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Table of Contents

 

 

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 July 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)

Registrant’s telephone number, including area code: (914) 701-0310

 

 

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 September 10, 2012.

 

 

 


Table of Contents

MVC Capital, Inc.

(A Delaware Corporation)

Index

 

     Page  

Part I. Consolidated Financial Information

  

Item 1. Consolidated Financial Statements

  

Consolidated Balance Sheets

  

—July 31, 2012 and October 31, 2011

     3   

Consolidated Statements of Operations

  

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

  

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

     4   

Consolidated Statements of Operations

  

—For the Period May 1, 2012 to July 31, 2012 and

  

—For the Period May 1, 2011 to July 31, 2011

     5   

Consolidated Statements of Cash Flows

  

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

  

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

     6   

Consolidated Statements of Changes in Net Assets

  

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

  

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

  

—For the Year ended October 31, 2011

     7   

Consolidated Selected Per Share Data and Ratios

  

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

  

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

  

—For the Year ended October 31, 2011

     8   

Consolidated Schedule of Investments

  

—July 31, 2012

  

—October 31, 2011

     9   

Notes to Consolidated Financial Statements

     13   

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

     33   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     57   

Item 4. Controls and Procedures

     63   

Part II. Other Information

     65   

SIGNATURE

     67   

Exhibits

     68   


Table of Contents

Part I. Consolidated Financial Information

Item 1. Consolidated Financial Statements

CONSOLIDATED FINANCIAL STATEMENTS

MVC Capital, Inc.

Consolidated Balance Sheets

 

     July 31,     October 31,  
     2012     2011  
     (Unaudited)        
ASSETS   

Assets

    

Cash and cash equivalents

   $ 24,895,220      $ 28,317,460   

Restricted cash and cash equivalents

     6,152,000        6,925,000   

Investments at fair value

    

Non-control/Non-affiliated investments (cost $63,767,552 and $90,292,464)

     49,863,801        51,182,558   

Affiliate investments (cost $127,801,028 and $126,356,770)

     179,897,585        187,953,099   

Control investments (cost $150,414,008 and $141,569,773)

     195,699,727        213,079,430   
  

 

 

   

 

 

 

Total investments at fair value (cost $341,982,588 and $358,219,007)

     425,461,113        452,215,087   

Dividends, interest and fee receivables, net of reserves

     6,967,678        7,872,867   

Escrow receivables

     856,563        1,146,899   

Prepaid expenses

     485,511        629,868   

Prepaid taxes

     1,978        —     
  

 

 

   

 

 

 

Total assets

   $ 464,820,063      $ 497,107,181   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Liabilities

    

Term loan

   $ 50,000,000      $ 50,000,000   

Provision for incentive compensation (Note 10)

     17,066,004        23,938,058   

Management fee payable

     3,042,103        2,600,905   

Professional fees payable

     756,480        703,293   

Other accrued expenses and liabilities

     615,197        288,111   

Portfolio fees payable

     453,210        —     

Consulting fees payable

     85,930        64,999   

Taxes payable

     —          2,099   
  

 

 

   

 

 

 

Total liabilities

     72,018,924        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

     58,047,616        40,499,006   

Dividends paid to stockholders

     (88,781,982     (80,171,868

Accumulated net realized loss

     (50,884,958     (25,755,440

Net unrealized appreciation

     83,478,525        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

     392,801,139        419,509,716   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 464,820,063      $ 497,107,181   
  

 

 

   

 

 

 

Net asset value per share

   $ 16.42      $ 17.54   
  

 

 

   

 

 

 

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

 

3


Table of Contents

MVC Capital, Inc.

Consolidated Statements of Operations

(Unaudited)

 

     For the Nine Month Period
November 1, 2011 to
July 31, 2012
    For the Nine Month Period
November 1, 2010 to
July 31, 2011
 

Operating Income:

    

Dividend income

    

Non-control/Non-affiliated investments

   $ 6,352      $ 245,066   

Affiliate investments

     277,720        382,434   

Control investments

     12,000,000        —     
  

 

 

   

 

 

 

Total dividend income

     12,284,072        627,500   
  

 

 

   

 

 

 

Interest income

    

Non-control/Non-affiliated investments

     1,504,749        2,277,715   

Affiliate investments

     3,861,467        3,663,524   

Control investments

     2,414,276        2,026,609   
  

 

 

   

 

 

 

Total interest income

     7,780,492        7,967,848   
  

 

 

   

 

 

 

Fee income

    

Non-control/Non-affiliated investments

     67,427        1,036,317   

Affiliate investments

     807,246        860,093   

Control investments

     570,331        424,979   
  

 

 

   

 

 

 

Total fee income

     1,445,004        2,321,389   
  

 

 

   

 

 

 

Fee income—Asset Management 1

    

Portfolio fees

     1,149,779        —     

Management fees

     823,562        594,500   
  

 

 

   

 

 

 

Total fee income—Asset Management

     1,973,341        594,500   
  

 

 

   

 

 

 

Other income

     255,874        1,039,423   
  

 

 

   

 

 

 

Total operating income

     23,738,783        12,550,660   
  

 

 

   

 

 

 

Operating Expenses:

    

Management fee

     6,560,420        6,540,917   

Interest and other borrowing costs

     2,480,757        2,298,520   

Portfolio fees—Asset Management 1

     862,335        —     

Management fee—Asset Management 1

     617,671        445,875   

Audit fees

     522,000        401,800   

Legal fees

     511,238        676,627   

Other expenses

     466,045        871,313   

Consulting fees

     327,353        400,501   

Directors’ fees

     259,000        243,000   

Insurance

     250,839        263,565   

Administration

     197,751        200,794   

Printing and postage

     99,900        81,280   

Public relations fees

     76,500        76,300   

Net Incentive compensation (Note 10)

     (4,526,865     (1,534,688
  

 

 

   

 

 

 

Total operating expenses

     8,704,944        10,965,804   
  

 

 

   

 

 

 

Less: Voluntary Expense Waiver by Adviser 2

     (112,500     (112,500

Less: Voluntary Management Fee Waiver by Adviser 3

     (58,728     (100,635

Less: Voluntary Incentive Fee Waiver by Adviser 4

     (2,345,189     —     
  

 

 

   

 

 

 

Total waivers

     (2,516,417     (213,135
  

 

 

   

 

 

 

Net operating income before taxes

     17,550,256        1,797,991   
  

 

 

   

 

 

 

Tax Expenses:

    

Current tax expense

     1,646        12,893   
  

 

 

   

 

 

 

Total tax expense

     1,646        12,893   
  

 

 

   

 

 

 

Net operating income

     17,548,610        1,785,098   
  

 

 

   

 

 

 

Net Realized and Unrealized Gain (Loss) on Investments:

    

Net realized gain (loss) on investments

    

Non-control/Non-affiliated investments

     (25,170,615     (6,361,489

Affiliate investments

     —          (8,081,806

Control investments

     41,097        —     
  

 

 

   

 

 

 

Total net realized loss on investments

     (25,129,518     (14,443,295

Net change in unrealized (depreciation) appreciation on investments

     (10,517,555     6,347,326   
  

 

 

   

 

 

 

Net realized loss and net change in unrealized depreciation on investments

     (35,647,073     (8,095,969
  

 

 

   

 

 

 

Net decrease in net assets resulting from operations

   $ (18,098,463   $ (6,310,871
  

 

 

   

 

 

 

Net decrease in net assets per share resulting from operations

   $ (0.76   $ (0.26
  

 

 

   

 

 

 

Dividends declared per share

   $ 0.36      $ 0.36   
  

 

 

   

 

 

 

 

1

These items are related to the management of the MVC Private Equity Fund, L.P. (“PE Fund”). Please see Note 9 “Management” for more information.

2

Reflects the nine month 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. Please see Note 9 “Management” for more information.

3

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.

4

Reflects TTG Advisers’ voluntary waiver of the Incentive Fee associated with pre-incentive fee net operationg income for the fiscal quarter ended April 30,2012. Please see Note 9 “Management” for more information.

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

 

4


Table of Contents

MVC Capital, Inc.

Consolidated Statements of Operations

(Unaudited)

 

     For the Quarter
May 1, 2012 to
July 31, 2012
    For the Quarter
May 1, 2011 to
July 31, 2011
 

Operating Income:

    

Dividend income

    

Non-control/Non-affiliated investments

   $ 2,110      $ 851   

Affiliate investments

     94,413        87,223   
  

 

 

   

 

 

 

Total dividend income

     96,523        88,074   
  

 

 

   

 

 

 

Interest income

    

Non-control/Non-affiliated investments

     507,084        327,460   

Affiliate investments

     1,333,340        1,290,971   

Control investments

     814,365        785,962   
  

 

 

   

 

 

 

Total interest income

     2,654,789        2,404,393   
  

 

 

   

 

 

 

Fee income

    

Non-control/Non-affiliated investments

     13,308        68,170   

Affiliate investments

     268,668        282,168   

Control investments

     196,300        141,446   
  

 

 

   

 

 

 

Total fee income

     478,276        491,784   
  

 

 

   

 

 

 

Fee income—Asset Management 1

    

Portfolio fees

     450,903        —     

Management fees

     54,473        —     
  

 

 

   

 

 

 

Total fee income—Asset Management

     505,376        —     
  

 

 

   

 

 

 

Other income

     195,737        498,005   
  

 

 

   

 

 

 

Total operating income

     3,930,701        3,482,256   
  

 

 

   

 

 

 

Operating Expenses:

    

