e497
The
information in this preliminary prospectus supplement is not
complete and may be changed. A registration statement relating
to these securities has been filed with and declared effective
by the Securities and Exchange Commission. This preliminary
prospectus supplement and the accompanying prospectus are not an
offer to sell these securities and are not soliciting an offer
to buy these securities in any state where the offer or sale is
not permitted.
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PRELIMINARY
PROSPECTUS SUPPLEMENT
|
SUBJECT
TO COMPLETION
|
February 22,
2007
|
To
the Prospectus dated February 9, 2007
5,000,000 Shares
Common
Stock
$ per
share
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. We have elected to be treated
as a regulated investment company for U.S. federal income
tax purposes. Our investment objective is to seek to maximize
total return from capital appreciation
and/or
income. We seek to achieve our investment objective primarily by
providing equity and debt financing to small- and mid-sized
companies that are, for the most part, privately owned. No
assurances can be given that we will achieve our objective.
We are offering for sale 5,000,000 shares of our common
stock. Our common stock is traded on the New York Stock Exchange
under the symbol MVC. The last reported closing
price for our common stock on February 13, 2007 was
$16.98 per share.
This prospectus supplement and the accompanying prospectus set
forth information about us that a prospective investor should
know before investing. Please read it before you invest and keep
it for future reference.
Investing in our common stock involves a high degree of risk.
Before buying any shares, you should read the discussion of the
material risks of investing in our common stock in Risk
Factors beginning on page 12 of the accompanying
prospectus and Risk factors beginning on
page S-14
of this prospectus supplement.
Neither the Securities and Exchange Commission nor any state
securities commission, nor any other regulatory body has
approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus is
truthful or complete. Any representation to the contrary is a
criminal offense.
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Per
share
|
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Total
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Public Offering Price
|
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$
|
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$
|
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Underwriting Discount and
Commissions
|
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$
|
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$
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Proceeds to Us Before Estimated
Expenses
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$
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$
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We have granted the underwriters a
30-day
option to purchase up to 750,000 additional shares of our
common stock at the public offering price, less the underwriting
discount and commissions, to cover over-allotments.
The underwriters expect to deliver the shares to purchasers on
or about
,
2007.
Joint Book-Running Managers
|
|
UBS
Investment Bank |
Bear,
Stearns & Co. Inc. |
|
|
|
RBC
Capital Markets |
Imperial
Capital, LLC |
Morgan
Joseph |
The date of this Prospectus Supplement
is ,
2007.
You should rely only on the information contained in this
prospectus supplement and the accompanying base prospectus,
which we refer to collectively as the prospectus. We
have not, and the underwriters have not, authorized anyone to
provide you with additional information, or information
different from that contained in this prospectus supplement and
the accompanying prospectus. If anyone provides you with
different or additional information, you should not rely on it.
We are offering to sell, and seeking offers to buy, common stock
only in jurisdictions where offers and sales are permitted. The
information contained in or incorporated by reference in this
prospectus supplement and the accompanying prospectus is
accurate only as of the date of this prospectus supplement or
such prospectus. Our business, financial condition, results of
operations and prospects may have changed since then.
TABLE OF
CONTENTS
Prospectus Supplement
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S-1
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S-4
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S-6
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S-8
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S-13
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S-14
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S-14
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S-15
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S-15
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S-16
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S-17
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S-18
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S-20
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S-21
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S-22
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S-26
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S-26
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Prospectus
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Prospectus Summary
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1
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Selected Condensed Consolidated
Financial Data
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9
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Fees and Expenses
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10
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Where You Can Find Additional
Information
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12
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Risk Factors
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12
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Disclosure Regarding
Forward-Looking Statements
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22
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Use of Proceeds
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22
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Price Range of Common Stock and
Distributions
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23
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Managements Discussion and
Analysis of Financial Condition and Results of Operations
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24
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Senior Securities
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54
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The Company
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55
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About MVC Capital
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55
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Portfolio Companies
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64
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Determination of Funds Net
Asset Value
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68
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Management
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70
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Compensation of Executive Officers
and Directors
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76
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Advisory Agreement
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77
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Control Persons and Principal
Holders of Securities
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86
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Federal Income Tax Matters
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88
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Certain Government Regulations
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92
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Dividend Reinvestment Plan
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94
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Description of Securities
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94
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Plan of Distribution
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96
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Legal Counsel
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97
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Safekeeping, Transfer and Dividend
Paying Agent and Registrar
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97
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Brokerage Allocation and Other
Practices
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97
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Independent Registered Public
Accounting Firm
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97
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Index to Financial Statements
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F-1
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i
Prospectus
supplement summary
The following summary highlights some of the information in
this prospectus supplement and the accompanying prospectus. It
is not complete and may not contain all the information that you
may want to consider. We encourage you to read more detailed
information set forth in this prospectus supplement and the
accompanying prospectus, including under Risk
Factors in the accompanying prospectus and Risk
factors in this prospectus supplement and any other
documents to which we have referred. In this prospectus
supplement and the accompanying prospectus, unless otherwise
indicated, MVC Capital, we,
us, our or the Company refer
to MVC Capital, Inc. and its subsidiary, MVC Financial Services,
Inc. (MVCFS), and TTG Advisers or the
Adviser refers to The Tokarz Group Advisers LLC.
Unless the context dictates otherwise, we also
refers to TTG Advisers acting on behalf of MVC Capital.
ABOUT
US
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 (a BDC)
under the Investment Company Act of 1940, as amended (the
1940 Act). We provide equity and debt investment
capital to fund growth, acquisitions and recapitalizations of
small- and mid-sized companies in a variety of industries
primarily located in the United States. Our investments take the
form of common and preferred stock and warrants or rights to
acquire equity interests, senior and subordinated loans, or
convertible securities. Our investments generally range between
$3.0 million and $25.0 million each. We generally
target companies with revenues of between $10.0 million and
$150.0 million and annual EBITDA of between
$3.0 million and $25.0 million. Our common stock is
traded on the New York Stock Exchange (NYSE) under
the symbol MVC. MVC Capital, Inc. has elected to be
treated as a regulated investment company (a RIC)
under Subchapter M of the Internal Revenue Code of 1986, as
amended (the Code).
Our investment team is led by Michael Tokarz, who became our
portfolio manager in November 2003. In November 2006, the
Company externalized its investment management function to The
Tokarz Group Advisers LLC, a registered investment adviser that
is controlled by Mr. Tokarz. Mr. Tokarz serves as the
Chairman of MVC Capital and the Manager of TTG Advisers. Prior
to joining MVC Capital, Mr. Tokarz was a senior General
Partner and Administrative Partner at Kohlberg Kravis
Roberts & Co. (KKR), a private equity firm
specializing in management buyouts. During his 17 year
tenure at KKR, Mr. Tokarz participated in diverse types of
investments, including leveraged buyouts, financings,
restructurings and dispositions.
Our strategy is to capitalize on our expertise and experience in
private equity investing and deal structuring, lending, and
providing strategic and financial advisory services in order to
provide customized equity and debt financing solutions to small-
and mid-sized companies in a variety of industries. We believe
that we are one of only a few firms with these capabilities
serving this market and that this sets us apart from many of our
competitors. Our portfolio management strategy is to maximize
total return on our equity and debt investments as well as the
fees we earn for providing services. We look to generate
dividends for our shareholders by targeting yielding investments
in portfolio companies and by earning fees for providing
structuring, monitoring or other financial services to portfolio
companies and other entities. We also target equity and similar
type investments that provide opportunities to generate capital
gains and grow our net asset value. This strategy has the added
advantage that, as of October 31, 2006, we had
approximately $125.0 million in realized and unrealized
capital loss carryforwards that may be available to offset
future capital gains. These potential tax benefits, until
exhausted, allow us to retain realized capital gains without
paying capital gains taxes. Retaining such gains would have the
effect of maintaining our net asset value and the funds
generated by the gains could be used to make new investments.
See Federal Income Tax Matters in the accompanying
prospectus for more information.
S-1
OUR RECENT
OPERATING RESULTS
Mr. Tokarz implemented our strategy in the fiscal year 2004
and we have generated consistently positive returns for
shareholders since then. Our total operating income increased by
37.7%, 206.0% and 51.7% in the fiscal years ended
October 31, 2004, 2005 and 2006, respectively. In addition,
our net assets per share increased by 10.8%, 10.7% and 19.2% in
the fiscal years ended October 31, 2004, 2005 and 2006,
respectively. Finally, our net increase in net assets per share
resulting from operations increased from $0.91 to $1.45 to $2.48
in the fiscal years ended October 31, 2004, 2005 and 2006,
respectively. In the third fiscal quarter of 2005, we instituted
a quarterly dividend program. In accordance with this program,
we have declared and paid seven straight $0.12 quarterly
dividends, as well as a $0.06 special dividend in December 2006.
OUR COMPETITIVE
ADVANTAGE
We believe that the following capabilities provide us with a
competitive advantage over various other capital providers to
small- and mid-sized companies.
Our teams
experience and expertise
The investment team of TTG Advisers is headed by Michael Tokarz,
who has over 30 years of lending and investment experience,
17 of which were with KKR. TTG Advisers has a dedicated
originations and underwriting team comprised of nine investment
professionals with over 15 years average experience in
private equity, leveraged finance, investment banking,
distressed debt transactions and business operations. The
members of the investment team have experience managing
investments and businesses during both recessionary and
expansionary periods, through interest rate cycles and a variety
of financial market conditions. TTG Advisers also retains the
services of other investment and industry professionals with
whom it has developed long-term relationships, on an as-needed
basis. In addition, TTG Advisers employs six other professionals
who manage our operations and provide investment support
functions both directly and indirectly to our portfolio
companies.
Proprietary deal
flow
We have relationships with various private equity firms,
investment banks, business brokers, commercial banks, accounting
firms, law firms, hedge funds, other investment firms, industry
professionals and management teams of several companies, all of
which provide us with access to unique investment opportunities.
Because of these relationships, we often have the first or
exclusive opportunity to provide investment capital and thus may
be able to avoid competitive situations.
Creative and
extensive transaction structuring
We are flexible in the types of securities in which we invest
and their structures, and can invest across a companys
capital structure. We believe that the investment teams
creativity and flexibility in structuring investments, coupled
with our ability to invest in companies across various
industries, gives us the ability to identify unique investment
opportunities and provides us with the opportunity to be a
one-stop capital provider to small- and mid-sized
companies.
Efficient
organizational structure
In contrast to traditional private equity and mezzanine funds,
which typically have a limited life, the perpetual nature of our
corporate structure provides us with a permanent capital base
and ensures we are not exposed to the investor withdrawals and
fund liquidations those other funds sometimes encounter. We
believe this greater flexibility with respect to our investment
horizon affords us greater investment opportunities and is also
attractive to our investors, as our structure enables us to be a
long-term partner for our portfolio companies.
S-2
Counsel to
portfolio companies
We provide valuable support to our portfolio companies in
different ways including: offering advice to senior management
on strategies for realizing their objectives, advising or
participating on their boards of directors, offering ideas to
help increase sales, offering advice on improving margins and
operating more efficiently, helping to augment the management
team, and providing access to external resources (e.g.,
financial, legal, accounting, or technology).
S-3
The offering
|
|
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Common Stock Offered by Us |
|
5,000,000 shares, excluding 750,000 shares of common stock
issuable pursuant to the over-allotment option granted to the
underwriters. |
|
Common Stock to be Outstanding After this Offering |
|
24,099,939 shares, excluding 750,000 shares of common stock
issuable pursuant to the over-allotment option granted to the
underwriters. |
|
Use of Proceeds |
|
We expect to use the net proceeds from this offering to make
investments in portfolio companies in accordance with our
investment objective and strategy, to repay indebtedness owed
under our credit facility and for general corporate purposes.
Pending such uses, we will hold the net proceeds from this
offering in cash or invest all or a portion of such net proceeds
in short-term, highly liquid investments. See Use of
proceeds. |
|
Purchases by Officers and Directors |
|
Directors, officers and employees of TTG Advisers may purchase
up to 400,000 shares. |
|
Dividends |
|
We have a policy of seeking to pay quarterly dividends to
shareholders. Our quarterly dividends, if any, will be
determined by our board of directors. Most recently, on
December 14, 2006, our board of directors declared a
regular quarterly dividend of $0.12 per share and an
additional special dividend of $0.06 per share, both of
which were paid on January 5, 2007 to shareholders of
record on December 28, 2006. |
|
Dividend Reinvestment Plan |
|
All of our shareholders who hold shares of common stock in their
own name will automatically be enrolled in our dividend
reinvestment plan, and as a result, any cash dividends and
distributions paid by us would automatically be reinvested in
additional shares of our common stock. Any shareholder may, of
course, elect to receive his or her dividends and distributions
in cash. See Dividend Reinvestment Plan in the
accompanying prospectus. |
|
NYSE Symbol |
|
MVC |
|
Financing Strategy |
|
We borrow funds to make additional investments, including
through a secured credit facility that we entered into on
April 27, 2006 (the Credit Facility), and we
may grant a security interest in our assets to a lender in
connection with any such borrowings under that facility or any
similar agreement into which we may enter. We expect to use this
practice, which is known as leverage, to attempt to
increase returns to our stockholders. 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 will
depend on our assessment of market and other factors at the time
of any proposed borrowing. However, leverage involves
significant risks. See Risk Factors in the
accompanying prospectus. |
S-4
|
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|
Risk Factors |
|
There is no assurance that we will achieve our objective and an
investment in our Company is subject to various risks. See
Risk Factors beginning on page 12 of the
accompanying prospectus and Risk factors beginning
on
page S-14
of this prospectus supplement and the other information included
in this prospectus supplement and the accompanying prospectus
for a discussion of factors you should carefully consider before
deciding to invest in shares of our common stock. |
|
Available Information |
|
We are required to file periodic reports, proxy statements and
other information with the Securities and Exchange Commission
(the SEC). This information will be available at the
SECs public reference room, located at
100 F Street, N.E., Room 1580,
Washington, D.C. and on the SECs Internet website at
www.sec.gov. We also maintain a website which can be used for
accessing our information at www.mvccapital.com. |
S-5
Fees and expenses
This table describes the various costs and expenses that an
investor in our common stock will bear directly or indirectly.
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Shareholder Transaction
Expenses (as a percentage of the offering price)
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Sales load
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5.00
|
%
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Offering expenses borne by
us(1)
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1.53
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%
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Total shareholder transaction
expenses
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6.53
|
%
|
Estimated Annual Expenses (as a
percentage of average consolidated net assets attributable to
common
stock)(2)
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Management fees
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2.61
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%(3)
|
Incentive fees payable under
Advisory Agreement (20% of net realized capital gains (on new
portfolio) and 20% of pre-incentive fee net operating income)
|
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2.82
|
%(3)
|
Other expenses
|
|
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1.31
|
%(4)
|
Interest payments on borrowed funds
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0.74
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%(5)
|
Total annual expenses
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7.48
|
%
|
Amount waived under Expense Cap
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|
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0.67
|
%(6)
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Total annual expenses after
Expense Cap
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6.81
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%
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|
(1) |
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The percentage reflects estimated offering expenses of
approximately $1.3 million. |
|
(2) |
|
Average consolidated net assets attributable to common
stock equals net assets at October 31, 2006. The SEC
requires that Total annual expenses be calculated as
a percentage of net assets in the above chart rather than as a
percentage of total assets. Total assets includes assets that
have been funded with borrowed funds (leverage). For reference,
the chart below illustrates our Total annual
expenses as a percentage of total assets: |
|
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Estimated Annual Expenses
(as a percentage of total assets)
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Management fees
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2.00
|
%(3)
|
Incentive fees payable under
Advisory Agreement (20% of net
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realized capital gains (on new
portfolio) and 20% of
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pre-incentive fee net operating
income)
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2.16
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%(3)
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Other expenses
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1.00
|
%(4)
|
Interest payments on borrowed
funds
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0.57
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%(5)
|
Total annual expenses
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5.73
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%
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Amount waived under Expense
Cap
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0.52
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%(6)
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Total annual expenses after
Expense Cap
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5.21
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%
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(3) |
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Pursuant to the Investment Advisory and Management Agreement,
dated October 31, 2006 (the Advisory
Agreement), we pay TTG Advisers a base management fee and
an incentive fee. The base management fee is calculated at an
annual rate of 2% of our total assets (excluding cash and the
value of any investment by us not made in an eligible
portfolio company (Non-Eligible Assets) but
including assets purchased with borrowed funds that are not
Non-Eligible Assets). The incentive fee payable to TTG Advisers
is based on our performance and may not be paid unless we
achieve certain goals. The incentive fee percentage shown in the
charts above is based on the current reserve for incentive
compensation (as of October 31, 2006), which remains unpaid
until certain realization events occur. For a more complete
description of the management and incentive fees, please see
Advisory Agreement in the accompanying
prospectus. |
|
(4) |
|
Other expenses are based on actual expenses
incurred for the fiscal year ended October 31, 2006.
However, these expenses exclude expenses that would not have
been incurred had the Advisory Agreement been in effect during
the past fiscal year. |
S-6
Fees and
expenses
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(5) |
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The estimate is based on borrowings outstanding as of
October 31, 2006 and our assumption is that our borrowings
and interest costs after this offering will remain similar to
the amounts outstanding and incurred for the fiscal year ended
October 31, 2006. See Risk FactorsBusiness
RisksWe have borrowed and may continue to borrow money,
which magnifies the potential for gain or loss on amounts
invested and may increase the risk of investing in us and
Managements Discussion and Analysis of Financial
Condition and Results of Operations in the accompanying
prospectus. |
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(6) |
|
TTG Advisers has contractually agreed to an expense cap for
each of the next two full fiscal years (i.e., the fiscal years
2007 and 2008) pursuant to which it will absorb or
reimburse operating expenses of the Company promptly following
the completion of such year, to the extent necessary to limit
the Companys Expense Ratio (as defined below) for any such
year to 3.25% (Expense Cap); provided however, if,
on October 31, 2007, the Companys net assets have not
increased by at least 5% from October 31, 2006, the dollar
value of the Expense Cap shall increase by 5% for the fiscal
year 2008. For these purposes, the Companys Expense
Ratio shall be calculated as of October 31 of any
such year and means: (i) 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,
taxes, incentive compensation, and extraordinary expenses
(including, but not limited to, any legal claims and liabilities
and litigation costs and any indemnification related thereto,
and the costs of any spin-off or other similar type transaction
contemplated by the Advisory Agreement)), as a percentage of
(ii) the average net assets of the Company (i.e., average
consolidated assets less average consolidated liabilities)
during such fiscal year as set forth in the Companys
financial statements contained in the Companys annual
report on
Form 10-K.
The Expense Cap is described further in Advisory
Agreement in the accompanying prospectus. |
Example
The following example, required by the SEC, demonstrates the
projected dollar amount of total cumulative expenses that would
be incurred over various periods with respect to a hypothetical
investment in us. In calculating the following expense amounts,
we assumed we would have no leverage and that our operating
expenses would remain at the levels set forth in the table above.
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1 Year
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3 Years
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5 Years
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10 Years
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You would pay the following
cumulative expenses on a $1,000 investment, assuming a 5.0%
annual return
|
|
$
|
67
|
|
|
$
|
199
|
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|
$
|
325
|
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|
$
|
622
|
|
Although the example assumes, as required by the SEC, a 5.0%
annual return, our performance will vary and may result in a
return of greater or less than 5.0%. In addition, while the
example assumes reinvestment of all dividends and distributions
at net asset value, participants in the dividend reinvestment
plan may receive shares of common stock that we issue at net
asset value or are purchased by the administrator of the
dividend reinvestment plan, at the market price in effect at the
time, which may be at or below net asset value. See
Dividend Reinvestment Plan in the accompanying
prospectus.
The example should not be considered a representation of
future expenses, and the actual expenses may be greater or less
than those shown.
S-7
Our portfolio
investments
The table below provides information on all of our portfolio
company investments as of October 31, 2006.
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Company
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Industry
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Investment
|
|
Principal
|
|
|
Cost
|
|
|
Fair
Value(g)
|
|
|
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|
Non-Control/Non-Affiliated
Investments 30.32%(a,c)
|
|
Actelis Networks, Inc.
|
|
Technology Investments
|
|
Preferred Stock
(150,602 shares)(d)
|
|
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|
|
|
$
|
5,000,003
|
|
|
$
|
|
|
|
|
Amersham Corp.
|
|
Manufacturer of
PrecisionMachined Components
|
|
Second Lien Seller
Note 10.0000%,
06/29/2010(f)
|
|
$
|
2,473,521
|
|
|
|
2,473,521
|
|
|
|
2,473,521
|
|
|
|
|
|
Second Lien Seller
Note 16.0000%,
06/30/2013(b,f)
|
|
|
2,627,538
|
|
|
|
2,627,538
|
|
|
|
2,627,538
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,101,059
|
|
|
|
5,101,059
|
|
|
|
BP Clothing, LLC
|
|
Apparel
|
|
Second Lien Loan 14.0000%,
07/18/2012(b,f)
|
|
|
10,041,165
|
|
|
|
9,862,650
|
|
|
|
10,041,165
|
|
|
|
|
|
Term Loan A 9.6500%,
07/18/2011(f)
|
|
|
2,910,000
|
|
|
|
2,858,549
|
|
|
|
2,858,549
|
|
|
|
|
|
Term Loan B 11.8000%,
07/18/2011(f)
|
|
|
2,000,000
|
|
|
|
1,964,638
|
|
|
|
1,964,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,685,837
|
|
|
|
14,864,352
|
|
|
|
DPHI, Inc.
|
|
Technology Investments
|
|
Preferred Stock
(602,131 shares)(d)
|
|
|
|
|
|
|
4,520,350
|
|
|
|
|
|
|
|
FOLIOfn, Inc.
|
|
Technology Investments
|
|
Preferred Stock
(5,802,259 shares)(d)
|
|
|
|
|
|
|
15,000,000
|
|
|
|
5,000,000
|
|
|
|
Henry Company
|
|
Building Products/
Specialty Chemicals
|
|
Term Loan A 8.8244%,
04/06/2011(f)
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
|
|
|
|
Term Loan B 13.0744%,
04/06/2011(f)
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
Innovative Brands, LLC
|
|
Consumer Products
|
|
Term Loan 11.1250%,
09/22/2011(f)
|
|
|
15,000,000
|
|
|
|
15,000,000
|
|
|
|
15,000,000
|
|
|
|
JDC Lighting, LLC
|
|
Electrical Distribution
|
|
Senior Subordinated Debt 17.0000%,
01/31/2009(b,f)
|
|
|
3,035,844
|
|
|
|
2,988,002
|
|
|
|
3,035,844
|
|
|
|
MainStream Data
|
|
Technology Investments
|
|
Common Stock
(5,786 shares)(d)
|
|
|
|
|
|
|
3,750,000
|
|
|
|
|
|
|
|
SafeStone
Technologies PLC
|
|
Technology Investments
|
|
Preferred Stock
(2,106,378 shares)(d,e)
|
|
|
|
|
|
|
4,015,402
|
|
|
|
|
|
|
|
Sonexis, Inc.
|
|
Technology Investments
|
|
Common Stock
(131,615 shares)(d)
|
|
|
|
|
|
|
10,000,000
|
|
|
|
|
|
|
|
SP Industries, Inc.
|
|
Laboratory Research Equipment
|
|
Term Loan B 13.3244%,
03/31/2011(f)
|
|
|
3,059,300
|
|
|
|
3,007,411
|
|
|
|
3,059,300
|
|
|
|
|
|
Senior Subordinated Debt 16.0000%,
03/31/2012(b,f)
|
|
|
12,959,013
|
|
|
|
12,653,021
|
|
|
|
12,959,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,660,432
|
|
|
|
16,018,313
|
|
|
|
S-8
Our portfolio
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Fair
Value(g)
|
|
|
|
|
Storage Canada, LLC
|
|
Self Storage
|
|
Term Loan 8.7500%,
03/30/2013(f)
|
|
$
|
1,320,500
|
|
|
$
|
1,327,073
|
|
|
$
|
1,320,500
|
|
|
|
|
|
Term Loan 8.7500%,
10/06/2013(f)
|
|
|
619,000
|
|
|
|
619,000
|
|
|
|
619,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,946,073
|
|
|
|
1,939,500
|
|
|
|
Total Safety U.S., Inc.
|
|
Engineering Services
|
|
Term Loan A 9.8300%,
12/31/2010(f)
|
|
|
4,908,257
|
|
|
|
4,908,257
|
|
|
|
4,908,257
|
|
|
|
|
|
Term Loan B 13.8300%,
12/31/2010(f)
|
|
|
981,651
|
|
|
|
981,651
|
|
|
|
981,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,889,908
|
|
|
|
5,889,908
|
|
|
|
Sub Total
Non-Control/Non-Affiliated Investments
|
|
|
|
|
|
|
108,557,066
|
|
|
|
71,848,976
|
|
|
|
Affiliate
Investments31.75%(a,c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dakota Growers
Pasta Company, Inc.
|
|
Manufacturer of
Packaged Foods
|
|
Common Stock (1,081,195 shares)
|
|
|
|
|
|
|
5,879,242
|
|
|
|
8,957,880
|
|
|
|
Endymion Systems, Inc.
|
|
Technology Investments
|
|
Preferred Stock
(7,156,760 shares)(d)
|
|
|
|
|
|
|
7,000,000
|
|
|
|
|
|
|
|
Harmony Pharmacy &
Health Center, Inc.
|
|
HealthcareRetail
|
|
Common Stock
(2,000,000 shares)(d)
|
|
|
|
|
|
|
750,000
|
|
|
|
750,000
|
|
|
|
Impact Confections,
Inc.
|
|
Confections
Manufacturing and Distribution
|
|
Senior Subordinated Debt 17.0000%,
07/30/2009(b,f)
|
|
|
5,468,123
|
|
|
|
5,390,649
|
|
|
|
5,468,123
|
|
|
|
|
|
Senior Subordinated Debt 9.3244%,
07/29/2008(f)
|
|
|
325,000
|
|
|
|
321,218
|
|
|
|
325,000
|
|
|
|
|
|
Common Stock
(252 shares)(d)
|
|
|
|
|
|
|
2,700,000
|
|
|
|
2,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,411,867
|
|
|
|
8,493,123
|
|
|
|
Marine Exhibition
Corporation
|
|
Theme Park
|
|
Senior Subordinated Debt 11.0000%,
06/30/2013(b,f)
|
|
|
10,091,111
|
|
|
|
9,899,988
|
|
|
|
10,091,111
|
|
|
|
|
|
Convertible Preferred Stock
(20,000 shares)(b)
|
|
|
|
|
|
|
2,035,652
|
|
|
|
2,035,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,935,640
|
|
|
|
12,126,763
|
|
|
|
Octagon Credit
Investors, LLC
|
|
Financial Services
|
|
Term Loan 9.5744%,
12/31/2011(f)
|
|
|
5,000,000
|
|
|
|
4,931,096
|
|
|
|
5,000,000
|
|
|
|
|
|
Revolving Line of Credit 9.5744%,
12/31/2011(f)
|
|
|
3,250,000
|
|
|
|
3,250,000
|
|
|
|
3,250,000
|
|
|
|
|
|
Limited Liability Company Interest
|
|
|
|
|
|
|
894,095
|
|
|
|
1,927,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,075,191
|
|
|
|
10,177,932
|
|
|
|
Phoenix Coal
Corporation
|
|
Coal Processing and Production
|
|
Common Stock
(1,666,667)(d)
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
Second Lien Note 15.0000%,
06/08/2011(b,f)
|
|
|
7,088,615
|
|
|
|
6,959,809
|
|
|
|
7,088,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,959,809
|
|
|
|
8,088,615
|
|
|
|
PreVisor, Inc.
|
|
Human Capital Management
|
|
Common Stock
(9 shares)(d)
|
|
|
|
|
|
|
6,000,000
|
|
|
|
6,000,000
|
|
|
|
S-9
Our portfolio
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Fair
Value(g)
|
|
|
|
|
Vitality Foodservice,
Inc.
|
|
Non-Alcoholic Beverages
|
|
Common Stock
(500,000 shares)(d)
|
|
|
|
|
|
$
|
5,000,000
|
|
|
$
|
8,500,000
|
|
|
|
|
|
Preferred Stock
(1,000,000 shares)(b,f)
|
|
|
|
|
|
|
9,660,637
|
|
|
|
11,053,827
|
|
|
|
|
|
Warrants(d)
|
|
|
|
|
|
|
|
|
|
|
1,100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,660,637
|
|
|
|
20,653,827
|
|
|
|
Sub Total Affiliate
Investments
|
|
|
|
|
|
|
71,672,386
|
|
|
|
75,248,140
|
|
|
|
Control
Investments54.34%(a,c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
auto MOTOL BENI
|
|
Automotive Dealership
|
|
Common Stock
(200 shares)(d,e)
|
|
|
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
Baltic Motors
Corporation
|
|
Automotive Dealership
|
|
Senior Subordinated Debt 10.0000%,
06/24/2007(e,f)
|
|
$
|
4,500,000
|
|
|
|
4,500,000
|
|
|
|
4,500,000
|
|
|
|
|
|
Bridge Loan 12.0000%,
12/22/2006(e,f)
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
Common Stock
(60,684 shares)(d,e)
|
|
|
|
|
|
|
8,000,000
|
|
|
|
21,155,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,500,000
|
|
|
|
26,655,000
|
|
|
|
Ohio Medical
Corporation
|
|
Medical Device
Manufacturer
|
|
Common Stock
(5,620 shares)(d)
|
|
|
|
|
|
|
17,000,000
|
|
|
|
26,200,000
|
|
|
|
SGDA
Sanierungsgesellschaft
fur Deponien und
Altlasten
|
|
Soil Remediation
|
|
Term Loan 7.0000%,
08/25/2009(e,f)
|
|
|
6,187,350
|
|
|
|
5,989,710
|
|
|
|
5,989,710
|
|
|
|
|
|
Common Equity
Interest(d,e)
|
|
|
|
|
|
|
338,551
|
|
|
|
338,551
|
|
|
|
|
|
Preferred Equity
Interest(d,e)
|
|
|
|
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,328,261
|
|
|
|
11,328,261
|
|
|
|
SIA BM Auto
|
|
Automotive Dealership
|
|
Common Stock
(47,300 shares)(d,e)
|
|
|
|
|
|
|
8,000,000
|
|
|
|
8,000,000
|
|
|
|
Summit Research
Labs, Inc.
|
|
Specialty Chemicals
|
|
Second Lien Loan 14.0000%,
08/15/2012(b,f)
|
|
|
5,044,813
|
|
|
|
4,948,327
|
|
|
|
5,044,813
|
|
|
|
|
|
Preferred Stock
(800 shares)(d)
|
|
|
|
|
|
|
11,200,000
|
|
|
|
11,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,148,327
|
|
|
|
16,244,813
|
|
|
|
Timberland Machines &
Irrigation, Inc.
|
|
DistributorLandscaping
and Irrigation Equipment
|
|
Senior Subordinated Debt 14.4260%,
08/04/2009(b,f)
|
|
|
6,607,859
|
|
|
|
6,551,408
|
|
|
|
6,607,859
|
|
|
|
|
|
Junior Revolving Line
of Credit 12.5000%,
07/07/2007(f)
|
|
|
2,829,709
|
|
|
|
2,829,709
|
|
|
|
2,829,709
|
|
|
|
|
|
Common Stock
(542 shares)(d)
|
|
|
|
|
|
|
5,420,291
|
|
|
|
4,420,291
|
|
|
|
|
|
Warrants(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,801,408
|
|
|
|
13,857,859
|
|
|
|
S-10
Our portfolio
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Fair
Value(g)
|
|
|
|
|
Turf Products, LLC
|
|
DistributorLandscaping
and Irrigation Equipment
|
|
Senior Subordinated Debt 15.0000%,
11/30/2010(b,f)
|
|
|
7,676,330
|
|
|
$
|
7,627,137
|
|
|
$
|
7,676,330
|
|
|
|
|
|
Limited Liability Company
Interest(d)
|
|
|
|
|
|
|
3,821,794
|
|
|
|
5,821,794
|
|
|
|
|
|
Warrants(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,448,931
|
|
|
|
13,498,124
|
|
|
|
Velocitius B.V.
|
|
Renewable Energy
|
|
Common Equity
Interest(d,e)
|
|
|
|
|
|
|
2,966,765
|
|
|
|
2,966,765
|
|
|
|
|
|
Revolving Line of Credit 8.0000%,
10/31/2009(e,f)
|
|
|
143,614
|
|
|
|
143,614
|
|
|
|
143,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,110,379
|
|
|
|
3,110,379
|
|
|
|
Vendio Services, Inc.
|
|
Technology
Investments
|
|
Common Stock
(10,476 shares)(d)
|
|
|
|
|
|
|
5,500,000
|
|
|
|
|
|
|
|
|
|
Preferred Stock
(6,443,188 shares)(d)
|
|
|
|
|
|
|
1,134,001
|
|
|
|
3,400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,634,001
|
|
|
|
3,400,000
|
|
|
|
Vestal Manufacturing
Enterprises, Inc.
|
|
Iron Foundries
|
|
Senior Subordinated Debt 12.0000%,
04/29/2011(f)
|
|
$
|
800,000
|
|
|
|
800,000
|
|
|
|
800,000
|
|
|
|
|
|
Common Stock (81,000 shares)
|
|
|
|
|
|
|
1,850,000
|
|
|
|
3,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,650,000
|
|
|
|
4,500,000
|
|
|
|
Sub Total Control
Investments
|
|
|
|
|
|
|
|
|
|
|
106,621,307
|
|
|
|
128,794,436
|
|
|
|
TOTAL INVESTMENT ASSETS
116.41%(c)
|
|
|
|
|
|
$
|
286,850,759
|
|
|
$
|
275,891,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
See Note 3 of the Notes to Consolidated Financial
Statements in the accompanying prospectus for further
information regarding Investment Classification.
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. All of the Companys equity and debt
investments are issued by eligible portfolio companies, as
defined in the Investment Company Act of 1940, except auto MOTOL
BENI, Baltic Motors Corporation, Safestone Technologies PLC,
SGDA Sanierungsgesellschaft fur Deponien und Altlasten, SIA BM
Auto and Velocitius B.V. The Company makes available significant
managerial assistance to all of the portfolio companies in which
it has invested. |
|
(b) |
|
These securities accrue a portion of their interest/dividends
in payment in kind interest/dividends which is
capitalized to the investment. |
|
(c) |
|
Percentages are based on our net assets which totaled
$236,993,374 as of October 31, 2006. |
|
(d) |
|
Non-income producing assets. |
|
(e) |
|
The principal operations of these portfolio companies are
located outside of the United States. |
|
(f) |
|
All or a portion of these securities have been committed as
collateral for the Credit Facility. |
|
(g) |
|
denotes zero cost/fair
value. |
S-11
Our portfolio
investments
The following summaries provide additional information regarding
any investment whose fair value comprised more than 5% of our
total assets as of October 31, 2006.
Baltic Motors
Corporation
Baltic Motors Corporation (Baltic Motors), Purchase,
New York, is a U.S. company focused on the importation and
sale of Ford and Land Rover vehicles and parts throughout
Latvia, a member of the European Union. The Company made its
initial investment in Baltic Motors in June 2004.
At October 31, 2006, the Companys investment in
Baltic Motors consisted of 60,684 shares of common stock at
a cost of $8.0 million, senior subordinated debt with a
cost basis of $4.5 million and a $1.0 million bridge
loan. The senior subordinated debt has a maturity date of
June 24, 2007 and earns interest at 10% per annum. The
bridge loan bears annual interest at 12% with a maturity date of
January 5, 2007. We are also contemplating follow-on
investments in Baltic Motors to assist that companys
growth and acquisition strategies. At October 31, 2006, the
Companys investment in Baltic Motors was assigned a fair
value of $26.7 million, including the Companys equity
investment in Baltic Motors valued at $21.2 million.
Michael Tokarz, Chairman of the Company, and Christopher
Sullivan, a representative of the Company, serve as directors
for Baltic Motors. Please see Managements Discussion
and Analysis of Financial Condition and Results of
OperationsSubsequent Events in the accompanying
prospectus for subsequent events relating to Baltic Motors.
Ohio Medical
Corporation
Ohio Medical Corporation (Ohio), Gurnee, Illinois,
is a designer, manufacturer and marketer of vacuum regulators,
flow meters and portable suction devices that are primarily sold
to healthcare facilities, and oxygen therapy products and custom
vacuum and compressed air pumping systems for application in
medical gas pumping systems. Its brand names include Ohmeda,
Aeros and HealthCair. Our original investment in Ohio was in
July 2005.
During the fiscal year 2005, the Company invested
$17.0 million and sponsored the acquisition of General
Electrics Ohmeda Brand Suction and Oxygen Therapy business
unit (GE-SOT), a leading global supplier of suction
and oxygen therapy products. On July 14, 2005, in
connection with this transaction, the Company acquired
GE-SOTs largest supplier, Squire Cogswell/Aeros
Instruments, Inc. and merged both businesses creating Ohio
Medical Corporation. The Companys investment in Ohio
consists of 5,620 shares of common stock with a cost basis
of $17.0 million. During the year ended October 31,
2006, the Valuation Committee increased the fair value of the
Companys equity investment in Ohio by $9.2 million
from $17.0 million, as of October 31, 2005, to
approximately $26.2 million. Michael Tokarz, Chairman of
the Company, Peter Seidenberg, Chief Financial Officer of the
Company and David Hadani, a representative of the Company, serve
as directors of Ohio.
Vitality
Foodservice, Inc.
Vitality Foodservice, Inc. (Vitality), Tampa,
Florida, is a market leader in the processing and marketing of
dispensed and non-dispensed juices and frozen concentrate liquid
coffee to the foodservice industry. With an installed base of
over 42,000 dispensers worldwide, Vitality sells its frozen
concentrate through a network of over 350 distributors to such
market niches as institutional foodservice, including schools,
hospitals, cruise ships, hotels and restaurants.
The convertible preferred stock has a liquidation date of
September 24, 2011 and has a yield of 13% per annum.
At October 31, 2006, the investment in Vitality consisted
of 500,000 shares of common stock at a cost of
$5.0 million and 1,000,000 shares of Series A
convertible preferred stock at a cost of approximately
$9.7 million. The convertible preferred stock also has
detachable warrants granting the
S-12
Our portfolio
investments
Company the right to purchase 211,243 shares of common
stock at the price of $0.01 per share. At October 31,
2006, the common stock, Series A convertible preferred
stock and warrants were assigned fair values of approximately
$8.5 million, $11.1 million and $1.1 million,
respectively. David Hadani, a representative of the Company,
serves as a director of Vitality. Please see
Managements Discussion and Analysis of Financial
Condition and Results of OperationsSubsequent Events
in the accompanying prospectus for subsequent events relating to
Vitality.
MVC Partners and
other potential opportunities
Over the past several months, we have been presented with a
number of opportunities to manage and invest in various private
investment funds and offshore business enterprises. However,
because MVC Capital, Inc. is a business development company (and
because of its treatment as a RIC), we are limited in our
ability to participate in many of these opportunities due to the
SEC regulatory and Internal Revenue Service tax requirements to
which we are subject. Therefore, in an effort to provide our
shareholders an opportunity to participate in these
opportunities, we formed the subsidiary MVC Partners LLC
(MVC Partners). It is contemplated that MVC Partners
may be spun-off in the future. Our board of directors has not
yet considered or approved the specific terms of such a
spin-off, and there can be no assurance that the board of
directors will determine to proceed with any such spin-off.
Following any such spin-off, MVC Partners, together with TTG
Advisers, is expected to own, directly or indirectly, an
interest in the general partner or managing member of private
investment vehicles (a Private Fund General
Partner). Each Private Fund General Partner would be
entitled to receive management fees and incentive compensation
from the private investment vehicles it manages (the
Private Fund Compensation). If MVC Partners
were spun-off, our shareholders could participate in a portion
of the Private Fund Compensation received by the Private
Fund General Partners. Further, the vehicles managed by a
Private Fund General Partner will likely be able to take
advantage of investment opportunities without being restricted
by the various rules and regulations governing business
development companies. Consistent with the foregoing strategy,
on December 6, 2006, MVC Partners wholly-owned
subsidiary, MVC Europe LLC, entered into an agreement to co-own
BPE Management Ltd. (BPE) with Parex Asset
Management IPAS, a Baltic investment management company and
subsidiary of the Parex Bank. BPE will pursue investments in
businesses throughout the Baltic region. MVC Partners expects to
enter into a services agreement with TTG Advisers whereby TTG
Advisers, for compensation (including incentive compensation),
would make its resources (e.g., personnel, facilities and
equipment) available to MVC Partners for purposes of carrying
out MVC Partners obligations under its investment
management arrangements.
In addition, our board of directors is also considering selling
or spinning off, through MVC Partners or other means, certain
portfolio company investments of the Company whose continued
ownership, due to their growing size and our regulatory and tax
requirements, could limit our ability to invest in other
business opportunities. Our board has not yet considered or
approved the specific terms of any such sale or spin-off, and
there can be no assurance that the board of directors will
determine to proceed with any such sale or spin-off. Among the
factors the board may consider in determining whether any such
spin-off is in the best interests of our shareholders are: the
viability of MVC Partners as a public company given its expected
revenue and expenses, the listing requirements of the relevant
securities markets on which MVC Partners shares could be
traded, the anticipated market capitalization of MVC Partners,
the anticipated liquidity of MVC Partners shares, the
federal income tax consequences of a spin-off to our
shareholders and the anticipated treatment of MVC Partners for
federal income tax purposes.
S-13
Corporate information
Our principal executive office is located at 287 Bowman Avenue,
2nd Floor, Purchase, New York 10577 and our telephone
number is
(914) 701-0310.
Our Internet website address is http://www.mvccapital.com.
Information contained on our website is not incorporated by
reference into this prospectus supplement or the accompanying
prospectus and you should not consider information contained on
our website to be part of this prospectus supplement or the
accompanying prospectus unless otherwise indicated.
Risk factors
Investing in our common stock involves a high degree of risk.
There can be no assurance that we will achieve our investment
objective. In addition to the other information contained in
this prospectus supplement and the accompanying prospectus, you
should consider carefully the following information before
making an investment in our common stock.
Our ability to
use our capital loss carryforwards may be subject to
limitations.
If we experience a shift in the ownership of our common stock
(e.g., if a shareholder 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 significantly limited. In this
regard, we may seek to address this matter by implementing
restrictions on the ownership of our common stock which, if
implemented, would generally prevent investors from acquiring 5%
or more of the outstanding shares of our common stock. Further,
in the event that we are deemed to have failed to meet the
requirements to qualify as a RIC, our ability to use our capital
loss carryforwards could be adversely affected.
Complying with
the RIC requirements may cause us to forego otherwise attractive
opportunities.
To qualify as a RIC for U.S. federal income tax purposes,
we must satisfy tests concerning the sources of our income, the
nature and diversification of our assets and the amounts we
distribute to our shareholders. We may be unable to pursue
investments that would otherwise be advantageous to us in order
to satisfy the source of income or asset diversification
requirements for qualification as a RIC. In particular, to
qualify as a RIC, at least 50% of our assets must be in the form
of cash and cash items, Government securities, securities of
other RICs, and other securities that represent not more than 5%
of our total assets and not more than 10% of the outstanding
voting securities of the issuer. We have from time to time held
a significant portion of our assets in the form of securities
that exceed 5% of our total assets or more than 10% of the
outstanding securities of the issuer, and compliance with the
RIC requirements may adversely affect our ability to make
additional investments that represent more than 5% of our total
assets or more than 10% of the outstanding voting securities of
the issuer. Thus, compliance with the RIC requirements may
hinder our ability to take advantage of attractive investment
opportunities.
The foregoing represent only two of many material risks relating
to investing in our common stock. Please see the Risk
Factors section beginning on page 12 of the
accompanying prospectus for more information.
S-14
Use of proceeds
We estimate that the net proceeds from the sale of the
5,000,000 shares of our common stock that we are offering,
after deducting the underwriting discount and commissions and
estimated expenses of this offering payable by us, will be
approximately $79.4 million (or $91.5 million, if the
over-allotment is exercised in full), based upon a public
offering price of $16.98 per share. We expect to use the
net proceeds from this offering to make investments in portfolio
companies in accordance with our investment objective and
strategy, to repay all or a portion of indebtedness owed under
the Credit Facility (see The Credit Facility) and
for general corporate purposes (including, for example, funding
our subsidiaries activities). Pending such investments, we
will hold the net proceeds from the sale of our common stock in
cash or invest all or a portion of such net proceeds in short
term, highly liquid investments.
The Credit Facility
At October 31, 2006, we had $100.0 million outstanding
under the Credit Facility, entered into on April 27, 2006
with Guggenheim Corporate Funding, LLC as administrative agent
to the lenders. The Credit Facility matures on April 27,
2010 and bears interest, at the Companys option, at a
floating rate equal to either (i) the LIBOR rate (for one,
two, three or six months), plus a spread of 2.00% per
annum, or (ii) the Prime rate in effect from time to time,
plus a spread of 1.00% per annum. Borrowings under the
Credit Facility were used to fund investments in portfolio
companies and for general corporate purposes. Amounts repaid
under the Credit Facility will remain available for future
borrowings.
S-15
Price range of
common stock
Our common stock is traded on the NYSE under the symbol
MVC. The following table lists the high and low
closing sales prices for our common stock, and the closing sales
price as a percentage of net asset value. On February 13,
2007, the last reported sale price on the NYSE for our common
stock was $16.98 and on January 31, 2007, the
Companys net asset value per share was $13.23.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
Premium/Discount
of
|
|
|
Premium/Discount
of
|
|
|
|
|
|
|
Asset
|
|
|
Closing Sale
Price
|
|
|
High Sales
Price
|
|
|
Low Sales
Price
|
|
|
Declared
|
|
|
|
Value(1)
|
|
|
High
|
|
|
Low
|
|
|
to Net Asset
Value
|
|
|
to Net Asset
Value
|
|
|
Dividends
|
|
|
|
|
Fiscal Year ended
October 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
8.76
|
|
|
$
|
8.47
|
|
|
$
|
7.83
|
|
|
|
(3.31
|
)%
|
|
|
(10.62
|
)%
|
|
|
|
|
Second Quarter
|
|
|
8.85
|
|
|
|
9.20
|
|
|
|
8.19
|
|
|
|
3.95
|
%
|
|
|
(7.46
|
)%
|
|
|
|
|
Third Quarter
|
|
|
9.25
|
|
|
|
9.72
|
|
|
|
8.81
|
|
|
|
5.08
|
%
|
|
|
(4.76
|
)%
|
|
|
|
|
Fourth Quarter
|
|
$
|
9.40
|
|
|
$
|
9.47
|
|
|
$
|
8.94
|
|
|
|
0.74
|
%
|
|
|
(4.89
|
)%
|
|
$
|
0.12
|
|
Fiscal Year ended
October 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
9.41
|
|
|
$
|
9.55
|
|
|
$
|
8.95
|
|
|
|
1.49
|
%
|
|
|
(4.89
|
)%
|
|
|
|
|
Second Quarter
|
|
|
9.64
|
|
|
|
9.50
|
|
|
|
9.17
|
|
|
|
(1.45
|
)%
|
|
|
(4.88
|
)%
|
|
|
|
|
Third Quarter
|
|
|
10.06
|
|
|
|
11.34
|
|
|
|
9.41
|
|
|
|
12.72
|
%
|
|
|
(6.46
|
)%
|
|
$
|
0.12
|
|
Fourth Quarter
|
|
$
|
10.41
|
|
|
$
|
12.22
|
|
|
$
|
10.30
|
|
|
|
17.39
|
%
|
|
|
1.06
|
%
|
|
$
|
0.12
|
|
Fiscal Year ended
October 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
10.94
|
|
|
$
|
12.22
|
|
|
$
|
10.50
|
|
|
|
11.70
|
%
|
|
|
(4.02
|
)%
|
|
$
|
0.12
|
|
Second Quarter
|
|
|
11.40
|
|
|
|
12.75
|
|
|
|
11.66
|
|
|
|
11.84
|
%
|
|
|
2.28
|
%
|
|
$
|
0.12
|
|
Third Quarter
|
|
|
11.70
|
|
|
|
13.49
|
|
|
|
11.98
|
|
|
|
15.30
|
%
|
|
|
2.39
|
%
|
|
$
|
0.12
|
|
Fourth Quarter
|
|
$
|
12.41
|
|
|
$
|
13.87
|
|
|
$
|
12.61
|
|
|
|
11.76
|
%
|
|
|
1.61
|
%
|
|
$
|
0.12
|
|
Fiscal Year ending
October 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
13.23
|
|
|
$
|
15.26
|
|
|
$
|
13.11
|
|
|
|
15.34
|
%
|
|
|
(0.91
|
)%
|
|
$
|
0.18
|
|
Second Quarter (through
February 13, 2007)
|
|
|
*
|
|
|
$
|
17.07
|
|
|
$
|
15.41
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
(1) |
|
Net asset value is currently calculated and published on a
monthly basis. The net asset value shown is as of the last day
in the relevant quarter and therefore may not reflect the net
asset value per share on the date of the high and low sales
prices. The net asset values shown are based on shares
outstanding at the end of each period. To view our latest net
asset value per share, visit our Internet website address at
http://www.mvccapital.com. |
|
* |
|
Net asset value has not yet been calculated for this
period. |
At times, our common stock price per share has traded in excess
of our net asset value per share. We cannot predict whether our
shares of common stock will trade at a premium to net asset
value.
S-16
Distributions
Currently, we have a policy of seeking to pay quarterly
dividends to shareholders. Our quarterly dividends, if any, will
be determined by our board of directors. Most recently, on
December 14, 2006, our board of directors declared a
regular quarterly dividend of $0.12 per share and a special
cash dividend of $0.06 per share, both of which were paid
on January 5, 2007 to shareholders of record on
December 28, 2006.
We maintain a dividend reinvestment plan for our registered
shareholders. As a result, if our board of directors declares a
dividend or distribution, certain shareholders can have any cash
dividends and distributions automatically reinvested in
additional shares of our common stock. Please see Dividend
Reinvestment Plan beginning on page 94 in the
accompanying prospectus for more information.
S-17
Selected condensed
consolidated financial data
You should read the condensed consolidated financial information
below with Consolidated Financial Statements and the
Notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations
included in the accompanying prospectus. Financial information
for the fiscal years ended October 31, 2006, 2005, 2004 and
2003 are derived from the consolidated financial statements,
which have been audited by Ernst & Young LLP, the
Companys current independent registered public accounting
firm. The selected financial data for the fiscal year ended
October 31, 2002 are derived from the financial statements,
which were audited by the Companys former independent
public accountants. For more information concerning the Notes
referred to in the table below, see Notes to Consolidated
Financial Statements beginning on
page F-16
of the accompanying prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
October 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
(in thousands of
U.S. dollars, except per share data)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and related portfolio
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
$
|
13,909
|
|
|
$
|
9,457
|
|
|
$
|
2,996
|
|
|
$
|
2,833
|
|
|
$
|
3,740
|
|
Fee income
|
|
|
3,828
|
|
|
|
1,809
|
|
|
|
926
|
|
|
|
62
|
|
|
|
|
|
Other income
|
|
|
771
|
|
|
|
933
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
18,508
|
|
|
|
12,199
|
|
|
|
3,986
|
|
|
|
2,895
|
|
|
|
3,740
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
3,499
|
|
|
|
2,336
|
|
|
|
1,366
|
|
|
|
2,476
|
|
|
|
696
|
|
Incentive compensation
(Note 5)
|
|
|
6,055
|
|
|
|
1,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
|
|
|
3,420
|
|
|
|
3,021
|
|
|
|
2,891
|
|
|
|
8,911
|
(1)
|
|
|
2,573
|
|
Interest and other borrowing costs
|
|
|
1,594
|
|
|
|
31
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Management fee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
14,568
|
|
|
|
6,505
|
|
|
|
4,259
|
|
|
|
11,387
|
|
|
|
6,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation recovery of management
fees (Note 12, 13)
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
Net operating income (loss) before
taxes
|
|
|
3,940
|
|
|
|
5,694
|
|
|
|
97
|
|
|
|
(8,492
|
)
|
|
|
(3,122
|
)
|
Tax expense (benefit), net
|
|
|
159
|
|
|
|
(101
|
)
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
|
3,781
|
|
|
|
5,795
|
|
|
|
18
|
|
|
|
(8,492
|
)
|
|
|
(3,122
|
)
|
Net realized and unrealized gains
(losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
|
5,221
|
|
|
|
(3,295
|
)
|
|
|
(37,795
|
)
|
|
|
(4,220
|
)
|
|
|
(33,469
|
)
|
Net change in unrealized
appreciation (depreciation)
|
|
|
38,334
|
|
|
|
23,768
|
|
|
|
49,382
|
|
|
|
(42,771
|
)
|
|
|
(21,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gains
(losses) on investments
|
|
|
43,555
|
|
|
|
20,473
|
|
|
|
11,587
|
|
|
|
(46,991
|
)
|
|
|
(55,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net
assets resulting from operations
|
|
$
|
47,336
|
|
|
$
|
26,268
|
|
|
$
|
11,605
|
|
|
$
|
(55,483
|
)
|
|
$
|
(58,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-18
Selected
condensed consolidated financial data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
October 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
(in thousands of
U.S. dollars, except per share data)
|
|
|
Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net
assets per share resulting from operations
|
|
$
|
2.48
|
|
|
$
|
1.45
|
|
|
$
|
0.91
|
|
|
$
|
(3.42
|
)
|
|
$
|
(3.54
|
)
|
Dividends per share
|
|
|
0.48
|
|
|
|
0.24
|
|
|
|
0.12
|
|
|
|
|
|
|
|
0.04
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio at value
|
|
$
|
275,892
|
|
|
$
|
122,298
|
|
|
$
|
78,520
|
|
|
$
|
24,071
|
|
|
$
|
54,194
|
|
Portfolio at cost
|
|
|
286,851
|
|
|
|
171,591
|
|
|
|
151,582
|
|
|
|
146,515
|
|
|
|
133,864
|
|
Total assets
|
|
|
347,047
|
|
|
|
201,379
|
|
|
|
126,577
|
|
|
|
137,880
|
|
|
|
196,511
|
|
Shareholders equity
|
|
|
236,993
|
|
|
|
198,739
|
|
|
|
115,567
|
|
|
|
137,008
|
|
|
|
195,386
|
|
Shareholders equity per
share (net asset value)
|
|
|
12.41
|
|
|
|
10.41
|
|
|
|
9.40
|
|
|
|
8.48
|
|
|
|
11.84
|
|
Common shares outstanding at
period end
|
|
|
19,094
|
|
|
|
19,087
|
|
|
|
12,293
|
|
|
|
16,153
|
|
|
|
16,500
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Investments funded in
period
|
|
|
24
|
|
|
|
9
|
|
|
|
7
|
|
|
|
5
|
|
|
|
10
|
|
Investments funded ($) in period
|
|
$
|
166,300
|
|
|
$
|
53,836
|
|
|
$
|
60,710
|
|
|
$
|
21,955
|
|
|
$
|
26,577
|
|
|
|
|
(1) |
|
The administrative expenses for the year ended
October 31, 2003 included approximately $4.0 million
of proxy/litigation fees and expenses. These are non-recurring
expenses. |
S-19
Capitalization
The following table sets forth our cash and capitalization as of
October 31, 2006 (1) on an actual basis and
(2) as adjusted to reflect the effects of the sale of
5,000,000 shares of our common stock in this offering at an
offering price of $16.98 per share. You should read this
table together with Use of proceeds included in this
prospectus supplement and Use of Proceeds,
Consolidated Financial Statements and the Notes
thereto and Managements Discussion and Analysis of
Financial Condition and Results of Operations included in
the accompanying prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of
October 31, 2006
|
|
|
|
|
|
|
As Adjusted
For
|
|
|
|
|
|
|
February 2007
|
|
|
|
Actual
|
|
|
Offering(1)
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
66,217,123
|
|
|
$
|
145,572,123
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
347,046,649
|
|
|
$
|
426,401,649
|
|
|
|
|
|
|
|
|
|
|
Borrowings under the Credit
Facility
|
|
$
|
100,000,000
|
|
|
$
|
100,000,000
|
(2)
|
|
|
|
|
|
|
|
|
|
Common stock, par value
$0.01 per share; 150,000,000 shares authorized,
19,093,929 shares issued and outstanding,
24,093,929 shares issued and outstanding, as adjusted
|
|
|
231,459
|
|
|
|
281,459
|
|
Capital in excess of par value
|
|
|
353,479,871
|
|
|
|
432,784,871
|
|
Accumulated earnings
|
|
|
22,026,261
|
|
|
|
22,026,261
|
|
Dividends paid to stockholders
|
|
|
(21,592,946
|
)
|
|
|
(21,592,946
|
)
|
Accumulated net realized loss
|
|
|
(73,016,601
|
)
|
|
|
(73,016,601
|
)
|
Net unrealized depreciation
|
|
|
(10,959,207
|
)
|
|
|
(10,959,207
|
)
|
Treasury stock, as cost,
4,052,019 shares held
|
|
|
(33,175,463
|
)
|
|
|
(33,175,463
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
236,993,374
|
|
|
$
|
316,348,374
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
336,993,374
|
|
|
$
|
416,348,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does not include the underwriters over-allotment option
of 750,000 shares. |
|
(2) |
|
As described under Use of proceeds, we intend to
use a part of the net proceeds from this offering to repay a
portion of the borrowings outstanding under the Credit Facility.
We have not yet determined how much of the net proceeds of this
offering will be used for this purpose and, as a result, we have
not reflected the consequences of such repayment in this
table. |
S-20
Disclosure regarding
forward-looking statements
Information contained in this prospectus supplement and the
accompanying prospectus may contain forward-looking
statements which can be identified by the use of
forward-looking terminology such as may,
will, expect, intend,
anticipate, estimate or
continue or the negative thereof or other variations
or similar words or phrases. The matters described in Risk
Factors beginning on page 12 of the accompanying
prospectus and Risk factors beginning on page S-14
of this prospectus supplement and certain other factors noted
throughout this prospectus supplement and the accompanying
prospectus constitute cautionary statements identifying
important factors with respect to any such forward-looking
statements, including certain risks and uncertainties, that
could cause actual results to differ materially from those in
such forward-looking statements.
Although we believe that the assumptions on which these
forward-looking statements are based are reasonable, any of
those assumptions could prove to be inaccurate, and as a result,
the forward-looking statements based on those assumptions also
could be incorrect. Important assumptions include our ability to
originate new investments, maintain certain margins and levels
of profitability, access the capital markets for equity and debt
capital, the ability to meet regulatory requirements and the
ability to maintain certain debt to asset ratios. In light of
these and other uncertainties, the inclusion of a projection or
forward-looking statement in this prospectus supplement and the
accompanying prospectus should not be regarded as a
representation by us that our plans and objectives will be
achieved. These risks and uncertainties include those described
in Risk factors and elsewhere in this prospectus
supplement and the accompanying prospectus. You should not place
undue reliance on these forward-looking statements, which apply
only as of the date of this prospectus supplement and the
accompanying prospectus.
S-21
Underwriting
We are offering the shares of our common stock described in this
prospectus supplement and the accompanying prospectus through
the underwriters named below. UBS Securities LLC
(UBS) and Bear, Stearns & Co. Inc.
(Bear Stearns) are the representatives of the
underwriters. We have entered into an underwriting agreement
with the underwriters. Subject to the terms and conditions of
the underwriting agreement, each of the underwriters has
severally agreed to purchase the number of shares of common
stock listed next to its name in the following table:
|
|
|
|
|
|
|
Number of
|
|
Underwriters
|
|
shares
|
|
|
|
|
UBS Securities LLC
|
|
|
|
|
Bear, Stearns & Co.
Inc.
|
|
|
|
|
RBC Capital Markets Corporation
|
|
|
|
|
Imperial Capital, LLC
|
|
|
|
|
Morgan Joseph & Co.
Inc.
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
The underwriting agreement provides that the underwriters must
buy all of the shares if they buy any of them. However, the
underwriters are not required to take or pay for the shares
covered by the underwriters over-allotment option
described below.
Our common stock is offered subject to a number of conditions,
including:
|
|
Ø
|
receipt and acceptance of our common stock by the
underwriters, and
|
|
Ø
|
the underwriters right to reject orders in whole or in
part.
|
In connection with this offering, certain of the underwriters or
securities dealers may distribute prospectus supplements and
prospectuses electronically.
Sales of shares made outside of the United States may be made by
affiliates of the underwriters. Upon the execution of the
underwriting agreement, the underwriters will be obligated to
purchase the shares at the prices and upon the terms stated
therein, and, as a result, will thereafter bear any risk
associated with changing the offering price to the public or
other selling terms.
OVER-ALLOTMENT
OPTION
We have granted the underwriters an option to buy up to
750,000 additional shares of our common stock. The
underwriters may exercise this option solely for the purpose of
covering over-allotments, if any, made in connection with this
offering. The underwriters have 30 days from the date of
this prospectus supplement to exercise this option. If the
underwriters exercise this option, they will purchase additional
shares approximately in proportion to the amounts specified in
the table above.
COMMISSIONS AND
DISCOUNTS
Shares sold by the underwriters to the public will initially be
offered at the offering price set forth on the cover of this
prospectus supplement. Any shares sold by the underwriters to
securities dealers may be sold at a discount of up to
$ per share from the public
offering price. Any of these securities dealers may resell any
shares purchased from the underwriters to other brokers or
dealers at a discount of up to
$ per share from the public
offering price. If all the shares are not sold at the public
offering price, the representatives may change the offering
price and the other selling terms. Sales of shares made outside
of the United States may be made by affiliates of the
underwriters.
S-22
Underwriting
The following table shows the per share and total underwriting
discounts and commissions we will pay to the underwriters,
assuming both no exercise and full exercise of the
underwriters option to purchase up to an additional
750,000 shares:
|
|
|
|
|
|
|
|
|
|
|
No
exercise
|
|
|
Full
exercise
|
|
|
|
|
Per share
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
In compliance with National Association of Securities Dealers.
Inc. (NASD) guidelines, the maximum compensation
received by NASD Members in connection with this offering will
not exceed 10% of the gross proceeds of the offering, plus 0.5%
for bona fide due diligence expenses.
We estimate that the total expenses of this offering payable by
us, not including the underwriting discounts and commissions,
will be approximately $1.3 million.
NO SALES OF
SIMILAR SECURITIES
We, our executive officers and directors have entered into
lock-up
agreements with the underwriters. Under these agreements, we and
each of these persons may not, without the prior written
approval of UBS and Bear Stearns, subject to limited exceptions,
offer, sell, contract to sell or otherwise transfer our common
stock or securities convertible into or exercisable or
exchangeable for our common stock. These restrictions will be in
effect for a period of 180 days after the date of this
prospectus supplement. At any time and without public notice,
UBS and Bear Stearns may release all or some of the securities
from these
lock-up
agreements.
INDEMNIFICATION
AND CONTRIBUTION
We have agreed to indemnify the underwriters and their
controlling persons against certain liabilities, including
liabilities under the Securities Act. If we are unable to
provide this indemnification, we will contribute to payments the
underwriters and their controlling persons may be required to
make in respect of those liabilities.
NEW YORK STOCK
EXCHANGE LISTING
Our common stock is quoted on the NYSE under the symbol
MVC.
