[March 07, 2013] MVC CAPITAL, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Tweet (Edgar Glimpses Via Acquire Media NewsEdge) 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, 2012. SELECTED CONSOLIDATED FINANCIAL DATA: Financial information for the fiscal year ended October 31, 2012 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 32 -------------------------------------------------------------------------------- Table of Contents 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. Selected Consolidated Financial Data Quarter Ended Quarter Ended Year Ended January 31, January 31, October 31, 2013 2012 2012 (Unaudited) (Unaudited) (In thousands, except per share data and number of investments) Operating Data: Interest and related portfolio income: Interest and dividend income $ 5,595 $ 2,668 $ 25,205 Fee income 371 487 1,940 Fee income - asset management 450 601 2,300 Other (loss) income (30 ) (112 ) 442 Total operating income 6,386 3,644 29,887 Expenses: Management fee 2,080 2,257 8,588 Portfolio fees - asset management 106 62 968 Management fee - asset management 232 388 757 Administrative 890 923 3,573 Interest and other borrowing costs 937 795 3,367 Net Incentive compensation (Note 10) 1,175 (1,937 ) (5,937 ) Total operating expenses 5,420 2,488 11,316 Total waiver by adviser (38 ) (96 ) (2,554 ) Net operating income before taxes 1,004 1,252 21,125 Tax expense, net 1 1 4 Net operating income 1,003 1,251 21,121 Net realized and unrealized (loss) gain: Net realized (loss) gain on investments (1,923 ) 194 (20,518 ) Net change in unrealized appreciation (depreciation) on investments 7,796 (10,463 ) (22,257 ) Net realized and unrealized gain (loss) on investments 5,873 (10,269 ) (42,775 ) Net increase (decrease) in net assets resulting from operations $ 6,876 $ (9,018 ) $ (21,654 ) Per Share: Net (decrease) increase in net assets per share resulting from operations $ 0.29 $ (0.38 ) $ (0.90 ) Dividends per share $ 0.135 $ 0.120 $ 0.495 Balance Sheet Data: Portfolio at value $ 416,477 $ 449,227 $ 404,171 Portfolio at cost 336,943 365,694 332,432 Total assets 461,466 484,014 456,431 Shareholders' equity 389,664 407,622 386,016 Shareholders' equity per share (net asset value) $ 16.29 $ 17.04 $ 16.14 Common shares outstanding at period end 23,917 23,917 23,917 Other Data: Number of Investments funded in period 2 5 11 Investments funded ($) in period $ 8,500 $ 7,315 $ 11,300 33 -------------------------------------------------------------------------------- Table of Contents 2013 2012 2011 Qtr 1 Qtr 4 Qtr 3 Qtr 2 Qtr 1 Qtr 4 Qtr 3 Qtr 2 Qtr 1 (In thousands, except per share data) Quarterly Data (Unaudited): Total operating income 6,386 6,148 3,931 16,164 3,644 3,421 3,482 4,544 4,524 Management fee 2,080 2,027 2,127 2,177 2,257 2,155 2,183 2,022 2,485 Portfolio fees - asset management 106 106 338 462 62 - - - - Management fee - asset management 232 140 41 188 388 - - 227 70 Administrative 890 862 971 817 923 1,105 1,049 990 1,176 Interest, fees and other borrowing costs 937 886 854 832 795 783 784 745 770 Net Incentive compensation 1,175 (1,410 ) (2,415 ) (175 ) (1,937 ) 3,483 (463 ) 531 (1,603 ) Total waiver by adviser (38 ) (38 ) (37 ) (2,383 ) (96 ) (38 ) (37 ) (38 ) (138 ) Tax expense 1 3 - - 1 2 - 2 10 Net operating income (loss) before net realized and unrealized gains 1,003 3,572 2,052 14,246 1,251 (4,069 ) (34 ) 65 1,754 Net (decrease) increase in net assets resulting from operations 6,876 (3,556 ) (10,595 ) 1,515 (9,018 ) 13,282 (2,369 ) 2,302 (6,244 ) Net (decrease) increase in net assets resulting from operations per share 0.29 (0.14 ) (0.45 ) 0.06 (0.37 ) 0.56 (0.10 ) 0.10 (0.26 ) Net asset value per share 16.29 16.14 16.42 16.99 17.04 17.54 17.1 17.32 17.33 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, 2012, the Company made two new investments and made nine follow-on investments in five existing portfolio companies committing a total of $11.3 million of capital to these investments. During the quarter ended January 31, 2013, the Company made two follow-on investments in existing portfolio companies, committing capital totaling $8.5 million. Prior to the adoption of our current investment objective, the Company's investment objective had been to achieve long-term capital appreciation from venture capital investments in information technology companies. The Company's investments had thus previously focused on investments in equity and debt securities of information technology companies. As of January 31, 2013, 2.34% 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. 34 -------------------------------------------------------------------------------- Table of Contents 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 funds. Furthermore, the Board of Directors authorized the establishment of a PE Fund, for which an indirect wholly-owned subsidiary of the Company serves as the GP and which may raise up to $250 million. On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in the PE Fund. The PE Fund closed on approximately $104 million of capital commitments. The Company's Board of Directors authorized the establishment of, and investment in, the PE Fund for a variety of reasons, including the Company's ability to make Non-Diversified Investments through the PE Fund. 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. During the fiscal year ended October 31, 2012, MVC Partners was consolidated with the operations of the Company as MVC Partners' limited partnership interest in the PE Fund is a substantial portion of MVC Partners operations. Previously, MVC Partners was presented as a portfolio company on the Consolidated Schedule of Investments. The consolidation of MVC Partners has not had any material effect on the financial position or net results of operations of the Company. Please see Note 2 of our consolidated financial statements "Consolidation" for more information. As a result of the closing of the PE Fund, consistent with the Board-approved policy concerning the allocation of investment opportunities, the PE Fund 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 Quarter Ended January 31, 2013 and 2012. Total operating income was $6.4 million for the quarter ended January 31, 2013 and $3.6 million for the quarter ended January 31, 2012, an increase of approximately $2.8 million. For the Quarter Ended January 31, 2013 Total operating income was $6.4 million for the quarter ended January 31, 2013. The increase in operating income over the same period last year was primarily due to an increase in dividend and interest income offset by a decrease in fees from portfolio companies and asset management activities. The main components of operating income for the quarter ended January 31, 2013, was dividend income from portfolio companies and the interest earned on loans. The Company earned approximately $5.6 million in interest and dividend income from investments in portfolio companies. Of the $5.6 million recorded in interest/dividend income, approximately $634,000 was "payment in kind" interest/dividends. The "payment in kind" interest/dividends are computed at the contractual rate specified in each investment agreement and added to the principal balance of each investment. The Company's debt investments yielded rates from 6% to 14%. The Company also received fee income from asset management of the PE Fund and its portfolio companies totaling approximately $449,000 and fee income from portfolio companies of approximately $371,000, totaling approximately $820,000. Of the $449,000 of fee income from asset management activities, 75% of the income is obligated to be paid to TTG Advisers. However, under the PE Fund's agreements, a significant portion of the portfolio fees that are paid by the PE Fund's portfolio companies to the GP and TTG Advisers is subject to recoupment by the PE Fund in the form of an offset to future management fees paid by the PE Fund. 35 -------------------------------------------------------------------------------- Table of Contents For the Quarter Ended January 31, 2012 Total operating income was $3.6 million for the quarter ended January 31, 2012. The decrease in operating income over the same period last year was primarily due to the repayment of investments that provided the Company with current income and a decrease in dividend income from the sale of portfolio companies. The main components of operating income were the interest earned on loans and the receipt of closing, monitoring and termination fees from certain portfolio companies by the Company and MVCFS. The Company earned approximately $2.7 million in interest and dividend income from investments in portfolio companies. Of the $2.7 million recorded in interest/dividend income, approximately $759,000 was "payment in kind" interest/dividends. The "payment in kind" interest/dividends are computed at the contractual rate specified in each investment agreement and added to the principal balance of each investment. The Company's debt investments yielded rates from 6% to 15%, excluding those investments which interest is being reserved against. The Company received fee income and had other losses from portfolio companies and other entities totaling a net amount of approximately $976,000. OPERATING EXPENSES For the Quarter Ended January 31, 2013 and 2012. Operating expenses, net of Voluntary Waivers, were approximately $5.4 million for the quarter ended January 31, 2013 and $2.4 million for the quarter ended January 31, 2012, an increase of approximately $3.0 million. For the Quarter Ended January 31, 2013 Operating expenses, net of the Voluntary Waivers (as described below), were approximately $5.4 million or 5.53% of the Company's average net assets, when annualized, for the quarter ended January 31, 2013. Significant components of operating expenses for the quarter ended January 31, 2013 were management fee expense related to the Company of approximately $2.1 million, incentive compensation expense of approximately $1.2 million and interest and other borrowing costs of approximately $937,000. The approximately $3.0 million increase in the Company's net operating expenses for the quarter ended January 31, 2013 compared to the quarter ended January 31, 2012, was primarily due to the $3.0 million increase in the estimated provision for incentive compensation expense and an approximately $142,000 increase in interest and other borrowing costs offset by a decrease of approximately $333,000 in management fee expense, which includes management fees related to the Company and portfolio management fees related to the PE Fund. 