MVC Capital, Inc.
MVC CAPITAL, INC. (Form: 10-K, Received: 01/17/2017 17:31:48)

Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the fiscal year ended October 31, 2016

 

or

 

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

 

For the transition period from                     to                     

 

Commission file number:  814-00201

 

MVC CAPITAL, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

94-3346760

(State or other jurisdiction of
incorporation or organization)

 

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

 

287 Bowman Avenue, Purchase, New York 10577

(Address of principal executive offices)

 

(914) 701-0310

Registrant’s telephone number, including area code

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock

 

New York Stock Exchange

 

Securities registered pursuant to section 12(g) of the Act:   None

 

(Title of each class)

 

 

 

(Title of each class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  o  No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes  o  No  x

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

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

 

o Large accelerated filer

 

x Accelerated filer

 

o Non-accelerated filer

 

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

 

Approximate aggregate market value of common stock held by non-affiliates of the registrant as of the last business day of the Company’s most recently completed fiscal second quarter: $93,998,137 computed on the basis of $7.43 per share, closing price of the common stock on the New York Stock Exchange (the “NYSE”) on April 29, 2016.  For purposes of calculating this amount only, all directors and executive officers of the registrant have been treated as affiliates.

 

There were 22,556,412 shares of the registrant’s common stock, $.01 par value, outstanding as of January 17, 2017.

 

Document Incorporated by Reference:

 

None

 

 

 



Table of Contents

 

MVC Capital, Inc.

(A Delaware Corporation)

Index

 

 

Page

PART I

 

3

Item 1.

Business

3

Item 1A.

Risk Factors

22

Item 1B.

Unresolved Staff Comments

39

Item 2.

Properties

39

Item 3.

Legal Proceedings

39

Item 4.

Mine Safety Disclosures

39

PART II

 

40

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

40

Item 6.

Selected Consolidated Financial Data

46

Item 7.

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

47

Item 8.

Financial Statements and Supplementary Data

95

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

156

Item 9A.

Controls and Procedure

156

Item 9B.

Other Information

159

PART III

 

159

Item 10.

Directors and Executive Officers of the Registrant

159

Item 11.

Executive Compensation

164

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

165

Item 13.

Certain Relationships and Related Transactions, and Director Independence

167

Item 14.

Principal Accounting Fees and Services

168

PART IV

 

168

Item 15.

Exhibits, Financial Statements, Schedules

168

 

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PART I

 

Factors That May Affect Future Results

 

This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the federal securities laws that involve substantial uncertainties and risks.  The Company’s future results may differ materially from its historical results and actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors.  These factors are described in the “Risk Factors” section below.  Readers should pay particular attention to the considerations described in the section of this report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  Readers should also carefully review the risk factors described in the other documents the Company files, or has filed, from time to time with the United States Securities and Exchange Commission (the “SEC”).

 

In this Annual Report on Form 10-K, unless otherwise indicated, “MVC Capital,” “we,” “us,” “our” or the “Company” refer to MVC Capital, Inc. and its wholly-owned subsidiaries, MVC Financial Services, Inc., MVC Turf, LLC and MVC Cayman, and “TTG Advisers” or the “Adviser” refers to The Tokarz Group Advisers LLC.

 

ITEM 1.                         BUSINESS

 

GENERAL

 

MVC Capital, Inc. is an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”).  MVC Capital provides equity and debt investment capital to fund growth, acquisitions and recapitalizations of small and middle-market companies in a variety of industries primarily located in the United States. Our investments can take the form of senior and subordinated loans, common and preferred stock and warrants or rights to acquire equity interests, or convertible securities, among other instruments. Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “MVC.” Beginning November 1, 2006, the Company has been externally managed by The Tokarz Group Advisers LLC (“TTG Advisers”) pursuant to an Amended and Restated Investment Advisory and Management Agreement (the “Advisory Agreement”).  Our Board of Directors, including all of the directors who are not “interested persons” (as defined under the 1940 Act) of the Company (the “Independent Directors”), last approved the renewal of the Advisory Agreement at their in-person meeting held on October 28, 2016.

 

In fiscal year 2016, we continued the transition to our yielding strategy while allocating capital into new opportunities and supporting our existing portfolio companies.  The Company made six new investments: Somotra NV (“Somotra”) ($1.7 million), Pride Engineering, LLC (“Pride”) ($5.1 million), Dukane IAS, LLC (“Dukane”) ($7.0 million), Quantum Plastics, LLC (“Quantum”) ($10.0 million), FDS, Inc. (“FDS”) ($2.3 million) and HTI Technologies and Industries, Inc. (“HTI”) ($9.6 million) and made 9 follow-on investments in the following 6 existing portfolio companies: MVC Automotive Group GmbH (“MVC Automotive”), Legal Solutions Holdings, Inc. (“Legal Solutions”), Thunderdome Restaurants, LLC (“Thunderdome”), SIA Tekers Invest (“Tekers”), Biovation Acquisition Company (“BAC”) and RuMe, Inc. (“RuMe”).  The total capital committed in fiscal year 2016 was $44.2 million compared to $62.4 million and $105.8 million in fiscal years 2015 and 2014, respectively.

 

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During fiscal year 2015 eight new investments were made in: RX Innovations, Inc. (“RX”) ($10.3 million), Agri-Carriers Group, Inc. (“Agri-Carriers”) ($11.8 million), Legal Solutions ($8.7 million), The Results Companies, LLC (“Results Companies”) ($9.0 million), Vestal Manufacturing Enterprises, Inc. (“Vestal”) ($6.5 million), Thunderdome ($2.0 million), Initials, Inc. (“Initials”) ($4.8 million) and United States Technologies, Inc. (“U.S. Technologies”) ($5.0 million) and 5 follow-on investments were made in the following 4 existing portfolio companies: BAC, Centile Holdings B.V. (“Centile”), Biogenic Reagents (“Biogenic”), and MVC Automotive.  The total capital committed in fiscal year 2015 was $62.4 million compared to $105.8 million and $95.7 million in fiscal years 2014 and 2013, respectively.

 

During fiscal year 2014 four new investments were made in: G3K Displays, Inc. (“G3K”) ($6.0 million), Inland Environmental & Remediation LP (“Inland”) ($15.0 million), Equus Total Return, Inc. (“Equus”) ($4.4 million) and Custom Alloy Corporation (“Custom Alloy”) ($23.0 million) and made 20 follow-on investments in the following 13 existing portfolio companies: Security Holdings B.V. (“Security Holdings”), Centile, Biogenic, MVC Automotive, RuMe, Morey’s Seafood International LLC (“Morey’s”), Equus, U.S. Gas & Electric, Inc. (“U.S. Gas”), Ohio Medical Corporation (“Ohio Medical”), Inland, U.S. Spray Drying Holding Company (“SCSD”), Biovation Holdings, Inc. (“Biovation”) and the MVC Private Equity Fund L.P. (“MVC PE Fund”).

 

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, though our current focus is more on yield generating investments. 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 that may provide us with investment opportunities.

 

We are working on an active pipeline of potential new investment opportunities. Our loan and equity investments will generally range between $3.0 million and $25.0 million each, though we may occasionally invest smaller or greater amounts of capital depending upon the particular investment. While the Company does not adhere to a specific equity and debt asset allocation mix, no more than 25% of the value of our total assets may be invested in the securities of one issuer (other than U.S. government securities), or of two or more issuers that are controlled by us and are engaged in the same or similar or related trades or businesses as of the close of each quarter. Our portfolio company investments are typically illiquid and 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).  The Company has been focusing its strategy more on yield generating investments, which can include, but not limited to senior and subordinated loans, convertible debt, common and preferred equity with a coupon or liquidation preference and warrants or rights to acquire equity interests.

 

Our portfolio company investments currently consist of common and preferred stock, other forms of equity interests and warrants or rights to acquire equity interests, senior and subordinated loans and convertible securities. At October 31, 2016, the fair value of our investments in portfolio companies was approximately $360.1 million and our total assets were approximately $434.5 million compared to the fair value of investments in portfolio companies of approximately $400.9 million and gross assets of approximately $516.8 million at October 31, 2015.

 

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We expect that our investments in senior loans and subordinated debt will generally have stated terms of three to ten years. However, there are no constraints on the maturity or duration of any security the Company acquires. 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 Moody’s or lower than “BBB-” by Standard & Poor’s). In addition, we may invest without limit in non-rated or debt of any rating, by any rating organization.

 

On July 16, 2004, the Company formed a wholly-owned subsidiary, MVC Financial Services, Inc. (“MVCFS”). MVCFS is incorporated in Delaware and its principal purpose is to provide advisory, administrative and other services to the Company and its portfolio companies.  The Company does not hold MVCFS for investment purposes. The results of MVCFS are consolidated into the Company and all inter-company accounts have been eliminated in consolidation.   On October 14, 2011, the Company formed a wholly-owned subsidiary, MVC Cayman, an exempted company incorporated in the Cayman Islands, to hold certain of its investments.  The results of MVC Cayman are also consolidated into the Company . During the fiscal year ended October 31, 2012 and thereafter, MVC Partners, LLC (“MVC Partners”) was consolidated with the operations of the Company as MVC Partners’ limited partnership interest in the PE Fund is a substantial portion of MVC Partners operations.  The consolidation of MVC Partners has not had any material effect on the financial position or net results of operations of the Company.  During fiscal year ended October 31, 2014, MVC Turf, LLC (“MVC Turf”) was consolidated with the Company as MVC Turf is an MVC wholly-owned holding company.  The consolidation of MVC Turf has not had any material effect on the financial position or net results of operations of the Company.  Of the $21.0 million in cash and cash equivalents on the Company’s Consolidated Balance Sheets as of October 31, 2016, approximately $328,000 was held by MVC Turf, an MVC wholly-owned holding company, and approximately $238,000 held by MVCFS.  Also, as of October 31, 2016, approximately $1.1 million was held by MVC Cayman.

 

Our Board of Directors has the authority to change any of the strategies described in this report without seeking the approval of our shareholders. However, the 1940 Act prohibits us from altering or changing our investment objective, strategies or policies such that we cease to be a business development company, nor can we voluntarily withdraw our election to be regulated as a business development company, without the approval of the holders of a “majority of our outstanding voting securities,” as defined in the 1940 Act, of our shares.

 

Substantially all amounts not invested in securities of portfolio companies are invested in short-term , highly liquid money market investments, U.S. Government issued securities, or held in cash in interest bearing accounts. As of October 31, 2016, the Company’s investments in short-term securities, U.S. Government issued securities and cash and cash equivalents were valued at $56.0 million. Of that amount, approximately $800,000 was restricted cash equivalents, which was related to the Company’s $500,000 of cash collateral for a third party working capital line of credit for MVC Environmental and $300,000 of cash collateral related to a third party letter of credit for RuMe.

 

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.

 

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On December 2, 2002, the Company announced it had begun 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.

 

Although the Company has been in operation since 2000, the year 2003 marked a new beginning for the Company. In February 2003, shareholders elected an entirely new board of directors.  (All but two of the independent members of the current Board of Directors were first elected at the February 2003 Annual Meeting of the shareholders.)  The Board of Directors developed a new long-term strategy for the Company. In September 2003, upon the recommendation of the Board of Directors, shareholders voted to adopt a new investment objective for the Company of seeking to maximize total return from capital appreciation and/or income. The Company’s prior objective had been limited to seeking long-term capital appreciation from venture capital investments in the information technology industries. Consistent with our broader objective, we adopted a more flexible investment strategy of providing equity and debt financing to small and middle-market companies in a variety of industries. With the recommendation of the Board of Directors, shareholders also voted to appoint Michael Tokarz as Chairman and Portfolio Manager to lead the implementation of our new objective and strategy and to stabilize the existing portfolio. Prior to the arrival of Mr. Tokarz and his new management team in November 2003, the Company had experienced significant valuation declines from investments made by the former management team.

 

Mr. Tokarz and his team managed the Company under an internal structure through October 31, 2006. On September 7, 2006, the shareholders of the Company approved the Advisory Agreement (with over 92% of the votes cast on the agreement voting in its favor) that provided for the Company to be externally managed by TTG Advisers. The agreement took effect on November 1, 2006. TTG Advisers is a registered investment adviser that is controlled by Mr. Tokarz. All of the individuals (including the Company’s investment professionals) that had been previously employed by the Company as of the fiscal year ended October 31, 2006 became employees of TTG Advisers.  The Company’s investment approach and selection process has remained the same under the externalized management structure.   Our Board of Directors, including all of the Independent Directors, last approved a renewal of the Advisory Agreement at their in-person meeting held on October 28, 2016.

 

Our principal executive office is located at 287 Bowman Avenue, Purchase, New York 10577 and our telephone number is (914) 701-0310.  Our website is http://www.mvccapital.com.  Copies of the Company’s annual regulatory filings on Form 10-K, quarterly regulatory filings on Form 10-Q, Form 8-K, other regulatory filings, code of ethics, audit committee charter, compensation committee charter, nominating and corporate governance committee charter, corporate governance guidelines, and privacy policy may be obtained from our website, free of charge.

 

OUR INVESTMENT STRATEGY

 

On November 6, 2003, Mr. Tokarz assumed his current positions as Chairman and Portfolio Manager.  We seek to implement our investment objective (i.e., to maximize total return from capital appreciation and/or income) through making a broad range of private investments in a variety of industries. The investments can include common and preferred stock, other forms of

 

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equity interests and warrants or rights to acquire equity interests, senior and subordinated loans, or convertible securities. During the fiscal year ended October 31, 2016, the Company made six new investments and 9 follow-on investments in 6 existing portfolio companies, committing a total of $44.2 million of capital to these investments.

 

Prior to the adoption of our current investment objective, the Company’s investment objective had been to achieve long-term capital appreciation from venture capital investments in information technology companies. The Company’s investments had thus previously focused on investments in equity and debt securities of information technology companies. As of October 31, 2016, 1.4% of our assets consisted of investments made by the Company’s former management team pursuant to the prior investment objective (the Legacy Investments”). We are, however, managing these Legacy Investments to try and realize maximum returns. At October 31, 2016, the fair value of portfolio investments of the Legacy Investments was $5.9 million.  We generally seek to capitalize on opportunities to realize cash returns on these investments when presented with a potential “liquidity event,” i.e., a sale, public offering, merger or other reorganization.

 

Our new portfolio investments are made pursuant to our current 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, though our current focus is more on yield generating investments. Under our investment approach, we have the authority to invest, without limit, in any one 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”).  Presently due to our asset composition, compliance with the RIC requirements may limit 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 an issuer (“Non-Diversified Investments”).

 

We participate in the private equity business generally by providing negotiated equity and/or long-term debt investment capital. Our financing is generally used to fund growth, buyouts, acquisitions, recapitalizations, note purchases and/or bridge financings. We are typically the lead investor in such transactions, but may also provide equity and debt financing to companies led by private equity firms or others. We generally invest in private companies, though, from time to time, we may invest in small public companies that lack adequate access to public capital.

 

We may also seek to achieve our investment objective by establishing a subsidiary or subsidiaries that would serve as general partner to a private equity or other investment fund(s).  Furthermore, the Board of Directors authorized the establishment of the MVC Private Equity Fund, L.P. (“PE Fund”), for which an indirect wholly-owned subsidiary, MVC GP II, LLC (“MVC GP II”), of the Company serves as the GP.  On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in the PE Fund.  The PE Fund closed on approximately $104 million of capital commitments.  As of October 31, 2016, $14.6 million of the Company’s commitment has been contributed.  The Company’s Board of Directors authorized the establishment of, and investment in, the PE Fund for a variety of reasons, including the Company’s ability to make Non-Diversified Investments through the PE Fund. As previously disclosed, the Company is restricted in its ability to make Non-Diversified Investments.  For services provided to the PE Fund, the GP and MVC Partners are together entitled to receive 25% of all management fees and other fees paid by the PE Fund and its portfolio companies and up to 30% of the carried interest generated by the PE Fund.  Further, at the direction of the Board of Directors, the GP retained TTG Advisers to serve as the portfolio manager of the PE Fund.  In exchange for

 

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providing those services, and pursuant to the Board of Directors’ authorization and direction, TTG Advisers is entitled to receive the balance of the fees and any carried interest generated by the PE Fund and its portfolio companies.  Given this separate arrangement with the GP and the PE Fund, under the terms of the Company’s Advisory Agreement with TTG Advisers, TTG Advisers is not entitled to receive from the Company a management fee or an incentive fee on assets of the Company that are invested in the PE Fund.  During the fiscal year ended October 31, 2012 and thereafter, MVC Partners was consolidated with the operations of the Company as MVC Partners’ limited partnership interest in the PE Fund is a substantial portion of MVC Partners operations.  Previously, MVC Partners was presented as a portfolio company on the Consolidated Schedule of Investments.  The consolidation of MVC Partners has not had any material effect on the financial position or net results of operations of the Company.  Please see Note 2 of our consolidated financial statements “Consolidation” for more information.

 

As a result of the closing of the PE Fund, consistent with the Board-approved policy concerning the allocation of investment opportunities, the PE Fund received a priority allocation of all private equity investments that would otherwise be Non-Diversified Investments for the Company during the PE Fund’s investment period, which ended on October 28, 2014.  Additional capital may be called for follow-on investments in existing portfolio companies of the PE Fund or to pay operating expenses of the PE Fund.  For further discussion of this allocation policy, please see “Our Investment Strategy — Allocation of Investment Opportunities” below.

 

Additionally, in pursuit of our objective, we may acquire a portfolio of existing private equity or debt investments held by financial institutions or other investment funds should such opportunities arise.

 

Furthermore, pending investments in portfolio companies pursuant to the Company’s principal investment strategy, the Company may invest in certain securities on a short-term or temporary basis.  In addition to cash-equivalents and other money market-type investments, such short-term investments may include exchange-traded funds and private investment funds offering periodic liquidity.

 

As of October 31, 2016 and October 31, 2015, the fair value/market value of the invested portion (excluding cash, escrow receivables and U.S. Treasury obligations) of our net assets as a percentage consisted of the following:

 

 

 

Fair Value/Market Value as a Percentage of Our Net Assets

 

Type of Investment

 

As of October 31, 2016

 

As of October 31, 2015

 

 

 

 

 

 

 

Senior/Subordinated Loans and Credit facilities

 

50.76

%

47.09

%

Common Stock

 

6.38

%

5.30

%

Warrants

 

0.67

%

0.56

%

Preferred Stock

 

41.20

%

50.68

%

Guarantees

 

(0.10

)%

(0.01

)%

Common Equity Interest

 

19.25

%

23.69

%

LP Interest of the PE Fund

 

9.00

%

7.46

%

GP Interest of the PE Fund

 

0.23

%

0.19

%

LLC Interest

 

1.43

%

1.36

%

 

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Substantially all amounts not invested in securities of portfolio companies are invested in short-term, highly liquid money market investments , U.S. Government issued securities, or held in cash in an interest bearing account. As of October 31, 2016, these investments were valued at approximately $56.0 million or 20.0% of net assets.

 

The current portfolio has investments in a variety of industries, including energy, specialty chemicals, automotive dealerships, electrical engineering, medical devices, consumer products, value-added distribution, industrial manufacturing, financial services, and information technology in a variety of geographical areas, including the United States and Europe.

 

Market . We have developed and maintain relationships with intermediaries, including investment banks, industry executives, financial services companies and private mezzanine and equity sponsors to source investment opportunities. Through these relationships, we have been able to strengthen our position as an investor.

 

Investment Criteria . Prospective investments are evaluated by the investment team based upon criteria that may be modified from time to time. The criteria currently being used by management in determining whether to make an investment in a prospective portfolio company include, but are not limited to, management’s view of:

 

·                                           Opportunity to revitalize and redirect a company’s resources and strategy;

 

·                                           Stable free cash flow of the business;

 

·                                           Businesses with secure market niches and predictable profit margins;

 

·                                           The presence or availability of highly qualified management teams;

 

·                                           The line of products or services offered and their market potential;

 

·                                           The presence of a sustainable competitive advantage;

 

·                                           Favorable industry and competitive dynamics; and

 

·                                           Yield potential offered by an investment in such company.

 

Due diligence includes a thorough review and analysis of the business plan and operations of a potential portfolio company. We generally perform financial and operational due diligence, study the industry and competitive landscape, and meet with current and former employees, customers, suppliers and/or competitors. In addition, as applicable, we engage attorneys, independent accountants and other consultants to assist with legal, environmental, tax, accounting and marketing due diligence.

 

Investment Sourcing. Mr. Tokarz and the other investment professionals have established an extensive network of investment referral relationships. Our network of relationships with investors, lenders and intermediaries includes:

 

·                                           Private mezzanine and equity investors;

 

·                                           Investment banks;

 

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·                                          Industry executives;

 

·                                           Business brokers;

 

·                                           Merger and acquisition advisors;

 

·                                           Financial services companies; and

 

·                                           Banks, law firms and accountants.

 

Allocation of Investment Opportunities .  In allocating investment opportunities, TTG Advisers adheres to the following policy, which was approved by the Board of Directors: TTG Advisers will give the Company priority with respect to all investment opportunities in (i) mezzanine and debt securities and (ii) equity or other “non-debt” investments that are (a) expected to be equal to or less than the lesser of 10% of the Company’s net assets or $25.0 million, and (b) issued by U.S. companies with less than $150.0 million in revenues during the prior twelve months (“MVC Targeted Investments”).  The PE Fund received a priority allocation of all the new equity investments (i.e., not follow-on investments in existing MVC portfolio companies) that would otherwise be Non-Diversified Investments for the Company, which will terminate on the deployment of 80% of the committed capital of the PE Fund.  The investment period related to the PE Fund has ended.  Additional capital may be called for follow-on investments in existing portfolio companies of the PE Fund or to pay operating expenses of the PE Fund.  In addition, pursuant to a shared services arrangement with PPC Enterprises LLC (“PPC”), a registered investment adviser (of which Mr. Tokarz is a co-founder and investment team member) that provides advisory services to Series A of Public Pension Capital, LLC (the “PPC Fund”), a private equity fund, Firm personnel may refer to PPC and the PPC Fund any investment that is not: (i) an MVC Targeted Investment; and (ii) in a company that, at the time of acquisition, has EBITA in excess of $25 million or is expected to require, either at such time or over time, in excess of $25 million in aggregate equity capital (i.e., an investment that is outside of the PE Fund’s investment focus pursuant to its governing documents).

 

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 company’s business (including potential representation on its Board of Directors). The investment professionals will seek to structure the terms of the investment as to provide for the capital needs of the portfolio company and at the same time seek to maximize the Company’s total return.

 

Once we have determined that a prospective portfolio company is a suitable 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 company’s capital structure.

 

We make preferred and common equity investments in companies as a part of our investing activities, particularly when we see a unique opportunity to profit from the growth of a company and the potential to enhance our returns. At times, we may invest in companies that are undergoing new strategic initiatives or a restructuring but have several of the above attributes and a

 

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management team that we believe has the potential to successfully execute their plans. Preferred equity investments may be structured with a dividend yield, which may provide us with a current return, if earned and received by the Company.

 

Our senior, subordinated and mezzanine debt investments are tailored to the facts and circumstances of the deal. The specific structure is negotiated over a period of several weeks and is designed to seek to protect our rights and manage our risk in the transaction. We may structure the debt instrument to require restrictive affirmative and negative covenants, default penalties, lien protection, equity calls, take control provisions and board observation. Our debt investments are not, and typically will not be, rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade quality (rated lower than “Baa3” by Moody’s or lower than “BBB—“ by Standard & Poor’s, commonly referred to as “junk bonds”).

 

Our mezzanine debt investments are typically structured as subordinated loans (with or without warrants) that carry a fixed rate of interest.  The loans may have interest-only payments in the early years and payments of both principal and interest in the later years, with maturities of three to ten years, although debt maturities and principal amortization schedules vary.

 

Our mezzanine debt investments may include equity features, such as warrants or options to buy a minority interest in a portfolio company. Any warrants or other rights we receive with our debt securities generally require only a nominal cost to exercise, and thus, as the portfolio company appreciates in value, we may achieve additional investment return from this equity interest. We may structure the warrants to provide minority rights provisions and event-driven puts. We may seek to achieve additional investment return from the appreciation and sale of our warrants.

 

Under certain circumstances, the Company or PE Fund may acquire more than 50% of the common stock of a company in a control buyout transaction. In addition to our common equity investment, we may also provide additional capital to the controlled portfolio company in the form of senior loans, subordinated debt or preferred stock.

 

We fund new investments using cash, the reinvestment of accrued interest and dividends in debt and equity securities, or the current reinvestment of interest and dividend income through the receipt of a debt or equity security (payment-in-kind income).  From time to time, we may also opt to reinvest accrued interest receivable in a new debt or equity security, in lieu of receiving such interest in cash and funding a subsequent investment. We may also acquire investments through the issuance of common or preferred stock, debt, or warrants representing rights to purchase shares of our common or preferred stock.  The issuance of our stock as consideration may provide us with the benefit of raising equity without having to access the public capital markets in an underwritten offering, including the added benefit of the elimination of any commissions payable to underwriters.

 

Providing Management Assistance . As a business development company, we are required to make managerial assistance available to the companies in our investment portfolio. In addition to the interest and dividends received from our investments, we often generate additional fee income for the structuring, diligence, transaction, administration and management services and financial guarantees we provide to our portfolio companies through the Company or our wholly-owned subsidiary, MVCFS.  In some cases, officers, directors and employees of the Company or the Adviser may serve as members of the Board of Directors or Board of Directors observers of portfolio companies.  The Company may provide guidance and management assistance to portfolio

 

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companies with respect to such matters as budgets, profit goals, business and financing strategies, management additions or replacements and plans for liquidity events for portfolio company investors such as a merger or initial public offering.

