UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 

 

 

 

Form 10-Q

 

 

 

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

For the quarterly period ended June 30, 2018

 

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

For the transition period from           to

 

Commission File No. 814-00735

 

KCAP Financial, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

  Delaware       20-5951150  
 

(State or other jurisdiction of

Incorporation or organization)

     

(I.R.S. Employer

Identification Number)

 

 

295 Madison Avenue, 6th Floor

New York, New York 10017

(Address of principal executive offices)

 

(212) 455-8300

(Registrant's telephone number, including area code)

 

 

 

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

 

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

 

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

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.¨

 

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

 

The number of outstanding shares of common stock of the registrant as of July 30, 2018 was 37,357,221.

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
  Part I. Financial Information  
     
Item 1. Consolidated Financial Statements
     
  Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017 3
     
  Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2018 and 2017 4
     
  Consolidated Statements of Changes in Net Assets (unaudited) for the six months ended June 30, 2018 and 2017 5
     
  Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2018 and 2017 6
     
  Consolidated Schedules of Investments as of June 30, 2018 (unaudited) and December 31, 2017 7
     
  Consolidated Financial Highlights (unaudited) for the six months ended June 30, 2018 and 2017 25
     
  Notes to Consolidated Financial Statements (unaudited) 26
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 60
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 81
     
Item 4. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 83
     
Item 5. Controls and Procedures 83
     
  Part II. Other Information  
     
Item 1. Legal Proceedings 84
     
Item 1A. Risk Factors 84
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 85
     
Item 3. Defaults Upon Senior Securities 85
     
Item 4. Mine Safety Disclosures 85
     
Item 5. Other Information 85
     
Item 6. Exhibits 86
   
Signatures 87

 

 2 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

 

  

As of

June 30, 2018

  

As of

December 31, 2017

 
   (unaudited)     
ASSETS          
Investments at fair value:          
Short-term investments (cost: 2018 - $11,454,078; 2017 - $77,300,320)  $11,454,078   $77,300,320 
Debt securities (amortized cost: 2018 - $170,246,598; 2017 - $125,179,470)   162,139,246    118,197,479 
CLO Fund Securities managed by affiliates (amortized cost: 2018 - $54,277,463; 2017 - $67,212,139)   35,545,465    49,488,393 
CLO Fund Securities managed by non-affiliates (amortized cost: 2018 - $5,168,837; 2017 - $5,126,893)   2,427,520    2,190,280 
Equity securities (cost: 2018 - $10,571,007; 2017 - $10,571,007)   4,251,111    4,414,684 
Asset Manager Affiliates (cost: 2018 - $51,591,230; 2017 - $52,591,230)   36,853,000    38,849,000 
Joint Venture (cost: 2018 - $24,914,858; 2017 - $24,914,858)   21,091,494    21,516,000 
Total Investments at Fair Value (cost: 2018 - $328,224,071; 2017 - $362,895,917)   273,761,914    311,956,156 
Cash   2,451,249    2,034,095 
Restricted cash   1,023,114     
Interest receivable   1,520,858    1,051,271 
Receivable for open trades       2,993,750 
Due from affiliates   1,155,635    1,243,493 
Other assets   478,024    530,209 
Total Assets  $280,390,794   $319,808,974 
           
LIABILITIES          
6.125% Notes Due 2022 (net of offering costs of: 2018-$2,474,275; 2017 - $2,734,248)  $74,932,925   $74,672,952 
7.375% Notes Due 2019 (net of offering costs of: 2018 - $40,536; 2017 - $259,635)   6,959,463    26,740,365 
KCAP Funding I, LLC Revolving Credit Facility (net of offering costs of: 2018 - $1,265,107)   19,895,080     
Payable for open trades   776,180    34,215,195 
Accounts payable and accrued expenses   1,582,528    2,350,803 
Accrued interest payable   90,664     
Due to affiliates   8,690    25,083 
Total Liabilities   104,245,530    138,004,398 
           
COMMITMENTS AND CONTINGENCIES (Note 8)          
           
STOCKHOLDERS' EQUITY          
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 37,536,496 issued, and 37,341,924 outstanding at June 30, 2018, and 37,507,402 issued, and 37,339,224 outstanding at December 31, 2017   373,419    373,392 
Capital in excess of par value   330,266,874    329,789,716 
Excess distribution of net investment income   (12,432,385)   (9,987,928)
Accumulated net realized losses   (86,201,443)   (86,031,799)
Net unrealized depreciation on investments   (55,861,201)   (52,338,805)
Total Stockholders' Equity   176,145,264    181,804,576 
           
Total Liabilities and Stockholders' Equity  $280,390,794   $319,808,974 
           
NET ASSET VALUE PER COMMON SHARE  $4.72   $4.87 

 

See accompanying notes to financial statements.

 

 3 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
                 
Investment Income:                    
Interest from investments in debt securities  $3,910,473   $4,565,276   $7,308,670   $8,901,115 
Payment-in-kind investment income   369,116    204,577    732,053    423,916 
Interest from cash and time deposits   12,211    14,300    61,416    30,206 
Investment income on CLO Fund Securities managed by affiliates   1,414,903    2,710,680    3,248,569    5,685,238 
Investment income on CLO Fund Securities managed by non-affiliates   98,341    111,419    197,702    229,530 
Dividends from Asset Manager Affiliates   300,000        620,000     
Investment income - Joint Venture   700,000        1,400,000     
Capital structuring service fees   43,399    53,480    106,509    164,124 
Total investment income   6,848,443    7,659,732    13,674,919    15,434,129 
                     
Expenses:                    
Interest and amortization of debt issuance costs   1,847,432    2,237,317    3,711,280    4,418,289 
Compensation   1,005,050    1,175,294    2,212,387    2,401,030 
Professional fees   906,965    1,193,407    1,621,375    1,742,688 
Insurance   79,726    80,644    157,748    175,680 
Administrative and other   480,351    364,301    982,466    869,534 
Total expenses   4,319,524    5,050,963    8,685,256    9,607,221 
                     
Net Investment Income   2,528,919    2,608,771    4,989,663    5,826,908 
Realized And Unrealized Gains (Losses) On Investments:                    
Net realized losses from investment transactions   (3,671)   (1,009,342)   (571)   (965,405)
Net change in unrealized (depreciation) appreciation on:                    
Debt securities   (682,477)   1,211,554    (1,125,361)   2,413,571 
Equity securities   (227,169)   (266,249)   (163,573)   (419,811)
CLO Fund Securities managed by affiliates   (787,433)   (852,828)   (1,008,252)   (2,105,814)
CLO Fund Securities managed by non-affiliates   (154,059)   (227,903)   195,296    (293,897)
Asset Manager Affiliates investments   (1,310,000)   1,165,000    (996,000)   (1,441,000)
Joint Venture Investment   (675,882)       (424,506)    
Total net change in unrealized appreciation (depreciation)   (3,837,020)   1,029,574    (3,522,396)   (1,846,951)
Net realized and unrealized appreciation (depreciation) on investments   (3,840,691)   20,232    (3,522,967)   (2,812,356)
Realized losses on extinguishments of Debt       (107,276)   (169,074)   (107,276)
Net (Decrease )Increase In Stockholders’ Equity Resulting From Operations  $(1,311,772)  $2,521,727   $1,297,622   $2,907,276 
Net (Decrease) Increase In Stockholders' Equity Resulting from Operations per Common Share:                    
Basic:  $(0.04)  $0.07   $0.03   $0.08 
Diluted:  $(0.03)  $0.07   $0.03   $0.08 
Net Investment Income Per Common Share:                    
Basic:  $0.07   $0.07   $0.13   $0.16 
Diluted:  $0.07   $0.07   $0.13   $0.16 
                     
Weighted Average Shares of Common Stock Outstanding—Basic   37,363,038    37,206,487    37,356,759    37,204,751 
Weighted Average Shares of Common Stock Outstanding—Diluted   37,363,038    37,206,487    37,356,759    37,204,751 

 

See accompanying notes to consolidated financial statements.

 

 4 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

 

  

Six Months Ended

June 30,

 
   2018   2017 
         
Operations:          
Net investment income  $4,989,663   $5,826,908 
Net realized gains (losses) from investment transactions   (571)   (965,405)
Realized losses from extinguishments of Debt   (169,074)   (107,276)
Net change in unrealized (depreciation) on investments   (3,522,396)   (1,846,951)
Net increase/(decrease) in stockholders’ equity resulting from operations   1,297,622    2,907,276 
           
Stockholder distributions:   (7,434,120)   (8,867,480)
           
Capital share transactions:          
Dividend reinvestment plan   102,079    224,479 
Common stock withheld for payroll taxes upon vesting of restricted stock   (85,807)   (223,849)
Stock based compensation   460,913    647,612 
Net increase in net assets resulting from capital share transactions   477,185    648,242 
Net assets at beginning of period   181,804,576    194,924,925 
Net assets at end of period (including undistributed net investment income of $0 in 2018 and $0 in 2017)  $176,145,264   $189,612,963 
Net asset value per common share  $4.72   $5.10 
Common shares outstanding at end of period   37,341,924    37,167,622 

 

See accompanying notes to consolidated financial statements.

 

 5 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

  

Six Months Ended

June 30,

 
   2018   2017 
         
OPERATING ACTIVITIES:          
Net increase in stockholder's equity resulting from operations  $1,297,622   $2,907,276 
Adjustments to reconcile net increase in stockholder’s equity resulting from operations to net cash provided by operations:          
Net realized losses on investment transactions   571    965,405 
Net change in unrealized depreciation from investments   3,522,396    1,846,951 
Purchases of investments   (61,534,043)   (60,293,176)
Proceeds from sales and redemptions of investments   100,935,386    69,846,940 
Net accretion of investments   (3,998,143)   (234,621)
Amortization of original issue discount on indebtedness       316,858 
Amortization of debt issuance costs   424,938    432,349 
Realized losses on extinguishments of debt   169,074    107,276 
Payment-in-kind interest income   (732,053)   (423,916)
Stock-based compensation   460,913    647,612 
Changes in operating assets and liabilities:          
Decrease in payable for open trades   (33,439,015)   (5,924,943)
Decrease in receivable for open trades   2,993,750    2,950,658 
Increase in interest and dividends receivable   (469,587)   (217,220)
Increase in accrued interest payable   90,664    68,302 
Decrease in other assets   52,185    130,931 
Decrease in due from affiliates   87,858    91,604 
Decrease in due to affiliates   (16,393)   (54)
Decrease in accounts payable and accrued expenses   (768,275)   (633,591)
Net cash provided by operating activities   9,077,848    12,584,641 
           
FINANCING ACTIVITIES:          
Issuance (forfeitures) of restricted shares   (20)   60 
Debt issuance costs   (1,379,899)    
Distributions to stockholders   (7,332,041)   (8,642,960)
Common stock withheld for payroll taxes upon vesting of restricted stock   (85,807)   (223,849)
Repayment 7.375% Notes Due 2019   (20,000,000)   (6,530,925)
Borrowings under KCAP Funding LLC, Revolving Credit Facility   27,000,000     
Repayments of KCAP Funding LLC, Revolving Credit Facility   (5,839,813)    
Net cash used in financing activities   (7,637,580)   (15,397,674)
           
CHANGE IN CASH AND RESTRICTED CASH   1,440,268    (2,813,033)
CASH AND RESTRICTED CASH, BEGINNING OF PERIOD   2,034,095    9,835,555 
CASH AND RESTRICTED CASH, END OF PERIOD  $3,474,363   $7,022,522 
           
Supplemental Information:          
Interest paid during the period  $3,195,678   $3,600,780 
Dividends paid during the period under the dividend reinvestment plan  $102,079   $224,479 

 

See accompanying notes to consolidated financial statements.