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 or management fees related to the PE Fund, 25% of such fees shall be paid to or retained by the GP and 75% of such fees shall be paid to or retained by TTG Advisers. For the 2011 and 2012 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 23, 2012, TTG Advisers and the Company entered into an agreement to extend the expense cap of 3.5% and the Voluntary Waiver to the 2013 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 2012 and for the quarter ended January 31, 2013 annualized, the Company's expense ratio was 2.95% and 3.04%, respectively, (taking into account the same carve outs as those applicable to the expense cap). Pursuant to the terms of the Advisory Agreement, during quarter ended January 31, 2013, the provision for incentive compensation was increased by a net amount of approximately $1.2 million to approximately $16.8 million. The net increase in the provision for incentive compensation during the quarter ended January 31, 2013 reflects the Valuation Committee's determination to increase the fair values of ten of the Company's portfolio investments (Custom Alloy, MVC Automotive, Octagon, Security Holdings, SIA Tekers, Turf, Vestal, Pre-Paid Legal, RuMe, and Centile) by a total of approximately $9.2 million. The net increase in the provision also reflects the Valuation Committee's determination to decrease the fair values of five of the Company's portfolio investments (Harmony, Ohio Medical, SGDA Europe, Velocitius and NPWT) by a total of approximately $3.3 million and the $84,000 realized gain related to NPWT. For the quarter ended January 31, 2013, there was no provision recorded for the net operating income portion of the incentive fee 36 -------------------------------------------------------------------------------- Table of Contents as pre-incentive fee net operating income did not exceed the hurdle rate. Please see Note 10 of our consolidated financial statements "Incentive Compensation" for more information. For the Quarter Ended January 31, 2012 Operating expenses, net of the Voluntary Waivers (as defined below), were approximately $2.4 million or 2.28% of the Company's average net assets, when annualized, for the quarter ended January 31, 2012. Significant components of operating expenses for the quarter ended January 31, 2012 were the management fee expense of $2.7 million and interest and other borrowing costs of approximately $795,000. The $400,000 decrease in the Company's operating expenses for the quarter ended January 31, 2012 compared to the quarter ended January 31, 2011, was primarily due to the $334,000 decrease in the estimated provision for incentive compensation expense and the $198,000 decrease in other expenses offset by an increase of approximately $152,000 in management fee expense. For the 2010 and 2011 fiscal years, TTG Advisers voluntarily agreed to waive $150,000 of expenses that the Company is obligated to reimburse to TTG Advisers under the Advisory Agreement (the "Voluntary Waiver"). On October 25, 2011, TTG Advisers and the Company entered into an agreement to extend the expense cap of 3.5% and the Voluntary Waiver to the 2012 fiscal year. TTG Advisers has also voluntarily agreed that any assets of the Company that are invested in exchange-traded funds and the Octagon Fund would not be taken into account in the calculation of the base management fee due to TTG Advisers under the Advisory Agreement. For fiscal year 2011 and for the quarter ended January 31, 2012 annualized, the Company's expense ratio was 3.18% and 3.37%, respectively, (taking into account the same carve outs as those applicable to the expense cap). Pursuant to the terms of the Advisory Agreement, during the quarter ended January 31, 2012, the provision for incentive compensation was decreased by a net amount of approximately $1.9 million to approximately $22.0 million. The net decrease in the provision for incentive compensation during the quarter ended January 31, 2012 reflects the Valuation Committee's determination to decrease the fair values of seven of the Company's portfolio investments (BP, HH&B, MVC Automotive, NPWT, Tekers, Velocitius and Ohio Medical) by a total of $11.4 million. The net decrease in the provision also reflects the Valuation Committee's determination to increase the fair values of four of the Company's portfolio investments (Octagon Fund, SGDA Europe, Security Holdings, and Turf) by a total of approximately $1.1 million. The Valuation Committee also increased the fair value of the Company's escrow receivable related to Vitality by $130,000. During the quarter ended January 31, 2012, there was no provision recorded for the net operating income portion of the incentive fee as pre-incentive fee net operating income did not exceed the hurdle rate. Please see Note 10 of our consolidated financial statements "Incentive Compensation" for more information. REALIZED GAINS AND LOSSES ON PORTFOLIO SECURITIES For the Quarter Ended January 31, 2013 and 2012. Net realized losses for the quarter ended January 31, 2013 were approximately $1.9 million and net realized gains for the quarter ended January 31, 2012 were approximately $194,000, a decrease of approximately $2.1 million. For the Quarter Ended January 31, 2013 Net realized losses for the quarter ended January 31, 2013 were approximately $1.9 million. The significant components of the Company's net realized losses for the quarter ended January 31, 2013 were primarily due to the realization of Lockorder Limited and a distribution received from NPWT. On December 17, 2012, the Company realized a loss of approximately $2.0 million on the 21,064 common shares of Lockorder Limited, a Legacy Investment, which had a fair value of $0. On December 31, 2012, the Company received a distribution from NPWT of approximately $89,000, which was characterized as a return of capital. Of the $89,000 distribution, approximately $5,000 was related to the common stock and reduced the cost basis. The remaining $84,000 was related to the preferred stock and recorded as a capital gain, as the cost basis of the preferred stock had already been reduced to $0. 37 -------------------------------------------------------------------------------- Table of Contents For the Quarter Ended January 31, 2012 Net realized gains for the quarter ended January 31, 2012 were approximately $194,000. The significant components of the Company's net realized gains for the quarter ended January 31, 2012 were primarily the distributions received from the Octagon Fund and the increase in the fair values of the Vitality and Vendio escrows. During the quarter ended January 31, 2012, the Company received distributions from Octagon Fund of approximately $45,000, which were treated as realized gains. During the quarter ended January 31, 2012, the Valuation Committee increased the fair values of the Vitality and Vendio escrows by a combined amount of approximately $143,000, which were recorded as realized gains. UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES For the Quarter Ended January 31, 2013 and 2012. The Company had a net change in unrealized appreciation on portfolio investments of approximately $7.8 million for the quarter ended January 31, 2013 and unrealized depreciation on portfolio investments of approximately $10.5 million for the quarter ended January 31, 2012, a net increase of approximately $18.3 million. For the Quarter Ended January 31, 2013 The Company had a net change in unrealized appreciation on portfolio investments of approximately $7.8 million for the quarter ended January 31, 2013. The change in unrealized appreciation for the quarter ended January 31, 2013 primarily resulted from the Valuation Committee's decision to increase the fair value of the Company's investments in Custom Alloy series A preferred stock by approximately $4,000 and series B preferred stock by approximately $836,000, Turf equity interest by $180,000, MVC Automotive equity interest by approximately $2.2 million, Octagon equity