MVC Capital, Inc.
MVC CAPITAL, INC. (Form: N-2, Received: 07/20/2017 16:57:04)

 

As filed with the Securities and Exchange Commission on July 20, 2017

Registration No. 333-184803

 

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form N-2

 

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

o PRE-EFFECTIVE AMENDMENT NO.

 

o POST-EFFECTIVE AMENDMENT NO.

 

MVC CAPITAL, INC.

(Exact Name of Registrant as Specified in Charter)

 


 

287 Bowman Avenue

2nd Floor

Purchase, NY 10577

(Address of Principal Executive Offices)

 

Registrant’s telephone number, including Area Code: (914) 701-0310

 

 

Michael T. Tokarz, Chairman

MVC Capital, Inc.

287 Bowman Avenue

2nd Floor

Purchase, NY 10577

(Name and Address of Agent for Service)

 


 

Copies of information to:

 

George M. Silfen, Esq.

Kramer Levin Naftalis & Frankel LLP

1177 Avenue of the Americas

New York, NY 10036

(212) 715-9100

 

Approximate date of proposed public offering: From time to time after the effective date of this Registration Statement.

 

If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a distribution reinvestment plan, check the following box. x

 

It is proposed that this filing will become effective (check appropriate box):

 

x when declared effective pursuant to section 8(c).

 

If appropriate, check the following box:

 

o                                     This [post-effective amendment] designates a new effective date for a previously filed [post-effective amendment] [registration statement].

 

o                                     This form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act and the Securities Act registration statement number of the earlier effective registration statement for the same offering is                      .

 

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

 

 

Title of Securities Being Registered

 

Amount
Being
Registered

 

Proposed Maximum
Offering Price per
Unit

 

Proposed Maximum
Aggregate Offering
Price

 

Amount of
Registration
Fee

 

Common Stock, $0.01 par value per share(2)

 

 

 

 

 

 

 

 

 

Preferred Stock(2)

 

 

 

 

 

 

 

 

 

Warrants(3)

 

 

 

 

 

 

 

 

 

Debt Securities(4)

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

$

250,000,000

(5)

$

28,975

(1)

 


(1)          Estimated pursuant to Rule 457 solely for the purpose of determining the registration fee. The proposed maximum offering price per security will be determined, from time to time, by the Registrant in connection with the sale by the Registrant of the securities registered under this registration statement.

(2)          Subject to Note 5 below, there is being registered hereunder an indeterminate principal amount of common stock or preferred stock as may be sold, from time to time.

(3)          Subject to Note 5 below, there is being registered hereunder an indeterminate principal amount of warrants as may be sold, from time to time, representing rights to purchase common stock, preferred stock or debt securities.

(4)          Subject to Note 5 below, there is being registered hereunder an indeterminate principal amount of debt securities as may be sold, from time to time. If any debt securities are issued at an original issue discount, then the offering price shall be in such greater principal amount as shall result in an aggregate price to investors not to exceed $250,000,000.

(5)          In no event will the aggregate offering price of all securities issued from time to time pursuant to this registration statement exceed $250,000,000.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.

 

 

 



 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer and sale is not permitted.

 

SUBJECT TO COMPLETION

 

PRELIMINARY PROSPECTUS

 

$250,000,000

 

 

Common Stock
Preferred Stock
Warrants
Debt Securities

 

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”). Our investment objective is to seek to maximize total return from capital appreciation and/or income. Our current focus is more on achieving total return through generating income/yield for our shareholders. We seek to achieve our investment objective primarily by providing debt and equity financing to small and middle-market companies that are, for the most part, privately owned. No assurances can be given that we will achieve our objective.

 

We are managed by The Tokarz Group Advisers LLC, a registered investment adviser.

 

We may offer, from time to time, in one or more offerings or series, together or separately, up to $250,000,000 of our common stock, preferred stock, debt securities or warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, which we refer to, collectively, as the “securities.” The securities may be offered at prices and on terms to be described in one or more supplements to this prospectus.

 

Our common stock is traded on the New York Stock Exchange under the symbol “MVC.”

 

This prospectus, and the accompanying prospectus supplement, if any, sets forth information about us that a prospective investor should know before investing. It includes the information required to be included in a prospectus and statement of additional information. Please read it before you invest and keep it for future reference. You may request a free copy of this prospectus, and the accompanying prospectus supplement, if any, annual and quarterly reports, and other information about us, and make shareholder inquiries by calling (914) 510-9400, by writing to us or from our website at www.mvccapital.com. Additional information about us has been filed with the Securities and Exchange Commission and is available on the Securities and Exchange Commission’s website at www.sec.gov.

 


 

We invest in securities that generally are not rated by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are commonly referred to as “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal.

 


 

Our shares have historically traded at a discount to net asset value, which may create an additional risk of loss of your investment.

 

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Investing in our securities involves a high degree of risk. Before buying any securities, you should read the discussion of the material risks of investing in our securities, including the risk of leverage, in “Risk Factors” beginning on page 16 of this prospectus.

 


 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 


 

This prospectus may not be used to consummate sales of securities unless accompanied by a prospectus supplement.

 


 

               , 2017

 

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TABLE OF CONTENTS

 

You should rely only on the information contained in this prospectus and the accompanying prospectus supplement, if any. We have not authorized anyone to provide you with additional information, or information different from that contained in this prospectus and the accompanying prospectus supplement, if any. If anyone provides you with different or additional information, you should not rely on it. We are offering to sell, and seeking offers to buy, securities only in jurisdictions where offers and sales are permitted. The information contained in or incorporated by reference in this prospectus and the accompanying prospectus supplement, if any, is accurate only as of the date of this prospectus or such prospectus supplement; however, the prospectus and such supplement will be updated to reflect any material changes. Our business, financial condition, results of operations and prospects may have changed since then.

 

PROSPECTUS SUMMARY

1

WHERE YOU CAN FIND ADDITIONAL INFORMATION

12

FEES AND EXPENSES

12

SELECTED CONSOLIDATED FINANCIAL DATA

14

RISK FACTORS

16

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

31

USE OF PROCEEDS

31

PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

32

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

33

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

74

SENIOR SECURITIES

74

ABOUT MVC CAPITAL

75

PORTFOLIO COMPANIES

90

DETERMINATION OF COMPANY’S NET ASSET VALUE

94

MANAGEMENT

98

COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

103

ADVISORY AGREEMENT

105

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

111

FEDERAL INCOME TAX MATTERS

112

CERTAIN GOVERNMENT REGULATIONS

117

DIVIDEND REINVESTMENT PLAN

119

DESCRIPTION OF SECURITIES

119

PLAN OF DISTRIBUTION

122

LEGAL COUNSEL

123

SAFEKEEPING, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR

123

BROKERAGE ALLOCATION AND OTHER PRACTICES

123

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

123

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

 

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ABOUT THIS PROSPECTUS

 

This prospectus is part of a registration statement that we have filed with the Securities and Exchange Commission, or SEC, using the “shelf” registration process. Under the shelf registration process, we may offer, from time to time, up to an aggregate of $250,000,000 of our common stock, preferred stock, debt securities or warrants representing rights to purchase shares of our common stock, preferred stock or debt securities on the terms to be determined at the time of the offering. The securities may be offered at prices and on terms described in one or more supplements to this prospectus. This prospectus provides you with a general description of the securities that we may offer. Each time we use this prospectus to offer securities, we will provide a prospectus supplement that will contain specific information about the terms of that offering. The prospectus supplement may also add, update or change information contained in this prospectus. Please carefully read this prospectus and any prospectus supplement together with any exhibits and the additional information described under the heading “Where You Can Find Additional Information” and the section under the heading “Risk Factors” before you make an investment decision.

 

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As filed with the Securities and Exchange Commission on July [  ], 2017

Registration No. 333-31848303

 

 

PROSPECTUS SUMMARY

 

The following summary highlights some of the information in this prospectus. It is not complete and may not contain all the information that you may want to consider. We encourage you to read this entire document and the documents to which we have referred.

 

In this prospectus and any accompanying prospectus supplement, unless otherwise indicated, “MVC Capital,” “we,” “us,” “our” or the “Company” refer to MVC Capital, Inc. and its subsidiary, MVC Financial Services, Inc. (“MVCFS”), and “TTG Advisers” or the “Adviser” refers to The Tokarz Group Advisers LLC.

 

ABOUT MVC CAPITAL

 

Overview

 

MVC Capital is an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company under the 1940 Act. MVC Capital provides debt and other investment capital/financing 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, convertible securities, common and preferred stock and warrants or rights to acquire equity interests. Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “MVC.”

 

Our Corporate History

 

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.

 

From 2000 through 2003, the Company experienced significant valuation declines from investments made by the original management team. During fiscal 2002, the Company’s largest shareholder at the time launched a proxy contest against the former management. On December 2, 2002, the Company announced it had begun doing business under the name MVC Capital. In late February 2003, a shareholder meeting was held which replaced the entire board of directors (the “Board of Directors” or “Board”) who then removed the former management of the Company.

 

In September 2003, the Company’s shareholders voted to implement the Board of Director’s long-term plan to adopt and amend the investment objective and strategy of the Company, seeking to maximize total return from more traditional mezzanine investments, senior and subordinated loans and other private equity investments and to elect a new Chairman and Portfolio Manager, Michael Tokarz.

 

While the Company has been in operation since 2000, fiscal 2004 marked a new beginning for the Company as this period reflects when Mr. Tokarz and his management team assumed portfolio management responsibilities for the Company.  As part of this change, Mr. Tokarz and his team determined to manage the existing investments made by the prior management which we refer to as our “Legacy Investments.” After only three quarters of operations under the new management team, the Company posted a profitable third quarter for fiscal year 2004, reversing a trend of 12 consecutive quarters of net investment losses and earned a profit for the entire fiscal year.

 

As described above, the current management team determined to manage the Legacy Investments, which were comprised of all the remaining portfolio investments made by the original management team. At the time that the current management team took over the portfolio responsibilities of the Company, the fair market value of the Legacy Investments was $24.1 million. Through active management of these assets, current management was able to realize $58.6 million of cash from the Legacy Investments, providing more than $34 million of value to the Company’s shareholders. At April 30, 2017, the fair value of portfolio investments of the Legacy Investments was

 

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$5.8 million.  We generally seek to capitalize on opportunities to realize cash returns on these investments when presented with a potential “liquidity event,” i.e., a sale, public offering, merger or other reorganization.

 

During fiscal 2006, the Company found itself being presented with a number of opportunities to manage and invest in various private funds and offshore enterprises. Under the internal management structure, due to regulatory and tax constraints on the Company, due to its status as a business development company and regulated investment company, the Company was restricted in its ability to participate in many of these opportunities. During fiscal 2006, the Board developed a structure that would allow the Company’s stockholders to benefit from a broader range of investment and management opportunities and, in this connection, determined to externalize the Company’s management. The Board proposed the externalization to shareholders for a vote, which was overwhelmingly approved in September 2006. As a result, beginning on November 1, 2006, TTG Advisers began serving as the Company’s external investment adviser. (All of the employees of the Company immediately prior to that date 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 with TTG Advisers (the “Advisory Agreement”) at their in-person meeting held on October 28, 2016.

 

Our Management

 

The Company is managed by TTG Advisers, the Company’s investment adviser, which is headed by Michael Tokarz, who has over 40 years of lending and investment experience. TTG Advisers has a dedicated originations and transaction development investment team with significant experience in private equity, leveraged finance, investment banking, distressed debt transactions and business operations. The members of the investment team have invested in and managed businesses during both recessionary and expansionary periods, through interest rate cycles and a variety of financial market conditions. TTG Advisers has 13 full-time investment professionals. TTG Advisers also uses the services of other investment professionals with whom it has developed long-term relationships, on an as-needed basis. In addition, TTG Advisers employs 8 (eight) other full-time professionals who manage the operations of the Company and provide investment support functions both directly and indirectly to our portfolio companies.

 

When the current management team began managing the Company in fiscal 2004, total assets after the tender offer were $108.3 million. Since then and through April 30, 2017, the Company generated over $203.0 million of bottom line performance (net change in net assets resulting from operations). The current management team has also earned approximately $132.5 million in realized and unrealized gains (net of realized and unrealized losses) thus far on the portfolio (through April 30, 2017) and has repurchased approximately $58.5 million of stock below NAV, including the shares purchased during the 2004 tender offer.

 

Beginning in fiscal 2004, after nearly three years of not paying a dividend under the previous management team, the Company began paying a $0.12 per share dividend, with an average annual distribution rate through fiscal year 2016 of $0.47 per share since that time. From fiscal 2004 through fiscal 2016, the Company paid over $138.7 million in dividends, of which $102.9 million was paid from ordinary income, $31.9 million was paid from capital gains and $3.9 million represented a return of capital on a tax basis. During fiscal 2016, the Company paid $0.71 per share in dividends. Recently, the Company paid a $0.135 per share dividend for each of the first and second fiscal quarters of 2017. The most recent distribution payment represents the 48th consecutive quarterly dividend paid by the Company since implementing a dividend policy in July 2005.

 

Our Portfolio

 

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. Our current focus is more on achieving total return through generating income/yield for our shareholders. We believe that we have extensive relationships with private equity firms, investment banks, business brokers, commercial banks, accounting firms, law firms, hedge funds, other investment firms, industry professionals and management teams of several companies, which can continue to provide us with investment opportunities.

