Table of Contents

 

 

 

FORM 10-Q

 

SECURITIES AND EXCHANGE COMMISSION

Washington D.C.  20549

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended January 31, 2013 or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 814-00201

 

MVC CAPITAL, INC.

(Exact name of the registrant as specified in its charter)

 

DELAWARE

 

94-3346760

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

287 Bowman Avenue

2nd Floor

Purchase, New York

 

10577

(Address of principal
executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (914) 701-0310

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

There were 23,916,982 shares of the registrant’s common stock, $.01 par value, outstanding as of March 7, 2013.

 

 

 



Table of Contents

 

 MVC Capital, Inc.

(A Delaware Corporation)

Index

 

 

Page

 

 

Part I. Consolidated Financial Information

 

 

 

 

 

Item 1.

Consolidated Financial Statements

 

 

 

Consolidated Balance Sheets

 

 

 

·      January 31, 2013 and October 31, 2012

3

 

 

Consolidated Statements of Operations

 

 

 

·      For the Period November 1, 2012 to January 31, 2013 and

 

 

 

·      For the Period November 1, 2011 to January 31, 2012

4

 

 

Consolidated Statements of Cash Flows

 

 

 

·      For the Period November 1, 2012 to January 31, 2013 and

 

 

 

·      For the Period November 1, 2011 to January 31, 2012

5

 

 

Consolidated Statements of Changes in Net Assets

 

 

 

·      For the Period November 1, 2012 to January 31, 2013

 

 

 

·      For the Period November 1, 2011 to January 31, 2012 and

 

 

 

·      For the Year ended October 31, 2012

6

 

 

Consolidated Selected Per Share Data and Ratios

 

 

 

·      For the Period November 1, 2012 to January 31, 2013,

 

 

 

·      For the Period November 1, 2011 to January 31, 2012 and

 

 

 

·      For the Year ended October 31, 2012

7

 

 

Consolidated Schedule of Investments

 

 

 

·      January 31, 2013

 

 

 

·      October 31, 2012

8

 

 

Notes to Consolidated Financial Statements

12

 

 

 

 

 

Item 2.

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

32

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

54

 

 

 

 

 

Item 4.

Controls and Procedures

62

 

 

 

Part II. Other Information

63

 

 

SIGNATURE

64

 

Exhibits

66

 



Table of Contents

 

Part I. Consolidated Financial Information

Item 1. Consolidated Financial Statements

 

CONSOLIDATED FINANCIAL STATEMENTS

 

MVC Capital, Inc.

Consolidated Balance Sheets

 

 

 

January 31,
2013

 

October 31,
2012

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

30,339,225

 

$

36,160,558

 

Restricted cash and cash equivalents

 

6,790,000

 

6,480,000

 

Investments at fair value

 

 

 

 

 

Non-control/Non-affiliated investments (cost $53,047,510 and $54,629,419)

 

34,656,895

 

34,197,990

 

Affiliate investments (cost $136,400,934 and $128,521,214)

 

189,187,170

 

178,396,856

 

Control investments (cost $147,494,206 and $149,281,248)

 

192,633,030

 

191,575,802

 

Total investments at fair value (cost $336,942,650 and $332,431,881)

 

416,477,095

 

404,170,648

 

Dividends and interest receivables, net of reserves

 

2,811,833

 

4,559,703

 

Fee and other receivables

 

3,729,860

 

3,314,116

 

Escrow receivables

 

494,827

 

991,563

 

Prepaid expenses

 

822,417

 

753,501

 

Prepaid taxes

 

415

 

591

 

 

 

 

 

 

 

Total assets

 

$

461,465,672

 

$

456,430,680

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Term loan

 

$

50,000,000

 

$

50,000,000

 

Provision for incentive compensation (Note 10)

 

16,830,099

 

15,655,438

 

Management fee payable

 

2,080,237

 

2,027,571

 

Management fee payable - Asset Management

 

1,286,063

 

1,054,433

 

Professional fees payable

 

612,060

 

767,835

 

Other accrued expenses and liabilities

 

800,964

 

734,501

 

Portfolio fees payable - Asset Management

 

140,467

 

140,293

 

Consulting fees payable

 

52,204

 

34,476

 

 

 

 

 

 

 

Total liabilities

 

71,802,094

 

70,414,547

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Common stock, $0.01 par value; 150,000,000 shares authorized; 23,916,982 and 23,916,982 shares outstanding, respectively

 

283,044

 

283,044

 

Additional paid-in-capital

 

425,651,660

 

425,651,660

 

Accumulated earnings

 

65,527,765

 

64,524,665

 

Dividends paid to stockholders

 

(95,239,568

)

(92,010,775

)

Accumulated net realized loss

 

(48,324,522

)

(46,401,983

)

Net unrealized appreciation

 

79,534,444

 

71,738,767

 

Treasury stock, at cost, 4,387,466 and 4,387,466 shares held, respectively

 

(37,769,245

)

(37,769,245

)

 

 

 

 

 

 

Total shareholders’ equity

 

389,663,578

 

386,016,133

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

461,465,672

 

$

456,430,680

 

 

 

 

 

 

 

Net asset value per share

 

$

16.29

 

$

16.14

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

MVC Capital, Inc.

Consolidated Statements of Operations

(Unaudited)

 

 

 

For the Quarter Ended
January 31, 2013

 

For the Quarter Ended
January 31, 2012

 

Operating Income:

 

 

 

 

 

Dividend income

 

 

 

 

 

Non-control/Non-affiliated investments

 

$

974

 

$

1,580

 

Affiliate investments

 

2,385,748

 

30,249

 

Control investments

 

426,300

 

 

Total dividend income

 

2,813,022

 

31,829

 

 

 

 

 

 

 

Payment-in-kind dividend income

 

 

 

 

 

Affiliate investments

 

65,484

 

60,497

 

Total payment-in-kind dividend income

 

65,484

 

60,497

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

Non-control/Non-affiliated investments

 

543,884

 

495,471

 

Affiliate investments

 

1,022,952

 

771,642

 

Control investments

 

581,774

 

609,393

 

Total interest income

 

2,148,610

 

1,876,506

 

 

 

 

 

 

 

Payment-in-kind interest income

 

 

 

 

 

Non-control/Non-affiliated investments

 

16,012

 

 

 

Affiliate investments

 

338,675

 

500,024

 

Control investments

 

213,574

 

198,945

 

Total payment-in-kind interest income

 

568,261

 

698,969

 

 

 

 

 

 

 

Fee income

 

 

 

 

 

Non-control/Non-affiliated investments

 

104

 

15,082

 

Affiliate investments

 

236,846

 

293,615

 

Control investments

 

133,800

 

178,073

 

Total fee income

 

370,750

 

486,770

 

 

 

 

 

 

 

Fee income - Asset Management(1)

 

 

 

 

 

Portfolio fees

 

