MVC Capital, Inc.
MVC CAPITAL, INC. (Form: 497, Received: 11/09/2017 16:34:18)

 

Filed Pursuant to Rule 497
File No. 333-
219377

 

PROSPECTUS SUPPLEMENT

(to Prospectus dated September 26, 2017)

 

GRAPHIC

$100,000,000
6.25% Senior Notes due 2022

 

We are 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 are offering $ 100,000,000 in aggregate principal amount of 6.25% senior notes due 2022, or the “Notes.” The Notes will mature on November 30, 2022. We will pay interest on the Notes on January 15, April 15, July 15 and October 15 of each year, beginning on January 15, 2018. We may redeem the Notes in whole or in part at any time or from time to time on or after November 30, 2019, at the redemption price set forth under “Description of the Notes—Redemption and Payment” in this prospectus supplement. The Notes will be issued in minimum denominations of $25 and integral multiples of $25 in excess thereof.

 

The Notes will be our direct senior unsecured obligations and rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by MVC Capital, Inc.

 

We intend to apply to list the Notes on the New York Stock Exchange (the “NYSE”) under the symbol “MVCD.” If the application is approved, we expect trading in the Notes on the NYSE to begin within 30 days of the original issue date. The Notes are expected to trade “flat,” which means that purchasers will not pay, and sellers will not receive, any accrued and unpaid interest on the Notes that is not reflected in the trading price. Currently, there is no public market for the Notes.

 

An investment in the Notes involves a high degree of risk and should be considered highly speculative. See “Supplementary Risk Factors” beginning on page S-8 in this prospectus supplement and “Risk Factors” beginning on page 16 of the accompanying prospectus to read about factors you should consider, including the risk of leverage, before investing in our Notes.

 

This prospectus supplement and the accompanying prospectus contain important information about us that a prospective investor should know before investing in the Notes. Please read this prospectus supplement and the accompanying prospectus before investing and keep them for future reference. We file periodic reports, current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). This information is available free of charge by contacting us at 287 Bowman Avenue, 2nd Floor, Purchase, New York 10577 or by telephone at (914) 510-9400 or on our website at http://www.mvccapital.com. Information contained on our website is not incorporated by reference into this prospectus supplement or the accompanying prospectus, and

 



 

you should not consider that information to be part of this prospectus supplement or the accompanying prospectus. The SEC also maintains a website at www.sec.gov that contains information about us.

 

 

 

Per Note

 

Total

 

Public offering price(1)

 

100.0

%

$

100,000,000

 

Underwriting discount (sales load)

 

3.125

%

$

2,663,000

(2)

Proceeds, before expenses, to us(3)

 

96.875

%

$

97,337,000

(2)

 


(1) Plus accrued interest, if any from November 15, 2017 if settlement occurs after that date.

 

(2) Includes $20,600,000 in Notes purchased in this offering by certain investors with whom we have an existing relationship, for which Notes the underwriting discount (sales load) was 1.125% of the offering price per Note and $5,000,000 in Notes purchased in this offering by an investor with whom we have an existing relationship, for which Notes the underwriting discount (sales load) was 2.125% of the offering price per Note.

 

(3) We estimate that we will incur approximately $504,205 of expenses relating to this offering, resulting in net proceeds, after sales load (underwriting discount) and expenses, to us of approximately $96,832,795.

 

The underwriters may also purchase up to an additional $15,000,000 total aggregate amount of Notes to cover overallotments, if any, within 30 days of the date of this prospectus supplement.  If the underwriters exercise this option in full, the total public offering price will be $115,000,000, the total underwriting discount (sales load) paid by us will be $3,131,750, and total proceeds, before expenses, will be $111,868,250.

 

THE NOTES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

 

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

 

The underwriters are offering the Notes as set forth in “Underwriting.” Delivery of the Notes in book-entry form only through The Depository Trust Company will be made on or about November 15, 2017.

 

Joint Book-Running Managers

 

Ladenburg Thalmann     BB&T Capital Markets    

 

Co-Managers

 

B. Riley FBR     JMP Securities    Oppenheimer & Co.     William Blair     Maxim Group LLC   

The date of this prospectus supplement is November 8, 2017.

 



 

TABLE OF CONTENTS

 

PROSPECTUS SUPPLEMENT

 

ABOUT THIS PROSPECTUS SUPPLEMENT

S-1

PROSPECTUS SUPPLEMENT SUMMARY

S-2

THE OFFERING

S-4

SUPPLEMENTARY RISK FACTORS

S-8

USE OF PROCEEDS

S-11

RATIO OF EARNINGS TO FIXED CHARGES

S-12

CAPITALIZATION

S-13

DESCRIPTION OF THE NOTES

S-14

UNDERWRITING

S-24

CERTAIN MATERIAL U.S. FEDERAL TAX CONSIDERATIONS

S-27

LEGAL MATTERS

S-31

WHERE YOU CAN FIND ADDITIONAL INFORMATION

S-32

 

 

PROSPECTUS

 

 

 

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

32

USE OF PROCEEDS

32

PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

33

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

34

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

75

SENIOR SECURITIES

75

ABOUT MVC CAPITAL

77

PORTFOLIO COMPANIES

92

DETERMINATION OF COMPANY’S NET ASSET VALUE

96

MANAGEMENT

100

COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

109

ADVISORY AGREEMENT

111

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

117

FEDERAL INCOME TAX MATTERS

118

CERTAIN GOVERNMENT REGULATIONS

123

DIVIDEND REINVESTMENT PLAN

125

DESCRIPTION OF SECURITIES

125

PLAN OF DISTRIBUTION

128

LEGAL COUNSEL

129

SAFEKEEPING, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR

129

BROKERAGE ALLOCATION AND OTHER PRACTICES

129

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

129

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

 

S- i



 

ABOUT THIS PROSPECTUS SUPPLEMENT

 

You should rely only on the information contained in this prospectus supplement and the accompanying prospectus. Neither we nor the underwriters have authorized any other person to provide you with different information from that contained in this prospectus supplement or the accompanying prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. Neither this prospectus supplement nor the accompanying prospectus constitutes an offer to sell, or a solicitation of an offer to buy, the Notes by any person in any jurisdiction where it is unlawful for that person to make such an offer or solicitation or to any person in any jurisdiction to whom it is unlawful to make such an offer or solicitation. The information contained in this prospectus supplement and the accompanying prospectus is complete and accurate only as of their respective dates, regardless of the time of their delivery or sale of the Notes. Our financial condition, results of operations and prospects may have changed since those dates. To the extent required by law, we will amend or supplement the information contained in this prospectus supplement and the accompanying prospectus to reflect any material changes to such information subsequent to the date of this prospectus supplement and the accompanying prospectus and prior to the completion of any offering pursuant to this prospectus supplement and the accompanying prospectus.

 

This document is in two parts. The first part is this prospectus supplement, which describes the terms of the Notes and this offering and also adds to and updates information contained in the accompanying prospectus. The second part is the accompanying prospectus, which gives more general information and disclosure. To the extent the information contained in this prospectus supplement differs from or is additional to the information contained in the accompanying prospectus, you should rely only on the information contained in this prospectus supplement. You should read this prospectus supplement and the accompanying prospectus together with the additional information described under the heading “Where You Can Find Additional Information” before investing in the Notes.

 

Forward-Looking Statements

 

Information contained in this prospectus supplement and the accompanying prospectus may contain forward-looking statements. In addition, forward-looking statements can generally 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 thereon or comparable terminology. The matters described in “Supplementary Risk Factors” in this prospectus supplement, and in “Risk Factors” in the accompanying prospectus, and certain other factors noted throughout this prospectus supplement and the accompanying prospectus constitute cautionary statements identifying important factors with respect to any such forward-looking statements, including certain risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements.  The forward-looking statements contained in this prospectus supplement and the accompanying prospectus are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the “Securities Act”).  For a list of factors that could affect these forward-looking statements, see “Supplementary Risk Factors” in this prospectus supplement, and “Risk Factors” and “Disclosure Regarding Forward-Looking Statements” in the accompanying prospectus.

 

S- 1



 

PROSPECTUS SUPPLEMENT SUMMARY

 

This summary highlights some of the information in this prospectus supplement and the accompanying prospectus. It is not complete and may not contain all of the information that is important to you. To understand the terms of the Notes offered pursuant to this prospectus supplement and the accompanying prospectus, you should read the entire prospectus supplement and the accompanying prospectus carefully. Together, these documents describe the specific terms of the Notes we are offering. Except as otherwise noted, all information in this prospectus supplement and the accompanying prospectus assumes no exercise of the underwriters’ option to purchase additional Notes.

 

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

 

MVC Capital, Inc.

 

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.” The Company is managed by TTG Advisers, the Company’s investment adviser, which is headed by Michael Tokarz.

 

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 year 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, who has over 40 years of lending and investment experience.

 

While the Company has been in operation since 2000, fiscal year 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.

 

The Current Management Team

 

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

 

S- 2



 

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.

 

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 July 31, 2017, our portfolio is comprised of approximately 59.7% debt or similar income-producing investments and 40.3% equity investments. Our goal is that, over time, debt or similar income-producing 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 sold 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 $126.1 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 $115.1 million. As a result of the gross consideration received, MVC realized a gain of $114.6 million from this investment, excluding all fees and distributions received since its initial investment in 2007. We continue to seek to sell equity investments.

 

Subsequent Events

 

On October 10, 2017, the Board detailed its unanimously approved plan to increase shareholder value. Key components of the plan include, among other things: (i) increasing the quarterly dividend to $0.15 per share from $0.135 per share, and (ii) TTGA’s agreement to a revised management fee structure that ties fees to the NAV discount* as follows: (A) If the Company’s NAV discount is greater than 20%, the management fee for the current quarter is reduced to 1.25%; (B) If the NAV discount is between 10% and 20%, the management fee will be 1.50%; and (C) If the NAV discount is less than 10% or eliminated, the 1.50% management fee would be re-examined, but in no event would it exceed 1.75%, and (iii) a reduction in compensation of Independent Directors by 25% until such time as the NAV discount falls to 10% or less.

 

On October 19, 2017, the Company loaned Highpoint Global, LLC $5.0 million in the form of a second lien loan with an interest rate of 14%. The loan will mature on September 30, 2022.

 

On October 23, 2017, the Company announced that the Board approved commencement of a cash tender offer in November 2017 to purchase up to $25 million of Company common stock. The offer price per share will be determined prior to commencement of the offer based upon market and other factors.

 

The Company’s net asset value (“NAV”) per share for our fiscal quarter ended October 31, 2017 will be reflected in our Form 10-K to be filed for such period end in January 2017. Our most recent NAV per share, determined as of July 31, 2017, was $13.38 per share and is reflected in the Form 10-Q filed for such fiscal quarter end. Based on current estimates for fair valuations of our portfolio companies, we presently expect the NAV per share for the quarter ended October 31, 2017 to range between $13.03 and $13.49 per share. This is only an estimate. Therefore, until the valuation process is completed (closer to the January filing of the Form 10- K), the precise amount of the Fund’s NAV per share will not be certain.

 


* All NAV discount calculations are arrived at by taking the average daily discount to NAV for a quarter (i.e. the discount to the most recently determined NAV per share at which the Company stock price closes on any given day for the quarter based on the prior fiscal quarter’s NAV per share).

 

S- 3



 

Other 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 supplement or the accompanying prospectus, and you should not consider information contained on our website to be part of this prospectus supplement or the accompanying prospectus unless otherwise indicated.

 

Use of Proceeds

 

The net proceeds from our sale of the $ 100,000,000 aggregate principal amount of Notes in this offering are estimated to be approximately $96,832,795, or $111,364,045 if the underwriters fully exercise their overallotment option, after deducting an underwriting discount of approximately $2,663,000 (or $3,131,750 if the underwriters fully exercise their overallotment option) payable by us and estimated offering expenses of approximately $504,205 payable by us.

 

We intend to use the net proceeds from this offering to redeem the outstanding 7.25% Notes due 2023 (the “7.25% Notes”)  promptly following the completion of this offering in accordance with their terms. As of October 31, 2017, we had outstanding 7.25% Notes with an aggregate principal amount of $114,408,750 plus accrued and unpaid interest.

 

If there are any excess net proceeds from the sale of the Notes after the redemption of the 7.25% Notes, we intend to use such excess net proceeds for general corporate purposes, including, for example, investing in portfolio companies in accordance with our investment objective and strategy, funding distributions, funding our subsidiaries’ activities and/or repurchasing our shares.

