UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended October 31, 2011
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 814-00201
MVC CAPITAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 94-3346760 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
287 Bowman Avenue, Purchase, New York 10577
(Address of principal executive offices)
(914) 701-0310 Registrants telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered | |
Common Stock | New York Stock Exchange |
Securities registered pursuant to section 12(g) of the Act:
None
(Title of each class)
(Title of each class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
¨ Large accelerated filer |
x Accelerated filer | ¨ Non-accelerated filer |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Approximate aggregate market value of common stock held by non-affiliates of the registrant as of the last business day of the Companys most recently completed fiscal second quarter: $330,771,861 computed on the basis of $13.83 per share, closing price of the common stock on the New York Stock Exchange (the NYSE) on April 29, 2011. For purposes of calculating this amount only, all directors and executive officers of the registrant have been treated as affiliates.
There were 23,916,982 shares of the registrants common stock, $.01 par value, outstanding as of January 12, 2012.
Document Incorporated by Reference:
Proxy Statement for the Companys Annual Meeting of Shareholders 2012, incorporated by reference in Part III, Items 10, 11, 12, 13 and 14.
(A Delaware Corporation)
Index
Page | ||||||
PART I | ||||||
Item 1. |
1 | |||||
Item 1A. |
16 | |||||
Item 1B. |
27 | |||||
Item 2. |
27 | |||||
Item 3. |
27 | |||||
Item 4. |
27 | |||||
PART II | ||||||
Item 5. |
28 | |||||
Item 6. |
34 | |||||
Item 7. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
35 | ||||
Item 8. |
76 | |||||
Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
117 | ||||
Item 9A. |
117 | |||||
Item 9B. |
119 | |||||
PART III | ||||||
Item 10. |
119 | |||||
Item 11. |
119 | |||||
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
119 | ||||
Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
119 | ||||
Item 14. |
119 | |||||
PART IV | ||||||
Item 15. |
120 |
Factors That May Affect Future Results
This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the federal securities laws that involve substantial uncertainties and risks. The Companys future results may differ materially from its historical results and actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors. These factors are described in the Risk Factors section below. Readers should pay particular attention to the considerations described in the section of this report entitled Managements Discussion and Analysis of Financial Condition and Results of Operations. Readers should also carefully review the risk factors described in the other documents the Company files, or has filed, from time to time with the United States Securities and Exchange Commission (the SEC).
In this Annual Report on Form 10-K, unless otherwise indicated, MVC Capital, we, us, our or the Company refer to MVC Capital, Inc. and its wholly-owned subsidiary, MVC Financial Services, Inc. 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.
ITEM 1. | BUSINESS |
GENERAL
MVC Capital, Inc. is an externally managed, non-diversified 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). 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. Effective November 1, 2006, the Company has been externally managed by The Tokarz Group Advisers LLC (TTG Advisers) pursuant to an Amended and Restated Investment Advisory and Management Agreement (the Advisory Agreement). Our Board of Directors, including all of the directors who are not interested persons, as defined under the 1940 Act, of the Company (the Independent Directors), last approved the renewal of the Advisory Agreement at their in-person meeting held on October 25, 2011.
Fiscal year 2011 represented another year where we navigated through a challenging environment and prudently deployed capital into new and existing portfolio companies. The Company made six new investments in Octagon High Income Cayman Fund Ltd. (Octagon Fund), JSC Tekers Holdings (JSC Tekers), Teleguam Holdings, LLC (Teleguam), Pre-Paid Legal Services, Inc. (Pre-Paid Legal), RuMe, Inc. (RuMe) and Centile Holdings B.V. (Centile) and made seven follow-on investments in four existing portfolio companies in Harmony Health & Beauty, Inc. (HH&B), SGDA Europe B.V. (SGDA Europe), NPWT Corporation (NPWT) and Security Holdings B.V. (Security Holdings) in fiscal year 2011. The total capital committed in fiscal year 2011 was $43.2 million compared to $8.3 million and $6.3 million in fiscal years 2010 and 2009, respectively.
The fiscal year 2010 new investment was Integrated Packaging Corporation (IPC) and the follow-on investments were in Harmony Pharmacy & Health Center, Inc. (Harmony Pharmacy), SGDA Europe, and Security Holdings.
There were no new investments in fiscal year 2009 and the follow-on investments included: MVC Partners LLC (MVC Partners), Harmony Pharmacy, SGDA Europe, and Amersham Corporation (Amersham).
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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. Our equity and loan investments will generally range between $3.0 million and $25.0 million each, though 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 as of the close of each quarter. Our portfolio company investments are typically illiquid and are made through privately negotiated transactions. 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 interests and warrants or rights to acquire equity interests, senior and subordinated loans, and convertible securities. At October 31, 2011, the value of all investments in portfolio companies was approximately $452.2 million and our gross assets were approximately $497.1 million compared to the value of investments in portfolio companies of approximately $433.9 million and gross assets of approximately $500.4 million at October 31, 2010.
We expect that our investments in senior loans and subordinated debt will generally have stated terms of three to ten years. However, there are no constraints 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). In addition, we may invest without limit in debt of any rating, including debt that has not been rated by any nationally recognized statistical rating organization.
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 and the Companys portfolio companies. The Company does not hold MVCFS for investment purposes. The results of MVCFS are consolidated into the Company and all inter-company accounts have been eliminated in consolidation. On October 14, 2011, the Company formed a wholly-owned subsidiary, MVC Cayman, an exempted company incorporated in the Cayman Islands, to hold certain of its investments. When operational, the results of MVC Cayman will also be consolidated into the Company.
Our Board of Directors has the authority to change any of the strategies described in this report 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, nor can we voluntarily withdraw 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.
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 interest bearing accounts. As of October 31, 2011, the Companys investments in short-term securities, cash and cash equivalents were valued at $35.2 million. Of the $35.2 million in cash and cash equivalents, $6.9 million was restricted cash, relating to the Companys agreement to collateralize a letter of credit being used as collateral for a project guarantee for Security Holdings.
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CORPORATE HISTORY AND OFFICES
The Company was organized on December 2, 1999. Prior to July 2004, our name was meVC Draper Fisher Jurvetson Fund I, Inc. On March 31, 2000, the Company raised $330.0 million in an initial public offering whereupon it commenced operations as a closed-end investment company. On December 4, 2002, the Company announced it had commenced doing business under the name MVC Capital.
We are a Delaware corporation and a non-diversified closed-end management investment company that has elected to be regulated as a business development company under the 1940 Act. On July 16, 2004, the Company formed MVCFS.
In September 2003, upon the recommendation of the Board of Directors, shareholders voted to adopt a new investment objective for the Company.
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. (All but one of the independent members of the current Board of Directors were first elected at the February 2003 Annual Meeting of the shareholders.) 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.
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) that had been previously employed by the Company as of the fiscal year ended October 31, 2006 became employees of TTG Advisers. The Companys investment strategy and selection process has remained the same under the externalized management structure. Our Board of Directors, including all of the directors who are not interested persons, as defined under the 1940 Act, of the Company (the Independent Directors), last approved a renewal of the Advisory Agreement at their in-person meeting held on October 25, 2011.
Our principal executive office is located at 287 Bowman Avenue, Purchase, New York 10577 and our telephone number is (914) 701-0310. Our website is http://www.mvccapital.com. Copies of the Companys annual regulatory filings on Form 10-K, quarterly regulatory filings on Form 10-Q, Form 8-K, other regulatory filings, code of ethics, audit committee charter, compensation committee charter, nominating and corporate governance committee charter, corporate governance guidelines, and privacy policy may be obtained from our website, free of charge.
Our Investment Strategy
On November 6, 2003, Mr. Tokarz assumed his current positions 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
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include common and preferred stock, other forms of equity interests and warrants or rights to acquire equity interests, senior and subordinated loans, or convertible securities. During the fiscal year ended October 31, 2011, the Company made six new investments and seven follow-on investments in four existing portfolio companies, committing a total of $43.2 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 October 31, 2011, 2.17% of our assets consisted of investments made by the Companys former management team pursuant to the prior investment objective (the Legacy Investments). We are, however, managing these Legacy Investments to try and realize maximum returns. At October 31, 2011, the fair value of portfolio investments of the Legacy Investments was $10.8 million. 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 portfolio investments are made pursuant to our objective and strategy. We are concentrating our investment efforts on small and middle-market companies that, in our view, provide opportunities to maximize total return from capital appreciation and/or income. Under our investment approach, we have the authority to invest, without limit, in any one portfolio company, subject to any diversification limits that may be required in order for us to continue to qualify as a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). Due to our asset growth and composition, compliance with the RIC requirements currently restricts 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 (Non-Diversified Investments).
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 are typically the lead investor in such transactions but may also provide equity and debt financing to companies led by private equity firms or others. We generally invest in private companies, though, 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 general partner to a private equity or other investment fund(s). In fact, during fiscal year 2006, we established MVC Partners for this purpose. Furthermore, the Board of Directors had authorized the establishment of a private equity fund (the PE Fund), for which an indirect wholly-owned subsidiary of the Company serves as the general partner (the GP) and which may raise up to $250 million. On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in the PE Fund. The PE Fund has closed on approximately $104 million of capital commitments. The Companys Board of Directors authorized the establishment of, and investment in, the PE Fund for a variety of reasons, including the Companys ability to make Non-Diversified Investments through the PE Fund. As previously disclosed, the Company is currently restricted from making Non-Diversified Investments. For services provided to the PE Fund, the GP and MVC Partners are together entitled to receive 25% of all management fees paid by the PE Fund and up to 30% of the carried interest generated by the PE Fund. Further, at the direction of the Board of Directors, the GP retained TTG Advisers to serve as the portfolio manager of the PE Fund. In exchange for providing those services, and pursuant to the Board of Directors authorization and direction, TTG Advisers is entitled to receive the balance of the fees and any carried interest generated by the PE Fund. Given this separate arrangement with the GP and the PE Fund, under the terms of the Companys Advisory Agreement with TTG Advisers, TTG Advisers is not entitled to receive from the Company a management fee or an incentive fee on assets of the Company that are invested in the PE Fund.
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As a result of the closings of the PE Fund, consistent with the Board-approved policy concerning the allocation of investment opportunities, the PE Fund will receive a priority allocation of all private equity investments that would otherwise be Non-Diversified Investments for the Company during the PE Funds investment period. For a further discussion of this allocation policy, please see Our Investment StrategyAllocation of Investment Opportunities below.
Additionally, in pursuit of our objective we may acquire a portfolio of existing private equity or debt investments held by financial institutions or other investment funds should such opportunities arise.
As of October 31, 2011, October 31, 2010 and October 31, 2009, the fair value of the invested portion (excluding cash and short-term securities) of our net assets as a percentage consisted of the following:
Fair Value as a Percentage of Our Net Assets | ||||||||||||
Type of Investment |
As of |
As of |
As of |
|||||||||
Senior/Subordinated Loans and credit facilities |
20.40 | % | 26.17 | % | 36.16 | % | ||||||
Common Stock |
22.41 | % | 18.56 | % | 20.33 | % | ||||||
Warrants |
0.00 | % | 0.00 | % | 0.90 | % | ||||||
Preferred Stock |
34.89 | % | 35.06 | % | 38.86 | % | ||||||
Other Equity Investments |
30.09 | % | 22.30 | % | 22.21 | % |
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 October 31, 2011, these investments were valued at approximately $35.2 million or 8.4% of net assets.
The current portfolio has investments in a variety of industries, including energy, specialty chemicals, automotive dealerships, medical devices, consumer products, value-added distribution, industrial manufacturing, financial services, and information technology in a variety of geographical areas, including the United States, Europe and Asia.
Market. We have developed and maintain relationships with intermediaries, including investment banks, industry executives, 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.
Investment Criteria. Prospective investments are evaluated by the 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:
| Opportunity to revitalize and redirect a companys resources and strategy; |
| Stable free cash flow of the business; |
| 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; and |
| Favorable industry and competitive dynamics. |
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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; |
| Investment banks; |
| Industry executives; |
| Business brokers; |
| Merger and acquisition advisors; |
| Financial services companies; and |
| 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: TTG Advisers will give the Company priority with respect to all investment opportunities in (i) mezzanine and debt securities and (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 $25.0 million, and (b) issued by U.S. companies with less than $150.0 million in revenues during the prior twelve months. However, as a result of the PE Funds close, the PE Fund will now receive a priority allocation of all equity investments that would otherwise be Non-Diversified Investments for the Company, which will terminate on the later of: (i) the deployment of 80% of the committed capital of the PE Fund or (ii) two years from the first closing date of the PE Fund.
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). The investment professionals 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.
We make preferred and common equity investments in companies as a part of our investing activities, particularly when we see a unique 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 new strategic initiatives or a restructuring but have several of the above attributes and a management team that we believe has the potential to successfully execute their plans. 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
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rights and manage our risk in the transaction. We may structure the debt instrument to require restrictive affirmative and negative covenants, default penalties, lien protection, equity calls, take control provisions and board observation. Our debt investments are not, and typically will not be, rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade quality (rated lower than Baa3 by Moodys or lower than BBB by Standard & Poors, commonly referred to as junk bonds).
Our mezzanine debt investments are typically structured as subordinated loans (with or without warrants) that carry a fixed rate of interest. The loans may have interest-only payments in the early years and payments of both principal and interest in the later years, with maturities of three to ten years, although debt maturities and principal amortization schedules vary.
Our mezzanine debt investments may include equity features, such as warrants or options to buy a minority interest in a portfolio company. Any warrants or other rights we receive with our debt securities generally require only a nominal cost to exercise, and thus, as the portfolio company appreciates in value, we may achieve additional investment return from this equity interest. We may structure the warrants to provide minority rights provisions and event-driven puts. We may seek to achieve additional investment return from the appreciation and sale of our warrants.
Under certain circumstances, the Company or PE Fund 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 or the Adviser may serve as members of the Board of Directors of portfolio companies. The Company may provide guidance and management assistance to portfolio companies with respect to such matters as budgets, profit goals, business and financing strategies, management additions or replacements and plans for liquidity events for portfolio company investors such as a merger or initial public offering.
Portfolio Company Monitoring. We monitor our portfolio companies closely to determine whether or not they continue to be attractive candidates for further investment. Specifically, we monitor their ongoing performance and operations and provide guidance and assistance where appropriate. We would decline additional investments in portfolio companies that, in TTG Advisers view, do not continue to show promise. However, we may make follow-on investments in portfolio companies that we believe may perform well in the future.
TTG Advisers follows established procedures for monitoring equity and loan investments. The investment professionals have developed a multi-dimensional flexible rating system for all of the Companys portfolio
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investments. The rating grids are updated regularly and reviewed by the Portfolio Manager, together with the investment team. Additionally, the Companys Valuation Committee (the Valuation Committee) meets at least quarterly, to review a written valuation memorandum for each portfolio company and to discuss business updates. Furthermore, the Companys Chief Compliance Officer administers the Companys compliance policies and procedures, specifically as they relate to the Companys investments in portfolio companies.
We exit our investments generally when a liquidity event takes place, such as the sale, recapitalization or initial public offering of a portfolio company. Our equity holdings, including shares underlying warrants, after the exercise of such warrants, typically include registration rights which would allow us to sell the securities if the portfolio company completes a public offering.
Investment Approval Procedures. Generally, prior to approving any new investment, we follow the process outlined below. We usually conduct one to four months of due diligence and structuring before an investment is considered for approval. However, depending on the type of investment being contemplated, this process may be longer or shorter.
The typical key steps in our investment approval process are:
| 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; (iii) or 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. |
Employees
Upon the effectiveness of the Advisory Agreement on November 1, 2006, the Company no longer has any direct employees. TTG Advisers employs 18 individuals, including investment and portfolio management professionals, operations professionals and administrative staff.
OPERATING EXPENSES
During the fiscal year ended October 31, 2011, the Company bore the costs relating to the Companys operations, including fees and expenses of the Independent Directors; fees of unaffiliated transfer agents, registrars and disbursing agents; legal and accounting expenses; costs of printing and mailing proxy materials and reports to shareholders; NYSE fees; custodian fees and other extraordinary or nonrecurring expenses and
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other expenses properly payable by the Company. It should be noted that the Advisory Agreement provided for an expense cap pursuant to which TTG Advisers would 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 3.5% in each of the 2009 and 2010 fiscal years. On October 26, 2010, TTG Advisers and the Company entered into an agreement to extend the expense cap of 3.5% to the 2011 fiscal year. For fiscal year 2011, the Companys expense ratio was 3.18% (taking into account the same exclusions as those applicable to the expense cap). On the same basis, for fiscal years 2010 and 2009, the expense ratios were 2.95% and 3.23%, respectively. For the 2011 and 2010 fiscal years, TTG Advisers voluntarily agreed to waive $150,000 of expenses that the Company is obligated to reimburse to TTG Advisers under the Advisory Agreement (the Voluntary Waiver).
Under the externalized structure, 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 a special purpose vehicle; (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 $200,000, 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).
VALUATION OF PORTFOLIO SECURITIES
Pursuant to the requirements of the 1940 Act and in accordance with ASC 820, we value our portfolio securities and escrow receivables 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
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Procedures adopted by the Board of Directors which are consistent with ASC 820. As permitted by the SEC, the Board of Directors has delegated the responsibility of making fair value determinations to the Valuation Committee, subject to the Board of Directors supervision and pursuant to our Valuation Procedures. Our Board of Directors may also hire independent consultants to review our Valuation Procedures or to conduct an independent valuation of one or more of our portfolio investments.
Pursuant to our Valuation Procedures, the Valuation Committee (which is currently comprised of three Independent Directors) determines fair valuation of portfolio company investments and escrow receivables on a quarterly basis (or more frequently, if deemed appropriate under the circumstances). Any changes in valuation are recorded in the consolidated statements of operations as Net change in unrealized appreciation (depreciation) on investments. Currently, 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 that quarters NAV per share and in the next two months NAV per share calculation. (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.) Fair values of foreign investments determined as of quarter end reflect exchange rates, as applicable, in effect on the last day of the quarter. Exchange rates fluctuate on a daily basis, sometimes significantly. Exchange rate fluctuations following quarter end are not reflected in the valuations reported in this Annual Report. See Item 1A Risk Factor. Investments in foreign debt or equity may involve significant risks in addition to the risks inherent in U.S. investments.
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, 2011, approximately 91.20% of our total assets represented portfolio investments and escrow receivables recorded at fair value (Fair Value Investments).
Under most circumstances, at the time of acquisition, Fair Value Investments are carried at cost (absent the existence of conditions warranting, in managements and the Valuation Committees view, a different initial value). During the period that an investment is held by the Company, its original cost may cease to approximate fair value as the result of market and investment specific factors. No pre-determined formula can be applied to determine fair value. Rather, the Valuation Committee analyzes fair value measurements based on the value at which the securities of the portfolio company could be sold in an orderly disposition over a reasonable period of time between willing parties, other than in a forced or liquidation sale. The liquidity event whereby the Company ultimately exits an investment is generally the sale, the merger, the recapitalization or, in some cases, the initial public offering of the portfolio company.
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 comparable companies when available, comparable private transactions when available, precedent transactions in the market when available, performs a discounted cash flow analysis if appropriate, as well as other factors. The Company generally requires, where practicable, portfolio companies to provide annual audited and more regular unaudited financial statements, and/or annual projections for the upcoming fiscal year.
The fair value of our portfolio securities and escrow receivables is inherently subjective. Because of the inherent uncertainty of fair valuation of portfolio securities and escrow receivables that do not have readily ascertainable market values, our estimate of fair value may significantly differ from the fair value that would have been used had a ready market existed for the securities. Such values also do not reflect brokers fees or other selling costs which might become payable on disposition of such investments.
Our investments are carried at fair value in accordance with the 1940 Act and Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures. In accordance with the 1940 Act,
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unrestricted minority-owned publicly traded securities for which market quotations are readily available are valued at the closing market quote on the valuation date and majority-owned publicly traded securities and other privately held securities are valued as determined in good faith by the Valuation Committee of our Board of Directors. For legally or contractually restricted securities of companies that are publicly traded, the value is based on the closing market quote on the valuation date minus a discount for the restriction. At October 31, 2011, we did not hold restricted or unrestricted securities of publicly traded companies for which we have a majority-owned interest.
ASC 820 provides a framework for measuring the fair value of assets and liabilities and provides guidance regarding a fair value hierarchy which prioritizes information used to measure value.
ASC 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The price used to measure the fair value is not adjusted for transaction costs while the cost basis of our investments may include initial transaction costs. Under ASC 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset. In determining the principal market for an asset or liability under ASC 820, it is assumed that the reporting entity has access to the market as of the measurement date. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, Improving Disclosure about Fair Value Measurements. ASU 2010-06 provides an amendment to ASC 820-10 which requires new disclosures on transfers in and out of Levels I and II and activity in Level III fair value measurements. ASU 2010-06 also clarifies existing disclosures such as 1.) level of disaggregation and 2.) disclosure about inputs and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure about purchases, sales, issuance, and settlements in the roll-forward of activity in Level III fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company has adopted this guidance, the application of which has not had a material effect on the financial position or results of operations of the Company but has resulted in additional disclosures.
On May 12, 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 amends ASC 820, which will require entities to change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. ASU 2011-04 clarifies the application of existing fair value measurement and disclosure requirements related to the application of the highest and best use and valuation premise concepts for financial and nonfinancial instruments, measuring the fair value of an instrument classified in equity, and disclosures about fair value measurements. ASU 2011-04 requires additional disclosures about fair value measurements categorized within Level 3 of the fair value hierarchy, including the valuation processes used by the reporting entity, the sensitivity of the fair value to changes in unobservable inputs, and the interrelationships between those unobservable inputs, if any. All the amendments to ASC 820 made by ASU 2011-04 are effective for interim and annual periods beginning after December 15, 2011. Management is evaluating the new requirement and the potential impact, if any, to the Company upon implementation thereof.
If a security is publicly traded, the fair value is generally equal to market value based on the closing price on the principal exchange on which the security is primarily traded.
For equity securities of portfolio companies, the Valuation Committee estimates the fair value based on market approach with value then attributed to equity or equity like securities using the enterprise value waterfall
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(Enterprise Value Waterfall) valuation methodology. Under the Enterprise Value Waterfall valuation methodology, the Valuation Committee estimates the enterprise fair value of the portfolio company and then waterfalls the enterprise value over the portfolio companys securities in order of their preference relative to one another. To assess the enterprise value of the portfolio company, the Valuation Committee weighs some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing assets may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. For non-performing assets, the Valuation Committee may estimate the liquidation or collateral value of the portfolio companys assets. The Valuation Committee also takes into account historical and anticipated financial results.
In assessing enterprise value, the Valuation Committee considers the mergers and acquisitions (M&A) market as the principal market in which the Company would sell its investments in portfolio companies under circumstances where the Company has the ability to control or gain control of the board of directors of the portfolio company (Control Companies). This approach is consistent with the principal market that the Company would use for its portfolio companies if the Company has the ability to initiate a sale of the portfolio company as of the measurement date, i.e., if it has the ability to control or gain control of the board of directors of the portfolio company as of the measurement date. In evaluating if the Company can control or gain control of a portfolio company as of the measurement date, the Company takes into account its equity securities on a fully diluted basis as well as other factors.
For non-Control Companies, consistent with ASC 820, the Valuation Committee considers a hypothetical secondary market as the principal market in which it would sell investments in those companies.
For loans and debt securities of non-Control Companies (for which the Valuation Committee has identified the hypothetical secondary market as the principal market), the Valuation Committee determines fair value based on the assumptions that a hypothetical market participant would use to value the security in a current hypothetical sale using a market yield (Market Yield) valuation methodology. In applying the Market Yield valuation methodology, the Valuation Committee determines the fair value based on such factors as third party broker quotes and market participant assumptions including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date.
Estimates of average life are generally based on market data of the average life of similar debt securities. However, if the Valuation Committee has information available to it that the debt security is expected to be repaid in the near term, the Valuation Committee would use an estimated life based on the expected repayment date.
The Valuation Committee determines fair value of loan and debt securities of Control Companies based on the estimate of the enterprise value of the portfolio company. To the extent the enterprise value exceeds the remaining principal amount of the loan and all other debt securities of the company, the fair value of such securities is generally estimated to be their cost. However, where the enterprise value is less than the remaining principal amount of the loan and all other debt securities, the Valuation Committee may discount the value of such securities to reflect an impairment.
For the Companys or its subsidiarys investment in the PE Fund, for which an indirect wholly-owned subsidiary of the Company serves as the GP, the Valuation Committee will rely on the GPs determination of the Fair Value of the PE Fund, which will be made: (i) no less frequently than quarterly as of the Companys fiscal quarter end and (ii) based on methodologies consistent with those set forth in the Companys Valuation Procedures. Additionally, when both the Company and the PE Fund hold investments in the same portfolio company, the GPs Fair Value determination shall be based on the Valuation Committees determination of the Fair Value of the Companys portfolio security in that portfolio company.
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As permitted under GAAP, the Companys interests in private investment funds (Investment Vehicles) are generally valued, as a practical expedient, utilizing the net asset valuations provided by management of the underlying Investment Vehicles, without adjustment, unless TTG Advisers is aware of information indicating that a value reported does not accurately reflect the value of the Investment Vehicle, including any information showing that the valuation has not been calculated in a manner consistent with GAAP. Net unrealized appreciation (depreciation) of such investments is recorded based on the Companys proportionate share of the aggregate amount of appreciation (depreciation) recorded by each underlying Investment Vehicle. The Companys proportionate share includes its share of interest and dividend income and expense, and realized and unrealized gains and losses on securities held by the underlying Investment Vehicles, net of operating expenses and fees. Realized gains and losses on withdrawals from Investment Vehicles are generally recognized on a first in, first out basis.
The Company applies the practical expedient to interests in Investment Vehicles on an investment by investment basis, and consistently with respect to the Companys entire interest in an investment. The Company may adjust the valuation obtained from an Investment Vehicle with a premium, discount or reserve if it determines that the net asset value is not representative of the current market conditions.
When the Company receives nominal cost warrants or free equity securities (nominal cost equity) with a debt security, the Company typically allocates its cost basis in the investment between debt securities and nominal cost equity at the time of origination.
Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. Origination and/or closing fees associated with investments in portfolio companies are accreted into income over the respective terms of the applicable loans. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as income. Prepayment premiums are recorded on loans when received.
For loans, debt securities, and preferred securities with contractual payment-in-kind interest or dividends, which represent contractual interest/dividends accrued and added to the loan balance or liquidation preference that generally becomes due at maturity, the Company will not ascribe value to payment-in-kind interest/dividends if the portfolio company valuation indicates that the payment-in-kind interest is not collectible. However, the Company may ascribe value to 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.
CUSTODIAN
US Bank National Association is the primary custodian (the Primary Custodian) of the Companys portfolio securities. The principal business office of the Primary Custodian is 1555 North River Center Drive, Suite 302, Milwaukee, WI 53212.
JP Morgan Chase Bank, N.A. (JP Morgan) also serves as a custodian of the Companys securities and other assets. The principal business office of JP Morgan is 270 Park Avenue, New York, NY 10017.
TRANSFER AGENT AND PLAN AGENT
The Company employs Computershare Ltd. (the Plan Agent) as its transfer agent to record transfers of the shares, maintain proxy records, process distributions and to act as agent for each participant in the Companys dividend reinvestment plan. The principal business office of the Plan Agent is 250 Royall Street, Canton, Massachusetts 02021.
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CERTAIN GOVERNMENT REGULATIONS
We operate in a highly regulated environment. The following discussion generally summarizes certain government regulations.
Business Development Company. A business development company is defined and subject to the regulations of the 1940 Act. A business development company must be organized in the United States for the purpose of investing in or lending to primarily private companies and making managerial assistance available to them. A business development company may use capital provided by public shareholders and from other sources to invest in long-term, private investments in businesses.
As a business development company, we may not acquire any asset other than qualifying assets unless, at the time we make the acquisition, the value of our qualifying assets represents at least 70% of the value of our total assets. In accordance with the 1940 Act, valuation for these purposes are based on the Companys most recently filed quarterly or annual report, as applicable. 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:
| does not have any class of securities with respect to which a broker or dealer may extend margin credit; |
| 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 |
| is a small and solvent company having total assets of not more than $4.0 million and capital and surplus of not less than $2.0 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.
(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.
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(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, the Company is 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. The Company 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 certain conditions. Under the exemptive order, the Company is permitted to co-invest in certain portfolio companies with its affiliates, subject to specified conditions. 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.
As with other companies subject to the regulations of the 1940 Act, a business development company must adhere to certain other substantive ongoing regulatory requirements. A majority of our directors must be persons who are not interested persons, as that term is defined in the 1940 Act. Additionally, we are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect the business development company. Furthermore, as a business development company, we are prohibited from protecting any director or officer against any liability to the company or our shareholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such persons office.
We and TTG Advisers maintain a code of ethics that establishes procedures for personal investment and restricts certain transactions by our personnel. The code of ethics generally does not permit investment by our employees in securities that may be purchased or held by us. You may read and copy the code of ethics at the SECs Public Reference Room in Washington, D.C. You may obtain information on operations of the Public Reference Room by calling the SEC at (202) 942-8090. In addition, the code of ethics is available on the EDGAR Database on the SEC Internet site at http://www.sec.gov. You may obtain copies of the code of ethics, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov, or by writing to the SECs Public Reference Section, 100 F Street, NE, Washington, D.C. 20549. The code of ethics is also posted on our website at http://www.mvccapital.com.
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.
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Item 1A. | 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.
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. There is 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 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 and escrow receivables 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 October 31, 2011, approximately 91.20% of our total assets represented portfolio investments and escrow receivables recorded at fair value.
There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. In determining the fair
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value of a portfolio investment, the Valuation Committee analyzes, among other factors, the portfolio companys financial results and projections and publicly traded comparable companies when available, which may be dependent on general economic conditions. We specifically value each individual investment and record unrealized depreciation for an investment that we believe has become impaired, including where collection of a loan or realization of an equity security is doubtful. Conversely, we will record unrealized appreciation if we have an indication (based on a significant development) that the underlying portfolio company has appreciated in value and, therefore, our equity security has also appreciated in value, where appropriate. Without a readily ascertainable market value and because of the inherent uncertainty of fair valuation, fair value of our investments may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.
Pursuant to our Valuation Procedures, our Valuation Committee (which is currently comprised of three Independent Directors) reviews, considers and determines fair valuations on a quarterly basis (or more frequently, if deemed appropriate under the circumstances). Any changes in valuation are recorded in the consolidated statements of operations as Net change in unrealized appreciation (depreciation) on investments.
Economic recessions or downturns, including the current economic instability in Europe and the United States, could impair our portfolio companies and have a material adverse impact on our business, financial condition and results of operations.
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. Through the date of this report, conditions in the public debt and equity markets have been volatile and pricing levels have performed similarly. As a result, depending on market conditions, we could incur substantial realized losses and suffer unrealized losses in future periods, which could have a material adverse impact on our business, financial condition and results of operations. If current market conditions continue, or worsen, it may adversely impact our ability to deploy our investment strategy and achieve our investment objective.
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 and thus have a material adverse impact on our financial condition.
Depending on market conditions, we could incur substantial realized losses and suffer unrealized losses in future periods, which could have a material adverse impact on our business, financial condition and results of operations. In addition, the global financial markets have not fully recovered from the global financial crisis and the economic factors which gave rise to the crisis. The continuation of current global market conditions, uncertainty or further deterioration, including the economic instability in Europe, could result in further declines in the market values of the Company investments. Such declines could also lead to diminished investment opportunities for the Company, prevent the Company from successfully executing its investment strategies or require the Company to dispose of investments at a loss while such adverse market conditions prevail.
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
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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 sell. 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.
During the fiscal year ended October 31, 2011, the Company had net realized losses of approximately $26.4 million primarily associated with the dissolutions of Amersham, Harmony Pharmacy, HuaMei and Sonexis and has net unrealized losses of $21.5 million associated with Legacy Investments. Since the Companys realized losses were not offset by realized gains during the current fiscal year, the Company will be able to utilize them as capital loss carryforwards in future years. If we experience an aggregate 50% shift in the ownership of our common stock from shareholder transactions over a three year period (e.g., if a shareholder 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. 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 so as 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. In addition, 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. 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 and 98.2% of our capital gains, we generally will be subject to a 4% excise tax on certain undistributed amounts.
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Our ability to grow depends on our ability to raise capital.
To fund new investments, we may need to issue periodically equity securities or borrow from financial institutions. Unfavorable economic conditions could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. If we fail to obtain capital to fund our investments, it could limit both our ability to grow our business and our profitability. With certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ depends on TTG Advisers and our board of directors assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to maintain our current facilities or obtain other lines of credit at all or on terms acceptable to us.
Complying with the RIC requirements may cause us to forego otherwise attractive opportunities.
In order to qualify as a RIC for U.S. federal income tax purposes, we must satisfy tests concerning the sources of our income, the nature and diversification of our assets and the amounts we distribute to our shareholders. We may be unable to pursue investments that would otherwise be advantageous to us in order to satisfy the source of income or asset diversification requirements for qualification as a RIC. In particular, to qualify as a RIC, at least 50% of our assets must be in the form of cash and cash items, Government securities, securities of other RICs, and other securities that represent not more than 5% of our total assets and not more than 10% of the outstanding voting securities of the issuer. We have from time to time held a significant portion of our assets in the form of securities that exceed 5% of our total assets or more than 10% of the outstanding voting securities of an issuer, and compliance with the RIC requirements currently restricts us from making 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 investment opportunities believed to be attractive, including potential follow-on investments in certain of our portfolio companies. Furthermore, as a result of the foregoing restrictions, the Board has approved an amended policy for the allocation of investment opportunities, which requires TTG Advisers to give first priority to the PE Fund for all equity investments that would otherwise be Non-Diversified Investments for the Company. For a further discussion of this allocation policy, please see Our Investment StrategyAllocation of Investment Opportunities above.
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
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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 business development companies and RICs, including changes in tax regulations, may significantly impact our business.
We and our portfolio companies are subject to regulation by laws at the local, state and federal levels, including federal securities law and federal taxation law. These laws and regulations, as well as their interpretation, may change from time to time. A change in these laws or regulations 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; |
| Significant volatility in the market price and trading volume of securities of business development companies or other financial services companies; |
| 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; |
| Changes in regulatory policies or tax guidelines with respect to business development companies or RICs; |
| Our adherence to applicable regulatory and tax requirements, including the current restriction on our ability to make Non-Diversified Investments; |
| Actual or anticipated changes in our earnings or fluctuations in our operating results or changes in the expectations of securities analysts; |
| General economic conditions and trends; |
| Loss of a major funding source, which would limit our liquidity and our ability to finance transactions; or |
| Departures of key personnel of TTG Advisers. |
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We are subject to market discount risk.
As with any stock, the price of our shares will fluctuate with market conditions and other factors. If shares are sold, the price received may be more or less than the original investment. Whether investors will realize gains or losses upon the sale of our shares will not depend directly upon our NAV, 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 NAV. Although our shares, from time to time, have traded at a premium to our NAV, currently, our shares are trading at a discount to NAV, which discount may fluctuate 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 NAV attributable to our common stock to increase more sharply than it would had we not used leverage. Conversely, if the value of our consolidated assets decreases, leveraging would cause the NAV to decline more sharply than it otherwise would had we not used leverage. Similarly, any increase in our consolidated income in excess of consolidated interest expense on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our consolidated income would cause net investment 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.
Changes in interest rates may affect our cost of capital and net operating income and our ability to obtain additional financing.
Because we have borrowed and may continue to borrow money to make investments, our net investment income before net realized and unrealized gains or losses, or net investment income, may be dependent upon the
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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 investment 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 investment 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. Our long-term fixed-rate investments are financed primarily with equity and long-term fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Additionally, we cannot assure you that financing will be available on acceptable terms, if at all. Recent turmoil in the credit markets has greatly reduced the availability of debt financing. Deterioration in the credit markets, which could delay our ability to sell certain of our loan investments in a timely manner, could also negatively impact our cash flows.
We may be unable to meet our covenant obligations under our credit facility, which could adversely affect our business.
On April 27, 2006, the Company and MVCFS, as co-borrowers, entered into a four-year, $100 million revolving credit facility (the Credit Facility) with Guggenheim Corporate Funding, LLC (Guggenheim) as administrative agent to the lenders. On April 13, 2010, the Company renewed the Credit Facility for three years. The Credit Facility consists of a $50.0 million term loan with an interest rate of LIBOR plus 450 basis points with a 1.25% LIBOR floor. As of October 31, 2011, there was $50.0 million in term debt outstanding under the Credit Facility. The Credit Facility contains covenants that we may not be able to meet. If we cannot meet these covenants, events of default would arise, which could result in payment of the applicable indebtedness being accelerated and may limit our ability to execute on our investment strategy. As such, from time to time, due to investment activity, changing cash positions and the need to execute against certain corporate strategies, the Company has obtained Guggenheims consent to waive compliance with certain covenants contained in the Credit Facility and may require such consents in the future. The Credit Facility will expire on April 27, 2013, at which time the outstanding amount under the Credit Facility will be due and payable.
In addition, if we require working capital greater than that provided by the Credit Facility, we may be required to obtain other sources of funds, which, if available, may result in increased borrowing costs for the Company and/or additional covenant obligations.
A portion of our existing investment portfolio was not selected by the investment team of TTG Advisers.
As of October 31, 2011, 2.17% of the Companys assets were represented by Legacy Investments. 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. The Company is managing them to seek to realize maximum returns.
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.
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There are potential conflicts of interest that could impact our investment returns.
Our officers and directors, and members of the TTG Advisers investment team, may serve other entities, including the PE Fund and others 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 (which includes its current management of the PE Fund), TTG Advisers will endeavor to allocate investment opportunities in a fair and equitable manner. 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 management 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 of Directors) 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 Our Investment StrategyAllocation of Investment Opportunities above.
Wars, terrorist attacks, and other acts of violence may affect any market for our common stock, impact the businesses in which we invest and harm our operations and our profitability.
The continuing occupation of Iraq and other military presence in other countries, as well as the current unrest in the Middle East region, are likely to have a substantial impact on the U.S. and world economies and securities markets. The nature, scope and duration of the unrest, wars and occupation cannot be predicted with any certainty. Furthermore, terrorist attacks may harm our results of operations and your investment. We cannot assure you that there will not be further terrorist attacks against the United States or U.S. businesses. Such attacks and armed conflicts in the United States or elsewhere may impact the businesses in which we invest directly or indirectly, by undermining economic conditions in the United States. Losses resulting from terrorist events are generally uninsurable.
Our financial condition and results of operations will depend on our ability to effectively manage our future growth.
Our ability to achieve our investment 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. As we grow, TTG Advisers may need to hire, train, supervise and manage new employees. 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.
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Investing in private companies involves a high degree of risk.
Our investment portfolio generally consists of loans to, and investments in, private companies. Investments in private businesses involve a high degree of business and financial risk, which can result in substantial losses and, accordingly, should be considered speculative. There is generally very little publicly available information about the companies in which we invest, and we rely significantly on the due diligence of the members of the investment team to obtain information in connection with our investment decisions.
Our investments in portfolio companies are generally illiquid.
We generally acquire our investments directly from the issuer in privately negotiated transactions. Most of the investments in our portfolio (other than cash or cash equivalents and certain other investments made pending investments in portfolio companies such as investments in exchange-traded funds) 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 fair 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:
| 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. |
| 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. |
| There is generally little or no publicly available information about these privately-held companies. There is generally little or no publicly available operating and financial information about privately-held companies. 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. It is difficult, if not impossible, to protect the Company from the risk of fraud, misrepresentation or poor judgement by our portfolio companies. |
| 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. |
| 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. |
| 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.
