosistor) of approximately $1.0 million and
ShopEaze Systems, Inc. (ShopEaze) of approximately
$6.0 million. The Company received no proceeds from these
companies and they have been removed from the Companys
portfolio. The Valuation Committee previously decreased the fair
value of the Companys investment in these companies to
zero and as a result, the realized losses were offset by
reductions in unrealized losses. Therefore, the net effect of
the transactions on the Companys consolidated statement of
operations and NAV was zero.
On December 21, 2004, Determine Software, Inc.
(Determine) prepaid its senior credit facility from
the Company in full. The amount of proceeds the Company received
from the repayment was approximately $1.64 million. This
amount included all outstanding principal and accrued interest.
Under the terms of the early repayment, the Company returned its
2,229,955 Series C warrants for no consideration.
On July 5, 2005, Arcot Systems, Inc. (Arcot)
prepaid its senior credit facility from the Company in full. The
amount of proceeds the Company received from the repayment was
approximately $2.55 million. This amount included all
outstanding principal and accrued interest. Under the terms of
the early repayment, the Company returned its warrants to Arcot
for no consideration.
The Company continued to receive principal repayments on the
debt securities of Integral and BP. Integral made payments
during the year ended October 31, 2005, according to its
credit facility agreement totaling $1,683,336. BP made two
quarterly payments during the year ended totaling $833,333.
Also, the Company received a one time, early repayment on
Vestals debt securities totaling $100,000.
During the year ended October 31, 2005, the Valuation
Committee increased the fair value of the Companys
investments in Baltic by $1.5 million, Dakota Growers by
$514,000, Octagon by $1,022,638, Sygate by $7.5 million
(which was later realized), Vendio by $1,565,999, Vestal by
$1,850,000 and Vitality by $700,000. In addition, increases in
the cost basis and fair value of the Octagon loan, Impact loan,
Timberland loan, Vitality Series A preferred stock, JDC
loan and SP loans were due to the receipt of payment in
kind interest/dividends totaling $1,370,777. Also during
the year ended October 31, 2005, the undistributed
allocation of flow through income from the Companys equity
investment in Octagon increased the cost basis and fair value of
the investment by $114,845.
At October 31, 2005, the fair value of all portfolio
investments, exclusive of short-term securities, was
$122.3 million with a cost of $171.6 million. At
October 31, 2004, the fair value of all portfolio
investments, exclusive of short-term securities, was
$78.5 million with a cost of $151.6 million.
F-29
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
|
|
10.
|
Commitments
and Contingencies
|
Commitments
to/for Portfolio Companies:
At July 31, 2007, the Companys commitments to
portfolio companies consisted of the following:
Commitments
of MVC Capital, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Funded at
|
Portfolio Company
|
|
Amount Committed
|
|
July 31, 2007
|
|
Timberland
|
|
$
|
4.0 million
|
|
|
$
|
2.5 million
|
|
Storage Canada
|
|
$
|
6.0 million
|
|
|
$
|
2.7 million
|
|
Marine
|
|
$
|
2.0 million
|
|
|
|
|
|
BENI
|
|
$
|
514,000
|
|
|
|
|
|
Octagon
|
|
$
|
12.0 million
|
|
|
$
|
6.1 million
|
|
Turf
|
|
$
|
1.0 million
|
|
|
|
|
|
Harmony Pharmacy
|
|
$
|
4.0 million
|
|
|
$
|
3.4 million
|
|
Velocitius
|
|
$
|
260,000
|
|
|
$
|
134,000
|
|
Velocitius
|
|
$
|
650,000
|
|
|
$
|
547,392
|
|
Tekers
|
|
$
|
1.9 million
|
|
|
|
|
|
U.S. Gas
|
|
$
|
10.0 million
|
|
|
|
|
|
U.S. Gas
|
|
$
|
2.0 million
|
|
|
|
|
|
Total
|
|
$
|
44.3 million
|
|
|
$
|
15.4 million
|
|
At October 31, 2006, the Companys commitments to
portfolio companies consisted of the following:
Open
Commitments of MVC Capital, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Funded at
|
Portfolio Company
|
|
Amount Committed
|
|
October 31, 2007
|
|
Marine
|
|
$
|
2.0 million
|
|
|
|
|
|
Octagon
|
|
$
|
12.0 million
|
|
|
$
|
3.25 million
|
|
Storage Canada
|
|
$
|
6.0 million
|
|
|
$
|
1.95 million
|
|
Timberland
|
|
$
|
3.25 million
|
|
|
$
|
2.83 million
|
|
Velocitius
|
|
$
|
260,000
|
|
|
$
|
143,614
|
|
Total
|
|
$
|
23.5 million
|
|
|
$
|
8.2 million
|
|
On May 7, 2004, the Company provided a $5,000,000 senior
secured credit facility to Octagon. This credit facility expires
on May 6, 2007 and can be automatically extended until
May 6, 2009. The credit facility bears annual interest at
LIBOR plus 4%. The Company receives a 0.50% unused facility fee
on an annual basis and a 0.25% servicing fee on an annual basis
for maintaining the credit facility. On February 1, 2006,
Octagon drew $250,000 from the credit facility. The credit
facility was repaid in full including, all accrued interest on
February 23, 2006. This credit facility was refinanced on
October 12, 2006.
During February 2005, the Company made available to SGDA, a
$1,308,300 revolving credit facility that bears annual interest
at 7%. The credit facility expired on August 25, 2006.
During the fiscal year 2006, SGDA drew down $70,600 from the
credit facility. On April 28, 2006, the Company increased
the availability under the revolving credit facility by
$300,000. The balance of the Companys bridge loan to SDGA,
which would have matured on April 30, 2006, was added to
the revolving credit facility and the bridge loan was removed
from the Companys books.
F-30
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
On June 30, 2005, the Company pledged its common stock of
Ohio Medical to Guggenheim to collateralize a loan made by
Guggenheim to Ohio Medical.
On July 8, 2005 the Company extended Timberland a
$3.25 million junior revolving note that bears interest at
12.5% per annum and expires on July 7, 2007. The Company
also receives a fee of 0.25% on the unused portion of the note.
As of October 31, 2005, the total amount outstanding on the
note was $3.25 million. On December 27, 2005, the
Company exchanged $286,200 of the Timberland junior revolving
line of credit for 28.62 shares of common stock at a price
of $10,000 per share. As of January 31, 2006, the Company
owned 478.62 common shares and the funded debt under the junior
revolving line of credit has been reduced from
$3.25 million to approximately $2.96 million. On
April 21, 2006, Timberland repaid $500,000 on the note. On
May 18, 2006, Timberland repaid an additional $500,000 on
the note. On July 10, 2006, Timberland drew down
$1.0 million leaving the total amount on the note
outstanding at July 31, 2006 approximately
$2.96 million. On September 12, 2006, the Company
converted $409,091 of the Timberland junior revolving line of
credit into 40.91 shares of common stock at a price of
$10,000 per share. Effective September 22, 2006, the
Company converted $225,000 of the Timberland junior revolving
line of credit into 22.50 shares of common stock at a price
of $10,000 per share. Timberland then borrowed $500,000 from the
junior revolving line of credit. As a result of these
transactions, as of October 31, 2006 the Company owned
542.03 common shares and the funded debt under the junior
revolving line of credit was reduced from $3.25 million to
approximately $2.83 million.
