OHA Investment Corporation
OHA Investment Corp (Form: 10-Q, Received: 11/07/2014 17:15:32)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2014

or

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

For the transition period from _____________ to _______________

 

Commission file number: 814-00672

 

 

 

OHA Investment Corporation

 

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   20-1371499
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     

1114 Avenue of the Americas,

27 th Floor

  10036
New York, New York   (Zip Code)
(Address of principal executive
offices)
   

   

(212) 326-1500

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

 

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

 

Large accelerated filer   ¨ Accelerated filer   x Non-accelerated filer   ¨ Smaller reporting company   ¨
(Do not check if smaller reporting company)

 

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

 

As of November 6, 2014, there were 20,616,422 shares of the registrant’s common stock outstanding.

 

 
 

 

Table of Contents

 

PART I – FINANCIAL INFORMATION 1
   
Item 1. Financial Statements. 1
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 26
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 35
   
Item 4. Controls and Procedures. 35
   
PART II – OTHER INFORMATION 35
   
Item 1. Legal Proceedings. 35
   
Item 1A. Risk Factors. 35
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 37
   
Item 6. Exhibits. 37
   
SIGNATURES 38

  

 
 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

 

OHA INVESTMENT CORPORATION

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Amounts)

 

    September 30,     December 31,  
    2014     2013  
    (Unaudited)        
Assets                
Investments in portfolio securities at fair value        
Control investments (cost: $28,655 and $27,459, respectively)   $ 14,953     $ 24,218  
Affiliate investments (cost: $17,855 and $17,510, respectively)     16,970       17,043  
Non-affiliate investments (cost: $140,004 and $176,988, respectively)     139,033       170,110  
Total portfolio investments (cost: $186,514 and $221,957, respectively)     170,956       211,371  
Investments in U.S. Treasury Bills at fair value (cost: $30,610 and $46,000, respectively)     30,610       46,000  
Total investments     201,566       257,371  
Cash and cash equivalents     55,602       29,298  
Accounts receivable and other current assets     881       464  
Interest receivable     675       2,397  
Prepaid assets     1,807       3,093  
Total current assets     58,965       35,252  
Total assets   $ 260,531     $ 292,623  
                 
Liabilities and net assets                
Current liabilities                
Accounts payable and accrued expenses   $ 1,718     $ 1,313  
Management and incentive fees payable     1,254       1,387  
Dividends payable     3,299       3,280  
Income taxes payable     56       91  
Short-term debt     30,000       45,000  
Total current liabilities     36,327       51,071  
Long-term debt     57,000       53,000  
Total liabilities     93,327       104,071  
Commitments and contingencies  (Note 6)                
Net assets                

Common stock, $.001 par value, 250,000,000 shares authorized;

   20,616,422 and 20,499,188 shares issued and outstanding

    21       20  
Paid-in capital in excess of par     248,758       247,759  
Undistributed net investment income (loss)     (9,843 )     (583 )
Undistributed net realized capital gain (loss)     (59,292 )     (51,176 )
Net unrealized appreciation (depreciation) on investments     (12,440 )     (7,468 )
Total net assets     167,204       188,552  
Total liabilities and net assets   $ 260,531     $ 292,623  
Net asset value per share   $ 8.11     $ 9.20  

 

(See accompanying notes to consolidated financial statements)

 

1
 

  

OHA INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(Unaudited)

 

    For The Three Months Ended     For The Nine Months Ended  
    September 30,     September 30,  
    2014     2013     2014     2013  
Investment income                                
Interest income:                                
Control investments   $ 456     $ 546     $ 1,480     $ 1,439  
Affiliate investments     630       513       1,700       4,568  
Non-affiliate investments     3,414       3,896       10,510       12,356  
Dividend income:                                
Non-affiliate investments     1,010       1,005       2,992       2,983  
Royalty income, net of amortization:                                
Control investments     22       19       63       34  
Non-affiliate investments     10       16       65       16  
Other income (loss)     31       (29 )     134       (14 )
Total investment income     5,573       5,966       16,944       21,382  
Operating expenses                                
Interest expense and bank fees     405       655       1,569       2,468  
Management and incentive fees     1,254       1,405       3,906       4,602  
Costs related to strategic alternatives review     5,352       -       6,017       -  
Professional fees, net of legal fees of $418, $558, $1,306 and $2,914, respectively, related to ATP bankruptcy (See Note 6)     210       271       777       830  
Insurance expense     187       180       545       539  
Other general and administrative expenses     936       811       3,476       2,478  
Total operating expenses     8,344       3,322       16,290       10,917  
Income tax provision, net     17       11       56       49  
Net investment income (loss)     (2,788 )     2,633       598       10,416  
Net realized capital gain (loss) on investments                                
Control investments     -       -       (325 )     (464 )
Affiliate investments     -       -       95       (250 )
Non-affiliate investments     962       -       (7,886 )     1,550  
Benefit (provision) for taxes on realized gain (loss)     -       (53 )     -       (53 )
Total net realized capital gain (loss) on investments     962       (53 )     (8,116 )     783  
Net unrealized appreciation (depreciation) on investments                                
Control investments     (3,644 )     (459 )     (10,460 )     (3,469 )
Affiliate investments     666       189       (418 )     270  
Non-affiliate investments     (1,275 )     2,741       5,906       (7,044 )
Benefit (provision) for taxes on unrealized  appreciation (depreciation) on investments     -       -       -       1  
Total net unrealized appreciation (depreciation) on investments     (4,253 )     2,471       (4,972 )     (10,242 )
                                 
Net increase (decrease) in net assets resulting from operations   $ (6,079 )   $ 5,051     $ (12,490 )   $ 957  
                                 
Net increase (decrease) in net assets resulting from operations per common share   $ (0.30 )   $ 0.25     $ (0.61 )   $ 0.05  
                                 
Dividends declared per common share   $ 0.16     $ 0.16     $ 0.48     $ 0.48  
Weighted average shares outstanding - basic and diluted     20,500       20,499       20,500       20,764  

 

(See accompanying notes to consolidated financial statements)

 

2
 

  

OHA INVESTMENT CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

(In Thousands)

(Unaudited)

 

                Paid-in           Undistributed     Net Unrealized        
                Capital     Undistributed     Net Realized     Appreciation        
    Common Stock     in Excess     Net Investment     Capital     (Depreciation)     Total  
    Shares     Amount     of Par     Income (Loss)     Gain (Loss)     on Investments     Net Assets  
Balance at December 31, 2013     20,499     $ 20     $ 247,759     $ (583 )   $ (51,176 )   $ (7,468 )   $ 188,552  
Net increase (decrease) in net assets resulting from operations     -       -       -       598       (8,116 )     (4,972 )     (12,490 )
Issuance of common stock to affiliate     117       1       999       -       -       -       1,000  
Dividends declared     -       -       -       (9,858 )     -       -       (9,858 )
Balance at September 30, 2014     20,616     $ 21     $ 248,758     $ (9,843 )   $ (59,292 )   $ (12,440 )   $ 167,204  

 

(See accompanying notes to consolidated financial statements)

 

3
 

   

OHA INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

    For The Nine Months Ended September 30,  
    2014     2013  
Cash flows from operating activities                
Net increase (decrease) in net assets resulting from operations   $ (12,490 )   $ 957  

Adjustments to reconcile net increase (decrease) in net assets resulting

  from operations to net cash provided by operating activities:

               
Payment-in-kind interest     (1,001 )     (1,337 )
Net amortization of premiums, discounts and fees     (816 )     (631 )
Net realized capital (gain) loss on investments     8,116       (836 )
Net unrealized depreciation (appreciation) on investments     4,972       10,243  
Net deferred income tax provision (benefit)     -       (1 )
Effects of changes in operating assets and liabilities:                
Accounts receivable and other current assets     (417 )     552  
Interest receivable     1,722       773  
Prepaid assets     1,286       (294 )
Payables and accrued expenses     237       (642 )
Purchase of investments in portfolio securities     (2,448 )     (84,913 )
Proceeds from redemption of investments in portfolio securities     31,593       77,631  
Purchase of investments in U.S. Treasury Bills     (122,611 )     (137,999 )
Proceeds from redemption of investments in U.S. Treasury Bills     138,001       138,000  
Net cash provided by operating activities     46,144       1,503  
Cash flows from financing activities                
Borrowings under revolving credit facilities     241,000       343,500  
Repayments on revolving credit facilities     (252,000 )     (337,000 )
Acquisition of common stock under repurchase plan     -       (3,381 )
Proceeds from issuance of common stock to affiliate     1,000       -  
Dividends paid     (9,840 )     (10,006 )
Net cash used in financing activities     (19,840 )     (6,887 )
Net increase (decrease) in cash and cash equivalents     26,304       (5,384 )
Cash and cash equivalents, beginning of period     29,298       47,655  
Cash and cash equivalents, end of period   $ 55,602     $ 42,271  

 

(See accompanying notes to consolidated financial statements)

 

4
 

  

OHA INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

September 30, 2014

(In Thousands, Except Share Amounts and Percentages)

(Unaudited)

 

Portfolio Company   Industry Segment   Investment (1) (5)   Principal     Cost     Fair Value (2)  
PORTFOLIO INVESTMENTS                                
Control Investments - (More than 25% owned)                            
Contour Highwall Holdings, LLC   Coal Mining   Senior Secured Term Loan   $ 10,757     $ 10,778     $ 7,500  
        (12%, due 10/14/2015) (14)                        
        800 Membership Units representing             -       -  
        80% of the common equity (10)                        
                                 
Spirit Resources, LLC   Oil & Natural Gas   Tranche A - Senior Secured Term Loan     5,500       5,458       5,500  
     Production and Development   (The greater of 8% or LIBOR + 4%,                        
         due 4/28/2015)                        
        Tranche B - Senior Secured Term Loan     4,409       4,409       1,443  
        (The greater of 15% PIK or LIBOR + 11%,                        
         due 10/28/2015) (6)                        
        80,000 Preferred Units representing             8,000       -  
        100% of the outstanding equity                        
        3% Overriding Royalty Interest             10       510  
                                 
Subtotal Control Investments - (More than 25% owned)           $ 28,655     $ 14,953  
                                 
Affiliate Investments - (5% to 25% owned)                            
OCI Holdings, LLC   Home Health Services   Subordinated Note   $ 15,580     $ 15,355     $ 15,580  
        (The greater of 12% or LIBOR + 11% cash                        
        plus 3% PIK, due 8/15/2018) (13)                        
        NGP/OCI Investments, LLC Class A                        
        Units representing 20.8% diluted ownership                        
        of OCI Holdings, LLC             2,500       1,390  
                                 
Subtotal Affiliate Investments - (5% to 25% owned)           $ 17,855     $ 16,970  
                                 
Non-affiliate Investments - (Less than 5% owned)                            
Castex Energy 2005, LP   Oil & Natural Gas   Redeemable Preferred LP Units   $ 50,000     $ 50,024     $ 54,334  
     Production and Development   (current pay 8% cash, due 7/1/2016) (9)                        
                                 
ATP Oil & Gas Corporation/   Oil & Natural Gas   Limited Term Royalty Interest             27,578       25,641  
 Bennu Oil & Gas, LLC    Production and Development   (Notional rate of 13.2%) (15)                        
                                 
Nekoosa Coated Products Holdings, Inc.   Coated Paper Products   Second Lien Term Loan     18,018       17,733       18,199  
    Manufacturing and Distribution   (13% cash plus 2% PIK, due 10/22/2018) (16)                        
                                 
Shoreline Energy, LLC   Oil & Natural Gas   Second Lien Term Loan     13,611       13,250       13,611  
     Production and Development   (The greater of 10.25% or LIBOR plus                        
        9%, or the greater of 10.25% or                        
        Prime plus 8%, due 3/30/2019)                        
                                 
Talos Production, LLC   Oil & Natural Gas   Senior Unsecured Notes     12,000       11,948       12,360  
     Production and Development   (9.75%, due 2/15/2018) (3)                        
                                 
KOVA International, Inc.   Medical Supplies   Senior Subordinated Notes     9,000       8,860       9,000  
    Manufacturing and Distribution   (12.75%, due 8/15/2018)                        
                                 
Huff Energy Holdings, Inc.   Oil & Natural Gas   Senior Secured Term Loan     5,800       5,747       5,800  
     Production and Development   (The greater of 12.5% or LIBOR +                        
        8.5%, due 11/20/2015)                        
        3% Overriding Royalty Interest (11)             42       44  
        Warrants (12)             42       44  

 

(See accompanying notes to consolidated financial statements)

 

5
 

  

OHA INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

September 30, 2014

(In Thousands, Except Share Amounts and Percentages)

(Unaudited)

(Continued)

 

Portfolio Company   Industry Segment   Investment (1) (5)   Principal     Cost     Fair Value (2)  
PORTFOLIO INVESTMENTS - Continued                                
Non-affiliate Investments - (Less than 5% owned) - Continued                        
Chroma Exploration &   Oil & Natural Gas   13,442 Shares Series A Participating           $ 2,222     $ -  
 Production, Inc.    Production and Development   Convertible Preferred Stock (6)                        
        12,275 Shares Series AA Participating             2,090       -  
        Convertible Preferred Stock (6)                        
        8.11 Shares Common Stock             -       -  
                                 
Globe BG, LLC   Coal Production   Contingent earn-out related to July 2011 sale             -       -  
        of royalty interests in Alden Resources, LLC (8)                        
                                 
Myriant Corporation   Alternative Fuels and   131,741 shares of common stock, representing             419       -  
    Specialty Chemicals   0.56% of the outstanding common shares                        
        Warrants (7)             49       -  
                                 
Subtotal Non-affiliate Investments - (Less than 5% owned)               $ 140,004     $ 139,033  
Subtotal Portfolio Investments (84.8% of total investments)               $ 186,514     $ 170,956  
                                 
GOVERNMENT SECURITIES                                
U.S. Treasury Bills (4)           $ 30,610     $ 30,610     $ 30,610  
Subtotal Government Securities (15.2% of total investments)               $ 30,610     $ 30,610  
                                 
TOTAL INVESTMENTS                   $ 217,124     $ 201,566  

 

(See accompanying notes to consolidated financial statements)

 

6
 

  

OHA INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

September 30, 2014

(Unaudited)

(Continued)

 

NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS

 

(1) All of our portfolio investments are pledged as collateral for obligations under our Investment Facility. Our investments in U.S. Treasury Bills are pledged as collateral for obligations under our Treasury Facility. See Note 3 of Notes to Consolidated Financial Statements. Percentages represent interest rates in effect at the end of the period and due dates represent the contractual maturity dates. Warrants, common stocks, units and earn-outs are non-income producing securities, unless otherwise stated.

 

(2) Our Board of Directors determines, in good faith, the fair value of our investments. Fair value is determined using unobservable inputs (Level 3 hierarchy), unless otherwise stated.

 

(3) Fair value is determined using prices with observable market inputs (Level 2 hierarchy). See Note 7 of Notes to Consolidated Financial Statements.

 

(4) Fair value is determined using prices for identical securities in active markets (Level 1 hierarchy). See Note 7 of Notes to Consolidated Financial Statements.

 

(5) All of our investments constitute “qualifying assets” under Section 55(a) of the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. The status of these assets under the 1940 Act is subject to change. We monitor the status of these assets on an ongoing basis.

 

(6) Non-accrual status.

 

(7) Myriant Corporation warrants expire on August 15, 2015 and provide us the right to purchase 32,680 shares of Myriant Corporation common stock at a purchase price of $10.00 per share.

 

(8) Contingent payment of up to $6.8 million is dependent upon Alden Resources, LLC’s ability to achieve certain sales volume and operating efficiency levels during the three-year period ended July 2014. Globe BG, LLC has informally advised us that the company’s relative cost of production has not improved since July 2011. The reporting and review mechanism to conclude the ultimate value of the earn-out has not yet been completed.

 

(9) Upon redemption, we will receive the outstanding face amount plus an option to elect to receive either: a) a cash payment resulting in a total 12% IRR (inclusive of the 8% cash distributions) or b) our pro rata share of 2% of the outstanding regular limited partner interests in Castex Energy 2005, LP (0.67% net to us).

 

(10) The fair value of our Contour Highwall Holdings, LLC, or Contour, membership units also includes the value attributable to our ownership of 8,000 shares of common stock of Bundy Auger Mining, Inc., an affiliate of Contour.

 

(11) Huff Energy Holdings, Inc., or HEH, overriding royalty interests are effective the earlier of repayment in full of the Term Loan or the maturity date of the Term Loan. HEH has the right to purchase the overriding royalty interests on, or before, the maturity date of the Term Loan for $50,000, provided that the Term Loan is repaid by the maturity date.

 

(12) HEH warrants expire seven years after repayment of the Term Loan and entitle us to purchase 30% of the outstanding equity at $0.01 per share. HEH has the right to purchase these warrants on, or before, the maturity date of the Term Loan for $50,000, provided that the Term Loan is repaid by the maturity date.

 

(13) Effective July 9, 2014, we executed a third amendment to our credit agreement with OCI Holdings, LLC, or OCI, to amend certain covenant limits in exchange for increases in OCI’s interest to the greater of 12% or LIBOR plus 11% cash, plus 3% PIK.

 

(14) Contour has not made its September or October interest payments on the Senior Secured Term Loan. We are currently negotiating with Contour toward a potential restructuring or deferral arrangement.

 

(15) For more information, please refer to the discussion of the ATP litigation under the heading “Legal Proceedings” in Note 6 to the Consolidated Financial Statements.

 

(16) In November 2014, in connection with a refinancing, Nekoosa Coated Products Holdings, Inc., or Nekoosa, prepaid its Second Lien Term Loan in the amount of $18.4 million, which included a 2% ($0.4 million) call premium.

