As filed with the Securities and Exchange Commission on August 7, 2015
(Exact Name of Registrant as Specified in Charter)
(Address and Telephone Number of Principal Executive Offices)
(Name and Address of Agent for Service)
Copy to:
Harry S. Pangas, Esq.
Sutherland Asbill & Brennan LLP
700 Sixth Street, N.W., Suite 700
Washington, DC 20001-3980
Telephone: (202) 383-0100
Facsimile: (202) 637-3593
Approximate Date of Proposed Public Offering:
From time to time after the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box. þ
It is proposed that this filing will become effective (check appropriate box)
x when declared effective pursuant to Section 8(c)
Title of Securities Being Registered | Proposed Maximum Aggregate Offering Price(1) | Amount of Registration Fee(7) |
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Common Stock, $0.01 par value per share(2)(3) | ||||||||
Preferred Stock, $0.01 par value per share(2) | ||||||||
Warrants(4) | ||||||||
Debt Securities(5) | ||||||||
Total(6) | $ | 250,000,000 | (7) | $ | 34,100 |
(1) | Estimated pursuant to Rule 457(o) under the Securities Act of 1933 solely for the purpose of determining the registration fee. The proposed maximum offering price per security will be determined, from time to time, by the Registrant in connection with the sale by the Registrant of the securities registered under this Registration Statement. |
(2) | Subject to Note 7 below, there is being registered hereunder an indeterminate number of shares of common stock or preferred stock as may be sold, from time to time. |
(3) | Includes such indeterminate number of shares of common stock as may be issued, from time to time, upon conversion or exchange of other securities registered hereunder, to the extent any such securities are, by their terms, convertible or exchangeable for common stock. |
(4) | Subject to Note 7 below, there is being registered hereunder an indeterminate number of warrants as may be sold, from time to time, representing rights to purchase common stock, preferred stock or debt securities. |
(5) | Subject to Note 7 below, there is being registered hereunder an indeterminate number of debt securities as may be sold, from time to time. If any debt securities are issued at an original issue discount, then the offering price shall be in such greater principal amount as shall result in an aggregate price to investors not to exceed $250,000,000. |
(6) | In no event will the aggregate offering price of all securities issued from time to time pursuant to this Registration Statement exceed $250,000,000. |
(7) | Previously paid. |
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Prospectus
We are an internally managed, non-diversified closed-end investment company that is regulated as a business development company (BDC) under the Investment Company Act of 1940 (the 1940 Act). We have three principal areas of investment.
First, we originate, structure, and invest in senior secured term loans, mezzanine debt and selected equity securities primarily in privately-held middle market companies (the Debt Securities Portfolio).
Second, we have invested in asset management companies Katonah Debt Advisors, L.L.C and Trimaran Advisors, L.L.C., as well as affiliated management companies Katonah 2007-1 Management, L.L.C., Katonah X Management, L.L.C. and Trimaran Advisors Management L.L.C., collectively the Asset Manager Affiliates).
Third, we invest in debt and equity securities issued by collateralized loan obligation funds (CLO Funds) managed by our Asset Manager Affiliates or by other asset managers (the CLO Fund Securities).
In our Debt Securities Portfolio, our investment objective is to generate current income and, to a lesser extent, capital appreciation from the investments made in senior secured term loans, mezzanine debt and selected equity investments in privately-held middle market companies. We define the middle market as comprising companies with earnings before interest, taxes, depreciation and amortization (EBITDA) of $10 million to $50 million and/or total debt of $25 million to $150 million. We primarily invest in first and second lien term loans which, because of their priority in a companys capital structure, we expect will have lower default rates and higher rates of recovery of principal if there is a default and therefore we expect them to generate a stable stream of interest income. The investments in our Debt Securities Portfolio are all or predominantly below investment grade, which are often referred to as junk, and have speculative characteristics with respect to the issuers capacity to pay interest and repay principal. While our primary investment focus is making loans to, and selected equity investments in, privately-held middle market companies, we may also invest in other investments such as loans to smaller companies or larger, publicly-traded companies, high-yield bonds and distressed debt securities. We may also receive warrants or options to purchase common stock in connection with our debt investments.
With respect to our Asset Manager Affiliates investment, we expect to receive recurring cash distributions and to generate capital appreciation through the addition of new CLO Funds managed by our Asset Manager Affiliates. The Asset Manager Affiliates manage CLO Funds that invest in broadly syndicated loans, high-yield bonds and other credit instruments. Collectively, the Asset Manager Affiliates have approximately $3.2 billion of par value assets under management. The Asset Manager Affiliates are registered under the Investment Advisers Act of 1940, and are managed independently from the Company by a separate portfolio management team.
In addition, our investments in CLO Fund Securities, which are primarily made up of minority investments in the subordinated securities or preferred stock of CLO Funds raised and managed by our Asset Manager Affiliates, are anticipated to provide the Company with recurring cash distributions and complement the growth of our Asset Manager Affiliates.
We may offer, from time to time in one or more offerings, up to $250,000,000 of shares of our common stock, preferred stock, debt securities or warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, which we refer to collectively as the securities. Our securities may be offered at prices and on terms to be disclosed in one or more supplements to this prospectus. You should read this prospectus and the applicable prospectus supplement carefully before you invest in our securities.
Our securities may be offered directly to one or more purchasers through agents designated from time to time by us, or to or through underwriters or dealers. The prospectus supplement relating to the offering will identify any agents or underwriters involved in the sale of our securities, and will disclose any applicable purchase price, fee, commission or discount arrangement between us and our agents or underwriters or among our underwriters or the basis upon which such amount may be calculated. See Plan of Distribution. We may not sell any of our securities through agents, underwriters or dealers without delivery of this prospectus and a prospectus supplement describing the method and terms of the offering of such securities.
Our common stock is traded on the NASDAQ Global Select Market under the symbol KCAP. On August 5, 2015, the last reported sales price on the NASDAQ Global Select Market for our common stock was $5.16 per share. We are required to determine the net asset value per share of our common stock on a quarterly basis. The net asset value per share of our common stock as of June 30, 2015 was $6.96.
Please read this prospectus and any accompanying prospectus supplement before investing and keep it for future reference. This prospectus and any accompanying prospectus supplement contain important information about us that a prospective investor should know before investing in our securities. We file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission. This information is available free of charge by contacting us at 295 Madison Avenue, 6th Floor, New York, New York 10017, by telephone at (212) 455-8300, or on our website at http://www.kcapinc.com. The information on our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus. The SEC also maintains a website at www.sec.gov that contains such information.
Shares of closed-end investment companies such as ours frequently trade at a discount to their net asset value. This risk is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether our common stock will trade above, at or below net asset value. At a special meeting of our stockholders held on July 20, 2015 and to be continued on August 17, 2015, our stockholders will vote on a proposal to authorize us, with approval of our Board of Directors, to sell shares of our common stock at a price below the then current net asset value per share of such common stock, subject to certain limitations, including, but not limited to, our policy that we shall not seek approval from our Board of Directors to sell or otherwise issue more than 15% of our then outstanding shares of common stock at a price below its then current net asset value per share. If such proposal is approved, it will allow us to issue common stock at a price below net asset value per share until the earlier of the twelve-month period following such approval and our 2016 annual meeting of stockholders. Sales of common stock at prices below net asset value per share dilute the interests of existing stockholders, have the effect of reducing our net asset value per share and may reduce our market price per share. See Sales of Common Stock Below Net Asset Value in this prospectus.
Investing in our securities is speculative and involves numerous risks, including the risks associated with the use of leverage. For more information regarding these risks, please see Risk Factors beginning on page 15 of this prospectus.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or determined if either this prospectus or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is [ ], 2015.
This prospectus is part of a registration statement that we have filed with the Securities and Exchange Commission, or SEC, using the shelf registration process. Under the shelf registration process, we may offer, from time to time, up to $250,000,000 of our securities on terms to be determined at the time of the offering. This prospectus provides you with a general description of the securities that we may offer. Each time we use this prospectus to offer securities, we will provide a prospectus supplement that will contain specific information about the terms of that offering. The prospectus supplement may also add, update or change information contained in this prospectus. Please carefully read this prospectus and any accompanying prospectus supplement together with the additional information described under Risk Factors and Available Information before you make an investment decision.
No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus or any accompanying supplement to this prospectus. You must not rely on any unauthorized information or representations not contained in this prospectus or any accompanying prospectus supplement as if we had authorized it. This prospectus and any accompanying prospectus supplement do not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered securities to which they relate, nor do they constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The information contained in this prospectus and any accompanying prospectus supplement is accurate as of the dates on their respective covers. Our financial condition, results of operations and prospects may change subsequent to such dates. To the extent required by law, we will amend or supplement the information contained in this prospectus and any accompanying prospectus supplement to reflect any material changes to such information subsequent to the date of this prospectus and any accompanying prospectus supplement and prior to the completion of any offering pursuant to this prospectus and any accompanying prospectus supplement.
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KCAP Financial, Inc., our logo and other trademarks of KCAP Financial, Inc., mentioned in this prospectus are the property of KCAP Financial, Inc. All other trademarks or trade names referred to in this prospectus are the property of their respective owners.
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This summary highlights some of the information in this prospectus and may not contain all of the information that is important to you. You should read carefully the more detailed information set forth under Risk Factors and the other information included in this prospectus. In this prospectus, unless the context otherwise requires, the terms the Company, KCAP Financial, we, us and our refer to KCAP Financial, Inc., in each case together with our wholly-owned portfolio companies Katonah Debt Advisors, L.L.C., Trimaran Advisors, L.L.C. and Trimaran Advisors Management, L.L.C. Katonah Debt Advisors refers to Katonah Debt Advisors, L.L.C. and related affiliates controlled by us. Trimaran Advisors refers to Trimaran Advisors, L.L.C. and related affiliates controlled by us. Trimaran Advisors Management refers to Trimaran Advisors Management, L.L.C.
We are an internally managed, non-diversified closed-end investment company that is regulated as a business development company (BDC) under the Investment Company Act of 1940 (the 1940 Act). We have three principal areas of investment.
First, we originate, structure, and invest in senior secured term loans, mezzanine debt and selected equity securities primarily in privately-held middle market companies (the Debt Securities Portfolio).
Second, we have invested in asset management companies (Katonah Debt Advisors and Trimaran Advisors, as well as affiliated management companies Katonah 2007-1 Management, L.L.C., Katonah X Management, L.L.C. and Trimaran Advisors Management, L.L.C., collectively the Asset Manager Affiliates).
Third, we invest in debt and equity securities issued by collateralized loan obligation funds (CLO Funds) managed by our Asset Manager Affiliates or by other asset managers (the CLO Fund Securities).
In our Debt Securities Portfolio, our investment objective is to generate current income and, to a lesser extent, capital appreciation from the investments made by our middle market business in senior secured term loans, mezzanine debt and selected equity investments in privately-held middle market companies. We define the middle market as comprising companies with earnings before interest, taxes, depreciation and amortization (EBITDA) of $10 million to $50 million and/or total debt of $25 million to $150 million. We primarily invest in first and second lien term loans which, because of their priority in a companys capital structure, we expect will have lower default rates and higher rates of recovery of principal if there is a default and therefore we expect them to generate a stable stream of interest income. The investments in our Debt Securities Portfolio are all or predominantly below investment grade, and have speculative characteristics with respect to the issuers capacity to pay interest and repay principal. While our primary investment focus is making loans to, and selected equity investments in, privately-held middle market companies, we may also invest in other investments such as loans to smaller companies or larger, publicly-traded companies, high-yield bonds and distressed debt securities. We may also receive warrants or options to purchase common stock in connection with our debt investments.
With respect to our Asset Manager Affiliates investment, we expect to receive recurring cash distributions and to generate capital appreciation through the addition of new CLO Funds managed by our Asset Manager Affiliates. The Asset Manager Affiliates manage CLO Funds that invest in broadly syndicated loans, high-yield bonds and other credit instruments. Collectively, the Asset Manager Affiliates have approximately $3.2 billion of par value assets under management. The Asset Manager Affiliates are registered under the Investment Advisers Act of 1940, and are managed independently from the Company by a separate portfolio management team.
In addition, our investments in CLO Fund Securities, which are primarily made up of minority investments in the subordinated securities or preferred stock of CLO Funds raised and managed by our Asset Manager Affiliates, are anticipated to provide the Company with recurring cash distributions and complement the growth of our Asset Manager Affiliates.
Because we are internally managed by our executive officers under the supervision of our Board of Directors and do not depend on a third party investment advisor, we do not pay investment advisory fees, but
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instead incur the operating costs associated with employing investment and portfolio management professionals. We believe that our internally managed structure provides us with a beneficial operating expense structure when compared to other publicly-traded and privately-held investment firms which are externally managed. Our internally managed structure allows us the opportunity to leverage our non-interest operating expenses as we grow our investment portfolio. For the years ended December 31, 2014 and 2013, the ratio of our total operating expenses, excluding interest expense, as a percentage of our quarterly average total assets was approximately 2%.
As a BDC, we are required to comply with regulatory requirements, including limitations on our use of debt. We are permitted to, and expect to continue to, finance our investments through borrowings. However, as a BDC, we are only generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. The 1940 Act also generally prohibits us from declaring any cash dividend or distribution on any class of our capital stock if our asset coverage is below 200% at the time of the declaration of the dividend or distribution.
We intend to grow our portfolio of assets by raising additional capital, including through the prudent use of leverage available to us. Because we also recognize the need to have funds available for operating our business and to make investments, we seek to have adequate liquidity at all times to cover normal cyclical swings in funding availability and to allow us to meet abnormal and unexpected funding requirements. As a result, we may hold varying amounts of cash and other short-term investments from time-to-time for liquidity purposes.
The investments in our Debt Securities Portfolio are all or predominantly below investment grade, which are often referrred to as junk, and have speculative characteristics with respect to the issuers capacity to pay interest and repay principal.
We were formed in August 2006, as Kohlberg Capital Corporation, a Delaware limited liability company and converted to a corporation incorporated in Delaware prior to the completion of our initial public offering (IPO) in December 2006. Prior to our IPO, we did not have material operations. In our IPO we issued 14,462,000 shares of our common stock and raised net proceeds of approximately $200 million. Prior to our IPO, we issued 3,484,333 shares of our common stock to affiliates of Kohlberg & Co., L.L.C., a leading middle market private equity firm, in exchange for the contribution of ownership interests in Katonah Debt Advisors and in securities issued by CLO Funds managed by Katonah Debt Advisors and two other asset managers.
In April 2008, the Company completed a rights offering that resulted in the issuance of 3.1 million shares of our common stock, and net proceeds of $27 million.
On February 29, 2012, the Company purchased Trimaran Advisors, a CLO manager similar to Katonah Debt Advisors, with assets under management of approximately $1.5 billion, for total consideration of $13.0 million in cash and 3,600,000 shares of the Companys common stock. Contemporaneous with the acquisition of Trimaran Advisors, the Company acquired from Trimaran Advisors equity interests in certain CLO Funds managed by Trimaran Advisors for an aggregate purchase price of $12.0 million in cash. As of June 30, 2015, Asset Manager Affiliates had approximately $3.2 billion of par value assets under management.
On July 11, 2012, we changed our name from Kohlberg Capital Corporation to KCAP Financial, Inc.
On February 14, 2013, the Company completed a public offering of 5,232,500 shares of common stock, which included the underwriters full exercise of their option to purchase up to 682,500 shares of common stock, at a price of $9.75 per share, raising approximately $51.0 million in gross proceeds. In conjunction with this offering, the Company also sold 200,000 shares of common stock to a member of its Board of Directors, at a price of $9.31125 per share, raising approximately $1.9 million in gross proceeds.
On October 6, 2014, the Company completed a follow-on public offering of 3.0 million shares of its common stock at a price of $8.02 per share. The offering raised net proceeds of approximately $23.8 million, net of underwriting discounts and offering expenses.
Including employees of our Asset Manager Affiliates, we employ an experienced team of 14 investment professionals, 9 asset manager professionals, 7 BDC team members and 25 total staff members. Dayl W.
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Pearson, our President and Chief Executive Officer, and one of our directors, has been in the financial services industry for over 38 years. During the past 24 years, Mr. Pearson has focused almost exclusively on the middle market and has originated, structured and underwritten over $7 billion of debt and equity securities. R. Jon Corless, our Chief Investment Officer with primary responsibility for the Debt Securities Portfolio, has managed investment portfolios in excess of $4 billion at several institutions and has been responsible for managing portfolios of leveraged loans, high-yield bonds, mezzanine securities and middle market loans. Dominick J. Mazzitelli is the President and portfolio manager of the Asset Manager Affiliates. He has 20 years of experience within the credit markets, with most of his career focused on the leveraged finance markets. Edward U. Gilpin, our Chief Financial Officer, Secretary and Treasurer, has been in financial services for nearly 30 years, with significant experience in overseeing the financial operations and reporting for asset management businesses, including the fair value accounting of CLO securities owned by them.
Under the investment company rules and regulations pursuant to Article 6 of Regulation S-X and the Financial Standards Board Accounting Standards Codification 946, Financial Services Investment Companies (ASC 946), we are precluded from consolidating portfolio company investments, including those in which we have a controlling interest, unless the portfolio company is another investment company. An exception to this general principle in ASC 946 occurs if we own a controlled operating company that provides all or substantially all of its services directly to us, or to an investment company of ours. Other than KCAP Funding, Kohlberg Capital Funding I LLC, KCAP Senior Funding I Holdings LLC and KCAP Senior Funding I LLC, none of the investments made by us qualify for this exception. Therefore, our portfolio investments, including our investments in the Asset Manager Affiliates, are carried on the balance sheet at fair value with any adjustments to fair value recognized as Net Change in Unrealized Appreciation (Depreciation) in our statement of operations until the investment is exited, at which point any gain or loss on exit is reclassified and recognized as a Net Realized Gain (Loss) from Investments.
We have elected to be treated for U.S. federal income tax purposes as a Regulated Investment Company (RIC) under the Internal Revenue Code (the Code) and intend to operate in a manner to maintain our RIC tax treatment. Accordingly, we generally will not pay corporate-level U.S. federal income taxes on any net ordinary tax-basis taxable income or capital gains that we timely distribute to our shareholders as dividends. To maintain our RIC tax treatment, we must meet the specified source-of-income and asset diversification requirements and distribute annually at least 90% of our net ordinary tax-basis taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, for each year.
We believe that we can successfully compete with other providers of capital in the markets in which we compete for the following reasons:
| Internally managed structure and significant management resources. We are internally managed by our executive officers under the supervision of our Board of Directors and do not depend on a third party investment advisor. As a result, we do not pay investment advisory fees and all of our income is available to pay our operating costs, which include employing investment and portfolio management professionals, and to make distributions to our stockholders. We believe that our internally managed structure provides us with a beneficial operating expense structure when compared to other publicly traded and privately-held investment firms that are externally managed, and our internally managed structure allows us the opportunity to leverage our non-interest operating expenses as we grow our investment portfolio. |
| Multiple sourcing capabilities for middle market investments. We have multiple sources of loans, mezzanine investments and equity investments through our industry relationships. |
| Disciplined investment process. We employ a rigorous credit review and due diligence process which our senior management has developed over an average of approximately 25 years of investing experience. |
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| Investments across a wide variety of industries. Our Debt Security Portfolio is spread across 25 different industries and 84 different entities with an average par balance per investment of approximately $3.6 million as of December 31, 2014. |
| Significant equity ownership and alignment of incentives. Our Directors and senior management team and the senior management team of our Asset Manager Affiliates together have a significant equity interest in the Company, ensuring that their incentives are strongly aligned with those of our stockholders. |
| 100% ownership of Asset Manager Affiliates. Our CLO Fund investments and management of those securities through the Asset Manager Affiliates provide us with a competitive advantage by creating synergies with our investment operations and a source of recurring dividend cash flows. |
Our investment portfolios generates net investment income, which is generally used to pay principal and interest on our borrowings, operating expenses, and to fund our dividends. Our investment portfolios consist of three primary components: the Debt Securities Portfolio, the CLO Fund Securities and our investment in our wholly owned Asset Manager Affiliates.
Debt Securities Portfolio. We target privately-held middle market companies that have strong historical cash flows, experienced management teams and identifiable and defendable market positions in industries with positive dynamics. We generally target companies that generate positive cash flows because we look to cash flows as the primary source for servicing debt.
We employ a disciplined approach in the selection and monitoring of our investments. Generally, we target investments that will generate a current return through interest income to provide for stability in our shareholder distributions and place less reliance on realized capital gains from our investments. Our investment philosophy is focused on preserving capital with an appropriate return profile relative to risk. Our investment due diligence and selection generally focuses on an underlying issuers net cash flow after capital expenditures to service its debt rather than on multiples of net income, valuations or other broad benchmarks which frequently miss the nuances of an issuers business and prospective financial performance. We also generally avoid concentrations in any one industry or issuer. We manage risk by following our internal credit policies and procedures.
When we extend senior secured term loans, we will generally take a security interest in the available assets of the portfolio company, including the equity interests of their subsidiaries, which we expect to help mitigate the risk that we will not be repaid. Nonetheless, there is a possibility that our lien could be subordinated to claims of other creditors. Structurally, mezzanine debt ranks subordinate in priority of payment to senior term loans and is often unsecured. Relative to equity, mezzanine debt ranks senior to common and preferred equity in a borrowers capital structure. Typically, mezzanine debt has elements of both debt and equity instruments, offering the fixed returns in the form of interest payments associated with a loan, while providing an opportunity to participate in the capital appreciation of a borrower, if any, through an equity interest that is typically in the form of equity purchased at the time the mezzanine loan is repaid or warrants to purchase equity at a future date at a fixed cost. Mezzanine debt generally earns a higher return than senior secured debt due to its higher risk profile and usually less restrictive covenants. The warrants associated with mezzanine debt are typically detachable, which allows lenders to receive repayment of their principal on an agreed amortization schedule while retaining their equity interest in the borrower. Mezzanine debt also may include a put feature, which permits the holder to sell its equity interest back to the borrower at a price determined through an agreed formula.
Below are summary attributes for our Debt Securities Portfolio as of and for the period ended June 30, 2015:
| represents approximately 63% of total investment portfolio; |
| contains credit instruments issued by corporate borrowers; |
| primarily senior secured and junior secured loans (73% and 13% of debt securities, respectively); |
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| spread across 25 different industries and 90 different entities; |
| average par balance per investment of approximately $3.3 million; |
| all but one of our issuers (representing less than 1% of total investments at fair value) are current on their debt service obligations; |
| weighted average interest rate of 7.3% on income producing debt investments. |
Our investments generally average between $1 million to $20 million, although particular investments may be larger or smaller. The size of individual investments will vary according to their priority in a companys capital structure, with larger investments in more secure positions in an effort to maximize capital preservation. The size of our investments and maturity dates may vary as follows:
| senior secured term loans from $2 to $20 million maturing in five to seven years; |
| second lien term loans from $5 to $15 million maturing in six to eight years; |
| senior unsecured loans $5 to $23 million maturing in six to eight years; |
| mezzanine loans from $5 to $15 million maturing in seven to ten years; and |
| equity investments from $1 to $5 million. |
Asset Manager Affiliates. We expect to receive distributions of recurring cash distributions and seek to generate capital appreciation from our investment in our Asset Manager Affiliates. As a manager of the CLO Funds, our Asset Manager Affiliates receive contractual and recurring management fees from the CLO Funds for their management and advisory services. In addition, our Asset Manager Affiliates may also earn income related to net interest on assets accumulated for future CLO issuances on which they have provided a first loss guaranty in connection with loan warehouse arrangements for their CLO Funds.
The annual management fees that our Asset Manager Affiliates receive are generally based on a fixed percentage of the par value of assets under management and are recurring in nature for the term of the CLO Fund so long as the Asset Manager Affiliates manage the fund. As a result, the management fees earned by our Asset Manager Affiliates are not subject to market value fluctuations in the underlying collateral. The management fees our Asset Manager Affiliates receive generally have three contractual components: a senior management fee, a subordinated management fee and the possibility of an incentive management fee if certain conditions are met. Currently, all CLO Funds managed by Asset Manager Affiliates are paying both their senior and subordinated management fees on a current basis. In 2014, five CLO Funds achieved the minimum investment return threshold and our Asset Manager Affiliates received incentive fees from those CLO Funds, although two of such CLO Funds have recently been called for redemption by their investors.
Subject to the conditions of the capital markets, we expect to continue to make investments in CLO Funds managed by our Asset Manager Affiliates, which we believe will provide us with a current cash investment return. We believe that these investments will provide our Asset Manager Affiliates with greater opportunities to access new sources of capital, which will ultimately increase our Asset Manager Affiliates assets under management and resulting management fee income. See Risk Factors for a discussion of the risks relating to our ability to access the capital markets and the impact of certain risk retention rules that will require that we or our Asset Manager Affiliates make and maintain certain minimum investments in CLO Funds managed by the Asset Manager Affiliates.
The after-tax net fee cash flow that our Asset Manager Affiliates generate through the fees they receive for managing CLO Funds and after paying their expenses pursuant to an overhead allocation agreement with the Company associated with their operations, including compensation of their employees, may be distributed to us. Distributions from our Asset Manager Affiliates tax basis earnings and profits are recorded as Dividends From Asset Manager Affiliates in our financial statements when declared. From time to time our Asset Manager Affiliates may distribute cash in excess of tax basis earnings and profits. This excess is deemed a return of capital (ROC) and is recorded in unrealized gains (losses) on the statement of operations.
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Below are summary attributes for our Asset Manager Affiliates, as of June 30, 2015:
| represent approximately 16% of total investment portfolio; |
| have approximately $3.2 billion of assets under management; |
| receive contractual and recurring asset management fees based on par value of managed investments; |
| may receive an incentive management fee from a CLO Fund, provided that the CLO Fund achieves a minimum designated return on investment. In 2014, five such funds paid incentive fees to our Asset Manager Affiliates; although two of such CLO Funds have recently been called for redemption by their investors; |
| distributions paid by our Asset Manager Affiliates are an additional source of income to pay our dividend and service our debt obligations; and |
| for the six month period ended June 30, 2015, we received cash distributions of $5.0 million, of which $2.6 million was recognized as investment income from our Asset Manager Affiliates. |
CLO Fund Securities. Subject to conditions of the capital markets, we expect to continue to make investments in the CLO Funds managed by our Asset Manager Affiliates, which we believe will provide us with a current cash investment return. We believe that these investments will provide our Asset Manager Affiliates with greater opportunities to access new sources of capital which will ultimately increase our Asset Manager Affiliates assets under management and resulting management fee income.
Below are summary attributes for our CLO Fund Securities, as of June 30, 2015, unless otherwise specified:
| CLO Fund Securities represent approximately 17% of total investment portfolio at; |
| 93% of CLO Fund Securities represent investments in subordinated securities or equity securities issued by CLO Funds and 7% of CLO Fund Securities are rated notes; |
| all CLO Funds invest primarily in credit instruments issued by corporate borrowers; and |
| GAAP-basis investment income of $8.6 million and tax basis cash distributions received of $9.5 million during the six month period ended June 30, 2015. |
Investing in us involves significant risks. The following is a summary of certain risks that you should carefully consider before investing in us. For a further discussion of these risk factors, please see Risk Factors beginning on page 15.
| Economic recessions or downturns may have a material adverse effect on our business, financial condition and results of operations, and could impair the ability of our portfolio companies to repay loans. |
| The capital markets may experience periods of disruption and instability. Such market conditions may materially and adversely affect debt and equity capital markets in the United States, which may have a negative impact on our business and operations. |
| Uncertainty about the financial stability of the United States and abroad could have a significant adverse effect on our business, financial condition and results of operations. |
| In the past, we have identified a material weakness in our internal control over financial reporting. Our failure to establish and maintain effective internal control over financial reporting could result in material misstatements in our financial statements, our failure to meet our reporting obligations and cause investors to lose confidence in our reported financial information, which in turn could cause the trading price of our securities to decline. |
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| We are dependent upon our senior management for our future success, and if we are unable to hire and retain qualified personnel or if we lose any member of our senior management team, our ability to achieve our investment objective could be significantly harmed. |
| We operate in a highly competitive market for investment opportunities. |
| If we are unable to source investments effectively, we may be unable to achieve our investment objective and provide returns to stockholders. |
| Our business model depends to a significant extent upon strong referral relationships, and our inability to maintain or develop these relationships, as well as the failure of these relationships to generate investment opportunities, could adversely affect our business. |
| We may have difficulty paying our distributions to maintin RIC status if we recognize income before or without receiving cash equal to such income. |
| Our Asset Manager Affiliates may incur losses as a result of first loss agreements that they may enter into from time-to-time in connection with warehousing credit arrangements which may be put in place prior to raising a CLO Fund and pursuant to which they would typically agree to reimburse credit providers for a portion of losses (if any) on warehouse investments. |
| Any unrealized losses we experience on our loan portfolio may be an indication of future realized losses, which could reduce our income available to make distributions. |
| We may experience fluctuations in our quarterly and annual operating results and credit spreads. |
| We are exposed to risks associated with changes in interest rates and spreads. |
| We borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us. |
| It is unclear how increased regulatory oversight and changes in the method for determining LIBOR may affect the value of the financial obligations to be held or issued by us that are linked to LIBOR, or how such changes could affect our results of operations or financial condition. |
| Our indebtedness could adversely affect our financial health and our ability to respond to changes in our business. |
| Because we intend to continue to distribute substantially all of our income and net realized capital gains to our stockholders, we will need additional capital to finance our growth. |
| We may from time to time expand our business through acquisitions, which could disrupt our business and harm our financial condition. |
| Our Board of Directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval. |
| Pending legislation may allow us to incur additional leverage. |
| Our businesses may be adversely affected by litigation and regulatory proceedings. |
| Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital. |
| Changes in the laws or regulations governing our business and the business of our Asset Manager Affiliates, or changes in the interpretations thereof, and any failure by us or our Asset Manager Affiliates to comply with these laws or regulations, could negatively affect the profitability of our operations. |
| If we do not invest a sufficient portion of our assets in Qualifying Assets, we could fail to qualify as a BDC or be precluded from investing according to our current business strategy. |
| Our ability to enter into transactions with our affiliates is restricted. |
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| A failure on our part to maintain our status as a BDC would significantly reduce our operating flexibility. |
| We will be subject to corporate-level U.S. federal income taxes if we are unable to qualify as a RIC under Subchapter M of the Code. |
| Disruptions in current systems or difficulties in integrating new systems. |
| If we are unable to maintain the availability of our electronic data systems and safeguard the security of our data, our ability to conduct business may be compromised, which impair our liquidity, disrupt our business, damage our reputation and cause losses. |
| We are subject to certain risks as a result of our indirect interests in the subordinated notes and membership interests of KCAP Senior Funding I, LLC. |
| The subordinated notes and membership interests of the Issuer are subordinated obligations of the Issuer. |
| The Issuer may fail to meet certain coverage tests. |
| We may not receive cash on our equity interests in the Issuer. |
| A significant portion of the assets reflected on our financial statements are held by the Issuer and are subject to security interests under the senior secured notes issued by the Issuer and if it defaults on its obligations under the senior secured notes we and the Issuer may suffer adverse consequences, including foreclosure on those assets. |
| Our investments may be risky, and you could lose all or part of your investment. |
| Our portfolio investments for which there is no readily available market, including our investment in our Asset Manager Affiliates and our investments in CLO Funds, are recorded at fair value as determined in good faith by our Board of Directors. As a result, there is uncertainty as to the value of these investments. |
| We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we may invest a significant portion of our assets in a relatively small number of issuers, which subjects us to a risk of significant loss if any of these issuers defaults on its obligations under any of its debt instruments or as a result of a downturn in the particular industry. |
| Defaults by our portfolio companies could harm our operating results. |
| When we are a debt or minority equity investor in a portfolio company, which generally is the case, we may not be in a position to control the entity, and its management may make decisions that could decrease the value of our investment. |
| We may have limited access to information about privately held companies in which we invest. |
| Prepayments of our debt investments by our portfolio companies could negatively impact our operating results. |
| We may be unable to invest the net proceeds raised from offerings and repayments from investments on acceptable terms, which would harm our financial condition and operating results. |
| Our portfolio companies may incur debt that ranks equal with, or senior to, our investments in such companies. |
| Second priority liens on collateral securing loans that we make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us. |
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| There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims. |
| Our investments in equity securities involve a substantial degree of risk. |
| The lack of liquidity in our investments may adversely affect our business. |
| We may not receive any return on our investment in the CLO Funds in which we have invested and we may be unable to raise additional CLO Funds. |
| If our Asset Manager Affiliates do not meet certain risk retention requirements, they may not be able to sponsor and manage new CLOs, which would negatively impact our results of operations and financial conditions. |
Our principal executive offices are located at 295 Madison Avenue, 6th Floor, New York, New York 10017, and our telephone number is (212) 455-8300. We maintain a website on the Internet at http://www.kcapinc.com. Information contained in our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus.
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We may offer, from time to time, up to $250,000,000 of our securities, on terms to be determined at the time of the offering. Our securities may be offered at prices and on terms to be disclosed in one or more prospectus supplements.
Our securities may be offered directly to one or more purchasers by us or through agents designated from time to time by us, or to or through underwriters or dealers. The prospectus supplement relating to any offering will disclose the terms of the offering, including the name or names of any agents or underwriters involved in the sale of our securities by us, the purchase price, and any fee, commission or discount arrangement between us and our agents or underwriters or among our underwriters or the basis upon which such amount may be calculated. See Plan of Distribution. We may not sell any of our securities directly or through agents, underwriters or dealers without delivery of this prospectus and a prospectus supplement describing the method and terms of the offering of our securities.
Set forth below is additional information regarding any offering of our securities:
Use of Proceeds |
Unless otherwise specified in a prospectus supplement, we expect to use the net proceeds from the sale of our securities for general corporate purposes, which include investing in portfolio companies and CLO Fund Securities in accordance with our investment objective and strategies described elsewhere in this prospectus. See Use of Proceeds. |
NASDAQ Global Select Market symbol |
KCAP |
Taxation |
We have elected to be treated for U.S. federal income tax purposes as a RIC under subchapter M of the Code of and intend to operate in a manner to maintain our RIC tax treatment. Accordingly, we generally will not pay corporate-level U.S. federal income taxes on any net ordinary income or realized capital gains that we timely distribute to our shareholders as dividends. To maintain our RIC tax treatment, we must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, for each year. |
Leverage |
We have issued various types of debt, and in the future may borrow from, and/or issue additional senior securities (such as preferred or convertible debt securities or debt securities) to, banks and other lenders and investors. Subject to prevailing market conditions, we intend to grow our portfolio of assets by raising additional capital, including through the prudent use of leverage available to us. |
Trading |
Shares of closed-end investment companies frequently trade at a discount to their net asset value. The risk that our shares may trade at a discount to our net asset value is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether our shares will trade above, at or below net asset value. |
Dividend Reinvestment Plan |
We have adopted an opt out dividend reinvestment plan. |
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Certain anti-takeover measures |
Our charter and bylaws, as well as certain statutes and regulations, contain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us. This could delay or prevent a transaction that could give our stockholders the opportunity to realize a premium over the price for their securities. |
Available Information |
We are required to file annual, quarterly and current periodic reports, proxy statements and other information with the SEC. This information is available in the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SECs Public Reference Section, Washington, D.C. 20549-0102. In addition, the SEC maintains an Internet website that contains reports, proxy and information statements and other information filed electronically by us with the SEC at http://www.sec.gov. |
Risk Factors |
Your investment in our securities involves a high degree of risk and should be considered highly speculative. See Risk Factors in this prospectus for a discussion of factors you should carefully consider before investing in our securities. |
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The following table is intended to assist you in understanding the costs and expenses that an investor in an offering will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Moreover, the information set forth below does not include any transaction costs and expenses that investors will incur in connection with an offering of our securities pursuant to this prospectus and the attached prospectus supplement for that offering. As a result, investors are urged to read the Fees and Expenses table contained in any corresponding prospectus supplement to fully understanding the actual transaction costs and expenses they will incur in connection with each such offering. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by us or that we will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in the Company.
STOCKHOLDER TRANSACTION EXPENSES (as a percentage of the offering price) |
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Sales Load | | %(1) | ||
Offering Expenses | | %(2) | ||
Dividend Reinvestment Plan Fees | (3) | |||
Total Stockholder Transaction Expenses | | % | ||
ANNUAL EXPENSES (as a percentage of net assets attributable to common stock) |
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Operating Expenses | 3.11 | %(4) | ||
Interest Payments on Borrowed Funds | 4.62 | %(5) | ||
Other Expenses | 0.94 | %(6) | ||
Acquired Fund Fees and Expenses | 1.81 | %(7) | ||
Total Annual Expenses | 10.48 | % |
The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in the Company. In calculating the following expense amounts, we have assumed we would have no additional leverage and that our annual operating expenses would remain at the levels set forth in the table above, and that you would pay a sales load of 4.5% (the estimated underwriting discount to be paid by us with respect to common stock sold by us in an offering).
1 YEAR | 3 YEARS | 5 YEARS | 10 YEARS | |||||||||||||
You would pay the following expenses on a $1,000 investment, assuming a 5% annual return | $ | 118 | $ | 289 | $ | 445 | $ | 785 |
(1) | In the event that our securities are sold to or through underwriters, a corresponding prospectus supplement will disclose the applicable sales load. |
(2) | In the event that we conduct an offering of our securities, a corresponding prospectus supplement will disclose the estimated offering expenses. Our common stockholders will bear, directly or indirectly, the expenses of any offering of our securities, including debt securities. |
(3) | The expenses associated with the administration of our dividend reinvestment plan are included in Other Expenses. The participants in the dividend reinvestment plan pay a pro rata share of brokerage commissions incurred with respect to open market purchases, if any, made by the administrator under the plan. For more details about the plan, see Dividend Reinvestment Plan. |
(4) | Operating Expenses represents an estimate of our annual operating expense. We do not have an investment advisor. We are internally managed by our executive officers under the supervision of our Board of Directors. As a result, we do not pay investment advisory fees. Instead we pay the operating costs associated with employing investment management professionals. |
(5) | Interest Payments on Borrowed Funds represents an estimate of our annual interest expense based on payments required under our outstanding indebtedness. |
(6) | Other expenses include our overhead and administrative expenses. |
(7) | Reflects the estimated annual collateral manager fees that will be indirectly incurred by us in connection with our investments in CLO Fund Securities during the twelve months following the date of this prospectus. Collateral manager fees are charged on the total assets of the CLO Fund, including the assets acquired with borrowed funds, but are assumed to be paid by the equity holders of the CLO Fund Securities (i.e., from the residual cash flows after interest payments to the senior debt holders in the CLO Fund Securities). Therefore, these collateral manager fees (which generally range from 0.25% to 0.50% |
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of total assets) are effectively much higher when allocated only to the equity holders of the CLO Fund Securities as we have done in the table above. In this regard, the debt tranches that we hold in any of these CLO funds are not deemed to pay any such collateral manager fees for purposes of the table set forth above. The calculation also includes the payment of incentive fees that will likely be earned by the investment manager of the CLO funds in which we hold an equity investment in the next twelve months. It is important to highlight that approximately 97% of the collateral manager and incentive fees reflected in the table above are paid to our Asset Manager Affiliates, which are wholly owned by us. Therefore, any such fees paid to our Asset Manager Affiliates will inure to the benefit of our stockholders in light of our 100% ownership of the Asset Manager Affiliates. |
The example and the expenses in the tables above should not be considered a representation of our future expenses, and actual expenses may be greater or less than those shown. Moreover, while the example assumes, as required by the applicable rules of the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. In addition, while the example assumes reinvestment of all dividends and distributions at net asset value, participants in our dividend reinvestment plan may receive shares valued at the market price in effect at that time. This price may be at, above or below net asset value. See Dividend Reinvestment Plan for additional information regarding our dividend reinvestment plan.
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The following selected financial and other data for the years ended December 31, 2014, 2013, 2012, 2011, and 2010 is derived from our audited financial statements and for the six months ended June 30, 2015 is derived from our unaudited financial statements. The data should be read in conjunction with our financial statements and notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations, which are included in this prospectus. The historical data is not necessarily indicative of results to be expected for any future period.
Six Months Ended June 30, 2015 |
Year Ended December 31, 2014 |
Year Ended December 31, 2013 |
Year Ended December 31, 2012 |
Year Ended December 31, 2011 |
Year Ended December 31, 2010 |
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Income Statement Data: |
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Interest and related portfolio income: |
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Interest and Dividends | $ | 20,646,035 | $ | 34,802,690 | $ | 33,144,195 | $ | 29,821,676 | $ | 19,024,979 | $ | 23,631,783 | ||||||||||||
Fees and other income | 218,066 | 934,871 | 305,376 | 304,882 | 86,057 | 215,233 | ||||||||||||||||||
Dividends from Asset Manager Affiliates | 2,649,414 | 5,467,914 | 5,735,045 | 1,214,998 | 1,060,000 | | ||||||||||||||||||
Other Income | | | | | 2,000,000 | | ||||||||||||||||||
Total interest and related portfolio income | 23,513,515 | 41,205,475 | 39,184,616 | 31,341,556 | 22,171,036 | 23,847,016 | ||||||||||||||||||
Expenses: |
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Interest and amortization of debt issuance costs | 5,957,969 | 11,538,179 | 10,116,271 | 6,976,018 | 4,588,482 | 7,088,202 | ||||||||||||||||||
Compensation | 2,130,273 | 4,951,745 | 4,630,481 | 3,172,814 | 3,907,900 | 3,322,895 | ||||||||||||||||||
Other | 3,086,073 | 4,594,983 | 4,563,749 | 4,344,611 | 3,490,939 | 7,045,648 | ||||||||||||||||||
Total operating expenses | 11,174,315 | 21,084,907 | 19,310,501 | 14,493,443 | 11,987,321 | 17,456,745 | ||||||||||||||||||
Net Investment Income | 12,339,200 | 20,120,568 | 19,874,115 | 16,848,113 | 10,183,715 | 6,390,271 | ||||||||||||||||||
Realized and unrealized gains (losses) on investments: |
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Net realized gains (losses) | 98,406 | (11,132,491 | ) | (12,627,314 | ) | (3,232,974 | ) | (18,476,608 | ) | (17,862,984 | ) | |||||||||||||
Net change in unrealized gains (losses) | (3,532,611 | ) | 6,045,517 | 9,976,171 | 12,510,641 | 15,942,437 | (2,815,965 | ) | ||||||||||||||||
Total net gains (losses) | (3,434,205 | ) | (5,086,974 | ) | (2,651,143 | ) | 9,277,667 | (2,534,171 | ) | (20,678,949 | ) | |||||||||||||
Net increase (decrease) in net assets resulting from operations | $ | 8,904,995 | $ | 15,033,594 | $ | 17,222,972 | $ | 26,125,779 | $ | 7,649,544 | $ | (14,288,678 | ) | |||||||||||
Per Share: |
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Earnings per common share basic | $ | 0.24 | $ | 0.44 | $ | 0.53 | $ | 1.00 | $ | 0.33 | $ | (0.63 | ) | |||||||||||
Earnings per common share diluted | $ | 0.24 | $ | 0.43 | $ | 0.53 | $ | 0.95 | $ | 0.33 | $ | (0.63 | ) | |||||||||||
Net investment income per share basic | $ | 0.33 | $ | 0.59 | $ | 0.62 | $ | 0.65 | $ | 0.45 | $ | 0.28 | ||||||||||||
Net investment income per share diluted | $ | 0.33 | $ | 0.58 | $ | 0.62 | $ | 0.64 | $ | 0.45 | $ | 0.28 | ||||||||||||
Distributions declared per common share | $ | 0.21 | $ | 1.00 | $ | 1.06 | $ | 0.94 | $ | 0.69 | $ | 0.68 | ||||||||||||
Taxable Distributable Income per basic share | $ | 0.36 | $ | 0.78 | $ | 0.70 | $ | 0.77 | $ | 0.65 | $ | 0.51 | ||||||||||||
Balance Sheet Data: |
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Investment assets at fair value | $ | 474,100,660 | $ | 479,706,494 | $ | 440,549,994 | $ | 312,044,763 | $ | 239,791,681 | $ | 191,186,296 | ||||||||||||
Total assets | $ | 495,080,157 | $ | 510,446,797 | $ | 459,172,388 | $ | 319,260,473 | $ | 248,133,661 | $ | 279,822,686 | ||||||||||||
Total debt outstanding | $ | 224,184,981 | $ | 223,884,593 | $ | 192,592,373 | $ | 101,400,000 | $ | 60,000,000 | $ | 86,746,582 | ||||||||||||
Stockholders' equity | $ | 257,796,358 | $ | 255,316,701 | $ | 250,369,693 | $ | 207,875,659 | $ | 180,525,942 | $ | 186,925,667 | ||||||||||||
Net asset value per common share | $ | 6.96 | $ | 6.94 | $ | 7.51 | $ | 7.85 | $ | 7.85 | $ | 8.21 | ||||||||||||
Common shares outstanding at end of period | 37,032,825 | 36,775,127 | 33,332,123 | 26,470,408 | 22,992,211 | 22,767,130 | ||||||||||||||||||
Other Data: |
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Investments funded | $ | 58,170,779 | $ | 235,905,130 | $ | 243,966,586 | $ | 123,165,150 | $ | 85,541,809 | $ | 11,245,300 | ||||||||||||
Principal collections related to investment repayments or sales | $ | 57,762,100 | $ | 193,554,964 | $ | 94,197,886 | $ | 104,556,500 | $ | 81,681,314 | $ | 223,103,170 | ||||||||||||
Number of portfolio investments at period end | 137 | 141 | 126 | 88 | 68 | 58 | ||||||||||||||||||
Weighted average yield of income producing debt investments | 7.3 | % | 7.3 | % | 7.3 | % | 7.5 | % | 8.4 | % | 8.6 | % |
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Investing in our securities involves a high degree of risk. Before you invest in our securities, you should be aware of various significant risks, including those described below. You should carefully consider these risks, together with all of the other information included in this prospectus and any accompanying prospectus supplement, before you decide whether to make an investment in our securities. The risks set forth below are not the only risks we face. If any of the following risks occur, our business, financial condition and results of our operations could be materially adversely affected. In such case, you could lose all or part of your investment.
Economic recessions or downturns may result in a prolonged period of market illiquidity which could have a material adverse effect on our business, financial condition and results of operations. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could limit our investment originations, limit our ability to grow and negatively impact our operating results.
To the extent that recessionary conditions return, the financial results of small and mid-sized companies, like those in which we invest, will likely experience deterioration, which could ultimately lead to difficulty in meeting debt service requirements and an increase in defaults. Additionally, the end markets for certain of our portfolio companies products and services would likely experience negative economic trends. The performances of certain of our portfolio companies have been, and may continue to be, negatively impacted by these economic or other conditions, which may ultimately result in our receipt of a reduced level of interest income from our portfolio companies and/or losses or charge offs related to our investments, and, in turn, may adversely affect distributable income. Further, adverse economic conditions may decrease the value of collateral securing some of our loans and the value of our equity investments. As a result, we may need to modify the payment terms of our investments, including changes in payment-in-kind interest provisions and/or cash interest rates. These factors may result in our receipt of a reduced level of interest income from our portfolio companies and/or losses or charge offs related to our investments, and, in turn, may adversely affect distributable income and have a material adverse effect on our results of operations.
The U.S. capital markets experienced extreme volatility and disruption over the past several years, leading to recessionary conditions and depressed levels of consumer and commercial spending. Disruptions in the capital markets increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. While recent indicators suggest improvement in the capital markets, we cannot provide any assurance that these conditions will not worsen. If these conditions continue or worsen, the prolonged period of market illiquidity may have an adverse effect on our business, financial condition, and results of operations. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could limit our investment originations, limit our ability to grow and negatively impact our operating results.
In addition, significant changes or volatility in the capital markets may also have a negative effect on the valuations of our investments. While most of our investments are not publicly traded, applicable accounting standards require us to assume as part of our valuation process that our investments are sold in a principal market to market participants (even if we plan on holding an investment through its maturity). Significant changes in the capital markets may also affect the pace of our investment activity and the potential for liquidity events involving our investments. Thus, the illiquidity of our investments may make it difficult for us to sell such investments to access capital if required, and as a result, we could realize significantly less than
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the value at which we have recorded our investments if we were required to sell them for liquidity purposes. An inability to raise or access capital could have a material adverse effect on our business, financial condition or results of operations.
Ongoing U.S. debt ceiling and budget deficit concerns have increased the possibility of additional credit-rating downgrades and economic slowdowns, or a recession in the U.S. Although U.S. lawmakers passed legislation to raise the federal debt ceiling on multiple occasions, ratings agencies have lowered or threatened to lower the long-term sovereign credit rating on the United States. The impact of this or any further downgrades to the U.S. governments sovereign credit rating or its perceived creditworthiness could adversely affect the U.S. and global financial markets and economic conditions. Absent further quantitative easing by the Federal Reserve, these developments could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. In addition, disagreement over the federal budget has caused the U.S. federal government to shut down for periods of time. Continued adverse political and economic conditions could have a material adverse effect on our business, financial condition and results of operations.
Ongoing U.S. debt ceiling and budget deficit concerns raise the possibility of additional credit-rating downgrades and economic slowdowns, or a recession in the U.S. Although U.S. lawmakers passed legislation to raise the federal debt ceiling on multiple occasions, ratings agencies have lowered or threatened to lower the long-term sovereign credit rating on the United States. The impact of this or any further downgrades to the U.S. governments sovereign credit rating or its perceived creditworthiness could adversely affect the U.S. and global financial markets and economic conditions. Absent further quantitative easing by the Federal Reserve, these developments could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. In addition, disagreement over the federal budget has caused the U.S. federal government to shut down for periods of time.
The current worldwide financial market situation, as well as various social and political tensions in the United States and around the world, may continue to contribute to increased market volatility, may have long-term effects on the United States and worldwide financial markets, and may cause further economic uncertainties or deterioration in the United States and worldwide. Since 2010, several European Union (EU) countries, including Greece, Ireland, Italy, Spain, and Portugal, have faced budget issues, some of which may have negative long-term effects for the economies of those countries and other EU countries. Growth in the EUs economy has continued to stagnate, as concerns over deflation and the effects of Russian sanctions on growth were added to longstanding issues with burdensome debt loads and high unemployment. Recently, the European Central Bank began employing more aggressive stimulus measures, with the initiation of full-scale quantitative easing that involves purchase of Eurozone sovereign debt. In addition to EU fiscal policy, the fiscal policy of foreign nations, such as Russia and China, may have a severe impact on the worldwide and United States financial markets. We do not know how long the financial markets will continue to be affected by these events and cannot predict the effects of these or similar events in the future on the United States economy and securities markets or on our investments. We monitor developments and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that we will be successful in doing so.
We have identified a material weakness in our internal control over financial reporting relating to the review and oversight of tax-related matters and, as a result of such weakness, our management concluded that our disclosure controls and procedures and internal control over financial reporting were not effective as of
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December 31, 2014. This contributed to a delay in the filing of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and the restatement of all of our previously issued quarterly and annual financial statements since 2010. For further information regarding this matter, please refer to Item 9A. Controls and Procedures.
Unless and until remediated, this material weakness could result in additional material misstatements to our interim or annual consolidated financial statements and disclosures that may not be prevented or detected on a timely basis. In addition, we may experience delay or be unable to meet our reporting obligations or to comply with SEC rules and regulations, which could result in investigations and sanctions by regulatory authorities. Managements ongoing assessment of disclosure controls and procedures as well as internal control over financial reporting may in the future identify additional weaknesses and conditions that need to be addressed. Any failure to improve our disclosure controls and procedures or internal control over financial reporting to address identified weaknesses in the future, if they were to occur, could prevent us from maintaining accurate accounting records and discovering material accounting errors. Any of these results could adversely affect our business and the value of our common stock.
We depend on the members of our senior management as well as other key personnel for the identification, final selection, structuring, closing and monitoring of our investments. These employees have critical industry experience and relationships that we rely on to implement our business plan. Our future success depends on the continued service of our senior management team. The departure of any of the members of our senior management or a significant number of our senior personnel could have a material adverse effect on our ability to achieve our investment objective. As a result, we may not be able to operate our business as we expect, and our ability to compete could be harmed, which could cause our operating results to suffer.
Additionally, the management agreements governing some of the CLO funds managed by our Asset Manager Affiliates have key person provisions that provide certain CLO investors with rights upon the departure of a key person, as defined in each agreement. As a result, the departure of a key person could trigger a material change in the Asset Manager Affiliates role in managing the CLO Funds, and therefore KCAPs financial benefits from its investments in the Asset Manager Affiliates.
A large number of entities compete with us to make the types of investments that we plan to make in prospective portfolio companies. We compete with other BDCs, as well as a number of investment funds, investment banks and other sources of financing, including traditional financial services companies, such as commercial banks and finance companies. Many of our competitors are substantially larger and have considerably greater financial, technical, marketing and other resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. This may enable some of our competitors to make commercial loans with interest rates that are comparable to or lower than the rates we typically offer. We may lose prospective portfolio investments if we do not match our competitors pricing, terms and structure. If we do match our competitors pricing, terms or structure, we may experience decreased net interest income. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, establish more relationships and build their market shares. Furthermore, many of our potential competitors have greater experience operating under, or are not subject to, the regulatory restrictions that the 1940 Act imposes on us as a BDC. As a result of this competition, there can be no assurance that we will be able to identify and take advantage of attractive investment opportunities or that we will be able to fully invest our available capital. If we are not able to compete effectively, our business and financial condition and results of operations will be adversely affected.
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Our ability to achieve our investment objective depends on our senior management teams ability to identify, evaluate and invest in suitable companies that meet our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of our marketing capabilities, our management of the investment process, our ability to provide efficient services and our access to financing sources on acceptable terms. In addition to monitoring the performance of our existing investments, members of our management team and our investment professionals may also be called upon to provide managerial assistance to our portfolio companies. These demands on their time may distract them or slow the rate of investment. To grow, we need to continue to hire, train, supervise and manage new employees and to implement computer and other systems capable of effectively accommodating our growth. However, we cannot provide assurance that any such employees will contribute to the success of our business or that we will implement such systems effectively. Failure to source investments effectively could have a material adverse effect on our business, financial condition and results of operations.
We expect that members of our senior management team will maintain their relationships with intermediaries, financial institutions, investment bankers, commercial bankers, financial advisors, attorneys, accountants, consultants and other individuals within their networks, and we will rely to a significant extent upon these relationships to provide us with potential investment opportunities. If our senior management team fails to maintain its existing relationships or develop new relationships with sources of investment opportunities, we will not be able to grow our investment portfolio. In addition, individuals with whom members of our senior management team have relationships are not obligated to provide us with investment opportunities, and, therefore, there is no assurance that such relationships will generate investment opportunities for us.
In accordance with the Code, we include in income certain amounts that we have not yet received in cash, such as contracted non-cash PIK interest, which represents contractual interest added to the loan balance and due at the end of the loan term. The increases in loan balances as a result of contracted non-cash PIK arrangements are included in income for the period in which such non-cash PIK interest was received, which is often in advance of receiving cash payment, and are separately identified on our statements of cash flows. We also may be required to include in income certain other amounts that we will not receive in cash. Any warrants that we receive in connection with our debt investments generally are valued as part of the negotiation process with the particular portfolio company. As a result, a portion of the aggregate purchase price for the debt investments and warrants is allocated to the warrants that we receive. This generally results in the associated debt investment having original issue discount for tax purposes, which we must recognize as ordinary income as it accrues. This increases the amounts we are required to distribute to maintain our qualification for tax treatment as a RIC. Because such original issue discount income might exceed the amount of cash received in a given year with respect to such investment, we might need to obtain cash from other sources to satisfy such distribution requirements. Other features of the debt instruments that we hold may also cause such instruments to generate original issue discount.
Since, in certain cases, we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the annual distribution requirement necessary to maintain RIC tax treatment under the Code. Accordingly, we may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax. For additional discussion regarding the tax implications of a RIC, see Business Regulation Taxation as a Regulated Investment Company.
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Our Asset Manager Affiliates have in the past entered into, are currently entered into, and we and our Asset Manager Affiliates may in the future enter into first loss agreements in connection with warehouse credit lines established to fund the initial accumulation of loan investments for future CLO Funds that our Asset Manager Affiliates will manage. Under such agreements, our Asset Manager Affiliates generally make a junior investment in a warehouse facility, which serves as a loss buffer for the senior capital provider. Such junior investment may be subject to losses (either in whole or in part) that stem from factors including (i) losses as a result of individual loan or other investments being ineligible for purchase by the CLO Fund (typically due to a payment default on such loan or other investments) when such fund formation is completed or (ii) if the CLO Fund has not been completed before the expiration of the warehouse credit line, the loss (if any, and net of any accumulated interest income) on the resale of such loans funded by the warehouse credit line, or (iii) realized losses from trading activity within the warehouse facility. As a result, our Asset Manager Affiliates may incur losses if loans and debt obligations, if applicable, that had been purchased in the warehouse facility become ineligible for inclusion in the CLO Fund or if a planned CLO Fund does not close.
As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at the fair value as determined in good faith by our Board of Directors pursuant to a valuation methodology approved by our Board of Directors. Decreases in the market values or fair values of our investments will be recorded as unrealized losses. An unrealized loss in our loan portfolio could be an indication of a portfolio companys inability to meet its repayment obligations with respect to the affected loans. This could result in realized losses in the future and ultimately in reductions of our income available to pay dividends or interest and principal on our securities and could cause you to lose all or part of your investment.
We could experience fluctuations in our quarterly and annual operating results due to a number of factors, some of which are beyond our control, including our ability to make investments in companies that meet our investment criteria, the interest rate payable on the debt securities we acquire (which could stem from the general level of interest rates, credit spreads, or both), the default rate on such securities, prepayment upon the triggering of covenants in our middle market loans as well as our CLO Funds, our level of expenses, variations in and timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
Changes in interest rates may have a substantial negative impact on our investments, the value of our securities and our rate of return on invested capital. A reduction in the interest spreads on new investments could also have an adverse impact on our net interest income. An increase in interest rates could decrease the value of any investments we hold which earn fixed interest rates, including mezzanine securities and high-yield bonds, and also could increase our interest expense, thereby decreasing our net income. An increase in interest rates due to an increase in credit spreads, regardless of general interest rate fluctuations, could also negatively impact the value of any investments we hold in our portfolio.
In addition, an increase in interest rates available to investors could make an investment in our securities less attractive than alternative investments, a situation which could reduce the value of our securities. Conversely, a decrease in interest rates may have an adverse impact on our returns by requiring us to seek lower yields on our debt investments and by increasing the risk that our portfolio companies will prepay our
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debt investments, resulting in the need to redeploy capital at potentially lower rates. A decrease in market interest rates may also adversely impact our returns on idle funds, which would reduce our net investment income.
Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in the common stock. We have issued senior securities, and in the future may borrow from, or issue additional senior securities (such as preferred or convertible securities or debt securities) to, banks and other lenders and investors. Subject to prevailing market conditions, we intend to grow our portfolio of assets by raising additional capital, including through the prudent use of leverage available to us. Lenders and holders of such senior securities would have fixed dollar claims on our assets that are superior to the claims of our common stockholders. Leverage is generally considered a speculative investment technique. Any increase in our income in excess of interest payable on our outstanding indebtedness would cause our net income to increase more than it would have had we not incurred leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not incurred leverage. Such a decline could negatively affect our ability to make distributions. In addition, our common stockholders will bear the burden of any increase in our expenses as a result of leverage. There can be no assurance that our leveraging strategy will be successful.
Our outstanding indebtedness imposes, and additional debt we may incur in the future will likely impose, financial and operating covenants that restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a RIC. A failure to add new debt facilities or issue additional debt securities or other evidences of indebtedness in lieu of or in addition to existing indebtedness could have a material adverse effect on our business, financial condition or results of operations.
As a result of concerns about the accuracy of the calculation of LIBOR, a number of British Bankers Association, or BBA, member banks entered into settlements with certain regulators and law enforcement agencies with respect to the alleged manipulation of LIBOR, and there are ongoing investigations by regulators and governmental authorities in various jurisdictions. Following a review of LIBOR conducted at the request of the U.K. government, on September 28, 2012, recommendations for reforming the setting and governing of LIBOR were released, which are referred to as the Wheatley Review. The Wheatley Review made a number of recommendations for changes with respect to LIBOR, including the introduction of S-5 statutory regulation of LIBOR, the transfer of responsibility for LIBOR from the BBA to an independent administrator, changes to the method of the compilation of lending rates and new regulatory oversight and enforcement mechanisms for rate-setting and a reduction in the number of currencies and tenors for which LIBOR is published. Based on the Wheatley Review and on a subsequent public and governmental consultation process, on March 25, 2013, the U.K. Financial Services Authority published final rules for the U.K. Financial Conduct Authoritys regulation and supervision of LIBOR, which are referred to as the FCA Rules. In particular, the FCA Rules include requirements that (1) an independent LIBOR administrator monitor and survey LIBOR submissions to identify breaches of practice standards and/or potentially manipulative behavior, and (2) firms submitting data to LIBOR establish and maintain a clear conflicts of interest policy and appropriate systems and controls. The FCA Rules took effect on April 2, 2013.
It is uncertain what additional regulatory changes or what changes, if any, in the method of determining LIBOR may be required or made by the U.K. government or other governmental or regulatory authorities. Accordingly, uncertainty as to the nature of such changes may adversely affect the market for or value of any LIBOR-linked securities, loans, derivatives and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or
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decrease in reported LIBOR, which could have an adverse impact on the market for or value of any LIBOR- linked securities, loans, derivatives and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.
With certain limited exceptions, we are only allowed to borrow amounts or issue senior securities such that our asset coverage, as defined in the 1940 Act, is at least 200% immediately after such borrowing or issuance. As of June 30, 2015, our asset coverage ratio was 212%. The amount of leverage that we employ in the future will depend on our managements and our Board of Directors assessment of market and other factors at the time of any proposed borrowing. There is no assurance that a leveraging strategy will be successful. As a result of the level of our leverage:
| our exposure to risk of loss is greater if we incur debt or issue senior securities to finance investments because a decrease in the value of our investments has a greater negative impact on our equity returns and, therefore, the value of our business if we did not use leverage; |
| the decrease in our asset coverage ratio resulting from increased leverage and the covenants contained in documents governing our indebtedness (which may impose asset coverage or investment portfolio composition requirements that are more stringent than those imposed by the 1940 Act) limit our flexibility in planning for, or reacting to, changes in our business and industry, as a result of which we could be required to liquidate investments at an inopportune time; |
| we are required to dedicate a portion of our cash flow to interest payments, limiting the availability of cash for dividends and other purposes; and |
| our ability to obtain additional financing in the future may be impaired. |
We cannot be sure that our leverage will not have a material adverse effect on us. In addition, we cannot be sure that additional financing or the refinancing of our current debt will be available when required or, if available, will be on terms satisfactory to us. Further, even if we are able to obtain additional financing, we may be required to use some or all of the proceeds thereof to repay our outstanding indebtedness.
Economic recessions or downturns may result in a prolonged period of market illiquidity which could have a material adverse effect on our business, financial condition and results of operations. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could limit our investment originations, limit our ability to grow and negatively impact our operating results.
In addition, to the extent that recessionary conditions return, the financial results of small and mid-sized companies, like those in which we invest, will likely experience deterioration, which could ultimately lead to difficulty in meeting debt service requirements and an increase in defaults. Additionally, the end markets for certain of our portfolio companies products and services would likely experience negative economic trends. The performances of certain of our portfolio companies have been, and may continue to be, negatively impacted by these economic or other conditions, which may ultimately result in our receipt of a reduced level of interest income from our portfolio companies and/or losses or charge offs related to our investments, and, in turn, may adversely affect distributable income. Further, adverse economic conditions may decrease the value of collateral securing some of our loans and the value of our equity investments. As a result, we may need to modify the payment terms of our investments, including changes in payment-in-kind interest provisions and/or cash interest rates. These factors may result in our receipt of a reduced level of interest income from our portfolio companies and/or losses or charge offs related to our investments, and, in turn, may adversely affect distributable income and have a material adverse effect on our results of operations.
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Recent U.S. debt ceiling and budget deficit concerns have increased the possibility of additional credit-rating downgrades and economic slowdowns, or a recession in the U.S. Although U.S. lawmakers passed legislation to raise the federal debt ceiling on multiple occasions, ratings agencies have lowered or threatened to lower the long-term sovereign credit rating on the United States. The impact of this or any further downgrades to the U.S. governments sovereign credit rating or its perceived creditworthiness could adversely affect the U.S. and global financial markets and economic conditions. Absent further quantitative easing by the Federal Reserve, these developments could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. In addition, disagreement over the federal budget has caused the U.S. federal government to shut down for periods of time. Continued adverse political and economic conditions could have a material adverse effect on our business, financial condition and results of operations.
The current worldwide financial market situation, as well as various social and political tensions in the United States and around the world, may continue to contribute to increased market volatility, may have long-term effects on the United States and worldwide financial markets, and may cause further economic uncertainties or deterioration in the United States and worldwide. Since 2010, several European Union (EU) countries, including Greece, Ireland, Italy, Spain, and Portugal, have faced budget issues, some of which may have negative long-term effects for the economies of those countries and other EU countries. There is continued concern about national-level support for the Euro and the accompanying coordination of fiscal and wage policy among European Economic and Monetary Union member countries. In addition, the fiscal policy of foreign nations, such as China, may have a severe impact on the worldwide and United States financial markets. We do not know how long the financial markets will continue to be affected by these events and cannot predict the effects of these or similar events in the future on the United States economy and securities markets or on our investments. We monitor developments and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that we will be successful in doing so.
In order to continue to qualify as a RIC, to avoid payment of excise taxes and to minimize or avoid payment of income taxes, we intend to continue to distribute to our stockholders substantially all of our net ordinary income and realized net capital gains except for certain net long-term capital gains (which we may retain, pay applicable income taxes with respect thereto, and elect to treat as deemed distributions to our stockholders). As a BDC, in order to incur new debt, we are generally required to meet a coverage ratio of total assets to total senior securities, which includes all of our borrowings and any preferred stock we may issue in the future, of at least 200%, as measured immediately after issuance of such security. This requirement limits the amount that we may borrow. Because we will continue to need capital to grow our loan and investment portfolio, this limitation may prevent us from incurring debt and require us to issue additional equity at a time when it may be disadvantageous to do so. We cannot assure you that debt and equity financing will be available to us on favorable terms, or at all, and debt financings may be restricted by the terms of such borrowings. If additional funds are not available to us, we could be forced to curtail or cease new lending and investment activities.
We may pursue potential acquisitions of, and investments in, businesses complementary to our business and from time to time engage in discussions regarding such possible acquisitions. For example, in February 2012, we completed the acquisition of Trimaran Advisors. Such acquisition and any other acquisitions we may undertake involve a number of risks, including:
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| failure of the acquired businesses to achieve the results we expect; |
| substantial cash expenditures; |
| diversion of capital and management attention from operational matters; |
| our inability to retain key personnel of the acquired businesses; |
| incurrence of debt and contingent liabilities and risks associated with unanticipated events or liabilities; and |
| the potential disruption and strain on our existing business and resources that could result from our planned growth and continuing integration of our acquisitions. |
If we fail to properly evaluate acquisitions or investments, we may not achieve the anticipated benefits of such acquisitions, we may incur costs in excess of what we anticipate, and management resources and attention may be diverted from other necessary or valuable activities. Any acquisition, including the Trimaran Advisors acquisition, may not result in short-term or long-term benefits to us. If we are unable to integrate or successfully manage any business that we acquire, we may not realize anticipated cost savings, improved efficiencies or revenue growth, which may result in reduced profitability or operating losses.
Our Board of Directors has the authority to modify or waive certain of our operating policies and strategies without prior notice and without stockholder approval. However, absent stockholder approval, we may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC. We cannot predict the effect any changes to our current operating policies and strategies would have on our business and operating results. Nevertheless, the effects may adversely affect our business and they could negatively impact our ability to pay you dividends and could cause you to lose all or part of your investment in our securities.
As a BDC under the 1940 Act, we are generally not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). Recent legislation introduced in the U.S. House of Representatives, if eventually passed, would modify this section of the 1940 Act and increase the amount of debt that business development companies may incur by modifying the percentage from 200% to 150%, as proposed. As a result, we may be able to incur additional indebtedness in the future and therefore your risk of an investment in our securities may increase.
From time to time, we may be subject to legal actions as well as various regulatory, governmental and law enforcement inquiries, investigations and subpoenas including relating to the restatement described in Note 2 to our consolidated financial statements for the year ended December 31, 2014 contained in the registration statement of which this prospectus is a part. In any such claims or actions, demands for substantial monetary damages may be asserted against us and may result in financial liability or an adverse effect on our reputation among investors. We may be unable to accurately estimate our exposure to litigation risk when we record balance sheet reserves for probable loss contingencies. As a result, any reserves we establish to cover any settlements or judgments may not be sufficient to cover our actual financial exposure, which may have a material impact on our results of operations or financial condition. In regulatory enforcement matters, claims for disgorgement, the imposition of penalties and the imposition of other remedial sanctions are possible.
Our business requires a substantial amount of additional capital. We may acquire additional capital from the issuance of senior securities or other indebtedness, the issuance of additional shares of our common stock or from securitization transactions. However, we may not be able to raise additional capital in the future on
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favorable terms or at all. We may issue debt securities or preferred securities, which we refer to collectively as senior securities, and we may borrow money from banks or other financial institutions, up to the maximum amount permitted by the 1940 Act. The 1940 Act permits us to issue senior securities or incur indebtedness only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% immediately after such issuance or incurrence. With respect to certain types of senior securities, we must make provisions to prohibit any dividend distribution to our stockholders or the repurchase of certain of our securities, unless we meet the applicable asset coverage ratios at the time of the dividend distribution or repurchase. If the value of our assets declines, we may be unable to satisfy the asset coverage test. Furthermore, any amounts that we use to service our indebtedness would not be available for distributions to our common stockholders.
All of the costs of offering and servicing such debt or preferred stock (if issued by us in the future), including interest or preferential dividend payments thereon, will be borne by our common stockholders. The interests of the holders of any debt or preferred stock we may issue will not necessarily be aligned with the interests of our common stockholders. In particular, the rights of holders of our debt or preferred stock to receive interest, dividends or principal repayment will be senior to those of our common stockholders. Also, in the event we issue preferred stock, the holders of such preferred stock will have the ability to elect two members of our board of directors. In addition, we may grant a lender a security interest in a significant portion or all of our assets, even if the total amount we may borrow from such lender is less than the amount of such lenders security interest in our assets. In no event, however, will any lender to us have any veto power over, or any vote with respect to, any change in our, or approval of any new, investment objective or investment policies or strategies.
We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock at a price below the then-current net asset value of our common stock if our board of directors determines that such sale is in the best interests of KCAP and its stockholders, and our stockholders approve such sale. Our stockholders did approve such sale in 2014 and at a special meeting of our stockholder held on July 20, 2015 and to be continued on August 17, 2015, our stockholders will again vote on a proposal to authorize us, with approval of our Board of Directors, to sell shares of our common stock at a price below the then current net asset value per share of such common stock, subject to certain limitations, including, but not limited to, our policy that we shall not seek approval from our Board of Directors to sell or otherwise issue more than 15% of our then outstanding shares of common stock at a price below its then current net asset value per share. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any distributing commission or discount). We are also generally prohibited under the 1940 Act from issuing securities convertible into voting securities without obtaining the approval of our existing stockholders. In addition to issuing securities to raise capital as described above; we may securitize a portion of the loans generate cash for funding new investments. If we are unable to successfully securitize our loan portfolio our ability to grow our business and fully execute our business strategy and our earnings (if any) may be adversely affected. Moreover, even successful securitization of our loan portfolio might expose us to losses, as the residual loans in which we do not sell interests tend to be those that are riskier and more apt to generate losses.
Changes in the laws or regulations or the interpretations of the laws and regulations that govern BDCs, Registered Investment Advisers (such as our Asset Manager Affiliates), RICs or non-depository commercial lenders could significantly affect our operations and our cost of doing business. We are subject to federal, state and local laws and regulations as well as the rules of the stock exchange on which our securities are listed, and are subject to judicial and administrative decisions that affect our operations, including our loan originations, maximum interest rates, fees and other charges, disclosures to portfolio companies, the terms of secured transactions, collection and foreclosure procedures and other trade practices. The various regulatory bodies, including the SEC and the NASDAQ Global Select Market, that administer these laws and regulations have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations.
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In addition, as registered investment advisers, the Asset Manager Affiliates are subject to new and existing regulations, regulatory risks, costs and expenses associated with operating as registered investment advisers that may limit their ability to operate, structure or expand their businesses in the future. If these laws, regulations or decisions change, or if we expand our business into jurisdictions that have adopted more stringent requirements than those in which we currently conduct business, we may have to incur significant expenses in order to comply or we might have to restrict our operations. In addition, if we do not comply with applicable laws, regulations and decisions, we may lose licenses needed for the conduct of our business and be subject to civil fines and criminal penalties, any of which could have a material adverse effect upon our business, results of operations or financial condition.
Moreover, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) has increased and may significantly increase the regulation of the financial services industry. The Dodd-Frank Act contains a broad set of provisions designed to govern the practices and oversight of financial institutions and other participants in the financial markets. One such provision, Section 619 of the Dodd-Frank Act, commonly referred to as the Volcker Rule, contains certain prohibitions and restrictions on the ability of a banking entity which includes insured depository institutions, bank holding companies, foreign banking entities regulated by the Federal Reserve Board and their respective affiliates and nonbank financial company supervised by the Federal Reserve to engage in proprietary trading and have certain interests in, or relationships with certain private funds (covered funds). Under the final regulations implementing the Volcker Rule, which were adopted in December 2013, many CLOs will be covered funds if they invest, or are permitted to invest, in assets other than loans, certain cash equivalents and interest rate or currency hedges. As a result, many banking entities, including many U.S. and non-U.S. broker-dealers with affiliated banks, may be unable to invest in, or in some cases to make a market in, the securities of CLOs in which we have invested, which may reduce liquidity in these securities and have a material adverse effect on their valuation. Moreover, the Volcker Rule regulations may affect the market for CLOs such that our Asset Manager Affiliates may be unable to establish, or to obtain warehouse funding for, new CLOs that would be covered funds. If our Asset Manager Affiliates establish CLOs that are structured not to be covered funds and thus do not permit investments in customary assets such as corporate bonds, asset-backed securities or synthetic investments, and we invest in such CLOs, the ability of our Asset Manager Affiliates to manage such CLOs will be constrained by those limitations, which could materially adversely affect any investments we make in such CLOs.
In October 2014, the SEC, the FDIC, the Federal Reserve and certain other prudential banking regulators adopted final rules that will mandate risk retention for securitizations, including CLOs, beginning on December 24, 2016. Under the final risk-retentions rules, our Asset Manager Affiliates (or a majority-owned affiliate of such entities, including the Company) may be required to hold interests equal to 5% of the fair value of any CLO they sponsor (unless the CLO invests only in certain qualifying loans, which we do not expect to be the case) and would be prohibited from selling or hedging those interests in accordance with the limitations on such sales or hedges set forth in the final rule. Our Asset Manager Affiliates (or a majority-owned affiliate of such entities, including the Company) will need to have the requisite capital to hold such interests as a condition to their ability to sponsor new CLOs, and the restrictions on hedging such interests may create greater risk with respect to those interests.
Our Asset Manager Affiliates (or a majority owned affiliates) investments in such CLOs, or their inability to invest in such CLOs (and thus inability to sponsor them) could each have a material adverse effect upon our business, results of operations or financial condition.
In April 2010, the SEC proposed revised rules for asset-backed securities offerings (Regulation AB II) that, if adopted, would substantially change the disclosure, reporting and offering process for public and private offerings of asset-backed securities, including CLOs. The proposed rules, if adopted, would have required significant additional disclosures and would have altered the safe-harbor standards for the private placement of asset-backed securities to impose informational requirements similar to those that would apply to registered public offerings of such securities. The application of such informational requirements to CLOs, which have not historically been publicly registered, was unclear. On August 27, 2014, the SEC adopted a set of Regulation AB II final rules that was limited to asset-backed securities that were publicly registered. These rules impose changes to the offering process for publicly registered asset-backed securities and require disclosure of loan-level data for a subset of classes addressed in the proposed rules, but do not at this time
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extend to privately offered CLOs. However, the SEC has indicated that many aspects of the rule proposals, including the expansion of loan-level or grouped data disclosure requirements to additional asset classes and the possible application of the rules to private offerings of securities, remain under active consideration. The timing of the adoption of any additional final rules, their application to privately offered securities in general and to CLOs in particular, the cost of compliance with such rules, and whether compliance would compromise proprietary methods or strategies of our Asset Manager Affiliates, is currently unclear.
Other financial reform regulations, including regulations requiring clearing and margining of swap transactions, which may affect our ability to enter into hedging transactions; changes in the definition and regulation of commodity pool operators and commodity trading advisors, which could subject our Asset Manager Affiliates to additional regulations; leveraged lending guidance that may affect the ways in which banking institutions originate the loans in which we and our affiliates invest; heightened regulatory capital and liquidity requirements for banks that may affect our ability to borrow on reasonable terms; and non-US regulations of financial market participants that may overlap, expand upon or be inconsistent with US regulations may all have material adverse effects on our business.
As a BDC, we may not acquire any assets other than Qualifying Assets for purposes of the 1940 Act unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are Qualifying Assets. See Regulation.
We believe that most of the senior loans and mezzanine investments that we acquire constitute Qualifying Assets. However, investments in the securities of CLO Funds generally do not constitute Qualifying Assets, and we may invest in other assets that are not Qualifying Assets. If we do not invest a sufficient portion of our assets in Qualifying Assets, we may be precluded from investing in what we believe are attractive investments, which would have a material adverse effect on our business, financial condition and results of operations. These restrictions could also prevent us from making investments in the equity securities of CLO Funds, which could limit our Asset Manager Affiliates ability to organize new CLO Funds. Similarly, these rules could prevent us from making follow-on investments in existing portfolio companies (which could result in the dilution of our position).
We are prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of the members of our independent directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities is our affiliate for purposes of the 1940 Act and we are generally prohibited from buying or selling any securities (other than our securities) from or to such affiliate, absent the prior approval of our independent directors. The 1940 Act also prohibits certain joint transactions with certain of our affiliates, which could include investments in the same portfolio company (whether at the same or different times), without prior approval of our independent directors and, in some cases, the SEC. If a person acquires more than 25% of our voting securities, we will be prohibited from buying or selling any security (other than any security of which we are the issuer) from or to such person or certain of that persons affiliates, or entering into prohibited joint transactions with such person, absent the prior approval of the SEC. Similar restrictions limit our ability to transact business with our officers or directors or their affiliates. As a result of these restrictions, we may be prohibited from buying or selling any security (other than any security of which we are the issuer) from or to any portfolio company of a private equity fund managed by our investment adviser without the prior approval of the SEC, which may limit the scope of investment opportunities that would otherwise be available to us.
We have received certain exemptive relief from the SEC to permit us to co-invest, subject to the conditions of the relief granted by the SEC, with other funds managed by our Asset Manager Affiliates in a manner consistent with our investment objectives, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors. The conditions of such exemptive relief may limit our ability or the ability of our Asset Manager Affiliates, each a registered investment adviser, to operate, structure or expand their business in the future.
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If we fail to maintain our status as a BDC, we might be regulated as a closed-end investment company that is required to register under the Investment Company Act, which would subject us to additional regulatory restrictions and significantly decrease our operating flexibility. In addition, any such failure could cause an event of default under our outstanding indebtedness, which could have a material adverse effect on our business, financial condition or results of operations.
To maintain RIC tax treatment under the Code, we must meet the following annual distribution, income source and asset diversification requirements:
| The annual distribution requirement for a RIC will be satisfied if we distribute to our stockholders on an annual basis at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Because we use debt financing, we are subject to certain asset coverage ratio requirements under the 1940 Act and are (and may in the future become) subject to certain financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the distribution requirement. If we are unable to obtain cash from other sources, we could fail to qualify for RIC tax treatment and thus become subject to corporate-level U.S. federal income taxes. |
| The source income requirement will be satisfied if we obtain at least 90% of our income for each year from dividends, interest, gains from the sale of stock or securities or similar sources. |
| The asset diversification requirement will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year. To satisfy this requirement, at least 50% of the value of our assets must consist of cash, cash equivalents, U.S. Government securities, securities of other RICs, and other acceptable securities; and no more than 25% of the value of our assets can be invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain qualified publicly traded partnerships. If we do not satisfy the diversification requirements as of the end of any quarter, we will not lose our status as RIC provided that (i) we satisfied the requirements in a prior quarter and (ii) our failure to satisfy the requirements in the current quarter is not due in whole or in part to an acquisition of any security or other property. |
Failure to meet these requirements may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments will be in private companies, and therefore will be illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses. Moreover, if we fail to maintain RIC tax treatment for any reason and are subject to corporate-level U.S. federal income taxes, the resulting taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on us and on our stockholders.
We rely on various information technology systems to manage our operations. Information technology systems are subject to numerous risks including unanticipated operating problems, system failures, rapid technological change, failure of the systems that operate as anticipated, reliance on third party computer hardware, software and IT service providers, computer viruses, telecommunication failures, data breaches, denial of service attacks, spamming, phishing attacks, computer hackers and other similar disruptions, any of which could materially adversely impact our consolidated financial condition and results of operations. Additional risks include, but are not limited to, the following:
We regularly maintain, upgrade, enhance or replace our information technology systems to support our business strategies and provide business continuity. Replacing legacy systems with successor systems, making
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changes to existing systems or acquiring new systems with new functionality have inherent risks including disruptions, delays, or difficulties that may impair the effectiveness of our information technology systems.
Cybersecurity refers to the combination of technologies, processes, and procedures established to protect information technology systems and data from unauthorized access, attack, or damage. We are subject to cybersecurity risks. Information cyber security risks have significantly increased in recent years and, while we have not experienced any material losses relating to cyber attacks or other information security breaches, we could suffer such losses in the future. Our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code and other events that could have a security impact. If one or more of such events occur, this potentially could jeopardize confidential and other information, including nonpublic personal information and sensitive business data, processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties, which could result in significant losses or reputational damage. This could result in significant losses, reputational damage, litigation, regulatory fines or penalties, or otherwise adversely affect our business, financial condition or results of operations. Privacy and information security laws and regulation changes, and compliance with those changes, may result in cost increases due to system changes and the development of new administrative processes. In addition, we may be required to expend significant additional resources to modify our protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks. We currently do not maintain insurance coverage relating to cybersecurity risks, and we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are not fully insured.
Third parties with which we do business may also be sources of cybersecurity or other technological risks. We outsource certain functions and these relationships allow for the storage and processing of our information, as well as customer, counterparty, employee and borrower information. While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure or destruction of data, or other cybersecurity incidents, with increased costs and other consequences, including those described above.
On June 18, 2013, KCAP Senior Funding I, LLC, a specialty finance subsidiary of the Company, was capitalized through the issuance of $140 million of notes (the KCAP Senior Funding I Notes). In December 2014, KCAP Senior Funding I, LLC, issued an additional $56 million of notes. The KCAP Senior Funding I Notes are backed by a diversified portfolio of bank loans.
Under the terms of the master loan sale agreement governing the debt securitization financing transaction, (1) we sold and/or contributed to KCAP Senior Funding I Holdings, LLC (Holdings) all of our ownership interest in our portfolio loans and participations for the purchase price and other consideration set forth in the master loan sale agreement and (2) Holdings, in turn, sold and/or contributed to KCAP Senior Funding I, LLC (the Issuer) all of its ownership interest in such portfolio loans and participations for the purchase price and the consideration set forth in the master loan sale agreement. Following these transfers, the Issuer, and not Holdings or us, held all of the ownership interest in such portfolio loans and participations. As a result of the debt securitization financing transaction, we hold indirectly through Holdings all of the subordinated notes and membership interests of the Issuer. As a result, we consolidate the financial statements of Holdings and the Issuer in our consolidated financial statements. Because Holdings and the Issuer are disregarded as entities separate from its owner for U.S. federal income tax purposes, each of the sale or contribution of portfolio loans by us to Holdings, and the sale of portfolio loans by Holdings to the Issuer, did not constitute a taxable
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event for U.S. federal income tax purposes. If the U.S. Internal Revenue Service were to take a contrary position, there could be a material adverse effect on our business, financial condition, results of operations or cash flows.
The subordinated notes of the Issuer are the junior class of notes issued by the Issuer, are subordinated in priority of payment to the secured notes issued by the Issuer and are subject to certain payment restrictions set forth in the indenture governing the notes of the Issuer. Therefore, Holdings only receives cash distributions on the subordinated notes if the Issuer has made all cash interest payments on the secured notes it has issued, and we only receive cash distributions in respect of our indirect ownership of the Issuer to the extent that Holdings receives any cash distributions in respect of its direct ownership of the Issuer. The subordinated notes of the Issuer are also unsecured and rank behind all of the secured creditors, known or unknown, of the Issuer, including the holders of the secured notes it has issued. Consequently, to the extent that the value of either the Issuers portfolio of loan investments has been reduced as a result of conditions in the credit markets, or as a result of defaulted loans or individual fund assets, the value of the subordinated notes of such securitization issuer at their redemption could be reduced. Accordingly, our investment in the Issuer may be subject to complete loss.
The membership interests in the Issuer represent all of the residual economic interest in the Issuer. As such, the holder of the membership interests of the Issuer is the residual claimant on distributions, if any, made by the Issuer after holders of all classes of notes issued by the Issuer have been paid in full on each payment date or upon maturity of such notes under the debt securitization financing transaction documents.
If an event of default has occurred and acceleration occurs in accordance with the terms of the indenture governing the notes of the Issuer, the secured notes of the Issuer then outstanding will be paid in full before any further payment or distribution on the subordinated notes of the Issuer. In addition, if an event of default occurs, holders of a majority of the most senior class of secured notes then outstanding will be entitled to determine the remedies to be exercised under the indenture, subject to the terms of the indenture. For example, upon the occurrence of an event of default with respect to the notes issued by the Issuer, the trustee or holders of a majority of the most senior class of secured notes of the Issuer then outstanding may declare the principal, together with any accrued interest, of all the notes of such class and any junior classes to be immediately due and payable. This would have the effect of accelerating the principal on such notes, triggering a repayment obligation on the part of the Issuer. If at such time the portfolio loans of the Issuer were not performing well, the Issuer may not have sufficient proceeds available to enable the trustee under the indenture to repay the obligations of holders of the subordinated notes of the Securitization Issuer, or to pay a dividend to holders of the membership interests of the Issuer.
Remedies pursued by the holders of the secured notes of the Issuer could be adverse to the interests of the holders of the subordinated notes of the Issuer, and the holders of such secured notes will have no obligation to consider any possible adverse effect on such other interests. Thus, any remedies pursued by the holders of the secured notes of the Issuer may not be in our best interests and we may not receive payments or distributions upon an acceleration of the secured notes. Any failure of the Issuer to make distributions on the subordinated notes we hold, directly or indirectly, whether as a result of an event of default or otherwise, could have a material adverse effect on our business, financial condition, results of operations and cash flows and may result in an inability of us to make distributions sufficient to allow our qualification as a RIC.
Under the documents governing the debt securitization financing transaction, there are two coverage tests applicable to the secured notes. The first such test compares the amount of interest received on the portfolio loans held by the Issuer to the amount of interest payable in respect of the secured notes of the Issuer. To meet this test at any time, interest received on the portfolio loans must equal at least 127% to 150% (based upon a graduated scale for the most senior class of secured notes then outstanding as provided for in the indenture) of the interest payable in respect of the secured notes of the Issuer. The second such test compares the principal amount of the portfolio loans held by the Issuer to the aggregate outstanding principal amount of the secured notes of the Issuer. To meet this test at any time, the aggregate principal amount of the portfolio
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loans held by the Issuer must equal at least 124% to 147% (based upon a graduated scale for the most senior class of secured notes then outstanding as provided for in the indenture) of the outstanding principal amount of the secured notes of the Issuer. If either coverage test is not satisfied, interest and principal received by the Issuer are diverted on the following payment date to pay the most senior class or classes of secured notes to the extent necessary to cause all coverage tests to be satisfied on a pro forma basis after giving effect to all payments made in respect of the notes, which, with respect to the payment of any principal amount of the secured notes, we refer to as a mandatory redemption. If any coverage test with respect to the secured notes is not met, proceeds from the portfolio of loan investments that otherwise would have been distributed to the Issuer and the holders of its subordinated notes will instead be used to redeem first the secured notes of the Issuer, to the extent necessary to satisfy the applicable coverage tests.
We receive cash from the Issuer only to the extent that we or Holdings, as applicable, receives payments on the subordinated notes or membership interests of the Issuer. The Issuer may only make payments on such securities to the extent permitted by the payment priority provisions of the indenture governing the notes, which generally provides that principal payments on the subordinated notes may not be made on any payment date unless all amounts owing under the secured notes issued under such indenture are paid in full. In addition, if the Issuer does not meet the coverage tests set forth in the documents governing the debt securitization financing transaction, cash would be diverted from the subordinated notes of the Issuer to first pay the secured notes of the Issuer in amounts sufficient to cause such tests to be satisfied. In the event that we fail to directly or indirectly receive cash from the Issuer, we could be unable to make distributions in amounts sufficient to maintain our status as a RIC, or at all. We also could be forced to sell investments in portfolio companies at less than their fair value in order to continue making such distributions. However, the indenture places significant restrictions on the Issuers ability to sell investments. As a result, there may be times or circumstances during which the Issuer is unable to sell investments or take other actions that might be in our best interests.
In connection with our debt securitization financing transaction, we transferred all of our interests in certain portfolio loans to the Issuer. In doing so, we transferred any right we previously had to the payments made on such portfolio loans in exchange for 100% of the residual interests in the Issuer. As a result, we face a heightened risk of loss due to the impact of leverage utilized by the Issuer, which would have the effect of magnifying the impact on us of a loss on any portfolio loan held by the Issuer. In addition, while we serve as the collateral manager for the Issuer, which provides us with the authority to enforce payment obligations and loan covenants of the portfolio loans that we transferred to the Issuer, we are required to exercise such authority for the interests of the Issuer, rather than for our own interests alone.
The structure of the debt securitization financing transaction is intended to prevent, in the event of our bankruptcy or the bankruptcy of Holdings, the consolidation for purposes of such bankruptcy proceedings of the Issuer with our operations or those of Holdings. If the true sale of these assets were not respected in the event of our insolvency, a trustee or debtor-in-possession might reclaim the assets of the Issuer for our estate. However, in doing so, we would become directly liable for all of the indebtedness then outstanding under the debt securitization financing transaction, which would equal the full amount of debt of the Issuer reflected on our consolidated balance sheet. In addition, we cannot assure that the recovery in the event we were consolidated with the Issuer for purposes of any bankruptcy proceeding would exceed the amount to which we would otherwise be entitled as a direct or indirect holder of the subordinated notes had we not been consolidated with the Issuer.
As of December 31, 2014, $194.8 million of the assets that are reflected on our financial statements were held by the Issuer and pledged as collateral under the senior secured notes issued by the Issuer. If the Issuer defaults on its obligations under the senior secured notes, the holders of the senior secured notes may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests. In such
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event, we and the Issuer may be forced to sell our investments to raise funds to repay the Issuers outstanding borrowings in order to avoid foreclosure and these forced sales may be at times and at prices we and the Issuer would not consider advantageous. Moreover, such deleveraging of our company could significantly impair our ability to effectively operate our business in the manner in which we have historically operated. As a result, we could be forced to curtail or cease new investment activities and lower or eliminate the dividends that we have historically paid to our stockholders.
In addition, in certain limited circumstances in the event of default, if the holders of the senior secured notes exercise their right to sell the assets pledged by the Issuer, such sales may be completed at distressed sale prices, thereby diminishing or potentially eliminating the amount of cash available to the Issuer and us after repayment of the amounts outstanding under the senior secured notes.
We invest primarily in senior secured term loans, mezzanine debt, selected equity investments issued by middle market companies, CLO Funds and our Asset Manager Affiliates. The investments in our Debt Securities Portfolio are all or predominantly below investment grade, may be highly leveraged, and therefore have speculative characteristics with respect to the issuers capacity to pay interest and repay principal. Defaults by portfolio companies may harm our operating results.
Secured Loans. When we extend secured term loans, we generally take a security interest (either as a first lien position or as a second lien position) in the available assets of these portfolio companies, including the equity interests of their subsidiaries, which we expect to assist in mitigating the risk that we will not be repaid. However, there is a risk that the collateral securing our loans may decrease in value over time, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions, including as a result of the inability of the portfolio company to raise additional capital, and, in some circumstances, our lien could be subordinated to claims of other creditors. In addition, deterioration in a portfolio companys financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interest payments according to the loans terms, or at all, or that we will be able to collect on the loan should we be forced to exercise our remedies.
Mezzanine Debt. Our mezzanine debt investments generally are subordinated to senior loans and generally are unsecured. This may result in an above average amount of risk and volatility or loss of principal.
These investments may entail additional risks that could adversely affect our investment returns. To the extent interest payments associated with such debt are deferred, such debt is subject to greater fluctuations in value based on changes in interest rates and such debt could subject us to phantom income. Since we generally do not receive any cash prior to maturity of the debt, the investment is of greater risk.
Equity Investments. We have made and expect to make selected equity investments in the middle market companies. In addition, when we invest in senior secured loans or mezzanine debt, we may acquire warrants in the equity of the portfolio company. Our goal is ultimately to dispose of such equity interests and realize gains upon our disposition of such interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.
Risks Associated with Middle Market Companies. Investments in middle market companies also involve a number of significant risks, including:
| limited financial resources and inability to meet their obligations, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of our realizing the value of any guarantees we may have obtained in connection with our investment; |
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| shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors actions and market conditions, as well as general economic downturns; |
| dependence on management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us; |
| less predictable operating results, being parties to litigation from time to time, engaging in rapidly changing businesses with products subject to a substantial risk of obsolescence and requiring substantial additional capital expenditures to support their operations, finance expansion or maintain their competitive position; |
| difficulty accessing the capital markets to meet future capital needs; and |
| generally less publicly available information about their businesses, operations and financial condition. |
CLO Fund Investments. Investments in CLO Funds also involve a number of significant risks, including:
| CLOs typically are comprised of a portfolio of senior secured loans; payments on CLO investments are and will be payable solely from the cash-flows from such senior secured loans. |
| CLO investments are exposed to leveraged credit risk. |
| CLO Funds are highly leveraged. |
| There is the potential for interruption and deferral of cash-flow from CLO investments. |
| Interest rates paid by corporate borrowers are subject to volatility. |
| The inability of a CLO collateral manager to reinvest the proceeds of the prepayment of senior secured loans may adversely affect us. |
| Our CLO investments are subject to prepayments and calls, increasing re-investment risk. |
| We have limited control of the administration and amendment of senior secured loans owned by the CLOs in which we invest. |
| We have limited control of the administration and amendment of any CLO in which we invest. |
| Senior secured loans of CLOs may be sold and replaced resulting in a loss to us. |
| Our financial results may be affected adversely if one or more of our significant equity or junior debt investments in a CLO vehicle defaults on its payment obligations or fails to perform as we expect. |
| Non-investment grade debt involves a greater risk of default and higher price volatility than investment grade debt. |
Asset Manager Affiliates. We may not receive all or a portion of the income we expect to continue to receive from our Asset Manager Affiliates including incentive fees.
We expect to receive cash distributions from our Asset Manager Affiliates. However, the existing asset management agreements pursuant to which our Asset Manager Affiliates receive fee income from the CLO Funds for which they serve as managers may be terminated for cause by the holders of a majority of the most senior class of securities issued by such CLO Funds and the holders of a majority of the subordinated securities issued by such CLO Funds. Cause is defined in the asset management agreements to include a material breach by our Asset Manager Affiliates of the indenture governing the applicable CLO Fund, breaches by our Asset Manager Affiliates of certain specified provisions of the indenture (including, in some cases, a key person provision), material breaches of representations or warranties made by our Asset Manager Affiliates, bankruptcy or insolvency of our Asset Manager Affiliates, fraud or criminal activity on the
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part of our Asset Manager Affiliates or an event of default under the indenture governing the CLO Funds. We expect that future asset management agreements will contain comparable provisions.
Further, a significant portion of the asset management fees payable to our Asset Manager Affiliates under the asset management agreements are subordinated to the prior payments of interest on the senior securities issued by the CLO Funds. If the asset management agreements are terminated, or the CLO Funds do not generate enough income (due to run-off of existing funds and de-leveraging), or otherwise have insufficient residual cash flow due to diversion of cash as a result of the failure by the CLO Funds to satisfy certain restrictive covenants contained in their indenture agreements to pay the subordinated management fees, the Asset Manager Affiliates will not receive the fee income that they expect to continue to receive which would reduce dividend income available to us, and in turn reduce our ability to make distributions to our stockholders.
Our investments consist primarily of securities issued by privately-held companies, the fair value of which is not readily determinable. In addition, we are not permitted to maintain a general reserve for anticipated loan losses. Instead, we are required by the 1940 Act to specifically value each investment and record an unrealized gain or loss for any asset that we believe has increased or decreased in value. We value these securities at fair value as determined in good faith by our Board of Directors pursuant to a valuation methodology approved by our Board of Directors. These valuations are initially prepared by our management and reviewed by our Valuation Committee, which uses its best judgment in arriving at the fair value of these securities. However, the Board of Directors retains ultimate authority to determine the appropriate valuation for each investment.
The Company has engaged an independent valuation firm to provide third party valuation consulting services to the Companys Board of Directors. Each quarter, the independent valuation firm performs third party valuations on the Companys material investments in illiquid securities, such that they are reviewed at least once during a trailing 12 month period. These third party valuation estimates are one of the relevant data points in the Board of Directors determination of fair value. The Board of Directors intends to continue to engage an independent valuation firm in the future to provide certain valuation services, including the review of certain portfolio assets, as part of the quarterly and annual year-end valuation process. In addition to such third-party input, the types of factors that may be considered in valuing our investments include the nature and realizable value of any collateral, the portfolio companys ability to make payments and its earnings, the markets in which the portfolio company does business, comparison to publicly-traded companies, discounted cash flow and other relevant factors. Our investment in our Asset Manager Affiliates is carried at fair value, which is determined after taking into consideration a percentage of assets under management and a discounted cash flow model incorporating different levels of discount rates depending on the hierarchy of fees earned (including the likelihood of realization of senior, subordinate and incentive fees) and prospective modeled performance. Such valuation includes an analysis of comparable asset management companies. Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain and may be based on estimates, our determinations of fair value may differ materially from the values that would be assessed if a ready market for these securities existed. Our net asset value could be adversely affected if our determinations regarding the fair value of our illiquid investments were materially higher than the values that we ultimately realize upon the disposal of such securities.
We are classified as a non-diversified investment company within the meaning of the 1940 Act, and therefore we may invest a significant portion of our assets in a relatively small number of issuers in a limited number of industries. As of June 30, 2015, our largest investment, our 100% equity interest in our Asset Manager Affiliates, equaled approximately 29% of the fair value of our total investments. Beyond the asset
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diversification requirements associated with our qualification as a RIC, we do not have fixed guidelines for diversification, and while we are not targeting any specific industries, relatively few industries may become significantly represented among our investments. To the extent that we assume large positions in the securities of a small number of issuers, our net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the markets assessment of the issuer, changes in fair value over time or a downturn in any particular industry. We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company.
A portfolio companys failure to satisfy financial or operating covenants imposed by us or other debt holders could lead to defaults and, potentially, acceleration of the time when the loans are due and foreclosure on its secured assets. Such events could trigger cross-defaults under other agreements and jeopardize a portfolio companys ability to meet its obligations under the debt that we hold and the value of any equity securities we own. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company.
Most of our investments are either debt or minority equity investments in our portfolio companies. Therefore, we are subject to the risk that a portfolio company may make business decisions with which we disagree, and the stockholders and management of such company may take risks or otherwise act in ways that do not serve our interests. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings. In addition, we generally are not in a position to control any portfolio company by investing in its debt securities.
We invest primarily in privately-held companies. Generally, little public information exists about these companies, and we are required to rely on the ability of our investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. These companies and their financial information are not subject to the Sarbanes-Oxley Act of 2002 and other rules that govern public companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investment.
We are subject to the risk that the investments we make in our portfolio companies may be repaid prior to maturity. When this occurs, we generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments typically have substantially lower yields than the debt being prepaid and we could experience significant delays in reinvesting these amounts. Any future investment in a new portfolio company may also be at lower yields than the debt that was repaid. Consequently, our results of operations could be materially adversely affected if one or more of our portfolio companies elects to prepay amounts owed to us. Additionally, prepayments could negatively impact our return on equity, which could result in a decline in the market price of our common stock.
Until we identify new investment opportunities, we intend to either invest the net proceeds of future offerings and repayments from investments in interest-bearing deposits or other short-term instruments or use the net proceeds from such offerings to reduce then-outstanding obligations under our credit facility, if any. We cannot assure you that we will be able to find enough appropriate investments that meet our investment criteria or that any investment we complete using the proceeds from an offering will produce a sufficient return.
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We invest primarily in debt securities issued by our portfolio companies. In some cases portfolio companies are permitted to have other debt that ranks equal with, or senior to, the debt securities in which we invest. By their terms, such debt instruments may provide that the holders thereof are entitled to receive payment of interest or principal on or before the dates on which we are entitled to receive payments in respect of the debt securities in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equal with debt securities in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company.
Certain loans that we make are secured by a second priority security interest in the same collateral pledged by a portfolio company to secure senior debt owed by the portfolio company to commercial banks or other traditional lenders. Often the senior lender has procured covenants from the portfolio company prohibiting the incurrence of additional secured debt, without the senior lender's consent. Prior to, and as a condition of, permitting the portfolio company to borrow money from us secured by the same collateral pledged to the senior lender, the senior lender will require assurances that it will control the disposition of any collateral in the event of bankruptcy or other default. In many such cases, the senior lender will require us to enter into an intercreditor agreement prior to permitting the portfolio company to borrow from us. Typically, the intercreditor agreements we are requested to execute expressly subordinate our debt instruments to those held by the senior lender and further provide that the senior lender shall control: (1) the commencement of foreclosure or other proceedings to liquidate and collect on the collateral; (2) the nature, timing and conduct of foreclosure or other collection proceedings; (3) the amendment of any collateral document; (4) the release of the security interests in respect of any collateral; and (5) the waiver of defaults under any security agreement. Because of the control we may cede to senior lenders under intercreditor agreements we may enter, we may be unable to realize the proceeds of any collateral securing some of our loans.
Even though we may have structured certain of our investments as senior loans, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, including the size of our investment and the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize our debt investment and subordinate all or a portion of our claim to that of other creditors. In addition, lenders can be subject to lender liability claims for actions taken by them where they become too involved in the borrowers business or exercise control over the borrower. It is possible that we could become subject to a lenders liability claim, including as a result of actions taken in rendering significant managerial assistance.
We may purchase common stock and other equity securities, including warrants. Although equity securities have historically generated higher average total returns than fixed-income securities over the long term, equity securities have also experienced significantly more volatility in those returns. The equity securities we acquire may fail to appreciate and may decline in value or become worthless, and our ability to recover our investment depends on our portfolio companys success. Investments in equity securities involve a number of significant risks, including the risk of further dilution as a result of additional issuances, inability to
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access additional capital and failure to pay current distributions. Investments in preferred securities involve special risks, such as the risk of deferred distributions, credit risk, illiquidity and limited voting rights.
We may invest in securities issued by private companies. These securities may be subject to legal and other restrictions on resale or otherwise be less liquid than publicly-traded securities. The illiquidity of these investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. Our investments are usually subject to contractual or legal restrictions on resale or are otherwise illiquid because there is usually no established trading market for such investments. The illiquidity of most of our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.
As of June 30, 2015, we had $78.4 million at fair value invested in the subordinated securities, preferred shares, or other securities issued by the CLO Funds managed by our Asset Manager Affiliates and certain other third party asset managers. Subject to market conditions and legal requirements applicable to us under the 1940 Act, we expect to continue to acquire subordinated securities in the future in CLO Funds managed by our Asset Manager Affiliates and/or third party managers. Subordinated securities are the most junior class of securities issued by the CLO Funds and are subordinated in priority of payment to every other class of securities issued by these CLO Funds. Therefore, they only receive cash distributions if the CLO Funds have made all cash interest payments to all other debt securities issued by the CLO Fund. The subordinated securities are also unsecured and rank behind all of the secured creditors, known or unknown, of the CLO Fund, including the holders of the senior securities issued by the CLO Fund. Consequently, to the extent that the value of a CLO Funds loan investments has been reduced as a result of conditions in the credit markets, or as a result of default loans or individual fund assets, the value of the subordinated securities at their redemption could be reduced. Additionally, the Asset Manager Affiliates may not be able to continue to raise new CLO Funds due to prevailing CLO market conditions, regulatory requirements or other factors.
In October 2014, the SEC, the FDIC, the Federal Reserve and certain other prudential banking regulators finalized regulations that mandate risk retention for securitizations. The rules will be effective for CLOs beginning December 24, 2016. Under the final rules, our Asset Manager Affiliates (directly or through any of their majority-controlled affiliates, including the Company) may be required to hold interests equal to 5% of the credit risk of the assets of any CLO sponsored by our Asset Manager Affiliates (unless the CLO invests only in certain qualifying loans which we do not expect will be the case) and would be prohibited from selling or hedging those interests in accordance with the limitations on such sales or hedges set forth in the final rule. Thus, our Asset Manager Affiliates (or any of their majority-controlled affiliates, including the Company, permitted to retain risk on their behalf) will need to have the requisite capital to hold such interests as a condition to their ability to sponsor new CLOs, and the restrictions on selling or hedging such interests may create greater risk with respect to those interests, including, to the extent that we retain risk in the CLOs managed by the Asset Manager Affiliates on their behalf, our ability to sell CLO Fund Securities when advantageous for us to do so. These mandatory investments in such CLOs, or the inability to invest in such CLOs (and thus inability to sponsor them) could each have a material adverse effect upon our business, results of operations or financial condition of the Asset Manager Affiliates, which would, in turn, negatively impact our business results of operations and financial condition. In addition, the application of the risk retention rules to CLOs may have broader effects on the CLO and loan markets in general, potentially resulting in fewer or less desirable investment opportunities for the Company, our Asset Manager Affiliates, and any CLOs that our Asset Manager Affiliates sponsor or in which we otherwise invest.
On August 27, 2014, the SEC finalized revised rules for asset-backed securities offerings (Regulation AB II). Although the proposed rules would have substantially changed the disclosure, reporting
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and offering process for public and private offerings of asset-backed securities, including CLOs, the final rules only apply to public offerings of asset-backed securities and thus will not affect CLOs at this time. However, the SEC has indicated that it is continuing to consider the proposals that were not included in the final regulations, and may issue further rules in that regard. The timing and likelihood of the adoption of additional final rules, their application to privately offered securities in general and to CLOs in particular, the cost of compliance with such rules, and whether compliance would compromise proprietary methods or strategies of our Asset Manager Affiliates, is currently unclear.
We intend to make distributions on a quarterly basis to our stockholders out of assets legally available for distribution. We may not be able to achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. Our ability to pay distributions might be adversely affected by, among other things, the impact of one or more of the risk factors described herein. In addition, the inability to satisfy the asset coverage test applicable to us as a BDC could limit our ability to pay distributions. In addition, due to the asset coverage test applicable to us as a BDC and a covenant that we agreed to in connection with the issuance of the 7.375% Notes Due 2019, we are limited in our ability to make distributions in certain circumstances. In this regard, we agreed in connection with our issuance of the 7.375% Notes Due 2019 that for the period of time during which the 7.375% Notes Due 2019 are outstanding, we will not violate (regardless of whether we are subject to) Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act. These provisions generally prohibit us from declaring any cash dividend or distribution upon our common stock, or purchasing any such common stock if our asset coverage, as defined in the 1940 Act, is below 200% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase. Further, if we invest a greater amount of assets in equity securities that do not pay current dividends, it could reduce the amount available for distribution.
All distributions will be paid at the discretion of our Board of Directors and will depend on our earnings and those of the Asset Manager Affiliates, our financial condition, maintenance of our RIC status, compliance with applicable BDC regulations and such other factors as our Board of Directors may deem relevant from time to time. We cannot assure you that we will pay distributions to our stockholders in the future.
When we make quarterly distributions, we will be required to determine the extent to which such distributions are paid out of current or accumulated earnings, recognized capital gains or capital. To the extent there is a return of capital, investors will be required to reduce their basis in our stock for U.S. federal income tax purposes, which may result in higher tax liability when the shares are sold, even if they have not increased in value or have lost value. Our distributions have over the last several years included a significant return of capital component. For more information about our distributions over the last several years that have included a return of capital component, see Note 8 Distributable Taxable Income to our consolidated financial statements for the year ended December 31, 2014 contained in the registration statement of which this prospectus is a part.
The investments we make in accordance with our investment objective may result in a higher amount of risk, volatility or loss of principal than alternative investment options. Our investments in portfolio companies may be highly speculative, and therefore, an investment in our common stock may not be suitable for investors with lower risk tolerance.
We cannot predict the price at which our common stock will trade. Shares of closed-end investment companies frequently trade at a discount to their net asset value and our stock may also be discounted in the
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market. This characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether shares of our common stock will trade above, at or below our net asset value. The risk of loss associated with this characteristic of closed-end investment companies may be greater for investors expecting to sell shares of common stock soon after the purchase of such shares of common stock. In addition, if our common stock trades below its net asset value, we will generally not be able to issue additional shares of our common stock at its market price without first obtaining the approval of our stockholders and our independent directors.
The market price and liquidity of the market for shares of our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:
| price and volume fluctuations in the overall stock market from time to time; |
| significant volatility in the market price and trading volume of securities of BDCs or other companies in our sector, which are not necessarily related to the operating performance of these companies; |
| our inability to deploy or invest our capital; |
| fluctuations in interest rates; |
| any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; |
| operating performance of companies comparable to us; |
| changes in regulatory policies or tax rules, particularly with respect to RICs or BDCs; |
| inability to maintain our qualification as a RIC for U.S. federal income tax purposes; |
| changes in earnings or variations in operating results; |
| changes in the value of our portfolio; |
| general economic conditions and trends; and |
| departure of key personnel. |
Our stockholders have previously, and could again approve our ability to sell an unlimited number of shares of our common stock at any level of discount from net asset value per share during the 12 month period following such approval in accordance with the exception described above in Risk Factors Risks Related to Our Business and Structure Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital. The issuance or sale by us of shares of our common stock at a discount to net asset value poses a risk of dilution to our stockholders. In particular, stockholders who do not purchase additional shares at or below the discounted price in proportion to their current ownership will experience an immediate decrease in net asset value per share (as well as in the aggregate net asset value of their shares if they do not participate at all). These stockholders will also experience a disproportionately greater decrease in their participation in our earnings and assets and their voting power than the increase we experience in our assets, potential earning power and voting interests from such issuance or sale. In addition, such sales may adversely affect the price at which our common stock trades.
The Delaware General Corporation Law, our certificate of incorporation and our bylaws contain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us.
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These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price of our common stock.
Our 8.75% convertible notes due 2016 (the Convertible Notes) are convertible into shares of our common stock at any time prior to the end of business on the business day preceding the maturity date. Upon conversion, we will satisfy our conversion obligation by issuing shares of our common stock to the converting holder or cash, at our option. Our stockholders may experience dilution in their ownership percentage of common stock upon our issuance of common stock on any conversion of the Convertible Notes and any dividends paid on our common stock will also be paid on shares issued on any conversion, which may result in a reduction of the per share dividend.
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This prospectus includes forward-looking statements. The matters discussed in this prospectus, as well as in future oral and written statements by management of the Company that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as may, will, should, expects, plans, anticipates, could, intends, target, projects, contemplates, believes, estimates, predicts, potential or continue or the negative of these terms or other similar words. Important assumptions include our ability to acquire or originate new investments, achieve certain margins and levels of profitability, the availability of additional capital, and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this prospectus should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this prospectus include statements as to:
| our future operating results; |
| our business prospects and the prospects of our existing and prospective portfolio companies; |
| the return or impact of current and future investments; |
| our contractual arrangements and other relationships with third parties; |
| the dependence of our future success on the general economy and its impact on the industries in which we invest; |
| the financial condition and ability of our existing and prospective portfolio companies to achieve their objectives; |
| our expected financings and investments; |
| our regulatory structure and tax treatment; |
| our ability to operate as a BDC and a RIC, including the impact of changes in laws or regulations governing our operations, the operations of the Asset Manager Affiliates or the operations of our portfolio companies; |
| the adequacy of our cash resources and working capital; |
| the timing of cash flows, if any, from the operations of our portfolio companies, including our Asset Manager Affiliates; |
| the impact of a protracted decline in the liquidity of credit markets on our business; |
| the impact of fluctuations in interest rates on our business; |
| the valuation of our investments in portfolio companies, particularly those having no liquid trading market; |
| our ability to recover unrealized losses; and |
| market conditions and our ability to access additional capital. |
There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements. For a discussion of factors that could cause our actual results to differ from forward-looking statements contained in this prospectus, please see the discussion under Risk Factors. You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this prospectus.
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We intend to use substantially all of the net proceeds from selling our securities for general corporate purposes, which includes investing in portfolio companies and CLO Funds in accordance with our investment objective and strategies described elsewhere in this prospectus. The supplement to this prospectus relating to an offering will more fully identify the use of proceeds from such an offering.
We anticipate that substantially all of the net proceeds from any offering of our securities will be used as described above within six to twelve months. Pending such use, we intend to invest the net proceeds of an offering in cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment. These securities may earn yields substantially lower than the income that we anticipate receiving once we are fully invested in accordance with our investment objective. See Regulation Temporary Investments for additional information about temporary investments we may make while waiting to make longer-term investments in pursuit of our investment objective.
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Our common stock is traded on The NASDAQ Global Select Market under the symbol KCAP. We completed the initial public offering of our common stock in December 2006 at an initial public offering price of $15.00 per share. Prior to such initial public offering, there was no public market for our common stock. On August 5, 2015, the last reported closing price of our stock was $5.16 per share. As of December 31, 2014, we had 16 stockholders of record.
The following table sets forth the range of high and low closing prices of our common stock as reported on The NASDAQ Global Select Market and other information relating to our common stock for each fiscal quarter during the last three most recently completed fiscal years and the current fiscal year to date. The stock quotations are inter-dealer quotations and do not include markups, markdowns or commissions and as such do not necessarily represent actual transactions.
NAV(1) | Price Range | Discount of High Sales Price to NAV | Discount of Low Sales Price to NAV | |||||||||||||||||
High | Low | |||||||||||||||||||
2010 |
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First quarter (January 1, 2010 through March 31, 2010) | $ | 9.62 | $ | 5.71 | $ | 3.79 | (40.6 | )% | (60.6 | )% | ||||||||||
Second quarter (April 1, 2010 through June 30, 2010) | $ | 9.20 | $ | 5.88 | $ | 4.43 | (36.1 | )% | (51.9 | )% | ||||||||||
Third quarter (July 1, 2010 through September 30, 2010) | $ | 8.84 | $ | 6.69 | $ | 4.55 | (24.3 | )% | (48.5 | )% | ||||||||||
Fourth quarter (October 1, 2010 through December 31, 2010) | $ | 8.21 | $ | 7.10 | $ | 6.34 | (13.5 | )% | (22.8 | )% | ||||||||||
2011 |
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First quarter (January 1, 2011 through March 31, 2011) | $ | 8.64 | $ | 8.58 | $ | 6.70 | (0.7 | )% | (22.5 | )% | ||||||||||
Second quarter (April 1, 2011 through June 30, 2011) | $ | 8.52 | $ | 8.16 | $ | 7.12 | (4.2 | )% | (16.4 | )% | ||||||||||
Third quarter (July 1, 2011 through September 30, 2011) | $ | 8.29 | $ | 8.26 | $ | 5.33 | (0.36 | )% | (35.7 | )% | ||||||||||
Fourth quarter (October 1, 2011 through December 31, 2011) | $ | 7.85 | $ | 6.85 | $ | 5.65 | (12.7 | )% | (28.0 | )% | ||||||||||
2012 |
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First quarter (January 1, 2012 through March 31, 2012) | $ | 7.78 | $ | 7.34 | $ | 6.35 | (5.7 | )% | (18.4 | )% | ||||||||||
Second quarter (April 1, 2012 through June 30, 2012) | $ | 7.66 | $ | 7.26 | $ | 5.58 | (5.2 | )% | (27.2 | )% | ||||||||||
Third quarter (July 1, 2012 through September 30, 2012) | $ | 7.82 | $ | 9.36 | $ | 7.27 | 19.7 | %(2) | (7.0 | )% | ||||||||||
Fourth quarter (October 1, 2012 through December 31, 2012) | $ | 7.85 | $ | 9.67 | $ | 7.40 | 23.2 | %(2) | (5.7 | )% | ||||||||||
2013 |
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First quarter (January 1, 2013 through March 31, 2013) | $ | 8.33 | $ | 10.89 | $ | 9.41 | 30.7 | %(2) | 13.0 | %(2) | ||||||||||
Second quarter (April 1, 2013 through June 30, 2013) | $ | 8.24 | $ | 11.26 | $ | 9.72 | 36.7 | %(2) | 18.0 | %(2) | ||||||||||
Third quarter (July 1, 2013 through September 30, 2013) | $ | 7.96 | $ | 11.10 | $ | 8.30 | 39.4 | %(2) | 4.3 | %(2) | ||||||||||
Fourth quarter (October 1, 2013 through December 31, 2013) | $ | 7.51 | $ | 8.97 | $ | 7.99 | 19.4 | %(2) | 6.4 | %(2) |
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NAV(1) | Price Range | Premium/(Discount) of High Sales Price to NAV |
Premium (Discount) of Low Sales Price to NAV |
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High | Low | |||||||||||||||||||
2014 |
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First Quarter (January 1, 2014 through March 31, 2014) | $ | 8.66 | $ | 8.66 | $ | 7.83 | 0 | % | (9.58 | )% | ||||||||||
Second Quarter (April 1, 2014 through June 30, 2014) | $ | 8.72 | $ | 8.72 | $ | 7.79 | 0 | % | (8.60 | )% | ||||||||||
Third Quarter (July 1, 2014 through September 30, 2014) | $ | 7.67 | $ | 8.54 | $ | 7.87 | 11.3 | %(2) | 2.6 | %(2) | ||||||||||
Fourth Quarter (October 1, 2014 through December 31, 2014) | $ | 6.94 | $ | 8.59 | $ | 6.63 | 23.8 | %(2) | (4.47 | )% | ||||||||||
2015 |
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First Quarter (January 1, 2015 through March 31, 2015) | $ | 7.16 | $ | 7.68 | $ | 6.52 | 7.3 | %(2) | (8.9 | )% | ||||||||||
Second Quarter (April 1, 2015 through June 30, 2015) | $ | 6.96 | $ | 6.40 | $ | 5.56 | (8.04 | )% | (20.1 | )% | ||||||||||
Third Quarter (July 1, 2015 through August 5, 2015) | $ | * | $ | 5.87 | $ | 5.08 | * | % | *% |
* | Not determinable at the time of the filing. |
(1) | Net asset value, or NAV, per share is generally determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low closing sales prices. The net asset value shown is based on the number of shares outstanding at the end of the applicable period. |
(2) | Represents a premium to NAV. |
Shares of BDCs may trade at a market price that is less than the value of the net assets attributable to those shares. The possibility that our shares of common stock will trade at a discount from net asset value or at premiums that are unsustainable over the long term are separate and distinct from the risk that our net asset value will decrease.
Our stockholder distributions, if any, are determined by our Board of Directors. We have elected to be treated for federal income tax purposes as a RIC under Subchapter M of the Code and intend to operate in a manner to maintain our qualification as a RIC. As long as we maintain our qualification as a RIC, we will not be taxed on our net ordinary income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis. We intend to distribute to our stockholders substantially all our net taxable income and realized net capital gains (if any).
We intend to continue to make quarterly distributions to our stockholders. To maintain RIC tax treatment, we must, among other things, timely distribute at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, for each year.
To avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal to the sum of:
| 98% of our net ordinary income for the calendar year; |
| 98.2% of our capital gains, if any, in excess of capital losses for the one-year period ending on October 31 of the calendar year; and |
| any net ordinary income and net capital gains for the preceding year that were not distributed during such year. |
However, depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay the 4% excise tax on
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such income. Any such carryover taxable income must be distributed through a dividend declared prior to filing the final tax return related to the year which generated such taxable income. We will not be subject to excise taxes on amounts on which we are required to pay U.S. federal income tax (such as retained realized net long-term capital gains in excess of net short-term capital losses, or net capital gains). We may in the future retain for investment net capital gains and elect to treat such net capital gains as a deemed distribution. If this happens, you will be treated as if you received an actual distribution of the capital gains we retain and then reinvested the net after-tax proceeds in our common stock. You would be eligible to claim a tax credit against your U.S. federal income tax liability (or, in certain circumstances, a tax refund) equal to your allocable share of the tax we paid on the capital gains deemed distributed to you. Please refer to Material United States Federal Income Tax Considerations for further information regarding the consequences of our possible retention of net capital gains. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we may be prohibited from making distributions if we fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. See Regulation.
The following table sets forth the quarterly dividends declared by us since January 1, 2011:
Dividend | Declaration Date | Record Date | Payment Date | |||||||||||||
2015: |
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Second quarter | $ | 0.21 | 6/23/2015 | 7/6/2015 | 7/27/2015 | |||||||||||
First quarter | 0.21 | 3/24/2015 | 4/6/2015 | 4/27/2015 | ||||||||||||
2014: |
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Fourth quarter | $ | 0.25 | 12/17/2014 | 12/29/2014 | 1/29/2015 | |||||||||||
Third quarter | 0.25 | 9/19/2014 | 10/14/2014 | 10/29/2014 | ||||||||||||
Second quarter | 0.25 | 6/20/2014 | 7/3/2014 | 7/25/2014 | ||||||||||||
First quarter | 0.25 | 3/21/2014 | 4/4/2014 | 4/25/2014 | ||||||||||||
2013: |
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Fourth quarter | $ | 0.25 | 12/13/2013 | 12/27/2013 | 1/27/2014 | |||||||||||
Third quarter | 0.25 | 9/13/2013 | 10/8/2013 | 10/29/2013 | ||||||||||||
Second quarter | 0.28 | 6/17/2013 | 7/5/2013 | 7/26/2013 | ||||||||||||
First quarter | 0.28 | 3/15/2013 | 4/5/2013 | 4/26/2013 | ||||||||||||
2012: |
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Fourth quarter | $ | 0.28 | 12/17/2012 | 12/28/2012 | 1/28/2013 | |||||||||||
Third quarter | 0.24 | 9/17/2012 | 10/10/2012 | 10/29/2012 | ||||||||||||
Second quarter | 0.24 | 6/18/2012 | 7/6/2012 | 7/27/2012 | ||||||||||||
First quarter | 0.18 | 3/16/2012 | 4/6/2012 | 4/27/2012 | ||||||||||||
2011: |
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Fourth quarter | $ | 0.18 | 12/12/2011 | 12/23/2011 | 1/27/2012 | |||||||||||
Third quarter | 0.18 | 9/15/2011 | 10/10/2011 | 10/28/2011 | ||||||||||||
Second quarter | 0.17 | 6/13/2011 | 7/8/2011 | 7/29/2011 | ||||||||||||
First quarter | 0.17 | 3/21/2011 | 4/8/2011 | 4/29/2011 |
Due to our ownership of our Asset Manager Affiliates and certain timing, structural and tax considerations, our stockholder distributions may include a return of capital for tax purposes.
We maintain an opt out dividend reinvestment plan for our common stockholders. As a result, when we declare a dividend, cash dividends will be automatically reinvested in additional shares of our common stock unless the stockholder specifically opts out of the dividend reinvestment plan and chooses to receive cash dividends. See Dividend Reinvestment Plan.
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For purposes of computing the ratios of earnings to fixed charges, earnings represent net increase in net assets resulting from operations plus (or minus) income tax provision (benefit) including excise tax expense plus fixed charges. Fixed charges include interest and credit facility fees and amortization of deferred financing fees.
For the six months ended June 30, 2015 and the years ended December 31, 2014, 2013, 2012, 2011 and 2010, the ratios of earnings to fixed charges of the Company, computed as set forth below, were as follows:
Six Months Ended June 30, 2015 |
Year Ended December 31, 2014 |
Year Ended December 31, 2013 |
Year Ended December 31, 2012 |
Year Ended December 31, 2011 |
Year Ended December 31, 2010 |
|||||||||||||||||||
Earnings to Fixed Charges(1) | 2.49 | 2.30 | 2.70 | 4.75 | 2.67 | (1.06 ) |
(1) | Earnings include net realized and unrealized gains or losses. Net realized and unrealized gains or losses can vary substantially from period to period. |
| Excluding net unrealized gains or losses, the earnings to fixed charges ratio would be 3.09 for the six months ended June 30, 2015, 1.78 for the year ended December 31, 2014, 1.72 for the year ended December 31, 2013, 2.95 for the year ended December 31, 2012, (0.81) for the year ended December 31, 2011 and (0.66) for the year ended December 31, 2010. |
| Excluding net realized and unrealized gains or losses, the earnings to fixed charges ratio would be 3.07 for the six months ended June 30, 2015, 2.74 for the year ended December 31, 2014, 2.96 for the year ended December 31, 2013, 3.42 for the year ended December 31, 2012, 3.22 for the year ended December 31, 2011 and 1.92 for the year ended December 31, 2010. |
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The following discussion should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this prospectus. In addition to historical information, the following discussion and other parts of this prospectus contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under Risk Factors and Forward-Looking Statements appearing elsewhere in this prospectus.
We are an internally managed, non-diversified closed-end investment company that is regulated as a Business Development Company, or BDC under the Investment Company Act of 1940 (the 1940 Act). We have three principal areas of investments:
First, the Company originates, structures, and invests in senior secured term loans and mezzanine debt primarily in privately-held middle market companies (the Debt Securities Portfolio). In addition, from time to time the Company may invest in the equity securities of privately held middle market companies.
Second, the Company has invested in asset management companies (Katonah Debt Advisors and Trimaran Advisors, as well as affiliated management companies Katonah 2007-1 Management, L.L.C., Katonah X Management, L.L.C. and Trimaran Advisors Management, collectively the Asset Manager Affiliates) that manage collateralized loan obligation funds (CLOs).
Third, the Company invests in debt and subordinated securities issued by CLOs (CLO Fund Securities). These CLO Fund Securities are primarily managed by our Asset Manager Affiliates, but from time-to-time the Company makes investments in CLO Fund Securities managed by other asset managers. The CLOs typically invest in broadly syndicated loans, high-yield bonds and other credit instruments.
The Company may also invest in other investments such as loans to larger, publicly-traded companies, high-yield bonds and distressed debt securities. The Company may also receive warrants or options to purchase common stock in connection with its debt investments.
In our Debt Securities Portfolio, our investment objective is to generate current income and, to a lesser extent, capital appreciation from the investments made by our middle market business in senior secured term loans, mezzanine debt and selected equity investments in privately-held middle market companies. We define the middle market as comprising of companies with earnings before interest, taxes, depreciation and amortization (EBITDA) of $10 million to $50 million and/or total debt of $25 million to $150 million. We primarily invest in first and second lien term loans which, because of their priority in a companys capital structure, we expect will have lower default rates and higher rates of recovery of principal if there is a default and which we expect will create a stable stream of interest income. The investments in our Debt Securities Portfolio are all or predominantly below investment grade, and have speculative characteristics with respect to the issuers capacity to pay interest and repay principal. While our primary investment focus is on making loans to, and selected equity investments in, privately-held middle market companies, we may also invest in other investments such as loans to smaller companies or larger, publicly-traded companies, high-yield bonds and distressed debt securities. We may also receive warrants or options to purchase common stock in connection with our debt investments.
From our Asset Manager Affiliates investment, we expect to receive recurring cash distributions and to generate capital appreciation through the addition of new CLO Funds managed by our Asset Manager Affiliates. The Asset Manager Affiliates manage CLO Funds that invest in broadly syndicated loans, high-yield bonds and other credit instruments. Collectively, the Asset Manager Affiliates have approximately $3.2 billion of par value assets under management as of June 30, 2015. The Asset Manager Affiliates are registered under the Investment Advisers Act of 1940, and are managed independently from the Company by a separate portfolio management team.
In addition, our investments in CLO Fund Securities, which are primarily made up of a minority investment in the subordinated securities or preferred stock of CLO Funds raised and managed by our Asset
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Manager Affiliates, are anticipated to provide the Company with recurring cash distributions and complement the growth of our Asset Manager Affiliates.
We intend to grow our entire portfolio of investments by raising additional capital, including through the prudent use of leverage available to us. As a BDC, we are limited in the amount of leverage we can incur under the 1940 Act. We are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing.
We have elected to be treated for U.S. federal income tax purposes as a RIC and intend to operate in a manner to maintain our RIC status. As a RIC, we intend to distribute to our stockholders substantially all of our net ordinary taxable income and the excess of realized net short-term capital gains over realized net long-term capital losses, if any, for each year. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. Pursuant to this election, we generally will not have to pay corporate-level U.S. federal income taxes on any income that we timely distribute to our stockholders.
Our primary investments are: (1) lending to and investing in middle-market businesses through investments in senior secured loans, junior secured loans, subordinated/mezzanine debt investments, and other equity investments, which may include warrants, (2) our investments in our Asset Manager Affiliates, which manage portfolios of broadly syndicated loans, high-yield bonds and other credit instruments, and (3) CLO Fund Securities.
Total portfolio investment activity (excluding activity in time deposit and money market investments) for the six months ended June 30, 2015 (unaudited) and for the year ended December 31, 2014 was as follows:
Debt Securities | CLO Fund Securities |
Equity Securities |
Asset Manager Affiliates |
Total Portfolio | ||||||||||||||||
Fair Value at December 31, 2013 | $ | 266,830,427 | $ | 79,452,220 | $ | 11,006,398 | $ | 76,148,000 | $ | 433,437,045 | ||||||||||
2014 Activity: |
||||||||||||||||||||
Purchases/originations/draws | 224,513,503 | 22,421,847 | 2,216,847 | 545,979 | 249,698,176 | |||||||||||||||
Pay-downs/pay-offs/sales | (168,429,374 | ) | (10,132,500 | ) | (5,007,311 | ) | (6,432,086 | ) | (190,001,271 | ) | ||||||||||
Net accretion of interest | 410,718 | (11,102,015 | ) | | | (10,691,297 | ) | |||||||||||||
Net realized losses | (8,823,507 | ) | 5,575,498 | (7,136,408 | ) | | (10,384,417 | ) | ||||||||||||
Increase (decrease) in fair value | 5,641,403 | (8,700,148 | ) | 7,040,155 | 2,064,107 | 6,045,517 | ||||||||||||||
Fair Value at December 31, 2014 | 320,143,170 | 77,514,902 | 8,119,681 | 72,326,000 | 478,103,753 | |||||||||||||||
Year to Date 2015 Activity: |
||||||||||||||||||||
Purchases/originations/draws | 36,166,881 | 11,952,000 | | | 48,118,881 | |||||||||||||||
Pay-downs/pay-offs/sales | (57,444,864 | ) | | (317,340 | ) | (2,350,586 | ) | (60,112,790 | ) | |||||||||||
Net accretion of interest | 207,338 | (5,240,135 | ) | | | (5,032,797 | ) | |||||||||||||
Net realized gains (losses) | 95,393 | | 3,015 | | 98,408 | |||||||||||||||
Increase (decrease) in fair value | (1,252,614 | ) | (5,778,312 | ) | (263,271 | ) | 3,761,586 | (3,532,611 | ) | |||||||||||
Fair Value at June 30, 2015 | $ | 297,915,304 | $ | 78,448,455 | $ | 7,542,085 | $ | 73,737,000 | $ | 457,642,844 |
The level of investment activity for investments funded and principal repayments for our investments can vary substantially from period to period depending on the number and size of investments that we invest in or divest of, and many other factors, including the amount and competition for the debt and equity securities available to middle market companies, the level of merger and acquisition activity for such companies and the general economic environment.
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The following table shows the Companys portfolio by security type at June 30, 2015 and December 31, 2014:
June 30, 2015 (unaudited) | December 31, 2014 | |||||||||||||||||||||||
Security Type | Cost | Fair Value | %(1) | Cost | Fair Value | %(1) | ||||||||||||||||||
Money Market Accounts(3) | $ | 16,457,816 | $ | 16,457,816 | 6 | $ | 1,602,741 | $ | 1,602,741 | 1 | ||||||||||||||
Senior Secured Loan | 220,875,385 | 217,535,523 | 84 | 220,965,922 | 218,329,860 | 86 | ||||||||||||||||||
Junior Secured Loan | 40,194,817 | 39,898,155 | 15 | 38,664,199 | 38,569,006 | 15 | ||||||||||||||||||
Senior Unsecured Loan | 10,143,525 | 10,143,525 | 4 | 33,066,984 | 33,066,984 | 13 | ||||||||||||||||||
First Lien Bond | 2,972,088 | 2,547,600 | 1 | 2,962,507 | 2,580,000 | 1 | ||||||||||||||||||
Senior Subordinated Bond | 4,375,084 | 4,278,531 | 2 | 4,295,544 | 4,240,301 | 2 | ||||||||||||||||||
Senior Unsecured Bond | 11,527,830 | 11,618,855 | 5 | 11,208,178 | 11,386,218 | 4 | ||||||||||||||||||
Senior Secured Bond | 1,512,620 | 1,481,700 | 1 | 1,515,584 | 1,552,500 | 1 | ||||||||||||||||||
CLO Fund Securities | 97,601,049 | 78,448,455 | 30 | 90,889,190 | 77,514,901 | 30 | ||||||||||||||||||
Equity Securities | 8,514,487 | 7,542,085 | 3 | 8,828,812 | 8,119,681 | 3 | ||||||||||||||||||
Preferred Securities | 10,308,332 | 10,411,415 | 4 | 10,206,016 | 10,418,302 | 4 | ||||||||||||||||||
Asset Manager Affiliates(2) | 57,942,090 | 73,737,000 | 29 | 60,292,677 | 72,326,000 | 28 | ||||||||||||||||||
Total | $ | 482,425,123 | $ | 474,100,660 | 184 | % | $ | 484,498,354 | $ | 479,706,494 | 188 | % |
(1) | Represents percentage of Net Asset Value. |
(2) | Represents the equity investment in the Asset Manager Affiliates. |
(3) | Includes restricted cash held under employee benefit plans. |
At June 30, 2015 and December 31, 2014, our investments in income producing loans and debt securities, excluding CLO Fund securities, had a weighted average interest rate of approximately 7.3% for both periods.
The investment portfolio (excluding the Companys investment in Asset Manager Affiliates and CLO Funds) at June 30, 2015 was spread across 25 different industries and 103 different entities with an average balance per entity of approximately $3.0 million. As of June 30, 2015, all but one of our portfolio companies were current on their debt service obligations.
We may invest up to 30% of our investment portfolio in Non-qualifying opportunistic investments such as high-yield bonds, debt and equity securities of CLO Funds, foreign investments, and distressed debt or equity securities of public companies. At June 30, 2015 and December 31, 2014, the total amount of non-qualifying assets was approximately 21% for both periods. The majority of non-qualifying assets were foreign investments which was approximately 16% of the Companys total assets, for both periods (including the Companys investments in CLO Funds, which are typically domiciled outside the U.S. and represented approximately 16% of its total assets on such dates), for both periods. The investments in our Debt Securities Portfolio are all or predominantly below investment grade, and therefore have speculative characteristics with respect to the issuers capacity to pay interest and repay principal.
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The following tables detail the ten largest portfolio companies (at fair value) as of June 30, 2015 and December 31, 2014:
June 30, 2015 (unaudited) | ||||||||||||
Investment | Cost | Fair Value | % | |||||||||
Asset Manager Affiliates | $ | 57,942,090 | $ | 73,737,000 | 16 | % | ||||||
Katonah 2007-I CLO Ltd. | 23,740,077 | 24,674,912 | 5 | |||||||||
US Bank Money Market Account | 16,208,632 | 16,208,632 | 3 | |||||||||
Crowley Holdings Preferred, LLC | 10,308,332 | 10,411,415 | 2 | |||||||||
Tank Partners Holdings, LLC | 10,416,387 | 9,788,240 | 2 | |||||||||
Catamaran CLO 2015-1 Ltd. | 12,132,538 | 9,531,720 | 2 | |||||||||
Restorix Health, Inc. | 8,124,738 | 8,124,738 | 2 | |||||||||
Catamaran CLO 2014-1 Ltd. | 9,690,780 | 7,908,078 | 2 | |||||||||
Catamaran CLO 2014-2 Ltd. | 8,847,407 | 7,763,580 | 2 | |||||||||
Grupo HIMA San Pablo, Inc. | 6,909,329 | 7,105,000 | 1 | |||||||||
Total | $ | 164,320,310 | $ | 175,253,315 | 37 | % |
December 31, 2014 | ||||||||||||
Investment | Cost | Fair Value | % | |||||||||
Asset Manager Affiliates | $ | 60,292,677 | $ | 72,326,000 | 15 | % | ||||||
Katonah 2007-I CLO Ltd. | 23,471,779 | 25,191,782 | 5 | |||||||||
Trimaran Credit Facility | 23,000,000 | 23,000,000 | 5 | |||||||||
Crowley Holdings Preferred, LLC | 10,206,016 | 10,418,302 | 2 | |||||||||
Tank Partners Holdings, LLC | 10,212,907 | 9,866,065 | 2 | |||||||||
Catamaran CLO 2014-1 Ltd. | 10,473,628 | 8,867,176 | 2 | |||||||||
Catamaran CLO 2014-2 Ltd. | 9,862,799 | 8,761,500 | 2 | |||||||||
Restorix Health, Inc. | 8,063,397 | 8,063,397 | 2 | |||||||||
Catamaran CLO 2013-1 Ltd. | 7,492,702 | 7,874,910 | 2 | |||||||||
Grupo HIMA San Pablo, Inc. | 6,894,754 | 7,105,000 | 1 | |||||||||
Total | $ | 169,970,659 | $ | 181,474,132 | 38 | % |
Excluding the Asset Manager Affiliates and CLO Fund securities, the Companys ten largest portfolio companies represented approximately 14% and 17% of the total fair value of the Companys investments at June 30, 2015 and December 31, 2014, respectively.
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The industry concentrations based on the fair value of the Companys investment portfolio as of June 30, 2015 and December 31, 2014, were as follows:
June 30, 2015 (unaudited) | December 31, 2014 | |||||||||||||||||||||||
Industry Classification | Cost | Fair Value | %(1) | Cost | Fair Value | %(1) | ||||||||||||||||||
Aerospace and Defense | $ | 9,962,961 | $ | 9,507,015 | 4.0 | % | $ | 10,059,487 | $ | 9,533,092 | 4 | % | ||||||||||||
Asset Management Company(2) | 57,942,090 | 73,737,000 | 30.0 | 60,292,677 | 72,326,000 | 28 | ||||||||||||||||||
Portfolio Company Loan | | | | 23,000,000 | 23,000,000 | 9 | ||||||||||||||||||
Automotive | 8,338,128 | 8,288,792 | 3.0 | 8,362,956 | 8,312,548 | 3 | ||||||||||||||||||
Banking, Finance, Insurance & Real Estate | 6,883,390 | 6,932,029 | 3.0 | 7,660,721 | 7,639,366 | 3 | ||||||||||||||||||
Beverage, Food and Tobacco | 26,075,029 | 25,908,282 | 10.0 | 17,974,974 | 17,883,421 | 7 | ||||||||||||||||||
Capital Equipment | 9,503,020 | 10,144,194 | 4.0 | 9,486,407 | 10,351,329 | 4 | ||||||||||||||||||
Chemicals, Plastics and Rubber | 9,813,938 | 9,817,440 | 4.0 | 6,348,226 | 6,210,253 | 2 | ||||||||||||||||||
CLO Fund Securities | 97,601,049 | 78,448,455 | 30.0 | 90,889,190 | 77,514,901 | 31 | ||||||||||||||||||
Construction & Building | 1,985,014 | 1,985,000 | 1.0 | | | | ||||||||||||||||||
Consumer goods: Durable | 14,308,915 | 13,799,538 | 5.0 | 13,876,482 | 13,301,207 | 5 | ||||||||||||||||||
Consumer goods: Non-durable | 13,470,912 | 13,389,057 | 5.0 | 13,535,975 | 13,314,952 | 5 | ||||||||||||||||||
Containers, Packaging and Glass |
2,916,649 | 2,930,328 | 1.0 | 2,992,443 | 2,946,734 | 1 | ||||||||||||||||||
Energy: Oil & Gas | 14,071,674 | 12,659,600 | 5.0 | 13,866,208 | 13,289,753 | 5 | ||||||||||||||||||
Environmental Industries | 12,836,897 | 12,869,296 | 5.0 | 12,942,593 | 12,911,017 | 5 | ||||||||||||||||||
Forest Products & Paper | 5,902,645 | 5,939,900 | 2.0 | 5,917,051 | 5,942,523 | 2 | ||||||||||||||||||
Healthcare & Pharmaceuticals | 64,268,378 | 62,621,277 | 24.0 | 66,186,412 | 65,720,782 | 27 | ||||||||||||||||||
High Tech Industries | 10,837,095 | 10,924,468 | 4.0 | 14,457,495 | 14,419,110 | 6 | ||||||||||||||||||
Hotel, Gaming & Leisure | 3,219,576 | 2,825,862 | 1.0 | 3,392,481 | 2,962,315 | 1 | ||||||||||||||||||
Media: Advertising, Printing & Publishing | 11,239,642 | 10,844,244 | 4.0 | 11,318,815 | 11,396,027 | 4 | ||||||||||||||||||
Media: Broadcasting & Subscription | 10,468,451 | 10,360,599 | 4.0 | 14,477,078 | 14,409,401 | 6 | ||||||||||||||||||
Metals & Mining | 228,563 | 1,000 | | 228,563 | 1,000 | | ||||||||||||||||||
Retail | 4,389,620 | 4,028,444 | 2.0 | 4,234,086 | 3,773,847 | 1 | ||||||||||||||||||
Services: Business | 20,521,595 | 20,426,472 | 8.0 | 16,550,255 | 16,066,421 | 6 | ||||||||||||||||||
Services: Consumer | 6,542,350 | 6,577,250 | 3.0 | 6,798,372 | 6,752,521 | 3 | ||||||||||||||||||
Telecommunications | 15,111,618 | 14,979,978 | 6.0 | 22,030,434 | 21,865,864 | 9 | ||||||||||||||||||
Time Deposit and Money Market Accounts(3) | 16,457,815 | 16,457,816 | 6.0 | 1,602,741 | 1,602,741 | 1 | ||||||||||||||||||
Transportation: Cargo | 21,724,053 | 21,876,962 | 8.0 | 20,156,700 | 20,455,941 | 8 | ||||||||||||||||||
Utilities: Electric | 5,804,056 | 5,820,362 | 2.0 | 5,859,532 | 5,803,428 | 2 | ||||||||||||||||||
Total | $ | 482,425,123 | $ | 474,100,660 | 184 | % | $ | 484,498,354 | $ | 479,706,494 | 188 | % |
(1) | Calculated as a percentage of Net Asset Value. |
(2) | Represents the equity investment in the Asset Manager Affiliates. |
(3) | Includes restricted cash held under employee benefit plans. |
We typically make a minority investment in the subordinated securities or preferred stock of CLO Funds raised and managed by our Asset Manager Affiliates and may selectively invest in securities issued by CLO Funds managed by other asset management companies. As of June 30, 2015, we had approximately $78 million invested in CLO Fund Securities, issued primarily by funds managed by our Asset Manager Affiliates.