 

Pending the use of net proceeds contemplated above, we will hold the net proceeds from the sale of the Notes in cash or invest all or a portion of such net proceeds in short term, liquid investments.

 

THE OFFERING

 

This section summarizes the principal legal and financial terms of the Notes. You should read this section together with the more detailed description of the Notes in this prospectus supplement under the heading “Description of the Notes” and the more general description found in the prospectus under the heading “Description of Securities—Debt Securities” before investing in the Notes. Capitalized terms used in this prospectus supplement and not otherwise defined shall have the meanings ascribed to them in the accompanying prospectus or the indenture governing the Notes.

 

Issuer

 

MVC Capital, Inc., a Delaware corporation

 

 

 

Title of the securities

 

6.25% Senior Notes due 2022

 

 

 

Initial aggregate principal amount being offered


Overallotment Option

 

$100,000,000

The underwriters may also purchase from us up to an additional $15,000,000 aggregate principal amount of Notes to cover overallotments, if any, within 30 days of the date of this prospectus supplement.

 

 

 

Initial public offering price

 

100% of the aggregate principal amount.

 

 

 

Listing

 

We intend to apply to list the Notes on the NYSE under the symbol “MVCD.” If the application is approved, we expect trading in the Notes on the NYSE to begin within 30 days of the original issue date.

 

S- 4



 

Rating of the Notes

 

BBB- from Egan-Jones Rating Company. An explanation of the significance of ratings may be obtained from the rating agency. Generally, rating agencies base their ratings on such material and information, and such of their own investigations, studies and assumptions, as they deem appropriate. The rating of the Notes should be evaluated independently from similar ratings of other securities. A credit rating of a security is not a recommendation to buy, sell or hold securities and maybe subject to review, revision, suspension, reduction or withdrawal at any time by the assigning rating agency.

 

 

 

Interest rate

 

6.25% per year

 

 

 

Stated maturity date

 

November 30, 2022, unless redeemed prior to maturity.

 

 

 

Interest payment dates

 

Each January 15, April 15, July 15 and October 15, commencing January 15, 2018. If an interest payment date falls on a non-business day, the applicable interest payment will be made on the next business day and no additional interest will accrue as a result of such delayed payment.

 

 

 

Additional Notes

 

We may from time to time, without notice to or the consent of the registered holders of the Notes, create and issue further notes ranking equally and ratably with the Notes in all respects, including having the same CUSIP number, so that such further notes shall be consolidated and form a single series of notes and shall have the same terms as to status or otherwise as the Notes.

 

 

 

Ranking of Notes

 

The Notes will be our direct unsecured obligations and will rank:

 

 

 

 

 

·                   pari passu with our outstanding and future senior unsecured indebtedness;

 

 

 

 

 

·                   senior to any of our future indebtedness that expressly provides it is subordinated to the Notes; and

 

 

 

 

 

·                   structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, financing vehicles or similar facilities, including senior debt outstanding under our existing credit facilities, which are (i) the Santander Facility and (ii) the BB&T Facility (together, the “Debt Facilities,” and each, a “Debt Facility”) and are more fully described herein.

 

 

 

Denominations

 

We will issue the Notes in denominations of $25 and integral multiples of $25 in excess thereof.

 

 

 

Optional redemption

 

The Notes may be redeemed in whole or in part at

 

S- 5



 

 

 

any time or from time to time at our option on or after November 30, 2019, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to but not including the date fixed for redemption.

 

 

 

Repayment at option of Holders

 

Holders will not have the option to have the Notes repaid prior to the stated maturity date.

 

 

 

Governing Law

 

New York

 

 

 

Trustee, Paying Agent, Registrar and Transfer Agent

 

U.S. Bank National Association

 

 

 

Certain covenants

 

In addition to the covenants described in the prospectus attached to this prospectus supplement, the following covenants shall apply to the Notes:

 

 

 

 

 

We have agreed to provide to holders of the Notes and the trustee, if at any time when the Notes are outstanding and we are not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act to file any periodic reports with the SEC, our audited annual consolidated financial statements, within 90 days of our fiscal year end, and unaudited interim consolidated financial statements, within 45 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all material respects, in accordance with applicable United States generally accepted accounting principles.

We agree that for the period of time during which the Notes are outstanding, we will not violate Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to us by the SEC. These provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowings.

We have agreed that for the period of time during which the Notes are outstanding, we will not violate Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, giving effect to any exemptive relief granted to us by the SEC. These provisions

 

S- 6



 

 

 

generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, is below 200% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase.

 

S- 7



 

SUPPLEMENTARY RISK FACTORS

 

Investing in the Notes involves a high degree of risk. In addition to the other information contained in this prospectus supplement and the accompanying prospectus, you should carefully consider the following supplementary risk factors together with the risk factors set forth in the accompanying prospectus before making an investment in the Notes.  The risks set out below and in the accompanying prospectus are not the only risks we face. Additional risks and uncertainties not presently known to us might also impair our operations and performance. If any of the events described herein or in the accompanying prospectus occur, our business, financial condition and results of operations could be materially and adversely affected.  In such case, our net asset value and the market price of the Notes could decline, and you may lose part or all of your investment.

 

The Notes will be unsecured and therefore will be effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future.

 

The Notes will not be secured by any of our assets or any of the assets of our subsidiaries.  As a result, the Notes are effectively subordinated to any secured indebtedness we or our subsidiaries have currently incurred and may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness.  In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the Notes.

 

The Company entered into a credit facility with Santander Bank N.A. (“Santander”) on December 9, 2015 (the “Santander Facility”). The Santander Facility consists of a three-year, $50 million revolving borrowing base credit facility with Santander as a lender and lead agent and Wintrust Bank as a lender and syndication agent. The Santander Facility can, under certain conditions, be increased up to $85 million. It bears an interest rate of LIBOR plus 3.75% or the prime rate plus 1% (at the Company’s option), and includes a 1% closing fee of the commitment amount and a 0.75% unused fee. As of October 31, 2017, the Company is in compliance with all covenants related to the Santander Facility.

 

The Company entered into a credit facility with Branch Banking and Trust Company (“BB&T”) on July 31, 2013 (the “BB&T Facility”). On August 31, 2017, the Company renewed the BB&T Facility for one year. The BB&T Facility consists of a $25 million revolving credit facility with an interest rate of LIBOR plus 125 basis points. In addition, the Company is also subject to a 25 basis point commitment fee for the average amount of the BB&T Facility that is unused during each fiscal quarter. As of October 31, 2017, the Company is in compliance with all covenants related to the BB&T Facility.

 

As of October 31, 2017, we had no outstanding borrowings under both the Santander Facility and the BB&T Facility. The Santander Facility will expire on December 8, 2018, and the BB&T Facility will expire on August 31, 2018 at which time any outstanding borrowing amounts will be due and payable.  However, we may borrow other secured indebtedness in the future.  We had no other secured indebtedness outstanding as of October 31, 2017.

 

The Notes will be structurally subordinated to the indebtedness and other liabilities of our subsidiaries.

 

The Notes are obligations exclusively of MVC Capital, Inc. and not of any of our subsidiaries.  None of our subsidiaries is a guarantor of the Notes, and the Notes are not required to be guaranteed by any subsidiaries we may acquire or create in the future.

 

Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors (including trade creditors) and holders of preferred stock, if any, of our subsidiaries will have priority over our equity interests in such subsidiaries (and therefore the claims of our creditors, including holders of the Notes) with respect to the assets of such subsidiaries.  Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be effectively subordinated to any security interests in the assets of any such

 

S- 8



 

subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our claims.  Consequently, the Notes will be structurally subordinated to all indebtedness and other liabilities (including trade payables) of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish as financing vehicles or otherwise.  As of October 31, 2017, we had no outstanding borrowings under both the Santander Facility and the BB&T Facility. We and our subsidiaries had no other senior indebtedness outstanding as of October 31, 2017. All of such indebtedness would be structurally senior to the Notes. In addition, we or our subsidiaries may incur substantial additional indebtedness in the future, all of which would be structurally senior to the Notes.

 

The indenture under which the Notes will be issued will contain limited protection for holders of the Notes.

 

The indenture under which the Notes will be issued offers limited protection to holders of the Notes. The terms of the indenture and the Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have a material adverse impact on your investment in the Notes. In particular, the terms of the indenture and the Notes will not place any restrictions on our or our subsidiaries’ ability to:

 

·                   issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to the Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to us by the SEC (these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowings);

 

·                   pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the Notes, including subordinated indebtedness, in each case other than dividends, purchases, redemptions or payments that would cause a violation of Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions giving effect to any exemptive relief granted to us by the SEC (these provisions generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, is below 200% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase);

 

·                   sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);

 

·                   enter into transactions with affiliates;

 

·                   create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;

 

·                   make investments; or

 

·                   create restrictions on the payment of dividends or other amounts to us from our subsidiaries.

 

In addition, the indenture will not require us to offer to purchase the Notes in connection with a change of control or any other event.

 

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Furthermore, the terms of the indenture and the Notes do not protect holders of the Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, if any, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow or liquidity.

 

Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the Notes may have important consequences for you as a holder of the Notes, including making it more difficult for us to satisfy our obligations with respect to the Notes or negatively affecting the trading value of the Notes.

 

Other debt that we may issue or incur in the future could contain more protections for its holders than the indenture and the Notes, including additional covenants and events of default.  The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the Notes.

 

There is no existing trading market for the Notes and, even if the NYSE approves the listing of the Notes, an active trading market for the Notes may not develop, which could limit your ability to sell the Notes or the market price of the Notes.

 

The Notes will be a new issue of debt securities for which there initially will not be a trading market.  We intend to list the Notes on the NYSE within 30 days of the original issue date under the symbol MVCD.” However, there is no assurance that the Notes will be approved for listing on the NYSE.  Moreover, even if the listing of the Notes is approved, we cannot provide any assurances that an active trading market will develop for the Notes or that you will be able to sell your Notes.  If the Notes are traded after their initial issuance, they may trade at a discount from their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, if any, general economic conditions, our financial condition, performance and prospects and other factors. The underwriters have advised us that they may make a market in the Notes, but they are not obligated to do so. The underwriters may discontinue any market-making in the Notes at any time at their sole discretion. Accordingly, we cannot assure you that the Notes will be approved for listing on the NYSE, that a liquid trading market will develop for the Notes, that you will be able to sell your Notes at a particular time or that the price you receive when you sell will be favorable. To the extent an active trading market does not develop, the liquidity and trading price for the Notes may be harmed. Accordingly, you may be required to bear the financial risk of an investment in the Notes for an indefinite period of time.

 

If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Note.

 

Any default under the agreements governing our indebtedness, including a default under a Debt Facility or other indebtedness to which we may be a party that is not waived by the required lenders or holders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the Notes and substantially decrease the market value of the Notes.  If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness.  In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under a Debt Facility or other debt we may incur in the future could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation.  Further, we may in the future need to seek to obtain waivers from the required lender under a Debt Facility, the Lenders, or other debt that we may incur in the future to avoid being in default.  The Company has previously obtained the Lenders’ consent to waive compliance with certain covenants contained in a Debt Facility, and we may require such consents in the future from the Lenders or other future lenders, but there can be no assurance that such future consents will be granted.  If this occurs, we would be in default, and the Lenders and any other future lender or debt holder could exercise their rights as described above, and we could be forced into bankruptcy or liquidation.  If we are unable to repay debt, lenders having secured obligations, including the Lenders, could proceed against the collateral securing the debt.  Because the Debt Facilities have, and any future credit facilities will likely have, customary cross-default provisions, if the

 

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indebtedness thereunder or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.  See “Description of the Notes.”

 

Ratings of the Notes may not reflect all risks of an investment in the Notes, and changes in ratings of the Notes or associated outlooks could adversely affect the market price of the Notes.

 

Egan-Jones Rating Company has assigned ratings of “BBB-” to the Notes. A rating may not fully or accurately reflect all of the credit and market risks associated with the Notes. A rating agency could downgrade the Notes or indicate that they may downgrade the Notes in the future, which may make the Notes less liquid in the secondary market or cause their trading price to fall. Ratings on the Notes are not a recommendation to buy the Notes and such ratings may be withdrawn or changed at any time.