 

(See accompanying notes to consolidated financial statements)

 

7
 

  

OHA INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2013

(In Thousands, Except Share Amounts and Percentages)

 

Portfolio Company   Industry Segment   Investment (1)   Principal     Cost     Fair Value (2)  
PORTFOLIO INVESTMENTS                                
Control Investments - Majority Owned (50% or more owned)                            
Contour Highwall Holdings, LLC (8)   Coal Mining   Senior Secured Term Loan   $ 10,344     $ 10,379     $ 10,344  
        (12%, due 10/14/2015)                        
        800 Membership Units representing             -       836  
        80% of the common equity (11)                        
                                 
Spirit Resources, LLC   Oil & Natural Gas   Tranche A - Senior Secured Term Loan     5,500       5,406       5,500  
    Production and Development   (The greater of 8% or LIBOR + 4%,                        
        due 4/28/2015)                        
        Tranche B - Senior Secured Term Loan     3,664       3,664       3,664  
        (The greater of 15% PIK or LIBOR + 11%,                        
        due 10/28/2015)                        
        80,000 Preferred Units representing             8,000       3,356  
        100% of the outstanding equity                        
        3% Overriding Royalty Interest             10       518  
                                 
Subtotal Control Investments - Majority Owned (50% or more owned)               $ 27,459     $ 24,218  
                                 
Affiliate Investments - (5% to 25% owned)                            
OCI Holdings, LLC   Home Health Services   Subordinated Note   $ 15,268     $ 15,010     $ 15,268  
        (The greater of 11% or LIBOR + 10%                        
        cash plus 2% PIK, due 8/15/2018)                        
        NGP/OCI Investments, LLC Class A                        
        Units representing 24.07% ownership                        
        of OCI Holdings, LLC             2,500       1,775  
                                 
Subtotal Affiliate Investments - (5% to 25% owned)               $ 17,510     $ 17,043  
                                 
Non-affiliate Investments - (Less than 5% owned)                            
ATP Oil & Gas Corporation   Oil & Natural Gas   Limited Term Royalty Interest           $ 28,704     $ 28,966  
    Production and Development   (Notional rate of 13.2%) (5)                        
                                 
Castex Energy 2005, LP   Oil & Natural Gas   Redeemable Preferred LP Units   $ 50,000       50,034       52,760  
    Production and Development   (current pay 8% cash, due 7/1/2016) (10)                        
                                 
Chroma Exploration &   Oil & Natural Gas   13,051 Shares Series A Participating             2,222       -  
 Production, Inc.   Production and Development   Convertible Preferred Stock (6)                        
        11,918 Shares Series AA Participating             2,090       21  
        Convertible Preferred Stock (6)                        
        8.11 Shares Common Stock             -       -  
                                 
Crossroads Energy Development, LLC   Oil & Natural Gas   Senior Secured Term Loan     8,975       8,463       8,975  
    Production and Development   (The greater of 11.5% or LIBOR +                        
        10.5%, due 5/24/2016)                        
        2% Overriding Royalty Interest             166       546  
        Warrants (12)             237       796  

 

(See accompanying notes to consolidated financial statements)

 

8
 

  

OHA INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2013

(In Thousands, Except Share Amounts and Percentages)

(Continued)

 

Portfolio Company   Industry Segment   Investment (1)   Principal     Cost     Fair Value (2)  
PORTFOLIO INVESTMENTS - Continued                                
Non-affiliate Investments - (Less than 5% owned) - Continued                            
Globe BG, LLC   Coal Production   Contingent earn-out related to July 2011 sale           $ -     $ -  
        of royalty interests in Alden Resources, LLC (9)                        
                                 
GMX Resources, Inc.   Oil & Natural Gas   Senior Secured Second-Priority Notes   $ 12,661       9,452       70  
     Production and Development   (9%, due 3/2/2018) (6) (15)                        
                                 
Huff Energy Holdings, Inc.   Oil & Natural Gas   Senior Secured Term Loan     7,000       6,916       7,000  
     Production and Development   (The greater of 12.5% or LIBOR +                        
        8.5%, due 11/20/2015)                        
        3% Overriding Royalty Interest (13)             42       42  
        Warrants (14)             42       42  
                                 
KOVA International, Inc.   Medical Supplies   Senior Subordinated Notes     9,000       8,841       9,000  
    Manufacturing and Distribution   (12.75%, due 8/15/2018)                        
                                 
Midstates Petroleum Company   Oil & Natural Gas   Senior Unsecured Notes     13,000       13,367       14,137  
     Production and Development   (10.75%, due 10/1/2020) (3) (5)                        
                                 
Myriant Corporation   Alternative Fuels and   131,741 shares of common stock, representing             419       640  
    Specialty Chemicals   0.56% of the outstanding common shares                        
        Warrants (7)             49       30  
                                 
Nekoosa Coated Products Holdings, Inc.   Coated Paper Products   Second Lien Term Loan     17,748       17,427       17,748  
    Manufacturing and Distribution   (13% cash plus 2% PIK, due 10/22/2018)                        
                                 
Shoreline Energy, LLC   Oil & Natural Gas   Second Lien Term Loan     14,000       13,594       14,000  
     Production and Development   (The greater of 10.25% or LIBOR plus                        
        9%, or the greater of 10.25% or                        
        Prime plus 8%, due 3/27/2019)                        
                                 
Talos Production, LLC   Oil & Natural Gas   Senior Unsecured Notes                        
     Production and Development   (9.75%, due 2/15/2018) (3)     15,000       14,923       15,337  
                                 
Subtotal Non-affiliate Investments - (Less than 5% owned)               $ 176,988     $ 170,110  
Subtotal Portfolio Investments (82.1% of total investments)               $ 221,957     $ 211,371  
                                 
GOVERNMENT SECURITIES                                
U.S. Treasury Bills (4)           $ 46,000     $ 46,000     $ 46,000  
Subtotal Government Securities (17.9% of total investments)               $ 46,000     $ 46,000  
                                 
TOTAL INVESTMENTS                   $ 267,957     $ 257,371  

 

(See accompanying notes to consolidated financial statements)

 

9
 

  

OHA INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2013

(Continued)

 

NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS

 

1) All of our portfolio investments are collateral for obligations under our Investment Facility. Our investments in U.S. Treasury Bills are collateral for obligations under our Treasury Facility. See Note 3 of Notes to Consolidated Financial Statements. Percentages represent interest rates in effect at the end of the period and due dates represent the contractual maturity dates. Warrants, common stocks, units and earn-outs are non-income producing securities, unless otherwise stated.

 

2) Our Board of Directors determines, in good faith, the final estimates of fair value of our investments. Fair value estimates are determined using unobservable inputs (Level 3 hierarchy), unless otherwise stated.

 

3) Fair value estimate is determined using prices with observable market inputs (Level 2 hierarchy).See Note 7 of Notes to Consolidated Financial Statements.

 

4) Fair value is determined using prices for identical securities in active markets (Level 1 hierarchy).See Note 7 of Notes to Consolidated Financial Statements.

 

5) We have determined that this investment is not a "qualifying asset" under Section 55(a) of the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. The status of these assets under the 1940 Act is subject to change. We monitor the status of these assets on an ongoing basis.

 

6) Non-accrual status.

 

7) Myriant Corporation warrants expire on August 15, 2015 and provide us the right to purchase 32,680 shares of Myriant Corporation common stock at a purchase price of $10.00 per share.

 

8) Effective January 14, 2013, Pallas Contour Mining, LLC changed its name to Contour Highwall Holdings, LLC.

 

9) Contingent payment of up to $6.8 million is dependent upon Alden Resources, LLC’s ability to achieve certain sales volume and operating efficiency levels during the three year period ending July 2014.

 

10) Upon redemption, we will receive the outstanding face amount plus an option to elect to receive either: a) a cash payment resulting in a total 12% IRR (inclusive of the 8% cash distributions) or b) our pro rata share of 2% of the outstanding regular limited partner interests in Castex Energy 2005, LP (0.67% net to us).

 

11) The fair value of our Contour Highwall Holdings, LLC membership units also includes the value attributable to our ownership of 8,000 shares of Bundy Auger Mining, Inc. common stock.

 

12) Crossroads Energy Development, LLC, or Crossroads, warrants expire seven years after repayment of the Term Loan and entitle us to purchase 21,529 Class A Units, representing 18% ownership in Crossroads, for $0.01 per unit.

 

13) Huff Energy Holdings, Inc., or HEH, overriding royalty interests are after payout. HEH has the right to purchase the overriding royalty interests on, or before, the maturity date of the Term Loan for $50,000, provided that the Term Loan is repaid by the maturity date.

 

14) HEH warrants expire seven years after repayment of the Term Loan and entitle us to purchase 30% of the outstanding equity at $0.01 per share. HEH has the right to purchase these warrants on, or before, the maturity date of the Term loan for $50,000, provided that the Term Loan is repaid by the maturity date.

 

15) On January 14, 2014, we sold all of our investment in GMX Resources, Inc. Senior Secured Second-Priority Notes for $70,000.

 

 

(See accompanying notes to consolidated financial statements)

 

10
 

  

OHA INVESTMENT CORPORATION

CONSOLIDATED FINANCIAL HIGHLIGHTS

(Unaudited)

 

    For The Nine Months Ended September 30,  
Per Share Data (1)   2014     2013  
Net asset value, beginning of period   $ 9.20     $ 9.57  
Net investment income     0.03       0.50  
Net realized and unrealized loss on investments (2)     (0.64 )     (0.45 )
Net increase (decrease) in net assets resulting from operations     (0.61 )     0.05  
Dividends declared     (0.48 )     (0.48 )
Other (3)     -       0.08  
Net asset value, end of period   $ 8.11     $ 9.22  
                 
Market value, beginning of period   $ 7.47     $ 7.22  
Market value, end of period   $ 6.18     $ 7.43  
Market value return (4)     (11.0 )%     10.0 %
Net asset value return (4)     (5.2 )%     3.0 %
                 
Ratios and Supplemental Data                
($ and shares in thousands)                
Net assets, end of period   $ 167,204     $ 188,919  
Average net assets   $ 180,495     $ 193,094  
Common shares outstanding, end of period     20,616       20,499  
Net investment income/average net assets (5)     0.4 %     7.2 %
Portfolio turnover rate     1.3 %     34.5 %
Total operating expenses/average net assets (5) (6)     12.1 %     7.6 %
Net increase (decrease) in net assets resulting from operations/average net assets (5)     (9.3 )%     0.7 %
                 
Expense Ratios (as a percentage of average net assets) (5) (7)                
Interest expense and bank fees     1.2 %     1.7 %
Management and incentive fees     2.9 %     3.2 %
Costs related to strategic alternatives review     4.5 %     -  
Other operating expenses (6)     3.5 %     2.7 %
Total operating expenses (6)     12.1 %     7.6 %

 

(1) Per Share Data is based on weighted average number of common shares outstanding for the period.
(2) May include a balancing amount necessary to reconcile the change in net asset value per share with other per share information presented. This amount may not agree with the aggregate gains and losses for the period because the difference in the net asset value at the beginning and end of the period may not equal the per share changes of the line items disclosed.
(3) Represents the impact of common stock repurchases.
(4) Return calculations assume reinvestment of dividends and are not annualized.
(5) Annualized.
(6) Net of legal fee reimbursements of $1.3 million and $2.9 million in 2014 and 2013, respectively. Excluding these legal fee reimbursements, other operating expense ratio and total operating expense ratios would have been 4.4% and 4.7% and 13% and 9.6%, respectively, for the nine months ended September 30, 2014 and 2013.
(7) On September 30, 2014, Oak Hill Advisors, L.P. replaced NGP Investment Advisor, LP as our investment advisor.

 

(See accompanying notes to consolidated financial statements)

 

11
 

   

OHA INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014

(Unaudited)

 

Note 1: Organization and Recent Developments

 

These consolidated financial statements present the financial position, results of operations and cash flows of OHA Investment Corporation and its consolidated subsidiaries. The terms “we,” “us,” “our” and “OHAI” refer to OHA Investment Corporation and its consolidated subsidiaries. We are a specialty finance company that was organized in July 2004 as a Maryland corporation. Our investment objective is to generate both current income and capital appreciation primarily through debt investments with certain equity components. We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, or the 1940 Act. For federal income tax purposes we operate so as to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. We have several direct and indirect subsidiaries that are single member limited liability companies and wholly-owned limited partnerships established to hold certain portfolio investments or provide services to us in accordance with specific rules prescribed for a company operating as a RIC. We consolidate the financial results of our wholly-owned subsidiaries for financial reporting purposes, and we do not consolidate the financial results of our portfolio companies.

 

On September 30, 2014, our stockholders approved the appointment of Oak Hill Advisors, L.P., or OHA, as our new investment advisor, replacing NGP Investment Advisor, LP, which had been our investment advisor since our inception. In connection with this change in investment advisor, we changed our name from NGP Capital Resources Company to OHA Investment Corporation. OHA is a registered investment adviser under the Investment Advisers Act of 1940. OHA acts as our investment advisor and administrator pursuant to an investment advisory agreement and an administration agreement, respectively, each dated as of September 30, 2014, which we refer to as the Investment Advisory Agreement and the Administration Agreement, respectively (see Note 4).

 

In connection with the appointment of OHA as our new investment advisor, each member of our Board of Directors resigned. In connection with their resignations, the Board of Directors appointed a new slate of five directors, including Glenn R. August (Chairman) and Robert B. Okun as “interested directors,” and Stuart I. Oran, James A. Stern and Frank V. Tannura as independent directors. The new members of the Board of Directors appointed Robert W. Long as our President and Chief Executive Officer, and L. Scott Biar remains our Chief Financial Officer, Secretary, Treasurer and Chief Compliance Officer on an interim basis.

 

On September 30, 2014, we completed the private sale of $1 million in aggregate purchase price of our common stock at an offering price of $8.53 per share to an affiliate of OHA, pursuant to the stock purchase and transaction agreement dated July 21, 2014, by and among us, OHA and the affiliate. The price per share paid by the affiliate was the net asset value per share established by our previous board of directors as of a date within 48 hours prior to the purchase, excluding the impact of certain transaction and closing expenses, and represented a 38% premium to the market price per share on such date. The OHA affiliate has also executed a stock purchase plan in accordance with Rule 10b-5-1 of the Securities Exchange Act of 1934, pursuant to which it has committed to purchase, from time to time during the 12-month period ending September 30, 2015, through open market purchases, additional shares of our common stock having an aggregate purchase price of $4 million. Through November 6, 2014, pursuant to such plan, the OHA affiliate has purchased an aggregate of 266,268 shares of our common stock in the open market at an average price of $6.38 per share, totaling $1.7 million. If the affiliate has not purchased shares of our common stock under the stock purchase plan for an aggregate purchase price of $4 million by September 30, 2015, it has agreed to purchase from us, and we have agreed to issue and sell, the remaining balance at a price per share equal to the net asset value per share of our common stock.

 

In connection with the transactions described above, and the process of evaluating strategic alternatives which led up to them, we incurred costs totaling $5.4 million, or $0.26 per share, during the three months ended September 30, 2014, including $3.4 million of retention payments to employees of our former administrator pursuant to retention agreements entered into in September 2013 allocated to us under the terms of the administration agreement with NGP Administration, LLC, $1.1 million for a “tail” insurance policy covering our former directors and officers, and $0.9 million of legal and investment banking advisory fees.

 

12
 

  

Note 2: Basis of Presentation

 

These interim unaudited consolidated financial statements include the accounts of OHAI and its subsidiaries. We eliminate all significant intercompany accounts and transactions.

 

We prepare the interim consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. We omit certain information and footnote disclosures normally included in audited financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, pursuant to such rules and regulations. We believe we include all adjustments, which are of a normal recurring nature, so that these financial statements fairly present our financial position, results of operations and cash flows. Interim results are not necessarily indicative of results for a full year. You should read these unaudited consolidated financial statements in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Preparing interim consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes thereto, including the estimated fair values of our investment portfolio discussed in Note 7. Although we believe our estimates and assumptions are reasonable, actual results could differ from these estimates.

 

Dividends

 

We record distributions to stockholders on the ex-dividend date. We currently intend that our distributions each year will be sufficient to maintain our status as a RIC for federal income tax purposes and to eliminate federal excise tax liability. We currently intend to make distributions to stockholders on a quarterly basis that total substantially all of our net taxable income for the year. We also intend to make distributions of net realized capital gains, if any, at least annually. However, we may in the future decide to retain such capital gains for investment and designate such retained amounts as deemed distributions. Each quarter, we estimate our annual taxable earnings. The Board of Directors considers this estimate and determines the distribution amount, if any. We generally declare our dividends each quarter and pay them shortly thereafter. The following table summarizes our recent distribution history:

 

    Per Share      
Declaration Date   Amount     Record Date   Payment Date
March 18, 2013   $ 0.16     March 29, 2013   April 8, 2013
June 10, 2013     0.16     June 28, 2013   July 8, 2013
September 10, 2013     0.16     September 30, 2013   October 7, 2013
December 3, 2013     0.16     December 27, 2013   January 6, 2014
March 18, 2014     0.16     March 31, 2014   April 7, 2014
June 10, 2014     0.16     June 30, 2014   July 7, 2014
September 11, 2014     0.16     September 30, 2014   October 7, 2014

 

We determine the tax characteristics of our dividend distributions as of the end of the fiscal year, based on the taxable income for the full year and distributions paid during the year. Taxable income available for distribution differs from consolidated net investment income under GAAP due to (i) temporary and permanent differences in income and expense recognition, (ii) capital gains and losses, (iii) activity at taxable subsidiaries, and (iv) the timing and period of recognition regarding dividends declared in December of one year and paid in January of the following year. The tax characteristics for dividends paid in 2014 will be reported to each stockholder on Form 1099-DIV after the end of the year. Based on the information currently available, and largely as a result of the costs incurred related to the strategic review process, the final tax characteristics for dividend distributions in 2014 are expected to include ordinary taxable income and return of capital.

 

Note 3: Credit Facilities and Borrowings

 

On May 23, 2013, we entered into a $72.0 million Third Amended and Restated Revolving Credit Agreement, or the Investment Facility, which replaced our previous investment credit facility. The total amounts outstanding under the Investment Facility were $57.0 million and $53.0 million as of September 30, 2014 and December 31, 2013, respectively. The Investment Facility was amended September 29, 2014, to permit the appointment of OHA as our new investment advisor. Substantially all of our assets, except our investments in U.S. Treasury Bills, are pledged as collateral for the obligations under the Investment Facility. The Investment Facility matures on May 23, 2016, and bears interest, at our option, at either (i) LIBOR plus 325 to 475 basis points, or (ii) the base rate plus 225 to 375 basis points, both based on our amounts outstanding. As of September 30, 2014, the average interest rate on our outstanding balance of $57.0 million was 3.9%, and an additional $15.0 million was available for borrowing under the Investment Facility. We repaid $51.0 million of the balance outstanding under the Investment Facility in early October 2014.

 

13
 

  

On March 31, 2011, we entered into a $30.0 million Treasury Secured Revolving Credit Agreement, or the Treasury Facility, that can only be used to purchase U.S. Treasury Bills. Proceeds from the Treasury Facility facilitate the growth of our investment portfolio and provide flexibility in the sizing of our portfolio investments. The Treasury Facility has been amended from time to time, generally to extend the expiration date and, in some cases, to revise the size of the facility. On September 24, 2014, we entered into a fifth amendment to the Treasury Facility which extended the expiration date to September 24, 2015, reduced the size of the Treasury Facility to $30.0 million, and permitted the appointment of OHA as our new investment advisor. Borrowings under the Treasury Facility bear interest, at our option, at either (i) LIBOR plus 150 basis points or (ii) the base rate plus 50 basis points. We have the right at any time to prepay amounts outstanding under the Treasury Facility, in whole or in part, without premium or penalty. As of September 30, 2014, we had $30.0 million outstanding and no additional amount available for borrowing under the Treasury Facility, and the interest rate on our outstanding balance was 1.7%. We repaid the entire balance outstanding under the Treasury Facility in October 2014 with proceeds from the sale of U.S. Treasury Bills.

