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MVC CAPITAL, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(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, 2013. SELECTED CONSOLIDATED FINANCIAL DATA: Financial information for the fiscal year ended October 31, 2013 is derived from the consolidated financial statements included in the Company's annual report on Form 10-K, which have been audited by Ernst & Young LLP, the Company's independent registered public accounting firm. Quarterly financial information is derived from unaudited financial data, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments), which are necessary to present fairly the results for such interim periods. 34 -------------------------------------------------------------------------------- Table of Contents Selected Consolidated Financial Data Quarter Ended Quarter Ended Year Ended January 31, January 31, October 31, 2014 2013 2013 (Unaudited) (Unaudited) (In thousands, except per share data and number of investments) Operating Data: Interest and related portfolio income: Interest and dividend income $ 3,650 $ 5,595 $ 19,622 Fee income 311 371 2,853 Fee income - asset management 450 450 1,795 Other income (loss) 202 (30 ) 493 Total operating income 4,613 6,386 24,763 Expenses: Management fee 2,304 2,080 8,267 Portfolio fees - asset management 106 106 418 Management fee - asset management 232 232 929 Administrative 908 890 3,712 Interest and other borrowing costs 2,255 937 6,724 Net Incentive compensation (Note 10) 554 1,175 8,304 Total operating expenses 6,359 5,420 28,354 Total waiver by adviser (38 ) (38 ) (150 ) Net operating (loss) income before taxes (1,708 ) 1,004 (3,441 ) Tax expense, net 1 1 4 Net operating (loss) income (1,709 ) 1,003 (3,445 ) Net realized and unrealized (loss) gain: Net realized (loss) gain on investments (237 ) (1,923 ) 43,665 Net change in unrealized appreciation (depreciation) on investments 3,993 7,796 (3,483 ) Net realized and unrealized gain on investments 3,756 5,873 40,182 Net increase in net assets resulting from operations $ 2,047 $ 6,876 $ 36,737 Per Share: Net increase in net assets per share resulting from operations $ 0.10 $ 0.29 $ 1.59 Dividends per share $ 0.135 $ 0.135 $ 0.540 Balance Sheet Data: Portfolio at value $ 458,800 $ 416,477 $ 440,298 Portfolio at cost 386,625 336,943 371,932 Total assets 636,530 461,466 586,828 Shareholders' equity 392,546 389,664 393,554 Shareholders' equity per share (net asset value) $ 17.36 $ 16.29 $ 17.40 Common shares outstanding at period end 22,618 23,917 22,618 Other Data: Number of Investments funded in period 5 2 15 Investments funded ($) in period $ 19,509 $ 8,500 $ 95,701 Repayment/sales in period 6,100 2,683 103,069 Net investment activity in period 13,409 5,817 (7,368 ) 35 -------------------------------------------------------------------------------- Table of Contents 2014 2013 2012 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 4,613 4,469 7,245 6,663 6,386 6,148 3,931 16,164 3,644 Management fee 2,304 2,221 2,101 1,865 2,080 2,027 2,127 2,177 2,257 Portfolio fees - asset management 106 106 103 103 106 106 338 462 62 Management fee - asset management 232 233 232 232 232 140 41 188 388 Administrative 908 1,023 897 902 890 862 971 817 923 Interest, fees and other borrowing costs 2,255 2,254 2,115 1,418 937 886 854 832 795 Net Incentive compensation 554 2,160 3,961 1,008 1,175 (1,410 ) (2,415 ) (175 ) (1,937 ) Total waiver by adviser (38 ) (37 ) (38 ) (37 ) (38 ) (38 ) (37 ) (2,383 ) (96 ) Tax expense 1 1 1 1 1 3 - - 1 Net operating (loss) income before net realized and unrealized gains (1,709 ) (3,492 ) (2,127 ) 1,171 1,003 3,572 2,052 14,246 1,251 Net increase (decrease) in net assets resulting from operations 2,047 3,855 18,114 7,892 6,876 (3,556 ) (10,595 ) 1,515 (9,018 ) Net increase (decrease) in net assets resulting from operations per share 0.10 0.18 0.79 0.33 0.29 (0.14 ) (0.45 ) 0.06 (0.37 ) Net asset value per share 17.36 17.40 17.36 16.56 16.29 16.14 16.42 16.99 17.04 OVERVIEW The Company is an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company under the 1940 Act. The Company's investment objective is to seek to maximize total return from capital appreciation and/or income. On November 6, 2003, Mr. Tokarz assumed his positions as Chairman and Portfolio Manager of the Company. He and the Company's investment professionals (who, effective November 1, 2006, provide their services to the Company through the Company's investment adviser, TTG Advisers) are seeking to implement our investment objective (i.e., to maximize total return from capital appreciation and/or income) through making a broad range of private investments in a variety of industries. The investments can include senior or subordinated loans, convertible debt and convertible preferred securities, common or preferred stock, equity interests, warrants or rights to acquire equity interests, and other private equity transactions. During the fiscal year ended October 31, 2013, the Company made six new investments and made nine follow-on investments in five existing portfolio companies committing a total of $95.7 million of capital to these investments. During the quarter ended January 31, 2014, the Company made five follow-on investments in existing portfolio companies, committing capital totaling $19.4 million. The Company's prior investment objective was 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, 2014, approximately 1.0% 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 limits our ability to make additional investments that represent more than 5% of our total assets or more than 10% of the outstanding voting securities of 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 financings are generally used to fund growth, buyouts, acquisitions, recapitalizations, note purchases, and/or bridge financings. We generally invest in private companies, though, from time to time, we may invest in public companies that may lack adequate access to public capital. We may also seek to achieve our investment objective by establishing a subsidiary or subsidiaries that would serve as general partner to a private equity or other investment funds. Furthermore, the Board of Directors authorized the 36 -------------------------------------------------------------------------------- Table of Contents 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 limited in its ability to make Non-Diversified Investments. For services provided to the PE Fund, the GP and MVC Partners are together entitled to receive 25% of all management fees and other fees paid by the PE Fund and its portfolio companies and up to 30% of the carried interest generated by the PE Fund. Further, at the direction of the Board of Directors, the GP retained TTG Advisers to serve as the portfolio manager of the PE Fund. In exchange for providing those services, and pursuant to the Board of Directors' authorization and direction, TTG Advisers is entitled to 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 Schedules of Investments. The consolidation of MVC Partners has not had any material effect on the financial position or net results of operations of the Company. 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, 2014 and 2013. Total operating income was $4.6 million for the quarter ended January 31, 2014 and $6.4 million for the quarter ended January 31, 2013, a decrease of approximately $1.8 million. For the Quarter Ended January 31, 2014 Total operating income was $4.6 million for the quarter ended January 31, 2014. The decrease in operating income over the same period last year was primarily due to a decrease in dividend income from portfolio companies, specifically U.S. Gas, which was partially offset by an increase in interest income from portfolio companies. The main components of operating income for the quarter ended January 31, 2014 was fee income from portfolio companies and asset management and the interest earned on loans. The Company earned approximately $3.6 million in interest and dividend income from investments in portfolio companies. Of the $3.6 million recorded in interest/dividend income, approximately $1.1 million was "payment in kind" interest/dividends. The "payment in kind" interest/dividends are computed at the contractual rate specified in each investment agreement and added to the principal balance of each investment. The Company's debt investments yielded rates from 5% to 16%. The Company also received fee income from asset management of the PE Fund and its portfolio companies totaling approximately $450,000 and fee income from the Company's portfolio companies of approximately $311,000, totaling approximately $761,000. Of the $450,000 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. 