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The CLO Funds invest primarily in broadly syndicated non-investment grade loans, high-yield bonds and other credit instruments of corporate issuers. The underlying assets in each of the CLO Fund Securities in which we have an investment are generally diversified secured or unsecured corporate debt.
Our CLO Fund Securities as of June 30, 2015 and December 31, 2014 are as follows:
June 30, 2015 | December 31, 2014 | |||||||||||||||||||||||
CLO Fund Securities | Investment | %(1) | Cost | Fair Value | Cost | Fair Value | ||||||||||||||||||
Grant Grove CLO, Ltd. | Subordinated Securities | 22.2 | % | $ | 2,498,355 | $ | 522,005 | $ | 2,254,638 | $ | 469,132 | |||||||||||||
Katonah III, Ltd.(3) | Preferred Shares | 23.1 | 1,361,891 | 375,000 | 1,015,334 | 400,000 | ||||||||||||||||||
Katonah VII CLO Ltd.(2) | Subordinated Securities | 16.4 | 3,530,488 | 1,000 | 3,563,252 | 1,000 | ||||||||||||||||||
Katonah VIII CLO Ltd.(2) | Subordinated Securities | 10.3 | 2,706,408 | 20,000 | 2,755,267 | 100,000 | ||||||||||||||||||
Katonah IX CLO Ltd.(2) | Preferred Shares | 6.9 | 1,203,124 | 493,427 | 1,262,496 | 594,988 | ||||||||||||||||||
Katonah X CLO Ltd.(2) | Subordinated Securities | 33.3 | 8,932,776 | 4,686,406 | 8,910,471 | 4,863,001 | ||||||||||||||||||
Katonah 2007-I CLO Ltd.(2) |
Preferred Shares | 100.0 | 23,740,077 | 24,674,912 | 23,471,779 | 25,191,782 | ||||||||||||||||||
Trimaran CLO IV, Ltd.(2) | Preferred Shares | 19.0 | | | 11,094 | 900,000 | ||||||||||||||||||
Trimaran CLO V, Ltd.(2) | Subordinated Notes | 20.8 | 142,490 | 675,000 | 1,292,698 | 1,657,020 | ||||||||||||||||||
Trimaran CLO VI, Ltd.(2) | Income Notes | 16.2 | | | 1,531,142 | 1,950,000 | ||||||||||||||||||
Trimaran CLO VII, Ltd.(2) | Income Notes | 10.5 | 1,340,875 | 2,042,214 | 1,399,074 | 2,084,394 | ||||||||||||||||||
Catamaran CLO 2012-1 Ltd.(2) | Subordinated Notes | 24.9 | 7,507,610 | 5,052,888 | 7,994,677 | 5,793,924 | ||||||||||||||||||
Catamaran CLO 2012-1 Ltd.(2) | Class F Notes | 42.9 | 3,949,318 | 4,060,000 | 3,917,442 | 4,160,000 | ||||||||||||||||||
Catamaran CLO 2013-1 Ltd.(2) | Subordinated Notes | 23.5 | 6,881,847 | 6,963,300 | 7,492,702 | 7,874,910 | ||||||||||||||||||
Dryden 30 Senior Loan Fund | Subordinated Notes | 7.5 | 1,712,276 | 2,368,925 | 10,473,628 | 8,867,176 | ||||||||||||||||||
Catamaran CLO 2014-1 Ltd.(2) | Subordinated Notes | 24.9 | 9,690,780 | 7,908,078 | 1,417,376 | 1,340,000 | ||||||||||||||||||
Catamaran CLO 2014-1 Ltd.(2) | Class E Notes | 15.1 | 1,422,789 | 1,310,000 | 2,263,321 | 2,506,075 | ||||||||||||||||||
Catamaran CLO 2014-2 Ltd.(2) | Subordinated Notes | 24.9 | 8,847,407 | 7,763,580 | 9,862,799 | 8,761,500 | ||||||||||||||||||
Catamaran CLO 2015-1 Ltd.(2) | Subordinated Notes | 24.0 | 12,132,538 | 9,531,720 | | | ||||||||||||||||||
Total | $ | 97,601,049 | $ | 78,448,455 | $ | 90,889,190 | $ | 77,514,902 |
(1) | Represents percentage of class held. |
(2) | A CLO Fund managed by an Asset Manager Affiliate. |
(3) | As of June 30, 2015, this CLO Fund security was not providing a dividend distribution. |
The Asset Manager Affiliates are our wholly-owned asset management companies that manage CLO Funds that invest in broadly syndicated loans, high yield bonds and other credit instruments. The CLO Funds managed by our Asset Manager Affiliates consist primarily of credit instruments issued by corporations. As of June 30, 2015, our Asset Manager Affiliates had approximately $3.2 billion of par value of assets under management on which they earn management fees, and were valued at approximately $74 million.
All CLO Funds managed by the Asset Manager Affiliates are currently paying all senior and subordinate management fees. In addition, in the second quarter of 2015, our Asset Manager Affiliates received incentive fees from three funds.
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The principal measure of our financial performance is the net increase (decrease) in stockholders equity resulting from operations, which includes net investment income (loss) and net realized and unrealized appreciation (depreciation). Net investment income (loss) is the difference between our income from interest, distributions, fees, and other investment income and our operating expenses. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net change in unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio.
Set forth below is a discussion of our results of operations for the three and six months ended June 30, 2015 and 2014.
Revenues consist primarily of investment income from interest and dividends on our investment portfolio and various ancillary fees related to our investment holdings.
Interest from Investments in Debt Securities. We generate interest income from our investments in debt securities that consist primarily of senior and junior secured loans. Our debt securities portfolio is spread across multiple industries and geographic locations, and as such, we are broadly exposed to market conditions and business environments. As a result, although our investments are exposed to market risks, we continuously seek to limit concentration of exposure in any particular sector or issuer.
Investment Income on Investments in CLO Fund Securities. We generate investment income from our investments in the securities (typically preferred shares or subordinated securities) of CLO Funds managed by our Asset Manager Affiliates and selective investments in securities issued by CLO Funds managed by other asset management companies. CLO Funds managed by our Asset Manager Affiliates and those managed by non-affiliates invest primarily in broadly syndicated non-investment grade loans, high-yield bonds and other credit instruments of corporate issuers. The Company distinguishes CLO Funds managed by its Asset Manager Affiliates as CLO Fund Securities Managed by Affiliates, in its financial consolidated statements. The underlying assets in each of the CLO Funds in which we have an investment are generally diversified secured or unsecured corporate debt. Our CLO Fund Securities that are subordinated securities or preferred shares (junior securities) are subordinated to senior note holders who typically receive a return on their investment at a fixed spread relative to the LIBOR index. The CLO Funds are leveraged funds and any excess cash flow or excess spread (interest earned by the underlying securities in the fund less payments made to senior bond holders and less fund expenses and management fees) is paid to the holders of the CLO Funds subordinated securities or preferred shares. The level of excess spread from CLO Fund Securities can be impacted by the timing and level of the resetting of the benchmark interest rate for the underlying assets (which reset at various times throughout the quarter) in the CLO Fund and the related CLO Fund note liabilities (which reset at each quarterly distribution date); in periods of short-term and volatile changes in the benchmark interest rate, the levels of excess spread and resulting cash distributions to us can vary significantly.
Interest income on investments in CLO equity investments is recorded using the effective interest method in accordance with the provisions of ASC 325-40, Beneficial Interests in Securitized Financial Assets (ASC 325-40), based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated projected future cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield prospectively over the remaining life of the investment from the date the estimated yield was changed. Accordingly, investment income recognized on CLO equity securities in the GAAP statement of operations differs from both the taxbasis investment income and from the cash distributions actually received by the Company during the period. As a RIC, the Company anticipates a timely distribution of its tax-basis taxable income.
For non-junior class CLO Fund securities, such as our investment in the Class F notes of the Catamaran 2012-1 and the Class E notes of Catamaran 2014-1, interest is earned at a fixed spread relative to the LIBOR index.
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Distributions from Asset Manager Affiliates. We receive cash distributions from our investment in our Asset Manager Affiliates, which are wholly-owned and manage CLO Funds that invest primarily in broadly syndicated non-investment grade loans, high yield bonds and other credit instruments issued by corporations. As managers of CLO Funds, our Asset Manager Affiliates receive contractual and recurring management fees from the CLO Funds for their management and advisory services. In addition, our Asset Manager Affiliates may also earn income related to net interest on assets accumulated for future CLO issuances on which they have taken a first loss position in connection with loan warehouse arrangements for their CLO Funds. The annual management fees that our Asset Manager Affiliates receive are generally based on a fixed percentage of the par value of assets under management and are recurring in nature for the term of the CLO Fund so long as the Asset Manager Affiliates manage the fund. As a result, the annual management fees earned by our Asset Manager Affiliates generally are not subject to market value fluctuations in the underlying collateral. Our Asset Manager Affiliates may receive incentive fees provided such CLO Funds have achieved a minimum investment return to holders of their subordinated securities or preferred shares as per the terms of each CLO Fund management agreement. During the three and six months ended June 30, 2015, the Asset Manager Affiliates received incentive fees from three funds.
The Asset Manager Affiliates are expected to pay future distributions to the Company based upon their after-tax free cash flow, which generally will be dependent upon the maintenance and growth in their assets under management and incentive fees. As a result of tax-basis goodwill amortization and certain other tax-related adjustments, portions of distributions received may be deemed return of capital. As amortizing funds which are paying incentive fees are redeemed, we expect incentive fees available for distribution to diminish. During the three and six months ended June 30, 2015, three CLO Funds have achieved the minimum investment return threshold and are paying the Asset Manager Affiliates incentive fees. The fair value of our investment in our Asset Manager Affiliates was approximately $74 million at June 30, 2015, with an unrealized gain of approximately $3.8 million. For the three months ended June 30, 2015 and 2014, we recognized dividend income of approximately $1.2 million and $1.4 million from the Asset Manager Affiliates, respectively, while cash distributions received were $2.3 million and $3.0 million for those periods, respectively. For the six months ended June 30, 2015 and 2014, we recognized dividend income of approximately $2.6 million and $2.8 million from the Asset Manager Affiliates, respectively, while cash distributions received were $5.0 million and $6.0 million for those periods, respectively. The difference between cash distributions received and the tax-basis earnings and profits is recorded as an adjustment to the cost basis of the Asset Manager Affiliates investments. For interim periods, the Company estimates the tax attributes of any distributions as being either tax-basis earnings and profits (i.e. dividend income) or return of capital (i.e. adjustment to the Companys cost basis in the Asset Manager Affiliates). The final determination of the tax attributes of distributions from our Asset Manager Affiliates is made on an annual (full calendar year) basis at the end of the year based upon taxable income and distributions for the full-year. Therefore, any estimate of tax attributes of distributions made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year. CLO Funds typically have automatic orderly wind-down features following an initial period of reinvestment. Thus, with all else being equal, as managed CLO Fund portfolios age, projected future assets under management (and associated management fees) will naturally decline, resulting in a reduction in fair value of our Asset Manager Affiliates. On the other hand, mandates to manage new CLO Fund portfolios will generally result in an increase in the fair value of our investment in our Asset Manager Affiliates. The aggregate of par value of assets under management by our Asset Manager Affiliates was $3.2 billion and $3.0 billion as of June 30, 2015 and December 31, 2014, respectively.
Capital Structuring Service Fees. We may earn ancillary structuring and other fees related to the origination, investment, disposition or liquidation of debt and investment securities.
Investment income for the three months ended June 30, 2015 and 2014 was approximately $11.2 million and $9.8 million, respectively. Of these amounts, approximately $5.9 million and $5.2 million was attributable to interest income on our Debt Securities Portfolio. Increases in interest income from 2014 to 2015 were due to higher average invested assets stemming primarily from capital raising activities.
Investment income for the six months ended June 30, 2015 and 2014 was approximately $23.5 million and $19.8 million, respectively. Of these amounts, approximately $12.1 million and $10.4 million was
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attributable to interest income on our Debt Securities Portfolio. Increases in interest income from 2014 to 2015 were due to higher average invested assets stemming primarily from capital raising activities.
The weighted average yield on debt securities Portfolio was 7.3% as of June 30, 2015 and December 31, 2014.
Investment income is primarily dependent on the composition and credit quality of our investment portfolio. Generally, our Debt Securities Portfolio is expected to generate predictable, recurring interest income in accordance with the contractual terms of each loan. Corporate equity securities may pay a dividend and may increase in value for which a gain may be recognized; generally such dividend payments and gains are less predictable than interest income on our loan portfolio.
For the three months ended June 30, 2015 and 2014, approximately $4.0 million and $3.1 million, respectively, of investment income was attributable to investments in CLO Fund securities. For the six months ended June 30, 2015 and 2014, approximately $8.6 million and $6.2 million, respectively, of investment income was attributable to investments in CLO Fund securities. On a tax-basis, the Company recognized $4.4 million of taxable cash distributions during the six months ended June 30, 2015. Distributions from CLO Fund Securities are dependent on the performance of the underlying assets in each CLO Fund; interest payments, principal amortization and prepayments of the underlying loans in each CLO Fund are primary factors which determine the level of distributions on our CLO Fund Securities. The level of excess spread from CLO Fund Securities can be impacted by the timing and level of the resetting of the benchmark interest rate for the underlying assets (which reset at various times throughout the quarter) in the CLO Fund and the related CLO Fund bond liabilities (which reset at each quarterly distribution date); in periods of short-term and volatile changes in the benchmark interest rate, the levels of excess spread and distributions to us can vary significantly.
Because we are internally managed, we directly incur the cost of management and operations. As a result, we pay no investment management fees or other fees to an external advisor. Our expenses consist primarily of interest expense on outstanding borrowings, compensation expense and general and administrative expenses, including professional fees. Interest and compensation expense are typically our largest expenses each period.
Interest and Amortization of Debt Issuance Costs. Interest expense is dependent on the average outstanding balance on our borrowings and, the base index rate for the period. Debt issuance costs represent fees, and other direct costs incurred in connection with the Companys borrowings. These amounts are capitalized and amortized ratably over the contractual term of the borrowing.
Compensation Expense. Compensation expense includes base salaries, bonuses, stock compensation, employee benefits and employer-related payroll costs. The largest components of total compensation costs are base salaries and bonuses; generally, base salaries are expensed as incurred and annual bonus expenses are estimated and accrued. Our compensation arrangements with our employees contain a profit sharing and/or performance based bonus component. Therefore, as our net revenues increase, our compensation costs may also rise. In addition, our compensation expenses may also increase to reflect increased investment in personnel as we grow our products and businesses.
Professional Fees and General and Administrative Expenses. The balance of our expenses includes professional fees (primarily legal, accounting, valuation and other professional services), occupancy costs and general administrative and other costs.
Total expenses for the three months ended June 30, 2015 and 2014 were approximately $5.3 million and $5.2 million, respectively. Interest expense and amortization on debt issuance costs for the periods, were approximately $3.0 million and $2.9 million, respectively, on average debt outstanding of $227 million and $196 million, respectively.
For the three months ended June 30, 2015 and 2014, approximately $1.1 million and $1.2 million, respectively, of expenses were attributable to employee compensation, including salaries, bonuses, employee benefits, payroll taxes and stock-based compensation expense. For the three months ended June 30, 2015 and
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2014, respectively, professional fees and insurance expenses totaled approximately $812,000 and $657,000. Administrative costs, which include occupancy expense, technology and other office expenses, totaled approximately $479,000 and $399,000 for the three months ended June 30, 2015 and 2014, respectively.
Total expenses for the six months ended June 30, 2015 and 2014 were approximately $11.2 million and $10.7 million, respectively. Interest expense and amortization on debt issuance costs for the periods, were approximately $6.0 million and $5.9 million, respectively, on average debt outstanding of $227 million and $196 million, respectively.
For the six months ended June 30, 2015 and 2014, approximately $2.1 million and $2.5 million, respectively, of expenses were attributable to employee compensation, including salaries, bonuses, employee benefits, payroll taxes and stock-based compensation expense. For the six months ended June 30, 2015 and 2014, respectively, professional fees and insurance expenses totaled approximately $2.1 million and $1.5 million. The increase in professional fees is primarily due to costs incurred in connection with the restatement. Administrative costs, which include occupancy expense, technology and other office expenses, totaled approximately $990,000 and $868,000 for the six months ended June 30, 2015 and 2014, respectively.
Net investment income and net realized gains (losses) represents the stockholders equity before net unrealized appreciation or depreciation on investments. For the three months ended June 30, 2015, net investment income and net realized gains were approximately $5.9 million, or $0.16 per share. For the three months ended June 30, 2014, net investment income and net realized losses were approximately $4.5 million or $0.14 per share. For the six months ended June 30, 2015, net investment income and net realized gains were approximately $12.4 million, or $0.33 per share. For the six months ended June 30, 2014, net investment income and net realized gains were approximately $9.3 million or $0.28 per share. Net investment income represents the income earned on our investments less operating and interest expense before net realized gains or losses and unrealized appreciation or depreciation on investments. For the three months ended June 30, 2015, net investment income was approximately $5.8 million, or $0.16 per share. For the six months ended June 30, 2015, net investment income was approximately $12.3 million, or $0.33 per share.
During the three months ended June 30, 2015, our total investments had net unrealized depreciation of approximately $4.6 million. During the three months ended June 30, 2014, our total investments had net unrealized appreciation of approximately $7.7 million. For the three months ended June 30, 2015, our Asset Manager Affiliates had net unrealized appreciation of approximately $3.3 million. For the three months ended June 30, 2014, our Asset Manager Affiliates had net unrealized appreciation of approximately $2.8 million. For the three months ended June 30, 2015, our middle market portfolio of debt securities and equity securities had net unrealized depreciation of approximately $2.7 million, compared with net unrealized appreciation of $1.6 million during the second quarter of 2014. For the three months ended June 30, 2015, our CLO Fund securities had net unrealized depreciation of approximately $5.2 million compared with net unrealized appreciation of $3.2 million during the second quarter of 2014.
During the six months ended June 30, 2015, our total investments had net unrealized depreciation of approximately $3.5 million. During the six months ended June 30, 2014, our total investments had net unrealized appreciation of approximately $6.4 million. For the six months ended June 30, 2015, our Asset Manager Affiliates had net unrealized appreciation of approximately $3.8 million. For the six months ended June 30, 2014, our Asset Manager Affiliates had net unrealized appreciation of approximately $1.9 million. For the six months ended June 30, 2015, our middle market portfolio of debt securities and equity securities had net unrealized depreciation of approximately $1.5 million, compared with net unrealized appreciation of $718,000 during the six months ended June 30, 2014. For the six months ended June 30, 2015, our CLO Fund securities had net unrealized depreciation of approximately $5.8 million compared with net unrealized appreciation of $3.8 million during the six months ended June 30, 2014.
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The net increase in stockholders equity resulting from operations for the three months ended June 30, 2015 was $1.2 million, or $0.03 per share. Net increase in stockholders equity resulting from operations for the three months ended June 30, 2014 was $12.3 million, or $0.37 per share.
The net increase in stockholders equity resulting from operations for the six months ended June 30, 2015 was $8.9 million, or $0.24 per share. Net increase in stockholders equity resulting from operations for the six months ended June 30, 2014 was $15.7 million, or $0.47 per share.
Set forth below is a discussion of our results of operations for December 31, 2014, 2013, 2012.
For the Years Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Investment Income: |
||||||||||||
Interest from investments in debt securities | $ | 21,386,432 | $ | 13,967,235 | $ | 12,504,569 | ||||||
Interest from cash and time deposits | 3,452 | 20,656 | 5,741 | |||||||||
Investment income on CLO Fund Securities managed by affiliates | 12,367,581 | 17,346,770 | 12,603,810 | |||||||||
Investment income on CLO Fund Securities managed by non-affiliates | 1,045,225 | 1,809,534 | 4,707,556 | |||||||||
Dividends from Asset Manager Affiliates | 5,467,914 | 5,735,045 | 1,214,998 | |||||||||
Capital structuring service fees | 934,871 | 305,376 | 304,882 | |||||||||
Total investment income | $ | 41,205,475 | $ | 39,184,616 | $ | 31,341,556 |
Revenues consist primarily of investment income from interest and dividends on our investment portfolio and various ancillary fees related to our investment holdings.
Interest from Investments in Debt Securities. We generate interest income from our investments in debt securities that consist primarily of senior and junior secured loans. Our Debt Securities Portfolio is spread across multiple industries and geographic locations, and as such, we are broadly exposed to market conditions and business environments. As a result, although our investments are exposed to market risks, we continuously seek to limit concentration of exposure in any particular sector or issuer.
Investment Income on Investments in CLO Fund Securities. We generate investment income from our investments in the securities (typically preferred shares or subordinated securities) of CLO Funds managed by our Asset Manager Affiliates and selective investments in securities issued by CLO Funds managed by other asset management companies. CLO Funds managed by our Asset Manager Affiliates and those managed by non-affiliates invest primarily in broadly syndicated non-investment grade loans, high-yield bonds and other credit instruments of corporate issuers. The Company distinguishes CLO Funds managed by its Asset Manager Affiliates as CLO Fund Securities Managed by Affiliates, in its financial consolidated statements. The underlying assets in each of the CLO Funds in which we have an investment are generally diversified secured or unsecured corporate debt. Our CLO Fund Securities that are subordinated securities or preferred shares (junior securities) are subordinated to senior note holders who typically receive a return on their investment at a fixed spread relative to the LIBOR index. The CLO Funds are leveraged funds and any excess cash flow or excess spread (interest earned by the underlying securities in the fund less payments made to senior bond holders and less fund expenses and management fees) is paid to the holders of the CLO Funds subordinated securities or preferred shares. The level of excess spread from CLO Fund Securities can be impacted by the timing and level of the resetting of the benchmark interest rate for the underlying assets (which reset at various times throughout the quarter) in the CLO Fund and the related CLO Fund note liabilities (which reset at each quarterly distribution date); in periods of short-term and volatile changes in the benchmark interest rate, the levels of excess spread and resulting cash distributions to us can vary significantly.
Interest income on investments in CLO equity investments is recorded using the effective interest method in accordance with the provisions of ASC 325-40, Beneficial Interests in Securitized Financial Assets
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(ASC 325-40), based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated projected future cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield prospectively over the remaining life of the investment from the date the estimated yield was changed. Accordingly, investment income recognized on CLO equity securities in the GAAP statement of operations differs from both the taxbasis investment income and from the cash distributions actually received by the Company during the period. As a RIC, the Company anticipates a timely distribution of its tax-basis taxable income.
For non-junior class CLO Fund securities, such as our investment in the Class F notes of the Catamaran 2012-1, interest is earned at a fixed spread relative to the LIBOR index.
Distributions from Asset Manager Affiliates. We receive cash distributions from our investment in our Asset Manager Affiliates, which are wholly-owned and manage CLO Funds that invest primarily in broadly syndicated non-investment grade loans, high yield bonds and other credit instruments issued by corporations. As managers of CLO Funds, our Asset Manager Affiliates receive contractual and recurring management fees from the CLO Funds for their management and advisory services. In addition, our Asset Manager Affiliates may also earn income related to net interest on assets accumulated for future CLO issuances on which they have taken a first loss position in connection with loan warehouse arrangements for their CLO Funds. Our Asset Manager Affiliates generate annual operating income equal to the amount by which their fee income exceeds their operating expenses. The annual management fees that our Asset Manager Affiliates receive are generally based on a fixed percentage of the par value of assets under management and are recurring in nature for the term of the CLO Fund so long as the Asset Manager Affiliates manage the fund. As a result, the annual management fees earned by our Asset Manager Affiliates generally are not subject to market value fluctuations in the underlying collateral. Our Asset Manager Affiliates may also receive incentive fees, provided such CLO Funds have achieved a minimum investment return to holders of their subordinated securities or preferred shares as per the terms of each CLO Fund management agreement. During the year ended December 31, 2014, the Asset Manager Affiliates received incentive fees from five funds.
Capital Structuring Service Fees. We may earn ancillary structuring and other fees related to the origination, investment, disposition or liquidation of debt and investment securities.
Investment income for the years ended December 31, 2014, 2013, and 2012 was approximately $41 million, $39 million, and $31 million, respectively. Of these amounts, approximately $21 million, $14 million and $13 million, respectively, was attributable to interest income on our Debt Securities Portfolio. Increases in interest income from 2012 to 2013 and 2013 to 2014 were due to higher average invested assets stemming primarily from capital raising activities.
Investments in debt securities increased by approximately $53 million during 2014, primarily due to the investment of the proceeds from the upsizing of the KCAP Senior Funding I, LLC Notes and from the issuance of common stock of the Company.
The weighted average yield on debt securities portfolio was 7.3% for both periods.
Investment income is primarily dependent on the composition and credit quality of our investment portfolio. Generally, our Debt Securities Portfolio is expected to generate predictable, recurring interest income in accordance with the contractual terms of each loan. Corporate equity securities may pay a dividend and may increase in value for which a gain may be recognized; generally such dividend payments and gains are less predictable than interest income on our loan portfolio.
For the years ended December 31, 2014, 2013, and 2012, approximately $13.4 million, $19.2 million and $17.3 million, respectively, of investment income was attributable to investments in CLO Fund Securities. On a tax-basis, the Company recognized $19.2 million, $21.0 million and $19.9 million of taxable cash distributions during the years ended December 31, 2014, 2013, and 2012, respectively. Distributions from CLO Fund Securities are dependent on the performance of the underlying assets in each CLO Fund; interest payments, principal amortization and prepayments of the underlying loans in each CLO Fund are primary factors which determine the level of distributions on our CLO Fund Securities. The level of excess spread
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from CLO Fund Securities can be impacted by the timing and level of the resetting of the benchmark interest rate for the underlying assets (which reset at various times throughout the quarter) in the CLO Fund and the related CLO Fund bond liabilities (which reset at each quarterly distribution date); in periods of short-term and volatile changes in the benchmark interest rate, the levels of excess spread and distributions to us can vary significantly.
The Asset Manager Affiliates are expected to pay future distributions to the Company based upon their after-tax free cash flow, which generally will be dependent upon the maintenance and growth in their assets under management and incentive fees. As a result of tax-basis goodwill amortization and certain other tax-related adjustments, portions of distributions received may be deemed return of capital. As amortizing funds which are paying incentive fees are redeemed, we expect incentive fees available for distribution to diminish. In this regard, while five CLO Funds have achieved the minimum investment return threshold and are paying the Asset Manager Affiliates incentive fees, two of the CLO Funds have recently been called for redemption by their investors. The fair value of our investment in our Asset Manager Affiliates was approximately $72 million at December 31, 2014, down by approximately $3.8 million from December 31, 2013. For the years ended December 31, 2014, 2013, and 2012, we recognized dividend income of $5.5 million, $5.7 million and $1.2 million, from the Asset Manager Affiliates, respectively, while cash distributions received were $11.9 million, $12.8 million and $4.7 million for those years, respectively. The difference between cash distributions received and the tax-basis earnings and profits is recorded in unrealized gains (losses) in the statement of operations. CLO Funds typically have automatic orderly wind-down features following an initial period of reinvestment. Thus, with all else being equal, as managed CLO Fund portfolios age, projected future assets under management (and associated management fees) will naturally decline, resulting in a reduction in fair value of our Asset Manager Affiliates. On the other hand, mandates to manage new CLO Fund portfolios will generally result in an increase in the fair value of our investment in our Asset Manager Affiliates. During 2014 and 2013, our Asset Manager Affiliates added two CLO Fund portfolios and one CLO Fund portfolio, respectively, with initial assets under management of approximately $900 million and $450 million, respectively. The aggregate of par value of assets under management by our Asset Manager Affiliates was $3.0 billion and $3.2 billion as of December 31, 2014 and 2013, respectively.
For the Years Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Expenses: |
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Interest and amortization of debt issuance costs | $ | 11,538,179 | $ | 10,116,271 | $ | 6,976,018 | ||||||
Compensation | 4,951,745 | 4,630,481 | 3,172,814 | |||||||||
Professional fees | 2,614,479 | 2,191,305 | 2,453,945 | |||||||||
Insurance | 471,276 | 552,568 | 546,989 | |||||||||
Administrative and other | $ | 1,509,228 | $ | 1,819,876 | $ | 1,343,677 | ||||||
Total expenses | 21,084,907 | 19,310,501 | 14,493,443 |
Because we are internally managed, we directly incur the cost of management and operations. As a result, we pay no investment management fees or other fees to an external advisor. Our expenses consist primarily of interest expense on outstanding borrowings, compensation expense and general and administrative expenses, including professional fees. Interest and compensation expense are typically our largest expenses each period.
Interest and Amortization of Debt Issuance Costs. Interest expense is dependent on the average outstanding balance on our borrowings and the base index rate for the period. Debt issuance costs represent fees and other direct costs incurred in connection with the Companys borrowings. These amounts are capitalized and amortized ratably over the contractual term of the borrowing.
Compensation Expense. Compensation expense includes base salaries, bonuses, stock compensation, employee benefits and employer related payroll costs. The largest components of total compensation costs are base salaries and bonuses; generally, base salaries are expensed as incurred and annual bonus expenses are estimated and accrued. Our compensation arrangements with our employees contain a profit sharing and/or
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performance based bonus component. Therefore, as our net revenues increase, our compensation costs may also rise. In addition, our compensation expenses may also increase to reflect increased investment in personnel as we grow our products and businesses.
Professional Fees and General and Administrative Expenses. The balance of our expenses includes professional fees (primarily legal, accounting, valuation and other professional services), occupancy costs and general administrative and other costs.
Total expenses for the years ended December 31, 2014, 2013, and 2012 were approximately $21 million, $19 million, and $14 million, respectively. Interest expense and amortization on debt issuance costs for the period was approximately $12 million, $10 million, and $7 million, respectively, on average debt outstanding of $197 million, $151 million, and $81 million, respectively.
For the years ended December 31, 2014, 2013 and 2012, approximately $5.0 million, $4.6 million, and $3.2 million, respectively, of expenses were attributable to employee compensation, including salaries, bonuses, employee benefits, payroll taxes and stock-based compensation expense. The increase in compensation expense from 2012 to 2013 relates primarily to the addition of headcount and the full-year effect of our acquisition of Trimaran. For the years ended December 31, 2014, 2013, and 2012, professional fees and insurance expenses totaled approximately $3.1 million, $2.7 million and $3.0 million, respectively. Administrative costs, which include occupancy expense, technology and other office expenses, totaled approximately $1.5 million, $1.8 million and $1.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Net investment income and net realized gains (losses) represents the stockholders equity before net unrealized appreciation or depreciation on investments. For the year ended December 31, 2014, net investment income and net realized losses (including realized losses on extinguishment of debt) were approximately $9 million, or $0.26 per basic share. Net investment income represents the income earned on our investments less operating and interest expense before net realized gains or losses and unrealized appreciation or depreciation on investments. For the year ended December 31, 2014, GAAP-basis net investment income was approximately $20 million, or $0.59 per basic share, while tax-basis distributable income was approximately $27 million or $0.78 per share.
For the year ended December 31, 2014, total distributions were approximately $35 million, or $1.00 per share. See Note 8 Distributable Taxable Income to our consolidated financial statements for the year ended December 31, 2014 contained in the registration statement of which this prospectus is a part for more information regarding our taxable income and related distributions.
For the Years Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Unrealized Gains (Losses) On Investments: |
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Net change in unrealized appreciation (depreciation) on: |
||||||||||||
Debt securities | $ | 5,641,403 | $ | 14,956,103 | $ | (3,701,536 | ) | |||||
Equity securities | 7,040,155 | 2,605,586 | 163,843 | |||||||||
CLO Fund Securities managed by affiliates | (11,584,257 | ) | (11,195,901 | ) | 14,919,869 | |||||||
CLO Fund Securities managed by non-affiliates | 2,884,109 | (2,093,360 | ) | 38,690 | ||||||||
Asset Manager Affiliates investments | 2,064,107 | 5,703,743 | 1,089,775 | |||||||||
Total net unrealized gain from investment transactions | $ | 6,045,517 | $ | 9,976,171 | $ | 12,510,641 |
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During the year ended December 31, 2014, our total investments had net unrealized appreciation of approximately $6 million. Included in the net unrealized gain in 2014 are unrealized depreciation on CLO Fund Securities of approximately $9 million and unrealized appreciation of the Asset Manager Affiliates of $2 million, offset by unrealized appreciation on our debt securities of $6 million and equity securities of $7 million. During the year ended December 31, 2013, our total investments had net unrealized appreciation of approximately $10 million, including net unrealized losses of approximately $13 million on CLO Fund Securities, offset by net unrealized gains on debt securities of approximately $15 million and net unrealized gains on equity securities of $3 million. During the year ended December 31, 2012, our total investments had net unrealized appreciation of $13 million, including approximately $4 million of unrealized losses on debt securities, offset by net unrealized gains of approximately $15 million related to CLO Fund Securities.
The net increase in stockholders equity resulting from operations for the year ended December 31, 2014 was approximately $15 million, or $0.44 per basic share. The net increase in stockholders equity resulting from operations for the year ended December 31, 2013 was approximately $17 million, or $0.53 per basic share, and the net increase in stockholders equity resulting from operations for the year ended December 31, 2012 was approximately $26 million, or $1.00 per basic share.
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, pay distributions to our stockholders and other general business needs. We recognize the need to have funds available for operating our business and to make investments. We seek to have adequate liquidity at all times to cover normal cyclical swings in funding availability and to allow us to meet irregular and unexpected funding requirements. We plan to satisfy our liquidity needs through normal operations with the goal of avoiding unplanned sales of assets or emergency borrowing of funds.
As of June 30, 2015 and December 31, 2014 the fair value of investments and cash were as follows:
Investments at Fair Value | ||||||||
Security Type | June 30, 2015 | December 31, 2014 | ||||||
Cash | $ | 2,807,432 | $ | 1,220,798 | ||||
Money Market Accounts | 16,457,816 | 1,602,741 | ||||||
Senior Secured Loan | 217,535,523 | 218,329,860 | ||||||
Junior Secured Loan | 39,898,155 | 38,569,006 | ||||||
Senior Unsecured Loan | 10,143,525 | 33,066,984 | ||||||
First Lien Bond | 2,547,600 | 2,580,000 | ||||||
Senior Subordinated Bond | 4,278,531 | 4,240,301 | ||||||
Senior Secured Bond | 1,481,700 | 1,552,500 | ||||||
Senior Unsecured Bond | 11,618,855 | 11,386,218 | ||||||
CLO Fund Securities | 78,448,455 | 77,514,902 | ||||||
Equity Securities | 7,542,085 | 8,119,681 | ||||||
Preferred | 10,411,415 | 10,418,302 | ||||||
Asset Manager Affiliates | 73,737,000 | 72,326,000 | ||||||
Total | $ | 476,908,092 | $ | 480,927,293 |
We use borrowed funds, known as leverage, to make investments and to attempt to increase returns to our shareholders by reducing our overall cost of capital. As a BDC, we are limited in the amount of leverage we can incur under the 1940 Act. We are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. As of June 30, 2015, we had approximately $227.4 million of par value of outstanding borrowings and our asset coverage ratio of total assets to total borrowings was 212%, compliant with the minimum asset coverage level of 200% generally required for a BDC by the 1940 Act. We may also borrow amounts of up to 5% of the value of our total assets for temporary purposes.
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On March 16, 2011, the Company issued $55 million in aggregate principal amount of unsecured 8.75% convertible notes due March 2016 (Convertible Notes). On March 23, 2011, pursuant to an over-allotment option, the Company issued an additional $5 million of such Convertible Notes for a total of $60 million in aggregate principal amount. The net proceeds from the sale of the Convertible Notes, following underwriting expenses, were approximately $57.7 million. Interest on the Convertible Notes is paid semi-annually in arrears on March 15 and September 15, at a rate of 8.75%, commencing September 15, 2011. The Convertible Notes mature on March 15, 2016 unless converted earlier. The Convertible Notes are senior unsecured obligations of the Company.
The Convertible Notes are convertible into shares of the Companys common stock. As of June 30, 2015, the conversion rate was 133.59 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to a conversion price of approximately $7.49 per share of common stock. The conversion rate is subject to adjustment upon certain events. Upon conversion, the Company would issue the full amount of common stock or settle the conversion in cash, at its option, and retire the full amount of debt outstanding.
On April 4, 2013, approximately $9 million of the Companys 8.75% Convertible Notes were converted at a price per share of $8.159 into 1,102,093 shares of KCAP common stock. On September 4, 2013, the Company purchased $2 million face value of its own Convertible Notes at a price of $114.50, plus accrued interest. KCAP subsequently surrendered these notes to the note trustee for cancellation effective September 13, 2013. On October 9, 2014, the Company purchased approximately $10.4 million face value of its own Convertible Notes at $114.875 plus accrued interest. KCAP subsequently surrendered these notes to the trustee for cancellation. Due to the cash conversion option embedded in the Convertible Notes, the Company applied the guidance in ASC 470-40-20, Debt with Conversion and Other Options, and realized a loss on the extinguishment of this debt. For the six months ended June 30, 2015, there were no realized losses on extinguishment of debt. The indenture governing the Convertible Notes contains certain restrictive covenants, including compliance with certain provisions of the 1940 Act and conditions governing the undertaking of new debt.
In February 2012, the Company entered into a Note Purchase Agreement, under which it was able to obtain up to $30 million in financing (the Facility). The Facility was terminated on November 4, 2013 and remaining unamortized capitalized costs of approximately $203,000 related to the Facility were written-off and are included in Realized Losses on Extinguishments of Debt.
On October 10, 2012, the Company issued $41.4 million in aggregate principal amount of unsecured 7.375% Notes Due 2019. The net proceeds for the 7.375% Notes Due 2019, following underwriting expenses, were approximately $39.9 million. Interest on the 7.375% Notes Due 2019 is paid quarterly in arrears on March 30, June 30, September 30 and December 30, at a rate of 7.375%, commencing December 30, 2012. The 7.375% Notes Due 2019 mature on September 30, 2019, and are senior unsecured obligations of the Company. In addition, due to the coverage test applicable to the Company as a BDC and a covenant that the Company agreed to in connection with the issuance of the 7.375% Notes Due 2019, the Company is limited in its ability to make distributions in certain circumstances. At June 30, 2015, the Company was in compliance with all of its debt covenants. The indenture governing the 7.375% Notes Due 2019 contains certain restrictive covenants, including compliance with certain provisions of the 1940 Act relating to borrowing and dividends.
On February 14, 2013, the Company completed a public offering of 5,232,500 shares of common stock, which included the underwriters full exercise of their option to purchase up to 682,500 shares of common stock, at a price of $9.75 per share, raising approximately $51.0 million in gross proceeds. In conjunction with this offering, the Company also sold 200,000 shares of common stock to a member of its Board of Directors, at a price of $9.31125 per share, raising approximately $1.9 million in gross proceeds.
On June 18, 2013, KCAP Senior Funding I, LLC, a specialty finance subsidiary of the Company, was capitalized through the issuance of $140 million of notes (the KCAP Senior Funding I Notes). The KCAP Senior Funding I Notes are backed by a diversified portfolio of bank loans. The Company invested in the most junior class of the notes, issued in the approximate amount of $35 million, representing the Companys primary exposure to the performance of the assets acquired from the proceeds of the issuance of the KCAP Senior Funding I Notes. On December 8, 2014, the Company completed the sale of additional
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KCAP Senior Funding I Notes for $56 million. The issuance of additional notes was pro-rata across all existing classes of notes originally issued. KCAP purchased an additional $13.9 million in the most junior class of notes. These junior notes eliminate in consolidation and the remaining notes with a par value of $105 million, net of $3.2 million of unamortized discount, are reflected on our consolidated balance sheet. The indenture governing the KCAP Senior Funding I Notes contains an event of default that is triggered in the event that certain coverage tests are not met.
On October 6, 2014, the Company priced a follow-on public offering of 3.0 million shares of its common stock at a price of $8.02 per share. The offering raised net proceeds were approximately $23.8 million, after deducting underwriting discounts and offering expenses.
Subject to prevailing market conditions, we intend to grow our portfolio of assets by raising additional capital, including through the prudent use of leverage available to us. As a result, we may seek to enter into new agreements with other lenders or into other financing arrangements as market conditions permit. From time to time, we may seek to retire, repurchase, or exchange debt securities in open market purchases or by other means dependent on market conditions, liquidity, contractual obligations, and other matters.
If our common stock trades below our net asset value per share, we will generally not be able to issue additional common stock at the market price unless our shareholders approve such a sale and our Board of Directors makes certain determinations. At a special meeting of our shareholders held on July 20, 2015 and to be continued on August 17, 2015 our shareholders will vote on a proposal to authorize us to sell shares of our common stock below the then current net asset value per share of our common stock in one or more offerings for the period ending on the earlier of (i) the one year anniversary of such approval, or (ii) the date of our 2016 annual meeting of shareholders. If our shareholders approve such proposal, any issuance of shares of our common stock below the then current net asset value per share will be subject to certain limitations, including, but not limited to, the Companys policy that it will not seek approval from our Board of Directors to sell or otherwise issue more than 15% of the Companys then outstanding shares of common stock at a price below its then current net asset value. If the proposal is approved, we will need similar future approval from our shareholders to issue shares below the then current net asset value per share any time after the expiration of the then current approval.
We intend to continue to make quarterly distributions to our stockholders. To avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal to the sum of:
| 98% of our ordinary net taxable income for the calendar year; |
| 98.2% of our capital gains, if any, in excess of capital losses for the one-year period ending on October 31 of the calendar year; and |
| any net ordinary income and net capital gains for the preceding year that were not distributed during such year. |
The amount of our declared distributions, as evaluated by management and approved by our Board of Directors, is based primarily on our evaluation of distributable taxable income and after-tax free cash flow from our Asset Manager Affiliates.
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The following table sets forth the quarterly distributions declared by us since 2013.
Distribution | Declaration Date | Record Date | Pay Date | |||||||||||||
2015: |
||||||||||||||||
Second quarter | $ | 0.21 | 6/23/2015 | 7/6/2015 | 7/27/2015 | |||||||||||
First quarter | 0.21 | 3/24/2015 | 4/6/2015 | 4/27/2015 | ||||||||||||
Total declared in 2015 | $ | 0.42 | ||||||||||||||
2014: |
||||||||||||||||
Fourth quarter | $ | 0.25 | 12/17/2014 | 12/29/2014 | 1/29/2015 | |||||||||||
Third quarter | 0.25 | 9/19/2014 | 10/14/2014 | 10/29/2014 | ||||||||||||
Second quarter | 0.25 | 6/20/2014 | 7/3/2014 | 7/25/2014 | ||||||||||||
First quarter | 0.25 | 3/21/2014 | 4/4/2014 | 4/25/2014 | ||||||||||||
Total declared in 2014 | $ | 1.00 | ||||||||||||||
2013: |
||||||||||||||||
Fourth quarter | $ | 0.25 | 12/13/2013 | 12/27/2013 | 1/27/2014 | |||||||||||
Third quarter | 0.25 | 9/13/2013 | 10/8/2013 | 10/29/2013 | ||||||||||||
Second quarter | 0.28 | 6/17/2013 | 7/5/2013 | 7/26/2013 | ||||||||||||
First quarter | 0.28 | 3/15/2013 | 4/5/2013 | 4/26/2013 | ||||||||||||
Total declared in 2013 | $ | 1.06 |
We are a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the needs of the Companys investment objectives. Such instruments include commitments to extend credit and may involve, in varying degrees, elements of credit risk in excess of amounts recognized on our balance sheet. Prior to extending such credit, we attempt to limit our credit risk by conducting extensive due diligence, obtaining collateral where necessary and negotiating appropriate financial covenants. As of June 30, 2015, the Company had a commitment of $23 million, at December 31, 2014, there were no outstanding commitments.
The following table summarizes our contractual cash obligations and other commercial commitments as of June 30, 2015:
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | Less than one year |
1 3 years | 3 5 years | More than 5 years |
|||||||||||||||
Long-term debt obligations(1) | $ | 227,397,000 | $ | 38,647,000 | $ | | $ | 41,400,000 | $ | 147,350,000 |
(1) | Represents approximately $38.6 million of Convertible Notes, $41.4 million of 7.375% Notes Due 2019 and $147.4 Notes issued by KCAP Senior Funding I, L.L.C. |
The consolidated financial statements are based on the selection and application of critical accounting policies, which require management to make significant estimates and assumptions. Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require managements most difficult, complex, or subjective judgments. Our critical accounting policies are those applicable to the basis of presentation, valuation of investments, and certain revenue recognition matters as discussed below. See Note 2: Significant Accounting Policies Investments to our consolidated financial statements for the six months ended June 30, 2015, contained in the registration statement of which this prospectus is a part.
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The most significant estimate inherent in the preparation of our consolidated financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded.
Value, as defined in Section 2(a)(41) of 1940 Act, is (1) the market price for those securities for which a market quotation is readily available and (2) for all other securities and assets, fair value as determined in good faith by our Board of Directors pursuant to procedures approved by our Board of Directors. Our valuation policy is intended to provide a consistent basis for determining the fair value of the portfolio based on the nature of the security, the market for the security and other considerations including the financial performance and enterprise value of the portfolio company. Because of the inherent uncertainty of valuation, the Board of Directors determined values may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material.
Pursuant to the AICPA Guide, we reflect our investments on our balance sheet at their estimated fair value with unrealized gains and losses resulting from changes in fair value reflected as a component of unrealized gains or losses on our statements of operations. Fair value is the amount that would be received to sell the investments in an orderly transaction between market participants at the measurement date (i.e., the exit price).
See Note 4 to the consolidated financial statements for the six months ended June 30, 2015 contained in the registration statement of which this prospectus is a part for the additional information about the level of market observability associated with investments carried at fair value.
The Company follows the provisions of ASC 820: Fair Value, which among other matters, requires enhanced disclosures about investments that are measured and reported at fair value. This standard defines fair value and establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring investments at fair value and expands disclosures about assets and liabilities measured at fair value. ASC 820: Fair Value defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This fair value definition focuses on an exit price in the principal, or most advantageous market, and prioritizes, within a measurement of fair value, the use of market-based inputs (which may be weighted or adjusted for relevance, reliability and specific attributes relative to the subject investment) over entity-specific inputs. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. Subsequent to the adoption of ASC 820: Fair Value, the FASB has issued various staff positions clarifying the initial standard (see Note 2: Significant Accounting Policies Investments to the consolidated financial statements for the six months ended June 30, 2015 contained in the registration statement of which this prospectus is a part).
ASC 820: Fair Value establishes the following three-level hierarchy, based upon the transparency of inputs to the fair value measurement of an asset or liability as of the measurement date:
| Level I Unadjusted quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I include listed equities and listed securities. As required by ASC 820: Fair Value, the Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably affect the quoted price. |
| Level II Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. Such inputs may be quoted prices for similar assets or liabilities, quoted markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full character of the financial |
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instrument, or inputs that are derived principally from, or corroborated by, observable market information. Investments which are generally included in this category include illiquid debt securities and less liquid, privately held or restricted equity securities, for which some level of recent trading activity has been observed. |
| Level III Pricing inputs are unobservable for the investment and includes situations where there is little, if any, market activity for the investment. The inputs may be based on the Companys own assumptions about how market participants would price the asset or liability or may use Level II inputs, as adjusted, to reflect specific investment attributes relative to a broader market assumption. These inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data for comparable performance or valuation measures (earnings multiples, discount rates, other financial/valuation ratios, etc.) are available, such investments are grouped as Level III if any significant data point that is not also market observable (private company earnings, cash flows, etc.) is used in the valuation methodology. |
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investments level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the investment. A majority all of the Companys investments are classified as Level III. The Company evaluates the source of inputs, including any markets in which its investments are trading, in determining fair value. Inputs that are backed by actual transactions, those that are highly correlated to the specific investment being valued and those derived from reliable or knowledgeable sources will tend to have a higher weighting in determining fair value. Ongoing reviews by the Companys investment analysts, Chief Investment Officer, Valuation Committee and independent valuation firms (if engaged) may include factors such as an assessment of each underlying investment, its current and prospective operating and financial performance, consideration of financing and sale transactions with third parties, expected cash flows and market-based information, including comparable transactions, performance factors, and other investment or industry specific market data, among other factors.
We have valued our investments, in the absence of observable market prices, using the valuation methodologies described below applied on a consistent basis. For some investments little market activity may exist; managements determination of fair value is then based on the best information available in the circumstances, and may incorporate managements own assumptions and involves a significant degree of managements judgment.
Our investments in CLO Fund Securities are carried at fair value, which is based either on (i) the present value of the net expected cash inflows for interest income and principal repayments from underlying assets and the cash outflows for interest expense, debt paydown and other fund costs for the CLO Funds which are approaching or past the end of their reinvestment period and therefore are selling assets and/or using principal repayments to pay-down CLO Fund debt, and for which there continue to be net cash distributions to the class of we securities own, or (ii) a discounted cash flow model that utilizes prepayment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow and comparable yields for similar securities or preferred shares to those in which the Company has invested, or (iii) indicative prices provided by the underwriters or brokers who arrange CLO Funds. We recognize unrealized appreciation or depreciation on our investments in CLO Fund Securities as comparable yields in the market change and/or based on changes in net asset values or estimated cash flows resulting from changes in prepayment or loss assumptions in the underlying collateral pool. As each investment in CLO Fund Securities ages, the expected amount of losses and the expected timing of recognition of such losses in the underlying collateral pool are updated and the revised cash flows are used in determining the fair value of the CLO Fund Securities. We determine the fair value of our investments in CLO Fund Securities on a security-by-security basis.
The Companys investments in its wholly-owned Asset Manager Affiliates are carried at fair value, which is primarily determined utilizing a discounted cash flow model which incorporates different levels of discount rates depending on the hierarchy of fees earned (including the likelihood of realization of senior, subordinate
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and incentive fees) and prospective modeled performance (Discounted Cash Flow). Such valuation takes into consideration an analysis of comparable asset management companies and a percentage of assets under management. The Asset Manager Affiliates are classified as a Level III investment (as described above). Any change in value from period to period is recognized as net change in unrealized appreciation or depreciation.
Fair values of other investments for which market prices are not observable are determined by reference to public market or private transactions or valuations for comparable companies or assets in the relevant asset class and/or industry when such amounts are available. Generally these valuations are derived by multiplying a key performance metric of the investee company or asset (e.g., EBITDA) by the relevant valuation multiple observed for comparable companies or transactions, adjusted by management for differences between the investment and the referenced comparable. Such investments may also be valued at cost for a period of time after an acquisition as the best indicator of fair value. If the fair value of such investments cannot be valued by reference to observable valuation measures for comparable companies, then the primary analytical method used to estimate the fair value is a discounted cash flow method and/or cap rate analysis. A sensitivity analysis is applied to the estimated future cash flows using various factors depending on the investment, including assumed growth rates (in cash flows), capitalization rates (for determining terminal values) and appropriate discount rates to determine a range of reasonable values or to compute projected return on investment.
For bond rated note tranches of CLO Fund Securities (those above the junior class) without transactions to support a fair value for the specific CLO Fund and tranche, fair value is based on discounting estimated bond payments at current market yields, which may reflect the adjusted yield on the leveraged loan index for similarly rated tranches, as well as prices for similar tranches for other CLO Funds and also other factors such as indicative prices provided by underwriters or brokers who arrange CLO Funds, and the default and recovery rates of underlying assets in the CLO Fund, as may be applicable. Such model assumptions may vary and incorporate adjustments for risk premiums and CLO Fund specific attributes.
We derive fair value for our illiquid loan investments that do not have indicative fair values based upon active trades primarily by using the Income Approach, and also consider recent loan amendments or other activity specific to the subject asset as described above. Other significant assumptions, such as coupon and maturity, are asset-specific and are noted for each investment in the Schedules of Investments.
The determination of fair value using this methodology takes into consideration a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance and financing transactions subsequent to the acquisition of the investment. This valuation methodology involves a significant degree of managements judgment.
Our Board of Directors may consider other methods of valuation to determine the fair value of investments as appropriate in conformity with GAAP.
Interest income, including amortization of premium and accretion of discount, is recorded on the accrual basis to the extent that such amounts are expected to be collected. We generally place a loan on non-accrual status and cease recognizing interest income on such loan or security when a loan or security becomes 90 days or more past due or if we otherwise do not expect the debtor to be able to service its debt obligations. Non-accrual loans remain in such status until the borrower has demonstrated the ability and intent to pay contractual amounts due or such loans become current. As of June 30, 2015 and December 31, 2014, there was one issuer representing less than 1% of our total investments at fair value was on non-accrual status.
We receive distributions from our investments in the most junior class of securities of CLO Funds (typically preferred shares or subordinated securities) managed by the Asset Manager Affiliates and selective investments in securities issued by funds managed by other asset management companies. Our CLO Fund junior class securities are subordinated to senior note holders who typically receive a return on their investment at a fixed spread relative to the LIBOR index. The CLO Funds are leveraged funds and any excess cash flow or excess spread (interest earned by the underlying securities in the fund less payments made to
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senior note holders and less fund expenses and management fees) is paid to the holders of the CLO Funds subordinated securities or preferred shares. The level of excess spread from CLO Fund securities can be impacted from the timing and level of the resetting of the benchmark interest rate for the underlying assets (which reset at various times throughout the quarter) in the CLO Fund and the related CLO Fund note liabilities (which reset at each quarterly distribution date); in periods of short-term and volatile changes in the benchmark interest rate, the levels of excess spread and distributions to us can vary significantly. In addition, the failure of CLO Funds in which we invest to comply with certain financial covenants may lead to the temporary suspension or deferral of cash distributions to us.
GAAP-basis investment income on CLO equity investments is recorded using the effective interest method in accordance with the provisions of ASC 325-40, based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated projected future cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield prospectively over the remaining life of the investment from the date the estimated yield was changed. Accordingly, investment income recognized on CLO equity securities in the GAAP statement of operations differs from both the taxbasis investment income and from the cash distributions actually received by the Company during the period.
For non-junior class CLO Fund Securities, such as our investment in the class F notes of Catamaran 2012-1 and the class E notes of Catamaran 2014-1, interest is earned at a fixed spread relative to the LIBOR index.
We record distributions from our Asset Manager Affiliates on the declaration date, which represents the ex-dividend date. Distributions in excess of tax-basis earnings and profits are recorded as tax-basis return of capital. For interim periods, the Company estimates the tax attributes of any distributions as being either tax-basis earnings and profits (i.e. dividend income) or return of capital (i.e. adjustment to the Companys cost basis in the Asset Manager Affiliates). The final determination of the tax attributes of distributions from our Asset Manager Affiliates is made on an annual (full calendar year) basis at the end of the year based upon taxable income and distributions for the full-year. Therefore, any estimate of tax attributes of distributions made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year.
We may have loans in our portfolio that contain a payment-in-kind (PIK) provision. PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain our RIC status, this non-cash source of income must be distributed to stockholders in the form of cash dividends, even though the Company has not yet collected any cash.
Fee income includes fees, if any, for due diligence, structuring, commitment and facility fees, and fees, if any, for transaction services and management services rendered by us to portfolio companies and other third parties. Commitment and facility fees are generally recognized as income over the life of the underlying loan, whereas due diligence, structuring, transaction service and management service fees are generally recognized as income when the services are rendered.
We may, from time to time, issue stock options or restricted stock, under the Equity Incentive Plan, to officers and employees for services rendered to us. We follow Accounting Standards Codification 718, Compensation Stock Compensation, a method by which the fair value of options or restricted stock is determined and expensed.
The Company has elected and intends to continue to qualify for the tax treatment applicable to RICs under Subchapter M of the Code and, among other things, intends to make the required distributions to its stockholders as specified therein. In order to qualify as a RIC, the Company is required to timely distribute to
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its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income, to the extent required.
The amount of our declared distributions, as evaluated by management and approved by our Board of Directors, is based primarily on our evaluation of distributable taxable income and after-tax free cash flow from our Asset Manager Affiliates.
The following table sets forth the quarterly distributions declared by us since the most recent completed calendar year.
Distribution | Declaration Date | Record Date | Pay Date | |||||||||||||
2015: |
||||||||||||||||
Second quarter | $ | 0.21 | 6/23/2015 | 7/6/2015 | 7/27/2015 | |||||||||||
First quarter | 0.21 | 3/24/2015 | 4/6/2015 | 4/27/2015 | ||||||||||||
Total declared in 2015 | $ | 0.42 | ||||||||||||||
2014: |
||||||||||||||||
Fourth quarter | $ | 0.25 | 12/17/2014 | 12/29/2014 | 1/29/2015 | |||||||||||
Third quarter | 0.25 | 9/19/2014 | 10/14/2014 | 10/29/2014 | ||||||||||||
Second quarter | 0.25 | 6/20/2014 | 7/3/2014 | 7/25/2014 | ||||||||||||
First quarter | 0.25 | 3/21/2014 | 4/4/2014 | 4/25/2014 | ||||||||||||
Total declared in 2014 | $ | 1.00 | ||||||||||||||
2013: |
||||||||||||||||
Fourth quarter | $ | 0.25 | 12/13/2013 | 12/27/2013 | 1/27/2014 | |||||||||||
Third quarter | 0.25 | 9/13/2013 | 10/8/2013 | 10/29/2013 | ||||||||||||
Second quarter | 0.28 | 6/17/2013 | 7/5/2013 | 7/26/2013 | ||||||||||||
First quarter | 0.28 | 3/15/2013 | 4/5/2013 | 4/26/2013 | ||||||||||||
Total declared in 2013 | $ | 1.06 |
The following table depicts the composition of shareholder distributions on a per share basis:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2015(1) | 2014(1) | 2015(1) | 2014(1) | |||||||||||||
Net investment income | $ | 0.16 | $ | 0.14 | $ | 0.33 | $ | 0.27 | ||||||||
Tax Accounting Difference on CLO Equity Investments | 0.01 | 0.05 | 0.02 | 0.11 | ||||||||||||
Other tax accounting differences | | 0.01 | | | ||||||||||||
Taxable distributable income | 0.17 | 0.20 | 0.36 | 0.39 | ||||||||||||
Cash distributed to the Company by Asset Manager Affiliates in excess of their taxable earnings | 0.03 | 0.05 | 0.06 | 0.10 | ||||||||||||
Available for distribution(2) | 0.20 | 0.25 | 0.43 | 0.49 | ||||||||||||
Distributed | $ | 0.21 | $ | 0.25 | $ | 0.42 | $ | 0.50 | ||||||||
Difference | $ | (0.01 | ) | $ | | $ | 0.01 | $ | (0.01 | ) |
(1) | Table may not foot due to rounding. |
(2) | The Available for distribution financial measure is a non-GAAP financial measure that is calculated by including the cash distributed to the Company by the Asset Manager Affiliates in excess of their taxable earnings to the Companys taxable distributable income, which is the most directly comparable GAAP financial measure. In order to reconcile the Available for distribution financial measure to taxable distributable income per share in accordance with GAAP, the $0.03 and $0.06 per share of cash distributed to the Company by the Asset Manager Affiliates in excess of their taxable earnings is subtracted from the Available for distribution financial measure for the three and six months ended June 30, 2015, respectively. The Companys management believes that the presentation of the non-GAAP Available for distribution financial measure provides useful information to investors. |
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Our business activities contain elements of market risks. We consider our principal market risks to be fluctuations in interest rates and the valuations of our investment portfolio. Managing these risks is essential to our business. Accordingly, we have systems and procedures designed to identify and analyze our risks, to establish appropriate policies and thresholds and to continually monitor these risks and thresholds by means of administrative and information technology systems and other policies and processes.
Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest earning assets and our interest expense incurred in connection with our interest bearing debt and liabilities. Changes in interest rates can also affect, among other things, our ability to acquire and originate loans and securities and the value of our investment portfolio.
Our investment income is affected by fluctuations in various interest rates, including LIBOR and prime rates. As of June 30, 2015, approximately 97.5% of our debt securities portfolio were either fixed rate or floating rate with a spread to an interest rate index such as LIBOR or the prime rate. Most of these floating rate loans contain LIBOR floors ranging between 0.75% and 3.00%. We generally expect that future portfolio investments will predominately be floating rate investments. As of June 30, 2015, we had $227.4 million of borrowings outstanding at a weighted average rate of 4.45%.
Because we borrow money to make investments, our net investment income is dependent upon the difference between our borrowing rate and the rate we earn on the invested proceeds borrowed. In periods of rising or lowering interest rates, the cost of the portion of our debt associated with our Convertible Notes or 7.375% Notes Due 2019 would remain the same at 8.75% and 7.375%, respectively, given that this debt is at a fixed rate. The Notes issued by KCAP Senior Funding are floating rate based upon a LIBOR index plus a spread, which serves as a floor should LIBOR decrease to zero. Accordingly, our interest costs associated with this debt will fluctuate with changes in LIBOR.
Generally we would expect that an increase in the base rate index for our floating rate investment assets would increase our gross investment income and that a decrease in the base rate index for such assets would decrease our gross investment income (in either case, such increase/decrease may be limited by interest rate floors/minimums for certain investment assets).
We have analyzed the potential impact of changes in interest rates on interest income net of interest expense. Assuming that our balance sheet at June 30, 2015 was to remain constant and no actions were taken to alter the existing interest rate sensitivity, the table below illustrates the impact on net investment income on our Debt Securities Portfolio for various hypothetical increases in interest rates:
Impact on net investment income: | ||||||||||||
1% | 2% | 3% | ||||||||||
Increase in interest rate | $ | (802,523 ) | $ | 117,294 | $ | 1,189,842 | ||||||
Decrease in interest rate | $ | 383,469 | $ | 383,469 | $ | 383,469 |
As shown above, net investment income assuming a 1% increase in interest rates would decrease by approximately $803,000 on an annualized basis, reflecting the impact to investments in our portfolio that are either fixed rate or which have embedded floors that would be unaffected by a 1% change in the underlying interest rate while our interest expense would be increasing. However, if the increase in rates was more significant, such as 2% or 3%, the net effect on net investment income would be an increase of approximately $117,000 and $1.2 million, respectively. Since LIBOR underlying certain investments, as well as certain of our borrowings, is currently very low, it is unlikely that the underlying rate will decrease by 1% or 2% or even 3%. If the underlying rate decreased to 0%, it would result in approximately a $383,000 increase in net investment income.
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Although management believes that this measure is indicative of sensitivity to interest rate changes on our Debt Securities Portfolio, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet and other business developments that could affect a net change in assets resulting from operations or net income. Accordingly, no assurances can be given that actual results would not materially differ from the potential outcome simulated by this estimate.
We did not hold any derivative financial instruments for hedging purposes as of June 30, 2015.
We carry our investments at fair value, as determined in good faith by our Board of Directors pursuant to a valuation methodology approved by our Board of Directors. Investments for which market quotations are generally readily available are generally valued at such market quotations. Investments for which there is not a readily available market value are valued at fair value as determined in good faith by our Board of Directors under a valuation policy and consistently applied valuation process. However, due to the inherent uncertainty of determining the fair value of investments that cannot be marked to market, the fair value of our investments may differ materially from the values that would have been used had a ready market existed for such investments. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the value realized on these investments to be different than the valuations that are assigned. The types of factors that we may take into account in fair value pricing of our investments include, as relevant, the nature and realizable value of any collateral, third party valuations, the portfolio companys ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly-traded securities, recent sales of or offers to buy comparable companies, and other relevant factors.
The Company has engaged an independent valuation firm to provide third party valuation consulting services to the Companys Board of Directors. Each quarter, the independent valuation firm will perform third party valuations on the Companys material investments in illiquid securities such that they are reviewed at least once during a trailing 12 month period. These third party valuation estimates were considered as one of the relevant data inputs in the Companys determination of fair value. The Company intends to continue to engage an independent valuation firm in the future to provide certain valuation services, including the review of certain portfolio assets, as part of the quarterly and annual year-end valuation process.
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Information about our senior securities (including debt obligations and indebtedness) is shown in the following table as of December 31 for the years indicated in the table, unless otherwise noted. Ernst & Young LLPs report on the table as of December 31, 2014, is attached as an exhibit to the registration statement of which this prospectus is a part.
Class and Year | Total Amount Outstanding Exclusive of Treasury Securities(1) | Asset Coverage per Unit(2) |
Involuntary Liquidating Preference per Unit(3) | Average Market Value per Unit(4) |
||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Senior securities payable |
||||||||||||||||||||
2006 | N/A | N/A | N/A | N/A | ||||||||||||||||
2007 | $ | 255,000 | 2,016 | | N/A | |||||||||||||||
2008 | 261,691 | 1,751 | | N/A | ||||||||||||||||
2009 | 218,050 | 1,981 | | N/A | ||||||||||||||||
2010 | 86,747 | 3,155 | | N/A | ||||||||||||||||
2011 | 60,000 | 4,009 | | N/A | ||||||||||||||||
2012 | 101,400 | 3,050 | | N/A | ||||||||||||||||
2013 | 192,592 | 2,264 | | N/A | ||||||||||||||||
2014 | 223,885 | 2,140 | | N/A | ||||||||||||||||
2015 (as of June 30, 2015, unaudited) | 224,185 | 2,150 | | N/A |
(1) | Total amount of each class of senior securities outstanding at the end of the period presented. |
(2) | Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness. |
(3) | The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it. The indicates information which the Securities and Exchange Commission expressly does not require to be disclosed for certain types of senior securities. |
(4) | Not applicable, except with respect to the 7.375% Notes Due 2019, as other debt securities are not registered for public trading. For the period ended June 30, 2015, the year ended December 31, 2014, the year-ended December 31, 2013 and for the period from October 17, 2012 (date of issuance) to December 31, 2012, the average market value per $1,000 of par value of the 7.375% Notes Due 2019 was $1,018.62, $1,032.96 and $1,012.28, respectively. |
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We are an internally managed, non-diversified closed-end investment company that is regulated as a business development company (BDC) under the Investment Company Act of 1940 (the 1940 Act). We have three principal areas of investment.
| First, we originate, structure, and invest in senior secured term loans, mezzanine debt and selected equity securities primarily in privately-held middle market companies (the Debt Securities Portfolio). |
| Second, we have invested in asset management companies (Katonah Debt Advisors and Trimaran Advisors, as well as affiliated management companies Katonah 2007-1 Management, L.L.C., Katonah X Management, L.L.C. and Trimaran Advisors Management, collectively the Asset Manager Affiliates). |
| Third, we invest in debt and equity securities issued by collateralized loan obligation funds (CLO Funds) managed by our Asset Manager Affiliates or by other asset managers (the CLO Fund Securities). |
In our Debt Securities Portfolio, our investment objective is to generate current income and, to a lesser extent, capital appreciation from the investments made by our middle market business in senior secured term loans, mezzanine debt and selected equity investments in privately-held middle market companies. We define the middle market as comprising companies with earnings before interest, taxes, depreciation and amortization (EBITDA) of $10 million to $50 million and/or total debt of $25 million to $150 million. We primarily invest in first and second lien term loans which, because of their priority in a companys capital structure, we expect will have lower default rates and higher rates of recovery of principal if there is a default and therefore we expect them to generate a stable stream of interest income. The investments in our Debt Securities Portfolio are all or predominantly below investment grade, and have speculative characteristics with respect to the issuers capacity to pay interest and repay principal. While our primary investment focus is making loans to, and selected equity investments in, privately-held middle market companies, we may also invest in other investments such as loans to smaller companies or larger, publicly-traded companies, high-yield bonds and distressed debt securities. We may also receive warrants or options to purchase common stock in connection with our debt investments.
With respect to our Asset Manager Affiliates investment, we expect to receive recurring cash distributions and to generate capital appreciation through the addition of new CLO Funds managed by our Asset Manager Affiliates. The Asset Manager Affiliates manage CLO Funds that invest in broadly syndicated loans, high-yield bonds and other credit instruments. Collectively, the Asset Manager Affiliates have approximately $3.2 billion of par value assets under management. The Asset Manager Affiliates are registered under the Investment Advisers Act of 1940, and are managed independently from the Company by a separate portfolio management team.
In addition, our investments in CLO Fund Securities, which are primarily made up of minority investments in the subordinated securities or preferred stock of CLO Funds raised and managed by our Asset Manager Affiliates, are anticipated to provide the Company with recurring cash distributions and complement the growth of our Asset Manager Affiliates.
Because we are internally managed by our executive officers under the supervision of our Board of Directors and do not depend on a third party investment advisor, we do not pay investment advisory fees, but instead incur the operating costs associated with employing investment and portfolio management professionals. We believe that our internally managed structure provides us with a beneficial operating expense structure when compared to other publicly-traded and privately-held investment firms which are externally managed, and our internally managed structure allows us the opportunity to leverage our non-interest operating expenses as we grow our investment portfolio. For the years ended December 31, 2014 and 2013, the ratio of our total operating expenses, excluding interest expense, as a percentage of our quarterly average total assets was approximately 2%.
As a BDC, we are required to comply with regulatory requirements, including limitations on our use of debt. We are permitted to, and expect to continue to, finance our investments through borrowings. However, as
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a BDC, we are only generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. The 1940 Act also generally prohibits us from declaring any cash dividend or distribution on any class of our capital stock if our asset coverage is below 200% at the time of the declaration of the dividend or distribution.
We intend to grow our portfolio of assets by raising additional capital, including through the prudent use of leverage available to us. Because we also recognize the need to have funds available for operating our business and to make investments, we seek to have adequate liquidity at all times to cover normal cyclical swings in funding availability and to allow us to meet abnormal and unexpected funding requirements. As a result, we may hold varying amounts of cash and other short-term investments from time-to-time for liquidity purposes.
The investments in our Debt Securities Portfolio are all or predominantly below investment grade, which are often referred to as junk, and have speculative characteristics with respect to the issuers capacity to pay interest and repay principal.
We were formed in August 2006, as Kohlberg Capital Corporation, a Delaware limited liability company and converted to a corporation incorporated in Delaware prior to the completion of our initial public offering (IPO) in December 2006. Prior to our IPO, we did not have material operations. In our IPO we issued 14,462,000 shares of our common stock and raised net proceeds of approximately $200 million. Prior to our IPO, we issued 3,484,333 shares of our common stock to affiliates of Kohlberg & Co., L.L.C., a leading middle market private equity firm, in exchange for the contribution of ownership interests in Katonah Debt Advisors and in securities issued by CLO Funds managed by Katonah Debt Advisors and two other asset managers.
In April 2008, the Company completed a rights offering that resulted in the issuance of 3.1 million shares of our common stock, and net proceeds of $27 million.
On February 29, 2012, the Company purchased Trimaran Advisors, L.L.C. (Trimaran Advisors), a CLO manager similar to Katonah Debt Advisors, with assets under management of approximately $1.5 billion, for total consideration of $13.0 million in cash and 3,600,000 shares of the Companys common stock. Contemporaneous with the acquisition of Trimaran Advisors, the Company acquired from Trimaran Advisors equity interests in certain CLO Funds managed by Trimaran Advisors for an aggregate purchase price of $12.0 million in cash. As of December 31, 2014, Asset Manager Affiliates had approximately $3.0 billion of par value assets under management.
On July 11, 2012, we changed our name from Kohlberg Capital Corporation to KCAP Financial, Inc.
On February 14, 2013, the Company completed a public offering of 5,232,500 shares of common stock, which included the underwriters full exercise of their option to purchase up to 682,500 shares of common stock, at a price of $9.75 per share, raising approximately $51.0 million in gross proceeds. In conjunction with this offering, the Company also sold 200,000 shares of common stock to a member of its Board of Directors, at a price of $9.31125 per share, raising approximately $1.9 million in gross proceeds.
On October 6, 2014, the Company completed a follow-on public offering of 3.0 million shares of its common stock at a price of $8.02 per share. The offering raised net proceeds of approximately $23.8 million, net of underwriting discounts and offering expenses.
Including employees of our Asset Manager Affiliates, we employ an experienced team of 14 investment professionals, 9 asset manager professionals, 7 BDC team members and 25 total staff members. Dayl W. Pearson, our President and Chief Executive Officer, and one of our directors, has been in the financial services industry for over 38 years. During the past 24 years, Mr. Pearson has focused almost exclusively on the middle market and has originated, structured and underwritten over $7 billion of debt and equity securities. R. Jon Corless, our Chief Investment Officer with primary responsibility for the Middle Debt Securities Portfolio, has managed investment portfolios in excess of $4 billion at several institutions and has been responsible for managing portfolios of leveraged loans, high-yield bonds, mezzanine securities and middle market loans. Dominick J. Mazzitelli is the President and portfolio manager of the Asset Manager Affiliates. He has 20 years of experience within the credit markets, with most of his career focused on the leveraged finance markets. Edward U. Gilpin, our Chief Financial Officer, Secretary and Treasurer, has been in financial
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services for nearly 30 years, with significant experience in overseeing the financial operations and reporting for asset management businesses, including the fair value accounting of CLO securities owned by them.
Under the investment company rules and regulations pursuant to Article 6 of Regulation S-X and the Financial Standards Board Accounting Standards Codification 946, Financial Services Investment Companies (ASC 946), we are precluded from consolidating portfolio company investments, including those in which we have a controlling interest, unless the portfolio company is another investment company. An exception to this general principle in ASC 946 occurs if we own a controlled operating company that provides all or substantially all of its services directly to us, or to an investment company of ours. Other than KCAP Funding, Kohlberg Capital Funding LLC I, KCAP Senior Funding I Holdings LLC and KCAP Senior Funding I LLC, none of the investments made by us qualify for this exception. Therefore, our portfolio investments, including our investments in the Asset Manager Affiliates, are carried on the balance sheet at fair value with any adjustments to fair value recognized as Net Change in Unrealized Appreciation (Depreciation) in our statement of operations until the investment is exited, at which point any gain or loss on exit is reclassified and recognized as a Net Realized Gain (Loss) from Investments.
We have elected to be treated for U.S. federal income tax purposes as a Regulated Investment Company (RIC) under the Internal Revenue Code (the Code) and intend to operate in a manner to maintain our RIC tax treatment. Accordingly, we generally will not pay corporate-level U.S. federal income taxes on any net ordinary tax-basis taxable income or capital gains that we timely distribute to our shareholders as dividends. To maintain our RIC tax treatment, we must meet the specified source-of-income and asset diversification requirements and distribute annually at least 90% of our net ordinary tax-basis taxable income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, for each year.
Our common stock is traded on The NASDAQ Global Select Market under the symbol KCAP. The net asset value per share of our common stock at June 30, 2015 was $6.96. On August 5, 2015, the last reported sale price of a share of our common stock on The NASDAQ Global Select Market was $5.16. In addition, our 7.375% notes due 2019 (7.375% Notes Due 2019) are traded on the New York Stock Exchange under the symbol KAP.
Our principal executive offices are located at 295 Madison Avenue, 6th Floor, New York, New York 10017, and our telephone number is (212) 455-8300. We maintain a website on the Internet at http://www.kcapfinancial.com. The information contained in our website is not incorporated by reference into this prospectus.
We believe that we can successfully compete with other providers of capital in the markets in which we compete for the following reasons:
| Internally managed structure and significant management resources. We are internally managed by our executive officers under the supervision of our Board of Directors and do not depend on a third party investment advisor. As a result, we do not pay investment advisory fees and all of our income is available to pay our operating costs, which include employing investment and portfolio management professionals, and to make distributions to our stockholders. We believe that our internally managed structure provides us with a beneficial operating expense structure when compared to other publicly traded and privately-held investment firms that are externally managed, and our internally managed structure allows us the opportunity to leverage our non-interest operating expenses as we grow our investment portfolio. |
| Multiple sourcing capabilities for middle market investments. We have multiple sources of loans, mezzanine investments and equity investments through our industry relationships. |
| Disciplined investment process. We employ a rigorous credit review and due diligence process which our senior management has developed over an average of approximately 25 years of investing experience. |
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| Investments across a wide variety of industries. Our Debt Security Portfolio is spread across 25 different industries and 84 different entities with an average par balance per investment of approximately $3.6 million. |
| Significant equity ownership and alignment of incentives. Our Directors and senior management team and the senior management team of our Asset Manager Affiliates together have a significant equity interest in the Company, ensuring that their incentives are strongly aligned with those of our stockholders. |
| 100% ownership of Asset Manager Affiliates. Our CLO Fund investments and management of those securities through the Asset Manager Affiliates provide us with a competitive advantage by creating synergies with our investment operations and a source of recurring dividend cash flows. |
Our investment portfolio generates net investment income, which is generally used to pay principal and interest on our borrowings, operating expenses, and to fund our dividends. Our investment portfolio consists of three primary components: the Debt Securities Portfolio, the CLO Fund Securities and our investment in our wholly owned Asset Manager Affiliates.
Debt Securities Portfolio. We target privately held middle market companies that have strong historical cash flows, experienced management teams and identifiable and defendable market positions in industries with positive dynamics. We generally target companies that generate positive cash flows because we look to cash flows as the primary source for servicing debt.
We employ a disciplined approach in the selection and monitoring of our investments. Generally, we target investments that will generate a current return through interest income to provide for stability in our shareholder distributions and place less reliance on realized capital gains from our investments. Our investment philosophy is focused on preserving capital with an appropriate return profile relative to risk. Our investment due diligence and selection generally focuses on an underlying issuers net cash flow after capital expenditures to service its debt rather than on multiples of net income, valuations or other broad benchmarks which frequently miss the nuances of an issuers business and prospective financial performance. We also generally avoid concentrations in any one industry or issuer. We manage risk by following our internal credit policies and procedures.
When we extend senior secured term loans, we will generally take a security interest in the available assets of the portfolio company, including the equity interests of their subsidiaries, which we expect to help mitigate the risk that we will not be repaid. Nonetheless, there is a possibility that our lien could be subordinated to claims of other creditors. Structurally, mezzanine debt ranks subordinate in priority of payment to senior term loans and is often unsecured. Relative to equity, mezzanine debt ranks senior to common and preferred equity in a borrowers capital structure. Typically, mezzanine debt has elements of both debt and equity instruments, offering the fixed returns in the form of interest payments associated with a loan, while providing an opportunity to participate in the capital appreciation of a borrower, if any, through an equity interest that is typically in the form of equity purchased at the time the mezzanine loan is repaid or warrants to purchase equity at a future date at a fixed cost. Mezzanine debt generally earns a higher return than senior secured debt due to its higher risk profile and usually less restrictive covenants. The warrants associated with mezzanine debt are typically detachable, which allows lenders to receive repayment of their principal on an agreed amortization schedule while retaining their equity interest in the borrower. Mezzanine debt also may include a put feature, which permits the holder to sell its equity interest back to the borrower at a price determined through an agreed formula.
Below are summary attributes for our Debt Securities Portfolio as of and for the period ended June 30, 2015:
| represents approximately 63% of total investment portfolio; |
| contains credit instruments issued by corporate borrowers; |
| primarily senior secured and junior secured loans (73% and 13% of debt securities, respectively); |
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| spread across 25 different industries and 90 different entities; |
| average par balance per investment of approximately $3.3 million; |
| all but one of our issuers (representing less than 1% of total investments at fair value) are current on their debt service obligations; |
| weighted average interest rate of 7.3% on income producing debt investments. |
Our investments generally average between $1 million to $20 million, although particular investments may be larger or smaller. The size of individual investments will vary according to their priority in a companys capital structure, with larger investments in more secure positions in an effort to maximize capital preservation. The size of our investments and maturity dates may vary as follows:
| senior secured term loans from $2 to $20 million maturing in five to seven years; |
| second lien term loans from $5 to $15 million maturing in six to eight years; |
| senior unsecured loans $5 to $23 million maturing in six to eight years; |
| mezzanine loans from $5 to $15 million maturing in seven to ten years; and |
| equity investments from $1 to $5 million. |
Asset Manager Affiliates. We expect to receive distributions of recurring cash distributions and seek to generate capital appreciation from our investment in our Asset Manager Affiliates. As a manager of the CLO Funds, our Asset Manager Affiliates receive contractual and recurring management fees from the CLO Funds for their management and advisory services. In addition, our Asset Manager Affiliates may also earn income related to net interest on assets accumulated for future CLO issuances on which they have provided a first loss guaranty in connection with loan warehouse arrangements for their CLO Funds.
The annual management fees that our Asset Manager Affiliates receive are generally based on a fixed percentage of the par value of assets under management and are recurring in nature for the term of the CLO Fund so long as the Asset Manager Affiliates manage the fund. As a result, the management fees earned by our Asset Manager Affiliates are not subject to market value fluctuations in the underlying collateral. The management fees our Asset Manager Affiliates receive generally have three contractual components: a senior management fee, a subordinated management fee and the possibility of an incentive management fee if certain conditions are met. Currently, all CLO Funds managed by Asset Manager Affiliates are paying both their senior and subordinated management fees on a current basis. During 2014, five CLO Funds have achieved the minimum investment return threshold and our Asset Manager Affiliates received incentive fees from those CLO Funds, although two of such CLO Funds have recently been called for redemption by their investors.
Subject to the conditions of the capital markets, we expect to continue to make investments in CLO Funds managed by our Asset Manager Affiliates, which we believe will provide us with a current cash investment return. We believe that these investments will provide our Asset Manager Affiliates with greater opportunities to access new sources of capital, which will ultimately increase our Asset Manager Affiliates assets under management and resulting management fee income. See Risk Factors for a discussion of the risks relating to our ability to access the capital markets and the impact of certain risk retention rules that will require that we or our Asset Manager Affiliates make and maintain certain minimum investments in CLO Funds managed by the Asset Manager Affiliates.
The after-tax net fee cash flow that our Asset Manager Affiliates generate through the fees they receive for managing CLO Funds and after paying their expenses pursuant to an overhead allocation agreement with the Company associated with their operations, including compensation of their employees, may be distributed to us. Distributions from our Asset Manager Affiliates tax basis earnings and profits are recorded as Dividends From Asset Manager Affiliates in our financial statements when declared. From time to time our Asset Manager Affiliates may distribute cash in excess of tax basis earnings and profits. This excess is deemed a return of capital (ROC) and is recorded in unrealized gains (losses) on the statement of operations.
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Below are summary attributes for our Asset Manager Affiliates, as of and for the period ended June 30, 2015:
| represent approximately 16% of total investment portfolio; |
| have approximately $3.2 billion of assets under management; |
| receive contractual and recurring asset management fees based on par value of managed investments; |
| may receive an incentive management fee from a CLO Fund, provided that the CLO Fund achieves a minimum designated return on investment. In 2014, five such funds paid incentive fees to our Asset Manager Affiliates; although two of such CLO Funds have recently been called for redemption by their investors; |
| distributions paid by our Asset Manager Affiliates are an additional source of income to pay our dividend and service our debt obligations; and |
| for the six month period ended June 30, 2015, we received cash distributions of $5.0 million, of which $2.6 million was recognized as investment income from our Asset Manager Affiliates. |
CLO Fund Securities. Subject to conditions of the capital market, we expect to continue to make investments in the CLO Funds managed by our Asset Manager Affiliates, which we believe will provide us with a current cash investment return. We believe that these investments will provide our Asset Manager Affiliates with greater opportunities to access new sources of capital which will ultimately increase our Asset Manager Affiliates assets under management and resulting management fee income.
Below are summary attributes for our CLO Fund Securities, as of June 30, 2015, unless otherwise specified:
| CLO Fund Securities represent approximately 17% of total investment portfolio; |
| 93% of CLO Fund Securities represent investments in subordinated securities or equity securities issued by CLO Funds and 7% of CLO Fund Securities are rated notes; |
| all CLO Funds invest primarily in credit instruments issued by corporate borrowers; and |
| GAAP-basis investment income of $8.6 million and tax basis cash distributions received of $9.5 million during the six month period ended June 30, 2015. |
We are an internally managed BDC with 25 full-time employees (inclusive of employees of our Asset Manager Affiliates). The following are our key functional teams that execute our business strategy:
| Our BDC investment team consists of 7 professionals who originate, structure, and invest in senior secured term loans, mezzanine debt and selected equity securities primarily in privately-held middle market companies as well as CLO Funds. |
| Our Asset Manager Affiliates team consists of 9 professionals who structure, purchase and manage portfolios of primarily broadly syndicated corporate senior debt in the form of CLOs. |
| The remainder of the employees include senior management, operations, financial accounting, legal, compliance and human resources. |
KCAP will review potential investment opportunities and conduct due diligence that will typically include a review of historical and prospective financial information, participation in a presentation held by the prospective portfolio companys management and/or the transaction sponsor, a review of the prospective portfolio companys product or service, an analysis and understanding of the drivers of the particular industry in which the prospective portfolio company operates, and an assessment of the debt service capabilities of the
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prospective portfolio company under a variety of assumed forecast scenarios. Where appropriate, this may be performed in conjunction with the relevant industry analysts from the Asset Manager Affiliates.
Due to our ability to source transactions through multiple channels, we expect to continue to maintain a pipeline of opportunities to allow comparative risk return analysis and selectivity. By focusing on the drivers of revenue and cash flow, we develop our own underwriting cases, and multiple stress and event specific case scenarios for each company analyzed.
We focus on lending and investing opportunities in:
| companies with EBITDA of $10 to $50 million; |
| companies with financing needs of $25 to $150 million; |
| companies purchased by well regarded private equity sponsors; |
| non-sponsored companies with successful management and systems; |
| high-yield bonds and broadly syndicated loans to larger companies on a selective basis; and |
| equity co-investment in companies where we see substantial opportunity for capital appreciation. |
We expect to continue to source investment opportunities from:
| private equity sponsors; |
| regional investment banks for non-sponsored companies; |
| other middle market lenders with whom we can participate in loans; and |
| our Asset Manager Affiliates, with regard to high-yield bonds and syndicated loans. |
In our experience, good credit judgment is based on a thorough understanding of both the qualitative and quantitative factors that determine a companys performance. Our analysis begins with an understanding of the fundamentals of the industry in which a company operates, including the current economic environment and the outlook for the industry. We also focus on the companys relative position within the industry and its historical ability to weather economic cycles. Other key qualitative factors include the experience and depth of the management team and the financial sponsor, if any.
Only after we have a comprehensive understanding of the qualitative factors do we focus on quantitative metrics. We believe that with the context provided by the qualitative analysis, we can gain a better understanding of a companys financial performance. We analyze a potential portfolio companys sales growth and margins in the context of its competition as well as its ability to manage its working capital requirements and its ability to generate consistent cash flow. Based upon this historical analysis, we develop a set of projections which represents a reasonable underwriting case of most likely outcomes for the company over the period of our investment. We also look at potential downside cases to determine a companys ability to service its debt in a stressed credit environment.
Elements of the qualitative analysis we use in evaluating investment opportunities include the following:
| industry fundamentals; |
| competitive position and market share; |
| past ability to work through historical down-cycles; |
| quality of financial and technology infrastructure; |
| sourcing risks and opportunities; |
| labor and union strategy; |
| technology risk; |
| diversity of customer base and product lines; |
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| quality of financial sponsor (if applicable); and |
| acquisition and integration history. |
Elements of the quantitative analysis we use in evaluating investment opportunities include the following:
| income statement analysis of growth and margin trends; |
| cash flow analysis of capital expenditures and free cash flow; |
| financial ratio and market share standing among comparable companies; |
| financial projections: underwriting versus stress case; |
| event specific credit modeling; |
| event profile trend; |
| future capital expenditure needs and asset sale plans; |
| downside protection to limit losses in an event of default; |
| risk adjusted returns and relative value analysis; and |
| enterprise and asset valuations. |
The origination, structuring and credit approval processes are fully integrated. Our credit team is directly involved in all due diligence and analysis prior to the formal credit approval process by the Investment Committee.
The Investment Committee consists of the Chairman of the Board of Directors, the Chief Executive Officer, Chief Investment Officer, and an additional member of the Board of Directors. The Investment Committee serves to provide investment consistency and adherence to our core investment philosophy and policies.
Upon completion of the due diligence investigation, the underwriting team of investment professionals/analysts will prepare a credit underwriting memorandum that will summarize the contemplated transaction, present the investment highlights, analyze the risk in the transaction and mitigating factors to those risks, analyze the prospective portfolios historical financial statements, financial projections, industry and management team, and will then present this memorandum with its recommendations to the Investment Committee for review and approval.
The approval of a majority of the Investment Committee will be required for all investments of less than $15 million, and the unanimous approval of the Investment Committee will be required for investments of $15 million or greater.
Our management team has significant experience monitoring credit portfolios. Along with origination and credit analysis, portfolio management is one of the key elements of our business. Most of our investments will not be liquid and, therefore, we must prepare to act quickly if potential issues arise so that we can work closely with management and the private equity sponsor, if applicable, of the portfolio company to take any necessary remedial action quickly. In addition, most of our senior management team, including the credit team at the Asset Manager Affiliates, has substantial workout and restructuring experience.
In order to assist us in detecting issues with our Debt Securities Portfolio companies as early as possible, we perform financial analysis at least quarterly of each portfolio company. This analysis typically includes:
| A summary of the portfolio companys current total credit exposure as well as the KCAP portion of this exposure. |
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| A summary and update of the portfolio companys financial condition and performance, including but not limited to, performance versus plan, deterioration/improvement in market position, or industry fundamentals, management changes or additions, and ongoing business strategy. |
| Reaffirmation of, or proposal to change, the risk rating of the underlying investment. |
| A summary of the portfolio companys financial covenant results vis a vis financial covenant levels established in the credit agreement. |
| Watch list credits will be followed closely and discussed periodically with the Chief Investment Officer, as appropriate. |
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We determine the net asset value per share of our common stock quarterly. The net asset value per share is equal to the value of our total assets minus liabilities and any preferred stock outstanding divided by the total number of shares of common stock outstanding.
Our net asset value per share was $6.96, $6.94 and $7.51 as of June 30, 2015, December 31, 2014 and December 31, 2013, respectively. Since we report our assets at fair value for each reporting period, net asset value also represents the amount of stockholders equity per share for the reporting period. Our net asset value is comprised mostly of investment assets less debt and other liabilities:
June 30, 2015 (unaudited) |
December 31, 2014 | December 31, 2013 | ||||||||||||||||||||||
Fair Value(1) | per Share(1) | Fair Value(1) | per Share(1) | Fair Value(1) | per Share(1) | |||||||||||||||||||
Investments at fair value: |
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Investments in money market accounts(2) | $ | 16,457,816 | 0.44 | $ | 1,602,741 | 0.04 | $ | 7,112,949 | 0.21 | |||||||||||||||
Investments in debt securities | 297,915,304 | 8.04 | 320,143,170 | 8.70 | 266,830,427 | 8.02 | ||||||||||||||||||
Investments in CLO Fund Securities | 78,448,455 | 2.12 | 77,514,903 | 2.11 | 79,452,220 | 2.38 | ||||||||||||||||||
Investments in equity securities | 7,542,085 | 0.20 | 8,119,681 | 0.22 | 11,006,398 | 0.34 | ||||||||||||||||||
Investments in Asset Manager Affiliates | 73,737,000 | 1,99 | 72,326,000 | 1.97 | 76,148,000 | 2.28 | ||||||||||||||||||
Cash | 2,807,432 | 0.08 | 1,220,798 | 0.03 | 3,433,675 | 0.10 | ||||||||||||||||||
Restricted Cash | 8,641,346 | 0.23 | 19,325,550 | 0.53 | 4,078,939 | 0.12 | ||||||||||||||||||
All other assets | 9,530,719 | 0.26 | 10,193,954 | 0.28 | 11,109,780 | 0.33 | ||||||||||||||||||
Total Assets | $ | 495,080,157 | $ | 13.36 | $ | 510,446,797 | $ | 13.88 | $ | 459,172,388 | $ | 13.78 | ||||||||||||
Convertible Notes | $ | 38,647,000 | $ | 1.04 | $ | 38,647,000 | $ | 1.05 | $ | 49,008,000 | $ | 1.47 | ||||||||||||
7.375% Notes Due 2019 | 41,400,000 | 1.12 | 41,400,000 | 1.13 | 41,400,000 | 1.24 | ||||||||||||||||||
Payable for open trades | 7,741,875 | 0.21 | 18,293,725 | 0.50 | 3,980,000 | 0.12 | ||||||||||||||||||
Notes payable KCAP Senior Funding I, LLC (net of discount) | 144,137,981 | 3.89 | 143,837,593 | 3.91 | 102,184,373 | 3.07 | ||||||||||||||||||
Other liabilities | 5,356,943 | 0.14 | 12,951,778 | 0.35 | 12,230,322 | 0.37 | ||||||||||||||||||
Total Liabilities | 237,283,799 | 6.40 | 255,130,096 | 6.94 | 208,802,695 | 6.27 | ||||||||||||||||||
NET ASSET VALUE | $ | 257,796,358 | $ | 6.96 | $ | 255,316,701 | $ | 6.94 | $ | 250,369,693 | $ | 7.51 |
(1) | Our balance sheet at fair value and resultant net asset value are calculated on a basis consistent with accounting principles generally accepted in the United States of America (GAAP). Our per share presentation of such amounts (other than net asset value per share) is an internally derived non-GAAP performance measure calculated by dividing the applicable balance sheet amount by outstanding shares. We believe that the per share amounts for such balance sheet items are helpful in analyzing our balance sheet both quantitatively and qualitatively. |
(2) | Includes restricted cash held under employee benefit plans. |
As a BDC, we invest primarily in illiquid securities, including loans to and warrants of private companies and interests in other illiquid securities, such as interests in CLO Fund Securities. These portfolio investments may be subject to restrictions on resale and will generally have no established trading market. As a result, our Board of Directors determines in good faith the fair value of our portfolio investments pursuant to a valuation policy developed in accordance with the Financial Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurements and Disclosures (ASC 820: Fair Value), and a valuation process approved by our Board of Directors and in accordance with the 1940 Act. Our valuation policy is intended to
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provide a consistent basis for determining the fair value of the portfolio. Our Board of Directors is ultimately and solely responsible for making a good faith determination of the fair value of portfolio investments on a quarterly basis. The Company uses an independent valuation firm to provide third party valuation consulting services to the Company and the Board of Directors. For additional information concerning valuation, see MD&A Valuation of Portfolio Investments; and Notes 2 and 4 to our consolidated financial statements for the six months ended June 30, 2015 contained in the registration statement of which this prospectus is a part.
Our primary competitors also provide financing to prospective portfolio companies and include commercial banks, specialty finance companies, hedge funds, structured investment funds, other BDCs and investment banks. Our competitors may have a lower cost of funds, and many have access to funding sources that are not available to us. Many of these entities have greater managerial resources than we have, and the 1940 Act imposes certain regulatory restrictions on us as a BDC to which many of our competitors are not subject. For additional information concerning the competitive risks we face, see Risk Factors Risks Related to Our Business and Structure We operate in a highly competitive market for investment opportunities.
We believe that we provide a unique combination of an experienced middle market origination and a CLO management platform at the Asset Manager Affiliates that includes experienced lenders with broad industry expertise. We believe that this combination of resources provides us with a thorough credit process and multiple sources of investment opportunities that make us attractive within our market.
As of June 30, 2015, we and our Asset Manager Affiliates had 25 employees, including an experienced team of 14 investment professionals, 9 asset manager professionals and 7 BDC team members.
The Company is not currently a party to any material legal proceedings.
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The following table sets forth certain information as of June 30, 2015 for each portfolio company in which we had an investment.
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost | Fair Value(2) | ||||||||||||
4L Technologies Inc. (fka Clover Holdings, Inc.)(9), (11) Consumer goods: Non-durable |
Senior Secured Loan Term Loan 5.5% Cash, 1.0% Libor Floor, Due 5/20 |
$ | 2,779,000 | $ | 2,756,481 | $ | 2,695,908 | |||||||||
Advanced Lighting Technologies, Inc.(9), (11) Consumer goods: Durable |
First Lien Bond 10.5% 06/2019 00753CAE2 10.5% Cash, Due 6/19 |
3,000,000 | 2,972,087 | 2,547,600 | ||||||||||||
Advantage Sales & Marketing Inc.(9) Services: Business |
Junior Secured Loan Term Loan (Second Lien) 7.5% Cash, 1.0% Libor Floor, Due 7/22 |
1,000,000 | 1,002,228 | 1,007,915 | ||||||||||||
Alaska Communications Systems Holdings, Inc.(9), (11) Telecommunications |
Senior Secured Loan Term Loan 6.3% Cash, 1.5% Libor Floor, Due 10/16 |
1,294,902 | 1,292,011 | 1,295,032 | ||||||||||||
Alere Inc. (fka IM US Holdings, LLC)(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan B Term Loan 4.3% Cash, 1.0% Libor Floor, Due 6/22 |
1,250,000 | 1,246,873 | 1,252,625 | ||||||||||||
AmSurg Corp.(11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan 3.8% Cash, 0.8% Libor Floor, Due 7/21 |
2,977,444 | 2,977,444 | 2,981,165 | ||||||||||||
Anaren, Inc.(9), (11) Aerospace and Defense |
Senior Secured Loan Term Loan (First Lien) 5.5% Cash, 1.0% Libor Floor, Due 2/21 |
1,970,000 | 1,954,074 | 1,969,803 | ||||||||||||
Asurion, LLC (fka Asurion Corporation)(9), (11) Banking, Finance, Insurance & Real Estate |
Senior Secured Loan Incremental Tranche B-1 Term Loan 5.0% Cash, 1.3% Libor Floor, Due 5/19 |
1,902,705 | 1,914,090 | 1,909,707 | ||||||||||||
AZ Chem US Inc.(9), (11) Chemicals, Plastics and Rubber |
Senior Secured Loan Initial Term Loan (First Lien) 4.5% Cash, 1.0% Libor Floor, Due 6/21 |
451,370 | 449,446 | 451,934 | ||||||||||||
Bankruptcy Management Solutions, Inc.(9) Services: Business |
Senior Secured Loan Term B Loan 7.0% Cash, 1.0% Libor Floor, Due 6/18 |
691,364 | 691,364 | 646,425 | ||||||||||||
BarBri, Inc. (Gemini Holdings, Inc.)(9), (11) Services: Consumer |
Senior Secured Loan Term Loan 4.5% Cash, 1.0% Libor Floor, Due 7/19 |
2,731,875 | 2,722,603 | 2,723,679 | ||||||||||||
BBB Industries US Holdings, Inc.(9), (11) Automotive |
Senior Secured Loan Initial Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 11/21 |
2,992,500 | 2,938,204 | 2,928,461 | ||||||||||||
Bellisio Foods, Inc.(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan U.S. Term B Loans 5.3% Cash, 1.0% Libor Floor, Due 8/19 |
1,947,351 | 1,940,399 | 1,913,467 | ||||||||||||
Carolina Beverage Group LLC(9) Beverage, Food and Tobacco |
Senior Secured Bond 10.625% 08/2018 143818AA0 144A 10.6% Cash, Due 8/18 |
1,500,000 | 1,512,620 | 1,481,700 | ||||||||||||
CCS Intermediate Holdings, LLC(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan (First Lien) 5.0% Cash, 1.0% Libor Floor, Due 7/21 |
2,977,500 | 2,964,498 | 2,888,175 | ||||||||||||
Cengage Learning Acquisitions, Inc. (fka TL Acquisitions, Inc.)(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Term Loan 7.0% Cash, 1.0% Libor Floor, Due 3/20 |
2,979,950 | 2,973,892 | 2,988,338 | ||||||||||||
Checkout Holding Corp. (fka Catalina Marketing)(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Term B Loan (First Lien) 4.5% Cash, 1.0% Libor Floor, Due 4/21 |
990,000 | 985,908 | 878,625 | ||||||||||||
Consolidated Communications, Inc.(11) Telecommunications |
Senior Secured Loan Initial Term Loan 4.3% Cash, 1.0% Libor Floor, Due 12/20 |
2,977,330 | 2,987,499 | 2,984,773 | ||||||||||||
CRGT Inc.(9), (11) High Tech Industries |
Senior Secured Loan Term Loan 7.5% Cash, 1.0% Libor Floor, Due 12/20 |
2,962,500 | 2,908,022 | 2,947,095 | ||||||||||||
Crowley Holdings Preferred, LLC(9) Transportation: Cargo |
Preferred Stock 12.000% 12/2049 Series A Income Preferred Securities 12.0% Cash, 2.0% PIK, Due 12/49 |
10,308,332 | 10,308,332 | 10,411,415 | ||||||||||||
Crowne Group, LLC(9), (11) Automotive |
Senior Secured Loan Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 9/20 |
3,970,000 | 3,917,727 | 3,863,207 |
83
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost | Fair Value(2) | ||||||||||||
CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)(9) Beverage, Food and Tobacco |
Junior Secured Loan Term Loan (Second Lien) 8.8% Cash, 1.0% Libor Floor, Due 7/21 |
$ | 3,000,000 | $ | 3,015,110 | $ | 2,857,500 | |||||||||
CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Term Loan (First Lien) 5.0% Cash, 1.0% Libor Floor, Due 7/20 |
2,610,113 | 2,609,282 | 2,610,530 | ||||||||||||
CT Technologies Intermediate Holdings, Inc. (Smart Holdings Corp.) (aka HealthPort)(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan Retired 07/01/2015 6.0% Cash, 1.0% Libor Floor, Due 12/21 |
2,985,000 | 2,957,539 | 2,999,925 | ||||||||||||
DBI Holding LLC(9) Services: Business |
Senior Unsecured Bond 13% 09/2019 PIK Note 0.0% Cash, 13.0% PIK, Due 9/19 | 3,733,857 | 3,524,810 | 3,618,855 | ||||||||||||
DBI Holding LLC(9) Services: Business |
Senior Subordinated Bond 13% 09/2019 Senior Subordinated Note 12.0% Cash, 1.0% PIK, Due 9/19 |
4,391,390 | 4,375,084 | 4,278,531 | ||||||||||||
DJO Finance LLC(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan 4.3% Cash, 1.0% Libor Floor, Due 6/20 |
2,058,377 | 2,058,377 | 2,058,377 | ||||||||||||
Drew Marine Group Inc.(9) Transportation: Cargo |
Junior Secured Loan Term Loan (Second Lien) 8.0% Cash, 1.0% Libor Floor, Due 5/21 |
2,500,000 | 2,495,069 | 2,522,500 | ||||||||||||
ELO Touch Solutions, Inc.(9), (11) High Tech Industries |
Senior Secured Loan Term Loan (First Lien) 8.0% Cash, 1.5% Libor Floor, Due 6/18 |
1,586,611 | 1,544,041 | 1,580,424 | ||||||||||||
EWT Holdings III Corp. (fka WTG Holdings III Corp.)(9) Environmental Industries |
Junior Secured Loan Term Loan (Second Lien) 8.5% Cash, 1.0% Libor Floor, Due 1/22 |
4,000,000 | 3,983,630 | 4,035,600 | ||||||||||||
Fender Musical Instruments Corporation(9), (11) Consumer goods: Durable |
Senior Secured Loan Initial Loan 5.8% Cash, 1.3% Libor Floor, Due 4/19 |
1,772,515 | 1,781,753 | 1,773,047 | ||||||||||||
FHC Health Systems, Inc.(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan 5.0% Cash, 1.0% Libor Floor, Due 12/21 |
3,897,375 | 3,860,941 | 3,869,119 | ||||||||||||
First American Payment Systems, L.P.(9) Banking, Finance, Insurance & Real Estate |
Junior Secured Loan Term Loan (Second Lien) 10.8% Cash, 1.3% Libor Floor, Due 4/19 |
2,796,448 | 2,763,831 | 2,822,455 | ||||||||||||
First Data Corporation(9), (11) Banking, Finance, Insurance & Real Estate |
Senior Secured Loan 2018 New Dollar Term Loan 3.7% Cash, Due 3/18 |
500,000 | 503,055 | 498,150 | ||||||||||||
Getty Images, Inc.(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Initial Term Loan 4.8% Cash, 1.3% Libor Floor, Due 10/19 |
2,174,016 | 2,178,653 | 1,616,652 | ||||||||||||
GK Holdings, Inc. (aka Global Knowledge)(9) Services: Business |
Junior Secured Loan Initial Term Loan (Second Lien) 10.5% Cash, 1.0% Libor Floor, Due 1/22 |
1,500,000 | 1,471,712 | 1,471,500 | ||||||||||||
GK Holdings, Inc. (aka Global Knowledge)(9), (11) Services: Business |
Senior Secured Loan Initial Term Loan (First Lien) 6.5% Cash, 1.0% Libor Floor, Due 1/21 |
2,487,500 | 2,464,283 | 2,511,131 | ||||||||||||
Global Tel*Link Corporation(9) Telecommunications |
Junior Secured Loan Term Loan (Second Lien) 9.0% Cash, 1.3% Libor Floor, Due 11/20 |
4,000,000 | 3,941,068 | 3,820,800 | ||||||||||||
Gold Standard Baking, Inc.(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Term Loan 5.5% Cash, 1.0% Libor Floor, Due 4/21 |
2,500,000 | 2,487,742 | 2,487,500 | ||||||||||||
Grande Communications Networks LLC(9), (11) Telecommunications |
Senior Secured Loan Initial Term Loan 4.5% Cash, 1.0% Libor Floor, Due 5/20 |
3,920,066 | 3,924,616 | 3,917,322 | ||||||||||||
Grifols Worldwide Operations Limited(11) Healthcare & Pharmaceuticals |
Senior Secured Loan U.S. Tranche B Term Loan 3.2% Cash, Due 2/21 |
2,977,387 | 2,957,053 | 2,979,754 | ||||||||||||
Grupo HIMA San Pablo, Inc.(9) Healthcare & Pharmaceuticals |
Senior Secured Loan Term B Loan (First Lien) 8.5% Cash, 1.5% Libor Floor, Due 1/18 |
2,932,500 | 2,902,131 | 2,932,500 | ||||||||||||
Grupo HIMA San Pablo, Inc.(9) Healthcare & Pharmaceuticals |
Junior Secured Loan Term Loan (Second Lien) 13.8% Cash, Due 7/18 |
7,000,000 | 6,909,329 | 7,105,000 | ||||||||||||
Gymboree Corporation., The(9), (11) Retail |
Senior Secured Loan Term Loan 5.0% Cash, 1.5% Libor Floor, Due 2/18 |
1,421,105 | 1,398,904 | 1,019,643 | ||||||||||||
Hargray Communications Group, Inc. (HCP Acquisition LLC)(9), (11) Media: Broadcasting & Subscription |
Senior Secured Loan Initial Term Loan 5.3% Cash, 1.0% Libor Floor, Due 6/19 |
2,930,662 | 2,911,080 | 2,934,472 |
84
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost | Fair Value(2) | ||||||||||||
Harland Clarke Holdings Corp. (fka Clarke American Corp.)(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Tranche B-3 Term Loan 7.0% Cash, 1.5% Libor Floor, Due 5/18 |
$ | 3,325,000 | $ | 3,303,059 | $ | 3,342,922 | |||||||||
Harland Clarke Holdings Corp. (fka Clarke American Corp.)(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Tranche B-4 Term Loan 6.0% Cash, 1.0% Libor Floor, Due 8/19 |
1,443,750 | 1,438,365 | 1,449,388 | ||||||||||||
Hoffmaster Group, Inc.(9) Forest Products & Paper |
Junior Secured Loan Initial Term Loan (Second Lien) 10.0% Cash, 1.0% Libor Floor, Due 5/21 |
2,000,000 | 1,974,855 | 1,970,000 | ||||||||||||
Hoffmaster Group, Inc.(9), (11) Forest Products & Paper |
Senior Secured Loan Initial Term Loan (First Lien) 5.3% Cash, 1.0% Libor Floor, Due 5/20 |
3,960,000 | 3,927,790 | 3,969,900 | ||||||||||||
Hunter Defense Technologies, Inc.(9), (11) Aerospace and Defense |
Senior Secured Loan Term Loan (First Lien) 6.5% Cash, 1.0% Libor Floor, Due 8/19 |
2,887,500 | 2,863,555 | 2,915,509 | ||||||||||||
Integra Telecom Holdings, Inc.(9), (11) Telecommunications |
Senior Secured Loan Term B-1 Loan 5.3% Cash, 1.0% Libor Floor, Due 8/20 | 2,977,310 | 2,966,424 | 2,962,051 | ||||||||||||
International Architectural Products, Inc.(7), (9) Metals & Mining |
Senior Secured Loan Term Loan 0.0% Cash, 3.3% PIK, 2.5% Libor Floor, Due 5/15 |
247,636 | 228,563 | 1,000 | ||||||||||||
Kellermeyer Bergensons Services, LLC(9) Services: Business |
Senior Secured Loan Initial Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 10/21 |
1,990,000 | 1,971,943 | 1,981,841 | ||||||||||||
Key Safety Systems, Inc.(9), (11) Automotive |
Senior Secured Loan Initial Term Loan 4.8% Cash, 1.0% Libor Floor, Due 8/21 |
1,488,750 | 1,482,197 | 1,497,124 | ||||||||||||
Kinetic Concepts, Inc.(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Dollar Term E-1 Loan 4.5% Cash, 1.0% Libor Floor, Due 5/18 |
2,977,330 | 2,970,965 | 2,993,050 | ||||||||||||
Landslide Holdings, Inc. (Crimson Acquisition Corp.)(9), (11) High Tech Industries |
Senior Secured Loan New Term Loan (First Lien) 5.0% Cash, 1.0% Libor Floor, Due 2/20 |
3,434,854 | 3,442,469 | 3,434,854 | ||||||||||||
MB Aerospace ACP Holdings III Corp.(9), (11) Aerospace and Defense |
Senior Secured Loan Dollar Term Loan 5.0% Cash, 1.0% Libor Floor, Due 5/19 |
3,920,000 | 3,894,370 | 3,920,000 | ||||||||||||
Media General, Inc.(11) Media: Broadcasting & Subscription |
Senior Secured Loan Term B Loan 4.0% Cash, 1.0% Libor Floor, Due 7/20 |
2,761,905 | 2,765,071 | 2,765,357 | ||||||||||||
Medical Specialties Distributors, LLC(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Term Loan 6.5% Cash, 1.0% Libor Floor, Due 12/19 |
3,940,000 | 3,910,865 | 3,813,132 | ||||||||||||
Millennium Health, LLC (fka Millennium Laboratories, LLC)(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Tranche B Term Loan 5.3% Cash, 1.0% Libor Floor, Due 4/21 |
2,977,444 | 2,977,444 | 1,429,173 | ||||||||||||
Nellson Nutraceutical, LLC(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Term A-1 Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 12/21 |
2,386,554 | 2,366,863 | 2,387,270 | ||||||||||||
Nellson Nutraceutical, LLC(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Term A-2 Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 12/21 |
2,103,446 | 2,085,330 | 2,104,077 | ||||||||||||
Nielsen & Bainbrige, LLC(9) Consumer goods: Durable |
Senior Secured Loan Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 8/20 |
995,000 | 986,369 | 985,050 | ||||||||||||
Nielsen & Bainbrige, LLC(9) Consumer goods: Durable |
Junior Secured Loan Term Loan (Second Lien) 10.3% Cash, 1.0% Libor Floor, Due 8/21 |
2,091,954 | 2,063,548 | 2,050,115 | ||||||||||||
Nielsen & Bainbrige, LLC(9), (11) Consumer goods: Durable |
Senior Secured Loan Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 8/20 |
3,805,000 | 3,771,078 | 3,766,950 | ||||||||||||
NM Z Parent Inc. (aka Zep, Inc.)(9), (11) Chemicals, Plastics and Rubber |
Senior Secured Loan Initial Term Loan 5.8% Cash, 1.0% Libor Floor, Due 6/22 |
3,500,000 | 3,512,502 | 3,512,600 | ||||||||||||
Novetta, LLC(9) Services: Business |
Senior Secured Loan Initial Term Loan 6.0% Cash, 1.0% Libor Floor, Due 10/20 |
2,729,375 | 2,704,795 | 2,690,891 | ||||||||||||
Novitex Acquisition, LLC (fka ARSloane Acquisition, LLC)(9), (11) Services: Business |
Senior Secured Loan Tranche B-2 Term Loan (First Lien) 7.5% Cash, 1.3% Libor Floor, Due 7/20 |
985,056 | 976,819 | 937,774 |
85
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost | Fair Value(2) | ||||||||||||
Onex Carestream Finance LP(9) Healthcare & Pharmaceuticals |
Junior Secured Loan Term Loan (Second Lien) 9.5% Cash, 1.0% Libor Floor, Due 12/19 |
$ | 1,932,311 | $ | 1,932,311 | $ | 1,884,969 | |||||||||
Onex Carestream Finance LP(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Term Loan (First Lien 2013) 5.0% Cash, 1.0% Libor Floor, Due 6/19 |
1,909,238 | 1,914,986 | 1,910,288 | ||||||||||||
Orbitz Worldwide, Inc.(11) Hotel, Gaming & Leisure |
Senior Secured Loan Tranche C Term Loan 4.5% Cash, 1.0% Libor Floor, Due 4/21 |
2,819,576 | 2,819,576 | 2,824,862 | ||||||||||||
Otter Products, LLC (OtterBox Holdings, Inc.)(9), (11) Consumer goods: Durable |
Senior Secured Loan Term B Loan 5.8% Cash, 1.0% Libor Floor, Due 6/20 |
2,754,168 | 2,734,080 | 2,676,776 | ||||||||||||
Ozburn-Hessey Holding Company LLC(9), (11) Transportation: Cargo |
Senior Secured Loan Term Loan 6.8% Cash, 1.3% Libor Floor, Due 5/19 |
3,494,596 | 3,487,824 | 3,494,247 | ||||||||||||
PGX Holdings, Inc.(9), (11) Services: Consumer |
Senior Secured Loan Initial Term Loan (First Lien) 6.3% Cash, 1.0% Libor Floor, Due 9/20 |
3,853,571 | 3,819,747 | 3,853,571 | ||||||||||||
Playpower, Inc.(9), (11) Construction & Building |
Senior Secured Loan Initial Term Loan (First Lien) 4.8% Cash, 1.0% Libor Floor, Due 6/21 |
2,000,000 | 1,985,014 | 1,985,000 | ||||||||||||
Post Holdings, Inc.(11) Beverage, Food and Tobacco |
Senior Secured Loan Series A Incremental Term Loan 3.8% Cash, 0.8% Libor Floor, Due 6/21 |
2,977,452 | 2,970,701 | 2,966,435 | ||||||||||||
PQ Corporation(9), (11) Chemicals, Plastics and Rubber |
Senior Secured Loan 2014 Term Loan 4.0% Cash, 1.0% Libor Floor, Due 8/17 |
2,977,099 | 2,977,099 | 2,973,378 | ||||||||||||
PSC Industrial Holdings Corp.(9), (11) Environmental Industries |
Senior Secured Loan Term Loan (First Lien) 5.8% Cash, 1.0% Libor Floor, Due 12/20 |
1,990,000 | 1,971,873 | 1,983,373 | ||||||||||||
Quad-C JH Holdings Inc. (aka Joerns Healthcare)(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Term Loan A 6.0% Cash, 1.0% Libor Floor, Due 5/20 |
3,960,000 | 3,935,698 | 3,960,000 | ||||||||||||
Restorix Health, Inc.(9) Healthcare & Pharmaceuticals |
Senior Unsecured Loan Delayed Draw 10.0% Cash, 1.5% PIK, Due 6/18 |
2,018,787 | 2,018,787 | 2,018,787 | ||||||||||||
Restorix Health, Inc.(9) Healthcare & Pharmaceuticals |
Senior Unsecured Loan Subordinated Term Loan 10.0% Cash, 1.5% PIK, Due 6/18 |
8,124,738 | 8,124,738 | 8,124,738 | ||||||||||||
Reynolds Group Holdings Inc.(9), (11) Containers, Packaging and Glass |
Senior Secured Loan Incremental U.S. Term Loan 4.5% Cash, 1.0% Libor Floor, Due 12/18 |
2,916,649 | 2,916,649 | 2,930,328 | ||||||||||||
Roscoe Medical, Inc.(9) Healthcare & Pharmaceuticals |
Junior Secured Loan Term Loan (Second Lien) 11.3% Cash, Due 9/19 |
6,700,000 | 6,648,400 | 6,478,900 | ||||||||||||
Rovi Solutions Corporation/Rovi Guides, Inc.(11) High Tech Industries |
Senior Secured Loan Term B Loan 3.8% Cash, 0.8% Libor Floor, Due 7/21 |
2,977,444 | 2,942,563 | 2,962,095 | ||||||||||||
Sandy Creek Energy Associates, L.P.(9), (11) Utilities: Electric |
Senior Secured Loan Term Loan 5.0% Cash, 1.0% Libor Floor, Due 11/20 |
2,805,007 | 2,794,225 | 2,805,512 | ||||||||||||
SGF Produce Holding Corp. (Frozsun, Inc.)(9) Beverage, Food and Tobacco |
Senior Secured Loan Term Loan 5.6% Cash, 1.0% Libor Floor, Due 3/19 |
2,180,291 | 2,166,554 | 2,180,291 | ||||||||||||
SGF Produce Holding Corp.(Frozsun, Inc.)(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Term Loan 5.6% Cash, 1.0% Libor Floor, Due 3/19 |
4,919,511 | 4,920,428 | 4,919,511 | ||||||||||||
Stafford Logistics, Inc. (dba Custom Ecology, Inc.)(9), (11) Environmental Industries |
Senior Secured Loan Term Loan 6.8% Cash, 1.3% Libor Floor, Due 6/19 |
2,861,935 | 2,842,873 | 2,854,781 | ||||||||||||
Sun Products Corporation, The (fka Huish Detergents Inc.)(9), (11) Consumer goods: Non-durable |
Senior Secured Loan Tranche B Term Loan 5.5% Cash, 1.3% Libor Floor, Due 3/20 |
3,882,654 | 3,861,506 | 3,792,887 | ||||||||||||
Tank Partners Holdings, LLC(9) Energy: Oil & Gas |
Senior Secured Loan Loan 9.8% Cash, 3.5% PIK, 3.0% Libor Floor, Due 8/19 |
10,570,454 | 10,416,387 | 9,788,240 | ||||||||||||
TPF II Power, LLC (TPF II Covert Midco, LLC)(9), (11) Utilities: Electric |
Senior Secured Loan Term Loan 5.5% Cash, 1.0% Libor Floor, Due 10/21 |
2,985,000 | 3,009,831 | 3,014,850 | ||||||||||||
TRSO I, Inc.(9) Energy: Oil & Gas |
Junior Secured Loan Term Loan (Second Lien) 11.0% Cash, 1.0% Libor Floor, Due 12/17 |
1,000,000 | 990,082 | 967,700 |
86
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost | Fair Value(2) | ||||||||||||
TWCC Holding Corp.(9) Media: Broadcasting & Subscription |
Junior Secured Loan Term Loan (Second Lien) 7.0% Cash, 1.0% Libor Floor, Due 6/20 |
$ | 1,000,000 | $ | 1,003,643 | $ | 903,200 | |||||||||
TWCC Holding Corp.(9), (11) Media: Broadcasting & Subscription |
Senior Secured Loan Term B-1 Loan 5.8% Cash, 0.8% Libor Floor, Due 2/20 |
826,613 | 828,897 | 817,570 | ||||||||||||
U.S. Shipping Corp (fka U.S. Shipping Partners LP)(9), (11) Transportation: Cargo |
Senior Secured Loan Tranche B-2 Term Loan 5.3% Cash, 1.0% Libor Floor, Due 6/21 |
1,500,000 | 1,498,750 | 1,498,800 | ||||||||||||
Univar Inc.(11) Chemicals, Plastics and Rubber |
Senior Secured Loan Term B Loan 5.0% Cash, 1.5% Libor Floor, Due 6/17 |
2,879,528 | 2,874,890 | 2,879,528 | ||||||||||||
USJ-IMECO Holding Company, LLC(9), (11) Transportation: Cargo |
Senior Secured Loan Term Loan 7.0% Cash, 1.0% Libor Floor, Due 4/20 |
3,950,000 | 3,934,078 | 3,950,000 | ||||||||||||
Vantiv, LLC (fka Fifth Third Processing Solutions, LLC)(11) Banking, Finance, Insurance & Real Estate |
Senior Secured Loan Term B Loan 3.8% Cash, 0.8% Libor Floor, Due 6/21 |
1,698,532 | 1,702,414 | 1,701,717 | ||||||||||||
Verdesian Life Sciences, LLC(9) Environmental Industries |
Senior Secured Loan Initial Term Loan 6.0% Cash, 1.0% Libor Floor, Due 7/20 |
950,037 | 938,105 | 928,376 | ||||||||||||
Verdesian Life Sciences, LLC(9), (11) Environmental Industries |
Senior Secured Loan Initial Term Loan 6.0% Cash, 1.0% Libor Floor, Due 7/20 |
3,138,730 | 3,100,416 | 3,067,167 | ||||||||||||
Vestcom International, Inc. (fka Vector Investment Holdings, Inc.)(9), (11) Retail |
Senior Secured Loan Term Loan 5.3% Cash, 1.0% Libor Floor, Due 9/21 |
3,005,045 | 2,990,716 | 3,008,801 | ||||||||||||
Weiman Products, LLC(9) Consumer goods: Non-durable |
Senior Secured Loan Term Loan 6.3% Cash, 1.0% Libor Floor, Due 11/18 |
2,957,255 | 2,936,695 | 2,957,255 | ||||||||||||
Weiman Products, LLC(9), (11) Consumer goods: Non-durable |
Senior Secured Loan Term Loan 6.3% Cash, 1.0% Libor Floor, Due 11/18 |
3,943,007 | 3,916,231 | 3,943,007 | ||||||||||||
WideOpenWest Finance, LLC(9) Media: Broadcasting & Subscription |
Senior Secured Loan Replacement Term B Loan 4.5% Cash, 1.0% Libor Floor, Due 4/19 |
2,940,000 | 2,959,761 | 2,940,000 | ||||||||||||
WireCo WorldGroup Inc.(9) Capital Equipment |
Senior Unsecured Bond 9.000% 05/2017 9.0% Cash, Due 5/17 | 5,000,000 | 5,001,887 | 5,000,000 | ||||||||||||
WireCo WorldGroup Inc.(9), (11) Capital Equipment |
Senior Unsecured Bond 9.000% 05/2017 9.0% Cash, Due 5/17 | 3,000,000 | 3,001,132 | 3,000,000 | ||||||||||||
Total Investment in Debt Securities (116% of net asset value at fair value) | $ | 303,656,137 | $ | 301,909,681 | $ | 297,915,304 |
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Portfolio Company/Principal Business | Investment | Percentage Ownership/Shares |
Amortized Cost |
Fair Value(2) | ||||||||||||
Aerostructures Holdings L.P.(5), (9) Aerospace and Defense |
Partnership Interests | 1.2 | % | $ | 1,000,000 | $ | 1,000 | |||||||||
Aerostructures Holdings L.P.(5), (9) Aerospace and Defense |
Series A Preferred Interests | 1.2 | % | 250,960 | 700,703 | |||||||||||
Caribe Media Inc. (fka Caribe Information Investments Incorporated)(5), (9) Media: Advertising, Printing & Publishing |
Common | 1.3 | % | 359,765 | 568,319 | |||||||||||
DBI Holding LLC(5), (9) Services: Business |
Class A Warrants | 3.2 | % | 258,940 | 1,280,609 | |||||||||||
eInstruction Acquisition, LLC(5), (9) Services: Business |
Membership Units | 1.1 | % | 1,079,617 | 1,000 | |||||||||||
FP WRCA Coinvestment Fund VII, Ltd.(3), (5), Capital Equipment |
Class A Shares | 1,500 | 1,500,000 | 2,144,194 | ||||||||||||
Perseus Holding Corp.(5), (9) Hotel, Gaming & Leisure |
Common | 0.2 | % | 400,000 | 1,000 | |||||||||||
Roscoe Investors, LLC(5), (9) Healthcare & Pharmaceuticals |
Class A Units | 1.6 | % | 1,000,000 | 941,600 | |||||||||||
Tank Partners Holdings, LLC(5), (9), (13) Energy: Oil & Gas |
Unit | 5.8 | % | 980,000 | 452,394 | |||||||||||
Tank Partners Holdings, LLC(5), (9) Energy: Oil & Gas |
Warrants | 1.3 | % | 185,205 | 108,893 | |||||||||||
TRSO II, Inc.(5), (9), (13) Energy: Oil & Gas |
Common Stock | 5.4 | % | 1,500,000 | 1,342,373 | |||||||||||
Total Investment in Equity Securities (3% of net asset value at fair value) |
$ | 8,514,487 | $ | 7,542,085 |
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Portfolio Company | Investment(14) | Percentage Interest |
Amortized Cost |
Fair Value(2) | ||||||||||||
Grant Grove CLO, Ltd.(3) | Subordinated Securities, effective interest 11.3%, 1/21 maturity |
22.2 | % | $ | 2,498,355 | $ | 522,005 | |||||||||
Katonah III, Ltd.(3), (10), (15) | Preferred Shares, 5/15 maturity | 23.1 | % | 1,361,891 | 375,000 | |||||||||||
Katonah VII CLO Ltd.(3), (6), (15) | Subordinated Securities, 11/17 maturity |
16.4 | % | 3,530,487 | 1,000 | |||||||||||
Katonah VIII CLO Ltd(3), (6), (15) | Subordinated Securities, 5/18 maturity |
10.3 | % | 2,706,408 | 20,000 | |||||||||||
Katonah IX CLO Ltd(3), (6) | Preferred Shares, effective interest 2.1%, 1/19 maturity |
6.9 | % | 1,203,125 | 493,427 | |||||||||||
Katonah X CLO Ltd(3), (6) | Subordinated Securities, effective interest 16.8%, 4/20 maturity |
33.3 | % | 8,932,776 | 4,686,406 | |||||||||||
Katonah 2007-I CLO Ltd.(3), (6) | Preferred Shares, effective interest 26.9%, 4/22 maturity |
100.0 | % | 23,740,077 | 24,674,912 | |||||||||||
Trimaran CLO V, Ltd.(3), (6) | Subordinated Notes, effective interest 43.2%, 3/18 maturity |
20.8 | % | 142,490 | 675,000 | |||||||||||
Trimaran CLO VII, Ltd.(3), (6) | Income Notes, effective interest 43.9%, 6/21 maturity |
10.5 | % | 1,340,875 | 2,042,214 | |||||||||||
Catamaran CLO 2012-1 Ltd.(3), (6) | Subordinated Notes, 10.2% effective interest, 12/23 maturity |
24.9 | % | 7,507,610 | 5,052,888 | |||||||||||
Catamaran CLO 2013-1 Ltd.(3), (6) | Subordinated Notes, effective interest 13.3%, 1/25 maturity |
23.5 | % | 6,881,847 | 6,963,300 | |||||||||||
Catamaran CLO 2014-1 Ltd.(3), (6) | Subordinated Notes, effective interest 8.2%, 4/26 maturity |
24.9 | % | 9,690,780 | 7,908,078 | |||||||||||
Dryden 30 Senior Loan Fund(3) | Subordinated Notes, effective interest 27.7%, 11/25 maturity |
7.5 | % | 1,712,276 | 2,368,925 | |||||||||||
Catamaran CLO 2014-2 Ltd.(3), (6) | Subordinated Notes, effective interest 7.2%, 10/26 maturity |
24.9 | % | 8,847,407 | 7,763,580 | |||||||||||
Catamaran CLO 2015-1 Ltd.(3), (6) | Subordinated Notes, effective interest 9.9%, 4/27 maturity |
24.0 | % | 12,132,538 | 9,531,720 | |||||||||||
Total Investment in CLO Subordinated Securities | $ | 92,228,942 | $ | 73,078,455 |
Portfolio Company | Investment | Percentage Ownership | Amortized Cost | Fair Value(2) | ||||||||||||
Catamaran CLO 2012-1 Ltd.(3), (6) | Float 12/2023 F 14889CAE0 Par Value of $4,500,000 Due 12/23 |
42.9 | % | $ | 3,949,318 | $ | 4,060,000 | |||||||||
Catamaran CLO 2014-1 Ltd.(3), (6) | Float 04/2026 E 14889FAC7 Par Value of $1,525,000 Due 4/26 |
15.1 | % | 1,422,789 | 1,310,000 | |||||||||||
Total Investment in CLO Rated-Note |
$ | 5,372,107 | $ | 5,370,000 | ||||||||||||
Total Investment in CLO Fund Securities (30% of net asset value at fair value) | $ | 97,601,049 | $ | 78,448,455 |
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Portfolio Company/Principal Business | Investment | Percentage Ownership | Cost | Fair Value(2) | ||||||||||||
Asset Manager Affiliates(9), (12) | Asset Management Company | 100.0 | % | $ | 57,942,090 | $ | 73,737,000 | |||||||||
Total Investment in Asset Manager Affiliates (29% of net asset value at fair value) | $ | 57,942,090 | $ | 73,737,000 |
Time Deposit and Money Market Accounts | Investment | Yield | Par/Amortized Cost |
Fair Value(2) | ||||||||||||
JP Morgan Business Money Market Account(8), (9) | Money Market Account | 0.10 | % | $ | 249,184 | $ | 249,184 | |||||||||
US Bank Money Market Account(9) | Money Market Account | 0.02 | % | 16,208,632 | 16,208,632 | |||||||||||
Total Investment in Time Deposit and Money Market Accounts (6% of net asset value at fair value) |
$ | 16,457,816 | $ | 16,457,816 | ||||||||||||
Total Investments(4) (184% of net asset value at fair value) |
$ | 482,425,123 | $ | 474,100,660 |
(1) | A majority of the variable rate loans in the Companys investment portfolio bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly at the borrowers option. The Borrower may also elect to have multiple interest reset periods for each loan. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at June 30, 2015. As noted in the table above, 81% (based on par) of debt securities contain LIBOR floors which range between .75% and 3.00%. |
(2) | Reflects the fair market value of all investments as of June 30, 2015, as determined by the Companys Board of Directors. |
(3) | Non-U.S. company or principal place of business outside the U.S. |
(4) | The aggregate cost of investments for federal income tax purposes is approximately $500 million. The aggregate gross unrealized appreciation is approximately $20 million, the aggregate gross unrealized depreciation is approximately $45 million, and the net unrealized depreciation is approximately $25 million. |
(5) | Non-income producing. |
(6) | An affiliate CLO Fund managed by an Asset Manager Affiliate (as such term is defined in the notes to the consolidated financial statements). |
(7) | Loan or debt security is on non-accrual status and therefore is considered non-income producing. |
(8) | Money market account holding restricted cash and security deposits for employee benefit plans. |
(9) | Qualified asset for purposes of section 55(a) of the Investment Company Act of 1940. |
(10) | As of June 30, 2015, this CLO Fund Security was not providing a taxable distribution. |
(11) | As of June 30, 2015, this investment is owned by KCAP Senior Funding I, LLC and was pledged to secure KCAP Senior Funding I, LLCs obligation. |
(12) | Other than the Asset Manager Affiliates, which we are deemed to control, we do not control and are not an affiliate of any of our portfolio companies, each as defined in the Investment Company Act of 1940 (the 1940 Act). In general, under the 1940 Act, we would be presumed to control a portfolio company if we owned 25% or more of its voting securities and would be an affiliate of a portfolio company if we owned 5% or more of its voting securities. |
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(13) | Non-voting. |
(14) | CLO Subordinated Investments are entitled to periodic distributions which are generally equal to the remaining cash flow of the payments made by the underlying funds investments less contractual payments to debt holders and fund expenses. The estimated annualized effective yield indicated is based upon a current projection of the amount and timing of these distributions. Such projections are updated on a quarterly basis and the estimated effective yield is adjusted prospectively. |
(15) | Transaction has been called. |
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Our business and affairs are managed under the direction of our Board of Directors. Our Board of Directors elects our officers who serve at its discretion. Our Board of Directors has seven members, two of whom are interested persons as defined in Section 2(a)(19) of the 1940 Act and five of whom are not interested persons, whom we refer to as our independent directors.
As of May 11, 2015, our executive officers, directors and key employees and their positions are as set forth below. The address for each executive officer and director is c/o KCAP Financial, Inc., 295 Madison Avenue, 6th Floor, New York, New York 10017.
Name | Age | Position with Us | ||
Independent Directors(1): | ||||
Christopher Lacovara | 50 | Chairman | ||
C. Turney Stevens, Jr. | 64 | Director | ||
Albert G. Pastino | 73 | Director | ||
C. Michael Jacobi | 73 | Director | ||
John A. Ward, III | 69 | Director | ||
Non-Independent Directors: | ||||
Dayl W. Pearson(2) | 60 | Director, President and Chief Executive Officer | ||
Dean C. Kehler(3) | 58 | Director, Portfolio Manager of Trimaran Advisors | ||
Executive Officers | ||||
Edward U. Gilpin | 53 | Chief Financial Officer, Treasurer and Secretary | ||
R. Jon Corless | 63 | Chief Investment Officer | ||
Jill Simeone | 48 | General Counsel and Chief Compliance Officer | ||
Daniel P. Gilligan | 42 | Vice President, Director of Portfolio Administration |
(1) | As used herein the term Independent Directors refers to directors who are not interested persons of the Company within the meaning of Section 2(a)(19) of the 1940 Act. |
(2) | Mr. Pearson is not an Independent Director because he is an officer of the Company. |
(3) | Mr. Kehler is not an Independent Director because he was an employee of Trimaran Advisors, a wholly-owned portfolio company of the Company until February 28, 2015. |
The following is a summary of certain biographical information concerning our directors, executive officers and key employees:
Mr. Lacovara is the Chairman of the Board of KCAP Financial and the Chairman of the Valuation Committee of the Board. He also serves on the Companys Investment Committee. Mr. Lacovara joined the Board in December 2006. Mr. Lacovara is a former co-managing partner of Kohlberg & Co., L.L.C. (Kohlberg & Co.), a leading middle market private equity firm, which he joined in 1988, and is a member of its Investment Committee. From 1987 to 1988, he was an Associate in the Mergers and Acquisitions Department at Lazard Freres & Company. Prior to that he was a Financial Analyst in the Corporate Finance Department of Goldman, Sachs & Co. Mr. Lacovara received a A.B. from Harvard College, an M.S. from the Columbia University School of Engineering and Applied Sciences, and a J.D. from the Columbia University School of Law. Mr. Lacovara has served on the boards of directors of more than 20 privately-held and publicly-listed companies. As a result of these and other professional experiences, Mr. Lacovara possesses particular knowledge and experience in corporate finance, corporate governance, strategic planning, business evaluation and oversight and financial analysis that strengthen the Boards collective qualifications, skills and experience.
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Mr. Stevens has served on KCAP Financials Board since December 2006, serves on the Valuation Committee and the Compensation Committee and serves as the Chair of the Nominating and Corporate Governance Committee of the Board. Mr. Stevens is a former Dean of the College of Business at Lipscomb University and continues as Dean Emeritus and Clinical Professor of Management at Lipscomb University. Mr. Stevens retired as Chairman and CEO of Harpeth Companies, LLC, a diversified financial services company that he founded and that is the parent company of Harpeth Capital, LLC and Harpeth Consulting, LLC. Prior to founding Harpeth in 1999, Mr. Stevens was a founder and Chairman of Printing Arts America, Inc. From 1986 to 1994, Mr. Stevens served in various capacities at Rodgers Capital Corporation, a middle market investment banking firm focused on mergers and acquisitions and private institutional equity transactions, including as President. In 1973, Mr. Stevens founded PlusMedia, Inc., a magazine publishing company that he later sold to a public company in 1982. Mr. Stevens began his career at Tennessee Securities, a Nashville investment banking firm, which was one of the regions leaders in helping to capitalize early-stage and growth-stage companies. Mr. Stevens graduated from David Lipscomb University in 1972 and received an Executive M.B.A. degree from the Owen Graduate School of Management at Vanderbilt University in 1981. He is a 2007 graduate of the Directors College at the Anderson School of Management at UCLA and is certified as a public company director by Institutional Shareholder Services. Mr. Stevens is a founder of the Hilton and Sallie Dean institute for Corporate Governance and Integrity, and in 2009, he was named as one of the worlds 100 Most Influential Leaders in Business Ethics. As a result of these and other professional experiences, Mr. Stevens possesses particular knowledge and experience in ethics and governance, financial services, business management and investment banking that strengthen the Boards collective qualifications, skills and experience.
John A. Ward, III has served on KCAP Financials Board since May, 2013. He serves as Chairman of the Compensation Committee and a member of the Nominating and Governance Committee and the Audit Committee. Mr. Ward currently serves as a director of Lambro Industries, Inc., a venting solutions manufacturing company. Mr. Ward served as Chairman and Chief Executive Officer of Innovative Card Technologies, Inc., a developer of secured powered cards for payment and identification, from August 2006 to September 2007, and served as a director of Innovative Card Technologies, Inc. from August 2004 through December 2007 and from January 2010 to present. Mr. Ward previously served as the Chairman of the Board and Chief Executive Officer of Doral Financial (NYSE:DRL), a consumer finance and bank holding company, from 2005 2006 and the Chairman of the Board of Directors and Chief Executive Officer of American Express Bank and President of Travelers Cheque Group from 1996 2000. Prior to joining American Express, Mr. Ward had a 27-year career at The Chase Manhattan Bank from 1969 to 1996 where his last position was that of Chief Executive Officer of Chase BankCard Services and an Executive Vice President of the Bank. In addition, he was the President and CEO of Chase Personal Financial Services, a retail mortgage and home equity lender and a Malcolm Baldrige National Quality Award finalist, the Senior Credit Executive for the Individual Bank (small business, middle market, private banking and consumer globally), and the Area Credit Executive for the Europe, Middle East and Africa Areas of the Global Bank. He is currently the President of the Chase Alumni Association. During the past 5 years, Mr. Ward served as a director of Primus Guaranty, Ltd. (NYSE:PRS), and Industrial Enterprises of America (Nasdaq: IEAM). During his career, Mr. Ward has successfully turned around and grown a diverse group of financial services companies, both domestically and internationally. These businesses include credit cards, retail mortgages and home equity, travelers cheques, private banking, affluent financial services, correspondent banking, third party funds distribution, corporate banking, and trade and export finance. He has developed a professional knowledge and expertise in sales management and risk management in wholesale and retail credit. Mr. Ward majored in Economics & Finance at Boston College (Valedictorian) and in Finance & International Business at the Wharton Graduate School of Business of the University of Pennsylvania (Joseph Wharton Fellow). In addition to Mr. Wards extensive experience in the consumer credit market, his former experience with credit and risk management as Senior Credit Policy Officer at Chase Manhattan Bank is relevant to understanding the risks and opportunities that KCAP Financial faces and give him the qualifications and skill to serve as a director.
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Mr. Pastino has served on KCAP Financials Board since December 2006 and is the Chair of the Audit Committee of the Board and also serves on the Compensation Committee of the Board. Mr. Pastino serves as lead independent director of the Board. Mr. Pastino is the Executive Vice Chairman of Revere Merchant Capital, a merchant bank that makes principal investments and provides strategic advisory services to middle-market companies. Mr. Pastino serves on the Board and is the Chair of the Audit Committee of Oceanworks International, one of Revere Merchant Capitals portfolio companies. Prior to Revere, Mr. Pastino was a Managing Director at Kildare Capital and Amper Investment Banking where he offered advisory services focusing on capital formation, mergers and acquisitions, and financial management. After leaving an affiliate of Kohlberg & Co. in June 1997, Mr. Pastino worked as an investor, CFO and Chief Operating Officer at a variety of companies and was involved in all aspects of financial and general management, reporting and fundraising for a variety of companies, including Aptegrity, Inc., Bolt, Inc., AmTec, Inc. and Square Earth, Inc. From 1976 to 1986, he was a partner at Deloitte & Touche LLP and was in charge of its Emerging Business Practice. Mr. Pastino is a member of the Small Business Advisory Board of the Financial Accounting Standards Board. Mr. Pastino is a graduate of Saint Josephs University and received an Executive M.B.A. degree from Fairleigh Dickinson University. He also attended the Harvard Business School Executive Management Program for Small Business and is a certified public accountant. As a result of these and other professional experiences, Mr. Pastino possesses particular knowledge and experience in corporate finance, strategic planning, and financial analysis that strengthen the Boards collective qualifications, skills and experience.
