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| MVC > SEC Filings for MVC > Form 10-K/A on 9-May-2008 | All Recent SEC Filings |
9-May-2008
Annual Report
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 investment capital demand, pricing, market acceptance, the effect of economic conditions, litigation and the effect of regulatory proceedings, competitive forces, the results of financing and investing efforts, the ability to complete transactions and other risks identified below or in the Company's filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the Financial Statements, the Notes thereto and the other financial information included elsewhere in this report.
Overview
The Company is an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company under the 1940 Act. The Company's investment objective is to seek to maximize total return from capital appreciation and/or income.
On November 6, 2003, Mr. Tokarz assumed his positions as Chairman and Portfolio Manager of the Company. He and the Company's investment professionals (who, effective November 1, 2006, provide their services to the Company through the Company's investment adviser, TTG Advisers) are seeking to implement our investment objective (i.e., to maximize total return from capital appreciation and/or income) through making a broad range of private investments in a variety of industries.
The investments can include senior or subordinated loans, convertible debt and convertible preferred securities, common or preferred stock, equity interests, warrants or rights to acquire equity interests, and other private equity transactions. During the fiscal year ended October 31, 2006, the Company made 16 new investments
and eight additional investments in existing portfolio companies, committing capital totaling approximately $166.3 million. During the fiscal year ended October 31, 2007, the Company made ten new investments and 16 additional investments in existing portfolio companies committing a total of $167.1 million of capital to these investments.
Prior to the adoption of our current investment objective, the Company's
investment objective had been to achieve long-term capital appreciation from
venture capital investments in information technology companies. The Company's
investments had thus previously focused on investments in equity and debt
securities of information technology companies. As of October 31, 2007, 3.63% of
the current fair value of our assets consisted of Legacy Investments. We are,
however, seeking to manage these Legacy Investments to try and realize maximum
returns. We generally seek to capitalize on opportunities to realize cash
returns on these investments when presented with a potential "liquidity event,"
i.e., a sale, public offering, merger or other reorganization.
Our new portfolio investments are made pursuant to our new objective and strategy. We are concentrating our investment efforts on small and middle-market companies that, in our view, provide opportunities to maximize total return from capital appreciation and/or income. Under our investment approach, we are permitted to invest, without limit, in any one portfolio company, subject to any diversification limits required in order for us to continue to qualify as a RIC under Subchapter M of the Code.
We participate in the private equity business generally by providing privately negotiated long-term equity and/or debt investment capital to small and middle-market companies. Our financing is generally used to fund growth, buyouts, acquisitions, recapitalizations, note purchases, and/or bridge financings. We generally invest in private companies, though, from time to time, we may invest in public companies that may lack adequate access to public capital.
We may also seek to achieve our investment objective by establishing a subsidiary or subsidiaries that would serve as a general partner or managing member to a private equity or other investment vehicle(s). In fact, during fiscal year 2006, we established MVC Partners, LLC for this purpose. Additionally, we may also acquire a portfolio of existing private equity or debt investments held by financial institutions or other investment funds should such opportunities arise.
Operating Income
For the Fiscal Years Ended October 31, 2007, 2006 and 2005. Total operating income was $27.0 million for the fiscal year ended October 31, 2007 and $18.5 million for the fiscal year ended October 31, 2006, an increase of $8.5 million. Fiscal year 2006 operating income increased by $6.3 million compared to fiscal year 2005 operating income of $12.2 million.
For the Fiscal Year Ended October 31, 2007
Total operating income was $27.0 million for the fiscal year ended October 31, 2007. The increase in operating income over the last year was primarily due to the increase in the number of investments that provide the Company with current income. The main components of investment income were the interest and dividend income earned on loans to portfolio companies and the receipt of closing and monitoring fees from certain portfolio companies by the Company and MVCFS. The Company earned approximately $21.3 million in interest and dividend income from investments in portfolio companies. Of the $21.3 million recorded in interest/dividend income, approximately $2.7 million was "payment in kind" interest/dividends. The "payment in kind" interest/dividends are computed at the contractual rate specified in each investment agreement and added to the principal balance of each investment. The Company's debt investments yielded rates from 0% to 27%. Also, the Company earned approximately $1.5 million in interest income on its cash equivalents and short-term investments. The Company received fee income and other income from portfolio companies and other entities totaling approximately $3.8 million and $374,000, respectively.
