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MVC Capital 10-Q 2012

Documents found in this filing:

  1. 10-Q
  2. Ex-10
  3. Ex-31
  4. Ex-32
  5. Ex-32
FORM 10-Q

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended January 31, 2012

or

 

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

Commission File Number 814-00201

 

 

MVC CAPITAL, INC.

(Exact name of the registrant as specified in its charter)

 

 

 

DELAWARE   94-3346760

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

287 Bowman Avenue

2nd Floor

Purchase, New York

  10577
(Address of principal executive offices)   (Zip Code)

(914) 701-0310

Registrant’s telephone number, including area code:

 

 

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  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨      Smaller reporting company   ¨

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

There were 23,916,982 shares of the registrant’s common stock, $.01 par value, outstanding as of March 12, 2012.

 

 

 


MVC Capital, Inc.

(A Delaware Corporation)

Index

 

Part I. Consolidated Financial Information

     Page   

Item 1. Consolidated Financial Statements

  

Consolidated Balance Sheets

  

—January 31, 2012 and October 31, 2011

     3   

Consolidated Statements of Operations

  

—For the Period November 1, 2011 to January 31, 2012 and

  

—For the Period November 1, 2010 to January 31, 2011

     4   

Consolidated Statements of Cash Flows

  

—For the Period November 1, 2011 to January 31, 2012 and

  

—For the Period November 1, 2010 to January 31, 2011

     5   

Consolidated Statements of Changes in Net Assets

  

—For the Period November 1, 2011 to January 31, 2012

  

—For the Period November 1, 2010 to January 31, 2011 and

  

—For the Year ended October 31, 2011

     6   

Consolidated Selected Per Share Data and Ratios

  

—For the Period November 1, 2011 to January 31, 2012,

  

—For the Period November 1, 2010 to January 31, 2011 and

  

—For the Year ended October 31, 2011

     7   

Consolidated Schedule of Investments

  

—January 31, 2012

  

—October 31, 2011

     8   

Notes to Consolidated Financial Statements

     12   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     29   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     52   

Item 4. Controls and Procedures

     59   

Part II. Other Information

     60   

SIGNATURE

     62   

Exhibits

     61   


Part I. Consolidated Financial Information

 

Item 1. Consolidated Financial Statements

CONSOLIDATED FINANCIAL STATEMENTS

MVC Capital, Inc.

Consolidated Balance Sheets

 

     January 31,     October 31,  
     2012     2011  
     (Unaudited)        

ASSETS

  

Assets

    

Cash and cash equivalents

   $ 19,076,052      $ 28,317,460   

Restricted cash and cash equivalents

     6,540,000        6,925,000   

Investments at fair value

    

Non-control/Non-affiliated investments (cost $90,908,201 and $90,292,464)

     51,650,872        51,182,558   

Affiliate investments (cost $126,694,020 and $126,356,770)

     188,221,968        187,953,099   

Control investments (cost $148,091,407 and $141,569,773)

     209,353,894        213,079,430   
  

 

 

   

 

 

 

Total investments at fair value (cost $365,693,628 and $358,219,007)

     449,226,734        452,215,087   

Dividends, interest and fee receivables, net of reserves

     7,718,090        7,872,867   

Escrow receivables

     704,973        1,146,899   

Prepaid expenses

     748,335        629,868   
  

 

 

   

 

 

 

Total assets

   $ 484,014,184      $ 497,107,181   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Liabilities

    

Term loan

   $ 50,000,000      $ 50,000,000   

Provision for incentive compensation (Note 10)

     22,000,922        23,938,058   

Management fee payable

     2,942,022        2,600,905   

Other accrued expenses and liabilities

     756,559        288,111   

Professional fees payable

     607,625        703,293   

Consulting fees payable

     84,312        64,999   

Taxes payable

     893        2,099   
  

 

 

   

 

 

 

Total liabilities

     76,392,333        77,597,465   
  

 

 

   

 

 

 

Shareholders’ equity

    

Common stock, $0.01 par value; 150,000,000 shares authorized; 23,916,982 and 23,916,982 shares outstanding, respectively

     283,044        283,044   

Additional paid-in-capital

     428,428,139        428,428,139   

Accumulated earnings

     41,750,360        40,499,006   

Dividends paid to stockholders

     (83,041,906     (80,171,868

Accumulated net realized loss

     (25,561,647     (25,755,440

Net unrealized appreciation

     83,533,106        93,996,080   

Treasury stock, at cost, 4,387,466 and 4,387,466 shares held, respectively

     (37,769,245     (37,769,245
  

 

 

   

 

 

 

Total shareholders’ equity

     407,621,851        419,509,716   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 484,014,184      $ 497,107,181   
  

 

 

   

 

 

 

Net asset value per share

   $ 17.04      $ 17.54   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


MVC Capital, Inc.

Consolidated Statements of Operations

(Unaudited)

 

     For the Quarter Ended     For the Quarter Ended  
     January 31, 2012     January 31, 2011  

Operating Income:

    

Dividend income

    

Non-control/Non-affiliated investments

   $ 1,580      $ 2,081   

Affiliate investments

     90,746        209,699   
  

 

 

   

 

 

 

Total dividend income

     92,326        211,780   
  

 

 

   

 

 

 

Interest income

    

Non-control/Non-affiliated investments

     495,471        1,353,524   

Affiliate investments

     1,271,666        1,133,858   

Control investments

     808,338        676,232   
  

 

 

   

 

 

 

Total interest income

     2,575,475        3,163,614   
  

 

 

   

 

 

 

Fee income

    

Non-control/Non-affiliated investments

     640,097        367,926   

Affiliate investments

     269,822        277,372   

Control investments

     178,073        142,338   
  

 

 

   

 

 

 

Total fee income

     1,087,992        787,636   
  

 

 

   

 

 

 

Other (loss) income

     (111,652     361,108   
  

 

 

   

 

 

 

Total operating income

     3,644,141        4,524,138   
  

 

 

   

 

 

 

Operating Expenses:

    

Management fee

     2,707,335        2,554,923   

Interest and other borrowing costs

     795,124        769,533   

Other expenses

     184,203        382,508   

Legal fees

     175,020        244,628   

Audit fees

     144,000        139,800   

Consulting fees

     122,251        129,501   

Insurance

     83,613        87,855   

Directors fees

     87,000        72,000   

Administration

     67,356        68,267   

Printing and postage

     34,200        27,241   

Public relations fees

     25,500        25,300   

Incentive compensation (Note 10)

     (1,937,136     (1,603,421
  

 

 

   

 

 

 

Total operating expenses

     2,488,466        2,898,135   
  

 

 

   

 

 

 

Less: Voluntary Expense Waiver by Adviser1

     (37,500     (37,500

Less: Voluntary Management Fee Waiver by Adviser2

     (58,728     (100,635
  

 

 

   

 

 

 

Total waivers

     (96,228     (138,135
  

 

 

   

 

 

 

Net operating income before taxes

     1,251,903        1,764,138   
  

 

 

   

 

 

 

Tax Expenses:

    

Current tax expense

     549        10,185   
  

 

 

   

 

 

 

Total tax expense

     549        10,185   
  

 

 

   

 

 

 

Net operating income

     1,251,354        1,753,953   
  

 

 

   

 

 

 

Net Realized and Unrealized Gain (Loss) on Investments:

    

Net realized gain (loss) on investments

    

Non-control/Non-affiliated investments

     193,793        (6,540,024

Affiliate investments

     —          (8,081,806
  

 

 

   

 

 

 

Total net realized gain (loss) on investments

     193,793        (14,621,830

Net change in unrealized (depreciation) appreciation on investments

     (10,462,974     6,624,024   
  

 

 

   

 

 

 

Net realized and unrealized loss on investments

     (10,269,181     (7,997,806
  

 

 

   

 

 

 

Net decrease in net assets resulting from operations

   $ (9,017,827   $ (6,243,853
  

 

 

   

 

 

 

Net decrease in net assets per share resulting from operations

   $ (0.38   $ (0.26
  

 

 

   

 

 

 

Dividends declared per share

   $ 0.12      $ 0.12   
  

 

 

   

 

 

 

 

1 

Reflects the quarterly portion of the TTG Advisers’ voluntary waiver of $150,000 of expenses for the 2012 and 2011 fiscal years, that the Company would otherwise be obligated to reimburse TTG Advisers under the Advisory Agreement (the “Voluntary Waiver”). Please see Note 9 “Management” for more information.

2 

Reflects TTG Advisers’ voluntary agreement that any assets of the Company invested in exchange-traded funds or the Octagon High Income Cayman Fund Ltd. would not be taken into the calculation of the base management fee due to TTG Advisers under the Advisory Agreement. Please see Note 9 “Management” for more information.

The accompanying notes are an integral part of these consolidated financial statements.

 

4


MVC Capital, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

     For the Quarter Ended
January 31, 2012
    For the Quarter Ended
January 31, 2011
 

Cash flows from Operating Activities:

    

Net decrease in net assets resulting from operations

   $ (9,017,827   $ (6,243,853

Adjustments to reconcile net decrease increase in net assets resulting from operations to net cash used in provided by operating activities:

    

Net realized (gain) loss

     (193,793     14,621,830   

Net change in unrealized depreciation (appreciation)

     10,462,974        (6,624,024

Amortization of discounts and fees

     (17,158     (3,912

Increase in accrued payment-in-kind dividends and interest

     (759,466     (980,119

Allocation of flow through loss (income)

     111,652        (228,718

Changes in assets and liabilities:

    

Dividends, interest and fees receivable

     154,777        (106,671

Escrow receivables

     441,926        956,051   

Prepaid expenses

     (118,467     94,385   

Prepaid taxes

     —          9,675   

Incentive compensation (Note 10)

     (1,937,136     (1,603,421

Other liabilities

     732,004        (380,139

Purchases of equity investments

     (6,314,993     (23,282,540

Purchases of debt instruments

     (1,000,000     (5,770,268

Proceeds from equity investments

     —          541,940   

Proceeds from debt instruments

     699,137        47,341   
  

 

 

   

 

 

 

Net cash used in provided by operating activities

     (6,756,370     (28,952,443
  

 

 

   

 

 

 

Cash flows from Financing Activities:

    

Distributions paid to shareholders

     (2,870,038     (2,878,918
  

 

 

   

 

 

 

Net cash used in financing activities

     (2,870,038     (2,878,918
  

 

 

   

 

 

 

Net change in cash and cash equivalents for the period

     (9,626,408     (31,831,361
  

 

 

   

 

 

 

Cash and cash equivalents, beginning of period

   $ 35,242,460      $ 56,390,628   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 25,616,052      $ 24,559,267   
  

 

 

   

 

 

 

During the quarters ended January 31, 2012 and 2011 MVC Capital, Inc. paid $734,720 and $734,721 in interest expense, respectively.

During the quarters ended January 31, 2012 and 2011 MVC Capital, Inc. paid $1,967 and $1,755 in income taxes, respectively.

Non-cash activity:

During the quarters ended January 31, 2012 and 2011, MVC Capital, Inc. recorded payment in kind dividend and interest of $759,466 and $980,119, respectively. This amount was added to the principal balance of the investments and recorded as dividend/interest income.

During the quarter ended January 31, 2012 and 2011, MVC Capital, Inc. was allocated ($111,652) and $361,108, respectively, in flow-through (loss)/income from its equity investment in Octagon Credit Investors, LLC. Of these amounts, $0 and $132,390, respectively, was received in cash and the balance of ($111,652) and $228,718, respectively, was undistributed and therefore (decreased)/increased the cost of the investment. The fair value was then (decreased)/increased by ($111,652) and $228,718, respectively, by the Company’s Valuation Committee.

On November 30, 2010, a public Uniform Commercial Code (“UCC”) sale of Harmony Pharmacy’s assets took place. Prior to this sale, the Company formed a new entity, Harmony Health & Beauty, Inc. (“HH&B”). The Company assigned its secured debt interest in Harmony Pharmacy of approximately $6.4 million to HH&B in exchange for a majority of the economic ownership. At the UCC sale, HH&B submitted a successful credit bid of approximately $5.9 million for all of the assets of Harmony Pharmacy. On December 21, 2010, Harmony Pharmacy filed for dissolution in the states of California, New Jersey and New York. As a result, the Company realized an $8.4 million loss on its investment in Harmony Pharmacy.

On January 11, 2011, SHL Group Limited acquired the Company’s portfolio company PreVisor. The Company received 1,518,762 common shares of SHL Group Limited for its investment in PreVisor. The cost basis and market value of the Company’s investment remained unchanged as a result of the transaction.

On January 13, 2012, the Company received free warrants related to their debt investment in Freshii USA, Inc. The Company allocated the cost basis in the investment between the senior secured loan and the warrant at the time the investment was made. The Company will amortize the discount associated with the warrant over the four year life of the loan. During the quarter ended January 31, 2012, the Company recorded approximately $441 of amortization.

The accompanying notes are an integral part of these consolidated financial statements.

 

5


MVC Capital, Inc.

Consolidated Statements of Changes in Net Assets

 

     For the Quarter Ended
January 31, 2012
    For the Quarter Ended
January 31, 2011
    For the Year Ended
October 31, 2011
 
     (Unaudited)     (Unaudited)        

Operations:

      

Net operating income (loss)

   $ 1,251,354      $ 1,753,953      $ (2,284,137

Net realized gain (loss) on investments and foreign currencies

     193,793        (14,621,830     (26,421,609

Net change in unrealized (depreciation) appreciation on investments

     (10,462,974     6,624,024        35,676,725   
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in net assets from operations

     (9,017,827     (6,243,853     6,970,979   
  

 

 

   

 

 

   

 

 

 

Shareholder Distributions:

      

Distributions to shareholders from income

     (1,251,354     (1,753,953     —     

Distributions to shareholders from return of capital

     (1,618,684     (1,124,965     (11,489,032
  

 

 

   

 

 

   

 

 

 

Net decrease in net assets from shareholder distributions

     (2,870,038     (2,878,918     (11,489,032
  

 

 

   

 

 

   

 

 

 

Capital Share Transactions:

      

Repurchase of common stock

     —          —          (966,655
  

 

 

   

 

 

   

 

 

 

Net decrease in net assets from capital share transactions

     —          —          (966,655
  

 

 

   

 

 

   

 

 

 

Total decrease in net assets

     (11,887,865     (9,122,771     (5,484,708
  

 

 

   

 

 

   

 

 

 

Net assets, beginning of period/year

     419,509,716        424,994,424        424,994,424   
  

 

 

   

 

 

   

 

 

 

Net assets, end of period/year

   $ 407,621,851      $ 415,871,653      $ 419,509,716   
  

 

 

   

 

 

   

 

 

 

Common shares outstanding, end of period/year

     23,916,982        23,990,987        23,916,982   
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


MVC Capital, Inc.