PRICE
STABILIZATION, SHORT POSITIONS, PASSIVE MARKET MAKING
In connection with this offering, the underwriters may engage in
activities that stabilize, maintain or otherwise affect the
price of our common stock, including:
|
|
Ø
|
stabilizing transactions;
|
|
Ø
|
short sales;
|
|
Ø
|
purchases to cover positions created by short sales;
|
|
Ø
|
imposition of penalty bids; and
|
|
Ø
|
syndicate covering transactions.
|
Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market
price of our common stock while this offering is in progress.
These transactions
S-23
Underwriting
may also include making short sales of our common stock, which
involve the sale by the underwriters of a greater number of
shares of common stock than they are required to purchase in
this offering. Short sales may be covered short
sales, which are short positions in an amount not greater
than the underwriters over-allotment option referred to
above, or may be naked short sales, which are short
positions in excess of that amount.
The underwriters may close out any covered short position either
by exercising their over-allotment option, in whole or in part,
or by purchasing shares in the open market. In making this
determination, the underwriters will consider, among other
things, the price of shares available for purchase in the open
market compared to the price at which they may purchase shares
through the over-allotment option. The underwriters must close
out any naked short position by purchasing shares in the open
market. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward
pressure on the price of the common stock in the open market
that could adversely affect investors who purchased in this
offering.
The underwriters also may impose a penalty
bid. This occurs when a particular underwriter
repays to the underwriters a portion of the underwriting
discount received by it because the representatives have
repurchased shares sold by or for the account of that
underwriter in stabilizing or short covering transactions.
As a result of these activities, the price of our common stock
may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. The underwriters
may carry out these transactions on the NYSE, in the
over-the-counter
market or otherwise.
In addition, in connection with this offering, the underwriters
(and selling group members) may engage in passive market making
transactions in our common stock on the NYSE prior to the
pricing and completion of this offering. Passive market making
consists of displaying bids on the NYSE no higher than the bid
prices of independent market makers and making purchases at
prices no higher than these independent bids and effected in
response to order flow. Net purchases by a passive market maker
on each day are generally limited to a specified percentage of
the passive market makers average daily trading volume in
the common stock during a specified period and must be
discontinued when such limit is reached. Passive market making
may cause the price of our common stock to be higher than the
price that otherwise would exist in the open market in the
absence of these transactions. If passive market making is
commenced, it may be discontinued at any time.
AFFILIATIONS
The underwriters and their affiliates have provided and may
provide certain commercial banking, financial advisory and
investment banking services to us for which they receive fees.
The underwriters and their affiliates may from time to time in
the future engage in transactions with us and perform services
for us in the ordinary course of their business.
NOTICE TO
PROSPECTIVE INVESTORS IN THE EUROPEAN ECONOMIC AREA
In relation to each member state of the European Economic Area
that has implemented the Prospectus Directive (each, a relevant
member state), with effect from and including the date on which
the Prospectus Directive is implemented in that relevant member
state (the relevant implementation date), an offer of shares
described in this prospectus may not be made to the public in
that relevant member state prior to the publication of a
prospectus in relation to the shares that has been approved by
the competent authority in that relevant member state or, where
appropriate, approved in another relevant member state and
notified to the competent authority in that relevant member
state, all in accordance
S-24
Underwriting
with the Prospectus Directive, except that, with effect from and
including the relevant implementation date, an offer of
securities may be offered to the public in that relevant member
state at any time:
|
|
Ø
|
to any legal entity that is authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities or
|
|
Ø
|
to any legal entity that has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than 43,000,000 and
(3) an annual net turnover of more than 50,000,000,
as shown in its last annual or consolidated accounts or
|
|
Ø
|
in any other circumstances that do not require the publication
of a prospectus pursuant to Article 3 of the Prospectus
Directive.
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Each purchaser of shares of our common stock described in this
prospectus located within a relevant member state will be deemed
to have represented, acknowledged and agreed that it is a
qualified investor within the meaning of
Article 2(1)(e) of the Prospectus Directive.
For purposes of this provision, the expression an offer to
the public in any relevant member state means the
communication in any form and by any means of sufficient
information on the terms of the offer and the securities to be
offered so as to enable an investor to decide to purchase or
subscribe the securities, as the expression may be varied in
that member state by any measure implementing the Prospectus
Directive in that member state, and the expression
Prospectus Directive means Directive 2003/71/EC and
includes any relevant implementing measure in each relevant
member state.
The sellers of shares of our common stock have not authorized
and do not authorize the making of any offer of shares through
any financial intermediary on their behalf, other than offers
made by the underwriters with a view to the final placement of
the shares as contemplated in this prospectus. Accordingly, no
purchaser of the shares, other than the underwriters, is
authorized to make any further offer of the shares on behalf of
the sellers or the underwriters.
NOTICE TO
PROSPECTIVE INVESTORS IN THE UNITED KINGDOM
This prospectus is only being distributed to, and is only
directed at, persons in the United Kingdom who fall within the
definition of qualified investor as that term is
defined in Section 86(1) of the Financial Services and
Markets Act 2000 (FSMA) or otherwise in
circumstances which do not result in an offer of transferable
securities to the public in the United Kingdom within the
meaning of FSMA. Any invitation or inducement to engage in
investment activity by the underwriters (within the meaning of
section 21 of the FSMA) in connection with an issue or sale
of shares of our common stock may only be communicated or caused
to be communicated and will only be communicated or caused to be
communicated in circumstances in which section 21(1) of
FSMA does not apply. All applicable provisions of the FSMA with
respect to anything done by the underwriters in relation to the
shares in, from or otherwise involving the United Kingdom must
be complied with. This prospectus and its contents are
confidential and should not be distributed, published or
reproduced (in whole or in part) or disclosed by recipients to
any other persons in the United Kingdom. Any person in the
United Kingdom that is not a qualified investor or a
person to whom this prospectus may lawfully be communicated
should not act or rely on this document or any of its contents.
S-25
Legal matters
Certain legal matters regarding the securities offered by this
prospectus will be passed upon for us by Schulte Roth &
Zabel LLP, 919 Third Avenue, New York, New York 10022. Certain
legal matters in connection with the offering will be passed
upon for the underwriters by Clifford Chance US LLP,
31 West 52nd Street, New York, New York 10019.
Independent
registered public accounting firm
The audited financial statements and schedules included in the
accompanying prospectus to the extent and for the periods
indicated in their reports have been audited by Ernst &
Young LLP, for the years ended October 31, 2006,
October 31, 2005, October 31, 2004 and
October 31, 2003, as set forth in its reports thereon and
included elsewhere herein and are included in reliance upon such
reports given on the authority of said firm as experts in
accounting and auditing.
S-26
$100,000,000
Common Stock
Preferred Stock
Warrants
Debt Securities
MVC Capital, Inc. is a closed-end management investment company
that has elected to be regulated as a business development
company under the Investment Company Act of 1940, as amended
(the 1940 Act). Our investment objective is to seek
to maximize total return from capital appreciation
and/or
income. We seek to achieve our investment objective primarily by
providing equity and debt financing to small and middle-market
companies that are, for the most part, privately owned. No
assurances can be given that we will achieve our objective.
We are managed by The Tokarz Group Advisers LLC, a registered
investment adviser.
We may offer, from time to time, in one or more offerings or
series, together or separately, up to $100,000,000 of our common
stock, preferred stock, debt securities or warrants representing
rights to purchase shares of our common stock, preferred stock
or debt securities, which we refer to, collectively, as the
securities. The securities may be offered at prices
and on terms to be described in one or more supplements to this
prospectus.
Our common stock is traded on the New York Stock Exchange under
the symbol MVC.
This prospectus, and the accompanying prospectus supplement, if
any, sets forth information about us that a prospective investor
should know before investing. It includes the information
required to be included in a prospectus and statement of
additional information. Please read it before you invest and
keep it for future reference. You may request a free copy of
this prospectus, and the accompanying prospectus supplement, if
any, annual and quarterly reports, and other information about
us, and make shareholder inquiries by calling
(914) 510-9400,
by writing to us or from our website at www.mvccapital.com.
Additional information about us has been filed with the
Securities and Exchange Commission and is available on the
Securities and Exchange Commissions website at www.sec.gov.
Investing in our securities
involves a high degree of risk. Before buying any securities,
you should read the discussion of the material risks of
investing in our securities in Risk Factors
beginning on page 12 of this prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
This prospectus may not be used to consummate sales of
securities unless accompanied by a prospectus supplement.
February 9, 2007
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus and the accompanying prospectus supplement, if any.
We have not authorized anyone to provide you with additional
information, or information different from that contained in
this prospectus and the accompanying prospectus supplement, if
any. If anyone provides you with different or additional
information, you should not rely on it. We are offering to sell,
and seeking offers to buy, securities only in jurisdictions
where offers and sales are permitted. The information contained
in or incorporated by reference in this prospectus and the
accompanying prospectus supplement, if any, is accurate only as
of the date of this prospectus or such prospectus supplement.
Our business, financial condition, results of operations and
prospects may have changed since then.
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F-1
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ABOUT
THIS PROSPECTUS
This prospectus is part of a registration statement that we have
filed with the Securities and Exchange Commission, or SEC, using
the shelf registration process. Under the shelf
registration process, we may offer, from time to time, up to an
aggregate of $100,000,000 of our common stock, preferred stock,
debt securities or warrants representing rights to purchase
shares of our common stock, preferred stock or debt securities
on the terms to be determined at the time of the offering. The
securities may be offered at prices and on terms described in
one or more supplements to this prospectus. This prospectus
provides you with a general description of the securities that
we may offer. Each time we use this prospectus to offer
securities, we will provide a prospectus supplement that will
contain specific information about the terms of that offering.
The prospectus supplement may also add, update or change
information contained in this prospectus. Please carefully read
this prospectus and any prospectus
i
supplement together with any exhibits and the additional
information described under the heading Where You Can Find
Additional Information and the section under the heading
Risk Factors before you make an investment decision.
ii
PROSPECTUS
SUMMARY
The following summary highlights some of the information in
this prospectus. It is not complete and may not contain all the
information that you may want to consider. We encourage you to
read this entire document and the documents to which we have
referred.
In this prospectus and any accompanying prospectus
supplement, unless otherwise indicated, MVC Capital,
we, us, our or the
Company refer to MVC Capital, Inc. and its
subsidiary, MVC Financial Services, Inc (MVCFS), and
TTG Advisers or the Adviser refers to
The Tokarz Group Advisers LLC. Unless the context dictates
otherwise, we also refers to TTG Advisers acting on
behalf of MVC Capital.
THE
COMPANY
MVC Capital is an externally managed, non-diversified,
closed-end management investment company that has elected to be
regulated as a business development company under the 1940 Act.
MVC Capital provides equity and debt investment capital to fund
growth, acquisitions and recapitalizations of small and
middle-market companies in a variety of industries primarily
located in the United States. Our investments can take the form
of common and preferred stock and warrants or rights to acquire
equity interests, senior and subordinated loans, or convertible
securities. Our common stock is traded on the New York Stock
Exchange (NYSE) under the symbol MVC.
Although the Company has been in operation since 2000, the year
2003 marked a new beginning for the Company. In February 2003,
shareholders elected an entirely new board of directors. The
board of directors developed a new long-term strategy for the
Company. In September 2003, upon the recommendation of the board
of directors, shareholders voted to adopt a new investment
objective for the Company of seeking to maximize total return
from capital appreciation
and/or
income. The Companys prior objective had been limited to
seeking long-term capital appreciation from venture capital
investments in information technology industries. Consistent
with our broader objective, we adopted a more flexible
investment strategy of providing equity and debt financing to
small and middle-market companies in a variety of industries.
With the recommendation of the board of directors, shareholders
also voted to appoint Michael Tokarz as Chairman and Portfolio
Manager to lead the implementation of our new objective and
strategy and to stabilize the existing portfolio. Prior to the
arrival of Mr. Tokarz and his new management team in
November 2003, the Company had experienced significant valuation
declines from investments made by the former management team.
After only three quarters of operations under the new management
team, the Company posted a profitable third quarter for the
fiscal year 2004, reversing a trend of 12 consecutive quarters
of net investment losses and earned a profit for the entire
fiscal year. The Company has continued to be profitable in each
of the last eight quarters since then and has recorded net
operating income of approximately $5.7 million and
$3.9 million for the fiscal years ended October 31,
2005 and October 31, 2006, respectively. The change in net
assets resulting from operations increased from
$11.6 million at the end of the fiscal year 2004 to
$26.3 million as of the end of the fiscal year 2005 and to
$47.3 million as of the end of the fiscal year 2006.
On September 7, 2006, the shareholders of the Company
approved the Investment Advisory and Management Agreement, dated
October 31, 2006 (the Advisory Agreement) (with
over 92% of the votes cast on the agreement voting in its
favor), which provided for the Company to be externally managed
by The Tokarz Group Advisers LLC (TTG Advisers). The
agreement took effect on November 1, 2006. TTG Advisers was
organized to provide investment advisory and management services
to the Company and other investment vehicles. TTG Advisers is a
registered investment adviser that is controlled by
Mr. Tokarz. All of the individuals (including the
Companys investment professionals) that had been
previously employed by the Company as of the fiscal year ended
October 31, 2006 are now employed by TTG Advisers and are
expected to continue to provide services to the Company. It is
anticipated that the Companys investment strategy and
selection process will remain the same under the externalized
management structure.
ABOUT MVC
CAPITAL
The Company is managed by TTG Advisers, the Companys
investment adviser. The investment team of TTG Advisers is
headed by Michael Tokarz, who has over 30 years of lending
and investment experience. TTG Advisers has a dedicated
originations and transaction development investment team with
significant experience in private
1
equity, leveraged finance, investment banking, distressed debt
transactions and business operations. The members of the
investment team have invested in and managed businesses during
both recessionary and expansionary periods and through full
interest rate cycles and financial market conditions. TTG
Advisers has eight full-time investment professionals and one
part-time investment professional, the majority of whom were
previously employed by the Company. TTG Advisers also uses the
services of other investment professionals with whom it has
developed long-term relationships, on an as-needed basis. In
addition, TTG Advisers employs five other full-time
professionals and one part-time professional who manage the
operations of the Company and provide investment support
functions both directly and indirectly to our portfolio
companies. As TTG Advisers grows, it expects to hire, train,
supervise and manage new employees at various levels, many of
whom would be expected to provide services to the Company.
The fiscal year 2006 represented a positive year for the
Company. The Company made 16 new investments and eight follow-on
investments. The Company committed a total of
$166.3 million of capital in the fiscal year 2006, compared
to $53.8 million and $60.7 million in the fiscal years
2005 and 2004, respectively. The fiscal year 2006 new
investments included: Turf Products, LLC (Turf),
Strategic Outsourcing, Inc. (SOI), Henry Company
(Henry), SIA BM Auto (BM Auto), Storage
Canada, LLC (Storage Canada), Phoenix Coal
Corporation (Phoenix), Harmony Pharmacy &
Health Center, Inc. (Harmony Pharmacy), Total Safety
U.S., Inc. (Total Safety), PreVisor, Inc.
(PreVisor), Marine Exhibition Corporation
(Marine), BP Clothing, LLC (BP),
Velocitius B.V. (Velocitius), Summit Research Labs,
Inc. (Summit), Octagon Credit Investors, LLC
(Octagon), auto MOTOL BENI (BENI), and
Innovative Brands LLC (Innovative Brands). The
fiscal year 2006 follow-on investments included: Dakota Growers
Pasta Company, Inc. (Dakota), Baltic Motors
Corporation (Baltic Motors), SGDA
Sanierungsgesellschaft fur Deponien und Altasten mbH
(SGDA), Amersham Corporation (Amersham),
Timberland Machines & Irrigation, Inc.
(Timberland), SP Industries, Inc. (SP),
Harmony Pharmacy, and Velocitius.
The fiscal year 2005 investments included: JDC Lighting, LLC
(JDC), SGDA, SP, BP, Ohio Medical Corporation
(Ohio), Amersham, Timberland, Vestal Manufacturing
Enterprises, Inc. (Vestal), and Impact Confections,
Inc. (Impact).
We continue to perform due diligence and seek new investments
that are consistent with our objective of maximizing total
return from capital appreciation
and/or
income. We believe that we have extensive relationships with
private equity firms, investment banks, business brokers,
commercial banks, accounting firms, law firms, hedge funds,
other investment firms, industry professionals and management
teams of several companies, which can continue to provide us
with investment opportunities.
We are currently working on an active pipeline of potential new
investment opportunities. We expect that our equity and loan
investments will generally range between $3 million and
$25 million each, 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 interest and warrants
or rights to acquire equity interests, senior and subordinated
loans, and convertible securities. At October 31, 2006, the
value of all investments in portfolio companies was
approximately $275.9 million and our gross assets were
approximately $347.0 million.
We expect that our investments in senior loans and subordinated
debt will generally have stated terms of three to ten years.
However, there is no limit on the maturity or duration of any
security in our portfolio. Our debt investments are not, and
typically will not be, rated by any rating agency, but we
believe that if such investments were rated, they would be below
investment grade (rated lower than Baa3 by
Moodys or lower than BBB− by
Standard & Poors). 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.
2
Our board of directors has the authority to change any of the
strategies described in this prospectus without seeking the
approval of our shareholders. However, the 1940 Act prohibits us
from altering or changing our investment objective, strategies
or policies such that we cease to be a business development
company, 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.
COMPETITIVE
ADVANTAGES
We believe that we enjoy the following competitive advantages
over various other capital providers to small and middle-market
companies:
Existing Investment Platform: As of
October 31, 2006, we had approximately $347.0 million
in gross assets under management. The Company made 16 new
investments and eight follow-on investments pursuant to its new
strategy of maximizing capital appreciation
and/or
income. We believe that our current investment platform provides
us with the ability to, among other things, identify unique
investment opportunities and conduct marketing activities and
extensive due diligence for potential investments.
New Capital Sources: We have ongoing access to
sources of capital from the public debt and equity markets. This
allows us access to different sources of capital versus private
funds within a short time frame.
Oversight: The public nature of the Company
allows for oversight not normally found in a typical private
equity firm. This oversight is provided by the SEC, the NYSE,
the Companys board of directors and, most importantly, the
Companys shareholders. The Company, through its periodic
filings with the SEC, provides transparency into its investment
portfolio and operations thus allowing shareholders access to
information about the Company on a regular basis.
Patient Capital: The Companys public
nature allows its shareholders to freely trade its stock. Due to
this fact, the Company can be more patient with its invested
capital as there is not a limited investment horizon or fund
life which is normally seen in typical private equity
funds.
Seasoned Investment Team: We capitalize on the
teams significant combined experience in investing in
leveraged loans, high yield bonds, mezzanine debt, distressed
debt, private equity transactions and business operations.
Collectively, the investment team has significant capital
markets, investing and research experience and has invested and
managed during both recessionary and expansionary periods and
through full interest rate cycles and financial market
conditions. We believe that the investment teams extensive
relationships with financial institutions and companies, across
a broad range of industries, provides us with the ability to
identify and invest in small and middle-market companies.
Counsel to Portfolio Companies: We provide
support for our portfolio companies in different ways including:
offering advice to senior management on strategies for realizing
their objectives, advising or participating on their boards of
directors, offering ideas to help increase sales, reviewing
monthly/quarterly financial statements, offering advice on
improving margins and saving costs, helping to augment the
management team, and providing access to external resources
(e.g., financial, legal, accounting, or technology).
Diverse Industry Knowledge: We provide
financing to companies in a variety of industries. We generally
look at companies with secure market niches and a history of
predictable or dependable cash flows in which members of the
investment team have prior investment experience. We believe
that the ability to invest in portfolio companies in various
industries has the potential to give our portfolio greater
diversity.
Creative and Extensive Transaction
Structuring: We are flexible in the types of
securities in which we invest and their structures. We believe
that the investment teams creativity and flexibility in
structuring investments, coupled with our ability to invest in
portfolio companies across various industries, gives us the
ability to identify unique investment opportunities and provides
us with the opportunity to be a one-stop capital
provider to numerous small and middle-market companies.
3
Disciplined and Opportunistic Investment
Philosophy: Our investment philosophy and method
of portfolio construction involves an assessment of the overall
macroeconomic environment, financial markets and
company-specific research and analysis. While the composition of
our portfolio may change based on our opportunistic investment
philosophy, we continue to seek to provide long-term equity and
debt investment capital to small and middle-market companies
that we believe will provide us strong returns on our
investments while taking into consideration the overall risk
profile of the specific investment.
Tax Status and Capital Loss Carryforwards: It
is the policy of the Company to meet the requirements for
qualification as a regulated investment company
(RIC) under Subchapter M of the Internal Revenue
Code of 1986, as amended (the Code). The Company is
not subject to federal income tax to the extent that it
distributes substantially all of its investment company taxable
income and net realized gains for its taxable year (see
Federal Income Tax Matters). This allows us to
attract different kinds of investors than other publicly held
corporations. The Company is also exempt from excise tax if it
distributes 98% of its ordinary income
and/or
capital gains during each calendar year. As of October 31,
2006, the Company had a net capital loss carryforward of
approximately $73.5 million, of which $28.2 million
will expire in the year 2010, $4.2 million will expire in
the year 2011, $37.8 million will expire in the year 2012
and $3.3 million will expire in the year 2013. To the
extent future capital gains are offset by capital loss
carryforwards, such gains need not be distributed.
Capital loss carryforwards may be subject to additional
limitations as a result of capital share activity. As of
October 31, 2006, the Company also had net unrealized
capital loss carryforwards of approximately $11.6 million,
which is not included in the aforementioned net capital loss
carryforwards balance.
OPERATING
AND REGULATORY STRUCTURE
Our tax status generally allows us to pass-through
our income to our shareholders as dividends without the
imposition of corporate level of taxation, if certain
requirements are met. See Federal Income Tax Matters.
As a business development company, we are required to meet
certain regulatory tests, the most significant relating to our
investments and borrowings. We are required to have at least 70%
of the value of our total assets invested in eligible
portfolio companies or cash or cash equivalents.
Generally,
U.S.-based,
privately held or thinly-traded public companies are deemed
eligible portfolio companies under the 1940 Act. A
business development company must also maintain a coverage ratio
of assets to borrowings of at least 200%. See Certain
Government Regulations.
As a business development company, we must make available
significant managerial assistance to our portfolio companies. We
provide support for our portfolio companies in several different
ways including: offering advice to senior management on
strategies for realizing their objectives, advising or
participating on their boards of directors, offering ideas to
help increase sales, reviewing monthly/quarterly financial
statements, offering advice on improving margins and saving
costs, helping to augment the management team, and providing
access to external resources (e.g., financial, legal,
accounting, or technology). We may receive fees for these
services.
PLAN OF
DISTRIBUTION
We may offer, from time to time, up to $100,000,000 of our
common stock, preferred stock, debt securities or warrants
representing rights to purchase shares of our common stock,
preferred stock or debt securities, on terms to be determined at
the time of the offering.
Securities may be offered at prices and on terms described in
one or more supplements to this prospectus directly to one or
more purchasers, through agents designated from time to time by
us, or to or through underwriters or dealers. The supplement to
this prospectus relating to the offering will identify any
agents or underwriters involved in the sale of our securities,
and will set forth any applicable purchase price, fee and
commission or discount arrangement or the basis upon which such
amount may be calculated.
We may not sell securities pursuant to this prospectus without
delivering a prospectus supplement describing the method and
terms of the offering of such securities. See Plan of
Distribution.
4
USE OF
PROCEEDS
We intend to use the net proceeds from the sale of our
securities for general corporate purposes, including investing
in portfolio companies in accordance with our investment
objective and strategy and repaying debt. Pending such
investments, we will hold the net proceeds from the sale of our
securities in cash or invest all or a portion of such net
proceeds in short term, highly liquid investments. The
supplement to this prospectus relating to an offering will more
fully identify the use of the proceeds from such offering.
DETERMINATION
OF COMPANYS NET ASSET VALUE
Pursuant to the requirements of the 1940 Act, we value our
portfolio securities at their current market value or, if market
quotations are not readily available, at their estimates of fair
values. Because our portfolio company investments generally do
not have readily ascertainable market values, we record these
investments at fair value in accordance with Valuation
Procedures adopted by our board of directors. 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.
At October 31, 2006, approximately 79.5% of our total
assets represented portfolio investments recorded at fair value.
Pursuant to our Valuation Procedures, our Valuation Committee
(Valuation Committee) (which is currently comprised
of three independent directors) determines fair valuations of
our portfolio companies on a quarterly basis (or more
frequently, if deemed appropriate under the circumstances). Any
changes in valuation are recorded in the statements of
operations as Net unrealized gain (loss) on
investments.
There is no one methodology to determine fair value and, in
fact, for any portfolio security, fair value may be expressed as
a range of values, from which we derive a single estimate of
fair value. We specifically value each individual investment and
record unrealized depreciation for an investment that we believe
has become impaired, including where collection of a loan or
realization of an equity security is doubtful or diminished.
Conversely, we will record unrealized appreciation if we have an
indication (based on a significant development) that the
underlying portfolio company has appreciated in value and,
therefore, our equity security has also appreciated in value,
where appropriate. Without a readily ascertainable market value
and because of the inherent uncertainty of fair valuation, the
fair value of our investments may differ significantly from the
values that would have been used had a ready market existed for
the investments, and the differences could be material.
DISTRIBUTIONS
Currently, the Company has a policy of seeking to pay quarterly
dividends to shareholders. Our quarterly dividends, if any, will
be determined by our board of directors. Most recently, on
December 14, 2006, our board of directors declared a
regular quarterly dividend of $0.12 per share and an
additional special dividend of $0.06 both of which were paid on
January 5, 2007 to shareholders of record on
December 28, 2006.
We intend to continue to qualify for treatment as a RIC under
Subchapter M of the Code. To qualify for such treatment, in
addition to meeting other requirements, we must distribute to
our shareholders for each taxable year at least 90% of
(i) our investment company taxable income (consisting
generally of net investment income from interest and dividends
and net short term capital gains) and (ii) our net
tax-exempt interest, if any. See Federal Income Tax
Matters.
DIVIDEND
REINVESTMENT PLAN
All of our shareholders who hold shares of common stock in their
own name will automatically be enrolled in our dividend
reinvestment plan (the Plan). All such shareholders
will have any cash dividends and distributions automatically
reinvested by Computershare Ltd. (f/k/a EquiServe) (the
Plan Agent) in additional shares of our common
stock. Any shareholder may, of course, elect to receive his or
her dividends and distributions in cash. Currently, the Company
has a policy of seeking to pay quarterly dividends to
shareholders. For any of our shares that are held by banks,
brokers or other entities that hold our shares as nominees for
individual shareholders, the Plan Agent will administer the Plan
on the basis of the number of shares certified by any nominee as
being registered for
5
shareholders that have not elected to receive dividends and
distributions in cash. To receive your dividends and
distributions in cash, you must notify the Plan Agent.
The Plan Agent serves as agent for the shareholders in
administering the Plan. If we declare a dividend or distribution
payable in cash or in additional shares of our common stock,
those shareholders participating in the Plan will receive their
dividend or distribution in additional shares of our common
stock. Such shares will be either newly issued by us or
purchased in the open market by the Plan Agent. If the market
value of a share of our common stock on the payment date for
such dividend or distribution equals or exceeds the net asset
value per share on that date, we will issue new shares at the
net asset value. If the net asset value exceeds the market price
of our common stock, the Plan Agent will purchase in the open
market such number of shares as is necessary to complete the
distribution.
CORPORATE
INFORMATION
Our principal executive office is located at 287 Bowman Avenue,
2nd Floor, Purchase, New York 10577 and our telephone
number is
(914) 701-0310.
Our Internet website address is http://www.mvccapital.com.
Information contained on our website is not incorporated by
reference into this prospectus and you should not consider
information contained on our website to be part of this
prospectus unless otherwise indicated.
RISK
FACTORS
Investment in MVC Capital involves certain significant risks
relating to our business and investment objective. We have
identified below a summary of these risks. For a more complete
description of the risk factors impacting an investment in our
securities, we urge you to read the Risk Factors
section. There can be no assurance that we will achieve our
investment objective and an investment in the Company should not
constitute a complete investment program for an investor.
BUSINESS
RISKS
|
|
|
|
|
We depend on key personnel of TTG Advisers, especially
Mr. Tokarz, in seeking to achieve our investment
objective.
|
|
|
|
Our investment adviser, TTG Advisers, is a newly-formed
entity.
|
|
|
|
Our returns may be substantially lower than the average
returns historically realized by the private equity industry as
a whole.
|
|
|
|
Substantially all of our portfolio investments are recorded
at fair value and, as a result, there is a degree of
uncertainty regarding the carrying values of our portfolio
investments.
|
|
|
|
Economic recessions or downturns could impair our portfolio
companies and harm our operating results.
|
|
|
|
We may not realize gains from our equity investments.
|
|
|
|
The market for private equity investments can be highly
competitive. In some cases, our status as a regulated business
development company may hinder our ability to participate in
investment opportunities.
|
|
|
|
Loss of pass-through tax treatment would substantially reduce
net assets and income available for dividends.
|
|
|
|
Changes in the law or regulations that govern us could have a
material impact on our business.
|
|
|
|
Results may fluctuate and may not be indicative of future
performance.
|
|
|
|
Our common stock price can be volatile.
|
|
|
|
We are subject to market discount risk.
|
|
|
|
We have not established a minimum dividend payment level and
we cannot assure you of our ability to make distributions to our
shareholders in the future.
|
6
|
|
|
|
|
We have borrowed and may continue to borrow money, which
magnifies the potential for gain or loss on amounts invested and
may increase the risk of investing in us.
|
|
|
|
Changes in interest rates may affect our cost of capital and
net operating income.
|
|
|
|
We may be unable to meet our covenant obligations under our
credit facility which could adversely affect our business.
|
|
|
|
We have a limited operating history upon which you can
evaluate our new management team.
|
|
|
|
A portion of our existing investment portfolio was not
selected by the investment team of TTG Advisers.
|
|
|
|
Under the Advisory Agreement, TTG Advisers is entitled to
compensation based on our portfolios performance. This
arrangement may result in riskier or more speculative
investments in an effort to maximize incentive compensation.
|
|
|
|
There are potential conflicts of interest that could impact
our investment returns.
|
|
|
|
The war with Iraq, terrorist attacks and other acts of
violence or war may affect any market for our common stock,
impact the businesses in which we invest and harm our operations
and our profitability.
|
|
|
|
Our financial condition and results of operations will depend
on our ability to effectively manage our future growth.
|
INVESTMENT
RISKS
|
|
|
|
|
Investing in private companies involves a high degree of
risk.
|
|
|
|
Our investments in portfolio companies are generally
illiquid.
|
|
|
|
Our investments in small and middle-market privately-held
companies are extremely risky and the Company could lose its
entire investment.
|
|
|
|
Our borrowers may default on their payments, which may have
an effect on our financial performance.
|
|
|
|
Our investments in mezzanine and other debt securities may
involve significant risks.
|
|
|
|
When we are a debt or minority equity investor in a portfolio
company, we may not be in a position to control the entity, and
management of the company may make decisions that could decrease
the value of our portfolio holdings.
|
|
|
|
We may choose to waive or defer enforcement of covenants in
the debt securities held in our portfolio, which may cause us to
lose all or part of our investment in these companies.
|
|
|
|
Our portfolio companies may incur obligations that rank
equally with, or senior to, our investments in such companies.
As a result, the holders of such obligations may be entitled to
payments of principal or interest prior to us, preventing us
from obtaining the full value of our investment in the event of
an insolvency, liquidation, dissolution, reorganization,
acquisition, merger or bankruptcy of the relevant portfolio
company.
|
|
|
|
Our portfolio investments may be concentrated in a limited
number of portfolio companies, which would magnify the effect if
one of those companies were to suffer a significant loss. This
could negatively impact our ability to pay dividends and cause
you to lose all or part of your investment.
|
|
|
|
Investments in foreign debt or equity may involve significant
risks in addition to the risks inherent in
U.S. investments.
|
OFFERING
RISKS
|
|
|
|
|
Our common stock price can be volatile.
|
|
|
|
Investing in our securities may involve an above average
degree of risk.
|
7
|
|
|
|
|
We may allocate the net proceeds from this offering in ways
with which you may not agree.
|
|
|
|
Sales of substantial amounts of our securities may have an
adverse effect on the market price of our securities.
|
|
|
|
Future offerings of debt securities, which would be senior to
our common stock upon liquidation, or equity securities, which
could dilute our existing shareholders and be senior to our
common stock for the purposes of distributions, may harm the
value of our common stock.
|
8
SELECTED
CONDENSED CONSOLIDATED FINANCIAL DATA
You should read the condensed consolidated financial information
below with Consolidated Financial Statements and the
Notes thereto included in this prospectus. Financial information
for the fiscal years ended October 31, 2006, 2005, 2004 and
2003 are derived from the consolidated financial statements,
which have been audited by Ernst & Young LLP, the
Companys current independent registered public accounting
firm. The following selected financial data for the fiscal year
ended October 31, 2002 is derived from the financial
statements, which were audited by the Companys former
independent public accounting firm. Quarterly financial
information is derived from unaudited financial data, but in the
opinion of management, reflects all adjustments (consisting only
of normal recurring adjustments), which are necessary to present
fairly the results for such interim periods. Notes referred to
below are references to the Notes to Consolidated
Financial Statements, which begin on
page F-16.
See Managements Discussion and Analysis of
Financial Condition and Results of Operations on
page 24 for more information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands of U.S. dollars, except per share data
)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and related portfolio
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
$
|
13,909
|
|
|
$
|
9,457
|
|
|
$
|
2,996
|
|
|
$
|
2,833
|
|
|
$
|
3,740
|
|
Fee income
|
|
|
3,828
|
|
|
|
1,809
|
|
|
|
926
|
|
|
|
62
|
|
|
|
|
|
Other income
|
|
|
771
|
|
|
|
933
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
18,508
|
|
|
|
12,199
|
|
|
|
3,986
|
|
|
|
2,895
|
|
|
|
3,740
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
3,499
|
|
|
|
2,336
|
|
|
|
1,366
|
|
|
|
2,476
|
|
|
|
696
|
|
Incentive compensation
(Note 5)
|
|
|
6,055
|
|
|
|
1,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
|
|
|
3,420
|
|
|
|
3,021
|
|
|
|
2,891
|
|
|
|
8,911
|
(1)
|
|
|
2,573
|
|
Interest and other borrowing costs
|
|
|
1,594
|
|
|
|
31
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Management fee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
14,568
|
|
|
|
6,505
|
|
|
|
4,259
|
|
|
|
11,387
|
|
|
|
6,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation recovery of management
fees (Note 12, 13)
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
Net operating income (loss) before
taxes
|
|
|
3,940
|
|
|
|
5,694
|
|
|
|
97
|
|
|
|
(8,492
|
)
|
|
|
(3,122
|
)
|
Tax expense (benefit), net
|
|
|
159
|
|
|
|
(101
|
)
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
|
3,781
|
|
|
|
5,795
|
|
|
|
18
|
|
|
|
(8,492
|
)
|
|
|
(3,122
|
)
|
Net realized and unrealized gains
(losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
|
5,221
|
|
|
|
(3,295
|
)
|
|
|
(37,795
|
)
|
|
|
(4,220
|
)
|
|
|
(33,469
|
)
|
Net change in unrealized
appreciation (depreciation)
|
|
|
38,334
|
|
|
|
23,768
|
|
|
|
49,382
|
|
|
|
(42,771
|
)
|
|
|
(21,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gains
(losses) on investments
|
|
|
43,555
|
|
|
|
20,473
|
|
|
|
11,587
|
|
|
|
(46,991
|
)
|
|
|
(55,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net
assets resulting from operations
|
|
$
|
47,336
|
|
|
$
|
26,268
|
|
|
$
|
11,605
|
|
|
$
|
(55,483
|
)
|
|
$
|
(58,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net
assets per share resulting from operations
|
|
$
|
2.48
|
|
|
$
|
1.45
|
|
|
$
|
0.91
|
|
|
$
|
(3.42
|
)
|
|
$
|
(3.54
|
)
|
Dividends per share
|
|
|
0.48
|
|
|
|
0.24
|
|
|
|
0.12
|
|
|
|
|
|
|
|
0.04
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio at value
|
|
$
|
275,892
|
|
|
$
|
122,298
|
|
|
$
|
78,520
|
|
|
$
|
24,071
|
|
|
$
|
54,194
|
|
Portfolio at cost
|
|
|
286,851
|
|
|
|
171,591
|
|
|
|
151,582
|
|
|
|
146,515
|
|
|
|
133,864
|
|
Total assets
|
|
|
347,047
|
|
|
|
201,379
|
|
|
|
126,577
|
|
|
|
137,880
|
|
|
|
196,511
|
|
Shareholders equity
|
|
|
236,993
|
|
|
|
198,739
|
|
|
|
115,567
|
|
|
|
137,008
|
|
|
|
195,386
|
|
Shareholders equity per
share (net asset value)
|
|
|
12.41
|
|
|
|
10.41
|
|
|
|
9.40
|
|
|
|
8.48
|
|
|
|
11.84
|
|
Common shares outstanding at
period end
|
|
|
19,094
|
|
|
|
19,087
|
|
|
|
12,293
|
|
|
|
16,153
|
|
|
|
16,500
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Investments funded in
period
|
|
|
24
|
|
|
|
9
|
|
|
|
7
|
|
|
|
5
|
|
|
|
10
|
|
Investments funded ($) in
period
|
|
$
|
166,300
|
|
|
$
|
53,836
|
|
|
$
|
60,710
|
|
|
$
|
21,955
|
|
|
$
|
26,577
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Qtr 4
|
|
|
Qtr 3
|
|
|
Qtr 2
|
|
|
Qtr 1
|
|
|
Qtr 4
|
|
|
Qtr 3
|
|
|
Qtr2
|
|
|
Qtr 1
|
|
|
Qtr 4
|
|
|
Qtr 3(2)
|
|
|
Qtr 2
|
|
|
Qtr 1
|
|
|
|
(In thousands of U.S. dollars, except per share data)
|
|
|
Quarterly Data
(Unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
6,104
|
|
|
|
4,607
|
|
|
|
3,915
|
|
|
|
3,882
|
|
|
|
3,361
|
|
|
|
4,404
|
|
|
|
2,439
|
|
|
|
1,995
|
|
|
|
1,811
|
|
|
|
951
|
|
|
|
508
|
|
|
|
716
|
|
Net operating income (loss) before
net realized and unrealized gains
|
|
|
1,723
|
|
|
|
1,072
|
|
|
|
156
|
|
|
|
830
|
|
|
|
1,612
|
|
|
|
2,480
|
|
|
|
821
|
|
|
|
882
|
|
|
|
665
|
|
|
|
281
|
|
|
|
(498
|
)
|
|
|
(430
|
)
|
Net increase (decrease) in net
assets resulting from operations
|
|
|
15,866
|
|
|
|
8,046
|
|
|
|
11,117
|
|
|
|
12,307
|
|
|
|
8,933
|
|
|
|
10,310
|
|
|
|
4,360
|
|
|
|
2,665
|
|
|
|
3,274
|
|
|
|
4,922
|
|
|
|
1,104
|
|
|
|
2,305
|
|
Net increase (decrease) in net
assets resulting from operations per share
|
|
|
0.83
|
|
|
|
0.42
|
|
|
|
0.58
|
|
|
|
0.65
|
|
|
|
0.46
|
|
|
|
0.58
|
|
|
|
0.23
|
|
|
|
0.18
|
|
|
|
0.27
|
|
|
|
0.41
|
|
|
|
0.09
|
|
|
|
0.14
|
|
Net assets value per share
|
|
|
12.41
|
|
|
|
11.70
|
|
|
|
11.40
|
|
|
|
10.94
|
|
|
|
10.41
|
|
|
|
10.06
|
|
|
|
9.64
|
|
|
|
9.41
|
|
|
|
9.40
|
|
|
|
9.25
|
|
|
|
8.85
|
|
|
|
8.76
|
|
|
|
|
(1) |
|
The administrative expenses for the year ended October 31,
2003 included approximately $4.0 million of
proxy/litigation fees and expenses. These are non-recurring
expenses. |
|
(2) |
|
Data for 2004 differs from that which was filed on
Form 10-Q
on September 9, 2004, due to a reclassification of
investment income and related expenses which had previously been
accrued for. |
FEES AND
EXPENSES
This table describes the various costs and expenses that an
investor in our common stock will bear directly or indirectly.
|
|
|
|
|
Shareholder Transaction
Expenses
|
|
|
|
|
Sales load
|
|
|
|
%(1)
|
Offering expenses borne by us (as
a percentage of offering price)
|
|
|
|
%(2)
|
Total shareholder transaction
expenses (as a percentage of offering price)
|
|
|
|
%(3)
|
Estimated Annual Expenses (as a
percentage of average consolidated net assets attributable to
common stock)(4)
|
|
|
|
|
Management fees
|
|
|
2.61
|
%(5)
|
Incentive fees payable under
Advisory Agreement (20% of net realized capital gains (on new
portfolio) and 20% of pre-incentive fee net operating income)
|
|
|
2.82
|
%(5)
|
Other expenses
|
|
|
1.31
|
%(6)
|
Interest payments on borrowed funds
|
|
|
0.74
|
%(7)
|
Total annual expenses
|
|
|
7.48
|
%
|
Amount waived under Expense Cap
|
|
|
0.67
|
%(8)
|
Total annual expenses after
Expense Cap
|
|
|
6.81
|
%
|
|
|
|
(1) |
|
In the event that the securities to which this prospectus
relates are sold to or through underwriters, a corresponding
prospectus supplement will disclose the applicable sales load. |
|
(2) |
|
The related prospectus supplement will disclose the estimated
amount of offering expenses, the offering price and the offering
expenses borne by us as a percentage of the offering price. |
|
(3) |
|
The related prospectus supplement will disclose the offering
price and the total shareholder transaction expenses as a
percentage of the offering price. |
|
(4) |
|
Consolidated average net assets attributable to common
stock equals net assets (i.e., average total
consolidated assets less average total consolidated liabilities)
at October 31, 2006. The SEC requires that Total
annual expenses be calculated as a percentage of net
assets in the above chart rather than as a percentage of |
10
|
|
|
|
|
total assets. Total assets includes assets that have been funded
with borrowed monies (leverage). For reference, the below chart
illustrates our Total annual expenses as a
percentage of total assets: |
|
|
|
|
|
Estimated Annual Expenses (as a
percentage of total assets)
|
|
|
|
|
Management fees
|
|
|
2.00
|
%(5)
|
Incentive fees payable under
Advisory Agreement (20% of net realized capital gains (on new
portfolio) and 20% of pre-incentive fee net operating income)
|
|
|
2.16
|
%(5)
|
Other expenses
|
|
|
1.00
|
%(6)
|
Interest payments on borrowed funds
|
|
|
0.57
|
%(7)
|
Total annual expenses
|
|
|
5.73
|
%
|
Amount waived under Expense Cap
|
|
|
0.52
|
%(8)
|
Total annual expenses after
Expense Cap
|
|
|
5.21
|
%
|
|
|
|
(5) |
|
Pursuant to the Advisory Agreement, the Company pays TTG
Advisers a management fee and an incentive fee. The management
fee is calculated at an annual rate of 2% of our total assets
(excluding cash and the value of any investment by the Company
not made in a portfolio company (Non-Eligible
Assets) but including assets purchased with borrowed funds
that are not Non-Eligible Assets). The incentive fee payable to
TTG Advisers is based on our performance and may not be paid
unless we achieve certain goals. The incentive fee percentage is
based on the current reserve for incentive compensation (as of
October 31, 2006), which, under Mr. Tokarzs
employment agreement with the Company (which terminated upon the
effectiveness of the Advisory Agreement), remains unpaid until
certain realization events occur. For a more complete
description of the management and incentive fees, please see
Advisory Agreement on page 77 below. |
|
(6) |
|
Other expenses are based on actual expenses incurred
for the fiscal year ended October 31, 2006. However, these
expenses exclude expenses that would not have been incurred had
the Advisory Agreement been in effect during the fiscal year. |
|
(7) |
|
The estimate is based on borrowings outstanding as of
October 31, 2006 and our assumption is that our borrowings
and interest costs after an offering will remain similar to the
amounts outstanding and incurred for the fiscal year ended
October 31, 2006. See Risk Factors
Business Risks We have borrowed and may continue to
borrow money, which magnifies the potential for gain or loss on
amounts invested and may increase the risk of investing in
us and Managements Discussion and Analysis of
Financial Condition and Results of Operations. |
|
(8) |
|
TTG Advisers has agreed to an Expense Cap for each of the next
two full fiscal years (i.e., the fiscal years 2007 and
2008) pursuant to which it will absorb or reimburse
operating expenses of the Company (promptly following the
completion of such year), to the extent necessary to limit the
Companys Expense Ratio (as defined below) for any such
year to 3.25%; provided however, if, on October 31,
2007, the Companys net assets have not increased by at
least 5% from October 31, 2006, the dollar value of the
Expense Cap shall increase by 5% for the fiscal year 2008. The
Expense Cap is described further in Advisory
Agreement on page 77 below. |
Example
The following example, required by the SEC, demonstrates the
projected dollar amount of total cumulative expenses that would
be incurred over various periods with respect to a hypothetical
investment in us. In calculating the following expense amounts,
we assumed we would have no leverage and that our operating
expenses would remain at the levels set forth in the table above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
3 Years
|
|
|
5 Years
|
|
|
10 Years
|
|
|
You would pay the following
cumulative expenses on a $1,000 investment, assuming a 5.0%
annual return
|
|
$
|
67
|
|
|
$
|
199
|
|
|
$
|
325
|
|
|
$
|
622
|
|
Although the example assumes (as required by the SEC) a 5.0%
annual return, our performance will vary and may result in a
return of greater or less than 5.0%. In addition, while the
example assumes reinvestment of all dividends and distributions
at net asset value, participants in the dividend reinvestment
plan may receive shares of common stock that we issue at net
asset value or are purchased by the administrator of the
dividend reinvestment
11
plan, at the market price in effect at the time, which may be at
or below net asset value. See Dividend Reinvestment
Plan.
The example should not be considered a representation of
future expenses, and the actual expenses may be greater or less
than those shown.
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on
Form N-2
together with all amendments and related exhibits under the
Securities Act of 1933. The registration statement contains
additional information about us and the common stock being
offered by this prospectus. You may inspect the registration
statement and the exhibits without charge at the SEC at 100 F
Street, NE, Washington, DC 20549. You may obtain copies from the
SEC at prescribed rates.
We file annual, quarterly and current reports, proxy statements
and other information with the SEC. You can inspect our SEC
filings, without charge, at the public reference facilities of
the SEC at 100 F Street, NE, Washington, DC 20549. The SEC also
maintains a web site at http://www.sec.gov that contains our SEC
filings. You can also obtain copies of these materials from the
public reference section of the SEC at 100 F Street, NE,
Washington, DC 20549, at prescribed rates. Please call the SEC
at 1-202-551-8090 for further information on the public
reference room. Copies may also be obtained, after paying a
duplicating fee, by electronic request to publicinfo@sec.gov or
by written request to Public Reference Section, Washington, DC
20549-0102.
You can also inspect reports and other information we file at
the offices of the NYSE, and you are able to inspect those at
20 Broad Street, New York, NY 10005.
RISK
FACTORS
Investing in MVC Capital involves a number of significant
risks relating to our business and investment objective. As a
result, there can be no assurance that we will achieve our
investment objective. In addition to the other information
contained in this prospectus, you should consider carefully the
following information before making an investment in our common
stock. The Companys risk factors include those directly
related to the Companys business, its investments, and
potential offerings.
BUSINESS
RISKS
Business
risks are risks that are associated with general business
conditions, the economy, and the operations of the Company.
Business risks are not risks associated with our specific
investments or an offering of our securities.
We
depend on key personnel of TTG Advisers, especially
Mr. Tokarz, in seeking to achieve our investment
objective.
We depend on the continued services of Mr. Tokarz and
certain other key management personnel of TTG Advisers. If we
were to lose access to any of these personnel, particularly
Mr. Tokarz, it could negatively impact our operations and
we could lose business opportunities. Mr. Tokarz has
entered into an agreement with TTG Advisers pursuant to which he
has agreed to serve as the Companys Portfolio Manager for
the full twenty-four calendar months following November 1,
2006, absent the occurrence of certain extraordinary events.
Furthermore, the Advisory Agreement may not be terminated by TTG
Advisers during the initial two-year term of the Advisory
Agreement. However, there is still a risk that
Mr. Tokarzs expertise may be unavailable to the
Company, which could significantly impact the Companys
ability to achieve its investment objective.
Our
investment adviser, TTG Advisers, is a newly-formed
entity.
Our future success depends to a significant extent on the
services of our investment adviser. We are dependent for the
selection, structuring, closing, and monitoring of our
investment on the diligence and skill of our newly-formed
investment adviser. TTG Advisers identifies, evaluates,
structures, monitors and disposes of our investments, and the
services it provides significantly impact our results of
operations. Because TTG Advisers is newly
12
formed, it has a limited operating history and limited equity
capital. However, Mr. Tokarz and the Companys
investment and operations professionals that had been employed
by the Company, as of the fiscal year ended October 31,
2006, are now employed by TTG Advisers and are expected to
continue to provide services to the Company.
Our
returns may be substantially lower than the average returns
historically realized by the private equity industry as a
whole.
Past performance of the private equity industry is not
necessarily indicative of that sectors future performance,
nor is it necessarily a good proxy for predicting the returns of
the Company. We cannot guarantee that we will meet or exceed the
rates of return historically realized by the private equity
industry as a whole. Additionally, our overall returns are
impacted by certain factors related to our structure as a
publicly-traded business development company, including:
|
|
|
|
|
the lower return we are likely to realize on short-term liquid
investments during the period in which we are identifying
potential investments, and
|
|
|
|
the periodic disclosure required of business development
companies, which could result in the Company being less
attractive as an investor to certain potential portfolio
companies.
|
Substantially
all of our portfolio investments are recorded at fair
value and, as a result, there is a degree of uncertainty
regarding the carrying values of our portfolio
investments.
Pursuant to the requirements of the 1940 Act, because our
portfolio company investments do not have readily ascertainable
market values, we record these investments at fair value in
accordance with Valuation Procedures adopted by our board of
directors.
At October 31, 2006, approximately 79.5% of our total
assets represented portfolio investments recorded at fair value.
There is no single standard for determining fair value in good
faith. As a result, determining fair value requires that
judgment be applied to the specific facts and circumstances of
each portfolio investment while employing a consistently applied
valuation process for the types of investments we make. We
specifically value each individual investment and record
unrealized depreciation for an investment that we believe has
become impaired, including where collection of a loan or
realization of an equity security is doubtful. Conversely, we
will record unrealized appreciation if we have an indication
(based on a significant development) that the underlying
portfolio company has appreciated in value and, therefore, our
equity security has also appreciated in value, where
appropriate. Without a readily ascertainable market value and
because of the inherent uncertainty of fair valuation, fair
value of our investments may differ significantly from the
values that would have been used had a ready market existed for
the investments, and the differences could be material.
Pursuant to our valuation procedures, our Valuation Committee
(which is currently comprised of three independent directors)
reviews, considers and determines fair valuations on a quarterly
basis (or more frequently, if deemed appropriate under the
circumstances). Any changes in valuation are recorded in the
statements of operations as Net change in unrealized
appreciation (depreciation) on investments.
Economic
recessions or downturns could impair our portfolio companies and
harm our operating results.
Many of the companies in which we have made or will make
investments may be susceptible to economic slowdowns or
recessions. An economic slowdown may affect the ability of a
company to engage in a liquidity event. These conditions could
lead to financial losses in our portfolio and a decrease in our
revenues, net income and assets.
Our overall business of making private equity investments may be
affected by current and future market conditions. The absence of
an active mezzanine lending or private equity environment may
slow the amount of private equity investment activity generally.
As a result, the pace of our investment activity may slow, which
could impact our ability to achieve our investment objective. In
addition, significant changes in the capital markets could
13
have an effect on the valuations of private companies and on the
potential for liquidity events involving such companies. This
could affect the amount and timing of any gains realized on our
investments.
We may
not realize gains from our equity investments.
When we invest in mezzanine and senior debt securities, we may
acquire warrants or other equity securities as well. We may also
invest directly in various equity securities. Our goal is
ultimately to dispose of such equity interests and realize gains
upon our disposition of such interests. However, the equity
interests we receive or invest in may not appreciate in value
and, in fact, may decline in value. In addition, the equity
securities we receive or invest in may be subject to
restrictions on resale during periods in which it would be
advantageous to resell. Accordingly, we may not be able to
realize gains from our equity interests, and any gains that we
do realize on the disposition of any equity interests may not be
sufficient to offset any other losses we experience.
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.
Loss
of pass-through tax treatment would substantially reduce net
assets and income available for dividends.
We have operated to qualify as a RIC. If we meet source of
income, diversification and distribution requirements, we will
qualify for effective pass-through tax treatment. We would cease
to qualify for such pass-through tax treatment if we were unable
to comply with these requirements. 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, we generally will be
subject to a 4% excise tax.
Changes
in the law or regulations that govern us could have a material
impact on our business.
We are regulated by the SEC. Changes in the laws or regulations
that govern business development companies and RICs may
significantly affect our business.
Results
may fluctuate and may not be indicative of future
performance.
Our operating results will fluctuate and, therefore, you should
not rely on current or historical period results to be
indicative of our performance in future reporting periods. In
addition to many of the above-cited risk factors, other factors
could cause operating results to fluctuate including, among
others, variations in the investment origination volume and fee
income earned, variation in timing of prepayments, variations in
and the timing of the recognition of realized and unrealized
gains or losses, the degree to which we encounter competition in
our markets and general economic conditions.
14
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;
|
|
|
|
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; or
|
|
|
|
departures of key personnel of TTG Advisers..
|
We are
subject to market discount risk.
As with any stock, the price of our shares will fluctuate with
market conditions and other factors. If shares are sold, the
price received may be more or less than the original investment.
Whether investors will realize gains or losses upon the sale of
our shares will not depend directly upon our net asset value,
but will depend upon the market price of the shares at the time
of sale. Since the market price of our shares will be affected
by such factors as the relative demand for and supply of the
shares in the market, general market and economic conditions and
other factors beyond our control, we cannot predict whether the
shares will trade at, below or above our net asset value.
Although our shares have recently traded at a premium to our net
asset value, historically, our shares, as well as those of other
closed-end investment companies, have frequently traded at a
discount to their net asset value, which discount often
fluctuates over time.
We
have not established a minimum dividend payment level and we
cannot assure you of our ability to make distributions to our
shareholders in the future.
We cannot assure that we will achieve investment results that
will allow us to make cash distributions or
year-to-year
increases in cash distributions. Our ability to make
distributions is impacted by, among other things, the risk
factors described in this report. In addition, the asset
coverage test applicable to us as a business development company
can limit our ability to make distributions. Any distributions
will be made at the discretion of our board of directors and
will depend on our earnings, our financial condition,
maintenance of our RIC status and such other factors as our
board of directors may deem relevant from time to time. We
cannot assure you of our ability to make distributions to our
shareholders.
We
have borrowed and may continue to borrow money, which magnifies
the potential for gain or loss on amounts invested and may
increase the risk of investing in us.
We have borrowed and may continue to borrow money (subject to
the 1940 Act limits) in seeking to achieve our investment
objective going forward. Borrowings, also known as leverage,
magnify the potential for gain or loss on amounts invested and,
therefore, can increase the risks associated with investing in
our securities.
Under the provisions of the 1940 Act, we are permitted, as a
business development company, to borrow money or issue
senior securities only in amounts such that our asset
coverage, as defined in the 1940 Act, equals at least 200% after
each issuance of senior securities. If the value of our assets
declines, we may be unable to satisfy this
15
test. If that happens, we may be required to sell a portion of
our investments and, depending on the nature of our leverage,
repay a portion of our indebtedness at a time when such sales
may be disadvantageous.
We may borrow from, and issue senior debt securities to, banks,
insurance companies and other lenders. Lenders of these senior
securities have fixed dollar claims on our assets that are
superior to the claims of our common shareholders. If the value
of our assets increases, then leveraging would cause the net
asset value attributable to our common stock to increase more
sharply than it would have had we not leveraged. Conversely, if
the value of our consolidated assets decreases, leveraging would
cause net asset value to decline more sharply than it otherwise
would have had we not leveraged. Similarly, any increase in our
consolidated income in excess of consolidated interest payable
on the borrowed funds would cause our net operating income to
increase more than it would without the leverage, while any
decrease in our consolidated income would cause net operating
income to decline more sharply than it would have had we not
borrowed. Such a decline could negatively affect our ability to
make common stock dividend payments. Leverage is generally
considered a speculative investment technique.
Changes
in interest rates may affect our cost of capital and net
operating income.
Because we have borrowed and may continue to borrow money to
make investments, our net operating income before net realized
and unrealized gains or losses, or net operating income, may be
dependent upon the difference between the rate at which we
borrow funds and the rate at which we invest these funds. As a
result, there can be no assurance that a significant change in
market interest rates would not have a material adverse effect
on our net operating income. In periods of declining interest
rates, we may have difficulty investing our borrowed capital
into investments that offer an appropriate return. In periods of
sharply rising interest rates, our cost of funds would increase,
which could reduce our net operating income. We may use a
combination of long-term and short-term borrowings and equity
capital to finance our investing activities. We may utilize our
short-term credit facilities as a means to bridge to long-term
financing. We may use interest rate risk management techniques
in an effort to limit our exposure to interest rate
fluctuations. Such techniques may include various interest rate
hedging activities to the extent permitted by the 1940 Act.
We may
be unable to meet our covenant obligations under our credit
facility which could adversely affect our
business.
On April 27, 2006, the Company and MVCFS, as co-borrowers
entered into a new four-year, $100.0 million revolving
credit facility (the Credit Facility) with
Guggenheim Corporate Funding, LLC (Guggenheim) as
administrative agent to the lenders. On April 27, 2006, the
Company borrowed $45.0 million ($27.5 million drawn
from the revolving credit facility and $17.5 million in
term debt) under the Credit Facility. The $27.5 million
drawn from the revolving credit facility was repaid in full on
May 2, 2006. On July 28, 2006, the Company borrowed
$57.5 million ($45.0 million drawn from the revolving
credit facility and $12.5 million in term debt) under the
Credit Facility. On August 2, 2006, the Company repaid the
$45.0 million borrowed on the revolving credit facility
portion of the Credit Facility. The Credit Facility contains
certain covenants that if we were unable to meet would result in
an event of default, which could result in payment of the
applicable indebtedness being accelerated. In addition, if we
require working capital greater than that provided by the Credit
Facility, we may be required either to (i) seek to increase
the availability under the Credit Facility or (ii) obtain
other sources of financing. As of October 31, 2006, there
was outstanding $50.0 million in term debt and
$50.0 million on the revolving note under the Credit
Facility.
We
have a limited operating history upon which you can evaluate our
new management team.
Although we commenced operations in 2000, we changed our
investment objective and strategy in September 2003 from seeking
long-term capital appreciation from venture capital investments
in information technology companies (primarily in the Internet,
e-commerce,
telecommunications, networking, software and information
services industries) to an objective of seeking to maximize
total return from capital appreciation
and/or
income. We no longer have a strategy seeking to concentrate our
investments in the information technology industries and, as a
result, our new investments may be in a variety of industries.
Therefore, we have only a limited history of operations under
our current investment objective and strategy upon which you can
evaluate our business.
16
A
portion of our existing investment portfolio was not selected by
the investment team of TTG Advisers.
As of October 31, 2006, 2.4% of the Companys assets
are represented by investments made by the Companys former
management team (the Legacy Investments) based on
the fair values assigned to these investments by our Valuation
Committee. These investments were made pursuant to the
Companys prior investment objective of seeking long-term
capital appreciation from venture capital investments in
information technology companies. Generally, a cash return may
not be received on these investments until a liquidity
event, i.e., a sale, public offering or merger,
occurs. Until then, these Legacy Investments remain in the
Companys portfolio. We are managing them to try and
realize maximum returns. Nevertheless, because they were not
made in accordance with the Companys current investment
strategy, their future performance may impact our ability to
achieve our current objective.
Under
the Advisory Agreement, TTG Advisers is entitled to compensation
based on our portfolios performance. This arrangement may
result in riskier or more speculative investments in an effort
to maximize incentive compensation.
The way in which the compensation payable to TTG Advisers is
determined may encourage the investment team to recommend
riskier or more speculative investments and to use leverage to
increase the return on our investments. Under certain
circumstances, the use of leverage may increase the likelihood
of default, which would adversely affect our shareholders,
including investors in this offering. In addition, key criteria
related to determining appropriate investments and investment
strategies, including the preservation of capital, might be
under-weighted if the investment team focuses exclusively or
disproportionately on maximizing returns.
There
are potential conflicts of interest that could impact our
investment returns.
Our officers and directors, and members of the TTG Advisers
investment team, may serve entities that operate in the same or
similar lines of business as we do. Accordingly, they may have
obligations to those entities, the fulfillment of which might
not be in the best interests of us or our shareholders. It is
possible that new investment opportunities that meet our
investment objectives may come to the attention of one of the
management team members or our officers or directors in his or
her role as an officer or director of another entity or as an
investment professional associated with that entity, and, if so,
such opportunity might not be offered, or otherwise made
available, to us.
Additionally, as an investment adviser, TTG Advisers has a
fiduciary obligation to act in the best interests of its
clients, including us. To that end, if TTG Advisers manages any
additional investment vehicles or client accounts in the future,
TTG Advisers will endeavor to allocate investment opportunities
in a fair and equitable manner. If TTG Advisers chooses to
establish another investment fund in the future, when the
investment professionals of TTG Advisers identify an investment,
they will have to choose which investment fund should make the
investment. As a result, there may be times when the investment
team of TTG Advisers has interests that differ from those of our
shareholders, giving rise to a conflict. In an effort to
mitigate situations that give rise to such conflicts, TTG
Advisers adheres to a policy (which was approved by our Board)
relating to allocation of investment opportunities, which
generally requires, among other things, that TTG Advisers
continue to offer the Company investment opportunities in
mezzanine and debt securities as well as non-control equity
investments in small and middle market U.S. companies. For
a further discussion of this allocation policy, please see
About MVC Capital Our Investment
Strategy Allocation of Investment
Opportunities below.
The
war with Iraq, terrorist attacks and other acts of violence or
war may affect any market for our common stock, impact the
businesses in which we invest and harm our operations and our
profitability.
The war with Iraq, its aftermath and the continuing occupation
of Iraq are likely to have a substantial impact on the U.S. and
world economies and securities markets. The nature, scope and
duration of the war and occupation cannot be predicted with any
certainty. Furthermore, terrorist attacks may harm our results
of operations and your investment. We cannot assure you that
there will not be further terrorist attacks against the United
States or U.S. businesses. Such attacks and armed conflicts
in the United States or elsewhere may impact the businesses in
17
which we invest directly or indirectly, by undermining economic
conditions in the United States. Losses resulting from terrorist
events are generally uninsurable.
Our
financial condition and results of operations will depend on our
ability to effectively manage our future growth.
Our ability to achieve our investment objectives can depend on
our ability to sustain continued growth. Accomplishing this
result on a cost-effective basis is largely a function of our
marketing capabilities, our management of the investment
process, our ability to provide competent, attentive and
efficient services and our access to financing sources on
acceptable terms. Failure to effectively manage our future
growth could have a material adverse effect on our business,
financial condition and results of operations.
INVESTMENT
RISKS
Investment
risks are risks associated with our determination to execute on
our business objective. These risks are not risks associated
with general business conditions or those relating to an
offering of our securities.
Investing
in private companies involves a high degree of
risk.