interest by $450,000, Tekers common stock by $234,000, Vestal common stock by approximately $1.7 million, Pre-Paid Legal term loan A and term loan B by a total of approximately $117,000, RuMe preferred stock by $423,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $12,000, Centile equity interest by $90,000 and Security Holdings equity interest by $3.0 million. The reclassification from unrealized depreciation to a realized loss caused by the dissolution of Lockorder Limited, a Legacy Investment formerly Safestone Technologies PLC, of approximately $2.0 million was also a component in the change in unrealized appreciation. The Valuation Committee also decreased the fair value of the Company's investments in SGDA Europe equity interest by approximately $1.7 million, HH&B common stock by $100,000, NPWT preferred stock by approximately $89,000 due to the distribution received, Velocitius equity interest by approximately $1.1 million. The Valuation Committee also increased the liability associated with the Ohio Medical guarantee by $350,000. For the Quarter Ended January 31, 2012 The Company had a net change in unrealized depreciation on portfolio investments of approximately $10.5 million for the quarter ended January 31, 2012. The change in unrealized depreciation for the quarter ended January 31, 2012 primarily resulted from the Valuation Committee's decision to decrease the fair values of the Company's investments in BP term loan A by $100,000, HH&B common stock by $500,000, MVC Automotive equity interest by approximately $7.5 million, MVC Partners equity interest by approximately $326,000, MVCFS' General Partnership interest in the PE Fund by approximately $8,000, NPWT common and preferred stock by approximately $6,000 and $120,000, respectively, Tekers common stock by $280,000, Velocitius equity interest by approximately $1.9 million and value the liability associated with the Ohio Medical guarantee at $700,000. The Valuation Committee also increased the fair value of the Company's investments in Octagon Fund by approximately $84,000, SGDA Europe equity interest by $265,000, Turf equity interest by $500,000 and Security Holdings equity interest by $205,000. PORTFOLIO INVESTMENTS For the Quarter Ended January 31, 2013 and the Year Ended October 31, 2012. The cost of the portfolio investments held by the Company at January 31, 2013 and at October 31, 2012 was $336.9 million and $332.4 million, respectively, an increase of $4.5 million. The aggregate fair value of portfolio investments at January 31, 2013 and at October 31, 2012 was $416.5 million and $404.2 million, respectively, an increase of $12.3 million. The Company held 38 -------------------------------------------------------------------------------- Table of Contents unrestricted cash and cash equivalents at January 31, 2013 and at October 31, 2012 of $30.3 million and $36.2 million, respectively, a decrease of approximately $5.9 million. For the Quarter Ended January 31, 2013 During the quarter ended January 31, 2013, the Company made two follow-on investments in existing portfolio companies totaling approximately $8.5 million. On November 26, 2012, the Company loaned an additional $8.0 million to JSC Tekers, increasing the secured loan amount to $12.0 million. The interest rate remains at 8% per annum and the maturity date was extended to December 31, 2014. On December 14, 2012, the Company loaned an additional $500,000 to Biovation, increasing the loan amount to $2.0 million. The Company also received a warrant at no cost. The Company allocated a portion of the cost basis in the additional $500,000 loan to the warrant at the time the investment was made. On December 17, 2012, the Company received a dividend from Vestal of approximately $426,000. On December 17, 2012, the Company realized a loss of approximately $2.0 million on the 21,064 common shares of Lockorder Limited, a Legacy Investment, which had a fair value of $0. On December 19, 2012, MVC Automotive made a principal payment of approximately $2.0 million on its bridge loan. As of January 31, 2013, the balance of the bridge loan was approximately $1.6 million. On December 31, 2012, Marine made a principal payment of $250,000 on its senior subordinated loan. As of January 31, 2013, the balance of the loan was approximately $11.7 million. On December 31, 2012, the Company received a distribution from NPWT of approximately $89,000, which was characterized as a return of capital. Of the $89,000 distribution, approximately $5,000 was related to the common stock and reduced the cost basis. The remaining $84,000 was related to the preferred stock and recorded as a capital gain as the cost basis of the preferred stock had already been reduced to $0. On January 23, 2013, the Company received a dividend from U.S. Gas of approximately $2.4 million. On January 31, 2013, Custom Alloy made a principal payment of $250,000 on its loan. As of January 31, 2013, the outstanding balance of the loan was approximately $15.5 million. During the quarter ended January 31, 2013, Pre-Paid Legal made principal payments on its tranche A term loan totaling approximately $98,000. The outstanding balance of the tranche A term loan was approximately $2.9 million. During the quarter ended January 31, 2013, the Valuation Committee increased the fair value of the Company's investments in Custom Alloy series A preferred stock by approximately $4,000 and series B preferred stock by approximately $836,000, Turf equity interest by $180,000, MVC Automotive equity interest by approximately $2.2 million, Octagon equity interest by $450,000, Tekers common stock by $234,000, Vestal common stock by approximately $1.7 million, Pre-Paid Legal term loan A and term loan B by a total of approximately $117,000, RuMe preferred stock by $423,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $12,000, Centile equity interest by $90,000 and Security Holdings equity interest by $3.0 million. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, Marine, Summit, Freshii and U.S. Gas, and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $633,745. The Valuation Committee also decreased the fair value of the Company's investments in SGDA Europe equity interest by approximately $1.7 million, HH&B common stock by $100,000, NPWT preferred stock by approximately $89,000 due to the distribution received, and Velocitius equity interest by approximately $1.1 million. The Valuation Committee also determined to increase the liability associated with the Ohio Medical guarantee by $350,000. Also, during the quarter ended January 31, 2013, 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 $30,000. 39 -------------------------------------------------------------------------------- Table of Contents At January 31, 2013, the fair value of all portfolio investments, exclusive of short-term investments, was $416.5 million with a cost basis of $336.9 million. At January 31, 2013, the fair value and cost basis of portfolio investments of the Legacy Investments was $10.8 million and $28.3 million, respectively, and the fair value and cost basis of portfolio investments made by the Company's current management team was $405.7 million and $308.6 million, respectively. At October 31, 2012, the fair value of all portfolio investments, exclusive of short-term investments, was $404.2 million with a cost basis of $332.4 million. At October 31, 2012, the fair value and cost basis of portfolio investments of the Legacy Investments were $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 were $393.4 million and $302.1 million, respectively. For the Fiscal Year Ended October 31, 2012 During the fiscal year ended October 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 fiscal year ended October 31, 2012, the Company made nine follow-on investments in five existing Portfolio Companies totaling approximately $8.8 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 October 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 September 17, 2012, the Company loaned SGDA $360,000, increasing the term loan to approximately $6.5 million at October 31, 2012 and extended the maturity date to August 31, 2014. On October 3, 2012, the Company increased its common equity interest in Centile by approximately $173,000, which was fair valued at $3.1 million as of October 31, 2012. 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 October 31, 2012, the amount guaranteed was approximately $21.1 million and the guarantee obligation was fair valued at $825,000 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. 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 October 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 $12.0 million reduction in the fair value of the common stock. 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 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. 