Consolidated Selected Per Share Data and Ratios

 

     For the
Quarter Ended
January 31, 2012
    For the
Quarter Ended
January 31, 2011
    For the
Year Ended
October 31, 2011
 
     (Unaudited)     (Unaudited)        

Net asset value, beginning of period/year

   $ 17.54      $ 17.71      $ 17.71   

(Loss) gain from operations:

      

Net operating income (loss)

     0.05        0.07        (0.10

Net realized and unrealized (loss) gain on investments

     (0.43     (0.33     0.40   
  

 

 

   

 

 

   

 

 

 

Total (loss) gain from investment operations

     (0.38     (0.26     0.30   
  

 

 

   

 

 

   

 

 

 

Less distributions from:

      

Income

     (0.05     (0.07     —     

Return of capital

     (0.07     (0.05     (0.48
  

 

 

   

 

 

   

 

 

 

Total distributions

     (0.12     (0.12     (0.48
  

 

 

   

 

 

   

 

 

 

Capital share transactions

      

Anti-dilutive effect of share repurchase program

     —          —          0.01   
  

 

 

   

 

 

   

 

 

 

Total capital share transactions

     —          —          0.01   
  

 

 

   

 

 

   

 

 

 

Net asset value, end of period/year

   $ 17.04      $ 17.33      $ 17.54   
  

 

 

   

 

 

   

 

 

 

Market value, end of period/year

   $ 12.54      $ 13.92      $ 12.93   
  

 

 

   

 

 

   

 

 

 

Market discount

     (26.41 )%      (19.68 )%      (26.28 )% 

Total Return—At NAV (a)

     (2.18 )%      (1.48 )%      1.80

Total Return—At Market (a)

     (1.04 )%      5.11     0.35

Ratios and Supplemental Data:

      

Net assets, end of period (in thousands)

   $ 407,622      $ 415,872      $ 419,510   

Ratios to average net assets:

      

Expenses excluding tax expense (benefit)

     2.28 % (b)      2.59 % (b)      4.38

Expenses including tax expense (benefit)

     2.28 % (b)      2.60 % (b)      4.39

Expenses excluding incentive compensation

     4.13 % (b)      4.11 % (b)      3.92

Expenses excluding incentive compensation, interest and other borrowing costs

     3.37 % (b)      3.39 % (b)      3.18

Net operating income before tax expense (benefit)

     1.19 % (b)      1.66 % (b)      (0.54 )% 

Net operating income after tax expense (benefit)

     1.19 % (b)      1.65 % (b)      (0.55 )% 

Net operating income before incentive compensation

     (0.66 )% (b)      0.14 % (b)      (0.08 )% 

Net operating income before incentive compensation, interest and other borrowing costs

     0.10 % (b)      0.86 % (b)      0.66

Ratios to average net assets excluding waivers:

      

Expenses excluding tax expense (benefit)

     2.38 % (b)      2.72 % (b)      4.44

Expenses including tax expense (benefit)

     2.38 % (b)      2.73 % (b)      4.45

Expenses excluding incentive compensation

     4.22 % (b)      4.24 % (b)      3.98

Expenses excluding incentive compensation, interest and other borrowing costs

     3.47 % (b)      3.52 % (b)      3.24

Net operating income before tax expense (benefit)

     1.10 % (b)      1.53 % (b)      (0.60 )% 

Net operating income after tax expense (benefit)

     1.10 % (b)      1.52 % (b)      (0.61 )% 

Net operating income before incentive compensation

     (0.74 )% (b)      0.01 % (b)      (0.14 )% 

Net operating income before incentive compensation, interest and other borrowing costs

     0.01 % (b)      0.73 % (b)      0.60

 

(a) Total annual return is historical and assumes changes in share price, reinvestments of all dividends and distributions, and no sales charge for the period.

 

(b) Annualized.

The accompanying notes are an integral part of these consolidated financial statements.

 

7


MVC Capital, Inc.

Consolidated Schedule of Investments

January 31, 2012 (Unaudited)

 

Company

  

Industry

  

Investment

   Principal      Cost      Fair Value  

Non-control/Non-affiliatedinvestments—12.67% (a, c, f, g)

        
Actelis Networks, Inc.    Technology Investments    Preferred Stock (150,602 shares) (d, j)       $ 5,000,003         —     
BP Clothing, LLC    Apparel    Second Lien Loan 12.5000% Cash, 4.0000% PIK, 07/18/2012 (b, h, i)    $ 20,518,602         19,594,237         —     
      Term Loan A 8.0000% Cash, 07/18/2011 (h, i)      1,987,500         1,987,500       $ 180,000   
      Term Loan B 11.0000% Cash, 07/18/2011 (h, i)      2,000,000         2,000,000         —     
           

 

 

    

 

 

 
              23,581,737         180,000   
           

 

 

    

 

 

 
DPHI, Inc.    Technology Investments    Preferred Stock (602,131 shares) (d, j)         4,520,355         —     
FOLIOfn, Inc.    Technology Investments    Preferred Stock (5,802,259 shares) (d, j)         15,000,000         10,790,000   
Freshii USA, Inc.    Food Services    Senior Secured Loan 6.0000% Cash, 6.0000% PIK, 01/13/2016 (b, h)      1,000,000         956,698         966,568   
      Warrants (d)         33,873         33,873   
           

 

 

    

 

 

 
              990,571         1,000,441   
           

 

 

    

 

 

 
GDC Acquisition, LLC    Electrical Distribution    Senior Subordinated Debt 12.5000% Cash, 4.5000% PIK, 08/31/2011 (b, h, i)      3,348,160         3,237,952         —     
      Warrants (d)         —           —     
           

 

 

    

 

 

 
              3,237,952         —     
           

 

 

    

 

 

 
Integrated Packaging Corporation    Manufacturer of Packaging Material    Warrants (d)         —           —     
Lockorder Limited    Technology Investments    Common Stock (21,064 shares) (d, e, j)         2,007,701         —     
MainStream Data, Inc.    Technology Investments    Common Stock (5,786 shares) (d, j)         3,750,000         —     
NPWT Corporation    Medical Device Manufacturer    Series B Common Stock (281 shares) (d)         1,236,364         50,000   
      Series A Convertible Preferred Stock (5,000 shares) (d)         —           880,000   
           

 

 

    

 

 

 
              1,236,364         930,000   
           

 

 

    

 

 

 
Octagon High Income Cayman Fund Ltd.    Investment Company    Series 1 Participating Non-Voting Shares (3,014 shares) (e, k)         3,013,952         2,888,566   
Prepaid Legal Services, Inc.    Consumer Services    Tranche A Term Loan 7.5000% Cash, 1/1/2017 (h)      3,593,496         3,545,043         3,545,043   
      Tranche B Term Loan 11.0000% Cash, 1/1/2017 (h)      4,000,000         3,892,132         3,892,132   
           

 

 

    

 

 

 
              7,437,175         7,437,175   
           

 

 

    

 

 

 
SafeStone Technologies Limited    Technology Investments    Common Stock (21,064 shares) (d, e, j)         2,007,701         —     
SGDA Sanierungsgesellschaft fur Deponien und Altlasten GmbH    Soil Remediation    Term Loan 7.0000% Cash, 08/31/2012 (e, h)      6,187,350         6,187,350         6,187,350   
SHL Group Limited    Human Capital Management    Common Stock (1,518,762 shares) (d, e)         6,000,000         15,300,000   
Teleguam Holdings, LLC    Telecommunications    Second Lien Loan 9.7500% Cash, 06/09/2017 (h)      7,000,000         6,937,340         6,937,340   
           

 

 

    

 

 

 
Sub Total Non-control/Non-affiliated investments         90,908,201         51,650,872   
           

 

 

    

 

 

 
Affiliate investments—46.18%(a, c, f, g)            
Centile Holdings B.V.    Software    Common Equity Interest (d, e)         3,001,376         3,001,376   
Custom Alloy Corporation    Manufacturer of Pipe Fittings    Unsecured Subordinated Loan 7.0000% Cash, 7.0000% PIK , 09/18/2012 (b, h)      14,819,684         14,766,810         14,819,684   
      Convertible Series A Preferred Stock (9 shares) (d)         44,000         44,000   
      Convertible Series B Preferred Stock (1,991 shares) (d)         9,956,000         9,956,000   
           

 

 

    

 

 

 
              24,766,810         24,819,684   
           

 

 

    

 

 

 
Harmony Health & Beauty, Inc.    Healthcare — Retail    Common Stock (10 shares) (d)         639,424         69,903   
      Common Stock (147,611 shares) (d)         6,060,576         430,097   
           

 

 

    

 

 

 
              6,700,000         500,000   
           

 

 

    

 

 

 
JSC Tekers Holdings    Real Estate Management    Common Stock (2,250 shares) (d, e)         4,500         4,500   
      Secured Loan 8.0000% Cash, 06/30/2014 (e, h)      4,000,000         4,000,000         4,000,000   
           

 

 

    

 

 

 
              4,004,500         4,004,500   
           

 

 

    

 

 

 
Marine Exhibition Corporation    Theme Park    Senior Subordinated Debt 7.0000% Cash 4.0000% PIK, 10/26/2017 (b, h)      11,930,427         11,899,984         11,930,427   
      Convertible Preferred Stock (20,000 shares) (b)         3,085,369         3,085,369   
           

 

 

    

 

 

 
              14,985,353         15,015,796   
           

 

 

    

 

 

 
Octagon Credit Investors, LLC    Financial Services    Limited Liability Company Interest         2,064,955         5,222,005   
RuMe Inc.    Consumer Products    Common Stock (999,999 shares) (d)         160,000         160,000   
      Series B-1 Preferred Stock (4,999,076 shares) (d)         999,815         999,815   
           

 

 

    

 

 

 
              1,159,815         1,159,815   
           

 

 

    

 

 

 
Security Holdings B.V.    Electrical Engineering    Common Equity Interest (d, e)         40,186,620         33,405,000   
SGDA Europe B.V.    Soil Remediation    Common Equity Interest (d, e)         20,084,599         10,765,000   
U.S. Gas & Electric, Inc.    Energy Services    Second Lien Loan 9.0000% Cash, 5.0000% PIK , 07/26/2012 (b, h)      9,261,185         9,239,992         9,261,185   
      Convertible Series I Preferred Stock (32,200 shares) (d)         500,000         78,515,749   
      Convertible Series J Preferred Stock (8,216 shares) (d)         —           2,551,858   
           

 

 

    

 

 

 
              9,739,992         90,328,792   
           

 

 

    

 

 

 
Sub Total Affiliate investments            126,694,020         188,221,968   
           

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

8


MVC Capital, Inc.

Consolidated Schedule of Investments—(Continued)

January 31, 2012 (Unaudited)

 

Company

  

Industry

  

Investment

   Principal      Cost      Fair Value  

Control Investments—51.36% (a, c, f, g)

        
MVC Automotive Group B.V.    Automotive Dealerships    Common Equity Interest (d, e)       $ 34,736,939       $ 34,915,000   
      Bridge Loan 10.0000% Cash, 12/31/2012 (e, h)    $ 3,643,557         3,643,557         3,643,557   
           

 

 

    

 

 

 
              38,380,496         38,558,557   
           

 

 

    

 

 

 
MVC Partners, LLC    Private Equity    Limited Liability Company Interest (d)         7,508,156         6,965,479   
MVC Private Equity Fund, L.P.    Private Equity    General Partnership Interest (d, l)         157,089         148,769   
Ohio Medical Corporation    Medical Device Manufacturer    Common Stock (5,620 shares) (d)         15,763,636         —     
      Series A Convertible Preferred Stock (18,826 shares) (b)         30,000,000         39,500,000   
      Guarantee — Series B Preferred Stock (d)         —           (700,000
           

 

 

    

 

 

 
              45,763,636         38,800,000   
           

 

 

    

 

 

 
SIA Tekers Invest    Port Facilities    Common Stock (68,800 shares) (d, e)         2,300,000         1,245,000   
Summit Research Labs, Inc.    Specialty Chemicals    Second Lien Loan 7.0000% Cash, 7.0000% PIK , 08/31/2013 (b, h)      11,254,033         11,205,759         11,254,033   
      Common Stock (1,115 shares) (d)         16,000,000         74,500,000   
           

 

 

    

 

 

 
              27,205,759         85,754,033   
           

 

 

    

 

 

 
Turf Products, LLC    Distributor — Landscaping and Irrigation Equipment    Senior Subordinated Debt 9.0000% Cash, 4.0000% PIK , 01/31/2014 (b, h)      8,395,262         8,395,262         8,395,262   
      Junior Revolving Note 6.0000% Cash, 01/31/2014 (h)      1,000,000         1,000,000         1,000,000   
      Limited Liability Company Interest (d)         3,535,694         3,221,794   
      Warrants (d)         —           —     
           

 

 

    

 

 

 
              12,930,956         12,617,056   
           

 

 

    

 

 

 
Velocitius B.V.    Renewable Energy    Common Equity Interest (d, e)         11,395,315         23,210,000   
Vestal Manufacturing Enterprises, Inc.    Iron Foundries    Senior Subordinated Debt 12.0000% Cash, 04/29/2013 (h)      600,000         600,000         600,000   
      Common Stock (81,000 shares) (d)         1,850,000         1,455,000   
           

 

 

    

 

 

 
              2,450,000         2,055,000   
           

 

 

    

 

 

 
Sub Total Control Investments         148,091,407         209,353,894   
           

 

 

    

 

 

 
TOTAL INVESTMENT ASSETS — 110.21% (f)       $ 365,693,628       $ 449,226,734   
           

 

 

    

 

 

 

 

(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 Company’s equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except Lockorder Limited, MVC Automotive Group B.V., Octagon High Income Cayman Fund Ltd., SafeStone Technologies Limited, Security Holdings B.V., SGDA Europe B.V., SGDA Sanierungsgesellschaft fur Deponien und Altlasten mbH, SIA Tekers Invest, JSC Tekers Holdings, Centile Holding B.V., Velocitius B.V., Freshii and MVC Partners, LLC. 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 outside of the United States.
(f) Percentages are based on net assets of $407,621,851 as of January 31, 2012.
(g) See Note 3 for further information regarding “Investment Classification.”
(h) All or a portion of these securities have been committed as collateral for the Guggenheim Corporate Funding, LLC Credit Facility.
(i) All or a portion of the accrued interest on these securities have been reserved against.
(j) Legacy Investments.
(k) Octagon High Income Cayman Fund Ltd., which seeks to maximize current income consistent with the preservation of capital through the leveraged loan market and offers monthly liquidity after the initial six months of the investment with a 15-day notice period.
(l) MVC Private Equity Fund, L.P. is a private equity fund focused on control equity investments in the lower middle market. The fund currently holds two investments, one located in the United States and one in Gibraltar, which are in the energy and industrial sectors, respectively.

PIK—Payment-in-kind

— Denotes zero cost or fair value.

The accompanying notes are an integral part of these consolidated financial statements.

 

9


MVC Capital, Inc.

Consolidated Schedule of Investments

October 31, 2011

 

Company

  

Industry

  

Investment

  Principal     Cost     Fair Value  

Non-control/Non-affiliated investments- 12.20% (a, c, f, g)

     
           

Actelis Networks, Inc.

  

Technology Investments

  

Preferred Stock (150,602 shares) (d, j)

    $ 5,000,003        —     

BP Clothing, LLC

  

Apparel

  

Second Lien Loan 12.5000% Cash, 4.0000% PIK, 07/18/2012 (b, h, i)

  $ 20,362,135        19,579,285        —     
     

Term Loan A 8.0000% Cash,
07/18/2011 (h, i)

    1,987,500        1,987,500      $ 280,000   
     

Term Loan B 11.0000% Cash,
07/18/2011 (h, i)

    2,000,000        2,000,000        —     
         

 

 

   

 

 

 
            23,566,785        280,000   
         

 

 

   

 

 

 

DPHI, Inc.

  

Technology Investments

  

Preferred Stock (602,131 shares) (d, j)

      4,520,355        —     

FOLIOfn, Inc.