For the Fiscal Year Ended October 31, 2006
Total operating income was $18.5 million for the fiscal year ended October 31, 2006. The increase in operating income over the last year was primarily due to the increase in the number of investments that provide the Company with current income. For the fiscal years ended October 31, 2006 and 2005, the Company made 24 and nine investments in portfolio companies, respectively. The main components of operating income were the interest and dividend income earned on loans to portfolio companies and the receipt of closing and monitoring fees from certain portfolio companies by the Company and MVCFS. During 2006, the Company earned approximately $13.9 million in interest and dividend income from investments in portfolio companies. Of the $13.9 million recorded in interest/dividend income, approximately $2.2 million was payment in kind interest/dividends. The payment in kind interest/dividends are computed at the contractual rate specified in each investment agreement and added to the principal balance of each investment. During the fiscal year ended October 31, 2006, the Company reclassified dividend income received from Vitality totaling approximately $900,000 to return of capital. The reclassification occurred due to the determination that Vitality did not have sufficient taxable earnings and profits for their fiscal year 2006. This reclassification to return of capital had limited impact on the Company's net asset value. The Company's investments yielded rates from 7% to 17%. Also, the Company earned approximately $2.3 million in interest income on its cash equivalents and short-term investments. The Company received fee income and other income from portfolio companies and other entities totaling approximately $3.8 million and $771,000, respectively. Included in other income is flow through income from limited liability companies and cash received from the Mentor Graphics Corp. ("Mentor Graphics") multi-year earnout.
For the Fiscal Year Ended October 31, 2005
Total operating income was $12.2 million for the fiscal year ended October 31, 2005. The increase in operating income over 2004 was primarily due to the increase in the number of investments that provide the Company with current income. The main components of investment income were the interest and dividend income earned on loans to portfolio companies and the receipt of closing and monitoring fees from certain portfolio companies by the Company and MVCFS. The Company earned approximately $7.53 million in interest and dividend income from investments in portfolio companies. Of the $7.53 million recorded in interest/dividend income, approximately $1.37 million was "payment in kind" interest/dividends. The "payment in kind" interest/dividends are computed at the contractual rate specified in each investment agreement and added to the principal balance of each investment. The Company's yielding investments were paying interest to the Company at various rates from 7% to 17%. Also, the Company earned approximately $1.93 million in interest income on its cash equivalents and short-term investments. The Company received fee income and other income from portfolio companies and other entities totaling approximately $1.81 million and $900,000 respectively. Included in other income is flow through income from limited liability companies, cash received from the Mentor Graphics multi-year earnout and a legal settlement of $473,968. Without the receipt of this settlement, other income earned for the fiscal year ended October 31, 2005, would have been $428,855.
Operating Expenses
For the Fiscal Years Ended October 31, 2007, 2006 and 2005. Operating expenses were $25.3 million for the fiscal year ended October 31, 2007 and $14.6 million for the fiscal year ended 2006, an increase of $10.7 million. For the fiscal year ended October 31, 2006, operating expenses increased $8.1 million from $6.5 million for the fiscal year ended 2005.
For the Fiscal Year Ended October 31, 2007
Operating expenses were $25.3 million or 7.89% of the Company's average net assets for the fiscal year ended October 31, 2007. Significant components of operating expenses for the fiscal year ended October 31, 2007, included the estimated provision for incentive compensation expense of approximately $10.8 million, management fee of $7.0 million, and interest expense and other borrowing costs of $4.9 million.