 

We are currently working on an active pipeline of potential new investment opportunities. As of April 30, 2017, our portfolio is comprised of approximately 41.5% yielding investments and 58.5% equity investments. Our

 

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goal is that, over time, yielding investments ( i.e., investments that produce regular income or cash distributions) will comprise a significant majority of our portfolio. In furtherance of this goal, we have monetized various equity investments. In fact, we recently completed the sale of our largest equity investment, U.S. Gas & Electric, Inc. (“U.S. Gas”). MVC received gross consideration for its investment in U.S. Gas valued at $128.1 million, including $11.0 million for the repayment of its two outstanding loans from MVC. The fair value of the consideration received by MVC for its equity investment in U.S. Gas was $116.4 million (excluding any illiquidity discount for the securities received). As a result of the gross consideration received, MVC anticipates a realized gain of $115.9 million from this investment, excluding all fees and distributions received since its initial investment in 2007.  At April, 30, 2107, and assuming the sale of U.S. Gas had occurred and there were no other changes in the portfolio, the pro-forma portfolio would be comprised of approximately 63% yielding investments and 37% equity investments.

 

We expect that our loans and any equity investments will generally range between $3 million and $25 million each, although we may occasionally invest smaller or greater amounts of capital depending upon the particular investment. While the Company does not adhere to a specific asset allocation mix, no more than 25% of the value of our total assets may be invested in the securities of one issuer (other than U.S. government securities), or of two or more issuers that are controlled by us and are engaged in the same or similar or related trades or businesses, determined as of the close of each quarter. Our portfolio company investments are typically illiquid and are made through privately negotiated transactions. We generally target companies with annual revenues of between $10.0 million and $150.0 million and annual EBITDA (earnings before net interest expense, income tax expense, depreciation and amortization) of between $3.0 million and $25.0 million. We generally seek to invest in companies that are believed by the Adviser to have a history of strong, predictable, positive EBITDA. The Company has been focusing its strategy more on yield generating investments, which can include, but not be 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.

 

In fiscal year 2017, we have continued the transition to our yielding strategy. We have done this through monetizing a number of equity investments, including our recently completed sale of U.S. Gas, our then-largest portfolio company for approximately $128.1 million in total consideration, including the repayment of outstanding loans by MVC and accrued fees. During this current fiscal year, we have also received $12.2 million from the MVC Private Equity Fund L.P.’s (the “PE Fund”) sale of AccuMed Corp. (“AccuMed”) on December 23, 2016, realizing a gain of $9.8 million for MVC; converted our equity investment in Turf Products, LLC (“Turf “) to a yielding investment, receiving a $323K distribution which was treated as a return of capital, and realizing a capital gain of $609K; and sold our common stock and warrant of Vestal Manufacturing Enterprises, Inc. (“Vestal”) for $1.1 million, resulting in a realized capital gain of $850K. The Company also received a principal payment from Vestal of approximately $4.1 million on its senior subordinated loan, resulting in an outstanding balance of approximately $2.5 million at a revised interest rate of 12%. Additionally, the Company received total proceeds of approximately $18.1 million from the repayment of the outstanding Biogenic Reagents (“Biogenics”) loans. The total proceeds from Biogenics include repayment of all outstanding principal and a substantial portion of the unpaid accrued interest related to the loans that was previously reserved against in full beginning on April 1, 2016. These monetizations and repayments have improved our liquidity position which provides us with flexibility to pursue share repurchases, a tender offer, increased shareholder distributions and/or redeploy capital into yielding investments.  During the fiscal year, we have deployed capital opportunistically to support our existing portfolio companies. We made four follow-on investments into existing portfolio companies, as follows: On November 9, 2016, the Company invested approximately $59,000 in MVC Environmental and received an additional 30 shares of common stock.  On December 1, 2016, the Company loaned an additional $500,000 to U.S. Tech increasing the total amount outstanding to $5.5 million.  On December 13, 2016, the Company loaned an additional $475,000 to MVC Automotive increasing the amount outstanding on the bridge loan to approximately $3.8 million.  The maturity date was also extended to December 31, 2017.  On April 3, 2017, the Company loaned Security Holdings approximately $4.1 million in the form of a bridge loan with an interest rate of 5% and a maturity date of December 31, 2019.

 

MVC Private Equity Fund, L.P. In seeking to achieve our investment objective, we established subsidiaries to sponsor, and provide services to the PE Fund. The Company’s Board of Directors authorized the establishment of, and investment in, the PE Fund for a variety of reasons, including enhancing the Company’s ability to make investments that represent more than 5% of our total assets or more than 10% of the outstanding voting securities of

 

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the issuer (“Non-Diversified Investments”) through the PE Fund. Specifically, on October 29, 2010, the Company committed to invest approximately $20.1 million in the PE Fund. MVC GP II, LLC, an indirect wholly-owned subsidiary of the Company, serves as the general partner of the PE Fund (the “GP”). Substantially all of the Company’s commitment was made by our wholly-owned subsidiary, MVC Partners, LLC (“MVC Partners”) as a limited partner investor in the Fund. Additionally, pursuant to the direction of the Company and the GP, MVC Partners, as the anchor investor and sponsor of the PE Fund, was designated as the “Carried Interest Partner,” entitling it to up to 30% of the carried interest generated by the PE Fund. 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.  Further, at the direction of the Board of Directors, the GP retained TTG Advisers to serve as the portfolio manager of the PE Fund.  In exchange for providing those services, and pursuant to the Board of Directors’ authorization and direction, TTG Advisers is entitled to receive the balance of the fees and any carried interest generated by the PE Fund 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. The GP’s general partnership interest capital commitment is nominal — approximately $500,000 of the total $20.1 million capital commitment attributable to the Company. The Company’s capital commitment ( i.e ., its investment in the Fund) was made mostly through MVC Partners’ limited partnership interest for tax efficiency reasons, including that, for tax purposes, MVC Partners is a partnership ( i.e. , a look through vehicle), which can help limit the Company’s taxable income associated with its investment in the PE Fund. The PE Fund closed on approximately $104 million of capital commitments. As of April 30, 2017, $14.6 million of the Company’s commitment has been contributed. As of April 30, 2017, the PE Fund had invested in Plymouth Rock Energy, LLC, Gibdock Limited, Focus Pointe Holdings, Inc., and Advanced Oilfield Services, LLC . On December 23, 2016, the PE Fund sold AccuMed Corp. (“AccuMed”), upon which MVC received $12.2 million, realizing a gain of $9.8 million for MVC. for serving as the manager and GP of the PE Fund, respectively. The PE Fund’s investment period ended on October 28, 2014, though 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. We may continue to establish additional subsidiaries for similar purposes and/or sponsor additional private equity or other investment funds in seeking to achieve our investment objective.

 

Our portfolio company investments currently consist of senior and subordinated loans, convertible securities, common and preferred stock, other forms of equity interest and warrants or rights to acquire equity interests, in addition to our interest in the PE Fund. At April 30, 2017, the fair value of all investments in portfolio companies was approximately $358.9 million and our gross assets were approximately $424.5 million.

 

We expect that our investments in senior loans, subordinated debt, mezzanine debt and other yielding instruments will generally have stated terms of three to ten years. However, there is no limit on the maturity or duration of any security in our portfolio. Our debt investments are not, and typically will not be, rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade (rated lower than “Baa3” by Moody’s or lower than “BBB-” by Standard & Poor’s). In addition, we may invest without limit in debt of any rating and debt that has not been rated by any nationally recognized statistical rating organization.

 

Our Board of Directors has the authority to change any of the strategies described in this prospectus without seeking the approval of our shareholders. However, the 1940 Act prohibits us from altering or changing our investment objective, strategies or policies such that we cease to be a business development company and prohibits us from voluntarily withdrawing our election to be regulated as a business development company, without the approval of the holders of a “majority of the outstanding voting securities,” as defined in the 1940 Act, of the Company.

 

COMPETITIVE ADVANTAGES

 

We believe that the following capabilities provide us with a competitive advantage over various other capital providers to small- and middle-market companies:

 

Our Team’s Experience and Expertise. The investment team of TTG Advisers is headed by Michael Tokarz, who has over 40 years of lending and investment experience, 17 of which were with Kohlberg Kravis Roberts & Co., Warren Holtsberg who has extensive investment experience, including as Corporate Vice President of Equity Investments and as Founder and Head of Motorola Ventures where he spent 13 years, including eight

 

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years actively managing the corporate venture group, and David Williams, who leads our yielding investment strategy with more than 150 transactions led or co-led prior to his tenure at TTG Advisers.

 

TTG Advisers has a dedicated originations and investment team comprised of 13 investment professionals with the senior most professionals having over 30 years average experience in private equity, leveraged finance, investment banking, distressed debt transactions and business operations. The members of the investment team have experience managing investments and businesses during both recessionary and expansionary periods, through interest rate cycles and a variety of financial market conditions. TTG Advisers also retains the services of other investment and industry professionals with whom it has developed long-term relationships, on an as-needed basis. In addition, TTG Advisers employs 8 other professionals who manage our operations and provide investment support functions both directly and indirectly to our portfolio companies.

 

Proprietary Deal Flow. We have relationships with various private equity firms, investment banks, business brokers, commercial banks, accounting firms, law firms, hedge funds, other investment firms, industry professionals and management teams of several companies, all of which provide us with access to a variety of investment opportunities. Because of these relationships, we often have the first or exclusive opportunity to provide investment capital and thus may be able to avoid competitive situations.

 

Creative and Extensive Transaction Structuring. We are flexible in the types of securities in which we invest and their structures, and can invest across a company’s capital structure. We believe that the investment team’s creativity and flexibility in structuring investments, coupled with our ability to invest in companies across various industries, gives us the ability to identify investment opportunities and provides us with the opportunity to be a “one-stop” capital provider to small- and mid-sized companies.

 

Efficient/Collaborative Organizational Structure. In contrast to traditional private equity and mezzanine funds, which typically have a limited life, the perpetual nature of our corporate structure provides us with a permanent capital base. We believe this greater flexibility with respect to our investment horizon affords us greater investment opportunities and is also attractive to our investors and potential investee companies, as our structure enables us to be a long-term partner for our portfolio companies.

 

Counsel to Portfolio Companies. We provide valuable support to our portfolio companies in different ways including: offering advice to senior management on strategies for realizing their objectives, advising or participating on their boards of directors, offering ideas to help increase sales, offering advice on improving margins and operating more efficiently, helping to augment the management team, capital structure assistance and providing access to external resources ( e.g. , financial, legal, accounting, or technology).

 

Existing Investment Platform: As of April 30, 2017, we had approximately $424.5 million in gross assets under management. During the 2017 fiscal year thus far, the Company made no new investments and four follow-on investments, as a concentrated effort to improve liquidity was underway. In fiscal 2016, the Company made six new investments and nine follow-on investments. The total capital committed in fiscal year 2017 thus far was $5.1 million compared to $44.2 million in fiscal 2016. We believe that our current investment platform provides us with the ability to, among other things, identify investment opportunities and conduct marketing activities and extensive due diligence for potential investments. David Williams and his team of three other debt investment professionals were able to close in excess of 40 transactions per year from 2011 through 2014.  With our improved liquidity position, we anticipate increased investment activity.

 

Oversight: The public nature of the Company allows for oversight not normally found in a typical private investment firm. This oversight is provided by the SEC, the NYSE, the Company’s Board and, most importantly, the Company’s shareholders. The Company, through its periodic filings with the SEC, provides transparency into its investment portfolio and operations thus allowing shareholders access to information about the Company on a regular basis.

 

Diverse Industry Knowledge: We provide financing to companies in a variety of industries. We generally look at companies with secure market niches and a history of predictable or dependable cash flows in which members of the investment team have prior investment experience. We believe that the ability to invest in portfolio companies in various industries has the potential to give our portfolio greater diversity.

 

Disciplined and Opportunistic Investment Philosophy: Our investment philosophy and method of portfolio construction involves an assessment of the overall macroeconomic environment, financial markets and company-

 

5



 

specific research and analysis. While the composition of our portfolio may change based on our opportunistic investment philosophy, we continue to seek to provide long-term debt and other investment capital to small and middle-market companies that we believe will provide us strong returns on our investments while taking into consideration the overall risk profile of the specific investment.

 

Tax Status and Capital Loss Carry Forwards: The Company has elected to be taxed as a “regulated investment company” (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). It is the policy of the Company to continue to meet the requirements for RIC status. As a RIC, the Company is not subject to federal income tax to the extent that it distributes all of its investment company taxable income and net realized capital gains for its taxable year (see “Federal Income Tax Matters”). This allows us to attract different kinds of investors than other publicly held corporations. The Company is also exempt from excise tax if it distributes at least (1) 98% of its ordinary income during each calendar year, (2) 98.2% of its capital gain net income 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 gain net income for previous years that were not distributed during those years. On October 31, 2016, the Company had a net capital loss carry forward of approximately $50.2 million which has no expiration date. To the extent future capital gains are offset by capital loss carry forwards, such gains need not be distributed. Our tax status generally allows us to “pass-through” our income to our shareholders as dividends without the imposition of corporate level taxation, if certain requirements are met. See “Federal Income Tax Matters.”

 

OPERATING AND REGULATORY STRUCTURE

 

As a business development company, we are required to meet certain regulatory tests, the most significant of which relate to our investments and borrowings. We are required to have at least 70% of the value of our total assets invested in “eligible portfolio companies” or cash or cash equivalents. Generally, U.S.-based, privately held or thinly-traded public companies are deemed “eligible portfolio companies” under the 1940 Act. A business development company must also maintain a coverage ratio of assets to borrowings of at least 200%. See “Certain Government Regulations.”

