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As
filed with the Securities and Exchange Commission on November 30, 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. 1 |
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POST-EFFECTIVE AMENDMENT NO. |
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. |
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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.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
$250,000,000
(MVC CAPITAL LOGO)
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 6 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.
______________,
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 Available Information and the section under
the heading Risk Factors before you make an investment decision.
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PROSPECTUS SUMMARY
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 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-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 cash value to the Company of $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
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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 $470.6 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.
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 various 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 capital base and ensures 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.
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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.
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
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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 investments, 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 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
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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.
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
6
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
|
|
|
We depend on key personnel of TTG Advisers, especially Mr. Tokarz, in seeking to achieve
our investment objective. |
|
|
|
|
Our investment adviser, TTG Advisers, is a recently-formed entity. |
|
|
|
|
Our returns may be substantially lower than the average returns historically realized by
the private equity industry as a whole. |
|
|
|
|
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. |
|
|
|
|
Economic recessions or downturns could impair our portfolio companies and harm our
operating results. |
|
|
|
|
We may not realize gains from our equity investments. |
|
|
|
|
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
investment opportunities. |
|
|
|
|
|
Our ability to use our capital loss carryforwards may be subject to limitations. |
|
|
|
|
|
Loss of pass-through tax treatment would substantially reduce net assets and income
available for dividends. |
|
|
|
|
|
Complying with the RIC requirements may cause us to forego otherwise attractive
opportunities. |
|
|
|
|
|
|
Regulations governing our operation as a business development company affect our ability
to, and the way in which we, raise additional capital. |
|
|
|
|
|
|
Any failure on our part to maintain our status as a business development company would
reduce our operating flexibility. |
|
|
|
|
|
|
Changes in the law or regulations that govern us could have a material impact on our
business. |
|
|
|
|
|
Results may fluctuate and may not be indicative of future performance. |
|
|
|
|
Our common stock price can be volatile. |
|
|
|
|
We are subject to market discount risk. |
|
|
|
|
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 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. |
|
|
|
|
Changes in interest rates may affect our cost of capital and net operating income. |
|
|
|
|
We may be unable to meet our covenant obligations under our credit facility which could
adversely affect our business. |
|
|
|
|
A portion of our existing investment portfolio was not selected by the investment team of
TTG Advisers. |
7
|
|
|
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. |
|
|
|
|
There are potential conflicts of interest that could impact our investment returns. |
|
|
|
|
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. |
|
|
|
|
Our financial condition and results of operations will depend on our ability to effectively
manage our future growth. |
INVESTMENT RISKS
|
|
|
Investing in private companies involves a high degree of risk. |
|
|
|
|
Our investments in portfolio companies are generally illiquid. |
|
|
|
|
Our investments in small and middle-market privately-held companies are extremely risky and
the Company could lose its entire investment. |
|
|
|
|
Our borrowers may default on their payments, which may have an effect on our financial
performance. |
|
|
|
|
Our investments in mezzanine and other debt securities may involve significant risks. |
|
|
|
|
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 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. |
|
|
|
|
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 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
|
|
|
Our common stock price can be volatile. |
|
|
|
|
|
Investing in our securities may involve a high degree of risk. |
|
|
|
|
|
We may allocate the net proceeds from this offering in ways with which you may not agree. |
|
|
|
|
Sales of substantial amounts of our securities may have an adverse effect on the market
price of our securities. |
8
|
|
|
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. |
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form N-2 together with all amendments
and related exhibits under the Securities Act 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.
FEES AND EXPENSES
This table describes the various costs and expenses that an investor in our common stock will
bear directly or indirectly.
Shareholder Transaction Expenses
|
|
|
|
|
Sales load |
|
|
|
%(1) |
Offering expenses borne by us (as a percentage of offering price) |
|
|
|
%(2) |
Total shareholder transaction expenses (as a percentage of offering price) |
|
|
|
%(3) |
Estimated Annual Expenses (as a percentage of consolidated net
assets attributable to common stock) (4) |
|
|
|
|
Management fees |
|
|
2.17 |
%(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) |
|
|
3.87 |
%(5) |
Other expenses |
|
|
0.83 |
%(6) |
Interest payments on borrowed funds |
|
|
1.56 |
%(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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year |
|
3 Years |
|
5 Years |
|
10 Years |
You would pay the
following cumulative
expenses on a $1,000
investment, assuming a
5.0% annual return |
|
$ |
83 |
|
|
$ |
240 |
|
|
$ |
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.
|
|
|
|
(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 87 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 FactorsBusiness RisksWe 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 87 below. |
|
SELECTED CONDENSED 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
10
year ended October 31, 2007. See Managements Discussion and Analysis of Financial
Condition and Results of Operations on page 24 for more information.
Selected Consolidated Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Month |
|
|
Nine Month |
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended |
|
|
Period Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, |
|
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
347,082 |
|
|
|
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. |
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
RISK FACTORS
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 Companys 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.
12
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. |
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. 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.
13
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.
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 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
14
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.
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:
|
|
|
price and volume fluctuations in the overall stock market from time to time;
|
15
|
|
|
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. |
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
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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.
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 can be seen, 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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-10 |
% |
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-5 |
% |
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0 |
% |
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5 |
% |
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10 |
% |
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20 |
% |
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Corresponding Return to
Common Stockholders (2) |
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-30.94 |
% |
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-16.30 |
% |
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-8.98 |
% |
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-1.65 |
% |
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5.67 |
% |
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12.99 |
% |
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27.64 |
% |
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(1) |
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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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(2) |
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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. |
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Changes in interest rates may affect our cost of capital and net operating income.
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.
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
17
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.
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
entities 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
objectives 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 CapitalOur Investment StrategyAllocation of Investment Opportunities below.
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
18
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 objectives 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 Companys 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.
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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19
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There is generally little or no publicly available information about these privately-held
companies. Because we seek to make investments in 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. |
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 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.
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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 you 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 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
21
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. |
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.
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.
22
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.
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 investments, 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.
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 November 27, 2007, the last reported sale price on the NYSE for our common stock was
$15.92 and on October 31, 2007, the Companys NAV per share was $15.21. To view the Companys
latest NAV per share, visit the Companys Internet website address at http://www.mvccapital.com.