40 -------------------------------------------------------------------------------- Table of Contents 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 $9.2 million. The $15.3 million in proceeds includes all transaction expenses and approximately $225,000 held in escrow, which had a fair value of $135,000 as of October 31, 2012. On October 12, 2012, the Company received a dividend from U.S. Gas of approximately $2.4 million. U.S. Gas' board approved an initial dividend to its shareholders, with future distributions projected to be paid quarterly. The Company anticipates receiving dividends from U.S. Gas for as long as it maintains its equity investment in U.S. Gas, and its cash flows can support the dividend. Each quarterly dividend must be approved by U.S. Gas's board of directors and be permissible under its gas and electric supply credit agreement. During the fiscal year ended October 31, 2012, Marine Exhibition Corporation ("Marine") made principal payments totaling $600,000 on its senior subordinated loan. As of October 31, 2012, the balance of the loan was approximately $11.8 million. During the fiscal year ended October 31, 2012, Pre-Paid Legal made principal payments on its tranche A term loan totaling approximately $976,000. The outstanding balance of the tranche A term loan was approximately $3.0 million. During the fiscal year ended October 31, 2012, the Company realized a loss on its investment in MVC Partners of approximately $1.4 million. Please see Note 2 above for more information. 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. 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 41 -------------------------------------------------------------------------------- Table of Contents 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 quarter ended October 31, 2012, the Valuation Committee increased the fair value of the Company's investments in Vestal common stock by approximately $1.8 million, Octagon equity interest by $700,000, Velocitius equity interest by approximately $2.5 million, Turf equity interest by $271,000, SGDA Europe equity interest by $239,000, Tekers common stock by $139,000 and MVCFS' General Partnership interest in the PE Fund 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, Freshii and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $836,104. The Valuation Committee also decreased the fair value of the Company's investments in HH&B common stock by $150,000, MVC Automotive equity interest by $362,000, MVC Partners equity interest by approximately $71,000, Security Holdings equity interest by approximately $3.0 million, Ohio Medical preferred stock and guarantee by $8.4 million and $125,000, respectively, NPWT common and preferred stock by approximately $25,000 and $440,000, respectively, and Centile equity interest by approximately $34,000. Also, during the quarter ended October 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 $99,000. During the fiscal year ended October 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, Turf equity interest by approximately $153,000, MVCFS' General Partnership interest in the PE Fund by approximately $1,000, Octagon equity interest by $700,000 and Vestal common stock by approximately $4.2 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 $3,131,042. 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 $900,000, MVC Automotive equity interest by approximately $8.9 million, SGDA Europe equity interest by approximately $2.6 million, Security Holdings equity interest by approximately $9.2 million, BPC equity interest by $180,000, MVC Partners equity interest by approximately $1.1 million, NPWT common and preferred stock by approximately $31,000 and $560,000, respectively, Tekers common stock by $278,000, Velocitius equity interest by approximately $3.4 million, Ohio Medical preferred stock by $8.4 million, Centile equity interest by approximately $34,000 and valued the liability associated with the Ohio Medical guarantee at $825,000. Also, during the fiscal year ended October 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 $188,000. At October 31, 2012, the fair value of all portfolio investments, exclusive of short-term investments, was $404.2 million with a cost basis of $332.4 million. At October 31, 2012, the fair value and cost basis of portfolio investments of the Legacy Investments were $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 were $393.4 million and $303.5 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. Portfolio Companies During the quarter ended January 31, 2013, the Company had investments in: 42 -------------------------------------------------------------------------------- Table of Contents 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, 2012 and January 31, 2013, 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. Biovation Holdings Inc. Biovation, Montgomery, Minnesota, is a manufacturer and marketer of environmentally friendly, organic and sustainable laminate materials and composites. At October 31, 2012, the Company's investment in Biovation consisted of a bridge loan with an annual interest of 12% and a maturity date of February 28, 2014. The loan had an outstanding balance, cost basis and fair value of approximately $1.5 million. On December 14, 2012, the Company loaned an additional $500,000 to Biovation, increasing the bridge loan amount to $2.0 million. The Company also received a warrant at no cost. The Company allocated a portion of the cost basis of the $500,000 loan to the warrant at the time the investment was made. At January 31, 2013, the Company's investment consisted of a bridge loan with an outstanding balance of $2.0 million and a cost basis and fair value of approximately $1.8 million. The warrant had a cost and a fair value of $165,000. Peter Seidenberg, Chief Financial Officer of the Company, and Jim Lynch, a representative of the Company, serve as directors of Biovation. BPC II, LLC BPC, Arcadia, California, is a company that designs, manufactures, markets and distributes women's apparel under several brand names. On December 12, 2011, BP filed for Chapter 11 protection in New York with agreement to turn ownership over to secured lenders under a bankruptcy reorganization plan. Secured lenders, including the Company, agreed to support a Chapter 11. 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. At October 31, 2012 and January 31, 2013, the equity investment had a cost basis of $180,000 and a fair value of $0. Centile Holding B.V. Centile, Sophia-Antipolis, France, is a leading European innovator of unified communications, network platforms, hosted solutions, applications and tools that help mobile, fixed and web-based communications service providers serve the needs of enterprise end users. At October 31, 2012, the Company's investment in Centile consisted of common equity interest at a cost of $3.2 million and a fair value of approximately $3.1 million. During the quarter ended January 31, 2013, the Valuation Committee increased the fair value of the common equity interest by approximately $90,000. At January 31, 2013, the Company's investment in Centile consisted of common equity interest at a cost of $3.2 million and a fair value of approximately $3.2 million. Christopher Sullivan, a representative of the Company, serves as a director of Centile. Custom Alloy Corporation Custom Alloy, High Bridge, New Jersey, manufactures time sensitive and mission critical butt-weld pipe fittings for the natural gas pipeline, power generation, oil/gas refining and extraction, and nuclear generation markets. At October 31, 2012, the Company's investment in Custom Alloy consisted of nine shares of convertible series A preferred stock at a cost and fair value of $44,000 and 1,991 shares of convertible series B preferred stock at a cost and fair value of approximately $10.0 million. The unsecured subordinated loan, which bears annual interest at 14% and has a maturity date of June 18, 2013, had a cost basis, outstanding balance and fair value of approximately $15.6 million. 43 -------------------------------------------------------------------------------- Table of Contents On November 1, 2012, the interest rate on the unsecured subordinated loan was decreased to 12%. On January 31, 2013, Custom Alloy made a principal payment of $250,000 on its loan. During the quarter ended January 31, 2013, the Valuation Committee increased the fair value of the series A preferred stock by approximately $4,000 and the series B preferred stock by approximately $836,000. At January 31, 2013, the Company's investment in Custom Alloy consisted of nine shares of convertible series A preferred stock at a cost of $44,000 and a fair value of approximately $48,000 and the 1,991 shares of convertible series B preferred stock at a cost of approximately $10.0 million and a fair value of approximately $10.8 million. The unsecured subordinated loan had a cost basis, outstanding balance and fair value of approximately $15.5 million. The increase in the cost basis and fair value of the loan is due to the amortization of loan origination fees and the capitalization of "payment in kind" interest. These increases were approved by the Company's Valuation Committee. Michael Tokarz, Chairman of the Company, and Shivani Khurana, representative of the Company, serve as directors of Custom Alloy. DPHI, Inc. (formerly DataPlay, Inc.) DPHI, Inc. ("DPHI"), Boulder, Colorado, a Legacy Investment, is trying to develop new ways of enabling consumers to record and play digital content. At October 31, 2012 and January 31, 2013, the Company's investment in DPHI consisted of 602,131 shares of Series A-1 preferred stock with a cost of $4.5 million. This investment has been fair valued at $0. Foliofn, Inc. Foliofn, Vienna, Virginia, a Legacy Investment, is a financial services technology company that offers investment solutions to financial services firms and investors. At October 31, 2012 and January 31, 2013, the Company's investment in Foliofn consisted of 5,802,259 shares of Series C preferred stock with a cost of $15.0 million and a fair value of $10.8 million. Bruce Shewmaker, an officer of the Company, serves as a director of Foliofn. Freshii USA, Inc. Freshii, Chicago, Illinois, is a chain of "fast casual" restaurants serving fresh and healthy food for breakfast, lunch and dinner. Freshii currently has 33 locations in 21 cities and four countries. At October 31, 2012, the Company's investment in Freshii consisted of a senior secured loan, bearing annual interest of 12% and a maturity date of January 11, 2017. The loan had an outstanding balance, cost basis and fair value of approximately $1.0 million. The warrant had a cost and fair value of approximately $34,000. At January 31, 2013, the Company's investment in Freshii consisted of a senior secured loan with an outstanding balance of approximately $1.1 million and a cost basis and fair value of approximately $1.0 million. The warrant had a cost and fair value of approximately $34,000. The increase in cost and fair value of the loan is due to the amortization of loan origination fees, the capitalization of "payment in kind" interest and the discount associated with the warrant. These increases were approved by the Company's Valuation Committee. Harmony Health & Beauty, Inc. Harmony Health & Beauty, Purchase, New York, purchased the assets of Harmony Pharmacy on November 30, 2010, during a public UCC sale for approximately $6.4 million. HH&B now operates the health and beauty stores previously owned by Harmony Pharmacy in John F. Kennedy International Airport and San Francisco International Airport. The Company's initial investment consisted of 100,010 shares of common stock. At October 31, 2012, the Company's investment in HH&B consisted of 147,621 shares of common stock with a cost of $6.7 million and fair value of $100,000. During the quarter ended January 31, 2013, the Valuation Committee decreased the fair value of the common stock by $100,000. At January 31, 2013, the Company's investment in HH&B consisted of 147,621 shares of common stock with a cost of $6.7 million and fair value of $0. 44 -------------------------------------------------------------------------------- Table of Contents Michael Tokarz, Chairman of the Company, serves as a director of HH&B. JSC Tekers Holdings JSC Tekers, Latvia, is an acquisition company focused on real estate management. At October 31, 2012, the Company's investment in JSC Tekers consisted of a secured loan with an outstanding balance, a cost basis and a fair value of $4.0 million and 2,250 shares of common stock with a cost basis and fair value of $4,500. The secured loan has an interest rate of 8% and a maturity date of June 30, 2014. On November 26, 2012, the Company loaned an additional $8.0 million to JSC Tekers, increasing the secured loan amount to $12.0 million. The interest rate remained at 8% per annum and the maturity date was extended to December 31, 2014. At January 31, 2013, the Company's investment in JSC Tekers consisted of a secured loan with an outstanding balance, a cost basis and a fair value of $12.0 million and 2,250 shares of common stock with a cost basis and fair value of $4,500. Lockorder Limited (formerly Safestone Technologies PLC) Lockorder, located in Old Amersham, United Kingdom, a Legacy Investment, provides organizations with technology designed to secure access controls, enforcing compliance with security policies and enabling effective management of corporate IT and e-business infrastructure. At October 31, 2012, the Company's investment in Lockorder consisted of 21,064 shares of common stock with a cost of $2.0 million. The investment has been fair valued at $0 by the Company's Valuation Committee. On December 17, 2012, the Company realized a loss of approximately $2.0 million on the 21,064 common shares of Lockorder which had a fair value of $0. At January 31, 2013, the Company no longer held an investment in Lockorder. Mainstream Data, Inc. Mainstream Data, Inc. ("Mainstream"), Salt Lake City, Utah, a Legacy Investment, builds and operates satellite, internet and wireless broadcast networks for information companies. Mainstream networks deliver text news, streaming stock quotations and digital images to subscribers around the world. At October 31, 2012 and January 31, 2013, the Company's investment in Mainstream consisted of 5,786 shares of common stock with a cost of $3.75 million. The investment has been fair valued at $0. Marine Exhibition Corporation Marine, Miami, Florida, owns and operates the Miami Seaquarium. The Miami Seaquarium is a family-oriented entertainment park. At October 31, 2012, the Company's investment in Marine consisted of a senior secured loan and 20,000 shares of preferred stock. The senior secured loan had an outstanding balance, cost basis and fair value of approximately $11.8 million. The senior secured loan bears annual interest at 11% and matures on August 30, 2017. The preferred stock was fair valued at approximately $3.9 million. The dividend rate on the preferred stock is 12% per annum. On December 31, 2012, Marine made a principal payment of $250,000 on its senior secured loan. At January 31, 2013, the Company's senior secured loan had an outstanding balance, cost basis and fair value of approximately $11.7 million. The preferred stock had a cost and fair value of approximately $3.3 million. The increase in the outstanding balance, cost and fair value of the loan and preferred stock is due to the amortization of loan origination fees and the capitalization of "payment in kind" interest/dividends. These increases were approved by the Company's Valuation Committee. MVC Automotive Group B.V. MVC Automotive, an Amsterdam-based holding company, owns and operates ten Ford, Jaguar, Land Rover, Mazda, and Volvo dealerships located in Austria, Belgium, and the Czech Republic. 45 -------------------------------------------------------------------------------- Table of Contents At October 31, 2012, the Company's investment in MVC Automotive consisted of an equity interest with a cost of approximately $34.7 million and a fair value of approximately $33.5 million. The bridge loan, which bears annual interest at 10% and matures on December 31, 2013, had a cost and fair value of approximately $3.6 million. The guarantee for MVC Automotive was equivalent to approximately $5.2 million at October 31, 2012. On December 19, 2012, MVC Automotive made a principal payment of approximately $2.0 million on its bridge loan. During the quarter ended January 31, 2013, the Valuation Committee increased the fair value of the equity interest by approximately $2.2 million. At January 31, 2013, the Company's investment in MVC Automotive consisted of an equity interest with a cost of approximately $34.7 million and a fair value of approximately $35.7 million. The bridge loan had a cost and fair value of approximately $1.6 million. The mortgage guarantee for MVC Automotive was equivalent to approximately $5.4 million at January 31, 2013. This guarantee was taken into account in the valuation of MVC Automotive. Michael Tokarz, Chairman of the Company, and Christopher Sullivan, a representative of the Company, serve as directors of MVC Automotive. MVC Private Equity Fund, L.P. MVC Private Equity Fund, L.P., Purchase, New York, is a private equity fund focused on control equity investments in the lower middle market. MVC GP II, an indirect wholly-owned subsidiary of the Company, serves as the GP to the PE Fund and is exempt from the requirement to register with the Securities and Exchange Commission as an investment adviser under Section 203 of the Investment Advisers Act of 1940. MVC GP II is wholly-owned by MVCFS, a subsidiary of the Company. The Company's Board of Directors authorized the establishment of, and investment in, the PE Fund for a variety of reasons, including the Company's ability to participate in Non-Diversified Investments made by the PE Fund. As previously disclosed, the Company is currently restricted from making Non-Diversified Investments. For services provided to the PE Fund, the GP and MVC Partners are together entitled to receive 25% of all management fees and other fees paid by the PE Fund and its portfolio companies and up to 30% of the carried interest generated by the PE Fund. Further, at the direction of the Board of Directors, the GP retained TTG Advisers to serve as the portfolio manager of the PE Fund. In exchange for providing those services, and pursuant to the Board of Directors' authorization and direction, TTG Advisers is entitled to the remaining 75% of the management and other fees generated by the PE Fund and its portfolio companies and any carried interest generated by the PE Fund. A significant portion of the portfolio fees that are paid by the PE 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. Given this separate arrangement with the GP and the PE Fund, under the terms of the Company's Advisory Agreement with TTG Advisers, TTG Advisers is not entitled to receive from the Company a management fee or an