 

The Investment and Treasury Facilities contain affirmative and reporting covenants and certain financial ratio and restrictive covenants that apply to our subsidiaries and us. We were in compliance with these covenants as of September 30, 2014 and had no existing defaults or events of default under either facility. The most restrictive covenants are:

 

· maintaining a ratio of net asset value to consolidated total indebtedness (excluding net hedging liabilities) of not less than 2.25:1.0,
· maintaining a ratio of net asset value to consolidated total indebtedness (including net hedging liabilities) of not less than 2.0:1.0,
· maintaining a ratio of EBITDA (excluding revenue from cash collateral) to interest expense (excluding interest on loans under the Treasury Facility) of not less than 3.0:1.0, and
· maintaining a ratio of collateral to the aggregate principal amount of borrowings under the Treasury Facility of not less than 1.02:1.0.

 

Note 4: Investment Management

 

Investment Advisory Agreement

 

On September 30, 2014, we entered into an Investment Advisory Agreement with OHA, an investment adviser registered under the Investment Advisers Act of 1940, pursuant to which OHA replaced NGP Investment Advisor, LP as our investment advisor. The initial term of the Investment Advisory Agreement is for two years, with automatic, one-year renewals, subject to approval by our Board of Directors, a majority of whom are not “interested” persons (as defined in the 1940 Act) of us. Pursuant to the Investment Advisory Agreement, OHA implements our business strategy on a day-to-day basis and performs certain services for us, subject to the supervision of our Board of Directors. Under the Investment Advisory Agreement, we pay OHA a fee consisting of two components — a base management fee and an incentive fee.

 

Base Management Fee: The base management fee is paid quarterly in arrears, and is calculated by multiplying the average value of our total assets (excluding cash, cash equivalents and U.S. treasury bills that are purchased with borrowed funds solely for the purpose of satisfying quarter-end diversification requirements related to our election to be taxed as a RIC under the Code), as of the end of the two immediately prior fiscal quarters, by a rate of 1.75% per annum, with a 0.25% reduction in this 1.75% annual rate for the first year following September 30, 2014.

 

Incentive Fee: The incentive fee consists of two parts. The first part, the investment income incentive fee, will be calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the fiscal quarter for which the fee is being calculated. Pre-incentive fee net investment income means interest income, dividend income, royalty payments, net profits interest payments, and any other income (including any other fees, such as commitment, origination, syndication, structuring, diligence, monitoring and consulting fees or other fees that we receive from portfolio companies) accrued during the fiscal quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received in cash. Accordingly, we may pay an incentive fee based partly on accrued investment income, the collection of which is uncertain or deferred. Net investment income does not include any realized capital gains, realized capital losses, or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets (defined as total assets less liabilities at the end of the immediately preceding fiscal quarter) will be compared to a “hurdle rate” of 1.75% per quarter (7% annualized). OHA will receive no incentive fee for any fiscal quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate. OHA will receive an incentive fee equal to 100% of our pre-incentive fee net investment income for any fiscal quarter in which our pre-incentive fee net investment income exceeds the hurdle rate but is less than 2.1875% (8.75% annualized) of net assets (also referred to as the “catch up” provision) plus 20% of our pre-incentive fee net investment income for such fiscal quarter greater than 2.1875% (8.75% annualized) of net assets.

 

14
 

 

 

The second part of the incentive fee, the capital gains fee, will be determined and payable in arrears as of the end of each fiscal year (or, upon termination of the Investment Advisory Agreement, as of the termination date). The capital gains fee is equal to 20% of our cumulative aggregate realized capital gains from the date of the Investment Advisory Agreement through the end of that fiscal year, computed net of our cumulative aggregate realized capital losses and cumulative aggregate unrealized depreciation on investments for the same time period. The aggregate amount of any previously paid capital gains incentive fees to OHA will be subtracted from the capital gains incentive fee calculated. If such amount is negative, then there is no capital gains fee for such year. For the purposes of the capital gains fee, any gains and losses associated with our investment portfolio as of September 30, 2014 shall be excluded from the capital gains fee calculation.

 

The Investment Advisory Agreement may be terminated at any time, without the payment of any penalty, by a vote of our Board of Directors or the holders of a majority of our shares on 60 days’ written notice to OHA, and would automatically terminate in the event of its “assignment” (within the meaning of the 1940 Act). Either party may terminate the Investment Advisory Agreement without penalty upon not more than 60 days’ written notice to the other. Pursuant to the Investment Advisory Agreement, OHA pays the compensation expense of its investment professionals, who provide management and investment advisory services to us. We bear all other costs and expenses of our operations and transactions.

 

Previous Investment Advisory Agreement

 

Prior to the September 30, 2014 appointment of OHA as our investment advisor, we had a similar investment advisory agreement with our previous investment advisor, NGP Investment Advisor, LP. The fee structure under our previous investment advisory agreement consisted of two components — a base management fee and an incentive fee.

 

Base Management Fee : Under the previous investment advisory agreement, we calculated the quarterly base management fee as 0.45% (1.8% annualized) of the average of our total assets (inclusive of all cash and cash equivalents without any exclusions) as of the end of the two most recent fiscal quarters, payable quarterly in arrears.

 

Incentive Fee : The incentive fee under the previous investment advisory agreement consisted of two parts. We calculated the first part of the incentive fee, the investment income incentive fee, as 20% of the excess, if any, of our net investment income for the quarter that exceeded a quarterly hurdle rate equal to 2% (8% annualized) of our net assets, with no “catch up” provision. We calculated and paid this investment income incentive fee quarterly in arrears. For the purpose of this fee calculation, net investment income was defined similarly to that under the Investment Advisory Agreement. For the three and nine months ended September 30, 2014, we did not incur any investment income incentive fees. For the three and nine months ended September 30, 2013, we incurred investment income incentive fees totaling zero and $0.4 million, respectively.

 

We calculated the second part of the incentive fee, the capital gains fee, as (1) 20% of (a) our net realized capital gains (realized capital gains less realized capital losses) on a cumulative basis from the closing date of our initial public offering to the end of such fiscal year, less (b) any unrealized capital depreciation at the end of such fiscal year, less (2) the aggregate amount of all capital gains fees paid to NGP Investment Advisor, LP in prior fiscal years. We determined and paid the capital gains fee in arrears as of the end of each fiscal year. We have not incurred any capital gains fees under the previous investment advisory agreement since 2007.

 

Administration Agreement

 

On September 30, 2014, we entered into an Administration Agreement with OHA pursuant to which OHA replaced NGP Administration, LLC as our administrator and furnishes us with certain administrative services, personnel and facilities. The Administration Agreement has an initial term of two years. Payments under the Administration Agreement will be equal to our allocable portion of OHA’s overhead in performing its obligations under the Administration Agreement, including all administrative services necessary for our operation and the conduct of our business. The aggregate amount of certain costs and expenses payable by us under the Investment Advisory Agreement and the Administration Agreement for the period from October 1, 2014 to September 30, 2015 shall not exceed $2.5 million (the “Cap”); provided that, generally speaking, interest expense and bank fees, management and incentive fees, legal and professional fees, insurance expenses, taxes and costs related to the change in investment advisor are not subject to the Cap. The Administration Agreement may be terminated at any time, without penalty, by a vote of our Board of Directors or by OHA upon 60 days’ written notice to the other party.

 

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Prior to the September 30, 2014 appointment of OHA as our administrator, we had a similar administration agreement with our previous administrator, NGP Administration, LLC, with similar terms and conditions as the Administration Agreement. We owed $253,000 and $296,000 to our previous administrator as of September 30, 2014 and December 31, 2013, respectively, for expenses incurred on our behalf for the final month of the respective quarterly period. We include these amounts in accounts payable and accrued expenses.

 

Note 5: Federal Income Taxes

 

For federal income tax purposes, we operate so as to qualify as a RIC under Subchapter M of Chapter 1 of the Code, as amended. As a RIC, we are generally not subject to corporate-level federal income taxes on the portion of our investment company taxable income and net capital gain (i.e., realized net long term capital gains in excess of realized net short term capital losses) distributed to stockholders. To qualify as a RIC, we are required, among other things, to distribute to our stockholders each year at least 90% of investment company taxable income, as defined by the Code, and to meet certain asset-diversification and source-of-income requirements.

 

Certain of our wholly-owned subsidiaries, or Taxable Subsidiaries, have elected to be taxed as corporations for federal income tax purposes. The Taxable Subsidiaries hold certain of our portfolio investments and are consolidated for financial reporting purposes, but not for income tax reporting purposes. These Taxable Subsidiaries permit us to hold equity investments in portfolio companies that are “pass through” entities for tax purposes, in order to comply with the “source-of-income” requirements that must be satisfied to maintain our qualification as a RIC. The Taxable Subsidiaries may generate net income tax expense or benefit, which is reflected on our consolidated statements of operations.

 

Note 6: Commitments and Contingencies

 

As of September 30, 2014, we had investments in or commitments to fund investments in 13 portfolio companies totaling $189.6 million. Of this total, $189.3 million was outstanding and $0.3 million remained committed and available to fund. Generally, these commitments have fixed expiration dates, and we may not fund the entire $0.3 million of commitments before they expire. We do not report the unfunded portions of these commitments on our consolidated balance sheets.

 

We have continuing obligations under the Investment Advisory Agreement and the Administration Agreement with OHA. See Note 4. The agreements provide that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or the reckless disregard of its duties and obligations, OHA and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with them will be entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of OHA’s services under the agreements or otherwise as our investment advisor or administrator. The agreements also provide that OHA and its affiliates will not be liable to us or any stockholder for any error of judgment, mistake of law, any loss or damage with respect to any of our investments or any action taken or omitted to be taken by OHA in connection with the performance of any of its duties or obligations under the agreements or otherwise as investment advisor or administrator to us, except to the extent specified in Section 36(b) of the 1940 Act concerning loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services.

 

In the normal course of business, we enter into a variety of undertakings containing a variety of representations that may expose us to some risk of loss. We do not expect significant losses, if any, from such undertakings.

 

Legal Proceedings

 

From time to time, we are involved in various legal proceedings arising in the normal course of business. While we cannot predict the outcome of these proceedings with certainty, we do not believe that an adverse result in any pending legal proceeding, other than those described below, individually or in the aggregate, would be material to our business, financial condition or cash flows.

 

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ATP Litigation . On August 17, 2012, ATP Oil & Gas Corporation, or ATP, filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas. Prior to the bankruptcy filing, we purchased limited term overriding royalty interests, or ORRIs, in certain offshore oil and gas producing properties operated by ATP (generally, the Gomez and Telemark properties). On August 23, 2012, on a motion filed by ATP (Bankr. Dkt. No.15), the bankruptcy judge presiding over ATP’s case signed an order (Bankr. Dkt. No. 191) requiring ATP to pay amounts received after August 17, 2012 to those parties it believes are entitled to receive them, including the ORRI holders, provided that the owners of the ORRIs execute a disgorgement agreement providing for the repayment to ATP of any amounts that the bankruptcy court later finds to have been inappropriately paid. We executed the disgorgement agreement and began receiving monthly distributions in September 2012 from ATP of our share of production proceeds received by ATP after August 17, 2012. As of September 30, 2014, our unrecovered investment was $27.7 million, and we had received aggregate production payments of $30.1 million subject to the disgorgement agreement; both of these amounts are the subject of disputes in the litigation described herein.

 

As of September 30, 2014, we had incurred legal and consulting fees totaling $4.5 million in connection with the enforcement of our rights under the ORRIs. On various occasions, we have provided notice that such legal expenses will be added to our unrecovered investment balance to the extent they are not reimbursed. To date, we have not received any payments on account of legal expenses aside from our receipt of regular monthly production payments. We add our legal expenses to the unrecovered investment balance in accordance with our transaction documents. As of September 30, 2014, $4.2 million of the $4.5 million in legal and consulting fees have been added to, and are thus included in, the unrecovered investment balance under the terms of our transaction documents. The remaining amounts of legal and consulting fees, totaling $0.3 million and $0.5 million as of September 30, 2014 and December 31, 2013, respectively, are included in accounts receivable and other current assets on our consolidated balance sheets and are, thus, not included in the unrecovered investment balance as of such dates.

 

On October 17, 2012, we filed a lawsuit against ATP styled: NGP Capital Resources Company v. ATP Oil & Gas Corporation , Adv. Proc. No. 12-03443, in the U.S. Bankruptcy Court for the Southern District of Texas, seeking a declaration that the ORRIs are our property and not property of ATP and that the conveyance and purchase and sale documents are not executory contracts that may be rejected in order to remove or recharacterize our interests in the properties. ATP filed an answer and counterclaim in which it (a) denies that the ORRIs are valid and enforceable, (b) seeks a declaration that (i) the ORRIs are a financing agreement and not a true sale and (ii) the ORRIs are executory contracts that are subject to rejection under 11 U.S.C. Sec. 365, and (c) seeks disgorgement from us of amounts paid to us since August 17, 2012, the date of filing of ATP’s Chapter 11 proceeding. The United States, on behalf of the Department of the Interior, intervened in the lawsuit, arguing that the underlying leases are unexpired leases of real property or executory contracts (and not real property conveyances) and are subject to rejection by ATP. Certain service companies claiming statutory liens or privileges have intervened in the lawsuit for the purposes of establishing that their liens and privileges are superior to our rights and asserting related claims for disgorgement of proceeds paid to us by ATP. The Bank of New York Mellon Trust Company, N.A., the secondary lien holder, has also intervened in the lawsuit, arguing (i) the ORRIs are a financing agreement and not a true sale, (ii) our claims are barred, waived, released and/or otherwise foreclosed by the express terms of the conveyance of the ORRIs, and (iii) either we have not met a condition precedent or we failed to perform or substantially perform our contractual obligations. The issues in the lawsuit have been bifurcated such that the issues of (i) whether the conveyances and transactions between us and ATP constituted outright transfers of ownership and (ii) whether the conveyances are executory contracts or leases that ATP may reject, will be tried first as “Phase 1” of the legal proceedings. Any additional claims, including the service company lien claims and related issues, will be decided later if necessary in “Phase 2.” This lawsuit is currently pending, and the initial trial date was abated along with certain other deadlines pending consideration of various motions. In that context, a Motion for Summary Judgment that we filed was denied, and we subsequently filed a motion to appeal the denial on an interlocutory basis. After our motion to appeal was denied by the United States District Court, we filed a Motion for Reconsideration of the summary judgment denial with the bankruptcy court on June 17, 2014. A new scheduling order has not been entered. We intend to vigorously defend our position that the ORRIs constitute real property interests and are fully valid and enforceable pursuant to their terms, and we intend to vigorously defend our position that the service companies’ statutory liens and privileges do not attach to our ORRIs and/or are not superior to our rights.

 

Separately, ATP (through a motion filed by the Official Committee of Unsecured Creditors on October 31, 2012) threatened to bring a fraudulent transfer action against us, in which ATP would allege that (a) ATP was insolvent at the time of the assignment of the ORRIs to us, (b) ATP received less than fair value from us in exchange for the assignments of the ORRIs and (c) as a result, the assignments should be set aside. The motion was abated and the referenced claim has not been asserted. We vigorously deny these allegations.

 

On April 23, 2013, the Department of the Interior, on behalf of the Bureau of Safety and Environmental Enforcement, issued an order directing that the wells on the Gomez properties be shut in and that operations cease. Operations and production ceased on the Gomez properties on April 30, 2013. On June 13, 2013, the Court entered an order (Bankr. Dkt. No. 1999) approving ATP’s request (set forth in Bankr. Dkt. No. 1902) to reject and/or abandon and relinquish its interests in the Gomez properties and related agreements, or the Abandonment Order. Consequently, we no longer receive payments attributable to the Gomez properties.

 

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On May 7, 2013, ATP conducted an auction of its assets, and ATP selected a credit bid from Credit Suisse AG, as administrative and collateral agent to those lenders who are parties to that certain Senior Secured Super Priority Priming Debtor in Possession Credit Agreement dated August 29, 2012, or the DIP Lenders, based on a reduction in the amount of ATP’s outstanding indebtedness to Credit Suisse AG, or the Credit Bid, as the highest and best bid. The Credit Bid did not include an offer to purchase the Gomez properties, but it included an offer to purchase the Telemark properties. On October 17, 2013, the Court entered its Final Order approving the sale (Bankr. Dkt. No. 2706). Under the Final Order, Bennu Oil & Gas, LLC, or Bennu, a newly formed company owned by the DIP Lenders, was authorized to purchase certain ATP assets, including the Telemark properties, as well as claims asserted by ATP in our pending lawsuit relating to the Telemark properties. Our ORRI continues to burden the Telemark properties subject to a resolution of the issues in our pending lawsuit against ATP. The sale to Bennu closed on November 1, 2013. On May 20, 2014, Bennu substituted into our lawsuit for ATP with respect to any claims that relate to assets purchased from ATP.

 

On March 7, 2014, Bennu filed complaints seeking declaratory judgments that it acquired the Telemark properties free and clear of liens asserted by certain statutory lien claimants, thereby commencing the adversary proceedings styled Bennu Oil & Gas LLC v. Frank’s Casing Crew & Rental Tools, Inc., et. al., (Adv. No. 14-03060), or the Frank’s Casing Adversary, and Bennu Oil & Gas LLC v. Advanced Fire & Safety LLC, et. al., (Adv. No. 14-03056), or the Advanced Fire Adversary. Two of the defendants in the Advanced Fire Adversary filed counterclaims seeking declaratory judgments regarding the extent, validity and priority of their alleged liens. We sought and were granted leave to intervene in the Frank’s Casing and Advanced Fire Adversaries to protect our rights in connection with any determinations relating to the extent, validity and priority of liens against the Telemark properties. These proceedings are pending, and an initial scheduling conference has been set for January 8, 2015.

 

On June 26, 2014, the bankruptcy court entered an order converting ATP’s bankruptcy case to a case under Chapter 7 of the U.S. Bankruptcy Code. Rodney D. Tow was appointed as Chapter 7 Trustee of ATP’s bankruptcy estate.

 

On July 10, 2014, we filed, in our lawsuit, a Motion for Leave to amend our complaint to, among other things, add claims and defenses based on facts that occurred after the filing of our complaint, as well as claims and defenses specifically applicable to Bennu. On September 3, 2014, Bennu filed a Motion to Dismiss claims between Bennu and us, as well as an objection to our Motion for Leave. In connection with the Motion to Dismiss, Bennu stated that it does not desire to pursue affirmative claims against us for recharacterization or disgorgement, and it disclaimed any intention to sue us regarding the characterization of the ORRIs. The Motion to Dismiss does not seek to determine any claims, including our claims, any claims of the bankruptcy estate or of the numerous intervenors involved in the litigation, nor does it preclude Bennu or a succeeding party from refiling such claims in the future. On October 1, 2014, we filed an objection to the Motion to Dismiss, asserting that Bennu is the owner of all recharacterization claims against us and requesting that the judge enter a declaratory judgment (rather than a dismissal) that the ORRIs do, in fact, constitute real property interests that are not subject to recharacterization as a loan or otherwise, and are fully valid and enforceable pursuant to their terms. In a related briefing, the Trustee asserted that Bennu does not own recharacterization claims relating to the Gomez properties, and objected to entry of a judgment in our favor due to alleged prejudice that would result against the estate’s alleged claims. Bennu asserted in response that it owns all recharacterization claims against us, but it is opposed to entry of a judgment in our favor. On October 23, 2014, in a status conference conducted by the court, the court required Bennu to file a motion to determine the ownership of the recharacterization claims and set a hearing to determine the issue on December 18, 2014. The court has not set hearings or heard arguments relating to the Motion to Dismiss, our Motion for Reconsideration, or our Motion for Leave. Another status conference has been scheduled for December 18, 2014.