140,613

 

83,417

 

Management Fees

 

308,841

 

517,805

 

Total fee income - Asset Management

 

449,454

 

601,222

 

 

 

 

 

 

 

Other loss

 

(29,845

)

(111,652

)

 

 

 

 

 

 

Total operating income

 

6,385,736

 

3,644,141

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

Management fee

 

2,080,237

 

2,256,419

 

Interest and other borrowing costs

 

937,043

 

795,124

 

Management fee - Asset Management(1)

 

231,631

 

388,353

 

Legal fees

 

136,000

 

175,020

 

Audit fees

 

158,300

 

144,000

 

Other expenses

 

133,553

 

184,203

 

Consulting fees

 

132,251

 

122,251

 

Portfolio fees - Asset Management(1)

 

105,460

 

62,563

 

Directors fees

 

103,125

 

87,000

 

Insurance

 

82,770

 

83,613

 

Administration

 

63,872

 

67,356

 

Public relations fees

 

49,500

 

25,500

 

Printing and postage

 

31,000

 

34,200

 

Incentive compensation (Note 10)

 

1,174,661

 

(1,937,136

)

 

 

 

 

 

 

Total operating expenses

 

5,419,403

 

2,488,466

 

 

 

 

 

 

 

Less: Voluntary Expense Waiver by Adviser(2)

 

(37,500

)

(37,500

)

Less: Voluntary Management Fee Waiver by Adviser(3)

 

 

(58,728

)

 

 

 

 

 

 

Total waivers

 

(37,500

)

(96,228

)

 

 

 

 

 

 

Net operating income before taxes

 

1,003,833

 

1,251,903

 

 

 

 

 

 

 

Tax Expenses:

 

 

 

 

 

Current tax expense

 

733

 

549

 

 

 

 

 

 

 

Total tax expense

 

733

 

549

 

 

 

 

 

 

 

Net operating income

 

1,003,100

 

1,251,354

 

 

 

 

 

 

 

Net Realized and Unrealized Gain (Loss) on Investments:

 

 

 

 

 

 

 

 

 

 

 

Net realized (loss) gain on investments

 

 

 

 

 

Non-control/Non-affiliated investments

 

(1,922,539

)

193,793

 

 

 

 

 

 

 

Total net realized (loss) gain on investments

 

(1,922,539

)

193,793

 

 

 

 

 

 

 

Net change in unrealized appreciation (depreciation) on investments

 

7,795,677

 

(10,462,974

)

 

 

 

 

 

 

Net realized and unrealized gain (loss) on investments

 

5,873,138

 

(10,269,181

)

 

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations

 

$

6,876,238

 

$

(9,017,827

)

 

 

 

 

 

 

Net increase (decrease) in net assets per share resulting from operations

 

$

0.29

 

$

(0.38

)

 

 

 

 

 

 

Dividends declared per share

 

$

0.135

 

$

0.120

 

 


(1) These items are related to the management of the MVC Private Equity Fund, L.P. (“PE Fund”). Please see Note 4 “Management” for more information.

 

(2) Reflects the quarterly portion of the TTG Advisers’ voluntary waiver of $150,000 of expenses for the 2013 and 2012 fiscal years, that the Company would otherwise be obligated to reimburse TTG Advisers under the Advisory Agreement (the “Voluntary Waiver”).  Please see Note 9 “Management” for more information.

 

(3) Reflects TTG Advisers’ voluntary agreement that any assets of the Company invested in exchange-traded funds or the Octagon High Income Cayman Fund Ltd. would not be taken into the calculation of the base management fee due to TTG Advisers under the Advisory Agreement.  Please see Note 9 “Management” for more information.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

MVC Capital, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

For the Quarter Ended

 

For the Quarter Ended

 

 

 

January 31, 2013

 

January 31, 2012

 

Cash flows from Operating Activities:

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations

 

$

6,876,238

 

$

(9,017,827

)

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities:

 

 

 

 

 

Net realized loss (gain)

 

1,922,539

 

(193,793

)

Net change in unrealized (appreciation) depreciation

 

(7,795,677

)

10,462,974

 

Amortization of discounts and fees

 

(11,964

)

(17,158

)

Increase in accrued payment-in-kind dividends and interest

 

(633,745

)

(759,466

)

Allocation of flow through loss

 

29,845

 

111,652

 

Changes in assets and liabilities:

 

 

 

 

 

Dividends and interest receivables, net of reserves

 

1,747,870

 

280,395

 

Fee and other receivables

 

(415,744

)

(125,618

)

Escrow receivables

 

496,736

 

441,926

 

Prepaid expenses

 

(68,916

)

(118,467

)

Prepaid taxes

 

176

 

 

Incentive compensation (Note 10)

 

1,174,661

 

(1,937,136

)

Other liabilities

 

212,886

 

732,004

 

Purchases of equity investments

 

 

(6,314,993

)

Purchases of debt instruments

 

(8,500,000

)

(1,000,000

)

Proceeds from equity investments

 

 

 

Proceeds from debt instruments

 

2,682,555

 

699,137

 

 

 

 

 

 

 

Net cash used in operating activities

 

(2,282,540

)

(6,756,370

)

 

 

 

 

 

 

Cash flows from Financing Activities:

 

 

 

 

 

Distributions paid to shareholders

 

(3,228,793

)

(2,870,038

)

 

 

 

 

 

 

Net cash used in financing activities

 

(3,228,793

)

(2,870,038

)

 

 

 

 

 

 

Net change in cash and cash equivalents for the period

 

(5,511,333

)

(9,626,408

)

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

$

42,640,558

 

$

35,242,460

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

37,129,225

 

$

25,616,052

 

 

During the quarters ended January 31, 2013 and 2012 MVC Capital, Inc. paid $830,555 and $734,720 in interest expense, respectively.

 

During the quarters ended January 31, 2013 and 2012 MVC Capital, Inc. paid $857 and $1,967 in  income taxes, respectively.

 

Non-cash activity:

 

During the quarters ended January 31, 2013 and 2012, MVC Capital, Inc. recorded payment in-kind dividend and interest of $633,745 and $759,466, respectively. This amount was added to the principal balance of the investments and recorded as dividend/interest income.

 

During the quarters ended January 31, 2013 and 2012, MVC Capital, Inc. was allocated ($29,845) and ($111,652), respectively, in flow-through losses from its equity investment in Octagon Credit Investors, LLC.  Of these amounts, $0 and $0, respectively, was received in cash and the balance of ($29,845) and ($111,652), respectively, was undistributed and therefore decreased the cost of the investment.  The fair value was then decreased by $29,845 and $111,652, respectively, by the Company’s Valuation Committee.