Our investment portfolio generally consists of loans to, and
investments in, private companies. Investments in private
businesses involve a high degree of business and financial risk,
which can result in substantial losses and accordingly should be
considered speculative. There is generally very little publicly
available information about the companies in which we invest,
and we rely significantly on the due diligence of the members of
the Companys investment team to obtain information in
connection with our investment decisions.
Our
investments in portfolio companies are generally
illiquid.
We generally acquire our investments directly from the issuer in
privately negotiated transactions. Most of the investments in
our portfolio (other than cash or cash equivalents) are
typically subject to restrictions on resale or otherwise have no
established trading market. We may exit our investments when the
portfolio company has a liquidity event, such as a sale,
recapitalization or initial public offering. The illiquidity of
our investments may adversely affect our ability to dispose of
equity and debt securities at times when it may be otherwise
advantageous for us to liquidate such investments. In addition,
if we were forced to immediately liquidate some or all of the
investments in the portfolio, the proceeds of such liquidation
could be significantly less than the current value of such
investments.
Our
investments in small and middle-market privately-held companies
are extremely risky and the Company could lose its entire
investment.
Investments in small and middle-market privately-held companies
are subject to a number of significant risks including the
following:
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Small and middle-market companies may have limited financial
resources and may not be able to repay the loans we make to
them. Our strategy includes providing financing
to companies that typically do not have capital sources readily
available to them. While we believe that this provides an
attractive opportunity for us to generate profits, this may make
it difficult for the borrowers to repay their loans to us upon
maturity.
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Small and middle-market companies typically have narrower
product lines and smaller market shares than large
companies. Because our target companies are
smaller businesses, they may be more vulnerable to
competitors actions and market conditions, as well as
general economic downturns. In addition, smaller companies may
face intense competition, including competition from companies
with greater financial resources, more extensive development,
manufacturing, marketing and other capabilities, and a larger
number of qualified managerial and technical personnel.
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There is generally little or no publicly available
information about these privately-held
companies. Because we seek to make investments in
privately-held companies, there is generally little or no
publicly
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18
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available operating and financial information about them. As a
result, we rely on our investment professionals to perform due
diligence investigations of these privately-held companies,
their operations and their prospects. We may not learn all of
the material information we need to know regarding these
companies through our investigations.
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Small and middle-market companies generally have less
predictable operating results. We expect that our
portfolio companies may have significant variations in their
operating results, may from time to time be parties to
litigation, may be engaged in rapidly changing businesses with
products subject to a substantial risk of obsolescence, may
require substantial additional capital to support their
operations, finance expansion or maintain their competitive
position, may otherwise have a weak financial position or may be
adversely affected by changes in the business cycle. Our
portfolio companies may not meet net income, cash flow and other
coverage tests typically imposed by their senior lenders.
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Small and middle-market businesses are more likely to be
dependent on one or two persons. Typically, the
success of a small or middle-market company also depends on the
management talents and efforts of one or two persons or a small
group of persons. The death, disability or resignation of one or
more of these persons could have a material adverse impact on
our portfolio company and, in turn, on us.
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Small and middle-market companies are likely to have greater
exposure to economic downturns than larger
companies. We expect that our portfolio companies
will have fewer resources than larger businesses and an economic
downturn may thus more likely have a material adverse effect on
them.
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Small and middle-market companies may have limited operating
histories. We may make debt or equity investments
in new companies that meet our investment criteria. Portfolio
companies with limited operating histories are exposed to the
operating risks that new businesses face and may be particularly
susceptible to, among other risks, market downturns, competitive
pressures and the departure of key executive officers.
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Our
borrowers may default on their payments, which may have an
effect on our financial performance.
We may make long-term unsecured, subordinated loans, which may
involve a higher degree of repayment risk than conventional
secured loans. We primarily invest in companies that may have
limited financial resources and that may be unable to obtain
financing from traditional sources. In addition, numerous
factors may adversely affect a portfolio companys ability
to repay a loan we make to it, including the failure to meet a
business plan, a downturn in its industry or operating results,
or negative economic conditions. Deterioration in a
borrowers financial condition and prospects may be
accompanied by deterioration in any related collateral.
Our
investments in mezzanine and other debt securities may involve
significant risks.
Our investment strategy contemplates investments in mezzanine
and other debt securities of privately held companies.
Mezzanine investments typically are structured as
subordinated loans (with or without warrants) that carry a fixed
rate of interest. We may also make senior secured and other
types of loans or debt investments. Our debt investments are
not, and typically will not be, rated by any rating agency, but
we believe that if such investments were rated, they would be
below investment grade quality (rated lower than
Baa3 by Moodys or lower than BBB-
by Standard & Poors, commonly referred to as
junk bonds). Loans of below investment grade quality
have predominantly speculative characteristics with respect to
the borrowers capacity to pay interest and repay
principal. Our debt investments in portfolio companies may thus
result in a high level of risk and volatility
and/or loss
of principal.
When
we are a debt or minority equity investor in a portfolio
company, we may not be in a position to control the entity, and
management of the company may make decisions that could decrease
the value of our portfolio holdings.
We anticipate making debt and minority equity investments;
therefore, we will be subject to the risk that a portfolio
company may make business decisions with which we disagree, and
the shareholders and management of such company may take risks
or otherwise act in ways that do not serve our interests. Due to
the lack of liquidity in the markets for our investments in
privately held companies, we may not be able to dispose of our
interests in our
19
portfolio companies as readily as we would like. As a result, a
portfolio company may make decisions that could decrease the
value of our portfolio holdings.
We may
choose to waive or defer enforcement of covenants in the debt
securities held in our portfolio, which may cause us to lose all
or part of our investment in these companies.
Some of our loans to our portfolio companies may be structured
to include customary business and financial covenants placing
affirmative and negative obligations on the operation of each
companys business and its financial condition. However,
from time to time, we may elect to waive breaches of these
covenants, including our right to payment, or waive or defer
enforcement of remedies, such as acceleration of obligations or
foreclosure on collateral, depending upon the financial
condition and prospects of the particular portfolio company.
These actions may reduce the likelihood of our receiving the
full amount of future payments of interest or principal and be
accompanied by a deterioration in the value of the underlying
collateral as many of these companies may have limited financial
resources, may be unable to meet future obligations and may go
bankrupt. This could negatively impact our ability to pay
dividends and cause you to lose all or part of your investment.
Our
portfolio companies may incur obligations that rank equally
with, or senior to, our investments in such companies. As a
result, the holders of such obligations may be entitled to
payments of principal or interest prior to us, preventing us
from obtaining the full value of our investment in the event of
an insolvency, liquidation, dissolution, reorganization,
acquisition, merger or bankruptcy of the relevant portfolio
company.
Our portfolio companies may have other obligations that rank
equally with, or senior to, the securities in which we invest.
By their terms, such other securities may provide that the
holders are entitled to receive payment of interest or principal
on or before the dates on which we are entitled to receive
payments in respect of the securities in which we invest. Also,
in the event of insolvency, liquidation, dissolution,
reorganization or bankruptcy of a portfolio company, holders of
securities ranking senior to our investment in the relevant
portfolio company would typically be entitled to receive payment
in full before we receive any distribution in respect of our
investment. After repaying investors that are more senior than
us, the portfolio company may not have any remaining assets to
use for repaying its obligation to us. In the case of other
securities ranking equally with securities in which we invest,
we would have to share on an equal basis any distributions with
other investors holding such securities in the event of an
insolvency, liquidation, dissolution, reorganization or
bankruptcy of the relevant portfolio company. As a result, we
may be prevented from obtaining the full value of our investment
in the event of an insolvency, liquidation, dissolution,
reorganization or bankruptcy of the relevant portfolio company.
Our
portfolio investments may be concentrated in a limited number of
portfolio companies, which would magnify the effect if one of
those companies were to suffer a significant loss. This could
negatively impact our ability to pay you dividends and cause you
to lose all or part of your investment.
While we aim to have a broad mix of investments in portfolio
companies, our investments, at any time, may be concentrated in
a limited number of companies. A consequence of this
concentration is that the aggregate returns we seek to realize
may be adversely affected if a small number of our investments
perform poorly or if we need to write down the value of any one
such investment. Beyond the applicable federal income tax
diversification requirements, we do not have fixed guidelines
for diversification, and our investments could be concentrated
in relatively few portfolio companies. These factors could
negatively impact our ability to pay dividends and cause you to
lose all or part of your investment.
Investments
in foreign debt or equity may involve significant risks in
addition to the risks inherent in
U.S. investments.
Our investment strategy has resulted in some investments in debt
or equity of foreign companies (subject to applicable limits
prescribed by the 1940 Act). Investing in foreign companies can
expose us to additional risks not typically associated with
investing in U.S. companies. These risks include exchange
rates, changes in exchange 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
20
government supervision of exchanges, brokers and issuers, less
developed bankruptcy laws, difficulty in enforcing contractual
obligations, lack of uniform accounting and auditing standards
and greater price volatility.
OFFERING
RISKS
Offering
risks are risks that are associated with an offering of our
securities.
Our
common stock price can be volatile.
The trading price of our common stock may fluctuate
substantially. The price of the common stock may be higher or
lower than the price you pay for your shares, depending on many
factors, some of which are beyond our control and may not be
directly related to our operating performance. These factors
include the following:
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price and volume fluctuations in the overall stock market from
time to time;
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significant volatility in the market price and trading volume of
securities of business development companies or other financial
services companies;
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volatility resulting from trading in derivative securities
related to our common stock including puts, calls, long-term
equity participation securities, or LEAPs, or short trading
positions;
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changes in regulatory policies or tax guidelines with respect to
business development companies or RICs;
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actual or anticipated changes in our earnings or fluctuations in
our operating results or changes in the expectations of
securities analysts;
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general economic conditions and trends;
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loss of a major funding source; or
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departures of key personnel of TTG Advisers.
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Investing
in our securities may involve an above average degree of
risk.
The investments we make in accordance with our investment
objective may result in a higher amount of risk than alternative
investment options and volatility or loss of principal. Our
investments in portfolio companies may be highly speculative and
aggressive, and therefore, an investment in our securities may
not be suitable for someone with a low risk tolerance.
We may
allocate the net proceeds from this offering in ways with which
you may not agree.
We have significant flexibility in investing the net proceeds of
an offering of our securities and may use the net proceeds from
the offering in ways with which you may not agree or for
purposes other than those contemplated at the time of the
offering.
Sales
of substantial amounts of our securities may have an adverse
effect on the market price of our securities.
Sales of substantial amounts of our securities, or the
availability of such securities for sale, could adversely affect
the prevailing market prices for our securities. If this occurs
and continues, it could impair our ability to raise additional
capital through the sale of securities should we desire to do so.
Future
offerings of debt securities, which would be senior to our
common stock upon liquidation, or equity securities, which could
dilute our existing shareholders and be senior to our common
stock for the purposes of distributions, may harm the value of
our common stock.
In the future, we may attempt to increase our capital resources
by making additional offerings of equity or debt securities,
including medium-term notes, senior or subordinated notes and
classes of preferred stock or common stock. Upon the liquidation
of our Company, holders of our debt securities and shares of
preferred stock and lenders with respect to other borrowings
will receive a distribution of our available assets prior to the
holders of our
21
common stock. Additional equity offerings by us may dilute the
holdings of our existing shareholders or reduce the value of our
common stock, or both. Any preferred stock we may issue would
have a preference on distributions that could limit our ability
to make distributions to the holders of our common stock.
Because our decision to issue securities in any future offering
will depend on market conditions and other factors beyond our
control, we cannot predict or estimate the amount, timing or
nature of our future offerings. Thus, our shareholders bear the
risk of our future offerings reducing the market price of our
common stock and diluting their stock holdings in us.
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
Information contained in this prospectus may contain
forward-looking statements which can be identified
by the use of forward-looking terminology such as
may, will, expect,
intend, anticipate, estimate
or continue or the negative thereof or other
variations or similar words or phrases. The matters described in
Risk Factors and certain other factors noted
throughout this prospectus and in any exhibits to the
registration statement of which this prospectus is a part,
constitute cautionary statements identifying important factors
with respect to any such forward-looking statements, including
certain risks and uncertainties, that could cause actual results
to differ materially from those in such forward-looking
statements.
Although we believe that the assumptions on which these
forward-looking statements are based are reasonable, any of
those assumptions could prove to be inaccurate, and as a result,
the forward-looking statements based on those assumptions also
could be incorrect. Important assumptions include our ability to
originate new investments, maintain certain margins and levels
of profitability, access the capital markets for equity and debt
capital, the ability to meet regulatory requirements and the
ability to maintain certain debt to asset ratios. In light of
these and other uncertainties, the inclusion of a projection or
forward-looking statement in this prospectus should not be
regarded as a representation by us that our plans and objectives
will be achieved. These risks and uncertainties include those
described in Risk Factors and elsewhere in this
prospectus and any exhibits of the registration statement of
which this prospectus is a part. You should not place undue
reliance on these forward-looking statements, which apply only
as of the date of this prospectus.
USE OF
PROCEEDS
We intend to use the net proceeds from the sale of our
securities for general corporate purposes, including investing
in portfolio companies in accordance with our investment
objective and strategy and repaying debt. Pending such
investments, we will hold the net proceeds from the sale of our
securities in cash or invest all or a portion of such net
proceeds in short term, highly liquid investments. The
supplement to this prospectus relating to an offering will more
fully identify the use of the proceeds from such offering.
22
PRICE
RANGE OF COMMON STOCK AND DISTRIBUTIONS
Our common stock is traded on the NYSE under the symbol
MVC. The following table lists the high and low
closing sales prices for our common stock, and the closing sales
price as a percentage of NAV. On January 4, 2007, the last
reported sale price on the NYSE for our common stock was $13.52
and the Companys NAV per share was $13.21. To view the
Companys latest NAV per share, visit the Companys
Internet website address at
http://www.mvccapital.com.
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Closing Sale
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Closing Sale
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Premium/Discount
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Premium/Discount
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Price
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Price
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of High Sales
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of Low Sales
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Declared
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NAV(1)
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High
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Low
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Price to NAV
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Price to NAV
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Dividends
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Year ended October 31,
2004
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First Quarter
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$
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8.76
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$
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8.47
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$
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7.83
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(3.31
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)%
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(10.62
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)%
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Second Quarter
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8.85
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9.20
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8.19
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3.95
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%
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(7.46
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)%
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Third Quarter
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9.25
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9.72
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8.81
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5.08
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%
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(4.76
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)%
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Fourth Quarter
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$
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9.40
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$
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9.47
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$
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8.94
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0.74
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%
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(4.89
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)%
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$
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0.12
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Year ended October 31,
2005
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First Quarter
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$
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9.41
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$
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9.55
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$
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8.95
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1.49
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%
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(4.89
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)%
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Second Quarter
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9.64
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9.50
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9.17
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(1.45
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)%
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(4.88
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)%
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Third Quarter
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10.06
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11.34
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9.41
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12.72
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%
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(6.46
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$
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0.12
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Fourth Quarter
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$
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10.41
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$
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12.22
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$
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10.30
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17.39
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%
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1.06
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%
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$
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0.12
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Year ended October 31,
2006
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First Quarter
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$
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10.94
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$
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12.22
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$
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10.50
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11.70
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%
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(4.02
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)%
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$
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0.12
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Second Quarter
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11.40
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12.75
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11.66
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11.84
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%
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2.28
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%
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$
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0.12
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Third Quarter
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11.70
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13.49
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11.98
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15.30
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%
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2.39
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%
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$
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0.12
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Fourth Quarter
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$
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12.41
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$
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13.87
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$
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12.61
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11.67
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%
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1.61
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%
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$
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0.12
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Net asset value is currently calculated and published on a
monthly basis. The net asset value shown is as of the last day
in the relevant quarter and therefore may not reflect the net
asset value per share on the date of the high and low sales
prices. The net asset values shown are based on shares
outstanding at the end of each period. |
At times, our common stock price per share has traded in excess
of our net asset value per share. We cannot predict whether our
shares of common stock will trade at a premium to net asset
value.
Currently, the Company has a policy of seeking to pay quarterly
dividends to shareholders. Our quarterly dividends, if any, will
be determined by our board of directors. Most recently, on
December 14, 2006, our board of directors declared a
regular quarterly dividend of $0.12 per share and an
additional special dividend of $0.06 per share, both of
which were paid on January 5, 2007 to shareholders of
record on December 28, 2006.
We maintain a dividend reinvestment plan for our registered
shareholders. As a result, if our board of directors declares a
dividend or distribution, certain shareholders can have any cash
dividends and distributions automatically reinvested in
additional shares of our common stock. See Dividend
Reinvestment Plan.
23
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company is an externally managed, non-diversified,
closed-end management investment company that has elected to be
regulated as a business development company under the 1940 Act.
The Companys investment objective is to seek to maximize
total return from capital appreciation
and/or
income.
On November 6, 2003, Mr. Tokarz assumed his positions
as Chairman and Portfolio Manager of the Company. He and the
Companys investment professionals (who, effective
November 1, 2006, provide their services to the Company
through the Companys investment adviser, TTG Advisers) are
seeking to implement our investment objective (i.e., to
maximize total return from capital appreciation
and/or
income) through making a broad range of private investments in a
variety of industries.
The investments can include senior or subordinated loans,
convertible debt and convertible preferred securities, common or
preferred stock, equity interests, warrants or rights to acquire
equity interests, and other private equity transactions. In the
year ended October 31, 2005, we made six new investments
and three additional investments in existing portfolio
companies, committing capital totaling $53.8 million. In
the year ended October 31, 2006, we made sixteen new
investments and eight additional investments in existing
portfolio companies, committing capital totaling
$166.3 million.
Prior to the adoption of our current investment objective, the
Companys investment objective had been to achieve
long-term capital appreciation from venture capital investments
in information technology companies. The Companys
investments had thus previously focused on investments in equity
and debt securities of information technology companies. As of
October 31, 2006, 2.4% 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 new portfolio investments are made pursuant to our new
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 regulated investment company under Subchapter M
of the Code.
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.
Operating
Income
For the Years Ended October 31, 2006, 2005 and
2004. Total operating income was
$18.5 million for the fiscal year ended October 31,
2006 and $12.2 million for the fiscal year ended
October 31, 2005, an increase of $6.3 million. For the
fiscal year 2005, operating income increased $8.2 million
over the fiscal year 2004 operating income of $4.0 million.
For
the Year Ended October 31, 2006
Total operating income was $18.5 million for the year ended
October 31, 2006. The increase in operating income over
last year was primarily due to the increase in the number of
investments that provide the Company with current income. For
the years ended October 31, 2006 and 2005, the Company made
24 and 9 investments in portfolio companies, respectively. The
main components of operating income were the interest and
dividend income earned on loans to portfolio companies and the
receipt of closing and monitoring fees from certain portfolio
companies by the Company and MVCFS. During 2006, the Company
earned approximately $13.9 million in
24
interest and dividend income from investments in portfolio
companies. Of the $13.9 million recorded in
interest/dividend income, approximately $2.2 million was
payment in kind interest/dividends. The payment in kind
interest/dividends are computed at the contractual rate
specified in each investment agreement and added to the
principal balance of each investment. During the year ended
October 31, 2006, the Company reclassified dividend income
received from Vitality totaling approximately $900,000 to return
of capital. The reclassification occurred due to the
determination that Vitality did not have sufficient taxable
earnings and profits for its fiscal year 2006. This
reclassification to return of capital had limited impact on the
Companys net asset value. The Companys investments
yielded rates from 7.0% to 17.0%. Also, the Company earned
approximately $2.3 million in interest income on its cash
equivalents and short-term investments. The Company received fee
income and other income from portfolio companies and other
entities totaling approximately $3.8 million and $771,405,
respectively. Included in other income is flow through income
from limited liability companies and cash received from the
Mentor Graphics Corp. (Mentor Graphics) multi-year
earnout.
For
the Year Ended October 31, 2005
Total operating income was $12.2 million for the year ended
October 31, 2005. The increase in operating income over
2004 was primarily due to the increase in the number of
investments that provide the Company with current income. The
main components of investment income were the interest and
dividend income earned on loans to portfolio companies and the
receipt of closing and monitoring fees from certain portfolio
companies by the Company and MVCFS. The Company earned
approximately $7.5 million in interest and dividend income
from investments in portfolio companies. Of the
$7.5 million recorded in interest/dividend income,
approximately $1.4 million was payment in kind
interest/dividends. The payment in kind
interest/dividends are computed at the contractual rate
specified in each investment agreement and added to the
principal balance of each investment. The Companys
yielding investments were paying interest to the Company at
various rates from 7.0% to 17.0%. Also, the Company earned
approximately $1.9 million in interest income on its cash
equivalents and short-term investments. The Company received fee
income and other income from portfolio companies and other
entities totaling approximately $1.8 million and $900,000
respectively. Included in other income is flow through income
from limited liability companies, cash received from the Mentor
Graphics multi-year earnout and a legal settlement of $473,968.
See Note 12 Legal Proceedings of our
consolidated financial statements for more information. Without
the receipt of this settlement, other income earned for the year
ended October 31, 2005, would have been $428,855.
For
the Year Ended October 31, 2004
Total operating income was $4.0 million for the year ended
October 31, 2004. The main components of operating income
were the interest income earned on loans to portfolio companies
and the receipt of closing and monitoring fees from certain
portfolio companies by the Company and MVCFS. The Company earned
approximately $2.3 million in interest income from
investments in portfolio companies. Of the $2.3 million
recorded in interest income, approximately $100,000 was
payment in kind interest. The payment in
kind interest is computed at the contractual rate
specified in each investment agreement and added to the
principal balance of each investment. The Companys
yielding investments were paying interest to the Company at
various rates from 10.0% to 17.0%. Also, the Company earned
approximately $700,000 in interest income on its cash
equivalents and short-term investments. The Company received fee
income and other income from portfolio companies totaling
approximately $900,000 and $64,000 respectively.
Operating
Expenses
For the Years Ended October 31, 2006, 2005 and
2004. Operating expenses were $14.6 million
for the fiscal year ended October 31, 2006 and
$6.5 million for the fiscal year ended 2005, an increase of
$8.1 million. For the fiscal year ended October 31,
2005, operating expenses increased $2.2 million from
$4.3 million for the fiscal year ended 2004.
25
For
the Year Ended October 31, 2006
Operating expenses were $14.6 million or 6.78% of the
Companys average net assets for the year ended
October 31, 2006. Significant components of operating
expenses for the year ended October 31, 2006, included an
estimated provision for incentive compensation expense of
approximately $6.1 million, salaries and benefits of
approximately $3.5 million, interest and other borrowing
costs of $1.6 million, legal fees of $685,396,
facilities-related expenses of $603,328, and insurance premium
expenses of $471,711. The estimated provision for incentive
compensation expense is a non-cash, not yet payable, provisional
expense relating to Mr. Tokarzs employment agreement
with the Company.
The $8.1 million increase in the Companys operating
expenses for the year ended October 31, 2006 compared to
the year ended October 31, 2005, was primarily due to: the
$4.9 million increase in the provision for estimated
incentive compensation; an increase in the number of employees
needed to service the larger portfolio, which resulted in an
increase of $1.2 million in salaries and benefits; and the
Companys rent and other facility related expenses
increased approximately $118,908 primarily due to the
Companys procurement of larger office space to accommodate
the Companys increased number of employees. See
Note 10 Commitments and Contingencies of our
consolidated financial statements for more information. Finally,
the increase of approximately $1.6 million compared to the
year ended October 31, 2005 in the Companys interest
expense and other borrowing costs was due to borrowings under
the Credit Facility.
In February 2006, the Company renewed its Directors &
Officers/Professional Liability Insurance policies at an expense
of approximately $459,000 which is amortized over the twelve
month life of the policy. The prior policy premium was $517,000.
Pursuant to the terms of the Companys employment agreement
with Mr. Tokarz, during the year ended October 31,
2006, the provision for estimated incentive compensation was
increased by approximately $6.1 million. The increase in
the provision for incentive compensation resulted from the
determination of the Valuation Committee to increase the fair
value of six of the Companys portfolio investments: Baltic
Motors, Dakota, Ohio, Octagon, Turf, and Vitality, which are
subject to the Companys employment agreement with
Mr. Tokarz, by a total of approximately $30.3 million.
This reserve balance of approximately $7.2 million will
remain unpaid until net capital gains are realized, if ever, by
the Company. Without this reserve for incentive compensation,
operating expenses would have been approximately
$8.5 million or 3.96% of average net assets when annualized
as compared to 6.78% which is reported on the Consolidated Per
Share Data and Ratios, for the year ended October 31, 2006.
Pursuant to Mr. Tokarzs employment agreement with the
Company, only after a realization event, may the incentive
compensation be paid to him. Mr. Tokarz has determined to
allocate a portion of his incentive compensation to certain
employees of the Company. During the years ended
October 31, 2006 and October 31, 2005, Mr. Tokarz
was paid no cash or other compensation. However, on
October 2, 2006 and as discussed in Realized Gains
and Losses on Portfolio Securities, the Company realized a
gain of $551,092 from the sale of a portion of the
Companys LLC member interest in Octagon. This transaction
triggered an incentive compensation payment obligation to
Mr. Tokarz, which payment is not required to be made until
the precise amount of the payment obligation is confirmed based
on the Companys completed audited financials for the
fiscal year 2006. Subject to confirmation following the audit,
the payment obligation to Mr. Tokarz from this transaction
is approximately $110,000 (which is expected to be paid during
the first quarter of the Companys fiscal year 2007).
Please see Note 5 Incentive Compensation of our
consolidated financial statements for more information.
For
the Year Ended October 31, 2005
Operating expenses were $6.5 million or 3.75% of average
net assets for the year ended October 31, 2005. Significant
components of operating expenses for the year ended
October 31, 2005 included salaries and benefits of $2.3
million estimated incentive compensation expense of
$1.1 million insurance premium expenses of $590,493, legal
fees of $529,541 and facilities related expenses of $484,420.
Estimated incentive compensation expense is a non-cash, not yet
payable, provisional expense relating to Mr. Tokarzs
compensation arrangement with the Company.
The increase in the Companys operating expenses in 2005
compared to 2004 was primarily due to an increase in employees
needed to service the larger portfolio and work to continue to
grow the Company. Also, the
26
Companys rent and other facility related expenses
increased primarily due to the Companys procurement of
larger office space to accommodate the Companys increased
number of employees. See Note 10 Commitments and
Contingencies of our consolidated financial statements for
more information.
Pursuant to the terms of the Companys agreement with
Mr. Tokarz, during the year ended October 31, 2005,
the Company created a provision for $1.1 million of
incentive compensation. This provision for incentive
compensation resulted from the determination of the Valuation
Committee to increase the fair value of five of the
Companys portfolio investments: Baltic Motors, Dakota,
Octagon, Vestal and Vitality which are subject to the
Companys agreement with Mr. Tokarz, by an aggregate
amount of $5.6 million. This reserve balance of
$1.1 million will remain unpaid and not finally determined
until net capital gains are realized, if ever, by the Company.
Pursuant to Mr. Tokarzs agreement with the Company,
only after a realization event, will the incentive compensation
be paid to him. Mr. Tokarz has determined to allocate a
portion of his incentive compensation to certain employees of
the Company. During the year ended October 31, 2005,
Mr. Tokarz was paid no cash or other compensation. Without
this reserve for incentive compensation, operating expenses
would have been approximately $5.4 million or 3.10% of
average net assets. Please see Note 5 Incentive
Compensation of our consolidated financial statements for
more information.
In February 2005, the Company renewed its Directors &
Officers/Professional Liability Insurance policies at an expense
of approximately $517,000 which is amortized over the twelve
month life of the policy. The prior policy premium was $719,000.
During the year ended October 31, 2005, the Company paid or
accrued $529,541 in legal fees. This amount includes legal fees
of $47,171 which were incurred while pursuing a claim against
Federal Insurance Company. See Note 12 Legal
Proceedings of our consolidated financial statements for
more information. The Company received $473,968 from the
settlement of the legal action which was recorded as other
income. After fees and expenses the cash received from the
settlement was $426,797. Without the legal fees related to the
legal action, the Company would have paid or accrued $482,370 in
legal fees.
For
the Year Ended October 31, 2004
Operating expenses were $4.3 million or 3.68% of average
net assets for the year ended October 31, 2004. Significant
components of operating expenses for the year ended
October 31, 2004 included insurance premium expenses of
$959,570, salaries and benefits of $1.4 million legal fees
of $810,848, and facilities expense of $90,828.
In February 2003, the former management of the Company
(Former Management) entered into new
Directors & Officers/Professional Liability Insurance
policies with total premiums of approximately $1.4 million.
The cost was amortized over the life of the policy, through
February 2004, at which time a new policy was entered into with
a premium of approximately $719,000. For the year ended
October 31, 2004, the Company expensed $959,570 in
insurance premiums.
During the year ended October 31, 2004, the Company paid or
accrued $810,848 in legal fees (compared to $1.5 million in
2003). Legal expenses included fees of $124,787 incurred while
pursuing action against the Companys former advisor, meVC
Advisers, Inc. (the Former Adviser) for the
reimbursement of management fees which were alleged to be
excessive. See Note 12 Legal Proceedings of our
consolidated financial statements for more information. The
Company received $370,000 from the settlement of the legal
action which was recorded as other income. After fees and
expenses the cash received from the settlement was $245,213.
Without the legal fees related to this litigation, the Company
would have paid or accrued $686,061 in legal fees. The legal
expenses for the year ended October 31, 2004, were
reflective of a decreased need for legal counsel due to the
redefinition of the Companys direction by Management.
On January 21, 2004, the Company reached an agreement with
the property manager at 3000 Sand Hill Road, Menlo Park,
California to terminate its lease at such location. Under the
terms of the agreement, the Company bought-out its lease
directly from the property manager, for an amount equal to
$232,835. As a result, the Company recovered approximately
$250,000 of the remaining reserve established at
October 31, 2003. Without the recovery of the reserve, the
gross facilities expense for the year ended October 31,
2004 would have been approximately $340,828.
27
Realized
Gains and Losses On Portfolio Securities
For the Years Ended October 31, 2006, 2005 and
2004. Net realized gains for the year ended
October 31, 2006 were $5.2 million and net realized
losses for the year ended October 31, 2005 were
$3.3 million, an increase of $8.5 million. Net
realized losses for the year ended October 31, 2004 were
$37.8 million which was $34.5 million more compared to
the fiscal year 2005.
For
the Year Ended October 31, 2006
Net realized gains for the year ended October 31, 2006 were
$5.2 million. The significant component of the
Companys net realized gain for the year ended
October 31, 2006 was primarily due to the gain on the sale
of ProcessClaims Inc. (ProcessClaims), the escrow
distribution from Sygate Technologies, Inc.
(Sygate), and the sale of a portion of the Octagon
equity interest, an investment made during
Mr. Tokarzs tenure as portfolio manager.
During the year ended October 31, 2006, the Company sold
its investment in ProcessClaims and realized a gain of
approximately $5.5 million. The Company was entitled to
receive approximately $8.3 million in gross proceeds, of
which approximately $400,000 or 5.0% of the proceeds will be
deposited into a reserve account for one year. Due to the
contingencies associated with the escrow, the Company has not
presently placed any value on the proceeds deposited in escrow
and has therefore not factored such proceeds into the
Companys increased NAV. The Company received net proceeds
of approximately $7.9 million.
On October 2, 2006, Octagon bought back a total of 15.0%
equity interest from non-service members. This resulted in a
sale of a portion of the Companys LLC member interest to
Octagon for proceeds of $1.0 million. The Company realized
a gain of $551,092 from this sale.
On October 17, 2006, the Company received a
$1.6 million escrow disbursement from the sale of Sygate on
October 10, 2005. Due to the contingencies associated with
the escrow, the Company had not placed any value on the proceeds
deposited in escrow. This resulted in an increase in NAV of
$1.6 million.
The Company received notification of the final dissolution of
Yaga Inc. (Yaga). The Company received no proceeds
from the dissolution of this company and the investment has been
removed from the Companys books. The Company realized a
loss of $2.3 million as a result of this dissolution. The
fair value of Yaga was previously written down to zero and
therefore, the net effect of the removal of Yaga from the
Companys books on the Companys consolidated
statement of operations and NAV was zero.
On April 7, 2006, the Company sold its investment in Lumeta
Corporation (Lumeta) for its then carrying value of
$200,000. The Company realized a loss on Lumeta of approximately
$200,000. However, the Valuation Committee previously decreased
the fair value of the Companys investment in this company
to $200,000 and as a result, the realized loss was offset by a
reduction in unrealized losses. Therefore, the net effect of the
Companys sale of its investment in Lumeta on the
Companys consolidated statement of operations and NAV was
zero.
The Company also received a payout related to a former portfolio
company, Annuncio, of approximately $70,000.
For
the Year Ended October 31, 2005
Net realized losses for the year ended October 31, 2005
were $3.3 million. The significant components of the
Companys net realized loss for the year ended
October 31, 2005 were realized gains on the Companys
investments in Sygate, Mentor Graphics and BlueStar Solutions,
Inc. (BlueStar) which were offset by realized losses
on CBCA, Inc. (CBCA), Phosistor Technologies, Inc.
(Phosistor) and ShopEaze Systems, Inc.
(ShopEaze).
During the year ended October 31, 2005, the Company sold
its entire investment in Sygate and received net proceeds of
$14.4 million. In addition, approximately $1.6 million
or 10% of proceeds from the sale were deposited in an escrow
account for approximately one year. Due to the contingencies
associated with the escrow, the Company did not place any value
on the proceeds deposited in escrow and did not factor such
proceeds into the Companys NAV. The realized gain from the
$14.4 million in net proceeds received was
$10.4 million. The Company also sold 685,679 shares of
Mentor Graphics receiving net proceeds of approximately
$9.0 million and a realized gain on the
28
shares sold of approximately $5.0 million. The Company also
received approximately $300,000 from the release of money held
in escrow in connection with the Companys sale of its
investment in BlueStar in 2004 (see below).
The Company realized losses on CBCA of approximately
$12.0 million, Phosistor of approximately $1.0 million
and ShopEaze of approximately $6.0 million. The Company
received no proceeds from these companies and they have been
removed from the Companys portfolio. The Valuation
Committee previously decreased the fair value of the
Companys investment in these companies to zero and as a
result, the realized losses were offset by reductions in
unrealized losses. Therefore, the net effect of the transactions
on the Companys consolidated statement of operations and
NAV was zero for the fiscal year ended October 31, 2005.
For
the Year Ended October 31, 2004
Net realized losses for the year ended October 31, 2004
were $37.8 million. The significant components of the
Companys realized losses for the year ended
October 31, 2004 were transactions with PTS Messaging, Inc.
(PTS Messaging), Ishoni Networks, Inc.
(Ishoni), Synhrgy HR Technologies, Inc.
(Synhrgy), BlueStar and DataPlay, Inc.
(DataPlay).
The Company had a return of capital from PTS Messaging with
proceeds totaling approximately $102,000 from the initial and
final disbursement of assets and a realized loss totaling
approximately $11.6 million. As of October 31, 2004
the Company no longer held an investment in PTS Messaging. The
Valuation Committee previously decreased the fair value of the
Companys investment in PTS Messaging to zero.
The Company also realized a loss on Ishoni of approximately
$10.0 million. The Company received no proceeds from the
dissolution of this company and the investment has been removed
from the Companys portfolio. The Valuation Committee
previously decreased the fair value of the Companys
investment in Ishoni to zero.
There was a gain of $39,630 representing proceeds received from
the cashless exercise of the Companys warrants of Synhrgy
in conjunction with the early repayment by Synhrgy of the
balance of Synhrgys credit facility.
On August 26, 2004, Affiliated Computer Services, Inc.
(ACS) acquired the Companys portfolio company
BlueStar in a cash transaction. The Company received
approximately $4.5 million for its investment in BlueStar.
The amount received included up to $459,000 in contingent
payments that were held in escrow. The carrying value of the
BlueStar investment was $3.0 million. The Company realized
a loss of approximately $8.8 million, which was offset by a
decrease in unrealized loss by the same amount. The effect of
the transaction on the Company was an increase in assets by
$1.1 million. After the sale, the Company no longer held an
investment in BlueStar.
On August 29, 2004, the Company entered into a transaction
pursuant to which it received 602,131
Series A-1
preferred shares of DPHI, Inc. (DPHI), which
purchased the assets of DataPlay out of bankruptcy in late 2003.
The Companys legal fees in connection with the transaction
were approximately $20,000. The shares of DPHI were received in
exchange for the Companys seven promissory notes in
DataPlay. The 2,500,000 shares of DataPlay Series D
Preferred Stock were removed from the books of the Company for a
realized loss of $7.5 million. The unrealized loss had
previously been recorded; therefore, the net effect of the
transaction was zero.
Unrealized
Appreciation and Depreciation of Portfolio Securities
For the Years Ended October 31, 2006, 2005 and
2004. The Company had a net change in unrealized
appreciation on portfolio investments of $38.3 million for
the year ended October 31, 2006. The Company had a net
change in unrealized appreciation on portfolio investments of
$23.8 million and $49.4 million for the years ended
October 31, 2005 and 2004, respectively.
For
the Year Ended October 31, 2006
The Company had a net change in unrealized appreciation on
portfolio investments of $38.3 million for the year ended
October 31, 2006. The change in unrealized appreciation on
investment transactions for the year ended October 31, 2006
primarily resulted from the Valuation Committees decision
to increase the fair value of the Companys investments in
Baltic Motors common stock by $11.6 million, Dakota common
stock by approximately $2.6 million, Turfs membership
interest by approximately $2.0 million, Octagons
membership interest by
29
approximately $562,000, Ohio common stock by $9.2 million,
ProcessClaims preferred stock by $4.8 million, Foliofn
preferred stock by $5.0 million, Vendio Services, Inc.
(Vendio) preferred stock by $700,000, and Vitality
common stock and warrants by $3.5 million and $400,000,
respectively. The Valuation Committee also decided to decrease
the fair value of the Companys investment in Timberland
common stock by $1.0 million. Other key components of the
net change in unrealized appreciation were the $2.5 million
depreciation reclassification from unrealized to realized caused
by the removal of Yaga and Lumeta and the $4.8 million
appreciation reclassification from the sale of ProcessClaims
from the Companys books.
For
the Year Ended October 31, 2005
The Company had a net change in unrealized appreciation on
portfolio investments of $23.8 million for the year ended
October 31, 2005. The change in unrealized appreciation on
investment transactions for the year ended October 31, 2005
primarily resulted from the Valuation Committees
determinations to increase the fair value of the Companys
investments in Baltic Motors by $1.5 million, Dakota by
$514,000, Octagon by approximately $1.0 million, Sygate by
$7.5 million, Vendio by approximately $1.6 million,
Vestal by approximately $1.9 million and Vitality by
$700,000. The increase in the fair value of these portfolio
investments resulted in a change in unrealized appreciation of
approximately $14.7 million. Other key components were the
realization of a $10.4 million gain on the sale of the
Companys investment in Sygate, a $5.0 million gain on
the sale of the Companys investment in Mentor Graphics,
the $19.0 million depreciation reclassification from
unrealized to realized caused by the removal of CBCA, Phosistor
and ShopEaze from the Companys books and the $500,000
decrease in unrealized caused by repayment in full of the Arcot
Systems, Inc. (Arcot) loan which was being carried
below cost.
For
the Year Ended October 31, 2004
Net change in unrealized appreciation for the year ended
October 31, 2004 was approximately $49.4 million. The
net change in unrealized appreciation on investment transactions
for the year ended October 31, 2004 resulted mainly from
the $37.8 million reclassification from unrealized
depreciation to realized loss caused by the sale or disbursement
of assets from PTS Messaging, Ishoni, Synhrgy, BlueStar and
DataPlay (See Realized Gains and Losses on Portfolio
Securities). This net decrease also resulted from the
determinations of the Valuation Committee to (i) increase
the fair value of the Companys investments in 0-In Design
Automation, Inc. (0-In) by $5 million, Sygate
by $1.5 million, BlueStar by $1.5 million, Vendio by
$634,000 and Integral Development Corp. (Integral)
by $989,000 and (ii) decrease the fair value of the
Companys investments in Actelis Networks, Inc.
(Actelis) by $1.0 million, CBCA by $500,000 and
Sonexis, Inc. (Sonexis) by $500,000.
The Company also sold its investment in 0-In for
685,679 shares of Mentor Graphics in a tax-free exchange.
Of these shares, 603,396 are freely tradable and valued daily at
market price. As of October 31, 2004 these shares had an
unrealized gain of approximately $3.0 million above the
Companys cost basis in 0-In and $6.0 million above
0-Ins
carrying value at October 31, 2003.
Portfolio
Investments
For the Years Ended October 31, 2006 and
2005. The cost of the portfolio investments held
by the Company at October 31, 2006 and at October 31,
2005 was $286.9 million and $171.6 million,
respectively, an increase of $115.3 million. The aggregate
fair value of portfolio investments at October 31, 2006 and
at October 31, 2005 was $275.9 million and
$122.3 million, respectively, an increase of
$153.6 million. The cost and aggregated market value of
short-term securities held by the Company at October 31,
2006 and at October 31, 2005 was $0 and $51 million,
respectively, a decrease of $51 million. The cost and
aggregate market value of cash and cash equivalents held by the
Company at October 31, 2006 and at October 31, 2005
was $66.2 million and $26.3 million, respectively, an
increase of approximately $39.9 million.
For
the Year Ended October 31, 2006
During the year ended October 31, 2006, the Company made 16
new investments, committing capital totaling approximately
$142.1 million. The investments were made in Turf
($11.6 million), SOI ($5.0 million), Henry
30
($5.0 million), BM Auto ($15.0 million), Storage
Canada ($6.0 million), Phoenix ($8.0 million), Harmony
Pharmacy ($200,000), Total Safety ($6.0 million), PreVisor
($6.0 million), Marine ($14.0 million), BP
($15.0 million), Velocitius ($66,290), Summit
($16.2 million), Octagon ($17.0 million), BENI
($2.0 million), and Innovative Brands ($15.0 million).
The Company also made eight follow-on investments in existing
portfolio companies committing capital totaling approximately
$24.2 million. During the year ended October 31, 2006,
the Company invested approximately $879,000 in Dakota by
purchasing an additional 172,104 shares of common stock at
an average price of $5.11 per share. On December 22,
2005, the Company made a follow-on investment in Baltic Motors
in the form of a $1.8 million revolving bridge note. Baltic
Motors immediately drew down $1.5 million from the note. On
January 12, 2006, Baltic Motors repaid the amount drawn
from the note in full, including all unpaid interest. The note
matured on January 31, 2006 and has been removed from the
Companys books. On January 12, 2006, the Company
provided SGDA a $300,000 bridge loan. On March 28, 2006,
the Company provided Baltic Motors a $2.0 million revolving
bridge note. Baltic Motors immediately drew down
$2.0 million from the note. On April 5, 2006, Baltic
Motors repaid the amount drawn from the note in full, including
all unpaid interest. The note matured on April 30, 2006 and
has been removed from the Companys books. On April 6,
2006, the Company invested an additional $2.0 million in
SGDA in the form of a preferred equity security. On
April 25, 2006, the Company purchased an additional common
equity security in SGDA for $23,000. On June 30, 2006, the
Company invested $2.5 million in Amersham in the form of a
second lien loan. On August 4, 2006, the Company invested
$750,000 in Harmony Pharmacy in the form of common stock. On
September 28, 2006, the Company made another follow-on
investment in Baltic Motors in the form of a $1.0 million
bridge loan and $2.0 million equity investment. On
October 13, 2006, the Company made a $10.0 million
follow-on investment in SP. The $10.0 million was invested
in the form of an additional $4.0 million in term
loan B and $6.0 million in a mezzanine loan. On
October 20, 2006, the Company then assigned
$5.0 million of SPs $8.0 million term
loan B to Citigroup Global Markets Realty Corp. On
October 24, 2006, the Company invested an additional
$3.0 million in SGDA in the form of a preferred equity
security. On October 26, 2006, the Company invested an
additional $2.9 million in Velocitius in the form of common
equity. The Company also provided Velocitius a $260,000
revolving note on October 31, 2006. Velocitius immediately
drew down $143,614 from the note.
At the beginning of the 2006 fiscal year, the revolving credit
facility provided to SGDA had an outstanding balance of
approximately $1.2 million. During December 2005, SGDA drew
down an additional $70,600 from the credit facility. On
April 28, 2006, the Company increased the availability
under the revolving credit facility by $300,000. The balance of
the bridge loan mentioned above, which would have matured on
April 30, 2006, was added to the revolving credit facility
and the bridge loan was eliminated from the Companys books
as a part of the refinancing.
On December 21, 2005, Integral prepaid its senior credit
facility from the Company in full. The Company received
approximately $850,000 from the prepayment. This amount included
all outstanding principal and accrued interest. The Company
recorded no gain or loss as a result of the prepayment. Under
the terms of the prepayment, the Company returned its warrants
to Integral for no consideration.
Effective December 27, 2005, the Company exchanged
$286,200, of the approximately $3.25 million outstanding,
of the Timberland junior revolving line of credit into
28.62 shares of common stock at a price of $10,000 per
share. As a result, as of July 31, 2006, the Company owned
478.62 common shares of Timberland and the funded debt under the
junior revolving line of credit was reduced from
$3.25 million to approximately $3.0 million.
Effective December 31, 2005, the Company received
373,362 shares of Series E preferred stock of
ProcessClaims, in exchange for its rights under a warrant issued
by ProcessClaims that has been held by the Company since May
2002. On January 5, 2006, the Valuation Committee increased
the fair value of the Companys entire investment in
ProcessClaims by $3.3 million to $5.7 million. Please
see the paragraph below for more information on ProcessClaims.
On January 3, 2006, the Company exercised its warrant
ownership in Octagon which increased its existing membership
interest. As a result, Octagon is now considered an affiliate of
the Company.
31
Due to the dissolution of Yaga, one of the Companys Legacy
Investments, the Company realized losses on its investment in
Yaga totaling $2.3 million during the year ended
October 31, 2006. The Company received no proceeds from the
dissolution of Yaga and the Companys investment in Yaga
has been removed from the Companys books. The Valuation
Committee previously decreased the fair value of the
Companys investment in Yaga to zero and as a result, the
Companys realized losses were offset by reductions in
unrealized losses. Therefore, the net effect of the removal of
Yaga from the Companys books on the Companys
consolidated statement of operations and NAV at October 31,
2006, was zero.
On February 24, 2006, BP repaid its second lien loan from
the Company in full. The amount of the proceeds received from
the prepayment was approximately $8.7 million. This amount
included all outstanding principal, accrued interest, accrued
monitoring fees and an early prepayment fee. The Company
recorded no gain or loss as a result of the repayment.
On April 7, 2006, the Company sold its investment in Lumeta
for its then carrying value of $200,000. The Company realized a
loss on Lumeta of approximately $200,000. However, the Valuation
Committee previously decreased the fair value of the
Companys investment in Lumeta to $200,000 and, as a
result, the realized loss was offset by a reduction in
unrealized losses. Therefore, the net effect of the
Companys sale of its investment in Lumeta on the
Companys consolidated statement of operations and NAV was
zero.
On April 21, 2006, BM Auto repaid its bridge loan from the
Company in full. The amount of the proceeds received from the
repayment was approximately $7.2 million. This amount
included all outstanding principal, accrued interest and was net
of foreign taxes withheld. The Company recorded no gain or loss
as a result of the repayment.
On May 4, 2006, the Company received a working capital
adjustment of approximately $250,000 related to the
Companys purchase of a membership interest in Turf. As a
result, the Companys cost basis in the investment was
reduced.
On May 30, 2006, ProcessClaims, one of the Companys
Legacy Investments, entered into a definitive agreement to be
acquired by CCC Information Services Inc. (CCC). The
acquisition by CCC closed on June 9, 2006. As of
June 9, 2006, the Company received net proceeds of
approximately $7.9 million. The gross proceeds were
approximately $8.3 million of which approximately $400,000
or 5% of the gross proceeds were deposited into a reserve
account for one year. Due to the contingencies associated with
the escrow, the Company has not presently placed any value on
the proceeds deposited in escrow and has therefore not factored
such proceeds into the Companys increased NAV. The
Companys total investment in ProcessClaims was
$2.4 million which resulted in a capital gain of
approximately $5.5 million.
On July 27, 2006, SOI repaid their loan from the Company in
full. The amount of the proceeds received from the prepayment
was approximately $4.5 million. This amount included all
outstanding principal, accrued interest, and an early prepayment
fee. The Company recorded no gain or loss as a result of the
prepayment.
On August 25, 2006, Harmony Pharmacy repaid their loan from
the Company in full. The amount of the proceeds received from
the prepayment was $207,444. This amount included all
outstanding principal and accrued interest. The Company recorded
no gain or loss as a result of the prepayment.
On August 25, 2006, SGDAs revolving credit facility
was added to the term loan, increasing the balance of the term
loan by $1.6 million. The revolving credit facility was
eliminated from the Companys books as a result of this
refinancing.
Effective September 12, 2006, the Company exchanged
$409,091 of the approximately $3.0 million outstanding, of
the Timberland junior revolving line of credit into
40.9 shares of common stock at a price of $10,000 per
share. Effective September 22, 2006, the Company exchanged
$225,000 of the $2.6 million outstanding, of the Timberland
junior revolving line of credit into 22.5 shares of common
stock at a price of $10,000 per share. On
September 22, 2006, Timberland drew down $500,000 from the
junior revolving line of credit. As a result of these
transactions, as of October 31, 2006, the Company owned
542.0 common shares of Timberland and the funded debt under the
junior revolving line of credit was reduced from approximately
$3.0 million to approximately $2.8 million.
32
On October 2, 2006, Octagon bought-back a total of 15.0%
equity interest from non-service members. This resulted in a
sale of a portion of the Companys LLC member interest to
Octagon for proceeds of approximately $1.0 million. The
Company realized a gain of $551,092 from this sale.
On October 2, 2006, Octagon repaid their loan and revolving
credit facility from the Company in full. The amount of the
proceeds received from the prepayment of the loan was
approximately $5.4 million. This amount included all
outstanding principal, accrued interest, and an unused fee on
the revolving credit facility. The Company recorded a gain as a
result of these prepayments of approximately $429,000 from the
acceleration of amortization of original issue discount.
On October 20, 2006, the Company assigned $5.0 million
of SPs $8.0 million term loan B to Citigroup
Global Markets Realty Corp.
On October 30, 2006, JDC repaid $160,116 of principal on
the senior subordinated debt.
During the year ended October 31, 2006, the Valuation
Committee increased the fair value of the Companys
investments in Baltic Motors common stock by $11.6 million,
Dakota common stock by approximately $2.6 million,
Turfs membership interest by $2.0 million,
Octagons membership interest by approximately $562,000,
Ohio common stock by $9.2 million, Foliofn preferred stock
by $5.0 million, Vendio preferred stock by $700,000,
ProcessClaims preferred stock by $4.8 million and Vitality
common stock and warrants by $3.5 million and $400,000,
respectively. In addition, increases recorded to the cost basis
and fair value of the loans to Amersham, BP, Impact, JDC,
Phoenix, SP, Timberland, Turf, Marine, Summit and the Vitality
and Marine preferred stock were due to the receipt of payment in
kind interest/dividends totaling approximately
$2.2 million. Also during the year ended October 31,
2006, the undistributed allocation of flow through income from
the Companys equity investment in Octagon increased the
cost basis and fair value of the Companys investment by
approximately $279,000. During the year ended October 31,
2006, the Valuation Committee also decreased the fair value of
the Companys equity investment in Timberland by
$1.0 million. The increase in fair value from payment in
kind interest/dividends and flow through income has been
approved by the Companys Valuation Committee.
At October 31, 2006, the fair value of all portfolio
investments, exclusive of short-term securities, was
$275.9 million with a cost basis of $286.9 million. At
October 31, 2005, the fair value of all portfolio
investments, exclusive of short-term securities, was
$122.3 million with a cost basis of $171.6 million.
For
the Year Ended October 31, 2005
During the year ended October 31, 2005, the Company made
six new investments, committing capital totaling approximately
$48.8 million. The investments were made in JDC, SGDA, SP,
BP, Ohio and Amersham. The amounts invested were
$3.0 million, $5.8 million, $10.5 million,
$10.0 million, $17.0 million and $2.5 million
respectively.
The Company also made three follow-on investments in existing
portfolio companies committing capital totaling approximately
$5.0 million. In December 2004 and January 2005, the
Company invested a total of $1.25 million in Timberland in
the form of subordinated bridge notes. On April 15, 2005,
the Company re-issued 146,750 shares of its treasury stock
at the Companys NAV per share of $9.54 in exchange for
40,500 shares of common stock of Vestal. On July 8,
2005 the Company extended Timberland a $3.25 million junior
revolving note. According to the terms of the note, Timberland
immediately drew $1.3 million from the revolving note and
used the proceeds to repay the subordinated bridge notes in
full. The repayment included all outstanding principal and
accrued interest. On July 29, 2005, the Company invested an
additional $325,000 in Impact in the form of a secured
promissory note.
In April 2005, Octagon drew $1.5 million from the senior
secured credit facility provided to it by the Company and repaid
it in full during June 2005.
During 2005, SGDA drew approximately $1.2 million from the
revolving credit facility provided to it by the Company. As of
October 31, 2005, all amounts drawn from the facility
remained outstanding.
33
On July 14, 2005 and September 28, 2005, Timberland
drew an additional $1.5 million and $425,000, respectively,
from the revolving note mentioned above. As of October 31,
2005, the note was drawn in full and the balance of
$3.25 million remained outstanding.
Also, during the year ended October 31, 2005, the Company
sold its entire investment in Sygate and received
$14.4 million in net proceeds. In addition, approximately
$1.6 million or 10.0% of proceeds from the sale were
deposited in an escrow account for approximately one year. Due
to the contingencies associated with the escrow, the Company did
not place any value on the proceeds deposited in escrow and did
not factor such proceeds into the Companys NAV. The
realized gain from the $14.4 million in net proceeds
received was $10.4 million. The Company also sold
685,679 shares of Mentor Graphics receiving net proceeds of
approximately $9.0 million and a realized gain on the
shares sold of approximately $5.0 million. The Company also
received approximately $300,000 from the escrow related to the
2004 sale of BlueStar.
The Company realized losses on CBCA of approximately
$12.0 million, Phosistor of approximately $1.0 million
and ShopEaze of approximately $6.0 million. The Company
received no proceeds from these companies and they have been
removed from the Companys portfolio. The Valuation
Committee previously decreased the fair value of the
Companys investments in these companies to zero.
Therefore, the net effect of the transactions on the
Companys consolidated statement of operations and NAV for
the fiscal year ended October 31, 2005, was zero.
On December 21, 2004, Determine Software, Inc.
(Determine) prepaid its senior credit facility from
the Company in full. The amount of proceeds the Company received
from the repayment was approximately $1.6 million. This
amount included all outstanding principal and accrued interest.
Under the terms of the early repayment, the Company returned its
approximately 2,229,955 Series C warrants for no
consideration.
On July 5, 2005, Arcot prepaid its senior credit facility
from the Company in full. The amount of proceeds the Company
received from the repayment was approximately $2.6 million.
This amount included all outstanding principal and accrued
interest. Under the terms of the early repayment, the Company
returned its warrants to Arcot for no consideration.
The Company continued to receive principal repayments on the
debt securities of Integral and BP. Integral made payments
during the year ended October 31, 2005, according to its
credit facility agreement totaling $1.7 million. BP made
two quarterly payments during the year ended October 31,
2005 totaling $833,333. Also, the Company received a one time,
early repayment on Vestals debt securities totaling
$100,000.
During the year ended October 31, 2005, the Valuation
Committee increased the fair value of the Companys
investments in Baltic Motors by $1.5 million, Dakota by
$514,000, Octagon by approximately $1.0 million, Sygate by
$7.5 million (which was later realized), Vendio by
approximately $1.6 million, Vestal by approximately
$1.9 million and Vitality by approximately $700,000. In
addition, increases in the cost basis and fair value of the
Octagon loan, Impact loan, Timberland loan, Vitality
Series A preferred stock, JDC loan and SP loans were due to
the receipt of payment in kind interest/dividends
totaling approximately $1.4 million. Also during the year
ended October 31, 2005, the undistributed allocation of
flow through income from the Companys equity investment in
Octagon increased the cost basis and fair value of the
investment by $114,845.
At October 31, 2005, the fair value of all portfolio
investments, exclusive of short-term securities, was
$122.3 million with a cost of $171.6 million. At
October 31, 2004, the fair value of all portfolio
investments, exclusive of short-term securities, was
$78.5 million with a cost of $151.6 million.
Portfolio
Companies
During the year ended October 31, 2006, 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.
34
At October 31, 2005 and October 31, 2006, the
Companys investment in Actelis consisted of
150,602 shares of Series C preferred stock at a cost
of $5.0 million. The investment has been assigned a fair
value of $0.
Amersham
Corp.
Amersham Corp. (Amersham), Louisville, Colorado, is
a manufacturer of precision machined components for the
automotive, furniture, security and medical device markets.
During the fiscal year 2005 the Company made an investment in
Amersham. The Companys investment in Amersham consists of
$2.5 million in purchased notes, bearing annual interest at
10.0%. The notes have a maturity date of June 29, 2010. The
notes have a principal face amount and cost basis of
$2.5 million.
On June 30, 2006, the Company made an additional investment
in Amersham consisting of an additional $2.5 million note
bearing annual interest at 16.0% from June 30, 2006 to
June 30, 2008. The interest rate then steps down to 14.0%
for the period July 1, 2008 to June 30, 2010, steps
down to 13.0% for the period July 1, 2010 to June 30,
2012 and steps down again to 12.0% for the period July 1,
2012 to June 30, 2013. The note has a maturity date of
June 30, 2013. The note has a principal face amount and
cost basis of $2.6 million. The increase in the outstanding
balance, cost and fair value of the loan, is due to the
capitalization of payment in kind interest. These
increases were approved by the Companys Valuation
Committee.
At October 31, 2006, the notes had a combined outstanding
balance, cost and fair value of $5.1 million.
Auto
MOTOL BENI
Auto MOTOL BENI (BENI), consists of two leased Ford
sales and service dealerships located in the western side of
Prague, in the Czech Republic.
On October 10, 2006 the Company made an investment in BENI
by purchasing 200 shares of common stock at a cost of
$2.0 million.
At October 31, 2006, the Companys investment in BENI
was assigned a cost and fair value of $2.0 million.
Christopher Sullivan, a representative of the Company, serves as
a director for BENI.
Baltic
Motors Corporation
Baltic Motors Corporation (Baltic Motors), Purchase,
New York, is a U.S. company focused on the importation and
sale of Ford and Land Rover vehicles and parts throughout
Latvia, a member of the European Union.
At October 31, 2005, the Companys investment in
Baltic Motors consisted of 54,947 shares of common stock at
a cost of $6.0 million and a mezzanine loan with a cost
basis of $4.5 million. The loan has a maturity date of
June 24, 2007 and earns interest at 10.0% per annum.
At October 31, 2005, the investment in Baltic Motors was
assigned a fair value of $12.0 million.
On December 22, 2005, the Company extended to Baltic Motors
a $1.8 million revolving bridge note. Baltic Motors
immediately drew down $1.5 million from the note. On
January 12, 2006, Baltic Motors repaid the amount drawn
from the note in full including all unpaid interest. The note
ended on January 31, 2006 and has been removed from the
Companys books.
On March 28, 2006, the Company extended to Baltic Motors a
$2.0 million revolving bridge note. Baltic Motors
immediately drew down $2.0 million from the note. On
April 5, 2006, Baltic Motors repaid the amount drawn from
the note in full including all unpaid interest. The note ended
on April 30, 2006 and has been removed from the
Companys books.
On September 28, 2006, the Company purchased an additional
5,737 shares of common stock at a cost of
$2.0 million. The Company also extended to Baltic Motors a
$1.0 million bridge loan. The loan bears annual interest at
12.0% with a maturity date of December 27, 2006.
35
During the year ended October 31, 2006, the Valuation
Committee increased the fair value of the Companys equity
investment in Baltic Motors by $11.6 million. The fair
value of the Companys equity investment at
October 31, 2006 was $21.2 million.
At October 31, 2006, the Companys investment in
Baltic Motors was assigned a fair value of $26.7 million.
Michael Tokarz, Chairman of the Company, and Christopher
Sullivan, a representative of the Company, serve as directors
for Baltic Motors.
BP
Clothing, LLC
BP Clothing, LLC (BP), Pico Rivera, California, is a
company which designs, manufactures, markets and distributes,
Baby
Phat®,
a line of womens clothing.
On June 3, 2005, the Company made an initial investment in
BP consisting of a $10.0 million second lien loan bearing
annual interest at LIBOR plus 8.0% for the first year and
variable interest rates for the remainder of the four year term.
The loan has a $10.0 million principal face amount and was
issued at a cost basis of $10.0 million. The loans
cost basis was subsequently discounted to reflect loan
origination fees received. The Company is scheduled to receive
quarterly principal repayments totaling $625,000 per
quarter with the remaining principal balance due upon maturity.
On February 24, 2006, BP repaid its initial second lien
loan from the Company in full. The amount of the proceeds
received from the prepayment was approximately
$8.7 million. This amount included all outstanding
principal, accrued interest, accrued monitoring fees and an
early prepayment fee.
On July 19, 2006, the Company extended to BP a subsequent
$10.0 million second lien loan bearing annual interest at
14.0%. The loan has a $10.0 million principal face amount
and was issued at a cost basis of $10.0 million. The
loans cost basis was subsequently discounted to reflect
loan origination fees received. The maturity date of the loan is
July 18, 2012. The principal balance is due upon maturity.
On July 20, 2006, the Company purchased at a discount
$5.0 million in loan assignments in BP. The
$3.0 million term loan A bears annual interest at
LIBOR plus 4.25% or Prime Rate plus 3.25%. The $2.0 million
term loan B bears annual interest at LIBOR plus 6.40% or
Prime Rate plus 5.40%. The interest rate option on the loan
assignments is at the borrowers discretion. Both loans
mature on July 18, 2011.
On September 29, 2006, the Company received a quarterly
principal payment for term loan A of $90,000. The increase
in the outstanding balance, cost and fair value of the loans 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.
At October 31, 2006, the loans had a combined outstanding
balance and cost basis of $14.7 million. The loan and loan
assignments had a combined fair value of $14.9 million.
Dakota
Growers Pasta Company, Inc.
Dakota Growers Pasta Company, Inc. (Dakota),
Carrington, North Dakota, is the third largest manufacturer of
dry pasta in North America and a market leader in private label
sales. Dakota and its partners in DNA Dreamfields Company, LLC
introduced a new process that is designed to reduce the number
of digestible carbohydrates found in traditional pasta products.
At October 31, 2005, the Companys investment in
Dakota consisted of 909,091 shares of common stock with a
cost of $5.0 million and assigned fair value of
$5.5 million.
During the year ended October 31, 2006, the Company
purchased an additional 172,104 shares of common stock at
an average price of $5.11 per share or approximately
$879,000.
Effective January 31, 2006 and April 30, 2006, the
Valuation Committee increased the fair value of the newly
purchased shares to the carrying value of the original shares or
approximately $6.07. The increase in the fair value of the newly
purchased shares over their cost was approximately $164,000.
36
Effective July 31, 2006, the Valuation Committee increased
the fair value of the investment by approximately $900,000.
Effective October 31, 2006, the Valuation Committee
increased the fair value of the investment by approximately
$1.5 million.