 

Portfolio Company Monitoring . We monitor our portfolio companies closely to determine whether or not they continue to be attractive candidates for further investment. Specifically, we monitor their ongoing performance and operations and provide guidance and assistance where appropriate. We would decline additional investments in portfolio companies that, in TTG Advisers’ view, do not continue to show promise. However, we may make follow-on investments in portfolio companies that we believe may perform well in the future.

 

TTG Advisers follows established procedures for monitoring equity and loan investments. The investment professionals have developed a multi-dimensional flexible rating system for all of the Company’s portfolio investments. The rating grids are updated regularly and reviewed by the Portfolio Manager, together with the investment team. Additionally, the Company’s Valuation Committee (the “Valuation Committee”) meets at least quarterly, to review a written valuation memorandum and materials for each portfolio company and to discuss business updates. Furthermore, the Company’s Chief Compliance Officer administers the Company’s compliance policies and procedures, which includes the Company’s investments in portfolio companies.

 

We exit our investments generally when a liquidity event takes place, such as the sale, recapitalization or initial public offering of a portfolio company. Our equity holdings, including shares underlying warrants, after the exercise of such warrants, typically include registration rights, which would allow us to sell the securities if the portfolio company completes a public offering.

 

Investment Approval Procedures . Generally, prior to approving any new investment, we follow the process outlined below. We usually conduct one to four months of due diligence and structuring before an investment is considered for approval. However, depending on the type of investment being contemplated, this process may be longer or shorter.

 

The typical key steps in our investment approval process are:

 

·                                           Initial investment screening by deal person or investment team;

 

·                                           Investment professionals present an investment proposal containing key terms and understandings (verbal and written) to the entire investment team;

 

·                                           Our Chief Compliance Officer reviews the proposed investment for compliance with the 1940 Act, the Code and all other relevant rules and regulations;

 

·                                           Investment professionals are authorized to commence due diligence;

 

·                                           Any investment professional can call a meeting, as deemed necessary, to: (i) review the due diligence reports; (ii) review the investment structure and terms; (iii) or to obtain any other information deemed relevant;

 

·                                           Once all due diligence is completed, the proposed investment is rated using a rating system, which tests several factors including, but not limited to, cash flow, EBITDA growth, management and business stability. We use this rating system as the base line for tracking the investment in the future;

 

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·                   Our Chief Compliance Officer confirms that the proposed investment will not cause us to violate the 1940 Act, the Code or any other applicable rule or regulation;

 

·                   Mr. Tokarz approves the transaction; and

 

·                   The investment is funded.

 

Hedging Transactions.   The Company, in the Adviser’s complete discretion, may also (but is not obligated to) enter into derivative or other transactions (such as forward, futures or options transactions) seeking to hedge the Company’s or a portfolio company’s exposure to currency, commodity or other risks.

 

Employees. Since the effectiveness of the Advisory Agreement on November 1, 2006, the Company has not had any direct employees.  TTG Advisers employs 20 individuals, including investment and portfolio management professionals, operations professionals and administrative staff.

 

OPERATING EXPENSES

 

During the fiscal year ended October 31, 2016, the Company bore the costs relating to the Company’s operations, including fees and expenses of the Independent Directors; fees of unaffiliated transfer agents, registrars and disbursing agents; legal and accounting expenses; costs of printing and mailing proxy materials and reports to shareholders; NYSE fees; management fee; incentive fee, if applicable; travel and due diligence costs related to investments; custodian fees and other extraordinary or nonrecurring expenses and other expenses properly payable by the Company.  It should be noted that the Company and TTG Advisers had entered into an agreement pursuant to which TTG Advisers would absorb or reimburse operating expenses of the Company to the extent necessary to limit the Company’s expense ratio to 3.5% in each of the 2009 and 2010 fiscal years (the consolidated expenses of the Company, including any amounts payable to TTG Advisers under the base management fee, but excluding the amount of any interest and other direct borrowing costs, taxes, incentive compensation, payments made by the GP of the PE Fund to TTG Advisers pursuant to the Portfolio Management Agreement between the GP and TTG Advisers respecting the PE Fund and extraordinary expenses taken as a percentage of the Company’s average net assets).  On various dates, TTG Advisers and the Company entered into annual agreements to extend the expense cap of 3.5% to the 2011, 2012, 2013 and 2014 fiscal years (“Expense Limitation Agreement”).  On October 28, 2014 and on October 29, 2015, the Company and the Adviser agreed to continue the expense cap into fiscal year 2015 and fiscal year 2016, respectively.  On October 29, 2015,  the Company and the Adviser lowered the expense cap percentage to 3.25% and modified the methodology so that the cap is applied to limit the Company’s ratio of expenses to total assets less cash (the “Modified Methodology”), consistent with the asset level used to calculate the base management fee. (The expenses covered by the cap remain unchanged.)  The amount of any payments made by the GP of the PE Fund to TTG Advisers pursuant to the Portfolio Management Agreement between the GP and TTG Advisers respecting the PE Fund continues to be excluded from the calculation of the Company’s expense ratio under the Expense Limitation Agreement.  In addition, for fiscal years 2010 through 2016, TTG Advisers voluntarily agreed to waive $150,000 of expenses that the Company is obligated to reimburse to TTG Advisers under the Advisory Agreement (the “Voluntary Waiver”).  TTG Advisers also voluntarily agreed that any assets of the Company that are invested in exchange-traded funds would not be taken into account in the calculation of the base management fee due to TTG Advisers under the Advisory Agreement.  As

 

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of October 31, 2016, the Company did not have an investment in an exchange-traded fund.  On October 28, 2016, the Board approved the renewal of the Advisory Agreement for the 2017 fiscal year. Further, the Adviser agreed to continue to waive a portion of the base management fee so that it is reduced to 1.50% for fiscal year 2017.  Furthermore, the Company and the Adviser, similar to fiscal year 2016, agreed on an expense cap for fiscal 2017 of 3.25% under the Modified Methodology.

 

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 Company’s 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 Company’s investments or to maintain its tax status; (iv) offerings of the Company’s 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 Company’s 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 Company’s fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums; (xv) direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, independent auditors and outside legal costs; (xvi) the costs and expenses associated with the establishment of a special purpose vehicle; (xvii) the allocable portion of the cost (excluding office space) of the Company’s Chief Financial Officer, Chief Compliance Officer and Secretary in an amount not to exceed $200,000, per year, in the aggregate;  (xviii) subject to a cap of $150,000 in any fiscal year of the Company, fifty percent of the unreimbursed travel and other related (e.g., meals) out-of-pocket expenses (subject to item (ii) above) incurred by TTG Advisers in sourcing investments for the Company; provided that , if the investment is sourced for multiple clients of TTG Advisers, then the Company shall only reimburse fifty percent of its allocable pro rata portion of such expenses; and (xix) all other expenses incurred by the Company in connection with administering the Company’s business (including travel and other out-of-pocket expenses (subject to item (ii) above) incurred in providing significant managerial assistance to a portfolio company).

 

VALUATION OF PORTFOLIO SECURITIES

 

Pursuant to the requirements of the 1940 Act and in accordance with the Accounting Standards Codification (“ASC”), Fair Value Measurements and Disclosures (“ASC 820”), we value our portfolio securities at their current market values or, if market quotations are not readily available, at their estimated fair values. Because our portfolio company investments generally do not have

 

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readily ascertainable market values, we record these investments at fair value in accordance with our Valuation Procedures adopted by the Board of Directors, which are consistent with ASC 820.  As permitted by the SEC, the Board of Directors has delegated the responsibility of making fair value determinations to the Valuation Committee, subject to the Board of Directors’ supervision and pursuant to our Valuation Procedures.  Our Board of Directors may also hire independent consultants to review our Valuation Procedures or to conduct an independent valuation of one or more of our portfolio investments.

 

Pursuant to our Valuation Procedures, the Valuation Committee (which is comprised of three Independent Directors) determines fair values of portfolio company investments on a quarterly basis (or more frequently, if deemed appropriate under the circumstances). In doing so, the Committee considers the recommendations of TTG Advisers.  The Committee also takes into account input and reviews by third party consultants retained to support the Company’s valuation process. The Company has also adopted other enhanced processes related to valuations of controlled/affiliated portfolio companies. Any changes in valuation are recorded in the consolidated statements of operations as “Net unrealized appreciation (depreciation) on investments.”

 

Currently, our NAV per share is calculated and published on a quarterly basis.  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.  Fair values of foreign investments reflect exchange rates, as applicable, in effect on the last business day of the quarter end.  Exchange rates fluctuate on a daily basis, sometimes significantly.  Exchange rate fluctuations following the most recent fiscal year end are not reflected in the valuations reported in this Annual Report.  See Item 1A Risk Factor, “Investments in foreign debt or equity may involve significant risks in addition to the risks inherent in U.S. investments.”

 

At October 31, 2016, approximately 80.97% of total assets represented investments in portfolio companies recorded at fair value (“Fair Value Investments”).

 

Under most circumstances, at the time of acquisition, Fair Value Investments are carried at cost (absent the existence of conditions warranting, in management’s and the Valuation Committee’s view, a different initial value).  During the period that an investment is held by the Company, its original cost may cease to approximate fair value as the result of market and investment specific factors.  No pre-determined formula can be applied to determine fair value.  Rather, the Valuation Committee analyzes fair value measurements based on the value at which the securities of the portfolio company could be sold in an orderly disposition over a reasonable period of time between willing parties, other than in a forced or liquidation sale.  The liquidity event whereby the Company ultimately exits an investment is generally the sale, the merger, the recapitalization of a portfolio company or a public offering of its securities.

 

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 company’s financial results and projections, publicly traded comparable companies when available, comparable private transactions when available, precedent transactions in the market when available, third-party real estate and asset appraisals if appropriate and available,

 

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discounted cash flow analysis, if appropriate, as well as other factors.  The Company generally requires, where practicable, Portfolio Companies to provide annual audited and more regular unaudited financial statements, and/or annual projections for the upcoming fiscal year.

 

The fair value of our portfolio securities is inherently subjective. Because of the inherent uncertainty of fair valuation of portfolio securities and escrow receivables that do not have readily ascertainable market values, our estimate of fair value may significantly differ from the value that would have been used had a ready market existed for the securities. Such values also do not reflect brokers’ fees or other selling costs, which might become payable on disposition of such investments.

 

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

 

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

 

Our investments are carried at fair value in accordance with ASC 820. Unrestricted minority-owned publicly traded securities for which market quotations are readily available are valued at the closing market quote on the valuation date and majority-owned publicly traded securities and other privately held securities are valued as determined in good faith by the Valuation Committee of the Board of Directors. For legally or contractually restricted securities of companies that are publicly traded, the value is based on the closing market quote on the valuation date minus a discount for the restriction.  At October 31, 2016, we did not own restricted or unrestricted securities of any publicly traded company in which we have a majority-owned interest, but did own one security in which we have a minority-owned interest.

 

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

 

For equity securities of Portfolio Companies, the Valuation Committee estimates the fair value based on market and/or income approach with value then attributed to equity or equity like securities using the enterprise value waterfall (“Enterprise Value Waterfall”) valuation methodology.  Under the Enterprise Value Waterfall valuation methodology, the Valuation Committee estimates the enterprise fair value of the portfolio company and then waterfalls the enterprise value over the portfolio company’s securities in order of their preference relative to one another.  To assess the enterprise value of the portfolio company, the Valuation Committee weighs some or all of the traditional market valuation methods and factors based on the individual

 

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circumstances of the portfolio company in order to estimate the enterprise value.  The methodologies for performing assets may be based on, among other things:  valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company, and third-party asset and real estate appraisals.  For non-performing assets, the Valuation Committee may estimate the liquidation or collateral value of the portfolio company’s assets.  The Valuation Committee also takes into account historical and anticipated financial results.

 

The Company does not utilize hedge accounting and instead, when applicable, marks its derivatives to market on the Company’s consolidated statement of operations.

 

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

 

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

 

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

 

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

 

The Valuation Committee determines fair value of loan and debt securities of Control Companies based on the estimate of the enterprise value of the portfolio company.  To the extent the enterprise value exceeds the remaining principal amount of the loan and all other debt securities of the company, the fair value of such securities is generally estimated to be par.  However, where the enterprise value is less than the remaining principal amount of the loan and all other debt

 

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securities, the Valuation Committee may discount the value of such securities to reflect an impairment.

 

For the Company’s or its subsidiary’s investment in the PE Fund, for which an indirect wholly-owned subsidiary of the Company serves as the general partner (the “GP”) of the PE Fund, the Valuation Committee relies on the GP’s determination of the fair value of the PE Fund which will be generally valued, as a practical expedient, utilizing the net asset valuations provided by the GP, which will be made:  (i) no less frequently than quarterly as of the Company’s fiscal quarter end and (ii) with respect to the valuation of PE Fund investments in portfolio companies, will be based on methodologies consistent with those set forth in the Company’s valuation procedures.  In making its determinations, the GP considers and generally relies on TTG Advisers’ recommendations.  The determination of the net asset value of the Company’s or its subsidiary’s investment in the PE Fund will follow the methodologies described for valuing interests in private investment funds (“Investment Vehicles”) described below.  Additionally, when both the Company and the PE Fund hold investments in the same portfolio company, the GP’s Fair Value determination shall be based on the Valuation Committee’s determination of the Fair Value of the Company’s portfolio security in that portfolio company.

 

As permitted under GAAP, the Company’s interests in private investment funds are generally valued, as a practical expedient, utilizing the net asset valuations provided by management of the underlying Investment Vehicles, without adjustment, unless TTG Advisers is aware of information indicating that a value reported does not accurately reflect the value of the Investment Vehicle, including any information showing that the valuation has not been calculated in a manner consistent with GAAP.  Net unrealized appreciation (depreciation) of such investments is recorded based on the Company’s proportionate share of the aggregate amount of appreciation (depreciation) recorded by each underlying Investment Vehicle.  The Company’s proportionate investment interest includes its share of interest and dividend income and expense, and realized and unrealized gains and losses on securities held by the underlying Investment Vehicles, net of operating expenses and fees.  Realized gains and losses on distributions from Investment Vehicles are generally recognized on a first in, first out basis.

 

The Company applies the practical expedient to interests in Investment Vehicles on an investment by investment basis, and consistently with respect to the Company’s entire interest in an investment.  The Company may adjust the valuation obtained from an Investment Vehicle with a premium, discount or reserve if it determines that the net asset value is not representative of fair value.

 

If the Company intends to sell all or a portion of its interest in an Investment Vehicle to a third-party in a privately negotiated transaction near the valuation date, the Company will consider offers from third parties to buy the interest in an Investment Vehicle in valuations, which may be discounted for both probability of close and time.

 

When the Company receives nominal cost warrants or free equity securities (“nominal cost equity”) with a debt security, the Company typically allocates its cost basis in the investment between debt securities and nominal cost equity at the time of origination.  If the Company is not reimbursed for investment or transaction related costs at the time an investment is made, the Company typically capitalizes those costs to the cost basis of the investment.

 

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Interest income, adjusted for amortization of premium and accretion of discount on a yield to maturity methodology, is recorded on an accrual basis to the extent that such amounts are expected to be collected.  Origination and/or closing fees associated with investments in portfolio companies are accreted into income over the respective terms of the applicable loans.  Upon the prepayment of a loan or debt security, any unamortized original issue discount or market discount is recorded as interest income. Prepayment premiums are recorded on loans when received as interest income.  Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that the Company expects to collect such amounts.

 

For loans, debt securities, and preferred securities with contractual payment-in-kind interest or dividends, which represent contractual interest/dividends accrued and added to the loan balance or liquidation preference that generally becomes due at maturity, the Company will not ascribe value to payment-in-kind interest/dividends, if the portfolio company valuation indicates that the payment-in-kind interest is not collectible.  However, the Company may ascribe value to payment-in-kind interest if the health of the portfolio company and the underlying securities are not in question.  All payment-in-kind interest that has been added to the principal balance or capitalized is subject to ratification by the Valuation Committee.   For interest or deferred interest receivables purchased by the Company at a discount to their outstanding amount, the Company amortizes the discount using the effective yield method and records it as interest income over the life of the loan.  The Company will not ascribe value to the interest or deferred interest, if the Company has determined that the interest is not collectible.

 

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 escrow’s various conditions and discounted for both risk and time.

 

ASC 460, Guarantees , requires the Company to estimate the fair value of the guarantee obligation at its inception and requires the Company to assess whether a probable loss contingency exists in accordance with the requirements of ASC 450, Contingencies .  The Valuation Committee typically will look at the pricing of the security in which the guarantee provided support for the security and compare it to the price of a similar or hypothetical security without guarantee support.  The difference in pricing will be discounted for time and risk over the period in which the guarantee is expected to remain outstanding.

 

CUSTODIAN

 

US Bank National Association is the primary custodian (the “Primary Custodian”) of the Company’s portfolio securities.  The principal business office of the Primary Custodian is 1555 North River Center Drive, Suite 302, Milwaukee, WI 53212.

 

Branch Banking and Trust Company (“BB&T”) also serves as the custodian for certain securities and other assets of the Company.  The principal business office of BB&T is 200 West 2 nd  Street, Winston Salem, North Carolina 27101.

 

Santander Bank N.A. and Wintrust Bank also serve as custodians for certain assets of the Company. The principal business office of Santander Bank N.A. is 75 State Street, Boston, Massachusetts 02109 and the principal business office of Wintrust Bank is 9700 W. Higgins Road, Suite 800, Rosemont, Illinois 60018.

 

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TRANSFER AGENT AND PLAN AGENT

 

The Company employs Computershare Ltd. (the Plan Agent”) as its transfer agent to record transfers of the shares, maintain proxy records, process distributions and to act as agent for each participant in the Company’s dividend reinvestment plan. The principal business office of the Plan Agent is 250 Royall Street, Canton, Massachusetts 02021 and the phone number for the plan agent is (781) 575-2000.

 

CERTAIN GOVERNMENT REGULATIONS

 

We operate in a highly regulated environment. The following discussion generally summarizes certain government regulations.

 

Business Development Company. A business development company is defined and subject to the regulations of the 1940 Act. A business development company must be organized in the United States for the purpose of investing in or lending to primarily private companies and making managerial assistance available to them. A business development company may use capital provided by public shareholders and from other sources to invest in long-term, private investments in businesses.

 

As a business development company, we may not acquire any asset other than “qualifying assets” unless, at the time we make the acquisition, the value of our qualifying assets represents at least 70% of the value of our total assets.  In accordance with the 1940 Act, valuation for these purposes are based on the Company’s most recently filed quarterly or annual report, as applicable.  The principal categories of qualifying assets relevant to our business are:

 

(1)                                 Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions):

 

(a) 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:

 

(i)                                     is organized under the laws of, and has its principal place of business in, the United States;

 

(ii)                                  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

 

(iii)                                satisfies one of the following:

 

·                   does not have any class of securities with respect to which a broker or dealer may extend margin credit;

 

·                   is controlled by a business development company or a group of companies including a business development company and the business development company has an affiliated person who is a director of the eligible portfolio company; or

 

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·                   is a small and solvent company having total assets of not more than $4.0 million and capital and surplus of not less than $2.0 million.

 

(b) is a company that meets the requirements of (a)(i) and (ii) above, but is not an eligible portfolio company because it has issued a class of securities on a national securities exchange, if:

 

(i) at the time of the purchase, we own at least 50% of the (x) greatest number of equity securities of such issuer and securities convertible into or exchangeable for such securities; and (y) the greatest amount of debt securities of such issuer, held by us at any point in time during the period when such issuer was an eligible portfolio company; and

 

(ii) we are one of the 20 largest holders of record of such issuer’s outstanding voting securities; or

 

(c) is a company that meets the requirements of (a)(i) and (ii) above, but is not an eligible portfolio company because it has issued a class of securities on a national securities exchange, if the aggregate market value of such company’s outstanding voting and non-voting common equity is less than $250.0 million.

 

(2)                                 Securities of any eligible portfolio company that 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, the Company is entitled to issue senior securities in the form of stock or senior securities representing indebtedness, including debt securities and preferred stock, as long as each class of senior security has an asset coverage ratio of at least 200% immediately after each such issuance. See “Risk Factors.” The Company may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without

 

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the prior approval of our Independent Directors and, in some cases, prior approval by the SEC. On July 11, 2000, the SEC granted us an exemptive order permitting us to make co-investments with certain of our affiliates in portfolio companies, subject to certain conditions.  Under the exemptive order, the Company is permitted to co-invest in certain portfolio companies with its affiliates, subject to specified conditions.  Under the terms of the exemptive order, portfolio companies purchased by the Company and its affiliates are required to be approved by the Independent Directors and are required to satisfy certain other conditions established by the SEC.

 

As with other companies subject to the regulations of the 1940 Act, a business development company must adhere to certain other substantive ongoing regulatory requirements. A majority of our directors must be persons who are not “interested persons,” as that term is defined in the 1940 Act. Additionally, we are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect the business development company. Furthermore, as a business development company, we are prohibited from protecting any director or officer against any liability to the company or our shareholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s 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 are held by us.  You may read and copy the code of ethics at the SEC’s 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 SEC’s Public Reference Section, 100 F Street, NE, Washington, D.C. 20549.  The code of ethics is also posted on our website at http://www.mvccapital.com.

 

We may not change the nature of our business so as to cease to be, or withdraw our election as, a business development company unless authorized by vote of a “majority of the outstanding voting securities,” as defined in the 1940 Act, of our shares. A majority of the outstanding voting securities of a company is defined by the 1940 Act as the lesser of: (i) 67% or more of such company’s shares present at a meeting if more than 50% of the outstanding shares of such company are present and represented by proxy, or (ii) more than 50% of the outstanding shares of such company.

 

We are subject to periodic examinations by the SEC for compliance with the 1940 Act.

 

ITEM 1A.                                        RISK FACTORS

 

Investing in MVC Capital involves a number of significant risks relating to our business and investment objective. As a result, there can be no assurance that we will achieve our investment objective.

 

BUSINESS RISKS

 

Business risks are risks that are associated with general business conditions, the economy, and the operations of the Company. Business risks are not risks associated with our specific investments or an offering of our securities.

 

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We depend on key personnel of TTG Advisers, especially Mr. Tokarz, in seeking to achieve our investment objective.

 

We depend on the continued services of Mr. Tokarz and certain other key management personnel of TTG Advisers. If we were to lose access to any of these personnel, particularly Mr. Tokarz, it could negatively impact our operations and we could lose business opportunities.  There is a risk that Mr. Tokarz’s expertise may be unavailable to the Company, which could significantly impact the Company’s ability to achieve its investment objective.

 

Our returns may be substantially lower than the average returns historically realized by the private equity industry as a whole.

 

Past performance of the private equity industry is not necessarily indicative of that sector’s 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 substantially lower return we are likely to realize on short-term liquid investments during the period in which we are identifying potential investments, and

 

·                   The periodic disclosure required of business development companies, which could result in the Company being less attractive as an investor to certain potential portfolio companies.

 

Substantially all of our portfolio investments and escrow receivables are recorded at “fair value” and, as a result, there is a degree of uncertainty regarding the carrying values of our portfolio investments.

 

Pursuant to the requirements of the 1940 Act, because our portfolio company investments do not have readily ascertainable market values, we record these investments at fair value in accordance with our Valuation Procedures adopted by our Board of Directors.  As permitted by the SEC, the Board of Directors has delegated the responsibility of making fair value determinations to the Valuation Committee, subject to the Board of Directors’ supervision and pursuant to the Valuation Procedures.

 

At October 31, 2016, approximately 80.97% of our total assets represented portfolio investments recorded at fair value.

 

There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. In determining the fair value of a portfolio investment, the Valuation Committee analyzes, among other factors, the portfolio company’s financial results and projections and publicly traded comparable companies when available, which may be dependent on general economic conditions.  We specifically value each individual investment and record unrealized depreciation for an investment that we believe has become impaired, including where collection of a loan or realization of an equity security is doubtful. Conversely, we will record unrealized appreciation if we have an indication (based on a significant development) that the underlying portfolio company has appreciated in value and, therefore, our equity security has also appreciated in value, where

 

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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 comprised of three Independent Directors) reviews, considers and determines fair valuations on a quarterly basis (or more frequently, if deemed appropriate under the circumstances). Any changes in valuation are recorded in the consolidated statements of operations as “Net change in unrealized appreciation (depreciation) on investments.”

 

We previously identified a material weakness in our internal control over financial reporting, which has now been remediated. Any future failure to establish and maintain effective internal control over financial reporting could result in material misstatements in our financial statements and cause investors to lose confidence in our reported financial information, which in turn could cause the trading price of our securities to decline.

 

We previously identified a material weakness in our internal control over financial reporting related to the valuation of certain portfolio companies and, as a result of such weakness, our management concluded that our disclosure controls and procedures and internal control over financial reporting were not effective as of October 31, 2014 and October 31, 2015. This contributed to a delay in the filing of certain prior financial statements. For more information on this matter and the remediation of the material weakness, please refer to Item 9A. Controls and Procedures.

 

Although we have remediated this material weakness in our internal control over financial reporting, any failure to improve our disclosure controls and procedures or internal control over financial reporting to address any identified weaknesses in the future, if they were to occur, could prevent us from maintaining accurate accounting records and discovering material accounting errors. Any of these results could adversely affect our business and the value of our common stock.

 

Economic recessions or downturns, including the current economic instability in Europe and the United States, could impair our portfolio companies and have a material adverse impact on our business, financial condition and results of operations.

