UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2015
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 814-00201
MVC CAPITAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE |
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94-3346760 |
(State or other jurisdiction of
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(I.R.S. Employer
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287 Bowman Avenue, Purchase, New York 10577
(Address of principal executive offices)
(914) 701-0310
Registrants telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Name of each exchange on which registered |
Common Stock |
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New York Stock Exchange |
Securities registered pursuant to section 12(g) of the Act: None
(Title of each class)
(Title of each class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated filer |
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x Accelerated filer |
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o Non-accelerated filer |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Approximate aggregate market value of common stock held by non-affiliates of the registrant as of the last business day of the Companys most recently completed fiscal second quarter: $154,792,675 computed on the basis of $8.32 per share, closing price of the common stock on the New York Stock Exchange (the NYSE) on April 30, 2015. For purposes of calculating this amount only, all directors and executive officers of the registrant have been treated as affiliates.
There were 22,702,821 shares of the registrants common stock, $.01 par value, outstanding as of May 16, 2016.
Document Incorporated by Reference:
Proxy Statement for the Companys Annual Meeting of Shareholders 2015, incorporated by reference in Part III, Items 10, 11, 12, 13 and 14.
MVC Capital, Inc.
(A Delaware Corporation)
Index
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3 |
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3 |
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23 |
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41 |
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41 |
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41 |
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41 |
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41 |
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41 |
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47 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
49 |
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97 |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
154 |
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154 |
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158 |
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158 |
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158 |
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166 |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
168 |
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Certain Relationships and Related Transactions, and Director Independence |
170 |
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171 |
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172 |
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172 |
Factors That May Affect Future Results
This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the federal securities laws that involve substantial uncertainties and risks. The Companys future results may differ materially from its historical results and actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors. These factors are described in the Risk Factors section below. Readers should pay particular attention to the considerations described in the section of this report entitled Managements Discussion and Analysis of Financial Condition and Results of Operations. Readers should also carefully review the risk factors described in the other documents the Company files, or has filed, from time to time with the United States Securities and Exchange Commission (the SEC).
In this Annual Report on Form 10-K, unless otherwise indicated, MVC Capital, we, us, our or the Company refer to MVC Capital, Inc. and its wholly-owned subsidiaries, MVC Financial Services, Inc., MVC Turf, LLC and MVC Cayman, and TTG Advisers or the Adviser refers to The Tokarz Group Advisers LLC.
GENERAL
MVC Capital, Inc. is an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the 1940 Act). MVC Capital provides equity and debt investment capital to fund growth, acquisitions and recapitalizations of small and middle-market companies in a variety of industries primarily located in the United States. Our investments can take the form of senior and subordinated loans, common and preferred stock and warrants or rights to acquire equity interests, or convertible securities, among other instruments. Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol MVC. Beginning November 1, 2006, the Company has been externally managed by The Tokarz Group Advisers LLC (TTG Advisers) pursuant to an Amended and Restated Investment Advisory and Management Agreement (the Advisory Agreement). Our Board of Directors, including all of the directors who are not interested persons (as defined under the 1940 Act) of the Company (the Independent Directors), last approved the renewal of the Advisory Agreement at their in-person meeting held on October 29, 2015.
Fiscal year 2015 represented a year in which we continued the transition to our yielding strategy while allocating capital into new opportunities and supporting our existing portfolio companies. The Company made eight new investments: RX Innovations, Inc. (RX) ($10.3 million), Agri-Carriers Group, Inc. (Agri-Carriers) ($11.8 million), Legal Solutions Holdings, Inc. (Legal Solutions) ($8.7 million), The Results Companies, LLC (Results Companies) ($9.0 million), Vestal Manufacturing Enterprises, Inc. (Vestal) ($6.5 million), Thunderdome Restaurants, LLC (Thunderdome) ($2.0 million), Initials, Inc. (Initials) ($4.8 million) and United States Technologies, Inc. (U.S. Technologies) ($5.0 million) and made 5 follow-on investments in the following 4 existing portfolio companies: Biovation Acquisition Company (BAC), Centile Holdings B.V. (Centile), Biogenic Reagents (Biogenic), and MVC Automotive Group B.V. (MVC Automotive). The total capital committed in fiscal year 2015 was $62.4 million compared to $105.8 million and $95.7 million in fiscal years 2014 and 2013, respectively.
During fiscal year 2014 four new investments were made in: G3K Displays, Inc. (G3K) ($6.0 million), Inland Environmental & Remediation LP (Inland) ($15.0 million), Equus Total Return, Inc. (Equus) ($4.4 million) and Custom Alloy Corporation (Custom Alloy) ($23.0 million) and made 20 follow-on investments in the following 13 existing portfolio companies: Security Holdings B.V. (Security Holdings), Centile, Biogenic, MVC Automotive, RuMe, Inc. (RuMe), Moreys Seafood International LLC (Moreys), Equus, U.S. Gas & Electric, Inc. (U.S. Gas), Ohio Medical Corporation (Ohio Medical), Inland, U.S. Spray Drying Holding Company (SCSD), Biovation Holdings, Inc. (Biovation) and the MVC Private Equity Fund L.P. (MVC PE Fund).
During fiscal year 2013 six new investments were made in: Summit Research Labs, Inc. (Summit) ($22.0 million), SCSD ($5.5 million), Prepaid Legal Services, Inc. (Prepaid Legal) ($9.9 million), Advantage Insurance Holdings LTD (Advantage) ($7.5 million), Moreys ($8.0 million) and Biogenic ($9.5 million) and nine follow-on investments were made in the following five existing portfolio companies: MVC PE Fund, JSC Tekers Holdings (JSC Tekers), Biovation, Ohio Medical and MVC Automotive.
We continue to perform due diligence and seek new investments that are consistent with our objective of maximizing total return from capital appreciation and/or income, though our current focus is more on yield generating investments. We believe that we have extensive relationships with private equity firms, investment banks, business brokers, commercial banks, accounting firms, law firms, hedge funds, other investment firms, industry professionals and management teams of several companies that may provide us with investment opportunities.
We are working on an active pipeline of potential new investment opportunities. Our loan and equity investments will generally range between $3.0 million and $25.0 million each, though we may occasionally invest smaller or greater amounts of capital depending upon the particular investment. While the Company does not adhere to a specific equity and debt asset allocation mix, no more than 25% of the value of our total assets may be invested in the securities of one issuer (other than U.S. government securities), or of two or more issuers that are controlled by us and are engaged in the same or similar or related trades or businesses as of the close of each quarter. Our portfolio company investments are typically illiquid and made through privately negotiated transactions. We generally seek to invest in companies with a history of strong, predictable, positive EBITDA (net income before net interest expense, income tax expense, depreciation and amortization). More recently, the Company has been focusing its strategy more on yield generating investments, which can include, but not limited to senior and subordinated loans, convertible debt, common and preferred equity with a coupon or liquidation preference and warrants or rights to acquire equity interests.
Our portfolio company investments currently consist of common and preferred stock, other forms of equity interests and warrants or rights to acquire equity interests, senior and subordinated loans and convertible securities. At October 31, 2015, the value of our investments in portfolio companies was approximately $400.9 million and our total assets were approximately $516.8 million compared to the value of investments in portfolio companies of approximately $447.6 million and gross assets of approximately $577.7 million at October 31, 2014.
We expect that our investments in senior loans and subordinated debt will generally have stated terms of three to ten years. However, there are no constraints on the maturity or duration
of any security the Company acquires. Our debt investments are not, and typically will not be, rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade (rated lower than Baa3 by Moodys or lower than BBB- by Standard & Poors). In addition, we may invest without limit in non-rated or debt of any rating, by any rating organization.
On July 16, 2004, the Company formed a wholly-owned subsidiary, MVC Financial Services, Inc. (MVCFS). MVCFS is incorporated in Delaware and its principal purpose is to provide advisory, administrative and other services to the Company and its portfolio companies. The Company does not hold MVCFS for investment purposes. The results of MVCFS are consolidated into the Company and all inter-company accounts have been eliminated in consolidation. On October 14, 2011, the Company formed a wholly-owned subsidiary, MVC Cayman, an exempted company incorporated in the Cayman Islands, to hold certain of its investments. The results of MVC Cayman are also consolidated into the Company . During the fiscal year ended October 31, 2012 and thereafter, MVC Partners, LLC (MVC Partners) was consolidated with the operations of the Company as MVC Partners limited partnership interest in the PE Fund is a substantial portion of MVC Partners operations. The consolidation of MVC Partners has not had any material effect on the financial position or net results of operations of the Company. During fiscal year ended October 31, 2014, MVC Turf, LLC (MVC Turf) was consolidated with the Company as MVC Turf is an MVC wholly-owned holding company. The consolidation of MVC Turf has not had any material effect on the financial position or net results of operations of the Company. Of the $7.8 million in cash on the Companys Consolidated Balance Sheets as of October 31, 2015, approximately $360,000 was held by MVC Turf, an MVC wholly-owned holding company, and approximately $359,000 held by MVCFS. Also, as of October 31, 2015, approximately $1.0 million was held by MVC Cayman.
Our Board of Directors has the authority to change any of the strategies described in this report without seeking the approval of our shareholders. However, the 1940 Act prohibits us from altering or changing our investment objective, strategies or policies such that we cease to be a business development company, nor can we voluntarily withdraw our election to be regulated as a business development company, without the approval of the holders of a majority of our outstanding voting securities, as defined in the 1940 Act, of our shares.
Substantially all amounts not invested in securities of portfolio companies are invested in short-term , highly liquid money market investments, U.S. Government issued securities, or held in cash in interest bearing accounts. As of October 31, 2015, the Companys investments in short-term securities, U.S. Government issued securities and cash and cash equivalents were valued at $106.5 million. Of that amount, approximately $5.5 million was restricted cash equivalents, which was related to the Companys agreement to collateralize a letter of credit being used as collateral for a project guarantee for Security Holdings of approximately $5.5 million and approximately $1.0 million was restricted cash related to Inlands working capital line of credit.
CORPORATE HISTORY AND OFFICES
The Company was organized on December 2, 1999. Prior to July 2004, our name was meVC Draper Fisher Jurvetson Fund I, Inc. On March 31, 2000, the Company raised $330.0 million in an initial public offering whereupon it commenced operations as a closed-end investment
company. On December 4, 2002, the Company announced it had begun doing business under the name MVC Capital.
We are a Delaware corporation and a non-diversified closed-end management investment company that has elected to be regulated as a business development company under the 1940 Act. On July 16, 2004, the Company formed MVCFS.
Although the Company has been in operation since 2000, the year 2003 marked a new beginning for the Company. In February 2003, shareholders elected an entirely new board of directors. (All but two of the independent members of the current Board of Directors were first elected at the February 2003 Annual Meeting of the shareholders.) The Board of Directors developed a new long-term strategy for the Company. In September 2003, upon the recommendation of the Board of Directors, shareholders voted to adopt a new investment objective for the Company of seeking to maximize total return from capital appreciation and/or income. The Companys prior objective had been limited to seeking long-term capital appreciation from venture capital investments in the information technology industries. Consistent with our broader objective, we adopted a more flexible investment strategy of providing equity and debt financing to small and middle-market companies in a variety of industries. With the recommendation of the Board of Directors, shareholders also voted to appoint Michael Tokarz as Chairman and Portfolio Manager to lead the implementation of our new objective and strategy and to stabilize the existing portfolio. Prior to the arrival of Mr. Tokarz and his new management team in November 2003, the Company had experienced significant valuation declines from investments made by the former management team.
Mr. Tokarz and his team managed the Company under an internal structure through October 31, 2006. On September 7, 2006, the shareholders of the Company approved the Advisory Agreement (with over 92% of the votes cast on the agreement voting in its favor) that provided for the Company to be externally managed by TTG Advisers. The agreement took effect on November 1, 2006. TTG Advisers is a registered investment adviser that is controlled by Mr. Tokarz. All of the individuals (including the Companys investment professionals) that had been previously employed by the Company as of the fiscal year ended October 31, 2006 became employees of TTG Advisers. The Companys investment approach and selection process has remained the same under the externalized management structure. Our Board of Directors, including all of the Independent Directors, last approved a renewal of the Advisory Agreement at their in-person meeting held on October 29, 2015.
Our principal executive office is located at 287 Bowman Avenue, Purchase, New York 10577 and our telephone number is (914) 701-0310. Our website is http://www.mvccapital.com. Copies of the Companys annual regulatory filings on Form 10-K, quarterly regulatory filings on Form 10-Q, Form 8-K, other regulatory filings, code of ethics, audit committee charter, compensation committee charter, nominating and corporate governance committee charter, corporate governance guidelines, and privacy policy may be obtained from our website, free of charge.
Our Investment Strategy
On November 6, 2003, Mr. Tokarz assumed his current positions as Chairman and Portfolio Manager. We seek to implement our investment objective (i.e., to maximize total return from capital appreciation and/or income) through making a broad range of private investments in a
variety of industries. The investments can include common and preferred stock, other forms of equity interests and warrants or rights to acquire equity interests, senior and subordinated loans, or convertible securities. During the fiscal year ended October 31, 2015, the Company made eight new investments and 5 follow-on investments in 4 existing portfolio companies, committing a total of $62.4 million of capital to these investments.
Prior to the adoption of our current investment objective, the Companys investment objective had been to achieve long-term capital appreciation from venture capital investments in information technology companies. The Companys investments had thus previously focused on investments in equity and debt securities of information technology companies. As of October 31, 2015, 1.1% of our assets consisted of investments made by the Companys former management team pursuant to the prior investment objective (the Legacy Investments). We are, however, managing these Legacy Investments to try and realize maximum returns. At October 31, 2015, 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.
Our new portfolio investments are made pursuant to our current objective and strategy. We are concentrating our investment efforts on small and middle-market companies that, in our view, provide opportunities to maximize total return from capital appreciation and/or income, though our current focus is more on yield generating investments. Under our investment approach, we have the authority to invest, without limit, in any one company, subject to any diversification limits that may be required in order for us to continue to qualify as a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). Presently due to our asset growth and composition, compliance with the RIC requirements limits our ability to make additional investments that represent more than 5% of our total assets or more than 10% of the outstanding voting securities of an issuer (Non-Diversified Investments).
We participate in the private equity business generally by providing negotiated equity and/or long-term debt investment capital. Our financing is generally used to fund growth, buyouts, acquisitions, recapitalizations, note purchases and/or bridge financings. We are typically the lead investor in such transactions, but may also provide equity and debt financing to companies led by private equity firms or others. We generally invest in private companies, though, from time to time, we may invest in small public companies that lack adequate access to public capital.
We may also seek to achieve our investment objective by establishing a subsidiary or subsidiaries that would serve as general partner to a private equity or other investment fund(s). Furthermore, the Board of Directors authorized the establishment of the MVC Private Equity Fund, L.P. (PE Fund), for which an indirect wholly-owned subsidiary, MVC GP II, LLC (MVC GP II), of the Company serves as the GP. On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in the PE Fund. The PE Fund closed on approximately $104 million of capital commitments. As of October 31, 2015, $14.6 million of the Companys commitment has been contributed. The Companys Board of Directors authorized the establishment of, and investment in, the PE Fund for a variety of reasons, including the Companys ability to make Non-Diversified Investments through the PE Fund. As previously disclosed, the Company is restricted in its ability to make Non-Diversified Investments. For services provided to the PE Fund, the GP and MVC Partners are together
entitled to receive 25% of all management fees and other fees paid by the PE Fund and its portfolio companies and up to 30% of the carried interest generated by the PE Fund. Further, at the direction of the Board of Directors, the GP retained TTG Advisers to serve as the portfolio manager of the PE Fund. In exchange for 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 Companys Advisory Agreement with TTG Advisers, TTG Advisers is not entitled to receive from the Company a management fee or an incentive fee on assets of the Company that are invested in the PE Fund. During the fiscal year ended October 31, 2012 and thereafter, MVC Partners was consolidated with the operations of the Company as MVC Partners limited partnership interest in the PE Fund is a substantial portion of MVC Partners operations. Previously, MVC Partners was presented as a portfolio company on the Consolidated Schedule of Investments. The consolidation of MVC Partners has not had any material effect on the financial position or net results of operations of the Company. Please see Note 2 of our consolidated financial statements Consolidation for more information.
As a result of the closing of the PE Fund, consistent with the Board-approved policy concerning the allocation of investment opportunities, the PE Fund received a priority allocation of all private equity investments that would otherwise be Non-Diversified Investments for the Company during the PE Funds investment period, which ended on October 28, 2014. Additional capital may be called for follow-on investments in existing portfolio companies of the PE Fund or to pay operating expenses of the PE Fund. For further discussion of this allocation policy, please see Our Investment Strategy Allocation of Investment Opportunities below.
Additionally, in pursuit of our objective, we may acquire a portfolio of existing private equity or debt investments held by financial institutions or other investment funds should such opportunities arise.
Furthermore, pending investments in portfolio companies pursuant to the Companys principal investment strategy, the Company may invest in certain securities on a short-term or temporary basis. In addition to cash-equivalents and other money market-type investments, such short-term investments may include exchange-traded funds and private investment funds offering periodic liquidity.
As of October 31, 2015 and October 31, 2014, the fair value/market value of the invested portion (excluding cash, escrow receivables and U.S. Treasury obligations) of our net assets as a percentage consisted of the following:
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Fair Value as a Percentage of Our Net Assets |
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Type of Investment |
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As of October 31, 2015 |
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As of October 31,
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Senior/Subordinated Loans and Credit facilities |
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47.09% |
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37.55% |
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Common Stock |
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5.30% |
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9.98% |
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Warrants |
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0.56% |
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0.21% |
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Preferred Stock |
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50.68% |
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46.66% |
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Guarantees |
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(0.01)% |
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(0.02)% |
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Common Equity Interest |
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23.69% |
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28.67% |
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LP Interest of the PE Fund |
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7.46% |
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5.81% |
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GP Interest of the PE Fund |
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0.19% |
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0.14% |
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LLC Interest |
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1.36% |
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1.16% |
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Substantially, all amounts not invested in securities of portfolio companies are invested in short-term, highly liquid money market investments , U.S. Government issued securities, or held in cash in an interest bearing account. As of October 31, 2015, these investments were valued at approximately $106.5 million or 36.2% of net assets.
The current portfolio has investments in a variety of industries, including energy, specialty chemicals, automotive dealerships, electrical engineering, medical devices, consumer products, value-added distribution, industrial manufacturing, financial services, and information technology in a variety of geographical areas, including the United States and Europe.
Market . We have developed and maintain relationships with intermediaries, including investment banks, industry executives, financial services companies and private mezzanine and equity sponsors to source investment opportunities. Through these relationships, we have been able to strengthen our position as an investor.
Investment Criteria . Prospective investments are evaluated by the investment team based upon criteria that may be modified from time to time. The criteria currently being used by management in determining whether to make an investment in a prospective portfolio company include, but are not limited to, managements view of:
· Opportunity to revitalize and redirect a companys resources and strategy;
· Stable free cash flow of the business;
· Businesses with secure market niches and predictable profit margins;
· The presence or availability of highly qualified management teams;
· The line of products or services offered and their market potential;
· The presence of a sustainable competitive advantage;
· Favorable industry and competitive dynamics; and
· Yield potential offered by an investment in such company.
Due diligence includes a thorough review and analysis of the business plan and operations of a potential portfolio company. We generally perform financial and operational due diligence, study the industry and competitive landscape, and meet with current and former employees, customers, suppliers and/or competitors. In addition, as applicable, we engage attorneys, independent accountants and other consultants to assist with legal, environmental, tax, accounting and marketing due diligence.
Investment Sourcing. Mr. Tokarz and the other investment professionals have established an extensive network of investment referral relationships. Our network of relationships with investors, lenders and intermediaries includes:
· Private mezzanine and equity investors;
· Investment banks;
· Industry executives;
· Business brokers;
· Merger and acquisition advisors;
· Financial services companies; and
· Banks, law firms and accountants.
Allocation of Investment Opportunities . In allocating investment opportunities, TTG Advisers adheres to the following policy, which was approved by the Board of Directors: TTG Advisers will give the Company priority with respect to all investment opportunities in (i) mezzanine and debt securities and (ii) equity or other non-debt investments that are (a) expected to be equal to or less than the lesser of 10% of the Companys net assets or $25.0 million, and (b) issued by U.S. companies with less than $150.0 million in revenues during the prior twelve months (MVC Targeted Investments). The PE Fund received a priority allocation of all the new equity investments (i.e., not follow-on investments in existing MVC portfolio companies) that would otherwise be Non-Diversified Investments for the Company, which will terminate on the deployment of 80% of the committed capital of the PE Fund. The investment period related to the PE Fund has ended. Additional capital may be called for follow-on investments in existing portfolio companies of the PE Fund or to pay operating expenses of the PE Fund. In addition, pursuant to a shared services arrangement with PPC Enterprises LLC (PPC), a registered investment adviser (of which Mr. Tokarz is a co-founder and investment team member) that provides advisory services to Series A of Public Pension Capital, LLC (the PPC Fund), a private equity fund, Firm personnel may refer to PPC and the PPC Fund any investment that is not: (i) an MVC Targeted Investment; and (ii) in a company that, at the time of acquisition, has EBITA in excess of $25 million or is expected to require, either at such time or over time, in excess of $25 million in aggregate equity capital (i.e., an investment that is outside of the PE Funds investment focus pursuant to its governing documents).
Investment Structure . Portfolio company investments typically will be negotiated directly with the prospective portfolio company or its affiliates. The investment professionals will structure the terms of a proposed investment, including the purchase price, the type of security to be purchased or financing to be provided and the future involvement of the Company and
affiliates in the portfolio companys business (including potential representation on its Board of Directors). The investment professionals will seek to structure the terms of the investment as to provide for the capital needs of the portfolio company and at the same time seek to maximize the Companys total return.
Once we have determined that a prospective portfolio company is a suitable investment, we work with the management and, in certain cases, other capital providers, such as senior, junior and/or equity capital providers, to structure an investment. We negotiate on how our investment is expected to relate relative to the other capital in the portfolio companys capital structure.
We make preferred and common equity investments in companies as a part of our investing activities, particularly when we see a unique opportunity to profit from the growth of a company and the potential to enhance our returns. At times, we may invest in companies that are undergoing new strategic initiatives or a restructuring but have several of the above attributes and a management team that we believe has the potential to successfully execute their plans. Preferred equity investments may be structured with a dividend yield, which may provide us with a current return, if earned and received by the Company.
Our senior, subordinated and mezzanine debt investments are tailored to the facts and circumstances of the deal. The specific structure is negotiated over a period of several weeks and is designed to seek to protect our rights and manage our risk in the transaction. We may structure the debt instrument to require restrictive affirmative and negative covenants, default penalties, lien protection, equity calls, take control provisions and board observation. Our debt investments are not, and typically will not be, rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade quality (rated lower than Baa3 by Moodys or lower than BBB by Standard & Poors, commonly referred to as junk bonds).
Our mezzanine debt investments are typically structured as subordinated loans (with or without warrants) that carry a fixed rate of interest. The loans may have interest-only payments in the early years and payments of both principal and interest in the later years, with maturities of three to ten years, although debt maturities and principal amortization schedules vary.
Our mezzanine debt investments may include equity features, such as warrants or options to buy a minority interest in a portfolio company. Any warrants or other rights we receive with our debt securities generally require only a nominal cost to exercise, and thus, as the portfolio company appreciates in value, we may achieve additional investment return from this equity interest. We may structure the warrants to provide minority rights provisions and event-driven puts. We may seek to achieve additional investment return from the appreciation and sale of our warrants.
Under certain circumstances, the Company or PE Fund may acquire more than 50% of the common stock of a company in a control buyout transaction. In addition to our common equity investment, we may also provide additional capital to the controlled portfolio company in the form of senior loans, subordinated debt or preferred stock.
We fund new investments using cash, the reinvestment of accrued interest and dividends in debt and equity securities, or the current reinvestment of interest and dividend income through the receipt of a debt or equity security (payment-in-kind income). From time to time, we may also opt to reinvest accrued interest receivable in a new debt or equity security, in lieu of
receiving such interest in cash and funding a subsequent investment. We may also acquire investments through the issuance of common or preferred stock, debt, or warrants representing rights to purchase shares of our common or preferred stock. The issuance of our stock as consideration may provide us with the benefit of raising equity without having to access the public capital markets in an underwritten offering, including the added benefit of the elimination of any commissions payable to underwriters.
Providing Management Assistance . As a business development company, we are required to make managerial assistance available to the companies in our investment portfolio. In addition to the interest and dividends received from our investments, we often generate additional fee income for the structuring, diligence, transaction, administration and management services and financial guarantees we provide to our portfolio companies through the Company or our wholly-owned subsidiary, MVCFS. In some cases, officers, directors and employees of the Company or the Adviser may serve as members of the Board of Directors of portfolio companies. The Company may provide guidance and management assistance to portfolio companies with respect to such matters as budgets, profit goals, business and financing strategies, management additions or replacements and plans for liquidity events for portfolio company investors such as a merger or initial public offering.
Portfolio Company Monitoring . We monitor our portfolio companies closely to determine whether or not they continue to be attractive candidates for further investment. Specifically, we monitor their ongoing performance and operations and provide guidance and assistance where appropriate. We would decline additional investments in portfolio companies that, in TTG Advisers view, do not continue to show promise. However, we may make follow-on investments in portfolio companies that we believe may perform well in the future.
TTG Advisers follows established procedures for monitoring equity and loan investments. The investment professionals have developed a multi-dimensional flexible rating system for all of the Companys portfolio investments. The rating grids are updated regularly and reviewed by the Portfolio Manager, together with the investment team. Additionally, the Companys Valuation Committee (the Valuation Committee) meets at least quarterly, to review a written valuation memorandum for each portfolio company and to discuss business updates. Furthermore, the Companys Chief Compliance Officer administers the Companys compliance policies and procedures, which includes the Companys investments in portfolio companies.
We exit our investments generally when a liquidity event takes place, such as the sale, recapitalization or initial public offering of a portfolio company. Our equity holdings, including shares underlying warrants, after the exercise of such warrants, typically include registration rights, which would allow us to sell the securities if the portfolio company completes a public offering.
Investment Approval Procedures . Generally, prior to approving any new investment, we follow the process outlined below. We usually conduct one to four months of due diligence and structuring before an investment is considered for approval. However, depending on the type of investment being contemplated, this process may be longer or shorter.
The typical key steps in our investment approval process are:
· Initial investment screening by deal person or investment team;
· Investment professionals present an investment proposal containing key terms and understandings (verbal and written) to the entire investment team;
· Our Chief Compliance Officer reviews the proposed investment for compliance with the 1940 Act, the Code and all other relevant rules and regulations;
· Investment professionals are authorized to commence due diligence;
· Any investment professional can call a meeting, as deemed necessary, to: (i) review the due diligence reports; (ii) review the investment structure and terms; (iii) or to obtain any other information deemed relevant;
· Once all due diligence is completed, the proposed investment is rated using a rating system, which tests several factors including, but not limited to, cash flow, EBITDA growth, management and business stability. We use this rating system as the base line for tracking the investment in the future;
· Our Chief Compliance Officer confirms that the proposed investment will not cause us to violate the 1940 Act, the Code or any other applicable rule or regulation;
· Mr. Tokarz approves the transaction; and
· The investment is funded.
Hedging Transactions. The Company, in the Advisers complete discretion, may also (but is not obligated to) enter into derivative or other transactions (such as forward, futures or options transactions) seeking to hedge the Companys or a portfolio companys exposure to currency, commodity or other risks.
Employees. Since the effectiveness of the Advisory Agreement on November 1, 2006, the Company has not had any direct employees. TTG Advisers employs 28 individuals, including investment and portfolio management professionals, operations professionals and administrative staff.
OPERATING EXPENSES
During the fiscal year ended October 31, 2015, the Company bore the costs relating to the Companys operations, including fees and expenses of the Independent Directors; fees of unaffiliated transfer agents, registrars and disbursing agents; legal and accounting expenses; costs of printing and mailing proxy materials and reports to shareholders; NYSE fees; management fee; incentive fee, if applicable; travel and due diligence costs related to investments; custodian fees and other extraordinary or nonrecurring expenses and other expenses properly payable by the Company. It should be noted that the Company and TTG Advisers had entered into an agreement pursuant to which TTG Advisers would absorb or reimburse operating expenses of the Company to the extent necessary to limit the Companys expense ratio to 3.5% in each of the 2009 and 2010 fiscal years (the consolidated expenses of the Company, including any amounts payable to TTG Advisers under the base management fee, but excluding the amount of any interest and other direct borrowing costs, taxes, incentive compensation, payments made by the GP of the PE Fund to TTG Advisers pursuant to the Portfolio Management Agreement
between the GP and TTG Advisers respecting the PE Fund and extraordinary expenses taken as a percentage of the Companys average net assets). On various dates, TTG Advisers and the Company entered into annual agreements to extend the expense cap of 3.5% to the 2011, 2012, 2013, 2014 and 2015 fiscal years (Expense Limitation Agreement). The Company and the Adviser also agreed in 2015 to modify the methodology so that the cap is applied to limit the Companys ratio of expenses to total assets less cash (the Modified Methodology), consistent with the asset level used to calculate the base management fee. (The expenses covered by the cap remain unchanged.) The amount of any payments made by the GP of the PE Fund to TTG Advisers pursuant to the Portfolio Management Agreement between the GP and TTG Advisers respecting the PE Fund continues to be excluded from the calculation of the Companys expense ratio under the Expense Limitation Agreement. In addition, for fiscal years 2010 through 2015, TTG Advisers voluntarily agreed to waive $150,000 of expenses that the Company is obligated to reimburse to TTG Advisers under the Advisory Agreement (the Voluntary Waiver). TTG Advisers also voluntarily agreed that any assets of the Company that are invested in exchange-traded funds would not be taken into account in the calculation of the base management fee due to TTG Advisers under the Advisory Agreement. As of October 31, 2015, the Company did not have an investment in an exchange-traded fund. On October 29, 2015, the Board approved the renewal of the Advisory Agreement for the 2016 fiscal year. Further, the Adviser agreed to waive a portion of the base management fee so that it is reduced to 1.50% for fiscal year 2016. In addition, the Adviser agreed to waive $1 million of any incentive fee on capital gains if and when payable to the Adviser under the Advisory Agreement. Please see Note 17 to our consolidated financial statements Subsequent Events for more information. Furthermore, the Company and the Adviser agreed to reduce the expense cap for fiscal 2016 to 3.25% under the Modified Methodology.
Under the externalized structure, all investment professionals of TTG Advisers and its staff, when and to the extent engaged in providing services required to be provided by TTG Advisers under the Advisory Agreement and the compensation and routine overhead expenses of such personnel allocable to such services, are provided and paid for by TTG Advisers and not by the Company, except that costs or expenses relating to the following items are borne by the Company: (i) the cost and expenses of any independent valuation firm; (ii) expenses incurred by TTG Advisers payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for the Company and in monitoring the Companys investments and performing due diligence on its prospective portfolio companies, provided, however, the retention by TTG Advisers of any third party to perform such services shall require the advance approval of the board (which approval shall not be unreasonably withheld) if the fees for such services are expected to exceed $30,000; once the third party is approved, any expenditure to such third party will not require additional approval from the board; (iii) interest payable on debt and other direct borrowing costs, if any, incurred to finance the Companys investments or to maintain its tax status; (iv) offerings of the Companys common stock and other securities; (v) investment advisory and management fees; (vi) fees and payments due under any administration agreement between the Company and its administrator; (vii) transfer agent and custodial fees; (viii) federal and state registration fees; (ix) all costs of registration and listing the Companys shares on any securities exchange; (x) federal, state and local taxes; (xi) independent directors fees and expenses; (xii) costs of preparing and filing reports or other documents required by governmental bodies (including the SEC); (xiii) costs of any reports, proxy statements or other notices to stockholders, including printing and mailing costs; (xiv) the cost of the Companys fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums; (xv) direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, independent auditors and outside
legal costs; (xvi) the costs and expenses associated with the establishment of a special purpose vehicle; (xvii) the allocable portion of the cost (excluding office space) of the Companys Chief Financial Officer, Chief Compliance Officer and Secretary in an amount not to exceed $200,000, per year, in the aggregate; (xviii) subject to a cap of $150,000 in any fiscal year of the Company, fifty percent of the unreimbursed travel and other related (e.g., meals) out-of-pocket expenses (subject to item (ii) above) incurred by TTG Advisers in sourcing investments for the Company; provided that , if the investment is sourced for multiple clients of TTG Advisers, then the Company shall only reimburse fifty percent of its allocable pro rata portion of such expenses; and (xix) all other expenses incurred by the Company in connection with administering the Companys business (including travel and other out-of-pocket expenses (subject to item (ii) above) incurred in providing significant managerial assistance to a portfolio company).
VALUATION OF PORTFOLIO SECURITIES
Pursuant to the requirements of the 1940 Act and in accordance with the Accounting Standards Codification (ASC), Fair Value Measurements and Disclosures (ASC 820), we value our portfolio securities at their current market values or, if market quotations are not readily available, at their estimated fair values. Because our portfolio company investments generally do not have readily ascertainable market values, we record these investments at fair value in accordance with our Valuation Procedures adopted by the Board of Directors, which are consistent with ASC 820. As permitted by the SEC, the Board of Directors has delegated the responsibility of making fair value determinations to the Valuation Committee, subject to the Board of Directors supervision and pursuant to our Valuation Procedures. Our Board of Directors may also hire independent consultants to review our Valuation Procedures or to conduct an independent valuation of one or more of our portfolio investments.
Pursuant to our Valuation Procedures, the Valuation Committee (which is comprised of three Independent Directors) determines fair values of portfolio company investments on a quarterly basis (or more frequently, if deemed appropriate under the circumstances). In doing so, the Committee considers the recommendations of TTG Advisers. The Committee also considers input and reviews by third party consultants retained to support the Companys valuation process. The Company has also adopted other enhanced processes related to valuations of controlled/affiliated portfolio companies. Any changes in valuation are recorded in the consolidated statements of operations as Net unrealized appreciation (depreciation) on investments.
Currently, our NAV per share is calculated and published on a quarterly basis. The Company calculates our NAV per share by subtracting all liabilities from the total value of our portfolio securities and other assets and dividing the result by the total number of outstanding shares of our common stock on the date of valuation. Fair values of foreign investments reflect exchange rates, as applicable, in effect on the last business day of the quarter end. Exchange rates fluctuate on a daily basis, sometimes significantly. Exchange rate fluctuations following the most recent fiscal year end are not reflected in the valuations reported in this Annual Report. See Item 1A Risk Factor, Investments in foreign debt or equity may involve significant risks in addition to the risks inherent in U.S. investments.
At October 31, 2015, approximately 76.08% 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 managements and the Valuation Committees view, a different initial value). During the period that an investment is held by the Company, its original cost may cease to approximate fair value as the result of market and investment specific factors. No pre-determined formula can be applied to determine fair value. Rather, the Valuation Committee analyzes fair value measurements based on the value at which the securities of the portfolio company could be sold in an orderly disposition over a reasonable period of time between willing parties, other than in a forced or liquidation sale. The liquidity event whereby the Company ultimately exits an investment is generally the sale, the merger, the recapitalization of a portfolio company or a public offering of its securities.
Valuation Methodology
There is no one methodology to determine fair value and, in fact, for any portfolio security, fair value may be expressed as a range of values, from which the Company derives a single estimate of fair value. To determine the fair value of a portfolio security, the Valuation Committee analyzes the portfolio companys 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, where practicable, Portfolio Companies to provide annual audited and more regular unaudited financial statements, and/or annual projections for the upcoming fiscal year.
The fair value of our portfolio securities is inherently subjective. Because of the inherent uncertainty of fair valuation of portfolio securities and escrow receivables that do not have readily ascertainable market values, our estimate of fair value may significantly differ from the value that would have been used had a ready market existed for the securities. Such values also do not reflect brokers fees or other selling costs, which might become payable on disposition of such investments.
ASC 820 provides a framework for measuring the fair value of assets and liabilities and provides guidance regarding a fair value hierarchy, which prioritizes information used to measure value. In determining fair value, the Valuation Committee primarily uses the level 3 inputs referenced in ASC 820.
ASC 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The price used to measure the fair value is not adjusted for transaction costs while the cost basis of our investments may include initial transaction costs. Under ASC 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset to which the reporting entity has access to as of the measurement date. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.
In June 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-08, Financial ServicesInvestment Companies. ASU 2013-08 provides clarifying guidance to determine if an entity qualifies as an investment company. ASU 2013-08 also requires an investment company to measure non-controlling interests in other investment companies at fair value. The following disclosures will also be required upon adoption of ASU 2013-08: (i) whether an entity is an investment company and is applying the accounting and reporting guidance for investment companies; (ii) information about changes, if any, in an entitys status as an investment company; and (iii) information about financial support provided or contractually required to be provided by an investment company to any of its investees. The requirements of ASU 2013-08 became effective for the Company beginning in fiscal year 2015. These updates have had no impact on the Companys financial condition or results of operations.
Our investments are carried at fair value in accordance with ASC 820. Unrestricted minority-owned publicly traded securities for which market quotations are readily available are valued at the closing market quote on the valuation date and majority-owned publicly traded securities and other privately held securities are valued as determined in good faith by the Valuation Committee of the Board of Directors. For legally or contractually restricted securities of companies that are publicly traded, the value is based on the closing market quote on the valuation date minus a discount for the restriction. At October 31, 2015, we did not own restricted or unrestricted securities of any publicly traded company in which we have a majority-owned interest, but did own one security in which we have a minority-owned interest.
If a security is publicly traded, the fair value is generally equal to the market value based on the closing price on the principal exchange on which the security is primarily traded, unless the security is restricted and in such a case, a discount is applied for the restriction.
For equity securities of Portfolio Companies, the Valuation Committee estimates the fair value based on market and/or income approach with value then attributed to equity or equity like securities using the enterprise value waterfall (Enterprise Value Waterfall) valuation methodology. Under the Enterprise Value Waterfall valuation methodology, the Valuation Committee estimates the enterprise fair value of the portfolio company and then waterfalls the enterprise value over the portfolio companys securities in order of their preference relative to one another. To assess the enterprise value of the portfolio company, the Valuation Committee weighs some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing assets may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company, and third-party asset and real estate appraisals. For non-performing assets, the Valuation Committee may estimate the liquidation or collateral value of the portfolio companys assets. The Valuation Committee also takes into account historical and anticipated financial results.
In assessing enterprise value, the Valuation Committee considers the mergers and acquisitions (M&A) market as the principal market in which the Company would sell its investments in portfolio companies under circumstances where the Company has the ability to
control or gain control of the board of directors of the portfolio company (Control Companies). This approach is consistent with the principal market that the Company would use for its portfolio companies if the Company has the ability to initiate a sale of the portfolio company as of the measurement date, i.e., if it has the ability to control or gain control of the board of directors of the portfolio company as of the measurement date. In evaluating if the Company can control or gain control of a portfolio company as of the measurement date, the Company takes into account its equity securities on a fully diluted basis, as well as other factors.
For non-Control Companies, consistent with ASC 820, the Valuation Committee considers a hypothetical secondary market as the principal market in which it would sell investments in those companies. The Company also considers other valuation methodologies such as the Option Pricing Method and liquidity preferences when valuing minority equity positions of a portfolio company.
For loans and debt securities of non-Control Companies (for which the Valuation Committee has identified the hypothetical secondary market as the principal market), the Valuation Committee determines fair value based on the assumptions that a hypothetical market participant would use to value the security in a current hypothetical sale using a market yield (Market Yield) valuation methodology. In applying the Market Yield valuation methodology, the Valuation Committee determines the fair value based on such factors as third party broker quotes (if available) and market participant assumptions, including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date.
Estimates of average life are generally based on market data of the average life of similar debt securities. However, if the Valuation Committee has information available to it that the debt security is expected to be repaid in the near term, the Valuation Committee would use an estimated life based on the expected repayment date.
The Valuation Committee determines fair value of loan and debt securities of Control Companies based on the estimate of the enterprise value of the portfolio company. To the extent the enterprise value exceeds the remaining principal amount of the loan and all other debt securities of the company, the fair value of such securities is generally estimated to be their cost. However, where the enterprise value is less than the remaining principal amount of the loan and all other debt securities, the Valuation Committee may discount the value of such securities to reflect an impairment.
For the Companys or its subsidiarys investment in the PE Fund, for which an indirect wholly-owned subsidiary of the Company serves as the general partner (the GP) of the PE Fund, the Valuation Committee relies on the GPs determination of the fair value of the PE Fund which will be generally valued, as a practical expedient, utilizing the net asset valuations provided by the GP, which will be made: (i) no less frequently than quarterly as of the Companys fiscal quarter end and (ii) with respect to the valuation of PE Fund investments in portfolio companies, will be based on methodologies consistent with those set forth in the Companys valuation procedures. In making its determinations, the GP considers and generally relies on TTG Advisers recommendations. The determination of the net asset value of the Companys or its subsidiarys investment in the PE Fund will follow the methodologies described for valuing interests in private investment funds (Investment Vehicles) described below. Additionally, when both the Company and the PE Fund hold investments in the same
portfolio company, the GPs Fair Value determination shall be based on the Valuation Committees determination of the Fair Value of the Companys portfolio security in that portfolio company.
As permitted under GAAP, the Companys interests in private investment funds are generally valued, as a practical expedient, utilizing the net asset valuations provided by management of the underlying Investment Vehicles, without adjustment, unless TTG Advisers is aware of information indicating that a value reported does not accurately reflect the value of the Investment Vehicle, including any information showing that the valuation has not been calculated in a manner consistent with GAAP. Net unrealized appreciation (depreciation) of such investments is recorded based on the Companys proportionate share of the aggregate amount of appreciation (depreciation) recorded by each underlying Investment Vehicle. The Companys proportionate investment interest includes its share of interest and dividend income and expense, and realized and unrealized gains and losses on securities held by the underlying Investment Vehicles, net of operating expenses and fees. Realized gains and losses on distributions from Investment Vehicles are generally recognized on a first in, first out basis.
The Company applies the practical expedient to interests in Investment Vehicles on an investment by investment basis, and consistently with respect to the Companys entire interest in an investment. The Company may adjust the valuation obtained from an Investment Vehicle with a premium, discount or reserve if it determines that the net asset value is not representative of fair value.
If the Company intends to sell all or a portion of its interest in an Investment Vehicle to a third-party in a privately negotiated transaction near the valuation date, the Company will consider offers from third parties to buy the interest in an Investment Vehicle in valuations, which may be discounted for both probability of close and time.
When the Company receives nominal cost warrants or free equity securities (nominal cost equity) with a debt security, the Company typically allocates its cost basis in the investment between debt securities and nominal cost equity at the time of origination. If the Company is not reimbursed for investment or transaction related costs at the time an investment is made, the Company typically capitalizes those costs to the cost basis of the investment.
Interest income, adjusted for amortization of premium and accretion of discount on a yield to maturity methodology, is recorded on an accrual basis to the extent that such amounts are expected to be collected. Origination and/or closing fees associated with investments in portfolio companies are accreted into income over the respective terms of the applicable loans. Upon the prepayment of a loan or debt security, any unamortized original issue discount or market discount is recorded as a realized gain. Prepayment premiums are recorded on loans when received as interest income. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that the Company expects to collect such amounts.
For loans, debt securities, and preferred securities with contractual payment-in-kind interest or dividends, which represent contractual interest/dividends accrued and added to the loan balance or liquidation preference that generally becomes due at maturity, the Company will not ascribe value to payment-in-kind interest/dividends, if the portfolio company valuation indicates that the payment-in-kind interest is not collectible. However, the Company may ascribe value to payment-in-kind interest if the health of the portfolio company and the underlying securities are
not in question. All payment-in-kind interest that has been added to the principal balance or capitalized is subject to ratification by the Valuation Committee.
Escrows from the sale of a portfolio company are generally valued at an amount, which may be expected to be received from the buyer under the escrows various conditions and discounted for both risk and time.
ASC 460, Guarantees , requires the Company to estimate the fair value of the guarantee obligation at its inception and requires the Company to assess whether a probable loss contingency exists in accordance with the requirements of ASC 450, Contingencies . The Valuation Committee typically will look at the pricing of the security in which the guarantee provided support for the security and compare it to the price of a similar or hypothetical security without guarantee support. The difference in pricing will be discounted for time and risk over the period in which the guarantee is expected to remain outstanding.
CUSTODIAN
US Bank National Association is the primary custodian (the Primary Custodian) of the Companys portfolio securities. The principal business office of the Primary Custodian is 1555 North River Center Drive, Suite 302, Milwaukee, WI 53212.
JP Morgan Chase Bank, N.A. (JP Morgan) and Branch Banking and Trust Company (BB&T) also serve as custodians for certain securities and other assets of the Company. The principal business office of JP Morgan is 270 Park Avenue, New York, NY 10017 and the principal office of BB&T is 200 West 2 nd Street, Winston Salem, North Carolina 27101.
Santander Bank N.A. and Wintrust Bank also serve as custodians for certain assets of the Company. The principal business office of Santander Bank N.A. is 75 State Street, Boston, Massachusetts 02109 and the principal business office of Wintrust Bank is 9700 W. Higgins Road, Suite 800, Rosemont, Illinois 60018.
TRANSFER AGENT AND PLAN AGENT
The Company employs Computershare Ltd. (the Plan Agent) as its transfer agent to record transfers of the shares, maintain proxy records, process distributions and to act as agent for each participant in the Companys dividend reinvestment plan. The principal business office of the Plan Agent is 250 Royall Street, Canton, Massachusetts 02021 and the phone number for the plan agent is (781) 575-2000.
CERTAIN GOVERNMENT REGULATIONS
We operate in a highly regulated environment. The following discussion generally summarizes certain government regulations.
Business Development Company. A business development company is defined and subject to the regulations of the 1940 Act. A business development company must be organized in the United States for the purpose of investing in or lending to primarily private companies and making managerial assistance available to them. A business development company may use
capital provided by public shareholders and from other sources to invest in long-term, private investments in businesses.
As a business development company, we may not acquire any asset other than qualifying assets unless, at the time we make the acquisition, the value of our qualifying assets represents at least 70% of the value of our total assets. In accordance with the 1940 Act, valuation for these purposes are based on the Companys most recently filed quarterly or annual report, as applicable. The principal categories of qualifying assets relevant to our business are:
(1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions):
(a) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which:
(i) is organized under the laws of, and has its principal place of business in, the United States;
(ii) is not an investment company (other than a small business investment company wholly-owned by the business development company) or a company that would be an investment company but for certain exclusions under the 1940 Act; and
(iii) satisfies one of the following:
· does not have any class of securities with respect to which a broker or dealer may extend margin credit;
· is controlled by a business development company or a group of companies including a business development company and the business development company has an affiliated person who is a director of the eligible portfolio company; or
· is a small and solvent company having total assets of not more than $4.0 million and capital and surplus of not less than $2.0 million.
(b) is a company that meets the requirements of (a)(i) and (ii) above, but is not an eligible portfolio company because it has issued a class of securities on a national securities exchange, if:
(i) at the time of the purchase, we own at least 50% of the (x) greatest number of equity securities of such issuer and securities convertible into or exchangeable for such securities; and (y) the greatest amount of debt securities of such issuer, held by us at any point in time during the period when such issuer was an eligible portfolio company; and
(ii) we are one of the 20 largest holders of record of such issuers outstanding voting securities; or
(c) is a company that meets the requirements of (a)(i) and (ii) above, but is not an eligible portfolio company because it has issued a class of securities on a national securities exchange, if the aggregate market value of such companys outstanding voting and non-voting common equity is less than $250.0 million.
(2) Securities of any eligible portfolio company that we control.
(3) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.
(4) Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company.
(5) Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities.
(6) Cash, cash equivalents, U.S. Government securities or high-quality debt maturing in one year or less from the time of investment.
To include certain securities described above as qualifying assets for the purpose of the 70% test, a business development company must make available to the issuer of those securities significant managerial assistance such as providing significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company, or making loans to a portfolio company. We offer to provide managerial assistance to each of our portfolio companies.
As a business development company, the Company is entitled to issue senior securities in the form of stock or senior securities representing indebtedness, including debt securities and preferred stock, as long as each class of senior security has an asset coverage ratio of at least 200% immediately after each such issuance. See Risk Factors. The Company may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our Independent Directors and, in some cases, prior approval by the SEC. On July 11, 2000, the SEC granted us an exemptive order permitting us to make co-investments with certain of our affiliates in portfolio companies, subject to certain conditions. Under the exemptive order, the Company is permitted to co-invest in certain portfolio companies with its affiliates, subject to specified conditions. Under the terms of the exemptive order, portfolio companies purchased by the Company and its affiliates are required to be approved by the Independent Directors and are required to satisfy certain other conditions established by the SEC.
As with other companies subject to the regulations of the 1940 Act, a business development company must adhere to certain other substantive ongoing regulatory requirements. A majority of our directors must be persons who are not interested persons, as that term is defined in the 1940 Act. Additionally, we are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect the business development company. Furthermore, as a
business development company, we are prohibited from protecting any director or officer against any liability to the company or our shareholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such persons office.
We and TTG Advisers maintain a code of ethics that establishes procedures for personal investment and restricts certain transactions by our personnel. The code of ethics generally does not permit investment by our employees in securities that may be purchased or are held by us. You may read and copy the code of ethics at the SECs Public Reference Room in Washington, D.C. You may obtain information on operations of the Public Reference Room by calling the SEC at (202) 942-8090. In addition, the code of ethics is available on the EDGAR Database on the SEC Internet site at http://www.sec.gov. You may obtain copies of the code of ethics, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov, or by writing to the SECs Public Reference Section, 100 F Street, NE, Washington, D.C. 20549. The code of ethics is also posted on our website at http://www.mvccapital.com.
We may not change the nature of our business so as to cease to be, or withdraw our election as, a business development company unless authorized by vote of a majority of the outstanding voting securities, as defined in the 1940 Act, of our shares. A majority of the outstanding voting securities of a company is defined by the 1940 Act as the lesser of: (i) 67% or more of such companys shares present at a meeting if more than 50% of the outstanding shares of such company are present and represented by proxy, or (ii) more than 50% of the outstanding shares of such company.
We are subject to periodic examinations by the SEC for compliance with the 1940 Act.
Investing in MVC Capital involves a number of significant risks relating to our business and investment objective. As a result, there can be no assurance that we will achieve our investment objective.
BUSINESS RISKS
Business risks are risks that are associated with general business conditions, the economy, and the operations of the Company. Business risks are not risks associated with our specific investments or an offering of our securities.
We depend on key personnel of TTG Advisers, especially Mr. Tokarz, in seeking to achieve our investment objective.
We depend on the continued services of Mr. Tokarz and certain other key management personnel of TTG Advisers. If we were to lose access to any of these personnel, particularly Mr. Tokarz, it could negatively impact our operations and we could lose business opportunities. There is a risk that Mr. Tokarzs expertise may be unavailable to the Company, which could significantly impact the Companys ability to achieve its investment objective.
Our returns may be substantially lower than the average returns historically realized by the private equity industry as a whole.
Past performance of the private equity industry is not necessarily indicative of that sectors future performance, nor is it necessarily a good proxy for predicting the returns of the Company. We cannot guarantee that we will meet or exceed the rates of return historically realized by the private equity industry as a whole. Additionally, our overall returns are impacted by certain factors related to our structure as a publicly-traded business development company, including:
· The substantially lower return we are likely to realize on short-term liquid investments during the period in which we are identifying potential investments, and
· The periodic disclosure required of business development companies, which could result in the Company being less attractive as an investor to certain potential portfolio companies.
Substantially all of our portfolio investments and escrow receivables are recorded at fair value and, as a result, there is a degree of uncertainty regarding the carrying values of our portfolio investments.
Pursuant to the requirements of the 1940 Act, because our portfolio company investments do not have readily ascertainable market values, we record these investments at fair value in accordance with our Valuation Procedures adopted by our Board of Directors. As permitted by the SEC, the Board of Directors has delegated the responsibility of making fair value determinations to the Valuation Committee, subject to the Board of Directors supervision and pursuant to the Valuation Procedures.
At October 31, 2015, approximately 76.08% 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 companys financial results and projections and publicly traded comparable companies when available, which may be dependent on general economic conditions. We specifically value each individual investment and record unrealized depreciation for an investment that we believe has become impaired, including where collection of a loan or realization of an equity security is doubtful. Conversely, we will record unrealized appreciation if we have an indication (based on a significant development) that the underlying portfolio company has appreciated in value and, therefore, our equity security has also appreciated in value, where appropriate. Without a readily ascertainable market value and because of the inherent uncertainty of fair valuation, fair value of our investments may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.
Pursuant to our Valuation Procedures, our Valuation Committee (which is currently comprised of three Independent Directors) reviews, considers and determines fair valuations on a quarterly basis (or more frequently, if deemed appropriate under the circumstances). Any changes in valuation are recorded in the consolidated statements of operations as Net change in unrealized appreciation (depreciation) on investments.
We have identified a material weakness in our internal control over financial reporting. Our 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 have 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. This contributed to a delay in the filing of our Annual Report on Form 10-K for the fiscal year ended October 31, 2014 and, as a result, this Form 10-K for the fiscal year ended October 31, 2015, as well as the restatement of our previously issued quarterly and annual financial statements for the fiscal year ended October 31, 2013. For further information regarding this matter and the related material weakness, please refer to Item 9A. Controls and Procedures.
In addition, we may experience delay or be unable to meet our reporting obligations or to comply with SEC rules and regulations, which could result in investigations and sanctions by regulatory authorities. Managements ongoing assessment of disclosure controls and procedures as well as internal control over financial reporting may in the future identify additional weaknesses and conditions that need to be addressed. Any failure to improve our disclosure controls and procedures or internal control over financial reporting to address identified weaknesses in the future, if they were to occur, could prevent us from maintaining accurate accounting records and discovering material accounting errors, which in turn, could adversely affect our business and the value of our common stock.
Our failure to prepare and timely file our periodic reports with the SEC limits our access to the public markets to raise debt or equity capital
We did not file this Annual Report on Form 10-K within the timeframe required by the SEC. Because we have not remained current in our reporting requirements with the SEC, we are limited in our ability to access the public markets to raise debt or equity capital. Our limited ability to access the public markets could prevent us from pursuing transactions or implementing business strategies that we might otherwise believe are beneficial to our business.
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 Companys investments. Such declines could also lead to diminished investment opportunities for the Company, prevent the Company from successfully executing its investment strategies or require the Company to dispose of investments at a loss while such adverse market conditions prevail.
We may not realize gains from our equity investments.
When we invest in mezzanine and senior debt securities, we may acquire warrants or other equity securities as well. We may also invest directly in various equity securities. Our goal is ultimately to realize gains upon our disposition of such interests. However, the equity interests we receive or invest in may not appreciate in value and, in fact, may decline in value. In addition, the equity securities we receive or invest in may be subject to restrictions on resale during periods in which it would be advantageous to sell. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.
The market for private equity investments can be highly competitive. In some cases, our status as a regulated business development company may hinder our ability to participate in investment opportunities.
We face competition in our investing activities from private equity funds, other business development companies, investment banks, investment affiliates of large industrial, technology, service and financial companies, small business investment companies, wealthy individuals and foreign investors. As a regulated business development company, we are required to disclose quarterly the name and business description of portfolio companies and the value of any portfolio securities. Many of our competitors are not subject to this disclosure requirement. Our obligation to disclose this information could hinder our ability to invest in certain portfolio companies. Additionally, other regulations, current and future, may make us less attractive as a potential investor to a given company than a private equity fund not subject to the same regulations. Furthermore, some of our competitors have greater resources than we do. Increased competition
would make it more difficult for us to purchase or originate investments at attractive prices. As a result of this competition, sometimes we may be precluded from making certain investments.
Our ability to use our capital loss carryforwards may be subject to limitations.
On October 31, 2015, the Company did not have a net capital loss carryforward. The Company had approximately $18.2 million in unrealized losses associated with Legacy Investments as of October 31, 2015. 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. The Regulated Investment Company Modernization Act of 2010, which was enacted on December 22, 2010, changed various technical rules governing the tax treatment of regulated investment companies, including the treatment of capital loss carryforwards. Please see Note 12 of our consolidated financial statements Tax Matters for more information.
Loss of pass-through tax treatment would substantially reduce net assets and income available for dividends.
We have operated so as to qualify as a RIC. If we meet source of income, diversification and distribution requirements, we will qualify for effective pass-through tax treatment. We would cease to qualify for such pass-through tax treatment if we were unable to comply with these requirements. In addition, we may have difficulty meeting the requirement to make distributions to our shareholders because in certain cases we may recognize income before or without receiving cash representing such income, such as in the case of debt obligations that are treated as having original issue discount. If we fail to qualify as a RIC, we will have to pay corporate-level taxes on all of our income whether or not we distribute it, which would substantially reduce the amount of income available for distribution to our shareholders, and all of our distributions will be taxed to our shareholders as ordinary corporate distributions. Even if we qualify as a RIC, we generally will be subject to a corporate-level income tax on the income we do not distribute. Moreover, if we do not distribute at least; (1) 98% of our ordinary income during each calendar year, (2) 98.2% of our net capital gains realized in the period from November 1 of the prior year through October 31 of the current year, and (3) all such ordinary income and net capital gains for the previous years that were not distributed during those years, we generally will be subject to a 4% excise tax on certain undistributed amounts.
There are certain risks associated with the Company holding debt obligations that are treated under applicable tax rules as having original issue discount.
For federal income tax purposes, we may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (OID) (such as debt instruments with payment-in-kind, or PIK, interest or, in certain cases, increasing interest rates or debt instruments that were issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the
obligation, regardless of whether cash representing such income is received by us in the same taxable year. We may also have to include in income other amounts that we have not yet received in cash, such as deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. We anticipate that a portion of our income may constitute original issue discount or other income required to be included in taxable income prior to receipt of cash. Further, we may elect to amortize market discounts and include such amounts in our taxable income in the current year, instead of upon disposition, as an election not to do so would limit our ability to deduct interest expenses for tax purposes.
Any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of the accrual. Therefore, we may be required to make a distribution to our shareholders in order to satisfy the annual distribution requirement necessary to qualify for and maintain RIC tax treatment under Subchapter M of the Code, even though we will not have received any corresponding cash amount. As a result, we may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for or maintain RIC tax treatment and thus become subject to corporate-level income tax, as described in the previous risk factor regarding loss of pass-through tax treatment.
Additionally, the higher interest rates of OID instruments reflect the payment deferral and increased credit risk associated with these instruments, and OID instruments generally represent a significantly higher credit risk than coupon loans. Even if the accounting conditions for income accrual are met, the borrower could still default when the Companys 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 Companys cash distributions. For accounting purposes, any cash distributions to shareholders representing OID income are not treated as coming from paid-in capital, even though the cash to pay them comes from the offering proceeds. Thus, despite the fact that a distribution of OID income comes from the cash invested by the shareholders, the 1940 Act does not require that shareholders be given notice of this fact by reporting it as a return of capital. PIK interest has the effect of generating investment income and potentially increasing the incentive fees payable to TTG Adviser at a compounding rate. In addition, the deferral of PIK interest also reduces the loan-to-value ratio at a compounding rate. Furthermore, OID creates the risk that fees will be paid to TTG Adviser based on non-cash accruals that ultimately may not be realized, while TTG Adviser will be under no obligation to reimburse the Company for these fees.
Our ability to grow depends on our ability to raise capital.
To fund new investments, periodically we may need to issue equity securities or borrow from financial institutions. Unfavorable economic conditions could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. If we fail to obtain capital to fund our investments, it could limit both our ability to grow our business and our profitability. With certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ depends on TTG Advisers and our board of
directors assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to maintain our current facilities or obtain other lines of credit at all or on terms acceptable to us.
Complying with the RIC requirements may cause us to forego otherwise attractive opportunities.
In order to qualify as a RIC for U.S. federal income tax purposes, we must satisfy tests concerning the sources of our income, the nature and diversification of our assets and the amounts we distribute to our shareholders. We may be unable to pursue investments that would otherwise be advantageous to us in order to satisfy the source of income or asset diversification requirements for qualification as a RIC. In particular, to qualify as a RIC, at least 50% of our assets must be in the form of cash and cash items, Government securities, securities of other RICs, and other securities that represent not more than 5% of our total assets and not more than 10% of the outstanding voting securities of the issuer. We have from time to time held a significant portion of our assets in the form of securities that exceed 5% of our total assets or more than 10% of the outstanding voting securities of an issuer, and compliance with the RIC requirements currently limits us from making investments that represent more than 5% of our total assets or more than 10% of the outstanding voting securities of the issuer. Thus, compliance with the RIC requirements may hinder our ability to take advantage of investment opportunities believed to be attractive, including potential follow-on investments in certain of our portfolio companies.
Regulations governing our operation as a business development company affect our ability to, and the way in which we, raise additional capital.
Generally we are not able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock or warrants at a price below the then-current net asset value per share of our common stock if our board of directors determines that such sale is in the best interests of the Company and its stockholders, and, if required by law or regulation, our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount). If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, then the percentage ownership of our stockholders at that time will decrease, and you might experience dilution.
Any failure on our part to maintain our status as a business development company would reduce our operating flexibility.
We intend to continue to qualify as a business development company (BDC) under the 1940 Act. The 1940 Act imposes numerous constraints on the operations of BDCs. For example, BDCs are required to invest at least 70% of their total assets in specified types of securities, primarily in private companies or thinly-traded U.S. public companies, cash, cash equivalents, U.S. government securities and other high quality debt investments that mature in one year or less. Furthermore, any failure to comply with the requirements imposed on BDCs by the 1940 Act could cause the SEC to bring an enforcement action against us and/or expose us to claims of private litigants. In addition, upon approval of a majority of our stockholders, we may elect to withdraw our status as a business development company. If we decide to withdraw our election,
or if we otherwise fail to qualify as a business development company, we may be subject to the substantially greater regulation under the 1940 Act as a closed-end investment company. Compliance with such regulations would significantly decrease our operating flexibility, and could significantly increase our costs of doing business.
Changes in the law or regulations that govern business development companies and RICs, including changes in tax regulations, may significantly impact our business.
We and our portfolio companies are subject to regulation by laws at the local, state and federal levels, including federal securities law and federal taxation law. These laws and regulations, as well as their interpretation, may change from time to time. A change in these laws or regulations may significantly affect our business.
Results may fluctuate and may not be indicative of future performance.
Our operating results will fluctuate and, therefore, you should not rely on current or historical period results to be indicative of our performance in future reporting periods. In addition to many of the above-cited risk factors, other factors could cause operating results to fluctuate including, among others, variations in the investment origination volume and fee income earned, variation in timing of prepayments, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions.
Our common stock price can be volatile.
The trading price of our common stock may fluctuate substantially. The price of the common stock may be higher or lower than the price you pay for your shares, depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include the following:
· Price and volume fluctuations in the overall stock market from time to time;
· Significant volatility in the market price and trading volume of securities of business development companies or other financial services companies;
· Volatility resulting from trading by third parties in derivative instruments that use our common stock as the referenced asset, including puts, calls, long-term equity participation securities, or LEAPs, or short trading positions;
· Changes in regulatory policies or tax guidelines with respect to business development companies or RICs;
· Our adherence to applicable regulatory and tax requirements, including the current restriction on our ability to make Non-Diversified Investments;
· Actual or anticipated changes in our earnings or fluctuations in our operating results or changes in the expectations of securities analysts;
· General economic conditions and trends;
· Loss of a major funding source, which would limit our liquidity and our ability to finance transactions;
· Changes in interest rates; or
· 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, have traded at a premium to our NAV, currently, our shares are trading at a discount to NAV, which discount may fluctuate over time.
We have not established a mandated minimum dividend payment level and we cannot assure you of our ability to make distributions to our shareholders in the future.
We cannot assure that we will achieve investment results that will allow us to make cash distributions or year-to-year increases in cash distributions. Our ability to make distributions is impacted by, among other things, the risk factors described in this report. In addition, the asset coverage test applicable to us as a business development company can limit our ability to make distributions. Any distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our RIC status and such other factors as our board of directors may deem relevant from time to time. We cannot assure you of our ability to make distributions to our shareholders.
During certain periods, our distribution proceeds (dividends) have exceeded and may, in the future, exceed our taxable earnings and profits. Therefore, during those times, portions of the distributions that we make may represent a return of capital to you for tax purposes, which will reduce your tax basis in your shares.
During certain periods, our distribution proceeds have exceeded and may, in the future, exceed our earnings and profits. For example, in the event that we encounter delays in locating suitable investment opportunities, we may pay all or a portion of our distributions from the proceeds of any securities offering, from borrowings that were made in anticipation of future cash flow or from available funds. Therefore, portions of the distributions that we make may be a return of the money that you originally invested and represent a return of capital to you for tax purposes. A return of capital generally is a return of your investment rather than a return of earnings or gains derived from our investment activities and will be made after deducting the fees and expenses payable in connection with the offering. Such a return of capital is not taxable, but reduces your tax basis in your shares, which may result in higher taxes for you even if your shares are sold at a price below your original investment.
We have borrowed and may continue to borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.
We have borrowed and may continue to borrow money (subject to the 1940 Act limits) in seeking to achieve our investment objective going forward. Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, can increase the risks associated with investing in our securities.
Under the provisions of the 1940 Act, we are permitted, as a business development company, to borrow money or issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous.
We have borrowed from and may continue to borrow from, and issue senior debt securities to, banks, insurance companies and other private and public lenders. Lenders of these senior securities have fixed dollar claims on our assets that are superior to the claims of our common shareholders. If the value of our assets increases, then leveraging would cause the NAV attributable to our common stock to increase more sharply than it would had we not used leverage. Conversely, if the value of our consolidated assets decreases, leveraging would cause the NAV to decline more sharply than it otherwise would have had we not used leverage. Similarly, any increase in our consolidated income in excess of consolidated interest expense on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our consolidated income would cause net investment income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock dividend payments. Leverage is generally considered a speculative investment technique.
As of October 31, 2015, we had $90 million in borrowings under our short-term credit facility, Credit Facility II (as defined below), due on May 31, 2016. Further, we have approximately $114.4 million in aggregate principal amount of Senior Notes (as defined below), due on January 15, 2023, and an approximately $8.0 million Bridge loan outstanding (as defined below), due on December 31, 2015. See Note 17 Subsequent Events for additional information. We are also contemplating accessing additional debt through another credit facility. 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 managements and our Board of Directors assessments of market and other factors at the time of any proposed borrowing. The Senior Notes and Credit Facility II impose certain financial and operating covenants that may restrict a portion of our business activities, including limitations that could hinder our ability to obtain additional financings and in some cases, to increase our dividends. Any additional facility we access could also impose additional covenants that could restrict our business activities. A failure to add new or replacement debt facilities or issue additional debt securities or other evidences of indebtedness could have an adverse effect on our business, financial condition or results of operations.
Changes in interest rates may affect our cost of capital and net operating income and our ability to obtain additional financing.
Because we have borrowed and may continue to borrow money to make investments, our net investment income before net realized and unrealized gains or losses, or net investment income, may be dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates would not have a material adverse effect on our net investment income. 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 Companys net investment income. In periods of declining interest rates, we may have difficulty investing our borrowed capital into investments that offer an appropriate return. In periods of sharply rising interest rates, our cost of funds would increase, which could reduce our net investment income. We may use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. We may utilize our short-term credit facilities as a means to bridge to long-term financing. Our long-term fixed-rate investments are financed primarily with equity and long-term fixed-rate debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Additionally, we cannot assure you that financing will be available on acceptable terms, if at all. Recent turmoil in the credit markets has greatly reduced the availability of debt financing. Deterioration in the credit markets, which could delay our ability to sell certain of our loan investments in a timely manner, could also negatively impact our cash flows.
A portion of our existing investment portfolio was not selected by the investment team of TTG Advisers.
As of October 31, 2015, 1.1% of the Companys assets were represented by Legacy Investments. These investments were made pursuant to the Companys prior investment objective of seeking long-term capital appreciation from venture capital investments in information technology companies. Generally, a cash return may not be received on these investments until a liquidity event, i.e., a sale, public offering or merger, occurs. Until then, these Legacy Investments remain in the Companys portfolio. The Company is managing them to seek to realize maximum returns.
Under the Advisory Agreement, TTG Advisers is entitled to compensation based on our portfolios performance. This arrangement may result in riskier or more speculative investments in an effort to maximize incentive compensation. Additionally, because the base management fee payable under the Advisory Agreement is based on total assets less cash, TTG Advisers may have an incentive to increase portfolio leverage in order to earn higher base management fees.
The way in which the compensation payable to TTG Advisers is determined may encourage the investment team to recommend riskier or more speculative investments and to use leverage to increase the return on our investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would adversely affect our shareholders, including investors in this offering. In addition, key criteria related to determining appropriate investments and investment strategies, including the preservation of capital, might be under-weighted if the investment team focuses exclusively or disproportionately on maximizing returns.
There are potential conflicts of interest that could impact our investment returns.
Our officers and directors, and members of the TTG Advisers investment team, may serve other entities, including the PE Fund, PPC Fund and others that operate in the same or similar lines of business as we do. Accordingly, they may have obligations to those entities, the fulfillment of which might not be in the best interests of the Company or our shareholders. It is possible that new investment opportunities that meet our investment objective may come to the attention of one of the management team members or our officers or directors in his or her role as an officer or director of another entity or as an investment professional associated with that entity, and, if so, such opportunity might not be offered, or otherwise made available, to the Company.
Additionally, as an investment adviser, TTG Advisers has a fiduciary obligation to act in the best interests of its clients, including us. To that end, if TTG Advisers manages any additional investment vehicles or client accounts (which includes its current management of the PE Fund and the PPC Fund), TTG Advisers will endeavor to allocate investment opportunities in a fair and equitable manner. When the investment professionals of TTG Advisers identify an investment, they will have to choose which investment fund should make the investment. As a result, there may be times when the management team of TTG Advisers has interests that differ from those of our shareholders, giving rise to a conflict. In an effort to mitigate situations that give rise to such conflicts, TTG Advisers adheres to a policy (which was approved by our Board of Directors) relating to allocation of investment opportunities, which generally requires, among other things, that TTG Advisers continue to offer the Company MVC Targeted Investments that are not Non-Diversified Investments. For more information on the allocation policy, please see Our Investment Strategy Allocation of Investment Opportunities above.
Our relationship with any investment vehicle we or TTG Advisers manage could give rise to conflicts of interest with respect to the allocation of investment opportunities between us on the one hand and the other vehicles on the other hand.
Our subsidiaries are authorized to and serve as a general partner or managing member to a private equity or other investment vehicle(s) (Other Vehicles). In addition, TTG Advisers may serve as an investment manager, sub-adviser or portfolio manager to Other Vehicles. Further, Mr. Tokarz is a co-founder of PPC, a registered investment adviser that provides advisory services to Series A of the PPC Fund. As a result of this relationship, certain of PPCs principals and other PPC investment professionals may make themselves available, from time to time, to consult with TTG Advisers on investment matters relating to MVC or the PE Fund. In this connection, certain employees of PPC are associated persons of TTG Advisers when providing certain services on behalf of TTG Advisers and, in this capacity, are subject to its oversight and supervision. Likewise, TTG Advisers makes available to PPC certain investment professionals that are employed by TTG Advisers to provide services for PPC and the PPC Fund. The foregoing raises a potential conflict of interest with respect to allocation of investment opportunities to us, on the one hand and to the Other Vehicles on the other hand. The Board and TTG Advisers have adopted an allocation policy (described above) to help mitigate potential conflicts of interest among us and Other Vehicles. For more information on the allocation policy, please see Our Investment Strategy Allocation of Investment Opportunities above.
Wars, terrorist attacks, and other acts of violence may affect any market for our common stock, impact the businesses in which we invest and harm our operations and our profitability.
Wars, terrorist attacks and other acts of violence are likely to have a substantial impact on the U.S. and world economies and securities markets. The nature, scope and duration of the unrest, wars and occupation cannot be predicted with any certainty. Furthermore, terrorist attacks may harm our results of operations and your investment. We cannot assure you that there will not be further terrorist attacks against the United States or U.S. businesses. Such attacks and armed conflicts in the United States or elsewhere may impact the businesses in which we invest directly or indirectly, by undermining economic conditions in the United States. Losses resulting from terrorist events are generally uninsurable.
Our financial condition and results of operations will depend on our ability to effectively manage our future growth.
Our ability to achieve our investment objective can depend on our ability to sustain continued growth. Accomplishing this result on a cost-effective basis is largely a function of our marketing capabilities, our management of the investment process, our ability to provide competent, attentive and efficient services and our access to financing sources on acceptable terms. As we grow, TTG Advisers may need to hire, train, supervise and manage new employees. Failure to effectively manage our future growth could have a material adverse effect on our business, financial condition and results of operations.
INVESTMENT RISKS
Investment risks are risks associated with our determination to execute on our business objective. These risks are not risks associated with general business conditions or those relating to an offering of our securities.
Investing in private companies involves a high degree of risk.
Our investment portfolio generally consists of loans to, and investments in, private companies. Investments in private businesses involve a high degree of business and financial risk, which can result in substantial losses and, accordingly, should be considered speculative. There is generally very little publicly available information about the companies in which we invest, and we rely significantly on the due diligence of the members of the investment team to obtain information in connection with our investment decisions. It is thus difficult, and often impossible, to protect the Company from the risk of fraud, misrepresentation or poor judgment by these companies.
Our investments in portfolio companies are generally illiquid.
We generally acquire our investments directly from the issuer in privately negotiated transactions. Most of the investments in our portfolio (other than cash or cash equivalents and certain other investments made pending investments in portfolio companies such as investments in exchange-traded funds) are typically subject to restrictions on resale or otherwise have no established trading market. We may exit our investments when the portfolio company has a liquidity event, such as a sale, recapitalization or initial public offering. The illiquidity of our investments may adversely affect our ability to dispose of equity and debt securities at times when it may be otherwise advantageous for us to liquidate such investments. In addition, if we were forced to immediately liquidate some or all of the investments in the portfolio, the proceeds of such liquidation could be significantly less than the current fair value of such investments.
Our investments in small and middle-market privately-held companies are extremely risky and the Company could lose its entire investment.
Investments in small and middle-market privately-held companies are subject to a number of significant risks including the following:
· Small and middle-market companies may have limited financial resources and may not be able to repay the loans we make to them. Our strategy includes providing financing to companies that typically do not have capital sources readily available to them. While we 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 Companys performance (including the valuation of its investments) is subject to the ongoing risk that the portfolio companies or their employees, agents, or service providers, may commit fraud adversely affecting the value of our investments.