At October 31, 2006, the Companys investment in
Dakota consisted of 1,081,195 shares of common stock with a
cost of $5.9 million and assigned fair value of
$9.0 million.
Michael Tokarz, Chairman of the Company, serves as a director of
Dakota.
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.
At October 31, 2005 and October 31, 2006, the
Companys investment in DPHI consisted of
602,131 shares of
Series A-1
preferred stock with a cost of $4.5 million. This
investment has been assigned a fair value of $0.
Endymion
Systems, Inc.
Endymion Systems, Inc. (Endymion), Oakland,
California, a Legacy Investment, is a single source supplier for
strategic, web-enabled,
end-to-end
business solutions designed to help its customers leverage
Internet technologies to drive growth and increase productivity.
At October 31, 2005 and October 31, 2006, the
Companys investment in Endymion consisted of
7,156,760 shares of Series A preferred stock with a
cost of $7.0 million. The investment has been assigned a
fair value of $0.
Foliofn,
Inc.
Foliofn, 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, 2005 and October 31, 2006, the
Companys investment in Foliofn consisted of
5,802,259 shares of Series C preferred stock with a
cost of $15.0 million. During the year ended
October 31, 2006, the Valuation Committee increased the
fair value of the Companys equity investment in Foliofn by
$5.0 million. The fair value of the Companys equity
investment at October 31, 2006 was $5.0 million.
Bruce Shewmaker, an officer of the Company, serves as a director
of Foliofn.
Harmony
Pharmacy & Health Center, Inc.
Harmony Pharmacy & Health Center, Inc. (Harmony
Pharmacy), Purchase, NY, plans to operate pharmacy and
healthcare centers primarily in airports in the United States.
The Company invested $200,000 in Harmony Pharmacy in the form of
a demand note. The note bears annual interest at 10% and is
callable anytime at the Companys discretion.
On August 4, 2006 the Company purchased 750,000 shares
of common stock at a cost of $750,000.
On August 25, 2006, Harmony Pharmacy repaid its demand note
in full. The amount of the proceeds received from the prepayment
was $207,444.44. This amount included all outstanding principal
and accrued interest. There was no gain or loss as a result of
the prepayment.
At October 31, 2006, the Companys investment in
Harmony Pharmacy consisted of 2.0 million shares of common
stock with a cost of $750,000 and was assigned a fair value of
$750,000.
Michael Tokarz, Chairman of the Company, serves as a director of
Harmony Pharmacy.
37
Henry
Company
Henry Company (Henry), Huntington Park, California,
is a manufacturer and distributor of building products and
specialty chemicals.
In January 2006, The Company purchased the $5.0 million in
loan assignments in Henry Company. The $3.0 million term
loan A bears annual interest at LIBOR plus 3.50% and
matures on April 6, 2011. The $2.0 million term
loan B bears annual interest at LIBOR plus 7.75% and also
matures on April 6, 2011.
At October 31, 2006, the loans had a combined outstanding
balance, cost basis, and fair value of $5.0 million.
Impact
Confections, Inc.
Impact Confections, Inc. (Impact), Roswell, New
Mexico founded in 1981, is a manufacturer and distributor of
childrens candies.
The Companys investment in Impact consists of
252 shares of common stock at a cost of $10,714.28 per
share or $2.7 million and a loan to Impact in the form of a
senior subordinated note with an outstanding balance of
$5.0 million. The Companys common stock has a
preferred status if there is a liquidation of the company. The
loan bears annual interest at 17.0% and matures on July 30,
2009. The loan was issued at a cost basis of $5.0 million.
The loans cost basis was then discounted to reflect loan
origination fees received.
On July 29, 2005, the Company made a $325,000 follow-on
investment in Impact in the form of a secured promissory note
which bears annual interest at LIBOR plus 4.0%. The promissory
note has a three year term. The note has a $325,000 principal
face amount and was issued at a cost basis of $325,000. The
notes cost basis was then discounted to reflect loan
origination fees received.
At October 31, 2005, the Companys investment in
Impact consisted of 252 shares of common stock at a cost of
$2.7 million, the loan to Impact with an outstanding
balance of approximately $5.2 million and the secured
promissory note with an outstanding balance of $325,000. The
cost basis of the loan and promissory note at October 31,
2005 was approximately $5.1 million and $319,000,
respectively. At October 31, 2005, the equity investment,
loan and secured promissory note were assigned fair values of
$2.7 million, $5.2 million and $325,000, respectively.
At October 31, 2006, the Companys investment in
Impact consisted of 252 shares of common stock at a cost of
$2.7 million, the loan to Impact with an outstanding
balance of $5.5 million and the secured promissory note
with a balance of $325,000. The cost basis of the loan and
promissory note at October 31, 2006 were approximately
$5.4 million and $321,000 respectively. At October 31,
2006, the equity investment, loan and secured promissory note
were assigned fair values of $2.7 million,
$5.5 million and $325,000, respectively. The increase in
the outstanding balance, cost and fair value of the loan is due
to the amortization of loan origination fees and the
capitalization of payment in kind interest. These
increases were approved by the Companys Valuation
Committee.
Puneet Sanan and Shivani Khurana, representatives of the
Company, serve as directors of Impact.
Innovative
Brands, LLC
Innovative Brands, LLC (Innovative Brands), Phoenix,
Arizona, is a consumer product company that manufactures and
distributes personal care products.
The Company purchased a $15.0 million loan assignment in
Innovative Brands. The $15.0 million term loan bears annual
interest at 11.13% and matures on September 25, 2011.
At October 31, 2006, the loan had an outstanding balance,
cost basis, and was assigned a fair value of $15.0 million.
38
Integral
Development Corporation
Integral Development Corporation (Integral),
Mountain View, California, a Legacy Investment, is a developer
of technology for financial institutions to expand, integrate
and automate their capital markets businesses and operations.
At October 31, 2005, the Companys investment in
Integral consisted of an outstanding balance on the loan of
approximately $1.1 million with a cost of approximately
$1.1 million. The investment had been assigned a fair value
of approximately $1.1 million.
During the year ended October 31, 2006, Integral prepaid
its outstanding loan balance in full including all accrued
interest. The Company recorded no gain or loss as a result of
the prepayment. Under the terms of the prepayment, the Company
returned its warrants to Integral for no consideration.
As of October 31, 2006, the Company no longer held any
investment in Integral.
JDC
Lighting, LLC
JDC Lighting, LLC (JDC), New York, New York, is a
distributor of commercial lighting and electrical products.
The Companys investment in JDC consists of a
$3.0 million senior subordinated loan, bearing annual
interest at 17.0% over a four year term. The loan has a
$3.0 million principal face amount and was issued at a cost
basis of $3.0 million. The loans cost basis was
discounted to reflect loan origination fees received.
At October 31, 2005, the loan had an outstanding balance of
approximately $3.1 million with a cost of approximately
$3.0 million. The loan was assigned a fair value of
approximately $3.1 million.
On October 30, 2006, JDC repaid $160,116 of principal.
At October 31, 2006, the loan had an outstanding balance of
approximately $3.0 million with a cost of approximately
$3.0 million. The loan was assigned a fair value of
approximately $3.0 million. The increase in the outstanding
balance, cost and fair value of the loan, is due to the
amortization of loan origination fees and the capitalization of
payment in kind interest. These increases were
approved by the Companys Valuation Committee.
Lumeta
Corporation
Lumeta Corporation (Lumeta), Somerset, New Jersey, a
Legacy Investment, is a developer of network management,
security, and auditing solutions. The company provides
businesses with an analysis of their network security that is
designed to reveal the vulnerabilities and inefficiencies of
their corporate intranets.
At October 31, 2005 and January 31, 2006, the
Companys investment in Lumeta consisted of
384,615 shares of Series A preferred stock and
266,846 shares of Series B preferred stock with a
combined cost of approximately $406,000.
At October 31, 2005 the investments were assigned a fair
value of $200,000, or approximately $0.11 per share of
Series A preferred stock and approximately $0.59 per
share of Series B preferred stock.
On April 7, 2006, the Company sold its investment in Lumeta
for its carrying value of $200,000. The Company realized a loss
on Lumeta of approximately $200,000. However, the Valuation
Committee previously decreased the fair value of the
Companys investment in this company to $200,000 and as a
result, the realized loss was offset by a reduction in
unrealized losses. Therefore, the net effect of the
Companys sale of its investment in Lumeta on the
Companys consolidated statement of operations and NAV was
zero.
As of October 31, 2006, the Company no longer held any
investment in Lumeta.
39
Mainstream
Data, Inc.
Mainstream Data, Inc. (Mainstream), Salt Lake City,
Utah, a Legacy Investment, builds and operates satellite,
internet, and wireless broadcast networks for information
companies. Mainstream networks deliver text news, streaming
stock quotations, and digital images to subscribers around the
world.
At October 31, 2005 and October 31, 2006, the
Companys investment in Mainstream consisted of
5,786 shares of common stock with a cost of
$3.75 million. The investment has been assigned a fair
value of $0.
Marine
Exhibition Corporation
Marine Exhibition Corporation (Marine), Miami,
Florida, owns and operates the Miami Seaquarium. The Seaquarium
is a family-oriented entertainment park.
On July 11, 2006, the Company extended to Marine a
$10.0 million senior secured loan bearing annual interest
at 11.0%. The senior secured loan has a $10.0 million
principal face amount and was issued at a cost basis of
$10.0 million. The loans cost basis was subsequently
discounted to reflect loan origination fees received. The
maturity date of the loan is June 30, 2013. The Company
also extended a secured revolving note bearing interest at LIBOR
plus 1.0%. The amount available to draw down at any time on the
note is $2.0 million. The Company also invested
$2.0 million into Marine in the form of preferred stock,
purchasing 2,000 shares. The dividend rate on the preferred
stock is 12.0% per annum.
At October 31, 2006, the Companys senior secured loan
had an outstanding balance of $10.1 million with a cost of
$9.9 million. The senior secured loan was assigned a fair
value of $10.1 million. The secured revolving note was not
drawn upon. The preferred stock had been assigned a fair value
of $2.0 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.
Octagon
Credit Investors, LLC
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.
The Companys initial investment in Octagon consisted of a
$5.0 million senior subordinated loan, bearing annual
interest at 15% over a seven year term. The loan has a
$5.0 million principal face amount and was issued at a
discounted cost basis of $4.5 million. The loan included
detachable warrants with a cost basis of $550,000. The Company
also provided a $5.0 million senior secured credit facility
to Octagon. This credit facility expires on May 7, 2009 and
bears annual interest at LIBOR plus 4.0%. 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. The Company also made a $560,000 equity investment in
Octagon which provides the Company a membership interest in
Octagon.
At October 31, 2005, the loan had an outstanding balance of
$5.2 million with a cost of $4.6 million. The loan was
carried at a fair value of $4.7 million.
At October 31, 2005, the equity investment and detachable
warrants had a cost basis of $724,857 and $550,000 respectively.
The equity investment and detachable warrants were assigned a
fair value of approximately $1.2 million and
$1.1 million, respectively.
On January 3, 2006, the Company exercised its warrant
ownership in Octagon for no additional cost which increased its
existing membership interest in Octagon. As a result, Octagon is
now considered an affiliate under the definition of the 1940 Act.
Effective January 31, 2006, the Valuation Committee
determined to increase the fair value of the Companys
equity investment in Octagon by $562,291.
The cost basis and fair value of the equity investment was also
increased by approximately $279,000 to account for the
Companys allocated portion of the flow-through income,
from its membership interest in Octagon, which was not
distributed to members. This flow-through income is recorded by
the Company as other income.
40
On October 2, 2006, Octagon repaid the loan and credit
facility in full. The amount of the proceeds received from the
prepayment was approximately $5.4 million. This amount
included all outstanding principal, accrued interest, and unused
fee on the credit facility. The Company recorded a gain as a
result of these prepayments of approximately $429,000 from the
acceleration of amortization of original issue discount. After
this repayment, the Company extended a $5.0 million term
loan, cost discounted for loan fees, and a $12.0 million
revolving line of credit to Octagon. Octagon immediately drew
down $3.75 million from the revolving line of credit. The
Company received two distributions from Octagon on
October 2, 2006, a return of capital of $191,258 and a one
time incentive fee of $100,411. Also on October 2, 2006,
Octagon repurchased a portion of the LLC membership interest for
approximately $1.0 million. The Company realized a capital
gain of approximately $550,000 from this sale.
On October 30, 2006, Octagon repaid $500,000 of the
outstanding balance on the revolving line of credit.
At October 31, 2006, the term loan had an outstanding
balance of $5.0 million with a cost of $4.9 million.
The loan was assigned a fair value of $5.0 million. The
revolving line of credit had an outstanding balance of
$3.25 million with a cost and fair value of
$3.25 million.
At October 31, 2006, the equity investment had a cost basis
of approximately $900,000 and was assigned a fair value of
approximately $1.9 million.
Ohio Medical Corporation
Ohio Medical Corporation (Ohio), Gurnee, Illinois,
is a manufacturer and supplier of suction and oxygen therapy
products, as well as medical gas equipment.
During the fiscal year 2005, the Company invested
$17.0 million and sponsored the acquisition of General
Electrics Ohmeda Brand Suction and Oxygen Therapy business
unit (GE-SOT), a leading global supplier of suction
and oxygen therapy products. On July 14, 2005, in
conjunction with this transaction, the Company acquired
GE-SOTs largest supplier, Squire Cogswell/Aeros
Instruments, Inc. and merged both businesses creating Ohio
Medical Corporation.
The Companys investment in Ohio consists of
5,620 shares of common stock with a cost basis of
$17.0 million.
As of October 31, 2005, the Companys investment was
assigned a fair value of $17.0 million.
During the year ended October 31, 2006, the Valuation
Committee increased the fair value of the Companys equity
investment in Ohio by $9.2 million from $17.0 million
to approximately $26.2 million.
As of October 31, 2006, the cost basis and fair value of
the Companys investment in Ohio was $17.0 million and
$26.2 million, respectively.
Michael Tokarz, Chairman of the Company, Peter Seidenberg, Chief
Financial Officer of the Company and David Hadani, a
representative of the Company, serve as directors of Ohio.
Phoenix Coal Corporation
Phoenix Coal Corporation (Phoenix), Madisonville,
KY, is engaged in the acquisition, development, production and
sale of bituminous coal reserves and resources located primarily
in the Illinois Basin. With offices in Madisonville, Kentucky
and Champaign, Illinois, the company is focused on consolidating
small and medium-sized coal mining projects and applying
proprietary technology to increase efficiency and enhance profit
margins.
On April 4, 2006, the Company purchased 1 million
shares of common stock of Phoenix for a purchase price of
$500,000. On June 8, 2006, the Company purchased an
additional 666,667 shares of common stock of Phoenix for a
purchase price of approximately $500,000.
Also, on June 8, 2006, the Company committed to Phoenix
$7.0 million in debt. The first $3.5 million second
lien loan bears annual interest at 15.0%. The loan was
discounted for the loan origination fees received.
41
On July 26, 2006 the Company extended to Phoenix the
remaining portion of the $7.0 million commitment. This
$3.5 million second lien loan also bears annual interest at
15.0%. The maturity date for both loans is June 8, 2011.
At October 31, 2006, the second lien loan had an
outstanding balance of $7.1 million with a cost of
$7.0 million. The loan was assigned a fair value of
$7.1 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.
At October 31, 2006, the equity investment had a cost basis
of approximately $1.0 million and was assigned a fair value
of $1.0 million.
Bruce Shewmaker, an officer of the Company, serves as a director
of Phoenix.
PreVisor,
Inc.
PreVisor, Inc. (PreVisor), Roswell, Georgia,
provides pre-employment testing and assessment solutions and
related professional consulting services.
On May 31, 2006, the Company invested $6.0 million in
PreVisor in the form of common stock. Mr. Tokarz, our
Chairman and Portfolio Manager, is a minority non-controlling
shareholder of PreVisor. Our board of directors, including all
of our directors who are not interested persons of
the Company, as defined by the 1940 Act (the Independent
Directors), approved the transaction (Mr. Tokarz
recused himself from making a determination or recommendation on
this matter).
As of October 31, 2006, the common stock had been assigned
a fair value of $6.0 million.
ProcessClaims,
Inc.
ProcessClaims, Inc. (ProcessClaims), a Legacy
Investment, Manhattan Beach, California, provides web-based
solutions and value added services that streamline the
automobile insurance claims process for the insurance industry
and its partners.
At October 31, 2005, the Companys investments in
ProcessClaims consisted of 6,250,000 shares of
Series C preferred stock, 849,257 shares of
Series D preferred stock, and 873,362 warrants to purchase
873,362 shares of Series E convertible preferred stock
with a combined cost of $2.4 million. The investment in the
Series C preferred stock was assigned a fair value of
$2.0 million, the investment in the Series D preferred
stock was assigned a fair value of $400,000, and the investment
in the Series E warrants was assigned a fair value of $0.
Effective December 31, 2005, in a cashless transaction, the
Company received 373,362 shares of Series E preferred
stock of ProcessClaims in exchange for its rights under a
warrant issued by ProcessClaims that has been held by the
Company since May 2002.
On January 5, 2006, the Companys Valuation Committee
determined to increase the fair value of the Companys
entire investment in ProcessClaims by $3.3 million.
During March 2006, the Company was granted and accepted 50,000
options to purchase shares of ProcessClaims common stock. Bruce
Shewmaker, an officer of the Company, serves as a director of
ProcessClaims. The options were granted for Bruce
Shewmakers service on ProcessClaims board of directors.
The options vested immediately, have an exercise price of
$0.32 per share and have an expiration date of ten years
from the date of grant.
Effective April 30, 2006, the Companys Valuation
Committee determined to increase the fair value of the
Companys investment in ProcessClaims by approximately
$760,000.
At April 30, 2006, the Companys investments in
ProcessClaims consisted of 6,250,000 shares of
Series C preferred stock, 849,257 shares of
Series D preferred stock, 373,362 shares of
Series E convertible preferred stock and 50,000 common
stock options with a combined cost of $2.4 million. The
investment in the Series C preferred stock was assigned a
fair value of $5.2 million, the investment in the
Series D preferred stock was assigned a fair
42
value of $831,000, the investment in the Series E warrants
was assigned a fair value of $446,000 and the options were fair
valued at $9,000.
On May 30, 2006, ProcessClaims, one of the Companys
Legacy Investment companies, entered into a definitive agreement
to be acquired by CCC Information Services Inc.
(CCC). The acquisition by CCC closed on June 9,
2006. As of June 9, 2006, the Company received net proceeds
of approximately $7.9 million. The gross proceeds were
approximately $8.3 million of which approximately $400,000
or 5.0% of the gross proceeds were deposited into a reserve
account for one year. Due to the contingencies associated with
the escrow, the Company has not presently placed any value on
the proceeds deposited in escrow and has therefore not factored
such proceeds into the Companys increased NAV. The
Companys total investment in ProcessClaims was
$2.4 million which resulted in a capital gain of
approximately $5.5 million.
As of October 31, 2006, the Company no longer held any
investment in ProcessClaims.
SafeStone
Technologies PLC
SafeStone Technologies PLC (SafeStone), Old
Amersham, UK, 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, 2005 and October 31, 2006, the
Companys investments in SafeStone consisted of
2,106,378 shares of Series A ordinary stock with a
cost of $4.0 million. The investment has been assigned a
fair value of $0 by the Companys Valuation Committee.
SGDA
Sanierungsgesellschaft fur Deponien und Altasten
mbH
SGDA Sanierungsgesellschaft fur Deponien und Altasten mbH
(SGDA), Zella-Mehlis, Germany, is a company that is
in the business of landfill remediation and revitalization of
contaminated soil.
The Companys investment in SGDA consists of a
$4.6 million term loan, bearing annual interest at 7.0%
over a four and a half year term. The term loan has a
$4.6 million principal face amount and was issued at a
discounted cost basis of $4.3 million. The loan included a
common equity ownership interest in SGDA with a cost basis of
$315,000. The Company also made available to SGDA a
$1.3 million revolving credit facility that bears annual
interest at 7.0%. The credit facility expires on August 25,
2006.
At October 31, 2005, the term loan had an outstanding
balance of approximately $4.6 million with a cost of
$4.3 million. The term loan was carried at a fair value of
$4.3 million. The increase in the cost and fair value of
the loan is due to the accretion of the market discount of the
term loan. The ownership interest in SGDA has been assigned a
fair value of $315,000 which is its cost basis. As of
October 31, 2005, SGDA had drawn approximately
$1.2 million upon the revolving credit facility.
During December 2005, SGDA drew an additional $70,600 on the
revolving line of credit. This brought the amount drawn under
the line of credit to $1.3 million, the maximum available
under the line of credit.
Also during December 2005, the Company did not accrue, and
therefore was not paid, approximately $23,000 in implied
interest owed from the SGDA loan and revolving credit facility.
This was due to a contractual agreement (based on German tax
provisions) to cap the interest paid by SGDA to the Company, in
the aggregate, at 240,000 Euro in any given calendar year.
Despite forgoing this interest, management believes there is no
credit risk associated with this portfolio company.
On January 12, 2006, the Company extended to SGDA a
$300,000 bridge loan. The loan bore annual interest at 7.0% and
had a maturity date of April 30, 2006.
On April 6, 2006, the Company invested an additional
$2.0 million into SGDA in the form of a preferred equity
interest. On April 25, 2006 the Company purchased an
additional common equity interest in SGDA for $23,551.
On April 28, 2006, the Company increased the availability
under the revolving credit facility by $300,000. The balance of
the bridge loan mentioned above, which would have matured on
April 30, 2006, was added to the
43
revolving credit facility and the bridge loan was removed from
the Companys books as a part of the refinancing. As of
July 31, 2006, the entire $1.6 million facility was
drawn in full.
On August 25, 2006 the revolving credit facility was added
to the term loan balance assuming the same terms as the term
loan.
On October 24, 2006, the Company invested an additional
$3.0 million into SGDA in the form of preferred equity
interest.
At October 31, 2006, the term loan had an outstanding
balance of approximately $6.2 million with a cost of
approximately $6.0 million. The term loan was assigned a
fair value of approximately $6.0 million. The increase in
the cost and fair value of the loan is due to the accretion of
the market discount of the term loan. These increases were
approved by the Companys Valuation Committee. The
ownership interest in SGDA has been assigned a fair value of
$338,551 which is its cost basis. The preferred stock has been
assigned a fair value of approximately $5.0 million.
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, 2005 and October 31, 2006, the
Companys investment in Sonexis consisted of
131,615 shares of common stock with a cost of
$10.0 million. The investment has been assigned a fair
value of $0.
SIA BM
Auto
SIA BM Auto (BM Auto), Riga, Latvia, is a company
focused on the importation and sale of BMW vehicles and parts
throughout Latvia, a member of the European Union.
The Companys investment in BM Auto consisted of
47,300 shares of common stock at a cost of
$8.0 million and a sixty day bridge loan with a cost basis
of $7.0 million. The loan was repaid in full, including all
principal and accrued interest, on April 21, 2006.
At October 31, 2006, the Companys investment in BM
Auto was assigned a fair value of $8.0 million.
SP
Industries, Inc.
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.
The Companys investment in SP consists of a
$6.5 million mezzanine loan and a $4.0 million term
loan. The mezzanine loan bears annual interest at 17.0% over a
seven year term. The mezzanine loan has a $6.5 million
principal face amount and was issued at a cost basis of
$6.5 million. The mezzanine loans cost basis was
discounted to reflect loan origination fees received. The term
loan bears annual interest at LIBOR plus 10.0% over a five year
term. The term loan has a $4.0 million principal face
amount and was issued at a cost basis of $4.0 million. The
term loans cost basis was discounted to reflect loan
origination fees received by the Company.
At October 31, 2005, the mezzanine loan and the term loan
had outstanding balances of $6.7 million and
$4.0 million, respectively, with cost basis of
approximately $6.4 million and $4.0 million,
respectively. The mezzanine loan and term loan were assigned
fair values of approximately $6.7 million and
$4.0 million, respectively.
On October 13, 2006 the Company extended to SP
$10.0 million in the form of an additional
$4.0 million of term loan and an additional
$6.0 million mezzanine loan. The interest rate and maturity
date of the term loan were adjusted to LIBOR plus 8.0% and
March 31, 2011, respectively. The interest rate of the
mezzanine loan was adjusted to 16.0% with the maturity date
remaining March 31, 2012.
44
On October 20, 2006 the Company assigned $5.0 million
of term loan to Citigroup Global Markets Realty.
At October 31, 2006, the mezzanine loan and the term loan
had outstanding balances of approximately $13.0 million and
$3.1 million, respectively, with a cost basis of
approximately $12.7 million and $3.0 million,
respectively. The mezzanine loan and term loan were assigned
fair values of approximately $13.0 million and
$3.1 million, respectively. The increase in the outstanding
balance, cost and fair value of the loan, is due to the
amortization of loan origination fees and the capitalization of
payment in kind interest. These increases were
approved by the Companys Valuation Committee.
Strategic
Outsourcing, Inc.
Strategic Outsourcing, Inc. (SOI), Charlotte, North
Carolina, is a professional employer organization that provides
services that enable small businesses to outsource their human
resource function.
The Company purchased a $5.0 million loan assignment in
SOI. The loan has a five year term and bears annual
interest at LIBOR plus 5.25%
On December 31, 2005, SOI repaid a portion of its
outstanding loan. The Companys prorated share of the
repayment was approximately $108,000.
On March 31, 2006, SOI repaid a portion of its outstanding
loan. The Companys prorated share of the repayment was
approximately $108,000.
On May 3, 2006, SOI repaid a portion of its outstanding
loan. The Companys prorated share of the repayment was
approximately $440,000.
On July 27, 2006, SOI repaid the loan assignment in full.
The amount of the proceeds received from the prepayment was
approximately $4.5 million. This amount included all
outstanding principal, accrued interest, and an early prepayment
fee.
As of October 31, 2006, the Company no longer held any
investment in SOI.
Storage
Canada, LLC
Storage Canada, LLC (Storage Canada), Omaha, NE, is
a real estate company that owns and develops self-storage
facilities throughout the U.S. and Canada.
On March 30, 2006, the Company provided a $6.0 million
loan commitment to Storage Canada on which Storage Canada
immediately borrowed approximately $1.3 million. The
commitment expires after one year, but may be renewed with the
consent of both parties. The initial borrowing on the loan bears
annual interest at 8.75% and has a maturity date of
March 30, 2013. Any additional borrowings will mature seven
years from the date of the subsequent borrowing. The Company
receives monthly principal payments. The Company also receives a
fee of 0.25% on the unused portion of the loan.
On October 6, 2006, Storage Canada borrowed $619,000. The
borrowing bears annual interest at 8.75% and has a maturity date
of October 6, 2013.
At October 31, 2006, the Companys investment in
Storage Canada had an outstanding balance of approximately
$1.9 million and a cost basis of approximately
$2.0 million and was assigned a fair value of approximately
$1.9 million.
Summit
Research Labs, Inc.
Summit Research Labs, Inc. (Summit), Huguenot, NY,
is a specialty chemical company that manufactures antiperspirant
actives.
On August 16, 2006, the Company extended to Summit a
$5.0 million second lien loan bearing annual interest at
14.0%. The second lien loan has a $5.0 million principal
face amount and was issued at a cost basis of $5.0 million.
The loans cost basis was subsequently discounted to
reflect loan origination fees received. The
45
maturity date of the loan is August 15, 2012. The Company
also invested $11.2 million into Summit in the form of
preferred stock, purchasing 800 shares.
At October 31, 2006, the Companys second lien loan
had an outstanding balance of approximately $5.0 million
with a cost of approximately $5.0 million. The second lien
loan was assigned a fair value of approximately
$5.0 million. The preferred stock had been assigned a fair
value of $11.2 million. The increase in cost and fair value
of the loan is due to the amortization of loan origination fees
and the capitalization of payment in kind interest.
These increases were approved by the Companys Valuation
Committee.
Michael Tokarz, Chairman of the Company, and Puneet Sanan and
Shivani Khurana, representatives of the Company, serve as
directors of Summit.
Timberland
Machines & Irrigation, Inc.
Timberland Machines & Irrigation, Inc.
(Timberland), Enfield, Connecticut, is a distributor
of landscaping outdoor power equipment and irrigation products.
The Companys investment in Timberland consists of a
$6.0 million senior subordinated loan, bearing annual
interest at 17.0% over a five year term. The note has a
$6.0 million principal face amount and was issued at a cost
basis of $6.0 million. The loans cost basis was then
discounted to reflect loan origination fees received. The
Company also owns 450 shares of common stock for a
$4.5 million equity investment in Timberland. The Company
has an option to purchase an additional 150 shares of
common stock at a price of $10,000 per share. The Company
has also extended to Timberland a $3.25 million junior
revolving note. The junior revolving note bears interest at
12.5% per annum and matures on July 7, 2007.
Timberland has a floor plan financing program administered by
Transamerica Commercial Finance Corporation
(Transamerica). As is typical in Timberlands
industry, under the terms of the dealer financing arrangement,
Timberland guarantees the repurchase of product from
Transamerica, if a dealer defaults on payment and the underlying
assets are repossessed. The Company has agreed to be a
co-guarantor of this repurchase commitment, but its maximum
potential exposure as a result of the guarantee is contractually
limited to $500,000.
At October 31, 2005, the Companys mezzanine loan had
an outstanding balance of approximately $6.3 million with a
cost of approximately $6.2 million. The mezzanine loan was
assigned a fair value of approximately $6.3 million. The
junior revolving note was fully drawn upon and assigned a fair
value of $3.25 million. The common stock had been assigned
a fair value of $4.5 million. The warrant was assigned a
fair value of $0.
Effective December 27, 2005, the Company converted $286,200
of the Timberland junior revolving line of credit into
28.6 shares of common stock at a price of $10,000 per
share. As a result, as of July 31, 2006 the Company owned
478.6 common shares and the funded debt under the junior
revolving line of credit was reduced from $3.25 million to
approximately $3.0 million.
During the quarter ended, April 30, 2006, Timberland had
repaid an additional $500,000 on the note leaving the total
amount outstanding at approximately $2.5 million.
On July 1, 2006, the Company reduced the interest rate on
the mezzanine loan from 17.0% to approximately 14.4%.
During the quarter ended, July 31, 2006, Timberland repaid
an additional $500,000 and drew down $1.0 million on the
note leaving the total amount outstanding at approximately
$3.0 million.
Effective September 12, 2006, the Company converted
$409,091 of the Timberland junior revolving line of credit into
40.9 shares of common stock at a price of $10,000 per
share. Effective September 22, 2006, the Company converted
$225,000 of the Timberland junior revolving line of credit into
22.5 shares of common stock at a price of $10,000 per
share. Timberland then borrowed $500,000 from the junior
revolving line of credit. As a result of these transactions, as
of October 31, 2006 the Company owned 542.0 common shares
and the funded debt under the junior revolving line of credit
was reduced from approximately $3.25 million to
approximately $2.8 million.
During the year ended October 31, 2006, the Valuation
Committee decreased the fair value of the Companys equity
investment in Timberland by $1.0 million from approximately
$5.4 million to approximately $4.4 million.
46
At October 31, 2006, the Companys mezzanine loan had
an outstanding balance of approximately $6.6 million with a
cost of approximately $6.6 million. The mezzanine loan was
assigned a fair value of approximately $6.6 million. The
increase in the outstanding balance, cost and fair value of the
loan is due to the amortization of loan origination fees and the
capitalization of payment in kind interest. These
increases were approved by the Companys Valuation
Committee. The junior revolving note was assigned a fair value
of approximately $2.8 million. The common stock was
assigned a fair value of approximately $4.4 million. The
warrant was assigned a fair value of $0.
Michael Tokarz, Chairman of the Company, and Puneet Sanan, a
representative of the Company, serve as directors of Timberland.
Total
Safety U.S., Inc.
Total Safety 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.
The Company purchased $6.0 million of loan assignments in
Total Safety. The $5.0 million term loan A bears
annual interest at LIBOR plus 4.5% and matures on
December 31, 2010. The $1.0 million term loan B
bears annual interest at LIBOR plus 8.5% and also matures on
December 31, 2010.
On June 30, 2006, the Company received a quarterly
principal payment for each loan totaling $55,046.
On September 29, 2006, the Company received a quarterly
principal payment for each loan totaling $55,046.
At October 31, 2006, the loans had a combined outstanding
balance and cost basis of $5.9 million. The loan
assignments were assigned a fair value of $5.9 million.
Turf
Products, LLC
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.
The Companys investment in Turf consists of senior
subordinated loan, bearing interest at 15.0% per annum over
a five year term. The note has a $7.5 million principal
face amount and was issued at a cost basis of $7.5 million.
The loans cost basis was then discounted to reflect loan
origination fees received. The Company also owns a membership
interest from a $3.8 million equity investment in Turf. The
Company also has a warrant to purchase an additional 15.0% of
the company.
During the year ended October 31, 2006, the Valuation
Committee increased the fair value of the Companys equity
investment in Turf by $2.0 million from approximately
$3.8 million to approximately $5.8 million.
At October 31, 2006, the Companys mezzanine loan had
an outstanding balance of approximately $7.7 million with a
cost of approximately $7.6 million. The loan was assigned a
fair value of approximately $7.7 million. The increase in
the outstanding balance, cost and fair value of the loan is due
to the amortization of loan origination fees and the
capitalization of payment in kind interest. These
increases were approved by the Companys Valuation
Committee. The membership interest has been assigned a fair
value of $5.8 million. The option was assigned a fair value
of $0.
Michael Tokarz, Chairman of the Company, and Puneet Sanan and
Shivani Khurana, representatives of the Company, serve as
directors of Turf.
Velocitius
B.V.
Velocitius B.V. (Velocitius), a Netherlands based
company, manages Germany based wind farms through operating
subsidiaries.
On May 10, 2006, the Company made an equity investment of
approximately $66,290 in Velocitius.
On October 26, 2006, the Company made an additional equity
investment of approximately $2.9 million.
47
On October 30, 2006, the Company provided a $260,000
revolving line of credit to Velocitius on which Velocitius
immediately borrowed approximately $143,614. The revolving line
of credit expires on October 31, 2009. The note bears
annual interest at 8.0%.
At October 31, 2006, the equity investment in Velocitius
had a cost and was assigned a fair value of approximately
$3.0 million. The revolving line of credit had a cost and
was assigned a fair value of $143,614.
Bruce Shewmaker, an officer of the Company, serves as a director
of Velocitius.
Vendio
Services, Inc.
Vendio Services, Inc. (Vendio), San Bruno,
California, a Legacy Investment, offers small businesses and
entrepreneurs resources to build Internet sales channels by
providing software solutions designed to help these merchants
efficiently market, sell and distribute their products.
At October 31, 2005, the Companys investments in
Vendio consisted of 10,476 shares of common stock and
6,443,188 shares of Series A preferred stock at a
total cost of $6.6 million. The investments were assigned a
fair value of $2.7 million, $0 for the common stock and
$2.7 million for the Series A preferred stock.
During the year ended October 31, 2006, the Valuation
Committee increased the fair value of the Companys equity
investment in Vendio by $700,000 from $2.7 million to
$3.4 million.
At October 31, 2006, the Companys investments in
Vendio consisted of 10,476 shares of common stock and
6,443,188 shares of Series A preferred stock at a
total cost of $6.6 million. The investments were assigned a
fair value of $3.4 million, $0 for the common stock and
$3.4 million for the Series A preferred stock.
Bruce Shewmaker, an officer of the Company, serves as a director
of Vendio.
Vestal
Manufacturing Enterprises, Inc.
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.
The Companys investment in Vestal consists of
81,000 shares of common stock at a cost of approximately
$1.9 million and a loan of $900,000 to Vestal in the form
of a senior subordinated promissory note. The loan has a
maturity date of April 29, 2011 and earns interest at
12.0% per annum.
At October 31, 2005, the senior subordinated promissory
note had an outstanding balance, cost, and fair value of
$900,000. The 81,000 shares of common stock of Vestal that
had a cost basis of approximately $1.9 million were
assigned a fair value of $3.7 million.
On September 1, 2006, the Company received a principal
payment of approximately $100,000.
At October 31, 2006, the senior subordinated promissory
note had an outstanding balance, cost, and fair value of
$800,000. The 81,000 shares of common stock of Vestal that
had a cost basis of approximately $1.9 million were
assigned a fair value of $3.7 million.
David Hadani and Ben Harris, representatives of the Company,
serve as directors of Vestal.
Vitality
Foodservice, Inc.
Vitality Foodservice, Inc. (Vitality), Tampa,
Florida, is a market leader in the processing and marketing of
dispensed and non-dispensed juices and frozen concentrate liquid
coffee to the foodservice industry. With an installed base of
over 42,000 dispensers worldwide, Vitality sells its frozen
concentrate through a network of over 350 distributors to such
market niches as institutional foodservice, including schools,
hospitals, cruise ships, hotels and restaurants.
The Companys investment in Vitality consists of
500,000 shares of common stock at a cost of
$5.0 million and 1,000,000 shares of Series A
convertible preferred stock at a cost of $10.0 million. The
convertible preferred stock
48
has a liquidation date of September 24, 2011 and has a
yield of 13.0% per annum. The convertible preferred stock
also has detachable warrants granting the Company the right to
purchase 211,243 shares of common stock at the price of
$0.01 per share.
At October 31, 2005, the investment in Vitality consisted
of 500,000 shares of common stock at a cost of
$5.0 million and 1,000,000 shares of Series A
convertible preferred stock at a cost of $10.5 million. The
common stock, Series A convertible preferred stock and
warrants were assigned fair values of $5.0 million,
approximately $10.5 million and $700,000, respectively.
Effective January 31, 2006, the Valuation Committee
determined to increase the fair value of the common stock and
warrants in Vitality by $3.5 million and $400,000,
respectively.
During the year ended October 31, 2006, the Company
reclassified dividend income received from Vitality totaling
approximately $900,000 to return of capital. The
reclassification occurred due to Vitalitys determination
that it would not have taxable earnings and profits for their
fiscal year 2006. This reclassification to return of capital had
no impact on the Companys net asset value
At October 31, 2006, the investment in Vitality consisted
of 500,000 shares of common stock at a cost of
$5.0 million and 1,000,000 shares of Series A
convertible preferred stock at a cost of approximately
$9.7 million. The increase in the cost and fair value of
the Series A convertible preferred stock is due to the
capitalization of payment in kind dividends. These
increases were approved by the Companys Valuation
Committee. The common stock, Series A convertible preferred
stock and warrants were assigned fair values of
$8.5 million, $11.1 million and $1.1 million,
respectively.
David Hadani, a representative of the Company, serves as a
director of Vitality.
Yaga,
Inc.
Yaga, Inc. (Yaga), San Francisco, California, a
Legacy Investment, provided a hosted application service
provider (ASP) platform that is designed to address emerging
revenue and payment infrastructure needs of online businesses.
Yagas payment and accounting application supports
micropayments, aggregated billing and stored value accounts
while also managing royalty/affiliate accounting and split
payments.
At October 31, 2005, the Companys investment in Yaga
consisted of 300,000 shares of Series A preferred
stock and 1.0 million shares of Series B with a
combined cost of $2.3 million. The investments had been
assigned a fair value of $0.
During the quarter ended January 31, 2006, the Company
received notification of the final dissolution of Yaga. The
Company received no proceeds from the dissolution of this
company and the investment has been removed from the
Companys books. The fair value of Yaga was previously
written down to zero and therefore, the net effect of the
removal of Yaga from the Companys books on the
Companys consolidated statement of operations and NAV was
zero.
At October 31, 2006, the Company no longer held any
investment in Yaga.
Liquidity
and Capital Resources
At October 31, 2006, the Company had investments in
portfolio companies totaling $275.9 million. Also, at
October 31, 2006, the Company had investments in cash
equivalents totaling approximately $66.2 million. The
Company considers all money market and other cash investments
purchased with an original maturity of less than three months to
be cash equivalents. U.S. government securities and cash
equivalents are highly liquid.
During the year ended October 31, 2006, the Company made
sixteen new investments, committing capital totaling
approximately $142.1 million. The investments were made in
Turf, SOI, Henry, BM Auto, Storage Canada, Phoenix, Harmony
Pharmacy, Inc., Total Safety, PreVisor, Marine, BP, Velocitius,
Summit, Octagon, BENI, and Innovative Brands. The amounts
invested were $11.6 million, $5.0 million,
$5.0 million, $15.0 million, $6.0 million,
$8.0 million, $200,000, $6.0 million,
$6.0 million, $14.0 million, $15.0 million,
$66,290, $16.2 million, $17.0 million,
$2.0 million and $15.0 million, respectively.
49
The Company also made eight follow-on investments in existing
portfolio companies committing capital totaling approximately
$24.2 million. During the year ended October 31, 2006,
the Company invested approximately $879,000 in Dakota by
purchasing an additional 172,104 shares of common stock at
an average price of $5.11 per share. On December 22,
2005, the Company made a follow-on investment in Baltic Motors
in the form of a $1.8 million revolving bridge note. Baltic
Motors immediately drew down $1.5 million from the note. On
January 12, 2006, Baltic Motors repaid the amount drawn
from the note in full including all unpaid interest. The note
matured on January 31, 2006 and has been removed from the
Companys books. On January 12, 2006, the Company
provided SGDA a $300,000 bridge loan. On March 28, 2006,
the Company provided Baltic Motors a $2.0 million revolving
bridge note. Baltic Motors immediately drew down
$2.0 million from the note. On April 5, 2006, Baltic
Motors repaid the amount drawn from the note in full including
all unpaid interest. The note matured on April 30, 2006 and
has been removed from the Companys books. On April 6,
2006, the Company invested an additional $2.0 million in
SGDA in the form of a preferred equity security. On
April 25, 2006, the Company purchased an additional common
equity security in SGDA for $23,000. On June 30, 2006, the
Company invested $2.5 million in Amersham in the form of a
second lien loan. On August 4, 2006, the Company invested
$750,000 in Harmony Pharmacy in the form of common stock. On
September 28, 2006, the Company made another follow-on
investment in Baltic Motors in the form of a $1.0 million
bridge loan and $2.0 million equity investment. On
October 13, 2006, the Company made a $10.0 million
follow-on investment in SP. The $10.0 million was invested
in the form of an additional $4.0 million in term
loan B and $6.0 million in a mezzanine loan. On
October 20, 2006, the Company then assigned
$5.0 million of SPs $8.0 million term
loan B to Citigroup Global Markets Realty Corp. On
October 24, 2006, the Company invested an additional
$3.0 million in SGDA in the form of a preferred equity
security. On October 26, 2006, the Company invested an
additional $2.9 million in Velocitius in the form of common
equity. The Company also provided Velocitius a $260,000
revolving note on October 31, 2006. Velocitius immediately
drew down $143,614 from the note.
Commitments
to/for Portfolio Companies:
At October 31, 2006, the Companys commitments to
portfolio companies consisted of the following:
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Open Commitments of MVC Capital, Inc.
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Amount Funded
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Portfolio Company
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Amount Committed
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at October 31, 2006
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Marine
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$
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2.0 million
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Octagon
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$
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12.0 million
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$
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3.25 million
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Storage Canada
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$
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6.0 million
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$
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1.95 million
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Timberland
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$
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3.25 million
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$
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2.83 million
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Velocitius
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$
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260,000
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$
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143,614
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On May 7, 2004, the Company provided a $5.0 million
senior secured credit facility to Octagon. This credit facility
expires on May 6, 2007 and can be automatically extended
until May 6, 2009. The credit facility bears annual
interest at LIBOR plus 4.0%. The Company receives a 0.50% unused
facility fee on an annual basis and a 0.25% servicing fee on an
annual basis for maintaining the credit facility. On
February 1, 2006, Octagon drew $250,000 from the credit
facility. The credit facility was repaid in full including all
accrued interest on February 23, 2006. This credit facility
was refinanced on October 12, 2006.
During February 2005, the Company made available to SGDA, an
approximately $1.3 million revolving credit facility that
bears annual interest at 7.0%. The credit facility expired on
August 25, 2006. During the fiscal year 2006, SGDA drew
down $70,600 from the credit facility. On April 28, 2006,
the Company increased the availability under the revolving
credit facility by $300,000. The balance of the Companys
bridge loan to SDGA, which would have matured on April 30,
2006, was added to the revolving credit facility and the bridge
loan was removed from the Companys books.
On June 30, 2005, the Company pledged its common stock of
Ohio to Guggenheim to collateralize a loan made by Guggenheim to
Ohio.
On July 8, 2005 the Company extended Timberland a
$3.25 million junior revolving note that bears interest at
12.5% per annum and expires on July 7, 2007. The
Company also receives a fee of 0.25% on the unused portion of
50
the note. As of October 31, 2005, the total amount
outstanding on the note was $3.25 million. On
December 27, 2005, the Company exchanged $286,200 of the
Timberland junior revolving line of credit for 28.6 shares
of common stock at a price of $10,000 per share. As of
January 31, 2006, the Company owned 478.6 common shares and
the funded debt under the junior revolving line of credit was
reduced from $3.25 million to approximately
$3.0 million. On April 21, 2006, Timberland repaid
$500,000 on the note. On May 18, 2006, Timberland repaid an
additional $500,000 on the note. On July 10, 2006,
Timberland drew down $1.0 million leaving the total amount
on the note outstanding at July 31, 2006 approximately
$3.0 million. On September 12, 2006, the Company
converted $409,091 of the Timberland junior revolving line of
credit into 40.9 shares of common stock at a price of
$10,000 per share. Effective September 22, 2006, the
Company converted $225,000 of the Timberland junior revolving
line of credit into 22.5 shares of common stock at a price
of $10,000 per share. Timberland then borrowed $500,000
from the junior revolving line of credit. As a result of these
transactions, as of October 31, 2006 the Company owned
542.0 common shares and the funded debt under the junior
revolving line of credit was reduced from $3.25 million to
approximately $2.8 million.
On December 22, 2005, the Company extended to Baltic Motors
a $1.8 million revolving bridge note. The note bore
interest at 12.0% per annum and had a maturity date of
January 31, 2006. Baltic Motors immediately drew
$1.5 million from the note. On January 12, 2006,
Baltic Motors repaid the amount drawn from the note in full
including all unpaid interest. The revolver matured on
January 31, 2006 and has been removed from the
Companys books.
On March 28, 2006, the Company extended to Baltic Motors a
$2.0 million revolving bridge note. Baltic Motors
immediately drew down $2.0 million from the note. On
April 5, 2006, Baltic Motors repaid the amount drawn from
the note in full including all unpaid interest. The note matured
on April 30, 2006 and has been removed from the
Companys books.
On March 30, 2006, the Company provided a $6.0 million
loan commitment to Storage Canada and the company immediately
borrowed $1.3 million. The commitment expires after one
year, but may be renewed with the consent of both parties. The
initial borrowing on the loan bears annual interest at 8.75% and
has a maturity date of March 30, 2013. Any additional
borrowings will mature seven years from the date of the
subsequent borrowing. The Company also receives a fee of 0.25%
on the unused portion of the loan. On October 6, 2006,
Storage Canada borrowed an additional $619,000. The borrowing
bears annual interest at 8.75% and has a maturity date of
October 6, 2013.
On July 11, 2006, the Company extended to Marine a
$2.0 million secured revolving note. The note bears annual
interest at LIBOR plus 1.0%. The Company also receives a fee of
0.50% of the unused portion of the loan. There was no amount
drawn on the revolving note as of October 31, 2006.
On August 25, 2006, SGDAs revolving credit facility
was added to the term loan, increasing the balance of the term
loan by $1.6 million. The revolving credit facility was
eliminated from the Companys books as a result of this
refinancing.
On October 12, 2006, the Company provided a
$12.0 million revolving credit facility to Octagon in
replacement of the senior secured credit facility provided on
May 7, 2004. This credit facility expires on
December 31, 2011. The credit facility bears annual
interest at LIBOR plus 4.25%. The Company receives a 0.50%
unused facility fee on an annual basis and a 0.25% servicing fee
on an annual basis for maintaining the credit facility. On
October 12, 2006, Octagon drew $3.75 million from the
credit facility. Octagon repaid $500,000 of the credit facility
on October 30, 2006. As of October 31, 2006, there was
$3.25 million outstanding.
On October 30, 2006, the Company provided a $260,000
revolving line of credit to Velocitius on which Velocitius
immediately borrowed $143,614. The revolving line of credit
expires on October 31, 2009. The note bears annual interest
at 8.0%.
Timberland also has a floor plan financing program administered
by Transamerica. As is typical in Timberlands industry,
under the terms of the dealer financing arrangement, Timberland
guarantees the repurchase of product from Transamerica if a
dealer defaults on payment and the underlying assets are
repossessed. The Company has agreed to be a limited co-guarantor
for up to $500,000 on this repurchase commitment.
51
Commitments
of the Company:
On October 28, 2004, the Company entered into a one-year,
cash collateralized, $20.0 million revolving credit
facility (the LaSalle Credit Facility) with LaSalle
Bank National Association (the Bank). On
July 20, 2005, the Company amended the LaSalle Credit
Facility, increasing the maximum aggregate loan amount available
from $20.0 million to $30.0 million and extending the
maturity date from October 31, 2005 to August 31,
2006. All other material terms of the LaSalle Credit Facility
remained unchanged. On January 27, 2006, the Company
borrowed $10.0 million under the LaSalle Credit Facility.
The $10.0 million borrowed under the LaSalle Credit
Facility was repaid in full by February 3, 2006. Borrowings
under the LaSalle Credit Facility bore interest, at the
Companys option, at either a fixed rate equal to the LIBOR
rate (for one, two, three or six months), plus 1.0% per
annum, or at a floating rate equal to the Banks prime rate
in effect from time to time, minus 1.0% per annum. The
LaSalle Credit Facility expired on August 31, 2006.
On February 16, 2005, the Company entered into a sublease
(the Sublease) for a larger space in the building in
which the Companys current executive offices are located.
Effective November 1, 2006, the Company subleased its
principal executive office to TTG Advisers. The Sublease is
scheduled to expire on February 28, 2007. Future payments
under the Sublease for TTG Advisers total approximately $75,000
in the fiscal year 2007. The Companys previous lease was
terminated effective March 1, 2005, without penalty. The
building in which the Companys executive offices are
located, 287 Bowman Avenue, is owned by Phoenix Capital
Partners, LLC, an entity which is 97.0% owned by
Mr. Tokarz. See Note 4 Management of our
consolidated financial statements for more information on
Mr. Tokarz.
On April 27, 2006, the Company and MVCFS, as co-borrowers
entered into a four-year, $100.0 million revolving credit
facility (the Credit Facility) with Guggenheim as
administrative agent to the lenders. On April 27, 2006, the
Company borrowed $45.0 million ($27.5 million drawn
from the revolving credit facility and $17.5 million in
term debt) under the Credit Facility. The $27.5 million
drawn from the revolving credit facility was repaid in full on
May 2, 2006. On July 28, 2006, the Company borrowed
$57.5 million ($45.0 million drawn from the revolving
credit facility and $12.5 million in term debt) under the
Credit Facility. On August 2, 2006, the Company repaid
$45.0 million borrowed on the revolving credit facility. On
August 31, 2006, the Company borrowed $5.0 million in
term debt under the Credit Facility. On October 27, 2006,
the Company borrowed $4.0 million from the revolving credit
under the Credit Facility. On October 30, 2006, the Company
borrowed $61.0 million under the Credit Facility,
$15.0 million in term debt and $46.0 million drawn
from the revolving credit facility. As of October 31, 2006,
there was $50.0 million in term debt and $50.0 million
on the revolving credit facility outstanding. The proceeds from
borrowings made under the Credit Facility are expected to be
used to fund new and existing portfolio investments, pay fees
and expenses related to the financing and for general corporate
purposes. The Credit Facility will expire on April 27,
2010, at which time all outstanding amounts under the Credit
Facility will be due and payable. Borrowings under the Credit
Facility will bear interest, at the Companys option, at a
floating rate equal to either (i) the LIBOR rate (for one,
two, three or six months), plus a spread of 2.0% per annum, or
(ii) the Prime rate in effect from time to time, plus a
spread of 1.0% per annum. The Company paid a closing fee,
legal and other costs associated with this transaction. These
costs will be amortized evenly over the life of the facility.
The prepaid expenses on the Balance Sheet include the
unamortized portion of these costs. Borrowings under the Credit
Facility will be secured, by among other things, cash, cash
equivalents, debt investments, accounts receivable, equipment,
instruments, general intangibles, the capital stock of MVCFS,
and any proceeds from all the aforementioned items, as well as
all other property except for equity investments made by the
Company.
The Company enters into contracts with portfolio companies and
other parties that contain a variety of indemnifications. The
Companys maximum exposure under these arrangements is
unknown. However, the Company has not experienced claims or
losses pursuant to these contracts and believes the risk of loss
related to indemnifications to be remote.
Subsequent
Events
Effective November 1, 2006, pursuant to the Advisory
Agreement, the Company is externally managed by TTG Advisers,
which serves as the Companys investment adviser. Under the
terms of the Advisory Agreement, TTG Advisers will determine,
consistent with the Companys investment strategy, the
composition of the
52
Companys portfolio, the nature and timing of the changes
to the Companys portfolio and the manner of implementing
such changes, identify, and negotiate the structure of the
Companys investments (including performing due diligence
on prospective portfolio companies), close and monitor the
Companys investments, determine the securities and other
assets purchased, retain or sell and oversee 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: (i) a
base management fee and (ii) an incentive fee. The base
management fee shall be 2.0% per annum of the
Companys total assets excluding cash. The incentive fee
will consist of two parts: (i) one part will be based on
our pre-incentive fee net operating income; and (ii) the
other part will be based on the capital gains realized on our
portfolio of securities acquired after November 1, 2003.
For a detailed description of the Advisory Agreement, please
refer to the Definitive Proxy Statement on Schedule 14A (as
filed with the SEC on August 3, 2006).
On November 1, 2006, Timberland borrowed $420,291 from the
secured junior revolving note.
On November 2, 2006, the Company repaid $54.5 million
borrowed on the revolving credit facility under the Credit
Facility.
On November 7, 2006, the Company made an additional
$100,000 equity investment into SGDA.
On November 7, 2006, the Company repaid $5.5 million
borrowed on the revolving credit facility under the Credit
Facility.
On November 21, 2006, consistent with the contemplated
spin-off identified in the Advisory Agreement (and which is
depicted in this prospectus), the Company formed MVC Partners
LLC (MVC Partners), a private equity firm. On
December 5, 2006, MVC Partners subsidiary, MVC Europe
LLC, arrived at an agreement to co-own BPE Management Ltd.
(BPE) with Parex Asset Management IPAS, a management
investment company and subsidiary of the Parex Bank. BPE will
pursue investments in businesses throughout the Baltic region.
In addition, on November 21, 2006, MVC Partners established
its MVC Global LLC division, which pursues investments in
foreign operating companies.
On November 22, 2006, the Company invested
$3.2 million in Westwood Chemical Corporation, a
manufacturer of antiperspirant actives and water treatment
chemicals, consisting of a $1.6 million bridge loan and
$1.6 million in equity.
On November 27, 2006, the Company increased the amount
available to draw down on the Timberland secured junior
revolving note from $3.25 million to $4.0 million.
Timberland then borrowed $750,000 from the secured junior
revolver.
On December 6, 2006, the Company borrowed
$10.0 million on the revolving credit facility under the
Credit Facility. As of this time, the revolving credit facility
had a balance of $15.0 million and the term loan had a
balance of $35.0 million.
On December 8, 2006, Total Safety repaid term loan A
and term loan B in full including all accrued interest and
fees. The total amount received in repayment for term
loan A was approximately $5.0 million and for term
loan B was approximately $1.0 million.
On December 12, 2006, the Company invested
$10.0 million in Levlad Arbonne International LLC, a
marketer of personal care products, in the form of a
$10.0 million second lien loan. The loan bears annual
interest of LIBOR plus 6.5% and the maturity date is
December 19, 2013.
On December 13, 2006, the Company made an investment in
Total Safety by extending a $3.5 million second lien loan
and a $1.0 million first lien loan. The second lien loan
has an annual interest rate of LIBOR plus 6.5% and a maturity
date of December 8, 2013. The first lien loan has an annual
interest rate of LIBOR plus 3.0% and a maturity date of
December 8, 2012.
53
On December 14, 2006, the Companys Board of Directors
declared a $0.12 per share dividend for the first quarter of the
fiscal year 2007. The Board of Directors also declared an
additional cash dividend of $0.06 per share. The dividends
were paid on January 5, 2007 to shareholders of record on
December 28, 2006. The ex-dividend date is
December 26, 2006.
On December 18, 2006, the Company extended the maturity
date on the $1.0 million Baltic Motors bridge loan from
December 22, 2006 to January 5, 2007. This note was
then repaid in full on January 5, 2007, including principal
and all accrued interest.
On December 22, 2006, the Company invested $564,716 in
Vitality in the form of common stock.
On January 3, 2007, the Company borrowed $3.0 million
on the revolving credit facility under the Credit Facility. As
of this time, the revolving credit facility had a balance of
$18.0 million and the term loan had a balance of
$35.0 million.
On January 4, 2007, the Companys Valuation Committee
determined to increase the fair values of the Companys
investments in the following portfolio companies by an aggregate
amount of approximately $20.8 million*: SIA BM Auto, Baltic
Motors Corporation, Dakota Growers Pasta Company, Inc., Octagon
Credit Investors, LLC, SGDA Sanierungsgesellschaft für
Deponien und Altlasten mbH, Vendio Services, Inc., and Vitality
Foodservice, Inc.
The payment obligation to Mr. Tokarz resulting from the
sale of a portion of the Companys LLC membership interest
in Octagon was approximately $110,000 and was paid on
January 12, 2007.
SENIOR
SECURITIES
Information about our senior securities is shown in the
following tables as of each fiscal year ended October 31
since the Company commenced operations, unless otherwise noted.
The indicates information which the SEC
expressly does not require to be disclosed for certain types of
senior securities.
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|
|
Total Amount
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
Involuntary
|
|
|
|
|
Exclusive of
|
|
Asset
|
|
Liquidating
|
|
Average
|
|
|
Treasury
|
|
Coverage
|
|
Preference
|
|
Market Value
|
Class and Year
|
|
Securities(1)
|
|
per Unit(2)
|
|
per Unit(3)
|
|
per Unit(4)
|
|
Revolving Lines of
Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
N/A
|
|
2001
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
N/A
|
|
2002
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
N/A
|
|
2003
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
N/A
|
|
2004
|
|
$
|
10,025,000
|
|
|
$
|
12,525.42
|
|
|
$
|
|
|
|
|
N/A
|
|
2005
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
N/A
|
|
2006
|
|
$
|
100,000,000
|
|
|
$
|
3,369.93
|
|
|
$
|
|
|
|
|
N/A
|
|
|
|
|
(1) |
|
Total amount of each class of senior securities outstanding at
the end of the period presented. |
|
(2) |
|
The asset coverage ratio for a class of senior securities
representing indebtedness is calculated as our consolidated
total assets, less all liabilities and indebtedness not
represented by senior securities, divided by senior securities
representing indebtedness. This asset coverage ratio is
multiplied by $1,000 to determine the Asset Coverage Per Unit. |
|
(3) |
|
The amount to which such class of senior security would be
entitled upon the involuntary liquidation of the issuer in
preference to any security junior to it. |
|
(4) |
|
Not applicable, as senior securities are not registered for
public trading. |
|
* |
|
Unaudited |
54
THE
COMPANY
MVC Capital is an externally managed, non-diversified,
closed-end management investment company that has elected to be
regulated as a business development company under the 1940 Act.
MVC Capital provides equity and debt investment capital to fund
growth, acquisitions and recapitalizations of small and
middle-market companies in a variety of industries primarily
located in the United States. Our investments can take the form
of common and preferred stock and warrants or rights to acquire
equity interests, senior and subordinated loans, or convertible
securities. Our common stock is traded on the NYSE under the
symbol MVC.
Although the Company has been in operation since 2000, the year
2003 marked a new beginning for the Company. In February 2003,
shareholders elected an entirely new board of directors. The
board of directors developed a new long-term strategy for the
Company. In September 2003, upon the recommendation of the board
of directors, shareholders voted to adopt a new investment
objective for the Company of seeking to maximize total return
from capital appreciation
and/or
income. The Companys prior objective had been limited to
seeking long-term capital appreciation from venture capital
investments in the information technology industries. Consistent
with our broader objective, we adopted a more flexible
investment strategy of providing equity and debt financing to
small and middle-market companies in a variety of industries.
With the recommendation of the board of directors, shareholders
also voted to appoint Michael Tokarz as Chairman and Portfolio
Manager to lead the implementation of our new objective and
strategy and to stabilize the existing portfolio. Prior to the
arrival of Mr. Tokarz and his new management team in
November 2003, the Company had experienced significant valuation
declines from investments made by the former management team.
After only three quarters of operations under the new management
team, the Company posted a profitable third quarter for the
fiscal year 2004 reversing a trend of 12 consecutive quarters of
net investment losses and earned a profit for the entire fiscal
year. The Company has continued to be profitable in each of the
last eight quarters since then and has recorded net operating
income of approximately $5.7 million and $3.9 million
for the fiscal years ended October 31, 2005 and
October 31, 2006, respectively. The change in net assets
resulting from operations increased from $11.6 million at
the end of the fiscal year 2004 to $26.3 million as of the
end of the fiscal year 2005 and to $47.3 million as of the
end of the fiscal year 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 was organized
to provide investment advisory and management services to the
Company and other investment vehicles. TTG Advisers is a
registered investment adviser that is controlled by
Mr. Tokarz. All of the individuals (including the
Companys investment professionals) that had been
previously employed by the Company as of the fiscal year ended
October 31, 2006 are now employed by TTG Advisers and are
expected to continue to provide services to the Company. It is
anticipated that the Companys investment strategy and
selection process will remain the same under the externalized
management structure.
ABOUT MVC
CAPITAL
The Company is managed by TTG Advisers, the Companys
investment adviser. The investment team of TTG Advisers is
headed by Michael Tokarz, who has over 30 years of lending
and investment experience. TTG Advisers has a dedicated
originations and transaction development investment team with
significant experience in private equity, leveraged finance,
investment banking, distressed debt transactions and business
operations. The members of the investment team have invested in
and managed businesses during both recessionary and expansionary
periods and through full interest rate cycles and financial
market conditions. TTG Advisers has eight full-time investment
professionals and one part-time investment professional, the
majority of whom were previously employed by the Company. TTG
Advisers also uses the services of other investment
professionals with whom it has developed long-term
relationships, on an as-needed basis. In addition, TTG Advisers
employs five other full-time professionals and one part-time
professional who manage the operations of the Company and
provide investment support functions both directly and
indirectly to our portfolio companies. As TTG Advisers grows, it
expects to hire, train, supervise and manage new employees at
various levels, many of which would be expected to provide
services to the Company.
55
The fiscal year 2006 represented a positive year for the
Company. The Company made 16 new investments and eight follow-on
investments in the fiscal year 2006, which is an increase from
six new investments and three follow-on investments in the
fiscal year 2005 and seven new investments in the fiscal year
2004. The Company committed a total of $166.3 million of
capital in the fiscal year 2006, compared to $53.8 million
and $60.7 million in the fiscal years 2005 and 2004,
respectively. The fiscal year 2006 new investments included:
Turf, SOI, Henry, BM Auto, Storage Canada, Phoenix, Harmony
Pharmacy, Total Safety, PreVisor, Marine, BP, Velocitius,
Summit, Octagon, BENI, and Innovative Brands. The fiscal year
2006 follow-on investments included: Dakota, Baltic Motors,
SGDA, Amersham, Timberland, SP, Harmony Pharmacy, and Velocitius.