  

Technology Investments

  

Preferred Stock (5,802,259 shares) (d, j)

      15,000,000        10,790,000   

GDC Acquisition, LLC

  

Electrical Distribution

  

Senior Subordinated Debt 12.5000% Cash, 4.5000% PIK%,
08/31/2011 (b, h, i)

    3,348,160        3,237,952        —     
     

Warrants (d)

      —          —     
         

 

 

   

 

 

 
            3,237,952        —     
         

 

 

   

 

 

 

Integrated Packaging Corporation

  

Manufacturer of Packaging Material

  

Warrants (d)

      —          —     

Lockorder Limited

  

Technology Investments

  

Common Stock (21,064 shares) (d, e, j)

      2,007,701        —     

MainStream Data, Inc.

  

Technology Investments

  

Common Stock (5,786 shares) (d, j)

      3,750,000        —     

NPWT Corporation

  

Medical Device Manufacturer

  

Series B Common Stock (281 shares) (d)

      1,236,364        56,364   
     

Series A Convertible Preferred Stock (5,000 shares) (d)

      —          1,000,000   
         

 

 

   

 

 

 
            1,236,364        1,056,364   
         

 

 

   

 

 

 

Octagon High Income Cayman Fund Ltd.

  

Investment Company

  

Series 1 Participating Non-Voting Shares (3,014 shares) (e, k)

      3,013,952        2,804,543   

Prepaid Legal Services, Inc.

  

Consumer Services

  

Tranche A Term Loan 7.5000% Cash, 12/31/2016 (h)

    4,000,000        3,943,303        3,943,303   
     

Tranche B Term Loan 11.0000% Cash, 12/31/2016 (h)

    4,000,000        3,886,607        3,886,607   
         

 

 

   

 

 

 
            7,829,910        7,829,910   
         

 

 

   

 

 

 

SafeStone Technologies Limited

  

Technology Investments

  

Common Stock (21,064 shares) (d, e, j)

      2,007,701        —     

SGDA Sanierungsgesellschaft fur Deponien und Altlasten GmbH

  

Soil Remediation

  

Term Loan 7.0000% Cash,
08/31/2012 (e, h)

    6,187,350        6,187,350        6,187,350   

SHL Group Limited

  

Human Capital Management

  

Common Stock (1,518,762 shares) (d, e)

      6,000,000        15,300,000   

Teleguam Holdings, LLC

  

Telecommunications

  

Second Lien Loan 9.7500% Cash, 06/09/2017 (h)

    7,000,000        6,934,391        6,934,391   
         

 

 

   

 

 

 

Sub Total Non-control/Non-affiliated investments

         90,292,464        51,182,558   
         

 

 

   

 

 

 

Affiliate investments—44.80% (a, c, f, g)

        
           

Centile Holding B.V.

  

Software

  

Common Equity Interest (d, e)

      3,001,376        3,001,376   

Custom Alloy Corporation

  

Manufacturer of Pipe Fittings

  

Unsecured Subordinated Loan 7.0000% Cash, 7.0000% PIK, 09/18/2012 (b, h)

    14,559,236        14,485,213        14,559,236   
     

Convertible Series A Preferred Stock (9 shares) (d)

      44,000        44,000   
     

Convertible Series B Preferred Stock (1,991 shares) (d)

      9,956,000        9,956,000   
         

 

 

   

 

 

 
            24,485,213        24,559,236   
         

 

 

   

 

 

 

Harmony Health & Beauty, Inc.

  

Healthcare - Retail

  

Common Stock (147,621 shares) (d)

      6,700,000        1,000,000   

JSC Tekers Holdings

  

Real Estate Management

  

Common Stock (2,250 shares) (d, e)

      4,500        4,500   
     

Secured Loan 8.0000% Cash,
06/30/2014 (e, h)

    4,000,000        4,000,000        4,000,000   
         

 

 

   

 

 

 
            4,004,500        4,004,500   
         

 

 

   

 

 

 

Marine Exhibition Corporation

  

Theme Park

  

Senior Subordinated Debt 7.0000% Cash, 4.0000% PIK, 10/26/2017 (b, h)

    11,958,188        11,921,592        11,958,188   
     

Convertible Preferred Stock (20,000 shares) (b)

      3,024,872        3,024,872   
         

 

 

   

 

 

 
            14,946,464        14,983,060   
         

 

 

   

 

 

 

Octagon Credit Investors, LLC

  

Financial Services

  

Limited Liability Company Interest

      2,176,607        5,333,657   

RuMe Inc.

  

Consumer Products

  

Common Stock (999,999 shares) (d)

      160,000        160,000   
     

Series B-1 Preferred Stock (4,999,076 shares) (d)

      999,815        999,815   
         

 

 

   

 

 

 
            1,159,815        1,159,815   
         

 

 

   

 

 

 

Security Holdings B.V.

  

Electrical Engineering

  

Common Equity Interest (d, e)

      40,186,620        33,200,000   

SGDA Europe B.V.

  

Soil Remediation

  

Common Equity Interest (d, e)

      20,084,598        10,500,000   

U.S. Gas & Electric, Inc.

  

Energy Services

  

Second Lien Loan 9.0000% Cash, 5.0000% PIK%, 07/26/2012 (b, h)

    9,143,848        9,111,577        9,143,848   
     

Convertible Series I Preferred Stock (32,200 shares) (d)

      500,000        78,515,749   
     

Convertible Series J Preferred Stock (8,216 shares) (d)

      —          2,551,858   
         

 

 

   

 

 

 
            9,611,577        90,211,455   
         

 

 

   

 

 

 

Sub Total Affiliate investments

      126,356,770        187,953,099   
         

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

10


MVC Capital, Inc.

Consolidated Schedule of Investments—(Continued)

October 31, 2011

 

Company

  

Industry

  

Investment

   Principal      Cost      Fair Value  

Control Investments—50.79% (a, c, f, g)

           
              

MVC Automotive Group B.V.

  

Automotive Dealerships

  

Common Equity Interest (d, e)

      $ 34,736,939       $ 42,450,000   
     

Bridge Loan 10.0000% Cash, 12/31/2011 (e, h)

   $ 3,643,557         3,643,557         3,643,557   
           

 

 

    

 

 

 
              38,380,496         46,093,557   
           

 

 

    

 

 

 

MVC Partners, LLC

  

Private Equity

  

Limited Liability Company Interest (d)

        1,350,253         1,133,729   

Ohio Medical Corporation

  

Medical Device Manufacturer

  

Common Stock (5,620 shares) (d)

        15,763,636         —     
     

Series A Convertible Preferred Stock (18,102 shares) (b)

        30,000,000         39,500,000   
           

 

 

    

 

 

 
              45,763,636         39,500,000   
           

 

 

    

 

 

 

SIA Tekers Invest

  

Port Facilities

  

Common Stock (68,800 shares) (d, e)

        2,300,000         1,525,000   

Summit Research Labs, Inc.

  

Specialty Chemicals

  

Second Lien Loan 7.0000% Cash, 7.0000% PIK, 08/31/2013 (b, h)

     11,055,089         10,999,118         11,055,089   
     

Common Stock (1,115 shares) (d)

        16,000,000         74,500,000   
           

 

 

    

 

 

 
              26,999,118         85,555,089   
           

 

 

    

 

 

 

Turf Products, LLC

  

Distributor - Landscaping and Irrigation Equipment

  

Senior Subordinated Debt 9.0000% Cash, 4.0000% PIK, 01/31/2014 (b, h)

     8,395,261         8,395,261         8,395,261   
     

Junior Revolving Note 6.0000% Cash, 01/31/2014 (h)

     1,000,000         1,000,000         1,000,000   
     

Limited Liability Company Interest (d)

        3,535,694         2,721,794   
     

Warrants (d)

        —           —     
           

 

 

    

 

 

 
              12,930,955         12,117,055   
           

 

 

    

 

 

 

Velocitius B.V.

  

Renewable Energy

  

Common Equity Interest (d, e)

        11,395,315         25,100,000   

Vestal Manufacturing Enterprises, Inc.

  

Iron Foundries

  

Senior Subordinated Debt 12.0000% Cash, 04/29/2013 (h)

     600,000         600,000         600,000   
     

Common Stock (81,000 shares) (d)

        1,850,000         1,455,000   
           

 

 

    

 

 

 
              2,450,000         2,055,000   
           

 

 

    

 

 

 

Sub Total Control Investments

        141,569,773         213,079,430   
           

 

 

    

 

 

 

TOTAL INVESTMENT ASSETS—107.79% (f)

         $ 358,219,007       $ 452,215,087   
           

 

 

    

 

 

 

 

(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 Company’s equity and debt investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940, except Lockorder Limited, MVC Automotive Group B.V., Octagon High Income Cayman Fund Ltd., SafeStone Technologies Limited, Security Holdings B.V., SGDA Europe B.V., SGDA Sanierungsgesellschaft fur Deponien und Altlasten mbH, SIA Tekers Invest, JSC Tekers Holdings, Centile Holding B.V. and Velocitius B.V. 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 outside of the United States.
(f) Percentages are based on net assets of $419,509,716 as of October 31, 2011.
(g) See Note 3 for further information regarding “Investment Classification.”
(h) All or a portion of these securities have been committed as collateral for the Guggenheim Corporate Funding, LLC Credit Facility.
(i) All or a portion of the accrued interest on these securities have been reserved against.
(j) Legacy Investments.
(k) Octagon High Income Cayman Fund Ltd., which seeks to maximize current income consistent with the preservation of capital through the leveraged loan market and offers monthly liquidity after the initial six months of the investment with a 15-day notice

PIK—Payment-in-kind

— Denotes zero cost or fair value.

The accompanying notes are an integral part of these consolidated financial statements.

 

11


MVC Capital, Inc. (the “Company”)

Notes to Consolidated Financial Statements

January 31, 2012

(Unaudited)

1. Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements. Certain amounts have been reclassified to adjust to current period presentations. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 31, 2011, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on January 12, 2012.

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 Company’s 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.

MVC GP II, LLC (“MVC GP II”), an indirect wholly-owned subsidiary of the Company, serves as the general partner to the MVC Private Equity Fund, L.P. (“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.

Pursuant to the guidance of the Financial Accounting Standards Board (“FASB”) ASC 810, Consolidation of Partnerships and Similar Entities Subtopic, the Company is not required to consolidate MVC GP II’s general partnership interest in the PE Fund. As a result, MVC GP II’s general partnership interest in the PE Fund is shown as an investment on the Company’s books.

3. Investment Classification

As required by the Investment Company Act of 1940, as amended (the “1940 Act”), 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 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.

 

12


4. Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. Cash and cash equivalents are carried at cost which approximates fair value.

Restricted Cash and Cash Equivalents

Cash and cash equivalent accounts that are not available to the Company for day to day use are classified as restricted cash. Restricted cash and cash equivalents are carried at cost which approximates fair value.

5. Investment Valuation Policy

Our investments are carried at fair value in accordance with the 1940 Act and Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures. In accordance with the 1940 Act, unrestricted minority-owned publicly traded securities for which market quotations are readily available are valued at the closing market quote on the valuation date and majority-owned publicly traded securities and other privately held securities are valued as determined in good faith by the Valuation Committee of our Board of Directors. For legally or contractually restricted securities of companies that are publicly traded, the value is based on the closing market quote on the valuation date minus a discount for the restriction. At January 31, 2012, we did not hold restricted or unrestricted securities of publicly traded companies for which we have a majority-owned interest.

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

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. In determining the principal market for an asset or liability under ASC 820, it is assumed that the reporting entity has access to the market 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.

On May 12, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 amends ASC 820, which will require entities to change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. 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. All the amendments to ASC 820 made by ASU 2011-04 are effective for interim and annual periods beginning after December 15, 2011. Management is evaluating the new requirement and the potential impact, if any, to the Company upon implementation thereof.

Valuation Methodology

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

 

13


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 currently 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). Any changes in valuation are recorded in the consolidated statements of operations as “Net change in unrealized appreciation (depreciation) on investments.” The Company’s Board of Directors determined that after January 31, 2012, the Company’s NAV per share will be 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 determined as of quarter end reflect exchange rates, as applicable, in effect on the last business day of the quarter. Exchange rates fluctuate on a daily basis, sometimes significantly. Exchange rate fluctuations following the most recent quarter end are not reflected in the valuations reported in this Quarterly Report. See Item 3 Risk Factor, “Investments in foreign debt or equity may involve significant risks in addition to the risks inherent in U.S. investments.”

At January 31, 2012, approximately 92.96% of our total assets represented portfolio investments and escrow receivables recorded at fair value.

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

There is no one methodology to determine fair value and, in fact, for any portfolio security, fair value may be expressed as a range of values, from which the Company derives a single estimate of fair value. To determine the fair value of a portfolio security, the Valuation Committee analyzes the portfolio company’s financial results and projections, publicly traded comparable companies when available, comparable private transactions when available, precedent transactions in the market when available, performs a 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.

 

14


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.

For equity securities of portfolio companies, the Valuation Committee estimates the fair value based on market and/or income approach with value then attributed to equity or equity like securities using the enterprise value waterfall (“Enterprise Value Waterfall”) valuation methodology. Under the Enterprise Value Waterfall valuation methodology, the Valuation Committee estimates the enterprise fair value of the portfolio company and then waterfalls the enterprise value over the portfolio company’s securities in order of their preference relative to one another. To assess the enterprise value of the portfolio company, the Valuation Committee weighs some or all of the traditional market valuation methods and factors based on the individual 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. For non-performing assets, the Valuation Committee may estimate the liquidation or collateral value of the portfolio company’s assets. The Valuation Committee also takes into account historical and anticipated financial results.

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.

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 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.

 

15


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 Company’s or its subsidiary’s investment in the PE Fund, for which an indirect wholly-owned subsidiary of the Company serves as the general partner (“GP”), the Valuation Committee will rely on the GP’s determination of the Fair Value of the PE Fund, which will be made: (i) no less frequently than quarterly as of the Company’s fiscal quarter end and (ii) based on methodologies consistent with those set forth in the Company’s Valuation Procedures. Additionally, when both the Company and the PE Fund hold investments in the same portfolio company, the GP’s Fair Value determination shall be based on the Valuation Committee’s determination of the Fair Value of the Company’s portfolio security in that portfolio company.

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

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

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 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 prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as income. Prepayment premiums are recorded on loans when received.

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.

 

16


Escrows from the sale of a portfolio company are generally valued at an amount which may be expected to be received from the buyer under the escrow’s various conditions discounted for both risk and time.

6. Concentration of Market 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 92.96% of the Company’s total assets at January 31, 2012. As discussed in Note 7, these investments consist of securities in companies with no readily determinable market values and as such are valued in accordance with the Company’s fair value policies and procedures. The Company’s investment strategy represents a high degree of business and financial risk due to the fact that the Company’s portfolio investments (other than cash equivalents) are generally illiquid, in small and middle market companies, and include 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. At this time, the Company’s investments in short-term securities are in 90-day Treasury Bills, which are federally guaranteed securities, or other high quality, 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 Company’s cash balances, if not large enough to be invested in 90-day Treasury Bills or other high quality, highly liquid investments, are swept into designated money market accounts or other interest bearing accounts.

7. 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 investment’s 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 did not value any of our investments using Level 1 inputs as of January 31, 2012.

 

17


   

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 Company’s interests in Investment Vehicles that can be withdrawn by the Company at the net asst 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 one of our investments using Level 2 inputs as of January 31, 2012.