 

Many of the companies in which we have made or will make investments may be susceptible to adverse economic conditions. Adverse economic conditions may affect the ability of a company to engage in a liquidity event. These conditions could lead to financial losses in our portfolio and a decrease in our revenues, net income and assets.  Through the date of this report, conditions in the public debt and equity markets have been volatile and pricing levels have performed similarly. As a result, depending on market conditions, we could incur substantial realized losses and suffer unrealized losses in future periods, which could have a material adverse impact on our business, financial condition and results of operations.  If current market conditions continue, or worsen, it

 

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may adversely impact our ability to deploy our investment strategy and achieve our investment objective.

 

Our overall business of making loans or 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. As a result, the pace of our investment activity may slow, which could impact our ability to achieve our investment objective. In addition, significant changes in the capital markets could have an effect on the valuations of private companies and on the potential for liquidity events involving such companies. This could affect the amount and timing of any gains realized on our investments and thus have a material adverse impact on our financial condition.

 

Depending on market conditions, we could incur substantial realized losses and suffer unrealized losses in future periods, which could have a material adverse impact on our business, financial condition and results of operations.  In addition, the global financial markets have not fully recovered from the global financial crisis and the economic factors that gave rise to the crisis.  The continuation of current global market conditions, uncertainty or further deterioration, including the economic instability in Europe, could result in further declines in the market values of the Company’s investments.  Such declines could also lead to diminished investment opportunities for the Company, prevent the Company from successfully executing its investment strategies or require the Company to dispose of investments at a loss while such adverse market conditions prevail.

 

We may not realize gains from our equity investments.

 

When we invest in mezzanine and senior debt securities, we may acquire warrants or other equity securities as well. We may also invest directly in various equity securities. Our goal is ultimately to realize gains upon our disposition of such interests. However, the equity interests we receive or invest in may not appreciate in value and, in fact, may decline in value. In addition, the equity securities we receive or invest in may be subject to restrictions on resale during periods in which it would be advantageous to sell. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.

 

The market for private equity investments can be highly competitive. In some cases, our status as a regulated business development company may hinder our ability to participate in investment opportunities.

 

We face competition in our investing activities from private equity funds, other business development companies, investment banks, investment affiliates of large industrial, technology, service and financial companies, small business investment companies, wealthy individuals and foreign investors. As a regulated business development company, we are required to disclose quarterly the name and business description of portfolio companies and the value of any portfolio securities. Many of our competitors are not subject to this disclosure requirement. Our obligation to disclose this information could hinder our ability to invest in certain portfolio companies. Additionally, other regulations, current and future, may make us less attractive as a potential investor to a given 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.

 

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Our ability to use our capital loss carryforwards may be subject to limitations.

 

On October 31, 2016, the Company had a net capital loss carryforward of approximately $50.2 million. The Company had approximately $17.8 million in unrealized losses associated with Legacy Investments as of October 31, 2016.  If we experience an aggregate 50% shift in the ownership of our common stock from shareholder transactions over a three year period (e.g., if a shareholder acquires 5% or more of our outstanding shares of common stock, or if a shareholder who owns 5% or more of our outstanding shares of common stock significantly increases or decreases its investment in the Company), our ability to utilize our capital loss carryforwards to offset future capital gains may be severely limited.  Further, in the event that we are deemed to have failed to meet the requirements to qualify as a RIC, our ability to use our capital loss carryforwards could be adversely affected.   Please see Note 12 of our consolidated financial statements “Tax Matters” for more information.

 

Loss of pass-through tax treatment would substantially reduce net assets and income available for dividends.

 

We have operated so as to qualify as a RIC. If we meet source of income, diversification and distribution requirements, we will qualify for effective pass-through tax treatment. We would cease to qualify for such pass-through tax treatment if we were unable to comply with these requirements. In addition, we may have difficulty meeting the requirement to make distributions to our shareholders because in certain cases we may recognize income before or without receiving cash representing such income, such as in the case of debt obligations that are treated as having original issue discount. 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, and all of our distributions will be taxed to our shareholders as ordinary corporate distributions. 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; (1) 98% of our ordinary income during each calendar year, (2) 98.2% of our net capital gains realized in the period from November 1 of the prior year through October 31 of the current year, and (3) all such ordinary income and net capital gains for the previous years that were not distributed during those years, we generally will be subject to a 4% excise tax on certain undistributed amounts.

 

There are certain risks associated with the Company holding debt obligations that are treated under applicable tax rules as having original issue discount.

 

For federal income tax purposes, we may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (“OID”) (such as debt instruments with payment-in-kind, or PIK, interest or, in certain cases, increasing interest rates or debt instruments that were issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. We may also have to include in income other amounts that we have not yet received in cash, such as deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. We anticipate that a portion of our income may constitute original issue discount or other income required to be included in taxable income prior to receipt of

 

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cash. Further, we may elect to amortize market discounts and include such amounts in our taxable income in the current year, instead of upon disposition, as an election not to do so would limit our ability to deduct interest expenses for tax purposes.

 

Any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of the accrual.  Therefore, we may be required to make a distribution to our shareholders in order to satisfy the annual distribution requirement necessary to qualify for and maintain RIC tax treatment under Subchapter M of the Code, even though we will not have received any corresponding cash amount. As a result, we may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for or maintain RIC tax treatment and thus become subject to corporate-level income tax, as described in the previous risk factor regarding loss of pass-through tax treatment.

 

Additionally, the higher interest rates of OID instruments reflect the payment deferral and increased credit risk associated with these instruments, and OID instruments generally represent a significantly higher credit risk than coupon loans.  Even if the accounting conditions for income accrual are met, the borrower could still default when the Company’s actual collection is supposed to occur at the maturity of the obligation.

 

OID instruments may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of any associated collateral.  OID income may also create uncertainty about the source of the Company’s cash distributions.  For accounting purposes, any cash distributions to shareholders representing OID income are not treated as coming from paid-in capital, even though the cash to pay them comes from the offering proceeds.  Thus, despite the fact that a distribution of OID income comes from the cash invested by the shareholders, the 1940 Act does not require that shareholders be given notice of this fact by reporting it as a return of capital.  PIK interest has the effect of generating investment income and potentially increasing the incentive fees payable to TTG Adviser at a compounding rate.  In addition, the deferral of PIK interest also reduces the loan-to-value ratio at a compounding rate.  Furthermore, OID creates the risk that fees will be paid to TTG Adviser based on non-cash accruals that ultimately may not be realized, while TTG Adviser will be under no obligation to reimburse the Company for these fees.

 

Our ability to grow depends on our ability to raise capital.

 

To fund new investments, periodically we may need to issue equity securities or borrow from financial institutions. Unfavorable economic conditions, amongst other things, could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us.  If we fail to obtain capital to fund our investments, it could limit both our ability to grow our business and our profitability.  With certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ depends on TTG Advisers’ and our board of directors’ assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to maintain our current facilities or obtain other lines of credit at all or on terms acceptable to us.

 

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Complying with the RIC requirements may cause us to forego otherwise attractive opportunities.

 

In order to qualify as a RIC for U.S. federal income tax purposes, we must satisfy tests concerning the sources of our income, the nature and diversification of our assets and the amounts we distribute to our shareholders.  We may be unable to pursue investments that would otherwise be advantageous to us in order to satisfy the source of income or asset diversification requirements for qualification as a RIC.  In particular, to qualify as a RIC, at least 50% of our assets must be in the form of cash and cash items, Government securities, securities of other RICs, and other securities that represent not more than 5% of our total assets and not more than 10% of the outstanding voting securities of the issuer.  We have from time to time held a significant portion of our assets in the form of securities that exceed 5% of our total assets or more than 10% of the outstanding voting securities of an issuer, and compliance with the RIC requirements currently limits us from making investments that represent more than 5% of our total assets or more than 10% of the outstanding voting securities of the issuer.  Thus, compliance with the RIC requirements may hinder our ability to take advantage of investment opportunities believed to be attractive, including potential follow-on investments in certain of our portfolio companies.

 

Regulations governing our operation as a business development company affect our ability to, and the way in which we, raise additional capital.

 

Generally we are not able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock or warrants at a price below the then-current net asset value per share of our common stock if our board of directors determines that such sale is in the best interests of the Company and its stockholders, and, if required by law or regulation, our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount). If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, then the percentage ownership of our stockholders at that time will decrease, and you might experience dilution.

 

Any failure on our part to maintain our status as a business development company would reduce our operating flexibility.

 

We intend to continue to qualify as a business development company (“BDC”) under the 1940 Act. The 1940 Act imposes numerous constraints on the operations of BDCs. For example, BDCs are required to invest at least 70% of their total assets in specified types of securities, primarily in private companies or thinly-traded U.S. public companies, cash, cash equivalents, U.S. government securities and other high quality debt investments that mature in one year or less. Furthermore, any failure to comply with the requirements imposed on BDCs by the 1940 Act could cause the SEC to bring an enforcement action against us and/or expose us to claims of private litigants. In addition, upon approval of a majority of our stockholders, we may elect to withdraw our status as a business development company. If we decide to withdraw our election, or if we otherwise fail to qualify as a business development company, we may be subject to the substantially greater regulation under the 1940 Act as a closed-end investment company. Compliance with such regulations would significantly decrease our operating flexibility, and could significantly increase our costs of doing business.

 

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Changes in the law or regulations that govern business development companies and RICs, including changes in tax regulations, may significantly impact our business.

 

We and our portfolio companies are subject to regulation by laws at the local, state and federal levels, including federal securities law and federal taxation law.  These laws and regulations, as well as their interpretation, may change from time to time.  A change in these laws or regulations may significantly affect our business.

 

Results may fluctuate and may not be indicative of future performance.

 

Our operating results will fluctuate and, therefore, you should not rely on current or historical period results to be indicative of our performance in future reporting periods. In addition to many of the above-cited risk factors, other factors could cause operating results to fluctuate including, among others, variations in the investment origination volume and fee income earned, variation in timing of prepayments, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions.

 

Our common stock price can be volatile.

 

The trading price of our common stock may fluctuate substantially. The price of the common stock may be higher or lower than the price you pay for your shares, depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include the following:

 

·                   Price and volume fluctuations in the overall stock market from time to time;

 

·                   Significant volatility in the market price and trading volume of securities of business development companies or other financial services companies;

 

·                   Volatility resulting from trading by third parties in derivative instruments that use our common stock as the referenced asset, including puts, calls, long-term equity participation securities, or LEAPs, or short trading positions;

 

·                   Changes in regulatory policies or tax guidelines with respect to business development companies or RICs;

 

·                   Our adherence to applicable regulatory and tax requirements, including the current restriction on our ability to make Non-Diversified Investments;

 

·                   Actual or anticipated changes in our earnings or fluctuations in our operating results or changes in the expectations of securities analysts;

 

·                   General economic conditions and trends;

 

·                   Loss of a major funding source, which would limit our liquidity and our ability to finance transactions;

 

·                   Changes in interest rates; or

 

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·                   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 NAV, but will depend upon the market price of the shares at the time of sale. Since the market price of our shares will be affected by such factors as the relative demand for and supply of the shares in the market, general market and economic conditions and other factors beyond our control, we cannot predict whether the shares will trade at, below or above our NAV. Although our shares, from time to time, had traded at a premium to our NAV, in more recent years, our shares have traded at a discount to NAV, which discount may fluctuate over time.

 

We have not established a mandated 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.

 

During certain periods, our distribution proceeds (dividends) have exceeded and may, in the future, exceed our taxable earnings and profits. Therefore, during those times, portions of the distributions that we make may represent a return of capital to you for tax purposes, which will reduce your tax basis in your shares.

 

During certain periods, our distribution proceeds have exceeded and may, in the future, exceed our earnings and profits.  For example, in the event that we encounter delays in locating suitable investment opportunities, we may pay all or a portion of our distributions from the proceeds of any securities offering, from borrowings that were made in anticipation of future cash flow or from available funds.  Therefore, portions of the distributions that we make may be a return of the money that you originally invested and represent a return of capital to you for tax purposes.  A return of capital generally is a return of your investment rather than a return of earnings or gains derived from our investment activities and will be made after deducting the fees and expenses payable in connection with the offering.  Such a return of capital is not taxable, but reduces your tax basis in your shares, which may result in higher taxes for you even if your shares are sold at a price below your original investment.

 

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,

 

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magnify the potential for gain or loss on amounts invested and, therefore, can increase the risks associated with investing in our securities.

 

Under the provisions of the 1940 Act, we are permitted, as a business development company, to borrow money or “issue senior securities” only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous.

 

We have borrowed from and may continue to borrow from, and issue senior debt securities to, banks, insurance companies and other private and public lenders. Lenders of these senior securities have fixed dollar claims on our assets that are superior to the claims of our common shareholders. If the value of our assets increases, then leveraging would cause the NAV attributable to our common stock to increase more sharply than it would had we not used leverage. Conversely, if the value of our consolidated assets decreases, leveraging would cause the NAV to decline more sharply than it otherwise would have had we not used leverage.

 

Similarly, any increase in our consolidated income in excess of consolidated interest expense on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our consolidated income would cause net investment income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock dividend payments. Leverage is generally considered a speculative investment technique.

 

As of October 31, 2016, we borrowed $35 million under our short-term credit facility, Credit Facility II (as defined below), which is due on February 28, 2017.  Further, we have approximately $114.4 million in aggregate principal amount of Senior Notes (as defined below), due on January 15, 2023.  See Note 17 Subsequent Events for additional information.

 

Our ability to service our debt depends largely on our financial performance and is subject to prevailing economic conditions and competitive pressures.  The amount of leverage that we employ at any particular time will depend on our management’s and our Board of Director’s assessments of market and other factors at the time of any proposed borrowing.  The Senior Notes and Credit Facility II impose certain financial and operating covenants that may restrict a portion of our business activities, including limitations that could hinder our ability to obtain additional financings and in some cases, to increase our dividends.  Any additional facility we access could also impose additional covenants that could restrict our business activities.  A failure to add new or replacement debt facilities or issue additional debt securities or other evidences of indebtedness could have an adverse effect on our business, financial condition or results of operations.

 

Changes in interest rates may affect our cost of capital and net operating income and our ability to obtain additional financing.

 

Because we have borrowed and may continue to borrow money to make investments, our net investment income before net realized and unrealized gains or losses, or net investment income, may be dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates would not have a material adverse effect on our net investment income.

 

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Because of the generally fixed-rate nature of our debt investments and our borrowings, a hypothetical 1% increase or 1% decrease in interest rates is not expected to have a determinable (or easily predictable) material impact on the Company’s net investment income.  In periods of declining interest rates, we may have difficulty investing our borrowed capital into investments that offer an appropriate return. In periods of sharply rising interest rates, our cost of funds would increase, which could reduce our net investment income. We may use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. We may utilize our short-term credit facilities as a means to bridge to long-term financing. Our long-term fixed-rate investments are financed primarily with equity and long-term fixed-rate debt.  We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act.  Additionally, we cannot assure you that financing will be available on acceptable terms, if at all.  Deterioration in the credit markets, which could delay our ability to sell certain of our loan investments in a timely manner, could also negatively impact our cash flows.

 

A portion of our existing investment portfolio was not selected by the investment team of TTG Advisers.

 

As of October 31, 2016, 1.4% of the Company’s assets consisted of Legacy Investments.  These investments were made pursuant to the Company’s 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 Company’s portfolio. The Company is managing them to seek to realize maximum returns.

 

Under the Advisory Agreement, TTG Advisers is entitled to compensation based on our portfolio’s performance. This arrangement may result in riskier or more speculative investments in an effort to maximize incentive compensation. Additionally, because the base management fee payable under the Advisory Agreement is based on total assets less cash, TTG Advisers may have an incentive to increase portfolio leverage in order to earn higher base management fees.

 

The way in which the compensation payable to TTG Advisers is determined may encourage the investment team to recommend riskier or more speculative investments and to use leverage to increase the return on our investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would adversely affect our shareholders, including investors in this offering. In addition, key criteria related to determining appropriate investments and investment strategies, including the preservation of capital, might be under-weighted if the investment team focuses exclusively or disproportionately on maximizing returns.

 

There are potential conflicts of interest that could impact our investment returns.

 

Our officers and directors, and members of the TTG Advisers investment team, may serve other entities, including the PE Fund, PPC Fund and others that operate in the same or similar lines of business as we do. Accordingly, they may have obligations to those entities, the fulfillment of which might not be in the best interests of the Company or our shareholders. It is possible that new investment opportunities that meet our investment objective may come to the attention of one of the management team members or our officers or directors in his or her role as an officer or director of another entity or as an investment professional associated with that entity, and, if so, such opportunity might not be offered, or otherwise made available, to the Company.

 

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Additionally, as an investment adviser, TTG Advisers has a fiduciary obligation to act in the best interests of its clients, including us.  To that end, if TTG Advisers manages any additional investment vehicles or client accounts (which includes its current management of the PE Fund and the PPC Fund), TTG Advisers will endeavor to allocate investment opportunities in a fair and equitable manner.  When the investment professionals of TTG Advisers identify an investment, they will have to choose which investment fund should make the investment.  As a result, there may be times when the management team of TTG Advisers has interests that differ from those of our shareholders, giving rise to a conflict.  In an effort to mitigate situations that give rise to such conflicts, TTG Advisers adheres to a policy (which was approved by our Board of Directors) relating to allocation of investment opportunities, which generally requires, among other things, that TTG Advisers continue to offer the Company MVC Targeted Investments that are not Non-Diversified Investments.  For more information on the allocation policy, please see “Our Investment Strategy — Allocation of Investment Opportunities” above.

 

Our relationship with any investment vehicle we or TTG Advisers manage could give rise to conflicts of interest with respect to the allocation of investment opportunities between us on the one hand and the other vehicles on the other hand.

 

Our subsidiaries are authorized to and serve as a general partner or managing member to a private equity or other investment vehicle(s) (“Other Vehicles”).  In addition, TTG Advisers may serve as an investment manager, sub-adviser or portfolio manager to Other Vehicles.  Further, Mr. Tokarz is a co-founder of PPC, a registered investment adviser that provides advisory services to Series A of the PPC Fund.  As a result of this relationship, certain of PPC’s principals and other PPC investment professionals may make themselves available, from time to time, to consult with TTG Advisers on investment matters relating to MVC or the PE Fund.  In this connection, certain employees of PPC are “associated persons” of TTG Advisers when providing certain services on behalf of TTG Advisers and, in this capacity, are subject to its oversight and supervision.  Likewise, TTG Advisers makes available to PPC certain investment professionals that are employed by TTG Advisers to provide services for PPC and the PPC Fund.  The foregoing raises a potential conflict of interest with respect to allocation of investment opportunities to us, on the one hand and to the Other Vehicles on the other hand.  The Board and TTG Advisers have adopted an allocation policy (described above) to help mitigate potential conflicts of interest among us and Other Vehicles.  For more information on the allocation policy, please see “Our Investment Strategy — Allocation of Investment Opportunities” above.

 

Wars, terrorist attacks, and other acts of violence may affect any market for our common stock, impact the businesses in which we invest and harm our operations and our profitability.

 

Wars, terrorist attacks and other acts of violence are likely to have a substantial impact on the U.S. and world economies and securities markets. The nature, scope and duration of the unrest, wars and occupation cannot be predicted with any certainty. Furthermore, terrorist attacks may harm our results of operations and your investment. We cannot assure you that there will not be further terrorist attacks against the United States or U.S. businesses. Such attacks and armed conflicts in the United States or elsewhere may impact the businesses in which we invest directly or indirectly, by undermining economic conditions in the United States. Losses resulting from terrorist events are generally uninsurable.

 

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Our financial condition and results of operations will depend on our ability to effectively manage our future growth.

 

Our ability to achieve our investment objective can depend on our ability to sustain continued growth. Accomplishing this result on a cost-effective basis is largely a function of our marketing capabilities, our management of the investment process, our ability to provide competent, attentive and efficient services and our access to financing sources on acceptable terms. As we grow, TTG Advisers may need to hire, train, supervise and manage new employees. Failure to effectively manage our future growth could have a material adverse effect on our business, financial condition and results of operations.

 

INVESTMENT RISKS

 

Investment risks are risks associated with our determination to execute on our business objective. These risks are not risks associated with general business conditions or those relating to an offering of our securities.

 

Investing in private companies involves a high degree of risk.

 

Our investment portfolio generally consists of loans to, and investments in, private companies. Investments in private businesses involve a high degree of business and financial risk, which can result in substantial losses and, accordingly, should be considered speculative. There is generally very little publicly available information about the companies in which we invest, and we rely significantly on the due diligence of the members of the investment team to obtain information in connection with our investment decisions.  It is thus difficult, and often impossible, to protect the Company from the risk of fraud, misrepresentation or poor judgment by these companies.

 

Our investments in portfolio companies are generally illiquid.

 

We generally acquire our investments directly from the issuer in privately negotiated transactions. Most of the investments in our portfolio (other than cash or cash equivalents and certain other investments made pending investments in portfolio companies such as investments in exchange-traded funds) are typically subject to restrictions on resale or otherwise have no established trading market. We may exit our investments when the portfolio company has a liquidity event, such as a sale, recapitalization or initial public offering. The illiquidity of our investments may adversely affect our ability to dispose of equity and debt securities at times when it may be otherwise advantageous for us to liquidate such investments. In addition, if we were forced to immediately liquidate some or all of the investments in the portfolio, the proceeds of such liquidation could be significantly less than the current fair value of such investments.

 

Our investments in small and middle-market privately-held companies are extremely risky and the Company could lose its entire investment.

 

Investments in small and middle-market privately-held companies are subject to a number of significant risks including the following:

 

·         Small and middle-market companies may have limited financial resources and may not be able to repay the loans we make to them.   Our strategy includes providing financing to companies that typically do not have capital sources readily available to them. While we

 

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believe that this provides an attractive opportunity for us to generate profits, this may make it difficult for the borrowers to repay their loans to us upon maturity.

 

·         Small and middle-market companies typically have narrower product lines and smaller market shares than large companies.   Because our target companies are smaller businesses, they may be more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. In addition, smaller companies may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing and other capabilities, and a larger number of qualified managerial and technical personnel.

 

·         There is generally little or no publicly available information about these privately-held companies. There is generally little or no publicly available operating and financial information about privately-held companies. As a result, we rely on our investment professionals to perform due diligence investigations of these privately-held companies, their operations and their prospects. We may not learn all of the material information we need to know regarding these companies through our investigations.  It is difficult, if not impossible, to protect the Company from the risk of fraud, misrepresentation or poor judgment by our portfolio companies.  Accordingly, the Company’s performance (including the valuation of its investments) is subject to the ongoing risk that the portfolio companies or their employees, agents, or service providers, may commit fraud adversely affecting the value of our investments.

 

·         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.

 

·         Small and middle-market businesses are more likely to be dependent on one or two persons.   Typically, the success of a small or middle-market company also depends on the management talents and efforts of one or two persons or a small group of persons. The death, disability or resignation of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us.

 

·         Small and middle-market companies are likely to have greater exposure to economic downturns than larger companies.   We expect that our portfolio companies will have fewer resources than larger businesses and an economic downturn may thus more likely have a material adverse effect on them.

 

·         Small and middle-market companies may have limited operating histories.   We may make debt or equity investments in new companies that meet our investment criteria. Portfolio companies with limited operating histories are exposed to the operating risks that new businesses face and may be particularly susceptible to, among other risks, market downturns, competitive pressures and the departure of key executive officers.

 

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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 company’s ability to repay a loan we made 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 borrower’s 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 Moody’s or lower than “BBB-” by Standard & Poor’s, commonly referred to as “junk bonds”). Loans of below investment grade quality have predominantly speculative characteristics with respect to the borrower’s 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.

 

Our portfolio companies may be highly leveraged.

 

Some of our portfolio companies may be highly leveraged, which may have adverse consequences to these companies and to us as an investor. These companies may be subject to restrictive financial and operating covenants and the leverage may impair such companies’ ability to finance their future operations and capital needs. As a result, the flexibility of these companies’ to respond to changing business and economic conditions and to take advantage of business opportunities may be limited. Further, a leveraged company’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used.

 

We are a non-diversified investment company within the meaning of the 1940 Act, and therefore may invest a significant portion of our assets in a relatively small number of portfolio companies, which subjects us to a risk of significant loss should the performance or financial condition of one or more portfolio companies deteriorate.

 

We are classified as a non-diversified investment company within the meaning of the 1940 Act, and therefore we may invest a significant portion of our assets in a relatively small number of portfolio companies and/or in a limited number of industries.  As of October 31, 2016, the fair value of our largest investment, U.S. Gas & Electric, Inc. (“U.S. Gas”), comprised 35.8% of our net assets.  Beyond the asset diversification requirements associated with our qualification as a RIC, we do not have fixed guidelines for diversification, and while we are not targeting any specific industries, relatively few industries may continue to be significantly represented among our investments.  To the extent that we have large positions in the securities of a small number of portfolio companies, we are subject to an increased risk of significant loss should the performance or financial condition of these portfolio companies or their respective industries deteriorate.  We

 

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may also be more susceptible to any single economic or regulatory occurrence as a result of holding large positions in a small number of portfolio companies.  See the risk factor below regarding the industry in which U.S. Gas operates.

 

As a result of our significant portfolio investment in U.S. Gas, we are particularly subject to the risks of that company and the energy services industry.