The fiscal year 2005 investments included: JDC, SGDA, SP, BP,
Ohio, Amersham, Timberland, Vestal, and Impact.
The fiscal year 2004 investments included: Vestal, Octagon,
Baltic Motors, Dakota, Impact, Timberland, and Vitality.
We continue to perform due diligence and seek new investments
that are consistent with our objective of maximizing total
return from capital appreciation
and/or
income. We believe that we have extensive relationships with
private equity firms, investment banks, business brokers,
commercial banks, accounting firms, law firms, hedge funds,
other investment firms, industry professionals and management
teams of several companies, which can continue to provide us
with investment opportunities.
We are currently working on an active pipeline of potential new
investment opportunities. We expect that our equity and loan
investments will generally range between $3 million and
$25 million each, 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 interest and warrants
or rights to acquire equity interests, senior and subordinated
loans, and convertible securities. At October 31, 2006, the
value of all investments in portfolio companies was
approximately $275.9 million and our gross assets were
approximately $347.0 million.
We expect that our investments in senior loans and subordinated
debt will generally have stated terms of three to ten years.
However, there is no limit on the maturity or duration of any
security in our portfolio. Our debt investments are not, and
typically will not be, rated by any rating agency, but we
believe that if such investments were rated, they would be below
investment grade (rated lower than Baa3 by
Moodys or lower than BBB- by
Standard & Poors). 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, the Companys portfolio companies and other
entities (including other private equity firms or business
development companies). The Company does not hold MVCFS for
investment purposes. The results of MVCFS are consolidated into
the Company and all inter-company accounts have been eliminated
in consolidation.
Our board of directors has the authority to change any of the
strategies described in this prospectus without seeking the
approval of our shareholders. However, the 1940 Act prohibits us
from altering or changing our investment objective, strategies
or policies such that we cease to be a business development
company, 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.
56
Corporate
History and Offices
The Company was organized on December 2, 1999. Prior to
July 2004, our name was meVC Draper Fisher Jurvetson
Fund I, Inc. On March 31, 2000, the Company raised
$330.0 million in an initial public offering whereupon it
commenced operations as a closed-end investment company. On
December 4, 2002, the Company announced it had commenced
doing business under the name MVC Capital. We are a Delaware
corporation and a non-diversified closed-end management
investment company that has elected to be regulated as a
business development company under the 1940 Act. On
July 16, 2004, the Company formed MVCFS.
All but one of the independent members of the current board of
directors were first elected at the February 28, 2003
Annual Meeting of the shareholders, replacing the previous board
of directors in its entirety. The new board of directors then
worked on developing a new long-term strategy for the Company.
Then, in September 2003, upon the recommendation of the board of
directors, shareholders voted to adopt our new investment
objective. With the recommendation of the board of directors,
shareholders also voted to appoint Mr. Tokarz as Chairman
and Portfolio Manager to lead the implementation of our new
objective and strategy and to stabilize the existing portfolio.
Mr. Tokarz and his team managed the Company under an
internal structure through October 31, 2006. On
September 7, 2006, the shareholders of the Company approved
the Advisory Agreement (with over 92% of the votes cast on the
agreement voting in its favor) that provided for the Company to
be externally managed by TTG Advisers. The agreement took effect
on November 1, 2006. TTG Advisers is a registered
investment adviser that is controlled by Mr. Tokarz. All of
the individuals (including the Companys investment
professionals) that had been previously employed by the Company
as of the fiscal year ended October 31, 2006 are now
employed by TTG Advisers and are expected to continue to provide
services to the Company.
Our principal executive office is located at 287 Bowman Avenue,
Purchase, New York 10577 and our telephone number is
(914) 701-0310.
Our website address is www.mvccapital.com.
Our
Investment Strategy
On November 6, 2003, Mr. Tokarz assumed his new
position as Chairman and Portfolio Manager. We seek to implement
our investment objective (i.e., to maximize total return
from capital appreciation
and/or
income) through making a broad range of private investments in a
variety of industries. The investments can include common and
preferred stock, other forms of equity interests and warrants or
rights to acquire equity interests, senior and subordinated
loans, or convertible securities. As of October 31, 2006,
we made 16 new investments and eight follow-on investments,
committing a total of $166.3 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, 2006, approximately 2.4% of our assets
consisted of Legacy Investments. We are, however, seeking to
manage these Legacy Investments to try and realize maximum
returns. We generally seek to capitalize on opportunities to
realize cash returns on these investments when presented with a
potential liquidity event, i.e., a sale,
public offering, merger or other reorganization.
Our new portfolio investments are made pursuant to our new
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).
We participate in the private equity business generally by
providing negotiated equity
and/or
long-term debt investment capital. Our financing is generally
used to fund growth, buyouts, acquisitions, recapitalizations,
note purchases,
and/or
bridge financings. We may or may not be a lead investor in such
transactions and may also provide equity and debt financing to
companies led by private equity firms. We generally invest in
private companies, 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
57
as a general partner or a managing member to a private
investment vehicle(s). Additionally, we may also acquire a
portfolio of existing private equity or debt investments held by
financial institutions or other investment funds should such
opportunities arise.
At October 31, 2006, October 31, 2005 and
October 31, 2004, the fair value of the invested portion
(excluding cash and short-term securities) of our net assets
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as a Percentage of Our Net Assets
|
|
|
As of
|
|
As of
|
|
As of
|
|
|
October 31,
|
|
October 31,
|
|
October 31,
|
Type of Investment
|
|
2006
|
|
2005
|
|
2004
|
|
Senior/Subordinated Loans and
credit facilities
|
|
|
55.98
|
%
|
|
|
28.81
|
%
|
|
|
23.80
|
%
|
Common Stock
|
|
|
39.40
|
%
|
|
|
23.10
|
%
|
|
|
26.54
|
%
|
Warrants
|
|
|
0.46
|
%
|
|
|
0.89
|
%
|
|
|
0.48
|
%
|
Preferred Stock
|
|
|
13.79
|
%
|
|
|
7.96
|
%
|
|
|
16.64
|
%
|
Other Equity Investments
|
|
|
6.77
|
%
|
|
|
0.78
|
%
|
|
|
0.48
|
%
|
Other Rights
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Substantially all amounts not invested in securities of
portfolio companies are invested in short-term, highly liquid
money market investments or held in cash in an interest bearing
account. As of October 31, 2006, these investments were
valued at approximately $66.2 million or 27.94% of net
assets.
Our current portfolio includes investments in a wide variety of
industries, including food and food service, value-added
distribution, industrial manufacturing, financial services and
information technology.
Market. We have developed and maintained
relationships with intermediaries, including investment banks,
financial services companies and private mezzanine and equity
sponsors, through which we source investment opportunities.
Through these relationships, we have been able to strengthen our
position as an investor. For the transactions in which we may
provide debt capital, an equity sponsor can provide a source of
additional equity capital if a portfolio company requires
additional financing. Private equity sponsors also assist us in
confirming due diligence findings when assessing a new
investment opportunity, and they may provide assistance and
leadership to the portfolio companys management throughout
our investment period.
Investment Criteria. Prospective investments
are evaluated by TTG Advisers investment team based upon
criteria that may be modified from time to time. The criteria
currently being used by management in determining whether to
make an investment in a prospective portfolio company include,
but are not limited to, managements view of:
|
|
|
|
|
Businesses with secure market niches and predictable profit
margins;
|
|
|
|
The presence or availability of highly qualified management
teams;
|
|
|
|
The line of products or services offered and their market
potential;
|
|
|
|
The presence of a sustainable competitive advantage;
|
|
|
|
Favorable industry and competitive dynamics; and
|
|
|
|
Stable free cash flow of the business.
|
Due diligence includes a thorough review and analysis of the
business plan and operations of a potential portfolio company.
We generally perform financial and operational due diligence,
study the industry and competitive landscape, and meet with
current and former employees, customers, suppliers
and/or
competitors. In addition, as applicable, we engage attorneys,
independent accountants and other consultants to assist with
legal, environmental, tax, accounting and marketing due
diligence.
58
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;
|
|
|
|
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
on October 31, 2006: (1) absent the consent of the
board of directors, TTG Advisers will allocate to the Company
all investment opportunities in (i) mezzanine and debt
securities or (ii) equity or other non-debt
investments that are (a) expected to be equal to or less
than the lesser of 10% of the Companys net assets or
$25 million; and (b) issued by U.S. companies
with less than $150 million in revenues (Targeted
Investments); (2) notwithstanding Item 1 any
private fund managed or co-managed by TTG Advisers and a person
or entity not affiliated with TTG Advisers or MVC Partners, LLC,
a subsidiary of the Company (MVC Partners), is
permitted to make an investment, without regard to the Company,
if such investment is sourced by a person or entity not
affiliated with TTG Advisers and MVC Partners; and
(3) notwithstanding Item 1, TTG Advisers shall not
have an obligation to seek the consent of the board of directors
nor be required to allocate to the Company any equity investment
where the investor would hold a majority of the outstanding
voting securities (as defined by the 1940 Act) of
the relevant company, provided that such investment is
allocated, in its entirety, to MVC Partners.
Co-Investments. The Company is permitted to
co-invest in certain portfolio companies with its affiliates,
subject to specified conditions set forth in an exemptive order
obtained from the SEC dated July 11, 2000. Under the terms
of the exemptive order, portfolio companies purchased by the
Company and its affiliates are required to be approved by the
directors who are not interested persons of the
Company (the Independent Directors) and are required
to satisfy certain other conditions established by the SEC.
Investment Structure. Portfolio company
investments typically will be negotiated directly with the
prospective portfolio company or its affiliates. The investment
professionals will structure the terms of a proposed investment,
including the purchase price, the type of security to be
purchased or financing to be provided and the future involvement
of the Company and affiliates in the portfolio companys
business (including potential representation on its board of
directors). TTG Advisers will seek to structure the terms of the
investment as to provide for the capital needs of the portfolio
company and at the same time seek to maximize the Companys
total return.
Once we have determined that a prospective portfolio company is
suitable for investment, we work with the management and, in
certain cases, other capital providers, such as senior, junior
and/or
equity capital providers, to structure an investment. We
negotiate on how our investment is expected to relate relative
to the other capital in the portfolio companys capital
structure.
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 a restructuring but have several
of the above attributes and a management team that we believe
has the potential to achieve a successful turnaround. Preferred
equity investments may be structured with a dividend yield,
which may provide us with a current return, if earned and
received by the Company.
Our senior, subordinated and mezzanine debt investments are
tailored to the facts and circumstances of the deal. The
specific structure is negotiated over a period of several weeks
and is designed to seek to protect our rights
59
and manage our risk in the transaction. We may structure the
debt instrument to require restrictive affirmative and negative
covenants, default penalties, lien protection, equity calls,
take control provisions and board observation. Our debt
investments are not, and typically will not be, rated by any
rating agency, but we believe that if such investments were
rated, they would be below investment grade quality (rated lower
than Baa3 by Moodys or lower than
BBB- by Standard & Poors, commonly
referred to as junk bonds).
Our mezzanine debt investments are typically structured as
subordinated loans (with or without warrants) that carry a fixed
rate of interest. The loans may have interest-only payments in
the early years and payments of both principal and interest in
the later years, with maturities of three to ten years, although
debt maturities and principal amortization schedules vary.
Our mezzanine debt investments may include equity features, such
as warrants or options to buy a minority interest in the
portfolio company. Any warrants or other rights we receive with
our debt securities generally require only a nominal cost to
exercise, and thus, as the portfolio company appreciates in
value, we may achieve additional investment return from this
equity interest. We may structure the warrants to provide
minority rights provisions and event-driven puts. We may seek to
achieve additional investment return from the appreciation and
sale of our warrants.
Under certain circumstances, we may acquire more than 50% of the
common stock of a company in a control buyout transaction. In
addition to our common equity investment, we may also provide
additional capital to the controlled portfolio company in the
form of senior loans, subordinated debt or preferred stock.
We fund new investments using cash, the reinvestment of accrued
interest and dividends in debt and equity securities, or the
current reinvestment of interest and dividend income through the
receipt of a debt or equity security
(payment-in-kind
income). From time to time, we may also opt to reinvest accrued
interest receivable in a new debt or equity security, in lieu of
receiving such interest in cash and funding a subsequent
investment. We may also acquire investments through the issuance
of common or preferred stock, debt, or warrants representing
rights to purchase shares of our common or preferred stock. The
issuance of our stock as consideration may provide us with the
benefit of raising equity without having to access the public
capital markets in an underwritten offering, including the added
benefit of the elimination of any commissions payable to
underwriters.
Providing Management Assistance. As a business
development company, we are required to make significant
managerial assistance available to the companies in our
investment portfolio. In addition to the interest and dividends
received from our investments, we often generate additional fee
income for the structuring, diligence, transaction,
administration, and management services and financial guarantees
we provide to our portfolio companies through the Company or our
wholly-owned subsidiary MVCFS. In some cases, officers,
directors and employees of the Company may serve as members of
the board of directors of portfolio companies or fill officer
roles within portfolio companies. The Company may provide
guidance and management assistance to portfolio companies with
respect to such matters as budgets, profit goals, business and
financing strategy, management additions or replacements and
plans for liquidity events for portfolio company investors such
as a merger or initial public offering. MVCFS may also generate
additional fee income for providing administrative and other
management services to other entities, including private equity
firms or other business development companies (as it currently
does for Brantley Capital Corporation).
Portfolio Company Monitoring. We monitor our
portfolio companies closely to determine whether or not they
continue to be attractive candidates for further investment.
Specifically, we monitor their ongoing performance and
operations and provide guidance and assistance where
appropriate. We would decline additional investments in
portfolio companies that, in TTG Advisers view, do not
continue to show promise. However, we may make follow on
investments in portfolio companies that we believe may perform
well in the future.
TTG Advisers follows established procedures for monitoring the
Companys equity and loan investments. The investment
professionals have developed a multi-dimensional flexible rating
system for all of the Companys portfolio investments.
These rating grids are updated regularly and reviewed by the
Portfolio Manager, together with the investment team.
Additionally, the Companys Valuation Committee (the
Valuation Committee) meets at least quarterly, to
review a written valuation memorandum for each portfolio company
and to discuss business
60
updates. Furthermore, the Companys Chief Compliance
Officer administers the Companys compliance policies and
procedures, specifically as they relate to the Companys
investments in portfolio companies.
We exit our investments generally when a liquidity event takes
place, such as the sale, recapitalization or initial public
offering of a portfolio company. Our equity holdings, including
shares underlying warrants, after the exercise of such warrants,
typically includes registration rights which would allow us to
sell the securities if the portfolio company completes a public
offering.
Investment Approval Procedures. Generally,
prior to approving any new investment, we follow the process
outlined below. We usually conduct one to four months of due
diligence and structuring before an investment is considered for
approval. However, depending on the type of investment being
contemplated, this process may be longer or shorter.
The typical key steps in our investment approval process are:
|
|
|
|
|
Initial investment screening by deal person or investment team;
|
|
|
|
Investment professionals present an investment proposal
containing key terms and understandings (verbal and written) to
the entire investment team;
|
|
|
|
Our Chief Compliance Officer reviews the proposed investment for
compliance with the 1940 Act, the Code and all other relevant
rules and regulations;
|
|
|
|
Investment professionals are provided with authorization to
commence due diligence;
|
|
|
|
Any investment professional can call a meeting, as deemed
necessary, to: (i) review the due diligence reports;
(ii) review the investment structure and terms; or
(iii) to obtain any other information deemed relevant;
|
|
|
|
Once all due diligence is completed, the proposed investment is
rated using a rating system which tests several factors
including, but not limited to, cash flow, EBITDA growth,
management and business stability. We use this rating system as
the base line for tracking the investment in the future;
|
|
|
|
Our Chief Compliance Officer confirms that the proposed
investment will not cause us to violate the 1940 Act, the Code
or any other applicable rule or regulation;
|
|
|
|
Mr. Tokarz approves the transaction; and
|
|
|
|
The investment is funded.
|
The
Investment Team
Mr. Tokarz is responsible for the
day-to-day
management of the Companys portfolio. Mr. Tokarz
draws upon the experience of the eight full-time investment
professionals and one part-time investment professional of TTG
Advisers, all of whom were previously employed by the Company.
TTG Advisers also uses the services of other investment
professionals, with whom it has developed long-term
relationships, on an as-needed basis. TTG Advisers looks to
benefit from the combined resources and investment experience of
all of its investment professionals. In addition, TTG Advisers
employs five other professionals who manage the operations of
the Company and provide investment support functions both
directly and indirectly to our portfolio companies. As the
Company grows, TTG Advisers expects to hire, train, supervise
and manage new employees at various levels, many of whom would
be expected to provide services to the Company. The following
information contains biographical information for key personnel
of TTG Advisers (including their titles with TTG Advisers).
Michael Tokarz, Manager. Mr. Tokarz is a
senior investment professional with over 30 years of
lending and investment experience. Mr. Tokarz serves as
Manager of TTG Advisers and as Chairman and Portfolio Manager of
the Company. Prior to assuming his position as Chairman and
Portfolio Manager of the Company, and prior to founding The
Tokarz Group (in 2002), a private merchant bank of which he is
Chairman, Mr. Tokarz was a General Partner with Kohlberg
Kravis Roberts & Co. (KKR), one of the
worlds most experienced private equity firms. During his
17-year
tenure at KKR, he participated in diverse leveraged buyouts,
financings, restructurings and dispositions. Mr. Tokarz
currently serves on numerous corporate boards including Walter
Industries, Inc.,
61
Stonewater Control Systems, Lomonsov, Athleta, Inc. and Apertio
Ltd. In addition, Mr. Tokarz is on the Board of Managers of
Illinois Ventures, a University of Illinois focused venture
capital seed fund and high technology incubator, and is Chairman
of a related private equity follow on investment fund.
Mr. Tokarz also serves on the Board of the University of
Illinois Foundation and its Investment and Executive Committees,
and serves as Chairman of the Budget and Finance Committees.
Prior to his tenure at KKR, Mr. Tokarz was a commercial
banker at Continental Illinois where he was renowned for
innovation and buyout financings. Mr. Tokarz rose to run
the East Coast operation of Continental Illinois from New York.
He is also active on the Endowment Committee and Board of
Directors of the National Wildlife Federation. He received his
undergraduate degree with High Distinction in Economics and MBA
in Finance from the University of Illinois and is a Certified
Public Accountant.
Bruce Shewmaker, Managing
Director. Mr. Shewmaker serves as Managing
Director of both TTG Advisers and the Company.
Mr. Shewmaker is a senior investment professional with over
30 years of private equity and investment banking
experience. Prior to becoming a Managing Director of the Company
in November 2003, Mr. Shewmaker served as a member of the
board of the Company from March 2003 and served out his one year
term. Mr. Shewmaker was a co-founder of Merrill Lynch
Venture Capital Inc. where he initiated several private equity
investment partnerships, including three business development
companies. During his ten year career at Merrill Lynch, he
participated in sourcing, negotiating and monitoring over 40
private equity transactions including leveraged buyouts and
venture capital investments, of which seven companies completed
initial public offerings. More recently, Mr. Shewmaker
served as President and CEO of The US Russia Investment Fund,
with committed capital of $440 million, where he managed a
staff of 60 people, including eight private equity
professionals, in seven offices across the Russian Federation.
As a Managing Director of E*OFFERING Corp., he helped this
investment banking firm participate in underwriting more than 50
initial public offerings of domestic companies and was
responsible for organizing a global investment banking network.
While Mr. Shewmaker has spent the majority of his career
with registered investment companies or investment management
divisions of NYSE listed firms (divisions of The Chase Manhattan
Bank and Time Inc.), in the late 1990s Mr. Shewmaker
co-founded Crossbow Ventures, a regionally focused private
equity partnership located in Florida. He earned his
undergraduate degree in Finance from The Ohio State University
and has passed the Series 7 and 63 NASD qualifying
examinations.
David Hadani, Investment
Professional. Mr. Hadani joined MVC Capital
in April of 2005. He previously served as the CEO of Nebraska
Heavy Industries, a firm he co-founded. Mr. Hadani has more
than 15 years of operational and investment experience
including senior operational and general management positions at
Philips Electronics and at AlliedSignal, where he held various
roles in operations, mergers and acquisitions and finance. He
also worked for four years in commercial banking and has
international business experience in Asia and Eastern Europe.
Mr. Hadani received his bachelor degree from Washington
University and his MBA from Duke University.
Ben Harris, Investment
Professional. Mr. Harris joined MVC Capital
in April of 2005. Prior to joining the Company, he was the
co-founder and General Counsel of Nebraska Heavy Industries.
Mr. Harris has more than 10 years of experience in
transactional work, venture capital, private equity and buyouts.
Previously, Mr. Harris founded ITC Ventures, a Latin
America-based private equity and venture capital fund
responsible for launching more than 20 companies throughout
Brazil, Chile and Argentina. Mr. Harris also worked for the
tax and legal departments of KPMG International in Santiago,
Chile. Mr. Harris received his bachelor degree from
Washington University and his J.D. from the University of
Nebraska College of Law.
Shivani Khurana, Investment
Professional. Ms. Khurana joined MVC Capital
in March 2004 and serves as a Vice President of MVC Financial
Services, Inc. with responsibilities for sourcing, executing and
monitoring of investments. Before joining MVC Capital,
Ms. Khurana worked at Cadigan Investment Partners, a
middle-market leveraged buyout firm where she was involved in
originating, structuring, financing and negotiating leveraged
and management buyout, and recapitalization transactions.
Previously, Ms. Khurana worked in the leveraged finance
group of Wachovia Securities where she specialized in
restructuring advisory, distressed debt investing and turnaround
financing; and the investment banking group of Merrill Lynch.
Ms. Khuranas prior experience includes independently
managing $20 million in diversified U.S. and European
equities at Al-Ahlia Investment Company. Ms. Khurana
received a Bachelor of Commerce with Accounting honors from
Panjab University, India; an MBA in Finance from University of
Sheffield, UK; and an M.S. in Finance from University of
Rochester, New York.
62
Forrest Mertens, Investment
Professional. Mr. Mertens joined MVC Capital
in January of 2003 and is responsible for the sourcing,
executing and monitoring of investments. He also serves as the
Companys Technology Officer. Before joining MVC Capital,
Mr. Mertens worked at Next Level Communications, a
telecommunications solutions provider, where he managed the
firms Enclosures and Backplanes product line, which
generated approximately $20 million in annual revenue.
Previously, Mr. Mertens worked as a Research Analyst for
Beacon Investment Management, an asset management firm in
Boston, MA. Mr. Mertens earned a Bachelors of Science in
Business Administration from Boston University School of
Management where he graduated summa cum laude.
Puneet Sanan, Investment
Professional. Mr. Sanan joined MVC Capital
in March 2004 and serves as a Vice President of MVC Financial
Services, Inc. with responsibilities for sourcing, executing and
monitoring of investments. Before joining MVC Capital,
Mr. Sanan worked at Cadigan Investment Partners, a
leveraged buyout firm and was involved in originating,
developing, analyzing, structuring, financing and negotiating
leveraged and management buyouts, recapitalizations and growth
capital financing for middle-market companies. Previously,
Mr. Sanan was a Vice President and managed the Investment
Banking Division of Fano Securities where he received
international recognition for financial advisory work in
alternative energy technology. Prior to joining Fano,
Mr. Sanan was an Associate Director at UBS Warburgs
Leveraged Finance/ Financial Sponsors group where he advised
leading private equity firms on leveraged buyouts, mergers and
acquisitions and private equity investments. Mr. Sanan has
held various corporate finance and industry positions at
PaineWebber, Legg Mason, Royal Dutch/ Shell Group and Gist
Brocades (now DSM N.V.). Mr. Sanan received a Bachelor of
Engineering (Honors) in Chemical Engineering from Panjab
University, India and an MBA in Finance from The University of
Texas at Austin.
Christopher Sullivan, Investment
Professional. Mr. Sullivan joined MVC
Capital first in June 2004 as an Associate on a part-time basis
and then permanently in June of 2005. Mr. Sullivan is
responsible for the sourcing, executing and monitoring of
investments. Prior to joining MVC Capital, Mr. Sullivan
worked as an Associate for Credit Suisse First Boston, in Equity
Capital Markets, where he worked with numerous issuers and
financial sponsors to execute 47 lead managed initial public
offerings and 152 lead managed follow-on stock offerings. Before
working at Credit Suisse First Boston, Mr. Sullivan worked
as an Analyst in Equity Capital Markets for CIBC World Markets.
Mr. Sullivan received his MBA, with a concentration in
Finance, from the Carroll School of Management at Boston College
in May of 2005. Mr. Sullivan holds a BA in History from
Dartmouth College.
Portfolio
Support and Operations Management
Scott Schuenke, CPA, Chief Compliance
Officer. Mr. Schuenke currently serves as
Chief Compliance Officer of the Company and TTG Advisers.
Mr. Schuenke joined MVC Capital in June 2004 and holds
various positions with the Company. Mr. Schuenke serves as
the Companys Controller where he is responsible for
overseeing the financial operations of the Company and, as of
October 4, 2004, he began serving as the Companys
Chief Compliance Officer. In this role, Mr. Schuenke is
responsible for administering the Companys compliance
program required by
Rule 38a-1
under the 1940 Act. Before Mr. Schuenke joined MVC Capital,
he was a compliance officer with US Bancorp
Fund Services, LLC, where he was responsible for financial
reporting and compliance oversight of more than fifteen open and
closed-end registered investment companies. Previously,
Mr. Schuenke worked as an audit and assurance services
staff member with PricewaterhouseCoopers, LLP (PWC).
While with PWC, he performed audit and review services for
financial services clients including several large mutual fund
complexes. Mr. Schuenke received his Bachelors of Business
Administration from the University of Wisconsin-Milwaukee.
Mr. Schuenke also holds his Masters of Professional
Accountancy from the University of Wisconsin-Whitewater.
Mr. Schuenke is a Certified Public Accountant licensed in
the State of Wisconsin.
Peter Seidenberg, Chief Financial
Officer. Mr. Seidenberg currently serves as
Chief Financial Officer of the Company and TTG Advisers. In
October 2005, Mr. Seidenberg became the Chief Financial
Officer of the Company. Prior to joining MVC in April 2005,
Mr. Seidenberg served as a Principal of Nebraska Heavy
Industries, where he worked on various engagements, including
serving as CFO of Commerce One, Inc. Mr. Seidenberg has
over 10 years of experience in corporate finance,
operations and general management. Prior to his tenure at
Nebraska Heavy Industries, Mr. Seidenberg served as the
Director of Finance and Business Development and as Corporate
Controller for Plumtree Software, Inc. where he was responsible
for driving strategic initiatives and managing the finance and
accounting staff. Mr. Seidenberg has also worked at
AlliedSignal and several small manufacturing
63
companies, where he held roles in finance and operations.
Mr. Seidenberg received his bachelor degree and MBA from
Cornell University.
Jaclyn Shapiro-Rothchild,
Vice-President. Ms. Shapiro currently serves
as Vice President and Secretary of the Company and as Vice
President of TTG Advisers. Ms. Shapiro joined MVC Capital
in June of 2002 and is responsible for board and shareholder
matters and as the Head of Portfolio Development &
Fund Administration, responsible for monitoring the
Companys Legacy Investments and directing the
Companys operations. Prior to joining MVC Capital,
Ms. Shapiro was an Associate and Business Manager with
Draper Fisher Jurvetson meVC Management Co. LLC, the former
sub-advisor
of the Company. Before joining the Companys former
sub-advisor,
Ms. Shapiro was an Associate at The Bank Companies
(acquired by Newmark & Co. Real Estate), where she was
responsible for analyzing the various real estate trends in the
Washington, DC greater metropolitan area. Previously,
Ms. Shapiro worked as a Research Analyst to a Senior
Portfolio Manager at Gruntal & Co. and began her
business career as a Marketing Consultant at Archstone-Smith
formerly known as Charles E. Smith & Co.
Ms. Shapiro received her Bachelors of Business
Administration degrees in Entrepreneurship and Small Business
Management from George Washington University in Washington, DC.
Compensation
of the Portfolio Manager
Mr. Tokarz does not receive compensation from TTG Advisers
in the form of salary, bonus, deferred compensation or pension
and retirement plans. However, as the sole controlling equity
owner of TTG Advisers, he has a significant equity interest in
the profits generated by TTG Advisers from its management of the
Company.
Company
Ownership
Mr. Tokarz owns, as of the date of this prospectus, over
$6.0 million worth of our common shares. Mr. Tokarz
purchased each share on his behalf. The Company did not grant
any shares to him or any other member of the team.
Portfolio
Diversity
Our portfolio is not currently concentrated and we currently do
not have a policy with respect to concentrating
(i.e., investing 25% or more of our total assets) in any
industry or group of industries. We may or may not concentrate
in any industry or group of industries in the future.
PORTFOLIO
COMPANIES
The following is a listing of our portfolio companies in which
we had an investment at October 31, 2006. The portfolio
companies are presented in three categories
companies more than 25% owned which represent portfolio
companies where we directly or indirectly own more than 25% of
the outstanding voting securities of such portfolio company and,
therefore, are deemed controlled by us under the 1940 Act;
companies owned 5% to 25% which represent portfolio companies
where we directly or indirectly own 5% to 25% of the outstanding
voting securities of such portfolio company and, therefore, are
deemed to be an affiliated person under the 1940 Act; and
companies less than 5% owned which represent portfolio companies
where we directly or indirectly own less than 5% of the
outstanding voting securities of such portfolio company.
We make available significant managerial assistance to our
portfolio companies. We generally receive rights to observe the
meetings of our portfolio companies board of directors,
and may have one or more voting seats on their boards.
64
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Nature of its
|
|
Title of Securities
|
|
of Class
|
Name and Address of Portfolio Company
|
|
Principal Business
|
|
Held by the Company
|
|
Held(1)
|
|
Companies More Than 25%
Owned
|
|
|
|
|
|
|
Auto Motol Beni
Plzenska 130
Prague
Praha 5
150 00 Czech Republic
|
|
Automotive Dealership
|
|
Common Stock
|
|
100.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baltic Motors Corporation(2)
31513 Northwestern Highway
Suite 201 Farmington Hills, MI 48334
|
|
Automotive Dealership
|
|
Common Stock
Subordinated Loan
6/24/2007
Bridge Loan
12/22/2006
|
|
100.00%
NA
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio Medical Corp.
1111 Lakeside Drive
Gurnee, IL 60606
|
|
Manufacturer & Marketer
Of Medical Products
|
|
Common Stock
|
|
56.26%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sanierungsgesellschaft für
Deponien und
Altlasten mbH (SGDA)(2)
98544 Zella-Mehlis, Bahnhofsstraße 66
Germany
|
|
Soil Remediation
|
|
Term Loan 8/25/2009 Common
Equity
Preferred Equity
|
|
NA
57.50%
100.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIA BM Auto
Dârzciema 64a, Rîga, LV-1073 Latvia
|
|
Automotive Dealership
|
|
Common Stock
|
|
87.40%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit Research Labs, Inc.
15 Big Pond Road
Huguenot, NY 12746
|
|
Specialty Chemicals
|
|
Second Lien Loan
8/15/2012
Preferred Stock
|
|
NA
80.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timberland Machines &
Irrigation, Inc.(3)
One Niblick Road
PO Box 1190
Enfield, CT 06083
|
|
Landscaping Equipment &
Irrigation Products Distributor
|
|
Common Stock
Warrants
Senior Subordinated
8/4/2009
Jr. Revolving Line
7/7/2007
|
|
45.00%
100.00%
NA
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turf Products, LLC
157 Moody Road,
PO Box 1200
Enfield, CT 06083
|
|
Wholesale Distributor of Golf
Course & Maintenance Equipment
|
|
Senior Subordinated
11/30/2010
LLC Interest
Warrants
|
|
NA
45.00%
100.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Velocitius B.V.
Telestone 8 Teleport
Naritaweg 165
P.O. Box 7241
1007 JE, Amsterdam
|
|
Renewable Energy
|
|
Common Equity
Revolving Line
10/31/2009
|
|
100.00%
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendio Services, Inc.(3)
2800 Campus Drive, Suite 150
San Mateo, CA 94403
|
|
Online Auction Enabler
|
|
Series A Preferred
Common Stock
|
|
37.80%
0.40%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vestal Manufacturing
Enterprises(3)
176 Industrial Park Road
Sweetwater, TN 37874
|
|
Iron Foundry
|
|
Common Stock
Senior Subordinated 4/29/2011
|
|
90.00%
NA
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Nature of its
|
|
Title of Securities
|
|
of Class
|
Name and Address of Portfolio Company
|
|
Principal Business
|
|
Held by the Company
|
|
Held(1)
|
|
Companies 5% to 25%
Owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dakota Growers Pasta Company,
Inc.(3)
One Pasta Avenue
Carrington, ND 58421
|
|
Manufacturer of
Packaged Foods
|
|
Common Stock
|
|
8.21%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endymion Systems, Inc.
80 Swan Way, #250
Oakland, CA 94621
|
|
Software Applications
|
|
Series A Preferred
|
|
23.12%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harmony Pharmacy & Health
Center, Inc.
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
|
|
Healthcare Retail
|
|
Common Stock
|
|
33.30%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact Confections, Inc.(3)
888 Garden of the Gods Road, #200
Colorado Springs, CO 80907
|
|
Confections
Manufacturing & Distribution
|
|
Senior Subordinated 7/30/2009
Senior Subordinated
7/29/2008
Common Stock A
Common Stock B
|
|
NA
NA
9.96%
100.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine Exhibition Corporation
4400 Rickenbacker Causeway
Miami, FL
33149-1095
|
|
Theme Park
|
|
Senior Subordinated
6/30/2013
Convertible Preferred Stock
Revolving Line
6/30/2013
|
|
NA
100.00%
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Octagon Credit Investors,
LLC(2)
52 Vanderbilt Avenue, 18th Floor
New York, NY 10017
|
|
Asset Management
|
|
LLC Interest
Subordinated 12/31/2011
Revolving Line
12/31/2011
|
|
6.24%
NA
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phoenix Coal Corporation
1215 Nebo Road Ste A
Madisonville, KY 42431
|
|
Coal Processing and Production
|
|
Common Stock
Second Lien Note 6/8/2011
|
|
5.64%
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PreVisor, Inc.
1805 Old Alabama Road, Suite 150
Roswell, GA 30076
|
|
Human Capital Management
|
|
Common Stock
|
|
8.87%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vitality Foodservice Holding
Corp.(3)
400 North Tampa St., Suite 2000
Tampa, FL 33602
|
|
Holding Company of Subsidiary
Companies That are Non-Alcoholic Beverage Suppliers
|
|
Common Stock
Series A
Warrants
|
|
11.28%
100.00%
13.46%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies Less Than 5%
Owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actelis Networks, Inc.
6150 Stevenson Blvd.
Fremont, CA 94538
|
|
Telecommunications
|
|
Series C Preferred
|
|
10.81%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amersham Corporation
1797 Boxelder Street
Louisville, CO 80027
|
|
Precision Machine Components
|
|
Second Lien Seller Note
6/29/2010
Second Lien Seller Note
6/30/2013
|
|
NA
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BP Clothing, LLC
8700 Rex Road
Pico Rivera, CA 90660
|
|
Clothing Designer &
Manufacturer
|
|
Second Lien Loan 7/18/2012
Term Loan A 7/18/2011
Term Loan B 7/18/2011
|
|
NA
NA
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DPHI, Inc.
2580 55th Street
Boulder, CO 80301
|
|
Digital Media
|
|
Series A-1 Preferred
|
|
20.20%
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Nature of its
|
|
Title of Securities
|
|
of Class
|
Name and Address of Portfolio Company
|
|
Principal Business
|
|
Held by the Company
|
|
Held(1)
|
|
Foliofn, Inc.(3)
PO Box 3068
Merrifield, VA 22116
|
|
Financial Services Technology
|
|
Series C Preferred
|
|
49.36%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innovative Brands
4729 East Union Hills Drive Suite 103 Phoenix, AZ 85050
|
|
Consumer Products
|
|
Term Loan 9/22/2011
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henry Company
2911 Slauson Avenue
Huntington Park, CA 90255
|
|
Manufacturer of roofing supplies
|
|
Term Loan A 4/6/2011
Term Loan B 4/6/2011
|
|
NA
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JDC Lighting, LLC
45 West 36th Street, 5th Floor
New York, NY 10018
|
|
Electrical Distribution
|
|
Senior Subordinated Debt 1/31/2009
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MainStream Data, Inc.
375 Chipeta Way, Suite B
Salt Lake City, UT USA 84108
|
|
Satellite & Broadcast
Communications
|
|
Common Stock
|
|
2.83%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SafeStone Technologies PLC
Apollo House, Mercury Park
Wycombe Lane
Wooburn Green Bucks
HP10 0HH
|
|
Network Security Software
|
|
Series A Ordinary
|
|
2.90%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sonexis, Inc.
400 Network Center Drive, Suite 210 Tewksbury, MA 01876
|
|
Web Conferencing
|
|
Common Stock
|
|
13.16%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SP Industries, Inc.
935 Mearns Road
Warminster, PA 18974
|
|
Specialty Glassware &
Equipment
|
|
Term Loan B 3/31/2010
Subordinated Debt 3/31/2012
|
|
NA
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Storage Canada LLC
101 N
38th Avenue
Omaha, NE 68131
|
|
Self Storage
|
|
Term Loan 3/30/2013
Term Loan 10/6/2013
|
|
NA
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Safety U.S., Inc.
11111 Wilcrest Green Drive
Suite 300
Houston, TX 77042
|
|
Engineering Services
|
|
Term Loan A 12/31/2010
Term Loan B 12/31/2010
|
|
NA
NA
|
|
|
|
(1) |
|
Percentages shown for securities held by us represent percentage
of the class owned and do not necessarily represent voting
ownership. Percentages shown for equity securities other than
warrants or options represent the actual percentage of the class
of security held before dilution. Percentages shown for warrants
and options held represent the percentage of class of security
we may own, on a fully diluted basis, assuming we exercise our
warrants or options. |
|
(2) |
|
We directly or indirectly own more than 50% of the voting
securities of the company, or control the board of directors, or
are the controlling member. |
|
(3) |
|
The portfolio company is deemed to be an affiliated person under
the 1940 Act because we hold one or more seats on the portfolio
companys board of directors, are the general partner, or
are the managing member. |
For companies held by the Company at October 31, 2006
please reference pages 34 to 49 for a brief description of
each portfolio companys business. With respect to
portfolio companies in which we invested since that date, please
see pages 49 to 51 for a brief description of the business
of those companies. In addition, we have provided
67
below a more detailed description for each portfolio company
which represented more than 5.0% of our assets as of
October 31, 2006:
Baltic
Motors Corporation
On June 24, 2004, the Company provided a $4.5 million
mezzanine loan and $6.0 million in equity financing to
Baltic Motors. Baltic Motors is a U.S. company focused on
the importation and sale of Ford and Land Rover vehicles and
parts throughout Latvia, a new entrant to the European Union as
of May 1, 2004.
On September 28, 2006, the Company purchased an additional
5,737 shares of common stock at a cost of
$2.0 million. The Company also extended to Baltic Motors a
$1.0 million bridge loan. The loan bore annual interest at
12.0% with a maturity date of December 22, 2006. On
December 18, 2006, the Company extended the maturity date
on the $1.0 million Baltic Motors bridge loan from
December 22, 2006 to January 5, 2007. This note was
then repaid in full on January 5, 2007, including principal
and all accrued interest.
Baltic Motors is composed of three subsidiaries. The first, SIA
Baltic Motors Imports, is currently an importer of Ford
vehicles, parts and accessories, and is responsible for
selecting dealers and service centers within the country. The
second subsidiary, SIA Baltic Motors Limited, operates Ford and
Land Rover car dealerships in three locations within Latvia. The
third subsidiary, SIA Baltic Ipashumu Fonds, controls the real
estate holdings of Baltic Motors inclusive of all land and
facilities.
Beyond Ford and Land Rover, Baltic Motors relationship
with Ford permits the importation of additional brands into
Latvia and for potential expansion into other Baltic states.
Recognizable brands include Mazda, Jaguar and Volvo. MVC Capital
controls the board of directors of Baltic Motors.
Ohio
Medical Corporation
On July 1, 2005, the Company invested $17.0 million
and sponsored the acquisition of General Electrics Ohmeda
Brand Suction and Oxygen Therapy business unit
(GE-SOT), a leading global supplier of suction and
oxygen therapy products. On July 14, 2005, in conjunction
with this transaction, the Company acquired GE-SOTs
largest supplier, Squire Cogswell/Aeros Instruments, Inc. and
merged both businesses creating Ohio.
The Companys investment in Ohio consists of
5,620 shares of Common Stock with a cost basis of
$17.0 million.
Ohio is a designer, manufacturer and marketer of vacuum
regulators, flowmeters and portable suction devices that are
primarily sold to healthcare facilities for application in
medical gas pumping systems. Ohio markets its medical gas and
industrial gas pumping systems under the Aeros and Healthcair
brand names.
Vitality
Foodservice, Inc.
On September 27, 2004, the Company announced that it had
provided $10.0 million of preferred and $5.0 million
in common equity financing to Vitality to support the strategic
buyout of the Company by Goldner Hawn Johnson &
Morrison.
Vitality is headquartered in Tampa, FL, and is a provider of
dispensed, non-alcoholic beverages to the foodservice industry
worldwide. Its total beverage system provides
innovative, proprietary dispensers, quality beverages and
leading sales and service expertise. Vitality has distribution
in over 30 markets including the U.S., Canada, Europe, Central
and South America, Asia, the Caribbean, and the Middle East.
DETERMINATION
OF COMPANYS NET ASSET VALUE
Pursuant to the requirements of the 1940 Act, the Company values
its portfolio securities at their current market values or, if
market quotations are not readily available, at their estimates
of fair values. Because the Companys portfolio company
investments generally do not have readily ascertainable market
values, the Company records these investments at fair value in
accordance with Valuation Procedures adopted by its board of
directors.
68
The Companys board of directors may also hire independent
consultants to review its Valuation Procedures or to conduct an
independent valuation of one or more of its portfolio
investments.
Pursuant to the Companys Valuation Procedures, the
Companys Valuation Committee determines fair valuations of
portfolio company investments on a quarterly basis (or more
frequently, if deemed appropriate under the circumstances). Any
changes in valuation are recorded in the statements of
operations as Net unrealized gain (loss) on
investments. Currently, the Companys net asset value
per share is calculated and published on a monthly basis. The
fair values determined as of the most recent quarter end are
reflected, in the next calculated net asset value per share. (If
the Valuation Committee determines to fair value an investment
more frequently than quarterly, the most recently determined
fair value would be reflected in the published net asset value
per share.)
The Company calculates its net asset value per share by
subtracting all liabilities from the total value of its
portfolio securities and other assets and dividing the result by
the total number of outstanding shares of its common stock on
the date of valuation.
At October 31, 2006, approximately 79.5% of the
Companys total assets represented portfolio investments
recorded at fair value.
Initially, portfolio securities for which a reliable market
value cannot be determined are valued at cost (absent the
existence of circumstances warranting, in managements and
the Valuation Committees view, a different initial value).
During the period that such a portfolio security is held by the
Company, its original cost may cease to represent an appropriate
valuation, and other factors must be considered. No
pre-determined formula can be applied to determine fair values.
Rather, the Valuation Committee makes fair value assessments
based upon the estimated value at which the securities of the
portfolio company could be sold in an orderly disposition over a
reasonable period of time between willing parties (other than in
a forced or liquidation sale). The liquidity event whereby the
Company exits an investment is generally a sale, merger,
recapitalization or, in some cases, the initial public offering
of the portfolio company.
Valuation
Methodology
There is no one methodology to determine fair value and, in
fact, for any portfolio security, fair value may be expressed as
a range of values, from which the Company derives a single
estimate of fair value. To determine the fair value of a
portfolio security, the Valuation Committee analyzes the
portfolio companys financial results and projections,
publicly traded comparables when available, precedent exit
transactions in the market when available, as well as other
factors. The Company generally requires, where practicable,
portfolio companies to provide annual audited and more regular
unaudited financial statements,
and/or
annual projections for the upcoming fiscal year.
The fair value of the Companys portfolio securities is
inherently subjective. Because of the inherent uncertainty of
fair valuation of portfolio securities that do not have readily
ascertainable market values, the Companys estimate of fair
value may significantly differ from the fair market value that
would have been used had a ready market existed for the
securities. Such values also do not reflect brokers fees
or other selling costs which might become payable on disposition
of such investments.
Equity
Securities
The Companys equity interests in portfolio companies for
which there is no liquid public market are valued at fair value.
The Valuation Committees analysis of fair value may
include various factors, such as multiples of EBITDA, cash
flow(s), net income, revenues or in limited instances book value
or liquidation value. All of these factors may be subject to
adjustments based upon the particular circumstances of a
portfolio company or the Companys actual investment
position. For example, adjustments to EBITDA may take into
account compensation to previous owners or acquisition,
recapitalization, or restructuring or related items.
The Valuation Committee may look to private merger and
acquisition statistics, public trading multiples discounted for
illiquidity and other factors, or industry practices in
determining fair value. The Valuation Committee may also
consider the size and scope of a portfolio company and its
specific strengths and weaknesses, as well as any other factors
it deems relevant in assessing the value. The determined fair
values may be discounted to account for restrictions on resale
and minority positions. Generally, the value of the
Companys equity interests in
69
public companies for which market quotations are readily
available is based upon the most recent closing public market
price. Portfolio securities that carry certain restrictions on
sale are typically valued at a discount from the public market
value of the security.
Loans and
Debt Securities
For loans and debt securities, fair value generally approximates
cost unless there is a reduced value or overall financial
condition of the portfolio company or other factors indicate a
lower fair value for the loan or debt security.
Generally, in arriving at a fair value for a debt security or a
loan, the Valuation Committee focuses on the portfolio
companys ability to service and repay the debt and
considers its underlying assets. With respect to a convertible
debt security, the Valuation Committee also analyzes the excess
of the value of the underlying security over the conversion
price as if the security was converted when the conversion
feature is in the money (appropriately discounted if
restricted). If the security is not currently convertible, the
use of an appropriate discount in valuing the underlying
security is typically considered. If the value of the underlying
security is less than the conversion price, the Valuation
Committee focuses on the portfolio companys ability to
service and repay the debt.
When the Company receives nominal cost warrants or free equity
securities (nominal cost equity) with a debt
security, the Company allocates its cost basis in the investment
between debt securities and nominal cost equity at the time of
origination.
Interest income is recorded on an accrual basis to the extent
that such amounts are expected to be collected. Origination,
closing
and/or
closing fees associated with investments in portfolio companies
are accreted into income over the respective terms of the
applicable loans. Upon the prepayment of a loan or debt
security, any prepayment penalties and unamortized loan
origination, closing and commitment fees are recorded as income.
Prepayment premiums are recorded on loans when received.
For loans, debt securities, and preferred securities with
contractual
payment-in-kind
interest or dividends, which represent contractual
interest/dividends accrued and added to the loan balance or
liquidation preference that generally becomes due at maturity,
the Company will not accrue
payment-in-kind
interest/dividends if the portfolio company valuation indicates
that the
payment-in-kind
interest is not collectible. However, the Company may accrue
payment-in-kind
interest if the health of the portfolio company and the
underlying securities are not in question. All
payment-in-kind
interest that has been added to the principal balance or
capitalized is subject to ratification by the Valuation
Committee.
MANAGEMENT
The overall responsibility for oversight of the Company rests
with the Companys board of directors. The
day-to-day
operations of the Company are delegated to TTG Advisers, subject
to the supervision of our board of directors.
The board of directors currently has five members. The board of
directors maintains an Audit Committee, a Valuation Committee, a
Compensation Committee, and a Nominating/Corporate
Governance/Strategy Committee, and may establish additional
committees in the future.
The Company is externally managed by TTG Advisers pursuant to
the Advisory Agreement. TTG Advisers was organized to provide
investment advisory and management services to the Company and
other investment vehicles.
These investment professionals collectively have extensive
experience in managing investments in private businesses in a
variety of industries, and are familiar with the Companys
approach of lending and investing. Because the Company is
externally managed, it pays a base management fee and an
incentive fee. The Advisory Agreement and fees paid by the
Company to TTG Advisers pursuant to the Advisory Agreement are
described under Advisory Agreement below.
70
Information regarding the directors and the key executive
officers of MVC Capital as of the date of this prospectus,
including brief biographical information, is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Portfolios in
|
|
(6)
|
|
|
|
|
|
|
|
|
Fund Complex
|
|
Other
|
|
|
(2)
|
|
(3)
|
|
|
|
Overseen by
|
|
Directorships
|
|
|
Positions(s)
|
|
Term of Office/
|
|
(4)
|
|
Director or
|
|
Held by Director
|
(1)
|
|
Held with the
|
|
Length of Time
|
|
Principal Occupation(s)
|
|
Nominee for
|
|
or Nominee for
|
Name, Address and Age
|
|
Company
|
|
Served
|
|
During Past 5 Years
|
|
Director
|
|
Director
|
|
Nominees for Independent
Directors
|
|
|
|
|
|
|
|
|
|
|
Emilio Dominianni
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 75
|
|
Director
|
|
1 year/3 years,
11 months
|
|
Mr. Dominianni is a retired Partner
of, and was Special Counsel to Coudert Brothers LLP, a law firm.
He is currently a Director of Stamm International Corporation,
Powrmatic Inc., and Powrmatic of Canada Ltd., manufacturers and
distributors of heating, ventilating, and air conditioning
equipment. He was a Director of American Air Liquide Inc., Air
Liquide International Corporation, and a Consultant to Air
Liquide America Corp., all manufacturers and distributors of
industrial gases, and Mouli Manufacturing Corp., a distributor
of kitchen and household products.
|
|
None(1)
|
|
See column 4
|
Gerald Hellerman
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 69
|
|
Director
|
|
1 year/3 years,
11 months
|
|
Mr. Hellerman has been the
Principal of Hellerman Associates, a financial and corporate
consulting firm, since the firms inception in 1993. He is
currently a Director of The Mexico Equity and Income Fund, Inc.,
a Director and President of Innovative Clinical Solutions, Ltd.,
a company formerly engaged in clinical trials and physician
network management which is currently in liquidation, a Director
of FNC Realty Corporation which is developing and operating
owned properties, a Director of AirNet Systems Inc., and a
Director of Old Mutual 2100 Absolute Return Fund, L.L.C., Old
Mutual 2100 Absolute Return Master Fund, L.L.C., Old Mutual 2100
Emerging Managers Fund, L.L.C. and Old Mutual 2100 Emerging
Managers Master Fund, L.L.C. Mr. Hellerman is presently
serving as Manager-Investment Advisor for a U.S. Department
of Justice Settlement Trust. Mr. Hellerman has served as a
Trustee or Director of Third Avenue Value Trust, a Trustee of
Third Avenue Variable Series Trust, a Director of Clemente
Global Growth Fund, Inc. and a Director of Brantley Capital
Corporation.
|
|
None(1)
|
|
See column 4
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Portfolios in
|
|
(6)
|
|
|
|
|
|
|
|
|
Fund Complex
|
|
Other
|
|
|
(2)
|
|
(3)
|
|
|
|
Overseen by
|
|
Directorships
|
|
|
Positions(s)
|
|
Term of Office/
|
|
(4)
|
|
Director or
|
|
Held by Director
|
(1)
|
|
Held with the
|
|
Length of Time
|
|
Principal Occupation(s)
|
|
Nominee for
|
|
or Nominee for
|
Name, Address and Age
|
|
Company
|
|
Served
|
|
During Past 5 Years
|
|
Director
|
|
Director
|
|
Robert Knapp
Millenco, L.P.
666 Fifth Avenue,
8th Floor
New York, NY 10103
Age: 40
|
|
Director
|
|
1 year/3 years,
11 months
|
|
Mr. Knapp is a Managing Director of
Millennium Partners where he specializes in mis-priced assets,
turnaround situations, and closed end fund arbitrage. He also is
a Director of the Vietnam Opportunity Fund, a Cayman Islands
private equity fund listed on the London Stock Exchange, for
which Millennium acted as seed investor. Formerly he served as a
director for the First Hungary Fund, a Channel Islands private
equity fund, and as a Director of the Vietnam Frontier Fund, a
Cayman Islands investment company.
|
|
None(1)
|
|
See column 4
|
William Taylor
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 64
|
|
Director
|
|
11 months
|
|
Mr. Taylor is a Certified
Public Accountant and is currently a Director of Northern
Illinois University Foundation and a Trustee of Writers Theatre.
From 1976 through May, 2005, Mr. Taylor was a Partner at
Deloitte & Touche. From 1997 to 2001 Mr. Taylor
was a Director of Deloitte & Touche USA and from 1999
to 2003 Mr. Taylor was a Director of Deloitte Touche
Tohmatsu.
|
|
None(1)
|
|
See column 4
|
Officer and Nominee for
Interested Director
|
|
|
|
|
|
|
|
|
|
|
Michael Tokarz(2)
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 57
|
|
Director, Chairman, and Portfolio
Manager
|
|
1 year/3 years,
3 months
|
|
Mr. Tokarz currently serves as
Chairman and Portfolio Manager of the Company. Mr. Tokarz
also is Chairman of The Tokarz Group, a private merchant bank,
since 2002. Prior to this, Mr. Tokarz was a senior General
Partner and Administrative Partner at Kohlberg Kravis
Roberts & Co., a private equity firm specializing in
management buyouts. He also currently serves on the corporate
boards of Conseco, Inc., Walter Industries, Inc., IDEX
Corporation, Stonewater Control Systems, Lomonosov, Athleta,
Inc. and Apertio Ltd. Mr. Tokarz is an active member of the
endowment committee and Board of Trustees of YMCA in Westchester
County. He is also a member of the Board of the Warwick Business
School in England. He is a member of the Board of the University
of Illinois Foundation, and serves on its investment policy
committee; he is also a member of the Venture Capital
Subcommittee and serves as a member of the Board of Managers for
Illinois Ventures, LLC. Mr. Tokarz also serves as the
Chairman of the Illinois Emerging Technology Fund LLC.
Mr. Tokarz serves as a director for the following portfolio
companies of the Company: Baltic Motors, Dakota, Ohio,
Timberland, and previously served on the Board of Vestal from
April 2004 until July 2005.
|
|
None(1)
|
|
See column 4
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Portfolios in
|
|
(6)
|
|
|
|
|
|
|
|
|
Fund Complex
|
|
Other
|
|
|
(2)
|
|
(3)
|
|
|
|
Overseen by
|
|
Directorships
|
|
|
Positions(s)
|
|
Term of Office/
|
|
(4)
|
|
Director or
|
|
Held by Director
|
(1)
|
|
Held with the
|
|
Length of Time
|
|
Principal Occupation(s)
|
|
Nominee for
|
|
or Nominee for
|
Name, Address and Age
|
|
Company
|
|
Served
|
|
During Past 5 Years
|
|
Director
|
|
Director
|
|
Executive Officers
|
|
|
|
|
|
|
|
|
|
|
Bruce Shewmaker(3)
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 61
|
|
Managing Director
|
|
Indefinite term/3 years,
3 months
|
|
Until June 2003, Mr. Shewmaker
served as Managing Director of Crossbow Ventures Inc., and as a
Vice President of Crossbow Venture Partners Corp., the general
partner of Crossbow Venture Partners LP, a licensed small
business investment company. Mr. Shewmaker also is a
co-founder and Director of Infrared Imaging Systems, Inc., a
medical devices company. From 1999 to 2001, he was a Managing
Director of E*OFFERING Corp., an investment banking firm which
merged into Wit SoundView Group in 2000. He has also served as a
General Partner of ML Oklahoma Venture Partners, L.P., a
business development company. Mr. Shewmaker serves as a
director for the following portfolio companies of the Company:
Baltic Motors, Foliofn, ProcessClaims and Vendio.
Mr. Shewmaker also serves on the Board of VIANY
|
|
None
|
|
See column 4
|
Peter Seidenberg
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 37
|
|
Chief Financial Officer
|
|
Indefinite term/1 year,
4 months
|
|
Mr. Seidenberg joined the Company
in April 2005 after having previously served as a Principal of
Nebraska Heavy Industries, where he worked on engagements
including serving as the Chief Financial Officer of Commerce
One, Inc.. Prior to that, Mr. Seidenberg served as the
Director of Finance and Business Development and as Corporate
Controller for Plumtree Software, Inc. Mr. Seidenberg has
also worked at AlliedSignal and several small manufacturing
companies, where he held roles in finance and operations.
Mr. Seidenberg sat on the Board of Sutter Holding from
January 2004 to January 2006 and is currently on the Board of
Commerce One. Mr. Seidenberg on behalf of the Company sits
on the Board of Ohio.
|
|
None
|
|
None
|
Scott Schuenke
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 27
|
|
Chief Compliance Officer
|
|
Indefinite term/2 years,
4 months
|
|
Mr. Schuenke served as a Compliance
Officer with U.S. Bancorp Fund Services, LLC, from 2002
until he joined MVC Capital, Inc. in 2004. Mr. Schuenke
also served as the Secretary of The Mexico Equity &
Income Fund, Inc. and Assistant Secretary of Tortoise Energy
Infrastructure Corporation during his tenure at
U.S. Bancorp Fund Services, LLC. Mr. Schuenke is a
Certified Public Accountant.
|
|
None
|
|
None
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Portfolios in
|
|
(6)
|
|
|
|
|
|
|
|
|
Fund Complex
|
|
Other
|
|
|
(2)
|
|
(3)
|
|
|
|
Overseen by
|
|
Directorships
|
|
|
Positions(s)
|
|
Term of Office/
|
|
(4)
|
|
Director or
|
|
Held by Director
|
(1)
|
|
Held with the
|
|
Length of Time
|
|
Principal Occupation(s)
|
|
Nominee for
|
|
or Nominee for
|
Name, Address and Age
|
|
Company
|
|
Served
|
|
During Past 5 Years
|
|
Director
|
|
Director
|
|
Jaclyn Shapiro-Rothchild
287 Bowman Avenue
2nd Floor
Purchase, NY 10577
Age: 28
|
|
Vice President/ Secretary
|
|
Indefinite term/2 years,
2 months; Indefinite term/3 years
|
|
Ms. Shapiro has worked directly for
the Company since June 2002. Prior to that, she was an Associate
and Business Manager with Draper Fisher Jurvetson meVC
Management Co. LLC, the former investment sub-adviser to the
Company, and an Associate at The Bank Companies (acquired by
Newmark & Co. Real Estate), a commercial real estate
company.
|
|
None
|
|
None
|
|
|
|
(1) |
|
Other than the Company. |
|
(2) |
|
Mr. Tokarz is an interested person, as defined
in the 1940 Act, of the Company (an Interested
Director) because he serves as an officer of the Company. |
|
(3) |
|
Mr. Shewmaker served as Director of the Company from March
2003 to March 2004. |
Board
Meetings and Committees
The Board currently has an Audit Committee, a Valuation
Committee, a Nominating/Corporate Governance/Strategy Committee
and a Compensation Committee. The Board has adopted a written
charter for the Audit Committee, a copy of which is currently
available on the Companys website at
http://www.mvccapital.com.
The current members of the Audit Committee are
Messrs. Dominianni, Hellerman and Taylor, each of whom is
an independent audit committee member as defined in
Sections 303.01(B)(2)(a) and (3) of the NYSEs
listing standards and an Independent Director.
Mr. Hellerman is the Chairman of the Audit Committee. The
Audit Committees primary purposes are:
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oversight responsibility with respect to: (a) the adequacy
of the Companys accounting and financial reporting
processes, policies and practices; (b) the integrity of the
Companys financial statements and the independent audit
thereof; (c) the adequacy of the Companys overall
system of internal controls and, as appropriate, the internal
controls of certain service providers; (d) the
Companys compliance with certain legal and regulatory
requirements; (e) determining the qualification and
independence of the Companys independent auditors; and
(f) the Companys internal audit function, if
any; and
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|
oversight of the preparation of any report required to be
prepared by the Audit Committee pursuant to the rules of the SEC
for inclusion in the Companys annual proxy statement with
respect to the election of directors.
|
The most recent fiscal year of the Company ended on
October 31, 2006. During that fiscal year, the Audit
Committee held four (4) meetings.
During the fiscal year ended October 31, 2006, the Board
held ten (10) meetings. During that year, each of the
Directors attended 100% of the aggregate number of meetings of
the Board and any committee of the Board on which such Director
served. Currently, 80% of the Directors are Independent
Directors.
The Valuation Committee, the principal purpose of which is to
determine the fair values of securities in the Companys
portfolio for which market quotations are not readily available,
is currently comprised of Messrs. Dominianni, Hellerman and
Knapp. The Valuation Committee held five (5) meetings
during the fiscal year ended October 31, 2006.
The Nominating/Corporate Governance/Strategy Committee (the
Nominating Committee), the principal purposes of
which are to consider and nominate persons to serve as
Independent Directors and oversee the composition and governance
of the Board and its committees, is currently comprised of
Messrs. Dominianni,
74
Hellerman, and Knapp, each of whom is an Independent Director.
The Nominating Committee was established in January 2004. The
Board has adopted a written charter for the Nominating
Committee, a copy of which is available on the Companys
website at http://www.mvccapital.com.
The Nominating Committee considers director candidates nominated
by shareholders in accordance with procedures set forth in the
Companys By-Laws. The Companys By-Laws provide that
nominations may be made by any shareholder of record of the
Company entitled to vote for the election of directors at a
meeting, provided that such nominations are made pursuant to
timely notice in writing to the Secretary. The Nominating
Committee then determines the eligibility of any nominated
candidate based on criteria described below. To be timely, a
shareholders notice must be received at the principal
executive offices of the Company not less than 60 days nor
more than 90 days prior to the scheduled date of a meeting.
A shareholders notice to the Secretary shall set forth:
(a) as to each shareholder-proposed nominee, (i) the
name, age, business address and residence address of the
nominee, (ii) the principal occupation or employment of the
nominee, (iii) the class, series and number of shares of
capital stock of the Company that are owned beneficially by the
nominee, (iv) a statement as to the nominees
citizenship, and (v) any other information relating to the
person that is required to be disclosed in solicitations for
proxies for election of directors pursuant to Section 14 of
the Securities Exchange Act of 1934, as amended (the
1934 Act), and the rules and regulations
promulgated thereunder; and (b) as to the shareholder
giving the notice, (i) the name and record address of the
shareholder and (ii) the class, series and number of shares
of capital stock of the corporation that are owned beneficially
by the shareholder. The Company or the Nominating Committee may
require a shareholder who proposes a nominee to furnish any such
other information as may reasonably be required by the Company
to determine the eligibility of the proposed nominee to serve as
director of the Company. The Nominating Committee held two
(2) meetings during the fiscal year ended October 31,
2006.
The Compensation Committee, the principal purpose of which is to
oversee the compensation of the Independent Directors, is
currently comprised of Messrs. Hellerman and Knapp. The
Compensation Committee was established in March 2003. There was
one (1) formal meeting of the Compensation Committee held
during the fiscal year ended October 31, 2006. The Board
has adopted a written charter for the Compensation Committee, a
copy of which is available on the Companys website at
http://www.mvccapital.com.
75
COMPENSATION
OF EXECUTIVE OFFICERS AND DIRECTORS
Director
and Executive Officer Compensation
The following table sets forth compensation paid by us in all
capacities during the fiscal year ended October 31, 2006 to
all of our Directors and our three highest paid executive
officers. Our Directors have been divided into two
groups Interested Directors and Independent
Directors. The Interested Director is an interested
person, as defined in the 1940 Act, of the Company. (The
Company is not part of any Fund Complex.)