 

While we intend to vigorously defend the legal positions described above, there can be no assurance that we will ultimately prevail in any or all of these matters.

 

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Note 7: Fair Value

 

Our investments consisted of the following as of September 30, 2014 and December 31, 2013:

 

    September 30, 2014     December 31, 2013  
          % of           % of           % of           % of  
(Dollar amounts in thousands)   Cost     Total     Fair Value     Total     Cost     Total     Fair Value     Total  
Portfolio investments                                                                
Senior secured debt   $ 26,392       12.2 %   $ 20,243       10.0 %   $ 34,828       13.0 %   $ 35,483       13.8 %
Subordinated debt     67,146       30.9 %     68,750       34.1 %     92,614       34.5 %     85,560       33.2 %
Limited term royalties     27,578       12.7 %     25,641       12.7 %     28,704       10.7 %     28,966       11.4 %
Contingent earn-out     -       0.0 %     -       0.0 %     -       0.0 %     -       0.0 %
Royalty interests     52       0.0 %     554       0.3 %     218       0.1 %     1,106       0.4 %
Redeemable preferred units     50,024       23.0 %     54,334       27.0 %     50,034       18.7 %     52,760       20.5 %
Equity securities                                                                
Membership and partnership units     10,500       4.9 %     1,390       0.7 %     10,500       3.9 %     5,967       2.3 %
Participating preferred stock     4,312       2.0 %     -       0.0 %     4,312       1.6 %     21       0.0 %
Common stock     419       0.2 %     -       0.0 %     419       0.2 %     640       0.2 %
Warrants     91       0.0 %     44       0.0 %     328       0.1 %     868       0.3 %
Total equity securities     15,322       7.1 %     1,434       0.7 %     15,559       5.8 %     7,496       2.8 %
Total portfolio investments     186,514       85.9 %     170,956       84.8 %     221,957       82.8 %     211,371       82.1 %
Government securities                                                                
U.S. Treasury Bills     30,610       14.1 %     30,610       15.2 %     46,000       17.2 %     46,000       17.9 %
Total investments   $ 217,124       100.0 %   $ 201,566       100.0 %   $ 267,957       100.0 %   $ 257,371       100.0 %

 

We account for all of the assets in our investment portfolio at fair value, following the provisions of the Financial Accounting Standards Board Accounting Standards Codification Fair Value Measurements and Disclosures , or ASC 820. ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.

 

On a quarterly basis, the investment team of our investment advisor prepares fair value estimates for all of the assets in our portfolio utilizing the income approach and market approach in accordance with ASC 820 and presents them to a committee of our Board of Directors — the Audit Committee since OHA has been our investment advisor, and the Valuation Committee under our previous investment advisor. The committee recommends fair values of each investment to our Board of Directors, which in good faith determines the final fair value for each investment. We record investments in securities for which market quotations are readily available at such market quotations in our financial statements as of the valuation date. For investments in securities for which market quotations are unavailable, or which have various degrees of trading restrictions, the investment team of our investment advisor prepares valuation analyses as generally described below.

 

· Investment Team Valuation. The investment professionals of our investment advisor prepare fair value estimates for each investment.

 

· Investment Team Valuation Documentation. The investment team documents and discusses its preliminary fair value estimates with senior management of our investment advisor.

 

· Presentation to Audit Committee . Senior management presents the valuation analyses and fair value estimates to the Audit Committee of our Board of Directors. Prior to September 30, 2014, such presentation was made to the Valuation Committee of our Board of Directors. Effective September 30, 2014, our Board of Directors no longer has a separate Valuation Committee.

 

· Third Party Valuation Activity. We may, at our discretion, retain an independent valuation firm to review any or all of the valuation analyses and fair value estimates provided by the investment team of our investment advisor. We have retained an independent valuation firm in connection with the fair value determinations of our middle market, non-energy investments beginning with the quarter ended September 30, 2013. As of September 30, 2014, our middle market non-energy investments collectively represented 26% of the total fair value of our portfolio investments at such date.

 

· Board of Directors and Audit Committee. The Board of Directors and the Audit Committee (or the Valuation Committee prior to September 30, 2014) review and discuss the valuation analyses and fair value recommendations provided by the investment team of our investment advisor and the analysis of the independent valuation firm, if applicable.

 

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· Final Valuation Determination. Our Board of Directors discusses the fair values recommended by the Audit Committee (or the Valuation Committee prior to September 30, 2014) and determines the fair value of each investment in our portfolio, in good faith, based on the input of the investment team of our investment advisor, our Audit Committee (or Valuation Committee prior to September 30, 2014), and the independent valuation firm, if any.

 

ASC 820 defines fair value as the price that a seller would receive for an asset or pay to transfer a liability in an orderly transaction between independent, knowledgeable and willing market participants at the measurement date. The fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes the use of observable market inputs over unobservable entity-specific inputs. In accordance with ASC 820, we categorize our investments based on the inputs to our valuation methodologies as follows:

 

· Level 1 — Quoted unadjusted prices for identical instruments in active markets to which we have access at the date of measurement.

 

· Level 2  — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers.

 

· Level 3 — Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect our own assumptions that market participants would use to price the asset or liability based on the best available information.

 

Fair value accounting classifies financial assets and liabilities in their entirety based on the lowest level of input that is significant to the estimated fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels.

 

Debt Securities and Limited-Term Royalties:   In determining the fair value of our debt investments, we first assess the overall financial health of the portfolio company through an evaluation of a number of factors, including, as relevant, historical and projected financial results, the portfolio company's enterprise value, and the nature and realizable value of any collateral. In estimating the portfolio company’s enterprise value, we analyze the discounted value of estimated future net cash flows of the portfolio company, derived, when appropriate, from third party valuations of a portfolio company’s assets, such as engineering reserve reports of oil and natural gas properties. We also use a market approach in determining the portfolio company’s estimated enterprise value, considering recent comparable transactions involving similar businesses or assets. We also may consider the markets in which the portfolio company operates; comparison to a peer group of publicly traded securities; the size and scope of the portfolio company and its specific strengths and weaknesses; recent purchases or sales of securities by the portfolio company; recent offers to purchase the portfolio company; the estimated value of comparable securities; and other relevant factors. Based upon these analyses, we assess the sources of cash flow available to the portfolio company to service its debt and the underlying credit risk, and determine an appropriate yield, or discount rate, to apply to our anticipated cash flows to be collected from each debt investment, recognizing that the collection of contractual cash flows may come from one or a combination of cash flows generated from continuing operations of the portfolio company, liquidation of collateral or sale of the portfolio company.  The appropriateness of the yield on our investments is directly relative to our judgment of the associated risks, using observable yield or price data for similar or comparable debt investments when available. Fair value determinations using the discounted cash flow method can be sensitive to significant changes in the inputs. A significant increase (decrease) in the discount rate for a particular security may result in a lower (higher) value for that security.

 

We invest primarily in illiquid debt investments in small private companies, many of which are in the early stages of development, or are start-up companies in need of growth development capital. There is limited activity, transparency and variable data in the markets in which we invest. In circumstances where there is limited observable price or yield data of similar or comparable securities, we base our considerations on our assessments of the credit trends and underlying performance of our portfolio companies and of the markets in which we invest, relying on the collective judgment of the investment team of our investment advisor and our Board of Directors, which is based on their extensive experience and expertise investing in public and private securities markets.

 

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Equity Securities:   We record our investments in preferred and common equity securities (including warrants or options to acquire equity securities) for which no market prices are available at fair value based on our pro rata share of the residual equity value available after deducting all outstanding debt and other obligations, as applicable, from the estimated enterprise value of the portfolio company. To estimate the enterprise value of the portfolio company, we analyze the discounted cash flows of the portfolio company and indicative pricing (on a proved reserve and/or units-of-production basis, as appropriate) in recent comparable market transactions as mentioned above, adjusted for lack of marketability due to the illiquid nature or other restrictions on the sale of the security. In most cases, we may compute an average of the calculated values of our share of the residual equity value (using multiple approaches or various assumptions) in determining the fair value of the equity security to be reported in our financial statements. Estimating a company’s enterprise value involves judgment, and residual equity values can be relatively volatile based on changes in market conditions, the company’s financial performance and outlook, and other factors. Fair value determinations using market comparables can be sensitive to significant changes in the inputs. A significant increase (decrease) in the reserve multiple, or a significant decrease (increase) in the discount for lack of marketability, for a particular equity security may result in a higher (lower) fair value for that security.

 

In some cases, where we deem recent or pending financing or recapitalization transactions involving the portfolio company to be more indicative of enterprise value, we use such recent transactions to value the enterprise, in lieu of the discounted cash flow or market comparables. In addition, in cases where we deem appropriate, we utilize an option pricing method, or OPM, to value the various preferred stock, common stock and warrants we have in companies with complex capital structures. The OPM treats preferred stock, common stock and warrants as call options on the enterprise value, with exercise prices based on liquidation preference of the security. The OPM commonly uses the Black-Scholes model to price the call option and considers the various terms of the stockholder agreements upon liquidation of the enterprise. In addition, the OPM implicitly considers the effect of the liquidation preference as of a future liquidation date, not as of the valuation date.

 

Royalty Interests : We record our investments in overriding royalty interests at fair value based on a multiple of cash flows generated by such investments, multiples from transactions involving the sale of comparable assets and/or the discounted value of expected future net cash flows from such investments, adjusted for lack of marketability due to the illiquid nature or other restrictions on the sale of our investment. We derive appropriate cash flow multiples from the review of comparable transactions involving similar assets. We derive the discounted value of future net cash flows, when appropriate, from third party valuations of a portfolio company’s assets, such as engineering reserve reports of oil and natural gas properties. A significant increase (decrease) in the cash flow multiple, or a significant decrease (increase) in the discount for lack of marketability, for a particular investment may result in a higher (lower) fair value for that investment.

 

Contingent Earn-Out : Our contingent earn-out investment resulted from the sale of our investment in Alden Resources, LLC to Globe BG, LLC in July 2011. The amount of the payment, up to $6.8 million, is based on a formula involving the number of clean tons of coal produced multiplied by the difference between the company’s cost of production in 2010 and the cost of production during the optimal consecutive twelve-month period during the three-year period ended July 2014. Globe has informally advised us that the company’s relative cost of production has not improved since July 2011, so we have estimated the value of the earn-out to be zero. The reporting and review mechanism to conclude the ultimate value of the earn-out has not yet been completed.

 

Commodity Derivative Instruments : We record all derivative instruments at fair value. Quoted market prices are the best evidence of fair value. We determine the fair value of the crude oil and natural gas options using a market-based valuation methodology based upon forward commodity price and volatility curves. Independent pricing services provide the curves, which reflect broker market quotes. We consider these investments as Level 2 on the valuation hierarchy, as the values represent quoted prices for similar instruments in active markets. We have not held any commodity derivative instruments since September 30, 2013.

 

We hold certain investments in debt or equity securities that are publicly traded, but for which there are relatively few transactions or for which trading activity is relatively infrequent. We value these investments at broker quotes as of the balance sheet date or at prices for which such securities were most recently traded. We consider these investments as Level 2 on the valuation hierarchy, as the values represent quoted prices for identical instruments in thinly-traded markets.

 

Due to the inherent uncertainty in the valuation process, the fair values of our investments may differ materially from the values that would have been used had a ready market for the securities existed. Additionally, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the gains or losses ultimately realized on our investments to be materially different than the valuations currently assigned.

 

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We have investments in our portfolio that contain payment-in-kind, or PIK, provisions. We compute PIK interest income or PIK dividend income at the contractual rate specified in each investment agreement and add that amount to the principal balance of the investment. For those investments with PIK interest or PIK dividends, we calculate our income accruals on the principal balance plus any PIK amounts. If the portfolio company’s projected cash flows, further supported by estimated total enterprise value, are not sufficient to cover the contractual principal and interest or dividend amounts, as applicable, we do not accrue interest income or dividend income on the investment. To maintain our RIC status, we must pay out this non-cash income to stockholders in the form of dividends, even though we have not yet collected the cash.

 

Fair value accounting classifies financial assets and liabilities in their entirety based on the lowest level of input that is significant to the estimated fair value measurement. Our assessment of the significance of a particular input to the estimated fair value measurement requires judgment, and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels. We did not have any liabilities measured at fair value at September 30, 2014 or December 31, 2013.

 

During the three-and nine-month periods ended September 30, 2014, none of our investments in portfolio companies changed between the categories of Control Investments, Affiliate Investments and Non-Affiliate Investments, and there were no transfers between Levels 3, 2 or 1. During the nine-month period ended September 30, 2013, our investment in Spirit Resources, LLC changed from a Non-Affiliate Investment to a Control Investment. During the three- and nine- month periods ended September 30, 2013, we transferred one investment from Level 2 to Level 3 due to changes in observability of significant inputs.

 

The following tables set forth our financial assets by level within the fair value hierarchy that we accounted for at fair value as of September 30, 2014 and December 31, 2013 (in thousands):

  

September 30, 2014:   Total     Level 1     Level 2     Level 3  
Portfolio investments                                
Control investments                                
Senior secured debt   $ 14,443     $ -     $ -     $ 14,443  
Royalty interests     510       -       -       510  
Equity securities     -       -       -       -  
Total control investments     14,953       -       -       14,953  
Affiliate investments                                
Subordinated debt     15,580       -       -       15,580  
Equity securities     1,390       -       -       1,390  
Total affiliate investments     16,970       -       -       16,970  
Non-affiliate investments                                
Senior secured debt     5,800       -       -       5,800  
Subordinated debt     53,170       -       12,360       40,810  
Limited term royalties     25,641       -       -       25,641  
Contingent earn-out     -       -       -       -  
Redeemable preferred units     54,334       -       -       54,334  
Royalty interests     44       -       -       44  
Equity securities     44       -       -       44  
Total non-affiliate investments     139,033       -       12,360       126,673  
Total portfolio investments     170,956       -       12,360       158,596  
Government securities                                
U.S. Treasury Bills     30,610       30,610       -       -  
Total investments   $ 201,566     $ 30,610     $ 12,360     $ 158,596  

 

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December 31, 2013:   Total     Level 1     Level 2     Level 3  
Portfolio investments                                
Control investments                                
Senior secured debt   $ 19,508     $ -     $ -     $ 19,508  
Royalty interests     518       -       -       518  
Equity securities     4,192       -       -       4,192  
Total control investments     24,218       -       -       24,218  
Affiliate investments                                
Subordinated debt     15,268       -       -       15,268  
Equity securities     1,775       -       -       1,775  
Total affiliate investments     17,043       -       -       17,043  
Non-affiliate investments                                
Senior secured debt     15,975       -       -       15,975  
Subordinated debt     70,292       -       29,474       40,818  
Limited term royalties     28,966       -       -       28,966  
Contingent earn-out     -       -       -       -  
Redeemable preferred units     52,760       -       -       52,760  
Royalty interests     588       -       -       588  
Equity securities     1,529       -       -       1,529  
Total non-affiliate investments     170,110       -       29,474       140,636  
Total portfolio investments     211,371       -       29,474       181,897  
Government securities                                
U.S. Treasury Bills     46,000       46,000       -       -  
Total investments   $ 257,371     $ 46,000     $ 29,474     $ 181,897  

 

The following tables present roll-forwards of the changes in fair value during the three-and nine-month periods ended September 30, 2014 and 2013 for all investments for which we determine fair value using unobservable (Level 3) factors (in thousands):

 

    Senior Secured     Subordinated     Royalty              
    Debt and     Debt and     Interests              
    Limited Term     Redeemable     and Equity     Contingent     Total  
    Royalties     Preferred Units     Securities     Earn-out     Investments  
Three Months Ended September 30, 2014:                                        
Fair value at June 30, 2014   $ 57,491     $ 109,732     $ 3,720     $ -     $ 170,943  
Total gains, (losses) and amortization:                                        
Net realized gains (losses)     -       -       962       -       962  
Net unrealized gains (losses)     (3,477 )     929       (1,342 )     -       (3,890 )
Net amortization of premiums, discounts and fees     488       42       (2 )     -       528  
New investments, repayments and settlements, net:                                        
New investments     969       -       -       -       969  
Payment-in-kind     273       215       -       -       488  
Repayments and settlements     (9,860 )     (194 )     (1,350 )     -       (11,404 )
Fair value at September 30, 2014   $ 45,884     $ 110,724     $ 1,988     $ -     $ 158,596  
                                         
Nine Months Ended September 30, 2014:                                        
Fair value at December 31, 2013   $ 64,449     $ 108,846     $ 8,602     $ -     $ 181,897  
Total gains, (losses) and amortization:                                        
Net realized gains (losses)     -       (9,382 )     962       -       (8,420 )
Net unrealized gains (losses)     (9,001 )     11,012       (6,211 )     -       (4,200 )
Net amortization of premiums, discounts and fees     707       123       (15 )     -       815  
New investments, repayments and settlements, net:                                        
New investments     2,448       -       -       -       2,448  
Payment-in-kind     418       583       -       -       1,001  
Repayments and settlements     (13,137 )     (458 )     (1,350 )     -       (14,945 )
Fair value at September 30, 2014   $ 45,884     $ 110,724     $ 1,988     $ -     $ 158,596  

 

Of the net unrealized losses presented in the table above, $12.1 million of such unrealized losses for the nine months ended September 30, 2014 were attributable to assets we held at September 30, 2014, including Spirit Resources, LLC ($6.4 million) and Contour Highwall Holdings, LLC ($4.1 million). We present net unrealized gains (losses) on our consolidated statements of operations as “Net unrealized appreciation (depreciation) on investments.”

 

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    Senior Secured     Subordinated     Royalty              
    Debt and     Debt and     Interests              
    Limited Term     Redeemable     and Equity     Contingent     Total  
    Royalties     Preferred Units     Securities     Earn-out     Investments  
Three Months Ended September 30, 2013:                                        
Fair value at June 30, 2013   $ 71,529     $ 93,436     $ 9,297     $ -     $ 174,262  
Total gains, (losses) and amortization:                                        
Net unrealized gains (losses)     (97 )     466       179       -       548  
Net amortization of premiums, discounts and fees     95       24       (3 )     -       116  
Transfers to Level 3     -       -       109       -       109  
New investments, repayments and settlements, net:                                        
New investments     2,153       -       -       -       2,153  
Payment-in-kind     107       171       -       -       278  
Repayments and settlements     (779 )     -       -       -       (779 )
Fair value at September 30, 2013   $ 73,008     $ 94,097     $ 9,582     $ -     $ 176,687  
                                         
Nine Months Ended September 30, 2013:                                        
Fair value at December 31, 2012   $ 101,234     $ 81,357     $ 2,863     $ 240     $ 185,694  
Total gains, (losses) and amortization:                                        
Net realized gains (losses)     -       -       1,500       -       1,500  
Net unrealized gains (losses)     19       (5,687 )     (4,135 )     (240 )     (10,043 )
Net amortization of premiums, discounts and fees     565       78       (3 )     -       640  
Transfers to Level 3     -       -       210       -       210  
New investments, repayments and settlements, net:                                        
New investments     16,492       40,676       2,897       -       60,065  
Restructuring     (8,000 )     -       8,000       -       -  
Payment-in-kind     212       1,125       -       -       1,337  
Repayments and settlements     (37,514 )     (23,452 )     (1,750 )     -       (62,716 )
Fair value at September 30, 2013   $ 73,008     $ 94,097     $ 9,582     $ -     $ 176,687  

  

Of the $10.0 million in net unrealized losses presented in the table above, $9.6 million was attributable to assets we held at September 30, 2013.