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|
Price |
|
Price |
|
of High Sales |
|
of Low Sales |
|
Declared |
|
|
NAV(1) |
|
High |
|
Low |
|
Price to NAV |
|
Price to NAV |
|
Dividends |
Year ending October
31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
9.41 |
|
|
$ |
9.55 |
|
|
$ |
8.95 |
|
|
|
1.49 |
% |
|
|
-4.89 |
% |
|
|
|
|
Second Quarter |
|
|
9.64 |
|
|
|
9.50 |
|
|
|
9.17 |
|
|
|
-1.45 |
% |
|
|
-4.88 |
% |
|
|
|
|
Third Quarter |
|
|
10.06 |
|
|
|
11.34 |
|
|
|
9.41 |
|
|
|
12.61 |
% |
|
|
-6.55 |
% |
|
$ |
0.12 |
|
Fourth Quarter |
|
$ |
10.41 |
|
|
$ |
12.22 |
|
|
$ |
10.30 |
|
|
|
17.39 |
% |
|
|
1.06 |
% |
|
$ |
0.12 |
|
Year ending October
31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
10.94 |
|
|
$ |
12.22 |
|
|
$ |
10.50 |
|
|
|
11.70 |
% |
|
|
-4.02 |
% |
|
$ |
0.12 |
|
Second Quarter |
|
|
11.40 |
|
|
|
12.75 |
|
|
|
11.66 |
|
|
|
11.84 |
% |
|
|
2.28 |
% |
|
$ |
0.12 |
|
Third Quarter |
|
|
11.70 |
|
|
|
13.49 |
|
|
|
11.98 |
|
|
|
15.30 |
% |
|
|
2.39 |
% |
|
$ |
0.12 |
|
Fourth Quarter |
|
$ |
12.41 |
|
|
$ |
13.87 |
|
|
$ |
12.61 |
|
|
|
11.67 |
% |
|
|
1.61 |
% |
|
$ |
0.12 |
|
Year ending October
31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
13.23 |
|
|
$ |
15.26 |
|
|
$ |
13.11 |
|
|
|
15.34 |
% |
|
|
-0.91 |
% |
|
$ |
0.18 |
|
Second Quarter |
|
|
14.53 |
|
|
|
17.89 |
|
|
|
15.38 |
|
|
|
23.12 |
% |
|
|
5.85 |
% |
|
$ |
0.12 |
|
Third Quarter |
|
$ |
14.98 |
|
|
$ |
19.93 |
|
|
$ |
15.83 |
|
|
|
33.04 |
% |
|
|
5.67 |
% |
|
$ |
0.12 |
|
Fourth Quarter |
|
$ |
15.21 |
|
|
$ |
19.01 |
|
|
$ |
15.70 |
|
|
|
24.98 |
% |
|
|
3.22 |
% |
|
$ |
0.12 |
|
Year ending October
31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
(through
November 27,
2007) |
|
|
* |
|
|
$ |
17.44 |
|
|
$ |
15.87 |
|
|
|
* |
|
|
|
* |
|
|
|
|
|
|
|
|
(1) |
|
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. |
|
|
* |
|
Net asset value has not yet been calculated for this period. |
|
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 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.
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.
24
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.
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
25
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 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
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 Corp. (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
26
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 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
27
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 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.
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.
28
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 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.
29
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.
30
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.
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.
31
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 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
32
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 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.
33
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).
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
34
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 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.
35
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.
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 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
MOTO 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.
36
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.
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.
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
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
37
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 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.
38
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 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 $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,
of 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.
39
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 portfolio companies, 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.
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 portfolio companies, 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,
of the Timberland junior revolving line of credit into 40.91 shares of common stock at a price of
$10,000 per share.
40
Effective September 22, 2006, the Company exchanged $225,000 of the $2.55 million outstanding,
of 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 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 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 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.
41
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 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:
42
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.
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.
43
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.
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.
44
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.
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.
45
Harmony Pharmacy & Health Center, Inc.
Harmony Pharmacy, Purchase, New York, plans to operate 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.
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.
46
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 million
loan assignment.The $15 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.
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.
47
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 subsidiary, 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.
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.
48
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 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
49
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.
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.
50
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.
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.
51
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. 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 $0.5
million.
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.
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
52
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.
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 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.
53
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 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 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, 2005, 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 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. 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.
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.
54
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 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 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:
55
|
|
|
|
|
|
|
|
|
|
Commitments of MVC Capital, Inc. |
|
|
|
Portfolio Company |
|
Amount Committed |
|
Amount Funded at 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
|
|
$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
|
|
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 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.
56
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 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 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 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,
57
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
After |
|
|
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
5 years |
|
Term Debt Portion
of Credit Facility |
|
$ |
50,000,000 |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
50,000,000 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt |
|
$ |
50,000,000 |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
50,000,000 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 repaid its second lien loan in full including all accrued interest
and fees. 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. 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 $47,276 to MVC Partners increasing
their 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 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 first lien loan.
On October 1, 2007, Innovative Brands repaid $37,500 on its term loan.
58
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, net borrowings on U.S. Gass revolving credit
facility were approximately $1.1 million.
Since
October 31, 2007, net borrowings on Octagons revolving credit
facility were $750,000.
On
November 6, 2007, the Company invested $750,000 in SGDA Europe BV in
the form of common equity interest.
On
November 14 and 21, 2007, the Company invested approximately $200,000
and $17,000, respectively, in MVC Partners.
On
November 26, 2007, the Company made an additional investment in
Harmony Pharmacy in the form of a $500,000 demand note.
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
59
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.)
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 (Fair Value). 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.
60
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.
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
61
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.
Income Taxes It is the policy of the Company to meet the requirements for
qualification as a 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.
In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty
in Income Taxesan 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
62
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.
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.
SENIOR SECURITIES
Information about our senior securities is shown in the following tables 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. |
63
|
|
|
(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. |
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 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.
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
64
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-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 cash value to the Company of $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 $470.6 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.
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.
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, the Companys portfolio companies and other entities (including other private equity
firms or business development
65
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 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. As of 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.
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
66
required in order for us to continue to qualify as a regulated investment company (RIC)
under Subchapter M of the Internal Revenue Code of 1986, as amended (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.
At July 31, 2007, October 31, 2006 and October 31, 2005, the fair value of the invested
portion (excluding cash and short-term securities) of our net assets consisted of the following:
|
|
|
|
|
|
|
|
|
Fair Value as a Percentage of Our Net Assets |
|
|
As of |
|
As of |
|
As of |
Type of Investment |
|
July 31, 2007 |
|
October 31, 2006 |
October 31, 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 maintained 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; |
|
|
|
|
Favorable industry and competitive dynamics; and |
67
|
|
|
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:
|
|
|
private mezzanine and equity investors; |
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|
|
|
investment banks; |
|
|
|
|
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. |
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.
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
Securities and Exchange Commission (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.
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.