 

On December 12, 2011, BP Clothing, LLC (“BP”) filed for Chapter 11 protection in New York with agreement to turn ownership over to secured lenders under a bankruptcy reorganization plan.  On June 20, 2012, BP completed the bankruptcy process which resulted in a realized loss of approximately $23.4 million on the second lien loan, term loan A and term loan B.  As a result of the bankruptcy process, the Company received limited liability company interest in BPC II, LLC (“BPC”).

 

On January 13, 2012, the Company received free warrants related to their debt investment in Freshii USA, Inc.  The Company allocated the cost basis in the investment between the senior secured loan and the warrant at the time the investment was made.  The Company will amortize the discount associated with the warrant over the life of the loan.  During the quarter ended January 31, 2013 and January 31, 2012, the Company recorded $353 and $441, respectively of amortization.

 

On January 13, 2012, the Company received free warrants related to their debt investment in Biovation Holdings, Inc.  The Company allocated the cost basis in the investment between the bridge loan and the warrant at the time the investment was made.  The Company will amortize the discount associated with the warrant over the life of the loan.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

MVC Capital, Inc.

Consolidated Statements of Changes in Net Assets

 

 

 

For the Quarter Ended

 

For the Quarter Ended

 

For the Year Ended

 

 

 

January 31, 2013

 

January 31, 2012

 

October 31, 2012

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

Operations:

 

 

 

 

 

 

 

Net operating income

 

$

1,003,100

 

$

1,251,354

 

$

21,121,070

 

Net realized (loss) gain on investments

 

(1,922,539

)

193,793

 

(20,518,433

)

Net change in unrealized appreciation (depreciation) on investments

 

7,795,677

 

(10,462,974

)

(22,257,313

)

 

 

 

 

 

 

 

 

Net increase (decrease) in net assets from operations

 

6,876,238

 

(9,017,827

)

(21,654,676

)

 

 

 

 

 

 

 

 

Shareholder Distributions:

 

 

 

 

 

 

 

Distributions to shareholders from income

 

(3,228,793

)

(1,251,354

)

(11,838,907

)

Distributions to shareholders from return of capital

 

 

(1,618,684

)

 

 

 

 

 

 

 

 

 

Net decrease in net assets from shareholder distributions

 

(3,228,793

)

(2,870,038

)

(11,838,907

)

 

 

 

 

 

 

 

 

Total increase (decrease) in net assets

 

3,647,445

 

(11,887,865

)

(33,493,583

)

 

 

 

 

 

 

 

 

Net assets, beginning of period/year

 

386,016,133

 

419,509,716

 

419,509,716

 

 

 

 

 

 

 

 

 

Net assets, end of period/year

 

$

389,663,578

 

$

407,621,851

 

$

386,016,133

 

 

 

 

 

 

 

 

 

Common shares outstanding, end of period/year

 

23,916,982

 

23,916,982

 

23,916,982

 

 

 

 

 

 

 

 

 

Undistributed net operating income

 

$

7,057,502

 

$

 

$

9,282,163

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



Table of Contents

 

MVC Capital, Inc.

Consolidated Selected Per Share Data and Ratios

 

 

 

For the

 

For the

 

For the

 

 

 

Quarter Ended

 

Quarter Ended

 

Year Ended

 

 

 

January 31, 2013

 

January 31, 2012

 

October 31, 2012

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net asset value, beginning of period/year

 

$

16.14

 

$

17.54

 

$

17.54

 

 

 

 

 

 

 

 

 

Gain from operations:

 

 

 

 

 

 

 

Net operating income

 

0.04

 

0.05

 

0.88

 

Net realized and unrealized gain (loss) on investments

 

0.25

 

(0.43

)

(1.78

)

 

 

 

 

 

 

 

 

Total gain (loss) from investment operations

 

0.29

 

(0.38

)

(0.90

)

 

 

 

 

 

 

 

 

Less distributions from:

 

 

 

 

 

 

 

Income

 

(0.14

)

(0.05

)

(0.50

)

Return of capital

 

 

(0.07

)

 

 

 

 

 

 

 

 

 

Total distributions

 

(0.14

)

(0.12

)

(0.50

)

 

 

 

 

 

 

 

 

Net asset value, end of period/year

 

$

16.29

 

$

17.04

 

$

16.14

 

 

 

 

 

 

 

 

 

Market value, end of period/year

 

$

12.17

 

$

12.54

 

$

12.36

 

 

 

 

 

 

 

 

 

Market discount

 

(25.29

)%

(26.41

)%

(23.42

)%

 

 

 

 

 

 

 

 

Total Return - At NAV (a)

 

1.77

% (d)

(2.18

)% (d)

(5.21

)%

 

 

 

 

 

 

 

 

Total Return - At Market (a)

 

(0.44

)% (d)

(1.04

)% (d)

0.44

%

 

 

 

 

 

 

 

 

Ratios and Supplemental Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Portfolio turnover ratio

 

0.63

%

0.50

%

3.31

%

 

 

 

 

 

 

 

 

Net assets, end of period/year (in thousands)

 

$

389,665

 

$

407,622

 

$

386,016

 

 

 

 

 

 

 

 

 

Ratios to average net assets:

 

 

 

 

 

 

 

Expenses excluding tax expense

 

5.53

%(c)

2.28

%(c)

2.17

%

Expenses including tax expense

 

5.53

%(c)

2.28

%(c)

2.17

%

 

 

 

 

 

 

 

 

Net operating income before tax expense

 

1.03

%(c)

1.19

%(c)

5.22

%

Net operating income after tax expense

 

1.03

%(c)

1.19

%(c)

5.22

%

 

 

 

 

 

 

 

 

Ratios to average net assets excluding waivers:

 

 

 

 

 

 

 

Expenses excluding tax expense

 

5.57

%(c)

2.38

%(c)

2.80

%

Expenses including tax expense

 

5.57

%(c)

2.38

%(c)

2.80

%

 

 

 

 

 

 

 

 

Net operating income before tax expense

 

0.99

%(c)

1.10

%(c)

4.59

%

Net operating income after tax expense

 

0.99

%(c)

1.10

%(c)

4.59

%

 


(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/year.

 

(b) Supplemental Ratio information

 

Ratios to average net assets: (b)

 

 

 

 

 

 

 

Expenses excluding incentive compensation

 

4.32

%(c)

4.13

%(c)

4.21

%

Expenses excluding incentive compensation, interest and other borrowing costs

 

3.36

%(c)

3.37

%(c)

3.38

%

 

 

 

 

 

 

 

 

Net operating income (loss) before incentive compensation

 

2.24

%(c)

(0.66

)%(c)

3.18

%

Net operating income before incentive compensation, interest and other borrowing costs

 

3.20

%(c)

0.10

%(c)

4.01

%

 

 

 

 

 

 

 

 

Ratios to average net assets excluding waivers: (b)

 

 

 

 

 

 

 

Expenses excluding incentive compensation

 

4.36

%(c)

4.22

%(c)

4.27

%

Expenses excluding incentive compensation, interest and other borrowing costs

 

3.40

%(c)

3.47

%(c)

3.44

%

 

 

 

 

 

 

 

 

Net operating income (loss) before incentive compensation

 

2.20

%(c)

(0.74

)%(c)

3.12

%

Net operating income before incentive compensation, interest and other borrowing costs

 

3.16

%(c)

0.01

%(c)

3.95

%

 

(c) Annualized.