On December 22, 2005, the Company extended to Baltic a
$1.8 million revolving bridge note. The note bears interest
at 12% per annum and had a maturity date of January 31,
2006. Baltic immediately drew $1.5 million from the note.
On January 12, 2006, Baltic repaid the amount drawn from
the note in full including all unpaid interest. The revolver
matured on January 31, 2006 and has been removed from the
Companys books.
On March 28, 2006, the Company extended to Baltic a
$2.0 million revolving bridge note. Baltic immediately drew
down $2.0 million from the note. On April 5, 2006,
Baltic repaid the amount drawn from the note in full including
all unpaid interest. The note matured on April 30, 2006 and
has been removed from the Companys books.
On March 30, 2006, the Company provided a $6 million
loan commitment to Storage Canada and the company immediately
borrowed $1.34 million. The commitment expires after one
year, but may be renewed with the consent of both parties. The
initial borrowing on the loan bears annual interest at 8.75% and
has a maturity date of March 30, 2013. Any additional
borrowings will mature seven years from the date of the
subsequent borrowing. The Company also receives a fee of 0.25%
on the unused portion of the loan. On October 6, 2006,
Storage Canada borrowed an additional $619,000. The borrowing
bears annual interest at 8.75% and has a maturity date of
October 6, 2013.
On July 11, 2006, the Company extended to Marine a
$2.0 million secured revolving note. The note bears annual
interest at LIBOR plus 1%. The Company also receives a fee of
0.50% of the unused portion of the loan. There was no amount
drawn on the revolving note as of October 31, 2006.
On August 25, 2006, SGDAs revolving credit facility
was added to the term loan, increasing the balance of the term
loan by $1.6 million. The revolving credit facility was
eliminated from the Companys books as a result of this
refinancing.
On October 12, 2006, the Company provided a
$12.0 million revolving credit facility to Octagon in
replacement of the senior secured credit facility provided on
May 7, 2004. This credit facility expires on
December 31, 2011. The credit facility bears annual
interest at LIBOR plus 4.25%. The Company receives a 0.50%
unused facility fee on an annual basis and a 0.25% servicing fee
on an annual basis for maintaining the credit facility. On
October 12, 2006, Octagon drew $3.75 from the credit
facility. Octagon repaid $500,000 of the credit facility on
October 30, 2006. As of October 31, 2006, there was
$3.25 million outstanding.
On October 30, 2006, the Company provided a $260,000
revolving line of credit to Velocitius on which Velocitius
immediately borrowed $143,614. The revolving line of credit
expires on October 31, 2009. The note bears annual interest
at 8%.
F-31
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
On January 9, 2007, the Company extended to Turf a
$1.0 million secured junior revolving note. Turf
immediately borrowed $1.0 million on the note. The note
bears annual interest at 12.5% and expires on May 1, 2008.
The Company also receives a fee of 0.25% of the unused portion
of the note. On May 1, 2007, Turf repaid the secured junior
revolving note in full including accrued interest. There was no
amount outstanding on the revolving note as of July 31,
2007.
On January 11, 2007, the Company provided a
$4.0 million revolving credit facility to Harmony Pharmacy.
The credit facility bears annual interest at 10%. The Company
also receives a fee of 0.50% on the unused portion of the loan.
The revolving credit facility expires on December 1, 2009.
Net borrowings during the nine month period ended July 31,
2007 were $3.4 million resulting in a balance outstanding
of $3.4 million at such date.
On May 1, 2007, the Company provided a $650,000 revolving
line of credit to Velocitius. Velocitius immediately borrowed
$547,392. The revolving line of credit expires on April 30,
2010. The line bears annual interest at 8%. At July 31,
2007, there was $547,392 outstanding under the line.
On July 19, 2007, the Company agreed to guarantee a
1.4 million Euro mortgage for Tekers, equivalent to
approximately $1.9 million at July 31, 2007.
On July 26, 2007, the Company provided a $10.0 million
revolving credit facility and a $2.0 million junior
revolver to U.S. Gas. The credit facility bears annual interest
at LIBOR plus 6% and the revolver bears annual interest at 14%.
The Company receives a fee of 0.50% on the unused portion of the
credit facility and the revolver. The revolving credit facility
and junior revolver expire on July 26, 2010. There was no
amount outstanding on the credit facility or junior revolver as
of July 31, 2007.
Timberland also has a floor plan financing program administered
by Transamerica. As is typical in Timberlands industry,
under the terms of the dealer financing arrangement, Timberland
guarantees the repurchase of product from Transamerica, if a
dealer defaults on payment and the underlying assets are
repossessed. The Company has agreed to be a limited co-guarantor
for up to $500,000 on this repurchase commitment.
Commitments
of the Company:
On October 28, 2004, the Company entered into a one-year,
cash collateralized, $20 million revolving credit facility
(the LaSalle Credit Facility) with LaSalle Bank
National Association (the Bank). On July 20,
2005, the Company amended the LaSalle Credit Facility. The
maximum aggregate loan amount under the LaSalle Credit Facility
was increased from $20 million to $30 million.
Additionally, the maturity date was extended from
October 31, 2005 to August 31, 2006. All other
material terms of the LaSalle Credit Facility remained
unchanged. On January 27, 2006, the Company borrowed
$10 million under the LaSalle Credit Facility. The
$10 million borrowed under the LaSalle Credit Facility was
repaid in full by February 3, 2006. Borrowings under the
LaSalle Credit Facility bear interest, at the Companys
option, at either a fixed rate equal to the LIBOR rate (for one,
two, three or six months), plus 1.00% per annum, or at a
floating rate equal to the Banks prime rate in effect from
time to time, minus 1.00% per annum. The LaSalle Credit Facility
expired on August 31, 2006.
On February 16, 2005, the Company entered into a sublease
(the Sublease) for a larger space in the building in
which the Companys current executive offices are located.
Effective November 1, 2006, the Company subleased its
principal executive office to TTG Advisers. The Sublease expired
on February 28, 2007. Future payments under the Sublease
for TTG Advisers total approximately $75,000 in fiscal year
2007. The Companys previous lease was terminated effective
March 1, 2005, without penalty.