Compensation
Table
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|
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Pension or
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|
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|
|
Retirement
|
|
Estimated
|
|
Total
|
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|
|
|
Benefits Accrued
|
|
Annual
|
|
Compensation
|
|
|
Aggregate
|
|
as Part of
|
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Benefits
|
|
from Company and
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|
Compensation
|
|
Company
|
|
Upon
|
|
Fund Complex
|
Name of Person, Position
|
|
from Company(4)
|
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Expenses(1)
|
|
Retirement
|
|
Paid to Directors
|
|
Interested Director
|
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|
|
|
|
|
|
|
|
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|
|
|
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|
Michael Tokarz, Chairman and
Portfolio Manager
|
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$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Independent Directors
|
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|
|
|
|
|
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|
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|
|
|
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|
Emilio Dominianni, Director
|
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$
|
59,750.00
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
59,750.00
|
|
Robert Everett, Director(2)
|
|
$
|
10,000.00
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
10,000.00
|
|
Gerald Hellerman, Director
|
|
$
|
66,333.34
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
66,333.34
|
|
Robert Knapp, Director
|
|
$
|
57,750.00
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
57,750.00
|
|
William Taylor, Director(2)
|
|
$
|
43,750.00
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
43,750.00
|
|
Executive Officers (who are not
directors)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce Shewmaker, Managing
Director(3)
|
|
$
|
385,000.00
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
385,000.00
|
|
Peter Seidenberg, Chief
Financial Officer
|
|
$
|
325,000.00
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
325,000.00
|
|
Jaclyn Shapiro, Vice President
and Secretary
|
|
$
|
200,000.00
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
200,000.00
|
|
|
|
|
(1) |
|
Directors do not receive any pension or retirement benefits from
the Company. |
|
(2) |
|
On February 20, 2006, Mr. Everett resigned from the
Board. On February 23, 2006, Mr. William Taylor was
appointed to the Board. |
|
(3) |
|
As of the Annual Meeting of Stockholders on March 29, 2004,
Mr. Shewmaker was no longer a member of the Board. |
|
(4) |
|
The following table provides detail as to aggregate compensation
paid during the fiscal year 2006 to our three highest paid
executive officers: |
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|
|
|
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|
Salary
|
|
Bonus and Awards
|
|
Mr. Shewmaker
|
|
$
|
150,000
|
|
|
$
|
235,000
|
|
Mr. Seidenberg
|
|
$
|
125,000
|
|
|
$
|
200,000
|
|
Ms. Shapiro
|
|
$
|
140,000
|
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|
$
|
60,000
|
|
At a meeting of the Board held on January 31, 2006, the
Board along with the Compensation Committee changed the fees
payable to Independent Directors and the fees payable to the
Chairman of the Audit Committee, Valuation Committee, and
Nominating Committee as follows. Each Independent Director is
now paid: an annual retainer of $50,000 ($60,000 for the
Chairman of the Audit Committee and $55,000 for the Chairman of
each of the Valuation Committee and Nominating Committee) for up
to five in-person board meetings and committee meetings per
year. In the event that more than five board meetings and
committee meetings occur, each Director will be paid an
additional $1,000 for an in-person meeting and $0 for a
telephonic meeting. Each Independent Director is also reimbursed
by the Company for reasonable
out-of-pocket
expenses. The Directors do not receive any pension or retirement
benefits from the Company.
76
Mr. Tokarz, Chairman and Portfolio Manager of the Company,
received no cash compensation from the Company during the last
fiscal year. During the last fiscal year, Mr. Tokarz had
entered into a compensation arrangement with the Company, which
terminated upon the effectiveness of the Advisory Agreement on
November 1, 2006.
On February 16, 2005, the Company entered into a sublease
for a larger space in the building in which the Companys
current executive offices are located. The sublease is scheduled
to expire on February 28, 2007. Future payments under the
sublease total approximately $75,000 in fiscal year 2007. The
Companys previous lease was terminated effective
March 1, 2005, without penalty. The building in which the
Companys executive offices are located, 287 Bowman Avenue,
is owned by Phoenix Capital Partners, LLC, an entity which is
97.0% owned by Mr. Tokarz. See Note 4
Management of our consolidated financial statements
for more information on Mr. Tokarz.
Director
Equity Ownership
The following table sets forth, as of December, 31 2006, with
respect to each Director, certain information regarding the
dollar range of equity securities beneficially owned in the
Company. The Company does not belong to a family of investment
companies.
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(3)
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Aggregate Dollar Range of Equity
|
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(2)
|
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Securities of All Funds Overseen
|
(1)
|
|
Dollar Range of Equity
|
|
or to be Overseen by Director in
|
Name of Director
|
|
Securities in the Company
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|
Family of Investment Companies
|
|
Independent Directors
|
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|
Emilio Dominianni
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Over $
|
100,000
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|
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Over $
|
100,000
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|
Gerald Hellerman
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Over $
|
100,000
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Over $
|
100,000
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Robert Knapp
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Over $
|
100,000
|
(1)
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Over $
|
100,000
|
(1)
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William Taylor
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Over $
|
100,000
|
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Over $
|
100,000
|
|
Interested Director
|
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|
|
|
|
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|
Michael Tokarz(2)
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Over $
|
100,000
|
|
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Over $
|
100,000
|
|
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|
(1) |
|
These shares are owned by Mr. Knapp directly. |
|
(2) |
|
Mr. Tokarz is an Interested Director of the Company because
he serves as an officer of the Company. |
ADVISORY
AGREEMENT
Under the terms of the Advisory Agreement, TTG Advisers
determines the composition of our portfolio, the nature and
timing of the changes to our portfolio and the manner of
implementing such changes, identifies, evaluates and negotiates
the structure of the investments we make (including performing
due diligence on our prospective portfolio companies), closes
and monitors the investments we make, determines the securities
and other assets that we purchase, retain or sell and oversees
the administration, recordkeeping and compliance functions of
the Company
and/or third
parties performing such functions for the Company. TTG
Advisers services under the Advisory Agreement are not
exclusive, and it may furnish similar services to other entities.
Pursuant to the Advisory Agreement, the Company pays TTG
Advisers a fee for investment advisory and management services
consisting of two components a base management fee
and an incentive fee.
The base management fee is calculated at an annual rate of 2% of
our total assets (excluding Non-Eligible Assets, but including
assets purchased with borrowed funds that are not Non-Eligible
Assets) (the Base Management Fee). The Base
Management Fee is payable quarterly in arrears. The Base
Management Fee is calculated based on the value of our total
assets (excluding Non-Eligible Assets, but including assets
purchased with borrowed funds that are not Non-Eligible Assets)
at the end of the most recently completed fiscal quarter. Base
Management Fees for any partial month or quarter will be
appropriately pro rated.
77
The incentive fee is comprised of the following two parts:
One part is calculated and payable quarterly in arrears based on
our pre-incentive fee net operating income. Pre-incentive fee
net operating income means interest income, dividend income and
any other income (including any other fees to the Company, such
as directors, commitment, origination, structuring,
diligence and consulting fees or other fees that we receive from
portfolio companies) accrued during the fiscal quarter, minus
the Companys operating expenses for the quarter (including
the Base Management Fee and any interest expense and dividends
paid on any outstanding preferred stock, but excluding the
incentive fee (whether paid or accrued)). Pre-incentive fee net
operating income includes, in the case of investments with a
deferred interest feature (such as market discount, debt
instruments with
payment-in-kind
interest, preferred stock with
payment-in-kind
dividends and zero coupon securities), accrued income that we
have not yet received in cash. TTG Advisers is not under any
obligation to reimburse us for any part of the incentive fee it
received that was based on accrued income that we never receive
as a result of a default by an entity on the obligation that
resulted in the accrual of such income.
Pre-incentive fee net operating income does not include any
realized capital gains, realized capital losses or unrealized
capital appreciation or depreciation. Because of the structure
of the incentive fee, it is possible that we may pay an
incentive fee in a quarter where we incur a loss. For example,
if we receive pre-incentive fee net operating income in excess
of the hurdle rate (explained below) for a quarter, we will pay
the applicable incentive fee even if we have incurred a loss in
that quarter due to realized and unrealized capital losses.
Pre-incentive fee net operating income, expressed as a rate of
return on the value of our net assets at the end of the
immediately preceding fiscal quarter, is compared to a fixed
hurdle rate of 1.75% per fiscal quarter. If
market interest rates rise, we may be able to invest our funds
in debt instruments that provide for a higher return, which
would increase our pre-incentive fee net operating income and
make it easier for TTG Advisers to surpass the fixed hurdle rate
and receive an incentive fee based on such net operating income.
Our pre-incentive fee net operating income used to calculate
this part of the incentive fee is also included in the amount of
our total assets (excluding Non-Eligible Assets, but including
assets purchased with borrowed funds that are not Non-Eligible
Assets) used to calculate the 2% Base Management Fee.
Under the Advisory Agreement, we pay TTG Advisers an incentive
fee with respect to our pre-incentive fee net operating income
in each fiscal quarter as follows:
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no incentive fee in any fiscal quarter in which our
pre-incentive fee net operating income does not exceed the
hurdle rate;
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100% of our pre-incentive fee net operating income with respect
to that portion of such pre-incentive fee net operating income,
if any, that exceeds the hurdle rate but is less than 2.1875% in
any fiscal quarter. We refer to this portion of our
pre-incentive fee net operating income (which exceeds the hurdle
rate but is less than 2.1875%) as the
catch-up.
The
catch-up
is meant to provide our investment adviser with 20% of our
pre-incentive fee net operating income as if a hurdle rate did
not apply if this net operating income exceeds 2.1875% in any
fiscal quarter; and
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20% of the amount of our pre-incentive fee net operating income,
if any, that exceeds 2.1875% in any fiscal quarter.
|
These calculations are appropriately pro rated for any period of
less than three months and adjusted for any share issuances or
repurchases during the current quarter.
The second part of the incentive fee (the Capital Gains
Fee) is determined and payable in arrears as of the end of
each fiscal year (or upon termination of the Advisory Agreement,
as of the termination date), commencing with the fiscal year
ending on October 31, 2007, and equals 20% of: (i) the
Companys aggregate net realized capital gains, during such
fiscal year, on the Companys investments made after
November 1, 2003 (the Companys New
Portfolio) (exclusive of any realized gains subject to an
SPV Incentive Allocation, as defined below); minus (ii) the
cumulative aggregate unrealized capital depreciation of the
Companys New Portfolio calculated from November 1,
2003. For purposes of this calculation, neither the
Companys contribution of an investment to MVC Partners nor
the Companys distribution of an investment to the
Companys stockholders shall be deemed to be a realization
event.
78
In addition, the Company has authorized TTG Advisers to create
or arrange for the creation of one or more special purpose
vehicles for which it may serve as the general partner or
managing member for purposes of making investments on behalf of
the Company (each, an SPV). It is proposed that TTG
Advisers, in its role as the general partner or managing member
of an SPV, receive an incentive allocation equal to 20% of the
net profits of the SPV (the SPV Incentive
Allocation). In no event would any SPV Incentive
Allocation received by TTG Advisers cause the total compensation
received by TTG Advisers under the Advisory Agreement to exceed
the limits imposed by the Investment Advisers Act of 1940, as
amended.
Notwithstanding the foregoing, in no event shall the sum of the
Capital Gains Fee and the SPV Incentive Allocation, if any, for
any fiscal year exceed: (i) 20% of (a) the
Companys cumulative realized capital gains on the
Companys investments (the Companys Total
Portfolio) (including any realized gains attributable to
an SPV Incentive Allocation), minus (b) the sum of the
Companys cumulative realized capital losses on, and
aggregate unrealized capital depreciation of, the Companys
Total Portfolio; minus (ii) the aggregate amount of Capital
Gains Fees paid and the value of SPV Incentive Allocations made
in all prior years (the Cap). For purposes of
calculating the Cap: (i) the initial value of any
investment held by the Company on November 1, 2003 shall
equal the fair value of such investment on November 1,
2003; and (ii) the initial value of any investment made by
the Company after November 1, 2003 shall equal the accreted
or amortized cost basis of such investment. Furthermore, in the
event that the Capital Gains Fee for any fiscal year exceeds the
Cap (Uncollected Capital Gains Fees), all or a
portion of such amount shall be accrued and payable to TTG
Advisers following any subsequent fiscal year in which the
Advisory Agreement is in effect, but only to the extent
the Capital Gains Fee, plus the amount of Uncollected Capital
Gains Fees, each calculated as of the end of such subsequent
fiscal year, do not exceed the Cap. Any remaining Uncollected
Capital Gains Fees shall be paid following subsequent fiscal
years in accordance with the same process, provided the Advisory
Agreement is in effect during such fiscal year.
Examples
of Incentive Fee Calculations
Example
1: Income Related Portion of Incentive Fee(1):
Assumptions
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Hurdle rate(2) = 1.75%
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|
Management fee(3) = 2.00%
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|
Other expenses (legal, accounting, custodian, transfer agent,
etc.)(4) = maximum value of 3.25% of the Companys average
net asset value including management fee
|
Alternative
1
Additional
Assumptions
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|
Operating income (including interest, dividends, fees, etc.) =
4.00%
|
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|
Pre-incentive fee net operating income
|
(operating income − (management fee + other expenses)) =
.075%
Pre-incentive fee net operating income does not exceed hurdle
rate, therefore there is no incentive fee.
Alternative
2
Additional
Assumptions
|
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|
|
Operating income (including interest, dividends, fees, etc.) =
5.25%
|
|
|
|
Pre-incentive fee net operating income
|
(operating income − (management fee + other expenses)) =
2.00%
Pre-incentive fee net operating income exceeds hurdle rate,
therefore there is an incentive fee.
79
|
|
|
|
|
Incentive Fee
|
|
=
|
|
100% ×
Catch-Up
+ the greater of 0% AND (20% × (pre-incentive fee
net operating income − 2.1875)%
|
|
|
=
|
|
(100% × (2.00% −
1.75%)) + 0%
|
|
|
=
|
|
0.25%
|
Alternative
3
Additional
Assumptions
|
|
|
|
|
Operating income (including interest, dividends, fees, etc.) =
6.00%
|
|
|
|
Pre-incentive fee net operating income
|
(operating income − (management fee + other expenses)) =
2.75%
Pre-incentive fee net operating income exceeds hurdle rate,
therefore there is an incentive fee.
|
|
|
|
|
Incentive Fee
|
|
=
|
|
100% ×
Catch-Up
+ the greater of 0% AND (20% × (pre-incentive fee
net operating income − 2.1875)%
|
|
|
=
|
|
(100% × (2.1875% −
1.75%)) + (20% × (2.75% − 2.1875%))
|
|
|
=
|
|
0.4375% + (20% × 0.5625%)
|
|
|
=
|
|
0.4375% + 0.1125%
|
|
|
=
|
|
0.55%
|
|
|
|
(1) |
|
The hypothetical amount of pre-incentive fee net operating
income shown is based on a percentage of total net assets. |
|
(2) |
|
Represents 1.75% annualized hurdle rate. |
|
(3) |
|
Represents 2.00% annualized management fee. |
|
(4) |
|
Excludes offering expenses. |
Example
2: Capital Gains Portion of Incentive Fee
Assumptions
Year 1 of the Advisory Agreement:
$20 million investment made in Company A (Investment
A), and $30 million investment made in Company B
(Investment B).
Legacy Investment I (Legacy I) is assumed from prior
management and has a cost basis of $5 million, and had a
fair market value (FMV) of $2 million at
November 1, 2003.
Legacy Investment II (Legacy II) is
assumed from prior management and has a cost basis of
$3 million, and had a FMV of $0 at November 1, 2003.
Year 2 of the Advisory Agreement:
Investment A is sold for $50 million, FMV of Investment B
is $32 million, FMV of Legacy I is $0 and FMV of
Legacy II is $2 million.
Year 3 of the Advisory Agreement:
FMV of Investment B is $32 million, Legacy I is written off
for no proceeds and a $5 million loss is realized and FMV
of Legacy II is $2 million.
Year 4 of the Advisory Agreement:
Investment B is sold for $32 million and Legacy II is
sold for $5 million.
80
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Compensation
Calculation (20% of:
net realized capital gains, during the fiscal year, on the
Companys New Portfolio minus the aggregate
unrealized capital depreciation on the Companys New
Portfolio calculated from November 1, 2003)
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Cap
Calculation ((a) 20% of
(i) cumulative net realized capital gains, calculated based
on the FMV of investments on November 1, 2003 for
investments made prior to that date and on accreted/amortized
cost for those investments made after November 1, 2003, on
the Companys Total Portfolio minus (ii) the
cumulative unrealized capital depreciation on the Companys
Total Portfolio calculated based on the FMV of investments on
November 1, 2003 for investments made prior to that date
and on accreted/amortized cost for those investments made after
November 1, 2003; minus, (b) the aggregate
amount of Capital Gains Fees paid in all prior years)
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Actual
Payout (the
Compensation Calculation plus any uncollected fees to the extent
they do not exceed the Cap Calculation)
|
Year 1
|
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|
20% of: ($0 realized capital gains
on the Companys New Portfolio minus $0 realized losses on
the Companys New Portfolio) minus ($0 aggregate
unrealized capital depreciation on the Companys New
Portfolio) = $0
|
|
|
(a) 20% of (i) ($0 cumulative
net realized capital gains on the Companys Total
Portfolio), minus (ii) ($2 million cumulative
unrealized capital depreciation (based on Legacy Is FMV
value at 11/1/03) on the Companys Total Portfolio);
minus, (b) ($0 in Capital Gains Fees paid in all
prior years) = $(2 million)
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$0
|
Year 2
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|
20% of: ($30 million realized
capital gains on the Companys New Portfolio minus $0
realized losses on the Companys New Portfolio)
minus ($0 aggregate unrealized capital depreciation on
the Companys New Portfolio) = $6 million
|
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|
(a) 20% of
(i) ($30 million cumulative net realized capital gains
on the Companys Total Portfolio) minus (ii)
($2 million cumulative unrealized capital depreciation
(based on Legacy Is FMV value at 11/1/03) on the
Companys Total Portfolio); minus, (b) ($0 in
Capital Gains Fees paid in all prior years) =
$5.6 million
|
|
|
$5.6 million
($400,000 (i.e., the Compensation Calculation minus the
Cap Calculation) is uncollected)
|
|
|
|
|
|
|
|
|
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|
81
|
|
|
|
|
|
|
|
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|
Year 3
|
|
|
20% of: ($0 realized capital gains
on the Companys New Portfolio minus $0 realized losses on
the Companys New Portfolio) minus ($0 aggregate
unrealized capital depreciation on the Companys New
Portfolio) = $0
|
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|
(a) 20% of
(i) ($28 million cumulative net realized capital gains
on the Companys Total Portfolio ($30 million on
Investment A and a realized loss of $2 million on Legacy I
based on the FMV on 11/1/2003)) minus (ii) ($0 cumulative
unrealized capital depreciation on the Companys Total
Portfolio); minus, (b) ($5.6 million in Capital
Gains Fees paid in all prior years) = $0
|
|
|
$0
($400,000 earned in Year 2 remains uncollected)
|
Year 4
|
|
|
20% of: ($2 million realized
capital gains on the Companys New Portfolio minus $0
realized losses on the Companys New Portfolio)
minus ($0 aggregate unrealized capital depreciation on
the Companys New Portfolio) = $400,000
|
|
|
(a) 20% of (i)($35 million
cumulative net realized capital gains on the Companys
Total Portfolio ($30 million on Investment A, a
$2 million realized gain on Investment B, a $5 million
realized gain on Legacy II based on the FMV on 11/1/2003
and a realized loss of $2 million on Legacy I based on the
FMV on 11/1/2003)) minus (ii) ($0 cumulative unrealized
capital depreciation on the Companys Total Portfolio);
minus, (b) ($5.6 million in Capital Gains Fees paid
in all prior years) = $1.4 million
|
|
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$800,000
($400,000 earned in Year 4 and the $400,000 that was uncollected
in Year 2 is paid out.)
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Payment
of our expenses
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
82
other insurance premiums; (xv) direct costs and expenses of
administration, including printing, mailing, long distance
telephone, copying, independent auditors and outside legal
costs; (xvi) the costs and expenses associated with the
establishment of an SPV; (xvii) the allocable portion of
the cost (excluding office space) of the Companys Chief
Financial Officer, Chief Compliance Officer and Secretary in an
amount not to exceed $100,000, per year, in the aggregate;
(xviii) subject to a cap of $150,000 in any fiscal year of
the Company, fifty percent of the unreimbursed travel and other
related (e.g., meals)
out-of-pocket
expenses (subject to item (ii) above) incurred by TTG
Advisers in sourcing investments for the Company; provided
that, if the investment is sourced for multiple clients of
TTG Advisers, then the Company shall only reimburse fifty
percent of its allocable pro rata portion of such expenses; and
(xix) all other expenses incurred by the Company in
connection with administering the Companys business
(including travel and other
out-of-pocket
expenses (subject to item (ii) above) incurred in providing
significant managerial assistance to a portfolio company).
Notwithstanding the foregoing, absent the consent of the Board,
any fees or income earned, on the Companys behalf, by any
officer, director, employee or agent of TTG Advisers in
connection with the monitoring or closing of an investment or
disposition by the Company or for providing managerial
assistance to a portfolio company (e.g., serving on the
board of directors of a portfolio company) shall inure to the
Company.
The
Expense Cap
In addition, for each of the next two full fiscal years
(i.e., the fiscal years 2007 and 2008), TTG Advisers has
agreed to absorb or reimburse operating expenses of the Company
(promptly following the completion of such year), to the extent
necessary to limit the Companys Expense Ratio for any such
year to 3.25% (the Expense Cap); provided
however, if, on October 31, 2007, the Companys
net assets have not increased by at least 5% from
October 31, 2006, the dollar value of the Expense Cap shall
increase by 5% for the fiscal year 2008. For purposes of this
paragraph, the Companys Expense Ratio is
calculated as of October 31 of any such year and means:
(i) the consolidated expenses of the Company (which
expenses include any amounts payable to TTG Advisers under the
Base Management Fee, but exclude the amount of any interest,
taxes, incentive compensation, and extraordinary expenses
(including, but not limited to, any legal claims and liabilities
and litigation costs and any indemnification related thereto,
and the costs of any spin-off or other similar type transaction
contemplated by the Advisory Agreement)), as a percentage of
(ii) the average net assets of the Company (i.e.,
average consolidated assets less average consolidated
liabilities) during such fiscal year as set forth in the
Companys financial statements contained in the
Companys annual report on
Form 10-K.
Indemnification
The Advisory Agreement provides that, absent willful
misfeasance, bad faith or gross negligence in the performance of
its duties or by reason of the reckless disregard of its duties
and obligations, TTG Advisers, its members and their respective
officers, managers, partners, agents, employees, controlling
persons, members and any other person or entity affiliated with
it (collectively, the Indemnified Parties) are
entitled to indemnification from the Company for any damages,
liabilities, costs and expenses (including reasonable
attorneys fees and amounts reasonably paid in settlement)
arising from the rendering of TTG Advisers services under
the Advisory Agreement or otherwise as an investment adviser of
the Company. In addition, TTG Advisers has agreed to indemnify
the Company for losses or damages arising out of the willful
misfeasance, bad faith or gross negligence in the performance of
an Indemnified Partys duties or by reason of the reckless
disregard of its duties and obligations under the Advisory
Agreement.
The
Spin-Off of a Subsidiary and Opportunities to Manage Other
Entities
As consideration for the Company entering into the Advisory
Agreement, TTG Advisers has acknowledged the parties
objective of having the Companys stockholders participate
in a portion of the revenues generated by private investment
funds managed by TTG Advisers. The Advisory Agreement provides
for the pursuit of a spin-off of MVC Partners to all of our
shareholders (on a pro-rata basis) (the Spin-Off).
It is contemplated that, after the spin-off, MVC Partners would,
together with TTG Advisers, own (directly or indirectly) the
manager
and/or
general partner (or managing member) of private investment
vehicles(a Private Fund General Partner). As a
result, our stockholders, as stockholders of the spun-off MVC
Partners, may have the opportunity to participate in a portion
of
83
the management fees and incentive compensation generated by
these vehicles. Further, the Advisory Agreement provides that a
Private Fund General Partner would be a general partner (or
managing member) of any private investment fund or other pooled
investment vehicle formed by TTG Advisers that has an investment
objective of investing in Targeted Investments.
The illustrations below depict the proposed structure of the
Company before and after the Spin-Off:
Before
Spin-Off
84
After
Spin-Off
Under this structure, Private Fund General Partners would
be entitled to the entire portion of incentive allocations made
by the investment funds they serve (provided that, a portion of
the allocation may be allocated to third parties not affiliated
with, and independent of, TTG Advisers). It has not yet been
determined the extent to which MVC Partners would share the
revenues generated from any Private Fund General Partner
and this percentage may vary depending on the nature and size of
the vehicles to be managed, among other factors. Furthermore,
the Board recognizes that following the Spin-Off, MVC Partners
may offer its shares to investors other than the Companys
stockholders which could potentially have the effect of diluting
our stockholders participation in the revenue generated by
Private Fund General Partners.
Following the Spin-Off, MVC Partners would be expected to
operate as a public company subject to the oversight and control
of a board of directors, a majority of whose members would be
independent of TTG Advisers. Details regarding the Spin-Off are
in the process of being considered and its specific terms will
be subject to the due diligence of, and the consideration and
approval by, the Board. It is expected that the material terms
will be disclosed in a registration statement filed with the
SEC. However, there can be no assurance that the Board will
approve the specific terms of the Spin-Off. As a result, it is
possible that the Board may determine not to proceed with the
Spin-Off.
Principal
Executive Officers
The following individual is the principal executive officer of
TTG Advisers. The principal business address of such person is
287 Bowman Avenue, Purchase, New York 10577.
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Name
|
|
Position
|
|
Principal Occupation
|
|
Michael Tokarz
|
|
Manager
|
|
The
principal occupations of Mr. Tokarz is set forth under
Management above.
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85
Duration
and Termination of Agreement
The Advisory Agreement was unanimously approved by the
independent directors on May 30, 2006 and by shareholders
at the annual meeting of shareholders on September 7, 2006.
It remains in effect for two years after the Effective Date, and
thereafter shall continue automatically for successive annual
periods, provided that such continuance is specifically approved
at least annually by: (i) the vote of the Board, or by the
vote of stockholders holding a majority of the outstanding
voting securities of the Company; and (ii) the vote of a
majority of the Companys directors who are not parties to
the Advisory Agreement and are not interested
persons (as such term is defined in Section 2(a)(19)
of the 1940 Act) of either the Company or TTG Advisers, in
accordance with the requirements of the 1940 Act. The Advisory
Agreement may be terminated at any time, without the payment of
any penalty, upon 60 days written notice, by:
(i) TTG Advisers in the event (a) a majority of the
current Independent Directors cease to serve as Directors of the
Company or (b) the Company undergoes a change in
control (as such term is defined by
Section 2(a)(9) of the 1940 Act) not caused by TTG
Advisers; (ii) TTG Advisers, following the initial two year
term of the Advisory Agreement; (iii) by the vote of the
stockholders holding a majority of the outstanding voting
securities of the Company (as such term is defined by
Section 2(a)(42) of the 1940 Act); or (iv) by the
action of the Companys Directors. Furthermore, the
Advisory Agreement shall automatically terminate in the event of
its assignment (as such term is defined for purposes
of Section 15(a)(4) of the 1940 Act).
Mr. Tokarzs
Commitment to the Company
TTG Advisers has entered into an agreement with Mr. Tokarz
pursuant to which Mr. Tokarz agreed to serve as the
portfolio manager primarily responsible for the
day-to-day
management of the Companys portfolio for the full
twenty-four calendar months following the Effective Date, absent
the occurrence of certain extraordinary events. In addition, the
Company and TTG Advisers have acknowledged that Mr. Tokarz
is the current Portfolio Manager of the Company and TTG Advisers
has covenanted that throughout the term of the Advisory
Agreement it will not undertake any action that would cause
Mr. Tokarz to cease to serve as the Companys primary
Portfolio Manager, including, without limitation, transferring
any controlling interest in TTG Advisers to another entity or
person.
CONTROL
PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of January 19, 2007, there were no persons that owned
25% or more of our outstanding voting securities, and no person
would be deemed to control us, as such term is defined in the
1940 Act.
The following table sets forth, as of January 19, 2007,
information with respect to the beneficial ownership of our
common stock by the shareholders who own more than 5% of our
outstanding shares of common stock. Unless otherwise indicated,
we believe that each beneficial owner set forth in the table has
sole voting and investment power. Beneficial ownership is
determined in accordance with the rules of the SEC and includes
voting or investment power with respect to the securities.
Ownership information for those persons who beneficially own 5%
or more of our shares of common stock is based upon schedules
filed by such persons with the SEC.
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Amount of
|
|
Percentage of
|
Shareholder Name and Address
|
|
Shares Owned
|
|
Company Held
|
|
The Anegada Master Fund Ltd
|
|
|
2,611,800
|
(1)
|
|
|
13.67
|
%
|
The Cuttyhunk Fund Limited
Tonga Partners, L.P.
TE Cannell Portfolio, Ltd.
c/o Cannell Capital LLC
150 California Street, 5th Floor
San Francisco, CA 94111
|
|
|
|
|
|
|
|
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QVT Financial LP
|
|
|
2,039,600
|
(2)
|
|
|
10.68
|
%
|
527 Madison Avenue,
8th Floor
New York, New York 10022
|
|
|
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|
|
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86
|
|
|
|
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|
|
|
|
|
|
Amount of
|
|
Percentage of
|
Shareholder Name and Address
|
|
Shares Owned
|
|
Company Held
|
|
Western Investment Hedged Partners
LP
|
|
|
1,372,400
|
(3)
|
|
|
7.88
|
%
|
Western Investment Institutional
Partners LLC
Western Investment Activism Partners LLC
Western Investment Total Return Master Fund Ltd. and
Arthur D. Lipson
c/o Western Investment LLC
2855 East Cottonwood Parkway
Suite 110
Salt Lake City, UT 84121
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|
|
|
|
|
|
|
|
Deutsche Bank AG
|
|
|
1,336,366
|
(4)
|
|
|
6.99
|
%
|
Taunusanlage 12
D-60325 Frankfurt am Main
Federal Republic of Germany
|
|
|
|
|
|
|
|
|
Millenco, L.P.
|
|
|
1,369,770
|
(5)
|
|
|
7.17
|
%
|
Millennium Global Estate, L.P.
Millennium USA, L.P.
Millennium Partners, L.P and
Millennium International, Ltd.
c/o Millennium Management, LLC
666 Fifth Avenue, 8th Floor
New York, NY 10103
|
|
|
|
|
|
|
|
|
Wynnefield Partners Small Cap
Value, L.P
|
|
|
1,189,600
|
(6)
|
|
|
6.23
|
%
|
Wynnefield Partners Small Cap
Value, L.P I
Wynnefield Small Cap Value Offshore Fund, Ltd.
Channel Partnership II, L.P.
Wynnefield Capital Management, LLC
Wynnefield Capital, Inc.
Nelson Obus
c/o Wynnefield Capital Management LLC
450 Seventh Avenue
Suite 509
New York, NY 10123
|
|
|
|
|
|
|
|
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MFP Investors, LLC
|
|
|
999,700
|
(7)
|
|
|
5.23
|
%
|
51 John F. Kennedy Parkway,
2nd Floor
Short Hills, NJ 07078
|
|
|
|
|
|
|
|
|
Interested
Director
|
|
|
|
|
|
|
|
|
Michael Tokarz
|
|
|
407,773
|
|
|
|
2.14
|
%
|
Independent Directors
|
|
|
|
|
|
|
|
|
Emilio Dominianni
|
|
|
10,000
|
|
|
|
*
|
|
Gerald Hellerman
|
|
|
23,729
|
|
|
|
*
|
|
Robert Knapp(8)
|
|
|
1,492,470
|
|
|
|
7.81
|
%
|
William Taylor
|
|
|
20,048
|
|
|
|
|
|
Executive Officers
|
|
|
|
|
|
|
|
|
Bruce Shewmaker
|
|
|
3,601
|
|
|
|
*
|
|
Peter Seidenberg
|
|
|
1,929
|
|
|
|
*
|
|
Scott Schuenke
|
|
|
334
|
|
|
|
*
|
|
Jaclyn Shapiro
|
|
|
1,000
|
|
|
|
*
|
|
All directors and executive
officers as a group (9 in total)
|
|
|
1,960,884
|
|
|
|
10.44
|
%
|
87
|
|
|
* |
|
Less than 1%. |
|
(1) |
|
Based upon information contained in Form 4 filed with the
SEC on January 9, 2007. |
|
(2) |
|
Based upon information contained in Schedule 13G filed with
the SEC on December 8, 2005. This amount includes
1,336,366 shares where Deutsche Bank AG is the beneficial
owner of the shares. |
|
(3) |
|
Based upon information contained in Schedule 13G/A filed
with the SEC on February 14, 2006. |
|
(4) |
|
Based upon information contained in Schedule 13G filed with
the SEC on January 31, 2006. See footnote (2) above. |
|
(5) |
|
Based upon information contained in Schedule 13D/A filed
with the SEC on December 1, 2005. |
|
(6) |
|
Based upon information contained in Schedule 13G/A filed
with the SEC on February 14, 2006. |
|
(7) |
|
Based upon information contained in Schedule 13G/A filed
with the SEC on January 20, 2005. |
|
(8) |
|
1,369,770 shares are owned by Millennium Partners, L.P.
and/or its
affiliates (Millennium). Mr. Knapp is an
officer of Millennium. Mr. Knapp has disclaimed all
beneficial ownership in these shares to the extent permitted
under applicable law. |
FEDERAL
INCOME TAX MATTERS
This summary of certain aspects of the federal income tax
treatment of the Company and its shareholders is based upon the
Code, judicial decisions, Treasury Regulations and rulings in
existence on the date hereof, all of which are subject to
change. This summary does not discuss the impact of various
proposals to amend the Code which could change certain of the
tax consequences of an investment in shares of our common stock.
You should consult your own tax adviser with respect to the tax
considerations applicable to the holding of shares of our common
stock. This discussion does not address all aspects of federal
income taxation relevant to holders of our common stock in light
of their personal circumstances, or to certain types of holders
subject to special treatment under federal income tax laws,
including foreign taxpayers. This discussion does not address
any aspects of foreign, state or local tax laws. The Company is
actively managed and its investment strategies may be employed
without regard to the tax consequences of the Companys
transactions on the Companys shareholders.
We intend to qualify for treatment as a RIC under Subchapter M
of the Code. To qualify for such treatment, we must distribute
to our shareholders for each taxable year at least 90% of
(i) our investment company taxable income (consisting
generally of net investment income from interest and dividends
and net short term capital gains) and (ii) our net
tax-exempt interest, if any. We must also meet several
additional requirements, including:
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At least 90% of our gross income for each taxable year must be
from dividends, interest, payments with respect to securities
loans, and gains from sales or other disposition of stock,
securities or foreign currencies, other income derived with
respect to our business of investing in such stock, securities
or currencies, or net income derived from an interest in a
qualified publicly traded partnership (generally, a
publicly traded partnership other than one where at least 90% of
its gross income is gross income that would otherwise be
qualifying gross income for a RIC),
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As diversification requirements, as of the close of each quarter
of our taxable year:
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at least 50% of the value of our assets must consist of cash,
cash items, U.S. government securities, the securities of
other RICs and other securities to the extent that (1) we
do not hold more than 10% of the outstanding voting securities
of an issuer of such other securities and (2) such other
securities of any one issuer do not represent more than 5% of
our total assets, and
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no more than 25% of the value of our total assets may be
invested in the securities of one issuer (other than
U.S. government securities or the securities of other
RICs), of two or more issuers that are controlled by us and are
engaged in the same or similar or related trades or businesses,
or of one or more qualified publicly traded partnerships.
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If we were unable to qualify for treatment as a RIC, we would be
subject to tax on our ordinary income and capital gains
(including gains realized on the distribution of appreciated
property) at regular corporate rates. We
88
would not be able to deduct distributions to shareholders, nor
would they be required to be made. Distributions would be
taxable to our shareholders as ordinary dividend income to the
extent of our current and accumulated earnings and profits.
Subject to certain limitations under the Code, corporate
distributees would be eligible for the dividends received
deduction and individual distributees would qualify for the
reduced tax rates applicable to qualified dividends.
Distributions in excess of current and accumulated earnings and
profits would be treated first as a return of capital to the
extent of the shareholders tax basis, and any remaining
distributions would be treated as a gain realized from the sale
or exchange of property. If the Company fails to meet the
requirements of Subchapter M for more than two consecutive
taxable years and then seeks to requalify under Subchapter M, it
may be required to recognize gain to the extent of any
unrealized appreciation on its assets. In that case, any gain
recognized by the Company likely would be distributed to
shareholders as a taxable distribution.
If we qualify as a RIC and distribute to shareholders each year
in a timely manner the sum of (i) at least 90% of our
investment company taxable income as defined in the
Code and (ii) at least 90% of our net tax-exempt interest,
if any, we will not be subject to federal income tax on the
portion of our taxable income and gains we distribute to
shareholders. In addition, if we distribute in a timely manner
the sum of (i) 98% of our ordinary income for each calendar
year, (ii) 98% of our capital gain net income for the
one-year period ending October 31 in that calendar year and
(iii) any income not distributed in prior years, we will
not be subject to the 4% nondeductible federal excise tax on
certain undistributed income of RICs. We will be subject to
regular corporate income tax (currently at rates up to 35%) on
any undistributed net investment income and any undistributed
net capital gain. We will also be subject to alternative minimum
tax, but any tax preference items would be apportioned between
us and our shareholders in the same proportion that dividends
(other than capital gain dividends) paid to each shareholder
bear to our taxable income determined without regard to the
dividends paid deduction.
The Companys net realized capital gains from securities
transactions will be distributed only after reducing such gains
by the amount of any available capital loss carryforwards.
Capital losses may be carried forward to offset any capital
gains for eight years, after which any undeducted capital loss
remaining is lost as a deduction. As of October 31, 2006,
the Company had a net capital loss carryforward of approximately
$73.5 million, of which approximately $28.2 million
will expire in the year 2010, approximately $4.2 million
will expire in the year 2011, approximately $37.8 million
will expire in the year 2012 and approximately $3.3 million
will expire in the year 2013. To the extent future capital gains
are offset by capital loss carryforwards, such gains need not be
distributed. Capital loss carryforwards may be subject to
additional limitations as a result of capital share activity. As
of October 31, 2006, the Company also had net unrealized
capital loss carryforwards of approximately $11.6 million,
which is not included in the aforementioned net capital loss
carryforwards balance. The deductibility of such losses upon
realization may be subject to limitations as a result of the
capital share activity.
If we acquire debt obligations that were originally issued at a
discount, or that bear interest at rates that are not fixed (or
certain qualified variable rates) or that is not
payable, or payable at regular intervals over the life of the
obligation, we will be required to include in taxable income
each year a portion of the original issue discount
that accrues over the life of the obligation, regardless of
whether the income is received by us, and may be required to
make distributions in order to continue to qualify as a RIC or
to avoid the 4% excise tax on certain undistributed income. In
this event, we may be required to sell temporary investments or
other assets to meet the distribution requirements.
For any period during which we qualify for treatment as a RIC
for federal income tax purposes, distributions to shareholders
attributable to our ordinary income (including dividends,
interest and original issue discount) and net short-term capital
gains generally will be taxable as ordinary income to
shareholders to the extent of our current or accumulated
earnings and profits, except to the extent the we receive
qualified dividends and designate such amounts for
individual shareholders as qualified dividends. The
lower tax rate for qualified dividends (currently a
maximum rate of 15%) will apply only if the individual
shareholder holds shares in the Company, and the Company holds
shares in the dividend-paying corporation, at least 61 days
during a prescribed period. The prescribed period is the
121-day
period beginning 60 days before the date on which the
shareholder or the Company, as the case may be, becomes entitled
to receive the dividend. In determining the holding period for
this purpose, any period during which the recipients risk
of loss is offset by means of options, short sales or similar
transactions is not counted. Additionally, an individual
shareholder would not benefit to the extent it is obligated
(e.g., pursuant to a short sale) to make related payments with
respect to positions in substantially similar or related
property.
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Corporate shareholders are generally eligible for the 70%
dividends-received deduction with respect to ordinary income
(but not capital gain) dividends to the extent such amount
designated by us does not exceed the dividends received by us
from domestic corporations. A corporate shareholders
dividends-received deduction will be disallowed unless it holds
shares in the Company, and the Company holds shares in the
dividend-paying corporation, at least 46 days during the
91-day
period beginning 45 days before the date on which the
shareholder or the Company, as the case may be, becomes entitled
to receive the dividend. In determining the holding period for
this purpose, any period during which the recipients risk
of loss is offset by means of options, short sales or similar
transactions is not counted. Additionally, a corporate
shareholder would not benefit to the extent it is obligated
(e.g., pursuant to a short sale) to make related payments with
respect to positions in substantially similar or related
property. Furthermore, the dividends-received deduction will be
disallowed to the extent a corporate shareholders
investment in shares of the Company, or the Companys
investment in the shares of the dividend-paying corporation, is
financed with indebtedness.
Distributions in excess of our earnings and profits will first
be treated as a return of capital which reduces the
shareholders adjusted basis in his or her shares of common
stock and then as gain from the sale of shares of our common
stock. Distributions of our net long-term capital gains
(designated by us as capital gain dividends) will be taxable to
shareholders as long-term capital gains regardless of the
shareholders holding period in his or her common stock.
Any dividend declared by us in October, November or December of
any calendar year, payable to shareholders of record on a
specified date in such a month and actually paid during January
of the following year, will be treated as if it were paid by us
and received by the shareholders on December 31 of the year
in which it was declared. In addition, we may elect to relate a
dividend back to the prior taxable year if we (i) declare
such dividend prior to the due date (including extensions) for
filing our return for that taxable year, (ii) make the
election in that return, and (iii) distribute the amount in
the 12-month
period following the close of the taxable year but not later
than the first regular dividend payment following the
declaration. Any such election will not alter the general rule
that a shareholder will be treated as receiving a dividend in
the taxable year in which the distribution is made (subject to
the October, November, December rule described above).
To the extent that we retain any capital gains, we may designate
them as deemed distributions and pay a tax thereon
for the benefit of our shareholders. In that event, the
shareholders report their share of retained realized long-term
capital gains on their individual tax returns as if the share
had been received, and report a credit for the tax paid thereon
by us. The amount of the deemed distribution net of such tax is
then added to the shareholders cost basis for his or her
common stock. Since we expect to pay tax on capital gains at
regular corporate tax rates and the maximum rate payable by
individuals on such gains can currently be as low as 15%, the
amount of credit that individual shareholders may report is
expected to exceed the amount of tax that they would be required
to pay on long-term capital gains. Shareholders who are not
subject to federal income tax or tax on long-term capital gains
should be able to file a return on the appropriate form or a
claim for refund that allows them to recover the taxes paid on
their behalf.
Section 1202 of the Code permits the exclusion, for federal
income tax purposes, of 50% of any gain (subject to certain
limitations) realized upon the sale or exchange of
qualified small business stock held for more than
five years. Generally, qualified small business stock is stock
of a small business corporation acquired directly from the
issuing corporation, which must (i) at the time of issuance
and immediately thereafter have assets of not more than
$50 million and (ii) throughout substantially all of
the holders holding period for the stock be actively
engaged in the conduct of a trade or business not excluded by
law. If we acquire qualified small business stock, hold such
stock for five years and dispose of such stock at a profit, a
noncorporate shareholder who held shares of our common stock at
the time we purchased the qualified small business stock and at
all times thereafter until we disposed of the stock would be
entitled to exclude from such shareholders taxable income
50% of such shareholders share of such gain. Seven percent
(7%) of any amount so excluded would currently be treated as a
preference item for alternative minimum tax purposes. Comparable
rules apply under the qualified small business stock
rollover provisions of section 1045 of the
Code, under which gain otherwise reportable by individuals with
respect to sales by us of qualified small business stock held
for more than six months can be deferred if we reinvest the
sales proceeds within 60 days in other qualified small
business stock.
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A shareholder may recognize taxable gain or loss if the
shareholder sells or exchanges such shareholders shares of
common stock. Any gain arising from the sale or exchange of
common stock generally will be treated as capital gain or loss
if the common stock is held as a capital asset, and will be
treated as long-term capital gain or loss if the shareholder has
held his or her shares of common stock for more than one year.
However, any capital loss arising from a sale or exchange of
shares of common stock held for six months or less will be
treated as a long-term capital loss to the extent of the amount
of long-term capital gain distributions received (or deemed to
be received) with respect to such shares of common stock.
Pursuant to recently issued Treasury Regulations directed at tax
shelter activity, taxpayers are required to disclose to the
Internal Revenue Service (the IRS), certain
information on Form 8886 if they participate in a
reportable transaction. A transaction may be a
reportable transaction based upon any of several
indicia with respect to a shareholder, including the existence
of significant book-tax differences or the recognition of a loss
in excess of certain thresholds. Under new legislation a
significant penalty is imposed on taxpayers who participate in a
reportable transaction and fail to make the required
disclosure. Investors should consult their own tax advisors
concerning any possible federal, state or local disclosure
obligations with respect to their investment in shares of the
Company.
We may be required to withhold U.S. federal income tax at
the rate of 28% of all taxable distributions payable to
shareholders who fail to provide us with their correct taxpayer
identification number or a certificate that the shareholder is
exempt from backup withholding, or if the IRS notifies us that
the shareholder is subject to backup withholding. Any amounts
withheld may be credited against a shareholders
U.S. federal income tax liability.
There is generally no withholding tax to a shareholder who is
not a U.S. person within the meaning of the Code
(Non-U.S. Person)
(i) on the portion of the Companys distributions that
consist of long-term capital gains realized by the Company, and
(ii) for the Companys taxable years beginning after
December 31, 2004 and before January 1, 2008, on the
portion of the Companys distributions that we designate as
short-term capital gain dividends or interest-related
dividends (generally, dividends attributable to net
interest income from U.S. sources that would not result in
U.S. withholding taxes if earned directly by the
shareholder), in all cases provided that such distributions are
not effectively connected with the conduct of a trade or
business in the U.S. by such
Non-U.S. Person.
However, the remaining distributions to
Non-U.S. Persons
are generally subject to a 30% withholding tax, unless reduced
or eliminated by treaty. Other rules may apply to
Non-U.S. Persons
(i) whose income from the Company is effectively connected
with the conduct of a U.S. trade or business by such
Non-U.S. Person
or (ii) to the extent the Company makes distributions prior
to January 1, 2008 if such distributions are attributable
to dispositions of United States real property interests (e.g.,
investments in certain real estate investment trusts); such
investors should consult with their own advisers regarding those
rules.
If we distribute our net capital gains in the form of deemed
rather than actual distributions, a
Non-U.S. Person
will be entitled to a U.S. federal income tax credit or tax
refund equal to the shareholders allocable share of the
corporate-level tax we pay on the capital gains deemed to have
been distributed; however, in order to obtain the refund, the
Non-U.S. Person
must obtain a U.S. taxpayer identification number and file
a U.S. federal income tax return even if the
Non-U.S. Person
would not otherwise be required to obtain a U.S. taxpayer
identification number or file a U.S. federal income tax
return.
A tax-exempt U.S. person investing in the Company will not
realize unrelated business taxable income with respect to an
unleveraged investment in shares. Tax-exempt U.S. persons
are urged to consult their own tax advisors concerning the
U.S. tax consequences of an investment in the Company.
From time to time, the Company may be considered under the Code
to be a nonpublicly offered regulated investment company. Under
Temporary Regulations, certain expenses of nonpublicly offered
regulated investment companies, including advisory fees, may not
be deductible by certain shareholders, generally including
individuals and entities that compute their taxable income in
the same manner as an individual (thus, for example, a qualified
pension plan is not subject to this rule). Such a
shareholders pro rata portion of the affected expenses,
including the management fee and incentive fee payable to the
manager, will be treated as an additional dividend to the
shareholder and will be deductible by such shareholder, subject
to the 2% floor on miscellaneous itemized deductions
and other limitations on itemized deductions set forth in the
Code. A nonpublicly offered regulated investment
company is a RIC whose shares are neither
(i) continuously offered pursuant to a public offering,
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(ii) regularly traded on an established securities market
nor (iii) held by at least 500 persons at all times during
the taxable year.
Unless an exception applies, we will mail to each shareholder,
as promptly as possible after the end of each fiscal year, a
notice detailing, on a per distribution basis, the amounts
includible in such shareholders taxable income for such
year as net investment income, as net realized capital gains (if
applicable) and as deemed distributions of capital
gains, including taxes paid by us with respect thereto. In
addition, absent an exemption, the federal tax status of each
years distributions will be reported to the IRS.
Distributions may also be subject to additional state, local and
foreign taxes depending on each shareholders particular
situation. Shareholders should consult their own tax advisers
with respect to the particular tax consequences to them of an
investment in us.
Under our Plan, all cash distributions to shareholders will be
automatically reinvested in additional whole and fractional
shares of our common stock unless you elect to receive cash. For
federal income tax purposes, however, you will be deemed to have
constructively received cash and such amounts should be included
in your income to the extent such constructive distribution
otherwise represents a taxable dividend for the year in which
such distribution is credited to your account. The amount of the
distribution is the value of the shares of common stock acquired
through the dividend reinvestment plan.
CERTAIN
GOVERNMENT REGULATIONS
We operate in a highly regulated environment. The following
discussion generally summarizes certain government regulations.
Business Development Company. A business
development company is defined and regulated by the 1940 Act. A
business development company must be organized in the United
States for the purpose of investing in or lending to primarily
private companies and making managerial assistance available to
them. A business development company may use capital provided by
public shareholders and from other sources to invest in
long-term, private investments in businesses.
As a business development company, we may not acquire any asset
other than qualifying assets unless, at the time we
make the acquisition, the value of our qualifying assets
represent at least 70% of the value of our total assets. The
principal categories of qualifying assets relevant to our
business are:
(1) Securities purchased in transactions not involving any
public offering from the issuer of such securities, which issuer
(subject to certain limited exceptions) is an eligible portfolio
company, or from any person who is, or has been during the
preceding 13 months, an affiliated person of an eligible
portfolio company, or from any other person, subject to such
rules as may be prescribed by the SEC. An eligible
portfolio company is defined in the 1940 Act as any issuer
which:
(a) is organized under the laws of, and has its principal
place of business in, the United States;
(b) is not an investment company (other than a small
business investment company wholly owned by the business
development company) or a company that would be an investment
company but for certain exclusions under the 1940 Act; and
(c) satisfies any of the following:
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does not have any class of securities with respect to which a
broker or dealer may extend margin credit;
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is controlled by a business development company or a group of
companies including a business development company and the
business development company has an affiliated person who is a
director of the eligible portfolio company; or
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is a small and solvent company having total assets of not more
than $4 million and capital and surplus of not less than
$2 million.
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The SEC recently adopted
Rules 2a-46
and 55a-1
under the 1940 Act, which together expand the foregoing
definition of eligible portfolio company to include,
among others, U.S. operating companies that do not have a
class of securities listed on a national exchange.
(2) Securities of any eligible portfolio company which we
control.
(3) Securities purchased in a private transaction from a
U.S. issuer that is not an investment company or from an
affiliated person of the issuer, or in transactions incident
thereto, if the issuer is in bankruptcy and subject to
reorganization or if the issuer, immediately prior to the
purchase of its securities was unable to meet its obligations as
they came due without material assistance other than
conventional lending or financing arrangements.
(4) Securities of an eligible portfolio company purchased
from any person in a private transaction if there is no ready
market for such securities and we already own 60% of the
outstanding equity of the eligible portfolio company.
(5) Securities received in exchange for or distributed on
or with respect to securities described in (1) through
(4) above, or pursuant to the exercise of warrants or
rights relating to such securities.
(6) Cash, cash equivalents, U.S. Government securities
or high-quality debt maturing in one year or less from the time
of investment.
To include certain securities described above as qualifying
assets for the purpose of the 70% test, a business development
company must make available to the issuer of those securities
significant managerial assistance such as providing significant
guidance and counsel concerning the management, operations, or
business objectives and policies of a portfolio company, or
making loans to a portfolio company. We offer to provide
managerial assistance to each of our portfolio companies.
As a business development company, we are entitled to issue
senior securities in the form of stock or senior securities
representing indebtedness, including debt securities and
preferred stock, as long as each class of senior security has an
asset coverage ratio of at least 200% immediately after each
such issuance. See Risk Factors. We may also be
prohibited under the 1940 Act from knowingly participating in
certain transactions with our affiliates without the prior
approval of our Independent Directors and, in some cases, prior
approval by the SEC. On July 11, 2000, the SEC granted us
an exemptive order permitting us to make co-investments with
certain of our affiliates in portfolio companies, subject to
various conditions. During the last completed fiscal year, the
Company did not engage in any transactions pursuant to this
order.
As with other companies regulated by the 1940 Act, a business
development company must adhere to certain other substantive
ongoing regulatory requirements. A majority of our directors
must be persons who are not interested persons, as
that term is defined in the 1940 Act. Additionally, we are
required to provide and maintain a bond issued by a reputable
fidelity insurance company to protect the business development
company. Furthermore, as a business development company, we are
prohibited from protecting any director or officer against any
liability to the company or our shareholders arising from
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such
persons office.
We and TTG Advisers maintain a code of ethics that establishes
procedures for personal investment and restricts certain
transactions by our personnel. The code of ethics generally does
not permit investment by our employees in securities that may be
purchased or held by us. You may read and copy the code of
ethics at the SECs Public Reference Room in
Washington, D.C. You may obtain information on operations
of the Public Reference Room by calling the SEC at
(202) 942-8090.
In addition, the code of ethics is available on the EDGAR
Database on the SEC Internet site at http://www.sec.gov. You may
obtain copies of the code of ethics, after paying a duplicating
fee, by electronic request at the following email address:
publicinfo@sec.gov, or by writing to the SECs Public
Reference Section, 100 F Street, NE, Washington, D.C. 20549.
We may not change the nature of our business so as to cease to
be, or withdraw our election as, a business development company
unless authorized by vote of a majority of the outstanding
voting securities, as defined in the 1940 Act, of our
shares. A majority of the outstanding voting securities of a
company is defined by the 1940 Act as the lesser of:
(i) 67% or more of such companys shares present at a
meeting if more than 50% of the outstanding
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shares of such company are present and represented by proxy, or
(ii) more than 50% of the outstanding shares of such
company.
We are periodically examined by the SEC for compliance with the
1940 Act.
DIVIDEND
REINVESTMENT PLAN
All of our shareholders who hold shares of common stock in their
own name will automatically be enrolled in our dividend
reinvestment plan (the Plan). All such shareholders
will have any cash dividends and distributions automatically
reinvested by Computershare Ltd. (f/k/a Equiserve) (the
Plan Agent), in additional shares of our common
stock. Any shareholder may, of course, elect to receive his or
her dividends and distributions in cash. Currently, the Company
has a policy of seeking to pay quarterly dividends to
shareholders. For any of our shares that are held by banks,
brokers or other entities that hold our shares as nominees for
individual shareholders, the Plan Agent will administer the Plan
on the basis of the number of shares certified by any nominee as
being registered for shareholders that have not elected to
receive dividends and distributions in cash. To receive your
dividends and distributions in cash, you must notify the Plan
Agent.
The Plan Agent serves as agent for the shareholders in
administering the Plan. When we declare a dividend or
distribution payable in cash or in additional shares of our
common stock, those shareholders participating in the dividend
reinvestment plan will receive their dividend or distribution in
additional shares of our common stock. Such shares will be
either newly issued by us or purchased in the open market by the
Plan Agent. If the market value of a share of our common stock
on the payment date for such dividend or distribution equals or
exceeds the net asset value per share on that date, we will
issue new shares at the net asset value. If the net asset value
exceeds the market price of our common stock, the Plan Agent
will purchase in the open market such number of shares of our
common stock as is necessary to complete the distribution.
The Plan Agent will maintain all shareholder accounts in the
Plan and furnish written confirmation of all transactions.
Shares of our common stock in the Plan will be held in the name
of the Plan Agent or its nominee and such shareholder will be
considered the beneficial owner of such shares for all purposes.
There is no charge to shareholders for participating in the Plan
or for the reinvestment of dividends and distributions. We will
not incur brokerage fees with respect to newly issued shares
issued in connection with the Plan. Shareholders will, however,
be charged a pro rata share of any brokerage fee charged for
open market purchases in connection with the Plan.
We may terminate the Plan upon providing written notice to each
shareholder participating in the Plan at least 60 days
prior to the effective date of such termination. We may also
materially amend the Plan at any time upon providing written
notice to shareholders participating in the Plan at least
30 days prior to such amendment (except when necessary or
appropriate to comply with applicable law or rules and policies
of the SEC or other regulatory authority). You may withdraw from
the Plan upon providing notice to the Plan Agent. You may obtain
additional information about the Plan from the Plan Agent.
DESCRIPTION
OF SECURITIES
The following summary of our capital stock and other securities
does not purport to be complete and is subject to, and qualified
in its entirety by, our Certificate of Incorporation.
Our authorized capital stock is 150 million shares,
$0.01 par value.
Common
Stock
At October 31, 2006, there were 19,093,929 shares of
common stock outstanding and 4,052,019 shares of common
stock in our treasury. To date, no other classes of stock have
been issued.
All shares of common stock have equal rights as to earnings,
assets, dividends and voting privileges and all outstanding
shares of common stock are fully paid and non-assessable.
Distributions may be paid to the holders of common stock if and
when declared by our board of directors out of funds legally
available therefore. Our common
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stock has no preemptive, conversion, or redemption rights and is
freely transferable. In the event of liquidation, each share of
common stock is entitled to share ratably in all of our assets
that are legally available for distributions after payment of
all debts and liabilities and subject to any prior rights of
holders of preferred stock, if any, then outstanding. Each share
of common stock is entitled to one vote and does not have
cumulative voting rights, which means that holders of a majority
of the shares, if they so choose, could elect all of the
directors, and holders of less than a majority of the shares
would, in that case, be unable to elect any director. All shares
of common stock offered hereby will be, when issued and paid
for, fully paid and non-assessable.
Preferred
Stock
In addition to shares of common stock, we may issue preferred
stock. Our board of directors is authorized to provide for the
issuance of preferred stock with such preferences, powers,
rights and privileges as the board deems appropriate; except
that, such an issuance must adhere to the requirements of the
1940 Act. The 1940 Act requires, among other things, that
(i) immediately after issuance and before any distribution
is made with respect to common stock, the preferred stock,
together with all other senior securities, must not exceed an
amount equal to 50% of our total assets; and (ii) the
holders of shares of preferred stock, if any are issued, must be
entitled as a class to elect two directors at all times and to
elect a majority of the directors if dividends on the preferred
stock are in arrears by two years or more. We believe the
availability of such stock will provide us with increased
flexibility in structuring future financings and acquisitions.
If we offer preferred stock under this prospectus, we will issue
an appropriate prospectus supplement. You should read that
prospectus supplement for a description of the preferred stock,
including, but not limited to, whether there will be an
arrearage in the payment of dividends or sinking fund
installments, if any, restrictions with respect to the
declaration of dividends, requirements in connection with the
maintenance of any ratio or assets, or creation or maintenance
of reserves, or provisions for permitting or restricting the
issuance of additional securities.
Warrants
We may issue warrants to purchase shares of our common stock.
Such warrants may be issued independently or together with
shares of common stock and may be attached or separate from such
shares of common stock. We will issue each series of warrants
under a separate warrant agreement to be entered into between us
and a warrant agent. The warrant agent will act solely as our
agent and will not assume any obligation or relationship of
agency for or with holders or beneficial owners of warrants.
Particular terms of any warrants we offer will be described in
the prospectus supplement relating to such warrants.
Under the 1940 Act, we may generally only offer warrants
provided that (i) the warrants expire by their terms within
ten years; (ii) the exercise or conversion price is not
less than the current market value at the date of issuance;
(iii) our shareholders authorize the proposal to issue such
warrants, and our board of directors approves such issuance on
the basis that the issuance is in the best interests of MVC
Capital and its shareholders; and (iv) if the warrants are
accompanied by other securities, the warrants are not separately
transferable unless no class of such warrants and the securities
accompanying them has been publicly distributed. The 1940 Act
also generally provides that the amount of our voting securities
that would result from the exercise of all outstanding warrants
at the time of issuance may not exceed 25% of our outstanding
voting securities.
Debt
Securities
We may issue debt securities that may be senior or subordinated
in priority of payment. We will provide a prospectus supplement
that describes the ranking, whether senior or subordinated, the
specific designation, the aggregate principal amount, the
purchase price, the maturity, the redemption terms, the interest
rate or manner of calculating the interest rate, the time of
payment of interest, if any, the terms for any conversion or
exchange, including the terms relating to the adjustment of any
conversion or exchange mechanism, the listing, if any, on a
securities exchange, the name and address of the trustee and any
other specific terms of the debt securities.
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Limitation
on Liability of Directors
We have adopted provisions in our certificate of incorporation
limiting the liability of our directors for monetary damages.
The effect of these provisions in the certificate of
incorporation is to eliminate the rights of MVC Capital and its
shareholders (through shareholders derivative suits on our
behalf) to recover monetary damages against a director for
breach of the fiduciary duty of care as a director or officer
(including breaches resulting from negligent behavior) except in
certain limited situations. These provisions do not limit or
eliminate the rights of MVC Capital or any shareholder to seek
non-monetary relief such as an injunction or rescission in the
event of a breach of a directors or officers duty of
care. These provisions will not alter the liability of directors
or officers under federal securities laws.
PLAN OF
DISTRIBUTION
We may sell the securities in any of three ways (or in any
combination): (i) through underwriters or dealers;
(ii) directly to a limited number of purchasers or to a
single purchaser; or (iii) through agents. The securities
may be sold
at-the-market
to or through a market maker or into an existing trading market
for the securities, on an exchange or otherwise. The prospectus
supplement will set forth the terms of the offering of such
securities, including:
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the name or names of any underwriters, dealers or agents and the
amounts of securities underwritten or purchased by each of them;
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the offering price of the securities and the proceeds to us and
any discounts, commissions or concessions allowed or reallowed
or paid to dealers; and
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any securities exchanges on which the securities may be listed.
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Any offering price and any discounts or concessions allowed or
reallowed or paid to dealers may be changed from time to time.
If underwriters are used in the sale of any securities, the
securities will be acquired by the underwriters for their own
account and may be resold from time to time in one or more
transactions, including negotiated transactions, at a fixed
public offering price or at varying prices determined at the
time of sale. The securities may be either offered to the public
through underwriting syndicates represented by managing
underwriters, or directly by underwriters. Generally, the
underwriters obligations to purchase the securities will
be subject to certain conditions precedent. The underwriters
will be obligated to purchase all of the securities if they
purchase any of the securities.
The offering of securities by the Company pursuant to this
prospectus will be reviewed by the NASD under Rule 2810.
The maximum commission or discount to be received by any member
of the National Association of Securities Dealers, Inc. or
broker-dealer will not be greater than 10% for the sale of any
securities being registered and 0.5% for due diligence.
We may sell the securities through agents from time to time. The
prospectus supplement will name any agent involved in the offer
or sale of the securities and any commissions we pay to them.
Generally, any agent will be acting on a best efforts basis for
the period of its appointment.