· Small and middle-market companies generally have less predictable operating results. We expect that our portfolio companies may have significant variations in their operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, may require substantial additional capital to support their operations, finance expansion or maintain their competitive position, may otherwise have a weak financial position or may be adversely affected by changes in the business cycle. Our portfolio companies may not meet net income, cash flow and other coverage tests typically imposed by their senior lenders.
· Small and middle-market businesses are more likely to be dependent on one or two persons. Typically, the success of a small or middle-market company also depends on the management talents and efforts of one or two persons or a small group of persons. The death, disability or resignation of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us.
· Small and middle-market companies are likely to have greater exposure to economic downturns than larger companies. We expect that our portfolio companies will have
fewer resources than larger businesses and an economic downturn may thus more likely have a material adverse effect on them.
· Small and middle-market companies may have limited operating histories. We may make debt or equity investments in new companies that meet our investment criteria. Portfolio companies with limited operating histories are exposed to the operating risks that new businesses face and may be particularly susceptible to, among other risks, market downturns, competitive pressures and the departure of key executive officers.
Our borrowers may default on their payments, which may have an effect on our financial performance.
We may make long-term unsecured, subordinated loans, which may involve a higher degree of repayment risk than conventional secured loans. We primarily invest in companies that may have limited financial resources and that may be unable to obtain financing from traditional sources. In addition, numerous factors may adversely affect a portfolio companys ability to repay a loan we make to it, including the failure to meet a business plan, a downturn in its industry or operating results, or negative economic conditions. Deterioration in a borrowers financial condition and prospects may be accompanied by deterioration in any related collateral.
Our investments in mezzanine and other debt securities may involve significant risks.
Our investment strategy contemplates investments in mezzanine and other debt securities of privately held companies. Mezzanine investments typically are structured as subordinated loans (with or without warrants) that carry a fixed rate of interest. We may also make senior secured and other types of loans or debt investments. Our debt investments are not, and typically will not be, rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade quality (rated lower than Baa3 by Moodys or lower than BBB- by Standard & Poors, commonly referred to as junk bonds). Loans of below investment grade quality have predominantly speculative characteristics with respect to the borrowers capacity to pay interest and repay principal. Our debt investments in portfolio companies may thus result in a high level of risk and volatility and/or loss of principal.
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 companys income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used.
We are a non-diversified investment company within the meaning of the 1940 Act, and therefore may invest a significant portion of our assets in a relatively small number of portfolio companies, which subjects us to a risk of significant loss should the performance or financial condition of one or more portfolio companies deteriorate.
We are classified as a non-diversified investment company within the meaning of the 1940 Act, and therefore we may invest a significant portion of our assets in a relatively small number of portfolio companies in a limited number of industries. As of October 31, 2015, the fair value of our largest investment, U.S. Gas & Electric, Inc. (U.S. Gas), comprised 32.1% 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. See the risk factor below regarding the industry in which U.S. Gas operates.
As a result of our significant portfolio investment in U.S. Gas, we are particularly subject to the risks of that company and the energy services industry.
Given the extent of our investment in U.S. Gas, the Company is particularly subject to the risks impacting U.S. Gas and the energy service industry. U.S. Gass operating results may fluctuate on a seasonal or quarterly basis and with general economic conditions. Weather conditions and other natural phenomena can also have an adverse impact on earnings and cash flows. Unusually mild weather in the future could diminish U.S. Gass results of operations and harm its financial condition. U.S. Gas enters into contracts to purchase and sell electricity and natural gas as part of its operations. With respect to such transactions, the rate of return on its capital investments is not determined through mandated rates, and its revenues and results of operations are likely to depend, in large part, upon prevailing market prices for power in its regional markets and other competitive markets. These market prices can fluctuate substantially over relatively short periods of time. Trading margins may erode as markets mature and there may be diminished opportunities for gain should volatility decline. Fuel prices may also be volatile, and the price U.S. Gas can obtain for power sales may not change at the same rate as changes in fuel costs. These factors could reduce U.S. Gass margins and therefore diminish its revenues and results of operations.
U.S. Gas relies on a firm supply source to meet its energy management obligations for its customers. Should U.S. Gass suppliers fail to deliver supplies of natural gas and electricity, there could be a material impact on its cash flows and statement of operations. U.S. Gas depends on natural gas pipelines and other storage and transportation facilities owned and operated by third parties to deliver natural gas to wholesale markets and to provide retail energy services to customers. If transportation or storage of natural gas is disrupted, including for reasons of force majeure, the ability of U.S. Gas to sell and deliver its services may be hindered. As a result, it may be responsible for damages incurred by its customers, such as the additional cost of acquiring alternative supply at then-current market rates. Additionally, U.S. Gas depends on transmission facilities owned and operated by unaffiliated power companies to deliver the power it sells at wholesale. If transmission is disrupted, or transmission capacity is inadequate, U.S. Gas may not be able to deliver its wholesale power.
U.S. Gas is subject to substantial regulation by federal, state and local regulatory authorities. It is required to comply with numerous laws and regulations and to obtain numerous authorizations, permits, approvals and certificates from governmental agencies. U.S. Gas cannot
predict the impact of any future revisions or changes in interpretations of existing regulations or the adoption of new laws and regulations applicable to it. Changes in regulations or the imposition of additional regulations could influence its operating environment and may result in substantial costs to U.S. Gas.
The Polar Vortex
A confluence of issues in January and February 2014 associated with the 2013-2014 winter seasons polar vortex resulted in extraordinarily large spikes in the prices of wholesale electricity and, to some extent, natural gas in markets where U.S. Gas and other retail providers purchase their supply. U.S. Gas responded by taking various actions, including providing rebates to hard hit customers.
A repeat of these or comparable circumstances could similarly harm margins and profitability in the future, and U.S. Gas could find it necessary to take similar or other actions that may have a negative impact on its financial condition and results of operations in order to mitigate the impact of extreme weather and retain customers.
As a result of price increases caused by the polar vortex, customers of U.S. Gas and other industry competitors filed claims or complaints regarding their bills during the 2013-2014 winter season, many of which have been reported to local public utility commissions and other regulatory bodies. In addition to dealing with any private litigation, regulatory bodies may take action to counter actual or perceived violations of regulations that could have a negative impact on retail energy providers such as U.S. Gas, even if such actions are successfully defended. Legislators and regulators may enact or modify laws or regulations to prevent the repetition of the price spikes discussed above, which could negatively impact U.S. Gas financial condition and results of operations. Any of these actions (legislation and regulatory actions or litigation) may have an adverse effect on the value of our interest in U.S. Gas and thus the value of our Company.
When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and management of the company may make decisions that could decrease the value of our portfolio holdings.
We anticipate making debt and minority equity investments; therefore, we will be subject to the risk that a portfolio company may make business decisions with which we disagree, and the shareholders and management of such company may take risks or otherwise act in ways that do not serve our interests. Due to the lack of liquidity in the markets for our investments in privately held companies, we may not be able to dispose of our interests in our portfolio companies as readily as we would like. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings.
We may choose to waive or defer enforcement of covenants in the debt securities held in our portfolio, which may cause us to lose all or part of our investment in these companies.
Some of our loans to our portfolio companies may be structured to include customary business and financial covenants placing affirmative and negative obligations on the operation of each companys business and its financial condition. However, from time to time, we may elect to waive breaches of these covenants, including our right to payment, or waive or defer
enforcement of remedies, such as acceleration of obligations or foreclosure on collateral, depending upon the financial condition and prospects of the particular portfolio company. These actions may reduce the likelihood of our receiving the full amount of future payments of interest or principal and be accompanied by a deterioration in the value of the underlying collateral as many of these companies may have limited financial resources, may be unable to meet future obligations and may go bankrupt. This could negatively impact our ability to pay dividends and cause you to lose all or part of your investment.
Our portfolio companies may incur obligations that rank equally with, or senior to, our investments in such companies. As a result, the holders of such obligations may be entitled to payments of principal or interest prior to us, preventing us from obtaining the full value of our investment in the event of an insolvency, liquidation, dissolution, reorganization, acquisition, merger or bankruptcy of the relevant portfolio company.
Our portfolio companies may have other obligations that rank equally with, or senior to, the securities in which we invest. By their terms, such other securities may provide that the holders are entitled to receive payment of interest or principal on or before the dates on which we are entitled to receive payments in respect of the securities in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of securities ranking senior to our investment in the relevant portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying investors that are 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 Companys shares and our interests in affected portfolio companies.
Hedging transactions may expose us to additional risks.
We may enter into hedging transactions to seek to reduce currency, commodity or other rate risks. However, unanticipated changes in currency or other rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek or be able to establish a perfect or effective correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies.
Investing in our securities may involve a high degree of risk.
The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and volatility or loss of principal. Our investments in portfolio companies may be highly speculative and aggressive, and therefore, an investment in our securities may not be suitable for someone with a low risk tolerance.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Effective November 1, 2006, under the terms of the Advisory Agreement, TTG Advisers is responsible for providing office space to the Company and for the costs associated with providing such office space. The Companys offices continue to be located on the second floor of 287 Bowman Avenue, Purchase, NY 10577.
We are not currently subject to any material pending legal proceedings.
ITEM 4. MINE SAFETY DOSCLOSURES
Not Applicable.
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Companys shares of common stock began to trade on the NYSE on June 26, 2000, under the symbol MVC. The Company had 5,632 shareholders on February 9, 2016.
The following table reflects, for the periods indicated, the high and low closing prices per share of the Companys common stock on the NYSE, by quarter.
|
|
QUARTER
|
|
HIGH |
|
LOW |
|
||
FISCAL YEAR 2015 |
|
|
|
|
|
|
|
||
|
|
10/31/15 |
|
$ |
9.73 |
|
$ |
8.02 |
|
|
|
07/31/15 |
|
$ |
10.36 |
|
$ |
9.61 |
|
|
|
04/30/15 |
|
$ |
10.11 |
|
$ |
9.36 |
|
|
|
01/31/15 |
|
$ |
11.24 |
|
$ |
9.48 |
|
FISCAL YEAR 2014 |
|
|
|
|
|
|
|
||
|
|
10/31/14 |
|
$ |
12.72 |
|
$ |
10.71 |
|
|
|
07/31/14 |
|
$ |
13.11 |
|
$ |
12.14 |
|
|
|
04/30/14 |
|
$ |
14.73 |
|
$ |
12.94 |
|
|
|
01/31/14 |
|
$ |
14.52 |
|
$ |
13.24 |
|
PERFORMANCE GRAPH
This graph compares the return on our common stock with that of the Standard & Poors 500 Stock Index and the Russell 2000 Financial Index for the fiscal years 2011 through 2015. The graph assumes that, on October 31, 2010, a person invested $10,000 in each of our common stock, the S&P 500 Stock Index, and the Russell 2000 Financial Index. The graph measures total shareholder return, which takes into account both changes in stock price and dividends. It assumes that dividends paid are reinvested in additional shares of our common stock. Past performance is no guarantee of future results.
Shareholder Return Performance Graph
Five-Year Cumulative Total Return
1
(Through October 31, 2015)
1 Total Return includes reinvestment of dividends through October 31, 2015. Past performance is no guarantee of future results.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
As a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code), the Company is required to distribute to its shareholders, in a timely manner, at least 90% of its investment company taxable and tax-exempt income each year. If the Company distributes, in a calendar year, at least (1) 98% of our ordinary income during each calendar year, (2) 98.2% of our capital gains realized in the period from November 1 of the prior year through October 31 of the current year, and (3) all such ordinary income and capital gains for previous years that were not distributed during those years, it will not be subject to the 4% non-deductible federal excise tax on certain undistributed income of RICs.
Dividends and capital gain distributions, if any, are recorded on the ex-dividend date. Dividends and capital gain distributions are generally declared and paid quarterly according to the Companys policy established on July 11, 2005. An additional distribution may be paid by the Company to avoid imposition of federal income tax on any remaining undistributed net investment income and capital gains. Distributions can be made payable by the Company either in the form of a cash distribution or a stock dividend. The amount and character of income and capital gain distributions are determined in accordance with income tax regulations that may differ from U.S. generally accepted accounting principles . These differences are due primarily to differing treatments of income and gain on various investment securities held by the Company, differing treatments of expenses paid by the Company, timing differences and differing characterizations of distributions made by the Company. Key examples of the primary differences in expenses paid are the accounting treatment of MVCFS (which is consolidated for GAAP purposes, but not income tax purposes) and the variation in treatment of incentive compensation expense. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications and may affect the allocation between net operating income, net realized gain (loss) and paid-in capital.
All of our shareholders who hold shares of common stock in their own name will automatically be enrolled in our dividend reinvestment plan (the Plan). All such shareholders will have any cash dividends and distributions automatically reinvested by the Plan Agent in additional shares of our common stock. Of course, any shareholder may elect to receive his or her dividends and distributions in cash. Currently, the Company has a policy of seeking to pay quarterly dividends to shareholders. For any of our shares that are held by banks, brokers or other entities that hold our shares as nominees for individual shareholders, the Plan Agent will administer the Plan on the basis of the number of shares certified by any nominee as being registered for shareholders that have not elected to receive dividends and distributions in cash. To receive your dividends and distributions in cash, you must notify the Plan Agent, broker or other entity that holds the shares.
The Plan Agent serves as agent for the shareholders in administering the Plan. When we declare a dividend or distribution payable in cash or in additional shares of our common stock, those shareholders participating in the Plan will receive their dividend or distribution in additional shares of our common stock. Such shares will be either newly issued by us or purchased in the open market by the Plan Agent. If the market value of a share of our common stock on the payment date for such dividend or distribution equals or exceeds the NAV per share
on that date, we will issue new shares at the NAV. If the NAV exceeds the market price of our common stock, the Plan Agent will purchase in the open market such number of shares of our common stock as is necessary to complete the distribution.
The Plan Agent will maintain all shareholder accounts in the Plan and furnish written confirmation of all transactions. Shares of our common stock in the Plan will be held in the name of the Plan Agent or its nominee and such shareholder will be considered the beneficial owner of such shares for all purposes.
There is no charge to shareholders for participating in the Plan or for the reinvestment of dividends and distributions. We will not incur brokerage fees with respect to newly issued shares issued in connection with the Plan. Shareholders will, however, be charged a pro rata share of any brokerage fee charged for open market purchases in connection with the Plan.
We may terminate the Plan upon providing written notice to each shareholder participating in the Plan at least 60 days prior to the effective date of such termination. We may also materially amend the Plan at any time upon providing written notice to shareholders participating in the Plan at least 30 days prior to such amendment (except when necessary or appropriate to comply with applicable law or rules and policies of the SEC or other regulatory authority). You may withdraw from the Plan upon providing notice to the Plan Agent. You may obtain additional information about the Plan from the Plan Agent. Below is a description of our dividends declared during fiscal years 2013 and 2014:
For the Quarter Ended January 31, 2014
On December 20, 2013, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was paid on January 7, 2014 to shareholders of record on December 31, 2013. The total distribution amounted to $3,053,388.
During the quarter ended January 31, 2014, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 248 shares of our common stock at an average price of $13.52, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
For the Quarter Ended April 30, 2014
On April 14, 2014, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was paid on April 30, 2014 to shareholders of record on April 24, 2014. The total distribution amounted to $3,032,750.
During the quarter ended April 30, 2014, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 271 shares of our common stock at an average price of $13.11, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
For the Quarter Ended July 31, 2014
On July 15, 2014, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was paid on July 31, 2014 to shareholders of record on July 25, 2014. The total distribution amounted to $3,064,881.
During the quarter ended July 31, 2014, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 303 shares of our common stock at an average price of $12.40, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
For the Quarter Ended October 31, 2014
On October 17, 2014, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was paid on October 31, 2014 to shareholders of record on October 27, 2014. The total distribution amounted to $3,064,881.
During the quarter ended October 31, 2014, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 229 shares of our common stock at an average price of $11.21, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
For the Quarter Ended January 31, 2015
On December 19, 2014, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was paid on January 7, 2015 to shareholders of record on December 31, 2014 and amounted to $3,064,881.
During the quarter ended January 31, 2015, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 5,647 shares of our common stock at an average price of $10.14, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
For the Quarter Ended April 30, 2015
On April 17, 2015, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was paid on April 30, 2015 to shareholders of record on April 27, 2015 and amounted to $3,064,881.
During the quarter ended April 30, 2015, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 5,855 shares of our common stock at an average price of $9.92, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
For the Quarter Ended July 31, 2015
On July 17, 2015, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was paid on July 31, 2015 to shareholders of record on July 27, 2015 and amounted to $3,064,881.
During the quarter ended July 31, 2015, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 6,141 shares of our common stock at an average price of $9.55, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
For the Quarter Ended October 31, 2015
On October 16, 2015, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was paid on October 30, 2015 to shareholders of record on October 26, 2015 and amounted to $3,064,881.
During the quarter ended October 31, 2015, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 7,140 shares of our common stock at an average price of $8.33, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
The Company designated 0% of dividends declared and paid during the fiscal year ended October 31, 2015 from net operating income as qualified dividend income under the Jobs Growth and Tax Relief Reconciliation Act of 2003.
Corporate shareholders may be eligible for a dividend received deduction for certain ordinary income distributions paid by the Company. The Company designated 0% of dividends declared and paid during the fiscal year ended October 31, 2015 from net operating income as qualifying for the dividends received deduction. The information necessary to prepare and complete shareholder s tax returns for the 2015 calendar year will be reported separately on form 1099-DIV, if applicable, in February 2016.
The Company reserves the right to retain net long-term capital gains in excess of net short-term capital losses for reinvestment or to pay contingencies and expenses. Such retained amounts, if any, will be taxable to the Company, and shareholders will be able to claim their proportionate share of the federal income taxes paid by the Company on such gains as a credit against their own federal income tax liabilities. Shareholders will also be entitled to increase the adjusted tax basis of their company shares by the difference between their undistributed capital gains and their tax credit.
PURCHASES OF COMMON STOCK
In fiscal 2015, as part of the Plan, we directed the Plan Agent to purchase a total of 24,783 shares of our common stock for an aggregate amount of approximately $233,465 in the open market in order to satisfy the reinvestment portion of our dividends. The following chart outlines purchases of our common stock during fiscal 2015.
|
|
Total Number of Shares |
|
Average Price paid Per Share |
|
Quarter Ended |
|
Purchased |
|
Including Commission |
|
|
|
|
|
|
|
10/31/2015 |
|
7,140 |
|
$8.33 |
|
7/31/2015 |
|
6,141 |
|
$9.55 |
|
4/30/2015 |
|
5,855 |
|
$9.92 |
|
1/31/2015 |
|
5,647 |
|
$10.14 |
|
SHARE REPURCHASE PROGRAM
On April 3, 2013 the Companys Board of Directors authorized an expanded share repurchase program to opportunistically buy back shares in the market in an effort to narrow the market discount of its shares. The previously authorized $5 million limit has been eliminated.
Under the repurchase program, shares may be repurchased from time to time at prevailing market prices. The repurchase program does not obligate the Company to acquire any specific number of shares and may be discontinued at any time. The following table represents purchases made under our stock repurchase program for the fiscal years ended October 31, 2013 and October 31, 2014. There were no repurchases made during the fiscal year ended October 31, 2015.
|
|
|
|
|
|
Total Number of Shares |
|
|
|
||
|
|
|
|
Average Price Paid per |
|
Purchased as Part of |
|
Approximate Dollar Value |
|
||
|
|
Total Number of Shares |
|
Share including |
|
Publicly Announced |
|
of Shares Purchased Under |
|
||
Period * |
|
Purchased |
|
commission |
|
Program |
|
the Program |
|
||
For the Year Ended October 31, 2013 |
|
1,299,294 |
|
$ |
12.83 |
|
1,299,294 |
|
$ |
16,673,207 |
|
For the Year Ended October 31, 2014 |
|
310,706 |
|
$ |
13.24 |
|
1,610,000 |
|
$ |
4,114,967 |
|
Total |
|
1,610,000 |
|
$ |
12.91 |
|
1,610,000 |
|
$ |
20,788,174 |
|
*Disclosure covering repurchases made on a monthly basis is available on the Companys website at http://www.mvccapital.com
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Financial information for the fiscal years ended October 31, 2015, 2014, 2013, 2012 and 2011 are derived from the consolidated financial statements. Fiscal years 2011 through 2014 have been audited by Ernst & Young LLP, the Companys predecessor independent registered public accounting firm, and fiscal year 2015 has been audited by Grant Thornton LLP, the Companys successor independent registered public accounting firm. Quarterly financial information is derived from unaudited financial data, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments), which are necessary to present fairly the results for such interim periods. See Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations for more information.
Selected Consolidated Financial Data
|
|
Year Ended October 31, |
|
|||||||||||||
|
|
2015 |
|
2014 |
|
2013 |
|
2012 |
|
2011 |
|
|||||
|
|
(In thousands, except per share data) |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest and related portfolio income: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest and dividend income |
|
$ |
20,402 |
|
$ |
15,311 |
|
$ |
19,621 |
|
$ |
25,205 |
|
$ |
11,450 |
|
Fee income |
|
2,048 |
|
1,562 |
|
2,853 |
|
1,940 |
|
2,784 |
|
|||||
Fee income - asset management |
|
1,249 |
|
1,910 |
|
1,795 |
|
2,300 |
|
396 |
|
|||||
Other income |
|
|
|
1,033 |
|
493 |
|
442 |
|
1,341 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total operating income |
|
23,699 |
|
19,816 |
|
24,762 |
|
29,887 |
|
15,971 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Management fee |
|
7,845 |
|
8,681 |
|
7,833 |
|
8,588 |
|
8,845 |
|
|||||
Portfolio fees - asset management |
|
767 |
|
986 |
|
418 |
|
968 |
|
|
|
|||||
Management fee - asset management |
|
160 |
|
354 |
|
929 |
|
757 |
|
297 |
|
|||||
Administrative |
|
5,305 |
|
3,672 |
|
3,712 |
|
3,573 |
|
4,320 |
|
|||||
Interest and other borrowing costs |
|
10,230 |
|
9,442 |
|
6,724 |
|
3,367 |
|
3,082 |
|
|||||
Net Incentive compensation (Note 5) |
|
(9,757 |
) |
(4,750 |
) |
3,828 |
|
(5,937 |
) |
1,948 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total operating expenses |
|
14,550 |
|
18,385 |
|
23,444 |
|
11,316 |
|
18,492 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total waiver by adviser |
|
(150 |
) |
(150 |
) |
(150 |
) |
(2,554 |
) |
(251 |
) |
|||||
Total net operating expenses |
|
14,400 |
|
18,235 |
|
23,294 |
|
8,762 |
|
18,241 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net operating income (loss) before taxes |
|
9,299 |
|
1,581 |
|
1,468 |
|
21,125 |
|
(2,270 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Tax expense |
|
2 |
|
2 |
|
4 |
|
4 |
|
14 |
|
|||||
Net operating income (loss) |
|
9,297 |
|
1,579 |
|
1,464 |
|
21,121 |
|
(2,284 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net realized and unrealized (loss) gain: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net realized gain (loss) on investments |
|
3,700 |
|
16,520 |
|
43,665 |
|
(20,518 |
) |
(26,422 |
) |
|||||
Net unrealized (depreciation) appreciation on investments |
|
(50,557 |
) |
(37,941 |
) |
(25,860 |
) |
(22,257 |
) |
35,677 |
|
|||||
Net realized and unrealized (loss) gain on investments |
|
(46,857 |
) |
(21,421 |
) |
17,805 |
|
(42,775 |
) |
9,255 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net (decrease) increase in net assets resulting from operations |
|
$ |
(37,560 |
) |
$ |
(19,842 |
) |
$ |
19,269 |
|
$ |
(21,654 |
) |
$ |
6,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net (decrease) increase in net assets per share resulting from operations |
|
$ |
(1.66 |
) |
$ |
(0.88 |
) |
$ |
0.82 |
|
$ |
(0.90 |
) |
$ |
0.30 |
|
Dividends per share |
|
$ |
0.540 |
|
$ |
0.540 |
|
$ |
0.540 |
|
$ |
0.495 |
|
$ |
0.480 |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Portfolio at value |
|
$ |
400,876 |
|
$ |
447,630 |
|
$ |
417,921 |
|
$ |
404,171 |
|
$ |
452,215 |
|
Portfolio at cost |
|
443,717 |
|
439,970 |
|
371,932 |
|
332,432 |
|
358,219 |
|
|||||
Total assets |
|
516,842 |
|
577,713 |
|
564,450 |
|
456,431 |
|
497,107 |
|
|||||
Shareholders equity |
|
294,076 |
|
343,903 |
|
376,086 |
|
386,016 |
|
419,510 |
|
|||||
Shareholders equity per share (net asset value) |
|
$ |
12.95 |
|
$ |
15.15 |
|
$ |
16.63 |
|
$ |
16.14 |
|
$ |
17.54 |
|
Common shares outstanding at period end |
|
22,703 |
|
22,703 |
|
22,618 |
|
23,917 |
|
23,917 |
|
|||||
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Number of Investments funded in period |
|
13 |
|
24 |
|
15 |
|
11 |
|
13 |
|
|||||
Investments funded ($) in period |
|
$ |
62,591 |
|
$ |
103,671 |
|
$ |
95,701 |
|
$ |
11,300 |
|
$ |
43,235 |
|
Repayment/sales in period |
|
65,247 |
|
62,508 |
|
103,069 |
|
19,950 |
|
60,157 |
|
|||||
Net investment activity in period |
|
(2,656 |
) |
41,163 |
|
(7,368 |
) |
(8,650 |
) |
(16,922 |
) |
|
|
2015 |
|
2014 |
|
2013 |
|
||||||||||||||||||
|
|
Qtr 4 |
|
Qtr 3 |
|
Qtr 2 |
|
Qtr 1 |
|
Qtr 4 |
|
Qtr 3 |
|
Qtr 2 |
|
Qtr 1 |
|
Qtr 4 |
|
Qtr 3 |
|
Qtr 2 |
|
Qtr 1 |
|
|
|
(In thousands, except per share data) |
|
||||||||||||||||||||||
Quarterly Data (Unaudited): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
6,046 |
|
7,524 |
|
5,273 |
|
4,856 |
|
4,325 |
|
5,016 |
|
5,862 |
|
4,613 |
|
4,469 |
|
7,245 |
|
6,663 |
|
6,386 |
|
Management fee |
|
1,900 |
|
1,899 |
|
2,066 |
|
1,980 |
|
2,121 |
|
2,144 |
|
2,227 |
|
2,189 |
|
2,109 |
|
1,986 |
|
1,758 |
|
1,979 |
|
Portfolio fees - asset management |
|
187 |
|
189 |
|
187 |
|
204 |
|
386 |
|
153 |
|
341 |
|
106 |
|
105 |
|
103 |
|
103 |
|
106 |
|
Management fee - asset management |
|
85 |
|
77 |
|
(18 |
) |
16 |
|
(126 |
) |
17 |
|
231 |
|
232 |
|
233 |
|
232 |
|
232 |
|
232 |
|
Administrative |
|
1,685 |
|
1,136 |
|
1,325 |
|
1,159 |
|
942 |
|
1,095 |
|
727 |
|
908 |
|
1,024 |
|
897 |
|
902 |
|
890 |
|
Interest, fees and other borrowing costs |
|
2,532 |
|
2,627 |
|
2,616 |
|
2,455 |
|
2,355 |
|
2,426 |
|
2,406 |
|
2,255 |
|
2,254 |
|
2,115 |
|
1,418 |
|
937 |
|
Net Incentive compensation |
|
(771 |
) |
(3,404 |
) |
(3,462 |
) |
(2,120 |
) |
(2,339 |
) |
568 |
|
(3,414 |
) |
435 |
|
2,248 |
|
3,674 |
|
794 |
|
(2,888 |
) |
Total waiver by adviser |
|
(37 |
) |
(38 |
) |
(37 |
) |
(38 |
) |
(37 |
) |
(38 |
) |
(37 |
) |
(38 |
) |
(37 |
) |
(38 |
) |
(37 |
) |
(38 |
) |
Tax expense |
|
|
|
1 |
|
1 |
|
|
|
|
|
1 |
|
|
|
1 |
|
1 |
|
1 |
|
1 |
|
1 |
|
Net operating income (loss) before net realized and unrealized gains |
|
465 |
|
5,037 |
|
2,595 |
|
1,200 |
|
1,023 |
|
(1,350 |
) |
3,381 |
|
(1,475 |
) |
(3,468 |
) |
(1,725 |
) |
1,492 |
|
5,167 |
|
Net (decrease) increase in net assets resulting from operations |
|
(2,045 |
) |
(13,959 |
) |
(11,813 |
) |
(9,743 |
) |
(10,614 |
) |
1,738 |
|
(12,651 |
) |
1,685 |
|
4,319 |
|
17,081 |
|
7,143 |
|
(9,273 |
) |
Net (decrease) increase in net assets resulting from operations per share |
|
(0.10 |
) |
(0.61 |
) |
(0.52 |
) |
(0.43 |
) |
(0.46 |
) |
0.07 |
|
(0.57 |
) |
0.08 |
|
0.16 |
|
0.74 |
|
0.30 |
|
(0.38 |
) |
Net asset value per share |
|
12.95 |
|
13.18 |
|
13.93 |
|
14.58 |
|
15.15 |
|
15.75 |
|
15.89 |
|
16.57 |
|
16.63 |
|
16.57 |
|
15.84 |
|
15.62 |
|
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company and its investment portfolio companies. Words such as may, will, expect, believe, anticipate, intend, could, estimate, might and continue, and the negative or other variations thereof or comparable terminology, are intended to identify forward-looking statements. Forward-looking statements are included in this report pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Such statements are predictions only, and the actual events or results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those relating to adverse conditions in the U.S. and international economies, competition in the markets in which our portfolio companies operate, investment capital demand, pricing, market acceptance, any changes in the regulatory environments in which we operate, changes in our accounting assumptions that regulatory agencies, including the SEC, may require or that result from changes in the accounting rules or their application, competitive forces, adverse conditions in the credit markets impacting the cost, including interest rates and/or availability of financing, the results of financing and investing efforts, the ability to complete transactions, the inability to implement our business strategies and other risks identified below or in the Companys filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements, the notes thereto and the other financial information included elsewhere in this report.
OVERVIEW
The Company is an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company under the 1940 Act. The Companys investment objective is to seek to maximize total return from capital appreciation and/or income, though our current focus is more on yield generating investments.
On November 6, 2003, Mr. Tokarz assumed his positions as Chairman and Portfolio Manager of the Company. He and the Companys management team are seeking to implement our investment objective (i.e., to maximize total return from capital appreciation and/or income) through making a broad range of private investments in a variety of industries.
The investments can include senior or subordinated loans, convertible debt and convertible preferred securities, common or preferred stock, equity interests, warrants or rights to acquire equity interests and other private equity transactions, among other investments. During the fiscal year ended October 31, 2014, the Company made four new investments and made 20 follow-on investments in 13 existing portfolio companies committing a total of approximately $105.8 million of capital to these investments. During the fiscal year ended October 31, 2015, the Company made eight new investments and made 5 follow-on investments in 4 existing portfolio companies committing a total of approximately $62.4 million of capital to these investments.
Prior to the adoption of our current investment objective, the Companys investment objective had been to achieve long-term capital appreciation from venture capital investments in information technology companies. The Companys investments had thus previously focused on investments in equity and debt securities of information technology companies. As of October 31, 2015, 1.1% of the current fair value of our assets consisted of Legacy Investments. We are, however, managing these Legacy Investments to try and realize maximum returns. We generally seek to capitalize on opportunities to realize cash returns on these investments when presented with a potential liquidity event, i.e., a sale, public offering, merger or other reorganization.
Our new portfolio investments are made pursuant to our current objective and strategy. We are concentrating our investment efforts on small and middle-market companies that, in our view, provide opportunities to maximize total return from capital appreciation and/or income. More recently, the Company has been focusing its strategy more on yield generating investments. Under our investment approach, we have the authority to invest, without limit, in any one portfolio company, subject to any diversification limits required in order for us to continue to qualify as a RIC under Subchapter M of the Code. Presently, due to our asset growth and composition, compliance with the RIC requirements limits our ability to make Non-Diversified Investments.
We participate in the private equity business generally by providing privately negotiated long-term equity and/or debt investment capital to small and middle-market companies. Our financings are generally used to fund growth, buyouts, acquisitions, recapitalizations, note purchases and/or bridge financings. We generally invest in private companies, though, from time to time, we may invest in public companies that may lack adequate access to public capital.
We may also seek to achieve our investment objective by establishing a subsidiary or subsidiaries that would serve as general partner to a private equity or other investment fund(s). In fact, during fiscal year 2006, we established MVC Partners for this purpose. Furthermore, the Board of Directors authorized the establishment of a PE Fund, for which an indirect wholly-owned subsidiary of the Company serves as the GP and which may raise up to $250 million. On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in the PE Fund. The PE Fund closed on approximately $104 million of capital commitments. The Companys Board of Directors authorized the establishment of, and investment in, the PE Fund for a variety of reasons, including the Companys ability to make Non-Diversified Investments through the PE Fund. As previously disclosed, the Company is restricted in its ability to make Non-Diversified Investments. For services provided to the PE Fund, the GP and MVC Partners are together entitled to receive 25% of all management fees and other fees paid by the PE Fund and its portfolio companies and up to 30% of the carried interest generated by the PE Fund. Further, at the direction of the Board of Directors, the GP retained TTG Advisers to serve as the portfolio manager of the PE Fund. In exchange for 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 Companys Advisory Agreement with TTG Advisers, TTG Advisers is not entitled to receive from the Company a management fee or an incentive fee on assets of the Company that are invested in the PE Fund. During the fiscal year
ended October 31, 2012 and thereafter, MVC Partners was consolidated with the operations of the Company as MVC Partners limited partnership interest in the PE Fund is a substantial portion of MVC Partners operations. Previously, MVC Partners was presented as a portfolio company on the Schedule of Investments. The consolidation of MVC Partners has not had any material effect on the financial position or net results of operations of the Company. Also, during fiscal year ended October 31, 2014, MVC Turf, LLC (MVC Turf) was consolidated with the Company as MVC Turf is an MVC wholly-owned holding company. The consolidation of MVC Turf has not had any material effect on the financial position or net results of operations of the Company. Please see Note 2 of our consolidated financial statements Consolidation for more information.
As a result of the closing of the PE Fund, consistent with the Board-approved policy concerning the allocation of investment opportunities, the PE Fund received a priority allocation of all private equity investments that would otherwise be Non-Diversified Investments for the Company during the PE Funds investment period that ended on October 28, 2014. Additional capital may be called for follow-on investments in existing portfolio companies of the PE Fund or to pay operating expenses of the PE Fund. For a further discussion of this allocation policy, please see Our Investment Strategy Allocation of Investment Opportunities above.
Additionally, in pursuit of our objective, we may acquire a portfolio of existing private equity or debt investments held by financial institutions or other investment funds should such opportunities arise.
Furthermore, pending investments in portfolio companies pursuant to the Companys principal investment strategy, the Company may invest in certain securities on a short-term or temporary basis. In addition to cash-equivalents and other money market-type investments, such short-term investments may include exchange-traded funds and private investment funds offering periodic liquidity.
OPERATING INCOME
For the Fiscal Years Ended October 31, 2015, 2014 and 2013. Total operating income was $23.7 million for the fiscal year ended October 31, 2015 and $19.8 million for the fiscal year ended October 31, 2014, an increase of $3.9 million. Fiscal year 2014 operating income decreased by approximately $5.0 million compared to Fiscal year 2013 operating income of $24.8 million.
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 Companys debt investments yielded annualized rates from 9.75% to 16.0%. The Company also
received fee income from asset management of the PE Fund and its portfolio companies totaling approximately $1.3 million and fee income from the Companys 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 Funds agreements, a significant portion of the portfolio fees that are paid by the PE Funds 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 Companys debt investments yielded rates from 5% to 16%. The Company also received fee income from asset management of the PE Fund and its portfolio companies totaling approximately $1.9 million and fee income from the Companys 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 Funds agreements, a significant portion of the portfolio fees that are paid by the PE Funds 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, 2013
Total operating income was $24.8 million for the fiscal year ended October 31, 2013. The decrease in operating income over the same period last year was primarily due to a decrease in dividend income and fee income from asset management partially offset by an increase in fee income and interest income from portfolio companies. The main components of operating income for the fiscal year ended October 31, 2013, was dividend income from portfolio companies and the interest earned on loans. The Company earned approximately $19.6 million in interest and dividend income from investments in portfolio companies. Of the $19.6 million recorded in interest/dividend income, approximately $3.4 million was payment in kind interest/dividends. The payment in kind interest/dividends are computed at the contractual rate specified in each investment agreement and added to the principal balance of each investment. The Companys debt investments yielded rates from 6% to 16%. The Company also received fee income from asset management of the PE Fund and its portfolio companies totaling approximately $1.8 million and fee income from the Companys portfolio companies of approximately $2.9 million, totaling approximately $4.7 million. Of the $1.8 million of fee income from such asset management activities, 75% of the income was obligated to be paid to TTG Advisers. However, under the PE Funds agreements, a significant portion of the portfolio
fees that were paid by the PE Funds portfolio companies to the GP and TTG Advisers was subject to recoupment by the PE Fund in the form of an offset to future management fees paid by the PE Fund.
OPERATING EXPENSES
For the Fiscal Years Ended October 31, 2015, 2014 and 2013. Net Operating expenses were $14.4 million for the fiscal year ended October 31, 2015 and $18.2 million for the fiscal year ended October 31, 2014, a decrease of $3.8 million. Fiscal year 2014 operating expenses decreased by approximately $5.1 million compared to Fiscal year 2013 operating expenses of $23.3 million.
For the Fiscal Year Ended October 31, 2015
Operating expenses, net of the Voluntary Waivers (as described below), were approximately $14.4 million or 4.54% of the Companys average net assets for the fiscal year ended October 31, 2015. Significant components of operating expenses for the fiscal year ended October 31, 2015 were interest and other borrowing costs of approximately $10.2 million and management fee expense paid by the Company of approximately $7.8 million.
The approximately $3.8 million decrease in the Companys net operating expenses for the fiscal year ended October 31, 2015 compared to the same period in 2014, was primarily due to the approximately $5.0 million decrease in the estimated provision for incentive compensation expense and approximately $836,000 decrease in management fees, which was partially offset by an increase in interest and other borrowing costs of approximately $788,000 and an increase in audit and tax preparation fees, which was due to the fiscal year 2014 restatements and related expenses, totaling $836,000. The portfolio fees - asset management are payable to TTG Advisers for monitoring and other customary fees received by the GP from portfolio companies of the PE Fund. To the extent the GP or TTG Advisers receives advisory, monitoring, organization or other customary fees from any portfolio company of the PE Fund or management fees related to the PE Fund, 25% of such fees shall be paid to or retained by the GP and 75% of such fees shall be paid to or retained by TTG Advisers. For the 2015 fiscal year, TTG Advisers voluntarily agreed to waive $150,000 of expenses that the Company is obligated to reimburse to TTG Advisers under the Advisory Agreement (the Voluntary Waiver). TTG Advisers voluntarily agreed that any assets of the Company that were invested in exchange-traded funds would not be taken into account in the calculation of the base management fee due to TTG Advisers under the Advisory Agreement. TTG Advisers has voluntarily agreed to waive any management fees on the Companys assets invested in Equus common stock. The Company and the Adviser also agreed to continue the expense cap of 3.5% (on consolidated expenses of the Company, including any amounts payable to TTG Advisers under the base management fee, but excluding the amount of any interest and other direct borrowing costs, taxes, incentive compensation, payments made by the GP of the PE Fund to TTG Advisers pursuant to the Portfolio Management Agreement between the GP and TTG Advisers respecting the PE Fund and extraordinary expenses taken as a percentage of the Companys average net assets) in fiscal year 2015, though they modified the methodology so that the cap limits the Companys ratio of expenses to total assets less cash (the Modified Methodology), consistent with the asset level used to calculate the base management fee. (The expenses covered by the cap remain unchanged.) Under the Modified Methodology, for the fiscal year ended October 31,
2015, the Companys expense ratio was 3.21% (taking into account the same carve outs as those applicable to the expense cap).
Pursuant to the terms of the Advisory Agreement, during the fiscal year ended October 31, 2015, the provision for incentive compensation was decreased by a net amount of approximately $9.7 million to approximately $5.0 million. The net decrease in the provision for incentive compensation during the fiscal year ended October 31, 2015 primarily reflects the Valuation Committees determination to decrease the fair values of sixteen of the Companys portfolio investments (Custom Alloy, NPWT, BAC, SIA Tekers Invest (Tekers), PrePaid Legal, Centile, Biovation, Inland, MVC Automotive, Ohio Medical, SGDA Europe, Security Holdings, JSC Tekers, Moreys, Velocitius and Equus) by a total of approximately $58.2 million. The net decrease in the provision also reflects the Valuation Committees determination to increase the fair values of five of the Companys portfolio investments (Turf, RuMe, Biogenic, Advantage Insurance and SCSD) by a total of approximately $4.3 million. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $4.7 million due to a PIK distribution, which was treated as a return of capital. For the fiscal year ended October 31, 2015, no incentive compensation fee was paid . Also, for the fiscal year ended October 31, 2015, no provision was recorded for the net operating income portion of the incentive fee as pre-incentive fee net operating income did not exceed the hurdle rate. Please see Note 5 of our consolidated financial statements Incentive Compensation for more information.
For the Fiscal Year Ended October 31, 2014
Operating expenses, net of the Voluntary Waivers (as described below), were approximately $18.2 million or 5.04% of the Companys average net assets, for the fiscal year ended October 31, 2014. Significant components of operating expenses for the fiscal year ended October 31, 2014 were management fee expense paid by the Company of approximately $8.7 million and interest and other borrowing costs of approximately $9.4 million.
The approximately $5.1 million decrease in the Companys net operating expenses for the fiscal year ended October 31, 2014 compared to the fiscal year ended October 31, 2013, was primarily due to the approximately $8.6 million decrease in the estimated provision for incentive compensation expense, which was partially offset by an increase in interest and other borrowing costs of approximately $2.7 million and an increase in the Companys management fee expense of approximately $849,000. The portfolio fees - asset management are payable to TTG Advisers for monitoring and other customary fees received by the GP from portfolio companies of the PE Fund. To the extent the GP or TTG Advisers receives advisory, monitoring, organization or other customary fees from any portfolio company of the PE Fund or management fees related to the PE Fund, 25% of such fees shall be paid to or retained by the GP and 75% of such fees shall be paid to or retained by TTG Advisers. For the 2011 through 2015 fiscal years, TTG Advisers voluntarily agreed to waive $150,000 of expenses that the Company is obligated to reimburse to TTG Advisers under the Advisory Agreement (the Voluntary Waiver). TTG Advisers voluntarily agreed that any assets of the Company that were invested in exchange-traded funds would not be taken into account in the calculation of the base management fee due to TTG Advisers under the Advisory Agreement. TTG Advisers has voluntarily agreed to waive any management fees on the Companys assets invested in Equus common stock. The Company and the Adviser agreed to continue the expense cap of 3.5% (on consolidated expenses of the Company, including any amounts payable to TTG Advisers under the base management fee, but
excluding the amount of any interest and other direct borrowing costs, taxes, incentive compensation, payments made by the GP of the PE Fund to TTG Advisers pursuant to the Portfolio Management Agreement between the GP and TTG Advisers respecting the PE Fund and extraordinary expenses taken as a percentage of the Companys average net assets) into fiscal year 2015, though they reserved the ability to revise the calculation methodology later that year. For the fiscal year ended October 31, 2014, no incentive compensation fee was paid. Also, for fiscal year 2013 and fiscal year 2014, the Companys expense ratio was 3.03% and 3.37%, respectively, (taking into account the same carve outs as those applicable to the expense cap).
Pursuant to the terms of the Advisory Agreement, during the fiscal year ended October 31, 2014, the provision for incentive compensation was decreased by a net amount of approximately $4.7 million to approximately $14.7 million. The net decrease in the provision for incentive compensation during the fiscal year ended October 31, 2014 primarily reflects the Valuation Committees determination to decrease the fair values of eleven of the Companys portfolio investments (MVC Automotive, G3K, Ohio Medical, NPWT, U.S. Gas, Velocitius, Octagon, Tekers, JSC Tekers, SGDA Europe and Biovation) by a total of approximately $40.7 million. The net decrease in the provision also reflects the Valuation Committees determination to increase the fair values of twelve of the Companys portfolio investments (Custom Alloy, Advantage, Biogenic, PrePaid Legal, RuMe, Freshii USA, Inc. (Freshii), Centile, Security Holdings, Summit, Moreys, Turf and Vestal) by a total of approximately $11.5 million. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $4.0 million due to a PIK distribution, which was treated as a return of capital. For the fiscal year ended October 31, 2014, no provision was recorded for the net operating income portion of the incentive fee as pre-incentive fee net operating income did not exceed the hurdle rate. Please see Note 5 of our consolidated financial statements Incentive Compensation for more information.
For the Fiscal Year Ended October 31, 2013
Operating expenses, net of the Voluntary Waivers (as described below), were approximately $23.3 million or 6.19% of the Companys average net assets, when annualized, for the fiscal year ended October 31, 2013. Significant components of operating expenses for the fiscal year ended October 31, 2013 were the provision for incentive compensation expense of approximately $3.8 million, management fee expense related to the Company of approximately $7.8 million, and interest and other borrowing costs of approximately $6.7 million.
The approximately $14.5 million increase in the Companys net operating expenses for the fiscal year ended October 31, 2013 compared to the fiscal year ended October 31, 2012, was primarily due to the approximately $12.1 million increase in the estimated provision for incentive compensation expense, which included the voluntary incentive fee waiver by TTG Advisers during the year ended October 31, 2012 and an approximately $3.4 million increase in interest and other borrowing costs which were partially offset by a decrease of approximately $755,000 in management fee expense related to the Company and a decrease of approximately $500,000 in portfolio management fees related to the PE Fund. The portfolio fees were payable to TTG Advisers for monitoring and other customary fees received by the GP from portfolio companies of the PE Fund. To the extent the GP or TTG Advisers receives advisory, monitoring, organization or other customary fees from any portfolio company of the PE Fund or management fees related to the PE Fund, 25% of such fees shall be paid to or retained by the GP and 75% of such fees shall be paid to or retained by TTG Advisers. For the 2011 through 2014
fiscal years, TTG Advisers voluntarily agreed to waive $150,000 of expenses that the Company is obligated to reimburse to TTG Advisers under the Advisory Agreement (the Voluntary Waiver). TTG Advisers voluntarily agreed that any assets of the Company that were invested in exchange-traded funds would not be taken into account in the calculation of the base management fee due to TTG Advisers under the Advisory Agreement. For fiscal year 2012 and fiscal year 2013, the Companys expense ratio was 2.95% and 3.03%, respectively, (taking into account the same carve outs as those applicable to the expense cap). The Company and the Adviser agreed to continue the expense cap into fiscal year 2014, though they may determine to revise the present calculation methodology later in the year.
Pursuant to the terms of the Advisory Agreement, during the year ended October 31, 2013, the provision for incentive compensation was increased by a net amount of approximately $3.8 million to approximately $19.5 million. The net increase in the provision for incentive compensation during the fiscal year ended October 31, 2013 reflects the Valuation Committees determination to increase the fair values of ten of the Companys portfolio investments (Custom Alloy, Octagon Credit Investors, LLC (Octagon), Security Holdings, Turf, Vestal, Centile, Biovation, Prepaid Legal, U.S. Gas, and Tekers) by a total of approximately $43.9 million and the difference between the amount received from the sale of Summit and Summits carrying value at January 31, 2013, which was an increase of approximately $3.6 million. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.1 million due to a PIK distribution, which was treated as a return of capital. The net increase in the provision also reflects the Valuation Committees determination to decrease the fair values of nine of the Companys portfolio investments (MVC Automotive, Ohio Medical, SGDA Europe, NPWT, Freshii, Harmony Health and Beauty, Inc. (HH&B), Velocitius, RuMe and JSC Tekers) by a total of approximately $29.1 million and reflects the $84,000 realized gain related to NPWT, the $82,000 realized gain associated with the Vitality escrow and realized gains of approximately $150,000 with the repayments of the loans associated with Prepaid Legal and Teleguam. For the fiscal year ended October 31, 2013, no incentive compensation fee was paid. Also, for the fiscal year ended October 31, 2013, there was no provision recorded for the net operating income portion of the incentive fee as pre-incentive fee net operating income did not exceed the hurdle rate. Please see Note 5 of our consolidated financial statements Incentive Compensation for more information.
REALIZED GAINS AND LOSSES ON PORTFOLIO SECURITIES
For the Fiscal Years Ended October 31, 2015, 2014 and 2013. Net realized gains for the fiscal year ended October 31, 2015 were $3.7 million and $16.5 million for the fiscal year ended October 31, 2014, a decrease of approximately $12.8 million. Net realized gains for the fiscal year ended October 31, 2013 were $43.7 million.
For the Year Ended October 31, 2015
Net realized gains for the fiscal year ended October 31, 2015 were approximately $3.7 million. The main components of the Companys net realized gain for the fiscal year ended October 31, 2015 was primarily due to the realized gain of approximately $15.0 million on the sale of Vestal common stock which was partially offset by realized losses of $2.2 million on the sale of the Biovation loans when BAC credit purchased the assets of Biovation, $2.7 million on the sale of the common equity interest in Velocitius and $6.7 million on the dissolution of HH&B.
On May 29, 2015, the Company sold its 81,000 shares of common stock in Vestal receiving total proceeds of approximately $17.9 million resulting in a realized gain of approximately $15.0 million. The total proceeds included a $1.0 million dividend and assumes full receipt of the escrow proceeds. The $600,000 loan was also repaid in full including all accrued interest.
On October 16, 2015, the Company sold its remaining common equity interest in Velocitius and received zero proceeds resulting in a realized loss of approximately $2.7 million.
On October 30, 2015, the Company realized a loss of $6.7 million with the dissolution of HH&B.
During the fiscal year ended October 31, 2015, the Company also recorded net realized gains of approximately $302,000 with the sale of its short-term investments.
For the Year Ended October 31, 2014
Net realized gains for the fiscal year ended October 31, 2014 were approximately $16.5 million. The significant component of the Companys net realized gains for the fiscal year ended October 31, 2014 was primarily due to the sale of Custom Alloys convertible series A and B preferred shares and the sale of Octagons limited liability company interest.
On November 7, 2013, the Company recorded a realized gain of approximately $25,000 associated with the SHL Group Limited escrow.
On November 11, 2013, the Company recorded a realized gain of approximately $19,000 associated with the Vendio escrow.
On January 30, 2014, BPC II, LLC completed the dissolution of its operations. The Company realized a loss of $180,000 as a result of this dissolution.
On May 1, 2014, the Company converted the JSC Tekers $12.0 million secured loan to preferred equity. The cost and fair value assigned to the preferred equity was approximately $11.8 million. As a result of the loan conversion, the Company realized a loss of approximately $190,000.
On July 29, 2014, the Company sold its limited liability company interest in Octagon for approximately $6.3 million resulting in a realized gain of approximately $3.2 million.
On October 3, 2014, Freshii repaid its $1.1 million senior secured loan in full, including all accrued interest. With this repayment and the removal of the warrant associated with Freshii, the Company recorded a net realized loss of approximately $14,000.
On October 31, 2014, the Company redeemed its convertible series A and series B preferred shares in Custom Alloy for $23.0 million, which resulted in a realized gain of $13.0 million.
During the fiscal year ended October 31, 2014, the Company recorded realized losses of approximately $131,000 with the sale of its short-term investments and realized gains of approximately $823,000 related to a Summit distribution.
For the Fiscal Year Ended October 31, 2013
Net realized gains for the year ended October 31, 2013 were approximately $43.7 million. The significant components of the Companys net realized gains for the year ended October 31, 2013 were primarily due to the realized gain on Summit and the realized losses on Lockorder Limited and DPHI, Inc. (both were Legacy Investments).
On December 17, 2012, the Company realized a loss of approximately $2.0 million on the 21,064 common shares of Lockorder Limited, a Legacy Investment, which had a fair value of $0.
On December 31, 2012, the Company received a distribution from NPWT of approximately $89,000, which was characterized as a return of capital. Of the $89,000 distribution, approximately $5,000 was related to the common stock and reduced the cost basis. The remaining $84,000 was related to the preferred stock and recorded as a capital gain, as the cost basis of the preferred stock had already been reduced to $0.
On February 13, 2013, the Company announced the signing of a definitive agreement to sell Summit to an affiliate of One Rock Capital Partners, LLC, subject to regulatory approvals, which were received on February 25, 2013, and the satisfaction of other customary closing conditions, including an escrow. Prior to the completion of the transaction, the Company and other existing Summit shareholders purchased SCSD from Summit. The Company invested approximately $5.5 million for 784 shares of class B common stock. SCSD provides custom spray drying products to the food, pharmaceutical, nutraceutical, flavor and fragrance industries. On March 29, 2013, the Company received gross equity proceeds of approximately $66.3 million, resulting in a realized gain of approximately $49.5 million from the transaction, a $3.6 million premium to the last reported fair market value placed on Summit by the Companys Valuation Committee as of January 31, 2013. The $66.3 million of proceeds included approximately $6.3 million held in escrow, which had a fair value of approximately $5.9 million as of October 31, 2013. The decrease in the escrow fair value of approximately $400,000 was recorded as a realized loss.
On February 27, 2013, the Company realized a loss of approximately $4.5 million on the 602,131 preferred shares of DPHI, Inc., a Legacy Investment formerly DataPlay, Inc., which had a fair value of $0.
On May 31, 2013, the Company recorded a realized gain of approximately $82,000 associated with the Vitality escrow.
During the year ended October 31, 2013, the Company recorded a realized gain of approximately $150,000 with the repayments of the loans associated with Prepaid Legal and Teleguam.
UNREALIZED APPRECIATION AND DEPRECIATION ON PORTFOLIO SECURITIES
For the Fiscal Years Ended October 31, 2015, 2014 and 2013 . The Company had a net change in unrealized depreciation on portfolio investments of $50.6 million for the fiscal year ended October 31, 2015 and $37.9 million for the fiscal year ended October 31, 2014, an
increase of $12.7 million. The Company had a net change in unrealized depreciation on portfolio investments of $25.9 million for the fiscal year ended October 31, 2013.
For the Fiscal Year Ended October 31, 2015
The Company had a net change in unrealized depreciation on portfolio investments of approximately $50.6 million for the fiscal year ended October 31, 2015. The change in unrealized depreciation for the fiscal year ended October 31, 2015 primarily resulted from the Valuation Committees decision to decrease the fair value of the Companys investments in: Foliofn, Inc. preferred stock by $297,000, NPWT common stock by $3,000 and preferred stock by $45,000, Tekers common stock by $883,000, PrePaid Legal loan by $100,000, Centile equity interest by $339,000, BAC common stock by approximately $229,000, Biovations loan by approximately $3.4 million, Moreys second lien loan by approximately $1.9 million, Velocitius B.V. (Velocitius) equity interest by $2.8 million, Equus common stock by approximately $2.1 million, JSC Tekers preferred and common stock by a combined $1.1 million, Security Holdings equity interest by $5.3 million, SGDA Europe equity interest by approximately $4.0 million, Custom Alloy second lien loan by approximately $153,000, Ohio Medical series A preferred stock by $17.7 million, MVC Automotive equity interest by $10.9 million, Inland warrant by approximately $700,000 and loan by approximately $6.4 million and the reversal of the unrealized appreciation on the Vestal common stock which resulted in a realized gain of approximately $15.0 million. These changes in unrealized depreciation were partially off-set by the Valuation Committee determination to increase the fair value of the Companys investments in: Turf loan and guarantee by a total of approximately $25,000, Biogenic warrant and senior convertible note by a total of approximately $802,000, SCSD common stock by $387,000, Advantage preferred stock by approximately $294,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $2.0 million and RuMe series C preferred stock and series B preferred stock by a total of approximately $2.8 million and the reversal of the unrealized depreciation on the Biovation loan, Velocitius equity interest and HH&B which resulted in total realized loss of approximately $11.6 million. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $4.7 million due to a PIK distribution, which was treated as a return of capital.
For the Fiscal Year Ended October 31, 2014
The Company had a net change in unrealized depreciation on portfolio investments of approximately $37.9 million for the fiscal year ended October 31, 2014. The change in unrealized depreciation for the fiscal year ended October 31, 2014 primarily resulted from the reclassification from unrealized appreciation to realized gain, caused by the sale of Custom Alloy and Octagon of approximately $14.3 million in total and the Valuation Committees decision to decrease the fair value of the Companys investments in: Foliofn, Inc. preferred stock by approximately $1.1 million, MVC Automotive equity interest by approximately $6.7 million, G3K loan by approximately $5.6 million, NPWT common stock by approximately $9,000 and preferred stock by approximately $160,000, U.S. Gas preferred stock by $9.0 million, Velocitius equity interest by approximately $8.4 million, Ohio Medical series A preferred stock by $800,000, Biovation warrants by $311,000, SGDA Europe equity interest by approximately $2.6 million, Biovation bridge loan by approximately $439,000, Octagon equity interest by approximately $750,000, Tekers common stock by $252,000, JSC Tekers common and preferred stock by approximately $5.6 million, Turf loan by approximately $31,000 and the Turf guarantee
by approximately $67,000. These changes in unrealized depreciation were partially off-set by the Valuation Committee determinations to increase the fair value of the Companys investments in: Custom Alloy series A preferred stock by approximately $12,000 and series B preferred stock by approximately $2.7 million, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $3.6 million, Centile equity interest by $117,000, PrePaid Legal loan by $100,000, Freshii warrant by approximately $23,000, Security Holdings equity interest by $1.7 million, RuMe series C preferred stock by approximately $875,000, Biogenic senior convertible note by $305,000, Advantage preferred stock by $221,000, Summit loan by approximately $253,000, Turf equity interest by $525,000, Moreys loan by approximately $253,000 and Vestal common stock by approximately $4.5 million. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $4.0 million due to a PIK distribution, which was treated as a return of capital. The reclassification from unrealized depreciation to a realized loss caused by the dissolution of BPC II, LLC of $180,000 was also a component in the change in unrealized depreciation.
For the Fiscal Year Ended October 31, 2013
The Company had a net change in unrealized depreciation on portfolio investments of approximately $25.9 million for the fiscal year ended October 31, 2013. The change in unrealized depreciation for the fiscal year ended October 31, 2013 primarily resulted from the reclassification from unrealized appreciation to realized gain caused by the sale of Summit of $46.5 million and the Valuation Committees decision to decrease the fair value of the Companys investments in: Ohio Medical Preferred stock by $6.5 million, SGDA Europe equity interest by approximately $3.8 million, MVC Automotive equity interest by approximately $16.1 million, NPWT preferred and common stock by a total of approximately $205,000, Freshii warrant by approximately $15,000, HH&B common stock by $100,000, Velocitius equity interest by approximately $1.9 million, JSC Tekers secured loan by $1.0 million, RuMe preferred stock by $327,000, Foliofn preferred stock by $3.8 million and the Biovation warrant by $87,000. The Valuation Committee also determined to remove the liability associated with the Ohio Medical guarantee that had a net change of $825,000. These changes in unrealized depreciation were off-set by the reclassification from unrealized depreciation to realized losses caused by Lockorder Limited and DPHI, Inc., Legacy Investments, totaling approximately $6.5 million and the Valuation Committee determinations to increase the fair value of the Companys investments in: Custom Alloy series A preferred stock by approximately $44,000 and series B preferred stock by approximately $10.0 million, Octagon equity interest by $450,000, Pre-Paid Legal term loans A and B by a total of approximately $119,000, Pre-Paid Legal second lien term loan by approximately $144,000, Security Holdings equity interest by approximately $12.2 million, Turf equity interest by $592,000, Vestal common stock by approximately $6.8 million, U.S. Gas convertible series I preferred stock by $11.6 million, Centile equity interest by $1.6 million, Biovation loan by approximately $177,000, Tekers common stock by $230,000 and the MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $2.2 million. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.1 million due to a PIK distribution, which was treated as a return of capital.
PORTFOLIO INVESTMENTS
For the Fiscal Years Ended October 31, 2015 and October 31, 2014. The cost of the portfolio investments held by the Company at October 31, 2015 and October 31, 2014 was $443.7 million and $440.0 million, respectively, representing an increase of $3.7 million. The aggregate fair value of portfolio investments at October 31, 2015 and at October 31, 2014 was $400.9 million and $447.6 million, respectively, representing a decrease of $46.7 million. The cost and fair value of cash and cash equivalents held by the Company at October 31, 2015 and October 31, 2014 was $16.8 million and $23.4 million, respectively, representing a decrease of approximately $6.6 million. The cost and fair value of U.S. Treasury obligations held by the Company at October 31, 2015 was $89.8 million and $89.7 million, respectively, and at October 31, 2014 were $100.0 million and $99.9 million, respectively.
For the Fiscal Year Ended October 31, 2015
During the fiscal year ended October 31, 2015, the Company made eight new investments, committing capital totaling approximately $58.1 million. The investments were made in RX ($10.3 million), Agri-Carriers ($11.8 million), Legal Solutions ($8.7 million), Results Companies ($9.0 million), Vestal ($6.5 million), Thunderdome ($2.0 million), Initials ($4.8 million) and U.S. Technologies ($5.0 million).
During the fiscal year ended October 31, 2015, the Company made 5 follow-on investments into 4 existing portfolio companies totaling approximately $4.3 million. On May 27, 2015, the Company invested an additional $1.1 million into MVC Automotive in the form of common equity interest. On June 3, 2015, the Company invested an additional $250,000 into Centile in the form of common equity interest. On July 6, 2015, the Company invested $250,000 into BAC in the form of equity. See below for further information on BAC. On July 7, 2015, the Company made a secured $1.0 million loan to Biogenic. The loan has a 16% interest rate and matures on February 29, 2016. The Company also received a warrant at no cost and allocated a portion of the cost basis of the loan to the warrant at the time the investment was made. On October 19, 2015, the Company invested an additional $1.7 million in MVC Automotive in the form of common equity interest.
On November 26, 2014, Summit Research Labs, Inc. repaid its second lien loan in full including all accrued interest totaling approximately $25.7 million.
On December 31, 2014, the Company received distributions totaling $388,000 from the PE Fund, which was treated as a return of capital.
On April 20, 2015, BAC credit purchased the assets of Biovation. The Company received 90 shares of class B non-voting common stock in BAC as part of the transaction and realized a loss on Biovation of approximately $2.2 million.
On May 1, 2015, the Company sold 2,893 shares of common stock in Ohio Medical for a nominal amount resulting in no realized gain or loss.
On May 29, 2015, the Company sold its 81,000 shares of common stock in Vestal receiving total proceeds of approximately $17.9 million resulting in a realized gain of approximately $15.0 million. The total proceeds include a $1.0 million dividend and assumes full receipt of the
escrow proceeds. The $600,000 loan was also repaid in full, including all accrued interest. As part of the transaction, the Company reinvested approximately $6.3 million in the form of a subordinated loan, $250,000 for 5,610 shares of common stock and a warrant with no cost. The loan has an interest rate of 15% and matures on November 28, 2021.
On June 19, 2015, the Company monetized a majority of its investment in Velocitius, receiving approximately $9.2 million in proceeds, which included a return of capital and closing fees and was net of a minimal currency loss.
On October 16, 2015, the Company sold its remaining equity interest in Velocitius and received zero proceeds resulting in a realized loss of approximately $2.7 million.
On October 30, 2015, the Company realized a loss of $6.7 million with the dissolution of HH&B.
During the fiscal year ended October 31, 2015, the Company sold its $10.0 million PrePaid Legal loan for proceeds totaling approximately $10.1 million, including all accrued interest.
During the fiscal year ended October 31, 2015, Custom Alloy made principal payments totaling $3.5 million on its unsecured subordinated loan. The balance of the loan at October 31, 2015 was $3.0 million.
During the quarter ended January 31, 2015, the Valuation Committee increased the fair value of the Companys investments in: Foliofn, Inc. (Foliofn) preferred stock by $109,000, Turf Products, LLC (Turf) loan by approximately $2,000, RuMe series C preferred stock by $800,000 and series B preferred stock by $200,000, Advantage preferred stock by $20,000, Biogenic warrant and senior convertible note by a net total of approximately $28,000 and SCSD common stock by $387,000. In addition, increases in the cost basis and fair value of the loans to Biogenic, Custom Alloy, Moreys, and U.S. Gas were due to the capitalization of PIK interest totaling $436,878. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.1 million due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $759,000, Custom Alloy second lien loan by approximately $84,000, NPWT Corporation (NPWT) common stock by $2,000 and preferred stock by $36,000, Tekers common stock by $170,000, PrePaid Legal loan by $100,000, Centile equity interest by $538,000, Biovation loan by approximately $716,000, Velocitius equity interest by approximately $1.1 million, Security Holdings equity interest by $1.1 million, JSC Tekers preferred stock by approximately $599,000, MVC Automotive equity interest by approximately $5.9 million, SGDA Europe equity interest by approximately $749,000 and Inland Environmental & Remediation LP (Inland) warrant by approximately $713,000.
During the quarter ended April 30, 2015, the Valuation Committee increased the fair value of the Companys investments in: MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $610,000, Turf loan by approximately $2,000, JSC Tekers preferred stock by $5,000, Biogenic warrant and senior convertible note by a total of approximately $852,000, MVC Automotive equity interest by $246,000 and RuMe series C preferred stock by approximately $558,000 and series B preferred stock by $142,000. In addition, increases in the cost basis and fair value of the loans to
Biogenic, Custom Alloy, Moreys, and U.S. Gas were due to the capitalization of PIK interest totaling $501,906. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.2 million due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: Custom Alloy second lien loan by approximately $11,000, Foliofn, Inc. preferred stock by $82,000, NPWT common stock by $1,000 and preferred stock by $12,000, Tekers common stock by $21,000, Centile equity interest by $98,000, Moreys second lien loan by approximately $253,000, Advantage preferred stock by approximately $28,000, Velocitius equity interest by $899,000, Biovations loan by approximately $2.7 million, SGDA Europe equity interest by approximately $1.3 million, Security Holdings equity interest by $850,000, Ohio Medical series A preferred stock by $10.5 million and the Inland loan by approximately $1.4 million.
During the quarter ended July 31, 2015, the Valuation Committee increased the fair value of the Companys investments in: RuMe series C preferred stock by approximately $198,000 and series B preferred stock by approximately $53,000, Custom Alloy second lien loan by approximately $191,000, Turf guarantee by approximately $19,000, Centile equity interest by $48,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $751,000 and Advantage preferred stock by approximately $302,000. In addition, increases in the cost basis and fair value of the loans to Biogenic, Custom Alloy, Moreys, Vestal and U.S. Gas were due to the capitalization of PIK interest totaling $525,997. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.2 million due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: Foliofn, Inc. preferred stock by $383,000, NPWT preferred stock by $1,000, Tekers common stock by $117,000, Turf loan by approximately $2,000, Vestal escrow by approximately $15,000, BAC common stock by approximately $167,000, Biogenic warrant and senior convertible note by a net total of approximately $2,000, Moreys second lien loan by approximately $753,000, Inland loan by $10.0 million, Velocitius equity interest by approximately $774,000, JSC Tekers preferred stock by $35,000, SGDA Europe equity interest by approximately $1.1 million, Ohio Medical series A preferred stock by $6.0 million, MVC Automotive equity interest by $616,000 and Security Holdings equity interest by $2.0 million.
During the quarter ended October 31, 2015, the Valuation Committee increased the fair value of the Companys investments in: Turf loan and guarantee by a total of approximately $5,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $1.4 million, Foliofn, Inc. preferred stock by $59,000, NPWT preferred stock by $4,000, Centile equity interest by $249,000, Inland loan by $5.0 million and RuMe series C preferred stock by approximately $626,000 and series B preferred stock by approximately $184,000. In addition, increases in the cost basis and fair value of the loans to Biogenic, Custom Alloy, Moreys, Vestal and U.S. Gas were due to the capitalization of PIK interest totaling $801,815. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.2 million due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: Biogenic warrant and senior convertible note by a net total of approximately $76,000, Tekers common stock by $575,000, Custom Alloy second lien loan by approximately $249,000, Moreys second lien loan by approximately $922,000, JSC Tekers preferred stock by $483,000, Security Holdings equity interest by $1.3 million,
SGDA Europe equity interest by approximately $830,000, BAC common stock by approximately $62,000, Ohio Medical series A preferred stock by $1.2 million and MVC Automotive equity interest by $4.6 million.
During the fiscal year ended October 31, 2015 the Valuation Committee increased the fair value of the Companys investments in: Turf loan and guarantee by a total of approximately $25,000, Biogenic warrant and senior convertible note by a total of approximately $802,000, SCSD common stock by $387,000, Advantage preferred stock by approximately $294,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $2.0 million and RuMe series C preferred stock and series B preferred stock by a total of approximately $2.8 million. In addition, increases in the cost basis and fair value of the loans to Biogenic, Custom Alloy, Moreys, Vestal and U.S. Gas were due to the capitalization of PIK interest totaling $2,266,596. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $4.7 million due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: Foliofn, Inc. preferred stock by $297,000, NPWT common stock by $3,000 and preferred stock by $45,000, Tekers common stock by $883,000, PrePaid Legal loan by $100,000, Centile equity interest by $339,000, BAC common stock by approximately $229,000, Vestal escrow by approximately $15,000, Biovations loan by approximately $3.4 million, Moreys second lien loan by approximately $1.9 million, Velocitius equity interest by $2.8 million, JSC Tekers preferred and common stock by a combined $1.1 million, Security Holdings equity interest by $5.3 million, SGDA Europe equity interest by approximately $4.0 million, Custom Alloy second lien loan by approximately $153,000, Ohio Medical series A preferred stock by $17.7 million, MVC Automotive equity interest by $10.9 million and Inland warrant by approximately $713,000 and loan by approximately $6.4 million.
At October 31, 2015, the fair value of all portfolio investments, exclusive of U.S. Treasury obligations and escrow receivables, was $400.9 million with a cost basis of $443.7 million. At October 31, 2015, the fair value and cost basis of investments made by the Companys former management team pursuant to the prior investment objective (Legacy Investments) was $5.6 million and $23.8 million, respectively, and the fair value and cost basis of portfolio investments made by the Companys current management team was $395.3 million and $419.9 million, respectively. At October 31, 2014, the fair value of all portfolio investments, exclusive of U.S. Treasury obligations and escrow receivables, was $447.6 million with a cost basis of $440.0 million. At October 31, 2014, the fair value and cost basis of portfolio investments of the Legacy Investments was $5.9 million and $23.8 million, respectively, and the fair value and cost basis of portfolio investments made by the Companys current management team was $441.7 million and $416.2 million, respectively.
For the Fiscal Year Ended October 31, 2014
During the year ended October 31, 2014, the Company made four new investments, committing capital totaling approximately $48.4 million. The investments were made in G3K ($6.0 million), Inland ($15.0 million), Equus ($4.4 million) and Custom Alloy ($23.0 million).
During the year ended October 31, 2014, the Company made 20 follow-on investments into 13 existing portfolio companies totaling approximately $57.4 million. On November 13, 2013, the Company loaned $4.0 million to Security Holdings in the form of a 5% cash bridge loan with
a maturity date of February 15, 2014. On November 19, 2013, the Company increased its common equity interest in Centile by $100,000. Also on November 19, 2013, the Company invested $5.0 million into MVC Automotive in the form of common equity interest and converted its bridge loan of approximately $1.8 million, including accrued interest, to common equity interest. On December 23, 2013, the Company made a senior secured loan of $3.3 million to RuMe with a cash interest rate of 12% and a maturity date of April 4, 2014. The Company also purchased warrants for shares of common stock in RuMe for a nominal amount and allocated a portion of the cost basis of the loan to the warrants at the time the investment was made. On January 2, 2014, the Company loaned $7.0 million to Moreys, increasing its second lien loan amount to $15.0 million. The interest rate on the total loan was increased to 10% cash and 3% PIK. On March 5, 2014, the Company invested an additional $4.0 million into MVC Automotive in the form of common equity interest. On March 10, 2014, the Company exercised its warrant in RuMe at a cost of approximately $43,000 and received 4,297,549 shares of common stock. On March 5, 2014 and April 1, 2014, the Company contributed a total of approximately $2.8 million to the PE Fund related to expenses, an additional investment in Plymouth Rock Energy, LLC and an investment in Advanced Oilfield Services, LLC. On April 1, 2014, the Company loaned $1.5 million to Marine in the form of a second lien loan with an interest rate of 11%. The loan matured on June 30, 2014. On May 2, 2014, the Company loaned $1.5 million to SCSD in the form of a secured loan. The loan has an interest rate of 12% and a maturity date of May 2, 2019. On May 7, 2014, the Company converted RuMes $3.3 million senior secured loan and accrued interest of approximately $161,000 into 23,896,634 shares of series C preferred stock. On May 9, 2014, the Company loaned an additional $500,000 to Biovation increasing the total amount outstanding on the bridge loan to $3.8 million and extended the maturity date of the loan to October 31, 2014. The Company also received a warrant at no cost and allocated a portion of the cost basis of the loan to the warrant at the time the investment was made. On May 14, 2014, the Company signed a share exchange agreement with Equus, another publicly traded business development company, as part of a plan of reorganization adopted by the Equus Board of Directors. Under the terms of the reorganization, Equus will pursue a merger or consolidation with the Company, a subsidiary of the Company, or one or more of the Companys portfolio companies. Absent Equus merging or consolidating with/into the Company itself (whereby the Company would own a majority of Equus shares), the current intention is for Equus to (i) be restructured into a publicly-traded operating company focused on the energy and/or financial services sectors and (ii) seek to terminate its election as a business development company. Pursuant to the share exchange agreement, the Company has received 2,112,000 shares of Equus in exchange for 395,839 shares of the Company. The exchange was calculated based upon each companys respective net asset value per share published at that time. As part of the reorganization, the Company may acquire additional Equus shares from time to time, either through Equus direct sale of newly issued shares to the Company or through the purchase of outstanding Equus shares. The Company continues to discuss reorganization options with Equus. As a result of the restatement for the quarter ending July 31, 2014, the Company has a liability to Equus of $221,424 for additional shares and dividends due to Equus. TTG Advisers has voluntarily agreed to waive any management fees on the Companys assets invested in Equus common stock. Also, as part of the Equus plan of reorganization, on May 21, 2014, June 3, 2014 and June 12, 2014, the Company purchased 512,557, 850,000 and 970,087 additional outstanding common shares of Equus, respectively, at a cost of approximately $1.2 million, $2.1 million and $2.4 million, respectively. On May 27, 2014, the Company purchased 2,893 common shares of Ohio Medical from Champlain Capital Partners at a nominal cost. On May 30, 2014, the Company loaned $3.0 million to U.S. Gas. The loan has an interest rate of 14% and a maturity date of July 1, 2018. On August 26, 2014,
the Company invested $12.7 million in Security Holdings for additional common equity interest. On September 30, 2014, the Company loaned $4.0 million to Biogenics in the form of a secured loan. The loan has a 16% interest rate and matures on September 30, 2015. On October 7, 2014, the Company contributed a total of approximately $2.4 million to the PE Fund related to an investment in AccuMed Corp. As of October 31, 2014, the PE Fund had invested in Plymouth Rock Energy, LLC, Gibdock Limited, Focus Pointe Holdings, Inc., Advanced Oilfield Services, LLC and AccuMed Corp.