 

USE OF PROCEEDS

 

The net proceeds from our sale of the $100,000,000 aggregate principal amount of Notes in this offering are estimated to be approximately $96,832,795 , or $ 111,364,045 if the underwriters fully exercise their overallotment option, after deducting an underwriting discount of approximately $2,663,000 (or $3,131,750 if the underwriters fully exercise their overallotment option) payable by us and estimated offering expenses of approximately $504,205 payable by us.

 

We intend to use the net proceeds from this offering to redeem the 7.25% Notes promptly following the completion of this offering in accordance with their terms. As of October 31, 2017, we had outstanding 7.25% Notes with an aggregate principal amount of $114,408,750 plus accrued and unpaid interest.

 

If there are any excess net proceeds from the sale of the Notes after the redemption of the 7.25% Notes, we intend to use such excess net proceeds for general corporate purposes, including, for example, investing in portfolio companies in accordance with our investment objective and strategy, funding distributions, funding our subsidiaries’ activities and/or repurchasing our shares.

 

Pending the use of the net proceeds contemplated above, we will hold the net proceeds from the sale of the Notes in cash or invest all or a portion of such net proceeds in short term, liquid investments.

 

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RATIO OF EARNINGS TO FIXED CHARGES

 

The following table contains our ratio of earnings to fixed charges for the periods indicated, computed as set forth below. You should read these ratios of earnings to fixed charges together with our consolidated financial statements, including the notes to those statements, included in the accompanying prospectus.

 

 

 

For the Nine
Month
Period
Ended
July 31,
2017
Pro forma
for Notes
Offering

 

For the Year
Ended
October 31,
2016

 

For the Year
Ended
October 31,
2015

 

For the Year
Ended
October 31,
2014

 

For the Year
Ended
October 31,
2013

 

For the
Year
Ended
October
31,
2012

 

Earnings to Fixed Charges

 

5.32

 

1.27

 

(2.67

)

(1.10

)

3.87

 

(5.43

)

 

For purposes of computing the ratios of earnings to fixed charges, earnings represent net increase (decrease) in net assets resulting from operations plus (or minus) income tax expense (benefit) including excise tax expense plus fixed charges. Fixed charges include interest, credit facility fees and amortized capitalized expenses related to indebtedness.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of July 31, 2017:

 

·                   on an actual basis; and

 

·                   on an as adjusted basis to reflect the sale of $100,000,000 aggregate principal amount of Notes in this offering and the use of proceeds therefrom (assuming no exercise of the overallotment option and without reflecting the issuance of any additional Notes in any subsequent offering or offerings by the Company and the use of proceeds therefrom), in each case assuming a public offering price of 100% par, after deducting the underwriting discounts and commissions of $2,663,000 payable by us and estimated offering expenses of approximately $504,205 payable by us.

 

 

 

Actual

 

As Adjusted

 

Cash and cash equivalents

 

$

119,525,302

 

$

116,370,047

 

Restricted cash and cash equivalents

 

300,253

 

300,253

 

Total cash and cash equivalents

 

$

119,825,555

 

$

116,670,300

 

 

 

 

 

 

 

Long-term debt, including current maturities:

 

 

 

 

 

Revolving credit facility II

 

$

 

$

 

Revolving credit facility III

 

 

 

 

 

Senior Notes

 

114,408,750

 

14,408,750

(1)

Notes offered hereby

 

 

100,000,000

 

Total long-term debt

 

$

114,408,750

 

$

114,408,750

 

 

 

 

 

 

 

Net assets:

 

 

 

 

 

Common stock, $0.01 par value; (150,000,000 shares authorized; 22,556,412 shares outstanding)

 

$

283,044

 

$

283,044

 

Additional paid-in-capital

 

418,298,709

 

418,298,709

 

Accumulated earnings

 

120,479,685

 

120,479,685

 

Dividends paid to stockholders

 

(154,247,487

)

(154,247,487

)

Accumulated net realized gain

 

73,600,388

 

73,600,388

 

Net unrealized depreciation

 

(100,127,173

)

(100,127,173

)

Treasury stock, at cost (5,748,036 shares held)

 

(56,512,952

)

(56,512,952

)

 

 

 

 

 

 

Total net assets

 

$

301,774,214

 

$

301,774,214

 

 

 

 

 

 

 

Total Capitalization

 

$

416,182,964

 

$

416,182,964

 

 


(1) We intend to use the net proceeds from this offering to repay current notes outstanding  promptly following the completion of this offering in accordance with their terms.

 

* Above results do not reflect or take into account capital activity relating to the tender offer of the Company that expired on August 18, 2017.

 

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DESCRIPTION OF THE NOTES

 

This prospectus supplement sets forth certain terms of the Notes that we are offering pursuant to this prospectus supplement. This description supplements, and to the extent inconsistent therewith, replaces the descriptions of the general terms and provisions contained in “Description of Securities—Debt Securities” in the accompanying prospectus.

 

The Notes will be issued under an indenture to be dated as of February 26, 2013, entered into between us and U.S. Bank National Association, as trustee, as supplemented by the second supplemental indenture to be dated as of the closing date, entered into between us and U.S. Bank National Association, as trustee. The terms of the Notes include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act of 1939, as amended. As used in this section, all references to “Indenture” mean the indenture as supplemented by the first supplemental indenture, and all references to “we,” “our” and “us” mean MVC Capital, Inc., a Delaware corporation, exclusive of our subsidiaries, unless we specify otherwise.

 

Because this section is a summary, it does not describe every aspect of the Notes and the Indenture. We urge you to read the Indenture because it, and not this description, defines your rights as a holder of the Notes. For example, in this section, we use capitalized words to signify terms that are specifically defined in the Indenture. Some of the definitions are repeated in this prospectus supplement, but for the rest you will need to read the Indenture. You may obtain a copy of the Indenture from us without charge. See “Where You Can Find Additional Information” in the accompanying prospectus.

 

General

 

The Notes:

 

·                   will be issued in an initial principal amount of $100,000,000 ($115,000,000 if the underwriters’ option to purchase Notes to cover overallotments, if any, is exercised in full);

 

·                   will mature on November 30, 2022, unless redeemed prior to maturity;

 

·                   will be issued in denominations of $25 and integral multiples of $25 in excess thereof;

 

·                   will be redeemable in whole or in part at any time or from time to time on and after November 30, 2019, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to the date fixed for redemption as described under “—Redemption and Repayment” below;

 

·                   are expected to be listed on The New York Stock Exchange within 30 days of the original issue date.

 

The Notes will be our direct unsecured obligations and will rank:

 

·                   pari passu with outstanding and future senior unsecured indebtedness;

 

·                   senior to any of our future indebtedness that expressly provides it is subordinated to the Notes;

 

·                   effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness; and

 

·                   structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, financing vehicles or similar facilities, including senior debt outstanding under our existing credit facilities, which are (i) the Santander Facility and (ii) the BB&T Facility.

 

Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due on the Notes or to make any funds available for payment on the Notes, whether by dividends, loans or other payments. In addition, the payment of dividends and the making of loans and advances to us by our subsidiaries may be subject to statutory, contractual or other restrictions, may depend on the earnings or financial condition of all of the foregoing and are subject to various business considerations. As a result, we may be unable to gain significant, if any, access to the cash flow or assets of our subsidiaries.

 

S- 14



 

The Indenture does not limit the amount of debt (secured and unsecured) that we and our subsidiaries may incur or our ability to pay dividends, sell assets, enter into transactions with affiliates or make investments. In addition, the Indenture does not contain any provisions that would necessarily protect holders of Notes if we become involved in a highly leveraged transaction, reorganization, merger or other similar transaction that adversely affects us or them.

 

The Notes will be issued in fully registered form only, without coupons, in minimum denominations of $25 and integral multiples thereof. The Notes will be represented by one or more global notes deposited with or on behalf of The Depository Trust Company (“DTC”), or a nominee thereof. Except as otherwise provided in the Indenture, the Notes will be registered in the name of that depositary or its nominee, and you will not receive certificates for the Notes. We will make payments on a global security in accordance with the applicable policies of the depositary as in effect from time to time. Under those policies, we will make payments directly to the depositary, or its nominee, and not to any indirect holders who own beneficial interests in the global security. An indirect holder’s right to those payments will be governed by the rules and practices of the depositary and its participants.

 

We are permitted, under specified conditions, to issue multiple classes of indebtedness if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any indebtedness and senior securities remain outstanding, we must make provisions to prohibit the distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. Specifically, we may be precluded from declaring dividends or repurchasing shares of our common stock unless our asset coverage is at least 200%. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see “Risk Factors—Business Risks—We have borrowed and may continue to borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.” in the prospectus.

 

Interest Provisions Related to the Notes

 

Interest on the Notes will accrue at the rate of 6.25% per annum and will be payable quarterly on each January 15 , April 15, July 15 and October 15, commencing January 15, 2018. The initial interest period will be the period from and including the original issue date to, but excluding, the initial interest payment date, and the subsequent interest periods will be the periods from and including an interest payment date to, but excluding, the next interest payment date or the stated maturity date, as the case may be. We will pay interest to those persons who were holders of record of such Notes on the first day of the month during which each interest payment date occurs: each January, April, July and October, commencing January 1, 2018.

 

Interest on the Notes will accrue from the date of original issuance and will be computed on the basis of a 360-day year comprised of twelve 30-day months. We will not provide a sinking fund for the Notes.

 

Interest payments will be made only on a business day, defined in the Indenture as each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in New York City are authorized or required by law or executive order to close. If any interest payment is due on a non-business day, we will make the payment on the next day that is a business day. Payments made on the next business day in this situation will be treated under the Indenture as if they were made on the original due date. Such payment will not result in a default under the Notes or the Indenture, and no interest will accrue on the payment amount from the original due date to the next day that is a business day.

 

Book-entry and other indirect holders should consult their banks or brokers for information on how they will receive payments on their Notes.

 

Redemption and Repayment

 

The Notes may be redeemed in whole or in part at any time or from time to time at our option on or after November 30, 2019, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to the date fixed for redemption.

 

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You may be prevented from exchanging or transferring the Notes when they are subject to redemption. In case any Notes are to be redeemed in part only, the redemption notice will provide that, upon surrender of such Note, you will receive, without a charge, a new Note or Notes of authorized denominations representing the principal amount of your remaining unredeemed Notes.

 

Any exercise of our option to redeem the Notes will be done in compliance with the 1940 Act and the rules, regulations and interpretations promulgated thereunder, to the extent applicable.

 

If we redeem only some of the Notes, the Trustee or DTC, as applicable, will determine the method for selection of the particular Notes to be redeemed, in accordance with the Indenture, and in accordance with the rules of any national securities exchange or quotation system on which the Notes are listed and the 1940 Act to the extent applicable. Unless we default in payment of the redemption price, on and after the date of redemption, interest will cease to accrue on the Notes called for redemption.

 

Holders will not have the option to have the Notes repaid prior to the stated maturity date.

 

Listing

 

We intend to apply to list the Notes on the New York Stock Exchange under the symbol “MVCD.” If the application is approved, we expect trading in the Notes to begin within 30 days of the original issue date.

 

Trading Characteristics

 

We expect the Notes to trade at a price that takes into account the value, if any, of accrued and unpaid interest. This means that purchasers will not pay, and sellers will not receive, accrued and unpaid interest on the Notes that is not included in their trading price. Any portion of the trading price of a note that is attributable to accrued and unpaid interest will be treated as a payment of interest for U.S. federal income tax purposes and will not be treated as part of the amount realized for purposes of determining gain or loss on the disposition of the Notes. See “Certain Material U.S. Federal Tax Considerations.”

 

Certain Covenants

 

Reporting.   We have agreed to provide to holders of the Notes and the trustee (if at any time when Notes are outstanding we are not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act to file any periodic reports with the SEC), our audited annual consolidated financial statements, within 90 days of our fiscal year end, and unaudited interim consolidated financial statements, within 45 days of our fiscal quarter end (other than our fourth fiscal quarter). All such financial statements will be prepared, in all material respects, in accordance with applicable United States generally accepted accounting principles.

 

1940 Act Compliance.   We have agreed that for the period of time during which the Notes are outstanding, we will not violate Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to us by the SEC. These provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowings.

 

We have agreed that for the period of time during which the Notes are outstanding, we will not violate Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, giving effect to any exemptive relief granted to us by the SEC.  These provisions generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, is below 200% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase.

 

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Events of Default

 

You will have rights if an Event of Default occurs in respect of the Notes and is not cured, as described later in this subsection.