 

   

Level 3: Level 3 inputs are unobservable and cannot be corroborated by observable market data. Additionally, included in Level 3 are the Company’s 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 5 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 January 31, 2012 and October 31, 2011 (in thousands):

 

     January 31, 2012  
     Level 1      Level 2      Level 3      Total  

Senior/Subordinated Loans and credit facilities

   $ —         $ —         $ 86,613       $ 86,613   

Common Stock

     —           —           93,214         93,214   

Preferred Stock

     —           —           145,623         145,623   

Warrants

     —           —           34         34   

Other Equity Investments

     —           2,889         120,854         123,743   

Escrow receivables

     —           —           705         705   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments, net

   $ —         $ 2,889       $ 447,043       $ 449,932   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     October 31, 2011  
     Level 1      Level 2      Level 3      Total  

Senior/Subordinated Loans and credit facilities

   $ —         $ —         $ 85,587       $ 85,587   

Common Stock

     —           —           94,001         94,001   

Preferred Stock

     —           —           146,382         146,382   

Other Equity Investments

     —           2,804         123,441         126,245   

Escrow receivables

     —           —           1,147         1,147   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments, net

   $ —         $ 2,804       $ 450,558       $ 453,362   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the quarter ended January 31, 2012 and the year ended October 31, 2011, 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 quarters ended January 31, 2012 and January 31, 2011 (in thousands):

 

18


 

$85,587 $85,587 $85,587 $85,587 $85,587 $85,587 $85,587 $85,587
     Balances,
November 1,
2011
     Realized Gains
(Losses) (1)
     Reversal of Prior
Period
(Appreciation)
Depreciation on
Realization (2)
     Unrealized
Appreciation
(Depreciation)
(3)
    Purchases (4)      Sales (5)     Transfers In &
Out of Level 3
     Balances,
January 31,
2012
 

Senior/Subordinated Loans and
credit facilities

   $ 85,587       $ 6       $ —         $ (151   $ 1,734       $ (563   $ —         $ 86,613   

Common Stock

     94,001         —           —           (787     —           —          —           93,214   

Preferred Stock

     146,382         —           —           (820     61         —          —           145,623   

Warrants

     —           —           —           —          34         —          —           34   

Other Equity Investments

     123,441         —           —           (8,790     6,203         —          —           120,854   

Escrow receivables

     1,147         143         —           —          —           (585     —           705   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 450,558       $ 149       $ —         $ (10,548   $ 8,032       $ (1,148   $ —         $ 447,043   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Balances,
November 1,
2010
     Realized Gains
(Losses) (1)
    Reversal of
Prior Period
Appreciation
(Depreciation)
on Realization
(2)
     Unrealized
Appreciation
(Depreciation)
(3)
    Purchases (4)      Sales (5)     Transfers In &
Out of Level 3
     Balances,
January 31,
2011
 

Senior/Subordinated Loans and
credit facilities

   $ 111,244       $ (14,189   $ 14,215       $ (6,000   $ 5,904       $ (5,746   $ —         $ 105,428   

Common Stock

     78,865         (433     433         4,775        6,400         (450     —           89,590   

Preferred Stock

     148,995         —          —           (3,844     57         —          —           145,208   

Warrants

     —           —          —           —          —           —          —           —     

Other Equity Investments

     94,798         —          —           (3,100     3,529         —          —           95,227   

Escrow receivables

     2,063         —          —           —          —           (956     —           1,107   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 435,965       $ (14,622   $ 14,648       $ (8,169   $ 15,890       $ (7,152   $ —         $ 436,560   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(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 three months ended January 31, 2012 and January 31, 2011, respectively.
(3) Included in net unrealized appreciation (depreciation) of investments in the Consolidated Statement of Operations related to securities held at January 31, 2012 and January 31, 2011, respectively.
(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.

For the Quarter Ended January 31, 2012

During the quarter ended January 31, 2012, the Company made one new investment, a $1.0 million loan to Freshii USA, Inc. (“Freshii”).

During the quarter ended January 31, 2012, the Company made four follow-on investments in two existing portfolio companies totaling approximately $6.3 million. The Company through MVC Partners, LLC (“MVC Partners”) Limited Partnership interest and MVCFS’ General Partnership interest contributed approximately $6.3 million of its $20.1 million capital commitment to the private equity fund (“PE Fund”), which as of January 31, 2012, has invested in Plymouth Rock Energy, LLC and Gibdock Limited.

On November 30, 2011, as part of the Ohio Medical Corporation (“Ohio Medical”) debt refinancing, the Company agreed to guarantee a series B preferred stock tranche of equity. As of January 31, 2012, the amount guaranteed was $19.4 million and the guarantee obligation was fair valued at $700,000 by the Valuation Committee.

On December 28, 2011, the Company received its third scheduled disbursement from the Vitality Foodservice, Inc. (“Vitality”) escrow of approximately $585,000. The escrow was fair valued at approximately $472,000 as of January 31, 2012.

On December 31, 2011, Marine Exhibition Corporation (“Marine”) made a principal payment of $150,000 on its senior subordinated loan. The balance of the loan as of January 31, 2012 was approximately $11.9 million.

During the quarter ended January 31, 2012, Pre-Paid Legal Services, Inc. (“Pre-Paid Legal”) made principal payments on its tranche A term loan totaling approximately $407,000.

 

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During the quarter ended January 31, 2012, the Valuation Committee increased the fair value of the Company’s investments in Octagon High Income Cayman Fund Ltd. (“Octagon Fund”) by approximately $84,000, SGDA Europe B.V. (“SGDA Europe”) equity interest by $265,000, Turf Products, LLC (“Turf”) equity interest by $500,000 and Security Holdings B.V. (“Security Holdings”) equity interest by $205,000. The Valuation Committee also increased the fair values of the Company’s escrow receivables related to Vitality by $130,000 and Vendio Services, Inc. (“Vendio”) by approximately $13,000. In addition, increases in the cost basis and fair value of the loans to Custom Alloy Corporation (“Custom Alloy”), Marine, Summit Research Labs, Inc. (“Summit”) and U.S. Gas & Electric, Inc. (“U.S. Gas”) and the Marine preferred stock were due to the capitalization of payment in kind (“PIK”) interest/dividends totaling $759,466. The Valuation Committee also decreased the fair value of the Company’s investments in BP Clothing, LLC (“BP”) term loan A by $100,000, Harmony Health & Beauty, Inc. (“HH&B”) common stock by $500,000, MVC Automotive Group B.V. (“MVC Automotive”) equity interest by approximately $7.5 million, MVC Partners equity interest by approximately $326,000, MVCFS’ General Partnership interest in the PE Fund by approximately $8,000, NPWT Corporation (“NPWT”) common and preferred stock by approximately $6,000 and $120,000, respectively, SIA Tekers Invest (“Tekers”) common stock by $280,000, Velocitius B.V. (“Velocitius”) equity interest by approximately $1.9 million. The Valuation Committee also determined to value the liability associated with the Ohio Medical guarantee at $700,000. Also, during the quarter ended January 31, 2012, the undistributed allocation of flow through losses from the Company’s equity investment in Octagon Credit Investors, LLC (“Octagon”) decreased the cost basis and fair value of this investment by approximately $112,000.

At January 31, 2012, the fair value of all portfolio investments, exclusive of short-term investments, was $449.2 million with a cost basis of $365.7 million. At January 31, 2012, the fair value and cost basis of portfolio investments of the Legacy Investments was $10.8 million and $32.3 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $438.4 million and $333.4 million, respectively. At October 31, 2011, the fair value of all portfolio investments, exclusive of short-term securities, was $452.2 million, with a cost basis of $358.2 million. At October 31, 2011, the fair value and cost basis of portfolio investments of the Legacy Investments was $10.8 million and $32.3 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $441.4 million and $325.9 million, respectively.

For the Fiscal Year Ended October 31, 2011

During the fiscal year ended October 31, 2011, the Company made six new investments, committing capital totaling approximately $26.1 million. The investments were made in Octagon Fund ($3.0 million), JSC Tekers Holdings “JSC Tekers”) ($4.0 million), Teleguam Holdings, LLC (“Teleguam”) ($7.0 million), Pre-Paid Legal ($8.0 million), RuMe Inc. (“RuMe”) ($1.2 million) and Centile Holding B.V. (“Centile”) ($3.0 million).

During the fiscal year ended October 31, 2011, the Company made seven follow-on investments in four existing portfolio companies totaling approximately $17.1 million. On January 27, 2011, the Company invested $3.3 million in Security Holdings in the form of an additional equity interest. On January 28, 2011, the Company loaned an additional $5.0 million to Security Holdings in the form of a bridge loan with an annual interest rate of 3%. This bridge loan allowed Security Holdings to secure project guarantees. On May 4, 2011, the Company invested $500,000 in NPWT to acquire 5,000 shares of convertible preferred stock. On May 26, 2011 and September 14, 2011, the Company invested an additional $150,000 on each date into HH&B to acquire an additional 47,612 shares of common stock. On September 6, 2011, the Company invested $7.0 million in Security Holdings in the form of an additional equity interest. On October 17, 2011, the Company invested $1.0 million in SGDA Europe in the form of additional equity interest. In addition, during the fiscal year ended October 31, 2011, the Company invested approximately $10.0 million in the SPDR Barclays Capital High Yield Bond Fund and approximately $10.0 million in the iShares S&P U.S. Preferred Stock Index Fund. These investments were sold during the fiscal year ended October 31, 2011, resulting in a realized gain of approximately $106,000. The investments in these exchange traded funds were intended to provide the

 

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Company with higher yielding investments than cash and cash equivalents while awaiting deployment into portfolio companies pursuant to the Company’s principal investment strategy. TTG Advisers had voluntarily agreed that any assets of the Company that are invested in exchange-traded funds would not be subject to the base management fee due to TTG Advisers under the Advisory Agreement.

Effective November 4, 2010, the interest rate on the Turf senior subordinated loan was reduced from 15% to 13% and the maturity date on the senior subordinated loan and junior revolving note was extended to January 31, 2014.

On November 30, 2010, the Company loaned an additional $700,000 to Harmony Pharmacy & Health Center, Inc. (“Harmony Pharmacy”), which was the remaining portion of the $1.3 million demand note committed on September 23, 2010.

On November 30, 2010, a public Uniform Commercial Code (“UCC”) sale of Harmony Pharmacy’s assets took place. Prior to this sale, the Company formed a new entity, HH&B. The Company assigned its secured debt interest in Harmony Pharmacy of approximately $6.4 million to HH&B in exchange for a majority of the economic ownership. At the UCC sale, HH&B submitted a successful credit bid of approximately $5.9 million for all of the assets of Harmony Pharmacy. On December 21, 2010, Harmony Pharmacy filed for dissolution in the states of California, New Jersey and New York. As a result, the Company realized an $8.4 million loss on its investment in Harmony Pharmacy.

On December 1, 2010, Amersham Corporation (“Amersham”) filed for dissolution in the State of California as all operating divisions were sold in 2010. As a result, the Company realized a $6.5 million loss on its investment in Amersham. The Company may be eligible to receive proceeds from an earnout related to the sale of an operating division once the senior lender is repaid in full. At this time, it is not likely that any proceeds will be received by the Company.

On January 11, 2011, SHL Group Limited, which provides workplace talent assessment solutions, including ability and personality tests, and psychometric assessments, acquired the Company’s portfolio company PreVisor. The Company received 1,518,762 common shares of SHL Group Limited for its investment in PreVisor. The cost basis and market value of the Company’s investment remained unchanged at the time as a result of the transaction.

On January 25, 2011, the Company sold its common stock in LHD Europe Holding Inc. (“LHD Europe”) and received approximately $542,000 in proceeds, which resulted in a realized gain of approximately $317,000.

On March 1, 2011, SP Industries, Inc. (“SP”) repaid its first lien and second lien loans in full including all accrued interest. The Company received a $500,000 termination fee associated with the repayment of the loans.

On April 29, 2011, assets from a division of Ohio Medical were distributed to Ohio Medical shareholders on a pro-rata basis. The Company received 281 shares of common stock in NPWT as a result of this transaction.

On May 26, 2011, Security Holdings repaid its bridge loan in full, including all accrued interest.

On August 1, 2011, as part of a restructuring of the Company’s investment in HuaMei Capital Company, Inc. (“HuaMei”), the Company sold its shares to HuaMei, resulting in a realized loss of $2.0 million.

On August 31, 2011, Sonexis, Inc. (“Sonexis”), a Legacy Investment, completed the dissolution of its operations and the sale of its assets. The Company realized a loss of $10.0 million as a result of this dissolution.

On October 3, 2011, Storage Canada, LLC (“Storage Canada”) repaid its term loan in full including all accrued interest.

 

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On October 17, 2011, the Company converted SGDA Europe’s $1.5 million senior secured loan and all accrued interest to additional common equity interest.

On October 28, 2011, Total Safety U.S., Inc. (“Total Safety”) repaid its first and second lien loans in full including all accrued interest.

On October 31, 2011, the Company received a distribution from NPWT of $500,000, which was treated as a return of capital and returned all cash invested into NPWT to the Company.

During the fiscal year ended October 31, 2011, Marine made principal payments totaling $450,000 on its senior subordinated loan. The balance of the loan as of October 31, 2011 was approximately $12.0 million.

During the fiscal year ended October 31, 2011, Octagon borrowed and repaid $1.5 million on its revolving line of credit. Octagon cancelled the revolving line of credit effective June 30, 2011. As of October 31, 2011, the revolving credit facility was no longer a commitment of the Company.

During the quarter ended January 31, 2011, the Valuation Committee increased the fair value of the Company’s investments in Summit common stock by $7.5 million and U.S. Gas preferred stock by $2.5 million. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, SP, Marine, Summit and U.S. Gas and the Marine preferred stock were due to the capitalization of payment in kind (“PIK”) interest/dividends totaling $980,119. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $1.9 million due to PIK distributions, which were treated as a return of capital. Also, during the quarter ended January 31, 2011, the undistributed allocation of flow through income from the Company’s equity investment in Octagon increased the cost basis and fair value of this investment by approximately $229,000. The Valuation Committee also decreased the fair value of the Company’s investments in BP second lien loan by $3.9 million and term loan A and B by a combined $2.0 million, Ohio Medical common stock by $500,000 and preferred stock by $8.2 million, MVC Automotive equity interest by $3.1 million, HuaMei stock by $325,000 and HH&B by $1.9 million during the quarter ended January 31, 2011.

During the quarter ended April 30, 2011, the Valuation Committee increased the fair value of the Company’s investments in Summit common stock by $2.0 million, MVC Automotive equity interest by $3.0 million, SHL Group Limited common stock by $2.5 million, Security Holdings equity interest by approximately $2.0 million, Tekers common stock by $590,000, Total Safety first lien loan by approximately $74,000 and Velocitius equity interest by $2.6 million. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, SP, Marine, Summit and U.S. Gas and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $714,247. In addition, during the quarter ended April 30, 2011, the undistributed allocation of flow through income from the Company’s equity investment in Octagon increased the cost basis and fair value of this investment by approximately $28,000. The Valuation Committee also decreased the fair value of the Company’s investments in BP term loan A by approximately $1.2 million, Ohio Medical preferred stock by approximately $164,000, HuaMei common stock by approximately $1.0 million, SGDA Europe equity interest by $3.9 million and HH&B by $3.8 million during the quarter ended April 30, 2011.

During the quarter ended July 31, 2011, the Valuation Committee increased the fair value of the Company’s investments in SHL Group Limited common stock by $1.0 million, Octagon Fund by approximately $25,000 and Security Holdings equity interest by approximately $2.5 million. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, Marine, Summit and U.S. Gas and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $731,374. In addition, during the quarter ended July 31, 2011, the undistributed allocation of flow through income from the Company’s equity investment in Octagon increased the cost basis and fair value of this investment by approximately $139,000. The Valuation Committee also decreased the fair value of the Company’s investments in HuaMei common stock by $250,000, SGDA Europe equity interest by $400,000, MVC Automotive by $2.3 million, Tekers common stock by $180,000, Velocitius equity interest by $2.3 million and Vestal Manufacturing Enterprises, Inc. (“Vestal”) common stock by $670,000 during the quarter ended July 31, 2011.