 6 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of June 30, 2018

 

Debt Securities Portfolio

 

Portfolio Company / Principal Business 

Investment16

Interest Rate1 / Maturity

  Initial
Acquisition
Date
  Principal  

Amortized

Cost

   Fair Value2 
Advanced Lighting Technologies, Inc.(8)(14)
Consumer goods: Durable
 

Junior Secured Loan — Second Lien Notes

9.3% Cash, 10.0% PIK, 3 month LIBOR(12.31%) + 7.00%; LIBOR Floor 1.00% , Due 10/23  

  6/13/2012  $911,573   $911,573   $837,451 
                      
Advantage Sales & Marketing Inc.(8)(14)(15)
Services: Business
 

Junior Secured Loan — Term Loan (Second Lien)

8.6% Cash, 1 month LIBOR(2.09%) + 6.50%; LIBOR Floor 1.00% , Due 7/22  

  7/17/2014   1,000,000    1,001,281    977,900 
                      
Avalign Technologies, Inc.(8)(14)(15)
Healthcare & Pharmaceuticals
 

Senior Secured Loan — Initial Term Loan (First Lien)

6.6% Cash, 1 month LIBOR(2.10%) + 4.50%; LIBOR Floor 1.00% , Due 7/21  

  7/16/2015   1,058,929    1,056,913    1,050,987 
                      
Avalign Technologies, Inc.(8)(14)(15)
Healthcare & Pharmaceuticals
 

Junior Secured Loan — Initial Term Loan (Second Lien)

10.4% Cash, 6 month LIBOR(2.13%) + 8.25%; LIBOR Floor 1.00% , Due 7/22  

  7/16/2015   1,500,000    1,490,176    1,467,300 
                      
BMC Acquisition, Inc. (aka BenefitMall)(8)(14)(15)
Banking, Finance, Insurance & Real Estate
 

Senior Secured Loan — Initial Term Loan

7.7% Cash, 6 month LIBOR(2.45%) + 5.25%; LIBOR Floor 1.00% , Due 12/24  

  1/2/2018   2,985,000    2,983,367    2,957,837 
                      
BW NHHC Holdco Inc.(8)(14)(15)
Healthcare & Pharmaceuticals
 

Senior Secured Loan — Initial Term Loan (First Lien)

7.1% Cash, 1 month LIBOR(2.07%) + 5.00%; Due 5/25  

  5/16/2018   2,000,000    1,970,447    1,970,000 
                      
Child Development Schools, Inc.(8)(14)(15)
Services: Business
 

Senior Secured Loan — Term Loan

6.3% Cash, 3 month LIBOR(2.10%) + 4.25%; Due 5/21  

  6/6/2018   4,931,507    4,919,462    4,919,178 
                      
Community Care Health Network, Inc. (aka Matrix Medical Network)(8)(15)
Healthcare & Pharmaceuticals
 

Senior Secured Loan — Closing Date Term Loan

6.9% Cash, 3 month LIBOR(2.17%) + 4.75%; LIBOR Floor 1.00% , Due 2/25  

  2/9/2018   2,000,000    1,995,253    1,959,400 
                      
CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)(8)
Beverage, Food and Tobacco
 

Junior Secured Loan — Term Loan (Second Lien)

10.1% Cash, 3 month LIBOR(2.31%) + 7.75%; LIBOR Floor 1.00% , Due 7/21  

  5/23/2013   3,000,000    3,007,571    2,892,600 
                      
CT Technologies Intermediate Holdings, Inc. (Smart Holdings Corp.) (aka HealthPort)(8)(15)
Healthcare & Pharmaceuticals
 

Senior Secured Loan — New Term Loan Facility

6.3% Cash, 1 month LIBOR(2.09%) + 4.25%; LIBOR Floor 1.00% , Due 12/21  

  11/19/2014   3,984,602    3,977,456    3,856,696 

 

See accompanying notes to consolidated financial statements.

 7 

 

 

Portfolio Company / Principal Business 

Investment16

Interest Rate1 / Maturity

  Initial
Acquisition
Date
  Principal  

Amortized

Cost

   Fair Value2 
Cyanco Intermediate 2 Corp.(8)
Chemicals, Plastics and Rubber
 

Junior Secured Loan — Initial Term Loan (Second Lien)

9.6% Cash, 1 month LIBOR(2.09%) + 7.50%; Due 3/26  

  3/9/2018   4,681,250    4,635,825    4,632,097 
                      
Decolin Inc.(3)(14)(15)
Textiles and Leather
 

Senior Secured Loan — Initial Term Loan

6.6% Cash, 1 month LIBOR(2.08%) + 4.50%; LIBOR Floor 1.00% , Due 12/23  

  1/26/2018   2,238,750    2,228,321    2,214,795 
                      
DigiCert, Inc.(8)(14)
High Tech Industries
 

Junior Secured Loan — Initial Loan (Second Lien)

10.1% Cash, 1 month LIBOR(2.09%) + 8.00%; LIBOR Floor 1.00% , Due 10/25  

  7/19/2017   1,000,000    995,371    967,600 
                      
Drew Marine Group Inc.(8)(14)(15)
Transportation: Cargo
 

Junior Secured Loan — Term Loan (Second Lien)

9.1% Cash, 1 month LIBOR(2.09%) + 7.00%; LIBOR Floor 1.00% , Due 5/21  

  11/19/2013   4,000,000    4,000,768    4,001,600 
                      
EagleTree-Carbide Acquisition Corp. (aka Corsair Components, Inc.)(8)(14)
High Tech Industries
 

Junior Secured Loan — Term Loan (Second Lien)

10.8% Cash, 3 month LIBOR(2.33%) + 8.50%; LIBOR Floor 1.00% , Due 8/25  

  9/29/2017   5,000,000    4,931,735    5,001,500 
                      
EagleTree-Carbide Acquisition Corp. (aka Corsair Components, Inc.)(8)(15)
High Tech Industries
 

Senior Secured Loan — Term Loan (First Lien)

7.1% Cash, 3 month LIBOR(2.33%) + 4.75%; LIBOR Floor 1.00% , Due 8/24  

  9/29/2017   997,491    992,674    998,089 
                      
Evergreen North America Acquisition, LLC (f/k/a Industrial Services Acquisition, LLC)(8)(14)(15)
Environmental Industries
 

Senior Secured Loan — Term Loan

7.4% Cash, 3 month LIBOR(2.38%) + 5.00%; LIBOR Floor 1.00% , Due 6/22  

  6/21/2016   1,135,819    1,140,566    1,135,819 
                      
First American Payment Systems, L.P.(8)(14)(15)
Banking, Finance, Insurance & Real Estate
 

Junior Secured Loan — Term Loan (Second Lien)

12.5% Cash, 1 month LIBOR(2.01%) + 10.50%; LIBOR Floor 1.00% , Due 7/24  

  1/4/2017   1,500,000    1,463,838    1,437,750 
                      
Flexera Software LLC (fka Flexera Software, Inc.)(8)
High Tech Industries
 

Junior Secured Loan — Initial Term Loan (Second Lien)

9.4% Cash, 1 month LIBOR(2.10%) + 7.25%; LIBOR Floor 1.00% , Due 2/26  

  1/25/2018   100,000    99,521    96,550 
                      
GI Advo Opco, LLC(8)(14)(15)
Healthcare & Pharmaceuticals
 

Senior Secured Loan — Term Loan

7.3% Cash, 3 month LIBOR(2.33%) + 5.00%; LIBOR Floor 1.00% , Due 11/21  

  11/19/2015   180,304    179,280    180,250 
                      
GK Holdings, Inc. (aka Global Knowledge)(8)(14)
Services: Business
 

Junior Secured Loan — Initial Term Loan (Second Lien)

12.6% Cash, 3 month LIBOR(2.33%) + 10.25%; LIBOR Floor 1.00% , Due 1/22  

  1/30/2015   1,500,000    1,484,657    1,406,400 

 

See accompanying notes to consolidated financial statements.

 8 

 

 

Portfolio Company / Principal Business 

Investment16

Interest Rate1 / Maturity

  Initial
Acquisition
Date
  Principal  

Amortized

Cost

   Fair Value2 

Global Tel*Link Corporation(8)(14)

Telecommunications

 

Junior Secured Loan — Term Loan (Second Lien)

10.6% Cash, 3 month LIBOR(2.33%) + 8.25%; LIBOR Floor 1.25% , Due 11/20  

  5/21/2013   5,000,000    4,969,724    4,944,500 
                      
Global Tel*Link Corporation(8)(14)(15)
Telecommunications
 

Senior Secured Loan — Term Loan (First Lien)

6.3% Cash, 3 month LIBOR(2.33%) + 4.00%; LIBOR Floor 1.25% , Due 5/20  

  12/7/2017   1,478,100    1,475,230    1,474,700 
                      
Grupo HIMA San Pablo, Inc.(8)(14)
Healthcare & Pharmaceuticals
 

Senior Secured Loan — Term B Loan (First Lien)

8.8% Cash, 3 month LIBOR(1.84%) + 7.00%; LIBOR Floor 1.50% , Due 1/18  

  1/30/2013   2,850,000    2,850,000    2,593,500 
                      
Grupo HIMA San Pablo, Inc.(5)(8)(14)
Healthcare & Pharmaceuticals
 

Junior Secured Loan — Term Loan (Second Lien)

13.8% Cash, Due 7/18  

  1/30/2013   7,191,667    7,170,432    4,566,708 
                      
Harland Clarke Holdings Corp. (fka Clarke American Corp.)(8)(14)(15)
Media: Advertising, Printing & Publishing
 

Senior Secured Loan — Initial Term Loan

7.1% Cash, 3 month LIBOR(2.33%) + 4.75%; LIBOR Floor 1.00% , Due 11/23  

  6/18/2013   2,901,829    2,923,905    2,834,217 
                      
Hoffmaster Group, Inc.(8)(14)(15)
Forest Products & Paper
 

Junior Secured Loan — Initial Term Loan (Second Lien)

11.6% Cash, 1 month LIBOR(2.09%) + 9.50%; LIBOR Floor 1.00% , Due 11/24  

  5/6/2014   1,600,000    1,561,553    1,600,960 
                      
Infobase Holdings, Inc.(8)(14)(15)
High Tech Industries
 

Senior Secured Loan — Term Loan

6.8% Cash, 3 month LIBOR(2.33%) + 4.50%; LIBOR Floor 1.00% , Due 12/22  

  12/13/2017   1,975,000    1,957,167    1,964,335 
                      
Ivanti Software, Inc. (fka LANDesk Group, Inc.)(8)(14)
High Tech Industries
 

Junior Secured Loan — Loan (Second Lien)

11.1% Cash, 1 month LIBOR(2.10%) + 9.00%; LIBOR Floor 1.00% , Due 1/25  

  3/10/2017   3,228,619    3,228,619    3,135,958 
                      
Kellermeyer Bergensons Services, LLC(8)
Services: Business
 

Senior Secured Loan — Initial Term Loan (First Lien)

7.3% Cash, 3 month LIBOR(2.32%) + 5.00%; LIBOR Floor 1.00% , Due 10/21  

  10/31/2014   994,845    994,845    995,044 
                      
MB Aerospace Holdings II Corp.(8)(14)(15)
Aerospace and Defense
 

Senior Secured Loan — Initial Term Loan (First Lien)

5.6% Cash, 1 month LIBOR(2.09%) + 3.50%; LIBOR Floor 1.00% , Due 1/25  

  5/10/2013   1,243,750    1,237,891    1,211,413 

 

See accompanying notes to consolidated financial statements.