We are a non-diversified investment company within the meaning of the 1940 Act, and therefore may invest a significant portion of our assets in a relatively small number of portfolio companies, which subjects us to a risk of significant loss should the performance or financial condition of one or more portfolio companies deteriorate.
We are classified as a non-diversified investment company within the meaning of the 1940 Act, and therefore we may invest a significant portion of our assets in a relatively small number of portfolio companies in a limited number of industries. As of October 31, 2011, the fair value of our two largest investments, Summit Research Labs, Inc. (Summit) and U.S. Gas & Electric, Inc. (U.S. Gas), comprised 20.4% and 21.5% of our net assets, respectively. Beyond the asset diversification requirements associated with our qualification as a RIC, we do not have fixed guidelines for diversification, and while we are not targeting any specific industries, relatively few industries may continue to be significantly represented among our investments. To the extent that we have large positions in the securities of a small number of portfolio companies, we are subject to an increased risk of significant loss should the performance or financial condition of these portfolio companies deteriorate. We may also be more susceptible to any single economic or regulatory occurrence as a result of holding large positions in a small number of portfolio companies.
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When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and management of the company may make decisions that could decrease the value of our portfolio holdings.
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.
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
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not typically associated with investing in U.S. companies. These risks include exchange rates, changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility. A portion of our investments are located in countries that use the euro as their official currency. The USD/euro exchange rate, like foreign exchange rates in general, can be volatile and difficult to predict. This volatility could materially and adversely affect the value of the Companys shares.
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.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. | PROPERTIES |
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, Purchase, NY 10577.
ITEM 3. | LEGAL PROCEEDINGS |
We are not currently subject to any material pending legal proceedings.
ITEM 4. | (REMOVED AND RESERVED) |
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ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Companys shares of common stock began to trade on the NYSE on June 26, 2000, under the symbol MVC. The Company had 9,658 shareholders on December, 1 2011.
The following table reflects, for the periods indicated, the high and low closing prices per share of the Companys common stock on the NYSE, by quarter.
QUARTER ENDED |
HIGH | LOW | ||||||
FISCAL YEAR 2011 |
||||||||
10/31/11 |
$ | 13.14 | $ | 10.23 | ||||
07/31/11 |
$ | 13.70 | $ | 12.51 | ||||
04/30/11 |
$ | 14.74 | $ | 12.96 | ||||
01/31/11 |
$ | 15.12 | $ | 13.07 | ||||
FISCAL YEAR 2010 |
||||||||
10/31/10 |
$ | 13.44 | $ | 12.32 | ||||
07/31/10 |
$ | 14.80 | $ | 12.55 | ||||
04/30/10 |
$ | 14.71 | $ | 10.98 | ||||
01/31/10 |
$ | 12.27 | $ | 9.22 |
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PERFORMANCE GRAPH
This graph compares the return on our common stock with that of the Standard & Poors 500 Stock Index and the Russell 2000 Financial Index for the fiscal years 2007 through 2011. The graph assumes that, on October 31, 2006, a person invested $10,000 in each of our common stock, the S&P 500 Stock Index, and the Russell 2000 Financial Index. The graph measures total shareholder return, which takes into account both changes in stock price and dividends. It assumes that dividends paid are reinvested in additional shares of our common stock. Past performance is no guarantee of future results.
Shareholder Return Performance Graph
Five-Year Cumulative Total Return1
(Through October 31, 2011)
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
As a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code), 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 income and 98.2% of its capital gains for 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
1 Total Return includes reinvestment of dividends through October 31, 2011. Past performance is no guarantee of future results.
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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 U.S. generally accepted accounting principles. These differences are due primarily to differing treatments of income and gain on various investment securities held by the Company, differing treatments of expenses paid by the Company, timing differences and differing characterizations of distributions made by the Company. Key examples of the primary differences in expenses paid are the accounting treatment of MVCFS (which is consolidated for GAAP purposes, but not income tax purposes) and the variation in treatment of incentive compensation expense. 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.
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 the Plan Agent in additional shares of our common stock. Of course, any shareholder may 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, broker or other entity that holds the shares.
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 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 NAV per share on that date, we will issue new shares at the NAV. If the NAV 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. Below is a description of our dividends declared during fiscal years 2010 and 2011:
For the Quarter Ended January 31, 2010
On December 18, 2009, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on January 8, 2010 to shareholders of record on December 31, 2009. The total distribution amounted to $2,915,650.
30
During the quarter ended January 31, 2010, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 1,890 shares of our common stock at an average price of $12.27, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
For the Quarter Ended April 30, 2010
On April 16, 2010, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on April 30, 2010 to shareholders of record on April 27, 2010. The total distribution amounted to $2,915,650.
During the quarter ended April 30, 2010, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 1,315 shares of our common stock at an average price of $14.75, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
For the Quarter Ended July 31, 2010
On July 16, 2010, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on July 30, 2010 to shareholders of record on July 27, 2010. The total distribution amounted to $2,884,691.
During the quarter ended July 31, 2010, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 1,377 shares of our common stock at an average price of $12.93, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
For the Quarter Ended October 31, 2010
On October 15, 2010, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on October 29, 2010 to shareholders of record on October 25, 2010. The total distribution amounted to $2,878,918.
During the quarter ended October 31, 2010, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 1,337 shares of our common stock at an average price of $13.43, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
For the Quarter Ended January 31, 2011
On December 17, 2010, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on January 7, 2011 to shareholders of record on December 31, 2010. The total distribution amounted to $2,878,918.
During the quarter ended January 31, 2011, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 1,211 shares of our common stock at an average price of $14.86, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
31
For the Quarter Ended April 30, 2011
On April 15, 2011, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on April 29, 2011 to shareholders of record on April 25, 2011. The total distribution amounted to $2,870,038.
During the quarter ended April 30, 2011, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 1,252 shares of our common stock at an average price of $13.70, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
For the Quarter Ended July 31, 2011
On July 15, 2011, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on July 29, 2011 to shareholders of record on July 25, 2011. The total distribution amounted to $2,870,038.
During the quarter ended July 31, 2011, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 1,693 shares of our common stock at an average price of $12.56, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
For the Quarter Ended October 31, 2011
On October 14, 2011, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on October 31, 2011 to shareholders of record on October 24, 2011. The total distribution amounted to $2,870,038.
During the quarter ended October 31, 2011, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 1,492 shares of our common stock at an average price of $12.82, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
The Company designated 16% or a maximum amount of $1,315,928 of dividends declared and paid during the fiscal year ending October 31, 2011 from net operating income as qualified dividend income under the Jobs Growth and Tax Relief Reconciliation Act of 2003.
Corporate shareholders may be eligible for a dividend received deduction for certain ordinary income distributions paid by the Company. The Company designated 16% or a maximum amount of $1,315,928 of dividends declared and paid during the fiscal year ending October 31, 2011 from net operating income as qualifying for the dividends received deduction. The information necessary to prepare and complete shareholders tax returns for the 2011 calendar year will be reported separately on form 1099-DIV, if applicable, in January 2012.
The Company reserves the right to retain net long-term capital gains in excess of net short-term capital losses for reinvestment or to pay contingencies and expenses. Such retained amounts, if any, will be taxable to the Company, and shareholders will be able to claim their proportionate share of the federal income taxes paid by the Company on such gains as a credit against their own federal income tax liabilities. Shareholders will also be entitled to increase the adjusted tax basis of their company shares by the difference between their undistributed capital gains and their tax credit.
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Purchases of Common Stock
In fiscal 2011, as a part of the Plan, we directed the Plan Agent to purchase a total of 5,648 shares of our common stock for an aggregate amount of approximately $76,000 in the open market in order to satisfy the reinvestment portion of our dividends. The following chart outlines repurchases of our common stock during fiscal 2011.
Quarter Ended |
Total Number of Shares Purchased |
Average Price Paid Per Share Including Commission |
||||||
10/31/11 |
1,492 | $ | 12.82 | |||||
07/31/11 |
1,693 | $ | 12.56 | |||||
04/30/11 |
1,252 | $ | 13.70 | |||||
01/31/11 |
1,211 | $ | 14.86 |
SHARE REPURCHASE PROGRAM
On April 23, 2010, the Companys Board of Directors approved a share repurchase program authorizing up to $5.0 million for share repurchases. The share repurchase program was substantially completed during the quarter ended April 30, 2011. Under the program, 380,105 shares were repurchased at an average price of $13.06, including commission, with a total cost of approximately $5.0 million. The Companys net asset value per share was increased by approximately $0.07 as a result of the share repurchases.
On July 19, 2011, the Companys Board of Directors approved another share repurchase program authorizing up to $5.0 million for additional share repurchases. No shares were repurchased under this new repurchase program as of October 31, 2011. Implementation of the program, as well as the timing thereof, depends on a variety of factors, including, among others, the availability of capital, the Companys current share price and the ability to conduct the offer under the Credit Facility.
The following table represents our stock repurchase program for the fiscal year ended October 31, 2011.
Period |
Total Number of Shares Purchased |
Average Price Paid per Share including commission |
Total Number of Shares Purchased as Part of Publicly Announced Program |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program |
||||||||||||
As of October 31, |
306,100 | $ | 13.06 | 306,100 | $ | 1,000,872 | ||||||||||
April 1, 2011 April 30, |
74,005 | $ | 13.06 | 74,005 | $ | 34,217 | ||||||||||
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|
|
|
|
|||||||||
Total |
380,105 | $ | 13.06 | 380,105 | $ | 34,217 |
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ITEM 6. | SELECTED CONSOLIDATED FINANCIAL DATA |
Financial information for the fiscal years ended October 31, 2011, 2010, 2009, 2008 and 2007 are derived from the consolidated financial statements, which have been audited by Ernst & Young LLP, the Companys current independent registered 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. See Managements Discussion and Analysis of Financial Condition and Results of Operations for more information.
Selected Consolidated Financial Data
Year Ended October 31, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||
Operating Data: |
||||||||||||||||||||
Interest and related portfolio income: |
||||||||||||||||||||
Interest and dividend income |
$ | 11,450 | $ | 19,315 | $ | 21,755 | $ | 26,047 | $ | 22,826 | ||||||||||
Fee income |
3,180 | 3,696 | 4,099 | 3,613 | 3,750 | |||||||||||||||
Other income |
1,341 | 510 | 255 | 367 | 374 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating income |
15,971 | 23,521 | 26,109 | 30,027 | 26,950 | |||||||||||||||
Expenses: |
||||||||||||||||||||
Management fee |
9,142 | 9,330 | 9,843 | 8,989 | 7,034 | |||||||||||||||
Administrative |
4,320 | 3,395 | 3,519 | 3,620 | 2,559 | |||||||||||||||
Interest and other borrowing costs |
3,082 | 2,825 | 3,128 | 4,464 | 4,859 | |||||||||||||||
Incentive compensation (Note 5) |
1,948 | 2,479 | 3,717 | 10,822 | 10,813 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Total operating expenses |
18,492 | 18,029 | 20,207 | 27,895 | 25,265 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Expense Waiver by Adviser |
(251 | ) | (150 | ) | | | | |||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Total net operating expenses |
18,241 | 17,879 | 20,207 | 27,895 | 25,265 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net operating (loss) income before taxes |
(2,270 | ) | 5,642 | 5,902 | 2,132 | 1,685 | ||||||||||||||
Tax expense (benefit), net |
14 | 8 | 1,377 | (936 | ) | (375 | ) | |||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Net operating (loss) income |
(2,284 | ) | 5,634 | 4,525 | 3,068 | 2,060 | ||||||||||||||
Net realized and unrealized gain (loss): |
||||||||||||||||||||
Net realized (loss) gain on investments and foreign currency |
(26,422 | ) | 32,188 | (25,082 | ) | 1,418 | 66,944 | |||||||||||||
Net change in unrealized appreciation (depreciation) on investments |
35,677 | (21,689 | ) | 34,804 | 59,465 | (3,302 | ) | |||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Net realized and unrealized gain on investments and foreign currency |
9,255 | 10,499 | 9,722 | 60,883 | 63,642 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Net increase in net assets resulting from operations |
$ | 6,971 | $ | 16,133 | $ | 14,247 | $ | 63,951 | $ | 65,702 | ||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Per Share: |
||||||||||||||||||||
Net increase in net assets per share resulting from operations |
$ | 0.30 | $ | 0.66 | $ | 0.59 | $ | 2.63 | $ | 2.92 | ||||||||||
Dividends per share |
$ | 0.48 | $ | 0.48 | $ | 0.48 | $ | 0.48 | $ | 0.54 | ||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Portfolio at value |
$ | 452,215 | $ | 433,901 | $ | 502,803 | $ | 490,804 | $ | 379,168 | ||||||||||
Portfolio at cost |
358,219 | 375,582 | 422,794 | 445,600 | 393,428 | |||||||||||||||
Total assets |
497,107 | 500,373 | 510,846 | 510,711 | 470,491 | |||||||||||||||
Shareholders equity |
419,510 | 424,994 | 424,456 | 421,871 | 369,097 | |||||||||||||||
Shareholders equity per share (net asset value) |
$ | 17.54 | $ | 17.71 | $ | 17.47 | $ | 17.36 | $ | 15.21 | ||||||||||
Common shares outstanding at period end |
23,917 | 23,991 | 24,297 | 24,297 | 24,265 | |||||||||||||||
Other Data: |
||||||||||||||||||||
Number of Investments funded in period |
13 | 5 | 6 | 15 | 26 | |||||||||||||||
Investments funded ($) in period |
$ | 43,235 | $ | 8,332 | $ | 6,293 | $ | 126,300 | $ | 167,134 |
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2011 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||||||||||||||
Qtr 4 | 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 |
3,421 | 3,482 | 4,544 | 4,524 | 5,130 | 5,257 | 5,336 | 7,798 | 6,354 | 7,410 | 5,757 | 6,588 | ||||||||||||||||||||||||||||||||||||
Management fee |
2,155 | 2,183 | 2,249 | 2,555 | 2,232 | 2,176 | 2,467 | 2,455 | 2,560 | 2,379 | 2,421 | 2,483 | ||||||||||||||||||||||||||||||||||||
Administrative |
1,105 | 1,049 | 990 | 1,176 | 777 | 910 | 938 | 770 | 879 | 894 | 865 | 881 | ||||||||||||||||||||||||||||||||||||
Interest, fees and other borrowing costs |
783 | 784 | 745 | 770 | 770 | 767 | 647 | 641 | 642 | 660 | 736 | 1,090 | ||||||||||||||||||||||||||||||||||||
Incentive compensation |
3,483 | (463 | ) | 531 | (1,603 | ) | 2,504 | (3,270 | ) | 2,225 | 1,020 | 6,756 | (2,550 | ) | (335 | ) | (154 | ) | ||||||||||||||||||||||||||||||
Expense Waiver by Adviser |
(38 | ) | (37 | ) | (38 | ) | (138 | ) | (50 | ) | (50 | ) | (50 | ) | | | | | | |||||||||||||||||||||||||||||
Tax expense (benefit) |
2 | | 2 | 10 | 2 | | 1 | 5 | 1,377 | | 359 | (359 | ) | |||||||||||||||||||||||||||||||||||
Net operating (loss) income before net realized and unrealized gains |
(4,069 | ) | (34 | ) | 65 | 1,754 | (1,105 | ) | 4,724 | (892 | ) | 2,907 | (5,860 | ) | 6,027 | 1,711 | 2,647 | |||||||||||||||||||||||||||||||
Net increase in net assets resulting from operations |
13,282 | (2,369 | ) | 2,302 | (6,244 | ) | 11,307 | (11,281 | ) | 8,969 | 7,138 | 27,499 | (6,297 | ) | (7,809 | ) | 854 | |||||||||||||||||||||||||||||||
Net increase in net assets resulting from operations per share |
0.56 | (0.10 | ) | 0.10 | (0.26 | ) | 0.47 | (0.47 | ) | 0.37 | 0.29 | 1.13 | (0.26 | ) | (0.32 | ) | 0.04 | |||||||||||||||||||||||||||||||
Net asset value per share |
17.54 | 17.10 | 17.32 | 17.33 | 17.71 | 17.35 | 17.89 | 17.64 | 17.47 | 16.46 | 16.84 | 17.28 |
ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This report contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company and its investment portfolio companies. Words such as may, will, expect, believe, anticipate, intend, could, estimate, might and continue, and the negative or other variations thereof or comparable terminology, are intended to identify forward-looking statements. Forward-looking statements are included in this report pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Such statements are predictions only, and the actual events or results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those relating to investment capital demand, pricing, market acceptance, the effect of economic conditions, litigation and the effect of regulatory proceedings, competitive forces, the results of financing and investing efforts, the ability to complete transactions and other risks identified below or in the Companys filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements, the notes thereto and the other financial information included elsewhere in this report.
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 management team are seeking to implement our investment objective (i.e., to maximize total return from capital appreciation and/or income) through making a broad range of private investments in a variety of industries.
The investments can include senior or subordinated loans, convertible debt and convertible preferred securities, common or preferred stock, equity interests, warrants or rights to acquire equity interests and other private equity transactions. During the fiscal year ended October 31, 2010, the Company obtained one new
35
investment and made four additional investments in existing portfolio companies committing a total of $8.3 million of capital to these investments. During the fiscal year ended October 31, 2011, the Company made six new investments and made seven additional investments in four existing portfolio companies committing a total of $43.2 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 October 31, 2011, 2.17% of the current 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 portfolio investments are made pursuant to our 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 under Subchapter M of the Code. Due to our asset growth and composition, compliance with the RIC requirements currently restricts our ability to make Non-Diversified Investments.
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, though, 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 general partner to a private equity or other investment fund(s). In fact, during fiscal year 2006, we established MVC Partners, LLC (MVC Partners) for this purpose. Furthermore, the Board of Directors has authorized the establishment of a PE Fund, for which an indirect wholly-owned subsidiary of the Company serves as the GP and which may raise up to $250 million. On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in the PE Fund. The PE Fund has closed on approximately $104 million of capital commitments. The Companys Board of Directors authorized the establishment of, and investment in, the PE Fund for a variety of reasons, including the Companys ability to make Non-Diversified Investments through the PE Fund. As previously disclosed, the Company is currently restricted from making Non-Diversified Investments. For services provided to the PE Fund, the GP and MVC Partners are together entitled to receive 25% of all management fees paid by the PE Fund and up to 30% of the carried interest generated by the PE Fund. Further, at the direction of the Board of Directors, the GP retained TTG Advisers to serve as the portfolio manager of the PE Fund. In exchange for providing those services, and pursuant to the Board of Directors authorization and direction, TTG Advisers is entitled to receive the balance of the fees and any carried interest generated by the PE Fund. Given this separate arrangement with the GP and the PE Fund, under the terms of the Companys Advisory Agreement with TTG Advisers, TTG Advisers is not entitled to receive from the Company a management fee or an incentive fee on assets of the Company that are invested in the PE Fund.
As a result of the closing of the PE Fund, consistent with the Board-approved policy concerning the allocation of investment opportunities, the PE Fund will receive a priority allocation of all private equity investments that would otherwise be Non-Diversified Investments for the Company during the PE Funds investment period. For a further discussion of this allocation policy, please see Our Investment Strategy Allocation of Investment Opportunities above.
36
Additionally, in pursuit of our objective, we may 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 Fiscal Years Ended October 31, 2011, 2010 and 2009. Total operating income was $16.0 million for the fiscal year ended October 31, 2011 and $23.5 million for the fiscal year ended October 31, 2010, a decrease of $7.5 million. Fiscal year 2010 operating income decreased by $2.6 million compared to fiscal year 2009 operating income of $26.1 million.
For the Fiscal Year Ended October 31, 2011
Total operating income was $16.0 million for the fiscal year ended October 31, 2011. The decrease in operating income over the same period last year was primarily due to the repayment of investments that provided the Company with current income, reserves against non-performing loans and a decrease in dividend income from the sale of portfolio companies. The main components of operating income were the interest earned on loans and the receipt of closing, monitoring and termination fees from certain portfolio companies by the Company and MVCFS. The Company earned approximately $11.5 million in interest and dividend income from investments in portfolio companies. Of the $11.5 million recorded in interest/dividend income, approximately $3.2 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. The Companys debt investments yielded rates from 3% to 15%, excluding those investments which interest is being reserved against. The Company received fee income and other income from portfolio companies and other entities totaling approximately $4.5 million.
For the Fiscal Year Ended October 31, 2010
Total operating income was $23.5 million for the fiscal year ended October 31, 2010. The decrease of $2.6 million in operating income over the same period last year was primarily due to the repayment of investments that provided the Company with current income, reserves against non-performing loans and a decrease in fee income because of fewer new investments closed. The main components of investment income were the interest earned on loans and dividend income from portfolio companies and the receipt of closing and monitoring fees from certain portfolio companies by the Company and MVCFS. The Company earned approximately $19.3 million in interest and dividend income from investments in portfolio companies. Of the $19.3 million recorded in interest/dividend income, approximately $5.6 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 1.3% to 17% excluding those investments in which accrued interest is being reserved against. The Company received fee income and other income from portfolio companies and other entities totaling approximately $4.2 million.
For the Fiscal Year Ended October 31, 2009
Total operating income was $26.1 million for the fiscal year ended October 31, 2009. The decrease in operating income over the same period last year was primarily due to a decrease in interest income. This decrease was the result of the repayment of yielding investments that provide the Company with interest income, a decrease in the LIBOR rate which impacts our variable rate loans, and reserves against non-performing loans. The main components of investment income were the interest earned on loans and dividend income from portfolio companies and the receipt of closing and monitoring fees from certain portfolio companies by the Company and MVCFS. The Company earned approximately $21.8 million in interest and dividend income from investments in portfolio companies. Of the $21.8 million recorded in interest/dividend income, approximately
37
$6.4 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 1.25% to 17%. Also, the Company earned approximately $14,400 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 $4.3 million.
OPERATING EXPENSES
For the Fiscal Years Ended October 31, 2011, 2010 and 2009. Net Operating expenses were $18.2 million for the fiscal year ended October 31, 2011 and $17.9 million for the fiscal year ended 2010, an increase of approximately $300,000. Fiscal year 2010 operating expenses decreased by $2.3 million compared to fiscal year 2009 operating expenses of $20.2 million.
For the Fiscal Year Ended October 31, 2011
Operating expenses, net of the Voluntary Waiver defined below, were approximately $18.2 million or 4.38% of the Companys average net assets for the fiscal year ended October 31, 2011. Significant components of operating expenses for the fiscal year ended October 31, 2011 were management fee expense of $9.1 million and interest and other borrowing costs of approximately $3.1 million.
The $300,000 increase in the Companys operating expenses for the fiscal year ended October 31, 2011 compared to the fiscal year ended October 31, 2010, was primarily due to the increases in interest and other borrowing costs, legal and other expenses totaling approximately $1.0 million offset by the decreases in management fee and the estimated provision for incentive compensation expense of approximately $700,000. For the 2010 and 2011 fiscal years, TTG Advisers voluntarily agreed to waive $150,000 of expenses that the Company is obligated to reimburse to TTG Advisers under the Advisory Agreement (the Voluntary Waiver). On October 26, 2010, TTG Advisers and the Company entered into an agreement to extend the expense cap of 3.5% to the 2011 fiscal year. On October 25, 2011, TTG Advisers and the Company entered into an agreement to extend the expense cap of 3.5% and the Voluntary Waiver to the 2012 fiscal year. TTG Advisers has also voluntarily agreed that any assets of the Company that are invested in exchange-traded funds would not be taken into account in the calculation of the base management fee due to TTG Advisers under the Advisory Agreement. For fiscal year 2010 and fiscal year 2011, the Companys expense ratio was 2.95% and 3.18%, respectively, (taking into account the same carve outs as those applicable to the expense cap).
Pursuant to the terms of the Advisory Agreement, during the fiscal year ended October 31, 2011, the provision for incentive compensation was increased by a net amount of approximately $1.9 million to approximately $23.9 million. The increase in the provision for incentive compensation during the fiscal year ended October 31, 2011 reflects both increases and decreases by the Valuation Committee in the fair values of certain portfolio companies. The provision also reflects the sale of the SPDR Barclays Capital High Yield Bond Fund and the iShares S&P U.S. Preferred Stock Index Fund for a realized gain of approximately $106,000, realized gains of approximately $55,000 and $317,000 from the Octagon Fund and LHD Europe Holding, Inc. (LHD Europe), respectively, and a realized loss from the sale of HuaMei of $2.0 million. Specifically, it reflects the Valuation Committees determination to increase the fair values of six of the Companys portfolio investments (Summit, SHL Group Limited, Security Holdings, Total Safety U.S., Inc. (Total Safety), U.S. Gas, and Velocitius B.V. (Velocitius)) by a total of approximately $39.7 million. The Valuation Committee also increased the fair value of the Ohio Medical Corporation (Ohio Medical) preferred stock by approximately $1.9 million due to PIK distributions, which were treated as a return of capital. The net increase in the provision also reflects the Valuation Committees determination to decrease the fair values of eleven of the Companys portfolio investments (BP Clothing, LLC (BP), Ohio Medical common and preferred stock, MVC Automotive Group B.V. (MVC Automotive), HuaMei, SIA Tekers Invest (Tekers), Octagon Fund, NPWT, SGDA
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Europe, Vestal Manufacturing Enterprises, Inc. (Vestal) and HH&B) by a total of $32.1 million. During the fiscal year ended October 31, 2011, 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. Please see Note 5 of our consolidated financial statements Incentive Compensation for more information.
For the Fiscal Year Ended October 31, 2010
Operating expenses, net of the Voluntary Waiver, were $17.9 million or 4.19% of the Companys average net assets for the fiscal year ended October 31, 2010. Significant components of operating expenses for the fiscal year ended October 31, 2010, included the management fee of $9.3 million, interest and other borrowing costs of approximately $2.8 million and incentive compensation expense of approximately $2.5 million. The estimated provision for incentive compensation expense is a non-cash, not yet payable, provisional expense relating to the Advisory Agreement.
The $2.2 million decrease in the Companys operating expenses for the fiscal year ended October 31, 2010 compared to the fiscal year ended October 31, 2009, was primarily due to the $1.2 million decrease in the estimated provision for incentive compensation expense, an approximately $500,000 decrease in management fee expense and an approximately $300,000 decrease in interest and other borrowing costs. The Advisory Agreement extended the expense cap applicable to the Company for an additional two fiscal years (fiscal years 2009 and 2010) and increased the expense cap from 3.25% to 3.5%. For fiscal year 2009 and fiscal year 2010, the Companys expense ratio was 3.23% and 2.95%, respectively, (taking into account the same carve outs as those applicable to the expense cap). For the 2010 fiscal year, TTG Advisers voluntarily agreed to waive $150,000 of expenses that the Company is obligated to reimburse to TTG Advisers under the Advisory Agreement (the Voluntary Waiver). On October 26, 2010, TTG Advisers and the Company entered into an agreement to extend the expense cap of 3.5% and the Voluntary Waiver to the 2011 fiscal year.
Pursuant to the terms of the Advisory Agreement, during the fiscal year ended October 31, 2010, the provision for incentive compensation was increased by a net amount of $2.5 million to $22.0 million. The increase in the provision for incentive compensation reflects both increases and decreases by the Valuation Committee in the fair values of certain portfolio companies and the sale of Vitality for a realized gain of $13.9 million. The difference between the amount received from the sale and Vitalitys carrying value at October 31, 2009 was an increase of $3.0 million. The amount of the provision also reflects the Valuation Committees determination to increase the fair values of eight of the Companys portfolio investments (Octagon Credit Investors, LLC (Octagon), Summit, Velocitius, LHD Europe, PreVisor, Inc. (PreVisor), U.S. Gas, Vestal and Dakota Growers Pasta Company, Inc. (Dakota Growers)) by a total of $54.2 million. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $6.8 million due to PIK distributions, which were treated as a return of capital. The net increase in the provision also reflects the Valuation Committees determination to decrease the fair values of ten of the Companys portfolio investments (Amersham, BP, Ohio Medical, MVC Automotive, Security Holdings, Harmony Pharmacy, GDC Acquisition, LLC (GDC), SGDA Europe, Turf Products, LLC (Turf) and SGDA Sanierungsgesellschaft fur Deponien und Altasten GmbH (SGDA)) by a total of $50.5 million and the Valuation Committee determination not to increase the fair values of the Amersham loan, the BP second lien loan and the GDC senior subordinated loan for the accrued PIK interest totaling approximately $732,000. As of October 31, 2010, the Company does not anticipate an incentive compensation payment being made to TTG Advisers for fiscal year 2010 based on the terms of the Advisory Agreement. During the fiscal year ended October 31, 2010, 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. Please see Note 5 of the consolidated financial statements, Incentive Compensation for more information.
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For the Fiscal Year Ended October 31, 2009
Operating expenses were $20.2 million or 4.88% of the Companys average net assets for the fiscal year ended October 31, 2009. Significant components of operating expenses for the fiscal year ended October 31, 2009, included the management fee of $9.8 million, estimated provision for incentive compensation expense of approximately $3.7 million, and interest expense and other borrowing costs of $3.1 million. The estimated provision for incentive compensation expense is a non-cash, not yet payable, provisional expense relating to the Advisory Agreement.
The $7.7 million decrease in the Companys operating expenses for the fiscal year ended October 31, 2009, compared to the fiscal year ended October 31, 2008, was primarily due to the $7.1 million decrease in the estimated provision for incentive compensation expense and the $1.3 million decrease in interest and other borrowing costs which were offset by an increase of approximately $854,000 in the management fee expense. The Advisory Agreement extended the expense cap applicable to the Company for an additional two fiscal years (fiscal years 2009 and 2010) and increased the expense cap from 3.25% to 3.5%. For fiscal year 2008 and fiscal year 2009, the Companys expense ratio was 3.17% and 3.23 %, respectively, (taking into account the same exclusions as those applicable to the expense cap).
Pursuant to the terms of the Advisory Agreement, during the fiscal year ended October 31, 2009, the estimated provision for incentive compensation on the balance sheet was increased by a net amount of approximately $3.7 million to $19.5 million. The amount of the provision reflects the Valuation Committees determination to increase the fair values of eight of the Companys portfolio investments: U.S. Gas, Tekers, Vestal, Vitality, Summit, MVC Automotive, Dakota Growers and Velocitius by a total of $79.0 million. The provision also reflects the Valuation Committees determination to increase the fair value of the Ohio Medical preferred stock by approximately $5.8 million due to a PIK distribution, which was treated as a return of capital. The Company also received a return of capital distribution from Turf of approximately $286,000. The amount of the change in the provision for incentive compensation during the fiscal year ended October 31, 2009 also reflects the Valuation Committees determination to decrease the fair values of 12 of the Companys portfolio investments: Ohio Medical, Timberland Machines & Irrigation, Inc. (Timberland), Custom Alloy Corporation (Custom Alloy), PreVisor, Amersham, Turf, Harmony Pharmacy, BP, MVC Partners, SGDA, Security Holdings, and HuaMei by a total of $68.9 million. The Valuation Committee also determined not to increase the fair values of the Harmony Pharmacy revolving credit facility, Timberland senior subordinated loan and the Amersham loan for the accrued PIK totaling approximately $1.0 million. During the fiscal year ended October 31, 2009, 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. Please see Note 5 Incentive Compensation of our consolidated financial statements for more information.
REALIZED GAINS AND LOSSES ON PORTFOLIO SECURITIES
For the Fiscal Years Ended October 31, 2011, 2010 and 2009. Net realized losses for the fiscal year ended October 31, 2011 were $26.4 million and net realized gains for the fiscal year ended October 31, 2010 were $32.2 million. Net realized losses for the fiscal year ended October 31, 2009 were $25.1 million.
For the Fiscal Year Ended October 31, 2011
Net realized losses for the fiscal year ended October 31, 2011 were $26.4 million. The significant components of the Companys net realized losses for the fiscal year ended October 31, 2011 was primarily due to the loss on the sale of Harmony Pharmacy common stock, demand notes and revolving credit facility, the dissolution of Amersham, the dissolution of Sonexis and the sale of HuaMei common stock. A portion of these losses were offset by the gains on the sale of LHD Europe common stock, SPDR Barclays Capital High Yield Bond Fund, the iShares S&P U.S. Preferred Stock Index Fund, and distributions from the Octagon Fund.
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On November 30, 2010, a public Uniform Commercial Code (UCC) sale of Harmony Pharmacys assets took place. Prior to this sale, the Company formed a new entity, Harmony Health & Beauty, Inc. (HH&B). The Company assigned its secured debt interest in Harmony Pharmacy of approximately $6.4 million to HH&B in exchange for a majority of the economic ownership. At the UCC sale, HH&B submitted a successful credit bid of approximately $5.9 million for all of the assets of Harmony Pharmacy. On December 21, 2010, Harmony Pharmacy filed for dissolution in the states of California, New Jersey and New York. As a result, the Company realized an $8.4 million loss on its investment in Harmony Pharmacy.
On December 1, 2010, Amersham filed for dissolution in the State of California as all operating divisions were sold in 2010. As a result, the Company realized a $6.5 million loss on its investment in Amersham. The Company may be eligible to receive proceeds from an earnout related to the sale of an operating division once the senior lender is repaid in full. At this time, it is not likely that any proceeds will be received by the Company.
On January 25, 2011, the Company sold its common stock in LHD Europe, receiving approximately $542,000 in proceeds which resulted in a realized gain of approximately $317,000.
On August 1, 2011, as part of a restructuring of the Companys investment in HuaMei, the Company sold its shares to HuaMei, resulting in a realized loss of $2.0 million.
On August 31, 2011, Sonexis, a Legacy Investment, completed the dissolution of its operations and the sales of its assets. The Company realized a loss of $10.0 million as a result of this dissolution.
During the fiscal year ended October 31, 2011, the Company received distributions from Octagon Fund of approximately $55,000 which were treated as realized gains.
During the fiscal year ended October 31, 2011, the Company sold its shares in the SPDR Barclays Capital High Yield Bond Fund and the iShares S&P U.S. Preferred Stock Index Fund, which resulted in a realized gain of approximately $106,000.
For the Fiscal Year Ended October 31, 2010
Net realized gains for the fiscal year ended October 31, 2010 were $32.2 million. The significant components of the Companys net realized gains for the fiscal year ended October 31, 2010 were primarily due to the gains on the sale of Vitality Foodservice, Inc. (Vitality) common and preferred stock and warrants and the sale of Dakota Growers common and preferred stock which were offset by the losses on the sale of Vendio common and preferred stock and Phoenix Coal common stock.
On December 29, 2009, the Company sold its common stock, preferred stock and warrants of Vitality. The amount received from the sale of the 556,472 common shares was approximately $10.0 million, for the 1 million preferred shares was approximately $14.0 million, and for the 1 million warrants was approximately $3.8 million. As part of this transaction, there was approximately $2.9 million deposited in an escrow account subject to a reduction over a three year period in accordance with a specified schedule. On March 9, 2010, the Company received its first scheduled disbursement from the Vitality escrow totaling approximately $522,000. There were no claims against the escrow, so 100% of the expected proceeds of the first scheduled disbursement were released. At the same time, the Company received its portion of a working capital adjustment paid to Vitality. The Companys share of the proceeds from the working capital adjustment totaled approximately $471,000 and was recorded as additional long-term capital gain. The total proceeds received from the escrow disbursement and working capital adjustment was approximately $993,000. The value of the escrow was increased by $150,000 by the Valuation Committee during the fiscal year ended October 31, 2010. This escrow is currently valued at approximately $1.9 million on the Companys consolidated balance sheet as of October 31, 2010. The total amount received from the sale as of October 31, 2010 was approximately $30.6 million resulting in a realized gain of approximately $13.9 million, which was treated as a long-term capital gain.
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On March 10, 2010, the Company announced that its portfolio company, Dakota Growers had signed a definitive merger agreement with Viterra Inc. (TSX: VT) (Viterra), Canadas leading agri-business that provides premium quality ingredients to leading global food manufacturers, under which Dakota Growers would be acquired by a subsidiary of Viterra for approximately $240 million in cash. Under the terms of the agreement, Viterra would commence a tender offer to acquire all of the outstanding shares of Dakota Growers common stock at a price of $18.28 per share resulting in anticipated proceeds of approximately $37.9 million. The acquisition closed shortly after completion of a tender of a majority (50.1%) of the outstanding shares of Dakota Growers common stock, the receipt of various regulatory approvals and the satisfaction of other customary closing conditions and contingencies. On May 3, 2010, the Company converted its 1,065,000 preferred shares of Dakota Growers to 1,065,000 common shares of Dakota Growers. On May 6, 2010, the Company tendered its shares in Dakota Growers for approximately $37.9 million, resulting in a realized gain of approximately $22.0 million.
On July 2, 2010, the Company sold its common and preferred stock of Vendio Services, Inc. (Vendio), a legacy investment. The amount received from the sale of the 10,476 common shares was approximately $2,900 and for the 6,443,188 preferred shares was approximately $2.9 million, which resulted in a realized loss of approximately $3.5 million, including proceeds held in escrow. As part of this transaction, there was approximately $465,205 deposited in an escrow account, subject to a reduction over an eighteen month period. This escrow is valued at approximately $180,000 on the Companys consolidated balance sheet as of October 31, 2010.
During the fiscal year ended October 31, 2010, the Company sold the remaining 666,667 shares of Phoenix Coal Corporation (Phoenix Coal) common stock. The total amount received from the sale net of commission was approximately $295,000, resulting in a realized loss of approximately $205,000.
For the Fiscal Year Ended October 31, 2009
Net realized losses for the fiscal year ended October 31, 2009 were $25.1 million. The significant components of the Companys net realized losses for the fiscal year ended October 31, 2009 were primarily the loss on the liquidation of Timberland common stock, senior subordinated loan, and junior revolving line of credit and the loss on the liquidation of Endymion Systems, Inc. common stock.
The Company realized losses on Timberland of approximately $18.1 million and Endymion Systems, Inc., a Legacy Investment, of $7.0 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.
UNREALIZED APPRECIATION AND DEPRECIATION ON PORTFOLIO SECURITIES
For the Fiscal Years Ended October 31, 2011, 2010 and 2009. The Company had a net change in unrealized appreciation on portfolio investments of $35.7 million for the fiscal year ended October 31, 2011 and a net change in unrealized depreciation of $21.7 million for the fiscal year ended October 31, 2010, an increase of $57.4 million. The Company had a net change in unrealized appreciation on portfolio investments of $34.8 million for the fiscal year ended October 31, 2009.
For the Fiscal Year Ended October 31, 2011
The Company had a net change in unrealized appreciation on portfolio investments of approximately $35.7 million for the fiscal year ended October 31, 2011. The change in unrealized appreciation on investment transactions for the fiscal year ended October 31, 2011 primarily resulted from the increase in unrealized
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appreciation reclassification from unrealized to realized, caused by the sales of Harmony Pharmacy and HuaMei and the dissolutions of Amersham and Sonexis of approximately $26.9 million. The other components in the change in unrealized appreciation are the Valuation Committees decision to increase the fair value of the Companys investments in Summit common stock by $14.5 million, SHL Group Limited common stock by $4.9 million, Security Holdings equity interest by approximately $17.6 million, Total Safety first lien loan by approximately $74,000, U.S. Gas preferred stock by $2.5 million and Velocitius equity interest by $200,000. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $1.9 million due to PIK distributions which were treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in MVC Automotive equity interest by approximately $1.7 million, Tekers common stock by approximately $2.3 million, Octagon Fund by $209,000, BP second lien loan by $3.9 million and term loan A and B by a combined $3.2 million, Ohio Medical common stock by $500,000 and preferred stock by approximately $8.0 million, NPWT common and preferred stock by a net amount of $200,000, HuaMei common stock by approximately $1.5 million, SGDA Europe equity interest by approximately $4.3 million, Vestal common stock by $745,000 and HH&B by $5.7 million during the fiscal year ended October 31, 2011.