 

The following table summarizes the significant unobservable inputs in the fair value measurements of our Level 3 investments by category of investment and valuation technique as of September 30, 2014 (dollars in thousands):

 

    Fair Value as of     Valuation   Significant   Range of     Weighted  
Type of Investment   September 30, 2014     Technique   Unobservable Inputs   Inputs     Average  
Senior debt securities and limited term royalties   $ 36,941     Discounted cash flow   Discount rate     8.0% - 22.5%       18.8 %
      7,500     Market comparables   EBITDA multiples     3.0x - 5.0x        4 .0x  
      1,443     Recent or pending transactions   N/A     N/A       N/A  
      45,884                          
Subordinated debt securities and redeemable preferred units     42,779     Discounted cash flow   Discount rate     8.9% - 17.4%       14.5 %
      67,945     Market comparables   Reserve multiples (1)     $9.00 - $15.00     $ 12.39  
                Production multiples (2)     $24.00 - $51.00     $ 34.86  
                EBITDA multiples     3.5x - 5.5x        4.8 x  
      110,724                          
Royalty interests and equity securities     1,390     Market comparables   EBITDA multiples     5.5x - 6.5x        6 .0x  
      598     Recent or pending transactions   N/A     N/A       N/A  
      1,988                          
    $ 158,596                          

 

 

(1) Based on recent comparable transactions involving similar assets, expressed as price per unit of equivalent barrel of oil in proved reserves.
(2) Based on recent comparable transactions involving similar assets, expressed as price per daily production of equivalent barrel of oil in proved reserves.

 

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Note 8: Commodity Derivative Instruments

 

We use commodity derivative instruments from time to time to manage our exposure to commodity price fluctuations. We use all of our derivatives for risk management purposes and do not hold any amounts for speculative or trading purposes. These contracts generally consist of options contracts on underlying commodities. We do not designate these instruments as hedging instruments for financial accounting purposes and, as a result, we recognize the change in the instruments’ fair value currently on the consolidated statement of operations as net increase (decrease) in unrealized appreciation (depreciation) on investments. All of our oil put options had expired as of September 30, 2013.

 

The components of gains (losses) on commodity derivative instruments are as follows (in thousands):

 

    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2014     2013     2014     2013  
                         
Unrealized gains on commodity derivatives   $ -     $ 68     $ -     $ 235  
Realized losses on commodity derivatives     -       (68 )     -       (245 )
                                 
Net losses on commodity derivative instruments   $ -     $ -     $ -     $ (10 )

 

 

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

 

You should read the following analysis of our financial condition and results of operations in conjunction with management’s discussion and analysis contained in our 2013 Annual Report on Form 10-K, as well as our consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q.

 

Forward-Looking Statements

 

Certain statements in this Quarterly Report on Form 10-Q that relate to estimates or expectations of our future performance or financial condition may constitute “forward-looking statements”. These forward-looking statements are subject to various risks and uncertainties, which could cause actual results and conditions to differ materially from those projected, including, but not limited to,

 

uncertainties associated with the timing and likelihood of investment transaction closings;
changes in the prospects of our portfolio companies;
changes in interest rates;
the future operating results of our portfolio companies and their ability to achieve their objectives;
changes in regional, national or international economic conditions and their impact on the industries in which we invest;
disruptions in the credit and capital markets;
changes in the conditions of the industries in which we invest;
the adequacy of our cash resources and working capital;
the timing of cash flows, if any, from the operations of our portfolio companies;
the ability of our investment advisor to locate suitable investments for us and to monitor and administer the investments; and
other factors enumerated in our filings with the Securities and Exchange Commission, or the SEC.

 

We may use words such as “anticipates,” “believes,” “intends,” “plans,” “expects,” “projects,” “estimates,” “will,” “should,” “may” and similar expressions to identify forward-looking statements. These forward-looking statements are subject to various risks and uncertainties. Certain factors could cause actual results and conditions to differ materially from those projected and our historical experience. You should not place undue reliance on such forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update any forward-looking statements made herein, unless required by law.

 

Overview

 

We are a specialty finance company whose investment objective is to generate both current income and capital appreciation primarily through debt investments with certain equity components. We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, or the 1940 Act, and, as such, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” which include securities of private U.S. companies, U.S. companies whose securities are listed on a national securities exchange but whose market capitalization is less than $250 million, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, for federal income tax purposes we operate so as to qualify as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, or the Code, as amended. As a RIC, we generally do not have to pay corporate-level taxes on any income and capital gains we distribute to our stockholders. We have several direct and indirect subsidiaries that are single member limited liability companies and wholly-owned limited partnerships established to hold certain portfolio investments or provide services to us in accordance with specific rules prescribed for a company operating as a RIC. We consolidate the financial results of our subsidiaries for financial reporting purposes, and do not consolidate the financial results of our portfolio companies.

 

On September 30, 2014, our stockholders approved a new investment advisory agreement pursuant to which Oak Hill Advisors, L.P., or OHA, was appointed as our new investment advisor, replacing NGP Investment Advisor, LP, which had been our investment advisor since our inception. In connection with this change in investment advisor, we changed our name from NGP Capital Resources Company to OHA Investment Corporation. OHA is a leading independent investment firm specializing in direct lending, high yield bonds, leveraged loans, distressed investments, mortgage strategies and corporate structured products. Managing our portfolio is an extension of OHA’s direct lending activities to middle market companies, which OHA defines as companies with annual revenue of $50 million to $1 billion. With respect to sourcing, OHA pursues selective direct origination from key financial sponsors, corporations and other sources, and it has sought to position itself as a value-added partner in club transactions. OHA believes its experience in the below investment grade credit markets positions it well to execute private deals and capture illiquidity premium and attractive, uncorrelated returns that may be found in this market.

 

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OHA expects that most of our new investments will be in senior and junior secured, unsecured and subordinated debt securities in U.S. private and public middle market companies with maturities ranging from three to seven years. However, OHA seeks to identify attractive investments throughout the capital structure and thus may invest in equity, distressed debt and other assets. From time to time, OHA may invest opportunistically in other types of investments consistent with the terms of the 1940 Act.

 

In connection with the appointment of OHA as our new investment advisor, each member of our Board of Directors resigned. In connection with their resignations, the Board of Directors appointed a new slate of five directors, including Glenn R. August (Chairman) and Robert B. Okun as “interested directors,” and Stuart I. Oran, James A. Stern and Frank V. Tannura as independent directors. The new members of the Board of Directors appointed Robert W. Long as our President and Chief Executive Officer, and L. Scott Biar remains our Chief Financial Officer, Secretary, Treasurer and Chief Compliance Officer on an interim basis.

 

On September 30, 2014, we completed the private sale of $1 million in aggregate purchase price of our common stock at an offering price of $8.53 per share to an affiliate of OHA, pursuant to the stock purchase and transaction agreement dated July 21, 2014, by and among us, OHA and the affiliate. The price per share paid by the affiliate was the net asset value per share established by our previous board of directors as of a date within 48 hours prior to the purchase, excluding the impact of certain transaction and closing expenses, and represented a 38% premium to the market price per share on such date. The OHA affiliate has also executed a stock purchase plan in accordance with Rule 10b-5-1 of the Securities Exchange Act of 1934, pursuant to which it has committed to purchase, from time to time during the 12-month period ending September 30, 2015, through open market purchases, additional shares of our common stock having an aggregate purchase price of $4 million. Through November 6, 2014, pursuant to such plan, the OHA affiliate has purchased an aggregate of 266,268 shares of our common stock in the open market at an average price of $6.38 per share, totaling $1.7 million. If the affiliate has not purchased shares of our common stock under the stock purchase plan for an aggregate purchase price of $4 million by September 30, 2015, it has agreed to purchase from us, and we have agreed to issue and sell, the remaining balance at a price per share equal to the net asset value per share of our common stock.

 

We generate revenue in the form of interest income on the debt securities and limited-term royalty interests that we own, dividend income on common or preferred stock that we own, royalty income on royalty interests that we own and capital gains or losses on debt or equity securities that we acquire in portfolio companies and subsequently sell. Our investments, if in the form of debt securities, typically have a term of three to seven years and bear interest at a fixed or floating rate, a portion of which may be paid-in-kind, or PIK, interest which is added to the principal balance. To the extent achievable, we seek to collateralize our investments by obtaining security interests in our portfolio companies’ assets. We also may acquire minority or majority equity interests in our portfolio companies, which may pay cash or paid-in-kind, or PIK, dividends on a recurring or otherwise negotiated basis. In addition, we may generate revenue in other forms including commitment, origination, structuring, administration or due diligence fees; fees for providing managerial assistance; and potentially consulting fees. We recognize any such fees generated in connection with our investments as earned.

 

Our level of investment activity can and does vary substantially from period to period depending on many factors. Some of these factors are the amount of debt and equity capital available to middle market companies, the level of acquisition and divestiture activity for such companies, the general economic environment and the competitive environment for the types of investments we make, and our own ability to raise capital to fund our investments, both through the issuance of debt and equity securities. While we currently have capital available to invest, we do not have unlimited capital. In addition, if a substantial portion of our investment portfolio were to be realized in the near term, no assurance can be given that our investment advisor will be able to source sufficient appropriate investments to timely replace the investment income from the realized investments.

 

Portfolio and Investment Activity

 

On November 4, 2014, in connection with a refinancing, Nekoosa Coated Products Holdings, Inc., or Nekoosa, prepaid its Second Lien Term Loan in the amount of $18.4 million. This prepayment included a 2%, or $0.4 million, call premium, and we will record previously unamortized original issue discount of $0.3 million as additional interest income in the fourth quarter as a result of this prepayment. This investment was initiated in April 2013 and generated an internal rate of return of 19.6% and a return on investment of 1.3x.

 

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In July 2014, Crossroads Energy Development, LLC, or Crossroads, fully repaid its Senior Secured Term Loan in the amount of $9.0 million and repurchased our overriding royalty interest and warrants in Crossroads for a combined $1.4 million, resulting in a capital gain of $1.0 million, or $0.05 per common share. This investment was outstanding for 13 months and generated an internal rate of return of 31.0% and a return on investment of 1.3x.

 

In June 2014, we sold a $3.0 million face amount portion of our Talos Production, LLC 9.75% Senior Unsecured Notes, or the Talos Notes, at an average price of 105.8% of par, resulting in a capital gain of $0.2 million, or $0.01 per common share.

 

In April 2014, we sold our $13.0 million face amount of Midstates Petroleum Company 10.75% Senior Subordinated Notes, or the Midstates Notes, at an average price of 108.1% of par, resulting in a capital gain of $0.7 million, or $0.03 per common share. Our investment in the Midstates Notes, which originated in October 2012, generated an internal rate of return of 14.6% with a return on investment of 1.2x.

 

In January 2014, we accepted a third party bid to purchase our GMX Resources, Inc., or GMX, Senior Secured Second-Priority Notes due 2018, or the GMX 2018 Notes, for $70,000. This transaction resulted in a realized capital loss of $9.4 million, or $0.47 per share, which was entirely offset by the reversal of previously recognized unrealized depreciation on this investment. GMX’s bankruptcy filing in 2013 severely impacted our investment, which generated an internal rate of return of -21.2% and a return on investment of 0.5x.

 

In 2011 and 2012, we purchased from ATP Oil & Gas Corporation, or ATP, limited-term overriding royalty interests, or ORRIs, in certain offshore oil and gas producing properties operated by ATP in the Gulf of Mexico, including $25.0 million paid on July 3, 2012. Under this arrangement, we purchased the right to portions (ranging from 5.0% to 10.8%) of the monthly production proceeds from the various oil and gas properties subject to the ORRIs in ATP’s Gomez and Telemark properties. The terms of the ORRIs provide that they will terminate after we receive production payments that equal a defined sum calculated (generally) based on our investment in the ORRIs plus a time-value factor at a rate of 13.2% per annum. On August 17, 2012, ATP filed for protection under Chapter 11 of the U.S. Bankruptcy Code. For more information, please refer to the discussion of the ATP Litigation under the heading “Legal Proceedings” in Note 6, “Commitments and Contingencies,” to the Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. As of September 30, 2014, our unrecovered investment was $27.7 million, and we had received aggregate production payments of $30.1 million subject to a disgorgement agreement. In addition, as of September 30, 2014, we had incurred legal and consulting fees totaling $4.5 million in connection with the enforcement of our rights under the ORRIs. On various occasions, we have provided notice that such legal expenses will be added to our unrecovered investment balance to the extent they are not reimbursed. To date, we have not received any payments on account of legal expenses aside from our receipt of regular monthly production payments. We add our legal expenses to the unrecovered investment balance in accordance with our transaction documents. As of September 30, 2014, $4.2 million of the $4.5 million in legal and consulting fees have been added to, and are thus included in, the unrecovered investment balance under the terms of our transaction documents. The remaining amounts of legal and consulting fees, totaling $0.3 million and $0.5 million as of September 30, 2014 and December 31, 2013, respectively, are included in accounts receivable and other current assets on our consolidated balance sheets and are, thus, not included in the unrecovered investment balance as of such dates.

 

The following table summarizes our investment activity, on a cost basis, for the nine months ended September 30, 2014 and 2013 (dollars in millions):

 

    2014     2013  
Investment portfolio, beginning of period   $ 227.9     $ 219.9  
New investments     -       78.3  
Additional investments in existing portfolio companies     3.6       9.3  
Principal repayments, realizations and settlements     (42.2 )     (74.2 )
Investment portfolio, end of period   $ 189.3     $ 233.3  
                 
Number of portfolio companies at end of period     13       16  

 

The table below shows our portfolio investments by type as of September 30, 2014 and December 31, 2013. We compute yields on investments using interest rates as of the balance sheet date and include amortization of original issue discount and market premium or discount, royalty income and other similar investment income, weighted by their respective costs when averaged. We compute the yield on income from derivatives using estimated derivative income, net of expired options costs. These yields do not include income from any investments on non-accrual status but do include the cost basis of such investments in the denominator. Such weighted average yields are not necessarily indicative of expected total returns on a portfolio.

 

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    September 30, 2014     December 31, 2013  
    Weighted                 Weighted              
    Average     Percentage of Portfolio     Average     Percentage of Portfolio  
    Yields     Cost     Fair Value     Yields     Cost     Fair Value  
Senior secured debt     9.7 %     14.2 %     11.9 %     12.6 %     15.7 %     16.8 %
Subordinated debt     13.3 %     35.9 %     40.2 %     11.1 %     41.7 %     40.5 %
Limited term royalties     13.8 %     14.8 %     15.0 %     13.8 %     12.9 %     13.7 %
Contingent earn-out     0.0 %     0.0 %     0.0 %     0.0 %     0.0 %     0.0 %
Royalty interests     161.2 %     0.0 %     0.3 %     78.2 %     0.1 %     0.5 %
Redeemable preferred units     8.0 %     26.9 %     31.8 %     8.0 %     22.6 %     25.0 %
Equity securities                                                
Membership and partnership units     0.0 %     5.6 %     0.8 %     0.0 %     4.7 %     2.8 %
Participating preferred stock     0.0 %     2.3 %     0.0 %     0.0 %     1.9 %     0.0 %
Common stock     0.0 %     0.2 %     0.0 %     0.0 %     0.2 %     0.3 %
Warrants     0.0 %     0.1 %     0.0 %     0.0 %     0.2 %     0.4 %
Total equity securities     0.0 %     8.2 %     0.8 %     0.0 %     7.0 %     3.5 %
Total portfolio investments     10.4 %     100.0 %     100.0 %     10.2 %     100.0 %     100.0 %

 

As of September 30, 2014 and December 31, 2013, the total fair value of our portfolio investments was $171.0 million and $211.4 million, respectively. Of those fair value totals, approximately $158.6 million, or 93%, as of September 30, 2014, and $181.9 million, or 86%, as of December 31, 2013, are determined using significant unobservable (i.e., Level 3) inputs.

 

Results of Operations

 

Investment Income

 

During the three months ended September 30, 2014, our total investment income was $5.6 million, decreasing by $0.4 million, or 7%, compared to $6.0 million in the corresponding period of 2013. The decrease in 2014 was primarily a result of a decrease in the size of our investment portfolio due to sales, repayments and settlements in excess of new investments between the two periods. Our portfolio balance, on a cost basis, decreased from $227.8 million at September 30, 2013 to $186.5 million at September 30, 2014, primarily as a result of net sales, redemptions and settlements in excess of new portfolio investments. Our weighted average yield decreased slightly from 10.5% at September 30, 2013 to 10.4% at September 30, 2014.

 

During the nine months ended September 30, 2014, investment income decreased by $4.5 million, or 21%, to $16.9 million compared to the same period in 2013. The decrease in 2014 is primarily attributable to “make whole” interest income earned in 2013 totaling $2.5 million from the repayments of loans to Castex Energy Development Fund, LLC, or CDF, and Resaca Exploitation, Inc., or Resaca, and as a result of lower average portfolio balances in 2014.

 

The table below summarizes our non-accruing and non-income producing investments:

 

    September 30, 2014     December 31, 2013  
(Dollars in thousands)   Cost     Fair Value     Cost     Fair Value  
Non-accruing investments                                
Chroma Exploration & Production, Inc.   $ 4,312     $ -     $ 4,312     $ 21  
GMX Resources, Inc. second-priority notes (sold in January 2014)     -       -       9,452       70  
Spirit Resources, LLC - Tranche B (non-accrual 3/31/14)     4,409       1,443        N/A        N/A  
Total non-accruing investments     8,721       1,443       13,764       91  
Non-income producing investments                                
Contour Highwall Holdings, LLC units     -       -       -       836  
Crossroads Energy Development, LLC warrants (sold in July 2014)     -       -       237       796  
Globe BG, LLC (contingent Alden Resources royalty earn-out)     -       -       -       -  
Huff Energy Holdings, Inc. warrants and overriding royalty (after pay-out)     84       90       84       84  
Myriant Corporation common stock and warrants     468       -       468       670  
NGP/OCI Investments, LLC Class A Units     2,500       1,390       2,500       1,775  
Spirit Resources, LLC preferred units     8,000       -       8,000       3,356  
Total non-income producing investments     11,052       1,480       11,289       7,517  
Total non-accruing and non-income producing investments   $ 19,773     $ 2,923     $ 25,053     $ 7,608  

 

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Operating Expenses

 

The table below summarizes the components of our operating expenses (in thousands):

 

    For The Three Months Ended     For The Nine Months Ended  
    September 30,     September 30,  
    2014     2013     2014     2013  
Interest expense and bank fees   $ 405     $ 655     $ 1,569     $ 2,468  
Management and incentive fees     1,254       1,405       3,906       4,602  
Costs related to strategic alternatives review     5,352       -       6,017       -  
Professional fees, insurance expenses and other G&A     1,333       1,262       4,798       3,847  
Total operating expenses   $ 8,344     $ 3,322     $ 16,290     $ 10,917  

 

For the three months ended September 30, 2014, operating expenses were $8.3 million, increasing $5.0 million compared to $3.3 million for the quarter ended September 30, 2013. The increase was primarily attributable to $5.4 million of costs related to our strategic alternatives review that resulted in the appointment of OHA as our new investment advisor. Interest expense and fees on our credit facilities were $0.4 million for the three months ended September 30, 2014, compared to $0.7 million for the three months ended September 30, 2013, as a result of decreased borrowing levels supporting our smaller investment portfolio. Management and incentive fees were 11% lower in the quarter ended September 30, 2014 at $1.3 million, compared to $1.4 million for the quarter ended September 30, 2013, primarily as a result of lower average total asset balances, which are the basis for the base management fee computation. Professional fees, insurance expenses and other general and administrative expenses totaled $1.3 million for the quarter ended September 30, 2014, increasing slightly compared to the quarter ended September 30, 2013, primarily as a result of the timing of costs related to our annual stockholders meeting, which was held during the third quarter in 2014 but in the second quarter in 2013.