 

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During the quarter ended October 31, 2011, the Valuation Committee increased the fair value of the Company’s investments in SHL Group Limited common stock by $1.4 million, Security Holdings equity interest by approximately $13.1 million, Summit common stock by $5.0 million, Ohio Medical preferred stock by $400,000 and MVC Automotive equity interest by $750,000. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, Marine, Summit and U.S. Gas and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $748,981. In addition, during the quarter ended October 31, 2011, the undistributed allocation of flow through income from the Company’s equity investment in Octagon increased the cost basis and fair value of this investment by approximately $193,000. The Valuation Committee also decreased the fair value of the Company’s investments in Octagon Fund by approximately $234,000, Tekers common stock by $2.7 million, NPWT common and preferred stock by a net amount of approximately $200,000, Velocitius equity interest by $100,000 and Vestal common stock by $75,000 during the quarter ended October 31, 2011.

During the fiscal year ended October 31, 2011, the Valuation Committee increased the fair value of the Company’s investments in Summit common stock by $14.5 million, SHL Group Limited common stock by $4.9 million, Security Holdings equity interest by approximately $17.6 million, Total Safety first lien loan by approximately $74,000, U.S. Gas preferred stock by $2.5 million and Velocitius equity interest by $200,000. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, SP, Marine, Summit and U.S. Gas and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $3,174,721. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $1.9 million due to PIK distributions, which were treated as a return of capital. Also, during the fiscal year ended October 31, 2011, the undistributed allocation of flow through income from the Company’s equity investment in Octagon increased the cost basis and fair value of this investment by approximately $589,000. The Valuation Committee also decreased the fair value of the Company’s investments in MVC Automotive equity interest by approximately $1.7 million, Tekers common stock by approximately $2.3 million, Octagon Fund by $209,000, BP second lien loan by $3.9 million and term loan A and B by a combined $3.2 million, Ohio Medical common stock by $500,000 and preferred stock by approximately $8.0 million, NPWT common and preferred stock by a net amount of approximately of $200,000, HuaMei common stock by approximately $1.5 million, SGDA Europe equity interest by approximately $4.3 million, Vestal common stock by $745,000 and HH&B by $5.7 million during the fiscal year ended October 31, 2011.

At October 31, 2011, the fair value of all portfolio investments, exclusive of short-term investments, was $452.2 million with a cost basis of $358.2 million. At October 31, 2011, the fair value and cost basis of portfolio investments of the Legacy Investments was $10.8 million and $32.3 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $441.4 million and $325.9 million, respectively. At October 31, 2010, the fair value of all portfolio investments, exclusive of short-term securities, was $433.9 million, with a cost basis of $375.6 million. At October 31, 2010, the fair value and cost basis of portfolio investments of the Legacy Investments was $10.8 million and $42.3 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $423.1 million and $333.3 million, respectively.

8. Commitments and Contingencies

Commitments of the Company:

At January 31, 2012, the Company’s existing commitments to portfolio companies consisted of the following:

 

Portfolio Company

   Amount Committed      Amount Funded at January 31, 2012

Turf

   $ 1.0 million       $1.0 million

MVC Partners/MVCFS

   $ 20.1 million       $6.3 million
  

 

 

    

 

Total

   $ 21.1million       $7.3 million

 

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Guarantees:

As of January 31, 2012, the Company had the following commitments to guarantee various loans and mortgages:

 

Guarantee

   Amount Committed      Amount Funded at January 31, 2012  

MVC Automotive

   $ 5.2 million         —     

Tekers

   $ 294,000         —     

Ohio Medical

   $ 19.4 million         —     
  

 

 

    

 

 

 

Total

   $ 24.9 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 January 31, 2012, the Valuation Committee estimated the fair values of the guarantee obligations noted above to be $700,000.

These guarantees are further described below, together with the Company’s other commitments.

On June 30, 2005, the Company pledged its common stock of Ohio Medical to Guggenheim to collateralize a loan made by Guggenheim to Ohio Medical.

On July 19, 2007, the Company agreed to guarantee a 1.4 million Euro mortgage for Tekers. The guarantee had a commitment of approximately 225,000 euros at January 31, 2012, equivalent to approximately $294,000.

On January 15, 2008, the Company agreed to guarantee a 6.5 million Euro mortgage for MVC Automotive. The guarantee had a commitment of approximately 5.9 million euros at October 31, 2011, equivalent to approximately $8.2 million. On January 31, 2012, the mortgage that was guaranteed was repaid by MVC Automotive, resulting in the release of the guarantee. As of January 31, 2012, the guarantee was no longer a commitment of the Company.

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 (equivalent to approximately $5.2 million at January 31, 2012) through making financing available to the dealership and agreeing under certain circumstances not to reduce its equity stake in MVC Automotive. The Company has consistently reported the amount of the guarantee as 4.0 million Euro. The Company and MVC Automotive continues to view this amount as the full amount of our commitment. The Company learned that Erste Bank, the bank extending the mortgage to MVC Automotive, believes, based on a different methodology, that the balance of the guarantee as of January 31, 2012 is approximately 5.4 million Euro (equivalent to approximately $7.1 million). The Company and MVC Automotive are working to resolve the discrepancy.

On July 31, 2008, the Company extended a $1.0 million loan to Turf in the form of a secured junior revolving note. The note bears annual interest at 6.0% and expires on January 31, 2014. On July 31, 2008, Turf borrowed $1.0 million from the secured junior revolving note. At October 31, 2011 and January 31, 2012, the outstanding balance of the secured junior revolving note was $1.0 million.

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 Energy’s 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. As of January 31, 2012, $6.3 million of the Company’s commitment was contributed.

 

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

On November 30, 2011, as part of Ohio Medical’s refinancing of their debt, the Company agreed to guarantee a series B preferred stock tranche of equity, with a 12% coupon for the first 18 months it is outstanding. After that initial period, the rate increases by 400bps to 16% for the next 6 months and increases by 50 bps (.5%) each 6 month period thereafter. As of January 31, 2012, the amount guaranteed was $19.4 million and the guarantee obligation was fair valued at $700,000 by the Valuation Committee.

Commitments of the Company

Effective November 1, 2006, under the terms of the Investment Advisory and Management Agreement with TTG Advisers, which has since been amended and restated (the “Advisory Agreement”) and described in Note 4 of the consolidated financial statements, “Management”, TTG Advisers is responsible for providing office space to the Company and for the costs associated with providing such office space. The Company’s offices continue to be located on the second floor of 287 Bowman Avenue, Purchase, New York 10577.

On April 27, 2006, the Company and MVCFS, as co-borrowers, entered into a four-year, $100 million credit facility (the “Credit Facility”), consisting of $50.0 million in term debt and $50.0 million in revolving credit, with Guggenheim as administrative agent for the lenders. On April 13, 2010, the Company renewed the Credit Facility for three years. The Credit Facility now only consists of a $50.0 million term loan, which will expire on April 27, 2013, at which time the outstanding amount under the Credit Facility will be due and payable. As of January 31, 2012, there was $50.0 million outstanding on the Credit Facility. The proceeds from borrowings made under the Credit Facility are used to fund new and existing portfolio investments and for general corporate purposes. Borrowings under the Credit Facility will bear interest, at the Company’s option, at a floating rate equal to either (i) the LIBOR rate with a 1.25% LIBOR floor (for one, two, three or six months), plus a spread of 4.5% per annum, or (ii) the Prime rate in effect from time to time, plus a spread of 3.50% per annum. The Company paid a closing fee, legal and other costs associated with obtaining and renewing the Credit Facility. These costs will be amortized evenly over the life of the facility. The prepaid expenses on the consolidated balance sheet include the unamortized portion of these costs. Borrowings under the Credit Facility will be secured, by among other things, cash, cash equivalents, debt investments, accounts receivable, equipment, instruments, general intangibles, the capital stock of MVCFS, and any proceeds from all the aforementioned items, as well as all other property except for equity investments made by the Company. The Credit Facility includes standard financial covenants including limitations on total assets to debt, debt to equity, interest coverage and eligible debt ratios.

The Company enters into contracts with portfolio companies and other parties that contain a variety of indemnifications. The Company’s 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.

9. 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. Tokarz’s employment agreement with the Company terminated and the obligations under Mr. Tokarz’s 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.

 

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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 a renewal of the Advisory Agreement at their in-person meeting held on October 25, 2011.

Under the terms of the Advisory Agreement, TTG Advisers determines, consistent with the Company’s investment strategy, the composition of the Company’s portfolio, the nature and timing of the changes to the Company’s portfolio and the manner of implementing such changes. TTG Advisers also identifies and negotiates the structure of the Company’s investments (including performing due diligence on prospective portfolio companies), closes and monitors the Company’s 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 components—a base management fee and an incentive fee. The base management fee is calculated at 2.0% per annum of the Company’s 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 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 3.5% in each of the 2009 and 2010 fiscal years. For more information, please see Note 10.

On October 26, 2010 and October 25, 2011, TTG Advisers and the Company entered into an agreement to extend the expense cap of 3.5% to the 2011 and 2012 fiscal years, respectively. In addition, for fiscal years 2010, 2011 and 2012, TTG Advisers has voluntarily agreed to waive $150,000 of expenses that the Company is obligated to reimburse to TTGA Advisers under the Advisory Agreement (the “Voluntary Waiver”). TTG Advisers has also voluntarily agreed that any assets of the Company that are invested in exchange-traded funds or the Octagon Fund would not be taken into account in the calculation of the base management fee due to TTG Advisers under the Advisory Agreement.

10. Incentive Compensation

At October 31, 2011, the provision for estimated incentive compensation was approximately $23.9 million. During the quarter ended January 31, 2012, this provision for incentive compensation was decreased by a net amount of approximately $1.9 million to approximately $22.0 million. The net decrease in the provision for incentive compensation during the quarter ended January 31, 2012 reflects the Valuation Committee’s determination to decrease the fair values of seven of the Company’s portfolio investments (BP, HH&B, MVC Automotive, NPWT, Tekers, Velocitius and Ohio Medical) by a total of $11.4 million. The net decrease in the provision also reflects the Valuation Committee’s determination to increase the fair values of four of the Company’s portfolio investments (Octagon Fund, SGDA Europe, Security Holdings, and Turf) by a total of approximately $1.1 million and the escrow receivable related to Vitality by $130,000. During the quarter ended January 31, 2012, 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, 2010, the provision for estimated incentive compensation was approximately $22.0 million. During the fiscal year ended October 31, 2011, this provision for incentive compensation was increased by a net amount of approximately $1.9 million to approximately $23.9 million. The increase in the provision for

 

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incentive compensation during the fiscal year ended October 31, 2011 reflects both increases and decreases by the Valuation Committee in the fair values of certain portfolio companies. The provision also reflects the sale of the SPDR Barclays Capital High Yield Bond Fund and the iShares S&P U.S. Preferred Stock Index Fund for a realized gain of approximately $106,000, a realized gain of approximately $55,000 from the Octagon Fund, a realized gain of approximately 317,000 from LHD Europe and a realized loss from the sale of HuaMei of $2.0 million. Specifically, it reflects the Valuation Committee’s determination to increase the fair values of six of the Company’s portfolio investments (Summit, SHL Group Limited, Security Holdings, Total Safety, U.S. Gas, and Velocitius) by a total of approximately $39.7 million. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $1.9 million due to PIK distributions, which were treated as a return of capital. The net increase in the provision also reflects the Valuation Committee’s determination to decrease the fair values of eleven of the Company’s portfolio investments (BP, Ohio Medical common and preferred stock, MVC Automotive, HuaMei, Tekers, Octagon Fund, NPWT, SGDA Europe, Vestal and HH&B) by a total of $32.1 million. During the fiscal year ended October 31, 2011, 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.

11. Tax Matters

On October 31, 2011 and January 31, 2012, the Company had a net capital loss carryforward of $26,263,731, all of which will expire in the year 2019. To the extent future capital gains are offset by capital loss carryforwards, such gains need not be distributed. The Company had approximately $21.5 million in unrealized losses associated with Legacy Investments as of. January 31, 2012.

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 Company’s 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 quarter ended January 31, 2012, 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 2007, 2008, 2009, 2010 and 2011 federal tax years for the Company and for MVCFS remain subject to examination by the IRS.

On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the “Act”) was enacted, which changed various technical rules governing the tax treatment of regulated investment companies. The changes are generally effective for taxable years beginning after the date of enactment. One of the more prominent changes addresses capital loss carryforwards. Under the Act, each fund will be permitted to carry forward capital losses incurred in taxable years beginning after the date of enactment for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered all short-term as permitted under previous regulation.

12. Dividends and Distributions to Shareholders and Share Repurchase Program

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 98% of its ordinary income for such calendar year and 98.2% of its capital gain net income for the 12-month period ending on October 31 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.

 

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Dividends and capital gain distributions, if any, are recorded on the ex-dividend date. Dividends and capital gain distributions are generally declared and paid quarterly according to the Company’s policy established on July 11, 2005. An additional distribution may be paid by the Company to avoid imposition of federal income tax on any remaining undistributed net investment income and capital gains. Distributions can be made payable by the Company either in the form of a cash distribution or a stock dividend. The amount and character of income and capital gain 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 Computershare Ltd. (“the Plan Agent”) in 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.

For the Quarter Ended January 31, 2012

On December 16, 2011, the Company’s Board of Directors declared a dividend of $0.12 per share. The dividend was payable on January 6, 2012 to shareholders of record on December 30, 2011. The total distribution amounted to $2,870,038.

During the quarter ended January 31, 2012, as part of the Company’s dividend reinvestment plan for our common stockholders, the Plan Agent purchased 1,108 shares of our common stock at an average price of $11.98, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.

Share Repurchase Program

On April 23, 2010, the Company’s Board of Directors approved a share repurchase program authorizing up to $5.0 million for share repurchases. The share repurchase program was substantially completed during the quarter ended April 30, 2011. Under the program, 380,105 shares were repurchased at an average price of $13.06, including commission, with a total cost of approximately $5.0 million. The Company’s net asset value per share was increased by approximately $0.07 as a result of the share repurchases.

On July 19, 2011, the Company’s Board of Directors approved another share repurchase program authorizing up to $5.0 million for additional share repurchases. No shares were repurchased under this new repurchase program as of January 31, 2012. Implementation of the program as well as the timing thereof depends on a variety of factors, including, among others, the availability of capital, the Company’s current share price and the ability to conduct the offer under the Credit Facility.

 

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13. Segment Data

The Company’s reportable segments are its investing operations as a business development company, MVC Capital, Inc. and the wholly-owned subsidiaries MVC Financial Services, Inc and MVC Cayman.

The following table presents book basis segment data for the quarter ended January 31, 2012:

 

     MVC     MVCFS     Consolidated  

Interest and dividend income

   $ 2,667,782      $ 19      $ 2,667,801   

Fee income

     —          1,087,992        1,087,992   

Other losses

     (111,652     —          (111,652

Total operating income

     2,556,130        1,088,011        3,644,141   

Total operating expenses

     200,169        2,288,297        2,488,466   

Less: Waivers by Adviser

     (55,529     (40,699     (96,228

Total net operating expenses

     144,640        2,247,598        2,392,238   

Net operating income (loss) before taxes

     2,411,490        (1,159,587     1,251,903   

Tax expense

     —          549        549   

Net operating income (loss)

     2,411,490        (1,160,136     1,251,354   

Net realized loss on investments

     193,793        —          193,793   

Net change in unrealized appreciation on investments

     (10,454,654     (8,320     (10,462,974

Net increase (decrease) in net assets resulting from operations

     (7,849,371     (1,168,456     (9,017,827

14. Subsequent Events

On March 7, 2012, the Board of Directors of Summit approved a recapitalization as well as declared a $12.0 million dividend which was paid to the Company.