On April 27, 2006, the Company and MVCFS, as co-borrowers
entered into a new four-year, $100 million revolving credit
facility (the Credit Facility) with Guggenheim as
administrative agent to the lenders. On April 27, 2006, the
Company borrowed $45 million ($27.5 million drawn from
the revolving credit facility and $17.5 million in term
debt) under the Credit Facility. The $27.5 million drawn
from the revolving credit facility was repaid in full
F-32
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
on May 2, 2006. On July 28, 2006, the Company borrowed
$57.5 million ($45.0 million drawn from the revolving
credit facility and $12.5 million in term debt) under the
Credit Facility. On August 2, 2006, the Company repaid
$45.0 million borrowed on the revolving credit facility. On
August 31, 2006, the Company borrowed $5.0 million in
term debt under the Credit Facility. On October 27, 2006,
the Company borrowed $4.0 million from the revolving credit
under the Credit Facility. On October 30, 2006, the Company
borrowed $61 million under the Credit Facility,
$15 million in term debt and $46 million drawn from
the revolving credit facility. As of October 31, 2006,
there was $50.0 million in term debt and $50.0 million
on the revolving credit facility outstanding. The proceeds from
borrowings made under the Credit Facility are expected to be
used to fund new and existing portfolio investments, pay fees
and expenses related to the financing and for general corporate
purposes. The Credit Facility will expire on April 27,
2010, at which time all outstanding amounts under the Credit
Facility will be due and payable. Borrowings under the Credit
Facility will bear interest, at the Companys option, at a
floating rate equal to either (i) the LIBOR rate (for one,
two, three or six months), plus a spread of 2.00% per annum, or
(ii) the prime rate in effect from time to time, plus a
spread of 1.00% per annum. The Company paid a closing fee, legal
and other costs associated with this transaction. These costs
will be amortized evenly over the life of the facility. The
prepaid expenses on the Balance Sheet include the unamortized
portion of these costs. Borrowings under the Credit Facility
will be secured, by among other things, cash, cash equivalents,
debt investments, accounts receivable, equipment, instruments,
general intangibles, the capital stock of MVCFS, and any
proceeds from all the aforementioned items, as well as all other
property except for equity investments made by the Company.
The Company enters into contracts with portfolio companies and
other parties that contain a variety of indemnifications. The
Companys maximum exposure under these arrangements is
unknown. However, the Company has not experienced claims or
losses pursuant to these contracts and believes the risk of loss
related to indemnifications to be remote.
|
|
11.
|
Certain
Issuances of Equity Securities by the Issuer
|
On December 3, 2004, the Company commenced a rights
offering to its shareholders of non-transferable subscription
rights to purchase shares of the Companys common stock.
Pursuant to the terms of the rights offering, each share of
common stock held by a stockholder of record on December 3,
2004, entitled the holder to one right. For every two rights
held, shareholders were able to purchase one share of the
Companys common stock at the subscription price of 95% of
the Companys NAV per share on January 3, 2005. In
addition, shareholders who elected to exercise all of their
rights to purchase the Companys common stock received an
over-subscription right to subscribe for additional shares that
were not purchased by other holders of rights. Based on a final
count by the Companys subscription agent, the rights
offering was over-subscribed with 6,645,948 shares of the
Companys common stock subscribed for. This was in excess
of the 6,146,521 shares available before the 25%
oversubscription. Each share was subscribed for at a price of
$9.10 which resulted in gross proceeds to the Company of
approximately $60.5 million before offering expenses of
approximately $402,000.
On April 15, 2005, the Company re-issued
146,750 shares of its treasury stock at the Companys
NAV per share of $9.54 in exchange for 40,500 shares of
common stock of Vestal.
On February 28, 2007, the Company completed its public
offering of 5,000,000 shares of the Companys common
stock at a price of $16.25 per share. On March 28, 2007,
pursuant to the
30-day
over-allotment option granted by the Company to the underwriters
in connection with the offering, the underwriters purchased an
additional 158,500 shares of common stock at the purchase
price of $16.25 per share. The Company raised approximately
$78.4 million in net proceeds after deducting the
underwriting discount and commissions and estimated offering
expenses. The Company expects to use the net proceeds of the
offering to fund additional investments and for general
corporate purposes, including the repayment of debt.
F-33
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
On February 20, 2002, Millenco, L.P.
(Millenco), a stockholder, filed a complaint in the
United States District Court for the District of Delaware on
behalf of the Company against the meVC Advisers, Inc. (the
Former Advisor). The complaint alleged that the fees
received by the Former Advisor, beginning one year prior to the
filing of the complaint, were excessive, and in violation of
Section 36(b) of the 1940 Act. The case was settled for
$370,000 from which the Company received net proceeds in July
2004 of $245,213 after payment of legal fees and expenses.
During the year ended October 31, 2003, the Company paid or
accrued $4.0 million for legal and proxy solicitation fees
and expenses, which included $2.2 million accrued and paid
at the direction of the Board of Directors, to reimburse the
legal and proxy solicitation fees and expenses of two major
Company shareholders, Millenco and Karpus Investment Management,
including their costs of obtaining a judgment against the
Company in the Delaware Chancery Court and costs associated with
the proxy process and the election of the current Board of
Directors. The Company made a claim against its insurance
carrier, Federal Insurance Company (Federal) for its
right to reimbursement of such expenses. On June 13, 2005,
the Company reached a settlement with Federal in the amount of
$473,968 which has been recorded as Other Income in the
Consolidated Statement of Operations. Legal fees and expenses
associated with reaching this settlement were $47,171.
|
|
13.
|
Recovery
of Expenses and Unusual Income Items
|
On January 21, 2004, the Company reached an agreement with
the property manager at 3000 Sand Hill Road, Menlo Park,
California to terminate its lease at such location as a result
of the property managers ability to reach an agreement
with a new tenant for the space. Under the terms of the
agreement, the Company bought-out its lease directly from the
property manager, for an amount equal to $232,835. As a result,
the Company recovered approximately $250,000 of the remaining
reserve established at October 31, 2003. Without the
recovery of the reserve, the gross facilities expense for the
year ended October 31, 2004 would have been approximately
$340,828.
On July 13, 2004, the Company received $370,000 from the
settlement of the case Millenco v. meVC Advisers, Inc. (See
Note 12 Legal Proceedings). The actual cash
received was $245,213, after payment of legal fees and expenses.
This settlement was the reimbursement of management fees
received by the Former Advisor, which were alleged to be
excessive.
During the year ended October 31, 2003, the Company paid or
accrued $4.0 million for legal and proxy solicitation fees
and expenses, which included $2.2 million accrued and paid
at the direction of the Board of Directors, to reimburse the
legal and proxy solicitation fees and expenses of two major
Company shareholders, Millenco, and Karpus Investment
Management, including their costs of obtaining a judgment
against the Company in the Delaware Chancery Court and costs
associated with the proxy process and the election of the
current Board of Directors. The Company made a claim against its
insurance carrier, Federal for its right to reimbursement of
such expenses. On June 13, 2005, the Company reached a
settlement with Federal in the amount of $473,968 which has been
recorded as Other Income in the Consolidated Statement of
Operations. Legal fees and expenses associated with reaching
this settlement were $47,171.
Return of Capital Statement of Position (ROCSOP)
Adjustment: During the year ended
October 31, 2006, the Company recorded a reclassification
for permanent book to tax differences totaling $4,717,113. These
differences were primarily due to book/tax treatment of
partnership income and non-deductible excise taxes paid. These
differences resulted in a net increase in accumulated earnings
of $4,717,113, an increase in accumulated net realized loss of
$395,257, and a decrease in additional paid in capital of
$5,112,370. This reclassification had no effect on net assets.