For the Fiscal Year Ended October 31, 2010
The Company had a net change in unrealized depreciation on portfolio investments of approximately $21.7 million for the fiscal year ended October 31, 2010. The change in unrealized depreciation on investment transactions for the fiscal year ended October 31, 2010 primarily resulted from the increase in unrealized depreciation due to the reclassification from unrealized to realized, caused by the sale of Vitality, Dakota Growers, and Vendio, of approximately $29.2 million. The other components in the change in unrealized depreciation are the Valuation Committees decision to increase the fair value of the Companys investments in Dakota Growers common stock by approximately $3.4 million and preferred stock by approximately $3.6 million, Octagon equity interest by $1.5 million, Summit common stock by $22.0 million, Velocitius equity interest by $1.7 million, PreVisor common stock by $3.4 million, U.S. Gas preferred stock by $17.8 million, Vestal common stock by $600,000 and LHD Europe series A common stock by approximately $166,000 and series B common stock by approximately $58,000. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $6.8 million due to PIK distributions which were treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in Amersham second lien notes by $2.4 million, BP second lien loan by $14.1 million, Ohio Medical common stock by $8.6 million, SGDA preferred equity interest by approximately $2.4 million, MVC Automotive equity interest by $2.4 million, Security Holdings equity interest by approximately $6.4 million, SGDA Europe equity interest by approximately $4.1 million, Harmony Pharmacy demand notes and revolving credit facility by a net amount of $6.4 million, Turf equity interest by $500,000, GDC senior subordinated loan by approximately $3.2 million and Vendio preferred stock by approximately $1.9 million and common stock by $5,500 during the fiscal year ended October 31, 2010. The net decrease of $6.4 million in Harmony Pharmacy was a result of the Valuation Committee determination to decrease the value of the unsecured demand notes by $7.5 million and ascribed value of $1.1 million to the capitalized PIK interest on the revolving credit facility which had no previous value. The Valuation Committee also determined not to increase the fair values of the Amersham loan, BP second lien loan, and GDC senior subordinated loan for the accrued PIK interest totaling approximately $732,000.
For the Fiscal Year Ended October 31, 2009
The Company had a net change in unrealized appreciation on portfolio investments of $34.8 million for the fiscal year ended October 31, 2009. The change in unrealized appreciation on investment transactions for the fiscal year ended October 31, 2009 primarily resulted from the Valuation Committees decision to increase the fair value of the Companys investments in U.S. Gas preferred stock by $55.2 million, SGDA preferred equity interest by $500,000, Tekers common stock by $615,000, Velocitius equity interest by $2.2 million, Vestal common stock by $650,000, MVC Automotive Group equity interest by $5.0 million, Summit common stock by
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$5.0 million, Vitality common stock and warrants by $260,300 and $100,000, respectively, and Dakota Growers common stock by approximately $4.9 million and preferred stock by approximately $5.1 million and the Ohio Medical preferred stock by approximately $5.8 million due to a PIK distribution which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in Ohio Medical common stock by $8.1 million, Vendio preferred stock by approximately $2.1 million and common stock by $5,000, Foliofn preferred stock by $2.8 million, PreVisor common stock by $3.1 million, Custom Alloy preferred stock by $22.5 million, Amersham second lien notes by $3.1 million, Turf equity interest by $2.6 million, Harmony Pharmacy common stock by $750,000, MVC Partners equity interest by $16,000, SGDA common stock by $560,000, Security Holdings common equity interest by $18.2 million, HuaMei common stock by $475,000, Timberland senior subordinated loan by approximately $7.3 million and junior revolving line of credit by $1.0 million, and BP term loan B by approximately $219,000, term loan A by approximately $255,000 and second lien loan by approximately $1.3 million, during the fiscal year ended October 31, 2009. The Valuation Committee also determined not to increase the fair values of the Harmony Pharmacy revolving credit facility, Timberland senior subordinated loan and the Amersham loan for the accrued PIK interest totaling approximately $1.0 million. Also during the fiscal year ended October 31, 2009, the Company received a return of capital distribution from Turf of approximately $286,000. The net increase of $10.3 million in the fair values of the Companys investments determined by the Valuation Committee including the decrease in the fair values of the Harmony Pharmacy revolving credit facility, Timberland senior subordinated loan and the Amersham loan for accrued PIK was increased by the unrealized appreciation reclassification from unrealized to realized caused by the liquidation of Timberland and the sale of Endymion of $25.1 million. These were the primary components for the unrealized appreciation of $34.8 million for the fiscal year ended October 31, 2009.
PORTFOLIO INVESTMENTS
For the Fiscal Years Ended October 31, 2011 and 2010. The cost of the portfolio investments held by the Company at October 31, 2011 and 2010 was $358.2 million and $375.6 million, respectively, representing a decrease of $17.4 million. The primary reasons for the decrease in the cost of the portfolio investments are the realizations on equity investments and repayment of debt investments, as well as other factors. The aggregate fair value of portfolio investments at October 31, 2011 and at October 31, 2010 was $452.2 million and $433.9 million, respectively, representing an increase of $18.3 million. The cost and aggregate market value of cash and cash equivalents held by the Company at October 31, 2011 and 2010 was $35.2 million and $56.4 million, respectively, representing a decrease of approximately $21.2 million.
For the Fiscal Year Ended October 31, 2011
During the fiscal year ended October 31, 2011, the Company made six new investments, committing capital totaling approximately $26.1 million. The investments were made in Octagon Fund ($3.0 million), JSC Tekers ($4.0 million), Teleguam ($7.0 million), Pre-Paid Legal ($8.0 million), RuMe ($1.2 million) and Centile ($3.0 million).
During the fiscal year ended October 31, 2011, the Company made seven follow-on investments in four existing portfolio companies totaling approximately $17.1 million. On January 27, 2011, the Company invested $3.3 million in Security Holdings in the form of an additional equity interest. On January 28, 2011, the Company loaned an additional $5.0 million to Security Holdings in the form of a bridge loan with an annual interest rate of 3%. This bridge loan allowed Security Holdings to secure project guarantees. On May 4, 2011, the Company invested $500,000 in NPWT to acquire 5,000 shares of convertible preferred stock. On May 26, 2011 and September 14, 2011, the Company invested an additional $150,000 on each date into HH&B to acquire an additional 47,612 shares of common stock. On September 6, 2011, the Company invested $7.0 million in Security Holdings in the form of an additional equity interest. On October 17, 2011, the Company invested $1.0 million in SGDA Europe in the form of additional equity interest. In addition, during the fiscal year ended October 31, 2011, the Company invested approximately $10.0 million in the SPDR Barclays Capital High Yield
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Bond Fund and approximately $10.0 million in the iShares S&P U.S. Preferred Stock Index Fund. These investments were sold during the fiscal year ended October 31, 2011, resulting in a realized gain of approximately $106,000. The investments in these exchange traded funds were intended to provide the Company with higher yielding investments than cash and cash equivalents while awaiting deployment into portfolio companies pursuant to the Companys principal investment strategy. TTG Advisers had voluntarily agreed that any assets of the Company that are invested in exchange-traded funds would not be subject to the base management fee due to TTG Advisers under the Advisory Agreement.
Effective November 4, 2010, the interest rate on the Turf senior subordinated loan was reduced from 15% to 13% and the maturity date on the senior subordinated loan and junior revolving note was extended to January 31, 2014.
On November 30, 2010, the Company loaned an additional $700,000 to Harmony Pharmacy, which was the remaining portion of the $1.3 million demand note committed on September 23, 2010.
On November 30, 2010, a public Uniform Commercial Code (UCC) sale of Harmony Pharmacys assets took place. Prior to this sale, the Company formed a new entity, HH&B. The Company assigned its secured debt interest in Harmony Pharmacy of approximately $6.4 million to HH&B in exchange for a majority of the economic ownership. At the UCC sale, HH&B submitted a successful credit bid of approximately $5.9 million for all of the assets of Harmony Pharmacy. On December 21, 2010, Harmony Pharmacy filed for dissolution in the states of California, New Jersey and New York. As a result, the Company realized an $8.4 million loss on its investment in Harmony Pharmacy.
On December 1, 2010, Amersham filed for dissolution in the State of California as all operating divisions were sold in 2010. As a result, the Company realized a $6.5 million loss on its investment in Amersham. The Company may be eligible to receive proceeds from an earnout related to the sale of an operating division once the senior lender is repaid in full. At this time, it is not likely that any proceeds will be received by the Company.
On January 11, 2011, SHL Group Limited, which provides workplace talent assessment solutions, including ability and personality tests, and psychometric assessments, acquired the Companys portfolio company PreVisor. The Company received 1,518,762 common shares of SHL Group Limited for its investment in PreVisor. The cost basis and market value of the Companys investment remained unchanged at the time as a result of the transaction.
On January 25, 2011, the Company sold its common stock in LHD Europe and received approximately $542,000 in proceeds, which resulted in a realized gain of approximately $317,000.
On March 1, 2011, SP repaid its first lien and second lien loans in full including all accrued interest. The Company received a $500,000 termination fee associated with the repayment of the loans.
On April 29, 2011, assets from a division of Ohio Medical were distributed to Ohio Medical shareholders on a pro-rata basis. The Company received 281 shares of common stock in NPWT as a result of this transaction.
On May 26, 2011, Security Holdings repaid its bridge loan in full, including all accrued interest.
On August 1, 2011, as part of a restructuring of the Companys investment in HuaMei, the Company sold its shares to HuaMei, resulting in a realized loss of $2.0 million.
On August 31, 2011, Sonexis, a Legacy Investment, completed the dissolution of its operations and the sales of its assets. The Company realized a loss of $10.0 million as a result of this dissolution.
On October 3, 2011, Storage Canada, LLC (Storage Canada) repaid its term loan in full including all accrued interest.
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On October 17, 2011, the Company converted SGDA Europes $1.5 million senior secured loan and all accrued interest to additional common equity interest.
On October 28, 2011, Total Safety repaid its first and second lien loans in full including all accrued interest.
On October 31, 2011, the Company received a distribution from NPWT of $500,000, which was treated as a return of capital and returned all cash invested into NPWT to the Company.
During the fiscal year ended October 31, 2011, Marine Exhibition Corporation (Marine) made principal payments totaling $450,000 on its senior subordinated loan. The balance of the loan as of October 31, 2011 was approximately $12.0 million.
During the fiscal year ended October 31, 2011, Octagon borrowed and repaid $1.5 million on its revolving line of credit. Octagon cancelled the revolving line of credit effective June 30, 2011. As of October 31, 2011, the revolving credit facility was no longer a commitment of the Company.
During the quarter ended January 31, 2011, the Valuation Committee increased the fair value of the Companys investments in Summit common stock by $7.5 million and U.S. Gas preferred stock by $2.5 million. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, SP, Marine, Summit and U.S. Gas and the Marine preferred stock were due to the capitalization of payment in kind (PIK) interest/dividends totaling $980,119. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $1.9 million due to PIK distributions, which were treated as a return of capital. Also, during the quarter ended January 31, 2011, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $229,000. The Valuation Committee also decreased the fair value of the Companys investments in BP second lien loan by $3.9 million and term loan A and B by a combined $2.0 million, Ohio Medical common stock by $500,000 and preferred stock by $8.2 million, MVC Automotive equity interest by $3.1 million, HuaMei stock by $325,000 and HH&B by $1.9 million during the quarter ended January 31, 2011.
During the quarter ended April 30, 2011, the Valuation Committee increased the fair value of the Companys investments in Summit common stock by $2.0 million, MVC Automotive equity interest by $3.0 million, SHL Group Limited common stock by $2.5 million, Security Holdings equity interest by approximately $2.0 million, Tekers common stock by $590,000, Total Safety first lien loan by approximately $74,000 and Velocitius equity interest by $2.6 million. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, SP, Marine, Summit and U.S. Gas and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $714,247. In addition, during the quarter ended April 30, 2011, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $28,000. The Valuation Committee also decreased the fair value of the Companys investments in BP term loan A by approximately $1.2 million, Ohio Medical preferred stock by approximately $164,000, HuaMei common stock by approximately $1.0 million, SGDA Europe equity interest by $3.9 million and HH&B by $3.8 million during the quarter ended April 30, 2011.
During the quarter ended July 31, 2011, the Valuation Committee increased the fair value of the Companys investments in SHL Group Limited common stock by $1.0 million, Octagon Fund by approximately $25,000 and Security Holdings equity interest by approximately $2.5 million. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, Marine, Summit and U.S. Gas and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $731,374. In addition, during the quarter ended July 31, 2011, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $139,000. The Valuation Committee also decreased the fair value of the Companys investments in HuaMei common stock by $250,000, SGDA Europe equity interest by $400,000, MVC Automotive by $2.3 million, Tekers common stock by $180,000, Velocitius equity interest by $2.3 million and Vestal common stock by $670,000 during the quarter ended July 31, 2011.
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During the quarter ended October 31, 2011, the Valuation Committee increased the fair value of the Companys investments in SHL Group Limited common stock by $1.4 million, Security Holdings equity interest by approximately $13.1 million, Summit common stock by $5.0 million, Ohio Medical preferred stock by $400,000 and MVC Automotive equity interest by $750,000. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, Marine, Summit and U.S. Gas and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $748,981. In addition, during the quarter ended October 31, 2011, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $193,000. The Valuation Committee also decreased the fair value of the Companys investments in Octagon Fund by approximately $234,000, Tekers common stock by $2.7 million, NPWT common and preferred stock by a net amount of approximately $200,000, Velocitius equity interest by $100,000 and Vestal common stock by $75,000 during the quarter ended October 31, 2011.
During the fiscal year ended October 31, 2011, the Valuation Committee increased the fair value of the Companys investments in Summit common stock by $14.5 million, SHL Group Limited common stock by $4.9 million, Security Holdings equity interest by approximately $17.6 million, Total Safety first lien loan by approximately $74,000, U.S. Gas preferred stock by $2.5 million and Velocitius equity interest by $200,000. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, SP, Marine, Summit and U.S. Gas and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $3,174,721. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $1.9 million due to PIK distributions, which were treated as a return of capital. Also, during the fiscal year ended October 31, 2011, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $589,000. The Valuation Committee also decreased the fair value of the Companys investments in MVC Automotive equity interest by approximately $1.7 million, Tekers common stock by approximately $2.3 million, Octagon Fund by $209,000, BP second lien loan by $3.9 million and term loan A and B by a combined $3.2 million, Ohio Medical common stock by $500,000 and preferred stock by approximately $8.0 million, NPWT common and preferred stock by a net amount of $200,000, HuaMei common stock by approximately $1.5 million, SGDA Europe equity interest by approximately $4.3 million, Vestal common stock by $745,000 and HH&B by $5.7 million during the fiscal year ended October 31, 2011.
At October 31, 2011, the fair value of all portfolio investments, exclusive of short-term investments, was $452.2 million with a cost basis of $358.2 million. At October 31, 2011, the fair value and cost basis of portfolio investments of the Legacy Investments was $10.8 million and $32.3 million, respectively, and the fair value and cost basis of portfolio investments made by the Companys current management team was $441.4 million and $325.9 million, respectively. At October 31, 2010, the fair value of all portfolio investments, exclusive of short-term securities, was $433.9 million, with a cost basis of $375.6 million. At October 31, 2010, the fair value and cost basis of portfolio investments of the Legacy Investments was $10.8 million and $42.3 million, respectively, and the fair value and cost basis of portfolio investments made by the Companys current management team was $423.1 million and $333.3 million, respectively.
For the Fiscal Year Ended October 31, 2010
During the fiscal year ended October 31, 2010, the Company obtained one new investment in IPC in the form of a warrant. The Company received the warrant solely for services provided to another investor in IPC and invested no capital.
During the fiscal year ended October 31, 2010, the Company made four follow-on investments in existing portfolio companies committing capital totaling $8.3 million. On January 4, 2010, the Company loaned $800,000 to Harmony Pharmacy in the form of a demand note. The demand note has an annual interest rate of 10% with the accrued interest being reserved against. On March 12, 2010, the Company invested $4.5 million and $1.7
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million in SGDA Europe and Security Holdings, respectively, in the form of additional equity interests. On September 23, 2010, the Company committed an additional $1.3 million to Harmony Pharmacy in the form of a demand note. The demand note has an annual interest rate of 10% with the accrued interest being reserved against. As of October 31, 2010, $600,000 of the $1.3 million demand note to Harmony Pharmacy was funded.
At October 31, 2009, the balance of the secured revolving note provided to Marine was $900,000. Net borrowings during fiscal year 2010 were $1.1 million resulting in a balance of $2.0 million as of October 27, 2010. On October 27, 2010, the Company refinanced the secured revolving note and the senior subordinated loan of Marine. The revolving note balance of $2.0 million was added to the senior subordinated loan resulting in a balance of $11.9 million as of October 31, 2010. The interest on the senior subordinated loan remained 11% and the maturity date was extended to October 26, 2017. Prior to the refinancing of the senior subordinated loan, Marine made a principal payment of approximately $1.3 million.
On December 29, 2009, the Company sold the common stock, preferred stock and warrants of Vitality. The amount received from the sale of the 556,472 common shares was approximately $10.0 million, for the 1 million preferred shares was approximately $14.0 million, and for the 1 million warrants was approximately $3.8 million. As part of this transaction, there was approximately $2.9 million deposited in an escrow account subject to a reduction over a three year period in accordance with a specified schedule. On March 9, 2010, the Company received its first scheduled disbursement from the Vitality escrow totaling approximately $522,000. There were no claims against the escrow so 100% of the expected proceeds of the first scheduled disbursement were released. At the same time, the Company received its portion of a working capital adjustment paid to Vitality. The Companys share of the proceeds from the working capital adjustment totaled approximately $471,000 and was recorded as additional long-term capital gain. The total proceeds received from the escrow disbursement and working capital adjustment was approximately $993,000. The value of the escrow was increased by $150,000 by the Valuation Committee during the fiscal year ended October 31, 2010. This escrow is currently valued at approximately $1.9 million on the Companys consolidated balance sheet as of October 31, 2010. The total amount received from the sale as of October 31, 2010 was approximately $30.6 million resulting in a realized gain of approximately $13.9 million, which was treated as a long-term capital gain. Prior to the sale of Vitality on December 29, 2009, Vitalitys European operations (which were not acquired by the buyer) were distributed to Vitalitys shareholders on a pro-rata basis. The Company received 960 shares of Series A common stock and 334 shares of convertible Series B common stock in LHD Europe as part of this transaction. At October 31, 2010, the Series A common stock had a fair value of approximately $332,000 and the convertible Series B common stock had a fair value of approximately $118,000.
On March 10, 2010, the Company announced that its portfolio company, Dakota Growers had signed a definitive merger agreement with Viterra, Canadas leading agri-business that provides premium quality ingredients to leading global food manufacturers, under which Dakota Growers would be acquired by a subsidiary of Viterra for approximately $240 million in cash. Under the terms of the agreement, Viterra would commence a tender offer to acquire all of the outstanding shares of Dakota Growers common stock at a price of $18.28 per share resulting in anticipated proceeds of approximately $37.9 million. The acquisition closed shortly after completion of a tender of a majority (50.1%) of the outstanding shares of Dakota Growers common stock, the receipt of various regulatory approvals and the satisfaction of other customary closing conditions and contingencies. On May 3, 2010, the Company converted its 1,065,000 preferred shares of Dakota Growers to 1,065,000 common shares of Dakota Growers. On May 6, 2010, the Company tendered its shares in Dakota Growers for approximately $37.9 million, resulting in a realized gain of approximately $22.0 million. The Company no longer has an investment in Dakota Growers.
On March 16, 2010, the Company contributed its common and preferred equity interest in SGDA to SGDA Europe to achieve operating efficiencies. The Company has 99.99% economic ownership in SGDA Europe. The fair value of SGDA Europes equity interest increased by approximately $4.2 million and the cost basis was increased by $5.0 million as a result of this cashless transaction. There was no gain or loss to the Company from
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this transaction. During the fiscal year ended October 31, 2010, the Valuation Committee decreased the fair value of SGDA Europes equity interest by approximately $4.1 million. The fair value of SGDA Europes equity interest at October 31, 2010 was $12.1 million.
On July 2, 2010, the Company sold its common and preferred shares of Vendio, a Legacy Investment. The amount received from the sale of the 10,476 common shares was approximately $2,900 and for the 6,443,188 preferred shares was approximately $2.9 million, which resulted in a realized loss of approximately $3.5 million, including proceeds held in escrow. As part of this transaction, there was approximately $465,205 deposited in an escrow account subject to reduction over an eighteen month period. This escrow is valued at approximately $180,000 on the Companys consolidated balance sheet as of October 31, 2010.
During the fiscal year ended October 31, 2010, Amersham made principal payments of $375,000, repaying its senior secured loan in full, including all accrued interest.
During the fiscal year ended October 31, 2010, SP made principal payments of approximately $169,000, on its first lien loan. The balance of the first lien loan as of October 31, 2010, was approximately $732,000.
During the fiscal year ended October 31, 2010, Total Safety made principal payments of approximately $26,000 on its first lien loan. The balance of the first lien loan as of October 31, 2010 was approximately $946,000.
During the fiscal year ended October 31, 2010, the Company received approximately $106,000 in principal payments on the term loan provided to Storage Canada. The balance of the term loan at October 31, 2010 was approximately $1.0 million.
During the fiscal year ended October 31, 2010, Innovative Brands, LLC (Innovative Brands) made principal payments of approximately $10.4 million on its term loan, repaying the term loan in full including all accrued interest.
During the fiscal year ended October 31, 2010, Octagon made principal payments of $5.0 million, repaying its term loan in full, including all accrued interest.
During the fiscal year ended October 31, 2010, WBS Carbons Acquisitions Corp. (WBS) made principal payments of approximately $1.8 million, repaying its bridge loan in full, including all accrued interest.
During the fiscal year ended October 31, 2010, the Company sold the remaining 666,667 shares of Phoenix Coal Corporation (Phoenix Coal) common stock. The total amount received from the sale net of commission was approximately $295,000, resulting in a realized loss of approximately $205,000.
During the fiscal year ended October 31, 2010, Henry Company made principal payments of approximately $1.7 million and $2.0 million on its term loan A and term loan B, respectively, repaying the term loans in full including all accrued interest.
On July 31, 2009, the Company sponsored U.S. Gas in its acquisition of ESPI and provided a $10.0 million limited guarantee and cash collateral for a short-term $4.0 million letter of credit for U.S. Gas. For sponsoring and providing this credit support, the Company has earned one-time fee income of approximately $1.2 million and will be recognizing an additional $1.6 million in fee income over the life of the guarantee. As of October 31, 2010, the cash collateral has been released as the letter of credit has expired and the limited guarantee is no longer a commitment of the Company.
During the quarter ended January 31, 2010, the Valuation Committee increased the fair value of the Companys investments in Dakota Growers common stock by approximately $2.4 million and preferred stock by
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approximately $2.6 million, Octagon equity interest by $1.0 million, Summit common stock by $2.0 million, Velocitius equity interest by $1.0 million, and LHD Europe series A common stock by approximately $166,000 and series B common Stock by approximately $58,000. In addition, increases in the cost basis and fair value of the loans to GDC, Custom Alloy, SP, Marine, Turf, BP, Summit, and U.S. Gas and the Marine and Vitality preferred stock were due to the capitalization of payment in kind (PIK) interest/dividends totaling $1,752,454. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $1.6 million due to a PIK distribution which was treated as a return of capital. Also, during the quarter ended January 31, 2010, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $89,000. The Valuation Committee also decreased the fair value of the Companys investments in Amersham second lien notes by $2.4 million, BP second lien loan by $1.6 million, Ohio Medical common stock by $1.3 million, SGDA preferred equity interest by approximately $2.4 million, and Vendio preferred stock by approximately $746,000 and common stock by $3,600 during the quarter ended January 31, 2010. The Valuation Committee also determined not to increase the fair values of the Harmony Pharmacy revolving credit facility and the Amersham loan for the accrued PIK interest totaling approximately $186,000.
During the quarter ended April 30, 2010, the Valuation Committee increased the fair value of the Companys investments in Dakota Growers common stock by approximately $1.0 million and preferred stock by approximately $1.0 million, Octagon equity interest by $500,000 and Summit common stock by $7.0 million. In addition, increases in the cost basis and fair value of the loans to GDC, Custom Alloy, SP, Marine, Turf, BP, Summit, and U.S. Gas and the Marine preferred stock were due to the capitalization of payment in kind (PIK) interest/dividends totaling $1,343,814. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $1.7 million due to a PIK distribution which was treated as a return of capital. Also, during the quarter ended April 30, 2010, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $62,000. The Valuation Committee also decreased the fair value of the Companys investments in Velocitius equity interest by $600,000 and Vendio preferred stock by approximately $1.1 million and common stock by $1,900 during the quarter ended April 30, 2010. The Valuation Committee also determined not to increase the fair values of the Harmony Pharmacy revolving credit facility and the Amersham loan for the accrued PIK interest totaling approximately $188,000.
During the quarter ended July 31, 2010, the Valuation Committee increased the fair value of the Companys investments in PreVisor, Inc. common stock by $3.4 million. In addition, increases in the cost basis and fair value of the loans to GDC, Custom Alloy, SP, Marine, Turf, BP, Summit, and U.S. Gas and the Marine preferred stock were due to the capitalization of payment in kind (PIK) interest/dividends totaling $1,145,719. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $1.7 million due to a PIK distribution which was treated as a return of capital. Also, during the quarter ended July 31, 2010, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $108,000. The Valuation Committee also decreased the fair value of the Companys investments in BP second lien loan by approximately $5.2 million, MVC Automotive equity interest by $4.4 million, Security Holdings equity interest by approximately $6.4 million, Ohio Medical common stock by $3.7 million, and GDC senior subordinated loan by approximately $1.6 million during the quarter ended July 31, 2010. The Valuation Committee also determined not to increase the fair values of the Harmony Pharmacy revolving credit facility and the Amersham loan for the accrued PIK interest totaling approximately $193,000.
During the quarter ended October 31, 2010, the Valuation Committee increased the fair value of the Companys investments in MVC Automotive equity interest by $2.0 million, Summit common stock by $13.0 million, U.S. Gas preferred stock by approximately $17.8 million, Velocitius equity interest by $1.3 million and Vestal common stock by $600,000. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, SP, Marine, Summit, and U.S. Gas and the Marine preferred stock were due to the capitalization of payment in kind (PIK) interest/dividends totaling $1,319,321. The Valuation Committee also increased the fair
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value of the Ohio Medical preferred stock by approximately $1.8 million due to a PIK distribution which was treated as a return of capital. Also, during the fiscal quarter ended October 31, 2010, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $39,000. The Valuation Committee also decreased the fair value of the Companys investments in BP second lien loan by approximately $7.4 million, Harmony Pharmacy demand notes and revolving credit facility by a net amount of $6.4 million, SGDA Europe equity interest by $4.1 million, Turf equity interest by $500,000, Ohio Medical common stock by $3.6 million, and GDC senior subordinated loan by approximately $1.6 million during the fiscal quarter ended October 31, 2010. The net decrease of $6.4 million in Harmony Pharmacy was a result of the Valuation Committee determination to decrease the value of the unsecured demand notes by $7.5 million and ascribed value of $1.1 million to the capitalized PIK interest on the revolving credit facility which had no previous value. The Valuation Committee also determined not to increase the fair values of the Amersham loan, GDC senior subordinated loan and BP second lien loan for the accrued PIK interest totaling approximately $165,000.
During the fiscal year ended October 31, 2010, the Valuation Committee increased the fair value of the Companys investments in Dakota Growers common stock by approximately $3.4 million and preferred stock by approximately $3.6 million, Octagon equity interest by $1.5 million, Summit common stock by $22.0 million, Velocitius equity interest by $1.7 million, PreVisor common stock by $3.4 million, U.S. Gas preferred stock by $17.8 million, Vestal common stock by $600,000 and LHD Europe series A common stock by approximately $166,000 and series B common Stock by approximately $58,000. In addition, increases in the cost basis and fair value of the loans to GDC, Custom Alloy, SP, Marine, Turf, BP, Summit, and U.S. Gas and the Marine and Vitality preferred stock were due to the capitalization of payment in kind (PIK) interest/dividends totaling $5,561,308. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $6.8 million due to PIK distributions which were treated as a return of capital. Also, during the fiscal year ended October 31, 2010, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $298,000. The Valuation Committee also decreased the fair value of the Companys investments in Amersham second lien notes by $2.4 million, BP second lien loan by $14.1 million, Ohio Medical common stock by $8.6 million, SGDA preferred equity interest by approximately $2.4 million, MVC Automotive equity interest by $2.4 million, Security Holdings equity interest by approximately $6.4 million, SGDA Europe equity interest by approximately $4.1 million, Harmony Pharmacy demand notes and revolving credit facility by a net amount of $6.4 million, Turf equity interest by $500,000, GDC senior subordinated loan by approximately $3.2 million and Vendio preferred stock by approximately $1.9 million and common stock by $5,500 during the fiscal year ended October 31, 2010. The net decrease of $6.4 million in Harmony Pharmacy was a result of the Valuation Committee determination to decrease the value of the unsecured demand notes by $7.5 million and ascribed value of $1.1 million to the capitalized PIK interest on the revolving credit facility which had no previous value. The Valuation Committee also determined not to increase the fair values of the Harmony Pharmacy revolving credit facility, Amersham loan, BP second lien loan and GDC senior subordinated loan for the accrued PIK interest totaling approximately $732,000.
At October 31, 2010, the fair value of all portfolio investments, exclusive of short-term securities, was $433.9 million with a cost basis of $375.6 million. At October 31, 2010, the fair value and cost basis of portfolio investments of the Legacy Investments was $10.8 million and $42.3 million, respectively, and the fair value and cost basis of portfolio investments made by the Companys current management team was $423.1 million and $333.3 million, respectively. At October 31, 2009, the fair value of all portfolio investments, exclusive of short-term securities, was $502.8 million, with a cost basis of $422.8 million. At October 31, 2009, the fair value and cost basis of the Legacy Investments was $15.3 million and $48.9 million, respectively, and the fair value and cost basis of portfolio investments made by the Companys current management team was $487.5 million and $373.9 million, respectively.
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Portfolio Companies
During the fiscal year ended October 31, 2011, the Company had investments in the following portfolio companies:
Actelis Networks, Inc.
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, 2010 and October 31, 2011, 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 fair valued at $0.
Amersham Corporation
Amersham, Louisville, Colorado, manufactured precision machined components for the aviation, automotive and medical device markets.
At October 31, 2010, the Companys investment in Amersham consisted of a $2.5 million note and a $4.1 million note. The $2.5 million note had an annual interest rate of 10% and matured on June 29, 2010. The note was not repaid at the time of maturity. The $4.1 million note bears annual interest at 17%, which includes a 3% default interest rate. The interest rate then 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 $4.1 million at October 31, 2010. At October 31, 2010, the notes had a combined outstanding balance and cost of $6.5 million and a combined fair value of $0. The Company has reserved in full against the interest accrued on the $2.5 million and $4.1 million note.
On December 1, 2010, Amersham filed for dissolution in the State of California as all operating divisions were sold in 2010. As a result, the Company realized a $6.5 million loss on its investment in Amersham. The Company may be eligible to receive proceeds from an earnout related to the sale of an operating division once the senior lender is repaid in full. At this time, it is not likely that any proceeds will be received by the Company.
At October 31, 2011, the Company no longer held an investment in Amersham.
BP Clothing, LLC
BP, Pico Rivera, California, is a company that designs, manufactures, markets and distributes under several brand names womens apparel.
At October 31, 2010, the Companys investment in BP consisted of a $19.6 million second lien loan, a $2.0 million term loan A, and a $2.0 million term loan B. The second lien loan bears annual interest at 16.5%. The second lien loan had a $17.5 million principal face amount and was issued at a cost basis of $17.5 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 term loan A bears annual interest at LIBOR plus 7.75% or Prime Rate plus 6.75%. The term loan B bears annual interest at LIBOR plus 10.75% or Prime Rate plus 9.75%. The interest rate option on the loan assignments is at the borrowers discretion. Both term loans matured on July 18, 2011. The combined cost basis and fair value of the investments at October 31, 2010 was $23.4 million and $7.4 million, respectively.
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During the fiscal year ended October 31, 2011, the Valuation Committee decreased the fair value of the second lien loan by approximately $3.9 million, the fair value of term loan A by approximately $1.4 million, and the fair value of term loan B by approximately $1.8 million.
At October 31, 2011, the loans had a combined outstanding balance of $24.3 million, a cost basis of $23.6 million and a fair value of $280,000. The increase in the outstanding balance and cost of the term loans are due to the amortization of loan origination fees and the increase in the outstanding balance of the second lien loan is due to the capitalization of payment in kind interest. The Companys Valuation Committee determined not to increase the fair value of the investment as a result of the capitalization of the PIK interest for the fiscal year ended October 31, 2011. The Company has also reserved in full against all accrued interest starting on July 1, 2010.
Centile Holding B.V.
Centile, Sophia-Antipolis, France, is a leading European innovator of unified communications, network platforms, hosted solutions, applications and tools that help mobile, fixed and web-based communications service providers serve the needs of enterprise end users.
On October 20, 2011, the Company invested approximately $3.0 million in Centile in the form of equity interest.
At October 31, 2011, the equity investment in Centile had a cost and fair value of $3.0 million.
Christopher Sullivan, a representative of the Company, serves as a director of Centile.
Custom Alloy Corporation
Custom Alloy, High Bridge, New Jersey, manufactures time sensitive and mission critical butt-weld pipe fittings for the natural gas pipeline, power generation, oil/gas refining and extraction, and nuclear generation markets.
At October 31, 2010, the Companys investment in Custom Alloy consisted of nine shares of convertible series A preferred stock at a cost and fair value of $44,000, 1,991 shares of convertible series B preferred stock at a cost and fair value of approximately $10.0 million. The unsecured subordinated loan, which bears annual interest at 14% and matures on September 18, 2012, had a cost of $13.4 million and a fair value of $13.6 million.
At October 31, 2011, the Companys investment in Custom Alloy consisted of nine shares of convertible series A preferred stock at a cost and fair value of $44,000 and the 1,991 shares of convertible series B preferred stock had a cost and fair value of approximately $10.0 million. The unsecured subordinated loan had an outstanding balance of $14.6 million, a cost of $14.5 million and a fair value of $14.6 million. The increase in the cost basis 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 Companys Valuation Committee.
Michael Tokarz, Chairman of the Company, and Shivani Khurana, representative of the Company, serve as directors of Custom Alloy.
DPHI, Inc. (formerly DataPlay, Inc.)
DPHI, Inc. (DPHI), Boulder, Colorado, a Legacy Investment, is trying to develop new ways of enabling consumers to record and play digital content.
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At October 31, 2010 and October 31, 2011, 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 fair valued at $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, 2010 and October 31, 2011, the Companys investment in Foliofn consisted of 5,802,259 shares of Series C preferred stock with a cost of $15.0 million and a fair value of $10.8 million.
Bruce Shewmaker, an officer of the Company, serves as a director of Foliofn.
GDC Acquisitions, LLC d/b/a JDC Lighting, LLC
GDC is the holding company of JDC Lighting, LLC (JDC). GDC, New York, New York, which was a distributor of commercial lighting and electrical products.
At October 31, 2010, the Companys investment in GDC consisted of a $3.2 million senior subordinated loan, bearing annual interest at 17% with a maturity date of August 31, 2011. The loan had a principal amount, an outstanding balance and a cost basis of $3.2 million and was fair valued at $0. The warrant was fair valued at $0.
At October 31, 2011, the loan had an outstanding balance of $3.3 million and a cost of $3.2 million. The loan and warrants were fair valued at $0. The increase in the outstanding balance of the loan is due to the capitalization of payment in kind interest. The Companys Valuation Committee determined not to increase the fair value of the investment as a result of the capitalization of the PIK interest for the fiscal year ended October 31, 2011. The Company has reserved in full against the interest accrued on the senior subordinated loan since July 1, 2010.
Harmony Health & Beauty, Inc.
Harmony Health & Beauty, Purchase, New York, purchased the assets of Harmony Pharmacy on November 30, 2010, during a public UCC sale for approximately $6.4 million. HH&B now operates the health and beauty stores previously owned by Harmony Pharmacy in the Newark International Airport, John F. Kennedy International Airport and San Francisco International Airport. The Companys initial investment consisted of 100,010 shares of common stock.
On May 26, 2011 and September 14, 2011, the Company invested an additional $150,000 on each date into HH&B to acquire an additional 47,611 shares of common stock.
During the fiscal year ended October 31, 2011, the Valuation Committee decreased the fair value of the common stock by $5.7 million.
At October 31, 2011, the Companys investment in HH&B consisted of 147,621 shares of common stock with a cost of $6.7 million and fair value of $1.0 million.
Michael Tokarz, Chairman of the Company, serves as a director of HH&B.
Harmony Pharmacy & Health Center, Inc.
Harmony Pharmacy, Purchase, New York, operated health and beauty stores primarily in airports in the United States. Harmony Pharmacy opened their first store in Newark International Airport in March of 2007 and has since opened stores in John F. Kennedy International Airport and San Francisco International Airport.
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At October 31, 2010, the Companys equity investment in Harmony Pharmacy consisted of 2 million shares of common stock with a cost of $750,000 and a fair value of $0. The revolving credit facility had an outstanding balance of $5.2 million, a cost of $5.2 million, and a fair value of $5.1 million. The demand notes had an outstanding balance and cost of $8.1 million and a fair value of $600,000. The Company has reserved in full against the interest accrued on the revolving credit facility and the demand notes.
On November 30, 2010, the Company loaned an additional $700,000 to Harmony, which was the remaining portion of the $1.3 million demand note.
On November 30, 2010, a public UCC sale of Harmony Pharmacys assets took place. Prior to this sale, the Company formed a new entity, Harmony Health & Beauty. The Company assigned its secured debt interest in Harmony Pharmacy of approximately $6.4 million to Harmony Health & Beauty in exchange for a majority of the economic ownership. At the UCC sale, Harmony Health & Beauty submitted a successful credit bid of approximately $5.9 million for all of the assets of Harmony Pharmacy. On December 21, 2010, Harmony Pharmacy filed for dissolution in the states of California, New Jersey and New York. As a result, the Company realized an $8.4 million loss on its investment in Harmony Pharmacy.
At October 31, 2011, the Company no longer held an investment in Harmony Pharmacy.
HuaMei Capital Company, Inc.
HuaMei, San Francisco, California, is a Chinese-American, cross border investment bank and advisory company.
At October 31, 2010, the Companys investment in HuaMei consisted of 120,000 shares of common stock with a cost of $2.0 million and fair value of $1.5 million.
During the first three quarters of the 2011 fiscal year, the Valuation Committee decreased the fair value of the common stock by approximately $1.5 million.
On August 1, 2011, as part of a restructuring of the Companys investment in HuaMei, the Company sold its shares to HuaMei, resulting in a realized loss of $2.0 million.