(d) Non- Annualized.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7



Table of Contents

 

MVC Capital, Inc.

Consolidated Schedule of Investments

January 31, 2013 (Unaudited)

 

Company

 

Industry

 

Investment

 

Principal

 

Cost

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliated investments- 8.89% (a), (c), (f), (g)

 

 

 

 

 

 

 

 

 

 

 

Actelis Networks, Inc.

 

Technology Investment

 

Preferred Stock (150,602 shares) (d), (j)

 

 

 

$

5,000,003

 

 

Biovation Holdings, Inc.

 

Manufacturer of Laminate Material and Composites

 

Bridge Loan 6.0000% Cash, 6.0000% PIK, 02/28/2014 (b), (h)

 

$

2,000,000

 

1,835,000

 

$

1,835,000

 

 

 

 

 

Warrants

 

 

 

165,000

 

165,000

 

 

 

 

 

 

 

 

 

2,000,000

 

2,000,000

 

BPC II, LLC

 

Apparel

 

Limited Liability Company Interest (d)

 

 

 

180,000

 

 

DPHI, Inc.

 

Technology Investment

 

Preferred Stock (602,131 shares) (d), (j)

 

 

 

4,520,355

 

 

FOLIOfn, Inc.

 

Technology Investment

 

Preferred Stock (5,802,259 shares) (d), (j)

 

 

 

15,000,000

 

10,790,000

 

Freshii USA, Inc.

 

Food Services

 

Senior Secured Loan 6.0000% Cash, 6.0000% PIK, 01/11/2017 (b, h)

 

1,060,317

 

1,025,699

 

1,033,589

 

 

 

 

 

Warrants (d), (m)

 

 

 

33,873

 

33,873

 

 

 

 

 

 

 

 

 

1,059,572

 

1,067,462

 

MainStream Data, Inc.

 

Technology Investment

 

Common Stock (5,786 shares) (d), (j)

 

 

 

3,750,000

 

 

NPWT Corporation

 

Medical Device Manufacturer

 

Series B Common Stock (281 shares) (d)

 

 

 

1,231,638

 

20,274

 

 

 

 

 

Series A Convertible Preferred Stock (5,000 shares) (d)

 

 

 

 

355,909

 

 

 

 

 

 

 

 

 

1,231,638

 

376,183

 

Prepaid Legal Services, Inc.

 

Consumer Services

 

Tranche A Term Loan 7.5000% Cash, 01/1/2017 (h)

 

2,926,829

 

2,895,408

 

2,926,829

 

 

 

 

 

Tranche B Term Loan 11.0000% Cash, 01/1/2017 (h)

 

4,000,000

 

3,914,114

 

4,000,000

 

 

 

 

 

 

 

 

 

6,809,522

 

6,926,829

 

SGDA Sanierungsgesellschaft fur Deponien und Altlasten GmbH

 

Soil Remediation

 

Term Loan 7.0000% Cash, 08/31/2014 (e), (h)

 

6,547,350

 

6,547,350

 

6,547,350

 

Teleguam Holdings, LLC

 

Telecommunications

 

Second Lien Loan 9.7500% Cash, 06/09/2017 (h)

 

7,000,000

 

6,949,071

 

6,949,071

 

 

 

 

 

 

 

 

 

 

 

 

 

Sub Total Non-control/Non-affiliated investments

 

 

 

 

 

 

 

53,047,511

 

34,656,895

 

 

 

 

 

 

 

 

 

 

 

 

 

Affiliate investments - 48.55% (a), (c), (f), (g)

 

 

 

 

 

 

 

 

 

 

 

Centile Holdings B.V.

 

Software

 

Common Equity Interest (d), (e)

 

 

 

3,174,376

 

3,230,000

 

Custom Alloy Corporation

 

Manufacturer of Pipe Fittings

 

Unsecured Subordinated Loan 12.0000% Cash, 06/18/2013 (b), (h)

 

15,467,522

 

15,467,522

 

15,467,522

 

 

 

 

 

Convertible Series A Preferred Stock (9 shares) (d)

 

 

 

44,000

 

47,696

 

 

 

 

 

Convertible Series B Preferred Stock (1,991 shares) (d)

 

 

 

9,956,000

 

10,792,304

 

 

 

 

 

 

 

 

 

25,467,522

 

26,307,522

 

Harmony Health & Beauty, Inc.

 

Health & Beauty - Retail

 

Common Stock (147,621 shares) (d)

 

 

 

6,700,000

 

 

JSC Tekers Holdings

 

Real Estate Management

 

Common Stock (2,250 shares) (d), (e)

 

 

 

4,500

 

4,500

 

 

 

 

 

Secured Loan 8.0000% Cash, 12/31/2014 (e), (h)

 

12,000,000

 

12,000,000

 

12,000,000

 

 

 

 

 

 

 

 

 

12,004,500

 

12,004,500

 

Marine Exhibition Corporation

 

Theme Park

 

Senior Subordinated Debt 7.0000% Cash, 4.0000% PIK, 08/30/2017 (b), (h)

 

11,713,801

 

11,705,813

 

11,713,801

 

 

 

 

 

Convertible Preferred Stock (20,000 shares) (b)

 

 

 

3,339,703

 

3,339,703

 

 

 

 

 

 

 

 

 

15,045,516

 

15,053,504

 

Octagon Credit Investors, LLC

 

Financial Services

 

Limited Liability Company Interest

 

 

 

2,334,900

 

6,641,951

 

RuMe Inc.

 

Consumer Products

 

Common Stock (999,999 shares) (d)

 

 

 

160,000

 

160,000

 

 

 

 

 

Series B-1 Preferred Stock (4,999,076 shares) (d)

 

 

 

999,815

 

1,840,000

 

 

 

 

 

 

 

 

 

1,159,815

 

2,000,000

 

Security Holdings B.V.

 

Electrical Engineering

 

Common Equity Interest (d), (e)

 

 

 

40,186,620

 

26,966,000

 

SGDA Europe B.V.

 

Soil Remediation

 

Common Equity Interest (d), (e)

 

 

 

20,084,599

 

6,173,000

 

U.S. Gas & Electric, Inc.