37 -------------------------------------------------------------------------------- Table of Contents 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. OPERATING EXPENSES For the Quarter Ended January 31, 2014 and 2013. Operating expenses, net of Voluntary Waivers, were approximately $6.3 million for the quarter ended January 31, 2014 and $5.4 million for the quarter ended January 31, 2013, an increase of approximately $900,000. For the Quarter Ended January 31, 2014 Operating expenses, net of the Voluntary Waivers (as described below), were approximately $6.3 million or 6.39% of the Company's average net assets, when annualized, for the quarter ended January 31, 2014. Significant components of operating expenses for the quarter ended January 31, 2014 were management fee expense related to the Company of approximately $2.3 million, interest and other borrowing costs of approximately $2.3 million and incentive compensation expense of approximately $554,000. The approximately $900,000 increase in the Company's net operating expenses for the quarter ended January 31, 2014 compared to the quarter ended January 31, 2013, was primarily due to the approximately $1.3 million increase in interest and other borrowing costs and an approximately $200,000 increase in management fee expense related to the Company which were partially offset by a decrease of approximately $600,000 in the estimated provision for incentive compensation expense. The portfolio fees - asset management are payable to TTG Advisers for monitoring and other customary fees received by the GP from portfolio companies of the PE Fund. To the extent the GP or TTG Advisers receives advisory, monitoring, organization or other customary fees from any portfolio company of the PE Fund or management fees related to the PE Fund, 25% of such fees shall be paid to or retained by the GP and 75% of such fees shall be paid to or retained by TTG Advisers. For the 2014 fiscal year, TTG Advisers voluntarily agreed to waive $150,000 of expenses that the Company is obligated to reimburse to TTG Advisers under the Advisory Agreement (the "Voluntary Waiver"). TTG Advisers voluntarily agreed that any assets of the Company that were invested in exchange-traded funds would not be taken into account in the calculation of the base management fee due to TTG Advisers under the Advisory Agreement. The Company and the Adviser have agreed to continue the expense cap into fiscal year 2014, though they may determine to revise the present calculation methodology later in the year. For fiscal year 2013 and the quarter ended January 31, 2014, the Company's expense ratio was 3.04% and 3.24%, 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, 2014, the provision for incentive compensation was increased by a net amount of approximately $554,000 to approximately $24.5 million. The net increase in the provision for incentive compensation during the quarter ended January 31, 2014 reflects the Valuation Committee's determination to increase the fair values of five of the Company's portfolio investments (NPWT, Vestal, Freshii, Biovations, and Custom Alloy) by a total of approximately $7.1 million. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $949,000 due to a PIK distribution, which was treated as a return of capital. The net increase in the provision also reflects the Valuation Committee's determination to decrease the fair values of eight of the Company's portfolio investments (MVC 38 -------------------------------------------------------------------------------- Table of Contents Automotive, Octagon, Velocitius, Centile, SGDA Europe, Tekers, Turf and Security Holdings) by a total of approximately $5.5 million. For the three month period ended January 31, 2014, 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 11 of our consolidated financial statements "Incentive Compensation" for more information. 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 2013 fiscal year, TTG Advisers voluntarily agreed to waive $150,000 of expenses that the Company is obligated to reimburse to TTG Advisers under the Advisory Agreement (the "Voluntary Waiver"). On October 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 as pre-incentive fee net operating income did not exceed the hurdle rate. Please see Note 11 of our consolidated financial statements "Incentive Compensation" for more information. REALIZED GAINS AND LOSSES ON PORTFOLIO SECURITIES For the Quarter Ended January 31, 2014 and 2013. Net realized losses for the quarter ended January 31, 2014 were approximately $237,000 and for the quarter ended January 31, 2013 were approximately $1.9 million, a decrease of approximately $1.7 million. For the Quarter Ended January 31, 2014 Net realized losses for the quarter ended January 31, 2014 were approximately $237,000. The significant components of the Company's net realized losses for the quarter ended January 31, 2014 were primarily due to the realized loss on BPC II and the realized loss on a short-term investment. On November 7, 2013, the Company recorded a realized gain of approximately $26,000 associated with the SHL Group Limited escrow. 39 -------------------------------------------------------------------------------- Table of Contents On November 11, 2013, the Company recorded a realized gain of approximately $20,000 associated with the Vendio escrow. On January 30, 2014, BPC II, LLC completed the dissolution of its operations. The Company realized a loss of $180,000 as a result of this dissolution. During the quarter ended January 31, 2014, the Company recorded a realized loss of approximately $162,000 with the sale of its short-term investments. 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. UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES For the Quarter Ended January 31, 2014 and 2013. The Company had a net change in unrealized appreciation on portfolio investments of approximately $4.0 million for the quarter ended January 31, 2014 and approximately $7.8 million for the quarter ended January 31, 2013, a net decrease of approximately $3.8 million. For the Quarter Ended January 31, 2014 The Company had a net change in unrealized appreciation on portfolio investments of approximately $4.0 million for the quarter ended January 31, 2014. The change in unrealized appreciation for the quarter ended January 31, 2014 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 $18,000 and series B preferred stock by approximately $4.0 million, NPWT common stock by $1,000 and preferred stock by $34,000, Vestal common stock by $3.0 million, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $2.2 million, Biovation warrants by $162,000, and Freshii warrant by approximately $15,000. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $949,000 due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Company's investments in SGDA Europe equity interest by approximately $57,000, Centile equity interest by $29,000, Security Holdings equity interest by $304,000, MVC Automotive equity interest by approximately $1.9 million, Octagon equity interest by approximately $1.2 million, Velocitius equity interest by approximately $1.9 million, Biovation bridge loan by approximately $102,000, Foliofn, Inc. preferred stock by approximately $1.1 million, Turf guarantee by $92,000 and Tekers common stock by $12,000. The reclassification from unrealized depreciation to a realized loss caused by the dissolution of BPC II, LLC of $180,000 was also a component in the change in unrealized appreciation. 