 

As a business development company, we must make available significant managerial assistance to our portfolio companies. We provide support for our portfolio companies in several different ways including: offering advice to senior management on strategies for realizing their objectives, advising or participating on their boards of directors, offering ideas to help increase sales, reviewing monthly/quarterly financial statements, offering advice on improving margins and saving costs, helping to augment the management team, providing capital structure expertise and providing access to external resources ( e.g. , financial, legal, accounting, or technology). We may receive fees for these services.

 

PLAN OF DISTRIBUTION

 

We may offer, from time to time, up to $250,000,000 of our common stock, preferred stock, debt securities or warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, on terms to be determined at the time of the offering.

 

Securities may be offered at prices and on terms described in one or more supplements to this prospectus directly to one or more purchasers, through agents designated from time to time by us, or to or through underwriters or dealers. The supplement to this prospectus relating to the offering will identify any agents or underwriters involved in the sale of our securities, and will set forth any applicable purchase price, fee and commission or discount arrangement or the basis upon which such amount may be calculated.

 

We may not sell securities pursuant to this prospectus without delivering a prospectus supplement describing the method and terms of the offering of such securities. See “Plan of Distribution.”

 

6



 

USE OF PROCEEDS

 

We intend to use the net proceeds from the sale of our securities for general corporate purposes, including, for example, investing in portfolio companies in accordance with our investment objective and strategy, repaying debt, funding distributions, funding our subsidiaries’ activities and/or repurchasing our shares either pursuant to the share repurchase program adopted by the Board or pursuant to one or more tender offers conducted under Rule 13e-4 of the Securities Exchange Act of 1934, as amended (the “1934 Act”). Pending such uses, we will hold the net proceeds from the sale of our securities in cash or invest all or a portion of such net proceeds in short term, liquid investments. The supplement to this prospectus relating to an offering will more fully identify the use of the proceeds from such offering.

 

DETERMINATION OF COMPANY’S NET ASSET VALUE

 

Pursuant to the requirements of the 1940 Act and in accordance with Accounting Standards Codification, 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 estimates of fair values. Because our portfolio company investments generally do not have readily ascertainable market values, we record these investments at fair value in accordance with our Valuation Procedures adopted by the Board of Directors which are consistent with ASC 820. As permitted by the SEC, the Board of Directors has delegated the responsibility of making fair value determinations to the Valuation Committee, subject to the Board of Directors’ supervision and pursuant to our Valuation Procedures. Our Board of Directors may also hire independent consultants to review our Valuation Procedures or to conduct an independent valuation of one or more of our portfolio investments.

 

Pursuant to our Valuation Procedures, the Valuation Committee (which is comprised of three Independent Directors) determines fair values of portfolio company investments on a quarterly basis (or more frequently, if deemed appropriate under the circumstances). In doing so, the Valuation Committee considers 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 change in 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 value 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.

 

At April 30, 2017 and October 31, 2016, approximately 81.55% and 81.37%, respectively, 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.

 

There is no one methodology to determine fair value and, in fact, for any portfolio security, fair value may be expressed as a range of values, from which the Company derives a single estimate of fair value. To determine the fair value of a portfolio security, the Valuation Committee analyzes the portfolio company’s financial results and projections, publicly traded comparable companies when available, comparable private transactions when available, precedent transactions in the market when available, third-party real estate and asset appraisals if appropriate and available, discounted cash flow analysis, if appropriate, as well as other factors. The Company generally requires,

 

7



 

where practicable, portfolio companies to provide annual audited and more regular unaudited financial statements, and/or annual projections for the upcoming fiscal year.

 

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

 

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 our Board of Directors. For legally or contractually restricted securities of companies that are publicly traded, the value is based on the closing market quote on the valuation date minus a discount for the restriction. At April 30, 2017, we did not own restricted or unrestricted securities of publicly traded company in which we have a majority-owned interest, but did own one security in which we have a minority-owned interest.

 

ASC 820 provides a framework for measuring the fair value of assets and liabilities and provides guidance regarding a fair value hierarchy which prioritizes information used to measure value. In determining fair value, the Valuation Committee primarily uses the level 3 inputs referenced in ASC 820. See “Determination of Company’s Net Asset Value — Valuation Methodology” on page 95.

 

DISTRIBUTIONS

 

Currently, the Company has a policy of seeking to pay quarterly dividends to shareholders. Our quarterly dividends, if any, will be determined by our Board. Most recently, on April 28, 2017, we paid a quarterly dividend of $0.135 per share to shareholders of record on April 24, 2017, which was declared on April 13, 2017.

 

We intend to continue to qualify for treatment as a RIC under Subchapter M of the Code. In order to permit us to deduct from our taxable income dividends we distribute to our shareholders, in addition to meeting other requirements, we must distribute for each taxable year at least 90% of (i) our investment company taxable income (consisting generally of net investment income from interest and dividends and net realized short term capital gains) and (ii) our net tax-exempt interest income, if any. See “Federal Income Tax Matters” on page 112.

 

DIVIDEND REINVESTMENT PLAN

 

All of our shareholders who hold shares of common stock in their own name will automatically be enrolled in our dividend reinvestment plan (the “Plan”). All such shareholders will have any cash dividends and distributions automatically reinvested by Computershare Ltd. (the “Plan Agent”) in additional shares of our common stock. 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. You can contact Computershare Ltd. by calling toll free 1-718-575-2000 or by mail using the following principal business office: 250 Royall Street, Canton, Massachusetts 02021.

 

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 net asset value per share on that date, we will issue new shares at the net asset value. If the net asset value exceeds the market price of our common stock, the Plan Agent will purchase in the open market such number of shares of our common stock as is necessary to complete the distribution.

 

8



 

CORPORATE INFORMATION

 

Our principal executive office is located at 287 Bowman Avenue, 2nd Floor, Purchase, New York 10577 and our telephone number is (914) 510-9400.

 

Our Internet website address is http://www.mvccapital.com. Information contained on our website is not incorporated by reference into this prospectus and you should not consider information contained on our website to be part of this prospectus unless otherwise indicated.

 

RISK FACTORS

 

An investment in MVC Capital involves certain significant risks relating to our business and investment objective. We have identified below a summary of these risks. For a more complete description of the risk factors impacting an investment in our securities, we urge you to read the “Risk Factors” section. There can be no assurance that we will achieve our investment objective and an investment in the Company should not constitute a complete investment program for an investor.

 

Business Risks

 

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

 

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

 

·                   Substantially all of our portfolio investments 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.

 

·                   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.

 

·                   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.

 

·                   We may not realize gains from our equity investments.

 

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

 

·                   Our ability to use our capital loss carry forwards may be subject to limitations.

 

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

 

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

 

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

 

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

 

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

 

9



 

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

 

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

 

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

 

·                   Our common stock price can be volatile.

 

·                   We are subject to market discount risk.

 

·                   We have not established a mandated minimum dividend payment level and we cannot assure you of our ability to make distributions to our shareholders in the future.

 

·                   During certain periods, our distributions 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.

 

·                   We have borrowed and may continue to borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.

 

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

 

·                   We may be unable to meet our covenant obligations under our credit facility, which could adversely affect our business.

 

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

 

·                   Under the Advisory Agreement, TTG Advisers is entitled to compensation based on our 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.

 

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

 

·                   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.

 

·                   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.

 

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

 

Investment Risks

 

·                   Investing in private companies involves a high degree of risk.

 

·                   Our investments in portfolio companies are generally illiquid.

 

10



 

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

 

·                   Our borrowers may default on their payments, which may have an effect on our financial performance.

 

·                   Our investments in mezzanine and other debt securities may involve significant risks.

 

·                   Our portfolio may be highly leveraged.

 

·                   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.

 

·                   When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and management of the company may make decisions that could decrease the value of our portfolio holdings.

 

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

 

·                   Our portfolio companies may incur obligations that rank equally with, or senior to, our investments in such companies. As a result, the holders of such obligations may be entitled to payments of principal or interest prior to us, preventing us from obtaining the full value of our investment in the event of an insolvency, liquidation, dissolution, reorganization, acquisition, merger or bankruptcy of the relevant portfolio company.

 

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

 

·                   Hedging transactions may expose us to additional risks.

 

·                   Our investments in private equity funds, including the PE Fund, are subject to substantial risk, including a loss of investment.

 

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

 

Offering Risks

 

·                   Our common stock price can be volatile.

 

·                   Our common stock has historically traded at prices below our net asset value per share.

 

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

 

·                   We may allocate the net proceeds from an offering in ways with which you may not agree.

 

·                   Sales of substantial amounts of our securities may have an adverse effect on the market price of our securities.

 

·                   Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity securities, which could dilute our existing shareholders and be senior to our common stock for the purposes of distributions, may harm the value of our common stock.

 

11



 

WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

We have filed with the Securities and Exchange Commission (the “SEC”) a registration statement on Form N-2 together with all amendments and related exhibits under the Securities Act of 1933, as amended (the “Securities Act”). The registration statement contains additional information about us and the common stock being offered by this prospectus. You may inspect the registration statement and the exhibits without charge at the SEC at 100 F Street, NE, Washington, DC 20549. You may obtain copies from the SEC at prescribed rates.

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You can inspect our SEC filings, without charge, at the public reference facilities of the SEC at 100 F Street, NE, Washington, DC 20549. The SEC also maintains a web site at http://www.sec.gov that contains our SEC filings. You can also obtain copies of these materials from the public reference section of the SEC at 100 F Street, NE, Washington, DC 20549, at prescribed rates. Please call the SEC at 1-202-551-8090 for further information on the public reference room. Copies may also be obtained, after paying a duplicating fee, by electronic request to publicinfo@sec.gov or by written request to Public Reference Section, Washington, DC 20549-0102. You can also inspect reports and other information we file at the offices of the NYSE, and you are able to inspect those at 20 Broad Street, New York, NY 10005.

 

FEES AND EXPENSES

 

This table describes the various costs and expenses that an investor in our common stock will bear directly or indirectly.

 

12



 

Shareholder Transaction Expenses (as a percentage of the offering price)

 

 

 

Sales load

 

 

%(1)

Offering expenses borne by us

 

 

%(2)

Total shareholder transaction expenses

 

 

%(3)

Estimated Annual Expenses (as a percentage of consolidated net assets attributable to common stock) (4)

 

 

 

Management fees

 

2.00

%(5)

Incentive fees payable under Advisory Agreement (20% of net realized capital gains (on investments made after November 1, 2003) and 20% of pre-incentive fee net operating income)

 

0.74

%(6)

Other expenses

 

1.87

%(7)

Acquired fund fees and expenses

 

0.28

%

Interest payments on borrowed funds

 

3.60

%(8)

Total annual expenses

 

8.49

%(9)

 

Example

 

The following example, required by the SEC, demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in us. In calculating the following expense amounts, we assumed we would have $149.4 million of leverage and that our operating expenses would remain at the levels set forth in the table above.

 

 

 

1 Year

 

3 Years

 

5 Years

 

10 Years

 

You would pay the following cumulative expenses on a $1,000 investment, assuming a 5.0% annual return

 

$

83

 

$

242

 

$

389

 

$

715

 

 

Although the example assumes (as required by the SEC) a 5.0% annual return, our performance will vary and may result in a return of greater or less than 5.0%. In addition, while the example assumes reinvestment of all dividends and distributions at net asset value, participants in the dividend reinvestment plan may receive shares of common stock that we issue at net asset value or are purchased by the administrator of the dividend reinvestment plan, at the market price in effect at the time, which may be at or below net asset value. See “Dividend Reinvestment Plan.”

 

The example should not be considered a representation of future expenses, and the actual expenses may be greater or less than those shown.

 


(1)          In the event that the securities to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will disclose the applicable sales load.

 

(2)          The related prospectus supplement will disclose the estimated amount of offering expenses, the offering price and the offering expenses borne by us as a percentage of the offering price.

 

(3)          The related prospectus supplement will disclose the offering price and the total shareholder transaction expenses as a percentage of the offering price.

 

(4)          “Consolidated net assets attributable to common stock” equals the weighted average of the Company’s consolidated net assets ( i.e. , total consolidated assets less total consolidated liabilities) estimated for the current fiscal year, including the anticipated net proceeds from an offering in the current fiscal year.

 

(5)          The amount shown reflects the Adviser’s agreement to contractually waive (i.e., reduce) the management fee for the current fiscal year from 2.00% to 1.50% (the “Reduction”). Pursuant to the Advisory Agreement, the Company pays TTG Advisers a management fee and an incentive fee. As a result of the Reduction, the management fee is currently calculated at an annual rate of 1.50% of our total assets (excluding cash and the value of any investment by the Company not made in a portfolio company (“Non-Eligible Assets”) but including assets purchased with borrowed funds that are not Non-Eligible Assets). (Although the Company’s investments in the PE Fund may, as a technical matter, not be deemed a “Non-Eligible Asset,” such investments, due to a separate provision in the Advisory Agreement, are excluded from any management fee or incentive fee calculation and

 

13



 

thus are not subject to fees paid under the Advisory Agreement. See “Advisory Agreement” for more information.)