On November 1, 2013, Turf repaid its $1.0 million junior revolving note in full, including all accrued interest. The junior revolving note is no longer a commitment of the Company. Turf also made a $4.5 million principal payment on its senior subordinated loan, resulting in an outstanding balance of approximately $3.9 million as of October 31, 2014. The Company also guaranteed $1.0 million of Turfs indebtedness to Berkshire Bank. The guarantee was valued at negative $67,000 at October 31, 2014.
On November 11, 2013, MVC Automotive Group B.V. completed a tax free reorganization into MVC Automotive Group GmbH MVC Automotive, an Austrian holding company, to increase operating efficiencies.
On December 16, 2013, the Company announced the termination of its agreement to sell U.S. Gas to United States Gas & Electric Holdings, Inc. (US Holdings), a company organized to acquire U.S. Gas. US Holdings was unable to satisfy the closing conditions of the original agreement (October 4, 2013) and subsequently submitted a transaction termination notice to the Company on December 10, 2013.
On January 30, 2014, BPC II, LLC completed the dissolution of its operations. The Company realized a loss of $180,000 as a result of this dissolution.
On April 14, 2014, the Company agreed to provide G3K a $10.0 million loan in three installments and made its first loan of $6.0 million. The closing of the Companys G3K investment and first loan occurred following extensive due diligence, including receipt of an unqualified audit report on G3Ks financial statements and a separate quality of earnings review by an accounting firm. The Company has initiated legal action in the Superior Court of New Jersey, Chancery Division, against G3K, its three shareholders and certain corporate officers for fraudulently misrepresenting G3Ks financial records in order to secure financing from the Company. The Company is working diligently to uncover the full extent of what it believes to be a highly sophisticated fraud and is seeking to recover loan proceeds. All legal options available are being examined. The Company did recover $375,000 in principal prior to October 31, 2014. The loan had an outstanding balance of approximately $5.6 million and had a fair value of $0 as of October 31, 2014.
On May 1, 2014, the Company converted the JSC Tekers $12.0 million secured loan and accrued interest to preferred equity. The cost and fair value assigned to the preferred equity was approximately $11.8 million. As a result of the loan conversion, the Company realized a loss of approximately $190,000.
On May 19, 2014, the Company loaned an additional $2.0 million to Inland. The total amount outstanding of the senior secured loan as of October 31, 2014 was $15.0 million.
On May 30, 2014, the Company received an approximately $2.9 million principal payment from U.S. Gas on its second lien loan. The second lien loan interest rate was adjusted to 13% and the maturity date was extended to July 1, 2019.
On June 30, 2014, the Company converted its SGDA $6.5 million term loan and accrued interest of approximately $1.9 million to additional common equity interest in SGDA Europe.
On July 1, 2014, Marine repaid its $11.7 million senior subordinated and $1.5 million second lien loans in full including all accrued interest. The 20,000 shares of Marines preferred stock was also sold for approximately $3.8 million, which resulted in no gain or loss from the sale. During the fiscal year ended October 31, 2014, the Company received dividends totaling approximately $760,000 from Marine.
On July 29, 2014, the Company sold its limited liability company interest in Octagon for approximately $6.3 million resulting in a realized gain of approximately $3.2 million.
On September 2, 2014, Security Holdings repaid its $4.0 million bridge loan in full, including all accrued interest.
On October 3, 2014, Freshii repaid its $1.1 million senior secured loan in full, including all accrued interest. With this repayment and the removal of the warrant associated with Freshii, the Company recorded a net realized loss of approximately $14,000.
On October 8, 2014, the Company received approximately $6.3 million in proceeds related to the Summit escrow which was fair valued at approximately $5.9 million, resulting in a realized gain of approximately $377,000.
On October 31, 2014, the Company redeemed its convertible series A and series B preferred shares of Custom Alloy for $23.0 million, which resulted in a realized gain of $13.0 million. The Company then reinvested $23.0 million in Custom Alloy in the form of a second lien loan with an interest rate of 11% and a maturity date of April 30, 2020.
During the fiscal year ended October 31, 2014, Custom Alloy made $1.0 million of principal payments on its loan.
During the fiscal year ended October 31, 2014, the Company received a dividend of approximately $67,000 from NPWT.
During the quarter ended January 31, 2014, the Valuation Committee increased the fair value of the Companys investments in: Custom Alloy series A preferred stock by approximately $18,000 and series B preferred stock by approximately $4.0 million, NPWT common stock by $1,000 and preferred stock by $34,000, SGDA Europe equity interest by approximately $649,000, Vestal common stock by $3.0 million, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $2.2 million, Biovation warrants by $162,000, and Freshii warrant by approximately $15,000. In addition, increases in the cost basis and fair value of the loans to Marine, Summit, Freshii, Biogenic and U.S. Gas, and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $1,008,665. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $949,000 due to a PIK
distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: Centile equity interest by $29,000, Security Holdings equity interest by $304,000, Octagon equity interest by approximately $1.2 million, MVC Automotive equity interest by approximately $3.2 million, Velocitius equity interest by approximately $1.9 million, Biovation bridge loan by approximately $102,000, Foliofn, Inc. preferred stock by approximately $1.1 million, Turf guarantee by $92,000 and Tekers common stock by $12,000. Also, during the quarter ended January 31, 2014, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $101,000.
During the quarter ended April 30, 2014, the Valuation Committee increased the fair value of the Companys investments in: Foliofn, Inc. preferred stock by $127,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $900,000, Octagon equity interest by approximately $1.1 million, Security Holdings equity interest by $422,000, PrePaid Legal loan by $100,000, Centile equity interest by $57,000, Freshii warrant by approximately $8,000 and Tekers common stock by $7,000. In addition, increases in the cost basis and fair value of the loans to Marine, Summit, Freshii, Biogenic, Moreys and U.S. Gas, and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $1,118,793. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $987,000 due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: Custom Alloy series A preferred stock by approximately $6,000 and series B preferred stock by approximately $1.3 million, SGDA Europe equity interest by approximately $111,000, MVC Automotive equity interest by approximately $3.4 million, G3K loan by approximately $5.6 million, NPWT common stock by approximately $4,000 and preferred stock by approximately $70,000, U.S. Gas preferred stock by $9.0 million, Velocitius equity interest by approximately $606,000 and the Biovation bridge loan by approximately $20,000. Also, during the quarter ended April 30, 2014, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased only the cost basis of this investment by approximately $181,000.
During the quarter ended July 31, 2014, the Valuation Committee increased the fair value of the Companys investments in: MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $359,000, Vestal common stock by approximately $1.5 million, RuMe series C preferred stock by approximately $75,000, Biogenic senior convertible note by $275,000, MVC Automotive equity interest by approximately $4.4 million, Biovation bridge loan by approximately $103,000 and Advantage preferred stock by $96,000. In addition, increases in the cost basis and fair value of the loans to Marine, Summit, Freshii, Biogenic, Moreys and U.S. Gas, and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $1,094,938. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.0 million due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: Foliofn, Inc. preferred stock by approximately $109,000, Velocitius equity interest by approximately $198,000, Octagon equity interest by approximately $730,000, Ohio Medical series A preferred stock by $800,000, NPWT common stock by $5,000 and preferred stock by $104,000, Tekers common stock by $111,000, SGDA Europe equity interest by approximately $2.6 million, Security Holdings equity interest by $564,000, Centile equity interest by $76,000, JSC Tekers common and preferred stock by approximately $499,000 and the Biovation warrants
by approximately $232,000. Also, during the quarter ended July 31, 2014, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis of this investment by approximately $204,000.
During the quarter ended October 31, 2014, the Valuation Committee increased the fair value of the Companys investments in: MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $76,000, Centile equity interest by $165,000, Security Holdings equity interest by $2.1 million, RuMe series C preferred stock by approximately $800,000, Biogenic senior convertible note by $30,000, Advantage preferred stock by $125,000, Summit loan by approximately $253,000, Turf equity interest by $525,000, Turf guarantee by approximately $25,000, and Moreys loan by approximately $253,000. In addition, increases in the cost basis and fair value of the loans to Summit, Freshii, Biogenic, Moreys, Inland and U.S. Gas were due to the capitalization of PIK interest totaling $706,601. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.1 million due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: Foliofn, Inc. preferred stock by approximately $16,000, MVC Automotive equity interest by approximately $4.5 million, NPWT common stock by approximately $1,000 and preferred stock by approximately $20,000, Velocitius equity interest by approximately $5.7 million, Biovation warrants by $240,000, SGDA Europe equity interest by approximately $584,000, Biovation bridge loan by approximately $420,000, Tekers common stock by $136,000, JSC Tekers common and preferred stock by approximately $5.1 million and the Turf loan by approximately $31,000.
During the fiscal year ended October 31, 2014, the Valuation Committee increased the fair value of the Companys investments in: Custom Alloy series A preferred stock by approximately $12,000 and series B preferred stock by approximately $2.7 million, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $3.6 million, Centile equity interest by $117,000, PrePaid Legal loan by $100,000, Freshii warrant by approximately $23,000, Security Holdings equity interest by $1.7 million, RuMe series C preferred stock by approximately $875,000, Biogenic senior convertible note by $305,000, Advantage preferred stock by $221,000, Summit loan by approximately $253,000, Turf equity interest by $525,000, Moreys loan by approximately $253,000 and Vestal common stock by approximately $4.5 million. In addition, increases in the cost basis and fair value of the loans to Marine, Summit, Freshii, Biogenic, Moreys, Inland and U.S. Gas, and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $3,928,997. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $4.0 million due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: Foliofn, Inc. preferred stock by approximately $1.1 million, MVC Automotive equity interest by approximately $6.7 million, G3K loan by approximately $5.6 million, NPWT common stock by approximately $9,000 and preferred stock by approximately $160,000, U.S. Gas preferred stock by $9.0 million, Velocitius equity interest by approximately $8.4 million, Ohio Medical series A preferred stock by $800,000, Biovation warrants by $311,000, SGDA Europe equity interest by approximately $2.6 million, Biovation bridge loan by approximately $439,000, Octagon equity interest by approximately $750,000, Tekers common stock by $252,000, JSC Tekers common and preferred stock by approximately $5.6 million, Turf loan by approximately $31,000 and the Turf guarantee by approximately $67,000. Also, during the fiscal year ended October 31, 2014, the undistributed allocation of flow through income from
the Companys equity investment in Octagon totaled approximately $486,000. The $486,000 increased the cost basis and $101,000 increased the fair value of this investment.
At October 31, 2014, the fair value of all portfolio investments, exclusive of U.S. Treasury obligations and escrow receivables, was $447.6 million with a cost basis of $440.0 million. At October 31, 2014, the fair value and cost basis of portfolio investments of the Legacy Investments was $5.9 million and $23.8 million, respectively, and the fair value and cost basis of portfolio investments made by the Companys current management team was $441.7 million and $416.2 million, respectively. At October 31, 2013, the fair value of all portfolio investments, exclusive of U.S. Treasury obligations and escrow receivables, was $417.9 million with a cost basis of $372.0 million. At October 31, 2013, the fair value and cost basis of the Legacy Investments was $7.0 million and $23.8 million, respectively, and the fair value and cost basis of portfolio investments made by the Companys current management team was $410.9 million and $348.2 million, respectively.
Portfolio Companies
During the fiscal year ended October 31, 2015, the Company had investments in the following portfolio companies:
Actelis Networks, Inc.
Actelis Networks, Inc. (Actelis), Fremont, California, a Legacy Investment, provides authentication and access control solutions designed to secure the integrity of e-business in Internet-scale and wireless environments.
At October 31, 2014 and October 31, 2015, the Companys investment in Actelis consisted of 150,602 shares of Series C preferred stock at a cost of $5.0 million. The investment has been fair valued at $0.
Advantage Insurance Holdings
Advantage, Cayman Islands, is a provider of specialty insurance, reinsurance and related services to business owners and high net worth individuals.
At October 31, 2014, the Companys investment in Advantage consisted of 750,000 shares of preferred stock with a cost basis of $7.5 million and a fair value of approximately $7.7 million.
During the fiscal year ended October 31, 2015, the Valuation Committee increased the fair value of the preferred stock by approximately $294,000.
At October 31, 2015, the 750,000 shares of preferred stock had a cost basis of $7.5 million and a fair value of approximately $8.0 million.
Bruce Shewmaker, an officer of the Company, serves as a director of Advantage .
Agri-Carriers Group Inc.
Agri-Carriers Group, Inc. (Agri-Carriers), Covina, CA, is a transportation company focused on over-the-road, full-truckload transportation of agriculture products to be used in consumer food manufacturing.
On December 30, 2014, the Company invested approximately $11.8 million in Agri-Carriers in the form of a senior subordinated loan. The loan bears annual interest at 15% and has a maturity date of July 20, 2017.
At October 31, 2015, the Companys investment in Agri-Carriers consisted of a senior subordinated loan with an outstanding amount, cost basis and fair value of approximately $11.8 million. The decrease in cost basis of the loan is due to the amortization of loan origination costs.
Biogenic Reagents
Biogenic, Minneapolis, Minnesota, is a producer of high-performance activated carbon products made from renewable biomass.
At October 31, 2014, the Companys investment in Biogenic consisted of two senior notes with maturity dates of July 21, 2018 and September 30, 2015, a senior convertible note with a maturity note of July 21, 2018 and a warrant. The notes have an interest rate of 16%. The loans had a combined outstanding balance and cost basis of approximately $14.0 million and a combined fair value of approximately $14.3 million. The warrant had a cost basis and fair value of $0.
On July 7, 2015, the Company loaned $1.0 million to Biogenic in the form of a secured loan. The loan has a 16% interest rate and matures on February 29, 2016. The Company also received a warrant at no cost and allocated a portion of the cost basis of the loan to the warrant at the time the investment was made.
During the fiscal year ended October 31, 2015, the Valuation Committee decreased the fair value of the senior convertible note by approximately $239,000 and increased the fair value of the warrant by approximately $1.0 million.
At October 31, 2015, the Companys loans had a combined outstanding balance, cost basis and fair value of approximately $15.6 million. The warrants had a combined cost basis of approximately $620,000 and a combined fair value of approximately $1.7 million. The increase in cost basis of the loans is due to amortization of the discount and capitalization of payment in kind interest and the increase in the fair value is due to the capitalization of payment in kind interest. These increases were approved by the Companys Valuation Committee.
Biovation Acquisition Co.
BAC, Montgomery, Minnesota, is a manufacturer and marketer of environmentally friendly, organic and sustainable laminate materials and composites.
On April 20, 2015, BAC credit purchased the assets of Biovation. The Company received 90 shares of class B non-voting common stock in BAC as part of the transaction.
On July 6, 2015, the Company invested $250,000 into BAC in the form of equity.
During the fiscal year ended October 31, 2015, the Valuation Committee decreased the fair value of the common stock by approximately $229,000.
At October 31, 2015, the Companys investment consisted of 90 shares of class B non-voting common stock with a cost basis of approximately $785,000 and a fair value of approximately $556,000.
Biovation Holdings Inc.
Biovation, Montgomery, Minnesota, was a manufacturer and marketer of environmentally friendly, organic and sustainable laminate materials and composites.
At October 31, 2014, the Companys investment in Biovation consisted of a bridge loan with an annual interest of 12% and had a maturity date of October 31, 2014. The loan had an
outstanding balance and cost basis of approximately $3.8 million and a fair value of approximately $3.4 million. The warrants had a cost of $398,000 and a fair value of $0.
On April 20, 2015, Biovation Acquisition Co., a new portfolio company, credit purchased the assets of Biovation. The Company received 90 shares of class B non-voting common stock in Biovation Acquisition Company with a fair value of approximately $535,000, as part of the transaction and realized a loss of approximately $2.2 million.
During the fiscal year ended October 31, 2015, the Valuation Committee decreased the fair value of the loan by approximately $3.4 million.
At October 31, 2015, the Companys investment consisted of a bridge loan with an outstanding balance and cost basis of approximately $1.1 million and a fair value of $0. The warrants had a cost of $398,000 and a fair value of $0. The Company reserved in full against all of the accrued interest starting August 1, 2014.
Centile Holding B.V.
Centile, Sophia-Antipolis, France, is a leading European innovator of unified communications, network platforms, hosted solutions, applications and tools that help mobile, fixed and web-based communications service providers serve the needs of enterprise end users.
At October 31, 2014, the Companys investment in Centile consisted of common equity interest at a cost of $3.3 million and a fair value of approximately $5.0 million.
On June 3, 2015, the Company invested an additional $250,000 into Centile in the form of common equity interest.
During the fiscal year ended October 31, 2015, the Valuation Committee decreased the fair value of the common equity interest by approximately $339,000.
At October 31, 2015, the Companys investment in Centile consisted of common equity interest at a cost of $3.5 million and a fair value of approximately $4.9 million.
Kevin Scoby, a representative of the Company, serves as a director of Centile.
Custom Alloy Corporation
Custom Alloy, High Bridge, New Jersey, manufactures time sensitive and mission critical butt-weld pipe fittings and forgings for the natural gas pipeline, power generation, oil/gas refining and extraction, and nuclear generation markets.
At October 31, 2014, the Companys investment in Custom Alloy consisted of an unsecured subordinated loan with a cost basis, outstanding balance and fair value of approximately $6.5 million and a second lien loan with a cost basis, outstanding balance and fair value of approximately $23.0 million. The second lien loan had an interest rate of 11% and a maturity date of April 30, 2020 and the unsecured subordinated loan had an interest rate of 12% and a maturity date of September 4, 2016.
During the fiscal year ended October 31, 2015, Custom Alloy made principal payments totaling $3.5 million on its unsecured subordinated loan.
During the fiscal year ended October 31, 2015, the Valuation Committee decreased the fair value of the second lien loan by approximately $153,000.
At October 31, 2015, the Companys investment in Custom Alloy consisted of an unsecured subordinated loan with a cost basis, outstanding balance and fair value of approximately $3.0 million and a second lien loan with a cost basis and outstanding balance of approximately $23.8 million and a fair value of approximately $23.6 million. The increase in cost and fair value of the loans is due to the capitalization of payment in kind interest. The increases were approved by the Companys Valuation Committee.
Equus Total Return, Inc.
Equus is a publicly traded business development company and regulated investment company listed on the New York Stock Exchange (NYSE:EQS). Consistent with the Companys valuation procedures, the Company has been marking this investment to its market price.
At October 31, 2014, the Companys investment in Equus consisted of 4,444,644 shares of common stock with a cost of approximately $10.0 million and a market value of approximately $9.8 million.
At October 31, 2015, the Companys investment in Equus consisted of 4,444,644 shares of common stock with a cost of approximately $10.0 million and a market value of approximately $7.6 million.
Foliofn, Inc.
Folio fn , Vienna, Virginia, a Legacy Investment, is a financial services technology company that offers investment solutions to financial services firms and investors.
At October 31, 2014, the Companys investment in Folio fn consisted of 5,802,259 shares of Series C preferred stock with a cost of $15.0 million and a fair value of $5.9 million.
During the fiscal year ended October 31, 2015, the Valuation Committee decreased the fair value of the preferred stock by approximately $297,000.
At October 31, 2015, the Companys investment in Folio fn consisted of 5,802,259 shares of Series C preferred stock with a cost of $15.0 million and a fair value of approximately $5.6 million.
Bruce Shewmaker, an officer of the Company, serves as a director of Folio fn.
G3K Displays, Inc.
G3K, Hoboken, New Jersey, was a custom designer, manufacturer and installer of in-store environments, signage, displays and fixtures for major retailers such as Foot Locker, adidas and Luxottica.
On April 14, 2014, the Company agreed to provide G3K a $10.0 million loan in three installments and made its first loan of $6.0 million. The closing of the Companys G3K investment and first loan occurred following extensive due diligence, including receipt of an unqualified audit report on G3Ks financial statements by an accounting firm and a separate quality of earnings review by another accounting firm. The Company has initiated legal action in the Superior Court of New Jersey, Chancery Division, against G3K, its three shareholders and certain corporate officers for fraudulently misrepresenting G3Ks financial records in order to secure financing from the Company. The Company is working diligently to uncover the full extent of what it believes to be a highly sophisticated fraud and is seeking to recover loan proceeds. All legal options available are being examined. The Company did recover $375,000 in principal prior to October 31, 2014.
At October 31, 2014, and October 31, 2015, the Companys investment in G3K consisted of a senior loan with an outstanding balance and cost basis of $5.6 million and a fair value of $0. The senior loan has an interest rate of 13% and a maturity date of April 11, 2019. The Company has reserved in full against all of the accrued interest starting April 14, 2014.
Harmony Health & Beauty, Inc.
HH&B, Purchase, New York, purchased the assets of Harmony Pharmacy on November 30, 2010, during a public UCC sale for approximately $6.4 million. HH&B was a distributor of health and beauty products . The Companys initial investment consisted of 100,010 shares of common stock.
On October 30, 2015, the Company realized a loss of $6.7 million with the dissolution of HH&B.
At October 31, 2015, the Company no longer held an investment in HH&B.
Initials, Inc.
Initials, Inc. (Initials), Clarkesville, Georgia, is a direct selling organization specializing in customized bags, organizational products and fashion accessories.
On June 23, 2015, the Company loaned approximately $4.8 million to Initials in the form of a senior subordinated loan. The loan has an interest rate of 15% and matures on June 22, 2020.
At October 31, 2015, the Companys investment in Initials consisted of a senior subordinated loan with an outstanding amount, cost basis and fair value of approximately $4.8 million.
Inland Environmental & Remediation LP
Inland, Columbus, Texas, has developed a patented, environmentally-friendly recycling process to transform waste produced from oil field drilling sites into a road base product used in road construction.
At October 31, 2014, the Companys investment in Inland consisted of a senior secured loan with a cash interest rate of 12% and a maturity date of April 17, 2019 and warrants for shares of common stock. The loan had an outstanding balance of $15.0 million and a cost basis and fair value of approximately $14.4 million. The warrants had a cost basis and fair value of $713,000.
During the fiscal year ended October 31, 2015, the Valuation Committee decreased the fair value of the warrant by $713,000 and the senior secured loan by approximately $6.4 million.
At October 31, 2015, the Companys investment in Inland consisted of a senior secured loan with an outstanding balance of $15.0 million, a cost basis of $14.5 million and a fair value of approximately $8.0 million. The warrants had a cost basis of $713,000 and a fair value of $0. The increase in cost basis of the loans is due to amortization of the warrants. The increase was approved by the Companys Valuation Committee.
JSC Tekers Holdings
JSC Tekers, Latvia, is an acquisition company focused on real estate management.
At October 31, 2014, the Companys investment in JSC Tekers consisted of preferred equity with a cost basis of $11.8 million and a fair value of $6.2 million and 3,201 shares of common stock with a cost basis of $4,500 and a fair value of $4,200.
During the fiscal year ended October 31, 2015, the Valuation Committee decreased the fair value of the preferred stock and common stock by a total of approximately $1.1 million.
At October 31, 2015, the Companys investment in JSC Tekers consisted of preferred equity with a cost basis of $11.8 million and a fair value of $5.0 million and 3,201 shares of common stock with a cost basis of $4,500 and a fair value of $4,000.
Legal Solutions Holdings, Inc.
Legal Solutions Holdings, Inc. (Legal Solutions), Covina, CA, is a provider of record retrieval services to the California workers compensation applicant attorney market.
On December 30, 2014, the Company invested $8.7 million in Legal Solutions in the form of a senior subordinated loan. The loan bears annual interest at 14% and has a maturity date of September 12, 2018.
At October 31, 2015, the Companys investment in Legal Solutions consisted of a senior subordinated loan with an outstanding amount, cost basis and fair value of approximately $8.7 million. The decrease in cost basis of the loan is due to the amortization of loan origination costs.
Mainstream Data, Inc.
Mainstream Data, Inc. (Mainstream), Salt Lake City, Utah, a Legacy Investment, develops and operates satellite, internet and wireless broadcast networks for information companies. Mainstream networks deliver text news, streaming stock quotations and digital images to subscribers around the world.
At October 31, 2014 and October 31, 2015, the Companys investment in Mainstream consisted of 5,786 shares of common stock with a cost of $3.75 million. The investment has been fair valued at $0.
Moreys Seafood International LLC
Moreys, Motley, Minnesota, is a manufacturer, marketer and distributor of fish and seafood products.
At October 31, 2014, the Companys investment in Moreys consisted of a second lien loan that had an outstanding balance and cost basis of $15.3 million and a fair value of $15.6 million. The loan had an interest rate of 13% and a maturity date of August 12, 2018.
On June 28, 2015, the interest rate on the loan increased to 15%.
During the fiscal year ended October 31, 2015, the Valuation Committee decreased the fair value of the loan by approximately $1.9 million.
At October 31, 2015, the loan had an outstanding balance and cost basis of $16.0 million and a fair value of $14.4 million. The increase in cost and fair value of the loan is due to the capitalization of PIK interest. The increase in the fair value due to the capitalization of PIK interest was approved by the Companys Valuation Committee.
MVC Automotive Group GmbH
MVC Automotive, an Amsterdam-based holding company, owns and operates ten Ford, Jaguar, Land Rover, Mazda, and Volvo dealerships located in Austria, Belgium, and the Czech Republic.
At October 31, 2014, the Companys investment in MVC Automotive consisted of an equity interest with a cost of approximately $45.7 million and a fair value of approximately $21.5 million. The mortgage guarantee for MVC Automotive was equivalent to approximately $5.0 million at October 31, 2014. This guarantee was taken into account in the valuation of MVC Automotive.
On May 27, 2015, the Company invested an additional $1.1 million into MVC Automotive in the form of common equity interest.
On October 19, 2015, the Company invested an additional $1.7 million in MVC Automotive in the form of common equity interest.
During the fiscal year ended October 31, 2015, the Valuation Committee decreased the fair value of the equity interest by approximately $10.9 million.
At October 31, 2015, the Companys investment in MVC Automotive consisted of an equity interest with a cost of approximately $48.5 million and a fair value of approximately $13.5 million. The mortgage guarantee for MVC Automotive was equivalent to approximately $7.2 million at October 31, 2015. This guarantee was taken into account in the valuation of MVC Automotive.
Michael Tokarz, Chairman of the Company, and Puneet Sanan, a representative of the Company, serve as directors of MVC Automotive.
MVC Private Equity Fund, L.P.
MVC Private Equity Fund, L.P., Purchase, New York, is a private equity fund focused on control equity investments in the lower middle market. MVC GP II, an indirect wholly-owned subsidiary of the Company, serves as the GP to the PE Fund and is exempt from the requirement to register with the Securities and Exchange Commission as an investment adviser under Section 203 of the Investment Advisers Act of 1940. MVC GP II is wholly-owned by MVCFS, a subsidiary of the Company. The Companys Board of Directors authorized the establishment of, and investment in, the PE Fund for a variety of reasons, including the Companys ability to participate in Non-Diversified Investments made by the PE Fund. As previously disclosed, the Company is limited in its ability to make Non-Diversified Investments. For services provided to the PE Fund, the GP and MVC Partners are together entitled to receive 25% of all management fees and other fees paid by the PE Fund and its portfolio companies and up to 30% of the carried interest generated by the PE Fund. Further, at the direction of the Board of Directors, the GP retained TTG Advisers to serve as the portfolio manager of the PE Fund. In exchange for providing those services, and pursuant to the Board of Directors authorization and direction, TTG Advisers is entitled to the remaining 75% of the management and other fees generated by the PE Fund and its portfolio companies and any carried interest generated by the PE Fund. A significant portion of the portfolio fees that are paid by the PE Funds portfolio companies to the GP and TTG Advisers is subject to recoupment by the PE Fund in the form of an offset to future management fees paid by the PE Fund. Given this separate arrangement with the GP and the PE Fund, under the terms of the Companys Advisory Agreement with TTG Advisers, TTG Advisers is not entitled to receive from the Company a management fee or an incentive fee on assets of the Company that are invested in the PE Fund. The PE Funds term will end on October 29, 2016; unless the GP, in its sole discretion, extends the term of the PE Fund for two additional periods of one year each.
On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in the PE Fund. Of the $20.1 million total commitment, MVCFS, through its wholly-owned subsidiary MVC GP II, has committed $500,000 to the PE Fund as its general partner. See MVC Partners for more information on the other portion of the Companys commitment to the PE Fund. The PE Fund has closed on approximately $104 million of capital commitments.
During the fiscal year ended October 31, 2012 and thereafter, MVC Partners was consolidated with the operations of the Company as MVC Partners limited partnership interest in the PE Fund is a substantial portion of MVC Partners operations.
At October 31, 2014, the limited partnership interest in the PE Fund had a cost of approximately $14.2 million and a fair value of approximately $20.0 million. The Companys general partnership interest in the PE Fund had a cost basis of approximately $363,000 and a fair value of approximately $504,000.
On December 31, 2014, the Company received distributions totaling $388,000 from the PE Fund, which was treated as a return of capital.
During the fiscal year ended October 31, 2015, the Valuation Committee increased the fair values of the limited partnership and general partnership interests totaling approximately $2.0 million.
At October 31, 2015, the limited partnership interest in the PE Fund had a cost of approximately $13.8 million and a fair value of approximately $21.9 million. The Companys general partnership interest in the PE Fund had a cost basis of approximately $353,000 and a fair value of approximately $552,000. As of July 31, 2015, the PE Fund had invested in Plymouth Rock Energy, LLC, Gibdock Limited, Focus Pointe Holdings, Inc., Advanced Oilfield Services, LLC and AccuMed Corp.
NPWT Corporation
NPWT, Gurnee, Illinois, is a medical device manufacturer and distributor of negative pressure wound therapy products.
At October 31, 2014, the Companys investment in NPWT consisted of 281 shares of common stock with a cost basis of approximately $1.2 million and a fair value of approximately $5,000 and 5,000 shares of convertible preferred stock with a cost basis of $0 and a fair value of $81,000.
During the fiscal year ended October 31, 2015, the Valuation Committee decreased the fair values of the common stock and preferred stock totaling approximately $48,000.
At October 31, 2015, the common stock had a cost basis of approximately $1.2 million and a fair value of $2,000. The convertible preferred stock had a cost basis of $0 and a fair value of $36,000.
Scott Schuenke, an officer of the Company, serves as a director of NPWT.
Ohio Medical Corporation
Ohio Medical, Gurnee, Illinois, is a manufacturer and supplier of suction and oxygen therapy products, medical gas equipment, and input devices.
At October 31, 2014, the Companys investment in Ohio Medical consisted of 8,512 shares of common stock with a cost basis of approximately $15.8 million and a fair value of $0, 28,981 shares of series A convertible preferred stock with a cost basis of $30.0 million and a fair value of $23.8 million and 9,178 shares of series C convertible preferred stock with a cost basis of $22.6 million and a fair value of $27.8 million.
On May 1, 2015, the Company sold 2,893 shares of common stock in Ohio Medical for a nominal amount resulting in no realized gain or loss.
During the fiscal year ended October 31, 2015, the fair value of the series C convertible preferred stock was increased by approximately $4.7 million due to a PIK distribution, which was treated as a return of capital. During the fiscal year ended October 31, 2015, the Valuation Committee decreased the fair values of the series A preferred stock by $17.7 million.
At October 31, 2015, the Companys investment in Ohio Medical consisted of 5,620 shares of common stock with a cost basis of approximately $15.8 million and a fair value of $0, 33,904 shares of series A convertible preferred stock with a cost basis of $30.0 million and a fair value of $6.1 million and 10,737 shares of series C convertible preferred stock with a cost basis of $22.6 million and a fair value of $32.5 million.
Michael Tokarz, Chairman of the Company, and Peter Seidenberg, representative of the Company, serve as directors of Ohio Medical.
See Note 17 Subsequent Events for additional information.
PrePaid Legal Services, Inc.
PrePaid Legal, Ada, Oklahoma, is the leading marketer of legal counsel and identity theft solutions to families and small businesses in the U.S. and Canada.
At October 31, 2014, the Companys investment in PrePaid Legal consisted of a $9.9 million second lien loan, which was purchased at a discount. The interest rate on the loan is the greater of LIBOR plus 8.50% with a LIBOR floor of 1.25% or the ABR plus 7.5% with an ABR floor of 2.25% per annum. The loan matures on July 1, 2020. The loan had an outstanding balance of $10.0 million, a cost basis of approximately $9.9 million and a fair value of $10.1 million.
During the fiscal year ended October 31, 2015, the Valuation Committee decreased the fair value of the loan by $100,000.
During the fiscal year ended October 31, 2015, the Company sold its $10.0 million PrePaid Legal loan for proceeds totaling approximately $10.1 million, including all accrued interest.
At October 31, 2015, the Company no longer held an investment in PrePaid Legal.
The Results Companies, LLC
The Results Companies, LLC (Results Companies), Fort Lauderdale, FL, is a leading business process outsourcing provider of customer management solutions.
On December 30, 2014, the Company invested $9.0 million in Results Companies in the form of a senior subordinated loan. The loan bears annual interest at 15.5% and has a maturity date of July 1, 2016.
At October 31, 2015, the Companys investment in Results Companies consisted of a senior subordinated loan with an outstanding amount, cost basis and fair value of approximately $9.0 million. The decrease in cost basis of the loan is due to the amortization of loan origination costs.
RX Innovation, Inc.
RX Innovation, Inc. (RX Innovation), Fort Worth, TX, provides hardware and software products to pharmacies throughout the United States.
On December 30, 2014, the Company invested $10.3 million in RX Innovation in the form of a senior subordinated loan. The loan bears annual interest at 16% and has a maturity date of March 1, 2017.
At October 31, 2015, the Companys investment in RX Innovation consisted of a senior subordinated loan with an outstanding amount, cost basis and fair value of approximately $10.3 million. The decrease in cost basis of the loan is due to the amortization of loan origination costs.
RuMe, Inc.
RuMe, Denver, Colorado, produces functional and affordable products for the environmentally and socially-conscious consumer reducing dependence on single-use products.
At October 31, 2014, the Companys investment in RuMe consisted of 5,297,548 shares of common stock with a cost basis and fair value of approximately $924,000, 4,999,076 shares of
series B-1 preferred stock with a cost basis of approximately $1.0 million and a fair value of approximately $1.1 million and 23,896,634 shares of series C preferred stock with a cost basis of approximately $3.4 million and a fair value of approximately $4.3 million.
During the fiscal year ended October 31, 2015, the Valuation Committee increased the fair value of the series C preferred stock and the Series B preferred stock by a combined $2.8 million.
At October 31, 2015, the Companys investment in RuMe consisted of 5,297,548 shares of common stock with a cost basis and fair value of approximately $924,000, 4,999,076 shares of series B-1 preferred stock with a cost basis of approximately $1.0 million and a fair value of approximately $1.7 million and 23,896,634 shares of series C preferred stock with a cost basis of approximately $3.4 million and a fair value of approximately $6.5 million.
John Kelly, a representative of the Company, serves as a director of RuMe.
Security Holdings, B.V.
Security Holdings is an Amsterdam-based holding company that owns FIMA, a Lithuanian security and engineering solutions company.
On April 26, 2011, the Company agreed to collateralize a 5.0 million Euro letter of credit from JPMorgan Chase Bank, N.A., which is classified as restricted cash equivalents on the Companys consolidated balance sheet. This letter of credit is being used as collateral for a project guarantee by AB DnB NORD bankas to Security Holdings.
At October 31, 2014, the Companys common equity interest in Security Holdings had a cost basis of approximately $52.9 million and a fair value of approximately $50.6 million.
During the fiscal year ended October 31, 2015, the Valuation Committee decreased the fair value of the common equity interest by approximately $5.3 million.
At October 31, 2015, the Companys common equity interest in Security Holdings had a cost basis of approximately $52.9 million and a fair value of approximately $45.3 million.
Puneet Sanan, a representative of the Company, serves as a director of Security Holdings.
SGDA Europe B.V.
SGDA Europe is an Amsterdam-based holding company that pursues environmental and remediation opportunities in Romania.
At October 31, 2014, the Companys equity investment had a cost basis of approximately $28.5 million and a fair value of approximately $10.0 million.
During the fiscal year ended October 31, 2015, the Valuation Committee decreased the fair value of the common equity interest by approximately $4.0 million.
At October 31, 2015, the Companys equity investment had a cost basis of approximately $28.5 million and a fair value of approximately $6.0 million.
John Kelly, a representative of the Company, serves as a director of SGDA Europe.
SIA Tekers Invest
Tekers, Riga, Latvia, is a port facility used for the storage and servicing of vehicles.
At October 31, 2014, the Companys investment in Tekers consisted of 68,800 shares of common stock with a cost of $2.3 million and a fair value of approximately $1.2 million. There was no balance on the guarantee for Tekers at October 31, 2014.
During the fiscal year ended October 31, 2015, the Valuation Committee decreased the fair value of the common stock by approximately $883,000.
At October 31, 2015, the Companys investment in Tekers consisted of 68,800 shares of common stock with a cost of $2.3 million and a fair value of $342,000. There was no balance on the guarantee for Tekers at October 31, 2015.
Summit Research Labs, Inc.
Summit, Huguenot, New York, is a specialty chemical company that manufactures antiperspirant actives.
At October 31, 2014, the Companys investment in Summit consisted of a second lien loan that had an outstanding balance and cost basis of approximately $25.1 million and a fair value of approximately $25.4 million. The second lien loan bears annual interest at 14% and matures on October 1, 2018.
On November 26, 2014, Summit Research Labs, Inc. repaid its second lien loan in full including all accrued interest totaling approximately $25.7 million.
At October 31, 2015, the Company no longer held an investment in Summit.
Thunderdome Restaurants, LLC
Thunderdome Restaurants, LLC (Thunderdome), Cincinnati, Ohio, is a restaurant group with locations in Cincinnati, Columbus, Cleveland, Indianapolis, Nashville and Charlotte.
On June 11, 2015, the Company loaned $2.0 million to Thunderdome Restaurants LLC in the form of a second lien loan. The loan has an interest rate of 12% and matures on June 10, 2020.
During the fiscal year ended October 31, 2015, Thunderdome made principal payments of approximately $75,000.
At October 31, 2015, the Companys investment in Thunderdome consisted of a second lien loan with an outstanding amount, cost basis and fair value of approximately $2.0 million.
Turf Products, LLC
Turf, Enfield, Connecticut, is a wholesale distributor of golf course and commercial turf maintenance equipment, golf course irrigation systems and consumer outdoor power equipment.
At October 31, 2014, the Companys investment in Turf consisted of a senior subordinated loan, bearing interest at 11% per annum with a maturity date of November 1, 2018, membership interest and warrants. The senior subordinated loan had an outstanding balance, cost basis and a fair value of $3.9 million. The membership interest had a cost of approximately $3.5 million and a fair value of approximately $4.0 million. The warrants had a cost of $0 and a fair value of $0. The Company also had a guarantee to Berkshire Bank that was fair valued at -$67,000 or negative $67,000.
During the fiscal year ended October 31, 2015, the Valuation Committee increased the fair value of the loan and the guarantee by a net total of approximately $25,000.
At October 31, 2015, the senior subordinated loan had an outstanding balance, cost basis and a fair value of approximately $3.9 million. The membership interest had a cost of approximately $3.5 million and a fair value of approximately $4.0 million. The warrants had a cost and fair value of $0 and the guarantee was fair valued at -$41,000 or negative $41,000.
Michael Tokarz, Chairman of the Company, and Puneet Sanan and Shivani Khurana, representatives of the Company, serve as directors of Turf.
United States Technologies, Inc.
United States Technologies, Inc. (U.S. Technologies), Fairlawn, New Jersey, offers diagnostic testing, redesign, manufacturing, reverse engineering and repair services for malfunctioning electronic components of machinery and equipment.
On July 17, 2015, the Company loaned $5.0 million to U.S Technologies in the form of a senior term loan. The loan has an interest rate of 10.5% and matures on July 17, 2020.
At October 31, 2015, the Companys investment in U.S Technologies consisted of a senior term loan with an outstanding amount, cost basis and fair value of approximately $5.0 million.
U.S. Gas & Electric, Inc.
U.S. Gas, North Miami Beach, Florida, is a licensed Energy Service Company (ESCO) that markets and distributes natural gas to small commercial and residential retail customers in the state of New York.
At October 31, 2014, the Companys investment in U.S. Gas consisted of a second lien loan, an unsecured loan, convertible Series I preferred stock and convertible Series J preferred stock. The second lien loan had an outstanding balance, cost and fair value of $7.5 million and the unsecured loan had an outstanding balance, cost and fair value of approximately $3.0 million. The second lien loan bears annual interest at 13% and has a maturity date of July 1, 2019. The unsecured loan bears annual interest at 14% and has a maturity date of July 1, 2018. The 32,200 shares of convertible Series I preferred stock had a fair value of $83.7 million and a cost of $500,000 and the 8,216 shares of convertible Series J preferred stock had a cost and fair value of $0.
At October 31, 2015, the loans had a combined outstanding balance, cost basis and a fair value of approximately $10.7 million. The increases in the outstanding balance, cost and fair value of the loan are due to the capitalization of payment in kind interest. The increase in the fair value was approved by the Companys Valuation Committee. The convertible Series I preferred stock had a fair value of approximately $83.7 million and a cost basis of $500,000 and the convertible Series J preferred stock had a cost basis and fair value of $0.
Puneet Sanan and Peter Seidenberg, representatives of the Company, serve as Chairman and director, respectively, of U.S. Gas and Warren Holtsberg, a director of the Company, also serves as a director of U.S. Gas.
U.S. Spray Drying Holding Company
SCSD, Huguenot, New York, provides custom spray drying products to the food, pharmaceutical, nutraceutical, flavor and fragrance industries.
At October 31, 2014, the Companys investment in SCSD consisted of 784 shares of class B common stock with a cost and fair value of approximately $5.5 million and a secured loan with an outstanding balance, cost basis and fair value of $1.5 million. The secured loan had an interest rate of 12% and a maturity date of May 2, 2019.
During the fiscal year ended October 31, 2015, the Valuation Committee increased the fair value of the common stock by $387,000.
At October 31, 2015, the Companys investment in SCSD consisted of 784 shares of class B common stock with a cost basis of approximately $5.5 million and a fair value of approximately $5.9 million. The secured loan has an outstanding balance, cost basis and fair value of $1.5 million.
Puneet Sanan and Shivani Khurana, representatives of the Company, serve as directors of SCSD.
Velocitius B.V.
Velocitius, a Netherlands based holding company, manages wind farms based in Germany through operating subsidiaries.
At October 31, 2014, the Companys investment in Velocitius consisted of an equity investment with a cost of $11.4 million and a fair value of approximately $11.5 million.
On June 19, 2015, the Company monetized a majority of its investment in Velocitius receiving approximately $9.2 million in proceeds which included a return of capital and closing fees and was net of a minimal currency loss.
On October 16, 2015, the Company sold its remaining equity interest in Velocitius and received zero proceeds resulting in a realized loss of approximately $2.7 million.
At October 31, 2015, the Company no longer held an investment in Velocitius.
Vestal Manufacturing Enterprises, Inc.
Vestal, Sweetwater, Tennessee, is a market leader for steel fabricated products to brick and masonry segments of the construction industry. Vestal manufactures and sells both cast iron and fabricated steel specialty products used in the construction of single-family homes.
At October 31, 2014, the Companys investment in Vestal consisted of a senior subordinated promissory note and 81,000 shares of common stock. The senior subordinated note had an annual interest of 12%, a maturity date of April 29, 2015 and an outstanding balance, cost, and fair value of $600,000. The 81,000 shares of common stock had a cost basis of $1.9 million and a fair value of approximately $16.9 million.
On May 29, 2015, the Company sold its 81,000 shares of common stock in Vestal receiving total proceeds of approximately $17.9 million resulting in a realized gain of approximately $15.0 million. The total proceeds include a $1.0 million dividend and assumes full receipt of the escrow proceeds. The $600,000 loan was also repaid in full including all accrued interest. As part of the transaction, the Company reinvested approximately $6.3 million in the form of a subordinated loan, $250,000 for 5,610 shares of common stock and a warrant with no cost. The loan has an interest rate of 15% and matures on November 28, 2021.
At October 31, 2015, the Companys investment in Vestal consisted of a subordinated loan, 5,610 shares of common stock and a warrant. The loan had an outstanding balance, cost, and fair value of $6.3 million. The 5,610 shares of common stock had a cost basis and fair value of $250,000 and the warrant had no cost and was fair valued at $0.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources are derived from our credit facility and cash flows from operations, including investment sales and repayments and income earned. Our primary use of funds includes investments in portfolio companies and payments of fees and other operating expenses we incur. We have used, and expect to continue to use, our credit facility, proceeds generated from our portfolio investments and proceeds from public and private offerings of equity and debt securities to finance pursuit of our investment objective.
At October 31, 2015, the Company had investments in portfolio companies totaling $400.9 million. Also, at October 31, 2015, the Company had investments in cash and cash equivalents totaling approximately $10.3 million. The Company considers all money market and other cash investments purchased with an original maturity of less than three months to be cash equivalents. U.S. government securities and cash equivalents are highly liquid. Pending investments in
portfolio companies pursuant to our principal investment strategy, the Company may make other short-term or temporary investments, including in exchange-traded funds, in U.S. Government issued securities, and private investment funds offering significantly more liquidity than traditional portfolio company investments.
During the fiscal year ended October 31, 2015, the Company made eight new investments, committing capital totaling approximately $58.1 million. The investments were made in RX ($10.3 million), Agri-Carriers ($11.8 million), Legal Solutions ($8.7 million), Results Companies ($9.0 million), Vestal ($6.5 million), Thunderdome ($2.0 million), Initials ($4.8 million) and U.S. Technologies ($5.0 million).
During the fiscal year ended October 31, 2015, the Company made 5 follow-on investments into 4 existing portfolio companies totaling approximately $4.3 million. On May 27, 2015, the Company invested an additional $1.1 million into MVC Automotive in the form of common equity interest. On June 3, 2015, the Company invested an additional $250,000 into Centile in the form of common equity interest. On July 6, 2015, the Company invested $250,000 into BAC in the form of equity. See below for further information on BAC. On July 7, 2015, the Company made a secured $1.0 million loan to Biogenic. The loan has a 16% interest rate and matures on February 29, 2016. The Company also received a warrant at no cost and allocated a portion of the cost basis of the loan to the warrant at the time the investment was made. On October 19, 2015, the Company invested an additional $1.7 million in MVC Automotive in the form of common equity interest.
Current balance sheet resources, which include the additional cash resources from the Credit Facility, are believed to be sufficient to finance current commitments. Current commitments include:
Commitments to/for Portfolio Companies
At October 31, 2015 and October 31, 2014, the Companys existing commitments to portfolio companies consisted of the following:
Portfolio Company |
|
Amount Committed |
|
Amount Funded at October 31, 2015 |
|
MVC Private Equity Fund LP |
|
$20.1 million |
|
$14.6 million |
|
Total |
|
$20.1 million |
|
$14.6 million |
|
Portfolio Company |
|
Amount Committed |
|
Amount Funded at October 31, 2014 |
|
MVC Private Equity Fund LP |
|
$20.1 million |
|
$14.6 million |
|
Total |
|
$20.1 million |
|
$14.6 million |
|
Guarantees
As of October 31, 2015 and October 31, 2014, the Company had the following commitments to guarantee various loans and mortgages:
Guarantee |
|
Amount Committed |
|
Amount Funded at October 31, 2015 |
|
MVC Automotive |
|
$7.2 million |
|
|
|
Tekers |
|
|
|
|
|
Turf |
|
$1.0 million |
|
|
|
Total |
|
$8.2 million |
|
|
|
Guarantee |
|
Amount Committed |
|
Amount Funded at October 31, 2014 |
|
MVC Automotive |
|
$5.0 million |
|
|
|
Tekers |
|
|
|
|
|
Turf |
|
$1.0 million |
|
|
|
Total |
|
$6.0 million |
|
|
|
ASC 460, Guarantees , requires the Company to estimate the fair value of the guarantee obligation at its inception and requires the Company to assess whether a probable loss contingency exists in accordance with the requirements of ASC 450, Contingencies. At October 31, 2015, the Valuation Committee estimated the fair values of the guarantee obligations noted above to be approximately -$41,000 or negative $41,000.
These guarantees are further described below, together with the Companys other commitments.
On July 19, 2007, the Company agreed to guarantee a 1.4 million Euro mortgage for Tekers, which did not have an outstanding balance as of October 31, 2015.
On January 16, 2008, the Company agreed to support a 4.0 million Euro mortgage for a Ford dealership owned and operated by MVC Automotive through making financing available to the dealership and agreeing under certain circumstances not to reduce its equity stake in MVC Automotive. Overtime, Erste Bank, the bank extending the mortgage to MVC Automotive, increased the amount of the mortgage. As such, the balance of the guarantee as of October 31, 2015 was approximately 6.5 million Euro (equivalent to approximately $7.2 million).
The Company guaranteed $1.0 million of Turfs indebtedness to Berkshire Bank, which had a fair value of -$41,000 or negative $41,000 as of October 31, 2015.
On March 31, 2010, the Company pledged its Series I and Series J preferred stock of U.S. Gas to Macquarie Energy, LLC (Macquarie Energy) as collateral for Macquarie Energys trade supply credit facility to U.S. Gas.
On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in the PE Fund, for which an indirect wholly-owned subsidiary of the Company serves as GP. The PE Fund closed on approximately $104 million of capital commitments. During the fiscal year ended October 31, 2012 and thereafter, MVC Partners was consolidated with the operations of the Company as MVC Partners limited partnership interest in the PE Fund is a substantial portion of MVC Partners operations. The investment period related to the PE Fund has ended. Additional capital may be called for follow-on investments in existing portfolio companies of the PE Fund or to pay operating expenses of the PE Fund. As of October 31, 2015, $14.6 million of the Companys commitment has been contributed.
On April 26, 2011, the Company agreed to collateralize a 5.0 million Euro letter of credit from JPMorgan Chase Bank, N.A. (equivalent to approximately $5.5 million at October 31, 2015), which is classified as restricted cash equivalents on the Companys consolidated balance sheet at October 31, 2015. This letter of credit is being used as collateral for a project guarantee by AB DnB NORD bankas to Security Holdings.
On November 30, 2011, the Company pledged its common stock and series A convertible preferred stock of Ohio Medical to collateralize a loan made to Ohio Medical by another
financial institution. On June 27, 2013, the Company pledged its series C convertible preferred stock of Ohio Medical to further collateralize the same third party loan made to Ohio Medical in 2011.
During the fiscal year ended October 31, 2015, the Company agreed to cash collateralize a $1.0 million working capital line of credit for Inland, which is classified as restricted cash on the Companys consolidated balance sheet at October 31, 2015.
Commitments of the Company
On February 19, 2013, the Company sold $70.0 million of senior unsecured notes (the Senior Notes) in a public offering. The Senior Notes will mature on January 15, 2023 and may be redeemed in whole or in part at any time or from time to time at the Companys option on or after April 15, 2016. The Senior Notes bear interest at a rate of 7.25% per year payable quarterly on January 15, April 15, July 15, and October 15 of each year, beginning April 15, 2013. The Company had also granted the underwriters a 30-day option to purchase up to an additional $10.5 million of Senior Notes to cover overallotments. The additional $10.5 million in principal was purchased and the total principal amount of the Senior Notes totaled $80.5 million. The net proceeds to the Company from the sale of the Senior Notes, after offering expenses, were approximately $77.4 million. The offering expenses incurred are amortized over the term of the Senior Notes.
On February 26, 2013, the Company received the funds related to the Senior Notes offering, net of expenses, and subsequently repaid the credit facility (the Credit Facility) with Guggenheim as administrative agent for the lenders in full, including all accrued interest. The Company used the excess net proceeds after the repayment of the Credit Facility for general corporate purposes, including, for example, investing in portfolio companies according to our investment objective and strategy, repurchasing shares pursuant to the share repurchase program adopted by our Board of Directors, funding distributions, and/or funding the activities of our subsidiaries.
On May 3, 2013, the Company sold approximately $33.9 million of additional Senior Notes in a direct offering. The additional Senior Notes will also mature on January 15, 2023 and may be redeemed in whole or in part at any time or from time to time at the Companys option on or after April 15, 2016. The Notes will also bear interest at a rate of 7.25% per year payable quarterly on January 15, April 15, July 15, and October 15 of each year. As of October 31, 2015, the total outstanding amount of the Senior Notes was approximately $114.4 million with a market value of approximately $112.3 million. The market value of the Senior Notes is based on the closing price of the security as of October 31, 2015 on the New York Stock Exchange (NYSE:MVCB).
On July 31, 2013, the Company entered into a one-year, $50 million revolving credit facility (Credit Facility II) with Branch Banking and Trust Company (BB&T). At October 31, 2014, the balance of Credit Facility II was $100.0 million. On January 31, 2014, Credit Facility II was increased to a $100 million revolving credit facility. On December 1, 2015, Credit Facility II was renewed and will now expire on May 31, 2016, at which time all outstanding amounts under it will be due and payable. During the fiscal year ended October 31, 2015, the Companys net repayments on Credit Facility II were $10.0 million, resulting in an outstanding balance of $90.0 million at October 31, 2015. Credit Facility II is used to provide the Company with better
overall financial flexibility in managing its investment portfolio. Borrowings under Credit Facility II bear interest at LIBOR plus 100 basis points. In addition, the Company is also subject to a 20 basis point commitment fee for the average amount of Credit Facility II that is unused during each fiscal quarter. The Company paid closing fees, legal and other costs associated with these transactions. These costs will be amortized over the life of the facility. Borrowings under Credit Facility II will be secured by cash, short-term and long-term U.S. Treasury securities and other governmental agency securities. The Company received a waiver from BB&T with respect to the delivery of financial reports required under Credit Facility II, due to the Companys delayed filing of its Annual Report.
On December 30, 2014, the Company entered into a 6 month, $25.0 million bridge loan (Bridge Loan) with Firstrust Bank, initially borrowing approximately $15.9 million. Prior to maturity, the Bridge Loan was increased to $30.0 million and extended to December 31, 2015. During the fiscal year ended October 31, 2015 and after the initial borrowing of $15.9 million, the Company borrowed approximately $12.8 million and repaid approximately $20.7 million, resulting in an outstanding balance of $8.0 million. Borrowings under the Bridge Loan bear interest at 5%. The Company paid closing fees, legal and other costs associated with the transaction. These costs, of approximately $360,000, were amortized over the life of the Bridge Loan. The Company has received extensions from Firstrust Bank as to the delivery of the financial reports required under the Amended and Restated Loan Agreement, due to the Companys delayed quarterly filings. See Note 17 Subsequent Events for additional information.
The Company enters into contracts with Portfolio Companies and other parties that contain a variety of indemnifications. The Companys maximum exposure under these arrangements is unknown. However, the Company has not experienced claims or losses pursuant to these contracts and believes the risk of loss related to indemnifications to be remote.
SUBSEQUENT EVENTS
On November 1, 2015 and December 1, 2015, Thunderdome made principal payments totaling approximately $51,000 on its second lien loan.
On November 3, 2015, Results Companies repaid its loan in full totaling approximately $10.0 million, including all accrued interest.
On November 20, 2015 and December 3, 2015, the Company invested an additional $538,000 and $1.1 million, respectively, in MVC Automotive common equity.
On December 1, 2015, Credit Facility II was renewed and will now expire on May 31, 2016, at which time all outstanding amounts under it will be due and payable. The Company is in compliance with all loan covenants related to Credit Facility II as of the filing of this Form 10-K. The Company received a waiver from BB&T with respect to the delivery of financial reports required under Credit Facility II, due to the Companys delayed filing of its Annual Report.
On December 9, 2015, the Company entered into a three-year, $50 million revolving borrowing base credit facility with Santander Bank N.A. as a lender and lead agent and Wintrust Bank as a lender and syndication agent. The revolving credit facility can, under certain conditions, be increased up to $85 million. The new facility bears an interest rate of LIBOR plus 3.75% or the prime rate plus 1% (at the Companys option), and includes a 1% closing fee of the commitment amount and a 0.75% unused fee. The compensating balance for the revolving credit facility is $10.0 million. The new facility replaced the $30.0 million Bridge Loan with Firstrust Bank that would have matured on December 31, 2015.
On December 15, 2015, the Company loaned approximately $1.6 million to Somotra nv, a wholly-owned subsidiary of MVC Automotive.
On December 18, 2015, the Company invested approximately $5.1 million in Pride Engineering, LLC in the form of a second lien loan. The loan bears annual interest of 12% and matures on May 18, 2021.
On December 21, 2015, the Companys Board of Directors declared a dividend of $0.135 per share. Additionally, due to the realization of capital gains, the Companys Board of Directors declared a special dividend of $0.17 per share. The dividends were paid on January 8, 2016 to shareholders of record on December 31, 2015 and totaled approximately $6.9 million.
On December 22, 2015, the Company realized a loss of approximately $1.5 million due to the dissolution of Biovation.
On December 24, 2015, the Company realized a loss of approximately $5.5 million on Inlands senior secured loan and $713,000 on the warrants as part of Inlands restructuring. As part of the restructuring, the Company received a $6.0 million senior secured loan in MVC Environmental, Inc., a holding company formed by the Company that owns and operates intellectual property and environmental service facilities for oil and gas waste recycling related to Inland, and received 950 common shares of MVC Environmental, Inc. The loan bears annual interest of 9% and matures on December 22, 2020.
On December 31, 2015, the Company completed the sale of Ohio Medical through an asset sale and expects gross proceeds of approximately $40.0 million, including fees. At the time of closing, the Company received cash proceeds of approximately $29.0 million and anticipates receiving an additional $11.0 million, assuming the full receipt of all escrow proceeds scheduled for various periods, with the final release of payment scheduled for 18 months from the closing.
On January 4, 2016, the Company loaned an additional $1.5 million to Legal Solutions Holdings, Inc., which increased the senior subordinated loan to approximately $10.2 million.
On February 1, 2016, the Company loaned an additional $1.1 million to Thunderdome, which increased the second lien loan to approximately $3.0 million.
On February 17, 2016, the Company loaned $7.0 million to Dukane Intelligent Assembly, a global provider of plastic welding equipment, in the form of a second lien loan with an interest rate of 13% and a maturity date of November 16, 2020.
On March 7, 2016, the Company received a $10.0 million distribution from U.S. Gas.
On March 11, 2016, the Company loaned $10.0 million to Quantum Plastics, LLC, a global plastic injection manufacturer, in the form of a senior subordinated loan with an interest rate of 12% and a maturity date of March 10, 2021. The Company also received a warrant as part of the investment and allocated a portion of the cost basis of the loan to the warrant at the time the investment was made.
In March 2016, the Adviser agreed to modify its prior agreement to waive, effective November 1, 2015, the first $1.0 million of capital gains incentive fee due under the Advisory Agreement, such that the $1.0 million waiver of incentive fee would be applied to any incentive fee due under the agreement, whether it is a capital gains incentive fee or net operating income incentive fee.
On May 6, 2016, RX repaid $8.0 million of principal on its loan. In addition, RX repaid all outstanding accrued and deferred interest for a total payment of approximately $9.9 million. As a part of the transaction, which led to the repayment, RX was reorganized into FDS, Inc., a data service provider. The Companys outstanding $2.3 million of principal was amended to a senior loan with an interest rate of 16% and a maturity of November 30, 2016.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the Company in the preparation of its consolidated financial statements:
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In June 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-08, Financial ServicesInvestment Companies . ASU 2013-08 provides clarifying guidance to determine if an entity qualifies as an investment company. ASU 2013-08 also requires an investment company to measure non-controlling interests in other investment companies at fair value. The following disclosures will also be required upon adoption of ASU 2013-08: (i) whether an entity is an investment company and is applying the accounting and reporting guidance for investment companies; (ii) information about changes, if any, in an entitys status as an investment company; and (iii) information about financial support provided or contractually required to be provided by an investment company to any of its investees. The requirements of ASU 2013-08 became effective for the Company beginning in fiscal year 2015. These updates have had no impact on the Companys financial condition or results of operations.
ln May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 addresses the reporting of revenue by most entities and will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. This update is effective in fiscal periods beginning after December 15, 2016. Early application is not permitted. The impact on our financial statements of adopting ASU 2014-09 is currently being assessed by management.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern (ASU 2014-15). The standard requires management to evaluate, at each interim and annual reporting period, whether there are conditions or events that raise substantial doubt about the entitys ability to continue as a going concern within one year after the date the financial statements are issued, and provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter, and early adoption is permitted. The Company does not expect to adopt ASU 2014-15 early and does not believe the standard will have a material impact on our financial statements, when adopted.
In February 2015, the FASB issued Accounting Standards Update 2015-2, which updated consolidation standards under ASC Topic 810, Consolidation. Under this update, a new consolidation analysis is required for variable interest entities (VIEs) and will limit the circumstances in which investment managers and similar entities are required to consolidate the entities that they manage. The FASB decided to eliminate some of the criteria under which their fees are considered a variable interest and limit the circumstances in which variable interests in a VIE held by related parties of a reporting enterprise require the reporting enterprise to consolidate the VIE. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015. The Company does not expect the adoption of ASU 2015-2 to have a material impact on our financial statements.
In April 2015, the FASB issued Accounting Standards Update 2015-03, InterestImputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. Under this guidance, debt issuance costs related to a recognized debt liability are to be presented as a direct deduction from the debt liability rather than as an asset on the balance sheet, consistent with debt discounts. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015. The Company does not expect the adoption of ASU No. 2015-03 to have a material impact on our financial statements.
In May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). The new guidance removes the requirement that investments for which NAV is determined based on practical expedient reliance be reported utilizing the fair value hierarchy. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015. The Company does not expect the adoption of ASU 2015-07 to have a material impact on our financial statements.
Tax Status and Capital Loss Carryforwards
As a RIC, the Company is not subject to federal income tax to the extent that it distributes all of its investment company taxable income and net realized capital gains for its taxable year (see Notes 12 Tax Matters and Note 13 Income Taxes of our notes to the consolidated financial statements). This allows us to attract different kinds of investors than other publicly held corporations. The Company is also exempt from excise tax if it distributes at least (1) 98% of its ordinary income during each calendar year, (2) 98.2% of its capital gains realized in the period from November 1 of the prior year through October 31 of the current year, and (3) all such ordinary income and capital gains for previous years that were not distributed during those years. On October 31, 2015, the Company did not have a net capital loss carryforward. The Company had approximately $42.8 million in unrealized losses as of October 31, 2015.
Valuation of Portfolio Securities
Pursuant to the requirements of the 1940 Act and in accordance with the Accounting Standards Codification (ASC), Fair Value Measurements and Disclosures (ASC 820), we value our portfolio securities at their current market values or, if market quotations are not readily available, at their 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 its 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. In this regard, the Company has engaged an independent valuation firm to perform valuation services for certain portfolio debt investments.
Pursuant to our Valuation Procedures, the Valuation Committee (which is comprised of three Independent Directors) determines fair values of portfolio company investments on a quarterly basis (or more frequently, if deemed appropriate under the circumstances). In doing so, the
Committee considers the recommendations of TTG Advisers and input and reviews by third party consultants retained to support the Companys valuation process. The Company has also adopted other enhanced processes related to valuations of controlled/affiliated portfolio companies. Any changes in valuation are recorded in the consolidated statements of operations as Net unrealized appreciation (depreciation) on investments.
Currently, our NAV per share is calculated and published on a quarterly basis. The Company calculates our NAV per share by subtracting all liabilities from the total value of our portfolio securities and other assets and dividing the result by the total number of outstanding shares of our common stock on the date of valuation. Fair values of foreign investments reflect exchange rates, as applicable, in effect on the last business day of the quarter end. Exchange rates fluctuate on a daily basis, sometimes significantly. Exchange rate fluctuations following the most recent fiscal year end are not reflected in the valuations reported in this Annual Report. See Item 1A Risk Factor, Investments in foreign debt or equity may involve significant risks in addition to the risks inherent in U.S. investments.
At October 31, 2015, approximately 76.08% 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 managements and the Valuation Committees view, a different initial value). During the period that an investment is held by the Company, its original cost may cease to approximate fair value as the result of market and investment specific factors. No pre-determined formula can be applied to determine fair value. Rather, the Valuation Committee analyzes fair value measurements based on the value at which the securities of the portfolio company could be sold in an orderly disposition over a reasonable period of time between willing parties, other than in a forced or liquidation sale. The liquidity event whereby the Company ultimately exits an investment is generally the sale, the merger, or the recapitalization of a portfolio company or by a public offering of its securities.
Valuation Methodology
There is no one methodology to determine fair value and, in fact, for any portfolio security, fair value may be expressed as a range of values, from which the Company derives a single estimate of fair value. To determine the fair value of a portfolio security, the Valuation Committee analyzes the portfolio companys 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, 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.
ASC 820 provides a framework for measuring the fair value of assets and liabilities and provides guidance regarding a fair value hierarchy, which prioritizes information used to measure value. In determining fair value, the Valuation Committee primarily uses the level 3 inputs referenced in ASC 820.
ASC 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The price used to measure the fair value is not adjusted for transaction costs while the cost basis of our investments may include initial transaction costs. Under ASC 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset to which the reporting entity has access to as of the measurement date. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.
Our investments are carried at fair value in accordance with ASC 820. Unrestricted minority-owned publicly traded securities for which market quotations are readily available are valued at the closing market quote on the valuation date and majority-owned publicly traded securities and other privately held securities are valued as determined in good faith by the Valuation Committee of the Board of Directors. For legally or contractually restricted securities of companies that are publicly traded, the value is based on the closing market quote on the valuation date minus a discount for the restriction. At October 31, 2015, we did not hold restricted or unrestricted securities of publicly traded companies for which we have a majority-owned interest.
If a security is publicly traded, its value is generally equal to market value based on the closing price on the principal exchange on which the security is primarily traded unless restricted and a restricted discount is applied.
For equity securities of Portfolio Companies, whose securities are not publicly traded, the Valuation Committee estimates the fair value based on market and/or income approach with value then attributed to equity or equity like securities using the enterprise value waterfall (Enterprise Value Waterfall) valuation methodology. Under the Enterprise Value Waterfall valuation methodology, the Valuation Committee estimates the enterprise fair value of the portfolio company and then waterfalls the enterprise value over the portfolio companys securities in order of their preference relative to one another. To assess the enterprise value of the portfolio company, the Valuation Committee weighs some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing assets may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company, and third-party asset and real estate appraisals. For non-performing assets, the Valuation Committee may estimate the liquidation or collateral value of the portfolio companys assets. The Valuation Committee also takes into account historical and anticipated financial results.
In assessing enterprise value, the Valuation Committee considers the mergers and acquisitions (M&A) market as the principal market in which the Company would sell its investments in portfolio companies under circumstances where the Company has the ability to control or gain control of the board of directors of the portfolio company (Control Companies). This approach is consistent with the principal market that the Company would use for its portfolio companies if the Company has the ability to initiate a sale of the portfolio company as of the measurement date, i.e., if it has the ability to control or gain control of the board of directors of the portfolio company as of the measurement date. In evaluating if the Company can control or gain control of a portfolio company as of the measurement date, the Company takes into account its equity securities on a fully diluted basis, as well as other factors.
For non-Control Companies, consistent with ASC 820, the Valuation Committee considers a hypothetical secondary market as the principal market in which it would sell investments in those companies. The Company also considers other valuation methodologies such as the Option Pricing Method and liquidity preferences when valuing minority equity positions of a portfolio company.
For loans and debt securities of non-Control Companies (for which the Valuation Committee has identified the hypothetical secondary market as the principal market), the Valuation Committee determines fair value based on the assumptions that a hypothetical market participant would use to value the security in a current hypothetical sale using a market yield (Market Yield) valuation methodology. In applying the Market Yield valuation methodology, the Valuation Committee determines the fair value based on such factors as third party broker quotes (if available) and market participant assumptions, including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date.
Estimates of average life are generally based on market data of the average life of similar debt securities. However, if the Valuation Committee has information available to it that the debt security is expected to be repaid in the near term, the Valuation Committee would use an estimated life based on the expected repayment date.
The Valuation Committee determines fair value of loan and debt securities of Control Companies based on the estimate of the enterprise value of the portfolio company. To the extent the enterprise value exceeds the remaining principal amount of the loan and all other debt securities of the company, the fair value of such securities is generally estimated to be their cost. However, where the enterprise value is less than the remaining principal amount of the loan and all other debt securities, the Valuation Committee may discount the value of such securities to reflect an impairment.
For the Companys or its subsidiarys investment in the PE Fund, for which an indirect wholly-owned subsidiary of the Company serves as the general partner (the GP) of the PE Fund, the Valuation Committee relies on the GPs determination of the fair value of the PE Fund which will be generally valued, as a practical expedient, utilizing the net asset valuations provided by the GP, which will be made: (i) no less frequently than quarterly as of the Companys fiscal quarter end and (ii) with respect to the valuation of PE Fund investments in portfolio companies, will be based on methodologies consistent with those set forth in the Companys valuation procedures. In making its determinations, the GP considers and generally relies on TTG Advisers recommendations. The determination of the net asset value of the
Companys or its subsidiarys investment in the PE Fund will follow the methodologies described for valuing interests in private investment funds (Investment Vehicles) described below. Additionally, when both the Company and the PE Fund hold investments in the same portfolio company, the GPs Fair Value determination shall be based on the Valuation Committees determination of the Fair Value of the Companys portfolio security in that portfolio company.
As permitted under GAAP, the Companys interests in private investment funds are generally valued, as a practical expedient, utilizing the net asset valuations provided by management of the underlying Investment Vehicles, without adjustment, unless TTG Advisers is aware of information indicating that a value reported does not accurately reflect the value of the Investment Vehicle, including any information showing that the valuation has not been calculated in a manner consistent with GAAP. Net unrealized appreciation (depreciation) of such investments is recorded based on the Companys proportionate share of the aggregate amount of appreciation (depreciation) recorded by each underlying Investment Vehicle. The Companys proportionate investment interest includes its share of interest and dividend income and expense, and realized and unrealized gains and losses on securities held by the underlying Investment Vehicles, net of operating expenses and fees. Realized gains and losses on distributions from Investment Vehicles are generally recognized on a first in, first out basis.
The Company applies the practical expedient to interests in Investment Vehicles on an investment by investment basis, and consistently with respect to the Companys entire interest in an investment. The Company may adjust the valuation obtained from an Investment Vehicle with a premium, discount or reserve if it determines that the net asset value is not representative of fair value.
If the Company intends to sell all or a portion of its interest in an Investment Vehicle to a third-party in a privately negotiated transaction near the valuation date, the Company will consider offers from third parties to buy the interest in an Investment Vehicle in valuations which may be discounted for both probability of close and time.
When the Company receives nominal cost warrants or free equity securities (nominal cost equity) with a debt security, the Company typically allocates its cost basis in the investment between debt securities and nominal cost equity at the time of origination.
Interest income, adjusted for amortization of premium and accretion of discount on a yield to maturity methodology, is recorded on an accrual basis to the extent that such amounts are expected to be collected. Origination and/or closing fees associated with investments in portfolio companies are recorded as income at the time the investment is made. Upon the prepayment of a loan or debt security, any unamortized original issue discount or market discount is recorded as a realized gain. Prepayment premiums are recorded on loans when received as interest income. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that the Company expects to collect such amounts.
For loans, debt securities, and preferred securities with contractual payment-in-kind interest or dividends, which represent contractual interest/dividends accrued and added to the loan balance or liquidation preference that generally becomes due at maturity, the Company will not ascribe value to payment-in-kind interest/dividends, if the portfolio company valuation indicates that the payment-in-kind interest is not collectible. However, the Company may ascribe value to
payment-in-kind interest if the health of the portfolio company and the underlying securities are not in question. All payment-in-kind interest that has been added to the principal balance or capitalized is subject to ratification by the Valuation Committee.
Escrows from the sale of a portfolio company are generally valued at an amount, which may be expected to be received from the buyer under the escrows various conditions and discounted for both risk and time.
ASC 460, Guarantees , requires the Company to estimate the fair value of the guarantee obligation at its inception and requires the Company to assess whether a probable loss contingency exists in accordance with the requirements of ASC 450, Contingencies . The Valuation Committee typically will look at the pricing of the security in which the guarantee provided support for the security and compare it to the price of a similar or hypothetical security without guarantee support. The difference in pricing will be discounted for time and risk over the period in which the guarantee is expected to remain outstanding.
Investment Classification
We classify our investments by level of control. As defined in the 1940 Act, Control Investments are investments in those companies that we are deemed to Control. Affiliate Investments are investments in those companies that are Affiliated Companies of us, as defined in the 1940 Act, other than Control Investments. Non-Control/Non-Affiliate Investments are those that are neither Control Investments nor Affiliate Investments. Generally, under the 1940 Act, we are deemed to control a company in which we have invested if we own 25% or more of the voting securities of such company or have greater than 50% representation on its board. We are deemed to be an affiliate of a company in which we have invested if we own 5% or more and less than 25% of the voting securities of such company.
Investment Transactions and Related Operating Income
Investment transactions and related revenues and expenses are accounted for on the trade date (the date the order to buy or sell is executed). The cost of securities sold is determined on a first-in, first-out basis, unless otherwise specified. Dividend income and distributions on investment securities is recorded on the ex-dividend date. The tax characteristics of such distributions received from our portfolio companies will be determined by whether or not the distribution was made from the investments current taxable earnings and profits or accumulated taxable earnings and profits from prior years. Interest income, which includes accretion of discount and amortization of premium, if applicable, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Fee income includes fees for guarantees and services rendered by the Company or its wholly-owned subsidiary to portfolio companies and other third parties such as due diligence, structuring, transaction services, monitoring services, and investment advisory services. Guaranty fees are recognized as income over the related period of the guaranty. Due diligence, structuring, and transaction services fees are generally recognized as income when services are rendered or when the related transactions are completed. Monitoring and investment advisory services fees are generally recognized as income as the services are rendered. Any fee income determined to be loan origination fees is recorded as income at the time that the investment is made and any original issue discount and market discount are capitalized and then amortized into income using the effective interest method. Upon the prepayment of a loan or debt security, any unamortized original issue discount or
market discount is recorded as a realized gain. For investments with PIK interest and dividends, we base income and dividend accrual on the valuation of the PIK notes or securities received from the borrower. If the portfolio company indicates a value of the PIK notes or securities that is not sufficient to cover the contractual interest or dividend, we will not accrue interest or dividend income on the notes or securities.