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 40 -------------------------------------------------------------------------------- Table of Contents 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. PORTFOLIO INVESTMENTS For the Quarter Ended January 31, 2014 and the Year Ended October 31, 2013. The cost of the portfolio investments held by the Company at January 31, 2013 and at October 31, 2013 was $386.6 million and $372.0 million, respectively, an increase of $14.6 million. The aggregate fair value of portfolio investments at January 31, 2014 and at October 31, 2013 was $458.8 million and $440.3 million, respectively, an increase of $18.5 million. The Company held unrestricted cash and cash equivalents at January 31, 2014 and at October 31, 2013 of $61.8 million and $81.0 million, respectively, a decrease of approximately $19.2 million. The cost and fair value of short-term investments held by the Company at January 31, 2014 was $99.7 million and $99.8 million, respectively, and the cost and fair value of short-term investments held by the Company at October 31, 2013 was $49.9 million and $49.8 million, respectively. For the Quarter Ended January 31, 2014 During the quarter ended January 31, 2014, the Company made five follow-on investments into existing portfolio companies totaling approximately $19.4 million. On November 13, 2013, the Company loaned $4.0 million to Security Holdings in the form of a 5% cash bridge loan with a maturity date of February 15, 2014. On November 19, 2013, the Company increased its common equity interest in Centile by $100,000. Also on November 19, 2013, the Company invested $5.0 million into MVC Automotive Group in the form of common equity interest and converted its bridge loan, of approximately $1.8 million including accrued interest, to common equity interest. On December 23, 2013, the Company made a senior secured loan of $3.3 million to RuMe with a cash interest rate of 12% and a maturity date of April 4, 2014. The Company also purchased warrants for shares of common stock in RuMe for a nominal amount and allocated a portion of the cost basis of the loan to the warrants at the time the investment was made. On January 2, 2014, the Company loaned $7.0 million to Morey's, increasing its second lien loan amount to $15.0 million. The interest rate on the total loan was increased to 10% cash and 3% payment in kind ("PIK"). On November 1, 2013, Custom Alloy made a $500,000 principal payment on its loan. On November 1, 2013, Turf repaid its $1.0 million junior revolving note in full including all accrued interest. The junior revolving note is no longer a commitment of the Company. Turf also made a $4.5 million principal payment on its senior subordinated loan, resulting in an outstanding balance of approximately $3.9 million as of January 31, 2014. The Company also guaranteed $1.0 million of Turf's indebtedness to Berkshire Bank. The guarantee was valued at negative $92,000. On November 11, 2013, MVC Automotive Group B.V. completed a tax free reorganization into MVC Automotive Group GmbH "MVC Automotive", an Austrian holding company, to increase operating efficiencies. On December 16, 2013, the Company announced the termination of its agreement to sell U.S. Gas to US Holdings, a company organized to acquire U.S. Gas. US Holdings was unable to satisfy the closing conditions of the original agreement (October 4, 2013) and subsequently submitted a transaction termination notice to the Company on December 10, 2013. On January 30, 2014, BPC II, LLC completed the dissolution of its operations. The Company realized a loss of $180,000 as a result of this dissolution. 41 -------------------------------------------------------------------------------- Table of Contents During the quarter ended January 31, 2014, Marine made principal payments totaling $100,000 on its senior subordinated loan. As of January 31, 2014, the balance of the loan was approximately $11.4 million. During the quarter ended January 31, 2014, the Valuation Committee increased the fair value of the Company's investments in Custom Alloy series A preferred stock by approximately $18,000 and series B preferred stock by approximately $4.0 million, NPWT common stock by $1,000 and preferred stock by $34,000, Vestal common stock by $3.0 million, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $2.2 million, Biovation warrants by $162,000, and Freshii warrant by approximately $15,000. In addition, increases in the cost basis and fair value of the loans to Marine, Summit, Freshii, Biogenic and U.S. Gas, and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $1,008,665. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $949,000 due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Company's investments in SGDA Europe equity interest by approximately $57,000, Centile equity interest by $29,000, Security Holdings equity interest by $304,000, Octagon equity interest by approximately $1.2 million, MVC Automotive equity interest by approximately $1.9 million, Velocitius equity interest by approximately $1.9 million, Biovation bridge loan by approximately $102,000, Foliofn, Inc. preferred stock by approximately $1.1 million, Turf guarantee by $92,000 and Tekers common stock by $12,000. Also, during the quarter ended January 31, 2014, the undistributed allocation of flow through income from the Company's equity investment in Octagon increased the cost basis and fair value of this investment by approximately $101,000. At January 31, 2014, the fair value of all portfolio investments, exclusive of short-term investments and escrow receivables, was $458.8 million with a cost basis of $386.6 million. At January 31, 2014, the fair value and cost basis of portfolio investments of the Legacy Investments was $5.9 million and $23.8 million, respectively, and the fair value and cost basis of portfolio investments made by the Company's current management team was $452.9 million and $362.8 million, respectively. At October 31, 2013, the fair value of all portfolio investments, exclusive of short-term investments and escrow receivables, was $440.3 million with a cost basis of $372.0 million. At October 31, 2013, the fair value and cost basis of the Legacy Investments was $7.0 million and $23.8 million, respectively, and the fair value and cost basis of portfolio investments made by the Company's current management team was $433.3 million and $348.2 million, respectively. For the Fiscal Year Ended October 31, 2013 During the year ended October 31, 2013, the Company made six new investments, committing capital totaling approximately $62.4 million. The investments were made in Summit Research Labs, Inc. ("Summit") ($22.0 million), U.S. Spray Drying Holding Company ("SCSD") ($5.5 million), Prepaid Legal Services, Inc. ("Prepaid Legal") ($9.9 million), Morey's ($8.0 million), Biogenic ($9.5 million) and Advantage Insurance Holdings LTD ("Advantage") ($7.5 million). During the year ended October 31, 2013, the Company made nine follow-on investments into five existing portfolio companies totaling approximately $33.3 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 remained at 8% per annum and the maturity date was extended to December 31, 2014. On February 15, 2013 and May 7, 2013, the Company contributed a total of approximately $1.1 million to the PE Fund related to expenses and an additional investment in Plymouth Rock Energy, LLC. As of October 31, 2013, the PE Fund had invested in Plymouth Rock Energy, LLC, Gibdock Limited and Focus Pointe Holdings, Inc. On June 11, 2013, the Company invested $22.6 million in Ohio Medical in the form of 7,477 shares of series C convertible preferred stock. This follow-on investment replaced the guarantee the Company had with Ohio Medical. The guarantee is no longer a commitment of the Company. On August 2, 2013, the Company increased its common equity interest in MVC Automotive by approximately $133,000. During the year ended October 31, 2013, the Company loaned an additional $1.5 million to Biovation, increasing the loan amount to approximately $3.1 million. The Company also received warrants at no cost. The Company allocated a portion of the cost basis of the additional loan to the warrants at the time the investment was made. On December 17, 2012, the Company received a dividend from Vestal of approximately $426,000. 