 

Given the extent of our investment in U.S. Gas, the Company is particularly subject to the risks impacting U.S. Gas and the energy service industry.  U.S. Gas’s operating results may fluctuate on a seasonal or quarterly basis and with general economic conditions. Weather conditions and other natural phenomena can also have an adverse impact on earnings and cash flows.  Unusually mild weather in the future could diminish U.S. Gas’s results of operations and harm its financial condition. U.S. Gas enters into contracts to purchase and sell electricity and natural gas as part of its operations. With respect to such transactions, the rate of return on its capital investments is not determined through mandated rates, and its revenues and results of operations are likely to depend, in large part, upon prevailing market prices for power in its regional markets and other competitive markets. These market prices can fluctuate substantially over relatively short periods of time.  Trading margins may erode as markets mature and there may be diminished opportunities for gain should volatility decline. Fuel prices may also be volatile, and the price U.S. Gas can obtain for power sales may not change at the same rate as changes in fuel costs. These factors could reduce U.S. Gas’s margins and therefore diminish its revenues and results of operations.

 

U.S. Gas relies on a firm supply source to meet its energy management obligations for its customers. Should U.S. Gas’s suppliers fail to deliver supplies of natural gas and electricity, there could be a material impact on its cash flows and statement of operations.  U.S. Gas depends on natural gas pipelines and other storage and transportation facilities owned and operated by third parties to deliver natural gas to wholesale markets and to provide retail energy services to customers. If transportation or storage of natural gas is disrupted, including for reasons of force majeure, the ability of U.S. Gas to sell and deliver its services may be hindered. As a result, it may be responsible for damages incurred by its customers, such as the additional cost of acquiring alternative supply at then-current market rates.  Additionally, U.S. Gas depends on transmission facilities owned and operated by unaffiliated power companies to deliver the power it sells at wholesale. If transmission is disrupted, or transmission capacity is inadequate, U.S. Gas may not be able to deliver its wholesale power.

 

U.S. Gas is subject to substantial regulation by federal, state and local regulatory authorities. It is required to comply with numerous laws and regulations and to obtain numerous authorizations, permits, approvals and certificates from governmental agencies. U.S. Gas cannot predict the impact of any future revisions or changes in interpretations of existing regulations or the adoption of new laws and regulations applicable to it. Changes in regulations or the imposition of additional regulations could influence its operating environment and may result in substantial costs to U.S. Gas.

 

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

 

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shareholders and management of such company may take risks or otherwise act in ways that do not serve our interests. Due to the lack of liquidity in the markets for our investments in privately held companies, we may not be able to dispose of our interests in our portfolio companies as readily as we would like. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings.

 

We may choose to waive or defer enforcement of covenants in the debt securities held in our portfolio, which may cause us to lose all or part of our investment in these companies.

 

Some of our loans to our portfolio companies may be structured to include customary business and financial covenants placing affirmative and negative obligations on the operation of each company’s 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 senior to us, the portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of other securities ranking equally with securities in which we invest, we would have to share on an equal basis any distributions with other investors holding such securities in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company. As a result, we may be prevented from obtaining the full value of our investment in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

 

Investments in foreign debt or equity may involve significant risks in addition to the risks inherent in U.S. investments.

 

Our investment strategy has resulted in some investments in debt or equity of foreign companies (subject to applicable limits prescribed by the 1940 Act). These risks may be even more pronounced for investments in less developed or emerging market countries.  Investing in foreign companies can expose us to additional risks not typically associated with investing in U.S. companies.  These

 

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risks include exchange rates, changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility, including developing or emerging market countries.  A portion of our investments are located in countries that use the euro as their official currency.  The USD/euro exchange rate, like foreign exchange rates in general, can be volatile and difficult to predict.  This volatility could materially and adversely affect the value of the Company’s shares and our interests in affected portfolio companies.

 

Hedging transactions may expose us to additional risks.

 

We may enter into hedging transactions to seek to reduce currency, commodity or other rate risks. However, unanticipated changes in currency or other rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions.  In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek or be able to establish a perfect or effective correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies.

 

Investing in our securities may involve a high degree of risk.

 

The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and volatility or loss of principal. Our investments in portfolio companies may be highly speculative and aggressive, and therefore, an investment in our securities may not be suitable for someone with a low risk tolerance.

 

ITEM 1B.                                        UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.                               PROPERTIES

 

Effective November 1, 2006, under the terms of the Advisory Agreement, TTG Advisers is responsible for providing office space to the Company and for the costs associated with providing such office space.  The Company’s offices continue to be located on the second floor of 287 Bowman Avenue, Purchase, NY 10577.

 

ITEM 3.                               LEGAL PROCEEDINGS

 

We are not currently subject to any material pending legal proceedings.

 

ITEM 4.                               MINE SAFETY DISCLOSURES

 

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Not Applicable.

 

PART II

 

ITEM 5.                               MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company’s shares of common stock began to trade on the NYSE on June 26, 2000, under the symbol “MVC.” The Company had 5,184 shareholders on December 15, 2016.

 

The following table reflects, for the periods indicated, the high and low closing prices per share of the Company’s common stock on the NYSE, by quarter.

 

 

 

QUARTER
ENDED

 

HIGH

 

LOW

 

FISCAL YEAR 2016

 

 

 

 

 

 

 

 

 

10/31/16

 

$

8.71

 

$

7.95

 

 

 

07/31/16

 

$

8.37

 

$

7.14

 

 

 

04/30/16

 

$

7.72

 

$

6.85

 

 

 

01/31/16

 

$

8.49

 

$

6.82

 

FISCAL YEAR 2015

 

 

 

 

 

 

 

 

 

10/31/15

 

$

9.73

 

$

8.02

 

 

 

07/31/15

 

$

10.36

 

$

9.61

 

 

 

04/30/15

 

$

10.11

 

$

9.36

 

 

 

01/31/15

 

$

11.24

 

$

9.48

 

 

PERFORMANCE GRAPH

 

This graph compares the return on our common stock with that of the Standard & Poor’s (“S&P”) 500 Stock Index and the Russell 2000 Financial Index for the fiscal years 2012 through 2016.  The graph assumes that, on October 31, 2011, a person invested $10,000 in each of our common stock, the S&P 500 Stock Index, and the Russell 2000 Financial Index.  The graph measures total shareholder return, which takes into account both changes in stock price and dividends.  It assumes that dividends paid are reinvested in additional shares of our common stock.  Past performance is no guarantee of future results.

 

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Shareholder Return Performance Graph
Five-Year Cumulative Total Return
1

(Through October 31, 2016)

 

GRAPHIC

 


1  Total Return includes reinvestment of dividends through October 31, 2016.  Past performance is no guarantee of future results.

 

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS

 

As a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), the Company is required to distribute to its shareholders, in a timely manner, at least 90% of its investment company taxable and tax-exempt income each year. If the Company distributes, in a calendar year, at least (1) 98% of our ordinary income during each calendar year, (2) 98.2% of our capital gains realized in the period from November 1 of the prior year through October 31 of the current year, and (3) all such ordinary income and capital gains for previous years that were not distributed during those years, 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 Company’s 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

 

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distributions are determined in accordance with income tax regulations that may differ from U.S. generally accepted accounting principles . These differences are due primarily to differing treatments of income and gain on various investment securities held by the Company, differing treatments of expenses paid by the Company, timing differences and differing characterizations of distributions made by the Company.  Key examples of the primary differences in expenses paid are the accounting treatment of MVCFS (which is consolidated for GAAP purposes, but not income tax purposes) and the variation in treatment of incentive compensation expense.  Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications and may affect the allocation between net operating income, net realized gain (loss) and paid-in capital.

 

All of our shareholders who hold shares of common stock in their own name will automatically be enrolled in our dividend reinvestment plan (the “Plan”). All such shareholders will have any cash dividends and distributions automatically reinvested by the Plan Agent in additional shares of our common stock. Of course, any shareholder may elect to receive his or her dividends and distributions in cash. Currently, the Company has a policy of seeking to pay quarterly dividends to shareholders. For any of our shares that are held by banks, brokers or other entities that hold our shares as nominees for individual shareholders, the Plan Agent will administer the Plan on the basis of the number of shares certified by any nominee as being registered for shareholders that have not elected to receive dividends and distributions in cash. To receive your dividends and distributions in cash, you must notify the Plan Agent, broker or other entity that holds the shares.

 

The Plan Agent serves as agent for the shareholders in administering the Plan. When we declare a dividend or distribution payable in cash or in additional shares of our common stock, those shareholders participating in the Plan will receive their dividend or distribution in additional shares of our common stock. Such shares will be either newly issued by us or purchased in the open market by the Plan Agent. If the market value of a share of our common stock on the payment date for such dividend or distribution equals or exceeds the NAV per share on that date, we will issue new shares at the NAV. If the NAV exceeds the market price of our common stock, the Plan Agent will purchase in the open market such number of shares of our common stock as is necessary to complete the distribution.

 

The Plan Agent will maintain all shareholder accounts in the Plan and furnish written confirmation of all transactions. Shares of our common stock in the Plan will be held in the name of the Plan Agent or its nominee and such shareholder will be considered the beneficial owner of such shares for all purposes.

 

There is no charge to shareholders for participating in the Plan or for the reinvestment of dividends and distributions. We will not incur brokerage fees with respect to newly issued shares issued in connection with the Plan. Shareholders will, however, be charged a pro rata share of any brokerage fee charged for open market purchases in connection with the Plan.

 

We may terminate the Plan upon providing written notice to each shareholder participating in the Plan at least 60 days prior to the effective date of such termination. We may also materially amend the Plan at any time upon providing written notice to shareholders participating in the Plan at least 30 days prior to such amendment (except when necessary or appropriate to comply with applicable law or rules and policies of the SEC or other regulatory authority). You may withdraw from the Plan upon providing notice to the Plan Agent. You may obtain additional information about the Plan from the Plan Agent.  Below is a description of our dividends declared during fiscal years 2015 and 2016:

 

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For the Quarter Ended January 31, 2015

 

On December 19, 2014, the Company’s Board of Directors declared a dividend of $0.135 per share.  The dividend was paid on January 7, 2015 to shareholders of record on December 31, 2014 and amounted to $3,064,881.

 

During the quarter ended January 31, 2015, as part of the Company’s dividend reinvestment plan for our common stockholders, the Plan Agent purchased 5,647 shares of our common stock at an average price of $10.14, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.

 

For the Quarter Ended April 30, 2015

 

On April 17, 2015, the Company’s Board of Directors declared a dividend of $0.135 per share.  The dividend was paid on April 30, 2015 to shareholders of record on April 27, 2015 and amounted to $3,064,881.

 

During the quarter ended April 30, 2015, as part of the Company’s dividend reinvestment plan for our common stockholders, the Plan Agent purchased 5,855 shares of our common stock at an average price of $9.92, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.

 

For the Quarter Ended July 31, 2015

 

On July 17, 2015, the Company’s Board of Directors declared a dividend of $0.135 per share.  The dividend was paid on July 31, 2015 to shareholders of record on July 27, 2015 and amounted to $3,064,881.

 

During the quarter ended July 31, 2015, as part of the Company’s dividend reinvestment plan for our common stockholders, the Plan Agent purchased 6,141 shares of our common stock at an average price of $9.55, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.

 

For the Quarter Ended October 31, 2015

 

On October 16, 2015, the Company’s Board of Directors declared a dividend of $0.135 per share.  The dividend was paid on October 30, 2015 to shareholders of record on October 26, 2015 and amounted to $3,064,881.

 

During the quarter ended October 31, 2015, as part of the Company’s dividend reinvestment plan for our common stockholders, the Plan Agent purchased 7,140 shares of our common stock at an average price of $8.33, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.

 

For the Quarter Ended January 31, 2016

 

On December 21, 2015, the Company’s Board of Directors declared a dividend of $0.135 per share.  Additionally, due to the realization of capital gains, the Company’s Board of Directors declared a special dividend of $0.17 per share.  The dividends were paid on January 8, 2016 to shareholders of record on December 31, 2015 and totaled approximately $6.9 million.

 

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During the quarter ended January 31, 2016, as part of the Company’s dividend reinvestment plan for our common stockholders, the Plan Agent purchased 17,843 shares of our common stock at an average price of $7.65, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.

 

For the Quarter Ended April 30, 2016

 

On April 15, 2016, the Company’s Board of Directors declared a dividend of $0.135 per share.  The dividend was paid on April 29, 2016 to shareholders of record on April 25, 2016 and totaled approximately $3.1 million.

 

During the quarter ended April 30, 2016, as part of the Company’s dividend reinvestment plan for our common stockholders, the Plan Agent purchased 8,337 shares of our common stock at an average price of $7.55, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.

 

For the Quarter Ended July 31, 2016

 

On July 15, 2016, the Company’s Board of Directors declared a dividend of $0.135 per share.  The dividend was paid on July 29, 2016 to shareholders of record on July 25, 2016 and totaled approximately $3.1 million.

 

During the quarter ended July 31, 2016, as part of the Company’s dividend reinvestment plan for our common stockholders, the Plan Agent purchased 7,915 shares of our common stock at an average price of $8.09, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.

 

For the Quarter Ended October 31, 2016

 

On October 14, 2016, the Company’s Board of Directors declared a dividend of $0.135 per share.  The dividend was paid on October 31, 2016 to shareholders of record on October 24, 2016 and totaled approximately $3.0 million.

 

During the quarter ended October 31, 2016, as part of the Company’s dividend reinvestment plan for our common stockholders, the Plan Agent purchased 7,642 shares of our common stock at an average price of $8.51, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.

 

The Company designated 72.96% of dividends declared and paid during the fiscal year ended October 31, 2016 from net operating income as qualified dividend income under the Jobs Growth and Tax Relief Reconciliation Act of 2003.

 

Corporate shareholders may be eligible for a dividend received deduction for certain ordinary income distributions paid by the Company. The Company designated 72.96% of dividends declared and paid during the fiscal year ended October 31, 2016 from net operating income as qualifying for the dividends received deduction.  The information necessary to prepare and complete shareholder s tax returns for the 2016 calendar year will be reported separately on form 1099-DIV, if applicable, in February 2017.

 

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The Company reserves the right to retain net long-term capital gains in excess of net short-term capital losses for reinvestment or to pay contingencies and expenses. Such retained amounts, if any, will be taxable to the Company, and shareholders will be able to claim their proportionate share of the federal income taxes paid by the Company on such gains as a credit against their own federal income tax liabilities. Shareholders will also be entitled to increase the adjusted tax basis of their company shares by the difference between their undistributed capital gains and their tax credit.

 

PURCHASES OF COMMON STOCK

 

In fiscal 2016, as part of the Plan, we directed the Plan Agent to purchase a total of 41,737 shares of our common stock for an aggregate amount of $328,509 in the open market in order to satisfy the reinvestment portion of our dividends.  The following chart outlines purchases of our common stock during fiscal 2016.

 

 

 

Total Number of Shares

 

Average Price paid Per Share

 

Quarter Ended

 

Purchased

 

Including Commission

 

 

 

 

 

 

 

10/31/2016

 

7,642

 

$

8.51

 

7/31/2016

 

7,915

 

$

8.09

 

4/30/2016

 

8,337

 

$

7.55

 

1/31/2016

 

17,843

 

$

7.65

 

 

SHARE REPURCHASE PROGRAM

 

On April 3, 2013 the Company’s Board of Directors authorized an expanded share repurchase program to opportunistically buy back shares in the market in an effort to narrow the market discount of its shares.  The previously authorized $5 million limit has been eliminated.  Under the repurchase program, shares may be repurchased from time to time at prevailing market prices. The repurchase program does not obligate the Company to acquire any specific number of shares and may be discontinued at any time.  The following table represents purchases made under our stock repurchase program for the fiscal years ended October 31, 2013 through fiscal year ended October 31, 2016.

 

Period *

 

Total Number of Shares
Purchased

 

Average Price Paid per
Share including
commission

 

Total Number of Shares
Purchased as Part of
Publicly Announced
Program

 

Approximate Dollar Value
of Shares Purchased Under
the Program

 

For the Year Ended October 31, 2013

 

1,299,294

 

$

12.83

 

1,299,294

 

$

16,673,207

 

For the Year Ended October 31, 2014

 

310,706

 

$

13.24

 

1,610,000

 

$

4,114,967

 

For the Year Ended October 31, 2015

 

 

 

1,610,000

 

 

For the Year Ended October 31, 2016

 

146,409

 

$

8.31

 

1,756,409

 

$

1,216,746

 

Total

 

1,756,409

 

$

12.53

 

1,756,409

 

$

22,004,920

 

 


*Disclosure covering repurchases made on a monthly basis is available on the Company’s website at http://www.mvccapital.com

 

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ITEM 6.                                                 SELECTED CONSOLIDATED FINANCIAL DATA

 

Financial information for the fiscal years ended October 31, 2016, 2015, 2014, 2013 and 2012 are derived from the consolidated financial statements.  Fiscal years 2012 through 2014 have been audited by Ernst & Young LLP, the Company’s predecessor independent registered public accounting firm, and fiscal years 2015 and 2016 have been audited by Grant Thornton LLP, the Company’s current independent registered public accounting firm.  Quarterly financial information is derived from unaudited financial data, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments), which are necessary to present fairly the results for such interim periods.  See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information.

 

Selected Consolidated Financial Data

 

 

 

Year Ended October 31,

 

 

 

2016

 

2015

 

2014

 

2013

 

2012

 

 

 

(In thousands, except per share data)

 

Operating Data:

 

 

 

 

 

 

 

 

 

 

 

Interest and related portfolio income:

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

$

32,698

 

$

20,402

 

$

15,311

 

$

19,621

 

$

25,205

 

Fee income

 

3,255

 

2,048

 

1,562

 

2,853

 

1,940

 

Fee income - asset management

 

1,414

 

1,249

 

1,910

 

1,795

 

2,300

 

Other income

 

 

 

1,033

 

493

 

442

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating income

 

37,367

 

23,699

 

19,816

 

24,762

 

29,887

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Management fee

 

7,590

 

7,845

 

8,681

 

7,833

 

8,588

 

Portfolio fees - asset management

 

741

 

767

 

986

 

418

 

968

 

Management fee - asset management

 

319

 

160

 

354

 

929

 

757

 

Administrative

 

4,253

 

5,305

 

3,672

 

3,712

 

3,573

 

Interest and other borrowing costs

 

10,212

 

10,230

 

9,442

 

6,724

 

3,367

 

Net Incentive compensation (Note 5)

 

(2,030

)

(9,757

)

(4,750

)

3,828

 

(5,937

)

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

21,085

 

14,550

 

18,385

 

23,444

 

11,316

 

 

 

 

 

 

 

 

 

 

 

 

 

Expense waiver by Advisor

 

(150

)

(150

)

(150

)

(150

)

(150

)

Voluntary management fee waiver by Advisor

 

(1,897

)

 

 

 

(59

)

Voluntary incentive fee waiver by Advisor

 

(1,000

)

 

 

 

(2,345

)

Total waiver by adviser

 

(3,047

)

(150

)

(150

)

(150

)

(2,554

)

 

 

 

 

 

 

 

 

 

 

 

 

Total net operating expenses

 

18,038

 

14,400

 

18,235

 

23,294

 

8,762

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income before taxes

 

19,329

 

9,299

 

1,581

 

1,468

 

21,125

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax expense, net

 

2

 

2

 

2

 

4

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income

 

19,327

 

9,297

 

1,579

 

1,464

 

21,121

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized and unrealized (loss) gain:

 

 

 

 

 

 

 

 

 

 

 

Net realized (loss) gain on investments

 

(45,157

)

3,700

 

16,520

 

43,665

 

(20,518

)

Net unrealized appreciation (depreciation) on investments

 

28,628

 

(50,557

)

(37,941

)

(25,860

)

(22,257

)

 

 

 

 

 

 

 

 

 

 

 

 

Net realized and unrealized (loss) gain on investments

 

(16,529

)

(46,857

)

(21,421

)

17,805

 

(42,775

)

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations

 

$

2,798

 

$

(37,560

)

$

(19,842

)

$

19,269

 

$

(21,654

)

 

 

 

 

 

 

 

 

 

 

 

 

Per Share:

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.12

 

$

(1.66

)

$

(0.88

)

$

0.82

 

$

(0.90

)

Dividends per share

 

$

0.710

 

$

0.540

 

$

0.540

 

$

0.540

 

$

0.495

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Portfolio at value

 

$

360,120

 

$

400,876

 

$

447,630

 

$

417,921

 

$

404,171

 

Portfolio at cost

 

374,712

 

443,717

 

439,970

 

371,932

 

332,432

 

Total assets

 

434,491

 

516,842

 

577,713

 

564,450

 

456,431

 

Shareholders’ equity

 

279,558

 

294,076

 

343,903

 

376,086

 

386,016

 

Shareholders’ equity per share (net asset value)

 

$

12.39

 

$

12.95

 

$

15.15

 

$

16.63

 

$

16.14

 

Common shares outstanding at period end

 

22,556

 

22,703

 

22,703

 

22,618

 

23,917

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

Number of Investments funded in period

 

15

 

13

 

24

 

15

 

11

 

Investments funded ($) in period

 

$

43,968

 

$

62,591

 

$

103,671

 

$

95,701

 

$

11,300

 

Repayment/sales in period

 

75,105

 

65,247

 

62,508

 

103,069

 

19,950

 

Net investment activity in period

 

(31,137

)

(2,656

)

41,163

 

(7,368

)

(8,650

)

 

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2016

 

2015

 

2014

 

 

 

Qtr 4

 

Qtr 3

 

Qtr 2

 

Qtr 1

 

Qtr 4

 

Qtr 3

 

Qtr 2

 

Qtr 1

 

Qtr 4

 

Qtr 3

 

Qtr 2

 

Qtr 1

 

 

 

(In thousands, except per share data)

 

Quarterly Data (Unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating income

 

$

5,417

 

$

8,005

 

$

15,855

 

$

8,090

 

$

6,046

 

$

7,524

 

$

5,273

 

$

4,856

 

$

4,325

 

$

5,016

 

$

5,862

 

$

4,613

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management fee

 

1,721

 

1,932

 

1,958

 

1,979

 

1,900

 

1,899

 

2,066

 

1,980

 

2,121

 

2,144

 

2,227

 

2,189

 

Portfolio fees - asset management

 

183

 

185

 

186

 

187

 

187

 

189

 

187

 

204

 

386

 

153

 

341

 

106

 

Management fee - asset management

 

72

 

60

 

86

 

101

 

85

 

77

 

(18

)

16

 

(126

)

17

 

231

 

232

 

Administrative

 

802

 

1,319

 

1,174

 

958

 

1,685

 

1,136

 

1,325

 

1,159

 

942

 

1,095

 

727

 

908

 

Interest, fees and other borrowing costs

 

2,598

 

2,488

 

2,497

 

2,629

 

2,532

 

2,627

 

2,616

 

2,455

 

2,355

 

2,426

 

2,406

 

2,255

 

Net Incentive compensation

 

577

 

(1,512

)

1,135

 

(2,230

)

(771

)

(3,404

)

(3,462

)

(2,120

)

(2,339

)

568

 

(3,414

)

435

 

Total waiver by adviser

 

(467

)

(521

)

(1,527

)

(532

)

(37

)

(38

)

(37

)

(38

)

(37

)

(38

)

(37

)

(38

)

Tax expense

 

1

 

 

1

 

 

 

1

 

1

 

 

 

1

 

 

1

 

Net operating (loss) income before net realized and unrealized gains

 

(70

)

4,054

 

10,345

 

4,998

 

465

 

5,037

 

2,595

 

1,200

 

1,023

 

(1,350

)

3,381

 

(1,475

)

Net increase (decrease) in net assets resulting from operations

 

$

5,279

 

$

(3,536

)

$

6,046

 

$

(4,991

)

$

(2,045

)

$

(13,959

)

$

(11,813

)

$

(9,743

)

$

(10,614

)

$

1,738

 

$

(12,651

)

$

1,685

 

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

 

$

0.23

 

$

(0.16

)

$

0.26

 

$

(0.21

)

$

(0.10

)

$

(0.61

)

$

(0.52

)

$

(0.43

)

$

(0.46

)

$

0.07

 

$

(0.57

)

$

0.08

 

Net asset value per share

 

$

12.39

 

$

12.27

 

$

12.56

 

$

12.43

 

$

12.95

 

$

13.18

 

$

13.93

 

$

14.58

 

$

15.15

 

$

15.75

 

$

15.89

 

$

16.57

 

 

ITEM 7.                         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This report contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company and its investment portfolio companies. Words such as may, will, expect, believe, anticipate, intend, could, estimate, might and continue, and the negative or other variations thereof or comparable terminology, are intended to identify forward-looking statements. Forward-looking statements are included in this report pursuant to the “Safe Harbor” provision of the Private Securities Litigation Reform Act of 1995. Such statements are predictions only, and the actual events or results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those relating to adverse conditions in the U.S. and international economies, competition in the markets in which our portfolio companies operate, investment capital demand, pricing, market acceptance, any changes in the regulatory environments in which we operate, changes in our accounting assumptions that regulatory agencies, including the SEC, may require or that result from changes in the accounting rules or their application, competitive forces, adverse conditions in the credit markets impacting the cost, including interest rates and/or availability of financing,  the results of financing and investing efforts, the ability to complete transactions, the inability to implement our business strategies and other risks identified below or in the Company’s filings with the SEC.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements, the notes thereto and the other financial information included elsewhere in this report.

 

OVERVIEW

 

The Company is an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company under the 1940 Act. The Company’s investment objective is to seek to maximize total return from capital appreciation and/or income, though our current focus is more on yield generating investments.

 

On November 6, 2003, Mr. Tokarz assumed his positions as Chairman and Portfolio Manager of the Company. He and the Company’s management team are seeking to implement our investment

 

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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, among other investments. During the fiscal year ended October 31, 2015, the Company made eight new investments and made 5 follow-on investments in 4 existing portfolio companies committing a total of approximately $62.4 million to these investments.  During the fiscal year ended October 31, 2016, the Company made six new and 9 follow-on investments in 6 existing portfolio companies totaling approximately $44.2 million.