Mr. Jacobi has served on KCAP Financials Board since December 2006 and serves on the Audit Committee and the Nominating and Corporate Governance Committee of the Board. Mr. Jacobi is also the owner and President of Stable House, LLC, a company engaged in real estate development. From 2001 to 2005, Mr. Jacobi served as the President, CEO and member of the board of directors of Katy Industries, Inc., a portfolio company of investment funds affiliated with Kohlberg & Co., that is involved in the manufacture and distribution of maintenance products. Mr. Jacobi was the President and CEO of Timex Corporation from 1993 to 1999, and he was a member of the board of directors of Timex Corporation from 1992 to 2000. Prior to 1993, he served Timex Corporation in senior positions in marketing, sales, finance and manufacturing. Mr. Jacobi received a B.S. from the University of Connecticut, and he is a certified public accountant. Mr. Jacobi is currently Chairman of the board of directors of Sturm, Ruger & Co., Inc. and a member of the board of directors of Webster Financial Corporation, Corrections Corporation of America and Performance Sports Group, Ltd. He serves on the audit committee of Performance Sports Group, Ltd. and as the audit committee chairman of the board of directors of Corrections Corporation of America. As a result of these and other professional experiences, Mr. Jacobi possesses particular knowledge and experience in corporate finance, accounting, investment management and corporate governance that strengthen the Boards collective qualifications, skills and experience.
Mr. Pearson has served as KCAP Financials President and Chief Executive Officer since December 2006 and has served on KCAP Financials Board since June 2008. He has also served as Vice President of Katonah Debt Advisors, L.L.C. (Katonah Debt Advisors) since March 2008. Mr. Pearson has more than 35 years of banking and finance experience and has focused primarily on middle market credit intensive transactions, completing over $5 billion of financings over the past 16 years. From 1997 to 2006, he was a Managing Director at CIBC in the Leveraged Finance and Sponsor Coverage Group specializing in middle market debt transactions. Mr. Pearson was responsible for originating and executing more than $3 billion of transactions including senior loans, high-yield securities, mezzanine investments and equity co-investments. Prior to joining CIBC, Mr. Pearson was instrumental in developing the middle market leveraged finance business of IBJ Schroder from 1992 through 1997. In 1995, he became responsible for the entire $500 million leveraged finance portfolio and was involved in approving all new senior and mezzanine commitments. Previously, he was a senior lending officer in First Fidelity Banks middle market lending group primarily focused on
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restructurings, and prior to that Mr. Pearson invested in distressed securities. Mr. Pearson began his career at Chase Manhattan Bank after receiving a B.A. from Claremont Mens College and an M.B.A. from the University of Chicago. As a result of these and other professional experiences, Mr. Pearson possesses particular knowledge and experience in corporate finance, leverage finance, corporate credit and portfolio management that strengthen the Boards collective qualifications, skills and experience.
Mr. Kehler joined KCAP Financials Board in February 2012. Mr. Kehler is a Managing Partner of Trimaran Capital Partners, a manager of private investment funds. Prior to co-founding Trimaran Advisors, Mr. Kehler was a vice chairman of CIBC World Markets Corp. and co-head of the CIBC Argosy Merchant Banking Funds (Fund I). Prior to joining CIBC World Markets Corp. in 1995, Mr. Kehler was a founder and Managing Director of The Argosy Group L.P. Before Argosy, Mr. Kehler was a Managing Director at Drexel Burnham Lambert Incorporated and also worked at Lehman Brothers Kuhn Loeb Incorporated. Mr. Kehler currently serves on the Board of Directors of Inviva, Inc. and El Pollo Loco, Inc. Mr. Kehler previously served as a director of Ashley Stewart Holdings, Inc., Continental Airlines, Global Crossing, PrimeCo Wireless Communications, Urban Brands, Inc., Source Holdings, CNC Holding Corporation, Hills Department Stores, Inc., Jefferson National Financial, Charlie Brown Acquisition, Booth Creek Ski Holdings, TLC Beatrice International and Heating Oil Partners. Mr. Kehler also serves as a member of the Finance Committee and a director of CARE USA, one of the worlds largest private humanitarian organizations, and is the chair of the Board of Overseers of the University of Pennsylvania School of Nursing. Mr. Kehler earned his B.S. from The Wharton School of the University of Pennsylvania. Mr. Kehler possesses particular knowledge and experience in corporate finance, investment management, financial analysis and corporate governance that strengthen the Boards collective qualifications, skills and experience.
Mr. Gilpin joined KCAP Financial in June 2012 and has over 28 years of experience. Mr. Gilpin has also served as the Secretary of Trimaran Advisors and Chief Financial Officer and Secretary of Katonah Debt Advisors since June 2012. Prior to joining the Company, Mr. Gilpin served as the Chief Financial Officer at Associated Renewable Inc., an end-to-end full service energy consulting and carbon management company. From 2008 to 2010, he served as Executive Vice President and Chief Financial Officer of Ram Holdings, Ltd., a provider of financial guaranty reinsurance, and prior to that he was the Executive Vice President, Chief Financial Officer and Director of ACA Capital Holdings, Inc., a holding company that provided financial guaranty insurance and asset management services, from 2000 to 2008. Prior to joining ACA Capital, Mr. Gilpin was Vice President in the Financial Institutions Group at Prudential Securities, Inc.s investment banking division. From 1998 to 2000, Mr. Gilpin served in the capacity of Chief Financial Officer for an ACA Capital affiliated start-up venture, developing the financial plans and spearheading the capital raising process. From 1991 to 1998, Mr. Gilpin was with MBIA, Inc., a holding company whose subsidiaries provide financial guarantee insurance, fixed-income asset management, and other specialized financial services, where he held various positions in the finance area. His most recent position with MBIA was Director, Chief of Staff for MBIA Insurance Companys President. Mr. Gilpin began his career as an Assistant Vice President in the Mutual Funds Department of BHC Securities, Inc. Mr. Gilpin holds an M.B.A. from Columbia University and a B.S. from St. Lawrence University.
Mr. Corless joined KCAP Financial in 2006 as part of its middle market team. Mr. Corless has over 30 years of experience in high-yield and leveraged credits. Prior to joining the Company, Mr. Corless was a Credit Risk Manager for Trimaran Debt Advisors, a CLO manager. Prior to joining Trimaran Debt Advisors, Mr. Corless spent 15 years as a Senior Credit Risk Manager for CIBC with risk management responsibility for media and telecommunications, high-yield, middle market, and mezzanine loan portfolios. Before joining CIBC, Mr. Corless worked at Bank of America NA in Corporate Finance and at Bankers Trust Company. Mr. Corless received a B.A. from Wesleyan University.
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Jill Simeone joined KCAP in 2013 to serve as the companys first General Counsel. She has also been appointed by the Board of Directors to serve as Chief Compliance Officer. Ms. Simeone brings to the firm more than 20 years of legal experience. Before arriving at KCAP, Ms. Simeone held various positions at CEMEX (US General Counsel, North America General Counsel), and managed a broad portfolio of corporate law projects including international M&A, financial transactions, joint ventures, regulatory matters and public company reporting. She co-chaired the team that developed and rolled-out the companys global compliance program, ETHOS. Ms. Simeone started her legal career as an Assistant District Attorney in the Manhattan District Attorneys Office. During 2014 2015 she served as President of the UC Hastings Law School Board of Governors. Ms. Simeone holds a B.A. cum laude from Harvard University, a J.D. from the University of California Hastings College of the Law, and she is a Fulbright Scholar (Mexico).
Mr. Gilligan is the Director of Portfolio Administration responsible for overseeing the portfolio administration for all funds managed by the companys two asset manager affiliates, Katonah Debt Advisors and Trimaran Advisors, as well as for the parent company, KCAP Financial, Inc. From 2012 to 2013, he served as the Chief Compliance Officer for the Company. Prior to joining Katonah in 2004, Mr. Gilligan was a Relationship Officer in the Corporate Trust department for U.S. Bank (formerly State Street Corporate Trust Services), responsible for the administration of five CDO portfolios with combined assets of $2 billion. While at U.S. Bank, Mr. Gilligan was also a member of the new business development team and assisted with the closing of new CDO transactions. Prior to joining State Street in 1999, Mr. Gilligan was a Director of Management Services for Sodexho USA. Mr. Gilligan holds a B.A. from Fairfield University.
The number of directors constituting our Board of Directors is presently set at seven directors.
Our Board of Directors is divided into three classes. Class I holds office for a term expiring at the annual meeting of stockholders to be held in 2016, and Class II holds office for a term expiring at the annual meeting of stockholders to be held in 2017, and Class III holds office for a term expiring at the annual meeting of stockholders to be held in 2018. Each director holds office for the term to which he or she is elected and until his or her successor is duly elected and qualifies. Messrs. Stevens, Ward and Kehlers current term expires in 2016, Messrs. Pastino, and Jacobis current term expires in 2017 and Messrs. Lacovara and Pearsons current term expires in 2018. At each annual meeting of our stockholders, the successors to the class of directors whose terms expire at such meeting will be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election and until their successors are duly elected and qualify.
In fiscal year 2014, the Board of the Company met 8 times. Each director attended at least 75% of the total number of meetings of the Board and committees on which the director served that were held while the director was a member. It is the Companys policy that Board members are encouraged, but not required, to attend the Companys annual meetings of shareholders.
The Board has established an Audit Committee. The Audit Committee is composed of Messrs. Pastino Jacobi and Ward. Mr. Pastino serves as Chairman of the Audit Committee. The Audit Committees functions include providing assistance to the Board in fulfilling its oversight responsibility relating to the Companys financial statements and the financial reporting process, compliance with legal and regulatory requirements, the qualifications and independence of the Companys independent registered public accountant, the Companys system of internal controls, the Companys code of ethics, retaining and, if appropriate, terminating the independent registered public accountant and approving audit and non-audit services to be performed by the independent registered public accountant. The Audit Committee Charter, as approved by the Board, can be found in the Corporate Governance section of the Companys website at www.kcapfinancial.com.
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The Board has determined that all the members of the Audit Committee Messrs. Pastino, Jacobi and Ward:
| are independent, as independence for audit committee members is defined in Section 10A(m)(3) and Section 10C(a) of the Exchange Act and the SEC rules promulgated thereunder and Rule 5605(a)(2) and Rule 5605(c)(2) of The Nasdaq Global Select Market listing standards; |
| meet the requirements of Item 407(d)(5) of Regulation S-K under the Securities Act of 1933, as amended (the Securities Act), and the Securities Exchange Act of 1934, as amended (the Exchange Act) and are audit committee financial experts; and |
| possess the requisite financial sophistication required under The Nasdaq Global Select Market listing standards. |
The Audit Committee has adopted a policy under which all auditing services and all permitted non-audit services to be rendered by the Companys independent registered public accountant(s) are pre-approved.
In fiscal year 2014, the Audit Committee held 5 meetings.
The Board has established a Valuation Committee. The Valuation Committee is composed of Messrs. Lacovara, Stevens and Kehler. Mr. Lacovara serves as Chairman of the Valuation Committee. The Valuation Committee is responsible for reviewing and recommending to the full Board the fair value of debt and equity securities. The Valuation Committee may utilize the services of an independent valuation firm in arriving at fair value of these securities. The Board is ultimately and solely responsible for determining the fair value of portfolio investments. The Valuation Committee Charter, as approved by the Board, can be found in the Corporate Governance section of the Companys website at www.kcapfinancial.com.
In fiscal year 2014, the Valuation Committee held 4 meetings.
The Board has established a Compensation Committee. The Compensation Committee is currently composed of Messrs., Pastino Stevens and Ward. Mr. Ward serves as Chairman of the Compensation Committee. As determined by the Board, each of the members of the Compensation Committee is an Independent Director. The Compensation Committee determines compensation for KCAP Financials executive officers, in addition to administering the Companys equity compensation plans. The Compensation Committee Charter, as approved by the Board, can be found in the Corporate Governance section of the Companys website at www.kcapfinancial.com.
The Compensation Committees functions include examining the levels and methods of compensation employed by the Company with respect to the Chief Executive Officer and non-CEO officers, making recommendations to the Board with respect to non-CEO officer compensation, reviewing and approving the compensation package of the Chief Executive Officer, making recommendations to the Board with respect to incentive compensation plans and equity-based plans, reviewing management succession plans, making administrative and compensation decisions under equity compensation plans approved by the Board and making recommendations to the Board with respect to grants thereunder, administering cash bonuses, and implementing and administering the foregoing. In accordance with its Charter, the Compensation Committee may delegate its authority to a subcommittee.
In fiscal year 2014, the Compensation Committee held 3 meetings.
The Board has established a Nominating and Corporate Governance Committee (the Nominating Committee). The Nominating Committee is currently composed of Messrs. Jacobi, Ward and Stevens, who are Independent Directors of the Company. Mr. Stevens serves as Chairman of the Nominating Committee. The Nominating Committees responsibilities include (i) recommending director nominees for selection by the Board; (ii) overseeing the governance of the Company; (iii) leading the Board in its annual review of
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the Boards performance; (iv) recommending to the Board director nominees for each committee; and (v) recommending for approval by the Board the compensation paid to each Independent Director for serving on the Board.
In executing its power to recommend director nominees for selection by the Board, the Nominating Committee determines the requisite standards or qualifications for Board nominees. In the event that a director position is vacated or created and/or in contemplation of a shareholders meeting at which one or more directors are to be elected, the Nominating Committee will identify potential candidates to become members of the Board. In identifying potential candidates, the Nominating Committee may consider candidates recommended by any of the Independent Directors or by any other source the Nominating Committee deems appropriate. The Nominating Committee may, but is not required to, retain a third party search firm at the Companys expense to identify potential candidates. The Nominating Committee Charter, as approved by the Board, can be found in the Corporate Governance section of the Companys website at www.kcapfinancial.com.
The Nominating Committee will consider qualified director nominees recommended by shareholders, on the same basis it considers and evaluates candidates recommended by other sources, when such recommendations are submitted in accordance with the Companys bylaws and other applicable laws, rules or regulations regarding director nominations. When submitting a nomination to the Company for consideration, a shareholder must provide certain information that would be required under applicable SEC rules, including the following minimum information for each director nominee: full name, age, and address; class, series and number of shares of stock of the Company beneficially owned by the nominee, if any; the date such shares were acquired and the investment intent of such acquisition; whether such shareholder believes the individual is an interested person of the Company, as defined in the 1940 Act; and all other information required to be disclosed in solicitations of proxies for election of directors in an election contest or that is otherwise required. The Company has not received any recommendations from shareholders requesting consideration of a candidate for inclusion among the Nominating Committees slate of nominees in this proxy statement.
In considering and evaluating candidates, the Nominating Committee may take into account a wide variety of factors, including (but not limited to):
| availability and commitment of a candidate to attend meetings and to perform his or her responsibilities on the Board; |
| relevant business and related industry experience; |
| educational background; |
| financial expertise; |
| experience with corporate governance matters; |
| an assessment of the candidates ability, judgment and expertise; |
| overall diversity of the composition of the Board; |
| the percentage of the Board represented by Independent Directors and whether a candidate would qualify as an Independent Director; and |
| such other factors as the Nominating Committee deems appropriate. |
The Nominating Committee identifies nominees by first evaluating the current members of the Board willing to continue in service. Current members of the Board with skills and experience that are relevant to the Companys business and who are willing to continue in service are considered for re-nomination, balancing the value of continuity of service by existing members of the Board with that of obtaining new perspectives. If any member of the Board does not wish to continue in service, if the Nominating Committee or the Board decide not to nominate a member for re-election or if the Nominating Committee recommends to expand the size of the Board, the Nominating Committee identifies the desired skills and experience of a new nominee in light of the criteria set forth above. Current Independent Directors and members of the Board provide suggestions as to individuals meeting the criteria considered by the Nominating Committee.
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Consultants may also be engaged to assist in identifying qualified individuals. The Nominating Committee does not have a formal policy with respect to diversity; however, the Board and the Nominating Committee believe that it is essential that the Board members represent diverse viewpoints and a diverse mix of the specific factors listed above.
In fiscal year 2014, the Nominating Committee held 4 meetings.
Under our certificate of incorporation, we will fully indemnify any person who was or is involved in any actual or threatened action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was one of our directors or officers or is or was serving at our request as a director or officer of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, against all expense, liability and loss (including attorneys fees and related disbursements), judgments, fines, excise taxes or penalties under the Employee Retirement Income Security Act of 1974, as amended, penalties and amounts paid or to be paid in settlement, actually and reasonably incurred by such person in connection with such action, suit or proceeding, except with respect to any matter as to which such person shall have been finally adjudicated in a decision on the merits in any such action, suit or other proceeding not to have acted in good faith in the reasonable belief that such persons action was in our best interests or to be liable to us or our stockholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such persons office. Our certificate of incorporation also provides that our directors will not be personally liable for monetary damages to us for breaches of their fiduciary duty as directors, except for a breach of their duty of loyalty to us or our stockholders, for acts or omissions not in good faith in the reasonable belief that the action was in the best interests of the Company or which involve intentional misconduct or a knowing violation of law, for authorization of illegal dividends or redemptions or for any transaction from which the director derived an improper personal benefit. So long as we are regulated under the 1940 Act, the above indemnification and limitation of liability will be limited by the 1940 Act or by any valid rule, regulation or order of the SEC thereunder. The 1940 Act provides, among other things, that a company may not indemnify any director or officer against liability to it or its stockholders to which he or she might otherwise be subject by reason of his or her willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
Delaware law also provides that indemnification permitted under the law shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under the corporations bylaws, any agreement, a vote of stockholders or otherwise.
Our certificate of incorporation permits us to secure insurance on behalf of any person who is or was or has agreed to become a director or officer of our company or is or was serving at our request as a director or officer of another enterprise for any liability arising out of his or her actions, regardless of whether the Delaware General Corporation Law would permit indemnification. We have obtained liability insurance for our officers and directors.
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Unless otherwise indicated, the discussion and analysis below relates to compensation of executive officers of the Company.
Executive compensation in 2014 reflected both the financial market conditions as well as the Companys operating performance. In determining bonus awards for 2014 and salary increases for 2015, the Compensation Committee considered the following factors:
| Selection and maintenance of strong credit characteristics for the investment portfolio limited defaulted assets in the investment portfolio and limited realized losses relative to the overall market for such investments; |
| Payment of a dividend primarily out of current net investment income (as may be adjusted for non-recurring items), consistent with the Companys goal not to rely on capital gains; and |
| Comparison to compensation levels at other similar companies operating in the financial industry. |
In addition, at the Companys 2015 Annual Meeting of the Shareholders, the Company held a non-binding stockholder vote to approve the compensation paid to its named executive officers in 2014, commonly referred to as a say-on-pay vote. The Companys stockholders approved such compensation by a non-binding, advisory vote with approximately 80% of the votes submitted on the proposal voting in favor of the resolution. The Board considered the results of this vote and views this vote as confirmation that the Companys stockholders support the Companys executive compensation policies and decisions.
The Compensation Committee awarded 2014 performance bonuses to all of the named executive officers above or near to their existing minimum target bonus amounts and also determined that some of these individuals would receive merit increases in their base salaries in 2015.
The primary objectives of the Compensation Committee of the Board with respect to executive compensation are to attract, retain and motivate the best possible executive talent. The focus is to tie short- and long-term cash and equity incentives to achievement of measurable corporate and individual performance objectives and to align executives incentives with stockholder value creation. To achieve these objectives, the Compensation Committee maintains compensation plans that tie a substantial portion of executives overall compensation to the Companys operational performance. The structure of the executives base and incentive compensation is designed to encourage and reward the following:
| sourcing and pursuing attractively priced investment opportunities; |
| participating in comprehensive due diligence with respect to the Companys investments; |
| ensuring the most effective allocation of capital; and |
| working efficiently and developing relationships with other professionals. |
Management develops the Companys compensation plans by utilizing publicly available compensation data and subscription compensation survey data for national and regional companies in the middle market lending industry and in particular other publicly-traded, internally managed business development companies (BDCs). The Company believes that the practices of this group of companies provide the Company with appropriate compensation benchmarks because these companies have similar organizational structures and tend to compete with the Company for executives and other employees. For benchmarking executive compensation, the Company typically reviews the compensation data the Company has collected from the complete group of companies, as well as a subset of the data from those companies that have a similar number of employees and a similar investment portfolio as the Company.
Based on managements analyses and recommendations, the Compensation Committee has approved a pay-for-performance compensation philosophy, which is intended to bring base salaries and total executive
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compensation in line with approximately the fiftieth percentile of the companies with a similar number of employees represented in the compensation data the Company reviews. The Company works within the framework of this pay-for-performance philosophy to determine each component of an executives initial compensation package based on numerous factors, including:
| the individuals particular background and circumstances, including training and prior relevant work experience; |
| the individuals role with the Company and the compensation paid to similar persons in the companies represented in the compensation data that the Company reviews; |
| the demand for individuals with the individuals specific expertise and experience at the time of hire; |
| performance goals and other expectations for the position; |
| comparison to other executives within the Company having similar levels of expertise and experience; and |
| uniqueness of industry skills. |
The Compensation Committee has also implemented an annual performance management program, under which annual performance goals are determined and set forth in writing at the beginning of each calendar year for the Company as a whole and for each individual employee. Annual corporate goals are proposed by management and approved by the Board at the end of each calendar year for the following year. These corporate goals target the achievement of specific strategic, operational and financial milestones. Annual individual goals focus on contributions which facilitate the achievement of the corporate goals and are set during the first quarter of each calendar year. Individual goals are proposed by each employee and approved by his or her direct supervisor. The Chief Executive Officers goals are approved by the Compensation Committee. Annual salary increases, annual bonuses and annual restricted stock awards granted to the Companys employees are tied to the achievement of these corporate and individual performance goals.
The performance goals for the Companys Chief Executive Officer and other executive management are considered in the context of the performance of the broader financial industry and are as follows:
| achievement of the Companys dividend objectives (emphasizing both growth and stability); |
| growth of the Companys investment portfolio; |
| maintenance of the credit quality and financial performance of the Companys investment portfolio; and |
| development of the Companys human resources. |
The Company believes that the current performance goals are realistic stretch goals that should be reasonably attainable by management.
During the fourth calendar quarter, the Company evaluates individual and corporate performance against the written goals for the recently completed year. Consistent with the Companys compensation philosophy, each employees evaluation begins with a written self-assessment, which is submitted to the employees supervisor. The supervisor then prepares a written evaluation based on the employees self-assessment, the supervisors own evaluation of the employees performance and input from others within the Company. This process leads to a recommendation for annual employee salary increases, annual stock-based compensation awards and bonuses, if any, which is then reviewed and approved by the Compensation Committee. The Companys executive officers, other than the Chief Executive Officer, submit their self-assessments to the Chief Executive Officer, who performs the individual evaluations and submits recommendations to the Compensation Committee for salary increases, bonuses and stock-based compensation awards. In the case of the Chief Executive Officer, his individual performance evaluation is conducted by the Compensation Committee, which determines his compensation changes and awards. For all employees, including the Companys executive officers, annual base salary increases, annual stock-based compensation awards and annual bonuses, to the extent granted, are implemented during the first calendar quarter of the year.
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In accordance with the applicable disclosure requirements, to the extent that risks may arise from the Companys compensation policies and practices that are reasonably likely to have a material adverse effect on the Company, the Company is required to discuss those policies and practices for compensating the employees of the Company (including employees that are not named executive officers) as they relate to the Companys risk management practices and the possibility of incentivizing risk-taking.
The Compensation Committee has evaluated the policies and practices of compensating the Companys employees in light of the relevant factors, including the following:
| the financial performance targets of the Companys annual cash incentive program are the budgeted objectives that are reviewed and approved by the Board and/or the Compensation Committee; |
| bonus payouts are not based solely on corporate performance, but also require achievement of individual performance objectives; |
| bonus awards generally are not contractual entitlements, but are reviewed by the Compensation Committee and/or the Board and can be modified at their discretion; |
| the financial opportunity in the Companys long-term incentive program is best realized through long-term appreciation of the Companys stock price, which mitigates excessive short-term risk-taking; and |
| the allocation of compensation between cash and equity awards and the focus on stock-based compensation, primarily restricted stock awards generally vesting over a period of years, thereby mitigating against short-term risk taking. |
Based on such evaluation, the Compensation Committee has determined that the Companys policies and practices are not reasonably likely to have a material adverse effect on the Company.
The Companys compensation package consists of the following components, each of which the Company deems instrumental in motivating and retaining its executives:
Base salaries for the Companys executives are established based on the scope of their responsibilities and their prior relevant background, training and experience, taking into account competitive market compensation paid by the companies represented in the compensation data the Company reviews for similar positions and the overall market demand for such executives at the time of hire. As with total executive compensation, the Company believes that executive base salaries should generally target the fiftieth percentile of the range of salaries for executives in similar positions and with similar responsibilities in companies of similar size to the Company. An executives base salary is also evaluated together with other components of the executives compensation to ensure that the executives total compensation is in line with the Companys overall compensation philosophy.
Base salaries are reviewed annually as part of the Companys performance management program and increased for merit reasons, based on the executives success in meeting or exceeding individual performance objectives and an assessment of whether significant corporate goals were achieved. The Company also realigns base salaries with market levels for the same positions in companies of similar size to the Company represented in the compensation data the Company reviews if necessary and if the Company identifies significant market changes in the Companys data analysis. Additionally, the Company adjusts base salaries as warranted throughout the year for promotions or other changes in the scope or breadth of an executives role or responsibilities.
The Companys compensation program includes eligibility for an annual performance-based cash bonus in the case of all executives and certain senior, non-executive employees. The amount of the cash bonus depends on the level of achievement of the stated corporate and individual performance goals. The terms of
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any bonus compensation that each of Messrs. Pearson, Corless, Gilpin, Gilligan and Ms. Simeone are annually entitled to are set forth in each of their respective employment agreements descriptions of which are set forth below. See Executive Compensation Employment Agreements.
The amounts of the annual cash bonuses paid to the Companys named executive officers are determined by the Compensation Committee of the Board. In each case, the annual bonus award is based on the individual performance of each of these individuals and on the performance of the Company against goals established annually by the Board, after consultation with the individual. In reviewing and approving the annual performance-based cash bonus, the Compensation Committee considered the relative achievement of the stated corporate and individual performance goals. The most significant performance factors taken into account include, but are not limited to: total investment income; net investment income; overall credit performance of the total investment portfolio; growth of the overall investment portfolio; adding resources and expanding the organization at all levels; maintaining the Companys internal controls and compliance standards; and improving operating efficiency. All bonuses are subject to an annual increase, solely at the discretion of the Board, and in its discretion, the Compensation Committee may award bonus payments to the Companys executives above or below the amounts specified in their respective employment agreements.
The annual bonus awards paid to the named executive officers with respect to 2014 (shown in the Non-Equity Incentive Plan column of the Summary Compensation Table below) were above or near their existing minimum target bonus amounts.
The Company believes that long-term performance is achieved through an ownership culture that encourages long-term participation by the Companys executive officers in equity-based awards. The 2006 Equity Incentive Plan as amended and restated effective June 23, 2015 (the Equity Incentive Plan) currently allows the grant to executive officers of stock options, restricted stock or other stock-based awards. The Company typically makes an initial equity award to certain new senior level employees and annual grants as part of the Companys overall compensation program. All grants of awards pursuant to the Equity Incentive Plan are approved by the Board. Although the Company has the ability to make grants of restricted stock and options under the Equity Incentive Plan, the Board currently believes that restricted stock awards are a more appropriate form of equity incentive compensation for the Company given its emphasis on growing dividend payments to its stockholders. The Equity Incentive Plan is designed to allow, but not require, the grant of awards that qualify under an exception to the deduction limit of Section 162(m) of the Internal Revenue Code of 1986, as amended, for performance-based compensation.
Initial stock-based awards. Executives who join the Company may be awarded initial grants of options or restricted stock. Options awarded as part of these grants have an exercise price equal to the fair market value of common stock on the grant date. The vesting schedule and other terms of these awards are determined by the Board. The amount of the initial award is determined based on the executives position with the Company and an analysis of the competitive practices of companies similar in size to the Company represented in the compensation data that the Company reviews. The initial awards are intended to provide the executive with an incentive to build value in the organization over an extended period of time. The amount of the initial award is also reviewed in light of the executives base salary and other compensation to ensure that the executives total compensation is in line with the Companys overall compensation philosophy. The grant date for awards for existing employees is the later of the date that the Board approved the grant or the date that the Company and the employee have reached a mutual understanding as to the amount and terms of such grant. For prospective employees, the grant date is the date upon which the Company and the employee have reached an agreement regarding the terms of employment and the terms of the award granted by the Board, and the employment has commenced (thus such date is typically the first day of employment). All of the grant dates are approved by the Board or the Compensation Committee.
Annual stock-based awards. The Companys practice is to make annual stock based awards as part of the Companys overall performance management program. In 2014 and in 2015, awards of shares of the Companys restricted common stock were made to Messers. Pearson, Gilpin, Corless and Gilligan and as Ms. Simeone. The Compensation Committee believes that stock-based awards provide management with a strong link to long-term corporate performance and the creation of stockholder value. The Company intends that the
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annual aggregate value of these awards be set near competitive median levels for companies represented in the compensation data the Company reviews. As is the case when the amounts of base salary and initial equity awards are determined, a review of all components of the executives compensation is conducted when determining annual equity awards to ensure that an executives total compensation conforms to the Companys overall philosophy and objectives. A pool of stock-based awards is reserved for executives and other officers based on setting a target grant level for each employee category, with the higher ranked employees being eligible for a higher target grant. The Compensation Committee meets each year after the filing of the Annual Report on Form 10-K to evaluate, review and recommend for the Boards approval the annual stock-based award design, level of award and prospective grant date of such award for each named executive officer and the Chief Executive Officer. For promotions or new hires, the Compensation Committee approves the award in advance of the grant date, and the stock-based grant is awarded on the determined date at the Companys closing market price per share.
The Company maintains broad-based benefits and perquisites that are provided to all employees, including health, life and disability insurance, a savings plan, and a 401(k) plan. The Company participates in a defined contribution plan for their executive officers and employees. In particular circumstances, the Company also utilizes cash signing bonuses when certain executives and senior non-executives join the Company. Such cash signing bonuses typically either vest during a period of less than a year or are repayable in full to the Company if the employee recipient voluntarily terminates employment with the Company prior to the first anniversary of the date of hire. Whether a signing bonus is paid and the amount thereof are determined on a case-by-case basis under the specific hiring circumstances. For example, the Company will consider paying signing bonuses to compensate for amounts forfeited by an executive upon terminating prior employment, to assist with relocation expenses and/or to create an additional incentive for an executive to join the Company in a position where there is high market demand.
Severance. The terms of any severance based compensation that each of Messrs. Pearson, Corless, Gilpin, Gilligan and Ms. Simeone are entitled to are set forth in each of their respective employment agreements, descriptions of which are set forth below. See Executive Compensation Employment Agreements.
Acceleration of vesting of equity-based awards. In general, all unvested options and unvested shares of restricted common stock held by an employee are forfeited immediately upon that employees termination, whether or not for cause. Under the Equity Incentive Plan, however, the Board may, if it so chooses, provide in the case of any award for post-termination exercise provisions, including a provision that accelerates all or a portion of any award, but in no event may any award be exercised after its expiration date.
The compensation policies of the Company are designed to motivate and retain its senior executive officers and to ultimately reward them for outstanding individual and corporate performance.
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The following table shows the compensation paid or accrued during the fiscal years ended December 31, 2014, 2013 and 2012 to or with respect to the Companys named executive officers.
Name and Principal Position | Year | Salary(3) ($) |
Bonus ($) |
Stock Awards ($)(1) |
Option Awards ($) |
Non-Equity Incentive Plan Compensation ($)(2)(3) | All Other Compensation ($)(3)(4) | Total ($)(3) |
||||||||||||||||||||||||
Dayl W. Pearson President and Chief Executive Officer |
2014 | 500,000 | | 900,000 | | 800,000 | 189,308 | 2,389,309 | ||||||||||||||||||||||||
2013 | 500,000 | | 1,000,000 | | 850,000 | 112,495 | 2,462,495 | |||||||||||||||||||||||||
2012 | 400,000 | | | | 1,000,000 | 51,130 | 1,451,130 | |||||||||||||||||||||||||
Edward U. Gilpin(5) Chief Financial Officer, Treasurer and Secretary |
2014 | 365,000 | | 450,000 | | 400,000 | 148,906 | 1,363,906 | ||||||||||||||||||||||||
2013 | 350,000 | | 600,000 | | 350,000 | 109,734 | 1,409,734 | |||||||||||||||||||||||||
2012 | 350,000 | (8) | | 150,000 | | 400,000 | 58,720 | 958,720 | ||||||||||||||||||||||||
R. Jon Corless Chief Investment Officer |
2014 | 300,000 | | 275,000 | | 250,000 | 83,297 | 908,298 | ||||||||||||||||||||||||
2013 | 275,000 | | 300,000 | | 275,000 | 59,876 | 909,876 | |||||||||||||||||||||||||
2012 | 265,000 | | | | 275,000 | 37,246 | 577,246 | |||||||||||||||||||||||||
Jill Simeone(7) General Counsel and Chief Compliance Officer |
2014 | 310,000 | | 250,000 | | 200,000 | 37,205 | 797,205 | ||||||||||||||||||||||||
2013 | 300,000 | (8) | | | | 100,000 | 21,218 | 421,218 | ||||||||||||||||||||||||
Daniel P. Gilligan(6) Vice President, Director of Portfolio Administration and Former Chief Compliance Officer |
2014 | 250,000 | | 250,000 | | 175,000 | 80,010 | 755,010 | ||||||||||||||||||||||||
2013 | 200,000 | | 300,000 | | 175,000 | 58,115 | 733,115 | |||||||||||||||||||||||||
2012 | 175,000 | | | | 150,000 | 35,926 | 360,926 |
(1) | Represents the grant date fair market value of restricted stock grants in accordance with Financial Accounting Standards Board Accounting Standards Codification Compensation Stock Compensation (Topic 718) (January 2010) (ASC 718). Grant date fair value is based on the closing price of the Companys common stock on the date of grant. |
(2) | Annual performance-based cash bonus. As described in Compensation Discussion and Analysis Compensation Components Annual Bonus above, the annual bonuses of the named executive officers are derived based on the performance of the Company and the individual executive relative to pre-established objectives for the year. The threshold, target and/or maximum amounts for the year 2014 bonus opportunity of each named executive officer are reported in the Grants of Plan-Based Awards in Year 2014 table below. |
(3) | The amounts shown above represent the total compensation received from the Company and its affiliates. The Company may allocate compensation expense between Company and one or more of its Asset Manager Affiliates based upon expense allocation agreements. |
(4) | See the 2014 All Other Compensation Table below for a breakdown of these amounts, which consist of: |
| cash dividends on restricted stock granted; |
| amounts received pursuant to the Katonah Debt Advisors Employee Savings and Profit Sharing Plan (the Savings Plan); |
| contributions received pursuant to a 401(k) plan; |
| life insurance premiums; and |
| disability insurance premiums. |
The Savings Plan is a 401(k) plan, and the Company matches an individuals contribution up to a pre-set amount according to a specific formula.
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(5) | Mr. Gilpin was named the Companys Chief Financial Officer, Treasurer and Secretary effective June 1, 2012. |
(6) | Upon the hiring of Ms. Simeone, who assumed the role of Chief Compliance Officer, Mr. Gilligan stepped down from the role of Chief Compliance Officer on August 2, 2013. He remains our Vice President, Director of Portfolio Administration. |
(7) | Ms. Simeone was named the Companys General Counsel on July 11, 2013 and Chief Compliance Officer on August 2, 2013. |
(8) | Represents annual base salary. These employees joined the Company mid year and received a pro-rata share of their annual base salary. |
Name | Dividends on Restricted Stock ($) |
Savings Plan ($) |
401(k) Plan ($) |
Life Insurance Premiums ($) |
Disability Insurance Premiums ($) |
Severance Payments ($) |
Total ($) |
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Dayl W. Pearson | 148,217 | 28,454 | 5,200 | 84 | 7,353 | | 189,308 | |||||||||||||||||||||
Edward U. Gilpin | 107,215 | 28,454 | 5,200 | 84 | 7,953 | | 148,906 | |||||||||||||||||||||
R. Jon Corless | 44,775 | 28,454 | 5,200 | 84 | 4,785 | | 83,297 | |||||||||||||||||||||
Jill Simeone | 15,451 | 13,305 | 5,200 | 35 | 3,165 | | 37,205 | |||||||||||||||||||||
Daniel P. Gilligan | 43,229 | 28,454 | 5,200 | 84 | 3,043 | | 80,010 |
The following table shows information regarding grants of plan-based cash and equity awards during the fiscal year ended December 31, 2014 received by the named executive officers.
Name | Grant Date | Estimated Possible Payouts Under Non-Equity Incentive Plan Awards(1) |
All Other Stock Awards: Number of Shares of Stock (#)(3) | Grant Date Fair Value of Stock ($)(4) | ||||||||||||||||||||
Threshold ($) |
Target(2) ($) |
Maximum ($) |
||||||||||||||||||||||
Dayl W. Pearson | 6/20/2014 | 111,248 | 900,000 | |||||||||||||||||||||
1/31/2015 | 800,000 | |||||||||||||||||||||||
Edward U. Gilpin | 6/20/2014 | 55,624 | 450,000 | |||||||||||||||||||||
1/31/2015 | 400,000 | |||||||||||||||||||||||
R. Jon Corless | 6/20/2014 | 33,993 | 275,000 | |||||||||||||||||||||
1/31/2015 | 250,000 | |||||||||||||||||||||||
Jill Simeone | 6/20/2014 | 30,902 | 250,000 | |||||||||||||||||||||
1/31/2015 | 200,000 | |||||||||||||||||||||||
Daniel P. Gilligan | 6/20/2014 | 30,902 | 250,000 | |||||||||||||||||||||
1/31/2015 | 175,000 |
(1) | The actual bonus awards earned with respect to 2014 and paid in January of 2015 are reported under Non-Equity Incentive Plan Compensation in the Summary Compensation Table above. The annual performance-based bonus may be allocated between Company and one or more of its Asset Manager Affiliates based upon expense allocation agreements. |
(2) | Bonus awards in any year (or for the remaining portion of the year in the case of a mid-year hire), which could potentially be greater or lesser than the target depending on the terms of each named executive officers employment agreement with the Company, are determined by the Compensation Committee of the Board and are based on performance of the individual and that of the Company against goals established annually by the Board. |
(3) | Awards of restricted stock granted under the Equity Incentive Plan. |
(4) | Represents the grant date fair value of the shares of restricted stock in accordance with ASC 718. Grant date fair value of the shares of restricted stock is based on the closing price of the Companys common stock on the date of grant. |
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The Company and/or Katonah Debt Advisors is a party to employment agreements with Messrs. Pearson, Gilpin, Corless, Gilligan and Ms. Simeone. Each of Messrs. Pearson, Gilpin, Corless and Ms. Simeone receive their salary, bonus, stock awards and benefits pursuant to their employment agreements with the Company. Mr. Gilligan receives his salary, bonus and benefits pursuant to his employment agreement with Katonah Debt Advisors.
On June 1, 2012, Mr. Gilpin entered into an employment agreement with the Company providing for an initial term ending on December 31, 2013, subject to automatic one-year renewals thereafter (unless either party provides prior written notice not later than 30 days prior to the expiration of the term of his or its decision not to extend the term of employment). Under the employment agreement, Mr. Gilpin is entitled to receive an annual base salary of $350,000 (subject to increase from time to time in the discretion of the Board of Directors) and an annual performance-based cash bonus with a targeted amount of $400,000 to be paid on or before January 31 of the succeeding calendar year based on his performance and that of the Company against goals established annually by the Board. In addition, Mr. Gilpin is eligible to participate in all employee benefit plans of the Company available to employees. The employment agreement also provides that if Mr. Gilpins employment is terminated by the Company without cause or by him for good reason (each as defined in Mr. Gilpins employment agreement) or as a result of death or disability, he (or his designated beneficiary or estate) will be entitled to receive (i) his base salary and contributions toward health insurance premiums for the remaining term of the agreement (or, if greater, twelve months after such termination); provided that the Company may elect to cease continuation of base salary and contributions toward health insurance premiums at any point following the six-month anniversary of such termination so long as the Company releases Mr. Gilpin from his remaining non-competition and non-solicitation obligations as of such date; (ii) any base salary earned but not paid through the date of termination; (iii) vacation time accrued but not used to that date;1; (iv) any bonus compensation to which he is entitled in respect of the year of termination, prorated to the date of termination; and (v) in the case of a termination by the Company without cause or by Mr. Gilpin for good reason, continued annual bonuses at 50% of the target amount during the period of base salary continuation, pro rated with respect to partial years, all on the condition that he sign a release of claims and subject to his compliance with his non-compete, non-solicitation, and confidentiality obligations. In addition, Mr. Gilpins employment agreement was amended effective as of April 22, 2013 to eliminate a change in control protection provision. That provision, which is no longer in effect after April 22, 2013, provided that following a change in control of the Company, Mr. Gilpin would have been entitled to the benefits described above if he terminates for any reason in the 90 days after the change in control, and the Companys ability to elect to cease the continuation of base salary and contributions to health insurance premiums would have applied after twelve months rather than six months.
As amended on June 27, 2012, each of the employment agreements of Messrs. Pearson and Corless with the Company provides for an initial term ending on December 31, 2013 (subject to automatic one-year renewals thereafter as provided in their previous agreements) unless either party provides prior written notice (not later than 30 days prior to the expiration of the term) of his or its decision not to extend the term of the employment agreement. Under their respective employment agreements, Messrs. Pearson and Corless are entitled to receive an annual base salary of $400,000 and $265,000, respectively, and are eligible to earn annual discretionary performance-based cash bonuses with targeted amounts of $500,000 and $225,000, respectively, to be paid, in each case, on or about January 31 of the succeeding calendar year. The employment agreements provide that if the executives employment is terminated by the Company without cause or by the executive for good reason (each as defined in the applicable employment agreement) or as a result of death or disability, the executive (or his designated beneficiary or estate) will be entitled to receive (i) his base salary and contributions toward health insurance premiums for the remaining term of the agreement (or, if greater, six months after such termination); provided, that if the remaining term of the agreement exceeds six months, the Company may elect to cease continuation of base salary and contributions toward health insurance premiums at any point following the six-month anniversary of such termination so long as the Company releases the executive from his remaining non-competition and non-solicitation obligations as of such date; (ii) any base salary earned but not paid through the date of termination;
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(iii) vacation time accrued but not used to that date; and (iv) any bonus compensation to which the executive is entitled in respect of the year of termination, prorated to the date of termination, all on the condition that the executive sign a release of claims. In addition, the employment agreements were amended effective as of April 22, 2013 to eliminate a change in control protection provision. That provision, which is no longer in effect after April 22, 2013, provided that in addition to the benefits described above, the executive would have been entitled to a further six months of base salary and contributions toward health insurance premiums (i.e., for a total of one year) if he was terminated by the Company within 90 days following a change in control involving the Company.
As amended on June 27, 2012, Mr. Gilligans employment agreement with Katonah Debt Advisors provides for an initial term ending on December 31, 2013 (subject to automatic one-year renewals thereafter as provided in their previous agreements) unless either party provides prior written notice (not later than 30 days prior to the expiration of the term) of his or its decision not to extend the term of the employment agreement. Under the employment agreement, Mr. Gilligan is entitled to receive an annual base salary of $175,000 and is eligible to earn an annual discretionary bonus, targeted at $125,000, to be paid on or about January 31 of the succeeding calendar year. The employment agreement provides that if the executives employment is terminated by Katonah Debt Advisors without cause or by the executive for good reason (each as defined in the applicable employment agreement) or as a result of death or disability, the executive (or his designated beneficiary or estate) will be entitled to receive (i) his base salary and contributions toward health insurance premiums for the remaining term of the agreement; provided, that if the remaining term of the agreement exceeds six months, Katonah Debt Advisors may elect to cease continuation of base salary and contributions toward health insurance premiums at any point following the six-month anniversary of such termination so long as Katonah Debt Advisors releases the executive from his remaining non-competition and non-solicitation obligations as of such date; (ii) any base salary earned but not paid through the date of termination; (iii) vacation time accrued but not used to that date; and (iv) any bonus compensation to which the executive is entitled in respect of the year of termination, prorated to the date of termination, all on the condition that the executive sign a release of claims. In addition, the employment agreement was amended effective as of April 22, 2013 to eliminate a change in control protection provision. That provision, which is no longer in effect after April 22, 2013, provided that in addition to the benefits described above, the executive would have been entitled to a further six months of base salary and contributions toward health insurance premiums (i.e., for a total of one year) if he was terminated by Katonah Debt Advisors within 90 days following a change in control involving the Company.
On June 11, 2013, Ms. Simeone entered into an employment agreement with the Company providing for an initial term ending on December 31, 2013, subject to automatic one year renewals thereafter (unless previously terminated by either party). Under the employment agreement, Ms. Simeone is entitled to receive an annual base salary of $300,000 (subject to increase from time to time in the discretion of the Board of Directors) and an annual performance-based cash bonus, to be paid on or about January 31 of the succeeding calendar year. The employment agreement provides that if Ms. Simeone is terminated by the Company without cause (as defined in the employment agreement), Ms. Simeone will be entitled to receive (i) her base salary and contributions toward health insurance premiums for the remaining term of the agreement; provided that the Company may elect to cease continuation of base salary and contributions toward health insurance premiums at any point after Ms. Simeone has received 3 months such payments, so long as the Company releases Ms. Simeone from her remaining non-solicitation obligations as of such date; (ii) any base salary earned but not paid through the date of termination; (iii) vacation time accrued but not used as of that date; and (iv) any bonus compensation to which Ms. Simeone is entitled in respect of the year of termination, prorated to the date of termination, all on the condition that Ms. Simeone sign a release of claims. In the event of a termination due to the expiration of the employment agreements term, non-renewal of the employment agreement, death, or disability, Ms. Simeone will be entitled to receive (i) any base salary earned but not paid through the date of termination; (ii) vacation time accrued but not used as of that date; and (iii) any bonus compensation to which Ms. Simeone is entitled in respect of the year of termination, prorated to the date of termination.
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On May 5, 2015, the Company entered into employment agreements with Messrs. Pearson, Gilpin, Corless, Gilligan and Ms. Simeone. The employment agreements are effective as of May 5, 2015 and supersede and replace each executives previous employment agreement. The initial term of the employment agreement ends on December 31, 2015, subject to automatic extended one-year renewals thereafter (unless either party provides prior written notice not later than 30 days prior to the expiration of the then current term).
Under the terms of their employment agreements, Messrs. Pearson, Gilpin, Corless, Gilligan and Ms. Simeone are entitled to receive an annual base salary of $550,000, $400,000, $310,000, $275,000 and $310,000, respectively, (subject to increase from time to time by the Board of Directors) and are eligible to earn annual discretionary performance-based cash bonuses with targeted amounts of $800,000, $400,000, $250,000, $175,000 and $200,000, respectively, to be paid on or about January 31 of the succeeding calendar year.
Under the terms of the employment agreements, in the event of the termination of the executives employment, the executive will be entitled to receive (i) any base salary earned but not paid through the date of termination, (ii) any accrued but unused vacation pay calculated through the date of termination, (iii) any accrued but unpaid expense reimbursements calculated through the date of termination and (iv) any benefits provided under the terms of any Company benefit plan or program.
Under the terms of each employment agreement, in the event of an executives termination of employment by the Company without cause (as defined in the employment agreement), by the executive for good reason (as defined in the employment agreement), or due to the executives death or disability, the executive will, for a 12 month severance period following termination (i) continue to be paid his or her annual base salary, and (ii) receive a monthly payment equal to the after-tax amount of the executives monthly premium for COBRA continuation coverage under our health benefit plan. In addition, the executive will receive a one-time payment equal to the prorated amount of executives average annual bonus for the three calendar years preceding termination.
If the executive is terminated without cause or for good reason within 24 months following a change in control of the Company (as defined in the employment agreement), the executive will receive the above-described severance payments, except that the severance period will be 24 months instead of 12 months, and the executive will be fully vested in all outstanding equity and equity-based awards.
The employment agreements contain a provision for the protection of our confidential information, and provide for a one-year non-compete period and a two-year non-solicit period following the executives termination of employment for any reason. In the event of a termination without cause or for good reason, the executive may request that his or her one-year non-compete period be shortened, and if the Company grants such request, it will have no further obligation to make the salary continuation and COBRA premium severance payments.
The following table shows unvested stock awards outstanding on December 31, 2014, the last day of the Companys fiscal year, held by each of the named executive officers. There were no stock options awards held by any of the named executive officers outstanding on December 31, 2014.
Name | Number of Shares or Units of Stock That Have Not Vested (#) |
Market Value of Shares or Units That Have Not Vested ($)(1) |
||||||
Dayl W. Pearson | 203,841 | 1,390,196 | ||||||
Edward U. Gilpin | 135,027 | 920,884 | ||||||
R. Jon Corless | 61,771 | 421,278 | ||||||
Daniel. P. Gilligan | 58,680 | 400,198 | ||||||
Jill Simeone | 30,902 | 210,752 |
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(1) | Computed by multiplying the number of unvested outstanding shares of restricted stock by $6.82, the closing market price of the Companys common stock on December 31, 2014, the end of the last completed fiscal year. |
The named executive officers did not hold or exercise any stock options during the fiscal year ended December 31, 2014. The shares of restricted stock held by the named executive officers that vested in the fiscal year ended December 31, 2014 are set forth in the table below.
Stock Awards | ||||||||
Name | Number of Shares Acquired on Vesting (#) |
Value Realized on Vesting ($) |
||||||
Dayl W. Pearson | | | ||||||
Edward U. Gilpin | | | ||||||
R. Jon Corless | | | ||||||
Daniel P. Gilligan | | | ||||||
Jill Simeone | | |
The Company does not have any defined benefit pension plans.
The Company does not have any defined contribution or other plans that provide for the deferral of compensation on a basis that is not tax-qualified.
Under the Equity Incentive Plan, in the event of a Covered Transaction (as defined below), all outstanding, unexercised options, restricted stock awards and other stock-based awards granted under the Equity Incentive Plan will terminate and cease to be exercisable, and all other awards to the extent not fully vested (including awards subject to conditions not yet satisfied or determined) will be forfeited, provided that the Board may in its sole discretion on or prior to the effective date of the Covered Transaction take any (or any combination of) the following actions, as to some or all outstanding awards:
| make any outstanding option exercisable in full; |
| remove any performance or other conditions or restrictions on any award; |
| in the event of a Covered Transaction under the terms of which holders of the shares of the Company will receive upon consummation thereof a payment for each such share surrendered in the Covered Transaction (whether cash, non-cash or a combination of the foregoing), make or provide for a payment (with respect to some or all of the awards) to the participant equal in the case of each affected award to the difference between (A) the fair market value of a share of common stock times the numbers of shares subject to such outstanding award (to the extent then exercisable at prices not in excess of the fair market value) and (B) the aggregate exercise price of all shares subject to such outstanding award, in each case on such payment terms (which need not be the same as the terms of payment to holders of shares) and other terms, and subject to such conditions, as the Board determines; and |
| with respect to an outstanding award held by a participant who, following the Covered Transaction, will be employed by or otherwise providing services to an entity which is a surviving or acquiring entity in the Covered Transaction or any affiliate of such an entity, at or prior to the effective time of |
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the Covered Transaction, in its sole discretion and in lieu of the action described in the three preceding bullets, arrange to have such surviving or acquiring entity or affiliate assume any award held by such participant outstanding hereunder or grant a replacement award which, in the judgment of the Board is substantially equivalent to any award being replaced. |
Under the Equity Incentive Plan, a Covered Transaction is a (i) sale of shares of the Companys common stock, consolidation, merger, or similar transaction or series of related transactions in which KCAP Financial is not the surviving corporation or which results in the acquisition of all or substantially all of the Companys then outstanding shares of common stock by a single person or entity or by a group of persons and/or entities acting in concert; (ii) a sale or transfer of all or substantially all of the Companys assets; or (iii) a dissolution or liquidation of the Company. Where a Covered Transaction involves a tender offer that is reasonably expected to be followed by a merger described in clause (i) (as determined by the Board), the Covered Transaction shall be deemed to have occurred upon consummation of the tender offer.
Unless the Board expressly provides otherwise, immediately upon the cessation of employment or services of a participant in the Equity Incentive Plan, all awards to the extent not already vested terminate and all awards requiring exercise cease to be exercisable and terminate, except that:
| When a participants employment or services are ceased for Cause (as defined below), all options, vested and unvested, immediately terminate and unvested restricted stock is forfeited; |
| For vested options held by a participant immediately prior to his or her death, to the extent then exercisable, the options remain exercisable for the lesser of a period of 180 days following the participants death or the period ending on the latest date on which those options could have been exercised had there been no cessation of employment or services; and |
| In all other cases, all vested options held by the participant immediately prior to the cessation of his or her employment, to the extent then exercisable, remain exercisable for the lesser of a period of 90 days or the period ending on the latest date on which that option could have been exercised had there been no cessation of employment or services. |
Under the Equity Incentive Plan, Cause has the same meaning as provided in the employment agreement between the participant and the Company or its affiliate, provided that if the participant is not a party to any such agreement, Cause means (i) the participants chronic alcoholism or drug addiction; (ii) fraud, embezzlement, theft, dishonesty, or any deliberate misappropriation of any material amount of money or other assets or property of the Company or any of its affiliates by the participant; (iii) willful failure to perform, or gross negligence in the performance of, the participants duties and responsibilities to the Company and its affiliates; (iv) the participants material breach of any agreement between the participant and the Company or its affiliates, except where the breach is caused by incapacity or disability of the participant; (v) a charge, indictment or conviction of, or plea of nolo contendere by, the participant to a felony or other crime involving moral turpitude; (vi) the participants material breach of his fiduciary duties as an officer, trustee or director of the Company or any of its affiliates; (vii) the participants willful refusal or failure to carry out a lawful and reasonable written directive of the Board or its designee, which failure or refusal does not cease within 15 days after written notice of such failure is given to the participant by the Company; or (viii) the participants willful misconduct which has, or could be reasonably expected to have, a material adverse effect upon the business, interests or reputation of the Company or any of its affiliates.
The Board may provide in the case of any award for post-termination exercise provisions different from those set forth above, including, without limitation, terms allowing a later exercise by a former employee (or, in the case of a former employee who is deceased, the person or persons to whom the award is transferred by will or the laws of descent and distribution) as to all or any portion of the award not exercisable immediately prior to termination of employment or other service, but in no case may an award be exercised after the latest date on which it could have been exercised had there been no cessation of employment or services.
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The termination provisions are set forth in the discussion of the employment agreements above.
The following table sets forth estimated payment obligations to each of the named executive officers, assuming a termination on December 31, 2014.
Name | Termination by Company Without Cause or by Employee for Good Reason ($)(1) |
Termination by Company for Cause ($) |
Voluntary Termination ($)(2) | Disability ($) |
Death ($) |
|||||||||||||||
Dayl W. Pearson |
||||||||||||||||||||
Severance payment(3) | 550,000 | | | 500,000 | 500,000 | |||||||||||||||
Prorata bonus(4) | 800,000 | | | 800,000 | 800,000 | |||||||||||||||
Accrued and unused vacation time(5) | 0 48,077 | 0 48,077 | 0 48,077 | 0 48,077 | 0 48,077 | |||||||||||||||
Insurance benefits(6) | 63,219 | | | 63,219 | 63,219 | |||||||||||||||
TOTAL: | 1,363,219 1,411,296 | 0 48,077 | 0 48,077 | 1,363,219 1,411,296 | 1,363,219 1,411,296 | |||||||||||||||
Edward U. Gilpin |
||||||||||||||||||||
Severance payment(3) | 400,000 | | | 350,000 | 350,000 | |||||||||||||||
Prorata bonus(4) | 400,000 | | | 400,000 | 400,000 | |||||||||||||||
Accrued and unused vacation time(5) | 0 33,654 | 0 33,654 | 0 33,654 | 0 33,654 | 0 33,654 | |||||||||||||||
Insurance benefits(6) | 63,219 | | | 63,219 | 63,219 | |||||||||||||||
TOTAL: | 813,219 846,873 | 0 33,654 | 0 33,654 | 813,219 846,873 | 813,219 846,873 | |||||||||||||||
R. Jon Corless |
||||||||||||||||||||
Severance payment(3) | 310,000 | | | 275,000 | 275,000 | |||||||||||||||
Prorata bonus(4) | 250,000 | | | 250,000 | 250,000 | |||||||||||||||
Accrued and unused vacation time(5) | 0 26,442 | 0 26,442 | 0 26,442 | 0 26,442 | 0 26,442 | |||||||||||||||
Insurance benefits(6) | 63,219 | | | 63,219 | 63,219 | |||||||||||||||
TOTAL: | 588,219 614,661 | 0 26,442 | 0 26,442 | 588,219 614,661 | 588,219 614,661 | |||||||||||||||
Daniel P. Gilligan |
||||||||||||||||||||
Severance payment(3) | 275,000 | | | 200,000 | 200,000 | |||||||||||||||
Prorata bonus(4) | 175,000 | | | 175,000 | 175,000 | |||||||||||||||
Accrued and unused vacation time(5) | 0 19,231 | 0 19,231 | 0 19,231 | 0 19,231 | 0 19,231 | |||||||||||||||
Insurance benefits(6) | 63,219 | | | 63,219 | 63,219 | |||||||||||||||
TOTAL: | 438,219 457,450 | 0 19,231 | 0 19,231 | 438,219 457,450 | 438,219 457,450 | |||||||||||||||
Jill Simeone |
||||||||||||||||||||
Severance payment(3) | 310,000 | | | | | |||||||||||||||
Prorata bonus(4) | 200,000 | | | 200,000 | 200,000 | |||||||||||||||
Accrued and unused vacation time(5) | 0 28,846 | 0 28,846 | 0 28,846 | 0 28,846 | 0 28,846 | |||||||||||||||
Insurance benefits(6) | 63,219 | | | |||||||||||||||||
TOTAL: | 563,219 592,065 | 0 28,846 | 0 28,846 | 200,000 228,846 | 200,000 228,846 |
(1) | This column reflects payments to the employee for base salaries and health insurance premiums for the remaining term of their employment agreements, as well as the target bonus established for each executive. |
(2) | Voluntary termination other than for good reason. |
(3) | Assumes the Company does not reduce the severance payments in return for a release of the remaining noncompete obligations as provided in the employment agreements. |
(4) | Pro rata bonus for year of termination, based on full year of employment. |
(5) | Accrued and unused vacation time is a range of minimum and maximum amounts payable, depending on the amount of vacation time used at the time of termination. |
(6) | Insurance benefits are based on a December 2014 monthly payment for health and dental coverage, assuming a total tax rate of 45%. |
During 2014, none of the Companys executive officers served on the board of directors (or a compensation committee thereof or other board committee performing equivalent functions) of any entities that had one or more executive officers serve on the Compensation Committee of the Board or the Board. No current or past executive officers or employees of the Company or its subsidiaries serve on the Compensation Committee of the Board or had a relationship disclosable under Certain Relationships and Related Transactions Transactions with Related Persons.
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The following table sets forth a summary of the compensation earned by the Companys directors (other than Mr. Pearson, who is also a named executive officer and whose compensation is reflected in the Summary Compensation Table above) in 2014:
Name | Fees Earned(1) or Paid in Cash ($) |
Stock Awards ($)(2) |
Option Awards ($)(3)(4) | All Other Compensation ($) | Total ($) |
|||||||||||||||
Independent Directors |
||||||||||||||||||||
C. Michael Jacobi | 73,750 | 8,050 | | | 81,800 | |||||||||||||||
Albert G. Pastino | 88,250 | 8,050 | | | 96,300 | |||||||||||||||
C. Turney Stevens | 80,750 | 8,050 | | | 88,800 | |||||||||||||||
Christopher Lacovara | 100,000 | 8,050 | | | 108,050 | |||||||||||||||
John A. Ward III | 80,750 | 8,050 | | | 88,800 | |||||||||||||||
Non-Independent Directors |
||||||||||||||||||||
Jay R. Bloom(5) | | | | | | |||||||||||||||
Dean C. Kehler | | | | | |
(1) | Includes fees earned in 2014 but paid in 2015. |
(2) | On May 5, 2014, each of Messrs. Jacobi, Pastino, Ward, Stevens and Lacovara was granted an award of 1,000 shares of restricted stock under the Non-Employee Director Plan. Each of these awards had a grant date fair value of $8,050. The number of unvested restricted stock units held by each director listed in the table above at March 1, 2015 was as follows: Mr. Jacobi (500), Mr. Pastino (500), Mr. Stevens (500), Mr. Lacovara (500), Mr. Ward (500), Mr. Bloom (0), Mr. Kehler (0). |
(3) | As of March 31, 2015, such directors had the following aggregate vested and unvested option awards outstanding. |
Name | Option Awards Outstanding (#) |
|||
Jay R. Bloom(5) | | |||
C. Michael Jacobi | 5,000 | |||
Dean Kehler | | |||
Christopher Lacovara | | |||
Albert G. Pastino | 15,000 | |||
C. Turney Stevens | 15,000 | |||
John A. Ward III | |
Such awards consist of an option to purchase 5,000 shares granted to each of the Independent Directors on each of June 13, 2008, June 13, 2009 and July 22, 2010. The exercise prices of such options are $11.97, $4.93 and $4.83 per share, respectively, and each such option expires on the 10th anniversary of the applicable grant date. All of such option awards have fully vested.
(4) | Amounts reflect the grant date fair value of stock options in accordance with ASC 718. Grant date fair value is based on the Binary Option Pricing Model (American, call option) pricing model for use in valuing stock options. Assumptions used in the calculation of these amounts are shown in Note 10, Equity Incentive Plan Stock Options, to our audited consolidated financial statements included in our 2012 Annual Report on Form 10-K, filed with the SEC on March 18, 2013 (File No. 814-00735). |
(5) | On November 21, 2014, Jay R. Bloom provided notice of his retirement from the Board. |
As compensation for serving on the Board, each of the Independent Directors who served in such capacity in 2014 received an annual fee of $60,000 and the non-executive Chairman of the Board of Directors received an additional annual fee of $40,000. In addition, each of the Independent Directors receives $1,500 per Board meeting attended in person and $750 per Board meeting attended telephonically. Employee directors and Non-Independent Directors do not receive compensation for serving on the Board. Independent Directors who serve on Board committees receive cash compensation in addition to the compensation they
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receive for service on the Board. The chairperson of the Companys Audit Committee receives an additional $10,000 per year, the lead independent director receives an additional $5,000 per year, and the chairperson of each other committee of the Board receives an additional $5,000 per year and all committee members receive an additional $500 for each committee meeting they attend. The Company also reimburses its directors for their reasonable out-of-pocket expenses incurred in attending meetings of the Board.
Pursuant to the Amended and Restated Non-Employee Director Plan (the Non-Employee Director Plan), the Independent Directors and other directors who are not officers or employees of the Company (Non-Employee Directors) may be issued restricted stock as a portion of their compensation for service on the Board in accordance with the terms of exemptive relief granted by the SEC in August 2008. A description of the Non-Employee Director Plan is provided under Equity Incentive Plans 2008 Non-Employee Director Plan below.
Under the Equity Incentive Plan and pursuant to the exemptive relief, the Company may grant options to acquire shares and other share-based awards, including without limitation restricted shares and options to acquire restricted shares. As of June 30, 2015, 702,111 shares of restricted stock were outstanding, 103,798 shares of restricted stock had vested, 10,042 shares of restricted stock had been forfeited, no options were outstanding and 890,892 shares were available for future grants under the Equity Incentive Plan.
In accordance with the terms of the Equity Incentive Plan, the Board has authorized the Compensation Committee to administer the Equity Incentive Plan, but has retained the authority to make grants. In accordance with the provisions of the Equity Incentive Plan, the Compensation Committee will determine the terms of options and other awards, including:
| the determination of which employees will be granted options, restricted stock and other awards; |
| the number of shares subject to options, shares of restricted stock and other awards; |
| the exercise price of each option, which may not be less than fair market value (or, if no fair market value exists at the time of issuance, the current net asset value) of the shares subject to the award on the date of grant; |
| the schedule upon which options become exercisable or upon which a restricted stock award vests (including any performance criteria applicable to restricted stock awards); |
| the termination or cancellation provisions applicable to options and restricted stock awards; |
| the terms and conditions of other awards, including conditions for repurchase, termination or cancellation, issue price and repurchase price; and |
| all other terms and conditions upon which each award may be granted in accordance with the Equity Incentive Plan. |
No participant may receive awards of options for over 1,000,000 shares of common stock or over 500,000 shares of restricted stock in any fiscal year. The aggregate number of shares of restricted stock that may be issued under the Equity Incentive Plan may not exceed 10% of the outstanding shares on June 13, 2008, the effective date of the Equity Incentive Plan, plus 10% of the number of shares issued or delivered by the Company (other than pursuant to compensation plans) during the term of the Equity Incentive Plan. No one person may be granted more than 25% of the shares of restricted stock reserved for issuance under the Equity Incentive Plan. In addition, the amount of voting securities that would result from the exercise of all of the Companys outstanding warrants, options and rights, together with any restricted stock issued by the Company, at the time of issuance may not exceed 25% of the outstanding voting securities of the Company, except that if the amount of voting securities that would result from the exercise of all the Companys outstanding warrants, options and rights issued to the Companys directors, officers and employees, together with any restricted stock issued by the Company, would exceed 15% of the outstanding voting securities of the Company, the total amount of voting securities that would result from the exercise of all outstanding
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warrants, options and rights, together with any restricted stock issued by the Company, at the time of issuance may not exceed 20% of the outstanding voting securities of the Company.
The Board or any committee to which the Board delegates authority may, with the consent of any adversely affected Equity Incentive Plan participants and to the extent permitted by law, reprice or otherwise amend outstanding awards consistent with the terms of the Equity Incentive Plan. No share may be repriced other than in accordance with the 1940 Act and the applicable shareholder approval requirements of The Nasdaq Global Select Market.
In the case of a stock dividend, stock split, recapitalization or other similar change, the number and kind of shares subject to options, shares of restricted stock and other stock-based awards then outstanding or subsequently granted under the Equity Incentive Plan, the exercise price of such awards, the maximum number of shares that may be delivered under the Equity Incentive Plan, and other relevant provisions shall be appropriately adjusted by the Board. The Board may also adjust the number of shares subject to outstanding awards, the exercise price of outstanding awards, and the terms of outstanding awards to take into consideration extraordinary dividends, consolidations or mergers, acquisitions or dispositions of securities or property (with the exception of those that qualify as Covered Transaction, in which case the Board may take any one or more of the actions described above under Potential Payments Upon Termination or Change of Control Termination of Employment and Change of Control Arrangements Change of Control Arrangements in the Companys Equity Incentive Plan), or any other event if it is determined by the Board that such adjustment is appropriate to avoid distortion in the operation of the Equity Incentive Plan. However, the exercise price of options granted under the Equity Incentive Plan will not be adjusted unless the Company receives an exemptive order from the SEC or written confirmation from the SEC staff that the Company may do so.
The 2008 Non-Employee Director Plan was originally adopted by the Board and was approved by a vote of the Companys shareholders at the 2008 Annual Shareholder Meeting (the Prior Plan). Effective June 10, 2011, the Prior Plan was amended and restated in accordance with a resolution of the Board and approved by a vote of the Companys shareholders at the 2011 Annual Shareholder Meeting (as amended, the Non-Employee Director Plan). Pursuant to such amendment, the Company is permitted to issue restricted stock, and is no longer permitted to issue any options for common stock, of the Company to Non-Employee Directors. Options granted to Non-Employee Directors prior to the effectiveness of the Non-Employee Director Plan remain outstanding in accordance with the terms of the Non-Employee Director Plan. There are 31,000 shares of common stock currently remaining for issuance under the Non-Employee Director Plan. As of June 30, 2015, 50,000 shares were subject to outstanding options, and there were no additional options available for future grants under the Non-Employee Director Plan. Any options outstanding as of the date of the 2011 Annual Shareholder Meeting are governed in all respects by the terms of the Prior Plan.
Under the Non-Employee Director Plan, the Non-Employee Directors automatically receive 1,000 shares of restricted stock on the date of each annual meeting of shareholders during the term of the plan. The shares immediately vest as to one-half of the restricted stock grant and as to the remaining one-half of the restricted stock grant on the earlier of (i) the first anniversary of such grant, or (ii) the date immediately preceding the next annual meeting of shareholders (or meeting in lieu of the annual meeting of shareholders), so that vesting for one hundred percent (100%) of the restricted stock grant occurs one year after the date of grant; provided that the participant is then and since the date of grant has continuously been a Non-Employee Director. In addition, a Non-Employee Director who is appointed to serve on the Board outside of the annual election cycle would automatically be granted a pro rata portion of the restricted stock grant on the date of such appointment to the Board. The grants of restricted stock to Non-Employee Directors under the Non-Employee Director Plan are automatic (subject to the authority of the Board to prevent or limit the granting of restricted stock).
In accordance with the terms of the Non-Employee Director Plan, the Board has authorized the Compensation Committee to administer the Non-Employee Director Plan.
Unless the Board expressly provides otherwise, immediately upon the cessation of the Non-Employee Directors service (unless upon such termination or within 90 days thereafter such Non-Employee Director becomes an officer or employee of the Company or rejoins the Board as a Non-Employee Director), all awards of restricted stock, to the extent not already vested, will be forfeited. However, if the Non-Employee
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Director ceases providing services as a Non-Employee Director but within 90 days of such cessation becomes an officer or employee of the Company or rejoins the Board as a Non-Employee Director, such person shall vest in any unvested restricted shares on the later of (i) the next annual shareholders meeting (in accordance the terms of the Non-Employee Director Plan) or (ii) the date on which such person becomes an officer or employee of the Company or rejoins the Board as a Non-Employee Director.
Unless the Board expressly provides otherwise, immediately upon the cessation of the Non-Employee Directors service, all options awarded under the Prior Plan, to the extent not already vested, terminate, except that:
| When the Non-Employee Directors services are ceased for Cause (as defined below), all options, vested and unvested, immediately terminate; |
| For vested options held by the Non-Employee Director immediately prior to his or her death, to the extent then exercisable, the options remain exercisable for the lesser of a period of 180 days following the Non-Employee Directors death or the period ending on the latest date on which those options could have been exercised had there been no cessation of services; and |
| In all other cases, all vested options held by the Non-Employee Director immediately prior to the cessation of his or her services, to the extent then exercisable, remain exercisable for the lesser of a period of 90 days or the period ending on the latest date on which that option could have been exercised had there been no cessation of services. |
Under the Prior Plan, Cause means (i) commission of a felony or of a crime involving moral turpitude, (ii) gross dereliction of duty or (iii) any breach of duty that is materially injurious to the business or reputation of the Company.
The Board may provide in the case of any option award granted under the Prior Plan for post-termination exercise provisions different from those set forth above, including, without limitation, terms allowing a later exercise by a former Non-Employee Director (or, in the case of a former Non-Employee Director who is deceased, the person or persons to whom the award is transferred by will or the laws of descent and distribution) as to all or any portion of the option award not exercisable immediately prior to termination of service, but in no case may an award be exercised after the latest date on which it could have been exercised had there been no cessation of services.
The Non-Employee Director Plan has provisions relating to stock dividends, stock splits, recapitalizations or other changes to outstanding awards, and Covered Transactions analogous to those described under Equity Incentive Plan above.
The following table summarizes certain information regarding the Equity Incentive Plan and the Non-Employee Director Plan as of December 31, 2014:
Plan Category | Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) | |||||||||
(a) | (b) | (c) | ||||||||||
Equity Compensation Plans Approved by Security Holders(1) | 50,000 | $ | 7.72 | 1,078,870 | (2)(3) | |||||||
Equity Compensation Plans Not Approved by Security Holders | | | | |||||||||
Total | 50,000 | $ | 7.72 | 1,078,870 |
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(1) | The Companys Equity Incentive Plan and Non-Employee Director Plan. |
(2) | Subject to the following additional limitations: The aggregate number of shares of restricted stock that may be issued under the Equity Incentive Plan, the Non-Employee Director Plan, and any other Company executive compensation plan, collectively, may not exceed 10% of the outstanding shares of the Company on the effective date of the Non-Employee Director Plan, plus 10% of the number of shares of the Companys common stock issued or delivered by the Company (other than pursuant to compensation plans) during the term of the Non-Employee Director Plan. No one person may be granted more than 25% of the shares of restricted stock reserved for issuance under the Equity Incentive Plan. For purposes of calculating compliance with this limit, the Company will count as restricted stock all shares of the Companys common stock that are issued pursuant to the Non-Employee Director Plan less any shares that are forfeited back to the Company and cancelled as a result of forfeiture restrictions not lapsing. In addition, the amount of voting securities that would result from the exercise of all of the Companys outstanding warrants, options and rights, together with any restricted stock issued by the Company, at the time of issuance may not exceed 25% of the outstanding voting securities of the Company, except that if the amount of voting securities that would result from the exercise of all the Companys outstanding warrants, options and rights issued to the Companys directors, officers and employees, together with any restricted stock issued by the Company, would exceed 15% of the outstanding voting securities of the Company, the total amount of voting securities that would result from the exercise of all outstanding warrants, options and rights, together with any restricted stock issued by the Company, at the time of issuance may not exceed 20% of the outstanding voting securities of the Company. |
(3) | The 1,078,870 shares issuable under the Companys Equity Incentive Plan may be issued in the form of options, restricted stock or other stock-based awards. The 31,000 shares issuable under the Companys Non-Employee Director Plan may currently be issued in the form of restricted stock. |
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We have procedures in place for the review, approval and monitoring of transactions involving the Company and certain persons related to the Company. As a BDC, the Company is prohibited under the 1940 Act from participating in certain transactions with certain of its affiliates without meeting certain requirements, such as the prior approval of the Independent Directors and, in some cases, the SEC. The affiliates with which the Company may be prohibited from transacting include its officers, directors and employees and any person who owns 5% or more of our outstanding voting securities or controlling or under common control with the Company.
No person is deemed to control us, as such term is defined in the 1940 Act.
The following table sets forth, as of June 30, 2015, information with respect to the beneficial ownership of our common stock by:
| each person known to us to beneficially own more than 5% of the outstanding shares of our common stock; |
| each of our directors and each named executive officer; and |
| all of our directors, director nominees and executive officers as a group. |
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (the SEC) and includes voting or investment power with respect to the securities. Common stock subject to options that are currently exercisable or exercisable within 60 days of June 30, 2015 are deemed to be outstanding and beneficially owned by the person holding such options. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Percentage of beneficial ownership is based on 37,032,825 shares of our common stock outstanding as of June 30, 2015.
Unless otherwise indicated, to our knowledge, each shareholder listed below has sole voting and investment power with respect to the shares beneficially owned by the shareholder, except to the extent authority is shared by spouses under applicable law, and maintains an address of c/o KCAP Financial Inc., 295 Madison Avenue, 6th Floor, New York, New York 10017.
Name and Address | Number of Shares | Percentage of Class | Dollar Range of Equity Securities ($)(1) |
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Directors and Executive Officers: |
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Independent Directors |
||||||||||||
C. Michael Jacobi(2) | 40,000 | * | $ | >100,000 | ||||||||
Christopher Lacovara(3) | 581,134 | 1.57 | % | $ | >100,000 | |||||||
Albert G. Pastino(2) | 24,497 | * | $ | >100,000 | ||||||||
C. Turney Stevens(2) | 21,500 | * | $ | >100,000 | ||||||||
John A. Ward III(4) | 3,000 | * | $ | 1 10,000 | ||||||||
Non-Independent Directors |
||||||||||||
Dean C. Kehler(5) | 1,671,000 | 4.51 | % | $ | >100,000 | |||||||
Dayl W. Pearson(6) | 360,996 | * | $ | >100,000 | ||||||||
Executive Officers |
||||||||||||
R. Jon Corless(7) | 117,083 | * | $ | >100,000 | ||||||||
Edward U. Gilpin(8) | 133,674 | * | $ | >100,000 | ||||||||
Jill Simeone(9) | 35,914 | | $ | | ||||||||
Daniel P. Gilligan(10) | 81,269 | * | $ | >100,000 | ||||||||
Directors and Executive Officers as a Group (11 persons) | 3,070,067 | 8.29 | % |
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* | Less than 1%. |
(1) | Based on the closing price of the Companys common stock on July 10, 2015 ($5.45). |
(2) | Includes (a) 15,000 shares of common stock issuable pursuant to options granted under the 2008 Non-Employee Director Plan that are currently exercisable to each of Messrs. Jacobi, Pastino and Stevens; and (b) 1,000 shares of common stock issuable as restricted stock granted on May 21, 2015 under the Amended and Restated Non-Employee Director Plan, as amended (the Amended and Restated Non-Employee Director Plan) to each of Messrs. Jacobi, Pastino and Stevens. Fifty percent of the shares granted under the Amended and Restated Non-Employee Director Plan vested immediately on the grant date, and the remaining 50% will vest on the earlier of (i) the first anniversary of the grant date or (ii) the date immediately preceding the 2016 annual meeting of the Company's shareholders (or meeting in lieu of the Company's annual meeting of shareholders), and in certain other circumstances. |
(3) | Excludes shares of common stock held by the KKAT Entities. Mr. Lacovara is a member of the KKAT Entities and therefore may have a pecuniary interest in certain of the shares held by the KKAT Entities. Mr. Lacovara disclaims beneficial ownership of the shares held by the KKAT Entities except to the extent of their respective pecuniary interests therein. Includes 1,000 shares of common stock issuable as restricted stock granted on May 21, 2015 under the Amended and Restated Non-Employee Director Plan to Mr. Lacovara. Fifty percent of the shares granted under the Amended and Restated Non-Employee Director Plan vested immediately on the grant date, and the remaining 50% will vest on the earlier of (i) the first anniversary of the grant date or (ii) the date immediately preceding the 2016 annual meeting of the Company's shareholders (or meeting in lieu of the Company's annual meeting of shareholders), and in certain other circumstances. |
(4) | Includes 1,000 shares of common stock issuable as restricted stock granted on May 21, 2015 under the Amended and Restated Non-Employee Director Plan of which 50% vested immediately on the grant date, and the remaining 50% will vest on the earlier of (i) the first anniversary of the grant date or (ii) the date immediately preceding the 2016 annual meeting of the Company's shareholders (or meeting in lieu of the Company's annual meeting of shareholders), and in certain other circumstances. |
(5) | Includes shares from the 1,800,000 shares acquired by Mr. Kehler as consideration for his indirect sale of certain property and limited liability company interests in Trimaran Advisors, L.L.C. to KCAP Financial on February 29, 2012. Mr. Kehler indicated that he has sole dispositive and voting power over 725,000 of such shares which were delivered at the closing of the transaction. Includes 1,000 shares of common stock issuable as restricted stock granted on May 21, 2015 under the Amended and Restated Non-Employee Director Plan to Mr. Kehler. Fifty percent of the shares granted under the Amended and Restated Non-Employee Director Plan vested immediately on the grant date, and the remaining 50% will vest on the earlier of (i) the first anniversary of the grant date or (ii) the date immediately preceding the 2016 annual meeting of the Companys shareholders (or meeting in lieu of the Companys annual meeting of shareholders), and in certain other circumstances. |
(6) | Includes 92,593 shares of common stock issuable as restricted stock granted to Mr. Pearson on May 6, 2013, 111,248 shares of common stock issuable as restricted stock granted on June 20, 2014 and 63,114 shares of common stock issuable as restricted stock granted on June 23, 2015. Such restricted stock was granted to Mr. Pearson under the Equity Incentive Plan, as amended (the Equity Incentive Plan) and for the 2013 grant, one half of such restricted stock will vest on each of the third and fourth anniversaries of the grant date. For the 2014 and 2015 grants, the restricted stock will vest quarterly on each of the first four anniversaries of the grant date. |
(7) | Includes 27,778 shares of common stock issuable as restricted stock granted to Mr. Corless on May 6, 2013, 33,993 shares of common stock issuable as restricted stock granted on June 20, 2014 and 28,688 shares of common stock issuable as restricted stock granted on June 23, 2015. Such restricted stock was granted to Mr. Corless under the 2006 Equity Incentive Plan and for the 2013 grant, one half of such restricted stock will vest on each of the third and fourth anniversaries of the grant date. For the 2014 and 2015 grants, the restricted stock will vest quarterly on each of the first four anniversaries of the grant date. |
(8) | Includes 23,847 shares of common stock issuable as restricted stock granted to Mr. Gilpin on June 15, 2012, 55,556 shares of common stock issuable as restricted stock granted on May 6, 2013, 55,624 shares of common stock issuable as restricted stock granted on June 20, 2014 and 8,196 shares of common stock issuable as restricted stock granted on June 23, 2015. Such restricted stock was granted to Mr. Gilpin under the Equity Incentive Plan and for the 2013 grant, one half of such restricted stock will |
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vest on each of the third and fourth anniversaries of the grant date. For the 2014 and 2015 grants, the restricted stock will vest quarterly on each of the first four anniversaries of the grant date. |
(9) | Includes 30,982 shares of common stock issuable as restricted stock granted to Ms. Simeone on June 20, 2014 and 8,196 shares of common stock issuable as restricted stock granted on June 23, 2015 under the Equity Incentive Plan. For the 2014 and 2015 grants the restricted stock will vest quarterly on each of the first four anniversaries of the grant date. |
(10) | Includes 27,778 shares of common stock issuable as restricted stock granted to Mr. Gilligan on May 6, 2013, 30,902 shares of common stock issuable as restricted stock granted on June 20, 2014 and 16,393 shares of common stock issuable as restricted stock granted on June 23, 2015. Such restricted stock was granted to Mr. Gilligan under the Equity Incentive Plan for the 2013 grant, and one half of such restricted stock will vest on each of the third and fourth anniversaries of the grant date. For the 2014 and 2015 grants, the restricted stock will vest quarterly on each of the first four anniversaries of the grant date. |
The Board has established stock ownership guidelines pursuant to which the Companys directors and executive officers are required to achieve and maintain minimum levels of stock ownership. Our Corporate Governance and Stock Ownership Guidelines may be found at http://www.kcapfinancial.com/under Committees & Charters in the Corporate Governance section of our website.
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At a special meeting of our stockholders held on July 20, 2015 and to be continued on August 17, 2015, our stockholders will vote on a proposal to authorize us, with approval of our Board of Directors, to sell shares of our common stock at a price below the then current net asset value per share of such common stock, subject to certain limitations, including, but not limited to, our policy that we shall not seek approval from our Board of Directors to sell or otherwise issue more than 15% of our then outstanding shares of common stock at a price below its then current net asset value per share. If such proposal is approved, it will allow us to sell not more than 15% of our then outstanding shares of our common stock at any level of discount from the net asset value per share until the earlier of the twelve-month period following such approval and our 2016 annual meeting of stockholders. In order to sell shares pursuant to any authorization, a majority of our directors who have no financial interest in the sale and a majority of our independent directors must:
| find that the sale is in our best interests and in the best interests of our stockholders; and |
| in consultation with any underwriter or underwriters or sales manager or sales managers of the offering, make a good faith determination as of a time either immediately prior to the first solicitation by us or on our behalf of firm commitments to purchase such shares, or immediately prior to the issuance of such shares of common stock, that the price at which such shares are to be sold is not less than a price which closely approximates the market value of such shares, less any distributing commission or discount. |
If such proposal is approved, our Board of Directors may determine to issue shares of our common stock below net asset value of such common stock in a registered public offering or in a private placement either with or without an obligation to seek to register the resale thereof at the request of the holders. The Board may also determine to use an underwriter or placement agent to assist in selling such shares of common stock if it concludes that doing so would assist in marketing such securities on favorable terms.
In making a determination that an offering below net asset value per share is in our and our stockholders best interests, our Board of Directors considers a variety of factors, including matters such as:
| The effect that an offering below net asset value per share would have on our stockholders, including the potential dilution they would experience as a result of the offering; |
| The amount per share by which the offering price per share and the net proceeds per share are less than the most recently determined net asset value per share; |
| The relationship of recent market prices of common stock to net asset value per share and the potential impact of the offering on the market price per share of our common stock; |
| Whether the estimated offering price would closely approximate the market value of our shares; |
| The potential market impact of being able to raise capital during the current financial market difficulties; |
| The nature of any new investors anticipated to acquire shares of common stock in the offering; |
| The anticipated rate of return on and quality, type and availability of investments; and |
| The leverage available to us. |
Sales by us of our common stock at a discount from the net asset value per share pose potential risks for our existing stockholders whether or not they participate in the offering, as well as for new investors who participate in the offering. The following three headings and accompanying tables will explain and provide hypothetical examples on the impact of an offering at a price less than the net asset value per share on three different set of investors:
| existing shareholders who do not purchase any shares of common stock in the offering; |
| existing shareholders who purchase a relatively small amount of shares of common stock in the offering or a relatively large amount of shares of common stock in the offering; and |
| new investors who become shareholders by purchasing shares of common stock in the offering. |
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The tables below provide hypothetical examples of the impact that an offering at a price less than net asset value per share may have on the net asset value per share of shareholders and investors who do and do not participate in such an offering. However, the tables below do not show, nor are they intended to show, any potential changes in market price that may occur from an offering at a price less than net asset value per share and it is not possible to predict any potential market price change that may occur from such an offering.
Our existing stockholders who do not participate in an offering below net asset value per share or who do not buy additional shares of common stock in the secondary market at the same or lower price we obtain in the offering (after expenses and commissions) face the greatest potential risks. These stockholders will experience an immediate decrease (often called dilution) in the net asset value of the shares of common stock they hold and their net asset value per share. These stockholders will also experience a disproportionately greater decrease in their participation in our earnings and assets and their voting power than the increase we will experience in our assets, potential earning power and voting interests due to the offering. These shareholders may also experience a decline in the market price of their shares of common stock, which often reflects to some degree announced or potential increases and decreases in net asset value per share. This decrease could be more pronounced as the size of the offering and level of discounts increases.
The following chart illustrates the level of net asset value dilution that would be experienced by a nonparticipating stockholder in four different hypothetical offerings of different sizes and levels of discount from net asset value per share. It is not possible to predict the level of market price decline that may occur.
The examples assume that the issuer has 36,859,957 common shares outstanding, $504,753,533 in total assets and $240,830,098 in total liabilities. The current net asset value and net asset value per share are thus $263,923,435 and $7.16. The chart illustrates the dilutive effect on Stockholder A of (1) an offering of 1,842,998 shares of common stock (5% of the outstanding shares of common stock) at $6.80 per share after offering expenses and commission (a 5% discount from net asset value), (2) an offering of 3,685,996 shares of common stock (10% of the outstanding shares of common stock) at $6.44 per share after offering expenses and commissions (a 10% discount from net asset value), (3) an offering of 5,528,994 shares of common stock (15% of the outstanding shares of common stock) at $5.73 per share after offering expenses and commissions (a 20% discount from net asset value) and (4) an offering of 5,528,994 shares of common stock (15% of the outstanding shares of common stock) at $3.58 per share after offering expenses and commissions (a 50% discount from net asset value).
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Prior to Sale Below NAV | Example 1 5% Offering at 5% Discount |
Example 2 10% Offering at 10% Discount |
Example 3 15% Offering at 20% Discount |
Example 4 15% Offering at 50% Discount |
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Following Sale |
% Change |
Following Sale |
% Change |
Following Sale |
% Change |
Following Sale |
% Change |
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Offering Price |
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Price per Share to Public | | $ | 6.80 | | $ | 6.44 | | $ | 5.73 | | $ | 3.58 | | |||||||||||||||||||||||
Net Proceeds per Share to Issuer | | $ | 6.46 | | $ | 6.12 | | $ | 5.44 | | $ | 3.40 | | |||||||||||||||||||||||
Decrease to Net Asset Value |
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Total Shares Outstanding | 36,859,957 | 38,702,955 | 5.00 | % | 40,545,953 | 10.00 | % | 42,388,951 | 15.00 | % | 42,388,951 | 15.00 | % | |||||||||||||||||||||||
Net Asset Value per Share | $ | 7.16 | $ | 7.13 | (0.42 | )% | $ | 7.07 | (1.26 | )% | $ | 6.94 | (3.07 | )% | $ | 6.67 | (6.85 | )% | ||||||||||||||||||
Dilution to Non-participating Shareholder |
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Shares Held by Shareholder A | 36,859 | 36,859 | | 36,859 | | 36,859 | | 36,859 | | |||||||||||||||||||||||||||
Percentage Held by Shareholder A | 0.10 | % | 0.095 | % | (4.76 | )% | 0.091 | % | (9.09 | )% | 0.087 | % | (13.04 | )% | 0.087 | % | (13.04 | )% | ||||||||||||||||||
Total Net Asset Value Held by Shareholder A |
$ | 263,917 | $ | 262,805 | (0.42 | )% | $ | 260,593 | (1.26 | )% | $ | 255,801 | (3.07 | )% | $ | 245,850 | (6.85 | )% | ||||||||||||||||||
Total Investment by Shareholder A (Assumed to be $7.16 per Share) | $ | 263,917 | $ | 263,917 | | $ | 263,917 | | $ | 263,917 | | $ | 263,917 | | ||||||||||||||||||||||
Total Dilution to Shareholder A (Total Net Asset Value Less Total Investment) | | $ | (1,112 | ) | | $ | (3,323 | ) | | $ | (8,115 | ) | | $ | 18,067 | | ||||||||||||||||||||
Per Share Amounts |
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Net Asset Value per Share Held by Shareholder A | | $ | 7.13 | | $ | 7.07 | | $ | 6.94 | | $ | 6.67 | | |||||||||||||||||||||||
Investment per Share Held by Shareholder A (Assumed to be $7.16 per Share on Shares Held Prior to Sale) | $ | 7.16 | $ | 7.16 | | $ | 7.16 | | $ | 7.16 | | $ | 7.16 | | ||||||||||||||||||||||
Dilution per Share Held by Shareholder A (Net Asset Value per Share Less Investment per Share) | | $ | (0.03 | ) | | $ | (0.09 | ) | | $ | 0.22 | | $ | 0.49 | | |||||||||||||||||||||
Percentage Dilution to Shareholder A (Dilution per Share Divided by Investment per Share) | | | (0.42 | )% | | (1.26 | )% | | (3.07 | )% | | (6.85 | )% |
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Our existing stockholders who participate in an offering below net asset value per share or who buy additional shares of common stock in the secondary market at the same or lower price as we obtain in the offering (after expenses and commissions) will experience the same types of net asset value dilution as the nonparticipating stockholders, albeit at a lower level, to the extent they purchase less than the same percentage of the discounted offering as their interest in our shares of common stock immediately prior to the offering. The level of net asset value dilution will decrease as the number of shares of common stock such stockholders purchase increases. Existing stockholders who buy more than such percentage will experience net asset value dilution on their existing shares but will, in contrast to existing stockholders who purchase less than their proportionate share of the offering, experience an increase (often called accretion) in average net asset value per share over their investment per share and will also experience a disproportionately greater increase in their participation in our earnings and assets and their voting power than our increase in assets, potential earning power and voting interests due to the offering. The level of accretion will increase as the excess number of shares of common stock such stockholder purchases increases. Even a stockholder who over-participates will, however, be subject to the risk that we may make additional discounted offerings in which such stockholder does not participate, in which case such a stockholder will experience net asset value dilution as described above in such subsequent offerings. These shareholders may also experience a decline in the market price of their shares of common stock, which often reflects to some degree announced or potential decreases in net asset value per share. This decrease could be more pronounced as the size of the offering and level of discounts increases.
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The following chart illustrates the level of dilution and accretion in the hypothetical 20% discount offering from the prior chart (Example 3) for a stockholder that acquires shares of common stock equal to (1) 50% of its proportionate share of the offering (i.e., 2,764 shares of common stock, which is 0.05% of an offering of 5,528,994 shares of common stock) rather than its 0.10% proportionate share and (2) 150% of such percentage (i.e. 8,293 shares of common stock, which is 0.15% of an offering of 5,528,994 shares of common stock rather than its 0.10% proportionate share). It is not possible to predict the level of market price decline that may occur.
Prior to Sale Below NAV |
50% Participation | 150% Participation | ||||||||||||||||||
Following Sale | % Change |
Following Sale | % Change |
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Offering Price |
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Price per Share to Public | $ | 5.73 | $ | 5.73 | ||||||||||||||||
Net Proceeds per Share to Issuer | $ | 5.44 | $ | 5.44 | ||||||||||||||||
Decrease to Net Asset Value |
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Total Shares Outstanding | 36,859,957 | 42,388,951 | 15.00 | % | 42,388.951 | 15.00 | % | |||||||||||||
Net Asset Value per Share | $ | 7.16 | $ | 6.94 | (3.07 | )% | $ | 6.94 | (3.07 | )% | ||||||||||
Dilution to Shareholder |
||||||||||||||||||||
Shares Held by Shareholder A | 36,859 | 39,623 | 7.50 | % | 45,152 | 22.50 | % | |||||||||||||
Percentage Held by Shareholder A | 0.1000 | % | 0.0935 | % | (6.50 | )% | 0.1065 | % | 6.50 | % | ||||||||||
Total Asset Values |
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Total Net Asset Value Held by Shareholder A |
$ | 263,917 | $ | 274,987 | 4.19 | % | $ | 313,358 | 18.73 | % | ||||||||||
Total Investment by Shareholder A (Assumed to be $7.16 per Share) | $ | 263,917 | $ | 279,751 | 6.00 | % | $ | 311,432 | 18.00 | % | ||||||||||
Total Dilution to Shareholder A (Total Net Asset Value Less Total Investment) | $ | (4,763 | ) | $ | 1,926 | |||||||||||||||
Per Share Amounts |
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Net Asset Value per Share Held by Shareholder A | $ | 6.94 | $ | 6.94 | ||||||||||||||||
Investment per Share Held by Shareholder A (Assumed to be $7.16 on Shares Held Prior to Sale) |
$ | 7.16 | $ | 7.06 | $ | 6.90 | ||||||||||||||
Dilution per Share Held by Shareholder A (Net Asset Value per Share Less Investment per Share) | $ | (0.12 | ) | $ | 0.04 | |||||||||||||||
Percentage Dilution to Shareholder A (Dilution per Share Divided by Investment per Share) | (1.69 | )% | 0.58 | % |
Investors who are not currently stockholders and who participate in an offering of our common stock below net asset value but whose investment per share is greater than the resulting net asset value per share due to selling compensation and expenses paid by the issuer will experience an immediate decrease, albeit small, in the net asset value of their shares of common stock and their net asset value per share compared to the price they pay for their shares of common stock. Investors who are not currently stockholders and who participate in an offering below net asset value per share and whose investment per share is also less than the resulting net asset value per share due to selling compensation and expenses paid by the issuer being significantly less than the discount per share will experience an immediate increase in the net asset value of their shares of common stock and their net asset value per share compared to the price they pay for their shares of common stock. These investors will experience a disproportionately greater participation in our
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earnings and assets and their voting power than our increase in assets, potential earning power and voting interests. These investors will, however, be subject to the risk that we may make additional discounted offerings in which such new stockholder does not participate, in which case such new stockholder will experience dilution as described above in such subsequent offerings. These investors may also experience a decline in the market price of their shares of common stock, which often reflects to some degree announced or potential increases and decreases in net asset value per share. This decrease could be more pronounced as the size of the offering and level of discounts increases.
The following chart illustrates the level of dilution or accretion for new investors that would be experienced by a new investor in the same hypothetical 5%, 10% and 20% discounted offerings as described in the first chart above. The illustration is for a new investor who purchases the same percentage (0.10%) of the shares of common stock in the offering as Stockholder A in the prior examples held immediately prior to the offering. It is not possible to predict the level of market price decline that may occur.
Prior to Sale Below NAV | Example 1 5% Offering at 5% Discount |
Example 2 10% Offering at 10% Discount |
Example 3 15% Offering at 20% Discount |
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Following Sale | % Change |
Following Sale | % Change |
Following Sale | % Change |
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Offering Price |
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Price per Share to Public | $ | 6.80 | $ | 6.44 | $ | 5.73 | ||||||||||||||||||||||
Net Proceeds per Share to Issuer | $ | 6.46 | $ | 6.12 | $ | 5.44 | ||||||||||||||||||||||
Decrease/Increase to Net Asset Value |
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Total Shares Outstanding | 36,859,957 | 38,702,955 | 5.00 | % | 40,545,953 | 10.00 | % | 42,388,951 | 20.00 | % | ||||||||||||||||||
Net Asset Value per Share | $ | 7.16 | $ | 7.13 | (0.42 | )% | $ | 7.07 | (1.26 | )% | $ | 6.94 | (3.07 | )% | ||||||||||||||
Dilution/Accretion to New Investor A |
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Shares Held by New Investor A | 36,859 | 36,859 | 36,859 | |||||||||||||||||||||||||
Percentage Held by New Investor A | 0.0952 | % | 0.0909 | % | 0.0870 | % | ||||||||||||||||||||||
Total Net Asset Value Held by New Investor A |
$ | 262,804 | $ | 260,593 | $ | 255,801 | ||||||||||||||||||||||
Total Investment by New Investor A (At Price to Public) |
$ | 250,641 | $ | 237,371 | $ | 211,202 | ||||||||||||||||||||||
Total (Dilution)/Accretion to New Investor A (Total Net Asset Value Less Total Investment) | $ | 12,163 | $ | 23,221 | $ | 44,599 | ||||||||||||||||||||||
Net Asset Value per Share Held by New Investor A | $ | 7.13 | $ | 7.07 | $ | 6.94 | ||||||||||||||||||||||
Investment per Share Held by New Investor A |
$ | 6.80 | $ | 6.44 | $ | 5.73 | ||||||||||||||||||||||
(Dilution)/Accretion per Share Held by New Investor A (Net Asset Value per Share Less Investment per Share) | $ | (0.33 | ) | $ | 0.63 | $ | 1.21 | |||||||||||||||||||||
Percentage Dilution/Accretion to New Investor A (Dilution/Accretion per Share Divided by Investment per Share) | (4.85 | )% | 9.78 | % | 21.12 | % |
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We have adopted a dividend reinvestment plan that provides for reinvestment of our distributions on behalf of our stockholders, unless a stockholder elects to receive cash as provided below. As a result, if our Board of Directors authorizes, and we declare, a cash distribution, then our stockholders who have not opted out of our dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of our common stock, rather than receiving the cash.
No action is required on the part of a registered stockholder to have such shareholders cash distribution reinvested in shares of our common stock. A registered stockholder may elect to receive an entire distribution in cash by notifying American Stock Transfer & Trust Company, the plan administrator and our transfer agent and registrar, in writing so that such notice is received by the plan administrator no later than the record date for distributions to stockholders. The plan administrator will set up an account for shares acquired through the plan for each stockholder who has not elected to receive distributions in cash and hold such shares in non-certificated form. Upon request by a stockholder participating in the plan, received in writing not less than ten days prior to the record date, the plan administrator will, instead of crediting shares to the participants account, issue a certificate registered in the participants name for the number of whole shares of our common stock and a check for any fractional share.
Those stockholders whose shares are held by a broker or other financial intermediary may receive distributions in cash by notifying their broker or other financial intermediary of their election.
We intend to use primarily newly issued shares to implement the plan, whether our shares are trading at a premium or at a discount to net asset value. However, we reserve the right to purchase shares in the open market in connection with our implementation of the plan. The number of shares to be issued to a stockholder is determined by dividing the total dollar amount of the dividend payable to such stockholder by the market price per share of our common stock at the close of regular trading on The NASDAQ Global Select Market on the dividend payment date. Market price per share on that date will be the closing price for such shares on The NASDAQ Global Select Market or, if no sale is reported for such day, at the average of their reported bid and asked prices. Shares purchased in open market transactions by the plan administrator of the dividend reinvestment plan will be allocated to a stockholder based upon the average purchase price, excluding any brokerage charges or other charges, of all shares of common stock purchased with respect to the distribution.
There are no brokerage charges or other charges to stockholders who participate in the plan. The plan administrators fees under the plan are paid by us. If a participant elects by written notice to the plan administrator to have the plan administrator sell part or all of the shares held by the plan administrator in the participants account and remit the proceeds to the participant, the plan administrator is authorized to deduct a $15.00 transaction fee plus a $0.10 per share brokerage commission from the proceeds.
If your distributions are reinvested, you will be required to pay tax on the distributions in the same manner as if the distributions were received in cash. The taxation of distributions will not be affected by the form in which you receive them.
Participants may terminate their accounts under the plan by notifying the plan administrator via its website at www.amstock.com, by filling out the transaction request form located at bottom of their statement and sending it to the plan administrator at the address set forth below or by calling the plan administrator at 1-866-668-8564.
The plan may be terminated by us upon notice in writing mailed to each participant at least 30 days prior to any record date for the payment of any dividend by us. All correspondence concerning the plan should be directed to, and additional information about the plan may be obtained from, the plan administrator by mail at American Stock Transfer & Trust Company, Attn. Dividend Reinvestment Department, P.O. Box 922, Wall Street Station, New York, NY 10269-0560 or by telephone at 1-866-668-8564.
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The following discussion is a general summary of some of the material prohibitions and restrictions governing BDCs generally. It does not purport to be a complete description of all the laws and regulations affecting BDCs.
A BDC is a unique kind of investment company that primarily focuses on investing in or lending to private or relatively small publicly traded companies and making managerial assistance available to them. A BDC provides stockholders with the ability to retain the liquidity of a publicly traded stock, while sharing in the possible benefits of investing in privately-owned companies. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their directors and officers and principal underwriters and certain other related persons and requires that a majority of the directors be persons other than interested persons, as that term is defined in the 1940 Act. We have implemented certain procedures to ensure that we do not engage in any prohibited transactions with any persons affiliated with us.
In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by a majority of our outstanding voting securities. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of (i) 67% or more of such companys shares present at a meeting or represented by proxy if more than 50% of the outstanding shares of such company are present or represented by proxy or (ii) more than 50% of the outstanding shares of such company.
Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, or Qualifying Assets, unless, at the time the acquisition is made, Qualifying Assets represent at least 70% of the companys total assets. The principal categories of Qualifying Assets relevant to our business are the following:
| Securities of an eligible portfolio company purchased in transactions not involving any public offering. An eligible portfolio company is defined in the 1940 Act as any issuer which: |
(a) | is organized under the laws of, and has its principal place of business in, the United States; |
(b) | is not an investment company (other than a small business investment company wholly-owned by the BDC) or a company that would be an investment company but for certain exclusions under the 1940 Act; and |
(c) | satisfies any of the following: |
(i) | does not have any class of securities listed on a national securities exchange (or, if it has a class of securities listed on a national securities exchange, has an aggregate market value of outstanding voting and non-voting common equity of less than $250 million); |
(ii) | is controlled by a BDC or a group of companies including a BDC and the BDC has an affiliated person who is a director of the eligible portfolio company; |
(iii) | is a small and solvent company having total assets of not more than $4 million and capital and surplus of not less than $2 million; or |
(iv) | does not have outstanding any class of securities with respect to which a broker or dealer may extend margin credit. |
| Securities of any eligible portfolio company that we control; |
| Securities purchased in a private transaction from a U.S. issuer that is not an investment company and is in bankruptcy and subject to reorganization; |
| Securities received in exchange for or distributed on or with respect to securities described above, or pursuant to the conversion of warrants or rights relating to such securities; |
| Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment. |
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A BDC must be organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described above. In addition, BDCs must generally offer to make available to such issuer of the securities (other than small and solvent companies described above) significant managerial assistance; except that, where we purchase such securities in conjunction with one or more other persons acting together, one of the other persons is the group may make available such managerial assistance. Making available significant managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company through monitoring of portfolio company operations, selective participation in board and management meetings, consulting with and advising a portfolio companys officers or other organizational or financial guidance.
Pending investment in other types of qualifying assets, as described above, our investments may consist of cash, cash equivalents, U.S. government securities or high quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that at least 70% of our assets are qualifying assets. Typically, we invest in U.S. treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements that are treated, under applicable tax rules, as being issued by a single counterparty, we would not meet the diversification tests imposed on us by the Code to qualify for tax treatment as a RIC for U.S. federal income tax purposes. Thus, we do not intend to enter into repurchase agreements treated as issued, under applicable tax rules, by a single counterparty in excess of this limit. We monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.
We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, with respect to certain types of senior securities, we must make provisions to prohibit any dividend distribution to our stockholders or the repurchase of certain of our securities, unless we meet the applicable asset coverage ratios at the time of the dividend distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary purposes. For a discussion of the risks associated with the resulting leverage, see Risk Factors Risks Related to Our Business and Structure We borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us. As of December 31, 2014 our asset coverage ratio was 211%, above the minimum required asset coverage level of 200%.
We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, warrants, options or rights to acquire our common stock, at a price below the current net asset value of the common stock if our Board of Directors determines that such sale is in our best interests and that of our stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our Board of Directors, closely approximates the market value of such securities (less any distributing commission or discount). We may also make rights offerings to our stockholders at prices per share less than the net asset value per share, subject to applicable requirements of the 1940 Act.
At a special meeting of our shareholders held on July 20, 2015 and to be continued on August 17, 2015 our shareholders will vote on a proposal to authorize us to sell shares of our common stock below the then
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current net asset value per share of our common stock in one or more offerings for the period ending on the earlier of (i) the one year anniversary of such approval, or (ii) the date of our 2016 annual meeting of shareholders. If our shareholders approve such proposal, any issuance of shares of our common stock below the then current net asset value per share will be subject to certain limitations, including, but not limited to, the Companys policy that it will not seek approval from our Board of Directors to sell or otherwise issue more than 15% of the Companys then outstanding shares of common stock at a price below its then current net asset value. If the proposal is approved, we will need similar future approval from our shareholders to issue shares below the then current net asset value per share any time after the expiration of the then current approval. We may also make rights offerings to our stockholders at prices per share less than the net asset value per share, subject to applicable requirements of the 1940 Act. See Risk Factors Risks Relating to Our Business and Structure Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital.
We adopted and maintain a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to the code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the codes requirements. A copy of the code of ethics is available on the Corporate Governance section of the Companys website at http://www.kcapfinancial.com. Our code of ethics may also be reviewed and copied at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Copies of the code of ethics may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SECs Public Reference Section, Washington, D.C. 20549-0102. In addition, our code of ethics is available on the SECs website at http://www.sec.gov.
We are committed to maintaining the privacy of our stockholders and safeguarding their non-public personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.
Generally, we do not receive any non-public personal information relating to our stockholders, although some non-public personal information of our stockholders may become available to us. We do not disclose any non-public personal information about our stockholders or former stockholders to anyone, except as is necessary to service stockholder accounts, such as to a transfer agent, or as otherwise permitted by law.
We restrict access to non-public personal information about our stockholders to our employees with a legitimate business need for the information. We maintain safeguards designed to protect the non-public personal information of our stockholders.
Although the securities we hold are not typically voting securities, some of our investments could entitle us to voting rights. If this were to occur we would vote our portfolio securities in the best interest of our stockholders and we would review on a case-by-case basis each proposal submitted to a stockholder vote to determine its impact on the portfolio securities held by us. Although we would generally vote against proposals that we believe may have a negative impact on our portfolio securities, we may vote for such a proposal if we were to believe there exists a compelling long-term reason to do so.
Our voting decisions would be made by our Investment Committee. To ensure that our vote would not the product of a conflict of interest, we would require that (1) anyone involved in the decision making process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (2) employees involved in the decision making process or vote administration are prohibited from revealing how we intend to vote on a proposal to reduce any attempted influence from interested parties.
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We are periodically examined by the SEC for compliance with the 1940 Act and the Securities Exchange Act of 1934.
We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from indemnifying any director or officer against any liability to our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such persons office.
We are required to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws and to review these policies and procedures annually for their adequacy and the effectiveness of their implementation. We have a designated CCO who is responsible for administering these policies and procedures.
We are not currently a party to any material legal proceedings.
The following discussion is a general summary of the material U.S. federal income tax considerations applicable to us and to an investment in our shares of common stock. This summary does not purport to be a complete description of the U.S. federal income tax considerations applicable to such an investment. For example, we have not described certain considerations that may be relevant to certain types of beneficial owners of our common stock subject to special treatment under U.S. federal income tax laws, including persons subject to the alternative minimum tax, tax-exempt organizations, insurance companies, dealers in securities, pension plans and trusts, and financial institutions. This summary assumes that beneficial owners of our common stock hold our common stock as a capital asset (within the meaning of the Code). The discussion is based upon the Code, Treasury regulations, and administrative and judicial interpretations, each as of the date of this prospectus and all of which are subject to change, possibly retroactively, which could affect the continuing validity of this discussion. We have not sought and will not seek any ruling from the Internal Revenue Service, or the IRS, regarding the matters discussed in this summary. This summary does not discuss any aspects of U.S. estate or gift tax or foreign, state or local tax. It does not discuss the special treatment under U.S. federal income tax laws that could result if we invested in tax-exempt securities or certain other investment assets.
A U.S. stockholder is a beneficial owner of shares of our common stock that is for U.S. federal income tax purposes:
| an individual who is a citizen or resident of the United States; |
| a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any state thereof or the District of Columbia; |
| an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or |
| a trust if either a U.S. court can exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions or the trust was in existence on August 20, 1996, was treated as a U.S. person prior to that date, and has made a valid election to be treated as a U.S. person. |
A Non-U.S. stockholder is a beneficial owner of shares of our common stock that is not a U.S. stockholder.
If a partnership (including an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds shares of our common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner, the activities of the partnership, and certain determinations made at the partner level. A prospective investor that is a partner in a partnership that will hold shares of our common stock should consult its tax advisors with respect to the partnerships purchase, ownership and disposition of shares of our common stock.
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Tax matters are very complicated and the tax consequences to an investor of an investment in our shares of common stock will depend on the facts of his, her or its particular situation. We encourage investors to consult their tax advisors regarding the specific consequences of such an investment, including tax reporting requirements, the applicability of U.S. federal, state, local and foreign tax laws, eligibility for the benefits of any applicable tax treaty, and the effect of any possible changes in the tax laws.
We have elected to be treated as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that we timely distribute to our stockholders as dividends. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, we must distribute to our stockholders, for each taxable year, at least 90% of our investment company taxable income, which is generally our net ordinary taxable income plus the excess of our realized net short-term capital gains over our realized net long-term capital losses (the Annual Distribution Requirement).
For any taxable year in which we qualify as a RIC and satisfy the Annual Distribution Requirements, we generally will not be subject to U.S. federal income tax on the portion of our investment company taxable income and net capital gain, defined as net long-term capital gains in excess of net short-term capital losses, we distribute to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any net ordinary income or net capital gain not distributed (or deemed distributed) to our stockholders.
We will be subject to a 4% nondeductible U.S. federal excise tax on our undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (a) 98% of our net ordinary income for each calendar year, (b) 98.2% of our capital gain net income for the one-year period ending October 31 in that calendar year and (c) any income or gains realized, but not distributed, in the preceding year and on which we paid no U.S. federal income tax (the Excise Tax Avoidance Requirement). For this purpose, however, any net ordinary income or capital gain net income retained by us that is subject to corporate-level U.S. federal income tax for the tax year ending in that calendar year will be considered to have been distributed by year end (or earlier if estimated taxes are paid). We currently intend to make sufficient distributions each taxable year to satisfy the Excise Tax Avoidance Requirement.
To qualify as a RIC for U.S. federal income tax purposes, we must, among other things:
| qualify to be regulated as a business development company under the 1940 Act at all times during each taxable year; |
| derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, or other income derived with respect to our business of investing in such stock or securities, and net income derived from interests in qualified publicly traded partnerships (which generally are partnerships that are traded on an established securities market or tradable on a secondary market, other than partnerships that derive 90% of their income from interest, dividends and other permitted RIC income) (the 90% Income Test); and |
| diversify our holdings so that at the end of each quarter of the taxable year: |
| at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and |
| no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer or of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or in the securities of one or more qualified publicly traded partnerships (the Diversification Tests). |
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If we do not satisfy the requirements of Diversification Tests as of the end of any quarter, we will not lose our status as RIC provided that (i) we satisfied the requirements in a prior quarter and (ii) our failure to satisfy the requirements in the current quarter is not due in whole or in part to an acquisition of any security or other property.
We may invest in partnerships, including qualified publicly traded partnerships, which may result in our being subject to state, local or foreign income, franchise or withholding liabilities.
Any underwriting fees paid by us are not deductible. We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with payment-in-kind (PIK) interest or, in certain cases, with increasing interest rates or issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. Because any original issue discount accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount. If we are not able to obtain sufficient cash from other sources to satisfy the Annual Distribution Requirement, we may fail to qualify as a RIC and become subject to corporate-level U.S. federal income taxes on all of our taxable income without the benefit of the dividends-paid deduction.
We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest or, in certain cases, with increasing interest rates or issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. Because any original issue discount accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount. If we are ever not able to obtain sufficient cash from other sources to satisfy the Annual Distribution Requirement, we may fail to qualify as a RIC and become subject to corporate-level U.S. federal income taxes on all of our taxable income without the benefit of the dividends-paid deduction.
Although we do not presently expect to do so, we are authorized to borrow funds and to sell assets in order (i) to satisfy the Annual Distribution Requirement and to otherwise eliminate our liability for U.S. federal income and excise taxes and (ii) to satisfy the Diversification Tests. However, under the 1940 Act, we are not permitted to borrow additional funds or to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain asset coverage tests are met. See Regulation Indebtedness; Coverage Ratio. Moreover, our ability to dispose of assets to meet the Annual Distribution Requirement, the Excise Tax Avoidance Requirement or the Diversification Tests may be limited by (a) the illiquid nature of our portfolio and/or (b) other requirements relating to our qualification as a RIC. If we dispose of assets in order to meet the Annual Distribution Requirement, the Excise Tax Avoidance Requirement, or the Diversification Tests, we may make such dispositions at times that, from an investment standpoint, are not advantageous.
Certain of our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things, (a) treat dividends that would otherwise constitute qualified dividend income as non-qualified dividend income, (b) treat dividends that would otherwise be eligible for the corporate dividends received deduction as ineligible for such treatment, (c) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (d) convert lower-taxed long-term capital gain into higher-taxed short-term capital gain or ordinary income, (e) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited), (f) cause us to recognize income or gain without a corresponding receipt of cash, (g) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (h) adversely alter the characterization of certain complex financial transactions and
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(i) produce income that will not be qualifying income for purposes of the 90% Income Test. We intend to monitor our transactions and may make certain tax elections to mitigate the effect of these provisions and prevent our disqualification as a RIC.
Gain or loss realized by us from warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as capital gain or loss. Such capital gain or loss generally will be long- term or short-term, depending on how long we held a particular warrant.
Some of the income and fees that we may recognize will not satisfy the 90% Income Test. In order to ensure that such income and fees do not disqualify us as a RIC for a failure to satisfy the 90% Income Test, we may hold assets that generate such income and provide services that generate such fees indirectly through one or more entities treated as corporations for U.S. federal income tax purposes. Such corporations will be required to pay corporate-level U.S. federal income taxes on their earnings, which ultimately will reduce our return on such income and fees.
If we were unable to qualify for treatment as a RIC, and if certain remedial provisions were not available, we would be subject to U.S. federal income tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to our stockholders, nor would they be required to be made. Distributions, including distributions of net long-term capital gain, would generally be taxable to our stockholders as ordinary dividend income to the extent of our current or accumulated earnings and profits. Subject to certain limitations under the Code, corporate U.S. stockholders would be eligible to claim a dividends received deduction with respect to such distributions, and non-corporate U.S. stockholders would be able to treat such dividend income as qualified dividend income, which is subject to reduced rates of U.S. federal income tax. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholders tax basis, and any remaining distributions would be treated as a capital gain. If we fail to qualify as a RIC for a period greater than two taxable years, to qualify as a RIC in a subsequent year we may be subject to regular corporate-level federal income tax on any net built-in gains with respect to certain of our assets (i.e., the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if we had been liquidated) that we elect to recognize on requalification or when recognized over the next ten years.
The remainder of this discussion assumes that we will continue to qualify as a RIC and will satisfy the Annual Distribution Requirement.
A 3.8% tax will be imposed on the net investment income of certain individuals, and on the undistributed net investment income of certain estates and trusts. Among other items, net investment income generally includes gross income from interest, dividends and net gains from certain property sales, less certain deductions. U.S. stockholders should consult their tax advisors regarding the possible implications of this legislation in their particular circumstances.
Distributions by us generally are taxable to U.S. stockholders as ordinary income or capital gains. Distributions of our investment company taxable income (which is, generally, our net ordinary income plus net short-term capital gains in excess of net long-term capital losses) will be taxable as ordinary income to U.S. stockholders to the extent of our current or accumulated earnings and profits, whether paid in cash or reinvested in additional shares of our common stock. To the extent such distributions paid by us to non-corporate U.S. stockholders (including individuals) are attributable to dividends from U.S. corporations and certain qualified foreign corporations and if certain holding period requirements are met, such distributions generally will be treated as qualified dividend income and will be eligible for a maximum U.S. federal income tax rate of 20%. In this regard, it is anticipated that distributions paid by us will generally not be attributable to dividends and, therefore, generally will not qualify for the 20% maximum U.S. federal income tax rate. Distributions of our net capital gains (which is generally our realized net long-term capital gains in excess of realized net short-term capital losses) properly reported by us as capital gain dividends
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will be taxable to a U.S. stockholder as long-term capital gains (currently at a maximum U.S. federal income tax rate of 20%) in the case of individuals, trusts or estates, regardless of the U.S. stockholders holding period for his, her or its common stock and regardless of whether paid in cash or reinvested in additional shares of common stock. Distributions in excess of our earnings and profits first will reduce a U.S. stockholders adjusted tax basis in such stockholders common stock and, after the adjusted basis is reduced to zero, will constitute capital gains to such U.S. stockholder. U.S. stockholders receiving distributions in the form of additional shares of our common stock will be subject to the same tax consequences as if such distributions were received in cash.
Although we currently intend to distribute any net long-term capital gains at least annually, we may in the future decide to retain some or all of our net long-term capital gains but designate the retained amount as a deemed distribution. In that case, among other consequences, we will pay corporate-level federal income tax on the retained amount, each U.S. stockholder will be required to include its share of the deemed distribution in income as if it had been distributed to the U.S. stockholder, and the U.S. stockholder will be entitled to claim a credit equal its allocable share of the U.S. federal income tax paid on the deemed distribution by us. The amount of the deemed distribution net of such tax will be added to the U.S. stockholders tax basis for their shares of common stock. Since we expect to pay U.S. federal income tax on any retained capital gains at the regular corporate tax rate, and since that rate is in excess of the maximum rate currently payable by individuals on long-term capital gains, the amount of U.S. federal income tax that individual U.S. stockholders will be treated as having paid and for which they will receive a credit will exceed the U.S. federal income tax they owe on the retained net capital gain. Such excess generally may be claimed as a credit against the U.S. stockholders other U.S. federal income tax obligations or may be refunded to the extent it exceeds a stockholders liability for U.S. federal income tax. A U.S. stockholder that is not subject to U.S. federal income tax or otherwise required to file a U.S. federal income tax return would be required to file a U.S. federal income tax return on the appropriate form in order to claim a refund for the taxes we paid. In order to utilize the deemed distribution approach, we must provide written notice to our stockholders prior to the expiration of 60 days after the close of the relevant taxable year. We cannot treat any of our investment company taxable income as a deemed distribution.
We may distribute taxable dividends that are payable in part in our stock. Under certain applicable provision of the Code and the Treasury regulations, distributions payable in cash or in shares of stock at the election of shareholders are treated as taxable dividends. The Internal Revenue Service has issued private rulings indicating that this rule will apply even if the total amount of cash that may be distributed is limited to no more than 20% of the total distribution. Under these rulings, if too many shareholders elect to receive their distributions in cash, each such shareholder would receive a pro rata share of the total cash to be distributed and would receive the remainder of their distribution in shares of stock. If we decide to make any distributions consistent with these rulings that are payable in part in our stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend (whether received in cash, our stock, or combination thereof) as ordinary income (or as long-term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock.
For purposes of determining (a) whether the Annual Distribution Requirement is satisfied for any year and (b) the amount of capital gain dividends paid for that year, we may, under certain circumstances, elect to treat a dividend that is paid during the following taxable year as if it had been paid during the taxable year in question. If we make such an election, the U.S. stockholder will still be treated as receiving the dividend in the taxable year in which the distribution is made. However, any dividend declared by us in October, November or December of any calendar year, payable to stockholders of record on a specified date in such a
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month and actually paid during January of the following year, will be treated as if it had been received by our stockholders on December 31 of the year in which the dividend was declared.
If an investor purchases shares of our common stock shortly before the record date of a distribution, the price of the shares of our common stock will include the value of the distribution and the investor will be subject to tax on the distribution even though it represents a return of their investment.
A U.S. stockholder generally will recognize taxable gain or loss if the stockholder sells or otherwise disposes of their shares of our common stock. Any gain arising from such sale or disposition generally will be treated as long-term capital gain or loss if the stockholder has held their shares of common stock for more than one year. Otherwise, it would be classified as short-term capital gain or loss. However, any capital loss arising from the sale or disposition of shares of our common stock held for six months or less will be treated as long-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain deemed received, with respect to such shares. In addition, all or a portion of any loss recognized upon a disposition of shares of our common stock may be disallowed if other shares of our common stock are purchased (whether through reinvestment of distributions or otherwise) within 30 days before or after the disposition. In such a case, the basis of the common stock acquired will be increased to reflect the disallowed loss.
In general, individual U.S. stockholders currently are subject to a maximum U.S. federal income tax rate of 20% on their net capital gain, (i.e., the excess of realized net long-term capital gain over realized net short-term capital loss for a taxable year), including a long-term capital gain derived from an investment in our shares of common stock. Such rate is lower than the maximum rate on ordinary income currently payable by individuals. Corporate U.S. stockholders currently are subject to U.S. federal income tax on net capital gain at the maximum 35% rate also applied to ordinary income. Non-corporate stockholders with net capital losses for a year (i.e., net capital losses in excess of net capital gains) generally may deduct up to $3,000 of such losses against their ordinary income each year; any net capital losses of a non-corporate stockholder in excess of $3,000 generally may be carried forward and used in subsequent years as provided in the Code. Corporate stockholders generally may not deduct any net capital losses for a year, but may carryback such losses for three years or carry forward such losses for five years.
We (or the applicable withholding agent) will send to each of our U.S. stockholders, after the end of each calendar year, a notice reporting the amounts includible in such U.S. stockholders taxable income for such year as ordinary income and as long-term capital gain. In addition, the U.S. federal income tax status of each years distributions generally will be reported to the IRS. Distributions may also be subject to additional state, local and foreign taxes depending on a U.S. stockholders particular situation. Dividends distributed by us generally will not be eligible for the dividends-received deduction or the lower tax rates applicable to certain qualified dividends.
We (or the applicable withholding agent) may be required to withhold U.S. federal income tax (backup withholding) from all distributions to any non-corporate U.S. stockholder (a) who fails to furnish us with a correct taxpayer identification number or a certificate that such stockholder is exempt from backup withholding or (b) with respect to whom the IRS notifies us (or the applicable withholding agent) that such stockholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. An individuals taxpayer identification number is his or her social security number. Backup withholding is not an additional tax, and any amount withheld under the backup withholding rules is allowed as a credit against the U.S. stockholders U.S. federal income tax liability and may entitle such stockholder to a refund, provided that proper information is timely provided to the IRS.
Legislation, commonly referred to as the Foreign Account Tax Compliance Act (FATCA), generally imposes a 30% U.S. federal withholding tax on payments of certain types of income to foreign financial institutions that fail to enter into an agreement with the U.S. Treasury to report certain required information with respect to accounts held by U.S. persons (or held by foreign entities that have U.S. persons as substantial owners). The types of income subject to the tax include U.S. source dividends paid after June 30, 2014, and the gross proceeds from the sale of any property that could produce U.S.-source dividends paid after December 31, 2016. The information required to be reported includes the identity and taxpayer identification number of each account holder that is a U.S. person and transaction activity within the holders account. In
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addition, subject to certain exceptions, this legislation also imposes a 30% withholding on payments to foreign entities that are not financial institutions unless the foreign entity certifies that it does not have a greater than 10% U.S. owner or provides the withholding agent with identifying information on each greater than 10% U.S. owner. When these provisions become effective, a U.S. stockholder that holds its shares of our common stock through foreign intermediaries or foreign entities could be subject to this 30% withholding tax with respect to distributions on such shares and proceeds from the sale of such shares. Under certain circumstances, a U.S. stockholder might be eligible for refunds or credits of such taxes.
Whether an investment in the shares of our common stock is appropriate for a Non-U.S. stockholder will depend upon that persons particular circumstances. Non-U.S. stockholders should consult their tax advisors before investing in our common stock.
Distributions of our investment company taxable income to Non-U.S. stockholders will be subject to U.S. federal withholding tax at a 30% rate (or lower rate provided by an applicable treaty) to the extent of our current or accumulated earnings and profits unless the distributions are effectively connected with a U.S. trade or business of the Non-U.S. stockholder, and, if provided in an applicable treaty, attributable to a permanent establishment in the United States, in which case the distributions will be subject to U.S. federal income tax on a net basis at the rates and in the manner applicable to U.S. persons. In that case, no U.S. federal withholding tax will be imposed if the Non-U.S. stockholder complies with applicable certification and disclosure requirements. Special certification requirements apply to a Non-U.S. stockholder that is a foreign partnership or a foreign trust, and such entities are urged to consult their tax advisors.
Under a provision that applied to taxable years beginning before January 1, 2014, properly reported dividends received by a Non-U.S. stockholder generally were exempt from U.S. federal withholding tax when they (a) were paid in respect of our qualified net interest income (generally, our U.S. source interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which we were at least a 10% stockholder, reduced by expenses that are allocable to such income), or (b) were paid in connection with our qualified short-term capital gains (generally, the excess of our net short-term capital gain over our long-term capital loss for such taxable year). If this provision is extended and depending on the circumstances, we may report all, some or none of our potentially eligible dividends as such qualified net interest income or as qualified short-term capital gains, or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. Although this provision has been subject to previous extensions, we cannot be certain whether this exception will apply for any taxable years beginning after December 31, 2013. In order to qualify for this exemption from withholding if extended, a Non-U.S. stockholder must comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN or an acceptable substitute or successor form). In the case of shares held through an intermediary, the intermediary could withhold tax even if we properly report the payment as qualified net interest income or qualified short-term capital gain. Non-U.S. stockholders should contact their intermediaries with respect to the application of these rules to their accounts.
Actual or deemed distributions of our net capital gains to a Non-U.S. stockholder, and gains realized by a Non-U.S. stockholder upon the sale of our common stock, will not be subject to U.S. federal withholding tax and generally will not be subject to U.S. federal income tax unless the distributions or gains, as the case may be, are effectively connected with a U.S. trade or business of the Non-U.S. stockholder and, if provided in an applicable treaty, are attributable to a permanent establishment maintained by the Non-U.S. stockholder in the United States or, in the case of an individual Non-U.S. stockholder, the stockholder is present in the United States for 183 days or more during the year of the sale or capital gain dividend and certain other conditions are met.
If we distribute our net capital gains in the form of deemed rather than actual distributions (which we may do in the future), a Non-U.S. stockholder will be entitled to a U.S. federal income tax credit or tax refund equal to the stockholders allocable share of the U.S. federal income tax we pay on the capital gains deemed to have been distributed. In order to obtain the refund, the Non-U.S. stockholder must obtain a U.S. taxpayer identification number and file a U.S. federal income tax return even if the Non-U.S. stockholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a U.S. federal income
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tax return. For a corporate Non-U.S. stockholder, distributions (both actual and deemed), and gains realized upon the sale of our common stock that are effectively connected with a U.S. trade or business may, under certain circumstances, be subject to an additional branch profits tax at a 30% rate (or at a lower rate if provided for by an applicable treaty).
A Non-U.S. stockholder who is a non-resident alien individual, and who is otherwise subject to withholding of U.S. federal income tax, may be subject to information reporting and backup withholding of U.S. federal income tax on dividends unless the Non-U.S. stockholder provides us or the broker through which the Non-U.S. Stockholder holds its shares with an IRS Form W-8BEN (or an acceptable substitute form) or otherwise meets documentary evidence requirements for establishing that it is a Non-U.S. stockholder or otherwise establishes an exemption from backup withholding.
Legislation, commonly referred to as the FATCA, generally imposes a 30% U.S. federal withholding tax on payments of certain types of income to foreign financial institutions that fail to enter into an agreement with the U.S. Treasury to report certain required information with respect to accounts held by U.S. persons (or held by foreign entities that have U.S. persons as substantial owners). The types of income subject to the tax include U.S. source interest and dividends paid after June 30, 2014, and the gross proceeds from the sale of any property that could produce U.S.-source interest or dividends paid after December 31, 2016. The information required to be reported includes the identity and taxpayer identification number of each account holder that is a U.S. person and transaction activity within the holders account. In addition, subject to certain exceptions, this legislation also imposes a 30% withholding on payments to foreign entities that are not financial institutions unless the foreign entity certifies that it does not have a greater than 10% U.S. owner or provides the withholding agent with identifying information on each greater than 10% U.S. owner. When these provisions become effective, depending on the status of a Non-U.S. stockholder and the status of the intermediaries through which they hold their shares of our common stock, Non-U.S. stockholders could be subject to this 30% withholding tax with respect to distributions on such shares and proceeds from the sale of such shares. Under certain circumstances, a Non-U.S. stockholder might be eligible for refunds or credits of such taxes.
An investment in shares by a non-U.S. person may also be subject to U.S. federal estate tax. Non-U.S. persons should consult their tax advisors with respect to the U.S. federal income tax, withholding tax, and estate tax, tax and state, local and foreign tax consequences of an investment in the shares of our common stock.
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The following description is based on relevant portions of the Delaware General Corporation Law and on our certificate of incorporation and bylaws. This summary may not contain all of the information that is important to you, and we refer you to the Delaware General Corporation Law and our certificate of incorporation and bylaws for a more detailed description of the provisions summarized below.
Our authorized capital stock consists of 100,000,000 shares of common stock, par value $0.01 per share, of which 37,053,327 shares were outstanding as of August 5, 2015, and 5,000,000 shares of preferred stock, par value $0.01 per share, of which none were outstanding as of August 5, 2015. Our common stock is traded on The NASDAQ Global Select Market under the symbol KCAP. A total of 2,000,000 shares of our common stock have been authorized for issuance under our Equity Incentive Plan and a total of 100,000 shares of our common stock have been authorized for issuance under our Non-Employee Director Plan. Under Delaware law, our stockholders are not personally liable for our debts or obligations solely based on their ownership of our common stock.
Set forth below is a chart describing the shares of our common stock outstanding as of August 5, 2015:
(1) | (2) | (3) | (4) | |||||||||
Title of Class | Amount Authorized | Amount Held by Us or for Our Account | Amount Outstanding Exclusive of Amount Under Column(3) | |||||||||
Common Stock | 100,000,000 | | 37,053,327 |
Under the terms of our certificate of incorporation, all shares of our common stock have equal rights as to earnings, assets, dividends and voting, and those shares that have been issued are duly authorized, validly issued, fully paid and nonassessable. Distributions may be paid to the holders of our common stock if, as and when authorized by our Board of Directors and declared by us out of funds legally available therefor. Shares of our common stock have no preemptive, exchange, conversion or redemption rights and are freely transferable, except where their transfer is restricted by U.S. federal and state securities laws or by contract. In the event of our liquidation, dissolution or winding up, each share of our common stock would be entitled to share ratably in all of our assets that are legally available for distribution after we pay all debts and other liabilities and subject to any preferential rights of holders of any series preferred stock that might be outstanding at that time. Each share of our common stock is entitled to one vote on all matters submitted to a vote of stockholders, including the election of directors. The holders of common stock possess exclusive voting power except (i) as provided with respect to any other class or series of capital stock or (ii) as may be required by the 1940 Act if we fail to meet certain asset coverage requirements. There is no cumulative voting in the election of directors, or any other matter, which means that holders of a majority of the outstanding shares of common stock are able elect all of our directors, and holders of less than a majority of such shares are unable to elect any director.
Under our certificate of incorporation, we will fully indemnify any person who was or is involved in any actual or threatened action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was one of our directors or officers or is or was serving at our request as a director or officer of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, against all expense, liability and loss (including attorneys fees and related disbursements), judgments, fines, excise taxes or penalties under the Employee Retirement Income Security Act of 1974, as amended, penalties and amounts paid or to be paid in settlement, actually and reasonably incurred by such person in connection with such action, suit or proceeding, except with respect to any matter as to which such person shall have been finally adjudicated in a decision on the merits in any such action, suit or other proceeding not to have acted in good faith in the reasonable belief that such persons action was in our best interests or to be liable to us or our stockholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such persons office. Our certificate of incorporation also provides that our directors will not be personally liable for monetary damages to us for breaches of their fiduciary duty as directors, except for a breach of their duty of
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loyalty to us or our stockholders, for acts or omissions not in good faith in the reasonable belief that the action was in the best interests of the Company or which involve intentional misconduct or a knowing violation of law, for authorization of illegal dividends or redemptions or for any transaction from which the director derived an improper personal benefit. So long as we are regulated under the 1940 Act, the above indemnification and limitation of liability will be limited by the 1940 Act or by any valid rule, regulation or order of the SEC thereunder. The 1940 Act provides, among other things, that a company may not indemnify any director or officer against liability to it or its stockholders to which he or she might otherwise be subject by reason of his or her willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
Delaware law also provides that indemnification permitted under the law shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under the corporations bylaws, any agreement, a vote of stockholders or otherwise.
Our certificate of incorporation permits us to secure insurance on behalf of any person who is or was or has agreed to become a director or officer of our company or is or was serving at our request as a director or officer of another enterprise for any liability arising out of his or her actions, regardless of whether the Delaware General Corporation Law would permit indemnification. We have obtained liability insurance for our officers and directors.
We are subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly held Delaware corporation from engaging in a business combination with interested stockholders for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A business combination includes certain mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to exceptions, an interested stockholder is a person who, together with his, her or its affiliates and associates, owns, or within three years did own, 15% or more of the corporations voting stock. Our certificate of incorporation and bylaws provide that:
| the Board of Directors is divided into three classes, as nearly equal in size as possible, with staggered three-year terms; |
| directors may be removed only for cause, at a meeting called for that purpose, by the affirmative vote of the holders of 75% of the shares of our capital stock entitled to vote; and |
| subject to the requirements of the 1940 Act, any vacancy on the Board of Directors, however the vacancy occurs, including a vacancy due to an enlargement of the Board of Directors, may only be filled by vote of the directors then in office. |
The classification of our Board of Directors and the limitations on removal of directors and filling of vacancies could have the effect of making it more difficult for a third party to acquire us, or of discouraging a third party from acquiring us.
Our certificate of incorporation and bylaws also provide that:
| any action required or permitted to be taken by the stockholders at an annual meeting or special meeting of stockholders may only be taken if it is properly brought before such meeting and may not be taken by written action in lieu of a meeting; and |
| special meetings of the stockholders may only be called by our Board of Directors, chairman or CEO. |
Our bylaws provide that, in order for any matter to be considered properly brought before a meeting, a stockholder must comply with requirements regarding advance notice to us. These provisions could delay, until the next stockholders meeting, stockholder actions which are favored by the holders of a majority of our outstanding voting securities. These provisions may also discourage another person or entity from making a tender offer for our common stock, because such person or entity, even if it acquired a majority of our
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outstanding voting securities, would be able to take action as a stockholder (such as electing new directors or approving a merger) only at a duly called stockholders meeting, and not by written consent.
Delawares law generally provides that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporations certificate of incorporation or bylaws, unless a corporations certificate of incorporation or bylaws requires a greater percentage. Under our certificate of incorporation and bylaws, the affirmative vote of the holders of at least 75% of the shares of our capital stock entitled to vote is required to amend or repeal any of the provisions of our bylaws. Moreover, our bylaws provide that generally, a majority of the shares of our capital stock issued and outstanding and entitled to vote may amend our certificate of incorporation. However, the vote of at least 75% of the shares of our capital stock then outstanding and entitled to vote in the election of directors, voting together as a single class, is required to amend or repeal any provision of the certificate of incorporation pertaining to the Board of Directors, limitation of liability, indemnification, stockholder action or amendments to the certificate of incorporation, to approve a proposal to convert, whether by merger or otherwise, from a closed-end company to an open-end company or to approve a proposal to effect our liquidation or dissolution. However, if such amendment or proposal is approved by at least 75% of our continuing directors (in addition to approval by our Board of Directors), such amendment or proposal may be approved by the stockholders entitled to cast a majority of the votes entitled to be cast on such matter. The continuing directors is defined in our certificate of incorporation as our directors at the time of the completion of our initial public offering as well as those directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of the continuing directors then on our Board of Directors. The stockholder vote with respect to our certificate of incorporation or bylaws would be in addition to any separate class vote that might in the future be required under the terms of any series preferred stock that might be outstanding at the time any such changes are submitted to stockholders. In addition, our certificate of incorporation permits our Board of Directors to amend or repeal our bylaws by a majority vote.
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In addition to shares of common stock, our charter authorizes the issuance of preferred stock. If we offer preferred stock under this prospectus, we will issue an appropriate prospectus supplement. Under the terms of our certificate of incorporation, our Board of Directors is authorized to issue shares of preferred stock in one or more series without stockholder approval. Our Board of Directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences of each series of preferred stock.
Set forth below is a chart describing our preferred stock as of August 5, 2015:
Title of Class | Amount Authorized | Amount Held by Us or for Our Account | Amount Outstanding Exclusive of Amount Under Column | |||||||||
Preferred Stock | 5,000,000 | | |
Every issuance of preferred stock is required to comply with the requirements of the 1940 Act. The 1940 Act requires, among other things, that (1) immediately after issuance and before any dividend or other distribution is made with respect to our common stock, we meet a coverage ratio of total assets to total senior securities, which include all of our borrowings and our preferred stock, of at least 200% and (2) the holders of shares of preferred stock, if any are issued, must be entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends on such preferred stock are unpaid in an amount equal to two full years dividends, and to continue to be so represented until all dividends in arrears shall have been paid or otherwise provided for. Certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock.
For any series of preferred stock that we may issue, our Board of Directors will determine, and the prospectus supplement relating to such series will describe:
| the designation and number of shares of such series; |
| the rate and time at which, and the preferences and conditions under which, any dividends will be paid on shares of such series, which dividends are cumulative and not participating; |
| any provisions relating to convertibility or exchangeability of the shares of such series; |
| the rights and preferences, if any, of holders of shares of such series upon our liquidation, dissolution or winding up of our affairs; |
| the voting powers, if any, of the holders of shares of such series; |
| any provisions relating to the redemption of the shares of such series; |
| any limitations on our ability to pay dividends or make distributions on, or acquire or redeem, other securities while shares of such series are outstanding; |
| any conditions or restrictions on our ability to issue additional shares of such series or other securities; |
| if applicable, a discussion of certain U.S. federal income tax considerations; and |
| any other relative power, preferences and participating, optional or special rights of shares of such series, and the qualifications, limitations or restrictions thereof. |
Shares of preferred stock must be issued in one or more series with such particular terms as may be fixed by our Board of Directors, provided that no series shall have preference or priority over any other series upon the distribution of our assets or in respect of payment of interest or dividends.
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The following is a general description of the terms of the warrants we may issue from time to time. Particular terms of any warrants we offer will be described in the prospectus supplement relating to such warrants.
We may issue warrants to purchase shares of our common stock, preferred stock or debt securities. Such warrants may be issued independently or together with shares of common stock or other equity or debt securities and may be attached or separate from such securities. We will issue each series of warrants under a separate warrant agreement to be entered into between us and a warrant agent. The warrant agent will act solely as our agent and will not assume any obligation or relationship of agency for or with holders or beneficial owners of warrants.
A prospectus supplement will describe the particular terms of any series of warrants we may issue, including the following:
| the title of such warrants; |
| the aggregate number of such warrants; |
| the price or prices at which such warrants will be issued; |
| the currency or currencies, including composite currencies, in which the price of such warrants may be payable; |
| if applicable, the designation and terms of the securities with which the warrants are issued and the number of warrants issued with each such security or each principal amount of such security; |
| in the case of warrants to purchase debt securities, the principal amount of debt securities purchasable upon exercise of one warrant and the price at which and the currency or currencies, including composite currencies, in which this principal amount of debt securities may be purchased upon such exercise; |
| in the case of warrants to purchase common stock or preferred stock, the number of shares of common stock or preferred stock, as the case may be, purchasable upon exercise of one warrant and the price at which and the currency or currencies, including composite currencies, in which these shares may be purchased upon such exercise; |
| the date on which the right to exercise such warrants shall commence and the date on which such right will expire; |
| whether such warrants will be issued in registered form or bearer form; |
| if applicable, the minimum or maximum amount of such warrants which may be exercised at any one time; |
| if applicable, the date on and after which such warrants and the related securities will be separately transferable; |
| information with respect to book-entry procedures, if any; |
| the terms of the securities issuable upon exercise of the warrants; |
| if applicable, a discussion of certain U.S. federal income tax considerations; and |
| any other terms of such warrants, including terms, procedures and limitations relating to the exchange and exercise of such warrants. |
We and the warrant agent may amend or supplement the warrant agreement for a series of warrants without the consent of the holders of the warrants issued thereunder to effect changes that are not inconsistent with the provisions of the warrants and that do not materially and adversely affect the interests of the holders of the warrants.