At October 31, 2011, the Company no longer held an investment in HuaMei.
Integrated Packaging Corporation
IPC, New Brunswick, New Jersey, is a manufacturer of corrugated boxes and packaging material.
On April 2, 2010, the Company acquired an investment in IPC in the form of a warrant. The Company received the warrant in exchange for services provided to another investor in IPC.
At October 31, 2010 and October 31, 2011, the Companys investment in IPC had a zero cost basis and has been fair valued at $0.
iShares S&P U.S. Preferred Stock Index Fund
iShares S&P U.S. Preferred Stock Index Fund is an exchange traded fund, which seeks results that correspond generally to the price and yield of the S&P U.S. Preferred Stock Index.
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During the fiscal year ended October 31, 2011, the Company invested approximately $10.0 million in the iShares S&P U.S. Preferred Stock Index Fund. The Company sold the investment during the fiscal year ended October 31, 2011, which resulted in a realized capital gain of approximately $68,000. Investments in liquid, exchange traded funds were intended to provide the Company with a higher yielding investment than cash and cash equivalents while awaiting deployment into portfolio companies pursuant to the Companys principal investment strategy. TTG Advisers had voluntarily agreed that any assets of the Company that are invested in exchange-traded funds would not be subject to the base management fee due to TTG Advisers under the Advisory Agreement.
At October 31, 2011, the Company no longer held an investment in the iShares S&P U.S. Preferred Stock Index Fund.
JSC Tekers Holdings
JSC Tekers, Latvia, is an acquisition company focused on real estate management.
On May 4, 2011 and May 6, 2011, the Company invested $4,500 and $4.0 million, respectively, in JSC Tekers Holdings for 2,250 shares of common stock and a secured loan with an interest rate of 8% and maturity date of June 30, 2014.
At October 31, 2011, the Companys secured loan had an outstanding balance, a cost basis and a fair value of $4.0 million. The common stock had a cost and fair value of $4,500.
LHD Europe Holding Inc.
LHD Europe, incorporated in Delaware, processed and marketed dispensed and non-dispensed juices and frozen concentrate liquid coffee to the foodservice industry in Europe.
At October 31, 2010, the Companys investment consisted of 960 shares of convertible Series A common stock with a cost basis of approximately $166,000 and a fair value of approximately $332,000 and 334 shares of convertible Series B common stock with a cost basis of approximately $59,000 and a fair value of approximately $118,000.
On January 25, 2011, the Company sold its common stock in LHD Europe, receiving approximately $542,000 in proceeds, which resulted in a realized gain of approximately $317,000.
At October 31, 2011, the Company no longer held an investment in LHD Europe.
Lockorder Limited (formerly Safestone Technologies PLC)
Lockorder, located in 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.
At October 31, 2010 and October 31, 2011, the Companys investment in Lockorder consisted of 21,064 shares of common stock with a cost of $2.0 million. The investment has been fair valued at $0 by the Companys 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.
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At October 31, 2010 and October 31, 2011, the Companys investment in Mainstream consisted of 5,786 shares of common stock with a cost of $3.75 million. The investment has been fair valued at $0.
Marine Exhibition Corporation
Marine, Miami, Florida, owns and operates the Miami Seaquarium. The Miami Seaquarium is a family-oriented entertainment park.
At October 31, 2010, the Companys investment in Marine consisted of a senior secured loan and 20,000 shares of preferred stock. The senior secured loan had an outstanding balance and cost basis of $11.9 million. The senior secured loan bears annual interest at 11% and matures on October 26, 2017. The senior secured loan was fair valued at $11.9 million. The preferred stock was fair valued at $2.8 million. The dividend rate on the preferred stock is 12% per annum.
During the fiscal year ended October 31, 2011, Marine made principal payments of $450,000 on its senior secured loan.
At October 31, 2011, the Companys senior secured loan had an outstanding balance of $12.0 million, a cost basis of $11.9 million and a fair value of $12.0 million. The preferred stock had a cost and fair value of $3.0 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 Companys Valuation Committee.
MVC Automotive Group B.V.
MVC Automotive, an Amsterdam-based holding company, owns and operates twelve Ford, Jaguar, Land Rover, Mazda, and Volvo dealerships located in Austria, Belgium, Czech Republic, and the Netherlands.
At October 31, 2010, the Companys investment in MVC Automotive consisted of an equity interest with a cost of $34.7 million and a fair value of $44.1 million. The bridge loan, which bears annual interest at 10% and matures on December 31, 2011, had a cost and fair value of $3.6 million. The guarantees for MVC Automotive were equivalent to approximately $16.7 million at October 31, 2010.
During the fiscal year ended October 31, 2011, the Valuation Committee decreased the fair value of the equity interest by approximately $1.7 million.
At October 31, 2011, the Companys investment in MVC Automotive consisted of an equity interest with a cost of $34.7 million and a fair value of $42.5 million. The bridge loan had a cost and fair value of $3.6 million. The mortgage guarantees for MVC Automotive were equivalent to approximately $13.7 million at October 31, 2011. These guarantees were taken into account in the valuation of MVC Automotive.
Michael Tokarz, Chairman of the Company, and Christopher Sullivan, a representative of the Company, serve as directors of MVC Automotive.
MVC Partners LLC
MVC Partners, Purchase, New York, a wholly-owned portfolio company, is a private equity firm established primarily to serve as the general partner, managing member or anchor investor of private or other investment vehicles.
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On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in a private equity fund (PE Fund), for which an indirect wholly-owned subsidiary of the Company serves as the general partner (the GP). The PE Fund has closed on approximately $104 million of capital commitments.
At October 31, 2010 and October 31, 2011, the Companys equity investment in MVC Partners had a cost basis of approximately $1.4 million and fair value of approximately $1.1 million.
NPWT Corporation
NPWT, Gurnee, Illinois, is a medical device manufacturer and distributor of negative pressure wound therapy products.
On April 29, 2011, the assets of a division of Ohio Medical were distributed to Ohio Medical shareholders on a pro-rata basis. The Company received 281 shares of common stock in NPWT as part of this transaction.
On May 4, 2011, the Company invested $500,000 in NPWT for 5,000 shares of convertible preferred stock.
On October 31, 2011, the Company received a distribution from NPWT of $500,000, which was treated as a return of capital and returned all cash invested into NPWT to the Company.
During the fiscal year ended October 31, 2011, the Valuation Committee decreased the fair value of the common and preferred stock by a net amount of approximately $200,000.
At October 31, 2011, the common stock had a cost basis of $1.2 million and a fair value of approximately $56,000. The convertible preferred stock had a cost basis of $0 and a fair value of $1.0 million.
Scott Schuenke, an officer of the Company, serves as a director of NPWT.
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, 2010, the Companys investment in Octagon consisted of an equity investment with a cost basis of approximately $1.6 million and a fair value of approximately $4.5 million.
Octagon cancelled the revolving line of credit effective June 30, 2011. As of October 31, 2011, the revolving credit facility was no longer a commitment of the Company.
During the fiscal year ended October 31, 2011, the cost basis of the equity investment was increased by approximately $589,000 because of an allocation of flow through income.
During the fiscal year ended October 31, 2011, the Company received a distribution of approximately $202,000 from Octagon which was treated as a return of capital.
At October 31, 2011, the equity investment had a cost basis of approximately $2.2 million and a fair value of $5.3 million.
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Octagon High Income Cayman Fund Ltd.
Octagon Fund, is a private fund that seeks to maximize current income consistent with the preservation of capital through the leveraged loan market. This fund is managed by Octagon, a current portfolio company.
On February 14, 2011, the Company invested $3.0 million into the Octagon Fund.
During the fiscal year ended October 31, 2011, the Valuation Committee decreased the fair value of the investment by approximately $209,000.
During the fiscal year ended October 31, 2011, the Company received distributions of approximately $55,000 which were treated as realized gains.
At October 31, 2011, the investment had a cost basis of $3.0 million and a fair value of approximately $2.8 million.
Ohio Medical Corporation
Ohio Medical, Gurnee, Illinois, is a manufacturer and supplier of suction and oxygen therapy products, medical gas equipment, and input devices.
At October 31, 2010, 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 $500,000, respectively, and 15,473 shares of convertible preferred stock with a cost basis of $30.0 million and a fair value of $46.8 million.
On April 29, 2011, the assets of a division of Ohio Medical were distributed to Ohio Medical shareholders on a pro-rata basis. The Company received 281 shares of common stock in NPWT as a result of this transaction. As a result of this transaction, the cost basis and fair market value of Ohio Medical preferred stock was decreased by approximately $1.2 million.
During the fiscal year ended October 31, 2011, the fair value of the preferred stock was increased by approximately $1.9 million due to a PIK distribution, which was treated as a return of capital.
During the fiscal year ended October 31, 2011, the Valuation Committee decreased the fair value of the common stock by $500,000 and the preferred stock by approximately $8.0 million.
At October 31, 2011, the Companys investment in Ohio Medical consisted of 5,620 shares of common stock with a cost basis of $15.8 million and a fair value of $0 and 18,102 shares of convertible preferred stock with a cost basis of $30.0 million and a fair value of $39.5 million.
Michael Tokarz, Chairman of the Company, Peter Seidenberg, Chief Financial Officer of the Company, and Jim OConnor, a representative of the Company, serve as directors of Ohio Medical.
Pre-Paid Legal Services, Inc.
Pre-Paid Legal, Ada, Oklahoma, is the leading marketer of legal counsel and identity theft solutions to families and small businesses in the U.S. and Canada.
On July 14, 2011, the Company purchased, at a discount, a $4.0 million tranche A term loan and a $4.0 million tranche B term loan. The tranche A term loan bears annual interest at LIBOR, with a 1.5% floor, plus 6% and matures on January 1, 2017 and the tranche B term loan bears annual interest at LIBOR, with a 1.5% floor, plus 9.5% and matures on January 1, 2017.
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At October 31, 2011, the loans had a combined outstanding balance of $8.0 million and a cost basis and fair value of approximately $7.8 million. The increases in the costs of the term loans are due to the amortization of the original issue discount.
RuMe, Inc.
RuMe, Denver, Colorado, produces functional, affordable and responsible products for the environmentally and socially-conscious consumer reducing dependence on single-use products.
On July 15, 2011, the Company invested approximately $1.2 million in RuMe. The Company received 999,999 shares of common stock for approximately $160,000 and 4,999,076 shares of series B-1 preferred stock for approximately $1.0 million.
At October 31, 2011, the common stock had a cost basis and fair value of $160,000 and the series B-1 preferred stock had a cost basis and fair value of approximately $1.0 million.
Christopher Sullivan, a representative of the Company, serves as a director of RuMe.
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.
At October 31, 2010 and October 31, 2011, 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 fair valued at $0 by the Companys Valuation Committee.
Security Holdings, B.V.
Security Holdings is an Amsterdam-based holding company that owns FIMA, a Lithuanian security and engineering solutions company.
At October 31, 2010, the Companys investment in Security Holdings had a cost basis of $29.9 million and a fair value of $5.3 million.
On January 27, 2011, the Company invested $3.3 million in Security Holdings in the form of an additional equity interest.
On January 28, 2011, the Company invested an additional $5.0 million in Security Holdings in the form of a bridge loan. The bridge loan has an annual interest rate of 3% and a maturity date of July 31, 2012. This bridge loan allowed Security Holdings to secure project guarantees.
On April 26, 2011, the Company agreed to collateralize a 5.0 million Euro letter of credit from JPMorgan Chase Bank, N.A., which is classified as restricted cash on the Companys consolidated balance sheet. This letter of credit is being used as collateral for a project guarantee by AB DnB NORD bankas to Security Holdings.
On May 26, 2011, Security Holdings repaid its bridge loan in full including all accrued interest.
On September 6, 2011, the Company invested $7.0 million in Security Holdings in the form of an additional equity interest.
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During the fiscal year ended October 31, 2011, the Valuation Committee increased the fair value of the equity interest by approximately $17.6 million.
At October 31, 2011, the Companys investment in Security Holdings consisted of an equity interest with a cost of approximately $40.2 million and a fair value of $33.2 million.
Christopher Sullivan, a representative of the Company, serves as a director of Security Holdings.
SGDA Europe B.V.
SGDA Europe is an Amsterdam-based holding company that pursues environmental and remediation opportunities in Romania.
At October 31, 2010, the Companys equity investment had a cost basis of $17.4 million and a fair value of $12.1 million. The senior secured loan, with an annual interest rate of 10% and a maturity date of June 23, 2012, had an outstanding balance, cost and fair value of $1.5 million.
On October 17, 2011, the Company invested $1.0 million in SGDA Europe in the form of additional equity interest. Also on October 17, 2011, the Company converted SGDA Europes $1.5 million senior secured loan and all accrued interest to additional common equity interest.
During the fiscal year ended October 31, 2011, the Valuation Committee decreased the fair value of the common equity interest by approximately $4.3 million.
At October 31, 2011, the Companys equity investment had a cost basis of approximately $20.1 million and a fair value of $10.5 million.
Christopher Sullivan, a representative of the Company, serves as a director of SGDA Europe.
SGDA Sanierungsgesellschaft fur Deponien und Altasten GmbH
SGDA, Zella-Mehlis, Germany, is a company that is in the business of landfill remediation and revitalization of contaminated soil.
At October 31, 2010 and October 31, 2011, the Companys investment in SGDA consisted of a term loan with an outstanding balance and cost basis of approximately $6.2 million. The term loan bears annual interest at 7.0% and matures on August 31, 2012. The term loan was fair valued at $6.2 million.
SHL Group Limited (formerly PreVisor, Inc.)
SHL Group Limited, London, United Kingdom, provides workplace talent assessment solutions including ability and personality tests, and psychometric assessments in more than 50 countries and in 30 languages.
On May 31, 2006, the Company invested $6.0 million in PreVisor in the form of 9 shares 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 the Independent Directors, approved the transaction (Mr. Tokarz recused himself from making a determination or recommendation on this matter).
At October 31, 2010, the Companys investment in PreVisor consisted of 9 shares of common stock with a cost basis and fair value of $6.0 million and $10.4 million, respectively.
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On January 11, 2011, SHL Group Limited acquired the Companys portfolio company PreVisor. The Company received 1,518,762 common shares of SHL Group Limited for its investment in PreVisor. The cost basis and market value of the Companys investment remained unchanged as a result of the transaction.
During the fiscal year ended October 31, 2011, the Valuation Committee increased the fair value of the common stock by $4.9 million.
At October 31, 2011, the Companys investment in SHL Group Limited consisted of 1,518,762 shares of common stock with a cost basis and fair value of $6.0 million and $15.3 million, respectively.
SIA Tekers Invest
Tekers, Riga, Latvia, is a port facility used for the storage and servicing of vehicles.
At October 31, 2010, the Companys investment in Tekers consisted of 68,800 shares of common stock with a cost of $2.3 million and a fair value of $3.8 million. The Company guaranteed a 1.4 million Euro mortgage for Tekers. The guarantee was equivalent to approximately $2.0 million at October 31, 2010 for Tekers.
During the fiscal year ended October 31, 2011, the Valuation Committee decreased the fair value of the common stock by approximately $2.3 million.
At October 31, 2011, the Companys investment in Tekers consisted of 68,800 shares of common stock with a cost of $2.3 million and a fair value of approximately $1.5 million. The guarantee for Tekers had a commitment of 251,155 euros at October 31, 2011, equivalent to approximately $348,000. This guarantee was taken into account in the valuation of Tekers.
Sonexis, Inc.
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, 2010, the Companys investment in Sonexis consisted of 131,615 shares of common stock with a cost of $10.0 million. The investment has been fair valued at $0.
On August 31, 2011, Sonexis completed the dissolution of its operations and the sale of its assets. The Company realized a loss of $10.0 million as a result of this dissolution.
At October 31, 2011, the Company no longer held an investment in Sonexis.
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, 2010, the Companys investment in SP consisted of a first lien loan and a second lien loan that had outstanding balances of $732,000 and $26.2 million, respectively, with a cost basis of approximately $598,000 and $26.0 million, respectively. The first lien loan bears annual interest at LIBOR, with a 2.5% floor, plus 5% and matures on December 28, 2012, and the second lien loan bears annual interest at 15% and matures on December 31, 2013. The first lien loan and second lien loan had fair values of $732,000 and $26.2 million, respectively.
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On March 1, 2011, SP repaid its first lien and second lien loans in full including all accrued interest. The Company received a $500,000 termination fee associated with the repayment of the loans.
At October 31, 2011, the Company no longer held an investment in SP.
SPDR Barclays Capital High Yield Bond Fund
SPDR Barclays Capital High Yield Bond Fund is an exchange traded fund which seeks investment results that correspond to the price and yield of the Barclays Capital High Yield Very Liquid Bond Index.
During the fiscal year ended October 31, 2011, the Company invested approximately $10.0 million in the SPDR Barclays Capital High Yield Bond Fund. The Company sold the investment during the fiscal year ended October 31, 2011, which resulted in a realized capital gain of approximately $38,000. Investments in liquid, exchange traded funds were intended to provide the Company with a higher yielding investment than cash and cash equivalents while awaiting deployment into portfolio companies pursuant to the Companys principal investment strategy. TTG Advisers had voluntarily agreed that any assets of the Company that are invested in exchange-traded funds would not be subject to the base management fee due to TTG Advisers under the Advisory Agreement.
At October 31, 2011, the Company no longer held an investment in the SPDR Barclays Capital High Yield Bond Fund.
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, 2010, the Companys investment in Storage Canada consisted of a term loan with an outstanding balance, cost basis and a fair value of $1.0 million. The borrowing bears annual interest at 8.75% and matures on March 30, 2013. The loan commitment to Storage Canada was not renewed in March 2009.
On October 3, 2011, Storage Canada repaid its term loan in full including all accrued interest.
At October 31, 2011, the Company no longer held an investment in Storage Canada.
Summit Research Labs, Inc.
Summit, Huguenot, New York, is a specialty chemical company that manufactures antiperspirant actives.
At October 31, 2010, the Companys investment in Summit consisted of a second lien loan and 1,115 shares of common stock. The second lien loan bears annual interest at 14% and matures on August 31, 2013. The second lien loan had an outstanding balance of $10.3 million with a cost of $10.2 million. The second lien loan was fair valued at $10.3 million. The common stock had been fair valued at $60.0 million with a cost basis of $16.0 million.
During the fiscal year ended October 31, 2011, the Valuation Committee increased the fair value of the common stock by $14.5 million.
At October 31, 2011, the Companys second lien loan had an outstanding balance of approximately $11.1 million with a cost of approximately $11.0 million. The second lien loan was fair valued at approximately $11.1
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million. The 1,115 shares of common stock were fair valued at approximately $74.5 million and had a cost basis of approximately $16.0 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 Companys Valuation Committee.
Michael Tokarz, Chairman of the Company, and Puneet Sanan and Shivani Khurana, representatives of the Company, serve as directors of Summit.
Teleguam Holdings LLC
Teleguam, Guam, is a rural local exchange carrier providing broadband services, and local, long-distance and wireless phone services on the island of Guam.
On June 17, 2011, the Company purchased, at a discount, a $7.0 million second lien loan with an annual interest of LIBOR, with a 1.75% floor, plus 8% and a maturity date of June 9, 2017.
At October 31, 2011, the loan had an outstanding balance of $7.0 million and a cost basis and fair value of approximately $6.9 million. The increase in the cost of the second lien loan is due to the amortization of the original issue discount.
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, 2010, the Companys investment in Total Safety consisted of a $946,000 first lien loan bearing annual interest at LIBOR, with a 2.0% floor, plus 4.00% and maturing on December 8, 2012 and a $3.5 million second lien loan bearing annual interest at LIBOR plus 6.5% and maturing on December 8, 2013. The loans had a combined outstanding balance and cost basis of $4.4 million. The loans were fair valued at $4.4 million.
During the fiscal year ended October 31, 2011, the Valuation Committee increased the fair value of the first lien loan by approximately $74,000.
On October 28, 2011, Total Safety repaid its first and second lien loans in full including all accrued interest.
At October 31, 2011, the Company no longer held an investment in Total Safety.
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, 2010, 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, cost basis and a fair valued of $8.4 million. The junior revolving note had an outstanding balance, cost, and fair value of $1.0 million. The membership interest had a cost of $3.5 million and a fair value of $2.7 million. The warrants had a cost of $0 and a fair value of $0.
Effective November 4, 2010, the interest rate on the Turf Products, LLC (Turf) senior subordinated loan was reduced from 15% to 13% and the maturity date was extended to January 31, 2014.
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At October 31, 2011, the mezzanine loan had an outstanding balance, cost basis and a fair value of approximately $8.4 million. The increase in the cost basis of the loan is due to the amortization of loan origination fees. These increases were approved by the Companys Valuation Committee. The junior revolving note had an outstanding balance and fair value of $1.0 million. The membership interest has a cost of approximately $3.5 million and a fair value of approximately $2.7 million. The warrant was fair valued at $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, Florida, 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.
At October 31, 2010, the second lien loan had an outstanding balance of $8.7 million with a cost of $8.6 million and a fair value of $8.7 million. The second lien loan bears annual interest at 14% and matures on July 26, 2012. The 32,200 shares of convertible Series I preferred stock had a fair value of $76.1 million and a cost of $500,000, and the convertible Series J preferred stock had a fair value of $2.5 million and a cost of $0.
During the fiscal year ended October 31, 2011, the Valuation Committee increased the fair value of the Series I preferred stock by approximately $2.4 million and the Series J preferred stock by approximately $75,000.
At October 31, 2011, the second lien loan had an outstanding balance, cost and fair value of approximately $9.1 million. The increases in the outstanding balance, cost and fair value of the loan are due to the amortization of loan origination fees and the capitalization of payment in kind interest. These increases were approved by the Companys Valuation Committee. The convertible Series I preferred stock had a fair value of $78.5 million and a cost of $500,000 and the convertible Series J preferred stock had a fair value of $2.6 million and a cost of $0.
Puneet Sanan, a representative of the Company, serves as Chairman of U.S. Gas.
Velocitius B.V.
Velocitius, a Netherlands based holding company, manages wind farms based in Germany through operating subsidiaries.
At October 31, 2010, the equity investment in Velocitius had a cost of $11.4 million and a fair value of $24.9 million.
During the fiscal year ended October 31, 2011, the Valuation Committee increased the fair value of the equity investment by $200,000.
At October 31, 2011, the equity investment in Velocitius had a cost of $11.4 million and a fair value of $25.1 million.
Bruce Shewmaker, an officer of the Company, serves as a director of Velocitius.
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.
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At October 31, 2010, the senior subordinated promissory note, which had an annual interest of 12% and a maturity date of April 29, 2011, had an outstanding balance, cost, and fair value of $600,000. The 81,000 shares of common stock of Vestal that had a cost basis of $1.9 million were fair valued at $2.2 million.
During the fiscal year ended October 31, 2011, the maturity date on the senior subordinated promissory note was extended to April 29, 2013.
During the fiscal year ended October 31, 2011, the Valuation Committee decreased the fair value of the common stock by $745,000.
At October 31, 2011, the senior subordinated promissory note had an outstanding balance, cost, and fair value of $600,000. The 81,000 shares of common stock of Vestal that had a cost basis of approximately $1.9 million were fair valued at approximately $1.5 million.
Bruce Shewmaker and Scott Schuenke, officers of the Company, serve as directors of Vestal.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources are derived from our credit facility and cash flows from operations, including investment sales and repayments and income earned. Our primary use of funds includes investments in portfolio companies and payments of fees and other operating expenses we incur. We have used, and expect to continue to use, our credit facility, proceeds generated from our portfolio investments and proceeds from public and private offerings of securities to finance pursuit of our investment objective.
At October 31, 2011, the Company had investments in portfolio companies totaling $452.2 million. Also, at October 31, 2011, the Company had investments in cash and cash equivalents totaling approximately $35.2 million. Of the $35.2 million in cash and cash equivalents, $6.9 million was restricted cash related to the project guarantee for Security Holdings. 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. Pending investments in portfolio companies pursuant to our principal investment strategy, the Company may make other short-term or temporary investments, including in exchange-traded funds and private investment funds offering significantly more liquidity than traditional portfolio company investments.
During the fiscal year ended October 31, 2011, the Company made six new investments, committing capital totaling approximately $26.1 million. The investments were made in Octagon Fund ($3.0 million), JSC Tekers ($4.0 million), Teleguam ($7.0 million), Pre-Paid Legal ($8.0 million), RuMe ($1.2 million) and Centile ($3.0 million).
During the fiscal year ended October 31, 2011, the Company made seven follow-on investments in four existing portfolio companies totaling approximately $17.1 million. On January 27, 2011, the Company invested $3.3 million in Security Holdings in the form of an additional equity interest. On January 28, 2011, the Company loaned an additional $5.0 million to Security Holdings in the form of a bridge loan with an annual interest rate of 3%. This bridge loan allowed Security Holdings to secure project guarantees. On May 4, 2011, the Company invested $500,000 in NPWT to acquire 5,000 shares of convertible preferred stock. On May 26, 2011 and September 14, 2011, the Company invested an additional $150,000 on each date into HH&B to acquire an additional 47,612 shares of common stock. On September 6, 2011, the Company invested $7.0 million in Security Holdings in the form of an additional equity interest. On October 17, 2011, the Company invested $1.0 million in SGDA Europe in the form of additional equity interest. In addition, during the fiscal year ended October 31, 2011, the Company invested approximately $10.0 million in the SPDR Barclays Capital High Yield Bond Fund and approximately $10.0 million in the iShares S&P U.S. Preferred Stock Index Fund. These
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investments were sold during the fiscal year ended October 31, 2011, resulting in a realized gain of approximately $106,000. The investments in these exchange traded funds were intended to provide the Company with higher yielding investments than cash and cash equivalents while awaiting deployment into portfolio companies pursuant to the Companys principal investment strategy. TTG Advisers had voluntarily agreed that any assets of the Company that are invested in exchange-traded funds would not be subject to the base management fee due to TTG Advisers under the Advisory Agreement.
Current balance sheet resources, which include the additional cash resources from the Credit Facilities, are believed to be sufficient to finance current commitments. Current commitments include:
Commitments to/for Portfolio Companies
At October 31, 2011, the Companys existing commitments to portfolio companies consisted of the following:
Commitments of MVC Capital, Inc.
Portfolio Company |
Amount Committed | Amount Funded at October 31, 2011 | ||||||
Turf |
$ | 1.0 million | $ | 1.0 million | ||||
MVC Partners/MVCFS |
$ | 20.1 million | | |||||
|
|
|
|
|||||
Total |
$ | 21.1 million | $ | 1.0 million |
Guarantees
As of October 31, 2011, the Company had the following commitments to guarantee various loans and mortgages:
Off-Balance Sheet Arrangements
Guarantee |
Amount Committed | Amount Funded at October 31, 2011 | ||||||
MVC Automotive |
$ | 8.2 million | | |||||
MVC Automotive |
$ | 5.5 million | | |||||
Tekers |
$ | 348,000 | | |||||
|
|
|
|
|||||
Total |
$ | 14.0 million | |
ASC 460, Guarantees, requires the Company to estimate the fair value of the guarantee obligation at its inception and requires the Company to assess whether a probable loss contingency exists in accordance with the requirements of ASC 450, Contingencies. At October 31, 2011 and 2010, the estimated fair values of the guarantee obligations noted above were $0.
These guarantees are further described below, together with the Companys other commitments.
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 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. 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 February 12, 2009, the commitment amount of the revolving credit facility was reduced to $7.0 million. At October 31, 2010, there was no balance outstanding on the revolving credit facility. On June 30, 2011, Octagon cancelled the commitment. As of October 31, 2011, the revolving credit facility was no longer a commitment of the Company.
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On July 19, 2007, the Company agreed to guarantee a 1.4 million Euro mortgage for Tekers. The guarantee had a commitment of 251,155 euros at October 31, 2011, equivalent to approximately $348,000.
On January 15, 2008, the Company agreed to guarantee a 6.5 million Euro mortgage for MVC Automotive. The guarantee had a commitment of approximately 5.9 million euros at October 31, 2011, equivalent to approximately $8.2 million.
On January 16, 2008, the Company agreed to support a 4.0 million Euro mortgage for a Ford dealership owned and operated by MVC Automotive (equivalent to approximately $5.5 million at October 31, 2011) through making financing available to the dealership and agreeing under certain circumstances not to reduce its equity stake in MVC Automotive. The Company has consistently reported the amount of the guarantee as 4.0 million Euro. The Company and MVC Automotive continues to view this amount as the full amount of our commitment. The Company has recently learned that Erste Bank, the bank extending the mortgage to MVC Automotive, believes, based on a different methodology, that the balance of the guarantee as of October 31, 2011 is approximately 6.9 million Euro (equivalent to approximately $9.6 million). The Company is working with Erste Bank to resolve the discrepancy.
On July 31, 2008, the Company extended a $1.0 million loan to Turf in the form of a secured junior revolving note. The note bears annual interest at 6.0% and expires on January 31, 2014. On July 31, 2008, Turf borrowed $1.0 million from the secured junior revolving note. At October 31, 2010 and October 31, 2011, the outstanding balance of the secured junior revolving note was $1.0 million.
On September 9, 2008, the Company agreed to guarantee a 35.0 million Czech Republic Koruna (CZK) mortgage for MVC Automotive. On December 9, 2009, the mortgage that was guaranteed was refinanced by MVC Automotive, resulting in the release of the guarantee. As of October 31, 2011, the guarantee was no longer a commitment of the Company.
On March 31, 2010, the Company pledged its Series I and Series J preferred stock of U.S. Gas to Macquarie Energy, LLC (Macquarie Energy) as collateral for Macquarie Energys trade supply credit facility to U.S. Gas.
On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in a private equity fund (PE Fund), for which an indirect wholly-owned subsidiary of the Company serves as the general partner (the GP). The PE Fund has closed on approximately $104 million of capital commitments.
On April 26, 2011, the Company agreed to collateralize a 5.0 million Euro letter of credit from JPMorgan Chase Bank, N.A., which is classified as restricted cash on the Companys consolidated balance sheet. This letter of credit is being used as collateral for a project guarantee by AB DnB NORD bankas to Security Holdings.
Commitments of the Company
Effective November 1, 2006, under the terms of the Investment Advisory and Management Agreement with TTG Advisers, which has since been amended and restated (the Advisory Agreement) and described in Note 4 of the consolidated financial statements, Management, 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, Purchase, New York 10577.
On April 27, 2006, the Company and MVCFS, as co-borrowers, entered into a four-year, $100 million credit facility (the Credit Facility), consisting of $50.0 million in term debt and $50.0 million in revolving credit, with Guggenheim as administrative agent for the lenders. On April 13, 2010, the Company renewed the Credit Facility for three years. The Credit Facility now only consists of a $50.0 million term loan, which will expire on
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April 27, 2013, at which time the outstanding amount under the Credit Facility will be due and payable. As of October 31, 2011, there was $50.0 million outstanding on the Credit Facility. The proceeds from borrowings made under the Credit Facility are used to fund new and existing portfolio investments and for general corporate purposes. Borrowings under the Credit Facility will bear interest, at the Companys option, at a floating rate equal to either (i) the LIBOR rate with a 1.25% LIBOR floor (for one, two, three or six months), plus a spread of 4.5% per annum, or (ii) the Prime rate in effect from time to time, plus a spread of 3.50% per annum. The Company paid a closing fee, legal and other costs associated with obtaining and renewing the Credit Facility. These costs will be amortized evenly over the life of the facility. The prepaid expenses on the consolidated 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 Credit Facility includes standard financial covenants including limitations on total assets to debt, debt to equity, interest coverage and eligible debt ratios. Please see the Item 1A Risk Factor, We may be unable to meet our covenant obligations under our credit facility, which could adversely affect our business, for a risk factor relating to the Companys credit facility.
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, 2011 is as follows:
Payments Due by Period | ||||||||||||||||||||
Total | Less than 1 year |
1-3 years | 4-5 years | After 5 years |
||||||||||||||||
Credit Facility I |
$ | 50,000,000 | N/A | $ | 50,000,000 | N/A | N/A | |||||||||||||
Total Debt |
$ | 50,000,000 | N/A | $ | 50,000,000 | N/A | N/A |
SUBSEQUENT EVENTS
Since October 31, 2011, the Company through MVC Partners and MVCFS contributed approximately $6.3 million of its $20.1 million capital commitment to the PE Fund, which to date has invested in Plymouth Rock Energy, LLC and Gibdock Limited.
BP Clothing LLC, a designer and manufacturer of womens apparel, filed for Chapter 11 protection on December 12, 2011, in New York with agreement to turn ownership over to secured lenders under a bankruptcy reorganization plan. Secured lenders, including the Company, have agreed to support a Chapter 11 plan where first-lien creditors will take 90 percent of the new stock, second-lien lenders will have 6 percent, and subordinated lenders will have 4 percent. The plan-support agreement requires filing the plan and disclosure statement by years end, with consummation of the plan not later than March 31, 2012.
On December 16, 2011, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on January 6, 2012 to shareholders of record on December 30, 2011. The total distribution amounted to approximately $2.9 million.
On December 28, 2011, the Company received its third scheduled disbursement from the Vitality Foodservice, Inc. escrow of approximately $585,000.
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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 conformity with U.S. generally accepted accounting principles 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.
Recent Accounting Pronouncements
In January 2010, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, Improving Disclosure about Fair Value Measurements. ASU 2010-06 provides an amendment to ASC 820-10 which requires new disclosures on transfers in and out of Levels I and II and activity in Level III fair value measurements. ASU 2010-06 also clarifies existing disclosures such as 1.) level of disaggregation and 2.) disclosure about inputs and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure about purchases, sales, issuance, and settlements in the roll-forward of activity in Level III fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company has adopted this guidance, the application of which has not had a material effect on the financial position or results of operations of the Company but has resulted in additional disclosures.
On May 12, 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 amends ASC 820, which will require entities to change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. ASU 2011-04 clarifies the application of existing fair value measurement and disclosure requirements related to the application of the highest and best use and valuation premise concepts for financial and nonfinancial instruments, measuring the fair value of an instrument classified in equity, and disclosures about fair value measurements. ASU 2011-04 requires additional disclosures about fair value measurements categorized within Level 3 of the fair value hierarchy, including the valuation processes used by the reporting entity, the sensitivity of the fair value to changes in unobservable inputs, and the interrelationships between those unobservable inputs, if any. All the amendments to ASC 820 made by ASU 2011-04 are effective for interim and annual periods beginning after December 15, 2011. Management is evaluating the new requirement and the potential impact, if any, to the Company upon implementation thereof.
Tax Status and Capital Loss Carryforwards
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 Notes 12 and 13. Notes to Consolidated Financial Statements). 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 income and 98.2% of its capital gains during each calendar year. At October 31, 2010, the Company had no capital loss carryforwards. During fiscal year 2011, the Company had net realized losses of approximately $26.4 million and as a result, the Company had approximately $26.3 million in capital loss carryforwards as of October 31, 2011. The Company also has approximately $21.5 million in unrealized losses associated with Legacy Investments.
Valuation of Portfolio Securities
ASC 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The price used
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to measure the fair value is not adjusted for transaction costs while the cost basis of our investments may include initial transaction costs. Under ASC 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset. In determining the principal market for an asset or liability under ASC 820, it is assumed that the reporting entity has access to the market as of the measurement date. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.
Pursuant to our Valuation Procedures, the Valuation Committee (which is currently comprised of three Independent Directors) determines fair valuation of portfolio company investments on a quarterly basis (or more frequently, if deemed appropriate under the circumstances). Any changes in valuation are recorded in the consolidated statements of operations as Net change in unrealized appreciation (depreciation) on investments. Currently, 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 that quarters NAV per share and in the next two months NAV per share calculation. (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.) Fair values of foreign investments determined as of quarter end reflect exchange rates, as applicable, in effect on the last day of the quarter. Exchange rates fluctuate on a daily basis, sometimes significantly. Exchange rate fluctuations following quarter end are not reflected in the valuations reported in this Annual Report. See Item 1A Risk Factors, Investments in foreign debt or equity may involve significant risks in addition to the risks inherent in U.S. investments.
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, 2011, approximately 91.20% of our total assets represented portfolio investments and escrow receivables recorded at fair value.
Under most circumstances, at the time of acquisition, Fair Value Investments are carried at cost (absent the existence of conditions warranting, in managements and the Valuation Committees view, a different initial value). During the period that an investment is held by the Company, its original cost may cease to approximate fair value as the result of market and investment specific factors. No pre-determined formula can be applied to determine fair value. Rather, the Valuation Committee analyzes fair value measurements based on the value at which the securities of the portfolio company could be sold in an orderly disposition over a reasonable period of time between willing parties, other than in a forced or liquidation sale. The liquidity event whereby the Company ultimately exits an investment is generally the sale, the merger, the recapitalization or, in some cases, the initial public offering of the portfolio company.
There is no one methodology to determine fair value and, in fact, for any portfolio security, fair value may be expressed as a range of values, from which the Company derives a single estimate of fair value. To determine the fair value of a portfolio security, the Valuation Committee analyzes the portfolio companys financial results and projections, publicly traded comparable companies when available, comparable private transactions when available, precedent transactions in the market when available, performs a discounted cash flow analysis if appropriate, as well as other factors. The Company generally requires, where practicable, portfolio companies to provide annual audited and more regular unaudited financial statements, and/or annual projections for the upcoming fiscal year.
The fair value of our portfolio securities is inherently subjective. Because of the inherent uncertainty of fair valuation of portfolio securities that do not have readily ascertainable market values, our estimate of fair value may significantly differ from the fair value that would have been used had a ready market existed for the
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securities. Such values also do not reflect brokers fees or other selling costs which might become payable on disposition of such investments.
ASC 820 provides a framework for measuring the fair value of assets and liabilities and provides guidance regarding a fair value hierarchy which prioritizes information used to measure value.
If a security is publicly traded, the fair value is generally equal to market value based on the closing price on the principal exchange on which the security is primarily traded.
For equity securities of portfolio companies, the Valuation Committee estimates the fair value based on market approach with value then attributed to equity or equity like securities using the enterprise value waterfall (Enterprise Value Waterfall) valuation methodology. Under the Enterprise Value Waterfall valuation methodology, the Valuation Committee estimates the enterprise fair value of the portfolio company and then waterfalls the enterprise value over the portfolio companys securities in order of their preference relative to one another. To assess the enterprise value of the portfolio company, the Valuation Committee weighs some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing assets may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. For non-performing assets, the Valuation Committee may estimate the liquidation or collateral value of the portfolio companys assets. The Valuation Committee also takes into account historical and anticipated financial results.
In assessing enterprise value, the Valuation Committee considers the mergers and acquisitions (M&A) market as the principal market in which the Company would sell its investments in portfolio companies under circumstances where the Company has the ability to control or gain control of the board of directors of the portfolio company (Control Companies). This approach is consistent with the principal market that the Company would use for its portfolio companies if the Company has the ability to initiate a sale of the portfolio company as of the measurement date, i.e., if it has the ability to control or gain control of the board of directors of the portfolio company as of the measurement date. In evaluating if the Company can control or gain control of a portfolio company as of the measurement date, the Company takes into account its equity securities on a fully diluted basis as well as other factors.
For non-Control Companies, consistent with ASC 820, the Valuation Committee considers a hypothetical secondary market as the principal market in which it would sell investments in those companies.