 

Prior to the adoption of our current investment objective, the Company’s investment objective had been to achieve long-term capital appreciation from venture capital investments in information technology companies. The Company’s investments had thus previously focused on investments in equity and debt securities of information technology companies. As of October 31, 2016, 1.4% of the current fair value of our assets consisted of Legacy Investments. We are, however, managing 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 current 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. More recently, the Company has been focusing its strategy more on yield generating investments.  Under our investment approach, we have the authority to invest, without limit, in any one portfolio company, subject to any diversification limits required in order for us to continue to qualify as a RIC under Subchapter M of the Code.  Presently, due to our asset growth and composition, compliance with the RIC requirements limits our ability to make Non-Diversified Investments.

 

We participate in the private equity business generally by providing privately negotiated long-term equity and/or debt investment capital to small and middle-market companies. Our financings are generally used to fund growth, buyouts, acquisitions, recapitalizations, note purchases and/or bridge financings. We generally invest in private companies, though, from time to time, we may invest in public companies that may lack adequate access to public capital.

 

We may also seek to achieve our investment objective by establishing a subsidiary or subsidiaries that would serve as general partner to a private equity or other investment fund(s).  In fact, during fiscal year 2006, we established MVC Partners for this purpose.  Furthermore, the Board of Directors authorized the establishment of a PE Fund, for which an indirect wholly-owned subsidiary of the Company serves as the GP and which may raise up to $250 million.  On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in the PE Fund.  The PE Fund closed on approximately $104 million of capital commitments.  The Company’s Board of Directors authorized the establishment of, and investment in, the PE Fund for a variety of reasons, including the Company’s ability to make Non-Diversified Investments through the PE Fund. As previously disclosed, the Company is restricted in its ability to make Non-Diversified Investments.  For services provided to the PE Fund, the GP and MVC Partners are together entitled to receive 25% of all management fees and other fees paid by the PE Fund and its portfolio companies and up to 30% of the carried interest generated by the PE Fund.  Further, at the direction of the Board of Directors, the GP retained TTG Advisers to serve as the

 

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portfolio manager of the PE Fund.  In exchange for providing those services, and pursuant to the Board of Directors’ authorization and direction, TTG Advisers is entitled to receive the balance of the fees and any carried interest generated by the PE Fund and its portfolio companies.  Given this separate arrangement with the GP and the PE Fund, under the terms of the Company’s Advisory Agreement with TTG Advisers, TTG Advisers is not entitled to receive from the Company a management fee or an incentive fee on assets of the Company that are invested in the PE Fund. During the fiscal year ended October 31, 2012 and thereafter, MVC Partners was consolidated with the operations of the Company as MVC Partners’ limited partnership interest in the PE Fund is a substantial portion of MVC Partners operations.  Previously, MVC Partners was presented as a portfolio company on the Schedule of Investments.  The consolidation of MVC Partners has not had any material effect on the financial position or net results of operations of the Company.  Also, during fiscal year ended October 31, 2014, MVC Turf, LLC (“MVC Turf”) was consolidated with the Company as MVC Turf is an MVC wholly-owned holding company.  The consolidation of MVC Turf has not had any material effect on the financial position or net results of operations of the Company.  Please see Note 2 of our consolidated financial statements “Consolidation” for more information.

 

As a result of the closing of the PE Fund, consistent with the Board-approved policy concerning the allocation of investment opportunities, the PE Fund received a priority allocation of all private equity investments that would otherwise be Non-Diversified Investments for the Company during the PE Fund’s investment period that ended on October 28, 2014.  Additional capital may be called for follow-on investments in existing portfolio companies of the PE Fund or to pay operating expenses of the PE Fund. For a further discussion of this allocation policy, please see “Our Investment Strategy — Allocation of Investment Opportunities” above.

 

Additionally, in pursuit of our objective, we may acquire a portfolio of existing private equity or debt investments held by financial institutions or other investment funds should such opportunities arise.

 

Furthermore, pending investments in portfolio companies pursuant to the Company’s principal investment strategy, the Company may invest in certain securities on a short-term or temporary basis.  In addition to cash-equivalents and other money market-type investments, such short-term investments may include exchange-traded funds and private investment funds offering periodic liquidity.

 

OPERATING INCOME

 

For the Fiscal Years Ended October 31, 2016, 2015 and 2014. Total operating income was $37.4 million for the fiscal year ended October 31, 2016 and $23.7 million for the fiscal year ended October 31, 2015, an increase of $13.7 million.  Fiscal year 2015 operating income increased by approximately $3.9 million compared to Fiscal year 2014 operating income of $19.8 million.

 

For the Fiscal Year Ended October 31, 2016

 

Total operating income was $37.4 million for the fiscal year ended October 31, 2016. The increase in operating income over the same period last year was primarily due to an increase in dividend income and fee income from the Company’s portfolio companies.  The Company earned approximately $32.7 million in interest and dividend income from investments in portfolio companies.  Of the $32.7 million recorded in interest/dividend income, $12.5 million was dividend

 

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income from U.S. Gas and approximately $4.8 million was “payment in kind”/deferred interest.  The “payment in kind”/deferred interest is computed at the contractual rate specified in each investment agreement and may be added to the principal balance of each investment. The Company’s debt investments yielded annualized rates from 5.0% to 16.0%.  The Company also received fee income from asset management of the PE Fund and its portfolio companies totaling approximately $1.4 million and fee income from the Company’s portfolio companies of approximately $3.3 million, of which $2.3 million was one-time fee income related to the Ohio Medical sale, totaling approximately $4.7 million in fee income.  Of the $1.4 million of fee income from asset management activities, 75% of the income is obligated to be paid to TTG Advisers.  However, under the PE Fund’s agreements, a significant portion of the portfolio fees that are paid by the PE Fund’s portfolio companies to the GP and TTG Advisers is subject to recoupment by the PE Fund in the form of an offset to future management fees paid by the PE Fund.

 

For the Fiscal Year Ended October 31, 2015

 

Total operating income was $23.7 million for the fiscal year ended October 31, 2015. The increase in operating income over the same period last year was primarily due to an increase in interest earned on loans partially offset by a decrease in fee income from asset management and other income.  The main component of operating income for the fiscal year ended October 31, 2015 was interest earned on loans.  The Company earned approximately $20.4 million in interest and dividend income from investments in portfolio companies.  Of the $20.4 million recorded in interest/dividend income, approximately $5.2 million was “payment in kind”/deferred interest.  The “payment in kind”/deferred interest is computed at the contractual rate specified in each investment agreement and may be added to the principal balance of each investment. The Company’s debt investments yielded annualized rates from 9.75% to 16.0%.  The Company also received fee income from asset management of the PE Fund and its portfolio companies totaling approximately $1.3 million and fee income from the Company’s portfolio companies of approximately $2.0 million, totaling approximately $3.3 million.  Of the $1.3 million of fee income from asset management activities, 75% of the income is obligated to be paid to TTG Advisers.  However, under the PE Fund’s agreements, a significant portion of the portfolio fees that are paid by the PE Fund’s portfolio companies to the GP and TTG Advisers is subject to recoupment by the PE Fund in the form of an offset to future management fees paid by the PE Fund.

 

For the Fiscal Year Ended October 31, 2014

 

Total operating income was $19.8 million for the fiscal year ended October 31, 2014. The decrease in operating income over the same period last year was primarily due to a decrease in dividend income from portfolio companies, specifically U.S. Gas (which did not pay a dividend in fiscal 2014, as it did in 2013), which was partially offset by an increase in interest income from portfolio companies.  The main components of operating income for the fiscal year ended October 31, 2014 were interest earned on loans and fee income from portfolio companies and asset management.  The Company earned approximately $15.3 million in interest and dividend income from investments in portfolio companies.  Of the $15.3 million recorded in interest/dividend income, approximately $4.2 million was “payment in kind” interest/dividends.  The “payment in kind” interest/dividends are computed at the contractual rate specified in each investment agreement and added to the principal balance of each investment. The Company’s debt investments yielded rates from 5% to 16%.  The Company also received fee income from asset management of the PE Fund and its portfolio companies totaling approximately $1.9 million and fee income from the Company’s portfolio companies of approximately $1.6 million, totaling approximately $3.5

 

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million.  Of the $1.9 million of fee income from asset management activities, 75% of the income is obligated to be paid to TTG Advisers.  However, under the PE Fund’s agreements, a significant portion of the portfolio fees that are paid by the PE Fund’s portfolio companies to the GP and TTG Advisers is subject to recoupment by the PE Fund in the form of an offset to future management fees paid by the PE Fund.

 

OPERATING EXPENSES

 

For the Fiscal Years Ended October 31, 2016, 2015 and 2014.   Net Operating expenses were $18.0 million for the fiscal year ended October 31, 2016 and $14.4 million for the fiscal year ended October 31, 2015, an increase of $3.6 million.  Fiscal year 2015 operating expenses decreased by approximately $3.8 million compared to Fiscal year 2014 operating expenses of $18.2 million.

 

For the Fiscal Year Ended October 31, 2016

 

Operating expenses, net of the Voluntary Waivers (as described below), were approximately $18.02 million or 6.35% of the Company’s average net assets for the fiscal year ended October 31, 2016.  Significant components of operating expenses for the fiscal year ended October 31, 2016 were interest and other borrowing costs of approximately $10.2 million and management fee expense paid by the Company of approximately $5.7 million, which is net of the voluntary management fee waiver of approximately $1.9 million.

 

The approximately $3.6 million increase in the Company’s net operating expenses for the fiscal year ended October 31, 2016 compared to the same period in 2015, was primarily due to the approximately $6.7 million increase in the estimated provision for incentive compensation expense, including a $1.0 million incentive fee waiver for the fiscal year ended October 31, 2016, which was partially offset by an approximately $2.2 million decrease in management fee expense that included a voluntary management fee waiver of approximately $1.9 million.  The approximately $1.0 million decrease in audit and tax preparation fees for the fiscal year ended October 31, 2016 compared to the same period in 2015 was due to the delay in filing both the Annual Report on Form 10-K for the fiscal year ended October 31, 2015 and the Quarterly Report for the period ended January 31, 2016 and the timing of the work performed by the Company’s auditors during the fiscal year ended October 31, 2016.  The portfolio fees - asset management are payable to TTG Advisers for monitoring and other customary fees received by the GP from portfolio companies of the PE Fund.  To the extent the GP or TTG Advisers receives advisory, monitoring, organization or other customary fees from any portfolio company of the PE Fund or management fees related to the PE Fund, 25% of such fees shall be paid to or retained by the GP and 75% of such fees shall be paid to or retained by TTG Advisers.  On October 28, 2016, the Board approved the renewal of the Advisory Agreement for the 2017 fiscal year. Further, the Adviser agreed to continue to waive a portion of the base management fee so that it is reduced to 1.50% for fiscal year 2017.  In March 2016, the Adviser agreed to modify its prior agreement to waive, effective November 1, 2015, the first $1.0 million of capital gains incentive fee due under the Advisory Agreement, such that the $1.0 million waiver of incentive fee would be applied to any incentive fee due under the agreement, whether it is a capital gains incentive fee or net operating income incentive fee.  Furthermore, the Company and the Adviser, similar to fiscal year 2016, agreed on an expense cap for fiscal 2017 of 3.25% under the Modified Methodology.  The amount of any payments made by the GP of the PE Fund to TTG Advisers pursuant to the Portfolio Management Agreement between the GP and TTG Advisers respecting the PE Fund continues to be excluded from the calculation of the Company’s expense ratio under the Expense Limitation Agreement.  In addition, for fiscal years 2010 through

 

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2016, TTG Advisers voluntarily agreed to waive $150,000 of expenses that the Company is obligated to reimburse to TTG Advisers under the Advisory Agreement (the “Voluntary Waiver”).  TTG Advisers also voluntarily agreed that any assets of the Company that are invested in exchange-traded funds would not be taken into account in the calculation of the base management fee due to TTG Advisers under the Advisory Agreement.  As of October 31, 2016, the Company did not have an investment in an exchange traded fund.  Under the Modified Methodology, for the fiscal year ended October 31, 2016, the Company’s expense ratio was 2.47%, (taking into account the same carve outs as those applicable to the expense cap).

 

Pursuant to the terms of the Advisory Agreement, during the fiscal year ended October 31, 2016, the provision for incentive compensation was decreased by a net amount of approximately $3.0 million to approximately $1.9 million, including both the net operating income incentive fee and the capital gains incentive fee.  The net decrease in the provision for incentive compensation during the fiscal year ended October 31, 2016 primarily reflects the Valuation Committee’s determination to decrease the fair values of sixteen of the Company’s portfolio investments (Custom Alloy, MVC Automotive, Security Holdings, SGDA Europe, Tekers, Turf, JSC Tekers, RuMe, BAC, Biogenics, Morey’s, Ohio Medical, Equus, Legal Solutions, MVC Environmental and Initials) by a total of approximately $32.0 million.  The net decrease in the provision also reflects the Valuation Committee’s determination to increase the fair values of ten of the Company’s portfolio investments (NPWT, Centile, SCSD, Agri-Carriers, RX, U.S. Gas, Advantage, Thunderdome, U.S. Tech and Vestal) by a total of approximately $8.5 million.  For the fiscal year ended October 31, 2016, no incentive compensation was paid.  For the quarter ended April 30, 2016, a $2.1 million provision was recorded for the net operating income portion of the incentive fee as pre-incentive fee net operating income exceeded the hurdle rate.  A $1.0 million incentive fee waiver was recorded during the quarter ended April 30, 2016 resulting in a net $1.1 million provision being recorded for the net operating income portion of the incentive fee.  For the quarter ended October 31, 2016, no provision was recorded for the net operating income portion of the incentive fee as pre-incentive fee net operating income for the quarter did not exceed the hurdle rate.  Please see Note 5 of our consolidated financial statements “Incentive Compensation” for more information.

 

For the Fiscal Year Ended October 31, 2015

 

Operating expenses, net of the Voluntary Waivers (as described below), were approximately $14.4 million or 4.54% of the Company’s average net assets for the fiscal year ended October 31, 2015.  Significant components of operating expenses for the fiscal year ended October 31, 2015 were interest and other borrowing costs of approximately $10.2 million and management fee expense paid by the Company of approximately $7.8 million.

 

The approximately $3.8 million decrease in the Company’s net operating expenses for the fiscal year ended October 31, 2015 compared to the same period in 2014, was primarily due to the approximately $5.0 million decrease in the estimated provision for incentive compensation expense and approximately $836,000 decrease in management fees, which was partially offset by an increase in interest and other borrowing costs of approximately $788,000 and an increase in audit and tax preparation fees, which was due to the fiscal year 2014 restatements and related expenses, totaling $836,000.  The portfolio fees - asset management are payable to TTG Advisers for monitoring and other customary fees received by the GP from portfolio companies of the PE Fund.  To the extent the GP or TTG Advisers receives advisory, monitoring, organization or other customary fees from any portfolio company of the PE Fund or management fees related to the PE

 

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Fund, 25% of such fees shall be paid to or retained by the GP and 75% of such fees shall be paid to or retained by TTG Advisers.  For the 2015 fiscal year, TTG Advisers voluntarily agreed to waive $150,000 of expenses that the Company is obligated to reimburse to TTG Advisers under the Advisory Agreement (the “Voluntary Waiver”).  TTG Advisers voluntarily agreed that any assets of the Company that were invested in exchange-traded funds would not be taken into account in the calculation of the base management fee due to TTG Advisers under the Advisory Agreement.  TTG Advisers has voluntarily agreed to waive any management fees on the Company’s assets invested in Equus common stock.  The Company and the Adviser have agreed to continue the expense cap of 3.5% (on consolidated expenses of the Company, including any amounts payable to TTG Advisers under the base management fee, but excluding the amount of any interest and other direct borrowing costs, taxes, incentive compensation, payments made by the GP of the PE Fund to TTG Advisers pursuant to the Portfolio Management Agreement between the GP and TTG Advisers respecting the PE Fund and extraordinary expenses taken as a percentage of the Company’s average net assets)  into fiscal year 2015, though they modified the methodology so that the cap is applied to limit the Company’s ratio of expenses to total assets less cash (the “Modified Methodology”), consistent with the asset level used to calculate the base management fee. (The expenses covered by the cap remain unchanged.)   Under the Modified Methodology, for the fiscal year ended October 31, 2015, the Company’s expense ratio was 3.21% (taking into account the same carve outs as those applicable to the expense cap).

 

Pursuant to the terms of the Advisory Agreement, during the fiscal year ended October 31, 2015, the provision for incentive compensation was decreased by a net amount of approximately $9.7 million to approximately $5.0 million.  The net decrease in the provision for incentive compensation during the fiscal year ended October 31, 2015 primarily reflects the Valuation Committee’s determination to decrease the fair values of sixteen of the Company’s portfolio investments (Custom Alloy, NPWT, BAC, Tekers, PrePaid Legal, Centile, Biovation, Inland, MVC Automotive, Ohio Medical, SGDA Europe, Security Holdings, JSC Tekers, Morey’s, Velocitius and Equus) by a total of approximately $58.2 million.  The net decrease in the provision also reflects the Valuation Committee’s determination to increase the fair values of five of the Company’s portfolio investments (Turf, RuMe, Biogenic, Advantage Insurance and SCSD) by a total of approximately $4.3 million.  The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $4.7 million due to a PIK distribution, which was treated as a return of capital.  For the fiscal year ended October 31, 2015, no incentive compensation fee was paid.  Also, for the fiscal year ended October 31, 2015, no provision was recorded for the net operating income portion of the incentive fee as pre-incentive fee net operating income did not exceed the hurdle rate.  Please see Note 5 of our consolidated financial statements “Incentive Compensation” for more information.

 

For the Fiscal Year Ended October 31, 2014

 

Operating expenses, net of the Voluntary Waivers (as described below), were approximately $18.2 million or 5.04% of the Company’s average net assets, for the fiscal year ended October 31, 2014.  Significant components of operating expenses for the fiscal year ended October 31, 2014 were management fee expense paid by the Company of approximately $8.7 million and interest and other borrowing costs of approximately $9.4 million.

 

The approximately $5.1 million decrease in the Company’s net operating expenses for the fiscal year ended October 31, 2014 compared to the fiscal year ended October 31, 2013, was primarily due to the approximately $8.6 million decrease in the estimated provision for incentive

 

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compensation expense, which was partially offset by an increase in interest and other borrowing costs of approximately $2.7 million and an increase in the Company’s management fee expense of approximately $849,000.  The portfolio fees - asset management are payable to TTG Advisers for monitoring and other customary fees received by the GP from portfolio companies of the PE Fund.  To the extent the GP or TTG Advisers receives advisory, monitoring, organization or other customary fees from any portfolio company of the PE Fund or management fees related to the PE Fund, 25% of such fees shall be paid to or retained by the GP and 75% of such fees shall be paid to or retained by TTG Advisers.  For the 2011 through 2015 fiscal years, TTG Advisers voluntarily agreed to waive $150,000 of expenses that the Company is obligated to reimburse to TTG Advisers under the Advisory Agreement (the “Voluntary Waiver”).  TTG Advisers voluntarily agreed that any assets of the Company that were invested in exchange-traded funds would not be taken into account in the calculation of the base management fee due to TTG Advisers under the Advisory Agreement.  TTG Advisers has voluntarily agreed to waive any management fees on the Company’s assets invested in Equus common stock.  The Company and the Adviser agreed to continue the expense cap of 3.5% (on consolidated expenses of the Company, including any amounts payable to TTG Advisers under the base management fee, but excluding the amount of any interest and other direct borrowing costs, taxes, incentive compensation, payments made by the GP of the PE Fund to TTG Advisers pursuant to the Portfolio Management Agreement between the GP and TTG Advisers respecting the PE Fund and extraordinary expenses taken as a percentage of the Company’s average net assets)  into fiscal year 2015, though they reserved the ability to revise the calculation methodology later that year.  For the fiscal year ended October 31, 2014, no incentive compensation fee was paid.  Also, for fiscal year 2013 and fiscal year 2014, the Company’s expense ratio was 3.03% and 3.37%, respectively, (taking into account the same carve outs as those applicable to the expense cap).

 

Pursuant to the terms of the Advisory Agreement, during the fiscal year ended October 31, 2014, the provision for incentive compensation was decreased by a net amount of approximately $4.7 million to approximately $14.7 million.  The net decrease in the provision for incentive compensation during the fiscal year ended October 31, 2014 primarily reflects the Valuation Committee’s determination to decrease the fair values of eleven of the Company’s portfolio investments (MVC Automotive, G3K, Ohio Medical, NPWT, U.S. Gas, Velocitius, Octagon, Tekers, JSC Tekers, SGDA Europe and Biovation) by a total of approximately $40.7 million.  The net decrease in the provision also reflects the Valuation Committee’s determination to increase the fair values of twelve of the Company’s portfolio investments (Custom Alloy, Advantage, Biogenic, PrePaid Legal, RuMe, Freshii USA, Inc. (“Freshii”), Centile, Security Holdings, Summit, Morey’s, Turf and Vestal) by a total of approximately $11.5 million.  The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $4.0 million due to a PIK distribution, which was treated as a return of capital.  For the fiscal year ended October 31, 2014, no provision was recorded for the net operating income portion of the incentive fee as pre-incentive fee net operating income did not exceed the hurdle rate.  Please see Note 5 of our consolidated financial statements “Incentive Compensation” for more information.

 

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REALIZED GAINS AND LOSSES ON PORTFOLIO SECURITIES

 

For the Fiscal Years Ended October 31, 2016, 2015 and 2014. Net realized losses for the fiscal year ended October 31, 2016 were approximately $45.2 million and net realized gains for the fiscal year ended October 31, 2015 were $3.7 million, a decrease of approximately $48.9 million.  Net realized gains for the fiscal year ended October 31, 2014 were $16.5 million.

 

For the Year Ended October 31, 2016

 

Net realized losses for the fiscal year ended October 31, 2016 were approximately $45.2 million.  The Company’s net realized loss for the fiscal year ended October 31, 2016 was primarily due to realized losses of approximately $30.5 million on the sale of Ohio Medical common and preferred stock, approximately $6.2 million on the Inland senior secured loan and warrant and approximately $5.6 million on the G3K loan and warrant.

 

On December 22, 2015, the Company realized a loss of approximately $1.5 million as a result of the dissolution of Biovation.

 

On December 24, 2015, the Company realized losses of approximately $5.5 million on Inland’s senior secured loan and $713,000 on its warrants as part of Inland’s restructuring.  As part of the restructuring, the Company received a $6.0 million senior secured loan from MVC Environmental, Inc. and received 950 of its common shares.  The loan bears annual interest of 9% and matures on December 22, 2020.

 

On December 31, 2015, the Company completed the sale of Ohio Medical through an asset sale.  The Company expects gross proceeds of approximately $40.0 million, including fees. At the time of closing, the Company received cash proceeds of approximately $29.0 million and anticipates receiving an additional $11.0 million, assuming the full receipt of all escrow proceeds scheduled for various periods, with the final release of payment scheduled for 18 months from the closing.

 

On May 31, 2016, the Company realized a loss of approximately $1.2 million with the dissolution of NPWT.

 

On October 31, 2016, the Company realized a loss of approximately $5.6 million on its investment in G3K.

 

During the fiscal year ended October 31, 2016, the Company also recorded net realized gains of approximately $126,000 with the sale of its short-term investments and net realized losses of approximately $360,000 on its escrow receivables.

 

For the Year Ended October 31, 2015

 

Net realized gains for the fiscal year ended October 31, 2015 were approximately $3.7 million.  The main components of the Company’s net realized gain for the fiscal year ended October 31, 2015 was primarily due to the realized gain of approximately $15.0 million on the sale of Vestal common stock which was partially offset by realized losses of $2.2 million on the sale of the Biovation loans when BAC credit purchased the assets of Biovation, $2.7 million on the sale of the common equity interest in Velocitius and $6.7 million on the dissolution of HH&B.

 

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On May 29, 2015, the Company sold its 81,000 shares of common stock in Vestal for approximately $17.9 million resulting in a realized gain of approximately $15.0 million.  The total proceeds included a $1.0 million dividend and assumes full receipt of the escrow proceeds.  The $600,000 loan was also repaid in full including all accrued interest.

 

On October 16, 2015, the Company sold its remaining common equity interest in Velocitius and received zero proceeds resulting in a realized loss of approximately $2.7 million.

 

On October 30, 2015, the Company realized a loss of $6.7 million from the dissolution of HH&B.

 

During the fiscal year ended October 31, 2015, the Company also recorded net realized gains of approximately $302,000 from the sale of its short-term investments.

 

For the Year Ended October 31, 2014

 

Net realized gains for the fiscal year ended October 31, 2014 were approximately $16.5 million.  The significant component of the Company’s net realized gains for the fiscal year ended October 31, 2014 was primarily due to the sale of Custom Alloy’s convertible series A and B preferred shares and the sale of Octagon’s limited liability company interest.

 

On November 7, 2013, the Company recorded a realized gain of approximately $25,000 associated with the SHL Group Limited escrow.

 

On November 11, 2013, the Company recorded a realized gain of approximately $19,000 associated with the Vendio escrow.

 

On January 30, 2014, BPC II, LLC completed the dissolution of its operations.  The Company realized a loss of $180,000 as a result of this dissolution.

 

On May 1, 2014, the Company converted the JSC Tekers $12.0 million secured loan to preferred equity.  The cost and fair value assigned to the preferred equity was approximately $11.8 million.  As a result of the loan conversion, the Company realized a loss of approximately $190,000.

 

On July 29, 2014, the Company sold its limited liability company interest in Octagon for approximately $6.3 million resulting in a realized gain of approximately $3.2 million.