 9 

 

 

Portfolio Company / Principal Business 

Investment16

Interest Rate1 / Maturity

  Initial
Acquisition
Date
  Principal  

Amortized

Cost

   Fair Value2 
Onex Carestream Finance LP(8)(14)
Healthcare & Pharmaceuticals
 

Junior Secured Loan — Term Loan (Second Lien)

10.6% Cash, 1 month LIBOR(2.09%) + 8.50%; LIBOR Floor 1.00% , Due 12/19  

  10/7/2014   1,495,995    1,495,995    1,493,452 
                      
Playpower, Inc.(8)(14)(15)
Construction & Building
 

Senior Secured Loan — Initial Term Loan (First Lien)

7.1% Cash, 3 month LIBOR(2.33%) + 4.75%; LIBOR Floor 1.00% , Due 6/21  

  6/23/2015   989,796    997,633    989,895 
                      
PSC Industrial Holdings Corp.(8)(14)
Environmental Industries
 

Junior Secured Loan — Initial Term Loan (Second Lien)

10.6% Cash, 1 month LIBOR(2.09%) + 8.50%; LIBOR Floor 1.00% , Due 10/25  

  10/5/2017   3,000,000    2,945,251    2,943,300 
                      
Q Holding Company (fka Lexington Precision Corporation)(8)(15)
Chemicals, Plastics and Rubber
 

Senior Secured Loan — Term B Loan

7.1% Cash, 1 month LIBOR(2.09%) + 5.00%; LIBOR Floor 1.00% , Due 12/21  

  12/16/2016   1,989,691    2,017,148    1,987,303 
                      
Ravn Air Group, Inc.(8)(14)(15)
Aerospace and Defense
 

Senior Secured Loan — Initial Term Loan

6.8% Cash, 3 month LIBOR(1.83%) + 5.00%; LIBOR Floor 1.00% , Due 7/21  

  7/29/2015   1,944,063    1,944,063    1,857,163 
                      
Robertshaw US Holding Corp. (fka Fox US Bidco Corp.) (8)(14)
Capital Equipment
 

Junior Secured Loan — Initial Term Loan (Second Lien)

10.1% Cash, 1 month LIBOR(2.13%) + 8.00%; LIBOR Floor 1.00% , Due 2/26  

  2/15/2018   3,000,000    2,971,204    2,970,600 
                      
Roscoe Medical, Inc.(8)(14)
Healthcare & Pharmaceuticals
 

Junior Secured Loan — Term Loan (Second Lien)

11.3% Cash, 3 month LIBOR(0.00%) + 11.25%; Due 9/19  

  3/26/2014   1,700,000    1,696,177    1,626,390 
                      
Roscoe Medical, Inc.(8)(14)(15)
Healthcare & Pharmaceuticals
 

Junior Secured Loan — Term Loan (Second Lien)

11.3% Cash, 3 month LIBOR(0.00%) + 11.25%; Due 9/19  

  3/26/2014   5,000,000    4,988,776    4,783,500 
                      
Salient CRGT Inc.(8)(14)(15)
High Tech Industries
 

Senior Secured Loan — Initial Term Loan

7.8% Cash, 1 month LIBOR(2.09%) + 5.75%; LIBOR Floor 1.00% , Due 2/22  

  2/27/2017   1,906,269    1,927,495    1,866,047 
                      
SCSG EA Acquisition Company, Inc.(8)
Healthcare & Pharmaceuticals
 

Junior Secured Loan — Initial Term Loan (Second Lien)

10.6% Cash, 3 month LIBOR(2.31%) + 8.25%; LIBOR Floor 1.00% , Due 9/24  

  8/18/2017   1,000,000    990,413    990,600 
                      
SCSG EA Acquisition Company, Inc.(8)(15)
Healthcare & Pharmaceuticals
 

Junior Secured Loan — Initial Term Loan (Second Lien)

10.6% Cash, 3 month LIBOR(2.31%) + 8.25%; LIBOR Floor 1.00% , Due 9/24  

  8/18/2017   5,000,000    4,955,840    4,953,000 

 

See accompanying notes to consolidated financial statements.

 10 

 

 

Portfolio Company / Principal Business 

Investment16

Interest Rate1 / Maturity

  Initial
Acquisition
Date
  Principal  

Amortized

Cost

   Fair Value2 
Sierra Enterprises, LLC (aka Lyons Magnus)(8)(14)(15)
Beverage, Food and Tobacco
 

Senior Secured Loan — Tranche B-1 Term Loan (First Lien)

5.6% Cash, 1 month LIBOR(2.09%) + 3.50%; LIBOR Floor 1.00% , Due 11/24  

  11/3/2017   2,985,019    2,970,801    2,985,019 
                      
Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(8)(13)(14)
Environmental Industries
  Junior Secured Loan — Restructured Term Loan 1.0% Cash, 7.8% PIK, Due 10/22    6/25/2013   1,955,980    1,955,980    924,201 
                      
Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(8)(14)
Environmental Industries
 

Senior Secured Loan — Term Loan

14.3% Cash, 3 month LIBOR(2.34%) + 12.00%; Due 10/22  

  6/25/2013   339,788    339,788    339,788 
                      
Tank Partners Holdings, LLC(8)(13)(14)
Energy: Oil & Gas
 

Senior Secured Loan — Loan

2.0% Cash, 13.3% PIK, 1 month PRIME(4.75%) + 8.50%; PRIME Floor 3.00% , Due 8/19  

  8/28/2014   14,101,226    13,381,086    10,339,019 
                      
Tex-Tech Industries, Inc.(8)(14)
Textiles and Leather
 

Junior Secured Loan — Term Loan (Second Lien)

11.1% Cash, 1 month LIBOR(2.09%) + 9.00%; LIBOR Floor 1.00% , Due 8/24  

  8/24/2017   8,008,000    7,955,245    7,947,940 
                      
Time Manufacturing Acquisition, LLC(8)(14)(15)
Capital Equipment
 

Senior Secured Loan — Term Loan

7.5% Cash, 3 month LIBOR(2.50%) + 5.00%; LIBOR Floor 1.00% , Due 2/23  

  2/3/2017   1,984,937    1,987,351    1,971,043 
                      
Trimaran Advisors, L.L.C.(8)(9)(14)
Related Party Loan
 

Senior Unsecured Loan — Revolving Credit Facility

9.0% Cash, Due 11/22  

  11/20/2012   23,000,000    23,000,000    23,000,000 
                      
Trimaran Advisors, L.L.C.(8)(9)(14)
Related Party Loan
 

Senior Unsecured Loan — Term Loan Series 1

10.5% Cash, Due 4/30  

  10/30/2017   6,777,283    6,777,283    6,777,283 
                      
TronAir Parent Inc.(8)(14)(15)
Aerospace and Defense
 

Senior Secured Loan — Initial Term Loan (First Lien)

7.1% Cash, 3 month LIBOR(2.36%) + 4.75%; LIBOR Floor 1.00% , Due 9/23  

  9/30/2016   992,424    990,157    992,424 
                      
TRSO I, Inc.(8)(14)
Energy: Oil & Gas
 

Junior Secured Loan — Term Loan (Second Lien)

14.0% Cash, 3 month LIBOR(1.00%) + 13.00%; LIBOR Floor 1.00% , Due 12/19  

  12/24/2012   1,000,000    995,767    1,000,000 
                      
Verdesian Life Sciences, LLC(8)(14)(15)
Environmental Industries
 

Senior Secured Loan — Initial Term Loan

7.4% Cash, 3 month LIBOR(2.36%) + 5.00%; LIBOR Floor 1.00% , Due 7/20  

  6/25/2014   2,142,166    2,084,868    2,077,901 
                      
Weiman Products, LLC(8)(14)(15)
Consumer goods: Non-durable
 

Senior Secured Loan — Term Loan (2013)

6.8% Cash, 3 month LIBOR(2.33%) + 4.50%; LIBOR Floor 1.00% , Due 11/21  

  11/22/2013   602,344    599,752    602,344 
                      
WireCo WorldGroup Inc. (8)(14)
Capital Equipment
 

Junior Secured Loan — Initial Term Loan (Second Lien)

11.1% Cash, 1 month LIBOR(2.09%) + 9.00%; LIBOR Floor 1.00% , Due 9/24  

  8/9/2016   3,000,000    2,964,781    2,971,500 

 

See accompanying notes to consolidated financial statements.

 11 

 

 

Portfolio Company / Principal Business 

Investment16

Interest Rate1 / Maturity

  Initial
Acquisition
Date
  Principal  

Amortized

Cost

   Fair Value2 
Zest Acquisition Corp.(8)
Healthcare & Pharmaceuticals
 

Junior Secured Loan — Initial Term Loan (Second Lien)

9.8% Cash, 3 month LIBOR(2.34%) + 7.50%; LIBOR Floor 1.00% , Due 3/26  

  3/8/2018   3,500,000    3,478,323    3,466,400 
                      
Total Investment in Debt Securities
(92% of net asset value at fair value)
     $171,584,016   $170,246,598   $162,139,246 

 

See accompanying notes to consolidated financial statements.

 12 

 

 

Equity Securities Portfolio

 

Portfolio Company / Principal Business  Investment16  Initial
Acquisition
Date
 

Percentage

Ownership/Shares

   Cost   Fair Value2 
Advanced Lighting Technologies, Inc,(8)(14)
Consumer goods: Durable
  Warrants    6/13/2012   1.90%  $-   $1,000 
                      
Advanced Lighting Technologies, Inc.(8)(14)  
Consumer goods: Durable
  Membership Interests    6/13/2012   0.40%   181,999    1,000 
                      
Aerostructures Holdings L.P.(8)(14)  
Aerospace and Defense
  Partnership Interests    2/28/2007   1.16%   1,000,000    1,000 
                      
Aerostructures Holdings L.P.(8)(14)  
Aerospace and Defense
  Series A Preferred Interests    10/23/2008   1.16%   250,961    814,425 
                      
eInstruction Acquisition, LLC(8)(14)
Services: Business
  Membership Units    7/2/2007   1.10%   1,079,617    1,000 
                      
FP WRCA Coinvestment Fund VII, Ltd.(3)(14)  
Capital Equipment
  Class A Shares    2/2/2007   0.41%   1,500,000    642,605 
                      
New Millennium Holdco, Inc. (Millennium Health, LLC)(3)(14)  
Healthcare & Pharmaceuticals
  Common    10/7/2014   0.20%   1,953,299    1,000 
                      
Perseus Holding Corp.(14)  
Hotel, Gaming & Leisure
  Common    4/5/2007   0.19%   400,000    1,000 
                      
Roscoe Investors, LLC(8)(14)  
Healthcare & Pharmaceuticals
  Class A Units    3/26/2014   1.56%   1,000,000    1,229,000 
                      
Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(8)(14)  
Environmental Industries
  Class B Units     6/25/2013   1.56%   -    1,000 
                      
Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(8)(14)  
Environmental Industries
  Class B Equity    6/25/2013   1.56%   -    1,000 
                      
Tank Partners Holdings, LLC(8)(10)(14)  
Energy: Oil & Gas
  Unit    8/28/2014   10.68%   980,000    1,000 
                      
Tank Partners Holdings, LLC(8)(14)  
Energy: Oil & Gas
  Warrants    8/28/2014   1.04%   185,205    1,000 
                      
TRSO II, Inc.(8)(14)
Energy: Oil & Gas
  Common Stock    2/28/2007   5.40%   1,680,161    1,158,448 
                      
Caribe Media Inc. (fka Caribe Information Investments Incorporated)(8)(14)
Media: Advertising, Printing & Publishing
  Common    10/23/2008   1.17%   359,765    396,633 
                      
Total Investment in Equity Securities
(2% of net asset value at fair value)
             $10,571,007   $4,251,111 

 

See accompanying notes to consolidated financial statements.

 13 

 

 

CLO Fund Securities

 

CLO Subordinated Investments

 

Portfolio Company  Investment16,11  Initial
Acquisition
Date
 

Percentage

Ownership

   Amortized Cost   Fair Value 
Grant Grove CLO, Ltd.(3)(12)(14)  Subordinated Securities, effective interest N/M17, 1/21 maturity  3/13/2007   22.2%  $2,485,886   $1,000 
Katonah III, Ltd.(3)(12)(14)  Subordinated Securities, effective interest N/M17, 5/15 maturity  12/11/2006   23.1%   1,287,155    369,280 
Katonah 2007-I CLO Ltd.(3)(6)(12)(14)  Subordinated Securities, effective interest N/M17, 4/22 maturity    1/23/2008   100.0%   10,309,141    200,000 
Trimaran CLO VII, Ltd.(3)(6)(12)(14)  Subordinated Securities, effective interest N/M17, 6/21 maturity  2/29/2012   10.5%   379,830    10,000 
Catamaran CLO 2012-1 Ltd.(3)(6)(12)(14)  Subordinated Securities, effective interest 10.5%, 12/23 maturity    12/20/2012   24.9%   3,568,581    50,000 
Catamaran CLO 2013- 1 Ltd.(3)(6)(14)  Subordinated Securities, effective interest 21.2%, 1/28 maturity    6/4/2013   18.3%   4,938,710    5,974,982 
Catamaran CLO 2014-1 Ltd.(3)(6)(14)  Subordinated Securities, effective interest 13.7%, 4/30 maturity    5/6/2014   20.1%   9,838,586    9,444,045 
Dryden 30 Senior Loan Fund(3)(14)  Subordinated Securities, effective interest 28.7%, 12/29 maturity    10/10/2013   6.8%   1,395,797    2,057,241 
Catamaran CLO 2014-2 Ltd.(3)(6)(14)  Subordinated Securities, effective interest 10.7%, 11/25 maturity    8/15/2014   24.9%   6,488,780    4,021,183 
Catamaran CLO 2015-1 Ltd.(3)(6)(14)  Subordinated Securities, effective interest 12.1%, 10/26 maturity    5/5/2015   9.9%   4,455,464    3,307,190 
Catamaran CLO 2016-1 Ltd.(3)(6)(14)  Subordinated Securities, effective interest 9.1%, 4/27 maturity    12/21/2016   24.9%   9,912,304    7,850,221 
                      
Total Investment in CLO Subordinated Securities          $55,060,234   $33,285,142 

 

CLO Rated-Note Investment

 

Portfolio Company  Investment16  Initial
Acquisition
Date
 

Percentage

Ownership

   Amortized Cost   Fair Value 
KCAP F3C Senior Funding LLC(6)(14)(18)  Class E Notes, 9.8% Cash, 3 month LIBOR (2.34%) + 7.50%, Due 12/29    10/24/2017   27.4%   4,386,066    4,687,843 
                      
Total Investment in CLO Rated-Note             $4,386,066   $4,687,843 
                      
Total Investment in CLO Fund Securities                  
(22% of net asset value at fair value)          $59,446,300   $37,972,985 

 

See accompanying notes to consolidated financial statements.