 

Energy Services

 

Second Lien Loan 9.0000% Cash, 5.0000% PIK , 06/30/2015 (b), (h)

 

9,743,086

 

9,743,086

 

9,743,086

 

 

 

 

 

Convertible Series I Preferred Stock (32,200 shares) (d), (l)

 

 

 

500,000

 

81,067,607

 

 

 

 

 

Convertible Series J Preferred Stock (8,216 shares) (d)

 

 

 

 

 

 

 

 

 

 

 

 

 

10,243,086

 

90,810,693

 

 

 

 

 

 

 

 

 

 

 

 

 

Sub Total Affiliate investments

 

 

 

 

 

 

 

136,400,934

 

189,187,170

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

8



Table of Contents

 

MVC Capital, Inc.

Consolidated Schedule of Investments - (Continued)

January 31, 2013 (Unaudited)

 

Company

 

Industry

 

Investment

 

Principal

 

Cost

 

Fair Value

 

Control Investments - 49.44% (a), (c), (f), (g)

 

 

 

 

 

 

 

 

 

 

 

MVC Automotive Group B.V.

 

Automotive Dealerships

 

Common Equity Interest (d), (e)

 

 

 

$

34,736,939

 

$

35,699,000

 

 

 

 

 

Bridge Loan 10.0000% Cash, 12/31/2013 (e), (h)

 

$

1,635,244

 

1,635,244

 

1,635,244

 

 

 

 

 

 

 

 

 

36,372,183

 

37,334,244

 

MVC Private Equity Fund LP

 

Private Equity

 

Limited Partnership Interest (d), (k)

 

 

 

8,013,749

 

8,083,916

 

 

 

 

 

General Partnership Interest (d), (k)

 

 

 

204,432

 

206,222

 

 

 

 

 

 

 

 

 

8,218,181

 

8,290,138

 

Ohio Medical Corporation

 

Medical Device Manufacturer

 

Common Stock (5,620 shares) (d)

 

 

 

15,763,636

 

 

 

 

 

 

Series A Convertible Preferred Stock (22,023 shares) (b)

 

 

 

30,000,000

 

31,100,000

 

 

 

 

 

Guarantee - Series B Preferred (d)

 

 

 

 

(1,175,000

)

 

 

 

 

 

 

 

 

45,763,636

 

29,925,000

 

SIA Tekers Invest

 

Port Facilities

 

Common Stock (68,800 shares) (d), (e)

 

 

 

2,300,000

 

1,481,000

 

Summit Research Labs, Inc.

 

Specialty Chemicals

 

Second Lien Loan 7.0000% Cash, 7.0000% PIK , 09/30/2017 (b), (h)

 

12,081,591

 

12,063,935

 

12,081,592

 

 

 

 

 

Common Stock (1,115 shares)

 

 

 

16,000,000

 

62,500,000

 

 

 

 

 

 

 

 

 

28,063,935

 

74,581,592

 

Turf Products, LLC

 

Distributor - Landscaping and

 

Senior Subordinated Debt 9.0000% Cash, 4.0000% PIK , 01/31/2014 (b), (h)

 

8,395,262

 

8,395,262

 

8,395,262

 

 

 

Irrigation Equipment

 

Junior Revolving Note 6.0000% Cash, 01/31/2014 (h)

 

1,000,000

 

1,000,000

 

1,000,000

 

 

 

 

 

Limited Liability Company Interest (d)

 

 

 

3,535,694

 

3,054,794

 

 

 

 

 

Warrants (d)

 

 

 

 

 

 

 

 

 

 

 

 

 

12,930,956

 

12,450,056

 

Velocitius B.V.

 

Renewable Energy

 

Common Equity Interest (d), (e)

 

 

 

11,395,315

 

20,671,000

 

Vestal Manufacturing Enterprises, Inc.

 

Iron Foundries

 

Senior Subordinated Debt 12.0000% Cash, 04/29/2013 (h)

 

600,000

 

600,000

 

600,000

 

 

 

 

 

Common Stock (81,000 shares) (d)

 

 

 

1,850,000

 

7,300,000

 

 

 

 

 

 

 

 

 

2,450,000

 

7,900,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Sub Total Control Investments

 

 

 

 

 

 

 

147,494,206

 

192,633,030

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL INVESTMENT ASSETS - 106.88% (f)

 

 

 

 

 

 

 

$

 

336,942,651

 

$

 

416,477,095

 

 


(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 Company’s equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except MVC Automotive Group B.V., Security Holdings B.V.,  SGDA Europe B.V., SGDA Sanierungsgesellschaft fur Deponien und Altlasten mbH, SIA Tekers Invest, JSC Tekers Holdings, Centile Holdings B.V., Velocitius B.V. and Freshii USA, Inc. 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 in Europe which represents approximately 25% of the total assets.  The remaining portfolio companies are located in North America which represents approximately 65% of the total assets.

 

(f) Percentages are based on net assets of $389,663,578 as of January 31, 2013.

 

(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.

 

(i) All or a portion of the accrued interest on these securities have been reserved against.

 

(j) Legacy Investments.

 

(k) MVC Private Equity Fund, LP is a private equity fund focused on control equity investments in the lower middle market.  The fund currently holds three investments, two located in the United States and one in Gibraltar, which are in the energy, services, and industrial sectors, respectively.

 

(l) Upon a liquidity event, the Company may receive additional ownership in U.S. Gas & Electric, Inc.

 

(m) Includes a warrant in Freshii One LLC, an affiliate of Freshii USA, Inc.

 

PIK - Payment-in-kind

 

- Denotes zero cost or fair value.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

9



Table of Contents

 

MVC Capital, Inc.

Consolidated Schedule of Investments

October 31, 2012

 

Company

 

Industry

 

Investment

 

Principal

 

Cost

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-control/Non-affiliated investments- 8.86% (a), (c), (f), (g)

 

 

 

 

 

 

 

 

 

 

 

Actelis Networks, Inc.

 

Technology Investment

 

Preferred Stock (150,602 shares) (d), (j)

 

 

 

$

5,000,003

 

 

Biovation Holdings, Inc.

 

Manufacturer of Laminate Material & Composites

 

Bridge Loan 6.0000% Cash, 6.0000% PIK, 02/28/2014 (b), (h)

 

$

1,500,000

 

1,500,000

 

$

1,500,000

 

BPC II, LLC

 

Apparel

 

Limited Liability Company Interest (d)

 

 

 

180,000

 

 

DPHI, Inc.

 

Technology Investment

 

Preferred Stock (602,131 shares) (d), (j)

 

 

 

4,520,355

 

 

FOLIOfn, Inc.

 

Technology Investment

 

Preferred Stock (5,802,259 shares) (d), (j)

 

 

 

15,000,000

 

10,790,000

 

Freshii USA, Inc.

 

Food Services

 

Senior Secured Loan 6.0000% Cash, 6.0000% PIK, 01/11/2017 (b), (h)

 

1,044,304

 

1,009,230

 

1,017,224

 

 

 

 

 

Warrants (d), (m)

 

 

 

33,873

 

33,873

 

 

 

 

 

 

 

 

 

1,043,103

 

1,051,097

 

Lockorder Limited

 

Technology Investment

 

Common Stock (21,064 shares) (d), (e), (j)

 

 

 

2,007,701

 

 

MainStream Data, Inc.