68
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 the 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 strategy, 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 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
69
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. These 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 includes 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:
|
|
|
Initial investment screening by deal person or investment team; |
|
|
|
|
Investment professionals present an investment proposal containing key terms and
understandings (verbal and written) to the entire investment team; |
|
|
|
|
Our Chief Compliance Officer reviews the proposed investment for compliance with the 1940
Act, the Code and all other relevant rules and regulations; |
|
|
|
|
Investment professionals are provided with authorization to commence due diligence; |
|
|
|
|
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; |
|
|
|
|
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; |
|
|
|
|
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; |
|
|
|
|
Mr. Tokarz approves the transaction; and |
|
|
|
|
The investment is funded. |
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 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).
70
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 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 and served out his one year term. 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 (divisions
of The Chase Manhattan Bank and Time Inc.), in the late 1990s Mr. Shewmaker co-founded Crossbow
Ventures, a 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.
David Hadani, Investment Professional. Mr. Hadani joined MVC Capital in April of 2005. He
previously served as the CEO of Nebraska Heavy Industries, 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 bachelor degree from Washington University and his MBA from Duke University.
71
Shivani Khurana, Investment Professional. Ms. Khurana joined MVC Capital in March 2004 and
serves as a Vice President of MVC Financial Services, Inc. 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
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
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 the
Companys 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.
Puneet Sanan, Investment Professional. Mr. Sanan joined MVC Capital in March 2004 and serves
as a Vice President of MVC Financial Services, Inc. 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 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 Bachelor 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 joined MVC Capital first in June
2004 as an Associate on a part-time basis and then permanently 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 where 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
required by Rule 38a-1 under the 1940 Act. Before Mr. Schuenke joined MVC Capital, he was a
compliance officer with US 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.
72
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. In October 2005, Mr. Seidenberg became the Chief Financial Officer of the Company.
Prior to joining MVC in April 2005, Mr. Seidenberg served as a Principal of Nebraska Heavy
Industries, 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 bachelor 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 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 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 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.
PORTFOLIO COMPANIES
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
73
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-7, 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 |