 14 

 

 

Asset Manager Affiliates

 

Portfolio Company / Principal Business  Investment16  Initial
Acquisition
Date
 

Percentage

Ownership

   Cost   Fair Value2 
Asset Manager Affiliates(8)(9)(14)  Asset Management Company    12/11/2006   100%  $51,591,230   $36,853,000 
                      
Total Investment in Asset Manager Affiliates
(21% of net asset value at fair value)
          $51,591,230   $36,853,000 

 

Joint Ventures                        

 

Portfolio Company / Principal Business  Investment16  Initial
Acquisition
Date
 

Percentage

Ownership

   Cost   Fair Value 
KCAP Freedom 3 LLC(14)(18)  Joint Venture    7/19/2017   60%  $24,914,858   $21,091,494 
                      
Total Investment in Joint Ventures
(12% of net asset value at fair value)
             $24,914,858   $21,091,494 

 

Short-term Investments                        

 

Short-term Investments  Investment16  Initial
Acquisition
Date
  Yield   Par /Amortized
Cost
   Fair Value2 
US Bank Money Market Account(7)(8)  Money Market Account    N/A   0.20%  $11,454,078   $11,454,078 
                      
Total Short-term Investments
(7% of net asset value at fair value)
          $11,454,078   $11,454,078 
Total Investments4             $328,224,071   $273,761,914 

 

1

 

A majority of the variable rate loans in the Company’s 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 borrower’s 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, 2018. As noted in the table above, 83% (based on par) of debt securities contain LIBOR floors which range between 1.00% and 3.0%.
   
2 Reflects the fair market value of all investments as of June 30, 2018, as determined by the Company’s 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 $328 million. The aggregate gross unrealized appreciation is approximately $1.0 million, the aggregate gross unrealized depreciation is approximately $55.4 million, and the net unrealized depreciation is approximately $54.4 million.
   
5 Loan or debt security is on non-accrual status and therefore is considered 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 Money market account.
   
8 Qualified asset for purposes of section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act”). Qualifying assets represent approximately 78% of the total investments at June 30, 2018.

 

See accompanying notes to consolidated financial statements.

 15 

 

 

9

The Company is deemed to “Control” and be an “Affiliated Person” of the Asset Manager Affiliates, each as defined in the 1940 Act, as the Company owns 100% of each Asset Manager Affiliate’s outstanding voting securities. In general, under the 1940 Act, the Company would be presumed to “Control” a portfolio company if it owned 25% or more of its voting securities and would be an “Affiliated Person” of a portfolio company if it owned 5% or more of its voting securities.

   
10 Non-voting.
   
11

CLO Subordinated Investments are entitled to periodic distributions which are generally equal to the remaining cash flow of the payments made by the underlying fund’s 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.

 

12 Notice of redemption has been received for this security.
   
13

Loan or security was on partial nonaccrual status, whereby we have recognized income on a portion of contractual PIK amounts due.

 

14

Fair value of this investment was determined using significant unobservable inputs.

 

15 As of June 30, 2018, this investment is owned by KCAP Funding I, LLC and was pledged to secure KCAP Funding I, LLC’s debt obligation pursuant to its senior secured revolving credit facility (the “Revolving Credit Facility”) with the Company, as the servicer, certain institutional lenders, State Bank and Trust Company, as the administrative agent, lead arranger and bookrunner, and CIBC Bank USA, as documentation agent.
   
16

The Company's investments are generally acquired in private transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) and, therefore, are generally subject to limitations on resale, and may be deemed to be “restricted securities'' under the Securities Act of 1933.

 

17

The remaining collateral in these CLO Fund portfolios are illiquid and not producing meaningful cash flows, and thus, the Company’s investment in the CLO Subordinated securities are not currently receiving periodic cash distributions. Accordingly, the Company is no longer recording any investment income from these investments, and has thus noted the effective interest as not meaningful, or N/M. The fair value of the investment reflects the Company’s estimated share of the fair value of the underlying collateral. 

   
18

As defined in the 1940 Act, the Company is deemed to be both an “Affiliated Person” and has “Control” of this portfolio company as the Company owns more than 25% of the portfolio company’s outstanding voting securities or has the power to exercise control over management or policies of such portfolio company (including through a management agreement). Other than for purposes of the 1940 Act, the Company does not believe that it has control over this portfolio company.

 

See accompanying notes to consolidated financial statements.

 16 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of December 31, 2017

 

Debt Securities Portfolio

 

Portfolio Company / Principal Business 

Investment5

Interest Rate1 / Maturity

  Principal  

Amortized

Cost

   Fair Value2 
Advanced Lighting Technologies, Inc.(8)(14)
 Consumer goods: Durable
 

Junior Secured Loan — Second Lien Notes

8.7% Cash, 10.0% PIK, 3 month LIBOR(1.70%) + 17.00%; LIBOR Floor 1.00% , Due 10/23  

  $889,340   $889,338   $803,598 
                   
Advantage Sales & Marketing Inc.(8)(14)  
Services: Business
 

Junior Secured Loan — Term Loan (Second Lien)

7.9% Cash, 3 month LIBOR(1.38%) + 6.50%; LIBOR Floor 1.00% , Due 7/22  

   1,000,000    1,001,438    988,000 
                   
API Technologies Corp.(8)  
High Tech Industries
 

Senior Secured Loan — Initial Term Loan

8.2% Cash, 3 month LIBOR(1.69%) + 6.50%; LIBOR Floor 1.00% , Due 4/22  

   3,080,305    3,110,759    3,111,108 
                   
Avalign Technologies, Inc.(8)  
Healthcare & Pharmaceuticals
 

Senior Secured Loan — Initial Term Loan (First Lien)

6.1% Cash, 1 month LIBOR(1.57%) + 4.50%; LIBOR Floor 1.00% , Due 7/21  

   1,065,342    1,062,983    1,054,689 
                   
Avalign Technologies, Inc.(8)(14)
Healthcare & Pharmaceuticals
 

Junior Secured Loan — Initial Term Loan (Second Lien)

9.7% Cash, 6 month LIBOR(1.46%) + 8.25%; LIBOR Floor 1.00% , Due 7/22  

   1,500,000    1,488,964    1,467,300 
                   
BMC Acquisition, Inc. (aka BenefitMall)(8)(14)
 Banking, Finance, Insurance & Real Estate
 

Senior Secured Loan — Initial Term Loan

7.0% Cash, 3 month LIBOR(1.84%) + 5.17%; LIBOR Floor 1.00% , Due 12/24  

   3,000,000    2,998,125    2,970,000 
                   
Carolina Beverage Group LLC(8)(14)  
Beverage, Food and Tobacco
 

Senior Secured Bond — 10.625% - 08/2018 - 143818AA0 144A

10.6% Cash, Due 8/18  

   1,500,000    1,502,374    1,518,750 
                   
CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)(8)(14)
 Beverage, Food and Tobacco
 

Junior Secured Loan — Term Loan (Second Lien)

9.1% Cash, 3 month LIBOR(1.33%) + 7.75%; LIBOR Floor 1.00% , Due 7/21  

   3,000,000    3,008,816    2,914,800 
                   
DigiCert, Inc.(8)  
High Tech Industries
 

Junior Secured Loan — Initial Loan (Second Lien)

9.4% Cash, 3 month LIBOR(1.38%) + 8.00%; LIBOR Floor 1.00% , Due 10/25  

   1,000,000    995,059    979,100 
                   
Drew Marine Group Inc.(8)  
Transportation: Cargo
 

Junior Secured Loan — Term Loan (Second Lien)

8.6% Cash, 1 month LIBOR(1.57%) + 7.00%; LIBOR Floor 1.00% , Due 5/21  

   4,000,000    4,000,901    4,010,000 

 

See accompanying notes to consolidated financial statements.

 17 

 

 

Portfolio Company / Principal Business 

Investment5

Interest Rate1 / Maturity

  Principal  

Amortized

Cost

   Fair Value2 
EagleTree-Carbide Acquisition Corp. (aka Corsair Components, Inc.)(8)(14)  
High Tech Industries
 

Junior Secured Loan — Term Loan (Second Lien)

10.2% Cash, 3 month LIBOR(1.69%) + 8.50%; LIBOR Floor 1.00% , Due 8/25  

   5,000,000    4,927,010    4,997,500 
                   
First American Payment Systems, L.P.(8)  
Banking, Finance, Insurance & Real Estate
 

Junior Secured Loan — Term Loan (Second Lien)

11.9% Cash, 1 month LIBOR(1.39%) + 10.50%; LIBOR Floor 1.00% , Due 7/24  

   1,500,000    1,460,837    1,448,400 
                   
Flexera Software LLC (fka Flexera Software, Inc.)(8)  High Tech Industries 

Senior Secured Loan — Term Loan (First Lien)

5.1% Cash, 1 month LIBOR(1.57%) + 3.50%; LIBOR Floor 1.00% , Due 4/20  

   2,000,000    1,995,443    2,000,000 
                   
GI Advo Opco, LLC(8)
 Healthcare & Pharmaceuticals
 

Senior Secured Loan — Term Loan

6.2% Cash, 3 month LIBOR(1.69%) + 4.50%; LIBOR Floor 1.00% , Due 11/21  

   230,756    229,252    230,732 
                   
GK Holdings, Inc. (aka Global Knowledge)(8)
  Services: Business
 

Junior Secured Loan — Initial Term Loan (Second Lien)

11.9% Cash, 3 month LIBOR(1.69%) + 10.25%; LIBOR Floor 1.00% , Due 1/22  

   1,500,000    1,482,520    1,376,400 
                   
Global Tel*Link Corporation(8)  
Telecommunications
 

Senior Secured Loan — Term Loan (First Lien)

5.7% Cash, 3 month LIBOR(1.69%) + 4.00%; LIBOR Floor 1.25% , Due 5/20  

   1,495,689    1,492,021    1,491,949 
                   
Global Tel*Link Corporation(8)(14)  
Telecommunications
 

Junior Secured Loan — Term Loan (Second Lien)

9.9% Cash, 3 month LIBOR(1.69%) + 8.25%; LIBOR Floor 1.25% , Due 11/20  

   5,000,000    4,963,469    4,975,000 
                   
Grupo HIMA San Pablo, Inc.(8)  
Healthcare & Pharmaceuticals
 

Senior Secured Loan — Term B Loan (First Lien)

8.5% Cash, 3 month LIBOR(1.50%) + 7.00%; LIBOR Floor 1.50% , Due 1/18  

   2,850,000    2,849,063    2,593,500 
                   
Grupo HIMA San Pablo, Inc.(8)(14)  
Healthcare & Pharmaceuticals
 

Junior Secured Loan — Term Loan (Second Lien)

13.8% Cash, Due 7/18  

   7,191,667    7,174,676    4,566,708 
                   
Harland Clarke Holdings Corp. (fka Clarke American Corp.)(8)(14)  
Media: Advertising, Printing & Publishing
 

Senior Secured Loan — Initial Term Loan

6.4% Cash, 3 month LIBOR(1.69%) + 4.75%; LIBOR Floor 1.00% , Due 11/23  

   2,986,482    3,011,321    3,003,281 
                   
Hoffmaster Group, Inc.(8)(14)  
Forest Products & Paper
 

Junior Secured Loan — Initial Term Loan (Second Lien)

11.2% Cash, 3 month LIBOR(1.69%) + 9.50%; LIBOR Floor 1.00% , Due 11/24  

   1,600,000    1,558,556    1,600,960 

 

See accompanying notes to consolidated financial statements.