F-34
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
Distributions to Shareholders: The
table presented below includes MVC Capital, Inc. only. The
Companys wholly-owned subsidiary MVCFS has not been
included. As of October 31, 2006, the components of
accumulated earnings/ (deficit) on a tax basis were as follows:
|
|
|
|
|
Tax Basis Accumulated Earnings (Deficit)
|
|
|
|
|
Accumulated capital and other losses
|
|
$
|
(73,524,707
|
)
|
Undistributed net operating income
|
|
|
2,164,435
|
|
Gross unrealized appreciation
|
|
|
40,341,227
|
|
Gross unrealized depreciation
|
|
|
(51,934,799
|
)
|
|
|
|
|
|
Net unrealized depreciation
|
|
$
|
(11,593,572
|
)
|
|
|
|
|
|
Total tax basis accumulated deficit
|
|
|
(82,953,844
|
)
|
Tax cost of investments
|
|
|
287,485,124
|
|
Current year distributions to shareholders on a tax basis
|
|
|
|
|
Ordinary income
|
|
|
9,163,765
|
|
Prior year distributions to shareholders on a tax basis
|
|
|
|
|
Ordinary income
|
|
|
4,580,676
|
|
On October 31, 2006, the Company had a net capital loss
carryforward of $73,524,707 of which $28,213,867 will expire in
the year 2010, $4,220,380 will expire in the year 2011,
$37,794,910 will expire in the year 2012 and $3,295,550 will
expire in the year 2013. To the extent future capital gains are
offset by capital loss carryforwards, such gains need not be
distributed.
Qualified
Dividend Income Percentage
The Company designated 7%* or a maximum amount of $621,193 of
dividends declared and paid during the year ending
October 31, 2006 from net investment income as qualified
dividend income under the Jobs Growth and Tax Relief
Reconciliation Act of 2003. The information necessary to prepare
and complete shareholders tax returns for the 2006
calendar year, will be reported separately on
form 1099-DIV,
if applicable, in January 2007.
Corporate
Dividends Received Deduction Percentage
Corporate shareholders may be eligible for a dividends received
deduction for certain ordinary income distributions paid by the
Company. The Company designated 7%* or a maximum amount of
$621,193 of dividends declared and paid during the year ending
October 31, 2006 from net investment income as qualifying
for the dividends received deduction. The deduction is a pass
through of dividends paid by domestic corporations (i.e.
only equities) subject to taxation.
* Unaudited
F-35
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
The Companys wholly-owned subsidiary MVC Financial
Services, Inc. is subject to federal and state income tax. For
the year ended October 31, 2006 the Company recorded a tax
provision of $159,072. For the year ended October 31, 2005
the Company recorded a tax benefit of $100,933. For the year
ended October 31, 2004 the Company recorded a tax provision
of $78,927. The provision for income taxes was comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
314,859
|
|
|
$
|
92,892
|
|
|
$
|
134,201
|
|
State
|
|
|
89,078
|
|
|
|
22,152
|
|
|
|
32,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax expense
|
|
|
403,937
|
|
|
|
115,044
|
|
|
|
166,205
|
|
Deferred tax benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(203,645
|
)
|
|
|
(174,390
|
)
|
|
|
(70,472
|
)
|
State
|
|
|
(41,220
|
)
|
|
|
(41,587
|
)
|
|
|
(16,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax benefit
|
|
|
(244,865
|
)
|
|
|
(215,977
|
)
|
|
|
(87,278
|
)
|
Total tax (benefit) provision
|
|
$
|
159,072
|
|
|
$
|
(100,933
|
)
|
|
$
|
78,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation between the taxes computed at the federal
statutory rate and our effective tax rate for MVCFS for the
fiscal year ended October 31, 2006 is as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
October 31,
|
|
|
|
2006
|
|
|
Federal statutory tax rate
|
|
|
34.00
|
%
|
Permanent difference
|
|
|
(0.39
|
%)
|
State taxes, net of federal tax benefit
|
|
|
4.27
|
%
|
Valuation allowance for deferred tax assets
|
|
|
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
38.66
|
%
|
|
|
|
|
|
Deferred income tax balances for MVCFS reflect the impact of
temporary difference between the carrying amount of assets and
liabilities and their tax bases and are stated at tax rates
expected to be in effect when taxes are
F-36
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
actually paid or recovered. The components of our deferred tax
assets and liabilities for MVCFS as of October 31, 2006,
October 31, 2005 and October 31, 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenues
|
|
$
|
548,120
|
|
|
$
|
295,307
|
|
|
$
|
82,445
|
|
Others
|
|
|
2,822
|
|
|
|
7,948
|
|
|
|
4,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
548,120
|
|
|
$
|
303,255
|
|
|
$
|
87,278
|
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
548,120
|
|
|
$
|
303,255
|
|
|
$
|
87,278
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
548,120
|
|
|
$
|
303,255
|
|
|
$
|
87,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
Allowance
No valuation allowance was deemed necessary since the
significant portion of temporary differences resulting in
deferred tax assets are considered fully realizable.
The Companys reportable segments are its investing
operations as a business development company, MVC Capital, Inc.,
and the financial advisory operations of its wholly owned
subsidiary, MVCFS.
The following table presents book basis segment data for the
nine month period ended July 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MVC
|
|
|
MVCFS
|
|
|
Consolidated
|
|
|
Interest and dividend income
|
|
$
|
15,944,392
|
|
|
$
|
37,370
|
|
|
$
|
15,981,762
|
|
Fee income
|
|
|
61,673
|
|
|
|
2,216,592
|
|
|
|
2,278,265
|
|
Other income
|
|
|
252,237
|
|
|
|
|
|
|
|
252,237
|
|
Total operating income
|
|
|
16,258,302
|
|
|
|
2,253,962
|
|
|
|
18,512,264
|
|
Total operating expenses
|
|
|
17,291,573
|
|
|
|
3,420,756
|
|
|
|
20,712,329
|
|
Net operating loss before taxes
|
|
|
(1,033,271
|
)
|
|
|
(1,166,794
|
)
|
|
|
(2,200,065
|
)
|
Tax benefit
|
|
|
|
|
|
|
(452,394
|
)
|
|
|
(452,394
|
)
|
Net operating loss
|
|
|
(1,033,271
|
)
|
|
|
(714,400
|
)
|
|
|
(1,747,671
|
)
|
Net realized gain on investments
|
|
|
65,849,587
|
|
|
|
|
|
|
|
65,849,587
|
|
Net change in unrealized depreciation on investments
|
|
|
(6,914,139
|
)
|
|
|
|
|
|
|
(6,914,139
|
)
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
57,902,177
|
|
|
$
|
(714,400
|
)
|
|
$
|
57,187,777
|
|
F-37
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
The following table presents book basis segment data for the
year ended October 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MVC
|
|
|
MVCFS
|
|
|
Consolidated
|
|
|
Interest and dividend income
|
|
$
|
13,756,679
|
|
|
$
|
152,312
|
|
|
$
|
13,908,991
|
|
Fee income
|
|
|
291,764
|
|
|
|
3,535,956
|
|
|
|
3,827,720
|
|
Other income
|
|
|
770,501
|
|
|
|
904
|
|
|
|
771,405
|
|
Total operating income
|
|
|
14,818,944
|
|
|
|
3,689,172
|
|
|
|
18,508,116
|
|
Total operating expenses
|
|
|
14,152,170
|
|
|
|
416,252
|
|
|
|
14,568,422
|
|
Net operating income before taxes
|
|
|
666,774
|
|
|
|
3,272,920
|
|
|
|
3,939,694
|
|
Tax expense (benefit)
|
|
|
|
|
|
|
159,072
|
|
|
|
159,072
|
|
Net operating income
|
|
|
666,774
|
|
|
|
3,113,848
|
|
|
|
3,780,622
|
|
Net realized gain (loss) on investments and foreign currency
|
|
|
5,221,390
|
|
|
|
|
|
|
|
5,221,390
|
|
Net change in unrealized appreciation on investments
|
|
|
38,334,356
|
|
|
|
|
|
|
|
38,334,356
|
|
Net increase in net assets resulting from operations
|
|
$
|
44,222,520
|
|
|
$
|
3,113,848
|
|
|
$
|
47,336,368
|
|
In all periods prior to July 16, 2004, all business was
conducted through MVC Capital, Inc. With the externalization of
the Companys management on November 1, 2006, separate
invoices are now sent to MVC Capital and MVCFS for the quarterly
base management fee due to TTG Advisers.