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) |
Companies More Than 25% Owned |
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|
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|
Auto Motol Beni |
|
Automotive Dealership |
|
Common Stock |
|
|
100 |
% |
Plzenska 130 |
|
|
|
Bridge Loan, 12/31/2007 |
|
|
N/A |
|
Prague
Praha 5
150 00 Czech Republic |
|
|
|
|
|
|
|
|
Harmony Pharmacy & Health
Center, Inc. |
|
Healthcare Retail |
|
Common Stock |
|
|
33.3 |
% |
287 Bowman Avenue |
|
|
|
Revolving Credit |
|
|
|
|
2nd Floor |
|
|
|
Facility, 12/01/09 |
|
|
|
|
Purchase, NY 10577 |
|
|
|
|
|
|
|
|
MVC Partners, LLC |
|
Private Equity Firm |
|
LLC Interest |
|
|
100 |
% |
287 Bowman Avenue
2nd Floor
Purchase, New York 10577 |
|
|
|
|
|
|
|
|
Ohio Medical Corporation |
|
Medical Device |
|
Common Stock |
|
|
56.26 |
% |
1111 Lakeside Drive |
|
Manufacturer |
|
Convertible Unsecured |
|
|
|
|
Gurnee, Ill 60606 |
|
|
|
Subordinated |
|
|
|
|
|
|
|
|
Promissory Note, |
|
|
N/A |
|
|
|
|
|
07/30/2008 |
|
|
|
|
SIA Tekers Invest |
|
Port Facilities |
|
Common Stock |
|
|
100 |
% |
Atlantijas Street
Riga City Latvia |
|
|
|
|
|
|
|
|
SGDA Sanierungsgesellschaft |
|
Soil Remediation |
|
Term Loan, 08/25/2009 |
|
|
N/A |
|
Fur Deponien und Altlasten |
|
|
|
Common Equity |
|
|
70 |
% |
98544 Zella-Mehlis, |
|
|
|
Preferred Equity |
|
|
100 |
% |
Bahnhofsstrabe 66 |
|
|
|
|
|
|
|
|
Summit Research Labs, Inc. |
|
Specialty Chemicals |
|
Second Lien Loan |
|
|
N/A |
|
15 Big Pond Road |
|
|
|
14.0000%, 08/15/2012 |
|
|
|
|
Huguenot, NY 12746 |
|
|
|
Preferred Stock |
|
|
80 |
% |
|
|
|
|
(800 shares) |
|
|
|
|
Timberland Machines &
Irrigation, Inc.(3) |
|
Distributor - Landscaping |
|
Senior Subordinated |
|
|
|
|
One Niblick Road |
|
And Irrigation Equipment |
|
Debt, 08/04/2009 |
|
|
N/A |
|
PO Box 1190 |
|
|
|
Junior Revolving Line |
|
|
|
|
Enfield, CT 06083 |
|
|
|
Of Credit, 7/7/2009 |
|
|
N/A |
|
|
|
|
|
Common Stock |
|
|
45 |
% |
|
|
|
|
Warrants |
|
|
100 |
% |
Turf Products, LLC |
|
Distributor - Landscaping |
|
Senior Subordinated |
|
|
|
|
157 Moody Road, PO Box 1200 |
|
And Irrigation Equipment |
|
Debt, 11/30/2010 |
|
|
N/A |
|
Enfield, CT 06083 |
|
|
|
Junior Revolving Line |
|
|
|
|
|
|
|
|
Of Credit 5/1/2008 |
|
|
N/A |
|
|
|
|
|
LLC Interest |
|
|
45 |
% |
|
|
|
|
Warrants |
|
|
100 |
% |
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
Nature of its |
|
Title of Securities |
|
of Class |
Name and Address of Portfolio Company |
|
Principal Business |
|
Held by the Company |
|
Held(1) |
U.S. Gas & Electric |
|
Energy Services |
|
Second Lien Loan, |
|
|
|
|
290 NW 165th Street PH 5 |
|
|
|
07/26/2012 |
|
|
N/A |
|
N. Miami Beach, FL 33169 |
|
|
|
Second Credit Facility, |
|
|
|
|
|
|
|
|
07/25/2010 |
|
|
N/A |
|
|
|
|
|
Junior Credit Facility, |
|
|
|
|
|
|
|
|
07/25/2010 |
|
|
N/A |
|
|
|
|
|
Convertible Preferred |
|
|
|
|
|
|
|
|
Stock B |
|
|
60 |
% |
|
|
|
|
Convertible Preferred |
|
|
|
|
|
|
|
|
Stock C |
|
|
15.2 |
% |
|
|
|
|
Convertible Preferred |
|
|
|
|
|
|
|
|
Stock F |
|
|
2.9 |
% |
Velocitius B.V. |
|
Renewable Energy |
|
Revolving Credit |
|
|
|
|
Telestone 8 - Teleport |
|
|
|
Facility 1, 10/31/2009 |
|
|
N/A |
|
Naritaweg 165 |
|
|
|
Revolving Credit |
|
|
|
|
P.O. Box 7241 |
|
|
|
Facility II, 04/30/2010 |
|
|
N/A |
|
1007 JE, Amsterdam |
|
|
|
Common Equity |
|
|
100 |
% |
Vendio Services, Inc.(3) |
|
Online Auction Enabler |
|
Common Stock |
|
|
0.4 |
% |
2800 Campus Drive, Suite 150 |
|
|
|
Preferred Stock |
|
|
37.8 |
% |
San Mateo, CA 94403 |
|
|
|
|
|
|
|
|
Vestal Manufacturing
Enterprises(3) |
|
Iron Foundries |
|
Senior Subordinated |
|
|
|
|
176 Industrial Park Road |
|
|
|
Debt, 04/29/2011 |
|
|
N/A |
|
Sweetwater, TN 37874 |
|
|
|
Common Stock |
|
|
90 |
% |
WBS Carbons Acquisitions Corp. |
|
Specialty Chemicals |
|
Bridge Loan, 11/22/2011 |
|
|
N/A |
|
46 Tower Drive |
|
|
|
Common Stock |
|
|
80 |
% |
Middletown, NY 10941 |
|
|
|
|
|
|
|
|
Companies 5% to 25% Owned |
|
|
|
|
|
|
|
|
Dakota Growers Pasta Company,
Inc.(3) |
|
Manufacturer of |
|
Common Stock |
|
|
9.97 |
% |
One Pasta Avenue |
|
Packaged Foods |
|
Convertible Preferred |
|
|
|
|
Carrington, ND 58421 |
|
|
|
Stock |
|
|
100 |
% |
Endymion Systems, Inc |
|
Software Applications |
|
Preferred Stock |
|
|
23.12 |
% |
80 Swan Way, #250
Oakland, CA 94621 |
|
|
|
|
|
|
|
|
Genevac U.S. Holdings, Inc. |
|
Laboratory Research |
|
Senior Subordinated |
|
|
|
|
707 Executive Boulevard,
Suite D |
|
Equipment |
|
Debt, 01/03/2008 |
|
|
N/A |
|
Valley Cottage, NY 10989 |
|
|
|
Common Stock A |
|
|
9.9 |
% |
|
|
|
|
Commons Stock B |
|
|
100 |
% |
HuaMei Capital Company, Inc. |
|
Financial Services |
|
Common Stock |
|
|
20 |
% |
71 S. Wacker Drive
Suite 2760
Chicago, IL 60606 |
|
|
|
|
|
|
|
|
Impact Confections, Inc. (3) |
|
Confections, |
|
Senior Subordinated |
|
|
|
|
888 Garden of the Gods Road,
# 200 |
|
Manufacturing and |
|
Debt, 07/30/2009 |
|
|
N/A |
|
Colorado Springs, CO 80907 |
|
Distribution |
|
Senior Subordinated |
|
|
|
|
|
|
|
|
Debt, 07/29/2008 |
|
|
N/A |
|
|
|
|
|
Common Stock A |
|
|
9.96 |
% |
|
|
|
|
Common Stock B |
|
|
100 |
% |
Marine Exhibition Corporation |
|
Theme Park |
|
Senior Subordinated |
|
|
|
|
4400 Rickenbacker Causeway |
|
|
|
Debt, 06/30/2013 |
|
|
N/A |
|
Miami, FL 33149-1095 |
|
|
|
Convertible Preferred |
|
|
|
|
|
|
|
|
Stock |
|
|
100 |
% |
|
|
|
|
Revolving Line of |
|
|
|
|
|
|
|
|
Credit |
|
|
|
|
|
|
|
|
Facility I, 6/30/2013 |
|
|
N/A |
|
Octagon Credit Investors,
LLC(2) |
|
Financial Services |
|
Term Loan 12/31/2011 |
|
|
N/A |
|
52 Vanderbilt Avenue, 18th
Floor |
|
|
|
Revolving Line of |
|
|
|
|
New York, NY 10017 |
|
|
|
Credit, 12/31/2011 |
|
|
N/A |
|
|
|
|
|
LLC Interest |
|
|
6.24 |
% |
PreVisor, Inc. |
|
Human Capital |
|
Common Stock |
|
|
8.87 |
% |
1805 Old Alabama Road,
Suite 150 |
|
Management |
|
|
|
|
|
|
Roswell, GA 30076 |
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
Nature of its |
|
Title of Securities |
|
of Class |
Name and Address of Portfolio Company |
|
Principal Business |
|
Held by the Company |
|
Held(1) |
Vitality Foodservice Holding
Corp.(3) |
|
Non-Alcoholic Beverages |
|
Common Stock |
|
|
11.28 |
% |
400 North Tampa St., Suite
2000 |
|
|
|
Preferred Stock |
|
|
100.00 |
% |
Tampa, FL 33602 |
|
|
|
Warrants |
|
|
39.00 |
% |
Companies Less Than 5% Owned |
|
|
|
|
|
|
|
|
Actelis Networks, Inc |
|
Telecommunications |
|
Preferred Stock |
|
|
10.81 |
% |
6150 Stevenson Blvd.
Fremont, CA 94538 |
|
|
|
|
|
|
|
|
Amersham Corporation |
|
Manufacturer of Precision - |
|
Second Lien Seller Note, |
|
|
N/A |
|
1797 Boxelder Street |
|
Machined Components |
|
06/29/2010 |
|
|
|
|
Louisville, CO 80027 |
|
|
|
Second Lien Seller Note, |
|
|
|
|
|
|
|
|
06/30/2013 |
|
|
N/A |
|
BP Clothing, LLC |
|
Apparel |
|
Second Lien Loan, |
|
|
N/A |
|
8700 Rex Road |
|
|
|
07/18/2012 |
|
|
N/A |
|
Pico Rivera, CA 90660 |
|
|
|
Term Loan A, |
|
|
|
|
|
|
|
|
07/18/2011 |
|
|
N/A |
|
|
|
|
|
Term Loan B, |
|
|
|
|
|
|
|
|
7/18/2011 |
|
|
N/A |
|
DPHI, Inc |
|
Digital Media |
|
Preferred Stock |
|
|
20.12 |
% |
1900 Pike Road Suite F
Longmont, CO 80501 |
|
|