For loans and debt securities of non-Control Companies (for which the Valuation Committee has identified the hypothetical secondary market as the principal market), the Valuation Committee determines fair value based on the assumptions that a hypothetical market participant would use to value the security in a current hypothetical sale using a market yield (Market Yield) valuation methodology. In applying the Market Yield valuation methodology, the Valuation Committee determines the fair value based on such factors as third party broker quotes and market participant assumptions including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date.
Estimates of average life are generally based on market data of the average life of similar debt securities. However, if the Valuation Committee has information available to it that the debt security is expected to be repaid in the near term, the Valuation Committee would use an estimated life based on the expected repayment date.
The Valuation Committee determines fair value of loan and debt securities of Control Companies based on the estimate of the enterprise value of the portfolio company. To the extent the enterprise value exceeds the
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remaining principal amount of the loan and all other debt securities of the company, the fair value of such securities is generally estimated to be their cost. However, where the enterprise value is less than the remaining principal amount of the loan and all other debt securities, the Valuation Committee may discount the value of such securities to reflect an impairment.
For the Companys or its subsidiarys investment in the PE Fund, for which an indirect wholly-owned subsidiary of the Company serves as the GP, the Valuation Committee will rely on the GPs determination of the Fair Value of the PE Fund, which will be made: (i) no less frequently than quarterly as of the Companys fiscal quarter end and (ii) based on methodologies consistent with those set forth in the Companys Valuation Procedures. Additionally, when both the Company and the PE Fund hold investments in the same portfolio company, the GPs Fair Value determination shall be based on the Valuation Committees determination of the Fair Value of the Companys portfolio security in that portfolio company.
As permitted under GAAP, the Companys interests in private investment funds (Investment Vehicles) are generally valued, as a practical expedient, utilizing the net asset valuations provided by the underlying Investment Vehicles, without adjustment, unless TTG Advisers is aware of information indicating that a value reported does not accurately reflect the value of the Investment Vehicle, including any information showing that the valuation has not been calculated in a manner consistent with GAAP. Net unrealized appreciation (depreciation) of such investments is recorded based on the Companys proportionate share of the aggregate amount of appreciation (depreciation) recorded by each underlying Investment Vehicle. The Companys proportionate share includes its share of interest and dividend income and expense, and realized and unrealized gains and losses on securities held by the underlying Investment Vehicles, net of operating expenses and fees. Realized gains and losses on withdrawals from Investment Vehicles are generally recognized on a first in, first out basis.
The Company applies the practical expedient to interests in Investment Vehicles on an investment by investment basis, and consistently with respect to the Companys entire interest in an investment. The Company may adjust the valuation obtained from an Investment Vehicle with a premium, discount or reserve if it determines that the net asset value is not representative of the current market conditions.
When the Company receives nominal cost warrants or free equity securities (nominal cost equity) with a debt security, the Company typically allocates its cost basis in the investment between debt securities and nominal cost equity at the time of origination.
Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. Origination and/or closing fees associated with investments in portfolio companies are accreted into income over the respective terms of the applicable loans. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as income. Prepayment premiums are recorded on loans when received.
For loans, debt securities, and preferred securities with contractual payment-in-kind interest or dividends, which represent contractual interest/dividends accrued and added to the loan balance or liquidation preference that generally becomes due at maturity, the Company will not ascribe value to payment-in-kind interest/dividends if the portfolio company valuation indicates that the payment-in-kind interest is not collectible. However, the Company may ascribe value to 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.
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Investment Classification
We classify our investments by level of control. As defined in the 1940 Act, Control Investments are investments in those companies that we are deemed to Control. Affiliate Investments are investments in those companies that are Affiliated Companies of us, as defined in the 1940 Act, other than Control Investments. Non-Control/Non-Affiliate Investments are those that are neither Control Investments nor Affiliate Investments. Generally, under the 1940 Act, we are deemed to control a company in which we have invested if we own 25% or more of the voting securities of such company or have greater than 50% representation on its board. We are deemed to be an affiliate of a company in which we have invested if we own 5% or more and less than 25% of the voting securities of such company.
Investment Transactions and Related Operating Income
Investment transactions and related revenues and expenses are accounted for on the trade date (the date the order to buy or sell is executed). The cost of securities sold is determined on a first-in, first-out basis, unless otherwise specified. Dividend income and distributions on investment securities is recorded on the ex-dividend date. The tax characteristics of such distributions received from our portfolio companies will be determined by whether or not the distribution was made from the investments current taxable earnings and profits or accumulated taxable earnings and profits from prior years. Interest income, which includes accretion of discount and amortization of premium, if applicable, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Fee income includes fees for guarantees and services rendered by the Company or its wholly-owned subsidiary to portfolio companies and other third parties such as due diligence, structuring, transaction services, monitoring services, and investment advisory services. Guaranty fees are recognized as income over the related period of the guaranty. Due diligence, structuring, and transaction services fees are generally recognized as income when services are rendered or when the related transactions are completed. Monitoring and investment advisory services fees are generally recognized as income as the services are rendered. Any fee income determined to be loan origination fees, original issue discount, and market discount are capitalized and then amortized into income using the effective interest method. Upon the prepayment of a loan or debt security, any unamortized loan origination fees are recorded as income and any unamortized original issue discount or market discount is recorded as a realized gain. For investments with 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 Cash and Cash Equivalents
Cash and cash equivalent accounts that are not available to the Company for day to day use are classified as restricted cash. Restricted cash and cash equivalents are carried at cost which approximates fair value.
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.
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Distributions to Shareholders
Distributions to shareholders 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 Code. As a RIC, the Company is not subject to income tax to the extent that it distributes all of its investment company taxable income and net realized capital gains for its taxable year. The Company is also exempt from excise tax if it distributes at least 98% of its income and 98.2% of its capital gains during each calendar year.
Our consolidated operating subsidiary, MVCFS, is subject to federal and state income tax. We use the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
ASC 740, Income Taxes, provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Companys tax returns to determine whether the tax positions are more-likely-than-not of being sustained by the applicable tax authority. Tax positions deemed to meet a more-likely-than-not threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statement of operations. During the fiscal year ended October 31, 2011, the Company did not incur any interest or penalties. Although we file federal and state tax returns, our major tax jurisdiction is federal for the Company and MVCFS. The 2008, 2009, 2010 and 2011 federal tax years for the Company and MVCFS remain subject to examination by the IRS.
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Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
October 31, 2011 |
October 31, 2010 |
|||||||
ASSETS | ||||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 28,317,460 | $ | 56,390,628 | ||||
Restricted cash and cash equivalents |
6,925,000 | | ||||||
Investments at fair value |
||||||||
Non-control/Non-affiliated investments (cost $90,292,464 and $113,688,332) |
51,182,558 | 56,704,561 | ||||||
Affiliate investments (cost $126,356,770 and $119,874,343) |
187,953,099 | 167,106,213 | ||||||
Control investments (cost $141,569,773 and $142,019,459) |
213,079,430 | 210,090,715 | ||||||
|
|
|
|
|||||
Total investments at fair value (cost $358,219,007 and $375,582,134) |
452,215,087 | 433,901,489 | ||||||
Dividends, interest and fee receivables, net of reserves |
7,872,867 | 6,374,314 | ||||||
Escrow receivables |
1,146,899 | 2,063,420 | ||||||
Prepaid expenses |
629,868 | 1,564,306 | ||||||
Prepaid taxes |
| 78,463 | ||||||
|
|
|
|
|||||
Total assets |
$ | 497,107,181 | $ | 500,372,620 | ||||
|
|
|
|
|||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||
Liabilities |
||||||||
Term loan |
$ | 50,000,000 | $ | 50,000,000 | ||||
Provision for incentive compensation (Note 5) |
23,938,058 | 21,990,314 | ||||||
Management fee payable |
2,600,905 | 2,232,295 | ||||||
Professional fees payable |
703,293 | 515,651 | ||||||
Other accrued expenses and liabilities |
288,111 | 599,843 | ||||||
Consulting fees payable |
64,999 | 38,054 | ||||||
Taxes payable |
2,099 | 2,039 | ||||||
|
|
|
|
|||||
Total liabilities |
77,597,465 | 75,378,196 | ||||||
|
|
|
|
|||||
Shareholders equity |
||||||||
Common stock, $0.01 par value; 150,000,000 shares authorized; 23,916,982 and 23,990,987 shares outstanding, respectively |
283,044 | 283,044 | ||||||
Additional paid-in-capital |
428,428,139 | 429,461,516 | ||||||
Accumulated earnings |
40,499,006 | 40,218,844 | ||||||
Dividends paid to stockholders |
(80,171,868 | ) | (68,682,836 | ) | ||||
Accumulated net realized gain (loss) |
(25,755,440 | ) | 2,197,091 | |||||
Net unrealized appreciation |
93,996,080 | 58,319,355 | ||||||
Treasury stock, at cost, 4,387,466 and 4,313,461 shares held, respectively |
(37,769,245 | ) | (36,802,590 | ) | ||||
|
|
|
|
|||||
Total shareholders equity |
419,509,716 | 424,994,424 | ||||||
|
|
|
|
|||||
Total liabilities and shareholders equity |
$ | 497,107,181 | $ | 500,372,620 | ||||
|
|
|
|
|||||
Net asset value per share |
$ | 17.54 | $ | 17.71 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
76
Consolidated Schedule of Investments
October 31, 2011
Company |
Industry |
Investment |
Principal |
Cost |
Fair Value |
|||||||||||
Non-control/Non-affiliated investments 12.20% (a, c, f, g) |
| |||||||||||||||
Actelis Networks, Inc. |
Technology Investments | Preferred Stock (150,602 shares) (d, j) | $ | 5,000,003 | $ | | ||||||||||
BP Clothing, LLC |
Apparel | Second Lien Loan 16.5000%, 07/18/2012 (b, h, i) | $ | 20,362,135 | 19,579,285 | | ||||||||||
Term Loan A 8.0000%, 07/18/2011 (h, i) | 1,987,500 | 1,987,500 | 280,000 | |||||||||||||
Term Loan B 11.0000%, 07/18/2011 (h, i) | 2,000,000 | 2,000,000 | | |||||||||||||
|
|
|
|
|||||||||||||
23,566,785 | 280,000 | |||||||||||||||
DPHI, Inc. |
Technology Investments | Preferred Stock (602,131 shares) (d, j) | 4,520,355 | | ||||||||||||
FOLIOfn, Inc. |
Technology Investments | Preferred Stock (5,802,259 shares) (d, j) | 15,000,000 | 10,790,000 | ||||||||||||
GDC Acquisition, LLC |
Electrical Distribution | Senior Subordinated Debt 17.0000%, 08/31/2011 (b, h, i) |
3,348,160 | 3,237,952 | | |||||||||||
Warrants (d) | | | ||||||||||||||
|
|
|
|
|||||||||||||
3,237,952 | | |||||||||||||||
Integrated Packaging Corporation |
Manufacturer of Packaging Material | Warrants (d) | | | ||||||||||||
Lockorder Limited |
Technology Investments | Common Stock (21,064 shares) (d, e, j) | 2,007,701 | | ||||||||||||
MainStream Data, Inc. |
Technology Investments | Common Stock (5,786 shares) (d, j) | 3,750,000 | | ||||||||||||
NPWT Corporation |
Medical Device Manufacturer | Series B Common Stock (281 shares) (d) | 1,236,364 | 56,364 | ||||||||||||
Series A Convertible Preferred Stock (5,000 shares) (d) | | 1,000,000 | ||||||||||||||
|
|
|
|
|||||||||||||
1,236,364 | 1,056,364 | |||||||||||||||
Octagon High Income Cayman Fund Ltd. |
Investment Company | Series 1 Participating Non-Voting Shares (3,014 shares) (e, k) | 3,013,952 | 2,804,543 | ||||||||||||
Prepaid Legal Services, Inc. |
Consumer Services | Tranche A Term Loan 7.5000%, 12/31/2016 (h) | 4,000,000 | 3,943,303 | 3,943,303 | |||||||||||
Tranche B Term Loan 11.0000%, 12/31/2016 (h) | 4,000,000 | 3,886,607 | 3,886,607 | |||||||||||||
|
|
|
|
|||||||||||||
7,829,910 | 7,829,910 | |||||||||||||||
SafeStone Technologies Limited |
Technology Investments | Common Stock (21,064 shares) (d, e, j) | 2,007,701 | | ||||||||||||
SGDA Sanierungsgesellschaft fur Deponien und Altlasten GmbH |
Soil Remediation | Term Loan 7.0000%, 08/31/2012 (e, h) | 6,187,350 | 6,187,350 | 6,187,350 | |||||||||||
SHL Group Limited |
Human Capital Management | Common Stock (1,518,762 shares) (d, e) | 6,000,000 | 15,300,000 | ||||||||||||
Teleguam Holdings, LLC |
Telecommunications | Second Lien Loan 9.7500%, 06/09/2017 (h) | 7,000,000 | 6,934,391 | 6,934,391 | |||||||||||
Sub Total Non-control/Non-affiliated investments |
90,292,464 | 51,182,558 | ||||||||||||||
Affiliate investments 44.80% (a, c, f, g) |
||||||||||||||||
Centile Holding B.V. |
Software | Common Equity Interest (d, e) | 3,001,376 | 3,001,376 | ||||||||||||
Custom Alloy Corporation |
Manufacturer of Pipe Fittings | Unsecured Subordinated Loan 14.0000%, 09/18/2012 (b, h) |
14,559,236 | 14,485,213 | 14,559,236 | |||||||||||
Convertible Series A Preferred Stock (9 shares) (d) | 44,000 | 44,000 | ||||||||||||||
Convertible Series B Preferred Stock (1,991 shares) (d) | 9,956,000 | 9,956,000 | ||||||||||||||
|
|
|
|
|||||||||||||
24,485,213 | 24,559,236 | |||||||||||||||
Harmony Health & Beauty, Inc. |
Healthcare - Retail | Common Stock (147,621 shares) (d) | 6,700,000 | 1,000,000 | ||||||||||||
JSC Tekers Holdings |
Real Estate Management | Common Stock (2,250 shares) (d, e) | 4,500 | 4,500 | ||||||||||||
Secured Loan 8.0000%, 06/30/2014 (e, h) | 4,000,000 | 4,000,000 | 4,000,000 | |||||||||||||
|
|
|
|
|||||||||||||
4,004,500 | 4,004,500 | |||||||||||||||
Marine Exhibition Corporation |
Theme Park | Senior Subordinated Debt 11.0000%, 10/26/2017 (b, h) | 11,958,188 | 11,921,592 | 11,958,188 | |||||||||||
Convertible Preferred Stock (20,000 shares) (b) | 3,024,872 | 3,024,872 | ||||||||||||||
|
|
|
|
|||||||||||||
14,946,464 | 14,983,060 |
The accompanying notes are an integral part of these consolidated financial statements.
77
MVC Capital, Inc.
Consolidated Schedule of Investments (Continued)
October 31, 2011
Company |
Industry |
Investment |
Principal |
Cost |
Fair Value |
|||||||||||
Octagon Credit Investors, LLC |
Financial Services | Limited Liability Company Interest | $ | 2,176,607 | $ | 5,333,657 | ||||||||||
RuMe Inc. |
Consumer Products | Common Stock (999,999 shares) (d) | 160,000 | 160,000 | ||||||||||||
Series B-1 Preferred Stock (4,999,076 shares) (d) | 999,815 | 999,815 | ||||||||||||||
|
|
|
|
|||||||||||||
1,159,815 | 1,159,815 | |||||||||||||||
Security Holdings B.V. |
Electrical Engineering | Common Equity Interest (d, e) | 40,186,620 | 33,200,000 | ||||||||||||
SGDA Europe B.V. |
Soil Remediation | Common Equity Interest (d, e) | 20,084,598 | 10,500,000 | ||||||||||||
U.S. Gas & Electric, Inc. |
Energy Services | Second Lien Loan 14.0000%, 07/26/2012 (b, h) | $ | 9,143,848 | 9,111,577 | 9,143,848 | ||||||||||
Convertible Series I Preferred Stock (32,200 shares) (d) | 500,000 | 78,515,749 | ||||||||||||||
Convertible Series J Preferred Stock (8,216 shares) (d) | | 2,551,858 | ||||||||||||||
|
|
|
|
|||||||||||||
9,611,577 | 90,211,455 | |||||||||||||||
Sub Total Affiliate investments |
126,356,770 | 187,953,099 | ||||||||||||||
Control Investments 50.79% (a, c, f, g) |
||||||||||||||||
MVC Automotive Group B.V. |
Automotive Dealerships | Common Equity Interest (d, e) | 34,736,939 | 42,450,000 | ||||||||||||
Bridge Loan 10.0000%, 12/31/2011 (e, h) | 3,643,557 | 3,643,557 | 3,643,557 | |||||||||||||
|
|
|
|
|||||||||||||
38,380,496 | 46,093,557 | |||||||||||||||
MVC Partners, LLC |
Private Equity | Limited Liability Company Interest (d) | 1,350,253 | 1,133,729 | ||||||||||||
Ohio Medical Corporation |
Medical Device Manufacturer | Common Stock (5,620 shares) (d) | 15,763,636 | | ||||||||||||
Series A Convertible Preferred Stock (18,102 shares) (b) | 30,000,000 | 39,500,000 | ||||||||||||||
|
|
|
|
|||||||||||||
45,763,636 | 39,500,000 | |||||||||||||||
SIA Tekers Invest |
Port Facilities | Common Stock (68,800 shares) (d, e) | 2,300,000 | 1,525,000 | ||||||||||||
Summit Research Labs, Inc. |
Specialty Chemicals | Second Lien Loan 14.0000%, 08/31/2013 (b, h) | 11,055,089 | 10,999,118 | 11,055,089 | |||||||||||
Common Stock (1,115 shares) (d) | 16,000,000 | 74,500,000 | ||||||||||||||
|
|
|
|
|||||||||||||
26,999,118 | 85,555,089 | |||||||||||||||
Turf Products, LLC |
Distributor - Landscaping and Irrigation Equipment | Senior Subordinated Debt 13.0000%, 01/31/2014 (b, h) | 8,395,261 | 8,395,261 | 8,395,261 | |||||||||||
Junior Revolving Note 6.0000%, 01/31/2014 (h) | 1,000,000 | 1,000,000 | 1,000,000 | |||||||||||||
Limited Liability Company Interest (d) | 3,535,694 | 2,721,794 | ||||||||||||||
Warrants (d) | | | ||||||||||||||
|
|
|
|
|||||||||||||
12,930,955 | 12,117,055 | |||||||||||||||
Velocitius B.V. |
Renewable Energy | Common Equity Interest (d, e) | 11,395,315 | 25,100,000 | ||||||||||||
Vestal Manufacturing Enterprises, Inc. |
Iron Foundries | Senior Subordinated Debt 12.0000%, 04/29/2013 (h) |
600,000 | 600,000 | 600,000 | |||||||||||
Common Stock (81,000 shares) (d) | 1,850,000 | 1,455,000 | ||||||||||||||
|
|
|
|
|||||||||||||
2,450,000 | 2,055,000 | |||||||||||||||
Sub Total Control Investments |
141,569,773 | 213,079,430 | ||||||||||||||
TOTAL INVESTMENT ASSETS 107.79% (f) |
$ | 358,219,007 | $ | 452,215,087 | ||||||||||||
|
|
|
|
(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 Lockorder Limited, MVC Automotive Group B.V., Octagon High Income Cayman Fund Ltd., SafeStone Technologies Limited, Security Holdings B.V., SGDA Europe B.V., SGDA Sanierungsgesellschaft fur Deponien und Altlasten mbH, SIA Tekers Invest, JSC Tekers Holdings, Centile Holding B.V. 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 $419,509,716 as of October 31, 2011. |
(g) | See Note 3 for further information regarding Investment Classification. |
(h) | All or a portion of these securities have been committed as collateral for the Guggenheim Corporate Funding, LLC Credit Facility. |
(i) | All or a portion of the accrued interest on these securities have been reserved against. |
(j) | Legacy Investments. |
(k) | Octagon High Income Cayman Fund Ltd., which seeks to maximize current income consistent with the preservation of capital through the leveraged loan market and offers monthly liquidity after the initial six months of the investment with a 15-day notice period. |
| Denotes zero cost or fair value. |
The accompanying notes are an integral part of these consolidated financial statements.
78
MVC Capital, Inc.
Consolidated Schedule of Investments
October 31, 2010
Company |
Industry |
Investment |
Principal |
Cost |
Fair Value |
|||||||||||
Non-control/Non-affiliated investments 13.34% (a, c, f, g) |
| |||||||||||||||
Actelis Networks, Inc. |
Technology Investments | Preferred Stock (150,602 shares) (d, j) | $ | 5,000,003 | $ | | ||||||||||
Amersham Corp. |
Manufacturer of Precision - Machined Components | Second Lien Seller Note 10.0000%, 06/29/2010 (h, i) | $ | 2,473,521 | 2,473,521 | | ||||||||||
Second Lien Seller Note 17.0000%, 06/30/2013 (b, h, i) | 4,066,463 | 4,066,463 | | |||||||||||||
|
|
|
|
|||||||||||||
6,539,984 | | |||||||||||||||
BP Clothing, LLC |
Apparel | Second Lien Loan 16.5000%, 07/18/2012 (b, h, i) | 19,554,187 | 19,452,605 | 3,917,417 | |||||||||||
Term Loan A 8.0000%, 07/18/2011 (h) | 1,987,500 | 1,981,798 | 1,727,423 | |||||||||||||
Term Loan B 11.0000%, 07/18/2011 (h, i) | 2,000,000 | 1,994,690 | 1,749,486 | |||||||||||||
|
|
|
|
|||||||||||||
23,429,093 | 7,394,326 | |||||||||||||||
DPHI, Inc. |
Technology Investments | Preferred Stock (602,131 shares) (d, j) | 4,520,355 | | ||||||||||||
FOLIOfn, Inc. |
Technology Investments | Preferred Stock (5,802,259 shares) (d, j) | 15,000,000 | 10,790,000 | ||||||||||||
GDC Acquisition, LLC |
Electrical Distribution | Senior Subordinated Debt 17.0000%, 08/31/2011 (b, h, i) | 3,237,952 | 3,237,952 | | |||||||||||
Warrants (d) | | | ||||||||||||||
|
|
|
|
|||||||||||||
3,237,952 | | |||||||||||||||
Integrated Packaging Corporation |
Manufacturer of Packaging Material | Warrants (d) | | | ||||||||||||
Lockorder Limited |
Technology Investments | Common Stock (21,064 shares) (d, e, j) | 2,007,701 | | ||||||||||||
MainStream Data, Inc. |
Technology Investments | Common Stock (5,786 shares) (d, j) | 3,750,000 | | ||||||||||||
SafeStone Technologies Limited |
Technology Investments | Common Stock (21,064 shares) (d, e, j) | 2,007,701 | | ||||||||||||
SGDA Sanierungsgesellschaft fur Deponien und Altlasten GmbH |
Soil Remediation | Term Loan 7.0000%, 08/31/2012 (e, h) | 6,187,350 | 6,187,350 | 6,187,350 | |||||||||||
Sonexis, Inc. |
Technology Investments | Common Stock (131,615 shares) (d, j) | 10,000,000 | | ||||||||||||
SP Industries, Inc. |
Laboratory Research Equipment | First Lien Loan 7.5000%, 12/31/2012 (h) | 732,054 | 597,890 | 732,054 | |||||||||||
Second Lien Loan 15.0000%, 12/31/2013 (b, h) | 26,226,421 | 25,959,855 | 26,226,421 | |||||||||||||
|
|
|
|
|||||||||||||
26,557,745 | 26,958,475 | |||||||||||||||
Storage Canada, LLC |
Self Storage | Term Loan 8.7500%, 03/30/2013 (h) | 1,002,500 | 1,004,096 | 1,002,500 | |||||||||||
Total Safety U.S., Inc. |
Engineering Services | First Lien Seller Note 6.2500%, 12/08/2012 (h) | 946,352 | 946,352 | 871,910 | |||||||||||
Second Lien Seller Note 6.7880%, 12/08/2013 (h) | 3,500,000 | 3,500,000 | 3,500,000 | |||||||||||||
|
|
|
|
|||||||||||||
4,446,352 | 4,371,910 | |||||||||||||||
|
|
|
|
|||||||||||||
Sub Total Non-control/Non-affiliated investments |
113,688,332 | 56,704,561 | ||||||||||||||
Affiliate investments 39.32% (a, c, f, g) |
||||||||||||||||
Custom Alloy Corporation |
Manufacturer of Pipe Fittings | Unsecured Subordinated Loan 14.0000%, 09/18/2012 (b) | 13,570,193 | 13,412,262 | 13,570,193 | |||||||||||
Convertible Series A Preferred Stock (9 shares) (d) | 44,000 | 44,000 | ||||||||||||||
Convertible Series B Preferred Stock (1,991 shares) (d) | 9,956,000 | 9,956,000 | ||||||||||||||
|
|
|
|
|||||||||||||
23,412,262 | 23,570,193 | |||||||||||||||
Harmony Pharmacy & Health Center, Inc. |
Healthcare - Retail | Revolving Credit Facility 10.0000%, 12/31/2010 (b, h) | 5,248,696 | 5,248,696 | 5,100,000 | |||||||||||
Demand Note 10.0000% (h, i) | 500,000 | 500,000 | | |||||||||||||
Demand Note 10.0000% (h, i) | 800,000 | 800,000 | | |||||||||||||
Demand Note 10.0000% (h, i) | 600,000 | 600,000 | 600,000 | |||||||||||||
Demand Note 10.0000% (h, i) | 700,000 | 700,000 | | |||||||||||||
Demand Note 10.0000% (h, i) | 3,300,000 | 3,300,000 | | |||||||||||||
Demand Note 10.0000% (h, i) | 2,200,000 | 2,200,000 | | |||||||||||||
Common Stock (2,000,000 shares) (d) | 750,000 | | ||||||||||||||
|
|
|
|
|||||||||||||
14,098,696 | 5,700,000 |
The accompanying notes are an integral part of these consolidated financial statements.
79
MVC Capital, Inc.
Consolidated Schedule of Investments (Continued)
October 31, 2010
Company |
Industry |
Investment |
Principal |
Cost |
Fair Value |
|||||||||||
HuaMei Capital Company, Inc. |
Financial Services | Common Stock (120,000 shares) (d) | $ | 2,000,000 | $ | 1,525,000 | ||||||||||
LHD Europe Holding, Inc. |
Non-Alcoholic Beverages | Common Stock, Series A (960 shares) (d, e) | 165,682 | 332,144 | ||||||||||||
Convertible Common Stock, Series B (344 shares) (d, e) | 59,369 | 117,856 | ||||||||||||||
|
|
|
|
|||||||||||||
225,051 | 450,000 | |||||||||||||||
Marine Exhibition Corporation |
Theme Park | Senior Subordinated Debt 11.0000%, 10/26/2017 (b, h) | $ | 11,927,605 | 11,865,567 | 11,927,605 | ||||||||||
Convertible Preferred Stock (20,000 shares) (b) | 2,794,514 | 2,794,514 | ||||||||||||||
|
|
|
|
|||||||||||||
14,660,081 | 14,722,119 | |||||||||||||||
Octagon Credit Investors, LLC |
Financial Services | Limited Liability Company Interest | 1,587,236 | 4,542,141 | ||||||||||||
PreVisor, Inc. |
Human Capital Management | Common Stock (9 shares) (d) | 6,000,000 | 10,400,000 | ||||||||||||
Security Holdings B.V. |
Electrical Engineering | Common Equity Interest (d, e) | 29,885,900 | 5,300,000 | ||||||||||||
SGDA Europe B.V. |
Soil Remediation | Common Equity Interest (d, e) | 17,388,551 | 12,100,000 | ||||||||||||
Senior Secured Loan 10.0000%, 6/23/2012 (e, h) | 1,500,000 | 1,500,000 | 1,500,000 | |||||||||||||
|
|
|
|
|||||||||||||
18,888,551 | 13,600,000 | |||||||||||||||
U.S. Gas & Electric, Inc. |
Energy Services | Second Lien Loan 14.0000%, 07/26/2012 (b, h) | 8,692,789 | 8,616,566 | 8,692,789 | |||||||||||
Convertible Series I Preferred Stock (32,200 shares) (d) | 500,000 | 76,127,069 | ||||||||||||||
Convertible Series J Preferred Stock (8,216 shares) (d) | | 2,476,902 | ||||||||||||||
|
|
|
|
|||||||||||||
9,116,566 | 87,296,760 | |||||||||||||||
Sub Total Affiliate investments |
119,874,343 | 167,106,213 | ||||||||||||||
Control Investments49.43% (a, c, f, g) |
||||||||||||||||
MVC Automotive Group B.V. |
Automotive Dealerships | Common Equity Interest (d, e) | 34,736,939 | 44,100,000 | ||||||||||||
Bridge Loan 10.0000%, 12/31/2010 (e, h) | 3,643,557 | 3,643,557 | 3,643,557 | |||||||||||||
|
|
|
|
|||||||||||||
38,380,496 | 47,743,557 | |||||||||||||||
MVC Partners, LLC |
Private Equity Firm | Limited Liability Company Interest (d) | 1,350,253 | 1,133,729 | ||||||||||||
Ohio Medical Corporation |
Medical Device Manufacturer | Common Stock (5,620 shares) (d) | 17,000,000 | 500,000 | ||||||||||||
Series A Convertible Preferred Stock (15,473 shares) (b, h) | 30,000,000 | 46,806,540 | ||||||||||||||
|
|
|
|
|||||||||||||
47,000,000 | 47,306,540 | |||||||||||||||
SIA Tekers Invest |
Port Facilities | Common Stock (68,800 shares) (d, e) | 2,300,000 | 3,790,000 | ||||||||||||
Summit Research Labs, Inc. |
Specialty Chemicals | Second Lien Loan 14.0000%, 08/31/2013 (b, h) | 10,299,834 | 10,213,333 | 10,299,834 | |||||||||||
Common Stock (1,115 shares) (d) | 16,000,000 | 60,000,000 | ||||||||||||||
|
|
|
|
|||||||||||||
26,213,333 | 70,299,834 | |||||||||||||||
Turf Products, LLC |
Distributor - Landscaping and Irrigation Equipment | Senior Subordinated Debt 15.0000%, 11/30/2010 (b, h) | 8,395,261 | 8,394,368 | 8,395,261 | |||||||||||
Junior Revolving Note 6.0000%, 5/1/2011 (h) | 1,000,000 | 1,000,000 | 1,000,000 | |||||||||||||
Limited Liability Company Interest (d) | 3,535,694 | 2,721,794 | ||||||||||||||
Warrants (d) | | | ||||||||||||||
|
|
|
|
|||||||||||||
12,930,062 | 12,117,055 | |||||||||||||||
Velocitius B.V. |
Renewable Energy | Common Equity Interest (d, e) | 11,395,315 | 24,900,000 | ||||||||||||
Vestal Manufacturing Enterprises, Inc. |
Iron Foundries | Senior Subordinated Debt 12.0000%, 04/29/2011 (h) | 600,000 | 600,000 | 600,000 | |||||||||||
Common Stock (81,000 shares) (d) | 1,850,000 | 2,200,000 | ||||||||||||||
|
|
|
|
|||||||||||||
2,450,000 | 2,800,000 | |||||||||||||||
Sub Total Control Investments |
142,019,459 | 210,090,715 | ||||||||||||||
TOTAL INVESTMENT ASSETS 102.09% (f) |
$ | 375,582,134 | $ | 433,901,489 | ||||||||||||
|
|
|
|
(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. |
The accompanying notes are an integral part of these consolidated financial statements.
80
MVC Capital, Inc.
Consolidated Schedule of Investments (Continued)
October 31, 2010
(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 LHD Europe Holding Inc., Lockorder Limited, MVC Automotive Group B.V., SafeStone Technologies Limited, Security Holdings B.V., SGDA Europe B.V., SGDA Sanierungsgesellschaft fur Deponien und Altlasten mbH, 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 $424,994,424 as of October 31, 2010. |
(g) | See Note 3 for further information regarding Investment Classification. |
(h) | All or a portion of these securities have been committed as collateral for the Guggenheim Corporate Funding, LLC Credit Facility. |
(i) | All or a portion of the accrued interest on these securities have been reserved against. |
(j) | Legacy Investments. |
| Denotes zero cost or fair value. |
The accompanying notes are an integral part of these consolidated financial statements.
81
Consolidated Statements of Operations
For the Year Ended October 31, 2011 |
For the Year Ended October 31, 2010 |
For the Year Ended October 31, 2009 |
||||||||||
Operating Income: |
||||||||||||
Dividend income |
||||||||||||
Non-control/Non-affiliated investments |
$ | 246,234 | $ | | $ | | ||||||
Affiliate investments |
571,401 | 2,275,531 | 2,459,914 | |||||||||
|
|
|
|
|
|
|||||||
Total dividend income |
817,635 | 2,275,531 | 2,459,914 | |||||||||
|
|
|
|
|
|
|||||||
Interest income |
||||||||||||
Non-control/Non-affiliated investments |
2,624,633 | 8,693,240 | 10,294,769 | |||||||||
Affiliate investments |
4,898,975 | 5,007,696 | 5,070,990 | |||||||||
Control investments |
3,108,630 | 3,338,769 | 3,929,470 | |||||||||
|
|
|
|
|
|
|||||||
Total interest income |
10,632,238 | 17,039,705 | 19,295,229 | |||||||||
|
|
|
|
|
|
|||||||
Fee income |
||||||||||||
Non-control/Non-affiliated investments |
1,483,294 | 352,679 | 621,252 | |||||||||
Affiliate investments |
1,130,131 | 2,717,090 | 2,615,151 | |||||||||
Control investments |
566,426 | 626,780 | 862,253 | |||||||||
|
|
|
|
|
|
|||||||
Total fee income |
3,179,851 | 3,696,549 | 4,098,656 | |||||||||
|
|
|
|
|
|
|||||||
Other income |
1,341,241 | 509,712 | 254,945 | |||||||||
|
|
|
|
|
|
|||||||
Total operating income |
15,970,965 | 23,521,497 | 26,108,744 | |||||||||
|
|
|
|
|
|
|||||||
Operating Expenses: |
||||||||||||
Management fee |
9,141,822 | 9,329,809 | 9,843,427 | |||||||||
Interest and other borrowing costs |
3,082,125 | 2,824,788 | 3,127,594 | |||||||||
Incentive compensation (Note 5) |
1,947,744 | 2,479,167 | 3,716,852 | |||||||||
Other expenses |
1,209,693 | 832,391 | 904,695 | |||||||||
Legal fees |
884,472 | 487,000 | 594,000 | |||||||||
Audit fees |
560,800 | 548,500 | 659,400 | |||||||||
Consulting fees |
550,271 | 366,200 | 164,700 | |||||||||
Insurance |
348,027 | 353,135 | 377,400 | |||||||||
Directors fees |
329,000 | 346,800 | 272,100 | |||||||||
Administration |
268,146 | 273,986 | 290,362 | |||||||||
Public relations fees |
89,800 | 84,000 | 77,800 | |||||||||
Printing and postage |
80,280 | 103,396 | 178,875 | |||||||||
|
|
|
|
|
|
|||||||
Total operating expenses |
18,492,180 | 18,029,172 | 20,207,205 | |||||||||
|
|
|
|
|
|
|||||||
Less: Expense Waiver by Adviser1 |
(150,000 | ) | (150,000 | ) | | |||||||
Less: Voluntary Management Fee Waiver by Adviser2 |
(100,635 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
Total waivers |
(250,635 | ) | (150,000 | ) | | |||||||
|
|
|
|
|
|
|||||||
Total net operating expenses |
18,241,545 | 17,879,172 | 20,207,205 | |||||||||
|
|
|
|
|
|
|||||||
Net operating (loss) income before taxes |
(2,270,580 | ) | 5,642,325 | 5,901,539 | ||||||||
|
|
|
|
|
|
|||||||
Tax (Benefit) Expenses: |
||||||||||||
Deferred tax expense |
| | 1,443,765 | |||||||||
Current tax expense (benefit) |
13,557 | 8,476 | (66,946 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total tax expense |
13,557 | 8,476 | 1,376,819 | |||||||||
|
|
|
|
|
|
|||||||
Net operating (loss) income |
(2,284,137 | ) | 5,633,849 | 4,524,720 | ||||||||
|
|
|
|
|
|
|||||||
Net Realized and Unrealized Gain (Loss) on |
||||||||||||
Investments and Foreign Currency: |
||||||||||||
Net realized (loss) gain on investments and foreign currency |
||||||||||||
Non-control/Non-affiliated investments |
(16,339,803 | ) | (205,245 | ) | (324 | ) | ||||||
Affiliate investments |
(10,081,806 | ) | 36,111,253 | (7,000,000 | ) | |||||||
Control investments |
| (3,717,209 | ) | (18,081,404 | ) | |||||||
Foreign currency |
| (389 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Total net realized (loss) gain on investments and foreign currency |
(26,421,609 | ) | 32,188,410 | (25,081,728 | ) | |||||||
Net change in unrealized appreciation (depreciation) on investments |
35,676,725 | (21,689,497 | ) | 34,804,497 | ||||||||
|
|
|
|
|
|
|||||||
Net realized and unrealized gain on investments and foreign currency |
9,255,116 | 10,498,913 | 9,722,769 | |||||||||
|
|
|
|
|
|
|||||||
Net increase in net assets resulting from operations |
$ | 6,970,979 | $ | 16,132,762 | $ | 14,247,489 | ||||||
|
|
|
|
|
|
|||||||
Net increase in net assets per share resulting from operations |
$ | 0.30 | $ | 0.66 | $ | 0.59 | ||||||
|
|
|
|
|
|
|||||||
Dividends declared per share |
$ | 0.48 | $ | 0.48 | $ | 0.48 | ||||||
|
|
|
|
|
|
1 | Reflects waiver by TTG Advisers, pursuant to its voluntary waiver of $150,000 of expenses (for the 2011 & 2010 fiscal years) that the Company is obligated to reimburse to TTG Advisers under the Advisory Agreement (the Voluntary Waiver). Please see Note 4 Management for more information. |
2 | Reflects TTG Advisers voluntary agreement that any assets of the Company invested in exchange-traded funds would not be taken into account in the calculation of the base management fee due to TTG Advisers under the Advisory Agreement. Please see Note 4 Management for more information. |
The accompanying notes are an integral part of these consolidated financial statements.