42 -------------------------------------------------------------------------------- Table of Contents 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 October 31, 2013, the balance of the bridge loan was approximately $1.6 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 its cost basis. The remaining $84,000 was related to the preferred stock and recorded as a capital gain as the cost basis of the preferred stock had already been reduced to $0. On February 8, 2013, the Company received a $70,000 dividend from Marine. On February 13, 2013, the Company announced the signing of a definitive agreement to sell Summit to an affiliate of One Rock Capital Partners, LLC, subject to regulatory approvals, which were received on February 25, 2013, and the satisfaction of other customary closing conditions, including an escrow. Prior to the completion of the transaction, the Company and other existing Summit shareholders purchased SCSD from Summit. The Company invested approximately $5.5 million for 784 shares of class B common stock. SCSD provides custom spray drying products to the food, pharmaceutical, nutraceutical, flavor and fragrance industries. On March 29, 2013, the Company received gross equity proceeds of approximately $66.3 million, resulting in a realized gain of approximately $49.5 million from the transaction, a $3.6 million premium to the last reported fair market value placed on Summit by the Company's Valuation Committee as of January 31, 2013. The $66.3 million of proceeds included approximately $6.3 million held in escrow, which had a fair value of approximately $5.9 million as of October 31, 2013. The decrease in the escrow fair value of approximately $400,000 was recorded as a realized loss. Also, as part of the sale, the $12.1 million second lien loan to Summit was repaid in full, including all accrued interest. The Company then provided Summit with a $22.0 million second lien loan with an annual interest rate of 14% and a maturity date of October 1, 2018. On February 27, 2013, the Company realized a loss of approximately $4.5 million on the 602,131 preferred shares of DPHI, Inc., a Legacy Investment formerly DataPlay, Inc., which had a fair value of $0. On June 10, 2013, Teleguam repaid its $7.0 million second lien loan in full, including all accrued interest. On July 1, 2013, Prepaid Legal repaid its tranches A and B term loans in full including all accrued interest. Total proceeds received were approximately $6.8 million. During the year ended October 31, 2013, the Company received dividend payments from U.S. Gas totaling approximately $7.6 million. During the year ended October 31, 2013, Marine made principal payments totaling $900,000 on its senior subordinated loan. As of October 31, 2013, the balance of the loan was approximately $11.4 million. During the year ended October 31, 2013, Custom Alloy made principal payments of approximately $8.2 million on its loan. As of October 31, 2013, the outstanding balance of the loan was approximately $7.5 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 loans A and B by a total of approximately $119,000, 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 $648,977. The Valuation 43 -------------------------------------------------------------------------------- Table of Contents 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 $84,000 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. During the quarter ended April 30, 2013, the Valuation Committee increased the fair value of the Company's investments in MVC Automotive equity interest by approximately $665,000, NPWT preferred and common stock by a total of approximately $70,000, Security Holdings equity interest by approximately $4.0 million, SGDA Europe equity interest by approximately $614,000, Turf equity interest by $412,000, Vestal common stock by approximately $1.4 million, Centile equity interest by $505,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $1.7 million and Freshii warrant by approximately $5,000. In addition, increases in the cost basis and fair value of the loans to Marine, Summit, Freshii and U.S. Gas, and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $453,990. The Valuation Committee also decreased the fair value of the Company's investments in Ohio Medical Preferred stock by $4.6 million, Tekers common stock by $218,000, Velocitius equity interest by approximately $1.2 million, JSC Tekers secured loan by $1.0 million and the Biovation loan and warrant by a total of approximately $50,000. The Valuation Committee also determined to remove the liability associated with the Ohio Medical guarantee, which had a fair value as of January 31, 2013 of approximately $1.2 million. Also, during the quarter ended April 30, 2013, 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 $110,000. During the quarter ended July 31, 2013, the Valuation Committee increased the fair value of the Company's investments in Custom Alloy series A preferred stock by approximately $22,000 and series B preferred stock by approximately $5.0 million, Security Holdings equity interest by approximately $1.9 million, U.S. Gas convertible series I preferred stock by $11.6 million, Vestal common stock by $1.0 million, Centile equity interest by $474,000 and the Biovation bridge loan by approximately $135,000. In addition, increases in the cost basis and fair value of the loans to Marine, Summit, Freshii, Biovation and U.S. Gas, and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $1,198,394. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $201,000 due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Company's investments in NPWT preferred and common stock by a total of approximately $210,000, SGDA Europe equity interest by approximately $187,000, Velocitius equity interest by approximately $116,000, Freshii warrant by approximately $8,000, Biovation warrant by $82,000 and the MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $85,000. Also, during the quarter ended July 31, 2013, 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 $70,000. During the quarter ended October 31, 2013, the Valuation Committee increased the fair value of the Company's investments in Custom Alloy series A preferred stock by approximately $18,000 and series B preferred stock by approximately $4.1 million, Security Holdings equity interest by approximately $3.4 million, Vestal common stock by $2.7 million, Centile equity interest by $568,000, MVC Automotive equity interest by approximately $779,000, NPWT preferred and common stock by a total of approximately $19,000, SGDA Europe equity interest by approximately $141,000, Velocitius equity interest by approximately $505,000, Tekers common stock by $214,000, MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $649,000, Pre-Paid Legal second lien loan by approximately $144,000 and the Biovation bridge loan by approximately $87,000. In addition, increases in the cost basis and fair value of the loans to Marine, Summit, Freshii, Biovation, Biogenic and U.S. Gas, and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $968,538. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $900,000 due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Company's investments in the Freshii warrant by approximately $12,000, RuMe preferred stock by $750,000, Ohio Medical Preferred stock by $1.9 million and Foliofn preferred stock by 44 -------------------------------------------------------------------------------- Table of Contents approximately $3.8 million. Also, during the quarter ended October 31, 2013, 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 $97,000. During the year ended October 31, 2013, the Valuation Committee increased the fair value of the Company's investments in Custom Alloy series A preferred stock by approximately $44,000 and series B preferred stock by approximately $9.9 million, Octagon equity interest by $450,000, Pre-Paid Legal term loans A and B by a total of approximately $119,000, MVC Automotive equity interest by approximately $3.7 million, Security Holdings equity interest by approximately $12.2 million, Turf equity interest by $592,000, Vestal common stock by approximately $6.8 million, U.S. Gas convertible series I preferred stock by $11.6 million, Pre-Paid Legal second lien loan by approximately $144,000, Centile equity interest by approximately $1.7 million, Biovation loan by approximately $177,000, Tekers common stock by $230,000 and the MVC Private Equity Fund L.P. general partnership interest and limited partnership interest in the PE Fund by a total of approximately $2.2 million. In addition, increases in the cost basis and fair value of the loans to Custom Alloy, Marine, Summit, Freshii, Biogenic and U.S. Gas, and the Marine preferred stock were due to the capitalization of PIK interest/dividends totaling $3,269,909. The Valuation Committee also increased the fair value of the Ohio Medical series C convertible preferred stock by approximately $1.1 million due to a PIK distribution, which was treated as a return of capital. The Valuation Committee also decreased the fair value of the Company's investments in Ohio Medical Preferred stock by $6.5 million, SGDA Europe equity interest by approximately $1.2 million, NPWT preferred and common stock by a total of approximately $205,000, Freshii warrant by approximately $15,000, Foliofn preferred stock by approximately $3.8 million, RuMe preferred stock by $327,000, HH&B common stock by $100,000, Velocitius equity interest by approximately $1.9 million, JSC Tekers secured loan