 

In connection with the transactions surrounding the appointment of OHA as our new investment advisor, and the process of evaluating strategic alternatives which led up to it, we incurred costs totaling $5.4 million, or $0.26 per share, during the three months ended September 30, 2014, including $3.4 million of retention payments to employees of our former administrator pursuant to retention agreements entered into in September 2013 and allocated to us under the terms of the administration agreement with NGP Administration, LLC, $1.1 million for a “tail” insurance policy covering our former directors, and officers, and $0.9 million of legal and investment banking advisory fees. The additional $0.7 million, or $0.03 per share, of costs related to the strategic alternatives review incurred during the first six months of 2014 primarily included legal and professional fees. We also incurred an additional $0.6 million, or $0.03 per share, of costs related to the strategic alternatives review during the fourth quarter of 2013. Thus, the total cost incurred related to the strategic review process was $6.7 million, or $0.32 per share.

 

For the nine months ended September 30, 2014, operating expenses were $16.3 million, increasing by $5.4 million, or 50%, compared to $10.9 million for the nine months ended September 30, 2013, primarily as a result of $6.0 million of costs related to our strategic alternatives review that resulted in the appointment of OHA as our new investment advisor. Interest expense and fees on our credit facilities decreased to $1.6 million for the nine months ended September 30, 2014, compared to $2.5 million for the nine months ended September 30, 2013, as a result of decreased borrowing levels supporting our smaller investment portfolio. Management and incentive fees were 15% lower in the first nine months of 2014 at $3.9 million, compared to $4.6 million in the prior year, primarily as a result of investment income incentive fees of $0.4 million in 2013, driven by our net investment income exceeding the quarterly hurdle rate of 2% in the second quarter of 2013. Professional fees, insurance expenses and other general and administrative expenses for the nine months ended September 30, 2014 increased by $1.0 million, or 26%, to $4.8 million, compared to $3.8 million for the nine months ended September 30, 2013, primarily as a result of $0.6 million, or $0.03 per share, of administrative costs expensed upon the expiration of our shelf registration statement on Form N-2 in April 2014.

 

Operating expenses include our allocable portion of the total operating expenses incurred by us, our investment advisor and our administrator, as determined by our Board of Directors and representatives of our investment advisor and our administrator. Other general and administrative expenses include our allocated share of employee, facilities, stockholder services and marketing costs incurred by our administrator.

 

According to the terms of our previous investment advisory agreement with NGP Investment Advisor, LP, we calculated the base management fee quarterly as 0.45% of the average of our total assets (inclusive of all cash and cash equivalents without any exclusions) as of the end of the two most recent fiscal quarters. According to the terms of our new Investment Advisory Agreement with OHA, effective October 1, 2014, we will calculate the base management as 0.4375% (reduced to 0.375% in the first year) of the average of our total assets (excluding cash, cash equivalents and U.S. treasury bills that are purchased with borrowed funds solely for the purpose of satisfying quarter-end diversification requirements related to our election to be taxed as a RIC under the Code). Consequently, our base management fee, relative to our total asset balances, will be lower in future periods compared to historical levels.

 

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Under the OHA Investment Advisory Agreement, the investment income incentive fee will be calculated quarterly at a rate of 20% of quarterly net investment income above a “hurdle rate” of 1.75% per quarter (7% annualized) with a “catch up” provision. Under our previous investment advisory agreement, the investment income incentive fee was calculated at 20% of net investment income above a “hurdle rate” of 2.0% per quarter (8% annualized) with no “catch up” provision. We have not incurred any investment income incentive fees since the second quarter of 2013. However, if our operating results improve considerably in future periods and exceed the 1.75% quarterly hurdle rate, we will incur investment income incentive fees.

 

Net Investment Income (Loss)

 

For the three months ended September 30, 2014, net investment loss was $2.8 million, or $0.14 per common share, compared to net investment income of $2.6 million, or $0.13 per common share, for the three months ended September 30, 2013. The $5.4 million decrease in net investment income was primarily attributable to the $5.4 million of costs related to the strategic alternatives review process and the transactions related to the appointment of OHA as our new investment advisor.

 

For the nine months ended September 30, 2014, net investment income was $0.6 million, or $0.03 per common share, compared to $10.4 million, or $0.50 per common share, for the nine months ended September 30, 2013. The $9.8 million decrease was primarily attributable to the $6.0 million of costs related to the strategic alternatives review process and the decrease in investment income described above.

 

Net Realized Gains (Losses)

 

For the three months ended September 30, 2014, we realized net capital gains of $1.0 million, or $0.05 per common share, as a result of the realization of our overriding royalty interest and warrants in Crossroads. We did not realize any gains or losses on investments during the three months ended September 30, 2013.

 

For the nine months ended September 30, 2014, we realized net capital losses of $8.1 million, or $0.40 per common share, primarily as the result of a loss of $9.4 million on the disposition of our GMX 2018 Notes, partially offset by net realized gains on the settlement of our investments in Crossroads, the sale of our Midstates Notes and partial sale of our Talos Notes. For the nine months ended September 30, 2013, we recognized net realized capital gains of $0.8 million resulting from a $1.8 million gain from the sale of our Class B LP units of CDF and a $1.3 million gain from the sale of $10.0 million face amount of EP Energy Senior Unsecured Notes, or the EP Energy Notes, at an average price of 113.375% of par, partially offset by a $1.6 million loss from the sale of our 228,853 shares of GMX common stock at an average price of $3.28, a $0.2 million loss on the disposition of our Resaca warrants and a $0.5 million loss resulting from adjustments to liabilities recorded to satisfy obligations related to certain previously disposed investments.

 

Unrealized Appreciation or Depreciation on Investments

 

For the three months ended September 30, 2014, net unrealized depreciation on portfolio investments was $4.3 million, or $0.21 per share, primarily due to decreases in the estimated fair value of our investments in Contour Highwall Holdings, LLC, or Contour, of $3.9 million and the Crossroads investments, due to realization, of $1.4 million, offset by increases in the estimated fair value of our investments in OCI Holdings, LLC, or OCI, Subordinated Notes and Preferred Units of $0.7 million, Castex 2005, LP Preferred Units of $0.5 million and net decreases in the value of remaining investments of $0.2 million. By comparison, for the three months ended September 30, 2013, net unrealized appreciation on portfolio investments was $2.5 million, or $0.12 per share, primarily due to increases in the estimated fair value of our investments in Talos Notes of $1.3 million, Midstates Notes of $0.6 million, Crossroads ORRI and warrants totaling $0.5 million and net increases in the value of remaining investments of $0.1 million. We have lowered the estimated fair value of our Senior Secured Term Loan and equity investment in Contour to reflect the current weak industry conditions in the highwall coal mining market, and their impact on Contour’s operations, cash flows and underlying value of its assets.

 

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For the nine months ended September 30, 2014, net unrealized depreciation on portfolio investments was $5.0 million, or $0.24 per share, primarily due to decreases in the estimated fair value of our investments in Contour of $4.1 million, Spirit Resources, LLC, or Spirit, Preferred Units and Tranche B Senior Notes of $6.4 million, ATP limited-term ORRIs of $2.2 million and the reversal of previously recorded unrealized appreciation, due to realization, associated with our investments in Crossroads of $1.4 million, partially offset by the reversal of previously recorded unrealized depreciation, due to realization, associated with our investment in GMX 2018 Notes of $9.4 million and net decreases in the value of remaining investments of $0.3 million. By comparison, for the nine months ended September 30, 2013, net unrealized depreciation on portfolio investments was $10.2 million, or $0.49 per share, primarily due to decreases in the estimated fair value of our investments in GMX 2018 Notes of $7.4 million and Spirit Preferred Units and overriding royalty interests of $4.3 million, partially offset by increases in the fair value of Castex 2005 Preferred Units of $1.1 million and net increases in the fair value of our remaining investments of $0.4 million. We are involved in negotiations to liquidate Spirit’s assets, and we have lowered the fair value of our Spirit investments to reflect the status of such negotiations.

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

For the three months ended September 30, 2014, we recorded a net decrease in net assets resulting from operations of $6.1 million, or $0.30 per share, compared to a net increase in net assets resulting from operations of $5.1 million, or $0.25 per share, for the three months ended September 30, 2013. The $11.1 million, or $0.55 per share, net decrease between the two periods was primarily attributable to the $5.4 million of costs related to the strategic alternatives review process, and the $5.7 million net increase in net realized and unrealized losses on our investments, all of which are described above.

 

For the nine months ended September 30, 2014, we recorded a net decrease in net assets resulting from operations of $12.5 million, or $0.61 per share, compared to a net increase in net assets resulting from operations of $1.0 million, or $0.05 per share, for the nine months ended September 30, 2013. The $13.4 million, or $0.66 per share, net decrease between the two periods was primarily attributable to the $9.8 million reduction in net investment income, and the $3.6 million increase in net realized and unrealized losses on our investments, both of which are described above.

 

Financial Condition, Liquidity and Capital Resources

 

During the nine months ended September 30, 2014, we generated cash from operations of $1.6 million, excluding net purchases of investments, compared to $8.8 million during the comparable period of 2013. The lower amount of cash generated from operations in 2014 was primarily attributable to the $6.0 million of costs related to the strategic alternatives review in 2014 and lower cash investment income in 2014 compared to 2013.

 

Our net cash provided by operating activities for the nine months ended September 30, 2014 was $46.1 million, compared to $1.5 million for the same period of 2013. This increase in net cash provided in 2014 was primarily due to lower net purchases of investments in portfolio securities and U.S. Treasury Bills in 2014. Purchases of portfolio securities during the first nine months of 2014 totaled $2.4 million, compared to $84.9 million during the first nine months of 2013. Purchases in 2014 consisted of additional investments in existing portfolio companies. Purchases in 2013 primarily included the Talos Notes of $24.8 million, OCI Subordinated Notes and direct equity co-investment totaling $17.2 million, Nekoosa Second Lien Term Loan of $17.2 million, KOVA International, Inc. Senior Notes of $8.8 million, Crossroads Senior Secured Term Loan of $8.8 million and additional investments in existing portfolio companies totaling $8.1 million. Proceeds from the realization of investments totaled $31.6 million during the first nine months of 2014, compared to $77.6 million during the first nine months of 2013. Realizations in 2014 included Midstates Notes of $14.1 million, Crossroads Senior Secured Term Loan, ORRI and warrants totaling $10.4 million, Talos Notes of $3.2 million, ATP limited-term ORRI of $3.0 million and other realizations totaling $0.9 million. Realizations in 2013 included CDF Senior Secured Term Loan and Class B LP units of $29.3 million, Resaca Senior Unsecured Term Loan of $13.7 million, EP Energy Notes of $11.3 million, Southern Pacific Resources Corp. Term Loan of $9.7 million, ATP limited-term ORRI of $9.3 million and other realizations totaling $4.3 million. During the first nine months of 2014, we recorded net sales of U.S. Treasury Bills of $15.4 million, compared to zero in the first nine months of 2013.

 

At September 30, 2014, we had cash and cash equivalents totaling $55.6 million. At September 30, 2014, the amount outstanding under our $72.0 million Third Amended and Restated Revolving Credit Agreement, or the Investment Facility, was $57.0 million and $15.0 million was available for borrowing. We repaid $51.0 million of the balance outstanding under the Investment Facility in early October with cash on hand. As of September 30, 2014, the amount outstanding under our $30.0 million Treasury Secured Revolving Credit Agreement, or the Treasury Facility, was $30.0 million, and there was no additional amount available for borrowing. We repaid the entire balance outstanding under the Treasury Facility in October 2014 with proceeds from the sale of U.S. Treasury Bills.

 

During the nine months ended September 30, 2014, we paid cash dividends totaling $9.8 million, or $0.48 per share, to our common stockholders. In September 2014, we declared a third quarter dividend totaling $3.3 million, or $0.16 per share, which was paid in October 2014. We currently intend to continue to distribute, out of assets legally available for distribution and as determined by our Board of Directors, in the form of quarterly dividends, a minimum of 90% of our annual investment company taxable income to our stockholders.

 

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We determine the tax characteristics of our dividend distributions as of the end of the fiscal year, based on the taxable income for the full year and distributions paid during the year. Taxable income available for distribution differs from consolidated net investment income under GAAP due to (i) temporary and permanent differences in income and expense recognition, (ii) capital gains and losses, (iii) activity at taxable subsidiaries, and (iv) the timing and period of recognition regarding dividends declared in December of one year and paid in January of the following year. The tax characteristics for dividends paid in 2014 will be reported to each stockholder on Form 1099-DIV after the end of the year. Based on the information currently available, and largely as a result of the costs incurred related to the strategic review process, the final tax characteristics for dividend distributions in 2014 are expected to include ordinary taxable income and return of capital.

 

On October 31, 2011, our Board of Directors approved a stock repurchase plan, pursuant to which we may, from time to time, repurchase up to $10.0 million of our common stock in the open market at prices not to exceed net asset value during our open trading periods. Our Board of Directors authorized this plan because it believed that general market trading activity may cause our common stock to be undervalued from time to time. The repurchase program does not obligate us to purchase any shares and may be discontinued at any time. Pursuant to this plan, during 2012 and 2013, we repurchased an aggregate of 1,129,014 shares of our common stock in the open market at an average price of $6.71 per share, for total purchases of $7.6 million. We have not made any repurchases pursuant to the stock repurchase plan since May 2013. Under the terms of the stock repurchase plan, we are authorized to repurchase up to an additional $2.4 million of our common stock. Any future repurchases will be made in accordance with applicable securities laws and regulations that set certain restrictions on the method, timing, price and volume of stock repurchases and certain notice requirements.

 

Credit Facilities and Borrowings

 

On May 23, 2013, we entered into a $72.0 million Investment Facility, which replaced our previous credit facility. The total amounts outstanding under the Investment Facility were $57.0 million and $53.0 million as of September 30, 2014 and December 31, 2013, respectively. The Investment Facility was amended September 29, 2014, to permit the appointment of OHA as our new investment advisor. Substantially all of our assets except our investments in U.S. Treasury Bills are collateral for the obligations under the Investment Facility. The Investment Facility matures on May 23, 2016, and bears interest, at our option, at either (i) LIBOR plus 325 to 475 basis points, or (ii) the base rate plus 225 to 375 basis points, both based on our amounts outstanding. As of September 30, 2014, the average interest rate on our outstanding balance of $57.0 million was 3.9%, and an additional $15.0 million was available for borrowing under the Investment Facility. We repaid $51.0 million of the balance outstanding under the Investment Facility in early October 2014.

 

On March 31, 2011, we entered into a $30.0 million Treasury Facility that can only be used to purchase U.S. Treasury Bills. Proceeds from the Treasury Facility facilitate the growth of our investment portfolio and provide flexibility in the sizing of our portfolio investments. The Treasury Facility has been amended from time to time, generally to extend the expiration date and, in some cases, to revise the size of the facility. On September 24, 2014, we entered into a fifth amendment to the Treasury Facility which extended the expiration date to September 24, 2015, reduced the size of the Treasury Facility to $30.0 million, and permitted the appointment of OHA as our new investment advisor. We have the right at any time to prepay amounts outstanding under the Treasury Facility, in whole or in part, without premium or penalty. As of September 30, 2014, we had $30.0 million outstanding and no additional amount available for borrowing under the Treasury Facility, and the interest rate on our outstanding balance was 1.7%. We repaid the entire balance outstanding under the Treasury Facility in October 2014 with proceeds from the sale of U.S. Treasury Bills.

 

The Investment and Treasury Facilities contain affirmative and reporting covenants and certain financial ratio and restrictive covenants that apply to our subsidiaries and us. We complied with these covenants as of September 30, 2014 and had no existing defaults or events of default under either facility. The most restrictive covenants are:

 

· maintaining a ratio of net asset value to consolidated total indebtedness (excluding net hedging liabilities) of not less than 2.25:1.0,
· maintaining a ratio of net asset value to consolidated total indebtedness (including net hedging liabilities) of not less than 2.0:1.0,
· maintaining a ratio of EBITDA (excluding revenue from cash collateral) to interest expense (excluding interest on loans under the Treasury Facility) of not less than 3.0:1.0, and
· maintaining a ratio of collateral to the aggregate principal amount of borrowings under the Treasury Facility of not less than 1.02:1.0.

 

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In addition to proceeds from borrowings under our Investment Facility, we may also fund a portion of our investments with issuances of equity or senior debt securities. We expect our primary use of funds to be investments in portfolio companies, cash distributions to holders of our common stock and payment of operating expenses.

 

Dividends

 

We have elected to operate our business to be taxed as a RIC for federal income tax purposes. As a RIC, we generally are not required to pay corporate-level federal income taxes on any ordinary income or capital gains that we timely distribute to our stockholders as dividends. To maintain our RIC status, we must meet specific source-of-income and asset diversification requirements and distribute annually an amount equal to at least 90% of our “investment company taxable income” (which generally consists of ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses) and net tax-exempt interest. In order to avoid certain excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gain net income (i.e., realized capital gains in excess of realized capital losses) for the one-year period ended on October 31 of that calendar year, and (3) 100% of any ordinary income or capital gain net income not distributed in prior years and on which we did not pay corporate-level federal income taxes. We currently intend to make sufficient distributions to satisfy the annual distribution requirement and to avoid the excise taxes.

 

We determine the tax characteristics of our dividend distributions as of the end of the fiscal year, based on the taxable income for the full year and distributions paid during the year. Taxable income available for distribution differs from consolidated net investment income under GAAP due to (i) temporary and permanent differences in income and expense recognition, (ii) capital gains and losses, (iii) activity at taxable subsidiaries, and (iv) the timing and period of recognition regarding dividends declared in December of one year and paid in January of the following year. The tax characteristics for dividends paid in 2014 will be reported to each stockholder on Form 1099-DIV after the end of the year. Based on the information currently available, and largely as a result of the costs incurred related to the strategic review process, the final tax characteristics for dividend distributions in 2014 are expected to include ordinary taxable income and return of capital.