 

The term “Event of Default” in respect of the Notes means any of the following:

 

·                   We do not pay the principal of, or any premium on, the Notes when due, whether at maturity, upon redemption or otherwise.

 

·                   We do not pay interest on the Notes when due, and such default is not cured within 30 days.

 

·                   We remain in breach of a covenant in respect of the Notes for 60 days after we receive a written notice of default stating we are in breach. The notice must be sent by either the trustee or holders of at least 25% of the principal amount of the Notes.

 

·                   We or any of our significant subsidiaries file for bankruptcy, or certain other events of bankruptcy, insolvency or reorganization occur.

 

·                   On the last business day of each of twenty-four consecutive calendar months, we have an asset coverage of less than 100%.

 

The trustee may withhold notice to the holders of the Notes any default, except in the payment of principal, premium or interest, if it considers the withholding of notice to be in the interest of the holders.

 

Remedies if an Event of Default Occurs.   If an Event of Default, other than an Event of Default referred to in the second to last bullet point above with respect to us, has occurred and has not been cured, the trustee or the holders of at least 25% in principal amount of Notes may declare the entire principal amount of all the Notes to be due and immediately payable. If an Event of Default referred to in the second to last bullet point above with respect to us has occurred, the entire principal amount of all the Notes will automatically become due and immediately payable. This is called a declaration of acceleration of maturity. In certain circumstances, a declaration of acceleration of maturity may be canceled by the holders of a majority in principal amount of the Notes.

 

The trustee is not required to take any action under the Indenture at the request of any holders unless the holders offer the trustee security or indemnification satisfactory to it from expenses and liability (called an “indemnity”) (Section 315 of the Trust Indenture Act of 1939). If indemnity satisfactory to the trustee is provided, the holders of a majority in principal amount of the Notes may direct the time, method and place of conducting any lawsuit or other formal legal action seeking any remedy available to the trustee. The trustee may refuse to follow those directions in certain circumstances. No delay or omission in exercising any right or remedy will be treated as a waiver of that right, remedy or Event of Default.

 

Before you are allowed to bypass your trustee and bring your own lawsuit or other formal legal action or take other steps to enforce your rights or protect your interests relating to the Notes, the following must occur:

 

·                   You must give the trustee written notice of a continuing  Event of Default under the Notes.

 

·                   The holders of at least 25% in principal amount of all outstanding Notes must make a written request that the trustee take action because of the default and must offer indemnity satisfactory to the trustee against the cost and other liabilities of taking that action.

 

·                   The trustee must not have taken action for 60 calendar days after receipt of the above notice and offer of security or indemnity referred to in the immediately preceding paragraph.

 

·                   The holders of a majority in principal amount of the outstanding Notes must not have given the trustee a direction inconsistent with the above notice during that 60 calendar day period.

 

However, you are entitled at any time to bring a lawsuit for the payment of money due on your Notes on or after the due date therefor.

 

Holders of a majority in principal amount of the outstanding Notes may waive any past defaults other than:

 

·                   in respect of the payment of principal, any premium or interest; or

 

·                   in respect of a covenant that cannot be modified or amended without the consent of each holder of the outstanding Notes.

 

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Book-entry and other indirect holders should consult their banks or brokers for information on how to give notice or direction to or make a request of the trustee and how to declare or cancel an acceleration of maturity.

 

Each year, we will furnish to the trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance with the Indenture, or else specifying any default.

 

Merger or Consolidation

 

Under the terms of the Indenture, we are generally permitted to consolidate or merge with another entity. We are also permitted to sell all or substantially all of our assets to another entity. However, we may not consolidate with or into any other corporation or convey or transfer all or substantially all of our property or assets to any person unless all the following conditions are met:

 

·                   Where we merge out of existence or sell our assets, the resulting entity must agree to be legally responsible for all of our obligations under the Notes and the Indenture.

 

·                   Immediately after giving effect to such transaction, no Default or Event of Default shall have happened and be continuing. For purposes of this no-default test, a default would include an Event of Default that has occurred and has not been cured, as described under “Events of Default” above. A default for this purpose would also include any event that would be an Event of Default if the requirements for giving us notice of default or our default having to exist for a specified period of time were disregarded.

 

·                   We must deliver certain certificates and documents to the trustee.

 

Modification or Waiver

 

There are three types of changes we can make to the Indenture and the Notes.

 

Changes Requiring Your Approval.   First, there are changes that we cannot make to your Notes without your specific approval. The following is a list of those types of changes:

 

·                   change the stated maturity of the principal of or interest on the Notes;

 

·                   reduce any amounts due on the Notes, including, without limitation, the rate of interest or the method of calculation thereof;

 

·                   reduce the amount of principal payable upon acceleration of the maturity of the Notes following a default;

 

·                   adversely affect any right of repayment at the holder’s option;

 

·                   change the place or currency of payment on the Notes;

 

·                   impair your right to sue for payment;

 

·                   reduce the percentage of holders of Notes whose consent is needed to modify or amend the Indenture;

 

·                   reduce the percentage of holders of Notes whose consent is needed to waive compliance with certain provisions of the Indenture or to waive certain defaults; and

 

·                   modify any other aspect of the provisions of the Indenture dealing with supplemental indentures, modification and waiver of past defaults, changes to the quorum or voting requirements or the waiver of certain covenants.

 

Changes Not Requiring Approval.   The second type of change does not require any vote by the holders of the Notes. This type is limited to clarifications and certain other changes that would not adversely affect holders of the Notes in any material respect. We also do not need any approval to make any change that affects only debt securities to be issued under the indenture after the change takes effect.

 

Changes Requiring Majority Approval.   Any other change to the Indenture and the Notes would require the following approval:

 

·                   If the change affects only the Notes, it must be approved by the holders of a majority in principal amount of

 

S- 18



 

the outstanding Notes at such time.

 

·                   If the change affects more than one series of debt securities issued under the indenture, it must be approved by the holders of a majority in principal amount of all of the series affected by the change, with all affected series voting together as one class for this purpose.

 

The holders of a majority in principal amount of all of the series of debt securities issued under an indenture, voting together as one class for this purpose, may waive our compliance with some of our covenants in that indenture. However, we cannot obtain a waiver of a payment default or of any of the matters covered by the bullet points included above under “—Changes Requiring Your Approval.”

 

Further Details Concerning Voting.  When taking a vote, we will use the principal amount that would be due and payable on the voting date if the maturity of the Notes were accelerated to that date because of a default, to decide how much principal to attribute to the Notes.

 

The Notes will not be considered outstanding, and therefore not eligible to vote, if we have deposited or set aside in trust money for their payment or redemption or if they have been called by the Trustee or delivered to the Trustee for cancellation. The Notes will also not be eligible to vote if they have been fully defeased as described later under “Full Defeasance.”

 

We will generally be entitled to set any day as a record date for the purpose of determining the holders of the Notes that are entitled to vote or take other action under the indenture. If we set a record date for a vote or other action to be taken by holders of the Notes, that vote or action may be taken only by persons who are holders of the Notes on the record date and must be taken within eleven months following the record date.

 

Book-entry and other indirect holders should consult their banks or brokers for information on how approval may be granted or denied if we seek to change the Indenture or the Notes or request a waiver.

 

Defeasance

 

Covenant Defeasance.  If certain conditions are satisfied, we can make the deposit described below and be released from some of the restrictive covenants in the Indenture under which the Notes were issued. This is called “covenant defeasance.” In that event, you would lose the protection of those restrictive covenants but would gain the protection of having money and government securities set aside in trust to repay your Notes. In order to achieve covenant defeasance, we must do the following:

 

·                   We must irrevocably deposit in trust for the benefit of all holders of such Notes a combination of money and United States government or United States government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the Notes on their various due dates.

 

·                   No Default or Event of Default with respect to the Notes shall have occurred and be continuing on the date of such deposit, or in the case of a bankruptcy Event of Default, at any time during the period ending on the 91st day after the date of such deposit.

 

·                   Such defeasance shall not result in a violation under the Indenture or any other agreement or instrument to which we are a party.

 

·                   We must deliver to the trustee a legal opinion of our counsel that, under current U.S. federal income tax law, we may make the above deposit without causing you to be taxed on the Notes any differently than if we did not make the deposit and just repaid the Notes ourselves at maturity.

 

·                   We must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act and a legal opinion and officers’ certificate stating that all conditions precedent to covenant defeasance have been complied with.

 

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If we accomplish covenant defeasance, you can still look to us for repayment of the Notes if there were a shortfall in the trust deposit or the trustee is prevented from making payment. For example, if one of the remaining Events of Default occurred (such as our bankruptcy) and the Notes became immediately due and payable, there might be a shortfall. Depending on the event causing the default, you may not be able to obtain payment of the shortfall.

 

Full Defeasance.  If there is a change in U.S. federal tax law, as described below, we can legally release ourselves from all payment and other obligations on the Notes (called “full defeasance”) if we put in place the following other arrangements for you to be repaid:

 

·                   We must irrevocably deposit in trust for the benefit of all holders of such Notes a combination of money and United States government or United States government agency notes or bonds that will generate enough cash to make interest, principal and any other payments on the Notes on their various due dates.

 

·                   No Default or Event of Default with respect to the Notes shall have occurred and be continuing on the date of such deposit, or in the case of a bankruptcy Event of Default, at any time during the period ending on the 91st day after the date of such deposit.

 

·                   Such defeasance shall not result in a violation under the Indenture or any other agreement or instrument to which we are a party.

 

·                   We must deliver to the trustee a legal opinion of our counsel that, under current U.S. federal income tax law, we may make the above deposit without causing you to be taxed on the Notes any differently than if we did not make the deposit and just repaid the Notes ourselves at maturity.

 

·                   We must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act and a legal opinion and officers’ certificate stating that all conditions precedent to covenant defeasance have been complied with.

 

If we ever did accomplish full defeasance, as described above, you would have to rely solely on the trust deposit for repayment of the Notes. You could not look to us for repayment in the unlikely event of any shortfall. Conversely, the trust deposit would most likely be protected from claims of our lenders and other creditors if we ever became bankrupt or insolvent.

 

Transfer and Exchange

 

No service charge will be made for any registration of transfer or any exchange of Notes, but we may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith.

 

Satisfaction and Discharge

 

The Indenture will be discharged and will cease to be of further effect with respect to the Notes when either:

 

·                   all the Notes that have been authenticated have been delivered to the trustee for cancellation; or

 

·                   all the Notes that have not been delivered to the trustee for cancellation:

 

·                   have become due and payable,

 

·                   will become due and payable at their stated maturity within one year, or

 

·                   are to be called for redemption within one year,

 

and we, in the case of the first, second and third sub-bullets above, have irrevocably deposited or caused to be deposited with the trustee as trust funds in trust solely for the benefit of the holders of the Notes, in amounts as will be sufficient, without consideration of any reinvestment of interest, to pay and discharge the entire indebtedness (including all principal, premium, if any, and interest) on such Notes delivered to the trustee for

 

S- 20



 

cancellation (in the case of notes that have become due and payable on or prior to the date of such deposit) or to the stated maturity or redemption date, as the case may be,

 

·                   we have paid or caused to be paid all other sums payable by us under the Indenture with respect to the Notes; and

 

·                   we have delivered to the trustee an officers’ certificate and legal opinion, each stating that all conditions precedent provided for in the Indenture relating to the satisfaction and discharge of the Indenture and the Notes have been complied with.

 

Additional Notes and Additional Series of Notes

 

We may from time to time, without notice to or the consent of the registered holders of the Notes, create and issue further notes ranking equally and ratably with the Notes in all respects, including having the same CUSIP number, so that such further notes shall be consolidated and form a single series of notes and shall have the same terms as to status or otherwise as the Notes. No additional notes may be issued if an event of default has occurred and is continuing with respect to the Notes. The indenture also allows for the issuance of additional series of debt securities from time to time.

 

The Trustee Under the Indenture

 

U.S. Bank National Association will serve as the trustee under the Indenture.

 

Resignation of Trustee

 

The trustee may resign or be removed with respect to the Notes provided that a successor trustee is appointed to act with respect to the Notes. In the event that two or more persons are acting as trustee with respect to different series of indenture securities under the indenture, each of the trustees will be a trustee of a trust separate and apart from the trust administered by any other trustee.