Since July 31, 2007, net borrowings on Timberlandss
revolving credit facility were $1.5 million.
Since July 31, 2007, net repayments on Octagons
revolving credit facility were $1.95 million.
On August 1, 2007, Phoenix Coal repaid its second lien loan
in full including all accrued interest and fees. The total
amount received from the repayment was approximately
$8.4 million.
On August 10, 2007, Forrest Mertens, a representative of
the Company, resigned from the board of Phoenix Coal. The
Company still has board observance rights.
On August 15, 2007, Velocitius borrowed approximately
$57,000 on Line I and $65,000 from Line II.
On August 20, 2007, the Company contributed an additional
$45,000 to MVC Partners, increasing its limited liability
company interest.
On September 18 and 19, 2007 the Company invested
$24.0 million in Custom Alloy Corporation in the form of a
$14.0 million loan bearing annual interest at 14% and
$10.0 million in convertible preferred stock, respectively.
On September 20, 2007, the Company invested
$40.0 million in MVC Automotive Group BV in the form of a
$19.1 million bridge loan bearing annual interest at 10%
and $20.9 in common stock.
On, September 27, 2007, the Company made an additional
investment in Ohio Medical by extending $1.25 million of
convertible unsecured subordinated promissory note.
On September 28, 2007, Henry Company repaid approximately
$63,000 on term loan A.
On September 28, 2007, BP repaid $90,000 on term loan A.
On September 28, 2007, Henry Company repaid $2,500 on its
first lien loan.
On October 1, 2007, Innovative Brands repaid $37,500 on its
term loan.
On October 2, 2007, Harmony Pharmacy borrowed $650,000 from
its revolving credit facility.
F-38
MVC
Capital, Inc.
Notes to Consolidated Financial
Statements (Continued)
On October 15, 2007, our board of directors declared a
regular quarterly dividend of $0.12 per share, which was paid on
October 31, 2007 to shareholders of record on
October 24, 2007.
On October 17, 2007, all post-closing conditions from the
acquisition of Baltic Motors and BM Auto were satisfied. Of the
$3.0 million held in reserve, $1.1 million was not
needed to satisfy the post-closing conditions and as a result
will be added to the Companys gain on this sale.
On October 18, 2007, the Valuation Committee determined to
adjust the fair values of the following portfolio companies, as
of October 31, 2007: BENI, Foliofn, SGDA, PreVisor,
Tekers, Summit, Timberland, and Vitality. These adjustments
resulted in an aggregate net increase of approximately
$3.3 million.
On October 19, 2007, U.S. Gas borrowed approximately
$141,000 from its revolving credit facility.
On October 24, 2007, Octagon repaid $150,000 on its
revolving credit facility.
Since October 31, 2007, additional net borrowings on U.S.
Gass revolving credit facility were approximately
$1.5 million.
Since October 31, 2007, net repayments on the Octagon
revolving credit facility were $650,000.
On November 6, 2007, the Company invested $750,000 in SGDA
Europe BV in the form of common equity interest.
On November 14 and November 21, 2007, the Company made
additional investments of approximately $200,000 and $17,000,
respectively, in MVC Partners. In connection with these
investments, MVC Partners has made an investment in MVC
Acquisition Corp., a newly-formed blank check company organized
for the purpose of effecting a merger, capital stock exchange,
asset acquisition or other similar business combination with an
operating business. We have agreed to serve as the corporate
sponsor of MVC Acquisition Corp. Michael Tokarz, our Chairman
and Portfolio Manager and the Manager of TTG Advisers, and Peter
Seidenberg, our Chief Financial Officer, who serves in a similar
capacity for TTG Advisers, currently serve as Chairman of the
Board and Chief Financial Officer, respectively, for MVC
Acquisition Corp. In connection with our sponsorship of MVC
Acquisition Corp., we have agreed to purchase, through MVC
Partners, an aggregate of $5,000,000 of warrants from MVC
Acquisition Corp. concurrent with the consummation of its
initial public offering. In addition, we anticipate the
execution of a letter agreement with MVC Acquisition Corp.,
providing MVC Acquisition Corp. with a right of first review
with respect to target businesses with a fair market value in
excess of $250 million.
On November 26, 2007, the Company made an additional
investment in Harmony Pharmacy in the form of a $500,000 demand
note.
On November 30, 2007, the Company invested an additional
$40.0 million in Ohio Medical in the form of a
$10.0 million senior subordinated note and
$30.0 million in convertible preferred stock.
On December 13, 2007, the Company assigned the Ohio Medical
$10.0 million senior subordinated note to AEA Investors LLC.
F-39
Report
of Independent Registered Accounting Firm
To the Board of Directors and Shareholders of MVC Capital, Inc.
We have audited the accompanying consolidated balance sheets of
MVC Capital, Inc. (the Fund), including the
consolidated schedule of investments, as of October 31,
2006 and 2005, and the related consolidated statements of
operations, cash flows and changes in net assets for each of the
three years in the period ended October 31, 2006, and the
selected per share data and ratios for each of the four years in
the period ended October 31, 2006. Our audits also included
the financial statement schedule listed in the Index at
Item 15(a)(2). These financial statements, the selected per
share data and ratios and schedule are the responsibility of the
Funds management. Our responsibility is to express an
opinion on these financial statements, selected per share data
and ratios and schedule based on our audits. The selected per
share data and ratios for the year ended October 31, 2002,
were audited by other auditors whose report expressed an
unqualified opinion on those selected per share data and ratios.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and selected per share
data and ratios referred to above present fairly, in all
material respects, the consolidated financial position of MVC
Capital, Inc. at October 31, 2006 and 2005, and the
consolidated results of their operations, cash flows and their
changes in net assets for each of the three years in the period
ended October 31, 2006 and the selected per share data and
ratios for each of the indicated periods, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of MVC Capital, Inc.s internal control over
financial reporting as of October 31, 2006, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated January 5, 2007
expressed an unqualified opinion thereon.