 

On October 3, 2014, Freshii repaid its $1.1 million senior secured loan in full, including all accrued interest.  With this repayment and the removal of the warrant associated with Freshii, the Company recorded a net realized loss of approximately $14,000.

 

On October 31, 2014, the Company redeemed its convertible series A and series B preferred shares in Custom Alloy for $23.0 million, which resulted in a realized gain of $13.0 million.

 

During the fiscal year ended October 31, 2014, the Company recorded realized losses of approximately $131,000 with the sale of its short-term investments and realized gains of approximately $823,000 related to a Summit distribution.

 

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UNREALIZED APPRECIATION AND DEPRECIATION ON PORTFOLIO SECURITIES

 

For the Fiscal Years Ended October 31, 2016, 2015 and 2014 . The Company had a net change in unrealized appreciation on portfolio investments of $28.6 million for the fiscal year ended October 31, 2016 and unrealized depreciation of $50.6 million for the fiscal year ended October 31, 2015, an increase of $79.2 million.  The Company had a net change in unrealized depreciation on portfolio investments of $37.9 million for the fiscal year ended October 31, 2014.

 

For the Fiscal Year Ended October 31, 2016

 

The Company had a net change in unrealized appreciation on portfolio investments of approximately $28.6 million for the fiscal year ended October 31, 2016.  The change in unrealized appreciation for the fiscal year ended October 31, 2016 primarily resulted from the reversal of the unrealized depreciation on the Ohio Medical common and preferred stock, Inland senior secured loan and warrants, the Biovation bridge loan and warrant, G3K loan and the NPWT common and preferred stock by a total of approximately $45.4 million.  The net change is also a result of the Valuation Committee determination to increase the fair value of the Company’s investments in: Turf guarantee by approximately $27,000, RuMe series B-1 preferred stock by $349,000 and warrant by approximately $718,000, Agri-Carriers loan by approximately $95,000, Thunderdome loan by $30,000, Equus common stock by approximately $667,000, U.S. Tech loan by $50,000, Vestal loan by approximately $57,000, common stock by approximately $427,000 and warrants by approximately $438,000, U.S. Gas preferred stock series I by $5.7 million, Advantage preferred stock by approximately $289,000, Folio fn preferred stock by approximately $344,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $3.3 million, NPWT preferred stock by $4,000, Centile equity interest by $474,000, RX loan by approximately $230,000 and SCSD common stock by $750,000.    These changes in unrealized appreciation were partially off-set by the Valuation Committee determination to decrease the fair value of the Company’s investments in: Custom Alloy second lien and unsecured loans by a total of approximately $6.5 million, MVC Automotive equity interest by approximately $2.7 million, RuMe common stock by approximately $384,000, series C preferred stock by $632,000 and guarantee by approximately $278,000, SGDA Europe equity interest by approximately $4.8 million, Tekers common stock by $342,000 and loan by approximately $28,000, Initials loan by approximately $65,000, Turf loan by approximately $107,000, MVC Environmental common stock by $1.5 million, Security Holdings equity interest by $10.4 million, JSC Tekers preferred stock by approximately $1.3 million and common stock by $4,000, Biogenic warrant and loans by a total of approximately $2.4 million, Morey’s loan by approximately $323,000, Legal Solutions loan by approximately $129,000 and BAC common stock by approximately $500,000.

 

For the Fiscal Year Ended October 31, 2015

 

The Company had a net change in unrealized depreciation on portfolio investments of approximately $50.6 million for the fiscal year ended October 31, 2015.  The change in unrealized depreciation for the fiscal year ended October 31, 2015 primarily resulted from the Valuation Committee’s decision to decrease the fair value of the Company’s investments in: Foliofn, Inc. preferred stock by $297,000, NPWT common stock by $3,000 and preferred stock by $45,000, Tekers common stock by $883,000,  PrePaid Legal loan by $100,000,  Centile equity interest by $339,000,  BAC common stock by approximately $229,000,  Biovations loan by approximately $3.4 million,  Morey’s second lien loan by approximately $1.9 million,  Velocitius B.V.

 

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(“Velocitius”) equity interest by $2.8 million, Equus common stock by approximately $2.1 million, JSC Tekers preferred and common stock by a combined $1.1 million, Security Holdings equity interest by $5.3 million, SGDA Europe equity interest by approximately $4.0 million, Custom Alloy second lien loan by approximately $153,000, Ohio Medical series A preferred stock by $17.7 million, MVC Automotive equity interest by $10.9 million, Inland warrant by approximately $700,000 and loan by approximately $6.4 million and the reversal of the unrealized appreciation on the Vestal common stock which resulted in a realized gain of approximately $15.0 million. These changes in unrealized depreciation were partially off-set by the Valuation Committee determination to increase the fair value of the Company’s investments in: Turf loan and guarantee by a total of approximately $25,000, Biogenic warrant and senior convertible note by a total of approximately $802,000, SCSD common stock by $387,000, Advantage preferred stock by approximately $294,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $2.0 million and RuMe series C preferred stock and series B preferred stock by a total of approximately $2.8 million and the reversal of the unrealized depreciation on the Biovation loan, Velocitius equity interest and HH&B which resulted in total realized loss of approximately $11.6 million.  The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $4.7 million due to a PIK distribution, which was treated as a return of capital.

 

For the Fiscal Year Ended October 31, 2014

 

The Company had a net change in unrealized depreciation on portfolio investments of approximately $37.9 million for the fiscal year ended October 31, 2014.  The change in unrealized depreciation for the fiscal year ended October 31, 2014 primarily resulted from the reclassification from unrealized appreciation to realized gain, caused by the sale of Custom Alloy and Octagon of approximately $14.3 million in total and the Valuation Committee’s decision to decrease the fair value of the Company’s investments in: Foliofn, Inc. preferred stock by approximately $1.1 million, MVC Automotive equity interest by approximately $6.7 million, G3K loan by approximately $5.6 million, NPWT common stock by approximately $9,000 and preferred stock by approximately $160,000, U.S. Gas preferred stock by $9.0 million, Velocitius equity interest by approximately $8.4 million, Ohio Medical series A preferred stock by $800,000, Biovation warrants by $311,000, SGDA Europe equity interest by approximately $2.6 million, Biovation bridge loan by approximately $439,000,  Octagon equity interest by approximately $750,000, Tekers common stock by $252,000, JSC Tekers common and preferred stock by approximately $5.6 million, Turf loan by approximately $31,000 and the Turf guarantee by approximately $67,000.  These changes in unrealized depreciation were partially off-set by the Valuation Committee determinations to increase the fair value of the Company’s investments in: Custom Alloy series A preferred stock by approximately $12,000 and series B preferred stock by approximately $2.7 million, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $3.6 million, Centile equity interest by $117,000, PrePaid Legal loan by $100,000, Freshii warrant by approximately $23,000, Security Holdings equity interest by $1.7 million, RuMe series C preferred stock by approximately $875,000, Biogenic senior convertible note by $305,000, Advantage preferred stock by $221,000, Summit loan by approximately $253,000, Turf equity interest by $525,000, Morey’s loan by approximately $253,000 and Vestal common stock by approximately $4.5 million.  The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $4.0 million due to a PIK distribution, which was treated as a return of capital.  The reclassification from unrealized depreciation to a realized loss caused by the dissolution of BPC II, LLC of $180,000 was also a component in the change in unrealized depreciation.

 

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PORTFOLIO INVESTMENTS

 

For the Fiscal Years Ended October 31, 2016 and October 31, 2015. The cost of the portfolio investments held by the Company at October 31, 2016 and October 31, 2015 was $374.7 million and $443.7 million, respectively, representing a decrease of $69.0 million. The aggregate fair value of portfolio investments at October 31, 2016 and at October 31, 2015 was $360.1 million and $400.9 million, respectively, representing a decrease of $40.8 million.  The cost and fair value of cash and cash equivalents held by the Company at October 31, 2016 and October 31, 2015 was $21.0 million and $16.8 million, respectively, representing an increase of approximately $4.2 million.  The cost and fair value of U.S. Treasury obligations held by the Company at October 31, 2016 was $35.0 million and at October 31, 2015 were $89.8 million and $89.7 million, respectively.

 

For the Fiscal Year Ended October 31, 2016

 

During the fiscal year ended October 31, 2016, the Company made six new investments, committing capital that totaled approximately $35.7 million.  The investments were made in Somotra ($1.7 million), Pride ($5.1 million), Dukane ($7.0 million), Quantum ($10.0 million), FDS ($2.3 million) and HTI ($9.6 million).

 

During the fiscal year ended October 31, 2016, the Company made 9 follow-on investments in six existing portfolio companies that totaled approximately $8.5 million.  On November 20, 2015 and December 3, 2015, the Company invested an additional $538,000 and $1.1 million, respectively, in MVC Automotive common equity.  On January 4, 2016, the Company loaned an additional $1.5 million to Legal Solutions, which increased the senior subordinated loan to approximately $10.2 million. On February 1, 2016, the Company loaned an additional $1.1 million to Thunderdome, which increased the second lien loan to approximately $3.0 million.  On May 5, 2016, the Company loaned $30,000 to BAC in the form of a senior loan with an interest rate of 5% and a maturity date of May 5, 2021.  On June 28, 2016, the Company loaned approximately $1.7 million to MVC Automotive in the form of a bridge loan with an interest rate of 6% and a maturity date of December 31, 2016.  On June 28, 2016, the Company loaned approximately $28,000 to Tekers in the form of a bridge loan with an interest rate of 6% and a maturity date of June 27, 2017.  On October 12, 2016, the Company loaned an additional $1.6 million to MVC Automotive in the form of a bridge loan and extended the maturity date to June 30, 2017.  The loan had an outstanding balance at October 31, 2016 of approximately $3.3 million.  On October 7, 2016, the Company loaned RuMe $900,000 in the form of a subordinated note with an interest rate of 10% and a maturity date of October 7, 2017.  The Company also guaranteed $1.0 million of a third party’s working capital line of credit and received a warrant at no cost and allocated a portion of the cost basis of the loan to the warrant at the time the investment was made.

 

On November 3, 2015, Results Companies repaid its loan in full totaling approximately $10.0 million, including all accrued interest.

 

On December 22, 2015, the Company realized a loss of approximately $1.5 million due to the dissolution of Biovation.

 

On December 24, 2015, the Company realized losses of approximately $5.5 million on Inland senior secured loan and $713,000 on its warrants as part of Inland’s restructuring.  As part of the restructuring, the Company obtained a $6.0 million senior secured loan from MVC Environmental,

 

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a holding company formed by the Company that owns and operates intellectual property and environmental service facilities for oil and gas waste recycling related to Inland, and received 950 of its common shares.  The loan bears annual interest of 9% and matures on December 22, 2020.

 

On December 31, 2015, the Company completed the sale of Ohio Medical through an asset sale.  The Company expects gross proceeds of approximately $40.0 million, including fees, which results in a realized loss of approximately $30.5 million. At the time of closing, the Company received cash proceeds of approximately $29.0 million, which included $2.3 million in monitoring and closing fees, and anticipates receiving an additional $11.0 million, assuming the full receipt of all escrow proceeds scheduled for various periods, with the final release of payment scheduled for 18 months from the closing.  The Company has received approximately $1.3 million in escrow proceeds as of July 31, 2016.  The fair value of the escrow as of July 31, 2016 was approximately $8.8 million.

 

On March 7, 2016 and July 28, 2016, the Company received dividends of $10.0 million and $2.5 million, respectively, from U.S. Gas.

 

On April 18, 2016, Somotra repaid its loan in full totaling approximately $1.7 million, including all accrued interest.

 

On May 6, 2016, RX repaid $8.0 million on its loan.  In addition, RX repaid all outstanding accrued and deferred interest for a total payment of approximately $9.9 million.  As part of the transaction, which led to the repayment, RX was reorganized into FDS, Inc., a data service provider.  The Company’s outstanding $2.3 million of principal was changed to a senior subordinated loan with an interest rate of 16% and a maturity date of November 30, 2016.

 

On May 31, 2016, the Company realized a loss of approximately $1.2 million from the dissolution of NPWT.

 

On September 19, 2016, Agri-Carriers repaid $11.8 million of principal on its loan.  In addition, Agri-Carriers repaid all outstanding accrued and deferred interest for a total payment of approximately $13.7 million.

 

On October 31, 2016, the Company realized a loss of approximately $5.6 million on its investment in G3K.

 

During the fiscal year ended October 31, 2016, the Company recorded a distribution of approximately $1.9 million from Security Holdings of which a portion was recorded as a return of capital and a portion was recorded as dividend income.

 

During the fiscal year ended October 31, 2016, the Company received distributions totaling approximately $97,000 from the PE Fund that were recorded as dividend income.

 

During the fiscal year ended October 31, 2016, Thunderdome made principal payments totaling approximately $51,000 on its second lien loan.  The Company subsequently loaned Thunderdome an additional $1.1 million.  The balance of the loan at October 31, 2016 was approximately $3.0 million.

 

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During the fiscal year ended October 31, 2016, Dukane made principal payments totaling approximately $36,000 on its second lien loan.  The balance of the loan at October 31, 2016 was approximately $7.1 million.

 

During the quarter ended January 31, 2016, the Valuation Committee increased the fair value of the Company’s investments in: Folio fn preferred stock by $34,000, Turf loan by approximately $19,000 and guarantee by approximately $6,000, RuMe series C preferred stock by $630,000 and series B-1 preferred stock by $160,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $947,000, NPWT preferred stock by $4,000, Centile equity interest by $260,000, Argi-Carriers loan by approximately $108,000, RX loan by approximately $409,000 and SCSD common stock by $750,000.  In addition, increases in the cost basis and fair value of the loans to Biogenic, Custom Alloy, Morey’s, Vestal, Agri-Carriers, RX, Legal Solutions, MVC Environmental and U.S. Gas were due to the capitalization of PIK interest totaling $3,337,651.  The Valuation Committee also decreased the fair value of the Company’s investments in: Custom Alloy second lien and unsecured loans by a total of approximately $2.4 million, MVC Automotive equity interest by approximately $27,000, Security Holdings equity interest by approximately $4.6 million, SGDA Europe equity interest by approximately $2.9 million, Tekers common stock by $35,000, JSC Tekers preferred stock by approximately $740,000 and common stock by $4,000, BAC common stock by approximately $38,000, Biogenic warrant and loan by a total of approximately $35,000, Morey’s second lien loan by approximately $1.1 million, Legal Solutions loan by approximately $310,000 and the Ohio Medical escrow by approximately $1.3 million that was recorded as a realized loss.

 

During the quarter ended April 30, 2016, the Valuation Committee increased the fair value of the Company’s investments in: Security Holdings equity interest by $911,000, RuMe series B-1 preferred stock by approximately $347,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $763,000, JSC Tekers preferred stock by approximately $575,000, Centile equity interest by $281,000, Morey’s loan by approximately $51,000, Custom Alloy unsecured loan by approximately $50,000, Turf guarantee by approximately $6,000 and the Initials loan by approximately $2,000.  The Valuation Committee also increased the Ohio Medical escrow by approximately $177,000 that was recorded as a realized gain.  In addition, increases in the cost basis and fair value of the loans to Biogenic, Custom Alloy, Morey’s, Vestal, Agri-Carriers, RX, Legal Solutions, MVC Environmental, Dukane and U.S. Gas were due to the capitalization of PIK interest totaling $1,495,179.  The Valuation Committee also decreased the fair value of the Company’s investments in: Custom Alloy second lien loan by approximately $1.5 million, RuMe series C preferred stock by approximately $203,000 and common stock by approximately $144,000, Folio fn preferred stock by approximately $254,000, MVC Automotive equity interest by approximately $506,000, SGDA Europe equity interest by approximately $219,000, Tekers common stock by $266,000, Turf loan by approximately $138,000, U.S. Gas preferred stock series I by $3.9 million, BAC common stock by approximately $92,000, Biogenic warrant and loans by a total of approximately $136,000, Advantage preferred stock by approximately $67,000, MVC Environmental common stock by $38,000,  Agri-Carriers loan by approximately $133,000, RX loan by approximately $179,000 and Legal Solutions loan by approximately $91,000.

 

During the quarter ended July 31, 2016, the Valuation Committee increased the fair value of the Company’s investments in: Agri-Carriers loan by approximately $120,000, Thunderdome loan by $30,000, U.S. Tech loan by $50,000, Advantage preferred stock by approximately $161,000, Morey’s loan by approximately $358,000, Turf loan by approximately $14,000 and guarantee by

 

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approximately $6,000, Vestal loan by approximately $129,000, common stock by approximately $462,000 and warrants by approximately $459,000, MVC Environmental common stock by $67,000, Folio fn preferred stock by approximately $324,000, Legal Solutions loan by approximately $271,000 and Security Holdings equity interest by $292,000.  The Valuation Committee also increased the Ohio Medical escrow by approximately $210,000 that was recorded as a realized gain.  In addition, increases in the cost basis and fair value of the loans to Biogenic, Custom Alloy, Morey’s, Vestal, Agri-Carriers, Initials, Legal Solutions, MVC Environmental, Dukane and U.S. Gas were due to the capitalization of PIK interest totaling $1,865,633.  The Valuation Committee also decreased the fair value of the Company’s investments in: Custom Alloy second lien and unsecured loans by a total of approximately $2.9 million, Tekers common stock by $41,000 and loan by approximately $28,000, BAC common stock by approximately $72,000, Centile equity interest by $17,000, Initials loan by approximately $32,000, JSC Tekers preferred stock by approximately $1.0 million, MVC Automotive equity interest by approximately $448,000, SGDA Europe equity interest by approximately $245,000, Biogenic warrant and loans by a total of approximately $5.5 million and the MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $356,000.

 

During the quarter ended October 31, 2016, the Valuation Committee increased the fair value of the Company’s investments in: Advantage preferred stock by approximately $195,000, Custom Alloy second lien loan by approximately $256,000, Folio fn preferred stock by approximately $240,000, Legal Solutions loan by approximately $1,000, Morey’s loan by approximately $415,000, Turf guarantee by approximately $9,000, U.S. Gas preferred stock series I by $9.6 million, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $1.9 million, RuMe warrant by approximately $718,000 and the Biogenic loans by a total of approximately $3.2 million.  The Valuation Committee also increased the Ohio Medical escrow by approximately $364,000 that was recorded as a realized gain.  In addition, increases in the cost basis and fair value of the loans to Vestal, HTI, Legal Solutions, MVC Environmental, Dukane and U.S. Gas were due to the capitalization of PIK interest totaling $402,287.  The Valuation Committee also decreased the fair value of the Company’s investments in: BAC common stock by approximately $298,000, Centile equity interest by $50,000, Custom Alloy unsecured loan by approximately $32,000, Initials loan by approximately $35,000, JSC Tekers preferred stock by approximately $139,000, MVC Automotive equity interest by approximately $1.7 million, RuMe common stock by $240,000, series C preferred stock by $1.1 million, series B-1 preferred stock by $158,000 and guarantee by approximately $278,000, Security Holdings equity interest by $7.0 million, SGDA Europe equity interest by approximately $1.4 million, Turf loan by approximately $2,000, Vestal loan by approximately $72,000, common stock by approximately $35,000 and warrants by approximately $21,000 and MVC Environmental common stock by $1.5 million.

 

During the fiscal year ended October 31, 2016, the Valuation Committee increased the fair value of the Company’s investments in: Turf guarantee by approximately $27,000, RuMe series B-1 preferred stock by $349,000 and warrant by approximately $718,000, Agri-Carriers loan by approximately $95,000, Thunderdome loan by $30,000, U.S. Tech loan by $50,000, Vestal loan by approximately $57,000, common stock by approximately $427,000 and warrants by approximately $438,000, U.S. Gas preferred stock series I by $5.7 million, Advantage preferred stock by approximately $289,000, Folio fn preferred stock by approximately $344,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $3.3 million, NPWT preferred stock by $4,000, Centile equity interest by $474,000, RX loan by approximately $230,000 and SCSD common stock by $750,000.  In addition, increases

 

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in the cost basis and fair value of the loans to Biogenic, Custom Alloy, Morey’s, Vestal, Agri-Carriers, RX, Legal Solutions, Initials, MVC Environmental, Dukane and U.S. Gas were due to the capitalization of PIK interest totaling $7,100,750.  The Valuation Committee also decreased the fair value of the Company’s investments in: Custom Alloy second lien and unsecured loans by a total of approximately $6.5 million, MVC Automotive equity interest by approximately $2.7 million, RuMe common stock by approximately $384,000, series C preferred stock by $632,000 and guarantee by approximately $278,000, SGDA Europe equity interest by approximately $4.8 million, Tekers common stock by $342,000 and loan by approximately $28,000, Initials loan by approximately $65,000, Turf loan by approximately $107,000, MVC Environmental common stock by $1.5 million, Security Holdings equity interest by $10.4 million, JSC Tekers preferred stock by approximately $1.3 million and common stock by $4,000, Biogenic warrant and loans by a total of approximately $2.4 million, Morey’s loan by approximately $323,000, Legal Solutions loan by approximately $129,000, BAC common stock by approximately $500,000 and the Ohio Medical escrow by approximately $534,000 that was recorded as a realized loss.

 

At October 31, 2016, the fair value of all portfolio investments, exclusive of U.S. Treasury obligations and escrow receivables, was $360.1 million with a cost basis of $374.7 million.  At October 31, 2016, the fair value and cost basis of Legacy Investments was $5.9 million and $23.8 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $354.2 million and $350.9 million, respectively.  At October 31, 2015, the fair value of all portfolio investments, exclusive of U.S. Treasury obligations and escrow receivables, was $400.9 million with a cost basis of $443.7 million.  At October 31, 2015, the fair value and cost basis of the Legacy Investments was $5.6 million and $23.8 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $395.3 million and $419.9 million, respectively.

 

For the Fiscal Year Ended October 31, 2015

 

During the fiscal year ended October 31, 2015, the Company made eight new investments, committing capital totaling approximately $58.1 million.  The investments were made in RX ($10.3 million), Agri-Carriers ($11.8 million), Legal Solutions ($8.7 million), Results Companies ($9.0 million), Vestal ($6.5 million), Thunderdome ($2.0 million), Initials ($4.8 million) and U.S. Technologies ($5.0 million).

 

During the fiscal year ended October 31, 2015, the Company made 5 follow-on investments into 4 existing portfolio companies totaling approximately $4.3 million.  On May 27, 2015, the Company invested an additional $1.1 million into MVC Automotive in the form of common equity interest.  On June 3, 2015, the Company invested an additional $250,000 into Centile in the form of common equity interest. On July 6, 2015, the Company invested $250,000 into BAC in the form of equity.  See below for further information on BAC.  On July 7, 2015, the Company made a secured $1.0 million loan to Biogenic.  The loan has a 16% interest rate and matures on February 29, 2016.  The Company also received a warrant at no cost and allocated a portion of the cost basis of the loan to the warrant at the time the investment was made. On October 19, 2015, the Company invested an additional $1.7 million in MVC Automotive in the form of common equity interest.

 

On November 26, 2014, Summit Research Labs, Inc. repaid its second lien loan in full including all accrued interest totaling approximately $25.7 million.

 

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On December 31, 2014, the Company received distributions totaling $388,000 from the PE Fund, which was treated as a return of capital.

 

On April 20, 2015, BAC credit purchased the assets of Biovation.  The Company received 90 shares of class B non-voting common stock in BAC as part of the transaction and realized a loss on Biovation of approximately $2.2 million.

 

On May 1, 2015, the Company sold 2,893 shares of common stock in Ohio Medical for a nominal amount resulting in no realized gain or loss.

 

On May 29, 2015, the Company sold its 81,000 shares of common stock in Vestal receiving total proceeds of approximately $17.9 million resulting in a realized gain of approximately $15.0 million.  The total proceeds include a $1.0 million dividend and assumes full receipt of the escrow proceeds.  The $600,000 loan was also repaid in full, including all accrued interest.  As part of the transaction, the Company reinvested approximately $6.3 million in the form of a subordinated loan, $250,000 for 5,610 shares of common stock and a warrant with no cost. The loan has an interest rate of 15% and matures on November 28, 2021.

 

On June 19, 2015, the Company monetized a majority of its investment in Velocitius, receiving approximately $9.2 million in proceeds, which included a return of capital and closing fees and was net of a minimal currency loss.

 

On October 16, 2015, the Company sold its remaining equity interest in Velocitius and received zero proceeds resulting in a realized loss of approximately $2.7 million.

 

On October 30, 2015, the Company realized a loss of $6.7 million with the dissolution of HH&B.

 

During the fiscal year ended October 31, 2015, the Company sold its $10.0 million PrePaid Legal loan for proceeds totaling approximately $10.1 million, including all accrued interest.

 

During the fiscal year ended October 31, 2015, Custom Alloy made principal payments totaling $3.5 million on its unsecured subordinated loan.  The balance of the loan at October 31, 2015 was $3.0 million.

 

During the quarter ended January 31, 2015, the Valuation Committee increased the fair value of the Company’s investments in: Folio fn , Inc. (“Foliofn”) preferred stock by $109,000, Turf Products, LLC (“Turf”) loan by approximately $2,000, RuMe series C preferred stock by $800,000 and series B preferred stock by $200,000, Advantage preferred stock by $20,000, Biogenic warrant and senior convertible note by a net total of approximately $28,000 and SCSD common stock by $387,000.  In addition, increases in the cost basis and fair value of the loans to Biogenic, Custom Alloy, Morey’s, and U.S. Gas were due to the capitalization of PIK interest totaling $436,878.  The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.1 million due to a PIK distribution, which was treated as a return of capital.  The Valuation Committee also decreased the fair value of the Company’s investments in: MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $759,000, Custom Alloy second lien loan by approximately $84,000, NPWT Corporation (“NPWT”) common stock by $2,000 and preferred stock by $36,000, Tekers common stock by $170,000,  PrePaid Legal loan by $100,000,  Centile

 

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equity interest by $538,000,  Biovation loan by approximately $716,000, Velocitius equity interest by approximately $1.1 million, Security Holdings equity interest by $1.1 million, JSC Tekers preferred stock by approximately $599,000, MVC Automotive equity interest by approximately $5.9 million, SGDA Europe equity interest by approximately $749,000 and Inland Environmental & Remediation LP (“Inland”) warrant by approximately $713,000.