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Prior to exercising their warrants, holders of warrants will not have any of the rights of holders of the securities purchasable upon such exercise, including, in the case of warrants to purchase debt securities, the right to receive principal, premium, if any, or interest payments, on the debt securities purchasable upon exercise or to enforce covenants in the applicable indenture or, in the case of warrants to purchase common stock or preferred stock, the right to receive dividends, if any, or payments upon our liquidation, dissolution or winding up or to exercise any voting rights.
Under the 1940 Act, we may generally only offer warrants on the condition that (1) the warrants expire by their terms within ten years; (2) the exercise or conversion price is not less than the current market value at the date of issuance; (3) our stockholders authorize the proposal to issue such warrants and a required majority of our Board of Directors approves such issuance on the basis that the issuance is in the best interests of KCAP and our stockholders; and (4) if the warrants are accompanied by other securities, the warrants are not separately transferable unless no class of such warrants and the securities accompanying them has been publicly distributed. A required majority of our Board of Directors is a vote of both a majority of our directors who have no financial interest in the transaction and a majority of the directors who are not interested persons of the company. The 1940 Act also provides that the amount of our voting securities that would result from the exercise of all outstanding warrants, options and subscription rights at the time of issuance may not exceed 25% of our outstanding voting securities (which limit shall be 20% if the voting securities that would result from the exercise of all outstanding warrants, options and rights issued to our directors, officers and employees pursuant to certain of our executive compensation plans exceed 15% of the outstanding voting securities).
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We may issue debt securities in one or more series. The specific terms of each series of debt securities will be described in the particular prospectus supplement relating to that series. The prospectus supplement may or may not modify the general terms found in this prospectus and will be filed with the SEC. For a complete description of the terms of a particular series of debt securities, you should read both this prospectus and the prospectus supplement relating to that particular series.
As required by federal law for all bonds and notes of companies that are publicly offered, the debt securities are governed by a document called an indenture. An indenture is a contract between us and the financial institution acting as trustee on your behalf, and is subject to and governed by the Trust Indenture Act of 1939, as amended. The trustee has two main roles. First, the trustee can enforce your rights against us if we default. There are some limitations on the extent to which the trustee acts on your behalf, described in the second paragraph under Events of Default Remedies if an Event of Default Occurs. Second, the trustee performs certain administrative duties for us, with respect to our debt securities.
This section includes a description of the material provisions of the indenture. Because this section is a summary, however, it does not describe every aspect of the debt securities and the indenture. We urge you to read the indenture because it, and not this description, defines your rights as a holder of debt securities. A copy of the indenture has been filed with the SEC. We will file a supplemental indenture with the SEC in connection with any debt offering, at which time the supplemental indenture would be publicly available. See Available Information for information on how to obtain a copy of the indenture.
The prospectus supplement, which will accompany this prospectus, will describe the particular series of debt securities being offered by including:
| the designation or title of the series of debt securities; |
| the total principal amount of the series of debt securities; |
| the percentage of the principal amount at which the series of debt securities will be offered; |
| the date or dates on which principal will be payable; |
| the rate or rates (which may be either fixed or variable) and/or the method of determining such rate or rates of interest, if any; |
| the date or dates from which any interest will accrue, or the method of determining such date or dates, and the date or dates on which any interest will be payable; |
| whether any interest may be paid by issuing additional securities of the same series in lieu of cash (and the terms upon which any such interest may be paid by issuing additional securities); |
| the terms for redemption, extension or early repayment, if any; |
| the currencies in which the series of debt securities are issued and payable; |
| whether the amount of payments of principal, premium or interest, if any, on a series of debt securities will be determined with reference to an index, formula or other method (which could be based on one or more currencies, commodities, equity indices or other indices) and how these amounts will be determined; |
| the place or places, if any, other than or in addition to the City of New York, of payment, transfer, conversion and/or exchange of the debt securities; |
| the denominations in which the offered debt securities will be issued (if other than $1,000 and any integral multiple thereof); |
| the provision for any sinking fund; |
| any restrictive covenants; |
| any Events of Default (as defined in Events of Default below); |
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| whether the series of debt securities are issuable in certificated form; |
| any provisions for defeasance or covenant defeasance; |
| any special federal income tax implications, including, if applicable, federal income tax considerations relating to original issue discount; |
| whether and under what circumstances we will pay additional amounts in respect of any tax, assessment or governmental charge and, if so, whether we will have the option to redeem the debt securities rather than pay the additional amounts (and the terms of this option); |
| any provisions for convertibility or exchangeability of the debt securities into or for any other securities; |
| whether the debt securities are subject to subordination and the terms of such subordination; |
| whether the debt securities are secured and the terms of any security interest; |
| the listing, if any, on a securities exchange; and |
| any other terms. |
The debt securities may be secured or unsecured obligations. Unless the prospectus supplement states otherwise, principal (and premium, if any) and interest, if any, will be paid by us in immediately available funds.
We are permitted, under specified conditions, to issue multiple classes of indebtedness if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance after giving effect to any exemptive relief granted to us by the SEC. In addition, while any indebtedness and senior securities remain outstanding, we must make provisions to prohibit the distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see Risk Factors Risks Relating to Our Operation as a BDC Regulations governing our operation as a BDC will affect our ability to, and the way in which we, raise additional capital.
The indenture provides that any debt securities proposed to be sold under this prospectus and the accompanying prospectus supplement (offered debt securities) and any debt securities issuable upon the exercise of warrants or upon conversion or exchange of other offered securities (underlying debt securities) may be issued under the indenture in one or more series.
For purposes of this prospectus, any reference to the payment of principal of, or premium or interest, if any, on, debt securities will include additional amounts if required by the terms of the debt securities.
The indenture does not limit the amount of debt securities that may be issued thereunder from time to time. Debt securities issued under the indenture, when a single trustee is acting for all debt securities issued under the indenture, are called the indenture securities. The indenture also provides that there may be more than one trustee thereunder, each with respect to one or more different series of indenture securities. See Decription of Our Debt Securities Resignation of Trustee below. At a time when two or more trustees are acting under the indenture, each with respect to only certain series, the term indenture securities means the one or more series of debt securities with respect to which each respective trustee is acting. In the event that there is more than one trustee under the indenture, the powers and trust obligations of each trustee described in this prospectus will extend only to the one or more series of indenture securities for which it is trustee. If two or more trustees are acting under the indenture, then the indenture securities for which each trustee is acting would be treated as if issued under separate indentures.
The indenture does not contain any provisions that give you protection in the event we issue a large amount of debt or we are acquired by another entity.
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We refer you to the applicable prospectus supplement for information with respect to any deletions from, modifications of or additions to the Events of Default or our covenants that are described below, including any addition of a covenant or other provision providing event risk protection or similar protection, to the extent any of our debt offerings contemplate any of the foregoing.
We have the ability to issue indenture securities with terms different from those of indenture securities previously issued and, without the consent of the holders thereof, to reopen a previous issue of a series of indenture securities and issue additional indenture securities of that series unless the reopening was restricted when that series was created.
If any debt securities are convertible into or exchangeable for other securities, the prospectus supplement will explain the terms and conditions of the conversion or exchange, including the conversion price or exchange ratio (or the calculation method), the conversion or exchange period (or how the period will be determined), if conversion or exchange will be mandatory or at the option of the holder or us, provisions for adjusting the conversion price or the exchange ratio and provisions affecting conversion or exchange in the event of the redemption of the underlying debt securities. These terms may also include provisions under which the number or amount of other securities to be received by the holders of the debt securities upon conversion or exchange would be calculated according to the market price of the other securities as of a time stated in the applicable prospectus supplement.
We may issue the debt securities in registered form, in which case we may issue them either in book-entry form only or in certificated form. Debt securities issued in book-entry form will be represented by global securities. We expect that we will usually issue debt securities in book-entry form only represented by global securities, as described more fully below.
We will issue registered debt securities in book-entry form only, unless we specify otherwise in the applicable prospectus supplement. This means debt securities will be represented by one or more global securities registered in the name of a depositary that will hold them on behalf of financial institutions that participate in the depositarys book-entry system. These participating institutions, in turn, hold beneficial interests in the debt securities held by the depositary or its nominee. These institutions may hold these interests on behalf of themselves or customers.
Under the indenture, only the person in whose name a debt security is registered is recognized as the holder of that debt security. Consequently, for debt securities issued in book-entry form, we will recognize only the depositary as the holder of the debt securities and we will make all payments on the debt securities to the depositary. The depositary will then pass along the payments it receives to its participants, which in turn will pass the payments along to their customers who are the beneficial owners. The depositary and its participants do so under agreements they have made with one another or with their customers; they are not obligated to do so under the terms of the debt securities.
As a result, investors will not own debt securities directly. Instead, they will own beneficial interests in a global security, through a bank, broker or other financial institution that participates in the depositarys book-entry system or holds an interest through a participant. As long as the debt securities are represented by one or more global securities, investors will be indirect holders, and not holders, of the debt securities.
In the future, we may issue debt securities in certificated form or terminate a global security. In these cases, investors may choose to hold their debt securities in their own names or in street name. Debt securities held in street name are registered in the name of a bank, broker or other financial institution chosen by the investor, and the investor holds a beneficial interest in those debt securities through the account he or she maintains at that institution.
For debt securities held in street name, we will recognize only the intermediary banks, brokers and other financial institutions in whose names the debt securities are registered as the holders of those debt securities,
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and we will make all payments on those debt securities to them. These institutions will pass along the payments they receive to their customers who are the beneficial owners, but only because they agree to do so in their customer agreements or because they are legally required to do so. Investors who hold debt securities in street name will be indirect holders, and not holders, of the debt securities.
Our obligations, as well as the obligations of the applicable trustee and those of any third parties employed by us or the applicable trustee, run only to the legal holders of the debt securities. We do not have obligations to investors who hold beneficial interests in global securities, in street name or by any other indirect means. This will be the case whether an investor chooses to be an indirect holder of a debt security or has no choice because we are issuing the debt securities only in book-entry form.
For example, once we make a payment or give a notice to the holder, we have no further responsibility for the payment or notice even if that holder is required, under agreements with depositary participants or customers or by law, to pass it along to the indirect holders but does not do so. Similarly, if we want to obtain the approval of the holders for any purpose (for example, to amend an indenture or to relieve us of the consequences of a default or of our obligation to comply with a particular provision of an indenture), we would seek the approval only from the holders, and not the indirect holders, of the debt securities. Whether and how the holders contact the indirect holders is up to the holders.
When we refer to you in this Description of Debt Securities, we mean those who invest in the debt securities being offered by this prospectus and an accompanying prospectus supplement, whether they are the holders or only indirect holders of those debt securities. When we refer to your debt securities, we mean the debt securities in which you hold a direct or indirect interest.
If you hold debt securities through a bank, broker or other financial institution, either in book-entry form or in street name, we urge you to check with that institution to find out:
| how it handles securities payments and notices; |
| whether it imposes fees or charges; |
| how it would handle a request for the holders consent, if ever required; |
| whether and how you can instruct it to send you debt securities registered in your own name so you can be a holder, if that is permitted in the future for a particular series of debt securities; |
| how it would exercise rights under the debt securities if there were a default or other event triggering the need for holders to act to protect their interests; and |
| if the debt securities are in book-entry form, how the depositarys rules and procedures will affect these matters. |
As noted above, we usually will issue debt securities as registered securities in book-entry form only. A global security represents one or any other number of individual debt securities. Generally, all debt securities represented by the same global securities will have the same terms.
Each debt security issued in book-entry form will be represented by a global security that we deposit with and register in the name of a financial institution or its nominee that we select. The financial institution that we select for this purpose is called the depositary. Unless we specify otherwise in the applicable prospectus supplement, The Depository Trust Company, New York, New York, known as DTC, will be the depositary for all of our debt securities issued in book-entry form.
A global security may not be transferred to or registered in the name of anyone other than the depositary or its nominee, unless special termination situations arise. We describe those situations below under Special Situations when a Global Security Will Be Terminated. As a result of these arrangements, the depositary, or its nominee, will be the sole registered owner and holder of all debt securities represented by a global security, and investors will be permitted to own only beneficial interests in a global security. Beneficial interests must be held by means of an account with a broker, bank or other financial institution that in turn
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has an account with the depositary or with another institution that has an account with the depositary. Thus, an investor whose security is represented by a global security will not be a holder of the debt security, but only an indirect holder of a beneficial interest in the global security.
As an indirect holder, an investors rights relating to a global security will be governed by the account rules of the investors financial institution and of the depositary, as well as general laws relating to securities transfers. The depositary that holds the global security will be considered the holder of the debt securities represented by the global security.
If debt securities are issued only in the form of a global security, an investor should be aware of the following:
| an investor cannot cause the debt securities to be registered in his or her name and cannot obtain certificates for his or her interest in the debt securities, except in the special situations we describe below; |
| an investor will be an indirect holder and must look to his or her own bank or broker for payments on the debt securities and protection of his or her legal rights relating to the debt securities, as we describe under Issuance of Securities in Registered Form above; |
| an investor may not be able to sell interests in the debt securities to some insurance companies and other institutions that are required by law to own their securities in non-book-entry form; |
| an investor may not be able to pledge his or her interest in a global security in circumstances where certificates representing the debt securities must be delivered to the lender or other beneficiary of the pledge in order for the pledge to be effective; |
| the depositarys policies, which may change from time to time, will govern payments, transfers, exchanges and other matters relating to an investors interest in a global security, and we and the trustee have no responsibility for any aspect of the depositarys actions or for its records of ownership interests in a global security, nor do we or the trustee supervise the depositary in any way; |
| if we redeem less than all the debt securities of a particular series being redeemed, DTCs practice is to determine by lot the amount to be redeemed from each of its participants holding that series; |
| an investor is required to give notice of exercise of any option to elect repayment of its debt securities, through its participant, to the applicable trustee and to deliver the related debt securities by causing its participant to transfer its interest in those debt securities, on DTCs records, to the applicable trustee; |
| DTC requires that those who purchase and sell interests in a global security deposited in its book-entry system use immediately available funds, and your broker or bank may also require you to use immediately available funds when purchasing or selling interests in a global security; and |
| financial institutions that participate in the depositarys book-entry system, and through which an investor holds its interest in a global security, may also have their own policies affecting payments, notices and other matters relating to the debt securities; there may be more than one financial intermediary in the chain of ownership for an investor, and we do not monitor and are not responsible for the actions of any of those intermediaries. |
If a global security is terminated for any reason, interests in it will be exchanged for certificates in non-book-entry form (certificated securities). After that exchange, the choice of whether to hold the certificated debt securities directly or in street name will be up to the investor. Investors must consult their own banks or brokers to find out how to have their interests in a global security transferred on termination to their own names, so that they will be holders. We have described the rights of legal holders and street name investors under Issuance of Securities in Registered Form above.
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The applicable prospectus supplement may list situations for terminating a global security that would apply only to the particular series of debt securities covered by the prospectus supplement. If a global security is terminated, only the depositary, and not we or the applicable trustee, is responsible for deciding the investors in whose names the debt securities represented by the global security will be registered and, therefore, who will be the holders of those debt securities.
We will pay interest to the person listed in the applicable trustees records as the owner of the debt security at the close of business on a particular day in advance of each due date for interest, even if that person no longer owns the debt security on the interest due date. That day, usually about two weeks in advance of the interest due date, is called the record date. Because we will pay all the interest for an interest period to the holders on the record date, holders buying and selling debt securities must work out between themselves the appropriate purchase price. The most common manner is to adjust the sales price of the debt securities to prorate interest fairly between buyer and seller based on their respective ownership periods within the particular interest period. This prorated interest amount is called accrued interest.
We will make payments on a global security in accordance with the applicable policies of the depositary as in effect from time to time. Under those policies, we will make payments directly to the depositary, or its nominee, and not to any indirect holders who own beneficial interests in the global security. An indirect holders right to those payments will be governed by the rules and practices of the depositary and its participants, as described under Global Securities.
We will make payments on a certificated debt security as follows. We will pay interest that is due on an interest payment date to the holder of debt securities as shown on the trustees records as of the close of business on the regular record date at our office and/or other offices that may be specified in the prospectus supplement. We will make all payments of principal and premium, if any, by check at the office of the applicable trustee in New York, New York and/or at other offices that may be specified in the applicable prospectus supplement or in a notice to holders against surrender of the debt security.
Alternatively, at our option, we may pay any cash interest that becomes due on the debt security by mailing a check to the holder at his, her or its address shown on the trustees records as of the close of business on the regular record date or by transfer to an account at a bank in the United States, in either case, on the due date.
If any payment is due on a debt security on a day that is not a business day, we will make the payment on the next day that is a business day. Payments made on the next business day in this situation will be treated under the indenture as if they were made on the original due date, except as otherwise indicated in the attached prospectus supplement. Such payment will not result in a default under any debt security or the indenture, and no interest will accrue on the payment amount from the original due date to the next day that is a business day.
Book-entry and other indirect holders should consult their banks or brokers for information on how they will receive payments on their debt securities.
You will have rights if an Event of Default occurs in respect of the debt securities of your series and is not cured, as described later in this subsection.
The term Event of Default in respect of the debt securities of your series means any of the following (unless the prospectus supplement relating to such debt securities states otherwise):
| we do not pay the principal of, or any premium on, a debt security of the series on its due date; |
| we do not pay interest on a debt security of the series within 30 days of its due date; |
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| we do not deposit any sinking fund payment in respect of debt securities of the series within two business days of its due date; |
| we remain in breach of a covenant in respect of debt securities of the series for 60 days after we receive a written notice of default stating we are in breach (the notice must be sent by either the trustee or holders of at least 25% of the principal amount of the outstanding debt securities of the series); |
| we file for bankruptcy or certain other events of bankruptcy, insolvency or reorganization occur and remain undischarged or unstayed for a period of 60 days; or |
| the series of debt securities has an asset coverage, as such term is defined in the 1940 Act, of less than 100 per centum on the last business day of each of twenty-four consecutive calendar months; or |
| any other Event of Default in respect of debt securities of the series described in the prospectus supplement occurs. |
An Event of Default for a particular series of debt securities does not necessarily constitute an Event of Default for any other series of debt securities issued under the same or any other indenture. The trustee may withhold notice to the holders of debt securities of any default, except in the payment of principal, premium, interest, or sinking or purchase fund installment, if it in good faith considers the withholding of notice to be in the interest of the holders.
If an Event of Default has occurred and is continuing, the trustee or the holders of not less than 25% in principal amount of the debt securities of the affected series may (and the trustee shall at the request of such holders) declare the entire principal amount of all the debt securities of that series to be due and immediately payable. This is called a declaration of acceleration of maturity. A declaration of acceleration of maturity may be canceled by the holders of a majority in principal amount of the debt securities of the affected series if (1) we have deposited with the trustee all amounts due and owing with respect to the securities (other than principal that has become due solely by reason of such acceleration) and certain other amounts, and (2) any other Events of Default have been cured or waived.
Except in cases of default, where the trustee has some special duties, the trustee is not required to take any action under the indenture at the request of any holders unless the holders offer the trustee reasonable protection from expenses and liability (called an indemnity). If reasonable indemnity is provided, the holders of a majority in principal amount of the outstanding debt securities of the relevant series may direct the time, method and place of conducting any lawsuit or other formal legal action seeking any remedy available to the trustee. The trustee may refuse to follow those directions in certain circumstances. No delay or omission in exercising any right or remedy will be treated as a waiver of that right, remedy or Event of Default.
Before you are allowed to bypass your trustee and bring your own lawsuit or other formal legal action or take other steps to enforce your rights or protect your interests relating to the debt securities, the following must occur:
| you must give the trustee written notice that an Event of Default with respect to the relevant series of debt securities has occurred and remains uncured; |
| the holders of at least 25% in principal amount of all outstanding debt securities of the relevant series must make a written request that the trustee take action because of the default and must offer reasonable indemnity, security or both to the trustee against the cost, expenses and other liabilities of taking that action; |
| the trustee must not have taken action for 60 days after receipt of the above notice and offer of indemnity and/security; and |
| the holders of a majority in principal amount of the outstanding debt securities of that series must not have given the trustee a direction inconsistent with the above notice during that 60-day period. |
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However, you are entitled at any time to bring a lawsuit for the payment of money due on your debt securities on or after the due date.
Book-entry and other indirect holders should consult their banks or brokers for information on how to give notice or direction to or make a request of the trustee and how to declare or cancel an acceleration of maturity.
Each year, we will furnish to each trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance with the indenture and the debt securities, or else specifying any default.
Holders of a majority in principal amount of the debt securities of the affected series may waive any past defaults other than:
| the payment of principal, any premium or interest; or |
| in respect of a covenant that cannot be modified or amended without the consent of each holder. |
Under the terms of the indenture, we are generally permitted to consolidate or merge with another entity. We are also permitted to sell all or substantially all of our assets to another entity. However, unless the prospectus supplement relating to certain debt securities states otherwise, we may not take any of these actions unless all the following conditions are met:
| where we merge out of existence or sell substantially all our assets, the resulting entity or transferee must agree to be legally responsible for our obligations under the debt securities; |
| the merger or sale of assets must not cause a default on the debt securities and we must not already be in default (unless the merger or sale would cure the default). For purposes of this no-default test, a default would include an Event of Default that has occurred and has not been cured, as described under Events of Default above. A default for this purpose would also include any event that would be an Event of Default if the requirements for giving us a notice of default or our default having to exist for a specific period of time were disregarded; |
| we must deliver certain certificates and documents to the trustee; and |
| we must satisfy any other requirements specified in the prospectus supplement relating to a particular series of debt securities. |
There are three types of changes we can make to the indenture and the debt securities issued thereunder.
First, there are changes that we cannot make to your debt securities without your specific approval. The following is a list of those types of changes:
| change the stated maturity of the principal of or interest on a debt security or the terms of any sinking fund with respect to any security; |
| reduce any amounts due on a debt security; |
| reduce the amount of principal payable upon acceleration of the maturity of an original issue discount or indexed security following a default or upon the redemption thereof or the amount thereof provable in a bankruptcy proceeding; |
| adversely affect any right of repayment at the holders option; |
| change the place or currency of payment on a debt security (except as otherwise described in this prospectus or any prospectus supplement); |
| impair your right to sue for payment; |
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| adversely affect any right to convert or exchange a debt security in accordance with its terms; |
| modify the subordination provisions in the indenture in a manner that is adverse to outstanding holders of the debt securities; |
| reduce the percentage of holders of debt securities whose consent is needed to modify or amend the indenture; |
| reduce the percentage of holders of debt securities whose consent is needed to waive compliance with certain provisions of the indenture or to waive certain defaults; |
| modify any other aspect of the provisions of the indenture dealing with supplemental indentures, with the consent of holders, waiver of past defaults, changes to the quorum or voting requirements or the waiver of certain covenants; and |
| change any obligation we have to pay additional amounts. |
The second type of change does not require any vote by the holders of the debt securities. This type is limited to clarifications, establishment of the form of terms of new securities of any series as permitted by the indenture and certain other changes that would not adversely affect holders of the outstanding debt securities in any material respect. We also do not need any approval to make any change that affects only debt securities to be issued under the indenture after the change takes effect.
Any other change to the indenture and the debt securities would require the following approval:
| if the change affects only one series of debt securities, it must be approved by the holders of a majority in principal amount of that series; and |
| if the change affects more than one series of debt securities issued under the same indenture, it must be approved by the holders of a majority in principal amount of all of the series affected by the change, with all affected series voting together as one class for this purpose. |
In each case, the required approval must be given by written consent.
The holders of a majority in principal amount of a series of debt securities issued under the indenture, voting together as one class for this purpose, may waive our compliance with some of our covenants applicable to that series of debt securities. However, we cannot obtain a waiver of a payment default or of any of the matters covered by the bullet points included above under Changes Requiring Your Approval.
When taking a vote, we will use the following rules to decide how much principal to attribute to a debt security:
| for original issue discount securities, we will use the principal amount that would be due and payable on the voting date if the maturity of these debt securities were accelerated to that date because of a default; |
| for debt securities whose principal amount is not known (for example, because it is based on an index), we will use the principal face amount at original issuance or a special rule for that debt security described in the prospectus supplement; and |
| for debt securities denominated in one or more foreign currencies, we will use the U.S. dollar equivalent. |
Debt securities will not be considered outstanding, and therefore not eligible to vote, if we have deposited or set aside in trust money for their payment or redemption or if we, any other obligor, or any affiliate of us or any obligor own such debt securities. Debt securities will also not be eligible to vote if they have been fully defeased as described later under Defeasance Full Defeasance.
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We will generally be entitled to set any day as a record date for the purpose of determining the holders of outstanding indenture securities that are entitled to vote or take other action under the indenture. However, the record date may not be more than 30 days before the date of the first solicitation of holders to vote on or take such action. If we set a record date for a vote or other action to be taken by holders of one or more series, that vote or action may be taken only by persons who are holders of outstanding indenture securities of those series on the record date and must be taken within eleven months following the record date.
Book-entry and other indirect holders should consult their banks or brokers for information on how approval may be granted or denied if we seek to change the indenture or the debt securities or request a waiver.
The following provisions will be applicable to each series of debt securities unless we state in the applicable prospectus supplement that the provisions of covenant defeasance and full defeasance will not be applicable to that series.
Under current U.S. federal tax law and the indenture, we can make the deposit described below and be released from some of the restrictive covenants in the indenture under which the particular series was issued. This is called covenant defeasance. In that event, you would lose the protection of those restrictive covenants but would gain the protection of having money and government securities set aside in trust to repay your debt securities. If we achieved covenant defeasance and your debt securities were subordinated as described under Indenture Provisions Subordination below, such subordination would not prevent the trustee under the indenture from applying the funds available to it from the deposit described in the first bullet below to the payment of amounts due in respect of such debt securities for the benefit of the subordinated debt holders. In order to achieve covenant defeasance, we must do the following:
| we must deposit in trust for the benefit of all holders of a series of debt securities a combination of cash (in such currency in which such securities are then specified as payable at stated maturity) or government obligations applicable to such securities (determined on the basis of the currency in which such securities are then specified as payable at stated maturity) that will generate enough cash to make interest, principal and any other payments on the debt securities on their various due dates and any mandatory sinking fund payments or analogous payments; |
| we must deliver to the trustee a legal opinion of our counsel confirming that, under current U.S. federal income tax law, we may make the above deposit without causing you to be taxed on the debt securities any differently than if we did not make the deposit; |
| we must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act, as amended, and a legal opinion and officers certificate stating that all conditions precedent to covenant defeasance have been complied with; |
| defeasance must not result in a breach or violation of, or result in a default under, of the indenture or any of our other material agreements or instruments; |
| no default or event of default with respect to such debt securities shall have occurred and be continuing and no defaults or events of default related to bankruptcy, insolvency or reorganization shall occur during the next 60 days; and |
| satisfy the conditions for covenant defeasance contained in any supplemental indentures. |
If we accomplish covenant defeasance, you can still look to us for repayment of the debt securities if there were a shortfall in the trust deposit or the trustee is prevented from making payment. For example, if one of the remaining Events of Default occurred (such as our bankruptcy) and the debt securities became immediately due and payable, there might be such a shortfall. However, there is no assurance that we would have sufficient funds to make payment of the shortfall.
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If there is a change in U.S. federal tax law or we obtain an IRS ruling, as described below, we can legally release ourselves from all payment and other obligations on the debt securities of a particular series (called full defeasance) if we put in place the following other arrangements for you to be repaid:
| we must deposit in trust for the benefit of all holders of a series of debt securities a combination of cash (in such currency in which such securities are then specified as payable at stated maturity) or government obligations applicable to such securities (determined on the basis of the currency in which such securities are then specified as payable at stated maturity) that will generate enough cash to make interest, principal and any other payments on the debt securities on their various due dates and any mandatory sinking fund payments or analogous payments; |
| we must deliver to the trustee a legal opinion confirming that there has been a change in current U.S. federal tax law or an IRS ruling that allows us to make the above deposit without causing you to be taxed on the debt securities any differently than if we did not make the deposit. Under current U.S. federal tax law, the deposit and our legal release from the debt securities would be treated as though we paid you your share of the cash and notes or bonds at the time the cash and notes or bonds were deposited in trust in exchange for your debt securities and you would recognize gain or loss on the debt securities at the time of the deposit; |
| we must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act, as amended, and a legal opinion and officers certificate stating that all conditions precedent to defeasance have been complied with; |
| defeasance must not result in a breach or violation of, or constitute a default under, of the indenture or any of our other material agreements or instruments; and |
| no default or event of default with respect to such debt securities shall have occurred and be continuing and no defaults or events of default related to bankruptcy, insolvency or reorganization shall occur during the next 60 days; and |
| satisfy the conditions for full defeasance contained in any supplemental indentures. |
If we ever did accomplish full defeasance, as described above, you would have to rely solely on the trust deposit for repayment of the debt securities. You could not look to us for repayment in the unlikely event of any shortfall. Conversely, the trust deposit would most likely be protected from claims of our lenders and other creditors if we ever became bankrupt or insolvent. If your debt securities were subordinated as described later under Indenture Provisions Subordination, such subordination would not prevent the trustee under the indenture from applying the funds available to it from the deposit referred to in the first bullet of the preceding paragraph to the payment of amounts due in respect of such debt securities for the benefit of the subordinated debt holders.
If registered debt securities cease to be issued in book-entry form, they will be issued:
| only in fully registered certificated form; |
| without interest coupons; and |
| unless we indicate otherwise in a prospectus supplement, in denominations of $1,000 and amounts that are multiples of $1,000. |
Holders may exchange their certificated securities for debt securities of smaller denominations or combined into fewer debt securities of larger denominations, as long as the total principal amount is not changed and as long as the denomination is greater than the minimum denomination for such securities.
Holders may exchange or transfer their certificated securities at the office of the trustee. We have appointed the trustee to act as our agent for registering debt securities in the names of holders transferring debt securities, and may appoint another entity to perform these functions or perform them ourselves.
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Holders will not be required to pay a service charge to transfer or exchange their certificated securities, but they may be required to pay any tax or other governmental charge associated with the transfer or exchange. The transfer or exchange will be made only if our transfer agent is satisfied with the holders proof of legal ownership.
If we have designated additional transfer agents for your debt security, they will be named in the prospectus supplement. We may appoint additional transfer agents or cancel the appointment of any particular transfer agent. We may also approve a change in the office through which any transfer agent acts.
If any certificated securities of a particular series are redeemable and we redeem less than all the debt securities of that series, we may block the transfer or exchange of those debt securities during the period beginning 15 days before the day we mail the notice of redemption and ending on the day of that mailing, in order to freeze the list of holders to prepare the mailing. We may also refuse to register transfers or exchanges of any certificated securities selected for redemption, except that we will continue to permit transfers and exchanges of the unredeemed portion of any debt security that will be partially redeemed.
If a registered debt security is issued in book-entry form, only the depositary will be entitled to transfer and exchange the debt security as described in this subsection, since it will be the sole holder of the debt security.
Each trustee may resign or be removed with respect to one or more series of indenture securities provided that a successor trustee is appointed to act with respect to these series and has accepted such appointment. In the event that two or more persons are acting as trustee with respect to different series of indenture securities under the indenture, each of the trustees will be a trustee of a trust separate and apart from the trust administered by any other trustee.
Upon any distribution of our assets upon our dissolution, winding up, liquidation or reorganization, the payment of the principal of (and premium, if any) and interest, if any, on any indenture securities denominated as subordinated debt securities is to be subordinated to the extent provided in the indenture in right of payment to the prior payment in full of all Senior Indebtedness (as defined below), but our obligation to you to make payment of the principal of (and premium, if any) and interest, if any, on such subordinated debt securities will not otherwise be affected. In addition, no payment on account of principal (or premium, if any), sinking fund or interest, if any, may be made on such subordinated debt securities at any time unless full payment of all amounts due in respect of the principal (and premium, if any), sinking fund and interest on Senior Indebtedness has been made or duly provided for in money or moneys worth.
In the event that, notwithstanding the foregoing, any payment by us is received by the trustee in respect of subordinated debt securities or by the holders of any of such subordinated debt securities, upon our dissolution, winding up, liquidation or reorganization before all Senior Indebtedness is paid in full, the payment or distribution must be paid over to the holders of the Senior Indebtedness or on their behalf for application to the payment of all the Senior Indebtedness remaining unpaid until all the Senior Indebtedness has been paid in full, after giving effect to any concurrent payment or distribution to the holders of the Senior Indebtedness. Subject to the payment in full of all Senior Indebtedness upon this distribution by us, the holders of such subordinated debt securities will be subrogated to the rights of the holders of the Senior Indebtedness to the extent of payments made to the holders of the Senior Indebtedness out of the distributive share of such subordinated debt securities.
By reason of this subordination, in the event of a distribution of our assets upon our insolvency, certain of our senior creditors may recover more, ratably, than holders of any subordinated debt securities or the holders of any indenture securities that are not Senior Indebtedness. The indenture provides that these subordination provisions will not apply to money and securities held in trust under the defeasance provisions of the indenture.
156
Senior Indebtedness is defined in the indenture as the principal of (and premium, if any) and unpaid interest on:
| our indebtedness (including indebtedness of others guaranteed by us), whenever created, incurred, assumed or guaranteed, for money borrowed, that we have designated as Senior Indebtedness for purposes of the indenture and in accordance with the terms of the indenture (including any indenture securities designated as Senior Indebtedness); and |
| renewals, extensions, modifications and refinancings of any of this indebtedness. |
If this prospectus is being delivered in connection with the offering of a series of indenture securities denominated as subordinated debt securities, the accompanying prospectus supplement will set forth the approximate amount of our Senior Indebtedness and of our other Indebtedness outstanding as of a recent date.
Certain of our indebtedness, including certain series of indenture securities, may be secured. The prospectus supplement for each series of indenture securities will describe the terms of any security interest for such series and will indicate the approximate amount of our secured indebtedness as of a recent date. Any unsecured indenture securities will effectively rank junior to any secured indebtedness, including any secured indenture securities, that we incur in the future to the extent of the value of the assets securing such future secured indebtedness. The debt securities, whether secured or unsecured, of the Company will rank structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries, financing vehicles or similar facilities.
In the event of our bankruptcy, liquidation, reorganization or other winding up, any of our assets that secure secured debt will be available to pay obligations on unsecured debt securities only after all indebtedness under such secured debt has been repaid in full from such assets. We advise you that there may not be sufficient assets remaining to pay amounts due on any or all unsecured debt securities then outstanding. As a result, the holders of unsecured indenture securities may recover less, ratably, than holders of any of our secured indebtedness.
U.S. Bank National Association serves as the trustee under the indenture.
Debt securities denominated or payable in foreign currencies may entail significant risks. These risks include the possibility of significant fluctuations in the foreign currency markets, the imposition or modification of foreign exchange controls and potential illiquidity in the secondary market. These risks will vary depending upon the currency or currencies involved and will be more fully described in the applicable prospectus supplement.
157
We may offer, from time to time, in one or more offerings or series, up to $250,000,000 of our common stock, preferred stock, debt securities or warrants to purchase common stock, preferred stock or debt securities, in one or more underwritten public offerings, at-the-market offerings, negotiated transactions, block trades, best efforts offerings or a combination of these methods. We may sell the securities through underwriters or dealers, directly to one or more purchasers through agents or through a combination of any such methods of sale. Any underwriter or agent involved in an offer and sale of the securities will be named in the applicable prospectus supplement. A prospectus supplement or supplements will also describe the terms of the offering of the securities, including: the purchase price of the securities and the proceeds we will receive from the sale; any over-allotment options under which underwriters may purchase additional securities from us; any agency fees or underwriting discounts and other items constituting agents or underwriters compensation; the public offering price; any discounts or concessions allowed or re-allowed or paid to dealers; and any securities exchange or market on which the securities may be listed. Only underwriters named in the prospectus supplement will be underwriters of the securities offered by the prospectus supplement.
The distribution of our securities may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, at prevailing market prices at the time of sale, at prices related to such prevailing market prices, or at negotiated prices, provided, however, that the offering price per share of our common stock, less any underwriting commissions and discounts or agency fees paid by us, must equal or exceed the net asset value per share of our common stock.
In connection with the sale of our securities, underwriters or agents may receive compensation from us or from purchasers of our securities, for whom they may act as agents, in the form of discounts, concessions or commissions. Our common stockholders will bear, directly or indirectly, the expenses of any offering of our securities, including debt securities.
Underwriters may sell our securities to or through dealers and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agents. Underwriters, dealers and agents that participate in the distribution of our securities may be deemed to be underwriters under the Securities Act, and any discounts and commissions they receive from us and any profit realized by them on the resale of our securities may be deemed to be underwriting discounts and commissions under the Securities Act. Any such underwriter or agent will be identified and any such compensation received from us will be described in the applicable prospectus supplement.
We may enter into derivative transactions with third parties, or sell securities not covered by this prospectus to third parties in privately negotiated transactions. If the applicable prospectus supplement indicates, in connection with those derivatives, the third parties may sell securities covered by this prospectus and the applicable prospectus supplement, including in short sale transactions. If so, the third party may use securities pledged by us or borrowed from us or others to settle those sales or to close out any related open borrowings of stock, and may use securities received from us in settlement of those derivatives to close out any related open borrowings of stock. The third parties in such sale transactions will be underwriters and, if not identified in this prospectus, will be identified in the applicable prospectus supplement (or a post-effective amendment).
Any underwriter may engage in over-allotment, stabilizing transactions, short-covering transactions and penalty bids in accordance with Regulation M under the Exchange Act. Over-allotment involves sales in excess of the offering size, which create a short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum price. Syndicate-covering or other short-covering transactions involve purchases of the securities, either through exercise of the over-allotment option or in the open market after the distribution is completed, to cover short positions. Penalty bids permit the underwriters to reclaim a selling concession from a dealer when the securities originally sold by the dealer are purchased in a stabilizing or covering transaction to cover short positions. Those activities may cause the price of the securities to be higher than it would otherwise be. If commenced, the underwriters may discontinue any of the activities at any time.
158
Any underwriters that are qualified market makers on the NASDAQ Global Select Market may engage in passive market making transactions in our common stock on the NASDAQ Global Select Market in accordance with Regulation M under the Exchange Act, during the business day prior to the pricing of the offering, before the commencement of offers or sales of our common stock. Passive market makers must comply with applicable volume and price limitations and must be identified as passive market makers. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid for such security; if all independent bids are lowered below the passive market makers bid, however, the passive market makers bid must then be lowered when certain purchase limits are exceeded. Passive market making may stabilize the market price of the securities at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time.
We may sell securities directly or through agents we designate from time to time. We will name any agent involved in an offering and sale of securities and we will describe any commissions we will pay the agent in the prospectus supplement. Unless the prospectus supplement states otherwise, our agent will act on a best-efforts basis for the period of its appointment.
Unless otherwise specified in the applicable prospectus supplement, each class or series of securities will be a new issue with no trading market, other than our common stock, which is traded on the NASDAQ Global Select Market. We may elect to list any other class or series of securities on any exchanges, but we are not obligated to do so. We cannot guarantee the liquidity of the trading markets for any securities.
Under agreements into which we may enter, underwriters, dealers and agents who participate in the distribution of our securities may be entitled to indemnification by us against certain liabilities, including liabilities under the Securities Act. Underwriters, dealers and agents may engage in transactions with, or perform services for, us in the ordinary course of business.
If so indicated in the applicable prospectus supplement, we will authorize underwriters or other persons acting as our agents to solicit offers by certain institutions to purchase our securities from us pursuant to contracts providing for payment and delivery on a future date. Institutions with which such contracts may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions and others, but in all cases such institutions must be approved by us. The obligations of any purchaser under any such contract will be subject to the condition that the purchase of our securities shall not at the time of delivery be prohibited under the laws of the jurisdiction to which such purchaser is subject. The underwriters and such other agents will not have any responsibility in respect of the validity or performance of such contracts. Such contracts will be subject only to those conditions set forth in the prospectus supplement, and the prospectus supplement will set forth the commission payable for solicitation of such contracts.
In order to comply with the securities laws of certain states, if applicable, any securities offered will be sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain states, our securities may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.
The maximum commission or discount to be received by any member of the Financial Industry Regulatory Authority, Inc. will not be greater than 10% for the sale of any securities being registered.
159
Since we generally acquire and dispose of our investments in privately negotiated transactions, we infrequently use brokers in the normal course of our business. Subject to policies established by our Board of Directors, we generally do not execute transactions through any particular broker or dealer, but seek to obtain the best net results for us, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, operational facilities of the firm and the firms risk and skill in positioning blocks of securities. While we generally seek reasonably competitive trade execution costs, we do not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements, we may select a broker based partly upon brokerage or research services provided to us. In return for such services, we may pay a higher commission than other brokers would charge if we determine in good faith that such commission is reasonable in relation to the services provided, and our management and employees are authorized to pay such commission under these circumstances.
Our investment securities are held under a custody agreement with U.S. Bank National Association. The address of the custodian is U.S. Bank National Association, Corporate Trust Services, One Federal Street, 3rd Floor, Boston, MA 02110. The transfer agent and registrar for our common stock, American Stock Transfer & Trust Company, acts as our transfer agent, dividend paying and reinvestment agent for our common stock. The principal business address of the transfer agent is 59 Maiden Lane, New York, New York 10038. U.S. Bank National Association, our trustee under an indenture and the first supplemental indenture thereto relating to the Notes, is the paying agent, registrar and transfer agent relating to the Notes. The principal business address of our trustee is One Federal Street, 10th Floor, Boston, MA 02110.
Certain legal matters regarding any securities offered by this prospectus and any accompanying prospectus supplement will be passed upon for us by Sutherland Asbill & Brennan LLP, Washington, D.C.
The consolidated financial statements of KCAP Financial Inc. at December 31, 2014, and for the year then ended, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent registered public accounting firm, 5 Times Square New York NY 10036, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
On March 21, 2014, our Board of Directors elected to not renew their engagement of Grant Thornton LLP as the Companys independent registered public accounting firm. The Boards decision was recommended by the Audit Committee of the Board.
[ ] reports on the Companys financial statements for the fiscal years ended December 31, 2013, 2012 and 2011, contained no adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the fiscal years ended December 31, 2013, 2012 and 2011 through March 21, 2014, there were no (a) disagreements with Grant Thornton LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Grant Thornton LLP, would have caused it to make reference to the subject matter of such disagreements in its reports on the financial statements for such years or (b) reportable events, as described under Item 304(a)(1)(v) of Regulation S-K.
On March 26, 2014, our Board of Directors engaged, upon the recommendation of the Audit Committee of the Board, Ernst & Young LLP (EY) to serve as the Companys new independent registered public accounting firm to audit the Companys consolidated financial statements for the fiscal year ending December 31, 2014, subject to ratification by our stockholders.
160
As a public company, we file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Exchange Act. You may inspect and copy these reports, proxy statements and other information, as well as the registration statement of which this prospectus forms a part and the related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SECs Public Reference Section, Washington, D.C. 20549-0102. In addition, the SEC maintains an Internet website that contains reports, proxy and information statements and other information filed electronically by us with the SEC at http://www.sec.gov.
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We are committed to protecting your privacy. This privacy notice explains the privacy policies of KCAP Financial. This notice supersedes any other privacy notice you may have received from KCAP Financial.
We will safeguard, according to strict standards of security and confidentiality, all information we receive about you. The only information we collect from you is your name, address, and number of shares you hold. This information is used only so that we can send you annual reports and other information about us, and send you proxy statements or other information required by law.
We do not share this information with any non-affiliated third party except as described below.
| The People and Companies that Make Up KCAP Financial. It is our policy that only our authorized employees who need to know your personal information will have access to it. Our personnel who violate our privacy policy are subject to disciplinary action. |
| Service Providers. We may disclose your personal information to companies that provide services on our behalf, such as record keeping, processing your trades, and mailing you information. These companies are required to protect your information and use it solely for the purpose for which they received it. |
| Courts and Government Officials. If required by law, we may disclose your personal information in accordance with a court order or at the request of government regulators. Only that information required by law, subpoena, or court order will be disclosed. |
162
F-1
F-2
As of June 30, 2015 |
As of December 31, 2014 |
|||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Investments at fair value: |
||||||||
Money market accounts (cost: 2015 $16,457,816; 2014 $1,602,741) | $ | 16,457,816 | $ | 1,602,741 | ||||
Debt securities (cost: 2015 $301,909,681; 2014 $322,884,934) | 297,915,304 | 320,143,170 | ||||||
CLO Fund securities managed by affiliates (cost: 2015 $92,028,527; 2014 $85,355,897) | 75,182,525 | 74,139,696 | ||||||
CLO Fund securities managed by non-affiliates (cost: 2015 $5,572,522; 2014 $5,533,293) | 3,265,930 | 3,375,206 | ||||||
Equity securities (cost: 2015 $8,514,487; 2014 $8,828,812) | 7,542,085 | 8,119,681 | ||||||
Asset Manager Affiliates (cost: 2015 $57,942,090; 2014 $60,292,677) | 73,737,000 | 72,326,000 | ||||||
Total Investments at Fair Value (cost: 2015 $482,425,123; 2014 $484,498,354) | 474,100,660 | 479,706,494 | ||||||
Cash | 2,807,432 | 1,220,798 | ||||||
Restricted cash | 8,641,346 | 19,325,550 | ||||||
Interest receivable | 1,917,083 | 1,748,821 | ||||||
Due from affiliates | 2,412,580 | 3,027,409 | ||||||
Other assets | 5,201,056 | 5,417,725 | ||||||
Total Assets | $ | 495,080,157 | $ | 510,446,797 | ||||
LIABILITIES |
||||||||
Convertible Notes | $ | 38,647,000 | $ | 38,647,000 | ||||
7.375% Notes Due 2019 | 41,400,000 | 41,400,000 | ||||||
Notes issued by KCAP Senior Funding I, LLC (net of discount: 2015 $3,212,019; 2014 $3,512,407) | 144,137,981 | 143,837,593 | ||||||
Payable for open trades | 7,741,875 | 18,293,725 | ||||||
Accounts payable and accrued expenses | 1,428,803 | 2,166,400 | ||||||
Accrued interest payable | 1,712,049 | 1,566,255 | ||||||
Payable to officers and directors | | 107,750 | ||||||
Due to affiliates | 2,216,091 | 31,000 | ||||||
Shareholder distribution payable | | 9,080,373 | ||||||
Total Liabilities | 237,283,799 | 255,130,096 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 8) |
||||||||
STOCKHOLDERS EQUITY |
||||||||
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 37,032,825 and 36,775,127 common shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively | 370,328 | 367,751 | ||||||
Capital in excess of par value | 363,847,548 | 362,411,830 | ||||||
Excess distribution of net investment income | (20,886,123 | ) | (25,579,865 | ) | ||||
Accumulated net realized losses | (75,413,728 | ) | (75,512,134 | ) | ||||
Net unrealized depreciation on investments | (9,903,491 | ) | (6,370,881 | ) | ||||
Treasury stock at cost | (218,176 | ) | | |||||
Total Stockholders Equity | 257,796,358 | 255,316,701 | ||||||
Total Liabilities and Stockholders Equity | $ | 495,080,157 | $ | 510,446,797 | ||||
NET ASSET VALUE PER COMMON SHARE | $ | 6.96 | $ | 6.94 |
See accompanying notes to consolidated financial statements.
F-3
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Investment Income: |
||||||||||||||||
Interest from investments in debt securities | $ | 5,879,930 | $ | 5,173,514 | $ | 12,077,758 | $ | 10,420,750 | ||||||||
Interest from cash and time deposits | 3,657 | 724 | 4,358 | 1,510 | ||||||||||||
Investment income on CLO Fund Securities managed by affiliates | 3,599,699 | 2,816,749 | 7,939,842 | 5,639,127 | ||||||||||||
Investment income on CLO Fund Securities managed by non-affiliates | 396,398 | 279,261 | 624,077 | 598,674 | ||||||||||||
Dividends from Asset Manager Affiliates | 1,235,439 | 1,378,466 | 2,649,414 | 2,756,932 | ||||||||||||
Capital structuring service fees | 56,263 | 125,116 | 218,066 | 352,199 | ||||||||||||
Total investment income | 11,171,386 | 9,773,830 | 23,513,515 | 19,769,192 | ||||||||||||
Expenses: |
||||||||||||||||
Interest and amortization of debt issuance costs | 2,990,782 | 2,893,806 | 5,957,969 | 5,883,972 | ||||||||||||
Compensation | 1,057,452 | 1,227,651 | 2,130,273 | 2,490,088 | ||||||||||||
Professional fees | 705,132 | 545,913 | 1,876,574 | 1,217,123 | ||||||||||||
Insurance | 107,094 | 111,507 | 219,533 | 247,467 | ||||||||||||
Administrative and other | 478,674 | 399,315 | 989,966 | 867,597 | ||||||||||||
Total expenses | 5,339,134 | 5,178,192 | 11,174,315 | 10,706,247 | ||||||||||||
Net Investment Income | 5,832,252 | 4,595,638 | 12,339,200 | 9,062,945 | ||||||||||||
Realized And Unrealized Gains (Losses) On Investments: |
||||||||||||||||
Net realized gains (losses) from investment transactions | 26,050 | (64,797 | ) | 98,406 | 244,785 | |||||||||||
Net change in unrealized (depreciation) appreciation on: |
||||||||||||||||
Debt securities | (2,502,825 | ) | 1,102,632 | (1,252,614 | ) | 499,319 | ||||||||||
Equity securities | (207,148 | ) | 546,686 | (263,271 | ) | 219,023 | ||||||||||
CLO Fund securities managed by affiliates | (4,970,933 | ) | 2,650,352 | (5,629,804 | ) | 3,584,183 | ||||||||||
CLO Fund securities managed by non-affiliates | (222,252 | ) | 573,617 | (148,508 | ) | 232,911 | ||||||||||
Asset Manager Affiliates investments | 3,277,561 | 2,848,534 | 3,761,586 | 1,851,090 | ||||||||||||
Total net change in unrealized (depreciation) appreciation | (4,625,597 | ) | 7,721,821 | (3,532,611 | ) | 6,386,526 | ||||||||||
Net realized and unrealized (depreciation) appreciation on investments | (4,599,547 | ) | 7,657,024 | (3,434,205 | ) | 6,631,311 | ||||||||||
Net Increase In Stockholders Equity Resulting From Operations | $ | 1,232,705 | $ | 12,252,662 | $ | 8,904,995 | $ | 15,694,256 | ||||||||
Net Increase In Stockholders Equity Resulting from Operations per Common Share: |
||||||||||||||||
Basic: | $ | 0.03 | $ | 0.37 | $ | 0.24 | $ | 0.47 | ||||||||
Diluted: | $ | 0.03 | $ | 0.34 | $ | 0.24 | $ | 0.45 | ||||||||
Net Investment Income Per Common Share: |
||||||||||||||||
Basic: | $ | 0.16 | $ | 0.14 | $ | 0.33 | $ | 0.27 | ||||||||
Diluted: | $ | 0.16 | $ | 0.14 | $ | 0.33 | $ | 0.27 | ||||||||
Weighted Average Shares of Common Stock Outstanding Basic | 36,886,129 | 33,405,189 | 36,860,341 | 33,371,764 | ||||||||||||
Weighted Average Shares of Common Stock Outstanding Diluted | 36,891,931 | 39,723,264 | 36,867,887 | 39,689,884 |
See accompanying notes to consolidated financial statements.
F-4
Six Months Ended June 30, |
||||||||
2015 | 2014 | |||||||
Operations: |
||||||||
Net investment income | $ | 12,339,200 | $ | 9,062,945 | ||||
Net realized gains from investment transactions | 98,406 | 244,785 | ||||||
Net change in unrealized (depreciation) appreciation on investments | (3,532,611 | ) | 6,386,526 | |||||
Net increase in net assets resulting from operations | 8,904,995 | 15,694,256 | ||||||
Stockholder distributions: |
||||||||
Distribution of ordinary income | (7,645,458 | ) | (8,264,081 | ) | ||||
Return of capital | | | ||||||
Net decrease in net assets resulting from stockholder distributions | (7,645,458 | ) | (8,264,081 | ) | ||||
Capital transactions: |
||||||||
(Repurchase) issuance of common stock for: |
||||||||
Treasury stock | (218,536 | ) | | |||||
Dividend reinvestment plan | 708,417 | 300,813 | ||||||
Stock based compensation | 730,239 | 413,375 | ||||||
Net increase in net assets resulting from capital transactions | 1,220,120 | 714,188 | ||||||
Net assets at beginning of period | 255,316,701 | 250,369,692 | ||||||
Net assets at end of period (including undistributed net investment income of $0 in 2015 and $0 in 2014) | $ | 257,796,358 | $ | 258,514,055 | ||||
Net asset value per common share | $ | 6.96 | $ | 7.67 | ||||
Common shares outstanding at end of period | 37,032,825 | 33,725,223 |
See accompanying notes to consolidated financial statements.
F-5
Six Months Ended June 30, |
||||||||
2015 | 2014 | |||||||
OPERATING ACTIVITIES: |
||||||||
Net increase in stockholders equity resulting from operations | $ | 8,904,995 | $ | 15,694,256 | ||||
Adjustments to reconcile net increase in stockholders equity resulting from operations to net cash provided by in operating activities: |
||||||||
Net realized gains on investment transactions | (98,406 | ) | (244,785 | ) | ||||
Net change in unrealized depreciation (appreciation) on investments | 3,532,611 | (6,386,526 | ) | |||||
Purchases of investments | (62,257,431 | ) | (88,665,326 | ) | ||||
Proceeds from sales and redemptions of investments | 60,112,789 | 94,762,590 | ||||||
Net accretion of discount on investments | 5,032,797 | 3,602,374 | ||||||
Amortization of original issue discount on indebtedness | 300,388 | 218,488 | ||||||
Amortization of debt issuance costs | 594,525 | 555,445 | ||||||
Payment-in-kind interest income | (716,524 | ) | 55,777 | |||||
Stock-based compensation expense | 730,239 | 413,375 | ||||||
Changes in operating assets and liabilities: |
||||||||
Increase in receivable for open trades | | (2,943,835 | ) | |||||
Decrease in payable for open trades | (10,551,850 | ) | (40,000 | ) | ||||
Increase in interest and dividends receivable | (168,262 | ) | (7,518 | ) | ||||
Increase in other assets | (377,858 | ) | (457,452 | ) | ||||
Decrease (increase) in due from affiliates | 614,830 | (93,668 | ) | |||||
Increase in due to affiliates | 2,185,091 | | ||||||
(Decrease) in accounts payable and accrued expenses | (699,553 | ) | (590,959 | ) | ||||
Net cash provided by operating activities | 7,138,381 | 15,872,236 | ||||||
FINANCING ACTIVITIES: |
||||||||
Issuance of restricted shares | 1,820 | | ||||||
Distributions to stockholders | (16,019,236 | ) | (16,296,300 | ) | ||||
Purchase of treasury stock | (218,535 | ) | | |||||
Decrease (increase) in restricted cash | 10,684,204 | (699,022 | ) | |||||
Net cash used in financing activities | (5,551,747 | ) | (16,995,322 | ) | ||||
CHANGE IN CASH | 1,586,634 | (1,123,086 | ) | |||||
CASH, BEGINNING OF PERIOD | 1,220,798 | 3,433,675 | ||||||
CASH, END OF PERIOD | $ | 2,807,432 | $ | 2,310,589 | ||||
Supplemental Information: |
||||||||
Interest paid during the period | $ | 4,917,229 | $ | 4,985,509 | ||||
Dividends paid during the period under the dividend reinvestment plan | $ | 708,417 | $ | 300,813 |
See accompanying notes to consolidated financial statements.
F-6
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost | Fair Value(2) | ||||||||||||
4L Technologies Inc. (fka Clover Holdings, Inc.)(9), (11) Consumer goods: Non-durable |
Senior Secured Loan Term Loan 5.5% Cash, 1.0% Libor Floor, Due 5/20 |
$ | 2,779,000 | $ | 2,756,481 | $ | 2,695,908 | |||||||||
Advanced Lighting Technologies, Inc.(9), (11) Consumer goods: Durable |
First Lien Bond 10.5% 06/2019 00753CAE2 10.5% Cash, Due 6/19 |
3,000,000 | 2,972,087 | 2,547,600 | ||||||||||||
Advantage Sales & Marketing Inc.(9) Services: Business |
Junior Secured Loan Term Loan (Second Lien) 7.5% Cash, 1.0% Libor Floor, Due 7/22 |
1,000,000 | 1,002,228 | 1,007,915 | ||||||||||||
Alaska Communications Systems Holdings, Inc.(9), (11) Telecommunications |
Senior Secured Loan Term Loan 6.3% Cash, 1.5% Libor Floor, Due 10/16 |
1,294,902 | 1,292,011 | 1,295,032 | ||||||||||||
Alere Inc. (fka IM US Holdings, LLC)(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan B Term Loan 4.3% Cash, 1.0% Libor Floor, Due 6/22 |
1,250,000 | 1,246,873 | 1,252,625 | ||||||||||||
AmSurg Corp.(11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan 3.8% Cash, 0.8% Libor Floor, Due 7/21 |
2,977,444 | 2,977,444 | 2,981,165 | ||||||||||||
Anaren, Inc.(9), (11) Aerospace and Defense |
Senior Secured Loan Term Loan (First Lien) 5.5% Cash, 1.0% Libor Floor, Due 2/21 |
1,970,000 | 1,954,074 | 1,969,803 | ||||||||||||
Asurion, LLC (fka Asurion Corporation)(9), (11) Banking, Finance, Insurance & Real Estate |
Senior Secured Loan Incremental Tranche B-1 Term Loan 5.0% Cash, 1.3% Libor Floor, Due 5/19 |
1,902,705 | 1,914,090 | 1,909,707 | ||||||||||||
AZ Chem US Inc.(9), (11) Chemicals, Plastics and Rubber |
Senior Secured Loan Initial Term Loan (First Lien) 4.5% Cash, 1.0% Libor Floor, Due 6/21 |
451,370 | 449,446 | 451,934 | ||||||||||||
Bankruptcy Management Solutions, Inc.(9) Services: Business |
Senior Secured Loan Term B Loan 7.0% Cash, 1.0% Libor Floor, Due 6/18 |
691,364 | 691,364 | 646,425 | ||||||||||||
BarBri, Inc. (Gemini Holdings, Inc.)(9), (11) Services: Consumer |
Senior Secured Loan Term Loan 4.5% Cash, 1.0% Libor Floor, Due 7/19 |
2,731,875 | 2,722,603 | 2,723,679 | ||||||||||||
BBB Industries US Holdings, Inc.(9), (11) Automotive |
Senior Secured Loan Initial Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 11/21 |
2,992,500 | 2,938,204 | 2,928,461 | ||||||||||||
Bellisio Foods, Inc.(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan U.S. Term B Loans 5.3% Cash, 1.0% Libor Floor, Due 8/19 |
1,947,351 | 1,940,399 | 1,913,467 | ||||||||||||
Carolina Beverage Group LLC(9) Beverage, Food and Tobacco |
Senior Secured Bond 10.625% 08/2018 143818AA0 144A 10.6% Cash, Due 8/18 |
1,500,000 | 1,512,620 | 1,481,700 | ||||||||||||
CCS Intermediate Holdings, LLC(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan (First Lien) 5.0% Cash, 1.0% Libor Floor, Due 7/21 |
2,977,500 | 2,964,498 | 2,888,175 | ||||||||||||
Cengage Learning Acquisitions, Inc. (fka TL Acquisitions, Inc.)(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Term Loan 7.0% Cash, 1.0% Libor Floor, Due 3/20 |
2,979,950 | 2,973,892 | 2,988,338 | ||||||||||||
Checkout Holding Corp. (fka Catalina Marketing)(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Term B Loan (First Lien) 4.5% Cash, 1.0% Libor Floor, Due 4/21 |
990,000 | 985,908 | 878,625 | ||||||||||||
Consolidated Communications, Inc.(11) Telecommunications |
Senior Secured Loan Initial Term Loan 4.3% Cash, 1.0% Libor Floor, Due 12/20 |
2,977,330 | 2,987,499 | 2,984,773 | ||||||||||||
CRGT Inc.(9), (11) High Tech Industries |
Senior Secured Loan Term Loan 7.5% Cash, 1.0% Libor Floor, Due 12/20 |
2,962,500 | 2,908,022 | 2,947,095 | ||||||||||||
Crowley Holdings Preferred, LLC(9) Transportation: Cargo |
Preferred Stock 12.000% 12/2049 Series A Income Preferred Securities 12.0% Cash, 2.0% PIK, Due 12/49 |
10,308,332 | 10,308,332 | 10,411,415 |
See accompanying notes to consolidated financial statements.
F-7
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost | Fair Value(2) | ||||||||||||
Crowne Group, LLC(9), (11) Automotive |
Senior Secured Loan Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 9/20 |
$ | 3,970,000 | $ | 3,917,727 | $ | 3,863,207 | |||||||||
CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)(9) Beverage, Food and Tobacco |
Junior Secured Loan Term Loan (Second Lien) 8.8% Cash, 1.0% Libor Floor, Due 7/21 |
3,000,000 | 3,015,110 | 2,857,500 | ||||||||||||
CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Term Loan (First Lien) 5.0% Cash, 1.0% Libor Floor, Due 7/20 |
2,610,113 | 2,609,282 | 2,610,530 | ||||||||||||
CT Technologies Intermediate Holdings, Inc. (Smart Holdings Corp.) (aka HealthPort)(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan Retired 07/01/2015 6.0% Cash, 1.0% Libor Floor, Due 12/21 |
2,985,000 | 2,957,539 | 2,999,925 | ||||||||||||
DBI Holding LLC(9) Services: Business |
Senior Unsecured Bond 13% 09/2019 PIK Note 0.0% Cash, 13.0% PIK, Due 9/19 |
3,733,857 | 3,524,810 | 3,618,855 | ||||||||||||
DBI Holding LLC(9) Services: Business |
Senior Subordinated Bond 13% 09/2019 Senior Subordinated Note 12.0% Cash, 1.0% PIK, Due 9/19 |
4,391,390 | 4,375,084 | 4,278,531 | ||||||||||||
DJO Finance LLC(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan 4.3% Cash, 1.0% Libor Floor, Due 6/20 |
2,058,377 | 2,058,377 | 2,058,377 | ||||||||||||
Drew Marine Group Inc.(9) Transportation: Cargo |
Junior Secured Loan Term Loan (Second Lien) 8.0% Cash, 1.0% Libor Floor, Due 5/21 |
2,500,000 | 2,495,069 | 2,522,500 | ||||||||||||
ELO Touch Solutions, Inc.(9), (11) High Tech Industries |
Senior Secured Loan Term Loan (First Lien) 8.0% Cash, 1.5% Libor Floor, Due 6/18 |
1,586,611 | 1,544,041 | 1,580,424 | ||||||||||||
EWT Holdings III Corp. (fka WTG Holdings III Corp.)(9) Environmental Industries |
Junior Secured Loan Term Loan (Second Lien) 8.5% Cash, 1.0% Libor Floor, Due 1/22 |
4,000,000 | 3,983,630 | 4,035,600 | ||||||||||||
Fender Musical Instruments Corporation(9), (11) Consumer goods: Durable |
Senior Secured Loan Initial Loan 5.8% Cash, 1.3% Libor Floor, Due 4/19 |
1,772,515 | 1,781,753 | 1,773,047 | ||||||||||||
FHC Health Systems, Inc.(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan 5.0% Cash, 1.0% Libor Floor, Due 12/21 |
3,897,375 | 3,860,941 | 3,869,119 | ||||||||||||
First American Payment Systems, L.P.(9) Banking, Finance, Insurance & Real Estate |
Junior Secured Loan Term Loan (Second Lien) 10.8% Cash, 1.3% Libor Floor, Due 4/19 |
2,796,448 | 2,763,831 | 2,822,455 | ||||||||||||
First Data Corporation(9), (11) Banking, Finance, Insurance & Real Estate |
Senior Secured Loan 2018 New Dollar Term Loan 3.7% Cash, Due 3/18 |
500,000 | 503,055 | 498,150 | ||||||||||||
Getty Images, Inc.(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Initial Term Loan 4.8% Cash, 1.3% Libor Floor, Due 10/19 |
2,174,016 | 2,178,653 | 1,616,652 | ||||||||||||
GK Holdings, Inc. (aka Global Knowledge)(9) Services: Business |
Junior Secured Loan Initial Term Loan (Second Lien) 10.5% Cash, 1.0% Libor Floor, Due 1/22 |
1,500,000 | 1,471,712 | 1,471,500 | ||||||||||||
GK Holdings, Inc. (aka Global Knowledge)(9), (11) Services: Business |
Senior Secured Loan Initial Term Loan (First Lien) 6.5% Cash, 1.0% Libor Floor, Due 1/21 |
2,487,500 | 2,464,283 | 2,511,131 | ||||||||||||
Global Tel*Link Corporation(9) Telecommunications |
Junior Secured Loan Term Loan (Second Lien) 9.0% Cash, 1.3% Libor Floor, Due 11/20 |
4,000,000 | 3,941,068 | 3,820,800 | ||||||||||||
Gold Standard Baking, Inc.(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Term Loan 5.5% Cash, 1.0% Libor Floor, Due 4/21 |
2,500,000 | 2,487,742 | 2,487,500 | ||||||||||||
Grande Communications Networks LLC(9), (11) Telecommunications |
Senior Secured Loan Initial Term Loan 4.5% Cash, 1.0% Libor Floor, Due 5/20 |
3,920,066 | 3,924,616 | 3,917,322 | ||||||||||||
Grifols Worldwide Operations Limited(11) Healthcare & Pharmaceuticals |
Senior Secured Loan U.S. Tranche B Term Loan 3.2% Cash, Due 2/21 |
2,977,387 | 2,957,053 | 2,979,754 | ||||||||||||
Grupo HIMA San Pablo, Inc.(9) Healthcare & Pharmaceuticals |
Senior Secured Loan Term B Loan (First Lien) 8.5% Cash, 1.5% Libor Floor, Due 1/18 |
2,932,500 | 2,902,131 | 2,932,500 | ||||||||||||
Grupo HIMA San Pablo, Inc.(9) Healthcare & Pharmaceuticals |
Junior Secured Loan Term Loan (Second Lien) 13.8% Cash, Due 7/18 |
7,000,000 | 6,909,329 | 7,105,000 | ||||||||||||
Gymboree Corporation., The(9), (11) Retail |
Senior Secured Loan Term Loan 5.0% Cash, 1.5% Libor Floor, Due 2/18 |
1,421,105 | 1,398,904 | 1,019,643 |
See accompanying notes to consolidated financial statements.
F-8
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost | Fair Value(2) | ||||||||||||
Hargray Communications Group, Inc. (HCP Acquisition LLC)(9), (11) Media: Broadcasting & Subscription |
Senior Secured Loan Initial Term Loan 5.3% Cash, 1.0% Libor Floor, Due 6/19 |
$ | 2,930,662 | $ | 2,911,080 | $ | 2,934,472 | |||||||||
Harland Clarke Holdings Corp. (fka Clarke American Corp.)(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Tranche B-3 Term Loan 7.0% Cash, 1.5% Libor Floor, Due 5/18 |
3,325,000 | 3,303,059 | 3,342,922 | ||||||||||||
Harland Clarke Holdings Corp. (fka Clarke American Corp.)(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Tranche B-4 Term Loan 6.0% Cash, 1.0% Libor Floor, Due 8/19 |
1,443,750 | 1,438,365 | 1,449,388 | ||||||||||||
Hoffmaster Group, Inc.(9) Forest Products & Paper |
Junior Secured Loan Initial Term Loan (Second Lien) 10.0% Cash, 1.0% Libor Floor, Due 5/21 |
2,000,000 | 1,974,855 | 1,970,000 | ||||||||||||
Hoffmaster Group, Inc.(9), (11) Forest Products & Paper |
Senior Secured Loan Initial Term Loan (First Lien) 5.3% Cash, 1.0% Libor Floor, Due 5/20 |
3,960,000 | 3,927,790 | 3,969,900 | ||||||||||||
Hunter Defense Technologies, Inc.(9), (11) Aerospace and Defense |
Senior Secured Loan Term Loan (First Lien) 6.5% Cash, 1.0% Libor Floor, Due 8/19 |
2,887,500 | 2,863,555 | 2,915,509 | ||||||||||||
Integra Telecom Holdings, Inc.(9), (11) Telecommunications |
Senior Secured Loan Term B-1 Loan 5.3% Cash, 1.0% Libor Floor, Due 8/20 |
2,977,310 | 2,966,424 | 2,962,051 | ||||||||||||
International Architectural Products, Inc.(7), (9) Metals & Mining |
Senior Secured Loan Term Loan 0.0% Cash, 3.3% PIK, 2.5% Libor Floor, Due 5/15 |
247,636 | 228,563 | 1,000 | ||||||||||||
Kellermeyer Bergensons Services, LLC(9) Services: Business |
Senior Secured Loan Initial Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 10/21 |
1,990,000 | 1,971,943 | 1,981,841 | ||||||||||||
Key Safety Systems, Inc.(9), (11) Automotive |
Senior Secured Loan Initial Term Loan 4.8% Cash, 1.0% Libor Floor, Due 8/21 |
1,488,750 | 1,482,197 | 1,497,124 | ||||||||||||
Kinetic Concepts, Inc.(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Dollar Term E-1 Loan 4.5% Cash, 1.0% Libor Floor, Due 5/18 |
2,977,330 | 2,970,965 | 2,993,050 | ||||||||||||
Landslide Holdings, Inc. (Crimson Acquisition Corp.)(9), (11) High Tech Industries |
Senior Secured Loan New Term Loan (First Lien) 5.0% Cash, 1.0% Libor Floor, Due 2/20 |
3,434,854 | 3,442,469 | 3,434,854 | ||||||||||||
MB Aerospace ACP Holdings III Corp.(9), (11) Aerospace and Defense |
Senior Secured Loan Dollar Term Loan 5.0% Cash, 1.0% Libor Floor, Due 5/19 |
3,920,000 | 3,894,370 | 3,920,000 | ||||||||||||
Media General, Inc.(11) Media: Broadcasting & Subscription |
Senior Secured Loan Term B Loan 4.0% Cash, 1.0% Libor Floor, Due 7/20 |
2,761,905 | 2,765,071 | 2,765,357 | ||||||||||||
Medical Specialties Distributors, LLC(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Term Loan 6.5% Cash, 1.0% Libor Floor, Due 12/19 |
3,940,000 | 3,910,865 | 3,813,132 | ||||||||||||
Millennium Health, LLC (fka Millennium Laboratories, LLC)(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Tranche B Term Loan 5.3% Cash, 1.0% Libor Floor, Due 4/21 |
2,977,444 | 2,977,444 | 1,429,173 | ||||||||||||
Nellson Nutraceutical, LLC(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Term A-1 Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 12/21 |
2,386,554 | 2,366,863 | 2,387,270 | ||||||||||||
Nellson Nutraceutical, LLC(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Term A-2 Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 12/21 |
2,103,446 | 2,085,330 | 2,104,077 | ||||||||||||
Nielsen & Bainbrige, LLC(9) Consumer goods: Durable |
Senior Secured Loan Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 8/20 |
995,000 | 986,369 | 985,050 | ||||||||||||
Nielsen & Bainbrige, LLC(9) Consumer goods: Durable |
Junior Secured Loan Term Loan (Second Lien) 10.3% Cash, 1.0% Libor Floor, Due 8/21 |
2,091,954 | 2,063,548 | 2,050,115 | ||||||||||||
Nielsen & Bainbrige, LLC(9), (11) Consumer goods: Durable |
Senior Secured Loan Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 8/20 |
3,805,000 | 3,771,078 | 3,766,950 | ||||||||||||
NM Z Parent Inc. (aka Zep, Inc.)(9), (11) Chemicals, Plastics and Rubber |
Senior Secured Loan Initial Term Loan 5.8% Cash, 1.0% Libor Floor, Due 6/22 |
3,500,000 | 3,512,502 | 3,512,600 | ||||||||||||
Novetta, LLC(9) Services: Business |
Senior Secured Loan Initial Term Loan 6.0% Cash, 1.0% Libor Floor, Due 10/20 |
2,729,375 | 2,704,795 | 2,690,891 |
See accompanying notes to consolidated financial statements.
F-9
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost | Fair Value(2) | ||||||||||||
Novitex Acquisition, LLC (fka ARSloane Acquisition, LLC)(9), (11) Services: Business |
Senior Secured Loan Tranche B-2 Term Loan (First Lien) 7.5% Cash, 1.3% Libor Floor, Due 7/20 |
$ | 985,056 | $ | 976,819 | $ | 937,774 | |||||||||
Onex Carestream Finance LP(9) Healthcare & Pharmaceuticals |
Junior Secured Loan Term Loan (Second Lien) 9.5% Cash, 1.0% Libor Floor, Due 12/19 |
1,932,311 | 1,932,311 | 1,884,969 | ||||||||||||
Onex Carestream Finance LP(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Term Loan (First Lien 2013) 5.0% Cash, 1.0% Libor Floor, Due 6/19 |
1,909,238 | 1,914,986 | 1,910,288 | ||||||||||||
Orbitz Worldwide, Inc.(11) Hotel, Gaming & Leisure |
Senior Secured Loan Tranche C Term Loan 4.5% Cash, 1.0% Libor Floor, Due 4/21 |
2,819,576 | 2,819,576 | 2,824,862 | ||||||||||||
Otter Products, LLC (OtterBox Holdings, Inc.)(9), (11) Consumer goods: Durable |
Senior Secured Loan Term B Loan 5.8% Cash, 1.0% Libor Floor, Due 6/20 |
2,754,168 | 2,734,080 | 2,676,776 | ||||||||||||
Ozburn-Hessey Holding Company LLC(9), (11) Transportation: Cargo |
Senior Secured Loan Term Loan 6.8% Cash, 1.3% Libor Floor, Due 5/19 |
3,494,596 | 3,487,824 | 3,494,247 | ||||||||||||
PGX Holdings, Inc.(9), (11) Services: Consumer |
Senior Secured Loan Initial Term Loan (First Lien) 6.3% Cash, 1.0% Libor Floor, Due 9/20 |
3,853,571 | 3,819,747 | 3,853,571 | ||||||||||||
Playpower, Inc.(9), (11) Construction & Building |
Senior Secured Loan Initial Term Loan (First Lien) 4.8% Cash, 1.0% Libor Floor, Due 6/21 |
2,000,000 | 1,985,014 | 1,985,000 | ||||||||||||
Post Holdings, Inc.(11) Beverage, Food and Tobacco |
Senior Secured Loan Series A Incremental Term Loan 3.8% Cash, 0.8% Libor Floor, Due 6/21 |
2,977,452 | 2,970,701 | 2,966,435 | ||||||||||||
PQ Corporation(9), (11) Chemicals, Plastics and Rubber |
Senior Secured Loan 2014 Term Loan 4.0% Cash, 1.0% Libor Floor, Due 8/17 |
2,977,099 | 2,977,099 | 2,973,378 | ||||||||||||
PSC Industrial Holdings Corp.(9), (11) Environmental Industries |
Senior Secured Loan Term Loan (First Lien) 5.8% Cash, 1.0% Libor Floor, Due 12/20 |
1,990,000 | 1,971,873 | 1,983,373 | ||||||||||||
Quad-C JH Holdings Inc. (aka Joerns Healthcare)(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Term Loan A 6.0% Cash, 1.0% Libor Floor, Due 5/20 |
3,960,000 | 3,935,698 | 3,960,000 | ||||||||||||
Restorix Health, Inc.(9) Healthcare & Pharmaceuticals |
Senior Unsecured Loan Delayed Draw 10.0% Cash, 1.5% PIK, Due 6/18 |
2,018,787 | 2,018,787 | 2,018,787 | ||||||||||||
Restorix Health, Inc.(9) Healthcare & Pharmaceuticals |
Senior Unsecured Loan Subordinated Term Loan 10.0% Cash, 1.5% PIK, Due 6/18 |
8,124,738 | 8,124,738 | 8,124,738 | ||||||||||||
Reynolds Group Holdings Inc.(9), (11) Containers, Packaging and Glass |
Senior Secured Loan Incremental U.S. Term Loan 4.5% Cash, 1.0% Libor Floor, Due 12/18 |
2,916,649 | 2,916,649 | 2,930,328 | ||||||||||||
Roscoe Medical, Inc.(9) Healthcare & Pharmaceuticals |
Junior Secured Loan Term Loan (Second Lien) 11.3% Cash, Due 9/19 |
6,700,000 | 6,648,400 | 6,478,900 | ||||||||||||
Rovi Solutions Corporation/Rovi Guides, Inc.(11) High Tech Industries |
Senior Secured Loan Term B Loan 3.8% Cash, 0.8% Libor Floor, Due 7/21 |
2,977,444 | 2,942,563 | 2,962,095 | ||||||||||||
Sandy Creek Energy Associates, L.P.(9), (11) Utilities: Electric |
Senior Secured Loan Term Loan 5.0% Cash, 1.0% Libor Floor, Due 11/20 |
2,805,007 | 2,794,225 | 2,805,512 | ||||||||||||
SGF Produce Holding Corp. (Frozsun, Inc.)(9) Beverage, Food and Tobacco |
Senior Secured Loan Term Loan 5.6% Cash, 1.0% Libor Floor, Due 3/19 |
2,180,291 | 2,166,554 | 2,180,291 | ||||||||||||
SGF Produce Holding Corp. (Frozsun, Inc.)(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Term Loan 5.6% Cash, 1.0% Libor Floor, Due 3/19 |
4,919,511 | 4,920,428 | 4,919,511 | ||||||||||||
Stafford Logistics, Inc. (dba Custom Ecology, Inc.)(9), (11) Environmental Industries |
Senior Secured Loan Term Loan 6.8% Cash, 1.3% Libor Floor, Due 6/19 |
2,861,935 | 2,842,873 | 2,854,781 | ||||||||||||
Sun Products Corporation, The (fka Huish Detergents Inc.)(9), (11) Consumer goods: Non-durable |
Senior Secured Loan Tranche B Term Loan 5.5% Cash, 1.3% Libor Floor, Due 3/20 |
3,882,654 | 3,861,506 | 3,792,887 | ||||||||||||
Tank Partners Holdings, LLC(9) Energy: Oil & Gas |
Senior Secured Loan Loan 9.8% Cash, 3.5% PIK, 3.0% Libor Floor, Due 8/19 |
10,570,454 | 10,416,387 | 9,788,240 | ||||||||||||
TPF II Power, LLC (TPF II Covert Midco, LLC)(9), (11) Utilities: Electric |
Senior Secured Loan Term Loan 5.5% Cash, 1.0% Libor Floor, Due 10/21 |
2,985,000 | 3,009,831 | 3,014,850 |
See accompanying notes to consolidated financial statements.
F-10
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost | Fair Value(2) | ||||||||||||
TRSO I, Inc.(9) Energy: Oil & Gas |
Junior Secured Loan Term Loan (Second Lien) 11.0% Cash, 1.0% Libor Floor, Due 12/17 |
$ | 1,000,000 | $ | 990,082 | $ | 967,700 | |||||||||
TWCC Holding Corp.(9) Media: Broadcasting & Subscription |
Junior Secured Loan Term Loan (Second Lien) 7.0% Cash, 1.0% Libor Floor, Due 6/20 |
1,000,000 | 1,003,643 | 903,200 | ||||||||||||
TWCC Holding Corp.(9), (11) Media: Broadcasting & Subscription |
Senior Secured Loan Term B-1 Loan 5.8% Cash, 0.8% Libor Floor, Due 2/20 |
826,613 | 828,897 | 817,570 | ||||||||||||
U.S. Shipping Corp (fka U.S. Shipping Partners LP)(9), (11) Transportation: Cargo |
Senior Secured Loan Tranche B-2 Term Loan 5.3% Cash, 1.0% Libor Floor, Due 6/21 |
1,500,000 | 1,498,750 | 1,498,800 | ||||||||||||
Univar Inc.(11) Chemicals, Plastics and Rubber |
Senior Secured Loan Term B Loan 5.0% Cash, 1.5% Libor Floor, Due 6/17 |
2,879,528 | 2,874,890 | 2,879,528 | ||||||||||||
USJ-IMECO Holding Company, LLC(9), (11) Transportation: Cargo |
Senior Secured Loan Term Loan 7.0% Cash, 1.0% Libor Floor, Due 4/20 |
3,950,000 | 3,934,078 | 3,950,000 | ||||||||||||
Vantiv, LLC (fka Fifth Third Processing Solutions, LLC)(11) Banking, Finance, Insurance & Real Estate |
Senior Secured Loan Term B Loan 3.8% Cash, 0.8% Libor Floor, Due 6/21 |
1,698,532 | 1,702,414 | 1,701,717 | ||||||||||||
Verdesian Life Sciences, LLC(9) Environmental Industries |
Senior Secured Loan Initial Term Loan 6.0% Cash, 1.0% Libor Floor, Due 7/20 |
950,037 | 938,105 | 928,376 | ||||||||||||
Verdesian Life Sciences, LLC(9), (11) Environmental Industries |
Senior Secured Loan Initial Term Loan 6.0% Cash, 1.0% Libor Floor, Due 7/20 |
3,138,730 | 3,100,416 | 3,067,167 | ||||||||||||
Vestcom International, Inc. (fka Vector Investment Holdings, Inc.)(9), (11) Retail |
Senior Secured Loan Term Loan 5.3% Cash, 1.0% Libor Floor, Due 9/21 |
3,005,045 | 2,990,716 | 3,008,801 | ||||||||||||
Weiman Products, LLC(9) Consumer goods: Non-durable |
Senior Secured Loan Term Loan 6.3% Cash, 1.0% Libor Floor, Due 11/18 |
2,957,255 | 2,936,695 | 2,957,255 | ||||||||||||
Weiman Products, LLC(9), (11) Consumer goods: Non-durable |
Senior Secured Loan Term Loan 6.3% Cash, 1.0% Libor Floor, Due 11/18 |
3,943,007 | 3,916,231 | 3,943,007 | ||||||||||||
WideOpenWest Finance, LLC(9) Media: Broadcasting & Subscription |
Senior Secured Loan Replacement Term B Loan 4.5% Cash, 1.0% Libor Floor, Due 4/19 |
2,940,000 | 2,959,761 | 2,940,000 | ||||||||||||
WireCo WorldGroup Inc.(9) Capital Equipment |
Senior Unsecured Bond 9.000% 05/2017 9.0% Cash, Due 5/17 | 5,000,000 | 5,001,887 | 5,000,000 | ||||||||||||
WireCo WorldGroup Inc.(9), (11) Capital Equipment |
Senior Unsecured Bond 9.000% 05/2017 9.0% Cash, Due 5/17 | 3,000,000 | 3,001,132 | 3,000,000 | ||||||||||||
Total Investment in Debt Securities (116% of net asset value at fair value) | $ | 303,656,137 | $ | 301,909,681 | $ | 297,915,304 |
See accompanying notes to consolidated financial statements.
F-11
Portfolio Company/Principal Business | Investment | Percentage Ownership/Shares | Amortized Cost | Fair Value(2) | ||||||||||||
Aerostructures Holdings L.P.(5), (9) Aerospace and Defense |
Partnership Interests | 1.2 | % | $ | 1,000,000 | $ | 1,000 | |||||||||
Aerostructures Holdings L.P.(5), (9) Aerospace and Defense |
Series A Preferred Interests | 1.2 | % | 250,960 | 700,703 | |||||||||||
Caribe Media Inc. (fka Caribe Information Investments Incorporated)(5), (9) Media: Advertising, Printing & Publishing |
Common | 1.3 | % | 359,765 | 568,319 | |||||||||||
DBI Holding LLC(5), (9) Services: Business |
Class A Warrants | 3.2 | % | 258,940 | 1,280,609 | |||||||||||
eInstruction Acquisition, LLC(5), (9) Services: Business |
Membership Units | 1.1 | % | 1,079,617 | 1,000 | |||||||||||
FP WRCA Coinvestment Fund VII, Ltd.(3), (5), Capital Equipment |
Class A Shares | 1,500 | 1,500,000 | 2,144,194 | ||||||||||||
Perseus Holding Corp.(5), (9) Hotel, Gaming & Leisure |
Common | 0.2 | % | 400,000 | 1,000 | |||||||||||
Roscoe Investors, LLC(5), (9) Healthcare & Pharmaceuticals |
Class A Units | 1.6 | % | 1,000,000 | 941,600 | |||||||||||
Tank Partners Holdings, LLC(5), (9), (13) Energy: Oil & Gas |
Unit | 5.8 | % | 980,000 | 452,394 | |||||||||||
Tank Partners Holdings, LLC(5), (9) Energy: Oil & Gas |
Warrants | 1.3 | % | 185,205 | 108,893 | |||||||||||
TRSO II, Inc.(5), (9), (13) Energy: Oil & Gas |
Common Stock | 5.4 | % | 1,500,000 | 1,342,373 | |||||||||||
Total Investment in Equity Securities (3% of net asset value at fair value) |
$ | 8,514,487 | $ | 7,542,085 |
See accompanying notes to consolidated financial statements.
F-12
Portfolio Company | Investment(14) | Percentage Ownership | Amortized Cost | Fair Value(2) | ||||||||||||
Grant Grove CLO, Ltd.(3) | Subordinated Securities, effective interest 11.3%, 1/21 maturity |
22.2 | % | $ | 2,498,355 | $ | 522,005 | |||||||||
Katonah III, Ltd.(3), (10), (15) | Preferred Shares, 5/15 maturity | 23.1 | % | 1,361,891 | 375,000 | |||||||||||
Katonah VII CLO Ltd.(3), (6), (15) | Subordinated Securities, 11/17 maturity |
16.4 | % | 3,530,487 | 1,000 | |||||||||||
Katonah VIII CLO Ltd(3), (6), (15) | Subordinated Securities, 5/18 maturity |
10.3 | % | 2,706,408 | 20,000 | |||||||||||
Katonah IX CLO Ltd(3), (6) | Preferred Shares, effective interest 2.1%, 1/19 maturity |
6.9 | % | 1,203,125 | 493,427 | |||||||||||
Katonah X CLO Ltd(3), (6) | Subordinated Securities, effective interest 16.8%, 4/20 maturity |
33.3 | % | 8,932,776 | 4,686,406 | |||||||||||
Katonah 2007-I CLO Ltd.(3), (6) | Preferred Shares, effective interest 26.9%, 4/22 maturity |
100.0 | % | 23,740,077 | 24,674,912 | |||||||||||
Trimaran CLO V, Ltd.(3), (6) | Subordinated Notes, effective interest 43.2%, 3/18 maturity |
20.8 | % | 142,490 | 675,000 | |||||||||||
Trimaran CLO VII, Ltd.(3), (6) | Income Notes, effective interest 43.9%, 6/21 maturity |
10.5 | % | 1,340,875 | 2,042,214 | |||||||||||
Catamaran CLO 2012-1 Ltd.(3), (6) | Subordinated Notes, 10.2% effective interest, 12/23 maturity |
24.9 | % | 7,507,610 | 5,052,888 | |||||||||||
Catamaran CLO 2013-1 Ltd.(3), (6) | Subordinated Notes, effective interest 13.3%, 1/25 maturity |
23.5 | % | 6,881,847 | 6,963,300 | |||||||||||
Catamaran CLO 2014-1 Ltd.(3), (6) | Subordinated Notes, effective interest 8.2%, 4/26 maturity |
24.9 | % | 9,690,780 | 7,908,078 | |||||||||||
Dryden 30 Senior Loan Fund(3) | Subordinated Notes, effective interest 27.7%, 11/25 maturity |
7.5 | % | 1,712,276 | 2,368,925 | |||||||||||
Catamaran CLO 2014-2 Ltd.(3), (6) | Subordinated Notes, effective interest 7.2%, 10/26 maturity |
24.9 | % | 8,847,407 | 7,763,580 | |||||||||||
Catamaran CLO 2015-1 Ltd.(3), (6) | Subordinated Notes, effective interest 9.9%, 4/27 maturity |
24.0 | % | 12,132,538 | 9,531,720 | |||||||||||
Total Investment in CLO Subordinated Securities |
$ | 92,228,942 | $ | 73,078,455 |
Portfolio Company | Investment | Percentage Ownership | Amortized Cost | Fair Value(2) | ||||||||||||
Catamaran CLO 2012-1 Ltd.(3), (6) | Float 12/2023 F 14889CAE0 Par Value of $4,500,000 Due 12/23 |
42.9 | % | $ | 3,949,318 | $ | 4,060,000 | |||||||||
Catamaran CLO 2014-1 Ltd.(3), (6) | Float 04/2026 E 14889FAC7 Par Value of $1,525,000 Due 4/26 |
15.1 | % | 1,422,789 | 1,310,000 | |||||||||||
Total Investment in CLO Rated-Note |
$ | 5,372,107 | $ | 5,370,000 | ||||||||||||
Total Investment in CLO Fund Securities (30% of net asset value at fair value) | $ | 97,601,049 | $ | 78,448,455 |
Portfolio Company/Principal Business | Investment | Percentage Ownership | Cost | Fair Value(2) | ||||||||||||
Asset Manager Affiliates(9), (12) | Asset Management Company | 100.0 | % | $ | 57,942,090 | $ | 73,737,000 | |||||||||
Total Investment in Asset Manager Affiliates (29% of net asset value at fair value) | $ | 57,942,090 | $ | 73,737,000 |
See accompanying notes to consolidated financial statements.
F-13
Time Deposit and Money Market Accounts | Investment | Yield | Par/Amortized Cost | Fair Value(2) | ||||||||||||
JP Morgan Business Money Market Account(8), (9) | Money Market Account | 0.10 | % | $ | 249,184 | $ | 249,184 | |||||||||
US Bank Money Market Account(9) | Money Market Account | 0.02 | % | 16,208,632 | 16,208,632 | |||||||||||
Total Investment in Time Deposit and Money Market Accounts (6% of net asset value at fair value) |
$ | 16,457,816 | $ | 16,457,816 | ||||||||||||
Total Investments(4) (184% of net asset value at fair value) | $ | 482,425,123 | $ | 474,100,660 |
(1) | A majority of the variable rate loans in the Companys investment portfolio bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly at the borrowers option. The Borrower may also elect to have multiple interest reset periods for each loan. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at June 30, 2015. As noted in the table above, 81% (based on par) of debt securities contain LIBOR floors which range between .75% and 3.00%. |
(2) | Reflects the fair market value of all investments as of June 30, 2015, as determined by the Companys Board of Directors. |
(3) | Non-U.S. company or principal place of business outside the U.S. |
(4) | The aggregate cost of investments for federal income tax purposes is approximately $500 million. The aggregate gross unrealized appreciation is approximately $20 million, the aggregate gross unrealized depreciation is approximately $45 million, and the net unrealized depreciation is approximately $25 million. |
(5) | Non-income producing. |
(6) | An affiliate CLO Fund managed by an Asset Manager Affiliate (as such term is defined in the notes to the consolidated financial statements). |
(7) | Loan or debt security is on non-accrual status and therefore is considered non-income producing. |
(8) | Money market account holding restricted cash and security deposits for employee benefit plans. |
(9) | Qualified asset for purposes of section 55(a) of the Investment Company Act of 1940. |
(10) | As of June 30, 2015, this CLO Fund Security was not providing a taxable distribution. |
(11) | As of June 30, 2015, this investment is owned by KCAP Senior Funding I, LLC and was pledged to secure KCAP Senior Funding I, LLCs obligation. |
(12) | Other than the Asset Manager Affiliate, which we are deemed to control, we do not control and are not an affiliate of any of our portfolio companies, each as defined in the Investment Company Act of 1940 (the 1940 Act). In general, under the 1940 Act, we would be presumed to control a portfolio company if we owned 25% or more of its voting securities and would be an affiliate of a portfolio company if we owned 5% or more of its voting securities. |
(13) | Non-voting. |
(14) | CLO Subordinated Investments are entitled to periodic distributions which are generally equal to the remaining cash flow of the payments made by the underlying funds investments less contractual payments to debt holders and fund expenses. The estimated annualized effective yield indicated is based upon a current projection of the amount and timing of these distributions. Such projections are updated on a quarterly basis and the estimated effective yield is adjusted prospectively. |
(15) | Transaction has been called. |
See accompanying notes to consolidated financial statements.
F-14
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost |
Fair Value(2) | ||||||||||||
4L Technologies Inc. (fka Clover Holdings, Inc.)(9), (11) Consumer goods: Non-durable |
Senior Secured Loan Term Loan 5.5% Cash, 1.0% Libor Floor, Due 5/20 |
$ | 2,793,000 | $ | 2,768,057 | $ | 2,723,175 | |||||||||
Advanced Lighting Technologies, Inc.(9), (11) Consumer goods: Durable |
First Lien Bond 10.5% Cash, Due 6/19 | 3,000,000 | 2,962,507 | 2,580,000 | ||||||||||||
Advantage Sales & Marketing Inc.(9) Services: Business |
Junior Secured Loan Term Loan (Second Lien) 7.5% Cash, 1.0% Libor Floor, Due 7/22 |
1,000,000 | 1,002,384 | 992,000 | ||||||||||||
Alaska Communications Systems Holdings, Inc.(9), (11) Telecommunications |
Senior Secured Loan Term Loan 6.3% Cash, 1.5% Libor Floor, Due 10/16 |
5,200,227 | 5,193,935 | 5,200,227 | ||||||||||||
Alere Inc. (fka IM US Holdings, LLC)(11) Healthcare & Pharmaceuticals |
Senior Secured Loan B Term Loan 4.3% Cash, 1.0% Libor Floor, Due 6/17 |
2,992,277 | 2,988,629 | 2,972,947 | ||||||||||||
AmSurg Corp.(11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan 3.8% Cash, 0.8% Libor Floor, Due 7/21 |
2,992,481 | 2,992,481 | 2,975,020 | ||||||||||||
Anaren, Inc.(9), (11) Aerospace and Defense |
Senior Secured Loan Term Loan (First Lien) 5.5% Cash, 1.0% Libor Floor, Due 2/21 |
1,980,000 | 1,962,587 | 1,955,250 | ||||||||||||
Asurion, LLC (fka Asurion Corporation)(9), (11) Banking, Finance, Insurance & Real Estate |
Senior Secured Loan Incremental Tranche B-1 Term Loan 5.0% Cash, 1.3% Libor Floor, Due 5/19 |
1,917,430 | 1,932,331 | 1,896,549 | ||||||||||||
AZ Chem US Inc.(9), (11) Chemicals, Plastics and Rubber |
Senior Secured Loan Initial Term Loan (First Lien) 4.5% Cash, 1.0% Libor Floor, Due 6/21 |
467,123 | 464,966 | 457,977 | ||||||||||||
Bankruptcy Management Solutions, Inc.(9) Services: Business |
Senior Secured Loan Term B Loan 7.0% Cash, 1.0% Libor Floor, Due 6/18 |
700,227 | 700,227 | 624,463 | ||||||||||||
BarBri, Inc. (Gemini Holdings, Inc.)(9), (11) Services: Consumer |
Senior Secured Loan Term Loan 4.5% Cash, 1.0% Libor Floor, Due 7/19 |
2,872,500 | 2,861,557 | 2,835,158 | ||||||||||||
BBB Industries US Holdings, Inc.(9), (11) Automotive |
Senior Secured Loan Initial Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 11/21 |
3,000,000 | 2,941,316 | 2,985,000 | ||||||||||||
Bellisio Foods, Inc.(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan U.S. Term B Loans 5.3% Cash, 1.0% Libor Floor, Due 8/19 |
2,239,551 | 2,230,586 | 2,235,071 | ||||||||||||
Blue Coat Systems, Inc.(9), (11) High Tech Industries |
Senior Secured Loan New Term Loan 4.0% Cash, 1.0% Libor Floor, Due 5/19 |
467,636 | 468,971 | 456,530 | ||||||||||||
Carolina Beverage Group LLC(9) Beverage, Food and Tobacco |
Senior Secured Bond 10.6% Cash, Due 8/18 |
1,500,000 | 1,515,584 | 1,552,500 | ||||||||||||
CCS Intermediate Holdings, LLC(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan (First Lien) 5.0% Cash, 1.0% Libor Floor, Due 7/21 |
2,992,500 | 2,978,364 | 2,940,131 | ||||||||||||
Cengage Learning Acquisitions, Inc. (fka TL Acquisitions, Inc.)(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Term Loan 7.0% Cash, 1.0% Libor Floor, Due 3/20 |
2,987,475 | 2,980,768 | 2,963,829 | ||||||||||||
Charter Communications Operating, LLC (aka CCO Safari LLC)(11) Media: Broadcasting & Subscription |
Senior Secured Loan Term G Loan 4.3% Cash, 0.8% Libor Floor, Due 9/21 |
3,000,000 | 3,022,408 | 3,022,980 | ||||||||||||
Checkout Holding Corp.(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Term B Loan (First Lien) 4.5% Cash, 1.0% Libor Floor, Due 4/21 |
995,000 | 990,534 | 951,474 | ||||||||||||
Consolidated Communications, Inc.(11) Telecommunications |
Senior Secured Loan Initial Term Loan 4.3% Cash, 1.0% Libor Floor, Due 12/20 |
2,992,443 | 3,003,588 | 2,976,538 | ||||||||||||
CRGT Inc.(9), (11) High Tech Industries |
Senior Secured Loan Term Loan 7.5% Cash, 1.0% Libor Floor, Due 12/20 |
3,000,000 | 2,940,000 | 2,955,000 |
See accompanying notes to financial statements.
F-15
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost |
Fair Value(2) | ||||||||||||
Crowley Holdings Preferred, LLC(9) Transportation: Cargo |
Preferred Stock 10.0% Cash, 2.0% PIK, Due 12/49 |
$ | 10,206,016 | $ | 10,206,016 | $ | 10,418,302 | |||||||||
Crowne Group, LLC(9), (11) Automotive |
Senior Secured Loan Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 9/20 |
3,990,000 | 3,932,506 | 3,838,779 | ||||||||||||
CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)(9) Beverage, Food and Tobacco |
Junior Secured Loan Term Loan (Second Lien) 8.8% Cash, 1.0% Libor Floor, Due 7/21 |
3,000,000 | 3,016,357 | 2,910,000 | ||||||||||||
CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Term Loan (First Lien) 5.0% Cash, 1.0% Libor Floor, Due 7/20 |
2,623,371 | 2,622,454 | 2,570,903 | ||||||||||||
CT Technologies Intermediate Holdings, Inc. (Smart Holdings Corp.)(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan 6.0% Cash, 1.0% Libor Floor, Due 12/21 |
3,000,000 | 2,970,271 | 2,988,750 | ||||||||||||
DBI Holding LLC(9) Services: Business |
Senior Unsecured Bond 13.0% PIK, Due 9/19 |
3,457,795 | 3,221,771 | 3,386,218 | ||||||||||||
DBI Holding LLC(9) Services: Business |
Senior Subordinated Bond 12.0% Cash, 1.0% PIK, Due 9/19 |
4,314,949 | 4,295,544 | 4,240,301 | ||||||||||||
DJO Finance LLC (ReAble Therapeutics Fin LLC)(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan New Tranche B Term Loan 4.3% Cash, 1.0% Libor Floor, Due 9/17 |
2,063,574 | 2,063,574 | 2,022,303 | ||||||||||||
Drew Marine Group Inc.(9) Transportation: Cargo |
Junior Secured Loan Term Loan (Second Lien) 8.0% Cash, 1.0% Libor Floor, Due 5/21 |
2,500,000 | 2,494,654 | 2,523,250 | ||||||||||||
ELO Touch Solutions, Inc.(9), (11) High Tech Industries |
Senior Secured Loan Term Loan (First Lien) 8.0% Cash, 1.5% Libor Floor, Due 6/18 |
1,726,036 | 1,677,698 | 1,642,496 | ||||||||||||
EWT Holdings III Corp. (fka WTG Holdings III Corp.)(9) Environmental Industries |
Junior Secured Loan Term Loan (Second Lien) 8.5% Cash, 1.0% Libor Floor, Due 1/22 |
4,000,000 | 3,982,390 | 4,033,200 | ||||||||||||
Fender Musical Instruments Corporation(9), (11) Consumer goods: Durable |
Senior Secured Loan Initial Loan 5.8% Cash, 1.3% Libor Floor, Due 4/19 |
2,002,536 | 2,012,321 | 1,982,110 | ||||||||||||
FHC Health Systems, Inc.(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan 5.0% Cash, 1.0% Libor Floor, Due 12/21 |
3,407,143 | 3,373,191 | 3,381,589 | ||||||||||||
First American Payment Systems, L.P.(9) Banking, Finance, Insurance & Real Estate |
Junior Secured Loan Term Loan (Second Lien) 10.8% Cash, 1.3% Libor Floor, Due 4/19 |
2,796,448 | 2,759,556 | 2,782,466 | ||||||||||||
First Data Corporation(9), (11) Banking, Finance, Insurance & Real Estate |
Senior Secured Loan 2018 New Dollar Term Loan 3.7% Cash, Due 3/18 |
1,000,000 | 968,906 | 982,190 | ||||||||||||
Getty Images, Inc.(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Initial Term Loan 4.8% Cash, 1.3% Libor Floor, Due 10/19 |
2,185,164 | 2,187,551 | 2,012,165 | ||||||||||||
Global Tel*Link Corporation(9) Telecommunications |
Junior Secured Loan Term Loan (Second Lien) 9.0% Cash, 1.3% Libor Floor, Due 11/20 |
4,000,000 | 3,935,659 | 3,889,200 | ||||||||||||
Grande Communications Networks LLC(9), (11) Telecommunications |
Senior Secured Loan Initial Term Loan 4.5% Cash, 1.0% Libor Floor, Due 5/20 |
3,940,040 | 3,944,690 | 3,938,464 | ||||||||||||
Grifols Worldwide Operations Limited(11) Healthcare & Pharmaceuticals |
Senior Secured Loan U.S. Tranche B Term Loam 3.2% Cash, Due 2/21 |
2,992,462 | 2,970,236 | 2,956,298 | ||||||||||||
Grupo HIMA San Pablo, Inc.(9) Healthcare & Pharmaceuticals |
Senior Secured Loan Term B Loan (First Lien) 8.5% Cash, 1.5% Libor Floor, Due 1/18 |
2,947,500 | 2,911,129 | 2,947,500 | ||||||||||||
Grupo HIMA San Pablo, Inc.(9) Healthcare & Pharmaceuticals |
Junior Secured Loan Term Loan (Second Lien) 13.8% Cash, Due 7/18 |
7,000,000 | 6,894,754 | 7,105,000 | ||||||||||||
Gymboree Corporation., The(9), (11) Retail |
Senior Secured Loan Term Loan 5.0% Cash, 1.5% Libor Floor, Due 2/18 |
1,421,105 | 1,390,786 | 935,563 | ||||||||||||
Hargray Communications Group, Inc. (HCP Acquisition LLC)(9), (11) Media: Broadcasting & Subscription |
Senior Secured Loan Initial Term Loan 5.3% Cash, 1.0% Libor Floor, Due 6/19 |
2,930,662 | 2,908,645 | 2,928,611 | ||||||||||||
Harland Clarke Holdings Corp. (fka Clarke American Corp.)(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Tranche B-3 Term Loan 7.0% Cash, 1.5% Libor Floor, Due 5/18 |
3,368,750 | 3,343,813 | 3,385,594 |
See accompanying notes to financial statements.
F-16
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost |
Fair Value(2) | ||||||||||||
Harland Clarke Holdings Corp. (fka Clarke American Corp.)(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Tranche B-4 Term Loan 6.0% Cash, 1.0% Libor Floor, Due 8/19 |
$ | 1,462,500 | $ | 1,456,384 | $ | 1,458,661 | |||||||||
Hoffmaster Group, Inc.(9) Forest Products & Paper |
Junior Secured Loan Initial Term Loan (Second Lien) 10.0% Cash, 1.0% Libor Floor, Due 5/21 |
2,000,000 | 1,972,727 | 1,999,000 | ||||||||||||
Hoffmaster Group, Inc.(9), (11) Forest Products & Paper |
Senior Secured Loan Initial Term Loan (First Lien) 5.3% Cash, 1.0% Libor Floor, Due 5/20 |
3,980,000 | 3,944,324 | 3,943,523 | ||||||||||||
Hunter Defense Technologies, Inc.(9), (11) Aerospace and Defense |
Senior Secured Loan Term Loan (First Lien) 6.5% Cash, 1.0% Libor Floor, Due 8/19 |
2,962,500 | 2,934,961 | 2,988,866 | ||||||||||||
Integra Telecom Holdings, Inc.(9), (11) Telecommunications |
Senior Secured Loan Term B Loan 5.3% Cash, 1.3% Libor Floor, Due 2/19 |
2,992,386 | 2,981,164 | 2,919,461 | ||||||||||||
International Architectural Products, Inc.(7), (9) Metals & Mining |
Senior Secured Loan Term Loan Due 5/15 |
247,636 | 228,563 | 1,000 | ||||||||||||
Kellermeyer Bergensons Services, LLC(9) Services: Business |
Senior Secured Loan Initial Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 10/21 |
2,000,000 | 1,980,432 | 1,990,000 | ||||||||||||
Key Safety Systems, Inc.(9), (11) Automotive |
Senior Secured Loan Initial Term Loan 4.8% Cash, 1.0% Libor Floor, Due 8/21 |
1,496,250 | 1,489,134 | 1,488,769 | ||||||||||||
Kinetic Concepts, Inc.(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Dollar Term E-1 Loan 4.0% Cash, 1.0% Libor Floor, Due 5/18 |
2,992,443 | 2,984,962 | 2,956,279 | ||||||||||||
Landslide Holdings, Inc. (Crimson Acquisition Corp.)(9), (11) High Tech Industries |
Senior Secured Loan New Term Loan (First Lien) 5.0% Cash, 1.0% Libor Floor, Due 2/20 |
3,456,381 | 3,464,859 | 3,451,197 | ||||||||||||
MB Aerospace ACP Holdings III Corp.(9), (11) Aerospace and Defense |
Senior Secured Loan Dollar Term Loan 5.0% Cash, 1.0% Libor Floor, Due 5/19 |
3,940,000 | 3,910,979 | 3,939,212 | ||||||||||||
Media General, Inc.(11) Media: Broadcasting & Subscription |
Senior Secured Loan Term B Loan 4.3% Cash, 1.0% Libor Floor, Due 7/20 |
3,000,000 | 3,003,750 | 2,972,805 | ||||||||||||
Medical Specialties Distributors, LLC(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Term Loan 6.5% Cash, 1.0% Libor Floor, Due 12/19 |
3,960,000 | 3,927,435 | 3,804,372 | ||||||||||||
Millennium Health, LLC (fka Millennium Laboratories, LLC)(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Tranche B Term Loan 5.3% Cash, 1.0% Libor Floor, Due 4/21 |
2,992,481 | 2,992,481 | 2,985,000 | ||||||||||||
Nielsen & Bainbrige, LLC(9) Consumer goods: Durable |
Senior Secured Loan Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 8/20 |
1,000,000 | 990,487 | 963,200 | ||||||||||||
Nielsen & Bainbrige, LLC(9) Consumer goods: Durable |
Junior Secured Loan Term Loan (Second Lien) 10.3% Cash, 1.0% Libor Floor, Due 8/21 |
2,000,000 | 1,971,249 | 1,920,000 | ||||||||||||
Nielsen & Bainbrige, LLC(9), (11) Consumer goods: Durable |
Senior Secured Loan Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 8/20 |
3,000,000 | 2,971,460 | 2,889,600 | ||||||||||||
Novetta, LLC(9) Services: Business |
Senior Secured Loan Initial Term Loan 6.0% Cash, 1.0% Libor Floor, Due 10/20 |
2,743,125 | 2,716,093 | 2,743,125 | ||||||||||||
Novitex Acquisition, LLC (fka ARSloane Acquisition, LLC)(9), (11) Services: Business |
Senior Secured Loan Tranche B-2 Term Loan (First Lien) 7.5% Cash, 1.3% Libor Floor, Due 7/20 |
990,019 | 980,923 | 950,418 | ||||||||||||
Onex Carestream Finance LP(9) Healthcare & Pharmaceuticals |
Junior Secured Loan Term Loan (Second Lien) 9.5% Cash, 1.0% Libor Floor, Due 12/19 |
2,000,000 | 2,000,000 | 1,992,920 | ||||||||||||
Onex Carestream Finance LP(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Term Loan (First Lien 2013) 5.0% Cash, 1.0% Libor Floor, Due 6/19 |
1,973,333 | 1,980,022 | 1,969,219 | ||||||||||||
Orbitz Worldwide, Inc.(11) Hotel, Gaming & Leisure |
Senior Secured Loan Tranche C Term Loan 4.5% Cash, 1.0% Libor Floor, Due 4/21 |
2,992,481 | 2,992,481 | 2,961,315 | ||||||||||||
Otter Products, LLC (OtterBox Holdings, Inc.)(9), (11) Consumer goods: Durable |
Senior Secured Loan Term B Loan 5.8% Cash, 1.0% Libor Floor, Due 6/20 |
2,992,481 | 2,968,458 | 2,966,297 |
See accompanying notes to financial statements.
F-17
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost |
Fair Value(2) | ||||||||||||
Ozburn-Hessey Holding Company LLC(9), (11) Transportation: Cargo |
Senior Secured Loan Term Loan 6.8% Cash, 1.3% Libor Floor, Due 5/19 |
$ | 3,512,426 | $ | 3,503,687 | $ | 3,544,389 | |||||||||
PGX Holdings, Inc.(9), (11) Services: Consumer |
Senior Secured Loan Initial Term Loan (First Lien) 6.3% Cash, 1.0% Libor Floor, Due 9/20 |
3,975,000 | 3,936,815 | 3,917,363 | ||||||||||||
Post Holdings, Inc.(11) Beverage, Food and Tobacco |
Senior Secured Loan Series A Incremental Term Loan 3.8% Cash, 0.8% Libor Floor, Due 6/21 |
2,992,481 | 2,985,129 | 2,983,130 | ||||||||||||
PQ Corporation(9), (11) Chemicals, Plastics and Rubber |
Senior Secured Loan 2014 Term Loan 4.0% Cash, 1.0% Libor Floor, Due 8/17 |
2,992,366 | 2,992,366 | 2,943,740 | ||||||||||||
PSC Industrial Holdings Corp.(9), (11) Environmental Industries |
Senior Secured Loan Term Loan (First Lien) 7.0% Cash, 1.0% Libor Floor, Due 12/20 |
2,000,000 | 1,980,119 | 1,980,000 | ||||||||||||
Puerto Rico Cable Acquisition Company Inc. (D/B/A Choice TV)(9) Media: Broadcasting & Subscription |
Senior Secured Loan Initial Term Loan 5.5% Cash, 1.0% Libor Floor, Due 7/18 |
909,069 | 910,287 | 909,069 | ||||||||||||
Puerto Rico Cable Acquisition Company Inc. (D/B/A Choice TV)(9), (11) Media: Broadcasting & Subscription |
Senior Secured Loan Initial Term Loan 5.5% Cash, 1.0% Libor Floor, Due 7/18 |
2,727,206 | 2,717,359 | 2,727,206 | ||||||||||||
QoL Meds, LLC(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Term Loan 5.5% Cash, 1.0% Libor Floor, Due 7/20 |
498,750 | 496,449 | 480,296 | ||||||||||||
Quad-C JH Holdings Inc. (aka Joerns Healthcare)(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Term Loan A 6.0% Cash, 1.0% Libor Floor, Due 5/20 |
3,980,000 | 3,953,083 | 3,786,174 | ||||||||||||
Restorix Health, Inc.(9) Healthcare & Pharmaceuticals |
Senior Unsecured Loan Delayed Draw 10.0% Cash, 1.5% PIK, Due 6/18 |
2,003,587 | 2,003,587 | 2,003,587 | ||||||||||||
Restorix Health, Inc.(9) Healthcare & Pharmaceuticals |
Senior Unsecured Loan Subordinated Term Loan 10.0% Cash, 1.5% PIK, Due 6/18 |
8,063,397 | 8,063,397 | 8,063,397 | ||||||||||||
Reynolds Group Holdings Inc.(9), (11) Containers, Packaging and Glass |
Senior Secured Loan Incremental U.S. Term Loan 4.0% Cash, 1.0% Libor Floor, Due 12/18 |
2,992,443 | 2,992,443 | 2,946,734 | ||||||||||||
Roscoe Medical, Inc.(9) Healthcare & Pharmaceuticals |
Junior Secured Loan Term Loan (Second Lien) 11.3% Cash, Due 9/19 |
6,700,000 | 6,642,367 | 6,499,000 | ||||||||||||
Rovi Solutions Corporation/Rovi Guides, Inc.(11) High Tech Industries |
Senior Secured Loan Term B Loan 3.8% Cash, 0.8% Libor Floor, Due 7/21 |
2,992,481 | 2,954,531 | 2,936,387 | ||||||||||||
Safenet, Inc.(9), (11) High Tech Industries |
Senior Secured Loan Initial Term Loan (First Lien) 6.8% Cash, 1.0% Libor Floor, Due 3/20 |
2,977,500 | 2,951,435 | 2,977,500 | ||||||||||||
Sandy Creek Energy Associates, L.P.(9), (11) Utilities: Electric |
Senior Secured Loan Term Loan 5.0% Cash, 1.0% Libor Floor, Due 11/20 |
2,844,544 | 2,832,599 | 2,794,053 | ||||||||||||
SGF Produce Holding Corp.(Frozsun, Inc.)(9) Beverage, Food and Tobacco |
Senior Secured Loan Term Loan 5.5% Cash, 1.0% Libor Floor, Due 3/19 |
2,191,289 | 2,175,642 | 2,191,289 | ||||||||||||
SGF Produce Holding Corp.(Frozsun, Inc.)(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Term Loan 5.5% Cash, 1.0% Libor Floor, Due 3/19 |
3,440,528 | 3,429,224 | 3,440,528 | ||||||||||||
Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(9), (11) Environmental Industries |
Senior Secured Loan Term Loan 6.8% Cash, 1.3% Libor Floor, Due 6/19 |
2,861,935 | 2,840,504 | 2,858,501 | ||||||||||||
Sun Products Corporation, The (fka Huish Detergents Inc.)(9), (11) Consumer goods: Non-durable |
Senior Secured Loan Tranche B Term Loan 5.5% Cash, 1.3% Libor Floor, Due 3/20 |
3,910,711 | 3,887,178 | 3,656,515 | ||||||||||||
Tank Partners Holdings, LLC(9) Energy: Oil & Gas |
Senior Secured Loan Loan 9.8% Cash, 3.5% PIK, 3.0% Libor Floor, Due 8/19 |
10,385,331 | 10,212,907 | 9,866,065 | ||||||||||||
TPF II Power, LLC (TPF II Covert Midco, LLC)(9), (11) Utilities: Electric |
Senior Secured Loan Term Loan 5.5% Cash, 1.0% Libor Floor, Due 10/21 |
3,000,000 | 3,026,933 | 3,009,375 | ||||||||||||
Trimaran Advisors, L.L.C.(9), (12) Portfolio Company Loan |
Senior Unsecured Loan Revolving Credit Facility 9.0% Cash, Due 11/17 |
23,000,000 | 23,000,000 | 23,000,000 | ||||||||||||
TRSO I, Inc.(9) Energy: Oil & Gas |
Junior Secured Loan Term Loan (Second Lien) 11.0% Cash, 1.0% Libor Floor, Due 12/17 |
1,000,000 | 988,097 | 961,300 |
See accompanying notes to financial statements.
F-18
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost |
Fair Value(2) | ||||||||||||
TWCC Holding Corp.(9) Media: Broadcasting & Subscription |
Junior Secured Loan Term Loan (Second Lien) 7.0% Cash, 1.0% Libor Floor, Due 6/20 |
$ | 1,000,000 | $ | 1,004,005 | $ | 961,670 | |||||||||
TWCC Holding Corp.(9), (11) Media: Broadcasting & Subscription |
Senior Secured Loan Term Loan 3.5% Cash, 0.8% Libor Floor, Due 2/17 |
906,653 | 910,624 | 887,060 | ||||||||||||
Univar Inc.(9), (11) Chemicals, Plastics and Rubber |
Senior Secured Loan Term B Loan 5.0% Cash, 1.5% Libor Floor, Due 6/17 |
2,894,577 | 2,890,893 | 2,808,536 | ||||||||||||
USJ-IMECO Holding Company, LLC(9), (11) Transportation: Cargo |
Senior Secured Loan Term Loan 7.0% Cash, 1.0% Libor Floor, Due 4/20 |
3,970,000 | 3,952,343 | 3,970,000 | ||||||||||||
Vantiv, LLC (fka Fifth Third Processing Solutions, LLC)(11) Banking, Finance, Insurance & Real Estate |
Senior Secured Loan Term B Loan 3.8% Cash, 0.8% Libor Floor, Due 6/21 |
1,994,987 | 1,999,927 | 1,978,160 | ||||||||||||
Verdesian Life Sciences, LLC(9) Environmental Industries |
Senior Secured Loan Initial Term Loan 6.0% Cash, 1.0% Libor Floor, Due 7/20 |
975,012 | 961,553 | 938,547 | ||||||||||||
Verdesian Life Sciences, LLC(9), (11) Environmental Industries |
Senior Secured Loan Initial Term Loan 6.0% Cash, 1.0% Libor Floor, Due 7/20 |
3,221,243 | 3,178,026 | 3,100,769 | ||||||||||||
Vestcom International, Inc. (fka Vector Investment Holdings, Inc.)(9), (11) Retail |
Senior Secured Loan Term Loan 5.3% Cash, 1.0% Libor Floor, Due 9/21 |
2,866,953 | 2,843,300 | 2,838,284 | ||||||||||||
Weiman Products, LLC(9) Consumer goods: Non-durable |
Senior Secured Loan Term Loan 6.3% Cash, 1.0% Libor Floor, Due 11/18 |
2,972,255 | 2,948,574 | 2,972,255 | ||||||||||||
Weiman Products, LLC(9), (11) Consumer goods: Non-durable |
Senior Secured Loan Term Loan 6.3% Cash, 1.0% Libor Floor, Due 11/18 |
3,963,007 | 3,932,167 | 3,963,007 | ||||||||||||
WideOpenWest Finance, LLC(9) Telecommunications |
Senior Secured Loan Term B Loan 4.8% Cash, 1.0% Libor Floor, Due 4/19 |
2,954,887 | 2,971,397 | 2,941,974 | ||||||||||||
WireCo WorldGroup Inc.(9) Capital Equipment |
Senior Unsecured Bond 9.0% Cash, Due 5/17 |
5,000,000 | 4,991,504 | 5,000,000 | ||||||||||||
WireCo WorldGroup Inc.(9), (11) Capital Equipment |
Senior Unsecured Bond 9.0% Cash, Due 5/17 |
3,000,000 | 2,994,903 | 3,000,000 | ||||||||||||
Total Investment in Debt Securities (125% of net asset value at fair value) | $ | 324,808,055 | $ | 322,884,934 | $ | 320,143,170 |
See accompanying notes to financial statements.
F-19
Portfolio Company/Principal Business | Investment | Percentage Ownership/Shares |
Amortized Cost |
Fair Value(2) | ||||||||||||
Aerostructures Holdings L.P.(5), (9) Aerospace and Defense |
Partnership Interests | 1.2 | % | $ | 1,000,000 | $ | 1,000 | |||||||||
Aerostructures Holdings L.P.(5), (9) Aerospace and Defense |
Series A Preferred Interests | 1.2 | % | 250,961 | 648,764 | |||||||||||
Bankruptcy Management Solutions, Inc.(5), (9) Services: Business |
Class A Warrants | 1.7 | % | | | |||||||||||
Bankruptcy Management Solutions, Inc.(5), (9) Services: Business |
Class B Warrants | 1.7 | % | | | |||||||||||
Bankruptcy Management Solutions, Inc.(5), (9) Services: Business |
Class C Warrants | 1.7 | % | | | |||||||||||
Bankruptcy Management Solutions, Inc.(5), (9) Services: Business |
Common Stock 2013 | 0.8 | % | 314,325 | 391,932 | |||||||||||
Caribe Media Inc. (fka Caribe Information Investments Incorporated)(5), (9) Media: Advertising, Printing & Publishing |
Common | 1.3 | % | 359,765 | 624,304 | |||||||||||
DBI Holding LLC(5), (9) Services: Business |
Class A Warrants | 3.2 | % | 258,940 | 746,964 | |||||||||||
eInstruction Acquisition, LLC(5), (9) Services: Business |
Membership Units | 1.1 | % | 1,079,617 | 1,000 | |||||||||||
FP WRCA Coinvestment Fund VII, Ltd.(3), (5) Capital Equipment |
Class A Shares | 1,500 | 1,500,000 | 2,351,329 | ||||||||||||
Perseus Holding Corp.(5), (9) Hotel, Gaming & Leisure |
Common | 0.2 | % | 400,000 | 1,000 | |||||||||||
Roscoe Investors, LLC(5), (9) Healthcare & Pharmaceuticals |
Class A Units | 1.6 | % | 1,000,000 | 891,000 | |||||||||||
Tank Partners Holdings, LLC(5), (9) Energy: Oil & Gas |
Unit | 5.8 | % | 980,000 | 573,750 | |||||||||||
Tank Partners Holdings, LLC(5), (9) Energy: Oil & Gas |
Warrants | 1.3 | % | 185,204 | 99,752 | |||||||||||
TRSO II, Inc.(5), (9) Energy: Oil & Gas |
Common Stock | 5.4 | % | 1,500,000 | 1,788,886 | |||||||||||
Total Investment in Equity Securities (3% of net asset value at fair value) |
$ | 8,828,812 | $ | 8,119,681 |
Portfolio Company | Investment | Percentage Ownership |
Amortized Cost |
Fair Value(2) | ||||||||||||
Grant Grove CLO, Ltd.(3) | Subordinated Securities | 22.2 | % | $ | 2,254,638 | $ | 469,131 | |||||||||
Katonah III, Ltd.(3), (10) | Preferred Shares | 23.1 | % | 1,015,334 | 400,000 | |||||||||||
Katonah VII CLO Ltd.(3), (6) | Subordinated Securities | 16.4 | % | 3,563,252 | 1,000 | |||||||||||
Katonah VIII CLO Ltd(3), (6) | Subordinated Securities | 10.3 | % | 2,755,267 | 100,000 | |||||||||||
Katonah IX CLO Ltd(3), (6) | Preferred Shares | 6.9 | % | 1,262,496 | 594,989 | |||||||||||
Katonah X CLO Ltd(3), (6) | Subordinated Securities | 33.3 | % | 8,910,471 | 4,863,001 | |||||||||||
Katonah 2007-I CLO Ltd.(3), (6) | Preferred Shares | 100.0 | % | 23,471,779 | 25,191,782 | |||||||||||
Trimaran CLO IV, Ltd.(3), (6) | Preferred Shares | 19.0 | % | 11,094 | 900,000 | |||||||||||
Trimaran CLO V, Ltd.(3), (6) | Subordinate Notes | 20.8 | % | 1,292,698 | 1,657,020 | |||||||||||
Trimaran CLO VI, Ltd.(3), (6) | Income Notes | 16.2 | % | 1,531,142 | 1,950,000 | |||||||||||
Trimaran CLO VII, Ltd.(3), (6) | Income Notes | 10.5 | % | 1,399,074 | 2,084,394 | |||||||||||
Catamaran CLO 2012-1 Ltd.(3), (6) | Subordinated Notes | 24.9 | % | 7,994,677 | 5,793,924 | |||||||||||
Catamaran CLO 2013-1 Ltd.(3), (6) | Subordinated Notes | 23.5 | % | 7,492,702 | 7,874,910 | |||||||||||
Catamaran CLO 2014-1 Ltd.(3), (6) | Subordinated Notes | 24.9 | % | 10,473,628 | 8,867,176 | |||||||||||
Dryden 30 Senior Loan Fund(3) | Subordinated Notes | 7.5 | % | 2,263,321 | 2,506,075 | |||||||||||
Catamaran CLO 2014-2 Ltd.(3), (6) | Subordinated Notes | 24.9 | % | 9,862,799 | 8,761,500 | |||||||||||
Total Investment in CLO Subordinated Securities, Preferred Shares and Income Notes | $ | 85,554,372 | $ | 72,014,902 |
See accompanying notes to financial statements.
F-20
Portfolio Company | Investment | Percentage Ownership |
Amortized Cost |
Fair Value(2) | ||||||||||||
Catamaran CLO 2012-1 Ltd.(3), (6) | Class F Notes Par Value of $4,500,000 Due 12/23 |
42.9 | % | $ | 3,917,442 | $ | 4,160,000 | |||||||||
Catamaran CLO 2014-1 Ltd.(3), (6) | Class E Notes Par Value of $1,525,000 Due 4/26 |
15.1 | % | 1,417,376 | 1,340,000 | |||||||||||
Total Investment in CLO Rated-Note | $ | 5,334,818 | $ | 5,500,000 | ||||||||||||
Total Investment in CLO Fund Securities (30% of net asset value at fair value) | $ | 90,889,190 | $ | 77,514,902 |
Portfolio Company/Principal Business | Investment | Percentage Ownership |
Cost | Fair Value(2) | ||||||||||||
Asset Manager Affiliates(9) | Asset Management Company | 100.0 | % | $ | 60,292,677 | $ | 72,326,000 | |||||||||
Total Investment in Asset Manager Affiliates (28% of net asset value at fair value) | $ | 60,292,677 | $ | 72,326,000 |
Time Deposit and Money Market Accounts | Investment | Yield | Par/Amortized Cost |
Fair Value(2) | ||||||||||||
JP Morgan Business Money Market Account(8), (9) | Money Market Account | 0.10 | % | $ | 249,105 | $ | 249,105 | |||||||||
US Bank Money Market Account(9) | Money Market Account | 0.02 | % | 1,353,636 | 1,353,636 | |||||||||||
Total Investment in Time Deposit and Money Market Accounts (1% of net asset value at fair value) | $ | 1,602,741 | $ | 1,602,741 | ||||||||||||
Total Investments(4) (188% of net asset value at fair value) | $ | 484,498,354 | $ | 479,706,494 |
(1) | A majority of the variable rate loans in the Companys investment portfolio bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly at the borrowers option. The Borrower may also elect to have multiple interest reset periods for each loan. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at December 31, 2014. As noted in the table above, 75% (based on par) of debt securities contain LIBOR floors which range between 0.75% and 3.00%. |
(2) | Reflects the fair market value of all investments as of December 31, 2014, as determined by the Companys Board of Directors. |
(3) | Non-U.S. company or principal place of business outside the U.S. |
(4) | The aggregate cost of investments for federal income tax purposes is approximately $502 million. The aggregate gross unrealized appreciation is approximately $15.7 million, the aggregate gross unrealized depreciation is approximately $37.7 million, and the net unrealized depreciation is approximately $22 million. |
(5) | Non-income producing. |
(6) | An affiliate CLO Fund managed by an Asset Manager Affiliate (as such term is defined in the notes to the consolidated financial statements). |
(7) | Loan or debt security is on non-accrual status and therefore is considered non-income producing. |
(8) | Money market account holding restricted cash and security deposits for employee benefit plans. |
(9) | Qualified asset for purposes of section 55(a) of the Investment Company Act of 1940. |
(10) | As of December 31, 2014, this CLO Fund Security was not providing a taxable distribution. |
(11) | As of December 31, 2014, investment was owned by KCAP Senior Funding I, LLC and has been pledged to secure KCAP Senior Funding I, LLCs obligations. |
See accompanying notes to financial statements.
F-21
Six Months Ended June 30, |
||||||||
2015 | 2014 | |||||||
Per Share Data: |
||||||||
Net asset value, at beginning of period | $ | 6.94 | $ | 7.51 | ||||
Net investment income(1) | 0.33 | 0.27 | ||||||
Net realized gain (losses) from investments(1) | | 0.01 | ||||||
Net change in unrealized (depreciation) appreciation on investments(1) | (0.09 | ) | 0.19 | |||||
Net increase in net assets resulting from operations | 0.24 | 0.47 | ||||||
Net decrease in net assets resulting from distributions: |
||||||||
Distribution of ordinary income | (0.21 | ) | (0.25 | ) | ||||
Return of capital | | | ||||||
Net decrease in net assets resulting from distributions | (0.21 | ) | (0.25 | ) | ||||
Net (decrease) increase in net assets relating to stock-based transactions: |
||||||||
Stock based compensation | (0.01 | ) | (0.06 | ) | ||||
Net increase in net assets relating to stock-based transactions | (0.01 | ) | (0.06 | ) | ||||
Net asset value, end of period | $ | 6.96 | $ | 7.67 | ||||
Total net asset value return(2) | 3.3 | % | 5.5 | % | ||||
Ratio/Supplemental Data: |
||||||||
Per share market value at beginning of period | $ | 6.82 | $ | 8.07 | ||||
Per share market value at end of period | $ | 5.98 | $ | 8.49 | ||||
Total market return(3) | (9.2 | )% | 8.3 | % | ||||
Shares outstanding at end of period | 37,032,825 | 33,725,223 | ||||||
Net assets at end of period | $ | 257,796,358 | $ | 258,514,055 | ||||
Portfolio turnover rate(4) | 12.2 | % | 21.2 | % | ||||
Average par debt outstanding | $ | 227,397,000 | $ | 195,658,000 | ||||
Asset coverage ratio | 212 | % | 231 | % | ||||
Ratio of net investment income to average net assets(5) | 9.5 | % | 7.1 | % | ||||
Ratio of total expenses to average net assets(5) | 8.6 | % | 8.4 | % | ||||
Ratio of interest expense to average net assets(5) | 4.6 | % | 4.6 | % | ||||
Ratio of non-interest expenses to average net assets(5) | 4.0 | % | 3.8 | % |
(1) | Based on weighted average number of common shares outstanding-basic for the period. |
(2) | Total net asset value return (not annualized) equals the change in the net asset value per share over the beginning of period net asset value per share plus distributions (including any return of capital), divided by the beginning net asset value per share. |
(3) | Total market return equals the change in the ending market price over the beginning of period price per share plus distributions (including any return of capital), divided by the beginning price. |
(4) | Not annualized. Portfolio turnover rate equals the year-to-date sales and paydowns over the average of the invested assets at fair value. |
(5) | Annualized |
See accompanying notes to financial statements.
F-22
KCAP Financial, Inc. (KCAP or the Company) is an internally managed, non-diversified closed-end investment company that is regulated as a business development company (BDC) under the Investment Company Act of 1940 (the 1940 Act). The Company was formed as a Delaware limited liability company on August 8, 2006 and, prior to the issuance of shares of the Companys common stock in its initial public offering (IPO), converted to a corporation incorporated in Delaware on December 11, 2006. Prior to its IPO, the Company did not have material operations. The Companys IPO of 14,462,000 shares of common stock raised net proceeds of approximately $200 million. Prior to the IPO, the Company issued 3,484,333 shares to affiliates of Kohlberg & Co., L.L.C., a leading middle market private equity firm, in exchange for the contribution to the Company of their ownership interests in Katonah Debt Advisors, L.L.C., and related affiliates controlled by the Company (collectively, Katonah Debt Advisors) and in securities issued by collateralized loan obligation funds (CLO Funds) managed by Katonah Debt Advisors and two other asset managers.
On April 28, 2008, the Company completed a rights offering that resulted in the issuance of 3.1 million shares of our common stock, and net proceeds of $27 million.
On February 29, 2012, the Company purchased Trimaran Advisors, L.L.C. (Trimaran Advisors), a CLO manager similar to Katonah Debt Advisors with assets under management of approximately $1.5 billion, for total consideration of $13.0 million in cash and 3,600,000 shares of the Companys common stock. Contemporaneously with the acquisition of Trimaran Advisors, the Company acquired from Trimaran Advisors equity interests in certain CLO Funds managed by Trimaran Advisors for an aggregate purchase price of $12.0 million in cash.
On February 14, 2013, the Company completed a public offering of 5,232,500 shares of common stock, which included the underwriters full exercise of their option to purchase up to 682,500 shares of common stock, at a price of $9.75 per share, raising approximately $51.0 million in gross proceeds. In conjunction with this offering, the Company also sold 200,000 shares of common stock to a member of its Board of Directors, at a price of $9.31125 per share, raising approximately $1.9 million in gross proceeds.
On October 6, 2014, the Company completed a follow-on public offering of 3.0 million shares of its common stock at a price of $8.02 per share. The offering raised net proceeds of approximately $23.8 million, after deducting underwriting discounts and offering expenses.
As of June 30, 2015, Katonah Debt Advisors and Trimaran Advisors, as well as affiliated management companies Katonah 2007-1 Management, L.L.C., Katonah X Management, L.L.C. and Trimaran Advisors Management, L.L.C. (collectively the Asset Manager Affiliates) have approximately $3.2 billion of par value assets under management. The Asset Manager Affiliates are each managed independently from KCAP Financial by a separate management team (however, certain of the Companys executive officers also act in similar capacities for one or both of the Asset Manager Affiliates). The Asset Manager Affiliates provide investment management services to CLO Funds, making day-to-day investment decisions concerning the assets of the CLO Funds. The Asset Manager Affiliates do not have any investment interest in the CLO Funds they manage, however KCAP Financial holds investments in a portion of the securities issued by the CLO Funds managed by the Asset Manager Affiliates.
The Company has three principal areas of investment:
First, the Company originates, structures, and invests in senior secured term loans and mezzanine debt primarily in privately-held middle market companies (the Debt Securities Portfolio). In addition, from time to time the Company may invest in the equity securities of privately held middle market companies.
Second, the Company has invested in Asset Manager Affiliates that manage collateralized loan obligation funds (CLOs).
F-23
Third, the Company invests in debt and subordinated securities issued by CLOs (CLO Fund Securities). These CLO Fund Securities are primarily managed by our Asset Manager Affiliates, but from time-to-time the Company makes investments in CLO Fund Securities managed by other asset managers. The CLOs typically invest in broadly syndicated loans, high-yield bonds and other credit instruments.
The Company may also invest in other investments such as loans to larger, publicly-traded companies, high-yield bonds and distressed debt securities. The Company may also receive warrants or options to purchase common stock in connection with its debt investments.
The Company has elected to be treated as a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). To qualify as a RIC, the Company must, among other things, meet certain source-of-income, and asset diversification and annual distribution requirements. As a RIC, the Company generally will not have to pay corporate-level U.S. federal income taxes on any income that it distributes in a timely manner to its stockholders.
The accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required for annual consolidated financial statements. The unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto in the Companys Form 10-K for the year ended December 31, 2014, as filed with the U.S. Securities and Exchange Commission (the Commission or the SEC).
The consolidated financial statements reflect all adjustments, both normal and recurring which, in the opinion of management, are necessary for the fair presentation of the Companys results of operations and financial condition for the periods presented. Furthermore, the preparation of the consolidated financial statements requires management to make significant estimates and assumptions including with respect to the fair value of investments that do not have a readily available market value. Actual results could differ from those estimates, and the differences could be material. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for the full year. Certain prior period amounts have been reclassified to conform to the current year presentation.
The Company consolidates the financial statements of its wholly-owned special purpose financing subsidiaries KCAP Funding, Kolhberg Capital Funding LLC I, KCAP Senior Funding I, LLC and KCAP Senior Funding I Holdings, LLC in its consolidated financial statements as they are operated solely for investment activities of the Company. The creditors of KCAP Senior Funding I, LLC have received security interests in the assets owned by KCAP Senior Funding I, LLC and such assets are not intended to be available to the creditors of KCAP Financial, Inc., or any other affiliate.
In accordance with Article 6 of Regulation S-X under the Securities Act of 1933, as amended (the Securities Act), and the Securities Exchange Act of 1934, as amended (the Exchange Act), the Company does not consolidate portfolio company investments, including those in which it has a controlling interest (e.g., the Asset Manager Affiliates), unless the portfolio company is another investment company.
The Asset Manager Affiliates are subject to Accounting Standards Codification Topic 810, Consolidation and although the Company cannot consolidate the financial statements of portfolio company investments, this guidance impacts the required disclosures relating to the Asset Manager Affiliates, as it requires the Asset Manager Affiliates to consolidate the financial statements of managed CLO Funds. As a result of the consolidation of the financial statements of the CLOs into the financial statements of the Asset
F-24
Manager Affiliates, the Asset Manager Affiliates qualify as a significant subsidiary and, as a result, the Company is required to include additional financial information regarding the Asset Manager Affiliates in its filings with the SEC. This additional financial information regarding the Asset Manager Affiliates does not directly impact the financial position or results of operations of the Company.
In addition, in accordance with Rule 3-09 of Regulation S-X promulgated by the SEC, additional financial information with respect to one of the CLO Funds in which the Company has an investment, Katonah 2007-I CLO Ltd. (Katonah 2007-I CLO) is required to be included in the Companys SEC filings. The additional financial information regarding the Asset Manager Affiliates and Katonah 2007-I CLO (pursuant to Rule 3-09) is set forth in Note 5 to these consolidated financial statements.
Stockholder distributions on the Statement of Changes in Net Assets reflect the estimated allocation, between net investment income and return of capital, of distributions made during the reporting period, excluding the distribution declared in a quarter with a record date occurring after the quarter-end. The determination of the tax character of distributions is made on an annual (full calendar-year) basis. The determination of the tax attributes is made at the end of the year based upon our taxable income for the full year and the distributions paid during the full year. Therefore, an estimate of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year.
It is the Companys primary investment objective to generate current income and capital appreciation by lending directly to privately-held middle market companies. During the six months ended June 30, 2015, the Company provided $45 million to portfolio companies to support their growth objectives. None of this support was contractually obligated. See also Note 8 Commitments and Contingencies. As of June 30, 2015, the Company holds loans it has made to 99 investee companies with aggregate principal amounts of $273 million. The details of such loans have been disclosed on the consolidated schedule of investments as well as in Note 4 Investments. In addition to providing loans to investee companies, from time to time the Company assists investee companies in securing financing from other sources by introducing such investee companies to sponsors or by leading a syndicate of lenders to provide the investee companies with financing. During the six month period ended June 30, 2015, the Company did not make any such introductions or lead any syndicates.
In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern (ASU 2014-15). The standard requires management to evaluate, at each interim and annual reporting period, whether there are conditions or events that raise substantial doubt about the entitys ability to continue as a going concern within one year after the date the financial statements are issued, and provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter, and early adoption is permitted. We do not expect to adopt ASU 2014-15 early, and we do not believe the standard will have a material impact on our financial statements, when adopted.
On February 18, 2015, the FASB issued Accounting Standards Update 2015-2, which updated consolidation standards under ASC Topic 810, Consolidation. Under this update, a new consolidation analysis is required for variable interest entities (VIEs) and will limit the circumstances in which investment managers and similar entities are required to consolidate the entities that they manage. The FASB decided to eliminate some of the criteria under which their fees are considered a variable interest and limit the circumstances in which variable interests in a VIE held by related parties of a reporting enterprise require the reporting enterprise to consolidate the VIE. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015. We do not expect the adoption of ASU 2015-2 to have a material impact to the Companys financial statements.
F-25
In April 2015, the FASB issued Accounting Standards Update 2015-03, Interest Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. Under this guidance, debt issuance costs related to a recognized debt liability are to be presented as a direct deduction from the debt liability rather than as an asset on the balance sheet, consistent with debt discounts. For public business entities, the final guidance will be effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The Company intends to adopt the new guidance beginning the first quarter of 2016.
Investment transactions are recorded on the applicable trade date. Realized gains or losses are determined using the specific identification method.
Valuation of Portfolio Investments. The Companys Board of Directors is ultimately and solely responsible for making a good faith determination of the fair value of portfolio investments on a quarterly basis. Debt and equity securities for which market quotations are readily available are generally valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available are valued by the Board of Directors based on detailed analyses prepared by management, the Valuation Committee of the Board of Directors, and, in certain circumstances, third parties with valuation expertise. Valuations are conducted by management on 100% of the investment portfolio at the end of each quarter. The Company follows the provisions of ASC 820: Fair Value Measurements and Disclosures (ASC 820: Fair Value). This standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. ASC 820: Fair Value defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Subsequent to the adoption of ASC 820: Fair Value, the FASB has issued various staff positions clarifying the initial standard as noted below.
The FASB issued guidance that clarified and required disclosures about fair value measurements. These include requirements to disclose the amounts and reasons for significant transfers between Level I and Level II, as well as significant transfers in and out of Level III of the fair value hierarchy (see Note 4 Investments Fair Value Measurements for further information relating to Level I, Level II and Level III). The guidance also required that purchases, sales, issuances and settlements be presented gross in the Level III reconciliation.
ASC 820: Fair Value requires the disclosure in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period.
The Company utilizes an independent valuation firm to provide an annual third-party review of the Companys CLO fair value model relative to its functionality, model inputs and calculations as a reasonable method to determine CLO fair values, in the absence of Level I or Level II trading activity or observable market inputs. The independent valuation firms 2014 annual review concluded that the Companys CLO model appropriately factors in all the necessary inputs required to build a CLO equity cash flow model for fair value purposes and that the inputs were being employed correctly.
The Company utilizes an independent valuation firm to provide third party valuation consulting services. Each quarter the independent valuation firm will perform third party valuations of the Companys investments in material illiquid securities such that they are reviewed at least once during a trailing 12 month period. These third party valuation estimates are considered as one of the relevant data inputs in the Companys determination of fair value. The Company intends to continue to engage an independent valuation firm in the future to provide certain valuation services, including the review of certain portfolio assets, as part of the quarterly and annual year-end valuation process.
F-26
The Board of Directors may consider other methods of valuation than those set forth below to determine the fair value of Level III investments as appropriate in conformity with GAAP. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Companys investments may differ materially from the values that would have been used had a readily available market existed for such investments. Further, such investments may be generally subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities. In addition, changes in the market environment and other events may occur over the life of the investments that may cause the value realized on such investments to be different from the currently assigned valuations.