 18 

 

 

Portfolio Company / Principal Business 

Investment5

Interest Rate1 / Maturity

  Principal  

Amortized

Cost

   Fair Value2 
Industrial Services Acquisition, LLC (aka Evergreen / NAIC)(8)(14)  
Environmental Industries
 

Senior Secured Loan — Term Loan

6.6% Cash, 1 month LIBOR(1.63%) + 5.00%; LIBOR Floor 1.00% , Due 6/22  

   1,167,909    1,173,405    1,167,909 
                   
Infobase Holdings, Inc.(8)(14)  
High Tech Industries
 

Senior Secured Loan — Term Loan

8.0% Cash, Prime LIBOR(0.00%) + 8.00%; Due 12/22  

   2,000,000    1,980,000    1,980,000 
                   
Ivanti Software, Inc. (fka LANDesk Group, Inc.)(8)  
High Tech Industries
 

Junior Secured Loan — Loan (Second Lien)

10.6% Cash, 1 month LIBOR(1.57%) + 9.00%; LIBOR Floor 1.00% , Due 1/25  

   3,228,619    3,228,619    3,200,530 
                   
MB Aerospace ACP Holdings II Corp.(8)(14)  
Aerospace and Defense
 

Senior Secured Loan — Initial Term Loan

7.1% Cash, 1 month LIBOR(1.63%) + 5.50%; LIBOR Floor 1.00% , Due 12/22  

   980,000    981,158    980,000 
                   
MB Aerospace ACP Holdings III Corp.(8)(14)  
Aerospace and Defense
 

Senior Secured Loan — Term Loan

5.1% Cash, 1 month LIBOR(1.58%) + 3.50%; LIBOR Floor 1.00% , Due 1/25  

   1,250,000    1,243,750    1,243,750 
                   
National Home Health Care Corp.(8)(14)  
Healthcare & Pharmaceuticals
 

Junior Secured Loan — Term Loan (Second Lien)

10.4% Cash, 1 month LIBOR(1.43%) + 9.00%; LIBOR Floor 1.00% , Due 12/22  

   1,500,728    1,482,044    1,458,257 
                   
Onex Carestream Finance LP(8)  
Healthcare & Pharmaceuticals
 

Junior Secured Loan — Term Loan (Second Lien)

10.2% Cash, 3 month LIBOR(1.69%) + 8.50%; LIBOR Floor 1.00% , Due 12/19  

   1,495,995    1,495,995    1,487,618 
                   
Playpower, Inc.(8)(14)  
Construction & Building
 

Senior Secured Loan — Initial Term Loan (First Lien)

6.4% Cash, 3 month LIBOR(1.69%) + 4.75%; LIBOR Floor 1.00% , Due 6/21  

   994,898    1,004,093    999,872 
                   
PSC Industrial Holdings Corp.(8)(14)  
Environmental Industries
 

Junior Secured Loan — Initial Term Loan (Second Lien)

10.0% Cash, 1 month LIBOR(1.46%) + 8.50%; LIBOR Floor 1.00% , Due 10/25  

   3,000,000    2,941,524    2,940,000 
                   
RESIC Enterprises, LLC (aka Lyons Magnus)(8)
 Beverage, Food and Tobacco
 

Senior Secured Loan — Initial Term Loan (First Lien)

5.7% Cash, 1 month LIBOR(1.43%) + 4.25%; LIBOR Floor 1.00% , Due 11/24  

   3,000,000    2,985,247    3,001,500 
                   
Roscoe Medical, Inc.(8)(14)  
Healthcare & Pharmaceuticals
 

Junior Secured Loan — Term Loan (Second Lien)

11.3% Cash, Due 9/19  

   6,700,000    6,678,900    6,468,850 

 

See accompanying notes to consolidated financial statements.

 19 

 

 

Portfolio Company / Principal Business 

Investment5

Interest Rate1 / Maturity

  Principal  

Amortized

Cost

   Fair Value2 
Salient CRGT Inc.(8)  
High Tech Industries
 

Senior Secured Loan — Initial Term Loan

7.3% Cash, 1 month LIBOR(1.57%) + 5.75%; LIBOR Floor 1.00% , Due 2/22  

   1,967,742    1,992,339    1,992,339 
                   
SCSG EA Acquisition Company, Inc.(8)  
Healthcare & Pharmaceuticals
 

Senior Secured Loan — Initial Term Loan (Second Lien)

9.7% Cash, 3 month LIBOR(1.48%) + 8.25%; LIBOR Floor 1.00% , Due 9/24  

   5,000,000    4,952,274    4,955,000 
                   
Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(8)(13)(14)  
Environmental Industries
 

Junior Secured Loan — Restructured Term Loan

8.2% Cash, 7.2% PIK, 3 month LIBOR(1.57%) + 6.62%; LIBOR Floor 1.00% , Due 10/22  

   1,883,914    1,875,914    1,318,740 
                   
Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(8)(14)  
Environmental Industries
 

Senior Secured Loan — Term Loan

13.7% Cash, 3 month LIBOR(1.69%) + 12.00%; LIBOR Floor 1.00% , Due 10/22  

   339,788    339,788    339,788 
                   
Tank Partners Holdings, LLC(8)(13)  
Energy: Oil & Gas
 

Senior Secured Loan — Loan

2.0% Cash, 12.8% PIK, Base Rate (4.25%) + 10.5% , Due 8/19  

   12,739,078    12,258,031    9,153,028 
                   
Tex-Tech Industries, Inc.(8)  
Textiles and Leather
 

Junior Secured Loan — Term Loan (Second Lien)

10.6% Cash, 1 month LIBOR(1.57%) + 9.00%; LIBOR Floor 1.00% , Due 8/24  

   8,008,000    7,950,994    7,947,940 
                   
Time Manufacturing Acquisition, LLC(8)  
Capital Equipment
 

Senior Secured Loan — Term Loan

6.8% Cash, 3 month LIBOR(1.75%) + 5.00%; LIBOR Floor 1.00% , Due 2/23  

   994,987    992,633    999,962 
                   
Trimaran Advisors, L.L.C.(8)(9)(14)  
Related Party Loan
 

Senior Unsecured Loan — Term Loan Series 1

10.5% Cash, Due 4/30  

   8,359,051    8,359,051    8,359,051 
                   
Trimaran Advisors, L.L.C.(8)(9)(14)  
Related Party Loan
 

Senior Unsecured Loan — Term Loan Series 2

10.5% Cash, Due 1/28  

   4,418,232    4,418,232    4,418,232 
                   
TronAir Parent Inc.(8)(14)  
Aerospace and Defense
 

Senior Secured Loan — Initial Term Loan (First Lien)

6.2% Cash, 1 month LIBOR(1.41%) + 4.75%; LIBOR Floor 1.00% , Due 9/23  

   997,475    994,981    997,076 
                   
TRSO I, Inc.(8)(14)  
Energy: Oil & Gas
 

Junior Secured Loan — Term Loan (Second Lien)

14.0% Cash, 3 month LIBOR(1.00%) + 13.00%; LIBOR Floor 1.00% , Due 12/19  

   1,000,000    994,351    1,000,000 
                   
Weiman Products, LLC(8)(14)  
Consumer goods: Non-durable
 

Senior Secured Loan — Term Loan (2013)

6.2% Cash, 3 month LIBOR(1.69%) + 4.50%; LIBOR Floor 1.00% , Due 11/21  

   694,662    691,234    694,662 
                   
WireCo WorldGroup Inc. (8)(14)
 Capital Equipment
 

Junior Secured Loan — Initial Term Loan (Second Lien)

10.5% Cash, 3 month LIBOR(1.48%) + 9.00%; LIBOR Floor 1.00% , Due 9/24  

   3,000,000    2,961,988    2,991,600 
                   
Total Investment in Debt Securities                  
 (65% of net asset value at fair value)     $126,110,659   $125,179,470   $118,197,479 

 

See accompanying notes to consolidated financial statements.

 20 

 

 

Equity Securities Portfolio

 

Portfolio Company / Principal Business  Investment 

Percentage

Ownership/Shares

   Cost   Fair Value2 
Aerostructures Holdings L.P.(8)(14)  
Aerospace and Defense
  Partnership Interests     1.2%  $1,000,000   $1,000 
                   
Aerostructures Holdings L.P.(8)(14)
 Aerospace and Defense
  Series A Preferred Interests     1.2%   250,960    891,661 
                   
DBI Holding LLC(8)(14)  
Services: Business
  Warrants     3.2%   -    1,000 
                   
eInstruction Acquisition, LLC(8)(14)  
Services: Business
  Membership Units     1.1%   1,079,617    1,000 
                   
FP WRCA Coinvestment Fund VII, Ltd.(3)(14)  
Capital Equipment
  Class A Shares     0.0%   1,500,000    689,259 
                   
New Millennium Holdco, Inc. (Millennium Health, LLC)(8)(14)  
Healthcare & Pharmaceuticals
  Common     0.2%   1,953,299    1,000 
                   
Perseus Holding Corp.(14)  
Hotel, Gaming & Leisure
  Common     -    400,000    1,000 
                   
Roscoe Investors, LLC(8)(14)
 Healthcare & Pharmaceuticals
  Class A Units     1.6%   1,000,000    1,229,000 
                   
Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(8)(14)  
Environmental Industries
  Class A Equity     1.6%   -    - 
                   
Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(8)(14)  
Environmental Industries
  Class B Units      1.5%   -    - 
                   
Tank Partners Holdings, LLC(8)(10)(14)  
Energy: Oil & Gas
  Unit     1.3%   980,000    1,000 
                   
Tank Partners Holdings, LLC(8)(14)  
Energy: Oil & Gas
  Warrants     1.3%   185,205    1,000 
                   
TRSO II, Inc.(8)(14)  
Energy: Oil & Gas
  Common Stock     5.4%   1,680,161    1,280,749 
                   
Advanced Lighting Technologies, Inc,(8)(14)
Consumer goods: Durable
  Warrants     1.9%   -    1,000 
                   
Advanced Lighting Technologies, Inc.(8)(14)
 Consumer goods: Durable
  Membership Interests     0.4%   182,000    1,000 
                   
Caribe Media Inc. (fka Caribe Information Investments Incorporated)(8)(14)
Media: Advertising, Printing & Publishing
  Common     1.2%   359,765    315,015 
                   
Total Investment in Equity Securities                  
 (2% of net asset value at fair value)          $10,571,007   $4,414,684 

 

See accompanying notes to consolidated financial statements.