Cash Equivalents
For the purpose of the Consolidated Balance Sheets and Consolidated Statements of Cash Flows, the Company considers all money market and all highly liquid temporary cash investments purchased with an original maturity of less than three months to be cash equivalents. The Company places its cash and cash equivalents with financial institutions and cash held in bank accounts may exceed the Federal Deposit Insurance Corporation (FDIC) insured limit. As of October 31, 2015, the Company had approximately $8.1 million in cash equivalents and restricted cash equivalents and approximately $8.7 million in cash and restricted cash totaling approximately $16.8 million. Of the $8.7 million in cash, approximately $360,000 was held by MVC Turf, an MVC wholly-owned holding company.
Restricted Cash and Cash Equivalents
Cash and cash equivalent accounts that are not available to the Company for dayto-day use and are legally restricted are classified as restricted cash. Restricted cash and cash equivalents are carried at cost, which approximates fair value. On April 26, 2011, the Company agreed to collateralize a 5.0 million Euro letter of credit from JPMorgan Chase Bank, N.A., which is related to a project guarantee by AB DnB NORD bankas to Security Holdings B.V., a portfolio company investment, and is classified as restricted cash equivalents on the Companys Consolidated Balance Sheets (equivalent to approximately $5.5 million at October 31, 2015 and approximately $6.3 million at October 31, 2014). The Company also had approximately $1.0 million in restricted cash related to Inlands working capital line of credit, which is classified as restricted cash on the Companys consolidated balance sheet at October 31, 2015, related.
Restricted Securities
The Company will invest in privately-placed restricted securities. These securities may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expense, and a prompt sale at an acceptable price may be difficult.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date.
Income Taxes
It is the policy of the Company to meet the requirements for qualification as a RIC under Subchapter M of the Code. As a RIC, the Company is not subject to income tax to the extent that it distributes all of its investment company taxable income and net realized capital gains for its taxable year. The Company is also exempt from excise tax if it distributes at least 98% of its income and 98.2% of its capital gains during each calendar year.
Our consolidated operating subsidiary, MVCFS, is subject to federal and state income tax. We use the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
ASC 740, Income Taxes , provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Companys tax returns to determine whether the tax positions are more-likely-than-not of being sustained by the applicable tax authority. Tax positions deemed to meet a more-likely-than-not threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statement of operations. During the fiscal year ended October 31, 2015, the Company did not incur any interest or penalties. Although we file federal and state tax returns, our major tax jurisdiction is federal for the Company and MVCFS. The fiscal years 2012, 2013, 2014 and 2015 for the Company and MVCFS remain subject to examination by federal, state and local tax authorities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED FINANCIAL STATEMENTS
MVC Capital, Inc.
Consolidated Balance Sheets
|
|
October 31, |
|
October 31, |
|
||
|
|
2015 |
|
2014 |
|
||
|
|
|
|
|
|
||
ASSETS |
|
|
|
|
|
||
|
|
|
|
|
|
||
Assets |
|
|
|
|
|
||
Cash |
|
$ |
7,753,901 |
|
$ |
8,781,375 |
|
Restricted cash (cost $1,000,034 and $0) |
|
1,000,034 |
|
|
|
||
Restricted cash equivalents (cost $5,503,000 and $6,265,500) |
|
5,503,000 |
|
6,265,500 |
|
||
Cash equivalents (cost $2,557,666 and $8,391,089) |
|
2,557,666 |
|
8,391,089 |
|
||
Investments at fair value |
|
|
|
|
|
||
Short-term investments (cost $89,820,800 and $99,999,629) |
|
89,681,535 |
|
99,897,404 |
|
||
Non-control/Non-affiliated investments (cost $165,626,784 and $150,682,873) |
|
131,351,403 |
|
126,303,048 |
|
||
Affiliate investments (cost $121,962,460 and $115,021,554) |
|
170,189,927 |
|
173,682,927 |
|
||
Control investments (cost $156,127,715 and $174,266,037) |
|
99,334,391 |
|
147,644,189 |
|
||
Total investments at fair value (cost $533,537,759 and $539,970,093) |
|
490,557,256 |
|
547,527,568 |
|
||
Dividends and interest receivables, net of reserves |
|
4,404,600 |
|
1,188,398 |
|
||
Deferred financing fees |
|
2,467,305 |
|
2,972,864 |
|
||
Fee and other receivables |
|
1,696,280 |
|
1,939,827 |
|
||
Prepaid expenses |
|
609,517 |
|
646,801 |
|
||
Escrow receivables, net of reserves |
|
292,744 |
|
|
|
||
|
|
|
|
|
|
||
Total assets |
|
$ |
516,842,303 |
|
$ |
577,713,422 |
|
|
|
|
|
|
|
||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
||
|
|
|
|
|
|
||
Liabilities |
|
|
|
|
|
||
Senior notes |
|
$ |
114,408,750 |
|
$ |
114,408,750 |
|
Revolving credit facility |
|
90,000,000 |
|
100,000,000 |
|
||
Bridge loan |
|
8,000,000 |
|
|
|
||
Provision for incentive compensation (Note 5) |
|
4,976,767 |
|
14,733,887 |
|
||
Professional fees payable |
|
1,820,416 |
|
1,309,085 |
|
||
Management fee payable |
|
1,527,930 |
|
1,474,223 |
|
||
Accrued expenses and liabilities |
|
622,446 |
|
456,148 |
|
||
Interest payable |
|
359,866 |
|
374,875 |
|
||
Management fee payable - Asset Management |
|
296,812 |
|
296,812 |
|
||
Consulting fees payable |
|
272,880 |
|
97,250 |
|
||
Portfolio fees payable - Asset Management |
|
250,846 |
|
436,791 |
|
||
Liability for share exchange |
|
228,851 |
|
221,424 |
|
||
Taxes payable |
|
1,152 |
|
1,219 |
|
||
|
|
|
|
|
|
||
Total liabilities |
|
222,766,716 |
|
233,810,464 |
|
||
|
|
|
|
|
|
||
Commitments and Contingencies (Note 10) |
|
|
|
|
|
||
|
|
|
|
|
|
||
Shareholders equity |
|
|
|
|
|
||
Common stock, $0.01 par value; 150,000,000 shares authorized; 28,304,448 shares issued and 22,702,821 shares outstanding as of October 31, 2015 and October 31, 2014 |
|
283,044 |
|
283,044 |
|
||
Additional paid-in-capital |
|
418,298,784 |
|
421,037,726 |
|
||
Accumulated earnings |
|
102,420,976 |
|
83,996,734 |
|
||
Dividends paid to stockholders |
|
(129,012,902 |
) |
(116,753,378 |
) |
||
Accumulated net realized gain |
|
2,189 |
|
2,697,840 |
|
||
Net unrealized (depreciation) appreciation |
|
(42,620,298 |
) |
7,937,198 |
|
||
Treasury stock, at cost, 5,601,627 and 5,601,627 shares held, respectively |
|
(55,296,206 |
) |
(55,296,206 |
) |
||
|
|
|
|
|
|
||
Total shareholders equity |
|
294,075,587 |
|
343,902,958 |
|
||
|
|
|
|
|
|
||
Total liabilities and shareholders equity |
|
$ |
516,842,303 |
|
$ |
577,713,422 |
|
|
|
|
|
|
|
||
Net asset value per share |
|
$ |
12.95 |
|
$ |
15.15 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MVC Capital, Inc.
Consolidated Schedule of Investments
October 31, 2015
Company |
|
Industry |
|
Investment |
|
Principal |
|
Cost |
|
Fair Value/Market Value |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Non-control/Non-affiliated investments- 44.67% (a), (c), (f), (g) |
|
|
|
|
|
|
|
|
|
|
|
|||
Actelis Networks, Inc. |
|
Technology Investment |
|
Preferred Stock (150,602 shares) (d), (i) |
|
|
|
$ |
5,000,003 |
|
|
|
||
Agri-Carriers Group, Inc. |
|
Transportation |
|
Senior Subordinated Debt 12.0000% Cash, 3.0000% Deferred, 07/20/2017 (l), (m) |
|
$ |
11,774,486 |
|
11,787,114 |
|
$ |
11,774,486 |
|
|
Biogenic Reagents |
|
Renewable energy |
|
Senior Note 12.0000% Cash, 4.0000% PIK, 07/21/2018 (b), (l) |
|
5,463,002 |
|
5,463,002 |
|
5,463,002 |
|
|||
|
|
|
|
Senior Convertible Note 12.0000% Cash, 4.0000% PIK, 07/21/2018 (b), (l) |
|
4,916,702 |
|
4,916,702 |
|
4,983,082 |
|
|||
|
|
|
|
Senior Note 12.0000% Cash, 4.0000% PIK, 02/29/2016 (b), (l) |
|
4,165,169 |
|
4,165,169 |
|
4,165,169 |
|
|||
|
|
|
|
Senior Subordinated Debt 12.0000% Cash, 4.0000% PIK, 02/29/2016 (b), (l) |
|
1,009,556 |
|
1,009,556 |
|
1,009,556 |
|
|||
|
|
|
|
Warrants (d) |
|
2 |
|
620,077 |
|
1,660,689 |
|
|||
|
|
|
|
|
|
|
|
16,174,506 |
|
17,281,498 |
|
|||
Biovation Acquisition Co. |
|
Manufacturer of Laminate Material and Composites |
|
Common Stock (90 shares) (d) |
|
|
|
784,622 |
|
555,869 |
|
|||
Biovation Holdings, Inc. |
|
Manufacturer of Laminate Material and Composites |
|
Bridge Loan 6.0000% Cash, 6.0000% PIK, 10/31/2014 (b), (h) |
|
1,079,325 |
|
1,079,325 |
|
|
|
|||
|
|
|
|
Warrants (d) |
|
3 |
|
397,677 |
|
|
|
|||
|
|
|
|
|
|
|
|
1,477,002 |
|
|
|
|||
Custom Alloy Corporation |
|
Manufacturer of Pipe Fittings |
|
Second Lien Loan 7.3000% Cash, 3.7000% PIK, 04/30/2020 (b), (l) |
|
23,791,903 |
|
23,791,903 |
|
23,638,469 |
|
|||
|
|
|
|
Unsecured Subordinated Loan 12.0000% Cash, 09/04/2016 (l) |
|
3,000,000 |
|
3,000,000 |
|
3,000,000 |
|
|||
|
|
|
|
|
|
|
|
26,791,903 |
|
26,638,469 |
|
|||
FOLIOfn, Inc. |
|
Technology Investment - Financial Services |
|
Preferred Stock (5,802,259 shares) (d), (i) |
|
|
|
15,000,000 |
|
5,596,000 |
|
|||
G3K Display, Inc. |
|
Retail Store Fixtures |
|
Senior Lien Loan 13.0000% Cash, 04/11/2019 (h) |
|
5,625,000 |
|
5,625,000 |
|
|
|
|||
|
|
|
|
Warrants (d) |
|
1 |
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
5,625,000 |
|
|
|
|||
Initials, Inc. |
|
Consumer Products |
|
Senior Subordinated Debt 12.0000% Cash, 3.0000% PIK, 06/22/2020 (b), (l) |
|
4,750,000 |
|
4,750,000 |
|
4,750,000 |
|
|||
Inland Environmental & Remediation LP |
|
Environmental Services |
|
Senior Secured Loan 12.0000% Cash, 04/17/2019 (h), (l) |
|
15,000,000 |
|
14,506,835 |
|
8,000,000 |
|
|||
|
|
|
|
Warrants (d) |
|
1 |
|
713,000 |
|
|
|
|||
|
|
|
|
|
|
|
|
15,219,835 |
|
8,000,000 |
|
|||
Legal Solutions Holdings, Inc. |
|
Business Services |
|
Senior Subordinated Debt 12.0000% Cash, 2.0000% Deferred, 09/12/2018 (l), (m) |
|
8,705,000 |
|
8,718,402 |
|
8,705,000 |
|
|||
MainStream Data, Inc. |
|
Technology Investment |
|
Common Stock (5,786 shares) (d), (i) |
|
|
|
3,750,000 |
|
|
|
|||
Moreys Seafood International, LLC |
|
Food Services |
|
Second Lien Loan 6.0000% Cash, 9.0000% PIK, 08/12/2018 (b), (l) |
|
16,047,333 |
|
16,047,333 |
|
14,371,830 |
|
|||
NPWT Corporation |
|
Medical Device Manufacturer |
|
Series B Common Stock (281 shares) (d) |
|
|
|
1,231,638 |
|
2,000 |
|
|||
|
|
|
|
Series A Convertible Preferred Stock (5,000 shares) (d) |
|
|
|
|
|
36,000 |
|
|||
|
|
|
|
|
|
|
|
1,231,638 |
|
38,000 |
|
|||
The Results Companies, LLC |
|
Business Services |
|
Senior Subordinated Debt 13.0000% Cash, 2.5000% Deferred, 07/01/2016 (l), (m) |
|
9,000,000 |
|
9,008,330 |
|
9,000,000 |
|
|||
RX Innovation, Inc. |
|
Software |
|
Senior Subordinated Debt 12.0000% Cash, 4.0000% Deferred, 03/01/2017 (l), (m) |
|
10,300,000 |
|
10,307,845 |
|
10,300,000 |
|
|||
Thunderdome Restaurants, LLC |
|
Restaurants |
|
Second Lien Loan 12.0000% Cash, 06/10/2020 |
|
1,965,251 |
|
1,965,251 |
|
1,965,251 |
|
|||
U.S. Spray Drying Holding Company |
|
Specialty Chemicals |
|
Class B Common Stock (784 shares) (d) |
|
|
|
5,488,000 |
|
5,875,000 |
|
|||
|
|
|
|
Secured Loan 12.0000% Cash, 05/02/2019 |
|
1,500,000 |
|
1,500,000 |
|
1,500,000 |
|
|||
|
|
|
|
|
|
|
|
6,988,000 |
|
7,375,000 |
|
|||
United States Technologies, Inc. |
|
Electronics Manufacturing and Repair |
|
Senior Lien Loan 10.5000% Cash, 07/17/2020 (l) |
|
5,000,000 |
|
5,000,000 |
|
5,000,000 |
|
|||
Sub Total Non-control/Non-affiliated investments |
|
|
|
|
|
|
|
165,626,784 |
|
131,351,403 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Affiliate investments - 57.87% (a), (c), (f), (g) |
|
|
|
|
|
|
|
|
|
|
|
|||
Advantage Insurance Holdings LTD |
|
Insurance |
|
Preferred Stock (750,000 shares) (d), (e) |
|
|
|
7,500,000 |
|
8,015,164 |
|
|||
Centile Holdings B.V. |
|
Software |
|
Common Equity Interest (d), (e) |
|
|
|
3,524,376 |
|
4,905,000 |
|
|||
JSC Tekers Holdings |
|
Real Estate Management |
|
Common Stock (3,201 shares) (d), (e) |
|
|
|
4,500 |
|
4,000 |
|
|||
|
|
|
|
Preferred Stock (9,159,085 shares) (d), (e) |
|
|
|
11,810,188 |
|
5,045,700 |
|
|||
|
|
|
|
|
|
|
|
11,814,688 |
|
5,049,700 |
|
|||
Security Holdings B.V. |
|
Electrical Engineering |
|
Common Equity Interest (d), (e) |
|
|
|
52,846,140 |
|
45,300,000 |
|
|||
SGDA Europe B.V. |
|
Environmental Services |
|
Common Equity Interest (d), (e) |
|
|
|
28,544,800 |
|
6,020,000 |
|
|||
U.S. Gas & Electric, Inc. |
|
Energy Services |
|
Second Lien Loan 13.0000% Cash, 07/01/2019 (l) |
|
7,500,000 |
|
7,500,000 |
|
7,500,000 |
|
|||
|
|
|
|
Unsecured Loan 10.0000% Cash, 4.0000% PIK , 07/01/2018 (b), (l) |
|
3,167,220 |
|
3,167,220 |
|
3,167,220 |
|
|||
|
|
|
|
Convertible Series I Preferred Stock (32,200 shares) (d), (k), (o) |
|
|
|
500,000 |
|
83,667,607 |
|
|||
|
|
|
|
Convertible Series J Preferred Stock (8,216 shares) (d), (o) |
|
|
|
|
|
- |
|
|||
|
|
|
|
|
|
|
|
11,167,220 |
|
94,334,827 |
|
|||
Vestal Manufacturing Enterprises, Inc. |
|
Iron Foundries |
|
Senior Subordinated Debt 12.0000% Cash, 3.0000% PIK , 11/28/2021 (b), (l) |
|
6,315,236 |
|
6,315,236 |
|
6,315,236 |
|
|||
|
|
|
|
Common Stock (5,610 shares) (d) |
|
|
|
250,000 |
|
250,000 |
|
|||
|
|
|
|
Warrants (d) |
|
5,303 |
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
6,565,236 |
|
6,565,236 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Sub Total Affiliate investments |
|
|
|
|
|
|
|
121,962,460 |
|
170,189,927 |
|
|||
The accompanying notes are an integral part of these consolidated financial statements.
MVC Capital, Inc.
Consolidated Schedule of Investments - (Continued)
October 31, 2015
Company |
|
Industry |
|
Investment |
|
Principal |
|
Cost |
|
Fair Value/Market Value |
|
|||
Control Investments - 33.78% (c), (f), (g) |
|
|
|
|
|
|
|
|
|
|
|
|||
Equus Total Return, Inc. |
|
Regulated Investment Company |
|
Common Stock (4,444,644 shares) (d) |
|
|
|
$ |
10,030,272 |
|
$ |
7,644,788 |
|
|
MVC Automotive Group GmbH |
|
Automotive Dealerships |
|
Common Equity Interest (a), (d), (e) |
|
|
|
48,457,838 |
|
13,452,000 |
|
|||
MVC Private Equity Fund LP |
|
Private Equity |
|
Limited Partnership Interest (a), (d), (j) |
|
|
|
13,838,539 |
|
21,939,744 |
|
|||
|
|
|
|
General Partnership Interest (a), (d), (j) |
|
|
|
353,024 |
|
552,016 |
|
|||
|
|
|
|
|
|
|
|
14,191,563 |
|
22,491,760 |
|
|||
Ohio Medical Corporation |
|
Medical Device Manufacturer |
|
Common Stock (5,620 shares) (a), (d), (p) |
|
|
|
15,763,636 |
|
|
|
|||
|
|
|
|
Series A Convertible Preferred Stock 16.0000% PIK (33,904 shares) (a), (b), (p) |
|
|
|
30,000,000 |
|
6,050,797 |
|
|||
|
|
|
|
Series C Convertible Preferred Stock 16.0000% PIK (10,737shares) (a), (b), (p) |
|
|
|
22,618,466 |
|
32,479,292 |
|
|||
|
|
|
|
|
|
|
|
68,382,102 |
|
38,530,089 |
|
|||
RuMe Inc. |
|
Consumer Products |
|
Common Stock (5,297,548 shares) (a), (d) |
|
|
|
924,475 |
|
924,475 |
|
|||
|
|
|
|
Series C Preferred Stock (23,896,634 shares) (a), (d) |
|
|
|
3,410,694 |
|
6,467,772 |
|
|||
|
|
|
|
Series B-1 Preferred Stock (4,999,076 shares) (a), (d) |
|
|
|
999,815 |
|
1,667,753 |
|
|||
|
|
|
|
|
|
|
|
5,334,984 |
|
9,060,000 |
|
|||
SIA Tekers Invest |
|
Port Facilities |
|
Common Stock (68,800 shares) (a), (d), (e) |
|
|
|
2,300,000 |
|
342,000 |
|
|||
Turf Products, LLC |
|
Distributor - Landscaping and |
|
Senior Subordinated Debt 7.0000% Cash, 4.0000% PIK, 11/01/2018 (a), (b), (l) |
|
$ |
3,895,262 |
|
3,895,262 |
|
3,862,994 |
|
||
|
|
Irrigation Equipment |
|
Limited Liability Company Interest (a), (d) |
|
|
|
3,535,694 |
|
3,991,794 |
|
|||
|
|
|
|
Guarantee (a), (d) |
|
1 |
|
|
|
(41,034 |
) |
|||
|
|
|
|
Warrants (a), (d) |
|
150 |
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
7,430,956 |
|
7,813,754 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Sub Total Control Investments |
|
|
|
|
|
|
|
156,127,715 |
|
99,334,391 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
TOTAL PORTFOLIO INVESTMENTS - 136.32% (f) |
|
|
|
|
|
$ |
443,716,959 |
|
$ |
400,875,721 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Short-Term Investments - 30.49% (f), (g) |
|
|
|
|
|
|
|
|
|
|
|
|||
U.S. Treasury Obligations |
|
U.S. Government Securities |
|
1.3750% Cash, 10/31/2019 (n) |
|
90,300,000 |
|
$ |
89,820,800 |
|
$ |
89,681,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Sub Total Short-Term Investments |
|
|
|
|
|
|
|
$ |
89,820,800 |
|
$ |
89,681,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Cash Equivalents and Restricted Cash Equivalents - 2.74% (f), (g) |
|
|
|
|
|
|
|
|
|
|
|
|||
Fidelity Institutional Government Money Market Fund |
|
Money Market Fund |
|
Beneficial Shares (1,659,943 shares) |
|
|
|
1,659,943 |
|
1,659,943 |
|
|||
JP Morgan Prime Money Market Fund |
|
Money Market Fund |
|
Beneficial Shares (6,400,723 shares) |
|
|
|
6,400,723 |
|
6,400,723 |
|
|||
Total Cash Equivalents and Restricted Cash Equivalents |
|
|
|
|
|
8,060,666 |
|
8,060,666 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||
TOTAL INVESTMENT ASSETS - 169.55% |
|
|
|
|
|
$ |
541,598,425 |
|
$ |
498,617,922 |
|
|||
(a) These securities are restricted from public sale without prior registration under the Securities Act of 1933. The Company negotiates certain aspects of the method and timing of the disposition of these investments, including registration, rights and related costs.
(b) These securities accrue a portion of their interest/dividends in payment in kind interest/dividends which is capitalized to the investment.
(c) All of the Companys equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except MVC Automotive Group GmbH, Security Holdings B.V., SGDA Europe B.V.,
SIA Tekers Invest, JSC Tekers Holdings, Centile Holdings B.V., Equus Total Return, Inc., MVC Private Equity Fund L.P., and Advantage Insurance LTD. The Company makes available significant managerial assistance to all of the
portfolio companies in which it has invested.
(d) Non-income producing assets.
(e) The principal operations of these portfolio companies are located in Europe and Cayman Islands which represents approximately 28% of the net assets. The remaining portfolio companies are located in North America which represents
approximately 108% of the net assets.
(f) Percentages are based on net assets of $294,075,587 as of October 31, 2015.
(g) See Note 3 for further information regarding Investment Classification.
(h) All or a portion of the accrued interest on these securities have been reserved for.
(i) Legacy Investments.
(j) MVC Private Equity Fund, LP is a private equity fund focused on control equity investments in the lower middle market. The fund currently holds five investments, four located in the United States and one in Gibraltar, the investments are in the energy, services,
contract manufacturing, and industrial sectors. The Companys proportional share of the AccuMed Corp. preferred stock, Plymouth Rock Energy membership interest and loan and the Gibdock Limited equity interest is $4,251,620, $7,184,225 and $5,923,100, respectively.
(k) Upon a liquidity event, the Company may receive additional ownership in U.S. Gas & Electric, Inc.
(l) All or a portion of these securities may serve as collateral for the Firstrust Bank Bridge Loan.
(m) Deferred interest of $803,847, $303,877, $946,234 and $711,982 for Agri-Carriers Group, Legal Solutions Holdings, RXInnovation and The Results Companies, respectively, is shown as a receivable on the Consolidated Balance Sheet
as of October 31, 2015.
(n) All or a portion of these securities may serve as collateral for the BB&T Credit Facility.
(o) All or a portion of these securities may serve as collateral for the Macquarie Energy trade supple credit facility
(p) All or a portion of these securities may serve as collateral for a loan made to Ohio Medical by another financial institution
PIK - Payment-in-kind
- Denotes zero cost or fair value.
The accompanying notes are an integral part of these consolidated financial statements.
MVC Capital, Inc.
Consolidated Schedule of Investments
October 31, 2014
Company |
|
Industry |
|
Investment |
|
Principal |
|
Cost |
|
Fair Value/Market Value |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Non-control/Non-affiliated investments- 36.73% (a), (c), (f), (g) |
|
|
|
|
|
|
|
|
|
|
|
|||
Actelis Networks, Inc. |
|
Technology Investment |
|
Preferred Stock (150,602 shares) (d), (i) |
|
|
|
$ |
5,000,003 |
|
|
|
||
Biogenic Reagents |
|
Renewable energy |
|
Senior Note 12.0000% Cash, 4.0000% PIK, 07/21/2018 (b) |
|
$ |
5,246,951 |
|
5,246,951 |
|
$ |
5,246,951 |
|
|
|
|
|
|
Senior Convertible Note 12.0000% Cash, 4.0000% PIK, 07/21/2018 (b) |
|
4,722,256 |
|
4,722,256 |
|
5,027,257 |
|
|||
|
|
|
|
Senior Note 12.0000% Cash, 4.0000% PIK, 09/30/2015 (b) |
|
4,000,444 |
|
4,000,444 |
|
4,000,444 |
|
|||
|
|
|
|
Warrants (d) |
|
1 |
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
13,969,651 |
|
14,274,652 |
|
|||
Biovation Holdings, Inc. |
|
Manufacturer of Laminate Material and Composites |
|
Bridge Loan 6.0000% Cash, 6.0000% PIK, 10/31/2014 (b), (h) |
|
3,779,321 |
|
3,779,321 |
|
3,391,663 |
|
|||
|
|
|
|
Warrants (d) |
|
3 |
|
397,677 |
|
|
|
|||
|
|
|
|
|
|
|
|
4,176,998 |
|
3,391,663 |
|
|||
Custom Alloy Corporation |
|
Manufacturer of Pipe Fittings |
|
Second Lien Loan, 7.3000% Cash, 3.7000% PIK, 04/30/2020 (b) |
|
23,000,000 |
|
23,000,000 |
|
23,000,000 |
|
|||
|
|
|
|
Unsecured Subordinated Loan 12.0000% Cash, 09/04/2016 |
|
6,500,000 |
|
6,500,000 |
|
6,500,000 |
|
|||
|
|
|
|
|
|
|
|
29,500,000 |
|
29,500,000 |
|
|||
FOLIOfn, Inc. |
|
Technology Investment - Financial Services |
|
Preferred Stock (5,802,259 shares) (d), (i) |
|
|
|
15,000,000 |
|
5,893,000 |
|
|||
G3K Display, Inc. |
|
Retail Store Fixtures |
|
Senior Lien Loan 13.0000% Cash, 04/11/2019 (h) |
|
5,625,000 |
|
5,625,000 |
|
|
|
|||
|
|
|
|
Warrants (d) |
|
1 |
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
5,625,000 |
|
|
|
|||
Inland Environmental & Remediation LP |
|
Environmental Services |
|
Senior Secured Loan 12.0000% Cash, 04/17/2019 |
|
15,000,000 |
|
14,364,313 |
|
14,364,313 |
|
|||
|
|
|
|
Warrants (d) |
|
1 |
|
713,000 |
|
713,000 |
|
|||
|
|
|
|
|
|
|
|
15,077,313 |
|
15,077,313 |
|
|||
MainStream Data, Inc. |
|
Technology Investment |
|
Common Stock (5,786 shares) (d), (i) |
|
|
|
3,750,000 |
|
|
|
|||
Moreys Seafood International, LLC |
|
Food Services |
|
Second Lien Loan 10.0000% Cash, 3.0000% PIK, 08/12/2018 (b) |
|
15,338,768 |
|
15,338,768 |
|
15,591,635 |
|
|||
NPWT Corporation |
|
Medical Device Manufacturer |
|
Series B Common Stock (281 shares) (d) |
|
|
|
1,231,638 |
|
5,000 |
|
|||
|
|
|
|
Series A Convertible Preferred Stock (5,000 shares) (d) |
|
|
|
|
|
81,000 |
|
|||
|
|
|
|
|
|
|
|
1,231,638 |
|
86,000 |
|
|||
Prepaid Legal Services, Inc. |
|
Consumer Services |
|
Second Lien Term Loan , 9.7500% Cash, 07/01/2020 |
|
10,000,000 |
|
9,877,526 |
|
10,100,000 |
|
|||
Summit Research Labs, Inc. |
|
Specialty Chemicals |
|
Second Lien Loan 10.0000% Cash, 4.0000% PIK , 10/01/2018 (b) |
|
25,147,976 |
|
25,147,976 |
|
25,400,785 |
|
|||
U.S. Spray Drying Holding Company |
|
Specialty Chemicals |
|
Class B Common Stock (784 shares) |
|
|
|
5,488,000 |
|
5,488,000 |
|
|||
|
|
|
|
Secured Loan 12.0000% Cash, 05/02/2019 |
|
1,500,000 |
|
1,500,000 |
|
1,500,000 |
|
|||
|
|
|
|
|
|
|
|
6,988,000 |
|
6,988,000 |
|
|||
Sub Total Non-control/Non-affiliated investments |
|
|
|
|
|
|
|
150,682,873 |
|
126,303,048 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Affiliate investments - 50.50% (a), (c), (f), (g) |
|
|
|
|
|
|
|
|
|
|
|
|||
Advantage Insurance Holdings LTD |
|
Insurance |
|
Preferred Stock (750,000 shares) (d)(e) |
|
|
|
7,500,000 |
|
7,721,000 |
|
|||
Centile Holdings B.V. |
|
Software |
|
Common Equity Interest (d), (e) |
|
|
|
3,274,376 |
|
4,994,000 |
|
|||
JSC Tekers Holdings |
|
Real Estate Management |
|
Common Stock (3,201 shares) (d), (e) |
|
|
|
4,500 |
|
4,200 |
|
|||
|
|
|
|
Preferred Stock (9,159,085 shares) (d), (e) |
|
|
|
11,810,188 |
|
6,157,906 |
|
|||
|
|
|
|
|
|
|
|
11,814,688 |
|
6,162,106 |
|
|||
Security Holdings B.V. |
|
Electrical Engineering |
|
Common Equity Interest (d), (e) |
|
|
|
52,846,140 |
|
50,600,000 |
|
|||
SGDA Europe B.V. |
|
Environmental Services |
|
Common Equity Interest (d), (e) |
|
|
|
28,544,800 |
|
9,996,664 |
|
|||
U.S. Gas & Electric, Inc. |
|
Energy Services |
|
Second Lien Loan, 13.0000% Cash, 07/01/2019 |
|
7,500,000 |
|
7,500,000 |
|
7,500,000 |
|
|||
|
|
|
|
Unsecured Loan 10.0000% Cash, 4.0000% PIK , 07/01/2018 (b) |
|
3,041,550 |
|
3,041,550 |
|
3,041,550 |
|
|||
|
|
|
|
Convertible Series I Preferred Stock (32,200 shares) (d), (k), (m) |
|
|
|
500,000 |
|
83,667,607 |
|
|||
|
|
|
|
Convertible Series J Preferred Stock (8,216 shares) (d), (m) |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
11,041,550 |
|
94,209,157 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Sub Total Affiliate investments |
|
|
|
|
|
|
|
115,021,554 |
|
173,682,927 |
|
|||
The accompanying notes are an integral part of these consolidated financial statements.
MVC Capital, Inc.
Consolidated Schedule of Investments - (Continued)
October 31, 2014
(a) These securities are restricted from public sale without prior registration under the Securities Act of 1933. The Company negotiates certain aspects of the method and timing of the disposition of these investments, including registration, rights and related costs.
(b) These securities accrue a portion of their interest/dividends in payment in kind interest/dividends which is capitalized to the investment.
(c) All of the Companys equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except MVC Automotive Group GmbH, Security Holdings B.V., SGDA Europe B.V., SIA Tekers Invest, JSC Tekers Holdings, Centile Holdings B.V., Velocitius B.V., Equus Total Return, Inc., MVC Private Equity Fund L.P., and Advantage Insurance LTD. The Company makes available significant managerial assistance to all of the portfolio companies in which it has invested.
(d) Non-income producing assets.
(e) The principal operations of these portfolio companies are located in Europe and Cayman Islands which represents approximately 33% of the net assets. The remaining portfolio companies are located in North America which represents approximately 97% of the net assets.
(f) Percentages are based on net assets of $343,902,958 as of October 31, 2014.
(g) See Note 4 for further information regarding Investment Classification.
(h) All or a portion of the accrued interest on these securities have been reserved for.
(i) Legacy Investments.
(j) MVC Private Equity Fund, LP is a private equity fund focused on control equity investments in the lower middle market. The fund currently holds five investments, four located in the United States and one in Gibraltar, the investments are in the energy, services, contract manufacturing, and industrial sectors. The Companys proportional share of the Plymouth Rock Energy membership interest and loan and the Gibdock Limited equity interest is $6,894,951 and $7,030,040, respectively.
(k) Upon a liquidity event, the Company may receive additional ownership in U.S. Gas & Electric, Inc.
(l) All or a portion of these securities may serve as collateral for the BB&T Credit Facility.
(m) All or a portion of these securities may serve as collateral for the Macquarie Energy trade supple credit facility
(n) All or a portion of these securities may serve as collateral for a loan made to Ohio Medical by another financial institution
PIK - Payment-in-kind
- Denotes zero cost or fair value.
The accompanying notes are an integral part of these consolidated financial statements.
MVC Capital, Inc.
Consolidated Statements of Operations
|
|
For the Year Ended |
|
For the Year Ended |
|
For the Year Ended |
|
|||
|
|
October 31, 2015 |
|
October 31, 2014 |
|
October 31, 2013 |
|
|||
Operating Income: |
|
|
|
|
|
|
|
|||
Dividend income |
|
|
|
|
|
|
|
|||
Non-control/Non-affiliated investments |
|
$ |
3,220 |
|
$ |
69,956 |
|
$ |
1,993 |
|
Affiliate investments |
|
|
|
867,916 |
|
7,852,217 |
|
|||
Control investments |
|
1,002,872 |
|
|
|
426,300 |
|
|||
|
|
|
|
|
|
|
|
|||
Total dividend income |
|
1,006,092 |
|
937,872 |
|
8,280,510 |
|
|||
|
|
|
|
|
|
|
|
|||
Payment-in-kind dividend income |
|
|
|
|
|
|
|
|||
Affiliate investments |
|
|
|
216,928 |
|
269,900 |
|
|||
|
|
|
|
|
|
|
|
|||
Total payment-in-kind dividend income |
|
|
|
216,928 |
|
269,900 |
|
|||
|
|
|
|
|
|
|
|
|||
Interest income |
|
|
|
|
|
|
|
|||
Non-control/Non-affiliated investments |
|
12,579,802 |
|
7,074,870 |
|
3,206,590 |
|
|||
Affiliate investments |
|
1,303,835 |
|
2,756,306 |
|
3,319,241 |
|
|||
Control investments |
|
322,282 |
|
353,844 |
|
1,458,138 |
|
|||
|
|
|
|
|
|
|
|
|||
Total interest income |
|
14,205,919 |
|
10,185,020 |
|
7,983,969 |
|
|||
|
|
|
|
|
|
|
|
|||
Payment-in-kind/Deferred interest income |
|
|
|
|
|
|
|
|||
Non-control/Non-affiliated investments |
|
4,908,516 |
|
3,058,577 |
|
1,497,860 |
|
|||
Affiliate investments |
|
126,067 |
|
756,954 |
|
969,775 |
|
|||
Control investments |
|
155,810 |
|
155,810 |
|
619,495 |
|
|||
|
|
|
|
|
|
|
|
|||
Total payment-in-kind interest income |
|
5,190,393 |
|
3,971,341 |
|
3,087,130 |
|
|||
|
|
|
|
|
|
|
|
|||
Fee income |
|
|
|
|
|
|
|
|||
Non-control/Non-affiliated investments |
|
357,500 |
|
306,393 |
|
846,598 |
|
|||
Affiliate investments |
|
723,165 |
|
932,335 |
|
937,309 |
|
|||
Control investments |
|
966,992 |
|
323,001 |
|
1,068,910 |
|
|||
|
|
|
|
|
|
|
|
|||
Total fee income |
|
2,047,657 |
|
1,561,729 |
|
2,852,817 |
|
|||
|
|
|
|
|
|
|
|
|||
Fee income - Asset Management 1 |
|
|
|
|
|
|
|
|||
Portfolio fees |
|
1,023,210 |
|
1,314,441 |
|
557,071 |
|
|||
Management fees |
|
225,511 |
|
595,534 |
|
1,238,301 |
|
|||
|
|
|
|
|
|
|
|
|||
Total fee income - Asset Management |
|
1,248,721 |
|
1,909,975 |
|
1,795,372 |
|
|||
|
|
|
|
|
|
|
|
|||
Other income |
|
|
|
1,033,560 |
|
492,743 |
|
|||
|
|
|
|
|
|
|
|
|||
Total operating income |
|
23,698,782 |
|
19,816,425 |
|
24,762,441 |
|
|||
|
|
|
|
|
|
|
|
|||
Operating Expenses: |
|
|
|
|
|
|
|
|||
Interest and other borrowing costs |
|
10,230,140 |
|
9,442,466 |
|
6,724,270 |
|
|||
Management fee |
|
7,845,198 |
|
8,681,175 |
|
7,832,611 |
|
|||
Audit & tax preparation fees |
|
1,470,000 |
|
634,200 |
|
652,700 |
|
|||
Legal fees |
|
1,162,500 |
|
925,000 |
|
523,000 |
|
|||
Portfolio fees - Asset Management 1 |
|
767,408 |
|
985,831 |
|
417,803 |
|
|||
Other expenses |
|
750,531 |
|
411,266 |
|
543,422 |
|
|||
Consulting fees |
|
653,396 |
|
475,404 |
|
722,996 |
|
|||
Directors fees |
|
418,000 |
|
400,625 |
|
412,500 |
|
|||
Insurance |
|
347,426 |
|
346,020 |
|
333,700 |
|
|||
Administration |
|
236,918 |
|
259,351 |
|
254,961 |
|
|||
Public relations fees |
|
180,000 |
|
198,000 |
|
184,500 |
|
|||
Management fee - Asset Management 1 |
|
160,218 |
|
354,298 |
|
928,722 |
|
|||
Printing and postage |
|
85,595 |
|
21,352 |
|
84,712 |
|
|||
Net Incentive compensation (Note 5) |
|
(9,757,120 |
) |
(4,749,735 |
) |
3,828,184 |
|
|||
|
|
|
|
|
|
|
|
|||
Total operating expenses |
|
14,550,210 |
|
18,385,253 |
|
23,444,081 |
|
|||
|
|
|
|
|
|
|
|
|||
Less: Voluntary Expense Waiver by Adviser 2 |
|
(150,000 |
) |
(150,000 |
) |
(150,000 |
) |
|||
|
|
|
|
|
|
|
|
|||
Total waivers |
|
(150,000 |
) |
(150,000 |
) |
(150,000 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net operating income before taxes |
|
9,298,572 |
|
1,581,172 |
|
1,468,360 |
|
|||
|
|
|
|
|
|
|
|
|||
Tax Expenses: |
|
|
|
|
|
|
|
|||
Current tax expense |
|
1,756 |
|
1,755 |
|
3,600 |
|
|||
|
|
|
|
|
|
|
|
|||
Total tax expense |
|
1,756 |
|
1,755 |
|
3,600 |
|
|||
|
|
|
|
|
|
|
|
|||
Net operating income |
|
9,296,816 |
|
1,579,417 |
|
1,464,760 |
|
|||
|
|
|
|
|
|
|
|
|||
Net Realized and Unrealized Gain (Loss) on Investments: |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Net realized gain (loss) on investments |
|
|
|
|
|
|
|
|||
Short-term investments |
|
302,246 |
|
|
|
|
|
|||
Non-control/Non-affiliated investments |
|
(2,073,793 |
) |
(575,763 |
) |
(6,073,420 |
) |
|||
Affiliate investments |
|
|
|
15,979,686 |
|
82,512 |
|
|||
Control investments |
|
5,593,975 |
|
1,115,855 |
|
49,655,826 |
|
|||
Foreign currency |
|
(122,168 |
) |
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Total net realized gain on investments |
|
3,700,260 |
|
16,519,778 |
|
43,664,918 |
|
|||
|
|
|
|
|
|
|
|
|||
Net unrealized depreciation on investments |
|
(50,557,496 |
) |
(37,941,262 |
) |
(25,860,307 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net realized and unrealized (loss) gain on investments |
|
(46,857,236 |
) |
(21,421,484 |
) |
17,804,611 |
|
|||
|
|
|
|
|
|
|
|
|||
Net (decrease) increase in net assets resulting |
|
|
|
|
|
|
|
|||
from operations |
|
$ |
(37,560,420 |
) |
$ |
(19,842,067 |
) |
$ |
19,269,371 |
|
|
|
|
|
|
|
|
|
|||
Net (decrease) increase in net assets per share |
|
|
|
|
|
|
|
|||
resulting from operations |
|
$ |
(1.66 |
) |
$ |
(0.88 |
) |
$ |
0.82 |
|
|
|
|
|
|
|
|
|
|||
Dividends declared per share |
|
$ |
0.540 |
|
$ |
0.540 |
|
$ |
0.540 |
|
|
|
|
|
|
|
|
|
|||
Weighted average number of shares outstanding 3 |
|
22,702,821 |
|
22,632,584 |
|
23,334,367 |
|
1 These items are related to the management of the MVC Private Equity Fund, L.P. (PE Fund). Please see Note 4 Management for more information.
2 Reflects TTG Advisers voluntary waiver of $150,000 of expenses for the 2015, 2014 and 2013 fiscal years that the Company would otherwise be obligated to reimburse TTG Advisers under the Advisory Agreement. Please see Note 4 Management for more information.
3 Please see Note 6 Dividends and Distributions to Shareholders and Share Repurchase Program for more information.
The accompanying notes are an integral part of these consolidated financial statements.
MVC Capital, Inc.
Consolidated Statements of Cash Flows
|
|
For the Year Ended |
|
For the Year Ended |
|
For the Year Ended |
|
|||
|
|
October 31, 2015 |
|
October 31, 2014 |
|
October 31, 2013 |
|
|||
Cash flows from Operating Activities: |
|
|
|
|
|
|
|
|||
Net (decrease) increase in net assets resulting from operations |
|
$ |
(37,560,420 |
) |
$ |
(19,842,067 |
) |
$ |
19,269,371 |
|
Adjustments to reconcile net (decrease) increase in net assets resulting from operations to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|||
Net realized gain |
|
(3,700,260 |
) |
(16,519,778 |
) |
(43,664,918 |
) |
|||
Net change in unrealized depreciation |
|
50,557,496 |
|
37,941,262 |
|
25,860,307 |
|
|||
Amortization of discounts and fees |
|
(751,909 |
) |
(1,077,667 |
) |
(206,914 |
) |
|||
Increase in accrued payment-in-kind dividends and interest |
|
(2,266,596 |
) |
(3,928,997 |
) |
(3,269,909 |
) |
|||
Amortization of deferred financing fees |
|
1,070,967 |
|
565,723 |
|
258,242 |
|
|||
Allocation of flow through income |
|
|
|
(485,973 |
) |
(246,753 |
) |
|||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|||
Restricted cash |
|
(1,000,034 |
) |
526,500 |
|
(312,000 |
) |
|||
Restricted cash equivalents |
|
762,500 |
|
|
|
|
|
|||
Dividends, interest and fees receivable |
|
(3,216,202 |
) |
2,340,501 |
|
1,030,804 |
|
|||
Fee and other receivables |
|
243,547 |
|
169,711 |
|
1,204,578 |
|
|||
Escrow receivables, net of reserves |
|
(292,744 |
) |
6,236,928 |
|
(5,245,365 |
) |
|||
Prepaid expenses |
|
37,284 |
|
(111,897 |
) |
218,597 |
|
|||
Prepaid taxes |
|
|
|
336 |
|
255 |
|
|||
Incentive compensation (Note 5) |
|
(9,757,120 |
) |
(4,749,735 |
) |
3,828,184 |
|
|||
Other liabilities |
|
705,945 |
|
195,710 |
|
(286,992 |
) |
|||
Purchases of equity investments |
|
(3,545,400 |
) |
(35,743,194 |
) |
(36,626,663 |
) |
|||
Purchases of debt instruments |
|
(59,076,952 |
) |
(67,927,323 |
) |
(58,890,199 |
) |
|||
Purchases of short-term investments |
|
(384,062,785 |
) |
(398,801,536 |
) |
(99,447,664 |
) |
|||
Proceeds from equity investments (1) |
|
25,943,104 |
|
33,896,303 |
|
65,708,035 |
|
|||
Proceeds from debt instruments |
|
39,304,386 |
|
28,612,098 |
|
37,361,029 |
|
|||
Sales/maturities of short-term investments |
|
394,544,993 |
|
348,605,381 |
|
49,846,875 |
|
|||
|
|
|
|
|
|
|
|
|||
Net cash provided by (used in) operating activities |
|
7,939,800 |
|
(90,097,714 |
) |
(43,611,100 |
) |
|||
|
|
|
|
|
|
|
|
|||
Cash flows from Financing Activities: |
|
|
|
|
|
|
|
|||
Borrowings from senior notes |
|
|
|
|
|
114,408,750 |
|
|||
Borrowings from revolving credit facility |
|
385,000,000 |
|
700,000,000 |
|
100,000,000 |
|
|||
Repayments from revolving credit facility |
|
(395,000,000 |
) |
(650,000,000 |
) |
(50,000,000 |
) |
|||
Borrowings from bridge loan |
|
36,672,481 |
|
|
|
|
|
|||
Repayments from bridge loan |
|
(28,672,481 |
) |
|
|
|
|
|||
Repayments from Term Loan |
|
|
|
|
|
(50,000,000 |
) |
|||
Offering expenses |
|
|
|
(139,000 |
) |
|
|
|||
Repurchase of common stock |
|
|
|
(4,114,967 |
) |
(16,673,207 |
) |
|||
Share exchange |
|
(7,427 |
) |
(221,424 |
) |
|
|
|||
Financing fees paid |
|
(533,746 |
) |
(273,092 |
) |
(3,523,737 |
) |
|||
Distributions paid to shareholders |
|
(12,259,524 |
) |
(12,215,899 |
) |
(12,526,704 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net cash (used in) provided by financing activities |
|
(14,800,697 |
) |
33,035,618 |
|
81,685,102 |
|
|||
|
|
|
|
|
|
|
|
|||
Net change in cash and cash equivalents for the year |
|
(6,860,897 |
) |
(57,062,096 |
) |
38,074,002 |
|
|||
|
|
|
|
|
|
|
|
|||
Cash and cash equivalents, beginning of year |
|
$ |
17,172,464 |
|
$ |
74,234,560 |
|
$ |
36,160,558 |
|
|
|
|
|
|
|
|
|
|||
Cash and cash equivalents, end of year |
|
$ |
10,311,567 |
|
$ |
17,172,464 |
|
$ |
74,234,560 |
|
(1) For the year ended October 31, 2014 and October 31, 2013, proceeds from equity investments includes $868,286 and $5,627,657 from escrow receivables, net of reserves, respectively.
During the year ended October 31, 2015, 2014 and 2013 MVC Capital, Inc. paid $8,968,280, $8,729,321 and $5,890,475 in interest expense, respectively.
During the year ended October 31, 2015, 2014 and 2013 MVC Capital, Inc. paid $1,823, $1,420 and $3,345 in income taxes, respectively.
Non-cash activity:
During the year ended October 31, 2015, 2014 and 2013, MVC Capital, Inc. recorded payment in kind dividend and interest of $2,266,596, $3,928,997 and $3,269,909, respectively. This amount was added to the principal balance of the investments and recorded as dividend/interest income.
During the year ended October 31, 2014 and 2013, MVC Capital, Inc. was allocated $1,033,361 and $492,743, respectively, in flow-through income from its equity investment in Octagon Credit Investors, LLC. Of these amounts, $547,388 and $245,990, respectively, was received in cash and the balance of $485,973 and $246,753, respectively, was undistributed and therefore increased the cost of the investment. The fair value was then increased by $101,099 and $246,753, respectively, by the Companys Valuation Committee.
On December 14, 2012, and August 2, 2013, the Company received free warrants related to their debt investments in Biovation Holdings, Inc. The Company allocated the cost basis in the investments between the bridge loan and the warrants at the time the investments were made. The Company will amortize the discount associated with the warrants over the life of the loan. During the year ended October 31, 2013, the Company recorded approximately $115,000 of amortization.
On November 19, 2013, MVC Capital, Inc. converted the MVC Automotive Group B.V. bridge loan of approximately $1.6 million to addional common equity interest.
On May 1, 2014, the Company converted the JSC Tekers $12.0 million secured loan to preferred equity. The cost and fair value assigned to the preferred equity was approximately $11.8 million, which was based on the fair value of the real estate using the CZK/USD exchange rate on May 1, 2014. As a result of the loan conversion, the Company realized a loss of approximately $190,000.
On May 14, 2014, the Company signed a share exchange agreement with Equus, another publicly traded business development company, as part of a plan of reorganization adopted by the Equus Board of Directors. Pursuant to the share exchange agreement, the Company has received 2,112,000 common shares, with a fair value of approximately $4 million, of Equus in exchange for 395,839 common shares of the Company.
On June 30, 2014, the Company converted the SGDA $6.5 million term loan and accrued interest of approximately $1.9 million to additional common equity interest in SGDA Europe.
On April 20, 2015, Biovation Acquisition Corp., a newly formed entity by the Company, credit purchased the assets of Biovation Holdings, Inc. in exchange for the majority of the economic ownership. The company received 90 shares of Class B non-voting common stock of Biovation Acquisition Corp.
The accompanying notes are an integral part of these consolidated financial statements.
MVC Capital, Inc.
Consolidated Statements of Changes in Net Assets
|
|
For the Year Ended |
|
For the Year Ended |
|
For the Year Ended |
|
|||
|
|
October 31, 2015 |
|
October 31, 2014 |
|
October 31, 2013 |
|
|||
|
|
|
|
|
|
|
|
|||
Operations: |
|
|
|
|
|
|
|
|||
Net operating income |
|
$ |
9,296,816 |
|
$ |
1,579,417 |
|
$ |
1,464,760 |
|
Net realized gain on investments |
|
3,700,260 |
|
16,519,778 |
|
43,664,918 |
|
|||
Net change in unrealized depreciation on investments |
|
(50,557,496 |
) |
(37,941,262 |
) |
(25,860,307 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net (decrease) increase in net assets from operations |
|
(37,560,420 |
) |
(19,842,067 |
) |
19,269,371 |
|
|||
|
|
|
|
|
|
|
|
|||
Shareholder Distributions from: |
|
|
|
|
|
|
|
|||
Income |
|
(9,296,816 |
) |
(1,579,417 |
) |
(10,746,923 |
) |
|||
Realized gain |
|
(2,962,708 |
) |
(10,636,482 |
) |
|
|
|||
Return of capital |
|
|
|
|
|
(1,779,781 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net decrease in net assets from shareholder distributions |
|
(12,259,524 |
) |
(12,215,899 |
) |
(12,526,704 |
) |
|||
|
|
|
|
|
|
|
|
|||
Capital Share Transactions: |
|
|
|
|
|
|
|
|||
Reissuance of treasury stock for share exchange |
|
|
|
4,350,722 |
|
|
|
|||
Provision for share exchange |
|
(7,427 |
) |
(221,424 |
) |
|
|
|||
Offering expenses |
|
|
|
(139,000 |
) |
|
|
|||
Repurchase of common stock |
|
|
|
(4,114,967 |
) |
(16,673,207 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net decrease in net assets from capital share transactions |
|
(7,427 |
) |
(124,669 |
) |
(16,673,207 |
) |
|||
|
|
|
|
|
|
|
|
|||
Total decrease in net assets |
|
(49,827,371 |
) |
(32,182,635 |
) |
(9,930,540 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net assets, beginning of year |
|
343,902,958 |
|
376,085,593 |
|
386,016,133 |
|
|||
|
|
|
|
|
|
|
|
|||
Net assets, end of year |
|
$ |
294,075,587 |
|
$ |
343,902,958 |
|
$ |
376,085,593 |
|
|
|
|
|
|
|
|
|
|||
Common shares outstanding, end of year |
|
22,702,821 |
|
22,702,821 |
|
22,617,688 |
|
|||
|
|
|
|
|
|
|
|
|||
Undistributed net operating income |
|
$ |
|
|
$ |
|
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
MVC Capital, Inc.
Consolidated Selected Per Share Data and Ratios
|
|
For the |
|
For the |
|
For the |
|
For the |
|
For the |
|
|||||
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|||||
|
|
October 31, 2015 |
|
October 31, 2014 |
|
October 31, 2013 |
|
October 31, 2012 |
|
October 31, 2011 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net asset value, beginning of year |
|
$ |
15.15 |
|
$ |
16.63 |
|
$ |
16.14 |
|
$ |
17.54 |
|
$ |
17.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Gain from operations: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Net operating income (loss) |
|
0.41 |
|
0.07 |
|
0.06 |
|
0.88 |
|
(0.10 |
) |
|||||
Net realized and unrealized (loss) gain on investments |
|
(2.07 |
) |
(0.95 |
) |
0.76 |
|
(1.78 |
) |
0.40 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total (loss) gain from investment operations |
|
(1.66 |
) |
(0.88 |
) |
0.82 |
|
(0.90 |
) |
0.30 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Less distributions from: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Income |
|
(0.41 |
) |
(0.07 |
) |
(0.46 |
) |
(0.50 |
) |
|
|
|||||
Realized gain |
|
(0.13 |
) |
(0.47 |
) |
|
|
|
|
|
|
|||||
Return of capital |
|
|
|
|
|
(0.08 |
) |
|
|
(0.48 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total distributions |
|
(0.54 |
) |
(0.54 |
) |
(0.54 |
) |
(0.50 |
) |
(0.48 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Capital share transactions |
|
|
|
|
|
|
|
|
|
|
|
|||||
Dilutive effect of share issuance |
|
|
|
(0.10 |
) |
|
|
|
|
|
|
|||||
Anti-dilutive effect of share repurchase program |
|
|
|
0.04 |
|
0.21 |
|
|
|
0.01 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total capital share transactions |
|
|
|
(0.06 |
) |
0.21 |
|
|
|
0.01 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net asset value, end of year |
|
$ |
12.95 |
|
$ |
15.15 |
|
$ |
16.63 |
|
$ |
16.14 |
|
$ |
17.54 |
|
Market value, end of year |
|
$ |
8.32 |
|
$ |
11.27 |
|
$ |
13.83 |
|
$ |
12.36 |
|
$ |
12.93 |
|
Market discount |
|
(35.75 |
)% |
(25.61 |
)% |
(16.84 |
)% |
(23.42 |
)% |
(26.28 |
)% |
|||||
Total Return - At NAV (a) |
|
(11.08 |
)% |
(5.75 |
)% |
6.52 |
% |
(5.21 |
)% |
1.80 |
% |
|||||
Total Return - At Market (a) |
|
(21.85 |
)% |
(14.97 |
)% |
16.65 |
% |
0.44 |
% |
0.35 |
% |
|||||
Ratios and Supplemental Data: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Portfolio turnover ratio |
|
15.19 |
% |
14.16 |
% |
25.20 |
% |
3.31 |
% |
13.90 |
% |
|||||
Net assets, end of year (in thousands) |
|
$ |
294,076 |
|
$ |
343,903 |
|
$ |
376,086 |
|
$ |
386,016 |
|
$ |
419,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Ratios to average net assets: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Expenses including tax expense |
|
4.54 |
% |
5.04 |
% |
6.19 |
% |
2.17 |
% |
4.38 |
% |
|||||
Expenses excluding tax expense |
|
4.54 |
% |
5.04 |
% |
6.19 |
% |
2.17 |
% |
4.39 |
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net operating income (loss) before tax expense |
|
2.93 |
% |
0.44 |
% |
0.39 |
% |
5.22 |
% |
(0.54 |
)% |
|||||
Net operating income (loss) after tax expense |
|
2.93 |
% |
0.44 |
% |
0.39 |
% |
5.22 |
% |
(0.55 |
)% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Ratios to average net assets excluding waivers: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Expenses including tax expense |
|
4.59 |
% |
5.08 |
% |
6.23 |
% |
2.80 |
% |
4.44 |
% |
|||||
Expenses excluding tax expense |
|
4.59 |
% |
5.08 |
% |
6.23 |
% |
2.80 |
% |
4.45 |
% |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Net operating income (loss) before tax expense |
|
2.89 |
% |
0.40 |
% |
0.35 |
% |
4.59 |
% |
(0.60 |
)% |
|||||
Net operating income (loss) after tax expense |
|
2.89 |
% |
0.40 |
% |
0.35 |
% |
4.59 |
% |
(0.61 |
)% |
The accompanying notes are an integral part of these consolidated financial statements.
MVC Capital, Inc.
Notes to Consolidated Financial Statements
October 31, 2015
1. Organization and Business Purpose
MVC Capital, Inc. and its wholly-owned subsidiaries, MVC Financial Services, Inc. and MVC Cayman (the Company), formerly known as meVC Draper Fisher Jurvetson Fund I, Inc., is a Delaware corporation organized on December 2, 1999 which commenced operations on March 31, 2000. On December 2, 2002, the Company announced that it would begin doing business under the name MVC Capital, Inc. The Companys investment objective is to seek to maximize total return from capital appreciation and/or income, though our current focus is more yield generating investments. The Company seeks to achieve its investment objective by providing debt and equity financing to companies that are, for the most part, privately owned (Portfolio Companies). The Companys current investments in Portfolio Companies consist principally of senior and subordinated loans, venture capital, mezzanine and preferred instruments and private equity investments.
The Company has elected to be treated as a business development company under the 1940 Act. The shares of the Company commenced trading on the NYSE under the symbol MVC on June 26, 2000.
The Company had entered into an advisory agreement with meVC Advisers, Inc. (the Former Advisor), which had entered into a sub-advisory agreement with Draper Fisher Jurvetson MeVC Management Co., LLC (the Former Sub-Advisor). On June 19, 2002, the Former Advisor resigned without prior notice to the Company as its investment advisor. This resignation resulted in the automatic termination of the advisory agreement between the Former Advisor and the Former Sub-Advisor to the Company. As a result, the Companys board internalized the Companys operations, including management of the Companys investments.
At the February 28, 2003 Annual Meeting of Shareholders, a new board of directors (the Board) replaced the former board of directors of the Company (the Former Board) in its entirety. On March 6, 2003, the results of the election were certified by the Inspector of Elections, whereupon the Board terminated John M. Grillos, the Companys previous CEO. Shortly thereafter, other members of the Companys senior management team, who had previously reported to Mr. Grillos, resigned. With these significant changes in the Board and management of the Company, the Company operated in a transition mode and, as a result, no portfolio investments were made from early March 2003 through the end of October 2003 (the end of the Fiscal Year). During this period, the Board explored various alternatives for a long-term management plan for the Company. Accordingly, at the September 16, 2003 Special Meeting of Shareholders, the Board voted and approved the Companys revised business plan.
On November 6, 2003, Michael Tokarz assumed his position as Chairman, Portfolio Manager and Director of the Company.
On March 29, 2004 at the Annual Shareholders meeting, the shareholders approved the election of Emilio Dominianni, Robert S. Everett, Gerald Hellerman, Robert C. Knapp and Michael Tokarz to serve as members of the Board of Directors of the Company and adopted an
amendment to the Companys Certificate of Incorporation authorizing the changing of the name of the Company from meVC Draper Fisher Jurvetson Fund I, Inc. to MVC Capital, Inc.
On July 7, 2004, the Companys name change from meVC Draper Fisher Jurvetson Fund I, Inc. to MVC Capital, Inc. became effective.
On July 16, 2004, the Company commenced the operations of MVC Financial Services, Inc. (MVCFS). MVCFS is incorporated in Delaware and its principal purpose is to provide advisory, administrative and other services to the Company and the Companys Portfolio Companies. The Company does not hold MVCFS for investment purposes and does not intend to sell MVCFS. On October 14, 2011, the Company formed a wholly-owned subsidiary, MVC Cayman, an exempted company incorporated in the Cayman Islands, to hold certain of its investments.
On September 7, 2006, the stockholders of MVC Capital approved the adoption of the investment advisory and management agreement (the Advisory Agreement). The Advisory Agreement, which was entered into on October 31, 2006, provides for external management of the Company by TTG Advisers, which is led by Michael Tokarz. The agreement took effect on November 1, 2006. Upon the effectiveness of the Advisory Agreement, Mr. Tokarzs employment agreement with the Company terminated. All of the individuals (including the Companys investment professionals) that had been previously employed by the Company as of the fiscal year ended October 31, 2006 became employees of TTG Advisers.
On December 11, 2008, our Board of Directors, including all of the directors who are not interested persons, as defined under the 1940 Act, of the Company (the Independent Directors), at their in-person meeting approved an amended and restated investment advisory and management agreement (also, the Advisory Agreement), which was approved by stockholders of the Company on April 14, 2009. The renewal of the Advisory Agreement was last approved by the Independent Directors at their in-person meeting held on October 28, 2014.
2. Consolidation
On July 16, 2004, the Company formed a wholly-owned subsidiary, MVC Financial Services, Inc. (MVCFS). MVCFS is incorporated in Delaware and its principal purpose is to provide advisory, administrative and other services to the Company, the Companys portfolio companies and other entities. MVCFS had opening equity of $1 (100 shares at $0.01 per share). The Company does not hold MVCFS for investment purposes and does not intend to sell MVCFS.
On October 14, 2011, the Company formed a wholly-owned subsidiary, MVC Cayman, an exempted company incorporated in the Cayman Islands, to hold certain of its investments and to make certain future investments. The results of MVCFS and MVC Cayman are consolidated into the Company and all inter-company accounts have been eliminated in consolidation.
During fiscal year ended October 31, 2012 and thereafter, MVC Partners, LLC (MVC Partners) was consolidated with the operations of the Company as MVC Partners limited partnership interest in the MVC Private Equity Fund, L.P. (PE Fund) is a substantial portion of MVC Partners operations. Previously, MVC Partners was presented as a portfolio company on the Consolidated Schedule of Investments. The consolidation of MVC Partners has not had any
material effect on the financial position or net results of operations of the Company. There are additional disclosures resulting from this consolidation.
MVC GP II, LLC (MVC GP II), an indirect wholly-owned subsidiary of the Company, serves as the general partner to the PE Fund. MVC GP II is wholly-owned by MVCFS, a subsidiary of the Company. The results of MVC GP II are consolidated into MVCFS and ultimately the Company. All inter-company accounts have been eliminated in consolidation.
During fiscal year ended October 31, 2014, MVC Turf, LLC (MVC Turf) was consolidated with the Company as MVC Turf is an MVC wholly-owned holding company. The consolidation of MVC Turf did not have any material effect on the financial position or net results of operations of the Company. Of the $7.8 million in cash on the Companys Consolidated Balance Sheets as of October 31, 2015, approximately $360,000 was held by MVC Turf, an MVC wholly-owned holding company.
3. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Company in the preparation of its consolidated financial statements:
The preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. Actual results could differ from those estimates.
Recent Accounting Pronouncements In June 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-08, Financial ServicesInvestment Companies. ASU 2013-08 provides clarifying guidance to determine if an entity qualifies as an investment company. ASU 2013-08 also requires an investment company to measure non-controlling interests in other investment companies at fair value. The following disclosures will also be required upon adoption of ASU 2013-08: (i) whether an entity is an investment company and is applying the accounting and reporting guidance for investment companies; (ii) information about changes, if any, in an entitys status as an investment company; and (iii) information about financial support provided or contractually required to be provided by an investment company to any of its investees. The requirements of ASU 2013-08 became effective for the Company beginning in fiscal year 2015. These updates have had no impact on the Companys financial condition or results of operations.
ln May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 addresses the reporting of revenue by most entities and will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. This update is effective in fiscal periods beginning after December 15, 2016. Early application is not permitted. The impact on our financial statements of adopting ASU 2014-09 is currently being assessed by management.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern (ASU 2014-15). The standard requires management to evaluate, at each interim and annual reporting period, whether there are conditions or events that raise substantial doubt about the entitys ability to continue as a going concern within one year after the date the financial statements are issued, and provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter, and early adoption is permitted. The Company does not expect to adopt ASU 2014-15 early and does not believe the standard will have a material impact on our financial statements, when adopted.
In February 2015, the FASB issued Accounting Standards Update 2015-2, which updated consolidation standards under ASC Topic 810, Consolidation. Under this update, a new consolidation analysis is required for variable interest entities (VIEs) and will limit the circumstances in which investment managers and similar entities are required to consolidate the entities that they manage. The FASB decided to eliminate some of the criteria under which their fees are considered a variable interest and limit the circumstances in which variable interests in a VIE held by related parties of a reporting enterprise require the reporting enterprise to consolidate the VIE. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015. The Company does not expect the adoption of ASU 2015-2 to have a material impact on our financial statements.
In April 2015, the FASB issued Accounting Standards Update 2015-03, InterestImputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. Under this guidance, debt issuance costs related to a recognized debt liability are to be presented as a direct deduction from the debt liability rather than as an asset on the balance sheet, consistent with debt discounts. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015 The Company does not expect the adoption of ASU 2015-03 to have a material impact on our financial statements.
In May 2015, the FASB issued ASU No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). The new guidance removes the requirement that investments for which NAV is determined based on practical expedient reliance be reported utilizing the fair value hierarchy. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015. The Company does not expect the adoption of ASU 2015-07 to have a material impact on our financial statements.
Valuation of Investments The Accounting Standards Codification (ASC), Fair Value Measurements and Disclosures (ASC 820), defines fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The price used to measure the fair value is not adjusted for transaction costs while the cost basis of our investments may include initial transaction costs. Under ASC 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset to which the reporting entity has access as of the measurement date. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.
Pursuant to the requirements of the 1940 Act and in accordance with ASC 820, we value our portfolio securities at their current market values or, if market quotations are not readily available, at their estimates of fair values. Because our portfolio company investments generally do not have readily ascertainable market values, we record these investments at fair value in accordance with our Valuation Procedures adopted by the Board of Directors, which are consistent with ASC 820. As permitted by the SEC, the Board of Directors has delegated the responsibility of making fair value determinations to the Valuation Committee, subject to the Board of Directors supervision and pursuant to our Valuation Procedures. Our Board of
Directors may also hire independent consultants to review our Valuation Procedures or to conduct an independent valuation of one or more of our portfolio investments.
Pursuant to our Valuation Procedures, the Valuation Committee (which is comprised of three Independent Directors) determines fair values of portfolio company investments on a quarterly basis (or more frequently, if deemed appropriate under the circumstances). In doing so, the Committee considers the recommendations of TTG Advisers. Any changes in valuation are recorded in the consolidated statements of operations as Net unrealized appreciation (depreciation) on investments.
Currently, our NAV per share is calculated and published on a quarterly basis. The Company calculates our NAV per share by subtracting all liabilities from the total value of our portfolio securities and other assets and dividing the result by the total number of outstanding shares of our common stock on the date of valuation. Fair values of foreign investments reflect exchange rates, as applicable, in effect on the last business day of the quarter end. Exchange rates fluctuate on a daily basis, sometimes significantly. Exchange rate fluctuations subsequent to the measurement date of the most recent fiscal year end are not reflected in the valuations reported in this Annual Report. See Item 1A Risk Factor (Unaudited), Investments in foreign debt or equity may involve significant risks in addition to the risks inherent in U.S. investments.
At October 31, 2015 and October 31, 2014, approximately 76.08% and 75.79%, 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 managements and the Valuation Committees view, a different initial value). During the period that an investment is held by the Company, its original cost may cease to approximate fair value as the result of market and investment specific factors. No pre-determined formula can be applied to determine fair value. Rather, the Valuation Committee analyzes fair value measurements based on the value at which the securities of the portfolio company could be sold in an orderly disposition over a reasonable period of time between willing parties, other than in a forced or liquidation sale. The liquidity event whereby the Company ultimately exits an investment is generally the sale, the merger, the recapitalization of a portfolio company or by 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 companys 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, 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.
ASC 820 provides a framework for measuring the fair value of assets and liabilities and provides guidance regarding a fair value hierarchy which prioritizes information used to measure value. In determining fair value, the Valuation Committee primarily uses the level 3 inputs referenced in ASC 820.
ASC 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The price used to measure the fair value is not adjusted for transaction costs while the cost basis of our investments may include initial transaction costs. Under ASC 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset to which the reporting entity has access to as of the measurement date. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.
The Companys investment objective is to seek to maximize total return from capital appreciation and/or income, though our current focus is more yield generating investments. The Company seeks to achieve its investment objective by providing debt and equity financing to companies that are, for the most part, privately owned (Portfolio Companies). The Companys current investments in Portfolio Companies consist principally of senior and subordinated loans, venture capital, mezzanine and preferred instruments and private equity investments. During the fiscal year ended October 31, 2015, the Company made eight new investments and made 5 follow-on investments in 4 existing portfolio companies committing a total of $62.4 million of capital to these investments. At October 31, 2015, the fair value of all portfolio investments, exclusive of U.S. Treasury obligations and escrow receivables, was $400.9 million with a cost basis of $443.7 million.
Our investments are carried at fair value in accordance with ASC 820. Unrestricted minority-owned publicly traded securities for which market quotations are readily available are valued at the closing market quote on the valuation date and majority-owned publicly traded securities and other privately held securities are valued as determined in good faith by the Valuation Committee of the Board of Directors. For legally or contractually restricted securities of companies that are publicly traded, the value is based on the closing market quote on the valuation date minus a discount for the restriction. At October 31, 2015, we did not own restricted or unrestricted securities of any publicly traded company in which we have a majority-owned interest but did own one security in which we have a minority-owned interest.
If a security is publicly traded, the fair value is generally equal to market value based on the closing price on the principal exchange on which the security is primarily traded unless restricted and a restricted discount is applied.
For equity securities of Portfolio Companies, the Valuation Committee estimates the fair value based on market and/or income approach with value then attributed to equity or equity like
securities using the enterprise value waterfall (Enterprise Value Waterfall) valuation methodology. Under the Enterprise Value Waterfall valuation methodology, the Valuation Committee estimates the enterprise fair value of the portfolio company and then waterfalls the enterprise value over the portfolio companys securities in order of their preference relative to one another. To assess the enterprise value of the portfolio company, the Valuation Committee weighs some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing assets may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company, and third-party asset and real estate appraisals. For non-performing assets, the Valuation Committee may estimate the liquidation or collateral value of the portfolio companys assets. The Valuation Committee also takes into account historical and anticipated financial results.
For Controlled Companies, in assessing enterprise value, the Valuation Committee considers the mergers and acquisitions (M&A) market as the principal market in which the Company would sell its investments in portfolio companies under circumstances where the Company has the ability to control or gain control of the board of directors of the portfolio company (Control Companies). This approach is consistent with the principal market that the Company would use for its portfolio companies if the Company has the ability to initiate a sale of the portfolio company as of the measurement date, i.e., if it has the ability to control or gain control of the board of directors of the portfolio company as of the measurement date. In evaluating if the Company can control or gain control of a portfolio company as of the measurement date, the Company takes into account its equity securities on a fully diluted basis, as well as other factors.
For non-Control Companies, consistent with ASC 820 in assessing the enterprise value, the Valuation Committee considers a hypothetical secondary market as the principal market in which it would sell investments in those companies. The Company also considers other valuation methodologies such as the Option Pricing Method and liquidity preferences when valuing minority equity positions of a portfolio company.
For loans and debt securities of non-Control Companies (for which the Valuation Committee has identified the hypothetical secondary market as the principal market), the Valuation Committee determines fair value based on the assumptions that a hypothetical market participant would use to value the security in a current hypothetical sale using a market yield (Market Yield) valuation methodology. In applying the Market Yield valuation methodology, the Valuation Committee determines the fair value based on such factors as third party broker quotes (if available) and market participant assumptions, including synthetic credit ratings, estimated remaining life, current market yield and interest rate spreads of similar securities as of the measurement date.
Estimates of average life are generally based on market data of the average life of similar debt securities. However, if the Valuation Committee has information available to it that the debt security is expected to be repaid in the near term, the Valuation Committee would use an estimated life based on the expected repayment date.
For loans and debt securities of Control Companies, the Valuation Committee determines fair value based on the estimate of the enterprise value of the portfolio company. To the extent the enterprise value exceeds the remaining principal amount of the loan and all other debt securities of the company, the fair value of such securities is generally estimated to be their cost. However, where the enterprise value is less than the remaining principal amount of the loan and all other debt securities, the Valuation Committee may discount the value of such securities to reflect an impairment.
For the Companys or its subsidiarys investment in the PE Fund, for which an indirect wholly-owned subsidiary of the Company serves as the general partner (the GP) of the PE Fund, the Valuation Committee relies on the GPs determination of the fair value of the PE Fund which will be generally valued, as a practical expedient, utilizing the net asset valuations provided by the GP, which will be made: (i) no less frequently than quarterly as of the Companys fiscal quarter end and (ii) with respect to the valuation of PE Fund investments in portfolio companies, will be based on methodologies consistent with those set forth in the Companys valuation procedures. In making its determinations, the GP considers and generally relies on TTG Advisers recommendations. The determination of the net asset value of the Companys or its subsidiarys investment in the PE Fund will follow the methodologies described for valuing interests in private investment funds (Investment Vehicles) described below. Additionally, when both the Company and the PE Fund hold investments in the same portfolio company, the GPs Fair Value determination shall be based on the Valuation Committees determination of the Fair Value of the Companys portfolio security in that portfolio company.
As permitted under GAAP, the Companys interests in private investment funds are generally valued, as a practical expedient, utilizing the net asset valuations provided by management of the underlying Investment Vehicles, without adjustment, unless TTG Advisers is aware of information indicating that a value reported does not accurately reflect the value of the Investment Vehicle, including any information showing that the valuation has not been calculated in a manner consistent with GAAP. Net unrealized appreciation (depreciation) of such investments is recorded based on the Companys proportionate share of the aggregate amount of appreciation (depreciation) recorded by each underlying Investment Vehicle. The Companys proportionate investment interest includes its share of interest and dividend income and expense, and realized and unrealized gains and losses on securities held by the underlying Investment Vehicles, net of operating expenses and fees. Realized gains and losses on distributions from Investment Vehicles are generally recognized on a first in, first out basis.
