Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Financial Instruments

v2.4.0.6
Fair Value of Financial Instruments
 9 Months Ended
Aug. 31, 2012
Fair Value of Financial Instruments [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS
6. Fair Value of Financial Instruments

Various inputs are used in determining the fair value of the Company’s assets and liabilities. These inputs are summarized in the three broad levels listed below:

 

  •  

Level 1 — quoted prices in active markets for identical investments.

 

  •  

Level 2 — other significant observable inputs (including quoted prices for similar investments, market corroborated inputs, etc.).

 

  •  

Level 3 — significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments.

Valuation Techniques

In general, and where applicable, the Company uses readily available market quotations based upon the last updated sales price from the principal market to determine fair value. This pricing methodology applies to the Company’s Level 1 trading securities.

 

An equity security of a publicly traded company acquired in a private placement transaction without registration under the Securities Act of 1933, as amended (the “1933 Act”), is subject to restrictions on resale that can affect the security’s liquidity (and hence its fair value). If the security has a common share counterpart trading in a public market, the Company generally determines an appropriate percentage discount for the security in light of the restrictions that apply to its resale (taking into account, for example, whether the resale restrictions of Rule 144 under the 1933 Act apply). This pricing methodology applies to the Company’s Level 2 trading securities.

The Company’s other equity securities, which represent security interests in private companies, are classified as Level 3 assets. Valuation of these investments is determined by weighting various valuation metrics for each security. Significant judgment is required in selecting the assumptions used to determine the fair values of these investments. Decreases in the valuation multiples and increases in the discount rates used would result in decreased fair values of these investments.

 

         

Security Investment

  

Valuation Technique

  

Valuation Metric and Weighting Used
Lightfoot Capital Partners LP   Weighting of various valuation metrics   Public company comparables historical EBITDA multiples (20.0%)
     
        Public company comparables projected EBITDA multiples (20.0%) Historical EBITDA multiples for recent comparables industry transactions (20.0%) Discounted cash flow analysis of EBITDA (20.0%) Distributable cash flows yield analysis (20.0%)
     
VantaCore Partners LP   Weighting of various valuation metrics   Public company comparables historical EBITDA multiples (12.5%)
     
        Public company comparables projected EBITDA multiples (12.5%) Historical EBITDA multiples for recent comparables industry transactions (12.5%) Discounted cash flow analysis of EBITDA (12.5%) Recent capital transaction of the company (50.0%)

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following tables provide the fair value measurements of applicable Company assets and liabilities by level within the fair value hierarchy as of August 31, 2012 and November 30, 2011. These assets and liabilities are measured on a recurring basis.

August 31, 2012

 

                                 
          Fair Value  

Description

   August 31, 2012     Level 1     Level 2     Level 3  

Assets:

                                

Trading securities

   $ 57,321,502     $ 27,172,862     $ 30,148,640     $ —    

Other equity securities

     19,529,783       —         —         19,529,783  
   

 

 

    

 

 

    

 

 

    

 

 

  

Total Assets

   $ 76,851,285     $ 27,172,862     $ 30,148,640     $ 19,529,783  
   

 

 

    

 

 

    

 

 

    

 

 

  

November 30, 2011

 

                                 
          Fair Value  

Description

   November 30, 2011     Level 1     Level 2     Level 3  

Assets:

                                

Trading securities

   $ 27,037,642     $ 27,037,642     $ —       $ —    

Other equity securities

     41,856,730       —         —         41,856,730  
   

 

 

    

 

 

    

 

 

    

 

 

  

Total Assets

   $ 68,894,372     $ 27,037,642     $ —       $ 41,856,730  
   

 

 

    

 

 

    

 

 

    

 

 

  

 

The changes for all Level 3 assets measured at fair value on a recurring basis using significant unobservable inputs for the nine months ended August 31, 2012 and August 31, 2011, are as follows:

 

                 
   

For the Nine Month

Periods ended

  