Management fee

     2,127,182        2,183,055   

Interest and other borrowing costs

     853,645        783,412   

Portfolio fees—Asset Management 1

     338,178        —     

Audit fees

     234,000        133,000   

Legal fees

     198,718        223,499   

Other expenses

     138,870        239,087   

Consulting fees

     109,651        150,000   

Directors’ fees

     84,000        96,000   

Insurance

     83,613        87,855   

Administration

     65,548        67,178   

Management fee—Asset Management 1

     40,855        —     

Printing and postage

     31,500        27,000   

Public relations fees

     25,500        25,500   

Net Incentive compensation (Note 10)

     (2,415,163     (462,747
  

 

 

   

 

 

 

Total operating expenses

     1,916,097        3,552,839   
  

 

 

   

 

 

 

Less: Voluntary Expense Waiver by Adviser 2

     (37,500     (37,500
  

 

 

   

 

 

 

Total waivers

     (37,500     (37,500
  

 

 

   

 

 

 

Net operating income (loss) before taxes

     2,052,104        (33,083
  

 

 

   

 

 

 

Tax Expenses:

    

Current tax expense

     549        510   
  

 

 

   

 

 

 

Total tax expense

     549        510   
  

 

 

   

 

 

 

Net operating income (loss)

     2,051,555        (33,593
  

 

 

   

 

 

 

Net Realized and Unrealized (Loss) Gain on Investments:

    

Net realized (loss) gain on investments

    

Non-control/Non-affiliated investments

     (25,384,331     72,311   
  

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) on investments

     12,737,773        (2,407,722
  

 

 

   

 

 

 

Net realized (loss) gain and net change in unrealized appreciation (depreciation) on investments

     (12,646,558     (2,335,411
  

 

 

   

 

 

 

Net decrease in net assets resulting from operations

   $ (10,595,003   $ (2,369,004
  

 

 

   

 

 

 

Net decrease in net assets per share resulting from operations

   $ (0.45   $ (0.10
  

 

 

   

 

 

 

Dividends declared per share

   $ 0.12      $ 0.12   
  

 

 

   

 

 

 

 

1

These items are related to the management of the PE Fund. Please see Note 9 “Management” for more information.

2

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.

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

 

5


Table of Contents

MVC Capital, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

     For the Nine Month Period
November 1, 2011 to
July 31, 2012
    For the Nine Month Period
November 1, 2010 to
July 31, 2011
 

Cash flows from Operating Activities:

    

Net decrease in net assets resulting from operations

   $ (18,098,463   $ (6,310,871

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

    

Net realized loss

     25,129,518        14,443,295   

Net change in unrealized depreciation (appreciation)

     10,517,555        (6,347,326

Amortization of discounts and fees

     (48,372     (23,090

Increase in accrued payment-in-kind dividends and interest

     (2,294,938     (2,425,740

Allocation of flow through income

     (89,495     (395,935

Changes in assets and liabilities:

    

Dividends, interest and fees receivable

     905,189        (238,601

Escrow receivables

     290,336        916,521   

Prepaid expenses

     144,357        114,862   

Prepaid taxes

     (1,978     78,463   

Incentive compensation (Note 10)

     (6,872,054     (1,534,688

Other liabilities

     1,293,513        370,712   

Purchases of equity investments

     (8,266,513     (28,096,855

Purchases of debt instruments

     (2,500,000     (25,909,586

Proceeds from equity investments

     3,082,192        20,630,017   

Proceeds from debt instruments

     1,224,027        33,490,637   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     4,414,874        (1,238,185
  

 

 

   

 

 

 

Cash flows from Financing Activities:

    

Repurchase of common stock

     —          (966,655

Distributions paid to shareholders

     (8,610,114     (8,618,994
  

 

 

   

 

 

 

Net cash used in financing activities

     (8,610,114     (9,585,649
  

 

 

   

 

 

 

Net change in cash and cash equivalents for the period

     (4,195,240     (10,823,834
  

 

 

   

 

 

 

Unrestricted and restricted cash and cash equivalents, beginning of period

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

 

 

   

 

 

 

Unrestricted and restricted cash and cash equivalents, end of period

   $ 31,047,220      $ 45,566,794   
  

 

 

   

 

 

 

During the nine months ended July 31, 2012 and 2011 MVC Capital, Inc. paid $2,188,207 and $2,180,202 in interest expense, respectively.

During the nine months ended July 31, 2012 and 2011 MVC Capital, Inc. paid $5,935 and $2,134 in income taxes, respectively.

Non-cash activity:

During the nine months ended July 31, 2012 and 2011, MVC Capital, Inc. recorded payment in kind dividend and interest of $2,294,938 and $2,425,740, respectively. This amount was added to the principal balance of the investments and recorded as dividend/interest income.

During the nine months ended July 31, 2012 and 2011, MVC Capital, Inc. was allocated $255,874 and $1,033,937, respectively, in flow-through income from its equity investment in Octagon Credit Investors, LLC. Of these amounts, $166,379 and $638,002, respectively, was received in cash and the balance of $89,495 and $395,935, respectively, was undistributed and therefore increased the cost of the investment. The fair value was then increased by $89,495 and $395,935, 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 December 12, 2011, BP Clothing, LLC (“BP”) filed for Chapter 11 protection in New York with agreement to turn ownership over to secured lenders under a bankruptcy reorganization plan. On June 20, 2012, BP completed the bankruptcy process which resulted in a realized loss of approximately $23.4 million on the second lien loan, term loan A and term loan B. As a result of the bankruptcy process, the Company received limited liability company interest in BPC II, LLC (“BPC”).

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 nine month period ended July 31, 2012, the Company recorded approximately $6,036 of amortization.

On March 23, 2012, the Company sold its shares in the Octagon High Income Cayman Fund Ltd. (“Octagon Fund”). As part of this transaction, there was approximately $152,000 held back until Octagon Fund's fiscal year 2012 audit is complete.

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

 

6


Table of Contents

MVC Capital, Inc.

Consolidated Statements of Changes in Net Assets

 

     For the Nine Month Period
November 1, 2011 to
July 31, 2012
    For the Nine Month Period
November 1, 2010 to
July 31, 2011
    For the Year Ended
October 31, 2011
 
     (Unaudited)     (Unaudited)        

Operations:

      

Net operating income (loss)

   $ 17,548,610      $ 1,785,098      $ (2,284,137

Net realized loss on investments

     (25,129,518     (14,443,295     (26,421,609

Net change in unrealized (depreciation) appreciation on investments

     (10,517,555     6,347,326        35,676,725   
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in net assets from operations

     (18,098,463     (6,310,871     6,970,979   
  

 

 

   

 

 

   

 

 

 

Shareholder Distributions:

      

Distributions to shareholders from income

     (8,610,114     (1,785,098     —     

Distributions to shareholders from return of capital

     —          (6,833,896     (11,489,032
  

 

 

   

 

 

   

 

 

 

Net decrease in net assets from shareholder distributions

     (8,610,114     (8,618,994     (11,489,032
  

 

 

   

 

 

   

 

 

 

Capital Share Transactions:

      

Repurchase of common stock

     —          (966,655     (966,655
  

 

 

   

 

 

   

 

 

 

Net decrease in net assets from capital share transactions

     —          (966,655     (966,655
  

 

 

   

 

 

   

 

 

 

Total decrease in net assets

     (26,708,577     (15,896,520     (5,484,708
  

 

 

   

 

 

   

 

 

 

Net assets, beginning of period/year

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

 

 

   

 

 

   

 

 

 

Net assets, end of period/year

   $ 392,801,139      $ 409,097,904      $ 419,509,716   
  

 

 

   

 

 

   

 

 

 

Common shares outstanding, end of period/year

     23,916,982        23,916,982        23,916,982   
  

 

 

   

 

 

   

 

 

 

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

 

7


Table of Contents

MVC Capital, Inc.

Consolidated Selected Per Share Data and Ratios

 

    For the Nine Month Period
November 1, 2011 to
July 31, 2012
    For the Nine Month Period
November 1, 2010 to
July 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)

    0.73        0.06        (0.10

Net realized and unrealized (loss) gain on investments

    (1.49     (0.32     0.40   
 

 

 

   

 

 

   

 

 

 

Total (loss) gain from investment operations

    (0.76     (0.26     0.30   
 

 

 

   

 

 

   

 

 

 

Less distributions from:

     

Income

    (0.36     (0.07     —     

Return of capital

    —          (0.29     (0.48
 

 

 

   

 

 

   

 

 

 

Total distributions

    (0.36     (0.36     (0.48
 

 

 

   

 

 

   

 

 

 

Capital share transactions

     

Anti-dilutive effect of share repurchase program

    —          0.01        0.01   
 

 

 

   

 

 

   

 

 

 

Total capital share transactions

    —          0.01        0.01   
 

 

 

   

 

 

   

 

 

 

Net asset value, end of period/year

  $ 16.42      $ 17.10      $ 17.54   
 

 

 

   

 

 

   

 

 

 

Market value, end of period/year

  $ 12.71      $ 12.51      $ 12.93   
 

 

 

   

 

 

   

 

 

 

Market discount

    (22.59 )%      (26.84 )%      (26.28 )% 

Total Return—At NAV (a)

    (4.38 )%      (1.43 )%      1.80

Total Return—At Market (a)

    2.16     (3.80 )%      0.35

Ratios and Supplemental Data:

     

Net assets, end of period (in thousands)

  $ 392,801      $ 409,098      $ 419,510   

Ratios to average net assets including waivers:

     

Expenses excluding tax expense (benefit)

    2.01 %(b)      3.44 %(b)      4.38

Expenses including tax expense (benefit)