The Company applies the practical expedient to interests in Investment Vehicles on an investment by investment basis, and consistently with respect to the Companys entire interest in an investment. The Company may adjust the valuation obtained from an Investment Vehicle with a premium, discount or reserve if it determines that the net asset value is not representative of fair value.
If the Company intends to sell all or a portion of its interest in an Investment Vehicle to a third-party in a privately negotiated transaction near the valuation date, the Company will consider offers from third parties to buy the interest in an Investment Vehicle in valuations which may be discounted for both probability of close and time.
When the Company receives nominal cost warrants or free equity securities (nominal cost equity) with a debt security, the Company typically allocates its cost basis in the investment between debt securities and nominal cost equity at the time of origination. If the Company is not reimbursed for investment or transaction related costs at the time an investment is made, the Company typically capitalizes those costs to the cost basis of the investment.
Interest income, adjusted for amortization of premium and accretion of discount on a yield to maturity methodology, is recorded on an accrual basis to the extent that such amounts are expected to be collected. Origination and/or closing fees associated with investments in portfolio companies are accreted into income over the respective terms of the applicable loans. Upon the prepayment of a loan or debt security, any unamortized original issue discount or market discount is recorded as a realized gain. Prepayment premiums are recorded on loans when received. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that the Company expects to collect such amounts.
For loans, debt securities, and preferred securities with contractual payment-in-kind interest or dividends, which represent contractual interest/dividends accrued and added to the loan balance or liquidation preference that generally becomes due at maturity, the Company will not ascribe value to payment-in-kind interest/dividends, if the portfolio company valuation indicates that the payment-in-kind interest is not collectible. However, the Company may ascribe value to payment-in-kind interest if the health of the portfolio company and the underlying securities are not in question. All payment-in-kind interest that has been added to the principal balance or capitalized is subject to ratification by the Valuation Committee.
Escrows from the sale of a portfolio company are generally valued at an amount, which may be expected to be received from the buyer under the escrows various conditions and discounted for both risk and time.
ASC 460, Guarantees , requires the Company to estimate the fair value of the guarantee obligation at its inception and requires the Company to assess whether a probable loss contingency exists in accordance with the requirements of ASC 450, Contingencies . The Valuation Committee typically will look at the pricing of the security in which the guarantee provided support for the security and compare it to the price of a similar or hypothetical security without guarantee support. The difference in pricing will be discounted for time and risk over the period in which the guarantee is expected to remain outstanding.
Investment Classification As defined in the 1940 Act, Control Investments are investments in those companies that we are deemed to Control. Affiliate Investments are investments in those companies that are Affiliated Companies of us, as defined in the 1940 Act, other than Control Investments. Non-Control/Non-Affiliate Investments are those that are neither Control Investments nor Affiliate Investments. Generally, under that 1940 Act, we are deemed to control a company in which we have invested if we own 25% or more of the voting securities of such company or have greater than 50% representation on its board. We are deemed to be an affiliate of a company in which we have invested if we own 5% or more and less than 25% of the voting securities of such company.
Investment Transactions and Related Operating Income Investment transactions and related revenues and expenses are accounted for on the trade date. The cost of securities sold is determined on a first-in, first-out basis, unless otherwise specified. Dividend income and
distributions on investment securities is recorded on the ex-dividend date. The tax characteristics of such distributions received from our Portfolio Companies will be determined by whether or not the distribution was made from the investments current taxable earnings and profits or accumulated taxable earnings and profits from prior years. Interest income, which includes accretion of discount and amortization of premium, if applicable, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Fee income includes fees for guarantees and services rendered by the Company or its wholly-owned subsidiary to Portfolio Companies and other third parties such as due diligence, structuring, transaction services, monitoring services, and investment advisory services. Guaranty fees are recognized as income over the related period of the guaranty. Due diligence, structuring, and transaction services fees are generally recognized as income when services are rendered or when the related transactions are completed. Monitoring and investment advisory services fees are generally recognized as income as the services are rendered. Any fee income determined to be loan origination fees is accreted into income over the respective terms of the applicable loans and any original issue discount and market discount are capitalized and then amortized into income using the effective interest method. Upon the prepayment of a loan or debt security, any unamortized original issue discount or market discount is recorded as a realized gain. For investments with PIK interest and dividends, we base income and dividend accrual on the valuation of the PIK notes or securities received from the borrower. If the portfolio company indicates a value of the PIK notes or securities that is not sufficient to cover the contractual interest or dividend, the Company does not accrue interest or dividend income on the notes or securities.
The functional currency of the Company is the U.S. Dollar. Assets and liabilities denominated in a currency other than the U.S. Dollar are translated into U.S. Dollars at the closing rates of exchange on the date of determination. Purchases and sales of investments and income and expenses denominated in currencies other than U.S. Dollars are translated at the rates of exchange on the respective dates of the transactions. The resulting gains and losses from such currency translation are included in the Consolidated Statement of Operations. The Company does not isolate the portion of the results of operations resulting from the changes in foreign exchange rates on investments from the fluctuation arising from changes in fair values of securities held. Such fluctuations are included with the Net Realized and Unrealized Gain (Loss) on Investments and foreign currency in the Consolidated Statement of Operations.
Cash Equivalents - For the purpose of the Consolidated Balance Sheets and Consolidated Statements of Cash Flows, the Company considers all money market and all highly liquid temporary cash investments purchased with an original maturity of less than three months to be cash equivalents. As of October 31, 2015, the Company had approximately $2.6 million in cash equivalents and approximately $7.8 million in cash totaling approximately $10.4 million. Of the $7.8 million in cash, approximately $360,000 was held by MVC Turf, an MVC wholly-owned holding company. As of October 31, 2014, the Company had approximately $8.4 million in cash equivalents and approximately $8.8 million in cash totaling approximately $17.2 million. Of the $8.8 million in cash, approximately $380,000 was held by MVC Turf, an MVC wholly-owned holding company.
Restricted Cash and Cash Equivalents - Cash and cash equivalent accounts that are not available to the Company for dayto-day use and are legally restricted are classified as restricted cash. Restricted cash and cash equivalents are carried at cost, which approximates fair value. On April 26, 2011, the Company agreed to collateralize a 5.0 million Euro letter of credit from JPMorgan Chase Bank, N.A., which is related to a project guarantee by AB DnB NORD bankas
to Security Holdings B.V., a portfolio company investment, and is classified as restricted cash equivalents on the Companys Consolidated Balance Sheets (equivalent to approximately $5.5 million at October 31, 2015 and approximately $6.3 million at October 31, 2014). The Company also had approximately $1.0 million in restricted cash related to Inlands working capital line of credit, which is classified as restricted cash on the Companys consolidated balance sheet at October 31, 2015,.
Restricted Securities The Company may invest in privately placed restricted securities. These securities may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expense, and a prompt sale at an acceptable price may be difficult.
Reclassifications Certain amounts from prior years have been reclassified to conform to the current year presentation.
Distributions to Shareholders Distributions to shareholders are recorded on the ex-dividend date.
Income Taxes To be taxed as a regulated investment company (RIC), the Company is required (amongst other things) to distribute to its shareholders, in a timely manner, at least 90% of its investment company taxable income and 90% of its net tax-exempt income each year. If the Company distributes, in a calendar year, at least 98% of its ordinary income and 98.2% of its capital gain net income for the one year period ending October 31 st of such calendar year (as well as any undistributed amounts from previous years), it will not be liable for the 4% non-deductible federal excise tax on certain undistributed income of RICs.
Our consolidated operating subsidiary, MVCFS, is subject to federal and state income tax. We use the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
ASC 740, Income Taxes , provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Companys tax returns to determine whether the tax positions are more-likely-than-not of being sustained by the applicable tax authority. Tax positions deemed to meet a more-likely-than-not threshold would be recorded as a tax benefit or expense in the current period. There were no uncertain tax positions as of October 31, 2015 that needed to be recorded or disclosed on the financial statements. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statement of operations. During the fiscal year ended October 31, 2015, the Company did not incur any interest or penalties. Although we file federal and state tax returns, our major tax jurisdiction is federal for the Company and MVCFS. The fiscal years 2012, 2013, 2014 and 2015 for the Company and MVCFS remain subject to examination by the federal, state and local tax authorities.
4. Management
On November 6, 2003, Michael Tokarz assumed his positions as Chairman, Portfolio Manager and Director of the Company. From November 6, 2003 to October 31, 2006, the Company was internally managed. Effective November 1, 2006, Mr. Tokarzs employment agreement with the Company terminated and the obligations under that agreement were superseded by those under the Advisory Agreement entered into with TTG Advisers. Under the terms of the Advisory Agreement, the Company pays TTG Advisers a base management fee and an incentive fee for its provision of investment advisory and management services.
Our Board of Directors, including all of the Independent Directors, last approved a renewal of the Advisory Agreement at their in-person meeting held on October 23, 2014.
Under the terms of the Advisory Agreement, TTG Advisers determines, consistent with the Companys investment strategy, the composition of the Companys portfolio, the nature and timing of the changes to the Companys portfolio and the manner of implementing such changes. TTG Advisers also identifies and negotiates the structure of the Companys investments (including performing due diligence on prospective Portfolio Companies), closes and monitors the Companys investments, determines the securities and other assets purchased, retains or sells and oversees the administration, recordkeeping and compliance functions of the Company and/or third parties performing such functions for the Company. TTG Advisers services under the Advisory Agreement are not exclusive, and it may furnish similar services to other entities. Pursuant to the Advisory Agreement, the Company is required to pay TTG Advisers a fee for investment advisory and management services consisting of two componentsa base management fee and an incentive fee. The base management fee is calculated at 2.0% per annum of the Companys total assets excluding cash, the value of any investment in a Third-Party Vehicle covered by a Separate Agreement (as defined in the Advisory Agreement) and the value of any investment by the Company not made in portfolio companies (Non-Eligible Assets) but including assets purchased with borrowed funds that are not Non-Eligible Assets. The incentive fee consists of two parts: (i) one part is based on our pre-incentive fee net operating income; and (ii) the other part is based on the capital gains realized on our portfolio of securities acquired after November 1, 2003.
The Advisory Agreement provides for an expense cap pursuant to which TTG Advisers will absorb or reimburse operating expenses of the Company, to the extent necessary to limit the Companys expense ratio (the consolidated expenses of the Company, including any amounts payable to TTG Advisers under the base management fee, but excluding the amount of any interest and other direct borrowing costs, taxes, incentive compensation and extraordinary expenses taken as a percentage of the Companys average net assets) to 3.5%.
On various dates, TTG Advisers and the Company entered into annual agreements to extend the expense cap of 3.5% to the 2013 and 2014 fiscal years (Expense Limitation Agreement). The Company and the Adviser also agreed to continue the expense cap into fiscal year 2015, though they modified the methodology so that the cap limits the Companys ratio of expenses to total assets less cash (the Modified Methodology), consistent with the asset level used to calculate the base management fee. (The expenses covered by the cap remain unchanged.) On October 29, 2015, the Board approved the renewal of the Advisory Agreement for the 2016 fiscal year. Further, the Adviser agreed to waive a portion of the base management fee so that it is reduced to 1.50% for fiscal year 2016. In addition, the Adviser agreed to waive $1
million of any incentive fee on capital gains if and when payable to the Adviser under the Advisory Agreement. Please see Note 17 to our consolidated financial statements Subsequent Events for more information. Furthermore, the Company and the Adviser agreed to reduce the expense cap for fiscal 2016 to 3.25% under the Modified Methodo logy. The amount of any payments made by the GP of the PE Fund to TTG Advisers pursuant to the Portfolio Management Agreement between the GP and TTG Advisers respecting the PE Fund continues to be excluded from the calculation of the Companys expense ratio under the Expense Limitation Agreement. In addition, for fiscal years 2013 through 2015, TTG Advisers voluntarily agreed to waive $150,000 of expenses that the Company is obligated to reimburse to TTG Advisers under the Advisory Agreement for its allocable portion of the compensation payable to certain officers of the Company, which may not exceed $200,000 per year in the aggregate (the Voluntary Waiver). TTG Advisers also voluntarily agreed that any assets of the Company that are invested in exchange-traded funds would not be taken into account in the calculation of the base management fee due to TTG Advisers under the Advisory Agreement.
On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in the PE Fund. The PE Fund has closed on approximately $104 million of capital commitments. The Companys Board of Directors authorized the establishment of, and investment in, the PE Fund for a variety of reasons, including the Companys ability to make additional investments that represent more than 5% of its total assets or more than 10% of the outstanding voting securities of the issuer (Non-Diversified Investments) through the PE Fund. As previously disclosed, the Company is restricted in its ability to make Non-Diversified Investments. For services provided to the PE Fund, the GP and MVC Partners are together entitled to receive 25% of all management fees and other fees paid by the PE Fund and its portfolio companies and up to 30% of the carried interest generated by the PE Fund. Further, at the direction of the Board of Directors, the GP retained TTG Advisers to serve as the portfolio manager of the PE Fund. In exchange for providing those services, and pursuant to the Board of Directors authorization and direction, TTG Advisers is entitled to receive the balance of the fees generated by the PE Fund and its portfolio companies and a portion of any carried interest generated by the PE Fund. Given this separate arrangement with the GP and the PE Fund (the PM Agreement), under the terms of the Companys Advisory Agreement with TTG Advisers, TTG Advisers is not entitled to receive from the Company a management fee or an incentive fee on assets of the Company that are invested in the PE Fund. During the fiscal year ended October 31, 2012 and thereafter, MVC Partners was consolidated with the operations of the Company as MVC Partners limited partnership interest in the PE Fund is a substantial portion of MVC Partners operations. Previously, MVC Partners was presented as a Portfolio Company on the Consolidated Schedules 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. There are additional disclosures resulting from this consolidation.
Management and portfolio fees (e.g., closing or monitoring fees) generated by the PE Fund (including its portfolio companies) that are paid to the GP are classified on the Consolidated Statements of Operations as Management fee income - Asset Management and Portfolio fee income - Asset Management, respectively. The portion of such fees that the GP pays to TTG Advisers (in accordance with its PM Agreement described above) are classified on the Consolidated Statements of Operations as Management fee - Asset Management and Portfolio fees - Asset Management. Under the PE Funds agreements, a significant portion of the portfolio fees that are paid by the PE Funds 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 of October 31, 2014, the balance of the management fee payable on the Companys consolidated balance sheet was approximately $1.5 million, which reflected a reduced amount due to prior overpayments to TTG Advisers related to the restatement of the 2013 annual financial statements, and 2013 and 2014 interim financial statements. The management fee payable was reduced in this regard by approximately $824,000. As of October 31, 2015, the balance of the management fee payable reflected an overpayment reducing the fee payable by approximately $16,000.
5. Incentive Compensation
Effective November 1, 2006, Mr. Tokarzs employment agreement with the Company terminated and the obligations under Mr. Tokarzs agreement were superseded by those under the Advisory Agreement entered into with TTG Advisers. Pursuant to the Advisory Agreement, the Company pays an incentive fee to TTG Advisers which is generally: (i) 20% of pre-incentive fee net operating income and (ii) 20% of cumulative aggregate net realized capital gains less aggregate unrealized depreciation (on our portfolio securities acquired after November 1, 2003). TTG Advisers is entitled to an incentive fee with respect to our pre-incentive fee net operating income in each fiscal quarter as follows: no incentive fee in any fiscal quarter in which our pre-incentive fee net operating income does not exceed the lower hurdle rate of 1.75% of net assets, 100% of our pre-incentive fee net operating income with respect to that portion of such pre-incentive fee net operating income, if any, that exceeds the lower hurdle amount but is less than 2.1875% of net assets in any fiscal quarter and 20% of the amount of our pre-incentive fee net operating income, if any, that exceeds 2.1875% of net assets in any fiscal quarter. Under the Advisory Agreement, the accrual of the provision for incentive compensation for net realized capital gains is consistent with the accrual that was required under the employment agreement with Mr. Tokarz.
At October 31, 2012, the provision for estimated incentive compensation was approximately $15.7 million. During the fiscal year ended October 31, 2013, this provision for incentive compensation was increased by a net amount of approximately $3.8 million to approximately $19.5 million. The net increase in the provision for incentive compensation during the year ended October 31, 2013 reflects the Valuation Committees determination to increase the fair values of ten of the Companys portfolio investments (Custom Alloy, Octagon, Security Holdings, Turf, Vestal, Centile, Biovation, Prepaid Legal, U.S. Gas, and SIA Tekers) by a total of approximately $43.9 million and the difference between the amount received from the sale of Summit and Summits carrying value at January 31, 2013, which was an increase of approximately $3.6 million. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.1 million due to a PIK distribution, which was treated as a return of capital. The net increase in the provision also reflects the Valuation Committees determination to decrease the fair values of nine of the Companys portfolio investments (Ohio Medical, SGDA Europe, MVC Automotive, NPWT, Freshii, HH&B, Velocitius, RuMe and JSC Tekers) by a total of approximately $29.1 million and reflects the $84,000 realized gain related to NPWT. For the fiscal year ended October 31, 2013, no incentive compensation was paid. Also, for the year ended October 31, 2013, there was no provision recorded for the net operating income portion of the incentive fee as pre-incentive fee net operating income did not exceed the hurdle rate.
At October 31, 2013, the provision for estimated incentive compensation was approximately $19.5 million. During the fiscal year ended October 31, 2014, this provision for incentive compensation was decreased by a net amount of approximately $4.7 million to approximately $14.7 million. The net decrease in the provision for incentive compensation during the fiscal year ended October 31, 2014 primarily reflects the Valuation Committees determination to decrease the fair values of eleven of the Companys portfolio investments (MVC Automotive, G3K, Ohio Medical, NPWT, U.S. Gas, Velocitius, Octagon, Tekers, JSC Tekers, SGDA Europe and Biovation) by a total of approximately $40.7 million. The net decrease in the provision also reflects the Valuation Committees determination to increase the fair values of twelve of the Companys portfolio investments (Custom Alloy, Advantage, Biogenic, PrePaid Legal, RuMe, Freshii, Centile, Security Holdings, Summit, Moreys, Turf and Vestal) by a total of approximately $11.5 million. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $4.0 million due to a PIK distribution, which was treated as a return of capital. For the fiscal year ended October 31, 2014, no incentive compensation was paid. Also, for the fiscal year ended October 31, 2014, no provision was recorded for the net operating income portion of the incentive fee as pre-incentive fee net operating income did not exceed the hurdle rate.
At October 31, 2014, the provision for estimated incentive compensation was approximately $14.7 million. During the fiscal year ended October 31, 2015, the provision for incentive compensation was decreased by a net amount of approximately $9.7 million to approximately $5.0 million. The net decrease in the provision for incentive compensation during the fiscal year ended October 31, 2015 primarily reflects the Valuation Committees determination to decrease the fair values of sixteen of the Companys portfolio investments (Custom Alloy, NPWT, BAC, SIA Tekers Invest (Tekers), PrePaid Legal, Centile, Biovation, Inland, MVC Automotive, Ohio Medical, SGDA Europe, Security Holdings, JSC Tekers, Moreys, Velocitius and Equus) by a total of approximately $58.2 million. The net decrease in the provision also reflects the Valuation Committees determination to increase the fair values of five of the Companys portfolio investments (Turf, RuMe, Biogenic, Advantage Insurance and SCSD) by a total of approximately $4.3 million. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $4.7 million due to a PIK distribution, which was treated as a return of capital. For the fiscal year ended October 31, 2015, no incentive compensation was paid. Also, for the fiscal year ended October 31, 2015, no provision was recorded for the net operating income portion of the incentive fee as pre-incentive fee net operating income did not exceed the hurdle rate.
6. Dividends and Distributions to Shareholders
As a RIC, the Company is required to distribute to its shareholders, in a timely manner, at least 90% of its investment company taxable income and tax-exempt income each year. The Company did meet this requirement for the fiscal year ended October 31, 2015. If the Company distributes, in a calendar year, at least 98% of its income and 98.2% of its capital gains of such calendar year (as well as any portion of the respective 2% balances not distributed in the previous year), it will not be subject to the 4% non-deductible federal excise tax on certain undistributed income of RICs.
Dividends and capital gain distributions, if any, are recorded on the ex-dividend date. Dividends and capital gain distributions are generally declared and paid quarterly according to
the Companys policy established on July 11, 2005. An additional distribution may be paid by the Company to avoid imposition of federal income tax on any remaining undistributed net investment income and capital gains. Distributions can be made payable by the Company either in the form of a cash distribution or a stock dividend. The amount and character of income and capital gain distributions are determined in accordance with income tax regulations which may differ from U.S. generally accepted accounting principles. These differences are due primarily to differing treatments of income and gain on various investment securities held by the Company, differing treatments of expenses paid by the Company, timing differences and differing characterizations of distributions made by the Company. Key examples of the primary differences in expenses paid are the accounting treatment of MVCFS (which is consolidated for GAAP purposes, but not income tax purposes) and the variation in treatment of incentive compensation expense. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications and may affect the allocation between net operating income, net realized gain (loss) and paid-in capital.
All of our shareholders who hold shares of common stock in their own name will automatically be enrolled in our dividend reinvestment plan (the Plan). All such shareholders will have any cash dividends and distributions automatically reinvested by the Plan Agent in additional shares of our common stock. Of course, any shareholder may elect to receive his or her dividends and distributions in cash. Currently, the Company has a policy of seeking to pay quarterly dividends to shareholders. For any of our shares that are held by banks, brokers or other entities that hold our shares as nominees for individual shareholders, the Plan Agent will administer the Plan on the basis of the number of shares certified by any nominee as being registered for shareholders that have not elected to receive dividends and distributions in cash. To receive your dividends and distributions in cash, shareholders must notify the Plan Agent, broker or other entity that holds the shares.
For the Fiscal Year Ended October 31, 2015
On December 19, 2014, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was paid on January 7, 2015 to shareholders of record on December 31, 2014 and amounted to $3,064,881.
During the quarter ended January 31, 2015, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 5,647 shares of our common stock at an average price of $10.14, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
On April 17, 2015, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was paid on April 30, 2015 to shareholders of record on April 27, 2015 and amounted to $3,064,881.
During the quarter ended April 30, 2015, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 5,855 shares of our common stock at an average price of $9.92, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
On July 17, 2015, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was paid on July 31, 2015 to shareholders of record on July 27, 2015 and amounted to $3,064,881.
During the quarter ended July 31, 2015, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 6,141 shares of our common stock at an average price of $9.55, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
On October 16, 2015, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was paid on October 30, 2015 to shareholders of record on October 26, 2015 and amounted to $3,064,881.
During the quarter ended October 31, 2015, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 7,140 shares of our common stock at an average price of $8.33, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
For the Fiscal Year Ended October 31, 2014
On December 20, 2013, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was paid on January 7, 2014 to shareholders of record on December 31, 2013. The total distribution amounted to $3,053,388.
During the quarter ended January 31, 2014, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 248 shares of our common stock at an average price of $13.52, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
On April 14, 2014, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was paid on April 30, 2014 to shareholders of record on April 24, 2014. The total distribution amounted to $3,032,750.
During the quarter ended April 30, 2014, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 271 shares of our common stock at an average price of $13.11, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
On July 15, 2014, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was paid on July 31, 2014 to shareholders of record on July 25, 2014. The total distribution amounted to $3,064,881.
During the quarter ended July 31, 2014, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 303 shares of our common stock at an average price of $12.40, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
On October 17, 2014, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was paid on October 31, 2014 to shareholders of record on October 27, 2014. The total distribution amounted to $3,064,881.
During the quarter ended October 31, 2014, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 229 shares of our common stock at
an average price of $11.21, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
For the Fiscal Year Ended October 31, 2013
On December 17, 2012, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was payable on January 7, 2013 to shareholders of record on December 31, 2012. The total distribution amounted to $3,228,793.
During the quarter ended January 31, 2013, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 728 shares of our common stock at an average price of $12.33, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
On April 12, 2013, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was payable on April 30, 2013 to shareholders of record on April 23, 2013. The total distribution amounted to $3,191,136.
During the quarter ended April 30, 2013, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 271 shares of our common stock at an average price of $13.11, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
On July 12, 2013, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was payable on July 31, 2013 to shareholders of record on July 24, 2013. The total distribution amounted to $3,053,388.
During the quarter ended July 31, 2013, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 619 shares of our common stock at an average price of $12.74, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
On October 14, 2013, the Companys Board of Directors declared a dividend of $0.135 per share. The dividend was payable on October 31, 2013 to shareholders of record on October 24, 2013. The total distribution amounted to $3,053,388.
During the quarter ended October 31, 2013, as part of the Companys dividend reinvestment plan for our common stockholders, the Plan Agent purchased 231 shares of our common stock at an average price of $13.91, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.
7. Transactions with Other Parties
The Company has procedures in place for the review, approval and monitoring of transactions involving the Company and certain persons related to the Company. For example, the Company has a code of ethics that generally prohibits, among others, any officer or director of the Company from engaging in any transaction where there is a conflict between such individuals personal interest and the interests of the Company. As a business development company, the 1940 Act also imposes regulatory restrictions on the Companys ability to engage in certain related-party transactions. However, the Company is permitted to co-invest in certain
Portfolio Companies with its affiliates to the extent consistent with applicable law or regulation and, if necessary, subject to specified conditions set forth in an exemptive order obtained from the SEC. During the past four fiscal years, no transactions were effected pursuant to the exemptive order. As a matter of policy, our Board of Directors has required that any related-party transaction (as defined in Item 404 of Regulation S-K) must be subject to the advance consideration and approval of the Independent Directors, in accordance with applicable procedures set forth in Section 57(f) of the 1940 Act.
The principal equity owner of TTG Advisers is Mr. Tokarz, our Chairman. Our senior officers and Mr. Holtsberg, a Director of the Company, have other financial interests in TTG Advisers (i.e., based on TTG Advisers performance). In addition, our officers and the officers and employees of TTG Advisers may serve as officers, directors or principals of entities that operate in the same or related line of business as we do or of investment funds managed by TTG Advisers or our affiliates. However, TTG Advisers intends to allocate investment opportunities in a fair and equitable manner. Our Board of Directors has approved a specific policy in this regard that is set forth in this Form 10-K.
8. Concentration of Market and Credit Risk
Financial instruments that subjected the Company to concentrations of market risk consisted principally of equity investments, subordinated notes, debt instruments and escrow receivables (other than cash equivalents), which collectively represented approximately 77.62% and 77.48% of the Companys total assets at October 31, 2015 and October 31, 2014, respectively. As discussed in Note 9, these investments consist of securities in companies with no readily determinable market values and as such are valued in accordance with the Companys fair value policies and procedures. The Companys investment strategy represents a high degree of business and financial risk due to the fact that the Companys portfolio investments (other than cash equivalents) are generally illiquid, in small and middle market companies, and include foreign investments (which subject the Company to additional risks such as currency, geographic, demographic and operational risks), entities with little operating history or entities that possess operations in new or developing industries. These investments, should they become publicly traded, would generally be (i) subject to restrictions on resale, if they were acquired from the issuer in private placement transactions; and (ii) susceptible to market risk. Additionally, we are classified as a non-diversified investment company within the meaning of the 1940 Act, and therefore may invest a significant portion of our assets in a relatively small number of portfolio companies, which gives rise to a risk of significant loss should the performance or financial condition of one or more portfolio companies deteriorate. As of October 31, 2015, the fair value of our largest investment, U.S. Gas & Electric, Inc. (U.S. Gas), comprised 18.3% of our total assets and 32.1% of our net assets. The Companys investments in short-term securities are generally in U.S. government securities, with a maturity of greater than three months but generally less than one year or other high quality and highly liquid investments. The Company considers all money market and other cash investments purchased with an original maturity of less than three months to be cash equivalents.
The following table shows the portfolio composition by industry grouping at fair value as a percentage of net assets as of October 31, 2015 and 2014.
|
|
October 31, 2015 |
|
October 31, 2014 |
|
Energy Services |
|
32.08% |
|
27.39% |
|
Electrical Engineering |
|
15.40% |
|
14.71% |
|
Medical Device Manufacturer |
|
13.12% |
|
15.02% |
|
Manufacturer of Pipe Fittings |
|
9.06% |
|
8.58% |
|
Private Equity |
|
7.65% |
|
5.95% |
|
Business Services |
|
6.02% |
|
0.00% |
|
Renewable Energy |
|
5.88% |
|
7.49% |
|
Software |
|
5.17% |
|
1.45% |
|
Food Services |
|
4.89% |
|
4.53% |
|
Environmental Services |
|
4.77% |
|
7.29% |
|
Consumer Products |
|
4.70% |
|
1.83% |
|
Automotive Dealerships |
|
4.57% |
|
6.27% |
|
Transportation |
|
4.00% |
|
0.00% |
|
Insurance |
|
2.73% |
|
2.25% |
|
Distributor - Landscaping and Irrigation Equipment |
|
2.66% |
|
2.26% |
|
Regulated Investment Company |
|
2.60% |
|
2.84% |
|
Specialty Chemicals |
|
2.51% |
|
9.42% |
|
Iron Foundries |
|
2.23% |
|
5.09% |
|
Technology Investment - Financial Services |
|
1.90% |
|
1.71% |
|
Real Estate Management |
|
1.72% |
|
1.79% |
|
Electronics Manufacturing and Repair |
|
1.70% |
|
0.00% |
|
Restaurants |
|
0.66% |
|
0.00% |
|
Manufacturer of Laminate Material and Composites |
|
0.18% |
|
0.99% |
|
Port Facilities |
|
0.12% |
|
0.36% |
|
Consumer Services |
|
0.00% |
|
2.94% |
|
Health & Beauty - Distributor |
|
0.00% |
|
0.00% |
|
Retail Store Fixtures |
|
0.00% |
|
0.00% |
|
|
|
136.32% |
|
130.16% |
|
The Company is classified as a non-diversified investment company within the meaning of the 1940 Act, and therefore we may invest a significant portion of our assets in a relatively small number of portfolio companies in a limited number of industries. 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.
9. Portfolio Investments
Pursuant to the requirements of the 1940 Act and ASC 820, we value our portfolio securities at their current market values or, if market quotations are not readily available, at their estimates of fair values. Because our portfolio company investments generally do not have readily ascertainable market values, we record these investments at fair value in accordance with
Valuation Procedures adopted by our Board of Directors. As permitted by the SEC, the Board of Directors has delegated the responsibility of making fair value determinations to the Valuation Committee, subject to the Board of Directors supervision and pursuant to our Valuation Procedures.
The levels of fair value inputs used to measure our investments are characterized in accordance with the fair value hierarchy established by ASC 820. Where inputs for an asset or liability fall in more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investments fair value measurement. We use judgment and consider factors specific to the investment in determining the significance of an input to a fair value measurement. The three levels of the fair value hierarchy and investments that fall into each of the levels are described below:
· Level 1: Level 1 inputs are unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We use Level 1 inputs for investments in publicly traded unrestricted securities for which we do not have a controlling interest. Such investments are valued at the closing price on the measurement date. We valued one of our investments using Level 1 inputs as of October 31, 2015.
· Level 2: Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly or other inputs that are observable or can be corroborated by observable market data. Additionally, the Companys interests in Investment Vehicles that can be withdrawn by the Company at the net asset value reported by such Investment Vehicle as of the measurement date, or within six months of the measurement date, are generally categorized as Level 2 investments. We valued our U.S. Treasury obligations using Level 2 inputs as of October 31, 2015.
· Level 3: Level 3 inputs are unobservable and cannot be corroborated by observable market data. Additionally, included in Level 3 are the Companys interests in Investment Vehicles from which the Company cannot withdraw at the net asset value reported by such Investment Vehicles as of the measurement date, or within six months of the measurement date. We use Level 3 inputs for measuring the fair value of substantially all of our investments. See Note 3 Significant Accounting Policies for the investment valuation policies used to determine the fair value of these investments.
As noted above, the interests in Investment Vehicles are included in Level 2 or 3 of the fair value hierarchy. In determining the appropriate level, the Company considers the length of time until the investment is redeemable, including notice and lock-up periods and any other restriction on the disposition of the investment. The Company also considers the nature of the portfolios of the underlying Investment Vehicles and such vehicles ability to liquidate their investment.
The following fair value hierarchy table sets forth our investment portfolio by level as of October 31, 2015 and 2014 (in thousands):
|
|
October 31, 2015 |
|
||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
Senior/Subordinated Loans and credit facilities |
|
$ |
|
|
$ |
|
|
$ |
138,471 |
|
$ |
138,471 |
|
Common Stock |
|
7,645 |
|
|
|
7,953 |
|
15,598 |
|
||||
Preferred Stock |
|
|
|
|
|
149,026 |
|
149,026 |
|
||||
Warrants |
|
|
|
|
|
1,661 |
|
1,661 |
|
||||
Common Equity Interest |
|
|
|
|
|
69,677 |
|
69,677 |
|
||||
LP Interest of the PE Fund |
|
|
|
|
|
21,940 |
|
21,940 |
|
||||
GP Interest of the PE Fund |
|
|
|
|
|
552 |
|
552 |
|
||||
LLC Interest |
|
|
|
|
|
3,992 |
|
3,992 |
|
||||
Guarantee |
|
|
|
|
|
(41 |
) |
(41 |
) |
||||
Escrow Receivable |
|
|
|
|
|
293 |
|
293 |
|
||||
Short-term investments |
|
|
|
89,682 |
|
|
|
89,682 |
|
||||
Total Investments, net |
|
$ |
7,645 |
|
$ |
89,682 |
|
$ |
393,524 |
|
$ |
490,851 |
|
|
|
October 31, 2014 |
|
||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
Senior/Subordinated Loans and credit facilities |
|
$ |
|
|
$ |
|
|
$ |
129,129 |
|
$ |
129,129 |
|
Common Stock |
|
9,778 |
|
|
|
24,547 |
|
34,325 |
|
||||
Preferred Stock |
|
|
|
|
|
160,459 |
|
160,459 |
|
||||
Warrants |
|
|
|
|
|
713 |
|
713 |
|
||||
Common Equity Interest |
|
|
|
|
|
98,606 |
|
98,606 |
|
||||
LP Interest of the PE Fund |
|
|
|
|
|
19,969 |
|
19,969 |
|
||||
GP Interest of the PE Fund |
|
|
|
|
|
504 |
|
504 |
|
||||
LLC Interest |
|
|
|
|
|
3,992 |
|
3,992 |
|
||||
Guarantee |
|
|
|
|
|
(67 |
) |
(67 |
) |
||||
Escrow receivables |
|
|
|
|
|
|
|
|
|
||||
Short-term investments |
|
|
|
99,897 |
|
|
|
99,897 |
|
||||
Total Investments, net |
|
$ |
9,778 |
|
$ |
99,897 |
|
$ |
437,852 |
|
$ |
547,527 |
|
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the period in which the reclassifications occur. During the fiscal year ended October 31, 2015 and October 31, 2014, there were no transfers in and out of Level 1 or 2.
The following tables sets forth a summary of changes in the fair value of investment assets and liabilities measured using Level 3 inputs for the fiscal years ended October 31, 2015 and October 31, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loss for the Year Included in Earnings Attributable to the Change in Unrealized Appreciation (Depreciation) on Investments held as of October 31, 2015 |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
Reversal of Prior |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
Period |
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
Balances, |
|
|
|
(Appreciation) |
|
Appreciation |
|
|
|
|
|
|
|
Balances, |
|
|
||||||||||
|
|
November 1, |
|
Realized Gains |
|
Depreciation on |
|
(Depreciation) |
|
|
|
|
|
Transfers In & |
|
October 31, |
|
|
||||||||||
|
|
2014 |
|
(Losses) (1) |
|
Realization (2) |
|
(3) |
|
Purchases (4) |
|
Sales (5) |
|
Out of Level 3 |
|
2015 |
|
|
||||||||||
Senior/Subordinated Loans and credit facilities |
|
$ |
129,129 |
|
$ |
(2,073 |
) |
$ |
1,943 |
|
$ |
(12,193 |
) |
$ |
61,216 |
|
$ |
(39,551 |
) |
$ |
|
|
$ |
138,471 |
|
$ |
(15,048 |
) |
Common Stock |
|
24,547 |
|
8,340 |
|
(8,350 |
) |
(718 |
) |
1,034 |
|
(16,900 |
) |
|
|
7,953 |
|
(22,544 |
) |
|||||||||
Preferred Stock |
|
160,459 |
|
|
|
|
|
(16,148 |
) |
4,715 |
|
|
|
|
|
149,026 |
|
52,187 |
|
|||||||||
Warrants |
|
713 |
|
|
|
|
|
328 |
|
620 |
|
|
|
|
|
1,661 |
|
(70 |
) |
|||||||||
Common Equity Interest |
|
98,606 |
|
(2,730 |
) |
(72 |
) |
(20,508 |
) |
3,046 |
|
(8,665 |
) |
|
|
69,677 |
|
(63,696 |
) |
|||||||||
LP Interest of the PE Fund |
|
19,969 |
|
|
|
|
|
1,971 |
|
|
|
|
|
|
|
21,940 |
|
8,101 |
|
|||||||||
GP Interest of the PE Fund |
|
504 |
|
|
|
|
|
48 |
|
|
|
|
|
|
|
552 |
|
199 |
|
|||||||||
LLC Interest |
|
3,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,992 |
|
456 |
|
|||||||||
Guarantees |
|
(67 |
) |
|
|
|
|
26 |
|
|
|
|
|
|
|
(41 |
) |
(41 |
) |
|||||||||
Escrow Receivable |
|
|
|
|
|
|
|
(15 |
) |
308 |
|
|
|
|
|
293 |
|
|
|
|||||||||
Total |
|
$ |
437,852 |
|
$ |
3,537 |
|
$ |
(6,479 |
) |
$ |
(47,209 |
) |
$ |
70,939 |
|
$ |
(65,116 |
) |
$ |
|
|
$ |
393,524 |
|
$ |
(40,456 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loss for the Year Included in Earnings Attributable to the Change in Unrealized Appreciation (Depreciation) on Investments held as of October 31, 2014
|
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
Reversal of Prior |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
|
|
Period |
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
Balances, |
|
|
|
(Appreciation) |
|
Appreciation |
|
|
|
|
|
|
|
Balances, |
|
|
||||||||||
|
|
November 1, |
|
Realized Gains |
|
Depreciation on |
|
(Depreciation) |
|
|
|
|
|
Transfers In & |
|
October 31, |
|
|
||||||||||
|
|
2013 |
|
(Losses) (1) |
|
Realization (2) |
|
(3) |
|
Purchases (4) |
|
Sales (5) |
|
Out of Level 3 |
|
2014 |
|
|
||||||||||
Senior/Subordinated Loans and credit facilities |
|
$ |
113,153 |
|
$ |
(170 |
) |
$ |
980 |
|
$ |
(6,010 |
) |
$ |
72,050 |
|
$ |
(50,874 |
) |
$ |
|
|
$ |
129,129 |
|
$ |
(5,011 |
) |
Common Stock |
|
19,593 |
|
|
|
|
|
4,190 |
|
764 |
|
|
|
|
|
24,547 |
|
(13,466 |
) |
|||||||||
Preferred Stock |
|
180,357 |
|
13,000 |
|
(10,000 |
) |
(15,606 |
) |
19,469 |
|
(26,761 |
) |
|
|
160,459 |
|
63,620 |
|
|||||||||
Warrants |
|
220 |
|
(34 |
) |
15 |
|
409 |
|
825 |
|
(722 |
) |
|
|
713 |
|
(398 |
) |
|||||||||
Common Equity Interest |
|
82,539 |
|
|
|
|
|
(15,946 |
) |
32,013 |
|
|
|
|
|
98,606 |
|
(43,117 |
) |
|||||||||
LP Interest of the PE Fund |
|
11,384 |
|
|
|
|
|
3,465 |
|
5,120 |
|
|
|
|
|
19,969 |
|
5,752 |
|
|||||||||
GP Interest of the PE Fund |
|
288 |
|
|
|
|
|
85 |
|
131 |
|
|
|
|
|
504 |
|
141 |
|
|||||||||
LLC Interest |
|
10,386 |
|
2,989 |
|
(4,128 |
) |
525 |
|
487 |
|
(6,267 |
) |
|
|
3,992 |
|
456 |
|
|||||||||
Guarantees |
|
|
|
|
|
|
|
(67 |
) |
|
|
|
|
|
|
(67 |
) |
(67 |
) |
|||||||||
Escrow receivables |
|
6,237 |
|
869 |
|
|
|
|
|
|
|
(7,106 |
) |
|
|
|
|
|
|
|||||||||
Total |
|
$ |
424,157 |
|
$ |
16,654 |
|
$ |
(13,133 |
) |
$ |
(28,955 |
) |
$ |
130,859 |
|
$ |
(91,730 |
) |
$ |
|
|
$ |
437,852 |
|
$ |
7,912 |
|
(1) Included in net realized gain (loss) on investments in the Consolidated Statement of Operations.
(2) Included in net unrealized appreciation (depreciation) of investments in the Consolidated Statement of Operations related to securities disposed of during the fiscal years ended October 31, 2015 and 2014, respectively.
(3) Included in net unrealized appreciation (depreciation) of investments in the Consolidated Statement of Operations related to securities held at October 31, 2015 and 2014, respectively. As of October 31, 2015, unrealized depreciation of Level 3 investments was approximately $40.5 million and as of October 31, 2014 unrealized appreciation of Level 3 investments was approximately $7.9 million.
(4) Includes increases in the cost basis of investments resulting from new portfolio investments, PIK interest or dividends, the amortization of discounts, premiums and closing fees and the exchange of one or more existing securities for one or more new securities.
(5) Includes decreases in the cost basis of investments resulting from principal repayments or sales.
In accordance with ASU 2011-04, the following table summarizes information about the Companys Level 3 fair value measurements as of October 31, 2015 and October 31, 2014 (Fair Value is disclosed in thousands):
Quantitative Information about Level 3 Fair Value Measurements*
|
|
Fair value as of |
|
|
|
|
|
Range |
|
Weighted |
|
|||
|
|
10/31/2015 |
|
Valuation technique |
|
Unobservable input |
|
Low |
|
High |
|
average (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock (c) (d) |
|
$ |
7,953 |
|
Adjusted Net Asset Approach |
|
Discount to Net Asset Value |
|
0.0 |
% |
0.0 |
% |
0.0 |
% |
|
|
|
|
|
|
Real Estate Appraisals |
|
N/A |
|
N/A |
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Approach |
|
Discount Rate |
|
15.0 |
% |
30.0 |
% |
29.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Approach |
|
Revenue Multiple |
|
2.0x |
|
2.0x |
|
2.0x |
|
|
|
|
|
|
|
|
EBITDA Multiple |
|
4.7x |
|
4.7x |
|
4.7x |
|
|
|
|
|
|
|
|
Forward EBITDA Multiple |
|
7.0x |
|
7.0x |
|
7.0x |
|
|
|
|
|
|
|
|
Discount to Letter of Intent |
|
2.4 |
% |
2.4 |
% |
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior/Subordinated loans |
|
$ |
137,462 |
|
Market Approach |
|
EBITDA Multiple |
|
5.0x |
|
6.0x |
|
5.1x |
|
and credit facilities (b) (d) |
|
|
|
|
|
Forward EBITDA Multiple |
|
7.0x |
|
7.0x |
|
7.0x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Approach |
|
Required Rate of Return |
|
10.3 |
% |
35.0 |
% |
15.6 |
% |
|
|
|
|
|
|
|
Discount Rate |
|
14.9 |
% |
14.9 |
% |
14.9 |
% |
|
|
|
|
|
|
|
Perpetual Growth Rate of Free Cash Flow |
|
2.0 |
% |
2.0 |
% |
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Asset Approach |
|
Real Estate Appraisals |
|
N/A |
|
N/A |
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LP Interest (e) |
|
$ |
21,940 |
|
Adjusted Net Asset Approach |
|
Discount to Net Asset Value |
|
0.0 |
% |
0.0 |
% |
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GP Interest (e) |
|
$ |
552 |
|
Adjusted Net Asset Approach |
|
Discount to Net Asset Value |
|
0.0 |
% |
0.0 |
% |
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LLC Interest |
|
$ |
3,992 |
|
Market Approach |
|
EBITDA Multiple |
|
6.0x |
|
6.0x |
|
6.0x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Interest |
|
$ |
69,677 |
|
Market Approach |
|
Revenue Multiple |
|
2.0x |
|
2.0x |
|
2.0x |
|
|
|
|
|
|
|
Forward EBITDA Multiple |
|
7.0x |
|
7.0x |
|
7.0x |
|
|
|
|
|
|
|
|
EBITDA Multiple |
|
5.5x |
|
5.6x |
|
5.6x |
|
|
|
|
|
|
|
|
Multiple of Book Value |
|
1.0x |
|
1.0x |
|
1.0x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Asset Approach |
|
Real Estate Appraisals |
|
N/A |
|
N/A |
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Approach |
|
Discount Rate |
|
13.0 |
% |
15.9 |
% |
15.6 |
% |
|
|
|
|
|
|
|
Perpetual Growth Rate of Free Cash Flow |
|
3.0 |
% |
3.0 |
% |
3.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock (c) |
|
$ |
149,026 |
|
Adjusted Net Asset Approach |
|
Discount to Net Asset Value |
|
0.0 |
% |
0.0 |
% |
0.0 |
% |
|
|
|
|
|
|
Real Estate Appraisals |
|
N/A |
|
N/A |
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Approach |
|
Revenue Multiple |
|
2.0x |
|
2.0x |
|
2.0x |
|
|
|
|
|
|
|
|
EBITDA Multiple |
|
5.0x |
|
5.0x |
|
3.4x |
|
|
|
|
|
|
|
|
% of AUM |
|
0.82 |
% |
0.82 |
% |
0.82 |
% |
|
|
|
|
|
|
|
Illiquidity Discount |
|
30.0 |
% |
30.0 |
% |
30.0 |
% |
|
|
|
|
|
|
|
Multiple of Book Value |
|
1.0x |
|
1.0x |
|
1.0x |
|
|
|
|
|
|
|
|
EBT Multiple |
|
20.7x |
|
20.7x |
|
20.7x |
|
|
|
|
|
|
|
|
Discount to Letter of Intent |
|
2.4 |
% |
2.4 |
% |
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Approach |
|
Discount Rate |
|
15.0 |
% |
15.9 |
% |
15.9 |
% |
|
|
|
|
|
|
|
Perpetual Growth Rate of Free Cash Flow |
|
2.5 |
% |
2.5 |
% |
2.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
$ |
2,670 |
|
Market Approach |
|
Discount to Enterprise Value of Joint Venture |
|
0.0 |
% |
0.0 |
% |
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees |
|
$ |
(41 |
) |
Income Approach |
|
Discount Rate |
|
7.3 |
% |
7.3 |
% |
7.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Escrows |
|
$ |
293 |
|
Income Approach |
|
Discount Rate |
|
5.0 |
% |
5.0 |
% |
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
393,524 |
|
|
|
|
|
|
|
|
|
|
|
Notes:
(a) Calculated based on fair values.
(b) Certain investments are priced using non-binding broker or dealer quotes.
(c) Certain common and preferred stock investments are fair valued based on liquidation-out preferential rights held by the Company.
(d) Real estate appraisals are performed by independent third parties and the Company does not have reasonable access to the underlying unobservable inputs.
(e) Practical expedient is used utilizing the net asset valuations provided by the GP
* The above table excludes certain investments whose fair value is zero due to certain specific situations at the portfolio company level.
NM - Not Meaningful
Quantitative Information about Level 3 Fair Value Measurements*
|
|
Fair value as of |
|
|
|
|
|
Ran ge |
|
Weighted |
|
||||||
|
|
10/31/2014 |
|
Valuation technique |
|
Unobservable input |
|
Low |
|
High |
|
average (a) |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Common Stock (c) (d) |
|
$ |
24,547 |
|
Adjusted Net Asset Approach |
|
Discount to Net Asset Value |
|
0.0 |
% |
100.0 |
% |
0.0 |
% |
|||
|
|
|
|
|
|
Real Estate Appraisals |
|
N/A |
|
N/A |
|
N/A |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
Income Approach |
|
Discount Rate |
|
12.6 |
% |
15.0 |
% |
12.6 |
% |
||||
|
|
|
|
|
|
Perpetual Growth Rate of Free Cash Flow |
|
3.0 |
% |
3.0 |
% |
3.0 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
Market Approach |
|
Revenue Multiple |
|
2.0x |
|
2.0x |
|
2.0x |
|
||||
|
|
|
|
|
|
EBITDA Multiple |
|
5.0x |
|
9.0x |
|
5.0x |
|
||||
|
|
|
|
|
|
Forward EBITDA Multiple |
|
5.5x |
|
5.5x |
|
5.5x |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Senior/Subordinated loans and credit facilities (b) (d) |
|
$ |
129,129 |
|
Adjusted Net Asset Approach |
|
Discount to Net Asset Value |
|
30.0 |
% |
30.0 |
% |
30.0 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
Market Approach |
|
EBITDA Multiple |
|
5.0x |
|
10.2x |
|
8.0x |
|
||||
|
|
|
|
|
|
Forward EBITDA Multiple |
|
5.0x |
|
5.5x |
|
5.1x |
|
||||
|
|
|
|
|
|
Market Quotes |
|
101.0 |
% |
101.0 |
% |
101.0 |
% |
||||
|
|
|
|
|
|
Discount to Forward EBITDA |
|
15.0 |
% |
15.0 |
% |
15.0 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
Income Approach |
|
Discount Rate |
|
12.6 |
% |
12.6 |
% |
12.6 |
% |
||||
|
|
|
|
|
|
Perpetual Growth Rate of Free Cash Flow |
|
3.0 |
% |
3.0 |
% |
3.0 |
% |
||||
|
|
|
|
|
|
Required Rate of Return |
|
9.2 |
% |
16.0 |
% |
11.7 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
LP Interest (e) |
|
$ |
19,969 |
|
Adjusted Net Asset Approach |
|
Discount to Net Asset Value |
|
N/A |
|
N/A |
|
N/A |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
GP Interest (e) |
|
$ |
504 |
|
Adjusted Net Asset Approach |
|
Discount to Net Asset Value |
|
N/A |
|
N/A |
|
N/A |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
LLC Interest |
|
$ |
3,992 |
|
Market Approach |
|
EBITDA Multiple |
|
6.0x |
|
6.0x |
|
6.0x |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Common Equity Interest |
|
$ |
98,606 |
|
Market Approach |
|
Revenue Multiple |
|
2.0x |
|
2.0x |
|
2.0x |
|
|||
|
|
|
|
|
|
Forward EBITDA Multiple |
|
7.0x |
|
7.0x |
|
7.0x |
|
||||
|
|
|
|
|
|
EBITDA Multiple |
|
5.0x |
|
5.5x |
|
5.2x |
|
||||
|
|
|
|
|
|
Euros per TTM MWhr |
|
|
0.70 |
|
|
0.70 |
|
|
0.70 |
|
|
|
|
|
|
|
|
Multiple of Book Value |
|
1.0x |
|
1.0x |
|
1.0x |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
Adjusted Net Asset Approach |
|
Real Estate Appraisals |
|
N/A |
|
N/A |
|
N/A |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
Income Approach |
|
Discount Rate |
|
8.0 |
% |
15.5 |
% |
13.5 |
% |
||||
|
|
|
|
|
|
Perpetual Growth Rate of Free Cash Flow |
|
3.0 |
% |
3.0 |
% |
3.0 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Preferred Stock (c) |
|
$ |
160,459 |
|
Adjusted Net Asset Approach |
|
Discount to Net Asset Value |
|
0.0 |
% |
0.0 |
% |
0.0 |
% |
|||
|
|
|
|
|
|
Real Estate Appraisals |
|
N/A |
|
N/A |
|
N/A |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
Market Approach |
|
Revenue Multiple |
|
2.0x |
|
2.0x |
|
2.0x |
|
||||
|
|
|
|
|
|
EBITDA Multiple |
|
9.0x |
|
9.0x |
|
9.0x |
|
||||
|
|
|
|
|
|
% of AUM |
|
1.06 |
% |
1.06 |
% |
1.06 |
% |
||||
|
|
|
|
|
|
Illiquidity Discount |
|
30.0 |
% |
30.0 |
% |
30.0 |
% |
||||
|
|
|
|
|
|
Multiple of Book Value |
|
1.0x |
|
1.0x |
|
1.0x |
|
||||
|
|
|
|
|
|
EBT Multiple |
|
16.1x |
|
16.1x |
|
16.1x |
|
||||
|
|
|
|
|
|
Forward EBITDA Multiple |
|
5.0x |
|
5.0x |
|
5.0x |
|
||||
|
|
|
|
|
|
Discount to Forward EBITDA |
|
15.0 |
% |
15.0 |
% |
15.0 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
Income Approach |
|
Discount Rate |
|
15.0 |
% |
16.6 |
% |
16.6 |
% |
||||
|
|
|
|
|
|
Perpetual Growth Rate of Free Cash Flow |
|
2.5 |
% |
2.5 |
% |
2.5 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Warrants |
|
$ |
713 |
|
Market Approach |
|
EBITDA Multiple |
|
6.0x |
|
6.0x |
|
6.0x |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
Income Approach |
|
Discount Rate |
|
21.5 |
% |
21.5 |
% |
NM |
|
||||
|
|
|
|
|
|
Perpetual Growth Rate of Free Cash Flow |
|
3.0 |
% |
3.0 |
% |
NM |
|
||||
|
|
|
|
|
|
Illiquidity Discount |
|
100.0 |
% |
100.0 |
% |
NM |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
Adjusted Net Asset Approach |
|
Discount to Net Asset Value |
|
0.0 |
% |
0.0 |
% |
NM |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Guarantees |
|
$ |
(67 |
) |
Income Approach |
|
Discount Rate |
|
7.3 |
% |
7.3 |
% |
7.3 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
437,852 |
|
|
|
|
|
|
|
|
|
|
|
|||
Notes:
(a) Calculated based on fair values.
(b) Certain investments are priced using non-binding broker or dealer quotes.
(c) Certain common and preferred stock investments are fair valued based on liquidation-out preferential rights held by the Company.
(d) Real estate appraisals are performed by independent third parties and the Company does not have reasonable access to the underlying unobservable inputs.
(e) Practical expedient is used utilizing the net asset valuations provided by the GP
* The above table excludes certain investments whose fair value is zero due to certain specific situations at the portfolio company level.
NM - Not Meaningful
ASU 2011-04 clarifies the application of existing fair value measurement and disclosure requirements related to the application of the highest and best use and valuation premise concepts for financial and nonfinancial instruments, measuring the fair value of an instrument classified in equity, and disclosures about fair value measurements. ASU 2011-04 requires additional disclosures about fair value measurements categorized within Level 3 of the fair value
hierarchy, including the valuation processes used by the reporting entity, the sensitivity of the fair value to changes in unobservable inputs and the interrelationships between those unobservable inputs, if any.
Following are descriptions of the sensitivity of the Level 3 recurring fair value measurements to changes in the significant unobservable inputs presented in the above table. For securities utilizing the income approach valuation technique, a significant increase (decrease) in the discount rate, risk premium or discount for lack of marketability would result in a significantly lower (higher) fair value measurement. The discount for lack of marketability used to determine fair value may include other factors such as liquidity or credit risk. Generally, a change in the discount rate is accompanied by a directionally similar change in the risk premium and discount for lack of marketability. For securities utilizing the market approach valuation technique, a significant increase (decrease) in the EBITDA, revenue multiple or other key unobservable inputs listed in the above table would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the discount for lack of marketability would result in a significantly lower (higher) fair value measurement. The discount for lack of marketability used to determine fair value may include other factors such as liquidity or credit risk. For securities utilizing an adjusted net asset approach valuation technique, a significant increase (decrease) in the price to book value ratio, discount rate or other key unobservable inputs listed in the above table would result in a significantly higher (lower) fair value measurement.
For the Fiscal Year Ended October 31, 2015
During the fiscal year ended October 31, 2015, the Company made eight new investments, committing capital totaling approximately $58.1 million. The investments were made in RX ($10.3 million), Agri-Carriers ($11.8 million), Legal Solutions ($8.7 million), Results Companies ($9.0 million), Vestal ($6.5 million), Thunderdome ($2.0 million), Initials ($4.8 million) and U.S. Technologies ($5.0 million).
During the fiscal year ended October 31, 2015, the Company made 5 follow-on investments into 4 existing portfolio companies totaling approximately $4.3 million. On May 27, 2015, the Company invested an additional $1.1 million into MVC Automotive in the form of common equity interest. On June 3, 2015, the Company invested an additional $250,000 into Centile in the form of common equity interest. On July 6, 2015, the Company invested $250,000 into BAC in the form of equity. See below for further information on BAC. On July 7, 2015, the Company made a secured $1.0 million loan to Biogenic. The loan has a 16% interest rate and matures on February 29, 2016. The Company also received a warrant at no cost and allocated a portion of the cost basis of the loan to the warrant at the time the investment was made. On October 19, 2015, the Company invested an additional $1.7 million in MVC Automotive in the form of common equity interest.
On November 26, 2014, Summit Research Labs, Inc. repaid its second lien loan in full including all accrued interest totaling approximately $25.7 million.
On December 31, 2014, the Company received distributions totaling $388,000 from the PE Fund, which was treated as a return of capital.
On April 20, 2015, BAC credit purchased the assets of Biovation. The Company received 90 shares of class B non-voting common stock in BAC as part of the transaction and realized a loss on Biovation of approximately $2.2 million.
On May 1, 2015, the Company sold 2,893 shares of common stock in Ohio Medical for a nominal amount resulting in no realized gain or loss.
On May 29, 2015, the Company sold its 81,000 shares of common stock in Vestal receiving total proceeds of approximately $17.9 million resulting in a realized gain of approximately $15.0 million. The total proceeds include a $1.0 million dividend and assumes full receipt of the escrow proceeds. The $600,000 loan was also repaid in full, including all accrued interest. As part of the transaction, the Company reinvested approximately $6.3 million in the form of a subordinated loan, $250,000 for 5,610 shares of common stock and a warrant with no cost. The loan has an interest rate of 15% and matures on November 28, 2021.
On June 19, 2015, the Company monetized a majority of its investment in Velocitius, receiving approximately $9.2 million in proceeds, which included a return of capital and closing fees and was net of a minimal currency loss.
On October 16, 2015, the Company sold its remaining equity interest in Velocitius and received zero proceeds resulting in a realized loss of approximately $2.7 million.
On October 30, 2015, the Company realized a loss of $6.7 million with the dissolution of HH&B.
During the fiscal year ended October 31, 2015, the Company sold its $10.0 million PrePaid Legal loan for proceeds totaling approximately $10.1 million, including all accrued interest.
During the fiscal year ended October 31, 2015, Custom Alloy made principal payments totaling $3.5 million on its unsecured subordinated loan. The balance of the loan at October 31, 2015 was $3.0 million.
During the quarter ended January 31, 2015, the Valuation Committee increased the fair value of the Companys investments in: Foliofn, Inc. (Foliofn) preferred stock by $109,000, Turf Products, LLC (Turf) loan by approximately $2,000, RuMe series C preferred stock by $800,000 and series B preferred stock by $200,000, Advantage preferred stock by $20,000, Biogenic warrant and senior convertible note by a net total of approximately $28,000 and SCSD common stock by $387,000. In addition, increases in the cost basis and fair value of the loans to Biogenic, Custom Alloy, Moreys, and U.S. Gas were due to the capitalization of PIK interest totaling $436,878. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.1 million due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $759,000, Custom Alloy second lien loan by approximately $84,000, NPWT Corporation (NPWT) common stock by $2,000 and preferred stock by $36,000, Tekers common stock by $170,000, PrePaid Legal loan by $100,000, Centile equity interest by $538,000, Biovation loan by approximately $716,000, Velocitius equity
interest by approximately $1.1 million, Security Holdings equity interest by $1.1 million, JSC Tekers preferred stock by approximately $599,000, MVC Automotive equity interest by approximately $5.9 million, SGDA Europe equity interest by approximately $749,000 and Inland Environmental & Remediation LP (Inland) warrant by approximately $713,000.
During the quarter ended April 30, 2015, the Valuation Committee increased the fair value of the Companys investments in: MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $610,000, Turf loan by approximately $2,000, JSC Tekers preferred stock by $5,000, Biogenic warrant and senior convertible note by a total of approximately $852,000, MVC Automotive equity interest by $246,000 and RuMe series C preferred stock by approximately $558,000 and series B preferred stock by $142,000. In addition, increases in the cost basis and fair value of the loans to Biogenic, Custom Alloy, Moreys, and U.S. Gas were due to the capitalization of PIK interest totaling $501,906. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.2 million due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: Custom Alloy second lien loan by approximately $11,000, Foliofn, Inc. preferred stock by $82,000, NPWT common stock by $1,000 and preferred stock by $12,000, Tekers common stock by $21,000, Centile equity interest by $98,000, Moreys second lien loan by approximately $253,000, Advantage preferred stock by approximately $28,000, Velocitius equity interest by $899,000, Biovations loan by approximately $2.7 million, SGDA Europe equity interest by approximately $1.3 million, Security Holdings equity interest by $850,000, Ohio Medical series A preferred stock by $10.5 million and the Inland loan by approximately $1.4 million.
During the quarter ended July 31, 2015, the Valuation Committee increased the fair value of the Companys investments in: RuMe series C preferred stock by approximately $198,000 and series B preferred stock by approximately $53,000, Custom Alloy second lien loan by approximately $191,000, Turf guarantee by approximately $19,000, Centile equity interest by $48,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $751,000 and Advantage preferred stock by approximately $302,000. In addition, increases in the cost basis and fair value of the loans to Biogenic, Custom Alloy, Moreys, Vestal and U.S. Gas were due to the capitalization of PIK interest totaling $525,997. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.2 million due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: Foliofn, Inc. preferred stock by $383,000, NPWT preferred stock by $1,000, Tekers common stock by $117,000, Turf loan by approximately $2,000, Vestal escrow by approximately $15,000, BAC common stock by approximately $167,000, Biogenic warrant and senior convertible note by a net total of approximately $2,000, Moreys second lien loan by approximately $753,000, Inland loan by $10.0 million, Velocitius equity interest by approximately $774,000, JSC Tekers preferred stock by $35,000, SGDA Europe equity interest by approximately $1.1 million, Ohio Medical series A preferred stock by $6.0 million, MVC Automotive equity interest by $616,000 and Security Holdings equity interest by $2.0 million.
During the quarter ended October 31, 2015, the Valuation Committee increased the fair value of the Companys investments in: Turf loan and guarantee by a total of approximately $5,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $1.4 million, Foliofn, Inc. preferred stock by $59,000, NPWT preferred stock by $4,000, Centile equity interest by $249,000, Inland loan by $5.0
million and RuMe series C preferred stock by approximately $626,000 and series B preferred stock by approximately $184,000. In addition, increases in the cost basis and fair value of the loans to Biogenic, Custom Alloy, Moreys, Vestal and U.S. Gas were due to the capitalization of PIK interest totaling $801,815. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.2 million due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: Biogenic warrant and senior convertible note by a net total of approximately $76,000, Tekers common stock by $575,000, Custom Alloy second lien loan by approximately $249,000, Moreys second lien loan by approximately $922,000, JSC Tekers preferred stock by $483,000, Security Holdings equity interest by $1.3 million, SGDA Europe equity interest by approximately $830,000, BAC common stock by approximately $62,000, Ohio Medical series A preferred stock by $1.2 million and MVC Automotive equity interest by $4.6 million.
During the fiscal year ended October 31, 2015 the Valuation Committee increased the fair value of the Companys investments in: Turf loan and guarantee by a total of approximately $25,000, Biogenic warrant and senior convertible note by a total of approximately $802,000, SCSD common stock by $387,000, Advantage preferred stock by approximately $294,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $2.0 million and RuMe series C preferred stock and series B preferred stock by a total of approximately $2.8 million. In addition, increases in the cost basis and fair value of the loans to Biogenic, Custom Alloy, Moreys, Vestal and U.S. Gas were due to the capitalization of PIK interest totaling $2,266,596. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $4.7 million due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: Foliofn, Inc. preferred stock by $297,000, NPWT common stock by $3,000 and preferred stock by $45,000, Tekers common stock by $883,000, PrePaid Legal loan by $100,000, Centile equity interest by $339,000, BAC common stock by approximately $229,000, Vestal escrow by approximately $15,000, Biovations loan by approximately $3.4 million, Moreys second lien loan by approximately $1.9 million, Velocitius equity interest by $2.8 million, JSC Tekers preferred and common stock by a combined $1.1 million, Security Holdings equity interest by $5.3 million, SGDA Europe equity interest by approximately $4.0 million, Custom Alloy second lien loan by approximately $153,000, Ohio Medical series A preferred stock by $17.7 million, MVC Automotive equity interest by $10.9 million and Inland warrant by approximately $713,000 and loan by approximately $6.4 million.
At October 31, 2015, the fair value of all portfolio investments, exclusive of U.S. Treasury obligations and escrow receivables, was $400.9 million with a cost basis of $443.7 million. At October 31, 2015, the fair value and cost basis of investments made by the Companys former management team pursuant to the prior investment objective (Legacy Investments) was $5.6 million and $23.8 million, respectively, and the fair value and cost basis of portfolio investments made by the Companys current management team was $395.3 million and $419.9 million, respectively. At October 31, 2014, the fair value of all portfolio investments, exclusive of U.S. Treasury obligations and escrow receivables, was $447.6 million with a cost basis of $440.0 million. At October 31, 2014, the fair value and cost basis of portfolio investments of the Legacy Investments was $5.9 million and $23.8 million, respectively, and the fair value and cost basis of portfolio investments made by the Companys current management team was $441.7 million and $416.2 million, respectively.
For the Fiscal Year Ended October 31, 2014
During the year ended October 31, 2014, the Company made four new investments, committing capital totaling approximately $48.4 million. The investments were made in G3K ($6.0 million), Inland ($15.0 million), Equus ($4.4 million) and Custom Alloy ($23.0 million).
During the year ended October 31, 2014, the Company made 20 follow-on investments into 13 existing portfolio companies totaling approximately $57.4 million. On November 13, 2013, the Company loaned $4.0 million to Security Holdings in the form of a 5% cash bridge loan with a maturity date of February 15, 2014. On November 19, 2013, the Company increased its common equity interest in Centile by $100,000. Also on November 19, 2013, the Company invested $5.0 million into MVC Automotive in the form of common equity interest and converted its bridge loan of approximately $1.8 million, including accrued interest, to common equity interest. On December 23, 2013, the Company made a senior secured loan of $3.3 million to RuMe with a cash interest rate of 12% and a maturity date of April 4, 2014. The Company also purchased warrants for shares of common stock in RuMe for a nominal amount and allocated a portion of the cost basis of the loan to the warrants at the time the investment was made. On January 2, 2014, the Company loaned $7.0 million to Moreys, increasing its second lien loan amount to $15.0 million. The interest rate on the total loan was increased to 10% cash and 3% PIK. On March 5, 2014, the Company invested an additional $4.0 million into MVC Automotive in the form of common equity interest. On March 10, 2014, the Company exercised its warrant in RuMe at a cost of approximately $43,000 and received 4,297,549 shares of common stock. On March 5, 2014 and April 1, 2014, the Company contributed a total of approximately $2.8 million to the PE Fund related to expenses, an additional investment in Plymouth Rock Energy, LLC and an investment in Advanced Oilfield Services, LLC. On April 1, 2014, the Company loaned $1.5 million to Marine in the form of a second lien loan with an interest rate of 11%. The loan matured on June 30, 2014. On May 2, 2014, the Company loaned $1.5 million to SCSD in the form of a secured loan. The loan has an interest rate of 12% and a maturity date of May 2, 2019. On May 7, 2014, the Company converted RuMes $3.3 million senior secured loan and accrued interest of approximately $161,000 into 23,896,634 shares of series C preferred stock. On May 9, 2014, the Company loaned an additional $500,000 to Biovation increasing the total amount outstanding on the bridge loan to $3.8 million and extended the maturity date of the loan to October 31, 2014. The Company also received a warrant at no cost and allocated a portion of the cost basis of the loan to the warrant at the time the investment was made. On May 14, 2014, the Company signed a share exchange agreement with Equus, another publicly traded business development company, as part of a plan of reorganization adopted by the Equus Board of Directors. Under the terms of the reorganization, Equus will pursue a merger or consolidation with the Company, a subsidiary of the Company, or one or more of the Companys portfolio companies. Absent Equus merging or consolidating with/into the Company itself (whereby the Company would own a majority of Equus shares), the current intention is for Equus to (i) be restructured into a publicly-traded operating company focused on the energy and/or financial services sectors and (ii) seek to terminate its election as a business development company. Pursuant to the share exchange agreement, the Company has received 2,112,000 shares of Equus in exchange for 395,839 shares of the Company. The exchange was calculated based upon each companys respective net asset value per share published at that time. As part of the reorganization, the Company may acquire additional Equus shares from time to time, either through Equus direct sale of newly issued shares to the Company or through the purchase of outstanding Equus shares. The Company continues to discuss reorganization options with Equus. As a result of the restatement for the quarter ending
July 31, 2014, the Company has a liability to Equus of $221,424 for additional shares and dividends due to Equus. TTG Advisers has voluntarily agreed to waive any management fees on the Companys assets invested in Equus common stock. Also, as part of the Equus plan of reorganization, on May 21, 2014, June 3, 2014 and June 12, 2014, the Company purchased 512,557, 850,000 and 970,087 additional outstanding common shares of Equus, respectively, at a cost of approximately $1.2 million, $2.1 million and $2.4 million, respectively. On May 27, 2014, the Company purchased 2,893 common shares of Ohio Medical from Champlain Capital Partners at a nominal cost. On May 30, 2014, the Company loaned $3.0 million to U.S. Gas. The loan has an interest rate of 14% and a maturity date of July 1, 2018. On August 26, 2014, the Company invested $12.7 million in Security Holdings for additional common equity interest. On September 30, 2014, the Company loaned $4.0 million to Biogenics in the form of a secured loan. The loan has a 16% interest rate and matures on September 30, 2015. On October 7, 2014, the Company contributed a total of approximately $2.4 million to the PE Fund related to an investment in AccuMed Corp. As of October 31, 2014, the PE Fund had invested in Plymouth Rock Energy, LLC, Gibdock Limited, Focus Pointe Holdings, Inc., Advanced Oilfield Services, LLC and AccuMed Corp.
On November 1, 2013, Turf repaid its $1.0 million junior revolving note in full, including all accrued interest. The junior revolving note is no longer a commitment of the Company. Turf also made a $4.5 million principal payment on its senior subordinated loan, resulting in an outstanding balance of approximately $3.9 million as of October 31, 2014. The Company also guaranteed $1.0 million of Turfs indebtedness to Berkshire Bank. The guarantee was valued at negative $67,000 at October 31, 2014.
On November 11, 2013, MVC Automotive Group B.V. completed a tax free reorganization into MVC Automotive Group GmbH MVC Automotive, an Austrian holding company, to increase operating efficiencies.
On December 16, 2013, the Company announced the termination of its agreement to sell U.S. Gas to United States Gas & Electric Holdings, Inc. (US Holdings), a company organized to acquire U.S. Gas. US Holdings was unable to satisfy the closing conditions of the original agreement (October 4, 2013) and subsequently submitted a transaction termination notice to the Company on December 10, 2013.
On January 30, 2014, BPC II, LLC completed the dissolution of its operations. The Company realized a loss of $180,000 as a result of this dissolution.
On April 14, 2014, the Company agreed to provide G3K a $10.0 million loan in three installments and made its first loan of $6.0 million. The closing of the Companys G3K investment and first loan occurred following extensive due diligence, including receipt of an unqualified audit report on G3Ks financial statements and a separate quality of earnings review by an accounting firm. The Company has initiated legal action in the Superior Court of New Jersey, Chancery Division, against G3K, its three shareholders and certain corporate officers for fraudulently misrepresenting G3Ks financial records in order to secure financing from the Company. The Company is working diligently seeking to uncover the full extent of what it believes to be a highly sophisticated fraud and is seeking to recover loan proceeds. All legal options available are being examined. The Company did recover $375,000 in principal prior to October 31, 2014. The loan had an outstanding balance of approximately $5.6 million and had a fair value of $0 as of October 31, 2014.
On May 1, 2014, the Company converted the JSC Tekers $12.0 million secured loan and accrued interest to preferred equity. The cost and fair value assigned to the preferred equity was approximately $11.8 million. As a result of the loan conversion, the Company realized a loss of approximately $190,000.
On May 19, 2014, the Company loaned an additional $2.0 million to Inland. The total amount outstanding of the senior secured loan as of October 31, 2014 was $15.0 million.
On May 30, 2014, the Company received an approximately $2.9 million principal payment from U.S. Gas on its second lien loan. The second lien loan interest rate was adjusted to 13% and the maturity date was extended to July 1, 2019.
On June 30, 2014, the Company converted its SGDA $6.5 million term loan and accrued interest of approximately $1.9 million to additional common equity interest in SGDA Europe.
On July 1, 2014, Marine repaid its $11.7 million senior subordinated and $1.5 million second lien loans in full including all accrued interest. The 20,000 shares of Marines preferred stock was also sold for approximately $3.8 million, which resulted in no gain or loss from the sale. During the fiscal year ended October 31, 2014, the Company received dividends of approximately $760,000 from Marine.
On July 29, 2014, the Company sold its limited liability company interest in Octagon for approximately $6.3 million resulting in a realized gain of approximately $3.2 million.
On September 2, 2014, Security Holdings repaid its $4.0 million bridge loan in full, including all accrued interest.
On October 3, 2014, Freshii repaid its $1.1 million senior secured loan in full, including all accrued interest. With this repayment and the removal of the warrant associated with Freshii, the Company recorded a net realized loss of approximately $14,000.
On October 8, 2014, the Company received approximately $6.3 million in proceeds related to the Summit escrow which was fair valued at approximately $5.9 million, resulting in a realized gain of approximately $377,000.
On October 31, 2014, the Company redeemed its convertible series A and series B preferred shares of Custom Alloy for $23.0 million, which resulted in a realized gain of $13.0 million. The Company then reinvested $23.0 million in Custom Alloy in the form of a second lien loan with an interest rate of 11% and a maturity date of April 30, 2020.
During the fiscal year ended October 31, 2014, Custom Alloy made $1.0 million of principal payments on its loan.