We may authorize underwriters, dealers or agents to solicit
offers by certain purchasers to purchase the securities from us
at the public offering price set forth in the prospectus
supplement pursuant to delayed delivery contracts providing for
payment and delivery on a specified date in the future. The
contracts will be subject only to those conditions set forth in
the prospectus supplement, and the prospectus supplement will
set forth any commissions we pay for soliciting these contracts.
Agents and underwriters may be entitled to indemnification by us
against certain civil liabilities, including liabilities under
the Securities Act of 1933 or to contribution with respect to
payments which the agents or underwriters may be required to
make in respect thereof. Agents and underwriters may be
customers of, engage in transactions with, or perform services
for us in the ordinary course of business.
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We may enter into derivative transactions with third parties, or
sell securities not covered by this prospectus to third parties
in privately negotiated transactions. If the applicable
prospectus supplement indicates, in connection with those
derivatives, the third parties may sell securities covered by
this prospectus and the applicable prospectus supplement,
including in short sale transactions. If so, the third party may
use securities pledged by us or borrowed from us or others to
settle those sales or to close out any related open borrowings
of stock, and may use securities received from us in settlement
of those derivatives to close out any related open borrowings of
stock. The third party in such sale transactions will be an
underwriter identified in the applicable prospectus supplement.
We may loan or pledge securities to a financial institution or
other third party that in turn may sell the securities using
this prospectus. Such financial institution or third party may
transfer its short position to investors in our securities or in
connection with a simultaneous offering of other securities
offered by this prospectus or otherwise.
LEGAL
COUNSEL
Schulte Roth & Zabel LLP, 919 Third Avenue, New York,
New York 10022, acts as legal counsel to the Company.
SAFEKEEPING,
TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR
Pursuant to an agreement with the Company, US Bank National
Association acts as the Companys custodian with respect to
the safekeeping of its securities. The principal business office
of the custodian is 1555 North River Center Drive,
Suite 302, Milwaukee, WI 53212.
The Company employs Computershare Ltd. (f/k/a EquiServe) as its
transfer agent to record transfers of the shares, maintain proxy
records and to process distributions. Computershares
principal business office is 250 Royall Street, Canton,
Massachusetts 02021.
BROKERAGE
ALLOCATION AND OTHER PRACTICES
Since we generally acquire and dispose of our investments in
privately negotiated transactions, we infrequently use brokers
in the normal course of business.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The audited financial statements and schedules included in this
prospectus and elsewhere in the registration statement to the
extent and for the periods indicated in their reports have been
audited by Ernst & Young LLP, for the years ended
October 31, 2006, October 31, 2005, October 31,
2004 and October 31, 2003, as set forth in its reports
thereon and included elsewhere herein and are included in
reliance upon such reports given on the authority of said firm
as experts in accounting and auditing.
97
MVC
CAPITAL, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-11
|
|
|
|
|
F-12
|
|
|
|
|
F-14
|
|
|
|
|
F-15
|
|
|
|
|
F-16
|
|
|
|
|
F-36
|
|
F-1
CONSOLIDATED
FINANCIAL STATEMENTS
MVC
Capital, Inc.
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
66,217,123
|
|
|
$
|
26,297,190
|
|
Short term investments at market
value (cost $- and $51,026,902)
|
|
|
|
|
|
|
51,026,902
|
|
Investments at fair value (cost
$286,850,759 and $171,591,242)
|
|
|
|
|
|
|
|
|
Non-control/Non-affiliated
investments (cost $108,557,066 and $74,495,549)
|
|
|
71,848,976
|
|
|
|
33,685,925
|
|
Affiliate investments (cost
$71,672,386 and $40,370,059)
|
|
|
75,248,140
|
|
|
|
32,385,810
|
|
Control investments (cost
$106,621,307 and $56,725,634)
|
|
|
128,794,436
|
|
|
|
56,225,944
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
|
275,891,552
|
|
|
|
122,297,679
|
|
Dividends, interest and fees
receivable
|
|
|
1,617,511
|
|
|
|
902,498
|
|
Prepaid expenses
|
|
|
2,597,547
|
|
|
|
364,780
|
|
Prepaid taxes
|
|
|
|
|
|
|
98,374
|
|
Deferred tax
|
|
|
548,120
|
|
|
|
303,255
|
|
Deposits
|
|
|
120,000
|
|
|
|
|
|
Other assets
|
|
|
54,796
|
|
|
|
88,600
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
347,046,649
|
|
|
$
|
201,379,278
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Liabilities
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
50,000,000
|
|
|
$
|
|
|
Term loan
|
|
|
50,000,000
|
|
|
|
|
|
Provision for incentive
compensation (Note 5)
|
|
|
7,172,352
|
|
|
|
1,117,328
|
|
Employee compensation and benefits
|
|
|
1,635,600
|
|
|
|
807,000
|
|
Other accrued expenses and
liabilities
|
|
|
774,048
|
|
|
|
353,606
|
|
Professional fees
|
|
|
402,133
|
|
|
|
276,621
|
|
Consulting fees
|
|
|
70,999
|
|
|
|
3,117
|
|
Payable for investment purchased
|
|
|
|
|
|
|
79,708
|
|
Taxes payable
|
|
|
33,455
|
|
|
|
|
|
Directors fees
|
|
|
(35,312
|
)
|
|
|
2,898
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
110,053,275
|
|
|
|
2,640,278
|
|
|
|
|
|
|
|
|
|
|
Shareholders
equity
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value;
150,000,000 shares authorized; 19,093,929 and
19,086,566 shares outstanding, respectively
|
|
|
231,459
|
|
|
|
231,459
|
|
Additional
paid-in-capital
|
|
|
353,479,871
|
|
|
|
358,571,795
|
|
Accumulated earnings
|
|
|
22,026,261
|
|
|
|
13,528,526
|
|
Dividends paid to stockholders
|
|
|
(21,592,946
|
)
|
|
|
(12,429,181
|
)
|
Accumulated net realized loss
|
|
|
(73,016,601
|
)
|
|
|
(78,633,248
|
)
|
Net unrealized depreciation
|
|
|
(10,959,207
|
)
|
|
|
(49,293,563
|
)
|
Treasury stock, at cost, 4,052,019
and 4,059,382 shares held, respectively
|
|
|
(33,175,463
|
)
|
|
|
(33,236,788
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders
equity
|
|
|
236,993,374
|
|
|
|
198,739,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
347,046,649
|
|
|
$
|
201,379,278
|
|
|
|
|
|
|
|
|
|
|
Net asset value per
share
|
|
$
|
12.41
|
|
|
$
|
10.41
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
MVC
Capital, Inc.
October 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Non-Control/Non-
Affiliated Investments 30.32% (a, c, g,
f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actelis Networks, Inc.
|
|
Technology Investments
|
|
Preferred Stock
(150,602 shares)(d)
|
|
|
|
|
|
$
|
5,000,003
|
|
|
$
|
|
|
Amersham Corp.
|
|
Manufacturer of Precision Machined
Components
|
|
Second Lien Seller
Note 10.0000%, 06/29/2010(h)
|
|
$
|
2,473,521
|
|
|
|
2,473,521
|
|
|
|
2,473,521
|
|
|
|
|
|
Second Lien Seller
Note 16.0000%, 06/30/2013(b, h)
|
|
|
2,627,538
|
|
|
|
2,627,538
|
|
|
|
2,627,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,101,059
|
|
|
|
5,101,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BP Clothing, LLC
|
|
Apparel
|
|
Second Lien Loan 14.0000%,
07/18/2012(b, h)
|
|
|
10,041,165
|
|
|
|
9,862,650
|
|
|
|
10,041,165
|
|
|
|
|
|
Term Loan A 9.6500%,
07/18/2011(h)
|
|
|
2,910,000
|
|
|
|
2,858,549
|
|
|
|
2,858,549
|
|
|
|
|
|
Term Loan B 11.8000%,
07/18/2011(h)
|
|
|
2,000,000
|
|
|
|
1,964,638
|
|
|
|
1,964,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,685,837
|
|
|
|
14,864,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DPHI, Inc.
|
|
Technology Investments
|
|
Preferred Stock
(602,131 shares)(d)
|
|
|
|
|
|
|
4,520,350
|
|
|
|
|
|
FOLIOfn, Inc.
|
|
Technology Investments
|
|
Preferred Stock
(5,802,259 shares)(d)
|
|
|
|
|
|
|
15,000,000
|
|
|
|
5,000,000
|
|
Henry Company
|
|
Building Products/Specialty
Chemicals
|
|
Term Loan A 8.8244%,
04/06/2011(h)
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
|
|
|
|
Term Loan B 13.0744%,
04/06/2011(h)
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innovative Brands, LLC
|
|
Consumer Products
|
|
Term Loan 11.1250%, 09/22/2011(h)
|
|
|
15,000,000
|
|
|
|
15,000,000
|
|
|
|
15,000,000
|
|
JDC Lighting, LLC
|
|
Electrical Distribution
|
|
Senior Subordinated Debt 17.0000%,
01/31/2009(b, h)
|
|
|
3,035,844
|
|
|
|
2,988,002
|
|
|
|
3,035,844
|
|
MainStream Data
|
|
Technology Investments
|
|
Common Stock (5,786 shares)(d)
|
|
|
|
|
|
|
3,750,000
|
|
|
|
|
|
SafeStone Technologies PLC
|
|
Technology Investments
|
|
Preferred Stock
(2,106,378 shares)(d, e)
|
|
|
|
|
|
|
4,015,402
|
|
|
|
|
|
Sonexis, Inc.
|
|
Technology Investments
|
|
Common Stock
(131,615 shares)(d)
|
|
|
|
|
|
|
10,000,000
|
|
|
|
|
|
SP Industries, Inc.
|
|
Laboratory Research Equipment
|
|
Term Loan B 13.3244%,
03/31/2011(h)
|
|
|
3,059,300
|
|
|
|
3,007,411
|
|
|
|
3,059,300
|
|
|
|
|
|
Senior Subordinated Debt 16.0000%,
03/31/2012(b, h)
|
|
|
12,959,013
|
|
|
|
12,653,021
|
|
|
|
12,959,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,660,432
|
|
|
|
16,018,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Storage Canada, LLC
|
|
Self Storage
|
|
Term Loan 8.7500%, 03/30/2013(h)
|
|
|
1,320,500
|
|
|
|
1,327,073
|
|
|
|
1,320,500
|
|
|
|
|
|
Term Loan 8.7500%, 10/06/2013(h)
|
|
|
619,000
|
|
|
|
619,000
|
|
|
|
619,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,946,073
|
|
|
|
1,939,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Safety U.S., Inc.
|
|
Engineering Services
|
|
Term Loan A 9.8300%,
12/31/2010(h)
|
|
|
4,908,257
|
|
|
|
4,908,257
|
|
|
|
4,908,257
|
|
|
|
|
|
Term Loan B 13.8300%,
12/31/2010(h)
|
|
|
981,651
|
|
|
|
981,651
|
|
|
|
981,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,889,908
|
|
|
|
5,889,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub Total Non-
Control/ Non-Affiliated Investments
|
|
|
|
|
|
|
|
|
|
|
108,557,066
|
|
|
|
71,848,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
Investments 31.75% (a, c, g, f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dakota Growers Pasta Company,
Inc.
|
|
Manufacturer of Packaged Foods
|
|
Common Stock (1,081,195 shares)
|
|
|
|
|
|
$
|
5,879,242
|
|
|
$
|
8,957,880
|
|
Endymion Systems, Inc.
|
|
Technology Investments
|
|
Preferred Stock
(7,156,760 shares)(d)
|
|
|
|
|
|
|
7,000,000
|
|
|
|
|
|
Harmony Pharmacy & Health
Center, Inc.
|
|
Healthcare Retail
|
|
Common Stock
(2,000,000 shares)(d)
|
|
|
|
|
|
|
750,000
|
|
|
|
750,000
|
|
Impact Confections, Inc.
|
|
Confections Manufacturing and
Distribution
|
|
Senior Subordinated Debt 17.0000%,
07/30/2009(b, h)
|
|
$
|
5,468,123
|
|
|
|
5,390,649
|
|
|
|
5,468,123
|
|
|
|
|
|
Senior Subordinated Debt 9.3244%,
07/29/2008(h)
|
|
|
325,000
|
|
|
|
321,218
|
|
|
|
325,000
|
|
|
|
|
|
Common Stock (252 shares)(d)
|
|
|
|
|
|
|
2,700,000
|
|
|
|
2,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,411,867
|
|
|
|
8,493,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Marine Exhibition Corporation
|
|
Theme Park
|
|
Senior Subordinated Debt 11.0000%,
06/30/2013(b, h)
|
|
|
10,091,111
|
|
|
|
9,899,988
|
|
|
|
10,091,111
|
|
|
|
|
|
Convertible Preferred Stock
(20,000 shares)(b)
|
|
|
|
|
|
|
2,035,652
|
|
|
|
2,035,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,935,640
|
|
|
|
12,126,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Octagon Credit Investors, LLC
|
|
Financial Services
|
|
Term Loan 9.5744%, 12/31/2011(h)
|
|
|
5,000,000
|
|
|
|
4,931,096
|
|
|
|
5,000,000
|
|
|
|
|
|
Revolving Line of Credit 9.5744%,
12/31/2011(h)
|
|
|
3,250,000
|
|
|
|
3,250,000
|
|
|
|
3,250,000
|
|
|
|
|
|
Limited Liability Company Interest
|
|
|
|
|
|
|
894,095
|
|
|
|
1,927,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,075,191
|
|
|
|
10,177,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phoenix Coal Corporation
|
|
Coal Processing and Production
|
|
Common Stock (1,666,667)(d)
|
|
|
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
Second Lien Note 15.0000%,
06/08/2011(b, h)
|
|
|
7,088,615
|
|
|
|
6,959,809
|
|
|
|
7,088,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,959,809
|
|
|
|
8,088,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PreVisor, Inc.
|
|
Human Capital Management
|
|
Common Stock (9 shares)(d)
|
|
|
|
|
|
|
6,000,000
|
|
|
|
6,000,000
|
|
Vitality Foodservice, Inc.
|
|
Non-Alcoholic Beverages
|
|
Common Stock
(500,000 shares)(d)
|
|
|
|
|
|
|
5,000,000
|
|
|
|
8,500,000
|
|
|
|
|
|
Preferred Stock
(1,000,000 shares)(b, h)
|
|
|
|
|
|
|
9,660,637
|
|
|
|
11,053,827
|
|
|
|
|
|
Warrants(d)
|
|
|
|
|
|
|
|
|
|
|
1,100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,660,637
|
|
|
|
20,653,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub Total Affiliate
Investments
|
|
|
|
|
|
|
|
|
|
|
71,672,386
|
|
|
|
75,248,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
MVC
Capital, Inc.
Consolidated Schedule of Investments
(Continued)
October 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Control Investments
54.34%(a, c, g, f)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
auto MOTOL BENI
|
|
Automotive Dealership
|
|
Common Stock
(200 shares)(d, e)
|
|
|
|
|
|
$
|
2,000,000
|
|
|
$
|
2,000,000
|
|
Baltic Motors Corporation
|
|
Automotive Dealership
|
|
Senior Subordinated Debt 10.0000%,
06/24/2007(e, h)
|
|
$
|
4,500,000
|
|
|
|
4,500,000
|
|
|
|
4,500,000
|
|
|
|
|
|
Bridge Loan 12.0000%, 12/22/2006(e,
h)
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
Common Stock
(60,684 shares)(d, e)
|
|
|
|
|
|
|
8,000,000
|
|
|
|
21,155,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,500,000
|
|
|
|
26,655,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio Medical Corporation
|
|
Medical Device Manufacturer
|
|
Common Stock (5,620 shares)(d)
|
|
|
|
|
|
|
17,000,000
|
|
|
|
26,200,000
|
|
SGDA Sanierungsgesellschaft fur
Deponien und Altlasten
|
|
Soil Remediation
|
|
Term Loan 7.0000%, 08/25/2009(e, h)
|
|
|
6,187,350
|
|
|
|
5,989,710
|
|
|
|
5,989,710
|
|
|
|
|
|
Common Equity Interest(d, e)
|
|
|
|
|
|
|
338,551
|
|
|
|
338,551
|
|
|
|
|
|
Preferred Equity Interest(d, e)
|
|
|
|
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,328,261
|
|
|
|
11,328,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIA BM Auto
|
|
Automotive Dealership
|
|
Common Stock
(47,300 shares)(d, e)
|
|
|
|
|
|
|
8,000,000
|
|
|
|
8,000,000
|
|
Summit Research Labs, Inc.
|
|
Specialty Chemicals
|
|
Second Lien Loan 14.0000%,
08/15/2012(b, h)
|
|
|
5,044,813
|
|
|
|
4,948,327
|
|
|
|
5,044,813
|
|
|
|
|
|
Preferred Stock (800 shares)(d)
|
|
|
|
|
|
|
11,200,000
|
|
|
|
11,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,148,327
|
|
|
|
16,244,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timberland Machines &
Irrigation, Inc.
|
|
Distributor Landscaping
and Irrigation Equipment
|
|
Senior Subordinated Debt 14.4260%,
08/04/2009(b, h)
|
|
|
6,607,859
|
|
|
|
6,551,408
|
|
|
|
6,607,859
|
|
|
|
|
|
Junior Revolving Line of Credit
12.5000%, 07/07/2007(h)
|
|
|
2,829,709
|
|
|
|
2,829,709
|
|
|
|
2,829,709
|
|
|
|
|
|
Common Stock (542 shares)(d)
|
|
|
|
|
|
|
5,420,291
|
|
|
|
4,420,291
|
|
|
|
|
|
Warrants(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,801,408
|
|
|
|
13,857,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turf Products, LLC
|
|
Distributor Landscaping
and Irrigation Equipment
|
|
Senior Subordinated Debt 15.0000%,
11/30/2010(b, h)
|
|
|
7,676,330
|
|
|
|
7,627,137
|
|
|
|
7,676,330
|
|
|
|
|
|
Limited Liability Company
Interest(d)
|
|
|
|
|
|
|
3,821,794
|
|
|
|
5,821,794
|
|
|
|
|
|
Warrants(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,448,931
|
|
|
|
13,498,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Velocitius B.V.
|
|
Renewable Energy
|
|
Common Equity Interest(d, e)
|
|
|
|
|
|
|
2,966,765
|
|
|
|
2,966,765
|
|
|
|
|
|
Revolving Line of Credit 8.0000%,
10/31/2009(e, h)
|
|
|
143,614
|
|
|
|
143,614
|
|
|
|
143,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,110,379
|
|
|
|
3,110,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendio Services, Inc.
|
|
Technology Investments
|
|
Common Stock (10,476 shares)(d)
|
|
|
|
|
|
|
5,500,000
|
|
|
|
|
|
|
|
|
|
Preferred Stock
(6,443,188 shares)(d)
|
|
|
|
|
|
|
1,134,001
|
|
|
|
3,400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,634,001
|
|
|
|
3,400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vestal Manufacturing Enterprises,
Inc.
|
|
Iron Foundries
|
|
Senior Subordinated Debt 12.0000%,
04/29/2011(h)
|
|
|
800,000
|
|
|
|
800,000
|
|
|
|
800,000
|
|
|
|
|
|
Common Stock (81,000 shares)
|
|
|
|
|
|
|
1,850,000
|
|
|
|
3,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,650,000
|
|
|
|
4,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub Total Control
Investments
|
|
|
|
|
|
|
|
|
|
|
106,621,307
|
|
|
|
128,794,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTMENT
ASSETS 116.41%(f)
|
|
|
|
|
|
|
|
|
|
$
|
286,850,759
|
|
|
$
|
275,891,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
These securities are restricted
from public sale without prior registration under the Securities
Act of 1933. The Fund 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.
|
F-5
|
|
|
(c)
|
|
All of the Funds equity and
debt investments are issued by eligible portfolio companies, as
defined in the Investment Company Act of 1940, except auto MOTOL
BENI, Baltic Motors Corporation, Safestone Technologies PLC,
SGDA Sanierungsgesellschaft fur Deponien und Altlasten, SIA BM
Auto and Velocitius B.V. The Fund makes available significant
managerial assistance to all of the portfolio companies in which
it has invested.
|
|
(d)
|
|
Non-income producing assets.
|
|
(e)
|
|
The principal operations of these
portfolio companies are located outside of the United States.
|
|
(f)
|
|
Percentages are based on net assets
of $236,993,374 as of October 31, 2006.
|
|
(g)
|
|
See Note 3 for further
information regarding Investment Classification.
|
|
(h)
|
|
All or a portion of these
securities have been committed as collateral for the Guggenheim
Corporate Funding, LLC Credit Facility.
|
|
|
|
Denotes zero cost/fair
value.
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
MVC
Capital, Inc.
Consolidated
Schedule of Investments
October 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Non-Control/Non-Affiliated
Investments 16.95%(a, c, g,
h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actelis Networks, Inc.
|
|
Technology Investments
|
|
Preferred Stock
(150,602 shares)(d)
|
|
|
|
|
|
$
|
5,000,003
|
|
|
$
|
|
|
Amersham Corp.
|
|
Manufacturer of Precision-Machined
Components
|
|
Second Lien Seller Note 10.0000%,
06/29/2010
|
|
$
|
2,473,521
|
|
|
|
2,473,521
|
|
|
|
2,473,521
|
|
BP Clothing, LLC
|
|
Apparel
|
|
Second Lien Loan 11.8406%,
06/02/2009
|
|
|
9,166,667
|
|
|
|
8,998,430
|
|
|
|
9,166,667
|
|
DPHI, Inc.
|
|
Technology Investments
|
|
Preferred Stock
(602,131 shares)(d)
|
|
|
|
|
|
|
4,520,350
|
|
|
|
|
|
FOLIOfn, Inc.
|
|
Technology Investments
|
|
Preferred Stock
(5,802,259 shares)(d)
|
|
|
|
|
|
|
15,000,000
|
|
|
|
|
|
Integral Development Corporation
|
|
Technology Investments
|
|
Convertible Credit Facility
11.7500%, 12/31/2005(e)
|
|
|
1,122,216
|
|
|
|
1,121,520
|
|
|
|
1,122,216
|
|
JDC Lighting, LLC
|
|
Electrical Distribution
|
|
Senior Subordinated Debt 17.0000%,
01/31/2009(b)
|
|
|
3,090,384
|
|
|
|
3,025,871
|
|
|
|
3,090,384
|
|
Lumeta Corporation
|
|
Technology Investments
|
|
Preferred Stock
(384,615 shares)(d)
|
|
|
|
|
|
|
250,000
|
|
|
|
43,511
|
|
|
|
|
|
Preferred Stock
(266,846 shares)(d)
|
|
|
|
|
|
|
156,489
|
|
|
|
156,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
406,489
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MainStream Data
|
|
Technology Investments
|
|
Common Stock (5,786 shares)(d)
|
|
|
|
|
|
|
3,750,000
|
|
|
|
|
|
Octagon Credit Investors, LLC
|
|
Financial Services
|
|
Senior Subordinated Debt 15.0000%,
05/07/2011(b)
|
|
|
5,145,912
|
|
|
|
4,560,740
|
|
|
|
4,664,794
|
|
|
|
|
|
Limited Liability Company Interest
|
|
|
|
|
|
|
724,857
|
|
|
|
1,228,038
|
|
|
|
|
|
Warrants(d)
|
|
|
|
|
|
|
550,000
|
|
|
|
1,069,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,835,597
|
|
|
|
6,962,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SafeStone Technologies PLC
|
|
Technology Investments
|
|
Preferred Stock
(2,106,378 shares)(d, f)
|
|
|
|
|
|
|
4,015,402
|
|
|
|
|
|
Sonexis, Inc.
|
|
Technology Investments
|
|
Common Stock
(131,615 shares)(d)
|
|
|
|
|
|
|
10,000,000
|
|
|
|
|
|
SP Industries, Inc.
|
|
Laboratory Research Equipment
|
|
Term Loan B 13.8406%, 03/31/2010(b)
|
|
|
4,020,488
|
|
|
|
3,947,304
|
|
|
|
4,020,488
|
|
|
|
|
|
Senior Subordinated Debt 17.0000%,
03/31/2012(b)
|
|
|
6,650,360
|
|
|
|
6,401,062
|
|
|
|
6,650,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,348,366
|
|
|
|
10,670,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub Total Non-Control/
Non-Affiliated Investments
|
|
|
|
|
|
|
|
|
|
|
74,495,549
|
|
|
|
33,685,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
Investments 16.29%(a, c, g, h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dakota Growers Pasta Company,
Inc.
|
|
Manufacturer of Packaged Foods
|
|
Common Stock
(909,091 shares)(d)
|
|
|
|
|
|
$
|
5,000,000
|
|
|
$
|
5,514,000
|
|
Endymion Systems, Inc.
|
|
Technology Investments
|
|
Preferred Stock
(7,156,760 shares)(d)
|
|
|
|
|
|
|
7,000,000
|
|
|
|
|
|
Impact Confections, Inc.
|
|
Confections Manufacturing and
Distribution
|
|
Senior Subordinated Debt 17.0000%,
07/30/2009(b)
|
|
$
|
5,228,826
|
|
|
|
5,133,069
|
|
|
|
5,228,826
|
|
|
|
|
|
Senior Subordinated Debt 7.8406%,
07/29/2008
|
|
|
325,000
|
|
|
|
318,986
|
|
|
|
325,000
|
|
|
|
|
|
Common Stock (252 shares)(d)
|
|
|
|
|
|
|
2,700,000
|
|
|
|
2,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,152,055
|
|
|
|
8,253,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ProcessClaims, Inc.
|
|
Technology Investments
|
|
Preferred Stock
(6,250,000 shares)(d)
|
|
|
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
|
|
Preferred Stock
(849,257 shares)(d)
|
|
|
|
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
|
|
Preferred Stock Warrants(d)
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,400,020
|
|
|
|
2,400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Vitality Foodservice, Inc.
|
|
Non-Alcoholic Beverages
|
|
Common Stock
(500,000 shares)(d)
|
|
|
|
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
|
|
Preferred Stock
(1,000,000 shares)(b)
|
|
|
|
|
|
|
10,517,984
|
|
|
|
10,517,984
|
|
|
|
|
|
Warrants(d)
|
|
|
|
|
|
|
|
|
|
|
700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,517,984
|
|
|
|
16,217,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yaga, Inc.
|
|
Technology Investments
|
|
Preferred Stock
(300,000 shares)(d)
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
Preferred Stock
(1,000,000 shares)(d)
|
|
|
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub Total Affiliate
Investments
|
|
|
|
|
|
|
|
|
|
|
40,370,059
|
|
|
|
32,385,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
MVC
Capital, Inc.
Consolidated
Schedule of Investments (Continued)
October 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Investment
|
|
Principal
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Control Investments
28.30%(a, c, g, h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baltic Motors Corporation
|
|
Automotive Dealership
|
|
Senior Subordinated Debt 10.0000%,
06/24/2007(f)
|
|
$
|
4,500,000
|
|
|
$
|
4,500,000
|
|
|
$
|
4,500,000
|
|
|
|
|
|
Common Stock
(54,947 shares)(d, f)
|
|
|
|
|
|
|
6,000,000
|
|
|
|
7,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,500,000
|
|
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio Medical Corporation
|
|
Medical Device Manufacturer
|
|
Common Stock (5,620 shares)(d)
|
|
|
|
|
|
|
17,000,000
|
|
|
|
17,000,000
|
|
SGDA Sanierungsgesellschaft fur
Deponien und Altlasten
|
|
Soil Remediation
|
|
Revolving Line of Credit 7.0000%,
08/25/2006(f)
|
|
|
1,237,700
|
|
|
|
1,237,700
|
|
|
|
1,237,700
|
|
|
|
|
|
Term Loan 7.0000%, 08/25/2009(f)
|
|
|
4,579,050
|
|
|
|
4,304,560
|
|
|
|
4,304,560
|
|
|
|
|
|
Equity Interest(f)
|
|
|
|
|
|
|
315,000
|
|
|
|
315,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,857,260
|
|
|
|
5,857,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timberland Machines &
Irrigation, Inc.
|
|
Distributor Landscaping
and Irrigation Equipment
|
|
Senior Subordinated Debt 17.0000%,
08/04/2009(b)
|
|
|
6,318,684
|
|
|
|
6,234,373
|
|
|
|
6,318,684
|
|
|
|
|
|
Junior Revolving Line of Credit
12.5000%, 07/07/2007
|
|
|
3,250,000
|
|
|
|
3,250,000
|
|
|
|
3,250,000
|
|
|
|
|
|
Common Stock (450 shares)(d)
|
|
|
|
|
|
|
4,500,000
|
|
|
|
4,500,000
|
|
|
|
|
|
Warrants(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,984,373
|
|
|
|
14,068,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendio Services, Inc.
|
|
Technology Investments
|
|
Common Stock (10,476 shares)(d)
|
|
|
|
|
|
|
5,500,000
|
|
|
|
|
|
|
|
|
|
Preferred Stock (6,443,188
shares)(d)
|
|
|
|
|
|
|
1,134,001
|
|
|
|
2,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,634,001
|
|
|
|
2,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vestal Manufacturing Enterprises,
Inc.
|
|
Iron Foundries
|
|
Senior Subordinated Debt 12.0000%,
04/29/2011
|
|
|
900,000
|
|
|
|
900,000
|
|
|
|
900,000
|
|
|
|
|
|
Common Stock
(81,000 shares)(d)
|
|
|
|
|
|
|
1,850,000
|
|
|
|
3,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,750,000
|
|
|
|
4,600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub Total Control
Investments
|
|
|
|
|
|
|
|
|
|
|
56,725,634
|
|
|
|
56,225,944
|
|
Short Term
Investments 25.67%(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills
|
|
U.S. Government &
|
|
3.4400%, 12/01/2005
|
|
|
14,600,000
|
|
|
|
14,560,162
|
|
|
|
14,560,162
|
|
|
|
Agency Securities
|
|
3.2200%, 12/29/2005
|
|
|
9,865,000
|
|
|
|
9,812,368
|
|
|
|
9,812,368
|
|
|
|
|
|
3.6300%, 01/12/2006
|
|
|
14,856,000
|
|
|
|
14,750,225
|
|
|
|
14,750,225
|
|
|
|
|
|
3.4300%, 01/19/2006
|
|
|
12,000,000
|
|
|
|
11,904,147
|
|
|
|
11,904,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,026,902
|
|
|
|
51,026,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub Total Short Term
Investments
|
|
|
|
|
|
|
|
|
|
|
51,026,902
|
|
|
|
51,026,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTMENT
ASSETS 87.21%(g)
|
|
|
|
|
|
$
|
222,618,144
|
|
|
$
|
173,324,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
These securities are restricted
from public sale without prior registration under the Securities
Act of 1933. The Fund 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.
|
F-9
|
|
|
(c)
|
|
All of the Funds equity and
debt investments are issued by eligible portfolio companies, as
defined in the Investment Company Act of 1940, except Baltic
Motors Corporation, Safestone Technologies PLC and SGDA
Sanierungsgesellschaft fur Deponien und Altlasten. The Fund
makes available significant managerial assistance to all of the
portfolio companies in which it has invested.
|
|
(d)
|
|
Non-income producing assets.
|
|
(e)
|
|
Also received warrants to purchase
a number of shares of preferred stock to be determined upon
exercise.
|
|
(f)
|
|
The principal operations of these
portfolio companies are located outside of the United States.
|
|
(g)
|
|
Percentages are based on net assets
of $198,739,000 as of October 31, 2005.
|
|
(h)
|
|
See Note 3 for further
information regarding Investment Classification.
|
|
|
|
Denotes zero cost/fair
value.
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
MVC
Capital, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate investments
|
|
$
|
89,842
|
|
|
$
|
1,346,760
|
|
|
$
|
|
|
Control investments
|
|
|
132,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividend income
|
|
|
222,387
|
|
|
|
1,346,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (net of foreign
taxes withheld of $18,433, $0, and $0, respectively)
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-control/Non-affiliated
investments
|
|
|
6,930,733
|
|
|
|
5,134,907
|
|
|
|
2,308,502
|
|
Affiliate investments
|
|
|
2,922,372
|
|
|
|
874,041
|
|
|
|
218,904
|
|
Control investments
|
|
|
3,833,499
|
|
|
|
2,101,808
|
|
|
|
469,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
13,686,604
|
|
|
|
8,110,756
|
|
|
|
2,996,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee income
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-control/Non-affiliated
investments
|
|
|
1,187,954
|
|
|
|
398,520
|
|
|
|
109,538
|
|
Affiliate investments
|
|
|
470,530
|
|
|
|
232,256
|
|
|
|
727,595
|
|
Control investments
|
|
|
2,169,236
|
|
|
|
1,178,331
|
|
|
|
88,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
3,827,720
|
|
|
|
1,809,107
|
|
|
|
925,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
771,405
|
|
|
|
932,761
|
|
|
|
64,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
18,508,116
|
|
|
|
12,199,384
|
|
|
|
3,986,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
3,498,571
|
|
|
|
2,336,242
|
|
|
|
1,365,913
|
|
Incentive compensation (Note 5)
|
|
|
6,055,024
|
|
|
|
1,117,328
|
|
|
|
|
|
Insurance
|
|
|
471,711
|
|
|
|
590,493
|
|
|
|
959,570
|
|
Legal fees
|
|
|
685,396
|
|
|
|
529,541
|
|
|
|
810,848
|
|
Facilities
|
|
|
603,328
|
|
|
|
484,420
|
|
|
|
90,828
|
|
Other expenses
|
|
|
334,212
|
|
|
|
461,769
|
|
|
|
369,085
|
|
Audit fees
|
|
|
381,944
|
|
|
|
287,797
|
|
|
|
154,938
|
|
Consulting fees
|
|
|
344,576
|
|
|
|
192,255
|
|
|
|
|
|
Directors fees
|
|
|
205,071
|
|
|
|
148,875
|
|
|
|
175,956
|
|
Administration
|
|
|
194,826
|
|
|
|
137,191
|
|
|
|
102,593
|
|
Public relations fees
|
|
|
70,316
|
|
|
|
116,482
|
|
|
|
146,509
|
|
Printing and postage
|
|
|
129,438
|
|
|
|
71,785
|
|
|
|
80,278
|
|
Interest and other borrowing costs
|
|
|
1,594,009
|
|
|
|
30,771
|
|
|
|
2,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses
|
|
|
14,568,422
|
|
|
|
6,504,949
|
|
|
|
4,258,990
|
|
Litigation recovery of management
fees (Note 12, 13)
|
|
|
|
|
|
|
|
|
|
|
370,000
|
|
Net operating income before
taxes
|
|
|
3,939,694
|
|
|
|
5,694,435
|
|
|
|
97,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax (Benefit)
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax benefit
|
|
|
(244,865
|
)
|
|
|
(215,977
|
)
|
|
|
(87,278
|
)
|
Current tax expense
|
|
|
403,937
|
|
|
|
115,044
|
|
|
|
166,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax (benefit)
expense
|
|
|
159,072
|
|
|
|
(100,933
|
)
|
|
|
78,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
|
3,780,622
|
|
|
|
5,795,368
|
|
|
|
18,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized and Unrealized Gain
(Loss) on Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain (loss) on
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-control/Non-affiliated
investments
|
|
|
(151,877
|
)
|
|
|
(6,684,320
|
)
|
|
|
(17,465,808
|
)
|
Affiliate investments
|
|
|
5,373,267
|
|
|
|
3,407,457
|
|
|
|
(20,329,102
|
)
|
Foreign currency
|
|
|
|
|
|
|
(18,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized gain (loss) on
investments
|
|
|
5,221,390
|
|
|
|
(3,295,550
|
)
|
|
|
(37,794,910
|
)
|
Net change in unrealized
appreciation on investments
|
|
|
38,334,356
|
|
|
|
23,768,366
|
|
|
|
49,381,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gain on
investments
|
|
|
43,555,746
|
|
|
|
20,472,816
|
|
|
|
11,587,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets
resulting from operations
|
|
$
|
47,336,368
|
|
|
$
|
26,268,184
|
|
|
$
|
11,605,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets per
share resulting from operations
|
|
$
|
2.48
|
|
|
$
|
1.45
|
|
|
$
|
0.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per
share
|
|
$
|
0.48
|
|
|
$
|
0.24
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-11
MVC
Capital, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets
resulting from operations
|
|
$
|
47,336,368
|
|
|
$
|
26,268,184
|
|
|
$
|
11,605,531
|
|
Adjustments to reconcile net
increase in net assets resulting from operations to net cash
provided (used) by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized (gain) loss
|
|
|
(5,221,390
|
)
|
|
|
3,295,550
|
|
|
|
37,794,910
|
|
Net change in unrealized
(appreciation) depreciation
|
|
|
(38,334,356
|
)
|
|
|
(23,768,366
|
)
|
|
|
(49,381,974
|
)
|
Amortization of discounts and fees
|
|
|
(505,428
|
)
|
|
|
(235,428
|
)
|
|
|
|
|
Increase in accrued
payment-in-kind
|
|
|
|
|
|
|
|
|
|
|
|
|
dividends and interest
|
|
|
(2,183,786
|
)
|
|
|
(1,370,777
|
)
|
|
|
(101,861
|
)
|
Increase in allocation of flow
through income
|
|
|
(279,422
|
)
|
|
|
(114,845
|
)
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees receivable
|
|
|
(715,013
|
)
|
|
|
(474,207
|
)
|
|
|
(275,661
|
)
|
Prepaid expenses
|
|
|
(2,232,767
|
)
|
|
|
(130,977
|
)
|
|
|
178,200
|
|
Prepaid taxes
|
|
|
98,374
|
|
|
|
(98,374
|
)
|
|
|
|
|
Deferred tax
|
|
|
(244,865
|
)
|
|
|
(215,977
|
)
|
|
|
(87,278
|
)
|
Deposits
|
|
|
(120,000
|
)
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
33,804
|
|
|
|
(43,155
|
)
|
|
|
(45,445
|
)
|
Payable for investment purchased
|
|
|
(79,708
|
)
|
|
|
79,708
|
|
|
|
|
|
Liabilities
|
|
|
7,492,705
|
|
|
|
1,576,079
|
|
|
|
112,361
|
|
Purchases of equity investments
|
|
|
(45,913,914
|
)
|
|
|
(17,315,000
|
)
|
|
|
(34,210,000
|
)
|
Purchases of debt instruments
|
|
|
(111,105,943
|
)
|
|
|
(37,950,271
|
)
|
|
|
(20,848,139
|
)
|
Purchases of short term investments
|
|
|
(406,066,963
|
)
|
|
|
(313,505,406
|
)
|
|
|
(398,988,675
|
)
|
Purchases of warrants
|
|
|
|
|
|
|
|
|
|
|
(550,000
|
)
|
Proceeds from equity investments
|
|
|
10,593,459
|
|
|
|
23,396,719
|
|
|
|
4,309,991
|
|
Proceeds from debt instruments
|
|
|
37,895,884
|
|
|
|
10,796,111
|
|
|
|
8,478,894
|
|
Sales/maturities of short term
investments
|
|
|
458,554,888
|
|
|
|
297,482,209
|
|
|
|
478,170,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) by
operating activities
|
|
|
(50,998,073
|
)
|
|
|
(32,328,223
|
)
|
|
|
36,161,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
60,478,127
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(31,571,184
|
)
|
Distributions to shareholders paid
|
|
|
(9,081,994
|
)
|
|
|
(4,572,359
|
)
|
|
|
(1,475,165
|
)
|
Net borrowings under (repayments
on) revolving credit facility
|
|
|
100,000,000
|
|
|
|
(10,427,296
|
)
|
|
|
10,025,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) for
financing activities
|
|
|
90,918,006
|
|
|
|
45,478,472
|
|
|
|
(23,021,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash
equivalents for the year
|
|
|
39,919,933
|
|
|
|
13,150,249
|
|
|
|
13,140,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents,
beginning of year
|
|
|
26,297,190
|
|
|
|
13,146,941
|
|
|
|
6,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end
of year
|
|
$
|
66,217,123
|
|
|
$
|
26,297,190
|
|
|
$
|
13,146,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-12
During the years ended October 31, 2006, 2005 and 2004, MVC
Capital, Inc. paid $1,471,556, $32,185 and $- in interest
expense, respectively.
During the years ended October 31, 2006, 2005 and 2004, MVC
Capital, Inc. paid $217,204, $379,623 and $- in income taxes,
respectively.
Non-cash
activity:
During the years ended October 31, 2006, 2005 and 2004, MVC
Capital, Inc. recorded payment in kind dividend and interest of
$2,183,786, $1,370,777 and $101,861, respectively. This amount
was added to the principal balance of the investments and
recorded as interest/dividend income.
During the years ended October 31, 2006, 2005 and 2004, MVC
Capital, Inc. was allocated $587,273, $244,557 and $-,
respectively, in flow-through income from its equity investment
in Octagon Credit Investors, LLC (Octagon). Of this
amount, $307,851, $129,712 and $-, respectively, was received in
cash and the balance of $279,422, $114,845 and $-, respectively,
was undistributed and therefore increased the cost of the
investment. The fair value was then retroactively increased by
the Funds Valuation Committee.
On August 3, 2005, MVC Capital, Inc. re-issued
826 shares of treasury stock, in lieu of a cash
distribution totaling $8,317, in accordance with the
Companys dividend reinvestment plan.
On November 2, 2005, MVC Capital, Inc. re-issued
1,904 shares of treasury stock, in lieu of a cash
distribution totaling $19,818, in accordance with the
Companys dividend reinvestment plan.
On December 27, 2005, MVC Capital, Inc. exchanged $286,200
from the Timberland Machines & Irrigation, Inc.s
(Timberland) junior revolving line of credit for
29 shares of its common stock.
On December 31, 2005, MVC Capital, Inc. exercised its
ProcessClaims, Inc. warrants for 373,362 shares of
preferred stock.
On January 3, 2006, MVC Capital, Inc. exercised its warrant
in Octagon Credit Investors, LLC. After the warrant was
exercised, MVC Capitals ownership increased. As a result,
Octagon is now considered an affiliate as defined in the
Investment Company Act of 1940. See Note 3 to the financial
statements for further information regarding Investment
Classification.
On February 1, 2006, MVC Capital, Inc. re-issued
1,824 shares of treasury stock, in lieu of a cash
distribution totaling $19,953, in accordance with the
Companys dividend reinvestment plan.
On April 28, 2006, MVC Capital, Inc. increased the
availability under the SGDA Sanierungsgesellschaft fur Deponien
und Altlasten (SGDA) revolving credit facility by
$300,000. The SGDA bridge note for $300,000 was added to the
revolving credit facility and the bridge loan was removed from
MVC Capitals books as apart of the refinancing.
On May 1, 2006, MVC Capital, Inc. re-issued
1,734 shares of treasury stock, in lieu of a cash
distribution totaling $19,761, in accordance with the
Companys dividend reinvestment plan.
On August 1, 2006, MVC Capital, Inc. re-issued
1,901 shares of treasury stock, in lieu of a cash
distribution totaling $22,240, in accordance with the
Companys dividend reinvestment plan.
On August 25, 2006, MVC Capital, Inc. increased the SGDA
term loan by $1,608,300. The SGDA revolving line of credit for
$1,608,300 was added to the term loan and the revolving line of
credit was removed from MVC Capitals books as apart of the
refinancing.
On September 12, 2006, MVC Capital, Inc. decreased the
balance under the Timberland junior revolving line of credit by
$409,091 in exchange for 41 shares of Timberland common
stock.
On September 22, 2006, MVC Capital, Inc. decreased the
balance under the Timberland junior revolving line of credit by
$225,000 in exchange for 23 shares of Timberland common
stock.
The accompanying notes are an integral part of these
consolidated financial statements.
F-13
MVC
Capital, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income
|
|
$
|
3,780,622
|
|
|
$
|
5,795,368
|
|
|
$
|
18,467
|
|
Net realized gain (loss)
|
|
|
5,221,390
|
|
|
|
(3,295,550
|
)
|
|
|
(37,794,910
|
)
|
Net change in unrealized
appreciation
|
|
|
38,334,356
|
|
|
|
23,768,366
|
|
|
|
49,381,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets from
operations
|
|
|
47,336,368
|
|
|
|
26,268,184
|
|
|
|
11,605,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder
Distributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to shareholders
|
|
|
(9,163,765
|
)
|
|
|
(4,580,676
|
)
|
|
|
(10,072
|
)
|
Return of capital distributions to
shareholders
|
|
|
|
|
|
|
|
|
|
|
(1,465,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets from
shareholder distributions
|
|
|
(9,163,765
|
)
|
|
|
(4,580,676
|
)
|
|
|
(1,475,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Share
Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
60,478,127
|
|
|
|
|
|
Reissuance of treasury stock to
purchase investment
|
|
|
|
|
|
|
1,400,000
|
|
|
|
|
|
Offering expenses
|
|
|
|
|
|
|
(402,296
|
)
|
|
|
|
|
Reissuance of treasury stock in
lieu of cash dividend
|
|
|
81,771
|
|
|
|
8,317
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(31,571,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net
assets from capital share transactions
|
|
|
81,771
|
|
|
|
61,484,148
|
|
|
|
(31,571,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in
net assets
|
|
|
38,254,374
|
|
|
|
83,171,656
|
|
|
|
(21,440,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, beginning of
year
|
|
|
198,739,000
|
|
|
|
115,567,344
|
|
|
|
137,008,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of
year
|
|
$
|
236,993,374
|
|
|
$
|
198,739,000
|
|
|
$
|
115,567,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding, end
of year
|
|
|
19,093,929
|
|
|
|
19,086,566
|
|
|
|
12,293,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-14
MVC
Capital, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Net asset value, beginning of year
|
|
$
|
10.41
|
|
|
$
|
9.40
|
|
|
$
|
8.48
|
|
|
$
|
11.84
|
|
|
$
|
15.42
|
|
Gain (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income (loss)
|
|
|
0.20
|
|
|
|
0.32
|
|
|
|
|
|
|
|
(0.53
|
)
|
|
|
(0.19
|
)
|
Net realized and unrealized gain
(loss) on investments
|
|
|
2.28
|
|
|
|
1.13
|
|
|
|
0.91
|
|
|
|
(2.89
|
)
|
|
|
(3.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gain (loss) from investment
operations
|
|
|
2.48
|
|
|
|
1.45
|
|
|
|
0.91
|
|
|
|
(3.42
|
)
|
|
|
(3.54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
(0.48
|
)
|
|
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.04
|
)
|
Return of capital
|
|
|
|
|
|
|
|
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions
|
|
|
(0.48
|
)
|
|
|
(0.24
|
)
|
|
|
(0.12
|
)
|
|
|
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital share transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of share issuance
|
|
|
|
|
|
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive effect of share
repurchase program
|
|
|
|
|
|
|
|
|
|
|
0.13
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital share transactions
|
|
|
|
|
|
|
(0.20
|
)
|
|
|
0.13
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
12.41
|
|
|
$
|
10.41
|
|
|
$
|
9.40
|
|
|
$
|
8.48
|
|
|
$
|
11.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value, end of year
|
|
$
|
13.08
|
|
|
$
|
11.25
|
|
|
$
|
9.24
|
|
|
$
|
8.10
|
|
|
$
|
7.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market premium (discount)
|
|
|
5.40
|
%
|
|
|
8.07
|
%
|
|
|
(1.70
|
)%
|
|
|
(4.48
|
)%
|
|
|
(33.28
|
)%
|
Total Return At
NAV(a)
|
|
|
24.23
|
%
|
|
|
13.36
|
%
|
|
|
12.26
|
%
|
|
|
(28.38
|
)%
|
|
|
(22.88
|
)%
|
Total Return At
Market(a)
|
|
|
20.75
|
%
|
|
|
24.38
|
%
|
|
|
15.56
|
%
|
|
|
2.53
|
%
|
|
|
(14.22
|
)%
|
Ratios and Supplemental
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of year (in
thousands)
|
|
$
|
236,993
|
|
|
$
|
198,739
|
|
|
$
|
115,567
|
|
|
$
|
137,008
|
|
|
$
|
195,386
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses excluding incentive
compensation, interest and other borrowing costs
|
|
|
3.29
|
%
|
|
|
3.03
|
%
|
|
|
3.74
|
%(c)
|
|
|
7.01
|
%(b)
|
|
|
3.02
|
%
|
Expenses excluding incentive
compensation
|
|
|
4.03
|
%
|
|
|
3.05
|
%
|
|
|
3.74
|
%(c)
|
|
|
7.01
|
%(b)
|
|
|
3.02
|
%
|
Expenses excluding tax expense
(benefit)
|
|
|
6.78
|
%
|
|
|
3.75
|
%
|
|
|
3.68
|
%(c)
|
|
|
7.01
|
%(b)
|
|
|
3.02
|
%
|
Expenses including tax expense
(benefit), incentive compensation, interest and other borrowing
costs
|
|
|
6.85
|
%
|
|
|
3.69
|
%
|
|
|
3.74
|
%(c)
|
|
|
7.01
|
%(b)
|
|
|
3.02
|
%
|
Net operating income (loss) before
incentive compensation, interest and other borrowing costs
|
|
|
5.32
|
%
|
|
|
4.00
|
%
|
|
|
0.02
|
%
|
|
|
(5.22
|
)%(b)
|
|
|
(1.37
|
)%
|
Net operating income (loss) before
incentive compensation
|
|
|
4.58
|
%
|
|
|
3.98
|
%
|
|
|
0.02
|
%
|
|
|
(5.22
|
)%(b)
|
|
|
(1.37
|
)%
|
Net operating income (loss) before
tax expense (benefit)
|
|
|
1.83
|
%
|
|
|
3.28
|
%
|
|
|
0.08
|
%
|
|
|
(5.22
|
)%(b)
|
|
|
(1.37
|
)%
|
Net operating income (loss) after
tax expense (benefit), incentive compensation, interest and
other borrowing costs
|
|
|
1.76
|
%
|
|
|
3.34
|
%
|
|
|
0.02
|
%
|
|
|
(5.22
|
)%(b)
|
|
|
(1.37
|
)%
|
|
|
|
(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. |
|
(b) |
|
The expense ratio for the year ended October 31, 2003
included approximately $4.0 million of proxy/litigation
fees and expenses. When these fees and expenses are excluded,
the Funds expense ratio was 4.52% and the net operating
loss was −2.74%. |
|
(c) |
|
The expense ratio for the year ended October 31, 2004,
included a one-time expense recovery of approximately $250,000
(See Note 13). For the year ended October 31, 2004,
without this one-time recovery, the expense ratio, excluding and
including tax expense would have been 3.89% and 3.95%,
respectively. |
The accompanying notes are an integral part of these
consolidated financial statements.
F-15
MVC
Capital, Inc.
Notes to
Consolidated Financial Statements
October 31, 2006
|
|
1.
|
Organization
and Business Purpose
|
MVC Capital, Inc., formerly known as meVC Draper Fisher
Jurvetson Fund I, Inc. (the Company), is a
Delaware corporation organized on December 2, 1999 which
commenced operations on March 31, 2000. On December 2,
2002 the Company announced that it would begin doing business
under the name MVC Capital. The Companys investment
objective is to seek to maximize total return from capital
appreciation
and/or
income. The Company seeks to achieve its investment objective by
providing equity and debt financing to companies that are, for
the most part, privately owned (Portfolio
Companies). The Companys current investments in
Portfolio Companies consist principally of senior and
subordinated loans, venture capital, mezzanine and preferred
instruments and private equity investments.
The Company has elected to be treated as a business development
company under the Investment Company Act of 1940, as amended
(the 1940 Act). The shares of the Company commenced
trading on the New York Stock Exchange, Inc. (the
NYSE) under the symbol MVC on June 26, 2000.
The Company had entered into an advisory agreement with meVC
Advisers, Inc. (the Former Advisor) which had
entered into a
sub-advisory
agreement with Draper Fisher Jurvetson MeVC Management Co., LLC
(the Former
Sub-Advisor).
On June 19, 2002, the Former Advisor resigned without prior
notice to the Company as the Companys investment advisor.
This resignation resulted in the automatic termination of the
agreement between the Former Advisor and the Former
Sub-Advisor
to the Company. As a result, the Companys board
internalized the Companys operations, including management
of the Companys investments.
At the February 28, 2003 Annual Meeting of Shareholders, a
new board of directors replaced the former board of directors of
the Company (the Former Board) in its entirety. On
March 6, 2003, the results of the election were certified
by the Inspector of Elections, whereupon the Board terminated
John M. Grillos, the Companys previous CEO. Shortly
thereafter, other members of the Companys senior
management team, who had previously reported to
Mr. Grillos, resigned. With these significant changes in
the Board and management of the Company, the Company operated in
a transition mode and, as a result, no portfolio investments
were made from early March 2003 through the end of October 2003
(the end of the fiscal year). During this period, the Board
explored various alternatives for a long-term management plan
for the Company. Accordingly, at the September 16, 2003
Special Meeting of Shareholders, the Board voted and approved
the Companys business plan.
On November 6, 2003, Michael Tokarz assumed his position as
Chairman, Portfolio Manager and Director of the Company.
Mr. Tokarz is compensated by the Company based upon his
positive performance as the Portfolio Manager.
On March 29, 2004 at the Annual Shareholders meeting, the
shareholders approved the election of Emilio Dominianni, Robert
S. Everett, Gerald Hellerman, Robert C. Knapp and Michael Tokarz
to serve as members of the Board of Directors of the Company and
adopted an amendment to the Companys Certificate of
Incorporation authorizing the changing of the name of the
Company from meVC Draper Fisher Jurvetson Fund I,
Inc. to MVC Capital, Inc.
On July 7, 2004 the Companys name change from
meVC Draper Fisher Jurvetson Fund I, Inc. to
MVC Capital, Inc. became effective.
On July 16, 2004 the Company commenced the operations of
MVC Financial Services, Inc.
On September 7, 2006, the stockholders of MVC Capital
approved the adoption of an investment advisory and management
agreement with a 92% shareholder approval. The approved
investment advisory and management agreement, which was entered
into on October 31, 2006, provides for external management
of the Company by The Tokarz Group Advisers LLC (TTG
Advisers) (the Advisory Agreement), which is
led by Michael Tokarz. The agreement took effect on
November 1, 2006. Upon the effectiveness of the Advisory
Agreement on November 1, 2006, Mr. Tokarzs
employment agreement with the Company terminated. All of the
individuals (including the
F-16
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
Companys investment professionals) that had been
previously employed by the Company as of the fiscal year ended
October 31, 2006 are now employed by TTG Advisers and are
expected to continue to provide services to the Company.
On July 16, 2004, the Company formed a wholly owned
subsidiary company, MVC Financial Services, Inc.
(MVCFS). MVCFS is incorporated in Delaware and its
principal purpose is to provide advisory, administrative and
other services to the Company, the Companys portfolio
companies and other entities. Under regulations governing the
content of the Companys financial statements, the Company
is generally precluded from consolidating any entity other than
another investment company; however, an exception to these
regulations allows the Company to consolidate MVCFS since it is
a wholly owned operating subsidiary. MVCFS had opening equity of
$1 (100 shares at $0.01 per share). The Company does
not hold MVCFS for investment purposes and does not intend to
sell MVCFS. All intercompany accounts have been eliminated in
consolidation.
|
|
3.
|
Significant
Accounting Policies
|
The following is a summary of significant accounting policies
followed by the Company in the preparation of its consolidated
financial statements:
The preparation of consolidated financial statements in
accordance with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts and disclosures
in the consolidated financial statements. Actual results could
differ from those estimates.
Valuation of Portfolio Securities Pursuant to
the requirements of the 1940 Act, we value our portfolio
securities at their current market values or, if market
quotations are not readily available, at their estimates of fair
values. Because our portfolio company investments generally do
not have readily ascertainable market values, we record these
investments at fair value in accordance with Valuation
Procedures adopted by our board of directors. 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 valuations of portfolio company investments on a
quarterly basis (or more frequently, if deemed appropriate under
the circumstances). Any changes in valuation are recorded in the
statements of operations as Net unrealized gain (loss) on
investments. Currently, our net asset value
(NAV) per share is calculated and published on a
monthly basis. The fair values determined as of the most recent
quarter end are reflected, in the next calculated NAV per share.
(If the Valuation Committee determines to fair value an
investment more frequently than quarterly, the most recently
determined fair value would be reflected in the published NAV
per share.)
The Company calculates our NAV per share by subtracting all
liabilities from the total value of our portfolio securities and
other assets and dividing the result by the total number of
outstanding shares of our common stock on the date of valuation.
At October 31, 2006, approximately 79.5% of our total
assets represented portfolio investments recorded at fair value.
Initially, Fair Value Investments held by the Company are valued
at cost (absent the existence of circumstances warranting, in
managements and the Valuation Committees view, a
different initial value). During the period that a Fair Value
Investment is held by the Company, its original cost may cease
to represent an appropriate valuation, and other factors must be
considered. No pre-determined formula can be applied to
determine fair values. Rather, the Valuation Committee makes
fair value assessments based upon the value at which the
securities of the portfolio
F-17
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
company could be sold in an orderly disposition over a
reasonable period of time between willing parties, other than in
a forced or liquidation sale (Fair Value). The
liquidity event whereby the Company exits an investment is
generally the sale, the merger, the recapitalization or, in some
cases, the initial public offering of the portfolio company.
There is no one methodology to determine fair value and, in
fact, for any portfolio security, fair value may be expressed as
a range of values, from which the Company derives a single
estimate of fair value. To determine the fair value of a
portfolio security, the Valuation Committee analyzes the
portfolio companys financial results and projections,
publicly traded comparables when available, precedent exit
transactions in the market when available, as well as other
factors. The Company generally requires, where practicable,
portfolio companies to provide annual audited and more regular
unaudited financial statements,
and/or
annual projections for the upcoming fiscal year.
The fair value of our portfolio securities is inherently
subjective. Because of the inherent uncertainty of fair
valuation of portfolio securities that do not have readily
ascertainable market values, our estimate of fair value may
significantly differ from the fair market value that would have
been used had a ready market existed for the securities. Such
values also do not reflect brokers fees or other selling
costs which might become payable on disposition of such
investments.
The Companys equity interests in portfolio companies for
which there is no liquid public market are valued at Fair Value.
The Valuation Committees analysis of fair value may
include various factors, such as multiples of EBITDA, cash
flow(s), net income, revenues or in limited instances book value
or liquidation value. All of these factors may be subject to
adjustments based upon the particular circumstances of a
portfolio company or the Companys actual investment
position. For example, adjustments to EBITDA may take into
account compensation to previous owners or acquisition,
recapitalization, or restructuring or related items.
The Valuation Committee may look to private merger and
acquisition statistics, public trading multiples discounted for
illiquidity and other factors, or industry practices in
determining Fair Value. The Valuation Committee may also
consider the size and scope of a portfolio company and its
specific strengths and weaknesses, as well as any other factors
it deems relevant in assessing the value. The determined Fair
Values may be discounted to account for restrictions on resale
and minority positions.
Generally, the value of our equity interests in public companies
for which market quotations are readily available is based upon
the most recent closing public market price. Portfolio
securities that carry certain restrictions on sale are typically
valued at a discount from the public market value of the
security.
For loans and debt securities, Fair Value generally approximates
cost unless there is a reduced value or overall financial
condition of the portfolio company or other factors indicate a
lower Fair Value for the loan or debt security.
Generally, in arriving at a Fair Value for a debt security or a
loan, the Valuation Committee focuses on the portfolio
companys ability to service and repay the debt and
considers its underlying assets. With respect to a convertible
debt security, the Valuation Committee also analyzes the excess
of the value of the underlying security over the conversion
price as if the security was converted when the conversion
feature is in the money (appropriately discounted if
restricted). If the security is not currently convertible, the
use of an appropriate discount in valuing the underlying
security is typically considered. If the value of the underlying
security is less than the conversion price, the Valuation
Committee focuses on the portfolio companys ability to
service and repay the debt.
When the Company receives nominal cost warrants or free equity
securities (nominal cost equity) with a debt
security, the Company allocates its cost basis in the investment
between debt securities and nominal cost equity at the time of
origination.
Interest income is recorded on an accrual basis to the extent
that such amounts are expected to be collected. Origination,
closing
and/or
closing fees associated with investments in portfolio companies
are accreted into income over the respective terms of the
applicable loans. Upon the prepayment of a loan or debt
security, any
F-18
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
prepayment penalties and unamortized loan origination, closing
and commitment fees are recorded as income. Prepayment premiums
are recorded on loans when received.
For loans, debt securities, and preferred securities with
contractual
payment-in-kind
interest or dividends, which represent contractual
interest/dividends accrued and added to the loan balance or
liquidation preference that generally becomes due at maturity,
the Company will not accrue
payment-in-kind
interest/dividends if the portfolio company valuation indicates
that the
payment-in-kind
interest is not collectible. However, the Company may accrue
payment-in-kind
interest if the health of the portfolio company and the
underlying securities are not in question. All
payment-in-kind
interest that has been added to the principal balance or
capitalized is subject to ratification by the Valuation
Committee.
Escrows from the sale of a portfolio company are generally
valued at an amount which may be expected to be received from
the buyer under the escrows various conditions discounted
for both risk and time.
Investment Classification As required by the
1940 Act, we classify our investments by level of control. As
defined in the 1940 Act, Control Investments are
investments in those companies that we are deemed to
Control. Affiliate Investments are
investments in those companies that are Affiliated
Companies of us, as defined in the 1940 Act, other than
Control Investments. Non-Control/Non-Affiliate
Investments are those that are neither Control Investments
nor Affiliate Investments. Generally, under 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
date the order to buy or sell is executed). The cost of
securities sold is determined on a
first-in,
first-out basis, unless otherwise specified. Dividend income and
distributions on investment securities is recorded on the
ex-dividend date. The tax characteristics of such distributions
received from our portfolio companies will be determined by
whether or not the distribution was made from the
investments current taxable earnings and profits or
accumulated taxable earnings and profits from prior years.
Interest income, which includes accretion of discount and
amortization of premium, if applicable, is recorded on the
accrual basis to the extent that such amounts are expected to be
collected. Fee income includes fees for guarantees and services
rendered by the Company or its wholly-owned subsidiary to
portfolio companies and other third parties such as due
diligence, structuring, transaction services, monitoring
services, and investment advisory services. Guaranty fees are
recognized as income over the related period of the guaranty.
Due diligence, structuring, and transaction services fees are
generally recognized as income when services are rendered or
when the related transactions are completed. Monitoring and
investment advisory services fees are generally recognized as
income as the services are rendered. Any fee income determined
to be loan origination fees, original issue discount, and market
discount are capitalized and then amortized into income using
the effective interest method. Upon the prepayment of a loan or
debt security, any unamortized loan origination fees are
recorded as income and any unamortized original issue discount
or market discount is recorded as a realized gain. For
investments with
payment-in-kind
(PIK) interest and dividends, we base income and
dividend accrual on the valuation of the PIK notes or securities
received from the borrower. If the portfolio company indicates a
value of the PIK notes or securities that is not sufficient to
cover the contractual interest or dividend, we will not accrue
interest or dividend income on the notes or securities.
Cash Equivalents For the purpose of the
Consolidated Balance Sheets and Consolidated Statements of Cash
Flows, the Company considers all money market and all highly
liquid temporary cash investments purchased with an original
maturity of less than three months to be cash equivalents.
Restricted Securities The Company will invest
in privately placed restricted securities. These securities may
be resold in transactions exempt from registration or to the
public if the securities are registered. Disposal of these
securities may involve time-consuming negotiations and expense,
and a prompt sale at an acceptable price may be difficult.