    2.01 %(b)      3.45 %(b)      4.39

Expenses excluding incentive compensation

    3.49 %(b)      3.94 %(b)      3.92

Expenses excluding incentive compensation, interest and other borrowing costs

    2.68 %(b)      3.20 %(b)      3.18

Net operating income (loss) before tax expense (benefit)

    5.72 %(b)      0.58 %(b)      (0.54 )% 

Net operating income (loss) after tax expense (benefit)

    5.72 %(b)      0.57 %(b)      (0.55 )% 

Net operating income (loss) before incentive compensation

    4.24 %(b)      0.08 %(b)      (0.08 )% 

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

    5.05 %(b)      0.82 %(b)      0.66

Ratios to average net assets excluding waivers:

     

Expenses excluding tax expense

    2.84 %(b)      3.51 %(b)      4.44

Expenses including tax expense

    2.84 %(b)      3.52 %(b)      4.45

Expenses excluding incentive compensation

    4.31 %(b)      4.01 %(b)      3.98

Expenses excluding incentive compensation, interest and other borrowing costs

    3.50 %(b)      3.27 %(b)      3.24

Net operating income (loss) before tax expense

    4.90 %(b)      0.51 %(b)      (0.60 )% 

Net operating income (loss) after tax expense

    4.90 %(b)      0.50 %(b)      (0.61 )% 

Net operating income (loss) before incentive compensation

    3.42 %(b)      0.01 %(b)      (0.14 )% 

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

    4.23 %(b)      0.75 %(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.

 

8


Table of Contents

MVC Capital, Inc.

Consolidated Schedule of Investments

July 31, 2012 (Unaudited)

 

Company

 

Industry

 

Investment

  Principal     Cost     Fair Value  

Non-control/Non-affiliated investments—12.69% (a, c, f, g)

     

Actelis Networks, Inc.

  Technology Investments   Preferred Stock (150,602 shares) (d, j)     $ 5,000,003        —     

Biovation Holdings, Inc.

  Manufacturer of Laminate Material & Composites   Bridge Loan 6.0000% Cash, 6.0000% PIK, 02/28/2014 (b, h)   $ 1,500,000        1,500,000      $ 1,500,000   

BPC II, LLC

  Apparel   Limited Liability Company Interest (d)       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)     1,028,533        990,696        999,320   
    Warrants (d, m)       33,873        33,873   
       

 

 

   

 

 

 
          1,024,569        1,033,193   

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        —     

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   

Prepaid Legal Services, Inc.

  Consumer Services   Tranche A Term Loan 7.5000% Cash, 01/01/2017 (h)     3,268,293        3,228,690        3,228,690   
    Tranche B Term Loan 11.0000% Cash, 01/01/2017 (h)     4,000,000        3,903,063        3,903,063   
       

 

 

   

 

 

 
          7,131,753        7,131,753   

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 (1,528,330 shares) (d, e)       6,048,332        15,348,332   

Teleguam Holdings, LLC

  Telecommunications   Second Lien Loan 9.7500% Cash, 06/09/2017 (h)     7,000,000        6,943,173        6,943,173   
       

 

 

   

 

 

 

Sub Total Non-control/Non-affiliated investments

      63,767,552        49,863,801   
       

 

 

   

 

 

 

Affiliate investments—45.80% (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 , 06/18/2013 (b, h)     15,348,776        15,337,742        15,348,776   
    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   
       

 

 

   

 

 

 
          25,337,742        25,348,776   

Harmony Health & Beauty, Inc.

  Health & Beauty—Retail   Common Stock (147,621 shares) (d)       6,700,000        250,000   

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)     11,871,390        11,852,490        11,871,390   
    Convertible Preferred Stock (20,000 shares) (b)       3,210,018        3,210,018   
       

 

 

   

 

 

 
          15,062,508        15,081,408   

Octagon Credit Investors, LLC

  Financial Services   Limited Liability Company Interest       2,266,102        5,423,152   

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        1,417,000   
       

 

 

   

 

 

 
          1,159,815        1,577,000   

Security Holdings B.V.

  Electrical Engineering   Common Equity Interest (d, e)       40,186,620        26,970,000   

SGDA Europe B.V.

  Soil Remediation   Common Equity Interest (d, e)       20,084,599        7,676,000   

U.S. Gas & Electric, Inc.

  Energy Services   Second Lien Loan 9.0000% Cash, 5.0000% PIK , 06/30/2015 (b, h)     9,497,766        9,497,766        9,497,766   
    Convertible Series I Preferred Stock (32,200 shares) (d) (l)       500,000        81,067,607   
    Convertible Series J Preferred Stock (8,216 shares) (d)       —          —     
       

 

 

   

 

 

 
          9,997,766        90,565,373   
       

 

 

   

 

 

 

Sub Total Affiliate investments

      127,801,028        179,897,585   
       

 

 

   

 

 

 

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

 

9


Table of Contents

MVC Capital, Inc.

Consolidated Schedule of Investments—(Continued)

July 31, 2012 (Unaudited)

 

Company

 

Industry

 

Investment

  Principal     Cost     Fair Value  

Control Investments—49.82% (a, c, f, g)

     

MVC Automotive Group B.V.

  Automotive Dealerships   Common Equity Interest (d, e)     $ 34,736,939      $ 33,881,000   
    Bridge Loan 10.0000% Cash,
12/31/2012 (e, h)
  $ 3,643,557        3,643,557        3,643,557   
       

 

 

   

 

 

 
          38,380,496        37,524,557   

MVC Partners, LLC

  Private Equity   Limited Liability Company Interest (d)       9,364,002        8,143,609   

MVC Private Equity Fund LP

  Private Equity   Limited Liability Company Interest (d, k)       204,432        193,284   

Ohio Medical Corporation

  Medical Device Manufacturer   Common Stock (5,620 shares) (d)       15,763,636        —     
    Series A Convertible Preferred Stock (20,362 shares) (b)       30,000,000        39,500,000   
    Guarantee—Series B Preferred (d)       —          (700,000
       

 

 

   

 

 

 
          45,763,636        38,800,000   

SIA Tekers Invest

  Port Facilities   Common Stock (68,800 shares) (d, e)       2,300,000        1,108,000   

Summit Research Labs, Inc.

  Specialty Chemicals   Second Lien Loan 7.0000% Cash, 7.0000% PIK , 09/30/2017 (b, h)     11,658,222        11,625,172        11,658,222   
    Common Stock (1,115 shares)       16,000,000        62,500,000   
       

 

 

   

 

 

 
          27,625,172        74,158,222   

Turf Products, LLC

  Distributor—Landscaping and   Senior Subordinated Debt 9.0000% Cash, 4.0000% PIK , 01/31/2014 (b, h)     8,395,261        8,395,261        8,395,261   
 

Irrigation Equipment

  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        2,603,794   
    Warrants (d)       —          —     
       

 

 

   

 

 

 
          12,930,955        11,999,055   

Velocitius B.V.

  Renewable Energy   Common Equity Interest (d, e)       11,395,315        19,273,000   

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        3,900,000   
       

 

 

   

 

 

 
          2,450,000        4,500,000   
       

 

 

   

 

 

 

Sub Total Control Investments

          150,414,008        195,699,727   
       

 

 

   

 

 

 

TOTAL INVESTMENT ASSETS—108.31% (f)

    $ 341,982,588      $ 425,461,113   
       

 

 

   

 

 

 

 

(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., Security Holdings B.V., SGDA Europe B.V., SGDA Sanierungsgesellschaft fur Deponien und Altlasten mbH, SIA Tekers Invest, JSC Tekers Holdings, Centile Holdings B.V., Velocitius B.V., Freshii USA, Inc. 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 in Europe.
(f) Percentages are based on net assets of $392,801,139 as of July 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) 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 three investments, two located in the United States and one in Gibraltar, which are in the energy, services, and industrial sectors, respectively.
(l) Upon a liquidity event, the Company may receive additional ownership in U.S. Gas & Electronic, Inc.
(m) Includes a warrant in Freshii One LLC, an affiliate of Freshii USA, Inc.

PIK—Payment-in-kind

—Denotes zero cost or fair value.

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

 

10


Table of Contents

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, 7/18/2012 (b, h, i)   $ 20,362,135        19,579,285        —     
    Term Loan A 8.0000% Cash,
7/18/2011 (h, i)
    1,987,500        1,987,500      $ 280,000   
    Term Loan B 11.0000% Cash, 7/18/2011 (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%,
8/31/2011 (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,
8/31/2012 (e, h)
    6,187,350        6,187,350        6,187,350   

SHL Group Limited

  Talent Management Assessment   Common Stock (1,518,762 shares) (d, e)       6,000,000        15,300,000   

Teleguam Holdings, LLC

  Telecommunications   Second Lien Loan 9.7500% Cash, 6/9/2017 (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, 9/18/2012 (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.

  Health and Beauty—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,
6/30/2014 (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%, 7/26/2012 (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.

 

11


Table of Contents

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, 8/31/2013 (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, 1/31/2014 (b, h)     8,395,261        8,395,261        8,395,261   
    Junior Revolving Note 6.0000% Cash, 1/31/2014 (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, 4/29/2013 (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 in Europe.
(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.

 

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MVC Capital, Inc. (the “Company”)

Notes to Consolidated Financial Statements

July 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.

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.

 

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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 , Fair Value Measurements and Disclosures (“ASC 820”). 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 July 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 to which the reporting entity has access to as of the measurement date. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.