|
|
|
|
|
|
Foliofn, Inc.(3) |
|
Financial Services |
|
Preferred Stock |
|
|
49.36 |
% |
8000 Towers Crescent Drive |
|
Technology |
|
|
|
|
|
|
Suite 1500
Vienna, VA 22182 |
|
|
|
|
|
|
|
|
Henry Company |
|
Building Products/ |
|
Term Loan A 4/6/2011 |
|
|
N/A |
|
2911 Slauson Avenue |
|
Specialty Chemicals |
|
Term Loan B 4/6/2011 |
|
|
N/A |
|
Huntington Park, CA 90255 |
|
|
|
|
|
|
|
|
Innovative Brands |
|
Consumer Products |
|
Term Loan, 9/25/2011 |
|
|
N/A |
|
4729 East Union Hills Drive
Suite 103
Phoenix, AZ 85050 |
|
|
|
|
|
|
|
|
JDC Lighting, LLC |
|
Electrical Distribution |
|
Senior Subordinated |
|
|
N/A |
|
45 West 36th Street, 5th Floor |
|
|
|
Debt, 1/31/2009 |
|
|
|
|
New York, NY 10018 |
|
|
|
|
|
|
|
|
Lockorder Limited |
|
Enterprise Security |
|
Common Stock |
|
|
2.90 |
% |
Unit 3A Wycombe |
|
Software |
|
|
|
|
|
|
3 Boundary Road
Loudwater Bucks HP109PN (UK) |
|
|
|
|
|
|
|
|
MainStream Data, Inc |
|
Satellite & Broadcast |
|
Common Stock |
|
|
2.83 |
% |
375 Chipeta Way, Suite B |
|
Communications |
|
|
|
|
|
|
Salt Lake City, UT 84108 |
|
|
|
|
|
|
|
|
Phoenix Coal Corporation |
|
Coal Processing and |
|
Second Lien Note, |
|
|
|
|
1215 Nebo Road Ste A |
|
Production |
|
6/8/2011 |
|
|
N/A |
|
Madisonville, KY 42431 |
|
|
|
Common Stock |
|
|
4.2 |
% |
SafeStone Technologies PLC |
|
Enterprise Security |
|
Common Stock |
|
|
2.90 |
% |
Unit 3A Wycombe |
|
Software |
|
|
|
|
|
|
3 Boundary Road
Loudwater Bucks HP10 9PN (UK) |
|
|
|
|
|
|
|
|
Sonexis, Inc |
|
Web Conferencing |
|
Common Stock |
|
|
13.16 |
% |
400 Network Center Drive,
Suite 210
Tewksbury, MA 01876 |
|
|
|
|
|
|
|
|
SP Industries, Inc |
|
Laboratory Research |
|
Term Loan B, |
|
|
N/A |
|
935 Mearns Road |
|
Equipment |
|
3/31/2011 |
|
|
|
|
Warminster, PA 18974 |
|
|
|
Subordinated Debt, |
|
|
|
|
|
|
|
|
03/31/2012 |
|
|
N/A |
|
Storage Canada LLC |
|
Self Storage |
|
Term Loan, 1/19/2014 |
|
|
N/A |
|
101 N 38th Avenue
Omaha, NE 68131 |
|
|
|
|
|
|
|
|
Total Safety U.S., Inc. |
|
Engineering Services |
|
First Lien Seller Note, |
|
|
N/A |
|
11111 Wilcrest Green Drive |
|
|
|
12/08/2012 |
|
|
|
|
Suite 300 |
|
|
|
Second Lien Seller Note, |
|
|
|
|
Houston, TX 77042 |
|
|
|
12/08/2013 |
|
|
N/A |
|
76
|
|
|
(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 42 to 55 for a brief
description of each portfolio companys business. With respect to portfolio companies in which we
invested since that date, please see pages 58 to 59 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.
77
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 well-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 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
78
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.
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.
79
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 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.
MANAGEMENT
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.
Information regarding the directors and the key executive officers of MVC Capital, including
brief biographical information, as of November 21, 2007, is set forth below:
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) |
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
(3) |
|
(4) |
|
Portfolios in |
|
(6) |
|
|
(2) |
|
Term of Office/ |
|
Principal |
|
Fund Complex |
|
Other |
(1) |
|
Positions(s) |
|
Length of Time |
|
Occupation(s) |
|
Overseen by |
|
Directorships |
Name, Address and Age |
|
Held with the 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,
8 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,
8 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, 8
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, 8
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 |
81
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) |
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
(3) |
|
(4) |
|
Portfolios in |
|
(6) |
|
|
(2) |
|
Term of Office/ |
|
Principal |
|
Fund Complex |
|
Other |
(1) |
|
Positions(s) |
|
Length of Time |
|
Occupation(s) |
|
Overseen by |
|
Directorships |
Name, Address and Age |
|
Held with the 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/7 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
|
|
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 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 |
|
Executive
Officers |
|
|
|
|
|
|
|
|
|
|
Bruce Shewmaker
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 61
|
|
Managing Director
|
|
Indefinite term/4
years
|
|
Mr. Shewmaker currently serves as
Managing Director of TTGA and the
Company. Mr. Shewmaker worked
directly for the Company from
November 2003 through
|
|
None
|
|
See column 4 |
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) |
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
(3) |
|
(4) |
|
Portfolios in |
|
(6) |
|
|
(2) |
|
Term of Office/ |
|
Principal |
|
Fund Complex |
|
Other |
(1) |
|
Positions(s) |
|
Length of Time |
|
Occupation(s) |
|
Overseen by |
|
Directorships |
Name, Address and Age |
|
Held with the Company |
|
Served |
|
During Past 5 Years |
|
Director |
|
Held by Director |
|
|
|
|
|
|
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. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter Seidenberg
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 38
|
|
Chief Financial Officer
|
|
Indefinite term/
2 years, 1 month
|
|
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.
|
|
None
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
Scott Schuenke
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 28
|
|
Chief Compliance Officer
|
|
Indefinite term/3
years, 1 month
|
|
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
|
|
Vice President/
Secretary
|
|
Indefinite term/3
years;
|
|
Ms. Shapiro currently serves as
Vice President and Secretary of
TTGA, in
|
|
None
|
|
None |
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) |
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
(3) |
|
(4) |
|
Portfolios in |
|
(6) |
|
|
(2) |
|
Term of Office/ |
|
Principal |
|
Fund Complex |
|
Other |
(1) |
|
Positions(s) |
|
Length of Time |
|
Occupation(s) |
|
Overseen by |
|
Directorships |
Name, Address and Age |
|
Held with the Company |
|
Served |
|
During Past 5 Years |
|
Director |
|
Held by Director |
2nd Floor
Purchase, NY 10577
Age: 29
|
|
|
|
Indefinite term/3
years, 10 months
|
|
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. |
|
|
|
|
|
|
|
(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. |
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
84
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.
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 Paid |
|
|
|
|
|
All Other |
|
|
Name of Person, Position |
|
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 |
|
85
|
|
|
(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. |
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(4) |
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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. |
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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.