82
Consolidated Statements of Cash Flows
For the Year Ended October 31, 2011 |
For the Year Ended October 31, 2010 |
For the Year Ended October 31, 2009 |
||||||||||
Cash flows from Operating Activities: |
||||||||||||
Net increase in net assets resulting from operations |
$ | 6,970,979 | $ | 16,132,762 | $ | 14,247,489 | ||||||
Adjustments to reconcile net increase in net assets resulting from operations to net cash (used) provided by operating activities: |
||||||||||||
Net realized (gain) loss |
26,421,609 | (32,188,410 | ) | 25,081,728 | ||||||||
Net change in unrealized (appreciation) depreciation |
(35,676,725 | ) | 21,689,497 | (34,804,497 | ) | |||||||
Amortization of discounts and fees |
(34,327 | ) | (15,517 | ) | (73,434 | ) | ||||||
Increase in accrued payment-in-kind dividends and interest |
(3,174,721 | ) | (5,561,308 | ) | (6,354,807 | ) | ||||||
Increase in allocation of flow through income |
(589,371 | ) | (298,058 | ) | (156,742 | ) | ||||||
Changes in assets and liabilities: |
||||||||||||
Dividends, interest and fees receivable |
(1,498,553 | ) | (988,981 | ) | (2,743,339 | ) | ||||||
Escrow receivables |
916,521 | (2,063,420 | ) | | ||||||||
Prepaid expenses |
934,438 | (292,953 | ) | 1,026,081 | ||||||||
Prepaid taxes |
78,463 | 299,420 | 381,142 | |||||||||
Deferred tax |
| | 1,443,765 | |||||||||
Incentive compensation (Note 5) |
1,947,744 | 2,479,167 | 3,716,852 | |||||||||
Other Liabilities |
271,525 | (1,190,987 | ) | 533,176 | ||||||||
Purchases of equity investments |
(39,507,490 | ) | (6,456,751 | ) | (1,017,554 | ) | ||||||
Purchases of debt instruments |
(25,909,586 | ) | (2,500,000 | ) | (11,652,248 | ) | ||||||
Proceeds from equity investments |
20,630,017 | 71,987,346 | 286,100 | |||||||||
Proceeds from debt instruments |
39,526,996 | 22,244,985 | 16,692,298 | |||||||||
|
|
|
|
|
|
|||||||
Net cash (used) provided by operating activities |
(8,692,481 | ) | 83,276,792 | 6,606,010 | ||||||||
|
|
|
|
|
|
|||||||
Cash flows from Financing Activities: |
||||||||||||
Repurchase of common stock |
(966,655 | ) | (3,999,128 | ) | | |||||||
Distributions to shareholders paid |
(11,489,032 | ) | (11,594,909 | ) | (11,662,602 | ) | ||||||
Net repayments on revolving credit facility |
| (12,300,000 | ) | (6,700,000 | ) | |||||||
|
|
|
|
|
|
|||||||
Net cash used in financing activities |
(12,455,687 | ) | (27,894,037 | ) | (18,362,602 | ) | ||||||
|
|
|
|
|
|
|||||||
Net change in cash and cash equivalents for the year |
(21,148,168 | ) | 55,382,755 | (11,756,592 | ) | |||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents, beginning of year |
56,390,628 | 1,007,873 | 12,764,465 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents, end of year |
$ | 35,242,460 | $ | 56,390,628 | $ | 1,007,873 | ||||||
|
|
|
|
|
|
During the year ended October 31, 2011, 2010 and 2009 MVC Capital, Inc. paid $2,898,949, $2,205,644 and $2,307,884, in interest expense, respectively.
During the year ended October 31, 2011, 2010 and 2009 MVC Capital, Inc. paid $2,134, $2,039 and $0 in income taxes, respectively.
Non-cash activity:
During the years ended October 31, 2011, 2010 and 2009, MVC Capital, Inc. recorded payment-in-kind dividend and interest income of $3,174,721, $5,561,308 and $6,354,807, respectively. This amount was added to the principal balance of the investments and recorded as dividend/interest income.
During the years ended October 31, 2010, 2009 and 2008 MVC Capital Inc. was allocated $1,335,755, $509,712 and $254,945, respectively, in flow-through income from its equity investment in Octagon Credit Investors, LLC. Of these
83
amounts, $746,384 $211,654 and $98,203 respectively, was received in cash and the balance of $589,371, $298,058 and $156,742, respectively, was undistributed and therefore increased the cost of the investment. The fair value was then increased by $589,371, $298,058 and $156,742 respectively, by the Companys Valuation Committee.
On December 29, 2009, MVC Capital, Inc. sold the common and preferred shares and the warrants of Vitality Food Service, Inc.s (Vitality). As part of this transaction, there was approximately $2.9 million deposited in an escrow account subject to a reduction over a three year period in accordance with a specified schedule. This escrow is currently carried at approximately $927,349 on the Companys consolidated balance sheet.
Prior to the sale of Vitality on December 29, 2009, Vitalitys European operations (which were not purchased by the buyer) were distributed to Vitalitys shareholders on a pro-rata basis. MVC Capital, Inc. received 960 shares of Series A common stock and 334 shares of convertible Series B common stock in LHD Europe as part of this transaction.
On March 17, 2010, MVC Capital, Inc. transferred its equity interest in SGDA Sanierungsgesellschaft fur Deponien und Altlasten GmbH to their equity interest in SGDA Europe B.V. The Company owned 70% of the common stock of SGDA Sanierungsgesellschaft fur Deponien und Altlasten GmbH and a majority economic ownership in SGDA Europe B.V. SGDA Europe B.V. increased its shareholders equity by $4.2 million as a result of the cashless transaction.
On July 2, 2010, MVC Capital, Inc. sold its common and preferred shares of Vendio Services, Inc. As part of this transaction, there was approximately $180,020 deposited in an escrow account subject to a reduction over an 18 month period in accordance with a specified schedule. This escrow is currently carried at $219,550 on the Companys consolidated balance sheet.
On November 30, 2010, a public Uniform Commercial Code (UCC) sale of Harmony Pharmacys assets took place. Prior to this sale, the Company formed a new entity, Harmony Health & Beauty, Inc. (HH&B). The Company assigned its secured debt interest in Harmony Pharmacy of approximately $6.4 million to HH&B in exchange for a majority of the economic ownership. At the UCC sale, HH&B submitted a successful credit bid of approximately $5.9 million for all of the assets of Harmony Pharmacy. On December 21, 2010, Harmony Pharmacy filed for dissolution in the states of California, New Jersey and New York. As a result, the Company realized an $8.4 million loss on its investment in Harmony Pharmacy.
On January 11, 2011, SHL Group Limited acquired the Companys portfolio company PreVisor. The Company received 145,674 common shares of SHL Group Limited for its investment in PreVisor. The cost basis and market value of the Companys investment remained unchanged as a result of the transaction.
On April 29, 2011, assets from a division of Ohio Medical were distributed to Ohio Medical shareholders on a pro-rata basis. The Company received 281 shares of common stock in NPWT Corporation as part of this transaction.
On October 17, 2011, MVC Capital, Inc. converted the SGDA Europe B.V. senior secured loan of $1.5 million to additional common equity interest.
The accompanying notes are an integral part of these consolidated financial statements.
84
Consolidated Statements of Changes in Net Assets
For the Year Ended October 31, 2011 |
For the Year Ended October 31, 2010 |
For the Year Ended October 31, 2009 |
||||||||||
Operations: |
||||||||||||
Net operating (loss) income |
$ | (2,284,137 | ) | $ | 5,633,849 | $ | 4,524,720 | |||||
Net realized (loss) gain on investments and foreign currencies |
(26,421,609 | ) | 32,188,410 | (25,081,728 | ) | |||||||
Net change in unrealized appreciation (depreciation) on investments |
35,676,725 | (21,689,497 | ) | 34,804,497 | ||||||||
|
|
|
|
|
|
|||||||
Net increase in net assets from operations |
6,970,979 | 16,132,762 | 14,247,489 | |||||||||
|
|
|
|
|
|
|||||||
Shareholder Distributions: |
||||||||||||
Distributions to shareholders |
(11,489,032 | ) | (11,594,909 | ) | (11,662,602 | ) | ||||||
|
|
|
|
|
|
|||||||
Net decrease in net assets from shareholder distributions |
(11,489,032 | ) | (11,594,909 | ) | (11,662,602 | ) | ||||||
|
|
|
|
|
|
|||||||
Capital Share Transactions: |
||||||||||||
Repurchase of common stock |
(966,655 | ) | (3,999,128 | ) | | |||||||
|
|
|
|
|
|
|||||||
Net decrease in net assets from capital share transactions |
(966,655 | ) | (3,999,128 | ) | | |||||||
|
|
|
|
|
|
|||||||
Total (decrease) increase in net assets |
(5,484,708 | ) | 538,725 | 2,584,887 | ||||||||
|
|
|
|
|
|
|||||||
Net assets, beginning of year |
424,994,424 | 424,455,699 | 421,870,812 | |||||||||
|
|
|
|
|
|
|||||||
Net assets, end of year |
$ | 419,509,716 | $ | 424,994,424 | $ | 424,455,699 | ||||||
|
|
|
|
|
|
|||||||
Common shares outstanding, end of year |
23,916,982 | 23,990,987 | 24,297,087 | |||||||||
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
85
Consolidated Selected Per Share Data and Ratios
For the Year Ended October 31, 2011 |
For the Year Ended October 31, 2010 |
For the Year Ended October 31, 2009 |
For the Year Ended October 31, 2008 |
For the Year Ended October 31, 2007 |
||||||||||||||||
Net asset value, beginning of year |
$ | 17.71 | $ | 17.47 | $ | 17.36 | $ | 15.21 | $ | 12.41 | ||||||||||
Gain from operations: |
||||||||||||||||||||
Net operating (loss) income |
(0.10 | ) | 0.23 | 0.19 | 0.24 | 0.13 | ||||||||||||||
Net realized and unrealized gain on investments |
0.40 | 0.43 | 0.40 | 2.39 | 2.79 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total gain from investment operations |
0.30 | 0.66 | 0.59 | 2.63 | 2.92 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Less distributions from: |
||||||||||||||||||||
Income |
| (0.23 | ) | (0.19 | ) | (0.09 | ) | (0.08 | ) | |||||||||||
Return of capital |
(0.48 | ) | (0.25 | ) | (0.29 | ) | (0.39 | ) | (0.46 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total distributions |
(0.48 | ) | (0.48 | ) | (0.48 | ) | (0.48 | ) | (0.54 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Capital share transactions |
||||||||||||||||||||
Anti-dilutive effect of share issuance |
| | | | 0.42 | |||||||||||||||
Anti-dilutive effect of share repurchase program |
0.01 | 0.06 | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total capital share transactions |
0.01 | 0.06 | | | 0.42 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net asset value, end of year |
$ | 17.54 | $ | 17.71 | $ | 17.47 | $ | 17.36 | $ | 15.21 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Market value, end of year |
$ | 12.93 | $ | 13.35 | $ | 9.18 | $ | 12.30 | $ | 17.06 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Market premium (discount) |
(26.28 | )% | (24.62 | )% | (47.45 | %) | (29.15 | %) | 12.16 | % | ||||||||||
Total Return At NAV (a) |
1.80 | % | 4.16 | % | 3.50 | % | 17.49 | % | 27.39 | % | ||||||||||
Total Return At Market (a) |
0.35 | % | 50.86 | % | (21.48 | %) | (25.44 | %) | 35.02 | % | ||||||||||
Ratios and Supplemental Data: |
||||||||||||||||||||
Net assets, end of year (in thousands) |
$ | 419,510 | $ | 424,994 | $ | 424,456 | $ | 421,871 | $ | 369,097 | ||||||||||
Ratios to average net assets: |
||||||||||||||||||||
Expenses excluding tax expense (benefit) |
4.38 | % | 4.19 | % | 4.88 | % | 7.00 | % | 7.89 | % | ||||||||||
Expenses including tax expense (benefit) |
4.39 | % | 4.19 | % | 5.21 | % | 6.77 | % | 7.78 | % | ||||||||||
Expenses excluding incentive compensation |
3.92 | % | 3.61 | % | 4.31 | % | 4.05 | % | 4.40 | % | ||||||||||
Expenses excluding incentive compensation, interest and other borrowing costs |
3.18 | % | 2.95 | % | 3.56 | % | 2.93 | % | 2.88 | % | ||||||||||
Net operating income before tax expense (benefit) |
(0.54 | )% | 1.32 | % | 1.42 | % | 0.54 | % | 0.53 | % | ||||||||||
Net operating income after tax expense (benefit) |
(0.55 | )% | 1.32 | % | 1.09 | % | 0.77 | % | 0.64 | % | ||||||||||
Net operating income before incentive compensation |
(0.08 | )% | 1.90 | % | 1.99 | % | 3.49 | % | 4.02 | % | ||||||||||
Net operating income before incentive compensation, interest and other borrowing costs |
0.66 | % | 2.56 | % | 2.74 | % | 4.61 | % | 5.54 | % | ||||||||||
Ratios to average net assets excluding waivers: |
||||||||||||||||||||
Expenses excluding tax expense (benefit) |
4.44 | % | 4.22 | % | N/A | N/A | N/A | |||||||||||||
Expenses including tax expense (benefit) |
4.45 | % | 4.22 | % | N/A | N/A | N/A | |||||||||||||
Expenses excluding incentive compensation |
3.98 | % | 3.64 | % | N/A | N/A | N/A | |||||||||||||
Expenses excluding incentive compensation, interest and other borrowing costs |
3.24 | % | 2.98 | % | N/A | N/A | N/A | |||||||||||||
Net operating income before tax expense (benefit) |
(0.60 | )% | 1.29 | % | N/A | N/A | N/A | |||||||||||||
Net operating income after tax expense (benefit) |
(0.61 | )% | 1.29 | % | N/A | N/A | N/A | |||||||||||||
Net operating income before incentive compensation |
(0.14 | )% | 1.87 | % | N/A | N/A | N/A | |||||||||||||
Net operating income before incentive compensation, interest and other borrowing costs |
0.60 | % | 2.53 | % | N/A | N/A | N/A |
(a) | Total annual return is historical and assumes changes in share price, reinvestments of all dividends and distributions, and no sales charge for the year. |
The accompanying notes are an integral part of these consolidated financial statements.
86
Notes to Consolidated Financial Statements
October 31, 2011
1. | Organization and Business Purpose |
MVC Capital, Inc. (the Company), formerly known as meVC Draper Fisher Jurvetson Fund I, Inc., 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, Inc. 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 1940 Act. The shares of the Company commenced trading on 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 (the Board) 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 revised business plan.
On November 6, 2003, Michael Tokarz assumed his position as Chairman, Portfolio Manager and Director of the Company.
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. (MVCFS). MVCFS is incorporated in Delaware and its principal purpose is to provide advisory, administrative and other
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services to the Company and the Companys portfolio companies. The Company does not hold MVCFS for investment purposes and does not intend to sell MVCFS. On October 14, 2011, the Company formed a wholly-owned subsidiary, MVC Cayman, an exempted company incorporated in the Cayman Islands, to hold certain of its investments.
On September 7, 2006, the stockholders of MVC Capital approved the adoption of the investment advisory and management agreement (the Advisory Agreement). The Advisory Agreement, which was entered into on October 31, 2006, provides for external management of the Company by TTG Advisers, which is led by Michael Tokarz. The agreement took effect on November 1, 2006. Upon the effectiveness of the Advisory Agreement, Mr. Tokarzs employment agreement with the Company terminated. All of the individuals (including the Companys investment professionals) that had been previously employed by the Company as of the fiscal year ended October 31, 2006 became employees of TTG Advisers.
On December 11, 2008, our Board of Directors, including all of the directors who are not interested persons, as defined under the 1940 Act, of the Company (the Independent Directors), at their in-person meeting approved an amended and restated investment advisory and management agreement (also, the Advisory Agreement), which was approved by stockholders of the Company on April 14, 2009. The renewal of the Advisory Agreement was last approved by the Independent Directors at their in-person meeting held on October 25, 2011.
2. | Consolidation |
On July 16, 2004, the Company formed a wholly owned subsidiary company, MVCFS. On October 14, 2011, the Company formed a wholly-owned subsidiary, MVC Cayman, an exempted company incorporated in the Cayman Islands, to hold certain of its investments.
The results of MVCFS are consolidated into the Company and all inter-company accounts have been eliminated in consolidation. When operational, the results of MVC Cayman will also be consolidated into the Company.
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 conformity with U.S. generally accepted accounting principles 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.
Recent Accounting Pronouncements In January 2010, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, Improving Disclosure about Fair Value Measurements. ASU 2010-06 provides an amendment to ASC 820-10 which requires new disclosures on transfers in and out of Levels I and II and activity in Level III fair value measurements. ASU 2010-06 also clarifies existing disclosures such as 1.) level of disaggregation and 2.) disclosure about inputs and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure about purchases, sales, issuance, and settlements in the roll-forward of activity in Level III fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company has adopted this guidance, the application of which has not had a material effect on the financial position or results of operations of the Company but has resulted in additional disclosures.
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On May 12, 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04). ASU 2011-04 amends ASC 820, which will require entities to change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. ASU 2011-04 clarifies the application of existing fair value measurement and disclosure requirements related to the application of the highest and best use and valuation premise concepts for financial and nonfinancial instruments, measuring the fair value of an instrument classified in equity, and disclosures about fair value measurements. ASU 2011-04 requires additional disclosures about fair value measurements categorized within Level 3 of the fair value hierarchy, including the valuation processes used by the reporting entity, the sensitivity of the fair value to changes in unobservable inputs, and the interrelationships between those unobservable inputs, if any. All the amendments to ASC 820 made by ASU 2011-04 are effective for interim and annual periods beginning after December 15, 2011. Management is evaluating the new requirement and the potential impact, if any, to the Company upon implementation thereof.
Valuation of Portfolio Securities ASC 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The price used to measure the fair value is not adjusted for transaction costs while the cost basis of our investments may include initial transaction costs. Under ASC 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset. In determining the principal market for an asset or liability under ASC 820, it is assumed that the reporting entity has access to the market as of the measurement date. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.
Pursuant to the requirements of the 1940 Act and in accordance with ASC 820, we value our portfolio securities at their current market values or, if market quotations are not readily available, at their estimates of fair values. Because our portfolio company investments generally do not have readily ascertainable market values, we record these investments at fair value in accordance with our Valuation Procedures adopted by the Board of Directors which are consistent with ASC 820. As permitted by the SEC, the Board of Directors has delegated the responsibility of making fair value determinations to the Valuation Committee, subject to the Board of Directors supervision and pursuant to our Valuation Procedures. Our Board of Directors may also hire independent consultants to review our Valuation Procedures or to conduct an independent valuation of one or more of our portfolio investments.
Pursuant to our Valuation Procedures, the Valuation Committee (which is currently comprised of three Independent Directors) determines fair valuation of portfolio company investments on a quarterly basis (or more frequently, if deemed appropriate under the circumstances). Any changes in valuation are recorded in the consolidated statements of operations as Net change in unrealized appreciation (depreciation) on investments. Currently, 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 that quarters NAV per share and in the next two months NAV per share calculation. (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.) Fair values of foreign investments determined as of quarter end reflect exchange rates, as applicable, in effect on the last day of the quarter. Exchange rates fluctuate on a daily basis, sometimes significantly. Exchange rate fluctuations following quarter end are not reflected in the valuations reported as of quarter end.
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, 2011, approximately 91.20% of our total assets represented portfolio investments and escrow receivables recorded at fair value.
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Under most circumstances, at the time of acquisition, Fair Value Investments are carried at cost (absent the existence of conditions warranting, in managements and the Valuation Committees view, a different initial value). During the period that an investment is held by the Company, its original cost may cease to approximate fair value as the result of market and investment specific factors. No pre-determined formula can be applied to determine fair value. Rather, the Valuation Committee analyzes fair value measurements based on the value at which the securities of the portfolio company could be sold in an orderly disposition over a reasonable period of time between willing parties, other than in a forced or liquidation sale. The liquidity event whereby the Company ultimately exits an investment is generally the sale, the merger, the recapitalization or, in some cases, the initial public offering of the portfolio company.
There is no one methodology to determine fair value and, in fact, for any portfolio security, fair value may be expressed as a range of values, from which the Company derives a single estimate of fair value. To determine the fair value of a portfolio security, the Valuation Committee analyzes the portfolio companys financial results and projections, publicly traded comparable companies when available, comparable private transactions when available, precedent transactions in the market when available, performs a discounted cash flow analysis if appropriate, as well as other factors. The Company generally requires, where practicable, portfolio companies to provide annual audited and more regular unaudited financial statements, and/or annual projections for the upcoming fiscal year.
The fair value of our portfolio securities is inherently subjective. Because of the inherent uncertainty of fair valuation of portfolio securities that do not have readily ascertainable market values, our estimate of fair value may significantly differ from the fair value that would have been used had a ready market existed for the securities. Such values also do not reflect brokers fees or other selling costs which might become payable on disposition of such investments.
ASC 820 provides a framework for measuring the fair value of assets and liabilities and provides guidance regarding a fair value hierarchy which prioritizes information used to measure value.
If a security is publicly traded, the fair value is generally equal to market value based on the closing price on the principal exchange on which the security is primarily traded.
For equity securities of portfolio companies, the Valuation Committee estimates the fair value based on market approach with value then attributed to equity or equity like securities using the enterprise value waterfall (Enterprise Value Waterfall) valuation methodology. Under the Enterprise Value Waterfall valuation methodology, the Valuation Committee estimates the enterprise fair value of the portfolio company and then waterfalls the enterprise value over the portfolio companys securities in order of their preference relative to one another. To assess the enterprise value of the portfolio company, the Valuation Committee weighs some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing assets may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. For non-performing assets, the Valuation Committee may estimate the liquidation or collateral value of the portfolio companys assets. The Valuation Committee also takes into account historical and anticipated financial results.
In assessing enterprise value, the Valuation Committee considers the mergers and acquisitions (M&A) market as the principal market in which the Company would sell its investments in portfolio companies under circumstances where the Company has the ability to control or gain control of the board of directors of the portfolio company (Control Companies). This approach is consistent with the principal market that the Company would use for its portfolio companies if the Company has the ability to initiate a sale of the portfolio company as of the measurement date, i.e., if it has the ability to control or gain control of the board of directors
of the portfolio company as of the measurement date. In evaluating if the Company can control or gain control of
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a portfolio company as of the measurement date, the Company takes into account its equity securities on a fully diluted basis as well as other factors.
For non-Control Companies, consistent with ASC 820, the Valuation Committee considers a hypothetical secondary market as the principal market in which it would sell investments in those companies.
For loans and debt securities of non-Control Companies (for which the Valuation Committee has identified the hypothetical secondary market as the principal market), the Valuation Committee determines fair value based on the assumptions that a hypothetical market participant would use to value the security in a current hypothetical sale using a market yield (Market Yield) valuation methodology. In applying the Market Yield valuation methodology, the Valuation Committee determines the fair value based on such factors as third party broker quotes and market participant assumptions including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date.
Estimates of average life are generally based on market data of the average life of similar debt securities. However, if the Valuation Committee has information available to it that the debt security is expected to be repaid in the near term, the Valuation Committee would use an estimated life based on the expected repayment date.
The Valuation Committee determines fair value of loan and debt securities of Control Companies based on the estimate of the enterprise value of the portfolio company. To the extent the enterprise value exceeds the remaining principal amount of the loan and all other debt securities of the company, the fair value of such securities is generally estimated to be their cost. However, where the enterprise value is less than the remaining principal amount of the loan and all other debt securities, the Valuation Committee may discount the value of such securities to reflect an impairment.
As permitted under GAAP, the Companys interests in private investment funds (Investment Vehicles) are generally valued, as a practical expedient, utilizing the net asset valuations provided by the underlying Investment Vehicles, without adjustment, unless TTG Advisers is aware of information indicating that a value reported does not accurately reflect the value of the Investment Vehicle, including any information showing that the valuation has not been calculated in a manner consistent with GAAP. Net unrealized appreciation (depreciation) of such investments is recorded based on the Companys proportionate share of the aggregate amount of appreciation (depreciation) recorded by each underlying Investment Vehicle. The Companys proportionate share includes its share of interest and dividend income and expense, and realized and unrealized gains and losses on securities held by the underlying Investment Vehicles, net of operating expenses and fees. Realized gains and losses on withdrawals from Investment Vehicles are generally recognized on a first in, first out basis.
The Company applies the practical expedient to interests in Investment Vehicles on an investment by investment basis, and consistently with respect to the Companys entire interest in an investment. The Company may adjust the valuation obtained from an Investment Vehicle with a premium, discount or reserve if it determines that the net asset value is not representative of the current market conditions.
When the Company receives nominal cost warrants or free equity securities (nominal cost equity) with a debt security, the Company typically allocates its cost basis in the investment between debt securities and nominal cost equity at the time of origination.
Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. Origination and/or closing fees associated with investments in portfolio companies are accreted into income over the respective terms of the applicable loans. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as income. Prepayment premiums are recorded on loans when received.
For loans, debt securities, and preferred securities with contractual payment-in-kind interest or dividends, which represent contractual interest/dividends accrued and added to the loan balance or liquidation preference
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that generally becomes due at maturity, the Company will not ascribe value to payment-in-kind interest/dividends if the portfolio company valuation indicates that the payment-in-kind interest is not collectible. However, the Company may ascribe value to 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 We classify our investments by level of control. As defined in the 1940 Act, Control Investments are investments in those companies that we are deemed to Control. Affiliate Investments are investments in those companies that are Affiliated Companies of us, as defined in the 1940 Act, other than Control Investments. Non-Control/Non-Affiliate Investments are those that are neither Control Investments nor Affiliate Investments. Generally, under that 1940 Act, we are deemed to control a company in which we have invested if we own 25% or more of the voting securities of such company 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 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 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 Cash and Cash Equivalents Cash and cash equivalent accounts that are not available to the Company for day to day use are classified as restricted cash. Restricted cash and cash equivalents are carried at cost which approximates fair value.
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.
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Distributions to Shareholders Distributions to shareholders 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 Code. The Company is not subject to income tax to the extent that it distributes all of its investment company taxable income and net realized gains for its taxable year. The Company is also exempt from excise tax if it distributes most of its ordinary income and/or capital gains during each calendar year.
Our consolidated operating subsidiary, MVCFS, is subject to federal and state income tax. We use the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
ASC 740, Income Taxes, provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Companys tax returns to determine whether the tax positions are more-likely-than-not of being sustained by the applicable tax authority. Tax positions deemed to meet a more-likely-than-not threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statement of operations. During the fiscal year ended October 31, 2010, the Company did not incur any interest or penalties. Although we file federal and state tax returns, our major tax jurisdiction is federal for the Company and MVCFS. The 2008, 2009, 2010 and 2011 federal tax years for the Company and the 2008, 2009, 2010 and 2011 federal tax years for MVCFS remain subject to examination by the IRS.
4. | Management |
On November 6, 2003, Michael Tokarz assumed his positions as Chairman, Portfolio Manager and Director of the Company. From November 6, 2003 to October 31, 2006, the Company was internally managed. 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. Under the terms of the Advisory Agreement, the Company pays TTG Advisers a base management fee and an incentive fee for its provision of investment advisory and management services.
Our Board of Directors, including all of the directors who are not interested persons, as defined under the 1940 Act, of the Company (the Independent Directors), last approved a renewal of the Advisory Agreement at their in-person meeting held on October 25, 2011.
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 components a base management fee and an incentive fee. The base management fee is calculated at 2.0% per annum of the Companys total assets excluding cash, the value of any investment in a Third-Party Vehicle covered by a Separate Agreement (as defined in the Advisory Agreement) and the value of any investment by the Company not made in portfolio companies (Non-Eligible Assets) but
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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 3.5% in each of the 2009, 2010 and 2011 fiscal years. For more information, please see Note 5. On October 25, 2011, TTG Advisers and the Company entered into an agreement to extend the expense cap of 3.5% to the 2012 fiscal year. In addition, for fiscal years 2010, 2011 and 2012, TTG Advisers voluntarily agreed to waive $150,000 of expenses that the Company is obligated to reimburse to TTGA Advisers under the Advisory Agreement (the Voluntary Waiver).
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 cumulative aggregate net realized capital gains less aggregate unrealized depreciation (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 lower 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 lower hurdle amount 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.
At October 31, 2008, the provision for estimated incentive compensation was approximately $15.8 million. During the fiscal year ended October 31, 2009, this provision for incentive compensation was increased by a net amount of approximately $3.7 million to $19.5 million. The amount of the provision reflects the Valuation Committees determination to increase the fair values of eight of the Companys portfolio investments: U.S. Gas, Tekers, Vestal, Vitality, Summit, MVC Automotive, Dakota Growers and Velocitius by a total of $79.0 million. The provision also reflects the Valuation Committees determination to increase the fair value of the Ohio Medical preferred stock by approximately $5.8 million due to a PIK distribution which was treated as a return of capital. The Company also received a return of capital distribution from Turf of approximately $286,000. The net increase in the provision for incentive compensation during the fiscal year ended October 31, 2009 was a result of the Valuation Committees determination to decrease the fair values of 12 of the Companys portfolio investments (Ohio Medical, Timberland, Custom Alloy, PreVisor, Amersham, Turf Products, LLC (Turf), Harmony Pharmacy & Health Center, Inc. (Harmony Pharmacy), BP, MVC Partners, SGDA, Security Holdings B.V. (Security Holdings), and HuaMei Capital Company, Inc. (HuaMei)) by a total of $68.9 million. The Valuation Committee also determined not to increase the fair values of the Harmony Pharmacy revolving credit facility, Timberland senior subordinated loan and the Amersham loan for the accrued PIK totaling $1.0 million. During the fiscal year ended October 31, 2009, 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.
At October 31, 2009, the provision for estimated incentive compensation was approximately $19.5 million. During the fiscal year ended October 31, 2010, this provision for incentive compensation was increased by a net
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amount of approximately $2.5 million to $22.0 million. The increase in the provision for incentive compensation reflects both increases and decreases by the Valuation Committee in the fair values of certain portfolio companies and the sale of Vitality for a realized gain of $13.9 million. The difference between the amount received from the sale and Vitalitys carrying value at October 31, 2009 was an increase of $3.0 million. The amount of the provision also reflects the Valuation Committees determination to increase the fair values of eight of the Companys portfolio investments (Octagon, Summit, Velocitius, LHD Europe, PreVisor, U.S. Gas, Vestal and Dakota Growers) by a total of $54.2 million. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $6.8 million due to PIK distributions, which were treated as a return of capital. The net increase in the provision also reflects the Valuation Committees determination to decrease the fair values of ten of the Companys portfolio investments (Amersham, BP, Ohio Medical, MVC Automotive, Security Holdings, Harmony Pharmacy, GDC, SGDA Europe, Turf and SGDA) by a total of $50.5 million and the Valuation Committee determination not to increase the fair values of the Harmony Pharmacy revolving credit facility, the Amersham loan, the BP second lien loan and the GDC senior subordinated loan for the accrued PIK interest totaling approximately $656,000. As of October 31, 2010, the Company does not anticipate an incentive compensation payment being made to TTG Advisers for fiscal year 2010 because 20% of cumulative aggregate net realized capital gains was than less than the aggregate unrealized depreciation (on our portfolio securities acquired after November 1, 2003) based on the terms of the Advisory Agreement. During the fiscal year ended October 31, 2010, 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.
At October 31, 2010, the provision for estimated incentive compensation was approximately $22.0 million. During the fiscal year ended October 31, 2011, this provision for incentive compensation was increased by a net amount of approximately $1.9 million to approximately $23.9 million. The increase in the provision for incentive compensation during the fiscal year ended October 31, 2011 reflects both increases and decreases by the Valuation Committee in the fair values of certain portfolio companies. The provision also reflects the sale of the SPDR Barclays Capital High Yield Bond Fund and the iShares S&P U.S. Preferred Stock Index Fund for a realized gain of approximately $106,000, a realized gain of approximately $55,000 from the Octagon Fund, a realized gain of approximately 317,000 from LHD Europe and a realized loss from the sale of HuaMei of $2.0 million. Specifically, it reflects the Valuation Committees determination to increase the fair values of six of the Companys portfolio investments (Summit, SHL Group Limited, Security Holdings, Total Safety, U.S. Gas, and Velocitius) by a total of approximately $39.7 million. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $1.9 million due to PIK distributions, which were treated as a return of capital. The net increase in the provision also reflects the Valuation Committees determination to decrease the fair values of eleven of the Companys portfolio investments (BP, Ohio Medical common and preferred stock, MVC Automotive, HuaMei, Tekers, Octagon Fund, NPWT, SGDA Europe, Vestal and HH&B) by a total of $32.1 million. During the fiscal year ended October 31, 2011, 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 income and tax-exempt income each year. If the Company distributes, in a calendar year, at least 98% of its income and 98.2% of its capital gains 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
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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 U.S. generally accepted accounting principles. These differences are due primarily to differing treatments of income and gain on various investment securities held by the Company, differing treatments of expenses paid by the Company, timing differences and differing characterizations of distributions made by the Company. Key examples of the primary differences in expenses paid are the accounting treatment of MVCFS (which is consolidated for Generally Accepted Accounting Principles (GAAP) purposes, but not income tax purposes) and the variation in treatment of incentive compensation expense. 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.
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 the Plan Agent in additional shares of our common stock. Of course, any shareholder may 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, broker or other entity that holds the shares.
For the Fiscal Year Ended October 31, 2011
On December 17, 2010, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on January 7, 2011 to shareholders of record on December 31, 2010. The total distribution amounted to $2,878,918.
During the quarter ended January 31, 2011, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 1,211 shares of our common stock at an average price of $14.86, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
On April 15, 2011, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on April 29, 2011 to shareholders of record on April 25, 2011. The total distribution amounted to $2,870,038.
During the quarter ended April 30, 2011, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 1,252 shares of our common stock at an average price of $13.70, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
On July 15, 2011, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on July 29, 2011 to shareholders of record on July 25, 2011. The total distribution amounted to $2,870,038.
During the quarter ended July 31, 2011, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 1,693 shares of our common stock at an average price of $12.56, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
On October 14, 2011, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on October 31, 2011 to shareholders of record on October 24, 2011. The total distribution amounted to $2,870,038.
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During the quarter ended October 31, 2011, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 1,492 shares of our common stock at an average price of $12.82, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
For the Fiscal Year Ended October 31, 2010
On December 18, 2009, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on January 8, 2010 to shareholders of record on December 31, 2009. The total distribution amounted to $2,915,650.
During the quarter ended January 31, 2010, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 1,890 shares of our common stock at an average price of $12.27, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
On April 16, 2010, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on April 30, 2010 to shareholders of record on April 27, 2010. The total distribution amounted to $2,915,650.
During the quarter ended April 30, 2010, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 1,315 shares of our common stock at an average price of $14.75, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
On July 16, 2010, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on July 30, 2010 to shareholders of record on July 27, 2010. The total distribution amounted to $2,884,691.
During the quarter ended July 31, 2010, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 1,377 shares of our common stock at an average price of $12.93, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
On October 15, 2010, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on October 29, 2010 to shareholders of record on October 25, 2010. The total distribution amounted to $2,878,918.
During the quarter ended October 31, 2010, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 1,337 shares of our common stock at an average price of $13.43, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
For the Fiscal Year Ended October 31, 2009
On December 19, 2008, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on January 9, 2009 to shareholders of record on December 31, 2008. The total distribution amounted to $2,915,650, including reinvested distributions.
During the quarter ended January 31, 2009, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 4,833 shares of our common stock at an average price of $11.00, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
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On April 13, 2009, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on April 30, 2009 to shareholders of record on April 23, 2009. The total distribution amounted to $2,915,650, including reinvested distributions.
During the quarter ended April 30, 2009, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 2,705 shares of our common stock at an average price of $8.74, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
On July 14, 2009, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on July 31, 2009 to shareholders of record on July 24, 2009. The total distribution amounted to $2,915,651, including reinvested distributions.
During the quarter ended July 31, 2009, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 6,395 shares of our common stock at an average price of $9.49, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
On October 13, 2009, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on October 30, 2009 to shareholders of record on October 23, 2009. The total distribution amounted to $2,915,651, including reinvested distributions.
During the quarter ended October 31, 2009, as part of the Companys dividend reinvestment plan for our common stockholders, the Company purchased 6,806 shares of our common stock at an average price of $9.34, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
7. | Transactions with Other Parties |
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, a Director of the Company, 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 this Form 10-K.
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 represented
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approximately 90.97% of the Companys total assets at October 31, 2011. As discussed in Note 9, 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. Additionally, we are classified as a non-diversified investment company within the meaning of the 1940 Act, and therefore may invest a significant portion of our assets in a relatively small number of portfolio companies in a limited number of industries. 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 or other interest bearing accounts.
9. | Portfolio Investments |
Pursuant to the requirements of the 1940 Act and ASC 820, we value our portfolio securities at their current market values or, if market quotations are not readily available, at their estimates of fair values. Because our portfolio company investments generally do not have readily ascertainable market values, we record these investments at fair value in accordance with 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 our Valuation Procedures.
The levels of fair value inputs used to measure our investments are characterized in accordance with the fair value hierarchy established by ASC 820. Where inputs for an asset or liability fall in more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investments fair value measurement. We use judgment and consider factors specific to the investment in determining the significance of an input to a fair value measurement. The three levels of the fair value hierarchy and investments that fall into each of the levels are described below:
| Level 1: Level 1 inputs are unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We use Level 1 inputs for investments in publicly traded unrestricted securities for which we do not have a controlling interest. Such investments are valued at the closing price on the measurement date. We did not value any of our investments using Level 1 inputs as of October 31, 2011. |
| Level 2: Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly or other inputs that are observable or can be corroborated by observable market data. Additionally, the Companys interests in Investment Vehicles that can be withdrawn by the Company at the net asst value reported by such Investment Vehicle as of the measurement date, or within six months of the measurement date, are generally categorized as Level 2 investments. We valued one of our investments using Level 2 inputs as of October 31, 2011. |
| Level 3: Level 3 inputs are unobservable and cannot be corroborated by observable market data. Additionally, included in Level 3 are the Companys interests in Investment Vehicles from which the Company cannot withdraw at the net asset value reported by such Investment Vehicles as of the measurement date, or within six months of the measurement date. We use Level 3 inputs for measuring the fair value of substantially all of our investments. See Note 3 for the investment valuation policies used to determine the fair value of these investments. |
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The following fair value hierarchy table sets forth our investment portfolio by level as of October 31, 2011 and October 31, 2010 (in thousands):
October 31, 2011 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Senior/Subordinated Loans and credit facilities |
$ | | $ | | $ | 85,587 | $ | 85,587 | ||||||||
Common Stock |
| | 94,001 | 94,001 | ||||||||||||
Preferred Stock |
| | 146,382 | 146,382 | ||||||||||||
Other Equity Investments |
| 2,805 | 123,441 | 126,246 | ||||||||||||
Escrow receivables |
| | 1,147 | 1,147 | ||||||||||||
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|
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Total Investments, net |
$ | | $ | 2,805 | $ | 450,558 | $ | 453,363 | ||||||||
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October 31, 2010 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Senior/Subordinated Loans and credit facilities |
$ | | $ | | $ | 111,244 | $ | 111,244 | ||||||||
Common Stock |
| | 78,865 | 78,865 | ||||||||||||
Preferred Stock |
| | 148,995 | 148,995 | ||||||||||||
Other Equity Investments |
| | 94,798 | 94,798 | ||||||||||||
Escrow receivables |
| | 2,063 | 2,063 | ||||||||||||
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|
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Total Investments, net |
$ | | $ | | $ | 435,965 | $ | 435,965 | ||||||||
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The following tables sets forth a summary of changes in the fair value of investment assets and liabilities measured using Level 3 inputs for the fiscal years ended October 31, 2011 and 2010 (in thousands):
Balances, November 1, 2010 |
Realized Gains (Losses)(1) |
Reversal of Prior Period (Appreciation) Depreciation on Realization(2) |
Unrealized Appreciation (Depreciation)(3) |
Purchases(4) | Sales(5) | Transfers In & Out of Level 3 |
Balances, October 31, 2011 |
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Senior/Subordinated Loans and credit facilities |
$ | 111,244 | $ | (14,189 | ) | $ | 14,215 | $ | (7,689 | ) | $ | 27,233 | $ | (45,227 | ) | $ | $ | 85,587 | ||||||||||||||
Common Stock |
78,865 | (12,433 | ) | 12,433 | 7,485 | 8,101 | (450 | ) | | 94,001 | ||||||||||||||||||||||
Preferred Stock |
148,995 | | | (2,608 | ) | 1,731 | (1,736 | ) | | 146,382 | ||||||||||||||||||||||
Warrants |
| | | | | | | | ||||||||||||||||||||||||
Other Equity Investments |
94,798 | | | 12,055 | 16,790 | (202 | ) | | 123,441 | |||||||||||||||||||||||
Escrow receivables |
2,063 | 40 | | | | (956 | ) | | 1,147 | |||||||||||||||||||||||
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|
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Total |
$ | 435,965 | $ | (26,582 | ) | $ | 26,648 | $ | 9,243 | $ | 53,855 | $ | (48,571 | ) | $ | $ | 450,558 | |||||||||||||||
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Balances, November 1, 2009 |
Realized Gains (Losses)(1) |
Reversal of Prior Period Appreciation (Depreciation) on Realization(2) |
Unrealized Appreciation (Depreciation)(3) |
Purchases(4) | Sales(5) | Transfers In & Out of Level 3 |
Balances, October 31, 2010 |
|||||||||||||||||||||||||
Senior/Subordinated Loans and credit facilities |
$ | 153,468 | $ | | $ | | $ | (27,595 | ) | $ | 8,182 | $ | (22,811 | ) | $ | $ | 111,244 | |||||||||||||||
Common Stock |
86,159 | 12,306 | (11,970 | ) | 21,039 | 223 | (28,892 | ) | | 78,865 | ||||||||||||||||||||||
Preferred Stock |
164,943 | 13,703 | (13,355 | ) | 23,857 | 385 | (40,538 | ) | | 148,995 | ||||||||||||||||||||||
Warrants |
3,835 | 3,800 | (3,835 | ) | | | (3,800 | ) | | | ||||||||||||||||||||||
Other Equity Investments |
94,250 | | | (10,182 | ) | 10,730 | | | 94,798 | |||||||||||||||||||||||
Escrow receivables |
| 2,585 | | | | (522 | ) | | 2,063 | |||||||||||||||||||||||
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Total |
$ | 502,655 | $ | 32,394 | $ | (29,160 | ) | $ | 7,119 | $ | 19,520 | $ | (96,563 | ) | $ | $ | 435,965 | |||||||||||||||
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(1) | Included in net realized gain (loss) on investments in the Consolidated Statement of Operations. |
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(2) | Included in net unrealized appreciation (depreciation) of investments in the Consolidated Statement of Operations related to securities disposed of during the fiscal years ended October 31, 2011 and October 31, 2010, respectively. |
(3) | Included in net unrealized appreciation (depreciation) of investments in the Consolidated Statement of Operations related to securities held at October 31, 2011 and October 31, 2010, respectively. |
(4) | Includes increases in the cost basis of investments resulting from new portfolio investments, PIK interest or dividends, the amortization of discounts, premiums and closing fees and the exchange of one or more existing securities for one or more new securities. |
(5) | Includes decreases in the cost basis of investments resulting from principal repayments or sales. |
For the Fiscal Year Ended October 31, 2011
During the fiscal year ended October 31, 2011, the Company made six new investments, committing capital totaling approximately $26.1 million. The investments were made in Octagon Fund ($3.0 million), JSC Tekers ($4.0 million), Teleguam ($7.0 million), Pre-Paid Legal ($8.0 million), RuMe ($1.2 million) and Centile ($3.0 million).