On May 12, 2011, the 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 requires entities to change the wording used to describe the requirements in U.S. Generally Accepted Accounting Principles “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. The adoption of this new guidance has not had a material effect on the financial position or results of operations of the Company and has resulted in additional disclosures. Please see Note 7 “Portfolio Investments.”

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 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.

 

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Pursuant to our Valuation Procedures, the Valuation Committee (which is comprised of three Independent Directors) determines fair values of portfolio company investments on a quarterly basis (or more frequently, if deemed appropriate under the circumstances). Any changes in valuation are recorded in the consolidated statements of operations as “Net change in unrealized appreciation (depreciation) on investments.” Currently, our NAV per share is calculated and published on a quarterly basis. The Company calculates our NAV per share by subtracting all liabilities from the total value of our portfolio securities and other assets and dividing the result by the total number of outstanding shares of our common stock on the date of valuation. Fair 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 July 31, 2012, approximately 91.72% 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, third-party real estate and asset appraisals if appropriate and available, discounted cash flow analysis, if appropriate, as well as other factors. The Company generally requires, where practicable, portfolio companies to provide annual audited and more regular unaudited financial statements, and/or annual projections for the upcoming fiscal year.

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

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, and third-party asset and real estate appraisals. For non-performing assets, the Valuation Committee may estimate the liquidation or collateral value of the portfolio company’s assets. The Valuation Committee also takes into account historical and anticipated financial results.

 

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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.

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 (the “GP”) of the PE Fund, the Valuation Committee relies on the GP’s determination of the Fair Value of the PE Fund which will be generally valued, as a practical expedient, utilizing the net asset valuations provided by the GP, which will be made: (i) no less frequently than quarterly as of the Company’s fiscal quarter end and (ii) with respect to the valuation of PE Fund investments in portfolio companies, will be based on methodologies consistent with those set forth in the valuation procedures. The determination of the net asset value of the Company’s or its subsidiary’s investment in the PE Fund will follow the methodologies described for valuing interests in private investment funds (“Investment Vehicles”) described below. Additionally, when both the Company and the PE Fund hold investments in the same portfolio company, the 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 are generally valued, as a practical expedient, utilizing the net asset valuations provided by management of the underlying Investment Vehicles, without adjustment, unless The Tokarz Group Advisers LLC (“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 investment interest includes its share of interest and dividend income and expense, and realized and unrealized gains and losses on securities held by the underlying Investment Vehicles, net of operating expenses and fees. Realized gains and losses on withdrawals from Investment Vehicles are generally recognized on a first in, first out basis.

 

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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 fair value.

If the Company intends to sell all or a portion of its interest in an Investment Vehicle to a third-party in a privately negotiated transaction, the Company will consider offers from third parties to buy the interest in an Investment Vehicle in valuations which may be discounted for both probability of close and time.

When the Company receives nominal cost warrants or free equity securities (“nominal cost equity”) with a debt security, the Company typically allocates its cost basis in the investment between debt securities and nominal cost equity at the time of origination.

Interest income, adjusted for amortization of premium and accretion of discount on a yield to maturity methodology, is recorded on an accrual basis to the extent that such amounts are expected to be collected. Origination and/or closing fees associated with investments in portfolio companies are 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. Dividend income, if any, is recognized on an accrual basis on the ex-dividend date to the extent that the Company expects to collect such amounts.

For loans, debt securities, and preferred securities with contractual payment-in-kind interest or dividends, which represent contractual interest/dividends accrued and added to the loan balance or liquidation preference that generally becomes due at maturity, the Company will not ascribe value to payment-in-kind interest/dividends, if the portfolio company valuation indicates that the payment-in-kind interest is not collectible. However, the Company may ascribe value to payment-in-kind interest if the health of the portfolio company and the underlying securities are not in question. All payment-in-kind interest that has been added to the principal balance or capitalized is subject to approval of the Valuation Committee.

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

ASC 460, Guarantees , requires the Company to estimate the fair value of the guarantee obligation at its inception and requires the Company to assess whether a probable loss contingency exists in accordance with the requirements of ASC 450, Contingencies. The Valuation Committee typically will look at the pricing of the security in which the guarantee provided support for the security and compare it to the price of a similar or hypothetical security without guarantee support. The difference in pricing will be discounted for time and risk over the period in which the guarantee is expected to remain outstanding.

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 91.72% of the Company’s total assets at July 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

 

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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 July 31, 2012.

 

   

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 asset value reported by such Investment Vehicle as of the measurement date, or within six months of the measurement date, are generally categorized as Level 2 investments. We did not value any of our investments using Level 2 inputs as of July 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.

 

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In accordance with ASU 2011-04, the following table summarizes information about the Company’s Level 3 fair value measurements as of July 31, 2012 (in thousands):

Quantitative Information about Level 3 Fair Value Measurements*

 

    Fair value as of             Range     Weighted  
    7/31/2012    

Valuation technique

 

Unobservable input

  Low     High     average (a)  

Common Stock (c) (d)

  $ 83,321      Adjusted Net Asset Approach   Discount to Net Asset Value     0.0     50.0     9.2
      Real Estate Appraisals     N/A        N/A        N/A   
    Income Approach   Discount Rate     14.0     20.6     14.3
      Non-Control Discount     10.0     10.0     10.0
    Market Approach   Revenue Multiple     2.0x        2.0x        2.0x   
      EBITDA Multiple     5.0x        11.0x        8.0x   

Senior/Subordinated loans and credit facilities (b) (d)

  $ 88,776      Adjusted Net Asset Approach   Discount to Net Asset Value     0.0     50.0     13.6
      Real Estate Appraisals     N/A        N/A        N/A   
    Market Approach   EBITDA Multiple     2.9x        8.6x        6.3x   
      Forward EBITDA Multiple     6.7x        6.7x        6.7x   
      Market Quotes     97.0     99.0     98.0
    Income Approach   Discount Rate     14.0     16.0     15.3

Other Equity Investments (d)

  $ 107,165      Adjusted Net Asset Approach   Discount to Net Asset Value     0.0     0.0     0.0
      Real Estate Appraisals     N/A        N/A        N/A   
    Market Approach   EBIT Multiple     8.0x        8.0x        8.0x   
      Discount to notional value of CLO equity     80.0     80.0     80.0
      Revenue Multiple     2.0x        2.0x        2.0x   
      EBITDA Multiple     4.7x        8.5x        6.3x   
      Euros (millions) per Installed MW   1.24      1.24      1.24   
      Euros per 3 year production average of MWhr   0.70      0.70      0.70   
      Euros per Expected MWhr original P50   0.70      0.70      0.70   
      Euros per Expected MWhr new P50   0.70      0.70      0.70   
    Income Approach   Discount Rate     11.6     22.7     13.0

Preferred Stock (c)

  $ 146,865      Market approach   Revenue Multiple     2.0x        2.9x        2.8x   
      EBITDA Multiple     6.0x        9.0x        7.0x   
      % of AUM     1.0     1.0     1.0
      Illiquidity Discount     20.0     20.0     20.0
    Income Approach   Discount Rate     20.0     20.6     20.4
      Non-Control Discount     10.0     10.0     10.0

Warrants

  $ 34      Market approach   Forward EBITDA Multiple     6.7x        6.7x        6.7x   
    Income Approach   Discount Rate     16.0     16.0     16.0

Guarantees

  $ (700   Income Approach   Discount Rate     16.0     16.0     16.0

Escrow Receivables

  $ 857      Adjusted Net Asset Approach   Discount to Net Asset Value     0.0     50.0     24.6

Total

  $ 426,318             

Notes:

(a) Calculated based on fair values.
(b) Certain investments are priced using non-binding broker or dealer quotes.
(c) Certain common and preferred stock investments are fair valued based on liquidation-out preferential rights held by the Company.
(d) Real estate appraisals are performed by independent third parties and the Company does not have reasonable access to the underlying unobservable inputs.
* The above table excludes certain investments whose fair value is zero due to certain specific situations at the portfolio company level.

Following are descriptions of the sensitivity of the Level 3 recurring fair value measurements to changes in the significant unobservable inputs presented in the above table. For securities utilizing the income approach valuation technique, a significant increase (decrease) in the discount rate, risk premium or discount for lack of marketability would result in a significantly lower (higher) fair value measurement. The discount for lack of marketability used to determine fair value may include other factors such as liquidity or credit risk. Generally, a change in the discount rate is accompanied by a directionally similar change in the risk premium and discount for lack of marketability. For securities utilizing the market approach valuation technique, a significant increase (decrease) in the EBITDA, revenue multiple or other key unobservable inputs listed in the above table would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the discount for lack of marketability would result in a significantly lower (higher) fair value measurement. The discount for lack of marketability used to determine fair value may include

 

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other factors such as liquidity or credit risk. For securities utilizing an adjusted net asset approach valuation technique, a significant increase (decrease) in the price to book value ratio, discount rate or other key unobservable inputs listed in the above table would result in a significantly higher (lower) fair value measurement.