The $10.7 million increase in the Company's operating expenses for the fiscal year ended October 31, 2007 compared to the fiscal year ended October 31, 2006, was primarily due to the $4.8 million increase in the provision
for estimated incentive compensation, the $3.3 million increase in the Company's interest expense and other borrowings, and the $2.9 million increase in the management fee expense compared to the facilities and employee compensation and benefits expense incurred when the Company was internally managed. It should be noted, in this regard, that 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 Company's 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 Company's average net assets) to 3.25% in each of the 2007 and 2008 fiscal years. In fiscal year 2006, when the Company was still internally managed and not subject to the expense cap, the expense ratio was 3.22% (taking into account the same carve outs as those applicable to the expense cap). For fiscal year 2007, the expense ratio was 3.0% (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, 2007, the provision for estimated incentive compensation was increased by a net amount of $10,703,144 to $17,875,496. The increase in the provision for incentive compensation during the fiscal year ended October 31, 2007 was primarily a result of the sale of Baltic Motors and BM Auto for a combined realized gain of $66.5 million. The difference between the amount received from the sale and Baltic Motors and BM Auto's combined carrying value at October 31, 2006 was $53.3 million. The amount of the provision also reflects the Valuation Committee's determination to increase the fair values of eight of the Company's portfolio investments (Dakota Growers, Octagon, SGDA, PreVisor, Tekers, BENI, Summit, and Vitality) by a total of $9.6 million and decrease the fair values of Ohio Medical and Timberland by a total of $10.0 million. On October 2, 2006, the Company realized a gain of $551,092 from the sale of a portion of the Company's LLC membership interest in Octagon. This transaction triggered an incentive compensation payment obligation of $110,218 to Mr. Tokarz, which was paid on January 12, 2007. After the increase in the provision due to the sale of Baltic Motors and BM Auto and the decrease in the provision due to the Valuation Committee's determinations and payment made to Mr. Tokarz, the reserve balance at October 31, 2007 was $17,875,496. This reserve balance of $17,875,496 will remain unpaid until net capital gains are realized, if ever, by the Company. Pursuant to the Advisory Agreement, incentive compensation payments will be made to TTG Advisers only upon the occurrence of a realization event (as defined under such agreement). On July 24, 2007, as discussed in "Realized Gains and Losses on Portfolio Securities," the Company realized a gain of $66.5 million from the sale of Baltic Motors and BM Auto. This transaction triggered an incentive compensation payment obligation to TTG Advisers, which payment is not required to be made until the precise amount of the payment obligation is confirmed based on the Company's completed audited financials for the fiscal year 2007. Subject to confirmation following the audit, the payment obligation to TTG Advisers from this transaction is approximately $12.9 million (which is 20% of the realized gain from the sale less unrealized depreciation on the portfolio) and is expected to be paid during the first quarter of the Company's fiscal year 2008. Without this reserve for incentive compensation, operating expenses would have been approximately $14.5 million or 4.52% of average net assets when annualized as compared to 7.89%, which is reported in the Consolidated Per Share Data and Ratios, for the fiscal year ended October 31, 2007. During the fiscal year ended October 31, 2007, 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. For more information, please see Note 5 of our consolidated financial statements, "Incentive Compensation."
For the Fiscal Year Ended October 31, 2006
Operating expenses were $14.6 million or 6.78% of the Company's average net assets for the fiscal year ended October 31, 2006. Significant components of operating expenses for the fiscal year ended October 31, 2006, included an estimated provision for incentive compensation expense of approximately $6.1 million, salaries and benefits of approximately $3.5 million, interest and other borrowing costs of $1.6 million, legal fees of $685,396, facilities-related expenses of $603,328, and insurance premium expenses of $471,711. The estimated provision for incentive compensation expense was a non-cash, not then payable, provisional expense relating to Mr. Tokarz's employment agreement with the Company.
The $8.1 million increase in the Company's operating expenses for the fiscal year ended October 31, 2006 compared to the fiscal year ended October 31, 2005, was primarily due to: the $4.9 million increase in the provision for estimated incentive compensation; an increase in the number of employees needed to service the larger portfolio, which resulted in an increase of $1.2 million in salaries and benefits; and the Company's rent and other facility related expenses increased approximately $118,908 primarily due to the Company's procurement of larger office space to accommodate the Company's increased number of employees. For more information, please see Note 10 of our consolidated financial statements, "Commitments and Contingencies." Finally, the increase of approximately $1.6 million compared to the fiscal year ended October 31, 2005 in the Company's interest expense and other borrowing costs was due to borrowings under the Credit Facility.