ITEM 2. 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

 

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rates and/or availability of financing, the results of financing and investing efforts, the ability to complete transactions, the inability to implement our business strategies and other risks identified below or in the Company’s filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements, the Notes thereto and the other financial information included elsewhere in this report and the Company’s annual report on Form 10-K for the year ended October 31, 2011.

SELECTED CONSOLIDATED FINANCIAL DATA:

Financial information for the fiscal year ended October 31, 2011 is derived from the consolidated financial statements included in the Company’s annual report on Form 10-K, which have been audited by Ernst & Young LLP, the Company’s 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.

 

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Selected Consolidated Financial Data

 

     Quarter Ended
January 31,
    Quarter Ended
January 31,
    Year Ended
October 31,
 
     2012     2011     2011  
     (Unaudited)     (Unaudited)        
     (In thousands, except per share data)  

Operating Data:

      

Interest and related portfolio income:

      

Interest and dividend income

   $ 2,668      $ 3,375      $ 11,450   

Fee income

     1,088        788        3,180   

Other (loss) income

     (112     361        1,341   
  

 

 

   

 

 

   

 

 

 

Total operating income

     3,644        4,524        15,971   

Expenses:

      

Management fee

     2,707        2,555        9,142   

Administrative

     923        1,176        4,320   

Interest and other borrowing costs

     795        770        3,082   

Incentive compensation (Note 10)

     (1,937     (1,603     1,948   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     2,488        2,898        18,492   
  

 

 

   

 

 

   

 

 

 

Total waiver by adviser

     (96     (138     (251
  

 

 

   

 

 

   

 

 

 

Total net operating expenses

     2,392        2,760        18,241   
  

 

 

   

 

 

   

 

 

 

Net operating income (loss) before taxes

     1,252        1,764        (2,270

Tax expense, net

     1        10        14   
  

 

 

   

 

 

   

 

 

 

Net operating income (loss)

     1,251        1,754        (2,284

Net realized and unrealized (loss) gain:

      

Net realized gain (loss) on investments

     194        (14,622     (26,422

Net change in unrealized (depreciation) appreciation on investments

     (10,463     6,624        35,677   
  

 

 

   

 

 

   

 

 

 

Net realized and unrealized (loss) gain on investments

     (10,269     (7,998     9,255   
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in net assets resulting from operations

   $ (9,018   $ (6,244   $ 6,971   
  

 

 

   

 

 

   

 

 

 

Per Share:

      

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

   $ (0.38   $ (0.26   $ 0.30   

Dividends per share

   $ 0.12      $ 0.12      $ 0.48   

Balance Sheet Data:

      

Portfolio at value

   $ 449,227      $ 455,580      $ 452,215   

Portfolio at cost

     365,694        390,637        358,219   

Total assets

     484,014        489,266        497,107   

Shareholders’ equity

     407,622        415,872        419,510   

Shareholders’ equity per share (net asset value)

   $ 17.04      $ 17.33      $ 17.54   

Common shares outstanding at period end

     23,917        23,991        23,917   

Other Data:

      

Number of Investments funded in period

     5        4        13   

Investments funded ($) in period

   $ 7,315      $ 28,251      $ 43,235   

 

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     2012     2011     2010  
     Qtr 1     Qtr 4     Qtr 3     Qtr 2     Qtr 1     Qtr 4     Qtr 3     Qtr 2     Qtr 1  
     (In thousands, except per share data)  

Quarterly Data (Unaudited):

                  

Total operating income

     3,644        3,421        3,482        4,544        4,524        5,130        5,257        5,336        7,798   

Management fee

     2,707        2,155        2,183        2,249        2,555        2,232        2,176        2,467        2,455   

Administrative

     923        1,105        1,049        990        1,176        777        910        938        770   

Interest, fees and other borrowing costs

     795        783        784        745        770        770        767        647        641   

Incentive compensation

     (1,937     3,483        (463     531        (1,603     2,504        (3,270     2,225        1,020   

Total waiver by adviser

     (96     (38     (37     (38     (138     (50     (50     (50     —     

Tax expense

     1        2        —          2        10        2        —          1        5   

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

     1,251        (4,069     (34     65        1,754        (1,105     4,724        (892     2,907   

Net (decrease) increase in net assets resulting from operations

     (9,018     13,282        (2,369     2,302        (6,244     11,307        (11,281     8,969        7,138   

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

     (0.38     0.56        (0.10     0.10        (0.26     0.47        (0.47     0.37        0.29   

Net asset value per share

     17.04        17.54        17.10        17.32        17.33        17.71        17.35        17.89        17.64   

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 year ended October 31, 2011, the Company made six new investments and made seven follow-on investments in existing portfolio companies committing a total of $43.2 million of capital to these investments. During the quarter ended January 31, 2012, the Company made one new investment and four follow-on investments in two existing portfolio companies, committing capital totaling $7.3 million.

Prior to the adoption of our current investment objective, the Company’s investment objective had been to achieve long-term capital appreciation from venture capital investments in information technology companies. The Company’s investments had thus previously focused on investments in equity and debt securities of information technology companies. As of January 31, 2012, 2.23% of the current fair value of our assets consisted of Legacy Investments. We are, however, seeking to manage these Legacy Investments to try and realize maximum returns. We generally seek to capitalize on opportunities to realize cash returns on these investments when presented with a potential “liquidity event,” i.e., a sale, public offering, merger or other reorganization.

Our new portfolio investments are made pursuant to our current objective and strategy. We are concentrating our investment efforts on small and middle-market companies that, in our view, provide opportunities to maximize total return from capital appreciation and/or income. 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. Due to the asset growth and composition of the portfolio, compliance with the RIC requirements currently restricts 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 the issuer (“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 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.

 

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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 has authorized the establishment of the PE Fund, for which an indirect wholly-owned subsidiary of the Company serves as the GP and which may raise up to $250 million. On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in the PE Fund. The PE Fund has closed on approximately $104 million of capital commitments. The Company’s Board of Directors authorized the establishment of, and investment in, the PE Fund for a variety of reasons, including the Company’s ability to make Non-Diversified Investments through the PE Fund. As previously disclosed, the Company is currently restricted from making 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 paid by the PE Fund 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. Given this separate arrangement with the GP and the PE Fund, under the terms of the Company’s Advisory Agreement with TTG Advisers, TTG Advisers is not entitled to receive from the Company a management fee or an incentive fee on assets of the Company that are invested in the PE Fund.

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 will receive a priority allocation of all private equity investments that would otherwise be Non-Diversified Investments for the Company during the PE Fund’s investment period.

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

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

OPERATING INCOME

For the Quarters Ended January 31, 2012 and 2011. Total operating income was $3.6 million for the quarter ended January 31, 2012 and $4.5 million for the quarter ended January 31, 2011, a decrease of approximately $900,000.

For the Quarter Ended January 31, 2012

Total operating income was $3.6 million for the quarter ended January 31, 2012. The decrease in operating income over the same period last year was primarily due to the repayment of investments that provided the Company with current income and a decrease in dividend income from the sale of portfolio companies. The main components of operating income were the interest earned on loans and the receipt of closing, monitoring and termination fees from certain portfolio companies by the Company and MVCFS. The Company earned approximately $2.7 million in interest and dividend income from investments in portfolio companies. Of the $2.7 million recorded in interest/dividend income, approximately $759,000 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 6% to 15%, excluding those investments which interest is being reserved against. The Company received fee income and had other losses from portfolio companies and other entities totaling a net amount of approximately $976,000.

 

33


For the Quarter Ended January 31, 2011

Total operating income was $4.5 million for the quarter ended January 31, 2011. The decrease in operating income over the same period last year was primarily due to the repayment of investments that provide the Company with current income and a decrease in dividend income from exiting portfolio companies. The main components of operating income were the interest earned on loans and the receipt of closing and monitoring fees from certain portfolio companies by the Company and MVCFS. The Company earned approximately $3.4 million in interest and dividend income from investments in portfolio companies. Of the $3.4 million recorded in interest/dividend income, approximately $980,000 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 3% to 15% excluding those investments which interest is being reserved against. The Company received fee income and other income from portfolio companies and other entities totaling approximately $1.1 million.

OPERATING EXPENSES

For the Quarters Ended January 31, 2012 and 2011. Operating expenses, net of Voluntary Waivers, were $2.4 million for the quarter ended January 31, 2012 and $2.8 million for the quarter ended January 31, 2011, a decrease of approximately $400,000.

For the Quarter Ended January 31, 2012

Operating expenses, net of the Voluntary Waivers (as defined below), were approximately $2.4 million or 2.28% of the Company’s average net assets, when annualized, for the quarter ended January 31, 2012. Significant components of operating expenses for the quarter ended January 31, 2012 were the management fee expense of $2.7 million and interest and other borrowing costs of approximately $795,000.

The $400,000 decrease in the Company’s operating expenses for the quarter ended January 31, 2012 compared to the quarter ended January 31, 2011, was primarily due to the $334,000 decrease in the estimated provision for incentive compensation expense and the $198,000 decrease in other expenses offset by an increase of approximately $152,000 in management fee expense. For the 2010 and 2011 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”). On October 25, 2011, TTG Advisers and the Company entered into an agreement to extend the expense cap of 3.5% and the Voluntary Waiver to the 2012 fiscal year. TTG Advisers has also voluntarily agreed that any assets of the Company that are invested in exchange-traded funds and the Octagon Fund 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 2011 and for the quarter ended January 31, 2012 annualized, the Company’s expense ratio was 3.18% 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 quarter ended January 31, 2012, the provision for incentive compensation was decreased by a net amount of approximately $1.9 million to approximately $22.0 million. The net decrease in the provision for incentive compensation during the quarter ended January 31, 2012 reflects the Valuation Committee’s determination to decrease the fair values of seven of the Company’s portfolio investments (BP, HH&B, MVC Automotive, NPWT, Tekers, Velocitius and Ohio Medical) by a total of $11.4 million. The net decrease in the provision also reflects the Valuation Committee’s determination to increase the fair values of four of the Company’s portfolio investments (Octagon Fund, SGDA Europe, Security Holdings, and Turf) by a total of approximately $1.1 million. The Valuation Committee also increased the fair value of the Company’s escrow receivable related to Vitality by $130,000. During the quarter ended January 31, 2012, 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 10 of our consolidated financial statements “Incentive Compensation” for more information.

For the Quarter Ended January 31, 2011

Operating expenses, net of the Voluntary Waivers, were approximately $2.8 million or 2.59% of the Company’s average net assets, when annualized, for the quarter ended January 31, 2011. Significant components of operating expenses for the quarter ended January 31, 2011 were the management fee expense of $2.6 million and interest and other borrowing costs of approximately $770,000.

 

34


The $2.0 million decrease in the Company’s operating expenses for the quarter ended January 31, 2011 compared to the quarter ended January 31, 2010, was primarily due to the $2.6 million decrease in the estimated provision for incentive compensation expense offset by minimal increases in the management fee, interest and other borrowings costs, other expenses and legal expense totaling approximately $600,000. The Advisory Agreement extended the expense cap applicable to the Company for an additional two fiscal years (fiscal years 2009 and 2010) and increased the expense cap from 3.25% to 3.5%. For the 2010 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”). On October 26, 2010, TTG Advisers and the Company entered into an agreement to extend the expense cap of 3.5% and the Voluntary Waiver to the 2011 fiscal year. TTG Advisers has 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. For fiscal year 2010 and for the quarter ended January 31, 2011 annualized, the Company’s expense ratio was 2.95% and 3.38%, 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 quarter ended January 31, 2011, the provision for incentive compensation was decreased by a net amount of approximately $1.6 million to $20.4 million. The decrease in the provision for incentive compensation reflects the Valuation Committee’s determination to increase the fair values of two of the Company’s portfolio investments (Summit and U.S. Gas) by a total of approximately $10.0 million. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $1.9 million due to a PIK distribution, which was treated as a return of capital. The net decrease in the provision also reflects the Valuation Committee’s determination to decrease the fair values of five of the Company’s portfolio investments (BP, Ohio Medical, MVC Automotive, HuaMei, and HH&B) by a total of approximately $19.9 million. During the quarter ended January 31, 2011, 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 9 “Incentive Compensation” for more information.

REALIZED GAINS AND LOSSES ON PORTFOLIO SECURITIES

For the Quarters Ended January 31, 2012 and 2011. Net realized gains for the quarter ended January 31, 2012 were approximately $194,000 and net realized losses for the quarter ended January 31, 2011 were approximately $14.6 million, an increase of approximately $14.8 million.

For the Quarter Ended January 31, 2012

Net realized gains for the quarter ended January 31, 2012 were approximately $194,000. The significant components of the Company’s net realized gains for the quarter ended January 31, 2012 were primarily the distributions received from the Octagon Fund and the increase in the fair values of the Vitality and Vendio escrows.

During the quarter ended January 31, 2012, the Company received distributions from Octagon Fund of approximately $45,000, which were treated as realized gains.

During the quarter ended January 31, 2012, the Valuation Committee determined to increase the fair values of the Vitality and Vendio escrows by a combined amount of approximately $143,000, which were recorded as realized gains.

For the Quarter Ended January 31, 2011

Net realized losses for the quarter ended January 31, 2011 were $14.6 million. The significant components of the Company’s net realized losses for the quarter ended January 31, 2011 were primarily the loss on the sale of Harmony Pharmacy common stock, demand notes and revolving credit facility and the dissolution of the Amersham loans. A portion of these losses were offset by the gain on the sale of LHD Europe common stock.

 

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On November 30, 2010, a public Uniform Commercial Code (“UCC”) sale of Harmony Pharmacy’s assets took place. Prior to this sale, the Company formed a new entity, Harmony Health & Beauty, Inc. (“HH&B”). The Company assigned its secured debt interest in Harmony Pharmacy of approximately $6.4 million to HH&B in exchange for a majority of the economic ownership. At the UCC sale, HH&B submitted a successful credit bid of approximately $5.9 million for all of the assets of Harmony Pharmacy. On December 21, 2010, Harmony Pharmacy filed for dissolution in the states of California, New Jersey and New York. As a result, the Company realized an $8.4 million loss on its investment in Harmony Pharmacy.

On December 1, 2010, Amersham filed for dissolution in the State of California as all operating divisions were sold in 2010. As a result, the Company realized a $6.5 million loss on its investment in Amersham. The Company may be eligible to receive proceeds from an earnout related to the sale of an operating division once the senior lender is repaid in full. At this time, it is not likely that any proceeds will be received by the Company.

On January 25, 2011, the Company sold its common stock in LHD Europe, receiving approximately $542,000 in proceeds which resulted in a realized gain of approximately $317,000.

UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES

For the Quarters Ended January 31, 2012 and 2011. The Company had a net change in unrealized depreciation on portfolio investments of approximately $10.5 million for the quarter ended January 31, 2012 and unrealized appreciation on portfolio investments of approximately $6.6 million for the quarter ended January 31, 2011, a decrease of approximately $17.1 million.