Ernst & Young LLP
New York, New York
January 5, 2007
F-40
MVC
Capital, Inc. and Subsidiaries
Schedule
of Invesments in and Advances to Affiliaties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Interest or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Credited
|
|
|
October 31,
|
|
|
Gross
|
|
|
Gross
|
|
|
October 31,
|
|
Portfolio Company
|
|
Investment(1)
|
|
To Income(5)
|
|
|
Other(2)
|
|
|
2005 Value
|
|
|
Additions(3)
|
|
|
Reductions(4)
|
|
|
2006 Value
|
|
|
Companies More than 25% owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto MOTOL BENI (Automotive Dealership)
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
2,000,000
|
|
Baltic Motors Corporation
|
|
Loan
|
|
|
456,250
|
|
|
|
|
|
|
|
4,500,000
|
|
|
|
|
|
|
|
|
|
|
|
4,500,000
|
|
(Automotive Dealership)
|
|
Loan
|
|
|
11,333
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
Bridge Loan
|
|
|
15,833
|
|
|
|
|
|
|
|
|
|
|
|
3,500,000
|
|
|
|
(3,500,000
|
)
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
7,500,000
|
|
|
|
13,655,000
|
|
|
|
|
|
|
|
21,155,000
|
|
Ohio Medical Corporation
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
17,000,000
|
|
|
|
9,200,000
|
|
|
|
|
|
|
|
26,200,000
|
|
(Medical Device Manufacturer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SGDA Sanierungsgesellschaft fur Deponien und Altlasten
|
|
Loan
|
|
|
408,895
|
|
|
|
|
|
|
|
4,304,560
|
|
|
|
1,685,150
|
|
|
|
|
|
|
|
5,989,710
|
|
(Soil Remediation)
|
|
Revolver
|
|
|
74,023
|
|
|
|
|
|
|
|
1,237,700
|
|
|
|
370,600
|
|
|
|
(1,608,300
|
)
|
|
|
|
|
|
|
Bridge Loan
|
|
|
6,300
|
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
(300,000
|
)
|
|
|
|
|
|
|
Common Equity Interest
|
|
|
|
|
|
|
|
|
|
|
315,000
|
|
|
|
23,551
|
|
|
|
|
|
|
|
338,551
|
|
|
|
Preferred Equity Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
5,000,000
|
|
SIA BM Auto
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,000,000
|
|
|
|
|
|
|
|
8,000,000
|
|
(Automotive Dealership)
|
|
Loan
|
|
|
165,900
|
|
|
|
|
|
|
|
|
|
|
|
7,000,000
|
|
|
|
(7,000,000
|
)
|
|
|
|
|
Summit Research Labs, Inc.
|
|
Loan
|
|
|
150,444
|
|
|
|
|
|
|
|
|
|
|
|
5,044,813
|
|
|
|
|
|
|
|
5,044,813
|
|
(Specialty Chemical)
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,200,000
|
|
|
|
|
|
|
|
11,200,000
|
|
Timberland Machines & Irrigation, Inc.
|
|
Loan
|
|
|
1,039,760
|
|
|
|
|
|
|
|
6,318,684
|
|
|
|
289,175
|
|
|
|
|
|
|
|
6,607,859
|
|
(Distributer Landscaping & Irrigation Equipment)
|
|
Revolver
|
|
|
347,554
|
|
|
|
|
|
|
|
3,250,000
|
|
|
|
500,000
|
|
|
|
(920,291
|
)
|
|
|
2,829,709
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
4,500,000
|
|
|
|
920,291
|
|
|
|
(1,000,000
|
)
|
|
|
4,420,291
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turf Products, LLC
|
|
Loan
|
|
|
1,049,262
|
|
|
|
|
|
|
|
|
|
|
|
7,676,331
|
|
|
|
|
|
|
|
7,676,331
|
|
(Distributer Landscaping & Irrigation Equipment)
|
|
LLC Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,074,750
|
|
|
|
(252,957
|
)
|
|
|
5,821,793
|
|
|
|
Warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendio Services, Inc.
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Technology)
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
2,700,000
|
|
|
|
700,000
|
|
|
|
|
|
|
|
3,400,000
|
|
Vestal Manufacturing Enterprises, Inc.
|
|
Loan
|
|
|
107,467
|
|
|
|
|
|
|
|
900,000
|
|
|
|
|
|
|
|
(100,000
|
)
|
|
|
800,000
|
|
(Iron Foundries)
|
|
Common Stock
|
|
|
132,545
|
|
|
|
|
|
|
|
3,700,000
|
|
|
|
|
|
|
|
|
|
|
|
3,700,000
|
|
Velocitius B.V
|
|
Revolver
|
|
|
478
|
|
|
|
|
|
|
|
|
|
|
|
143,614
|
|
|
|
|
|
|
|
143,614
|
|
(Renewable Energy)
|
|
Common Equity Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,966,765
|
|
|
|
|
|
|
|
2,966,765
|
|
Total companies more than 25% owned
|
|
|
|
$
|
3,966,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
128,794,436
|
|
Companies More than 5% owned, but less than 25%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dakota Growers Pasta Company, Inc.
|
|
Common Stock
|
|
|
36,364
|
|
|
|
|
|
|
|
5,514,000
|
|
|
|
3,443,880
|
|
|
|
|
|
|
|
8,957,880
|
|
(Manufacturer of Packged Food)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endymion Systems, Inc.
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Technology Investments) Harmony Pharmacy & Health
Center, Inc.
|
|
Loan
|
|
|
7,444
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
(200,000
|
)
|
|
|
|
|
(Healthcase Retail)
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
750,000
|
|
|
|
|
|
|
|
750,000
|
|
Impact Confections, Inc.
|
|
Loan
|
|
|
907,468
|
|
|
|
|
|
|
|
5,228,826
|
|
|
|
239,297
|
|
|
|
|
|
|
|
5,468,123
|
|
(Confections Manufacturing & Distribution)
|
|
Loan
|
|
|
28,768
|
|
|
|
|
|
|
|
325,000
|
|
|
|
|
|
|
|
|
|
|
|
325,000
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
2,700,000
|
|
|
|
|
|
|
|
|
|
|
|
2,700,000
|
|
Marine Exhibition Corporation
|
|
Loan
|
|
|
346,141
|
|
|
|
|
|
|
|
|
|
|
|
10,091,111
|
|
|
|
|
|
|
|
10,091,111
|
|
(Theme Park)
|
|
Preferred Stock*
|
|
|
53,478
|
|
|
|
|
|
|
|
|
|
|
|
2,035,652
|
|
|
|
|
|
|
|
2,035,652
|
|
ProcessClaims, Inc.
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
(2,000,000
|
)
|
|
|
|
|
(Technology)
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
|
|
(400,000
|
)
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Interest or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Credited
|
|
|
October 31,
|
|
|
Gross
|
|
|
Gross
|
|
|
October 31,
|
|
Portfolio Company
|
|
Investment(1)
|
|
To Income(5)
|
|
|
Other(2)
|
|
|
2005 Value
|
|
|
Additions(3)
|
|
|
Reductions(4)
|
|
|
2006 Value
|
|
|
Octagon Credit Investors, LLC
|
|
Loan
|
|
|
1,244,315
|
|
|
|
|
|
|
|
4,664,794
|
|
|
|
5,568,803
|
|
|
|
(5,233,597
|
)
|
|
|
5,000,000
|
|
(Financial Services)
|
|
Revolver
|
|
|
30,830
|
|
|
|
|
|
|
|
|
|
|
|
3,750,000
|
|
|
|
(500,000
|
)
|
|
|
3,250,000
|
|
|
|
LLC Interest
|
|
|
|
|
|
|
|
|
|
|
1,228,038
|
|
|
|
1,911,171
|
|
|
|
(1,211,277
|
)
|
|
|
1,927,932
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
1,069,457
|
|
|
|
|
|
|
|
(1,069,457
|
)
|
|
|
|
|
Phoenix Coal Corporation
|
|
Loan
|
|
|
357,407
|
|
|
|
|
|
|
|
|
|
|
|
7,088,615
|
|
|
|
|
|
|
|
7,088,615
|
|
(Coal Processing and Production)
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
1,000,000
|
|
Previsor
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000,000
|
|
|
|
|
|
|
|
6,000,000
|
|
(Human Capital Management) Vitality Foodservice, Inc.