 

Technology Investment

 

Common Stock (5,786 shares) (d), (j)

 

 

 

3,750,000

 

 

NPWT Corporation

 

Medical Device Manufacturer

 

Series B Common Stock (281 shares) (d)

 

 

 

1,236,364

 

25,000

 

 

 

 

 

Series A Convertible Preferred Stock (5,000 shares) (d)

 

 

 

 

440,000

 

 

 

 

 

 

 

 

 

1,236,364

 

465,000

 

Prepaid Legal Services, Inc.

 

Consumer Services

 

Tranche A Term Loan 7.5000% Cash, 01/1/2017 (h)

 

3,024,390

 

2,989,832

 

2,989,832

 

 

 

 

 

Tranche B Term Loan 11.0000% Cash, 01/1/2017 (h)

 

4,000,000

 

3,908,589

 

3,908,589

 

 

 

 

 

 

 

 

 

6,898,421

 

6,898,421

 

SGDA Sanierungsgesellschaft fur Deponien und Altlasten GmbH

 

Soil Remediation

 

Term Loan 7.0000% Cash, 08/31/2014 (e), (h)

 

6,547,350

 

6,547,350

 

6,547,350

 

Teleguam Holdings, LLC

 

Telecommunications

 

Second Lien Loan 9.7500% Cash, 06/09/2017 (h)

 

7,000,000

 

6,946,122

 

6,946,122

 

 

 

 

 

 

 

 

 

 

 

 

 

Sub Total Non-control/Non-affiliated investments

 

 

 

 

 

 

 

54,629,419

 

34,197,990

 

 

 

 

 

 

 

 

 

 

 

 

 

Affiliate investments - 46.21% (a), (c), (f), (g)

 

 

 

 

 

 

 

 

 

 

 

Centile Holdings B.V.

 

Software

 

Common Equity Interest (d), (e)

 

 

 

3,174,376

 

3,140,000

 

Custom Alloy Corporation

 

Manufacturer of Pipe Fittings

 

Unsecured Subordinated Loan 7.0000% Cash, 7.0000% PIK , 06/18/2013 (b), (h)

 

15,623,348

 

15,623,348

 

15,623,348

 

 

 

 

 

Convertible Series A Preferred Stock (9 shares) (d)

 

 

 

44,000

 

44,000

 

 

 

 

 

Convertible Series B Preferred Stock (1,991 shares) (d)

 

 

 

9,956,000

 

9,956,000

 

 

 

 

 

 

 

 

 

25,623,348

 

25,623,348

 

Harmony Health & Beauty, Inc.

 

Health & Beauty - Retail

 

Common Stock (147,621 shares) (d)

 

 

 

6,700,000

 

100,000

 

JSC Tekers Holdings

 

Real Estate Management

 

Common Stock (2,250 shares) (d), (e)

 

 

 

4,500

 

4,500

 

 

 

 

 

Secured Loan 8.0000% Cash, 06/30/2014 (e), (h)

 

4,000,000

 

4,000,000

 

4,000,000

 

 

 

 

 

 

 

 

 

4,004,500

 

4,004,500

 

Marine Exhibition Corporation

 

Theme Park

 

Senior Subordinated Debt 7.0000% Cash, 4.0000% PIK, 08/30/2017 (b), (h)

 

11,842,742

 

11,829,348

 

11,842,742

 

 

 

 

 

Convertible Preferred Stock (20,000 shares) (b)

 

 

 

3,274,219

 

3,274,219

 

 

 

 

 

 

 

 

 

15,103,567

 

15,116,961

 

Octagon Credit Investors, LLC

 

Financial Services

 

Limited Liability Company Interest

 

 

 

2,364,745

 

6,221,796

 

RuMe Inc.

 

Consumer Products

 

Common Stock (999,999 shares) (d)

 

 

 

160,000

 

160,000

 

 

 

 

 

Series B-1 Preferred Stock (4,999,076 shares) (d)

 

 

 

999,815

 

1,417,000

 

 

 

 

 

 

 

 

 

1,159,815

 

1,577,000

 

Security Holdings B.V.

 

Electrical Engineering

 

Common Equity Interest (d), (e)

 

 

 

40,186,620

 

24,011,000

 

SGDA Europe B.V.

 

Soil Remediation

 

Common Equity Interest (d), (e)

 

 

 

20,084,599

 

7,915,000

 

U.S. Gas & Electric, Inc.

 

Energy Services

 

Second Lien Loan 9.0000% Cash, 5.0000% PIK , 07/25/2015 (b), (h)

 

9,619,644

 

9,619,644

 

9,619,644

 

 

 

 

 

Convertible Series I Preferred Stock (32,200 shares) (d), (l)

 

 

 

500,000

 

81,067,607

 

 

 

 

 

Convertible Series J Preferred Stock (8,216 shares) (d)

 

 

 

 

 

 

 

 

 

 

 

 

 

10,119,644

 

90,687,251

 

 

 

 

 

 

 

 

 

 

 

 

 

Sub Total Affiliate investments

 

 

 

 

 

 

 

128,521,214

 

178,396,856

 

 

 The accompanying notes are an integral part of these consolidated financial statements.

 

10



Table of Contents

 

MVC Capital, Inc.

Consolidated Schedule of Investments - (Continued)

October 31, 2012

 

Company

 

Industry

 

Investment

 

Principal

 

Cost

 

Fair Value

 

Control Investments - 49.63% (a), (c), (f), (g)

 

 

 

 

 

 

 

 

 

 

 

MVC Automotive Group B.V.

 

Automotive Dealerships

 

Common Equity Interest (d), (e)

 

 

 

$

 34,736,939

 

$

 33,519,000

 

 

 

 

 

Bridge Loan 10.0000% Cash, 12/31/2012 (e), (h)

 

$

 3,643,557

 

3,643,557

 

3,643,557

 

 

 

 

 

 

 

 

 

38,380,496

 

37,162,557

 

MVC Private Equity Fund LP

 

Private Equity

 

Limited Partnership Interest (d), (k)

 

 

 

8,013,749

 

8,072,249

 

 

 

 

 

General Partnership Interest (d), (k)

 

 

 

204,432

 

205,924

 

 

 

 

 

 

 

 

 

8,218,181

 

8,278,173

 

Ohio Medical Corporation

 

Medical Device Manufacturer

 

Common Stock (5,620 shares) (d)

 

 

 

15,763,636

 

 

 

 

 

 

Series A Convertible Preferred Stock (21,176 shares) (b)

 

 

 

30,000,000

 

31,100,000

 

 

 

 

 

Guarantee - Series B Preferred (d)

 

 

 

 

(825,000

)

 

 

 

 

 

 

 

 

45,763,636

 

30,275,000

 

SIA Tekers Invest

 

Port Facilities

 

Common Stock (68,800 shares) (d), (e)

 

 

 

2,300,000

 

1,247,000

 

Summit Research Labs, Inc.