The following fair value hierarchy table sets forth our investment portfolio by level as of July 31, 2012 and October 31, 2011 (in thousands):

 

     July 31, 2012  
     Level 1      Level 2      Level 3     Total  

Senior/Subordinated Loans and credit facilities

   $ —         $ —         $ 88,776      $ 88,776   

Common Stock

     —           —           83,321        83,321   

Preferred Stock

     —           —           146,865        146,865   

Warrants

     —           —           34        34   

Other Equity Investments

     —           —           107,165        107,165   

Guarantees

     —           —           (700     (700

Escrow receivables

     —           —           857        857   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Investments, net

   $ —         $ —         $ 426,318      $ 426,318   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     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

     —           2,805         123,441         126,246   

Escrow receivables

     —           —           1,147         1,147   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments, net

   $ —         $ 2,805       $ 450,558       $ 453,363   
  

 

 

    

 

 

    

 

 

    

 

 

 

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the period in which the reclassifications occur. During the nine month period ended July 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 nine month period ended July 31, 2012 and July 31, 2011 (in thousands):

 

     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,
July 31,  2012
 

Senior/Subordinated Loans and credit facilities

   $ 85,587       $ (23,420   $ 23,428       $ (237   $ 4,789       $ (1,371   $ —         $ 88,776   

Common Stock

     94,001         (1,957     2,008         (10,728     48         (51     —           83,321   

Preferred Stock

     146,382         —          —           297        186         —          —           146,865   

Warrants

     —           —          —           —          34         —          —           34   

Other Equity Investments

     123,441         41        —           (24,805     8,488         —          —           107,165   

Guarantees

     —           —          —           (700     —           —          —           (700

Escrow receivables

     1,147         143        —           —          152         (585     —           857   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 450,558       $ (25,193   $ 25,436       $ (36,173   $ 13,697       $ (2,007   $ —         $ 426,318   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     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,
July 31,  2011
 

Senior/Subordinated Loans and credit facilities

   $ 111,244       $ (14,189   $ 14,215       $ (7,628   $ 26,471       $ (38,215   $ —         $ 91,898   

Common Stock

     78,865         (433     433         5,015        7,951         (450     —           91,381   

Preferred Stock

     148,995         —          —           (4,008     1,672         (1,236     —           145,423   

Warrants

     —           —          —           —          —           —          —           —     

Other Equity Investments

     94,798         —          —           (1,699     3,899         (202     —           96,796   

Escrow receivables

     2,063         40        —           —          —           (956     —           1,147   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 435,965       $ (14,582   $ 14,648       $ (8,320   $ 39,993       $ (41,059   $ —         $ 426,645   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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(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 nine months ended July 31, 2012 and July 31, 2011, respectively.
(3) Included in net unrealized appreciation (depreciation) of investments in the Consolidated Statement of Operations related to securities held at July 31, 2012 and July 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 Nine Month Period Ended July 31, 2012

During the nine month period ended July 31, 2012, the Company made two new investments, committing capital totaling $2.5 million. The investments were made in Freshii USA, Inc. (“Freshii”) ($1.0 million) and Biovation Holdings, Inc. (“Biovation”) ($1.5 million).

During the nine month period ended July 31, 2012, the Company made seven follow-on investments in three existing portfolio companies totaling approximately $8.3 million. The Company through MVC Partners, LLC (“MVC Partners”) Limited Partnership interest and MVCFS’ General Partnership interest contributed approximately $8.2 million of its $20.1 million capital commitment to the PE Fund, which as of July 31, 2012, has invested in Plymouth Rock Energy, LLC, Gibdock Limited and Focus Pointe Holdings, Inc. On February 1, 2012, the Company made an equity investment in SHL Group Limited of approximately $48,000 for an additional 9,568 shares of common stock.

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 July 31, 2012, the amount guaranteed was approximately $20.5 million and the guarantee obligation was fair valued at $700,000 by the Valuation Committee.

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. On June 20, 2012, BP completed the bankruptcy process which resulted in a realized loss of approximately $23.4 million on the Company’s second lien loan, term loan A and term loan B. As a result of the bankruptcy process, the Company received a limited liability company interest in BPC II, LLC (“BPC”).

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 July 31, 2012.

On March 7, 2012, the Board of Directors of Summit Research Labs, Inc. (“Summit”) approved a recapitalization and declared a $15.0 million dividend, of which $12.0 million was paid to the Company resulting in a reduction in the fair value of the common stock by $12.0 million.

On March 23, 2012, the Company sold its shares in the Octagon High Income Cayman Fund Ltd. (“Octagon Fund”) for approximately $3.0 million resulting in a realized gain of approximately $18,000. The Company received approximately $2.9 million of the $3.0 million with the remaining proceeds of approximately $152,000 to be distributed when the Octagon Fund’s fiscal year audit is complete. The Company received additional proceeds of approximately $86,000 over the life of the investment.

On June 27, 2012, Integrated Packaging Corporation (“IPC”) completed the liquidation process filed under Chapter 7. There was no realized gain or loss as a result of the liquidation.

On July 2, 2012, The Corporate Executive Board (NYSE:EXBD), acquired SHL Group Limited for $660 million in cash. Upon closing of the transaction, the Company anticipates receiving net proceeds of approximately $15.3 million, its approximate fair market value as of July 31, 2012, which would result in a realized gain of approximately $9.3 million. See “Subsequent Events” below.

 

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On July 10, 2012, the Company sold its 21,064 common shares of Safestone Technologies Limited (“Safestone Limited”), a Legacy Investment, which had a fair value of $0. The amount received from the sale was approximately $50,000 and resulted in a realized loss of approximately $2.0 million.

During the nine month period ended July 31, 2012, Marine Exhibition Corporation (“Marine”) made principal payments totaling $450,000 on its senior subordinated loan. As of July 31, 2012, the balance of the loan was approximately $11.9 million.

During the nine month period ended July 31, 2012, Pre-Paid Legal Services, Inc. (“Pre-Paid Legal”) made principal payments on its tranche A term loan totaling approximately $732,000. The outstanding balance of the tranche A term loan was approximately $3.3 million.

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 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 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.

During the quarter ended April 30, 2012, the Valuation Committee increased the fair value of the Company’s investments in Vestal Manufacturing Enterprises, Inc. (“Vestal”) common stock by $1.2 million, MVC Automotive equity interest by $106,000, Security Holdings equity interest by $101,000, SGDA Europe equity interest by $33,000, Tekers common stock by $4,000 and Octagon Fund by approximately $143,000. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, Marine, Summit, U.S. Gas, Freshii and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $775,585. The Valuation Committee also decreased the fair value of the Company’s investments in HH&B common stock by $100,000, MVC Partners equity interest by approximately $113,000, MVCFS’ General Partnership interest in the PE Fund by approximately $3,000, and Velocitius equity interest by approximately $2.1 million. Also, during the quarter ended April 30, 2012, 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 $94,000.

During the quarter ended July 31, 2012, the Valuation Committee increased the fair value of the Company’s investments in Vestal common stock by approximately $1.2 million and RuMe Inc. (“RuMe”) preferred stock by approximately $417,000. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, Marine, Summit, U.S. Gas, Freshii and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $759,887. The Valuation Committee also decreased the fair value of the Company’s investments in BPC equity interest by $180,000, HH&B common stock by $150,000, MVC Automotive equity interest by approximately $1.1 million, MVC Partners equity interest by approximately $565,000, Security Holdings equity interest by approximately $6.5 million, SGDA Europe equity interest by approximately $3.1 million, Tekers common stock by $141,000, Turf equity interest by $618,000 and Velocitius equity interest by approximately $1.9 million. Also, during the quarter ended July 31, 2012, 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 $107,000.

 

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During the nine month period ended July 31, 2012, the Valuation Committee increased the fair value of the Company’s investments in Octagon Fund by approximately $227,000, RuMe preferred stock by approximately $417,000 and Vestal common stock by approximately $2.4 million. The Valuation Committee also increased the fair values of the Company’s escrow receivables related to Vitality by $130,000 and Vendio by approximately $13,000. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, Marine, Summit U.S. Gas, and Freshii and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $2,294,938. 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 $750,000, MVC Automotive equity interest by approximately $8.6 million, SGDA Europe equity interest by approximately $2.8 million, Security Holdings equity interest by approximately $6.2 million, Turf equity interest by $118,000, BPC equity interest by $180,000, MVC Partners equity interest by approximately $1.0 million, MVCFS’ General Partnership interest in the PE Fund by approximately $11,000, NPWT common and preferred stock by approximately $6,000 and $120,000, respectively, Tekers common stock by $417,000 and Velocitius equity interest by approximately $5.8 million. The Valuation Committee also determined to value the liability associated with the Ohio Medical guarantee at $700,000. Also, during the nine month period ended July 31, 2012, 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 $89,000.

At July 31, 2012, the fair value of all portfolio investments, exclusive of short-term investments, was $425.5 million with a cost basis of $342.0 million. At July 31, 2012, the fair value and cost basis of portfolio investments of the Legacy Investments was $10.8 million and $30.3 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $414.7 million and $311.7 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 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.

 

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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.

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.

 

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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 common stock by $670,000 during the quarter ended July 31, 2011.

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.

 

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

 

Portfolio Company

   Amount Committed      Amount Funded at July 31, 2012  

Turf

   $ 1.0 million       $ 1.0 million   

MVC Partners/MVCFS

   $ 20.1 million       $ 8.2 million   
  

 

 

    

 

 

 

Total

   $ 21.1 million       $ 9.2 million   

Guarantees:

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

 

Guarantee

   Amount Committed      Amount Funded at July 31, 2012  

MVC Automotive

   $ 4.9 million         —     

Tekers

   $ 215,000         —     

Ohio Medical

   $ 20.5 million         —     
  

 

 

    

 

 

 

Total

   $ 25.6 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 July 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.

 

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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 175,000 euros at July 31, 2012, equivalent to approximately $215,000.

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 July 31, 2012, the mortgage that was guaranteed was repaid by MVC Automotive, resulting in the release of the guarantee. As of July 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 $4.9 million at July 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 continue to view this amount as the full amount of our commitment. Erste Bank, the bank extending the mortgage to MVC Automotive, believes, based on a different methodology, that the balance of the guarantee as of July 31, 2012 is approximately 6.9 million Euro (equivalent to approximately $8.4 million). The Company and MVC Automotive are working to resolve this 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 July 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 July 31, 2012, $8.2 million of the Company’s commitment was contributed.