 

(6)          The incentive fee, which has two parts — an incentive fee on income and an incentive fee on capital gains, is payable to TTG Advisers based on our performance, may not be paid unless we achieve certain goals and remains unpaid until certain realization events occur. Because the example above assumes a 5.0% return, as required by the SEC, no incentive fee on income would be payable during the current fiscal year. The amount of the incentive fee in the table is based on the incentive fee on gains and income payable for the most recent fiscal year ended October 31, 2016. For the fiscal year ended October 31, 2016, $2.1 million of income incentive compensation was payable to the Adviser. Of the $2.1 million, only $1.1 million of incentive compensation was ultimately paid to the Adviser, because the Adviser voluntarily waived the remaining portion of this fee. Given the substantial realized capital gain resulting from the sale of U.S. Gas (described earlier), the provisional amount of incentive fee on capital gains accrued for 2016-2017 thus far and potentially payable in the 2017-2018 fiscal year is expected to be significantly higher than the amount shown in the Table. (Without taking into account any realized losses or unrealized depreciation in the portfolio, the incentive fee on the $114.8 million realized gain earned on the sale of USGE could exceed $5.3 million.) For a more complete description of the management and incentive fees, see “Advisory Agreement” on page 105 below.

 

(7)          “Other expenses” are based on estimated amounts for the fiscal year ended October 31, 2016. Included in other expenses is estimated current or deferred tax expense incurred by the Company and its consolidated subsidiaries.

 

(8)          The estimate is based on borrowings outstanding as of October 31, 2016 and our assumption is that our borrowings will remain similar to the amounts outstanding as of that date. We had outstanding borrowings of $149.4 million at October 31, 2016. The estimate also includes expected interest expense on borrowings during the current fiscal year.

 

(9)          TTG Advisers agreed to an expense cap for the fiscal year 2017 pursuant to which it absorbs or reimburses operating expenses of the Company (promptly following the completion of such year), to the extent necessary to limit the Company’s expense ratio as a percentage of total assets (i.e., 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 general partner (“GP”) of the PE Fund to TTG Advisers pursuant to the Portfolio Management Agreement between the GP and TTG Advisers and extraordinary expenses taken as a percentage of the Company’s total assets less cash) for such year to 3.25%. In addition, for the 2016 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 expense cap and voluntary waiver are described further in “Advisory Agreement” on page 105 below. Please also see footnote 6 above for information regarding management’s voluntary waiver of $1.0 million of incentive fees. If the expense cap and voluntary waiver(s) were taken into account in the fee table, the Company’s expense ratio for the current fiscal year would have been 8.08%.

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

You should read the condensed consolidated financial information below with the Consolidated Financial Statements and Notes thereto included in this prospectus. Financial information for the fiscal years ended October 31, 2016, 2015, 2014, 2013 and 2012 are derived from the consolidated financial statements. The financial information for the fiscal years ended October 31, 2016 and October 31, 2015 were audited by the Company’s current independent registered public accounting firm, and the information for the prior fiscal years was audited by the Company’s prior independent public accounting firm. The selected financial data and other data for the six months ended April 30, 2017, and 2016 are derived from our unaudited financial statements. Interim results as of and for the six months ended April 30, 2017 are not necessarily indicative of the results that may be expected for the year ending October 31, 2017. The data should be read in conjunction with our consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes included elsewhere herein. 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 33 for more information.

 

14



 

Selected Consolidated Financial Data

 

 

 

For the Six
Month
Period
Ended
April 30,
2017

 

For the Six
Month
Period
Ended
April 30,
2016

 

Year Ended October 31,

 

 

 

(Unaudited)

 

(Unaudited)

 

2016

 

2015

 

2014

 

2013

 

2012

 

 

 

 

 

 

 

(In thousands, except per share data)

 

Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and related portfolio income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

$

6,190

 

$

20,386

 

$

32,698

 

$

20,402

 

$

15,311

 

$

19,621

 

$

25,205

 

Fee income

 

550

 

2,812

 

3,255

 

2,048

 

1,562

 

2,853

 

1,940

 

Fee income - asset management

 

569

 

747

 

1,414

 

1,249

 

1,910

 

1,795

 

2,300

 

Other income

 

 

 

 

 

1,033

 

493

 

442

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating income

 

7,309

 

23,945

 

37,367

 

23,699

 

19,816

 

24,762

 

29,887

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management fee

 

3,510

 

3,937

 

7,590

 

7,845

 

8,681

 

7,833

 

8,588

 

Portfolio fees - asset management

 

315

 

373

 

741

 

767

 

986

 

418

 

968

 

Management fee - asset management

 

111

 

187

 

319

 

160

 

354

 

929

 

757

 

Administrative

 

2,646

 

2,132

 

4,253

 

5,305

 

3,672

 

3,712

 

3,573

 

Interest and other borrowing costs

 

5,144

 

5,126

 

10,212

 

10,230

 

9,442

 

6,724

 

3,367

 

Net Incentive compensation (Note 5)

 

1,745

 

(1,095

)

(2,030

)

(9,757

)

(4,750

)

3,828

 

(5,937

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

13,471

 

10,660

 

21,085

 

14,550

 

18,385

 

23,444

 

11,316

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expense waiver by Advisor

 

(75

)

(75

)

(150

)

(150

)

(150

)

(150

)

(150

)

Voluntary management fee waiver by Advisor

 

(877

)

(984

)

(1,897

)

 

 

 

(59

)

Voluntary incentive fee waiver by Advisor

 

 

(1,000

)

(1,000

)

 

 

 

(2,345

)

Total waiver by adviser

 

(952

)

(2,059

)

(3,047

)

(150

)

(150

)

(150

)

(2,554

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net operating expenses

 

12,519

 

8,601

 

18,038

 

14,400

 

18,235

 

23,294

 

8,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income before taxes

 

(5,210

)

15,344

 

19,329

 

9,299

 

1,581

 

1,468

 

21,125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax expense, net

 

1

 

1

 

2

 

2

 

2

 

4

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income

 

(5,211

)

15,343

 

19,327

 

9,297

 

1,579

 

1,464

 

21,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized and unrealized (loss) gain:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized (loss) gain on investments

 

10,902

 

(39,356

)

(45,157

)

3,700

 

16,520

 

43,665

 

(20,518

)

Net unrealized appreciation (depreciation) on investments

 

1,755

 

25,068

 

28,628

 

(50,557

)

(37,941

)

(25,860

)

(22,257

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized and unrealized (loss) gain on investments

 

12,657

 

(14,288

)

(16,529

)

(46,857

)

(21,421

)

17,805

 

(42,775

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations

 

$

7,446

 

$

1,055

 

$

2,798

 

$

(37,560

)

$

(19,842

)

$

19,269

 

$

(21,654

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.33

 

$

0.05

 

$

0.12

 

$

(1.66

)

$

(0.88

)

$

0.82

 

$

(0.90

)

Dividends per share

 

$

0.270

 

$

0.440

 

$

0.710

 

$

0.540

 

$

0.540

 

$

0.540

 

$

0.495

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Portfolio at value

 

$

358,919

 

$

371,920

 

$

360,120

 

$

400,876

 

$

447,630

 

$

417,921

 

$

404,171

 

Portfolio at cost

 

371,324

 

389,813

 

374,712

 

443,717

 

439,970

 

371,932

 

332,432

 

Total assets

 

424,464

 

441,713

 

434,491

 

516,842

 

577,713

 

564,450

 

456,431

 

Shareholders’ equity

 

280,914

 

285,141

 

279,558

 

294,076

 

343,903

 

376,086

 

386,016

 

Shareholders’ equity per share (net asset value)

 

$

12.45

 

$

12.56

 

$

12.39

 

$

12.95

 

$

15.15

 

$

16.63

 

$

16.14

 

Common shares outstanding at period end

 

22,556

 

22,703

 

22,556

 

22,703

 

22,703

 

22,618

 

23,917

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Investments funded in period

 

4

 

9

 

15

 

13

 

24

 

15

 

11

 

Investments funded ($) in period

 

$

5,124

 

$

27,966

 

$

43,968

 

$

62,591

 

$

103,671

 

$

95,701

 

$

11,300

 

Repayment/sales in period

 

20,035

 

47,421

 

75,105

 

65,247

 

62,508

 

103,069

 

19,950

 

Net investment activity in period

 

(14,911

)

(19,455

)

(31,137

)

(2,656

)

41,163

 

(7,368

)

(8,650

)

 

15



 

 

 

2017

 

2016

 

2015

 

2014

 

 

 

Qtr 2

 

Qtr 1

 

Qtr 4

 

Qtr 3

 

Qtr 2

 

Qtr 1

 

Qtr 4

 

Qtr 3

 

Qtr 2

 

Qtr 1

 

Qtr 4

 

Qtr 3

 

Qtr 2

 

Qtr 1

 

 

 

 

 

 

 

(In thousands, except per share data)

 

Quarterly Data (Unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating income

 

$

3,929

 

$

3,380

 

$

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

 

1,696

 

1,814

 

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

 

138

 

177

 

183

 

185

 

186

 

187

 

187

 

189

 

187

 

204

 

386

 

153

 

341

 

106

 

Management fee — asset management

 

49

 

62

 

72

 

60

 

86

 

101

 

85

 

77

 

(18

)

16

 

(126

)

17

 

231

 

232

 

Administrative

 

1,172

 

1,474

 

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

 

2,606

 

2,538

 

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

 

985

 

760

 

577

 

(1,512

)

1,135

 

(2,230

)

(771

)

(3,404

)

(3,462

)

(2,120

)

(2,339

)

568

 

(3,414

)

435

 

Total waiver by adviser

 

(461

)

(491

)

(467

)

(521

)

(1,527

)

(532

)

(37

)

(38

)

(37

)

(38

)

(37

)

(38

)

(37

)

(38

)

Tax expense

 

 

1

 

1

 

 

1

 

 

 

1

 

1

 

 

 

1

 

 

1

 

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

 

(2,256

)

(2,955

)

(70

)

4,054

 

10,345

 

4,998

 

465

 

5,037

 

2,595

 

1,200

 

1,023

 

(1,350

)

3,381

 

(1,475

)

Net (decrease) increase in net assets resulting from operations

 

3,069

 

4,377

 

$

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

 

$

0.14

 

$

0.19

 

$

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

 

$

12.45

 

$

12.45

 

$

12.39

 

$

12.27

 

$

12.56

 

$

12.43

 

$

12.95

 

$

13.18

 

$

13.93

 

$

14.58

 

$

15.15

 

$

15.75

 

$

15.89

 

$

16.57

 

 

RISK FACTORS

 

Investing in MVC Capital involves a number of significant risks relating to our business and investment objective. As a result, there can be no assurance that we will achieve our investment objective. In addition to the other information contained in this prospectus, you should consider carefully the following information before making an investment in our common stock. The Company’s risk factors include those directly related to the Company’s business, its investments, and potential offerings.

 

BUSINESS RISKS

 

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

 

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

 

We depend on the continued services of Mr. Tokarz and certain other key management personnel of TTG Advisers. If we were to lose access to any of these personnel, particularly Mr. Tokarz, it could negatively impact our operations and we could lose business opportunities. 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.

 

16



 

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 April 30, 2017, approximately 81.55% 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 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.

 

17



 

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 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

 

18



 

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.

 

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 “Federal Income 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 capital gain net income 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 gain net income 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 OID 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 OID or other income required to be included in taxable income prior to receipt of cash. Further, we may elect to include market discount in our taxable income in the current year, instead of upon disposition, as failing to make such election would limit our ability to deduct interest expenses for tax purposes.

 

Any OID 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,

 

19



 

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 Advisers 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 Advisers based on non-cash accruals that ultimately may not be realized, while TTG Advisers 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 or other activities, periodically we may need to issue equity securities or borrow from financial institutions. Unfavorable economic conditions, among 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.

 

Complying with the RIC requirements may cause us to forgo 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 may restrict 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.

 

We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock or warrants at a price below the then-current net asset value per share of our common stock if our Board of Directors determines that such sale is in the best interests of the Company and its stockholders, and, 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,

 

20



 

our common stock, then the percentage ownership of our stockholders at that time will decrease, and you might experience dilution.

 

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

 

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

 

Changes in the law or regulations that govern business development companies and RICs, including changes in tax laws or 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;

 

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

 

21



 

·                   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

 

·                   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. Our common stock has historically traded at prices below our net asset value per share and was trading as of April 30, 2017 at an approximately 27.39% discount to NAV. Therefore, shareholders selling their shares will likely have to sell at a significant discount to their purchase price.

 

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 prospectus. 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 distributions 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 distributions 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, 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

 

22



 

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.

 

At October 31, 2016, we had borrowed $35 million under our short-term credit facility, Credit Facility II (as defined below), which was due on February 28, 2017. On February 28, 2017, Credit Facility II was renewed and increased to a $100 million revolving credit facility and will expire on August 31, 2017. At October 31, 2016, the balance of Credit Facility II was $35.0 million. During the six month period ended April 30, 2017, the Company’s net repayments on Credit Facility II were $10.0 million, resulting in an outstanding balance of $25.0 million at April 30, 2017.  See “Subsequent Events” for more information. Further we have approximately $114.4 million in aggregate principal amount of Senior Notes (as defined below), due January 15, 2023. We may incur additional debt in the future. If our portfolio of investments fails to produce adequate returns, we may be unable to make interest or principal payments on our indebtedness when they are due. The following table is designed to illustrate the effect on return to a holder of our common stock of the leverage created by our use of borrowings, at the weighted annualized average interest rate of 6.6% for the twelve month period ended October 31, 2016 and assuming hypothetical annual returns on our portfolio of minus 20 to plus 20 percent. As shown in the table, leverage generally increases the return to stockholders when the portfolio return is positive and decreases the return to stockholders when the portfolio return is negative. Actual returns to stockholders may be greater or less than those appearing in the table.