 

Specialty Chemicals

 

Second Lien Loan 7.0000% Cash, 7.0000% PIK , 09/30/2017 (b), (h)

 

11,868,017

 

11,842,665

 

11,868,017

 

 

 

 

 

Common Stock (1,115 shares)

 

 

 

16,000,000

 

62,500,000

 

 

 

 

 

 

 

 

 

27,842,665

 

74,368,017

 

Turf Products, LLC

 

Distributor - Landscaping and

 

Senior Subordinated Debt 9.0000% Cash, 4.0000% PIK , 01/31/2014 (b), (h)

 

8,395,261

 

8,395,261

 

8,395,261

 

 

 

Irrigation Equipment

 

Junior Revolving Note 6.0000% Cash, 01/31/2014 (h)

 

1,000,000

 

1,000,000

 

1,000,000

 

 

 

 

 

Limited Liability Company Interest (d)

 

 

 

3,535,694

 

2,874,794

 

 

 

 

 

Warrants (d)

 

 

 

 

 

 

 

 

 

 

 

 

 

12,930,955

 

12,270,055

 

Velocitius B.V.

 

Renewable Energy

 

Common Equity Interest (d), (e)

 

 

 

11,395,315

 

21,725,000

 

Vestal Manufacturing Enterprises, Inc.

 

Iron Foundries

 

Senior Subordinated Debt 12.0000% Cash, 04/29/2013 (h)

 

600,000

 

600,000

 

600,000

 

 

 

 

 

Common Stock (81,000 shares) (d)

 

 

 

1,850,000

 

5,650,000

 

 

 

 

 

 

 

 

 

2,450,000

 

6,250,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Sub Total Control Investments

 

 

 

 

 

 

 

149,281,248

 

191,575,802

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL INVESTMENT ASSETS - 104.70% (f)

 

 

 

 

 

 

 

$

 332,431,881

 

$

 404,170,648

 

 


(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 Company’s equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except Lockorder Limited, MVC Automotive Group B.V., Security Holdings B.V., SGDA Europe B.V.,  SGDA Sanierungsgesellschaft fur Deponien und Altlasten mbH, SIA Tekers Invest, JSC Tekers Holdings, Centile Holdings B.V., Velocitius B.V. and Freshii USA, Inc.  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 in Europe which represents approximately 23% of the total assets.  The remaining portfolio companies are located in North America which represents approximately 65% of the total assets.

 

(f) Percentages are based on net assets of $386,016,133 as of October 31, 2012.

 

(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.

 

(i) All or a portion of the accrued interest on these securities have been reserved against.

 

(j) Legacy Investments.

 

(k) MVC Private Equity Fund, LP is a private equity fund focused on control equity investments in the lower middle market.  The fund currently holds three investments, two located in the United States and one in Gibraltar, which are in the energy, services, and industrial sectors, respectively.

 

(l) Upon a liquidity event, the Company may receive additional ownership in U.S. Gas & Electric, Inc.

 

(m) Includes a warrant in Freshii One LLC, an affiliate of Freshii USA, Inc.

 

PIK - Payment-in-kind

 

- Denotes zero cost or fair value.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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MVC Capital, Inc. (the “Company”)

Notes to Consolidated Financial Statements

January 31, 2013

(Unaudited)

 

1. Basis of Presentation

 

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements.  Certain amounts have been reclassified to adjust to current period presentations.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2012, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on December 27, 2012.

 

2. Consolidation

 

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 Company’s 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.

 

On October 14, 2011, the Company formed a wholly-owned subsidiary, MVC Cayman, an exempted company incorporated in the Cayman Islands, to hold certain of its investments and to make certain future investments.  The results of MVCFS and MVC Cayman are consolidated into the Company and all inter-company accounts have been eliminated in consolidation.

 

During fiscal year ended October 31, 2012, MVC Partners, LLC (“MVC Partners”) was consolidated with the operations of the Company as MVC Partners’ limited partnership interest in the PE Fund is a substantial portion of MVC Partners operations.  Previously, MVC Partners was presented as a Portfolio Company on the Consolidated Schedule of Investments.  The consolidation of MVC Partners has not had any material effect on the financial position or net results of operations of the Company.  There are additional disclosures resulting from this consolidation.

 

MVC GP II, LLC (“MVC GP II”), an indirect wholly-owned subsidiary of the Company, serves as the general partner to the MVC Private Equity Fund, L.P. (“PE Fund”).  MVC GP II is wholly-owned by MVCFS, a subsidiary of the Company.  The results of MVC GP II are consolidated into MVCFS and ultimately the Company. All inter-company accounts have been eliminated in consolidation.

 

3. Investment Classification

 

As required by the Investment Company Act of 1940, as amended (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 that 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. 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.

 

4. Cash and 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

 

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than three months to be cash equivalents. As of January 31, 2013, the Company had approximately $35.2 million in cash equivalents of the total cash and cash equivalents of approximately $37.1 million.

 

Restricted Cash and Cash Equivalents

 

Cash and cash equivalent accounts that are not available to the Company for day—to—day use are classified as restricted cash. Restricted cash and cash equivalents are carried at cost, which approximates fair value.  On April 26, 2011, the Company agreed to collateralize a 5.0 million Euro letter of credit from JPMorgan Chase Bank, N.A., which is related to a project guarantee by AB DnB NORD bankas to Security Holdings B.V. and is classified as restricted cash on the Company’s consolidated balance sheet (equivalent to approximately $6.8 million at January 31, 2013).

 

5. Investment Valuation Policy

 

Our investments are carried at fair value in accordance with the 1940 Act and Accounting Standards Codification, Fair Value Measurements and Disclosures (“ASC 820”). In accordance with the 1940 Act, unrestricted minority-owned publicly traded securities for which market quotations are readily available are valued at the closing market quote on the valuation date and majority-owned publicly traded securities and other privately held securities are valued as determined in good faith by the Valuation Committee of our Board of Directors. For legally or contractually restricted securities of companies that are publicly traded, the value is based on the closing market quote on the valuation date minus a discount for the restriction.  At January 31, 2013, we did not hold restricted or unrestricted securities of publicly traded companies for which we have a majority-owned interest.

 

ASC 820 provides a framework for measuring the fair value of assets and liabilities and provides guidance regarding a fair value hierarchy which prioritizes information used to measure value.  In determining fair value, the Valuation Committee primarily uses the level 3 inputs referenced in ASC 820.

 

ASC 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The price used to measure the fair value is not adjusted for transaction costs while the cost basis of our investments may include initial transaction costs. Under ASC 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset to which the reporting entity has access to as of the measurement date.  If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.