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
5,000,000
|
|
|
|
3,500,000
|
|
|
|
|
|
|
|
8,500,000
|
|
(Non-Alcoholic Beverages)
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
10,517,984
|
|
|
|
535,843
|
|
|
|
|
|
|
|
11,053,827
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
700,000
|
|
|
|
400,000
|
|
|
|
|
|
|
|
1,100,000
|
|
Yaga, Inc.
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Technology)
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total companies more than 5% owned, but less than 25%
|
|
|
|
$
|
3,012,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
75,248,140
|
|
This schedule should be read in conjunction with the Funds
consolidated statements as of and for the year ended
October 31, 2006, including the consolidated schedule of
investments.
|
|
|
(1) |
|
Common stock, preferred stock, warrants, options and equity
interests are generally non-income producing and restricted. The
principal amount for loans and debt securities and the number of
shares of common and preferred stock is shown in the
consolidated schedule of investments as of October 31, 2006. |
|
(2) |
|
Other includes interest, dividend, or other income which was
applied to the principal of the investment and therefore reduced
the total investment. These reductions are also included in the
Gross Reductions for the investment, as applicable. |
|
(3) |
|
Gross additions includes increases in the cost basis of
investments resulting from new portfolio investments,
paid-kind-interest or dividends, the amortization of discounts
and closing fees, and the exchange of one or more existing
securities for one or more new securities. Gross additions also
includes net increases in unrealized appreciation or net
decreases in unrealized depreciation. |
|
(4) |
|
Gross reductions included decreases in the cost basis of
investments resulting from principal collections related to
investment repayments or sales and the exchange of one or more
existing securities for one or more new securities. Gross
reductions also include net increases in unrealized depreciation
or net decreases in unrealized appreciation. |
|
(5) |
|
Represents the total amount of interest or dividends credited to
income for portion of the year an investment was included in the
companies more than 25% owned or companies 5% to 25% owned
categories, respectively. |
|
* |
|
All or a portion of the dividend income on this investment was
or will be paid in the form of additional securities or by
increasing the liquidation preference. Dividends
paid-in-kind
are also included in the Gross Additions for the investment, as
applicable. |
The accompanying notes are an integral part of these
consolidated financial statements.
F-42
PART C
OTHER INFORMATION
Item 25. Financial Statements and Exhibits
1. Financial Statements.
The following financial statements of MVC Capital, Inc. (the Company or the Registrant)
are included in this registration statement in Part A: Information Required in a Prospectus:
|
|
|
|
|
Page |
Consolidated Balance Sheets July 31, 2007 (unaudited), October 31, 2006 and October 31, 2005 |
|
F-2 |
Consolidated Schedule of Investments July 31, 2007 (unaudited) and October 31, 2006 |
|
F-3 |
Consolidated Statements of Operations For the Periods ended July 31, 2007 and July 31, 2006
(unaudited) and for the Years Ended October 31, 2006, 2005 and 2004 |
|
F-9 |
Consolidated Statements of Cash Flows For the Periods ended July 31, 2007 and July 31, 2006
(unaudited) and for the Years Ended October 31, 2006, 2005 and 2004 |
|
F-10 |
Consolidated Statements of Changes in Net Assets For the Periods ended July 31, 2007 and
July 31, 2006 (unaudited) and for the Years Ended October 31, 2006, 2005 and 2004 |
|
F-12 |
Consolidated Selected Per Share Data and Ratios For the Periods ended July 31, 2007 and
July 31, 2006 (unaudited) and for the Years Ended October 31, 2006, 2005 and 2004 |
|
F-13 |
Notes to Consolidated Financial Statements |
|
F-14 |
Report of Independent Registered Accounting Firm |
|
F-40 |
Schedule 12-14 |
|
F-41 |
C-1
2. Exhibits.
|
|
|
Exhibit |
|
|
Number |
|
Description |
a.
|
|
Certificate of Incorporation. (Previously filed as Exhibit 99.a filed with the Registrants Pre-Effective Amendment No. 5 to
Registration Statement on Form N-2 (File No. 333-92287) filed on March 28, 2000). |
|
|
|
b.
|
|
Fifth Amended and Restated Bylaws (Previously filed as Exhibit 99.b filed with the Registrants Pre-Effective Amendment No. 1 to
Registration Statement on Form N-2 (File No. 333- 125953) filed on August 29, 2005). |
|
|
|
c.
|
|
Not applicable. |
|
|
|
d.
|
|
Form of Share Certificate. ((Previously filed as Exhibit 99.d filed with Registrants Registration Statement on Form N-2/A (File No.
333-119625) filed on November 23, 2004). |
|
|
|
e.
|
|
Dividend Reinvestment Plan, as amended. (Previously filed as Exhibit 99.e filed with Registrants Registration Statement on Form N-2/A
(File No. 333-119625) filed on November 23, 2004). |
|
|
|
f.
|
|
Not applicable. |
|
|
|
g.
|
|
Investment Advisory and Management Agreement between the Registrant and The Tokarz Group Advisers LLC. (Previously filed as Exhibit
99.g filed with Registrants Post-Effective Amendment No. 2 to Registration Statement on Form N-2 (File No. 333-125953) filed on
November 29, 2006). |
|
|
|
|
h.
|
|
Form of Underwriting Agreement. (Previously filed
as Exhibit 99.h filed with Registrants Pre-Effective Amendment No. 1
to Registration Statement on Form N-2 (File No. 333-147039) filed on
November 30, 2007). |
|
|
|
|
i.
|
|
Not applicable. |
|
|
|
j.1
|
|
Form of Custody Agreement between Registrant and U.S. Bank National Association. (Previously filed as Exhibit 99.j.1 filed with
Registrants Registration Statement on Form N-2/A (File No. 333-119625) filed on November 23, 2004). |
|
|
|
j.2
|
|
Form of Amendment to Custody Agreement between Registrant and U.S. Bank National Association. (Previously filed as Exhibit 99.j.2 filed
with Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-119625) filed on February 21,
2006). |
|
|
|
j.3
|
|
Form of Custodian Agreement between Registrant and LaSalle Bank National Association. (Previously filed as Exhibit 99.j.3 filed with
Registrants Registration Statement on Form N-2/A (File No. 333-119625) filed on November 23, 2004). |
|
|
|
k.1
|
|
Form of Transfer Agency Letter Agreement with Registrant and EquiServe Trust Company, N.A. (Previously filed as Exhibit 99.k.2 filed
with Registrants Registration Statement on Form N-2/A (File No. 333-119625) filed on November 23, 2004). |
|
|
|
k.2
|
|
Form of Loan Agreement with Registrant and LaSalle Bank National Association. (Previously filed as Exhibit 99.k.3 filed with
Registrants Registration Statement on Form N-2/A (File No. 333-119625) filed on November 23, 2004). |
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k.3
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Form of Amendment to Loan Agreement with Registrant and LaSalle Bank National Association. (Previously filed as Exhibit 99.j.2 filed
with Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-119625) filed on February 21,
2006). |
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k.4
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Form of Custody Account Pledge Agreement with Registrant and LaSalle Bank National Association. (Previously filed as Exhibit 99.k.4
filed with Registrants Registration Statement on Form N-2/A (File No. 333-119625) filed on November 23, 2004). |
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k.5
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Form of Fund Administration Servicing Agreement with Registrant and U.S. Bancorp
Fund Services, LLC. (Previously filed as Exhibit 99.k.6 filed with Registrants
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No.