 

Payment, Paying Agent, Registrar and Transfer Agent

 

The principal amount of each Note will be payable on the stated maturity date at the office of the Paying Agent, Registrar and Transfer Agent for the Notes or at such other office in New York City as we may designate. The trustee will initially act as Paying Agent, Registrar and Transfer Agent for the Notes.

 

Governing Law

 

The Indenture and the Notes will be governed by the laws of the State of New York.

 

Book-Entry Debt Securities

 

The Notes will be represented by global securities that will be deposited and registered in the name of The Depository Trust Company (“DTC”) or its nominee. This means that, except in limited circumstances, you will not receive certificates for the Notes. Beneficial interests in the Notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in DTC. Investors may elect to hold interests in the Notes through either DTC, if they are a participant, or indirectly through organizations that are participants in DTC.

 

The Notes will be issued as fully registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered certificate will be issued for the Notes, in the aggregate principal amount of such issue, and will be deposited with DTC. Interests in the Notes will trade in DTC’s Same Day Funds Settlement System, and any permitted secondary market trading activity in such Notes will, therefore, be required by DTC to be settled in immediately available funds. None of the Company, the Trustee or the Paying Agent will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

 

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DTC is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”).

 

DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has Standard & Poor’s Ratings Services’ highest rating: AAA. The DTC Rules applicable to its participants are on file with the SEC. More information about DTC can he found at www.dtcc.com and www.dtc.org .

 

Purchases of debt securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the debt securities on DTC’s records. The ownership interest of each actual purchaser of each security (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the debt securities are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in debt securities, except in the event that use of the book-entry system for the debt securities is discontinued.

 

To facilitate subsequent transfers, all debt securities deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of debt securities with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the debt securities; DTC’s records reflect only the identity of the Direct Participants to whose accounts such debt securities are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

 

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

 

Redemption notices shall be sent to DTC. If less than all of the debt securities within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

 

Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the Notes unless authorized by a Direct Participant in accordance with DTC’s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to us as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Notes are credited on the record date (identified in a listing attached to the Omnibus Proxy).

 

Redemption proceeds, distributions, and dividend payments on the Notes will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct

 

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Participants’ accounts upon. DTC’s receipt of funds and corresponding detail information from us or the trustee on the payment date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC nor its nominee, the trustee, or us, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of us or the trustee, but disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

 

DTC may discontinue providing its services as securities depository with respect to the Notes at any time by giving reasonable notice to us or to the trustee. Under such circumstances, in the event that a successor securities depository is not obtained, certificates are required to be printed and delivered. We may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, subject to DTC’s internal procedures, certificates will be printed and delivered to DTC.

 

The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that we believe to be reliable, but we take no responsibility for the accuracy thereof.

 

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UNDERWRITING

 

Ladenburg Thalmann & Co. Inc. is acting as the representative of the underwriters named below. Subject to the terms and conditions stated in the underwriting agreement dated November 8, 2017,  the Company agrees to sell, and each underwriter named below severally agrees to purchase, the aggregate principal amount of Notes indicated opposite its respective name in the following table:

 

Underwriters

 

Principal
Amount

 

Ladenburg Thalmann & Co. Inc.

 

$

49,543,250

 

BB&T Capital Markets, a division of BB&T Securities, LLC

 

$

33,028,750

 

B. Riley FBR, Inc.

 

$

5,741,500

 

JMP Securities LLC

 

$

2,500,000

 

Oppenheimer & Co. Inc.

 

$

4,891,000

 

William Blair & Company, L.L.C.

 

$

3,721,250

 

Maxim Group LLC

 

$

574,250

 

Total

 

$

100,000,000

 

 

The underwriters are committed to take and pay for all of the Notes being offered, if any are purchased.

 

Overallotment Option

 

If the underwriters sell more Notes than the total number set forth in the table above, the underwriters have an option to buy up to an additional $15,000,000 aggregate principal amount of the Notes from us. They may exercise that option for 30 days from the date of this prospectus supplement. If any Notes are purchased pursuant to this option, the underwriters will severally purchase such Notes in approximately the same proportion as set forth in the table above.

 

Commissions and Discounts

 

The following table shows the per Note and total underwriting discounts and commissions to be paid by us to the underwriters. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional Notes.

 

Paid by MVC Capital, Inc.

 

No
Exercise

 

Full
Exercise

 

Per Note

 

3.125

%

3.125

%

Total

 

$

2,663,000

(1)

$

3,131,750

(1)

 


(1) Includes $20,600,000 in Notes purchased in this offering by certain investors with whom we have an existing relationship, for which Notes the underwriting discount (sales load) was 1.125% of the offering price per Note and $5,000,000 in Notes purchased in this offering by an investor with whom we have an existing relationship, for which Notes the underwriting discount (sales load) was 2.125% of the offering price per Note.

 

Notes sold by the underwriters to the public will initially be offered at the public offering price set forth on the cover of this prospectus supplement and to certain dealers at a price less a concession not in excess of per Note. The underwriters may allow, and the dealers may reallow, a discount from the concession not in excess of $0.50 per Note to certain broker dealers. If all the Notes are not sold at the public offering price, the representative may change the offering price and the other selling terms. The offering of the Notes by the underwriters is subject to receipt and acceptance and subject to the underwriters’ right to reject any order in whole or in part.

 

We estimate that our share of the total expenses of the offering, excluding underwriting discounts, will be approximately $504,205.

 

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We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act.

 

No Sales of Similar Securities

 

Subject to certain exceptions, we have agreed not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of any debt securities issued or guaranteed by the Company or any securities convertible into or exercisable or exchangeable for debt securities issued or guaranteed by the Company or file any registration statement under the Securities Act with respect to any of the foregoing for a period of 30 days after the date of this prospectus supplement without first obtaining the prior written consent of Ladenburg Thalmann & Co. Inc.

 

Listing

 

The Notes are a new issue of securities with no established trading market. We intend to apply to list the Notes on the NYSE under the symbol “MVCD.”  If the application is approved, we expect trading in the Notes on the NYSE to begin within 30 days after the original issue date.  Currently there is no public market for the Notes and we can provide no assurance that the Notes will be approved for listing on the NYSE or that an active trading market will develop for the Notes.

 

We have been advised by the underwriters that they presently intend to make a market in the Notes after completion of the offering as permitted by applicable laws and regulations. The underwriters are not obligated, however, to make a market in the Notes and any such market-making may be discontinued at any time in the sole discretion of the underwriters without any notice. Accordingly, no assurance can be given as to the liquidity of, or development of a public trading market for, the Notes. If an active public trading market for the Notes does not develop, the market price and liquidity of the Notes may be adversely affected.

 

Price Stabilizations and Short Positions

 

In connection with the offering, the underwriters may purchase and sell Notes in the open market.  Purchases and sales in the open market may include short sales, purchases to cover short positions and stabilizing purchases.

 

·                   Short sales involve secondary market sales by the underwriters of a greater number of Notes than they are required to purchase in the offering.

 

·                   Covering transactions involve purchases of Notes in the open market after the distribution has been completed in order to cover short positions.

 

·                   Stabilizing transactions involve bids to purchase Notes so long as the stabilizing bids do not exceed a specified minimum.

 

The underwriters also may impose a penalty bid.  Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the underwriters, in covering short positions or making stabilizing purchases, repurchase Notes originally sold by that syndicate member in order to cover short positions or make stabilizing purchases.

 

Purchases to cover short positions and stabilizing purchases, as well as other purchases by the underwriters for their own accounts, may have the effect of preventing or retarding a decline in the market price of the Notes.  They may also cause the price of the Notes to be higher than the price that would otherwise exist in the open market in the absence of these transactions.  The underwriters may conduct these transactions on the NYSE, in the over-the-counter market or otherwise.  If the underwriters commence any of these transactions, they may discontinue them at any time.

 

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Additional Underwriter Compensation

 

The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for the issuer, for which they received or will receive customary fees and expenses, including acting as underwriters for our securities offerings. The underwriters and their respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

 

Settlement

 

We expect that delivery of the Notes will be made against payment therefor on or about November 15, 2017, which will be the fifth business day following the date of the pricing of the Notes (such settlement being herein referred to as “T+5”). Under Rule 15c6-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), trades in the secondary market generally are required to settle in two business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade the Notes prior to the date of delivery hereunder will be required, by virtue of the fact that the Notes initially will settle in T+5 business days, to specify an alternate settlement arrangement at the time of any such trade to prevent a failed settlement.

 

Other Jurisdictions

 

Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the Notes offered by this prospectus supplement in any jurisdiction where action for that purpose is required. The Notes offered by this prospectus supplement may not be offered or sold, directly or indirectly, nor may this prospectus supplement or any other offering material or advertisements in connection with the offer and sale of any such Notes be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus supplement comes are advised to inform themselves about and to observe any restriction relating to the offering and the distribution of this prospectus supplement. This prospectus supplement and the accompanying prospectus do not constitute an offer to sell or a solicitation of an offer to buy the Notes offered by this prospectus supplement and the accompanying prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

 

The addresses of the underwriters are: Ladenburg Thalmann & Co. Inc., 277 Park Avenue, 26 th  Floor, New York, NY 10172; BB&T Capital Markets, a division of BB&T Securities, LLC, 901 East Byrd Street, Suite 300, Richmond, VA 23219; B. Riley FBR, Inc., 1300 17th Street North, Suite 1400, Arlington, VA 22209; JMP Securities LLC, 600 Montgomery Street, Suite 1100, San Francisco, CA 94111; Oppenheimer & Co. Inc., 85 Broad Street, 23rd Floor, New York, NY 10004; William Blair & Company, L.L.C., 150 North Riverside Plaza, Chicago, IL 60606; Maxim Group LLC, 405 Lexington Avenue, 2nd Floor, New York, NY 10174.

 

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CERTAIN MATERIAL U.S. FEDERAL TAX CONSIDERATIONS

 

The following discussion is a general summary of certain material United States federal income tax considerations (and, in the case of a non-U.S. holder (as defined below), the material United States federal estate tax considerations) applicable to an investment in the Notes. This summary does not purport to be a complete description of the tax considerations applicable to such an investment. The discussion is based upon the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations, and administrative and judicial interpretations, each as of the date of this prospectus supplement and all of which are subject to change, potentially with retroactive effect. You should consult your own tax advisor with respect to tax considerations that pertain to your purchase of the Notes.

 

This discussion deals only with Notes held as capital assets within the meaning of Section 1221 of the Code and does not purport to deal with persons in special tax situations or special classes of taxpayers, such as financial institutions, insurance companies, controlled foreign corporations, passive foreign investment companies and regulated investment companies (and shareholders of such corporations), dealers in securities or currencies, traders in securities, former citizens of the United States, persons holding the Notes as a hedge against currency risks or as a position in a “straddle,” “hedge,” “constructive sale transaction” or “conversion transaction” for tax purposes, entities that are tax-exempt for United States federal income tax purposes, retirement plans, individual retirement accounts, tax-deferred accounts, persons subject to the alternative minimum tax, pass-through entities (including partnerships and entities and arrangements classified as partnerships for United States federal income tax purposes) and beneficial owners of pass-through entities, or U.S. holders (as defined below) whose functional currency is not the U.S. dollar. It also does not deal with beneficial owners of the Notes other than original purchasers of the Notes who acquire the Notes in this offering for a price equal to their original issue price (i.e., the first price at which a substantial amount of the Notes is sold other than to bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). This discussion does not address any aspect of foreign, state or local tax laws. If you are considering purchasing the Notes, you should consult your own tax advisor concerning the application of the United States federal tax laws to you in light of your particular situation, as well as any consequences to you of purchasing, owning and disposing of the Notes under the laws of any other taxing jurisdiction.

 

For purposes of this discussion, the term “U.S. holder” means a beneficial owner of a Note that is, for United States federal income tax purposes, (i) an individual citizen or resident of the United States, (ii) a corporation or other entity treated as a corporation for United States federal income tax purposes, created or organized in or under the laws of the United States, any state thereof or the District of Columbia, (iii) a trust (a) if one or more United States persons have the authority to control all of its substantial decisions and a court in the United States is able to exercise primary supervision over its administration, or (b) that existed on August 20, 1996 and has in effect a valid election (under applicable Treasury Regulations) to be treated as a domestic trust for United States federal income tax purposes, or (iv) an estate the income of which is subject to United States federal income taxation regardless of its source. The term “non-U.S. holder” means a beneficial owner of a Note that is neither a U.S. holder nor a partnership (including an entity or arrangement treated as a partnership for United States federal income tax purposes). An individual may, subject to exceptions, be deemed to be a resident alien, as opposed to a non-resident alien, by, among other ways, being present in the United States (i) on at least 31 days in the calendar year, and (ii) for an aggregate of at least 183 days during a three-year period ending in the current calendar year, counting for such purposes all of the days present in the current year, one-third of the days present in the immediately preceding year, and one-sixth of the days present in the second preceding year. Resident aliens are subject to United States federal income tax as if they were United States citizens.