 

During the quarter ended April 30, 2015, the Valuation Committee increased the fair value of the Company’s investments in: MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $610,000, Turf loan by approximately $2,000, JSC Tekers preferred stock by $5,000, Biogenic warrant and senior convertible note by a total of approximately $852,000, MVC Automotive equity interest by $246,000 and RuMe series C preferred stock by approximately $558,000 and series B preferred stock by $142,000.  In addition, increases in the cost basis and fair value of the loans to Biogenic, Custom Alloy, Morey’s, and U.S. Gas were due to the capitalization of PIK interest totaling $501,906.  The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.2 million due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Company’s investments in: Custom Alloy second lien loan by approximately $11,000, Folio fn , Inc. preferred stock by $82,000, NPWT common stock by $1,000 and preferred stock by $12,000, Tekers common stock by $21,000, Centile equity interest by $98,000, Morey’s second lien loan by approximately $253,000, Advantage preferred stock by approximately $28,000, Velocitius equity interest by $899,000, Biovations loan by approximately $2.7 million, SGDA Europe equity interest by approximately $1.3 million, Security Holdings equity interest by $850,000, Ohio Medical series A preferred stock by $10.5 million and the Inland loan by approximately $1.4 million.

 

During the quarter ended July 31, 2015, the Valuation Committee increased the fair value of the Company’s investments in: RuMe series C preferred stock by approximately $198,000 and series B preferred stock by approximately $53,000, Custom Alloy second lien loan by approximately $191,000, Turf guarantee by approximately $19,000, Centile equity interest by $48,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $751,000 and Advantage preferred stock by approximately $302,000.  In addition, increases in the cost basis and fair value of the loans to Biogenic, Custom Alloy, Morey’s, Vestal and U.S. Gas were due to the capitalization of PIK interest totaling $525,997.  The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.2 million due to a PIK distribution, which was treated as a return of capital.  The Valuation Committee also decreased the fair value of the Company’s investments in: Folio fn , Inc. preferred stock by $383,000, NPWT preferred stock by $1,000, Tekers common stock by $117,000, Turf loan by approximately $2,000, Vestal escrow by approximately $15,000, BAC common stock by approximately $167,000,  Biogenic warrant and senior convertible note by a net total of approximately $2,000, Morey’s second lien loan by approximately $753,000, Inland loan by $10.0 million, Velocitius equity interest by approximately $774,000, JSC Tekers preferred stock by $35,000, SGDA Europe equity interest by approximately $1.1 million, Ohio Medical series A preferred stock by $6.0 million, MVC Automotive equity interest by $616,000 and Security Holdings equity interest by $2.0 million.

 

During the quarter ended October 31, 2015, the Valuation Committee increased the fair value of the Company’s investments in: Turf loan and guarantee by a total of approximately $5,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $1.4 million, Folio fn , Inc. preferred

 

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stock by $59,000, NPWT preferred stock by $4,000, Centile equity interest by $249,000, Inland loan by $5.0 million and RuMe series C preferred stock by approximately $626,000 and series B preferred stock by approximately $184,000.  In addition, increases in the cost basis and fair value of the loans to Biogenic, Custom Alloy, Morey’s, Vestal and U.S. Gas were due to the capitalization of PIK interest totaling $801,815.  The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.2 million due to a PIK distribution, which was treated as a return of capital.  The Valuation Committee also decreased the fair value of the Company’s investments in: Biogenic warrant and senior convertible note by a net total of approximately $76,000, Tekers common stock by $575,000, Custom Alloy second lien loan by approximately $249,000, Morey’s second lien loan by approximately $922,000,  JSC Tekers preferred stock by $483,000, Security Holdings equity interest by $1.3 million, SGDA Europe equity interest by approximately $830,000, BAC common stock by approximately $62,000, Ohio Medical series A preferred stock by $1.2 million and MVC Automotive equity interest by $4.6 million.

 

During the fiscal year ended October 31, 2015 the Valuation Committee increased the fair value of the Company’s investments in: Turf loan and guarantee by a total of approximately $25,000, Biogenic warrant and senior convertible note by a total of approximately $802,000, SCSD common stock by $387,000, Advantage preferred stock by approximately $294,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $2.0 million and RuMe series C preferred stock and series B preferred stock by a total of approximately $2.8 million.  In addition, increases in the cost basis and fair value of the loans to Biogenic, Custom Alloy, Morey’s, Vestal and U.S. Gas were due to the capitalization of PIK interest totaling $2,266,596.  The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $4.7 million due to a PIK distribution, which was treated as a return of capital.  The Valuation Committee also decreased the fair value of the Company’s investments in: Folio fn , Inc. preferred stock by $297,000, NPWT common stock by $3,000 and preferred stock by $45,000, Tekers common stock by $883,000, PrePaid Legal loan by $100,000,  Centile equity interest by $339,000,  BAC common stock by approximately $229,000, Vestal escrow by approximately $15,000, Biovations loan by approximately $3.4 million,  Morey’s second lien loan by approximately $1.9 million,  Velocitius equity interest by $2.8 million, JSC Tekers preferred and common stock by a combined $1.1 million, Security Holdings equity interest by $5.3 million, SGDA Europe equity interest by approximately $4.0 million, Custom Alloy second lien loan by approximately $153,000, Ohio Medical series A preferred stock by $17.7 million, MVC Automotive equity interest by $10.9 million and Inland warrant by approximately $713,000 and loan by approximately $6.4 million.

 

At October 31, 2015, the fair value of all portfolio investments, exclusive of U.S. Treasury obligations and escrow receivables, was $400.9 million with a cost basis of $443.7 million.  At October 31, 2015, the fair value and cost basis of investments made by the Company’s former management team pursuant to the prior investment objective (“Legacy Investments”) was $5.6 million and $23.8 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $395.3 million and $419.9 million, respectively.  At October 31, 2014, the fair value of all portfolio investments, exclusive of U.S. Treasury obligations and escrow receivables, was $447.6 million with a cost basis of $440.0 million.  At October 31, 2014, the fair value and cost basis of portfolio investments of the Legacy Investments was $5.9 million and $23.8 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $441.7 million and $416.2 million, respectively.

 

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Portfolio Companies

 

During the fiscal year ended October 31, 2016, the Company had investments in the following portfolio companies:

 

Actelis Networks, Inc.

 

Actelis Networks, Inc. (“Actelis”), Fremont, California, a Legacy Investment, provides authentication and access control solutions designed to secure the integrity of e-business in Internet-scale and wireless environments.

 

At October 31, 2015 and October 31, 2016, the Company’s investment in Actelis consisted of 150,602 shares of Series C preferred stock at a cost of $5.0 million.  The investment has been fair valued at $0.

 

Advantage Insurance Holdings

 

Advantage, Cayman Islands, is a provider of specialty insurance, reinsurance and related services to business owners and high net worth individuals.

 

At October 31, 2015, the Company’s investment in Advantage consisted of 750,000 shares of preferred stock at a cost basis of $7.5 million and a fair value of approximately $8.0 million.

 

During the fiscal year ended October 31, 2016, the Valuation Committee increased the fair value of the preferred stock by approximately $289,000.

 

At October 31, 2016, the Company’s investment in Advantage consisted of 750,000 shares of preferred stock at a cost basis of $7.5 million and a fair value of approximately $8.3 million.

 

Bruce Shewmaker, an officer of the Company, previously served as a director of Advantage .

 

Agri-Carriers Group, Inc.

 

Agri-Carriers Group, Inc. (“Agri-Carriers”), Covina, CA, is a transportation company focused on over-the-road, full-truckload transportation of agriculture products to be used in consumer food manufacturing.

 

At October 31, 2015, the Company’s investment in Agri-Carriers consisted of a senior subordinated loan with an outstanding amount, cost basis and fair value of approximately $11.8 million.  The decrease in cost basis of the loan is due to the amortization of loan origination costs.

 

During the fiscal year ended October 31, 2016, the Valuation Committee increased the fair value of the loan by approximately $95,000.

 

On September 19, 2016, Agri-Carriers repaid $11.8 million of principal on its loan.  In addition, Agri-Carriers repaid all outstanding accrued and deferred interest for a total payment of approximately $13.7 million.

 

At October 31, 2016, the Company no longer held an investment in Agri-Carriers.

 

Biogenic Reagents

 

Biogenic, Minneapolis, Minnesota, is a producer of high-performance activated carbon products made from renewable biomass.

 

At October 31, 2015, the Company’s investment in Biogenic consisted of two senior notes with maturity dates of July 21, 2018 and February 29, 2016, a senior convertible note with a maturity date of July 21, 2018, a senior subordinated note with a maturity date of February 29, 2016 and a

 

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warrant.  The notes have an interest rate of 16%.  The loans had a combined outstanding balance, cost basis and fair value of approximately $15.6 million.  The warrants had a combined cost basis of approximately $620,000 and a combined fair value of approximately $1.7 million.

 

On September 26, 2016, Biogenics entered into an Assignment for the Benefit of Creditors in order to ensure an efficient sale of the assets. The Company is exploring an asset sale of the tangible and intangible assets of Biogenics to a strategic and/or financial buyer.

 

During the fiscal year ended October 31, 2016, the Valuation Committee decreased the fair value of the senior note and senior convertible note by a combined amount of approximately $800,000 and the warrant by approximately $1.7 million.

 

At October 31, 2016, the Company’s loans had a combined outstanding balance and cost basis of approximately $15.9 million and a fair value of approximately $15.1 million.  The warrants had a combined cost basis of approximately $620,000 and a combined fair value of $0.  The increase in cost basis of the loans is due to capitalization of “payment in kind” interest. The Company reserved in full against all of the accrued interest starting April 1, 2016.

 

Biovation Acquisition Co.

 

BAC, Montgomery, Minnesota, is a manufacturing facility and marketer of environmentally friendly, organic and sustainable laminate materials and composites.

 

At October 31, 2015, the Company’s investment in BAC consisted of 90 shares of class B non-voting common stock with cost basis of approximately $785,000 and a fair value of approximately $556,000.

 

On May 5, 2016, the Company loaned $30,000 to BAC in the form of a senior loan with an interest rate of 5% and a maturity date of May 5, 2021.

 

During the fiscal year ended October 31, 2016, the Valuation Committee decreased the fair value of the common stock by approximately $500,000.

 

At October 31, 2016, the Company’s investment in BAC consisted of 90 shares of class B non-voting common stock with cost basis of approximately $785,000 and a fair value of approximately $55,000 and a senior loan with an outstanding balance, cost basis and fair value of $30,000.

 

Biovation Holdings Inc.

 

Biovation, Montgomery, Minnesota, was a manufacturer and marketer of environmentally friendly, organic and sustainable laminate materials and composites.

 

At October 31, 2015, the Company’s investment in Biovation consisted of a bridge loan with an outstanding balance and cost basis of approximately $1.1 million and a fair value of $0.  The warrants had a cost of $398,000 and a fair value of $0.  The Company reserved in full against all of the accrued interest starting August 1, 2014.

 

On December 22, 2015, the Company realized a loss of approximately $1.5 million as a result of the dissolution of Biovation.

 

At October 31, 2016, the Company no longer held an investment in Biovation.

 

Centile Holding B.V.

 

Centile, Sophia-Antipolis, France, is a leading European innovator of unified communications, network platforms, hosted solutions, applications and tools that help mobile, fixed and web-based communications service providers serve the needs of enterprise end users.

 

At October 31, 2015, the Company’s investment in Centile consisted of common equity interest at a cost of $3.5 million and a fair value of approximately $4.9 million.

 

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During the fiscal year ended October 31, 2016, the Valuation Committee increased the fair value of the common equity interest by approximately $474,000.

 

At October 31, 2016, the Company’s investment in Centile consisted of common equity interest at a cost of $3.5 million and a fair value of approximately $5.4 million.

 

Kevin Scoby, a representative of the Company, serves as a director of Centile.

 

Custom Alloy Corporation

 

Custom Alloy, High Bridge, New Jersey, manufactures time sensitive and mission critical butt-weld pipe fittings and forgings for the natural gas pipeline, power generation, oil/gas refining and extraction, and nuclear generation markets.

 

At October 31, 2015, the Company’s investment in Custom Alloy consisted of an unsecured subordinated loan with a cost basis, outstanding balance and fair value of approximately $3.0 million and a second lien loan with a cost basis and outstanding balance of approximately $23.8 million and a fair value of approximately $23.6 million.  The second lien loan had an interest rate of 11% and a maturity date of April 30, 2020 and the unsecured subordinated loan had an interest rate of 12% and a maturity date of September 4, 2016.

 

During the fiscal year ended October 31, 2016, the Company agreed to defer part of the cash interest portion and also adjust a portion to PIK interest on the unsecured subordinated loan and second lien loan for eight months beginning on March 1, 2016.  The maturity date of the unsecured subordinated loan was extended to March 31, 2018.

 

During the fiscal year ended October 31, 2016, the Valuation Committee decreased the fair value of the second lien loan by approximately $5.6 million and the unsecured subordinated loan by approximately $864,000.

 

At October 31, 2016, the Company’s investment in Custom Alloy consisted of an unsecured subordinated loan with a cost basis and outstanding balance of approximately $3.0 million and a fair value of approximately $2.1 million and a second lien loan with a cost basis and outstanding balance of approximately $24.4 million and a fair value of approximately $18.6 million.  The increase in cost basis of the loans is due to the capitalization of “payment in kind” interest.  The Company reserved in full against all accrued PIK interest starting July 1, 2016.

 

Dukane IAS, LLC

 

Dukane, St. Charles, Illinois, is a global provider of plastic welding equipment.

 

On February 17, 2016, the Company loaned $7.0 million to Dukane in the form of a second lien loan with an interest rate of 13% and a maturity date of November 17, 2020.

 

During the fiscal year ended October 31, 2016, Dukane made principal payments totaling approximately $36,000 on its second lien loan.

 

At October 31, 2016, the Company’s investment in Dukane consisted of a second lien loan with an outstanding amount of approximately $7.1 million, a cost basis of approximately $7.0 million and a fair value of approximately $7.1 million.  The increase in cost basis of the loans is due to the amortization of loan origination fees and capitalization of “payment in kind” interest.

 

Equus Total Return, Inc.

 

Equus is a publicly traded business development company and regulated investment company listed on the New York Stock Exchange (NYSE:EQS).  Consistent with the Company’s valuation procedures, the Company has been marking this investment to its market price.

 

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At October 31, 2015, the Company’s investment in Equus consisted of 4,444,644 shares of common stock with a cost of approximately $10.0 million and a market value of approximately $7.6 million.

 

At October 31, 2016, the Company’s investment in Equus consisted of 4,444,644 shares of common stock with a cost of approximately $10.0 million and a market value of approximately $8.3 million.

 

FDS, Inc.

 

FDS, Fort Worth, TX, is a data service provider.

 

On May 6, 2016, RX repaid $8.0 million of principal on its loan.  In addition, RX repaid all outstanding accrued and deferred interest for a total payment of approximately $9.9 million.  As part of the transaction, which led to the repayment, RX was reorganized into FDS.  The Company’s outstanding $2.3 million of principal was changed to a senior subordinated loan with an interest rate of 16% and a maturity date of November 30, 2016.

 

At October 31, 2016, the Company’s investment in FDS consisted of a senior subordinated loan with an outstanding amount, cost basis and fair value of $2.3 million.

 

Foliofn, Inc.

 

Folio fn , Vienna, Virginia, a Legacy Investment, is a financial services technology company that offers investment solutions to financial services firms and investors.

 

At October 31, 2015, the Company’s investment in Folio fn consisted of 5,802,259 shares of Series C preferred stock with a cost of $15.0 million and a fair value of $5.6 million.

 

During the fiscal year ended October 31, 2016, the Valuation Committee increased the fair value of the preferred stock by approximately $344,000.

 

At October 31, 2016, the Company’s investment in Folio fn consisted of 5,802,259 shares of Series C preferred stock with a cost of $15.0 million and a fair value of approximately $5.9 million.

 

Bruce Shewmaker, an officer of the Company, previously served as a director of Folio fn.

 

G3K Displays, Inc.

 

G3K, Hoboken, New Jersey, was a custom designer, manufacturer and installer of in-store environments, signage, displays and fixtures for major retailers such as Foot Locker, adidas and Luxottica.

 

On April 14, 2014, the Company agreed to provide G3K a $10.0 million loan in three installments and made its first loan of $6.0 million. The closing of the Company’s G3K investment and first loan occurred following extensive due diligence, including receipt of an unqualified audit report on G3K’s financial statements by an accounting firm and a separate quality of earnings review by another accounting firm.  The Company initiated legal action in the Superior Court of New Jersey, Chancery Division, against G3K, its three shareholders and certain corporate officers for fraudulently misrepresenting G3K’s financial records in order to secure financing from the Company.  The Company is working diligently to uncover the full extent of what it believes to be a highly sophisticated fraud and is seeking to recover loan proceeds. All legal options available are being examined.  The Company did recover $375,000 in principal prior to October 31, 2014.

 

On October 31, 2016, the Company realized a loss of approximately $5.6 million on its investment in G3K.

 

At October 31, 2016, the Company no longer held an investment in G3K.

 

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HTI Technologies and Industries, Inc.

 

HTI, LaVergne, Tennessee, is a manufacturer of electric motor components and designer of small motor systems.

 

On June 1, 2016, the Company loaned approximately $9.6 million to HTI in the form of a second lien note with an interest rate of 14% and a maturity date of June 21, 2018.

 

At October 31, 2016, the Company’s investment in HTI consisted of a second lien loan with an outstanding amount of approximately $9.7 million, a cost basis of approximately $9.6 million and a fair value of approximately $9.7 million.  The cost basis of the loan will increase over the life of the loan due to the amortization of loan origination fees and capitalization of “payment in kind” interest.

 

Initials, Inc.

 

Initials, Clarkesville, Georgia, is a direct selling organization specializing in customized bags, organizational products and fashion accessories.

 

At October 31, 2015, the Company’s investment in Initials consisted of a senior subordinated loan with an outstanding amount, cost basis and fair value of approximately $4.8 million. The loan has an interest rate of 15% and matures on June 23, 2020.

 

During the fiscal year ended October 31, 2016, the Valuation Committee decreased the fair value of the loan by approximately $65,000.

 

At October 31, 2016, the Company’s investment in Initials consisted of a senior subordinated loan with an outstanding amount, cost basis and fair value of approximately $4.8 million.

 

Inland Environmental & Remediation LP

 

Inland, Columbus, Texas, has developed a patented, environmentally-friendly recycling process to transform waste produced from oil field drilling sites into a road base product used in road construction.

 

At October 31, 2015, the Company’s investment in Inland consisted of a senior secured loan with a cash interest rate of 12% and a maturity date of April 17, 2019 and warrants for shares of common stock.  The loan had an outstanding balance of $15.0 million, a cost basis of $14.5 million and a fair value of approximately $8.0 million.  The warrants had a cost basis of $713,000 and a fair value of $0.

 

On December 24, 2015, the Company realized losses of approximately $5.5 million on Inland senior secured loan and $713,000 on its warrants as part of Inland’s restructuring.  As part of the restructuring, the Company received a $6.0 million senior secured loan from MVC Environmental, Inc., a holding company formed by the Company which owns and operates intellectual property and environmental service facilities for oil and gas waste recycling related to Inland, and received 950 of its common shares.  The loan bears annual interest of 9% and matures on December 22, 2020.

 

At October 31, 2016, the Company no longer held an investment in Inland.

 

JSC Tekers Holdings

 

JSC Tekers, Latvia, is an acquisition company focused on real estate management.

 

At October 31, 2015, the Company’s investment in JSC Tekers consisted of preferred equity with a cost basis of $11.8 million and a fair value of $5.0 million and 3,201 shares of common stock with a cost basis of $4,500 and a fair value of $4,000.

 

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During the fiscal year ended October 31, 2016, the Valuation Committee decreased the fair value of the preferred stock by approximately $1.3 million and the common stock by approximately $4,000.

 

At October 31, 2016, the Company’s investment in JSC Tekers consisted of 9,159,085 shares of preferred stock with a cost basis of $11.8 million and a fair value of $3.7 million and 3,201 shares of common stock with a cost basis of $4,500 and a fair value of $0.

 

Legal Solutions Holdings, Inc.

 

Legal Solutions, Covina, CA, is a provider of record retrieval services to the California workers’ compensation applicant attorney market.

 

At October 31, 2015, the Company’s investment in Legal Solutions consisted of a senior subordinated loan with an interest rate of 14% and a maturity date of September 12, 2018 with an outstanding amount, cost basis and fair value of approximately $8.7 million.

 

On January 4, 2016, the Company loaned an additional $1.5 million to Legal Solutions.

 

During the fiscal year ended October 31, 2016, the interest rate on the senior subordinated loan was amended to 16%.

 

During the fiscal year ended October 31, 2016, the Valuation Committee decreased the fair value of the senior subordinated loan by approximately $129,000.

 

At October 31, 2016, the Company’s investment in Legal Solutions consisted of a senior subordinated loan with an outstanding amount and cost basis of approximately $11.0 million and a fair value of approximately $10.9 million.  The increase in cost basis of the loan is due to the amortization of the discount on the deferred balance and the capitalization of deferred interest and PIK interest.

 

Mainstream Data, Inc.

 

Mainstream Data, Inc. (“Mainstream”), Salt Lake City, Utah, a Legacy Investment, develops 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, 2015 and October 31, 2016, the Company’s investment in Mainstream consisted of 5,786 shares of common stock with a cost of $3.75 million. The investment has been fair valued at $0.

 

Morey’s Seafood International LLC

 

Morey’s, Motley, Minnesota, is a manufacturer, marketer and distributor of fish and seafood products.

 

At October 31, 2015, the Company’s investment in Morey’s consisted of a second lien loan that had an outstanding balance and cost basis of $16.0 million and a fair value of $14.4 million.  The loan had an interest rate of 15% and a maturity date of August 12, 2018.

 

During the fiscal year ended October 31, 2016, the interest rate on the second lien loan was decreased to 14%.

 

During the fiscal year ended October 31, 2016, the Valuation Committee decreased the fair value of the loan by approximately $323,000.

 

At October 31, 2016, the loan had an outstanding balance and cost basis of $17.2 million and a fair value of $15.2 million.  The increase in cost basis of the loan is due to the capitalization of PIK interest.  The Company reserved in full against all accrued PIK interest starting July 1, 2016.

 

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MVC Automotive Group GmbH

 

MVC Automotive, an Amsterdam-based holding company, owns and operates ten Ford, Jaguar, Land Rover, Mazda, and Volvo dealerships located in Austria and the Czech Republic.

 

At October 31, 2015, the Company’s investment in MVC Automotive consisted of an equity interest with a cost of approximately $48.5 million and a fair value of approximately $13.5 million.  The mortgage guarantee for MVC Automotive was equivalent to approximately $7.2 million at October 31, 2015.  This guarantee was taken into account in the valuation of MVC Automotive.

 

On November 20, 2015 and December 3, 2015, the Company invested an additional $538,000 and $1.1 million, respectively, in MVC Automotive common equity.

 

On June 28, 2016, the Company loaned approximately $1.7 million to MVC Automotive in the form of a bridge loan with an interest rate of 6% and a maturity date of December 31, 2016.

 

On October 12, 2016, the Company loaned an additional $1.6 million to MVC Automotive in the form of a bridge loan and extended the maturity date to June 30, 2017.

 

During the fiscal year ended October 31, 2016, the Valuation Committee decreased the fair value of the equity interest by approximately $2.7 million.

 

At October 31, 2016, the Company’s investment in MVC Automotive consisted of an equity interest with a cost of approximately $50.1 million and a fair value of approximately $12.3 million and a bridge loan with an outstanding amount, cost basis and fair value of approximately $3.3 million.  The mortgage guarantee for MVC Automotive was equivalent to approximately $6.3 million at October 31, 2016.  This guarantee was taken into account in the valuation of MVC Automotive.

 

Michael Tokarz, Chairman of the Company, and Puneet Sanan and John Kelly, representatives of the Company, serve as directors of MVC Automotive.

 

MVC Environmental, Inc.

 

MVC Environmental, a New York-based holding company, owns and operates intellectual property and environmental service facilities for oil and gas waste recycling in the Eagle Ford Shale region of Texas.

 

On December 24, 2015, the Company realized a loss of approximately $5.5 million on Inland’s senior secured loan and $713,000 on its warrants as part of Inland’s restructuring.  As part of the restructuring, the Company obtained a $6.0 million senior secured loan from MVC Environmental, Inc., a holding company formed by the Company that owns and operates intellectual property and environmental service facilities for oil and gas waste recycling related to Inland, and received 950  of its common shares.  The loan bears annual interest of 9% and matures on December 22, 2020.

 

During the fiscal year ended October 31, 2016, the Valuation Committee decreased the fair value of the common stock by approximately $1.5 million.