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.
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(3) |
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Aggregate Dollar |
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Range of Equity |
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Securities of All |
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Funds Overseen |
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(2) |
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or to be Overseen by |
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Dollar Range of |
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Director in |
(1) |
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Equity Securities in |
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Family of Investment |
Name of Director |
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the Company |
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Companies |
Independent Directors |
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Emilio Dominianni
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Over$100,000
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Over$100,000 |
Gerald Hellerman
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Over$100,000
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Over$100,000 |
Robert Knapp
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Over$100,000(1)
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Over$100,000(1) |
William Taylor
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Over$100,000
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Over$100,000 |
Interested Directors |
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Warren Holtsberg (2)
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$50,000-$100,000
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$50,000-$100,000 |
Michael Tokarz (3)
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Over$100,000
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Over$100,000 |
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(1) |
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These shares are owned by Mr. Knapp directly. |
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(2) |
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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. |
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(3) |
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Mr. Tokarz is an Interested Director of the Company because he serves as an officer of the
Company. |
86
ADVISORY AGREEMENT
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 componentsa 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 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:
87
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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.
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.
88
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.
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% |
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.
89
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) |
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The hypothetical amount of pre-incentive fee net operating income shown is based on a
percentage of total net assets. |
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(2) |
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Represents 1.75% annualized hurdle rate. |
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(3) |
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Represents 2.00% annualized management fee. |
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(4) |
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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.
90
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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)
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Actual Payout (the Compensation
Calculation plus any uncollected
fees to the extent they do not
exceed the Cap Calculation) |
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Year 1
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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
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(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 |
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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
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$5.6 million ($400,000 (i.e., the
Compensation Calculation minus the
Cap Calculation) is uncollected) |
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Year 3
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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
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(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) |
91
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Year 4
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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
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$800,000 ($400,000
earned in Year 4 and the $400,000 that was uncollected in Year 2 is paid out.)
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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 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
92
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 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:
93
Before Spin-Off
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
94
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.
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 |
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Position |
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Principal occupation |
Michael Tokarz
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Manager
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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.
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.
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Amount of |
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Percentage of |
Shareholder Name and Address |
|
Shares Owned |
|
Company Held |
The Anegada Master Fund Ltd |
|
|
3,111,800 |
(1) |
|
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12.82 |
% |
The Cuttyhunk Fund Limited |
|
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|
|
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Tonga Partners, L.P. |
|
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TE Cannell Portfolio, Ltd. |
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c/o Cannell Capital LLC |
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P.O. Box 3459 |
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240 E. Deloney Ave |
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Jackson, WY 83001 |
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Western Investment, LLC |
|
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1,375,900 |
(3) |
|
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5.67 |
% |
Western Investment Hedged Partners LP |
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Western Investment Institutional Partners LLC |
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Western Investment Activism Partners LLC |
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Western Investment Total Return Master Fund Ltd. and |
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Arthur D. Lipson |
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c/o Western Investment LLC |
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7050 S. Union Park Center |
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Suite 590 |
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Midvale, UT 84047 |
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Millenco, L.P. |
|
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1,469,770 |
(4) |
|
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6.06 |
% |
Millennium Global Estate, L.P. |
|
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Millennium USA, L.P. |
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Millennium Partners, L.P and |
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Millennium International, Ltd. |
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c/o Millennium Management, LLC |
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666 Fifth Avenue, 8th Floor |
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New York, NY 10103 |
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Wynnefield Partners Small Cap Value, L.P |
|
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1,280,200 |
(5) |
|
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5.28 |
% |
Wynnefield Partners Small Cap Value, L.P I |
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Wynnefield Small Cap Value Offshore Fund, Ltd. |
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Channel Partnership II, L.P. |
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Wynnefield Capital, Inc. Profit Sharing and Money Purchase Plans |
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Wynnefield Capital Management, LLC |
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Wynnefield Capital, Inc. |
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Nelson Obus |
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c/o Wynnefield Capital Management LLC |
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450 Seventh Avenue |
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Suite 509 |
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New York, NY 10123 |
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Interested Directors |
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Warren Holtsberg |
|
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3,500 |
|
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* |
|
Michael Tokarz |
|
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452,525 |
|
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1.86 |
% |
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Independent Directors |
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Emilio Dominianni |
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15,641.594 |
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* |
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Gerald Hellerman |
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31,219.2657 |
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* |
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Robert Knapp(6) |
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1,678,711 |
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6.92 |
% |
William Taylor |
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26,235.9138 |
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Executive Officers |
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Bruce Shewmaker |
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5751.3308 |
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* |
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Peter Seidenberg |
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2291.7862 |
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* |
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Scott Schuenke |
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646.1231 |
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* |
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Jaclyn Shapiro |
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1,150 |
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* |
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All directors and executive officers as a group (9 in total) |
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2,217,671.67 |
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9.14 |
% |
96
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* |
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Less than 1%. |
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(1) |
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Based upon information contained in Form 4 filed with the SEC on March 13, 2007. |
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(2) |
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Based upon information contained in Schedule 13G filed with the SEC on June 27, 2007. |
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(3) |
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Based upon information contained in Schedule 13G/A filed with the SEC on February 13, 2007. |
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(4) |
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Based upon information provided by Millennium Partners, L.P. |
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(5) |
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Based upon information contained in Schedule 13G/A filed with the SEC on February 14, 2007. |
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(6) |
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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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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 |
97
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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. |
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.
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
98
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 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
99
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.
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
100
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 regulated by 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
(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 |
101
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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. |
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 regulated by 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 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
102
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.
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.
103
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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Amount Held |
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Outstanding |
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by Us |
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Exclusive of |
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or for Our |
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Title of Class |
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Authorized |
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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 |
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.
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
104
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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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.
105
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 (66 2/3%) 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 (66 2/3%) 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 (66 2/3%) 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..
PLAN OF DISTRIBUTION
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. |
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.
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
106
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.
LEGAL COUNSEL
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. (f/k/a EquiServe) 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.