During the fiscal year ended October 31, 2011, the Company made seven follow-on investments in four existing portfolio companies totaling approximately $17.1 million. On January 27, 2011, the Company invested $3.3 million in Security Holdings in the form of an additional equity interest. On January 28, 2011, the Company loaned an additional $5.0 million to Security Holdings in the form of a bridge loan with an annual interest rate of 3%. This bridge loan allowed Security Holdings to secure project guarantees. On May 4, 2011, the Company invested $500,000 in NPWT to acquire 5,000 shares of convertible preferred stock. On May 26, 2011 and September 14, 2011, the Company invested an additional $150,000 on each date into HH&B to acquire an additional 47,612 shares of common stock. On September 6, 2011, the Company invested $7.0 million in Security Holdings in the form of an additional equity interest. On October 17, 2011, the Company invested $1.0 million in SGDA Europe in the form of additional equity interest. In addition, during the fiscal year ended October 31, 2011, the Company invested approximately $10.0 million in the SPDR Barclays Capital High Yield Bond Fund and approximately $10.0 million in the iShares S&P U.S. Preferred Stock Index Fund. These investments were sold during the fiscal year ended October 31, 2011, resulting in a realized gain of approximately $106,000. The investments in these exchange traded funds were intended to provide the Company with higher yielding investments than cash and cash equivalents while awaiting deployment into portfolio companies pursuant to the Companys principal investment strategy. TTG Advisers had voluntarily agreed that any assets of the Company that are invested in exchange-traded funds would not be subject to the base management fee due to TTG Advisers under the Advisory Agreement.
Effective November 4, 2010, the interest rate on the Turf senior subordinated loan was reduced from 15% to 13% and the maturity date on the senior subordinated loan and junior revolving note was extended to January 31, 2014.
On November 30, 2010, the Company loaned an additional $700,000 to Harmony Pharmacy, which was the remaining portion of the $1.3 million demand note committed on September 23, 2010.
On November 30, 2010, a public Uniform Commercial Code (UCC) sale of Harmony Pharmacys assets took place. Prior to this sale, the Company formed a new entity, HH&B. The Company assigned its secured debt interest in Harmony Pharmacy of approximately $6.4 million to HH&B in exchange for a majority of the economic ownership. At the UCC sale, HH&B submitted a successful credit bid of approximately $5.9 million for all of the assets of Harmony Pharmacy. On December 21, 2010, Harmony Pharmacy filed for dissolution in the states of California, New Jersey and New York. As a result, the Company realized an $8.4 million loss on its investment in Harmony Pharmacy.
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On December 1, 2010, Amersham filed for dissolution in the State of California as all operating divisions were sold in 2010. As a result, the Company realized a $6.5 million loss on its investment in Amersham. The Company may be eligible to receive proceeds from an earnout related to the sale of an operating division once the senior lender is repaid in full. At this time, it is not likely that any proceeds will be received by the Company.
On January 11, 2011, SHL Group Limited, which provides workplace talent assessment solutions, including ability and personality tests, and psychometric assessments, acquired the Companys portfolio company PreVisor. The Company received 1,518,762 common shares of SHL Group Limited for its investment in PreVisor. The cost basis and market value of the Companys investment remained unchanged at the time as a result of the transaction.
On January 25, 2011, the Company sold its common stock in LHD Europe and received approximately $542,000 in proceeds, which resulted in a realized gain of approximately $317,000.
On March 1, 2011, SP repaid its first lien and second lien loans in full including all accrued interest. The Company received a $500,000 termination fee associated with the repayment of the loans.
On April 29, 2011, assets from a division of Ohio Medical were distributed to Ohio Medical shareholders on a pro-rata basis. The Company received 281 shares of common stock in NPWT as a result of this transaction.
On May 26, 2011, Security Holdings repaid its bridge loan in full, including all accrued interest.
On August 1, 2011, as part of a restructuring of the Companys investment in HuaMei, the Company sold its shares to HuaMei, resulting in a realized loss of $2.0 million.
On August 31, 2011, Sonexis, a Legacy Investment, completed the dissolution of its operations and the sales of its assets. The Company realized a loss of $10.0 million as a result of this dissolution.
On October 3, 2011, Storage Canada repaid its term loan in full including all accrued interest.
On October 17, 2011, the Company converted SGDA Europes $1.5 million senior secured loan and all accrued interest to additional common equity interest.
On October 28, 2011, Total Safety repaid its first and second lien loans in full including all accrued interest.
On October 31, 2011, the Company received a distribution from NPWT of $500,000, which was treated as a return of capital and returned all cash invested into NPWT to the Company.
During the fiscal year ended October 31, 2011, Marine made principal payments totaling $450,000 on its senior subordinated loan. The balance of the loan as of October 31, 2011 was approximately $12.0 million.
During the fiscal year ended October 31, 2011, Octagon borrowed and repaid $1.5 million on its revolving line of credit. Octagon cancelled the revolving line of credit effective June 30, 2011. As of October 31, 2011, the revolving credit facility was no longer a commitment of the Company.
During the quarter ended January 31, 2011, the Valuation Committee increased the fair value of the Companys investments in Summit common stock by $7.5 million and U.S. Gas preferred stock by $2.5 million. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, SP, Marine, Summit and U.S. Gas and the Marine preferred stock were due to the capitalization of payment in kind (PIK) interest/dividends totaling $980,119. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $1.9 million due to PIK distributions, which were treated as a return of capital. Also, during the quarter ended January 31, 2011, the undistributed allocation of flow through income from the Companys equity
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investment in Octagon increased the cost basis and fair value of this investment by approximately $229,000. The Valuation Committee also decreased the fair value of the Companys investments in BP second lien loan by $3.9 million and term loan A and B by a combined $2.0 million, Ohio Medical common stock by $500,000 and preferred stock by $8.2 million, MVC Automotive equity interest by $3.1 million, HuaMei stock by $325,000 and HH&B by $1.9 million during the quarter ended January 31, 2011.
During the quarter ended April 30, 2011, the Valuation Committee increased the fair value of the Companys investments in Summit common stock by $2.0 million, MVC Automotive equity interest by $3.0 million, SHL Group Limited common stock by $2.5 million, Security Holdings equity interest by approximately $2.0 million, Tekers common stock by $590,000, Total Safety first lien loan by approximately $74,000 and Velocitius equity interest by $2.6 million. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, SP, Marine, Summit and U.S. Gas and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $714,247. In addition, during the quarter ended April 30, 2011, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $28,000. The Valuation Committee also decreased the fair value of the Companys investments in BP term loan A by approximately $1.2 million, Ohio Medical preferred stock by approximately $164,000, HuaMei common stock by approximately $1.0 million, SGDA Europe equity interest by $3.9 million and HH&B by $3.8 million during the quarter ended April 30, 2011.
During the quarter ended July 31, 2011, the Valuation Committee increased the fair value of the Companys investments in SHL Group Limited common stock by $1.0 million, Octagon Fund by approximately $25,000 and Security Holdings equity interest by approximately $2.5 million. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, Marine, Summit and U.S. Gas and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $731,374. In addition, during the quarter ended July 31, 2011, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $139,000. The Valuation Committee also decreased the fair value of the Companys investments in HuaMei common stock by $250,000, SGDA Europe equity interest by $400,000, MVC Automotive by $2.3 million, Tekers common stock by $180,000, Velocitius equity interest by $2.3 million and Vestal common stock by $670,000 during the quarter ended July 31, 2011.
During the quarter ended October 31, 2011, the Valuation Committee increased the fair value of the Companys investments in SHL Group Limited common stock by $1.4 million, Security Holdings equity interest by approximately $13.1 million, Summit common stock by $5.0 million, Ohio Medical preferred stock by $400,000 and MVC Automotive equity interest by $750,000. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, Marine, Summit and U.S. Gas and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $748,981. In addition, during the quarter ended October 31, 2011, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $193,000. The Valuation Committee also decreased the fair value of the Companys investments in Octagon Fund by approximately $234,000, Tekers common stock by $2.7 million, NPWT common and preferred stock by a net amount of approximately $200,000, Velocitius equity interest by $100,000 and Vestal common stock by $75,000 during the quarter ended October 31, 2011.
During the fiscal year ended October 31, 2011, the Valuation Committee increased the fair value of the Companys investments in Summit common stock by $14.5 million, SHL Group Limited common stock by $4.9 million, Security Holdings equity interest by approximately $17.6 million, Total Safety first lien loan by approximately $74,000, U.S. Gas preferred stock by $2.5 million and Velocitius equity interest by $200,000. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, SP, Marine, Summit and U.S. Gas and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $3,174,721. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $1.9 million due to PIK distributions, which were treated as a return of capital. Also, during the fiscal year ended
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October 31, 2011, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $589,000. The Valuation Committee also decreased the fair value of the Companys investments in MVC Automotive equity interest by approximately $1.7 million, Tekers common stock by approximately $2.3 million, Octagon Fund by $209,000, BP second lien loan by $3.9 million and term loan A and B by a combined $3.2 million, Ohio Medical common stock by $500,000 and preferred stock by approximately $8.0 million, NPWT common and preferred stock by a net amount of approximately of $200,000, HuaMei common stock by approximately $1.5 million, SGDA Europe equity interest by approximately $4.3 million, Vestal common stock by $745,000 and HH&B by $5.7 million during the fiscal year ended October 31, 2011.
At October 31, 2011, the fair value of all portfolio investments, exclusive of short-term investments, was $452.2 million with a cost basis of $358.2 million. At October 31, 2011, the fair value and cost basis of portfolio investments of the Legacy Investments was $10.8 million and $32.3 million, respectively, and the fair value and cost basis of portfolio investments made by the Companys current management team was $441.4 million and $325.9 million, respectively. At October 31, 2010, the fair value of all portfolio investments, exclusive of short-term securities, was $433.9 million, with a cost basis of $375.6 million. At October 31, 2010, the fair value and cost basis of portfolio investments of the Legacy Investments was $10.8 million and $42.3 million, respectively, and the fair value and cost basis of portfolio investments made by the Companys current management team was $423.1 million and $333.3 million, respectively.
For the Fiscal Year Ended October 31, 2010
During the fiscal year ended October 31, 2010, the Company obtained one new investment in IPC in the form of a warrant. The Company received the warrant solely for services provided to another investor in IPC and invested no capital.
During the fiscal year ended October 31, 2010, the Company made four follow-on investments in existing portfolio companies committing capital totaling $8.3 million. On January 4, 2010, the Company loaned $800,000 to Harmony Pharmacy in the form of a demand note. The demand note has an annual interest rate of 10% with the accrued interest being reserved against. On March 12, 2010, the Company invested $4.5 million and $1.7 million in SGDA Europe and Security Holdings, respectively, in the form of additional equity interests. On September 23, 2010, the Company committed an additional $1.3 million to Harmony Pharmacy in the form of a demand note. The demand note has an annual interest rate of 10% with the accrued interest being reserved against. As of October 31, 2010, $600,000 of the $1.3 million demand note to Harmony Pharmacy was funded.
At October 31, 2009, the balance of the secured revolving note provided to Marine was $900,000. Net borrowings during fiscal year 2010 were $1.1 million resulting in a balance of $2.0 million as of October 27, 2010. On October 27, 2010, the Company refinanced the secured revolving note and the senior subordinated loan of Marine. The revolving note balance of $2.0 million was added to the senior subordinated loan resulting in a balance of $11.9 million as of October 31, 2010. The interest on the senior subordinated loan remained 11% and the maturity date was extended to October 26, 2017. Prior to the refinancing of the senior subordinated loan, Marine made a principal payment of approximately $1.3 million.
On December 29, 2009, the Company sold the common stock, preferred stock and warrants of Vitality. The amount received from the sale of the 556,472 common shares was approximately $10.0 million, for the 1 million preferred shares was approximately $14.0 million, and for the 1 million warrants was approximately $3.8 million. As part of this transaction, there was approximately $2.9 million deposited in an escrow account subject to a reduction over a three year period in accordance with a specified schedule. On March 9, 2010, the Company received its first scheduled disbursement from the Vitality escrow totaling approximately $522,000. There were no claims against the escrow so 100% of the expected proceeds of the first scheduled disbursement were released. At the same time, the Company received its portion of a working capital adjustment paid to Vitality.
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The Companys share of the proceeds from the working capital adjustment totaled approximately $471,000 and was recorded as additional long-term capital gain. The total proceeds received from the escrow disbursement and working capital adjustment was approximately $993,000. The value of the escrow was increased by $150,000 by the Valuation Committee during the fiscal year ended October 31, 2010. This escrow is currently valued at approximately $1.9 million on the Companys consolidated balance sheet as of October 31, 2010. Total amount received from the sale as of October 31, 2010 was approximately $30.6 million resulting in a realized gain of approximately $13.9 million, which was treated as a long-term capital gain. Prior to the sale of Vitality on December 29, 2009, Vitalitys European operations (which were not acquired by the buyer) were distributed to Vitalitys shareholders on a pro-rata basis. The Company received 960 shares of Series A common stock and 334 shares of convertible Series B common stock in LHD Europe as part of this transaction. At October 31, 2010, the Series A common stock had a fair value of approximately $332,000 and the convertible Series B common stock had a fair value of approximately $118,000.
On March 10, 2010, the Company announced that its portfolio company, Dakota Growers, had signed a definitive merger agreement with Viterra, Canadas leading agri-business that provides premium quality ingredients to leading global food manufacturers, under which Dakota Growers would be acquired by a subsidiary of Viterra for approximately $240 million in cash. Under the terms of the agreement, Viterra would commence a tender offer to acquire all of the outstanding shares of Dakota Growers common stock at a price of $18.28 per share resulting in anticipated proceeds of approximately $37.9 million. The acquisition closed shortly after completion of a tender of a majority (50.1%) of the outstanding shares of Dakota Growers common stock, the receipt of various regulatory approvals and the satisfaction of other customary closing conditions and contingencies. On May 3, 2010, the Company converted its 1,065,000 preferred shares of Dakota Growers to 1,065,000 common shares of Dakota Growers. On May 6, 2010, the Company tendered its shares in Dakota Growers for approximately $37.9 million, resulting in a realized gain of approximately $22.0 million. The Company no longer has an investment in Dakota Growers.
On March 16, 2010, the Company contributed its common and preferred equity interest in SGDA to SGDA Europe to achieve operating efficiencies. The Company has 99.99% economic ownership in SGDA Europe. The fair value of SGDA Europes equity interest increased by approximately $4.2 million and the cost basis was increased by $5.0 million as a result of this cashless transaction. There was no gain or loss to the Company from this transaction. During the fiscal year ended October 31, 2010, the Valuation Committee decreased the fair value of SGDA Europes equity interest by approximately $4.1 million. The fair value of SGDA Europes equity interest at October 31, 2010 was $12.1 million.
On July 2, 2010, the Company sold its common and preferred shares of Vendio, a Legacy Investment. The amount received from the sale of the 10,476 common shares was approximately $2,900 and for the 6,443,188 preferred shares was approximately $2.9 million, which resulted in a realized loss of approximately $3.5 million, including proceeds held in escrow. As part of this transaction, there was approximately $465,205 deposited in an escrow account subject to reduction over an eighteen month period. This escrow is valued at approximately $180,000 on the Companys consolidated balance sheet as of October 31, 2010.
During the fiscal year ended October 31, 2010, Amersham made principal payments of $375,000, repaying its senior secured loan in full, including all accrued interest.
During the fiscal year ended October 31, 2010, SP made principal payments of approximately $169,000, on its first lien loan. The balance of the first lien loan as of October 31, 2010, was approximately $732,000.
During the fiscal year ended October 31, 2010, Total Safety made principal payments of approximately $26,000 on its first lien loan. The balance of the first lien loan as of October 31, 2010 was approximately $946,000.
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During the fiscal year ended October 31, 2010, the Company received approximately $106,000 in principal payments on the term loan provided to Storage Canada. The balance of the term loan at October 31, 2010 was approximately $1.0 million.
During the fiscal year ended October 31, 2010, Innovative Brands made principal payments of approximately $10.4 million on its term loan, repaying the term loan in full including all accrued interest.
During the fiscal year ended October 31, 2010, Octagon made principal payments of $5.0 million, repaying its term loan in full, including all accrued interest.
During the fiscal year ended October 31, 2010, WBS made principal payments of approximately $1.8 million, repaying its bridge loan in full, including all accrued interest.
During the fiscal year ended October 31, 2010, the Company sold the remaining 666,667 shares of Phoenix Coal common stock. The total amount received from the sale net of commission was approximately $295,000, resulting in a realized loss of approximately $205,000.
During the fiscal year ended October 31, 2010, Henry Company made principal payments of approximately $1.7 million and $2.0 million on its term loan A and term loan B, respectively, repaying the term loans in full, including all accrued interest.
On July 31, 2009, the Company sponsored U.S. Gas in its acquisition of ESPI and provided a $10.0 million limited guarantee and cash collateral for a short-term $4.0 million letter of credit for U.S. Gas. For sponsoring and providing this credit support, the Company has earned one-time fee income of approximately $1.2 million and will be recognizing an additional $1.6 million in fee income over the life of the guarantee. As of October 31, 2010, the cash collateral has been released as the letter of credit has expired and the limited guarantee is no longer a commitment of the Company.
During the quarter ended January 31, 2010, the Valuation Committee increased the fair value of the Companys investments in Dakota Growers common stock by approximately $2.4 million and preferred stock by approximately $2.6 million, Octagon equity interest by $1.0 million, Summit common stock by $2.0 million, Velocitius equity interest by $1.0 million, and LHD Europe series A common stock by approximately $166,000 and series B common Stock by approximately $58,000. In addition, increases in the cost basis and fair value of the loans to GDC, Custom Alloy, SP, Marine, Turf, BP, Summit, and U.S. Gas and the Marine and Vitality preferred stock were due to the capitalization of payment in kind (PIK) interest/dividends totaling $1,752,454. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $1.6 million due to a PIK distribution which was treated as a return of capital. Also, during the quarter ended January 31, 2010, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $89,000. The Valuation Committee also decreased the fair value of the Companys investments in Amersham second lien notes by $2.4 million, BP second lien loan by $1.6 million, Ohio Medical common stock by $1.3 million, SGDA preferred equity interest by approximately $2.4 million, and Vendio preferred stock by approximately $746,000 and common stock by $3,600 during the quarter ended January 31, 2010. The Valuation Committee also determined not to increase the fair values of the Harmony Pharmacy revolving credit facility and the Amersham loan for the accrued PIK interest totaling approximately $186,000.
During the quarter ended April 30, 2010, the Valuation Committee increased the fair value of the Companys investments in Dakota Growers common stock by approximately $1.0 million and preferred stock by approximately $1.0 million, Octagon equity interest by $500,000 and Summit common stock by $7.0 million. In addition, increases in the cost basis and fair value of the loans to GDC, Custom Alloy, SP, Marine, Turf, BP, Summit, and U.S. Gas and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $1,343,814. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock
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by approximately $1.7 million due to a PIK distribution which was treated as a return of capital. Also, during the quarter ended April 30, 2010, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $62,000. The Valuation Committee also decreased the fair value of the Companys investments in Velocitius equity interest by $600,000 and Vendio preferred stock by approximately $1.1 million and common stock by $1,900 during the quarter ended April 30, 2010. The Valuation Committee also determined not to increase the fair values of the Harmony Pharmacy revolving credit facility and the Amersham loan for the accrued PIK interest totaling approximately $188,000.
During the quarter ended July 31, 2010, the Valuation Committee increased the fair value of the Companys investments in PreVisor, Inc. common stock by $3.4 million. In addition, increases in the cost basis and fair value of the loans to GDC, Custom Alloy, SP, Marine, Turf, BP, Summit, and U.S. Gas and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $1,145,719. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $1.7 million due to a PIK distribution which was treated as a return of capital. Also, during the quarter ended July 31, 2010, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $108,000. The Valuation Committee also decreased the fair value of the Companys investments in BP second lien loan by approximately $5.2 million, MVC Automotive equity interest by $4.4 million, Security Holdings equity interest by approximately $6.4 million, Ohio Medical common stock by $3.7 million, and GDC senior subordinated loan by approximately $1.6 million during the quarter ended July 31, 2010. The Valuation Committee also determined not to increase the fair values of the Harmony Pharmacy revolving credit facility and the Amersham loan for the accrued PIK interest totaling approximately $193,000.
During the quarter ended October 31, 2010, the Valuation Committee increased the fair value of the Companys investments in MVC Automotive equity interest by $2.0 million, Summit common stock by $13.0 million, U.S. Gas preferred stock by approximately $17.8 million, Velocitius equity interest by $1.3 million and Vestal common stock by $600,000. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, SP, Marine, Summit, and U.S. Gas and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $1,319,321. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $1.8 million due to a PIK distribution which was treated as a return of capital. Also, during the fiscal year ended October 31, 2010, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $39,000. The Valuation Committee also decreased the fair value of the Companys investments in BP second lien loan by approximately $7.4 million, Harmony Pharmacy demand notes by $6.4 million, SGDA Europe equity interest by $4.1 million, Turf equity interest by $500,000, Ohio Medical common stock by $3.6 million, and GDC senior subordinated loan by approximately $1.6 million during the fiscal year ended October 31, 2010. The Valuation Committee also determined not to increase the fair values of the Harmony Pharmacy revolving credit facility, Amersham loan, GDC senior subordinated loan and BP second lien loan for the accrued PIK interest totaling approximately $165,000.
During the fiscal year ended October 31, 2010, the Valuation Committee increased the fair value of the Companys investments in Dakota Growers common stock by approximately $3.4 million and preferred stock by approximately $3.6 million, Octagon equity interest by $1.5 million, Summit common stock by $22.0 million, Velocitius equity interest by $1.7 million, PreVisor common stock by $3.4 million, U.S. Gas preferred stock by $17.8 million, Vestal common stock by $600,000 and LHD Europe series A common stock by approximately $166,000 and series B common Stock by approximately $58,000. In addition, increases in the cost basis and fair value of the loans to GDC, Custom Alloy, SP, Marine, Turf, BP, Summit, and U.S. Gas and the Marine and Vitality preferred stock were due to the capitalization of PIK interest/dividends totaling $5,561,308. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $6.8 million due to PIK distributions which were treated as a return of capital. Also, during the fiscal year ended October 31, 2010, the undistributed allocation of flow through income from the Companys equity investment in
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Octagon increased the cost basis and fair value of this investment by approximately $298,000. The Valuation Committee also decreased the fair value of the Companys investments in Amersham second lien notes by $2.4 million, BP second lien loan by $14.1 million, Ohio Medical common stock by $8.6 million, SGDA preferred equity interest by approximately $2.4 million, MVC Automotive equity interest by $2.4 million, Security Holdings equity interest by approximately $6.4 million, SGDA Europe equity interest by approximately $4.1 million, Harmony Pharmacy demand notes and revolving credit facility by a net amount of $6.4 million, Turf equity interest by $500,000, GDC senior subordinated loan by approximately $3.2 million and Vendio preferred stock by approximately $1.9 million and common stock by $5,500 during the fiscal year ended October 31, 2010. The net decrease of $6.4 million in Harmony Pharmacy was a result of the Valuation Committee determination to decrease the value of the unsecured demand notes by $7.5 million and ascribed value of $1.1 million to the capitalized PIK interest on the revolving credit facility which had no previous value. The Valuation Committee also determined not to increase the fair values of the Harmony Pharmacy revolving credit facility, Amersham loan, BP second lien loan and GDC senior subordinated loan for the accrued PIK interest totaling approximately $732,000.
At October 31, 2010, the fair value of all portfolio investments, exclusive of short-term securities, was $433.9 million with a cost basis of $375.6 million. At October 31, 2010, the fair value and cost basis of portfolio investments of the Legacy Investments was $10.8 million and $42.3 million, respectively, and the fair value and cost basis of portfolio investments made by the Companys current management team was $423.1 million and $333.3 million, respectively. At October 31, 2009, the fair value of all portfolio investments, exclusive of short-term securities, was $502.8 million, with a cost basis of $422.8 million. At October 31, 2009, the fair value and cost basis of the Legacy Investments was $15.3 million and $48.9 million, respectively, and the fair value and cost basis of portfolio investments made by the Companys current management team was $487.5 million and $373.9 million, respectively.
10. | Commitments and Contingencies |
Commitments to/for Portfolio Companies:
At October 31, 2011, the Companys existing commitments to portfolio companies consisted of the following:
Commitments of MVC Capital, Inc.
Portfolio Company |
Amount Committed | Amount Funded at October 31, 2011 | ||||||
Turf |
$ | 1.0 million | $ | 1.0 million | ||||
MVC Partners/MVCFS |
$ | 20.1 million | | |||||
|
|
|
|
|||||
Total |
$ | 21.1 million | $ | 1.0 million |
Guarantees
As of October 31, 2011, the Company had the following commitments to guarantee various loans and mortgages:
Off-Balance Sheet Arrangements
Guarantee |
Amount Committed | Amount Funded at October 31, 2011 | ||||||
MVC Automotive |
$ | 8.2 million | | |||||
MVC Automotive |
$ | 5.5 million | | |||||
Tekers |
$ | 348,000 | | |||||
|
|
|
|
|||||
Total |
$ | 14.0 million | |
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ASC 460, Guarantees, requires the Company to estimate the fair value of the guarantee obligation at its inception and requires the Company to assess whether a probable loss contingency exists in accordance with the requirements of ASC 450, Contingencies. At October 31, 2011 and 2010, the estimated fair values of the guarantee obligations noted above were $0.
These guarantees are further described below, together with the Companys other commitments.
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 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. 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 February 12, 2009, the commitment amount of the revolving credit facility was reduced to $7.0 million. At October 31, 2010, there was no balance outstanding on the revolving credit facility. On June 30, 2011, Octagon cancelled the commitment. As of October 31, 2011, the revolving credit facility was no longer a commitment of the Company.
On July 19, 2007, the Company agreed to guarantee a 1.4 million Euro mortgage for Tekers. The guarantee had a commitment of 251,155 euros at October 31, 2011, equivalent to approximately $348,000.
On January 15, 2008, the Company agreed to guarantee a 6.5 million Euro mortgage for MVC Automotive. The guarantee had a commitment of approximately 5.9 million euros at October 31, 2011, equivalent to approximately $8.2 million.
On January 16, 2008, the Company agreed to support a 4.0 million Euro mortgage for a Ford dealership owned and operated by MVC Automotive (equivalent to approximately $5.5 million at October 31, 2011) through making financing available to the dealership and agreeing under certain circumstances not to reduce its equity stake in MVC Automotive. The Company has consistently reported the amount of the guarantee as 4.0 million Euro. The Company and MVC Automotive continues to view this amount as the full amount of our commitment. The Company has recently learned that Erste Bank, the bank extending the mortgage to MVC Automotive, believes, based on a different methodology, that the balance of the guarantee as of October 31, 2011 is approximately 6.9 million Euro (equivalent to approximately $9.6 million). The Company is working with Erste Bank to resolve the discrepancy.
On July 31, 2008, the Company extended a $1.0 million loan to Turf in the form of a secured junior revolving note. The note bears annual interest at 6.0% and expires on January 31, 2014. On July 31, 2008, Turf borrowed $1.0 million from the secured junior revolving note. At October 31, 2010 and October 31, 2011, the outstanding balance of the secured junior revolving note was $1.0 million.
On September 9, 2008, the Company agreed to guarantee a 35.0 million Czech Republic Koruna (CZK) mortgage for MVC Automotive. On December 9, 2009, the mortgage that was guaranteed was refinanced by MVC Automotive, resulting in the release of the guarantee. As of October 31, 2011, the guarantee was no longer a commitment of the Company.
On March 31, 2010, the Company pledged its Series I and Series J preferred stock of U.S. Gas to Macquarie Energy, LLC (Macquarie Energy) as collateral for Macquarie Energys trade supply credit facility to U.S. Gas.
On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in a private equity fund (PE Fund), for which an indirect wholly-owned subsidiary of the Company serves as the general partner (the GP). The PE Fund has closed on approximately $104 million of capital commitments.
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On April 26, 2011, the Company agreed to collateralize a 5.0 million Euro letter of credit from JPMorgan Chase Bank, N.A., which is classified as restricted cash on the Companys consolidated balance sheet. This letter of credit is being used as collateral for a project guarantee by AB DnB NORD bankas to Security Holdings.
Commitments of the Company
Effective November 1, 2006, under the terms of the Investment Advisory and Management Agreement with TTG Advisers, which has since been amended and restated (the Advisory Agreement) and described in Note 4 of the consolidated financial statements, Management, 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, Purchase, New York 10577.
On April 27, 2006, the Company and MVCFS, as co-borrowers, entered into a four-year, $100 million credit facility (the Credit Facility), consisting of $50.0 million in term debt and $50.0 million in revolving credit, with Guggenheim as administrative agent for the lenders. On April 13, 2010, the Company renewed the Credit Facility for three years. The Credit Facility now only consists of a $50.0 million term loan, which will expire on April 27, 2013, at which time the outstanding amount under the Credit Facility will be due and payable. As of October 31, 2011, there was $50.0 million outstanding on the Credit Facility. The proceeds from borrowings made under the Credit Facility are used to fund new and existing portfolio investments and for general corporate purposes. Borrowings under the Credit Facility will bear interest, at the Companys option, at a floating rate equal to either (i) the LIBOR rate with a 1.25% LIBOR floor (for one, two, three or six months), plus a spread of 4.5% per annum, or (ii) the Prime rate in effect from time to time, plus a spread of 3.50% per annum. The Company paid a closing fee, legal and other costs associated with obtaining and renewing the Credit Facility. These costs will be amortized evenly over the life of the facility. The prepaid expenses on the consolidated 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 Credit Facility includes standard financial covenants including limitations on total assets to debt, debt to equity, interest coverage and eligible debt ratios.
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, 2011 is as follows:
Payments Due by Period | ||||||||||||||
Total | Less than 1 year |
1-3 years | 4-5 years | After 5 years | ||||||||||
Credit Facility I |
$ | 50,000,000 | N/A | $ | 50,000,000 | N/A | N/A | |||||||
Total Debt |
$ | 50,000,000 | N/A | $ | 50,000,000 | N/A | N/A |
11. | Certain Issuances of Equity Securities by the Issuer and Share Repurchase Program |
We had no unregistered sales of equity securities for the fiscal year ended October 31, 2011.
On April 23, 2010, the Companys Board of Directors approved a share repurchase program authorizing up to $5.0 million for share repurchases. The share repurchase program was substantially completed during the quarter ended April 30, 2011. Under the program, 380,105 shares were repurchased at an average price of
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$13.06, including commission, with a total cost of approximately $5.0 million. The Companys net asset value per share was increased by approximately $0.07 as a result of the share repurchases.
On July 19, 2011, the Companys Board of Directors approved another share repurchase program authorizing up to $5.0 million for additional share repurchases. No shares were repurchased under this new repurchase program as of October 31, 2011. Implementation of the program, as well as the timing thereof, depends on a variety of factors, including, among others, the availability of capital, the Companys current share price and the ability to conduct the offer under the Credit Facility.
The following table represents our stock repurchase program for the fiscal year ended October 31, 2011.
Period |
Total Number of Shares Purchased |
Average Price Paid per Share including commission |
Total Number of Shares Purchased as Part of Publicly Announced Program |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program |
||||||||||||
As of October 31, 2010 |
306,100 | $ | 13.06 | 306,100 | $ | 1,000,872 | ||||||||||
April 1, 2011 April 30, 2011 |
74,005 | $ | 13.06 | 74,005 | $ | 34,217 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
380,105 | $ | 13.06 | 380,105 | $ | 34,217 |
On February 28, 2007, the Company completed its public offering of 5,000,000 shares of the Companys common stock at a price of $16.25 per share. On March 28, 2007, pursuant to the 30-day over-allotment option granted by the Company to the underwriters in connection with the offering, the underwriters purchased an additional 158,500 shares of common stock at the purchase price of $16.25 per share. The Company raised approximately $78.4 million in net proceeds after deducting the underwriting discount and commissions and estimated offering expenses. The Company used the net proceeds of the offering to fund additional investments and for general corporate purposes, including the repayment of debt.
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 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.
12. | Tax Matters |
Return of Capital Statement of Position (ROCSOP) Adjustment: During the year ended October 31, 2011, the Company recorded a reclassification for permanent book to tax differences. These differences were primarily due to book/tax treatment of partnership income. These differences resulted in a net decrease in accumulated losses of $2,564,299, an increase in accumulated net realized loss of $1,530,922, and a decrease in additional paid-in capital of 1,033,377. This reclassification had no effect on net assets.
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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, 2011, the components of accumulated earnings/ (deficit) on a tax basis were as follows:
Tax Basis Accumulated Earnings (Deficit) |
||||
Accumulated capital and other losses |
$ | (26,318,783 | ) | |
Undistributed Net investment Income |
| |||
Undistributed Long-Term Capital Gain |
| |||
Gross unrealized appreciation |
179,411,001 | |||
Gross unrealized depreciation |
(90,586,292 | ) | ||
|
|
|||
Net unrealized appreciation |
$ | 88,824,709 | ||
|
|
|||
Total tax basis accumulated earnings |
62,505,926 | |||
Tax cost of investments |
363,390,378 | |||
Current year distributions to shareholders on a tax basis |
||||
Ordinary income |
8,257,244 | |||
Long Term Capital Gain |
2,200,450 | |||
Return of Capital |
1,031,338 | |||
Prior year distributions to shareholders on a tax basis |
||||
Ordinary income |
11,594,910 |
On October 31, 2011, the Company had a net capital loss carryforward of $26,263,731, all of which will expire in the year 2019. 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 16% of dividends declared and paid from net investment income during the year ended October 31, 2011 qualified dividend income under the Jobs Growth and Tax Relief Reconciliation Act of 2003.
Corporate Dividends Received Deduction Percentage
Corporate shareholders may be eligible for the dividends received deduction for certain ordinary income distributions paid by the Company. The Company designated 16% of dividends declared and paid during the year ending October 31, 2011 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.
112
13. | Income Taxes |
The Companys wholly-owned subsidiary MVCFS is subject to federal and state income tax. For the fiscal year ended October 31, 2011, the Company recorded a tax provision of $13,557. For the fiscal year ended October 31, 2010, the Company recorded a tax provision of $8,476. For the fiscal year ended October 31, 2009, the Company recorded a tax benefit of $1,376,819. The provision for income taxes was comprised of the following:
Fiscal Year ended | ||||||||||||
October 31, 2011 | October 31, 2010 | October 31, 2009 | ||||||||||
Current tax (benefit) expense: |
||||||||||||
Federal |
$ | 11,363 | $ | | $ | (67,101 | ) | |||||
State |
2,194 | 8,476 | 155 | |||||||||
|
|
|
|
|
|
|||||||
Total current tax (benefit) expense |
13,557 | 8,476 | (66,946 | ) | ||||||||
Deferred tax expense (benefit): |
||||||||||||
Federal |
| | 1,173,420 | |||||||||
State |
| | 270,345 | |||||||||
|
|
|
|
|
|
|||||||
Total deferred tax expense (benefit) |
| | 1,443,765 | |||||||||
Total tax (benefit) provision |
$ | 13,557 | $ | 8,476 | $ | 1,376,819 | ||||||
|
|
|
|
|
|
The following table summarizes the significant differences between the U.S. federal statutory tax rate and the Companys effective tax rate for financial statement purposes for the fiscal years ended October 31, 2011, 2010 and 2009:
Fiscal Year Ended | ||||||||||||
October 31, 2011 |
October 31, 2010 |
October 31, 2009 |
||||||||||
Federal income tax benefit at statutory rate |
($ | 1,503,159 | ) | ($940,558 | ) | ($ | 1,035,500 | ) | ||||
State income taxes, net of federal benefit |
(244,827 | ) | (152,979 | ) | (168,239 | ) | ||||||
Other |
11,363 | 5,593 | 408 | |||||||||
Net change to valuation allowance |
1,750,180 | 1,096,420 | 2,580,150 | |||||||||
|
|
|
|
|
|
|||||||
$ | 13,557 | $ | 8,476 | $ | 1,376,819 | |||||||
|
|
|
|
|
|
The Company generated a net operating loss of approximately $5.3 million in the current year for federal and New York state purposes. The net operating loss will be carried forward to offset federal taxable income in future years. As of October 31, 2011, the Company had the following NOL available to be carried forward:
NOL Federal |
NOL New York State |
Fiscal Year of NOL |
Expiration | |||
$ | $327,526 |
October 31, 2007 |
October 31, 2027 | |||
$1,410,449 |
$2,282,601 |
October 31, 2008 |
October 31, 2028 | |||
$2,583,661 |
$2,780,861 |
October 31, 2009 |
October 31, 2029 | |||
$3,976,611 |
$3,968,135 |
October 31, 2010 |
October 31, 2030 | |||
$5,286,401 |
$5,284,207 |
October 31, 2011 |
October 31, 2031 |
Due to the uncertainty surrounding the ultimate utilization of these net operating losses, the Company has recorded a 100% valuation allowance against the current year federal deferred benefit of approximately $1,505,000 as well as against prior year federal deferred tax asset of approximately $3,085,000. Additionally, a 100% valuation allowance has been recorded for current year state and local deferred benefit of approximately $245,000 and against prior year state and local deferred tax asset of approximately $592,000
113
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, 2011, October 31, 2010 and October 31, 2009 were as follows:
October 31, 2011 | October 31, 2010 | October 31, 2009 | ||||||||||
Deferred tax assets: |
||||||||||||
Deferred revenues |
$ | 99,118 | $ | 362,391 | $ | 922,566 | ||||||
Net operating loss |
5,317,308 | 3,229,077 | 1,657,584 | |||||||||
Others |
8,895 | 85,102 | | |||||||||
|
|
|
|
|
|
|||||||
Total deferred tax assets |
$ | 5,425,321 | $ | 3,676,570 | $ | 2,580,150 | ||||||
|
|
|
|
|
|
|||||||
Valuation allowance on Deferred revenues and Net operating loss |
($ | 5,425,321 | ) | ($ | 3,676,570 | ) | ($ | 2,580,150 | ) | |||
|
|
|
|
|
|
|||||||
Net deferred tax assets |
$ | | $ | | $ | | ||||||
Deferred tax liabilities: |
||||||||||||
Deferred tax liabilities |
| | | |||||||||
|
|
|
|
|
|
|||||||
Total deferred tax liabilities |
| | | |||||||||
Net deferred taxes |
$ | | $ | | $ | | ||||||
|
|
|
|
|
|
14. | Segment Data |
The Companys reportable segments are its investing operations as a business development company, MVC Capital, and the financial advisory operations of its wholly owned subsidiary, MVCFS.