In February 2006, the Company renewed its Directors & Officers/Professional Liability Insurance policies at an expense of approximately $459,000 which is amortized over the twelve month life of the policy. The prior policy premium was $517,000.
Pursuant to the terms of the Company's employment agreement with Mr. Tokarz, during the fiscal year ended October 31, 2006, the provision for estimated incentive compensation was increased by $6,055,024. The increase in the provision for incentive compensation resulted from the determination of the Valuation Committee to increase the fair value of six of the Company's portfolio investments: Baltic Motors, Dakota Growers, Ohio Medical, Octagon, Turf, and Vitality, which are subject to the Company's employment agreement with Mr. Tokarz, by a total of $30,275,120. This reserve balance of $7,172,352 will remain unpaid until net capital gains are realized, if ever, by the Company. Without this reserve for incentive compensation, operating expenses would have been approximately $8.51 million or 3.96% of average net assets when annualized as compared to 6.78% which is reported on the Consolidated Per Share Data and Ratios, for the fiscal year ended October 31, 2006. Pursuant to Mr. Tokarz's employment agreement with the Company, only after a realization event, may the incentive compensation be paid to him. Mr. Tokarz has determined to allocate a portion of his incentive compensation to certain employees of the Company. During the fiscal years ended October 31, 2006 and October 31, 2005, Mr. Tokarz was paid no cash or other compensation. However, on October 2, 2006 and as discussed in "Realized Gains and Losses on Portfolio Securities," the Company realized a gain of $551,092 from the sale of a portion of the Company's LLC member interest in Octagon. This transaction triggered an incentive compensation payment obligation to Mr. Tokarz, which payment is not required to be made until the precise amount of the payment obligation is confirmed based on the Company's completed audited financials for the fiscal year 2006. Subject to confirmation following the audit, the payment obligation to Mr. Tokarz from this transaction is approximately $110,000 (which is expected to be paid during the first quarter of the Company's fiscal year 2007). For more information, please see Note 5 of our consolidated financial statements, "Incentive Compensation."
For the Fiscal Year Ended October 31, 2005
Operating expenses were $6.5 million or 3.75% of average net assets for the fiscal year ended October 31, 2005. Significant components of operating expenses for the fiscal year ended October 31, 2005 included salaries and benefits of $2,336,242, estimated incentive compensation expense of $1,117,328, insurance premium expenses of $590,493, legal fees of $529,541 and facilities related expenses of $484,420. Estimated incentive compensation expense was a non-cash, not then payable, provisional expense relating to Mr. Tokarz's compensation arrangement with the Company.
The increase in the Company's operating expenses in 2005 compared to 2004 was primarily due to an increase in employees needed to service the larger portfolio and work to continue to grow the Company. Also, the Company's rent and other facility related expenses increased primarily due to the Company's procurement of larger office space to accommodate the Company's increased number of employees. See Note 10 "Commitments and Contingencies" for more information.
Pursuant to the terms of the Company's agreement with Mr. Tokarz, during the fiscal year ended October 31, 2005, the Company created a provision for $1,117,328 of incentive compensation. This provision for incentive compensation resulted from the determination of the Valuation Committee to increase the fair value of five of the Company's portfolio investments: Baltic Motors, Dakota Growers, Octagon, Vestal and Vitality which are subject to the Company's agreement with Mr. Tokarz, by an aggregate amount of $5,586,638. This reserve balance of
$1,117,328 will remain unpaid and not finally determined until net capital gains are realized, if ever, by the Company. Pursuant to Mr. Tokarz's agreement with the Company, only after a realization event, will the incentive compensation be paid to him. Mr. Tokarz has determined to allocate a portion of his incentive compensation to certain employees of the Company. During the fiscal year ended October 31, 2005, Mr. Tokarz was paid no cash or other compensation. Without this reserve for incentive compensation, operating expenses would have been approximately $5.4 million or 3.10% of average net assets. For more information, please see Note 5 of our consolidated financial statements, "Incentive Compensation."
In February 2005, the Company renewed its Directors & Officers/Professional Liability Insurance policies at an expense of approximately $517,000 which is amortized over the twelve month life of the policy. The prior policy premium was $719,000.