 21 

 

 

CLO Fund Securities

 

CLO Subordinated Investments

 

Portfolio Company  Investment(11) 

Percentage

Ownership

   Amortized Cost   Fair Value 
Grant Grove CLO, Ltd.(3)(12)(14)  Subordinated Securities, effective interest N/M, 1/21 maturity     22.2%  $2,485,886   $1,000 
Katonah III, Ltd.(3)(12)(14)  Subordinated Securities, effective interest N/M, 5/15 maturity     23.1%   1,287,155    369,280 
Katonah 2007-I CLO Ltd.(3)(6)(12)(14)  Subordinated Securities, effective interest 9.2%, 4/22 maturity     100.0%   20,524,908    10,770,486 
Trimaran CLO VII, Ltd.(3)(6)(12)(14)  Subordinated Securities, effective interest N/M, 6/21 maturity     10.5%   379,830    10,000 
Catamaran CLO 2012-1 Ltd.(3)(6)(14)  Subordinated Securities, effective interest 15.5%, 12/23 maturity     24.9%   5,847,802    2,320,783 
Catamaran CLO 2013- 1 Ltd.(3)(6)(14)  Subordinated Securities, effective interest 25.1%, 1/28 maturity     18.3%   5,017,307    6,923,699 
Catamaran CLO 2014-1 Ltd.(3)(6)(14)  Subordinated Securities, effective interest 28.4%, 4/30 maturity     20.1%   9,858,073    8,230,178 
Dryden 30 Senior Loan Fund(3)(14)  Subordinated Securities, effective interest 28.7%, 12/29 maturity     6.8%   1,353,852    1,820,000 
Catamaran CLO 2014-2 Ltd.(3)(6)(14)  Subordinated Securities, effective interest 11.5%, 11/25 maturity     24.9%   6,642,805    4,500,962 
Catamaran CLO 2015-1 Ltd.(3)(6)(14)  Subordinated Securities, effective interest 11.8%, 10/26 maturity     9.9%   4,418,647    3,569,600 
Catamaran CLO 2016-1 Ltd.(3)(6)(14)  Subordinated Securities, effective interest 9.6%, 4/27 maturity     24.9%   10,086,802    8,530,685 
                   
Total Investment in CLO Subordinated Securities       $67,903,067   $47,046,673 

 

CLO Rated-Note Investment               
                
Portfolio Company  Investment 

Percentage

Ownership

   Amortized Cost   Fair Value 
KCAP F3C Senior Funding LLC(3)(6)(14)(15)  Class E Notes, 8.9% Cash, 3 month LIBOR (1.40%) + 7.50%, Due 12/29     27.4%   4,435,965    4,632,000 
                   
Total Investment in CLO Rated-Note          $4,435,965   $4,632,000 
                   
Total Investment in CLO Fund Securities
(28% of net asset value at fair value)
     $72,339,032   $51,678,673 

 

See accompanying notes to consolidated financial statements.

 22 

 

 

Asset Manager Affiliates

 

Portfolio Company / Principal Business  Investment 

Percentage

Ownership

   Cost   Fair Value2 
Asset Manager Affiliates(8)(9)(14)  Asset Management Company     100%  $52,591,230   $38,849,000 
                   
Total Investment in Asset Manager Affiliates
(21% of net asset value at fair value)
       $52,591,230   $38,849,000 

 

Joint Ventures

 

Portfolio Company / Principal Business  Investment 

Percentage

Ownership

   Cost   Fair Value 
KCAP Freedom 3 LLC(14)(15)  Joint Venture     60%  $24,914,858   $21,516,000 
                   
Total Investment in Joint Ventures
(12% of net asset value at fair value)
          $24,914,858   $21,516,000 

 

Short-term Investments

 

Short-term Investments  Investment  Yield  

Par /

Amortized

Cost

   Fair Value2 
US Bank Money Market Account(7)(8)  Money Market Account     0.20%  $52,293,570   $52,293,570 
                   
U.S Treasury Bills - CUSIP: 912796MLO(8)  U.S. Government Obligation     1.04%   25,006,750    25,006,750 
                   
Total Short-term Investments
 (43% of net asset value at fair value)
       $77,300,320   $77,300,320 
Total Investments4          $362,895,917   $311,956,156 

 

1

 

A majority of the variable rate loans in the Company’s 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 borrower’s 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, 2017. As noted in the table above, 74% (based on par) of debt securities contain LIBOR floors which range between 1.00% and 3.0%.
   
2 Reflects the fair market value of all investments as of December 31, 2017, as determined by the Company’s 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 $363 million. The aggregate gross unrealized appreciation is approximately $1.1 million, the aggregate gross unrealized depreciation is approximately $52.0 million, and the net unrealized depreciation is approximately $50.9 million.
   
5 No loan or debt securities were on non-accrual status as of December 31, 2017.
   
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 Money market account holding cash.
   
8 Qualified asset for purposes of section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act”).

 

See accompanying notes to consolidated financial statements.

 23 

 

 

9

The Company is deemed to “Control” and be an “Affiliated Person” of the Asset Manager Affiliates, each as defined in the 1940 Act, as the Company owns 100% of each Asset Manager Affiliate’s outstanding voting securities. In general, under the 1940 Act, the Company would be presumed to “Control” a portfolio company if it owned 25% or more of its voting securities and would be an “Affiliated Person” of a portfolio company if it owned 5% or more of its voting securities.

   
10 Non-voting.
   
11

CLO Subordinated Investments are entitled to periodic distributions which are generally equal to the remaining cash flow of the payments made by the underlying fund’s 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. 

   
12 Notice of redemption has been received for this security.
   
13

Loan or security was on partial nonaccrual status, whereby we have recognized income on a portion of

contractual PIK amounts due. 

   
14 Fair value of this investment was determined using significant unobservable inputs.
   
15

As defined in the 1940 Act, the Company is deemed to be both an “Affiliated Person” and has “Control” of this portfolio company as the Company owns more than 25% of the portfolio company’s outstanding voting securities or has the power to exercise control over management or policies of such portfolio company (including through a management agreement). Other than for purposes of the 1940 Act, the Company does not believe that it has control over this portfolio company.

 

See accompanying notes to consolidated financial statements.

 24 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED FINANCIAL HIGHLIGHTS

(unaudited)

 

  

Six Months Ended

June 30,

 
   2018   2017 
         
Per Share Data:          
Net asset value, at beginning of period  $4.87   $5.24 
Net investment income1   0.13    0.16 
Net realized gains (losses) from investments1   -    (0.03)
Net change in unrealized depreciation on investments1   (0.10)   (0.05)
Net increase in net assets resulting from operations   0.03    0.08 
Net decrease in net assets resulting from stockholder distributions   (0.20)   (0.24)
Capital share transactions:          
Dividend reinvestment plan   0.00    0.01 
Common stock withheld for payroll taxes upon vesting of restricted stock    0.00    (0.01)
Stock based compensation   0.02    0.02 
Net increase in net assets relating to stock-based transactions   0.02    0.02 
           
Net asset value, end of period  $4.72   $5.10 
Total net asset value return2   1.0%   1.9%
           
Ratio/Supplemental Data:          
Per share market value at beginning of period  $3.41   $3.98 
Per share market value at end of period  $3.25   $3.53 
Total market return3   1.2%   (5.3)%
Shares outstanding at end of period   37,341,924    37,167,622 
Net assets at end of period  $176,145,264   $189,612,963 
Portfolio turnover rate6   34.4%   20.7%
Average par debt outstanding  $108,605,754   $180,556,183 
Asset coverage ratio   263%   206%
Ratio of net investment income to average net assets5   5.6%   6.1%
Ratio of total expenses to average net assets5   9.7%   10.0%
Ratio of interest expense to average net assets5   4.1%   4.6%
Ratio of non-interest expenses to average net assets5   5.6%   5.4%

 

 

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, divided by the beginning net asset value per share.
3 Total market return (not annualized) equals the change in the ending market price, over the beginning of period price per share plus distributions, divided by the beginning market price.
4 Totals may not sum due to rounding.
5 Annualized.
6 Portfolio turnover rate equals the year-to-date sales and paydowns over the average of the invested assets at fair value.

 

See accompanying notes to consolidated financial statements.

 

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KCAP FINANCIAL, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. ORGANIZATION

 

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, as amended (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 Company’s 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 Company’s 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 (collectively, “Katonah Debt Advisors”) and in securities issued by collateralized loan obligation (“CLO”) 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 the Company’s common stock, and net proceeds of $27 million.

 

On February 29, 2012, the Company purchased Trimaran Advisors, L.L.C. (“Trimaran Advisors”), an asset manager similar to Katonah Debt Advisors, for total consideration of $13.0 million in cash and 3,600,000 shares of the Company’s 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, 2018, Katonah Debt Advisors and Trimaran Advisors, as well as affiliated management companies Katonah 2007-1 Management, L.L.C., Trimaran Advisors Management, L.L.C. and KCAP Management, L.L.C. (collectively the “Asset Manager Affiliates”), had approximately $2.8 billion of par value assets under management. Katonah Debt Advisors and Trimaran Advisors are registered under the Investment Advisers Act of 1940, as amended, and are each managed independently from the Company by a separate management team (however, certain of the Company’s executive officers also act in similar capacities for one or more 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, either directly or through their subsidiaries, may make investments in the CLO Funds they manage. In addition, the Company holds investments in a portion of the securities issued by the CLO Funds managed by the Asset Manager Affiliates.

 

During the third quarter of 2017, the Company formed a joint venture with Freedom 3 Opportunities LLC (“Freedom 3 Opportunities”), an affiliate of Freedom 3 Capital LLC, to create KCAP Freedom 3 LLC (the "Joint Venture"). The Company and Freedom 3 Opportunities LLC contributed approximately $37 million and $25 million, respectively, in assets to the Joint Venture, which in turn used the assets to capitalize a new fund (KCAP F3C Senior Funding, L.L.C. or the "Fund") managed by KCAP Management, LLC, one of the Company's indirectly wholly-owned Asset Manager Affiliate subsidiaries. In addition, the Fund used cash on hand and borrowings under a credit facility to purchase approximately $184 million of loans from the Company and the Company used the proceeds from such sale to redeem approximately $147 million in debt issued by KCAP Senior Funding. The Joint Venture may originate loans from time to time and sell them to the Fund.

 

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During the fourth quarter of 2017, the Fund was refinanced through the issuance of senior and subordinated notes. The Joint Venture purchased 100% of the subordinated notes issued by the Fund.  In connection with the refinancing, the Company received a cash distribution of $12.6 million, $11.8 million of which was a return of capital.

 

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 the Asset Manager Affiliates, which manage CLO Funds.

 

Third, the Company invests in debt and subordinated securities issued by CLO Funds (“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 CLO Funds 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 publicly-traded companies, high-yield bonds, joint venture 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.

 

On March 29, 2018, the Company’s Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Small Business Credit Availability Act (“SBCA”). As a result, the Company’s asset coverage requirement for senior securities will be changed from 200% to 150%, effective as of March 29, 2019. However, despite the SBCA, we will continue to be prohibited by the indentures governing our 7.375% Notes and 6.125% Notes (each, as defined and discussed in Note 6- “Borrowings” below) from making distributions on our common stock if our asset coverage, as defined in the 1940 Act, falls below 200%. In any such event, we would be prohibited from making distributions required in order to maintain our status as a RIC.

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“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 Company’s Form 10-K for the year ended December 31, 2017, 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 Company’s results of operations and financial condition for the periods presented. Furthermore, the preparation of the consolidated financial statements requires the Company 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.

 

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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, KCAP Senior Funding I Holdings, LLC and KCAP Funding I, LLC in its consolidated financial statements as they are operated solely for investment activities of the Company. The creditors of KCAP Funding I, LLC received security interests in the assets which owned by KCAP Funding I, LLC and such assets are not intended to be available to the creditors of the Company, or any other affiliate. All of the borrowings of KCAP Funding, Kolhberg Capital Funding LLC I, and KCAP Senior Funding I, LLC have been fully repaid.

 

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 Company’s required disclosures relating to the Asset 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.

 

On February 18, 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2015-2 (“ASU 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 management 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. The Asset Manager Affiliates adopted ASU 2015-2 in 2016 which resulted in the deconsolidation of the CLO Funds managed by them.

 

In addition, in accordance with 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 Company’s SEC filings. The additional financial information regarding the Asset Manager Affiliates and Katonah 2007-I CLO is set forth in Note 5 to these consolidated financial statements.

 

The determination of the tax character of distributions is made on an annual (full calendar-year) basis 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 Company’s primary investment objective to generate current income and capital appreciation by lending directly to privately-held middle market companies. During the quarter ended June 30, 2018, the Company provided approximately $61 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, 2018, the Company held loans it has made to 48 investee companies with aggregate principal amounts of approximately $171.6 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, among other things, leading a syndicate of lenders to provide the investee companies with financing. During the six months ended June 30, 2018, the Company did not engage in any such or similar activities.

 

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Recently adopted accounting pronouncements

 

FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, which updated accounting guidance for all revenue recognition arising from contracts with customers, and also affects entities that enter into contracts to provide goods or services to their customers (unless the contracts are in the scope of other GAAP requirements). This update provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. The FASB also issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of the standard for one year. As a result, the guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Management has concluded that the majority of its revenues associated with the financial instruments are scoped out of ASC 606, and therefore, there was no material impact from adoption.