 

We may not achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings when applicable to us as a BDC under the 1940 Act and due to provisions in our Investment Facility. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our status as a RIC. We cannot assure stockholders that they will receive any distributions or distributions at any specific level.

 

Portfolio Credit Quality

 

At September 30, 2014, most of our portfolio investments were in negotiated, and often illiquid, securities of energy-related and middle market businesses. We maintain a system to evaluate the credit quality of these investments. While incorporating quantitative analysis, this system is a qualitative assessment. This system is intended to reflect the overall, long-term performance of a portfolio company’s business, the collateral coverage of an investment, and other relevant factors. Our rating scale ranges from 1 to 7, with 1 being the highest credit quality. Our average portfolio rating on a dollar-weighted fair market value basis was 3.7 as of September 30, 2014 and December 31, 2013. Of the 21 rated investments in 13 portfolio companies as of September 30, 2014, compared to December 31, 2013, 15 investments retained the same rating and six investments declined in rating during the first nine months of 2014. We are currently evaluating our risk rating system and may revise or replace this system in the future.

 

As of September 30, 2014, we had two investments on non-accrual status with an aggregate cost and fair value of $8.7 million and $1.4 million, respectively. Our portfolio investments at fair value were approximately 92% and 95% of the related cost basis as of September 30, 2014 and December 31, 2013, respectively.

 

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Contractual Obligations and Off-Balance Sheet Arrangements

 

The following table summarizes our contractual payment obligations at September 30, 2014 (in thousands):

 

          Less than                 More than  
Revolving credit facilities  (1)  :   Total     1 Year     1-3 Years     3-5 Years     5 Years  
 Investment Facility   $ 57,000     $ -     $ 57,000     $ -     $ -  
 Treasury Facility     30,000       30,000       -       -       -  
Total   $ 87,000     $ 30,000     $ 57,000     $ -     $ -  

 

 

(1) Excludes accrued interest amounts.

 

We have certain unused commitments to extend credit to our portfolio companies. Generally, these commitments have fixed expiration dates, and we do not expect to fund the entire amounts before they expire. Therefore, these commitment amounts do not necessarily represent future cash requirements. We do not report the unused portions of these commitments on our consolidated balance sheets. Our unused credit commitments totaled $0.3 million and $3.3 million as of September 30, 2014 and December 31, 2013, respectively.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

There have been no material changes from the information provided in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act), designed to ensure that information required to be disclosed in our reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures.

 

In connection with the preparation of this Quarterly Report on Form 10-Q, as of the end of the fiscal period covered by this Quarterly Report on Form 10-Q (September 30, 2014), we performed an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(b) and 15d-15(b) of the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of September 30, 2014, our disclosure controls and procedures were effective in providing reasonable assurance (i) that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and (ii) that such information is accumulated and communicated to management in a manner that allows timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

No changes in internal control over financial reporting occurred during the quarter ended September 30, 2014 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act).

 

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

 

The information set forth under the heading “Legal Proceedings” in Note 6, “Commitments and Contingencies,” to Notes to Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q is incorporated herein by reference.

 

Item 1A. Risk Factors.

 

During the nine months ended September 30, 2014, there have been no material changes to the risk factors disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, except as described below.

 

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Our investment advisor has not previously managed a BDC.

 

Our investment advisor has not previously managed a BDC and the investment philosophy and techniques used by our investment advisor and its investment professionals to manage us may differ from the investment philosophy and techniques employed by our previous investment advisor and its investment professionals.  In addition, the 1940 Act imposes numerous constraints on the operations of BDCs that do not apply to the other types of investment vehicles managed by our investment advisor. For example, under the 1940 Act, BDCs are generally required to invest at least 70% of their total assets primarily in securities of qualifying U.S. private or small capitalization companies. The failure to comply with these provisions in a timely manner could prevent us from qualifying as a BDC, which could be material. Our investment advisor’s lack of experience in managing a portfolio of assets under these specific constraints may hinder our ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objectives.  As a result, an investment in shares of our common stock may entail more risk than the shares of common stock of a comparable company with an investment advisor with more experience in managing a BDC.

 

There are significant potential conflicts of interest which could adversely impact our investment returns.

 

Our executive officers and directors, and certain investment professionals of our investment advisor, serve or may serve as officers, directors, principals or investment professionals of entities that operate in the same or a related line of business as we do or of investment funds managed by our affiliates. OHA and its affiliates also manage private investment funds, and may manage other funds in the future, that have investment objectives or mandates that are similar, in whole and in part, to ours. Accordingly, such individuals and OHA may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. For example, the principals of our investment advisor may face conflicts of interest in the allocation of investment opportunities to us and such other funds.

 

OHA has adopted an investment allocation policy that governs the allocation of investment opportunities among the investment funds (including us) that are managed by OHA and its affiliates. To the extent an investment opportunity is appropriate for us or any other investment fund managed by OHA or its affiliates, OHA will adhere to its investment allocation policy in order to determine the allocation of such opportunity among the various investment funds. Although OHA’s investment professionals will endeavor to allocate investment opportunities in a fair and equitable manner, we and our stockholders could be adversely affected to the extent investment opportunities are allocated among us and other investment vehicles managed or sponsored by, or affiliated with, investment professionals of OHA, our executive officers and directors.

 

The 1940 Act prohibits us from making certain negotiated co-investments with certain affiliates unless we receive an order from the SEC permitting us to do so. Prior to receiving any such exemptive order from the SEC, OHA will offer us the right to participate in all investment opportunities that it determines are appropriate for us in view of our investment objectives, policies and strategies and other relevant factors. These offers will be subject to the caveat that, in accordance with OHA’s investment allocation policy, we might not participate in each individual opportunity, but will, on an overall basis, be entitled to participate equitably with other entities managed by OHA or its affiliates.

 

OHA’s investment allocation policy is also designed to manage and mitigate conflicts of interest associated with the allocation of investment opportunities if we are able to co-invest, either pursuant to SEC interpretive positions or an exemptive order, with other funds managed by OHA or its affiliates. Generally, under the investment allocation policy, if we are permitted to co-invest pursuant to an exemptive order, co-investments would be allocated pursuant to the conditions of the exemptive order. If we are able to co-invest pursuant to SEC interpretive positions, generally, under the investment allocation policy, a portion of each opportunity that is appropriate for us and any affiliated fund will be offered to us and such other eligible accounts as determined by OHA and generally based on asset class, fund size and liquidity, among other factors. OHA seeks to treat all clients fairly and equitably such that none receive preferential treatment over the others over time, in a manner consistent with its fiduciary duty to each of them; however, in some instances, especially in instances of limited liquidity, the factors may not result in allocations or may result in situations where certain funds receive allocations where others do not.

 

In addition, because we expect to make investments alongside other investment funds, accounts and other investment vehicles managed by OHA prior to the receipt of any exemptive relief, but consistent with existing regulatory guidance and OHA’s allocation procedures, we may subsequently be prohibited by the 1940 Act from re-negotiating the terms of such co-investments, including with respect to granting loan waivers or concessions or in connection with a restructuring, reorganization or similar transaction involving the portfolio company, to the extent that other investment funds, accounts or other investment vehicles managed by OHA continue to hold such investments at the time. As a result, we may have to sell such investments at such time in order to avoid violating the 1940 Act or otherwise not participate in the re-negotiation of the terms of such co-investments, which may result in investment losses or lost opportunities to generate additional income, or may otherwise negatively impact us. 

  

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

On September 30, 2014, we issued 117,234 shares of our common stock in a private placement for an aggregate purchase price of $1 million, or $8.53 per share, to an affiliate of Oak Hill Advisors, L.P., our investment advisor, pursuant to a stock purchase and transaction agreement dated July 21, 2014, by and among us, Oak Hill Advisors, L.P. and the affiliate. The price per share paid by the affiliate was the net asset value per share established by our board of directors as of a date within 48 hours prior to the purchase, excluding the impact of certain transaction and closing expenses.

 

Item 6. Exhibits.

 

See “Index to Exhibits” following the signature page for a description of the exhibits furnished as part of this Quarterly Report on Form 10-Q.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  OHA INVESTMENT CORPORATION
     
Date:  November 7, 2014 By: /s/ ROBERT W. LONG
    Robert W. Long
    President and Chief Executive Officer
     
Date:  November 7, 2014 By: /s/ L. SCOTT BIAR
    L. Scott Biar
   

Chief Financial Officer, Treasurer, Secretary

and Chief Compliance Officer

 

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Index to Exhibits

 

Exhibit No.    Exhibit
     
10.1   Investment Advisory Agreement, dated September 30, 2014, between OHA Investment Corporation and Oak Hill Advisors, L.P. (filed as Exhibit 10.1 to our Current Report on Form 8-K filed on October 2, 2014 and incorporated herein by reference)
10.2   Administration Agreement, dated September 30, 2014, between OHA Investment Corporation and Oak Hill Advisors, L.P. (filed as Exhibit 10.2 to our Current Report on Form 8-K filed on October 2, 2014 and incorporated herein by reference)
10.3*   Form of Indemnity Agreement between the Registrant and the directors and officers of the Registrant
10.4*   First Amendment to the Third Amended and Restated Revolving Credit Agreement effective as of May 23, 2013, between the Company, the lenders from time to time party thereto and SunTrust Bank, as administrative agent
10.5*   Consent, Waiver and Fifth Amendment to the Treasury Secured Revolving Credit Agreement effective as of September 24, 2014, between the Company, the lenders from time to time party thereto and SunTrust Bank, as administrative agent
31.1*   Certification required by Rule 13a-14(a)/15d-14(a) by the Chief Executive Officer
31.2*   Certification required by Rule 13a-14(a)/15d-14(a) by the Chief Financial Officer
32.1**   Section 1350 Certification by the Chief Executive Officer
32.2**   Section 1350 Certification by the Chief Financial Officer

 

 

*Filed herewith.

**Furnished herewith.

 

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Exhibit 10.3 

 

INDEMNITY AGREEMENT

 

This Agreement effective as of the [    ] day of [                ], 2014, by and between OHA Investment Corporation, a Maryland corporation (the “ Company ”), and [                ] (“ Indemnitee ”), who is currently serving the Company in the capacity of [                ].

 

WITNESSETH:

 

WHEREAS, the Company and Indemnitee recognize that the interpretation of ambiguous statutes, regulations, and court opinions and of the Certificate of Incorporation and Bylaws of the Company, and the vagaries of public policy, are too uncertain to provide the directors and officers of the Company with adequate or reliable advance knowledge or guidance with respect to the legal risks and potential liabilities to which they may become personally exposed as a result of performing their duties in good faith for the Company; and

 

WHEREAS, the Company and the Indemnitee are aware that highly experienced and capable persons are often reluctant to serve as directors or officers of a corporation unless they are protected to the fullest extent permitted by law by comprehensive insurance or indemnification, especially since the legal risks and potential liabilities, and the threat of such risks and liabilities, associated with lawsuits filed against the officers and directors of a corporation, and the resultant substantial time, expense, harassment, ridicule, abuse, and anxiety spent and endured in defending against such lawsuits, whether or not meritorious, bear no reasonable or logical relationship to the amount of compensation received by the directors or officers from the corporation; and

 

WHEREAS, Section 2-418 of the Maryland General Corporation Law and the Certificate of Incorporation of’ the Company, which set forth certain provisions relating to the mandatory and permissive indemnification of, and advancement of expenses to, officers and directors (among others) of a Maryland corporation by such corporation, is specifically not exclusive of other rights to which those indemnified thereunder may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise, and, thus, does not by itself limit the extent to which the Company may indemnify persons serving as its officers and directors; and

 

WHEREAS, after due consideration and investigation of the terms and provisions of this Agreement and the various other options available to the Company and the Indemnitee in lieu thereof, the board of directors of the Company has determined that the following Agreement is not only reasonable and prudent but necessary to promote and ensure the best interests of the Company and its stockholders; and

 

WHEREAS, the Company desires to have Indemnitee serve or continue to serve as [                ] of the Company, free from undue concern for unpredictable, inappropriate, or unreasonable legal risks and personal liabilities by reason of his acting in good faith in the performance of his duties to the Company; and Indemnitee desires to serve, or to continue to serve (provided that he is furnished the indemnity provided for hereinafter), in such capacity.

 

NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Indemnitee, intending to be legally bound, do hereby agree as follows:

 

 
 

 

 

 

1. Agreement to Serve. Indemnitee agrees to serve or continue to serve as an [employee, director, and/or officer] of the Company, and as Indemnitee and the Company may agree, as a director, officer, employee or agent of another Enterprise, for so long as he is duly elected or appointed and qualified in accordance with the provisions of the Maryland General Corporation Law and the Articles of Incorporation and Bylaws of the Company or until such time as he tenders his resignation. The Company acknowledges that the Indemnitee is relying on this Agreement in so serving.

 

2. Definitions. As used in this Agreement:

 

(a) “ Act ” means the Investment Company Act of 1940, as amended.

 

(b) “ Change in Control ” means a change in control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Exchange, whether or not the Company is then subject to such reporting requirement; provided , however , that, without limitation, such a Change in Control shall be deemed to have occurred if (i) any “ person ” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company is or becomes the “ beneficial owner ” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 15% or more of the combined voting power of the Company’s then outstanding securities without the prior approval of at least two-thirds of the members of the board of directors of the Company in office immediately prior to such person attaining such percentage interest; (ii) there occurs a proxy contest, or the Company is a party to a merger, consolidation, sale of assets, plan of liquidation or other reorganization not approved by at least two-thirds of the members of the board of directors of the Company then in office, as a consequence of which members of the board of directors in office immediately prior to such transaction or event constitute less than a majority of the board of directors thereafter; (iii) the Company terminates the engagement of the Incumbent Advisor; or (iv) during any period of two consecutive years, other than as a result of an event described in clause (ii) of this subsection (b), individuals who at the beginning of such period constituted the board of directors of the Company (including for this purpose any new director whose election or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the board of directors.

 

(c) “ Disabling Conduct ” means Indemnitee’s willful misfeasance, bad faith, or gross negligence in the performance of his duties or reckless disregard of his obligations and duties involved in the conduct of his office.

 

 
 

 

 

 

(d) “ Disinterested Director ” means a director of the Company who is neither an “interested person” of the Company as defined in Section 2(a)(l9) of the Act nor a party to the Proceeding in respect of which indemnification is sought by Indemnitee.

 

(e) “ Enterprise ” means any corporation, partnership, limited liability company, association, joint venture, trust, employee benefit plan, or other entity.

 

(f) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

 

(g) “ Expenses ” means all expenses, including, without limitation, all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in, or otherwise involved in, a Proceeding. Should any payments by the Company under this Agreement be determined to be subject to any federal, state, or local income or excise tax, “Expenses” shall also include such amounts as are necessary to place Indemnitee in the same after-tax position, after giving effect to all applicable taxes, Indemnitee would have been in had such tax not have been determined to apply to those payments. In addition, “Expenses” shall also include Expenses incurred in connection with any appeal resulting from any Proceeding, including, without limitation, the premium, security for, and other costs relating to any cost bond, supersede as bond, or other appeal bond or its equivalent.

 

(h) “ Incumbent Advisor ” means the investment advisor, which as of September 29, 2014, is a party to an Investment Advisory Agreement with the Company and any affiliate of such advisor.

 

(i) “ Independent Counsel ” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any Person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement. The Company agrees to pay the reasonable fees and expenses of the Independent Counsel referred to above.

 

(j) “ Liabilities ” means all liabilities, including, without limitation, the amounts of any judgments, fines, penalties, excise taxes, and amounts paid in settlement.

 

(k) “ Person ” means any person or entity of any nature whatsoever, specifically including an individual, a firm, a company, a corporation, a partnership, a trust, or other entity. A Person, together with that Person’s affiliates and associates (as those terms are defined in Rule 12b-2 under the Exchange Act), and any Persons acting as a partnership, limited partnership, joint venture, association, syndicate, or other group (whether or not formally organized), or otherwise acting jointly or in concert or in a coordinated or consciously parallel manner (whether or not pursuant to any express agreement), for the purpose of acquiring, holding, voting, or disposing of securities of the Company with such Person, shall be deemed a single “Person.”

 

 
 

 

 

 

(l) “ Potential Change in Control ” means if (i) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) any Person, including the Company, publicly announces an intention to take or to consider taking actions that, if consummated, would constitute a Change in Control; or (iii) the Board of Directors of the Company adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred.

 

(m) “ Proceeding ” means any threatened, pending, or completed claim, action (including any action by or in the right of the Company), suit, or proceeding, whether formal or informal, civil, criminal, administrative, legislative, arbitrative, or investigative, any appeal in such a claim, action, suit, or proceeding, and any inquiry or investigation that could lead to such a claim, action, suit, or proceeding irrespective of the initiator thereof. The final disposition of a Proceeding shall be as determined by a settlement or the judgment of a court or other investigative or administrative body. The Board of Directors shall not make a determination as to the final disposition of a Proceeding.

 

(n) “ Serving at the request of the Company ” means any Person serving at the request of the Company as a director, officer, employee, agent, fiduciary, or other representative of another Enterprise including any service as a director, officer, employee, or agent of the Company that imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a Person who acts in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Company” as referred to in this Agreement.

 

3. Indemnity in Third Party Proceedings. The Company shall indemnify Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is a party to or is threatened to be made a party to or is otherwise involved in any Proceeding (other than a Proceeding by or in the right of the Company to procure a judgment in its favor) by reason of the fact that Indemnitee is or was an employee, director, and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent, fiduciary, or other representative of another Enterprise, against all Expenses and Liabilities actually and reasonably incurred by Indemnitee (or on his behalf) in connection with such Proceeding or any claim, issue, or matter therein, unless it is determined pursuant to Section 8 of this Agreement or by the court having jurisdiction in the matter, that (a) the act or omission of Indemnitee was material in the matter giving rise to the Proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty, (b) Indemnitee actually received an improper personal benefit in money, property, or services, (c) with respect to any criminal Proceeding, Indemnitee had reasonable cause to believe his conduct was unlawful, or (d) the Expense or Liability arose by reason of Indemnitee’s Disabling Conduct. The termination of any Proceeding or of any claim, issue, or matter therein, by judgment, order, or settlement, shall not, of itself, adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee acted in a manner contrary to that specified above. Indemnitee shall have the right to employ Indemnitee’s own legal counsel in any Proceeding for which indemnification is available under this Section 3.