For the Quarter Ended January 31, 2012

The Company had a net change in unrealized depreciation on portfolio investments of approximately $10.5 million for the quarter ended January 31, 2012. The change in unrealized depreciation for the quarter ended January 31, 2012 primarily resulted from the Valuation Committee’s decision to decrease the fair values of the Company’s investments in BP term loan A by $100,000, HH&B common stock by $500,000, MVC Automotive equity interest by approximately $7.5 million, MVC Partners equity interest by approximately $326,000, MVCFS’ General Partnership interest in the PE Fund by approximately $8,000, NPWT common and preferred stock by approximately $6,000 and $120,000, respectively, Tekers common stock by $280,000, Velocitius equity interest by approximately $1.9 million and value the liability associated with the Ohio Medical guarantee at $700,000. The Valuation Committee also increased the fair value of the Company’s investments in Octagon Fund by approximately $84,000, SGDA Europe equity interest by $265,000, Turf equity interest by $500,000 and Security Holdings equity interest by $205,000.

For the Quarter Ended January 31, 2011

The Company had a net change in unrealized appreciation on portfolio investments of approximately $6.6 million for the quarter ended January 31, 2011. The change in unrealized appreciation on investment transactions for the quarter ended January 31, 2011 primarily resulted from the increase in unrealized appreciation reclassification from unrealized to realized, caused by the sale of Harmony Pharmacy and the dissolution of Amersham of approximately $14.9 million. The other components in the change in unrealized appreciation are the Valuation Committee’s decision to increase the fair value of the Company’s investments in Summit common stock by $7.5 million and U.S. Gas preferred stock by $2.5 million. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $1.9 million due to PIK distributions which were treated as a return of capital. The Valuation Committee also decreased the fair value of the Company’s investments in BP second lien loan by $3.9 million and term loan A and B by a combined $2.0 million, Ohio Medical common stock by $500,000 and preferred stock by $8.2 million, MVC Automotive equity interest by $3.1 million, HuaMei Capital common stock by $325,000 and Harmony Health & Beauty by $1.9 million during the quarter ended January 31, 2011.

 

36


PORTFOLIO INVESTMENTS

For the Quarter Ended January 31, 2012 and the Year Ended October 31, 2011. The cost of the portfolio investments held by the Company at January 31, 2012 and at October 31, 2011 was $365.7 million and $358.2 million, respectively, a decrease of $7.5 million. The aggregate fair value of portfolio investments at January 31, 2012 and at October 31, 2011 was $449.2 million and $452.2 million, respectively, a decrease of $3.0 million. The Company held cash and cash equivalents at January 31, 2012 and at October 31, 2011 of $25.6 million and $28.3 million, respectively, a decrease of approximately $2.7 million.

For the Quarter Ended January 31, 2012

During the quarter ended January 31, 2012, the Company made one new investment, a $1.0 million loan to Freshii.

During the quarter ended January 31, 2012, the Company made four follow-on investments in two existing portfolio companies totaling approximately $6.3 million. The Company through MVC Partners Limited Partnership interest and MVCFS’ General Partnership interest contributed approximately $6.3 million of its $20.1 million capital commitment to the PE Fund, which as of January 31, 2012, has invested in Plymouth Rock Energy, LLC and Gibdock Limited.

On November 30, 2011, as part of the Ohio Medical debt refinancing, the Company agreed to guarantee a series B preferred stock tranche of equity. As of January 31, 2012, the amount guaranteed was $19.4 million and the guarantee obligation was fair valued at $700,000 by the Valuation Committee.

On December 28, 2011, the Company received its third scheduled disbursement from the Vitality Foodservice, Inc. escrow of approximately $585,000. The escrow was fair valued at approximately $472,000 as of January 31, 2012.

On December 31, 2011, Marine made a principal payment of $150,000 on its senior subordinated loan. The balance of the loan as of January 31, 2012 was approximately $11.9 million.

During the quarter ended January 31, 2012, Pre-Paid Legal made principal payments totaling approximately $407,000.

During the quarter ended January 31, 2012, the Valuation Committee increased the fair value of the Company’s investments in Octagon Fund by approximately $84,000, SGDA Europe equity interest by $265,000, Turf equity interest by $500,000 and Security Holdings equity interest by $205,000. The Valuation Committee also increased the fair values of the Company’s escrow receivables related to Vitality by $130,000 and Vendio Services, Inc. (“Vendio”) by approximately $13,000. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, Marine, Summit and U.S. Gas and the Marine preferred stock were due to the capitalization of payment in kind (“PIK”) interest/dividends totaling $759,466. The Valuation Committee also decreased the fair value of the Company’s investments in BP term loan A by $100,000, HH&B common stock by $500,000, MVC Automotive equity interest by approximately $7.5 million, MVC Partners equity interest by approximately $326,000, MVCFS’ General Partnership interest in the PE Fund by approximately $8,000, NPWT common and preferred stock by approximately $6,000 and $120,000, respectively, Tekers common stock by $280,000, Velocitius equity interest by approximately $1.9 million. The Valuation Committee also determined to value the liability associated with the Ohio Medical guarantee at $700,000. Also, during the quarter ended January 31, 2012, the undistributed allocation of flow through losses from the Company’s equity investment in Octagon decreased the cost basis and fair value of this investment by approximately $112,000.

At January 31, 2012, the fair value of all portfolio investments, exclusive of short-term investments, was $449.2 million with a cost basis of $365.7 million. At January 31, 2012, the fair value and cost basis of portfolio investments of the Legacy Investments was $10.8 million and $32.3 million, respectively, and the fair

 

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value and cost basis of portfolio investments made by the Company’s current management team was $438.4 million and $333.4 million, respectively. At October 31, 2011, the fair value of all portfolio investments, exclusive of short-term securities, was $452.2 million, with a cost basis of $358.2 million. At October 31, 2011, the fair value and cost basis of portfolio investments of the Legacy Investments was $10.8 million and $32.3 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $441.4 million and $325.9 million, respectively.

For the Fiscal Year Ended October 31, 2011

During the fiscal year ended October 31, 2011, the Company made six new investments, committing capital totaling approximately $26.1 million. The investments were made in Octagon Fund ($3.0 million), JSC Tekers ($4.0 million), Teleguam ($7.0 million), Pre-Paid Legal ($8.0 million), RuMe ($1.2 million) and Centile ($3.0 million).

During the fiscal year ended October 31, 2011, the Company made seven follow-on investments in four existing portfolio companies totaling approximately $17.1 million. On January 27, 2011, the Company invested $3.3 million in Security Holdings in the form of an additional equity interest. On January 28, 2011, the Company loaned an additional $5.0 million to Security Holdings in the form of a bridge loan with an annual interest rate of 3%. This bridge loan allowed Security Holdings to secure project guarantees. On May 4, 2011, the Company invested $500,000 in NPWT to acquire 5,000 shares of convertible preferred stock. On May 26, 2011 and September 14, 2011, the Company invested an additional $150,000 on each date into HH&B to acquire an additional 47,612 shares of common stock. On September 6, 2011, the Company invested $7.0 million in Security Holdings in the form of an additional equity interest. On October 17, 2011, the Company invested $1.0 million in SGDA Europe in the form of additional equity interest. In addition, during the fiscal year ended October 31, 2011, the Company invested approximately $10.0 million in the SPDR Barclays Capital High Yield Bond Fund and approximately $10.0 million in the iShares S&P U.S. Preferred Stock Index Fund. These investments were sold during the fiscal year ended October 31, 2011, resulting in a realized gain of approximately $106,000. The investments in these exchange traded funds were intended to provide the Company with higher yielding investments than cash and cash equivalents while awaiting deployment into portfolio companies pursuant to the Company’s principal investment strategy. TTG Advisers had voluntarily agreed that any assets of the Company that are invested in exchange-traded funds would not be subject to the base management fee due to TTG Advisers under the Advisory Agreement.

Effective November 4, 2010, the interest rate on the Turf senior subordinated loan was reduced from 15% to 13% and the maturity date on the senior subordinated loan and junior revolving note was extended to January 31, 2014.

On November 30, 2010, the Company loaned an additional $700,000 to Harmony Pharmacy, which was the remaining portion of the $1.3 million demand note committed on September 23, 2010.

On November 30, 2010, a public Uniform Commercial Code (“UCC”) sale of Harmony Pharmacy’s assets took place. Prior to this sale, the Company formed a new entity, HH&B. The Company assigned its secured debt interest in Harmony Pharmacy of approximately $6.4 million to HH&B in exchange for a majority of the economic ownership. At the UCC sale, HH&B submitted a successful credit bid of approximately $5.9 million for all of the assets of Harmony Pharmacy. On December 21, 2010, Harmony Pharmacy filed for dissolution in the states of California, New Jersey and New York. As a result, the Company realized an $8.4 million loss on its investment in Harmony Pharmacy.

On December 1, 2010, Amersham filed for dissolution in the State of California as all operating divisions were sold in 2010. As a result, the Company realized a $6.5 million loss on its investment in Amersham. The Company may be eligible to receive proceeds from an earnout related to the sale of an operating division once the senior lender is repaid in full. At this time, it is not likely that any proceeds will be received by the Company.

 

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On January 11, 2011, SHL Group Limited, which provides workplace talent assessment solutions, including ability and personality tests, and psychometric assessments, acquired the Company’s portfolio company PreVisor. The Company received 1,518,762 common shares of SHL Group Limited for its investment in PreVisor. The cost basis and market value of the Company’s investment remained unchanged at the time as a result of the transaction.

On January 25, 2011, the Company sold its common stock in LHD Europe and received approximately $542,000 in proceeds, which resulted in a realized gain of approximately $317,000.

On March 1, 2011, SP repaid its first lien and second lien loans in full including all accrued interest. The Company received a $500,000 termination fee associated with the repayment of the loans.

On April 29, 2011, assets from a division of Ohio Medical were distributed to Ohio Medical shareholders on a pro-rata basis. The Company received 281 shares of common stock in NPWT as a result of this transaction.

On May 26, 2011, Security Holdings repaid its bridge loan in full, including all accrued interest.

On August 1, 2011, as part of a restructuring of the Company’s investment in HuaMei, the Company sold its shares to HuaMei, resulting in a realized loss of $2.0 million.

On August 31, 2011, Sonexis, a Legacy Investment, completed the dissolution of its operations and the sale of its assets. The Company realized a loss of $10.0 million as a result of this dissolution.

On October 3, 2011, Storage Canada, LLC (“Storage Canada”) repaid its term loan in full including all accrued interest.

On October 17, 2011, the Company converted SGDA Europe’s $1.5 million senior secured loan and all accrued interest to additional common equity interest.

On October 28, 2011, Total Safety repaid its first and second lien loans in full including all accrued interest.

On October 31, 2011, the Company received a distribution from NPWT of $500,000, which was treated as a return of capital and returned all cash invested into NPWT to the Company.

During the fiscal year ended October 31, 2011, Marine Exhibition Corporation (“Marine”) made principal payments totaling $450,000 on its senior subordinated loan. The balance of the loan as of October 31, 2011 was approximately $12.0 million.

During the fiscal year ended October 31, 2011, Octagon borrowed and repaid $1.5 million on its revolving line of credit. Octagon cancelled the revolving line of credit effective June 30, 2011. As of October 31, 2011, the revolving credit facility was no longer a commitment of the Company.

During the fiscal year ended October 31, 2011, the Valuation Committee increased the fair value of the Company’s investments in Summit common stock by $14.5 million, SHL Group Limited common stock by $4.9 million, Security Holdings equity interest by approximately $17.6 million, Total Safety first lien loan by approximately $74,000, U.S. Gas preferred stock by $2.5 million and Velocitius equity interest by $200,000. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, SP, Marine, Summit and U.S. Gas and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $3,174,721. The Valuation Committee also increased the fair value of the Ohio Medical preferred stock by approximately $1.9 million due to PIK distributions, which were treated as a return of capital. Also, during the fiscal year ended October 31, 2011, the undistributed allocation of flow through income from the Company’s equity investment in Octagon increased the cost basis and fair value of this investment by approximately $589,000.

 

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The Valuation Committee also decreased the fair value of the Company’s investments in MVC Automotive equity interest by approximately $1.7 million, Tekers common stock by approximately $2.3 million, Octagon Fund by $209,000, BP second lien loan by $3.9 million and term loan A and B by a combined $3.2 million, Ohio Medical common stock by $500,000 and preferred stock by approximately $8.0 million, NPWT common and preferred stock by a net amount of $200,000, HuaMei common stock by approximately $1.5 million, SGDA Europe equity interest by approximately $4.3 million, Vestal common stock by $745,000 and HH&B by $5.7 million during the fiscal year ended October 31, 2011.

At October 31, 2011, the fair value of all portfolio investments, exclusive of short-term investments, was $452.2 million with a cost basis of $358.2 million. At October 31, 2011, the fair value and cost basis of portfolio investments of the Legacy Investments was $10.8 million and $32.3 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $441.4 million and $325.9 million, respectively. At October 31, 2010, the fair value of all portfolio investments, exclusive of short-term securities, was $433.9 million, with a cost basis of $375.6 million. At October 31, 2010, the fair value and cost basis of portfolio investments of the Legacy Investments was $10.8 million and $42.3 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $423.1 million and $333.3 million, respectively.

Portfolio Companies

During the quarter ended January 31, 2012, the Company had investments in:

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, 2011 and January 31, 2012, the Company’s investment in Actelis consisted of 150,602 shares of Series C preferred stock at a cost of $5.0 million. The investment has been fair valued at $0.

BP Clothing, LLC

BP, Pico Rivera, California, is a company that designs, manufactures, markets and distributes under several brand names women’s apparel.

At October 31, 2011, the Company’s investment in BP consisted of a $20.4 million second lien loan, a $2.0 million term loan A, and a $2.0 million term loan B. The second lien loan bears annual interest at 16.5%. The second lien loan had a $17.5 million principal face amount and was issued at a cost basis of $17.5 million. The second lien loan’s cost basis was subsequently discounted to reflect loan origination fees received. The maturity date of the second lien loan is July 18, 2012. The principal balance is due upon maturity. The term loan A bears annual interest at LIBOR plus 7.75% or Prime Rate plus 6.75%. The term loan B bears annual interest at LIBOR plus 10.75% or Prime Rate plus 9.75%. The interest rate option on the loan assignments is at the borrower’s discretion. Both term loans matured on July 18, 2011. The combined cost basis and fair value of the investments at October 31, 2011 was $23.6 million and $280,000, respectively.

On December 12, 2011, BP filed for Chapter 11 protection in New York with agreement to turn ownership over to secured lenders under a bankruptcy reorganization plan. Secured lenders, including the Company, have agreed to support a Chapter 11 plan where first-lien creditors will take 90 percent of the new stock, second-lien lenders will have 6 percent, and subordinated lenders will have 4 percent. The plan-support agreement requires filing the plan and disclosure statement by year’s end, with consummation of the plan not later than March 31, 2012.

During the quarter ended January 31, 2012, the Valuation Committee decreased the fair value of the term loan A by $100,000.

At January 31, 2012, the loans had a combined outstanding balance of $24.5 million, a cost basis of $23.6 million and a fair value of $180,000. The increase in the outstanding balance and cost of the term loans are due

 

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to the amortization of loan origination fees and the increase in the outstanding balance of the second lien loan is due to the capitalization of “payment in kind” interest. The Company’s Valuation Committee determined not to increase the fair value of the investment as a result of the capitalization of the PIK interest for the quarter ended January 31, 2012. The Company has also reserved in full against all accrued interest starting on July 1, 2010 and stopped accruing interest as of the filing date for bankruptcy.