incentive fee on assets of the Company that are invested in the PE Fund. The PE Fund's term will end on October 29, 2016; unless the GP, in its sole discretion, extends the term of the PE Fund for two additional periods of one year each. On October 29, 2010, through MVC Partners and MVCFS, the Company committed to invest approximately $20.1 million in the PE Fund. Of the $20.1 million total commitment, MVCFS, via its wholly-owned subsidiary MVC GP II, has committed $500,000 to the PE Fund as its general partner. See MVC Partners for more information on the other portion of the Company's commitment to the PE Fund. The PE Fund has closed on approximately $104 million of capital commitments. During the fiscal year ended October 31, 2012, MVC Partners was consolidated with the operations of the Company as MVC Partners' limited partnership interest in the PE Fund is a substantial portion of MVC Partners' operations. At October 31, 2012, the cost basis of the limited partnership interest in the PE Fund was equal to the investments made in the PE Fund of approximately $8.0 million and had a fair value of approximately $8.1 million. The Company's general partnership interest in the PE Fund had a cost basis of approximately $204,000 and fair value of approximately $206,000. During the quarter ended January 31, 2013, the Valuation Committee increased the fair values of the limited partnership interest and general partnership interest totaling approximately $12,000. At January 31, 2013, the limited partnership interest in the PE Fund had a cost of approximately $8.0 million and a fair value of approximately $8.1 million. The Company's general partnership interest in the PE Fund had a cost basis of approximately $204,000 and a fair value of approximately $206,000. 46 -------------------------------------------------------------------------------- Table of Contents NPWT Corporation NPWT, Gurnee, Illinois, is a medical device manufacturer and distributor of negative pressure wound therapy products. During October of 2011 NPWT completed the sale of all of its assets to Invacare Corporation ("Invacare"). NPWT received an upfront payment as well as a limited five year royalty based on the sales of eligible product lines. On October 31, 2011, the Company received a distribution from NPWT of $500,000, which was treated as a return of capital and returned all cash invested into NPWT to the Company. This distribution was paid from the upfront payment mentioned previously. At October 31, 2012, the Company's investment in NPWT consisted of 281 shares of common with a cost basis of approximately $1.2 million and a fair value of approximately $25,000 and 5,000 shares of convertible preferred stock with a cost basis of $0 and a fair value of $440,000. On December 31, 2012, the Company received a distribution from NPWT of approximately $89,000, which was characterized as a return of capital. Of the $89,000 distribution, approximately $5,000 was related to the common stock and reduced the cost basis. The remaining $84,000 was related to the preferred stock and was recorded as a capital gain as the cost basis of the preferred stock had already been reduced to $0. At January 31, 2013, the common stock had a cost basis of approximately $1.2 million and a fair value of approximately $21,000. The convertible preferred stock had a cost basis of $0 and a fair value of approximately $356,000. Scott Schuenke, an officer of the Company, serves as a director of NPWT. Octagon Credit Investors, LLC Octagon, is a New York-based asset management company that manages leveraged loans and high yield bonds through collateralized debt obligations ("CDO") funds. At October 31, 2012, the Company's investment in Octagon consisted of an equity investment with a cost basis of approximately $2.4 million and a fair value of approximately $6.2 million. During the quarter ended January 31, 2013, the Valuation Committee increased the fair value of the equity investment by $450,000. Further, during the quarter ended January 31, 2013, the cost basis and fair value of the equity investment was decreased by approximately $30,000 because of an allocation of flow through losses by the Company's Valuation Committee. At January 31, 2013, the equity investment had a cost basis of approximately $2.3 million and a fair value of $6.6 million. Ohio Medical Corporation Ohio Medical, Gurnee, Illinois, is a manufacturer and supplier of suction and oxygen therapy products, medical gas equipment, and input devices. At October 31, 2012, the Company's investment in Ohio Medical consisted of 5,620 shares of common stock with a cost basis of approximately $15.8 million and a fair value of $0, and 21,176 shares of convertible preferred stock with a cost basis of $30.0 million and a fair value of $31.1million. The guarantee obligation had a fair value of negative $825,000. During the quarter ended January 31, 2013, the Valuation Committee increased the liability associated with the guarantee obligation by $350,000. At January 31, 2013, the Company's investment in Ohio Medical consisted of 5,620 shares of common stock with a cost basis of approximately $15.8 million and a fair value of $0 and 22,023 shares of convertible preferred stock with a cost basis of $30.0 million and a fair value of $31.1 million. The guarantee obligation had a fair value of approximately negative $1.2 million. Michael Tokarz, Chairman of the Company, Peter Seidenberg, Chief Financial Officer of the Company, and Jim O'Connor, a representative of the Company, serve as directors of Ohio Medical. 47 -------------------------------------------------------------------------------- Table of Contents Pre-Paid Legal Services, Inc. Pre-Paid Legal, Ada, Oklahoma, is the leading marketer of legal counsel and identity theft solutions to families and small businesses in the U.S. and Canada. At October 31, 2012, the Company's investment in Pre-Paid Legal consisted of a $3.0 million tranche A term loan and a $4.0 million tranche B term loan, both purchased at a discount. The tranche A term loan bears annual interest at LIBOR, with a 1.5% floor, plus 6% and matures on January 1, 2017 and the tranche B term loan bears annual interest at LIBOR, with a 1.5% floor, plus 9.5% and matures on January 1, 2017. At October 31, 2012, the loans had a combined outstanding balance of $7.0 million and a cost basis and fair value of approximately $6.9 million. During the quarter ended January 31, 2013, Pre-Paid Legal made principal payments on its tranche A term loan totaling approximately $98,000. During the quarter ended January 31, 2013, the Valuation Committee increased the fair value of the tranche A term loan by approximately $31,000 and the tranche B term loan by approximately $86,000. At January 31, 2013, the loans had a combined cost basis of approximately $6.8 million and a cost basis and fair value of approximately $6.9 million. The increases in the costs of the term loans are due to the amortization of the original issue discount and the increase in valuation mentioned above. RuMe, Inc. RuMe, Denver, Colorado, produces functional, affordable and responsible products for the environmentally and socially-conscious consumer reducing dependence on single-use products. At October 31, 2012, the Company's investment in RuMe consisted of 999,999 shares of common stock with a cost basis and fair value of approximately $160,000 and 4,999,076 shares of series B-1 preferred stock with a cost basis of approximately $1.0 million and a fair value of approximately $1.4 million. During the quarter ended January 31, 2013, the Valuation Committee increased the fair value of the preferred stock by approximately $423,000. At January 31, 2013, the Company's investment in RuMe consisted of 999,999 shares of common stock with a cost basis and fair value of approximately $160,000 and 4,999,076 shares of series B-1 preferred stock with a cost basis of approximately $1.0 million and a fair value of approximately $1.8 million. Christopher Sullivan, a representative of the Company, serves as a director of RuMe. Security Holdings, B.V. Security Holdings is an Amsterdam-based holding company that owns FIMA, a Lithuanian security and engineering solutions company. On April 26, 2011, the Company agreed to collateralize a 5.0 million Euro letter of credit from JPMorgan Chase Bank, N.A., which is classified as restricted cash on the Company's consolidated balance sheet. This letter of credit is being used as collateral for a project guarantee by AB DnB NORD bankas to Security Holdings. At October 31, 2012, the Company's common equity interest in Security Holdings had a cost basis of approximately $40.2 million and a fair value of $24.0 million. During the quarter ended January 31, 2013, the Valuation Committee increased the fair value of the common equity interest by approximately $3.0 million. At January 31, 2013, the Company's common equity interest in Security Holdings had a cost basis of approximately $40.2 million and a fair value of approximately $27.0 million. Christopher Sullivan, a representative of the Company, serves as a director of Security Holdings. SGDA Europe B.V. SGDA Europe is an Amsterdam-based holding company that pursues environmental and remediation opportunities in Romania. At October 31, 2012, the Company's equity investment had a cost basis of approximately $20.1 million and a fair value of $7.9 million. During the quarter ended January 31, 2013, the Valuation Committee decreased the fair value of the common equity interest by approximately $1.7 million. 