 

 
 

 

 

 

4. Indemnity in Proceedings By or In the Right of the Company. The Company shall indemnify Indemnitee in accordance with the provisions of this Section 4 if Indemnitee is a party to or is threatened to be made a party to or otherwise involved in any Proceeding by or in the right of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was an employee, director, and/or officer of the Company, or is or was serving, at the request of the Company, as a director, officer, employee, agent, fiduciary, or other representative of another Enterprise, against all Expenses actually and reasonably incurred by Indemnitee (or on his behalf) in connection with such Proceeding unless it is determined that (a) the act or omission of Indemnitee was material in the matter giving rise to the Proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty, (b) Indemnitee actually received an improper personal benefit in money, property or services, or (c) the Expense arose by reason of Indemnitee’s Disabling Conduct, except that no indemnification shall be made under this Section 4 in respect of any claim, issue, or matter as to which Indemnitee shall have been adjudged to be liable to the Company unless and only to the extent that the Maryland court of competent jurisdiction in which such Proceeding was brought or is pending, shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity as the Maryland court of competent jurisdiction in which such Proceeding was brought or such other court shall deem proper. Indemnitee shall have the right to employ Indemnitee’s own legal counsel in any Proceeding for which indemnification is available under this Section 4.

 

5. Indemnification for Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of the fact that Indemnitee is or was an employee, director, and/or officer of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent, fiduciary, or other representative of another Enterprise, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by Indemnitee (or on his behalf) in connection therewith.

 

6. Indemnification for Expenses of Successful Party. Notwithstanding any other provision of this Agreement to the contrary, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding referred to in Sections 3 and/or 4 of this Agreement, or in defense of any claim, issue, or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by Indemnitee (or on his behalf) in connection therewith. If Indemnitee is not wholly successful in any Proceeding referred to in Sections 3 and/or 4 of this Agreement, but is successful on the merits or otherwise (including dismissal without prejudice) as to one or more, but less than all claims, issues, or matters therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by Indemnitee (or on his behalf) in connection with each successfully resolved claim, issue or matter. For purposes of this Section 6, and without limitation, the termination of any claim, issue, or matter in any Proceeding referred to in Sections 3 and/or 4 of this Agreement by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue, or matter. 

   

 
 

 

 

7. Advances of Expenses. To the fullest extent permitted by applicable law, the Expenses incurred by Indemnitee pursuant to Sections 3 and/or 4 of this Agreement in connection with any Proceeding or any claim, issue or matter therein shall be paid by the Company in advance of the final disposition of such Proceeding or any claim, issue, or matter therein no later than 10 days after receipt by the Company of a written affirmation by Indemnitee of Indemnitee’s good faith belief that the standard of conduct necessary for indemnification by the Company as authorized by law and by this Agreement has been met and an undertaking by or on behalf of Indemnitee (“Indemnitee Undertaking”) to repay such amount to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Company. The Indemnitee Undertaking, which shall not be secured and shall be interest free, shall be substantially on the form of Exhibit A to this Agreement. For so long as the Company is subject to the Act, any advancement of Expenses shall be subject to at least one of the following as a condition of the advancement: (a) Indemnitee shall provide a security for his undertaking, (b) the Company shall be insured against losses arising by reason of any lawful advances or (c) a majority of a quorum of Disinterested Directors of the Company, or Independent Counsel in a written opinion, shall determine, based on a review of readily available facts (as opposed to a trial-type inquiry), that there is reason to believe Indemnitee ultimately will be found entitled to indemnification. Any judgments, lines, or amounts to be paid in settlement of any Proceeding shall also be advanced by the Company upon request by Indemnitee. If the Company advances or pays any amount to Indemnitee under Section 3, 4, 5, 6, or 7 and if Indemnitee shall thereafter receive all or a portion of such amount under one or more policies of directors and officers liability insurance maintained by the Company or pursuant to a trust fund, letter of credit, or other security or funding arrangement provided by the Company, Indemnitee shall promptly repay such amount or such portion thereof, as the case may be, to the Company.

 

8. Procedure for Determination of Entitlement to Indemnification.

 

(a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request.

 

(b) Upon written request by Indemnitee for indemnification pursuant to Section 8(a) hereof, a reasonable determination, based upon a review of the facts, with respect to Indemnitee’s entitlement to indemnification under Section 3, 4, 5, or 6 hereof shall be made in the specific case: (i) if a Change in Control shall have occurred, by Independent Counsel in a written opinion to the board of directors of the Company, a copy of which shall be delivered to Indemnitee; or (ii) if a Change in Control shall not have occurred, (A) by a majority vote of a quorum of the Disinterested Directors, or (B) if a quorum of Disinterested Directors cannot be obtained or, even if obtainable, if the Disinterested Directors so direct, by Independent Counsel in a written opinion to the board of directors of the Company, a copy of which shall be delivered to Indemnitee; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within 10 days after such determination. Any costs or expenses (including attorneys’ fees and disbursements) incurred by Indemnitee in cooperating with the Person or Persons making the determination discussed in this Section 8(b) with respect to Indemnitee’s entitlement to indemnification, shall be borne by the Company (respective of the determination as to Indemnitee’s entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.

 

 
 

  

(c) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 8(b) hereof, the Independent Counsel shall be selected as provided in this Section 8(c). If a Change in Control shall not have occurred, the Independent Counsel shall be selected by the board of directors of the Company, and the Company shall give written notice to Indemnitee advising him of the identity of the Independent Counsel so selected. If a Change in Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the board of directors of the Company, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided , however , that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “ Independent Counsel ” as defined in this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the Person so selected shall act as Independent Counsel. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 8(b) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Maryland court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Indemnitee to the other’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a Person selected by the Court or by such other Person as the Court shall designate, and the person with respect to whom all objections are so resolved or the Person so appointed shall act as Independent Counsel under Section 8(a) hereof.

 

(d) Indemnitee will be deemed a party to a Proceeding for all purposes hereof if Indemnitee is named as a defendant or respondent in a complaint or petition for relief in that Proceeding, regardless of whether Indemnitee is ever served with process or makes an appearance in that Proceeding.

 

9. Presumptions and Effect of Certain Provisions.  (a) In making a determination with respect to entitlement to indemnification hereunder, the Person or Persons making such determination shall presume, in the absence of a final decision on the merits by a court or other body before whom a Proceeding was brought, that the Indemnitee has not met the applicable standard of conduct or is not entitled to indemnification under this Agreement, if Indemnitee has submitted a request for indemnification in accordance with Section 8(a) of this Agreement, and the Company shall have the burden of proof in overcoming such presumption by clear and convincing evidence. Neither the failure of the Company (including the board of directors or independent legal counsel) to have made a determination prior to the commencement of such action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including its board of directors or independent legal counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.

 

 
 

  

(b) If the Person or Persons empowered or selected under Section 8 of this Agreement to determine whether Indemnitee is entitled to indemnification shall not have made a determination within 30 days after receipt by the Company therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided , however , that such 30-day period may be extended for a reasonable time, not to exceed an additional 15 days, if the Person or Persons making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating of documentation and/or information relating thereto.

 

(c) For purposes of any determination of whether (i) the act or omission of Indemnitee was material in the matter giving rise to the Proceeding and (A) was committed in bad faith or (B) was the result of active and deliberate dishonesty, (ii) Indemnitee actually received an improper personal benefit in money, property, or services, or (iii) with respect to any criminal Proceeding, Indemnitee had reasonable cause to believe his conduct was unlawful (collectively, “ Good Faith ”), Indemnitee shall be deemed to have acted in Good Faith if Indemnitee’s action is based on the records or books of account of the Company or another Enterprise of which Indemnitee is or was serving at the request of the Company as a director, officer, employee, agent, fiduciary, or other representative, information, opinions, reports, or statements, including financial statements and other financial information, concerning the Enterprise or any other Person that were prepared or supplied to Indemnitee by: (i) one or more officers or employees of the Enterprise; (ii) appraisers, engineers, investment bankers, legal counsel, or other Persons as to matters Indemnitee reasonably believed were within the professional or expert competence of those Persons; and (iii) any committee of the Board of Directors or equivalent managing body of the Enterprise of which Indemnitee is or was, at the relevant time, not a member. The provisions of this Section 9(c) shall not be deemed to be exclusive or to limit in any way the other circumstances in which the Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement.

 

(d) The knowledge and/or actions, or failure to act, of any director, officer, agent, or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement.

 

 
 

  

 

10. Establishment of a Trust. In the event of a Potential Change in Control or a Change in Control, the Company shall, upon written request by Indemnitee, create a trust for the benefit of Indemnitee (the “Trust”) and from time to time upon written request of Indemnitee shall fund the Trust in an amount equal to all Expenses and Liabilities reasonably anticipated at the time to be incurred in connection with any Proceeding. The amount to be deposited in the Trust pursuant to the foregoing funding obligation shall be determined by the party determining the Indemnitee’s entitlement to indemnification pursuant to Section 8. The terms of the Trust shall provide that, upon a Change in Control, (a) the Trust shall not be revoked or the principal thereof invaded, without the written consent of Indemnitee; (b) the trustee of the Trust shall advance, within 10 days of a request by Indemnitee, any and all Expenses to Indemnitee (and Indemnitee hereby agrees to reimburse the Trust under the circumstances in which Indemnitee would be required to reimburse the Company for Expenses under this Agreement); (c) the Trust shall continue to be funded by the Company in accordance with the funding obligation set forth above; (d) the trustee of the Trust shall promptly pay to Indemnitee all amounts for which Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise; and (e) all unexpended funds in that Trust shall revert to the Company upon a final determination by the party determining the Indemnitee’s entitlement to indemnification pursuant to Section 8 or a court of competent jurisdiction, as the case may be, that Indemnitee has been fully indemnified under the terms of this Agreement. The trustee of the Trust shall be chosen by Indemnitee. Nothing in this Section 10 shall relieve the Company of any of its obligations under this Agreement.

 

11. Remedies of Indemnitee.

 

(a) In the event that (i) a determination is made pursuant to Section 8(b) of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 7 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 8(b) of this Agreement within the time period provided in Section 9(b) after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 5, Section 6, or the last sentence of Section 8(b) of this Agreement within 10 days after receipt by the Company of a written request therefor, or (v) payment of indemnification pursuant to Section 3 or Section 4 of this Agreement is not made within 10 days after a determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an adjudication by the Maryland court of competent jurisdiction of his entitlement to such indemnification or advancement of Expenses and appeals therefrom, concluding in a final and unappealable judgment. The Company shall not oppose Indemnitee’s right to seek any such adjudication.

 

(b) In the event that a determination shall have been made pursuant to Section 8(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section 11 shall be conducted in all respects as a de novo trial on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination.

 

(c) If a determination shall have been made pursuant to Section 8(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 11, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law.

 

 
 

  

 

(d) In the event that Indemnitee, pursuant to this Section 11, seeks a judicial adjudication of his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall he indemnified by the Company against, any and all expenses (of the types described in the definition of Expenses in Section 2(d) of this Agreement) actually and reasonably incurred by him in such judicial adjudication, but only if (and only to the extent) he prevails therein. If it shall be determined in said judicial adjudication that Indemnitee is entitled to receive part but not all of the indemnification or advancement of Expenses sought, the expenses incurred by Indemnitee in connection with such judicial adjudication shall be appropriately prorated.

 

(e) The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 11 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement.

 

12. Indemnification and Advancement of Expenses Under this Agreement Not Exclusive; Survival of Rights. The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Certificate of Incorporation or Bylaws of the Company, any other agreement, any vote of stockholders or Disinterested Directors, the Maryland General Corporation Law, or otherwise. No amendment, alteration, or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee prior to such amendment, alteration or repeal. To the extent that a change in the Maryland General Corporation Law, whether by statute or judicial decision, permits greater indemnification or advancement of Expenses than would be afforded currently under the Certificate of Incorporation of the Company and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change, No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.

 

13. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification or to receive advancement by the Company for a portion of the Expenses or Liabilities actually and reasonably incurred by Indemnitee (or on his behalf) in connection with such Proceeding, or any claim, issue, or matter therein, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.

 

14. Rights Continued . The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall continue as to Indemnitee even though Indemnitee may have ceased to be a director or officer of the Company and shall inure to the benefit of Indemnitee’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

 

 
 

  

15. No Construction as an Employment Agreement or Any Other Commitment. Nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained as an employee or as an officer of the Company or any of its subsidiaries, if Indemnitee currently serves as an officer of the Company, or to be renominated or reelected as a director of the Company, if Indemnitee currently serves as a director of the Company.

 

16.  Liability Insurance. To the extent the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents of the Company or of another Enterprise that such Person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms, to the maximum extent of the coverage available for any director, officer, employee, or agent under such policy or policies.

17. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable under this Agreement if, and to the extent that, Indemnitee has otherwise actually received such payment under any contract, agreement, or insurance policy, the Certificate of Incorporation or Bylaws of the Company, or otherwise.

 

18. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including, without limitation, the execution of such documents as may be necessary to enable the Company effectively to bring suit to enforce such rights.

 

19. Exceptions. Notwithstanding any other provision in this Agreement, but except as provided in Section 11(d), the Company shall not be obligated pursuant to the terms of this Agreement, to indemnify or advance Expenses to Indemnitee with respect to any Proceeding, or any claim, issue, or matter therein, (i) brought or made by Indemnitee, unless the bringing of such Proceeding or the making of such claim, issue, or matter shall have been approved by the Board of Directors of the Company, or (ii) in which final judgment is rendered against Indemnitee for an accounting of profits made from the purchase and sale or the sale and purchase by Indemnitee of securities of the Company pursuant to the provisions of Section 17(b) of the Exchange Act, or similar provisions of any federal, state, or local statute.

 

20. Notices. Any notice or other communication required or permitted to be given or made to the Company or Indemnitee pursuant to this Agreement shall be given if made in writing and deposited in the United States mail, with postage thereon prepaid, addressed to the Person to whom such notice or communication is directed at the address of such Person on the records of the Company, and such notice or communication shall be deemed given or made at the time when the same shall be so deposited in the United States mail. Any such notice or communication to the Company shall be addressed to the Secretary of the Company. 

 

 

 
 

 

21. Contractual Rights. The right to be indemnified or to receive advancement of Expenses under this Agreement (i) is a contract right based upon good and valuable consideration, pursuant to which Indemnitee may sue, (ii) is and is intended to be retroactive and shall be available as to events occurring prior to the date of this Agreement, and (iii) shall continue after any rescission or restrictive modification of this Agreement as to events occurring prior thereto.

 

22. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby; to the fullest extent possible, the provisions of this Agreement shall be construed so as to give effect to the intent manifested by the provisions held invalid, illegal or unenforceable; and those provision or provisions held to be invalid, illegal or unenforceable for any reason whatsoever shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto.

 

23. Successors; Binding Agreement. The Company shall require and cause any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company, by written agreement in form and substance reasonably satisfactory to Indemnitee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that executes and delivers the agreement provided for in this Section 23 or that otherwise becomes bound by the terms and provisions of this Agreement by operation of law. This Agreement shall be binding upon the Company and its successors and assigns (including, without limitation, any direct or indirect successor by purchase, merger, consolidation, or otherwise to all or substantially all of the business or assets of the Company) and will inure to the benefit of Indemnitee (and Indemnitee’s spouse, if Indemnitee resides in Texas or another community property state), heirs, executors, and administrators.

 

24. Counterparts, Modification, Headings, Gender.

 

(a) This Agreement may be executed in counterparts, each of which shall constitute one and the same instrument, and either party hereto may execute this Agreement by signing any such counterpart.

 

(b) No provisions of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing and signed by Indemnitee and an appropriate officer of the Company. No waiver by any party at any time of any breach by any other party of, or compliance with, any condition or provision of this Agreement to be performed by any other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or at any prior or subsequent time.

 

(c) Section headings are not to be considered part of this Agreement, are solely for convenience of reference, and shall not affect the meaning or interpretation of this Agreement or any provision set forth herein.

 

 
 

 

 

 

(d) Pronouns in masculine, feminine, and neuter genders shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires.

 

25. Exclusive Jurisdiction; Governing Law. The Company and Indemnitee agree that all disputes in any way relating to or arising under this Agreement, including, without limitation, any action for advancement of Expenses or indemnification, shall be litigated, if at all, exclusively in the Maryland courts, and if necessary, the corresponding appellate courts. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Maryland applicable to contracts made and to be performed in such state without giving effect to the principles of conflicts of laws. The Company and Indemnitee (i) expressly submit themselves to the personal jurisdiction of the Maryland courts for purposes of any action or proceeding arising out of or in connection with this Agreement, (ii) irrevocably appoint, to the extent such party is not a resident of the State of Maryland, The Corporation Trust Incorporated as its agent in the State of Maryland as such party’s agent for acceptance of legal process in connection with any such action or proceeding against such party with the same legal force and validity as if served upon such party personally within the State of Maryland, (iii) waive any objection to the laying of venue of any such action or proceeding in the Maryland court of competent jurisdiction, and (iv) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Maryland court of competent jurisdiction has been brought in an improper or otherwise inconvenient forum.

 

26. Duration of Agreement. This Agreement shall continue until and terminate upon the later of: (a) 10 years after the date that Indemnitee shall have ceased to serve as a director and/or officer of the Company or director, officer, employee or agent of any Enterprise which Indemnitee served at the request of the Company; or (b) one year after the final, nonappealable termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 11 of this Agreement relating thereto.

 

27. Contribution. If it is established, under Section 8 or otherwise, that Indemnitee has the right to be indemnified under this Agreement in respect of any claim, but that right is unenforceable by reason of applicable law or public policy, then, to the fullest extent applicable law permits, the Company, in lieu of indemnifying or causing the indemnification of Indemnitee under this Agreement and to the extent permitted under Section 17(h) of the Act, will contribute to the amount Indemnitee has incurred, whether for Liabilities or for Expenses reasonably incurred, in connection with that Proceeding, in such proportion as is deemed fair and reasonable in light of all the circumstances of that Proceeding in order to reflect:

 

(a) the relative benefits Indemnitee and the Company have received as a result of the event(s) or transactions(s) giving rise to that Proceeding; or

 

(b) the relative fault of Indemnitee and of the Company and its other functionaries in connection with those event(s) or transaction(s).

 

28. Investment Company Act of 1940. Notwithstanding anything to the contrary in this Agreement, for so long as the Company is subject to the Act, the Company shall not indemnify or advance Expenses to Indemnitee to the extent such indemnification or advance would violate the Act.

 

 
 

 

 

 

IN WITNESS WHEREOF, the Company and Indemnitee have executed this Agreement as of the date and year first above written.

 

OHA INVESTMENT CORPORATION

 

By:                                                                    

Name:
Title:

 

 

 

INDEMNITEE

 

                                                                   

Name:

 

 
 

 

EXHIBIT A

 

INDEMNITEE’S UNDERTAKING

 

_______________, 20__

 

 

OHA Investment Corporation
[ Address ]

 

Re: Indemnity Agreement

 

Ladies and Gentlemen:

 

Reference is made to the Indemnity Agreement dated as of ____________ __, 20__, by and between OHA Investment Corporation and the undersigned Indemnitee (the “ Agreement ”), and particularly to Section 7 thereof relating to advance payment by the Company of certain Expenses incurred by the undersigned Indemnitee. Capitalized terms used and not otherwise defined in this Indemnitee’s Undertaking shall have the respective meanings given to such terms in the Agreement.

 

The types and amounts of Expenses incurred by or on behalf of the undersigned Indemnitee are itemized on