333-119625) filed on February 21, 2006). |
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k.6
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Form of Fund Accounting Servicing Agreement with Registrant and U.S. Bancorp Fund
Services, LLC. (Previously filed as Exhibit 99.k.7 filed with Registrants
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No.
333-119625) filed on February 21, 2006). |
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k.7
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Form of Credit Agreement with Registrant and Guggenheim Corporate Funding, LLC, et
al. (Previously filed as Exhibit 10 filed with Registrants Quarterly Report on
Form 10-Q (File No. 814-00201) filed on June 9, 2006). |
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l.
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Opinion of Counsel and Consent to its use (Previously filed as Exhibit 99.l filed
with Registrants Registration |
C-2
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Exhibit |
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Number |
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Description |
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Statement on Form N-2 (File No. 333-147039) filed on
October 31, 2007). |
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m.
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Not applicable. |
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n.1
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Consent of Ernst & Young LLP, filed herewith. |
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n.2
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Opinion of Ernst & Young LLP,
regarding Senior Securities table. (Previously filed
as Exhibit 99.n.2 filed with Registrants Pre-Effective Amendment No. 1
to Registration Statement on Form N-2 (File No. 333-147039) filed on
November 30, 2007). |
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o.
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Not applicable. |
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p.
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Not applicable. |
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q.
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Not applicable. |
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r.
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Joint Code of Ethics of the Registrant and The Tokarz Group Advisers LLC.
(Previously filed as Exhibit 99.r filed with Registrants Post-Effective Amendment
No. 2 to Registration Statement on Form N-2 (File No. 333-125953) filed on November
29, 2006). |
Item 26. Marketing Arrangements
The information contained under the heading Plan of Distribution in this Registration
Statement is incorporated herein by reference and any information concerning any underwriters for a
particular offering will be contained in the prospectus supplement related to that offering.
Item 27. Other Expenses of Issuance and Distribution
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Commission registration fee |
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$ |
7,675 |
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NASD filing fee |
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$ |
25,500 |
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Printing and engraving |
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$ |
450,000 |
* |
Accounting fees and expenses |
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$ |
300,000 |
* |
Legal fees and expenses |
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$ |
600,000 |
* |
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Total |
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$ |
1,383,175 |
* |
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Item 28. Persons Controlled by or Under Common Control with Registrant
Direct Subsidiaries
Set forth below is the name of our subsidiary, the state or country under whose laws the
subsidiary is organized, and the percentage of voting securities or membership interests owned by
us in such subsidiary:
MVC Financial Services, Inc. (Delaware) 100%
Our subsidiary is consolidated for financial reporting purposes.
Item 29. Number of Holders of Securities
The following table sets forth the approximate number of record holders of our common stock at
December 11, 2007.
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Number of |
Title of Class |
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Record Holders |
Common stock, $.01 par value |
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11,900 |
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Item 30. Indemnification
The Certificate of Incorporation of the Registrant provides that its directors and officers
shall, and its agents in the discretion of the board of directors may be indemnified to the fullest
extent permitted from time to time by the laws of Delaware, provided, however, that such
indemnification is limited by the Investment Company Act of 1940 or by any valid rule, regulation
or order of the Securities
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and Exchange Commission thereunder. The Registrants Fifth Amended and Restated Bylaws,
however, provide that the Registrant may not indemnify any director or officer against liability to
the Registrant or its security holders to which he or she might otherwise be subject by reason of
such persons willful misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office unless a determination is made by final decision of a
court, by vote of a majority of a quorum of directors who are disinterested, non-party directors or
by independent legal counsel that the liability for which indemnification is sought did not arise
out of such disabling conduct.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as
amended (the Securities Act) may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described above, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person in the successful defense of
an action, suit or proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of the court of the issue.
Item 31. Business and Other Connections of Investment Adviser
A description of any other business, profession, vocation or employment of a substantial
nature in which the investment adviser, The Tokarz Group Advisers LLC (the Adviser) and each
managing director, director or executive officer of the Adviser, is or has been during the past two
fiscal years, engaged in for his or her own account or in the capacity of director, officer,
employee, partner or trustee, is set forth in Part A of this Registration Statement in the section
entitled The Company TTG Advisers. Additional information regarding the Adviser and its
officers and directors is set forth in its Form ADV, as filed with the SEC (SEC File No.
801-67221), and is incorporated herein by reference.
Item 32. Location of Accounts and Records
We maintain at our principal office physical possession of each account, book or other
document required to be maintained by Section 31(a) of the 1940 Act and the rules thereunder.
Item 33. Management Services
Not applicable.
Item 34. Undertakings
We hereby undertake:
(1) to suspend the offering of shares until the prospectus is amended if (a) subsequent to the
effective date of this registration statement, our net asset value declines more than ten percent
from our net asset value as of the effective date of this registration statement or (b) our net
asset value increases to an amount greater than our net proceeds as stated in the prospectus;
(2) Not applicable.
(3) Not applicable.
(4) (a) to file, during any period in which offers or sales are being made, a post-effective
amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
C-4
(iii) to include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to such
information in the registration statement.
(b) that, for the purpose of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of those securities at that time shall be deemed to be
the initial bona fide offering thereof; and
(c) to remove from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the offering.
(5) that, for the purpose of determining any liability under the Securities Act, (i) the
information omitted from the form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus filed by us under Rule 497(h) under
the Securities Act shall be deemed to be part of this registration statement as of the time it was
declared effective; and (ii) each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered therein, and the
offering of the securities at that time shall be deemed to be the initial bona fide offering
thereof.
(6) Not applicable.
C-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has
duly caused this registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the County of Westchester, in the State of New
York, on this day, December 18, 2007.
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MVC Capital, Inc.
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By: |
/S/ MICHAEL T. TOKARZ
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Michael T. Tokarz |
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Chairman of the Board |
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Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities
indicated on December 18, 2007.
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SIGNATURE |
|
TITLE |
/s/ MICHAEL T. TOKARZ
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Chairman of the Board |
Michael T. Tokarz
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*
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Director |
Emilio A. Dominianni
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*
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Director |
Gerald Hellerman
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*
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Director |
Warren Holtsberg
|
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*
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Director |
Robert C. Knapp
|
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*
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Director |
William Taylor
|
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*
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Principal Financial Officer |
Peter Seidenberg
|
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/s/ BRUCE W. SHEWMAKER
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Attorney-in-Fact |
Bruce W. Shewmaker
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* Signed
by Bruce W. Shewmaker pursuant to a power of attorney signed by each
individual and filed with this Registration Statement on
November 30, 2007.
C-6