107
MVC CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
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Page |
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F-2 |
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F-3 |
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F-8 |
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F-9 |
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F-10 |
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F-11 |
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F-12 |
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F-34 |
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F-35 |
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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|
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Cash and cash equivalents |
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$ |
112,833,085 |
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$ |
66,217,123 |
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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 $56,725,634) |
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120,627,554 |
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128,794,436 |
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56,225,944 |
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Total investments at fair value |
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|
316,866,635 |
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|
|
275,891,552 |
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|
|
122,297,679 |
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Dividends, interest and fees receivable |
|
|
2,689,072 |
|
|
|
1,617,511 |
|
|
|
902,498 |
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Prepaid expenses |
|
|
2,579,035 |
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|
|
2,632,859 |
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|
|
364,780 |
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Prepaid taxes |
|
|
385,138 |
|
|
|
|
|
|
|
98,374 |
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Deferred tax |
|
|
724,006 |
|
|
|
548,120 |
|
|
|
303,255 |
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Deposits |
|
|
442,129 |
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|
|
120,000 |
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|
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|
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Other assets |
|
|
29,443 |
|
|
|
54,796 |
|
|
|
88,600 |
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total assets |
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$ |
436,548,543 |
|
|
$ |
347,081,961 |
|
|
$ |
201,379,278 |
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|
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LIABILITIES AND SHAREHOLDERS EQUITY
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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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|
$ |
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Revolving credit facility |
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|
|
|
|
|
50,000,000 |
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|
|
|
|
Provision for incentive compensation (Note 9) |
|
|
17,104,294 |
|
|
|
7,172,352 |
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|
|
1,117,328 |
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Management fee payable |
|
|
1,616,021 |
|
|
|
|
|
|
|
|
|
Employee compensation and benefits |
|
|
|
|
|
|
1,635,600 |
|
|
|
807,000 |
|
Reserve for closing conditions |
|
|
2,869,711 |
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|
|
|
|
|
|
|
|
Other accrued expenses and liabilities |
|
|
985,469 |
|
|
|
774,048 |
|
|
|
353,606 |
|
Professional fees |
|
|
438,487 |
|
|
|
402,133 |
|
|
|
276,621 |
|
Payable for investment purchased |
|
|
|
|
|
|
|
|
|
|
79,708 |
|
Consulting fees |
|
|
81,302 |
|
|
|
70,999 |
|
|
|
3,117 |
|
Directors fees |
|
|
|
|
|
|
|
|
|
|
2,898 |
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Taxes payable |
|
|
|
|
|
|
33,455 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total liabilities |
|
|
73,095,284 |
|
|
|
110,088,587 |
|
|
|
2,640,278 |
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|
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|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
$ |
347,081,961 |
|
|
$ |
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
MVC Capital, Inc.
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 |
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
F-3
MVC Capital, Inc.
Consolidated Schedule of Investments (Continued)
July 31, 2007
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
Industry |
|
Investment |
|
Principal |
|
|
Cost |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
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 Promissary 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 |
|
Senior Subordinated Debt 14.5500%, 08/04/2009 (b, h) |
|
|
6,765,785 |
|
|
|
6,724,639 |
|
|
|
6,765,785 |
|
|
|
Irrigation Equipment |
|
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 |
|
Senior Subordinated Debt 15.0000%, 11/30/2010 (b, h) |
|
|
7,676,330 |
|
|
|
7,635,261 |
|
|
|
7,676,330 |
|
|
|
Irrigation Equipment |
|
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 |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-4
MVC Capital, Inc.
Consolidated Schedule of Investments (Continued)
July 31, 2007
(Unaudited)
(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 |
|
|
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 |
|
|
F-6
MVC Capital, Inc.
Consolidated Schedule of Investments (Continued)
October 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
Industry |
|
Investment |
|
Principal |
|
|
Cost |
|
|
Fair Value |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-7
MVC Capital, Inc.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended |
|
|
For the Period Ended |
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2006 to |
|
|
November 1, 2005 to |
|
|
For the Year Ended |
|
|
For the Year Ended |
|
|
For the Year Ended |
|
|
|
July 31, 2007 |
|
|
July 31, 2006 |
|
|
October 31, 2006 |
|
|
October 31, 2005 |
|
|
October 31, 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-8
MVC Capital, Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended |
|
|
For the Period Ended |
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2006 to |
|
|
November 1, 2005 to |
|
|
For the Year Ended |
|
|
For the Year Ended |
|
|
For the Year Ended |
|
|
|
July 31, 2007 |
|
|
July 31, 2006 |
|
|
October 31, 2006 |
|
|
October 31, 2005 |
|
|
October 31, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended July 31, 2007 and 2006, MVC Capital, Inc. paid $3,536,606, and
$359,487 in interest
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 carring 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 Capitals 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
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 Capitals 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-9
MVC Capital, Inc.
Consolidated Statements of Changes in Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2006 to |
|
|
November 1, 2005 to |
|
|
For the Year Ended |
|
|
For the Year Ended |
|
|
For the Year Ended |
|
|
|
July 31, 2007 |
|
|
July 31, 2006 |
|
|
October 31, 2006 |
|
|
October 31, 2005 |
|
|
October 31, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-10
MVC Capital, Inc.
Consolidated Selected Per Share Data and Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period Ended |
|
|
For the Period Ended |
|
|
For the |
|
|
For the |
|
|
For the |
|
|
|
November 1, 2006 to |
|
|
November 1, 2005 to |
|
|
Year Ended |
|
|
Year Ended |
|
|
Year Ended |
|
|
|
July 31, 2007 |
|
|
July 31, 2006 |
|
|
October 31, 2006 |
|
|
October 31, 2005 |
|
|
October 31, 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-11
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
(Portfolio Companies). 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 ended October
31, 2006 became employed by TTG Advisers and are expected to continue to provide services to the
Company.
F-12
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 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.
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 (Fair Value). 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.
F-13
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.
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.
F-14
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.
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.
4. Management
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.
F-15
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 consisting of two componentsa 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).
F-16
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, Octagon, SGDA, PreVisor and Vitality) by a total of $5.8 million and decrease
the fair value of Ohio 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 overall impact of the Valuation
Committees determinations and payment made to Mr. Tokarz, the balance of the incentive
compensation prevision, 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
F-17
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 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.
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,
F-18
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.
9. Portfolio Investments
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 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 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 Pasta Company, Inc. (Dakota) preferred stock at a cost of
$10.0 million. At that time, 65,000 shares of Dakota common stock were converted to 65,000 shares
of convertible
F-19
preferred stock. On July 30, 2007, the Company provided Ohio Medical Corporation (Ohio) 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 (Henry).
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 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.
F-20
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 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 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 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), 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 during the nine month period ended July 31, 2007 by $9.0 million.
F-21
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 ($5.0 million), BM Auto ($15.0 million), Storage Canada ($6.0 million),
Phoenix ($8.0 million), Harmony Pharmacy, Inc. ($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 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 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,
of 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. in exchange for its rights under a warrant issued by ProcessClaims that has
been held by the Company since May 2002. On January 5,
F-22
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 portfolio companies, 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.
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 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 portfolio companies, 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, 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 exchanged $225,000, of the
$2.55 million outstanding, of 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.
F-23
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 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 common stock by
approximately $2.6 million, Turfs membership interest by $2.0 million, Octagons membership
interest by approximately $562,000, Ohio 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, 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
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.