The majority of the Companys investment portfolio is composed of debt and equity securities with unique contract terms and conditions and/or complexity that requires a valuation of each individual investment that considers multiple levels of market and asset specific inputs, which may include historical and forecasted financial and operational performance of the individual investment, projected cash flows, market multiples, comparable market transactions, the priority of the security compared with those of other securities for such issuers, credit risk, interest rates, and independent valuations and reviews.
Debt Securities. To the extent that the Companys investments are exchange traded and are priced or have sufficient price indications from normal course trading at or around the valuation date (financial reporting date), such pricing will determine fair value. Valuations from third party pricing services may be used as an indication of fair value, depending on the volume and reliability of the valuation, sufficient and reasonable correlation of bid and ask quotes, and, most importantly, the level of actual trading activity. However, if the Company has been unable to identify directly comparable market indices or other market guidance that correlate directly to the types of investments the Company owns, the Company will determine fair value using alternative methodologies such as available market data, as adjusted, to reflect the types of assets the Company owns, their structure, qualitative and credit attributes and other asset-specific characteristics.
The Company derives fair value for its illiquid investments that do not have indicative fair values based upon active trades primarily by using a present value technique that discounts the estimated contractual cash flows for the subject assets with discount rates imputed by broad market indices, bond spreads and yields for comparable issuers relative to the subject assets (the Income Approach). The Company also considers, among other things, recent loan amendments or other activity specific to the subject asset. Discount rates applied to estimated contractual cash flows for an underlying asset vary by specific investment, industry, priority and nature of the debt security (such as the seniority or security interest of the debt security) and are assessed relative to two indices, a leveraged loan index and a high-yield bond index, at the valuation date. The Company has identified these two indices as benchmarks for broad market information related to its loan and debt securities. Because the Company has not identified any market index that directly correlates to the loan and debt securities held by the Company and therefore uses these benchmark indices, these market indices may require significant adjustment to better correlate such market data for the calculation of fair value of the investment under the Income Approach. Such adjustments require judgment and may be material to the calculation of fair value. Further adjustments to the discount rate may be applied to reflect other market conditions or the perceived credit risk of the borrower. When broad market indices are used as part of the valuation methodology, their use is subject to adjustment for many factors, including priority, collateral used as security, structure, performance and other quantitative and qualitative attributes of the asset being valued. The resulting present value determination is then weighted along with any quotes from observable transactions and broker/pricing quotes. If such quotes are indicative of actual transactions with reasonable trading volume at or near the valuation date that are not liquidation or distressed sales, relatively more reliance will be put on such quotes to determine fair value. If such quotes are not indicative of market transactions or are insufficient as to volume, reliability, consistency or other relevant factors, such quotes will be compared with other fair value indications and given relatively less weight based on their relevancy. Other significant assumptions, such as coupon and maturity, are asset-specific and are noted for each investment in the Schedules of Investments.
F-27
Equity Securities. The Companys equity securities in portfolio companies for which there is no liquid public market are carried at fair value based on the Enterprise Value of the portfolio company, which is determined using various factors, including EBITDA (earnings before interest, taxes, depreciation and amortization) and discounted cash flows from operations, less capital expenditures and other pertinent factors, such as recent offers to purchase a portfolio companys securities or other liquidation events. The determined fair values are generally discounted to account for restrictions on resale and minority ownership positions. In the event market quotations are readily available for the Companys equity securities in public companies, those investments may be valued using the Market Approach. In cases where the Company receives warrants to purchase equity securities, a market standard Black-Scholes model is utilized.
The significant inputs used to determine the fair value of equity securities include prices, EBITDA and cash flows after capital expenditures for similar peer comparables and the investment entity itself. Equity securities are classified as Level III, when there is limited activity or less transparency around inputs to the valuation given the lack of information related to such equity investments held in nonpublic companies. Significant assumptions observed for comparable companies are applied to relevant financial data for the specific investment. Such assumptions, such as model discount rates or price/earnings multiples, vary by the specific investment, equity position and industry and incorporate adjustments for risk premiums, liquidity and company specific attributes. Such adjustments require judgment and may be material to the calculation of fair value.
Asset Manager Affiliates. The Companys investments in its wholly-owned asset management companies, the Asset Manager Affiliates, are carried at fair value, which is primarily determined utilizing the Discounted Cash Flow approach, which incorporates different levels of discount rates depending on the hierarchy of fees earned (including the likelihood of realization of senior, subordinate and incentive fees) and prospective modeled performance. Such valuation takes into consideration an analysis of comparable asset management companies and a percentage of assets under management. The Asset Manager Affiliates are classified as a Level III investment. Any change in value from period to period is recognized as net change in unrealized appreciation or depreciation.
CLO Fund Securities. The Company typically makes a minority investment in the most junior class of securities of CLO Funds raised and managed by the Asset Manager Affiliates and may selectively invest in securities issued by funds managed by other asset management companies. The investments held by CLO Funds generally relate to non-investment grade credit instruments issued by corporations.
The Companys investments in CLO Fund securities are carried at fair value, which is based either on (i) the present value of the net expected cash inflows for interest income and principal repayments from underlying assets and cash outflows for interest expense, debt pay-down and other fund costs for the CLO Funds that are approaching or past the end of their reinvestment period and therefore are selling assets and/or using principal repayments to pay down CLO Fund debt (or will begin to do so shortly), and for which there continue to be net cash distributions to the class of securities owned by the Company, a Discounted Cash Flow approach, (ii) a discounted cash flow model that utilizes prepayment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow and comparable yields for similar securities or preferred shares to those in which the Company has invested, or (iii) indicative prices provided by the underwriters or brokers who arrange CLO Funds, a Market Approach. The Company recognizes unrealized appreciation or depreciation on the Companys investments in CLO Fund securities as comparable yields in the market change and/or based on changes in net asset values or estimated cash flows resulting from changes in prepayment or loss assumptions in the underlying collateral pool. As each investment in CLO Fund securities ages, the expected amount of losses and the expected timing of recognition of such losses in the underlying collateral pool are updated and the revised cash flows are used in determining the fair value of the CLO Fund investment. The Company determines the fair value of its investments in CLO Fund securities on a security-by-security basis.
F-28
Due to the individual attributes of each CLO Fund security, they are classified as a Level III investment unless specific trading activity can be identified at or near the valuation date. When available, observable market information will be identified, evaluated and weighted accordingly in the application of such data to the present value models and fair value determination. Significant assumptions to the present value calculations include default rates, recovery rates, prepayment rates, investment/reinvestment rates and spreads and the discount rate by which to value the resulting underlying cash flows. Such assumptions can vary significantly, depending on market data sources which often vary in depth and level of analysis, understanding of the CLO market, detailed or broad characterization of the CLO market and the application of such data to an appropriate framework for analysis. The application of data points are based on the specific attributes of each individual CLO Fund securitys underlying assets, historic, current and prospective performance, vintage, and other quantitative and qualitative factors that would be evaluated by market participants. The Company evaluates the source of market data for reliability as an indicative market input, consistency amongst other inputs and results and also the context in which such data is presented.
For rated note tranches of CLO Fund securities (those above the junior class) without transactions to support a fair value for the specific CLO Fund and tranche, fair value is based on discounting estimated bond payments at current market yields, which may reflect the adjusted yield on the leveraged loan index for similarly rated tranches, as well as prices for similar tranches for other CLO Funds and also other factors such as indicative prices provided by underwriters or brokers who arrange CLO Funds, and the default and recovery rates of underlying assets in the CLO Fund, as may be applicable. Such model assumptions may vary and incorporate adjustments for risk premiums and CLO Fund specific attributes.
Cash. The Company defines cash as demand deposits. The Company places its cash with financial institutions and, at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit.
Restricted Cash. Restricted cash and cash equivalents (e.g. money market funds) consists of cash held for reinvestment, quarterly interest and principal distribution (if any) to holders of notes issued by KCAP Senior Funding I, LLC.
Time Deposits and Money Market Accounts. Time deposits primarily represent investments of cash held in demand deposit accounts. Money market accounts primarily represent short term interest-bearing deposit accounts. Also includes restricted cash held under employee benefit plans.
Interest Income. Interest income, including the amortization of premium and accretion of discount, is recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company generally places a loan or security on non-accrual status and ceases recognizing cash interest income on such loan or security when a loan or security becomes 90 days or more past due or if the Company otherwise does not expect the debtor to be able to service its debt obligations. Non-accrual loans remain in such status until the borrower has demonstrated the ability and intent to pay contractual amounts due or such loans become current. As of June 30, 2015, 1 issuer representing less than 1% of the Companys total investments at fair value was on a non-accrual status.
Distributions from Asset Manager Affiliates. The Company records distributions from our Asset Manager Affiliates on the declaration date, which represents the ex-dividend date. Distributions in excess of tax-basis earnings and profits of the distributing affiliate company are recognized as tax-basis return of capital. For interim periods, the Company estimates the tax attributes of any distributions as being either tax-basis earnings and profits (i.e. dividend income) or return of capital (i.e. adjustment to the Companys cost basis in the Asset Manager Affiliates). The final determination of the tax attributes of distributions from our Asset Manager Affiliates is made on an annual (full calendar year) basis at the end of the year based upon taxable income and distributions for the full-year. Therefore, any estimate of tax attributes of distributions made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year.
F-29
Investment Income on CLO Fund Securities. The Company generates investment income from its investments in the most junior class of securities of CLO Funds (typically preferred shares or subordinated securities) managed by the Asset Manager Affiliates and selective investments in securities issued by funds managed by other asset management companies. The Companys CLO Fund junior class securities are subordinated to senior note holders who typically receive a stated interest rate of return based on a floating rate index, such as the London Interbank Offered Rate (LIBOR) on their investment. The CLO Funds are leveraged funds and any excess cash flow or excess spread (interest earned by the underlying securities in the fund less payments made to senior note holders and less fund expenses and management fees) is paid to the holders of the CLO Funds subordinated securities or preferred shares.
GAAP-basis investment income on CLO equity investments is recorded using the effective interest method in accordance with the provisions of ASC 325-40, based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated projected future cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield prospectively over the remaining life of the investment from the date the estimated yield was changed. Accordingly, investment income recognized on CLO equity securities in the GAAP statement of operations differs from both the taxbasis investment income and from the cash distributions actually received by the Company during the period.
For non-junior class CLO Fund securities, such as the Companys investment in the Class F Notes of the Catamaran 2012-1 CLO and Class E Notes of the Catamaran 2014-1 CLO, interest is earned at a fixed spread relative to the LIBOR index.
Capital Structuring Service Fees. The Company may earn ancillary structuring and other fees related to the origination, investment, disposition or liquidation of debt and investment securities. Generally, the Company will capitalize loan origination fees, then amortize these fees into interest income over the term of the loan using the effective interest rate method, recognize prepayment and liquidation fees upon receipt and equity structuring fees as earned, which generally occurs when an investment transaction closes.
Debt Issuance Costs. Debt issuance costs represent fees and other direct costs incurred in connection with the Companys borrowings. These amounts are capitalized and amortized using the effective interest method over the contractual term of the borrowing.
Extinguishment of debt. An issuer must derecognize a liability if and only if it has been extinguished through delivery of cash, delivery of other financial assets, delivery of goods or services, or reacquisition by the issuer of its outstanding debt securities whether the securities are cancelled or held. If the debt contains a cash conversion option, the issuer must allocate the consideration transferred and transaction costs incurred to the extinguishment of the liability component and the reacquisition of the equity component and recognize a gain or loss in the statement of operations.
Expenses. The Company is internally managed and expenses costs, as incurred, with regard to the running of its operations. Primary operating expenses include employee salaries and benefits, the costs of identifying, evaluating, negotiating, closing, monitoring and servicing the Companys investments and related overhead charges and expenses, including rental expense, and any interest expense incurred in connection with borrowings. The Company and the Asset Manager Affiliates share office space and certain other operating expenses. The Company has entered into an Overhead Allocation Agreement with the Asset Manager Affiliates which provides for the sharing of such expenses based on an allocation of office lease costs and the ratable usage of other shared resources.
F-30
Shareholder Distributions. Distributions to common stockholders are recorded on the ex-dividend date. The amount of distributions, if any, is determined by the Board of Directors each quarter.
The Company has adopted a dividend reinvestment plan that provides for reinvestment of its distributions on behalf of its stockholders, unless a stockholder opts out of the plan to receive cash in lieu of having their cash distributions automatically reinvested in additional shares of the Companys common stock.
In accordance with the provisions of ASC 260, Earnings per Share (ASC 260), basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.
The following information sets forth the computation of basic and diluted net increase in stockholders equity per share for the three and six months ended June 30, 2015 and 2014 (unaudited):
(unaudited) Three Months Ended June 30, |
(unaudited) Six Months Ended June 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net increase in net assets resulting from operations |
$ | 1,232,705 | $ | 12,252,662 | $ | 8,904,995 | $ | 15,694,256 | ||||||||
Net decrease in net assets allocated to unvested share awards | (20,663 | ) | (115,402 | ) | (149,482 | ) | (138,230 | ) | ||||||||
Interest on Convertible Notes | | 1,072,050 | | 2,144,100 | ||||||||||||
Amortization of Capitalized Costs on Convertible Notes | | 104,430 | | 206,867 | ||||||||||||
Net increase in net assets available to common stockholders | $ | 1,212,042 | $ | 13,313,740 | $ | 8,755,513 | $ | 17,906,993 | ||||||||
Weighted average number of common shares outstanding for basic shares computation | 36,886,129 | 33,405,189 | 36,860,341 | 33,371,764 | ||||||||||||
Effect of dilutive securities stock options | 5,802 | 11,858 | 7,546 | 11,903 | ||||||||||||
Effect of dilutive Convertible Notes | | 6,306,217 | | 6,306,217 | ||||||||||||
Weighted average number of common and common stock equivalent shares outstanding for diluted shares computation | 36,891,931 | 39,723,264 | 36,867,887 | 39,689,884 | ||||||||||||
Net increase in net assets per basic common shares: |
||||||||||||||||
Net increase in net assets from operations | $ | 0.03 | $ | 0.37 | $ | 0.24 | $ | 0.47 | ||||||||
Net increase in net assets per diluted shares: |
||||||||||||||||
Net increase in net assets from operations | $ | 0.03 | $ | 0.34 | $ | 0.24 | $ | 0.45 |
Share-based awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and included in the computation of both basic and diluted earnings per share. Grants of restricted stock awards to the Companys employees and directors are considered participating securities when there are earnings in the period and the earnings per share calculations include outstanding unvested restricted stock awards in the basic weighted average shares outstanding calculation.
There were 50,000 options to purchase shares of common stock for the three months ended June 30, 2015 and 2014. For the three months ended June 30, 2015 and 2014 options to purchase 5,802 and 11,858 shares of common stock, respectively, were included in the computation of diluted earnings per share.
F-31
For the six months ended June 30, 2015 and 2014, options to purchase 7,546 and 11,903 shares of common stock, respectively, were included in the computation of diluted earnings per share. For the six months ended June 30, 2015, the company purchased 36,039 shares of treasury stock in connection with the vesting of employees restricted stock, such treasury shares reduce the weighted average shares outstanding in the computation of earnings per share.
The Companys Convertible Notes are included in the computation of the diluted net increase or decrease in net assets resulting from operations per share by application of the if-converted method. Under the if-converted method, interest charges applicable to the convertible notes for the period are added to reported net increase or decrease in net assets resulting from operations and the full amount of shares (pro-rata if not outstanding for the full period) that would be issued are added to weighted average basic shares. Convertible notes are considered anti-dilutive only when its interest per share upon conversion exceeds the basic net increase or decrease in net assets resulting from operations per share. For the three months and six months ended June 30, 2015, the effects of the convertible notes are anti-dilutive.
The if-converted method of computing the dilutive effects on convertible notes assumes a conversion even if the contracted conversion price exceeds the market value of the shares. As of June 30, 2015 the current conversion rate of the Convertible Notes is approximately 133.59 shares of our common stock per $1,000 principal amount of the Convertible Notes, equivalent to a conversion price of approximately $7.49 per share of the Companys common stock. Upon conversion, the Company may issue the full amount of common stock and retire the full amount of debt outstanding or, at its option, settle the conversion in cash.
The following table shows the Companys portfolio by security type at June 30, 2015 and December 31, 2014:
June 30, 2015 (unaudited) | December 31, 2014 | |||||||||||||||||||||||
Security Type | Cost | Fair Value | %(1) | Cost | Fair Value | %(1) | ||||||||||||||||||
Money Market Accounts(3) | $ | 16,457,816 | $ | 16,457,816 | 6 | $ | 1,602,741 | $ | 1,602,741 | 1 | ||||||||||||||
Senior Secured Loan | 220,875,385 | 217,535,523 | 84 | 220,965,922 | 218,329,860 | 86 | ||||||||||||||||||
Junior Secured Loan | 40,194,817 | 39,898,155 | 15 | 38,664,199 | 38,569,006 | 15 | ||||||||||||||||||
Senior Unsecured Loan | 10,143,525 | 10,143,525 | 4 | 33,066,984 | 33,066,984 | 13 | ||||||||||||||||||
First Lien Bond | 2,972,088 | 2,547,600 | 1 | 2,962,507 | 2,580,000 | 1 | ||||||||||||||||||
Senior Subordinated Bond | 4,375,084 | 4,278,531 | 2 | 4,295,544 | 4,240,301 | 2 | ||||||||||||||||||
Senior Unsecured Bond | 11,527,830 | 11,618,855 | 5 | 11,208,178 | 11,386,218 | 4 | ||||||||||||||||||
Senior Secured Bond | 1,512,620 | 1,481,700 | 1 | 1,515,584 | 1,552,500 | 1 | ||||||||||||||||||
CLO Fund Securities | 97,601,049 | 78,448,455 | 30 | 90,889,190 | 77,514,901 | 30 | ||||||||||||||||||
Equity Securities | 8,514,487 | 7,542,085 | 3 | 8,828,812 | 8,119,681 | 3 | ||||||||||||||||||
Preferred Securities | 10,308,332 | 10,411,415 | 4 | 10,206,016 | 10,418,302 | 4 | ||||||||||||||||||
Asset Manager Affiliates(2) | 57,942,090 | 73,737,000 | 29 | 60,292,677 | 72,326,000 | 28 | ||||||||||||||||||
Total | $ | 482,425,123 | $ | 474,100,660 | 184 | % | $ | 484,498,354 | $ | 479,706,494 | 188 | % |
(1) | Represents percentage of Net Asset Value. |
(2) | Represents the equity investment in the Asset Manager Affiliates. |
(3) | Includes restricted cash held under employee benefit plans. |
F-32
The industry concentrations based on the fair value of the Companys investment portfolio as of June 30, 2015 and December 31, 2014, were as follows:
June 30, 2015 (unaudited) | December 31, 2014 | |||||||||||||||||||||||
Industry Classification | Cost | Fair Value | %(1) | Cost | Fair Value | %(1) | ||||||||||||||||||
Aerospace and Defense | $ | 9,962,961 | $ | 9,507,015 | 4.0 | % | $ | 10,059,487 | $ | 9,533,092 | 4 | % | ||||||||||||
Asset Management Company(2) |
57,942,090 | 73,737,000 | 30.0 | 60,292,677 | 72,326,000 | 28 | ||||||||||||||||||
Portfolio Company Loan | | | | 23,000,000 | 23,000,000 | 9 | ||||||||||||||||||
Automotive | 8,338,128 | 8,288,792 | 3.0 | 8,362,956 | 8,312,548 | 3 | ||||||||||||||||||
Banking, Finance, Insurance & Real Estate | 6,883,390 | 6,932,029 | 3.0 | 7,660,721 | 7,639,366 | 3 | ||||||||||||||||||
Beverage, Food and Tobacco |
26,075,029 | 25,908,282 | 10.0 | 17,974,974 | 17,883,421 | 7 | ||||||||||||||||||
Capital Equipment | 9,503,020 | 10,144,194 | 4.0 | 9,486,407 | 10,351,329 | 4 | ||||||||||||||||||
Chemicals, Plastics and Rubber | 9,813,938 | 9,817,440 | 4.0 | 6,348,226 | 6,210,253 | 2 | ||||||||||||||||||
CLO Fund Securities | 97,601,049 | 78,448,455 | 30.0 | 90,889,190 | 77,514,901 | 31 | ||||||||||||||||||
Construction & Building | 1,985,014 | 1,985,000 | 1.0 | | | | ||||||||||||||||||
Consumer goods: Durable | 14,308,915 | 13,799,538 | 5.0 | 13,876,482 | 13,301,207 | 5 | ||||||||||||||||||
Consumer goods: Non-durable | 13,470,912 | 13,389,057 | 5.0 | 13,535,975 | 13,314,952 | 5 | ||||||||||||||||||
Containers, Packaging and Glass | 2,916,649 | 2,930,328 | 1.0 | 2,992,443 | 2,946,734 | 1 | ||||||||||||||||||
Energy: Oil & Gas | 14,071,674 | 12,659,600 | 5.0 | 13,866,208 | 13,289,753 | 5 | ||||||||||||||||||
Environmental Industries | 12,836,897 | 12,869,296 | 5.0 | 12,942,593 | 12,911,017 | 5 | ||||||||||||||||||
Forest Products & Paper | 5,902,645 | 5,939,900 | 2.0 | 5,917,051 | 5,942,523 | 2 | ||||||||||||||||||
Healthcare & Pharmaceuticals |
64,268,378 | 62,621,277 | 24.0 | 66,186,412 | 65,720,782 | 27 | ||||||||||||||||||
High Tech Industries | 10,837,095 | 10,924,468 | 4.0 | 14,457,495 | 14,419,110 | 6 | ||||||||||||||||||
Hotel, Gaming & Leisure | 3,219,576 | 2,825,862 | 1.0 | 3,392,481 | 2,962,315 | 1 | ||||||||||||||||||
Media: Advertising, Printing & Publishing | 11,239,642 | 10,844,244 | 4.0 | 11,318,815 | 11,396,027 | 4 | ||||||||||||||||||
Media: Broadcasting & Subscription | 10,468,451 | 10,360,599 | 4.0 | 14,477,078 | 14,409,401 | 6 | ||||||||||||||||||
Metals & Mining | 228,563 | 1,000 | | 228,563 | 1,000 | | ||||||||||||||||||
Retail | 4,389,620 | 4,028,444 | 2.0 | 4,234,086 | 3,773,847 | 1 | ||||||||||||||||||
Services: Business | 20,521,595 | 20,426,472 | 8.0 | 16,550,255 | 16,066,421 | 6 | ||||||||||||||||||
Services: Consumer | 6,542,350 | 6,577,250 | 3.0 | 6,798,372 | 6,752,521 | 3 | ||||||||||||||||||
Telecommunications | 15,111,618 | 14,979,978 | 6.0 | 22,030,434 | 21,865,864 | 9 | ||||||||||||||||||
Time Deposit and Money Market Accounts(3) | 16,457,815 | 16,457,816 | 6.0 | 1,602,741 | 1,602,741 | 1 | ||||||||||||||||||
Transportation: Cargo | 21,724,053 | 21,876,962 | 8.0 | 20,156,700 | 20,455,941 | 8 | ||||||||||||||||||
Utilities: Electric | 5,804,056 | 5,820,362 | 2.0 | 5,859,532 | 5,803,428 | 2 | ||||||||||||||||||
Total | $ | 482,425,123 | $ | 474,100,660 | 184 | % | $ | 484,498,354 | $ | 479,706,494 | 188 | % |
(1) | Calculated as a percentage of Net Asset Value. |
(2) | Represents the equity investment in the Asset Manager Affiliates. |
(3) | Includes restricted cash held under employee benefit plans. |
F-33
The Company may invest up to 30% of the investment portfolio in non-qualifying opportunistic investments in debt and equity securities of CLO Funds, distressed debt or debt and equity securities of public companies. The Company expects that these public companies generally will have debt that is non-investment grade. Within this 30% of the portfolio, the Company also may invest in debt of middle market companies located outside of the United States.
At both June 30, 2015 and December 31, 2014, the total amount of non-qualifying assets was approximately 21%. The majority of non-qualifying assets were foreign investments which were approximately 16% of the Companys total assets, respectively (including the Companys investments in CLO Funds, which are typically domiciled outside the U.S. and represented approximately 16% of its total assets on such dates).
The following tables detail the ten largest portfolio companies (at fair value) as of June 30, 2015 and December 31, 2014:
June 30, 2015 (unaudited) | ||||||||||||
Investment | Cost | Fair Value | % | |||||||||
Asset Manager Affiliates | $ | 57,942,090 | $ | 73,737,000 | 16 | % | ||||||
Katonah 2007-I CLO Ltd. | 23,740,077 | 24,674,912 | 5 | |||||||||
US Bank Money Market Account | 16,208,632 | 16,208,632 | 3 | |||||||||
Crowley Holdings Preferred, LLC | 10,308,332 | 10,411,415 | 2 | |||||||||
Tank Partners Holdings, LLC | 10,416,387 | 9,788,240 | 2 | |||||||||
Catamaran CLO 2015-1 Ltd. | 12,132,538 | 9,531,720 | 2 | |||||||||
Restorix Health, Inc. | 8,124,738 | 8,124,738 | 2 | |||||||||
Catamaran CLO 2014-1 Ltd. | 9,690,780 | 7,908,078 | 2 | |||||||||
Catamaran CLO 2014-2 Ltd. | 8,847,407 | 7,763,580 | 2 | |||||||||
Grupo HIMA San Pablo, Inc. | 6,909,329 | 7,105,000 | 1 | |||||||||
Total | $ | 164,320,310 | $ | 175,253,315 | 37 | % |
December 31, 2014 | ||||||||||||
Investment | Cost | Fair Value | % | |||||||||
Asset Manager Affiliates | $ | 60,292,677 | $ | 72,326,000 | 15 | % | ||||||
Katonah 2007-I CLO Ltd. | 23,471,779 | 25,191,782 | 5 | |||||||||
Trimaran Credit Facility | 23,000,000 | 23,000,000 | 5 | |||||||||
Crowley Holdings Preferred, LLC | 10,206,016 | 10,418,302 | 2 | |||||||||
Tank Partners Holdings, LLC | 10,212,907 | 9,866,065 | 2 | |||||||||
Catamaran CLO 2014-1 Ltd. | 10,473,628 | 8,867,176 | 2 | |||||||||
Catamaran CLO 2014-2 Ltd. | 9,862,799 | 8,761,500 | 2 | |||||||||
Restorix Health, Inc. | 8,063,397 | 8,063,397 | 2 | |||||||||
Catamaran CLO 2013-1 Ltd. | 7,492,702 | 7,874,910 | 2 | |||||||||
Grupo HIMA San Pablo, Inc. | 6,894,754 | 7,105,000 | 1 | |||||||||
Total | $ | 169,970,659 | $ | 181,474,132 | 38 | % |
Excluding the Asset Manager Affiliates and CLO Fund securities, the Companys ten largest portfolio companies represented approximately 14% and 17% of the total fair value of the Companys investments at June 30, 2015 and December 31, 2014, respectively.
F-34
The Company typically makes a minority investment in the most junior class of securities (typically preferred shares or subordinated securities) of CLO Funds managed by the Asset Manager Affiliates and may selectively invest in securities issued by CLO funds managed by other asset management companies. These securities also are entitled to recurring distributions which generally equal the net remaining cash flow of the payments made by the underlying CLO Funds securities less contractual payments to senior bond holders, management fees and CLO Fund expenses. CLO Funds invest primarily in broadly syndicated non-investment grade loans, high-yield bonds and other credit instruments of corporate issuers. The underlying assets in each of the CLO Funds in which the Company has an investment are generally diversified secured or unsecured corporate debt. The CLO Funds are leveraged funds and any excess cash flow or excess spread (interest earned by the underlying securities in the fund less payments made to senior bond holders, fund expenses and management fees) is paid to the holders of the CLO Funds subordinated securities or preferred shares.
The Company follows the provisions of ASC 820: Fair Value, which among other matters, requires enhanced disclosures about investments that are measured and reported at fair value. This standard defines fair value and establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring investments at fair value and expands disclosures about assets and liabilities measured at fair value. ASC 820: Fair Value defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This fair value definition focuses on an exit price in the principal, or most advantageous market, and prioritizes, within a measurement of fair value, the use of market-based inputs (which may be weighted or adjusted for relevance, reliability and specific attributes relative to the subject investment) over entity-specific inputs. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. Subsequent to the adoption of ASC 820: Fair Value, the FASB has issued various staff positions clarifying the initial standard (see Note 2 Significant Accounting Policies Investments).
ASC 820: Fair Value establishes the following three-level hierarchy, based upon the transparency of inputs to the fair value measurement of an asset or liability as of the measurement date:
Level I Unadjusted quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I include listed equities and listed securities. As required by ASC 820: Fair Value, the Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably affect the quoted price.
Level II Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. Such inputs may be quoted prices for similar assets or liabilities, quoted markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full character of the financial instrument, or inputs that are derived principally from, or corroborated by, observable market information. Investments which are generally included in this category include illiquid debt securities and less liquid, privately held or restricted equity securities for which some level of recent trading activity has been observed.
Level III Pricing inputs are unobservable for the investment and includes situations where there is little, if any, market activity for the investment. The inputs may be based on the Companys own assumptions about how market participants would price the asset or liability or may use Level II inputs,
F-35
as adjusted, to reflect specific investment attributes relative to a broader market assumption. These inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data for comparable performance or valuation measures (earnings multiples, discount rates, other financial/valuation ratios, etc.) are available, such investments are grouped as Level III if any significant data point that is not also market observable (private company earnings, cash flows, etc.) is used in the valuation methodology.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investments level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the investment. A majority of the Companys investments are classified as Level III. The Company evaluates the source of inputs, including any markets in which its investments are trading, in determining fair value. Inputs that are highly correlated to the specific investment being valued and those derived from reliable or knowledgeable sources will tend to have a higher weighting in determining fair value. Ongoing reviews by the Companys investment analysts, Chief Investment Officer, Valuation Committee and independent valuation firms (if engaged) may include factors such as an assessment of each underlying investment, its current and prospective operating and financial performance, consideration of financing and sale transactions with third parties, expected cash flows and market-based information, including comparable transactions, performance factors, and other investment or industry specific market data, among other factors.
The following table summarizes the fair value of investments by the above ASC 820: Fair Value fair value hierarchy levels as of June 30, 2015 (unaudited) and December 31, 2014, respectively:
As of June 30, 2015 (unaudited) | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
Money market accounts | $ | | $ | 16,457,816 | $ | | $ | 16,457,816 | ||||||||
Debt securities | | 138,608,514 | 159,306,790 | 297,915,304 | ||||||||||||
CLO Fund securities | | | 78,448,455 | 78,448,455 | ||||||||||||
Equity securities | | | 7,542,085 | 7,542,085 | ||||||||||||
Asset Manager Affiliates | | | 73,737,000 | 73,737,000 | ||||||||||||
Total | $ | | $ | 155,066,330 | $ | 319,034,330 | $ | 474,100,660 |
As of December 31, 2014 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
Money market accounts | $ | | $ | 1,602,741 | $ | | $ | 1,602,741 | ||||||||
Debt securities | | 149,124,827 | 171,018,343 | 320,143,170 | ||||||||||||
CLO Fund securities | | | 77,514,902 | 77,514,902 | ||||||||||||
Equity securities | | | 8,119,681 | 8,119,681 | ||||||||||||
Asset Manager Affiliates | | | 72,326,000 | 72,326,000 | ||||||||||||
Total | $ | | $ | 150,727,568 | $ | 328,978,926 | $ | 479,706,494 |
As a BDC, the Company is required to invest primarily in the debt and equity of non-public companies for which there is little, if any, market-observable information. As a result a significant portion of the Companys investments at any given time will likely be deemed Level III investments.
Investment values derived by a third party pricing service are generally deemed to be Level III values. For those that have observable trades, the Company considers them to be Level II.
F-36
Values derived for debt and equity securities using comparable public/private companies generally utilize market-observable data from such comparables and specific, non-public and non-observable financial measures (such as earnings or cash flows) for the private, underlying company/issuer. Such non-observable company/issuer data is typically provided on a monthly or quarterly basis, is certified as correct by the management of the company/issuer and/or audited by an independent accounting firm on an annual basis. Since such private company/issuer data is not publicly available it is not deemed market-observable data and, as a result, such investment values are grouped as Level III assets.
Values derived for the Asset Manager Affiliates using comparable public/private companies utilize market-observable data and specific, non-public and non-observable financial measures (such as assets under management, historical and prospective earnings) for the Asset Manager Affiliates. The Company recognizes that comparable asset managers may not be fully comparable to the Asset Manager Affiliates and typically identifies a range of performance measures and/or adjustments within the comparable population with which to determine value. Since any such ranges and adjustments are entity specific they are not considered market-observable data and thus require a Level III grouping. Illiquid investments that have values derived through the use of discounted cash flow models and residual enterprise value models are grouped as Level III assets.
The Companys policy for determining transfers between levels is based solely on the previously defined three-level hierarchy for fair value measurement. Transfers between the levels of the fair value hierarchy are separately noted in the tables below and the reason for such transfer described in each tables respective footnotes. Investments measured at fair value for which the Company has used unobservable inputs to determine fair value are as follows:
Six Months Ended June 30, 2015 (unaudited) | ||||||||||||||||||||
Debt Securities |
CLO Fund Securities |
Equity Securities |
Asset Manager Affiliate |
Total | ||||||||||||||||
Balance, December 31, 2014 | $ | 171,018,343 | $ | 77,514,902 | $ | 8,119,681 | $ | 72,326,000 | $ | 328,978,926 | ||||||||||
Transfers out of Level III | (21,995,810 | )(1) | | | | (21,995,810 | ) | |||||||||||||
Transfers into Level III | 25,635,428 | (2) | | | | 25,635,428 | ||||||||||||||
Net accretion of discount | 128,484 | (5,240,135 | ) | | | (5,111,651 | ) | |||||||||||||
Purchases | 26,340,042 | 11,952,000 | | | 38,292,042 | |||||||||||||||
Sales/Paydowns | (42,119,713 | ) | | (317,340 | ) | (2,350,586 | ) | (44,787,639 | ) | |||||||||||
Total realized gain (loss) included in earnings | 26,336 | | 3,015 | | 29,351 | |||||||||||||||
Total unrealized gain (loss) included in earnings | 273,680 | (5,778,312 | ) | (263,271 | ) | 3,761,586 | (2,006,317 | ) | ||||||||||||
Balance, June 30, 2015 | $ | 159,306,790 | $ | 78,448,455 | $ | 7,542,085 | $ | 73,737,000 | $ | 319,034,330 | ||||||||||
Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date | $ | 273,680 | $ | (5,778,312 | ) | $ | (263,271 | ) | $ | 3,761,586 | $ | (2,006,317 | ) |
(1) | Transfers out of Level III represent a transfer of $21,995,810 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were observable as of June 30, 2015 |
(2) | Transfers into Level III represent a transfer of $25,635,428 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were unobservable as of June 30, 2015 |
F-37
Year Ended December 31, 2014 | ||||||||||||||||||||
Debt Securities |
CLO Fund Securities |
Equity Securities |
Asset Manager Affiliate | Total | ||||||||||||||||
Balance, December 31, 2013 | $ | 198,097,374 | $ | 79,452,220 | $ | 11,006,399 | $ | 76,148,000 | $ | 364,703,993 | ||||||||||
Transfers out of Level III | (38,990,152 | )(1) | | | | (38,990,152 | ) | |||||||||||||
Transfers into Level III | 1,982,110 | (2) | | | | 1,982,110 | ||||||||||||||
Net accretion of discount | 198,600 | (11,102,015 | ) | | | (10,903,415 | ) | |||||||||||||
Purchases | 132,079,152 | 22,421,847 | 2,216,847 | 545,979 | 157,263,825 | |||||||||||||||
Sales/Paydowns | (121,242,093 | ) | (10,132,500 | ) | (5,007,311 | ) | (6,432,086 | ) | (142,813,990 | ) | ||||||||||
Total realized gain (loss) included in earnings | (9,069,550 | ) | 5,575,498 | (7,136,407 | ) | | (10,630,459 | ) | ||||||||||||
Total unrealized gain (loss) included in earnings | 7,962,902 | (8,700,148 | ) | 7,040,153 | 2,064,107 | 8,367,014 | ||||||||||||||
Balance, December 31, 2014 | $ | 171,018,343 | $ | 77,514,902 | $ | 8,119,681 | $ | 72,326,000 | $ | 328,978,926 | ||||||||||
Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date | $ | (1,448,794 | ) | $ | (4,908,278 | ) | $ | 424,306 | $ | 2,064,107 | $ | (3,868,659 | ) |
(1) | Transfers out of Level III represent a transfer of $2,783,195 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were observable as of December 31, 2013 |
(2) | Transfers into Level III represent a transfer of $34,070,557 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were unobservable as of December 31, 2013. |
As of June 30, 2015, the Companys Level II portfolio investments were valued by a third party pricing services for which the prices are not adjusted and for which inputs are observable or can be corroborated by observable market data for substantially the full character of the financial instrument, or by inputs that are derived principally from, or corroborated by, observable market information. The fair value of the Companys Level II portfolio investments was $155,066,330 as of June 30, 2015.
F-38
As of June 30, 2015, the Companys Level III portfolio investments had the following valuation techniques and significant inputs:
Type | Fair Value | Primary Valuation Methodology | Unobservable Inputs | Range of Inputs (Weighted Average) |
Debt Securities |
$ 2,547,600 | Enterprise Value | Average EBITDA Multiple |
7.2x |
$156,758,190 | Income Approach | Implied Discount Rate | 2.9% 17.9% (9.0%) | |
$ 1,000 | Options Value | Qualitative Inputs(1) | ||
Equity Securities | $ 7,539,085 | Enterprise Value | Average EBITDA Multiple/WAAC |
4.7x/11.9% 13.7x/15.8% (7.9x/13.6%) |
$ 3,000 | Options Value | Qualitative Inputs(1) |
||
CLO Fund Securities |
$ 68,916,735 | Discounted Cash Flow | Discount Rate | 11% 12% (11.4%) |
Probability of Default | 2.0% 2.5% (2.2%) | |||
Loss Severity | 25.0% 25.9% (25.6%) | |||
Recovery Rate | 74.1% 75.0% (74.4%) | |||
Prepayment Rate | 0% 35.8% (26.7%) | |||
$ 9,531,720 | Market Approach | Third Party Quote | 80 (80) | |
Asset Manager Affiliate | $ 73,737,000 | Discounted Cash Flow | Discount Rate | 1.95% 11.00% (6.76%) |
Total Level III Investments |
$319,034,330 |
(1) | The qualitative inputs used in the fair value measurements of the Debt Securities include estimates of the distressed liquidation value of the pledged collateral. |
The significant unobservable inputs used in the fair value measurement of the Companys debt securities may include, among other things, broad market indices, the comparable yields of similar investments in similar industries, effective discount rates, average EBITDA multiples, and weighted average cost of capital. Significant increases or decreases in such comparable yields would result in a significantly lower or higher fair value measurement.
The significant unobservable inputs used in the fair value measurement of the Companys equity securities include the EBITDA multiple of similar investments in similar industries and the weighted average cost of capital. Significant increases or decreases in such inputs would result in a significantly lower or higher fair value measurement.
Significant unobservable input used in the fair value measurement of the Companys CLO Fund securities include default rates, recovery rates, prepayment rates, spreads, and the discount rate by which to value the resulting underlying cash flows. Such assumptions can vary significantly, depending on market data sources which often vary in depth and level of analysis, understanding of the CLO market, detailed or broad characterization of the CLO market and the application of such data to an appropriate framework for analysis. The application of data points are based on the specific attributes of each individual CLO Fund securitys underlying assets, historic, current and prospective performance, vintage, and other quantitative and qualitative factors that would be evaluated by market participants. The Company evaluates the source of market data for reliability as an indicative market input, consistency amongst other inputs and results and also the context in which such data is presented. Significant increases or decreases in probability of default and loss severity inputs in isolation would result in a significantly lower or higher fair value measurement. In general, a change in the assumption of the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity in an event of default. Significant increases or decreases in the discount rate in isolation would result in a significantly lower or higher fair value measurement.
F-39
The significant unobservable inputs used in the fair value measurement of the Asset Manager Affiliates is the discount rate used to present value prospective cash flows. Prospective revenues are generally based on a fixed percentage of the par value of CLO Fund assets under management and are recurring in nature for the term of the CLO Fund so long as the Asset Manager Affiliates manage the fund. As a result, the fees earned by the Asset Manager Affiliates are generally not subject to market value fluctuations in the underlying collateral. The discounted cash flow model incorporates different levels of discount rates depending on the hierarchy of fees earned (including the likelihood of realization of senior, subordinate and incentive fees) and prospective modeled performance. Significant increases or decreases in such discount rate would result in a significantly lower or higher fair value measurement.
The Asset Manager Affiliates are wholly-owned portfolio companies. The Asset Manager Affiliates manage CLO Funds primarily for third party investors that invest in broadly syndicated loans, high yield bonds and other credit instruments issued by corporations. At June 30, 2015 and December 31, 2014, the Asset Manager Affiliates had approximately $3.2 billion and $3.0 billion, respectively, of par value of assets under management, and the Companys 100% equity interest in the Asset Manager Affiliates had a fair value of approximately $74 million and $72 million, respectively.
As a manager of the CLO Funds, the Asset Manager Affiliates receive contractual and recurring management fees from the CLO Funds for their management and advisory services. The annual fees which the Asset Manager Affiliates receive are generally based on a fixed percentage of assets under management (at par value and not subject to changes in market value), and the Asset Manager Affiliates generate net income equal to the amount by which their fee income exceeds their operating expenses, including compensation of their employees and income taxes. The management fees the Asset Manager Affiliates receive have three components a senior management fee, a subordinated management fee and an incentive fee. Currently, all CLO Funds managed by the Asset Manager Affiliates are paying both their senior and subordinated management fees on a current basis. Additionally, three managed funds made incentive fee distributions during the quarter ended June 30, 2015.
For the three months ended June 30, 2015 and 2014, the Asset Manager Affiliates declared cash distributions of $2.3 million and $3.0 million to the Company, respectively. Any distributions from the Asset Manager Affiliates out of the estimated tax-basis earnings and profits are recorded as Dividends from Asset Manager Affiliates on the Companys statement of operations. The Company recognized $1.2 million and $1.4 million, respectively, of Dividends from Asset Manager Affiliates in the Statement of Operations for the three months ended June 30, 2015 and 2014. The difference between cash distributions received and the tax-basis earnings and profits of the distributing affiliate, are recorded as an adjustment to the cost basis in the Asset Manager Affiliate (i.e. tax-basis return of capital). Distributions receivable, if any, are reflected in the Due from Affiliates account on the consolidated balance sheets.
The tax attributes of distributions received from the Asset Manager Affiliates are determined on an annual basis. The Company makes an estimate of the tax-basis earnings and profits of the Asset Manager Affiliates on a quarterly basis, and any quarterly distributions received in excess of the estimated earnings and profits are recorded as return of capital (reduction in the cost basis of the investment in Asset Manager Affiliate).
The Asset Manager Affiliates fair value is determined quarterly. The valuation is primarily determined utilizing a discounted cash flow model. See Note 2 Significant Accounting Policies and Note 4 Investments for further information relating to the Companys valuation methodology.
Effective January 1, 2010, the Asset Manager Affiliates adopted guidance encompassed in Accounting Standards Codification Topic 810, Consolidation. The adoption of this new guidance had an impact on the
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disclosures relating to the Asset Manager Affiliates which had previously not been required, as its provisions require the Asset Manager Affiliates to consolidate certain of their managed CLO Funds that were not previously consolidated. As a result of the consolidation of the CLO Funds into the Asset Manager Affiliates, the financial results of the Asset Manager Affiliates indicate that they qualify as a significant subsidiary of the Company requiring the following additional disclosures. In addition, Katonah 2007-I CLO qualifies as significant subsidiaries of the Company and the Company is also required to make the additional disclosures about them below. These disclosures regarding the Asset Manager Affiliates and Katonah 2007-I CLO do not directly impact the financial position, results of operations, or cash flows of the Company.
As of June 30, 2015 |
As of December 31, 2014 |
|||||||
Investments of CLO Funds, at fair value | $ | 3,011,247,799 | $ | 2,846,659,635 | ||||
Restricted cash of CLO Funds | 215,924,275 | 182,224,205 | ||||||
Total assets | 3,281,896,481 | 3,092,592,939 | ||||||
CLO Fund liabilities at fair value | 3,071,287,075 | 2,990,211,629 | ||||||
Total liabilities | 3,188,986,813 | 3,060,837,388 | ||||||
Total Asset Manager Affiliates equity | 32,292,146 | 34,780,345 | ||||||
Appropriated retained earnings of consolidated VIEs | 60,617,522 | (3,024,793 | ) |
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Interest income investments of CLO Funds | $ | 32,897,802 | $ | 30,880,597 | $ | 63,548,836 | $ | 58,565,082 | ||||||||
Total income | 35,937,055 | 31,293,058 | 66,789,017 | 61,681,843 | ||||||||||||
Interest expense of CLO Fund liabilities | 35,014,717 | 24,529,997 | 78,771,749 | 49,055,196 | ||||||||||||
Total expenses | 51,653,612 | 35,302,843 | 100,132,585 | 66,209,005 | ||||||||||||
Net realized and unrealized gains (losses) | 84,097,927 | (4,955,179 | ) | 100,417,283 | (9,673,667 | ) | ||||||||||
Net gain (loss) attributable to noncontrolling interests in consolidated Variable Interest Entities | 64,651,769 | (10,799,619 | ) | 63,135,461 | (18,258,038 | ) | ||||||||||
Net income attributable to Asset Manager Affiliates | 2,479,446 | 1,328,309 | 2,511,801 | 2,674,769 |
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As of June 30, 2015 |
As of December 31, 2014 |
|||||||
Total investments at fair value | $ | 250,422,683 | $ | 273,373,948 | ||||
Cash | 25,184,920 | 14,939,994 | ||||||
Total assets | 276,097,856 | 288,945,330 | ||||||
CLO Debt at fair value | 271,221,089 | 290,699,426 | ||||||
Total liabilities | 278,099,340 | 292,730,723 | ||||||
Total Net Assets | (2,001,485 | ) | (3,785,393 | ) |
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Interest income from investments | $ | 2,461,737 | $ | 3,027,364 | $ | 5,077,131 | $ | 6,019,495 | ||||||||
Total income | 2,734,441 | 3,086,962 | 5,384,309 | 6,384,610 | ||||||||||||
Interest expense | 2,229,543 | 2,727,556 | 4,605,179 | 5,521,464 | ||||||||||||
Total expenses | 2,492,448 | 3,078,583 | 5,192,301 | 6,195,570 | ||||||||||||
Net realized and unrealized gains (losses) | 3,713,620 | (4,847,359 | ) | 1,591,900 | (6,516,459 | ) | ||||||||||
Increase (decrease) in net assets resulting from operations | 3,955,613 | (4,838,980 | ) | 1,783,908 | (6,327,420 | ) |
As separately regarded entities for tax purposes, the Asset Manager Affiliates are taxed at normal corporate rates. In order to maintain its RIC status, any tax-basis dividends paid by the Asset Manager Affiliates to the Company would generally need to be distributed to the Companys shareholders. Generally, such tax-basis dividends of the Asset Manager Affiliates income which was distributed to the Companys shareholders will be considered as qualified dividends for tax purposes. The Asset Manager Affiliates taxable net income will differ from U.S. GAAP net income because of deferred tax temporary differences and permanent tax adjustments. Deferred tax temporary differences may include differences for the recognition and timing of amortization and depreciation, compensation related expenses, and net loss carryforward, among other things. Permanent differences may include adjustments, limitations or disallowances for meals and entertainment expenses, penalties, tax goodwill amortization and net operating loss carryforward.
Goodwill amortization for tax purposes was created upon the purchase of 100% of the equity interests in Katonah Debt Advisors prior to the Companys IPO in exchange for shares of the Companys stock valued at $33 million. Although this transaction was a stock transaction rather than an asset purchase and thus no goodwill was recognized for U.S. GAAP purposes, such exchange was considered an asset purchase under Section 351(a) of the Code. At the time of the transfer, Katonah Debt Advisors had equity of approximately $1 million resulting in tax goodwill of approximately $32 million which is being amortized for tax purposes on a straight-line basis over 15 years, which accounts for an annual difference between U.S. GAAP income and taxable income by approximately $2 million per year over such period.
Additional goodwill amortization for tax purposes was created upon the purchase of 100% of the equity interests in Trimaran Advisors by one of KCAPs affiliates, in exchange for shares of the Companys stock valued at $25.5 million and cash of $13.0 million. The transaction was considered an asset purchase under Section 351(a) of the Code and resulted in tax goodwill of approximately $22.8 million which is being
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amortized for tax purposes on a straight-line basis over 15 years, which accounts for an annual difference between GAAP income and taxable income by approximately $1.5 million per year over such period.
On February 26, 2013, the Company entered into a senior credit agreement (the Trimaran Credit Facility) with Trimaran Advisors, pursuant to which Trimaran Advisors may borrow from time to time up to $20 million from the Company in order to provide capital necessary to support one or more of Trimaran Advisors warehouse lines of credit and/or working capital in connection with Trimaran Advisors warehouse activities. The Trimaran Credit Facility expires on November 20, 2017 and bears interest at an annual rate of 9.0%. Outstanding borrowings on the Trimaran Credit Facility are callable by the Company at any time. On April 15, 2013, the Trimaran Credit Facility was amended and upsized from $20 million to $23 million. At December 31, 2014, the par value of the outstanding loan was $23 million. At June 30, 2015, there was no loan outstanding under the Trimaran Credit Facility. For the six months ended June 30, 2015, the Company recognized interest income of $792,000 related to the Trimaran Credit Facility.
The Companys debt obligations consist of the following:
As of June 30, 2015 (unaudited) |
As of December 31, 2014 |
|||||||
Convertible Notes, due March 15, 2016 | $ | 38,647,000 | $ | 38,647,000 | ||||
7.375% Notes Due 2019 | $ | 41,400,000 | $ | 41,400,000 | ||||
Notes Issued by KCAP Senior Funding I, LLC (net of discount: 2015 $3,212,019; 2014 $3,512,407) | $ | 144,137,981 | $ | 143,837,593 |
The weighted average stated interest rate and weighted average maturity on all our debt outstanding as of June 30, 2015 were 4.45% and 6.74 years, respectively, and as of December 31, 2014 were 4.43% and 7.23 years, respectively.
On March 16, 2011, the Company issued $55 million in aggregate principal amount of unsecured 8.75% convertible notes due March 2016 (Convertible Notes). On March 23, 2011, pursuant to an over-allotment option, the Company issued an additional $5 million of such Convertible Notes for a total of $60 million in aggregate principal amount. The net proceeds from the sale of the Convertible Notes, following underwriting expenses, were approximately $57.7 million. Interest on the Convertible Notes is paid semi-annually in arrears on March 15 and September 15, at a rate of 8.75%, commencing September 15, 2011. The Convertible Notes mature on March 15, 2016 unless converted earlier. The Convertible Notes are senior unsecured obligations of the Company.
The Convertible Notes are convertible into shares of Companys common stock. As of June 30, 2015, the conversion rate was 133.59 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to a conversion price of approximately $7.49 per share of common stock. Upon conversion, the Company would issue the full amount of common stock or settle the conversion in cash, at its option, and retire the full amount of debt outstanding.
Upon conversion, unless a holder converts after a record date for an interest payment but prior to the corresponding interest payment date, the holder will receive a separate cash payment with respect to the Convertible Notes surrendered for conversion representing accrued and unpaid interest to, but not including the conversion date. Any such payment will be made on the settlement date applicable to the relevant conversion on the Convertible Notes.
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No holder of Convertible Notes will be entitled to receive shares of the Companys common stock upon conversion to the extent (but only to the extent) that such receipt would cause such converting holder to become, directly or indirectly, a beneficial owner (within the meaning of Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of more than 5.0% of the shares of the Companys common stock outstanding at such time. The 5.0% limitation shall no longer apply following the effective date of any fundamental change.
Subject to certain exceptions, holders may require us to repurchase, for cash, all or part of their Convertible Notes upon a fundamental change at a price equal to 100% of the principal amount of the Convertible Notes being repurchased plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date. In addition, in the case of certain fundamental changes and without duplication of the foregoing amount, the Company will also pay holders an amount in cash (or, in certain circumstances, shares of the Companys common stock) equal to the present value of the remaining interest payments on such notes through, and including, the maturity date.
In connection with the issuance of the Convertible Notes, the Company incurred approximately $2.4 million of debt offering costs, which are being amortized over the term of the facility on an effective yield method, of which approximately $244,000 remains to be amortized. On April 4, 2013, approximately $9 million of the Companys 8.75% Convertible Notes were converted at a price basis per share of $8.159 into 1,102,093 shares of KCAP common stock. On September 4, 2013, the Company purchased $2.0 million face value of its own Convertible Notes at $114.50 plus accrued interest. KCAP subsequently surrendered these notes to the Trustee for cancellation effective September 13, 2013. On October 9, 2014, the Company purchased approximately $10.4 million face value of its own Convertible Notes at $114.875 plus accrued interest. KCAP subsequently surrendered these notes to the Trustee for cancellation. Due to the cash conversion option embedded in the Convertible Notes, the Company applied the guidance in ASC 470-40-20, Debt with Conversion and Other Options and realized a loss on the extinguishment of this debt. For the six months ended June 30, 2015 there were no realized losses on extinguishment of debt. The indenture governing the Convertible Notes contains certain restrictive covenants, including compliance with certain provisions of the 1940 Act and conditions governing the undertaking of new debt.
For the three months ended June 30, 2015 and 2014, interest expense related to the Convertible Notes was approximately $845,000 and $1.1 million, respectively. For the six months ended June 30, 2015 and 2014, interest expense related to the Convertible Notes was approximately $1.7 million and $2.1 million, respectively.
The Convertible Notes have been analyzed for any features that would require its accounting to be bifurcated. There are no features that require accounting to be bifurcated, and as a result, they are recorded as a liability at their contractual amounts. At June 30, 2015, the Company was in compliance with all of its debt covenants.
Fair Value of Convertible Notes. The Company carries the Convertible Notes at cost. The Convertible Notes were issued in a private placement and there is no active trading of these notes. The estimated fair value of the Companys outstanding Convertible Notes was approximately $40.2 million at June 30, 2015. The fair value was determined based on an indicative closing price as of June 30, 2015. The Convertible Notes are categorized as Level III following ASC 820: Fair Value.
On October 10, 2012, the Company issued $41.4 million in aggregate principal amount of unsecured 7.375% Notes due 2019. The net proceeds for these Notes, following underwriting expenses, were approximately $39.9 million. Interest on the 7.375% Notes Due 2019 is paid quarterly in arrears on March 30, June 30, September 30 and December 30, at a rate of 7.375%, commencing December 30, 2012. The 7.375%
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Notes Due 2019 mature on September, 30, 2019 and are senior unsecured obligations of the Company. The 7.375% Notes Due 2019 are subject to redemption in whole or in part at any time or from time to time, at the option of the Company, on or after September 30, 2015, at a redemption price per security equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to the date fixed for redemption. In addition, due to the asset coverage test applicable to the Company as a BDC and a covenant that the Company agreed to in connection with the issuance of the 7.375% Notes Due 2019, the Company is limited in its ability to make distributions in certain circumstances. The indenture governing the 7.375% Notes Due 2019 contains certain restrictive covenants, including compliance with certain provisions of the 1940 Act relating to borrowing and dividends. At June 30, 2015, the Company was in compliance with all of its debt covenants.
For the three months ended June 30, 2015 and 2014, interest expense related to the 7.375% Notes Due 2019 was approximately $763,000 for both periods. For the six months ended June 30, 2015 and 2014, interest expense related to the 7.375% Notes Due 2019 was approximately $1.5 million for both periods.
In connection with the issuance of the 7.375% Notes Due 2019, the Company incurred approximately $1.5 million of debt offering costs which are being amortized over the term of the facility on an effective yield method, of which approximately $993,000 remains to be amortized, as recorded on the consolidated balance sheets in other assets..
Fair Value of 7.375% Notes Due 2019. The 7.375% Notes Due 2019 were issued in a public offering on October 10, 2012 and are carried at cost. The fair value of the Companys outstanding 7.375% Notes Due 2019 was approximately $41.9 million at June 30, 2015. The fair value was determined based on the closing price on June 30, 2015 for the 7.375% Notes Due 2019. The 7.375% Notes Due 2019 are categorized as Level I under the ASC 820 Fair Value.
On June 18, 2013, the Company completed the sale of notes in a $140,000,000 debt securitization financing transaction. The notes offered in this transaction (the KCAP Senior Funding I Notes) were issued by KCAP Senior Funding I, LLC, a newly formed special purpose vehicle (the Issuer), in which KCAP Senior Funding I Holdings, LLC, a wholly-owned subsidiary of the Company (the Depositor), owns all of the KCAP Senior Funding I Subordinated Notes (as defined below), and are backed by a diversified portfolio of bank loans. The indenture governing the KCAP Senior Funding I Notes contains an event of default that is triggered in the event that certain coverage tests are not met.
The secured notes (the KCAP Senior Funding I Secured Notes) were issued as Class A senior secured floating rate notes which have an initial face amount of $77,250,000, are rated AAA (sf)/Aaa (sf) by Standard & Poors Ratings Services and Moodys Investors Service, Inc., respectively, and bear interest at the three-month LIBOR plus 1.50%, Class B senior secured floating rate notes which have an initial face amount of $9,000,000, are rated AA (sf)/Aa2 (sf) by Standard & Poors Ratings Services and Moodys Investors Service, Inc., respectively, and bear interest at three-month LIBOR plus the 3.25%, Class C secured deferrable floating rate notes which have an initial face amount of $10,000,000, are rated A (sf)/A2 (sf) by Standard & Poors Ratings Services and Moodys Investors Service, Inc., respectively, and bear interest at three-month LIBOR plus 4.25%, and Class D secured deferrable floating rate notes which have an initial face amount of $9,000,000, are rated BBB (sf)/Baa2 (sf) by Standard & Poors Ratings Services and Moodys Investors Service, Inc., respectively, and bear interest at three-month LIBOR plus 5.25%. The Depositor retained all of the subordinated notes of the Issuer (the KCAP Senior Funding I Subordinated Notes), which have an initial face amount of $34,750,000. The KCAP Senior Funding I Subordinated Notes do not bear interest and are not rated. Both the KCAP Senior Funding I Secured Notes and the KCAP Senior Funding I Subordinated Notes have a stated maturity on the payment date occurring in July, 2024, and are subject to a two year
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non-call period. The Issuer has a four year reinvestment period. The stated interest rate re-sets on a quarterly basis based upon the then-current level of the benchmark three-month LIBOR.
On December 8, 2014, the Company completed the sale of additional notes in a $56,000,000 increase to the collateralized loan obligation transaction that originally closed on June 18, 2013 (the Original Closing Date). The issuance of additional notes was proportional across all existing classes of notes issued on the Original Closing Date.
Each class of secured Additional Issuance Securities (all such classes, collectively, the Additional Issuance Offered Securities) was issued as a pari passu sub-class of an existing class of notes issued on the Original Closing Date. Accordingly, the ratings given by Standard & Poors Ratings Services and Moodys Investors Service, Inc. to each existing class of notes issued on the Original Closing Date will apply to each class of Additional Issuance Offered Securities that constitutes a related pari passu sub-class of such existing class of notes issued on the Original Closing Date.
The Additional Issuance Offered Securities were issued as Class A-2 senior secured floating rate notes which have an initial face amount of $30,900,000, have a rating of AAA (sf)/Aaa (sf) by Standard & Poors Ratings Services and Moodys Investors Service, Inc., respectively, and bear interest at the three-month LIBOR plus 1.50%, Class B-2 senior secured floating rate notes which have an initial face amount of $3,600,000, a rating of AA (sf)/Aa2 (sf) by Standard & Poors Ratings Services and Moodys Investors Service, Inc., respectively, and bear interest at three-month LIBOR plus 3.25%, Class C-2 secured deferrable floating rate notes which have an initial face amount of $4,000,000, a rating of A (sf)/A2 (sf) by Standard & Poors Ratings Services and Moodys Investors Service, Inc., respectively, and bear interest at three-month LIBOR plus 4.25%, and Class D-2 secured deferrable floating rate notes which have an initial face amount of $3,600,000, a rating of BBB (sf)/Baa2 (sf) by Standard & Poors Ratings Services and Moodys Investors Service, Inc., respectively, and bear interest at three-month LIBOR plus 5.25%. The Depositor retained all of the subordinated Additional Issuance Securities of the Issuer (the Additional Issuance Subordinated Notes), which have an initial face amount of $13,900,000. The Additional Issuance Subordinated Notes do not bear interest and are not rated. The Additional Issuance Securities have a stated maturity date of July 20, 2024 and are subject to a non-call period until the payment date on the Additional Issuance Securities occurring in July 2015. The Issuer has a reinvestment period to and including the payment date on the Additional Issuance Securities occurring in July 2017, or such earlier date as is provided in the indenture relating to the Additional Issuance Securities. In connection with the Additional Issuance Offered Securities, the Company incurred issuance costs and OID costs of approximately $679,000 and $896,000, respectively, which is included in other assets on the accompanying balance sheet.
As part of this transaction, the Company entered into a master loan sale agreement with the Depositor and the Issuer under which the Company sold or contributed certain bank loans to the Depositor, and the Depositor sold such loans to the Issuer in exchange for a combination of cash and the issuance of the KCAP Senior Funding I Subordinated Notes to the Depositor.
In connection with the issuance and sale of the KCAP Senior Funding I Notes, the Company has made customary representations, warranties and covenants in the purchase agreement by and between the Company, the Depositor, the Issuer and Guggenheim Securities, LLC, which served as the initial purchaser of the KCAP Senior Funding I Secured Notes. The KCAP Senior Funding I Secured Notes are the secured obligations of the Issuer, and an indenture governing the KCAP Senior Funding I Notes includes customary covenants and events of default. The KCAP Senior Funding I Notes were sold in a private placement transaction and have not been, and will not be, registered under the Securities Act of 1933, as amended, or any state blue sky laws and may not be offered or sold in the United States absent registration with the Securities and Exchange Commission or an applicable exemption from registration.
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The Company serves as collateral manager to the Issuer under a collateral management agreement, which contains customary representations, warranties and covenants. Under the collateral management agreement, the Company will perform certain investment management functions, including supervising and directing the investment and reinvestment of the Issuers assets, as well as perform certain administrative and advisory functions.
In addition, because each of the Issuer and the Depositor are consolidated subsidiaries, the Company did not recognize any gain or loss on the transfer of any of our portfolio assets to such vehicles in connection with the issuance and sale of the KCAP Senior Funding I Notes.
As of June 30, 2015, there were 74 investments in portfolio companies with a total fair value of approximately $195 million plus cash of $8.6 million, collateralizing the secured notes of the Issuer. At June 30, 2015, there were unamortized issuance costs of approximately $3.4 million included in other assets, and unamortized original issue discount, (OID) costs of approximately $3.2 million included in Notes issued by KCAP Senior Funding I, LLC liabilities in the accompanying consolidated balance sheet. The pool of loans in the securitization must meet certain requirements, including asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements.
For the six months ended June 30, 2015, interest expense, including the amortization of deferred debt issuance costs and the discount on the face amount of the notes, was approximately $2.5 million consisting of stated interest expense of approximately $1.8 million, accreted discount of approximately $300,000, and deferred debt issuance costs of approximately $321,000. As of June 30, 2015, the stated interest charged under the securitization was based on current three month LIBOR, which was 0.28%. The classes, stated interest rates, spread over LIBOR, and stated interest expense are as follows:
Stated Interest Rate(1) |
LIBOR Spread (basis points) |
Interest Expense |
||||||||||
KCAP Senior Funding LLC Class A Notes | 1.78 | % | 150 | $ | 484,288 | |||||||
KCAP Senior Funding LLC Class B Notes | 3.53 | % | 325 | 112,160 | ||||||||
KCAP Senior Funding LLC Class C Notes | 4.53 | % | 425 | 160,002 | ||||||||
KCAP Senior Funding LLC Class D Notes | 5.53 | % | 525 | 175,852 | ||||||||
Total | $ | 932,302 |
(1) | Stated Interest Rate (and thus periodic interest expense), will vary based upon prevailing 3 month LIBOR as of the reset date. |
The amounts, ratings and interest rates (expressed as a spread to LIBOR) of the Class A, B, C, and D are as follows:
Description | Class A Notes | Class B Notes | Class C Notes | Class D Notes | ||||
Type | Senior Secured Floating Rate |
Senior Secured Floating Rate |
Secured Deferrable Floating Rate |
Secured Deferrable Floating Rate |
||||
Amount Outstanding | $108,150,000 | $12,600,000 | $14,000,000 | $12,600,000 | ||||
Moodys Rating (sf) | Aaa | Aa2 | A2 | Baa2 | ||||
Standard & Poors Rating (sf) | AAA | AA | A | BBB | ||||
Interest Rate(1) | LIBOR + 1.50% | LIBOR + 3.25% | LIBOR + 4.25% | LIBOR + 5.25% | ||||
Stated Maturity | July, 2024 | July, 2024 | July, 2024 | July, 2024 | ||||
Junior Classes | B, C, D and Subordinated |
C, D and Subordinated |
D and Subordinated |
Subordinated |
(1) | Three month LIBOR, which was 0.28% as of June 30, 2015 |
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The Companys outstanding principal amounts, carrying values and fair values of the Class A, B, C and D Notes are as follows:
As of June 30, 2015 (unaudited) | ||||||||||||
Principal Amount |
Carrying Value |
Fair Value |
||||||||||
KCAP Senior Funding I, LLC Class A Notes | $ | 108,150,000 | $ | 105,792,485 | $ | 105,554,400 | ||||||
KCAP Senior Funding I, LLC Class B Notes | 12,600,000 | 12,325,338 | 12,474,000 | |||||||||
KCAP Senior Funding I, LLC Class C Notes | 14,000,000 | 13,694,820 | 13,972,000 | |||||||||
KCAP Senior Funding I, LLC Class D Notes | 12,600,000 | 12,325,338 | 12,285,000 | |||||||||
Total | $ | 147,350,000 | $ | 144,137,981 | $ | 144,285,400 |
Fair Value of KCAP Senior Funding I. The Company carries the KCAP Senior Funding I Notes at cost, net of unamortized discount of $3,212,019. The fair value of the KCAP Senior Funding I Notes was approximately $144.3 million at June 30, 2015. The fair values were determined based on third party indicative values. The KCAP Senior Funding I L.L.C. Notes are categorized as Level III under ASC 820: Fair Value.
Effective December 11, 2006, the Company elected to be treated as a RIC under the Code and adopted a December 31 tax-calendar year end. As a RIC, the Company is not subject to federal income tax on the portion of its taxable income and gains distributed currently to its stockholders as a dividend. The Companys quarterly distributions, if any, are determined by the Board of Directors. The Company anticipates distributing at least 90% of its taxable income and gains, within the Subchapter M rules, and thus the Company anticipates that it will not incur any federal or state income tax at the RIC level. As a RIC, the Company is also subject to a federal excise tax based on distributive requirements of its taxable income on a calendar year basis (e.g., calendar year 2015). Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income, to the extent required. The Company anticipates timely distribution of its taxable income within the tax rules, and the Company anticipates that it will not incur a US federal excise tax for the calendar year 2015.
The following reconciles net increase in net assets resulting from operations to taxable income for the six months ended June 30, 2015:
Six Months Ended June 30, 2015 (unaudited) |
||||
Net increase in net assets resulting from operations | $ | 8,904,995 | ||
Net change in unrealized depreciation from investments | 3,532,611 | |||
Excess capital gains over capital losses | (98,406 | ) | ||
Book/tax differences on CLO equity investments | 914,207 | |||
Other book/tax differences | 102,509 | |||
Taxable income before deductions for distributions | $ | 13,355,916 | ||
Taxable income before deductions for distributions per weighted average basic shares for the period | $ | 0.36 |
F-48
Tax-basis taxable income differs from net increase (decrease) in net assets resulting from operations primarily due to: (1) unrealized appreciation (depreciation) on investments, as investment gains and losses are not included in tax-basis taxable income until they are realized; (2) excess of capital losses over capital gains; (3) Book-to-tax differences on CLO equity investments; and (4) other non-deductible expenses including stock compensation expense that is not currently deductible for tax purposes.
Dividends from Asset Manager Affiliates are recorded based upon a quarterly estimate of tax-basis earnings and profits of each Asset Manager Affiliate. Distributions in excess of the estimated tax-basis quarterly earnings and profits of each distributing Asset Manager Affiliate are recognized as tax-basis return of capital. The actual tax-basis earnings and profits and resulting dividend and/or return of capital for the year will be determined at the end of the tax year for each distributing Asset Manager Affiliate. For the six months ended June 30, 2015 and 2014, the Asset Manager Affiliates declared cash distributions of $5.0 million and $6.0 million to the Company, respectively. The Company recognized $2.6 million and $2.8 million, respectively, of Dividends from Asset Manager Affiliates in the Statement of Operations for the six months ended June 30, 2015 and 2014. The difference of $2.4 million and $3.2 million, respectively, between cash distributions received and the tax-basis earnings and profits of the distributing affiliate, are recorded as an adjustment to the cost basis in the Asset Manager Affiliate (i.e. tax-basis return of capital), for the six months ended June 30, 2015 and 2014, respectively.
Distributions to shareholders that exceed tax distributable income (tax net investment income and realized gains, if any) are reported as distributions of paid-in capital (i.e. return of capital). The tax character of distributions is made on an annual (full calendar-year) basis. The determination of the tax attributes of our distributions is made at the end of the year based upon our taxable income for the full year and the distributions paid during the full year. Therefore, a determination of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year.
Six months ended June 30, 2015 |
Year ended December 31, 2014 |
|||||||
Distributions paid from: |
||||||||
Ordinary income | $ | 7,645,458 | $ | 26,807,154 | ||||
Return of Capital | | 7,972,633 | ||||||
Total | $ | 7,645,458 | (1) | $ | 34,779,787 |
(1) | Comprised of the first quarter distribution paid in April and the second quarter distribution paid in July. |
At June 30, 2015, the Company had a net capital loss carryforward of $76.3 million to offset net capital gains, to the extent provided by federal tax law. Of the net capital loss carryforward, $32.0 million will begin to expire in the tax year ending December 31, 2015. Of the net capital loss carryforward, $44.5 million is not subject to expiration under the RIC Modernization Act of 2010.
On June 23, 2015, the Companys Board of Directors declared a distribution to shareholders of $0.21 per share for a total of $7.6 million. The record date was July 6, 2015 and the distribution was paid on July 27, 2015.
The Company adopted Financial Accounting Standards Board ASC Topic 740 Accounting for Uncertainty in Income Taxes (ASC 740) as of January 1, 2007. ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the consolidated financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Companys tax returns to determine whether the tax positions are more-likely-than-not of being sustained by the applicable tax authority. The Company recognizes the tax benefits of uncertain tax positions only where
F-49
the position is more likely than not to be sustained assuming examination by tax authorities. Management has analyzed the Companys tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on returns filed for open tax years (the last three fiscal years) or expected to be taken in the Companys current year tax return. The Company identifies its major tax jurisdictions as U.S. Federal and New York State, and the Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months. Managements determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof.
From time-to-time the Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the needs of the Companys investment in portfolio companies. Such instruments include commitments to extend credit and may involve, in varying degrees, elements of credit risk in excess of amounts recognized on the Companys balance sheet. Prior to extending such credit, the Company attempts to limit its credit risk by conducting extensive due diligence, obtaining collateral where necessary and negotiating appropriate financial covenants. As of June 30, 2015, the Company had a commitment under the Trimaran Credit Facility of $23 million. As of December 31, 2014, the Trimaran Credit Facility was fully drawn and there was no remaining unfunded commitment thereunder. As of June 30, 2015 and December 31, 2014, the Company had no outstanding commitments to make investments in delayed draw senior secured loans.
During the six months ended June 30, 2015 and 2014, the Company issued 107,613 and 37,932 shares, respectively, of common stock under its dividend reinvestment plan. As of June 30, 2015 and December 31, 2014, there were 702,111 and 623,983 shares of unvested restricted shares, respectively. There were 196,166 grants, 10,042 forfeitures, and 103,798 vested shares during the six months ended June 30, 2015. The total number of shares of the Companys common stock issued and outstanding as of June 30, 2015 and December 31, 2014 was 37,032,825 and 36,775,127, respectively. During the quarter ended June 30, 2015, the Company repurchased 36,039 shares at an aggregate cost of approximately $218,000 in connection with the vesting of restricted stock awards.
The Company has an equity incentive plan, established in 2006 and as amended in 2008 and most recently in June 2014, (the Equity Incentive Plan). The Company reserved 2,000,000 shares of common stock for issuance under the Equity Incentive Plan. The purpose of the Equity Incentive Plan is to provide officers and prospective employees of the Company with additional incentives and align the interests of its employees with those of its shareholders. Options granted under the Equity Incentive Plan are exercisable at a price equal to the fair market value (market closing price) of the shares on the day the option is granted. Restricted stock granted under the Equity Incentive Plan is granted at a price equal to the fair market value (market closing price) of the shares on the day such restricted stock is granted. Vesting of restricted stock awarded under the 2008 amendment of the Equity Incentive Plan will occur in two equal installments of 50%, on each of the third and fourth anniversaries of the grant date; vesting of restricted stock under the 2014 amended Equity Incentive Plan will vest in four equal installments of 25%, on each of the first four anniversaries of the grant date.
F-50
On June 20, 2014, the Companys Board of Directors approved the amended and restated Non-Employee Director Plan (the Non-Employee Director Plan), which was approved by shareholders on June 10, 2011. Accordingly, the annual grant of options to non-employee directors has been discontinued and replaced with an annual grant of shares of restricted stock as partial annual compensation for the services of the non-employee directors.
Information with respect to options granted, exercised and forfeited under the Equity Incentive Plan for the period January 1, 2014 through June 30, 2015 is as follows:
Shares | Weighted Average Exercise Price per Share |
Weighted Average Contractual Remaining Term (years) |
Aggregate Intrinsic Value(1) |
|||||||||||||
Options outstanding at January 1, 2014 | 50,000 | $ | 7.72 | |||||||||||||
Granted | | | ||||||||||||||
Exercised | | | ||||||||||||||
Forfeited | | | ||||||||||||||
Options outstanding at December 31, 2014 | 50,000 | $ | 7.72 | 4.4 | $ | 77,600 | ||||||||||
Granted | | | ||||||||||||||
Exercised | | | ||||||||||||||
Forfeited | | | ||||||||||||||
Outstanding at June 30, 2015 | 50,000 | $ | 7.72 | 3.9 | $ | 44,000 | ||||||||||
Total vested at June 30, 2015 | 50,000 | $ | 7.72 | 3.9 |
(1) | Represents the difference between the market value of shares of the Company and the exercise price of the options. |
The Company uses a Binary Option Pricing Model (American, call option) to establish the expected value of all stock option grants. For the six months ended June 30, 2015 and 2014, the Company did not recognize any non-cash compensation expense related to stock options. At June 30, 2015, the Company had no remaining compensation costs related to unvested stock based awards.
Awards of restricted stock granted under the Non-Employee Director Plan vest as follows: 50% of the shares vest on the grant date and the remaining 50% of the shares vest on the earlier of:
(i) | the first anniversary of such grant, or |
(ii) | the date immediately preceding the next annual meeting of shareholders. |
On May 5, 2014, 5,000 shares of restricted stock were awarded to the Companys Board of Directors.
On June 20, 2014, the Companys Board of Directors approved the grant of 355,289 shares of restricted stock to the employees of the Company as partial compensation for their services. 25% of such awards will vest on each of the first four anniversaries of the grant date.
On May 21, 2015, 6,000 shares of restricted stock were awarded to the Companys Board of Directors.
On June 16, 2015, the Company received exemptive relief to repurchase shares of its common stock from its employees in connection with certain equity compensation plan arrangements. During the six months ended June 30, 2015, the Company repurchased 36,039 shares of common stock at an aggregate cost of
F-51
approximately $218,000 in connection with the vesting of employees restricted stock, which is reflected as Treasury Stock at cost on the Consolidated Balance Sheet. These shares are not available to be reissued under the Companys Equity Incentive Plan.
On June 23, 2015, the Companys Board of Directors approved the grant of 190,166 shares, with a fair value of approximately $1.2 million, of restricted stock to the employees of the Company as partial compensation for their services. 25% of such awards will vest on each of the first four anniversaries of the grant date. On June 23, 2015, the Companys Board of Directors also voted to amend the KCAP Financial, Inc. 2006 Equity Incentive Plan As Amended and Restated Effective June 23, 2015, to specify that shares withheld from an Award either to satisfy tax withholding requirements or the payment for the delivery of shares of Common Stock or Restricted Stock upon the exercise of options will not be returned to the plan reserve.
During the six months ended June 30, 2015, 103,798 shares of restricted stock vested and 10,042 shares of restricted stock were forfeited. As of June 30, 2015, after giving effect to these restricted stock awards, there were 702,111 shares of restricted stock outstanding. Information with respect to restricted stock granted, exercised and forfeited under the Plan for the period January 1, 2014 through June 30, 2015 is as follows:
Non-vested Restricted Shares |
||||
Non-vested shares outstanding at January 1, 2014 | 272,998 | |||
Granted | 360,289 | |||
Vested | (5,000 | ) | ||
Forfeited | (8,502 | ) | ||
Non-vested shares outstanding at December 31, 2014 | 619,785 | |||
Granted | 196,166 | |||
Vested | (103,798 | ) | ||
Forfeited | (10,042 | ) | ||
Outstanding at June 30, 2015 | 702,111 | |||
Total non-vested shares at June 30, 2015 | 702,111 |
For the six months ended June 30, 2015, non-cash compensation expense related to restricted stock was approximately $730,000; of this amount approximately $332,000 was expensed at the Company, and approximately $398,000 was a reimbursable expense allocated to the Asset Manager Affiliates. For the six months ended June 30, 2014, non-cash compensation expense related to restricted stock was approximately $413,000; of this amount approximately $218,000 was expensed at the Company and approximately $195,000 was a reimbursable expense allocated to the Asset Manager Affiliates.
Dividends are paid on all outstanding shares of restricted stock, whether or not vested. In general, shares of unvested restricted stock are forfeited upon the recipients termination of employment. As of June 30, 2015, the company had approximately $4.5 million of total unrecognized compensation cost related to non-vested share-based awards. That cost is expected to be recognized over a weighted average period of 2.9 years.
F-52
The Company adopted a 401(k) plan (401K Plan) effective January 1, 2007. The 401K Plan is open to all full time employees. The 401K Plan permits an employee to defer a portion of their total annual compensation up to the Internal Revenue Service annual maximum based on age and eligibility. The Company makes contributions to the 401K Plan of up to 2% of the Internal Revenue Services annual maximum eligible compensation, which fully vests at the time of contribution. Approximately $22,000 and $35,000 was expensed during the six months ended June 30, 2015 and 2014, respectively, related to the 401K Plan.
The Company has also adopted a deferred compensation plan (Profit-Sharing Plan) effective January 1, 2007. Employees are eligible for the Profit-Sharing Plan provided that they are employed and working with the Company to participate in at least 100 days during the year and remain employed as of the last day of the year. Employees do not make contributions to the Profit-Sharing Plan. On behalf of the employee, the Company may contribute to the Profit-Sharing Plan 1) up to 8.0% of all compensation up to the Internal Revenue Service annual maximum and 2) up to 5.7% excess contributions on any incremental amounts above the social security wage base limitation and up to the Internal Revenue Service annual maximum. Employees vest 100% in the Profit-Sharing Plan after five years of service. Approximately $106,000 and $124,000 was expensed during the six months ended June 30, 2015 and 2014, respectively, related to the Profit-Sharing Plan.
The Company has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2015 for items that should potentially be recognized or disclosed in these financial statements. Management has determined that there are no material subsequent events that would require adjustment to, or disclosure in, these consolidated financial statements.
F-53
The Board of Directors and Stockholders of
KCAP Financial, Inc.
We have audited the accompanying consolidated balance sheet of KCAP Financial, Inc. (the Company), including the consolidated schedule of investments, as of December 31, 2014, and the related consolidated statements of operations, changes in net assets, and cash flows and the financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2014, by correspondence with the custodians and management or agents of the underlying investments. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the consolidated financial position of KCAP Financial, Inc. at December 31, 2014, and the consolidated results of their operations, changes in their net assets, and cash flows and the financial highlights for the year ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), KCAP Financial, Inc.s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 31, 2015 expressed an adverse opinion thereon.
/s/ ERNST & YOUNG LLP
New York, New York
March 31, 2015
F-54
The Board of Directors and Stockholders of
KCAP Financial, Inc.
We have audited KCAP Financial, Inc.s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). KCAP Financial, Inc.s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the companys annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in managements assessment. Management has identified a material weakness in controls related to the companys recording of distributions from its wholly owned affiliates. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2014 consolidated financial statements. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2014 financial statements, and this report does not affect our report dated March 31, 2015, which expressed an unqualified opinion on those financial statements.
In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, KCAP Financial, Inc. has not maintained effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
/s/ Ernst & Young LLP
New York, New York
March 31, 2015
F-55
As of December 31, 2014 |
As of December 31, 2013 (restated) |
|||||||
ASSETS |
||||||||
Investments at fair value: |
||||||||
Money market accounts (cost: 2014 $1,602,741; 2013 $7,112,949) | $ | 1,602,741 | $ | 7,112,949 | ||||
Debt securities (amortized cost: 2014 $322,884,934; 2013 $275,213,594) | 320,143,170 | 266,830,427 | ||||||
CLO Fund Securities managed by affiliates (amortized cost: 2014 $85,355,897; 2013 $74,732,252 (restated)) | 74,139,696 | 75,100,306 | ||||||
CLO Fund Securities managed by non-affiliates (amortized cost: 2014 $5,533,293; 2013 $9,394,109 (restated)) | 3,375,206 | 4,351,914 | ||||||
Equity securities (cost: 2014 $8,828,812; 2013 $18,755,684) | 8,119,681 | 11,006,398 | ||||||
Asset Manager Affiliates (cost: 2014 $60,292,677; 2013 $66,178,784 (restated)) | 72,326,000 | 76,148,000 | ||||||
Total Investments at Fair Value (cost: 2014 $484,498,354; 2013 $451,387,372 (restated)) | 479,706,494 | 440,549,994 | ||||||
Cash | 1,220,798 | 3,433,675 | ||||||
Restricted cash | 19,325,550 | 4,078,939 | ||||||
Interest receivable | 1,748,821 | 2,032,559 | ||||||
Due from affiliates | 3,027,409 | 3,125,259 | ||||||
Other assets | 5,417,725 | 5,951,963 | ||||||
Total Assets | $ | 510,446,797 | $ | 459,172,388 | ||||
LIABILITIES |
||||||||
Convertible Notes | $ | 38,647,000 | $ | 49,008,000 | ||||
7.375% Notes Due 2019 | 41,400,000 | 41,400,000 | ||||||
Notes issued by KCAP Senior Funding I, LLC (net of discount: 2014 $3,512,407; 2013 $3,065,627) | 143,837,593 | 102,184,373 | ||||||
Payable for open trades | 18,293,725 | 3,980,000 | ||||||
Accounts payable and accrued expenses | 2,274,150 | 2,268,592 | ||||||
Accrued interest payable | 1,566,255 | 1,628,699 | ||||||
Due to affiliates | 31,000 | | ||||||
Dividend payable | 9,080,373 | 8,333,031 | ||||||
Total Liabilities | 255,130,096 | 208,802,695 | ||||||
Commitments and Contingencies (Note 9) | | | ||||||
STOCKHOLDERS' EQUITY |
||||||||
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 36,775,127 and 33,332,123 common shares issued and outstanding at December 31, 2014 and December 31, 2013, respectively | 367,751 | 333,472 | ||||||
Capital in excess of par value | 362,411,830 | 345,740,875 | ||||||
Excess distribution of net investment income | (25,579,865 | ) | (18,908,612 | ) | ||||
Accumulated net realized losses | (75,512,134 | ) | (64,379,643 | ) | ||||
Net unrealized depreciation on investments | (6,370,881 | ) | (12,416,399 | ) | ||||
Total Stockholders' Equity | 255,316,701 | 250,369,693 | ||||||
Total Liabilities and Stockholders' Equity | 510,446,797 | 459,172,388 | ||||||
NET ASSET VALUE PER COMMON SHARE | $ | 6.94 | $ | 7.51 |
See accompanying notes to financial statements.
F-56
For the Years Ended December 31, | ||||||||||||
2014 | 2013 (restated) | 2012 (restated) | ||||||||||
Investment Income: |
||||||||||||
Interest from investments in debt securities | $ | 21,386,432 | $ | 13,967,235 | $ | 12,504,569 | ||||||
Interest from cash and time deposits | 3,452 | 20,656 | 5,741 | |||||||||
Investment income on CLO Fund Securities managed by affiliates | 12,367,581 | 17,346,770 | 12,603,810 | |||||||||
Investment income on CLO Fund Securities managed by non-affiliates | 1,045,225 | 1,809,534 | 4,707,556 | |||||||||
Dividends from Asset Manager Affiliates | 5,467,914 | 5,735,045 | 1,214,998 | |||||||||
Capital structuring service fees | 934,871 | 305,376 | 304,882 | |||||||||
Total investment income | 41,205,475 | 39,184,616 | 31,341,556 | |||||||||
Expenses: |
||||||||||||
Interest and amortization of debt issuance costs | 11,538,179 | 10,116,271 | 6,976,018 | |||||||||
Compensation | 4,951,745 | 4,630,481 | 3,172,814 | |||||||||
Professional fees | 2,614,479 | 2,191,305 | 2,453,945 | |||||||||
Insurance | 471,276 | 552,568 | 546,989 | |||||||||
Administrative and other | 1,509,228 | 1,819,876 | 1,343,677 | |||||||||
Total expenses | 21,084,907 | 19,310,501 | 14,493,443 | |||||||||
Net Investment Income | 20,120,568 | 19,874,115 | 16,848,113 | |||||||||
Realized And Unrealized Gains (Losses) On Investments: |
||||||||||||
Net realized losses from investment transactions | (10,384,415 | ) | (12,090,503 | ) | (3,232,975 | ) | ||||||
Net change in unrealized appreciation (depreciation) on: |
||||||||||||
Debt securities | 5,641,403 | 14,956,103 | (3,701,536 | ) | ||||||||
Equity securities | 7,040,155 | 2,605,586 | 163,843 | |||||||||
CLO Fund Securities managed by affiliates | (11,584,257 | ) | (11,195,901 | ) | 14,919,869 | |||||||
CLO Fund Securities managed by non-affiliates | 2,884,109 | (2,093,360 | ) | 38,690 | ||||||||
Asset Manager Affiliates investments | 2,064,107 | 5,703,743 | 1,089,775 | |||||||||
Total net unrealized gain from investment transactions | 6,045,517 | 9,976,171 | 12,510,641 | |||||||||
Net realized and unrealized appreciation (depreciation) on investments | (4,338,898 | ) | (2,114,332 | ) | 9,277,666 | |||||||
Realized losses on extinguishments of debt | (748,076 | ) | (536,811 | ) | | |||||||
Net Increase In Stockholders Equity Resulting From Operations | $ | 15,033,594 | $ | 17,222,972 | $ | 26,125,779 | ||||||
Net Increase in Stockholders' Equity Resulting from Operations per Common Share: |
||||||||||||
Basic: | $ | 0.44 | $ | 0.53 | $ | 1.00 | ||||||
Diluted: | $ | 0.43 | $ | 0.53 | $ | 0.95 | ||||||
Net Investment Income Per Common Share: |
||||||||||||
Basic: | $ | 0.59 | $ | 0.62 | $ | 0.65 | ||||||
Diluted: | $ | 0.58 | $ | 0.62 | $ | 0.64 | ||||||
Weighted Average Shares of Common Stock Outstanding Basic | 34,248,346 | 32,280,160 | 26,011,517 | |||||||||
Weighted Average Shares of Common Stock Outstanding Diluted | 34,259,977 | 32,295,005 | 33,379,594 |
See accompanying notes to financial statements.
F-57
Years Ended December 31, | ||||||||||||
2014 | 2013 (restated) | 2012 (restated) | ||||||||||
Operations: |
||||||||||||
Net investment income | $ | 20,120,568 | $ | 19,874,115 | $ | 16,848,113 | ||||||
Net realized losses from investment transactions | (10,384,415 | ) | (12,090,503 | ) | (3,232,975 | ) | ||||||
Realized losses from extinguishments of debt | (748,076 | ) | (536,811 | ) | | |||||||
Net change in unrealized gains from investment transactions | 6,045,517 | 9,976,171 | 12,510,641 | |||||||||
Net increase in stockholders' equity resulting from operations | 15,033,594 | 17,222,972 | 26,125,779 | |||||||||
Stockholder distributions: |
||||||||||||
Distributions of ordinary income | (26,807,154 | ) | (22,479,384 | ) | (20,001,629 | ) | ||||||
Return of capital | (7,972,633 | ) | (12,681,755 | ) | (4,807,203 | ) | ||||||
Net decrease in net assets resulting from stockholder distributions | (34,779,787 | ) | (35,161,139 | ) | (24,808,832 | ) | ||||||
Capital share transactions: |
||||||||||||
Issuance of common stock for: |
||||||||||||
Interest in affiliate company | | | 25,560,000 | |||||||||
Dividend reinvestment plan | 724,935 | 715,780 | 556,881 | |||||||||
Conversion of Convertible Notes | | 8,786,000 | | |||||||||
Issuance of Common Stock | 23,772,408 | 50,404,236 | | |||||||||
Repurchase of Convertible Notes | (927,413 | ) | | | ||||||||
Stock based compensation | 1,123,271 | 526,185 | (84,111 | ) | ||||||||
Net increase in net assets resulting from capital share transactions | 24,693,201 | 60,432,201 | 26,032,770 | |||||||||
Net assets at beginning of period | 250,369,693 | 207,875,659 | 180,525,942 | |||||||||
Net assets at end of period (including accumulated undistributed net investment income of $0, $0, and $0 in 2014, 2013 (restated), and 2012 (restated), respectively. | $ | 255,316,701 | $ | 250,369,693 | $ | 207,875,659 | ||||||
Net asset value per common share | $ | 6.94 | $ | 7.51 | $ | 7.85 | ||||||
Common shares outstanding at end of period | 36,775,127 | 33,332,123 | 26,470,408 |
See accompanying notes to financial statements.
F-58
Years Ended December 31, | ||||||||||||
2014 | 2013 (restated) | 2012 (restated) | ||||||||||
OPERATING ACTIVITIES: |
||||||||||||
Net increase in stockholder's equity resulting from operations | $ | 15,033,594 | $ | 17,222,972 | $ | 26,125,779 | ||||||
Adjustments to reconcile net increase in stockholders equity resulting from operations to net cash used in operating activities: |
||||||||||||
Net realized losses on investment transactions | 10,384,415 | 12,090,503 | 3,232,975 | |||||||||
Net change in unrealized gains (losses) from investments | (6,045,517 | ) | (9,976,172 | ) | (12,510,640 | ) | ||||||
Purchases of investments | (249,264,398 | ) | (248,211,755 | ) | (148,344,654 | ) | ||||||
Proceeds from sales and redemptions of investments | 195,511,479 | 114,040,876 | 111,302,561 | |||||||||
Net accretion of discount on debt securities | 10,691,298 | 1,611,574 | 2,234,364 | |||||||||
Amortization of original issue discount on indebtedness |
449,568 | 229,848 | | |||||||||
Amortization of debt issuance costs | 1,109,081 | 904,027 | 604,809 | |||||||||
Realized losses on extinguishments of debt | 748,076 | 536,811 | | |||||||||
Payment-in-kind interest income | (433,778 | ) | (3,091 | ) | (581,355 | ) | ||||||
Stock-based compensation expense | 1,123,271 | 526,138 | (85,082 | ) | ||||||||
Changes in operating assets and liabilities: |
||||||||||||
Increase in payable for open trades | 14,313,725 | 3,980,000 | | |||||||||
Decrease (Increase) in interest and dividends receivable |
283,737 | (1,335,210 | ) | (174,770 | ) | |||||||
Decrease (Increase) in accounts receivable | 325,259 | (914,434 | ) | (1,351,713 | ) | |||||||
Decrease in time deposits | | 1,942,834 | | |||||||||
(Increase) Decrease in other assets | (644,715 | ) | 54,561 | (311,922 | ) | |||||||
Decrease (Increase) in due from affiliates | (227,409 | ) | | 3,517 | ||||||||
Increase in due to affiliates | 31,000 | | | |||||||||
(Decrease) Increase in accounts payable and accrued expenses | (56,886 | ) | 1,315,858 | (946,250 | ) | |||||||
Net cash used in operating activities | (6,668,200 | ) | (105,984,660 | ) | (20,802,381 | ) | ||||||
FINANCING ACTIVITIES: |
||||||||||||
Proceeds from issuance of common stock | 23,772,408 | 50,404,236 | | |||||||||
Debt issuance costs | (678,201 | ) | (3,878,583 | ) | (1,486,476 | ) | ||||||
Distributions to stockholders | (33,307,511 | ) | (33,515,661 | ) | (20,927,645 | ) | ||||||
Proceeds from issuance of debt, net of discount | 41,203,652 | 101,954,525 | 30,000,000 | |||||||||
Repurchase of Convertible Notes | (11,288,413 | ) | (2,206,000 | ) | | |||||||
Repayment of debt | | | (30,000,000 | ) | ||||||||
Issuance of 7.375% Notes Due 2019 | | | 41,400,000 | |||||||||
(Increase) Decrease in restricted cash | (15,246,612 | ) | (4,078,939 | ) | | |||||||
Net cash provided by financing activities | 4,455,323 | 108,679,578 | 18,985,879 | |||||||||
CHANGE IN CASH | (2,212,877 | ) | 2,694,918 | (1,816,502 | ) | |||||||
CASH, BEGINNING OF YEAR | 3,433,675 | 738,757 | 2,555,259 | |||||||||
CASH, END OF YEAR | $ | 1,220,798 | $ | 3,433,675 | $ | 738,757 | ||||||
Supplemental Information: |
||||||||||||
Interest paid during the period | $ | 9,966,425 | $ | 8,884,945 | $ | 6,374,134 | ||||||
Issuance of common stock under the dividend reinvestment plan | $ | 724,935 | $ | 715,768 | $ | 557,852 | ||||||
Issuance of common stock in connection with acquisition of Asset Manager Affiliate | $ | | $ | | $ | 25,560,000 |
See accompanying notes to financial statements.
F-59
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost | Fair Value(2) | ||||||||||||
4L Technologies Inc. (fka Clover Holdings, Inc.)(9), (11) Consumer goods: Non-durable |
Senior Secured Loan Term Loan 5.5% Cash, 1.0% Libor Floor, Due 5/20 |
$ | 2,793,000 | $ | 2,768,057 | $ | 2,723,175 | |||||||||
Advanced Lighting Technologies, Inc.(9), (11) Consumer goods: Durable |
First Lien Bond 10.5% Cash, Due 6/19 |
3,000,000 | 2,962,507 | 2,580,000 | ||||||||||||
Advantage Sales & Marketing Inc.(9) Services: Business |
Junior Secured Loan Term Loan (Second Lien) 7.5% Cash, 1.0% Libor Floor, Due 7/22 |
1,000,000 | 1,002,384 | 992,000 | ||||||||||||
Alaska Communications Systems Holdings, Inc.(9), (11) Telecommunications |
Senior Secured Loan Term Loan 6.3% Cash, 1.5% Libor Floor, Due 10/16 |
5,200,227 | 5,193,935 | 5,200,227 | ||||||||||||
Alere Inc. (fka IM US Holdings, LLC)(11) Healthcare & Pharmaceuticals |
Senior Secured Loan B Term Loan 4.3% Cash, 1.0% Libor Floor, Due 6/17 |
2,992,277 | 2,988,629 | 2,972,947 | ||||||||||||
AmSurg Corp.(11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan 3.8% Cash, 0.8% Libor Floor, Due 7/21 |
2,992,481 | 2,992,481 | 2,975,020 | ||||||||||||
Anaren, Inc.(9), (11) Aerospace and Defense |
Senior Secured Loan Term Loan (First Lien) 5.5% Cash, 1.0% Libor Floor, Due 2/21 |
1,980,000 | 1,962,587 | 1,955,250 | ||||||||||||
Asurion, LLC (fka Asurion Corporation)(9), (11) Banking, Finance, Insurance & Real Estate |
Senior Secured Loan Incremental Tranche B-1 Term Loan 5.0%Cash, 1.3% Libor Floor, Due 5/19 |
1,917,430 | 1,932,331 | 1,896,549 | ||||||||||||
AZ Chem US Inc.(9), (11) Chemicals, Plastics and Rubber |
Senior Secured Loan Initial Term Loan (First Lien) 4.5% Cash, 1.0% Libor Floor, Due 6/21 |
467,123 | 464,966 | 457,977 | ||||||||||||
Bankruptcy Management Solutions, Inc.(9) Services: Business |
Senior Secured Loan Term B Loan 7.0% Cash, 1.0% Libor Floor, Due 6/18 |
700,227 | 700,227 | 624,463 | ||||||||||||
BarBri, Inc. (Gemini Holdings, Inc.)(9), (11) Services: Consumer |
Senior Secured Loan Term Loan 4.5% Cash, 1.0% Libor Floor, Due 7/19 |
2,872,500 | 2,861,557 | 2,835,158 | ||||||||||||
BBB Industries US Holdings, Inc.(9), (11) Automotive |
Senior Secured Loan Initial Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 11/21 |
3,000,000 | 2,941,316 | 2,985,000 | ||||||||||||
Bellisio Foods, Inc.(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan U.S. Term B Loans 5.3% Cash, 1.0% Libor Floor, Due 8/19 |
2,239,551 | 2,230,586 | 2,235,071 | ||||||||||||
Blue Coat Systems, Inc.(9), (11) High Tech Industries |
Senior Secured Loan New Term Loan4.0% Cash, 1.0% Libor Floor, Due 5/19 |
467,636 | 468,971 | 456,530 | ||||||||||||
Carolina Beverage Group LLC(9) Beverage, Food and Tobacco |
Senior Secured Bond 10.6% Cash, Due 8/18 |
1,500,000 | 1,515,584 | 1,552,500 | ||||||||||||
CCS Intermediate Holdings, LLC(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan (First Lien) 5.0% Cash, 1.0% Libor Floor, Due 7/21 |
2,992,500 | 2,978,364 | 2,940,131 | ||||||||||||
Cengage Learning Acquisitions, Inc. (fka TL Acquisitions, Inc.)(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Term Loan 7.0% Cash, 1.0% Libor Floor, Due 3/20 |
2,987,475 | 2,980,768 | 2,963,829 | ||||||||||||
Charter Communications Operating, LLC (aka CCO Safari LLC)(11) Media: Broadcasting & Subscription |
Senior Secured Loan Term G Loan 4.3% Cash, 0.8% Libor Floor, Due 9/21 |
$ | 3,000,000 | $ | 3,022,408 | $ | 3,022,980 | |||||||||
Checkout Holding Corp.(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Term B Loan (First Lien) 4.5% Cash, 1.0% Libor Floor, Due 4/21 |
995,000 | 990,534 | 951,474 |
See accompanying notes to financial statements.
F-60
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost | Fair Value(2) | ||||||||||||
Consolidated Communications, Inc.(11) Telecommunications |
Senior Secured Loan Initial Term Loan 4.3% Cash, 1.0% Libor Floor, Due 12/20 |
2,992,443 | 3,003,588 | 2,976,538 | ||||||||||||
CRGT Inc.(9), (11) High Tech Industries |
Senior Secured Loan Term Loan 7.5% Cash, 1.0% Libor Floor, Due 12/20 |
3,000,000 | 2,940,000 | 2,955,000 | ||||||||||||
Crowley Holdings Preferred, LLC(9) Transportation: Cargo |
Preferred Stock 10.0% Cash, 2.0% PIK, Due 12/49 |
10,206,016 | 10,206,016 | 10,418,302 | ||||||||||||
Crowne Group, LLC(9), (11) Automotive |
Senior Secured Loan Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 9/20 |
3,990,000 | 3,932,506 | 3,838,779 | ||||||||||||
CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)(9) Beverage, Food and Tobacco |
Junior Secured Loan Term Loan (Second Lien) 8.8% Cash, 1.0% Libor Floor, Due 7/21 |
3,000,000 | 3,016,357 | 2,910,000 | ||||||||||||
CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Term Loan (First Lien) 5.0% Cash, 1.0% Libor Floor, Due 7/20 |
2,623,371 | 2,622,454 | 2,570,903 | ||||||||||||
CT Technologies Intermediate Holdings, Inc. (Smart Holdings Corp.)(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan 6.0% Cash, 1.0% Libor Floor, Due 12/21 |
3,000,000 | 2,970,271 | 2,988,750 | ||||||||||||
DBI Holding LLC(9) Services: Business |
Senior Unsecured Bond 13.0% PIK, Due 9/19 |
3,457,795 | 3,221,771 | 3,386,218 | ||||||||||||
DBI Holding LLC(9) Services: Business |
Senior Subordinated Bond 12.0% Cash, 1.0% PIK, Due 9/19 |
4,314,949 | 4,295,544 | 4,240,301 | ||||||||||||
DJO Finance LLC (ReAble Therapeutics Fin LLC)(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan New Tranche B Term Loan 4.3% Cash, 1.0% Libor Floor, Due 9/17 |
2,063,574 | 2,063,574 | 2,022,303 | ||||||||||||
Drew Marine Group Inc.(9) Transportation: Cargo |
Junior Secured Loan Term Loan (Second Lien) 8.0% Cash, 1.0% Libor Floor, Due 5/21 |
2,500,000 | 2,494,654 | 2,523,250 | ||||||||||||
ELO Touch Solutions, Inc.(9), (11) High Tech Industries |
Senior Secured Loan Term Loan (First Lien) 8.0% Cash, 1.5% Libor Floor, Due 6/18 |
1,726,036 | 1,677,698 | 1,642,496 | ||||||||||||
EWT Holdings III Corp. (fka WTG Holdings III Corp.)(9) Environmental Industries |
Junior Secured Loan Term Loan (Second Lien) 8.5% Cash, 1.0% Libor Floor, Due 1/22 |
4,000,000 | 3,982,390 | 4,033,200 | ||||||||||||
Fender Musical Instruments Corporation(9), (11) Consumer goods: Durable |
Senior Secured Loan Initial Loan 5.8% Cash, 1.3% Libor Floor, Due 4/19 |
2,002,536 | 2,012,321 | 1,982,110 | ||||||||||||
FHC Health Systems, Inc.(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan 5.0% Cash, 1.0% Libor Floor, Due 12/21 |
3,407,143 | 3,373,191 | 3,381,589 | ||||||||||||
First American Payment Systems, L.P.(9) Banking, Finance, Insurance & Real Estate |
Junior Secured Loan Term Loan (Second Lien) 10.8% Cash, 1.3% Libor Floor, Due 4/19 |
2,796,448 | 2,759,556 | 2,782,466 | ||||||||||||
First Data Corporation(9), (11) Banking, Finance, Insurance & Real Estate |
Senior Secured Loan 2018 New Dollar Term Loan 3.7% Cash, Due 3/18 |
1,000,000 | 968,906 | 982,190 | ||||||||||||
Getty Images, Inc.(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Initial Term Loan 4.8% Cash, 1.3% Libor Floor, Due 10/19 |
$ | 2,185,164 | $ | 2,187,551 | $ | 2,012,165 | |||||||||
Global Tel*Link Corporation(9) Telecommunications |
Junior Secured Loan Term Loan (Second Lien) 9.0% Cash, 1.3% Libor Floor, Due 11/20 |
4,000,000 | 3,935,659 | 3,889,200 | ||||||||||||
Grande Communications Networks LLC(9), (11) Telecommunications |
Senior Secured Loan Initial Term Loan 4.5% Cash, 1.0% Libor Floor, Due 5/20 |
3,940,040 | 3,944,690 | 3,938,464 | ||||||||||||
Grifols Worldwide Operations Limited(11) Healthcare & Pharmaceuticals |
Senior Secured Loan U.S. Tranche B Term Loam 3.2% Cash, Due 2/21 |
2,992,462 | 2,970,236 | 2,956,298 | ||||||||||||
Grupo HIMA San Pablo, Inc.(9) Healthcare & Pharmaceuticals |
Senior Secured Loan Term B Loan (First Lien) 8.5% Cash, 1.5% Libor Floor, Due 1/18 |
2,947,500 | 2,911,129 | 2,947,500 |
See accompanying notes to financial statements.
F-61
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost | Fair Value(2) | ||||||||||||
Grupo HIMA San Pablo, Inc.(9) Healthcare & Pharmaceuticals |
Junior Secured Loan Term Loan (Second Lien) 13.8% Cash, Due 7/18 |
7,000,000 | 6,894,754 | 7,105,000 | ||||||||||||
Gymboree Corporation., The(9), (11) Retail |
Senior Secured Loan Term Loan 5.0% Cash, 1.5% Libor Floor, Due 2/18 |
1,421,105 | 1,390,786 | 935,563 | ||||||||||||
Hargray Communications Group, Inc. (HCP Acquisition LLC)(9), (11) Media: Broadcasting & Subscription |
Senior Secured Loan Initial Term Loan 5.3% Cash, 1.0% Libor Floor, Due 6/19 |
2,930,662 | 2,908,645 | 2,928,611 | ||||||||||||
Harland Clarke Holdings Corp. (fka Clarke American Corp.)(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Tranche B-3 Term Loan 7.0% Cash, 1.5% Libor Floor, Due 5/18 |
3,368,750 | 3,343,813 | 3,385,594 | ||||||||||||
Harland Clarke Holdings Corp. (fka Clarke American Corp.)(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Tranche B-4 Term Loan 6.0% Cash, 1.0% Libor Floor, Due 8/19 |
1,462,500 | 1,456,384 | 1,458,661 | ||||||||||||
Hoffmaster Group, Inc.(9) Forest Products & Paper |
Junior Secured Loan Initial Term Loan (Second Lien) 10.0% Cash, 1.0% Libor Floor, Due 5/21 |
2,000,000 | 1,972,727 | 1,999,000 | ||||||||||||
Hoffmaster Group, Inc.(9), (11) Forest Products & Paper |
Senior Secured Loan Initial Term Loan (First Lien) 5.3% Cash, 1.0% Libor Floor, Due 5/20 |
3,980,000 | 3,944,324 | 3,943,523 | ||||||||||||
Hunter Defense Technologies, Inc.(9), (11) Aerospace and Defense |
Senior Secured Loan Term Loan (First Lien) 6.5% Cash, 1.0% Libor Floor, Due 8/19 |
2,962,500 | 2,934,961 | 2,988,866 | ||||||||||||
Integra Telecom Holdings, Inc.(9), (11) Telecommunications |
Senior Secured Loan Term B Loan 5.3% Cash, 1.3% Libor Floor, Due 2/19 |
2,992,386 | 2,981,164 | 2,919,461 | ||||||||||||
International Architectural Products, Inc.(7),(9) Metals & Mining |
Senior Secured Loan Term Loan Due 5/15 |
247,636 | 228,563 | 1,000 | ||||||||||||
Kellermeyer Bergensons Services, LLC(9) Services: Business |
Senior Secured Loan Initial Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 10/21 |
2,000,000 | 1,980,432 | 1,990,000 | ||||||||||||
Key Safety Systems, Inc.(9), (11) Automotive |
Senior Secured Loan Initial Term Loan 4.8% Cash, 1.0% Libor Floor, Due 8/21 |
1,496,250 | 1,489,134 | 1,488,769 | ||||||||||||
Kinetic Concepts, Inc.(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Dollar Term E-1 Loan 4.0% Cash, 1.0% Libor Floor, Due 5/18 |
2,992,443 | 2,984,962 | 2,956,279 | ||||||||||||
Landslide Holdings, Inc. (Crimson Acquisition Corp.)(9), (11) High Tech Industries |
Senior Secured Loan New Term Loan (First Lien) 5.0% Cash, 1.0% Libor Floor, Due 2/20 |
$ | 3,456,381 | $ | 3,464,859 | $ | 3,451,197 | |||||||||
MB Aerospace ACP Holdings III Corp.(9), (11) Aerospace and Defense |
Senior Secured Loan Dollar Term Loan 5.0% Cash, 1.0% Libor Floor, Due 5/19 |
3,940,000 | 3,910,979 | 3,939,212 | ||||||||||||
Media General, Inc.(11) Media: Broadcasting & Subscription |
Senior Secured Loan Term B Loan 4.3% Cash, 1.0% Libor Floor, Due 7/20 |
3,000,000 | 3,003,750 | 2,972,805 | ||||||||||||
Medical Specialties Distributors, LLC(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Term Loan 6.5% Cash, 1.0% Libor Floor, Due 12/19 |
3,960,000 | 3,927,435 | 3,804,372 | ||||||||||||
Millennium Health, LLC (fka Millennium Laboratories, LLC)(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Tranche B Term Loan 5.3% Cash, 1.0% Libor Floor, Due 4/21 |
2,992,481 | 2,992,481 | 2,985,000 | ||||||||||||
Nielsen & Bainbrige, LLC(9) Consumer goods: Durable |
Senior Secured Loan Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 8/20 |
1,000,000 | 990,487 | 963,200 | ||||||||||||
Nielsen & Bainbrige, LLC(9) Consumer goods: Durable |
Junior Secured Loan Term Loan (Second Lien) 10.3% Cash, 1.0% Libor Floor, Due 8/21 |
2,000,000 | 1,971,249 | 1,920,000 | ||||||||||||
Nielsen & Bainbrige, LLC(9), (11) Consumer goods: Durable |
Senior Secured Loan Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 8/20 |
3,000,000 | 2,971,460 | 2,889,600 |
See accompanying notes to financial statements.
F-62
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost | Fair Value(2) | ||||||||||||
Novetta, LLC(9) Services: Business |
Senior Secured Loan Initial Term Loan 6.0% Cash, 1.0% Libor Floor, Due 10/20 |
2,743,125 | 2,716,093 | 2,743,125 | ||||||||||||
Novitex Acquisition, LLC (fka ARSloane Acquisition, LLC)(9), (11) Services: Business |
Senior Secured Loan Tranche B-2 Term Loan (First Lien) 7.5% Cash, 1.3% Libor Floor, Due 7/20 |
990,019 | 980,923 | 950,418 | ||||||||||||
Onex Carestream Finance LP(9) Healthcare & Pharmaceuticals |
Junior Secured Loan Term Loan (Second Lien) 9.5% Cash, 1.0% Libor Floor, Due 12/19 |
2,000,000 | 2,000,000 | 1,992,920 | ||||||||||||
Onex Carestream Finance LP(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Term Loan (First Lien 2013) 5.0% Cash, 1.0% Libor Floor, Due 6/19 |
1,973,333 | 1,980,022 | 1,969,219 | ||||||||||||
Orbitz Worldwide, Inc.(11) Hotel, Gaming & Leisure |
Senior Secured Loan Tranche C Term Loan 4.5% Cash, 1.0% Libor Floor, Due 4/21 |
2,992,481 | 2,992,481 | 2,961,315 | ||||||||||||
Otter Products, LLC (OtterBox Holdings, Inc.)(9), (11) Consumer goods: Durable |
Senior Secured Loan Term B Loan 5.8% Cash, 1.0% Libor Floor, Due 6/20 |
2,992,481 | 2,968,458 | 2,966,297 | ||||||||||||
Ozburn-Hessey Holding Company LLC(9), (11) Transportation: Cargo |
Senior Secured Loan Term Loan 6.8% Cash, 1.3% Libor Floor, Due 5/19 |
3,512,426 | 3,503,687 | 3,544,389 | ||||||||||||
PGX Holdings, Inc.(9), (11) Services: Consumer |
Senior Secured Loan Initial Term Loan (First Lien) 6.3% Cash, 1.0% Libor Floor, Due 9/20 |
3,975,000 | 3,936,815 | 3,917,363 | ||||||||||||
Post Holdings, Inc.(11) Beverage, Food and Tobacco |
Senior Secured Loan Series A Incremental Term Loan 3.8% Cash, 0.8% Libor Floor, Due 6/21 |
2,992,481 | 2,985,129 | 2,983,130 | ||||||||||||
PQ Corporation(9), (11) Chemicals, Plastics and Rubber |
Senior Secured Loan 2014 Term Loan 4.0% Cash, 1.0% Libor Floor, Due 8/17 |
2,992,366 | 2,992,366 | 2,943,740 | ||||||||||||
PSC Industrial Holdings Corp.(9), (11) Environmental Industries |
Senior Secured Loan Term Loan (First Lien) 7.0% Cash, 1.0% Libor Floor, Due 12/20 |
$ | 2,000,000 | $ | 1,980,119 | $ | 1,980,000 | |||||||||
Puerto Rico Cable Acquisition Company Inc. (D/B/A Choice TV)(9) Media: Broadcasting & Subscription |
Senior Secured Loan Initial Term Loan 5.5% Cash, 1.0% Libor Floor, Due 7/18 |
909,069 | 910,287 | 909,069 | ||||||||||||
Puerto Rico Cable Acquisition Company Inc. (D/B/A Choice TV)(9), (11) Media: Broadcasting & Subscription |
Senior Secured Loan Initial Term Loan 5.5% Cash, 1.0% Libor Floor, Due 7/18 |
2,727,206 | 2,717,359 | 2,727,206 | ||||||||||||
QoL Meds, LLC(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Term Loan 5.5% Cash, 1.0% Libor Floor, Due 7/20 |
498,750 | 496,449 | 480,296 | ||||||||||||
Quad-C JH Holdings Inc. (aka Joerns Healthcare)(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Term Loan A 6.0% Cash, 1.0% Libor Floor, Due 5/20 |
3,980,000 | 3,953,083 | 3,786,174 | ||||||||||||
Restorix Health, Inc.(9) Healthcare & Pharmaceuticals |
Senior Unsecured Loan Delayed Draw 10.0% Cash, 1.5% PIK, Due 6/18 |
2,003,587 | 2,003,587 | 2,003,587 | ||||||||||||
Restorix Health, Inc.(9) Healthcare & Pharmaceuticals |
Senior Unsecured Loan Subordinated Term Loan 10.0% Cash, 1.5% PIK, Due 6/18 |
8,063,397 | 8,063,397 | 8,063,397 | ||||||||||||
Reynolds Group Holdings Inc.(9), (11) Containers, Packaging and Glass |
Senior Secured Loan Incremental U.S. Term Loan 4.0% Cash, 1.0% Libor Floor, Due 12/18 |
2,992,443 | 2,992,443 | 2,946,734 | ||||||||||||
Roscoe Medical, Inc.(9) Healthcare & Pharmaceuticals |
Junior Secured Loan Term Loan (Second Lien) 11.3% Cash, Due 9/19 |
6,700,000 | 6,642,367 | 6,499,000 | ||||||||||||
Rovi Solutions Corporation/Rovi Guides, Inc.(11) High Tech Industries |
Senior Secured Loan Term B Loan 3.8% Cash, 0.8% Libor Floor, Due 7/21 |
2,992,481 | 2,954,531 | 2,936,387 | ||||||||||||
Safenet, Inc.(9), (11) High Tech Industries |
Senior Secured Loan Initial Term Loan (First Lien) 6.8% Cash, 1.0% Libor Floor, Due 3/20 |
2,977,500 | 2,951,435 | 2,977,500 |
See accompanying notes to financial statements.
F-63
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost | Fair Value(2) | ||||||||||||
Sandy Creek Energy Associates, L.P.(9), (11) Utilities: Electric |
Senior Secured Loan Term Loan 5.0% Cash, 1.0% Libor Floor, Due 11/20 |
2,844,544 | 2,832,599 | 2,794,053 | ||||||||||||
SGF Produce Holding Corp.(Frozsun, Inc.)(9) Beverage, Food and Tobacco |
Senior Secured Loan Term Loan 5.5% Cash, 1.0% Libor Floor, Due 3/19 |
2,191,289 | 2,175,642 | 2,191,289 | ||||||||||||
SGF Produce Holding Corp.(Frozsun, Inc.)(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Term Loan 5.5% Cash, 1.0% Libor Floor, Due 3/19 |
3,440,528 | 3,429,224 | 3,440,528 | ||||||||||||
Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(9), (11) Environmental Industries |
Senior Secured Loan Term Loan 6.8% Cash, 1.3% Libor Floor, Due 6/19 |
2,861,935 | 2,840,504 | 2,858,501 | ||||||||||||
Sun Products Corporation, The (fka Huish Detergents Inc.)(9), (11) Consumer goods: Non-durable |
Senior Secured Loan Tranche B Term Loan 5.5% Cash, 1.3% Libor Floor, Due 3/20 |
3,910,711 | 3,887,178 | 3,656,515 | ||||||||||||
Tank Partners Holdings, LLC(9) Energy: Oil & Gas |
Senior Secured Loan Loan 9.8% Cash, 3.5% PIK, 3.0% Libor Floor, Due 8/19 |
10,385,331 | 10,212,907 | 9,866,065 | ||||||||||||
TPF II Power, LLC (TPF II Covert Midco, LLC)(9), (11) Utilities: Electric |
Senior Secured Loan Term Loan 5.5% Cash, 1.0% Libor Floor, Due 10/21 |
3,000,000 | 3,026,933 | 3,009,375 | ||||||||||||
Trimaran Advisors, L.L.C.(9), (12) Portfolio Company Loan |
Senior Unsecured Loan Revolving Credit Facility 9.0% Cash, Due 11/17 |
23,000,000 | 23,000,000 | 23,000,000 | ||||||||||||
TRSO I, Inc.(9) Energy: Oil & Gas |
Junior Secured Loan Term Loan (Second Lien) 11.0% Cash, 1.0% Libor Floor, Due 12/17 |
1,000,000 | 988,097 | 961,300 | ||||||||||||
TWCC Holding Corp.(9) Media: Broadcasting & Subscription |
Junior Secured Loan Term Loan (Second Lien) 7.0% Cash, 1.0% Libor Floor, Due 6/20 |
$ | 1,000,000 | $ | 1,004,005 | $ | 961,670 | |||||||||
TWCC Holding Corp.(9), (11) Media: Broadcasting & Subscription |
Senior Secured Loan Term Loan 3.5% Cash, 0.8% Libor Floor, Due 2/17 |
906,653 | 910,624 | 887,060 | ||||||||||||
Univar Inc.(9), (11) Chemicals, Plastics and Rubber |
Senior Secured Loan Term B Loan 5.0% Cash, 1.5% Libor Floor, Due 6/17 |
2,894,577 | 2,890,893 | 2,808,536 | ||||||||||||
USJ-IMECO Holding Company, LLC(9), (11) Transportation: Cargo |
Senior Secured Loan Term Loan 7.0% Cash, 1.0% Libor Floor, Due 4/20 |
3,970,000 | 3,952,343 | 3,970,000 | ||||||||||||
Vantiv, LLC (fka Fifth Third Processing Solutions, LLC)(11) Banking, Finance, Insurance & Real Estate |
Senior Secured Loan Term B Loan 3.8% Cash, 0.8% Libor Floor, Due 6/21 |
1,994,987 | 1,999,927 | 1,978,160 | ||||||||||||
Verdesian Life Sciences, LLC(9) Environmental Industries |
Senior Secured Loan Initial Term Loan 6.0% Cash, 1.0% Libor Floor, Due 7/20 |
975,012 | 961,553 | 938,547 | ||||||||||||
Verdesian Life Sciences, LLC(9), (11) Environmental Industries |
Senior Secured Loan Initial Term Loan 6.0% Cash, 1.0% Libor Floor, Due 7/20 |
3,221,243 | 3,178,026 | 3,100,769 | ||||||||||||
Vestcom International, Inc. (fka Vector Investment Holdings, Inc.)(9), (11) Retail |
Senior Secured Loan Term Loan 5.3% Cash, 1.0% Libor Floor, Due 9/21 |
2,866,953 | 2,843,300 | 2,838,284 | ||||||||||||
Weiman Products, LLC(9) Consumer goods: Non-durable |
Senior Secured Loan Term Loan 6.3% Cash, 1.0% Libor Floor, Due 11/18 |
2,972,255 | 2,948,574 | 2,972,255 | ||||||||||||
Weiman Products, LLC(9), (11) Consumer goods: Non-durable |
Senior Secured Loan Term Loan 6.3% Cash, 1.0% Libor Floor, Due 11/18 |
3,963,007 | 3,932,167 | 3,963,007 | ||||||||||||
WideOpenWest Finance, LLC(9) Telecommunications |
Senior Secured Loan Term B Loan 4.8% Cash, 1.0% Libor Floor, Due 4/19 |
2,954,887 | 2,971,397 | 2,941,974 | ||||||||||||
WireCo WorldGroup Inc.(9) Capital Equipment |
Senior Unsecured Bond 9.0% Cash, Due 5/17 |
5,000,000 | 4,991,504 | 5,000,000 | ||||||||||||
WireCo WorldGroup Inc.(9), (11) Capital Equipment |
Senior Unsecured Bond 9.0% Cash, Due 5/17 |
3,000,000 | 2,994,903 | 3,000,000 | ||||||||||||
Total Investment in Debt Securities (125% of net asset value at fair value) | $ | 324,808,055 | $ | 322,884,934 | $ | 320,143,170 |
See accompanying notes to financial statements.
F-64
Portfolio Company/Principal Business | Investment | Percentage Interest/Shares | Amortized Cost | Fair Value(2) | ||||||||||||
Aerostructures Holdings L.P.(5), (9) Aerospace and Defense |
Partnership Interests | 1.2 | % | $ | 1,000,000 | $ | 1,000 | |||||||||
Aerostructures Holdings L.P.(5), (9) Aerospace and Defense |
Series A Preferred Interests | 1.2 | % | 250,961 | 648,764 | |||||||||||
Bankruptcy Management Solutions, Inc.(5), (9) Services: Business |
Class A Warrants | 1.7 | % | | | |||||||||||
Bankruptcy Management Solutions, Inc.(5), (9) Services: Business |
Class B Warrants | 1.7 | % | | | |||||||||||
Bankruptcy Management Solutions, Inc.(5), (9) Services: Business |
Class C Warrants | 1.7 | % | | | |||||||||||
Bankruptcy Management Solutions, Inc.(5), (9) Services: Business |
Common Stock 2013 | 0.8 | % | 314,325 | 391,932 | |||||||||||
Caribe Media Inc. (fka Caribe Information Investments Incorporated)(5), (9) Media: Advertising, Printing & Publishing |
Common | 1.3 | % | 359,765 | 624,304 | |||||||||||
DBI Holding LLC(5), (9) Services: Business |
Class A Warrants | 3.2 | % | 258,940 | 746,964 | |||||||||||
eInstruction Acquisition, LLC(5), (9) Services: Business |
Membership Units | 1.1 | % | 1,079,617 | 1,000 | |||||||||||
FP WRCA Coinvestment Fund VII, Ltd.(3),(5) Capital Equipment |
Class A Shares | 1,500 | 1,500,000 | 2,351,329 | ||||||||||||
Perseus Holding Corp.(5), (9) Hotel, Gaming & Leisure |
Common | 0.2 | % | 400,000 | 1,000 | |||||||||||
Roscoe Investors, LLC(5), (9) Healthcare & Pharmaceuticals |
Class A Units | 1.6 | % | 1,000,000 | 891,000 | |||||||||||
Tank Partners Holdings, LLC(5), (9) Energy: Oil & Gas |
Unit | 5.8 | % | 980,000 | 573,750 | |||||||||||
Tank Partners Holdings, LLC(5), (9) Energy: Oil & Gas |
Warrants | 1.3 | % | 185,204 | 99,752 | |||||||||||
TRSO II, Inc.(5), (9) Energy: Oil & Gas |
Common Stock | 5.4 | % | 1,500,000 | 1,788,886 | |||||||||||
Total Investment in Equity Securities (3% of net asset value at fair value) | $ | 8,828,812 | $ | 8,119,681 |
See accompanying notes to financial statements.
F-65
Portfolio Company | Investment | Percentage Interest |
Amortized Cost |
Fair Value(2) | ||||||||||||
Grant Grove CLO, Ltd.(3) | Subordinated Securities | 22.2 | % | $ | 2,254,638 | $ | 469,131 | |||||||||
Katonah III, Ltd.(3), (10) | Preferred Shares | 23.1 | % | 1,015,334 | 400,000 | |||||||||||
Katonah VII CLO Ltd.(3), (6) | Subordinated Securities | 16.4 | % | 3,563,252 | 1,000 | |||||||||||
Katonah VIII CLO Ltd(3), (6) | Subordinated Securities | 10.3 | % | 2,755,267 | 100,000 | |||||||||||
Katonah IX CLO Ltd(3), (6) | Preferred Shares | 6.9 | % | 1,262,496 | 594,989 | |||||||||||
Katonah X CLO Ltd(3), (6) | Subordinated Securities | 33.3 | % | 8,910,471 | 4,863,001 | |||||||||||
Katonah 2007-I CLO Ltd.(3), (6) | Preferred Shares | 100.0 | % | 23,471,779 | 25,191,782 | |||||||||||
Trimaran CLO IV, Ltd.(3), (6) | Preferred Shares | 19.0 | % | 11,094 | 900,000 | |||||||||||
Trimaran CLO V, Ltd.(3), (6) | Subordinate Notes | 20.8 | % | 1,292,698 | 1,657,020 | |||||||||||
Trimaran CLO VI, Ltd.(3), (6) | Income Notes | 16.2 | % | 1,531,142 | 1,950,000 | |||||||||||
Trimaran CLO VII, Ltd.(3), (6) | Income Notes | 10.5 | % | 1,399,074 | 2,084,394 | |||||||||||
Catamaran CLO 2012-1 Ltd.(3), (6) | Subordinated Notes | 24.9 | % | 7,994,677 | 5,793,924 | |||||||||||
Catamaran CLO 2013- 1 Ltd.(3), (6) | Subordinated Notes | 23.5 | % | 7,492,702 | 7,874,910 | |||||||||||
Catamaran CLO 2014-1 Ltd.(3), (6) | Subordinated Notes | 24.9 | % | 10,473,628 | 8,867,176 | |||||||||||
Dryden 30 Senior Loan Fund(3) | Subordinated Notes | 7.5 | % | 2,263,321 | 2,506,075 | |||||||||||
Catamaran CLO 2014-2 Ltd.(3), (6) | Subordinated Notes | 24.9 | % | 9,862,799 | 8,761,500 | |||||||||||
Total Investment in CLO Subordinated Securities, Preferred Shares and Income Notes | $ | 85,554,372 | $ | 72,014,902 |
Portfolio Company | Investment | Percentage Interest |
Amortized Cost |
Fair Value(2) | ||||||||||||
Catamaran CLO 2012-1 Ltd.(3), (6) | Class F Notes Par Value of $4,500,000 Due 12/23 |
42.9 | % | $ | 3,917,442 | $ | 4,160,000 | |||||||||
Catamaran CLO 2014-1 Ltd.(3), (6) | Class E Notes Par Value of $1,525,000 Due 4/26 |
15.1 | % | 1,417,376 | 1,340,000 | |||||||||||
Total Investment in CLO Rated-Note |
$ | 5,334,818 | $ | 5,500,000 | ||||||||||||
Total Investment in CLO Fund Securities (30% of net asset value at fair value) | $ | 90,889,190 | $ | 77,514,902 |
Portfolio Company/Principal Business | Investment | Percentage Interest | Cost | Fair Value(2) | ||||||||||||
Asset Manager Affiliates(9) | Asset Management Company | 100.0 | % | $ | 60,292,677 | $ | 72,326,000 | |||||||||
Total Investment in Asset Manager Affiliates (28% of net asset value at fair value) | $ | 60,292,677 | $ | 72,326,000 |
See accompanying notes to financial statements.
F-66
Time Deposit and Money Market Accounts | Investment | Yield | Par/Amortized Cost |
Fair Value(2) | ||||||||||||
JP Morgan Business Money Market Account(8), (9) | Money Market Account | 0.10 | % | $ | 249,105 | $ | 249,105 | |||||||||
US Bank Money Market Account(9) | Money Market Account | 0.02 | % | 1,353,636 | 1,353,636 | |||||||||||
Total Investment in Time Deposit and Money Market Accounts (1% of net asset value at fair value) |
$ | 1,602,741 | $ | 1,602,741 | ||||||||||||
Total Investments(4) (188% of net asset value at fair value) | $ | 484,498,354 | $ | 479,706,494 |
(1) | A majority of the variable rate loans to the Companys investment portfolio bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly at the borrowers option. The Borrower may also elect to have multiple interest reset periods for each loan. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at December 31, 2014. As noted in the table above, 75% (based on par) of debt securities contain LIBOR floors which range between 0.75% and 3.00%. |
(2) | Reflects the fair market value of all investments as of December 31, 2014, as determined by the Companys Board of Directors. |
(3) | Non-U.S. company or principal place of business outside the U.S. |
(4) | The aggregate cost of investments for federal income tax purposes is approximately $502 million. The aggregate gross unrealized appreciation is approximately $15.7 million, the aggregate gross unrealized depreciation is approximately $37.7 million, and the net unrealized depreciation is approximately $22 million. |
(5) | Non-income producing. |
(6) | An affiliate CLO Fund managed by an Asset Manager Affiliate (as such term is defined in the notes to the financial statements). |
(7) | Loan or debt security is on non-accrual status and therefore is considered non-income producing. |
(8) | Money market account holding restricted cash and security deposits for employee benefit plans. |
(9) | Qualified asset for purposes of section 55(a) of the Investment Company Act of 1940. |
(10) | As of December 31, 2014, this CLO Fund Security was not providing a dividend distribution. |
(11) | As of December 31, 2014, investment was owned by KCAP Senior Funding I, LLC and has been pledged to secure KCAP Senior Funding I, LLCs obligation. |
(12) | Affiliated portfolio company. |
See accompanying notes to financial statements.
F-67
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost |
Fair Value(2) | ||||||||||||
Advanced Lighting Technologies, Inc.(9), (11) Consumer goods: Non-durable |
First Lien Bond 10.5% 06/2019 00753CAE2 10.5% Cash, Due 6/19 |
$ | 3,000,000 | $ | 2,948,332 | $ | 2,546,400 | |||||||||
Advantage Sales & Marketing Inc.(9) Services: Business |
Senior Secured Loan 2013 Term Loan (First Lien) 4.3% Cash, Due 12/17 |
1,989,952 | 1,996,642 | 2,001,892 | ||||||||||||
Alaska Communications Systems Holdings, Inc.(9), (11) Telecommunications |
Senior Secured Loan Term Loan 6.3% Cash, Due 10/16 |
2,358,409 | 2,362,064 | 2,357,702 | ||||||||||||
Apria Healthcare Group Inc.(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Initial Term Loan 6.8% Cash, Due 4/20 |
2,985,000 | 2,997,209 | 2,985,000 | ||||||||||||
Aramark Corporation Beverage, Food and Tobacco |
Senior Secured Loan U.S. Term D Loan 4.0% Cash, Due 9/19 |
850,000 | 856,173 | 856,374 | ||||||||||||
Aramark Corporation(11) Beverage, Food and Tobacco |
Senior Secured Loan LC-3 Facility 3.7% Cash, Due 7/16 |
61,707 | 61,967 | 61,861 | ||||||||||||
Aramark Corporation(11) Beverage, Food and Tobacco |
Senior Secured Loan U.S. Term C Loan 3.7% Cash, Due 7/16 |
938,293 | 942,256 | 940,639 | ||||||||||||
Aramark Corporation(11) Beverage, Food and Tobacco |
Senior Secured Loan U.S. Term D Loan 4.0% Cash, Due 9/19 |
1,150,000 | 1,158,352 | 1,158,625 | ||||||||||||
ARSloane Acquisition, LLC(9), (11) Services: Business |
Senior Secured Loan Tranche B Term Loan (First Lien) 7.5% Cash, Due 10/19 |
997,500 | 987,913 | 997,898 | ||||||||||||
Asurion, LLC (fka Asurion Corporation)(9), (11) Banking, Finance, Insurance & Real Estate |
Senior Secured Loan Incremental Tranche B-1 Term Loan 4.5% Cash, Due 5/19 |
1,980,000 | 2,000,806 | 1,983,168 | ||||||||||||
Bankruptcy Management Solutions, Inc.(9) Finance |
Senior Secured Loan Term B Loan 7.0% Cash, Due 6/18 |
718,182 | 718,182 | 713,514 | ||||||||||||
BarBri, Inc. (Gemini Holdings, Inc.)(9), (11) Services: Consumer |
Senior Secured Loan Term Loan 5.3% Cash, Due 7/19 |
3,000,000 | 2,986,055 | 3,000,900 | ||||||||||||
BBB Industries, LLC(9), (11) Automotive |
Senior Secured Loan Term Loan B 5.5% Cash, Due 3/19 |
2,887,500 | 2,878,820 | 2,888,366 | ||||||||||||
Bellisio Foods, Inc.(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Delayed Draw Term Loan 6.5% Cash, Due 8/19 |
1,582,475 | 1,575,088 | 1,582,316 | ||||||||||||
Bellisio Foods, Inc.(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan U.S. Term B Loans 5.3% Cash, Due 8/19 |
2,191,119 | 2,180,891 | 2,190,900 | ||||||||||||
Blue Coat Systems, Inc.(9), (11) High Tech Industries |
Senior Secured Loan New Term Loan 4.5% Cash, Due 5/19 |
3,990,000 | 4,003,966 | 3,991,995 | ||||||||||||
Caribe Media Inc. (fka Caribe Information Investments Incorporated)(9) Media: Advertising, Printing & Publishing |
Senior Secured Loan Loan 10.0% Cash, Due 11/14 |
379,763 | 379,763 | 379,193 | ||||||||||||
Carolina Beverage Group LLC(9) Beverage, Food and Tobacco |
Senior Secured Bond 10.625% 08/2018 143818AA0 144A 10.6% Cash, Due 8/18 |
1,500,000 | 1,519,072 | 1,619,550 | ||||||||||||
Catalina Marketing Corporation(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Initial Term Loan 5.3% Cash, Due 10/20 |
1,995,000 | 1,983,766 | 2,025,553 | ||||||||||||
Clover Technologies Group, LLC (Clover Holdings Inc.)(9), (11) Consumer goods: Non-durable |
Senior Secured Loan Term Loan 6.8% Cash, Due 5/18 |
$ | 2,850,292 | $ | 2,883,914 | $ | 2,850,291 |
See accompanying notes to financial statements.
F-68
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost |
Fair Value(2) | ||||||||||||
CoActive Technologies LLC (fka CoActive Technologies, Inc.)(7), (9) Capital Equipment |
Junior Secured Loan Term Loan (Second Lien) 7.0% Cash, 7.0% PIK, Due 1/15 |
2,063,007 | 1,987,358 | 1,863,721 | ||||||||||||
Crowley Holdings Preferred, LLC(9) Transportation: Cargo |
Preferred Stock 12.000% 12/2049 Series A Income Preferred Securities 10.0% Cash, 2.0% PIK, Due 12/49 |
10,000,000 | 10,000,000 | 10,600,000 | ||||||||||||
CSM Bakery Supplies LLC(9) Beverage, Food and Tobacco |
Junior Secured Loan Term Loan (Second Lien) 8.5% Cash, Due 7/21 |
3,000,000 | 3,018,871 | 3,001,500 | ||||||||||||
CSM Bakery Supplies LLC(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Term Loan 4.8% Cash, Due 7/20 |
3,657,500 | 3,655,989 | 3,659,329 | ||||||||||||
Del Monte Foods Company(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Initial Term Loan 4.0% Cash, Due 3/18 |
2,789,388 | 2,783,753 | 2,803,321 | ||||||||||||
Drew Marine Group Inc.(9) Transportation: Cargo |
Junior Secured Loan Term Loan (Second Lien) 8.0% Cash, Due 5/21 |
2,500,000 | 2,493,817 | 2,493,750 | ||||||||||||
ELO Touch Solutions, Inc.(9), (11) High Tech Industries |
Senior Secured Loan Term Loan (First Lien) 8.0% Cash, Due 6/18 |
1,898,703 | 1,835,507 | 1,893,577 | ||||||||||||
Fender Musical Instruments Corporation(9), (11) Hotel, Gaming & Leisure |
Senior Secured Loan Initial Loan 5.8% Cash, Due 4/19 |
2,421,986 | 2,434,723 | 2,463,620 | ||||||||||||
FHC Health Systems, Inc.(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Term Loan 5.8% Cash, Due 1/18 |
3,900,000 | 3,864,809 | 3,900,000 | ||||||||||||
First American Payment Systems, L.P.(9) Finance |
Junior Secured Loan Term Loan (Second Lien) 10.8% Cash, Due 4/19 |
3,000,000 | 2,951,174 | 2,999,400 | ||||||||||||
First Data Corporation(9), (11) Banking, Finance, Insurance & Real Estate |
Senior Secured Loan 2018 Dollar Term Loan 4.2% Cash, Due 3/18 |
2,000,000 | 1,875,135 | 2,006,520 | ||||||||||||
Flexera Software LLC (fka Flexera Software, Inc.)(9), (11) High Tech Industries |
Senior Secured Loan Term Loan 5.0% Cash, Due 3/19 |
2,722,955 | 2,734,588 | 2,725,133 | ||||||||||||
Fram Group Holdings Inc./Prestone Holdings Inc.(9), (11) Automotive |
Senior Secured Loan Term Loan (First Lien) 6.5% Cash, Due 7/17 |
966,900 | 970,557 | 966,610 | ||||||||||||
Freescale Semiconductor, Inc. High Tech Industries |
Senior Subordinated Bond 10.125% 12/2016 35687MAP2 10.1% Cash, Due 12/16 |
1,036,000 | 1,037,707 | 1,051,540 | ||||||||||||
Getty Images, Inc.(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Initial Term Loan 4.8% Cash, Due 10/19 |
3,711,259 | 3,711,065 | 3,471,698 | ||||||||||||
Ginn LA Conduit Lender, Inc.(7), (9) Construction & Building |
Senior Secured Loan First Lien Tranche A Credit-Linked Deposit 7.8% Cash, Due 6/11 |
1,257,143 | 1,224,101 | 37,714 | ||||||||||||
Ginn LA Conduit Lender, Inc.(7), (9) Construction & Building |
Senior Secured Loan First Lien Tranche B Term Loan 7.8% Cash, Due 6/11 |
2,694,857 | 2,624,028 | 80,846 | ||||||||||||
Ginn LA Conduit Lender, Inc.(7), (9) Construction & Building |
Junior Secured Loan Loan (Second Lien) 11.8% Cash, Due 6/12 |
3,000,000 | 2,715,997 | 30,015 | ||||||||||||
Global Tel*Link Corporation(9) Telecommunications |
Junior Secured Loan Term Loan (Second Lien) 9.0% Cash, Due 11/20 |
4,000,000 | 3,924,752 | 3,991,600 | ||||||||||||
Grande Communications Networks LLC(9), (11) Telecommunications |
Senior Secured Loan Initial Term Loan 4.5% Cash, Due 5/20 |
3,980,000 | 3,985,209 | 3,980,398 | ||||||||||||
Grupo HIMA San Pablo, Inc.(9) Healthcare, Education and Childcare |
Senior Secured Loan Term B Loan (First Lien) 8.5% PIK, Due 1/18 |
2,977,500 | 2,928,848 | 2,813,738 | ||||||||||||
Grupo HIMA San Pablo, Inc.(9) Healthcare, Education and Childcare |
Junior Secured Loan Term Loan (Second Lien) 13.8% PIK, Due 7/18 |
7,000,000 | 6,865,363 | 6,817,300 | ||||||||||||
Gymboree Corporation., The(9), (11) Retail |
Senior Secured Loan Term Loan 5.0% Cash, Due 2/18 |
$ | 1,421,105 | $ | 1,377,305 | $ | 1,332,286 |
See accompanying notes to financial statements.