 

If a partnership (including an entity or arrangement treated as a partnership for United States federal income tax purposes) holds any Notes, the United States federal income tax treatment of a partner of the partnership generally will depend upon the status of the partner, the activities of the partnership and certain determinations made at the partner level. Partners of partnerships holding Notes should consult their own tax advisors.

 

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Taxation of Note Holders

 

We are of the opinion that, under present law, the Notes will constitute our indebtedness for United States federal income tax purposes, and the discussion below assumes that the Notes will be so treated.  We intend to treat all payments made with respect to the Notes consistent with this characterization.

 

Taxation of U.S. Holders

 

Payments or accruals of interest on a Note generally will be taxable to a U.S. holder as ordinary interest income at the time they are received (actually or constructively) or accrued, in accordance with the U.S. holder’s regular method of tax accounting.

 

Upon the sale, exchange, redemption, retirement or other taxable disposition of a Note, a U.S. holder generally will recognize capital gain or loss equal to the difference between the amount realized on the sale, exchange, redemption, retirement or other taxable disposition (excluding amounts representing accrued and unpaid interest, which are treated as ordinary income) and the U.S. holder’s adjusted tax basis in the Note. A U.S. holder’s adjusted tax basis in a Note generally will equal the amount of the U.S. holder’s initial investment in the Note. Capital gain or loss generally will be long-term capital gain or loss if the Note was held for more than one year. Long-term capital gains recognized by individuals and certain other non-corporate U.S. holders generally are eligible for reduced rates of taxation. A U.S. holder’s ability to offset capital losses against ordinary income is subject to limitation.

 

A tax of 3.8% will be imposed on the amount of “net investment income,” in the case of an individual, or undistributed “net investment income,” in the case of an estate or trust (other than a charitable trust), which exceeds certain threshold amounts. “Net investment income” as defined for this purpose generally includes interest payments and gain recognized from the sale or other disposition of the Notes. Qualified pension trusts, which are not subject to income taxes generally, and non-U.S. individuals will not be subject to this tax. U.S. holders should consult their own tax advisors regarding the effect, if any, of this tax on their ownership and disposition of the Notes.

 

Taxation of Non-U.S. Holders.   A non-U.S. holder generally will not be subject to United States federal income tax or withholding of such tax on payments of interest on a Note provided that (i) interest on the Note is not effectively connected with the conduct by the non-U.S. holder of a trade or business within the United States (or, if it is so effectively connected, is not attributable to a United States “permanent establishment” maintained by the non-U.S. holder, if required by an applicable treaty), (ii) the non-U.S. holder is not a controlled foreign corporation related to the Company through sufficient stock ownership (as provided in the Code), (iii) the non-U.S. holder is not a bank receiving interest described in Section 881(c)(3)(A) of the Code, (iv) the non-U.S. holder does not own (actually or constructively) 10% or more of the total combined voting power of all classes of stock of the Company entitled to vote within the meaning of Section 871(h)(3) of the Code and the Treasury Regulations thereunder, and (v) the non-U.S. holder provides to the applicable withholding agent a statement in the year in which a payment occurs or in the preceding 3 years, on an Internal Revenue Service (IRS) Form W-8BEN (or other applicable form), signed under penalties of perjury, that includes its name and address and certifies, in compliance with applicable requirements that the non-U.S. holder is the beneficial owner and is not a United States person, or satisfies documentary evidence requirements for establishing that it is not a United States person.

 

A non-U.S. holder that is not exempt from United States federal income tax under these rules generally will be subject to withholding of United States federal income tax on payments of interest on the Notes at a rate of 30% unless (i) the interest is effectively connected with the non-U.S. holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, is attributable to a United States “permanent establishment” maintained by the non-U.S. holder), so long as the non-U.S. holder has provided to the applicable withholding agent an IRS Form W-8ECI (or substantially similar substitute form) stating that the interest on the Notes is effectively connected with the non-U.S. holder’s conduct of a trade or business within the United States, in which case the interest will be subject to United States federal income tax on a net income basis at the regular graduated rates and in the manner applicable to U.S. holders generally (unless an applicable income tax treaty provides otherwise), or (ii) an applicable income tax treaty provides for a lower rate of, or exemption from, this withholding.

 

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To claim the benefit of an income tax treaty or to claim exemption from withholding because interest is effectively connected with a United States trade or business, a non-U.S. holder must timely provide the appropriate, properly executed IRS forms to the applicable withholding agent. The non-U.S. holder must inform this withholding agent of any changes on these forms within 30 days of such change. These forms may be required to be periodically updated.

 

Generally, a non-U.S. holder will not be subject to United States federal income tax or withholding of such tax on any amount that constitutes capital gain upon the sale, exchange, redemption, retirement or other taxable disposition of a Note, unless (i) the gain is effectively connected with the conduct of a trade or business in the United States by the non-U.S. holder (and, if required by an applicable income tax treaty, is attributable to a United States “permanent establishment” maintained by the non-U.S. holder), in which case the gain will be subject to United States federal income tax on a net income basis at the regular graduated rates and in the manner applicable to U.S. holders generally or (ii) the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of the sale, exchange, redemption, retirement or other taxable disposition and meets certain other conditions, in which case, except as otherwise provided by an applicable income tax treaty, the gain, which may be offset by certain U.S.-source capital losses, generally will be subject to a flat 30% United States federal income tax, even though the non-U.S. holder is not considered a resident alien under the Code. Certain other exceptions may be applicable, and a non-U.S. holder should consult its tax advisor in this regard.

 

A non-U.S. holder that is a corporation for United States federal income tax purposes and that receives interest on, or recognizes capital gain on the disposition of, the Notes that is effectively connected with the non-U.S. holder’s conduct of a trade or business within the United States may also be subject to a branch profits tax (which is generally imposed on a non-U.S. corporation on the actual or deemed repatriation from the United States of earnings and profits, including such interest or gain, attributable to a United States trade or business) at a 30% rate.  The non-U.S. holder may be exempt from the branch profits tax or subject to the branch profits tax at a reduced rate, if the non-U.S. holder is a qualified resident of a country with which the United States has an income tax treaty.

 

A Note that is held by an individual who, at the time of death, is not a citizen or resident of the United States (as specially defined for United States federal estate tax purposes) generally will not be subject to the United States federal estate tax, unless, at the time of death, (i) such individual actually or constructively owns 10% or more of the total combined voting power of all classes of our stock entitled to vote within the meaning of Section 871(h)(3) of the Code and the Treasury Regulations thereunder or (ii) such individual’s interest in the Notes is effectively connected with the individual’s conduct of a trade or business within the United States.

 

Information Reporting and Backup Withholding.   A U.S. holder (other than an “exempt recipient,” including a corporation and certain other persons who, when required, demonstrate their exempt status) may be subject to backup withholding at a rate of 28% on, and to information reporting requirements with respect to, payments of interest on, and proceeds from the sale, exchange, redemption, retirement or other taxable disposition of, the Notes. In general, if a non-corporate U.S. holder subject to information reporting fails to furnish a correct taxpayer identification number or otherwise fails to comply with applicable backup withholding requirements, backup withholding at the applicable rate may apply.

 

In addition, backup withholding tax and certain other information reporting requirements apply to payments of interest on, and proceeds from the sale, exchange, redemption, retirement or other taxable disposition of, the Notes held by a non-U.S. holder, unless an exemption applies. Backup withholding and information reporting will not apply to such payments made to a non-U.S. holder if such non-U.S. holder has provided to the applicable withholding agent under penalties of perjury the required certification that the non-U.S. holder is not a United States person as discussed above (and the applicable withholding agent does not have actual knowledge or reason to know that the non-U.S. holder is a United States person) or if the non-U.S. holder is an exempt recipient.  However, the amount of interest we pay to a non-U.S. holder on the Notes will be reported to such non-U.S. holder and to the IRS annually on an IRS Form 1042-S even if the non-U.S. holder is exempt from the 30% withholding tax described above. Copies of the information returns reporting those payments and the amounts withheld may also be made available to the tax authorities in the country where the non-U.S. holder is resident under provisions of an applicable income tax treaty or agreement.

 

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If a non-U.S. holder sells or redeems a Note through a U.S. office of a U.S. or non-U.S. broker, the proceeds from such sale or redemption will be subject to information reporting and backup withholding unless such non-U.S. holder provides to the broker a withholding certificate or other appropriate documentary evidence establishing that such non-U.S. holder is not a United States person and such broker does not have actual knowledge or reason to know that such non-U.S. holder is a United States person, or the non-U.S. holder is an exempt recipient eligible for an exemption from information reporting and backup withholding. If a non-U.S. holder sells or redeems a Note through the non-U.S. office of a broker who is a United States person or has certain enumerated connections with the United States, the proceeds from such sale or redemption will be subject to information reporting unless the non-U.S. holder provides to such broker a withholding certificate or other documentary evidence establishing that the non-U.S. holder is not a United States person and such broker does not have actual knowledge or reason to know that such non-U.S. holder is a United States person, or the non-U.S. holder is an exempt recipient eligible for an exemption from information reporting. In circumstances where information reporting by the non-U.S. office of such a broker is required, backup withholding will be required only if the broker has actual knowledge that the non-U.S. holder is a United States person.

 

You should consult your tax advisor regarding the qualification for an exemption from backup withholding and information reporting and the procedures for obtaining such an exemption, if applicable. Backup withholding is not an additional tax, and any amounts withheld under the backup withholding rules from a payment to a beneficial owner generally will be allowed as a refund or a credit against such beneficial owner’s United States federal income tax liability provided the required information is timely furnished to the IRS.

 

Foreign Account Tax Compliance Act

 

In addition to the other withholding discussed herein, under the Foreign Account Tax Compliance Act (“FATCA”), certain foreign financial institutions (each an “FFI”), as that term (or its equivalent) is defined under an intergovernmental agreement between the United States and a foreign jurisdiction (an “IGA”) or, in the absence of an IGA, under FATCA, must comply with due diligence, withholding and reporting rules with respect to their owners, account holders and investors or else bear a 30% withholding tax on certain Unites States-source withholdable payments made to them. Regardless of whether an FFI is acting as the beneficial owner of or as an intermediary with respect to the withholdable payment, the FATCA withholding tax generally will be imposed on withholdable payments, subject to certain exceptions, unless the FFI (i) has entered into (or is otherwise subject to) and is complying with an agreement with the IRS (an “FFI Agreement”) or (ii) is required by and is in compliance with applicable foreign law enacted in connection with an IGA, in either case to, among other things, collect and provide to the United States or other relevant tax authorities certain information regarding United States account holders of such institution. In the case of United States-source payments made to a foreign entity that is not an FFI, the FATCA withholding tax generally will be imposed, subject to certain exceptions, unless such entity provides the withholding agent with a certification that it does not have any “substantial” United States owners, identifies its “substantial” United States owners or is otherwise exempt from FATCA. In certain cases, a “substantial” United States owner can mean an owner of any interest in the foreign entity.

 

Withholdable payments are generally United States -source payments, such as interest payments on the Notes, and beginning January 1, 2019, will also include the gross proceeds from the sale, exchange, redemption, principal payments on, retirement of or other disposition of certain equity or debt instruments (including the Notes) of United States issuers. The FATCA withholding tax will apply regardless of whether the payment would otherwise be exempt from withholding. To comply with the requirements of FATCA, we may, in appropriate circumstances, require the holders of the Notes to provide information and tax documentation regarding their direct and indirect owners.

 

Prospective purchasers of the Notes are urged to consult with their own tax advisors regarding the potential application and impact of FATCA and any applicable IGA on the ownership and disposition of a Note.

 

You should consult your own tax advisor with respect to the particular tax consequences to you of an investment in the Notes, including the possible effect of any pending legislation or proposed regulations.