Description

   August 31, 2012     August 31, 2011  

Fair value beginning balance

   $ 41,856,730     $ 72,929,409  

Total realized and unrealized gains (losses) included in net income

     15,467,845       3,655,464  

Purchases

     —         11,490,789  

Sales

     (35,919,672 )      (32,734,818 ) 

Return of capital adjustments impacting cost basis of securities

     (1,875,120 )      (861,917 ) 
   

 

 

    

 

 

  

Fair value ending balance

   $ 19,529,783     $ 54,478,927  
   

 

 

    

 

 

  

The amount of total gains (losses) for the period included in net income attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date which are included in net realized and unrealized gain on other equity securities within the statement of income

   $ (355,223 )    $ (434,354 ) 
   

 

 

    

 

 

  

As of May 31, 2012, the Company’s other equity securities, which represented security interests in private companies, and were classified as Level 3 assets, included High Sierra Energy, LP. On June 19, 2012, NGL Energy Partners, LP and certain of its affiliates (collectively “NGL”) acquired High Sierra Energy, LP and High Sierra Energy GP, LLC (collectively “High Sierra”) pursuant to which NGL, a New York Stock Exchange listed company, paid to the limited partners of High Sierra approximately $9.4 million in cash and approximately 1.2 million newly issued units of NGL. A realized gain of $15.8 million was recognized during the third quarter upon the sale. NGL is classified as a Level 2 Trading security above. (See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Private Company and Wholly Owned Subsidiary Update, High Sierra.)

The Company utilizes the beginning of reporting period method for determining transfers between levels. There were no transfers between levels for the nine months ended August 31, 2012 and August 31, 2011, respectively.

Certain condensed financial information of the unconsolidated affiliates follows. The information is the most recently available financial information for these companies, which is the nine months ending June 30, 2012 as reported by the portfolio companies for VantaCore Partners LP (11 percent equity interest), and Lightfoot Capital Partners LP (6.7 percent equity interest).

 

                     

Revenues

   $ 55,797,834     Current assets   $ 31,552,000  
       

Operating expenses

   $ 42,793,623     Noncurrent assets   $ 296,706,000  
       

Net income

   $ 1,283,754     Current liabilities   $ 16,974,000  
       
            Noncurrent liabilities   $ 108,331,000  
       
            Partner’s equity   $ 202,953,000  

The following section describes the valuation methodologies used by the Company for estimating fair value for financial instruments not recorded at fair value as required under disclosure guidance related to the fair value of financial instruments.

Cash and Cash Equivalents — The carrying value of cash, amounts due from banks, federal funds sold and securities purchased under resale agreements approximates fair value.

Escrow Receivable — The escrow receivable due the Company, which relates to the sale of International Resource Partners, LP, is anticipated to be released upon satisfaction of certain post-closing obligations and/or the expiration of certain time periods (the shortest of which was to be 14 months from the April 2011 closing date of the sale). The fair value of the escrow receivable reflects a discount for the potential that the full amount due to the Company will not be realized. During the third quarter, the carrying value of the escrow receivable was reduced by $335,486 to its fair value as of August 31, 2012.

Long-term Debt — The fair value of the Company’s long-term debt is calculated, for disclosure purposes, by discounting future cash flows by a rate equal to the Company’s current expected rate for an equivalent transaction.

Line of Credit — The carrying value of the line of credit approximates the fair value due to its short term nature.

 

                                     
        August 31, 2012     November 30, 2011  

Description

   Level within
the Fair
Value
Hierarchy		   Carrying
Amount 		    Fair Value     Carrying
Amount		     Fair Value  

Financial Assets

                                    

Cash and cash equivalents

   Level 1   $ 11,783,529     $ 11,783,529     $ 2,793,326     $ 2,793,326  

Escrow receivable

   Level 2   $ 1,341,566     $ 1,341,566     $ 1,677,052     $ 1,677,052  

Financial Liabilities

                                    

Long-term debt

   Level 2   $ 910,863     $ 947,985     $ 2,279,883     $ 2,320,851  

Line of credit

   Level 1   $ 125,000     $ 125,000       —         —