by $1.0 million and the Biovation warrant by $87,000. The Valuation Committee also determined to remove the liability associated with the Ohio Medical guarantee that had a net change of $825,000. Also, during the fiscal year ended October 31, 2013, 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 $247,000. At October 31, 2013, the fair value of all portfolio investments, exclusive of short-term investments and escrow receivables, was $440.3 million with a cost basis of $372.0 million. At October 31, 2013, the fair value and cost basis of the Legacy Investments was $7.0 million and $23.8 million, respectively, and the fair value and cost basis of portfolio investments made by the Company's current management team was $433.3 million and $348.2 million, respectively. At October 31, 2012, the fair value of all portfolio investments, exclusive of short-term investments and escrow receivables, was $404.2 million with a cost basis of $332.4 million. At October 31, 2012, the fair value and cost basis 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. Portfolio Companies During the quarter ended January 31, 2014, the Company had investments in the following portfolio companies: Actelis Networks, Inc. Actelis Networks, Inc. ("Actelis"), Fremont, California, a Legacy Investment, provides authentication and access control solutions designed to secure the integrity of e-business in Internet-scale and wireless environments. At October 31, 2013 and January 31, 2014, 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. Advantage Insurance Holdings Advantage, Cayman Islands, is a provider of specialty insurance, reinsurance and related services to business owners and high net worth individuals. At October 31, 2013 and January 31, 2014, the 750,000 shares of preferred stock had a cost basis and fair value of $7.5 million. 45 -------------------------------------------------------------------------------- Table of Contents Biogenic Reagents Biogenic, Minneapolis, Minnesota, is a producer of high-performance activated carbon products made from renewable biomass. At October 31, 2013, the Company's investment in Biogenic consisted of a senior note and a senior convertible note. The notes have an interest rate of 16% and a maturity date of July 21, 2018. The loans had a combined outstanding balance, cost basis and fair value of $9.6 million. At January 31, 2014, the Company's the loans had a combined outstanding balance, cost basis and fair value of $9.7 million. The increase in cost and fair value of the loans is due to the capitalization of "payment in kind" interest. These increases were approved by the Company's Valuation Committee. Biovation Holdings Inc. Biovation, Montgomery, Minnesota, is a manufacturer and marketer of environmentally friendly, organic and sustainable laminate materials and composites. At October 31, 2013, the Company's investment in Biovation consisted of a bridge loan with an annual interest of 12% and a maturity date of August 31, 2014. The loan had an outstanding balance of approximately $3.1 million, a cost basis of approximately $3.0 million and a fair value of approximately $3.2 million. The warrants had a cost of $288,000 and a fair value of $201,000. During the quarter ended January 31, 2014, the Valuation Committee decreased the fair value of the loan by approximately $102,000 and increased the value of the warrants by approximately $162,000. At January 31, 2014, the Company's investment consisted of a bridge loan with an outstanding balance, cost basis and fair value of approximately $3.1 million. The warrants had a cost of $288,000 and a fair value of $363,000. The increase in cost and fair value of the loan is due to the capitalization of "payment in kind" interest. These increases were approved by the Company's Valuation Committee. Peter Seidenberg and Jim Lynch, representatives 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, 2013, the equity investment had a cost basis of $180,000 and a fair value of $0. On January 30, 2014, BPC completed the dissolution of its operations. The Company realized a loss of $180,000 as a result of this dissolution. At January 31, 2014, the Company no longer held an investment in BPC. 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, 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 $4.8 million. On November 19, 2013, the Company increased its common equity interest in Centile by $100,000. During the quarter ended January 31, 2014, the Valuation Committee decreased the fair value of the common equity interest by approximately $29,000. 46 -------------------------------------------------------------------------------- Table of Contents At January 31, 2014, the Company's investment in Centile consisted of common equity interest at a cost of $3.3 million and a fair value of approximately $4.8 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, 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 $88,000 and 1,991 shares of convertible series B preferred stock at a cost of $10.0 million and fair value of approximately $19.9 million. The unsecured subordinated loan, which bears annual interest at 12% and has a maturity date of September 4, 2016, had a cost basis, outstanding balance and fair value of approximately $7.5 million. On November 1, 2013, Custom Alloy made a $500,000 principal payment on its loan. During the quarter ended January 31, 2014, the Valuation Committee increased the fair value of the series A preferred stock by approximately $18,000 and the series B preferred stock by approximately $4.0 million. At January 31, 2014, 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 $106,000 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 $23.9 million. The unsecured subordinated loan had a cost basis, outstanding balance and fair value of approximately $7.0 million. Michael Tokarz, Chairman of the Company, and Shivani Khurana, representative of the Company, serve as directors of Custom Alloy. 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, 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 $7.0 million. During the quarter ended January 31, 2014, the Valuation Committee decreased the fair value of the preferred stock by approximately $1.1 million. At January 31, 2014, 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 $5.9 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, 2013, 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 $1.1 million. The warrant had a cost of approximately $34,000 and a fair value of approximately $19,000. During the quarter ended January 31, 2014, the Valuation Committee increased the fair value of the warrant by approximately $15,000. At January 31, 2014, the Company's investment in Freshii consisted of a senior secured loan with an outstanding balance, cost basis and fair value of approximately $1.1 million. The warrant had a cost of approximately $34,000 and a fair value of approximately $33,000. 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. 47 -------------------------------------------------------------------------------- Table of Contents 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 is a distributor of health and beauty products. The Company's initial investment consisted of 100,010 shares of common stock. At October 31, 2013 and January 31, 2014, 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. 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, 2013 and January 31, 2014, the Company's investment in JSC Tekers consisted of a secured loan with an outstanding balance and cost basis of $12.0 million and a fair value of $11.0 million and 2,250 shares of common stock with a cost basis and fair value of $4,500. The secured loan had an interest rate of 8% and a maturity date of December 31, 2014. The Company has reserved in full against all of the accrued interest starting February 1, 2013. 