F-69
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost |
Fair Value(2) | ||||||||||||
Hargray Communications Group, Inc. (HCP Acquisition LLC)(9), (11) Media: Broadcasting & Subscription |
Senior Secured Loan Initial Term Loan 4.8% Cash, Due 6/19 |
2,985,000 | 2,957,575 | 2,986,194 | ||||||||||||
Harland Clarke Holdings Corp. (fka Clarke American Corp.)(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Tranche B-3 Term Loan 7.0% Cash, Due 5/18 |
3,456,250 | 3,424,170 | 3,488,341 | ||||||||||||
Hunter Defense Technologies, Inc.(9) Aerospace and Defense |
Junior Secured Loan Term Loan (Second Lien) 7.0% Cash, Due 2/15 |
4,074,074 | 4,049,553 | 3,911,111 | ||||||||||||
Iasis Healthcare LLC(9) Healthcare, Education and Childcare |
Senior Unsecured Bond 8.375% 05/2019 45072PAD4 8.4% Cash, Due 5/19 |
3,000,000 | 2,892,521 | 3,187,500 | ||||||||||||
International Architectural Products, Inc.(7), (9) Metals & Mining |
Senior Secured Loan Term Loan 12.0% Cash, Due 5/15 |
247,636 | 228,563 | 1,000 | ||||||||||||
Jones Stephens Corp.(9) Consumer goods: Non-durable |
Senior Secured Loan Term Loan 7.0% Cash, Due 9/15 |
1,214,195 | 1,214,195 | 1,214,195 | ||||||||||||
Jones Stephens Corp.(9), (11) Consumer goods: Non-durable |
Senior Secured Loan Term Loan 7.0% Cash, Due 9/15 |
2,925,620 | 2,925,620 | 2,925,620 | ||||||||||||
Key Safety Systems, Inc.(9), (11) Automotive |
Senior Secured Loan Initial Term Loan 4.8% Cash, Due 5/18 |
2,692,152 | 2,679,887 | 2,696,459 | ||||||||||||
Kinetic Concepts, Inc.(9) Healthcare, Education and Childcare |
Senior Secured Loan Dollar Term D-1 Loan 4.5% Cash, Due 5/18 |
1,989,979 | 2,003,621 | 2,003,661 | ||||||||||||
Kinetic Concepts, Inc.(9), (11) Healthcare, Education and Childcare |
Senior Secured Loan Dollar Term D-1 Loan 4.5% Cash, Due 5/18 |
1,994,979 | 2,012,272 | 2,008,695 | ||||||||||||
Landslide Holdings, Inc. (Crimson Acquisition Corp.)(9), (11) High Tech Industries |
Senior Secured Loan Initial Term Loan 5.3% Cash, Due 8/19 |
3,482,500 | 3,492,130 | 3,483,893 | ||||||||||||
LBREP/L-Suncal Master I LLC(7), (9) Construction & Building |
Senior Secured Loan Term Loan (First Lien) 7.5% Cash, Due 1/10 |
3,034,968 | 3,034,968 | 40,669 | ||||||||||||
LTS Buyer LLC (Sidera Networks, Inc.)(9) Telecommunications |
Senior Secured Loan Term B Loan (First Lien) 4.5% Cash, Due 4/20 |
3,980,000 | 3,974,154 | 4,003,024 | ||||||||||||
MB Aerospace ACP Holdings III Corp.(9) Aerospace and Defense |
Senior Secured Loan Term Loan 6.0% Cash, Due 5/19 |
3,980,000 | 3,944,023 | 3,980,796 | ||||||||||||
Medical Specialties Distributors, LLC(9), (11) Healthcare & Pharmaceuticals |
Senior Secured Loan Term Loan 6.5% Cash, Due 12/19 |
4,000,000 | 3,960,421 | 3,999,200 | ||||||||||||
Michael Foods Group, Inc. (f/k/a M-Foods Holdings, Inc.)(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Term B Facility 4.3% Cash, Due 2/18 | 1,751,716 | 1,761,555 | 1,753,116 | ||||||||||||
Nellson Nutraceutical, LLC(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Term Loan 6.8% Cash, Due 8/18 |
1,995,000 | 1,981,056 | 1,995,000 | ||||||||||||
Ozburn-Hessey Holding Company LLC(9), (11) Transportation: Cargo |
Senior Secured Loan Term Loan 6.8% Cash, Due 5/19 |
3,548,085 | 3,536,235 | 3,549,504 | ||||||||||||
PetCo Animal Supplies, Inc.(9), (11) Retail |
Senior Secured Loan New Loans 4.0% Cash, Due 11/17 |
1,979,592 | 1,987,274 | 1,992,746 | ||||||||||||
Pharmaceutical Product Development, Inc. (Jaguar Holdings, LLC)(9) Healthcare & Pharmaceuticals |
Senior Secured Loan 2013 Term Loan 4.0% Cash, Due 12/18 |
3,517,594 | 3,529,732 | 3,546,526 | ||||||||||||
Puerto Rico Cable Acquisition Company Inc.(9) Media: Broadcasting & Subscription |
Senior Secured Loan Term Loan 5.5% Cash, Due 7/18 |
980,693 | 982,374 | 981,086 | ||||||||||||
Puerto Rico Cable Acquisition Company Inc.(9), (11) Media: Broadcasting & Subscription |
Senior Secured Loan Term Loan 5.5% Cash, Due 7/18 |
2,942,080 | 2,928,491 | 2,943,257 | ||||||||||||
Sandy Creek Energy Associates, L.P.(9), (11) Utilities: Electric |
Senior Secured Loan Term Loan 5.0% Cash, Due 11/20 |
$ | 3,000,000 | $ | 2,985,253 | $ | 3,005,625 |
See accompanying notes to financial statements.
F-70
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost |
Fair Value(2) | ||||||||||||
SGF Produce Holding Corp.(Frozsun, Inc.)(9) Beverage, Food and Tobacco |
Senior Secured Loan Term Loan 5.0% Cash, Due 3/19 |
2,213,423 | 2,193,867 | 2,213,645 | ||||||||||||
SGF Produce Holding Corp.(Frozsun, Inc.)(9), (11) Beverage, Food and Tobacco |
Senior Secured Loan Term Loan 5.0% Cash, Due 3/19 |
3,475,281 | 3,454,967 | 3,475,629 | ||||||||||||
Spin Holdco Inc.(9) Consumer goods: Durable |
Senior Secured Loan Initial Term Loan (First Lien) 4.3% Cash, Due 11/19 |
1,246,875 | 1,245,425 | 1,255,454 | ||||||||||||
Spin Holdco Inc.(9), (11) Consumer goods: Durable |
Senior Secured Loan Initial Term Loan (First Lien) 4.3% Cash, Due 11/19 |
2,743,125 | 2,742,255 | 2,761,998 | ||||||||||||
Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(9), (11) Environmental Industries |
Senior Secured Loan Term Loan 6.8% Cash, Due 6/19 |
2,985,000 | 2,957,663 | 2,985,896 | ||||||||||||
Steinway Musical Instruments, Inc.(9) Hotel, Gaming & Leisure |
Junior Secured Loan Loan (Second Lien) 9.3% Cash, Due 9/20 |
1,000,000 | 990,403 | 1,001,900 | ||||||||||||
Sun Products Corporation, The (fka Huish Detergents Inc.)(9), (11) Consumer goods: Non-durable |
Senior Secured Loan Tranche B Term Loan 5.5% Cash, Due 3/20 |
3,970,000 | 3,941,540 | 3,780,433 | ||||||||||||
TPF II LC, LLC (TPF II Rolling Hills, LLC)(9), (11) Utilities: Electric |
Senior Secured Loan Term Loan 6.5% Cash, Due 8/19 |
2,985,000 | 2,942,573 | 2,987,985 | ||||||||||||
Trico Products Corporation(9) Automotive |
Senior Secured Loan Term Loan 6.3% Cash, Due 7/16 |
4,864,844 | 4,843,792 | 4,863,871 | ||||||||||||
Trico Products Corporation(9), (11) Automotive |
Senior Secured Loan Term Loan 6.3% Cash, Due 7/16 |
3,891,875 | 3,875,033 | 3,891,097 | ||||||||||||
Trimaran Advisors, L.L.C.(9), (12) Portfolio Company Loan |
Senior Unsecured Loan Revolving Credit Facility 9.0% Cash, Due 11/17 |
23,000,000 | 23,000,000 | 23,000,000 | ||||||||||||
TriZetto Group, Inc. (TZ Merger Sub, Inc.)(9), (11) High Tech Industries |
Senior Secured Loan Term Loan 4.8% Cash, Due 5/18 |
3,676,604 | 3,684,234 | 3,639,857 | ||||||||||||
TRSO I, Inc.(9) Energy: Oil & Gas |
Junior Secured Loan Term Loan (Second Lien) 11.0% Cash, Due 12/17 |
10,400,000 | 10,234,558 | 10,608,000 | ||||||||||||
TUI University, LLC(9) Healthcare, Education and Childcare |
Senior Secured Loan Term Loan (First Lien) 7.3% Cash, Due 10/14 |
1,647,733 | 1,637,909 | 1,614,779 | ||||||||||||
TWCC Holding Corp.(9) Media: Broadcasting & Subscription |
Junior Secured Loan Term Loan (Second Lien) 7.0% Cash, Due 6/20 |
1,000,000 | 1,004,735 | 1,030,005 | ||||||||||||
TWCC Holding Corp.(9), (11) Media: Broadcasting & Subscription |
Senior Secured Loan Term Loan 3.5% Cash, Due 2/17 |
1,965,101 | 1,980,166 | 1,975,379 | ||||||||||||
Univar Inc.(9), (11) Chemicals, Plastics and Rubber |
Senior Secured Loan Term B Loan 5.0% Cash, Due 6/17 |
2,924,675 | 2,921,597 | 2,906,601 | ||||||||||||
Vertafore, Inc.(9), (11) High Tech Industries |
Senior Secured Loan Term Loan (2013) 4.3% Cash, Due 10/19 |
1,202,077 | 1,201,491 | 1,203,039 | ||||||||||||
Vestcom International, Inc. (fka Vector Investment Holdings, Inc.)(9), (11) Media: Advertising, Printing & Publishing |
Senior Secured Loan Term Loan 7.0% Cash, Due 12/18 |
2,977,500 | 2,939,085 | 2,978,095 | ||||||||||||
Weiman Products, LLC(9) Consumer goods: Non-durable |
Senior Secured Loan Term Loan 6.3% Cash, Due 11/18 |
1,000,000 | 990,219 | 990,000 | ||||||||||||
Weiman Products, LLC(9), (11) Consumer goods: Non-durable |
Senior Secured Loan Term Loan 6.3% Cash, Due 11/18 |
4,000,000 | 3,960,876 | 3,960,000 | ||||||||||||
Wholesome Sweeteners, Inc.(9) Beverage, Food and Tobacco |
Junior Secured Loan Subordinated Note (Second Lien) 14.0% Cash, Due 10/17 |
6,648,596 | 6,614,827 | 6,715,082 | ||||||||||||
WideOpenWest Finance, LLC(9) Telecommunications |
Senior Secured Loan Term B Loan 4.8% Cash, Due 4/19 |
2,984,962 | 3,005,566 | 3,005,111 | ||||||||||||
WireCo WorldGroup Inc.(9) Capital Equipment |
Senior Unsecured Bond 11.75% 05/2017 11.8% Cash, Due 5/17 | $ | 5,000,000 | $ | 4,977,052 | $ | 5,121,000 | |||||||||
WireCo WorldGroup Inc.(9), (11) Capital Equipment |
Senior Unsecured Bond 11.75% 05/2017 11.8% Cash, Due 5/17 | 3,000,000 | 2,986,231 | 3,072,600 |
See accompanying notes to financial statements.
F-71
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Amortized Cost |
Fair Value(2) | ||||||||||||
WTG Holdings III Corp.(9) Environmental Industries |
Junior Secured Loan Term Loan (Second Lien) 8.5% Cash, Due 1/22 |
4,000,000 | 3,980,000 | 3,980,000 | ||||||||||||
Total Investment in Debt Securities (107% of net asset value at fair value) |
$ | 276,978,279 | $ | 275,213,594 | $ | 266,830,427 |
Portfolio Company/Principal Business | Investment | Percentage Interest/Shares | Amortized Cost | Fair Value(2) | ||||||||||||
Aerostructures Holdings L.P.(5), (9) Aerospace and Defense |
Partnership Interests | 1.2 | % | $ | 1,000,000 | $ | 1,000 | |||||||||
Aerostructures Holdings L.P.(5), (9) Aerospace and Defense |
Series A Preferred Interests | 1.2 | % | 250,961 | 207,988 | |||||||||||
Bankruptcy Management Solutions, Inc.(5), (9) Banking, Finance, Insurance & Real Estate |
Class A Warrants | 1.7 | % | | | |||||||||||
Bankruptcy Management Solutions, Inc.(5), (9) Banking, Finance, Insurance & Real Estate |
Class B Warrants | 1.7 | % | | | |||||||||||
Bankruptcy Management Solutions, Inc.(5), (9) Banking, Finance, Insurance & Real Estate |
Class C Warrants | 1.7 | % | | | |||||||||||
Bankruptcy Management Solutions, Inc.(5), (9) Banking, Finance, Insurance & Real Estate |
Common Stock 2013 | 0.8 | % | 314,325 | 309,363 | |||||||||||
Caribe Media Inc. (fka Caribe Information Investments Incorporated)(5), (9) Media: Advertising, Printing & Publishing |
Common | 1.27 | % | 359,765 | 692,710 | |||||||||||
Coastal Concrete Holding II, LLC(5), (9) Construction & Building |
Class A Units | 10.8 | % | 8,625,626 | 1,000 | |||||||||||
eInstruction Acquisition, LLC(5), (9) Services: Consumer |
Membership Units | 1.1 | % | 1,079,617 | 1,000 | |||||||||||
FP WRCA Coinvestment Fund VII, Ltd.(3), (5) Capital Equipment |
Class A Shares | 1,500 | 1,500,000 | 1,735,604 | ||||||||||||
Perseus Holding Corp.(5), (9) Hotel, Gaming & Leisure |
Common | 0.2 | % | 400,000 | 1,000 | |||||||||||
Plumbing Holdings Corporation(5), (9) Consumer goods: Durable |
Common | 7.8 | % | | 1,581,481 | |||||||||||
Plumbing Holdings Corporation(5), (9) Consumer goods: Durable |
Preferred | 15.5 | % | 3,725,390 | 4,152,689 | |||||||||||
TRSO II, Inc.(5), (9) Energy: Oil & Gas |
Common Stock | 5.4 | % | 1,500,000 | 2,322,563 | |||||||||||
Total Investment in Equity Securities (4% of net asset value at fair value) |
$ | 18,755,684 | $ | 11,006,398 |
See accompanying notes to financial statements.
F-72
Portfolio Company | Investment | Percentage Interest | Amortized Cost (restated) |
Fair Value(2) | ||||||||||||||||
Grant Grove CLO, Ltd.(3) | Subordinated Securities | 22.2 | % | $ | 2,880,785 | $ | 1,052,164 | |||||||||||||
Katonah III, Ltd.(3), (10) | Preferred Shares | 23.1 | % | 1,143,132 | 325,000 | |||||||||||||||
Katonah V, Ltd.(3), (10) | Preferred Shares | 26.7 | % | 2,412,692 | 1,000 | |||||||||||||||
Katonah VII CLO Ltd.(3), (6) | Subordinated Securities | 16.4 | % | 4,707,192 | 1,478,978 | |||||||||||||||
Katonah VIII CLO Ltd(3), (6) | Subordinated Securities | 10.3 | % | 2,837,798 | 1,230,731 | |||||||||||||||
Katonah IX CLO Ltd(3), (6) | Preferred Shares | 6.9 | % | 1,390,003 | 829,739 | |||||||||||||||
Katonah X CLO Ltd (3), (6) | Subordinated Securities | 33.3 | % | 9,860,887 | 5,932,163 | |||||||||||||||
Katonah 2007-I CLO Ltd.(3), (6) | Preferred Shares | 100.0 | % | 25,263,613 | 27,758,379 | |||||||||||||||
Trimaran CLO IV, Ltd.(3), (6) | Preferred Shares | 19.0 | % | 2,243,659 | 2,519,210 | |||||||||||||||
Trimaran CLO V, Ltd.(3), (6) | Subordinate Notes | 20.8 | % | 1,464,061 | 1,844,276 | |||||||||||||||
Trimaran CLO VI, Ltd.(3), (6) | Income Notes | 16.2 | % | 1,726,495 | 1,981,948 | |||||||||||||||
Trimaran CLO VII, Ltd.(3), (6) | Income Notes | 10.5 | % | 1,830,931 | 2,513,261 | |||||||||||||||
Catamaran CLO 2012-1 Ltd.(3), (6) | Subordinated Notes | 24.9 | % | 8,864,880 | 6,846,520 | |||||||||||||||
Catamaran CLO 2013-1 Ltd.(3), (6) | Subordinated Notes | 23.5 | % | 9,398,399 | 8,225,100 | |||||||||||||||
Dryden 30 Senior Loan Fund(3) | Subordinated Notes | 7.5 | % | 2,957,500 | 2,973,750 | |||||||||||||||
Total Investment in CLO Subordinated Securities, Preferred Shares and Income Notes | $ | 78,982,027 | $ | 65,512,219 |
Portfolio Company | Investment | Percentage Interest | Amortized Cost | Fair Value(2) | ||||||||||||
Katonah 2007-I CLO Ltd.(3), (6) | Floating 04/2022 B2L 48602NAA8 Par Value of $10,500,000 100.0%, Due 4/22 |
100.0 | % | $ | 1,300,937 | $ | 9,740,000 | |||||||||
Catamaran CLO 2012-1 Ltd.(3), (6) | Float 12/2023 F 14889CAE0 Par Value of $4,500,000 42.9%, Due 12/23 |
42.9 | % | 3,843,397 | 4,200,001 | |||||||||||
Total Investment in CLO Rated-Note | $ | 5,144,334 | $ | 13,940,001 | ||||||||||||
Total Investment in CLO Fund Securities (32% of net asset value at fair value) | $ | 84,126,361 | $ | 79,452,220 |
See accompanying notes to financial statements.
F-73
Portfolio Company/Principal Business | Investment | Percentage Interest |
Cost (restated) |
Fair Value(2) | ||||||||||||
Asset Manager Affiliates(9) | Asset Management Company | 100.0 | % | $ | 66,178,784 | $ | 76,148,000 | |||||||||
Total Investment in Asset Manager Affiliates (30% of net asset value at fair value) | $ | 66,178,784 | $ | 76,148,000 |
Time Deposit and Money Market Accounts |
Investment | Yield | Par/Amortized Cost |
Fair Value(2) | ||||||||||||
JP Morgan Business Money Market Account(8), (9) | Money Market Account | 0.15 | % | 237,088 | 237,088 | |||||||||||
US Bank Money Market Account(9) | Money Market Account | 0.30 | % | 6,875,861 | 6,875,861 | |||||||||||
Total Investment in Time Deposit and Money Market Accounts (3% of net asset value at fair value) | $ | 7,112,949 | $ | 7,112,949 | ||||||||||||
Total Investments(4) (176% of net asset value at fair value) | $ | 451,387,372 | $ | 440,549,994 |
(1) | A majority of the variable rate loans to the Companys portfolio companies bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at December 31, 2013. |
(2) | Reflects the fair market value of all investments as of December 31, 2013, as determined by the Companys Board of Directors. |
(3) | Non-U.S. company or principal place of business outside the U.S. |
(4) | The aggregate cost of investments for federal income tax purposes is approximately $463 million. The aggregate gross unrealized appreciation is approximately $16.1 million, the aggregate gross unrealized depreciation is approximately $38.1 million, and the net unrealized depreciation is approximately $22 million. |
(5) | Non-income producing. |
(6) | An affiliate CLO Fund managed by an Asset Manager Affiliate (as such term is defined in the notes to the financial statements). |
(7) | Loan or debt security is on non-accrual status and therefore is considered non-income producing. |
(8) | Money market account holding restricted cash and security deposits for employee benefit plans. |
(9) | Qualified asset for purposes of section 55(a) of the Investment Company Act of 1940. |
(10) | As of December 31, 2013, this CLO Fund Security was not providing a dividend distribution. |
(11) | As of December 31, 2013, investment was owned by KCAP Senior Funding I, LLC and has been pledged to secure KCAP Senior Funding I, LLCs obligation. |
(12) | Affiliated portfolio company. |
See accompanying notes to financial statements.
F-74
For the Years Ended December 31, | ||||||||||||||||||||
2014 | 2013 (restated)(6) |
2012 (restated)(6) |
2011 (restated)(6) |
2010 (restated)(6) |
||||||||||||||||
Per Share Data: |
||||||||||||||||||||
Net asset value, at beginning of period | $ | 7.51 | $ | 7.85 | $ | 7.85 | $ | 8.21 | $ | 9.56 | ||||||||||
Net investment income(1) | 0.59 | 0.62 | 0.65 | 0.45 | 0.28 | |||||||||||||||
Net realized losses from investment transactions(1) |
(0.30 | ) | (0.37 | ) | (0.12 | ) | (0.81 | ) | (0.79 | ) | ||||||||||
Realized losses from extinguishments of debt(1) | (0.02 | ) | (0.02 | ) | | | | |||||||||||||
Net change in unrealized gains from investments(1) |
0.17 | 0.31 | 0.39 | 0.62 | (0.29 | ) | ||||||||||||||
Net income | 0.44 | 0.54 | 0.92 | 0.26 | (0.80 | ) | ||||||||||||||
Net decrease in net assets resulting from distributions: |
||||||||||||||||||||
Distribution of ordinary income | (0.78 | ) | (0.70 | ) | (0.77 | ) | (0.65 | ) | (0.51 | ) | ||||||||||
Return of capital | (0.22 | ) | (0.35 | ) | (0.17 | ) | (0.04 | ) | (0.15 | ) | ||||||||||
Net decrease in net assets resulting from stockholder distributions | (1.00 | ) | (1.05 | ) | (0.94 | ) | (0.69 | ) | (0.66 | ) | ||||||||||
Net increase in net assets resulting from capital share transactions |
||||||||||||||||||||
Offering of common stock | 0.02 | 0.14 | | | | |||||||||||||||
Issuance of common stock under dividend reinvestment plan | | 0.02 | 0.02 | 0.04 | 0.07 | |||||||||||||||
Stock based compensation and other | (0.03 | ) | 0.01 | | 0.03 | 0.04 | ||||||||||||||
Net increase (decrease) in net assets relating to stock-based transactions | (0.01 | ) | 0.17 | 0.02 | 0.07 | 0.11 | ||||||||||||||
Net asset value, end of period | $ | 6.94 | $ | 7.51 | $ | 7.85 | $ | 7.85 | $ | 8.21 | ||||||||||
Total net asset value return(2) | 5.7 | % | 9.1 | % | 11.9 | % | 4.0 | % | (7.1 | )% | ||||||||||
Ratio/Supplemental Data: |
||||||||||||||||||||
Per share market value at beginning of period | $ | 8.07 | $ | 9.19 | $ | 6.31 | $ | 6.97 | $ | 4.56 | ||||||||||
Per share market value at end of period | $ | 6.82 | $ | 8.07 | $ | 9.19 | $ | 6.31 | $ | 6.97 | ||||||||||
Total market return(3) | (3.1 | )% | (0.7 | )% | 60.5 | % | 0.4 | % | 67.6 | % | ||||||||||
Shares outstanding at end of period | 36,775,127 | 33,332,123 | 26,470,408 | 22,992,211 | 22,767,130 | |||||||||||||||
Net assets at end of period | $ | 255,316,701 | $ | 250,369,693 | $ | 207,875,659 | $ | 180,525,942 | $ | 186,925,667 | ||||||||||
Portfolio turnover rate(4) | 45.8 | % | 45.5 | % | 39.2 | % | 24.5 | % | 3.4 | % | ||||||||||
Average par debt outstanding | $ | 196,622,077 | $ | 150,828,586 | $ | 80,758,743 | $ | 53,974,098 | $ | 154,952,070 | ||||||||||
Asset coverage ratio | 211 | % | 226 | % | 305 | % | 401 | % | 315 | % | ||||||||||
Ratio of net investment income to average net assets(5) | 7.9 | % | 7.8 | % | 8.3 | % | 5.2 | % | 3.1 | % | ||||||||||
Ratio of total expenses to average net assets(5) | 8.2 | % | 7.5 | % | 7.2 | % | 6.0 | % | 8.5 | % | ||||||||||
Ratio of interest expense to average net assets(5) | 4.5 | % | 3.9 | % | 3.4 | % | 2.3 | % | 3.4 | % | ||||||||||
Ratio of non-interest expenses to average net assets(5) |
3.7 | % | 3.6 | % | 3.7 | % | 3.7 | % | 5.0 | % |
(1) | Based on weighted average number of common shares outstanding for the period. |
(2) | Total net asset value return (not annualized) equals the change in the net asset value per share over the beginning of period net asset value per share plus dividends, divided by the beginning net asset value per share. |
(3) | Total market return equals the change in the ending market price over the beginning of period price per share plus dividends, divided by the beginning price. |
(4) | Not annualized. Portfolio turnover rate equals the year-to-date sales and paydowns over the average of the invested assets at fair value. |
(5) | Annualized. |
(6) | Please refer to Note 2, Restatement, for additional information about restatements of prior period amounts. |
See accompanying notes to financial statements.
F-75
KCAP Financial, Inc. (KCAP or the Company) is an internally managed, non-diversified closed-end investment company that is regulated as a business development company (BDC) under the Investment Company Act of 1940 (the 1940 Act). The Company was formed as a Delaware limited liability company on August 8, 2006 and, prior to the issuance of shares of the Companys common stock in its initial public offering (IPO), converted to a corporation incorporated in Delaware on December 11, 2006. Prior to its IPO, the Company did not have material operations. The Companys IPO of 14,462,000 shares of common stock raised net proceeds of approximately $200 million. Prior to the IPO, the Company issued 3,484,333 shares to affiliates of Kohlberg & Co., L.L.C., a leading middle market private equity firm, in exchange for the contribution to the Company of their ownership interests in Katonah Debt Advisors, L.L.C., and related affiliates controlled by the Company (collectively, Katonah Debt Advisors) and in securities issued by collateralized loan obligation funds (CLO Funds) managed by Katonah Debt Advisors and two other asset managers.
On April 28, 2008, the Company completed a rights offering that resulted in the issuance of 3.1 million shares of our common stock, and net proceeds of $27 million.
On February 29, 2012, the Company purchased Trimaran Advisors, L.L.C. (Trimaran Advisors), a CLO manager similar to Katonah Debt Advisors with assets under management of approximately $1.5 billion, for total consideration of $13.0 million in cash and 3,600,000 shares of the Companys common stock. Contemporaneously with the acquisition of Trimaran Advisors, the Company acquired from Trimaran Advisors equity interests in certain CLO Funds managed by Trimaran Advisors for an aggregate purchase price of $12.0 million in cash. As of December 31, 2014, Katonah Debt Advisors and Trimaran Advisors are the Companys only wholly-owned portfolio companies (collectively, Asset Manager Affiliates) and have approximately $3.0 billion of par value assets under management. The Asset Manager Affiliates are registered under the Investment Advisers Act of 1940 and are managed independently from the Company by a separate portfolio management team.
On February 14, 2013, the Company completed a public offering of 5,232,500 shares of common stock, which included the underwriters full exercise of their option to purchase up to 682,500 shares of common stock, at a price of $9.75 per share, raising approximately $51.0 million in gross proceeds. In conjunction with this offering, the Company also sold 200,000 shares of common stock to a member of its Board of Directors, at a price of $9.31125 per share, raising approximately $1.9 million in gross proceeds.
On October 6, 2014, the Company completed a follow-on public offering of 3.0 million shares of its common stock at a price of $8.02 per share. The offering raised net proceeds were approximately $23.8 million, after deducting underwriting discounts and offering expenses.
The Company has three principal areas of investment:
First, the Company originates, structures, and invests in senior secured term loans and mezzanine debt primarily in privately-held middle market companies (the Debt Securities Portfolio). In addition, from time to time the Company may invest in the equity securities of privately held middle market companies.
Second, the Company has invested in asset management companies (Katonah Debt Advisors, L.L.C. and Trimaran Advisors, L.L.C., collectively the Asset Manager Affiliates) that manage collateralized loan obligation funds (CLOs).
Third, the Company invests in debt and subordinated securities issued by CLOs (CLO Fund Securities). These CLO Fund Securities are primarily managed by our Asset Manager Affiliates, but from time-to-time the Company makes investments in CLO Fund Securities managed by other asset managers. The CLOs typically invest in broadly syndicated loans, high-yield bonds and other credit instruments.
F-76
The Company may also invest in other investments such as loans to larger, publicly-traded companies, high-yield bonds and distressed debt securities. The Company may also receive warrants or options to purchase common stock in connection with its debt investments.
The Company has elected to be treated as a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). To qualify as a RIC, the Company must, among other things, meet certain source-of-income, and asset diversification and annual distribution requirements. As a RIC, the Company generally will not have to pay corporate-level U.S. federal income taxes on any income that it distributes in a timely manner to its stockholders.
Restatement of Financial Statements The Company has restated its financial statements for the correction of a material error related to the accounting for distributions the Company has received from its Asset Manager Affiliates. Specifically, the entire amount of distributions from the Asset Manager Affiliates had been recorded as a component of net investment income, however, certain distributions contained tax-basis return of capital, which should have been recorded as adjustments to the cost basis of the Asset Manager Affiliates investment. As a result of this error, prior period financial statements for the years ended December 31, 2013 and 2012 have been restated. For the years ended December 31, 2013 and 2012, the Consolidated Statements of Operations were corrected as follows; Dividends from Asset Manager Affiliates was decreased by $7.0 million and $3.5 million, respectively, with a corresponding decrease in net unrealized loss in the same amount. The cumulative impact of these adjusting entries had no effect on net income and total shareholders equity in any period.
The Companys financial statements for prior periods have also been corrected to record investment income on CLO equity investments based on the accounting guidance in ASC 325-40, Beneficial Interests in Securitized Financial Assets (ASC 325-40). For the years ended December 31, 2013 and 2012, the statements of operations were corrected as follows: investment income from CLO Fund Securities managed by affiliates decreased by approximately $2.6 million and $6.6 million, respectively, with a corresponding decrease in unrealized loss on CLO Fund securities managed by affiliates in the same amount; and investment income from CLO Fund Securities managed by non-affiliates increased by approximately $500,000, and $2.8 million, respectively with a corresponding increase in unrealized gains on CLO Fund securities managed by non-affiliates.
For the years ended December 31, 2013, 2012, 2011, and 2010 the impact of both corrections on the Financial Highlights Net Investment Income per share and Net Change in Unrealized Depreciation on Investments were decreased by ($0.28), ($0.28), ($0.25) and ($0.25), respectively. As of December 31, 2013, Accumulated (excess distribution) undistributed Net Investment Income was decreased by $16.5 million, with a corresponding decrease in Net Unrealized Depreciation on Investments in the same amount.
The reclassifications of amounts between investment income and unrealized losses for both error corrections did not have any effect on net income, net asset value, net cash flows from operations, Earnings Per Share or Total Market Return for any periods presented.
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The following tables reflect the impact of this restatement on selected line items in the Balance Sheet for 2013 and on the Statements of Operations for 2013 and 2012:
The following table presents the impact of the restatement adjustments on our Consolidated Balance Sheets as of December 31, 2013:
As of December 31, 2013 | ||||||||||||
As published | Adjustments | As restated | ||||||||||
ASSETS |
||||||||||||
Investments at fair value: |
||||||||||||
Money market accounts | $ | 7,112,949 | $ | | $ | 7,112,949 | ||||||
Debt securities | 266,830,427 | | 266,830,427 | |||||||||
CLO Fund Securities managed by affiliates | 75,100,306 | | 75,100,306 | |||||||||
CLO Fund Securities managed by non-affiliates | 4,351,914 | | 4,351,914 | |||||||||
Equity securities | 11,006,398 | | 11,006,398 | |||||||||
Asset Manager Affiliates | 76,148,000 | | 76,148,000 | |||||||||
Total Investments at Fair Value | 440,549,994 | | 440,549,994 | |||||||||
Cash | 3,433,675 | | 3,433,675 | |||||||||
Restricted cash | 4,078,939 | | 4,078,939 | |||||||||
Interest receivable | 2,032,559 | | 2,032,559 | |||||||||
Accounts receivable | 3,125,259 | | 3,125,259 | |||||||||
Due from affiliates | 132 | | 132 | |||||||||
Other assets | 5,951,831 | | 5,951,831 | |||||||||
Total Assets | $ | 459,172,388 | $ | | $ | 459,172,388 | ||||||
LIABILITIES |
||||||||||||
Convertible Notes | $ | 49,008,000 | $ | | $ | 49,008,000 | ||||||
7.375% Notes Due 2019 | 41,400,000 | | 41,400,000 | |||||||||
Notes issued by KCAP Senior Funding I, LLC | 102,184,373 | | 102,184,373 | |||||||||
Payable for open trades | 3,980,000 | | 3,980,000 | |||||||||
Accounts payable and accrued expenses | 3,897,291 | | 3,897,291 | |||||||||
Dividend payable | 8,333,031 | | 8,333,031 | |||||||||
Total Liabilities | 208,802,695 | | 208,802,695 | |||||||||
STOCKHOLDERS' EQUITY |
||||||||||||
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 33,332,123 common shares issued and outstanding at December 31, 2013 | $ | 333,472 | | $ | 333,472 | |||||||
Capital in excess of par value | 370,929,615 | (25,188,740 | ) | 345,740,875 | ||||||||
Accumulated (excess distribution) undistributed net investment income | (6,102,017 | ) | (12,806,594 | ) | (18,908,611 | ) | ||||||
Accumulated net realized losses | (68,662,689 | ) | 4,283,045 | (64,379,644 | ) | |||||||
Net unrealized depreciation on investments | (46,128,688 | ) | 33,712,289 | (12,416,399 | ) | |||||||
Total Stockholders' Equity | 250,369,693 | | 250,369,693 | |||||||||
Total Liabilities and Stockholders' Equity | $ | 459,172,388 | $ | | $ | 459,172,388 | ||||||
Net Asset Value per Common Share | $ | 7.51 | $ | | $ | 7.51 | ||||||
AMORTIZED COST |
||||||||||||
CLO Fund Securities managed by affiliates | $ | 88,979,585 | $ | (14,247,333 | ) | $ | 74,732,252 | |||||
CLO Fund Securities managed by non-affiliates | $ | 12,717,365 | $ | (3,323,256 | ) | $ | 9,394,109 | |||||
Asset Manager Affiliates | $ | 83,378,741 | $ | (17,199,957 | ) | $ | 66,178,784 |
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The following table presents the impact of the restatement adjustments on our Consolidated Statement of Operations for the years ended December 31, 2013 and 2012:
Year Ended December 31, 2013 | ||||||||||||
As published | Adjustments | Restated | ||||||||||
Investment Income: |
||||||||||||
Interest from investments in debt securities | $ | 13,967,235 | $ | | $ | 13,967,235 | ||||||
Interest from cash and time deposits | 20,656 | | 20,656 | |||||||||
Investment income on CLO Fund Securities managed by affiliates | 19,902,348 | (2,555,578 | ) | 17,346,770 | ||||||||
Investment income on CLO Fund Securities managed by non-affiliates | 1,320,525 | 489,009 | 1,809,534 | |||||||||
Dividends from Asset Manager Affiliates | 12,750,000 | (7,014,955 | ) | 5,735,045 | ||||||||
Capital structuring service fees | 305,376 | | 305,376 | |||||||||
Total investment income | 48,266,140 | (9,081,524 | ) | 39,184,616 | ||||||||
Expenses: |
||||||||||||
Interest and amortization of debt issuance costs | 10,116,271 | | 10,116,271 | |||||||||
Compensation | 4,630,481 | | 4,630,481 | |||||||||
Professional fees | 2,191,305 | | 2,191,305 | |||||||||
Insurance | 552,568 | | 552,568 | |||||||||
Administrative and other | 1,819,876 | | 1,819,876 | |||||||||
Total expenses | 19,310,501 | | 19,310,501 | |||||||||
Net Investment Income | 28,955,639 | (9,081,524 | ) | 19,874,115 | ||||||||
Realized And Unrealized Gains (Losses) On Investments: |
||||||||||||
Net realized losses from investment transactions | (12,090,503 | ) | | (12,090,503 | ) | |||||||
Net change in unrealized appreciation (depreciation) on: |
||||||||||||
Debt securities | 14,956,103 | | 14,956,103 | |||||||||
Equity securities | 2,605,586 | | 2,605,586 | |||||||||
CLO Fund Securities managed by affiliates | (13,751,478 | ) | 2,555,577 | (11,195,901 | ) | |||||||
CLO Fund Securities managed by non-affiliates | (1,604,352 | ) | (489,008 | ) | (2,093,360 | ) | ||||||
Asset Manager Affiliates investments | (1,311,212 | ) | 7,014,955 | 5,703,743 | ||||||||
Total net unrealized gain from investment transactions | 894,647 | 9,081,524 | 9,976,171 | |||||||||
Net realized and unrealized appreciation (depreciation) on investments | (11,195,856 | ) | 9,081,524 | (2,114,332 | ) | |||||||
Realized losses on extinguishments of debt | (536,811 | ) | | (536,811 | ) | |||||||
Net Increase In Stockholders Equity Resulting From Operations | $ | 17,222,972 | $ | | $ | 17,222,972 | ||||||
Net Increase in Stockholders' Equity Resulting from Operations per Common Share: |
||||||||||||
Basic: | $ | 0.53 | $ | | $ | 0.53 | ||||||
Diluted: | $ | 0.53 | $ | | $ | 0.53 | ||||||
Net Investment Income Per Common Share: |
||||||||||||
Basic: | $ | 0.90 | $ | (0.28 | ) | $ | 0.62 | |||||
Diluted: | $ | 0.86 | $ | (0.24 | ) | $ | 0.62 | |||||
Weighted Average Shares of Common Stock Outstanding Basic | 32,280,160 | | 32,280,160 | |||||||||
Weighted Average Shares of Common Stock Outstanding Diluted | 32,295,005 | | 32,295,005 |
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Year Ended December 31, 2012 | ||||||||||||
As published | Adjustments | Restated | ||||||||||
Investment Income: |
||||||||||||
Interest from investments in debt securities | $ | 12,504,569 | $ | | $ | 12,504,569 | ||||||
Interest from cash and time deposits | 5,741 | | 5,741 | |||||||||
Investment income on CLO Fund Securities managed by affiliates | 19,207,401 | (6,603,591 | ) | 12,603,810 | ||||||||
Investment income on CLO Fund Securities managed by non-affiliates | 1,861,263 | 2,846,293 | 4,707,556 | |||||||||
Dividends from Asset Manager Affiliates | 4,700,000 | (3,485,002 | ) | 1,214,998 | ||||||||
Capital structuring service fees | 304,882 | | 304,882 | |||||||||
Total investment income | 38,583,856 | (7,242,300 | ) | 31,341,556 | ||||||||
Expenses: |
||||||||||||
Interest and amortization of debt issuance costs | 6,976,018 | | 6,976,018 | |||||||||
Compensation | 3,172,814 | | 3,172,814 | |||||||||
Professional fees | 2,453,945 | | 2,453,945 | |||||||||
Insurance | 546,989 | | 546,989 | |||||||||
Administrative and other | 1,343,677 | | 1,343,677 | |||||||||
Total expenses | 14,493,443 | | 14,493,443 | |||||||||
Net Investment Income | 24,090,413 | (7,242,300 | ) | 16,848,113 | ||||||||
Realized And Unrealized Gains (Losses) On Investments: |
||||||||||||
Net realized losses from investment transactions | (3,232,975 | ) | | (3,232,975 | ) | |||||||
Net change in unrealized appreciation (depreciation) on: |
||||||||||||
Debt securities | (3,701,536 | ) | | (3,701,536 | ) | |||||||
Equity securities | 163,843 | | 163,843 | |||||||||
CLO Fund Securities managed by affiliates | 8,316,279 | 6,603,590 | 14,919,869 | |||||||||
CLO Fund Securities managed by non-affiliates | 2,884,983 | (2,846,293 | ) | 38,690 | ||||||||
Asset Manager Affiliates investments | (2,395,228 | ) | 3,485,003 | 1,089,775 | ||||||||
Total net unrealized gain from investment transactions | 5,268,341 | 7,242,300 | 12,510,641 | |||||||||
Net realized and unrealized appreciation (depreciation) on investments | 2,035,366 | 7,242,300 | 9,277,666 | |||||||||
Net Increase In Stockholders Equity Resulting From Operations | $ | 26,125,779 | $ | | $ | 26,125,779 | ||||||
Net Increase in Stockholders' Equity Resulting from Operations per Common Share: |
||||||||||||
Basic: | $ | 1.00 | $ | | $ | 1.00 | ||||||
Diluted: | $ | 0.95 | $ | | $ | 0.95 | ||||||
Net Investment Income Per Common Share: |
||||||||||||
Basic: | $ | 0.93 | $ | (0.28 | ) | $ | 0.65 | |||||
Diluted: | $ | 0.89 | $ | (0.24 | ) | $ | 0.64 | |||||
Weighted Average Shares of Common Stock Outstanding Basic | 26,011,517 | | 26,011,517 | |||||||||
Weighted Average Shares of Common Stock Outstanding Diluted | 33,379,594 | | 33,379,594 |
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The following table summarizes the effects of cumulative restatement adjustments by type of error, whether material or not, and the associated AICPA Return of Capital Statement of Position (ROC SOP) reclassifications, recorded to all periods prior to December 31, 2012 on previously reported components of Shareholders Equity:
December 31, 2012 | ||||||||||||||||||||
As Reported | Effective Interest Method for CLO Equity |
AMA Distributions |
Associated ROC SOP Reclassifications |
Restated | ||||||||||||||||
STOCKHOLDER'S EQUITY |
||||||||||||||||||||
Common stock, par value | $ | 264,382 | $ | | $ | | $ | $ | 264,382 | |||||||||||
Capital in excess of par value | 310,566,503 | | | (10,641,592 | ) | 299,924,911 | ||||||||||||||
Accumulated (excess distribution) undistributed net investment income | 103,484 | (14,445,763 | ) | (10,185,002 | ) | 8,205,609 | (16,321,672 | ) | ||||||||||||
Accumulated net realized losses | (56,035,374 | ) | | | 2,435,983 | (53,599,391 | ) | |||||||||||||
Net unrealized depreciation on investments | (47,023,337 | ) | 14,445,763 | 10,185,002 | (22,392,572 | ) | ||||||||||||||
Total Stockholders Equity | $ | 207,875,658 | $ | | $ | | $ | | $ | 207,875,658 |
In addition to the restatement of the 2013 and 2012 consolidated financial statements, the Company has also restated the following notes for the years ended December 31, 2013 and 2012, to reflect the error corrections noted above: Note 5 Investments, Note 6 Asset Manager Affiliates, Note 8 Distributable Taxable Income and Note 13 Selected Quarterly Data (Unaudited).
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (GAAP).
The consolidated financial statements reflect all adjustments, both normal and recurring which, in the opinion of management, are necessary for the fair presentation of the Companys results of operations and financial condition for the periods presented. Furthermore, the preparation of the consolidated financial statements requires management to make significant estimates and assumptions including with respect to the fair value of investments that do not have a readily available market value. Actual results could differ from those estimates, and the differences could be material. Certain prior-year amounts have been reclassified to conform to the current year presentation.
The Company consolidates the financial statements of its wholly-owned special purpose financing subsidiaries KCAP Funding, Kolhberg Capital Funding I LLC, KCAP Senior Funding I, LLC and KCAP Senior Funding I Holdings, LLC in its consolidated financial statements as they are operated solely for investment activities of the Company. The creditors of KCAP Senior Funding I, LLC have received security interests in the assets owned by KCAP Senior Funding I, LLC and such assets are not intended to be available to the creditors of KCAP Financial, Inc., or any other affiliate.
In accordance with Article 6 of Regulation S-X under the Securities Act of 1933, as amended (the Securities Act), and the Securities Exchange Act of 1934, as amended (the Exchange Act), the Company does not consolidate portfolio company investments, including those in which it has a controlling interest (e.g., the Asset Manager Affiliates), unless the portfolio company is another investment company.
The Asset Manager Affiliates are subject to Accounting Standards Codification Topic 810, Consolidation and although the Company cannot consolidate the financial statements of portfolio company
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investments, this guidance impacts the required disclosures relating to the Asset Manager Affiliates, as it requires the Asset Manager Affiliates to consolidate the financial statements of managed CLO Funds. As a result of the consolidation of the financial statements of the CLOs into the financial statements of the Asset Manager Affiliates, the Asset Manager Affiliates qualify as a significant subsidiary under Rules 3-09 and 1-02 of Regulation S-X promulgated by the SEC and, as a result, the Company is required to include additional financial information regarding the Asset Manager Affiliates in its filings with the SEC. In addition, in accordance with Rules 3-09, Rule 4-08(g) and 1-02 of Regulation S-X, additional financial information with respect to two of the CLO Funds in which the Company has an investment, Katonah 2007-I CLO Ltd. (Katonah 2007-I CLO) and Katonah X CLO Ltd. (Katonah X CLO) are required to be included in the Companys SEC filings. The additional financial information regarding the Asset Manager Affiliates, Katonah 2007-I CLO (pursuant to Rule 3-09), and Katonah X CLO (pursuant to Rule 4-08(g)), immediately follows these financial statements. This additional financial information regarding the Asset Manager Affiliates, Katonah 2007-1 CLO and Katonah X CLO does not directly impact the financial position or results of operations of the Company.
Stockholder distributions on the Statement of Changes in Net Assets reflect the estimated allocation, between net investment income and return of capital, of distributions made during the reporting period, excluding the distribution declared in a quarter with a record date occurring after the quarter-end. The tax character of distributions is made on an annual (full calendar-year) basis. The determination of the tax attributes is made at the end of the year based upon our taxable income for the full year and the distributions paid during the full year. Therefore, a determination of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year.
In June 2013, the FASB issued Accounting Standards Update 2013-08 Financial Services-Investment Companies (Topic 946) Amendments to the Scope, Measurement, and Disclosure Requirements (ASU 2013-08). ASU 2013-08 clarifies the characteristics of an investment company and requires reporting entities to disclose information about the following items: (i) the type and amount of financial support provided to investee companies, including situations in which the Company assisted an investee in obtaining financial support, (ii) the primary reasons for providing the financial support, (iii) the type and amount of financial support the Company is contractually required to provide to an investee, but has not yet provided, and (iv) the primary reasons for the contractual requirement to provide the financial support. The Company adopted ASU 2013-08 effective January 1, 2014.
It is the Companys primary investment objective to generate current income and capital appreciation by lending directly to privately-held middle market companies. During the year ended December 31, 2014, the Company invested $236 million in portfolio companies to support their growth objectives. None of this support was contractually obligated. See also Note 9 Commitments and Contingencies. As of December 31, 2014, the Company holds loans it has made to 85 investee companies with aggregate principal amounts of $294 million. The details of such loans have been disclosed on the consolidated schedule of investments as well as in Note 4 Investments and Fair Value Measurements. In addition to providing loans to investee companies, from time to time the Company assists investee companies in securing financing from other sources by introducing such investee companies to sponsors or by leading a syndicate of lenders to provide the investee companies with financing. During the year ended December 31, 2014, the Company did not make any such introductions or lead any syndicates.
In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern (ASU 2014-15). The standard requires management to evaluate, at each interim and annual reporting period, whether there are conditions or events that raise substantial doubt about the entitys ability to continue as a going concern within one year after the date the financial statements are issued, and provide related disclosures. ASU 2014-15 is
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effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter, and early adoption is permitted. We do not expect to adopt ASU 2014-15 early, and we do not believe the standard will have a material impact on our financial statements.
On February 18, 2015, the FASB issued Accounting Standards Update 2015-2, which updated consolidation standards under ASC Topic 810, Consolidation. Under this update, a new consolidation analysis is required for VIEs and will limit the circumstances in which investment managers and similar entities are required to consolidate the entities that they manage. The FASB decided to eliminate some of the criteria under which their fees are considered a variable interest and limit the circumstances in which variable interests in a VIE held by related parties of a reporting enterprise require the reporting enterprise to consolidate the VIE. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015.
Investment transactions are recorded on the applicable trade date. Realized gains or losses are determined using the specific identification method.
Valuation of Portfolio Investments. The Companys Board of Directors is ultimately and solely responsible for making a good faith determination of the fair value of portfolio investments on a quarterly basis. Debt and equity securities for which market quotations are readily available are generally valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available are valued by the Board of Directors based on detailed analyses prepared by management, the Valuation Committee of the Board of Directors, and, in certain circumstances, third parties with valuation expertise. Valuations are conducted by management on 100% of the investment portfolio at the end of each quarter. The Company follows the provisions of ASC 820: Fair Value Measurements and Disclosures (ASC 820: Fair Value). This standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. ASC 820: Fair Value defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Subsequent to the adoption of ASC 820: Fair Value, the FASB has issued various staff positions clarifying the initial standard as noted below.
The FASB issued guidance that clarified and required disclosures about fair value measurements. These include requirements to disclose the amounts and reasons for significant transfers between Level I and Level II, as well as significant transfers in and out of Level III of the fair value hierarchy. The guidance also required that purchases, sales, issuances and settlements be presented gross in the Level III reconciliation.
ASC 820: Fair Value requires the disclosure in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period.
The Company utilizes an independent valuation firm to provide an annual third-party review of the Companys CLO fair value model relative to its functionality, model inputs and calculations as a reasonable method to determine CLO fair values, in the absence of Level I or Level II trading activity or observable market inputs. The independent valuation firm concluded that the Companys CLO model appropriately factors in all the necessary inputs required to build a CLO equity cash flow model for fair value purposes and that the inputs were being employed correctly.
The Company utilizes an independent valuation firm to provide third party valuation consulting services. Each quarter the independent valuation firm will perform third party valuations of the Companys investments on material illiquid securities such that they are reviewed at least once during a trailing 12 month period. These third party valuation estimates are considered as one of the relevant data inputs in the Companys determination of fair value. The Company intends to continue to engage an independent valuation firm in the
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future to provide certain valuation services, including the review of certain portfolio assets, as part of the quarterly and annual year-end valuation process.
The Board of Directors may consider other methods of valuation than those set forth below to determine the fair value of Level III investments as appropriate in conformity with GAAP. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Companys investments may differ materially from the values that would have been used had a readily available market existed for such investments. Further, such investments may be generally subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities. In addition, changes in the market environment and other events may occur over the life of the investments that may cause the value realized on such investments to be different from the currently assigned valuations.
The majority of the Companys investment portfolio is composed of debt and equity securities with unique contract terms and conditions and/or complexity that requires a valuation of each individual investment that considers multiple levels of market and asset specific inputs, which may include historical and forecasted financial and operational performance of the individual investment, projected cash flows, market multiples, comparable market transactions, the priority of the security compared with those of other securities for such issuers, credit risk, interest rates, and independent valuations and reviews.
Debt Securities. To the extent that the Companys investments are exchange traded and are priced or have sufficient price indications from normal course trading at or around the valuation date (financial reporting date), such pricing will determine fair value. Valuations from third party pricing services may be used as an indication of fair value, depending on the volume and reliability of the valuation, sufficient and reasonable correlation of bid and ask quotes, and, most importantly, the level of actual trading activity. However, if the Company has been unable to identify directly comparable market indices or other market guidance that correlate directly to the types of investments the Company owns, the Company will determine fair value using alternative methodologies such as available market data, as adjusted, to reflect the types of assets the Company owns, their structure, qualitative and credit attributes and other asset-specific characteristics.
The Company derives fair value for its illiquid investments that do not have indicative fair values based upon active trades primarily by using a present value technique that discounts the estimated contractual cash flows for the subject assets with discount rates imputed by broad market indices, bond spreads and yields for comparable issuers relative to the subject assets (the Income Approach). The Company also considers, among other things, recent loan amendments or other activity specific to the subject asset. Discount rates applied to estimated contractual cash flows for an underlying asset vary by specific investment, industry, priority and nature of the debt security (such as the seniority or security interest of the debt security) and are assessed relative to two indices, a leveraged loan index and a high-yield bond index, at the valuation date. The Company has identified these two indices as benchmarks for broad market information related to its loan and debt securities. Because the Company has not identified any market index that directly correlates to the loan and debt securities held by the Company and therefore uses these benchmark indices, these market indices may require significant adjustment to better correlate such market data for the calculation of fair value of the investment under the Income Approach. Such adjustments require judgment and may be material to the calculation of fair value. Further adjustments to the discount rate may be applied to reflect other market conditions or the perceived credit risk of the borrower. When broad market indices are used as part of the valuation methodology, their use is subject to adjustment for many factors, including priority, collateral used as security, structure, performance and other quantitative and qualitative attributes of the asset being valued. The resulting present value determination is then weighted along with any quotes from observable transactions and broker/pricing quotes. If such quotes are indicative of actual transactions with reasonable trading volume at or near the valuation date that are not liquidation or distressed sales, relatively more reliance will be put on such quotes to determine fair value. If such quotes are not indicative of market transactions or are insufficient as to volume, reliability, consistency or other relevant factors, such quotes will be compared with other fair
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value indications and given relatively less weight based on their relevancy. Other significant assumptions, such as coupon and maturity, are asset-specific and are noted for each investment in the Schedules of Investments.
Equity Securities. The Companys equity securities in portfolio companies for which there is no liquid public market are carried at fair value based on the enterprise value of the portfolio company, which is determined using various factors, including EBITDA (earnings before interest, taxes, depreciation and amortization) and discounted cash flows from operations, less capital expenditures and other pertinent factors, such as recent offers to purchase a portfolio companys securities or other liquidation events. The determined fair values are generally discounted to account for restrictions on resale and minority ownership positions. In the event market quotations are readily available for the Companys equity securities in public companies those investments may be valued using the Market Approach. In cases where the Company receives warrants to purchase equity securities, a market standard Black-Scholes model is utilized.
The significant inputs used to determine the fair value of equity securities include prices, EBITDA and cash flows after capital expenditures for similar peer comparables and the investment entity itself. Equity securities are classified as Level III when there is limited activity or less transparency around inputs to the valuation given the lack of information related to such equity investments held in nonpublic companies. Significant assumptions observed for comparable companies are applied to relevant financial data for the specific investment. Such assumptions, such as model discount rates or price/earnings multiples, vary by the specific investment, equity position and industry and incorporate adjustments for risk premiums, liquidity and company specific attributes. Such adjustments require judgment and may be material to the calculation of fair value.
Asset Manager Affiliates. The Companys investments in its wholly-owned asset management companies, the Asset Manager Affiliates, are carried at fair value, which is primarily determined utilizing the Discounted Cash Flow approach which incorporates different levels of discount rates depending on the hierarchy of fees earned (including the likelihood of realization of senior, subordinate and incentive fees) and prospective modeled performance. Such valuation takes into consideration an analysis of comparable asset management companies and a percentage of assets under management. The Asset Manager Affiliates are classified as a Level III investment. Any change in value from period to period is recognized as net change in unrealized appreciation or depreciation.
CLO Fund Securities. The Company typically makes a minority investment in the most junior class of securities of CLO Funds raised and managed by the Asset Manager Affiliates and may selectively invest in securities issued by funds managed by other asset management companies. The investments held by CLO Funds generally relate to non-investment grade credit instruments issued by corporations.
The Companys investments in CLO Fund securities are carried at fair value, which is based either on (i) the present value of the net expected cash inflows for interest income and principal repayments from underlying assets and cash outflows for interest expense, debt pay-down and other fund costs for the CLO Funds that are approaching or past the end of their reinvestment period and therefore are selling assets and/or using principal repayments to pay down CLO Fund debt (or will begin to do so shortly), and for which there continue to be net cash distributions to the class of securities owned by the Company a Discounted Cash Flow approach, (ii) a discounted cash flow model that utilizes prepayment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow and comparable yields for similar securities or preferred shares to those in which the Company has invested, or (iii) indicative prices provided by the underwriters or brokers who arrange CLO Funds a Market Approach. The Company recognizes unrealized appreciation or depreciation on the Companys investments in CLO Fund securities as comparable yields in the market change and/or based on changes in net asset values or estimated cash flows resulting from changes in prepayment or loss assumptions in the underlying collateral pool. As each investment in CLO Fund securities ages, the expected amount of losses and the expected timing of recognition of such losses in the underlying collateral pool are updated and the revised cash flows are used in
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determining the fair value of the CLO Fund investment. The Company determines the fair value of its investments in CLO Fund securities on a security-by-security basis.
Due to the individual attributes of each CLO Fund security, they are classified as a Level III investment unless specific trading activity can be identified at or near the valuation date. When available, observable market information will be identified, evaluated and weighted accordingly in the application of such data to the present value models and fair value determination. Significant assumptions to the present value calculations include default rates, recovery rates, prepayment rates, investment/reinvestment rates and spreads and the discount rate by which to value the resulting underlying cash flows. Such assumptions can vary significantly, depending on market data sources which often vary in depth and level of analysis, understanding of the CLO market, detailed or broad characterization of the CLO market and the application of such data to an appropriate framework for analysis. The application of data points are based on the specific attributes of each individual CLO Fund securitys underlying assets, historic, current and prospective performance, vintage, and other quantitative and qualitative factors that would be evaluated by market participants. The Company evaluates the source of market data for reliability as an indicative market input, consistency amongst other inputs and results and also the context in which such data is presented.
For rated note tranches of CLO Fund securities (those above the junior class) without transactions to support a fair value for the specific CLO Fund and tranche, fair value is based on discounting estimated bond payments at current market yields, which may reflect the adjusted yield on the leveraged loan index for similarly rated tranches, as well as prices for similar tranches for other CLO Funds and also other factors such as indicative prices provided by underwriters or brokers who arrange CLO Funds, and the default and recovery rates of underlying assets in the CLO Fund, as may be applicable. Such model assumptions may vary and incorporate adjustments for risk premiums and CLO Fund specific attributes.
Cash. The Company defines cash as demand deposits. The Company places its cash with financial institutions and, at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit.
Restricted Cash. Restricted cash and cash equivalents (e.g. money market funds) consists of cash held for reinvestment, quarterly interest and principal distribution (if any) to holders of notes issued by KCAP Senior Funding I, LLC.
Time Deposits and Money Market Accounts. Time deposits primarily represent investments of cash held in demand deposit accounts. Money market accounts primarily represent short term interest-bearing deposit accounts. Also includes restricted cash held under employee benefit plans.
Interest Income. Interest income, including the amortization of premium and accretion of discount, is recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company generally places a loan or security on non-accrual status and ceases recognizing cash interest income on such loan or security when a loan or security becomes 90 days or more past due or if the Company otherwise does not expect the debtor to be able to service its debt obligations. Non-accrual loans remain in such status until the borrower has demonstrated the ability and intent to pay contractual amounts due or such loans become current. As of December 31, 2014, 1 issuer representing less than 1% of the Companys total investments at fair value was on a non-accrual status.
Distributions from Asset Manager Affiliates. The Company records distributions from our Asset Manager Affiliates on the declaration date, which represents the ex-dividend date. Distributions in excess of tax-basis earnings and profits of the distributing affiliate company are recognized on tax-basis return of capital.
Investment Income on CLO Fund Securities. The Company generates investment income from its investments in the most junior class of securities of CLO Funds (typically preferred shares or subordinated securities) managed by the Asset Manager Affiliates and selective investments in securities issued by funds
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managed by other asset management companies. The Companys CLO Fund junior class securities are subordinated to senior note holders who typically receive a stated interest rate of return based on a floating rate index, such as the London Interbank Offered Rate (LIBOR) on their investment. The CLO Funds are leveraged funds and any excess cash flow or excess spread (interest earned by the underlying securities in the fund less payments made to senior note holders and less fund expenses and management fees) is paid to the holders of the CLO Funds subordinated securities or preferred shares.
GAAP-basis investment income on CLO equity investments is recorded using the effective interest method in accordance with the provisions of ASC 325-40, based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated projected future cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield prospectively over the remaining life of the investment from the date the estimated yield was changed. Accordingly, investment income recognized on CLO equity securities in the GAAP statement of operations differs from both the taxbasis investment income and from the cash distributions actually received by the Company during the period.
For non-junior class CLO Fund securities, such as the Companys investment in the Class F Notes of the Catamaran 2012-1 CLO and Class E Notes of the Catamaran 2014-1 CLO, interest is earned at a fixed spread relative to the LIBOR index.
Capital Structuring Service Fees. The Company may earn ancillary structuring and other fees related to the origination, investment, disposition or liquidation of debt and investment securities. Generally, the Company will capitalize loan origination fees, then amortize these fees into interest income over the term of the loan using the effective interest rate method, recognize prepayment and liquidation fees upon receipt and equity structuring fees as earned, which generally occurs when an investment transaction closes.
Debt Issuance Costs. Debt issuance costs represent fees and other direct costs incurred in connection with the Companys borrowings. These amounts are capitalized and amortized using the effective interest method over the contractual term of the borrowing.
Extinguishment of debt. An issuer must derecognize a liability if and only if it has been extinguished through delivery of cash, delivery of other financial assets, delivery of goods or services, or reacquisition by the issuer of its outstanding debt securities whether the securities are cancelled or held. If the debt contains a cash conversion option, the issuer must allocate the consideration transferred and transaction costs incurred to the extinguishment of the liability component and the reacquisition of the equity component and recognize a gain or loss in the statement of operations.
Expenses. The Company is internally managed and expenses costs, as incurred, with regard to the running of its operations. Primary operating expenses include employee salaries and benefits, the costs of identifying, evaluating, negotiating, closing, monitoring and servicing the Companys investments and related overhead charges and expenses, including rental expense, and any interest expense incurred in connection with borrowings. The Company and the Asset Manager Affiliates share office space and certain other operating expenses. The Company has entered into an Overhead Allocation Agreement with the Asset Manager Affiliates which provides for the sharing of such expenses based on an allocation of office lease costs and the ratable usage of other shared resources.
Distributions. Distributions to common stockholders are recorded on the ex-dividend date. The amount of distributions, if any, is determined by the Board of Directors each quarter and is generally based upon the distributable tax-basis taxable income estimated by management for the period and year.
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The Company has adopted a dividend reinvestment plan that provides for reinvestment of its distributions on behalf of its stockholders, unless a stockholder opts out of the plan to receive cash in lieu of having their cash distributions automatically reinvested in additional shares of the Companys common stock.
In accordance with the provisions of ASC 260: Earnings per Share, basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.
The following information sets forth the computation of basic and diluted net increase (decrease) in stockholders equity per share for the years ended December 31, 2014, 2013, and 2012:
For the Years ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Net increase in net assets resulting from operations | $ | 15,033,594 | $ | 17,222,972 | $ | 26,125,779 | ||||||
Net increase in net assets allocated to unvested share awards | (201,239 | ) | (101,076 | ) | (236,579 | ) | ||||||
Interest on Convertible Notes | | | 5,250,000 | |||||||||
Amortization of Capitalized Costs on Convertible Notes | | | 457,479 | |||||||||
Net increase in net assets available to common stockholders | $ | 14,832,355 | $ | 17,121,896 | $ | 31,596,679 | ||||||
Weighted average number of common shares outstanding for basic shares computation | 34,248,346 | 32,280,160 | 26,011,517 | |||||||||
Effect of dilutive securities stock options | 11,631 | 14,845 | 14,248 | |||||||||
Effect of dilutive Convertible Notes | | | 7,353,829 | |||||||||
Weighted average number of common and common stock equivalent shares outstanding for diluted shares computation | 34,259,977 | 32,295,005 | 33,379,594 | |||||||||
Net increase in net assets per basic common shares: |
||||||||||||
Net increase in net assets from operations | $ | 0.44 | $ | 0.53 | $ | 1.00 | ||||||
Net increase in net assets per diluted shares: |
||||||||||||
Net increase in net assets from operations | $ | 0.43 | $ | 0.53 | $ | 0.95 |
Share-based awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and included in the computation of both basic and diluted earnings per share. Grants of restricted stock awards to the Companys employees and directors are considered participating securities when there are earnings in the period and the earnings per share calculations include outstanding unvested restricted stock awards in the basic weighted average shares outstanding calculation.
There were 50,000 options to purchase shares of common stock for the year ended December 31, 2014. For the year ended December 31, 2014, options to purchase 11,631 shares of common stock were included in the computation of diluted earnings per share. For the years ended December 31, 2013 and 2012, options to purchase 14,845 and 14,248 shares of common stock, respectively, were included in the computation of diluted earnings per share.
The Companys Convertible Notes are included in the computation of the diluted net increase or decrease in net assets resulting from operations per share by application of the if-converted method. Under the if-converted method, interest charges applicable to the convertible notes for the period are added to the
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reported net increase or decrease in net assets resulting from operations and the full amount of shares (pro-rata if not outstanding for the full period) that would be issued are added to weighted average basic shares. Convertible notes are considered anti-dilutive only when its interest per share upon conversion exceeds the basic net increase or decrease in net assets resulting from operations per share. For the years ended December 31, 2014 and 2013, the effects of the Convertible Notes are anti-dilutive.
The if-converted method of computing the dilutive effects on Convertible Notes assumes a conversion even if the contracted conversion price exceeds the market value of the shares. As of December 31, 2014 the current conversion rate of the Convertible Notes is approximately 132.7726 shares of our common stock per $1,000 principal amount of the conversion rate, equivalent to a conversion price of approximately $7.53 per share of the Companys common stock. Upon conversion, the Company may issue the full amount of common stock and retire the full amount of debt outstanding or, at its option, settle the conversion in cash.
The following table shows the Companys portfolio by security type at December 31, 2014 and December 31, 2013, were as follows:
December 31, 2014 | December 31, 2013 (restated) | |||||||||||||||||||||||
Security Type | Cost | Fair Value | %(1) | Cost | Fair Value | %(1) | ||||||||||||||||||
Money Market Accounts(2) | 1,602,741 | 1,602,741 | 1 | 7,112,949 | 7,112,949 | 3 | ||||||||||||||||||
Senior Secured Loan | 220,965,922 | 218,329,860 | 86 | 175,021,272 | 168,188,453 | 67 | ||||||||||||||||||
Junior Secured Loan | 38,664,199 | 38,569,006 | 15 | 50,831,407 | 48,443,384 | 19 | ||||||||||||||||||
Senior Unsecured Loan | 33,066,984 | 33,066,984 | 13 | 23,000,000 | 23,000,000 | 9 | ||||||||||||||||||
First Lien Bond | 2,962,507 | 2,580,000 | 1 | 2,948,332 | 2,546,400 | 2 | ||||||||||||||||||
Senior Subordinated Bond | 4,295,544 | 4,240,301 | 2 | 1,037,707 | 1,051,540 | | ||||||||||||||||||
Senior Unsecured Bond | 11,208,178 | 11,386,217 | 4 | 10,855,804 | 11,381,100 | 5 | ||||||||||||||||||
Senior Secured Bond | 1,515,584 | 1,552,500 | 1 | 1,519,072 | 1,619,550 | 1 | ||||||||||||||||||
CLO Fund Securities(3) | 90,889,190 | 77,514,902 | 30 | 84,126,361 | 79,452,220 | 32 | ||||||||||||||||||
Equity Securities | 8,828,812 | 8,119,681 | 3 | 18,755,684 | 11,006,398 | 4 | ||||||||||||||||||
Preferred | 10,206,016 | 10,418,302 | 4 | 10,000,000 | 10,600,000 | 4 | ||||||||||||||||||
Asset Manager Affiliates | 60,292,677 | 72,326,000 | 28 | 66,178,784 | 76,148,000 | 30 | ||||||||||||||||||
Total | $ | 484,498,354 | $ | 479,706,494 | 188 | % | $ | 451,387,372 | $ | 440,549,994 | 176 | % |
(1) | Calculated as a percentage of Net Asset Value. |
(2) | Includes restricted cash held under employee benefit plans. |
(3) | Cost refers to amortized cost. |
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The industry concentrations based on the fair value of the Companys investment portfolio as of December 31, 2014 and December 31, 2013 were as follows:
December 31, 2014 | December 31, 2013 (restated)(2) | |||||||||||||||||||||||
Industry Classification | Amortized Cost | Fair Value | %(1) | Amortized Cost | Fair Value | %(1) | ||||||||||||||||||
Aerospace and Defense | $ | 10,059,487 | $ | 9,533,092 | 2 | % | $ | 9,244,538 | $ | 8,100,895 | 2 | % | ||||||||||||
Asset Management Company | 60,292,677 | 72,326,000 | 15 | 66,178,784 | 76,148,000 | 17 | ||||||||||||||||||
Portfolio Company Loan | 23,000,000 | 23,000,000 | 5 | 23,000,000 | 23,000,000 | 5 | ||||||||||||||||||
Automotive | 8,362,956 | 8,312,548 | 2 | 15,248,090 | 15,306,403 | 3 | ||||||||||||||||||
Banking, Finance, Insurance & Real Estate | 7,660,721 | 7,639,365 | 2 | 7,859,620 | 8,011,964 | 2 | ||||||||||||||||||
Beverage, Food and Tobacco | 17,974,974 | 17,883,421 | 4 | 33,758,684 | 34,026,889 | 8 | ||||||||||||||||||
Capital Equipment | 9,486,407 | 10,351,329 | 2 | 11,450,641 | 11,792,925 | 3 | ||||||||||||||||||
Chemicals, Plastics and Rubber | 6,348,226 | 6,210,253 | 1 | 2,921,597 | 2,906,601 | 1 | ||||||||||||||||||
CLO Fund Securities | 90,889,190 | 77,514,902 | 16 | 84,126,361 | 79,452,220 | 18 | ||||||||||||||||||
Construction & Building | | | | 18,224,720 | 190,244 | | ||||||||||||||||||
Consumer goods: Durable | 13,876,482 | 13,301,207 | 3 | 7,713,071 | 9,751,622 | 2 | ||||||||||||||||||
Consumer goods: Non-durable | 13,535,975 | 13,314,952 | 3 | 18,864,695 | 18,266,939 | 4 | ||||||||||||||||||
Containers, Packaging and Glass | 2,992,443 | 2,946,734 | 1 | | | | ||||||||||||||||||
Energy: Oil & Gas | 13,866,208 | 13,289,753 | 3 | 11,734,558 | 12,930,563 | 3 | ||||||||||||||||||
Environmental Industries | 12,942,593 | 12,911,017 | 3 | 6,937,663 | 6,965,896 | 2 | ||||||||||||||||||
Forest Products & Paper | 5,917,051 | 5,942,523 | 1 | | | | ||||||||||||||||||
Healthcare & Pharmaceuticals | 66,186,412 | 65,720,782 | 13 | 24,146,383 | 24,061,764 | 5 | ||||||||||||||||||
Healthcare, Education and Childcare | | | | 6,908,414 | 7,199,856 | 2 | ||||||||||||||||||
High Tech Industries | 14,457,495 | 14,419,110 | 3 | 17,989,624 | 17,989,034 | 4 | ||||||||||||||||||
Hotel, Gaming & Leisure | 3,392,481 | 2,962,315 | 1 | 3,825,126 | 3,466,520 | 1 | ||||||||||||||||||
Media: Advertising, Printing & Publishing | 11,318,815 | 11,396,027 | 2 | 12,797,615 | 13,035,590 | 3 | ||||||||||||||||||
Media: Broadcasting & Subscription | 14,477,078 | 14,409,401 | 3 | 9,853,341 | 9,915,921 | 2 | ||||||||||||||||||
Metals & Mining | 228,563 | 1,000 | | 228,563 | 1,000 | | ||||||||||||||||||
Retail | 4,234,086 | 3,773,847 | 1 | 3,364,579 | 3,325,032 | 1 | ||||||||||||||||||
Services: Business | 16,550,255 | 16,066,421 | 3 | 2,984,555 | 2,999,790 | 1 | ||||||||||||||||||
Services: Consumer | 6,798,372 | 6,752,521 | 1 | 5,703,581 | 4,616,678 | 1 | ||||||||||||||||||
Telecommunications | 22,030,434 | 21,865,864 | 5 | 17,251,743 | 17,337,835 | 4 | ||||||||||||||||||
Time Deposit and Money Market Accounts(3) | 1,602,741 | 1,602,741 | | 7,112,949 | 7,112,949 | 2 | ||||||||||||||||||
Transportation: Cargo | 20,156,700 | 20,455,941 | 4 | 16,030,051 | 16,643,254 | 4 | ||||||||||||||||||
Utilities: Electric | 5,859,532 | 5,803,428 | 1 | 5,927,826 | 5,993,610 | 1 | ||||||||||||||||||
Total | $ | 484,498,354 | $ | 479,706,494 | 100 | % | $ | 451,387,372 | $ | 440,549,994 | 100 | % |
(1) | Calculated as a percentage of total portfolio at fair value. |
(2) | In addition to the restated adjustments, certain prior year amounts have been reclassified to conform to the current year presentation. |
(3) | Includes restricted cash held under employee benefit plans. |
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The Company may invest up to 30% of the investment portfolio in non-qualifying opportunistic investments in debt and equity securities of CLO Funds, distressed debt or debt and equity securities of public companies. The Company expects that these public companies generally will have debt that is non-investment grade. Within this 30% of the portfolio, the Company also may invest in debt of middle market companies located outside of the United States.
At December 31, 2014 and December 31, 2013, the total amount of non-qualifying assets was approximately 21% and 19% of total assets, respectively. The majority of non-qualifying assets were foreign investments which were approximately 16% and 18% of the Companys total assets, respectively (primarily the Companys investments in CLO Funds, which are typically domiciled outside the U.S. and represented approximately 16% and 18% of its portfolio on such dates), respectively.
At December 31, 2014 and December 31, 2013, the Companys ten largest portfolio companies represented approximately 38% and 42%, respectively, of the total fair value of its investments. The Companys largest investment, the Asset Manager Affiliates, represented 15% and 17% of the total fair value of the Companys investments at December 31, 2014 and December 31, 2013, respectively. Excluding the Asset Manager Affiliates and CLO Fund securities, the Companys ten largest portfolio companies represented approximately 17% and 18% of the total fair value of the Companys investments at December 31, 2014 and December 31, 2013, respectively.
The Company typically makes a minority investment in the most junior class of securities (typically preferred shares or subordinated securities) of CLO Funds managed by the Asset Manager Affiliates and may selectively invest in securities issued by CLO funds managed by other asset management companies. These securities also are entitled to recurring distributions which generally equal the net remaining cash flow of the payments made by the underlying CLO Funds securities less contractual payments to senior bond holders, management fees and CLO Fund expenses. CLO Funds invest primarily in broadly syndicated non-investment grade loans, high-yield bonds and other credit instruments of corporate issuers. The underlying assets in each of the CLO Funds in which the Company has an investment are generally diversified secured or unsecured corporate debt. The CLO Funds are leveraged funds and any excess cash flow or excess spread (interest earned by the underlying securities in the fund less payments made to senior bond holders, fund expenses and management fees) is paid to the holders of the CLO Funds subordinated securities or preferred shares.
In December 2012, the Company purchased $4.5 million par value of the class F Notes and $8.9 million par value of the Subordinated Notes of Catamaran 2012-1 CLO (Catamaran 2012-1) managed by Trimaran Advisors.
In June 2013, the Company purchased $9.0 million of the par value of the Subordinated Notes of Catamaran 2013-1 CLO (Catamaran 2013-1) managed by Trimaran Advisors.
In May and August 2014, the Company purchased $11.1 million and $9.9 million of the par value of the Subordinated Notes of Catamaran 2014-1 CLO (Catamaran 2014-1) and 2014-2 CLO (Catamaran 2014-2), respectively. Both are managed by Trimaran Advisors.
All CLO Funds managed by the Asset Manager Affiliates are currently making quarterly distributions to the Company with respect to its interests in the CLO Funds and are paying all senior and subordinate management fees to the Asset Manager Affiliates. Additionally, five managed funds made incentive fee distributions to the Asset Manager Afilliates during the year ended December 31, 2014. With the exception of Katonah III, Ltd., all third-party managed CLO Funds are making distributions to the Company.
The Company follows the provisions of ASC 820: Fair Value, which among other matters requires enhanced disclosures about investments that are measured and reported at fair value. This standard defines fair
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value and establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring investments at fair value and expands disclosures about assets and liabilities measured at fair value. ASC 820: Fair Value defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This fair value definition focuses on an exit price in the principal, or most advantageous market, and prioritizes, within a measurement of fair value, the use of market-based inputs (which may be weighted or adjusted for relevance, reliability and specific attributes relative to the subject investment) over entity-specific inputs. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. Subsequent to the adoption of ASC 820: Fair Value, the FASB has issued various staff positions clarifying the initial standard (see Note 3. Significant Accounting Policies Investments).
ASC 820: Fair Value establishes the following three-level hierarchy, based upon the transparency of inputs to the fair value measurement of an asset or liability as of the measurement date:
Level I Unadjusted quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I include listed equities and listed securities. As required by ASC 820: Fair Value, the Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably affect the quoted price.
Level II Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. Such inputs may be quoted prices for similar assets or liabilities, quoted markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full character of the financial instrument, or inputs that are derived principally from, or corroborated by, observable market information. Investments which are generally included in this category include illiquid debt securities and less liquid, privately held or restricted equity securities for which some level of recent trading activity has been observed.
Level III Pricing inputs are unobservable for the investment and includes situations where there is little, if any, market activity for the investment. The inputs may be based on the Companys own assumptions about how market participants would price the asset or liability or may use Level II inputs, as adjusted, to reflect specific investment attributes relative to a broader market assumption. These inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data for comparable performance or valuation measures (earnings multiples, discount rates, other financial/valuation ratios, etc.) are available, such investments are grouped as Level III if any significant data point that is not also market observable (private company earnings, cash flows, etc.) is used in the valuation methodology.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investments level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the investment. A majority of the Companys investments are classified as Level III. The Company evaluates the source of inputs, including any markets in which its investments are trading, in determining fair value. Inputs that are highly correlated to the specific investment being valued and those derived from reliable or knowledgeable sources will tend to have a higher weighting in determining fair value. Ongoing reviews by the Companys investment analysts, Chief Investment Officer, Valuation Committee and independent valuation firms (if engaged) may include factors such as an assessment of each underlying investment, its current and prospective operating and financial performance, consideration of financing and
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sale transactions with third parties, expected cash flows and market-based information, including comparable transactions, performance factors, and other investment or industry specific market data, among other factors.
The following table summarizes the fair value of investments by the above ASC 820: Fair Value hierarchy levels as of December 31, 2014 and December 31, 2013, respectively:
As of December 31, 2014 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
Money market accounts | $ | | $ | 1,602,741 | $ | | $ | 1,602,741 | ||||||||
Debt securities | | 149,124,827 | 171,018,343 | 320,143,170 | ||||||||||||
CLO fund securities | | | 77,514,902 | 77,514,902 | ||||||||||||
Equity securities | | | 8,119,681 | 8,119,681 | ||||||||||||
Asset Manager Affiliates | | | 72,326,000 | 72,326,000 | ||||||||||||
Total | $ | | $ | 150,727,568 | $ | 328,978,926 | $ | 479,706,494 |
As of December 31, 2013 | ||||||||||||||||
Level I | Level II | Level III | Total | |||||||||||||
Time deposits and money market accounts | $ | | $ | 7,112,949 | $ | | $ | 7,112,949 | ||||||||
Debt securities | | 68,733,053 | 198,097,374 | 266,830,427 | ||||||||||||
CLO fund securities | | | 79,452,220 | 79,452,220 | ||||||||||||
Equity securities | | | 11,006,398 | 11,006,398 | ||||||||||||
Asset Manager Affiliates | | | 76,148,000 | 76,148,000 | ||||||||||||
Total | $ | | $ | 75,846,002 | $ | 364,703,992 | $ | 440,549,994 |
As a BDC, the Company is required to invest primarily in the debt and equity of non-public companies for which there is little, if any, market-observable information. As a result, a significant portion of the Companys investments at any given time will likely be deemed Level III investments. Investment values derived by a third party pricing service are generally deemed to be Level III values. For those that have observable trades, the Company considers them to be Level II.
Values derived for debt and equity securities using comparable public/private companies generally utilize market-observable data from such comparables and specific, non-public and non-observable financial measures (such as earnings or cash flows) for the private, underlying company/issuer. Such non-observable company/issuer data is typically provided on a monthly or quarterly basis, is certified as correct by the management of the company/issuer and/or audited by an independent accounting firm on an annual basis. Since such private company/issuer data is not publicly available it is not deemed market-observable data and, as a result, such investment values are grouped as Level III assets.
Values derived for the Asset Manager Affiliates using comparable public/private companies utilize market-observable data and specific, non-public and non-observable financial measures (such as assets under management, historical and prospective earnings) for the Asset Manager Affiliates. The Company recognizes that comparable asset managers may not be fully comparable to the Asset Manager Affiliates and typically identifies a range of performance measures and/or adjustments within the comparable population with which to determine value. Since any such ranges and adjustments are entity specific they are not considered market-observable data and thus require a Level III grouping. Illiquid investments that have values derived through the use of discounted cash flow models and residual enterprise value models are grouped as Level III assets.
The Companys policy for determining transfers between levels is based solely on the previously defined three-level hierarchy for fair value measurement. Transfers between the levels of the fair value hierarchy are
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separately noted in the tables below and the reason for such transfer described in each tables respective footnotes. Investments measured at fair value for which the Company has used unobservable inputs to determine fair value are as follows:
Year Ended December 31, 2014 | ||||||||||||||||||||
Debt Securities | CLO Fund Securities | Equity Securities | Asset Manager Affiliate | Total | ||||||||||||||||
Balance, December 31, 2013 | $ | 198,097,374 | $ | 79,452,220 | $ | 11,006,399 | $ | 76,148,000 | $ | 364,703,993 | ||||||||||
Transfers out of Level III(1) | (38,990,152 | ) | | | | (38,990,152 | ) | |||||||||||||
Transfers into Level III(2) | 1,982,110 | | | | 1,982,110 | |||||||||||||||
Net accretion of discount | 198,600 | (11,102,015 | ) | | | (10,903,415 | ) | |||||||||||||
Purchases | 132,079,152 | 22,421,847 | 2,216,847 | 545,979 | 157,263,825 | |||||||||||||||
Sales/Paydowns/Return of Capital | (121,242,093 | ) | (10,132,500 | ) | (5,007,311 | ) | (6,432,086 | ) | (142,813,990 | ) | ||||||||||
Total realized gain included in earnings | (9,069,550 | ) | 5,575,498 | (7,136,407 | ) | | (10,630,459 | ) | ||||||||||||
Total unrealized gain (loss) included in earnings | 7,962,902 | (8,700,148 | ) | 7,040,153 | 2,064,107 | 8,367,014 | ||||||||||||||
Balance, December 31, 2014 | $ | 171,018,343 | $ | 77,514,902 | $ | 8,119,681 | $ | 72,326,000 | $ | 328,978,926 | ||||||||||
Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date | $ | (1,448,794 | ) | $ | (4,908,278 | ) | $ | 424,306 | $ | 2,064,107 | $ | (3,868,659 | ) |
(1) | Transfers out of Level III represent a transfer of $38,990,152 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were observable as of Dec 31, 2014. |
(2) | Transfers into Level III represent a transfer of $1,982,110 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were unobservable as of Dec 31, 2014. |
Year Ended December 31, 2013 (restated) | ||||||||||||||||||||
Debt Securities | CLO Fund Securities | Equity Securities | Asset Manager Affiliate | Total | ||||||||||||||||
Balance, December 31, 2012 | $ | 51,865,406 | $ | 83,257,507 | $ | 8,020,716 | $ | 77,242,000 | $ | 220,385,629 | ||||||||||
Transfers out of Level III(1) | (2,783,195 | ) | | | | (2,783,195 | ) | |||||||||||||
Transfers into Level III(2) | 34,070,557 | | | | 34,070,557 | |||||||||||||||
Net accretion of discount | 174,977 | (1,850,126 | ) | | | (1,675,149 | ) | |||||||||||||
Purchases | 192,112,854 | 11,957,500 | 3,813,838 | 217,212 | 208,101,404 | |||||||||||||||
Sales/Paydowns/Return of Capital | (70,461,486 | ) | (623,403 | ) | (2,882,107 | ) | (7,014,955 | ) | (80,981,951 | ) | ||||||||||
Total realized gain included in earnings | 2,972,071 | | (551,636 | ) | | 2,420,435 | ||||||||||||||
Total unrealized gain (loss) included in earnings | (9,853,810 | ) | (13,289,258 | ) | 2,605,588 | 5,703,743 | (14,833,737 | ) | ||||||||||||
Balance, December 31, 2013 | $ | 198,097,374 | $ | 79,452,220 | $ | 11,006,399 | $ | 76,148,000 | $ | 364,703,993 | ||||||||||
Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date | $ | (9,853,810 | ) | $ | (13,289,258 | ) | $ | 2,605,588 | $ | 5,703,743 | $ | (23,915,261 | ) |
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(1) | Transfers out of Level III represent a transfer of $2,783,195 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were observable as of Dec 31, 2013. |
(2) | Transfers into Level III represent a transfer of $34,070,557 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were unobservable as of Dec 31, 2013. |
As of December 31, 2014, the Companys Level II portfolio investments were valued by a third party pricing services for which the prices are not adjusted and for which inputs are observable or can be corroborated by observable market data for substantially the full character of the financial instrument, or by inputs that are derived principally from, or corroborated by, observable market information. The fair value of the Companys Level II portfolio investments was $150,727,568 as of December 31, 2014.
As of December 31, 2014, the Companys Level III portfolio investments had the following valuation techniques and significant inputs:
Type | Fair Value | Primary Valuation Methodology | Unobservable Inputs | Range of Inputs (Weighted Average) |
Debt Securities |
$ 2,580,000 | Enterprise Value | Average EBITDA Multiple/WAAC |
7.9x |
$168,437,343 | Income Approach | Implied Discount Rate | 2.8% 18.3% (9.0)% | |
$ 1,000 | Options Value | Qualitative Inputs(1) |
||
Equity Securities |
$ 8,116,681 | Enterprise Value | Average EBITDA Multiple/WAAC |
4.3x/10.4% 12.6x/15.8% (8.1x/13.2)% |
$ 3,000 | Options Value | Qualitative Inputs(1) |
||
CLO Fund Securities |
$ 68,753,402 |
Discounted Cash Flow |
Discount Rate | 11% 12% (11.5)% |
Probability of Default | 2.0% 2.5% (2.3)% | |||
Loss Severity | 25.0% 25.9% (25.5)% | |||
Recovery Rate | 74.1% 75% (74.6)% | |||
Prepayment Rate | 0% 37.8% (31.1)% | |||
$ 8,761,500 | Market Approach | Third Party Quote | 88.5 (88.5) | |
Asset Manager Affiliate | $ 72,326,000 | Discounted Cash Flow | Discount Rate | 1.76 8.75 (6.65) |
Total Level III Investments | $328,978,926 |
(1) | The qualitative inputs used in the fair value measurements of the Debt Securities include estimates of the distressed liquidation value of the pledged collateral. |
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As of December 31, 2013, the Companys Level III portfolio investments had the following valuation techniques and significant inputs:
Type | Fair Value | Primary Valuation Methodology | Unobservable Inputs | Range of Inputs (Weighted Average) |
Debt Securities | $ 1,863,721 | Enterprise Value | Average EBITDA Multiple/WAAC |
9.22x/14.63% |
$161,619,660 | Income Approach | Implied Discount Rate | 2.2% 15.3% (4.9)% | |
$ 34,542,309 | Market Approach | Third Party Quote | 3 100 | |
$ 31,015 | Options Value | Qualitative Inputs(1) |
||
$ 40,669 | Recovery Approach | Qualitative Inputs(1) |
||
Equity Securities | $ 11,002,398 | Enterprise Value | Average EBITDA Multiple/WAAC |
3.5x 8.2x/9.35% 4.5% |
$ 4,000 | Options Value | Qualitative Inputs(1) |
||
CLO Fund Securities |
$ 47,466,849 |
Discounted Cash Flow |
Discount Rate | 7.5% 11% |
Probability of Default | 1% 3% | |||
Loss Severity | 20% 30% (21)% | |||
Recovery Rate | 70% 80% (79)% | |||
Prepayment Rate | 25% | |||
$ 31,985,371 | Market Approach | Third Party Quote | 77 93.4 | |
Asset Manager Affiliates | $ 76,148,000 | Discounted Cash Flow | Discount Rate | 2.09% 10.5% (7.08)% |
Total Level III Investments | $364,703,993 |
(1) | The qualitative inputs used in the fair value measurements of the Debt Securities include estimates of the distressed liquidation value of the pledged collateral. |
The significant unobservable inputs used in the fair value measurement of the Companys debt securities may include, among other things, broad market indices, the comparable yields of similar investments in similar industries, effective discount rates, average EBITDA multiples, and weighted average cost of capital. Significant increases or decreases in such comparable yields would result in a significantly lower or higher fair value measurement.
The significant unobservable inputs used in the fair value measurement of the Companys equity securities include the EBITDA multiple of similar investments in similar industries and the weighted average cost of capital. Significant increases or decreases in such inputs would result in a significantly lower or higher fair value measurement.
Significant unobservable input used in the fair value measurement of the Companys CLO Fund securities include default rates, recovery rates, prepayment rates, spreads, and the discount rate by which to value the resulting underlying cash flows. Such assumptions can vary significantly, depending on market data sources which often vary in depth and level of analysis, understanding of the CLO market, detailed or broad characterization of the CLO market and the application of such data to an appropriate framework for analysis. The application of data points are based on the specific attributes of each individual CLO Fund securitys underlying assets, historic, current and prospective performance, vintage, and other quantitative and qualitative factors that would be evaluated by market participants. The Company evaluates the source of market data for reliability as an indicative market input, consistency amongst other inputs and results and also the context in which such data is presented. Significant increases or decreases in probability of default and loss severity inputs in isolation would result in a significantly lower or higher fair value measurement. In general, a change in the assumption of the probability of default is accompanied by a directionally similar change in the
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assumption used for the loss severity in an event of default. Significant increases or decreases in the discount rate in isolation would result in a significantly lower or higher fair value measurement.
The significant unobservable inputs used in the fair value measurement of the Asset Manager Affiliates is the discount rate used to present value prospective cash flows. Prospective revenues are generally based on a fixed percentage of the par value of CLO Fund assets under management and are recurring in nature for the term of the CLO Fund so long as the Asset Manager Affiliates manage the fund. As a result, the fees earned by the Asset Manager Affiliates are generally not subject to market value fluctuations in the underlying collateral. The discounted cash flow model incorporates different levels of discount rates depending on the hierarchy of fees earned (including the likelihood of realization of senior, subordinate and incentive fees) and prospective modeled performance. Significant increases or decreases in such discount rate would result in a significantly lower or higher fair value measurement.
The Asset Manager Affiliates are wholly-owned portfolio companies. The Asset Manager Affiliates manage CLO Funds primarily for third party investors that invest in broadly syndicated loans, high yield bonds and other credit instruments issued by corporations. At December 31, 2014, the Asset Manager Affiliates had approximately $3.0 billion of par value of assets under management, and the Companys 100% equity interest in the Asset Manager Affiliates had a fair value of approximately $72 million.
As a manager of the CLO Funds, the Asset Manager Affiliates receive contractual and recurring management fees from the CLO Funds for their management and advisory services. The annual fees which the Asset Manager Affiliates receive are generally based on a fixed percentage of assets under management (at par value and not subject to changes in market value), and the Asset Manager Affiliates generate net income equal to the amount by which their fee income exceeds their operating expenses, including compensation of their employees and income taxes. The management fees the Asset Manager Affiliates receive have three components a senior management fee, a subordinated management fee and an incentive fee. Currently, all CLO Funds managed by the Asset Manager Affiliates are paying both their senior and subordinated management fees on a current basis. Additionally, five managed funds made incentive fee distributions during the year ended December 31, 2014, although two of such CLO Funds have been called for redemption by their investors.
Any distributions from the Asset Manager Affiliates out of tax-basis earnings and profits are recorded as Dividends from Asset Manager Affiliates on the Companys statement of operations. For the years ended December 31, 2014, 2013, and 2012 the Asset Manager Affiliates declared cash distributions of $11.9 million, $12.8 million, and $4.7 million to the Company, respectively. The Company recognized $5.5 million, $5.7 million, and $1.2 million of Dividends from Asset Manager Affiliates in the Statement of Operations in 2014, 2013, and 2012, respectively. The difference, of $6.4 million, $7.0 million, and $3.5 million, respectively between cash distributions received and the tax-basis earnings and profits of the distributing affiliate are recorded as an adjustment to the cost basis in the Asset Manager Affiliate (i.e. tax-basis return of capital). Distributions receivable, if any, are reflected in the Due from Affiliates account on the consolidated balance sheets.
The Asset Manager Affiliates fair value is determined quarterly. The valuation is primarily determined utilizing a discounted cash flow model. See Note 3, Significant Accounting Policies and Note 5, Investments for further information relating to the Companys valuation methodology. For the year ended December 31, 2014 the fair value of the Asset Manager Affiliates decreased by approximately $3.8 million.
Effective January 1, 2010, the Asset Manager Affiliates adopted guidance encompassed in Accounting Standards Codification Topic 810, Consolidation. The adoption of this new guidance had an impact on the disclosures relating to the Asset Manager Affiliates which had previously not been required, as its provisions
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require the Asset Manager Affiliates to consolidate certain of their managed CLO Funds that were not previously consolidated. As a result of the consolidation of these CLO Funds into the Asset Manager Affiliates, the financial results of the Asset Manager Affiliates indicate that they qualify as a significant subsidiary of the Company requiring additional disclosures. In addition, in accordance with Rules 3-09, Rule 4-08(g) and 1-02 of Regulation S-X, additional financial information with respect to two of the CLO Funds in which the Company has an investment, Katonah 2007-I CLO and Katonah X CLO are required to be included in the Companys SEC filings. The additional financial information regarding the Asset Manager Affiliates and Katonah 2007-I CLO (pursuant to Rule 3-09) immediately follow these financial statements. The additional financial information regarding Katonah X CLO (pursuant to Rule 4-08(g)) for 2014 is set forth below, and the audited financial information for 2013 can be found immediately following these financial statements. This additional financial information regarding the Asset Manager Affiliates, Katonah 2007-1 CLO and Katonah X CLO does not directly impact the financial position or results of operations of the Company.
As of December 31, 2014 |
||||
Total investments at fair value | $ | 294,519,583 | ||
Cash | 13,826,334 | |||
Total assets | 309,087,239 | |||
CLO Debt at fair value(1) | 301,099,336 | |||
Total liabilities | 302,052,535 | |||
Total Net Assets | 7,034,704 |
(1) | Includes subordinated securities of approximately $14.6 million |
Year Ended December 31, 2014 |
||||
Interest income from investments | $ | 12,441,502 | ||
Total income | 13,170,483 | |||
Interest expense | 8,945,449 | |||
Total expenses | 13,136,542 | |||
Net realized and unrealized losses | (10,998,445 | ) | ||
Decrease in net assets resulting from operations | (10,964,505 | ) |
As separately regarded entities for tax purposes, the Asset Manager Affiliates are taxed at normal corporate rates. For tax purposes, any tax-basis dividends paid by the Asset Manager Affiliates to the Company would generally need to be distributed to the Companys shareholders. Generally, such tax-basis dividends paid of the Asset Manager Affiliates income to the Companys shareholders will be considered as qualified dividends for tax purposes. The Asset Manager Affiliates taxable net income will differ from U.S. GAAP net income because of deferred tax temporary differences and permanent tax adjustments. Deferred tax temporary differences may include differences for the recognition and timing of amortization and depreciation, and compensation related expenses, among other things. Permanent differences may include adjustments, limitations or disallowances for meals and entertainment expenses, penalties, tax goodwill amortization and net operating loss carryforward.
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Goodwill amortization for tax purposes was created upon the purchase of 100% of the equity interests in Katonah Debt Advisors prior to the Companys IPO in exchange for shares of the Companys stock valued at $33 million. Although this transaction was a stock transaction rather than an asset purchase and thus no goodwill was recognized for U.S. GAAP purposes, such exchange was considered an asset purchase under Section 351(a) of the Code. At the time of the transfer, Katonah Debt Advisors had equity of approximately $1 million resulting in tax goodwill of approximately $32 million which is being amortized for tax purposes on a straight-line basis over 15 years, which accounts for an annual difference between U.S. GAAP income and taxable income by approximately $2.1 million per year over such period.
Additional goodwill amortization for tax purposes was created upon the purchase of 100% of the equity interests in Trimaran Advisors by one of KCAPs affiliates, in exchange for shares of the Companys stock valued at $25.5 million and cash of $13.0 million. The transaction was considered an asset purchase under Section 351(a) of the code and resulted in tax goodwill of approximately $22.8 million which is being amortized for tax purposes on a straight-line basis over 15 years, which accounts for an annual difference between GAAP income and taxable income by approximately $1.5 million per year over such period.
On November 20, 2012, the Company entered into a senior credit agreement (the Senior Credit Facility) with Trimaran Advisors, pursuant to which Trimaran Advisors may borrow from time to time up to $20 million from the Company in order to provide the capital necessary to support one or more of Trimaran Advisors warehouse lines and/or working capital in connection with Trimaran Advisors warehouse activities. The Senior Credit Facility expires on November 20, 2017 and bears interest at an annual rate of 9.0%. On December 27, 2012, the Senior Credit Facility was terminated and there were no borrowings outstanding.
On February 26, 2013, the Company entered into a senior credit agreement (the Trimaran Credit Facility) with Trimaran Advisors, pursuant to which Trimaran Advisors may borrow from time to time up to $20 million from the Company in order to provide capital necessary to support one or more of Trimaran Advisors warehouse lines of credit and/or working capital in connection with Trimaran Advisors warehouse activities. The Trimaran Credit Facility expires on November 20, 2017 and bears interest at an annual rate of 9.0%. On April 15, 2013, the Trimaran Credit Facility was amended and upsized from $20 million to $23 million. At December 31, 2014, there was $23 million outstanding under the Trimaran Credit Facility, which is included in our Schedule of Investments. For the year ended December 31, 2014, the Company recognized interest income of approximately $2 million related to the Trimaran Credit Facility.
The Companys debt obligations consist of the following:
As of December 31, 2014 |
As of December 31, 2013 |
|||||||
Convertible Notes due March 15, 2016 | $ | 38,647,000 | $ | 49,008,000 | ||||
7.375% Notes due September 30, 2019 | 41,400,000 | 41,400,000 | ||||||
KCAP Senior Funding I Notes (net of discount: $3,065,627) | 143,837,593 | 102,184,373 | ||||||
$ | 223,884,593 | $ | 192,592,373 |
The weighted average stated interest rate and weighted average maturity on all our debt outstanding as of December 31, 2014 were 4.43% and 7.23 years, respectively, and as of December 31, 2013 were 5.08% and 7.43 years, respectively.
On March 16, 2011, the Company issued $55 million in aggregate principal amount of unsecured 8.75% convertible notes due March 2016 (Convertible Notes). On March 23, 2011, pursuant to an over-allotment option, the Company issued an additional $5 million of such Convertible Notes for a total of $60 million in
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aggregate principal amount. The net proceeds from the sale of the Convertible Notes, following underwriting expenses, were approximately $57.7 million. Interest on the Convertible Notes is paid semi-annually in arrears on March 15 and September 15, at a rate of 8.75%, commencing September 15, 2011. The Convertible Notes mature on March 15, 2016 unless converted earlier. The Convertible Notes are senior unsecured obligations of the Company.
The Convertible Notes are convertible into shares of Companys common stock. As of December 31, 2014 the conversion rate was 132.7726 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to a conversion price of approximately $7.53 per share of common stock. Upon conversion, the Company would issue the full amount of common stock or settle the conversion in cash, at its option, and retire the full amount of debt outstanding.
Upon conversion, unless a holder converts after a record date for an interest payment but prior to the corresponding interest payment date, the holder will receive a separate cash payment with respect to the Convertible Notes surrendered for conversion representing accrued and unpaid interest to, but not including the conversion date. Any such payment will be made on the settlement date applicable to the relevant conversion on the Convertible Notes.
No holder of Convertible Notes will be entitled to receive shares of the Companys common stock upon conversion to the extent (but only to the extent) that such receipt would cause such converting holder to become, directly or indirectly, a beneficial owner (within the meaning of Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of more than 5.0% of the shares of the Companys common stock outstanding at such time. The 5.0% limitation shall no longer apply following the effective date of any fundamental change.
Subject to certain exceptions, holders may require us to repurchase, for cash, all or part of their Convertible Notes upon a fundamental change at a price equal to 100% of the principal amount of the Convertible Notes being repurchased plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date. In addition, in the case of certain fundamental changes and without duplication of the foregoing amount, the Company will also pay holders an amount in cash (or, in certain circumstances, shares of the Companys common stock) equal to the present value of the remaining interest payments on such Convertible Notes through, and including, the maturity date.
In connection with the issuance of the Convertible Notes, the Company incurred approximately $2.4 million of debt offering costs which are being amortized over the term of the facility on an effective yield method, of which approximately $419,000 remains to be amortized. On April 4, 2013, approximately $9 million of the Companys 8.75% Convertible Notes were converted at a price basis per share of $8.159 into 1,102,093 shares of KCAP common stock. On September 4, 2013, the Company purchased $2.0 million face value of its own Convertible Notes at $114.50 plus accrued interest. KCAP subsequently surrendered these notes to the Trustee for cancellation effective September 13, 2013. On October 9, 2014, the Company purchased approximately $10.4 million face value of its own Convertible Notes at $114.875 plus accrued interest. KCAP subsequently surrendered these notes to the Trustee for cancellation. Due to the cash conversion option embedded in the Convertible Notes, the Company applied the guidance in ASC 470-40-20, Debt with Conversion and Other Options and realized a loss on the extinguishment of this debt. For the year ended December 31, 2014 and 2013 total realized losses on extinguishment of debt was approximately $748,000 and $537,000, respectively. The indenture governing the Convertible Notes contains certain restrictive covenants, including compliance with certain provisions of the 1940 Act and conditions governing the undertaking of new debt.
For the years ended the years ended December 31, 2014, 2013, and 2012, interest expense related to the Convertible Notes was $4.1 million, $4.6 million and $5.2 million, respectively.
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The Convertible Notes have been analyzed for any features that would require its accounting to be bifurcated. There are no features that require accounting to be bifurcated, and as a result, they are recorded as a liability at their contractual amounts. At December 31, 2014, the Company was in compliance with all of its debt covenants.
Fair Value of Convertible Notes. The Company carries the Convertible Notes at cost. The Convertible Notes were issued in a private placement and there is no active trading of these notes. The estimated fair value of the Companys outstanding Convertible Notes was approximately $40.8 million at December 31, 2014. The fair value was determined based on an indicative closing price as of December 31, 2014. The Convertible Notes are categorized as Level III following ASC 820: Fair Value.
On October 10, 2012, the Company issued $41.4 million in aggregate principal amount of unsecured 7.375% Notes Due 2019. The net proceeds for these Notes, following underwriting expenses, were approximately $39.9 million. Interest on the 7.375% Notes Due 2019 is paid quarterly in arrears on March 30, June 30, September 30 and December 30, at a rate of 7.375%, commencing December 30, 2012. The 7.375% Notes Due 2019 mature on September, 30, 2019, and are senior unsecured obligations of the Company. The 7.375% Notes Due 2019 are subject to redemption in whole or in part at any time or from time to time, at the option of the Company, on or after September 30, 2015, at a redemption price per security equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to the date fixed for redemption. In addition, due to the asset coverage test applicable to the Company as a BDC and a covenant that the Company agreed to in connection with the issuance of the 7.375% Notes Due 2019, the Company is limited in its ability to make distributions in certain circumstances. The indenture governing the 7.375% Notes Due 2019 contains certain restrictive covenants, including compliance with certain provisions of the 1940 Act relating to borrowing and dividends. At December 31, 2014, the Company was in compliance with all of its debt covenants.
For the years ended December 31, 2014 and 2013 interest expense related to the 7.375% Notes Due 2019 was $3.1 million for both periods.
In connection with the issuance of the 7.375% Notes Due 2019, the Company incurred approximately $1.5 million of debt offering costs which are being amortized over the term of the facility on an effective yield method, of which approximately $1.1 million remains to be amortized.
Fair Value of 7.375% Notes Due 2019. The 7.375% Notes Due 2019 were issued in a public offering on October 10, 2012 and are carried at cost. The fair value of the Companys outstanding 7.375% Notes Due 2019 was approximately $42 million for both periods. The fair value was determined based on the closing price on December 31, 2014 and 2013 for the 7.375% Notes Due 2019. The 7.375% Notes Due 2019 are categorized as Level I under the ASC 820: Fair Value.
On June 18, 2013, the Company completed the sale of notes in a $140,000,000 debt securitization financing transaction. The notes offered in this transaction (the KCAP Senior Funding I Notes) were issued by KCAP Senior Funding I, LLC, a newly formed special purpose vehicle (the Issuer), in which KCAP Senior Funding I Holdings, LLC, a wholly-owned subsidiary of the Company (the Depositor), owns all of the KCAP Senior Funding I Subordinated Notes (as defined below), and are backed by a diversified portfolio of bank loans. The indenture governing the KCAP Senior Funding I Notes contains an event of default that is triggered in the event that certain coverage tests are not met.
The secured notes (the KCAP Senior Funding I Secured Notes) were issued as Class A senior secured floating rate notes which have an initial face amount of $77,250,000, are rated AAA (sf)/Aaa (sf) by Standard & Poors Ratings Services and Moodys Investors Service, Inc., respectively, and bear interest at the three-month LIBOR plus 1.50%, Class B senior secured floating rate notes which have an initial face amount
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of $9,000,000, are rated AA (sf)/Aa2 (sf) by Standard & Poors Ratings Services and Moodys Investors Service, Inc., respectively, and bear interest at three-month LIBOR plus the 3.25%, Class C secured deferrable floating rate notes which have an initial face amount of $10,000,000, are rated A (sf)/A2 (sf) by Standard & Poors Ratings Services and Moodys Investors Service, Inc., respectively, and bear interest at three-month LIBOR plus 4.25%, and Class D secured deferrable floating rate notes which have an initial face amount of $9,000,000, are rated BBB (sf)/Baa2 (sf) by Standard & Poors Ratings Services and Moodys Investors Service, Inc., respectively, and bear interest at three-month LIBOR plus 5.25%. The Depositor retained all of the subordinated notes of the Issuer (the KCAP Senior Funding I Subordinated Notes), which have an initial face amount of $34,750,000. The KCAP Senior Funding I Subordinated Notes do not bear interest and are not rated. Both the KCAP Senior Funding I Secured Notes and the KCAP Senior Funding I Subordinated Notes have a stated maturity on the payment date occurring in July, 2024, and are subject to a two year non-call period. The Issuer has a four year reinvestment period. The stated interest rate re-sets on a quarterly basis based upon the then-current level of the benchmark three-month LIBOR.
On December 8, 2014, the Company completed the sale of additional notes in a $56,000,000 increase to the collateralized loan obligation transaction that originally closed on June 18, 2013 (the Original Closing Date). The issuance of additional notes was proportional across all existing classes of notes issued on the Original Closing Date.
Each class of secured Additional Issuance Securities (all such classes, collectively, the Additional Issuance Offered Securities) was issued as a pari passu sub-class of an existing class of notes issued on the Original Closing Date. Accordingly, the ratings given by Standard & Poors Ratings Services and Moodys Investors Service, Inc. to each existing class of notes issued on the Original Closing Date will apply to each class of Additional Issuance Offered Securities that constitutes a related pari passu sub-class of such existing class of notes issued on the Original Closing Date.
The Additional Issuance Offered Securities were issued as Class A-2 senior secured floating rate notes which have an initial face amount of $30,900,000, have a rating of AAA (sf)/Aaa (sf) by Standard & Poors Ratings Services and Moodys Investors Service, Inc., respectively, and bear interest at the three-month LIBOR plus 1.50%, Class B-2 senior secured floating rate notes which have an initial face amount of $3,600,000, a rating of AA (sf)/Aa2 (sf) by Standard & Poors Ratings Services and Moodys Investors Service, Inc., respectively, and bear interest at three-month LIBOR plus 3.25%, Class C-2 secured deferrable floating rate notes which have an initial face amount of $4,000,000, a rating of A (sf)/A2 (sf) by Standard & Poors Ratings Services and Moodys Investors Service, Inc., respectively, and bear interest at three-month LIBOR plus 4.25%, and Class D-2 secured deferrable floating rate notes which have an initial face amount of $3,600,000, a rating of BBB (sf)/Baa2 (sf) by Standard & Poors Ratings Services and Moodys Investors Service, Inc., respectively, and bear interest at three-month LIBOR plus 5.25%. The Depositor retained all of the subordinated Additional Issuance Securities of the Issuer (the Additional Issuance Subordinated Notes), which have an initial face amount of $13,900,000. The Additional Issuance Subordinated Notes do not bear interest and are not rated. The Additional Issuance Securities have a stated maturity date of July 20, 2024 and are subject to a non-call period until the payment date on the Additional Issuance Securities occurring in July 2015. The Issuer has a reinvestment period to and including the payment date on the Additional Issuance Securities occurring in July 2017, or such earlier date as is provided in the indenture relating to the Additional Issuance Securities. In connection with the Additional Issuance Offered Securities, the Company incurred issuance costs and OID costs of approximately $584,000 and $896,000, respectively, which is included in other assets on the accompanying balance sheet.
As part of this transaction, the Company entered into a master loan sale agreement with the Depositor and the Issuer under which the Company sold or contributed certain bank loans to the Depositor, and the Depositor sold such loans to the Issuer in exchange for a combination of cash and the issuance of the KCAP Senior Funding I Subordinated Notes to the Depositor.
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In connection with the issuance and sale of the KCAP Senior Funding I Notes, the Company has made customary representations, warranties and covenants in the purchase agreement by and between the Company, the Depositor, the Issuer and Guggenheim Securities, LLC, which served as the initial purchaser of the KCAP Senior Funding I Secured Notes. The KCAP Senior Funding I Secured Notes are the secured obligations of the Issuer, and an indenture governing the KCAP Senior Funding I Notes includes customary covenants and events of default. The KCAP Senior Funding I Notes were sold in a private placement transaction and have not been, and will not be, registered under the Securities Act of 1933, as amended, or any state blue sky laws and may not be offered or sold in the United States absent registration with the Securities and Exchange Commission or an applicable exemption from registration.
The Company serves as collateral manager to the Issuer under a collateral management agreement, which contains customary representations, warranties and covenants. Under the collateral management agreement, the Company will perform certain investment management functions, including supervising and directing the investment and reinvestment of the Issuers assets, as well as perform certain administrative and advisory functions.
In addition, because each of the Issuer and the Depositor are consolidated subsidiaries, the Company did not recognize any gain or loss on the transfer of any of our portfolio assets to such vehicles in connection with the issuance and sale of the KCAP Senior Funding I Notes.
As of December 31, 2014, there were 72 investments in portfolio companies with a total fair value of approximately $194.8 million, collateralizing the secured notes of the Issuer. At December 31, 2014, there were unamortized issuance costs of approximately $3.8 million included in other assets, and unamortized original issue discount, (OID) costs of approximately $3.5 million included in Notes issued by KCAP Senior Funding I, L.L.C. liabilities in the accompanying consolidated balance sheet. The pool of loans in the securitization must meet certain requirements, including asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements.
For the year ended December 31, 2014, interest expense, including the amortization of deferred debt issuance costs and the discount on the face amount of the notes was approximately $3.8 million consisting of stated interest expense of approximately $2.8 million, accreted discount of approximately $450,000, and deferred debt issuance costs of approximately $525,000. As of December 31, 2014 the stated interest charged under the securitization was based on current three month LIBOR, which was .26%. The classes, stated interest rates, spread over LIBOR, and stated interest expense are as follows:
Stated Interest Rate(1) | LIBOR Spread (basis points) | Stated Interest Expense(1) | ||||||||||
KCAP Senior Funding LLC Class A Notes | 1.76 | % | 150 | $ | 1,355,211 | |||||||
KCAP Senior Funding LLC Class B Notes | 3.51 | % | 325 | 317,139 | ||||||||
KCAP Senior Funding LLC Class C Notes | 4.51 | % | 425 | 453,487 | ||||||||
KCAP Senior Funding LLC Class D Notes | 5.51 | % | 525 | 499,139 | ||||||||
Total | $ | 2,624,976 |
(1) | Stated Interest Rate and Stated Interest Expense will vary based upon prevailing 3 month LIBOR as of the reset date. |
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Description | Class A Notes | Class B Notes | Class C Notes | Class D Notes | ||||||||||||
Type | Senior Secured Floating Rate |
Senior Secured Floating Rate |
Secured Deferrable Floating Rate |
Secured Deferrable Floating Rate |
||||||||||||
Amount Outstanding | $ | 108,150,000 | $ | 12,600,000 | $ | 14,000,000 | $ | 12,600,000 | ||||||||
Moody's Rating (sf) | Aaa | Aa2 | A2 | Baa2 | ||||||||||||
Standard & Poor's Rating (sf) | AAA | AA | A | BBB | ||||||||||||
Interest Rate | three-month LIBOR + 1.50% |
three-month LIBOR + 3.25% |
three-month LIBOR + 4.25% |
three-month LIBOR + 5.25% |
||||||||||||
Stated Maturity | July, 2024 | July, 2024 | July, 2024 | July, 2024 | ||||||||||||
Junior Classes | B, C, D and Subordinated |
C, D and Subordinated |
D and Subordinated |
Subordinated |
The Companys outstanding principal amounts, carrying values and fair values of the Class A, B, C and D Notes are as follows:
As of December 31, 2014 | ||||||||||||
Principal Amount | Carrying Value |
Fair Value |
||||||||||
KCAP Senior Funding LLC Class A Notes | $ | 108,150,000 | $ | 105,572,010 | $ | 105,446,250 | ||||||
KCAP Senior Funding LLC Class B Notes | 12,600,000 | 12,299,652 | 12,514,320 | |||||||||
KCAP Senior Funding LLC Class C Notes | 14,000,000 | 13,666,280 | 13,966,400 | |||||||||
KCAP Senior Funding LLC Class D Notes | 12,600,000 | 12,299,652 | 12,285,000 | |||||||||
Total | $ | 147,350,000 | $ | 143,837,594 | $ | 144,211,970 |
Fair Value of KCAP Senior Funding-I L.L.C. The Company carries the KCAP Senior Funding-I Notes at cost, net of unamortized discount of $3,512,407. The fair value of the KCAP Senior Funding-I, L.L.C. Notes was approximately $144 million at December 31, 2014. The fair values were determined based on third party indicative values. The KCAP Senior Funding I, L.L.C. Notes are categorized as Level III under ASC 820: Fair Value.
Effective December 11, 2006, the Company elected to be treated as a RIC under the Code and adopted a December 31 tax-calendar year end. As a RIC, the Company is not subject to U.S. federal income tax on the portion of its taxable income and gains distributed currently to its stockholders as a dividend. The Companys quarterly dividends, if any, are determined by the Board of Directors. The Company anticipates distributing at least 90% of its taxable income and gains, within the Subchapter M rules, and thus the Company anticipates that it will not incur any federal or state income tax at the RIC level. As a RIC, the Company is also subject to a federal excise tax based on distributive requirements of its taxable income on a calendar year basis (e.g., calendar year 2014). Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income, to the extent required. The Company anticipates timely distribution of its tax-basis taxable income within the tax rules, and the Company anticipates that it will not incur a U.S. federal excise tax for the calendar year 2014.
F-104
Book and tax basis differences relating to stockholder dividends and distributions and other permanent book and tax differences are typically reclassified among the Companys capital accounts. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP; accordingly at calendar years ended December 31, 2014 and 2013, the Company reclassified for book purposes amounts arising from permanent book/tax differences related to the tax treatment of return of capital distributions and non-deductible expenses, as follows:
Year Ended December 31, | ||||||||
2014 | 2013 (restated) | |||||||
Capital in excess of par value | $ | (7,987,965 | ) | $ | (14,547,148 | ) | ||
Accumulated (excess distribution) undistributed net investment income | $ | 7,987,965 | $ | 12,700,085 | ||||
Accumulated net realized losses | $ | | $ | (1,847,063 | ) |
Total earnings and net asset value are not affected by the reclassifications.
The following reconciles net increase in net assets resulting from operations to taxable income for the years ended December 31, 2014 and 2013:
Year Ended December 31, | ||||||||
2014 | 2013 (restated) | |||||||
Net increase in net assets resulting from operations | $ | 15,033,594 | $ | 17,222,974 | ||||
Net change in unrealized depreciation (appreciation) from investments | (6,045,517 | ) | (9,976,173 | ) | ||||
Excess capital losses over capital gains | 11,132,492 | 11,859,868 | ||||||
Income not on GAAP books currently taxable | 6,115,685 | 4,706,827 | ||||||
Expenses not on GAAP books currently deductible | | (1,595,240 | ) | |||||
Expenses not currently deductible | 570,900 | 261,128 | ||||||
Taxable income before deductions for distributions | $ | 26,807,154 | $ | 22,479,384 | ||||
Taxable income before deductions for distributions per weighted average basic shares for the period | $ | 0.78 | $ | 0.70 |
Tax-basis taxable income differs from net increase (decrease) in net assets resulting from operations primarily due to: (1) unrealized appreciation (depreciation) on investments, as investment gains and losses are not included in tax-basis taxable income until they are realized; (2) excess of capital gains over capital losses; (3) differences in accounting for CLO equity investments; (4) non-deductible expenses; (5) stock compensation and rent expenses that are not currently deductible for tax purposes; and (6) recognition of interest income on certain loans.
Distributions to shareholders which exceed tax distributable income (tax net investment income and realized gains, if any) are reported as distributions of paid-in capital (i.e., return of capital). The tax character of distributions is made on an annual (full calendar-year) basis, at the end of the year, and based upon our taxable income for the full year and the distributions paid during the full year. Therefore, a determination of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year. The tax character of distributions paid during the years ended December 31, 2014, 2013, and 2012 was as follows:
Year Ended December 31, | ||||||||||||
2014 | 2013 (restated) | 2012 (restated) | ||||||||||
Distributions paid from: |
||||||||||||
Ordinary income | $ | 26,807,154 | $ | 22,479,384 | $ | 20,001,629 | ||||||
Return of Capital | 7,972,633 | 12,681,755 | 4,807,203 | |||||||||
Total | $ | 34,779,787 | $ | 35,161,139 | $ | 24,808,832 |
F-105
As of December 31, 2014 and 2013, the components of accumulated earnings on a tax basis were as follows:
Year Ended December 31, | ||||||||
2014 | 2013 (restated) | |||||||
Capital loss carryforward | $ | (76,591,751 | ) | $ | (65,459,260 | ) | ||
Other temporary differences | $ | (1,575,184 | ) | $ | (1,019,617 | ) | ||
Net unrealized depreciation | $ | (29,295,943 | ) | $ | (29,225,775 | ) |
At December 31, 2014, the Company had a net capital loss carryforward of $76.6 million to offset net capital gains, to the extent provided by federal tax law. Of the net capital loss carryforward, $32.0 million will begin to expire in the tax year ending December 31, 2015. Of the net capital loss carryforward, $44.5 million is not subject to expiration under the RIC Modernization Act of 2010. This amount is net of a $2.0 million tax-basis gain recognized from distributions received from Asset Manager Affiliates in excess of tax basis.
The Company adopted Financial Accounting Standards Board ASC Topic 740 Accounting for Uncertainty in Income Taxes (ASC 740) as of January 1, 2007. ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the consolidated financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Companys tax returns to determine whether the tax positions are more-likely-than-not of being sustained by the applicable tax authority. The Company recognizes the tax benefits of uncertain tax positions only where the position is more likely than not to be sustained assuming examination by tax authorities. Management has analyzed the Companys tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on returns filed for open tax years (the last three fiscal years) or expected to be taken in the Companys current year tax return. The Company identifies its major tax jurisdictions as U.S. Federal and New York State, and the Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months. Managements determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof.
From time-to-time the Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the needs of the Companys investment in portfolio companies. Such instruments include commitments to extend credit and may involve, in varying degrees, elements of credit risk in excess of amounts recognized on the Companys balance sheet. Prior to extending such credit, the Company attempts to limit its credit risk by conducting extensive due diligence, obtaining collateral where necessary and negotiating appropriate financial covenants. As of December 31, 2014 and December 31, 2013, the Company had no commitments. As of December 31, 2014 and December 31, 2013, the Company had no outstanding commitment to make investments in delayed draw senior secured loans.
During the years ended December 31, 2014 and December 31, 2013, the Company issued 91,217 and 71,381 shares, respectively, of common stock under its dividend reinvestment plan. For the year ended December 31, 2014, the Company issued 360,289 shares of restricted stock, 8,502 shares were forfeited, and 5,000 shares were vested. On February 14, 2013, the Company completed a public offering of 5,232,500 shares of common stock, which included the underwriters full exercise of their option to purchase up to 682,500 shares of common stock, at a price of $9.75 per share. In conjunction with this offering, the Company also sold 200,000 shares of common stock to a member of its Board of Directors, at a price of $9.31125 per share, raising approximately $1.9 million in gross proceeds. On April 4, 2013, approximately
F-106
$9 million of the Companys 8.75% Convertible Notes were converted at a price basis per share of $8.159 into 1,102,093 shares of KCAP common stock. On October 6, 2014, the Company priced a follow-on public offering of 3.0 million shares of its common stock at a price of $8.02 per share. The offering raised net proceeds were approximately $23.8 million, after deducting underwriting discounts and offering expenses. The total number of shares of the Companys common stock issued and outstanding as of December 31, 2014 was 36,775,127, and the total number of shares issued and outstanding as of December 31, 2013 was 33,332,123.
The Company has an equity incentive plan, established in 2006 and as amended in 2008 and most recently in June 2014 (the Equity Incentive Plan). The Company reserved 2,000,000 shares of common stock for issuance under the Equity Incentive Plan. The purpose of the Equity Incentive Plan is to provide officers and prospective employees of the Company with additional incentives and align the interests of its employees with those of its shareholders. Options granted under the Equity Incentive Plan are exercisable at a price equal to the fair market value (market closing price) of the shares on the day the option is granted. Restricted stock granted under the Equity Incentive Plan is granted at a price equal to the fair market value (market closing price) of the shares on the day such restricted stock is granted. Vesting of restricted stock awarded under the 2008 amendment of the Equity Incentive Plan will occur in two equal installments of 50%, on each of the third and fourth anniversaries of the grant date; vesting of restricted stock under the 2014 amended Equity Incentive Plan will vest in four equal installments of 25%, on each of the first four anniversaries of the grant date.
On June 20, 2014, the Companys Board of Directors approved the Amended and restated the Non-Employee Director Plan (the Non-Employee Director Plan), which was approved by shareholders on June 10, 2011. Accordingly, the annual grant of options to non-employee directors has been discontinued and replaced with an annual grant of shares of restricted stock as partial annual compensation for the services of the non-employee directors.
Information with respect to options granted, exercised and forfeited under the Equity Incentive Plan for the period January 1, 2013 through December 31, 2014 is as follows:
Shares | Weighted Average Exercise Price per Share |
Weighted Average Contractual Remaining Term (years) |
Aggregate Intrinsic Value(1) |
|||||||||||||
Options outstanding at January 1, 2013 | 60,000 | $ | 7.24 | |||||||||||||
Granted | | $ | | |||||||||||||
Exercised | (10,000 | ) | $ | | ||||||||||||
Forfeited | | $ | | |||||||||||||
Options outstanding at December 31, 2013 | 50,000 | $ | 7.72 | |||||||||||||
Granted | | $ | | |||||||||||||
Exercised | | $ | | |||||||||||||
Forfeited | | $ | | |||||||||||||
Outstanding at December 31, 2014 | 50,000 | $ | | 4.4 | $ | 77,600 | ||||||||||
Total vested at December 31, 2014 | 50,000 | $ | 7.72 | 4.4 |
(1) | Represents the difference between the market value of shares of the Company upon exercise of the options at December 31, 2014 and the cost for the option holders to exercise the options. |
F-107
The Company uses a Binary Option Pricing Model (American, call option) to establish the expected value of all stock option grants. For the years ended December 31, 2014, 2013 and 2012 the Company did not recognize non-cash compensation expense related to stock options. At December 31, 2014, the Company had no remaining compensation cost related to unvested stock-based awards.
On June 10, 2011, pursuant to the Non-Employee Director Plan, the Board of Directors approved the grant of 4,000 shares of restricted stock to the non-employee directors of the Company as partial annual compensation for their services as director. Awards of restricted stock granted under the Non-Employee Director Plan vest as follows: 50% of the shares vest on the grant date and the remaining 50% of the shares vest on the earlier of:
(i) the first anniversary of such grant, or
(ii) the date immediately preceding the next annual meeting of shareholders.
On June 15, 2012, 5,000 shares of restricted stock were awarded to the Companys Board of Directors.
During 2012, the Companys Board of Directors approved the grant of 29,757 shares of restricted stock to employees of the Company as partial compensation for their services. 50% of such shares will vest on the third anniversary of the grant date and the remainder will vest on the fourth anniversary of the grant date.
On May 5, 2013, the Companys Board of Directors approved the grant of 240,741 shares of restricted stock to the employees of the Company as partial compensation for their services. 50% of such awards will vest on the third anniversary of the grant date and the remaining 50% of the shares will vest on the fourth anniversary of the grant date.
On June 14, 2013, 5,000 shares of restricted stock were awarded to the Companys Board of Directors.
On May 5, 2014, 5,000 shares of restricted stock were awarded to the Companys Board of Directors.
On June 20, 2014, the Companys Board of Directors approved the grant of 355,289 shares of restricted stock to the employees of the Company as partial compensation for their services. 25% of such awards will vest on each of the first four anniversaries of the grant date.
During the year ended December 31, 2014, 5,000 shares of restricted stock vested and 8,502 shares of restricted stock were forfeited. As of December 31, 2014, after giving effect to these restricted stock awards, there were 619,785 shares of restricted stock outstanding. Information with respect to restricted stock granted, exercised and forfeited under the Plan for the period January 1, 2013 through December 31, 2014 is as follows:
Non-Vested Restricted Shares | ||||
Non-vested shares outstanding at January 1, 2013 | 32,257 | |||
Granted | 245,741 | |||
Vested | (5,000 | ) | ||
Non-vested shares outstanding at December 31, 2013 | 272,998 | |||
Granted | 360,289 | |||
Vested | (5,000 | ) | ||
Forfeited | (8,502 | ) | ||
Non-Vested Outstanding at December 31, 2014 | 619,785 |
For the year ended December 31, 2014, non-cash compensation expense related to restricted stock was approximately $1.1 million; of this amount approximately $534,000 was expensed by the Company and approximately $589,000 was a reimbursable expense allocated to the Asset Manager Affiliates. For the year
F-108
ended December 31, 2013, non-cash compensation expense related to restricted stock was approximately $526,000; of this amount approximately $273,000 was expensed by the Company and approximately $253,000 was a reimbursable expense allocated to the Asset Manager Affiliates. For the year ended December 31, 2012, non-cash compensation expense related to restricted stock was approximately $437,000; of this amount approximately $416,000 was expensed by the Company and approximately $21,000 was a reimbursable expense allocated to the Asset Manager Affiliates.
Dividends are paid on all outstanding shares of restricted stock, whether or not vested. In general, shares of unvested restricted stock are forfeited upon the recipients termination of employment. At December 31, 2014 and 2013, the Company had approximately $4.1 million and $1.1 million of total unrecognized compensation cost related to non-vested share-based awards, respectively. That cost is expected to be recognized over a weighted average period of 2.9 years.
The Company adopted a 401(k) plan (401K Plan) effective January 1, 2007. The 401K Plan is open to all full time employees. The 401K Plan permits an employee to defer a portion of their total annual compensation up to the Internal Revenue Service annual maximum based on age and eligibility. The Company makes contributions to the 401K Plan of up to 2% of the Internal Revenue Services annual maximum eligible compensation, which fully vests at the time of contribution. Approximately $38,000, $50,000 and $34,000 was expensed for the years ended December 31, 2014, 2013, and 2012, respectively, related to the 401K Plan.
The Company has also adopted a deferred compensation plan (Profit-Sharing Plan) effective January 1, 2007. Employees are eligible for the Profit-Sharing Plan provided that they are employed and working with the Company to participate in at least 100 days during the year and remain employed as of the last day of the year. Employees do not make contributions to the Profit-Sharing Plan. On behalf of the employee, the Company may contribute to the Profit-Sharing Plan 1) up to 8.0% of all compensation up to the Internal Revenue Service annual maximum and 2) up to 5.7% excess contributions on any incremental amounts above the social security wage base limitation and up to the Internal Revenue Service annual maximum. Employees vest 100% in the Profit-Sharing Plan after five years of service. Approximately $244,000, $180,000 and $139,000 was expensed during the years ended December 31, 2014, 2013, and 2012, respectively, related to the Profit-Sharing Plan.