During the fiscal year ended October 31, 2014, the Company received a dividend of approximately $67,000 from NPWT.
During the quarter ended January 31, 2014, the Valuation Committee increased the fair value of the Companys investments in: Custom Alloy series A preferred stock by approximately
$18,000 and series B preferred stock by approximately $4.0 million, NPWT common stock by $1,000 and preferred stock by $34,000, SGDA Europe equity interest by approximately $649,000, Vestal common stock by $3.0 million, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $2.2 million, Biovation warrants by $162,000, and Freshii warrant by approximately $15,000. In addition, increases in the cost basis and fair value of the loans to Marine, Summit, Freshii, Biogenic and U.S. Gas, and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $1,008,665. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $949,000 due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: Centile equity interest by $29,000, Security Holdings equity interest by $304,000, Octagon equity interest by approximately $1.2 million, MVC Automotive equity interest by approximately $3.2 million, Velocitius equity interest by approximately $1.9 million, Biovation bridge loan by approximately $102,000, Foliofn, Inc. preferred stock by approximately $1.1 million, Turf guarantee by $92,000 and Tekers common stock by $12,000. Also, during the quarter ended January 31, 2014, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis and fair value of this investment by approximately $101,000.
During the quarter ended April 30, 2014, the Valuation Committee increased the fair value of the Companys investments in: Foliofn, Inc. preferred stock by $127,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $900,000, Octagon equity interest by approximately $1.1 million, Security Holdings equity interest by $422,000, PrePaid Legal loan by $100,000, Centile equity interest by $57,000, Freshii warrant by approximately $8,000 and Tekers common stock by $7,000. In addition, increases in the cost basis and fair value of the loans to Marine, Summit, Freshii, Biogenic, Moreys and U.S. Gas, and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $1,118,793. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $987,000 due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: Custom Alloy series A preferred stock by approximately $6,000 and series B preferred stock by approximately $1.3 million, SGDA Europe equity interest by approximately $111,000, MVC Automotive equity interest by approximately $3.4 million, G3K loan by approximately $5.6 million, NPWT common stock by approximately $4,000 and preferred stock by approximately $70,000, U.S. Gas preferred stock by $9.0 million, Velocitius equity interest by approximately $606,000 and the Biovation bridge loan by approximately $20,000. Also, during the quarter ended April 30, 2014, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased only the cost basis of this investment by approximately $181,000.
During the quarter ended July 31, 2014, the Valuation Committee increased the fair value of the Companys investments in: MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $359,000, Vestal common stock by approximately $1.5 million, RuMe series C preferred stock by approximately $75,000, Biogenic senior convertible note by $275,000, MVC Automotive equity interest by approximately $4.4 million, Biovation bridge loan by approximately $103,000 and Advantage preferred stock by $96,000. In addition, increases in the cost basis and fair value of the loans to Marine, Summit, Freshii, Biogenic, Moreys and U.S. Gas, and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $1,094,938. The Valuation
Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.0 million due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: Foliofn, Inc. preferred stock by approximately $109,000, Velocitius equity interest by approximately $198,000, Octagon equity interest by approximately $730,000, Ohio Medical series A preferred stock by $800,000, NPWT common stock by $5,000 and preferred stock by $104,000, Tekers common stock by $111,000, SGDA Europe equity interest by approximately $2.5 million, Security Holdings equity interest by $564,000, Centile equity interest by $76,000, JSC Tekers common and preferred stock by approximately $499,000 and the Biovation warrants by approximately $232,000. Also, during the quarter ended July 31, 2014, the undistributed allocation of flow through income from the Companys equity investment in Octagon increased the cost basis of this investment by approximately $204,000.
During the quarter ended October 31, 2014, the Valuation Committee increased the fair value of the Companys investments in: MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $76,000, Centile equity interest by $165,000, Security Holdings equity interest by $2.1 million, RuMe series C preferred stock by approximately $800,000, Biogenic senior convertible note by $30,000, Advantage preferred stock by $125,000, Summit loan by approximately $253,000, Turf equity interest by $525,000, Turf guarantee by approximately $25,000 and Moreys loan by approximately $253,000. In addition, increases in the cost basis and fair value of the loans to Summit, Freshii, Biogenic, Moreys, Inland and U.S. Gas were due to the capitalization of PIK interest totaling $706,601. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.1 million due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: Foliofn, Inc. preferred stock by approximately $16,000, MVC Automotive equity interest by approximately $4.5 million, NPWT common stock by approximately $1,000 and preferred stock by approximately $20,000, Velocitius equity interest by approximately $5.7 million, Biovation warrants by $240,000, SGDA Europe equity interest by approximately $584,000, Biovation bridge loan by approximately $420,000, Tekers common stock by $136,000, JSC Tekers common and preferred stock by approximately $5.1 million and the Turf loan by approximately $31,000.
During the fiscal year ended October 31, 2014, the Valuation Committee increased the fair value of the Companys investments in: Custom Alloy series A preferred stock by approximately $12,000 and series B preferred stock by approximately $2.7 million, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $3.6 million, Centile equity interest by $117,000, PrePaid Legal loan by $100,000, Freshii warrant by approximately $23,000, Security Holdings equity interest by $1.7 million, RuMe series C preferred stock by approximately $875,000, Biogenic senior convertible note by $305,000, Advantage preferred stock by $221,000, Summit loan by approximately $253,000, Turf equity interest by $525,000, Moreys loan by approximately $253,000 and Vestal common stock by approximately $4.5 million. In addition, increases in the cost basis and fair value of the loans to Marine, Summit, Freshii, Biogenic, Moreys, Inland and U.S. Gas, and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $3,928,997. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $4.0 million due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Companys investments in: Foliofn, Inc. preferred stock by approximately $1.1 million, MVC
Automotive equity interest by approximately $6.7 million, G3K loan by approximately $5.6 million, NPWT common stock by approximately $9,000 and preferred stock by approximately $160,000, U.S. Gas preferred stock by $9.0 million, Velocitius equity interest by approximately $8.4 million, Ohio Medical series A preferred stock by $800,000, Biovation warrants by $311,000, SGDA Europe equity interest by approximately $2.6 million, Biovation bridge loan by approximately $439,000, Octagon equity interest by approximately $750,000, Tekers common stock by $252,000, JSC Tekers common and preferred stock by approximately $5.6 million, Turf loan by approximately $31,000 and the Turf guarantee by approximately $67,000. Also, during the fiscal year ended October 31, 2014, the undistributed allocation of flow through income from the Companys equity investment in Octagon totaled approximately $486,000. The $486,000 increased the cost basis and $101,000 increased the fair value of this investment.
At October 31, 2014, the fair value of all portfolio investments, exclusive of U.S. Treasury obligations and escrow receivables, was $447.6 million with a cost basis of $440.0 million. At October 31, 2014, the fair value and cost basis of portfolio investments of the Legacy Investments was $5.9 million and $23.8 million, respectively, and the fair value and cost basis of portfolio investments made by the Companys current management team was $441.7 million and $416.2 million, respectively. At October 31, 2013, the fair value of all portfolio investments, exclusive of U.S. Treasury obligations investments and escrow receivables, was $417.9 million with a cost basis of $372.0 million. At October 31, 2013, the fair value and cost basis of the Legacy Investments was $7.0 million and $23.8 million, respectively, and the fair value and cost basis of portfolio investments made by the Companys current management team was $410.9 million and $348.2 million, respectively.
10. Commitments and Contingencies
Commitments to/for Portfolio Companies
At October 31, 2015 and October 31, 2014, the Companys existing commitments to portfolio companies consisted of the following:
Portfolio Company |
|
Amount Committed |
|
Amount Funded at October 31, 2015 |
|
MVC Private Equity Fund LP |
|
$20.1 million |
|
$14.6 million |
|
Total |
|
$20.1 million |
|
$14.6 million |
|
Portfolio Company |
|
Amount Committed |
|
Amount Funded at October 31, 2014 |
|
MVC Private Equity Fund LP |
|
$20.1 million |
|
$14.6 million |
|
Total |
|
$20.1 million |
|
$14.6 million |
|
Guarantees
As of October 31, 2015 and October 31, 2014, the Company had the following commitments to guarantee various loans and mortgages:
Guarantee |
|
Amount Committed |
|
Amount Funded at October 31, 2015 |
|
MVC Automotive |
|
$7.2 million |
|
|
|
Tekers |
|
|
|
|
|
Turf |
|
$1.0 million |
|
|
|
Total |
|
$8.2 million |
|
|
|
Guarantee |
|
Amount Committed |
|
Amount Funded at October 31, 2014 |
|
MVC Automotive |
|
$5.0 million |
|
|
|
Tekers |
|
|
|
|
|
Turf |
|
$1.0 million |
|
|
|
Total |
|
$6.0 million |
|
|
|
ASC 460, Guarantees , requires the Company to estimate the fair value of the guarantee obligation at its inception and requires the Company to assess whether a probable loss contingency exists in accordance with the requirements of ASC 450, Contingencies. At October 31, 2015, the Valuation Committee estimated the fair values of the guarantee obligations noted above to be approximately -$41,000 or negative $41,000.
These guarantees are further described below, together with the Companys other commitments.
On July 19, 2007, the Company agreed to guarantee a 1.4 million Euro mortgage for Tekers, which did not have an outstanding balance as of October 31, 2015.
On January 16, 2008, the Company agreed to support a 4.0 million Euro mortgage for a Ford dealership owned and operated by MVC Automotive through making financing available to the dealership and agreeing under certain circumstances not to reduce its equity stake in MVC Automotive. Overtime, Erste Bank, the bank extending the mortgage to MVC Automotive, increased the amount of the mortgage. As such, the balance of the guarantee as of October 31, 2015 is approximately 6.5 million Euro (equivalent to approximately $7.2 million).
The Company guaranteed $1.0 million of Turfs indebtedness to Berkshire Bank, which had a fair value of -$41,000 or negative $41,000 as of October 31, 2015.
On March 31, 2010, the Company pledged its Series I and Series J preferred stock of U.S. Gas to Macquarie Energy, LLC (Macquarie Energy) as collateral for Macquarie Energys trade supply credit facility to U.S. Gas.
On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in the PE Fund, for which an indirect wholly-owned subsidiary of the Company serves as GP. The PE Fund closed on approximately $104 million of capital commitments. During the fiscal year ended October 31, 2012 and thereafter, MVC Partners was consolidated with the operations of the Company as MVC Partners limited partnership interest in the PE Fund is a substantial portion of MVC Partners operations. The investment period related to the PE Fund has ended. Additional capital may be called for follow-on investments in existing portfolio companies of the PE Fund or to pay operating expenses of the PE Fund. As of October 31, 2015, $14.6 million of the Companys commitment has been contributed.
On April 26, 2011, the Company agreed to collateralize a 5.0 million Euro letter of credit from JPMorgan Chase Bank, N.A. (equivalent to approximately $5.5 million at October 31, 2015), which is classified as restricted cash equivalents on the Companys consolidated balance sheet at October 31, 2015. This letter of credit is being used as collateral for a project guarantee by AB DnB NORD bankas to Security Holdings.
On November 30, 2011, the Company pledged its common stock and series A convertible preferred stock of Ohio Medical to collateralize a loan made to Ohio Medical by another
financial institution. On June 27, 2013, the Company pledged its series C convertible preferred stock of Ohio Medical to further collateralize the same third party loan made to Ohio Medical in 2011.
During the fiscal year ended October 31, 2015, the Company agreed to cash collateralize a $1.0 million working capital line of credit for Inland, which is classified as restricted cash on the Companys consolidated balance sheet at October 31, 2015.
Commitments of the Company
On February 19, 2013, the Company sold $70.0 million of senior unsecured notes (the Senior Notes) in a public offering. The Senior Notes will mature on January 15, 2023 and may be redeemed in whole or in part at any time or from time to time at the Companys option on or after April 15, 2016. The Senior Notes bear interest at a rate of 7.25% per year payable quarterly on January 15, April 15, July 15, and October 15 of each year, beginning April 15, 2013. The Company had also granted the underwriters a 30-day option to purchase up to an additional $10.5 million of Senior Notes to cover overallotments. The additional $10.5 million in principal was purchased and the total principal amount of the Senior Notes totaled $80.5 million. The net proceeds to the Company from the sale of the Senior Notes, after offering expenses, were approximately $77.4 million. The offering expenses incurred are amortized over the term of the Senior Notes.
On February 26, 2013, the Company received the funds related to the Senior Notes offering, net of expenses, and subsequently repaid the credit facility (the Credit Facility) with Guggenheim as administrative agent for the lenders in full, including all accrued interest. The Company used the excess net proceeds after the repayment of the Credit Facility for general corporate purposes, including, for example, investing in portfolio companies according to our investment objective and strategy, repurchasing shares pursuant to the share repurchase program adopted by our Board of Directors, funding distributions, and/or funding the activities of our subsidiaries.
On May 3, 2013, the Company sold approximately $33.9 million of additional Senior Notes in a direct offering. The additional Senior Notes will also mature on January 15, 2023 and may be redeemed in whole or in part at any time or from time to time at the Companys option on or after April 15, 2016. The Notes will also bear interest at a rate of 7.25% per year payable quarterly on January 15, April 15, July 15, and October 15 of each year. As of October 31, 2015, the total outstanding amount of the Senior Notes was approximately $114.4 million with a market value of approximately $112.3 million. The market value of the Senior Notes is based on the closing price of the security as of October 31, 2015 on the New York Stock Exchange (NYSE:MVCB).
On July 31, 2013, the Company entered into a one-year, $50 million revolving credit facility (Credit Facility II) with Branch Banking and Trust Company (BB&T). On January 31, 2014, Credit Facility II was increased to a $100 million revolving credit facility. On December 1, 2015, Credit Facility II was renewed and will now expire on May 31, 2016, at which time all outstanding amounts under it will be due and payable. At October 31, 2014, the balance of Credit Facility II was $100.0 million. During the fiscal year ended October 31, 2015, the Companys net repayments on Credit Facility II were $10.0 million, resulting in an outstanding balance of $90.0 million at October 31, 2015. Credit Facility II is used to provide the Company
with better overall financial flexibility in managing its investment portfolio. Borrowings under Credit Facility II bear interest at LIBOR plus 100 basis points. In addition, the Company is also subject to a 20 basis point commitment fee for the average amount of Credit Facility II that is unused during each fiscal quarter. The Company paid closing fees, legal and other costs associated with these transactions. These costs will be amortized over the life of the facility. Borrowings under Credit Facility II will be secured by cash, short-term and long-term U.S. Treasury securities and other governmental agency securities. The Company received a waiver from BB&T with respect to the delivery of financial reports required under Credit Facility II, due to the Companys delayed filing of its Annual Report.
On December 30, 2014, the Company entered into a 6 month, $25.0 million bridge loan (Bridge Loan) with Firstrust Bank, initially borrowing approximately $15.9 million. Prior to maturity, the Bridge Loan was increased to $30.0 million and extended to December 31, 2015. During the fiscal year ended October 31, 2015 and after the initial borrowing of $15.9 million, the Company borrowed approximately $20.8 million and repaid approximately $28.7 million, resulting in an outstanding balance of $8.0 million. Borrowings under the Bridge Loan bear interest at 5%. The Company paid closing fees, legal and other costs associated with the transaction. These costs, of approximately $360,000, were amortized over the life of the Bridge Loan. See Note 17 Subsequent Events for additional information. The Company has received extensions from Firstrust Bank as to the delivery of the financial reports required under the Amended and Restated Loan Agreement, due to the Companys delayed quarterly filings.
The Company enters into contracts with Portfolio Companies and other parties that contain a variety of indemnifications. The Companys maximum exposure under these arrangements is unknown. However, the Company has not experienced claims or losses pursuant to these contracts and believes the risk of loss relate d to indemnifications to be remote.
11. Certain Issuances of Equity Securities by the Issuer and Share Repurchase Program
On April 3, 2013 the Companys Board of Directors authorized an expanded share repurchase program to opportunistically buy back shares in the market in an effort to narrow the market discount of its shares. The previously authorized $5 million limit has been eliminated. Under the repurchase program, shares may be repurchased from time to time at prevailing market prices. The repurchase program does not obligate the Company to acquire any specific number of shares and may be discontinued at any time. The following table represents purchases made under our stock repurchase program for the fiscal years ended October 31, 2013 and October 31, 2014. There were no repurchases made during the fiscal year ended October 31, 2015.
|
|
|
|
|
|
Total Number of Shares |
|
|
|
||
|
|
|
|
Average Price Paid per |
|
Purchased as Part of |
|
Approximate Dollar Value |
|
||
|
|
Total Number of Shares |
|
Share including |
|
Publicly Announced |
|
of Shares Purchased Under |
|
||
Period * |
|
Purchased |
|
commission |
|
Program |
|
the Program |
|
||
For the Year Ended October 31, 2013 |
|
1,299,294 |
|
$ |
12.83 |
|
1,299,294 |
|
$ |
16,673,207 |
|
For the Year Ended October 31, 2014 |
|
310,706 |
|
$ |
13.24 |
|
1,610,000 |
|
$ |
4,114,967 |
|
|
|
|
|
|
|
|
|
|
|
||
Total |
|
1,610,000 |
|
$ |
12.91 |
|
1,610,000 |
|
$ |
20,788,174 |
|
*Disclosure covering repurchases made on a monthly basis is available on the Companys website at http://www.mvccapital.com
On May 14, 2014, the Company signed a share exchange agreement with Equus, another publicly traded business development company, as part of a plan of reorganization adopted by
the Equus Board of Directors. Under the terms of the reorganization, Equus will pursue a merger or consolidation with the Company, a subsidiary of the Company, or one or more of the Companys portfolio companies. Absent Equus merging or consolidating with/into the Company itself (whereby the Company would own a majority of Equus shares), the current intention is for Equus to (i) be restructured into a publicly-traded operating company focused on the energy and/or financial services sectors and (ii) seek to terminate its election as a business development company. Pursuant to the share exchange agreement, the Company has received 2,112,000 shares of Equus in exchange for 395,839 shares of the Company. The exchange was calculated based upon each companys respective net asset value per share published at that time. As part of the reorganization, the Company may acquire additional Equus shares from time to time, either through Equus direct sale of newly issued shares to the Company or through the purchase of outstanding Equus shares. The Company continues to discuss reorganization options with Equus. As a result of the restatement for the quarter ending July 31, 2014, the Company has a liability to Equus of $228,851 for additional shares and dividends due to Equus as of October 31, 2015.
12. Tax Matters
Return of Capital Statement of Position (ROCSOP) Adjustment: During the year ended October 31, 2015, the Company recorded a reclassification for permanent book to tax differences. These differences were primarily due to the liquidation of controlled subsidiaries, reclassification of dividends and character of PIK payments related to preferred equity. These differences resulted in a net decrease in accumulated losses of $9,127,426, a decrease in accumulated net realized gain of $6,395,911, and a decrease in additional paid-in capital of $2,731,515. This reclassification had no effect on net assets.
Distributions to Shareholders: The table presented below includes MVC Capital, Inc. only. The Companys wholly-owned subsidiary MVCFS has not been included. As of October 31, 2015, the components of accumulated earnings/ (deficit) on a tax basis were as follows:
Tax Basis Accumulated Earnings (Deficit) |
|
|
|
|
|
Accumulated capital and other losses |
|
|
$ |
|
|
Undistributed Net investment Income |
|
155,020 |
|
||
Undistributed Long-Term Capital Gain |
|
5,248,764 |
|
||
|
|
|
|
||
Gross unrealized appreciation |
|
105,958,017 |
|
||
Gross unrealized depreciation |
|
(153,827,017 |
) |
||
|
|
|
|
||
Net unrealized depreciation |
|
$ |
(47,869,000 |
) |
|
|
|
|
|
|
|
Total tax basis accumulated earnings |
|
(42,465,216 |
) |
||
Tax cost of investments |
|
448,192,705 |
|
||
|
|
|
|
||
Current year distributions to shareholders on a tax basis: |
|
|
|
||
Ordinary income |
|
|
|
||
Long Term Capital Gain |
|
12,259,524 |
|
The Company designated as long-term capital gain dividend, pursuant to Internal Revenue Code Section 852(b)(3), the amount necessary to reduce the earnings and profits of the Fund related to net capital gain to zero for the tax year ended October 31, 2015.
Prior year distributions to shareholders on a tax basis: |
|
|
|
Ordinary income |
|
1,029,522 |
|
Long Term Capital Gain |
|
11,186,377 |
|
On October 31, 2015, the Company had no net capital loss carryforward.
Qualified Dividend Income Percentage
The Company designated 0.00% of dividends declared and paid during the year ending October 31, 2015 from net investment income as qualified dividend income under the Jobs Growth and Tax Relief Reconciliation Act of 2003.
Corporate Dividends Received Deduction Percentage
Corporate shareholders may be eligible for the dividends received deduction for certain ordinary income distributions paid by the Company. The Company designated 0.00% of dividends declared and paid during the year ending October 31, 2015 from net investment income as qualifying for the dividends received deduction. The deduction is a pass through of dividends paid by domestic corporations (i.e. only equities) subject to taxation.
13. Income Taxes
The Companys wholly-owned subsidiary MVCFS is subject to federal and state income tax. For the fiscal year ended October 31, 2015, the Company recorded a tax provision of $1,756. For the fiscal year ended October 31, 2014, the Company recorded a tax provision of $1,755. For the fiscal year ended October 31, 2013, the Company recorded a tax provision of $3,600. The provision for income taxes was comprised of the following:
|
|
Fiscal Year ended |
|
|||||||
|
|
October 31, 2015 |
|
October 31, 2014 |
|
October 31, 2013 |
|
|||
Current tax (benefit) expense: |
|
|
|
|
|
|
|
|||
Federal |
|
$ |
|
|
$ |
|
|
$ |
|
|
State |
|
1,756 |
|
1,755 |
|
3,600 |
|
|||
Total current tax (benefit) expense |
|
1,756 |
|
1,755 |
|
3,600 |
|
|||
|
|
|
|
|
|
|
|
|||
Deferred tax expense (benefit): |
|
|
|
|
|
|
|
|||
Federal |
|
|
|
|
|
|
|
|||
State |
|
|
|
|
|
|
|
|||
Total deferred tax expense (benefit) |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Total tax (benefit) provision |
|
$ |
1,756 |
|
$ |
1,755 |
|
$ |
3,600 |
|
The following table summarizes the significant differences between the U.S. federal statutory tax rate and the Companys effective tax rate for financial statement purposes for the fiscal years ended October 31, 2015, 2014 and 2013:
|
|
Fiscal Year Ended |
|
|||||||
|
|
October 31,
|
|
October 31,
|
|
October 31,
|
|
|||
Federal income tax benefit at statutory rate |
|
$ |
(1,260,679 |
) |
$ |
(1,378,609 |
) |
$ |
(827,271 |
) |
State income taxes |
|
(300,955 |
) |
(329,273 |
) |
(200,176 |
) |
|||
Other |
|
735 |
|
65,086 |
|
(1,001 |
) |
|||
Net change to valuation allowance |
|
1,562,655 |
|
1,644,551 |
|
1,032,048 |
|
|||
|
|
1,756 |
|
1,755 |
|
3,600 |
|
|||
The Company generated a net operating loss of approximately $3.8 million in the current year for federal and New York state purposes. The net operating loss will be carried forward to offset federal taxable income in future years. As of October 31, 2015, the Company has the following NOL available to be carried forward:
NOL -
|
|
NOL New York
|
|
Fiscal Year of
|
|
Expiration |
|
||
|
|
|
|
|
|
|
|
||
$ |
1,411,365 |
|
$ |
2,284,298 |
|
October 31, 2008 |
|
October 31, 2028 |
|
$ |
2,585,262 |
|
$ |
2,780,861 |
|
October 31, 2009 |
|
October 31, 2029 |
|
$ |
3,969,891 |
|
$ |
3,968,135 |
|
October 31, 2010 |
|
October 31, 2030 |
|
$ |
5,286,401 |
|
$ |
5,284,207 |
|
October 31, 2011 |
|
October 31, 2031 |
|
$ |
3,660,070 |
|
$ |
3,656,073 |
|
October 31, 2012 |
|
October 31, 2032 |
|
$ |
2,639,679 |
|
$ |
2,637,924 |
|
October 31, 2013 |
|
October 31, 2033 |
|
$ |
4,382,426 |
|
$ |
4,384,181 |
|
October 31, 2014 |
|
October 31, 2034 |
|
$ |
3,830,541 |
|
$ |
3,832,297 |
|
October 31, 2015 |
|
October 31, 2035 |
|
Due to the uncertainty surrounding the ultimate utilization of these net operating losses, as of October 31, 2015, the Company has recorded a 100% valuation allowance against its federal and state net deferred tax assets totaling approximately $9,394,015 and $2,342,399 respectively.
Deferred income tax balances for MVCFS reflect the impact of temporary difference between the carrying amount of assets and liabilities and their tax bases and are stated at tax rates expected to be in effect when taxes are actually paid or recovered. The components of our deferred tax assets and liabilities for MVCFS as of October 31, 2015, October 31, 2014 and October 31, 2013 were as follows:
|
|
October 31, 2015 |
|
October 31, 2014 |
|
October 31, 2013 |
|
|||
Deferred tax assets: |
|
|
|
|
|
|
|
|||
Deferred revenues |
|
$ |
37,718 |
|
$ |
26,751 |
|
$ |
89,958 |
|
Net operating loss |
|
11,793,832 |
|
10,178,580 |
|
8,374,748 |
|
|||
Others |
|
(95,136 |
) |
(31,572 |
) |
64,502 |
|
|||
Total deferred tax assets |
|
$ |
11,736,414 |
|
$ |
10,173,759 |
|
$ |
8,529,208 |
|
|
|
|
|
|
|
|
|
|||
Valuation allowance on Deferred revenues and Net operating loss |
|
$ |
(11,736,414 |
) |
$ |
(10,173,759 |
) |
$ |
(8,529,208 |
) |
|
|
|
|
|
|
|
|
|||
Net deferred tax assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|||
Deferred tax liabilities: |
|
|
|
|
|
|
|
|||
Deferred tax liabilities |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Total deferred tax liabilities |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Net deferred taxes |
|
$ |
|
|
$ |
|
|
$ |
|
|
14. Segment Data
The Companys reportable segments are its investing operations as a business development company, MVC Capital, which includes MVC Cayman and MVC Turf. MVCFS, a wholly-owned subsidiary that provides advisory, administrative and other services to the Company and its portfolio companies, is also included.
The following table presents book basis segment data for the fiscal year ended October 31, 2015:
|
|
MVC |
|
MVCFS |
|
Consolidated |
|
|||
|
|
|
|
|
|
|
|
|||
Interest and dividend income |
|
$ |
20,402,332 |
|
$ |
72 |
|
$ |
20,402,404 |
|
Fee income |
|
|
|
2,047,657 |
|
2,047,657 |
|
|||
Fee income - asset management |
|
|
|
1,248,721 |
|
1,248,721 |
|
|||
Total operating income |
|
20,402,332 |
|
3,296,450 |
|
23,698,782 |
|
|||
|
|
|
|
|
|
|
|
|||
Total operating expenses |
|
7,488,126 |
|
7,062,084 |
|
14,550,210 |
|
|||
Less: Waivers by Adviser |
|
(150,000 |
) |
|
|
(150,000 |
) |
|||
Total net operating expenses |
|
7,338,126 |
|
7,062,084 |
|
14,400,210 |
|
|||
Net operating income (loss) before taxes |
|
13,064,206 |
|
(3,765,634 |
) |
9,298,572 |
|
|||
Tax expense |
|
|
|
1,756 |
|
1,756 |
|
|||
Net operating income (loss) |
|
13,064,206 |
|
(3,767,390 |
) |
9,296,816 |
|
|||
|
|
|
|
|
|
|
|
|||
Net realized gain on investments |
|
3,700,260 |
|
|
|
3,700,260 |
|
|||
Net unrealized (depreciation) appreciation on investments |
|
(50,615,250 |
) |
57,754 |
|
(50,557,496 |
) |
|||
|
|
|
|
|
|
|
|
|||
Net decrease in net assets resulting from operations |
|
$ |
(33,850,784 |
) |
$ |
(3,709,636 |
) |
$ |
(37,560,420 |
) |
In all periods prior to July 16, 2004, all business was conducted through MVC Capital, Inc.
15. Selected Quarterly Data (unaudited)
|
|
2015 |
|
2014 |
|
||||||||||||
|
|
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 |
|
6,046 |
|
7,524 |
|
5,273 |
|
4,856 |
|
4,325 |
|
5,016 |
|
5,862 |
|
4,613 |
|
Management fee |
|
1,900 |
|
1,899 |
|
2,066 |
|
1,980 |
|
2,121 |
|
2,144 |
|
2,227 |
|
2,189 |
|
Portfolio fees - asset management |
|
187 |
|
189 |
|
187 |
|
204 |
|
386 |
|
153 |
|
341 |
|
106 |
|
Management fee - asset management |
|
85 |
|
77 |
|
(18 |
) |
16 |
|
(126 |
) |
17 |
|
231 |
|
232 |
|
Administrative |
|
1,685 |
|
1,136 |
|
1,325 |
|
1,159 |
|
942 |
|
1,095 |
|
727 |
|
908 |
|
Interest, fees and other borrowing costs |
|
2,532 |
|
2,627 |
|
2,616 |
|
2,455 |
|
2,355 |
|
2,426 |
|
2,406 |
|
2,255 |
|
Net Incentive compensation |
|
(771 |
) |
(3,404 |
) |
(3,462 |
) |
(2,120 |
) |
(2,339 |
) |
568 |
|
(3,414 |
) |
435 |
|
Total waiver by adviser |
|
(37 |
) |
(38 |
) |
(37 |
) |
(38 |
) |
(37 |
) |
(38 |
) |
(37 |
) |
(38 |
) |
Tax expense |
|
|
|
1 |
|
1 |
|
|
|
|
|
1 |
|
|
|
1 |
|
Net operating income (loss) before net realized and unrealized gains |
|
465 |
|
5,037 |
|
2,595 |
|
1,200 |
|
1,023 |
|
(1,350 |
) |
3,381 |
|
(1,475 |
) |
Net (decrease) increase in net assets resulting from operations |
|
(2,045 |
) |
(13,959 |
) |
(11,813 |
) |
(9,743 |
) |
(10,614 |
) |
1,738 |
|
(12,651 |
) |
1,685 |
|
Net (decrease) increase in net assets resulting from operations per share |
|
(0.10 |
) |
(0.61 |
) |
(0.52 |
) |
(0.43 |
) |
(0.46 |
) |
0.07 |
|
(0.57 |
) |
0.08 |
|
Net asset value per share |
|
12.95 |
|
13.18 |
|
13.93 |
|
14.58 |
|
15.15 |
|
15.75 |
|
15.89 |
|
16.57 |
|
16. Significant Subsidiaries
We have determined that for the fiscal year ended October 31, 2015; Ohio Medical and MVC Automotive, for the fiscal year ended October 31, 2014; MVC Automotive, Vestal, Ohio Medical and Velocitius and for the fiscal year ended October 31, 2013; Vestal and Ohio Medical are unconsolidated portfolio companies that have met the conditions of a significant subsidiary. The financial information presented below includes summarized balance sheets as of September 30, 2015, September 30, 2014 and September 30, 2013 and income statements for the period October 1, 2014 to September 30, 2015, October 1, 2013 to September 30, 2014 and October 1, 2012 to September 30, 2013. The financial information below is based on unaudited financial statements and has been prepared and furnished by each portfolio company and not the Company.
|
|
Ohio Medical |
|
MVC Automotive |
|
Vestal |
|
Ohio Medical |
|
Velocitius |
|
MVC Automotive |
|
Vestal |
|
Ohio Medical |
|
||||||||
Balance Sheet |
|
As of September 30, |
|
As of September 30, |
|
As of September 30, |
|
As of September 30, |
|
As of September 30, |
|
As of September 30, |
|
As of September 30, |
|
As of September 30, |
|
||||||||
All numbers in thousands |
|
2015 |
|
2015 |
|
2014 |
|
2014 |
|
2014 |
|
2014 |
|
2013 |
|
2013 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Total current assets |
|
$ |
19,813 |
|
$ |
48,358 |
|
$ |
6,537 |
|
$ |
19,930 |
|
$ |
2,460 |
|
$ |
71,479 |
|
$ |
5,421 |
|
$ |
22,098 |
|
Tota non-current assets |
|
98,638 |
|
31,443 |
|
1,272 |
|
103,346 |
|
21,570 |
|
38,462 |
|
1,260 |
|
107,902 |
|
||||||||
Total Assets |
|
$ |
118,451 |
|
$ |
79,801 |
|
$ |
7,809 |
|
$ |
123,276 |
|
$ |
24,030 |
|
$ |
109,941 |
|
$ |
6,681 |
|
$ |
130,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Liabilities and Sharholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Current Liabilities |
|
$ |
9,597 |
|
$ |
61,465 |
|
$ |
1,914 |
|
$ |
9,725 |
|
$ |
333 |
|
$ |
75,333 |
|
$ |
2,385 |
|
$ |
10,247 |
|
Long-term liablities |
|
44,550 |
|
20,228 |
|
671 |
|
50,428 |
|
12,970 |
|
24,703 |
|
1,448 |
|
56,789 |
|
||||||||
Shareholders Equity |
|
64,304 |
|
(1,892 |
) |
5,224 |
|
63,123 |
|
10,727 |
|
9,905 |
|
2,848 |
|
62,964 |
|
||||||||
Total Liablities and Shareholders Equity |
|
$ |
118,451 |
|
$ |
79,801 |
|
$ |
7,809 |
|
$ |
123,276 |
|
$ |
24,030 |
|
$ |
109,941 |
|
$ |
6,681 |
|
$ |
130,000 |
|
|
|
Ohio Medical |
|
MVC Automotive |
|
Vestal |
|
Ohio Medical |
|
Velocitius |
|
MVC Automotive* |
|
Vestal |
|
Ohio Medical |
|
||||||||
|
For the Period from |
|
For the Period from |
|
For the Period from |
|
For the Period from |
|
For the Period from |
|
For the Period from |
|
For the Period from |
|
For the Period from |
|
|||||||||
Income Statement |
|
October 1, 2014 to |
|
October 1, 2014 to |
|
October 1, 2013 to |
|
October 1, 2013 to |
|
October 1, 2013 to |
|
October 1, 2013 to |
|
October 1, 2012 to |
|
October 1, 2012 to |
|
||||||||
All numbers in thousands |
|
September 30, 2015 |
|
September 30, 2015 |
|
September 30, 2014 |
|
September 30, 2014 |
|
September 30, 2014 |
|
September 30, 2014 |
|
September 30, 2013 |
|
September 30, 2013 |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Net Sales & Revenue |
|
$ |
49,217 |
|
$ |
185,664 |
|
$ |
22,570 |
|
$ |
48,513 |
|
$ |
3,837 |
|
$ |
238,470 |
|
$ |
20,921 |
|
$ |
51,245 |
|
Cost of Sales |
|
25,576 |
|
175,211 |
|
14,504 |
|
26,102 |
|
|
|
216,819 |
|
13,949 |
|
27,832 |
|
||||||||
Gross Margin |
|
23,641 |
|
10,453 |
|
8,066 |
|
22,411 |
|
3,837 |
|
21,651 |
|
6,972 |
|
23,413 |
|
||||||||
Operating Expenses |
|
16,707 |
|
19,806 |
|
4,139 |
|
16,517 |
|
3,421 |
|
27,087 |
|
3,971 |
|
18,614 |
|
||||||||
Operating Income |
|
6,934 |
|
(9,353 |
) |
3,927 |
|
5,894 |
|
416 |
|
(5,436 |
) |
3,001 |
|
4,799 |
|
||||||||
Income Tax (Benefit) |
|
633 |
|
(255 |
) |
1,098 |
|
462 |
|
37 |
|
44 |
|
1,127 |
|
(327 |
) |
||||||||
Interest Expense |
|
4,445 |
|
1,862 |
|
94 |
|
5,270 |
|
476 |
|
1,762 |
|
111 |
|
5,092 |
|
||||||||
Other Expenses (Income), Net |
|
786 |
|
(95 |
) |
|
|
966 |
|
(232 |
) |
(145 |
) |
|
|
953 |
|
||||||||
Net Income (Loss) |
|
$ |
1,070 |
|
$ |
(10,865 |
) |
$ |
2,735 |
|
$ |
(804 |
) |
$ |
135 |
|
$ |
(7,097 |
) |
$ |
1,763 |
|
$ |
(919 |
) |
* The MVC Automotive financial information excludes the results of one of MVC Automotives subsidiary dealerships, which filed for bankruptcy in March 2014 and whose records are restricted by the local administrator of the bankruptcy.
** 2013 Only includes OMC & Vestal, prior year US GAAP information is not available for MVC Auto and Velocitus
17. Subsequent Events
On November 1, 2015 and December 1, 2015, Thunderdome made principal payments totaling approximately $51,000 on its second lien loan.
On November 3, 2015, Results Companies repaid its loan in full totaling approximately $10.0 million, including all accrued interest.
On November 20, 2015 and December 3, 2015, the Company invested an additional $538,000 and $1.1 million, respectively, in MVC Automotive common equity.
On December 1, 2015, Credit Facility II was renewed and will now expire on May 31, 2016, at which time all outstanding amounts under it will be due and payable. The Company is in compliance with all loan covenants related to Credit Facility II as of the filing of this Form 10-K. The Company received a waiver from BB&T with respect to the delivery of financial reports required under Credit Facility II, due to the Companys delayed filing of its Annual Report.
On December 9, 2015, the Company entered into a three-year, $50 million revolving borrowing base credit facility with Santander Bank N.A. as a lender and lead agent and Wintrust Bank as a lender and syndication agent. The revolving credit facility can, under certain conditions, be increased up to $85 million. The new facility bears an interest rate of LIBOR plus 3.75% or the prime rate plus 1% (at the Companys option), and includes a 1% closing fee of the commitment amount and a 0.75% unused fee. The compensating balance for the revolving credit facility is $10.0 million. The new facility replaced the $30.0 million Bridge Loan with Firstrust Bank that would have matured on December 31, 2015.
On December 15, 2015, the Company loaned approximately $1.6 million to Somotra nv, a wholly-owned subsidiary of MVC Automotive.
On December 18, 2015, the Company invested approximately $5.1 million in Pride Engineering, LLC in the form of a second lien loan. The loan bears annual interest of 12% and matures on May 18, 2021.
On December 21, 2015, the Companys Board of Directors declared a dividend of $0.135 per share. Additionally, due to the realization of capital gains, the Companys Board of Directors declared a special dividend of $0.17 per share. The dividends were paid on January 8, 2016 to shareholders of record on December 31, 2015 and totaled approximately $6.9 million.
On December 22, 2015, the Company realized a loss of approximately $1.5 million due to the dissolution of Biovation.
On December 24, 2015, the Company realized a loss of approximately $5.5 million on Inlands senior secured loan and $713,000 on the warrants as part of Inlands restructuring. As part of the restructuring, the Company received a $6.0 million senior secured loan in MVC Environmental, Inc., a holding company formed by the Company that owns and operates intellectual property and environmental service facilities for oil and gas waste recycling related to Inland, and received 950 common shares of MVC Environmental, Inc. The loan bears annual interest of 9% and matures on December 22, 2020.
On December 31, 2015, the Company completed the sale of Ohio Medical through an asset sale and expects gross proceeds of approximately $40.0 million, including fees. At the time of closing, the Company received cash proceeds of approximately $29.0 million and anticipates receiving an additional $11.0 million, assuming the full receipt of all escrow proceeds scheduled for various periods, with the final release of payment scheduled for 18 months from the closing.
On January 4, 2016, the Company loaned an additional $1.5 million to Legal Solutions Holdings, Inc., which increased the senior subordinated loan to approximately $10.2 million.
On February 1, 2016, the Company loaned an additional $1.1 million to Thunderdome, which increased the second lien loan to approximately $3.0 million.
On February 17, 2016, the Company loaned $7.0 million to Dukane Intelligent Assembly, a global provider of plastic welding equipment, in the form of a second lien loan with an interest rate of 13% and a maturity date of November 16, 2020.
On March 7, 2016, the Company received a $10.0 million distribution from U.S. Gas.
On March 11, 2016, the Company loaned $10.0 million to Quantum Plastics, LLC, a global plastic injection manufacturer, in the form of a senior subordinated loan with an interest rate of 12% and a maturity date of March 10, 2021. The Company also received a warrant as part of the investment and allocated a portion of the cost basis of the loan to the warrant at the time the investment was made.
In March 2016, the Adviser agreed to modify its prior agreement to waive, effective November 1, 2015, the first $1.0 million of capital gains incentive fee due under the Advisory
Agreement, such that the $1.0 million waiver of incentive fee would be applied to any incentive fee due under the agreement, whether it is a capital gains incentive fee or net operating income incentive fee.
On May 6, 2016, RX repaid $8.0 million of principal on its loan. In addition, RX repaid all outstanding accrued and deferred interest for a total payment of approximately $9.9 million. As a part of the transaction, which led to the repayment, RX was reorganized into FDS, Inc., a data service provider. The Companys outstanding $2.3 million of principal was amended to a senior loan with an interest rate of 16% and a maturity date of November 30, 2016.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
MVC Capital, Inc.
We have audited the accompanying consolidated balance sheet of MVC Capital, Inc. (a Delaware corporation) and subsidiaries (the Company), including the consolidated schedule of investments, as of October 31, 2015, and the related consolidated statements of operations, cash flows, changes in net assets, and selected per share data and ratios for the year then ended. Our audit of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2015 by correspondence with the custodians and directly with the portfolio companies, as applicable. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MVC Capital, Inc. and subsidiaries as of October 31, 2015, and the results of their operations, cash flows, changes in net assets, and their selected per share data and ratios for the year end ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We were also engaged to audit, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Companys internal control over financial reporting as of October 31, 2015, based on criteria established in the 2013 Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated May 16, 2016 disclaimed an opinion on the effectiveness of the Companys internal control over financial reporting because of a scope limitation.
/s/ GRANT THORNTON LLP
New York, New York
May 16, 2016
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of MVC Capital, Inc.
We have audited the accompanying consolidated balance sheet of MVC Capital, Inc. (the Company), including the consolidated schedule of investments, as of October 31, 2014, and the related consolidated statements of operations, cash flows and changes in net assets for each of the two years in the period ended October 31, 2014, and the consolidated selected per share data and ratios for each of the four years in the period ended October 31, 2014. These financial statements and the selected per share data and ratios are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and the selected per share data and ratios based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2014, by correspondence with the custodians and directly with management of the portfolio companies, as applicable. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and selected per share data and ratios referred to above present fairly, in all material respects, the consolidated financial position of MVC Capital, Inc. at October 31, 2014, and the consolidated results of its operations and its cash flows for each of the two years then ended and the selected per share data and ratios for each of the four years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
October 14, 2015
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management has conducted an evaluation, under the supervision of, and with the participation of, the individual who performs the functions of a Principal Executive Officer (the CEO) and the individual who performs the functions of a Principal Financial Officer (the CFO), of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of October 31, 2015. Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures as of October 31, 2015 were not effective as a result of a material weakness in internal control over financial reporting concerning valuation related controls associated with certain affiliated or controlled portfolio companies (e.g., MVC Auto and SGDA Europe) which is discussed further below. This material weakness was disclosed in the October 31, 2014 Form 10K (2014 10-K) and continued to exist as of October 31, 2015. Disclosure controls and procedures are designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed under the Exchange Act is accumulated and communicated to management, including the Companys CEO and CFO as appropriate, to allow timely decisions regarding required disclosure.
Managements Report on Internal Control Over Financial Reporting
General. The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. The Companys internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Scope of Managements Report on Internal Control Over Financial Reporting. The Companys internal control over financial reporting includes those policies and procedures that:
· Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
· Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Companys receipts and expenditures are being made only in accordance with authorizations of the Companys management and directors; and
· Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect on the Companys financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, including the Companys CEO and CFO, assessed the effectiveness of the Companys internal control over financial reporting as of October 31, 2015. In making this assessment, management used the criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on managements assessment, management concluded, subject to the limitations described under Scope of Managements Report on Internal Control Over Financial Reporting above, that the Company did not maintain effective internal control over financial reporting as of October 31, 2015 (which was a continuation of what had existed as of October 31, 2014 as reported in the 2014 10-K).
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Companys annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses would permit information required to be disclosed by the Company in the reports that it files or submits to not be recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. In conducting our review of our internal control over financial reporting, we identified a material weakness in our internal control over financial reporting concerning 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). As a result of the weakness, a material misstatement of the fair values of certain investments (and related misstatements of Net Unrealized Appreciation/Depreciation on Investments, Total Assets, Net Asset Value Per Share, and related financial disclosures), were not prevented or detected on a timely basis, as reported in the 2014 10-K. The foregoing led to the restatement of the 2013 annual financial statements, and 2013 and 2014 interim financial statements.
Remediation of Material Weakness in Internal Control over Financial Reporting
We have improved and are in the process of continuing to improve our controls to remediate the material weakness that existed as of October 31, 2014 and continued to exist as of October 31, 2015. As discussed in the 2014 10-K, to address the material weakness, in the second half of 2015 the Company adopted a corrective action plan which has added new and/or enhanced existing controls surrounding the valuation process and financial reporting oversight of various controlled/affiliated portfolio companies, including additional reviews (by one or more MVC Capital representatives) of the financial reporting of controlled and certain affiliated portfolio
companies and additional reviews and testing of valuation data of these controlled/affiliated portfolio companies. The Company also enhanced its internal audit plan to incorporate risk assessments of controlled and certain affiliated portfolio companies. In addition, the Company retained a third party consultants to perform external reviews of certain fair valuations. While some of the remediation actions have been implemented, some are still in process and it will take time for the actions to be fully integrated and confirmed to be effective and sustainable. Until the remediation steps are fully implemented and tested, the material weakness described above will continue to exist.
Management does not expect that the Companys disclosure controls and procedures or the Companys internal control over financial reporting (even if fully remediated) will prevent or detect all error and all fraud. A control system, regardless of how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Attestation Report of the Independent Registered Public Accounting Firm
The Companys financial statements have been audited by Grant Thornton, an independent registered public accounting firm, which was engaged on November 20, 2015. Grant Thorntons attestation report on the Companys internal controls over financial reporting, which disclaims an opinion on the effectiveness of the Companys internal control over financial reporting, is included herein. Grant Thornton was unable to perform auditing procedures necessary to form an opinion on the Companys internal control over financial reporting as of October 31, 2015 due to the fact that Grant Thornton was engaged after October 31, 2015.
Changes in Internal Control over Financial Reporting
Other than the changes related to the material weakness and related remediation described in the 2014 10-K and above, there has been no change in the Companys internal control over financial reporting that occurred during the fiscal quarter ended October 31, 2015, that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
MVC Capital, Inc.
We were engaged to audit the internal control over financial reporting of MVC Capital, Inc. (a Delaware corporation) and subsidiaries (the Company) as of October 31, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control Over Financial Reporting.
As described in Item 9A of the Companys Annual Report on Form 10-K, we were engaged to audit the Companys internal control over financial reporting subsequent to October 31, 2015. Accordingly, we were unable to perform auditing procedures necessary to form an opinion on the Companys internal control over financial reporting as of October 31, 2015.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the companys annual or interim financial statements will not be prevented or detected on a timely basis. If one or more material weaknesses exist, a companys internal control over financial reporting cannot be considered effective. The following material weakness has been identified and included in managements assessment.
The Company identified a material weakness in their internal control over financial reporting concerning the design and operating effectiveness of certain valuation related controls associated with investments in certain affiliated or controlled portfolio companies. As a result of the weakness, a material misstatement of the fair values of certain investments (and related misstatements of Net Unrealized Appreciation/Depreciation on Investments, Total Assets, Net Asset Value Per Share, and related financial disclosures), were not prevented or detected on a timely basis, as reported in the 2014 10-K. The foregoing led to the restatement of the 2013 annual financial statements, and 2013 and 2014 interim financial statements.
Because of the limitation on the scope of our audit described above, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the effectiveness of the Companys internal control over financial reporting.
We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended October 31, 2015, and our report dated May 16, 2016 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
New York, New York
May 16, 2016
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors and the officers of the Fund, including brief biographical information, as of December 31, 2015, is set forth below.
(1)
|
|
(2)
|
|
|
(4)
|
|
(5)
|
|
(6)
|
|
Independent Directors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emilio Dominianni 287 Bowman Avenue 2nd Floor Purchase, NY 10577 Age: 84 |
|
Director |
|
1 year/12 years, 10 months |
|
Mr. Dominianni is a retired Partner of, and was Special Counsel to, Coudert Brothers LLP, a law firm. He is currently a director of Stamm International Corporation, Powrmatic Inc., and Powrmatic of Canada Ltd., manufacturers and distributors of heating, ventilating, and air conditioning equipment. |
|
None(1) |
|
See column 4 |
(1)
|
|
(2)
|
|
|
(4)
|
|
(5)
|
|
(6)
|
|
Phillip Goldstein 287 Bowman Avenue 2 nd Floor Purchase, NY 10577 Age: 70 |
|
Director |
|
1 year/3 years, 3 months |
|
Mr. Goldstein is a principal of Bulldog Holdings, LLC, the owner of several entities serving as the general partner of several investment partnerships in the Bulldog Investors group of private funds, and the owner of Kimball & Winthrop, LLC, the managing general partner of Bulldog Investors General Partnership, since 2012; he was also a principal of the general partner of several investment partnerships in the Bulldog Investors group of private funds from 1992-2012; additionally, Mr. Goldstein is a principal of Bulldog Investors, LLC (formerly known as Brooklyn Capital Management, LLC), the investment adviser for the Special Opportunities Fund and several private investment funds, since 2009. Mr. Goldstein is (or was previously) a Director of the following closed-end funds: Mexico Equity and Income Fund since 2000; Special Opportunities Fund since 2009; ASA Gold and Precious Metals Ltd. from 2008 to 2013; Korea Equity Fund from 2010-2012; Brantley Capital Corporation from 2001 to 2013; and Chairman and Director of Emergent Capital, Inc. (formerly known as Imperial Holdings, Inc.), a specialty finance company, since 2012. |
|
None(1) |
|
See column 4 |
(1)
|
|
(2)
|
|
|
(4)
|
|
(5)
|
|
(6)
|
|
Gerald Hellerman 287 Bowman Avenue 2nd Floor Purchase, NY 10577 Age: 78 |
|
Director |
|
1 year/12 years, 10 months |
|
Mr. Hellerman owned and served as Managing Director of Hellerman Associates, a financial and corporate consulting firm, from the firms inception in 1993 until it ceased operations in 2013. Mr. Hellerman currently serves as a director and chief compliance officer for The Mexico Equity and Income Fund, Inc. and for Special Opportunities Fund, Inc. Mr. Hellerman currently serves as director and chairman of the audit committee of Emergent Capital, Inc. (formerly known as Imperial Holdings Inc.) and Crossroads Capital, Inc. (formerly BDCA Venture, Inc.), as well as a director of Ironsides Partners Opportunity Offshore Fund Ltd. |
|
None(1) |
|
See column 4 |
|
|
|
|
|
|
|
|
|
|
|
Robert Knapp Ironsides Partners LLC 100 Summer Street 27th Floor Boston, MA 02108 Age: 49 |
|
Director |
|
1 year/12 years, 10 months |
|
Mr. Knapp is the Founder and Managing Director of Ironsides Partners LLC, Ironsides Partners Opportunity Fund, Ironsides Partners Special Situations Fund, Ironsides Partners Special Situations Fund II, and related partnerships and entities. He serves as a director of the Africa Opportunity Partners Ltd. and its related fund vehicles, including the Africa Opportunity Fund Ltd. (LSE SFM: AOF). Mr. Knapp is an independent, non-executive director of Pacific Alliance Asia Opportunity Fund and its related entities and Pacific Alliance Group Asset Management Ltd., as well as Castle Private Equity AG (SWX: CPEN). Mr. Knapp also serves as a member of the Board of Managers of Veracity Worldwide LLC. In addition to his directorships named above, Mr. Knapp is a Trustee of Princeton-in- |
|
None(1) |
|
See column 4 |
(1)
|
|
(2)
|
|
|
(4)
|
|
(5)
|
|
(6)
|
|
|
|
|
|
|
|
Asia, Regional Plan Association, and the Sea Education Association. He also serves as a director of the Massachusetts Eye and Ear Infirmary. Mr. Knapp was previously a director of Pacific Alliance Investment Management Ltd. and the Vietnam Opportunity Fund. He previously served as a member of the Board of Managers of and Waterloo Oil & Gas LLC. Mr. Knapp was previously a managing director with Millennium Partners. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William Taylor 287 Bowman Avenue 2nd Floor Purchase, NY 10577 Age: 73 |
|
Director |
|
1 year/9 years, 10 months |
|
Mr. Taylor is a Certified Public Accountant and retired Partner of Deloitte & Touche. Mr. Taylor is currently a director of Northern Illinois University Foundation (where he was Treasurer from 2007 to 2011) and President and a director of The William & Dian Taylor Foundation. Mr. Taylor was previously a trustee of Writers Theatre. From 1976 through May 2005, Mr. Taylor was a Partner at Deloitte & Touche. From 1997 to 2001, Mr. Taylor was a director of Deloitte & Touche USA and from 1999 to 2003 Mr. Taylor was a director of Deloitte Touche Tohmatsu. |
|
None(1) |
|
See column 4 |
|
|
|
|
|
|
|
|
|
|
|
Officer and Interested Directors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warren Holtsberg(2) 287 Bowman Avenue 2nd Floor Purchase, NY 10577 Age: 65 |
|
Director |
|
1 year/8 years, 9 months |
|
Mr. Holtsberg currently serves as Co-Head of Portfolio Management of The Tokarz Group Advisers LLC (the Adviser), the investment adviser to the Fund. Mr. Holtsberg founded Motorola Ventures, the venture capital and private equity investment |
|
None(1) |
|
See column 4 |
(1)
|
|
(2)
|
|
|
(4)
|
|
(5)
|
|
(6)
|
|
|
|
|
|
|
|
arm for Motorola, Inc. where he led the worldwide fund for eight years. He was also Corporate Vice President and Director of Equity Investments at Motorola. Mr. Holtsberg served as a member of the Board of Directors of the Illinois Venture Capital Association until 2014, and currently serves as a member of the Board of Sportvision, the Big Shoulders Fund, and Advanced Oilfield Services, a portfolio company of the MVC Private Equity Fund, L.P. Mr. Holtsberg serves as an Emeritus Board Member of the Chicagoland Entrepreneurship Center, the Illinois Emerging Technology Funds and as Chairman of the Board of UI Labs. Previously, Mr. Holtsberg served as a board member of Illinois Ventures, the venture investment arm for the University of Illinois through 2015. Mr. Holtsberg also serves as a director for U.S. Gas & Electric, Inc. and MVC Partners LLC, portfolio companies of the Fund. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Tokarz(3) 287 Bowman Avenue 2nd Floor Purchase, NY 10577 Age: 66 |
|
Director |
|
1 year/12 years, 2 months |
|
Mr. Tokarz currently serves as Chairman and Portfolio Manager of the Fund and as Manager of the Adviser. Mr. Tokarz also is the Managing Member of The Tokarz Group, a private merchant bank, since 2002. Mr. Tokarz is also a principal and investment team member of PPC Enterprises LLC, a registered investment adviser. Prior to this, Mr. Tokarz was a senior General Partner and Administrative Partner at Kohlberg Kravis Roberts & Co., a private equity firm specializing in management buyouts. He |
|
None(1) |
|
See column 4 |
(1)
|
|
(2)
|
|
|
(4)
|
|
(5)
|
|
(6)
|
|
|
|
|
|
|
|
also currently serves on the corporate boards of CNO Financial Group, Inc., Walter Energy, Inc. (Chairman of the board), Walter Investment Management Corp., and Mueller Water Products, Inc. He is Chairman Emeritus and is a member of the Board of the University of Illinois Foundation, and serves on its executive committee, investment policy committee and finance committee. He is also a member of the Board of Managers for Illinois Ventures, LLC and Illinois Emerging Technology Fund LLC. Mr. Tokarz serves as a director for the following portfolio companies of the Fund: Custom Alloy Corporation, MVC Automotive Group B.V., MVC Partners LLC, Ohio Medical Corporation and Turf Products, LLC. He also serves as a director of Focus Pointe Global, Gibdock Limited, and Plymouth Rock Energy, LLC, all portfolio companies of MVC Private Equity Fund, L.P. He was previously on the board of Lomonosov, Althleta, Inc., and Apertio Ltd. In addition, he was on the boards of Timberland Machines & Irrigation, Inc., Dakota Growers Pasta Company, Harmony Health and Beauty, Inc., Harmony Pharmacy & Health Centers, Inc., Summit Research Labs, Inc. and Huamei Capital Company, formerly portfolio companies of the Fund. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Officers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce Shewmaker 287 Bowman Avenue 2nd Floor |
|
Managing
|
|
Indefinite term/12 years, 2 months |
|
Mr. Shewmaker currently serves as Managing Director of the Adviser and the Fund. |
|
N/A |
|
N/A |
(1)
|
|
(2)
|
|
|
(4)
|
|
(5)
|
|
(6)
|
|
Purchase, NY 10577 Age: 70 |
|
|
|
|
|
Mr. Shewmaker worked directly for the Fund from November 2003 through October 2006. Previously, Mr. Shewmaker served as an Independent Director of the Fund in 2003. Mr. Shewmaker currently serves on the board of Garrison Capital Inc. Mr. Shewmaker previously served on the board of Harris & Harris Group, Inc. Mr. Shewmaker served as a director for the following portfolio companies of the Fund: Baltic Motors Corporation, Phoenix Coal Corporation, Processclaims, Inc. Vendio Services, Inc., Velocitius B.V., and Vestal Manufacturing Enterprises, Inc. He currently serves on the Boards of Foliofn, Inc., MVC Partners LLC, and Advantage Insurance Holdings Ltd. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott Schuenke 287 Bowman Avenue 2nd Floor Purchase, NY 10577 Age: 36 |
|
Chief Financial Officer |
|
Indefinite term/2 years, 2 months |
|
Mr. Schuenke currently serves as the Chief Financial Officer of the Adviser, in addition to his service as Chief Financial Officer of the Fund. He previously served as the Chief Compliance Officer to the Fund and the Adviser. Prior to joining the Fund in June 2004, Mr. Schuenke served as a compliance officer with U.S. Bancorp Fund Services, LLC, from 2002 until he joined the Fund in 2004. Mr. Schuenke also served as the secretary of The Mexico Equity & Income Fund, Inc. and assistant secretary of Tortoise Energy Infrastructure Corporation during his tenure at U.S. Bancorp Fund Services, LLC. He serves on the Board of NPWT Corporation, a portfolio company of the Fund. He previously served as a director of Vestal Manufacturing Enterprises, a portfolio company of the Fund. Mr. Schuenke is a Certified Public Accountant. |
|
N/A |
|
N/A |
(1)
|
|
(2)
|
|
|
(4)
|
|
(5)
|
|
(6)
|
|
Kevin Byrne 287 Bowman Avenue 2 nd Floor Purchase, NY 10577 Age: 56 |
|
Chief Compliance Officer |
|
Indefinite/1 year |
|
Mr. Byrne currently serves as Chief Compliance Officer of the Adviser, in addition to his service as Chief Compliance Officer of the Fund. He also currently serves as Financial, Administrative and Compliance Consultant/Member at Fisher Capital Corp, LLC and as Deputy Chief Compliance Officer for PPC Enterprises, LLC. He previously served as a Compliance Consultant to the Adviser from November 2013 to December 2014. |
|
N/A |
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
Jaclyn Rothchild 287 Bowman Avenue 2nd Floor Purchase, NY 10577 Age: 36 |
|
Vice President/
|
|
Indefinite term/11 years, 1 month;
|
|
Ms. Rothchild currently serves as Vice President and Secretary of the Adviser, in addition to her service as Vice President and Secretary of the Fund. Prior to joining the Fund in June 2002, she was an Associate and Business Manager with Draper Fisher Jurvetson meVC Management Co. LLC, the former investment sub-adviser to the Fund, and an Associate at The Bank Companies (acquired by Newmark & Co. Real Estate), a commercial real estate company. Ms. Rothchild serves as Vice President and Chief Operating Officer of Eleventh Street Partners, Inc. and is a member of the Advisory Board of Forward Health. Ms. Rothchild serves on the Board of MVC Partners LLC, a portfolio company of the Fund. |
|
N/A |
|
N/A |
(1) Other than the Fund.
(2) Mr. Holtsberg is an interested person, as defined in the 1940 Act, of the Fund (an Interested Director) because of his employment with the Adviser.
(3) Mr. Tokarz is an Interested Director because he serves as an officer of the Fund.
In determining whether each Director should continue to serve as a Director, the Nominating Committee and the Board considered a variety of factors, including each of the Directors performance as current Directors and their professional background and experience. The Board
noted the Directors collective knowledge and experience in financial services, legal and financial analysis, corporate finance, asset management, portfolio management and accounting, all of which strengthen the Boards collective qualifications. The Nominating Committee members considered that Messrs. Tokarz and Holtsberg are not Independent Directors but recognized that they represent the Adviser, and, as such, help foster the Boards direct access to information regarding the Adviser, which is the Funds most significant service provider.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Securities Exchange Act of 1934 (the 1934 Act), and Section 30(h) of the 1940 Act, taken together, require that the Directors, officers of the Fund and beneficial owners of more than 10% of the equity securities of the Fund (collectively, Reporting Persons) file with the SEC reports of their beneficial ownership and changes in their beneficial ownership of the Funds securities. Based solely on its review of the copies of such reports, the Fund believes that each of the Reporting Persons who was a Reporting Person during the fiscal year ended October 31, 2015 has complied with applicable filing requirements.
Code of Ethics.
The Board has also adopted a Code of Ethics, which applies to, among others, all of the Funds officers and directors, as well as a Code of Ethics for Principal Executive and Senior Financial Executives that applies to and has been signed by the Principal Executive Officer and the Chief Financial Officer of the Fund. These materials can be found on the Funds website at www.mvccapital.com. Waivers, if any, of the Funds Code of Ethics or Code of Ethics for Principal Executive and Senior Financial Executives will be promptly disclosed on the Funds website.
Audit Committee.
The Company has a separately-designated standing audit committee established in accordance with section 3(a)(58)(A) of the 1934 Act. The members of the Audit Committee are Emilio Dominianni, Gerald Hellerman and William Taylor. Each of the current members of the Audit Committee, is considered an independent director. Each member of the Audit Committee meets the applicable independence and experience requirements, and the Board has determined that Mr. Hellerman is an audit committee financial expert, as defined under Item 407(d)(5) of Regulation S-K of the 1934 Act. Mr. Hellerman is the Chairman of the Audit Committee.
ITEM 11. EXECUTIVE COMPENSATION
Director and Executive Officer Compensation
The Funds officers do not receive any direct compensation from the Fund. The Fund does not currently have any employees and does not expect to have any employees. Services necessary for its business are provided by individuals who are employees of the Adviser, and the Funds administrator, U.S. Bancorp Fund Services, LLC (the Administrator), pursuant to the terms of the Funds amended and restated investment advisory and management agreement (the Advisory Agreement) and administration agreement. Each of the Funds executive officers is
an employee of the Adviser. The Funds day-to-day investment operations are managed by the Adviser.
The following table sets forth compensation paid by the Fund in all capacities during the fiscal year ended October 31, 2015 to all of our Directors. Our Directors have been divided into two groups Interested Directors and Independent Directors. The Interested Directors are interested persons, as defined in the 1940 Act, of the Fund. No compensation is paid to the Interested Directors. (The Fund is not part of any Fund Complex.) No information has been provided with respect to executive officers of the Fund because the Funds executive officers do not receive any direct compensation from the Fund.
Name of Person, Position |
|
Fees Earned
|
|
Stock Awards |
|
All Other
|
|
Total |
|
||
Interested Directors |
|
|
|
|
|
|
|
|
|
||
Warren Holtsberg, Director |
|
None |
|
None |
|
None |
|
None |
|
||
Michael Tokarz, Chairman and Portfolio Manager |
|
None |
|
None |
|
None |
|
None |
|
||
Independent Directors |
|
|
|
|
|
|
|
|
|
||
Emilio Dominianni, Director |
|
$ |
80,000 |
|
None |
|
None |
|
$ |
80,000 |
|
Phillip Goldstein, Director |
|
$ |
70,000 |
|
None |
|
None |
|
$ |
70,000 |
|
Gerald Hellerman, Director |
|
$ |
90,000 |
|
None |
|
None |
|
$ |
90,000 |
|
Robert Knapp, Director |
|
$ |
90,000 |
|
None |
|
None |
|
$ |
90,000 |
|
William Taylor, Director |
|
$ |
70,000 |
|
None |
|
None |
|
$ |
70,000 |
|
(1) Directors do not receive any pension or retirement benefits from the Fund.
Effective May 1, 2014, the fees payable to Independent Directors and the fees payable to the Chairman of the Audit Committee, Valuation Committee, and Nominating Committee were as follows: Each Independent Director is paid an annual retainer of $70,000 ($80,000 for the Chairman of the Audit Committee and the non-Chairman members of the Valuation Committee and $90,000 for the Chairman of the Valuation Committee) for up to five in-person Board meetings and committee meetings per year. In the event that more than five in-person Board meetings and committee meetings occur, each Director will be paid an additional $1,000 for an in-person meeting. Each Independent Director is also reimbursed by the Fund for reasonable out-of-pocket expenses. The Directors do not receive any pension or retirement benefits from the Fund.
Compensation Committee.
The Compensation Committee, the principal purpose of which is to oversee the compensation of the Independent Directors, is currently comprised of Messrs. Hellerman and Knapp. Mr. Hellerman is the Chairman of the Compensation Committee. The Compensation Committee was established in March 2003. The Compensation Committee annually reviews the overall compensation principles of the Fund governing the compensation and benefits of the Directors and officers, including developing and recommending, for the Boards adoption, compensation for members of the Board.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Director Equity Ownership
The following table sets forth, as of the date of December 31, 2015, with respect to each Director, certain information regarding the dollar range of equity securities beneficially owned in the Fund. The Fund does not belong to a family of investment companies.
(1)
|
|
(2)
|
|
(3)
|
|
Independent Directors |
|
|
|
|
|
Emilio Dominianni |
|
Over $100,000 |
|
Over $100,000 |
|
Phillip Goldstein |
|
Over $100,000 |
|
Over $100,000 |
|
Gerald Hellerman |
|
Over $100,000 |
|
Over $100,000 |
|
Robert Knapp |
|
Over $100,000 |
|
Over $100,000 |
|
William Taylor |
|
Over $100,000 |
|
Over $100,000 |
|
|
|
|
|
|
|
Interested Directors |
|
|
|
|
|
Warren Holtsberg (1) |
|
$ 50,001-$100,000 |
|
$ 50,001-$100,000 |
|
Michael Tokarz (2) |
|
Over $100,000 |
|
Over $100,000 |
|
(1) Mr. Holtsberg is an Interested Director because of his employment with the Adviser.
(2) Mr. Tokarz is an Interested Director because he serves as an officer of the Fund and controls the Adviser.
The following table sets forth, as of December 31, 2015, each stockholder who owned more than 5% of the Funds outstanding shares of common stock, each current director, the Funds executive officers, and the directors and executive officers as a group. Unless otherwise indicated, the Fund believes that each beneficial owner set forth in the table has sole voting and investment power.
Shareholder Name and Address |
|
Amount of
|
|
Percentage of
|
|
|
|
|
|
|
|
Bulldog Investors LLC |
|
1,412,685 |
(1) |
6.22 |
% |
Park 80 West, 250 Pehle Ave Suite 708 |
|
|
|
|
|
Saddle Brook, NJ 07663 |
|
|
|
|
|
|
|
|
|
|
|
Royce & Associates, LLC |
|
1,233,700 |
(2) |
5.43 |
% |
745 Fifth Avenue |
|
|
|
|
|
New York, NY 10151 |
|
|
|
|
|
|
|
|
|
|
|
RiverNorth |
|
1,215,757 |
|
5.36 |
% |
325 N. Lasalle Street |
|
|
|
|
|
Suite 645 |
|
|
|
|
|
Chicago, IL 60654 |
|
|
|
|
|
|
|
|
|
|
|
Interested Directors |
|
|
|
|
|
|
|
|
|
|
|
Warren Holtsberg |
|
7,000 |
|
|
* |
|
|
|
|
|
|
Michael Tokarz |
|
931,042.57 |
|
4.10 |
% |
|
|
|
|
|
|
Independent Directors |
|
|
|
|
|
|
|
|
|
|
|
Emilio Dominianni |
|
52,899.3 |
|
|
* |
|
|
|
|
|
|
Phillip Goldstein |
|
1,008,551 |
** |
4.44 |
% |
|
|
|
|
|
|
Gerald Hellerman |
|
63,000 |
|
|
* |
|
|
|
|
|
|
Robert Knapp |
|
672,858.37 |
*** |
2.96 |
% |
|
|
|
|
|
|
William Taylor |
|
49,567.28 |
|
|
* |
|
|
|
|
|
|
Executive Officers |
|
|
|
|
|
|
|
|
|
|
|
Bruce Shewmaker |
|
23,365.72 |
|
|
* |
|
|
|
|
|
|
Scott Schuenke |
|
2,961.76 |
|
|
* |
|
|
|
|
|
|
Jaclyn Shapiro-Rothchild |
|
2,943.65 |
|
|
* |
|
|
|
|
|
|
Kevin Byrne |
|
|
|
|
* |
|
|
|
|
|
|
All directors and executive officers as a group (11 in total)***** |
|
2,814,189.65 |
|
12.40 |
% |
* Less than 1%.
** 971,301 of these Shares are owned by certain private investment funds managed by Bulldog Investors, LLC. Mr. Goldstein is a principal of Bulldog Investors. Mr. Goldstein disclaims all beneficial ownership in these Shares to the extent such ownership exceeds his pecuniary interest therein. For purposes of calculating the Percentage of Fund Held, however, all of Mr. Goldsteins 1,017,051 Shares have been counted as being beneficially owned. Based on information contained in Form 4 filed on October 29, 2014.
*** 300,765.37 of these Shares are held by Ironsides Holdings LLC, which is wholly-owned by Robert Knapp. 372,093 shares are held by a separately managed account and a private fund. Mr. Knapp is a principal of the investment adviser of the separately managed account and a principal of the general partner and investment adviser of the private fund. Mr. Knapp is also a limited partner in a fund that has an interest in the private fund. The investment adviser has sole voting and dispositive power over the 372,093 shares held by the separately managed account and the private fund. Mr. Knapp disclaims all beneficial ownership of such Shares, except to the extent of his pecuniary interest therein. For purposes of calculating the Percentage of Fund Held, however, all of the Shares have been counted as being
beneficially owned. Additionally, 672,858.37 of Mr. Knapps Shares are pledged as security to margin accounts. Based on information contained in Form 4 filed on October 10, 2014.
**** Unless indicated by footnote above, none of the Directors or Executive Officers Shares are pledged as security.
(1) Based on information contained in Form 13F filed with the SEC on August 13, 2015. With respect to 719,272 of these Shares, Bulldog Investors LLC shares voting and investment power.
(2) Based on information contained in Form 13F filed with the SEC on August 10, 2015.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The Fund has procedures in place for the review, approval and monitoring of transactions involving the Fund and certain persons related to the Fund. For example, the Fund has a Code of Ethics that generally prohibits, among others, any officer or director of the Fund from engaging in any transaction where there is a conflict between such individuals personal interest and the interests of the Fund. As a business development company, the 1940 Act also imposes regulatory restrictions on the Funds ability to engage in certain related party transactions. However, the Fund is permitted to co-invest in certain portfolio companies with its affiliates to the extent consistent with applicable law or regulation and, if necessary, subject to specified conditions set forth in an exemptive order obtained from the SEC. Since the Funds current management team joined the Fund in 2003, no transactions have been effected pursuant to the exemptive order. As a matter of policy, our Board has required that any related-party transaction (as defined in Item 404 of Regulation S-K) must be subject to the advance consideration and approval of the Independent Directors, in accordance with applicable procedures set forth in Section 57(f) of the 1940 Act.
The principal equity owner of the Adviser is Mr. Tokarz, our Chairman. Our senior officers and Mr. Holtsberg have other financial interests in the Adviser ( i.e. , based on the Advisers performance). In addition, our officers and the officers and employees of the Adviser may serve as officers, directors or principals of entities that operate in the same or related line of business as we do or of investment funds managed by the Adviser or our affiliates. These related businesses currently include a private equity fund (the PE Fund), the establishment of which was authorized by our Board. As previously disclosed in our 10-K reports for the last three fiscal years, an indirect wholly-owned subsidiary of the Fund serves as the general partner and the Adviser serves as the portfolio manager of the PE Fund, and both entities receives a portion of the carried interest and management fees generated from the PE Fund. Our Board has approved a specific policy regarding the allocation of investment opportunities, which was set forth in the reports. 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 have been non-diversified investments (investments that represent more than 5% of the Companys total assets or more than 10% of the outstanding voting securities of an issuer) for the Company during the PE Funds investment period, which ended on October 28, 2014.
Further, Mr. Tokarz is a co-founder of PPC Enterprises LLC (PPC), a registered investment adviser that provides advisory services to Series A of Public Pension Capital, LLC (the PPC Fund). As a result of this relationship and pursuant to a shared services arrangement with PPC,
certain of PPCs 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.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees:
The aggregate fees billed as of the day immediately prior to the date of this filing for professional services rendered by Ernst & Young LLP for the audit of the Funds annual financial statements and review of financial statements in the Form 10-Qs for the fiscal years ended October 31, 2015 and October 31, 2014 were $0 and $749,000, respectively.
The aggregate fees billed as of the day immediately prior to the date of this filing thus far for professional services rendered by Grant Thornton LLP for the audit of the Funds annual financial statements and review of financial statements in the Form 10-Qs for the fiscal year ended October 31, 2015 were $800,000.
Audit-Related Fees:
The aggregate fees billed as of the day immediately prior to the date of this filing by Ernst & Young LLP for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements for the fiscal years ended October 31, 2015 and October 31, 2014 were $50,000 and $75,000, respectively.
The aggregate fees billed as of the day immediately prior to the date of this filing thus far by Grant Thornton LLP for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements for the fiscal year ended October 31, 2015 were $0.
Tax Fees:
The aggregate fees billed as of the day immediately prior to the date of this filing by Ernst & Young LLP for services rendered with respect to tax compliance, tax advice and tax planning for the fiscal years ended October 31, 2015 and October 31, 2014 were $0 and $65,000, respectively.