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, 2013 and January 31, 2014, 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, 2013, 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 $11.4 million. The senior secured loan bears annual interest at 11% and matures on August 30, 2017. The preferred stock was fair valued at approximately $3.5 million. The dividend rate on the preferred stock is 12% per annum. During the quarter ended January 31, 2014, Marine made principal payments totaling $100,000 on its senior subordinated loan. At January 31, 2014, the Company's senior secured loan had an outstanding balance, cost basis and fair value of approximately $11.4 million. The preferred stock had a cost and fair value of approximately $3.6 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. Morey's Seafood International LLC Morey's, Motley, Minnesota, is a manufacturer, marketer and distributor of fish and seafood products. At October 31, 2013, the Company's investment in Morey's consisted of a $8.0 million second lien loan. The loan had an interest rate of 10% and a maturity date of August 12, 2018. On January 2, 2014, the Company loaned $7.0 million to Morey's, increasing the second lien loan amount to $15.0 million. The interest rate on the total loan amount was increased to 13%. At January 31, 2014, the loan had an outstanding balance, cost basis and fair value of $15.0 million. MVC Automotive Group GmbH MVC Automotive, an Amsterdam-based holding company, owns and operates ten Ford, Jaguar, Land Rover, Mazda, and Volvo dealerships located in Austria, Belgium, and the Czech Republic. 48 -------------------------------------------------------------------------------- Table of Contents At October 31, 2013, the Company's investment in MVC Automotive consisted of an equity interest with a cost of approximately $34.9 million and a fair value of approximately $37.3 million. The bridge loan, which bears annual interest at 10% and matures on December 31, 2013, had a cost and fair value of approximately $1.6 million. The guarantee for MVC Automotive was equivalent to approximately $5.4 million at October 31, 2013. On November 11, 2013, MVC Automotive Group B.V. completed a tax free reorganization into MVC Automotive Group GmbH, an Austrian holding company, to increase operating efficiencies. On November 19, 2013, the Company invested an additional $5.0 million into MVC Automotive in the form of common equity interest and converted its bridge loan, of approximately $1.8 million including accrued interest, to common equity interest. During the quarter ended January 31, 2014, the Valuation Committee decreased the fair value of the equity interest by approximately $1.9 million. At January 31, 2014, the Company's investment in MVC Automotive consisted of an equity interest with a cost of approximately $41.7 million and a fair value of approximately $42.1 million. The mortgage guarantee for MVC Automotive was equivalent to approximately $5.4 million at January 31, 2014. 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 limited in its ability to make Non-Diversified Investments. For services provided to the PE Fund, the GP and MVC Partners are together entitled to receive 25% of all management fees and other fees paid by the PE Fund and its portfolio companies and up to 30% of the carried interest generated by the PE Fund. Further, at the direction of the Board of Directors, the GP retained TTG Advisers to serve as the portfolio manager of the PE Fund. In exchange for providing those services, and pursuant to the Board of Directors' authorization and direction, TTG Advisers is entitled to the remaining 75% of the management and other fees generated by the PE Fund and its portfolio companies and any carried interest generated by the PE Fund. A significant portion of the portfolio fees that are paid by the PE 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, through its wholly-owned subsidiary MVC GP II, has committed $500,000 to the PE Fund as its general partner. See MVC Partners for more information on the other portion of the 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 and thereafter, MVC Partners was consolidated with the operations of the Company as MVC Partners' limited partnership interest in the PE Fund is a substantial portion of MVC Partners' operations. At October 31, 2013, the cost basis of the limited partnership interest in the PE Fund was equal to the investments made in the PE Fund of approximately $9.1 million and had a fair value of approximately $11.4 million. The Company's general partnership interest in the PE Fund had a cost basis of approximately $232,000 and fair value of approximately $288,000. During the quarter ended January 31, 2014, the Valuation Committee increased the fair values of the limited partnership and general partnership interests totaling approximately $2.2 million. 49 -------------------------------------------------------------------------------- Table of Contents At January 31, 2014, the limited partnership interest in the PE Fund had a cost of approximately $9.1 million and a fair value of approximately $13.5 million. The Company's general partnership interest in the PE Fund had a cost basis of approximately $232,000 and a fair value of approximately $341,000. As of January 31, 2014, the PE Fund has invested in Plymouth Rock Energy, LLC, Gibdock Limited and Focus Pointe Holdings, Inc. NPWT Corporation NPWT, Gurnee, Illinois, is a medical device manufacturer and distributor of negative pressure wound therapy products. At October 31, 2013, the Company's investment in NPWT consisted of 281 shares of common stock with a cost basis of approximately $1.2 million and a fair value of approximately $14,000 and 5,000 shares of convertible preferred stock with a cost basis of $0 and a fair value of $241,000. During the quarter ended January 31, 2014, the Valuation Committee increased the fair values of the common stock and preferred stock totaling approximately $35,000. At January 31, 2014, the common stock had a cost basis of approximately $1.2 million and a fair value of approximately $15,000. The convertible preferred stock had a cost basis of $0 and a fair value of approximately $275,000. 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, 2013, the Company's investment in Octagon consisted of an equity investment with a cost basis of approximately $2.6 million and a fair value of approximately $6.9 million. During the quarter ended January 31, 2014, the Valuation Committee decreased the fair value of the equity investment by approximately $1.2 million. During the quarter ended January 31, 2014, the cost basis and fair value of the equity investment was increased by approximately $101,000 because of an allocation of flow through income by the Company's Valuation Committee. At January 31, 2014, the equity investment had a cost basis of approximately $2.7 million and a fair value of $5.9 million. Ohio Medical Corporation Ohio Medical, Gurnee, Illinois, is a manufacturer and supplier of suction and oxygen therapy products, medical gas equipment, and input devices. At October 31, 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, 24,773 shares of series A convertible preferred stock with a cost basis of $30.0 million and a fair value of $24.6 million and 7,845 shares of series C convertible preferred stock with a cost basis of $22.6 million and a fair value of $23.7 million. During the quarter ended January 31, 2014, the fair value of the series C convertible preferred stock was increased by approximately $949,000 due to a PIK distribution, which was treated as a return of capital. At January 31, 2014, 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, 25,764 shares of series A convertible preferred stock with a cost basis of $30.0 million and a fair value of $24.6 million and 8,159 shares of series C convertible preferred stock with a cost basis of $22.6 million and a fair value of $24.7 million. Michael Tokarz, Chairman of the Company, Peter Seidenberg and Jim O'Connor, representatives of the Company, serve as directors of Ohio Medical. Prepaid Legal Services, Inc. Prepaid Legal, Ada, Oklahoma, is the leading marketer of legal counsel and identity theft solutions to families and small businesses in the U.S. and Canada. 50 -------------------------------------------------------------------------------- Table of Contents At October 31, 2013 and January 31, 2014, the Company's investment in Prepaid Legal consisted of a $9.9 million second lien loan, which was purchased at a discount. The interest rate on the loan is the greater of LIBOR plus 8.50% with a LIBOR floor of 1.25% or the Alternate Base rate ("ABR") plus 7.5% with an ABR floor of 2.25% per annum. The loan matures on July 1, 2020. The loan had an outstanding balance of $10.0 million, a cost basis of approximately $9.9 million and a fair value of approximately $10.0 million. The increase in the cost of the loan is due to the amortization of the original issue discount. RuMe, Inc. RuMe, Denver, Colorado, produces functional, affordable and responsible products for the environmentally and socially-conscious consumer reducing dependence on single-use products. At October 31, 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 $1.1 million. On December 23, 2013, the Company loaned $3.3 million to RuMe in the form of a senior secured loan with a cash interest rate of 12% and a maturity date of April 4, 2014. The Company also purchased warrants for shares of common stock in RuMe for a nominal amount and allocated a portion of the cost basis of the loan to the warrants at the time the investment was made. At January 31, 2014, 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 $1.1 million. The loan had an outstanding balance of approximately $3.3 million and a cost basis and fair value of approximately $2.8 million. The warrant had a cost basis and fair value of $721,500. The increase in the cost and fair value of the loan is due to the amortization of the original issue discount. 