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 July 31, 2012, the amount guaranteed was approximately $20.5 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 9 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.

 

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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 July 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 are being 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 are 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.

At July 31, 2012, the carrying amount of our Credit Facility approximates the fair value of our Credit Facility, which was $50.0 million. The fair value of our debt obligation is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of our Credit Facility is estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any.

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.

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.

 

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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 (“Expense Limitation Agreement”). The amount of any payments made by the GP of the PE Fund to TTG Advisers pursuant to the Portfolio Management Agreement between the GP and TTG Advisers respecting the PE Fund will be excluded from the calculation of the Company’s expense ratio under the Expense Limitation Agreement. 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 TTG 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.

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 additional investments that represent more than 5% of its total assets or more than 10% of the outstanding voting securities of the issuer (“Non-Diversified Investments”) through the PE Fund. As previously disclosed, the Company is 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 and other fees paid by the PE Fund and its portfolio companies and up to 30% of the carried interest generated by the PE Fund. Further, at the direction of the Board of Directors, the GP retained TTG Advisers to serve as the portfolio manager of the PE Fund. In exchange for providing those services, and pursuant to the Board of Directors’ authorization and direction, TTG Advisers is entitled to receive the balance of the fees generated by the PE Fund and its portfolio companies and a portion of any carried interest generated by the PE Fund. Given this separate arrangement with the GP and the PE Fund (the “PM Agreement”), under the terms of the 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.

Management and portfolio fees (e.g., closing or monitoring fees) generated by the PE Fund (including its portfolio companies) that are paid to the GP are classified on the consolidated statements of operations as Management fee income—Asset Management and Portfolio fee income—Asset Management, respectively. The portion of such fees that the GP pays to TTG Advisers (in accordance with its PM Agreement described above) are classified on the consolidated statements of operations as Management fee—Asset Management and Portfolio fees—Asset Management. Under the PE Fund’s agreements, a significant portion of the portfolio fees that are paid by the PE Fund’s portfolio companies to the GP and TTG Advisers is subject to recoupment by the PE Fund in the form of an offset to future management fees paid by the PE Fund.

10. Incentive Compensation

At October 31, 2011, the provision for estimated incentive compensation was approximately $23.9 million. During the nine month period ended July 31, 2012, this provision for incentive compensation was decreased by a net amount of approximately $6.8 million to approximately $17.1 million. The net decrease in the provision for incentive compensation during the nine month period ended July 31, 2012 reflects the Valuation Committee’s determination to decrease the fair values of eleven of the Company’s portfolio investments (BP, HH&B, MVC Automotive, Security Holdings, SGDA Europe, NPWT, Tekers, Velocitius, BPC, Turf and Ohio Medical) by a total of $25.8 million and the dividend distribution

 

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of $12.0 million received from Summit. The net decrease in the provision also reflects the Valuation Committee’s determination to increase the fair values of three of the Company’s portfolio investments (Octagon Fund, Vestal and RuMe) by a total of approximately $3.0 million and the escrow receivable related to Vitality by $130,000. For the nine month period ended July 31, 2012, a provision of approximately $2.3 million was recorded for the net operating income portion of the incentive fee as pre-incentive fee net operating income exceeded the hurdle rate for the quarter ended April 30, 2012. TTG Advisers voluntarily agreed to waive the income-related incentive fee payment of approximately $2.3 million that the Company would otherwise be obligated to pay to TTG Advisers under the Advisory Agreement.

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 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

At October 31, 2011, 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 $19.5 million in unrealized losses associated with Legacy Investments as of July 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 nine month period ended July 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 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.

 

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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.

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.

For the Quarter Ended April 30, 2012

On April 13, 2012, the Company’s Board of Directors declared a dividend of $0.12 per share. The dividend was payable on April 30, 2012 to shareholders of record on April 23, 2012. The total distribution amounted to $2,870,038.

During the quarter ended April 30, 2012, as part of the Company’s dividend reinvestment plan for our common stockholders, the Plan Agent purchased 648 shares of our common stock at an average price of $12.95, including commission, in the open market in order to satisfy the reinvestment portion of our dividends under the Plan.

 

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For the Quarter Ended July 31, 2012

On July 13, 2012, the Company’s Board of Directors declared a dividend of $0.12 per share. The dividend was payable on July 31, 2012 to shareholders of record on July 24, 2012. The total distribution amounted to $2,870,038.

During the quarter ended July 31, 2012, as part of the Company’s dividend reinvestment plan for our common stockholders, the Plan Agent purchased 671 shares of our common stock at an average price of $12.55, 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 July 31, 2012. Implementation of the program as well as the timing thereof depends on a variety of factors, including the availability of capital, the Company’s current share price and the ability to conduct the offer under the Credit Facility.

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 nine month period ended July 31, 2012:

 

     MVC     MVCFS     Consolidated  

Interest and dividend income

   $ 20,064,487      $ 77      $ 20,064,564   

Fee income

     —          1,445,004        1,445,004   

Fee income—asset management

     —          1,973,341        1,973,341   

Other income

     255,874        —          255,874   

Total operating income

     20,320,361        3,418,422        23,738,783   

Total operating expenses

     2,097,894        6,607,050        8,704,944   

Less: Waivers by Adviser

     (2,475,718     (40,699     (2,516,417

Total net operating expenses

     (377,824     6,566,351        6,188,527   

Net operating income (loss) before taxes

     20,698,185        (3,147,929     17,550,256   

Tax expense

     —          1,646        1,646   

Net operating income (loss)

     20,698,185        (3,149,575     17,548,610   

Net realized (loss) gain on investments

     (25,130,540     1,022        (25,129,518

Net change in unrealized depreciation on investments

     (10,506,407     (11,148     (10,517,555

Net decrease in net assets resulting from operations

     (14,938,762     (3,159,701     (18,098,463

 

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14. Subsequent Events

On August 9, 2012, the Company sold its common shares of SHL Group Limited and received gross proceeds of approximately $15.3 million, resulting in a realized gain of approximately $9.3 million. The $15.3 million in proceeds includes all transaction expenses and approximately $225,000 which will be held in escrow.

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 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

 

     Nine Month
Period Ended
    Nine Month
Period Ended
    Year Ended  
     July 31,     July 31,     October 31,  
     2012     2011     2011  
     (Unaudited)     (Unaudited)        
     (In thousands, except per share data)  

Operating Data:

      

Interest and related portfolio income:

      

Interest and dividend income

   $ 20,065      $ 8,596      $ 11,450   

Fee income

     1,445        2,321        2,784   

Fee income—asset management

     1,973        595        396   

Other (loss) income

     256        1,039        1,341   
  

 

 

   

 

 

   

 

 

 

Total operating income

     23,739        12,551        15,971   

Expenses:

      

Management fee

     7,178        6,987        9,142   

Portfolio fees—asset management

     862        —          —     

Administrative

     2,711        3,215        4,320   

Interest and other borrowing costs

     2,481        2,299        3,082   

Net Incentive compensation (Note 10)

     (4,527     (1,535     1,948   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     8,705        10,966        18,492   
  

 

 

   

 

 

   

 

 

 

Total waiver by adviser

     (2,516     (213     (251
  

 

 

   

 

 

   

 

 

 

Total net operating expenses

     6,189        10,753        18,241   
  

 

 

   

 

 

   

 

 

 

Net operating income (loss) before taxes

     17,550        1,798        (2,270

Tax expense, net

     1        13        14   
  

 

 

   

 

 

   

 

 

 

Net operating income (loss)

     17,549        1,785        (2,284

Net realized and unrealized (loss) gain:

      

Net realized loss on investments

     (25,129     (14,443     (26,422

Net change in unrealized (depreciation) appreciation on investments

     (10,518     6,347        35,677   
  

 

 

   

 

 

   

 

 

 

Net realized and unrealized (loss) gain on investments

     (35,647     (8,096     9,255   
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in net assets resulting from operations

   $ (18,098   $ (6,311   $ 6,971   
  

 

 

   

 

 

   

 

 

 

Per Share:

      

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

   $ (0.76   $ (0.26   $ 0.30   

Dividends per share

   $ 0.36      $ 0.36      $ 0.48   

Balance Sheet Data:

      

Portfolio at value

   $ 425,461      $ 428,536      $ 452,215   

Portfolio at cost

     341,983        363,869        358,219   

Total assets

     464,820        483,312        497,107   

Shareholders’ equity

     392,801        409,098        419,510   

Shareholders’ equity per share (net asset value)

   $ 16.42      $ 17.10      $ 17.54   

Common shares outstanding at period end

     23,917        23,917        23,917   

Other Data:

      

Number of Investments funded in period

     9        9        13   

Investments funded ($) in period

   $ 10,767      $ 32,084      $ 43,235   

 

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

Quarterly Data (Unaudited):

                      

Total operating income

     3,931        16,164        3,644        3,421        3,482        4,544        4,524        5,130        5,257        5,336        7,798   

Management fee

     2,168        2,365        2,645        2,155        2,183        2,249        2,555        2,232        2,176        2,467        2,455   

Portfolio fees—asset management

     338        462        62        —          —          —          —          —          —          —          —     

Administrative

     971        817        923        1,105        1,049        990        1,176        777        910        938        770   

Interest, fees and other borrowing costs

     854        832        795        783        784        745        770        770        767        647        641   

Net Incentive compensation

     (2,415     (175     (1,937     3,483        (463     531        (1,603     2,504        (3,270     2,225        1,020   

Total waiver by adviser

     (37     (2,383     (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

     2,052        14,246        1,251        (4,069     (34     65        1,754        (1,105     4,724        (892     2,907   

Net (decrease) increase in net assets resulting from operations

     (10,595     1,515        (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

     (0.45     0.06        (0.37     0.56        (0.10     0.10        (0.26     0.47        (0.47     0.37        0.29   

Net asset value per share

     16.42        16.99        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 nine month period ended July 31, 2012, the Company made two new investments and seven follow-on investments in three existing portfolio companies, committing capital totaling $10.8 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 July 31, 2012, 2.32% 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.