 

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LEGAL MATTERS

 

The validity of the Notes offered by this prospectus supplement and certain other legal matters will be passed upon for us by Kramer Levin Naftalis & Frankel LLP, New York, New York.  Certain legal matters related to the offering will be passed upon for the underwriters by Nelson Mullins Riley & Scarborough LLP, Washington, DC.

 

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WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

We have filed with the SEC a registration statement on Form N-2, together with all amendments and related exhibits, under the Securities Act, with respect to the Notes offered by this prospectus supplement. The registration statement contains additional information about us and the Notes being offered by this prospectus supplement.  Please also read the accompanying prospectus.

 

We file with or furnish to the SEC annual, quarterly and current reports, proxy statements and other information meeting the informational requirements of the Exchange Act. You may inspect and copy these reports, proxy statements and other information, as well as the registration statement and related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information filed electronically by us with the SEC, which are available on the SEC’s website at www.sec.gov. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.

 

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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.

 


 

The date of this Prospectus is September 26, 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

32

USE OF PROCEEDS

32

PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

33

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

34

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

75

SENIOR SECURITIES

75

ABOUT MVC CAPITAL

77

PORTFOLIO COMPANIES

92

DETERMINATION OF COMPANY’S NET ASSET VALUE

96

MANAGEMENT

100

COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

109

ADVISORY AGREEMENT

111

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

117

FEDERAL INCOME TAX MATTERS

118

CERTAIN GOVERNMENT REGULATIONS

123

DIVIDEND REINVESTMENT PLAN

125

DESCRIPTION OF SECURITIES

125

PLAN OF DISTRIBUTION

128

LEGAL COUNSEL

129

SAFEKEEPING, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR

129

BROKERAGE ALLOCATION AND OTHER PRACTICES

129

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

129

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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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 July 31, 2017, the fair value of portfolio investments of the Legacy Investments was $5.6 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 July 31, 2017, the Company generated over $226.6 million of bottom line performance (net change in net assets resulting from operations). The current management team has also earned approximately $158.8 million in realized and unrealized gains (net of realized and unrealized losses) thus far on the portfolio (through July 31, 2017) and has repurchased approximately $73.5 million of stock below NAV, including the shares purchased during the most recently completed tender offer as well as 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, on a tax basis, $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 shareholder’s investment. 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 July 31, 2017, our portfolio is comprised of approximately 59.7% debt or similar income-producing investments and 40.3% equity investments. Our

 

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goal is that, over time, debt or similar income-producing 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 sold 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 $126.1 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 $115.1 million. As a result of the gross consideration received, MVC realized a gain of $114.6 million from this investment, excluding all fees and distributions received since its initial investment in 2007.

 

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 selling 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 debt 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. Finally, we received $3.0 million and $5.1 million from Thunderdome Resturants, LLC (“Thunderdome”) and Pride Engineering, LLC (“Pride”), respectively, including all accrued interest.  These sales 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 debt or similar income-producing investments.  During the fiscal year, we have deployed capital opportunistically to support our existing portfolio companies. We made 5 follow-on investments in 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 United States Technologies, Inc. (“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 Group GmbH (“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 B.V. (“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 May 3, 2017, the Company invested approximately $1.1 million in MVC Automotive for additional common equity and loaned MVC Automotive approximately $1.1 million, increasing the amount outstanding on the bridge loan to approximately $4.9 million.  The maturity date was also extended to June 30, 2018.

 

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

 

3



 

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 July 31, 2017, $14.6 million of the Company’s commitment has been contributed. As of July 31, 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. 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 July 31, 2017, the fair value of all investments in portfolio companies was approximately $303.0 million and our gross assets were approximately $426.7 million.

 

We expect that our investments in senior loans, subordinated debt, mezzanine debt and other debt or similar income-producing 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 or similar income-producing 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

 

4



 

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, there is no set term for the life of the Company, which 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 July 31, 2017, we had approximately $426.7 in gross assets under management. During the 2017 fiscal year thus far, the Company made two new investments and five follow-on investments, as there was limited capital available for investment. 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 $72.4 million or $7.3 million excluding the securities received from the US Gas transaction, 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. Presently, the Company has retained two valuation consultants to support the Committee’s process. The Company consults with the valuation consultants on at least a quarterly basis. The consultants reviewed, at least once during the course of the fiscal year to date, approximately 99% of the investment portfolio held at July 31, 2017 on a fair value basis. Larger invesmtents and/or those with more complex valuation methodologies have been reviewed more than once. 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 July 31, 2017 and October 31, 2016, approximately 62.84% 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 July 31, 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 July 31, 2017, we paid a quarterly dividend of $0.135 per share to shareholders of record on July 24, 2017, which was declared on July 14, 2017. No portion of this distribution is estimated to be characterized as a return of capital.

 

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.

 

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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.

 

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

 

 

 

Sales load

 

 

%(1)

Offering expenses borne by us

 

 

%(2)

Automatic Dividend Reinvestment Plan Fees

 

$

0.05

(3)

Total shareholder transaction expenses

 

 

%(4)

Estimated Annual Expenses (as a percentage of consolidated net assets attributable to common stock) (5)

 

 

 

Management Fee

 

2.29

%(6)(7)

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)

 

2.68

%(8)

Other expenses

 

1.91

%(9)

Acquired fund fees and expenses

 

0.28

%

Interest payments on borrowed funds

 

3.65

%(10)

Total annual expenses (before Management Fee waiver/reduction)

 

10.81

%(7)

Less Management Fee waiver/reduction

 

(0.57

)% (7)

Total annual expenses (after Management Fee waiver/reduction)

 

10.241

%(7)(11)

 

Examples

 

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

 

$

100

 

$

284

 

$

449

 

$

792

 

 

Although the example assumes (as required by the SEC) a 5.0% annual return (and assumes the amount of Incentive fee set forth in the Fee Table above), 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.

 

If, however, the 5.0% return results entirely from net realized capital gains (all of which is subject to our incentive fees on capital gains assuming no unrealized gains/losses and, thus, the amount of Incentive fee in the Fee Table is replaced by 1.00% (i.e., 20% of 5% net realized gains)), you would pay the following expenses on a $1,000 investment:

 

1 Year

 

3 Years

 

5 Years

 

10 Years

 

$

84

 

243

 

391

 

718

 

 

See “Dividend Reinvestment Plan.”

 

The examples 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)          A fee of $0.05 per share is charged to a participant in the dividend reinvestment plan for reinvestments in Company shares which are made on the open market.

 

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

 

(5)          “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. Estimates for the current fiscal year for Management Fees, Other expenses and Interest payments on borrowed funds are based on average net assets of the Company for the current fiscal year (through July 31, 2017).

 

(6)          The amount of Management Fees shown in the Table is reflected as a percentage of net assets. Pursuant to the Advisory Agreement, the Company pays TTG Advisers a management fee, which is calculated as a percentage of 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 invested in portfolio companies). Under the Advisory Agreement, the management fee is calculated at a base annual rate of 2.00% (the “Management Fee Annual Rate ”) . The Management Fee Annual Rate is subject to waiver/reduction. See footnote 7 below. (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.)

 

(7)          The amount shown reflects the Adviser’s agreement to contractually waive (i.e., reduce) the Management Fee Annual Rate from 2.00% to 1.50% (the “Reduction”). The Reduction is in effect for at least the full fiscal year, from November 1, 2016 through October 31, 2017. The Reduction may not be terminated by the Adviser prior to November 1, 2017, nor may any amounts waived/reduced be recouped by the Adviser.

 

(8)          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 shown in the Table reflects an estimated amount of payable incentive fees based only on realized and unrealized capital gains/losses for the current fiscal year (through July 31, 2017). For a more detailed description of the management and incentive fees, see “Advisory Agreement” on page 105 below.

 

(9)          “Other expenses” are based on estimated amounts for the fiscal year ending October 31, 2017, which are based on the amounts incurred in the current fiscal year (through July 31, 2017). Included in other expenses is estimated current or deferred tax expense incurred by the Company and its consolidated subsidiaries.

 

(10)   The estimate is based on borrowings outstanding as of July 31, 2017 and our assumption is that our borrowings will remain similar to the amounts outstanding as of that date. We had outstanding borrowings of $114,408,750 at July 31, 2017. The estimate also includes expected interest expense on borrowings during the current fiscal year.

 

(11)   In addition to the Reduction, 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 2017 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. 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 10.19%.

 

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 nine months ended July 31, 2017, and 2016 are derived from our unaudited financial statements. Interim results as of and for the nine months ended July 31, 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. Pursuant to ASU 2015-03, “Simplifying the Presentation of Debt issuance Costs (Subtopic 835-30),” for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years reporting periods beginning after December 15, 2015, we are required to present debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred financing fee.  The application of this standard results in a retrospective elimination of deferred charges and a corresponding decrease of debt however, management has determined that the application of the standard does not result in a material change to the Company’s Annual Report for the year ended October 31, 2016 and therefore the consolidated financial statements included therein have not been retroactively restated. 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 Nine Month

 

For the Nine Month

 

 

 

 

 

Period Ended

 

Period Ended

 

 

 

 

 

July 31, 2017

 

July 31, 2016

 

Year Ended

 

 

 

(Unaudited)

 

(Unaudited)

 

October 31, 2016

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except per share data)

 

Operating Data:

 

 

 

 

 

 

 

Interest and related portfolio income:

 

 

 

 

 

 

 

Interest and dividend income

 

$

12,213

 

$

27,913

 

$

32,698

 

Fee income

 

1,548

 

2,964

 

3,255

 

Fee income - asset management

 

853

 

1,073

 

1,414

 

 

 

 

 

 

 

 

 

Total operating income

 

14,614

 

31,950

 

37,367

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

Management fee

 

4,903

 

5,869

 

7,590

 

Portfolio fees - asset management

 

461

 

558

 

741

 

Management fee - asset management

 

178

 

247

 

319

 

Administrative

 

3,450

 

3,451

 

4,253

 

Interest and other borrowing costs

 

7,793

 

7,614

 

10,212

 

Net Incentive compensation (Note 11)

 

6,822

 

(2,607

)

(2,030

)

 

 

 

 

 

 

 

 

Total operating expenses

 

23,607

 

15,132

 

21,085

 

 

 

 

 

 

 

 

 

Expense waiver by Advisor

 

(113

)

(113

)

(150

)

Voluntary management fee waiver by Advisor

 

(1,225

)

(1,467

)

(1,897

)

Voluntary incentive fee waiver by Advisor

 

 

(1,000

)

(1,000

)

Total waiver by adviser

 

(1,338

)

(2,580

)

(3,047

)

 

 

 

 

 

 

 

 

Total net operating expenses

 

22,269

 

12,552

 

18,038

 

 

 

 

 

 

 

 

 

Net operating (loss) income before taxes

 

(7,655

)

19,398

 

19,329

 

 

 

 

 

 

 

 

 

Tax expense, net

 

1

 

1

 

2

 

 

 

 

 

 

 

 

 

Net operating (loss) income

 

(7,656

)

19,397

 

19,327

 

 

 

 

 

 

 

 

 

Net realized and unrealized (loss) gain:

 

 

 

 

 

 

 

Net realized (loss) gain on investments

 

125,143

 

(40,101

)

(45,157

)

Net unrealized appreciation (depreciation) on investments

 

(86,135

)

18,223

 

28,628

 

 

 

 

 

 

 

 

 

Net realized and unrealized (loss) gain on investments

 

39,008

 

(21,878

)

(16,529

)

 

 

 

 

 

 

 

 

Net increase (decrease) in net assets resulting from operations

 

$

31,352

 

$

(2,481

)

$

2,798

 

 

 

 

 

 

 

 

 

Per Share:

 

 

 

 

 

 

 

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

 

$

1.39

 

$

(0.11

)

$

0.12

 

Dividends per share

 

$

0.405

 

$

0.575

 

$

0.710

 

Balance Sheet Data:

 

 

 

 

 

 

 

Portfolio at value

 

$

303,036

 

$

366,865

 

$

360,120

 

Portfolio at cost

 

403,225

 

391,595

 

374,712

 

Total assets

 

426,737

 

435,561

 

434,491

 

Shareholders’ equity

 

301,774

 

278,541

 

279,558

 

Shareholders’ equity per share (net asset value)

 

$

13.38

 

$

12.27

 

$

12.39

 

Common shares outstanding at period end

 

22,556

 

22,703

 

22,556

 

Other Data:

 

 

 

 

 

 

 

Number of Investments funded in period

 

7

 

13

 

15

 