 

On May 12, 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”).  ASU 2011-04 amends ASC 820, which requires entities to change the wording used to describe the requirements in U.S. Generally Accepted Accounting Principles “GAAP” for measuring fair value and for disclosing information about fair value measurements.  ASU 2011-04 clarifies the application of existing fair value measurement and disclosure requirements related to the application of the highest and best use and valuation premise concepts for financial and nonfinancial instruments, measuring the fair value of an instrument classified in equity, and disclosures about fair value measurements.  ASU 2011-04 requires additional disclosures about fair value measurements categorized within Level 3 of the fair value hierarchy, including the valuation processes used by the reporting entity, the sensitivity of the fair value to changes in unobservable inputs, and the interrelationships between those unobservable inputs, if any. All the amendments to ASC 820 made by ASU 2011-04 are effective for interim and annual periods beginning after December 15, 2011.  The adoption of this new guidance has not had a material effect on the financial position or results of operations of the Company and has resulted in additional disclosures.  Please see Note 7 “Portfolio Investments.”

 

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Valuation Methodology

 

Pursuant to the requirements of the 1940 Act and in accordance with ASC 820, 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 which are consistent with ASC 820.  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 hire independent consultants to review our 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 comprised of three Independent Directors) determines fair values 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 consolidated statements of operations as “Net change in unrealized appreciation (depreciation) on investments.”

 

Currently, NAV per share is calculated and published on a quarterly basis.  The Company calculates NAV per share by subtracting all liabilities from the total value of portfolio securities and other assets and dividing the result by the total number of outstanding shares of common stock on the date of valuation.  Fair values of foreign investments determined as of quarter end reflect exchange rates, as applicable, in effect on the last business day of the quarter.  Exchange rates fluctuate on a daily basis, sometimes significantly.  Exchange rate fluctuations following the most recent fiscal quarter end are not reflected in the valuations reported in this Quarterly Report.

 

At January 31, 2013, approximately 90.36% of total assets represented portfolio investments in Portfolio Companies and escrow receivables recorded at fair value (“Fair Value Investments”).

 

Under most circumstances, at the time of acquisition, fair value investments are carried at cost (absent the existence of conditions warranting, in management’s and the Valuation Committee’s view, a different initial value).  During the period that an investment is held by the Company, its original cost may cease to approximate fair value as the result of market and investment specific factors.  No pre-determined formula can be applied to determine fair value.  Rather, the Valuation Committee analyzes fair value measurements based on 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 ultimately 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 Company’s financial results and projections, publicly traded comparable companies when available, comparable private transactions when available, precedent transactions in the market when available, third-party real estate and asset appraisals if appropriate and available, discounted cash flow analysis, if appropriate, 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 and escrow receivables that do not have readily ascertainable market values, our estimate of fair value may significantly differ from the fair 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.

 

In accordance with the 1940 Act, unrestricted minority-owned publicly traded securities for which market quotations are readily available are valued at the closing market quote on the valuation date and majority-owned publicly traded securities and other privately held securities are valued as determined in good faith by the Valuation Committee of the Board of Directors. For legally or contractually restricted securities of companies that are publicly traded, the value is

 

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based on the closing market quote on the valuation date minus a discount for the restriction.  At January 31, 2013, we did not hold restricted or unrestricted securities of publicly traded companies for which we have a majority-owned interest.

 

If a security is publicly traded, the fair value is generally equal to market value based on the closing price on the principal exchange on which the security is primarily traded unless restricted and a restrict discount is applied.

 

ASC 820 provides a framework for measuring the fair value of assets and liabilities and provides guidance regarding a fair value hierarchy, which prioritizes information used to measure value.  In determining fair value, the Valuation Committee primarily uses the level 3 inputs referenced in ASC 820.

 

For equity securities of Portfolio Companies, the Valuation Committee estimates the fair value based on market and/or income approach with value then attributed to equity or equity like securities using the enterprise value waterfall (“Enterprise Value Waterfall”) valuation methodology.  Under the Enterprise Value Waterfall valuation methodology, the Valuation Committee estimates the enterprise fair value of the Portfolio Company and then waterfalls the enterprise value over the Portfolio Company’s securities in order of their preference relative to one another.  To assess the enterprise value of the Portfolio Company, the Valuation Committee weighs some or all of the traditional market valuation methods and factors based on the individual circumstances of the Portfolio Company in order to estimate the enterprise value.  The methodologies for performing assets may be based on, among other things:  valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the Portfolio Company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the Portfolio Company, and third-party asset and real estate appraisals.  For non-performing assets, the Valuation Committee may estimate the liquidation or collateral value of the Portfolio Company’s assets.  The Valuation Committee also takes into account historical and anticipated financial results.

 

In assessing enterprise value, the Valuation Committee considers the mergers and acquisitions (“M&A”) market as the principal market in which the Company would sell its investments in Portfolio Companies under circumstances where the Company has the ability to control or gain control of the board of directors of the Portfolio Company (“Control Companies”).  This approach is consistent with the principal market that the Company would use for its Portfolio Companies if the Company has the ability to initiate a sale of the Portfolio Company as of the measurement date, i.e., if it has the ability to control or gain control of the board of directors of the Portfolio Company as of the measurement date.  In evaluating if the Company can control or gain control of a Portfolio Company as of the measurement date, the Company takes into account its equity securities on a fully diluted basis, as well as other factors.

 

For non-Control Companies, consistent with ASC 820, the Valuation Committee considers a hypothetical secondary market as the principal market in which it would sell investments in those companies.  The Company also considers other valuation methodologies such as the Option Pricing Method and liquidity preferences when valuing minority equity positions of a Portfolio Company.

 

For loans and debt securities of non-Control Companies (for which the Valuation Committee has identified the hypothetical secondary market as the principal market), the Valuation Committee determines fair value based on the assumptions that a hypothetical market participant would use to value the security in a current hypothetical sale using a market yield (“Market Yield”) valuation methodology.  In applying the Market Yield valuation methodology, the Valuation Committee determines the fair value based on such factors as third party broker quotes and market participant assumptions, including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date.

 

Estimates of average life are generally based on market data of the average life of similar debt securities.  However, if the Valuation Committee has information available to it that the debt security is expected to be repaid in the near term, the Valuation Committee would use an estimated life based on the expected repayment date.

 

The Valuation Committee determines fair value of loan and debt securities of Control Companies based on the estimate of the enterprise value of the Portfolio Company.  To the extent the enterprise value exceeds the remaining principal amount of the loan and all other debt securities of the company, the fair value of such securities is generally

 

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estimated to be their cost.  However, where the enterprise value is less than the remaining principal amount of the loan and all other debt securities, the Valuation Committee may discount the value of such securities to reflect an impairment.

 

For the Company’s or its subsidiary’s investment in the PE Fund, for which an indirect wholly-owned subsidiary of the Company serves as the GP of the PE Fund, the Valuation Committee relies on the GP’s determination of the F