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

 

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an indirect wholly-owned subsidiary of the Company serves as the GP. On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in the PE Fund. The PE Fund 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 and other fees paid by the PE Fund and its portfolio companies and up to 30% of the carried interest generated by the PE Fund. Further, at the direction of the Board of Directors, the GP retained TTG Advisers to serve as the portfolio manager of the PE Fund. In exchange for providing those services, and pursuant to the Board of Directors’ authorization and direction, TTG Advisers is entitled to receive the balance of the fees and any carried interest generated by the PE Fund and its portfolio companies. Given this separate arrangement with the GP and the PE Fund, under the terms of the 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 Nine Month Period Ended July 31, 2012 and 2011. Total operating income was $23.7 million for the nine month period ended July 31, 2012 and $12.6 million for the nine month period ended July 31, 2011, an increase of approximately $11.1 million.

For the Nine Month Period Ended July 31, 2012

Total operating income was $23.7 million for the nine month period ended July 31, 2012. The increase in operating income over the same period last year was primarily due to an increase in dividend income offset by a decrease in fees from portfolio companies and other income. The main components of operating income for the nine month period ended July 31, 2012, was dividend income from portfolio companies and the interest earned on loans. The Company earned approximately $20.1 million in interest and dividend income from investments in portfolio companies, of which $12.0 million was a non-recurring dividend. Of the $20.1 million recorded in interest/dividend income, approximately $2.3 million was “payment in kind” interest/dividends. The “payment in kind” interest/dividends are computed at the contractual rate specified in each investment agreement and added to the principal balance of each investment. The Company’s debt investments yielded rates from 6% to 14%, excluding those investments which interest is being reserved against. The Company also received fee income from asset management of the PE Fund and its portfolio companies totaling approximately $2.0 million and fee income from portfolio companies of approximately $1.4 million, totaling approximately $3.4 million. Of the $2.0 million of fee income from asset management, 75% of the income is obligated to be paid to TTG Advisers. However, under the PE Fund’s agreements, a significant portion of the portfolio fees that are paid by the PE Fund’s portfolio companies to the GP and TTG Advisers is subject to recoupment by the PE Fund in the form of an offset to future management fees paid by the PE Fund.

For the Nine Month Period Ended July 31, 2011

Total operating income was $12.6 million for the nine month period ended July 31, 2011. 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, reserves against non-performing loans 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,

 

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monitoring and termination fees from certain portfolio companies by the Company and MVCFS. The Company earned approximately $8.6 million in interest and dividend income from investments in portfolio companies. Of the $8.6 million recorded in interest/dividend income, approximately $2.4 million was “payment in kind” interest/dividends. The “payment in kind” interest/dividends are computed at the contractual rate specified in each investment agreement and added to the principal balance of each investment. The 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 $4.0 million.

OPERATING EXPENSES

For the Nine Month Period Ended July 31, 2012 and 2011. Operating expenses, net of Voluntary Waivers, were approximately $6.2 million for the nine month period ended July 31, 2012 and $10.8 million for the nine month period ended July 31, 2011, a decrease of approximately $4.6 million.

For the Nine Month Period Ended July 31, 2012

Operating expenses, net of the Voluntary Waivers (as described below), were approximately $6.2 million or 2.01% of the Company’s average net assets, when annualized, for the nine month period ended July 31, 2012. Significant components of operating expenses for the nine month period ended July 31, 2012 were management fee expense of totaling approximately $7.2 million, which includes management fees related to the Company and the PE Fund, and interest and other borrowing costs of approximately $2.5 million.

The $4.6 million decrease in the Company’s net operating expenses for the nine month period ended July 31, 2012 compared to the nine month period ended July 31, 2011, was primarily due to the $3.0 million decrease in the estimated provision for incentive compensation expense and the $2.3 million voluntary waiver of the income incentive fee payment, which were offset by the addition of approximately $862,000 in portfolio fees – asset management expense. The portfolio fees are payable to TTG Advisers for monitoring and other customary fees received by the GP from portfolio companies of the PE Fund. To the extent the GP or TTG Advisers receives advisory, monitoring organization or other customary fees from any portfolio company of the PE Fund, 25% of such fees shall be paid to or retained by the GP and 75% of such fees shall be paid to or retained by TTG Advisers. For the 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 had also voluntarily agreed that any assets of the Company that were 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 nine month period ended July 31, 2012 annualized, the Company’s expense ratio was 3.18% and 2.968%, 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 nine month period ended July 31, 2012, the provision for incentive compensation was decreased by a net amount of approximately $6.8 million to approximately $17.1 million. The net decrease in the provision for incentive compensation during the nine month period ended July 31, 2012 reflects the Valuation Committee’s determination to decrease the fair values of eleven of the Company’s portfolio investments (BP, HH&B, MVC Automotive, Security Holdings, SGDA Europe, NPWT, Tekers, Velocitius, BPC, Turf and Ohio Medical) by a total of $25.8 million and the dividend distribution of $12.0 million received from Summit. The net decrease in the provision also reflects the Valuation Committee’s determination to increase the fair values of three of the Company’s portfolio investments (Octagon Fund, Vestal and RuMe) by a total of approximately $3.0 million. The Valuation Committee also increased the fair value of the Company’s escrow receivable related to Vitality by $130,000. For the nine month period ended July 31, 2012, a provision of approximately $2.3 million was recorded for the net operating income portion of the incentive fee as pre-incentive fee net operating income exceeded the hurdle rate for the quarter ended April 30, 2012. TTG Advisers has voluntarily agreed to waive the income-related incentive fee payment of approximately $2.3 million that the Company would otherwise be obligated to pay to TTG Advisers under the Advisory Agreement. Please see Note 10 of our consolidated financial statements “Incentive Compensation” for more information.

 

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For the Nine Month Period Ended July 31, 2011

Operating expenses, net of the Voluntary Waivers (as described below), were approximately $10.8 million or 3.44% of the Company’s average net assets, when annualized, for the nine month period ended July 31, 2011. Significant components of operating expenses for the nine month period ended July 31, 2011 were management fee expense of $7.0 million and interest and other borrowing costs of approximately $2.3 million.

The $800,000 decrease in the Company’s operating expenses for the nine month period ended July 31, 2011 compared to the nine month period ended July 31, 2010, was primarily due to the $1.5 million decrease in the estimated provision for incentive compensation expense offset by increases in interest and other borrowings costs, legal and other expenses totaling approximately $850,000. 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 nine month period ended July 31, 2011 annualized, the Company’s expense ratio was 2.95% and 3.19%, 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 nine month period ended July 31, 2011, the provision for incentive compensation was decreased by a net amount of approximately $1.5 million to $20.5 million. The decrease in the provision for incentive compensation reflects the Valuation Committee’s determination to increase the fair values of eight of the Company’s portfolio investments (Summit, SHL Group Limited, Security Holdings, Tekers, Total Safety, U.S. Gas, Octagon Fund and Velocitius) by a total of approximately $20.8 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 decrease in the provision also reflects the Valuation Committee’s determination to decrease the fair values of seven of the Company’s portfolio investments (BP, Ohio Medical, MVC Automotive, HuaMei, SGDA Europe, Vestal and HH&B) by a total of $30.6 million. During the nine month period ended July 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 10 of our consolidated financial statements “Incentive Compensation” for more information.

REALIZED GAINS AND LOSSES ON PORTFOLIO SECURITIES

For the Nine Month Period Ended July 31, 2012 and 2011. Net realized losses for the nine month period ended July 31, 2012 were approximately $25.1 million and net realized losses for the nine month period ended July 31, 2011 were approximately $14.4 million, an increase of approximately $10.7 million.

For the Nine Month Period Ended July 31, 2012

Net realized losses for the nine month period ended July 31, 2012 were approximately $25.1 million. The significant components of the Company’s net realized losses for the nine month period ended July 31, 2012 were primarily due to the reorganization of BP and the sale of Safestone.

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. On June 20, 2012, BP completed the bankruptcy process which resulted in a realized loss of approximately $23.4 million on the Company’s second lien loan, term loan A and term loan B.

On March 23, 2012, the Company sold its shares in the Octagon Fund for approximately $3.0 million resulting in a realized gain of approximately $18,000. Also during the nine month period ended July 31, 2012, the Company received distributions from Octagon Fund of approximately $45,000, which were treated as realized gains.

On July 10, 2012, the Company sold its 21,064 common shares of Safestone, a Legacy Investment. The amount received from the sale was approximately $50,000 and resulted in a realized loss of approximately $2.0 million.

During the nine month period ended July 31, 2012, MVC Partners and MVCFS’ General Partnership interest received distributions totaling approximately $41,000 from the PE Fund which were treated as realized gains.