Investments funded ($) in period

 

$

7,396

 

$

41,606

 

$

43,968

 

Repayment/sales in period

 

105,149

 

60,182

 

75,105

 

Net investment activity in period

 

(97,753

)

(18,576

)

(31,137

)

 

15



 

 

 

2017

 

2016

 

2015

 

 

 

Qtr 3

 

Qtr 2

 

Qtr 1

 

Qtr 4

 

Qtr 3

 

Qtr 2

 

Qtr 1

 

Qtr 4

 

Qtr 3

 

Qtr 2

 

Qtr 1

 

 

 

(In thousands, except per share data)

 

Quarterly Data (Unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating income

 

7,305

 

3,929

 

3,380

 

5,417

 

8,005

 

15,855

 

8,090

 

6,046

 

7,524

 

5,273

 

4,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management fee

 

1,393

 

1,696

 

1,814

 

1,721

 

1,932

 

1,958

 

1,979

 

1,900

 

1,899

 

2,066

 

1,980

 

Portfolio fees - asset management

 

146

 

138

 

177

 

183

 

185

 

186

 

187

 

187

 

189

 

187

 

204

 

Management fee - asset management

 

67

 

49

 

62

 

72

 

60

 

86

 

101

 

85

 

77

 

(18

)

16

 

Administrative

 

804

 

1,172

 

1,474

 

802

 

1,319

 

1,174

 

958

 

1,685

 

1,136

 

1,325

 

1,159

 

Interest, fees and other borrowing costs

 

2,649

 

2,606

 

2,538

 

2,598

 

2,488

 

2,497

 

2,629

 

2,532

 

2,627

 

2,616

 

2,455

 

Net Incentive compensation

 

5,077

 

985

 

760

 

577

 

(1,512

)

1,135

 

(2,230

)

(771

)

(3,404

)

(3,462

)

(2,120

)

Total waiver by adviser

 

(386

)

(461

)

(491

)

(467

)

(521

)

(1,527

)

(532

)

(37

)

(38

)

(37

)

(38

)

Tax expense

 

 

 

1

 

1

 

 

1

 

 

 

1

 

1

 

 

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

 

(2,445

)

(2,256

)

(2,955

)

(70

)

4,054

 

10,345

 

4,998

 

465

 

5,037

 

2,595

 

1,200

 

Net increase (decrease) in net assets resulting from operations

 

23,906

 

3,069

 

4,377

 

5,279

 

(3,536

)

6,046

 

(4,991

)

(2,045

)

(13,959

)

(11,813

)

(9,743

)

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

 

1.06

 

0.14

 

0.19

 

0.23

 

(0.16

)

0.26

 

(0.21

)

(0.10

)

(0.61

)

(0.52

)

(0.43

)

Net asset value per share

 

13.38

 

12.45

 

12.45

 

12.39

 

12.27

 

12.56

 

12.43

 

12.95

 

13.18

 

13.93

 

14.58

 

 

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 July 31, 2017, approximately 62.84% 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. The material weakness concerned the design and operating effectiveness of certain valuation related controls associated with investments in certain affiliated or controlled portfolio companies (e.g., MVC Auto and SGDA Europe). The Company addressed the material weakness through, among other things, adding new and/or enhanced existing controls surrounding the valuation process and financial reporting oversight of various controlled/affiliated portfolio companies.

 

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 $18.1 million in unrealized losses associated with Legacy Investments as of July 31, 2017.  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 July 31, 2017 at an approximately 22.35% 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 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.

 

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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 nine month period ended July 31, 2017, the Company’s net repayments on Credit Facility II were $35.0 million, resulting in no outstanding balance at July 31, 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

 

23



 

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 July 31, 2017, 1.3% 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 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.

 

24



 

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.

 

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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 or similar income-producing investments. Our debt or similar income-producing 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 or similar income-producing 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 July 31, 2017, the fair value of our largest investment, Crius Energy Trust (TSX: KWH-UN.TO), including its wholly-owned indirect subsidiary, U.S. Gas (collectively, “Crius”) comprised 21.5% 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.

 

We are particularly exposed to the risks of the energy services industry.

 

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

 

Crius relies on a firm supply source to meet its energy management obligations for its customers. Should Crius’s suppliers fail to deliver supplies of natural gas and electricity, there could be a material impact on its cash flows and statement of operations.

 

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

 

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

 

28



 

limited financial resources, may be unable to meet future obligations and may go bankrupt. This could negatively impact our ability to pay dividends and cause you to lose all or part of your investment.

 

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

 

Our portfolio companies may have other obligations that rank equally with, or senior to, the securities in which we invest. By their terms, such other securities may provide that the holders are entitled to receive payment of interest or principal on or before the dates on which we are entitled to receive payments in respect of the securities in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of securities ranking senior to our investment in the relevant portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying investors that are senior to us, the portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of other securities ranking equally with securities in which we invest, we would have to share on an equal basis any distributions with other investors holding such securities in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company. As a result, we may be prevented from obtaining the full value of our investment in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

 

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

 

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

 

29



 

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.

 

30



 

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 July 31, 2017 at an approximately 22.35% 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.

 

31



 

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.

 

32



 

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 August 25, 2017, the last reported sale price on the NYSE for our common stock was $10.14 and on July 31, 2017, the Company’s net asset value per share was $13.38 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

 

Third Quarter

 

13.38

 

10.40

 

8.65

 

-22.27

%

-35.35

 

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. Most recently, on July 31, 2017, we paid a quarterly dividend of $0.135 per share to shareholders of record on July 24, 2017, which was declared on July 14, 2017. No portion of this distribution is estimated to be characterized as a return of capital.

 

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.”

 

33



 

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.

 

On November 6, 2003, Mr. Tokarz assumed his positions as Chairman and Portfolio Manager of the Company. He and the Company’s investment professionals (who, effective November 1, 2006, provide their services to the Company through the Company’s investment adviser, TTG Advisers) are seeking to implement our investment objective ( i.e. , to maximize total return from capital appreciation and/or income) through making a broad range of private investments in a variety of industries.

 

The investments can include senior or subordinated loans, convertible debt and convertible preferred securities, common or preferred stock, equity interests, warrants or rights to acquire equity interests, and other private equity transactions. During the fiscal year ended October 31, 2016, the Company made six new investments and made 9 follow-on investments in 6 existing portfolio companies committing a total of approximately $44.2 million of capital to these investments.  During the nine month period ended July 31, 2017, the Company made 2 new investments and 5 follow-on investments in 4 existing portfolio companies committing capital totaling approximately $72.4 million.

 

The Company’s prior investment objective was to achieve long-term capital appreciation from venture capital investments in information technology companies. Accordingly, the Company’s investments had focused on investments in equity and debt securities of information technology companies. As of July 31, 2017, approximately 1.3% of the current fair value of our assets consisted of Legacy Investments. We are, however, seeking to manage these Legacy Investments to try and realize maximum returns. We generally seek to capitalize on opportunities to realize cash returns on these investments when presented with a potential “liquidity event,” i.e., a sale, public offering, merger or other reorganization.

 

Our new portfolio investments are made pursuant to our 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 negotiated long-term equity and/or debt investment capital to privately-owned small and middle-market companies. Our financings are generally used to fund growth, buyouts, acquisitions, recapitalizations, note purchases and/or bridge financings. We generally invest in private companies, though, from time to time, we may invest in public companies that may lack adequate access to public capital.

 

We may also seek to achieve our investment objective by establishing a subsidiary or subsidiaries that would serve as general partner to a private equity or other investment fund(s).  In fact, during fiscal year 2006, we established MVC Partners for this purpose.  Furthermore, the Board of Directors authorized the establishment of a PE Fund, for which an indirect wholly-owned subsidiary of the Company serves as the GP and which may raise up to $250 million.  On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in the PE Fund.  The PE Fund closed on approximately $104 million of capital commitments.  The Company’s Board of Directors authorized the establishment of, and investment in, the PE Fund for a variety of reasons, including the Company’s ability to make Non-Diversified Investments through the PE Fund. 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

 

34



 

separate arrangement with the GP and the PE Fund, under the terms of the Company’s Advisory Agreement with TTG Advisers, TTG Advisers is not entitled to receive from the Company a management fee or an incentive fee on assets of the Company that are invested in the PE Fund. During the fiscal year ended October 31, 2012 and thereafter, MVC Partners was consolidated with the operations of the Company as MVC Partners’ limited partnership interest in the PE Fund is a substantial portion of MVC Partners operations.  Previously, MVC Partners was presented as a portfolio company on the Schedule of Investments.  The consolidation of MVC Partners has not had any material effect on the financial position or net results of operations of the Company.  Also, during fiscal year ended October 31, 2014, MVC Turf, Inc. (“MVC Turf”) was consolidated with the Company as MVC Turf is an MVC wholly-owned holding company.  The consolidation of MVC Turf did not have a material effect on the financial position or net results of operations of the Company.  On March 7, 2017, the Company exchanged its shares of MVC Turf for approximately $3.8 million of additional subordinated debt in Turf Products.  MVC Turf is no longer consolidated with the Company.  Please see Note 2 of our consolidated financial statements “Consolidation” for more information.

 

As a result of the closing of the PE Fund, consistent with the Board-approved policy concerning the allocation of investment opportunities, the PE Fund received a priority allocation of all private equity investments that would otherwise be Non-Diversified Investments for the Company during the PE Fund’s investment period that ended on October 28, 2014.  Additional capital may be called for follow-on investments in existing portfolio companies of the PE Fund or to pay operating expenses of the PE Fund until the partnership is no longer extended.

 

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 Nine Month Period Ended July 31, 2017 and 2016. Total operating income was $14.6 million and $31.9 for the nine month period ended July 31, 2017 and 2016, respectively, a decrease of approximately $17.3 million.

 

For the Nine Month Period Ended July 31, 2017

 

Total operating income was $ 14.6 million for the nine month period ended July 31, 2017. The decrease in operating income over the same period last year was primarily due to the decrease in dividend income and the decrease in interest earned on loans and fee income from the Company’s portfolio companies.  The Company earned approximately $12.2 million in interest income from investments in portfolio companies.  Of the $12.2 million recorded in interest income, approximately $1.5 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 also received fee income from asset management of the PE Fund and its portfolio companies totaling approximately $853,000 and fee income from the Company’s portfolio companies of approximately $1.5 million, totaling approximately $2.4 million in fee income.  Of the $853,000 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. As a result, 80% of the total amount of portfolio fees paid to the GP in a fiscal quarter by PE Fund portfolio companies is credited back to the PE Fund in the subsequent quarter in the form of a PE Fund management fee offset. For example, for the quarter ended July 31, 2017, $118,000 in PE Fund management fees received were offset (i.e., waived) by the GP. Any amounts that are/were offset are not subject to recoupment by the GP or TTG Advisers.

 

For the Nine Month Period Ended July 31, 2016

 

Total operating income was $31.9 million for the nine month period ended July 31, 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 $27.9 million in interest and dividend income from investments in portfolio companies.  Of the $27.9 million recorded in interest/dividend income, $12.5 million was dividend income from U.S. Gas and approximately $3.9 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 also received fee income from asset management of the PE Fund and its portfolio companies totaling approximately $1.1 million and fee income from the Company’s portfolio companies of approximately $3.0 million, of which $2.3 million was one-time fee income related to the Ohio Medical sale, totaling approximately $4.1 million in fee income.  Of the $1.1 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.

 

35



 

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 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.

 

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OPERATING EXPENSES

 

For the Nine Month Period Ended July 31, 2017 and 2016.   Operating expenses, net of Voluntary Waivers, were approximately $22.3 million and $12.5 million for the nine month period ended July 31, 2017 and 2016, respectively, an increase of approximately $9.8 million.

 

For the Nine Month Period Ended July 31, 2017

 

Operating expenses, net of the Voluntary Waivers (as described below), were approximately $22.3 million or 10.42% of the Company’s average net assets, when annualized, for the nine month period ended July 31, 2017.  Significant components of operating expenses for the nine month period ended July 31, 2017 were interest and other borrowing costs of approximately $7.8 million, net incentive compensation expense of approximately $6.8 million and management fee expense paid by the Company of approximately $3.7 million, which is net of the voluntary management fee waiver of approximately $1.2 million.

 

The approximately $9.8 million increase in the Company’s net operating expenses for the nine month period ended July 31, 2017 compared to the same period in 2016, was primarily due to the approximately $10.4 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 su