 

Pending accounting pronouncements

 

In March 2017, the Financial Accounting Standards Board issued an Accounting Standards Update, ASU 2017-08, Receivables — Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”) which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. ASU 2017-08 does not require any accounting change for debt securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. At this time, management is evaluating the implications of these changes on the financial statements.

 

Investments

 

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 Company’s 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 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.

 

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 Company’s 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 points in the Company’s 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.

 

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 U.S. 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 Company’s 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 Company’s 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.

 

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Debt Securities. To the extent that the Company’s 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 be used to determine the fair value of the investments. 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 Consolidated Schedules of Investments.

 

Equity Securities. The Company’s 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 company’s 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 Company’s equity securities in public companies, those investments may be valued using the Market Approach (as defined below). 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 Company’s 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 the amount 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.

 

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The Company’s 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 Company’s 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.

 

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 Security’s 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.

 

Joint Venture. The Company carries investments in joint ventures at fair value based upon the fair value of the investments held by the joint venture. See Note 4 below, for more information regarding the Joint Venture.

 

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 and quarterly interest and principal distribution (if any) to holders of notes issued by KCAP Funding I, LLC and/or KCAP Senior Funding I, LLC.

 

Short-term investments. Short-term investments are generally comprised of money market accounts, time deposits, and U.S. treasury bills.

 

Interest Income. Interest income, including the amortization of premium and accretion of discount and accrual of payment-in-kind (“PIK”) interest, 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 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. For investments with PIK interest, which represents contractual interest accrued and added to the principal balance that generally becomes due at maturity, we will not accrue PIK interest if the portfolio company valuation indicates that the PIK interest is not collectible (i.e. via a partial or full non-accrual). Loans which are on partial or full non-accrual 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, 2018, one of our investments was on non-accrual status, and two of our investments were on partial non-accrual status, whereby we have recognized income on a portion of contractual PIK amounts due.

 

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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 Company’s 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.

 

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 select investments in securities issued by funds managed by other asset management companies. The Company’s 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 Fund’s 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 tax–basis 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 Company’s investment in the Class E Notes of the KCAP F3C Senior Funding, LLC, interest is earned at a fixed spread relative to the LIBOR index.

 

Investment in Joint Venture. For the three months and six months ended June 30, 2018, the Company recognized $700,000 and $1.4 million in investment income from its investment in the Joint Venture. As of June 30, 2018 and December 31, 2017, the fair value of the Company’s investment in the Joint venture was $21.1 million and $21.5 million, respectively. For interim periods, the Company recognizes investment income on its investment in the Joint Venture based upon its share of the estimated tax-basis earnings and profits of the Joint Venture. Any distributions in excess of tax-basis earnings and profits are recognized as a return of capital (adjustment to the Company’s cost basis in the investment). The final determination of the tax attributes of distributions from the Joint Venture is made on an annual (full calendar year) basis at year-end based upon taxable income and distributions for the full year. Therefore, any estimate of tax attributes of distributions made on an interim basis may not be representative of the actual tax attributes of distributions for the full year.

 

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 Company’s borrowings. These amounts are capitalized and amortized using the effective interest method over the expected term of the borrowing.

 

Extinguishment of debt. The Company 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 Company of its outstanding debt securities whether the securities are cancelled or held. If the debt contains a cash conversion option, the Company 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 Company’s 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.

 

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.

 

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The Company has adopted a dividend reinvestment plan (the “DRIP”) that provides for reinvestment of its distributions on behalf of its stockholders, unless a stockholder “opts out” of the DRIP to receive cash in lieu of having their cash distributions automatically reinvested in additional shares of the Company’s common stock.

 

3. EARNINGS (LOSSES) PER SHARE

 

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 (decrease) in stockholders’ equity per share for the three and six months ended June 30, 2018 and 2017:

 

   (unaudited)   (unaudited) 
   Three Months Ended June 30,   Six Months Ended June 30, 
   2018   2017   2018   2017 
                 
Net (decrease) increase in net assets resulting from operations  $(1,311,772)  $2,521,727   $1,297,622   $2,907,276 
Net (decrease) increase in net assets allocated to unvested share awards   10,438    (21,340)   (10,035)   (28,258)
Net (decrease) increase in net assets available to common stockholders  $(1,301,334)  $2,500,387    1,287,587    2,879,018 
Weighted average number of common and common stock equivalent shares outstanding for diluted shares computation   37,363,038    37,206,487    37,356,759    37,204,751 
                     
Net (decrease) increase in net assets per basic common shares:                    
Net (decrease) increase in net assets from operations  $(0.04)  $0.07   $0.03   $0.08 
Net (decrease) increase in net assets per diluted shares:                    
Net (decrease) increase in net assets from operations  $(0.03)  $0.07   $0.03   $0.08 

 

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 Company’s 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 30,000 and 50,000 options to purchase shares of common stock considered for the computation of the diluted per share information for the three and six months ended June 30, 2018 and 2017. Since the effects are anti-dilutive for both periods, the options were not included in the computation.

 

 33 

 

 

4. INVESTMENTS

 

The following table shows the Company’s portfolio by security type at June 30, 2018 and December 31, 2017:

 

   June 30, 2018 (unaudited)   December 31, 2017 
Security Type 

Cost/

Amortized

Cost

   Fair Value   %1  

Cost/

Amortized

Cost

   Fair Value   %1 
Short-term investments2  $11,454,078   $11,454,078    4   $77,300,320   $77,300,320    26 
Senior Secured Loan   62,122,920    58,324,196    21    48,337,900    44,960,146    14 
Junior Secured Loan   78,346,396    74,037,768    27    62,561,913    58,941,300    19 
Senior Unsecured Loan   29,777,282    29,777,282    11    12,777,283    12,777,283    4 
Senior Secured Bond           -    1,502,374    1,518,750    - 
CLO Fund Securities   59,446,300    37,972,985    14    72,339,032    51,678,673    17 
Equity Securities   10,571,007    4,251,111    2    10,571,007    4,414,684    1 
Asset Manager Affiliates3   51,591,230    36,853,000    13    52,591,230    38,849,000    12 
Joint Venture   24,914,858    21,091,494    8    24,914,858    21,516,000    7 
Total  $328,224,071   $273,761,914    100%  $362,895,917   $311,956,156    100%

 

 

1 Represents percentage of total portfolio at fair value.
2 Includes money market accounts and U.S. treasury bills.
3 Represents the equity investment in the Asset Manager Affiliates.

  

 34 

 

 

The industry concentrations based on the fair value of the Company’s investment portfolio as of June 30, 2018 and December 31, 2017, were as follows:

 

  June 30, 2018 (unaudited)  December 31, 2017
Industry Classification 

Cost/

Amortized

Cost

   Fair Value   %1  

Cost/

Amortized

Cost

   Fair Value   % 
Aerospace and Defense     $5,423,072   $4,876,425    2%  $5,636,056   $4,115,487    1%
Asset Management Company 2       51,591,230    36,853,000    13    52,591,230    38,849,000    12 
Banking, Finance, Insurance & Real Estate      4,447,205    4,395,587    2    4,458,962    4,418,391    1 
Beverage, Food and Tobacco      5,978,372    5,877,619    2    7,496,438    7,435,050    2 
Capital Equipment      9,423,335    8,555,748    3    5,454,621    4,680,821    2 
Chemicals, Plastics and Rubber      6,652,974    6,619,400    2             
CLO Fund Securities      59,446,300    37,972,985    14    72,339,032    51,678,673    17 
Construction & Building      997,633    989,895        1,004,093    999,872    - 
Consumer goods: Durable      1,093,572    839,450    1    1,071,340    805,607    - 
Consumer goods: Non-durable      599,752    602,344        691,234    694,662    - 
Energy: Oil & Gas      17,222,218    12,499,467    5    14,932,542    11,433,777    4 
Environmental Industries      8,466,453    7,423,009    3    6,330,630    5,766,437    2 
Forest Products & Paper      1,561,553    1,600,960    1    1,558,556    1,600,960    1 
Healthcare & Pharmaceuticals      41,248,780    36,188,183    13    30,367,449    25,512,654    8 
High Tech Industries      14,132,583    14,030,079    5    18,229,229    18,260,577    6 
Hotel, Gaming & Leisure      400,000    1,000        400,000    1,000    - 
Joint Venture      24,914,858    21,091,494    8    24,914,858    21,516,000    7 
Media: Advertising, Printing & Publishing      3,283,670    3,230,850    1    3,371,086    3,318,296    1 
Related Party Loans      29,777,283    29,777,283    11    12,777,283    12,777,283    4 
Services: Business      9,479,862    8,299,523    3    3,563,574    2,366,400    1 
Telecommunications      6,444,954    6,419,200    2    6,455,489    6,466,949    2 
Textiles and Leather      10,183,566    10,162,735    4    7,950,994    7,947,940    3 
Money Market Accounts      11,454,078    11,454,078    4    52,293,570    52,293,570    17 
Transportation: Cargo      4,000,768    4,001,600    1    4,000,901    4,010,000    1 
U.S. Government Obligations                  25,006,750    25,006,750    8 
Total   $328,224,071   $273,761,914    100%  $362,895,917   $311,956,156    100%

 

 

1 Calculated as a percentage of total portfolio at fair value.
2 Represents the equity investment in the Asset Manager Affiliates.

 

The Company may invest up to 30% of the investment portfolio in “non-qualifying” opportunistic investments, including investments in debt and equity securities of CLO Funds, distressed debt or debt and equity securities of large cap public companies. Within this 30% of the portfolio, the Company also may invest in debt of middle market companies located outside of the United States.

 

At June 30, 2018 and December 31, 2017, the total amount of non-qualifying assets was approximately 22% and 23% of total assets, respectively. The majority of non-qualifying assets were foreign investments which were approximately 14% and 16%, respectively, of the Company’s total assets (including the Company’s investments in CLO Funds, which are typically domiciled outside the U.S. and represented approximately 14% and 16% of its total assets on such dates, respectively).

 

 35 

 

 

Investments in CLO Fund Securities

 

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 Fund’s 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 Fund’s subordinated securities or preferred shares.

 

On February 29, 2016, Katonah X CLO Ltd. was fully liquidated and all of its outstanding obligations were satisfied. The Company received approximately $1.0 million in connection therewith related to its investment in the subordinated securities issued by Katonah X CLO Ltd. Accordingly, the Company recorded a realized loss during the first quarter of 2016 of approximately $6.6 million on its investment in Katonah X CLO Ltd. and a corresponding unrealized gain of the same amount in order to reverse the approximately $6.6 million of previously recorded unrealized depreciation with respect to the investment.

 

In June 2016, the Company sold $7.0 million par value of the Subordinated Notes of Catamaran 2015-1 for $4.2 million.

 

In December 2016, the Company purchased $10.1 million of the par value of the Subordinated Notes of Catamaran 2016-1 CLO (“Catamaran 2016-1”) managed by Trimaran Advisors.

 

On October 31, 2017, the Company purchased an additional $4.3 million of notional amount of Subordinated Notes issued by Catamaran CLO 2014-1 at a cost of $5.4 million.

 

In December 2017, the Company purchased an additional $201,000 of notional amount of Subordinated Notes issued by Catamaran CLO 2013-1 at a cost of $201,000.

 

In December 2017, the Company sold $5.0 million par value of the Subordinated Notes of Catamaran CLO 2014-1 for $3.0 million.

 

Except for Katonah 2007-1 CLO Ltd, (“Katonah 2007-1”), Trimaran VII CLO Ltd, and Catamaran 2012-1 CLO, Ltd, all of which have been called, 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. With the exception of Katonah III, Ltd. and Grant Grove CLO, Ltd. (both of which have been called), the remaining third-party managed CLO Fund is making distributions to the Company.