 

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During the nine month period ended July 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 Nine Month Period Ended July 31, 2011

Net realized losses for the nine month period ended July 31, 2011 were $14.4 million. The significant components of the Company’s net realized losses for the nine month period ended July 31, 2011 was primarily due to the loss on the sale of Harmony Pharmacy common stock, demand notes and revolving credit facility and the dissolution of Amersham. A portion of these losses were offset by the gain on the sale of LHD Europe common stock and the gains on the sale of the SPDR Barclays Capital High Yield Bond Fund and the iShares S&P U.S. Preferred Stock Index Fund.

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.

During the nine month period ended July 31, 2011, the Company sold its shares in the SPDR Barclays Capital High Yield Bond Fund and the iShares S&P U.S. Preferred Stock Index Fund, which resulted in a realized gain of approximately $106,000.

UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES

For the Nine Month Period Ended July 31, 2012 and 2011. The Company had a net change in unrealized depreciation on portfolio investments of approximately $10.5 million for the nine month period ended July 31, 2012 and unrealized appreciation on portfolio investments of approximately $6.3 million for the nine month period ended July 31, 2011, a net decrease of approximately $16.8 million.

For the Nine Month Period Ended July 31, 2012

The Company had a net change in unrealized depreciation on portfolio investments of approximately $10.5 million for the nine month period ended July 31, 2012. The change in unrealized depreciation for the nine month period ended July 31, 2012 primarily resulted from the $12.0 million cash dividend received from Summit and 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 $750,000, MVC Automotive equity interest by approximately $8.6 million, SGDA Europe equity interest by approximately $2.8 million, Security Holdings equity interest by approximately $6.2 million, Turf equity interest by $118,000, BPC equity interest by $180,000, MVC Partners equity interest by approximately $1.0 million, MVCFS’ General Partnership interest in the PE Fund by approximately $11,000, NPWT common and preferred stock by approximately $6,000 and $120,000, respectively, Tekers common stock by $417,000, Velocitius equity interest by approximately $5.8 million and value the liability associated with the Ohio Medical guarantee at $700,000. These changes in unrealized depreciation were partially off-set by the reclassifications from unrealized depreciation to realized losses caused by the reorganization of BP and the sale of Safestone of approximately $25.4 million and the Valuation Committee decision to increase the fair values of the Company’s investments in Octagon Fund by approximately $227,000, RuMe preferred stock by approximately $417,000 and Vestal common stock by approximately $2.4 million.

 

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For the Nine Month Period Ended July 31, 2011

The Company had a net change in unrealized appreciation on portfolio investments of approximately $6.3 million for the nine month period ended July 31, 2011. The change in unrealized appreciation on investment transactions for the nine month period ended July 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 $9.5 million, SHL Group Limited common stock by $3.5 million, Security Holdings equity interest by approximately $4.5 million, Tekers common stock by approximately $410,000, Total Safety first lien loan by approximately $74,000, U.S. Gas preferred stock by $2.5 million, Octagon Fund by $25,000 and Velocitius equity interest by $300,000. 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 MVC Automotive equity interest by approximately $2.4 million, 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 $8.4 million, HuaMei common stock by approximately $1.5 million, SGDA Europe equity interest by $4.3 million, Vestal common stock by $670,000 and HH&B by $5.7 million during the nine month period ended July 31, 2011.

PORTFOLIO INVESTMENTS

For the Nine Month Period Ended July 31, 2012 and the Year Ended October 31, 2011. The cost of the portfolio investments held by the Company at July 31, 2012 and at October 31, 2011 was $342.0 million and $358.2 million, respectively, a decrease of $16.2 million. The aggregate fair value of portfolio investments at July 31, 2012 and at October 31, 2011 was $425.5 million and $452.2 million, respectively, a decrease of $26.7 million. The Company held unrestricted cash and cash equivalents at July 31, 2012 and at October 31, 2011 of $24.9 million and $28.3 million, respectively, a decrease of approximately $3.4 million.

For the Nine Month Period Ended July 31, 2012

During the nine month period ended July 31, 2012, the Company made two new investments, committing capital totaling $2.5 million. The investments were made in Freshii ($1.0 million) and Biovation ($1.5 million).

During the nine month period ended July 31, 2012, the Company made seven follow-on investments in three existing portfolio companies totaling approximately $8.3 million. The Company through MVC Partners Limited Partnership interest and MVCFS’ General Partnership interest contributed approximately $8.2 million of its $20.1 million capital commitment to the PE Fund, which as of July 31, 2012, has invested in Plymouth Rock Energy, LLC, Gibdock Limited and Focus Pointe Holdings, Inc. On February 1, 2012, the Company made an equity investment in SHL Group Limited of approximately $48,000 for an additional 9,568 shares of common stock.

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 July 31, 2012, the amount guaranteed was approximately $20.5 million and the guarantee obligation was fair valued at $700,000 by the Valuation Committee.

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. On June 20, 2012, BP completed the bankruptcy process which resulted in a realized loss of approximately $23.4 million on the Company’s second lien loan, term loan A and term loan B. As a result of the bankruptcy process, the Company received limited liability company interest in BPC.

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

On March 7, 2012, the Board of Directors of Summit approved a recapitalization and declared a $15.0 million dividend, of which $12.0 million was paid to the Company resulting in a reduction in the fair value of the common stock by $12.0 million.

 

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On March 23, 2012, the Company sold its shares in the Octagon Fund for approximately $3.0 million resulting in a realized gain of approximately $18,000. The Company received approximately $2.9 million of the $3.0 million with the remaining proceeds of approximately $152,000 to be distributed when the Octagon Fund’s fiscal year audit is complete. The Company received additional proceeds of approximately $86,000 over the life of the investment.

On June 27, 2012, IPC completed the liquidation process filed under Chapter 7. There was no realized gain or loss as a result of the liquidation.

On July 2, 2012, The Corporate Executive Board (NYSE:EXBD), acquired SHL Group Limited for $660 million in cash. Upon closing of the transaction, the Company anticipates receiving net proceeds of approximately $15.3 million, its approximate fair market value as of July 31, 2012, which would result in a realized gain of approximately $9.3 million. See “Subsequent Events” below.

On July 10, 2012, the Company sold its 21,064 common shares of Safestone Limited, a Legacy Investment, which had a fair value of $0. The amount received from the sale was approximately $50,000 and resulted in a realized loss of approximately $2.0 million.

During the nine month period ended July 31, 2012, Marine made principal payments totaling $450,000 on its senior subordinated loan. As of July 31, 2012, the balance of the loan was approximately $11.9 million.

During the nine month period ended July 31, 2012, Pre-Paid Legal made principal payments on its tranche A term loan totaling approximately $732,000. The outstanding balance of the tranche A term loan was approximately $3.3 million.

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 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 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.

During the quarter ended April 30, 2012, the Valuation Committee increased the fair value of the Company’s investments in Vestal common stock by $1.2 million, MVC Automotive equity interest by $106,000, Security Holdings equity interest by $101,000, SGDA Europe equity interest by $33,000, Tekers common stock by $4,000 and Octagon Fund by approximately $143,000. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, Marine, Summit, U.S. Gas, Freshii and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $775,585. The Valuation Committee also decreased the fair value of the Company’s investments in HH&B common stock by $100,000, MVC Partners equity interest by approximately $113,000, MVCFS’ General Partnership interest in the PE Fund by approximately $3,000, and Velocitius equity interest by approximately $2.1 million. Also, during the quarter ended April 30, 2012, 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 $94,000.

 

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During the quarter ended July 31, 2012, the Valuation Committee increased the fair value of the Company’s investments in Vestal common stock by approximately $1.2 million and RuMe preferred stock by approximately $417,000. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, Marine, Summit, U.S. Gas, Freshii and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $759,887. The Valuation Committee also decreased the fair value of the Company’s investments in BPC equity interest by $180,000, HH&B common stock by $150,000, MVC Automotive equity interest by approximately $1.1 million, MVC Partners equity interest by approximately $565,000, Security Holdings equity interest by approximately $6.5 million, SGDA Europe equity interest by approximately $3.1 million, Tekers common stock by $141,000, Turf equity interest by $618,000 and Velocitius equity interest by approximately $1.9 million. Also, during the quarter ended July 31, 2012, 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 $107,000.

During the nine month period ended July 31, 2012, the Valuation Committee increased the fair value of the Company’s investments in Octagon Fund by approximately $227,000, RuMe preferred stock by approximately $417,000 and Vestal common stock by approximately $2.4 million. The Valuation Committee also increased the fair values of the Company’s escrow receivables related to Vitality by $130,000 and Vendio by approximately $13,000. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, Marine, Summit U.S. Gas, and Freshii and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $2,294,938. 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 $750,000, MVC Automotive equity interest by approximately $8.6 million, SGDA Europe equity interest by approximately $2.8 million, Security Holdings equity interest by approximately $6.2 million, Turf equity interest by $118,000, BPC equity interest by $180,000, MVC Partners equity interest by approximately $1.0 million, MVCFS’ General Partnership interest in the PE Fund by approximately $11,000, NPWT common and preferred stock by approximately $6,000 and $120,000, respectively, Tekers common stock by $417,000 and Velocitius equity interest by approximately $5.8 million. The Valuation Committee also determined to value the liability associated with the Ohio Medical guarantee at $700,000. Also, during the nine month period ended July 31, 2012, 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 $89,000.

At July 31, 2012, the fair value of all portfolio investments, exclusive of short-term investments, was $425.5 million with a cost basis of $342.0 million. At July 31, 2012, the fair value and cost basis of portfolio investments of the Legacy Investments was $10.8 million and $30.3 million, respectively, and the fair value and cost basis of portfolio investments made by the Company’s current management team was $414.7 million and $311.7 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.

 

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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.

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.

 

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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. 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 nine month period ended July 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 July 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.

 

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