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
F-24
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 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.
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.
|
|
|
|
|
|
|
|
|
Portfolio Company |
|
Amount Committed |
|
Amount Funded at 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 |
|
$4.0 million |
|
|
$3.4 million |
|
Velocitius |
|
$ |
260,000 |
|
|
|
$ 134,000 |
|
F-25
|
|
|
|
|
|
|
|
|
Portfolio Company |
|
Amount Committed |
|
Amount Funded at July 31, 2007 |
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.
|
|
|
|
|
|
|
|
|
Portfolio Company |
|
Amount Committed |
|
Amount Funded at 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.
On June 30, 2005, the Company pledged its common stock of Ohio to Guggenheim to collateralize
a loan made by Guggenheim to Ohio.
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.
F-26
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%.
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.
F-27
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 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
F-28
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.
12. Legal Proceedings
On February 20, 2002, Millenco LP (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, L.P. 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 L.P.
v. meVC Advisers, Inc. (See Note 12 Legal Proceedings). The actual cash received was $245,213,
after payment of legal fees and expense. 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.
14. Tax Matters
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.
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)
F-29
|
|
|
|
|
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.
15. Income Taxes
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, 2006 |
|
|
October 31, 2005 |
|
|
October 31, 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 |
|
|
|
|
F-30
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 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, 2006 |
|
|
October 31, 2005 |
|
|
October 31, 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.
16. Segment Data
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 |
) |
F-31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MVC |
|
|
MVCFS |
|
|
Consolidated |
|
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 |
|
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.
F-32
17. 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 repaid its second lien loan in full including all accrued interest
and fees. 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. The Company still has board observance rights.
On August 15, 2007, Velocitius borrowed approximately $57,000 on revolving line of credit I
and $65,000 from revolving line of credit II.
On August 20, 2007, the Company contributed an additional $47,276 to MVC Partners increasing
their 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 by extending $1.25
million of convertible unsecured subordinated promissory note.
On September 28, 2007, Henry 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 repaid $2,500 on first lien loan.
On October 1, 2007, Innovative Brands repaid $37,500 on its term loan.
On October 2, 2007, Harmony 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, net borrowings on U.S. Gass revolving credit
facility were approximately $1.1 million.
Since
October 31, 2007, net borrowings on Octagons revolving credit
facility were $750,000.
On
November 6, 2007, the Company invested $750,000 in SGDA Europe BV in
the form of common equity interest.
On
November 14 and 21, 2007, the Company invested approximately
$200,000 and $17,000, respectively, in MVC Partners.
On
November 26, 2007, the Company made an additional investment in
Harmony Pharmacy in the
form of a $500,000 demand note.
F-33
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-34
Schedule 12-14
MVC Capital, Inc. and Subsidiaries
Schedule of Invesments in and Advances to Affiliaties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Interest |
|
October |
|
Gross |
|
Gross |
|
October |
|
|
|
|
or Dividends Credited |
|
31, 2005 |
|
Additions |
|
Reductions |
|
31, 2006 |
Portfolio Company |
|
Investment (1) |
|
to Income (5) |
|
Other (2) |
|
Value |
|
(3) |
|
(4) |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-35
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-8 |
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-9 |
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-10 |
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-11 |
Notes to Consolidated Financial Statements |
|
F-12 |
Report of Independent Registered Accounting Firm |
|
F-34 |
Schedule 12-14 |
|
F-35 |
F-36
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, filed herewith. |
|
|
|
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). |
|
|
|
k.3
|
|
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). |
|
|
|
k.4
|
|
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). |
|
k.5
|
|
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). |
|
|
|
k.6
|
|
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). |
|
|
|
k.7
|
|
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). |
|
|
|
l.
|
|
Opinion of Counsel and Consent to its use (Previously filed as Exhibit 99.l filed
with Registrants Registration |
F-37
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
Statement on Form N-2 (File No. 333-147039) filed on
October 31, 2007). |
|
|
|
m.
|
|
Not applicable. |
|
|
|
n.1
|
|
Consent of Ernst & Young LLP, filed herewith. |
|
|
|
n.2
|
|
Opinion of Ernst & Young LLP, regarding Senior Securities table, filed herewith. |
|
|
|
o.
|
|
Not applicable. |
|
|
|
p.
|
|
Not applicable. |
|
|
|
q.
|
|
Not applicable. |
|
|
|
r.
|
|
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
|
|
|
|
|
Commission registration fee |
|
$ |
7,675 |
|
NASD filing fee |
|
$ |
25,500 |
|
Printing and engraving |
|
$ |
450,000 |
* |
Accounting fees and expenses |
|
$ |
300,000 |
* |
Legal fees and expenses |
|
$ |
600,000 |
* |
|
|
|
|
Total |
|
$ |
1,383,175 |
* |
|
|
|
|
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
November 19, 2007.
|
|
|
|
|
|
|
Number of |
Title of Class |
|
Record Holders |
Common stock, $.01 par value |
|
|
6,800 |
|
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
F-38
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
F-39
(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.
F-40
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, November 30, 2007.
|
|
|
|
|
|
MVC Capital, Inc.
|
|
|
By: |
/S/ MICHAEL T. TOKARZ
|
|
|
|
Michael T. Tokarz |
|
|
|
Chairman of the Board |
|
|
KNOW ALL MEN BY THESE PRESENT, each person whose signature appears below hereby constitutes
and appoints Michael T. Tokarz and Bruce Shewmaker, and each of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his
name, place, and stead, in any and all capacities, to sign any and all amendments to this
Registration Statement, and to file the same, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about the premises, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be done by virtue
hereof.
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 November 30, 2007.
|
|
|
SIGNATURE |
|
TITLE |
/s/ MICHAEL T. TOKARZ
|
|
Chairman of the Board |
Michael T. Tokarz
|
|
|
|
|
|
/s/ EMILIO A. DOMINIANNI
|
|
Director |
Emilio A. Dominianni
|
|
|
|
|
|
/s/ GERALD HELLERMAN
|
|
Director |
Gerald Hellerman
|
|
|
|
|
|
/s/ WARREN HOLTSBERG
|
|
Director |
Warren Holtsberg
|
|
|
|
|
|
/s/ ROBERT C. KNAPP
|
|
Director |
Robert C. Knapp
|
|
|
|
|
|
/s/ WILLIAM TAYLOR
|
|
Director |
William Taylor
|
|
|
|
|
|
/s/ PETER SEIDENBERG
|
|
Principal Financial Officer |
Peter Seidenberg
|
|
|
|
|
|
/s/ BRUCE W. SHEWMAKER
|
|
Attorney-in-Fact |
Bruce W. Shewmaker
|
|
|
F-41