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, 2011 and January 31, 2012, the Company’s investment in Centile consisted of common equity interest at a cost and fair value of approximately $3.0 million.

Christopher Sullivan, 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 for the natural gas pipeline, power generation, oil/gas refining and extraction, and nuclear generation markets.

At October 31, 2011, the Company’s investment in Custom Alloy consisted of nine shares of convertible series A preferred stock at a cost and fair value of $44,000, 1,991 shares of convertible series B preferred stock at a cost and fair value of approximately $10.0 million. The unsecured subordinated loan, which bears annual interest at 14% and matures on September 18, 2012, had a cost of $14.5 million and a fair value of $14.6 million.

At January 31, 2012, the Company’s investment in Custom Alloy consisted of nine shares of convertible series A preferred stock at a cost and fair value of $44,000 and the 1,991 shares of convertible series B preferred stock had a cost and fair value of approximately $10.0 million. The unsecured subordinated loan had an outstanding balance, cost basis and a fair value of $14.8 million. The increase in the cost basis and fair value of the loan is due to the amortization of loan origination fees and the capitalization of “payment in kind” interest. These increases were approved by the Company’s Valuation Committee.

Michael Tokarz, Chairman of the Company, and Shivani Khurana, representative of the Company, serve as directors of Custom Alloy.

DPHI, Inc. (formerly DataPlay, Inc.)

DPHI, Inc. (“DPHI”), Boulder, Colorado, a Legacy Investment, is trying to develop new ways of enabling consumers to record and play digital content.

At October 31, 2011 and January 31, 2012, the Company’s investment in DPHI consisted of 602,131 shares of Series A-1 preferred stock with a cost of $4.5 million. This investment has been fair valued at $0.

Foliofn, Inc.

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

At October 31, 2011 and January 31, 2012, the Company’s investment in Foliofn consisted of 5,802,259 shares of Series C preferred stock with a cost of $15.0 million and a fair value of $10.8 million.

Bruce Shewmaker, an officer of the Company, serves as a director of Foliofn.

Freshii USA, Inc.

Freshii, Chicago, Illinois, is a chain of “fast casual” restaurants serving fresh and healthy food for breakfast, lunch and dinner. Freshii currently has 33 locations in 21 cities and four countries.

 

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On January 13, 2012, the Company invested $1.0 million in Freshii in the form of a senior secured loan with an annual interest rate of 12% and a maturity date of January 13, 2016, and received a warrant at no cost to the Company. The Company allocated a portion of the cost basis in the senior secured loan to the warrant at the time the investment was made.

At January 31, 2012, the Company’s investment in Freshii consisted of a senior secured loan with an outstanding balance, cost basis and fair value of approximately $1.0 million. The warrant had a cost and fair value of approximately $34,000. The increase in cost and fair value of the loan is due to the amortization of loan origination fees and the discount associated with the warrant. These increases were approved by the Company’s Valuation Committee.

GDC Acquisitions, LLC d/b/a JDC Lighting, LLC

GDC is the holding company of JDC Lighting, LLC (“JDC”). GDC, New York, New York, which was a distributor of commercial lighting and electrical products.

At October 31, 2011 and January 31, 2012, the Company’s investment in GDC consisted of a $3.3 million senior subordinated loan, bearing annual interest at 17% and matured on August 31, 2011. The loan had a principal amount, an outstanding balance and a cost basis of $3.2 million and was fair valued at $0. The warrant was fair valued at $0. The Company has reserved in full against the interest accrued on the senior subordinated loan since July 1, 2010.

Harmony Health & Beauty, Inc.

Harmony Health & Beauty, 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 now operates the health and beauty stores previously owned by Harmony Pharmacy in the Newark International Airport, John F. Kennedy International Airport and San Francisco International Airport. The Company’s initial investment consisted of 100,010 shares of common stock.

At October 31, 2011, the Company’s investment in HH&B consisted of 147,621 shares of common stock with a cost of $6.7 million and fair value of $1.0 million.

During the quarter ended January 31, 2012, the Valuation Committee decreased the fair value of the common stock by $500,000.

At January 31, 2012, the Company’s investment in HH&B consisted of 147,621 shares of common stock with a cost of $6.7 million and fair value of $500,000.

Michael Tokarz, Chairman of the Company, serves as a director of HH&B.

Integrated Packaging Corporation

IPC, New Brunswick, New Jersey, is a manufacturer of corrugated boxes and packaging material.

At October 31, 2011 and January 31, 2012, the Company’s investment in IPC consisted of a warrant which was received in exchange for services provided to another investor in IPC. The warrant had a zero cost basis and has been fair valued at $0.

JSC Tekers Holdings

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

At October 31, 2011 and January 31, 2012, the Company’s investment in JSC Tekers consisted of a secured loan with an outstanding balance, a cost basis and a fair value of $4.0 million and 2,250 shares of common stock with a cost basis and fair value of $4,500. The secured loan has an interest rate of 8% and a maturity date of June 30, 2014.

 

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Lockorder Limited (formerly Safestone Technologies PLC)

Lockorder, located in Old Amersham, United Kingdom, a Legacy Investment, provides organizations with technology designed to secure access controls, enforcing compliance with security policies and enabling effective management of corporate IT and e-business infrastructure.

At October 31, 2011 and January 31, 2012, the Company’s investment in Lockorder consisted of 21,064 shares of common stock with a cost of $2.0 million. The investment has been fair valued at $0 by the Company’s Valuation Committee.

Mainstream Data, Inc.

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

At October 31, 2011 and January 31, 2012, the Company’s investment in Mainstream consisted of 5,786 shares of common stock with a cost of $3.75 million. The investment has been fair valued at $0.

Marine Exhibition Corporation

Marine, Miami, Florida, owns and operates the Miami Seaquarium. The Miami Seaquarium is a family-oriented entertainment park.

At October 31, 2011, the Company’s investment in Marine consisted of a senior secured loan and 20,000 shares of preferred stock. The senior secured loan had an outstanding balance of approximately $12.0 million and a cost basis of approximately $11.9 million. The senior secured loan bears annual interest at 11% and matures on October 26, 2017. The senior secured loan was fair valued at approximately $12.0 million. The preferred stock was fair valued at approximately $3.0 million. The dividend rate on the preferred stock is 12% per annum.

During the quarter ended January 31, 2012, Marine made a principal payment of $150,000 on its senior secured loan.

At January 31, 2012, the Company’s senior secured loan had an outstanding balance, cost basis and a fair value of approximately $11.9 million. The preferred stock had a cost and fair value of approximately $3.1 million. The increase in the outstanding balance, cost and fair value of the loan and preferred stock is due to the amortization of loan origination fees and the capitalization of “payment in kind” interest/dividends. These increases were approved by the Company’s Valuation Committee.

MVC Automotive Group B.V.

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

At October 31, 2011, the Company’s investment in MVC Automotive consisted of an equity interest with a cost of approximately $34.7 million and a fair value of approximately $42.5 million. The bridge loan, which bears annual interest at 10% and matures on December 31, 2012, had a cost and fair value of approximately $3.6 million. The guarantees for MVC Automotive were equivalent to approximately $13.7 million at October 31, 2011.

During the quarter ended January 31, 2012, the Valuation Committee decreased the fair value of the equity interest by approximately $7.5 million.

At January 31, 2012, the Company’s investment in MVC Automotive consisted of an equity interest with a cost of approximately $34.7 million and a fair value of approximately $34.9 million. The bridge loan had a cost and fair value of approximately $3.6 million. The mortgage guarantee for MVC Automotive were equivalent to approximately $5.2 million at January 31, 2012. This guarantee was taken into account in the valuation of MVC Automotive.

Michael Tokarz, Chairman of the Company, and Christopher Sullivan, a representative of the Company, serve as directors of MVC Automotive.

 

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MVC Partners LLC

MVC Partners, Purchase, New York, a wholly-owned portfolio company, is a private equity firm established primarily to serve as the general partner, managing member or anchor investor of private or other investment vehicles.

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 the GP. Of the $20.1 million total commitment, the Company, via MVC Partners, has committed $19.6 million to the PE Fund as its anchor limited partner. See MVC Private Equity Fund, L.P. for more information on the PE Fund. The PE Fund has closed on approximately $104 million of capital commitments.

At October 31, 2011, the Company’s equity investment in MVC Partners had a cost basis of approximately $1.4 million and fair value of approximately $1.1 million.

During the quarter ended January 31, 2012, the Company made two follow-on investments in MVC Partners totaling approximately $6.2 million which was used to fund MVC Partners’ limited partnership commitment to the PE Fund.

During the quarter ended January 31, 2012, the Valuation Committee decreased the fair value of the equity interest by approximately $326,000.

At January 31, 2012, the Company’s equity investment in MVC Partners had a cost basis of approximately $7.5 million and fair value of approximately $7.0 million.

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. MVC GP II is wholly-owned by MVCFS, a subsidiary of the Company. The Company’s Board of Directors authorized the establishment of, and investment in, the PE Fund for a variety of reasons, including the Company’s ability to participate in Non-Diversified Investments made by the PE Fund. As previously disclosed, the Company is currently restricted from making 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 paid by the PE Fund 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. Given this separate arrangement with the GP and the PE Fund, under the terms of the Company’s Advisory Agreement with TTG Advisers, TTG Advisers is not entitled to receive from the Company a management fee or an incentive fee on assets of the Company that are invested in the PE Fund.

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, via its wholly-owned subsidiary MVC GP II, has committed $500,000 to the PE Fund as its general partner. See MVC Partners for more information on the other portion of the Company’s commitment to the PE Fund. The PE Fund has closed on approximately $104 million of capital commitments.

During the quarter ended January 31, 2012, the Company, via MVCFS, made two investments in MVC PE Fund totaling approximately $157,000 in the form of a general partnership interest.

During the quarter ended January 31, 2012, the Valuation Committee decreased the fair value of the general partnership interest in the PE Fund by approximately $8,000.

At January 31, 2012, the Company’s equity investment in the PE Fund had a cost basis of approximately $157,000 and fair value of approximately $149,000.

NPWT Corporation

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

 

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During October of 2011 NPWT completed the sale of all of its assets to Invacare Corporation (“Invacare”). NPWT received an upfront payment as well as a limited five year royalty based on the sales of eligible product lines. On October 31, 2011, the Company received a distribution from NPWT of $500,000, which was treated as a return of capital and returned all cash invested into NPWT to the Company. This distribution was paid from the upfront payment mentioned previously.

At October 31, 2011, the Company’s investment in NPWT consisted of 281 shares of common with a cost basis of approximately $1.2 million and a fair value of approximately $56,000 and 5,000 shares of convertible preferred stock with a cost basis of $0 and a fair value of $1.0 million.

During the quarter ended January 31, 2012, the Valuation Committee decreased the fair value of the common stock by approximately $6,000 and the preferred stock by approximately $120,000.

At January 31, 2012, the common stock had a cost basis of approximately $1.2 million and a fair value of $50,000. The convertible preferred stock had a cost basis of $0 and a fair value of $880,000.

Scott Schuenke, an officer of the Company, serves as a director of NPWT.

Octagon Credit Investors, LLC

Octagon, is a New York-based asset management company that manages leveraged loans and high yield bonds through collateralized debt obligations (“CDO”) funds.

At October 31, 2011, the Company’s investment in Octagon consisted of an equity investment with a cost basis of approximately $2.2 million and a fair value of approximately $5.3 million.

During the quarter ended January 31, 2012, the cost basis and fair value of the equity investment was decreased by approximately $112,000 because of an allocation of flow through losses by the Company’s Valuation Committee.

At January 31, 2012, the equity investment had a cost basis of approximately $2.1 million and a fair value of $5.2 million.

Octagon High Income Cayman Fund Ltd.

Octagon Fund, is a private fund that seeks to maximize current income consistent with the preservation of capital through the leveraged loan market. This fund is managed by Octagon, a current portfolio company.

At October 31, 2011, the Company’s investment in Octagon Fund consisted of 3,014 shares of series 1 participating non-voting shares with a cost basis of approximately $3.0 million and a fair value of approximately $2.8 million.

During the quarter ended January 31, 2012, the Valuation Committee increased the fair value of the investment by approximately $84,000.

During the quarter ended January 31, 2012, the Company received distributions of approximately $45,000 which were treated as realized gains.

At January 31, 2012, the investment had a cost basis of approximately $3.0 million and a fair value of approximately $2.9 million.

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, 2011, the Company’s investment in Ohio Medical consisted of 5,620 shares of common stock with a cost basis and fair value of approximately $15.8 million and $0, respectively, and 18,102 shares of convertible preferred stock with a cost basis of $30.0 million and a fair value of $39.5 million.

On November 30, 2011, as part of Ohio Medical’s refinancing of their debt, the Company agreed to guarantee a series B preferred stock tranche of equity, with a 12% coupon for the first 18 months it is outstanding. After that initial period, the rate increases by 400bps to 16% for the next 6 months and increases by 50 bps (.5%) each 6 month period thereafter. As of January 31, 2012, the amount guaranteed was $19.4 million and the guarantee obligation was fair valued at $700,000 by the Valuation Committee.

 

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At January 31, 2012, the Company’s investment in Ohio Medical consisted of 5,620 shares of common stock with a cost basis of approximately $15.8 million and a fair value of $0 and 18,826 shares of convertible preferred stock with a cost basis of $30.0 million and a fair value of $39.5 million. The guarantee obligation had a fair value of negative $700,000.

Michael Tokarz, Chairman of the Company, Peter Seidenberg, Chief Financial Officer of the Company, and Jim O’Connor, a representative of the Company, serve as directors of Ohio Medical.

Pre-Paid Legal Services, Inc.

Pre-Paid 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, 2011, the Company’s investment in Pre-Paid Legal consisted of a $4.0 million tranche A term loan and a $4.0 million tranche B term loan, both purchased at a discount. The tranche A term loan bears annual interest at LIBOR, with a 1.5% floor, plus 6% and matures on January 1, 2017 and the tranche B term loan bears annual interest at LIBOR, with a 1.5% floor, plus 9.5% and matures on January 1, 2017. At October 31, 2011, the loans had a combined outstanding balance of $8.0 million and a cost basis and fair value of approximately $7.8 million.

During the quarter ended January 31, 2012, Pre-Paid Legal made principal payments on its tranche A term loan totaling approximately $407,000.

At January 31, 2012, the loans had a combined outstanding balance of $7.6 million and a cost basis and fair value of approximately $7.4 million. The increases in the costs of the term loans are due to the amortization of the original issue discount.

RuMe, Inc.

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

At October 31, 2011 and January 31, 2012, the Company’s investment in RuMe consisted of 999,999 shares of common stock with a costs basis and fair value of approximately $160,000 and 4,999,076 shares of series B-1 preferred stock with a cost basis and fair value of approximately $1.0 million.

Christopher Sullivan, a representative of the Company, serves as a director of RuMe.

SafeStone Technologies Limited (formerly Safestone Technologies PLC)

SafeStone Limited, Old Amersham, United Kingdom, a Legacy Investment, provides organizations with technology designed to secure access controls across the extended enterprise, enforcing compliance with security policies and enabling effective management of the corporate IT and e-business infrastructure.

At October 31, 2011 and January 31, 2012, the Company’s investment in SafeStone Limited consisted of 21,064 shares of common stock with a cost of $2.0 million. The investment has been fair valued at $0 by the Company’s Valuation Committee.

Security Holdings, B.V.

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

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

At October 31, 2011, the Company’s common equity interest in Security Holdings had a cost basis of approximately $40.2 million and a fair value of $33.2 million.

During th