 

Assumed Return on Our Portfolio

 

Assumed Return on Portfolio (net of expenses) (1)

 

-20

%

-10

%

-5

%

0

%

5

%

10

%

20

%

Corresponding Return to Common Stockholders (2)

 

-38.0

%

-20.5

%

-11.7

%

-2.9

%

5.9

%

14.7

%

32.3

%

 


(1)          The assumed portfolio return is required by regulation of the SEC and is not a prediction of, and does not represent, our projected or actual performance.

 

(2)          In order to compute the “Corresponding Return to Common Stockholders,” the “Assumed Return on Portfolio” is multiplied by the total value of our assets at the beginning of the period to obtain an assumed return to us. From this amount, all interest expense accrued during the period is subtracted to determine the return available to stockholders. The return available to stockholders is then divided by the total value of our net assets as of the beginning of the period to determine the “Corresponding Return to Common Stockholders.”

 

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.

 

We may be unable to meet our covenant obligations under our credit facility, which could adversely affect our business.

 

The Senior Notes (as defined below) and Credit Facility III (as defined below) 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.  If we cannot meet these

 

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covenants, events of default would arise, which could result in payment of the applicable indebtedness being accelerated and may limit our ability to execute on our investment strategy, as would be the case if we were unable to renew such facility. 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. In periods of declining interest rates, we may have difficulty investing our borrowed capital into investments that offer an appropriate return. 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 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 small portion of our existing investment portfolio was not selected by the investment team of TTG Advisers.

 

As of April 30, 2017, 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 and Series A of Public Pension Capital, LLC (the “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 us 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

 

24



 

officers or directors in his or her role as an officer or director of another entity or as an investment professional associated with that entity, and, if so, such opportunity might not be offered, or otherwise made available, to us.

 

Additionally, as an investment adviser, TTG Advisers has a fiduciary obligation to act in the best interests of its clients, including us. To that end, if TTG Advisers manages any additional investment vehicles or client accounts (which includes its current management of the PE Fund and 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 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”) that are not Non-Diversified Investments. For more information on the allocation policy, please see “About MVC Capital — Our Investment Strategy — Allocation of Investment Opportunities” below.

 

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 Enterprises, LLC, 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 below) to help mitigate potential conflicts of interest among us and Other Vehicles. For more information on the allocation policy, please see “About MVC Capital — Our Investment Strategy — Allocation of Investment Opportunities” below.

 

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.

 

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.

 

25



 

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 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

 

26



 

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.

 

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.

 

27



 

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. For example, as of April 30, 2017, the fair value of our largest investment (which has since been sold), U.S. Gas, comprised 35.7% 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 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.

 

When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and management of the company may make decisions that could decrease the value of our portfolio holdings.

 

We anticipate making debt and minority equity investments; therefore, we will be subject to the risk that a portfolio company may make business decisions with which we disagree, and the shareholders and management of such company may take risks or otherwise act in ways that do not serve our interests. Due to the lack of liquidity in the markets for our investments in privately held companies, we may not be able to dispose of our interests in our portfolio companies as readily as we would like. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings.

 

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

 

Some of our loans to our portfolio companies may be structured to include customary business and financial covenants placing affirmative and negative obligations on the operation of each 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,

 

28



 

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 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.

 

Our investments in private equity funds, including the PE Fund, are subject to substantial risk, including a loss of investment.

 

The PE Fund is not, and other private equity funds in which the Company may invest, will not be registered as an investment company under the 1940 Act. Therefore, with respect to its investments in such funds, the Company will not have the benefit of the protections afforded by the 1940 Act to investors in registered investment companies, such as the limitations applicable to the use of leverage and the requirements concerning custody of assets, composition of boards of directors and approvals of investment advisory arrangements. Additionally, the interests in the PE Fund are privately placed and are not registered under the Securities Act, and the PE Fund is not a reporting company under the 1934 Act. Accordingly, the amount of information available to investors about the PE Fund will be limited.

 

Investment in a private equity fund involves the same types of risks associated with an investment in any operating company. However, the investments made by private equity funds will entail a high degree of risk and in most cases be highly illiquid and difficult to value since no ready market typically exists for the securities of companies held in a private equity fund’s portfolio. (See “Determination of Company’s Net Asset Value — Valuation Methodology” on page 95, which discusses our valuation policy respecting our interest in the PE Fund.) Investing in private equity investments is intended for long-term investment by investors who can accept the risks associated with making highly speculative, primarily illiquid investments in privately negotiated transactions, and who can bear the risk of loss of their investment. Attractive investment opportunities in private equity may occur only periodically, if at all. Furthermore, private equity has generally been dependent on the availability of debt or equity financing to fund the acquisitions of their investments. Due to recent market conditions, however, the availability of such financing has been reduced dramatically, limiting the ability of private equity to obtain the required financing.

 

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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.

 

OFFERING RISKS

 

Offering risks are risks that are associated with an offering of our securities.

Our common stock price can be volatile.

 

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

 

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

 

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

 

·                   volatility resulting from trading in derivative securities related to our common stock including puts, calls, long-term equity participation securities, or LEAPs, or short trading positions;

 

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

 

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

 

·                   general economic conditions and trends;

 

·                   loss of a major funding source; or

 

·                   departures of key personnel of TTG Advisers.

 

Our common stock has historically traded at prices below our net asset value per share.

 

It is not possible to predict whether any common stock offered under this offering will trade at, above or below net asset value. Our common stock has historically traded at prices below our net asset value per share and was trading as of April 30, 2017 at an approximately 27.39% discount to NAV. Therefore, shareholders selling their shares will likely have to sell at a significant discount to their purchase price.

 

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

 

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

 

We may allocate the net proceeds from an offering in ways with which you may not agree.

 

We have significant flexibility in investing the net proceeds of an offering of our securities and may use the net proceeds from the offering in ways with which you may not agree.

 

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Sales of substantial amounts of our securities may have an adverse effect on the market price of our securities.

 

Sales of substantial amounts of our securities, or the availability of such securities for sale, could adversely affect the prevailing market prices for our securities. If this occurs and continues, it could impair our ability to raise additional capital through the sale of securities should we desire to do so.

 

Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity securities, which could dilute our existing shareholders and be senior to our common stock for the purposes of distributions, may harm the value of our common stock.

 

In the future, we may attempt to increase our capital resources by making additional offerings of equity or debt securities, including medium-term notes, senior or subordinated notes and classes of preferred stock or common stock. Upon the liquidation of our Company, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings by us may dilute the holdings of our existing shareholders or reduce the value of our common stock, or both. Any preferred stock we may issue would have a preference on distributions that could limit our ability to make distributions to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. However, it is the Company’s current expectation that, in the current fiscal year, it may issue debt securities that would be senior to the Company’s common stock. Our shareholders bear the risk of our future offerings reducing the market price of our common stock and diluting their stock holdings in us.

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

Information contained in this prospectus may contain “forward-looking statements” which can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate” or “continue” or the negative thereof or other variations or similar words or phrases. The matters described in “Risk Factors” and certain other factors noted throughout this prospectus and in any exhibits to the registration statement of which this prospectus is a part, constitute cautionary statements identifying important factors with respect to any such forward-looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from those in such forward-looking statements.

 

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be incorrect. Important assumptions include our ability to originate new investments, maintain certain margins and levels of profitability, access the capital markets for equity and debt capital, the ability to meet regulatory requirements and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this prospectus should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described in “Risk Factors” and elsewhere in this prospectus and any exhibits of the registration statement of which this prospectus is a part. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. The forward-looking statements contained in this prospectus and any accompanying prospectus supplement are excluded from the safe harbor protection provided by Section 27A of the Securities Act.

 

USE OF PROCEEDS

 

We intend to use the net proceeds from the sale of our securities for general corporate purposes, including, for example, investing in portfolio companies in accordance with our investment objective and strategy, repaying debt, funding distributions, funding our subsidiaries’ activities and/or repurchasing our shares either pursuant to the share repurchase program adopted by the Board or pursuant to one or more tender offers conducted under Rule 13e-4 of the 1934 Act. Pending such uses, we will hold the net proceeds from the sale of our securities in cash or invest all or a portion of such net proceeds in short term, liquid investments. The supplement to this prospectus relating to an offering will more fully identify the use of the proceeds from such offering.

 

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PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

 

Our common stock is traded on the NYSE under the symbol “MVC.” The following table lists the high and low closing sales prices for our common stock, and the closing sales price as a percentage of net asset value. On July 17, 2017, the last reported sale price on the NYSE for our common stock was $10.05 and on April 30, 2017, the Company’s net asset value per share was $12.45. To view the Company’s latest net asset value per share, visit the Company’s Internet website address at http://www.mvccapital.com.

 

 

 

NAV

 

Closing
Sale Price
High

 

Closing
Sale Price
Low

 

Premium/(Discount)
of High Sales Price
to NAV

 

Premium/(Discount)
of Low Sales Price to
NAV

 

Declared
Dividends

 

Fiscal Year ending October 31, 2013

First Quarter

 

15.62

 

12.40

 

11.65

 

-20.61%

 

-25.42%

 

0.135

 

Second Quarter

 

15.84

 

13.05

 

12.06

 

-17.61%

 

-23.86%

 

0.135

 

Third Quarter

 

16.57

 

13.09

 

12.46

 

-21.00%

 

-24.80%

 

0.135

 

Fourth Quarter

 

16.63

 

14.09

 

12.20

 

-15.27%

 

-26.64%

 

0.135

 

Fiscal Year ending October 31, 2014

First Quarter

 

16.57

 

14.52

 

13.24

 

-12.37%

 

-20.10%

 

0.135

 

Second Quarter

 

15.89

 

14.73

 

12.94

 

-7.30%

 

-18.57%

 

0.135

 

Third Quarter

 

15.75

 

13.11

 

12.14

 

-16.76%

 

-22.92%

 

0.135

 

Fourth Quarter

 

15.15

 

12.72

 

10.71

 

-16.04%

 

-29.31%

 

0.135

 

Fiscal Year ending October 31, 2015

First Quarter

 

14.58

 

11.24

 

9.48

 

-22.91%

 

-34.98%

 

0.135

 

Second Quarter

 

13.93

 

10.11

 

9.36

 

-27.42%

 

-32.81%

 

0.135

 

Third Quarter

 

13.18

 

10.36

 

9.61

 

-21.40%

 

-27.09%

 

0.135

 

Fourth Quarter

 

12.95

 

9.73

 

8.02

 

-24.86%

 

-38.07%

 

0.135

 

Fiscal Year ending October 31, 2016

First Quarter

 

12.43

 

8.49

 

6.82

 

-31.70%

 

-45.13%

 

0.305

 

Second Quarter

 

12.56

 

7.72

 

6.85

 

-38.54%

 

-45.46%

 

0.135

 

Third Quarter

 

12.27

 

8.37

 

7.14

 

-31.78%

 

-41.81%

 

0.135

 

Fourth Quarter

 

12.39

 

8.71

 

7.95

 

-29.70%

 

-35.84%

 

0.135

 

Fiscal Year ending October 31, 2017

First Quarter

 

12.45

 

8.80

 

8.24

 

-29.32%

 

-33.82%

 

0.135

 

Second Quarter

 

12.45

 

9.06

 

8.47

 

-27.23%

 

-31.97%

 

0.135

 

 

Our common stock price per share has generally traded at a significant discount to our net asset value per share. We cannot predict whether our shares of common stock will trade at a premium or discount to net asset value in the future.

 

Currently, the Company has a policy of seeking to pay quarterly dividends to shareholders. Our quarterly dividends, if any, will be determined by our Board. Recently, on April 28, 2017, we paid a quarterly dividend of $0.135 per share to shareholders of record on April 24, 2017, which was declared on April 13, 2017.

 

We maintain a dividend reinvestment plan for our registered shareholders. As a result, if our Board declares a dividend or distribution, certain shareholders can have any cash dividends and distributions automatically reinvested in additional shares of our common stock. See “Dividend Reinvestment Plan.”

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

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

 

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 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 current fiscal year ending October 31, 2017, the Company thus far has made no new investments and made four follow-on investments in four existing portfolio companies committing a total of approximately $5.1 million of capital to these investments. During the fiscal year ended October 31, 2016, the Company made six new investments and made nine follow-on investments in six existing portfolio companies totaling approximately $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 April 30, 2017, 1.4% of the current fair value of our assets consisted of Legacy Investments. 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.

 

We participate in the private equity business generally by providing privately negotiated long-term debt and/or other 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, or investor in, 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 the 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. 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 receive the balance of the fees and any carried interest generated by the PE Fund and its portfolio companies. Given this

 

33



 

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.

 

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, though 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” 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.

 

OPERATING INCOME

 

For the Six Month Period Ended April 30, 2017 and 2016. Total operating income was $7.3million and $23.9 million for the six month period ended April 30, 2017 and 2016, respectively, a decrease of approximately $16.6 million.