48 -------------------------------------------------------------------------------- Table of Contents At January 31, 2013, the Company's equity investment had a cost basis of approximately $20.1 million and a fair value of approximately $6.2 million. Christopher Sullivan, a representative of the Company, serves as a director of SGDA Europe. SGDA Sanierungsgesellschaft fur Deponien und Altasten GmbH SGDA, Zella-Mehlis, Germany, is a company that is in the business of landfill remediation and revitalization of contaminated soil. At October 31, 2012 and January 31, 2013, the Company's investment in SGDA consisted of a term loan with an outstanding balance and cost basis of approximately $6.5 million. The term loan bears annual interest at 7.0% and matures on August 31, 2014. The term loan was fair valued at approximately $6.5 million. SIA Tekers Invest Tekers, Riga, Latvia, is a port facility used for the storage and servicing of vehicles. At October 31, 2012, the Company's investment in Tekers consisted of 68,800 shares of common stock with a cost of $2.3 million and a fair value of approximately $1.2 million. The Company guaranteed a 1.4 million Euro mortgage for Tekers. The guarantee was equivalent to approximately $194,000 at October 31, 2012 for Tekers. During the quarter ended January 31, 2013, the Valuation Committee increased the fair value of the common stock by $234,000. At January 31, 2013, the Company's investment in Tekers consisted of 68,800 shares of common stock with a cost of $2.3 million and a fair value of approximately $1.5 million. The guarantee for Tekers had a commitment of 125,000 euros at January 31, 2013, equivalent to approximately $170,000. This guarantee was taken into account in the valuation of Tekers. Summit Research Labs, Inc. Summit, Huguenot, New York, is a specialty chemical company that manufactures antiperspirant actives. At October 31, 2012, the Company's investment in Summit consisted of a second lien loan and 1,115 shares of common stock. The second lien loan bears annual interest at 14% and matures on September 30, 2017. The second lien loan had an outstanding balance of $11.9 million with a cost of $11.8 million. The second lien loan was fair valued at $11.9 million. The common stock had been fair valued at $62.5 million with a cost basis of $16.0 million. At January 31, 2013, the Company's second lien loan had an outstanding balance, cost and fair value of approximately $12.1 million. The 1,115 shares of common stock were fair valued at $62.5 million and had a cost basis of $16.0 million. The increase in cost and fair value of the loan is due to the amortization of loan origination fees and the capitalization of "payment in kind" interest. These increases were approved by the Company's Valuation Committee. Michael Tokarz, Chairman of the Company, and Puneet Sanan and Shivani Khurana, representatives of the Company, serve as directors of Summit. See "Subsequent Events" for a discussion of the Company's announcement regarding a definitive agreement to sell Summit. Teleguam Holdings LLC Teleguam, Guam, is a rural local exchange carrier providing broadband services, and local, long-distance and wireless phone services on the island of Guam. At October 31, 2012, the Company's investment in Teleguam consisted of a $7.0 million second lien loan, which was purchased at a discount, with an annual interest of LIBOR plus 8%, with a 1.75% LIBOR floor, and a maturity date of June 9, 2017. The loan had an outstanding balance of $7.0 million and a cost basis and fair value of approximately $6.9 million. At January 31, 2013, the loan had an outstanding balance of $7.0 million and a cost basis and fair value of approximately $6.9 million. The increase in the cost and fair value of the second lien loan is due to the amortization of the original issue discount. 49 -------------------------------------------------------------------------------- Table of Contents Turf Products, LLC Turf, Enfield, Connecticut, is a wholesale distributor of golf course and commercial turf maintenance equipment, golf course irrigation systems and consumer outdoor power equipment. At October 31, 2012, the Company's investment in Turf consisted of a senior subordinated loan, bearing interest at 13% per annum with a maturity date of January 31, 2014, a junior revolving note, bearing interest at 6% per annum with a maturity date of January 31, 2014, LLC membership interest, and warrants. The senior subordinated loan had an outstanding balance, cost basis and a fair valued of $8.4 million. The junior revolving note had an outstanding balance, cost, and fair value of $1.0 million. The membership interest had a cost of $3.5 million and a fair value of $2.9 million. The warrants had a cost of $0 and a fair value of $0. During the quarter ended January 31, 2013, the Valuation Committee increased the fair value of the membership interest by $180,000. At January 31, 2013, the mezzanine loan had an outstanding balance, cost basis and a fair value of approximately $8.4 million. The junior revolving note had an outstanding balance and fair value of $1.0 million. The membership interest has a cost of approximately $3.5 million and a fair value of approximately $3.1 million. The warrants had a cost of $0 and a fair value of $0. Michael Tokarz, Chairman of the Company, and Puneet Sanan and Shivani Khurana, representatives of the Company, serve as directors of Turf. U.S. Gas & Electric, Inc. U.S. Gas, North Miami Beach, Florida, is a licensed Energy Service Company ("ESCO") that markets and distributes natural gas to small commercial and residential retail customers in the state of New York. At October 31, 2012, the Company's investment in U.S. Gas consisted of a second lien loan with an outstanding balance, cost and fair value of $9.6 million. The second lien loan bears annual interest at 14% and has a maturity date of July 25, 2015. The 32,200 shares of convertible Series I preferred stock had a fair value of $81.1 million and a cost of $500,000, and the 8,216 shares of convertible Series J preferred stock had a cost and fair value of $0. On January 22, 2013, the Company received a dividend from U.S. Gas of approximately $2.4 million. The Company anticipates receiving dividends from U.S. Gas for as long as it maintains its equity investment in U.S. Gas, and its cash flows can support the dividend. Each quarterly dividend must be approved by U.S. Gas's board of directors and be permissible under its gas and electric supply credit agreement. At January 31, 2013, the second lien loan had an outstanding balance, cost basis and a fair value of approximately $9.7 million. The increases in the outstanding balance, cost and fair value of the loan are due to the amortization of loan origination fees and the capitalization of "payment in kind" interest. These increases were approved by the Company's Valuation Committee. The convertible Series I preferred stock had a fair value of approximately $81.1 million and a cost of $500,000 and the convertible Series J preferred stock had a cost and fair value of $0. Puneet Sanan, a representative of the Company, and Warren Holtsberg, a director of the Company, serve as Chairman and director, respectively, of U.S. Gas. Velocitius B.V. Velocitius, a Netherlands based holding company, manages wind farms based in Germany through operating subsidiaries. At October 31, 2012, the Company's investment in Velocitius consisted of an equity investment with a cost of $11.4 million and a fair value of $21.7 million. During the quarter ended January 31, 2013, the Valuation Committee decreased the fair value of the equity investment by approximately $1.1 million. At January 31, 2013, the equity investment in Velocitius had a cost of approximately $11.4 million and a fair value of approximately $20.7 million. Bruce Shewmaker, an officer of the Company, serves as a director of Velocitius. 