 

At October 31, 2016, the Company’s investment in MVC Environmental consisted of common stock with a cost basis of approximately $3.1 million and a fair value of approximately $1.6 million and a senior secured loan with an outstanding balance, cost basis and fair value of $6.4 million.  The increase in cost basis of the loan is due to the capitalization of PIK interest.  David Williams and John Kelly, representatives of the Company, serve as directors of MVC Environmental.

 

MVC Private Equity Fund, L.P.

 

MVC Private Equity Fund, L.P., Purchase, New York, is a private equity fund focused on control equity investments in the lower middle market.  MVC GP II, an indirect wholly-owned subsidiary of the Company, serves as the GP to the PE Fund and is exempt from the requirement to

 

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register with the Securities and Exchange Commission as an investment adviser under Section 203 of the Investment Advisers Act of 1940.  MVC GP II is wholly-owned by MVCFS, a subsidiary of the Company.  The Company’s Board of Directors authorized the establishment of, and investment in, the PE Fund for a variety of reasons, including the Company’s ability to participate in Non-Diversified Investments made by the PE Fund. As previously disclosed, the Company is limited in its ability to make Non-Diversified Investments.  For services provided to the PE Fund, the GP and MVC Partners are together entitled to receive 25% of all management fees and other fees paid by the PE Fund and its portfolio companies and up to 30% of the carried interest generated by the PE Fund.  Further, at the direction of the Board of Directors, the GP retained TTG Advisers to serve as the portfolio manager of the PE Fund.  In exchange for providing those services, and pursuant to the Board of Directors’ authorization and direction, TTG Advisers is entitled to the remaining 75% of the management and other fees generated by the PE Fund and its portfolio companies and any carried interest generated by the PE Fund.  A significant portion of the portfolio fees that are paid by the PE Fund’s portfolio companies to the GP and TTG Advisers is subject to recoupment by the PE Fund in the form of an offset to future management fees paid by the PE Fund.  Given this separate arrangement with the GP and the PE Fund, under the terms of the Company’s Advisory Agreement with TTG Advisers, TTG Advisers is not entitled to receive from the Company a management fee or an incentive fee on assets of the Company that are invested in the PE Fund.  The PE Fund’s term will end on October 29, 2016; unless the GP, in its sole discretion, extends the term of the PE Fund for two additional periods of one year each.

 

On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in the PE Fund.  Of the $20.1 million total commitment, MVCFS, through its wholly-owned subsidiary MVC GP II, has committed $500,000 to the PE Fund as its general partner.  See MVC Partners for more information on the other portion of the Company’s commitment to the PE Fund. The PE Fund has closed on approximately $104 million of capital commitments.

 

During the fiscal year ended October 31, 2012 and thereafter, MVC Partners was consolidated with the operations of the Company as MVC Partners’ limited partnership interest in the PE Fund is a substantial portion of MVC Partners’ operations.

 

At October 31, 2015, the limited partnership interest in the PE Fund had a cost of approximately $13.8 million and a fair value of approximately $21.9 million.  The Company’s general partnership interest in the PE Fund had a cost basis of approximately $353,000 and a fair value of approximately $552,000.

 

During the fiscal year ended October 31, 2016, the Company received distributions totaling approximately $97,000 from the PE Fund, which was recorded as dividend income.

 

During the fiscal year ended October 31, 2016, the Valuation Committee increased the fair values of the limited partnership and general partnership interests by approximately $3.3 million.

 

At October 31, 2016, the limited partnership interest in the PE Fund had a cost of approximately $13.8 million and a fair value of approximately $25.2 million.  The Company’s general partnership interest in the PE Fund had a cost basis of approximately $353,000 and a fair value of approximately $631,000.  As of October 31, 2016, the PE Fund had invested in Plymouth Rock Energy, LLC, Gibdock Limited, Focus Pointe Holdings, Inc., Advanced Oilfield Services, LLC and AccuMed Corp.

 

NPWT Corporation

 

NPWT, Gurnee, Illinois, is a medical device manufacturer and distributor of negative pressure wound therapy products.

 

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At October 31, 2015, the Company’s investment in NPWT consisted of 281 shares of common stock with a cost basis of approximately $1.2 million and a fair value of approximately $2,000 and 5,000 shares of convertible preferred stock with a cost basis of $0 and a fair value of $36,000.

 

During the fiscal year ended October 31, 2016, the Valuation Committee increased the fair value of the preferred stock by $4,000.

 

On May 31, 2016, the Company realized a loss of approximately $1.2 million from the dissolution of NPWT.

 

At October 31, 2016, the Company no longer held an investment in NPWT.

 

Ohio Medical Corporation

 

Ohio Medical, Gurnee, Illinois, is a manufacturer and supplier of suction and oxygen therapy products, medical gas equipment, and input devices.

 

At October 31, 2015, the Company’s investment in Ohio Medical consisted of 5,620 shares of common stock with a cost basis of approximately $15.8 million and a fair value of $0, 33,904 shares of series A convertible preferred stock with a cost basis of $30.0 million and a fair value of $6.1 million and 10,737 shares of series C convertible preferred stock with a cost basis of $22.6 million and a fair value of $32.5 million.

 

On December 31, 2015, the Company completed the sale of Ohio Medical through an asset sale.  The Company expects gross proceeds of approximately $40.0 million, including fees, which results in a realized loss of approximately $30.5 million. At the time of closing, the Company received cash proceeds of approximately $29.0 million, which included $2.3 million in monitoring and closing fees, and anticipates receiving an additional $11.0 million, assuming the full receipt of all escrow proceeds scheduled for various periods, with the final release of payment scheduled for 18 months from the closing.  During the fiscal year ended October 31, 2016, the Company received approximately $1.3 million in escrow proceeds and the Valuation Committee decreased the fair value of the escrow by approximately $534,000.  The fair value of the escrow as of October 31, 2016 was approximately $9.2 million.

 

At October 31, 2016, the Company no longer held an investment in Ohio Medical.

 

Pride Engineering

 

Pride Engineering, LLC (“Pride Engineering”), Minneapolis, MN, designs and manufactures specialized components used globally in the production of two-piece metal cans.

 

On December 18, 2015, the Company invested approximately $5.1 million in Pride Engineering, LLC in the form of a second lien loan.  The loan bears annual interest of 12% and matures on June 18, 2021.

 

At October 31, 2016, the Company’s investment in Pride Engineering consisted of a second lien loan with an outstanding amount of approximately $5.1 million, a cost basis of approximately $5.0 million and a fair value of approximately $5.1 million.  The increase in cost basis of the loan is due to the amortization of loan origination fees.

 

Quantum Plastics, LLC

 

Quantum, Elgin, Illinois, is a global plastic injection manufacturer.

 

On March 11, 2016, the Company loaned $10.0 million to Quantum in the form of a senior subordinated loan with an interest rate of 12% and a maturity date of March 10, 2021.  The Company also received a warrant as part of the investment and allocated a portion of the cost basis of the loan to the warrant at the time the investment was made.

 

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At October 31, 2016, the Company’s investment in Quantum consisted of a senior subordinated loan with an outstanding amount of $10.0 million, a cost basis of approximately $9.6 million and a fair value of approximately $9.7 million.  The warrant had a cost basis and fair value of approximately $393,000. The increase in cost basis of the loan is due to amortization of the discount and loan origination fees.

 

RX Innovation, Inc.

 

RX Innovation, Inc. (“RX Innovation”), Fort Worth, TX, provides hardware and software products to pharmacies throughout the United States.

 

At October 31, 2015, the Company’s investment in RX Innovation consisted of a senior subordinated loan with an outstanding amount, cost basis and fair value of approximately $10.3 million.  The decrease in cost basis of the loan is due to the amortization of loan origination costs.

 

During the fiscal year ended October 31, 2016, the Valuation Committee increased the fair value of the loan by approximately $230,000.

 

On May 6, 2016, RX repaid $8.0 million of principal on its loan.  In addition, RX repaid all outstanding accrued and deferred interest for a total payment of approximately $9.9 million.  As part of the transaction, which led to the repayment, RX was reorganized into FDS.  The Company’s outstanding $2.3 million of principal was changed to a senior subordinated loan with an interest rate of 16% and a maturity date of November 30, 2016.

 

At October 31, 2016, the Company no longer held an investment in RX Innovation.

 

RuMe, Inc.

 

RuMe, Denver, Colorado, produces functional and affordable products for the environmentally and socially-conscious consumer reducing dependence on single-use products.

 

At October 31, 2015, the Company’s investment in RuMe consisted of 5,297,548 shares of common stock with a cost basis and fair value of approximately $924,000, 4,999,076 shares of series B-1 preferred stock with a cost basis of approximately $1.0 million and a fair value of approximately $1.7 million and 23,896,634 shares of series C preferred stock with a cost basis of approximately $3.4 million and a fair value of approximately $6.5 million.

 

On June 8, 2016, just prior to the initially scheduled filing date for the April 30, 2016 10-Q (the “Q2 Report”), MVC received notification that the former accounting manager at RuMe had sent an email accusing the company of certain accounting and financial reporting improprieties, as well as a number of personal grievances. Although RuMe represented only approximately 2.6% of MVC’s total portfolio as of April 30, 2016, the Company was compelled to delay filing its Form 10-Q, as RuMe’s summary financial information is required to be included as part of the filing of MVC’s financial results with the SEC. As a result, both the Company’s Audit Committee and RuMe’s Audit Committee retained independent counsel (who also retained a forensic accounting consultant) to investigate the matter. The investigation revealed that certain of the allegations were false and inaccurate, though it found that there were certain improper accounting practices and procedures at RuMe. The Audit Committees of the Company and RuMe were satisfied with the scope and content of the investigation. After a two-month investigation and re-valuation process, the fair value of RuMe for Q2 2016 remained unchanged as compared to the preliminary value ascribed to it prior to the investigation- though, certain accounting practices and procedures at RuMe were revised and/or adopted.

 

On October 7, 2016, the Company loaned RuMe $900,000 in the form of a subordinated note with an interest rate of 10% and a maturity date of October 7, 2017 and received a warrant at no cost with a portion of the cost basis of the loan allocated to the warrant at the time the investment

 

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was made.  The Company also guaranteed $1.0 million of a third party working capital line of credit, of which $300,000 was cash collateralized at October 31, 2016.

 

During the fiscal year ended October 31, 2016, the Valuation Committee decreased the fair value of the series C preferred stock by approximately $632,000, the common stock by approximately $384,000 and the guarantee by approximately $278,000 and increased the fair value of the series B-1 preferred stock by approximately $349,000 and warrant by approximately $718,000.

 

At October 31, 2016, the Company’s investment in RuMe consisted of 5,297,548 shares of common stock with a cost basis of approximately $924,000 and a fair value of $540,000, 4,999,076 shares of series B-1 preferred stock with a cost basis of approximately $1.0 million and a fair value of approximately $2.0 million, 23,896,634 shares of series C preferred stock with a cost basis of approximately $3.4 million and a fair value of approximately $5.8 million and a subordinated note with an outstanding balance of $900,000 and a cost basis and fair value of approximately $847,000. The warrant had a cost basis of approximately $336,000 and a fair value of approximately $1.1 million and the guarantee was fair valued at -$278,000 or negative $278,000.

 

John Kelly, a representative of the Company, serves as a director of RuMe.

 

Security Holdings, B.V.

 

Security Holdings is an Amsterdam-based holding company that owns FIMA, a Lithuanian security and engineering solutions company.

 

On April 26, 2011, the Company agreed to collateralize a 5.0 million Euro letter of credit from JPMorgan Chase Bank, N.A., which is classified as restricted cash on the Company’s consolidated balance sheet.  This letter of credit is being used as collateral for a project guarantee by AB DnB NORD bankas to Security Holdings.

 

At October 31, 2015, the Company’s common equity interest in Security Holdings had a cost basis of approximately $52.9 million and a fair value of approximately $45.3 million.

 

During the fiscal year ended October 31, 2016, the Euro letter of credit was released and is no longer collateralized by the Company and released from restricted cash.

 

During the fiscal year ended October 31, 2016, the Company recorded a distribution of approximately $1.9 million from Security Holdings of which a portion was recorded as a return of capital and a portion was recorded as dividend income.

 

During the fiscal year ended October 31, 2016, the Valuation Committee decreased the fair value of the common equity interest by approximately $10.4 million.

 

At October 31, 2016, the Company’s common equity interest in Security Holdings had a cost basis of approximately $51.5 million and a fair value of approximately $34.9 million.

 

Puneet Sanan, a representative of the Company, serves as a director of Security Holdings.

 

SGDA Europe B.V.

 

SGDA Europe is an Amsterdam-based holding company that pursues environmental and remediation opportunities in Romania.

 

At October 31, 2015, the Company’s equity investment had a cost basis of approximately $28.5 million and a fair value of approximately $6.0 million.

 

During the fiscal year ended October 31, 2016, the Valuation Committee decreased the fair value of the common equity interest by approximately $4.8 million.

 

At October 31, 2016, the Company’s equity investment had a cost basis of approximately $28.5 million and a fair value of approximately $1.3 million.

 

John Kelly, a representative of the Company, serves as a director of SGDA Europe.

 

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SIA Tekers Invest

 

Tekers, Riga, Latvia, is a port facility that has been used for the storage and servicing of vehicles.

 

At October 31, 2015, the Company’s investment in Tekers consisted of 68,800 shares of common stock with a cost of $2.3 million and a fair value of approximately $342,000.  There was no balance on the guarantee for Tekers at October 31, 2015.

 

On June 28, 2016, the Company loaned approximately $28,000 to Tekers in the form of a bridge loan with an interest rate of 6% and a maturity date of June 27, 2017.

 

During the fiscal year ended October 31, 2016, the Valuation Committee decreased the fair value of the common stock by approximately $342,000 and the bridge loan by approximately $28,000.

 

At October 31, 2016, the Company’s investment in Tekers consisted of 68,800 shares of common stock with a cost basis of $2.3 million and a fair value of $0 and a bridge loan with an outstanding amount and cost basis of approximately $28,000 and a fair value of $0.  The Company reserved in full against all accrued interest related to the bridge loan.  The guarantee related to Tekers is no longer a commitment of the Company.

 

Somotra, NV

 

Somotra, NV (“Somotra”), is a wholly owned subsidiary of MVC Automotive.

 

On December 15, 2015, the Company loaned approximately $1.7 million to Somotra. The bridge loan had an interest rate of 5% and matured on March 14, 2016.

 

During the fiscal year ended October 31, 2016, Somotra repaid the loan in full including all accrued interest.

 

At October 31, 2016, the Company no longer held a direct investment in Somotra.

 

The Results Companies, LLC

 

The Results Companies, LLC (“Results Companies”), Fort Lauderdale, FL, is a leading business process outsourcing provider of customer management solutions.

 

At October 31, 2015, the Company’s investment in Results Companies consisted of a senior subordinated loan with an outstanding amount, cost basis and fair value of approximately $9.0 million.

 

On November 3, 2015, Results Companies repaid its loan in full, including all accrued and deferred interest totaling approximately $10.0 million.

 

At October 31, 2016, the Company no longer held an investment in Results Companies.

 

Thunderdome Restaurants, LLC

 

Thunderdome Restaurants, LLC (“Thunderdome”), Cincinnati, Ohio, is a restaurant group with locations in Cincinnati, Columbus, Cleveland, Indianapolis, Nashville and Charlotte.

 

At October 31, 2015, the Company’s investment in Thunderdome consisted of a second lien loan with an outstanding amount, cost basis and fair value of approximately $2.0 million.  The loan has an interest rate of 12% and matures on June 10, 2020.

 

On February 1, 2016, the Company loaned an additional $1.1 million to Thunderdome.

 

During the fiscal year ended October 31, 2016, Thunderdome made principal payments totaling approximately $51,000 on its second lien loan.

 

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During the fiscal year ended October 31, 2016, the Valuation Committee increased the fair value of the loan by $30,000.

 

At October 31, 2016, the Company’s investment in Thunderdome consisted of a second lien loan with an outstanding amount, cost basis and fair value of approximately $3.0 million. The increase in cost basis of the loan is due to amortization of loan origination fees.

 

Turf Products, LLC

 

Turf, Enfield, Connecticut, is a wholesale distributor of golf course and commercial turf maintenance equipment, golf course irrigation systems and consumer outdoor power equipment.

 

At October 31, 2015, the Company’s investment in Turf consisted of a senior subordinated loan, bearing interest at 11% per annum with a maturity date of November 1, 2018, membership interest and warrants.  The senior subordinated loan had an outstanding balance, cost basis and a fair value of $3.9 million. The membership interest had a cost of approximately $3.5 million and a fair value of approximately $4.0 million.  The warrants had a cost and a fair value of $0.  The Company also had a guarantee to Berkshire Bank that was fair valued at -$41,000 or negative $41,000.

 

During the fiscal year ended October 31, 2016, the Valuation Committee increased the fair value of the guarantee by approximately $27,000 and decreased the fair value of the loan by approximately $107,000.

 

At October 31, 2016, the senior subordinated loan had an outstanding balance and cost basis of approximately $3.9 million and a fair value of approximately $3.8 million.  The membership interest had a cost of approximately $3.5 million and a fair value of approximately $4.0 million.  The warrants had a cost and fair value of $0 and the guarantee was fair valued at -$13,000 or negative $13,000.

 

Michael Tokarz, Chairman of the Company, and Puneet Sanan and Shivani Khurana, representatives of the Company, serve as directors of Turf.

 

United States Technologies, Inc.

 

United States Technologies, Inc. (“U.S. Technologies”), Fairlawn, New Jersey, offers diagnostic testing, redesign, manufacturing, reverse engineering and repair services for malfunctioning electronic components of machinery and equipment.

 

At October 31, 2015 the Company’s investment in U.S Technologies consisted of a senior term loan with an outstanding amount, cost basis and fair value of approximately $5.0 million.  The loan has an interest rate of 10.5% and matures on July 17, 2020.

 

During the fiscal year ended October 31, 2016, the Valuation Committee increased the fair value of the loan by $50,000.

 

At October 31, 2016, the senior term loan had an outstanding amount and cost basis of $5.0 million and a fair value of approximately $5.1 million.

 

U.S. Gas & Electric, Inc.

 

U.S. Gas, North Miami Beach, Florida, is a licensed Energy Service Company (“ESCO”) that markets and distributes natural gas to small commercial and residential retail customers in the state of New York.

 

At October 31, 2015, the Company’s investment in U.S. Gas consisted of a second lien loan, an unsecured loan, convertible Series I preferred stock and convertible Series J preferred stock. The second lien loan had an outstanding balance, cost basis and fair value of $7.5 million and the unsecured loan had an outstanding balance, cost and fair value of approximately $3.2 million.  The second lien loan bears annual interest at 13% and has a maturity date of July 1, 2019.  The

 

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unsecured loan bears annual interest at 14% and has a maturity date of July 1, 2018.  The 32,200 shares of convertible Series I preferred stock had a fair value of $83.7 million and a cost of $500,000 and the 8,216 shares of convertible Series J preferred stock had a cost and fair value of $0.

 

During the fiscal year ended October 31, 2016, the Valuation Committee increased the fair value of the series I preferred stock by $5.7 million.

 

At October 31, 2016, the loans had a combined outstanding balance, cost basis and a fair value of approximately $10.8 million.  The increases in the outstanding balance and cost basis of the loan are due to the capitalization of “payment in kind” interest.  The convertible Series I preferred stock had a fair value of approximately $89.4 million and a cost basis of $500,000 and the convertible Series J preferred stock had a cost basis and fair value of $0.

 

Puneet Sanan and Peter Seidenberg, representatives of the Company, serve as Chairman and director, respectively, of U.S. Gas and Warren Holtsberg, a director of the Company, also serves as a director of U.S. Gas.

 

U.S. Spray Drying Holding Company

 

SCSD, Huguenot, New York, provides custom spray drying products to the food, pharmaceutical, nutraceutical, flavor and fragrance industries.

 

At October 31, 2015, the Company’s investment in SCSD consisted of 784 shares of class B common stock with a cost basis of approximately $5.5 million and a fair value of approximately $5.9 million and a secured loan with an outstanding balance, cost basis and fair value of $1.5 million.  The secured loan had an interest rate of 12% and a maturity date of April 30, 2019.

 

During the fiscal year ended October 31, 2016, the Valuation Committee increased the fair value of the common stock by $750,000.

 

At October 31, 2016, the Company’s investment in SCSD consisted of 784 shares of class B common stock with a cost basis of approximately $5.5 million and a fair value of approximately $6.6 million.  The secured loan had an outstanding balance, cost basis and fair value of $1.5 million.

 

Puneet Sanan and Shivani Khurana, representatives of the Company, serve as directors of SCSD.

 

Vestal Manufacturing Enterprises, Inc.

 

Vestal, Sweetwater, Tennessee, is a market leader for steel fabricated products to brick and masonry segments of the construction industry. Vestal manufactures and sells both cast iron and fabricated steel specialty products used in the construction of single-family homes.

 

At October 31, 2015, the Company’s investment in Vestal consisted of a senior subordinated loan, 5,610 shares of common stock and a warrant.  The loan had an outstanding balance, cost, and fair value of $6.3 million.  The 5,610 shares of common stock had a cost basis and fair value of $250,000 and the warrant had no cost and was fair valued at $0.  The loan had an annual interest of 15% and a maturity date of November 28, 2021.

 

During the fiscal year ended October 31, 2016, the Valuation Committee increased the fair value of the loan by approximately $57,000, common stock by approximately $427,000 and warrant by approximately $438,000,

 

At October 31, 2016, the Company’s investment in Vestal consisted of a subordinated loan, 5,610 shares of common stock and a warrant.  The loan had an outstanding balance and cost basis of approximately $6.5 million and a fair value of approximately $6.6 million.  The 5,610 shares of common stock had a cost basis of $250,000 and a fair value of $677,000 and the warrant had no

 

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cost basis and was fair valued at $438,000. The increases in the outstanding balance and cost basis of the loan are due to the capitalization of “payment in kind” interest.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our liquidity and capital resources are derived from our credit facility and cash flows from operations, including investment sales and repayments and income earned.  Our primary use of funds includes investments in portfolio companies and payments of fees and other operating expenses we incur.  We have used, and expect to continue to use, our credit facility, proceeds generated from our portfolio investments and proceeds from public and private offerings of equity and debt securities to finance pursuit of our investment objective.

 

At October 31, 2016, the Company had investments in portfolio companies totaling $360.1 million. Also, at October 31, 2016, the Company had investments in unrestricted cash and cash equivalents totaling approximately $20.2 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.  Pending investments in portfolio companies pursuant to our principal investment strategy, the Company may make other short-term or temporary investments, including in exchange-traded funds, in U.S. Government issued securities, and private investment funds offering significantly more liquidity than traditional portfolio company investments.

 

During the fiscal year ended October 31, 2016, the Company made six new investments, committing capital that totaled approximately $35.7 million.  The investments were made in Somotra ($1.7 million), Pride ($5.1 million), Dukane ($7.0 million), Quantum ($10.0 million), FDS ($2.3 million) and HTI ($9.6 million).

 

During the fiscal year ended October 31, 2016, the Company made 9 follow-on investments in six existing portfolio companies that totaled approximately $8.5 million.  On November 20, 2015 and December 3, 2015, the Company invested an additional $538,000 and $1.1 million, respectively, in MVC Automotive common equity.  On January 4, 2016, the Company loaned an additional $1.5 million to Legal Solutions, which increased the senior subordinated loan to approximately $10.2 million. On February 1, 2016, the Company loaned an additional $1.1 million to Thunderdome, which increased the second lien loan to approximately $3.0 million.  On May 5, 2016, the Company loaned $30,000 to BAC in the form of a senior loan with an interest rate of 5% and a maturity date of May 5, 2021.  On June 28, 2016, the Company loaned approximately $1.7 million to MVC Automotive in the form of a bridge loan with an interest rate of 6% and a maturity date of December 31, 2016.  On June 28, 2016, the Company loaned approximately $28,000 to Tekers in the form of a bridge loan with an interest rate of 6% and a maturity date of June 27, 2017.  On October 12, 2016, the Company loaned an additional $1.6 million to MVC Automotive in the form of a bridge loan and extended the maturity date to June 30, 2017.  The loan had an outstanding balance at October 31, 2016 of approximately $3.3 million.  On October 7, 2016, the Company loaned RuMe $900,000 in the form of a subordinated note with an interest rate of 10% and a maturity date of October 7, 2017.  The Company also guaranteed $1.0 million of a third party’s working capital line of credit and received a warrant at no cost and allocated a portion of the cost basis of the loan to the warrant at the time the investment was made.

 

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Current balance sheet resources, which include the additional cash resources from the Credit Facility, are believed to be sufficient to finance current commitments.  Current commitments include:

 

Commitments to/for Portfolio Companies

 

At October 31, 2016 and October 31, 2015, the Company’s existing commitments to portfolio companies consisted of the following:

 

Portfolio Company

 

Amount Committed

 

Amount Funded at October 31, 2016

 

MVC Private Equity Fund LP

 

$20.1 million

 

$14.6 million

 

Total

 

$20.1 million

 

$14.6 million

 

 

Portfolio Company

 

Amount Committed

 

Amount Funded at October 31, 2015

 

MVC Private Equity Fund LP

 

$20.1 million

 

$14.6 million

 

Total

 

$20.1 million

 

$14.6 million

 

 

Guarantees

 

As of October 31, 2016 and October 31, 2015, the Company had the following commitments to guarantee various loans and mortgages:

 

Guarantee

 

Amount Committed

 

Amount Funded at October 31, 2016

 

MVC Automotive

 

$6.3 million

 

 

RuMe

 

$1.0 million

 

 

Turf

 

$1.0 million

 

 

Total

 

$8.3 million

 

 

 

Guarantee

 

Amount Committed

 

Amount Funded at October 31, 2015