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, 2013, the Company's common equity interest in Security Holdings had a cost basis of approximately $40.2 million and a fair value of $36.3 million. On November 13, 2013, the Company loaned $4.0 million to Security Holdings in the form of a 5% cash bridge loan with a maturity date of February 15, 2014. During the quarter ended January 31, 2014, the Valuation Committee decreased the fair value of the common equity interest by approximately $304,000. At January 31, 2014, the Company's common equity interest in Security Holdings had a cost basis of approximately $40.2 million and a fair value of approximately $36.0 million and the loan had an outstanding balance, cost basis and fair value of $4.0 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, 2013, the Company's equity investment had a cost basis of approximately $20.1 million and a fair value of $6.7 million. During the quarter ended January 31, 2014, the Valuation Committee decreased the fair value of the common equity interest by approximately $57,000. 51 -------------------------------------------------------------------------------- Table of Contents At January 31, 2014, the Company's equity investment had a cost basis of approximately $20.1 million and a fair value of approximately $6.7 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, 2013 and January 31, 2014, the Company's investment in SGDA consisted of a term loan with an outstanding balance, cost basis and fair value of approximately $6.5 million. The term loan bears annual interest at 7.0% and matures on August 31, 2014. SIA Tekers Invest Tekers, Riga, Latvia, is a port facility used for the storage and servicing of vehicles. At October 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 Company guaranteed a 1.4 million Euro mortgage for Tekers. The guarantee was equivalent to approximately $68,000 at October 31, 2013 for Tekers. During the quarter ended January 31, 2014, the Valuation Committee decreased the fair value of the common stock by approximately $12,000. At January 31, 2014, 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 25,000 euros at January 31, 2014, equivalent to approximately $34,000. 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, 2013, the Company's investment in Summit consisted of a second lien loan that had an outstanding balance, cost basis and fair value of approximately $23.1 million. The second lien loan bears annual interest at 14% and matures on October 1, 2018. At January 31, 2014, the Company's second lien loan had an outstanding balance, cost basis and a fair value of approximately $23.7 million. The increase in cost and fair value of the loan is due to the capitalization of "payment in kind" interest. These increases were approved by the Company's Valuation Committee. 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, 2013, 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 has a cost and fair value of approximately $3.5 million. The warrants had a cost of $0 and a fair value of $0. On November 1, 2013, Turf repaid its $1.0 million junior revolving note in full including all accrued interest. The junior revolving note is no longer a commitment of the Company. Turf also made a $4.5 million principal payment on its senior subordinated loan. The interest rate on the loan was decreased to 11% per annum with a new maturity date of November 1, 2018. The Company also guaranteed $1.0 million of Turf's indebtedness to Berkshire Bank. At January 31, 2014, the senior subordinated loan had an outstanding balance, cost basis and a fair value of approximately $3.9 million. The membership interest has a cost and fair value of approximately $3.5 million. The warrants had a cost and fair value of $0 and the guarantee was fair valued at negative $92,000. 52 -------------------------------------------------------------------------------- Table of Contents 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, 2013, the Company's investment in U.S. Gas consisted of a second lien loan with an outstanding balance, cost and fair value of $10.1 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 $92.7 million and a cost of $500,000 and the 8,216 shares of convertible Series J preferred stock had a cost and fair value of $0. On December 16, 2013, the Company announced the termination of its agreement to sell U.S. Gas to US Holdings, a company organized to acquire U.S. Gas. US Holdings was unable to satisfy the closing conditions of the original agreement (October 4, 2013) and subsequently submitted a transaction termination notice to the Company on December 10, 2013. At January 31, 2014, the second lien loan had an outstanding balance, cost basis and a fair value of approximately $10.2 million. The increases in the outstanding balance, cost and fair value of the loan are due to 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 $92.7 million and a cost of $500,000 and the convertible Series J preferred stock had a cost and fair value of $0. Puneet Sanan and Peter Seidenberg, representatives of the Company, serve as Chairman and director, respectively, of U.S. Gas and Warren Holtsberg, a director of the Company, also serves as a director of U.S. Gas. U.S. Spray Drying Holding Company SCSD, Huguenot, New York, provides custom spray drying products to the food, pharmaceutical, nutraceutical, flavor and fragrance industries. At October 31, 2013 and January 31, 2014, the Company's investment in SCSD consisted of 784 shares of class B common stock with a cost and fair value of approximately $5.5 million. Puneet Sanan and Shivani Khurana, representatives of the Company, serve as directors of SCSD. Velocitius B.V. Velocitius, a Netherlands based holding company, manages wind farms based in Germany through operating subsidiaries. At October 31, 2013, the Company's investment in Velocitius consisted of an equity investment with a cost of $11.4 million and a fair value of $19.9 million. During the quarter ended January 31, 2014, the Valuation Committee decreased the fair value of the equity investment by approximately $1.9 million. At January 31, 2014, the equity investment in Velocitius had a cost of approximately $11.4 million and a fair value of approximately $18.0 million. Peter Seidenberg, a representative of the Company, serves as a director of Velocitius. Vestal Manufacturing Enterprises, Inc. Vestal, Sweetwater, Tennessee, is a market leader for steel fabricated products to brick and masonry segments of the construction industry. Vestal manufactures and sells both cast iron and fabricated steel specialty products used in the construction of single-family homes. At October 31, 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 annual interest of 12%, a maturity date of April 29, 2015 and an outstanding balance, cost, and fair value of $600,000. The 81,000 shares of common stock had a cost basis of $1.9 million and a fair value of $12.5 million. 