 

For the Six Month Period Ended April 30, 2017

 

Total operating income was $7.3 million for the six month period ended April 30, 2017. The decrease in operating income over the same period last year was primarily due to the decrease in dividend income and the decreases in interest earned on loans and fee income from the Company’s portfolio companies.  The Company earned approximately $6.2 million in interest income from investments in portfolio companies.  Of the $6.2 million recorded in interest income, approximately $1.0 million was “payment in kind” interest.  The “payment in kind” 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 $568,000 and fee income from the Company’s portfolio companies of approximately $550,000, totaling approximately $1.1 million in fee income.  Of the $568,000 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 Six Month Period Ended April 30, 2016

 

Total operating income was $23.9 million for the six month period ended April 30, 2016. The increase in operating income over the same period last year was primarily due to an increase in dividend income, interest earned on loans and fee income from the Company’s portfolio companies.  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, $10.0 million was dividend income from U.S. Gas and approximately $3.0 million was “payment in kind”/deferred interest.  The “payment in kind”/deferred interest are 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 9.0% to 16.0%.  The Company also received fee income from asset management of the PE Fund and its portfolio companies totaling approximately $747,000 and fee income from the Company’s portfolio companies of approximately $2.8 million, of which $2.3 million was one-time fee income related to the Ohio Medical sale, totaling approximately $3.5 million in fee income.  Of the $747,000 of fee

 

34



 

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 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 $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 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%. 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

 

35



 

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 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 Six Month Period Ended April 30, 2017 and 2016.  Operating expenses, net of Voluntary Waivers, were approximately $12.5 million and $8.6 million for the six month period ended April 30, 2017 and 2016, respectively, an increase of approximately $3.9 million.

 

For the Six Month Period Ended April 30, 2017

 

Operating expenses, net of the Voluntary Waivers (as described below), were approximately $12.5 million or 9.00% of the Company’s average net assets, when annualized, for the six month period ended April 30, 2017.  Significant components of operating expenses for the six month period ended April 30, 2017 were interest and other borrowing costs of approximately $5.1 million and management fee expense paid by the Company of approximately $2.6 million, which is net of the voluntary management fee waiver of approximately $878,000.

 

The approximately $3.9 million increase in the Company’s net operating expenses for the six month period ended April 30, 2017 compared to the same period in 2016, was primarily due to the approximately $3.8 million increase in the estimated provision for incentive compensation expense, which takes into account the $1.0 million incentive fee waiver in 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.  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.  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.  As such, 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.  During the six month period ended April 30, 2017, the Company paid the Adviser the previously accrued $1.1 million incentive fee payment related to the net operating income for the quarter ended April 30, 2016.  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 2017, 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 April 30, 2017, the Company did not have an investment in an exchange traded fund.  Under the Modified Methodology, for the six month period ended April 30, 2017, the Company’s expense ratio was 2.97%, (taking into account the same carve outs as those applicable to the expense cap).

 

Pursuant to the terms of the Advisory Agreement, during the six month period ended April 30, 2017, the provision for incentive compensation was increased by a net amount of approximately $700,000 to approximately $2.6 million, including both the pre-incentive fee net operating income and the capital gains incentive fee.  The net increase in the provision for incentive compensation during the six month period ended April 30, 2017, primarily

 

36



 

reflects the Valuation Committee’s determination to increase the fair values of twelve of the Company’s portfolio investments (Advantage, Centile, Dukane, JSC Tekers, Legal Solutions, Morey’s, MVC Automotive, Pride, Quantum, Security Holdings, U.S. Tech and Equus) by a total of approximately $10.6 million. The net increase in the provision also reflects the Valuation Committee’s determination to decrease the fair values of nine of the Company’s portfolio investments (BAC, Custom Alloy, Initials, MVC Environmental, RuMe, Turf, SCSD, Vestal and SGDA Europe) by a total of approximately $3.3 million.  Also, for the quarter ended April 30, 2017, 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 Six Month Period Ended April 30, 2016

 

Operating expenses, net of the Voluntary Waivers (as described below), were approximately $8.6 million or 6.02% of the Company’s average net assets, when annualized, for the six month period ended April 30, 2016.  Significant components of operating expenses for the six month period ended April 30, 2016 were interest and other borrowing costs of approximately $5.1 million and management fee expense paid by the Company of approximately $3.0 million, which is net of the voluntary management fee waiver.

 

The approximately $2.3 million increase in the Company’s net operating expenses for the six month period ended April 30, 2016 compared to the same period in 2015, was primarily due to the approximately $3.5 million increase in the estimated provision for incentive compensation expense, which includes a $1.0 million incentive fee waiver for the six month period ended April 30, 2016 which was partially offset by an approximately $984,000 voluntary management fee waiver, which decreased the net management fee expense by the same amount.  The decrease in audit and tax preparation fees for the quarter ended April 30, 2016 compared to the same period in 2015 is due to the delay in the filing of the Annual Report on Form 10-K 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 quarter ended April 30, 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 29, 2015, the Board approved the renewal of the Advisory Agreement for the 2016 fiscal year. Further, the Adviser agreed to waive a portion of the base management fee so that it is reduced to 1.50% for fiscal year 2016. In addition, the Adviser agreed to waive $1 million of any incentive fee on capital gains if and when payable to the Adviser under the Advisory Agreement. 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 agreed to reduce the expense cap for fiscal 2016 to 3.25% under the Modified Methodology, consistent with the asset level used to calculate the base management fee.  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.  Under the Modified Methodology, for the six month period ended April 30, 2016, the Company’s expense ratio was 2.22%, (taking into account the same carve outs as those applicable to the expense cap).

 

Pursuant to the terms of the Advisory Agreement, during the six month period ended April 30, 2016, the provision for incentive compensation was decreased by a net amount of approximately $3.2 million to approximately $1.8 million.  The net decrease in the provision for incentive compensation during the six month period ended April 30, 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, JSC Tekers, Biogenics, Morey’s, Turf, U.S. Gas, Advantage, MVC Environmental, BAC, Agri-

 

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Carriers, Ohio Medical and Legal Solutions) by a total of approximately $18.8 million.  The net decrease in the provision also reflects the Valuation Committee’s determination to increase the fair values of seven of the Company’s portfolio investments (NPWT, Equus, Centile, RuMe, SCSD, Initials and RX) by a total of approximately $2.6 million.  For the six month period ended April 30, 2016, no incentive compensation was paid.  Also, 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.  Please see Note 5 of our consolidated financial statements “Incentive Compensation” for more information.

 

For the Fiscal Years Ended October 31, 2016, 2015 and 2014. Net Operating expenses were $18 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 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

 

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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 Corporation (“Custom Alloy”), MVC Automotive, Security Holdings B.V. (“Security Holdings”), SGDA Europe B.V. (“SGDA Europe”), Tekers, Turf, JSC Tekers Holdings (“JSC Tekers”), RuMe, BAC, Biogenics, Morey’s Seafood International, LLC (“Morey’s”), Ohio Medical Corporation (“Ohio Medical”), Equus Total Return Inc. (“Equus”), Legal Solutions, MVC Environmental, Inc. (“MVC Environmental”) and Initials, Inc. (“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 Corporation (“NPWT”), Centile Holdings B.V. (“Centile”), U.S. Spray Drying Holding Company (“SCSD”), Agri-Carriers Group, Inc. (“Agri-Carriers”), RX Innovations, Inc. (“RX”), U.S. Gas, Advantage Insurance Holdings (“Advantage”), Thunderdome, United States Technologies (“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 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

 

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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 Services, Inc. (“Pre-Paid Legal”), Centile, Biovation Holdings, Inc. (“Biovation”), Inland Environmental & Remediation LP (“Inland”), MVC Automotive, Ohio Medical, SGDA Europe, Security Holdings, JSC Tekers, Morey’s, Velocitius B.V. (“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 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 Displays, Inc. (“G3K”), Ohio Medical, NPWT, U.S. Gas, Velocitius, Octagon Credit Investors, LLC (“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, Pre-Paid 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

 

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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.

 

REALIZED GAINS AND LOSSES ON PORTFOLIO SECURITIES

 

For the Six Month Period Ended April 30, 2017 and 2016.  Net realized gains for the six month period ended April 30, 2017 were approximately $10.9 million and net realized losses for the six month period ended April 30, 2016 were $39.4 million, a net increase of approximately $50.3 million.

 

For the Six Month Period Ended April 30, 2017

 

Net realized gains for the six month period ended April 30, 2017 were approximately $10.9 million.  The Company’s net realized gains for the six month period ended April 30, 2017 was primarily due to realized gain of approximately $10.2 million on the sale of AccuMed Corp., a portfolio company of the PE Fund.

 

On December 23, 2016, the Company received proceeds of approximately $12.2 million from the PE Fund related to the sale of AccuMed Corp., a portfolio company of the PE Fund.  The Company’s pro-rata share of the PE Fund’s investment in AccuMed Corp. totaled approximately $2.4 million, resulting in a realized gain of approximately $9.8 million.  The Company later received an escrow distribution of approximately $416,000 and carried interest payments from the PE Fund totaling approximately $390,000 related to the sale, which were recorded as additional realized gains.

 

On March 7, 2017, the Company exchanged its shares of MVC Turf, LLC (“MVC Turf”) the holding company which owned the Company’s LLC interest in Turf Products, for approximately $3.8 million of additional subordinated debt in Turf Products.  The Company also received a cash distribution from MVC Turf prior to the share exchange of approximately $323,000, which was treated as a return of capital.  The Company realized a gain of approximately $609,000 as a result of the share exchange.

 

On March 22, 2017, the Company sold its common stock and warrant in Vestal receiving proceeds of approximately $687,000 and approximately $413,000, respectively.  This resulted in realized gains of approximately $437,000 and approximately $413,000 related to the common stock and warrant, respectively.

 

On April 7, 2017, the Company realized a loss of approximately $2.3 million on the common stock and loan of Tekers.

 

During the six month period ended April 30, 2017, the Company recorded net realized gains of approximately $183,000 from the sale of certain short-term investments and approximately $1.0 million from its escrow receivables.

 

For the Six Month Period Ended April 30, 2016

 

Net realized losses for the six month period ended April 30, 2016 were approximately $39.4 million.  The Company’s net realized loss for the six month period ended April 30, 2016 was primarily due to the realized loss of approximately $30.5 million on the sale of Ohio Medical common and preferred stock and the realized loss of approximately $6.2 million on the Inland senior secured loan and warrant.

 

On December 22, 2015, the Company realized a loss of approximately $1.5 million with 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 obtained 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.

 

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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.

 

During the six month period ended April 30, 2016, the Company also recorded net realized losses of approximately $90,000 with the sale of its short-term investments and $1.1 million on the escrow receivables.

 

For the Fiscal Years Ended October 31, 2016, 2015 and 2014 . Net realized losses for the fiscal year ended October 31, 2016 were $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 Fiscal 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 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 Fiscal 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 Harmony Health & Beauty, Inc. (“HH&B”).

 

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.

 

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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 Fiscal 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.

 

UNREALIZED APPRECIATION AND DEPRECIATION ON PORTFOLIO SECURITIES

 

For the Six Month Period Ended April 30, 2017 and 2016. The Company had a net change in unrealized appreciation on portfolio investments of approximately $2.0 million for the six month period ended April 30, 2017 and approximately $25.1 million for the six month period ended April 30, 2016, respectively, a net decrease of approximately $23.1 million.

 

For the Six Month Period Ended April 30, 2017

 

The Company had a net change in unrealized appreciation on portfolio investments of approximately $1.8 million for the six month period ended April 30, 2017.  The components of the net change in unrealized appreciation for the six month period ended April 30, 2017 were the reversal of the unrealized appreciation on the general partnership interest and limited partnership interest in the PE Fund by a total of approximately $6.5 million, the Turf equity interest of approximately $456,000 and the Vestal common stock and warrant totaling approximately $750,000 which was partially offset by the reversal of the unrealized depreciation on the Tekers common stock and loan of approximately $2.3 million.  The net change is also a result of the Valuation Committee determination to

 

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increase the fair value of the Company’s investments in: Advantage preferred stock by approximately $355,000, Centile equity interest by $476,000, Dukane loan by approximately $72,000, JSC Tekers preferred stock by approximately $28,000, Legal Solutions loan by approximately $242,000, Morey’s loan by approximately $1.7 million, MVC Automotive equity interest by approximately $1.4 million, Pride loan by approximately $51,000, Quantum loan by approximately $323,000 and warrant by approximately $1.0 million, Security Holdings equity interest by approximately $534,000, Equus common stock by approximately $4.4 million, U.S. Tech loan by $5,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $270,000, Turf guarantee by approximately $3,000 and the RuMe guarantee by approximately $141,000.  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: BAC common stock by approximately $55,000, Custom Alloy second lien and unsecured loans by a total of approximately $205,000, Folio fn preferred stock by $136,000, Initials loan by approximately $142,000, MVC Environmental common stock by approximately $927,000, RuMe series C preferred stock by approximately $350,000, series B-1 preferred stock by approximately $14,000, common stock by approximately $78,000 and warrant by approximately $138,000, Turf loan by approximately $239,000, SCSD common stock by $775,000, Vestal loan by approximately $57,000, common stock by approximately $54,000 and warrant by approximately $62,000 and the SGDA Europe common equity interest by approximately $358,000.