The aggregate fees billed as of the day immediately prior to the date of this filing by Grant Thornton LLP for services rendered with respect to tax compliance, tax advice and tax planning for the fiscal year ended October 31, 2015 was $3,925.
All Other Fees:
The aggregate fees billed as of the day immediately prior to the date of this filing by Ernst & Young LLP for any other products or services for the fiscal years ended October 31, 2015 and October 31, 2014 were $4,000 and $24,000, respectively.
The aggregate fees billed as of the day immediately prior to the date of this filing by Grant Thornton LLP for any other products or services for the fiscal year ended October 31, 2015 were $0.
The Audit Committee Charter requires that the Audit Committee pre-approve all audit and non-audit services to be provided to the Fund by the independent accountants; provided, however, that the Audit Committee may specifically authorize its Chairman to pre-approve the provision
of any non-audit service to the Fund. Further, the foregoing pre-approval policy may be waived, with respect to the provision of any non-audit services, consistent with the exceptions provided for in the federal securities laws. All of the audit and tax services provided by Ernst & Young LLP for the fiscal year ended October 31, 2014 and by Ernst & Young LLP and Grant Thornton LLP for the fiscal year ended October 31, 2015 were pre-approved by the Audit Committee or its Chairman. For the fiscal years ended October 31, 2014 and October 31, 2015, the Funds Audit Committee did not waive the pre-approval requirement with respect to any non-audit services provided to the Fund by Ernst & Young LLP or Grant Thornton LLP.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
|
|
|
Page(s) |
(a)(1) |
Financial Statements |
|
|
|
Consolidated Balance Sheets |
|
|
|
October 31, 2015 and October 31, 2014 |
|
97 |
|
|
|
|
|
Consolidated Schedule of Investments |
|
|
|
October 31, 2015 |
|
98-99 |
|
October 31, 2014 |
|
100-101 |
|
|
|
|
|
Consolidated Statement of Operations |
|
|
|
For the Year Ended October 31, 2015, |
|
|
|
the Year Ended October 31, 2014 and |
|
|
|
the Year Ended October 31, 2013 |
|
102 |
|
|
|
|
|
Consolidated Statement of Cash Flows |
|
|
|
For the Year Ended October 31, 2015, |
|
|
|
the Year Ended October 31, 2014 and |
|
|
|
the Year Ended October 31, 2013 |
|
103 |
|
|
|
|
|
Consolidated Statement of Changes in Net Assets |
|
|
|
For the Year Ended October 31, 2015, |
|
|
|
the Year Ended October 31, 2014 and |
|
|
|
the Year Ended October 31, 2013 |
|
104 |
|
|
|
|
|
Consolidated Selected Per Share Data and Ratios |
|
|
|
For the Year Ended October 31, 2015, |
|
|
|
the Year Ended October 31, 2014, |
|
|
|
the Year Ended October 31, 2013, |
|
|
|
the Year Ended October 31, 2012 and |
|
|
|
the Year Ended October 31, 2011 |
|
105 |
|
|
|
|
|
Notes to Consolidated Financial Statements |
|
106-154 |
|
Report of Independent Registered Public Accounting Firm |
|
155 |
|
|
|
|
(a)(2) |
The following financial statement schedules are filed here with: |
|
|
|
|
|
|
|
Schedule 12-14 of Investments in and Advances to Affiliates |
|
176 |
In addition, there may be additional information not provided in a schedule because (i) such information is not required or (ii) the information required has been presented in the aforementioned financial statements.
(a)(3) The following exhibits are filed herewith or incorporated by reference as set forth below:
Exhibit
|
|
Description |
3.1 |
|
Certificate of Incorporation. (Incorporated by reference to Exhibit 99.a filed with the Registrants initial Registration Statement on Form N-2 (File No. 333-92287) filed on December 8, 1999) |
3.2 |
|
Certificate of Amendment of Certificate of Incorporation. (Incorporated by reference to Exhibit 99.a.2 filed with the Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-119625) filed on November 23, 2004) |
3.3 |
|
Fifth Amended and Restated Bylaws. (Incorporated by reference to Exhibit 99.b. filed with Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-125953) filed on August 29, 2005) |
3.4 |
|
Sixth Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.(A) filed with the Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on March 12, 2014) |
4.1 |
|
Form of Share Certificate. (Incorporated by reference to Exhibit 99.d.1 filed with the Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-119625) filed on November 23, 2004) |
4.2 |
|
Form of Indenture, dated February 26, 2013, between Registrant and U.S. Bank National Association, as trustee. ( Incorporated by reference to Exhibit d.2 filed with Registrants Post-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-184803) filed on February 26, 2013) |
4.3 |
|
Form of First Supplemental Indenture relating to the 7.25% Senior Unsecured Notes due 2023, dated February 26, 2013, between the Registrant and U.S. Bank National Association, as trustee. ( Incorporated by reference to Exhibit d.3 filed with Registrants Post-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-184803) filed on February 26, 2013) |
4.4 |
|
Form of 7.25% Senior Unsecured Notes due 2023. ( Incorporated by reference to Exhibit d.4 filed with Registrants Post-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-184803) filed on February 26, 2013) |
10.1 |
|
Dividend Reinvestment Plan, as amended. (Incorporated by reference to Exhibit 99.e filed with the Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-119625) filed on November 23, 2004) |
10.2 |
|
Amended and Restated Investment Advisory and Management Agreement between the Registrant and The Tokarz Group Advisers LLC. ( Incorporated by reference to Exhibit 10.1 filed with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on June 4, 2009) |
10.3 |
|
Form of Custody Agreement between Registrant and U.S. Bank National Association. (Incorporated by reference to Exhibit 99.j.1 filed with the Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-119625) filed on November 23, 2004) |
10.4 |
|
Form of Amendment to Custody Agreement between Registrant and U.S. Bank National Association. (Incorporated by reference to Exhibit 99.j.2 filed with the Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-119625) filed on February 21, 2006) |
Exhibit
|
|
Description |
10.5 |
|
Form of Amendment to Custody Agreement between Registrant and U.S. Bank National Association. ( Incorporated by reference to Exhibit10.4 filed with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on June 4, 2009) |
10.6 |
|
Form of Amendment to Custody Agreement between Registrant and U.S. Bank National Association . (Incorporated by reference to Exhibit 10.3 filed with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on June 11, 2012) |
10.7 |
|
Form of Amendment to Custody Agreement between Registrant and U.S. Bank National Association (Incorporated by reference to Exhibit 10.7 filed with Registrants Annual Report on Form 10-K (File No. 814-00201) filed on October 15, 2015) . |
10.8 |
|
Form of Transfer Agency Letter Agreement with Registrant and EquiServe Trust Company, N.A. (Incorporated by reference to Exhibit 99.k.2 filed with the Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-119625) filed on November 23, 2004) |
10.9 |
|
Form of Fee and Service Schedule Amendment to Transfer Agency Agreement with Registrant and Computershare Trust Company, N.A. ( Incorporated by reference to Exhibit10.1 filed with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on September 8, 2009) |
10.10 |
|
Form of Fee and Service Schedule Amendment to Transfer Agency Agreement with Registrant and Computershare Trust Company, N.A. (Incorporated by reference to Exhibit 10.10 filed with Registrants Annual Report on Form 10-K (File No. 814-00201) filed on October 15, 2015) |
10.11 |
|
Form of Fund Administration Servicing Agreement with Registrant and U.S. Bancorp Fund Services, LLC. (Incorporated by reference to Exhibit 99.k.6 filed with the Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-119625) filed on February 21, 2006) |
10.12 |
|
Form of Fund Accounting Servicing Agreement with Registrant and U.S. Bancorp Fund Services, LLC. (Incorporated by reference to Exhibit 99.k.7 filed with Registrants Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-119625) filed on February 21, 2006) |
10.13 |
|
Form of First Amendment to Fund Administration Servicing Agreement with Registrant and U.S. Bancorp Fund Services, LLC. ( Incorporated by reference to Exhibit10.2 filed with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on June 4, 2009) |
10.14 |
|
Form of Second Amendment to Fund Administration Servicing Agreement with Registrant and U.S. Bancorp Fund Services, LLC. ( Incorporated by reference to Exhibit 10.2 with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on June 11, 2012) |
10.15 |
|
Form of Third Amendment to Fund Administration Servicing Agreement with Registrant and U.S. Bancorp Fund Services, LLC (Incorporated by reference to Exhibit 10.15 filed with Registrants Annual Report on Form 10-K (File No. 814-00201) filed on October 15, 2015) |
10.16 |
|
Form of First Amendment to Fund Accounting Servicing Agreement with Registrant and U.S. Bancorp Fund Services, LLC. ( Incorporated by reference to Exhibit10.3 filed with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on June 4, 2009) |
Exhibit
|
|
Description |
10.17 |
|
Form of Second Amendment to Fund Accounting Servicing Agreement with Registrant and U.S. Bancorp Fund Services, LLC. (Incorporated by reference to Exhibit 10.2 with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on June 11, 2012) |
10.18 |
|
Form of Third Amendment to Fund Accounting Servicing Agreement with Registrant and U.S. Bancorp Fund Services, LLC (Incorporated by reference to Exhibit 10.18 filed with Registrants Annual Report on Form 10-K (File No. 814-00201) filed on October 15, 2015) |
10.19 |
|
Form of Custody Agreement between Registrant and JP Morgan Chase Bank, N.A., (Incorporated by reference to Exhibit 10 filed with Registrants Annual Report on Form 10-K (File No. 814-00201) filed on December 21, 2010) . |
10.20 |
|
Form of Subscription Agreement, dated April 26, 2013. ( Incorporated by reference to Exhibit k.15 filed with Registrants Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 (File No. 333-184803) filed on April 26, 2013) |
10.21 |
|
Credit Agreement between MVC Capital Inc. and Branch Banking and Trust Company. (Incorporated by reference to Exhibit 10.(A) with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on September 9, 2013) |
10.22 |
|
Amended and Restated Custody Agreement between MVC Capital, Inc. and Branch Banking and Trust Company. (Incorporated by reference to Exhibit 10.(B) with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on September 9, 2013) |
10.23 |
|
Amended and Restated Credit Agreement between MVC Capital, Inc. and Branch Banking and Trust Company (Incorporated by reference to Exhibit 10.(A) with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on March 12, 2014. |
10.24 |
|
Second Amended and Restated Credit Agreement between MVC Capital, Inc. and Branch Banking and Trust Company (Incorporated by reference to Exhibit 10. (A) with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on June 6, 2014. |
10.25 |
|
Third Amended and Restated Credit Agreement between MVC Capital, Inc. and Branch Banking and Trust Company (Incorporated by reference to Exhibit 10(A) with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on September 9, 2014 |
10.26 |
|
Fourth Amended and Restated Credit Agreement between MVC Capital, Inc. and Branch Banking and Trust Company (Incorporated by reference to Exhibit 10.26 filed with Registrants Annual Report on Form 10-K (File No. 814-00201) filed on October 15, 2015) |
10.27 |
|
Fifth Amended and Restated Credit Agreement between MVC Capital, Inc. and Branch Banking and Trust Company (Incorporated by reference to Exhibit 10.27 filed with Registrants Annual Report on Form 10-K (File No. 814-00201) filed on October 15, 2015) |
10.28 |
|
Sixth Amended and Restated Credit Agreement between MVC Capital, Inc. and Branch Banking and Trust Company (Incorporated by reference to Exhibit 10.28 filed with Registrants Annual Report on Form 10-K (File No. 814-00201) filed on October 15, 2015) |
10.29 |
|
Seventh Amended and Restated Credit Agreement between MVC Capital, Inc. and Branch Banking and Trust Company (Incorporated by reference to Exhibit 10(A) with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on January 29, 2016) |
Exhibit
|
|
Description |
10.30 |
|
Loan Agreement between MVC Capital, Inc. and Firstrust Bank (Incorporated by reference to Exhibit 10.29 filed with Registrants Annual Report on Form 10-K (File No. 814-00201) filed on October 15, 2015) |
10.31 |
|
Amended and Restated Loan Agreement between MVC Capital, Inc. and Firstrust Bank (Incorporated by reference to Exhibit 10.30 filed with Registrants Annual Report on Form 10-K (File No. 814-00201) filed on October 15, 2015) |
10.32 |
|
Amendment to the Amended and Restated Loan Agreement between MVC Capital, Inc. and Firstrust Bank (Incorporated by reference to Exhibit 10(A) with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on December 1, 2015) |
10.33 |
|
Credit Agreement between MVC Capital, Inc., Santander Bank, N.A. and Wintrust Bank (Incorporated by reference to Exhibit 10(B) with Registrants Quarterly Report on Form 10-Q (File No. 814-00201) filed on January 29, 2016) |
12.1 |
|
Statement of Computation of Ratios of Earnings to Fixed Charges. ( Previously filed as Exhibit 99.1 filed with Registrants Post-Effective Amendment No. 1 to Registration Statement on Form N-2 (File No. 333-184803) filed on February 26, 2013 ) |
12.2 |
|
Statement of Computation of Ratios of Earnings to Fixed Charges. ( Previously filed as Exhibit 99.2 filed with Registrants Post-Effective Amendment No. 1 to Registration Statement on Form N-2 (File No. 333-184803) filed on April 26, 2013 ) |
16.1 |
|
Letter Regarding Change in Certifying Accountant (Previously filed as Exhibit 99.1 filed with Registrants Current Report on Form 8-K (File No. 814-00201) filed on July 6, 2015) |
21.1 |
|
Financial Statements (as of 12/31/2013) of Velocitius B.V., a current significant subsidiary ( unaudited by MVC Capital, Inc. but based on audited financial statements prepared and provided by the portfolio company) (Incorporated by reference to Exhibit 21.1 filed with Registrants Annual Report on Form 10-K (File No. 814-00201) filed on October 15, 2015) |
21.2 |
|
Financial Statements (as of 12/31/2013 and excludes financial information of a subsidiary dealership and the parent company) of MVC Automotive Group B.V., a current significant subsidiary ( unaudited by MVC Capital, Inc. but based on audited financial statements prepared and provided by the portfolio company) (Incorporated by reference to Exhibit 21.2 filed with Registrants Annual Report on Form 10-K (File No. 814-00201) filed on October 15, 2015) |
21.3 * |
|
Consolidated Financial Statements with Independent Auditors Report (as of 12/31/2014) of Ohio Medical Corporation, a significant subsidiary ( unaudited by MVC Capital, Inc. but based on audited financial statements prepared and provided by the portfolio company). |
21.4 * |
|
Combined Financial Statements with Independent Auditors Report (as of 12/31/2014) for a combined group of subsidiaries of MVC Automotive Group GmbH, a significant subsidiary. The Combined Financial Statements exclude one subsidiary and the parent company ( unaudited by MVC Capital, Inc. but based on audited financial statements prepared and provided by the portfolio company). |
31* |
|
Certifications of the Principal Executive Officer and the Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 |
32* |
|
Certifications of the Principal Executive Officer and the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 |
*Filed herewith
(b) Exhibits
Exhibit No. |
|
Exhibit |
|
|
|
31 |
|
Certifications pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 |
32 |
|
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 |
(c) Financial Statement Schedules
Schedule 12-14
MVC Capital, Inc. and Subsidiaries
Schedule of Invesments in and Advances to Affiliaties
|
|
|
|
Amount of Interest |
|
|
|
Gross |
|
Gross |
|
|
|
||||
|
|
|
|
or Dividends Credited |
|
October 31, 2014 |
|
Additions |
|
Reductions |
|
October 31, 2015 |
|
||||
Portfolio Company |
|
Investment (1) |
|
to Income (5) |
|
Other (2) |
|
Fair Value |
|
(3) |
|
(4) |
|
Fair Value |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Companies More than 25% owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Equus Total Return, Inc. (Regulated Investment Company) |
|
Common Stock |
|
|
|
|
|
9,778,217 |
|
|
|
(2,133,429 |
) |
7,644,788 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Harmony Health & Beauty, Inc. (Healthcare - Retail) |
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
MVC Automotive Group |
|
Common Stock |
|
|
|
|
|
21,548,000 |
|
2,795,400 |
|
(10,891,400 |
) |
13,452,000 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
MVC Private Equity Fund LP |
|
General Partnership Interest |
|
|
|
|
|
503,924 |
|
48,092 |
|
|
|
552,016 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
(Private Equity Firm) |
|
Limited Partnership Interest |
|
|
|
|
|
19,969,408 |
|
1,970,336 |
|
|
|
21,939,744 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Ohio Medical Corporation (Medical Device Manufacturer) |
|
Common Stock Series A Preferred Stock |
|
|
|
|
|
23,800,000 |
|
|
|
(17,749,203 |
) |
6,050,797 |
|
||
|
|
Series C Preferred Stock |
|
|
|
|
|
27,763,434 |
|
4,715,858 |
|
|
|
32,479,292 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
RuMe Inc. |
|
Common Stock |
|
|
|
|
|
924,475 |
|
|
|
|
|
924,475 |
|
||
(Consumer Products) |
|
Series C Preferred Stock |
|
|
|
|
|
4,285,525 |
|
2,182,247 |
|
|
|
6,467,772 |
|
||
|
|
Series B-1 Preferred Stock |
|
|
|
|
|
1,090,000 |
|
577,753 |
|
|
|
1,667,753 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
SIA Tekers Invest (Port Facilities) |
|
Common Stock |
|
|
|
|
|
1,225,000 |
|
|
|
(883,000 |
) |
342,000 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Turf Products, LLC |
|
Loan |
|
428,479 |
|
|
|
3,864,272 |
|
|
|
(1,278 |
) |
3,862,994 |
|
||
(Distributor - Landscaping & Irrigation Equipment) |
|
LLC Interest |
|
|
|
|
|
3,991,794 |
|
|
|
|
|
3,991,794 |
|
||
|
|
Guarantee |
|
|
|
|
|
(66,860 |
) |
25,826 |
|
|
|
(41,034 |
) |
||
|
|
Warrant |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Velocitius B.V. (Renewable Energy) |
|
Common Equity Interest |
|
|
|
|
|
11,467,000 |
|
|
|
(11,467,000 |
) |
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Total companies more than 25% owned |
|
|
|
$ |
1,480,964 |
|
|
|
|
|
|
|
|
|
$ |
99,334,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Companies More than 5% owned, but less than 25% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Advantage Insurance Holdings LTD (Insurance) |
|
Preferred Stock |
|
|
|
|
|
7,721,000 |
|
294,164 |
|
|
|
8,015,164 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Centile Holding B.V. (Software) |
|
Common Stock |
|
|
|
|
|
4,994,000 |
|
250,000 |
|
(339,000 |
) |
4,905,000 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
JSC Tekers Holdings |
|
Common Stock |
|
|
|
|
|
4,200 |
|
|
|
(200 |
) |
4,000 |
|
||
(Automotive Dealerships) |
|
Preferred Stock |
|
|
|
|
|
6,157,906 |
|
|
|
(1,112,206 |
) |
5,045,700 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Security Holdings, B.V. (Electrical Engineering) |
|
Common Equity Interest |
|
|
|
|
|
50,600,000 |
|
|
|
(5,300,000 |
) |
45,300,000 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
SGDA Europe B.V. (Soil Remediation) |
|
Common Equity Interest |
|
|
|
|
|
9,996,664 |
|
|
|
(3,976,664 |
) |
6,020,000 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
U.S. Gas & Electric, Inc. |
|
Second Lien Loan |
|
988,541 |
|
|
|
7,500,000 |
|
|
|
|
|
7,500,000 |
|
||
(Energy Services) |
|
Unsecured Loan |
|
441,361 |
|
|
|
3,041,550 |
|
125,670 |
|
|
|
3,167,220 |
|
||
|
|
Preferred Stock |
|
|
|
|
|
83,667,607 |
|
|
|
|
|
83,667,607 |
|
||
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Vestal Manufacturing Enterprises, Inc. |
|
Loan |
|
49,613 |
|
|
|
600,000 |
|
6,315,236 |
|
(600,000 |
) |
6,315,236 |
|
||
(Iron Foundries) |
|
Common Stock |
|
1,002,872 |
|
|
|
16,900,000 |
|
250,000 |
|
(16,900,000 |
) |
250,000 |
|
||
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Total companies more than 5% owned, but less than 25% |
|
|
|
$ |
1,429,902 |
|
|
|
|
|
|
|
|
|
$ |
170,189,927 |
|
This schedule should be read in conjunction with the Companys consolidated statements as of and for the year ended October 31, 2015, including the consolidated schedule of investments.
(1) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted. The principal amount for loans and debt securities and the number of shares of common and preferred stock are shown in the consolidated schedule of investments as of October 31, 2015.
(2) Other includes interest, dividend, or other income which was applied to the principal of the investment and therefore reduced the total investment. These reductions are also included in the Gross Reductions for the investment, as applicable.
(3) Gross additions include increases in the cost basis of investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of discounts and closing fees, and the exchange of one or more existing securities for one or more new securities. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation.
(4) Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales and the exchange of one or more existing securities for one or more new securities. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation.
(5) Represents the total amount of interest or dividends credited to income for a portion of the year an investment was included in the companies more than 25% owned.
* All or a portion of the dividend income on this investment was or will be paid in the form of additional securities or by increasing the liquidation preference. Dividends paid-in-kind are also included in the Gross Additions for the investment, as applicable.
The accompanying notes are an integral part of these consolidated financial statements.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date |
|
Signature |
|
Title |
|
|
|
|
|
Date: |
|
|
|
Chairman (Principal Executive Officer) and Director |
5/16/16 |
|
/s/ Michael Tokarz |
|
|
|
|
(Michael Tokarz) |
|
|
|
|
|
|
|
Date: |
|
|
|
Principal Financial Officer |
5/16/16 |
|
/s/ Scott Schuenke |
|
|
|
|
(Scott Schuenke) |
|
|
|
|
|
|
|
Date: |
|
|
|
Director |
5/16/16 |
|
/s/ Emilio Dominianni |
|
|
|
|
(Emilio Dominianni) |
|
|
|
|
|
|
|
Date: |
|
|
|
Director |
5/16/16 |
|
/s/ Gerald Hellerman |
|
|
|
|
(Gerald Hellerman) |
|
|
|
|
|
|
|
Date: |
|
|
|
Director |
5/16/16 |
|
/s/ Phillip F. Goldstein |
|
|
|
|
(Phillip F. Goldstein) |
|
|
|
|
|
|
|
Date: |
|
|
|
Director |
5/16/16 |
|
/s/ Warren Holtsberg |
|
|
|
|
(Warren Holtsberg) |
|
|
|
|
|
|
|
Date: |
|
|
|
Director |
5/16/16 |
|
/s/ Robert C. Knapp |
|
|
|
|
(Robert C. Knapp) |
|
|
|
|
|
|
|
Date: |
|
|
|
Director |
5/16/16 |
|
/s/ William E. Taylor |
|
|
|
|
(William E. Taylor) |
|
|
Exhibit 21.3
OHIO MEDICAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY INFORMATION
DECEMBER 31, 2014 AND 2013
WITH INDEPENDENT AUDITORS REPORT
INDEPENDENT AUDITORS REPORT
To the Board of Directors
Ohio Medical Corporation and subsidiaries
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of OHIO MEDICAL CORPORATION and subsidiaries which comprise the consolidated balance sheets as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income and changes in stockholders equity and cash flows for the years ended December 31, 2014, 2013 and 2012, and the related notes to the consolidated financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ohio Medical Corporation and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years ended December 31, 2014, 2013 and 2012 in accordance with accounting principles generally accepted in the United States of America.
Report on Supplementary Information
Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying supplementary information in schedules 1 and 2 is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audits of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion the information is fairly stated in all material respects in relation to the financial statements as a whole.
Brookfield, Wisconsin
February 25, 2015
CONSOLIDATED FINANCIAL STATEMENTS
OHIO MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 2014 AND 2013
|
|
2014 |
|
2013 |
|
||
ASSETS |
|
|
|
|
|
||
CURRENT ASSETS |
|
|
|
|
|
||
Cash |
|
$ |
1,675,082 |
|
$ |
2,575,842 |
|
Accounts receivable, less allowance for doubtful accounts of $118,000 in 2014 and $112,000 in 2013 |
|
9,975,001 |
|
7,464,509 |
|
||
Inventories, net |
|
8,108,817 |
|
8,752,294 |
|
||
Prepaid expenses and deposits |
|
508,396 |
|
692,556 |
|
||
Current deferred tax asset |
|
2,173,000 |
|
1,616,000 |
|
||
TOTAL CURRENT ASSETS |
|
22,440,296 |
|
21,101,201 |
|
||
PROPERTY AND EQUIPMENT |
|
|
|
|
|
||
Land |
|
539,500 |
|
539,500 |
|
||
Buildings and improvements |
|
3,704,951 |
|
3,692,287 |
|
||
Machinery and equipment |
|
4,310,345 |
|
4,046,097 |
|
||
Furniture and fixtures |
|
906,412 |
|
891,096 |
|
||
TOTAL PROPERTY AND EQUIPMENT |
|
9,461,208 |
|
9,168,980 |
|
||
Less - accumulated depreciation |
|
7,462,904 |
|
7,093,133 |
|
||
NET PROPERTY AND EQUIPMENT |
|
1,998,304 |
|
2,075,847 |
|
||
GOODWILL |
|
59,420,372 |
|
59,420,372 |
|
||
INTANGIBLE ASSETS, net |
|
27,306,822 |
|
31,607,146 |
|
||
NONCURRENT DEFERRED TAX ASSET |
|
12,518,000 |
|
13,557,000 |
|
||
|
|
$ |
123,683,794 |
|
$ |
127,761,566 |
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
||
CURRENT LIABILITIES |
|
|
|
|
|
||
Current portion of long-term debt |
|
$ |
5,962,000 |
|
$ |
6,331,000 |
|
Accounts payable |
|
4,612,765 |
|
4,175,586 |
|
||
Accrued liabilities |
|
2,710,188 |
|
1,890,038 |
|
||
TOTAL CURRENT LIABILITIES |
|
13,284,953 |
|
12,396,624 |
|
||
LONG-TERM DEBT, less current portion |
|
44,138,680 |
|
50,189,316 |
|
||
OTHER LIABILITIES |
|
2,227,084 |
|
1,685,417 |
|
||
OBLIGATION UNDER INTEREST RATE SWAP AGREEMENT |
|
|
|
57,891 |
|
||
STOCKHOLDERS EQUITY |
|
64,033,077 |
|
63,432,318 |
|
||
|
|
$ |
123,683,794 |
|
$ |
127,761,566 |
|
The accompanying notes are an integral part of these statements.
OHIO MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
|
|
2014 |
|
2013 |
|
2012 |
|
|||
NET SALES |
|
$ |
51,279,312 |
|
$ |
50,485,626 |
|
$ |
52,990,367 |
|
COST OF SALES |
|
26,872,891 |
|
27,489,022 |
|
28,760,262 |
|
|||
GROSS PROFIT |
|
24,406,421 |
|
22,996,604 |
|
24,230,105 |
|
|||
OPERATING EXPENSES |
|
|
|
|
|
|
|
|||
General and administrative |
|
11,130,216 |
|
10,459,863 |
|
13,513,432 |
|
|||
Selling |
|
5,745,245 |
|
5,494,754 |
|
6,400,446 |
|
|||
Research and development |
|
334,814 |
|
349,460 |
|
290,898 |
|
|||
Marketing |
|
469,126 |
|
417,728 |
|
421,810 |
|
|||
TOTAL OPERATING EXPENSES |
|
17,679,401 |
|
16,721,805 |
|
20,626,586 |
|
|||
OPERATING INCOME |
|
6,727,020 |
|
6,274,799 |
|
3,603,519 |
|
|||
OTHER EXPENSE |
|
|
|
|
|
|
|
|||
Interest expense |
|
5,036,118 |
|
5,301,024 |
|
5,158,706 |
|
|||
Management fees |
|
491,667 |
|
541,758 |
|
565,000 |
|
|||
Other expense, net |
|
198,619 |
|
341,213 |
|
221,677 |
|
|||
TOTAL OTHER EXPENSE |
|
5,726,404 |
|
6,183,995 |
|
5,945,383 |
|
|||
INCOME (LOSS) BEFORE INCOME TAXES |
|
1,000,616 |
|
90,804 |
|
(2,341,864 |
) |
|||
INCOME TAX (EXPENSE) BENEFIT |
|
(460,863 |
) |
(448,772 |
) |
621,952 |
|
|||
NET INCOME (LOSS) |
|
$ |
539,753 |
|
$ |
(357,968 |
) |
$ |
(1,719,912 |
) |
The accompanying notes are an integral part of these statements.
OHIO MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
|
|
|
|
|
|
|
|
Series A |
|
|
|
Series C |
|
|
|
Accumulated |
|
|
|
|||||||||
|
|
|
|
|
|
Additional |
|
convertible |
|
Series B |
|
convertible |
|
|
|
other |
|
|
|
|||||||||
|
|
Comprehensive |
|
Common |
|
paid in capital |
|
preferred |
|
preferred |
|
preferred |
|
Accumulated |
|
comprehensive |
|
|
|
|||||||||
|
|
income (loss) |
|
stock |
|
common stock |
|
stock |
|
stock |
|
stock |
|
deficit |
|
income (loss) |
|
Total equity |
|
|||||||||
BALANCES, DECEMBER 31, 2011 |
|
|
|
$ |
100 |
|
$ |
32,194,973 |
|
$ |
76,320,750 |
|
$ |
19,000,000 |
|
$ |
|
|
$ |
(62,418,419 |
) |
$ |
(221,583 |
) |
$ |
64,875,821 |
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Net loss |
|
$ |
(1,719,912 |
) |
|
|
|
|
|
|
|
|
|
|
(1,719,912 |
) |
|
|
(1,719,912 |
) |
||||||||
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Foreign currency translation adjustment |
|
54,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Unrealized loss on obligation under interest rate swap agreement, net of tax |
|
(74,018 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Total other comprehensive loss |
|
(19,799 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(19,799 |
) |
(19,799 |
) |
|||||||||
Total comprehensive loss |
|
$ |
(1,739,711 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Dividends accrued - Series B preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,280,000 |
) |
|
|
(2,280,000 |
) |
|||||||||
Issuance - Series A preferred stock dividends |
|
|
|
|
|
|
|
12,962,125 |
|
|
|
|
|
(12,962,125 |
) |
|
|
|
|
|||||||||
Stock-based compensation |
|
|
|
|
|
347,987 |
|
|
|
|
|
|
|
|
|
|
|
347,987 |
|
|||||||||
BALANCES, DECEMBER 31, 2012 |
|
|
|
100 |
|
32,542,960 |
|
89,282,875 |
|
19,000,000 |
|
|
|
(79,380,456 |
) |
(241,382 |
) |
61,204,097 |
|
|||||||||
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Net loss |
|
$ |
(357,968 |
) |
|
|
|
|
|
|
|
|
|
|
(357,968 |
) |
|
|
(357,968 |
) |
||||||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Foreign currency translation adjustment |
|
18,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Reclassification adjustment for interest expense included in net loss related to swap agreement, net of tax |
|
40,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Total other comprehensive income |
|
58,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
58,150 |
|
58,150 |
|
|||||||||
Total comprehensive loss |
|
$ |
(299,818 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Dividends paid - Series B preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
(895,262 |
) |
|
|
(895,262 |
) |
|||||||||
Redemption - Series B preferred stock |
|
|
|
|
|
|
|
|
|
(19,000,000 |
) |
|
|
|
|
|
|
(19,000,000 |
) |
|||||||||
Issuance - Series C preferred stock |
|
|
|
|
|
|
|
|
|
|
|
22,617,925 |
|
(343,876 |
) |
|
|
22,274,049 |
|
|||||||||
Issuance - Series A preferred stock dividends |
|
|
|
|
|
|
|
15,167,350 |
|
|
|
|
|
(15,167,350 |
) |
|
|
|
|
|||||||||
Issuance - Series C preferred stock dividends |
|
|
|
|
|
|
|
|
|
|
|
2,063,050 |
|
(2,063,050 |
) |
|
|
|
|
|||||||||
Stock-based compensation |
|
|
|
|
|
149,252 |
|
|
|
|
|
|
|
|
|
|
|
149,252 |
|
|||||||||
BALANCES, DECEMBER 31, 2013 |
|
|
|
100 |
|
32,692,212 |
|
104,450,225 |
|
|
|
24,680,975 |
|
(98,207,962 |
) |
(183,232 |
) |
63,432,318 |
|
|||||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Net income |
|
$ |
539,753 |
|
|
|
|
|
|
|
|
|
|
|
539,753 |
|
|
|
539,753 |
|
||||||||
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Foreign currency translation adjustment |
|
(46,323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Reclassification adjustment for interest expense included in net income related to swap agreement, net of tax |
|
33,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Total other comprehensive income (loss) |
|
(12,432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(12,432 |
) |
(12,432 |
) |
|||||||||
Total comprehensive income |
|
$ |
527,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Issuance - Series A preferred stock dividends |
|
|
|
|
|
|
|
17,741,625 |
|
|
|
|
|
(17,741,625 |
) |
|
|
|
|
|||||||||
Issuance - Series C preferred stock dividends |
|
|
|
|
|
|
|
|
|
|
|
4,192,650 |
|
(4,192,650 |
) |
|
|
|
|
|||||||||
Redemption - stock warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,219 |
) |
|
|
(20,219 |
) |
|||||||||
Stock-based compensation |
|
|
|
|
|
93,657 |
|
|
|
|
|
|
|
|
|
|
|
93,657 |
|
|||||||||
BALANCES, DECEMBER 31, 2014 |
|
|
|
$ |
100 |
|
$ |
32,785,869 |
|
$ |
122,191,850 |
|
$ |
|
|
$ |
28,873,625 |
|
$ |
(119,622,703 |
) |
$ |
(195,664 |
) |
$ |
64,033,077 |
|
The accompanying notes are an integral part of these statements.
OHIO MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012
|
|
2014 |
|
2013 |
|
2012 |
|
|||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|||
Net income (loss) |
|
$ |
539,753 |
|
$ |
(357,968 |
) |
$ |
(1,719,912 |
) |
Add (deduct) |
|
|
|
|
|
|
|
|||
Depreciation |
|
369,771 |
|
382,778 |
|
520,583 |
|
|||
Amortization of intangible assets |
|
4,739,988 |
|
4,647,247 |
|
6,427,372 |
|
|||
Stock-based compensation |
|
93,657 |
|
149,252 |
|
347,987 |
|
|||
Deferred income tax provision (credit) |
|
458,000 |
|
410,000 |
|
(633,000 |
) |
|||
Bad debt provision (credit) |
|
30,450 |
|
6,881 |
|
(66,998 |
) |
|||
Inventory obsolescence and valuation provision (credit) |
|
16,596 |
|
353,718 |
|
(32,634 |
) |
|||
Increase (decrease) in cash due to changes in |
|
|
|
|
|
|
|
|||
Accounts receivable |
|
(2,540,942 |
) |
(53,979 |
) |
(41,323 |
) |
|||
Inventories |
|
626,881 |
|
(623,931 |
) |
(1,131,691 |
) |
|||
Prepaid expenses and deposits |
|
184,160 |
|
47,841 |
|
(56,540 |
) |
|||
Accounts payable |
|
437,179 |
|
(481,879 |
) |
591,768 |
|
|||
Accrued liabilities and other liabilities |
|
1,361,817 |
|
544,211 |
|
750,861 |
|
|||
Accrued interest added to long-term debt |
|
455,864 |
|
360,316 |
|
|
|
|||
|
|
|
|
|
|
|
|
|||
NET CASH FLOW - OPERATING ACTIVITIES |
|
6,773,174 |
|
5,384,487 |
|
4,956,473 |
|
|||
|
|
|
|
|
|
|
|
|||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|||
Purchases of property and equipment |
|
(292,228 |
) |
(132,463 |
) |
(141,905 |
) |
|||
Patent costs paid |
|
(114,196 |
) |
(26,099 |
) |
|
|
|||
|
|
|
|
|
|
|
|
|||
NET CASH FLOW - INVESTING ACTIVITIES |
|
(406,424 |
) |
(158,562 |
) |
(141,905 |
) |
|||
|
|
|
|
|
|
|
|
|||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|||
Net (payments) proceeds on revolving line of credit |
|
(700,000 |
) |
250,000 |
|
(1,350,000 |
) |
|||
Payments on long-term debt |
|
(6,175,500 |
) |
(5,760,000 |
) |
(3,880,000 |
) |
|||
Issuance of Series C preferred stock |
|
|
|
22,617,925 |
|
|
|
|||
Redemption of Series B preferred stock |
|
|
|
(19,000,000 |
) |
|
|
|||
Financing fees paid |
|
(325,468 |
) |
|
|
|
|
|||
Stock warrants redemption costs paid |
|
(20,219 |
) |
|
|
|
|
|||
Stock issuance costs paid |
|
|
|
(343,876 |
) |
|
|
|||
Dividends paid - Series B preferred stock |
|
|
|
(3,365,262 |
) |
|
|
|||
|
|
|
|
|
|
|
|
|||
NET CASH FLOW - FINANCING ACTIVITIES |
|
(7,221,187 |
) |
(5,601,213 |
) |
(5,230,000 |
) |
|||
|
|
|
|
|
|
|
|
|||
EFFECT OF FOREIGN CURRENCY TRANSLATION ADJUSTMENT ON CASH |
|
(46,323 |
) |
18,023 |
|
54,219 |
|
|||
|
|
|
|
|
|
|
|
|||
NET CHANGE IN CASH |
|
(900,760 |
) |
(357,265 |
) |
(361,213 |
) |
|||
|
|
|
|
|
|
|
|
|||
CASH |
|
|
|
|
|
|
|
|||
Beginning of year |
|
2,575,842 |
|
2,933,107 |
|
3,294,320 |
|
|||
End of year |
|
$ |
1,675,082 |
|
$ |
2,575,842 |
|
$ |
2,933,107 |
|
|
|
|
|
|
|
|
|
|||
ADDITIONAL INFORMATION |
|
|
|
|
|
|
|
|||
Interest paid |
|
$ |
4,521,000 |
|
$ |
5,000,000 |
|
$ |
4,800,000 |
|
Stock dividends - Series A preferred stock |
|
$ |
17,742,000 |
|
$ |
15,167,000 |
|
$ |
12,964,000 |
|
Stock dividends - Series C preferred stock |
|
$ |
4,193,000 |
|
$ |
2,063,000 |
|
$ |
|
|
Dividends accrued - Series B preferred stock |
|
$ |
|
|
$ |
|
|
$ |
2,280,000 |
|
The accompanying notes are an integral part of these statements.
OHIO MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014 AND 2013
1. NATURE OF BUSINESS
Ohio Medical Corporation (OMC), located in Gurnee, IL, is an assembler of proprietary medical suction equipment and is a designer and fabricator of central vacuum and compressed air systems for industrial and medical use for domestic and international customers.
Amvex Corporation (AMVEX), a Delaware company with its primary operating facility located in Toronto, Canada, is a wholly owned subsidiary of OMC that develops, manufactures, markets and distributes medical and therapy products.
Ohio Medical Corporation UK Limited (OMC UK) is a wholly owned subsidiary of OMC located in the United Kingdom and distributes OMC and AMVEX products throughout Europe.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation - The consolidated financial statements include the accounts of OMC and its wholly owned subsidiaries, AMVEX and OMC UK (collectively referred to as the company). All significant intercompany accounts and transactions have been eliminated in consolidation.
Concentrations - International sales included in net sales were $13,441,000 in 2014, $13,000,000 in 2013 and $13,139,000 in 2012.
Accounting estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates.
Subsequent events - The preparation of these consolidated financial statements includes managements evaluation of the events and transactions occurring subsequent to December 31, 2014 through February 25, 2015, which is the date the consolidated financial statements were available to be issued.
Cash - The company maintains cash accounts at Federal Deposit Insurance Corporation (FDIC) and Canadian Deposit Insurance Corporation (CDIC) insured banks. The FDIC and CDIC provide limited insurance on cash deposits. At times, the companys cash deposits may exceed insurance limits, however, the company does not expect to experience any losses on its cash deposits.
Accounts receivable - The company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated credit risk by performing credit checks and actively pursuing past due accounts. The company determines its allowance for doubtful accounts by considering a number of factors, including the length of time accounts receivable are past due and the companys previous loss history.
Inventories - OMC inventories are stated at the lower of cost or market, with cost determined on the first-in, first-out (FIFO) method. AMVEX inventories are stated at the lower of cost or market, with cost determined on the weighted average method which approximates the FIFO method. The company determines its obsolescence and valuation reserves by considering a number of factors including the age of inventory, its historical cost and current replacement cost. Inventories as of December 31, 2014 and 2013 are as follows.
|
|
2014 |
|
2013 |
|
||
Raw materials and finished goods |
|
$ |
9,163,462 |
|
$ |
9,852,848 |
|
Work in process |
|
411,927 |
|
349,422 |
|
||
|
|
9,575,389 |
|
10,202,270 |
|
||
Less - obsolescence and valuation reserves |
|
(1,466,572 |
) |
(1,449,976 |
) |
||
|
|
$ |
8,108,817 |
|
$ |
8,752,294 |
|
The company had net inventories located in foreign jurisdictions of $2,540,000 and $3,071,000 as of December 31, 2014 and 2013.
Property and equipment - Property and equipment are recorded at cost. Depreciation is based upon the estimated useful lives of the respective assets using the straight-line method.
Buildings and improvements |
|
3 - 30 years |
|
Machinery and equipment |
|
3 - 5 years |
|
Furniture and fixtures |
|
3 - 5 years |
|
The company had net property and equipment located in foreign jurisdictions of $55,000 and $43,000 as of December 31, 2014 and 2013.
Goodwill - The goodwill acquired from business acquisitions is recorded in accordance with accounting principles generally accepted in the United States of America which establish a framework for accounting for goodwill and intangible assets. That framework requires the company to evaluate the goodwill on an annual basis for potential impairment. After estimating the value of goodwill using standard valuation techniques and comparing that value to the carrying cost, management has determined that there was no impairment of goodwill as of December 31, 2014, 2013 and 2012.
Intangible assets - Acquired intangible assets subject to amortization are stated at cost and are amortized using the straight-line method over the estimated useful lives of the assets. Intangible assets that are not subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable.
Debt issuance costs - Debt issuance costs were incurred by the company in connection with debt refinancing. These costs are included in the companys intangible assets and are amortized over the term of the related debt.
Long-lived assets - The company annually considers whether indicators of impairment of long-lived assets held for use are present. If such indicators are present, the company determines whether the sum of the estimated undiscounted future cash flow attributable to such assets is less than their carrying amounts, and if so, the company would recognize an impairment loss based on the excess of the carrying amount of the assets over their fair value. Management has determined that there was no impairment as of December 31, 2014, 2013 and 2012.
Other comprehensive income (loss) - Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income (loss). Certain changes in assets and liabilities, however, such as foreign currency translation adjustments and unrealized gains and losses on the obligation under interest rate swap agreement, are reported as a direct adjustment to the equity section of the consolidated balance sheets. Such items, along with net income (loss), are considered components of comprehensive income (loss).
Foreign currency translation - Management has determined the functional currency used by AMVEX is the US Dollar (USD). As such, adjustments resulting from the translation are included in the determination of net income (loss) for the period. In addition, the monetary assets and liabilities of AMVEX are translated from the Canadian Dollar (CAD) into USD at the rate of exchange in effect at the close of the period; nonmonetary assets and liabilities and equity are translated at the historical rate of exchange; and income and expenses are translated at an average rate of exchange for the period. The exchange rate was 1 CAD/0.86 USD as of December 31, 2014, 1 CAD/0.94 USD as of December 31, 2013 and 1 CAD/0.99 USD as of December 31, 2012.
Management has determined the functional currency used by OMC UK is the British Pound (GBP). As such, adjustments resulting from the translation of the foreign currency to USD are accumulated as accumulated other comprehensive income (loss) which is a separate component of stockholders equity and have not been included in the determination of net income (loss). In addition, assets and liabilities of OMC UK are translated from the GBP into USD at the rate of exchange in effect at the close of the period; equity is translated at the historical rate of exchange; and income and expenses are translated at an average rate of exchange for the period. The exchange rate was 1 GBP/1.55 USD as of December 31, 2014, 1 GBP/1.65 USD as of December 31, 2013 and 1 GBP/1.60 USD as of December 31, 2012.
Revenue recognition - The company generally recognizes sales upon shipment. Sales taxes imposed on revenue-producing transactions and remitted to tax authorities are presented on a net basis in the accompanying consolidated statements of operations as a reduction of net sales.
Warranty obligations - The company accrues an estimate of its exposure to warranty claims on an as needed basis based on both current and historical sales and returns data. The company provides limited repair or replacement warranties on its products. The adequacy of the warranty liability is assessed annually and is included in accrued liabilities in the accompanying consolidated balance sheets. The warranty liability was $255,000 and $205,000 as of December 31, 2014 and 2013.
Advertising - Advertising costs are expensed as incurred. Total advertising expense was $36,000 in 2014, $24,000 in 2013 and $64,000 in 2012.
Shipping and handling costs - Shipping and handling costs incurred by the company and fees billed to customers are included on a net basis in selling expenses in the consolidated statements of operations. Shipping and handling costs associated with outbound freight totaled $727,000 in 2014, $822,000 in 2013 and $1,010,000 in 2012. Freight revenue billed to customers totaled $1,184,000 in 2014, $1,330,000 in 2013 and $1,480,000 in 2012.
3. INTANGIBLE ASSETS
The company has intangible assets related to business purchases as of December 31, 2014 and 2013 as follows.
|
|
Estimated |
|
|
|
|
|
||
|
|
useful life |
|
2014 |
|
2013 |
|
||
Amortizable intangible assets: |
|
|
|
|
|
|
|
||
Customer lists |
|
5-10 years |
|
$ |
23,930,000 |
|
$ |
23,930,000 |
|
Noncompete agreements |
|
5 years |
|
12,509,000 |
|
12,509,000 |
|
||
Nonsolicitation agreement |
|
1.5 years |
|
69,000 |
|
69,000 |
|
||
Debt issuance costs |
|
4-6 years |
|
1,818,857 |
|
1,493,389 |
|
||
Trade names |
|
3-5 years |
|
116,120 |
|
514,120 |
|
||
Patented technologies |
|
5-15.5 years |
|
7,769,425 |
|
7,655,229 |
|
||
Unpatented technologies |
|
10-18.5 years |
|
2,498,099 |
|
2,498,099 |
|
||
Customer relationships |
|
20 years |
|
24,090,000 |
|
24,090,000 |
|
||
|
|
|
|
72,800,501 |
|
72,758,837 |
|
||
Less - accumulated amortization |
|
|
|
49,360,679 |
|
45,018,691 |
|
||
|
|
|
|
23,439,822 |
|
27,740,146 |
|
||
Intangible assets with indefinite lives - trade names |
|
|
|
3,867,000 |
|
3,867,000 |
|
||
|
|
|
|
$ |
27,306,822 |
|
$ |
31,607,146 |
|
Estimated amortization expense is as follows.
2015 |
|
$ |
3,569,000 |
|
2016 |
|
2,206,000 |
|
|
2017 |
|
1,851,000 |
|
|
2018 |
|
1,848,000 |
|
|
2019 |
|
1,844,000 |
|
|
Thereafter |
|
12,122,000 |
|
4. LONG-TERM DEBT
|
|
2014 |
|
2013 |
|
||
Term note payable, due in quarterly principal installments, balloon payment due November 2016 |
|
$ |
22,984,500 |
|
$ |
29,160,000 |
|
Subordinated term note payable, interest only payments due quarterly, balloon payment due May 2017 |
|
23,316,180 |
|
22,860,316 |
|
||
Revolving line of credit, due November 2016 |
|
3,800,000 |
|
4,500,000 |
|
||
|
|
50,100,680 |
|
56,520,316 |
|
||
Less current portion |
|
5,962,000 |
|
6,331,000 |
|
||
|
|
$ |
44,138,680 |
|
$ |
50,189,316 |
|
The term note payable and revolving line of credit are secured by substantially all assets of the company. Interest on the term note payable and revolving line of credit varies based on quarterly leverage ratio calculations (LIBOR plus 5% as of December 31, 2014). The company also has the option to select among various base rates in calculating monthly interest charges (LIBOR, prime rate and federal funds rate). The term note payable requires quarterly principal payments of $975,000 with a balloon payment due at maturity. In addition, the term note payable is subject to mandatory annual excess cash prepayment requirements determined by defined percentages of the companys annual net cash flow measured annually at December 31. The 2014 excess cash prepayment is estimated to be $2,062,000 due April 2015. The excess cash prepayments due are included in current portion of long-term debt in the accompanying consolidated balance sheets.
The amount available under the revolving line of credit is $10,000,000. A quarterly commitment fee is charged based on the unused portion of the revolving line of credit which varies based on quarterly leverage ratio calculations.
The subordinated term note payable is secured by substantially all assets of the company (subordinate to the term note payable and revolving line of credit). Interest on the subordinated term note payable is due quarterly and varies based on quarterly leverage ratio calculations ranging from 10% to 12% (12% as of December 31, 2014).
Effective March 2013, the interest rate on the subordinated term note payable was increased by an additional 2%. The additional interest is added to the outstanding balance of the note as incurred (PIK interest). The PIK interest rate will be reset to 0% when leverage ratio calculations are reduced by a certain amount as defined in the credit facilities. PIK interest added to the outstanding balance of the note was $456,000 in 2014 and $360,000 in 2013.
The credit facilities related to the above require limitations on additional indebtedness and contain certain financial covenant requirements measured quarterly including maintaining minimum fixed charge ratios, maximum senior debt and total leverage ratios. In addition, the related agreements limit the amount of management fees accrued and paid.
Maturities of long-term debt as of December 31, 2014 are presented below.
2015 |
|
$ |
5,962,000 |
|
2016 |
|
20,823,000 |
|
|
2017 |
|
23,316,000 |
|
5. DERIVATIVE FINANCIAL INSTRUMENT
During 2012, the company entered into an interest rate swap agreement with a financial institution to manage risks relating to interest rate movements on its long-term debt. The agreement effectively fixed the LIBOR base interest rate at 0.745% on a portion of the term note payable balance through November 2014. The swap agreement qualified as a cash flow hedge derivative instrument and was reported at fair value. Changes in the swap agreements fair value were included as a component of other comprehensive income (loss).
6. INCOME TAXES
Deferred income taxes result from temporary differences between the reporting of amounts for financial statement purposes and income tax purposes. These differences relate primarily to different methods used for depreciation and amortization for income tax purposes, certain prepaid expenses, certain accrued liabilities, inventory capitalization requirements of the Internal Revenue Code, allowance for doubtful accounts, stock-based compensation and net operating loss carryforwards.
The components of income tax (expense) benefit are as follows.
|
|
2014 |
|
2013 |
|
2012 |
|
|||
Current income tax expense |
|
$ |
(3,000 |
) |
$ |
(39,000 |
) |
$ |
(12,000 |
) |
Deferred income tax expense |
|
(1,170,000 |
) |
(1,442,000 |
) |
(637,000 |
) |
|||
Benefit from net operating loss carryforwards |
|
712,000 |
|
1,032,000 |
|
1,271,000 |
|
|||
|
|
$ |
(461,000 |
) |
$ |
(449,000 |
) |
$ |
622,000 |
|
The income tax (expense) benefit differs from statutory rates due to certain credits and permanent differences, and due to additional tax credits and deductions taken on the income tax returns which were not reflected in the income tax (expense) benefit in prior years.
During 2011, the company became aware of a potential exposure related to withholding taxes on intercompany loans for 2008 and 2009. The company engaged an outside advisor in 2011 and presented a proposal for resolution to the Canadian tax authorities in 2012. As of the date of this report, the company is still awaiting a response from the Canadian tax authorities in connection with the proposal for resolution. The company has estimated that it is more than likely that a settlement payment for the tax liability, interest and penalties will be made to the Canadian tax authorities ranging from $400,000 to $790,000. The company recorded a $600,000 provision in 2011 for the companys possible exposure related to this outstanding Canadian tax matter. The settlement liability was $600,000 as of December 31, 2014 and 2013.
The deferred income tax (expense) benefit does not include the deferred tax (expense) benefit related to the obligation under interest rate swap agreement of $(24,000) in 2014, $(28,000) in 2013 and $52,000 in 2012.
Total deferred tax assets and liabilities are as follows.
|
|
2014 |
|
2013 |
|
||
Current deferred tax assets |
|
$ |
2,242,000 |
|
$ |
1,828,000 |
|
Current deferred tax liabilities |
|
(69,000 |
) |
(212,000 |
) |
||
Noncurrent deferred tax assets |
|
1,122,000 |
|
1,100,000 |
|
||
Noncurrent deferred tax liabilities |
|
(6,222,000 |
) |
(4,449,000 |
) |
||
|
|
(2,927,000 |
) |
(1,733,000 |
) |
||
Tax effect of net operating loss carryforwards |
|
17,618,000 |
|
16,906,000 |
|
||
|
|
$ |
14,691,000 |
|
$ |
15,173,000 |
|
In assessing deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income prior to expiration of net operating loss carryforwards. As of December 31, 2014, the company has approximately $47,350,000 (tax effect of $16,100,000) of federal net operating loss carryforwards and $20,800,000 (tax effect of $1,518,000) of state (primarily Illinois) net operating loss carryforwards available which expire through 2035.
Management has not established a valuation allowance for the deferred tax assets as management estimates that the deferred tax assets are fully realizable. It is at least reasonably possible that this estimate could change in the near term.
The company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Generally the company is no longer subject to federal and state income tax examinations by tax authorities for years before 2011, although net operating loss carryforwards generated in those years may still be adjusted upon examination by the Internal Revenue Service or state taxing authorities if the net operating loss carryforwards either have been or will be used in future periods.
The company analyzed the requirements for accounting for uncertain tax positions, and determined that it was not required to record a liability related to uncertain tax positions as of December 31, 2014 and 2013.
7. CAPITAL STOCK
Common stock - During 2013, the company authorized an additional 40,000 shares of common stock. 165,000 shares of common stock are authorized with a par value of $.01 per share. There were 10,000 shares issued and outstanding as of December 31, 2014, 2013 and 2012.
Series A convertible preferred stock - During 2013, the company authorized an additional 40,000 shares of nonvoting Series A convertible preferred stock. 140,000 shares of nonvoting Series A convertible preferred stock are authorized with a par value of $.01 per share and a face value of $3,025 per share. Holders of Series A convertible preferred stock are entitled to receive preferred stock dividends issued quarterly in the form of Series A convertible preferred stock at a rate of 16% per annum. Total stock dividends issued were $17,742,000 in 2014, $15,167,000 in 2013 and $12,962,000 in 2012. The stock dividends are recorded by the company as a charge to accumulated deficit. The stock dividends represented 5,865 shares in 2014, 5,014 shares in 2013 and 4,285 shares in 2012. Shares issued and outstanding were 40,394, 34,529 and 29,515 as of December 31, 2014, 2013 and 2012. The stock has a liquidation value (preferential to common stock) of the original issue price plus any accrued and unpaid dividends.
Series B preferred stock - 10,000 shares of nonvoting Series B convertible preferred stock were authorized with a par value of $.01 per share and a face value of $20,000 per share. There were 950 shares issued and outstanding as of December 31, 2012. Holders of Series B preferred stock were entitled to receive dividends at a rate of 12% per annum. Dividends recorded were $895,000 in 2013 and $2,280,000 in 2012. During 2013, the company redeemed and retired all shares of Series B preferred stock at a redemption price equal to the face value of the stock. The company also paid all accrued unpaid dividends due as of the date of the redemption.
Series C convertible preferred stock - During 2013, the company authorized new Series C convertible preferred stock. 45,000 shares of nonvoting Series C convertible preferred stock are authorized with a par value of $.01 per share and a face value of $3,025 per share. Holders of Series C convertible preferred stock are entitled to receive dividends at a rate of 16% per annum. Total stock dividends issued were $4,193,000 in 2014 and $2,063,000 in 2013. The stock dividends are recorded by the company as a charge to accumulated deficit. The stock dividends represented 1,386 shares in 2014 and 682 shares in 2013. Shares issued and outstanding were 9,545 and 8,159 as of December 31, 2014 and 2013. The stock has a liquidation value (preferential to common stock and Series A convertible preferred stock) of the original issue price plus accrued and unpaid dividends.
An additional 70,000 shares of preferred stock are authorized but not yet designated as of December 31, 2014.
8. RETIREMENT PLANS
The company sponsors a 401(k) plan for substantially all OMC employees. The plan provides for discretionary employer matching and profit sharing contributions, as determined by the board of directors. Discretionary matching contributions to the plan were $129,000 in 2014, $106,000 in 2013, and $103,000 in 2012.
9. OPERATING LEASES
The company leases its AMVEX office and warehouse located in Toronto, Canada under an operating lease through May 2016. The lease requires the company to pay monthly rent of $17,000 plus all property taxes and other operating expenses of the facility. The company also leases a sales office in Madison, WI and certain other equipment under operating leases expiring at various dates through August 2017. Total rent expense under these leases, including property taxes and other operating expenses for the AMVEX office, was $440,000 in 2014, $459,000 in 2013 and $463,000 in 2012. Future minimum annual commitments under these operating leases, including estimates for property taxes and other operating expenses for the AMVEX office, are as follows.
2015 |
|
$ |
416,000 |
2016 |
|
200,000 |
|
2017 |
|
40,000 |
10. RELATED PARTY TRANSACTIONS
The company incurred expenses related to management fees charged from various entities that own/owned shares of the companys stock during 2014, 2013 and 2012. Management fees were $492,000 in 2014, $542,000 in 2013 and $550,000 in 2012. Accumulated unpaid fees of $1,958,000 and $1,467,000 are included in other liabilities in the accompanying consolidated balance sheets as of December 31, 2014 and 2013. Given the payment restrictions discussed in Note 4, the company is not certain what payments will be made in 2015, if any. As such, the accumulated unpaid fees are classified as long-term on the accompanying consolidated balance sheets.
11. STOCK OPTION PLAN
The companys stock option plan (the plan), which is stockholder approved, permits the grant of stock options to its employees. The company believes that such awards better align the interests of its employees with those of its stockholders. Option awards are generally granted with an exercise price equal to the market price of the companys stock at the date of the grant; those option awards generally vest over five years and have 10-year contractual terms.
As of December 31, 2014, all outstanding stock options granted are fully vested. As such, there is no unrecognized compensation cost related to nonvested share-based compensation. There were no stock options granted by the company in 2014, 2013 or 2012. The fair value of each option previously granted was estimated on the date of grant using a Black Scholes option valuation model that uses certain weighted average assumptions.
A summary of option activity under the plan as of December 31, 2014 and the year then ended is as follows.
|
|
|
|
|
|
Weighted |
|
|
|
||
|
|
|
|
|
|
average |
|
|
|
||
|
|
|
|
Weighted |
|
remaining |
|
|
|
||
|
|
Number |
|
average |
|
contractual |
|
Aggregate |
|
||
|
|
of |
|
exercise |
|
term |
|
intrinsic |
|
||
Options |
|
shares |
|
price |
|
(in years) |
|
value |
|
||
Outstanding at January 1, 2014 |
|
1,939 |
|
$ |
2,681 |
|
4.5 |
|
$ |
2,180,070 |
|
Granted (forfeited) |
|
|
|
|
|
|
|
|
|
||
Outstanding at December 31, 2014 |
|
1,939 |
|
$ |
2,681 |
|
3.5 |
|
$ |
2,180,070 |
|
Vested or expected to vest at December 31, 2014 |
|
1,939 |
|
$ |
2,681 |
|
3.5 |
|
$ |
2,180,070 |
|
A summary of option activity under the plan as of December 31, 2013 and the year then ended is as follows.
|
|
|
|
|
|
Weighted |
|
|
|
||
|
|
|
|
|
|
average |
|
|
|
||
|
|
|
|
Weighted |
|
remaining |
|
|
|
||
|
|
Number |
|
average |
|
contractual |
|
Aggregate |
|
||
|
|
of |
|
exercise |
|
term |
|
intrinsic |
|
||
Options |
|
shares |
|
price |
|
(in years) |
|
value |
|
||
Outstanding at January 1, 2013 |
|
2,049 |
|
$ |
2,788 |
|
5.4 |
|
$ |
2,394,911 |
|
Granted (forfeited) |
|
(110 |
) |
|
|
4.7 |
|
(214,841 |
) |
||
Outstanding at December 31, 2013 |
|
1,939 |
|
$ |
2,681 |
|
4.5 |
|
$ |
2,180,070 |
|
Vested or expected to vest at December 31, 2013 |
|
1,827 |
|
$ |
2,722 |
|
3.9 |
|
$ |
2,086,413 |
|
A summary of option activity under the plan as of December 31, 2012 and the year then ended is as follows.
|
|
|
|
|
|
Weighted |
|
|
|
||
|
|
|
|
|
|
average |
|
|
|
||
|
|
|
|
Weighted |
|
remaining |
|
|
|
||
|
|
Number |
|
average |
|
contractual |
|
Aggregate |
|
||
|
|
of |
|
exercise |
|
term |
|
intrinsic |
|
||
Options |
|
shares |
|
price |
|
(in years) |
|
value |
|
||
Outstanding at January 1, 2012 |
|
2,049 |
|
$ |
2,788 |
|
6.4 |
|
$ |
2,394,911 |
|
Granted (forfeited) |
|
|
|
|
|
|
|
|
|
||
Outstanding at December 31, 2012 |
|
2,049 |
|
$ |
2,788 |
|
5.4 |
|
$ |
2,394,911 |
|
Vested or expected to vest at December 31, 2012 |
|
1,764 |
|
$ |
2,890 |
|
5.2 |
|
$ |
2,152,002 |
|
SUPPLEMENTARY INFORMATION
Schedule 1
OHIO MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET INFORMATION - DECEMBER 31, 2014
|
|
|
|
|
|
Ohio Medical |
|
|
|
Ohio Medical |
|
|||||
|
|
Ohio Medical |
|
Amvex |
|
Corporation |
|
|
|
Corporation |
|
|||||
|
|
Corporation |
|
Corporation |
|
UK Limited |
|
Eliminations |
|
(Consolidated) |
|
|||||
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash |
|
$ |
847,951 |
|
$ |
697,642 |
|
$ |
129,489 |
|
$ |
|
|
$ |
1,675,082 |
|
Accounts receivable, net |
|
6,571,276 |
|
3,377,170 |
|
26,555 |
|
|
|
9,975,001 |
|
|||||
Inventories, net |
|
5,568,359 |
|
2,540,458 |
|
|
|
|
|
8,108,817 |
|
|||||
Prepaid expenses and deposits |
|
335,679 |
|
171,837 |
|
880 |
|
|
|
508,396 |
|
|||||
Current deferred tax asset |
|
2,173,000 |
|
|
|
|
|
|
|
2,173,000 |
|
|||||
TOTAL CURRENT ASSETS |
|
15,496,265 |
|
6,787,107 |
|
156,924 |
|
|
|
22,440,296 |
|
|||||
INTERCOMPANY |
|
43,705,356 |
|
(44,298,037 |
) |
592,681 |
|
|
|
|
|
|||||
PROPERTY AND EQUIPMENT |
|
|
|
|
|
|
|
|
|
|
|
|||||
Land |
|
539,500 |
|
|
|
|
|
|
|
539,500 |
|
|||||
Buildings and improvements |
|
3,512,320 |
|
192,631 |
|
|
|
|
|
3,704,951 |
|
|||||
Machinery and equipment |
|
3,964,699 |
|
345,646 |
|
|
|
|
|
4,310,345 |
|
|||||
Furniture and fixtures |
|
434,896 |
|
471,516 |
|
|
|
|
|
906,412 |
|
|||||
TOTAL PROPERTY AND EQUIPMENT |
|
8,451,415 |
|
1,009,793 |
|
|
|
|
|
9,461,208 |
|
|||||
Less - accumulated depreciation |
|
6,507,780 |
|
955,124 |
|
|
|
|
|
7,462,904 |
|
|||||
NET PROPERTY AND EQUIPMENT |
|
1,943,635 |
|
54,669 |
|
|
|
|
|
1,998,304 |
|
|||||
INVESTMENT IN SUBSIDIARY |
|
19,259,723 |
|
|
|
|
|
(19,259,723 |
) |
|
|
|||||
GOODWILL |
|
46,962,539 |
|
12,457,833 |
|
|
|
|
|
59,420,372 |
|
|||||
INTANGIBLE ASSETS, net |
|
2,104,431 |
|
25,202,391 |
|
|
|
|
|
27,306,822 |
|
|||||
NONCURRENT DEFERRED TAX ASSET |
|
4,776,000 |
|
7,742,000 |
|
|
|
|
|
12,518,000 |
|
|||||
|
|
$ |
134,247,949 |
|
$ |
7,945,963 |
|
$ |
749,605 |
|
$ |
(19,259,723 |
) |
$ |
123,683,794 |
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|||||
Current portion of long-term debt |
|
$ |
5,962,000 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
5,962,000 |
|
Accounts payable |
|
3,606,563 |
|
978,203 |
|
27,999 |
|
|
|
4,612,765 |
|
|||||
Accrued liabilities |
|
2,438,278 |
|
268,330 |
|
3,580 |
|
|
|
2,710,188 |
|
|||||
TOTAL CURRENT LIABILITIES |
|
12,006,841 |
|
1,246,533 |
|
31,579 |
|
|
|
13,284,953 |
|
|||||
LONG-TERM DEBT, less current portion |
|
44,138,680 |
|
|
|
|
|
|
|
44,138,680 |
|
|||||
OTHER LIABILITIES |
|
2,227,084 |
|
|
|
|
|
|
|
2,227,084 |
|
|||||
STOCKHOLDERS EQUITY |
|
75,875,344 |
|
6,699,430 |
|
718,026 |
|
(19,259,723 |
) |
64,033,077 |
|
|||||
|
|
$ |
134,247,949 |
|
$ |
7,945,963 |
|
$ |
749,605 |
|
$ |
(19,259,723 |
) |
$ |
123,683,794 |
|
Schedule 2
OHIO MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 2014
|
|
|
|
|
|
Ohio Medical |
|
|
|
Ohio Medical |
|
|||||
|
|
Ohio Medical |
|
Amvex |
|
Corporation |
|
|
|
Corporation |
|
|||||
|
|
Corporation |
|
Corporation |
|
UK Limited |
|
Eliminations |
|
(Consolidated) |
|
|||||
NET SALES |
|
$ |
34,886,225 |
|
$ |
16,282,376 |
|
$ |
110,711 |
|
$ |
|
|
$ |
51,279,312 |
|
COST OF SALES |
|
18,736,491 |
|
8,042,601 |
|
93,799 |
|
|
|
26,872,891 |
|
|||||
GROSS PROFIT |
|
16,149,734 |
|
8,239,775 |
|
16,912 |
|
|
|
24,406,421 |
|
|||||
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|||||
General and administrative |
|
7,602,816 |
|
3,507,289 |
|
20,111 |
|
|
|
11,130,216 |
|
|||||
Selling |
|
5,130,470 |
|
614,775 |
|
|
|
|
|
5,745,245 |
|
|||||
Research and development |
|
275,859 |
|
58,955 |
|
|
|
|
|
334,814 |
|
|||||
Marketing |
|
355,764 |
|
113,362 |
|
|
|
|
|
469,126 |
|
|||||
TOTAL OPERATING EXPENSES |
|
13,364,909 |
|
4,294,381 |
|
20,111 |
|
|
|
17,679,401 |
|
|||||
OPERATING INCOME (LOSS) |
|
2,784,825 |
|
3,945,394 |
|
(3,199 |
) |
|
|
6,727,020 |
|
|||||
OTHER (INCOME) EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest expense |
|
5,036,118 |
|
|
|
|
|
|
|
5,036,118 |
|
|||||
Management fees |
|
491,667 |
|
|
|
|
|
|
|
491,667 |
|
|||||
Other expense (income), net |
|
(5,662,559 |
) |
5,891,101 |
|
(29,923 |
) |
|
|
198,619 |
|
|||||
TOTAL OTHER (INCOME) EXPENSE |
|
(134,774 |
) |
5,891,101 |
|
(29,923 |
) |
|
|
5,726,404 |
|
|||||
INCOME (LOSS) BEFORE INCOME TAXES |
|
2,919,599 |
|
(1,945,707 |
) |
26,724 |
|
|
|
1,000,616 |
|
|||||
INCOME TAX (EXPENSE) BENEFIT |
|
(1,167,209 |
) |
707,000 |
|
(654 |
) |
|
|
(460,863 |
) |
|||||
NET INCOME (LOSS) |
|
$ |
1,752,390 |
|
$ |
(1,238,707 |
) |
$ |
26,070 |
|
$ |
|
|
$ |
539,753 |
|
Exhibit 21.4
MVC AUTOMOTIVE COMBINED GROUP
COMBINED FINANCIAL STATEMENTS (US GAAP)
December 31, 2013 and December 31, 2014
(in thousands of Euro)
Index
Independent Auditors Report |
|
|
|
Combined Financial Statements |
I |
Combined Balance Sheets as of December 31, 2013 and 2014 |
|
Combined Statement of Income for the year ended December 31, 2014 |
|
Combined Statement of Comprehensive Income for the year ended December 31, 2014 |
|
Combined Statement of Cash Flow for the year ended December 31, 2014 |
|
Combined Statement of Invested Equity for the year ended December 31, 2014 |
|
|
|
Notes to the Combined Financial Statements |
II |
|
PwC Wirtschaftspriifung GmbH |
|
Erdbergstra b e 200 |
||
1030 Vienna |
||
Tel.: |
+43 1 501 88 - 0 |
|
Fax: |
+43 1 501 88 - 601 |
|
E-Mail: office.wien@at.pwc.com |
||
www.pwc.at |
To the management of
MVC Automotive Combined Group
|
March 9, 2016 |
Independent Auditors Report
We have audited the accompanying combined financial statements of MVC Automotive Austria GmbH, Vienna, MVC Motors GmbH, Vienna, MVC Immobilien GmbH, Vienna, Auto Motol Beni a.s., Prague, Czech Republic, BE & NI Group a.s., Prague, Czech Republic, Somotra N.V., Brussels, Belgium and Bromalease NV, Brussels, Belgium (collectively, here after the Company) as of December 31, 2014 and 2013 expressed in EUR000, which comprise the combined balance sheet as of December 31, 2014 and 2013 and the related combined statements of comprehensive income, of shareholders equity and cash flow for the year ended December 31, 2014 and the related notes.
Managements Responsibility for the Combined Financial Statements
Management is responsible for the preparation and fair presentation of the combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of a combined financial statements that is free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on the combined financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risks assessments, the auditor considers internal control relevant to the Companys preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control. Accordingly, we express no such opinion.
Managing Directors: WP/StB Mag. Friedrich Baumgartner, WP/StB Mag. Horst Bemegger, WP/StB Mag. Dr. Christine Catasta, WP/StB Mag. Liane Hirner, WP/StB Mag. Werner Krumm, WP/StB Mag. Dr. Asian Milla, WP/StB WP/StB Mag. Peter Pessenlehner, WP/StB Mag. Dr. Anton Pichler, WP/StB Mag. Gerhard Prachner, WP/StB Mag. Birgit Pscheider, WP/StB Dipl.Kfm.Univ. Dorotea-E. Rebmann, WP/StB Mag. Alexandra Rester, WP/StB Mag. Jürgen Schauer, WP/StB Mag. Ute Unden-Schubert, WP/StB Mag. Günter Wiltschek,WP/StB Mag. Felix Wirth
Domicile: Vienna; Company Register: FN 88248 b, Commercial Court of Vienna; DVR: 0656071; VAT number: ATU16124600; WT: 800834
PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the accompanying combined financial statements presents fairly, in all material respects, the financial position of MVC Automotive Austria GmbH, Vienna, MVC Motors GmbH, Vienna, MVC Immobilien GmbH, Vienna, Auto Motol Beni a.s., Prague, Czech Republic, BE & NI Group a.s., Prague, Czech Republic, Somotra N.V., Brussels, Belgium and Bromalease NV, Brussels, Belgium, as of December 31, 2014 and 2013, and the results of their operations and their cash flow for the year ended December 31, 2014 in accordance with accounting principles generally accepted in the United States of America.
Emphasis of a matter
We draw attention to Note 2 to the combined financial statements, where it is indicated that management has prepared the combined financial statements of one of the Companys subsidiaries as of December 31, 2014 and 2013 under the assumption of going concern. Such assumption is only justified as long as the subsidiary continues receiving the financial support from its shareholders to support its subsidiary or has access other financial means. The combined financial statements as of December 31, 2014 and 2013 has not been subject to adjustments that might become necessary should the Company no longer be able to continue as a going concern. Our audit opinion is not modified with respect to this matter.