F-19
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
Distributions to Shareholders Distributions
to shareholder are recorded on the ex-dividend date.
Income Taxes It is the policy of the Company
to meet the requirements for qualification as a regulated
investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended. 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.
Reclassifications Certain amounts from prior
years have had to be reclassified to conform to the current year
presentation.
On November 6, 2003, Michael Tokarz assumed his positions
as Chairman, Portfolio Manager and Director of the Company.
Under internal management, Mr. Tokarz was entitled to
compensation pursuant to his agreement with the Company, under
which the Company was required to pay Mr. Tokarz incentive
compensation in an amount equal to the lesser of (a) 20% of
the net income of the Company for the fiscal year; or
(b) the sum of (i) 20% of the net capital gains
realized by the Company in respect of the investments made
during his tenure as Portfolio Manager; and (ii) the
amount, if any, by which the Companys total expenses for a
fiscal year were less than two percent of the Companys net
assets (determined as of the last day of the period).
Mr. Tokarz has determined to allocate a portion of the
incentive compensation to certain employees of the Company. For
the year ended October 31, 2006, Mr. Tokarz received
no cash or other compensation from the Company pursuant to his
contract. Please see Note 5 Incentive
Compensation for more information.
On February 20, 2006, Robert Everett resigned from the
Companys board of directors. Mr. Everetts
resignation did not involve a disagreement with the Company on
any matter.
On February 23, 2006, in accordance with the recommendation
of the Nominating/Corporate Governance/Strategy Committee of the
Companys board of directors, Mr. William E. Taylor
was appointed to serve on the Companys board of directors.
Mr. Taylor was also appointed to serve on the Audit
Committee and Nominating/Corporate Governance/Strategy Committee
of the Companys board of directors.
On May 30, 2006, the Companys board of directors,
including all of the Independent Directors (Mr. Tokarz
recused himself from making a determination on this matter),
unanimously approved the Advisory Agreement, which provides for
the Company to be managed externally by TTG Advisers, which is
controlled exclusively by Mr. Tokarz. On September 7,
2006, shareholders approved the Advisory Agreement at the annual
meeting of shareholders.
On November 1, 2006, Mr. Tokarzs agreement with
the Company was terminated when the Advisory Agreement became
effective as of that date. Under the terms of the Advisory
Agreement, the Company will pay TTG Advisers a base management
fee and an incentive fee for its provision of investment
advisory and management services. Please refer to
Exhibit 10.4, Investment Advisory and Management Agreement
and Note 17 Subsequent Events for more
information.
F-20
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
|
|
5.
|
Incentive
Compensation
|
Under the terms of the Companys agreement with
Mr. Tokarz, as discussed in Note 4
Management, during the year ended October 31,
2006, the provision for estimated incentive compensation was
increased by $6,055,024. The increase in the provision for
incentive compensation resulted from the determination of the
Valuation Committee to increase the fair value of six of the
Companys portfolio investments: Baltic Motors, Dakota,
Ohio, Octagon, Turf, and Vitality which are subject to the
Companys agreement with Mr. Tokarz, by a total of
$30,275,120. This reserve balance of $7,172,352 will remain
unpaid until net capital gains are realized, if ever, by the
Company. Pursuant to Mr. Tokarzs employment agreement
with the Company, only after a realization event may the
incentive compensation be paid to him. Mr. Tokarz has
determined to allocate a portion of the incentive compensation
to certain employees of the Company. During the year ended
October 31, 2005 and the year ended October 31, 2006,
Mr. Tokarz was paid no cash or other compensation. However,
on October 2, 2006 and as discussed in Realized Gains
and Losses on Portfolio Securities, the Company realized a
gain of $551,092 from the sale of a portion of the
Companys LLC member interest in Octagon. This transaction
triggered an incentive compensation payment obligation to
Mr. Tokarz, which payment is not required to be made until
the precise amount of the payment obligation is confirmed based
on the Companys completed audited financials for the
fiscal year 2006. Subject to confirmation following the audit,
the payment obligation to Mr. Tokarz from this transaction
is approximately $110,000 (which is expected to be paid during
the first quarter of the Companys fiscal year 2007).
Mr. Tokarzs agreement with the Company terminated on
the effective date of the Advisory Agreement and the obligations
under Mr. Tokarzs agreement are superseded by those
under the Advisory Agreement. TTG Advisers is entitled to
incentive compensation on capital gains realized on portfolio
securities acquired after November 1, 2003.
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|
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
ordinary income for such calendar year and its capital gain net
income for the
12-month
period ending on October 31 of such calendar year (as well
as any portion of the respective 2% balances not distributed in
the previous year), it will not be subject to the 4%
non-deductible federal excise tax on certain undistributed
income of RICs.
Dividends and capital gain distributions, if any, are recorded
on the ex-dividend date. Dividends and capital gain
distributions are generally declared and paid quarterly
according to the Companys policy established on
July 11, 2005. An additional distribution may be paid by
the Company to avoid imposition of federal income tax on any
remaining undistributed net investment income and capital gains.
Distributions can be made payable by the Company either in the
form of a cash distribution or a stock dividend. The amount and
character of income and capital gain distributions are
determined in accordance with income tax regulations which may
differ from accounting principles generally accepted in the
United States of America. These differences are due primarily to
differing treatments of income and gain on various investment
securities held by the Company, timing differences and differing
characterizations of distributions made by the Company.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications and may affect
the allocation between net operating income, net realized gain
(loss) and paid in capital.
For
the Year Ended October 31, 2006
On July 11, 2005, the Companys board of directors
announced that it has approved the Companys establishment
of a policy seeking to pay quarterly dividends to shareholders.
On December 20, 2005, the Companys board of directors
declared a dividend of $.12 per share payable on
January 31, 2006 to shareholders of record on
December 30, 2005. The ex-dividend date was
December 28, 2005. The total distribution amounted to
$2,290,616 including distributions reinvested. In accordance
with the Plan, the Plan Agent re-issued 1,824 shares of
common stock from the Companys treasury to shareholders
participating in the Plan.
F-21
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
On April 11, 2006, the Companys board of directors
declared a dividend of $.12 per share payable on
April 28, 2006 to shareholders of record on April 21,
2006. The ex-dividend date was April 19, 2006. The total
distribution amounted to $2,290,835 including distributions
reinvested. In accordance with the Plan, the Plan Agent
re-issued 1,734 shares of common stock from the
Companys treasury to shareholders participating in the
Plan.
On July 14, 2006, the Companys board of directors
declared a dividend of $.12 per share payable on
July 31, 2006 to shareholders of record on July 24,
2006. The ex-dividend date was July 20, 2006. The total
distribution amounted to $2,291,043 including distributions
reinvested. In accordance with the Plan, the Plan Agent
re-issued 1,901 shares of common stock from the
Companys treasury to shareholders participating in the
Plan.
On October 13, 2006, the Companys board of directors
declared a dividend of $.12 per share payable on
October 31, 2006 to shareholders of record on
October 24, 2006. The ex-dividend date was October 20,
2006. The total distribution amounted to $2,291,271 including
distributions reinvested. In accordance with the Plan, the Plan
Agent re-issued 2,327 shares of common stock from the
Companys treasury to shareholders participating in the
Plan.
For
the Year Ended October 31, 2005
On July 11, 2005, the Companys board of directors
announced that it has approved the Companys establishment
of a policy seeking to pay quarterly dividends to shareholders.
For the quarter, the board of directors declared a dividend of
$.12 per share payable on July 29, 2005 to
shareholders of record on July 22, 2005. The ex-dividend
date was July 20, 2005. The total distribution amounted to
$2,290,289. In accordance with the Plan, the Plan Agent
re-issued 826 shares of common stock from the
Companys treasury to shareholders participating in the
Plan.
On October 10, 2005, the Companys board of directors
declared a dividend of $.12 per share payable on
October 31, 2005 to shareholders of record on
October 21, 2005. The ex-dividend date was October 19,
2005. The total distribution amounted to $2,290,387. In
accordance with the Plan, the Plan Agent re-issued
1,904 shares of common stock from the Companys
treasury to shareholders participating in the Plan.
For
the Year Ended October 31, 2004
On October 14, 2004, the Companys Board of Directors
declared a nonrecurring dividend of $.12 per share payable
to shareholders of record on October 22, 2004 and payable
on October 29, 2004. In accordance with the Plan, the Plan
Agent purchased shares on the open market of the NYSE for
shareholders participating in the Plan. The total distribution
amounted to $1,475,165.
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7.
|
Transactions
with Other Parties
|
The Company is permitted to co-invest in certain Portfolio
Companies with its affiliates subject to specified conditions
set forth in an exemptive order obtained from the SEC. Under the
terms of the order, Portfolio Companies purchased by the Company
and its affiliates are required to be approved by the
Independent Directors and are required to satisfy certain
conditions established by the SEC. During 2004, 2005, and 2006
no transactions were effected pursuant to the exemptive order.
As stated above in Item 2, Properties, the
Company has
sub-leased
property at 287 Bowman Avenue, Purchase, NY 10577 a building
which is owned by Phoenix Capital Partners, LLC, which is 97%
owned by Mr. Tokarz.
In connection with the Companys investment in Velocitius,
we have entered into consulting services arrangements with
Jasper Energy, LLC (Jasper). Under the terms of the
arrangements, Jasper provides management consulting services
relating to Velocitius acquisition of certain wind farms
and is to be paid an ongoing monthly service fee of
approximately 8,000 euros ($10,000), a fee equal to 9% of the
profit distributions attributable
F-22
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
to the wind farm projects and a one-time fee equal to 2% of the
equity purchase price of the wind farms (estimated currently at
175,000 euros ($220,000)). Mr. Tokarz, our Chairman and
Portfolio Manager, has a minority ownership interest in Jasper.
Our board of directors, including all of our Independent
Directors (Mr. Tokarz recused himself from making a
determination on this matter), approved each of the arrangements
with Jasper.
|
|
8.
|
Concentration
of Market and Credit Risk
|
Financial instruments that subjected the Company to
concentrations of market risk consisted principally of equity
investments, subordinated notes, and debt instruments (other
than cash equivalents), which represent approximately 79.50% of
the Companys total assets at October 31, 2006. 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. At this time, the Companys investments in
short-term securities are in
90-day
Treasury Bills, which are federally guaranteed securities, or
other high quality, highly liquid investments. The
Companys cash balances, if not large enough to be invested
in 90-day
Treasury Bills or other high quality, highly liquid investments,
are swept into designated money market accounts.
For
the Year Ended October 31, 2006
During the year ended October 31, 2006, the Company made
sixteen new investments, committing capital totaling
approximately $142.1 million. The investments were made in
Turf ($11.6 million), SOI ($5.0 million), Henry
($5.0 million), BM Auto ($15.0 million), Storage
Canada ($6.0 million), Phoenix ($8.0 million), Harmony
Pharmacy, Inc. ($200,000), Total Safety ($6.0 million),
PreVisor ($6.0 million), Marine ($14.0 million), BP
($15.0 million), Velocitius ($66,290), Summit
($16.2 million), Octagon ($17.0 million), BENI
($2.0 million), and Innovative Brands ($15.0 million).
The Company also made eight follow-on investments in existing
portfolio companies committing capital totaling approximately
$24.2 million. During the year ended October 31, 2006,
the Company invested approximately $879,000 in Dakota by
purchasing an additional 172,104 shares of common stock at
an average price of $5.11 per share. On December 22,
2005, the Company made a follow-on investment in Baltic Motors
in the form of a $1.8 million revolving bridge note. Baltic
Motors immediately drew down $1.5 million from the note. On
January 12, 2006, Baltic Motors repaid the amount drawn
from the note in full including all unpaid interest. The note
matured on January 31, 2006 and has been removed from the
Companys books. On January 12, 2006, the Company
provided SGDA a $300,000 bridge loan. On March 28, 2006,
the Company provided Baltic Motors a $2.0 million revolving
bridge note. Baltic Motors immediately drew down
$2.0 million from the note. On April 5, 2006, Baltic
Motors repaid the amount drawn from the note in full including
all unpaid interest. The note matured on April 30, 2006 and
has been removed from the Companys books. On April 6,
2006, the Company invested an additional $2.0 million in
SGDA in the form of a preferred equity security. On
April 25, 2006, the Company purchased an additional common
equity security in SGDA for $23,000. On June 30, 2006, the
Company invested $2.5 million in Amersham in the form of a
second lien loan. On August 4, 2006, the Company invested
$750,000 in Harmony Pharmacy in the form of common stock. On
September 28, 2006, the Company made another follow-on
investment in Baltic Motors in the form of a $1.0 million
bridge loan and $2.0 million equity investment. On
October 13, 2006, the Company made a $10 million
follow-on investment in SP. The $10 million was invested in
the form of an additional $4.0 million in term loan B
and $6.0 million in a mezzanine loan. On October 20,
2006, the Company then assigned $5.0 million of SPs
$8.0 million term loan B to Citigroup Global Markets
Realty Corp. On
F-23
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
October 24, 2006, the Company invested an additional
$3.0 million in SGDA in the form of a preferred equity
security. On October 26, 2006, the Company invested an
additional $2.9 million in Velocitius in the form of common
equity. The Company also provided Velocitius a $260,000
revolving note on October 31, 2006. Velocitius immediately
drew down $143,614 from the note.
At the beginning of the 2006 fiscal year, the revolving credit
facility provided to SGDA had an outstanding balance of
approximately $1.2 million. During December 2005, SGDA drew
down an additional $70,600 from the credit facility. On
April 28, 2006, the Company increased the availability
under the revolving credit facility by $300,000. The balance of
the bridge loan mentioned above, which would have matured on
April 30, 2006, was added to the revolving credit facility
and the bridge loan was eliminated from the Companys books
as a part of the refinancing.
On December 21, 2005, Integral prepaid its senior credit
facility from the Company in full. The Company received
approximately $850,000 from the prepayment. This amount included
all outstanding principal and accrued interest. The Company
recorded no gain or loss as a result of the prepayment. Under
the terms of the prepayment, the Company returned its warrants
to Integral for no consideration.
Effective December 27, 2005, the Company exchanged
$286,200, of the $3.25 million outstanding, of the
Timberland junior revolving line of credit into
28.62 shares of common stock at a price of $10,000 per
share. As a result, as of July 31, 2006, the Company owned
478.62 common shares of Timberland and the funded debt under the
junior revolving line of credit was reduced from
$3.25 million to approximately $2.96 million.
Effective December 31, 2005, the Company received
373,362 shares of Series E preferred stock of
ProcessClaims, Inc. in exchange for its rights under a warrant
issued by ProcessClaims that has been held by the Company since
May 2002. On January 5, 2006, the Valuation Committee
increased the fair value of the Companys entire investment
in ProcessClaims by $3.3 million to $5.7 million.
Please see the paragraph below for more information on
ProcessClaims.
On January 3, 2006, the Company exercised its warrant
ownership in Octagon which increased its existing membership
interest. As a result, Octagon is now considered an affiliate of
the Company.
Due to the dissolution of Yaga, one of the Companys Legacy
Investments companies, the Company realized losses on its
investment in Yaga totaling $2.3 million during the nine
month period ended July 31, 2006. The Company received no
proceeds from the dissolution of Yaga and the Companys
investment in Yaga has been removed from the Companys
books. The Valuation Committee previously decreased the fair
value of the Companys investment in Yaga to zero and as a
result, the Companys realized losses were offset by
reductions in unrealized losses. Therefore, the net effect of
the removal of Yaga from the Companys books on the
Companys consolidated statement of operations and NAV at
October 31, 2006, was zero.
On February 24, 2006, BP repaid its second lien loan from
the Company in full. The amount of the proceeds received from
the prepayment was approximately $8.7 million. This amount
included all outstanding principal, accrued interest, accrued
monitoring fees and an early prepayment fee. The Company
recorded no gain or loss as a result of the repayment.
On April 7, 2006, the Company sold its investment in Lumeta
for its carrying value of $200,000. The Company realized a loss
on Lumeta of approximately $200,000. However, the Valuation
Committee previously decreased the fair value of the
Companys investment in Lumeta to $200,000 and, as a
result, the realized loss was offset by a reduction in
unrealized losses. Therefore, the net effect of the
Companys sale of its investment in Lumeta on the
Companys consolidated statement of operations and NAV was
zero.
On April 21, 2006, BM Auto repaid its bridge loan from the
Company in full. The amount of the proceeds received from the
repayment was approximately $7.2 million. This amount
included all outstanding principal, accrued interest and was net
of foreign taxes withheld. The Company recorded no gain or loss
as a result of the repayment.
F-24
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
On May 4, 2006, the Company received a working capital
adjustment of approximately $250,000 related to the
Companys purchase of a membership interest in Turf. As a
result, the Companys cost basis in the investment was
reduced.
On May 30, 2006, ProcessClaims, one of the Companys
Legacy Investments companies, entered into a definitive
agreement to be acquired by CCC Information Services Inc.
(CCC). The acquisition by CCC closed on June 9,
2006. As of June 9, 2006, the Company received net proceeds
of approximately $7.9 million. The gross proceeds were
approximately $8.3 million of which approximately $400,000
or 5% of the gross proceeds were deposited into a reserve
account for one year. Due to the contingencies associated with
the escrow, the Company has not presently placed any value on
the proceeds deposited in escrow and has therefore not factored
such proceeds into the Companys increased NAV. The
Companys total investment in ProcessClaims was
$2.4 million which resulted in a capital gain of
approximately $5.5 million.
On July 27, 2006, SOI repaid their loan from the Company in
full. The amount of the proceeds received from the prepayment
was approximately $4.5 million. This amount included all
outstanding principal, accrued interest, and an early prepayment
fee. The Company recorded no gain or loss as a result of the
prepayment.
On August 25, 2006, Harmony Pharmacy repaid their loan from
the Company in full. The amount of the proceeds received from
the prepayment was $207,444. This amount included all
outstanding principal and accrued interest. The Company recorded
no gain or loss as a result of the prepayment.
On August 25, 2006, SGDAs revolving credit facility
was added to the term loan, increasing the balance of the term
loan by $1.6 million. The revolving credit facility was
eliminated from the Companys books as a result of this
refinancing.
Effective September 12, 2006, the Company exchanged
$409,091, of the $2.96 million outstanding, of the
Timberland junior revolving line of credit into
40.91 shares of common stock at a price of $10,000 per
share. Effective September 22, 2006, the Company exchanged
$225,000, of the $2.55 million outstanding, of the
Timberland junior revolving line of credit into 22.5 shares
of common stock at a price of $10,000 per share. On
September 22, 2006, Timberland drew down $500,000 from the
junior revolving line of credit. As a result of these
transactions, as of October 31, 2006, the Company owned
542.03 common shares of Timberland and the funded debt under the
junior revolving line of credit was reduced from
$2.96 million to approximately $2.83 million.
On October 2, 2006, Octagon bought-back a total of 15%
equity interest from non-service members. This resulted in a
sale of a portion of the Companys LLC member interest to
Octagon for proceeds of $1,020,018. The Company realized a gain
of $551,092 from this sale.
On October 2, 2006, Octagon repaid their loan and revolving
credit facility from the Company in full. The amount of the
proceeds received from the prepayment of the loan was
approximately $5.4 million. This amount included all
outstanding principal, accrued interest, and an unused fee on
the revolving credit facility. The Company recorded a gain as a
result of these prepayments of approximately $429,000 from the
acceleration of amortization of original issue discount.
On October 20, 2006, the Company assigned $5.0 million
of SPs $8.0 million term loan B to Citigroup
Global Markets Realty Corp.
On October 30, 2006, JDC repaid $160,116 of principal on
the senior subordinated debt.
During the year ended October 31, 2006, the Valuation
Committee increased the fair value of the Companys
investments in Baltic Motors common stock by $11.6 million,
Dakota common stock by approximately $2.6 million,
Turfs membership interest by $2.0 million,
Octagons membership interest by approximately $562,000,
Ohio common stock by $9.2 million, Foliofn preferred stock
by $5.0 million, Vendio preferred stock by $700,000,
ProcessClaims preferred stock by $4.8 million and Vitality
common stock and warrants by $3.5 million and $400,000,
respectively. In addition, increases recorded to the cost basis
and fair value of the loans to Amersham, BP,
F-25
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
Impact, JDC, Phoenix, SP, Timberland, Turf, Marine, Summit and
the Vitality and Marine preferred stock were due to the receipt
of payment in kind interest/dividends totaling approximately
$2.2 million. Also during the year ended October 31,
2006, the undistributed allocation of flow through income from
the Companys equity investment in Octagon increased the
cost basis and fair value of the Companys investment by
approximately $279,000. During the year ended October 31,
2006, the Valuation Committee also decreased the fair value of
the Companys equity investment in Timberland by
$1 million. The increase in fair value from payment in kind
interest/dividends and flow through income has been approved by
the Companys Valuation Committee.
At October 31, 2006, the fair value of all portfolio
investments, exclusive of short-term securities, was
$275.9 million with a cost basis of $286.9 million. At
October 31, 2005, the fair value of all portfolio
investments, exclusive of short-term securities, was
$122.3 million with a cost basis of $171.6 million.
For
the Year Ended October 31, 2005
During the year ended October 31, 2005, the Company made
six new investments, committing capital totaling approximately
$48.8 million. The investments were made in JDC, SGDA, SP,
BP, Ohio and Amersham. The amounts invested were
$3.0 million, $5.8 million, $10.5 million,
$10 million, $17 million and $2.5 million,
respectively.
The Company also made three follow-on investments in existing
portfolio companies committing capital totaling approximately
$5.0 million. In December 2004 and January 2005, the
Company invested a total of $1.25 million in Timberland in
the form of subordinated bridge notes. On April 15, 2005,
the Company re-issued 146,750 shares of its treasury stock
at the Companys NAV per share of $9.54 in exchange for
40,500 shares of common stock of Vestal. On July 8,
2005 the Company extended Timberland a $3.25 million junior
revolving note. In accordance with the terms of the note,
Timberland immediately drew $1.3 million from the revolving
note and used the proceeds to repay the subordinated bridge
notes in full. The repayment included all outstanding principal
and accrued interest. On July 29, 2005, the Company
invested an additional $325,000 in Impact in the form of a
secured promissory note.
In April 2005, Octagon drew $1.5 million from the senior
secured credit facility provided to it by the Company and repaid
it in full during June 2005.
During 2005, SGDA drew approximately $1.2 million from the
revolving credit facility provided to it by the Company. As of
October 31, 2005, the entire $1.2 million drawn from
the facility remained outstanding.
On July 14, 2005 and September 28, 2005, Timberland
drew an additional $1.5 million and $425,000, from the
revolving note mentioned above, respectively. As of
October 31, 2005, the note was drawn in full and the
balance of $3.25 million remained outstanding.
Also, during the year ended October 31, 2005, the Company
sold its entire investment in Sygate and received
$14.4 million in net proceeds. In addition, approximately
$1.6 million or 10% of proceeds from the sale were
deposited in an escrow account for approximately one year. Due
to the contingencies associated with the escrow, the Company has
not presently placed any value on the proceeds deposited in
escrow and has therefore not factored such proceeds into the
Companys increased NAV. The realized gain from the
$14.4 million in net proceeds received was
$10.4 million. The Company also sold 685,679 shares of
Mentor Graphics Corp. (Mentor Graphics) receiving
net proceeds of approximately $9.0 million and realized a
gain on the shares sold of approximately $5.0 million. The
Company also received approximately $300,000 from the escrow
related to the 2004 sale of BlueStar Solutions, Inc.
(BlueStar).
The Company realized losses on CBCA, Inc. (CBCA) of
approximately $12.0 million, Phosistor Technologies, Inc.
(Phosistor) of approximately $1.0 million and
ShopEaze Systems, Inc. (ShopEaze) of approximately
$6.0 million. The Company received no proceeds from these
companies and they have been removed from the Companys
portfolio. The Valuation Committee previously decreased the fair
value of the Companys
F-26
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
investment in these companies to zero and as a result, the
realized losses were offset by reductions in unrealized losses.
Therefore, the net effect of the transactions on the
Companys consolidated statement of operations and NAV was
zero.
On December 21, 2004, Determine Software, Inc.
(Determine) prepaid its senior credit facility from
the Company in full. The amount of proceeds the Company received
from the repayment was approximately $1.64 million. This
amount included all outstanding principal and accrued interest.
Under the terms of the early repayment, the Company returned its
2,229,955 Series C warrants for no consideration.
On July 5, 2005, Arcot Systems, Inc. (Arcot)
prepaid its senior credit facility from the Company in full. The
amount of proceeds the Company received from the repayment was
approximately $2.55 million. This amount included all
outstanding principal and accrued interest. Under the terms of
the early repayment, the Company returned its warrants to Arcot
for no consideration.
The Company continued to receive principal repayments on the
debt securities of Integral and BP. Integral made payments
during the year ended October 31, 2005, according to its
credit facility agreement totaling $1,683,336. BP made two
quarterly payments during the year ended totaling $833,333.
Also, the Company received a one time, early repayment on
Vestals debt securities totaling $100,000.
During the year ended October 31, 2005, the Valuation
Committee increased the fair value of the Companys
investments in Baltic Motors by $1.5 million, Dakota by
$514,000, Octagon by $1,022,638, Sygate by $7.5 million
(which was later realized), Vendio by $1,565,999, Vestal by
$1,850,000 and Vitality by $700,000. In addition, increases in
the cost basis and fair value of the Octagon loan, Impact loan,
Timberland loan, Vitality Series A preferred stock, JDC
loan and SP loans were due to the receipt of payment in
kind interest/dividends totaling $1,370,777. Also during
the year ended October 31, 2005, the undistributed
allocation of flow through income from the Companys equity
investment in Octagon increased the cost basis and fair value of
the investment by $114,845.
At October 31, 2005, the fair value of all portfolio
investments, exclusive of short-term securities, was
$122.3 million with a cost of $171.6 million. At
October 31, 2004, the fair value of all portfolio
investments, exclusive of short-term securities, was
$78.5 million with a cost of $151.6 million.
|
|
10.
|
Commitments
and Contingencies
|
Commitments
to/for Portfolio Companies:
At October 31, 2006, the Companys commitments to
portfolio companies consisted of the following:
Open
Commitments of MVC Capital, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Funded at
|
|
Portfolio Company
|
|
Amount Committed
|
|
|
October 31, 2006
|
|
|
Marine
|
|
$
|
2.0 million
|
|
|
|
|
|
Octagon
|
|
$
|
12.0 million
|
|
|
$
|
3.25 million
|
|
Storage Canada
|
|
$
|
6.0 million
|
|
|
$
|
1.95 million
|
|
Timberland
|
|
$
|
3.25 million
|
|
|
$
|
2.83 million
|
|
Velocitius
|
|
$
|
260,000
|
|
|
$
|
143,614
|
|
On May 7, 2004, the Company provided a $5,000,000 senior
secured credit facility to Octagon. This credit facility expires
on May 6, 2007 and can be automatically extended until
May 6, 2009. The credit facility bears annual interest at
LIBOR plus 4%. The Company receives a 0.50% unused facility fee
on an annual basis and a 0.25% servicing fee on an annual basis
for maintaining the credit facility. On February 1, 2006,
Octagon drew $250,000 from the credit facility. The credit
facility was repaid in full including, all accrued interest on
February 23, 2006. This credit facility was refinanced on
October 12, 2006.
F-27
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
During February 2005, the Company made available to SGDA, a
$1,308,300 revolving credit facility that bears annual interest
at 7%. The credit facility expired on August 25, 2006.
During the fiscal year 2006, SGDA drew down $70,600 from the
credit facility. On April 28, 2006, the Company increased
the availability under the revolving credit facility by
$300,000. The balance of the Companys bridge loan to SDGA,
which would have matured on April 30, 2006, was added to
the revolving credit facility and the bridge loan was removed
from the Companys books.
On June 30, 2005, the Company pledged its common stock of
Ohio to Guggenheim to collateralize a loan made by Guggenheim to
Ohio.
On July 8, 2005 the Company extended Timberland a
$3.25 million junior revolving note that bears interest at
12.5% per annum and expires on July 7, 2007. The
Company also receives a fee of 0.25% on the unused portion of
the note. As of October 31, 2005, the total amount
outstanding on the note was $3.25 million. On
December 27, 2005, the Company exchanged $286,200 of the
Timberland junior revolving line of credit for 28.62 shares
of common stock at a price of $10,000 per share. As of
January 31, 2006, the Company owned 478.62 common shares
and the funded debt under the junior revolving line of credit
has been reduced from $3.25 million to approximately
$2.96 million. On April 21, 2006, Timberland repaid
$500,000 on the note. On May 18, 2006, Timberland repaid an
additional $500,000 on the note. On July 10, 2006,
Timberland drew down $1.0 million leaving the total amount
on the note outstanding at July 31, 2006 approximately
$2.96 million. On September 12, 2006, the Company
converted $409,091 of the Timberland junior revolving line of
credit into 40.91 shares of common stock at a price of
$10,000 per share. Effective September 22, 2006, the
Company converted $225,000 of the Timberland junior revolving
line of credit into 22.50 shares of common stock at a price
of $10,000 per share. Timberland then borrowed $500,000
from the junior revolving line of credit. As a result of these
transactions, as of October 31, 2006 the Company owned
542.03 common shares and the funded debt under the junior
revolving line of credit was reduced from $3.25 million to
approximately $2.83 million.
On December 22, 2005, the Company extended to Baltic Motors
a $1.8 million revolving bridge note. The note bears
interest at 12% per annum and had a maturity date of
January 31, 2006. Baltic Motors immediately drew
$1.5 million from the note. On January 12, 2006,
Baltic Motors repaid the amount drawn from the note in full
including all unpaid interest. The revolver matured on
January 31, 2006 and has been removed from the
Companys books.
On March 28, 2006, the Company extended to Baltic Motors a
$2.0 million revolving bridge note. Baltic Motors
immediately drew down $2.0 million from the note. On
April 5, 2006, Baltic Motors repaid the amount drawn from
the note in full including all unpaid interest. The note matured
on April 30, 2006 and has been removed from the
Companys books.
On March 30, 2006, the Company provided a $6 million
loan commitment to Storage Canada and the company immediately
borrowed $1.34 million. The commitment expires after one
year, but may be renewed with the consent of both parties. The
initial borrowing on the loan bears annual interest at 8.75% and
has a maturity date of March 30, 2013. Any additional
borrowings will mature seven years from the date of the
subsequent borrowing. The Company also receives a fee of 0.25%
on the unused portion of the loan. On October 6, 2006,
Storage Canada borrowed an additional $619,000. The borrowing
bears annual interest at 8.75% and has a maturity date of
October 6, 2013.
On July 11, 2006, the Company extended to Marine a
$2.0 million secured revolving note. The note bears annual
interest at LIBOR plus 1%. The Company also receives a fee of
0.50% of the unused portion of the loan. There was no amount
drawn on the revolving note as of October 31, 2006.
On August 25, 2006, SGDAs revolving credit facility
was added to the term loan, increasing the balance of the term
loan by $1.6 million. The revolving credit facility was
eliminated from the Companys books as a result of this
refinancing.
F-28
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
On October 12, 2006, the Company provided a
$12.0 million revolving credit facility to Octagon in
replacement of the senior secured credit facility provided on
May 7, 2004. This credit facility expires on
December 31, 2011. The credit facility bears annual
interest at LIBOR plus 4.25%. The Company receives a 0.50%
unused facility fee on an annual basis and a 0.25% servicing fee
on an annual basis for maintaining the credit facility. On
October 12, 2006, Octagon drew $3.75 from the credit
facility. Octagon repaid $500,000 of the credit facility on
October 30, 2006. As of October 31, 2006, there was
$3.25 million outstanding.
On October 30, 2006, the Company provided a $260,000
revolving line of credit to Velocitius on which Velocitius
immediately borrowed $143,614. The revolving line of credit
expires on October 31, 2009. The note bears annual interest
at 8%.
Timberland also has a floor plan financing program administered
by Transamerica. As is typical in Timberlands industry,
under the terms of the dealer financing arrangement, Timberland
guarantees the repurchase of product from Transamerica, if a
dealer defaults on payment and the underlying assets are
repossessed. The Company has agreed to be a limited co-guarantor
for up to $500,000 on this repurchase commitment.
Commitments
of the Company:
On October 28, 2004, the Company entered into a one-year,
cash collateralized, $20 million revolving credit facility
(the LaSalle Credit Facility) with LaSalle Bank
National Association (the Bank). On July 20,
2005, the Company amended the LaSalle Credit Facility. The
maximum aggregate loan amount under the LaSalle Credit Facility
was increased from $20 million to $30 million.
Additionally, the maturity date was extended from
October 31, 2005 to August 31, 2006. All other
material terms of the LaSalle Credit Facility remained
unchanged. On January 27, 2006, the Company borrowed
$10 million under the LaSalle Credit Facility. The
$10 million borrowed under the LaSalle Credit Facility was
repaid in full by February 3, 2006. Borrowings under the
LaSalle Credit Facility bear interest, at the Companys
option, at either a fixed rate equal to the LIBOR rate (for one,
two, three or six months), plus 1.00% per annum, or at a
floating rate equal to the Banks prime rate in effect from
time to time, minus 1.00% per annum. The LaSalle Credit
Facility expired on August 31, 2006.
On February 16, 2005, the Company entered into a sublease
(the Sublease) for a larger space in the building in
which the Companys current executive offices are located.
Effective November 1, 2006, the Company subleased its
principal executive office to TTG Advisers. The Sublease is
scheduled to expire on February 28, 2007. Future payments
under the Sublease for TTG Advisers total approximately $75,000
in the fiscal year 2007. The Companys previous lease was
terminated effective March 1, 2005, without penalty. The
building in which the Companys executive offices are
located, 287 Bowman Avenue, is owned by Phoenix Capital
Partners, LLC, an entity which is 97% owned by Mr. Tokarz.
See Note 4 Management for more information on
Mr. Tokarz.
On April 27, 2006, the Company and MVCFS, as co-borrowers
entered into a new four-year, $100 million revolving credit
facility (the Credit Facility) with Guggenheim as
administrative agent to the lenders. On April 27, 2006, the
Company borrowed $45 million ($27.5 million drawn from
the revolving the credit facility and $17.5 million in term
debt) under the Credit Facility. The $27.5 million drawn from
the revolving credit facility was repaid in full on May 2,
2006. On July 28, 2006, the Company borrowed
$57.5 million ($45.0 million drawn from the revolving
credit facility and $12.5 million in term debt) under the
Credit Facility. On August 2, 2006, the Company repaid
$45.0 million borrowed on the revolving credit facility. On
August 31, 2006, the Company borrowed $5.0 million in
term debt under the Credit Facility. On October 27, 2006,
the Company borrowed $4.0 million from the revolving credit
under the Credit Facility. On October 30, 2006, the Company
borrowed $61 million under the Credit Facility,
$15 million in term debt and $46 million drawn from
the revolving credit facility. As of October 31, 2006,
there was $50.0 million in term debt and $50.0 million
on the revolving credit facility outstanding. The proceeds from
borrowings made under the Credit Facility are expected to be
used to fund new and existing portfolio investments, pay fees
and expenses related to the financing and for general corporate
purposes. The Credit Facility will expire on April 27,
2010, at which time all outstanding amounts under the Credit
Facility will be due and payable. Borrowings under the Credit
Facility will bear interest, at the Companys option, at
F-29
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
a floating rate equal to either (i) the LIBOR rate (for
one, two, three or six months), plus a spread of 2.00% per
annum, or (ii) the Prime rate in effect from time to time,
plus a spread of 1.00% per annum. The Company paid a
closing fee, legal and other costs associated with this
transaction. These costs will be amortized evenly over the life
of the facility. The prepaid expenses on the Balance Sheet
include the unamortized portion of these costs. Borrowings under
the Credit Facility will be secured, by among other things,
cash, cash equivalents, debt investments, accounts receivable,
equipment, instruments, general intangibles, the capital stock
of MVCFS, and any proceeds from all the aforementioned items, as
well as all other property except for equity investments made by
the Company.
The Company enters into contracts with portfolio companies and
other parties that contain a variety of indemnifications. The
Companys maximum exposure under these arrangements is
unknown. However, the Company has not experienced claims or
losses pursuant to these contracts and believes the risk of loss
related to indemnifications to be remote.
|
|
11.
|
Certain
Issuances of Equity Securities by the Issuer
|
On December 3, 2004, the Company commenced a rights
offering to its shareholders of non-transferable subscription
rights to purchase shares of the Companys common stock.
Pursuant to the terms of the rights offering, each share of
common stock held by a stockholder of record on December 3,
2004, entitled the holder to one right. For every two rights
held, shareholders were able to purchase one share of the
Companys common stock at the subscription price of 95% of
the Companys NAV per share on January 3, 2005. In
addition, shareholders who elected to exercise all of their
rights to purchase the Companys common stock received an
over-subscription right to subscribe for additional shares that
were not purchased by other holders of rights. Based on a final
count by the Companys subscription agent, the rights
offering was over-subscribed with 6,645,948 shares of the
Companys common stock subscribed for. This was in excess
of the 6,146,521 shares available before the 25%
oversubscription. Each share was subscribed for at a price of
$9.10 which resulted in gross proceeds to the Company of
approximately $60.5 million before offering expenses of
approximately $402,000.
On April 15, 2005, the Company re-issued
146,750 shares of its treasury stock at the Companys
NAV per share of $9.54 in exchange for 40,500 shares of
common stock of Vestal.
On February 20, 2002, Millenco LP (Millenco), a
stockholder, filed a complaint in the United States District
Court for the District of Delaware on behalf of the Company
against the meVC Advisers, Inc. (the Former
Advisor). The complaint alleged that the fees received by
the Former Advisor, beginning one year prior to the filing of
the complaint, were excessive, and in violation of
Section 36(b) of the 1940 Act. The case was settled for
$370,000 from which the Company received net proceeds in July
2004 of $245,213 after payment of legal fees and expenses.
During the year ended October 31, 2003, the Company paid or
accrued $4.0 million for legal and proxy solicitation fees
and expenses, which included $2.2 million accrued and paid
at the direction of the Board of Directors, to reimburse the
legal and proxy solicitation fees and expenses of two major
Company shareholders, Millenco, L.P. and Karpus Investment
Management, including their costs of obtaining a judgment
against the Company in the Delaware Chancery Court and costs
associated with the proxy process and the election of the
current Board of Directors. The Company made a claim against its
insurance carrier, Federal Insurance Company
(Federal) for its right to reimbursement of such
expenses. On June 13, 2005, the Company reached a
settlement with Federal in the amount of $473,968 which has been
recorded as Other Income in the Consolidated Statement of
Operations. Legal fees and expenses associated with reaching
this settlement were $47,171.
F-30
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
|
|
13.
|
Recovery
of Expenses and Unusual Income Items
|
On January 21, 2004, the Company reached an agreement with
the property manager at 3000 Sand Hill Road, Menlo Park,
California to terminate its lease at such location as a result
of the property managers ability to reach an agreement
with a new tenant for the space. Under the terms of the
agreement, the Company bought-out its lease directly from the
property manager, for an amount equal to $232,835. As a result,
the Company recovered approximately $250,000 of the remaining
reserve established at October 31, 2003. Without the
recovery of the reserve, the gross facilities expense for the
year ended October 31, 2004 would have been approximately
$340,828.
On July 13, 2004, the Company received $370,000 from the
settlement of the case Millenco L.P. v. meVC Advisers, Inc.
(See Note 12 Legal Proceedings). The actual
cash received was $245,213, after payment of legal fees and
expense. This settlement was the reimbursement of management
fees received by the Former Advisor which were alleged to be
excessive.
During the year ended October 31, 2003, the Company paid or
accrued $4.0 million for legal and proxy solicitation fees
and expenses, which included $2.2 million accrued and paid
at the direction of the Board of Directors, to reimburse the
legal and proxy solicitation fees and expenses of two major
Company shareholders, Millenco, and Karpus Investment
Management, including their costs of obtaining a judgment
against the Company in the Delaware Chancery Court and costs
associated with the proxy process and the election of the
current Board of Directors. The Company made a claim against its
insurance carrier, Federal for its right to reimbursement of
such expenses. On June 13, 2005, the Company reached a
settlement with Federal in the amount of $473,968 which has been
recorded as Other Income in the Consolidated Statement of
Operations. Legal fees and expenses associated with reaching
this settlement were $47,171.
Return of Capital Statement of Position (ROCSOP)
Adjustment: During the year ended
October 31, 2006, the Company recorded a reclassification
for permanent book to tax differences totaling $4,717,113. These
differences were primarily due to book/tax treatment of
partnership income and non-deductible excise taxes paid. These
differences resulted in a net increase in accumulated earnings
of $4,717,113, an increase in accumulated net realized loss of
$395,257, and a decrease in additional paid in capital of
$5,112,370. This reclassification had no effect on net assets.
Distributions to Shareholders: The table
presented below includes MVC Capital, Inc. only. The
Companys wholly-owned subsidiary MVC Financial Services,
Inc. (MVCFS) has not been included. As of
October 31, 2006, the components of accumulated
earnings/(deficit) on a tax basis were as follows:
|
|
|
|
|
Tax Basis Accumulated Earnings (Deficit)
|
|
|
|
|
Accumulated capital and other
losses
|
|
$
|
(73,524,707
|
)
|
Undistributed net operating income
|
|
|
2,164,435
|
|
Gross unrealized appreciation
|
|
|
40,341,227
|
|
Gross unrealized depreciation
|
|
|
(51,934,799
|
)
|
|
|
|
|
|
Net unrealized depreciation
|
|
$
|
(11,593,572
|
)
|
|
|
|
|
|
Total tax basis accumulated deficit
|
|
|
(82,953,844
|
)
|
Tax cost of investments
|
|
|
287,485,124
|
|
Current year distributions to
shareholders on a tax basis
|
|
|
|
|
Ordinary income
|
|
|
9,163,765
|
|
Prior year distributions to
shareholders on a tax basis
|
|
|
|
|
Ordinary income
|
|
|
4,580,676
|
|
F-31
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
On October 31, 2006, the Company had a net capital loss
carryforward of $73,524,707 of which $28,213,867 will expire in
the year 2010, $4,220,380 will expire in the year 2011,
$37,794,910 will expire in the year 2012 and $3,295,550 will
expire in the year 2013. To the extent future capital gains are
offset by capital loss carryforwards, such gains need not be
distributed.
Qualified
Dividend Income Percentage
The Company designated 7%* or a maximum amount of $621,193 of
dividends declared and paid during the year ending
October 31, 2006 from net investment income as qualified
dividend income under the Jobs Growth and Tax Relief
Reconciliation Act of 2003. The information necessary to prepare
and complete shareholders tax returns for the 2006
calendar year, will be reported separately on
form 1099-DIV,
if applicable, in January 2007.
Corporate
Dividends Received Deduction Percentage
Corporate shareholders may be eligible for a dividends received
deduction for certain ordinary income distributions paid by the
Company. The Company designated
7%*
or a maximum amount of $621,193 of dividends declared and paid
during the year ending October 31, 2006 from net investment
income as qualifying for the dividends received deduction. The
deduction is a pass through of dividends paid by domestic
corporations (i.e. only equities) subject to taxation.
The Companys wholly-owned subsidiary MVC Financial
Services, Inc. is subject to federal and state income tax. For
the year ended October 31, 2006 the Company recorded a tax
provision of $159,072. For the year ended October 31, 2005
the Company recorded a tax benefit of $100,933. For the year
ended October 31, 2004 the Company recorded a tax provision
of $78,927. The provision for income taxes was comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
314,859
|
|
|
$
|
92,892
|
|
|
$
|
134,201
|
|
State
|
|
|
89,078
|
|
|
|
22,152
|
|
|
|
32,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax expense
|
|
|
403,937
|
|
|
|
115,044
|
|
|
|
166,205
|
|
Deferred tax benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(203,645
|
)
|
|
|
(174,390
|
)
|
|
|
(70,472
|
)
|
State
|
|
|
(41,220
|
)
|
|
|
(41,587
|
)
|
|
|
(16,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax benefit
|
|
|
(244,865
|
)
|
|
|
(215,977
|
)
|
|
|
(87,278
|
)
|
Total tax (benefit) provision
|
|
$
|
159,072
|
|
|
$
|
(100,933
|
)
|
|
$
|
78,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Unaudited
F-32
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
A reconciliation between the taxes computed at the federal
statutory rate and our effective tax rate for MVCFS for the
fiscal year ended October 31, 2006 is as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
October 31,
|
|
|
2006
|
|
Federal statutory tax rate
|
|
|
34.00
|
%
|
Permanent difference
|
|
|
(0.39
|
)%
|
State taxes, net of federal tax
benefit
|
|
|
4.27
|
%
|
Valuation allowance for deferred
tax assets
|
|
|
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
38.66
|
%
|
|
|
|
|
|
Deferred income tax balances for MVCFS reflect the impact of
temporary difference between the carrying amount of assets and
liabilities and their tax bases and are stated at tax rates
expected to be in effect when taxes are actually paid or
recovered. The components of our deferred tax assets and
liabilities for MVCFS as of October 31, 2006,
October 31, 2005 and October 31, 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenues
|
|
$
|
548,120
|
|
|
$
|
295,307
|
|
|
$
|
82,445
|
|
Others
|
|
|
2,822
|
|
|
|
7,948
|
|
|
|
4,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
548,120
|
|
|
$
|
303,255
|
|
|
$
|
87,278
|
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
548,120
|
|
|
$
|
303,255
|
|
|
$
|
87,278
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
548,120
|
|
|
$
|
303,255
|
|
|
$
|
87,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
Allowance
No valuation allowance was deemed necessary since the
significant portion of temporary differences resulting in
deferred tax assets are considered fully realizable.
The Companys reportable segments are its investing
operations as a business development company, MVC Capital, Inc.
(MVC), and the financial advisory operations of its
wholly owned subsidiary, MVC Financial Services, Inc.
(MVCFS).
F-33
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
The following table presents book basis segment data for the
year ended October 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MVC
|
|
|
MVCFS
|
|
|
Consolidated
|
|
|
Interest and dividend income
|
|
$
|
13,756,679
|
|
|
$
|
152,312
|
|
|
$
|
13,908,991
|
|
Fee income
|
|
|
291,764
|
|
|
|
3,535,956
|
|
|
|
3,827,720
|
|
Other income
|
|
|
770,501
|
|
|
|
904
|
|
|
|
771,405
|
|
Total operating income
|
|
|
14,818,944
|
|
|
|
3,689,172
|
|
|
|
18,508,116
|
|
Total operating expenses
|
|
|
14,152,170
|
|
|
|
416,252
|
|
|
|
14,568,422
|
|
Net operating income before taxes
|
|
|
666,774
|
|
|
|
3,272,920
|
|
|
|
3,939,694
|
|
Tax expense (benefit)
|
|
|
|
|
|
|
159,072
|
|
|
|
159,072
|
|
Net operating income
|
|
|
666,774
|
|
|
|
3,113,848
|
|
|
|
3,780,622
|
|
Net realized gain (loss) on
investments and foreign currency
|
|
|
5,221,390
|
|
|
|
|
|
|
|
5,221,390
|
|
Net change in unrealized
appreciation on investments
|
|
|
38,334,356
|
|
|
|
|
|
|
|
38,334,356
|
|
Net increase in net assets
resulting from operations
|
|
$
|
44,222,520
|
|
|
$
|
3,113,848
|
|
|
$
|
47,336,368
|
|
In all periods prior to July 16, 2004, all business was
conducted through MVC Capital, Inc.
Effective November 1, 2006, pursuant to the Advisory
Agreement, the Company is externally managed by TTG Advisers,
which serves as the Companys investment adviser. Under the
terms of the Advisory Agreement, TTG Advisers will determine,
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, identify, and negotiate the
structure of the Companys investments (including
performing due diligence on prospective portfolio companies),
close and monitor the Companys investments, determine the
securities and other assets purchased, retain or sell and
oversee 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 shall be 2.0% per annum of the Companys total
assets excluding cash. The incentive fee will consist of two
parts: (i) one part will be based on our pre-incentive fee
net operating income; and (ii) the other part will be based
on the capital gains realized on our portfolio of securities
acquired after November 1, 2003.
On November 1, 2006, Timberland borrowed $420,291 from the
secured junior revolving note.
On November 2, 2006, the Company repaid $54.5 million
borrowed on the revolving credit facility under the Credit
Facility.
On November 7, 2006, the Company made an additional
$100,000 equity investment into SGDA .
On November 7, 2006, the Company repaid $5.5 million
borrowed on the revolving credit facility under the Credit
Facility.
On November 21, 2006, consistent with the contemplated
spin-off identified in the Advisory Agreement (and which is
depicted in this prospectus), the Company formed MVC Partners, a
private equity firm. On December 5, 2006, MVC
Partners subsidiary, MVC Europe LLC, arrived at an
agreement to co-own BPE Management Ltd. (BPE) with
Parex Asset Management IPAS, a management investment company and
subsidiary of the Parex Bank. BPE will pursue investments in
businesses throughout the Baltic region.
F-34
MVC Capital, Inc.
Notes to Consolidated Financial Statements
(Continued)
In addition, on November 21, 2006, MVC Partners established
its MVC Global LLC division, which pursues investments in
foreign operating companies.
On November 22, 2006, the Company invested
$3.2 million in Westwood Chemical Corporation, a
manufacturer of antiperspirant actives and water treatment
chemicals, consisting of a $1.6 million bridge loan and
$1.6 million in equity.
On November 27, 2006, the Company increased the amount
available to draw down on the Timberland secured junior
revolving note from $3.25 million to $4.0 million.
Timberland then borrowed $750,000 from the secured junior
revolver.
On November 29, 2006, the Company filed Post-Effective
Amendment No. 2 to its Registration Statement on
Form N-2
(the Registration Statement).
On December 6, 2006, the Company borrowed
$10.0 million on the revolving credit facility under the
Credit Facility. The revolving credit facility now has a balance
of $15.0 million and the term loan has a balance of
$35.0 million.
On December 8, 2006, Total Safety repaid term loan A
and term loan B in full including all accrued interest and
fees. The total amount received in the repayment for term
loan A was $5,043,775 and for term loan B was
$1,009,628.
On December 12, 2006, the Company invested $10 million
in Levlad Arbonne International LLC, a marketer of personal care
products, in the form of a $10 million second lien loan.
The annual interest rate is LIBOR plus 6.5% and the maturity
date is December 19, 2013.
On December 13, 2006, the Company made an investment in
Total Safety by extending a $3.5 million second lien loan
and a $1.0 million first lien loan. The second lien loan
has an annual interest rate of LIBOR plus 6.5% and a maturity
date of December 8, 2013. The first lien loan has an annual
interest rate of LIBOR plus 3.0% and a maturity date of
December 8, 2012.
On December 14, 2006, the Companys Board of Directors
declared a $0.12 per share dividend for the first quarter of the
fiscal year 2007. The Board of Directors also declared an
additional cash dividend of $0.06 per share. The dividends
were paid on January 5, 2007 to shareholders of record on
December 28, 2006. The ex-dividend date is
December 26, 2006.
On December 18, 2006, the Company extended the maturity
date on the $1 million Baltic Motors bridge loan from
December 22, 2006 to January 5, 2007. This note was
then repaid in full on January 5, 2007, including principal
and all accrued interest.
On December 22, 2006, the Company invested $564,716 in
Vitality in the form of common stock.
On January 3, 2007, the Company borrowed $3.0 million
on the revolving credit facility under the Credit Facility. The
revolving credit facility now has a balance of
$18.0 million and the term loan has a balance of
$35.0 million.
On January 4, 2007, the Companys Valuation Committee
determined to increase the fair values of the Companys
investments in the following portfolio companies by an aggregate
amount of approximately
$20.8 million*:
BM Auto, Baltic Motors, Dakota, Octagon, SGDA, Vendio, and
Vitality.
Subject to confirmation following the audit, the payment
obligation to Mr. Tokarz resulting from the sale of a
portion of the Companys LLC membership interest in Octagon
is expected to be approximately $110,000 (which is expected to
be paid during the first quarter of the Companys fiscal
year 2007).
* Unaudited
F-35
Report of
Independent Registered Accounting Firm
To the Board of Directors and Shareholders of MVC Capital, Inc.:
We have audited the accompanying consolidated balance sheets of
MVC Capital, Inc. (the Fund), including the
consolidated schedule of investments, as of October 31,
2006 and 2005, and the related consolidated statements of
operations, cash flows and changes in net assets for each of the
three years in the period ended October 31, 2006, and the
selected per share data and ratios for each of the four years in
the period ended October 31, 2006. Our audits also included
the financial statement schedule listed in the Index at
Item 15(a)(2). These financial statements, the selected per
share data and ratios and schedule are the responsibility of the
Funds management. Our responsibility is to express an
opinion on these financial statements, selected per share data
and ratios and schedule based on our audits. The selected per
share data and ratios for the year ended October 31, 2002,
were audited by other auditors whose report expressed an
unqualified opinion on those selected per share data and ratios.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and selected per share
data and ratios referred to above present fairly, in all
material respects, the consolidated financial position of MVC
Capital, Inc. at October 31, 2006 and 2005, and the
consolidated results of their operations, cash flows and their
changes in net assets for each of the three years in the period
ended October 31, 2006 and the selected per share data and
ratios for each of the indicated periods, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of MVC Capital, Inc.s internal control over
financial reporting as of October 31, 2006, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated January 5, 2007
expressed an unqualified opinion thereon.
Ernst & Young LLP
New York, New York
January 5, 2007
F-36
Schedule 12-14
MVC
Capital, Inc. and Subsidiaries
Schedule
of Investments in and Advances to Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Interest or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Credited
|
|
|
October 31,
|
|
|
Gross
|
|
|
Gross
|
|
|
October 31,
|
|
Portfolio Company
|
|
Investment(1)
|
|
To Income(5)
|
|
|
Other(2)
|
|
|
2005 Value
|
|
|
Additions(3)
|
|
|
Reductions(4)
|
|
|
2006 Value
|
|
|
Companies More than 25%
owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
auto MOTOL BENI
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
2,000,000
|
|
(Automotive Dealership)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baltic Motors Corporation
|
|
Loan
|
|
|
456,250
|
|
|
|
|
|
|
|
4,500,000
|
|
|
|
|
|
|
|
|
|
|
|
4,500,000
|
|
(Automotive Dealership)
|
|
Loan
|
|
|
11,333
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
Bridge Loan
|
|
|
15,833
|
|
|
|
|
|
|
|
|
|
|
|
3,500,000
|
|
|
|
(3,500,000
|
)
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
7,500,000
|
|
|
|
13,655,000
|
|
|
|
|
|
|
|
21,155,000
|
|
Ohio Medical Corporation
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
17,000,000
|
|
|
|
9,200,000
|
|
|
|
|
|
|
|
26,200,000
|
|
(Medical Device Manufacturer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SGDA Sanierungsgesellschaft fur
Deponien und Altlasten
|
|
Loan
|
|
|
408,895
|
|
|
|
|
|
|
|
4,304,560
|
|
|
|
1,685,150
|
|
|
|
|
|
|
|
5,989,710
|
|
(Soil Remediation)
|
|
Revolver
|
|
|
74,023
|
|
|
|
|
|
|
|
1,237,700
|
|
|
|
370,600
|
|
|
|
(1,608,300
|
)
|
|
|
|
|
|
|
Bridge Loan
|
|
|
6,300
|
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
(300,000
|
)
|
|
|
|
|
|
|
Common Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
315,000
|
|
|
|
23,551
|
|
|
|
|
|
|
|
338,551
|
|
|
|
Preferred Equity
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
5,000,000
|
|
SIA BM Auto
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,000,000
|
|
|
|
|
|
|
|
8,000,000
|
|
(Automotive Dealership)
|
|
Loan
|
|
|
165,900
|
|
|
|
|
|
|
|
|
|
|
|
7,000,000
|
|
|
|
(7,000,000
|
)
|
|
|
|
|
Summit Research Labs, Inc.
|
|
Loan
|
|
|
150,444
|
|
|
|
|
|
|
|
|
|
|
|
5,044,813
|
|
|
|
|
|
|
|
5,044,813
|
|
(Specialty Chemical)
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,200,000
|
|
|
|
|
|
|
|
11,200,000
|
|
Timberland Machines &
Irrigation, Inc.
|
|
Loan
|
|
|
1,039,760
|
|
|
|
|
|
|
|
6,318,684
|
|
|
|
289,175
|
|
|
|
|
|
|
|
6,607,859
|
|
(Distributer
Landscaping & Irrigation Equipment)
|
|
Revolver
|
|
|
347,554
|
|
|
|
|
|
|
|
3,250,000
|
|
|
|
500,000
|
|
|
|
(920,291
|
)
|
|
|
2,829,709
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
4,500,000
|
|
|
|
920,291
|
|
|
|
(1,000,000
|
)
|
|
|
4,420,291
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turf Products, LLC
|
|
Loan
|
|
|
1,049,262
|
|
|
|
|
|
|
|
|
|
|
|
7,676,331
|
|
|
|
|
|
|
|
7,676,331
|
|
(Distributer
Landscaping & Irrigation Equipment)
|
|
LLC Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,074,750
|
|
|
|
(252,957
|
)
|
|
|
5,821,793
|
|
|
|
Warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendio Services, Inc.
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Technology)
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
2,700,000
|
|
|
|
700,000
|
|
|
|
|
|
|
|
3,400,000
|
|
Vestal Manufacturing Enterprises,
Inc.
|
|
Loan
|
|
|
107,467
|
|
|
|
|
|
|
|
900,000
|
|
|
|
|
|
|
|
(100,000
|
)
|
|
|
800,000
|
|
(Iron Foundries)
|
|
Common Stock
|
|
|
132,545
|
|
|
|
|
|
|
|
3,700,000
|
|
|
|
|
|
|
|
|
|
|
|
3,700,000
|
|
Velocitius B.V
|
|
Revolver
|
|
|
478
|
|
|
|
|
|
|
|
|
|
|
|
143,614
|
|
|
|
|
|
|
|
143,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Renewable Energy)
|
|
Common Equity
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,966,765
|
|
|
|
|
|
|
|
2,966,765
|
|
Total companies more than 25%
owned
|
|
|
|
$
|
3,966,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
128,794,736
|
|
Companies More than 5% owned,
but less than 25%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dakota Growers Pasta Company,
Inc.
|
|
Common Stock
|
|
|
36,364
|
|
|
|
|
|
|
|
5,514,000
|
|
|
|
3,443,880
|
|
|
|
|
|
|
|
8,957,880
|
|
(Manufacturer of Packaged Food)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endymion Systems, Inc.
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Technology Investments)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harmony Pharmacy & Health
Center, Inc.
|
|
Loan
|
|
|
7,444
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
(200,000
|
)
|
|
|
|
|
(Healthcase Retail)
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
750,000
|
|
|
|
|
|
|
|
750,000
|
|
Impact Confections, Inc.
|
|
Loan
|
|
|
907,468
|
|
|
|
|
|
|
|
5,228,826
|
|
|
|
239,297
|
|
|
|
|
|
|
|
5,468,123
|
|
(Confections
Manufacturing & Distribution)
|
|
Loan
|
|
|
28,768
|
|
|
|
|
|
|
|
325,000
|
|
|
|
|
|
|
|
|
|
|
|
325,000
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
2,700,000
|
|
|
|
|
|
|
|
|
|
|
|
2,700,000
|
|
Marine Exhibition Corporation
|
|
Loan
|
|
|
346,141
|
|
|
|
|
|
|
|
|
|
|
|
10,091,111
|
|
|
|
|
|
|
|
10,091,111
|
|
(Theme Park)
|
|
Preferred Stock*
|
|
|
53,478
|
|
|
|
|
|
|
|
|
|
|
|
2,035,652
|
|
|
|
|
|
|
|
2,035,652
|
|
ProcessClaims, Inc.
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
(2,000,000
|
)
|
|
|
|
|
F-37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Interest or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Credited
|
|
|
October 31,
|
|
|
Gross
|
|
|
Gross
|
|
|
October 31,
|
|
Portfolio Company
|
|
Investment(1)
|
|
To Income(5)
|
|
|
Other(2)
|
|
|
2005 Value
|
|
|
Additions(3)
|
|
|
Reductions(4)
|
|
|
2006 Value
|
|
|
(Technology)
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
|
|
(400,000
|
)
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Octagon Credit Investors, LLC
|
|
Loan
|
|
|
1,244,315
|
|
|
|
|
|
|
|
4,664,794
|
|
|
|
5,568,803
|
|
|
|
(5,233,597
|
)
|
|
|
5,000,000
|
|
(Financial Services)
|
|
Revolver
|
|
|
30,830
|
|
|
|
|
|
|
|
|
|
|
|
3,750,000
|
|
|
|
(500,000
|
)
|
|
|
3,250,000
|
|
|
|
LLC Interest
|
|
|
|
|
|
|
|
|
|
|
1,228,038
|
|
|
|
1,911,171
|
|
|
|
(1,211,277
|
)
|
|
|
1,927,932
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
1,069,457
|
|
|
|
|
|
|
|
(1,069,457
|
)
|
|
|
|
|
Phoenix Coal Corporation
|
|
Loan
|
|
|
357,407
|
|
|
|
|
|
|
|
|
|
|
|
7,088,615
|
|
|
|
|
|
|
|
7,088,615
|
|
(Coal Processing and Production)
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
1,000,000
|
|
Previsor
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000,000
|
|
|
|
|
|
|
|
6,000,000
|
|
(Human Capital Management)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vitality Foodservice, Inc.
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
5,000,000
|
|
|
|
3,500,000
|
|
|
|
|
|
|
|
8,500,000
|
|
(Non-Alcoholic Beverages)
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
10,517,984
|
|
|
|
535,843
|
|
|
|
|
|
|
|
11,053,827
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
700,000
|
|
|
|
400,000
|
|
|
|
|
|
|
|
1,100,000
|
|
Yaga, Inc.
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Technology)
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total companies more than 5%
owned, but less than 25%
|
|
|
|
$
|
3,012,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
75,245,140
|
|
This schedule should be read in conjunction with the Funds
consolidated statements as of and for the year ended
October 31, 2006, including the consolidated schedule of
investments.
|
|
|
(1) |
|
Common stock, preferred stock, warrants, options and equity
interests are generally non-income producing and restricted. The
principal amount for loans and debt securities and the number of
shares of common and preferred stock is shown in the
consolidated schedule of investments as of October 31, 2006. |
|
(2) |
|
Other includes interest, dividend, or other income which was
applied to the principal of the investment and therefore reduced
the total investment. These reductions are also included in the
Gross Reductions for the investment, as applicable. |
|
(3) |
|
Gross additions includes increases in the cost basis of
investments resulting from new portfolio investments,
paid-kind-interest or dividends, the amortization of discounts
and closing fees, and the exchange of one or more existing
securities for one or more new securities. Gross additions also
includes net increases in unrealized appreciation or net
decreases in unrealized depreciation. |
|
(4) |
|
Gross reductions included decreases in the cost basis of
investments resulting from principal collections related to
investment repayments or sales and the exchange of one or more
existing securities for one or more new securities. Gross
reductions also include net increases in unrealized depreciation
or net decreases in unrealized appreciation. |
|
(5) |
|
Represents the total amount of interest or dividends credited to
income for portion of the year an investment was included in the
companies more than 25% owned or companies 5% to 25% owned
categories, respectively. |
|
* |
|
All or a portion of the dividend income on this investment was
or will be paid in the form of additional securities or by
increasing the liquidation preference. Dividends
paid-in-kind
are also included in the Gross Additions for the investment, as
applicable. |
The accompanying notes are an integral part of these
consolidated financial statements.
F-38