F-109
Q1 2014 (restated) | Q2 2014 (restated) | Q3 2014 (restated) | Q4 2014 | |||||||||||||
ASSETS |
||||||||||||||||
Investments at fair value: |
||||||||||||||||
Money market accounts | $ | 4,133,429 | $ | 5,610,941 | $ | 341,694 | $ | 1,602,741 | ||||||||
Debt securities | 264,791,172 | 256,023,078 | 264,813,932 | 320,143,170 | ||||||||||||
CLO Fund Securities managed by affiliates | 73,585,796 | 87,549,239 | 83,487,288 | 74,139,696 | ||||||||||||
CLO Fund Securities managed by non-affiliates | 4,161,728 | 4,181,659 | 3,894,965 | 3,375,206 | ||||||||||||
Equity securities | 8,212,286 | 8,758,971 | 11,140,167 | 8,119,681 | ||||||||||||
Asset Manager Affiliates | 74,075,000 | 75,302,000 | 78,737,000 | 72,326,000 | ||||||||||||
Total Investments at Fair Value | 428,959,411 | 437,425,888 | 442,415,046 | 479,706,494 | ||||||||||||
Cash | 3,277,748 | 2,310,589 | 3,935,484 | 1,220,798 | ||||||||||||
Restricted cash | 5,861,582 | 4,777,960 | 5,443,575 | 19,325,550 | ||||||||||||
Interest receivable | 2,192,261 | 2,040,077 | 2,108,845 | 1,748,821 | ||||||||||||
Receivable for open trades | 6,972,467 | 2,943,835 | | | ||||||||||||
Accounts receivable | 3,000,000 | 3,000,000 | 3,100,000 | | ||||||||||||
Due from affiliates | 18 | 218,927 | 49,940 | 3,027,409 | ||||||||||||
Other assets | 6,172,882 | 5,853,972 | 5,632,707 | 5,417,725 | ||||||||||||
Total Assets | $ | 456,436,369 | $ | 458,571,248 | $ | 462,685,597 | $ | 510,446,797 | ||||||||
LIABILITIES |
||||||||||||||||
Convertible Notes | $ | 49,008,000 | $ | 49,008,000 | $ | 49,008,000 | $ | 38,647,000 | ||||||||
7.375% Notes Due 2019 | 41,400,000 | 41,400,000 | 41,400,000 | 41,400,000 | ||||||||||||
Notes issued by KCAP Senior Funding I, LLC | 102,293,250 | 102,402,861 | 102,513,211 | 143,837,593 | ||||||||||||
Payable for open trades | 7,960,000 | 3,940,000 | 8,262,000 | 18,293,725 | ||||||||||||
Accounts payable and accrued expenses | 1,672,509 | 3,306,332 | 2,444,312 | 2,274,150 | ||||||||||||
Accrued interest payable | | | | 1,566,255 | ||||||||||||
Due to affiliates | | | 31,000 | 31,000 | ||||||||||||
Dividend payable | | | | 9,080,373 | ||||||||||||
Total Liabilities | 202,333,759 | 200,057,193 | 203,658,523 | 255,130,096 | ||||||||||||
STOCKHOLDERS' EQUITY |
||||||||||||||||
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 36,775,127 and 33,332,123 common shares issued and outstanding at December 31, 2014 and December 31, 2013, respectively | 333,557 | 337,252 | 337,537 | 367,751 | ||||||||||||
Capital in excess of par value | 345,996,582 | 346,451,281 | 347,066,899 | 362,411,830 | ||||||||||||
Accumulated (excess distribution) undistributed net investment income | (14,405,770 | ) | (18,109,748 | ) | (20,931,601 | ) | (25,579,865 | ) | ||||||||
Accumulated net realized losses | (64,070,062 | ) | (64,134,859 | ) | (66,276,450 | ) | (75,512,134 | ) | ||||||||
Net unrealized depreciation on investments | (13,751,696 | ) | (6,029,871 | ) | (1,169,311 | ) | (6,370,881 | ) | ||||||||
Total Stockholders' Equity | 254,102,611 | 258,514,055 | 259,027,074 | 255,316,701 | ||||||||||||
Total Liabilities and Stockholders' Equity | $ | 456,436,370 | $ | 458,571,248 | $ | 462,685,597 | $ | 510,446,797 | ||||||||
Net Asset Value per Common Share | $ | 7.62 | $ | 7.67 | $ | 7.67 | $ | 6.94 |
F-110
The following table presents the impact of the restatement and correction adjustments on our Consolidated Balance Sheets as of Mach 31, 2014, June 30, 2014 and September 30, 2014:
As of March 31, 2014 | As of June 30, 2014 | |||||||||||||||||||||||
As published | Adjustments | As Restated | As published | Adjustments | As Restated | |||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Investments at fair value: |
||||||||||||||||||||||||
Money market accounts | $ | 4,133,429 | | $ | 4,133,429 | $ | 5,610,941 | | $ | 5,610,941 | ||||||||||||||
Debt securities | 264,791,172 | | 264,791,172 | 256,023,078 | | 256,023,078 | ||||||||||||||||||
CLO Fund Securities managed by affiliates | 73,585,796 | | 73,585,796 | 87,549,239 | | 87,549,239 | ||||||||||||||||||
CLO Fund Securities managed by non-affiliates | 4,161,728 | | 4,161,728 | 4,181,659 | | 4,181,659 | ||||||||||||||||||
Equity securities | 8,212,286 | | 8,212,286 | 8,758,971 | | 8,758,971 | ||||||||||||||||||
Asset Manager Affiliates | 74,075,000 | | 74,075,000 | 75,302,000 | | 75,302,000 | ||||||||||||||||||
Total Investments at Fair Value | 428,959,411 | | 428,959,411 | 437,425,888 | | 437,425,888 | ||||||||||||||||||
Cash | 3,277,748 | | 3,277,748 | 2,310,589 | | 2,310,589 | ||||||||||||||||||
Restricted cash | 5,861,582 | | 5,861,582 | 4,777,960 | | 4,777,960 | ||||||||||||||||||
Interest receivable | 2,192,261 | | 2,192,261 | 2,040,077 | | 2,040,077 | ||||||||||||||||||
Receivable for open trades | 6,972,467 | | 6,972,467 | 2,943,835 | | 2,943,835 | ||||||||||||||||||
Accounts receivable | 3,000,000 | | 3,000,000 | 3,000,000 | | 3,000,000 | ||||||||||||||||||
Due from affiliates | 18 | | 18 | 218,927 | | 218,927 | ||||||||||||||||||
Other assets | 6,172,882 | | 6,172,882 | 5,853,972 | | 5,853,972 | ||||||||||||||||||
Total Assets | $ | 456,436,369 | | $ | 456,436,369 | $ | 458,571,248 | | $ | 458,571,248 | ||||||||||||||
LIABILITIES |
||||||||||||||||||||||||
Convertible Notes | $ | 49,008,000 | | $ | 49,008,000 | $ | 49,008,000 | | $ | 49,008,000 | ||||||||||||||
7.375% Notes Due 2019 | 41,400,000 | | 41,400,000 | 41,400,000 | | 41,400,000 | ||||||||||||||||||
Notes issued by KCAP Senior Funding I, LLC | 102,293,250 | | 102,293,250 | 102,402,861 | | 102,402,861 | ||||||||||||||||||
Payable for open trades | 7,960,000 | | 7,960,000 | 3,940,000 | | 3,940,000 | ||||||||||||||||||
Accounts payable and accrued expenses | 1,672,509 | | 1,672,509 | 3,306,332 | | 3,306,332 | ||||||||||||||||||
Total Liabilities | 202,333,759 | | 202,333,759 | 200,057,193 | | 200,057,193 | ||||||||||||||||||
STOCKHOLDERS' EQUITY |
||||||||||||||||||||||||
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 36,775,127 and 33,332,123 common shares issued and outstanding at December 31, 2014 and December 31, 2013, respectively | 333,557 | | 333,557 | 337,252 | | 337,252 | ||||||||||||||||||
Capital in excess of par value | 371,185,322 | (25,188,740 | ) | 345,996,582 | 371,640,022 | (25,188,741 | ) | 346,451,281 | ||||||||||||||||
Accumulated (excess distribution) undistributed net investment income | 1,792,376 | (16,198,146 | ) | (14,405,770 | ) | 1,530,282 | (19,640,030 | ) | (18,109,748 | ) | ||||||||||||||
Accumulated net realized losses | (68,353,108 | ) | 4,283,046 | (64,070,062 | ) | (68,417,904 | ) | 4,283,045 | (64,134,859 | ) | ||||||||||||||
Net unrealized depreciation on investments | (50,855,536 | ) | 37,103,840 | (13,751,696 | ) | (46,575,597 | ) | 40,545,726 | (6,029,871 | ) | ||||||||||||||
Total Stockholders' Equity | 254,102,611 | | 254,102,611 | 258,514,055 | | 258,514,055 | ||||||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 456,436,370 | | $ | 456,436,370 | $ | 458,571,248 | | $ | 458,571,248 | ||||||||||||||
Net Asset Value per Common Share | $ | 7.62 | | $ | 7.62 | $ | 7.67 | | $ | 7.67 | ||||||||||||||
AMORTIZED COST |
||||||||||||||||||||||||
CLO Fund Securities managed by affiliates | $ | 88,345,107 | $ | (15,590,836 | ) | $ | 72,754,271 | $ | 101,293,076 | $ | (17,292,063 | ) | $ | 84,001,013 | ||||||||||
CLO Fund Securities managed by non-affiliates | $ | 12,824,040 | $ | (3,238,966 | ) | $ | 9,585,074 | $ | 12,455,827 | $ | (3,385,148 | ) | $ | 9,070,679 | ||||||||||
Asset Manager Affiliates | $ | 83,924,720 | $ | (18,821,492 | ) | $ | 65,103,228 | $ | 83,924,720 | $ | (20,443,026 | ) | $ | 63,481,694 |
F-111
As of September 30, 2014 | ||||||||||||
As published | Adjustments | As Restated | ||||||||||
ASSETS |
||||||||||||
Investments at fair value: |
||||||||||||
Money market accounts | $ | 341,694 | | $ | 341,694 | |||||||
Debt securities | 264,813,932 | | 264,813,932 | |||||||||
CLO Fund Securities managed by affiliates | 83,487,288 | | 83,487,288 | |||||||||
CLO Fund Securities managed by non-affiliates | 3,894,965 | | 3,894,965 | |||||||||
Equity securities | 11,140,167 | | 11,140,167 | |||||||||
Asset Manager Affiliates | 78,737,000 | | 78,737,000 | |||||||||
Total Investments at Fair Value | 442,415,046 | | 442,415,046 | |||||||||
Cash | 3,935,484 | | 3,935,484 | |||||||||
Restricted cash | 5,443,575 | | 5,443,575 | |||||||||
Interest receivable | 2,108,845 | | 2,108,845 | |||||||||
Accounts receivable | 3,100,000 | | 3,100,000 | |||||||||
Due from affiliates | 49,940 | | 49,940 | |||||||||
Other assets | 5,632,707 | | 5,632,707 | |||||||||
Total Assets | $ | 462,685,597 | | $ | 462,685,597 | |||||||
LIABILITIES |
||||||||||||
Convertible Notes | $ | 49,008,000 | | $ | 49,008,000 | |||||||
7.375% Notes Due 2019 | 41,400,000 | | 41,400,000 | |||||||||
Notes issued by KCAP Senior Funding I, LLC | 102,513,211 | | 102,513,211 | |||||||||
Payable for open trades | 8,262,000 | | 8,262,000 | |||||||||
Accounts payable and accrued expenses | 2,444,312 | | 2,444,312 | |||||||||
Due to affiliates | 31,000 | | 31,000 | |||||||||
Total Liabilities | 203,658,523 | | 203,658,523 | |||||||||
STOCKHOLDERS' EQUITY |
||||||||||||
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 36,775,127 and 33,332,123 common shares issued and outstanding at December 31, 2014 and December 31, 2013, respectively | 337,537 | | 337,537 | |||||||||
Capital in excess of par value | 372,255,639 | (25,188,740 | ) | 347,066,899 | ||||||||
Accumulated (excess distribution) undistributed net investment income | 1,550,569 | (22,482,170 | ) | (20,931,601 | ) | |||||||
Accumulated net realized losses | (70,559,495 | ) | 4,283,045 | (66,276,450 | ) | |||||||
Net unrealized depreciation on investments | (44,557,176 | ) | 43,387,865 | (1,169,311 | ) | |||||||
Total Stockholders' Equity | 259,027,074 | | 259,027,074 | |||||||||
Total Liabilities and Stockholders' Equity | $ | 462,685,597 | | $ | 462,685,597 | |||||||
Net Asset Value per Common Share | $ | 7.67 | | $ | 7.67 | |||||||
AMORTIZED COST |
||||||||||||
CLO Fund Securities managed by affiliates | $ | 110,317,772 | $ | (18,826,538 | ) | $ | 91,491,234 | |||||
CLO Fund Securities managed by non-affiliates | $ | 9,135,310 | $ | (2,538,518 | ) | $ | 6,596,792 | |||||
Asset Manager Affiliates | $ | 83,924,720 | $ | (22,118,611 | ) | $ | 61,806,109 |
F-112
Q1 2014 (restated) | Q2 2014 (restated) | Q3 2014 (restated) | Q4 2014 | |||||||||||||
Investment Income: |
||||||||||||||||
Interest from investments in debt securities | $ | 5,247,236 | $ | 5,173,514 | $ | 5,391,997 | $ | 5,573,685 | ||||||||
Interest from cash and time deposits | 786 | 724 | 831 | 1,111 | ||||||||||||
Investment income on CLO Fund Securities managed by affiliates | 2,822,378 | 2,816,749 | 3,374,704 | 3,353,750 | ||||||||||||
Investment income on CLO Fund Securities managed by non-affiliates | 319,414 | 279,261 | 230,529 | 216,021 | ||||||||||||
Dividends from Asset Manager Affiliates | 1,378,466 | 1,378,466 | 1,424,415 | 1,286,567 | ||||||||||||
Capital structuring service fees | 227,083 | 125,116 | 412,772 | 169,900 | ||||||||||||
Total investment income | 9,995,363 | 9,773,830 | 10,835,248 | 10,601,034 | ||||||||||||
Expenses: |
||||||||||||||||
Interest and amortization of debt issuance costs | 2,990,166 | 2,893,806 | 2,891,724 | 2,762,483 | ||||||||||||
Compensation | 1,262,437 | 1,227,651 | 1,431,825 | 1,029,832 | ||||||||||||
Professional fees | 671,210 | 545,913 | 566,320 | 831,036 | ||||||||||||
Insurance | 135,961 | 111,507 | 112,109 | 111,699 | ||||||||||||
Administrative and other | 468,283 | 399,315 | 315,769 | 325,861 | ||||||||||||
Total expenses | 5,528,057 | 5,178,192 | 5,317,747 | 5,060,911 | ||||||||||||
Net Investment Income | 4,467,306 | 4,595,638 | 5,517,501 | 5,540,123 | ||||||||||||
Realized And Unrealized Gains (Losses) On Investments: |
||||||||||||||||
Net realized losses from investment transactions | 309,581 | (64,797 | ) | (2,141,591 | ) | (8,487,608 | ) | |||||||||
Net change in unrealized appreciation (depreciation) on: |
||||||||||||||||
Debt securities | (603,315 | ) | 1,102,632 | 7,420,256 | (2,278,170 | ) | ||||||||||
Equity securities | (327,661 | ) | 546,686 | 1,215,992 | 5,605,138 | |||||||||||
CLO Fund Securities managed by affiliates | 933,828 | 2,650,352 | (11,986,471 | ) | (3,181,966 | ) | ||||||||||
CLO Fund Securities managed by non-affiliates |
(340,705 | ) | 573,617 | 3,100,201 | (449,004 | ) | ||||||||||
Asset Manager Affiliates investments | (997,444 | ) | 2,848,534 | 5,110,585 | (4,897,568 | ) | ||||||||||
Total net unrealized gain from investment transactions | (1,335,297 | ) | 7,721,821 | 4,860,563 | (5,201,570 | ) | ||||||||||
Net realized and unrealized appreciation (depreciation) on investments | (1,025,716 | ) | 7,657,024 | 2,718,972 | (13,689,178 | ) | ||||||||||
Realized losses on extinguishments of debt | | | | (748,076 | ) | |||||||||||
Net Increase In Stockholders Equity Resulting From Operations | $ | 3,441,590 | $ | 12,252,662 | $ | 8,236,473 | $ | (8,897,131 | ) | |||||||
Net Increase in Stockholders' Equity Resulting from Operations per Common Share: |
||||||||||||||||
Basic: | $ | 0.10 | $ | 0.37 | $ | 0.24 | $ | (0.24 | ) | |||||||
Diluted: | $ | 0.10 | $ | 0.34 | $ | 0.23 | $ | (0.24 | ) | |||||||
Net Investment Income Per Common Share: |
||||||||||||||||
Basic: | $ | 0.13 | $ | 0.14 | $ | 0.16 | $ | 0.15 | ||||||||
Diluted: | $ | 0.13 | $ | 0.14 | $ | 0.16 | $ | 0.15 | ||||||||
Weighted Average Shares of Common Stock Outstanding Basic | 33,337,967 | 33,405,189 | 33,746,159 | 36,475,119 | ||||||||||||
Weighted Average Shares of Common Stock Outstanding Diluted | 33,349,916 | 39,723,264 | 40,125,660 | 36,485,702 |
F-113
The following table presents the impact of the restatement and correction adjustments on our quarter-to-date and year-to-date Consolidated Statement of Operations for the periods ending Mach 31, 2014, June 30, 2014 and September 30, 2014:
Three Months Ended March 31, 2014 | ||||||||||||
As published | Adjustments | Restated | ||||||||||
Investment Income: |
||||||||||||
Interest from investments in debt securities | $ | 5,247,236 | | $ | 5,247,236 | |||||||
Interest from cash and time deposits | 786 | | 786 | |||||||||
Investment income on CLO Fund Securities managed by affiliates | 4,636,238 | (1,813,860 | ) | 2,822,378 | ||||||||
Investment income on CLO Fund Securities managed by non-affiliates |
275,571 | 43,843 | 319,414 | |||||||||
Dividends from Asset Manager Affiliates | 3,000,000 | (1,621,534 | ) | 1,378,466 | ||||||||
Capital structuring service fees | 227,083 | | 227,083 | |||||||||
Total investment income | 13,386,914 | (3,391,551 | ) | 9,995,363 | ||||||||
Expenses: |
||||||||||||
Interest and amortization of debt issuance costs | 2,990,166 | | 2,990,166 | |||||||||
Compensation | 1,262,437 | | 1,262,437 | |||||||||
Professional fees | 671,210 | | 671,210 | |||||||||
Insurance | 135,961 | | 135,961 | |||||||||
Administrative and other | 468,283 | | 468,283 | |||||||||
Total expenses | 5,528,057 | | 5,528,057 | |||||||||
Net Investment Income | 7,858,857 | (3,391,551 | ) | 4,467,306 | ||||||||
Realized And Unrealized Gains (Losses) On Investments: |
||||||||||||
Net realized losses from investment transactions | 309,581 | | 309,581 | |||||||||
Net change in unrealized appreciation (depreciation) on: |
||||||||||||
Debt securities | (603,315 | ) | | (603,315 | ) | |||||||
Equity securities | (327,661 | ) | | (327,661 | ) | |||||||
CLO Fund Securities managed by affiliates | (880,032 | ) | 1,813,860 | 933,828 | ||||||||
CLO Fund Securities managed by non-affiliates | (296,861 | ) | (43,844 | ) | (340,705 | ) | ||||||
Asset Manager Affiliates investments | (2,618,979 | ) | 1,621,535 | (997,444 | ) | |||||||
Total net unrealized gain from investment transactions | (4,726,848 | ) | 3,391,551 | (1,335,297 | ) | |||||||
Net realized and unrealized appreciation (depreciation) on investments | (4,417,267 | ) | 3,391,551 | (1,025,716 | ) | |||||||
Net Increase In Stockholders Equity Resulting From Operations | $ | 3,441,590 | | $ | 3,441,590 | |||||||
Net Increase in Stockholders' Equity Resulting from Operations per Common Share: |
||||||||||||
Basic: | $ | 0.10 | $ | | $ | 0.10 | ||||||
Diluted: | $ | 0.10 | $ | | $ | 0.10 | ||||||
Net Investment Income Per Common Share: |
||||||||||||
Basic: | $ | 0.24 | $ | (0.11 | ) | $ | 0.13 | |||||
Diluted: | $ | 0.24 | $ | (0.11 | ) | $ | 0.13 | |||||
Weighted Average Shares of Common Stock Outstanding Basic | 33,337,967 | | 33,337,967 | |||||||||
Weighted Average Shares of Common Stock Outstanding Diluted | 33,349,916 | | 33,349,916 |
F-114
Three Months Ended June 30, 2014 | Six Months Ended June 30, 2014 | |||||||||||||||||||||||
As published | Adjustments | Restated | As published | Adjustments | Restated | |||||||||||||||||||
Investment Income: |
||||||||||||||||||||||||
Interest from investments in debt securities | $ | 5,173,514 | | $ | 5,173,514 | $ | 10,420,750 | | $ | 10,420,750 | ||||||||||||||
Interest from cash and time deposits | 724 | | 724 | 1,510 | | 1,510 | ||||||||||||||||||
Investment income on CLO Fund Securities managed by affiliates |
4,451,626 | (1,634,877 | ) | 2,816,749 | 9,087,864 | (3,448,737 | ) | 5,639,127 | ||||||||||||||||
Investment income on CLO Fund Securities managed by non-affiliates | 464,734 | (185,473 | ) | 279,261 | 740,304 | (141,630 | ) | 598,674 | ||||||||||||||||
Dividends from Asset Manager Affiliates |
3,000,000 | (1,621,534 | ) | 1,378,466 | 6,000,000 | (3,243,068 | ) | 2,756,932 | ||||||||||||||||
Capital structuring service fees | 125,116 | | 125,116 | 352,199 | | 352,199 | ||||||||||||||||||
Total investment income | 13,215,714 | (3,441,884 | ) | 9,773,830 | 26,602,627 | (6,833,435 | ) | 19,769,192 | ||||||||||||||||
Expenses: |
||||||||||||||||||||||||
Interest and amortization of debt issuance costs | 2,893,806 | | 2,893,806 | 5,883,972 | | 5,883,972 | ||||||||||||||||||
Compensation | 1,227,651 | | 1,227,651 | 2,490,088 | | 2,490,088 | ||||||||||||||||||
Professional fees | 545,913 | | 545,913 | 1,217,123 | | 1,217,123 | ||||||||||||||||||
Insurance | 111,507 | | 111,507 | 247,467 | | 247,467 | ||||||||||||||||||
Administrative and other | 399,315 | | 399,315 | 867,597 | | 867,597 | ||||||||||||||||||
Total expenses | 5,178,192 | | 5,178,192 | 10,706,247 | | 10,706,247 | ||||||||||||||||||
Net Investment Income | 8,037,522 | (3,441,884 | ) | 4,595,638 | 15,896,380 | (6,833,435 | ) | 9,062,945 | ||||||||||||||||
Realized And Unrealized Gains (Losses) On Investments: |
||||||||||||||||||||||||
Net realized losses from investment transactions | (64,797 | ) | | (64,797 | ) | 244,785 | | 244,785 | ||||||||||||||||
Net change in unrealized appreciation (depreciation) on: |
||||||||||||||||||||||||
Debt securities | 1,102,632 | | 1,102,632 | 499,319 | | 499,319 | ||||||||||||||||||
Equity securities | 546,686 | | 546,686 | 219,023 | | 219,023 | ||||||||||||||||||
CLO Fund Securities managed by affiliates | 1,015,474 | 1,634,878 | 2,650,352 | 135,445 | 3,448,738 | 3,584,183 | ||||||||||||||||||
CLO Fund Securities managed by non-affiliates | 388,145 | 185,472 | 573,617 | 91,283 | 141,628 | 232,911 | ||||||||||||||||||
Asset Manager Affiliates investments |
1,227,000 | 1,621,534 | 2,848,534 | (1,391,979 | ) | 3,243,069 | 1,851,090 | |||||||||||||||||
Total net unrealized gain from investment transactions | 4,279,937 | 3,441,884 | 7,721,821 | (446,909 | ) | 6,833,435 | 6,386,526 | |||||||||||||||||
Net realized and unrealized appreciation (depreciation) on investments | 4,215,140 | 3,441,884 | 7,657,024 | (202,124 | ) | 6,833,435 | 6,631,311 | |||||||||||||||||
Net Increase In Stockholders Equity Resulting From Operations | $ | 12,252,662 | | $ | 12,252,662 | $ | 15,694,256 | | $ | 15,694,256 | ||||||||||||||
Net Increase in Stockholders' Equity Resulting from Operations per Common Share: |
||||||||||||||||||||||||
Basic: | $ | 0.37 | $ | | $ | 0.37 | $ | 0.47 | $ | | $ | 0.47 | ||||||||||||
Diluted: | $ | 0.34 | $ | | $ | 0.34 | $ | 0.45 | $ | | $ | 0.45 | ||||||||||||
Net Investment Income Per Common Share: |
||||||||||||||||||||||||
Basic: | $ | 0.24 | $ | (0.10 | ) | $ | 0.14 | $ | 0.48 | $ | (0.21 | ) | $ | 0.27 | ||||||||||
Diluted: | $ | 0.24 | $ | (0.10 | ) | $ | 0.14 | $ | 0.46 | $ | (0.19 | ) | $ | 0.27 | ||||||||||
Weighted Average Shares of Common Stock Outstanding Basic | 33,405,189 | | 33,405,189 | 33,371,764 | | 33,371,764 | ||||||||||||||||||
Weighted Average Shares of Common Stock Outstanding Diluted | 39,723,264 | | 39,723,264 | 39,689,884 | | 39,689,884 |
F-115
Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2014 | |||||||||||||||||||||||
As published | Adjustments | Restated | As published | Adjustments | Restated | |||||||||||||||||||
Investment Income: |
||||||||||||||||||||||||
Interest from investments in debt securities | $ | 5,391,997 | | $ | 5,391,997 | $ | 15,812,747 | | $ | 15,812,747 | ||||||||||||||
Interest from cash and time deposits | 831 | | 831 | 2,341 | | 2,341 | ||||||||||||||||||
Investment income on CLO Fund Securities managed by affiliates |
4,474,881 | (1,100,177 | ) | 3,374,704 | 13,562,745 | (4,548,914 | ) | 9,013,831 | ||||||||||||||||
Investment income on CLO Fund Securities managed by non-affiliates | 296,908 | (66,379 | ) | 230,529 | 1,037,212 | (208,009 | ) | 829,203 | ||||||||||||||||
Dividends from Asset Manager Affiliates |
3,100,000 | (1,675,585 | ) | 1,424,415 | 9,100,000 | (4,918,653 | ) | 4,181,347 | ||||||||||||||||
Capital structuring service fees | 412,772 | | 412,772 | 764,971 | | 764,971 | ||||||||||||||||||
Total investment income | 13,677,389 | (2,842,141 | ) | 10,835,248 | 40,280,016 | (9,675,576 | ) | 30,604,440 | ||||||||||||||||
Expenses: |
||||||||||||||||||||||||
Interest and amortization of debt issuance costs | 2,891,724 | | 2,891,724 | 8,775,697 | | 8,775,697 | ||||||||||||||||||
Compensation | 1,431,825 | | 1,431,825 | 3,921,913 | | 3,921,913 | ||||||||||||||||||
Professional fees | 566,320 | | 566,320 | 1,783,443 | | 1,783,443 | ||||||||||||||||||
Insurance | 112,109 | | 112,109 | 359,576 | | 359,576 | ||||||||||||||||||
Administrative and other | 315,769 | | 315,769 | 1,183,367 | | 1,183,367 | ||||||||||||||||||
Total expenses | 5,317,747 | | 5,317,747 | 16,023,996 | | 16,023,996 | ||||||||||||||||||
Net Investment Income | 8,359,642 | (2,842,141 | ) | 5,517,501 | 24,256,020 | (9,675,576 | ) | 14,580,444 | ||||||||||||||||
Realized And Unrealized Gains (Losses) On Investments: |
||||||||||||||||||||||||
Net realized losses from investment transactions | (2,141,591 | ) | | (2,141,591 | ) | (1,896,806 | ) | | (1,896,806 | ) | ||||||||||||||
Net change in unrealized appreciation (depreciation) on: |
||||||||||||||||||||||||
Debt securities | 7,420,256 | | 7,420,256 | 7,919,575 | | 7,919,575 | ||||||||||||||||||
Equity securities | 1,215,992 | | 1,215,992 | 1,435,014 | | 1,435,014 | ||||||||||||||||||
CLO Fund Securities managed by affiliates | (13,086,650 | ) | 1,100,179 | (11,986,471 | ) | (12,951,204 | ) | 4,548,917 | (8,402,287 | ) | ||||||||||||||
CLO Fund Securities managed by non-affiliates | 3,033,824 | 66,377 | 3,100,201 | 3,125,106 | 208,005 | 3,333,111 | ||||||||||||||||||
Asset Manager Affiliates investments |
3,435,000 | 1,675,585 | 5,110,585 | 2,043,021 | 4,918,654 | 6,961,675 | ||||||||||||||||||
Total net unrealized gain from investment transactions | 2,018,422 | 2,842,141 | 4,860,563 | 1,571,512 | 9,675,576 | 11,247,088 | ||||||||||||||||||
Net realized and unrealized appreciation (depreciation) on investments | (123,169 | ) | 2,842,141 | 2,718,972 | (325,294 | ) | 9,675,576 | 9,350,282 | ||||||||||||||||
Net Increase In Stockholders Equity Resulting From Operations | $ | 8,236,473 | | 8,236,473 | 23,930,726 | | 23,930,726 | |||||||||||||||||
Net Increase in Stockholders' Equity Resulting from Operations per Common Share: |
||||||||||||||||||||||||
Basic: | $ | 0.24 | $ | | $ | 0.24 | $ | 0.71 | $ | | $ | 0.71 | ||||||||||||
Diluted: | $ | 0.23 | $ | | $ | 0.23 | $ | 0.68 | $ | | $ | 0.68 | ||||||||||||
Net Investment Income Per Common Share: |
||||||||||||||||||||||||
Basic: | $ | 0.25 | $ | (0.09 | ) | $ | 0.16 | $ | 0.72 | $ | (0.28 | ) | $ | 0.44 | ||||||||||
Diluted: | $ | 0.23 | $ | (0.07 | ) | $ | 0.16 | $ | 0.69 | $ | (0.26 | ) | $ | 0.43 | ||||||||||
Weighted Average Shares of Common Stock Outstanding Basic | 33,746,159 | | 33,746,159 | 33,497,934 | | 33,497,934 | ||||||||||||||||||
Weighted Average Shares of Common Stock Outstanding Diluted | 40,125,660 | | 40,125,660 | 39,877,326 | | 39,877,326 |
F-116
Q1 2013 (restated) | Q2 2013 (restated) | Q3 2013 (restated) | Q4 2013 (restated) | |||||||||||||
ASSETS |
||||||||||||||||
Investments at fair value: |
||||||||||||||||
Money market accounts | $ | 38,887,925 | $ | 67,494,608 | $ | 9,055,634 | $ | 7,112,949 | ||||||||
Debt securities | 151,549,821 | 190,732,894 | 257,359,908 | 266,830,427 | ||||||||||||
CLO Fund Securities managed by affiliates | 75,076,683 | 79,700,585 | 77,707,198 | 75,100,306 | ||||||||||||
CLO Fund Securities managed by non-affiliates | 3,193,376 | 1,784,300 | 4,445,290 | 4,351,914 | ||||||||||||
Equity securities | 7,839,699 | 9,485,307 | 9,385,053 | 11,006,398 | ||||||||||||
Asset Manager Affiliates | 80,354,000 | 87,300,000 | 82,533,000 | 76,148,000 | ||||||||||||
Total Investments at Fair Value | 356,901,504 | 436,497,694 | 440,486,083 | 440,549,994 | ||||||||||||
Cash | 5,070,802 | 7,669,782 | 9,721,704 | 3,433,675 | ||||||||||||
Restricted cash | | 78,985,473 | 5,999,041 | 4,078,939 | ||||||||||||
Interest receivable | 1,850,238 | 1,164,144 | 2,074,680 | 2,032,559 | ||||||||||||
Receivable for open trades | 487,851 | 3,515,052 | | | ||||||||||||
Accounts receivable | 3,226,672 | 3,302,142 | 3,325,054 | | ||||||||||||
Due from affiliates | | | | 3,125,259 | ||||||||||||
Other assets | 3,650,894 | 10,364,201 | 6,406,360 | 5,951,963 | ||||||||||||
Total Assets | $ | 371,187,961 | $ | 541,498,488 | $ | 468,012,922 | $ | 459,172,388 | ||||||||
LIABILITIES |
||||||||||||||||
Convertible Notes | $ | 60,000,000 | $ | 51,008,000 | $ | 49,008,000 | $ | 49,008,000 | ||||||||
7.375% Notes Due 2019 | 41,400,000 | 41,400,000 | 41,400,000 | 41,400,000 | ||||||||||||
Notes issued by KCAP Senior Funding I, LLC | | 105,250,000 | 102,110,220 | 102,184,373 | ||||||||||||
Payable for open trades | 2,985,000 | 66,840,035 | 7,974,944 | 3,980,000 | ||||||||||||
Accounts payable and accrued expenses | 930,636 | 2,692,613 | 2,437,029 | 2,268,592 | ||||||||||||
Accrued interest payable | | | | 1,628,699 | ||||||||||||
Dividend payable | | | | 8,333,031 | ||||||||||||
Total Liabilities | 105,315,636 | 267,190,648 | 202,930,193 | 208,802,695 | ||||||||||||
STOCKHOLDERS' EQUITY |
||||||||||||||||
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 36,775,127 and 33,332,123 common shares issued and outstanding at December 31, 2014 and December 31, 2013, respectively | 319,043 | 330,207 | 331,955 | 333,472 | ||||||||||||
Capital in excess of par value | 350,657,961 | 359,800,281 | 359,950,031 | 345,740,875 | ||||||||||||
Accumulated (excess distribution) undistributed net investment income | (11,649,500 | ) | (15,918,270 | ) | (20,183,955 | ) | (18,908,612 | ) | ||||||||
Accumulated net realized losses | (53,682,328 | ) | (55,244,857 | ) | (65,965,800 | ) | (64,379,643 | ) | ||||||||
Net unrealized depreciation on investments | (19,772,851 | ) | (14,659,521 | ) | (9,049,502 | ) | (12,416,399 | ) | ||||||||
Total Stockholders' Equity | $ | 265,872,325 | $ | 274,307,840 | $ | 265,082,729 | $ | 250,369,693 | ||||||||
Total Liabilities and Stockholders' Equity | $ | 371,187,961 | $ | 541,498,488 | $ | 468,012,922 | $ | 459,172,388 | ||||||||
Net Asset Value Per Common Share | $ | 8.33 | $ | 8.24 | $ | 7.96 | $ | 7.51 |
F-117
The following table presents the impact of the restatement and correction adjustments on our Consolidated Balance Sheets as of Mach 31, 2013, June 30, 2013 and September 30, 2013:
As of March 31, 2013 | As of June 30, 2013 | |||||||||||||||||||||||
As published | Adjustments | As restated | As published | Adjustments | As restated | |||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Investments at fair value: |
||||||||||||||||||||||||
Money market accounts | $ | 38,887,925 | | $ | 38,887,925 | $ | 67,494,608 | | $ | 67,494,608 | ||||||||||||||
Debt securities | 151,549,821 | | 151,549,821 | 190,732,894 | | 190,732,894 | ||||||||||||||||||
CLO Fund Securities managed by affiliates | 75,076,683 | | 75,076,683 | 79,700,585 | | 79,700,585 | ||||||||||||||||||
CLO Fund Securities managed by non-affiliates | 3,193,376 | | 3,193,376 | 1,784,300 | | 1,784,300 | ||||||||||||||||||
Equity securities | 7,839,699 | | 7,839,699 | 9,485,307 | | 9,485,307 | ||||||||||||||||||
Asset Manager Affiliates | 80,354,000 | | 80,354,000 | 87,300,000 | | 87,300,000 | ||||||||||||||||||
Total Investments at Fair Value | 356,901,504 | | 356,901,504 | 436,497,694 | | 436,497,694 | ||||||||||||||||||
Cash | 5,070,802 | | 5,070,802 | 7,669,782 | | 7,669,782 | ||||||||||||||||||
Restricted cash | | | | 78,985,473 | | 78,985,473 | ||||||||||||||||||
Interest receivable | 1,850,238 | | 1,850,238 | 1,164,144 | | 1,164,144 | ||||||||||||||||||
Receivable for open trades | 487,851 | | 487,851 | 3,515,052 | | 3,515,052 | ||||||||||||||||||
Accounts receivable | 3,226,672 | | 3,226,672 | 3,302,142 | | 3,302,142 | ||||||||||||||||||
Other assets | 3,650,894 | | 3,650,894 | 10,364,201 | | 10,364,201 | ||||||||||||||||||
Total Assets | $ | 371,187,961 | | $ | 371,187,961 | $ | 541,498,488 | | $ | 541,498,488 | ||||||||||||||
LIABILITIES |
||||||||||||||||||||||||
Convertible Notes | $ | 60,000,000 | | $ | 60,000,000 | $ | 51,008,000 | | $ | 51,008,000 | ||||||||||||||
7.375% Notes Due 2019 | 41,400,000 | | 41,400,000 | 41,400,000 | | 41,400,000 | ||||||||||||||||||
Notes issued by KCAP Senior Funding I, LLC |
| | | 105,250,000 | | 105,250,000 | ||||||||||||||||||
Payable for open trades | 2,985,000 | | 2,985,000 | 66,840,035 | | 66,840,035 | ||||||||||||||||||
Accounts payable and accrued expenses | 930,636 | | 930,636 | 2,692,613 | | 2,692,613 | ||||||||||||||||||
Total Liabilities | 105,315,636 | | 105,315,636 | 267,190,648 | | 267,190,648 | ||||||||||||||||||
STOCKHOLDERS' EQUITY |
||||||||||||||||||||||||
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 36,775,127 and 33,332,123 common shares issued and outstanding at December 31, 2014 and December 31, 2013, respectively | 319,043 | | 319,043 | 330,207 | | 330,207 | ||||||||||||||||||
Capital in excess of par value | 361,299,553 | (10,641,592 | ) | 350,657,961 | 370,441,874 | (10,641,593 | ) | 359,800,281 | ||||||||||||||||
Accumulated (excess distribution) undistributed net investment income |
7,045,514 | (18,695,014 | ) | (11,649,500 | ) | 4,380,234 | (20,298,504 | ) | (15,918,270 | ) | ||||||||||||||
Accumulated net realized losses | (56,118,312 | ) | 2,435,984 | (53,682,328 | ) | (57,680,841 | ) | 2,435,984 | (55,244,857 | ) | ||||||||||||||
Net unrealized depreciation on investments | (46,673,473 | ) | 26,900,622 | (19,772,851 | ) | (43,163,634 | ) | 28,504,113 | (14,659,521 | ) | ||||||||||||||
Total Stockholders' Equity | $ | 265,872,325 | | $ | 265,872,325 | $ | 274,307,840 | | 274,307,840 | |||||||||||||||
Total Liabilities and Stockholders' Equity | $ | 371,187,961 | | $ | 371,187,961 | $ | 541,498,488 | | 541,498,488 | |||||||||||||||
Net Asset Value Per Common Share | $ | 8.33 | | $ | 8.33 | $ | 8.24 | | $ | 8.24 | ||||||||||||||
AMORTIZED COST |
||||||||||||||||||||||||
CLO Fund Securities managed by affiliates | $ | 79,783,663 | $ | (12,754,767 | ) | $ | 67,028,896 | $ | 88,175,787 | $ | (21,778,896 | ) | $ | 66,396,891 | ||||||||||
CLO Fund Securities managed by non-affiliates | $ | 10,321,884 | $ | (3,805,638 | ) | $ | 6,516,246 | $ | 9,733,633 | $ | (3,537,592 | ) | $ | 6,196,041 | ||||||||||
Asset Manager Affiliates | $ | 83,198,191 | $ | (11,835,580 | ) | $ | 71,362,611 | $ | 83,234,131 | $ | (13,651,215 | ) | $ | 69,582,916 |
F-118
As of September 30, 2013 | ||||||||||||
As published | Adjustments | As restated | ||||||||||
ASSETS |
||||||||||||
Investments at fair value: |
||||||||||||
Money market accounts | $ | 9,055,634 | | $ | 9,055,634 | |||||||
Debt securities | 257,359,908 | | 257,359,908 | |||||||||
CLO Fund Securities managed by affiliates | 77,707,198 | | 77,707,198 | |||||||||
CLO Fund Securities managed by non-affiliates | 4,445,290 | | 4,445,290 | |||||||||
Equity securities | 9,385,053 | | 9,385,053 | |||||||||
Asset Manager Affiliates | 82,533,000 | | 82,533,000 | |||||||||
Total Investments at Fair Value | 440,486,083 | | 440,486,083 | |||||||||
Cash | 9,721,704 | | 9,721,704 | |||||||||
Restricted cash | 5,999,041 | | 5,999,041 | |||||||||
Interest receivable | 2,074,680 | | 2,074,680 | |||||||||
Accounts receivable | 3,325,054 | | 3,325,054 | |||||||||
Other assets | 6,406,360 | | 6,406,360 | |||||||||
Total Assets | $ | 468,012,922 | | $ | 468,012,922 | |||||||
LIABILITIES |
||||||||||||
Convertible Notes | $ | 49,008,000 | | 49,008,000 | ||||||||
7.375% Notes Due 2019 | 41,400,000 | | 41,400,000 | |||||||||
Notes issued by KCAP Senior Funding I, LLC | 102,110,220 | | 102,110,220 | |||||||||
Payable for open trades | 7,974,944 | | 7,974,944 | |||||||||
Accounts payable and accrued expenses | 2,437,029 | | 2,437,029 | |||||||||
Total Liabilities | 202,930,193 | | 202,930,193 | |||||||||
STOCKHOLDERS' EQUITY |
||||||||||||
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 36,775,127 and 33,332,123 common shares issued and outstanding at December 31, 2014 and December 31, 2013, respectively | 331,955 | | 331,955 | |||||||||
Capital in excess of par value | 370,591,623 | (10,641,592 | ) | 359,950,031 | ||||||||
Accumulated (excess distribution) undistributed net investment income | 2,667,111 | (22,851,066 | ) | (20,183,955 | ) | |||||||
Accumulated net realized losses | (68,401,784 | ) | 2,435,984 | (65,965,800 | ) | |||||||
Net unrealized depreciation on investments | (40,106,176 | ) | 31,056,674 | (9,049,502 | ) | |||||||
Total Stockholders' Equity | $ | 265,082,729 | | $ | 265,082,729 | |||||||
Total Liabilities and Stockholders' Equity | $ | 468,012,922 | | $ | 468,012,922 | |||||||
Net Asset Value Per Common Share | $ | 7.96 | | $ | 7.96 | |||||||
AMORTIZED COST |
||||||||||||
CLO Fund Securities managed by affiliates | $ | 88,711,898 | $ | (13,548,804 | ) | $ | 75,163,094 | |||||
CLO Fund Securities managed by non-affiliates | $ | 12,634,461 | $ | (6,342,954 | ) | $ | 6,291,507 | |||||
Asset Manager Affiliates | $ | 83,273,236 | $ | (15,480,605 | ) | $ | 67,792,631 |
F-119
Q1 2013 (restated) | Q2 2013 (restated) | Q3 2013 (restated) | Q4 2013 (restated) | |||||||||||||
Investment Income: |
||||||||||||||||
Interest from investments in debt securities | $ | 2,478,018 | $ | 2,997,246 | $ | 3,716,675 | $ | 4,775,296 | ||||||||
Interest from cash and time deposits | 4,712 | 3,026 | 12,183 | 735 | ||||||||||||
Investment income on CLO Fund Securities managed by affiliates | 4,662,999 | 4,577,903 | 4,299,234 | 3,806,634 | ||||||||||||
Investment income on CLO Fund Securities managed by non-affiliates | 622,247 | 515,563 | 368,583 | 303,141 | ||||||||||||
Dividends from Asset Manager Affiliates | 1,349,422 | 1,484,365 | 1,495,610 | 1,405,648 | ||||||||||||
Capital structuring service fees | 6,573 | 52,753 | 200,185 | 45,865 | ||||||||||||
Total investment income | 9,123,971 | 9,630,856 | 10,092,470 | 10,337,319 | ||||||||||||
Expenses: |
||||||||||||||||
Interest and amortization of debt issuance costs |
2,260,246 | 2,250,063 | 2,902,486 | 2,703,476 | ||||||||||||
Compensation | 909,713 | 1,110,409 | 1,205,864 | 1,404,495 | ||||||||||||
Professional fees | 642,328 | 652,644 | 391,735 | 504,598 | ||||||||||||
Insurance | 128,717 | 126,632 | 140,647 | 156,572 | ||||||||||||
Administrative and other | 506,471 | 513,085 | 433,594 | 366,726 | ||||||||||||
Total expenses | 4,447,475 | 4,652,833 | 5,074,326 | 5,135,867 | ||||||||||||
Net Investment Income | 4,676,496 | 4,978,023 | 5,018,144 | 5,201,452 | ||||||||||||
Realized And Unrealized Gains (Losses) On Investments: |
||||||||||||||||
Net realized losses from investment transactions |
(82,937 | ) | (1,562,529 | ) | (10,387,242 | ) | (57,795 | ) | ||||||||
Net change in unrealized appreciation (depreciation) on: |
||||||||||||||||
Debt securities | 2,286,526 | 124,466 | 10,547,127 | 1,997,984 | ||||||||||||
Equity securities | (65,437 | ) | 1,064,379 | 85,773 | 1,520,871 | |||||||||||
CLO Fund Securities managed by affiliates | (3,761,503 | ) | (3,788,610 | ) | (1,719,316 | ) | (1,926,472 | ) | ||||||||
CLO Fund Securities managed by non-affiliates | (565,780 | ) | (1,012,599 | ) | (326,849 | ) | (188,132 | ) | ||||||||
Asset Manager Affiliates investments | 4,725,916 | 8,725,695 | (2,976,715 | ) | (4,771,153 | ) | ||||||||||
Total net unrealized gain from investment transactions | 2,619,722 | 5,113,331 | 5,610,020 | (3,366,902 | ) | |||||||||||
Net realized and unrealized appreciation (depreciation) on investments | 2,536,785 | 3,550,802 | (4,777,222 | ) | (3,424,697 | ) | ||||||||||
Realized losses on extinguishments of debt | | | (333,701 | ) | (203,110 | ) | ||||||||||
Net Increase In Stockholders Equity Resulting From Operations | $ | 7,213,281 | $ | 8,528,825 | $ | (92,779 | ) | $ | 1,573,645 | |||||||
Net Increase in Stockholders' Equity Resulting from Operations per Common Share: |
||||||||||||||||
Basic: | $ | 0.25 | $ | 0.26 | $ | | $ | 0.05 | ||||||||
Diluted: | $ | 0.24 | $ | 0.25 | $ | | $ | 0.05 | ||||||||
Net Investment Income Per Common Share: |
||||||||||||||||
Basic: | $ | 0.16 | $ | 0.15 | $ | 0.15 | $ | 0.15 | ||||||||
Diluted: | $ | 0.16 | $ | 0.15 | $ | 0.15 | $ | 0.15 | ||||||||
Weighted Average Shares of Common Stock Outstanding Basic | 29,266,186 | 33,040,155 | 33,312,328 | 33,599,842 | ||||||||||||
Weighted Average Shares of Common Stock Outstanding Diluted | 36,635,703 | 39,372,311 | 33,326,934 | 33,612,288 |
F-120
The following table presents the impact of the restatement and correction adjustments on our quarter-to-date and year-to-date Consolidated Statement of Operations for the periods ending Mach 31, 2013, June 30, 2013 and September 30, 2013:
Three Months Ended March 31, 2013 | ||||||||||||
As published | Adjustments | Restated | ||||||||||
Investment Income: |
||||||||||||
Interest from investments in debt securities | $ | 2,478,018 | | $ | 2,478,018 | |||||||
Interest from cash and time deposits | 4,712 | | 4,712 | |||||||||
Investment income on CLO Fund Securities managed by affiliates | 5,480,653 | (817,654 | ) | 4,662,999 | ||||||||
Investment income on CLO Fund Securities managed by non-affiliates | 423,875 | 198,372 | 622,247 | |||||||||
Dividends from Asset Manager Affiliates | 3,000,000 | (1,650,578 | ) | 1,349,422 | ||||||||
Capital structuring service fees | 6,573 | | 6,573 | |||||||||
Total investment income | 11,393,831 | (2,269,860 | ) | 9,123,971 | ||||||||
Expenses: |
||||||||||||
Interest and amortization of debt issuance costs | 2,260,246 | | 2,260,246 | |||||||||
Compensation | 909,713 | | 909,713 | |||||||||
Professional fees | 642,328 | | 642,328 | |||||||||
Insurance | 128,717 | | 128,717 | |||||||||
Administrative and other | 506,471 | | 506,471 | |||||||||
Total expenses | 4,447,475 | | 4,447,475 | |||||||||
Net Investment Income | 6,946,356 | (2,269,860 | ) | 4,676,496 | ||||||||
Realized And Unrealized Gains (Losses) On Investments: |
||||||||||||
Net realized losses from investment transactions | (82,937 | ) | | (82,937 | ) | |||||||
Net change in unrealized appreciation (depreciation) on: |
||||||||||||
Debt securities | 2,286,526 | | 2,286,526 | |||||||||
Equity securities | (65,437 | ) | | (65,437 | ) | |||||||
CLO Fund Securities managed by affiliates | (4,579,158 | ) | 817,655 | (3,761,503 | ) | |||||||
CLO Fund Securities managed by non-affiliates | (367,408 | ) | (198,372 | ) | (565,780 | ) | ||||||
Asset Manager Affiliates investments | 3,075,339 | 1,650,577 | 4,725,916 | |||||||||
Total net unrealized gain from investment transactions | 349,862 | 2,269,860 | 2,619,722 | |||||||||
Net realized and unrealized appreciation (depreciation) on investments | 266,925 | 2,269,860 | 2,536,785 | |||||||||
Net Increase In Stockholders Equity Resulting From Operations | $ | 7,213,281 | | $ | 7,213,281 | |||||||
Net Increase in Stockholders' Equity Resulting from Operations per Common Share: |
||||||||||||
Basic: | $ | 0.25 | $ | | $ | 0.25 | ||||||
Diluted: | $ | 0.24 | $ | | $ | 0.24 | ||||||
Net Investment Income Per Common Share: |
||||||||||||
Basic: | $ | 0.24 | $ | (0.08 | ) | $ | 0.16 | |||||
Diluted: | $ | 0.23 | $ | (0.07 | ) | $ | 0.16 | |||||
Weighted Average Shares of Common Stock Outstanding Basic | 29,266,186 | | 29,266,186 | |||||||||
Weighted Average Shares of Common Stock Outstanding Diluted | 36,635,703 | | 36,635,703 |
F-121
Three Months Ended June 30, 2013 | Six Months Ended June 30, 2013 | |||||||||||||||||||||||
As published | Adjustments | Restated | As published | Adjustments | Restated | |||||||||||||||||||
Investment Income: |
||||||||||||||||||||||||
Interest from investments in debt securities | $ | 2,997,246 | | $ | 2,997,246 | $ | 5,475,265 | | $ | 5,475,265 | ||||||||||||||
Interest from cash and time deposits |
3,026 | | 3,026 | 7,738 | | 7,738 | ||||||||||||||||||
Investment income on CLO Fund Securities managed by affiliates |
4,557,531 | 20,372 | 4,577,903 | 10,038,183 | (797,282 | ) | 9,240,901 | |||||||||||||||||
Investment income on CLO Fund Securities managed by non-affiliates |
323,790 | 191,773 | 515,563 | 747,664 | 390,145 | 1,137,809 | ||||||||||||||||||
Dividends from Asset Manager Affiliates |
3,300,000 | (1,815,635 | ) | 1,484,365 | 6,300,000 | (3,466,213 | ) | 2,833,787 | ||||||||||||||||
Capital structuring service fees | 52,753 | | 52,753 | 59,326 | | 59,326 | ||||||||||||||||||
Total investment income | 11,234,346 | (1,603,490 | ) | 9,630,856 | 22,628,176 | (3,873,350 | ) | 18,754,826 | ||||||||||||||||
Expenses: |
||||||||||||||||||||||||
Interest and amortization of debt issuance costs | 2,250,063 | | 2,250,063 | 4,510,309 | | 4,510,309 | ||||||||||||||||||
Compensation | 1,110,409 | | 1,110,409 | 2,020,122 | | 2,020,122 | ||||||||||||||||||
Professional fees | 652,644 | | 652,644 | 1,294,971 | | 1,294,971 | ||||||||||||||||||
Insurance | 126,632 | | 126,632 | 255,348 | | 255,348 | ||||||||||||||||||
Administrative and other | 513,085 | | 513,085 | 1,019,556 | | 1,019,556 | ||||||||||||||||||
Total expenses | 4,652,833 | | 4,652,833 | 9,100,306 | | 9,100,306 | ||||||||||||||||||
Net Investment Income | 6,581,513 | (1,603,490 | ) | 4,978,023 | 13,527,870 | (3,873,350 | ) | 9,654,520 | ||||||||||||||||
Realized And Unrealized Gains (Losses) On Investments: |
||||||||||||||||||||||||
Net realized losses from investment transactions | (1,562,529 | ) | | (1,562,529 | ) | (1,645,466 | ) | | (1,645,466 | ) | ||||||||||||||
Net change in unrealized appreciation (depreciation) on: |
||||||||||||||||||||||||
Debt securities | 124,466 | | 124,466 | 2,410,992 | | 2,410,992 | ||||||||||||||||||
Equity securities | 1,064,379 | | 1,064,379 | 998,942 | | 998,942 | ||||||||||||||||||
CLO Fund Securities managed by affiliates | (3,768,238 | ) | (20,372 | ) | (3,788,610 | ) | (8,347,397 | ) | 797,283 | (7,550,114 | ) | |||||||||||||
CLO Fund Securities managed by non-affiliates | (820,826 | ) | (191,773 | ) | (1,012,599 | ) | (1,188,235 | ) | (390,145 | ) | (1,578,380 | ) | ||||||||||||
Asset Manager Affiliates investments |
6,910,060 | 1,815,635 | 8,725,695 | 9,985,399 | 3,466,212 | 13,451,611 | ||||||||||||||||||
Total net unrealized gain from investment transactions | 3,509,841 | 1,603,490 | 5,113,331 | 3,859,701 | 3,873,350 | 7,733,051 | ||||||||||||||||||
Net realized and unrealized appreciation (depreciation) on investments | 1,947,312 | 1,603,490 | 3,550,802 | 2,214,235 | 3,873,350 | 6,087,585 | ||||||||||||||||||
Net Increase In Stockholders Equity Resulting From Operations | $ | 8,528,825 | | $ | 8,528,825 | $ | 15,742,105 | | $ | 15,742,105 | ||||||||||||||
Net Increase in Stockholders' Equity Resulting from Operations per Common Share: |
||||||||||||||||||||||||
Basic: | $ | 0.26 | | $ | 0.26 | $ | 0.51 | $ | | $ | 0.51 | |||||||||||||
Diluted: | $ | 0.25 | | $ | 0.25 | $ | 0.48 | $ | | $ | 0.48 | |||||||||||||
Net Investment Income Per Common Share: |
||||||||||||||||||||||||
Basic: | $ | 0.20 | (0.05 | ) | $ | 0.15 | $ | 0.43 | $ | (0.12 | ) | $ | 0.31 | |||||||||||
Diluted: | $ | 0.20 | (0.05 | ) | $ | 0.15 | $ | 0.42 | $ | (0.11 | ) | $ | 0.31 | |||||||||||
Weighted Average Shares of Common Stock Outstanding Basic | 33,040,155 | | 33,040,155 | 31,163,596 | | 31,163,596 | ||||||||||||||||||
Weighted Average Shares of Common Stock Outstanding Diluted | 39,372,311 | | 39,372,311 | 37,495,139 | | 37,495,139 |
F-122
Three Months Ended September 30, 2013 | Nine Months Ended September 30, 2013 | |||||||||||||||||||||||
As published | Adjustments | Restated | As published | Adjustments | Restated | |||||||||||||||||||
Investment Income: |
||||||||||||||||||||||||
Interest from investments in debt securities | $ | 3,716,675 | | $ | 3,716,675 | $ | 9,191,940 | | $ | 9,191,940 | ||||||||||||||
Interest from cash and time deposits | 12,183 | | 12,183 | 19,920 | | 19,920 | ||||||||||||||||||
Investment income on CLO Fund Securities managed by affiliates |
5,109,417 | (810,183 | ) | 4,299,234 | 15,147,600 | (1,607,465 | ) | 13,540,135 | ||||||||||||||||
Investment income on CLO Fund Securities managed by non-affiliates | 281,571 | 87,012 | 368,583 | 1,029,236 | 477,157 | 1,506,393 | ||||||||||||||||||
Dividends from Asset Manager Affiliates |
3,325,000 | (1,829,390 | ) | 1,495,610 | 9,625,000 | (5,295,603 | ) | 4,329,397 | ||||||||||||||||
Capital structuring service fees | 200,185 | | 200,185 | 259,512 | | 259,512 | ||||||||||||||||||
Total investment income | 12,645,031 | (2,552,561 | ) | 10,092,470 | 35,273,208 | (6,425,911 | ) | 28,847,297 | ||||||||||||||||
Expenses: |
||||||||||||||||||||||||
Interest and amortization of debt issuance costs | 2,902,486 | | 2,902,486 | 7,412,795 | | 7,412,795 | ||||||||||||||||||
Compensation | 1,205,864 | | 1,205,864 | 3,225,986 | | 3,225,986 | ||||||||||||||||||
Professional fees | 391,735 | | 391,735 | 1,686,707 | | 1,686,707 | ||||||||||||||||||
Insurance | 140,647 | | 140,647 | 395,995 | | 395,995 | ||||||||||||||||||
Administrative and other | 433,594 | | 433,594 | 1,453,150 | | 1,453,150 | ||||||||||||||||||
Total expenses | 5,074,326 | | 5,074,326 | 14,174,633 | | 14,174,633 | ||||||||||||||||||
Net Investment Income | 7,570,705 | (2,552,561 | ) | 5,018,144 | 21,098,575 | (6,425,911 | ) | 14,672,664 | ||||||||||||||||
Realized And Unrealized Gains (Losses) On Investments: |
||||||||||||||||||||||||
Net realized losses from investment transactions | (10,387,242 | ) | | (10,387,242 | ) | (12,032,708 | ) | | (12,032,708 | ) | ||||||||||||||
Net change in unrealized appreciation (depreciation) on: |
||||||||||||||||||||||||
Debt securities | 10,547,127 | | 10,547,127 | 12,958,119 | | 12,958,119 | ||||||||||||||||||
Equity securities | 85,773 | | 85,773 | 1,084,715 | | 1,084,715 | ||||||||||||||||||
CLO Fund Securities managed by affiliates | (2,529,499 | ) | 810,183 | (1,719,316 | ) | (10,876,896 | ) | 1,607,466 | (9,269,430 | ) | ||||||||||||||
CLO Fund Securities managed by non-affiliates | (239,837 | ) | (87,012 | ) | (326,849 | ) | (1,428,072 | ) | (477,157 | ) | (1,905,229 | ) | ||||||||||||
Asset Manager Affiliates investments |
(4,806,105 | ) | 1,829,390 | (2,976,715 | ) | 5,179,293 | 5,295,602 | 10,474,895 | ||||||||||||||||
Total net unrealized gain from investment transactions | 3,057,459 | 2,552,561 | 5,610,020 | 6,917,159 | 6,425,911 | 13,343,070 | ||||||||||||||||||
Net realized and unrealized appreciation (depreciation) on investments | (7,329,783 | ) | 2,552,561 | (4,777,222 | ) | (5,115,549 | ) | 6,425,911 | 1,310,362 | |||||||||||||||
Realized losses on extinguishments of debt |
(333,701 | ) | | (333,701 | ) | (333,701 | ) | | (333,701 | ) | ||||||||||||||
Net Increase In Stockholders Equity Resulting From Operations | $ | (92,779 | ) | | $ | (92,779 | ) | $ | 15,649,325 | | $ | 15,649,325 | ||||||||||||
Net Increase in Stockholders' Equity Resulting from Operations per Common Share: |
||||||||||||||||||||||||
Basic: | $ | | $ | | $ | | $ | 0.49 | $ | | $ | 0.49 | ||||||||||||
Diluted: | $ | | $ | | $ | | $ | 0.49 | $ | | $ | 0.49 | ||||||||||||
Net Investment Income Per Common Share: |
||||||||||||||||||||||||
Basic: | $ | 0.23 | $ | (0.08 | ) | $ | 0.15 | $ | 0.66 | $ | (0.20 | ) | $ | 0.46 | ||||||||||
Diluted: | $ | 0.22 | $ | (0.07 | ) | $ | 0.15 | $ | 0.65 | $ | (0.19 | ) | $ | 0.46 | ||||||||||
Weighted Average Shares of Common Stock Outstanding Basic | 33,312,328 | | 33,312,328 | 31,887,711 | | 31,887,711 | ||||||||||||||||||
Weighted Average Shares of Common Stock Outstanding Diluted | 33,326,934 | | 33,326,934 | 31,903,230 | | 31,903,230 |
F-123
The Company has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2014 for items that should potentially be recognized or disclosed in these financial statements. Management has determined that there are no material subsequent events that would require adjustment to, or disclosure in, these consolidated financial statements.
F-124
In accordance with certain SEC rules, KCAP Financial, Inc. (the Company) is providing additional information regarding the following three portfolio companies: Katonah Debt Advisers, L.L.C., Trimaran Advisors, L.L.C. (collectively the Asset Manager Affiliates), Katonah 2007-I CLO Ltd and Katonah X CLO Ltd. However, pursuant to SEC rules, the Company does not consolidate portfolio company investments, including those in which it has a controlling interest. As a result, the additional financial information regarding these entities does not directly impact the Companys financial position, results of operations or cash flows.
S-1
The Board of Directors and Shareholders of
Asset Manager Affiliates
We have audited the accompanying combined financial statements of Asset Manager Affiliates and subsidiaries (the Company), which comprise the combined balance sheet as of December 31, 2014 and the related combined statements of operations, changes in members equity, and cash flows for the year then ended, and the related notes to the combined financial statements.
Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Companys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Asset Manager Affiliates and subsidiaries at December 31, 2014, and the combined results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, NY
March 31, 2015
S-2
As of December 31, 2014 |
As of December 31, 2013 |
|||||||
ASSETS |
||||||||
Investments at fair value | $ | 2,846,659,635 | $ | 2,964,229,086 | ||||
Cash | 6,778,774 | 7,499,272 | ||||||
Restricted cash of CLO Funds | 182,224,205 | 278,813,923 | ||||||
Accrued interest receivable | 6,655,821 | 7,687,354 | ||||||
Receivable for open trades | 18,451,278 | 5,968,712 | ||||||
Due from affiliates | 31,000 | | ||||||
Deferred tax asset | 3,576,148 | 2,567,191 | ||||||
Intangible assets | 26,775,828 | 32,066,265 | ||||||
Other assets | 1,440,250 | 978,265 | ||||||
Total assets | $ | 3,092,592,939 | $ | 3,299,810,068 | ||||
LIABILITIES |
||||||||
CLO Funds' liabilities at fair value | $ | 2,990,211,629 | $ | 3,079,835,713 | ||||
Accrued interest payable | 17,245,940 | 16,254,470 | ||||||
Payable for open trades | 20,200,844 | 50,056,641 | ||||||
Accounts payable and accrued expenses | 9,951,588 | 7,507,917 | ||||||
Due to affiliates | 23,227,387 | 23,000,000 | ||||||
Total liabilities | 3,060,837,388 | 3,176,654,741 | ||||||
Commitments and Contingencies (Note 6) | | | ||||||
MEMBER'S EQUITY |
||||||||
Member's contributions | 52,519,916 | 51,984,116 | ||||||
Accumulated deficit | (17,739,571 | ) | (13,129,017 | ) | ||||
Total Asset Manager Affiliates equity | 34,780,345 | 38,855,099 | ||||||
Appropriated (accumulated deficit) retained earnings of Consolidated Variable Interest Entities | (3,024,794 | ) | 84,300,228 | |||||
Total member's equity | 31,755,551 | 123,155,327 | ||||||
Total liabilities and member's equity | $ | 3,092,592,939 | $ | 3,299,810,068 |
See accompanying notes to combined financial statements.
S-3
For the Years Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Income |
||||||||||||
Interest income | $ | 120,740,895 | $ | 125,889,874 | $ | 128,287,573 | ||||||
Interest income cash and time deposits | 322,219 | 332,775 | 280,546 | |||||||||
Fee income | 5,137,190 | 8,489,809 | 5,268,647 | |||||||||
Other income | | 92,624 | 75,301 | |||||||||
Total income | 126,200,304 | 134,805,082 | 133,912,067 | |||||||||
Expenses |
||||||||||||
Interest expense of CLO Fund liabilities | 136,240,383 | 107,760,918 | 113,547,094 | |||||||||
Other interest expense | 2,033,465 | 627,903 | 185,000 | |||||||||
Compensation | 8,921,240 | 8,384,972 | 7,491,019 | |||||||||
Insurance | 460,969 | 513,023 | 526,341 | |||||||||
Professional fees | 17,779,416 | 10,009,084 | 10,134,959 | |||||||||
Administrative and other | 8,632,640 | 6,014,316 | 4,680,284 | |||||||||
Trustee fees | 825,526 | 948,898 | 896,494 | |||||||||
Total expenses | 174,893,639 | 134,259,114 | 137,461,191 | |||||||||
Net realized and unrealized losses | (27,188,644 | ) | (13,899,200 | ) | (92,034,322 | ) | ||||||
Loss before tax | (75,881,979 | ) | (13,353,232 | ) | (95,583,446 | ) | ||||||
Income tax expense (benefit) | 4,153,598 | (657,334 | ) | (350,950 | ) | |||||||
Net loss | (80,035,577 | ) | (12,695,898 | ) | (95,232,496 | ) | ||||||
Net loss attributable to noncontrolling interests in consolidated Variable Interest Entities | (87,325,023 | ) | (20,570,766 | ) | (98,395,671 | ) | ||||||
Net income attributable to Asset Manager Affiliates | $ | 7,289,446 | $ | 7,874,868 | $ | 3,163,174 |
See accompanying notes to combined financial statements.
S-4
Member's Contributions |
Accumulated Earnings (Deficit) |
Appropriated Retained Earnings (Deficit) of Variable Interest Entities |
Total Member's Equity |
|||||||||||||
Total at January 1, 2012 | $ | 12,933,258 | $ | (6,707,276 | ) | $ | 95,845,268 | $ | 102,071,250 | |||||||
Adoption of guidance now encompassed in ASC Topic 810 | | | 107,421,398 | 107,421,398 | ||||||||||||
Net income | | 3,163,174 | | 3,163,174 | ||||||||||||
Distributions | | (4,700,000 | ) | | (4,700,000 | ) | ||||||||||
Contributions | 38,821,662 | | | 38,821,662 | ||||||||||||
Net loss classified to appropriated retained earnings | | | (98,395,671 | ) | (98,395,671 | ) | ||||||||||
Total at December 31, 2012 | 51,754,920 | (8,244,102 | ) | 104,870,995 | 148,381,813 | |||||||||||
Net income | | 7,874,869 | | 7,874,869 | ||||||||||||
Distributions | | (12,759,784 | ) | | (12,759,784 | ) | ||||||||||
Contributions | 229,196 | | | 229,196 | ||||||||||||
Net loss classified to appropriated retained earnings | | | (20,570,766 | ) | (20,570,766 | ) | ||||||||||
Total at December 31, 2013 | 51,984,116 | (13,129,017 | ) | 84,300,229 | 123,155,328 | |||||||||||
Net income | | 7,289,446 | | 7,289,446 | ||||||||||||
Distributions | | (11,900,000 | ) | | (11,900,000 | ) | ||||||||||
Contributions | 535,800 | | | 535,800 | ||||||||||||
Net loss classified to appropriated retained earnings | | | (87,325,023 | ) | (87,325,023 | ) | ||||||||||
Total at December 31, 2014 | $ | 52,519,916 | $ | (17,739,571 | ) | $ | (3,024,794 | ) | $ | 31,755,551 |
See accompanying notes to combined financial statements.
S-5
Years Ended December 31, | ||||||||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||||||
Asset Manager Affiliates Cash |
CLO Restricted Cash |
Asset Manager Affiliates Cash |
CLO Restricted Cash |
Asset Manager Affiliates Cash |
CLO Restricted Cash |
|||||||||||||||||||
OPERATING ACTIVITIES: |
||||||||||||||||||||||||
Net income attributable to Asset Manager Affiliates | $ | 7,289,446 | | $ | 7,874,870 | | $ | 3,163,174 | | |||||||||||||||
Net loss attributable to Variable Interest Entities | | $ | (87,325,023 | ) | | $ | (20,570,767 | ) | | $ | (98,395,671 | ) | ||||||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||||||||||||||||||
Net change in deferred tax assets | (1,008,957 | ) | | (1,458,743 | ) | | (725,100 | ) | | |||||||||||||||
Net realized and unrealized loss | | 27,188,644 | | 13,899,200 | | 92,034,322 | ||||||||||||||||||
Amortization of intangible assets | 5,290,437 | | 3,542,037 | | 2,951,698 | | ||||||||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||||||||||
Decrease (increase) in accrued management fees | (3,536,430 | ) | 3,536,430 | (672,200 | ) | 672,200 | (997,584 | ) | 997,584 | |||||||||||||||
Decrease (increase) in accrued interest receivable | | 1,031,534 | | 2,533,891 | 8 | (2,155,668 | ) | |||||||||||||||||
Decrease (increase) in other accounts receivable | 662 | | (755 | ) | | | | |||||||||||||||||
Decrease (increase) in other assets | 79,435 | (345,696 | ) | (22,639,188 | ) | 22,750,921 | (647,785 | ) | 280,983 | |||||||||||||||
Increase (decrease) in accounts payable and accrued expenses | 2,529,110 | (85,438 | ) | 27,374,152 | 43,500 | 328,890 | 11,475 | |||||||||||||||||
Increase (decrease) in accrued interest expense | | 991,471 | | 4,368,264 | | 4,209,310 | ||||||||||||||||||
Purchase of investments | | (1,262,264,671 | ) | | (1,279,323,341 | ) | | (962,709,464 | ) | |||||||||||||||
Proceeds from sale and redemption of investments | | 1,318,852,412 | | 1,571,177,633 | | 1,136,048,110 | ||||||||||||||||||
Decrease in receivable for open trades | | (12,482,566 | ) | | (1,725,775 | ) | | (4,242,938 | ) | |||||||||||||||
Increase (decrease) in payable for open trades | | (29,855,797 | ) | | (174,353,152 | ) | | 208,955,167 | ||||||||||||||||
Net cash provided by (used in) operating activities | 10,643,703 | (40,758,700 | ) | 14,020,173 | 139,472,574 | 4,073,301 | 375,033,210 | |||||||||||||||||
Investing activities: |
||||||||||||||||||||||||
Acquisition of Trimaran Advisors L.L.C. | 13,000,000 | |||||||||||||||||||||||
Debt offering proceeds | | 918,652,705 | | 465,000,000 | | | ||||||||||||||||||
Net cash provided by investing activities | | 918,652,705 | | 465,000,000 | 13,000,000 | | ||||||||||||||||||
Financing Activities: |
||||||||||||||||||||||||
Payment for acquisition of Trimaran Advisors, L.L.C. | | | | | (13,000,000 | ) | | |||||||||||||||||
Member's contributions | 535,800 | | 229,196 | | 261,662 | | ||||||||||||||||||
Dividends paid in cash | (11,900,000 | ) | | (12,750,000 | ) | | (4,700,000 | ) | | |||||||||||||||
Repayments of Debt | | (974,483,723 | ) | | (858,880,917 | ) | | 86,300,915 | ||||||||||||||||
Net cash (used in) provided by financing activities | (11,364,200 | ) | (974,483,723 | ) | (12,520,804 | ) | (858,880,917 | ) | (17,438,338 | ) | 86,300,915 | |||||||||||||
CHANGE IN CASH | (720,497 | ) | (96,589,718 | ) | 1,499,369 | (254,408,343 | ) | (365,037 | ) | 461,334,125 | ||||||||||||||
CASH, BEGINNING OF YEAR | 7,499,271 | 278,813,923 | 5,999,902 | 533,222,266 | 6,364,939 | 71,888,141 | ||||||||||||||||||
CASH, END OF YEAR | $ | 6,778,774 | $ | 182,224,205 | $ | 7,499,271 | $ | 278,813,923 | $ | 5,999,902 | $ | 533,222,266 |
See accompanying notes to combined financial statements.
S-6
Years Ended December 31, | ||||||||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||||||
Asset Manager Affiliates Cash |
CLO Restricted Cash |
Asset Manager Affiliates Cash |
CLO Restricted Cash |
Asset Manager Affiliates Cash |
CLO Restricted Cash |
|||||||||||||||||||
Supplemental Information: |
||||||||||||||||||||||||
Cash paid for interest | $ | 2,022,132 | $ | 135,255,155 | $ | | $ | 103,392,654 | $ | | $ | 109,337,784 | ||||||||||||
Cash paid for taxes | $ | 2,978,613 | $ | | $ | 432,500 | $ | | $ | 470,000 | $ | | ||||||||||||
Non-cash transactions: |
||||||||||||||||||||||||
Member's contributions | $ | 535,800 | $ | | $ | 229,196 | $ | | $ | 261,662 | $ | |
In conjunction with the acquisition of Trimaran Advisors in 2012, KCAP Financial, Inc. issued 3.6 million shares of its common stock, as follows:
Fair value of assets acquired | $ | 38,600,000 | ||
Cash paid for equity interests | (13,000,000 | ) | ||
Common stock issued | $ | 25,600,000 |
See accompanying notes to combined financial statements.
S-7
Katonah Debt Advisors, L.L.C. (Katonah Debt Advisors), a registered investment adviser under the Investment Advisors Act of 1940 (the IA Act of 1940), is a wholly-owned portfolio company of KCAP Financial, Inc. (KCAP Financial, the Company), which is an internally managed, non-diversified closed-end publicly traded investment company that is regulated as a business development company (BDC) under the Investment Company Act of 1940 (the 1940 Act). Katonah Debt Advisors manages collateralized loan obligation funds (CLO Funds) which invest in broadly syndicated loans, high-yield bonds and other credit instruments. On February 29, 2012, KCAP Financial, through its newly formed wholly-owned subsidiary Commodore Holdings LLC purchased Trimaran Advisors, L.L.C. (Trimaran Advisors), a registered investment adviser and CLO manager similar to Katonah Debt Advisors, for total consideration of $13.0 million in cash and 3,600,000 shares of KCAP Financials common stock. Contemporaneous with the acquisition of Trimaran Advisors, KCAP Financial acquired from Trimaran Advisors equity interests in certain CLO Funds managed by Trimaran Advisors for an aggregate purchase price of $12.0 million in cash. As of December 31, 2014, Katonah Debt Advisors and Trimaran Advisors, as well as affiliated management companies Katonah 2007-1 Management, L.L.C., Katonah X Management, L.L.C. and Trimaran Advisors Management, L.L.C. (collectively, the Asset Manager Affiliates) have approximately $3.0 billion of par value assets under management. Katonah Debt Advisors and Trimaran Advisors are each managed independently from KCAP Financial by a separate management team. The Asset Manager Affiliates provide investment management services to CLO Funds, making day-to-day investment decisions concerning the assets of the CLO Funds. The Asset Manager Affiliates do not have any investment interests in the CLO Funds they manage; however, KCAP Financial holds investments in a portion of the securities issued by the CLO Funds managed by the Asset Manager Affiliates.
All of the CLO funds managed by the Asset Manager Affiliates are considered to be variable interest entities (VIEs) for which the Asset Manager Affiliates are the primary beneficiary and, as a result, are required to be consolidated into the financial statements of the Asset Manager Affiliates as discussed in Note 3 CLO Funds. The CLO funds considered to be VIEs are as follows: KATONAH VII CLO LTD.; KATONAH VIII CLO LTD.; KATONAH IX CLO LTD.; KATONAH X CLO LTD.; KATONAH 2007-I CLO LTD.; TRIMARAN CLO IV LTD.; TRIMARAN CLO V LTD.; TRIMARAN CLO VI LTD.; TRIMARAN CLO VII LTD.; CATAMARAN CLO 2012-1 LTD.; CATAMARAN CLO 2013-1 LTD.; CATAMARAN 2014-1 LTD., and CATAMARAN 2014-2 LTD.
The combined financial statements have been prepared in accordance with U.S. GAAP (Accounting Principles Generally Accepted in the United States) and include the financial statements of the Asset Manager Affiliates and any VIEs required to be consolidated. The Asset Manager Affiliates provide investment management services to various CLO Funds, making day-to-day investment decisions concerning the assets of the CLO Funds. All of the CLO Funds managed by the Asset Manager Affiliates are VIEs that are required to be consolidated.
Although the Asset Manager Affiliates have no ownership interests in the CLO Funds they manage, the Asset Manager Affiliates follow the provisions of Accounting Standards Codification ASC Topic 810, Consolidation, when accounting for VIEs as further detailed below. Pursuant to ASC 810, VIEs, or entities in which the risks and rewards of ownership are not directly linked to voting interests, for which the Asset Manager Affiliates are the primary beneficiary, are consolidated.
For CLO Funds, if the Asset Manager Affiliates are deemed to have the power to direct the activities of the CLO that most significantly impact the CLOs economic performance, and the obligation to absorb losses/right to receive benefits (management fees and potential incentive fees) from the CLO that could potentially be significant to the CLO, then the Asset Manager Affiliates are deemed to be the CLOs primary beneficiary and are required to consolidate the CLO.
S-8
All of the investments held and notes issued by CLO Funds considered to be VIEs are presented at fair value in the Asset Manager Affiliates Combined Balance Sheets and interest income and expense of consolidated CLO Funds are presented in the Asset Manager Affiliates Combined Statements of Operations.
In the opinion of management, the combined financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial condition and results of operations for the periods presented. All significant intercompany transactions, balances, revenues and expenses are eliminated upon combination. Certain prior-year amounts have been reclassified to conform to the current year presentation. Furthermore, the preparation of the financial statements requires management to make significant estimates and assumptions including the fair value of investments that do not have a readily available market value. Actual results could differ from those estimates, and the differences could be material.
On February 18, 2015, the FASB issued Accounting Standards Update 2015-2, which updated consolidation standards under ASC Topic 810, Consolidation. Under this update, a new consolidation analysis is required for VIEs and will limit the circumstances in which investment managers and similar entities are required to consolidate the entities that they manage. The FASB decided to eliminate some of the criteria under which their fees are considered a variable interest and limit the circumstances in which variable interests in a VIE held by related parties of a reporting enterprise require the reporting enterprise to consolidate the VIE. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015, early adoption is permitted. The Company is analyzing the potential impact of this pronouncement on its financial statements.
Investments at Fair Value. Investment transactions are recorded on the applicable trade date. Realized gains or losses are determined using the specific identification method. Investments held by the CLO Funds are stated at fair value. ASC 820 Fair Value Measurements and Disclosures (ASC 820: Fair Value), requires, among other things, disclosures about assets and liabilities that are measured and reported at fair value. At December 31, 2014, Trimaran Advisors LLC had a $22 million investment in the subordinated notes of a newly formed CLO in connection with the warehousing of loans prior to the marketing and sale of interests in the CLO to third-party investors.
Hierarchy of Fair Value Inputs. The provisions of ASC 820: Fair Value establish a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and require companies to disclose the fair value of their financial instruments according to the fair value hierarchy (i.e., Level I, II and III inputs, as defined). The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Additionally, companies are required to provide additional disclosure regarding instruments in the Level III category (which have inputs to the valuation techniques that are unobservable and require significant management judgment), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities.
Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:
Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date.
| Level I assets may include listed mutual funds, ETFs, equities and certain derivatives. |
Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; quotes from pricing services or brokers, for which the Asset Manager Affiliates can determine that orderly transactions took place at the quoted price or that the inputs used to arrive at the price were observable; and inputs other than quoted prices that are observable, such as models or other valuation methodologies.
S-9
| Level II assets in this category may include debt securities, bank loans, short-term floating rate notes and asset-backed securities, restricted public securities valued at a discount, as well as over the counter derivatives, including interest and inflation rate swaps and foreign currency exchange contracts that have inputs to the valuations that generally can be corroborated by observable market data. |
Unobservable inputs for the valuation of the asset or liability, which may include non-binding broker quotes. Level III assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation.
| Level III assets in this category may include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds, and funds of hedge funds, direct private equity investments held within consolidated funds, bank loans, bonds issued by CLO Funds and certain held for sale real estate disposal assets. |
| Level III liabilities included in this category include borrowings of consolidated collateralized loan obligation funds and are valued based upon non-binding broker quotes or discounted cash flow models based on a discount margin calculation. |
The Asset Manager Affiliates assessment of the significance of a particular input to the Fair Value measurement in its entirety requires judgment and considers factors specific to the financial instrument.
Valuation of Portfolio Investments. Debt and equity securities for which market quotations are readily available are generally valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available are valued based on detailed analyses prepared by management, and, in certain circumstances, may utilize third parties with valuation expertise. The Asset Manager Affiliates follow the provisions of ASC 820: Fair Value which defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. ASC 820: Fair Value defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Subsequent to the adoption of ASC 820: Fair Value, the FASB has issued various staff positions clarifying the initial standard as noted below.
Fair Value Measurements and Disclosures requires the disclosure of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period.
The Asset Manager Affiliates valuation methodology and procedures for investments held by the CLO Funds are generally as follows:
1. | For any asset which is also held by KCAP Financial on the applicable date, the KCAP Financial fair value mark as of such applicable date is used. |
2. | Fair value for all assets which a Fund has committed to purchase but yet to settle will be the most recent mark produced by Markit (or other third party pricing service, as may be available). If the asset has not received a mark from Markit, the purchase price is deemed to be the fair value. |
3. | For performing loan and bond assets, the fair value is determined in accordance with the following procedure. First, if the asset was marked by Markit (or other third party pricing service, as may be available) within one month of applicable date, then the most recent Markit mark will be the fair value. Next, if the most recent Markit mark is aged beyond one month but less than one year, then |
S-10
the fair value will be the lower of the most recent Markit mark and the average price on the applicable rating bucket on the CSFB Loan Index produced on the date closest to the applicable date. Lastly, if the asset has not received a Markit mark within the last year, the fair value will be produced by haircutting (in percentage terms) the mark on the applicable rating bucket of the CSFB Loan Index produced on the date closest to the applicable date by said CSFB Loan Index value. |
4. | For loan and bond assets in payment default, the fair value is determined in accordance with the following procedure. First, if the asset was marked by Markit (or other third party pricing service, as may be available) within one month of applicable date, then the most recent Markit mark will be the fair value. Next, if the most recent Markit mark is aged beyond one month but less than one year, then the fair value will be the lower of most recent Markit mark and the average price on the Distressed/Defaulted bucket of the CSFB Distressed Loan Index produced on the date closet to the applicable date. Lastly, if the asset has not received a Markit mark within the last year, the fair value will be deemed to be zero. |
1. | For equity assets, the fair value is determined in accordance with the following procedure. If the asset is a publicly-traded equity, the fair value will be based upon the closing price per share as of the applicable date. If the asset was marked by Markit (or other third party pricing service, as may be available) within one month of the applicable date, then the Fair value will be based on the most recent Markit price per share. |
1. | For any asset which is also held by KCAP Financial on the applicable date, the KCAP Financial fair value mark as of such applicable date is used. |
2. | Fair value for all assets which a Fund has committed to purchase but yet to settle will be deemed to be the purchase price. |
3. | For performing assets, a Present Value is determined in accordance with the following procedure. First, the Asset Manager Affiliates amalgamate Discount Margin (DM) data from the most recent reports published by the CLO Research and Secondary Trading desks of sell side broker dealers. The DM data is averaged across each original rating bucket of the CLO capital structure. For each asset, future cash flows are produced based upon the three month LIBOR rate as of the applicable date and the contractually mandated spread each asset is required to pay in a no-loss scenario. The present value of the future cash flows is then calculated by using a discount rate equal to the applicable DM for the assets original rating bucket plus the three month LIBOR rate as of the applicable date. |
4. | Next, the Asset Manager Affiliates inquire with the sell-side institution from which they purchased each asset to provide indicative pricing as of the applicable date. The fair value is determined by an equal weight average of the Present Value determined from the cash flow model and the indicative price provided by the sell side broker dealer from which the asset was purchased. In the event there is no indicative price produced by a sell side broker dealer, then the Fair Value will be the Present Value determined from the cash flow model. |
5. | If the bond is a non-performing bond, it will be necessary to use a more detailed cash flow model. Such a model may be one that is commercially available (e.g. Intex) or one that is a spreadsheet-based CLO cash flow model which has been set up to replicate the deal in question, with specific prepayment, default, and severity inputs as appropriate to the bond in question. |
S-11
Debt Securities. Most of the CLO Funds investment portfolio is composed of broadly syndicated bank loans or other corporate debt securities for which an independent pricing service quote is available. To the extent that the investments are exchange traded and are priced or have sufficient price indications from normal course trading at or around the valuation date (financial reporting date), such pricing will determine fair value. Pricing service marks from third party pricing services may be used as an indication of fair value, depending on the volume and reliability of the marks, sufficient and reasonable correlation of bid and ask quotes, and, most importantly, the level of actual trading activity.
CLO Fund Securities. The CLO Funds managed by the Asset Manager Affiliates may selectively invest in securities issued by funds managed by other asset management companies. For bond rated tranches of CLO Funds (those above the junior class) without transactions to support a fair value for the specific CLO Fund and tranche, fair value is based on discounting estimated bond payments at current market yields, which may reflect the adjusted yield on the leveraged loan index for similarly rated tranches, as well as prices for similar tranches for other CLO Funds and also other factors such as the default and recovery rates of underlying assets in the CLO Fund, as may be applicable. Such model assumptions may vary and incorporate adjustments for risk premiums and CLO Fund specific attributes. Such adjustments require judgment and may be material to the calculation of fair value.
Equity Securities. From time to time, the CLO Funds may receive equity securities that are received in exchange with a default or restructuring of collateral obligations.
Cash. The Asset Manager Affiliates define cash as demand deposits. The Asset Manager Affiliates place their cash with financial institutions and, at times, cash held in these accounts may exceed the Federal Deposit Insurance Corporation insured limit.
Restricted Cash of CLO Funds. Restricted cash consists of cash held for reinvestment, quarterly interest and principal distributions (if any) to holders of CLO Fund liabilities, and for payment of CLO Fund expenses.
CLO Fund Liabilities at Fair Value. The CLO Funds managed by the Asset manager Affiliates and that are consolidated herein, have issued rated and unrated securities to finance their operations. CLO Fund liabilities are presented at fair value.
Interest Income. Interest income is recorded on the accrual basis on interest-bearing assets. The CLO Funds generally place a loan or security on non-accrual status and cease recognizing interest income on such loan or security when a loan or security becomes 90 days or more past due or if the Asset Manager Affiliates otherwise do not expect the debtor to be able to service its debt obligations. Non-accrual loans represented less than 1% of investments of CLO Funds at fair value as of December 31, 2014 and December 31, 2013. The aggregate unpaid principal value of loans past due as of December 31, 2014 was approximately $29.6 million and the difference between fair value and the unpaid principal balance was approximately $12.9 million. The aggregate unpaid principal value of loans past due as of December 31, 2013 was approximately $72.6 million and the difference between fair value and the unpaid principal balance was approximately $46.2 million.
Management Fees. As a manager of CLO Funds, the Asset Manager Affiliates receive contractual and recurring management fees (and may receive a one-time structuring fee) from the CLO Funds for their management and advisory services. The annual fees which the Asset Manager Affiliates receive are generally based on a fixed percentage of assets under management (at par value and not subject to changes in market value), and the Asset Manager Affiliates generate annual operating income equal to the amount by which their fee income exceeds their operating expenses. The annual management fees the Asset Manager Affiliates receive have two components a senior management fee and a subordinated management fee.
S-12
Incentive Fees. As a manager of CLO Funds, the Asset Manager Affiliates may receive incentive fees upon exceeding specified relative and/or absolute investment return thresholds. Such fees are recorded upon completion of the measurement period which varies by CLO Fund.
Distributions to Member. Distributions to the Asset Manager Affiliates sole member are recognized on the ex-dividend date. Generally, dividends are declared and paid on a quarterly basis.
Expenses. The Asset Manager Affiliates are internally managed and expense costs, as incurred, with regard to the running of their operations. Primary operating expenses include employee compensation and benefits, the costs of identifying, evaluating, monitoring and servicing the CLO Fund investments managed by the Asset Manager Affiliates, and related overhead charges and expenses, including rental expense. The Asset Manager Affiliates share office space and certain other operating expenses. Katonah Debt Advisors has entered into an Overhead Allocation Agreement with its sole member, KCAP Financial. Trimaran Advisors has entered into such an allocation agreement with Katonah Debt Advisors. The Agreements provide for the sharing of such expenses based on an equal sharing of office lease costs and the ratable usage of other shared resources. Katonah Debt Advisors accounts for its operating leases, which may include escalations, in accordance with ASC 840-10, Leases, and expenses the lease payments associated with operating leases evenly during the lease term (including rent-free periods), beginning on the commencement of the lease term.
Interest Expenses. Interest expense related to borrowings of the Asset Manager Affiliates is recorded on an accrual basis pursuant to the terms of the related borrowing agreements, however the CLO Funds they manage that are consolidated herein have issued rated and unrated bonds to finance their operations. Interest on CLO Fund liabilities is calculated by the third party trustee of the CLO Funds. Interest is accrued and generally paid quarterly.
Trustee Fees. Each CLO Fund has a third party trustee that is the custodian for all cash and investments of the CLO Funds and receives and disburses all cash in accordance to the trustee and custodial agreements. Trustee fees are accrued and paid quarterly by the CLO Funds.
Income Taxes. The Asset Manager Affiliates account for income taxes under the liability method prescribed by ASC 740-10, Income Taxes (ASC 740-10). Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using currently enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred income tax assets and liabilities is recognized in income in the period that includes the enactment date.
Management periodically assesses the recoverability of its deferred income tax assets based upon expected future earnings, taxable income in prior carryback years, future deductibility of the asset, changes in applicable tax laws and other factors. If management determines that it is not more likely than not that the deferred tax asset will be fully recoverable in the future, a valuation allowance will be established for the difference between the asset balance and the amount expected to be recoverable in the future. This allowance will result in a charge to income tax expense on the combined statements of operations. The Asset Manager Affiliate record their income taxes receivables and payables based upon their estimated income tax liability.
ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in a companys financial statements by prescribing a threshold for measurement and recognition in the financial statements of an asset or liability resulting from a tax position taken or expected to be taken in an income tax return. ASC 740-10 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
S-13
A CLO Fund generally refers to a special purpose vehicle that owns a portfolio of investments and issues various tranches of debt and subordinated securities to finance the purchase of those investments. Investments purchased by the CLO Funds are governed by extensive investment guidelines, including limits on exposure to any single industry or issuer and limits on the ratings of the CLO Funds assets. The CLO Funds managed by the Asset Manager Affiliates have a defined investment period during which they are allowed to make investments or reinvest capital as it becomes available.
The Asset Manager Affiliates manage CLO Funds primarily for third party investors that invest in broadly syndicated loans, high yield bonds and other credit instruments issued by corporations. At December 31, 2014 and December 31, 2013, the Asset Manager Affiliates had approximately $3.0 billion and $3.2 billion of par value of assets under management, respectively.
CLO Funds typically issue multiple tranches of debt and subordinated securities with varying ratings and levels of subordination to finance the purchase of their underlying investments. Interest and principal payments (net of designated CLO Fund expenses) from the CLO Fund are paid to each issued security in accordance with an agreed upon priority of payments, commonly referred to as the waterfall. The most senior notes, generally rated AAA/Aaa, commonly represent the majority of the total liabilities of the CLO Fund. AAA/Aaa notes are issued at a specified spread over LIBOR and normally have the first claim on the earnings on the CLO Funds investments after payment of certain fees and expenses. Lower subordinated mezzanine tranches of rated notes generally have ratings ranging from AA/Aa to BB/Ba and are usually issued at a specified spread over LIBOR with higher spreads paid on the tranches with lower ratings. Each tranche is typically only entitled to a share of the earnings on the CLO Funds investments if the required interest and principal payments have been made on the more senior tranches in the waterfall. The subordinated securities are the most junior tranche and can take the form of either subordinated notes, income notes or preferred shares. The subordinated notes, income notes or preferred shares generally do not have a stated coupon but are entitled to residual cash flows from the CLO Funds investments after all of the other tranches of notes and certain other fees and expenses are paid.
The CLO Funds are primarily financed via capital contributed by subordinated noteholders and debt holders. The Asset Manager Affiliates risk with respect to each investment in the CLO Funds they manage is limited to any uncollected management fees (as the Asset Manager Affiliates have no investment in the CLO Funds they have no exposure or benefits in the ownership of the CLO Funds securities). Therefore, the gains or losses of the CLO Funds have not had a significant impact on the Asset Manager Affiliates financial position, results of operations or cash flows. The Asset Manager Affiliates have no right to the benefits from, nor do they bear the risks associated with, these investments, beyond the management fees generated from the CLO Funds. If the Asset Manager Affiliates were to liquidate, these investments would not be available to any general creditors of the Asset Manager Affiliates. Additionally, the collateral assets of consolidated CLO Funds are held solely to satisfy the obligations of the CLO Funds, and the investors in the consolidated CLO Funds have no recourse to the general credit of the Asset Manager Affiliates for the notes issued by the CLO Funds.
CLO Funds are investment vehicles created for the sole purpose of issuing collateralized loan instruments that offer investors the opportunity for returns that vary with the risk level of their investment. The securities issued by the CLO Funds are backed by diversified collateral asset portfolios consisting primarily of loans. For managing the collateral for the CLO Fund entities, the Asset Manager Affiliates earn investment management fees, including senior subordinated management fees, as well as contingent incentive fees. The Asset Manager Affiliates have no investment in the CLO Funds they manage. However, their sole direct or indirect shareholder, KCAP Financial, has invested in certain of the CLO Funds, generally taking a portion of the unrated, junior subordinated position (generally subordinated to other interests in the entities and entitle KCAP Financial and other subordinated tranche investors to receive the residual cash flows, if any, from the entities).
S-14
Upon adoption of guidance encompassed in ASC Topic 810, the Asset Manager Affiliates determined that they were the primary beneficiary of these CLO Funds, as they have the power to direct the activities of the CLO Funds that most significantly impact the CLO Funds economic performance, and the obligation to absorb losses/right to receive benefits (in the form of senior and subordinate management fees as well as the potential to earn an incentive fee) from the CLO Funds that could potentially be significant to the CLO Funds. The primary beneficiary assessment includes an analysis of the rights of the Asset Manager Affiliates in their capacity as investment manager. In certain CLOs, the Asset Manager Affiliates role as investment manager provides that the Asset Manager Affiliates contractually have the power, as defined in ASC Topic 810, to direct the activities of the CLO Funds that most significantly impact the CLO Funds economic performance, such as managing the collateral portfolio and its credit risk. Additionally, the primary beneficiary assessment includes an analysis of the Asset Manager Affiliates rights to receive benefits and obligations to absorb losses associated with its management/incentive fees.
As a manager of the CLO Funds, the Asset Manager Affiliates receive contractual and recurring management fees and may receive a one-time structuring fee from the CLO Funds for their management and advisory services. The annual fees which the Asset Manager Affiliates receive are generally based on a fixed percentage of assets under management (at par value and not subject to changes in market value), and the Asset Manager Affiliates generate annual operating income equal to the amount by which their fee income exceeds their operating expenses. The management fees the Asset Manager Affiliates receive may have three components a senior management fee, a subordinated management fee and an incentive fee.
The investments held by consolidated CLO Funds are primarily invested in senior secured bank loans (typically syndicated by banks), bonds, and equity securities. Bank loan investments, which comprise the majority of consolidated CLO Fund portfolio collateral, are senior secured corporate loans from a variety of industries, including but not limited to the aerospace and defense, broadcasting, technology, utilities, household products, healthcare, oil and gas, and finance industries. These investments mature at various dates between 2015 and 2024, pay interest at LIBOR or Euribor plus a spread of up to 8.6%, and typically range in credit rating categories from BBB down to unrated. At December 31, 2014, the unpaid par principal balance exceeded the fair value by approximately $12.9 million. Less than 1% of the collateral assets are in default as of December 31, 2014. At December 31, 2013, the unpaid par principal balance exceeded the fair value by approximately $49 million. Less than 1% of the collateral assets were in default as of December 31, 2013. CLO Fund investments are valued based on price quotations provided by an independent third-party pricing source which are indicative of traded prices and/or dealer price quotations. In the event that a third-party pricing source is unable to price an investment, other relevant factors, data and information are considered, including: i) information relating to the market for the investment, including price quotations for and trading in the investment and interests in similar investments and the market environment and investor attitudes towards the investment and interests in similar investments; ii) the characteristics of and fundamental analytical data relating to the investment, including the cost, size, current interest rate, period until next interest rate reset, maturity and base lending rate, the terms and conditions of the loan and any related agreements, and the position of the loan in the issuers debt structure; iii) the nature, adequacy and value of the senior secured corporate loans collateral, including the CLOs rights, remedies and interests with respect to the collateral; iv) the creditworthiness of the borrower, based on an evaluation of its financial condition, financial statements and information about the business, cash flows, capital structure and future prospects; v) the reputation and financial condition of the agent and any intermediate participants in the senior secured corporate loan; and vi) general economic and market conditions affecting the fair value of the senior secured corporate loan.
S-15
CLO Fund liabilities issued by consolidated CLO Funds have stated maturity dates between 2015 and 2026. The CLO Fund liabilities are issued in various tranches with different risk profiles and ratings. The interest rates are generally variable rates based on LIBOR or Euribor plus a pre-defined spread, which varies from 0.225% for the more senior tranches to 6.25% for the more subordinated tranches. At December 31, 2014, the outstanding par balance on the CLO Fund liabilities issued by consolidated CLO Funds exceeded their fair value by approximately $257 million. At December 31, 2013, the outstanding par balance on the CLO Fund liabilities issued by consolidated CLO Funds exceeded their fair value by approximately $209 million. The investors in the CLO Fund liabilities have no recourse to the general credit of the Asset Manager Affiliates. CLO Fund liabilities are recorded at fair value using an income approach, driven by cash flows expected to be received from the portfolio collateral assets. Market yields, default rates and recovery rates used in the Asset Manager Affiliates estimate of fair value vary based on the nature of the investments in the underlying collateral pools. In periods of rising market yields, default rates and lower debt recovery rates, the fair value, and therefore the carrying value, of the liabilities may be adversely affected. Once the undiscounted cash flows of the collateral assets have been determined, the Asset Manager Affiliates apply appropriate discount rates that a market participant would use, to determine the discounted cash flow valuation of the notes.
The carrying value of investments held and CLO Fund liabilities issued by CLO Funds is also their fair value. The following table presents the fair value hierarchy levels of investments held and CLO Fund liabilities issued by the CLO Funds, which are measured at fair value as of December 31, 2014 and December 31, 2013:
December 31, 2014 | ||||||||||||||||
($ in millions) | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level I) |
Significant Other Observable Inputs (Level II) |
Significant Unobservable Inputs (Level III) |
||||||||||||
Assets: |
||||||||||||||||
Investments of CLO Funds | $ | 2,846.7 | $ | | $ | | $ | 2,846.7 | ||||||||
Liabilities: |
||||||||||||||||
CLO Fund Liabilities | $ | 2,990.2 | $ | | $ | | $ | 2,990.2 |
December 31, 2013 | ||||||||||||||||
($ in millions) | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level I) |
Significant Other Observable Inputs (Level II) |
Significant Unobservable Inputs (Level III) |
||||||||||||
Assets: |
||||||||||||||||
Investments of CLO Funds | $ | 2,964.2 | $ | | $ | | $ | 2,964.2 | ||||||||
Liabilities: |
||||||||||||||||
CLO Fund Liabilities | $ | 3,079.8 | $ | | $ | | $ | 3,079.8 |
S-16
The following table shows a reconciliation of the beginning and ending fair value measurements for Level 3 assets using significant unobservable inputs:
For the year ended December 31, |
||||||||
($ in millions) | 2014 | 2013 | ||||||
Beginning balance | $ | 2,964.2 | $ | 3,255.8 | ||||
Purchase of investments | 1,262.3 | 1,279.3 | ||||||
Proceeds from sale and redemption of investments | (1,318.9 | ) | (1,571.2 | ) | ||||
Realized and unrealized gains/(losses), net | (60.9 | ) | 0.3 | |||||
Ending balance | $ | 2,846.7 | $ | 2,964.2 | ||||
Changes in unrealized appreciation (depreciation) included in earnings related to investments still held at reporting date | $ | (62.2 | ) | $ | (29.4 | ) |
As of December 31, 2014, the Asset Manager Affiliates Level III portfolio investments had the following valuation techniques and significant inputs:
Type | Fair Value | Valuation Technique | Unobservable inputs | Range of Inputs | ||||||||||||
Debt Securities | $ | 9,561,170 | Income Approach | Implied Effective Discount Rate |
4.09% 10.73% | |||||||||||
$ | 2,761,092,487 | Market Quote | Third-Party Bid-Ask Mid | 43.3% 110.8% | ||||||||||||
Equity Securities | $ | 2,004,091 | Market Quote | Third-Party Bid-Ask Mid | $ | 1.31 $87.5 | ||||||||||
Option Value | 26.3% | |||||||||||||||
CLO Fund Securities | $ | 52,001,887 | Discounted Cash Flow | Discount Rate | 1.11% 5.01% |
The following table shows a reconciliation of the beginning and ending fair value measurements for Level III liabilities using significant unobservable inputs:
For the year ended December 31, |
||||||||
($ in millions) | 2014 | 2013 | ||||||
Beginning balance | $ | 3,079.8 | $ | 3,459.5 | ||||
Issuance of Catamaran CLO Fund Liabilities | 918.7 | 465.0 | ||||||
Prepayments, amortization, net | (974.5 | ) | (858.9 | ) | ||||
Unrealized appreciation/(depreciation) | (33.8 | ) | 14.2 | |||||
Ending balance | $ | 2,990.2 | $ | 3,079.8 | ||||
Changes in unrealized appreciation (depreciation) included in earnings related to liabilities still held at reporting date | $ | (40.0 | ) | $ | 14.2 |
As of December 31, 2014, the Asset Manager Affiliates Level III liabilities had the following valuation technique and significant inputs:
Asset Type | Fair Value | Valuation Technique | Unobservable Inputs | Range of Inputs | ||||||||||||
CLO Fund Liabilities | $ | 2,538,986,254 | Discounted Cash Flow | Discount Rate | 0.91% 8.64% | |||||||||||
$ | 451,225,375 | Dealer Marks | Dealer Marks | 81.9% 99.65% |
Transfers between levels, if any, are recognized at the beginning of the quarter in which the transfers occur. ASC 820-10 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with ASC 820-10, these inputs are summarized in the three broad levels listed below.
S-17
The CLO Funds managed by the Asset Manager Affiliate and that are consolidated herein, have issued rated and unrated securities to finance their operations. CLO Fund Liabilities are presented at fair value with the difference between principal and fair value recorded as unrealized gain/loss. The par amount of CLO Fund liabilities is approximately $3.2 billion and $3.3 billion respectively for the years ended December 31, 2014 and December 31, 2013.
The Asset Manager Affiliates have determined that, although the junior tranches have certain characteristics of equity, they should be accounted for and disclosed as debt on the its Combined Balance Sheet, as the subordinated and income notes and preferred shares have a stated maturity indicating a date for which they are mandatorily redeemable. The preference shares are also classified as debt, as they are mandatorily redeemable upon liquidation or termination of the CLO.
The Asset Manager Affiliates risk with respect to the CLO Funds is limited to any uncollected management fees. The Asset Manager Affiliates have no right to the benefits from, nor do they bear the risks associated with, the CLO Funds, beyond the management fees generated by the CLO Funds. If the Asset Manager Affiliates were to liquidate, the CLO Funds would not be available to the general creditors of the Asset Manager Affiliates. Additionally, the Investments of the CLO Funds are held solely to satisfy the obligations of the CLO Funds, and the investors in the consolidated CLO Funds have no recourse to the general credit of the Asset Manager Affiliates for the CO Fund liabilities.
On February 29, 2012, KCAP Financial, Inc. (the Company) and Commodore Holdings, L.L.C., a newly-formed, wholly-owned subsidiary of the Company (Commodore), acquired all of the outstanding equity interests in Trimaran for $13.0 million in cash and 3,600,000 shares of the Companys common stock, par value $0.01 per share, which were valued at the opening price on the closing date of the acquisition. Contemporaneously with the acquisition, the Company acquired the equity interests in four CLO Funds sponsored by Trimaran, at fair value, for $12.0 million in cash. The aggregate purchase price was $50.6 million.
In accordance with the purchase agreement, Commodore was deemed the acquirer of Trimaran and accounted for the acquisition as a business combination. The assets acquired (no liabilities were assumed) by Commodore through this acquisition were pushed-down to Trimaran. The purchase price allocation included the fair value of the identifiable intangible assets acquired, which consist of four CLO management contracts, of approximately $15.7 million, resulting in goodwill of $22.8 million. The CLO management contracts are being amortized over the estimated lives of the contracts (3 5 years). For the years ended December 31, 2014 and 2013, the Company recognized amortization expense of approximately $5.3 million and $3.5 million, respectively, relating to the management contracts, which resulted in a net carrying amount of $3.9 million and $9.2 million as of December 31, 2014 and 2013, respectively. Additionally, two managed CLO Funds were called in 2014 and as a result, the remaining unamortized intangible asset of $1.7 million were fully expensed. The following table summarizes future amortization amounts relating to the management contracts as of December 31, 2014:
Amortization of Management Contracts | Total | Less than one year |
1 3 years | 3 5 years | More than 5 years |
|||||||||||||||
Trimaran V | $ | 997,959 | $ | 798,367 | $ | 199,592 | $ | | $ | | ||||||||||
Trimaran VII | 2,947,869 | 1,310,164 | 1,637,705 | | | |||||||||||||||
Total | $ | 3,945,828 | $ | 2,108,531 | $ | 1,837,297 | $ | | $ | |
S-18
Trimaran, a taxable entity (corporation), has recognized the acquisition as an asset acquisition for tax purposes. The book and tax basis of the intangible assets and goodwill were identical; accordingly, Trimaran did not provide for any deferred taxes at the closing date of the acquisition. The tax basis of the intangible assets and goodwill will be amortized over 15 years, which gives rise to deferred taxes.
Trimaran will continue operating as a stand-alone entity and serve as collateral manager under its CLO management contracts. KDA is a 100% owned asset manager subsidiary of the Company. KDA and Trimaran are both under common control of the Company and have similar business characteristics; therefore they report on a combined basis for financial reporting purposes.
The combined 2012 results of operations associated with the acquisition of Trimaran Advisors, including the consolidated CLO Funds managed by Trimaran Advisors, for the ten-month period following the date of acquisition, includes revenues of $57 million and net loss before tax of $46 million.
As separately regarded entities for tax purposes, the Asset Manager Affiliates are taxed at normal corporate rates. The CLO Funds are not generally taxed.
For tax purposes, the Asset Manager Affiliates taxable net income will differ from GAAP net income because of deferred tax timing adjustments and permanent tax adjustments. Deferred tax timing adjustments may include differences for the recognition and timing of depreciation, bonuses to employees and restricted stock expense. Permanent differences may include adjustments, limitations or disallowances for meals and entertainment expenses, penalties, and tax goodwill amortization.
Goodwill amortization for tax purposes was created upon the purchase of 100% of the equity interests in Katonah Debt Advisors by its sole member, KCAP Financial, in exchange for shares of the KCAP Financials stock valued at $33 million. Although this transaction was a stock transaction rather than an asset purchase and thus no goodwill was recognized for GAAP purposes, such exchange was considered an asset purchase under Section 351(a) of the Code. At the time of the transfer, Katonah Debt Advisors had equity of approximately $1 million resulting in tax goodwill of approximately $32 million which is being amortized for tax purposes on a straight-line basis over 15 years, which accounts for an annual difference between GAAP income and taxable income by approximately $2 million per year over such period.
As discussed in Note 4, additional goodwill amortization for tax purposes was created upon the purchase of Trimaran Advisors by its sole member. The transaction was considered an asset purchase and resulted in tax goodwill of approximately $22.8 million which is being amortized for tax purposes on a straight-line basis over 15 years, which accounts for an annual difference between GAAP income and taxable income by approximately $1.5 million per year over such period.
S-19
The components of income tax expense (benefit) for the years ended December 31, 2014, 2013, and 2012 are as follows:
For the year ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Current income tax expense: |
||||||||||||
Federal | $ | 2,792,440 | $ | 508,874 | $ | 433,823 | ||||||
State & local | 2,370,115 | 292,533 | (59,674 | ) | ||||||||
Total net current income tax expense | 5,162,555 | 801,407 | 374,149 | |||||||||
Deferred income tax expense (benefit): |
||||||||||||
Federal | (590,934 | ) | (1,883,479 | ) | 11,143 | |||||||
State & local | (418,023 | ) | 424,735 | (736,242 | ) | |||||||
Total net deferred income tax expense (benefit) | (1,008,957 | ) | (1,458,744 | ) | (725,099 | ) | ||||||
Total income tax expense (benefit) | $ | 4,153,598 | $ | (657,337 | ) | $ | (350,950 | ) |
The Asset Manager Affiliates effective income tax rate was 5.6%, (4.8)% and (0.4)% for tax years 2014, 2013 and 2012, respectively. The difference between the Companys reported provision for income taxes and the U.S. federal statutory rate of 35% is primarily due to tax goodwill amortization and the CLO funds having no tax consequences.
Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the combined financial statements. These temporary differences result in taxable or deductible amounts in future years.
The components of deferred income tax assets and liabilities are shown below:
For the year ended December 31, |
||||||||
2014 | 2013 | |||||||
Deferred income tax assets: |
||||||||
Net operating loss and tax credit carryforward | $ | | $ | 766,341 | ||||
Restricted stock | 380,138 | 159,281 | ||||||
Intangible depreciation/amortization | 1,887,774 | 657,811 | ||||||
Compensation | 1,505,045 | 1,396,014 | ||||||
Other | 102,335 | 75,320 | ||||||
Total deferred tax assets | 3,875,292 | 3,054,767 | ||||||
Deferred income tax liabilities: |
||||||||
Other | (299,144 | ) | (487,576 | ) | ||||
Total deferred tax liabilities | (299,144 | ) | (487,576 | ) | ||||
Net deferred tax assets | $ | 3,576,148 | $ | 2,567,191 |
The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. If it is not more likely than not that some portion or all of the gross deferred income tax assets will be realized in future years, a valuation allowance is recorded.
At December 31, 2014 the Asset Manager Affiliates had no federal or state net loss carryovers available to offset future taxable income. At December 31, 2013, federal and state net loss carryovers were $2.2 million and $0, respectively.
S-20
Asset Manager Affiliates adopted Financial Accounting Standards Board ASC Topic 740 Accounting for Uncertainty in Income Taxes (ASC 740) as of January 1, 2009. ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the tax returns to determine whether the tax positions are more-likely-than-not of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. The Asset Manager Affiliates has not recorded a liability for any unrecognized tax benefits, nor are they aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months.
Managements determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof. With a few exceptions, the Asset Manager Affiliates are no longer subject to U.S. federal, state and local tax examinations by tax authorities for years prior to 2011.
The CLO Funds have commitments to fund approximately $1.1 million and $2.5 million of investments as of December 31, 2014 and December 31, 2013, respectively. The Asset Manager Affiliates have commitments under lease obligations.
Rent expense was approximately $277,000, $346,000 and $379,000 for the years ended December 31, 2014, 2013 and 2012, respectively.
The following table summarizes minimum future lease payments as of December 31, 2014:
Contractual Obligations | 2015 | 2016 | 2017 | 2018 | 2019 | More than 5 years |
||||||||||||||||||
Operating lease obligations | $ | 369,432 | $ | 369,432 | $ | 369,432 | $ | 369,432 | $ | 387,391 | $ | 1,767,630 |
The following table summarizes our long-term debt as of 2013:
Consolidated Variable Interest Entities Debt: | Carrying Value | Current Weighted Average Borrowing Rate |
Weighted Average Remaining Maturity (In years) |
|||||||||
CLO Debt(1) | $ | 3,079,835,713 | 1.30 | % | 6.0 |
(1) | Long-term debt of the VIEs is recorded at fair value. This includes the fair value of the subordinated notes issued by the VIEs. However, the subordinated notes do not have a stated interest rate and are therefore excluded from the calculation of the weighted average borrowing rate. The par value of the VIEs debt (excluding subordinated notes) was $3.0 billion and $3.4 billion as of December 31, 2013 and 2012, respectively. |
The following table summarizes our long-term debt as of 2014:
Consolidated Variable Interest Entities Debt: | Carrying Value | Current Weighted Average Borrowing Rate |
Weighted Average Remaining Maturity (In years) |
|||||||||
CLO Debt(1) | $ | 2,990,211,629 | 1.77 | % | 8.32 |
(1) | Long-term debt of the VIEs is recorded at fair value. This includes the fair value of the subordinated notes issued by the VIEs. However, the subordinated notes do not have a stated interest rate and are |
S-21
therefore excluded from the calculation of the weighted average borrowing rate. The par value of the VIEs debt (excluding subordinated notes) was $2.8 billion and $3.0 billion as of December 31, 2014 and 2013, respectively. |
The member interest of Asset Manager Affiliates is held solely by KCAP Financial. KCAP Financial owns 100% of Katonah Debt Advisors, Katonah 2007-1 Management, LLC, Katonah X Management, LLC and Commodore Holdings, which wholly owns Trimaran Advisors.
The Asset Manager Affiliates adopted a 401(k) plan (401K Plan) effective January 1, 2007 that it shares with its sole shareholder, KCAP Financial. The 401K Plan is open to all full time employees. The Plan permits an employee to defer a portion of their total annual compensation up to the Internal Revenue Service annual maximum based on age and eligibility. Katonah Debt Advisors and Trimaran Advisors make contributions to the 401K Plan of up to 2.67% of the employees first 74.9% of maximum eligible compensation, which vests 20% per year over five years. For the year ended December 31, 2014, 2013 and 2012, Asset Manager Affiliates made contributions to the 401K Plan of approximately $38,000, $102,000 and $54,000 respectively.
The Asset Manager Affiliates also adopted a deferred compensation plan (Profit-Sharing Plan) effective January 1, 2007. Employees are eligible for the Profit-Sharing Plan provided that they are employed and working with the Asset Manager Affiliates for at least 100 days during the year and remain employed as of the last day of the year. Employees do not make contributions to the Profit-Sharing Plan. The Asset Manager Affiliates may contribute to the Profit-Sharing Plan 1) up to 8.0% of all compensation up to the Internal Revenue Service annual maximum and 2) up to 5.7% excess contributions on any incremental amounts above the social security wage base limitation and up to the Internal Revenue Service annual maximum. Employees vest 100% in the Profit-Sharing Plan after five years of service. For the years ended December 31, 2014, 2013 and 2012, the Asset Manager Affiliates made contributions of approximately $396,000, $315,000 and $302,000 to the Profit-Sharing Plan, respectively.
Certain employees of Asset Manager Affiliates may receive restricted stock grants in the stock of Asset Manager Affiliates sole member, KCAP Financial. For the years ended December 31, 2014, 2013 and 2012, non-cash compensation expense of approximately $589,000, $252,000 and $20,000 respectively, was expensed at Asset Manager Affiliates related to an allocated reimbursable expense for a grant of restricted stock of KCAP Financial.
On November 20, 2012, the Company entered into a senior credit agreement (the Senior Credit Facility) with Trimaran Advisors, pursuant to which Trimaran Advisors may borrow from time to time up to $20 million from the Company in order to provide the capital necessary to support one or more of Trimaran Advisors warehouse lines and/or working capital in connection with Trimaran Advisors warehouse activities. The Senior Credit Facility expires on November 20, 2017 and bears interest at an annual rate of 9.0%. As of December 27, 2012, the Senior Credit Facility was repaid and terminated and there were no borrowings outstanding as of December 31, 2012.
On February 26, 2013, the Company entered into a senior credit agreement (the Trimaran Credit Facility) with Trimaran Advisors, pursuant to which Trimaran Advisors may borrow from time to time up to $20 million from the Company in order to provide capital necessary to support one or more of Trimaran Advisors warehouse lines of credit and/or working capital in connection with Trimaran Advisors warehouse activities. The Trimaran Credit Facility expires on November 20, 2017 and bears interest at an annual rate of 9.0%. On April 15, 2013, the Trimaran Credit Facility was amended and increased from $20 million to
S-22
$23 million. At both December 31, 2014 and 2013, there was $23 million outstanding under the Trimaran Credit Facility. Interest expense on this facility was $2.0 million, $1.5 million and $185,000 for the years ending December 31, 2014, 2013 and 2012, respectively.
The Company has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2014 through March 31, 2015 for items that should potentially be recognized or disclosed in these financial statements. Management has determined that there are no material subsequent events that would require adjustment to, or disclosure in, these consolidated financial statements.
S-23
The Board of Directors and Shareholders of
Katonah 2007-I CLO Ltd.
We have audited the accompanying financial statements of Katonah 2007-I CLO Ltd. (the Fund), which comprise the statement of net assets, including the schedule of investments as of December 31, 2014, and the related statements of operations, changes in net assets, and cash flows for the year then ended, and the related notes to the combined financial statements.
Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Funds preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Katonah 2007-I CLO Ltd. at December 31, 2014, and the results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, NY
March 31, 2015
S-24
As of December 31, 2014 |
As of December 31, 2013 |
|||||||
ASSETS |
||||||||
Investments at fair value: |
||||||||
Debt securities | $ | 259,163,759 | $ | 292,304,054 | ||||
Equity securities | 1,649 | | ||||||
CLO rated notes | 14,208,540 | 18,123,734 | ||||||
Total investments at fair value | 273,373,948 | 310,427,788 | ||||||
Cash | 14,939,994 | 15,260,243 | ||||||
Accrued interest receivable | 631,388 | 674,911 | ||||||
Total assets | $ | 288,945,330 | $ | 326,362,942 | ||||
LIABILITIES |
||||||||
CLO Fund liabilities at fair value | $ | 290,699,426 | $ | 314,549,615 | ||||
Accrued interest payable | 1,835,809 | 2,090,368 | ||||||
Payable for open trades | | 4,013,750 | ||||||
Accounts payable and accrued expenses | 184,636 | 174,270 | ||||||
Due to affiliates | 10,852 | | ||||||
Total liabilities | 292,730,723 | 320,828,003 | ||||||
Commitments and Contingencies (Note 6) | | | ||||||
NET ASSETS |
||||||||
Total net assets | $ | (3,785,393 | ) | $ | 5,534,939 |
See accompanying notes to the financial statements.
S-25
For the Years Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Income |
||||||||||||
Interest income from investments | $ | 11,690,586 | $ | 12,591,277 | $ | 12,899,200 | ||||||
Interest income from cash and time deposits | 1,922 | 2,761 | 3,196 | |||||||||
Other income | 32,346 | 652,959 | 504,941 | |||||||||
Total income | 11,724,854 | 13,246,997 | 13,407,337 | |||||||||
Expenses |
||||||||||||
Interest expense | 10,736,878 | 11,758,985 | 11,701,098 | |||||||||
Management fees | 805,526 | 811,758 | 809,547 | |||||||||
Trustee fees | 109,164 | 89,309 | 88,963 | |||||||||
Professional fees | 178,954 | 143,068 | 168,111 | |||||||||
Administrative and other | 125,224 | 73,964 | 99,110 | |||||||||
Total expenses | 11,955,746 | 12,877,084 | 12,866,829 | |||||||||
Net realized and unrealized losses | (9,089,440 | ) | (3,169,825 | ) | (13,092,966 | ) | ||||||
Decrease in net assets resulting from operations | $ | (9,320,332 | ) | $ | (2,799,912 | ) | $ | (12,552,458 | ) |
See accompanying notes to the financial statements.
S-26
Net Assets | ||||
Balance at January 1, 2012 | $ | 20,887,309 | ||
Net income (loss) classified to appropriated retained earnings | (12,552,458 | ) | ||
Balance at January 1, 2013 | $ | 8,334,851 | ||
Decrease in net assets resulting from operations | (2,799,912 | ) | ||
Balance at December 31, 2013 | 5,534,939 | |||
Decrease in net assets resulting from operations | (9,320,332 | ) | ||
Balance at December 31, 2014 | $ | (3,785,393 | ) |
See accompanying notes to the financial statements.
S-27
Years Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
OPERATING ACTIVITIES: |
||||||||||||
Decrease in net assets resulting from operations | $ | (9,320,332 | ) | $ | (2,799,912 | ) | $ | (12,552,458 | ) | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Net realized and unrealized losses on investments | 5,807,622 | (909,471 | ) | (16,364,401 | ) | |||||||
Change in unrealized loss on debt | 3,281,818 | 4,079,296 | 29,457,367 | |||||||||
Purchase of investments | (29,960,071 | ) | (116,281,142 | ) | (101,848,974 | ) | ||||||
Proceeds from sale and redemption of investments | 61,206,288 | 117,165,606 | 103,177,496 | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Decrease in accrued interest receivable | 43,523 | 62,712 | 8,678 | |||||||||
Increase (decrease) in accounts payable and accrued expenses | 10,366 | (10,850 | ) | (10,994 | ) | |||||||
Increase in due to affiliates | 10,852 | | | |||||||||
Increase decrease in accounts payable and accrued expenses | 21,219 | (10,580 | ) | (10,994 | ) | |||||||
(Decrease) increase in payable for open trades | (4,013,750 | ) | 1,043,750 | (1,870,440 | ) | |||||||
(Decrease) in accrued interest expense | (254,559 | ) | (108,626 | ) | 340,175 | |||||||
Net cash (used in) provided by operating activities | 26,811,757 | 2,241,633 | 336,449 | |||||||||
Cash used in Financing Activities: |
||||||||||||
Repayments of Debt | (27,132,006 | ) | | | ||||||||
(27,132,006 | ) | | | |||||||||
CHANGE IN CASH | (320,249 | ) | 2,241,633 | 336,449 | ||||||||
CASH, BEGINNING OF YEAR | 15,260,243 | 13,018,610 | 12,682,161 | |||||||||
CASH, END OF YEAR | $ | 14,939,994 | $ | 15,260,243 | $ | 13,018,610 | ||||||
Supplemental Information: |
||||||||||||
Interest paid | $ | 10,991,437 | $ | 11,867,611 | $ | 11,360,923 |
See accompanying notes to the financial statements.
S-28
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
AdvancePierre Foods, Inc. Beverage, Food and Tobacco |
Term Loan (First Lien) 5.8% Cash, Due 7/17 |
$ | 490,000 | $ | 488,041 | $ | 487,244 | |||||||||
Alaska Communications Systems Holdings, Inc. Telecommunications |
Term Loan 6.3% Cash, Due 10/16 |
2,872,467 | 2,860,913 | 2,872,467 | ||||||||||||
Allison Transmission, Inc. Automobile |
Term B-2 Loan 2.9% Cash, Due 8/17 |
136,863 | 132,975 | 136,755 | ||||||||||||
Allison Transmission, Inc. Automobile |
Term B-3 Loan 3.8% Cash, Due 8/19 |
3,046,843 | 3,013,146 | 3,019,633 | ||||||||||||
AMC Entertainment Inc. Leisure, Amusement, Motion Pictures, Entertainment |
Initial Term Loan 3.5% Cash, Due 4/20 |
6,586,942 | 6,593,496 | 6,496,371 | ||||||||||||
Aramark Corporation Diversified/Conglomerate Service |
U.S. Term F Loan 3.3% Cash, Due 2/21 |
2,552,196 | 2,452,038 | 2,517,907 | ||||||||||||
Armored AutoGroup Inc. (fka Viking Acquisition Inc.) Personal and Non Durable Consumer Products (Mfg. Only) |
New Term Loan 6.0% Cash, Due 11/16 |
465,000 | 463,479 | 461,317 | ||||||||||||
Armstrong World Industries, Inc. Buildings and Real Estate |
Term Loan B 3.5% Cash, Due 3/20 |
982,500 | 982,500 | 973,599 | ||||||||||||
Asurion, LLC (fka Asurion Corporation) Insurance |
Incremental Tranche B-1 Term Loan 5.0% Cash, Due 5/19 |
958,715 | 962,083 | 948,275 | ||||||||||||
Asurion, LLC (fka Asurion Corporation) Insurance |
Non-Amortizing Term Loan (First Lien) 3.8% Cash, Due 3/17 |
2,500,000 | 2,490,892 | 2,478,138 | ||||||||||||
Avis Budget Car Rental, LLC Personal Transportation |
Tranche B Term Loan 3.0% Cash, Due 3/19 |
1,560,825 | 1,547,229 | 1,543,266 | ||||||||||||
Berry Plastics Corporation Containers, Packaging and Glass |
Term E Loan 3.8% Cash, Due 1/21 |
2,591,612 | 2,490,312 | 2,529,142 | ||||||||||||
Big Heart Pet Brands (fka Del Monte Corporation) Beverage, Food and Tobacco |
Initial Term Loan 3.5% Cash, Due 3/20 |
2,740,772 | 2,744,696 | 2,637,993 | ||||||||||||
Biomet, Inc. Healthcare, Education and Childcare |
Dollar Term B-2 Loan 3.7% Cash, Due 7/17 |
2,690,775 | 2,673,717 | 2,682,366 | ||||||||||||
BPA Laboratories Inc. Healthcare, Education and Childcare |
Term Loan (First Lien) 2.7% Cash, Due 7/17 |
1,743,896 | 1,610,040 | 1,572,410 | ||||||||||||
BPA Laboratories Inc. Healthcare, Education and Childcare |
Term Loan (Second Lien) 2.7% Cash, Due 7/17 |
1,516,318 | 1,399,930 | 1,344,474 | ||||||||||||
Bragg Communications Incorporated Broadcasting and Entertainment |
Term Loan B 3.5% Cash, Due 2/18 |
5,658,331 | 5,697,763 | 5,658,331 | ||||||||||||
Burlington Coat Factory Warehouse Corporation Retail Stores |
Term B-3 Loan 4.3% Cash, Due 8/21 |
2,488,182 | 2,448,868 | 2,459,158 | ||||||||||||
Calpine Corporation Utilities |
Term Loan (3/11) 4.0% Cash, Due 4/18 |
962,500 | 962,500 | 955,281 | ||||||||||||
Calpine Corporation Utilities |
Term Loan (6/11) 4.0% Cash, Due 4/18 |
2,895,000 | 2,884,566 | 2,873,288 | ||||||||||||
Capital Automotive L.P. Finance |
Tranche B-1 Term Loan Facility 4.0% Cash, Due 4/19 |
1,284,355 | 1,275,210 | 1,261,879 | ||||||||||||
Capsugel Holdings US, Inc. Healthcare, Education and Childcare |
Initial Term Loan 3.5% Cash, Due 8/18 |
729,906 | 727,712 | 715,081 | ||||||||||||
CBRE Services, Inc. (fka CB Richard Ellis Services, Inc.). Buildings and Real Estate |
Tranche B Term Loan 2.9% Cash, Due 3/21 |
1,572,000 | 1,565,872 | 1,567,088 | ||||||||||||
Cedar Fair, L.P. Leisure, Amusement, Motion Pictures, Entertainment |
U.S. Term Facility 3.3% Cash, Due 3/20 |
966,429 | 964,638 | 967,153 | ||||||||||||
Celanese US Holdings LLC Chemicals, Plastics and Rubber |
Dollar Term C-3 Loan 2.5% Cash, Due 10/18 |
1,264,273 | 1,212,980 | 1,264,962 |
See accompanying notes to the financial statements.
S-29
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
Cequel Communications, LLC Broadcasting and Entertainment |
Term Loan 3.5% Cash, Due 2/19 |
$ | 1,899,929 | $ | 1,888,684 | $ | 1,874,337 | |||||||||
Charter Communications Operating, LLC (aka CCO Safari LLC) Broadcasting and Entertainment |
Term F Loan 3.0% Cash, Due 1/21 |
1,498,923 | 1,489,318 | 1,472,385 | ||||||||||||
CHS/Community Health Systems, Inc. Healthcare, Education and Childcare |
2017 Term E Loan 3.5% Cash, Due 1/17 |
1,218,364 | 1,212,543 | 1,213,368 | ||||||||||||
CHS/Community Health Systems, Inc. Healthcare, Education and Childcare |
2021 Term D Loan 4.3% Cash, Due 1/21 |
3,247,343 | 3,212,683 | 3,244,972 | ||||||||||||
Cinemark USA, Inc. Leisure, Amusement, Motion Pictures, Entertainment |
Term Loan 3.2% Cash, Due 12/19 |
2,940,000 | 2,947,059 | 2,918,685 | ||||||||||||
Consolidated Communications, Inc. Telecommunications |
Initial Term Loan 4.3% Cash, Due 12/20 |
2,947,575 | 2,924,508 | 2,931,909 | ||||||||||||
Covanta Energy Corporation Ecological |
Term Loan 3.3% Cash, Due 3/19 |
660,000 | 657,997 | 658,970 | ||||||||||||
Crown Castle Operating Company Buildings and Real Estate |
Extended Incremental Tranche B-2 Term Loan 3.0% Cash, Due 1/21 |
2,918,223 | 2,905,656 | 2,876,886 | ||||||||||||
Davids Bridal, Inc. Retail Stores |
Initial Term Loan 5.3% Cash, Due 10/19 |
477,723 | 474,458 | 456,424 | ||||||||||||
Delta 2 (Lux) S.a r.l Leisure, Amusement, Motion Pictures, Entertainment |
Facility B3 (USD) 4.8% Cash, Due 7/21 |
3,421,774 | 3,396,429 | 3,349,780 | ||||||||||||
Dex Media West LLC Printing and Publishing |
New Term Loan 8.0% Cash, Due 12/16 |
802,692 | 795,745 | 705,566 | ||||||||||||
DJO Finance LLC (ReAble Therapeutics Fin LLC) Healthcare, Education and Childcare |
New Tranche B Term Loan 4.3% Cash, Due 9/17 |
1,965,100 | 1,988,287 | 1,925,798 | ||||||||||||
Drumm Investors LLC (aka Golden Living) Healthcare, Education and Childcare |
Term Loan 6.8% Cash, Due 5/18 |
3,778,528 | 3,760,479 | 3,797,421 | ||||||||||||
Dunkin Brands, Inc. Personal, Food and Miscellaneous Services |
Term B-4 Loan 3.3% Cash, Due 2/21 |
2,131,738 | 2,100,720 | 2,081,120 | ||||||||||||
Education Management LLC(3) Healthcare, Education and Childcare |
Tranche C-2 Term Loan 0.0% Cash, Due 6/16 |
1,558,253 | 1,560,738 | 708,226 | ||||||||||||
Epicor Software Corporation (fka Eagle Parent Inc.) Electronics |
Term B-2 Loan 4.0% Cash, Due 5/18 |
1,864,054 | 1,849,531 | 1,844,249 | ||||||||||||
EquiPower Resources Holdings, LLC Utilities |
Term B Advance (First Lien) 4.3% Cash, Due 12/18 |
1,380,022 | 1,367,347 | 1,374,274 | ||||||||||||
Essential Power, LLC Utilities |
Term Loan 4.8% Cash, Due 8/19 |
942,322 | 933,009 | 925,831 | ||||||||||||
FCA US LLC (fka Chrysler Group LLC) Automobile |
Term Loan B 3.5% Cash, Due 5/17 |
2,899,837 | 2,714,079 | 2,890,007 | ||||||||||||
Federal-Mogul Corporation Automobile |
Tranche B Term Loan (2014) 4.0% Cash, Due 4/18 |
1,582,319 | 1,528,157 | 1,562,050 | ||||||||||||
General Nutrition Centers, Inc. Retail Stores |
Amended Tranche B Term Loan 3.3% Cash, Due 3/19 |
995,722 | 999,421 | 971,248 | ||||||||||||
Genpact Limited Diversified/Conglomerate Service |
Term Loan 3.5% Cash, Due 8/19 |
490,038 | 488,398 | 485,955 | ||||||||||||
Gentiva Health Services, Inc. Healthcare, Education and Childcare |
Initial Term B Loan 6.5% Cash, Due 10/19 |
3,390,400 | 3,219,451 | 3,388,298 | ||||||||||||
Getty Images, Inc. Printing and Publishing |
Initial Term Loan 4.8% Cash, Due 10/19 |
2,940,000 | 2,919,828 | 2,707,240 | ||||||||||||
Graceway Pharmaceuticals, LLC(3) Healthcare, Education and Childcare |
Term B Loan (First Lien) Sold Out 09/28/2012 0.0% Cash, Due 5/12 |
29,332 | 29,309 | 29,625 | ||||||||||||
Hamilton Lane Advisors, L.L.C. Finance |
Loan 4.0% Cash, Due 2/18 |
700,022 | 696,321 | 686,022 | ||||||||||||
Harland Clarke Holdings Corp. (fka Clarke American Corp.) Printing and Publishing |
Tranche B-2 Term Loan 5.5% Cash, Due 6/17 |
1,684,377 | 1,684,377 | 1,680,873 |
See accompanying notes to the financial statements.
S-30
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
Harland Clarke Holdings Corp. (fka Clarke American Corp.) Printing and Publishing |
Tranche B-3 Term Loan 7.0% Cash, Due 5/18 |
968,553 | 968,553 | 973,396 | ||||||||||||
HCA Inc. Healthcare, Education and Childcare |
Tranche B-4 Term Loan 3.0% Cash, Due 5/18 |
$ | 2,962,500 | $ | 2,905,967 | $ | 2,942,829 | |||||||||
HCR ManorCare, Inc. (fka HCR Healthcare, LLC) Healthcare, Education and Childcare |
Initial Term Loan 5.0% Cash, Due 4/18 |
481,250 | 479,007 | 463,504 | ||||||||||||
Hertz Corporation, The Personal Transportation |
Tranche B-1 Term Loan 4.0% Cash, Due 3/18 |
3,934,811 | 3,934,345 | 3,861,033 | ||||||||||||
Hertz Corporation, The Personal Transportation |
Tranche B-2 Term Loan 3.5% Cash, Due 3/18 |
962,850 | 959,731 | 939,583 | ||||||||||||
Huntsman International LLC Chemicals, Plastics and Rubber |
Extended Term B Loan 2.7% Cash, Due 4/17 |
2,266,992 | 2,220,325 | 2,230,154 | ||||||||||||
Ineos US Finance LLC Chemicals, Plastics and Rubber |
Cash Dollar Term Loan 3.8% Cash, Due 5/18 |
3,935,059 | 3,945,080 | 3,825,959 | ||||||||||||
Infor (US), Inc. (fka Lawson Software Inc.) Electronics |
Tranche B-5 Term Loan 3.8% Cash, Due 6/20 |
2,376,449 | 2,390,597 | 2,310,621 | ||||||||||||
International Architectural Products, Inc.(3) Mining, Steel, Iron and Non-Precious Metals |
Term Loan 0.0% Cash, Due 5/15 |
81,467 | 81,467 | | ||||||||||||
J. Crew Group, Inc. Retail Stores |
Initial Loan 4.0% Cash, Due 3/21 |
3,920,172 | 3,923,591 | 3,704,563 | ||||||||||||
Jarden Corporation Personal and Non Durable Consumer Products (Mfg. Only) |
New Tranche B Term Loan 2.7% Cash, Due 3/18 |
1,925,036 | 1,875,187 | 1,923,236 | ||||||||||||
Jazz Pharmaceuticals, Inc. Healthcare, Education and Childcare |
Tranche 2 Term Loan 3.3% Cash, Due 6/18 |
1,980,000 | 1,972,187 | 1,959,378 | ||||||||||||
JBS USA, LLC Beverage, Food and Tobacco |
Initial Term Loan 3.8% Cash, Due 5/18 |
861,507 | 859,411 | 855,045 | ||||||||||||
JMC Steel Group, Inc. Mining, Steel, Iron and Non-Precious Metals |
Term Loan 4.8% Cash, Due 4/17 |
1,454,728 | 1,451,490 | 1,431,998 | ||||||||||||
Jo-Ann Stores, Inc. Retail Stores |
Term B Loan 4.0% Cash, Due 3/18 |
984,962 | 988,287 | 959,107 | ||||||||||||
KAR Auction Services, Inc. Automobile |
Tranche B-2 Term Loan 3.5% Cash, Due 3/21 |
3,449,234 | 3,504,791 | 3,397,495 | ||||||||||||
Key Safety Systems, Inc. Automobile |
Initial Term Loan 4.8% Cash, Due 8/21 |
1,377,871 | 1,349,316 | 1,370,982 | ||||||||||||
Kronos Incorporated Diversified/Conglomerate Service |
Incremental Term Loan (First Lien) 4.5% Cash, Due 10/19 |
981,362 | 977,834 | 975,886 | ||||||||||||
Landrys Inc. (fka Landrys Restaurants, Inc.) Beverage, Food and Tobacco |
B Term Loan 4.0% Cash, Due 4/18 |
2,666,667 | 2,691,051 | 2,654,000 | ||||||||||||
Las Vegas Sands, LLC Hotels, Motels, Inns, and Gaming |
Term B Loan 3.3% Cash, Due 12/20 |
3,234,265 | 3,198,929 | 3,220,794 | ||||||||||||
Live Nation Entertainment, Inc. Leisure, Amusement, Motion Pictures, Entertainment |
Term B-1 Loan 3.5% Cash, Due 8/20 |
477,716 | 475,797 | 474,133 | ||||||||||||
Longview Power, LLC(3) Utilities |
2017 Term Loan 0.0% Cash, Due 10/17 |
828,079 | 760,275 | 538,252 | ||||||||||||
Longview Power, LLC Utilities |
DIP Delayed Term Loan 5.6% Cash, Due 11/15 |
2,821,995 | 1,749,637 | 2,821,995 | ||||||||||||
LPL Holdings, Inc. Finance |
2013 Incremental Tranche B Term Loan 3.3% Cash, Due 3/19 |
1,945,350 | 1,938,334 | 1,928,328 | ||||||||||||
MCC Iowa LLC Broadcasting and Entertainment |
Tranche J Term Loan 3.8% Cash, Due 6/21 |
697,448 | 686,170 | 684,078 | ||||||||||||
Mediacom Illinois, LLC (fka Mediacom Communications, LLC) Broadcasting and Entertainment |
Tranche F Term Loan 2.6% Cash, Due 3/18 |
5,955,000 | 5,943,088 | 5,843,344 | ||||||||||||
National CineMedia, LLC Leisure, Amusement, Motion Pictures, Entertainment |
Term Loan (2013) 2.9% Cash, Due 11/19 |
1,000,000 | 994,404 | 953,125 |
See accompanying notes to the financial statements.
S-31
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
NBTY, INC. Personal and Non Durable Consumer Products (Mfg. Only) |
Term B-2 Loan 3.5% Cash, Due 10/17 |
1,342,239 | 1,350,922 | 1,307,569 | ||||||||||||
Newsday, LLC Printing and Publishing |
Term Loan 3.7% Cash, Due 10/16 |
$ | 2,250,000 | $ | 2,258,527 | $ | 2,242,969 | |||||||||
Novelis, Inc. Mining, Steel, Iron and Non-Precious Metals |
Initial Term Loan 3.8% Cash, Due 3/17 |
2,918,047 | 2,923,391 | 2,890,325 | ||||||||||||
NRG Energy, Inc. Utilities |
Term Loan (2013) 2.8% Cash, Due 7/18 |
965,306 | 963,643 | 948,539 | ||||||||||||
Ocwen Loan Servicing Finance |
Initial Term Loan 5.0% Cash, Due 2/18 |
1,550,821 | 1,566,745 | 1,462,223 | ||||||||||||
Onex Carestream Finance LP Healthcare, Education and Childcare |
Term Loan (First Lien 2013) 5.0% Cash, Due 6/19 |
2,582,667 | 2,605,194 | 2,577,282 | ||||||||||||
OSI Restaurant Partners, LLC Personal, Food and Miscellaneous Services |
2013 Replacement Term Loan 3.5% Cash, Due 10/19 |
337,500 | 335,015 | 334,653 | ||||||||||||
Pacific Drilling S.A Oil and Gas |
Term Loan 4.5% Cash, Due 6/18 |
2,208,186 | 2,212,858 | 1,836,482 | ||||||||||||
Pantry, Inc., The Grocery |
Term Loan 4.8% Cash, Due 8/19 |
2,930,559 | 2,911,264 | 2,928,112 | ||||||||||||
Party City Holdings Inc. Retail Stores |
2014 Replacement Term Loan 4.0% Cash, Due 7/19 |
488,825 | 484,699 | 479,293 | ||||||||||||
PetCo Animal Supplies, Inc. Retail Stores |
New Loans 4.0% Cash, Due 11/17 |
3,379,394 | 3,325,259 | 3,348,405 | ||||||||||||
Petroleum GEO-Services ASA (PGS Finance, Inc) Oil and Gas |
Extended Term Loan 3.3% Cash, Due 3/21 |
4,962,500 | 4,962,500 | 4,193,313 | ||||||||||||
PQ Corporation Chemicals, Plastics and Rubber |
2014 Term Loan 4.0% Cash, Due 8/17 |
1,960,000 | 1,948,649 | 1,928,150 | ||||||||||||
Progressive Waste Solutions Ltd. Ecological |
Term B Loan 3.0% Cash, Due 10/19 |
735,000 | 732,465 | 739,597 | ||||||||||||
QCE, LLC (Quiznos) Personal, Food and Miscellaneous Services |
Existing Term Loan 7.5% Cash, Due 6/19 |
387,172 | 387,160 | 167,452 | ||||||||||||
R.H. Donnelley Inc. Printing and Publishing |
Loan 9.8% Cash, Due 12/16 | 448,594 | 446,327 | 324,298 | ||||||||||||
Regal Cinemas Corporation Leisure, Amusement, Motion Pictures, Entertainment |
Term Loan 2.7% Cash, Due 8/17 |
971,049 | 975,191 | 950,414 | ||||||||||||
Remy International, Inc. Automobile |
Term B Loan 2013 4.3% Cash, Due 3/20 |
532,537 | 531,551 | 528,543 | ||||||||||||
Revlon Consumer Products Corporation Personal and Non Durable Consumer Products (Mfg. Only) |
Replacement Term Loan 3.3% Cash, Due 11/17 |
3,500,000 | 3,527,549 | 3,477,040 | ||||||||||||
Reynolds Group Holdings Inc. Containers, Packaging and Glass |
Incremental U.S. Term Loan 4.0% Cash, Due 12/18 |
2,112,116 | 2,112,116 | 2,079,853 | ||||||||||||
RGIS Services, LLC Diversified/Conglomerate Service |
Tranche C Term Loan 5.5% Cash, Due 10/17 |
2,624,862 | 2,579,805 | 2,408,310 | ||||||||||||
Roundys Supermarkets, Inc. Grocery |
Tranche B Term Loan 5.8% Cash, Due 3/21 |
2,220,164 | 2,190,821 | 2,094,347 | ||||||||||||
RPI Finance Trust Healthcare, Education and Childcare |
Term B-2 Term Loan 3.3% Cash, Due 5/18 |
1,893,611 | 1,886,527 | 1,892,030 | ||||||||||||
Schaeffler AG (formerly named INA Beteiligungsgesellschaft mit beschränkter Haftung) Automobile |
Facility B-USD 4.3% Cash, Due 5/20 |
3,000,000 | 3,018,175 | 3,004,500 | ||||||||||||
Seaworld Parks & Entertainment, Inc. (f/k/a SW Acquisitions Co., Inc.) Leisure, Amusement, Motion Pictures, Entertainment |
Term B-2 Loan 3.0% Cash, Due 5/20 |
897,686 | 889,092 | 853,699 | ||||||||||||
Select Medical Corporation Healthcare, Education and Childcare |
Series E Tranche B Term Loan 3.8% Cash, Due 6/18 |
2,179,511 | 2,161,977 | 2,149,543 | ||||||||||||
Semiconductor Components Industries, LLC (On Semiconductor) Electronics |
Term Loan 2.0% Cash, Due 1/18 |
5,468,750 | 5,368,168 | 5,277,344 |
See accompanying notes to the financial statements.
S-32
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
Seminole Tribe of Florida Hotels, Motels, Inns, and Gaming |
Initial Term Loan 3.0% Cash, Due 4/20 |
2,632,500 | 2,632,500 | 2,625,919 | ||||||||||||
Sensata Technologies B.V. (Sensata Technologies Finance Company, LLC) Electronics |
Term Loan 3.3% Cash, Due 5/19 |
$ | 673,744 | $ | 670,900 | $ | 674,408 | |||||||||
Sinclair Television Group, Inc. Broadcasting and Entertainment |
New Tranche B Term Loan 3.0% Cash, Due 4/20 |
67,671 | 67,406 | 66,191 | ||||||||||||
Six Flags Theme Parks, Inc. Leisure, Amusement, Motion Pictures, Entertainment |
Tranche B Term Loan 3.5% Cash, Due 12/18 |
1,658,557 | 1,667,416 | 1,652,338 | ||||||||||||
Skilled Healthcare Group, Inc. Healthcare, Education and Childcare |
Term Loan 7.0% Cash, Due 4/16 |
848,943 | 853,886 | 848,943 | ||||||||||||
Spectrum Brands, Inc. Personal and Non Durable Consumer Products (Mfg. Only) |
Tranche A Term Loan 3.0% Cash, Due 9/17 |
2,242,023 | 2,234,500 | 2,237,819 | ||||||||||||
Spirit Aerosystems, Inc. (fka Mid-Western Aircraft Systems, Inc and Onex Wind Finance LP.) Aerospace and Defense |
Term Loan B 3.3% Cash, Due 9/20 |
2,431,250 | 2,420,574 | 2,401,868 | ||||||||||||
SRAM, LLC Leisure, Amusement, Motion Pictures, Entertainment |
Term Loan (First Lien) 4.0% Cash, Due 4/20 |
742,374 | 740,159 | 721,959 | ||||||||||||
SS&C Technologies Holdings Europe S.A.R.L. Electronics |
2013 Replacement Term B-2 Loan 3.3% Cash, Due 6/19 |
49,243 | 48,879 | 49,159 | ||||||||||||
SS&C Technologies, Inc.,/Sunshine Acquisition II, Inc. Electronics |
2013 Replacement Term B-1 Loan 3.3% Cash, Due 6/19 |
476,020 | 472,500 | 475,204 | ||||||||||||
SunGard Data Systems Inc (Solar Capital Corp.) Electronics |
Tranche E Term Loan 4.0% Cash, Due 3/20 |
3,986,225 | 3,886,804 | 3,956,328 | ||||||||||||
Telesat Canada Telecommunications |
U.S. Term B-2 Loan 3.5% Cash, Due 3/19 |
975,131 | 972,162 | 964,166 | ||||||||||||
Tesoro Corporation Oil and Gas |
Initial Term Loan 2.4% Cash, Due 5/16 |
198,750 | 198,750 | 198,502 | ||||||||||||
TPF Generation Holdings, LLC Utilities |
Term Loan 4.8% Cash, Due 12/17 |
190,325 | 181,043 | 173,196 | ||||||||||||
TransDigm Inc. Aerospace and Defense |
Tranche C Term Loan 3.8% Cash, Due 2/20 |
1,925,626 | 1,888,275 | 1,897,425 | ||||||||||||
Tronox Pigments (Netherlands) B. V. Chemicals, Plastics and Rubber |
New Term Loan 4.0% Cash, Due 3/20 |
2,525,107 | 2,507,905 | 2,489,869 | ||||||||||||
TWCC Holding Corp. Broadcasting and Entertainment |
Term Loan 3.5% Cash, Due 2/17 |
3,224,114 | 3,211,534 | 3,154,441 | ||||||||||||
Univar Inc. Chemicals, Plastics and Rubber |
Term B Loan 5.0% Cash, Due 6/17 |
3,125,113 | 3,018,493 | 3,032,219 | ||||||||||||
Univision Communications Inc. Broadcasting and Entertainment |
Replacement First-Lien Term Loan 4.0% Cash, Due 3/20 |
3,273,587 | 3,247,237 | 3,208,115 | ||||||||||||
UPC Financing Partnership Broadcasting and Entertainment |
Facility AH 3.3% Cash, Due 6/21 |
700,000 | 704,895 | 684,541 | ||||||||||||
Vertafore, Inc. Electronics |
Term Loan (2013) 4.3% Cash, Due 10/19 |
945,935 | 945,935 | 938,131 | ||||||||||||
VFH Parent LLC Finance |
Term Loan (2013) 5.8% Cash, Due 11/19 |
990,846 | 1,002,866 | 983,414 | ||||||||||||
Walter Investment Management Corp. Finance |
Tranche B Term Loan 4.8% Cash, Due 12/20 |
2,559,736 | 2,548,795 | 2,316,561 | ||||||||||||
Wendys International, Inc Personal, Food and Miscellaneous Services |
Term B Loan 3.3% Cash, Due 5/19 |
1,347,261 | 1,337,449 | 1,339,407 | ||||||||||||
WESCO Distribution, Inc. Machinery (Non-Agriculture, Non-Construction, Non-Electronic) |
Tranche B-1 Loan 3.8% Cash, Due 12/19 |
249,643 | 247,875 | 248,707 | ||||||||||||
West Corporation Diversified/Conglomerate Service |
Term B-10 Loan 3.3% Cash, Due 6/18 |
1,776,796 | 1,786,986 | 1,748,811 | ||||||||||||
West Corporation Diversified/Conglomerate Service |
Term B-9 Loan 2.8% Cash, Due 7/16 |
1,958,994 | 1,958,994 | 1,946,750 |
See accompanying notes to the financial statements.
S-33
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
WideOpenWest Finance, LLC Telecommunications |
Term B-1 Loan 2013 3.8% Cash, Due 7/17 |
5,170,755 | 5,200,187 | 5,131,975 | ||||||||||||
Windstream Corporation Telecommunications |
Tranche B-4 Term Loan 3.5% Cash, Due 1/20 |
$ | 3,430,000 | $ | 3,443,539 | $ | 3,398,564 | |||||||||
WireCo WorldGroup Inc. Machinery (Non-Agriculture, Non-Construction, Non-Electronic) |
Term Loan 6.0% Cash, Due 2/17 |
1,936,491 | 1,927,498 | 1,938,911 | ||||||||||||
Zuffa, LLC Leisure, Amusement, Motion Pictures, Entertainment |
Initial Term Loan (2013) 3.8% Cash, Due 2/20 |
2,940,019 | 2,929,192 | 2,807,718 | ||||||||||||
Total Investment in Debt Securities | $ | 266,252,508 | $ | 263,225,703 | $ | 259,163,759 |
Portfolio Company/Principal Business | Equity Investment | Shares | Cost | Fair Value | ||||||||||||
QCE, LLC (Quiznos)(2) Retail Stores |
New Common Stock | | $ | 1,256.00 | $ | 1,649.00 | ||||||||||
Total Investment in Equity Securities | $ | 1,256 | $ | 1,649 |
Portfolio Company | CLO Investment | Principal | Cost | Fair Value | ||||||||||||
APID 2007-5A(1) CLO Rated Notes |
Floating 04/2021 D 03761XAG5 | $ | 1,000,000 | $ | 1,000,000 | $ | 947,481 | |||||||||
Interest Rate | three-month LIBOR + 3.55% | |||||||||||||||
HLCNL 2007-2A(1) CLO Rated Notes |
Floating 04/2021 D 40537AAA3 | 3,000,000 | 2,962,139 | 2,854,478 | ||||||||||||
Interest Rate | three-month LIBOR + 3.60% | |||||||||||||||
MACCL 2007-1A(1) CLO Rated Notes |
Floating 07/2023 B1L 55265AAL5 | 2,000,000 | 2,000,000 | 1,901,675 | ||||||||||||
Interest Rate | three-month LIBOR + 1.70% | |||||||||||||||
MDPK 2007-4A(1) CLO Rated Notes |
Floating 03/2021 D 55817UAF7 | 2,000,000 | 2,000,000 | 1,871,637 | ||||||||||||
Interest Rate | three-month LIBOR + 1.43% | |||||||||||||||
NAVIG 2007-2A(1) CLO Rated Notes |
Floating 04/2021 D 63937HAD0 | 3,000,000 | 3,000,000 | 2,900,007 | ||||||||||||
Interest Rate | three-month LIBOR + 1.70% | |||||||||||||||
TRAL 2007-1A(1) CLO Rated Notes |
Floating 04/2022 C 89288BAG6 | 3,000,000 | 3,000,000 | 2,784,073 | ||||||||||||
Interest Rate | three-month LIBOR + 1.50% | |||||||||||||||
TRAL 2007-1A(1) CLO Rated Notes |
Floating 04/2022 D 89288AAA1 | 1,000,000 | 1,000,000 | 949,189 | ||||||||||||
Interest Rate | three-month LIBOR + 3.75% | |||||||||||||||
Total Investment in CLO Rated Notes | 15,000,000 | 14,962,139 | 14,208,540 | |||||||||||||
Total Investments | $ | 281,252,508 | $ | 278,189,098 | $ | 273,373,948 |
(1) | Investment in a Collateralized Loan Obligation Fund. |
(2) | Equity investment in common stock. |
(3) | Loan on non-accrual status. |
See accompanying notes to the financial statements.