Kind regards |
|
|
|
|
|
|
|
Alexandra Rester |
|
|
|
PwC Wirtschaftsprüfung GmbH |
|
COMBINED FINANCIAL STATEMENTS |
MVC AUTOMOTIVE GROUP |
December 31, 2014 |
I. COMBINED FINANCIAL STATEMENTS
COMBINED BALANCE SHEETS
|
|
December
|
|
December
|
|
|
Assets |
|
|
|
|
|
|
Cash and cash equivalents |
|
|
796 |
|
987 |
|
Trade accounts receivable, net |
|
|
7,557 |
|
9,111 |
|
Inventories |
|
|
40,441 |
|
32,197 |
|
Amounts due from related parties short-term |
|
|
3,493 |
|
5,057 |
|
Prepaid expenses and other assets |
|
|
3,783 |
|
5,487 |
|
Total current assets |
|
|
56,069 |
|
52,840 |
|
Other intangible assets, net |
|
|
31 |
|
55 |
|
Property, plant and equipment, net |
|
|
27,220 |
|
28,518 |
|
Deferred tax assets |
|
|
885 |
|
655 |
|
Total non-current assets |
|
|
28,136 |
|
29,228 |
|
Total assets |
|
|
84,205 |
|
82,068 |
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
Bank loans short-term |
|
|
6,755 |
|
9,471 |
|
Current portion of long-term financial liabilities |
|
|
923 |
|
941 |
|
Trade accounts payable |
|
|
7,915 |
|
4,364 |
|
Customer advances/prepayments |
|
|
1,665 |
|
2,112 |
|
Financial payables for acquisition of cars |
|
|
37,533 |
|
27,077 |
|
Amounts due to related parties short-term (trade) |
|
|
18 |
|
1,724 |
|
Financial liabilities due to related parties short-term |
|
|
260 |
|
727 |
|
Finance lease liabilities short-term |
|
|
211 |
|
313 |
|
Short-term personnel provisions |
|
|
126 |
|
106 |
|
Accrued expenses and other short term liabilities |
|
|
5,685 |
|
5,543 |
|
Income taxes payable |
|
|
4 |
|
24 |
|
Total current liabilities |
|
61,095 |
|
52,402 |
|
|
|
|
|
|
|
|
|
Long-term personnel provisions |
|
|
3,148 |
|
2,628 |
|
Financial liabilities due to related parties |
|
|
1,500 |
|
380 |
|
Bank loans long-term |
|
|
12,159 |
|
13,018 |
|
Finance lease liabilities long- term |
|
|
2,213 |
|
2,425 |
|
Financial payables for acquisition of cars long-term |
|
|
0 |
|
418 |
|
Total non-current liabilities |
|
|
19,021 |
|
18,868 |
|
|
|
|
|
|
|
|
Owners net investment |
|
|
4,734 |
|
11,214 |
|
Accumulated other comprehensive loss |
|
|
(644 |
) |
(416 |
) |
Total shareholders equity |
|
|
4,090 |
|
10,798 |
|
Total liabilities and shareholders equity |
|
|
84,205 |
|
82,068 |
|
COMBINED STATEMENT OF INCOME
|
|
for the year ended
|
|
|
|
|
|
|
|
Revenue |
|
|
167,096 |
|
Cost of sales |
|
|
(156,345 |
) |
Gross profit |
|
|
10,751 |
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
Sales, administrative, and other expenses |
|
|
(17,478 |
) |
Total operating expenses |
|
|
(17,478 |
) |
|
|
|
|
|
Other operating income: |
|
|
|
|
Income from disposal of property, plant and equipment |
|
|
164 |
|
Miscellaneous operating income |
|
|
274 |
|
Total other operating income |
|
|
438 |
|
Operating income/(loss) |
|
|
(6,288 |
) |
|
|
|
|
|
Interest income |
|
|
154 |
|
Interest expense |
|
|
(1,750 |
) |
Foreign exchange adjustments (financial) |
|
|
318 |
|
Other financial result |
|
|
(72 |
) |
Loss before income taxes |
|
|
(7,637 |
) |
|
|
|
|
|
Income tax benefits/(expenses) |
|
|
137 |
|
Net loss |
|
|
(7,500 |
) |
COMBINED STATEMENT OF COMPREHENSIVE INCOME
|
|
for the year ended
|
|
|
|
|
|
|
|
Net income |
|
|
(7,500 |
) |
Other comprehensive lass: |
|
|
|
|
Actuarial losses * |
|
|
(277 |
) |
Translation adjustments |
|
|
48 |
|
|
|
|
|
|
Other comprehensive lass |
|
|
(229 |
) |
Comprehensive loss |
|
|
(7,729 |
) |
* net of tax effects of EUR 92 thsd.
COMBINED STATEMENT OF CASH FLOW
Operations |
|
for the year ended
|
|
|
Net loss |
|
|
(7,500 |
) |
Adjustments to reconcile net income to net cash from operations: |
|
|
|
|
Depreciation, amortization |
|
|
1,858 |
|
Net recognized losses (gains) on disposal of tangible and intangible assets |
|
|
(166 |
) |
Deferred income taxes |
|
|
(138 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
Accounts receivable |
|
|
1,554 |
|
Inventories |
|
|
(8,244 |
) |
Other current assets |
|
|
3,268 |
|
Accounts payable |
|
|
13,560 |
|
Provisions |
|
|
171 |
|
Other current liabilities |
|
|
(2,153 |
) |
Other long-term liabilities |
|
|
498 |
|
Net cash provided by (used in) operating activities |
|
|
2,708 |
|
|
|
|
|
|
Investing |
|
|
|
|
Purchases of property, plant and equipment and intangible assets |
|
|
(1,230 |
) |
Proceeds from disposal of property, plant and equipment and intangible assets |
|
|
860 |
|
Net cash provided by (used in) investing |
|
|
(370 |
) |
|
|
|
|
|
Financing |
|
|
|
|
Repayments of debt |
|
|
(3,593 |
) |
Common stock issued |
|
|
2,300 |
|
Common stock repurchased |
|
|
(1,281 |
) |
Net cash provided by (used in) financing |
|
|
(2,574 |
) |
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents |
|
|
45 |
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
(191 |
) |
Cash and cash equivalents, beginning of period |
|
|
987 |
|
Cash and cash equivalents, end of period |
|
|
796 |
|
|
|
|
|
|
Supplemental disclosures |
|
|
|
|
Interest paid |
|
|
(1,750 |
) |
Interest received |
|
|
264 |
|
Income tax paid, net |
|
|
(22 |
) |
COMBINED STATEMENT OF INVESTED EQUITY
|
|
for the year ended
|
|
|||||
|
|
Owners net |
|
Other
|
|
|
|
|
in EUR thsd |
|
investment |
|
Income (Loss) |
|
Total |
|
|
Balance at December 31, 2013 |
|
|
11,214 |
|
(416 |
) |
10,798 |
|
Capital increase Somotra NV |
|
|
2,300 |
|
0 |
|
2,300 |
|
Capital decrease Auto Motol Beni a.s. |
|
|
(1,280 |
) |
0 |
|
(1,280 |
) |
Net loss |
|
|
(7,500 |
) |
0 |
|
(7,500 |
) |
Other comprehensive loss |
|
|
0 |
|
(229 |
) |
(229 |
) |
Balance at December 31, 2014 |
|
|
4,734 |
|
(644 |
) |
4,090 |
|
II. NOTES TO THE COMBINED FINANCIAL STATEMENTS
NOTE 1 BACKGROUND AND COMPANIES INCLUDED
These Combined Financial Statements (together MVC Automotive Combined Group ) includes the accounts of
· MVC Automotive Austria GmbH Subgroup and its investments in
· MVC Immobilien GmbH (Vienna)
· MVC Motors GmbH (Vienna)
· Somotra N.V. (Brussels),
· Bromalease N.V. (Brussels),
· Auto Motol Beni A.S. (Prague), and
· BE & NI Group A.S. (Prague)
MVC Automotive Group GmbH is 100% owned by MVC Capital Inc.
Due to insolvency proceedings in regard to the Belgium subsidiary Cegeac S.A. (Note 12) MVC Automotive Combined Groups ability to access accounting records are limited. It was not possible to obtain sufficient and reliable evidence about the amounts and disclosures in the annual accounts of Cegeac S.A. for the business years 2014 and 2013.
Therefore combined financial statements including all subsidiaries of MVC Automotive Group GmbH, Austria, except Cegeac S.A. and the parent company MVC Automotive Group GmbH itself have been prepared.
MVC Automotive Group B.V. was established in September 2007, and thereupon acquired nine Ford dealerships in the capitals of Belgium, Netherlands and Austria. In 2008 also two dealerships in Prague were restructured under MVC Automotive Group B.V. MVC Automotive Group is wholly owned by MVC Capital Inc., USA. Today MVC Automotive Group represents 7 brands: Ford, Mazda, Volvo, Land Rover, Jaguar, Fiat and Alfa Romeo.
In 2013 the former Dutch holding company, MVC Automotive Group B.V. was merged into the newly established Austrian holding company, MVC Automotive Group GmbH.
After the cross-border merger the MVC Automotive Group has the following current structure. All subsidiaries included in MVC Automotive Combined Group are 100% owned by MVC Automotive Group GmbH, Vienna.
NOTE 2 BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US-GAAP). MVC Automotive Combined Group has elected to use the EURO as its reporting currency. Management believes the assumptions underlying the combined financial statements are reasonable.
However, the combined financial statements may not necessarily reflect MVC Automotive Combined Groups combined results of operations, financial position and cash flows in the future or what its results on operations, financial position and cash flows would have been, had each of the entities included in MVC Automotive Combined Group been a stand-alone entity during the periods presented.
Intercompany transactions and balances between the companies included in the combined financial statements have been eliminated.
As these combined financial statements represent the combination of separate legal entities which are all wholly owned by MVC Capital Inc. (through an Austrian Holding Company MVC Automotive Group GmbH, Vienna), the net assets of all subsidiaries have been presented as MVC Capital Inc.s net investment. The MVC Capital Inc.s net investment in its subsidiaries is primarily composed of: (i) the initial investment to establish the net assets (and any subsequent adjustments thereto); (ii) the accumulated earnings; (iii) net transfers to or from the MVC Capital Inc.
The assets and liabilities of the companies are stated at historical costs and are included in the combined financial statements of MVC Automotive Combined Group from the beginning of the earliest period presented as if they had always been part of the Combined Group.
GOING CONCERN
The combined financial statements are prepared under the assumption that the Combined Group continues in operation for the foreseeable future. The going concern assumption is based on the measures described in Note 17 and letters dated April 10, 2015 and February 25, 2016 of financial support provided by MVC Capital Inc. New York, USA to the Board of Directors of Somotra N.V.
By letter dated April 10, 2015 MVC Capital Inc. has confirmed that:
· It will infuse up to EUR 2 million in equity or debt capital in Somotra N.V. if additional cash is required by Somotra N.V., Drogenbos, Belgium to pay its debts as they mature and for general purpose.
· It will cause MVC Automotive Group GmbH, a wholly owned and controlled affiliate of MVC Capital Inc., to forgive or convert into equity to Somotra N.V., Drogenbos, Belgium up to EUR 1.5 million of intercompany loans.
In 2015, debt capital has been infused based on the stipulations of the support letter.
By letter dated February 25, 2016 MVC Capital Inc. has confirmed that:
· On December 22, 2015, Somotra N.V. has entered into an agreement with Coventry Motors SA / NV to sell the majority of its assets and certain liabilities. When the notary deed is received and the real estate assets are transferred (expected in April 2016), Somotra N.V. wil receive approximately EUR 5.6 million. At this point, it is the intention of MVC Capital Inc. to liquidate the remaining assets and pay off in full all third party liabilities. However, it has been anticipated that Somotra N.V. will suffer a deficit. The final amount of which is not determined and certain intercompany debt owed to MVC Automotive Group will not be repaid in full (see Note 15).
· From February 25, 2016, through the date of the shareholders meeting held to approve the statutory accounts as of December 31, 2015 of Somotra N.V., MVC Capital Inc. will take all reasonable steps to cause MVC Automotive Group GmbH to forgive any intercompany loans that would remain unpaid following the liquidation of Somotras assets, or will take any actions that would have a similar result in order to avoid the bankruptcy of Somotra N.V.
· MVC Capital Inc. will suggest to the Board of Directors of Somotra N.V., in application of Article 633 of the Companies Code in Belgium, to propose to MVC Capital Inc. as ultimate shareholders to cease its activities once the proceeds from the liquidation of Somotras assets are incurred.
Both financial support letters are valid until the date of the shareholders meeting of Somotra N.V., Drogenbos, Belgium held to approve the statutory accounts as of December 31, 2015 of Somotra N.V.
To improve the capital structure and preserve liquidity a further recapitalization of the MVC Automotive Group GmbH by MVC Capital Inc. by an amount of EUR 4 million took place in 2015. Cash payments were made in May 2015 of EUR 1 million, in October 2015, EUR 1.5 million, in November 2015 EUR 0.5 million and in December 2015 EUR 1 million.
On December 22, 2015 an asset purchase agreement was signed between MVC Automotive Group GmbH and Coventry SA in which all assets of Somotra have been transferred. With this transaction MVC Automotive Group has left the Belgian market.
All remaining receivables and liabilities in Somotra will be offset. The purchase price of EUR 5.8 million will be primarily used to repay remaining liabilities. Due to the contract the cash inflow related to this transaction is agreed to take place in several steps in 2016.
After repayment of all third party liabilities and the loan received from MVC Capial Inc. of EUR 1.5 million as of December 22, 2015 the estimated remaining cash flow from the asset deal will be EUR 1.5 million. As of December 22, 2015 the intercompany loans of MVC Automotive Group GmbH amount to EUR 4.7 million. The cash inflow of EUR 1.5 million will be used for partial repayment of the outstanding intercompany loans of MVC Automotive Group GmbH. The remaining intercompany debts of EUR 3.2 million will be converted into equity or forgiven. (refer to Note 15 and 17)
BASIS OF COMBINATION
The combined financial statements include the consolidated accounts of MVC Automotive Austria GmbH Subgroup (Vienna), Somotra N.V. (Brussels), Bromalease N.V. (Brussels), Auto Motol Beni A.S. (Prague), and BE & NI Group A.S. (Prague).
The financial statements of MVC Automotive Austria GmbH Subgroup (Vienna) include the accounts of MVC Automotive Austria GmbH, Vienna, and its subsidiaries. Intercompany transactions and balances have been eliminated.
Subsidiaries are all entities over which MVC Automotive Group GmbH has the power to govern the financial and operating policies. Subsidiaries are included in the combined financial statements from the date on which control is transferred to MVC Automotive Group GmbH and are taken out from the date on which MVC Automotive Group GmbHs control ceases.
BUSINESS COMBINATIONS
ASC Topic 805 (Business Combinations) requires that companies record acquisitions under the purchase method of accounting. Accordingly, the purchase price is allocated to the tangible assets and liabilities and intangible assets acquired, based on their estimated fair values. The excess purchase price over the fair value is recorded as goodwill.
Purchased intangibles with definite lives are amortized over their respective useful lives. When a bargain purchase incurs, which is the case when the fair value of the acquired business exceeds the purchase price, this surplus in fair value is recognized as a gain from bargain purchase.
On February 19, 2013 MVC Automotive Combined Group acquired the entire business of a car dealer close to Vienna in Brunn am Gebirge for a cash consideration of EUR 263 thsd and consolidated the entity under the acquisition method of accounting. The new location was consolidated into our results of operations starting on the acquisition date. The management of the acquired car dealer was fully integrated into the business activities of MVC Automotive Combined Group by this date.
The following table summarizes the total purchase consideration and the identified assets and liabilities that were separately recognized in the finalized purchase price allocation.
|
|
Carrying Value of
|
|
Purchase Price
|
|
Fair Value |
|
Inventories |
|
82 |
|
370 |
|
370 |
|
Trade and other receivables |
|
54 |
|
54 |
|
54 |
|
CURRENT ASSETS |
|
136 |
|
424 |
|
424 |
|
Property, plant and equipment |
|
15 |
|
15 |
|
15 |
|
NON-CURRENT ASSETS |
|
15 |
|
15 |
|
15 |
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
151 |
|
439 |
|
439 |
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
0 |
|
72 |
|
72 |
|
CURRENT LIABILITIES |
|
0 |
|
72 |
|
72 |
|
TOTAL LIABILITIES |
|
0 |
|
72 |
|
72 |
|
|
|
|
|
|
|
|
|
IDENTIFIED NET ASSETS |
|
151 |
|
367 |
|
367 |
|
Cash acquired |
|
|
|
|
|
0 |
|
|
|
|
|
|
|
367 |
|
Total consideration |
|
|
|
|
|
(263 |
) |
BARGAIN PURCHASE GAIN |
|
|
|
|
|
104 |
|
* excluding acquired cash
The purchase price allocation resulted in the valuation of acquired equipment and vehicles. Acquisition related costs have been excluded from the cost of acquisition and recognized as an expense in the year when incurred as within the general and administrative expenses line item in the combined income statement.
The gain from a bargain purchase of EUR 104 thsd was recognized upon completion of the acquisition in 2013.
The gain from a bargain purchase on acquisition was mainly attributable to depressed market value of the acquired business due to bankruptcy of the seller.
USE OF ESTIMATES
The preparation of the combined financial statements in conformity with US-GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include, but are not limited to long-lived asset and indefinite-lived intangible asset impairment analyses, asset retirement obligations, warranty obligations, restructuring accruals, valuation of deferred taxes, obligations related to income taxes, obligations related to employee benefits and the useful lives of property and equipment.
Actual results could differ from those estimates. Future changes in economic conditions may have a significant effect on such estimates made by management. Management believes the following significant accounting policies affect its more significant estimates, judgments and assumptions used in the preparation of our combined financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016 the FASB issued an update to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between previous GAAP and Topic 842 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The amendments are effective for fiscal years beginning after December 15, 2019. We anticipate this standard will have impact on our combined financial statements, and we are currently evaluating its impact.
In November 2015 the FASB issued an update to simplify the presentation of deferred income taxes, the amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments are effective for fiscal years beginning after December 15, 2017. We anticipate this standard will have impact on our combined financial statements and we will change the presentation of deferred tax assets and liabilities on face of the balance sheet to comply with the amendments.
In July 2015 the FASB issued an amendment to the accounting standards to align the measurement of inventory according to US GAAP more closely to the measurement of inventory in IFRS. The amendment is effective for fiscal years beginning after December 15, 2016 and we expect no impact on our combined financial statements once adopted.
In April 2015 the FASB issued updated guidance in relation to debt issuance costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying value. This guidance is effective for annual periods beginning after December 15, 2015, and we are currently evaluating its impact.
In January 2015 the FASB issued updated guidance in relation to extraordinary items to simplify income statement presentation. The update eliminates the concept of extraordinary items. This guidance is effective for annual periods beginning after December 15, 2015, and we are currently evaluating its impact.
In November 2014 the FASB issued an amendment to the accounting standards related to business combinations that provide an acquired entity with an option to apply pushdown accounting in its separate financial statements. The amendments are effective on November 18, 2014 and it has no impact on our combined financial statements.
In August 2014 the FASB issued updated guidance in relation to going concern disclosure requirements. The amendments provide guidance about managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern. This guidance is effective for annual periods ending after December 15, 2016, and we are currently evaluating its impact.
In May 2014 the FASB issued a new standard related to revenue recognition. Under the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services.
In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard will be effective for annual reporting periods beginning after December 15, 2017 and early adoption is permitted, but only for periods beginning after December 15, 2016. We anticipate this standard will have impact on our combined financial statements, and we are currently evaluating its impact.
In April 2014 the FASB issued an updated Accounting Standard on reporting discontinued operations and disclosures of disposals of components on an entity that raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures. This guidance is effective for fiscal periods beginning after December 15, 2014. We do not expect the impact of the adoption of the standard to be material to our combined financials statement.
In July 2013, the Financial Accounting Standards Board (FASB) issued updated guidance requiring that certain unrecognized tax benefits be recognized as offsets against the corresponding deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, unless the deferred tax asset is not available or not intended to be used at the reporting date. This guidance is effective for fiscal periods beginning after December 15, 2013, and is to be applied prospectively to unrecognized tax benefits that exist at the effective date. We comply with this guidance as of January, 2014, and it has no material impact on our combined financial statements.
In March 2013, the FASB issued updated guidance to clarify a parent companys accounting for the release of the cumulative translation adjustment into income upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. This guidance is effective for fiscal periods beginning after December 15, 2013, and is to be applied prospectively to derecognition events occurring after the effective date. We comply with this guidance as of January, 2014, and it has no material impact on our combined financial statements.
In February 2013, the FASB issued updated guidance in relation to the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. This guidance is effective for fiscal periods beginning after December 15, 2013, and is to be applied prospectively for all periods presented for those obligations resulting from joint and several liability arrangements that exist at the beginning of the fiscal year of adoption. We comply with this guidance as of January, 2014, and it has no material impact on our combined financial statements.
In February 2013, the FASB issued updated guidance that amends the reporting of amounts reclassified out of accumulated other comprehensive income (loss) (AOCI). These amendments do not change the current requirements for reporting net income or other comprehensive income in the financial statements. However, the guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component, either on the face of the financial statement where net income is presented or in the notes to the financial statements. This guidance is effective for fiscal periods beginning after December 15, 2013. We comply with this guidance as of January, 2014, and it has no material impact on our combined financial statements.
SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue for sales of vehicles and service parts is recognized when persuasive evidence of an agreement exists, the risks and rewards of ownership have transferred to the customer, delivery has occurred or services have been rendered, the price of the transaction is fixed and determinable and collectability is reasonably assured. For vehicles, this is generally when the vehicle is released to the customer. Revenues are recognized net of discounts, including but not limited to, cash sales incentives, customer bonuses and rebates granted. Shipping and handling costs are recorded as cost of sales in the period incurred.
We use price discounts to adjust vehicle pricing in response to a number of market and product factors, including: pricing actions and incentives offered by competitors, economic conditions, sales incentive programs received, the intensity of market competition, consumer demand for the product.
We offer customers the opportunity to purchase separately-priced extended warranty and service contracts. In addition, from time to time we sell certain vehicles with a service contract included in the sales price of the vehicle. The service contract and vehicle qualified as separate units of accounting in accordance with the accounting guidance for multiple-element arrangements. The revenue from these contracts, as well as our separately-priced extended warranty and service contracts, is recorded as a component of Deferred Revenue in the accompanying combined financial statements at the inception of the contract and is recognized as revenue over the contract period in proportion to the costs expected to be incurred based on historical information.
A loss on these contracts is recognized if the sum of the expected costs for services under the contract exceeds unearned revenue.
COST OF SALES
Our income statement classifies our Automotive total costs and expenses into two categories: (i) cost of sales, and (ii) selling, administrative, and other expenses. We include within cost of sales those costs related to the purchase and distribution of our vehicles, parts, and services. Specifically, we include in cost of sales each of the following: purchase costs of new and used vehicles; service parts; freight costs; warranty; labor and other costs related to the purchase of our products and services rendered; depreciation and amortization and other associated costs. We include within selling, administrative, and other expenses labor and other costs not directly related to the purchase of our products and services rendered, including such expenses as advertising and sales promotion costs. Advertising, sales promotion and other product-related costs are also expensed as incurred.
We record the revenues of incentive programs offered by the manufacturer as a reduction to cost of sales at the time of the purchase from the manufacturer.
We establish reserves for product warranty obligations, including the estimated cost of these services, when the related sale is recognized. The estimated future costs of these actions are principally based on assumptions, as well as historical claims experience for our vehicles.
Costs associated with these actions are recorded in Cost of Sales.
RESTRUCTURING ACTIONS EXIT AND DISPOSAL ACTIVITIES
We account for employee separation, exit and disposal activities in accordance with the relevant accounting guidance on these topics. Actions associated with restructuring plans include, but are not limited to, workforce reductions, capacity adjustments.
Costs associated with these actions may include, but are not limited to, employee severance, accelerated post-employment benefits, relocations, contract terminations, and legal claims.
Post-employment benefits accrued for workforce reductions related to restructuring activities are recorded in the period when it is probable that employees will be terminated. The restructuring actions as described in Note 17 did not lead to additional accruals for post-employment benefits.
Other associated costs such as relocations, contract terminations are recorded when the costs are incurred. Costs associated with actions that will exceed one year are reflected on a discounted basis.
INCOME TAXES
MVC Automotive Austria GmbH is a group parent for corporate income tax purposes for MVC Immobilien GmbH and MVC Motors GmbH. Under group taxation provisions in Austria, the profits and losses of group members are offset, reducing the basis for calculating corporate income tax. Therefore MVC Automotive Austria GmbH is the only entity recognized for corporate income tax purposes for group taxation.
Our other subsidiaries are classified as separate entities for income tax purposes. Our subsidiaries income or loss is included in the income tax returns of their respective countries.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for net operating loss and tax credit carryforwards and the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the rates is recognized in income in the period that includes the enactment date. Valuation allowances on deferred tax assets are recognized if it is more likely than not that the benefit from the deferred tax asset will not be realized. In addition, current income taxes include adjustments to accruals or uncertain tax positions and related interest expense or income.
CASH AND CASH EQUIVALENTS
Highly liquid investments with original maturities of three months or less at the date of purchase are classified as cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable are stated at nominal value less an allowance for doubtful accounts.
A significant percentage of our accounts receivable is derived from sales of new and used vehicles to customers. In order to monitor potential credit losses, we perform ongoing credit evaluations of our customers financial conditions.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful accounts as a contra asset to our accounts receivable balances. A provision for probable losses is charged against selling, administrative and other expenses to maintain the allowance for doubtful accounts at an amount management believes represents the best estimate of potential losses related to specifically identified receivables, as well as probable losses inherent in all other receivables as of the balance sheet date. Management periodically and systematically evaluates the adequacy of the allowance for doubtful accounts by reviewing historical loss experience, delinquency statistics and other factors in the economy that are expected to have an impact on the losses incurred, in addition to specifically identified probable losses. As of December 31, 2014 the allowance for doubtful debts amounts of EUR 82 thsd. (December 31, 2013: EUR 88 thsd.) As of December 31, 2014 and 2013 the amount of past due receivables without allowance recorded is insignificant.
INVENTORIES
Inventories are stated at acquisition cost, subject to the lower of cost or market. Cost includes net prices paid for vehicles and spare parts purchased, charges for freight and overhead related to the purchase of inventories. MVC regularly reviews inventory quantities on hand, stock turn ratios, future purchase commitments with our suppliers, and the estimated utility of our inventory. These reviews include analysis of demand forecasts, current sales levels, pricing strategy, and cost trends. Used cars shall be
reviewed monthly based on Eurotax-valuation. If our review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of sales. The determination of market value and the estimated volume of demand used in the lower of cost or market analysis require significant judgment. The costing methodology for the cost of inventory within the MVC Automotive Combined Group is at average cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is generally provided using the straight-line method over the estimated useful lives of the assets.
Capital leased assets are recorded at the present value of future lease obligations. Depreciation is calculated using the straight-line method over the estimated useful lives. Leasehold improvements are depreciated over the lesser of the estimated useful life of the leasehold improvement or the term of the underlying lease. Maintenance is expensed during the financial period in which they incurred.
Estimated useful lives of the assets are as follows:
Asset |
|
Useful life |
|
Buildings |
|
10-30 years |
|
Technical plants and equipment |
|
5-10 years |
|
Other machinery and plants |
|
3-5 years |
|
Prepayments and assets under construction |
|
|
|
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets held and used (such as property, plant and equipment) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of an asset or asset group to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or group of assets. If the carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset or group of assets exceeds the fair value of the asset or group of assets.
As of December 31, 2013 useful lives of long-lived assets were reconsidered which lead to an additional depreciation of EUR 303 thsd (see also Note 5).
OTHER INTANGIBLE ASSETS
Intangible assets that have a definite useful life are generally amortized over their respective estimated useful lives, on a straight-line basis. The estimated useful lives of the intangible assets are reviewed by management each reporting period and whenever changes in circumstances indicate that the carrying value of the assets may not be recoverable.
FOREIGN CURRENCY
The functional currency of the companies included in these combined financial statements is the respective entitys local currency. The assets and liabilities of our foreign operations, where the functional currency is the respective entitys local currency, are translated into EUR using the exchange rate in effect as of the balance sheet date. Income statement amounts are translated at the average exchange rate prevailing during the period. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income (AOCI).
Foreign currency exchange gains and losses arising from fluctuations in currency exchange rates on transactions and the effects of remeasurement of monetary balances denominated in currencies other than the functional currency are recorded in earnings as incurred and are included in other income.
FAIR VALUE MEASUREMENTS
The measurement of fair value is based on a three-tier hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:
Level 1 Quoted prices are available in active markets for identical assets or liabilities as of the balance sheet date. Active markets are those in which transactions for the
asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the balance sheet date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument and can be derived from observable data.
Level 3 Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in managements best estimate of fair value. Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy.
At each balance sheet date, we perform an analysis of all instruments potentially subject to fair value measurement and include in Level 3 all of those whose fair value is based on significant unobservable inputs.
As of December 31, 2013 and 2014 MVC Automotive Combined Groups financial instruments measured at fair value primarily consists of Level 1 financial instruments such as cash and cash equivalents.
We measure debt at fair value for purposes of disclosure (see Note 10) using quoted prices from similar public debt with approximately the same remaining maturities, where possible. Where quoted prices are not available, we estimate fair value using discounted cash flows and market-based expectations for interest rates, credit risk, and the contractual terms of the debt instruments. For certain short-term debt with an original maturity date of one year or less, we assume that book value is a reasonable approximation of the debts fair value. The fair value of debt is categorized within Level 2 of the hierarchy.
NOTE 3 ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of AOCI as of December 31, 2013 and 2014 were as follows (in EUR thsd):
|
|
Actuarial |
|
|
|
|
|
|
|
gains |
|
Translation |
|
|
|
|
|
(losses) |
|
adjustments |
|
Total |
|
Balance at December 31, 2013 |
|
(303 |
) |
(113 |
) |
(416 |
) |
Total gain (loss) recorded in OCI |
|
(369 |
) |
48 |
|
(321 |
) |
Tax effect |
|
92 |
|
0 |
|
92 |
|
Balance at December 31, 2014 |
|
(580 |
) |
(65 |
) |
(644 |
) |
Actuarial gains (losses) reclassified from other comprehensive income to income were EUR 14 thsd. in the year ended December 31, 2014.
NOTE 4 INVENTORIES
The components of inventories as of December 31, 2013 and 2014 were as follows (in EUR thsd):
|
|
2014 |
|
2013 |
|
Raw materials and supplies |
|
2,383 |
|
4,441 |
|
New cars |
|
31,801 |
|
20,536 |
|
Used cars |
|
6,257 |
|
7,221 |
|
Total |
|
40,441 |
|
32,197 |
|
As of December 31, 2014 an inventory valuation allowance of EUR 658 thsd (2013: EUR 326 thsd) was recorded. Thereof an amount of EUR 508 thsd (2013: EUR 293 thsd) is based on applying the lower-cost-or-market rule to new cars.
NOTE 5 PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment as of December 31, 2013 and 2014 were as follows (in EUR thsd):
|
|
Range of
|
|
2014 |
|
2013 |
|
|
|
|
|
|
|
|
|
Land and buildings |
|
10-30 |
|
33,709 |
|
34,124 |
|
Machinery, equipment and others |
|
3-10 |
|
9,056 |
|
8,817 |
|
Assets under construction |
|
|
|
195 |
|
4 |
|
|
|
|
|
42,960 |
|
42,945 |
|
Accumulated depreciation |
|
|
|
(15,739 |
) |
(14,427 |
) |
Total |
|
|
|
27,220 |
|
28,518 |
|
Czech subsidiaries reduced their level of display cars and company cars on their books, resulting in income from the disposal of property, plant and equipment of EUR 164 thsd. in 2014. Proceeds from disposal of assets amount to EUR 860 thsd. in 2014.
Depreciation of property, plant and equipment was EUR 1,819 thsd. in the year ended December 31, 2014.
As of December 31, 2013 useful lives of long-lived assets were reconsidered which leads to an additional depreciation of EUR 303 thsd.
NOTE 6 OTHER INTANGIBLE ASSETS, NET
The components of other intangible assets, net as of December 31, 2013 and 2014 were as follows (in EUR thsd):
|
|
Range of |
|
|
|
|
|
|
|
Useful Lives |
|
2014 |
|
2013 |
|
Concessions, Licenses and similar rights |
|
3-5 |
|
1,103 |
|
1,097 |
|
|
|
|
|
1,103 |
|
1,097 |
|
Accumulated amortization |
|
|
|
(1,072 |
) |
(1,042 |
) |
Total |
|
|
|
31 |
|
55 |
|
Amortization for intangible assets was EUR 38 thsd. in the year ended December 31, 2014. The expected amortization for intangible assets for the next five years is insignificant.
NOTE 7 TRADE ACCOUNTS RECEIVABLE, NET
The components of trade accounts receivable, net as of December 31, 2013 and 2014 were as follows (in EUR thsd):
|
|
2014 |
|
2013 |
|
|
|
|
|
|
|
Trade accounts receivables |
|
7,639 |
|
9,199 |
|
Allowance far doubtful accounts |
|
(82 |
) |
(88 |
) |
Trade accounts receivables, net |
|
7,557 |
|
9,111 |
|
NOTE 8 PREPAID EXPENSES AND OTHER ASSETS
The components of prepaid expenses and other assets as of December 31, 2013 and 2014 were as follows (in EUR thsd):
|
|
2014 |
|
2013 |
|
||||
|
|
Current |
|
Current |
|
||||
Sales and marketing incentives |
|
649 |
|
649 |
|
2,195 |
|
2,195 |
|
Short-term tax receivables |
|
2,204 |
|
2,204 |
|
1,869 |
|
1,869 |
|
Prepaid expenses |
|
436 |
|
436 |
|
257 |
|
257 |
|
Other |
|
494 |
|
494 |
|
1,167 |
|
1,167 |
|
Total |
|
3,783 |
|
3,783 |
|
5,488 |
|
5,488 |
|
NOTE 9 ACCRUED EXPENSES AND OTHER SHORT-TERM LIABILITIES
The components of accrued expenses and other short-term liabilities as of December 31, 2013 and 2014 were as follows (in EUR thsd):
Accrued Expenses and Other Liabilities |
|
2014 |
|
2013 |
|
|
|
|
|
|
|
Product warranty costs |
|
156 |
|
125 |
|
Personnel casts |
|
2,504 |
|
2,363 |
|
Taxes other than income taxes |
|
713 |
|
811 |
|
Deferred income |
|
276 |
|
224 |
|
Credit balances customers |
|
658 |
|
654 |
|
Other |
|
1,378 |
|
1.367 |
|
Total |
|
5,685 |
|
5,543 |
|
NOTE 10 FINANCIAL LIABILITIES
The components of financial liabilities as of December 31, 2013 and 2014 were as follows (in EUR thsd):
|
|
|
|
2014 |
|
||
Financial liabilities < 1 year |
|
Interest Rate |
|
Fair Value |
|
Carrying
|
|
Financial liabilities due to related parties short-term |
|
|
|
|
|
|
|
MVC Automotive Group GmbH, Austria |
|
0% |
|
260 |
|
260 |
|
Total financial liabilities due to related parties short-term |
|
|
|
260 |
|
260 |
|
Financial payables for acquisition of cars short-term |
|
|
|
|
|
|
|
Car Financing Austria |
|
variable 2.8 - 6.45% |
|
26,492 |
|
26,492 |
|
Car Financing Czech Republic |
|
variable 2.8 - 9.0% |
|
4,691 |
|
4,691 |
|
Car Financing Belgium |
|
variable 4.5 - 10.0% |
|
6,350 |
|
6,350 |
|
Total financial payables for acquisition of cars short-term |
|
|
|
37,533 |
|
37,533 |
|
Bank loans short-term |
|
|
|
|
|
|
|
Revolving facilities Austria |
|
variable 2.13 - 2.78% |
|
5,411 |
|
5,411 |
|
Short-term loan Belgium |
|
variable 3.5% |
|
1,000 |
|
1,000 |
|
Other current accounts |
|
floating |
|
344 |
|
344 |
|
Total bank loans short-term |
|
|
|
6,755 |
|
6,755 |
|
Finance lease liabilities short-term |
|
|
|
|
|
|
|
Finance lease Belgium |
|
variable 4% |
|
9 |
|
9 |
|
Finance lease Austria |
|
variable 3.6% |
|
202 |
|
202 |
|
Total finance lease liabilities short-term |
|
|
|
211 |
|
211 |
|
|
|
|
|
2014 |
|
||
|
|
|
|
|
|
Carrying |
|
Financial liabilities > 1 year |
|
Interest Rate |
|
Fair Value |
|
Value |
|
Financial liabilities due to related parties long-term |
|
|
|
|
|
|
|
MVC Automotive Group GmbH, Austria |
|
0% |
|
1,350 |
|
1,500 |
|
Total financial liabilities due to related parties long-term |
|
|
|
1,350 |
|
1,500 |
|
Bank loans long-term |
|
|
|
|
|
|
|
Loan BE & NI |
|
fixed 6% |
|
3,251 |
|
3,251 |
|
Loan AMB |
|
variable 3% |
|
107 |
|
107 |
|
Loan Somotra |
|
fixed 5.71% |
|
1,207 |
|
1,334 |
|
Loans Somotra |
|
variable 1.5% - 1.9% |
|
126 |
|
126 |
|
Loan MVC Immo, Austria |
|
variable 1.95% |
|
8,264 |
|
8,264 |
|
Total Bank loans long-term |
|
|
|
12,955 |
|
13,082 |
|
thereof current portion long-term debt |
|
|
|
923 |
|
923 |
|
thereof bank loans long-term |
|
|
|
12,032 |
|
12,159 |
|
Finance lease liabilities long term |
|
|
|
|
|
|
|
Finance lease Beligum |
|
variable 4% |
|
10 |
|
10 |
|
Finance lease Austria |
|
variable 2.27 - 3.60% |
|
2,203 |
|
2,203 |
|
Total finance lease liabilities long term |
|
|
|
2,213 |
|
2,213 |
|
|
|
|
|
2013 |
|
||
Financial liabilities< 1 year |
|
Interest Rate |
|
Fair Value |
|
Carrying
|
|
Financial liabilities due to related parties short-term |
|
|
|
|
|
|
|
MVC Automotive Group GmbH, Austria |
|
0% |
|
120 |
|
120 |
|
Cegeac S.A., Belgium |
|
0% |
|
607 |
|
607 |
|
Total financial liabilities due to related parties short-term |
|
|
|
727 |
|
727 |
|
Financial payables for acquisition of cars short-term |
|
|
|
|
|
|
|
Car Financing Austria |
|
variable 2.8 - 7.0% |
|
17,897 |
|
17,897 |
|
Car Financing Czech Republic |
|
variable 6.7 - 8.8% |
|
4,278 |
|
4,278 |
|
Car Financing Belgium |
|
variable 5.4 - 9.4% |
|
4,902 |
|
4,902 |
|
Total financial payables for acquisition of cars short-term |
|
|
|
27,077 |
|
27,077 |
|
Bank loans short-term |
|
|
|
|
|
|
|
Revolving facilities Austria |
|
variable 2.13 - 2.78% |
|
8,377 |
|
8,377 |
|
Short-term loan Belgium |
|
variable 3.5% |
|
1,000 |
|
1,000 |
|
Other current accounts |
|
floating |
|
94 |
|
94 |
|
Total bank loans short-term |
|
|
|
9,471 |
|
9,471 |
|
Finance lease liabilities short-term |
|
|
|
|
|
|
|
Finance lease Beligum |
|
variable 4% |
|
117 |
|
117 |
|
Finance lease Austria |
|
variable 3.6% |
|
196 |
|
196 |
|
Total finance lease liabilities short-term |
|
|
|
313 |
|
313 |
|
|
|
|
|
2013 |
|
||
|
|
|
|
|
|
Carrying |
|
Financial liabilities> 1 year |
|
Interest Rate |
|
Fair Value |
|
Value |
|
Financial liabilities due to related parties long-term |
|
|
|
|
|
|
|
MVC Automotive Group GmbH, Austria |
|
0% |
|
342 |
|
380 |
|
Total financial liabilities due to related parties long-term |
|
|
|
342 |
|
380 |
|
Financial payables for acquisition of cars long-term |
|
|
|
|
|
|
|
Car Financing Czech Republic |
|
variable 6.7 - 8.8% |
|
418 |
|
418 |
|
Total financial payables for acquisition of cars long-term |
|
|
|
418 |
|
418 |
|
Bank loans long-term |
|
|
|
|
|
|
|
Loan BE & NI |
|
fixed 6% |
|
3,383 |
|
3,383 |
|
Loan Somotra |
|
fixed 5.71% |
|
1,568 |
|
1,665 |
|
Loans Somotra |
|
variable 1.6% - 1.9% |
|
307 |
|
307 |
|
Loan MVC Immo, Austria |
|
variable 1.83% |
|
8,604 |
|
8,604 |
|
Total bank loans long-term |
|
|
|
13,862 |
|
13,959 |
|
thereof current portion long-term debt |
|
|
|
941 |
|
941 |
|
thereof bank loans long-term |
|
|
|
12,921 |
|
13,018 |
|
Finance lease liabilities long-term |
|
|
|
|
|
|
|
Finance lease Beligum |
|
variable 4% |
|
20 |
|
20 |
|
Finance lease Austria |
|
variable 2.27 - 3.60% |
|
2,405 |
|
2,405 |
|
Total finance lease liabilities long-term |
|
|
|
2,425 |
|
2,425 |
|
MVC Automotive Combined Group and its subsidiaries borrow under separate short-term lines of credit with banks in the countries where they are located. The lines contain general provisions concerning renewal and continuance at the option of the banks.
Short-term lines of credit including lines for car financing amounted to EUR 17 million as of December 31, 2014 (December 31, 2013: EUR 23.6 million). The outstanding amount as of December 31, 2014 was EUR 9.8 million (December 31, 2013: EUR 20.7 million). For a credit facility of EUR 7 million (December 31, 2013: EUR 7.6 million) with Erste Bank der oesterreichischen Sparkassen AG, Vienna, Austria, the financing bank obtained a letter of comfort from MVC Capital Inc.
As of December 31, 2014 outstanding credit lines of EUR 14 million (December 31, 2013: EUR 15 million) are secured by a mortgage on real estate. Thereof EUR 8.3 million (December 31, 2013: EUR 8.6 million) are related to a loan of MVC Immobilien GmbH, Vienna, with Bawag PSK AG, Vienna, Austria. EUR 3.3 million (December 31, 2013: EUR 3.4 million) are related to a loan of BE/NI Group a.s., Prague, Czech Republic, for the acquisition of the new property in Orech, Czech Republic. Loans of Somotra N.V. Drogenbos, Belgium of EUR 2.5 millon (December 31, 2013: EUR 3 million) with ING bank are secured by mortgage of real estate.
Outstanding credit lines of EUR 38.1 million (December 31, 2013: EUR 27.5 million) for car financing are secured by reservation of title of the financed cars. In Austria the outstanding credit lines as of December 31, 2014 are with Santander Consumer Bank GmbH, Vienna, EUR 3.0 million (December 31, 2013: EUR 4.9 million), Autobank GmbH, Vienna, EUR 0.4 million (December 31, 2013: EUR 1.1 million) and Ford Bank Austria, Vienna, EUR 23.1 million (December 31, 2013: EUR 11.9 million).
In Belgium (Somotra N.V.) outstanding short term credit lines of EUR 6.4 million (December 31, 2013: EUR 4.9 million) used for car financing for Jaguar Land Rover brands with FGA Capital Belgium SA are secured by reservation of title of the financed cars.
Regarding future financing capacity, we refer to the letter of comfort Somotra N.V. received from MVC Capital Inc., USA, in Note 2 and Note 17.
The table below summarizes the maturities and conditions of all financial liabilities, including the financing of cars acquired for business purposes (in EUR thsd):
Debt maturities
|
|
Carrying Value |
|
Interests |
|
Expected
|
|
2015 |
|
45,673 |
|
3,132 |
|
48,805 |
|
2016 |
|
4,101 |
|
351 |
|
4,453 |
|
2017 |
|
895 |
|
223 |
|
1,119 |
|
2018 |
|
808 |
|
189 |
|
997 |
|
2019 |
|
6,990 |
|
162 |
|
7,151 |
|
thereafter |
|
3,088 |
|
244 |
|
3,332 |
|
Total |
|
61,555 |
|
4,302 |
|
65,857 |
|
Interest expenses for bank loans and car financing amount to EUR 1,750 thsd. in the year ended December 31, 2014.
NOTE 11 INCOME TAXES
VALUATION OF DEFERRED TAX ASSETS AND LIABILITIES
Deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards on a taxing jurisdiction basis. We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid.
Our accounting for deferred tax consequences represents our best estimate of the likely future tax consequences of events that have been recognized on our financial statements or tax returns and their future probability. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized, we record a valuation allowance.
The following table summarizes income tax (benefits) expenses before income taxes by jurisdiction (in EUR thsd.):
|
|
2014 |
|
Current income tax benefit/(expense) |
|
|
|
Austria |
|
(2 |
) |
Belgium |
|
0 |
|
Czech Republic |
|
0 |
|
|
|
(2 |
) |
|
|
|
|
Deferred income tax benefit/(expense) |
|
|
|
Austria |
|
120 |
|
Belgium |
|
0 |
|
Czech Republic |
|
19 |
|
|
|
139 |
|
Total |
|
137 |
|
A reconciliation of income tax (benefit) expense provided using the Austrian federal statutory tax rate of 25 percent to actual income taxes for 2014 was as follows (in EUR thsd):
Income tax benefit/(expense) |
|
2014 |
|
Income before income tax |
|
(7,637 |
) |
Tax benefit at statutory tax rate |
|
1,909 |
|
Valuation allowances |
|
(2,225 |
) |
Foreign statutory rate difference |
|
97 |
|
Unrecognized tax benefits of prior periods used in current period |
|
158 |
|
Prior year tax return adjustments |
|
0 |
|
Other |
|
199 |
|
Total |
|
137 |
|
Unrecognized tax benefits amount of EUR 25.6 million as of December 31, 2014 and EUR 19.8 million as of December 31, 2013.
Operating losses carried forward for tax purposes were EUR 25.6 million at December 31, 2014 (December 31, 2013: EUR 19.8 million), resulting in a deferred tax asset of EUR 6.4 million as of December 31, 2014. (December 31, 2013: EUR 4.9 million). Tax losses of EUR 0.5 million expire within four years. There is no expiration date for tax losses of EUR 25.1 million. Tax benefits of operating loss and tax credit carryforwards are evaluated on an ongoing basis, including a review of historical and
projected future operating results, the eligible carryforward period, and other circumstances.
In the absence of enough evidence of future profits, management decided to impair the deferred tax asset on, resulting in a valuation allowance of EUR 6.9 million as of December 31, 2014 (December 31, 2013: EUR 5.1 million) primarily for deferred tax assets related to tax losses carried forward.
Deferred tax assets and liabilities result from differences between assets and liabilities measured for financial reporting purposes and those measured for income tax return purposes. The table below summarizes the significant components of deferred tax assets and liabilities as of December 31, 2014 and 2013 (in EUR thsd):
Deferred Tax Assets |
|
2014 |
|
2013 |
|
Property, plant and equipment |
|
596 |
|
476 |
|
Pension liabilities and other assets |
|
733 |
|
683 |
|
Tax credit carryforwards |
|
6,412 |
|
4,595 |
|
Other |
|
46 |
|
98 |
|
Total Gross Deferred Tax Assets |
|
7,787 |
|
5,852 |
|
Less: Valuation Allowance |
|
(6,902 |
) |
(5,113 |
) |
Total Net Deferred Tax Assets |
|
885 |
|
739 |
|
Deferred Tax Liabilities |
|
2014 |
|
2013 |
|
Property, plant and equipment |
|
0 |
|
(8 |
) |
Inventory |
|
0 |
|
(72 |
) |
Other |
|
0 |
|
(4 |
) |
Total Deferred Tax Liabilities |
|
0 |
|
(84 |
) |
|
|
|
|
|
|
Net Deferred Tax Assets |
|
885 |
|
655 |
|
NOTE 12 COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
LITIGATION
As of December 31, 2014 and 2013 no material claims and proceedings are pending.
Reserves have been established for matters in which we believe that losses are probable and can be reasonably estimated.
CEGEAC
On March 11, 2014 the Belgium subsidiary Cegeac S.A. declared bankruptcy. From the date of the bankruptcy order the company (and therefore, the directors) lost the right to manage its assets. All payments, acts or transactions carried out by the company and all payments made to the company after the declaration of bankruptcy are void. The trustee in bankruptcy represents the company took over the running of the business. The trustee in bankruptcy has wide discretionary powers including a power to sell the assets of the company and to distribute the proceeds to creditors.
These restrictions due to the bankruptcy proceedings and other restrictions limit MVC Automotive Combined Groups ability to benefit from the investment and maintain a controlling interest in the Belgium subsidiary. Therefore the investment in Cegeac S.A. is stated at cost and fully impaired as of December 31, 2013 and 2014.
In course of the bankruptcy proceedings various legal actions, governmental investigations, claims and proceedings are pending including matters arising out of employment-related matters; dealer, supplier and other contractual relationships.
With regard to the bankruptcy litigation matters discussed in the previous paragraph Cegeac is not included in these combined financial statements. Potential reserves for litigations and claims associated with bankruptcy of Cegeac are therefore not recorded in these combined financial statements. The matters include claims from current and former employees related to alleged unpaid wage, benefit, severance and other compensation matters.
As of December 31, 2014 and 2013, investments and amounts due from the Belgium subsidiary Cegeac were not material. At December 31, 2013, the combined financial statements include payables to Cegeac related to purchases of goods and services of EUR 1.6 million in 2013, and a short term loan of EUR 607 thsd. (Note 15). As of December 31, 2014 the combined financial statements include no payables to Cegeac.
We believe that appropriate accruals have been established for related party transactions based on information currently available. Reserves for litigation losses are not to be recorded at combined financial statements level. Bankruptcy proceeding and litigation are inherently unpredictable however; and unfavorable resolutions could occur. Accordingly it is possible that an adverse outcome from such proceedings could also have negative impact on companies included in the combined financial statements (Note 17).
GUARANTEES AND INDEMNIFICATIONS
Guarantees and indemnifications are recorded at fair value at their inception. We regularly review our performance risk under these arrangements, and in the event it becomes probable we will be required to perform under the guarantee or indemnification, the amount of probable payment is recorded.
As of December 31, 2014 and 2013 the maximum potential payments and the carrying value of recorded liabilities related to guarantees and limited indemnities are insignificant.
ARRANGEMENTS WITH KEY SUPPLIERS
From time to time, in the ordinary course of our business, we enter into various arrangements with key suppliers in order to establish strategic and technological advantages. These arrangements do not contain unconditional purchase obligations to purchase a fixed or minimum quantity of goods and/or services with fixed and determinable price provisions.
LONG-TERM WARRANTY AND SERVICE CONTRACTS
We offer customers the opportunity to purchase separately-priced extended warranty and service contracts. In addition, from time to time we sell certain vehicles with a service contract included in the sales price of the vehicle. The revenue from these contracts, as well as our separately-priced extended warranty and service contracts, is recorded as a component of deferred revenue at the inception of the contract and is recognized as revenue over the contract period in proportion to the costs expected to be incurred based on historical information. A Loss on these contracts is recognized if the sum of the expected costs for services under the contract exceeds unearned revenue. The total amount of revenues and expenses related to these contracts is not material.
CONDITIONAL ASSET RETIREMENT OBLIGATIONS
In connection with certain agreements, we have entered into agreements indemnifying certain lessors and other parties with respect to environmental conditions and other closure costs pertaining to real property we leased (owned).
It is not possible to estimate our maximum exposure under these indemnifications or guarantees due to the conditional nature of these obligations. Immaterial amounts have been recorded for such obligations as the majority of them are not probable or estimable at this time and the fair value of the guarantees at issuance was insignificant.
Asset retirement obligations relate to legal obligations associated with retirement of tangible long-lived assets that result from acquisition, construction, development or normal operation of a long-lived asset. An analysis is performed of such obligations associated with all real property owned or leased, including facilities, warehouses and offices. Estimates of conditional asset retirement obligations relate, in the case of owned properties, to costs estimated to be necessary for the legally required removal or remediation of various regulated materials. For leased properties such obligations relate to the estimated cost of contractually required property restoration. At December 31, 2014 and 2013 accruals for asset retirement obligations were not material.
NON CANCELABLE OPERATING LEASES AND FINANCE LEASES
The following table summarizes our minimum commitments under non cancelable operating leases and Finance leases having initial terms in excess of one year, primarily for property.
The majority of our lease payments are for operating leases. As of December 31, 2014, the future minimum rental commitments under operating and finance leases with non-cancelable lease terms in excess of one year were as follows (in EUR thsd):
Operating Leases |
|
Minimum
|
|
2015 |
|
1,803 |
|
2016 |
|
745 |
|
2017 |
|
720 |
|
2018 |
|
510 |
|
2019 |
|
490 |
|
Thereafter |
|
1,320 |
|
Total |
|
5,589 |
|
Rental expense under operating leases was EUR 1,855 thsd. in the year ended December 31, 2014.
Finance Leases |
|
Minimum
|
|
Interest
|
|
Principal
|
|
2015 |
|
268 |
|
61 |
|
207 |
|
2016 |
|
263 |
|
50 |
|
213 |
|
2017 |
|
263 |
|
44 |
|
219 |
|
2018 |
|
169 |
|
37 |
|
132 |
|
2019 |
|
101 |
|
35 |
|
66 |
|
Thereafter |
|
1,832 |
|
244 |
|
1.588 |
|
Total |
|
2,896 |
|
471 |
|
2,425 |
|
Interest expense under finance leases was EUR 67 thsd. in the year ended December 31, 2014.
Finance leases included in property, plant and equipment are as follows (in EUR thsd):
Finance Leases-Assets |
|
2014 |
|
2013 |
|
Land and Buildings |
|
1,970 |
|
1,970 |
|
Machinery and equipment |
|
1,531 |
|
1,531 |
|
|
|
3,501 |
|
3,501 |
|
Less accumulated depreciation |
|
(1,090 |
) |
(830 |
) |
Total |
|
2,411 |
|
2,671 |
|
In February 2013 MVC Immobilien GmbH (lessor) and Hypo Tirol Leasing Wiener Betriebsansiedlungen GmbH signed a long term lease agreement in regard to business premises in Brunn am Gebirge. The contract was concluded based on a purchase price for land & buildings of EUR 4.6 million and a no cancelable lease term of 15 years. Because of the purchase obligation for MVC Immobilien GmbH to acquire the premises at the end of the lease term this contract was classified a finance lease.
RENTAL CONTRACTS BUILDINGS
|
|
|
|
EUR thsd |
|
Lessor, Site |
|
End of Contract |
|
Annual rent |
|
Fomoco, Vienna |
|
December 2015 |
|
380 |
|
CPB Immobilien, Vienna |
|
December 2021 |
|
390 |
|
Vohryzka, Vienna |
|
October 2015 |
|
528 |
|
Melchart, Vienna |
|
indefinite |
|
51 |
|
Wr. Stadtwerke, Vienna |
|
indefinite |
|
25 |
|
Moring, Vienna |
|
indefinite |
|
131 |
|
Ursula Deutsch, Vienna |
|
December 2017 |
|
110 |
|
Doris Haller-Deutsch, Vienna |
|
December 2017 |
|
100 |
|
ÖBB, Vienna |
|
indefinite |
|
18 |
|
Hypo Tirol Leasing, Brunn am Gebirge |
|
February 2028 |
|
62 |
|
Strakoniská & Plzenská, Prague and Orech |
|
indefinite |
|
234 |
|
Total annual rent |
|
|
|
2,029 |
|
NOTE 13 FAIR VALUE MEASUREMENTS
The following summarizes our financial assets and liabilities measured at fair value for disclosure purposes on a recurring basis as of December 31, 2014 and 2013 (in EUR thsd):
|
|
2014 |
|
2013 |
|
||||
|
|
Carrying |
|
|
|
Carrying |
|
|
|
|
|
Amount |
|
Fair Value |
|
Amount |
|
Fair Value |
|
Cash and cash equivalents |
|
796 |
|
796 |
|
987 |
|
987 |
|
Financial Liabilities (Note 10) |
|
61,554 |
|
61,277 |
|
54,771 |
|
54,636 |
|
The estimated fair values have been determined by using available market information and valuation methodologies as described below. Considerable judgment is required in interpreting market data to develop the estimates of fair value.
CASH AND CASH EQUIVALENTS
The carrying value of cash and cash equivalents approximates fair value due to the short maturity of these instruments and consists primarily of cash, marketable securities and time deposits.
FINANCIAL LIABILITIES
We estimate the fair values of our financial liabilities using quoted market prices where available. Where market prices are not available, we estimate fair value by discounting future cash flows using market interest rates, adjusted for non-performance risk over the remaining term of the financial liability.
For certain short-term debt with an original maturity date of one year or less, we assume that book value is a reasonable approximation of the debts fair value.
NOTE 14 EMPLOYEE RETIREMENT AND OTHER BENEFITS
We sponsor both noncontributory and contributory defined other post employment benefit obligations plans.
We have defined other post employment benefit obligations plans (OPEB), primarily severance and jubilee benefits, in Austria, Belgium and other locations covering hourly and salaried employees. The largest portion of our worldwide obligation is associated with Austrian statutory severance payments obligations. Our OPEB plans are unfunded and the benefits are paid from general Company cash.
Employees of MVC Automotive Combined Group which joined the Austrian subsidiaries after 2002 are members of state managed retirement benefit schemes operated by the relevant governments. MVC Automotive Combined Group is required to contribute a 1.54 percent of payroll costs to these schemes to fund the benefits. The only obligation of MVC Automotive Combined Group with respect to these schemes is to make the specified contributions. The assets of the schemes are held separately from those of MVC Automotive Combined Group in funds under the control of trustees. The contribution amounts to EUR 37 thsd. in the year ended December 31, 2014.
Defined benefit pension and OPEB plan obligations are measured based on the present value of projected future benefit payments for all participants for services rendered to date. The measurement of projected future benefits is dependent on the provisions of each specific plan, demographics of the group covered by the plan, and other key measurement assumptions. For plans that provide benefits dependent on salary assumptions, we include a projection of salary growth in our measurements. No assumption is made regarding any potential changes to benefit provisions beyond those to which we are presently committed (e.g., in existing labor contracts).
The net periodic benefit costs associated with the Companys defined benefit pension and OPEB plans are determined using assumptions regarding the benefit obligation as of the beginning of each year. Net periodic benefit costs are recorded in Automotive cost of sales and Selling, administrative, and other expenses. The benefit obligations are determined using assumptions as of the end of each year. The impact of plan amendments and actuarial gains and losses are recorded in Accumulated other comprehensive income/ (loss), and generally are amortized as a component of net periodic cost over the remaining service period of our active employees. Unamortized gains and losses are amortized only to the extent they exceed 10% of the market-related value of the benefit obligation of the respective plan (i.e., outside of corridor).
Curtailment gains or losses are recorded when an event occurs that significantly reduces the expected years of future service or eliminates the accrual of defined benefits for the future services of a significant number of employees. Upon a settlement, we recognize the proportionate amount of the unamortized gains and losses if the cost of all settlements during the year exceeds the interest component of net periodic cost for the affected plan. Expense from curtailments and settlements is recorded in Automotive cost of sales and Selling, administrative, and other expenses.
BENEFIT OBLIGATIONS
The following summarizes the changes in benefit obligations in the year ended December 31, 2014 (in EUR thsd):
|
|
Severance |
|
Jubilee |
|
Total |
|
Defined benefit obligations December 31, 2013 |
|
(2,330 |
) |
(405 |
) |
(2,734 |
) |
Current Service costs (-) |
|
(112 |
) |
(30 |
) |
(142 |
) |
Interest costs (-) |
|
(86 |
) |
(14 |
) |
(100 |
) |
Actuarial gains/(losses) |
|
(383 |
) |
(264 |
) |
(647 |
) |
Payments |
|
328 |
|
22 |
|
350 |
|
Defined benefit obligations December 31, 2014 |
|
(2,583 |
) |
(691 |
) |
(3,274 |
) |
CONTRIBUTIONS
The following summarizes the contributions in the year ended December 31, 2014 (in EUR thsd):
|
|
2014 |
|
||||
Benefit obligations for |
|
Severance |
|
Jubilee |
|
Total |
|
Service cost |
|
(112 |
) |
(30 |
) |
(142 |
) |
Interest cost |
|
(86 |
) |
(14 |
) |
(100 |
) |
Amortization of Actuarial gains/(losses) |
|
(14 |
) |
(264 |
) |
(278 |
) |
Net (expense)/income |
|
(212 |
) |
(308 |
) |
(520 |
) |
ASSUMPTIONS
Assumptions used to determine the benefit obligation and expense were as follows:
|
|
2014 |
|
||
|
|
Severance |
|
Jubilee |
|
Weighted-Average Assumptions used to determine Benefit Obligations |
|
|
|
|
|
Discount rate ongoing benefits |
|
2.50 |
% |
2.50 |
% |
Rate of compensation increase |
|
3.00 |
% |
3.00 |
% |
Weighted-Average Assumptions Used to Determine Periodic Costs: |
|
|
|
|
|
Discount rate ongoing benefits |
|
3.70 |
% |
3.70 |
% |
Rate of compensation increase |
|
3.00 |
% |
3.00 |
% |
|
|
2013 |
|
||
|
|
Severance |
|
Jubilee |
|
Weighted-Average Assumptions used to determine Benefit Obligations |
|
|
|
|
|
Discount rate ongoing benefits |
|
3.70 |
% |
3.70 |
% |
Rate of compensation increase |
|
3.00 |
% |
3.00 |
% |
ESTIMATED FUTURE BENEFIT PAYMENTS AND AMORTIZATION
The following table presents estimated future gross benefit payments (in EUR thsd):
|
|
Gross Benefit Payments |
|
||||
|
|
Severance |
|
Jubilee |
|
Total |
|
2015 |
|
76 |
|
50 |
|
126 |
|
2016 |
|
72 |
|
71 |
|
143 |
|
2017 |
|
70 |
|
37 |
|
107 |
|
2018 |
|
146 |
|
28 |
|
174 |
|
2019 |
|
277 |
|
36 |
|
313 |
|
2020 - 2025 |
|
871 |
|
258 |
|
1,129 |
|
Total |
|
1,512 |
|
480 |
|
1,992 |
|
NOTE 15 TRANSACTIONS WITH RELATED PARTIES
The Company is and was engaged in transactions with the US ultimate parent company, MVC Capital Inc., with Tekers Holdings, Latvia, 100% owned by MVC Capital Inc. and with the former (until December 2013) Belgian subsidiary, Cégéac S.A. Belgium, on commercial terms in their respective markets, considering the characteristics of the goods or services involved.
MVC INC.
As of December 31, 2014 and 2013, the MVC Capital Inc. had a 100 percent beneficial ownership interest in the Company.
In course of the cross border merger in 2013 MVC Capital Inc. made a capital contribution of USD 5 million (EUR 3.7 million) to MVC Automotive Group GmbH. Additionally the outstanding bridge loan (principal plus interest) of USD 1.8 million (EUR 1.3 million) was converted into further contribution. The total Contribution of Capital recorded in combined equity of MVC Automotive Group GmbH was EUR 5 million.
CÉGÉAC
As of December 31, 2013, the combined financial statements include trade payables to Cégéac S.A. of EUR 1.6 million related to purchases of goods and services and a short-term loan of EUR 607 thsd. As of December 31, 2014 these payables amount to EUR 0.0.
On March 11, 2014 the former holding company in Belgium Cégéac S.A. declared bankruptcy. We also refer to Note 17.
MVC AUTOMOTIVE GROUP GMBH
MVC Automotive Group GmbH performs only holding functions for MVC Automotive Group.
In 2012 Auto Motol Beni a.s (lender) and MVC Automotive Group GmbH (borrower) signed a revolving loan agreement up to an amount of EUR 5 million; repayment date was December 31, 2013 and the applicable interest rate 4% per annum. The loan was extended and amount to EUR 2,563 thsd. as of December 31, 2014 (December 31, 2013: EUR 4,095 thsd.) including interests.
In 2013 MVC Automotive Group GmbH granted a non interest bearing loan of EUR 500 thsd to Somotra N.V. which, for information purposes, was converted into a capital contribution to Somotra N.V. in May 2014.
For the financing of working capital of Somotra N.V. an additional loan in the amount of EUR 1.5 million with maturity date June 2015, was granted in 2014 by MVC Automotive Group GmbH. This amount was not required to be paid back until now. We also refer to Note 2.
A further recapitalization of the MVC Automotive Group GmbH by MVC Capital Inc. by an amount of EUR 2.9 million took place in May 2014. This was partly used to increase the share capital of Somotra N.V. by EUR 2.3 million in 2014 through a contribution in kind for a corresponding amount made by MVC Automotive Group GmbH to the Company.
The following table presents the balance sheet of MVC Automotive Group GmbH as of December 31, 2014 and 2013 for information purposes (in EUR thsd):
MVC Automotive Group GmbH - Single Balance Sheet as of Dec 31. 2014 and 2013
|
|
in EUR thsd |
|
||
|
|
2014 |
|
2013 |
|
Assets |
|
|
|
|
|
Cash and cash equivalents |
|
62 |
|
2,525 |
|
Amounts due from related parties trade |
|
26 |
|
165 |
|
Loan Somotra SA |
|
1,760 |
|
500 |
|
Allowance loan Somotra SA |
|
(260 |
) |
(500 |
) |
Prepaid expenses and other assets |
|
66 |
|
2 |
|
Total current assets |
|
1,654 |
|
2,692 |
|
Investment MVC Automotive Austria Subgroup |
|
4,500 |
|
8,100 |
|
Investment Auto Motol Beni a.s. |
|
2,649 |
|
3,855 |
|
Investment BE & NI Group a.s. |
|
0 |
|
0 |
|
Investment Cegeac SA |
|
0 |
|
0 |
|
Investment Somotra SA |
|
0 |
|
0 |
|
Total non-current assets |
|
7,149 |
|
11,955 |
|
Total assets |
|
8,803 |
|
14,647 |
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
Loan Auto Motol Beni a.s. |
|
2,460 |
|
4,272 |
|
Loan MVC Motors GmbH |
|
0 |
|
125 |
|
Amounts due to Cegeac SA |
|
0 |
|
930 |
|
Amounts due to related parties (Tekers) |
|
0 |
|
58 |
|
Amounts due to related parties short-term (trade) |
|
7 |
|
34 |
|
Trade accounts payable |
|
154 |
|
69 |
|
Accrued expenses and other short term liabilities |
|
282 |
|
310 |
|
Total current liabilities |
|
2,903 |
|
5,797 |
|
|
|
|
|
|
|
Share capital |
|
100 |
|
100 |
|
Capital reserves |
|
22,158 |
|
19,248 |
|
Retained earnings |
|
(16,358 |
) |
(10,498 |
) |
Total shareholders equity |
|
5,900 |
|
8,850 |
|
Total liabilities and shareholders equity |
|
8,803 |
|
14,647 |
|
MVC Automotive Group GmbH - Single Income Statement for the year ended December 31, 2014
|
|
in EUR thsd. |
|
|
|
|
|
Revenue (Management Fees) |
|
730 |
|
Operating expenses: |
|
|
|
Sales, administrative, and other expenses |
|
(901 |
) |
Total operating expenses |
|
(901 |
) |
Miscellaneous operating income: |
|
22 |
|
Total other operating income |
|
22 |
|
Operating income/(loss) |
|
(148 |
) |
|
|
|
|
Interest income |
|
37 |
|
Interest expense |
|
(89 |
) |
Impairment subsidiaries |
|
(5,660 |
) |
Loss before income taxes |
|
(5,859 |
) |
Income tax benefits/(expenses) |
|
(1 |
) |
Net loss |
|
(5,860 |
) |
The financial loss of EUR 5.7 million is related to EUR 2.1 million of impairments of the capital contributions and loans to Somotra N.V. granted in 2015 (refer to Note 17) and the impairment of the share in MVC Automotive Austria Subgroup of EUR 3.6 million due to net operating losses in 2014 of EUR 3.7 million and EUR 2.2 million (not audited yet) in 2015.
The impairments made are based on our best estimates and reflect all available information as of the release date of these combined financial statements.
TEKERS
In January 2013 Joint Stock Company Tekers Holdings, Latvia (100% owned by MVC Capital Inc.) purchased buildings in Prague, Smichov, from BE & NI Group A.S.. The parties agreed a purchase price in the amount of CZK 33.3 million (EUR 1.3 million). The same time Joint Stock Company Tekers Holdings (lessor) and AUTO MOTOL BENI A.S. (lessee) concluded an operating lease agreement for these buildings. The lease agreement can be terminated without cause by six months notice.
The company recorded an income from disposal of assets related to this transaction of EUR 1.3 million in 2013.
On January 2, 2013 MVC Immobilien GmbH (lender) and SIA Tekers Invest, Latvia (borrower) signed a revolving loan agreement up to an amount of EUR 763,500. Repayment date is December 31, 2014 and the applicable interest rate 8.5% per annum. The loan and the related interests amount to EUR 923 thsd. as of December 31, 2014 (December 31, 2013: EUR 822 thsd.).
RELATED PARTY SUMMARY
Amounts due from and to related parties as of December 31, 2014 and 2013 were as follows (in EUR thsd):
|
|
2014 |
|
||||||
|
|
MVC Group |
|
Cegeac |
|
Tekers |
|
Total |
|
Amounts due from related parties short-term |
|
2,570 |
|
0 |
|
923 |
|
3,493 |
|
Amounts due to related parties short-term (trade) |
|
18 |
|
0 |
|
0 |
|
18 |
|
Financial liabilities due to related parties short-term (Note 10) |
|
260 |
|
0 |
|
0 |
|
260 |
|
Financial liabilities long-term (Note 10) |
|
1,500 |
|
0 |
|
0 |
|
1,500 |
|
|
|
2013 |
|
||||||
|
|
MVC Group |
|
Cegeac |
|
Tekers |
|
Total |
|
Amounts due from related parties short-term |
|
4,223 |
|
12 |
|
822 |
|
5,057 |
|
Amounts due to related parties short-term (trade) |
|
119 |
|
1,605 |
|
0 |
|
1,724 |
|
Financial liabilities due to related parties short-term (Note 10) |
|
120 |
|
607 |
|
0 |
|
727 |
|
Financial liabilities long-term (Note 10) |
|
380 |
|
0 |
|
0 |
|
380 |
|
NOTE 16 GEOGRAPHIC INFORMATION
Revenues, net are allocated to geographic areas based on the customer location.
Revenue, net |
|
2014 |
|
Austria |
|
107,302 |
|
Belgium |
|
29,482 |
|
Czech republic |
|
30,309 |
|
Total |
|
167,093 |
|
Long-lived assets consist of property, plant and equipment (refer to Note 5) and equipment and other assets on operating leases (refer to Note 12), net of accumulated depreciation and amortization. Long-lived assets by geographic area were as follows (in EUR thsd):
Long-lived Assets |
|
2014 |
|
2013 |
|
Austria |
|
17,188 |
|
17,842 |
|
Belgium |
|
5,643 |
|
6,127 |
|
Czech Republic |
|
4,462 |
|
4,603 |
|
Total |
|
27,293 |
|
28,573 |
|
NOTE 17 SUBSEQUENT EVENTS
Subsequent events have been evaluated through March 9, 2016.
Notwithstanding our subsidiary in Belgium Somotra N.V. recorded a net loss of EUR 3.9 million and our Austrian Subgroup of EUR 3.7 million in 2014.
After a period of sustained losses, the Board took several measures and actions in 2014/2015. In Vienna and Belgium, work force was significantly reduced. The workforce reductions will affect represented and non-represented hourly and salaried employees and will be achieved through a combination of retirements and involuntary separations. Restrictive cost cutting measures were set in the whole Group.
In connection with the bankruptcy proceedings for Cegeac in November 2014 claims against MVC Automotive Group GmbH, not part of this combined financial statement, were raised. An official claim was sent in October 2015 to all involved parties. A unified defense will be worked out and a D&O insurance is contracted to carry all costs that may incur.
MVC Automotive Combined Groups Management can not rule out that an adverse outcome from such proceedings could also have negative impact on subsidiaries included in this combined financial statements as of December 31, 2014 and 2013. The management cannot estimate the reasonably likely outcome of these proceedings.
To improve the capital structure and preserve liquidity a further recapitalization of the MVC Automotive Group GmbH by MVC Capital Inc. by an amount of EUR 4 million took place in 2015. Cash payments were made in Mai 2015 of EUR 1 million, in October
2015, EUR 1.5 million, in November 2015 EUR 0.5 million and in December 2015 EUR 1 million.
On December 22, 2015 an asset purchase agreement was signed between MVC Automotive Group GmbH and Coventry SA in which all assets of Somotra have been transferred. With this transaction MVC Automotive Group has left the Belgian market. All remaining receivables and liabilities in Somotra will be offset. The purchase price will be primarily used to repay remaining liabilities. Due to the contract the cash inflow related to this transaction is agreed to take place in several steps in 2016.
After repayment of all third party liabilities and the loan received from MVC Capial Inc. of EUR 1.5 million as of December 22, 2015 the estimated remaining cash flow from the asset deal will be EUR 1.5 million. As of December 22, 2015 the intercompany loans of MVC Automotive Group GmbH amount to EUR 4.7 million. The cash inflow of EUR 1.5 million will be used for partial repayment of the outstanding intercompany loans of MVC Automotive Group GmbH. The remaining intercompany debts of EUR 3.2 million will be converted into equity or forgiven.
MVC Capital Inc. issued support letters dated April 10, 2015 and February 25, 2016 to the Board of Directors of Somotra N.V. (see Note 2).
MVC Capital Inc. has based on the financial support letter that has been issued on February 25, 2016 the intention to liquidate Somotra N.V., Belgium after the sales transaction with Coventry Motors SA / NV, Belgium has been closed and the real estate has been transferred (expected in April 2016). There has not been made a resolution by the shareholders of Somotra N.V., Belgium that approves the liquidation plan. The liquidation basis of accounting will be adopted for the financial statements of Somotra N.V., Belgium after the approval of the liquidation has been made.
NOTE 18 DIRECTORS REMUNERATION
DIRECTORS REMUNERATION
The costs relating to the remuneration of the Board of directors for the year 2014 were EUR 327 thsd. (2013: EUR 336 thsd.)
Vienna, March 9, 2016
The Managing Directors:
Alexander Bittner |
Puneet Sanan |
Michael Tokarz |
John Kelly |
EXHIBIT 31
RULE 13a-14(a) CERTIFICATIONS
I, Michael Tokarz, certify that:
1. I have reviewed this annual report on Form 10-K of MVC Capital, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: |
5/16/16 |
/s/ Michael Tokarz |
|
Michael Tokarz |
|
|
|
|
|
In the capacity of the officer who performs the functions of Principal Executive Officer of MVC Capital, Inc. |
I, Scott Schuenke, certify that:
1. I have reviewed this annual report on Form 10-K of MVC Capital, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: |
5/16/16 |
/s/ Scott Schuenke |
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Scott Schuenke |
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In the capacity of the officer who performs the functions of Principal Financial Officer of MVC Capital, Inc. |
EXHIBIT 32
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Michael Tokarz, in the capacity of the officer who performs the functions of Principal Executive Officer of MVC Capital, Inc., a Delaware corporation (the Registrant), certifies that:
1. The Registrants Annual Report on Form 10-K for the period ended October 31, 2015 (the Form 10-K) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
In the capacity of the officer who performs the functions
of Principal Executive Officer for
MVC Capital, Inc.
/s/ Michael Tokarz |
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Michael Tokarz |
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Date: |
5/16/16 |
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Scott Schuenke, in the capacity of the officer who performs the functions of Principal Financial Officer, of MVC Capital, Inc., a Delaware corporation (the Registrant), certifies that:
1. The Registrants Annual Report on Form 10-K for the period ended October 31, 2015 (the Form 10-K) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
In the capacity of the officer who performs the functions
of Principal Financial Officer for
MVC Capital, Inc.
/s/ Scott Schuenke |
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Scott Schuenke |
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Date: |
5/16/16 |
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