53 -------------------------------------------------------------------------------- Table of Contents During the quarter ended January 31, 2014, the Valuation Committee increased the fair value of the common stock by approximately $3.0 million. At January 31, 2014, 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 $15.5 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 public offering of securities, 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, 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, 2014, the Company had investments in portfolio companies totaling $458.8 million. Also, at January 31, 2014, the Company had investments in unrestricted cash and cash equivalents totaling approximately $55.0 million. The Company also had approximately $6.7 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, 2014, the Company made five follow-on investments into existing portfolio companies totaling approximately $19.4 million. On November 13, 2013, the Company loaned $4.0 million to Security Holdings in the form of a 5% cash bridge loan with a maturity date of February 15, 2014. On November 19, 2013, the Company increased its common equity interest in Centile by $100,000. Also on November 19, 2013, the Company invested $5.0 million into MVC Automotive Group in the form of common equity interest and converted its bridge loan, of approximately $1.8 million including accrued interest, to common equity interest. On December 23, 2013, the Company loaned $3.3 million to RuMe in the form of a senior secured loan with a cash interest rate of 12% and a maturity date of April 4, 2014. The Company also purchased warrants for shares of common non-voting stock in RuMe for a nominal amount and allocated a portion of the cost basis of the loan to the warrants at the time the investment was made. On January 2, 2014, the Company loaned $7.0 million to Morey's, increasing the second lien loan amount to $15.0 million. The interest rate on the total loan amount was increased to 10% cash and 3% payment in kind. Current commitments include: Commitments of the Company: At January 31, 2014 and October 31, 2013, the Company's existing commitments to portfolio companies consisted of the following: Portfolio Company Amount Committed Amount Funded at January 31, 2014 MVC Private Equity Fund LP $ 20.1 million $ 9.3 million Total $ 20.1 million $ 9.3 million Portfolio Company Amount Committed Amount Funded at October 31, 2013 Turf $ 1.0 million $ 1.0 million MVC Private Equity Fund LP $ 20.1 million $ 9.3 million Total $ 21.1 million $ 10.3 million 54 -------------------------------------------------------------------------------- Table of Contents Guarantees: At January 31, 2014 and October 31, 2013, the Company had the following commitments to guarantee various loans and mortgages: Guarantee Amount Committed Amount Funded at January 31, 2014 MVC Automotive $ 5.4 million - Tekers $ 34,000 - Turf $ 1.0 million - Total $ 6.4 million - Guarantee Amount Committed Amount Funded at October 31, 2013 MVC Automotive $ 5.4 million - Tekers $ 68,000 - Total $ 5.5 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, 2014, the Valuation Committee estimated the fair values of the guarantee obligations noted above to be negative $92,000. 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 25,000 euros at January 31, 2014, equivalent to approximately $34,000. 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, 2014) 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, 2014 is approximately 6.1 million Euro (equivalent to approximately $8.2 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 had an annual interest at 6.0% and was to expire on January 31, 2014. On November 1, 2013, Turf repaid its junior revolving note in full including all accrued interest. The junior revolving note is no longer a commitment of the Company. The Company also guaranteed $1.0 million of Turf's indebtedness to Berkshire Bank which had a fair value of negative $92,000 as of January 31, 2014. 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 and thereafter, MVC Partners was consolidated with the operations of the Company as MVC Partners' limited partnership interest in the PE Fund is a substantial portion of MVC Partners operations. As of January 31, 2014, $9.3 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. 55 -------------------------------------------------------------------------------- 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 10 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 consisted of a $50.0 million term loan with an interest rate of LIBOR plus 450 basis points with a 1.25% LIBOR floor and had a maturity date of April 27, 2013. On February 19, 2013, the Company sold $70.0 million of Senior Notes in a public offering. The Senior Notes will mature on January 15, 2023 and may be redeemed in whole or in part at any time or from time to time at the Company's option on or after April 15, 2016. The Senior 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 Senior Notes to cover overallotments. The additional $10.5 million in principal was purchased and the total principal amount of the Senior Notes totaled $80.5 million. The net proceeds to the Company from the sale of the Senior Notes, after offering expenses, were approximately $77.4 million. The offering expenses incurred are amortized over the term of the Senior Notes. On February 26, 2013, the Company received the funds related to the Senior Notes offering, net of expenses, and subsequently repaid the Credit Facility in full, including all accrued interest. The Company intends to use the excess net proceeds after the repayment of the Credit Facility for general corporate purposes, including, for example, investing in portfolio companies according to our investment objective and strategy, repurchasing shares pursuant to the share repurchase program adopted by our Board of Directors, funding distributions, and/or funding the activities of our subsidiaries. On May 3, 2013, the Company sold approximately $33.9 million of additional Senior Notes in a direct offering. The additional Senior Notes will also mature on January 15, 2023 and may be redeemed in whole or in part at any time or from time to time at the Company's option on or after April 15, 2016. The Notes will also bear interest at a rate of 7.25% per year payable quarterly on January 15, April 15, July 15, and October 15 of each year. As of January 31, 2014, the total outstanding amount of the Senior Notes was approximately $114.4 million with a market value of approximately $115.7 million. The market value of the Senior Notes is based on the closing price of the security as of January 31, 2014 on the New York Stock Exchange (NYSE:MVCB). On July 31, 2013, the Company entered into a one-year, $50 million revolving credit facility ("Credit Facility II") with Branch Banking and Trust Company ("BB&T"). At October 31, 2013, the balance of Credit Facility II was $50.0 million. On January 31, 2014, Credit Facility II was increased to a $100 million revolving credit facility. During the quarter ended January 31, 2014, the Company's net borrowings on Credit Facility II were $50.0 million, resulting in an outstanding balance of $100 million at January 31, 2014. Credit Facility II will be used to provide the Company with better overall financial flexibility in managing its investment portfolio. Borrowings under Credit Facility II bear interest at LIBOR plus 100 basis points. In addition, the Company is also subject to a 25 basis point commitment fee for the average amount of Credit Facility II that is unused during each fiscal quarter. The Company paid a closing fee, legal and other costs associated with this transaction. These costs will be amortized over the life of the facility. Borrowings under Credit Facility II will be secured by cash, short-term and long-term U.S. Treasury securities and other governmental agency securities. The Company enters into contracts with Portfolio Companies and other parties that contain a variety of indemnifications. The Company's maximum exposure under these arrangements is unknown. However, the Company has not experienced claims or losses pursuant to these contracts and believes the risk of loss related to indemnifications to be remote. 56 -------------------------------------------------------------------------------- Table of Contents Subsequent Events On March 5, 2014, the Company invested $4.0 million into MVC Automotive in the form of an additional common equity interest. This additional investment was used to assist MVC Automotive in the restructuring of the Belgium operations that led to the closure of one of three dealerships in that country through a court approved bankruptcy proceeding on March 11, 2014. This restructuring was completed in an effort to achieve greater operating efficiencies from the two remaining Belgian dealerships. On March 5, 2014, the Company contributed approximately $700,000 to the PE Fund related to expenses and an additional investment in Plymouth Rock Energy, LLC. On March 10, 2014, the Company exercised its warrant in RuMe and invested approximately $43,000 for 4,297,549 shares of common stock. On March 11, 2014, the Company made a senior secured loan of $1.5 million to Marine. The loan has an interest rate of 11% and a maturity date of June 30, 2014. |