S-34
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
Acosta, Inc. Grocery |
Term B Loan (2013) 4.3% Cash, Due 3/18 |
$ | 1,973,570 | $ | 1,988,570 | $ | 1,989,852 | |||||||||
AdvancePierre Foods, Inc. Beverage, Food and Tobacco |
Term Loan (First Lien) 5.8% Cash, Due 7/17 |
495,000 | 491,250 | 490,049 | ||||||||||||
Advantage Sales & Marketing Inc. Grocery |
2013 Term Loan (First Lien) 4.3% Cash, Due 12/17 |
3,252,912 | 3,257,249 | 3,272,429 | ||||||||||||
AES Corporation, The Utilities |
2013 Other Term Loan 3.8% Cash, Due 6/18 |
1,521,064 | 1,521,064 | 1,533,111 | ||||||||||||
Alaska Communications Systems Holdings, Inc. Telecommunications |
Term Loan 6.3% Cash, Due 10/16 |
3,078,978 | 3,058,621 | 3,078,053 | ||||||||||||
Allison Transmission, Inc. Automobile |
New Term B-2 Loan 3.2% Cash, Due 8/17 |
204,456 | 193,153 | 205,670 | ||||||||||||
Allison Transmission, Inc. Automobile |
Term B-3 Loan 3.8% Cash, Due 8/19 |
3,077,619 | 3,034,747 | 3,095,900 | ||||||||||||
Alpha Topco Limited Leisure, Amusement, Motion Pictures, Entertainment |
New Facility B (USD) 4.5% Cash, Due 4/19 |
3,439,099 | 3,411,637 | 3,480,179 | ||||||||||||
Altegrity, Inc (f.k.a. US Investigations Services, Inc.) Diversified/Conglomerate Service |
Term Loan 4.8% Cash, Due 2/15 |
384,419 | 384,419 | 376,730 | ||||||||||||
AMC Entertainment Inc. Leisure, Amusement, Motion Pictures, Entertainment |
Initial Term Loan 3.5% Cash, Due 4/20 |
6,653,985 | 6,662,788 | 6,675,244 | ||||||||||||
Aptalis Pharma Inc. (Aptalis Pharma Canada Inc.) Healthcare, Education and Childcare |
Term B Loan 6.0% Cash, Due 10/20 |
491,269 | 481,269 | 500,890 | ||||||||||||
Aramark Corporation Diversified/Conglomerate Service |
LC-2 Facility 1.8% Cash, Due 7/16 |
163,007 | 151,189 | 163,639 | ||||||||||||
Aramark Corporation Diversified/Conglomerate Service |
LC-3 Facility 1.8% Cash, Due 7/16 |
21,980 | 21,785 | 22,035 | ||||||||||||
Aramark Corporation Diversified/Conglomerate Service |
U.S. Term B Loan (Extending) 3.7% Cash, Due 7/16 | 1,360,339 | 1,180,638 | 1,365,610 | ||||||||||||
Aramark Corporation Diversified/Conglomerate Service |
U.S. Term C Loan 3.7% Cash, Due 7/16 |
272,850 | 270,420 | 273,532 | ||||||||||||
Armored AutoGroup Inc. (fka Viking Acquisition Inc.) Personal and Non Durable Consumer Products (Mfg. Only) |
New Term Loan 6.0% Cash, Due 11/16 |
485,000 | 486,859 | 487,427 | ||||||||||||
Armstrong World Industries, Inc.(3) Buildings and Real Estate(3) |
Term Loan B 3.5% Cash, Due 3/20 |
992,500 | 992,500 | 993,741 | ||||||||||||
Asurion, LLC (fka Asurion Corporation) Insurance |
Incremental Tranche B-1 Term Loan 4.5% Cash, Due 5/19 |
990,000 | 995,000 | 991,584 | ||||||||||||
Aurora Diagnostics, LLC Healthcare, Education and Childcare |
Tranche B Term Loan 6.8% Cash, Due 5/16 |
455,556 | 455,769 | 425,518 | ||||||||||||
Avis Budget Car Rental, LLC Personal Transportation |
Tranche B Term Loan 3.0% Cash, Due 3/19 |
1,576,711 | 1,568,193 | 1,577,302 | ||||||||||||
Berry Plastics Corporation Containers, Packaging and Glass |
Term C Loan 2.2% Cash, Due 1/14 |
2,860,149 | 2,704,448 | 2,861,736 | ||||||||||||
Biomet, Inc. Healthcare, Education and Childcare |
Dollar Term B-2 Loan 3.7% Cash, Due 7/17 |
2,879,962 | 2,838,076 | 2,901,864 | ||||||||||||
Bragg Communications Incorporated Broadcasting and Entertainment |
Term Loan B 3.5% Cash, Due 2/18 |
5,716,515 | 5,770,770 | 5,732,007 | ||||||||||||
Burger King Corporation Personal, Food and Miscellaneous Services |
Tranche B Term Loan (2012) 3.8% Cash, Due 9/19 |
3,653,750 | 3,644,500 | 3,675,563 | ||||||||||||
Burlington Coat Factory Warehouse Corporation Retail Stores |
Term B-2 Loan 4.3% Cash, Due 2/17 |
2,602,937 | 2,573,187 | 2,630,593 |
See accompanying notes to the financial statements.
S-35
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
BWay Holding Company Containers, Packaging and Glass |
Initial Term Loan 4.5% Cash, Due 8/17 |
$ | 990,000 | $ | 985,000 | $ | 997,272 | |||||||||
Calpine Corporation Utilities |
Term Loan (3/11) 4.0% Cash, Due 4/18 |
972,500 | 972,500 | 980,917 | ||||||||||||
Calpine Corporation Utilities |
Term Loan (6/11) 4.0% Cash, Due 4/18 |
2,925,000 | 2,902,613 | 2,950,316 | ||||||||||||
Capital Automotive L.P. Finance |
Tranche B-1 Term Loan Facility 4.0% Cash, Due 4/19 |
1,320,439 | 1,301,514 | 1,330,342 | ||||||||||||
Capsugel Holdings US, Inc. Healthcare, Education and Childcare |
Initial Term Loan 3.5% Cash, Due 8/18 |
796,029 | 791,042 | 797,526 | ||||||||||||
Catalent Pharma Solutions, Inc. (f/k/a Cardinal Health 409, Inc.) Healthcare, Education and Childcare |
Term Borrowing 6.5% Cash, Due 12/17 |
250,000 | 249,375 | 254,531 | ||||||||||||
CBRE Services, Inc. (fka CB Richard Ellis Services, Inc.).(3) Buildings and Real Estate(3) |
Tranche B Term Loan 2.9% Cash, Due 3/21 |
1,588,000 | 1,568,100 | 1,596,933 | ||||||||||||
Cedar Fair, L.P. Leisure, Amusement, Motion Pictures, Entertainment |
U.S. Term Facility 3.3% Cash, Due 3/20 |
982,302 | 979,802 | 987,827 | ||||||||||||
Celanese US Holdings LLC Chemicals, Plastics and Rubber |
Dollar Term C-2 Commitment 2.2% Cash, Due 10/16 |
1,277,043 | 1,290,595 | 1,293,722 | ||||||||||||
Cequel Communications, LLC Broadcasting and Entertainment |
Term Loan 3.5% Cash, Due 2/19 |
1,965,000 | 1,945,000 | 1,971,347 | ||||||||||||
Charter Communications Operating, LLC Broadcasting and Entertainment |
Term F Loan 3.0% Cash, Due 12/20 |
1,514,141 | 1,435,270 | 1,505,389 | ||||||||||||
Chrysler Group LLC Automobile |
Term Loan B 3.5% Cash, Due 5/17 |
2,929,887 | 2,718,094 | 2,954,908 | ||||||||||||
CHS/Community Health Systems, Inc. Healthcare, Education and Childcare |
Extended Term Loan 3.7% Cash, Due 1/17 |
4,510,815 | 4,435,896 | 4,552,743 | ||||||||||||
Cinemark USA, Inc. Leisure, Amusement, Motion Pictures, Entertainment |
Term Loan 3.2% Cash, Due 12/19 |
2,970,000 | 2,980,000 | 2,982,994 | ||||||||||||
Consolidated Communications, Inc. Telecommunications |
Initial Term Loan 4.3% Cash, Due 12/20 |
2,977,348 | 2,949,848 | 3,005,261 | ||||||||||||
Covanta Energy Corporation Ecological |
Term Loan 3.5% Cash, Due 3/19 |
982,500 | 977,500 | 992,325 | ||||||||||||
Crown Castle Operating Company(3) Buildings and Real Estate(3) |
New Tranche B Term Loan 3.3% Cash, Due 1/21 |
2,947,700 | 2,932,700 | 2,957,987 | ||||||||||||
Davids Bridal, Inc. Retail Stores |
Initial Term Loan 5.0% Cash, Due 10/19 |
495,000 | 490,000 | 497,787 | ||||||||||||
DaVita HealthCare Partners Inc. (fka DaVita Inc.) Healthcare, Education and Childcare |
Tranche B Term Loan 4.5% Cash, Due 10/16 |
1,940,000 | 1,961,196 | 1,956,248 | ||||||||||||
Del Monte Foods Company Beverage, Food and Tobacco |
Initial Term Loan 4.0% Cash, Due 3/18 |
2,789,388 | 2,793,119 | 2,803,321 | ||||||||||||
Dex Media West LLC Printing and Publishing |
New Term Loan 8.0% Cash, Due 12/16 |
907,969 | 788,709 | 714,522 | ||||||||||||
DineEquity, Inc. Personal, Food and Miscellaneous Services |
Term B-2 Loan 3.8% Cash, Due 10/17 |
291,528 | 291,528 | 293,093 | ||||||||||||
DJO Finance LLC (ReAble Therapeutics Fin LLC) Healthcare, Education and Childcare |
Tranche B Term Loan 4.8% Cash, Due 9/17 |
1,984,962 | 2,014,887 | 2,009,576 | ||||||||||||
Drumm Investors LLC (aka Golden Living) Healthcare, Education and Childcare |
Term Loan 5.0% Cash, Due 5/18 |
4,320,829 | 4,276,059 | 4,249,535 | ||||||||||||
Dunkin Brands, Inc. Personal, Food and Miscellaneous Services |
Term B-3 Loan 3.8% Cash, Due 2/20 |
2,139,495 | 2,139,495 | 2,149,519 | ||||||||||||
Education Management LLC Healthcare, Education and Childcare |
Tranche C-2 Term Loan 4.3% Cash, Due 6/16 |
1,549,002 | 1,519,317 | 1,491,077 | ||||||||||||
Epicor Software Corporation (fka Eagle Parent Inc.) Electronics |
Term B-1 Loan 4.5% Cash, Due 5/18 |
1,924,301 | 1,904,401 | 1,936,568 | ||||||||||||
EquiPower Resources Holdings, LLC Utilities |
Term B Advance (First Lien) 4.3% Cash, Due 12/18 |
1,463,010 | 1,440,510 | 1,471,240 |
See accompanying notes to the financial statements.
S-36
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
Essential Power, LLC Utilities |
Term Loan 4.3% Cash, Due 8/19 |
$ | 952,196 | $ | 937,196 | $ | 923,630 | |||||||||
Federal-Mogul Corporation Automobile |
Tranche B Term Loan 2.1% Cash, Due 12/14 |
1,170,287 | 1,140,992 | 1,158,402 | ||||||||||||
Federal-Mogul Corporation Automobile |
Tranche C Term Loan 2.1% Cash, Due 12/15 |
417,107 | 408,055 | 412,872 | ||||||||||||
General Nutrition Centers, Inc. Retail Stores |
Amended Tranche B Term Loan 3.3% Cash, Due 3/19 |
999,090 | 1,004,087 | 997,007 | ||||||||||||
Genpact Limited Diversified/Conglomerate Service |
Term Loan 3.5% Cash, Due 8/19 |
495,013 | 492,513 | 497,074 | ||||||||||||
Gentiva Health Services, Inc. Healthcare, Education and Childcare |
Initial Term B Loan 6.5% Cash, Due 10/19 |
3,424,646 | 3,424,646 | 3,394,698 | ||||||||||||
Getty Images, Inc. Printing and Publishing |
Initial Term Loan 4.8% Cash, Due 10/19 |
2,970,000 | 2,940,000 | 2,778,287 | ||||||||||||
Graceway Pharmaceuticals, LLC(2) Healthcare, Education and Childcare |
Term B Loan (First Lien) Sold Out 09/28/2012 7.0% Cash, Due 5/12 |
29,332 | 30,751 | 32,412 | ||||||||||||
Grifols Inc. Healthcare, Education and Childcare |
New U.S. Tranche B Term Loan 4.3% Cash, Due 6/17 |
969,247 | 959,297 | 976,865 | ||||||||||||
Hamilton Lane Advisors, L.L.C. Finance |
Loan 5.3% Cash, Due 2/18 | 862,907 | 852,907 | 869,379 | ||||||||||||
Harlan Laboratories, Inc. (fka Harlan Sprague Dawley, Inc.) Healthcare, Education and Childcare |
Term Loan 5.8% Cash, Due 7/14 |
3,262,842 | 2,902,052 | 2,936,558 | ||||||||||||
Harland Clarke Holdings Corp. (fka Clarke American Corp.) Printing and Publishing |
Tranche B-2 Term Loan 5.5% Cash, Due 6/17 |
871,597 | 740,208 | 880,857 | ||||||||||||
Harland Clarke Holdings Corp. (fka Clarke American Corp.) Printing and Publishing |
Tranche B-3 Term Loan 7.0% Cash, Due 5/18 |
993,711 | 993,711 | 1,002,937 | ||||||||||||
HCA Inc. Healthcare, Education and Childcare |
Tranche B-4 Term Loan 3.0% Cash, Due 5/18 |
2,992,500 | 2,970,355 | 2,997,797 | ||||||||||||
HCR ManorCare, Inc. (fka HCR Healthcare, LLC) Healthcare, Education and Childcare |
Initial Term Loan 5.0% Cash, Due 4/18 |
486,250 | 481,288 | 479,868 | ||||||||||||
Health Management Associates, Inc. Healthcare, Education and Childcare |
Replacement Term B Loan 3.5% Cash, Due 11/18 |
2,412,344 | 2,387,344 | 2,415,794 | ||||||||||||
Hertz Corporation, The Personal Transportation |
Tranche B-1 Term Loan 3.8% Cash, Due 3/18 |
3,974,962 | 3,972,462 | 3,990,862 | ||||||||||||
Hertz Corporation, The Personal Transportation |
Tranche B-2 Term Loan 3.0% Cash, Due 3/18 |
972,650 | 967,688 | 973,336 | ||||||||||||
Hillman Group, Inc., The Machinery (Non-Agriculture, Non-Construction, Non-Electronic) |
Term Loan 3.8% Cash, Due 5/17 |
965,555 | 970,327 | 971,889 | ||||||||||||
Huntsman International LLC Chemicals, Plastics and Rubber |
Extended Term B Loan 2.7% Cash, Due 4/17 |
2,290,204 | 2,162,053 | 2,295,460 | ||||||||||||
Ina Beteiligungsgesellschaft Mit Beschrankter Haftung (fka Schaeffler AG)- |
Facility C (USD) 4.3% Cash, Due 1/17 |
3,000,000 | 3,018,750 | 3,030,615 | ||||||||||||
Ineos US Finance LLC Chemicals, Plastics and Rubber |
Cash Dollar Term Loan 4.0% Cash, Due 5/18 |
3,974,870 | 3,989,870 | 3,995,579 | ||||||||||||
Infor (US), Inc. (fka Lawson Software Inc.) Electronics |
Tranche B-2 Term Loan 5.3% Cash, Due 4/18 |
2,447,816 | 2,464,733 | 2,459,798 | ||||||||||||
International Architectural Products, Inc.(2), (5) Mining, Steel, Iron and Non-Precious Metals |
Term Loan 12.0% Cash, 3.3% PIK, Due 5/15 |
81,467 | 74,587 | 318 | ||||||||||||
J. Crew Group, Inc. Retail Stores |
Term B-1 Loan 4.0% Cash, Due 3/18 |
3,950,000 | 3,960,000 | 3,979,605 | ||||||||||||
Jarden Corporation Personal and Non Durable Consumer Products (Mfg. Only) |
New Tranche B Term Loan 2.7% Cash, Due 3/18 |
1,945,037 | 1,960,897 | 1,947,623 | ||||||||||||
JBS USA, LLC Beverage, Food and Tobacco |
Initial Term Loan 3.8% Cash, Due 5/18 |
975,150 | 970,175 | 975,735 | ||||||||||||
JMC Steel Group, Inc. Mining, Steel, Iron and Non-Precious Metals |
Term Loan 4.8% Cash, Due 4/17 |
1,469,819 | 1,462,319 | 1,476,852 |
See accompanying notes to the financial statements.
S-37
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
Jo-Ann Stores, Inc. Retail Stores |
Term B Loan 4.0% Cash, Due 3/18 |
$ | 994,987 | $ | 999,987 | $ | 999,341 | |||||||||
KAR Auction Services, Inc. Automobile |
Term Loan 3.8% Cash, Due 5/17 |
3,800,649 | 3,870,148 | 3,824,992 | ||||||||||||
KCG Holdings, Inc. Finance |
Term Loan 5.8% Cash, Due 12/17 |
878,505 | 881,005 | 882,897 | ||||||||||||
Key Safety Systems, Inc. Automobile |
Initial Term Loan 4.8% Cash, Due 5/18 |
1,384,813 | 1,344,819 | 1,387,028 | ||||||||||||
Kronos Incorporated Diversified/Conglomerate Service |
Incremental Term Loan (First Lien) 4.5% Cash, Due 10/19 |
989,676 | 984,676 | 1,000,196 | ||||||||||||
Landrys Inc. (fka Landrys Restaurants, Inc.) Beverage, Food and Tobacco |
B Term Loan 4.0% Cash, Due 4/18 |
2,894,401 | 2,935,651 | 2,920,625 | ||||||||||||
Las Vegas Sands, LLC Hotels, Motels, Inns, and Gaming |
Term B Loan 3.3% Cash, Due 12/20 |
3,266,934 | 3,148,705 | 3,269,662 | ||||||||||||
Live Nation Entertainment, Inc. Leisure, Amusement, Motion Pictures, Entertainment |
Term B-1 Loan 3.5% Cash, Due 8/20 |
482,553 | 483,369 | 485,169 | ||||||||||||
Longview Power, LLC(2) Utilities |
2017 Term Loan 7.2% Cash, Due 10/17 |
822,784 | 722,082 | 421,677 | ||||||||||||
Longview Power, LLC Utilities |
DIP Delay Draw Term Loan .9% Cash, Due 11/15 |
2,822,000 | 2,822,000 | 2,889,018 | ||||||||||||
LPL Holdings, Inc. Finance |
2013 Incremental Tranche B Term Loan 3.3% Cash, Due 3/19 |
1,965,150 | 1,955,150 | 1,966,791 | ||||||||||||
Mackinaw Power Holdings, LLC Utilities |
Loan 1.7% Cash, Due 6/15 | 1,551,020 | 1,491,973 | 1,535,510 | ||||||||||||
MCC Iowa LLC (Mediacom Broadband Group) Broadcasting and Entertainment |
Tranche D-1 Term Loan 1.9% Cash, Due 1/15 |
961,240 | 923,594 | 957,636 | ||||||||||||
Michael Foods Group, Inc. (f/k/a M-Foods Holdings, Inc.) Beverage, Food and Tobacco |
Term B Facility 4.3% Cash, Due 2/18 |
3,227,495 | 3,266,657 | 3,230,077 | ||||||||||||
MultiPlan, Inc. Healthcare, Education and Childcare |
Term B-1 Loan 4.0% Cash, Due 8/17 |
876,468 | 889,731 | 883,589 | ||||||||||||
Munder Capital Management Finance |
Incremental Term Loan 6.0% Cash, Due 3/15 |
13,213 | 11,563 | 13,312 | ||||||||||||
National CineMedia, LLC Leisure, Amusement, Motion Pictures, Entertainment |
Term Loan (2013) 2.9% Cash, Due 11/19 |
1,000,000 | 992,500 | 1,000,000 | ||||||||||||
NBTY, INC. Personal and Non Durable Consumer Products (Mfg. Only) |
Term B-2 Loan 3.5% Cash, Due 10/17 |
1,342,239 | 1,355,912 | 1,353,024 | ||||||||||||
Newsday, LLC Printing and Publishing |
Term Loan 3.7% Cash, Due 10/16 |
2,250,000 | 2,268,750 | 2,258,438 | ||||||||||||
Novelis, Inc. Mining, Steel, Iron and Non-Precious Metals |
Initial Term Loan 3.8% Cash, Due 3/17 |
2,948,389 | 3,006,983 | 2,963,131 | ||||||||||||
NRG Energy, Inc. Utilities |
Term Loan (2013) 2.8% Cash, Due 7/18 |
975,131 | 972,644 | 974,195 | ||||||||||||
Nuveen Investments, Inc. Finance |
Tranche B First-Lien Term Loan 4.2% Cash, Due 5/17 |
3,803,194 | 3,778,940 | 3,793,686 | ||||||||||||
Ocwen Loan Servicing Finance |
Initial Term Loan 5.0% Cash, Due 2/18 |
2,992,462 | 3,033,712 | 3,034,731 | ||||||||||||
OSI Restaurant Partners, LLC Personal, Food and Miscellaneous Services |
2013 Replacement Term Loan 3.5% Cash, Due 10/19 |
1,402,500 | 1,387,500 | 1,405,831 | ||||||||||||
Pantry, Inc., The Grocery |
Term Loan 4.8% Cash, Due 8/19 |
2,962,500 | 2,932,500 | 3,005,678 | ||||||||||||
Party City Holdings Inc. Retail Stores |
2013 Replacement Term Loan 4.3% Cash, Due 7/19 |
493,763 | 488,763 | 496,656 | ||||||||||||
PetCo Animal Supplies, Inc. Retail Stores |
New Loans 4.0% Cash, Due 11/17 |
3,414,596 | 3,414,596 | 3,437,286 |
See accompanying notes to the financial statements.
S-38
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
Petroleum GEO-Services ASA/PGS Finance, Inc. Oil and Gas |
Term Loan 1.9% Cash, Due 6/15 |
1,568,444 | 1,548,839 | 1,584,623 | ||||||||||||
PQ Corporation (fka Niagara Acquisition, Inc.) Chemicals, Plastics and Rubber |
2013 Term Loan 4.5% Cash, Due 8/17 |
$ | 1,980,000 | $ | 1,965,000 | $ | 1,997,078 | |||||||||
Progressive Waste Solutions Ltd. Ecological |
Term B Loan 3.0% Cash, Due 10/19 |
742,500 | 738,750 | 744,820 | ||||||||||||
QCE, LLC (Quiznos)(2) Personal, Food and Miscellaneous Services |
Term Loan 9.0% Cash, Due 1/17 |
798,478 | 707,126 | 348,935 | ||||||||||||
R.H. Donnelley Inc. Printing and Publishing |
Loan 9.8% Cash, Due 12/16 |
490,513 | 366,193 | 300,966 | ||||||||||||
Regal Cinemas Corporation Leisure, Amusement, Motion Pictures, Entertainment |
Term Loan 2.7% Cash, Due 8/17 |
981,164 | 988,039 | 986,506 | ||||||||||||
Remy International, Inc. Automobile |
Term B Loan 2013 4.3% Cash, Due 3/20 |
537,971 | 536,613 | 542,345 | ||||||||||||
Revlon Consumer Products Corporation Personal and Non Durable Consumer Products (Mfg. Only) |
Replacement Term Loan 4.0% Cash, Due 11/17 |
3,500,000 | 3,535,625 | 3,527,353 | ||||||||||||
Reynolds Group Holdings Inc. Containers, Packaging and Glass |
Incremental U.S. Term Loan 4.0% Cash, Due 12/18 |
2,133,450 | 2,133,450 | 2,155,990 | ||||||||||||
RGIS Services, LLC Diversified/Conglomerate Service |
Extended Initial Term Loan 4.5% Cash, Due 10/16 |
2,006,777 | 1,933,262 | 1,975,421 | ||||||||||||
RGIS Services, LLC Diversified/Conglomerate Service |
Tranche C Term Loan 5.5% Cash, Due 10/17 |
645,076 | 652,388 | 638,222 | ||||||||||||
Roundys Supermarkets, Inc. Grocery |
Tranche B Term Loan 5.8% Cash, Due 2/19 |
2,296,549 | 2,251,549 | 2,300,143 | ||||||||||||
Rovi Solutions Corporation/Rovi Guides, Inc. Electronics |
Tranche B-3 Term Loan 3.5% Cash, Due 3/19 |
448,150 | 445,650 | 441,562 | ||||||||||||
RPI Finance Trust Healthcare, Education and Childcare |
Term B-2 Term Loan 3.3% Cash, Due 5/18 |
1,930,261 | 1,920,311 | 1,941,727 | ||||||||||||
SBA Senior Finance II LLC Telecommunications |
Incremental Tranche B Term Loan 3.8% Cash, Due 9/19 |
91,643 | 91,018 | 92,368 | ||||||||||||
SBA Senior Finance II LLC Telecommunications |
Term Loan 3.8% Cash, Due 6/18 |
361,058 | 358,570 | 363,316 | ||||||||||||
Seaworld Parks & Entertainment, Inc. (f/k/a SW Acquisitions Co., Inc.) Leisure, Amusement, Motion Pictures, Entertainment |
Term B-2 Loan 3.0% Cash, Due 5/20 |
927,912 | 915,422 | 918,633 | ||||||||||||
Select Medical Corporation Healthcare, Education and Childcare |
Series C Tranche B Term Loan 4.0% Cash, Due 6/18 |
2,274,479 | 2,224,729 | 2,284,441 | ||||||||||||
Semiconductor Components Industries, LLC (On Semiconductor) Electronics |
Term Loan 2.0% Cash, Due 1/18 |
2,718,750 | 2,598,750 | 2,691,563 | ||||||||||||
Seminole Tribe of Florida Hotels, Motels, Inns, and Gaming |
Initial Term Loan 3.0% Cash, Due 4/20 |
2,842,500 | 2,842,500 | 2,843,836 | ||||||||||||
Sensata Technologies B.V./Sensata Technology Finance Company, LLC Electronics |
Term Loan 3.3% Cash, Due 5/19 |
680,567 | 665,642 | 687,492 | ||||||||||||
Serena Software, Inc. Electronics |
2016 Term Loan (Extended) 4.2% Cash, Due 3/16 |
2,000,000 | 1,992,500 | 1,985,000 | ||||||||||||
ServiceMaster Company, The Diversified/Conglomerate Service |
Tranche C Term Loan 4.3% Cash, Due 1/17 |
2,481,203 | 2,515,578 | 2,461,664 | ||||||||||||
Sinclair Television Group, Inc. Broadcasting and Entertainment |
New Tranche B Term Loan 3.0% Cash, Due 4/20 |
68,358 | 58,358 | 68,016 | ||||||||||||
Six Flags Theme Parks, Inc. Leisure, Amusement, Motion Pictures, Entertainment |
Tranche B Term Loan 3.5% Cash, Due 12/18 |
1,675,481 | 1,696,106 | 1,683,105 | ||||||||||||
Skilled Healthcare Group, Inc. Healthcare, Education and Childcare |
Term Loan 6.8% Cash, Due 4/16 |
854,686 | 877,211 | 855,045 |
See accompanying notes to the financial statements.
S-39
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
Spectrum Brands, Inc. Personal and Non Durable Consumer Products (Mfg. Only) |
Tranche A Term Loan 3.0% Cash, Due 9/17 |
2,943,750 | 2,928,750 | 2,954,244 | ||||||||||||
Spirit Aerosystems, Inc. (fka Mid-Western Aircraft Systems, Inc and Onex Wind Finance LP.) Aerospace and Defense |
Term B Loan 3.8% Cash, Due 4/19 |
$ | 2,456,250 | $ | 2,443,750 | $ | 2,472,756 | |||||||||
SRAM, LLC Leisure, Amusement, Motion Pictures, Entertainment |
Term Loan (First Lien) 4.0% Cash, Due 4/20 |
821,346 | 816,475 | 822,714 | ||||||||||||
SS&C Technologies Holdings Europe S.A.R.L. Electronics |
2013 Replacement Term B-2 Loan 3.3% Cash, Due 6/19 |
66,335 | 65,398 | 66,553 | ||||||||||||
SS&C Technologies, Inc.,/Sunshine Acquisition II, Inc. Electronics |
2013 Replacement Term B-1 Loan 3.3% Cash, Due 6/19 |
641,238 | 632,176 | 643,342 | ||||||||||||
SunCoke Energy, Inc. Mining, Steel, Iron and Non-Precious Metals |
Tranche B Term Loan 4.0% Cash, Due 7/18 |
76,025 | 71,038 | 75,881 | ||||||||||||
SunGard Data Systems Inc (Solar Capital Corp.) Electronics |
Tranche E Term Loan 4.0% Cash, Due 3/20 |
4,538,683 | 4,475,604 | 4,575,560 | ||||||||||||
Telesat Canada Telecommunications |
U.S. Term B-2 Loan 3.5% Cash, Due 3/19 |
985,056 | 980,056 | 988,952 | ||||||||||||
Tesoro Corporation Oil and Gas |
Initial Term Loan 2.4% Cash, Due 5/16 |
198,750 | 198,750 | 199,660 | ||||||||||||
Toys R Us-Delaware, Inc. Retail Stores |
Initial Loan 6.0% Cash, Due 9/16 |
1,902,743 | 1,911,493 | 1,726,054 | ||||||||||||
TPF Generation Holdings, LLC Utilities |
Term Loan 4.8% Cash, Due 12/17 |
192,257 | 183,782 | 193,699 | ||||||||||||
TransDigm Inc. Aerospace and Defense |
Tranche C Term Loan 3.8% Cash, Due 2/20 |
1,945,275 | 1,945,275 | 1,953,018 | ||||||||||||
Tronox Pigments (Netherlands) B. V. Chemicals, Plastics and Rubber |
New Term Loan 4.5% Cash, Due 3/20 |
2,550,754 | 2,520,218 | 2,588,377 | ||||||||||||
TW Telecom Holdings Inc. (fka Time Warner Telecom Holdings Inc.) Telecommunications |
Term Loan B Loan 2.7% Cash, Due 4/20 |
2,408,018 | 2,415,166 | 2,408,030 | ||||||||||||
TWCC Holding Corp. Broadcasting and Entertainment |
Term Loan 3.5% Cash, Due 2/17 |
3,322,949 | 3,322,949 | 3,340,328 | ||||||||||||
Univar Inc. Chemicals, Plastics and Rubber |
Term B Loan 5.0% Cash, Due 6/17 |
3,157,608 | 3,164,666 | 3,138,094 | ||||||||||||
Universal Health Services, Inc. Healthcare, Education and Childcare |
Tranche B-1 Term Loan 2.4% Cash, Due 11/16 |
343,750 | 358,144 | 345,254 | ||||||||||||
Univision Communications Inc. Broadcasting and Entertainment |
2013 Converted Extended First-Lien Term Loan 4.5% Cash, Due 3/20 |
3,306,966 | 3,223,610 | 3,327,899 | ||||||||||||
UPC Financing Partnership Broadcasting and Entertainment |
Facility AH 3.3% Cash, Due 6/21 |
700,000 | 706,125 | 699,825 | ||||||||||||
Valleycrest Companies LLC (VCC Holdco II Inc.) Diversified/Conglomerate Service |
Initial Term Loan 5.5% Cash, Due 6/19 |
1,732,305 | 1,695,710 | 1,745,297 | ||||||||||||
Vertafore, Inc. Electronics |
Term Loan (2013) 4.3% Cash, Due 10/19 |
952,048 | 952,048 | 952,810 | ||||||||||||
VFH Parent LLC Finance |
Term Loan (2013) 5.8% Cash, Due 11/19 |
998,333 | 1,013,308 | 1,007,483 | ||||||||||||
Walter Investment Management Corp. Finance |
Tranche B Term Loan (2013) 4.8% Cash, Due 12/20 |
2,585,592 | 2,570,592 | 2,595,935 | ||||||||||||
Wendys International, Inc Personal, Food and Miscellaneous Services |
Term B Loan 3.3% Cash, Due 5/19 |
1,360,939 | 1,340,939 | 1,364,709 | ||||||||||||
WESCO Distribution, Inc. Machinery (Non-Agriculture, Non-Construction, Non-Electronic) |
Tranche B-1 Loan 3.8% Cash, Due 12/19 |
249,643 | 239,643 | 251,359 | ||||||||||||
West Corporation Diversified/Conglomerate Service |
Term B-7 Loan 3.3% Cash, Due 7/16 |
1,968,838 | 1,968,838 | 1,982,531 | ||||||||||||
West Corporation Diversified/Conglomerate Service |
Term B-8 Loan 3.8% Cash, Due 6/18 |
2,021,769 | 2,033,211 | 2,033,829 |
See accompanying notes to the financial statements.
S-40
Portfolio Company/Principal Business | Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
WideOpenWest Finance, LLC Telecommunications |
Term B-1 Loan 2013 3.8% Cash, Due 7/17 |
3,223,117 | 3,247,473 | 3,234,978 | ||||||||||||
Windstream Corporation Telecommunications |
Tranche B-4 Term Loan 3.5% Cash, Due 1/20 |
$ | 3,465,000 | $ | 3,483,750 | $ | 3,476,920 | |||||||||
WireCo WorldGroup Inc. Machinery (Non-Agriculture, Non-Construction, Non-Electronic) |
Term Loan 6.0% Cash, Due 2/17 |
1,975,000 | 1,955,000 | 1,993,516 | ||||||||||||
Zuffa, LLC Leisure, Amusement, Motion Pictures, Entertainment |
Initial Term Loan (2013) 4.5% Cash, Due 2/20 |
2,970,000 | 2,955,000 | 2,996,908 | ||||||||||||
Total Investment in Debt Securities | $ | 293,277,383 | $ | 290,553,460 | $ | 292,304,054 |
Portfolio Company | CLO Investment | Principal | Cost | Value | ||||||||||||
APID 2007-5A(1) CLO Rated Notes |
Floating 04/2021 D 03761XAG5 | $ | 1,000,000 | $ | 655,266 | $ | 913,577 | |||||||||
GALXY 2006-6X(1) CLO Rated Notes |
Floating 06/2018 B USG25803AC46 | 1,500,000 | 1,241,003 | 1,450,285 | ||||||||||||
GOLDK 2007-2A(1) CLO Rated Notes |
Floating 04/2019 B 381096AB2 | 1,000,000 | 812,174 | 944,673 | ||||||||||||
HLCNL 2007-2A (1) CLO Rated Notes |
Floating 04/2021 D 40537AAA3 | 3,000,000 | 1,973,011 | 2,746,035 | ||||||||||||
MACCL 2007-1A(1) CLO Rated Notes |
Floating 07/2023 B1L 55265AAL5 | 2,000,000 | 1,374,001 | 1,793,332 | ||||||||||||
MDPK 2007-4A(1) CLO Rated Notes |
Floating 03/2021 D 55817UAF7 | 2,000,000 | 1,329,842 | 1,870,019 | ||||||||||||
NAVIG 2007-2A (1) CLO Rated Notes |
Floating 04/2021 D 63937HAD0 | 3,000,000 | 2,062,998 | 2,844,054 | ||||||||||||
ROSED I-A(1) CLO Rated Notes |
Floating 07/2021 B 77732WAE2 | 2,000,000 | 1,553,529 | 1,890,582 | ||||||||||||
TRAL 2007-1A(1) CLO Rated Notes |
Floating 04/2022 C 89288BAG6 | 3,000,000 | 2,023,956 | 2,751,257 | ||||||||||||
TRAL 2007-1A(1) CLO Rated Notes |
Floating 04/2022 D 89288AAA1 | 1,000,000 | 666,854 | 919,920 | ||||||||||||
Total Investment in CLO Rated Notes | 19,500,000 | 13,692,634 | 18,123,734 | |||||||||||||
Total Investments | $ | 312,777,383 | $ | 304,246,094 | $ | 310,427,788 |
(1) | Investment in a Collateralized Loan Obligation Fund. |
(2) | Loan on non-accrual status. |
(3) | Buildings and real estate relate to real estate ownership, builders, managers and developers and excludes mortgage debt investments and mortgage lenders or originators. |
See accompanying notes to the financial statements.
S-41
Katonah 2007-I CLO LTD. (the Fund) is an exempted company incorporated in November 15, 2006 with limited liability under the laws of the Cayman Islands for the sole purpose of investing in broadly syndicated loans, high-yield bonds and other credit instruments. The Fund is what is commonly known as a collateralized loan obligation fund (CLO Fund).
A CLO Fund generally refers to a special purpose vehicle that owns a portfolio of investments and issues various tranches of debt and subordinated note securities to finance the purchase of those investments. Investments purchased by a CLO Fund are governed by extensive investment guidelines, including limits on exposure to any single industry or issuer and limits on the ratings of the CLO Funds assets. A CLO Fund has a defined investment period during which it is allowed to make investments or reinvest capital as it becomes available.
A CLO Fund typically issues multiple tranches of debt and subordinated note securities with varying ratings and levels of subordination to finance the purchase of their underlying investments. Interest and principal payments (net of designated CLO Fund expenses) from the CLO Fund are paid to each issued security in accordance with an agreed upon priority of payments, commonly referred to as the waterfall. The most senior notes, generally rated AAA/Aaa, commonly represent the majority of the total liabilities of the CLO Fund. AAA/Aaa notes are issued at a specified spread over LIBOR and normally have the first claim on the earnings on the CLO Funds investments after payment of certain fees and expenses. Lower subordinated mezzanine tranches of rated notes generally have ratings ranging from AA/Aa to BB/Ba and are usually issued at a specified spread over LIBOR with higher spreads paid on the tranches with lower ratings. Each tranche is typically only entitled to a share of the earnings on the CLO Funds investments if the required interest and principal payments have been made on the more senior tranches in the waterfall. The most junior tranche can take the form of either subordinated notes or preferred shares. The subordinated notes or preferred shares generally do not have a stated coupon but are entitled to residual cash flows from the CLO Funds investments after all of the other tranches of notes and certain other fees and expenses are paid.
On January 23, 2008, the Fund sold $323.9 million of notes or debt securities, consisting of Class A-1L Floating Rate Notes, Class A-2L Floating Rate Notes, Class A-3L Floating Rate Notes, Class B-1L Floating Rate Notes, Class B-2L Floating Rate Notes (Class B-2L Notes) and preferred shares. The notes were issued pursuant to an indenture, dated January 23, 2008 (the Indenture), with U.S. Bank National Association servicing as the trustee thereunder. KCAP Financial, Inc. (KCAP Financial) owns all of the preferred shares of Katonah 2007-I CLO LTD. The Funds defined investment period ended on April 22, 2014. Following the defined investment period, proceeds from principal payments in the investment portfolio of the Fund are used to pay down its outstanding notes, starting with Class A notes.
Pursuant to a collateral management agreement (the Collateral Management Agreement), Katonah Debt Advisors, L.L.C. (the Manager), which is a wholly-owned portfolio company of KCAP Financial, provides investment management services to the Fund, and makes day-to-day investment decisions concerning the assets of the Fund. The Manager also performs certain administrative services on behalf of the Fund under the Collateral Management Agreement. The Manager is a registered investment adviser under the Investment Advisers Act of 1940.
S-42
The financial statements of the Fund have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). In the opinion of the Managers management, the financial statements of the Fund reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial condition and results of operations for the periods presented. Furthermore, the preparation of the financial statements requires management to make significant estimates and assumptions including the fair value of investments that do not have a readily available market value. Actual results could differ from those estimates, and the differences could be material.
All of the investments held and notes issued by the Fund are presented at fair value in the Funds Statements of Net Assets.
Investments of the Fund at Fair Value. Investment transactions are recorded on the applicable trade date. Realized gains or losses are determined using the specific identification method. Investments held by the Fund are stated at fair value. ASC 820-10, Fair Value Measurements and Disclosures (ASC 820-10), requires among other things, disclosures about assets and liabilities that are measured and reported at fair value.
Hierarchy of Fair Value Inputs. The provisions of ASC 820-10 establish a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and require companies to disclose the fair value of their financial instruments according to the fair value hierarchy (i.e., Level 1, 2 and 3 inputs, as defined). The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Additionally, companies are required to provide additional disclosure regarding instruments in the Level 3 category (which have inputs to the valuation techniques that are unobservable and require significant management judgment), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities.
Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:
Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date.
| Level 1 assets may include listed mutual funds, ETFs, equities and certain derivatives. |
Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; quotes from pricing services or brokers, for which the Manager can determine that orderly transactions took place at the quoted price or that the inputs used to arrive at the price were observable; and inputs other than quoted prices that are observable, such as models or other valuation methodologies.
| Level 2 assets in this category may include debt securities, bank loans, short-term floating rate notes and asset-backed securities, restricted public securities valued at a discount, as well as over the counter derivatives, including interest and inflation rate swaps and foreign currency exchange contracts that have inputs to the valuations that generally can be corroborated by observable market data. |
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Level 3 Inputs:
Unobservable inputs for the valuation of the asset or liability, which may include non-binding broker quotes. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation.
| Level 3 assets in this category may include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds, and funds of hedge funds, direct private equity investments held within consolidated funds, bank loans, bonds issued by CLO Funds and certain held for sale real estate disposal assets. |
| Level 3 liabilities included in this category include borrowings of consolidated collateralized loan obligations valued based upon non-binding broker quotes or discounted cash flow model based on a discount margin calculation. |
The Managers assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.
Valuation of Portfolio Investments. Debt and equity securities for which market quotations are readily available are generally valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available are valued based on detailed analyses prepared by management, and, in certain circumstances, may utilize third parties with valuation expertise. The Manager follows the provisions of ASC 820-10 with respect to preparing the Funds financial statements. This standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Subsequent to the adoption of ASC 820-10, the FASB has issued various staff positions clarifying the initial standard as noted below.
In January 2010, the FASB issued guidance that clarifies and requires new disclosures about fair value measurements. The clarifications and requirement to disclose the amounts and reasons for significant transfers between Level 1 and Level 2, as well as significant transfers in and out of Level 3 of the fair value hierarchy, were adopted by the Fund in 2010.
Fair Value Measurements and Disclosures requires the disclosure of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period.
The Managers valuation methodology and procedures for investments held by the Fund are generally as follows:
1. | For any asset which is also held by KCAP Financial on the applicable date, the KCAP Financial fair value mark as of such applicable date is used. |
2. | Each portfolio company or investment is cross-referenced to an independent pricing service to determine if a current market quote is available. The nature and quality of such quote is reviewed to determine reliability and relevance of the quote. Factors considered in this determination include whether the quote is from a transaction or is a broker quote, the date and aging of such quote, whether the transaction is arms-length, whether it is of a liquidation or distressed nature and certain other factors judged to be relevant by the Managers management within the framework of ASC 820-10. |
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3. | If an investment does not have a market quotation on either a broad market exchange or from an independent pricing service, the investment is initially valued by the Managers investment professionals responsible for the portfolio investment in conjunction with the portfolio management team. Generally, such fair values are determined by reference to public market or private transactions or valuations for comparable companies or assets in the relevant asset class and or industry when such amounts are available. Generally these valuations are derived by multiplying a key performance metric of the investee company or asset (e.g., EBITDA) by the relevant valuation multiple observed for comparable companies or transactions, adjusted by management for differences between the investment and the referenced comparable. If the fair value of such investments cannot be valued by reference to observable valuation measures for comparable companies, then the primary analytical method used to estimate the fair value is a discounted cash flow method and/or cap rate analysis. A sensitivity analysis is applied to the estimated future cash flows using various factors depending on the investment, including assumed growth rates (in cash flows), capitalization rates (for determining terminal values) and appropriate discount rates to determine a range of reasonable values or to compute projected return on investment. |
4. | Preliminary valuation conclusions are discussed and documented by the Managers management. |
5. | Illiquid loans, junior and mezzanine securities and investments in other CLO bonds are fair valued using models developed by the Managers management with applicable market assumptions. |
6. | The Managers management discusses the valuations and determines in good faith that the fair values of each investment in the portfolio is reasonable based upon any applicable independent pricing service, input of management, and estimates from independent valuation firms (if any). |
Debt Securities. Most of the Funds investment portfolio is composed of broadly syndicated debt securities for which an independent pricing service quote is available. To the extent that the investments are exchange traded and are priced or have sufficient price indications from normal course trading at or around the valuation date (financial reporting date), such pricing will determine fair value. Pricing service marks from third party pricing services may be used as an indication of fair value, depending on the volume and reliability of the marks, sufficient and reasonable correlation of bid and ask quotes, and, most importantly, the level of actual trading activity.
CLO Fund Securities. The Fund may selectively invest in securities issued by CLO Funds managed by other asset management companies. For bond rated tranches of CLO Funds (those above the junior class) without transactions to support a fair value for the specific CLO Fund and tranche, fair value is based on discounting estimated bond payments at current market yields, which may reflect the adjusted yield on the leveraged loan index for similarly rated tranches, as well as prices for similar tranches for other CLO Funds and also other factors such as the default and recovery rates of underlying assets in the CLO Fund, as may be applicable. Such model assumptions may vary and incorporate adjustments for risk premiums and CLO Fund specific attributes. Such adjustments require judgment and may be material to the calculation of fair value.
Cash. Cash is defined as demand deposits. The Fund holds its cash with financial institutions and, at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit.
Debt at Fair Value. The Fund has issued rated and unrated bonds to finance its operations. Debt is presented at fair value.
Interest Income. Interest income is recorded on the accrual basis on interest-bearing assets. The Fund generally places a loan or security on non-accrual status and ceases recognizing cash interest income on such loan or security when a loan or security becomes 90 days or more past due or if Manager otherwise does not expect the debtor to be able to service its debt obligations.
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Management Fees. The Fund is externally managed by the Manager pursuant to the Collateral Management Agreement. As compensation for the performance of its obligations under the Collateral Management Agreement, the Manager is entitled to receive from the Fund a senior collateral management fee (the Senior Collateral Management Fee), a subordinated collateral management fee (the Subordinated Collateral Management Fee) and an incentive collateral management fee (the Incentive Collateral Management Fee). The Senior Collateral Management Fee is payable in arrears quarterly (subject to availability of funds and to the satisfaction of payment obligations on the debt obligations of the Fund (the Priority of Payments)) in an amount equal to 0.10% per annum of the aggregate principal amount of the Funds investments. The Subordinated Collateral Management Fee is payable in arrears quarterly (subject to availability of funds and to the Priority of Payments) in an amount equal to 0.15% per annum of the aggregate principal amount of the Funds investments. The Incentive Collateral Management Fee equals 20% of the amount of interest and principal payments remaining available for distribution to the holders of the Funds preferred shares under the Priority of Payments at which the Incentive Collateral Management Fee may be paid. For the years ended December 31, 2014 and 2013, there were no Incentive Fees incurred by the Fund.
Interest Expenses. The Fund has issued rated and unrated bonds to finance its operations. Interest on debt is calculated by the third party trustee of the Fund. Interest is accrued and generally paid quarterly.
Trustee Fees. The Fund has a third party trustee that is the custodian for all investments of the Fund and receives and disburses all cash in accordance to the trustee and custodial agreements. Trustee fees are accrued and paid quarterly by the Fund.
Income Taxes. The Fund is not subject to net income taxation in the United States or the Cayman Islands. Accordingly, no provision for income taxes has been made in the accompanying financial statements.
The investments held by the Fund are primarily invested in senior secured bank loans (typically syndicated by banks), bonds, and equity securities. Bank loan investments, which comprise the majority of the Funds portfolio, are senior secured corporate loans from a variety of industries, including but not limited to the aerospace and defense, broadcasting, technology, utilities, household products, healthcare, oil and gas, and finance industries. The investments mature at various dates between 2015 and 2023, pay interest at Libor or Prime plus a spread of up to 7.5%, and typically range in credit rating categories from BBB down to unrated. Non-accrual loans represented less than 1% of investments at fair value as of December 31, 2014 and December 31, 2013. The aggregate unpaid principal value of loans past due as of December 31, 2014 and December 31, 2013 was approximately $2.9 million and $1.7 million, respectively and the difference between fair value and the unpaid principal balance was approximately $1.4 million and $259,000, respectively. The Funds investments are valued based on price quotations provided by an independent third-party pricing source which are indicative of traded prices and/or dealer price quotations. In the event that a third-party pricing source is unable to price an investment, other relevant factors, data and information are considered, including: i) information relating to the market for the investment, including price quotations for and trading in the investment and interest in similar investments and the market environment and investor attitudes towards the investment and interests in similar investments; ii) the characteristics of and fundamental analytical data relating to the investment, including the cost, size, current interest rate, period until next interest rate reset, maturity and base lending rate, the terms and conditions of the loan and any related agreements, and the position of the loan in the issuers debt structure; iii) the nature, adequacy and value of the senior secured corporate loans collateral, including the CLOs rights, remedies and interests with respect to the collateral; iv) the creditworthiness of the borrower, based on an evaluation of its financial condition, financial statements and information about the business, cash flows, capital structure and future prospects; v) the reputation and financial condition of the agent and any intermediate participants in the senior secured corporate loan; and vi) general economic and market conditions affecting the fair value of the senior secured corporate loan.
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The debt issued by the Fund has a stated maturity date of April 23, 2022. The Funds debt was issued in various tranches with different risk profiles and ratings. The interest rates are variable rates based on Libor plus a pre-defined spread, which varies from 0.85% for the more senior tranches to 5% for the more subordinated tranches. The debt issued by the Fund is recorded at fair value using an income approach, driven by cash flows expected to be received from the portfolio collateral assets. Fair value is determined using current information, notably market yields and projected cash flows of collateral assets based on forecasted default and recovery rates that a market participant would use in determining the current fair value of the liabilities, taking into account the overall credit quality of the issuers and the Managers past experience in managing similar securities. Market yields, default rates and recovery rates used in the Managers estimate of fair value vary based on the nature of the investments in the underlying collateral pools. In periods of rising market yields, default rates and lower debt recovery rates, the fair value, and therefore the carrying value, of the liabilities may be adversely affected. Once the undiscounted cash flows of the collateral assets have been determined, the Manager applies appropriate discount rates that a market participant would use to determine the discounted cash flow valuation of the notes.
The carrying value of investments held and debt issued by the Fund is also their fair value. The following tables present the fair value hierarchy levels of investments held and debt issued by the Fund, which are measured at fair value as of December 31, 2014 and December 31, 2013:
December 31, 2014 | ||||||||||||||||
($ in millions) | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets: |
||||||||||||||||
Investments | $ | 273,373,948 | | | $ | 273,373,948 | ||||||||||
Liabilities: |
||||||||||||||||
CLO Fund Liabilities | $ | 290,699,426 | | | $ | 290,699,426 |
December 31, 2013 | ||||||||||||||||
($ in millions) | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets: |
||||||||||||||||
Investments | $ | 310,427,788 | | | $ | 310,427,788 | ||||||||||
Liabilities: |
||||||||||||||||
CLO Fund Liabilities | $ | 314,549,615 | | | $ | 314,549,615 |
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The following tables show a reconciliation of the beginning and ending fair value measurements for Level 3 assets using significant unobservable inputs:
For the year ended December 31, 2014 |
||||
Beginning balance | $ | 310,427,788 | ||
Purchase of investments | 29,960,070 | |||
Proceeds from sale and redemption of investments | (61,206,288 | ) | ||
Net Realized and Unrealized gains/(losses) | (5,807,622 | ) | ||
Ending balance | $ | 273,373,948 | ||
Changes in unrealized appreciation (depreciation) included in earnings related to investments still held at reporting date | (5,924,816 | ) |
For the year ended December 31, 2013 |
||||
Beginning balance | $ | 310,402,779 | ||
Purchase of investments | 116,281,142 | |||
Proceeds from sale and redemption of investments | (117,165,606 | ) | ||
Net Realized and Unrealized gains/(losses) | 909,473 | |||
Ending balance | $ | 310,427,788 | ||
Changes in unrealized appreciation (depreciation) included in earnings related to investments still held at reporting date | (2,866,419 | ) |
As of December 31, 2014, the Managers Level 3 portfolio investments had the following valuation techniques and significant inputs:
Type | Fair Value | Valuation Technique | Unobservable inputs | Range of Inputs | ||||||||||||
Debt Securities | 259,163,759 | Market Quote | Third-Party Bid-Ask Mid | 43.3% 101 | % | |||||||||||
Equity Securities | 1,649 | Market Quote | Third-Party Bid-Ask Mid | 1.31 | ||||||||||||
CLO Fund Securities | 14,208,540 | Discounted Cash Flow | Discount Rate | 2.12% 5.01 | % |
The following tables show a reconciliation of the beginning and ending fair value measurements for Level 3 liabilities using significant unobservable inputs:
For the year ended December 31, 2014 |
||||
Beginning balance | $ | 314,549,615 | ||
Prepayments, amortization, net | (27,132,006 | ) | ||
Unrealized appreciation/(depreciation) | 3,281,817 | |||
Ending balance | $ | 290,699,426 | ||
Changes in unrealized appreciation (depreciation) included in earnings related to liabilities still held at reporting date | $ | 3,281,817 |
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For the year ended December 31, 2013 |
||||
Beginning balance | $ | 310,470,318 | ||
Prepayments, amortization, net | | |||
Unrealized appreciation/(depreciation) | 4,079,297 | |||
Ending balance | $ | 314,549,615 | ||
Changes in unrealized appreciation (depreciation) included in earnings related to liabilities still held at reporting date | $ | 4,079,297 |
Transfers between levels, if any, are recognized at the beginning of the quarter in which the transfers occur. ASC 820-10 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with ASC 820-10, these inputs are summarized in the three broad levels listed below.
| Level 1 Valuations based on quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access. |
| Level 2 Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. |
| Level 3 Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
The Funds debt is presented at fair value with the difference between principal and fair value recorded as unrealized gain/loss. The par amount of the Funds debt is approximately $297 million and $324 million as of December 31, 2014 and December 31, 2013, respectively.
The Manager has determined that, although the junior tranches have certain characteristics of equity, they should be accounted for and disclosed as debt on the Funds Statement of net Assets, as the subordinated and income notes have a stated maturity indicating a date for which they are mandatorily redeemable. The preference shares are also classified as debt, as they are mandatorily redeemable upon liquidation or termination of the Fund.
Under the current laws, the Fund is not subject to net income taxation in the United States or the Cayman Islands. Accordingly, no provision for income taxes has been made in the accompanying financial statements.
Pursuant to ASC Topic 740, Accounting for Uncertainty in Income Taxes, the Fund adopted the provisions of Financial Accounting Standards Board (FASB) relating to accounting for uncertainty in income taxes which clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements and applies to all open tax years as of the effective date. As of December 31, 2014, 2013 and 2012 there was no impact to the financial statements as a result of the Funds accounting for uncertainty in income taxes. The Fund is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months. The Fund does not have any unrecognized tax benefits or liabilities for the years ended December 31, 2014, 2013 and 2012 Also, the Fund recognizes interest and, if applicable, penalties for any uncertain tax positions, as a component of income tax expense. No interest or penalty expense was recorded by the Fund for the years ended December 31, 2014, 2013 and 2012.
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On January 23, 2008, the Fund issued $323.9 million of notes or debt securities, consisting of the Class A-1L Floating Rate Notes, the Class A-2L Floating Rate Notes, the Class A-3L Floating Rate Notes, the Class B-1L Floating Rate Notes, the Class B-2L Floating Rate Notes and the preferred shares. The notes were issued pursuant to the Indenture.
The table below sets forth certain information for each outstanding class of debt securities issued pursuant to the Indenture.
Title of Debt Security | Principal Amount | Amount Outstanding | Interest Rate | Maturity | Fair Value | |||||||||||||||
Class A-1L Floating Rate Notes | $ | 199,867,994 | $ | 199,867,994 | LIBOR + 0.85% | April 23, 2022 | $ | 199,843,133 | ||||||||||||
Class A-2L Floating Rate Notes | $ | 26,000,000 | $ | 26,000,000 | LIBOR + 1.50% | April 23, 2022 | $ | 26,013,680 | ||||||||||||
Class A-3L Floating Rate Notes | $ | 18,000,000 | $ | 18,000,000 | LIBOR + 2.00% | April 23, 2022 | $ | 18,057,308 | ||||||||||||
Class B-1L Floating Rate Notes | $ | 11,000,000 | $ | 11,000,000 | LIBOR + 3.00% | April 23, 2022 | $ | 11,037,660 | ||||||||||||
Class B-2L Floating Rate Notes | $ | 10,500,000 | $ | 10,500,000 | LIBOR + 5.00% | April 23, 2022 | $ | 10,555,864 | ||||||||||||
Preferred Shares | $ | 31,411,736 | $ | 31,411,736 | N/A | April 23, 2022 | $ | 25,191,782 |
During 2014, approximately $27 million of the Class A-1L Floating Rate Notes was repaid in the normal course of business of the Fund.
The Fund had commitments of approximately $2.8 million to fund investments as of December 31, 2014, of this amount approximately $1.1 million was unfunded. As of December 31, 2013 the Fund had commitments of approximately $2.8 million to fund investments, of which approximately $2.5 million was unfunded.
The authorized share capital of the Fund is $32,250, consisting of 250 ordinary shares of $1.00 par value, each of which are issued and fully paid, and 32,000,000 preferred shares, 31,411,736 of which are issued and fully paid. The ordinary shares that have been issued are held by Maples Finance Limited, a licensed trust company incorporated in the Cayman Islands, as the trustee pursuant to the terms of a charitable trust. The preferred shares that have been issued by the Fund are owned by KCAP Financial. The preferred shares are classified as debt in the Funds financial statements, as they are mandatorily redeemable upon liquidation or termination of the Fund.
The Fund has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2014 through March 31, 2015 for items that should potentially be recognized or disclosed in these financial statements. Management has determined that there are no material subsequent events that would require adjustment to, or disclosure in, these consolidated financial statements.
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As of December 31, 2013 |
||||
ASSETS |
||||
Investments at fair value: |
||||
Debt securities | $ | 392,391,636 | ||
Equity securities | 1,528,067 | |||
CLO equity securities | 14,779,111 | |||
Total investments at fair value | 408,698,814 | |||
Restricted cash of CLO Funds | 26,050,568 | |||
Accrued interest receivable | 1,050,529 | |||
Total assets | $ | 435,799,911 | ||
LIABILITIES |
||||
CLO Fund liabilities at fair value | $ | 416,405,403 | ||
Accrued interest payable | 982,197 | |||
Accounts payable and accrued expenses | 413,101 | |||
Total liabilities | 417,800,701 | |||
Commitments and Contingencies (Note 6) | | |||
NET ASSETS |
||||
Total Net Assets | $ | 17,999,210 |
See accompanying notes to the financial statements.
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For the Year Ended December 31, 2013 | ||||
Income |
||||
Interest income from investments | $ | 18,286,805 | ||
Interest income from cash and time deposits | 1,068 | |||
Other income | 1,091,657 | |||
Total income | 19,379,530 | |||
Expenses |
||||
Interest expense | 14,887,931 | |||
Management fees | 3,596,358 | |||
Trustee fees | 134,118 | |||
Professional fees | 164,926 | |||
Administrative and other | 74,512 | |||
Total expenses | 18,857,845 | |||
Net realized and unrealized losses | (7,769,927 | ) | ||
Decrease in net assets resulting from operations | $ | (7,248,242 | ) |
See accompanying notes to the financial statements.
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Net Assets | ||||
Balance at January 1, 2012 | $ | 25,247,451 | ||
Decrease in net assets resulting from operations | (7,248,242 | ) | ||
Balance at December 31, 2013 | $ | 17,999,209 |
See accompanying notes to the financial statements.
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Year Ended December 31, 2013 |
||||
OPERATING ACTIVITIES: |
||||
Decrease in net assets resulting from operations | $ | (7,248,242 | ) | |
Adjustments to reconcile net income to net cash provided by operating activities: |
||||
Net change in realized and unrealized loss on investments | 834,721 | |||
Change in unrealized loss on debt | 6,935,207 | |||
Changes in operating assets and liabilities: |
||||
Decrease in accrued interest receivable | 211,704 | |||
Increase in accounts payable and accrued expenses | 109,555 | |||
Decrease in receivable for open trades | 942,875 | |||
Decrease in payable for open trades | (12,790,245 | ) | ||
Decrease in accrued interest payable | (579,274 | ) | ||
Purchase of investments | (99,242,299 | ) | ||
Sale of investments | 1,848,904 | |||
Proceeds from sale and redemption of investments | 162,109,010 | |||
Net cash provided by operating activities | 53,131,916 | |||
Financing Activities: |
||||
Repayments of Debt | (53,195,649 | ) | ||
CHANGE IN CASH | (63,733 | ) | ||
CASH, BEGINNING OF YEAR | 26,114,301 | |||
CASH, END OF YEAR | $ | 26,050,568 | ||
Supplemental Information: |
||||
Interest Paid | $ | 15,467,205 |
See accompanying notes to the financial statements.
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Portfolio Company/ Principal Business |
Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
Acosta, Inc. Grocery |
Term B Loan (2013) 4.3% Cash, Due 3/18 |
$ | 1,952,139 | $ | 1,952,139 | $ | 1,968,245 | |||||||||
AdvancePierre Foods, Inc. Beverage, Food and Tobacco |
Term Loan (First Lien) 5.8% Cash, Due 7/17 |
495,000 | 491,250 | 490,050 | ||||||||||||
Advantage Sales & Marketing Inc. Grocery |
2013 Term Loan (First Lien) 4.3% Cash, Due 12/17 |
970,202 | 974,538 | 976,023 | ||||||||||||
AES Corporation, The Utilities |
2013 Other Term Loan 3.8% Cash, Due 6/18 |
2,281,596 | 2,281,596 | 2,299,667 | ||||||||||||
Affinia Group Inc. Automobile |
Tranche B-1 Term Loan 3.5% Cash, Due 4/16 |
995,000 | 992,500 | 1,000,572 | ||||||||||||
Alaska Communications Systems Holdings, Inc. Telecommunications |
Term Loan 6.3% Cash, Due 10/16 |
3,881,158 | 3,850,807 | 3,879,994 | ||||||||||||
Alere Inc. (fka IM US Holdings, LLC) Healthcare, Education and Childcare |
B Term Loan 4.3% Cash, Due 6/17 |
977,500 | 972,513 | 985,955 | ||||||||||||
Allison Transmission, Inc. Automobile |
New Term B-2 Loan 3.2% Cash, Due 8/17 |
408,912 | 407,020 | 411,341 | ||||||||||||
Allison Transmission, Inc. Automobile |
Term B-3 Loan 3.8% Cash, Due 8/19 |
2,706,263 | 2,630,403 | 2,722,338 | ||||||||||||
Alpha Topco Limited Leisure, Amusement, Motion Pictures, Entertainment |
New Facility B (USD) 4.5% Cash, Due 4/19 |
3,439,099 | 3,420,343 | 3,480,179 | ||||||||||||
Altegrity, Inc (f/k/a US Investigations Services, Inc.) Diversified/Conglomerate Service |
Term Loan 4.8% Cash, Due 2/15 |
1,194,224 | 1,149,901 | 1,170,339 | ||||||||||||
Aptalis Pharma Inc. (Aptalis Pharma Canada Inc.) Healthcare, Education and Childcare |
Term B Loan Retired 01/31/2014 6.0% Cash, Due 10/20 |
1,461,338 | 1,446,388 | 1,489,958 | ||||||||||||
Aramark Corporation Diversified/Conglomerate Service |
LC-2 Facility 1.8% Cash, Due 7/16 |
178,433 | 179,046 | 179,124 | ||||||||||||
Aramark Corporation Diversified/Conglomerate Service |
LC-3 Facility 1.8% Cash, Due 7/16 |
99,056 | 98,174 | 99,305 | ||||||||||||
Aramark Corporation Diversified/Conglomerate Service |
U.S. Term B Loan (Extending) 3.7% Cash, Due 7/16 |
1,844,832 | 1,858,236 | 1,851,981 | ||||||||||||
Aramark Corporation Diversified/Conglomerate Service |
U.S. Term C Loan 3.7% Cash, Due 7/16 |
2,229,627 | 2,216,177 | 2,235,201 | ||||||||||||
Armored AutoGroup Inc. (fka Viking Acquisition Inc.) Personal and Non Durable Consumer Products (Mfg. Only) |
New Term Loan 6.0% Cash, Due 11/16 |
1,455,000 | 1,455,000 | 1,462,282 | ||||||||||||
Armstrong World Industries, Inc.(4) Buildings and Real Estate(4) |
Term Loan A 2.7% Cash, Due 3/18 |
5,000,000 | 5,025,000 | 5,003,125 | ||||||||||||
Aspect Software, Inc. Electronics |
Tranche B Term Loan 7.0% Cash, Due 5/16 |
475,696 | 480,071 | 478,224 | ||||||||||||
Asurion, LLC (fka Asurion Corporation) Insurance |
Incremental Tranche B-1 Term Loan 4.5% Cash, Due 5/19 |
990,000 | 995,000 | 991,584 | ||||||||||||
Aurora Diagnostics, LLC Healthcare, Education and Childcare |
Tranche B Term Loan 6.8% Cash, Due 5/16 |
911,111 | 911,538 | 851,037 | ||||||||||||
Avis Budget Car Rental, LLC Personal Transportation |
Tranche B Term Loan 3.0% Cash, Due 3/19 |
3,387,243 | 3,337,243 | 3,388,513 |
See accompanying notes to the financial statements.
S-55
Portfolio Company/ Principal Business |
Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
Axalta Coating Systems Dutch Holding B B.V. (Axalta Coating Systems U.S. Holdings, Inc.) Chemicals, Plastics and Rubber |
Initial Term B Loan Retired 02/03/2014 4.8% Cash, Due 2/20 |
$ | 1,985,000 | $ | 2,015,000 | $ | 2,002,270 | |||||||||
Berry Plastics Corporation Containers, Packaging and Glass |
Term C Loan Retired 01/06/2014 2.2% Cash, Due 1/14 |
2,845,333 | 2,690,439 | 2,846,912 | ||||||||||||
Biomet, Inc. Healthcare, Education and Childcare |
Dollar Term B-2 Loan 3.7% Cash, Due 7/17 |
3,835,013 | 3,830,140 | 3,864,178 | ||||||||||||
Burger King Corporation Personal, Food and Miscellaneous Services |
Tranche B Term Loan (2012) 3.8% Cash, Due 9/19 |
4,888,125 | 4,875,750 | 4,917,307 | ||||||||||||
Burlington Coat Factory Warehouse Corporation Retail Stores |
Term B-2 Loan 4.3% Cash, Due 2/17 |
2,592,000 | 2,562,375 | 2,619,540 | ||||||||||||
BWay Holding Company Containers, Packaging and Glass |
Initial Term Loan 4.5% Cash, Due 8/17 |
1,980,000 | 1,970,000 | 1,994,543 | ||||||||||||
Calpine Corporation Utilities |
Term Loan (3/11) 4.0% Cash, Due 4/18 |
2,917,500 | 2,917,500 | 2,942,751 | ||||||||||||
Calpine Corporation Utilities |
Term Loan (6/11) 4.0% Cash, Due 4/18 |
2,925,000 | 2,902,613 | 2,950,316 | ||||||||||||
Capital Automotive L.P. Finance |
Tranche B-1 Term Loan Facility 4.0% Cash, Due 4/19 |
2,640,878 | 2,603,028 | 2,660,685 | ||||||||||||
Capsugel Holdings US, Inc. Healthcare, Education and Childcare |
Initial Term Loan 3.5% Cash, Due 8/18 |
1,592,058 | 1,582,083 | 1,595,051 | ||||||||||||
Catalina Marketing Corporation Printing and Publishing |
Initial Term Loan 5.3% Cash, Due 10/20 |
3,396,687 | 3,294,490 | 3,448,708 | ||||||||||||
CBRE Services, Inc. (fka CB Richard Ellis Services, Inc.).(4) Buildings and Real Estate(4) |
Tranche B Term Loan 2.9% Cash, Due 3/21 |
2,382,000 | 2,352,150 | 2,395,399 | ||||||||||||
Celanese US Holdings LLC Chemicals, Plastics and Rubber |
Dollar Term C-2 Commitment 2.2% Cash, Due 10/16 |
1,717,927 | 1,736,157 | 1,740,363 | ||||||||||||
Cequel Communications, LLC Broadcasting and Entertainment |
Term Loan 3.5% Cash, Due 2/19 |
2,947,500 | 2,917,500 | 2,957,020 | ||||||||||||
Charter Communications Operating, LLC Broadcasting and Entertainment |
Term F Loan 3.0% Cash, Due 12/20 |
2,502,756 | 2,515,066 | 2,488,290 | ||||||||||||
Chrysler Group LLC Automobile |
Term Loan B 3.5% Cash, Due 5/17 |
3,414,944 | 3,170,994 | 3,444,107 | ||||||||||||
CHS/Community Health Systems, Inc. Healthcare, Education and Childcare |
2017 Term E Loan 3.7% Cash, Due 1/17 |
3,028,681 | 2,988,440 | 3,056,832 | ||||||||||||
CoActive Technologies LLC (fka CoActive Technologies, Inc.) Machinery (Non-Agriculture, Non-Construction, Non-Electronic) |
Term Loan (First Lien) 3.0% Cash, 2.8% PIK, Due 7/14 |
1,922,375 | 1,635,604 | 1,797,420 | ||||||||||||
Colfax Corporation Diversified/Conglomerate Manufacturing |
2013 Replacement Term A-1 Loan 1.9% Cash, Due 11/18 |
3,000,000 | 3,007,500 | 3,005,625 | ||||||||||||
Commscope, Inc. Electronics |
Tranche 3 Term Loan 2.7% Cash, Due 1/17 |
349,125 | 347,140 | 350,724 | ||||||||||||
Commscope, Inc. Electronics |
Tranche 4 Term Loan 3.3% Cash, Due 1/18 |
523,688 | 520,710 | 526,468 | ||||||||||||
Covanta Energy Corporation Ecological |
Term Loan 3.5% Cash, Due 3/19 |
1,965,000 | 1,955,000 | 1,984,650 |
See accompanying notes to the financial statements.
S-56
Portfolio Company/ Principal Business |
Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
CPI International Acquisition, Inc. (f/k/a Catalyst Holdings, Inc.) Aerospace and Defense |
Term B Loan 5.0% Cash, Due 2/17 |
$ | 924,500 | $ | 933,163 | $ | 931,434 | |||||||||
Cricket Communications, Inc. Telecommunications |
B Term Loan 4.8% Cash, Due 10/19 |
1,980,000 | 1,980,625 | 1,989,900 | ||||||||||||
Crown Castle Operating Company(4) Buildings and Real Estate(4) |
Non-Extended Incremental Tranche B Term Loan 3.3% Cash, Due 1/21 |
2,940,294 | 2,910,294 | 2,950,555 | ||||||||||||
David's Bridal, Inc. Retail Stores |
Initial Term Loan 5.0% Cash, Due 10/19 |
495,000 | 490,000 | 497,787 | ||||||||||||
DaVita HealthCare Partners Inc. (fka DaVita Inc.) Healthcare, Education and Childcare |
Tranche A Term Loan 2.9% Cash, Due 10/15 |
2,400,000 | 2,415,134 | 2,409,756 | ||||||||||||
DaVita HealthCare Partners Inc. (fka DaVita Inc.) Healthcare, Education and Childcare |
Tranche B Term Loan 4.5% Cash, Due 10/16 |
1,940,000 | 1,961,196 | 1,956,248 | ||||||||||||
Dealer Computer Services, Inc. (Reynolds & Reynolds) Electronics |
Tranche B Term Loan 2.2% Cash, Due 4/16 |
461,419 | 456,587 | 463,288 | ||||||||||||
Del Monte Foods Company Beverage, Food and Tobacco |
Initial Term Loan 4.0% Cash, Due 3/18 |
5,578,776 | 5,563,851 | 5,606,642 | ||||||||||||
Delphi Corporation Automobile |
Trache A Term Loan 1.4% Cash, Due 3/18 |
4,906,250 | 4,931,250 | 4,904,410 | ||||||||||||
DineEquity, Inc. Personal, Food and Miscellaneous Services |
Term B-2 Loan 3.8% Cash, Due 10/17 |
291,528 | 291,528 | 293,093 | ||||||||||||
Drumm Investors LLC (aka Golden Living) Healthcare, Education and Childcare |
Term Loan 5.0% Cash, Due 5/18 |
5,281,013 | 5,226,294 | 5,193,876 | ||||||||||||
Ducommun Incorporated Aerospace and Defense |
Term B-1 Loan 4.8% Cash, Due 6/17 |
698,026 | 688,076 | 703,262 | ||||||||||||
Dunkin' Brands, Inc. Personal, Food and Miscellaneous Services |
Term B-3 Loan 3.8% Cash, Due 2/20 |
3,796,679 | 3,659,001 | 3,814,467 | ||||||||||||
Education Management LLC Healthcare, Education and Childcare |
Tranche C-2 Term Loan 4.3% Cash, Due 6/16 |
3,646,433 | 3,576,553 | 3,510,074 | ||||||||||||
Emdeon Inc. Electronics |
Term B-2 Loan 3.8% Cash, Due 11/18 |
1,472,634 | 1,457,634 | 1,477,700 | ||||||||||||
Endo Health Solutions Inc. (fka Endo Pharmaceuticals Holdings Inc.) Healthcare, Education and Childcare |
2018 Term A Loan 1.9% Cash, Due 3/18 |
3,850,000 | 3,855,000 | 3,847,113 | ||||||||||||
Endo Health Solutions Inc. (fka Endo Pharmaceuticals Holdings Inc.) Healthcare, Education and Childcare |
Term Loan B 2011 4.0% Cash, Due 6/18 |
86,500 | 86,500 | 86,778 | ||||||||||||
Epicor Software Corporation (fka Eagle Parent Inc.) Electronics |
Term B-1 Loan Retired 01/17/2014 4.5% Cash, Due 5/18 |
4,815,586 | 4,763,318 | 4,846,286 | ||||||||||||
EquiPower Resources Holdings, LLC Utilities |
Term B Advance (First Lien) 4.3% Cash, Due 12/18 |
1,463,010 | 1,440,510 | 1,471,240 | ||||||||||||
Essential Power, LLC Utilities |
Term Loan 4.3% Cash, Due 8/19 |
952,196 | 937,196 | 923,630 | ||||||||||||
Federal-Mogul Corporation Automobile |
Tranche B Term Loan 2.1% Cash, Due 12/14 |
1,867,469 | 1,804,472 | 1,848,505 |
See accompanying notes to the financial statements.
S-57
Portfolio Company/ Principal Business |
Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
Federal-Mogul Corporation Automobile |
Tranche C Term Loan 2.1% Cash, Due 12/15 |
$ | 327,819 | $ | 320,705 | $ | 324,490 | |||||||||
Fidelity National Information Services, Inc. Electronics |
Term A-4 Loan 1.7% Cash, Due 3/17 |
8,981,052 | 8,971,899 | 9,003,504 | ||||||||||||
Generac Power Systems, Inc. Machinery (Non-Agriculture, Non-Construction, Non-Electronic) |
Term Loan B 3.5% Cash, Due 5/20 |
1,741,192 | 1,723,692 | 1,746,633 | ||||||||||||
General Nutrition Centers, Inc. Retail Stores |
Amended Tranche B Term Loan 3.3% Cash, Due 3/19 |
748,295 | 746,420 | 746,735 | ||||||||||||
Gentiva Health Services, Inc. Healthcare, Education and Childcare |
Initial Term B Loan 6.5% Cash, Due 10/19 |
1,696,118 | 1,696,118 | 1,681,286 | ||||||||||||
Getty Images, Inc. Printing and Publishing |
Initial Term Loan 4.8% Cash, Due 10/19 |
2,970,000 | 2,940,000 | 2,778,287 | ||||||||||||
Graceway Pharmaceuticals, LLC(3) Healthcare, Education and Childcare |
Term B Loan (First Lien) Sold Out 09/28/2012 7.0% Cash, Due 5/12 |
19,554 | 20,500 | 21,608 | ||||||||||||
Grifols Inc. Healthcare, Education and Childcare |
New U.S. Tranche B Term Loan 4.3% Cash, Due 6/17 |
969,247 | 959,297 | 976,865 | ||||||||||||
Gymboree Corporation., The Retail Stores |
Term Loan 5.0% Cash, Due 2/18 |
937,929 | 937,929 | 879,309 | ||||||||||||
Hamilton Lane Advisors, L.L.C. Finance |
Loan 5.3% Cash, Due 2/18 |
1,725,814 | 1,705,814 | 1,738,757 | ||||||||||||
Harlan Laboratories, Inc. (fka Harlan Sprague Dawley, Inc.) Healthcare, Education and Childcare |
Term Loan 5.8% Cash, Due 7/14 |
3,401,830 | 3,025,671 | 3,061,647 | ||||||||||||
Harland Clarke Holdings Corp. (fka Clarke American Corp.) Printing and Publishing |
9.500% 05/2015 412690AB5 9.5% Cash, Due 5/15 |
816,000 | 776,000 | 820,896 | ||||||||||||
Harland Clarke Holdings Corp. (fka Clarke American Corp.) Printing and Publishing |
Floating 05/2015 412690AA7 6.0% Cash, Due 5/15 |
1,000,000 | 850,000 | 1,000,000 | ||||||||||||
Harland Clarke Holdings Corp. (fka Clarke American Corp.) Printing and Publishing |
Tranche B-2 Term Loan 5.5% Cash, Due 6/17 |
1,743,194 | 1,480,416 | 1,761,715 | ||||||||||||
HCA Inc. Healthcare, Education and Childcare |
Tranche B-4 Term Loan 3.0% Cash, Due 5/18 |
1,528,943 | 1,531,020 | 1,531,650 | ||||||||||||
HCA Inc. Healthcare, Education and Childcare |
Tranche B-5 Term Loan 2.9% Cash, Due 3/17 |
2,230,173 | 2,233,202 | 2,233,886 | ||||||||||||
HCR ManorCare, Inc. (fka HCR Healthcare, LLC) Healthcare, Education and Childcare |
Initial Term Loan 5.0% Cash, Due 4/18 |
972,500 | 962,575 | 959,736 | ||||||||||||
Health Management Associates, Inc. Healthcare, Education and Childcare |
Replacement B Term Loan Retired 01/27/2014 3.5% Cash, Due 11/18 |
1,929,875 | 1,909,875 | 1,932,635 | ||||||||||||
Hertz Corporation, The Personal Transportation |
Tranche B-2 Term Loan 3.0% Cash, Due 3/18 |
2,917,950 | 2,903,063 | 2,920,007 | ||||||||||||
Hillman Group, Inc., The Machinery (Non-Agriculture, Non-Construction, Non-Electronic) |
Term Loan 3.8% Cash, Due 5/17 |
965,555 | 970,327 | 971,889 | ||||||||||||
Hubbard Radio, LLC Broadcasting and Entertainment |
Tranche 1 Term Loan 4.5% Cash, Due 4/19 |
1,708,522 | 1,726,022 | 1,720,627 |
See accompanying notes to the financial statements.
S-58
Portfolio Company/ Principal Business |
Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
Huntsman International LLC Chemicals, Plastics and Rubber |
Extended Term B Loan 2.7% Cash, Due 4/17 |
$ | 6,722,670 | $ | 6,531,685 | $ | 6,738,099 | |||||||||
Huntsman International LLC Chemicals, Plastics and Rubber |
Series 2 Extended Term B Dollar Loan 3.2% Cash, Due 4/17 |
1,008,768 | 993,993 | 1,011,083 | ||||||||||||
IAP Worldwide Services, Inc.(3) Aerospace and Defense |
Term Loan (Second Lien) 8.3% Cash, 8.5% PIK, Due 6/16 |
1,830,193 | 1,828,818 | 54,906 | ||||||||||||
Ina Beteiligungsgesellschaft Mit Beschrankter Haftung (fka Schaeffler AG) Automobile |
Facility C (USD) 4.3% Cash, Due 1/17 |
5,500,000 | 5,596,250 | 5,556,128 | ||||||||||||
Ineos US Finance LLC Chemicals, Plastics and Rubber |
Cash Dollar Term Loan 4.0% Cash, Due 5/18 |
2,951,341 | 2,906,341 | 2,966,717 | ||||||||||||
Ineos US Finance LLC Chemicals, Plastics and Rubber |
Short-Dated Cash Dollar Term Loan 2.2% Cash, Due 5/15 |
1,988,945 | 2,013,945 | 2,000,541 | ||||||||||||
Infor (US), Inc. (fka Lawson Software Inc.) Electronics |
Tranche B-2 Term Loan Retired 01/02/2014 5.3% Cash, Due 4/18 |
2,447,816 | 2,467,194 | 2,459,798 | ||||||||||||
Information Resources, Inc. (fka Symphonyiri Group, Inc.) Electronics |
Term Loan 4.8% Cash, Due 9/20 |
977,555 | 972,580 | 984,481 | ||||||||||||
J. Crew Group, Inc. Retail Stores |
Term B-1 Loan 4.0% Cash, Due 3/18 |
4,875,000 | 4,875,000 | 4,911,538 | ||||||||||||
Jarden Corporation Personal and Non Durable Consumer Products (Mfg. Only) |
New Tranche B Term Loan 2.7% Cash, Due 3/18 |
3,021,204 | 3,035,350 | 3,025,222 | ||||||||||||
JBS USA, LLC Beverage, Food and Tobacco |
Initial Term Loan 3.8% Cash, Due 5/18 |
1,950,300 | 1,940,350 | 1,951,470 | ||||||||||||
JMC Steel Group, Inc. Mining, Steel, Iron and Non-Precious Metals |
Term Loan 4.8% Cash, Due 4/17 |
1,945,060 | 1,935,135 | 1,954,367 | ||||||||||||
KAR Auction Services, Inc. Automobile |
Term Loan 3.8% Cash, Due 5/17 |
4,717,489 | 4,760,787 | 4,747,704 | ||||||||||||
Key Safety Systems, Inc. Automobile |
Initial Term Loan 4.8% Cash, Due 5/18 |
1,384,813 | 1,344,819 | 1,387,028 | ||||||||||||
Kronos Incorporated Diversified/Conglomerate Service |
Incremental Term Loan (First Lien) 4.5% Cash, Due 10/19 |
2,969,029 | 2,972,779 | 3,000,589 | ||||||||||||
Lamar Media Corp. Broadcasting and Entertainment |
Term B Loan Retired 01/10/2014 4.0% Cash, Due 12/16 |
38,446 | 43,630 | 38,494 | ||||||||||||
Live Nation Entertainment, Inc. Leisure, Amusement, Motion Pictures, Entertainment |
Term B-1 Loan 3.5% Cash, Due 8/20 |
965,107 | 966,738 | 970,338 | ||||||||||||
Longview Power, LLC(3) Utilities |
2017 Term Loan 7.2% Cash, Due 10/17 |
3,266,083 | 2,866,341 | 1,673,867 | ||||||||||||
Longview Power, LLC(3) Utilities |
Synthetic L/C Term Loan 7.2% Cash, Due 2/14 |
533,273 | 471,775 | 309,299 | ||||||||||||
LPL Holdings, Inc. Finance |
2013 Incremental Tranche B Term Loan 3.3% Cash, Due 3/19 |
1,965,150 | 1,955,150 | 1,966,791 | ||||||||||||
Mackinaw Power Holdings, LLC Utilities |
Loan 1.7% Cash, Due 6/15 |
2,050,733 | 2,003,197 | 2,030,226 | ||||||||||||
MCC Iowa LLC (Mediacom Broadband Group) Broadcasting and Entertainment |
Tranche D-1 Term Loan 1.9% Cash, Due 1/15 |
1,822,034 | 1,787,650 | 1,815,202 | ||||||||||||
MCC Iowa LLC (Mediacom Broadband Group) Broadcasting and Entertainment |
Tranche D-2 Term Loan 1.9% Cash, Due 1/15 |
2,419,553 | 2,428,724 | 2,410,480 | ||||||||||||
Michael Foods Group, Inc. (f/k/a M-Foods Holdings, Inc.) Beverage, Food and Tobacco |
Term B Facility 4.3% Cash, Due 2/18 |
337,225 | 342,942 | 337,495 |
See accompanying notes to the financial statements.
S-59
Portfolio Company/ Principal Business |
Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
MultiPlan, Inc. Healthcare, Education and Childcare |
Term B-1 Loan 4.0% Cash, Due 8/17 |
$ | 2,317,571 | $ | 2,352,641 | $ | 2,336,401 | |||||||||
Munder Capital Management Finance |
Incremental Term Loan 6.0% Cash, Due 3/15 |
26,425 | 23,125 | 26,623 | ||||||||||||
National CineMedia, LLC Leisure, Amusement, Motion Pictures, Entertainment |
Term Loan (2013) 2.9% Cash, Due 11/19 |
2,000,000 | 1,985,000 | 2,000,000 | ||||||||||||
NBTY, INC. Personal and Non Durable Consumer Products (Mfg. Only) |
Term B-2 Loan 3.5% Cash, Due 10/17 |
3,242,046 | 3,258,374 | 3,268,096.00 | ||||||||||||
NEP/NCP Holdco, Inc. Broadcasting and Entertainment |
Refinanced New Term Loan (First Lien) 4.8% Cash, Due 1/20 |
2,970,000 | 2,970,000 | 2,986,706 | ||||||||||||
Newsday, LLC Printing and Publishing |
Term Loan 3.7% Cash, Due 10/16 |
2,953,846 | 2,933,846 | 2,964,923 | ||||||||||||
Novelis, Inc. Mining, Steel, Iron and Non-Precious Metals |
Initial Term Loan 3.8% Cash, Due 3/17 |
2,928,595 | 2,962,665 | 2,943,238 | ||||||||||||
NPC International, Inc. Personal, Food and Miscellaneous Services |
Term Loan (2013) 4.0% Cash, Due 12/18 |
490,833 | 480,833 | 495,742 | ||||||||||||
NRG Energy, Inc. Utilities |
7.625% 01/2018 629377BN1 4.0% Cash, Due 1/18 |
1,000,000 | 1,000,000 | 1,145,000 | ||||||||||||
NRG Energy, Inc. Utilities |
Term Loan (2013) 2.8% Cash, Due 7/18 |
3,900,525 | 3,890,575 | 3,896,781 | ||||||||||||
Nuveen Investments, Inc. Finance |
Tranche B First-Lien Term Loan 4.2% Cash, Due 5/17 |
1,803,194 | 1,732,805 | 1,798,686 | ||||||||||||
Omnova Solutions, Inc. Chemicals, Plastics and Rubber |
Term B-1 Loan 4.3% Cash, Due 5/18 |
485,000 | 490,259 | 488,034 | ||||||||||||
OSI Restaurant Partners, LLC Personal, Food and Miscellaneous Services |
2013 Replacement Term Loan 3.5% Cash, Due 10/19 |
1,870,000 | 1,850,000 | 1,874,441 | ||||||||||||
Pantry, Inc., The Grocery |
Term Loan 4.8% Cash, Due 8/19 |
2,962,500 | 2,932,500 | 3,005,678 | ||||||||||||
Party City Holdings Inc. Retail Stores |
2013 Replacement Term Loan 4.3% Cash, Due 7/19 |
493,763 | 488,763 | 496,656 | ||||||||||||
PetCo Animal Supplies, Inc. Retail Stores |
New Loans 4.0% Cash, Due 11/17 |
3,404,798 | 3,404,798 | 3,427,423 | ||||||||||||
PQ Corporation (fka Niagara Acquisition, Inc.) Chemicals, Plastics and Rubber |
2013 Term Loan 4.5% Cash, Due 8/17 |
2,970,000 | 2,947,500 | 2,995,616 | ||||||||||||
Progressive Waste Solutions Ltd. Ecological |
Term B Loan 3.0% Cash, Due 10/19 |
742,500 | 738,750 | 744,820 | ||||||||||||
QCE, LLC (Quiznos)(3) Personal, Food and Miscellaneous Services |
Term Loan 9.0% Cash, Due 1/17 |
3,172,238 | 2,793,987 | 1,386,268 | ||||||||||||
Regal Cinemas Corporation Leisure, Amusement, Motion Pictures, Entertainment |
Term Loan 2.7% Cash, Due 8/17 |
4,443,146 | 4,480,021 | 4,467,339 | ||||||||||||
Remy International, Inc. Automobile |
Term B Loan 2013 4.3% Cash, Due 3/20 |
947,029 | 954,454 | 954,728 | ||||||||||||
Revlon Consumer Products Corporation Personal and Non Durable Consumer Products (Mfg. Only) |
Replacement Term Loan 4.0% Cash, Due 11/17 |
843,750 | 838,775 | 850,344 | ||||||||||||
Reynolds Group Holdings Inc. Containers, Packaging and Glass |
Incremental U.S. Term Loan 4.0% Cash, Due 12/18 |
2,841,300 | 2,841,300 | 2,871,318 | ||||||||||||
RGIS Services, LLC Diversified/Conglomerate Service |
Extended Initial Term Loan 4.5% Cash, Due 10/16 |
2,442,714 | 2,318,713 | 2,404,546 |
See accompanying notes to the financial statements.
S-60
Portfolio Company/ Principal Business |
Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
RGIS Services, LLC Diversified/Conglomerate Service |
Tranche C Term Loan 5.5% Cash, Due 10/17 |
$ | 2,977,273 | $ | 3,011,023 | $ | 2,945,639 | |||||||||
Roundy's Supermarkets, Inc. Grocery |
Tranche B Term Loan 5.8% Cash, Due 2/19 |
3,062,066 | 3,002,066 | 3,066,858 | ||||||||||||
Rovi Solutions Corporation/Rovi Guides, Inc. Electronics |
Tranche A-1 Loan 2.7% Cash, Due 2/16 |
1,107,114 | 1,111,817 | 1,105,730 | ||||||||||||
Rovi Solutions Corporation/Rovi Guides, Inc. Electronics |
Tranche A-2 Loan 2.4% Cash, Due 3/17 |
781,276 | 767,526 | 780,045 | ||||||||||||
Rovi Solutions Corporation/Rovi Guides, Inc. Electronics |
Tranche B-3 Term Loan 3.5% Cash, Due 3/19 |
448,150 | 445,650 | 441,562 | ||||||||||||
RPI Finance Trust Healthcare, Education and Childcare |
Term B-2 Term Loan 3.3% Cash, Due 5/18 |
3,860,522 | 3,840,622 | 3,883,454 | ||||||||||||
SBA Senior Finance II LLC Telecommunications |
Incremental Tranche B Term Loan Retired 02/07/2014 3.8% Cash, Due 9/19 |
91,643 | 91,018 | 92,368 | ||||||||||||
SBA Senior Finance II LLC Telecommunications |
Term Loan Retired 02/07/2014 3.8% Cash, Due 6/18 |
722,116 | 717,141 | 726,633 | ||||||||||||
Seaworld Parks & Entertainment, Inc. (f/k/a SW Acquisitions Co., Inc.) Leisure, Amusement, Motion Pictures, Entertainment |
Term B-2 Loan 3.0% Cash, Due 5/20 |
1,855,823 | 1,830,843 | 1,837,265 | ||||||||||||
Select Medical Corporation Healthcare, Education and Childcare |
Series C Tranche B Term Loan 4.0% Cash, Due 6/18 |
2,274,479 | 2,224,729 | 2,284,441 | ||||||||||||
Semiconductor Components Industries, LLC (On Semiconductor) Electronics |
Term Loan 2.0% Cash, Due 1/18 |
2,718,750 | 2,598,750 | 2,691,563 | ||||||||||||
Sensata Technologies B.V./Sensata Technology Finance Company, LLC Electronics |
Term Loan 3.3% Cash, Due 5/19 |
680,567 | 670,617 | 687,492 | ||||||||||||
Serena Software, Inc. Electronics |
2016 Term Loan (Extended) 4.2% Cash, Due 3/16 |
2,831,884 | 2,807,105 | 2,810,645 | ||||||||||||
ServiceMaster Company, The Diversified/Conglomerate Service |
Tranche C Term Loan 4.3% Cash, Due 1/17 |
2,481,203 | 2,515,578 | 2,461,664 | ||||||||||||
Sinclair Television Group, Inc. Broadcasting and Entertainment |
New Tranche B Term Loan 3.0% Cash, Due 4/20 |
136,716 | 116,716 | 136,032 | ||||||||||||
Six Flags Theme Parks, Inc. Leisure, Amusement, Motion Pictures, Entertainment |
Tranche B Term Loan 3.5% Cash, Due 12/18 |
1,675,481 | 1,696,106 | 1,683,105 | ||||||||||||
Spirit Aerosystems, Inc. (fka Mid-Western Aircraft Systems,Inc and Onex Wind Finance LP.) Aerospace and Defense |
Term B Loan 3.8% Cash, Due 4/19 |
3,438,750 | 3,421,250 | 3,461,858 | ||||||||||||
SRAM, LLC Leisure, Amusement, Motion Pictures, Entertainment |
Term Loan (First Lien) 4.0% Cash, Due 4/20 |
3,299,075 | 3,279,506 | 3,304,568 | ||||||||||||
SS&C Technologies Holdings Europe S.A.R.L. Electronics |
2013 Replacement Term B-2 Loan 3.3% Cash, Due 6/19 |
265,900 | 268,149 | 266,772 | ||||||||||||
SS&C Technologies, Inc.,/Sunshine Acquisition II, Inc. Electronics |
2013 Replacement Term B-1 Loan 3.3% Cash, Due 6/19 |
2,570,367 | 2,592,110 | 2,578,798 | ||||||||||||
SunCoke Energy, Inc. Mining, Steel, Iron and Non-Precious Metals |
Tranche B Term Loan 4.0% Cash, Due 7/18 |
303,340 | 298,365 | 302,764 |
See accompanying notes to the financial statements.
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Portfolio Company/ Principal Business |
Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
SunGard Data Systems Inc (Solar Capital Corp.) Electronics |
Tranche E Term Loan 4.0% Cash, Due 3/20 |
$ | 6,989,880 | $ | 6,871,424 | $ | 7,046,673 | |||||||||
SuperMedia Inc. (fka Idearc Inc.) Printing and Publishing |
Loan 11.6% Cash, Due 12/16 |
511,708 | 316,622 | 383,464 | ||||||||||||
Telesat Canada Telecommunications |
U.S. Term B-2 Loan 3.5% Cash, Due 3/19 |
2,955,169 | 2,940,169 | 2,966,856 | ||||||||||||
Tenneco Inc. Automobile |
Tranche A Term Loan 2.7% Cash, Due 3/17 |
3,650,000 | 3,650,000 | 3,654,563 | ||||||||||||
Tesoro Corporation Oil and Gas |
Initial Term Loan 2.4% Cash, Due 5/16 |
198,750 | 198,750 | 199,660 | ||||||||||||
Texas Competitive Electric Holdings Company, LLC (TXU) Utilities |
2014 Term Loan (Non-Extending) 3.7% Cash, Due 10/14 |
3,748,690 | 2,907,390 | 2,664,381 | ||||||||||||
Toys 'R' Us-Delaware, Inc. Retail Stores |
Initial Loan 6.0% Cash, Due 9/16 |
1,902,743 | 1,911,493 | 1,726,054 | ||||||||||||
TPF Generation Holdings, LLC Utilities |
Term Loan 4.8% Cash, Due 12/17 |
3,308,567 | 2,990,821 | 3,333,381 | ||||||||||||
TransDigm Inc. Aerospace and Defense |
Tranche C Term Loan 3.8% Cash, Due 2/20 |
3,890,551 | 3,890,551 | 3,906,035 | ||||||||||||
Tronox Pigments (Netherlands) B. V. Chemicals, Plastics and Rubber |
New Term Loan 4.5% Cash, Due 3/20 |
777,877 | 770,020 | 789,350 | ||||||||||||
TUI University, LLC Healthcare, Education and Childcare |
Term Loan (First Lien) 7.3% Cash, Due 10/14 |
411,933 | 372,562 | 403,695 | ||||||||||||
TW Telecom Holdings Inc. (fka Time Warner Telecom Holdings Inc.) Telecommunications |
Term Loan B Loan 2.7% Cash, Due 4/20 |
3,813,269 | 3,824,590 | 3,813,288 | ||||||||||||
TWCC Holding Corp. Broadcasting and Entertainment |
Term Loan 3.5% Cash, Due 2/17 |
4,300,575 | 4,300,575 | 4,323,067 | ||||||||||||
U.S. Security Associates Holdings, Inc. Diversified/Conglomerate Service |
Delayed Draw Loan 6.0% Cash, Due 7/17 |
160,148 | 160,148 | 161,048 | ||||||||||||
U.S. Security Associates Holdings, Inc. Diversified/Conglomerate Service |
Term B Loan 6.0% Cash, Due 7/17 |
818,172 | 809,823 | 822,775 | ||||||||||||
Univar Inc. Chemicals, Plastics and Rubber |
Term B Loan 5.0% Cash, Due 6/17 |
5,435,165 | 5,447,313 | 5,401,575 | ||||||||||||
Universal Health Services, Inc. Healthcare, Education and Childcare |
Tranche B-1 Term Loan 2.4% Cash, Due 11/16 |
1,031,250 | 1,074,432 | 1,035,762 | ||||||||||||
Univision Communications Inc. Broadcasting and Entertainment |
2013 Converted Extended First-Lien Term Loan 4.5% Cash, Due 3/20 |
4,855,196 | 4,567,418 | 4,885,929 | ||||||||||||
Valleycrest Companies LLC (VCC Holdco II Inc.) Diversified/Conglomerate Service |
Initial Term Loan 5.5% Cash, Due 6/19 |
3,299,311 | 3,229,612 | 3,324,056 | ||||||||||||
Vertafore, Inc. Electronics |
Term Loan (2013) 4.3% Cash, Due 10/19 |
952,048 | 952,048 | 952,810 | ||||||||||||
VFH Parent LLC Finance |
Term Loan (2013) 5.8% Cash, Due 11/19 |
998,333 | 1,013,308 | 1,007,483 | ||||||||||||
VML US Finance LLC (aka Venetian Macau) Hotels, Motels, Inns, and Gaming |
Term Loan US Dollar 1.7% Cash, Due 11/16 |
3,675,250 | 3,647,686 | 3,659,630 | ||||||||||||
Weight Watchers International, Inc. Beverage, Food and Tobacco |
Initial Tranche B-1 Term Loan 2.9% Cash, Due 4/16 |
496,250 | 491,250 | 482,913 | ||||||||||||
Wendy's International, Inc Personal, Food and Miscellaneous Services |
Term B Loan 3.3% Cash, Due 5/19 |
1,360,939 | 1,340,939 | 1,364,709 |
See accompanying notes to the financial statements.
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Portfolio Company/ Principal Business |
Investment Interest Rate(1)/Maturity |
Principal | Cost | Fair Value | ||||||||||||
West Corporation Diversified/Conglomerate Service |
Term B-8 Loan 3.8% Cash, Due 6/18 |
$ | 4,360,038 | $ | 4,381,867 | $ | 4,386,045 | |||||||||
WideOpenWest Finance, LLC Telecommunications |
Term B-1 Loan 2013 3.8% Cash, Due 7/17 |
3,970,050 | 4,000,050 | 3,984,660 | ||||||||||||
Windstream Corporation Telecommunications |
Tranche B-5 Term Loan 3.5% Cash, Due 8/19 |
493,750 | 488,750 | 495,330 | ||||||||||||
WireCo WorldGroup Inc. Machinery (Non-Agriculture, Non-Construction, Non-Electronic) |
Term Loan 6.0% Cash, Due 2/17 |
1,975,000 | 1,955,000 | 1,993,516 | ||||||||||||
Total Investment in Debt Securities | 398,726,561 | 392,855,444 | 392,391,636 |
Portfolio Company/ Principal Business |
Equity Investment | Shares | Cost | Fair Value | ||||||||||||
Dex Media Inc.(2) Printing and Publishing |
Common | 1,589 | | 10,755 | ||||||||||||
IAP Worldwide Services, Inc.(2) | Series A Warrant | 36,987 | | | ||||||||||||
IAP Worldwide Services, Inc.(2) | Series B Warrant | 10,833 | | | ||||||||||||
IAP Worldwide Services, Inc.(2) | Series C Warrant | 5,484 | | | ||||||||||||
LandSource Holding Company, LLC(2) | Common | 390,426 | | 1,347,155 | ||||||||||||
Natural Products Group, Inc.(2) | Series A-1 Common Stock | 2,618 | | 170,157 | ||||||||||||
Total Investment in Equity Securities | | 1,528,067 |
Portfolio Company | CLO Investment | Principal | Cost | Fair Value(2) | ||||||||||||
Duane 2006-3A(1) CLO Equity |
Floating 01/2021 C 26358BAJ7 |
$ | 2,000,000 | $ | 1,473,125 | $ | 1,900,106 | |||||||||
DUANE 2006-2A(1) CLO Equity |
Floating 08/2018 C 26357XAD3 |
4,000,000 | 3,392,110 | 3,889,935 | ||||||||||||
EAGLC 2006-1A (1) CLO Equity |
Floating 02/2018 A2 269491AC0 |
2,000,000 | 1,666,794 | 1,976,154 | ||||||||||||
FRASR 2006-2X(1) CLO Equity |
Floating 12/2020 B USG3661CAC40 |
2,000,000 | 1,536,087 | 1,877,249 | ||||||||||||
HICDO 2007-6A(1) CLO Equity |
Floating 06/2019 B 42823CAC4 |
1,500,000 | 1,209,867 | 1,437,382 | ||||||||||||
HLMK 2006-1X(1) CLO Equity |
Floating 05/2021 A2 USG4493LAB83 |
2,000,000 | 1,539,763 | 1,864,342 | ||||||||||||
VENTR 2006-7A(1) CLO Equity |
Floating 01/2022 C 92328WAG6 |
2,000,000 | 1,463,419 | 1,833,943 | ||||||||||||
Total Investment in CLO Equity Securities | 15,500,000 | 12,281,165 | 14,779,111 | |||||||||||||
Total Investments | $ | 414,226,561 | $ | 405,136,609 | $ | 408,698,814 |
(1) | Investment in a Collateralized Loan Obligation Fund |
(2) | Equity investment in common stock |
(3) | Loan on non-accrual status |
(4) | Buildings and real estate relate to real estate ownership, builders, managers and developers and excludes mortgage debt investments and mortgage lenders or originators. |
See accompanying notes to the financial statements.
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Katonah X CLO LTD. (the Fund) is an exempted company incorporated in September 7, 2006 with limited liability under the laws of the Cayman Islands for the sole purpose of investing in broadly syndicated loans, high-yield bonds and other credit instruments. The Fund is what is commonly known as a collateralized loan obligation fund (CLO Fund).
A CLO Fund generally refers to a special purpose vehicle that owns a portfolio of investments and issues various tranches of debt and subordinated note securities to finance the purchase of those investments. Investments purchased by a CLO Fund are governed by extensive investment guidelines, including limits on exposure to any single industry or issuer and limits on the ratings of the CLO Funds assets. A CLO Fund has a defined investment period during which it is allowed to make investments or reinvest capital as it becomes available.
A CLO Fund typically issues multiple tranches of debt and subordinated note securities with varying ratings and levels of subordination to finance the purchase of their underlying investments. Interest and principal payments (net of designated CLO Fund expenses) from the CLO Fund are paid to each issued security in accordance with an agreed upon priority of payments, commonly referred to as the waterfall. The most senior notes, generally rated AAA/Aaa, commonly represent the majority of the total liabilities of the CLO Fund. AAA/Aaa notes are issued at a specified spread over LIBOR and normally have the first claim on the earnings on the CLO Funds investments after payment of certain fees and expenses. Lower subordinated mezzanine tranches of rated notes generally have ratings ranging from AA/Aa to BB/Ba and are usually issued at a specified spread over LIBOR with higher spreads paid on the tranches with lower ratings. Each tranche is typically only entitled to a share of the earnings on the CLO Funds investments if the required interest and principal payments have been made on the more senior tranches in the waterfall. The most junior tranche can take the form of either subordinated notes or preferred shares. The subordinated notes or preferred shares generally do not have a stated coupon but are entitled to residual cash flows from the CLO Funds investments after all of the other tranches of notes and certain other fees and expenses are paid.
On May 15, 2007, the Fund issued $500.0 million of notes or debt securities, consisting of the Class A-1a Floating Rate Notes, the Class A-1b Floating Rate Notes, the Class A-2a Floating Rate Notes, the Class A-2b Floating Rate Notes, the Class B Floating Rate Notes, the Class C Floating Rate Notes, the Class D Floating Rate Notes, the Class E Floating Rate Notes and the Subordinated Securities. The notes were issued pursuant to an indenture, dated May 15, 2007 (the Indenture), with U.S. Bank National Association servicing as the trustee thereunder. KCAP Financial, Inc. (KCAP Financial) owns 12,500,000 of the subordinated securities of Katonah X CLO LTD. The Funds defined investment period ended on May 27, 2013. Following the defined investment period, proceeds from principal payments in the investment portfolio of the Fund will be used to pay down its outstanding notes, starting with Class A notes.
Pursuant to a collateral management agreement (the Collateral Management Agreement), Katonah Debt Advisors, L.L.C. (the Manager), which is a wholly-owned portfolio company of KCAP Financial, provides investment management services to the Fund, and makes day-to-day investment decisions concerning the assets of the Fund. The Manager also performs certain administrative services on behalf of the Fund under the Collateral Management Agreement. The Manager is a registered investment adviser under the Investment Advisers Act of 1940.
The financial statements of the Fund have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). In the opinion of the Managers management, the financial statements of the Fund reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial condition and results of operations for the periods presented. Furthermore, the preparation of the financial statements requires management to make significant estimates and assumptions
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including the fair value of investments that do not have a readily available market value. Actual results could differ from those estimates, and the differences could be material.
All of the investments held and notes issued by the Fund are presented at fair value in the Funds Statement of Net Assets.
Investments of the Fund at Fair Value. Investment transactions are recorded on the applicable trade date. Realized gains or losses are determined using the specific identification method. Investments held by the Fund are stated at fair value. ASC 820-10, Fair Value Measurements and Disclosures (ASC 820-10), requires among other things, disclosures about assets and liabilities that are measured and reported at fair value.
Hierarchy of Fair Value Inputs. The provisions of ASC 820-10 establish a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and require companies to disclose the fair value of their financial instruments according to the fair value hierarchy (i.e., Level 1, 2 and 3 inputs, as defined). The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Additionally, companies are required to provide additional disclosure regarding instruments in the Level 3 category (which have inputs to the valuation techniques that are unobservable and require significant management judgment), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities.
Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 Inputs:
Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date.
| Level 1 assets may include listed mutual funds (including those accounted for under the equity method of accounting as these mutual funds are investment companies, that have publicly available net asset values which in accordance with GAAP are calculated under fair value measures and are equal to the earnings of such funds), ETFs, equities and certain derivatives. |
Level 2 Inputs:
Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; quotes from pricing services or brokers, for which the Manager can determine that orderly transactions took place at the quoted price or that the inputs used to arrive at the price were observable; and inputs other than quoted prices that are observable, such as models or other valuation methodologies.
| Level 2 assets in this category may include debt securities, bank loans, short-term floating rate notes and asset-backed securities, restricted public securities valued at a discount, as well as over the counter derivatives, including interest and inflation rate swaps and foreign currency exchange contracts that have inputs to the valuations that generally can be corroborated by observable market data. |
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Level 3 Inputs:
Unobservable inputs for the valuation of the asset or liability, which may include non-binding broker quotes. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation.
| Level 3 assets in this category may include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds, and funds of hedge funds, direct private equity investments held within consolidated funds, bank loans, bonds issued by CLO Funds and certain held for sale real estate disposal assets. |
| Level 3 liabilities included in this category include borrowings of consolidated collateralized loan obligations valued based upon non-binding broker quotes or discounted cash flow model based on a discount margin calculation. |
Significance of Inputs:
The Managers assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.
Valuation of Portfolio Investments. Debt and equity securities for which market quotations are readily available are generally valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available are valued based on detailed analyses prepared by management, and, in certain circumstances, may utilize third parties with valuation expertise. The Manager follows the provisions of ASC 820-10 with respect to preparing the Funds financial statements. This standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Subsequent to the adoption of ASC 820-10, the FASB has issued various staff positions clarifying the initial standard as noted below.
In January 2010, the FASB issued guidance that clarifies and requires new disclosures about fair value measurements. The clarifications and requirement to disclose the amounts and reasons for significant transfers between Level 1 and Level 2, as well as significant transfers in and out of Level 3 of the fair value hierarchy, were adopted by the Fund in 2010.
Fair Value Measurements and Disclosures requires the disclosure of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period.
The Managers valuation methodology and procedures for investments held by the Fund are generally as follows:
1. | For any asset which is also held by KCAP Financial on the applicable date, the KCAP Financial fair value mark as of such applicable date is used. |
2. | Each portfolio company or investment is cross-referenced to an independent pricing service to determine if a current market quote is available. The nature and quality of such quote is reviewed to determine reliability and relevance of the quote. Factors considered in this determination include whether the quote is from a transaction or is a broker quote, the date and aging of such quote, whether the transaction is arms-length, whether it is of a liquidation or distressed nature and certain other factors judged to be relevant by the Managers management within the framework of ASC 820-10. |
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3. | If an investment does not have a market quotation on either a broad market exchange or from an independent pricing service, the investment is initially valued by the Managers investment professionals responsible for the portfolio investment in conjunction with the portfolio management team. Generally, such fair values are determined by reference to public market or private transactions or valuations for comparable companies or assets in the relevant asset class and or industry when such amounts are available. Generally these valuations are derived by multiplying a key performance metric of the investee company or asset (e.g., EBITDA) by the relevant valuation multiple observed for comparable companies or transactions, adjusted by management for differences between the investment and the referenced comparable. If the fair value of such investments cannot be valued by reference to observable valuation measures for comparable companies, then the primary analytical method used to estimate the fair value is a discounted cash flow method and/or cap rate analysis. A sensitivity analysis is applied to the estimated future cash flows using various factors depending on the investment, including assumed growth rates (in cash flows), capitalization rates (for determining terminal values) and appropriate discount rates to determine a range of reasonable values or to compute projected return on investment. |
4. | Preliminary valuation conclusions are discussed and documented by the Managers management. |
5. | Illiquid loans, junior and mezzanine securities and investments in other CLO bonds are fair valued using models developed by the Managers management with applicable market assumptions. |
6. | The Managers management discusses the valuations and determines in good faith that the fair values of each investment in the portfolio is reasonable based upon any applicable independent pricing service, input of management, and estimates from independent valuation firms (if any). |
Debt Securities. Most of the Funds investment portfolio is composed of broadly syndicated debt securities for which an independent pricing service quote is available. To the extent that the investments are exchange traded and are priced or have sufficient price indications from normal course trading at or around the valuation date (financial reporting date), such pricing will determine fair value. Pricing service marks from third party pricing services may be used as an indication of fair value, depending on the volume and reliability of the marks, sufficient and reasonable correlation of bid and ask quotes, and, most importantly, the level of actual trading activity.
CLO Fund Securities. The Fund may selectively invest in securities issued by CLO Funds managed by other asset management companies. For bond rated tranches of CLO Funds (those above the junior class) without transactions to support a fair value for the specific CLO Fund and tranche, fair value is based on discounting estimated bond payments at current market yields, which may reflect the adjusted yield on the leveraged loan index for similarly rated tranches, as well as prices for similar tranches for other CLO Funds and also other factors such as the default and recovery rates of underlying assets in the CLO Fund, as may be applicable. Such model assumptions may vary and incorporate adjustments for risk premiums and CLO Fund specific attributes. Such adjustments require judgment and may be material to the calculation of fair value.
Cash. Cash is defined as demand deposits. The Fund holds its cash with financial institutions and, at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit.
Debt at Fair Value. The Fund has issued rated and unrated bonds to finance its operations. Debt is presented at fair value.
Interest Income. Interest income is recorded on the accrual basis on interest-bearing assets. The Fund generally places a loan or security on non-accrual status and ceases recognizing cash interest income on such loan or security when a loan or security becomes 90 days or more past due or if Manager otherwise does not expect the debtor to be able to service its debt obligations.
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Management Fees. The Fund is externally managed by the Manager pursuant to the Collateral Management Agreement. As compensation for the performance of its obligations under the Collateral Management Agreement, the Manager is entitled to receive from the Fund a senior collateral management fee (the Senior Collateral Management Fee), a subordinated collateral management fee (the Subordinated Collateral Management Fee) and an incentive collateral management fee (the Incentive Collateral Management Fee).The Senior Collateral Management Fee is payable in arrears quarterly (subject to availability of funds and to the satisfaction of payment obligations on the debt obligations of the Fund (the Priority of Payments)) in an amount equal to 0.15% per annum of the aggregate principal amount of the Funds investments. The Subordinated Collateral Management Fee is payable in arrears quarterly (subject to availability of funds and to the Priority of Payments) in an amount equal to 0.35% per annum of the aggregate principal amount of the Funds investments. The Incentive Collateral Management Fee equals 20% of the amount of interest and principal payments remaining available for distribution to the holders of the Funds subordinated securities under the Priority of Payments at which the Incentive Collateral Management Fee may be paid. For the year ended December 31, 2013 Incentive Fees were approximately $1.1 million.
Interest Expenses. The Fund has issued rated and unrated bonds to finance its operations. Interest on debt is calculated by the third party trustee of the Fund. Interest is accrued and generally paid quarterly.
Trustee Fees. The Fund has a third party trustee that is the custodian for all investments of the Fund and receives and disburses all cash in accordance to the trustee and custodial agreements. Trustee fees are accrued and paid quarterly by the Fund.
Income Taxes. The Fund is not subject to net income taxation in the United States or the Cayman Islands. Accordingly, no provision for income taxes has been made in the accompanying financial statements.
The investments held by the Fund are primarily invested in senior secured bank loans (typically syndicated by banks), bonds, and equity securities. Bank loan investments, which comprise the majority of the Funds portfolio, are senior secured corporate loans from a variety of industries, including but not limited to the aerospace and defense, broadcasting, technology, utilities, household products, healthcare, oil and gas, and finance industries. The investments mature at various dates between 2014 and 2022, pay interest at Libor or Prime plus a spread of up to 8.5%, and typically range in credit rating categories from BBB down to unrated. Non-accrual loans represented less than 1% of investments at fair value as of December 31, 2013. The aggregate unpaid principal value of loans past due as of December 31, 2013 was approximately $8.8 million and the difference between fair value and the unpaid principal balance was approximately $881,000. The Funds investments are valued based on price quotations provided by an independent third-party pricing source which are indicative of traded prices and/or dealer price quotations. In the event that a third-party pricing source is unable to price an investment, other relevant factors, data and information are considered, including: i) information relating to the market for the investment, including price quotations for and trading in the investment and interest in similar investments and the market environment and investor attitudes towards the investment and interests in similar investments; ii) the characteristics of and fundamental analytical data relating to the investment, including the cost, size, current interest rate, period until next interest rate reset, maturity and base lending rate, the terms and conditions of the loan and any related agreements, and the position of the loan in the issuers debt structure; iii) the nature, adequacy and value of the senior secured corporate loans collateral, including the CLOs rights, remedies and interests with respect to the collateral; iv) the creditworthiness of the borrower, based on an evaluation of its financial condition, financial statements and information about the business, cash flows, capital structure and future prospects; v) the reputation and financial condition of the agent and any intermediate participants in the senior secured corporate loan; and vi) general economic and market conditions affecting the fair value of the senior secured corporate loan.
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The debt issued by the Fund has a stated maturity date of April 17, 2020. The Funds debt was issued in various tranches with different risk profiles and ratings. The interest rates are variable rates based on Libor plus a pre-defined spread, which varies from 0.225% for the more senior tranches to 4% for the more subordinated tranches. The debt issued by the Fund is recorded at fair value using an income approach, driven by cash flows expected to be received from the portfolio collateral assets. Fair value is determined using current information, notably market yields and projected cash flows of collateral assets based on forecasted default and recovery rates that a market participant would use in determining the current fair value of the liabilities, taking into account the overall credit quality of the issuers and the Managers past experience in managing similar securities. Market yields, default rates and recovery rates used in the Managers estimate of fair value vary based on the nature of the investments in the underlying collateral pools. In periods of rising market yields, default rates and lower debt recovery rates, the fair value, and therefore the carrying value, of the liabilities may be adversely affected. Once the undiscounted cash flows of the collateral assets have been determined, the Manager applies appropriate discount rates that a market participant would use to determine the discounted cash flow valuation of the notes.
The carrying value of investments held and debt issued by the Fund is also their fair value. The following table presents the fair value hierarchy levels of investments held and debt issued by the Fund, which are measured at fair value as of December 31, 2013:
December 31, 2013 | ||||||||||||||||
($ in millions) | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Assets: |
||||||||||||||||
Investments | $ | 408,698,814 | | | $ | 408,698,814 | ||||||||||
Liabilities: |
||||||||||||||||
CLO Fund Liabilities | $ | 416,405,403 | | | $ | 416,405,403 |
The following table shows a reconciliation of the beginning and ending fair value measurements for Level 3 assets using significant unobservable inputs:
For the year ended December 31, 2013 |
||||
Beginning balance | $ | 474,249,149 | ||
Transfers to Level 3 | | |||
Transfers from Level 3 | | |||
Purchase of investments | 99,242,299 | |||
Proceeds from sale and redemption of investments | (163,957,914 | ) | ||
Net realized and unrealized gains/(losses) | (834,721 | ) | ||
Ending balance | $ | 408,698,814 | ||
Changes in unrealized appreciation (depreciation) included in earnings related to investments still held at reporting date | $ | (7,017,345 | ) |
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As of December 31, 2013, the Managers Level 3 portfolio investments had the following valuation techniques and significant inputs:
Type | Fair Value | Valuation Technique | Unobservable inputs | Range of Inputs |
Debt Securities | $ 6,961,021 | Income Approach | Implied Effective Discount Rate | 2.73% 8.80% |
$ 385,430,614 | Market Quote | Third-Party Bid-Ask Mid | 3.0% 114.5% | |
Equity Securities | $ 1,528,066 | Market Quote | Third-Party Bid-Ask Mid | $3.45 $65.00 |
Listed Exchange Quote | $6.77 | |||
CLO Fund Securities | $ 14,779,111 | Market Quote | Third-Party Bid | 93.0% 98.0% |
Discounted Cash Flow | Discount Rate | 1.76% 2.55% |
The following table shows a reconciliation of the beginning and ending fair value measurements for Level 3 liabilities using significant unobservable inputs:
For the year ended December 31, 2013 |
||||
Beginning balance | $ | 462,665,846 | ||
Unrealized appreciation/(depreciation) | (46,260,443 | ) | ||
Ending balance | $ | 416,405,403 | ||
Changes in unrealized appreciation (depreciation) included in earnings related to liabilities still held at reporting date | $ | (46,260,443 | ) |
Transfers between levels, if any, are recognized at the beginning of the quarter in which the transfers occur. ASC 820-10 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with ASC 820-10, these inputs are summarized in the three broad levels listed below.
| Level 1 Valuations based on quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access. |
| Level 2 Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. |
| Level 3 Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
The Funds debt is presented at fair value with the difference between principal and fair value recorded as unrealized gain/loss. The par amount of the Funds debt is approximately $447 million as of December 31, 2013.
The Manager has determined that, although the junior tranches have certain characteristics of equity, they should be accounted for and disclosed as debt on the Funds Statement of Net Assets, as the subordinated and income notes have a stated maturity indicating a date for which they are mandatorily redeemable. The preference shares are also classified as debt, as they are mandatorily redeemable upon liquidation or termination of the Fund.
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Under the current laws, the Fund is not subject to net income taxation in the United States or the Cayman Islands. Accordingly, no provision for income taxes has been made in the accompanying financial statements.
Pursuant to ASC Topic 740, Accounting for Uncertainty in Income Taxes, the Fund adopted the provisions of Financial Accounting Standards Board (FASB) relating to accounting for uncertainty in income taxes which clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements and applies to all open tax years as of the effective date. As of December 31, 2013, there was no impact to the financial statements as a result of the Funds accounting for uncertainty in income taxes. The Fund does not have any unrecognized tax benefits or liabilities for the year ended December 31, 2013. Also, the Fund recognizes interest and, if applicable, penalties for any uncertain tax positions, as a component of income tax expense. No interest or penalty expense was recorded by the Fund for the year ended December 31, 2013.
On May 15, 2007, the Fund issued $500 million of notes or debt securities, consisting of the Class A-1a Floating Rate Notes, the Class A-1b Floating Rate Notes, the Class A-2a Floating Rate Notes, the Class A-2b Floating Rate Notes, the Class B Floating Rate Notes, the Class C Floating Rate Notes, the Class D Floating Rate Notes, the Class E Floating Rate Notes and the preferred shares. The notes were issued pursuant to the Indenture.
The table below sets forth certain information for each outstanding class of debt securities issued pursuant to the Indenture.
Title of Debt Security | Principal Amount | Amount Outstanding | Interest Rate | Maturity | Fair Value | |||||||||||||||
Class A-1a Floating Rate Notes | $ | 94,000,000 | $ | 76,392,989 | LIBOR + 0.225% | April 17, 2020 | $ | 75,629,847 | ||||||||||||
Class A-1b Floating Rate Notes | $ | 23,500,000 | $ | 23,500,000 | LIBOR + 0.300% | April 17, 2020 | $ | 23,009,903 | ||||||||||||
Class A-2a Floating Rate Notes | $ | 50,000,000 | $ | 42,507,655 | LIBOR + 0.260% | April 17, 2020 | $ | 41,695,025 | ||||||||||||
Class A-2b Floating Rate Notes | $ | 187,500,000 | $ | 159,403,706 | LIBOR + 0.240% | April 17, 2020 | $ | 156,171,657 | ||||||||||||
Class B Floating Rate Notes | $ | 40,000,000 | $ | 40,000,000 | LIBOR + 0.370% | April 17, 2020 | $ | 37,820,682 | ||||||||||||
Class C Floating Rate Notes | $ | 25,000,000 | $ | 25,000,000 | LIBOR + 0.850% | April 17, 2020 | $ | 23,655,712 | ||||||||||||
Class D Floating Rate Notes | $ | 22,500,000 | $ | 22,500,000 | LIBOR + 2.000% | April 17, 2020 | $ | 21,660,970 | ||||||||||||
Class E Floating Rate Notes | $ | 20,000,000 | $ | 20,000,000 | LIBOR + 4.000% | April 17, 2020 | $ | 19,068,997 | ||||||||||||
Subordinated Securities | $ | 37,500,000 | $ | 37,500,000 | N/A | April 17, 2020 | $ | 17,796,489 |
The Fund has no commitments to fund investments as of December 31, 2013.
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The authorized share capital of the Issuer consists of 250 ordinary shares of $1.00 par value, all of which were issued on or prior to the closing Date and 37,500,000.00 Subordinated Notes, all of which are issued and fully paid . The ordinary shares that have been issued are held by Maples Finance Limited, a licensed trust company incorporated in the Cayman Islands, as the trustee pursuant to the terms of a charitable trust. The subordinated securities that have been issued by the Fund are owned by KCAP Financial. The subordinated securities are classified as debt in the Funds financial statements, as they are mandatorily redeemable upon liquidation or termination of the Fund.
The Manager has evaluated events or transactions that have occurred since December 31, 2013 through March 12, 2014 the date the financial statements were available for issuance. The Manager has determined that there are no material events that would require the disclosure in the financial statements.
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2. Exhibits
Exhibit Number |
Description | |
a | Form of Certificate of Incorporation.(1) | |
b | Bylaws, as amended and restated effective February 29, 2012.(2) | |
d.1 | Specimen certificate of the Companys common stock, par value $0.01 per share.(3) | |
d.2 | Form of Base Indenture between the Company and U.S. Bank National Association relating to the 7.375% Unsecured Notes Due 2019.(20) | |
d.3 | Statement of Eligibility of Trustee on Form T-1.*** | |
d.4 | Form of First Supplemental Indenture between the Company and U.S. Bank National Association relating to the 7.375% Notes Due 2019.(20) |
|
d.5 | Form of Note (Filed as Exhibit A to Form of First Supplemental Indenture referred to in Exhibit d.4). |
|
e | Form of Dividend Reinvestment Plan.(4) | |
h.1 | Form of Underwriting Agreement.** | |
i.1 | Amended and Restated 2006 Equity Incentive Plan.(5) | |
i.2 | Form of Company Non-Qualified Stock Option Certificate.(4) | |
i.3 | Form of Restricted Stock Award Agreement.(6) | |
i.4 | Amended and Restated Non-Employee Director Plan.(7) | |
j | Custodian Agreement by and among the Company and U.S. Bank National Association.(8) | |
k.1 | Form of Overhead Allocation Agreement between the Company and Katonah Debt Advisors, LLC.(9) |
|
k.2 | Form of Employment Agreement between the Company and Dayl W. Pearson.(34) | |
k.3 | Form of Employment Agreement between the Company and Edward U. Gilpin.(10) | |
k.4 | Form of Employment Agreement between the Company and R. Jon Corless.(34) | |
k.5 | Form of Employment Agreement between Katonah Debt Advisors and Daniel P. Gilligan.(34) | |
k.6 | Form of Executive Employment Agreement, dated May 5, 2015.(33) | |
k.7 | Indenture, dated as of March 16, 2011, by and between the Company and U.S. Bank National Association, as trustee relating to the 8.75% Convertible Note Due 2016.(12) | |
k.8 | Form of 8.75% Convertible Note Due 2016 (included as part of Exhibit k.7). | |
k.9 | Employment Agreement, dated February 29, 2012, by and among, Jay R. Bloom and Trimaran Advisors, L.L.C., and, solely as to the last three sentences of Section 1(a) and Section 2(d), the Company.(13) |
|
k.10 | Employment Agreement, dated February 29, 2012, by and among, Dean C. Kehler and Trimaran Advisors, L.L.C., and, solely as to the last three sentences of Section 1(a) and Section 2(d), the Company.(14) |
|
k.11 | Purchase Agreement, dated June 16, 2013, by and among KCAP Financial, Inc., KCAP Senior Funding I Holdings, LLC, KCAP Senior Funding I, LLC and Guggenheim Securities, LLC.(21) | |
k.12 | Master Loan Sale Agreement, dated June 18, 2013, by and among KCAP Financial, Inc., KCAP Senior Funding I Holdings, LLC and KCAP Senior Funding I, LLC.(22) | |
k.13 | Indenture, dated June 18, 2013, by and between KCAP Senior Funding I, LLC and U.S. Bank National Association.(23) | |
k.14 | Collateral Management Agreement, dated June 18, 2013, by and between KCAP Senior Funding I, LLC and KCAP Financial, Inc.(24) | |
k.15 | Collateral Administration Agreement, dated June 18, 2013, by and among KCAP Senior Funding I, LLC, KCAP Financial, Inc. and U.S. Bank National Association.(25) | |
k.16 | Purchase and Sale Agreement, dated February 29, 2012, by and among Kohlberg Capital Corporation (the Company), Commodore Holdings, L.L.C., Trimaran Advisors, L.L.C., HBK Caravelle, L.L.C., Trimaran Fund Management, L.L.C., Jay R. Bloom, and Dean C. Kehler.(17) | |
k.17 | Escrow Agreement, dated February 29, 2012, by and among Commodore Holdings, L.L.C., Trimaran Fund Management, L.L.C., HBK Caravelle, L.L.C. and The Bank of New York Mellon, as escrow agent.(18) | |
k.18 | Non-Employee Director Plan as Amended and Restated Effective June 20, 2014.(26) | |
k.19 | 2006 Equity Incentive Plan as Amended and Restated Effective June 20, 2014.(27) | |
k.20 | 2006 Equity Incentive Plan as Amended and Restated Effective June 23, 2015(35) | |
k.21 | Form of Employee Restricted Stock Award Agreement.(28) |
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Exhibit Number |
Description | |
k.22 | Form of Executive Restricted Stock Award Agreement.(29) | |
k.23 | Upsize Purchase Agreement, dated as of December 4, 2014, by and among KCAP Financial, Inc., KCAP Senior Funding I Holdings, LLC, KCAP Senior Funding I, LLC and Guggenheim Securities, LLC.(30) | |
k.24 | Subordinated Note Purchase Agreement, dated as of December 8, 2014, by and between KCAP Senior Funding I Holdings, LLC and KCAP Senior Funding I, LLC.(31) | |
k.25 | First Supplemental Indenture, dated as of December 8, 2014, among KCAP Senior Funding I, LLC and U.S. Bank National Association.(32) | |
l | Opinion of Sutherland Asbill & Brennan LLP, counsel to the Company.*** | |
n.1 | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm, with respect to report dated March 31, 2015, relating to KCAP Financial, Inc.* | |
n.2 | Consent of Ernst & Young LLP, Independent Certified Public Accountants, with respect to the report dated March 31, 2015, relating to Asset Manager Affiliates.* | |
n.3 | Consent of Ernst & Young LLP, Independent Certified Public Accountants, with respect to the report dated March 31, 2015, relating to Katonah 2007-I CLO.* | |
n.4 | Report of Ernst & Young LLP, Independent Certified Public Accountants, with respect to report dated August 7, 2015, relating to the Senior Securities of KCAP Financial, Inc.* | |
r | Code of Ethics of the Company adopted under Rule 17j-1.(19) | |
99.1 | Statement of Computation of Ratios of Earnings of Fixed Charges.* | |
99.2 | Form of Common Stock Prospectus Supplement.*** | |
99.3 | Form of Preferred Stock Prospectus Supplement.*** | |
99.4 | Form of Warrants Prospectus Supplement.*** | |
99.5 | Form of Debt Securities Prospectus Supplement.*** |
* | Filed herewith. |
** | To be filed by amendment. |
*** | Previously filed as an exhibit hereto. |
(1) | Incorporated by reference to exhibit (a) included in Pre-Effective Amendment No. 1 on Form N-2, as filed on October 6, 2006 (File No. 333-136714). |
(2) | Incorporated by reference to Exhibit 3.1of the Current Report on Form 8-K, as filed on March 1, 2012 (File No. 814-00735). |
(3) | Incorporated by reference to exhibit (d)(1) included in Pre-Effective Amendment No. 1 on Form N-2, as filed on October 6, 2006 (File No. 333-136714). |
(4) | Incorporated by reference to Exhibit 10.3 of the Quarterly Report, as filed August 6, 2014 (File No. 814-00735. |
(5) | Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, as filed on June 19, 2008 (File No. 814-00735). |
(6) | Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K, as filed on June 19, 2008 (File No. 814-00735). |
(7) | Incorporated by reference to Exhibit 4.1 included in the Registration Statement on form S-8, as filed on July 28, 2011 (File No. 333-175838). |
(8) | Incorporated by reference to exhibit (j) included in Pre-Effective Amendment No. 2 on Form N-2, as filed on November 20, 2006 (File No. 333-136714). |
(9) | Incorporated by reference to exhibit (k)(5) included in Pre-Effective Amendment No. 2 on Form N-2, as filed on November 20, 2006 (File No. 333-136714). |
(10) | Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, as filed on June 5, 2012 (File No. 814-00735). |
(11) | Incorporated by reference to exhibit (k)(11) included in Pre-Effective Amendment No. 3 on Form N-2, as filed on November 24, 2006 (File No. 333-136714). |
(12) | Incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K, as filed on March 16, 2011 (File No. 814-00735). |
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(13) | Incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K, as filed on March 1, 2012 (File No. 814-00735). |
(14) | Incorporated by reference to Exhibit 10.4 of the Current Report on Form 8-K, as filed on March 1, 2012 (File No. 814-00735). |
(15) | Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, as filed on March 1, 2012 (File No. 814-00735). |
(16) | Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K, as filed on March 1, 2012 (File No. 814-00735). |
(17) | Incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K, as filed on March 1, 2012 (File No. 814-00735). |
(18) | Incorporated by reference to Exhibit 2.2 of the Current Report on Form 8-K, as filed on March 1, 2012 (File No. 814-00735). |
(19) | Incorporated by reference to exhibit included in Pre-Effective Amendment No. 2 to the Registration Statement on Form N-2, as filed on November 20, 2006 (File No. 333-136714). |
(20) | Incorporated by reference to exhibit included in the Registration Statement in Form N-2, as filed on October 3, 2012 (file No. 333-183032). |
(21) | Incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K, as filed on June 18, 2013 (File No. 814-00735). |
(22) | Incorporated by reference to Exhibit 10.2 of Current Report on Form 8-K, as filed on June 18, 2013 (File No. 814-00735). |
(23) | Incorporated by reference to Exhibit 10.3 of Current Report on Form 8-K, as filed on June 18, 2013 (File No. 814-00735). |
(24) | Incorporated by reference to Exhibit 10.4 of Current Report on Form 8-K, as filed on June 18, 2013 (File No. 814-00735). |
(25) | Incorporated by reference to Exhibit 10.5 of Current Report on Form 8-K, as filed on June 18, 2013 (File No. 814-00735). |
(26) | Incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q, as filed on August 6, 2014 (File No. 814-00735). |
(27) | Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q, as filed on August 6, 2014 (File No. 814-00735). |
(28) | Incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q, as filed on August 6, 2014 (File No. 814-00735). |
(29) | Incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q, as filed on August 6, 2014 (File No. 814-00735). |
(30) | Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, as filed on December 9, 2014 (File No. 814-00735). |
(31) | Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K, as filed on December 9, 2014 (File No. 814-00735). |
(32) | Incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K, as filed on December 9, 2014 (File No. 814-00735). |
(33) | Incorporated by reference to Exhibit 10.1 of Quarterly Report on Form 10-Q, as filed on May 6, 2015 (File No. 814-00735). |
(34) | Incorporated by reference to exhibit included in the Registration Statement on Form N-2, as filed on August 2, 2012 (File No. 333-183032). |
(35) | Incorporated by reference to exhibit 10.1 of Quarterly Report on Form 10-Q, as filed on August 5, 2015 (File No. 814-00735). |
The information contained under the heading Plan of Distribution on this Registration Statement is incorporated herein by reference and any information concerning any underwriters will be contained in the accompanying prospectus supplement, if any.
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The following table sets forth the estimated expenses payable by the Registrant in connection with an offering:
Amount | ||||
SEC registration fee | $ | 34,100 | ||
FINRA filing fee | 38,000 | |||
Accounting fees and expenses | 100,000 | |||
Legal fees and expenses | 100,000 | |||
Printing expenses | 45,180 | |||
NASDAQ Listing Fee | 40,000 | |||
Total | $ | 357,280 |
The amounts set forth above, with the exception of the Securities and Exchange Commission fee, are in each case estimated. All of the expenses set forth above will be borne by the Registrant. The SEC registration fee has been previously paid.
The following table sets forth each of the Registrants direct and indirect subsidiaries, the state under whose laws the subsidiary is organized, and the percentage of voting securities or membership interests owned by the Registrant in such subsidiary.
Katonah Debt Advisors, L.L.C.(1) | Delaware | |
Kohlberg Capital Funding LLC I | Delaware | |
KCAP Senior Funding I Holdings, LLC | Delaware | |
KCAP Senior Funding I, LLC(4) | Delaware | |
Katonah Management Holdings LLC(1) | Delaware | |
Katonah X Management LLC(1)(2) | Delaware | |
Katonah 2007-I Management LLC(1)(2) | Delaware | |
Commodore Holdings, L.L.C.(1) | Delaware | |
Trimaran Advisors, L.L.C.(1)(3) | Delaware |
(1) | Represents a wholly-owned portfolio company that is not consolidated for financial reporting purposes. |
(2) | A wholly-owned subsidiary of Katonah Management Holdings LLC. |
(3) | A wholly-owned subsidiary of Commodore Holdings, L.L.C. |
(4) | A wholly-owned subsidiary of KCAP Senior Funding I Holdings, LLC. |
The following table sets forth the number of record holders of the Registrants common stock at December 31, 2013.
Title of Class | Number of Record Holders |
|||
Common Stock | 13 |
The information contained under the heading Management Limitation on Liability of Directors and Officers and Indemnification is incorporated herein by reference.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person in the successful
E-4
defense of an action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The Registrant carries liability insurance for the benefit of its directors and officers (other than with respect to claims resulting from the willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office) on a claims-made basis of up to $10 million.
Not applicable.
The Registrant maintains physical possession of each account, book or other document required to be maintained by Section 31(a) of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder at the offices of:
(1) | The Registrant, 295 Madison Avenue, 6th Floor, New York, New York 10017; |
(2) | The Custodian, U.S. Bank National Association, Corporate Trust Services, One Federal Street, 3rd Floor, Boston, MA 02110; and |
(3) | The Transfer Agent, American Stock Transfer & Trust Company, 59 Maiden Lane, New York, New York 10038. |
Not applicable.
(1) | We hereby undertake to suspend any offering of our common stock until the prospectus is amended if (1) subsequent to the effective date of this Registration Statement, our net asset value declines more than ten percent from our net asset value as of the effective date of this Registration Statement or (2) our net asset value increases to an amount greater than our net proceeds (if applicable) as stated in the prospectus. |
(2) | We hereby undertake: |
(a) | to file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: |
1. | to include any prospectus required by Section 10(a)(3) of the Securities Act; |
2. | to reflect in the prospectus or prospectus supplement any facts or events after the effective date of this Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement; and |
3. | to include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement. |
(b) | for the purpose of determining any liability under the Securities Act, that each such post-effective amendment to this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of those securities at that time shall be deemed to be the initial bona fide offering thereof. |
(c) | to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
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(d) | for the purpose of determining liability under the Securities Act to any purchaser, that if we are subject to Rule 430C under the Securities Act, each prospectus filed pursuant to Rule 497(b), (c), (d) or (e) under the Securities Act as part of this Registration Statement relating to an offering shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness, provided, however, that no statement made in a registration statement or prospectus or prospectus supplement that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supercede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. |
(e) | for the purpose of determining liability of the Registrant under the Securities Act to any purchaser in the initial distribution of securities, regardless of the underwriting method used to sell such securities to the purchaser, that if the securities are offered or sold to such purchaser by means of any of the following communications, we will be a seller to the purchaser and will be considered to offer or sell such securities to the purchaser: |
1. | any preliminary prospectus or prospectus or prospectus supplement of us relating to the offering required to be filed pursuant to Rule 497 under the Securities Act; |
2. | the portion of any advertisement pursuant to Rule 482 under the Securities Act relating to the offering containing material information about us or our securities provided by or on behalf of us; and |
3. | any other communication that is an offer in the offering made by us to the purchaser. |
(f) | to file a post-effective amendment to the registration statement, and to suspend any offers or sales pursuant to the registration statement until such post-effective amendment has been declared effective under the 1933 Act, in the event our shares of common stock are trading below our net asset value per share and either (i) we receive, or have been advised by our independent registered accounting firm that we will receive, an audit report reflecting substantial doubt regarding our ability to continue as a going concern or (ii) we have concluded that a fundamental change has occurred in our financial position or results of operations. |
(g) | Insofar as indemnification for liability arising under the Securities Act may be permitted to our directors, officers and controlling persons, that we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person of us in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we undertake, unless in the opinion of our counsel the matter has been settled by controlling precedent, to submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and we will be governed by the final adjudication of such issue. |
(3) | We hereby undertake that: |
(a) | For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by us pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. |
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(b) | For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
(4) | We hereby undertake to not seek to sell shares under a prospectus supplement to the registration statement, or a post-effective amendment to the registration statement, of which the prospectus forms a part (the current registration statement) if the cumulative dilution to our net asset value (NAV) per share arising from offerings from the effective date of the current registration statement through and including any follow-on offering would exceed 15% based on the anticipated pricing of such follow-on offering. This limit would be measured separately for each offering pursuant to the current registration statement by calculating the percentage dilution or accretion to aggregate NAV from that offering and then summing the anticipated percentage dilution from each subsequent offering. If we file a new post-effective amendment, the threshold would reset. |
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Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement on Form N-2 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and State of New York, on the 7th day of August, 2015.
KCAP FINANCIAL, INC.
By: | /s/ Dayl W. Pearson Name: Dayl W. Pearson Title: President and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form N-2 has been signed by the following persons in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Dayl W. Pearson Dayl W. Pearson |
President and Chief Executive Officer; Director (principal executive officer) | August 7, 2015 | ||
/s/ Edward U. Gilpin Edward U. Gilpin |
Chief Financial Officer, Secretary and Treasurer (principal financial and accounting officer) | August 7, 2015 | ||
* Christopher Lacovara |
Director | August 7, 2015 | ||
* John A. Ward, III |
Director | August 7, 2015 | ||
* C. Michael Jacobi |
Director | August 7, 2015 | ||
* Albert G. Pastino |
Director | August 7, 2015 | ||
* C. Turney Stevens, Jr. |
Director | August 7, 2015 | ||
* Dean C. Kehler |
Director | August 7, 2015 |
* | Signed by Edward U. Gilpin pursuant to a power of attorney executed by each individual on March 27, 2013 or May 22, 2013 |
Exhibit n.1
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption "Independent Registered Public Accounting Firm" and to the use of our reports dated March 31, 2015, with respect to the consolidated financial statements and the effectiveness of internal control over financial reporting of KCAP Financial Inc. and dated August 7, 2015 with respect to the senior securities table of KCAP Financial, Inc. included in Amendment No. 3 of the Registration Statement (Form N-2 No. 333-187570) and related Prospectus.
/s/ Ernst & Young LLP
New York, New York
August 7, 2015
Exhibit n.2
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption "Independent Registered Public Accounting Firm" and to the use of our report dated March 31, 2015, with respect to the combined financial statements of Asset Manager Affiliates included in Amendment No. 3 of the Registration Statement (Form N-2 No. 333-187570) and related Prospectus of KCAP Financial, Inc.
/s/ Ernst & Young LLP
New York, New York
August 7, 2015
Exhibit n.3
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption "Independent Registered Public Accounting Firm" and to the use of our report dated March 31, 2015, with respect to the financial statements of Katonah 2007-I CLO Ltd. included in Amendment No. 3 of the Registration Statement (Form N-2 No. 333-187570) and related Prospectus of KCAP Financial, Inc.
/s/ Ernst & Young LLP
New York, New York
August 7, 2015
Exhibit n.4
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders of KCAP Financial, Inc.
We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of KCAP Financial, Inc. (the “Company”), including the consolidated schedule of investments, as of December 31, 2014, and the related consolidated statements of operations, changes in net assets and cash flows for the year then ended, and have issued an unqualified opinion thereon dated March 31, 2015 (included elsewhere in the Registration Statement). The senior securities table as of December 31, 2014 is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information has been subjected to the auditing procedures applied in our audits of the consolidated financial statements and in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole.
/s/ Ernst & Young LLP
New York, NY
August 7, 2015
Exhibit 99.1
Computation of Ratios of Earnings to Fixed Charges
Quarter Ended | Year Ended | Year Ended | Year Ended | Year Ended | Year Ended | |||||||||||||||||||
March 31, 2015 | December 31, 2014 | December 31, 2013 | December 31, 2012 | December 31, 2011 | December 31, 2010 | |||||||||||||||||||
Earnings: | ||||||||||||||||||||||||
Net increase in net assets from operations | $ | 7,672,290 | $ | 15,033,594 | $ | 17,222,972 | $ | 26,125,779 | $ | 7,649,544 | $ | (14,288,677 | ) | |||||||||||
Income tax expense, including excise tax | - | - | - | - | - | - | ||||||||||||||||||
Total Earnings before taxes | 7,672,290 | 15,033,594 | 17,222,972 | 26,125,779 | 7,649,544 | (14,288,677 | ) | |||||||||||||||||
Fixed Charges: | ||||||||||||||||||||||||
Interest expense | 2,967,154 | 11,538,179 | 10,116,271 | 6,976,018 | 4,588,465 | 6,921,159 | ||||||||||||||||||
Total fixed charges | $ | 2,967,154 | $ | 11,538,179 | $ | 10,116,271 | $ | 6,976,018 | $ | 4,588,465 | $ | 6,921,159 | ||||||||||||
Earnings available to cover fixed charges | $ | 10,639,444 | $ | 26,571,774 | $ | 27,339,243 | $ | 33,101,797 | $ | 12,238,009 | $ | (7,367,519 | ) | |||||||||||
Ratio of earnings to fixed charges | 3.59 | 2.30 | 2.70 | 4.75 | 2.67 | (1.06 | ) |