 

For the Six Month Period Ended April 30, 2016

 

The Company had a net change in unrealized appreciation on portfolio investments of approximately $25.1 million for the six month period ended April 30, 2016.  The change in unrealized appreciation for the six month period ended April 30, 2016 primarily resulted from the reversal of the unrealized depreciation on the Ohio Medical common and preferred stock, Inland senior secured loan and warrant and the Biovation bridge loan and warrant by a total of $38.5 million.  The net change is also a result of 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 $3.9 million, Folio fn preferred stock by approximately $220,000, MVC Automotive equity interest by approximately $533,000, RuMe common stock by approximately $144,000, SGDA Europe equity interest by approximately $3.2 million, Tekers common stock by $301,000, Turf loan by approximately $119,000, U.S. Gas preferred stock series I by $3.9 million,  Security Holdings equity interest by $3.7 million, JSC Tekers preferred stock by approximately $165,000 and common stock by $4,000, Biogenic warrant and senior convertible note by a total of approximately $171,000, Morey’s loan by approximately $1.1 million, Agri-Carriers loan by approximately $25,000, Legal Solutions loan by approximately $401,000, BAC common stock by approximately $130,000, Advantage preferred stock by approximately $67,000, MVC Environmental common stock by $38,000 and the Ohio Medical escrow by approximately $1.1 million that was recorded as a realized loss.  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 guarantee by approximately $12,000, RuMe series C preferred stock by $427,000 and series B-1 preferred stock by $507,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $1.7 million, Equus common stock by approximately $267,000, NPWT preferred stock by $4,000, Centile equity interest by $541,000, RX loan by approximately $230,000, Initials loan by approximately $2,000 and SCSD common stock by $750,000.

 

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

 

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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, Foliofn, Inc. (“Foliofn”) 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 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,

 

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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.

 

PORTFOLIO INVESTMENTS

 

For the Six Month Period Ended April 30, 2017 and the Year Ended October 31, 2016.   The cost of the portfolio investments held by the Company at April 30, 2017 and at October 31, 2016 was $371.3 million and $374.7 million, respectively, a decrease of $3.4 million.  The aggregate fair value of portfolio investments at April 30, 2017 and at October 31, 2016 was $358.9 million and $360.1 million, respectively, a decrease of approximately $1.2 million.  The cost and fair value of cash, restricted cash and cash equivalents held by the Company at April 30, 2017 and October 31, 2016 was $30.6 million and $21.0 million, respectively, representing an increase of approximately $9.6 million.  The cost and fair value of U.S. Treasury obligations held by the Company at April 30, 2017 was $25.0 million and at October 31, 2016 was $35.0 million, respectively.

 

For the Six Month Period Ended April 30, 2017

 

During the six month period ended April 30, 2017, the Company made 4 follow-on investments in existing portfolio companies that totaled approximately $5.1 million.  On November 9, 2016, the Company invested approximately $59,000 in MVC Environmental and received an additional 30 shares of common stock.  On December 1, 2016, the Company loaned an additional $500,000 to U.S. Tech increasing the total amount outstanding to $5.5 million.  On December 13, 2016, the Company loaned an additional $475,000 to MVC Automotive increasing the amount outstanding on the bridge loan to approximately $3.8 million.  The maturity date was also extended to December 31, 2017.  On April 3, 2017, the Company loaned Security Holdings approximately $4.1 million in the form of a bridge loan with an interest rate of 5% and a maturity date of December 31, 2019.

 

On December 23, 2016, the Company received proceeds of approximately $12.2 million from the PE Fund related to the sale of AccuMed Corp., a portfolio company of the PE Fund.  The Company’s pro-rata share of the PE Fund’s investment in AccuMed Corp. totaled approximately $2.4 million, resulting in a realized gain of approximately $9.8 million.  The Company later received an escrow distribution of approximately $416,000 and carried interest payments from the PE Fund totaling approximately $390,000 related to the sale, which were recorded as additional realized gains.

 

On January 4, 2017, BAC repaid their senior loan in full, including all accrued interest totaling approximately $31,000.

 

On March 7, 2017, the Company exchanged its shares of MVC Turf, the holding company that owned the Company’s LLC interest in Turf Products, for approximately $3.8 million of additional subordinated debt in Turf Products.  This additional subordinated debt increases the Company’s existing subordinated debt investment to approximately $7.7 million.   The subordinated debt has an interest rate of 10% and matures on August 7, 2020.  The Company’s warrant and guarantee were also retired as a part of this recapitalization.  The Company also received a cash distribution from MVC Turf prior to the share exchange of approximately $323,000, which was treated as a return of capital.  The Company realized a gain of approximately $609,000 as a result of the share exchange.

 

On March 22, 2017, the Company sold its common stock and warrant in Vestal receiving proceeds of approximately $687,000 and approximately $413,000, respectively.  This resulted in realized gains of approximately

 

46



 

$437,000 and approximately $413,000 related to the common stock and warrant, respectively.  The Company also received a principal payment of approximately $4.1 million on its senior subordinated loan as part of Vestal’s refinancing resulting in an outstanding balance of approximately $2.5 million.  The new loan has an interest rate of 12% and a maturity date of August 21, 2022.

 

On April 7, 2017, the Company realized a loss of approximately $2.3 million on the sale of the common stock and the forgiveness of the loan to Tekers.

 

On April 12, 2017, the Company received a principal payment from Pride of approximately $79,000.

 

On April 24, 2017, Equus entered into the Equus Merger Agreement to acquire U.S. Gas.  Subject to closing, the transaction would be effected in two stages.  The first stage consists of Equus’ acquisition of more than 90% of U.S. Gas’ common and convertible preferred stock from the Company and certain other U.S. Gas stockholders in exchange for shares of Equus.  In the second stage, a wholly-owned subsidiary of Equus (formed to hold all such common and convertible preferred stock of U.S. Gas) would be merged with and into U.S. Gas, with U.S. Gas as the surviving corporation and wholly-owned by Equus, which will change its name to USG&E, Inc.  Closing of the transaction is subject to a number of conditions.  See Note 17 Subsequent Events for additional information.

 

On April 28, 2017, the Company received a principal payment from Morey’s of $262,000.

 

During the six month period ended April 30, 2017, the Company recorded a distribution of approximately $330,000 from Security Holdings, which was recorded as a return of capital.

 

During the quarter ended January 31, 2017, the Valuation Committee increased the fair value of the Company’s investments in: Advantage preferred stock by approximately $136,000, Centile equity interest by $340,000, Dukane loan by approximately $71,000, Legal Solutions loan by approximately $112,000, Morey’s loan by approximately $462,000, Pride loan by approximately $51,000, Quantum loan by approximately $323,000 and warrant by approximately $1.0 million, Security Holdings equity interest by approximately $1.5 million, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $99,000, Turf loan by approximately $7,000 and guarantee by approximately $3,000, RuMe guarantee by approximately $50,000 and the U.S. Tech loan by $5,000.  The Valuation Committee also increased the Ohio Medical escrow by approximately $73,000 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, FDS, RuMe, Dukane and U.S. Gas were due to the capitalization of PIK interest totaling $511,649.  The Valuation Committee also decreased the fair value of the Company’s investments in: BAC common stock by approximately $55,000, Custom Alloy second lien and unsecured loans by a total of approximately $205,000, Folio fn preferred stock by $264,000, Initials loan by approximately $95,000, JSC Tekers preferred stock by approximately $43,000, MVC Automotive equity interest by $307,000, MVC Environmental common stock by approximately $517,000, RuMe series C preferred stock by approximately $186,000, series B-1 preferred stock by approximately $9,000, common stock by approximately $42,000 and warrant by approximately $66,000, SCSD common stock by $560,000, SGDA Europe common equity interest by approximately $252,000 and Vestal loan by approximately $57,000, common stock by approximately $54,000 and warrant by approximately $62,000.

 

During the quarter ended April 30, 2017, the Valuation Committee increased the fair value of the Company’s investments in: Advantage preferred stock by approximately $219,000, Centile equity interest by $136,000, Dukane loan by approximately $1,000, Folio fn preferred stock by $128,000, JSC Tekers preferred stock by approximately $71,000, Legal Solutions loan by approximately $130,000, Morey’s loan by approximately $1.3 million, MVC Automotive equity interest by approximately $1.7 million, Quantum warrant by approximately $2,000, RuMe guarantee by approximately $91,000 and the MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $171,000.  The Valuation Committee also increased the Ohio Medical escrow by approximately $228,000 that was recorded as a realized gain.  In addition, increases in the cost basis and fair value of the loans to HTI, Legal Solutions, MVC Environmental, RuMe, Dukane and U.S. Gas were due to the capitalization of PIK interest totaling $406,896.  The Valuation Committee also decreased the fair value of the Company’s investments in: Initials loan by approximately $47,000, MVC Environmental common stock by approximately $410,000, RuMe series C preferred stock by approximately $164,000, series B-1 preferred stock by approximately $5,000, common stock by approximately

 

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$36,000 and warrant by approximately $72,000, SGDA Europe common equity interest by approximately $106,000, Security Holdings equity interest by approximately $962,000, Turf loan by approximately $246,000 and SCSD common stock by $215,000.

 

During the six month period ended April 30, 2017, the Valuation Committee increased the fair value of the Company’s investments in: Advantage preferred stock by approximately $355,000, Centile equity interest by $476,000, Dukane loan by approximately $72,000, JSC Tekers preferred stock by approximately $28,000, Legal Solutions loan by approximately $242,000, Morey’s loan by approximately $1.7 million, MVC Automotive equity interest by approximately $1.4 million, Pride loan by approximately $51,000, Quantum loan by approximately $323,000 and warrant by approximately $1.0 million, Security Holdings equity interest by approximately $534,000, U.S. Tech loan by $5,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $270,000, Turf guarantee by approximately $3,000 and the RuMe guarantee by approximately $141,000.  The Valuation Committee also increased the Ohio Medical escrow by approximately $301,000 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, FDS, RuMe, Dukane and U.S. Gas were due to the capitalization of PIK interest totaling $918,545.  The Valuation Committee also decreased the fair value of the Company’s investments in: BAC common stock by approximately $55,000, Custom Alloy second lien and unsecured loans by a total of approximately $205,000, Folio fn preferred stock by $136,000, Initials loan by approximately $142,000, MVC Environmental common stock by approximately $927,000, RuMe series C preferred stock by approximately $350,000, series B-1 preferred stock by approximately $14,000, common stock by approximately $78,000 and warrant by approximately $138,000, Turf loan by approximately $239,000, SCSD common stock by $775,000, Vestal loan by approximately $57,000, common stock by approximately $54,000 and warrant by approximately $62,000 and the SGDA Europe common equity interest by approximately $358,000.

 

At April 30, 2017, the fair value of all portfolio investments, exclusive of U.S. Treasury obligations and escrow receivables, was $358.9 million with a cost basis of $371.3 million.  At April 30, 2017, the fair value and cost basis of Legacy Investments was $5.8 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 $353.1 million and $347.5 million, respectively.  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.

 

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 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.  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 November 3, 2015, The Results Companies, LLC (“Results Companies”) repaid its loan in full totaling approximately $10.0 million, including all accrued interest.

 

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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, 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 October 31, 2016.  The fair value of the escrow as of October 31, 2016 was approximately $9.1 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.

 

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

 

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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 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, Foliofn 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, Foliofn 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

 

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$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, Foliofn 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 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.

 

PORTFOLIO COMPANIES

 

During the six month period ended April 30, 2017, 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.

 

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At October 31, 2016 and April 30, 2017, 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, 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.

 

During the six month period ended April 30, 2017, the Valuation Committee increased the fair value of the preferred stock by approximately $355,000.

 

At April 30, 2017, 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 $8.7 million.

 

Biogenic Reagents

 

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

 

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

 

At October 31, 2016 and April 30, 2017, the Company’s investment in Biogenics consisted of two senior notes with maturity dates of July 21, 2018 and June 30, 2016, a senior convertible note with a maturity date of July 21, 2018, a senior subordinated note with a maturity date of June 30, 2016 and a warrant. The notes have an interest rate of 16%. The 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 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, 2016, the Company’s investment in BAC consisted of 90 shares of class B non-voting common stock with a 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.

 

On January 4, 2017, BAC repaid their senior loan in full, including all accrued interest totaling approximately $31,000.

 

During the six month period ended April 30, 2017, the Valuation Committee decreased the fair value of the common stock by approximately $55,000.

 

At April 30, 2017, 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 $0.

 

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.

 

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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.

 

During the six month period ended April 30, 2017, the Valuation Committee increased the fair value of the common equity interest by approximately $476,000.

 

At April 30, 2017, the Company’s investment in Centile consisted of common equity interest at a cost of $3.5 million and a fair value of approximately $5.9 million.

 

Puneet Sanan, 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, 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 second lien loan had an interest rate of 10% and a maturity date of April 30, 2020 and the unsecured subordinated loan had an interest rate of 12% and a maturity date of March 31, 2018. The Company reserved in full against all accrued PIK interest starting July 1, 2016.  The Company reserved in full against all accrued PIK interest starting July 1, 2016.

 

During the six month period ended April 30, 2017, the Valuation Committee decreased the fair value of the second lien loan by approximately $575,000 and increased the fair value of the unsecured subordinated loan by approximately $370,000.

 

At April 30, 2017, 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 $2.5 million and a second lien loan with a cost basis and outstanding balance of approximately $24.4 million and a fair value of approximately $18.0 million.  The Company has reserved in full against all of the accrued interest.

 

Dukane IAS, LLC

 

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

 

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 second lien loan had an interest rate of 13% and a maturity date of November 17, 2020.