The following table presents book basis segment data for the fiscal year ended October 31, 2011:
MVC | MVCFS | Consolidated | ||||||||||
Interest and dividend income |
$ | 11,449,736 | $ | 137 | $ | 11,449,873 | ||||||
Fee income |
35,223 | 3,144,628 | 3,179,851 | |||||||||
Other income |
1,335,755 | 5,486 | 1,341,241 | |||||||||
Total operating income |
12,820,714 | 3,150,251 | 15,970,965 | |||||||||
Total operating expenses |
10,854,158 | 7,638,022 | 18,492,180 | |||||||||
Less: Waivers by Adviser |
(189,379 | ) | (61,256 | ) | (250,635 | ) | ||||||
Total net operating expenses |
10,664,779 | 7,576,766 | 18,241,545 | |||||||||
Net operating income (loss) before taxes |
2,155,935 | (4,426,515 | ) | (2,270,580 | ) | |||||||
Tax expense |
| 13,557 | 13,557 | |||||||||
Net operating income (loss) |
2,155,935 | (4,440,072 | ) | (2,284,137 | ) | |||||||
Net realized loss on investments and foreign currency |
(26,421,609 | ) | | (26,421,609 | ) | |||||||
Net change in unrealized appreciation on investments |
35,676,725 | | 35,676,725 | |||||||||
Net increase (decrease) in net assets resulting from operations |
11,411,051 | (4,440,072 | ) | 6,970,979 |
In all periods prior to July 16, 2004, all business was conducted through MVC Capital, Inc.
114
15. | Subsequent Events |
Since October 31, 2011, the Company through MVC Partners and MVCFS contributed approximately $6.3 million of its $20.1 million capital commitment to the PE Fund, which to date has invested in Plymouth Rock Energy, LLC and Gibdock Limited.
BP Clothing LLC, a designer and manufacturer of womens apparel, filed for Chapter 11 protection on December 12, 2011, in New York with agreement to turn ownership over to secured lenders under a bankruptcy reorganization plan. Secured lenders, including the Company, have agreed to support a Chapter 11 plan where first-lien creditors will take 90 percent of the new stock, second-lien lenders will have 6 percent, and subordinated lenders will have 4 percent. The plan-support agreement requires filing the plan and disclosure statement by years end, with consummation of the plan not later than March 31, 2012.
On December 16, 2011, the Companys Board of Directors declared a dividend of $0.12 per share. The dividend was payable on January 6, 2012 to shareholders of record on December 30, 2011. The total distribution amounted to approximately $2.9 million.
On December 28, 2011, the Company received its third scheduled disbursement from the Vitality Foodservice, Inc. escrow of approximately $585,000.
115
Report of Independent Registered Public 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 Company), including the consolidated schedules of investments, as of October 31, 2011 and 2010, 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, 2011, and the consolidated selected per share data and ratios for each of the five years in the period ended October 31, 2011. Our audit 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 Companys management. Our responsibility is to express an opinion on these financial statements, selected per share data and ratios and schedule based on our audits.
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. Our procedures included confirmation of securities owned as of October 31, 2011, by correspondence with the custodians and management of the underlying investments. 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 financial position of MVC Capital, Inc. as of October 31, 2011 and 2010, and the consolidated results of their operations, their cash flows and their changes in net assets for each of the three years in the period ended October 31, 2011 and the consolidated selected per share data and ratios for each of the five years in the period ended October 31, 2011 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), MVC Capital, Inc.s internal control over financial reporting as of October 31, 2011, 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 11, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
January 11, 2012
116
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
The Company recognizes managements responsibility for establishing and maintaining adequate internal control over financial reporting for the Company. Within the 90 days prior to the filing date of this annual report on Form 10-K, the Company carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of management, including the individual who performs the functions of a Principal Executive Officer (the CEO) and the individual who performs the functions of a Principal Financial Officer (the CFO). Based upon that evaluation, the CEO and the CFO have concluded that our disclosure controls and procedures are adequate and effective.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
There have been no significant changes in our disclosure controls and procedures or in other factors that could significantly affect our disclosure controls and procedures subsequent to the date we carried out the evaluation discussed above.
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of management, including our CEO and CFO, the Company conducted an evaluation of the effectiveness of the Companys internal control over financial reporting based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the Companys evaluation under the framework in Internal Control Integrated Framework, management concluded that the Companys internal control over financial reporting was effective as of October 31, 2011. Managements assessment of the effectiveness of the Companys internal control over financial reporting as of October 31, 2011, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report which is included herein.
117
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of MVC Capital, Inc.
We have audited MVC Capital, Inc.s (the Company) internal control over financial reporting as of October 31, 2011, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). MVC Capital, Inc.s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Controls and Procedures. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, MVC Capital, Inc. maintained, in all material respects, effective internal control over financial reporting as of October 31, 2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of MVC Capital, Inc., including schedules of investments, as of October 31, 2011 and 2010, 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, 2011, and the consolidated selected per share data and ratios for each of the five years in the period ended October 31, 2011, and our report dated January 11, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
January 11, 2012
118
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION |
None.
ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
Reference is made to the information with respect to directors and executive officers of the Registrant to be contained in the Companys proxy statement to be filed with the SEC, in connection with the Companys annual meeting of shareholders to be held in 2012 (the 2012 Proxy Statement), which information is incorporated herein by reference.
The Company has adopted a code of ethics that applies to the Companys chief executive officer and chief financial officer/chief accounting officer, a copy of which is posted on our website http://www.mvccapital.com.
Our CEO and CFO certify the accuracy of the financial statements contained in our periodic reports, and so certified in this Form 10-K through the filing of Section 302 certifications as exhibits to this Form 10-K.
ITEM 11. | EXECUTIVE COMPENSATION |
Reference is made to the information with respect to executive compensation to be contained in the 2012 Proxy Statement, which information is incorporated herein by reference.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Reference is made to the information with respect to security ownership of certain beneficial owners and management to be contained in the 2012 Proxy Statement, which information is incorporated herein by reference.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Information in response to this Item is incorporated by reference to the relevant section of the 2012 Proxy Statement.
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Reference is made to the information with respect to principal accounting fees and services to be contained in the 2012 Proxy Statement, which information is incorporated herein by reference.
119
ITEM 15. | EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES |
Page(s) | ||||||
(a)(1) | Financial Statements |
|||||
Consolidated Balance Sheets |
76 | |||||
77-78 | ||||||
79-81 | ||||||
82 | ||||||
83 | ||||||
85 | ||||||
86 | ||||||
87-115 | ||||||
116-118 | ||||||
(a)(2) | The following financial statement schedules are filed here with: |
|||||
123-124 |
In addition, there may be additional information not provided in a schedule because (i) such information is not required or (ii) the information required has been presented in the aforementioned financial statements.
(a)(3) The following exhibits are filed herewith or incorporated by reference as set forth below:
Exhibit |
Description | |
3.1 | Certificate of Incorporation. (Incorporated by reference to Exhibit 99.a filed with the Registrants initial Registration Statement on Form N-2 (File No. 333-92287) filed on December 8, 1999) | |
3.2 | Certificate of Amendment of Certificate of Incorporation. (Incorporated by reference to Exhibit 99.a.2 filed with the Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-119625) filed on November 23, 2004) | |
3.3 | Fifth Amended and Restated Bylaws. (Incorporated by reference to Exhibit 99.b. filed with Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-125953) filed on August 29, 2005) |
120
Exhibit |
Description | |
4.1 | Form of Share Certificate. (Incorporated by reference to Exhibit 99.d.1 filed with the Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-119625) filed on November 23, 2004) | |
10.1 | Dividend Reinvestment Plan, as amended. (Incorporated by reference to Exhibit 99.e filed with the Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-119625) filed on November 23, 2004) | |
10.2 | Amended and Restated Investment Advisory and Management Agreement between the Registrant and The Tokarz Group Advisers LLC. (Incorporated by reference to Exhibit 10.1 filed with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on June 4, 2009) | |
10.3 | Form of Custody Agreement between Registrant and U.S. Bank National Association. (Incorporated by reference to Exhibit 99.j.1 filed with the Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-119625) filed on November 23, 2004) | |
10.4 | Form of Amendment to Custody Agreement between Registrant and U.S. Bank National Association. (Incorporated by reference to Exhibit 99.j.2 filed with the Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-119625) filed on February 21, 2006) | |
10.5 | Form of Amendment to Custody Agreement between Registrant and U.S. Bank National Association. (Incorporated by reference to Exhibit10.4 filed with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on June 4, 2009) | |
10.6 | Form of Transfer Agency Letter Agreement with Registrant and EquiServe Trust Company, N.A. (Incorporated by reference to Exhibit 99.k.2 filed with the Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-119625) filed on November 23, 2004) | |
10.7 | Form of Fee and Service Schedule Amendment to Transfer Agency Agreement with Registrant and Computershare Trust Company, N.A. (Incorporated by reference to Exhibit10.1 filed with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on September 8, 2009) | |
10.8 | Form of Fund Administration Servicing Agreement with Registrant and U.S. Bancorp Fund Services, LLC. (Incorporated by reference to Exhibit 99.k.6 filed with the Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-119625) filed on February 21, 2006) | |
10.9 | Form of Fund Accounting Servicing Agreement with Registrant and U.S. Bancorp Fund Services, LLC. (Incorporated by reference to 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) | |
10.10 | Form of First Amendment to Fund Administration Servicing Agreement with Registrant and U.S. Bancorp Fund Services, LLC. (Incorporated by reference to Exhibit10.2 filed with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on June 4, 2009) | |
10.11 | Form of First Amendment to Fund Accounting Servicing Agreement with Registrant and U.S. Bancorp Fund Services, LLC. (Incorporated by reference to Exhibit10.3 filed with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on June 4, 2009) | |
10.12 | Form of Credit Agreement with Registrant and Guggenheim Corporate Funding, LLC et al. (Incorporated by reference to Exhibit 10 filed with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on June 9, 2006) | |
10.13 | Form of Amendment to Credit Agreement with Registrant and Guggenheim Corporate Funding, LLC et al. (Incorporated by reference to Exhibit 10 filed with Registrants Annual Report on Form 10-K (File No. 814-00201) filed on December 29, 2008) |
121
Exhibit |
Description | |
10.14 | Form of Amendment to Credit Agreement with Registrant and Guggenheim Corporate Funding, LLC et al. (Incorporated by reference to Exhibit 10 filed with Registrants Annual Report on Form 10-K (File No. 814-00201) filed on December 21, 2010). | |
10.15 | Form of Amendment to Credit Agreement with Registrant and Guggenheim Corporate Funding, LLC et al., filed herewith. | |
10.16 | Form of Custody Agreement between Registrant and JP Morgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10 filed with Registrants Annual Report on Form 10-K (File No. 814-00201) filed on December 21, 2010). | |
14 | Joint Code of Ethics of the Registrant and The Tokarz Group LLC. (Incorporated by reference to Exhibit 99r filed with the Registrants Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 (File No. 333-119625) filed on November 29, 2006) | |
31* | Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 | |
32* | Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 |
* | Filed herewith |
(b) Exhibits
Exhibit No. |
Exhibit | |
10.15 | Form of Amendment to Credit Agreement | |
31 | Certifications pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 | |
32 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 |
(c) Financial Statement Schedules
122
MVC Capital, Inc. and Subsidiaries
Schedule of Investments in and Advances to Affiliaties
Amount of Interest or Dividends Credited |
October
31, 2010 Fair Value |
Gross Additions (3) |
Gross Reductions (4) |
October
31, 2011 Fair Value |
||||||||||||||||||||||
Portfolio Company |
Investment (1) |
to Income (5) | Other (2) | |||||||||||||||||||||||
Companies More than 25% owned |
||||||||||||||||||||||||||
MVC Automotive Group |
Common Stock | | | 44,100,000 | | (1,650,000 | ) | 42,450,000 | ||||||||||||||||||
(Automotive Dealership) |
Bridge Loan | 364,355 | | 3,643,557 | | | 3,643,557 | |||||||||||||||||||
MVC Partners, LLC |
Common Equity Interest | | | 1,133,729 | | | 1,133,729 | |||||||||||||||||||
(Private Equity Firm) |
||||||||||||||||||||||||||
Ohio Medical Corporation |
Common Stock | | | 500,000 | | (500,000 | ) | | ||||||||||||||||||
(Medical Device Manufacturer) |
Preferred Stock | | | 46,806,540 | 1,872,262 | (9,178,802 | ) | 39,500,000 | ||||||||||||||||||
SIA Tekers Invest |
Common Stock | | | 3,790,000 | | (2,265,000 | ) | 1,525,000 | ||||||||||||||||||
(Port Facilities) |
||||||||||||||||||||||||||
Summit Research Labs, Inc. |
Loan | 1,519,613 | | 10,299,834 | 755,255 | | 11,055,089 | |||||||||||||||||||
(Specialty Chemical) |
Preferred Stock | | | 60,000,000 | 14,500,000 | | 74,500,000 | |||||||||||||||||||
Turf Products, LLC |
Loan | 1,091,662 | | 8,395,261 | | | 8,395,261 | |||||||||||||||||||
(DistributorLandscaping & Irrigation Equipment) |
LLC Interest | | | 2,721,794 | | | 2,721,794 | |||||||||||||||||||
Revolver | 60,000 | | 1,000,000 | | | 1,000,000 | ||||||||||||||||||||
Warrant | | | | | | | ||||||||||||||||||||
Velocitius B.V. |
Common Equity Interest | | | 24,900,000 | 200,000 | | 25,100,000 | |||||||||||||||||||
(Renewable Energy) |
||||||||||||||||||||||||||
Vestal Manufacturing Enterprises, Inc. |
Loan | 73,000 | | 600,000 | | | 600,000 | |||||||||||||||||||
(Iron Foundries) |
Common Stock | | | 2,200,000 | | (745,000 | ) | 1,455,000 | ||||||||||||||||||
Total companies more than 25% owned |
$ | 3,108,630 | $ | 213,079,430 | ||||||||||||||||||||||
Companies More than 5% owned, but less than 25% |
||||||||||||||||||||||||||
Centile Holding B.V. |
Common Stock | | | | 3,001,376 | | 3,001,376 | |||||||||||||||||||
(Software) |
||||||||||||||||||||||||||
Custom Alloy Corporation |
Loan | 1,990,009 | | 13,570,193 | 989,043 | | 14,559,236 | |||||||||||||||||||
(Manufacturer of Tubular Goods for the Energy Industry) |
Preferred Stock | | | 44,000 | | | 44,000 | |||||||||||||||||||
Preferred Stock | | | 9,956,000 | | | 9,956,000 | ||||||||||||||||||||
Harmony Health & Beauty, Inc. |
Common Stock | | | | 6,700,000 | (5,700,000 | ) | 1,000,000 | ||||||||||||||||||
(Healthcare Retail) |
||||||||||||||||||||||||||
Harmony Pharmacy & Health Center, Inc. |
Revolver | | | 5,100,000 | | (5,100,000 | ) | | ||||||||||||||||||
(Healthcare Retail) |
Demand Note | | | | | | | |||||||||||||||||||
Demand Note | | | | | | | ||||||||||||||||||||
Demand Note | | | | | | | ||||||||||||||||||||
Demand Note | | | | | | | ||||||||||||||||||||
Demand Note | | | | | | | ||||||||||||||||||||
Demand Note | | | 600,000 | | (600,000 | ) | | |||||||||||||||||||
Common Stock | | | | | | | ||||||||||||||||||||
JSC Tekers Holdings |
Common Stock | | | | 4,500 | | 4,500 | |||||||||||||||||||
(Automotive Dealerships) |
Loan | 159,111 | | | 4,000,000 | | 4,000,000 | |||||||||||||||||||
HuaMei Capital Company, Inc. |
Common Stock | | | 1,525,000 | | (1,525,000 | ) | | ||||||||||||||||||
(Financial Services) |
||||||||||||||||||||||||||
LHD Europe Holdings, Inc. |
Common Stock | | | 332,144 | | (332,144 | ) | | ||||||||||||||||||
(Non-Alcoholic Beverages) |
Convertible Common Stock |
| | 117,856 | | (117,856 | ) | | ||||||||||||||||||
Marine Exhibition Corporation |
Loan | 1,337,783 | | 11,927,605 | 480,583 | (450,000 | ) | 11,958,188 | ||||||||||||||||||
(Theme Park) |
Preferred Stock* | 445,537 | | 2,794,514 | 230,358 | | 3,024,872 | |||||||||||||||||||
Octagon Credit Investors, LLC |
LLC Interest | 125,864 | | 4,542,141 | 791,516 | | 5,333,657 | |||||||||||||||||||
(Financial Services) |
Revolver | 2,997 | | | 1,500,000 | (1,500,000 | ) | |
The accompanying notes are an integral part of these consolidated financial statements.
123
Amount of Interest or Dividends Credited |
October
31, 2010 Fair Value |
Gross Additions (3) |
Gross Reductions (4) |
October
31, 2011 Fair Value |
||||||||||||||||||||||
Portfolio Company |
Investment (1) | to Income (5) | Other (2) | |||||||||||||||||||||||
Previsor, Inc. |
Common Stock | | | 10,400,000 | | (10,400,000 | ) | | ||||||||||||||||||
(Human Capital Management) |
||||||||||||||||||||||||||
RuMe Inc. |
Common Stock | | | | 160,000 | | 160,000 | |||||||||||||||||||
(Consumer Products) |
Preferred Stock | | | | 999,815 | | 999,815 | |||||||||||||||||||
Security Holdings, B.V. |
Common Equity Interest |
| | 5,300,000 | 32,868,600 | (4,968,600 | ) | 33,200,000 | ||||||||||||||||||
(Technology Services) |
||||||||||||||||||||||||||
SGDA Europe B.V. |
Common Equity Interest |
| | 12,100,000 | 2,696,047 | (4,296,047 | ) | 10,500,000 | ||||||||||||||||||
(Soil Remediation) |
Loan | 140,670 | | 1,500,000 | | (1,500,000 | ) | | ||||||||||||||||||
U.S. Gas & Electric, Inc. |
Loan | 1,268,405 | | 8,692,789 | 451,059 | | 9,143,848 | |||||||||||||||||||
(Energy Services) |
Preferred Stock | | | 76,127,069 | 2,388,680 | | 78,515,749 | |||||||||||||||||||
Preferred Stock | | | 2,476,902 | 74,956 | | 2,551,858 | ||||||||||||||||||||
Total companies more than 5% owned, but less than 25% |
$ | 5,470,376 | $ | 187,953,099 |
This schedule should be read in conjunction with the Companys consolidated statements as of and for the year ended October 31, 2011, 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 are shown in the consolidated schedule of investments as of October 31, 2011. |
(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 include increases in the cost basis of investments resulting from new portfolio investments, paid-in-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 include net increases in unrealized appreciation or net decreases in unrealized depreciation. |
(4) | Gross reductions include 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 a portion of the year an investment was included in the companies more than 25% owned. |
* | 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.
124
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date |
Signature |
Title | ||
Date: January 12, 2012 | /s/ Michael Tokarz (Michael Tokarz) |
Chairman | ||
Date: January 12, 2012 | /s/ Peter Seidenberg (Peter Seidenberg) |
Chief Financial Officer | ||
Date: January 12, 2012 | /s/ Emilio Dominianni (Emilio Dominianni) |
Director | ||
Date: January 12, 2012 | /s/ Gerald Hellerman (Gerald Hellerman) |
Director | ||
Date: January 12, 2012 | /s/ Warren Holtsberg (Warren Holtsberg) |
Director | ||
Date: January 12, 2012 | /s/ Robert C. Knapp (Robert C. Knapp) |
Director | ||
Date: January 12, 2012 | /s/ William E. Taylor (William E. Taylor) |
Director |
125
Exhibit 10.15
CONSENT, WAIVER AND AMENDMENT TO CREDIT AGREEMENT
This CONSENT, WAIVER AND AMENDMENT, dated as of December 23, 2011 (this Consent), among MVC CAPITAL, INC., a Delaware corporation (the Company), MVC FINANCIAL SERVICES, INC., a Delaware corporation (MVCFS, and together with the Company, each a Borrower, and collectively, the Borrowers), the Lenders identified on the signature pages hereto (the Lenders), and GUGGENHEIM CORPORATE FUNDING, LLC, as administrative agent for the lenders (in such capacity, the Administrative Agent), waives certain provisions of the Credit Agreement, dated as of April 27, 2006 (as amended to the date hereof and as the same may be further amended, supplemented or otherwise modified from time to time, the Credit Agreement) among the Borrowers, the institutions from time to time party thereto as Lenders, and the Administrative Agent. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement.
W I T N E S S E T H:
WHEREAS, the Borrowers have requested the Waivers and the Amendment (each as defined below) from the Administrative Agent and the Required Lenders on the terms and subject to the conditions herein provided;
WHEREAS, the Administrative Agent and the Required Lenders consent to the Waivers and the Amendment on the terms and subject to the conditions herein provided;
NOW, THEREFORE, in consideration of the premises and the covenants and obligations contained herein, the sufficiency of which is hereby acknowledged, the parties hereto agree as follows:
Section 1. Defined Terms.
As used in this Consent, the terms listed in this Section 1 shall have the respective meanings set forth in this Section 1:
Second Waiver Trigger Event means the consummation of [a material liquidity event in the first fiscal quarter of 2012].
Ohio Medical Guarantee means the Companys guarantee of payment to the holders of shares of Series B Preferred Equity of Ohio Medical Corporation, a Delaware corporation (Ohio Medical), of (i) the $19,000,000 original aggregate purchase price of such shares, (ii) the cumulative dividends to which such shares are entitled pursuant to the Amended and Restated Certificate of Incorporation of Ohio Medical, (iii) indemnification amounts to which any holder of Series B Preferred Equity is entitled for any out-of-pocket costs or expenses arising from any third-party claim against such holder or from the enforcement of the Guaranty, dated as of November 30, 2011, executed by the Company in favor of the holders of Series B Preferred Equity (the Guaranty) pursuant to Section 6.13(a) of the Series B Preferred Equity Purchase Agreement dated as of November 30, 2011 between Ohio Medical and the holders of Series B Preferred Equity, and (iv) certain interest that will accrue under the Guaranty on any payment required by the Company under the Guaranty in the event that such payment
is more than 30 days overdue because the Company is restricted from making such payment for reasons described in the Guaranty (such interest being referred to in the Guaranty as the Guarantor Premium).
Section 2. First Consent and Waiver (the First Waiver).
Notwithstanding anything in the Credit Agreement or any Loan Document to the contrary, effective as of the First Waiver Effective Date (as defined in Section 5(a) hereof) and subject to the satisfaction (or due waiver) of the conditions set forth in Section 5(a) hereof, Required Lenders hereby consent to (i) the waiver of compliance with Section 6.1(b) (Interest Coverage Ratio) of the Credit Agreement solely for the fiscal quarter ending October 31, 2011 and (ii) Ohio Medical Guarantee; provided, that the Ohio Medical Guarantee shall constitute Indebtedness but not an Eligible Debt Investment of the Company for all purposes under the Loan Documents.
Section 3. Second Consent and Waiver (the Second Waiver; together with the First Waiver, the Waivers).
Notwithstanding anything in the Credit Agreement or any Loan Document to the contrary, effective as of the Second Waiver Effective Date (as defined in Section 5(b) hereof) and subject to the satisfaction (or due waiver) of the conditions set forth in Section 5(b) hereof, the Required Lenders hereby agree to the following modifications to the Credit Agreement:
(a) Section 6.1(b) (Interest Coverage Ratio) shall be amended and restated in its entirety as follows:
Permit the ratio of EBIT (excluding any interest or other income received on account of the BB&T Investments) to Interest Expense (excluding all Interest Expense related to the Indebtedness pursuant to the BB&T Credit Facility) of the Company and its Consolidated Subsidiaries, determined on a consolidated basis as of the last day of each fiscal quarter (for such fiscal quarter) set forth below to be less than the ratio set forth below opposite such fiscal quarter:
Fiscal Quarter |
Interest Coverage Ratio | |
July 31, 2012 |
1.00 to 1.00 | |
October 30, 2012 |
1.25 to 1.00 | |
January 31, 2013 |
1.25 to 1.00 | |
April 30, 2013 |
1.75 to 1.00 |
(b) Any failure by the Company to comply with Section 6.1(b) (Interest Coverage Ratio) solely with respect to the fiscal quarters ending January 31, 2012 and April 30, 2012 shall be waived.
(c) Section 6.1(d)(ii) (Asset Coverage) shall be amended and restated in its entirety as follows:
Permit the ratio of (1) the sum of Unrestricted Cash (excluding any BB&T Investments that are Cash Equivalents) plus Eligible Debt Investments (excluding any
2
Investments in any obligor organized or incorporated in under the laws of a jurisdiction other than the United States of America in excess of 25% of the aggregate amount of Eligible Debt Investments) to (2) Consolidated Debt (excluding all Indebtedness pursuant to the BB&T Credit Facility) to be less than the ratio set forth below as of the last day of each fiscal quarter set forth below:
Fiscal Quarter |
Ratio | |||
January 31, 2012 |
1.75 to 1.00 | |||
April 30, 2012 |
1.75 to 1.00 | |||
July 31, 2012 |
2.00 to 1.00 | |||
October 30, 2012 |
2.00 to 1.00 | |||
January 31, 2013 |
2.25 to 1.00 | |||
April 30, 2013 |
2.25 to 1.00 |
provided, that with respect to Guarantee Obligations incurred by the Company or its Subsidiaries permitted under this Agreement, upon receipt by the Administrative Agent of evidence that a note or other debt instrument will be issued to the Company or such Subsidiary at the time of payment of such Guarantee Obligations, on terms satisfactory to the Administrative Agent, evidencing the amounts owing under such Guarantee Obligation from the Person on whose behalf such Guarantee Obligation was undertaken, the face value of such note or debt instrument shall be included in the calculation of Eligible Debt Investments solely for purposes of this Section 6.1(d)(ii).
Section 4. Amendments to Credit Agreement (the Amendment).
The Credit Agreement is, effective as of the First Waiver Effective Date and subject to the satisfaction (or due waiver) of the conditions set forth in Section 5(a) hereof, hereby amended as follows:
(a) Section 1.1 (Defined Terms) shall be amended by inserting the following definition in such Section 1.1 in the appropriate place to preserve the alphabetical order of the definitions.
MVC Cayman: MVC Cayman, a Cayman Islands exempted company.
(b) Section 6.1(d)(i) (Asset Coverage) shall be amended and restated in its entirety to read as follows:
Permit the ratio of Total Assets (excluding (x) any BB&T Investments in the BB&T Account and (y) with respect to Eligible Debt Investments or Eligible Equity Investments, collectively, any Investments in any issuer or obligor organized or incorporated in under the laws of a jurisdiction other than the United States of America in excess of 25% of the aggregate amount of Total Assets (other than, solely with respect to Eligible Equity Investments, any Investments in MVC Cayman)) to Consolidated Debt (excluding all Indebtedness pursuant to the BB&T Credit Facility) to be less than 2.5 to 1.0 as of the last day of any fiscal quarter; provided, that with respect to Guarantee Obligations incurred by the Company or its Subsidiaries permitted under this Agreement,
3
upon receipt by the Administrative Agent of evidence that a note or other debt instrument will be issued to the Company or such Subsidiary at the time of payment of such Guarantee Obligations, on terms satisfactory to the Administrative Agent, evidencing the amounts owing under such Guarantee Obligation from the Person on whose behalf such Guarantee Obligation was undertaken, the face value of such note or debt instrument shall be included in the calculation of Total Assets solely for purposes of this Section 6.1(d)(i).
Section 5. Conditions Precedent to the Effectiveness of the Waivers and Amendments.
(a) This Consent, the First Waiver and the Amendment shall become effective as of the date (such date, the First Waiver Effective Date) when, and only when, the Administrative Agent shall have received:
(i) this Consent, duly executed by the Borrowers, the Administrative Agent and the Required Lenders;
(ii) a non-refundable consent fee in the amount of $150,000, payable on a pro rata basis to each Lender consenting to this Consent based on the aggregate principal amount of its respective outstanding Term Loans and Revolving Credit Commitments; and
(iii) reimbursement for all its out-of-pocket costs and expenses incurred in connection with the Credit Agreement and the negotiation, preparation, execution and delivery of this Consent and the transactions contemplated hereby, including, without limitation, reasonable fees and other charges of Weil, Gotshal & Manges LLP, counsel to the Administrative Agent.
(b) The Second Waiver shall become effective as of the date (such date, the Second Waiver Effective Date) when, and only when:
(i) the Second Waiver Trigger Event shall have occurred;
(ii) the Administrative Agent shall have received a certificate from a Responsible Officer of the Borrowers stating that, after giving effect to the Second Trigger Event, (A) no Default or Event of Default shall have occurred and be continuing and (B) each of the representations and warranties contained in Section 3 (Representations and Warranties) of the Credit Agreement, the other Loan Documents or in any certificate, document or financial or other statement furnished at any time under or in connection therewith is true and correct in all material respects on and as of the date hereof as if made on and as of such date and except to the extent that such representations and warranties specifically relate to a specific date, in which case such representations and warranties shall be true and correct in all material respects as of such specific date; and
(iii) the Administrative Agent shall have received reimbursement for all its out-of-pocket costs and expenses incurred in connection with the Second Waiver
4
Trigger Event, including, without limitation, reasonable fees and other charges of Weil, Gotshal & Manges LLP, counsel to the Administrative Agent.
Section 6. Representations and Warranties.
On and as of the date hereof, after giving effect to this Consent, the Borrowers hereby represent and warrant to the Administrative Agent and each Lender as follows:
(a) this Consent has been duly authorized, executed and delivered by each Borrower and constitutes the legal, valid and binding obligation of each Borrower, enforceable against each Borrower in accordance with its terms, and the Credit Agreement as modified by this Consent constitutes the legal, valid and binding obligation of each Borrower, enforceable against each Borrower in accordance with its terms;
(b) each of the representations and warranties contained in Section 3 (Representations and Warranties) of the Credit Agreement, the other Loan Documents or in any certificate, document or financial or other statement furnished at any time under or in connection therewith is true and correct in all material respects on and as of the date hereof as if made on and as of such date and except to the extent that such representations and warranties specifically relate to a specific date, in which case such representations and warranties shall be true and correct in all material respects as of such specific date; provided, however, that references therein to the Credit Agreement shall be deemed to refer to the Credit Agreement as modified hereby;
(c) no Default or Event of Default has occurred and is continuing; and
(d) no litigation has been commenced against any Loan Party or any of its Subsidiaries seeking to restrain or enjoin (whether temporarily, preliminarily or permanently) the performance of any action by any Loan Party required or contemplated by this Consent, the Credit Agreement or any Loan Document, in each case as modified hereby (if applicable).
Section 7. Fees and Expenses.
The Borrowers and each other Loan Party agree to pay on demand in accordance with the terms of Section 9.5 (Payment of Expenses) of the Credit Agreement all reasonable out of pocket costs and expenses of the Administrative Agent in connection with the preparation, reproduction, execution and delivery of this Consent and all other Loan Documents entered into in connection herewith.
Section 8. Reference to the Effect on the Loan Documents.
(a) As of the date hereof, each reference in the Credit Agreement to this Agreement, hereunder, hereof, herein, or words of like import, and each reference in the other Loan Documents to the Credit Agreement (including, without limitation, by means of words like thereunder, thereof and words of like import), shall mean and be a reference to the Credit Agreement as modified hereby, and this Consent and the Credit Agreement shall be read together and construed as a single instrument.
5
(b) Except as expressly modified hereby, all of the terms and provisions of the Credit Agreement and all other Loan Documents are and shall remain in full force and effect and are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Consent shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Lenders or the Administrative Agent under any of the Loan Documents, nor constitute a waiver or amendment of any other provision of any of the Loan Documents or for any purpose except as expressly set forth herein.
(d) This Consent shall be deemed a Loan Document.
Section 9. Execution in Counterparts.
This Consent may be executed in any number of counterparts and by different parties in separate counterpart (including by facsimile), each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are attached to the same document. Delivery of an executed counterpart by telecopy shall be effective as delivery of a manually executed counterpart of this Consent.
Section 10. Release.
In consideration of the Administrative Agent and the Required Lenders willingness to enter into this Consent, each Loan Party hereby releases the Administrative Agent and each Lender and each of their respective officers, employees, representatives, agents, counsel and directors from any and all actions, causes of action, claims, demands, damages and liabilities of whatever kind or nature, in law or in equity, now known or unknown, suspected or unsuspected to the extent that any of the foregoing arises from any action or failure to act in connection with the Loan Documents on or prior to the date hereof.
Section 11. Governing Law.
This Consent shall be governed by and construed in accordance with the law of the State of New York.
Section 12. Section Titles.
The Section titles contained in this Consent are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto.
Section 13. Notices.
All communications and notices hereunder shall be given as provided in the Credit Agreement.
6
Section 14. Severability.
The fact that any term or provision of this Agreement is held invalid, illegal or unenforceable as to any person in any situation in any jurisdiction shall not affect the validity, enforceability or legality of the remaining terms or provisions hereof or the validity, enforceability or legality of such offending term or provision in any other situation or jurisdiction or as applied to any person.
Section 15. Successors.
The terms of this Consent shall be binding upon, and shall inure to the benefit of, the Lenders, the other parties hereto and their respective successors and assigns.
Section 16. Waiver of Jury Trial.
Each of the parties hereto irrevocably waives trial by jury in any action or proceeding with respect to this Consent or any other Loan Document.
[Signature Pages Follow]
7
IN WITNESS WHEREOF, the parties hereto have caused this Consent to be executed by their respective officers thereunto duly authorized, as of the date first written above.
MVC CAPITAL, INC., as Borrower | ||
By: | ||
Name: |
Peter Seidenberg | |
Title: |
CFO |
MVC FINANCIAL SERVICES, INC., as Borrower | ||
By: | ||
Name: |
Peter Seidenberg | |
Title: |
Treasurer |
GUGGENHEIM CORPORATE FUNDING, LLC, as Administrative Agent | ||
By: | ||
Name: |
William Hagner | |
Title: |
Senior Managing Director |
MIDLAND NATIONAL LIFE INSURANCE COMPANY, as Lender | ||
By: | Guggenheim Partners Asset Management, LLC | |
By: | ||
Name: |
Anne B. Walsh | |
Title: |
Senior Managing Director |
NORTH AMERICAN COMPANY FOR LIFE AND HEALTH INSURANCE, as Lender | ||
By: | Guggenheim Partners Asset Management, LLC | |
By: | ||
Name: |
Anne B. Walsh | |
Title: |
Senior Managing Director |
SANDS POINT FUNDING LTD., as Lender | ||
By: | Guggenheim Investment Management, LLC, its Collateral Manager | |
By: | ||
Name: |
Michael Damaso | |
Title: |
Senior Managing Director |
COPPER RIVER CLO LTD., as Lender | ||
By: | Guggenheim Investment Management, LLC, its Collateral Manager | |
By: | ||
Name: |
Michael Damaso | |
Title: |
Senior Managing Director |
KENNECOTT FUNDING LTD., as Lender | ||
By: | Guggenheim Investment Management, LLC, its Collateral Manager | |
By: | ||
Name: |
Michael Damaso | |
Title: |
Senior Managing Director |
GREEN LANE CLO LTD., as Lender | ||
By: | Guggenheim Investment Management, LLC, its Collateral Manager | |
By: | ||
Name: |
Michael Damaso | |
Title: |
Senior Managing Director |
IRON HILL CLO LIMITED, as Lender | ||
By: | Guggenheim Partners Europe Limited, its Collateral Manager | |
By: | ||
Name: |
Adrian Duffy | |
Title: |
Senior Managing Director | |
Guggenheim Partners Europe Limited |
EXHIBIT 31
RULE 13a-14(a) CERTIFICATIONS
I, Michael Tokarz, certify that:
1. I have reviewed this annual report on Form 10-K of MVC Capital, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: January 12, 2012 | /s/ Michael Tokarz | |||
Michael Tokarz
In the capacity of the officer who performs the functions of Principal Executive Officer of MVC Capital, Inc. |
I, Peter Seidenberg, certify that:
1. I have reviewed this annual report on Form 10-K of MVC Capital, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: January 12, 2012 | /s/ Peter Seidenberg | |||
Peter Seidenberg
In the capacity of the officer who performs the functions of Principal Financial Officer of MVC Capital, Inc. |
EXHIBIT 32
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Michael Tokarz, in the capacity of the officer who performs the functions of Principal Executive Officer of MVC Capital, Inc., a Delaware corporation (the Registrant), certifies that:
1. The Registrants Annual Report on Form 10-K for the period ended October 31, 2011 (the Form 10-K) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
In the capacity of the officer who performs the functions
of Principal Executive Officer for MVC Capital, Inc. |
/s/ Michael Tokarz |
Michael Tokarz |
Date: January 12, 2012
Peter Seidenberg, in the capacity of the officer who performs the functions of Principal Financial Officer, of MVC Capital, Inc., a Delaware corporation (the Registrant), certifies that:
1. The Registrants Annual Report on Form 10-K for the period ended October 31, 2011 (the Form 10-K) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
In the capacity of the officer who performs the functions
of Principal Financial Officer for MVC Capital, Inc. |
/s/ Peter Seidenberg |
Peter Seidenberg |
Date: January 12, 2012
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