During the fiscal year ended October 31, 2005, the Company paid or accrued $529,541 in legal fees. This amount includes legal fees of $47,171 which were incurred while pursuing a claim against Federal Insurance Company. The Company received $473,964 from the settlement of the legal action which was recorded as "other income." After fees and expenses the cash received from the settlement was $426,797. Without the legal fees related to the legal action, the Company would have paid or accrued $482,370 in legal fees.
Realized Gains and Losses On Portfolio Securities
For the Fiscal Years Ended October 31, 2007, 2006 and 2005. Net realized gains for the fiscal year ended October 31, 2007 were $66.9 million and net realized gains for the fiscal year ended October 31, 2006 were $5.2 million, an increase of $61.7 million. Net realized losses for the fiscal year ended October 31, 2005 were $3.3 million which was $8.5 million difference when compared to fiscal year 2006.
For the Fiscal Year Ended October 31, 2007
Net realized gains for the fiscal year ended October 31, 2007 were $66.9 million. The significant component of the Company's net realized gains for the fiscal year ended October 31, 2007 was primarily due to the gain on the sale of Baltic Motors and BM Auto. On July 24, 2007, the Company sold the common stock of Baltic Motors and BM Auto. The amount received from the sale of the 60,684 common shares of Baltic Motors was approximately $62.0 million, net of closing and other transaction costs, working capital adjustments and a reserve established by the Company to satisfy certain post-closing conditions requiring capital and other expenditures. Baltic Motors repaid all debt from the Company in full including all accrued interest. The total amount received from the repayment of the debt was approximately $10.2 million including all accrued interest. The remaining $51.8 million less the $8.0 million cost basis of Baltic Motors resulted in $43.8 million recorded as realized gain. The difference between the $51.8 million received from the Baltic Motors equity and the carrying value at October 31, 2006 is $30.6 million and the amount of the increase in net assets attributable to fiscal year 2007. The portion of the capital gain related to the equity investment made on June 24, 2004 ($40.9 million), will be treated as long-term capital gain and the portion related to the equity investment made on September 28, 2006 ($2.9 million) will be treated as a short-term capital gain. The amount received from the sale of the 47,300 common shares of BM Auto was approximately $29.7 million, net of closing and other transaction costs, working capital adjustments and a reserve established by the Company to satisfy certain post-closing conditions requiring capital and other expenditures. The $29.7 million less the $8.0 million cost basis of BM Auto resulted in $21.7 million recorded as a long term capital gain. The difference between the $29.7 million received from the BM Auto equity and the carrying value at October 31, 2006 is $21.7 million and the amount of the increase in net assets attributable to fiscal year 2007.
As mentioned above, a reserve account of approximately $3.0 million was created for post closing conditions that are required of the seller as a part of the purchase agreement. The cash held in the reserve account was held in Euros. On October 17, 2007, all post-closing conditions from the acquisition were satisfied. Of the $3.0 million held in reserve, $1.0 million was not needed to satisfy the post-closing conditions and as a result was added to the Company's gain on the sale. Of the $1.0 million gain from the reserve account, approximately $887,000 is attributable to the sale of Baltic Motors and approximately $148,000 is attributable to the sale to BM Auto. The Company also had a currency gain of approximately $42,000 from the reserve account. Total gain from the sale of Baltic Motors and BM Auto was $66.5 million.
On June 14, 2007, the Company received approximately $451,000 as a final disbursement from the sale of ProcessClaims Inc. ("ProcessClaims"). This amount was deposited into a reserve account at the time of sale. Due to the contingencies associated with the escrow, the Company placed no value on the proceeds deposited in escrow. This disbursement was recorded as a long term capital gain.
The Company also realized a loss from the prepayment from Levlad on the second lien loan, which was purchased at a premium and thus resulted in a realized loss of approximately $121,000.
For the Fiscal Year Ended October 31, 2006
Net realized gains for the fiscal year ended October 31, 2006 were $5.2 million. The significant component of the Company's net realized gain for the fiscal year ended October 31, 2006 was primarily due to the gain on the sale of . . .
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