 

During the six month period ended April 30, 2017, the Valuation Committee increased the fair value of the loan by approximately $72,000.

 

At April 30, 2017, the Company’s investment in Dukane consisted of a second lien loan with an outstanding amount of approximately $7.2 million, a cost basis of approximately $7.1 million and a fair value of approximately $7.2 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.

 

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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.

 

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.

 

On April 24, 2017, Equus had entered into a merger agreement to acquire U.S. Gas, which was ultimately terminated by U.S. Gas in order for it to consummate a merger transaction with Crius Energy Trust, which was considered by the Boards of MVC and U.S. Gas to be a superior transaction for U.S. Gas and MVC.

 

The Company continues to pursue strategic discussions with Equus to support the plan of reorganization adopted by Equus which provides that Equus will pursue a merger or consolidation with the Company, a subsidiary of the Company, or one or more of the Company’s portfolio companies.

 

FDS, Inc.

 

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

 

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. The loan had an interest rate of 16% and a maturity date of November 30, 2016.

 

On November 30, 2016, the interest rate was changed to 12% cash and the maturity date was extended to November 30, 2017.

 

At April 30, 2017, the Company’s investment in FDS consisted of a senior subordinated loan with an outstanding amount, cost basis and fair value of $2.4 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.

 

Foliofn, Inc.

 

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

 

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

 

During the six month period ended April 30, 2017, the Valuation Committee decreased the fair value of the preferred stock by $136,000.

 

At April 30, 2017, the Company’s investment in Foliofn consisted of 5,802,259 shares of Series C preferred stock with a cost of $15.0 million and a fair value of approximately $5.8 million.

 

Chris Ferguson, a representative of the Company, serves as a director of Foliofn.

 

HTI Technologies and Industries, Inc.

 

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

 

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 loan has an interest rate of 14% and a maturity date of June 21, 2018.

 

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At April 30, 2017, the Company’s investment in HTI consisted of a second lien loan with an outstanding amount of approximately $9.8 million, a cost basis of approximately $9.7 million and a fair value of approximately $9.8 million.  The increase in cost basis of the loan is 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, 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. The loan has an interest rate of 15% and matures on June 23, 2020.

 

During the six month period ended April 30, 2017, the Valuation Committee decreased the fair value of the loan by approximately $142,000.

 

At April 30, 2017, the Company’s investment in Initials consisted of a senior subordinated loan with an outstanding amount and cost basis of approximately $4.8 million and a fair value of approximately $4.6 million.

 

JSC Tekers Holdings

 

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

 

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.

 

During the six month period ended April 30, 2017, the Valuation Committee increased the fair value of the preferred stock by $28,000.

 

At April 30, 2017, 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 $3.8 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, 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.

 

During the six month period ended April 30, 2017, the Valuation Committee increased the fair value of the senior subordinated loan by approximately $242,000.

 

At April 30, 2017, the Company’s investment in Legal Solutions consisted of a senior subordinated loan with an outstanding balance and cost basis of approximately $11.3 million and a fair value of approximately $11.4 million.

 

Mainstream Data, Inc.

 

Mainstream Data, Inc. (“Mainstream”), Salt Lake City, Utah, a Legacy Investment, builds and operates satellite, internet and wireless broadcast networks for information companies. Mainstream networks deliver text news, streaming stock quotations and digital images to subscribers around the world.

 

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At October 31, 2016 and April 30, 2017, 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, 2016, the loan had an outstanding balance and cost basis of $17.2 million and a fair value of $15.2 million.  The Company reserved in full against all accrued PIK interest starting July 1, 2016.

 

During the six month period ended April 30, 2017, the Valuation Committee increased the fair value of the loan by approximately $1.7 million.

 

At April 30, 2017, the loan had an outstanding balance and cost basis of $16.9 million and a fair value of $16.6 million.  The Company reserved in full against all accrued PIK interest starting July 1, 2016.

 

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, 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 bridge loan had an interest rate of 6% and a maturity date of December 31, 2016. 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.

 

On December 13, 2016, the Company loaned an additional $475,000 to MVC Automotive increasing the amount outstanding on the bridge loan to approximately $3.8 million.  The maturity date was also extended to December 31, 2017.

 

During the six month period ended April 30, 2017, the Valuation Committee increased the fair value of the equity interest by approximately $1.4 million.

 

At April 30, 2017, 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 $13.7 million and a bridge loan with an outstanding amount, cost basis and fair value of approximately $3.8 million.  The mortgage guarantee for MVC Automotive was equivalent to approximately $4.9 million at April 30, 2017.  This guarantee was taken into account in the valuation of MVC Automotive.

 

Michael Tokarz, Chairman of the Company, and Puneet Sanan and Scott Foote, 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.

 

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. The loan bears annual interest of 9% and matures on December 22, 2020.

 

On November 9, 2016, the Company invested approximately $59,000 in MVC Environmental and received an additional 30 shares of common stock.

 

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During the six month period ended April 30, 2017, the Valuation Committee decreased the fair value of the common stock by approximately $927,000.

 

At April 30, 2017, 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 $760,000 and a senior secured loan with an outstanding balance, cost basis and fair value of approximately $6.7 million.  The increase in cost basis of the loan is due to the capitalization of PIK interest.

 

David Williams, representative of the Company, serves as a director 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 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. 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 was set to end on October 29, 2016, but has been extended for two years until October 29, 2018, though the investment period has ended.

 

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. 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, 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.

 

On December 23, 2016, the Company received proceeds of approximately $12.2 million from the PE Fund related to the sale of AccuMed, a portfolio company of the PE Fund.  The Company’s pro-rata share of the PE Fund’s investment in AccuMed totaled approximately $2.4 million, resulting in a realized gain of approximately $9.8 million.  The Company later received an escrow distribution of approximately $416,000 and carried interest payments from the PE Fund totaling approximately $390,000 related to the sale, which were recorded as additional realized gains.

 

During the six month period ended April 30, 2017, the Valuation Committee increased the fair values of the limited partnership and general partnership interests by approximately $270,000.

 

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At April 30, 2017, the limited partnership interest in the PE Fund had a cost of approximately $11.5 million and a fair value of approximately $16.4 million.  The Company’s general partnership interest in the PE Fund had a cost basis of approximately $292,000 and a fair value of approximately $414,000.  As of April 30, 2017, the PE Fund has investments in Plymouth Rock Energy, LLC, Gibdock Limited, Focus Pointe Holdings, Inc. and Advanced Oilfield Services, LLC.

 

Pride Engineering, LLC

 

Pride, Minneapolis, MN, designs and manufactures specialized components used globally in the production of two-piece metal cans.

 

At October 31, 2016, the Company’s investment in Pride 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 loan bears annual interest of 12% and matures on June 18, 2021.

 

On April 12, 2017, the Company received a principal payment from Pride of approximately $79,000.

 

During the six month period ended April 30, 2017, the Valuation Committee increased the fair value of the loan by approximately $51,000.

 

At April 30, 2017, the Company’s investment in Pride Engineering consisted of a second lien loan with an outstanding amount of approximately $5.1 million, 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.

 

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 senior subordinated loan had an interest rate of 12% and a maturity date of March 10, 2021.

 

During the six month period ended April 30, 2017, the Valuation Committee increased the fair value of the loan by approximately $323,000 and the warrant by approximately $1.0 million.

 

At April 30, 2017, 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 $10.0 million.  The warrant had a cost basis of approximately $393,000 and a fair value of approximately $1.4 million.  The increase in cost basis of the loan is due to amortization of the discount and loan origination fees.

 

RuMe, Inc.

 

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

 

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 subordinated note had an interest rate of 10% and a maturity date of October 7, 2017. 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 a liability of $278,000.

 

During the six month period ended April 30, 2017, the Valuation Committee decreased the fair value of the series C preferred stock by approximately $350,000, the common stock by approximately $78,000, the series B-1

 

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preferred stock by approximately $14,000 and warrant by approximately $138,000.  The Valuation Committee also increased the fair value of the guarantee by approximately $141,000.

 

At April 30, 2017, 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 $462,000, 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 $5.5 million and a subordinated note with an outstanding balance of $944,000 and a cost basis and fair value of approximately $920,000. The warrant had a cost basis of approximately $336,000 and a fair value of approximately $916,000 and the guarantee was fair valued at approximately -$136,000 or a liability of approximately $136,000.  The increase in cost basis of the loan is due to the capitalization of PIK interest.

 

Security Holdings, B.V.

 

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

 

At October 31, 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.

 

On April 3, 2017, the Company loaned Security Holdings approximately $4.1 million in the form of a bridge loan with an interest rate of 5% and a maturity date of December 31, 2019.

 

During the six month period ended April 30, 2017, the Company recorded a distribution of approximately $330,000 from Security Holdings, which was recorded as a return of capital.

 

During the six month period ended April 30, 2017, the Valuation Committee increased the fair value of the common equity interest by approximately $534,000.

 

At April 30, 2017, the Company’s investment in Security Holdings consisted of common equity interest with a cost basis of approximately $51.2 million and a fair value of approximately $35.4 million and a bridge loan with an outstanding balance, cost basis and fair value of approximately $4.1 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, 2016, the Company’s equity investment had a cost basis of approximately $28.5 million and a fair value of approximately $1.3 million.

 

During the six month period ended April 30, 2017, the Valuation Committee decreased the fair value of the common equity interest by approximately $358,000.

 

At April 30, 2017, the Company’s equity investment had a cost basis of approximately $28.5 million and a fair value of $899,000.

 

Puneet Sanan, a representative of the Company, serves as a director of SGDA Europe.

 

SIA Tekers Invest

 

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

 

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

 

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of approximately $28,000 and a fair value of $0. The bridge loan has an interest rate of 6% and a maturity date of June 27, 2017. The Company reserved in full against all accrued interest related to the bridge loan.

 

On April 7, 2017, the Company realized a loss of approximately $2.3 million on the sale of the common stock and the forgiveness of the loan to Tekers.

 

At April 30, 2017, the Company no longer held an investment in Tekers.

 

Thunderdome Restaurants, LLC

 

Thunderdome, Cincinnati, Ohio, is a restaurant group with locations in Cincinnati, Columbus, Cleveland, Indianapolis, Nashville and Charlotte.

 

At October 31, 2016 and April 30, 2017, 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 loan has an interest rate of 12% and matures on June 10, 2020. 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, 2016, 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 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. The Company also had a guarantee to Berkshire Bank that was fair valued at -$13,000 or a liability $13,000.

 

On March 7, 2017, the Company exchanged its shares of MVC Turf, the holding company which owned the Company’s LLC interest in Turf Products, for approximately $3.8 million of additional subordinated debt in Turf Products.  This additional subordinated debt increases the Company’s existing subordinated debt investment to approximately $7.7 million.   The subordinated debt has an interest rate of 10% and matures on August 7, 2020.  The Company’s warrant and guarantee were also retired as a part of this recapitalization.  The Company also received a cash distribution from MVC Turf prior to the share exchange of approximately $323,000, which was treated as a return of capital.  The Company realized a gain of approximately $609,000 as a result of the share exchange.

 

During the six month period ended April 30, 2017, the Valuation Committee increased the fair value of the guarantee by approximately $3,000 and decreased the fair value of the loan by approximately $239,000.

 

At April 30, 2017, the senior subordinated loan had an outstanding balance and cost basis of approximately $7.7 million and a fair value of approximately $7.3 million.

 

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United States Technologies, Inc.

 

U.S. Tech, Fairlawn, New Jersey, offers diagnostic testing, redesign, manufacturing, reverse engineering and repair services for malfunctioning electronic components of machinery and equipment.

 

At October 31, 2016, the Company’s investment in U.S. Tech consisted of a senior term loan with an outstanding amount and cost basis of $5.0 million and a fair value of approximately $5.1 million. The loan has an interest rate of 10.5% and mature on July 17, 2020.

 

On December 1, 2016, the Company loaned an additional $500,000 to U.S. Tech increasing the total amount outstanding to $5.5 million.

 

During the six month period ended April 30, 2017, the Valuation Committee increased the fair value of the loan by $5,000.

 

At April 30, 2017, the senior term loan had an outstanding amount and cost basis of approximately $5.5 million and a fair value of approximately $5.6 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 and electricity to small commercial and residential retail customers in various states.

 

At October 31, 2016, the Company’s investment in U.S. Gas consisted of a second lien 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 $3.3 million. The second lien loan bears annual interest at 13% and has a maturity date of July 1, 2019. The 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 $89.4 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.

 

On April 24, 2017, Equus entered into a merger agreement to acquire U.S. Gas.  Subject to closing, the transaction would be effected in two stages.  The first stage consists of Equus’ acquisition of more than 90% of U.S. Gas’ common and convertible preferred stock from the Company and certain other U.S. Gas stockholders in exchange for shares of Equus.  In the second stage, a wholly-owned subsidiary of Equus (formed to hold all such common and convertible preferred stock of U.S. Gas) would be merged with and into U.S. Gas, with U.S. Gas as the surviving corporation and wholly-owned by Equus, which will change its name to USG&E, Inc.  Closing of the transaction is subject to a number of conditions.

 

At April 30, 2017, the loans had a combined outstanding balance, cost basis and a fair value of approximately $10.9 million.  The increase in the cost basis of the unsecured loan is due to the capitalization of PIK 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.

 

On May 23, 2017, the Boards of MVC and U.S. Gas pro