50 -------------------------------------------------------------------------------- Table of Contents Vestal Manufacturing Enterprises, Inc. Vestal, Sweetwater, Tennessee, is a market leader for steel fabricated products to brick and masonry segments of the construction industry. Vestal manufactures and sells both cast iron and fabricated steel specialty products used in the construction of single-family homes. At October 31, 2012, the Company's investment in Vestal consisted of a senior subordinated promissory note and 81,000 shares of common stock. The senior subordinated note had an annual interest of 12%, a maturity date of April 29, 2013 and an outstanding balance, cost, and fair value of $600,000. The 81,000 shares of common stock had a cost basis of $1.9 million and a fair value of $5.7 million. On December 17, 2012, the Company received a dividend from Vestal of approximately $426,000. During the quarter ended January 31, 2013, the Valuation Committee increased the fair value of the common stock by approximately $1.7 million. At January 31, 2013, the Company's investment in Vestal consisted of a senior subordinated promissory note and 81,000 shares of common stock. The senior subordinated note had an outstanding balance, cost, and fair value of $600,000. The 81,000 shares of common stock had a cost basis of approximately $1.9 million and a fair value of $7.3 million. Bruce Shewmaker and Scott Schuenke, officers of the Company, serve as directors of Vestal. Liquidity and Capital Resources Our liquidity and capital resources are derived from our credit facility and cash flows from operations, including investment sales and repayments and income earned. Our primary use of funds includes investments in portfolio companies and payments of fees and other operating expenses we incur. We have used, and expect to continue to use, our credit facility, proceeds generated from our portfolio investments and/or proceeds from public and private offerings of securities to finance pursuit of our investment objective. At January 31, 2013, the Company had investments in portfolio companies totaling $416.5 million. Also, at January 31, 2013, the Company had investments in unrestricted cash and cash equivalents totaling approximately $30.3 million. The Company also had approximately $6.8 million in restricted cash and cash equivalents related to the project guarantee for Security Holdings. The Company considers all money market and other cash investments purchased with an original maturity of less than three months to be cash equivalents. U.S. government securities and cash equivalents are highly liquid. Pending investments in portfolio companies pursuant to our principal investment strategy, the Company may make other short-term or temporary investments, including in exchange-traded funds and private investment funds offering periodic liquidity. During the quarter ended January 31, 2013, the Company made two follow-on investments in existing portfolio companies totaling approximately $8.5 million. On November 26, 2012, the Company loaned an additional $8.0 million to JSC Tekers, increasing the secured loan amount to $12.0 million. The interest rate remains at 8% per annum and the maturity date was extended to December 31, 2014. On December 14, 2012, the Company loaned an additional $500,000 to Biovation, increasing the loan amount to $2.0 million. The Company also received a warrant at no cost. The Company allocated a portion of the cost basis in the additional $500,000 loan to the warrant at the time the investment was made. Current commitments include: Commitments of the Company: At January 31, 2013, the Company's existing commitments to portfolio companies consisted of the following: Portfolio Company Amount Committed Amount Funded at January 31, 2013 Turf $ 1.0 million $ 1.0 million MVC Private Equity Fund LP $ 20.1 million $ 8.2 million Total $ 21.1 million $ 9.2 million Guarantees: As of January 31, 2013, the Company had the following commitments to guarantee various loans and mortgages: 51 -------------------------------------------------------------------------------- Table of Contents Guarantee Amount Committed Amount Funded at January 31, 2013 MVC Automotive $ 5.4 million - Tekers $ 170,000 - Ohio Medical $ 21.7 million - Total $ 27.3 million - ASC 460, Guarantees, requires the Company to estimate the fair value of the guarantee obligation at its inception and requires the Company to assess whether a probable loss contingency exists in accordance with the requirements of ASC 450, Contingencies. At January 31, 2013, the Valuation Committee estimated the fair values of the guarantee obligations noted above to be $1.2 million. These guarantees are further described below, together with the Company's other commitments. On July 19, 2007, the Company agreed to guarantee a 1.4 million Euro mortgage for Tekers. The guarantee had a commitment of approximately 125,000 euros at January 31, 2013, equivalent to approximately $170,000. On January 16, 2008, the Company agreed to support a 4.0 million Euro mortgage for a Ford dealership owned and operated by MVC Automotive (equivalent to approximately $5.4 million at January 31, 2013) 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 January 31, 2013 is approximately 5.5 million Euro (equivalent to approximately $7.5 million). 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 January 31, 2013, 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. During the fiscal year ended October 31, 2012, MVC Partners was consolidated with the operations of the Company as MVC Partners' limited partnership interest in the PE Fund is a substantial portion of MVC Partners operations. As of January 31, 2013, $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. This guarantee requires the Company to assume this tranche of the Series B preferred stock if the Company is able to make Non-Diversified Investments. As of January 31, 2013, the amount guaranteed was approximately $21.7 million and the guarantee obligation was fair valued at approximately $1.2 million by the Valuation Committee. 52 -------------------------------------------------------------------------------- Table of Contents 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. On April 27, 2006, the Company and MVCFS, as co-borrowers, entered into a four-year, $100 million 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 consists of a $50.0 million term loan with an interest rate of LIBOR plus 450 basis points with a 1.25% LIBOR floor. As of January 31, 2013, there was $50.0 million in term debt outstanding under the Credit Facility and approximately $9,000 of interest payable. The Credit Facility will expire on April 27, 2013, at which time the outstanding amount under the Credit Facility will be due and payable. During the year ended October 31, 2012, the Company requested Guggenheim's consent, which was granted, to waive compliance with a particular covenant of the Credit Facility related to the interest and asset coverage ratios. In order to obtain this waiver, the Company agreed to increase the interest rate on the Credit Facility if the Company did not meet a newly established covenant level that was more stringent than required in the Company's Credit Facility documents. The covenant level for an event of default remained the same. As of October 31, 2012, the Company met all of its original covenant levels and was not in default, but was unable to meet the increased covenant level required by Guggenheim as part of the waiver obtained earlier in the year. As a result, the interest rate on the Credit Facility was increased to LIBOR plus 525 basis points with a 1.25% LIBOR floor. The increased rate is effective until the Company demonstrates that it has passed the higher covenant level. 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. See "Subsequent Events" for a discussion regarding the Company's repayment of the Credit Facility. At January 31, 2013, the carrying amount of our Credit Facility approximates the fair value, using Level 3 inputs under the fair value hierarchy, 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. Subsequent Events On February 13, 2013, the Company announced the signing of a definitive agreement to sell Summit to an affiliate of One Rock Capital Partners, LLC, subject to regulatory approvals, which were received on February 25, 2013, and the satisfaction of other customary closing conditions, including an escrow. Prior to the completion of the transaction, the Company and other existing Summit shareholders will purchase Summit Custom Spray Drying ("SCSD") from Summit. SCSD provides custom spray drying products to the food, pharmaceutical, nutraceutical, flavor and fragrance industries. Assuming satisfaction of the closing conditions and full realization of the escrow and the sale of SCSD, the Company anticipates receiving gross proceeds from its equity investment of approximately $63.0 million, which is the approximate fair value as of January 31, 2013. Also, as part of the sale, the $12.1 million second lien loan to Summit will be repaid in full and the Company will then provide Summit with a $22.0 million second lien loan. On February 19, 2013, the Company sold $70.0 million of senior unsecured notes, due in 2023 (the "Notes"), in a public offering. The Notes will mature on January 15, 2023, and may be redeemed in whole or in part at any time or from time to time at the Company's option on or after April 15, 2016. The Notes will bear interest at a rate of 7.25% per year payable quarterly on January 15, April 15, July 15, and October 15, of each year, beginning April 15, 2013. The Company had also granted the underwriters a 30-day option to purchase up to an additional $10.5 million of Notes to 53 -------------------------------------------------------------------------------- Table of Contents cover overallotments. The additional $10.5 million in principal was purchased and the total principal amount of the Notes was $80.5 million. On February 26, 2013, the Company received the funds related to the Notes offering, net of expenses, and subsequently repaid the Guggenheim Credit Facility in full including all accrued interest. On February 27, 2013, the Company realized a loss of approximately $4.5 million on its investment in DPHI, Inc., a Legacy Investment formerly DataPlay, Inc. On March 4, 2013, Custom Alloy made a principal payment of $5.0 million on its loan. [ Back To TMCnet.com's Homepage ]