 

On December 19, 2017, the Company, in its capacity as the holder of all of the outstanding preferred shares of Katonah 2007-1, exercised its right to cause Katonah 2007-1 to redeem all of its outstanding indebtedness through the sale of its investments and otherwise wind up its business. As of June 30, 2018, Katonah 2007-1 had paid off all of its outstanding indebtedness and had approximately $319,000 in total assets. It is expected that Katonah 2007-1 will be fully liquidated and dissolved in 2018. The Company received approximately $10.5 million on its investment in Katonah 2007-1 during the first quarter of 2018 in connection with the continuing liquidation of Katonah 2007-1. The Company expects to record a realized loss during 2018 of approximately $10 million on its investment in Katonah 2007-1 and a corresponding unrealized gain of the same amount in order to reverse the previously recorded unrealized depreciation with respect to the investment.

 

In January 2018, the trustees of Catamaran CLO 2012-1, Ltd received notice that the holders of a majority of the income notes issued by Catamaran CLO 2012-1, Ltd had exercised their right of optional redemption.

 

 36 

 

 

Affiliate Investments

 

The following table details investments in affiliates at June 30, 2018 (unaudited) and December 31, 2017:

 

   Industry Classification  Fair Value at of
December 31,
2017
   Purchases
/(Sales) of
or
Advances
/(Distributions)
   Net
Accretion
   Unrealized
Gain/(Loss)
   Realized
Gain/(Loss)
   Fair Value at
of June 30,
2018 (unaudited)
   Interest
Income
   Dividend
Income
 
                                    
Asset Manager Affiliates(4)(5)(6)   Asset Management Company  $38,849,000   $(1,000,000)   -    (996,000)  $      -   $36,853,000   $   $620,000 
 Trimaran Advisors, LLC Revolving Credit Facility(4)(5)(6)  Related Party Loans   -    23,000,000    -    -    -    23,000,000    638,631    - 
 Trimaran Advisors, LLC Related Party Loan (4)(5)(6)   Related Party Loans   8,359,051    (1,581,769)   -    -    -    6,777,282    439,904      
 Trimaran Advisors, LLC Related Party Loan (4)(5)(6)  Related Party Loans   4,418,232    (4,418,232)   -    -    -    -    229,380      
 Katonah 2007-I CLO, Ltd. (1)(2)(3)(4)   CLO Fund Securities   10,770,487    (10,487,425)   271,656    (354,719)   -    199,999    271,658    - 
 Trimaran CLO VII, Ltd. (1)(2)(3)(4)  CLO Fund Securities   10,000    -    -    -    -    10,000    -    - 
 Catamaran CLO 2012-1, Ltd. (1)(2)(3)(4)   CLO Fund Securities   2,320,783    (2,543,968)   264,746    8,437    -    49,998    264,746    - 
 Catamaran CLO 2013-1, Ltd. (1)(2)(4)  CLO Fund Securities   6,923,700    (756,859)   678,261    (870,117)   -    5,974,985    678,262    - 
 Catamaran CLO 2014-1, Ltd. (1)(2)(4)   CLO Fund Securities   8,230,177    (704,498)   685,011    1,233,354    -    9,444,044    685,011    - 
 Catamaran CLO 2014-2, Ltd. (1)(2)(4)  CLO Fund Securities   4,500,962    (518,472)   364,447    (325,754)   -    4,021,183    364,447    - 
 Catamaran CLO 2015-1, Ltd. (1)(2)(4)   CLO Fund Securities   3,569,603    (229,757)   266,574    (299,229)   -    3,307,191    266,574    - 
 Catamaran CLO 2016-1, Ltd. (1)(2)(4)  CLO Fund Securities   8,530,684    (647,232)   472,734    (505,966)   -    7,850,220    472,734    - 
KCAP F3C Senior Funding Rated Notes(2)(4)(7)  CLO Fund Securities   4,632,001    -    18,496    37,347    -    4,687,844    236,243      
 KCAP Freedom 3 LLC (4)(7)   Joint Venture   21,516,000    -    -    (424,506)   -    21,091,494    -    1,400,000 
                                            
Total Affiliated Investments     $122,630,680   $111,788   $3,021,925   $(2,497,153)  $-   $123,267,240   $4,547,590   $2,020,000 

 

   Industry Classification  Fair Value at
December 31,
2016
   Purchases/
(Sales) of
or
Advances/
(Distributions)
   Net
Accretion
   Unrealized
Gain/(Loss)
   Realized
Gain/(Loss)
   Fair Value at
of December 31,
2017
   Interest
Income
   Dividend
Income
 
                                    
Asset Manager Affiliates(4)(5)(6)   Asset Management Company  $40,198,000   $(2,750,000)  $-   $1,401,000   $-   $38,849,000   $-   $460,000 
 Trimaran Advisors, LLC Revolving Credit Facility(4)(5)(6)  Related Party Loans   -    -    -    -    -    -    916,765    - 
 Trimaran Advisors, LLC Related Party Loan (4)(5)(6)   Related Party Loans   -    8,359,051                   8,359,051    148,721      
 Trimaran Advisors, LLC Related Party Loan (4)(5)(6)  Related Party Loans   -    4,418,232                   4,418,232    16,752      
 Katonah 2007-I CLO, Ltd. (1)(2)(3)(4)   CLO Fund Securities   20,453,099    (13,157,760)   5,660,026    (2,184,878)   -    10,770,486    5,660,026    - 
 Trimaran CLO VII, Ltd. (1)(2)(3)(4)  CLO Fund Securities   1,195,152    (1,264,090)   -    78,938    -    10,000    -    - 
 Catamaran CLO 2012-1, Ltd. (1)(2)(4)   CLO Fund Securities   2,819,412    (771,743)   699,611    (426,497)   -    2,320,783    699,611    - 
 Catamaran CLO 2013-1, Ltd. (1)(2)(4)  CLO Fund Securities   4,918,807    (1,054,362)   834,448    2,224,807    -    6,923,699    834,448    - 
 Catamaran CLO 2014-1, Ltd. (1)(2)(4)   CLO Fund Securities   4,546,682    2,319,047    1,079,850    1,643,907    (1,359,309)   8,230,178    1,079,850    - 
 Catamaran CLO 2014-2, Ltd. (1)(2)(4)  CLO Fund Securities   5,092,087    (1,130,813)   806,058    (266,370)   -    4,500,962    806,058    - 
 Catamaran CLO 2015-1, Ltd. (1)(2)(4)   CLO Fund Securities   3,223,255    (571,562)   446,893    471,017    -    3,569,600    446,893    - 
 Catamaran CLO 2016-1, Ltd. (1)(2)(4)  CLO Fund Securities   8,350,290    (1,146,242)   1,093,043    233,593    -    8,530,685    1,093,043    - 
 CRMN 2014-1A (1)(2)(4)   CLO Fund Securities   1,310,000    (1,545,506)   9,259    131,727    94,520    -    97,885    - 
KCAP F3C Senior Funding Rated Notes(2)(4)(7)  CLO Fund Securities   -    4,346,290    89,676    196,035         4,632,000    89,676      
 KCAP Freedom 3 LLC (4)(7)   Joint Venture   -    24,914,858    -    (3,398,858)   -    21,516,000    -    949,037 
                                            
Total Affiliated Investments     $92,106,784   $20,965,400   $10,718,864   $104,421   $(1,264,789)  $122,630,676   $11,889,728   $1,409,037 

 

1 Non-U.S. company or principal place of business outside the U.S.
   
2 An affiliate CLO Fund managed by an Asset Manager Affiliate (as such term is defined in the notes to the consolidated financial statements).
   
3 Notice of redemption has been received for this security.
   
4 Fair value of this investment was determined using significant unobservable inputs.
   
5 Qualified asset for purposes of section 55(a) of the 1940 Act.
   
6

The Company is deemed to “Control” and be an “Affiliated Person” of the Asset Manager Affiliates, each as defined in the 1940 Act, as the Company owns 100% of each Asset Manager Affiliate’s outstanding voting securities. In general, under the 1940 Act, the Company would be presumed to “Control” a portfolio company if it owned 25% or more of its voting securities and would be an “Affiliated Person” of a portfolio company if it owned 5% or more of its voting securities.

   
7

As defined in the 1940 Act, the Company is deemed to be both an “Affiliated Person” and has “Control” of this portfolio company as the Company owns more than 25% of the portfolio company’s outstanding voting securities or has the power to exercise control over management or policies of such portfolio company (including through a management agreement). Other than for purposes of the 1940 Act, the Company does not believe that it has control over this portfolio company

 

 37 

 

 

Investment in Joint Venture

 

During the third quarter of 2017, the Company and Freedom 3 Opportunities LLC (“Freedom 3 Opportunities”), an affiliate of Freedom 3 Capital LLC, entered into an agreement to create KCAP Freedom 3 LLC (the “Joint Venture”). The Company and Freedom 3 Opportunities contributed approximately $37 million and $25 million, respectively, in assets to the Joint Venture, which in turn used the assets to capitalize a new fund, KCAP F3C Senior Funding, L.L.C. (the “Fund”) managed by KCAP Management, LLC, one of the Asset Manager Affiliates. In addition, the Fund used cash on hand and borrowings under a credit facility to purchase approximately $184 million of loans from the Company and the Company used the proceeds from such sale to redeem approximately $147 million in debt issued by KCAP Senior Funding I, LLC (“KCAP Senior Funding”). The Joint Venture may originate loans from time to time and sell them to the Fund.

 

During the fourth quarter of 2017, the Fund was refinanced through the issuance of senior and subordinated notes. The Joint Venture purchased 100% of the subordinated notes issued by the Fund. In connection with the refinancing, the Joint Venture made a cash distribution to the Company of approximately $12.6 million. The Company expects that approximately $11.8 million of this distribution was a return of capital, reducing the cost basis of its investment in the Joint Venture by that amount. The final determination of the tax attributes of distributions from the Joint Venture is made on an annual (full calendar year) basis at the end of the year, therefore, any estimate of tax attributes of distributions made on an interim basis may not be representative of the actual tax attributes of distributions for the full year.

 

The Joint Venture is structured as an unconsolidated Delaware limited liability company. All portfolio and other material decisions regarding the Joint Venture must be submitted to its board of managers, which is comprised of four members, two of whom were selected by the Company and two of whom were selected by Freedom 3 Opportunities, and must be approved by at least one member appointed by the Company and one appointed by Freedom 3 Opportunities. In addition, certain matters may be approved by the Joint Venture’s investment committee, which is comprised of one member appointed by the Company and one member appointed by Freedom 3 Opportunities.

 

The Company has determined that the Joint Venture is an investment company under Accounting Standards Codification (“ASC”), Financial Services — Investment Companies (“ASC 946”), however, in accordance with such guidance, the Company will generally not consolidate its investment in a company other than a wholly owned investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. The Company does not consolidate its interest in the Joint Venture, because the Company does not control the Joint Venture due to allocation of the voting rights among the Joint Venture partners.

 

 38 

 

 

KCAP Freedom 3 LLC

Summarized Statement of Financial Condition

 

   As of   As of 
   June 30, 2018
(unaudited)
  

December 31,

2017

 
Cash  $-   $1,717 
Investment at fair value   37,512,496    37,080,000 
Total Assets  $37,512,496   $37,081,717 
           
Total Liabilities  $2,360,006   $1,221,916 
Total Equity   35,152,490    35,859,801 
Total Liabilities and Equity  $37,512,496   $37,081,717 

 

KCAP Freedom 3 LLC

Summarized Statement of Operations

(unaudited)

 

   For the three
months ended
June 30, 2018
   For the three
months ended
June 30, 2017
   For the six
months ended
June 30, 2018
   For the six
months ended
June 30, 2017
 
Investment income  $1,221,996   $-   $2,417,814   $- 
Operating expenses   31,998    -    53,761    - 
Net investment income   1,189,998         -    2,364,053           - 
Unrealized (depreciation) appreciation on investments   (1,068,857)   -    (564,936)   - 
Net income  $121,141   $-   $1,799,117   $- 

 

 39 

 

 

   KCAP Freedom 3 LLC         
   Schedule of Investments         
   June 30, 2018         
   (unaudited)         
Portfolio Company  Investment 

Percentage

Ownership

by Joint
Venture

   Amortized Cost   Fair Value 
KCAP F3C Senior Funding, LLC(1)(2)  Subordinated Securities, effective interest 11.4%, 12/29 maturity     100.0%  $43,140,686   $37,512,496 
                   
Total Investments          $43,140,686   $37,512,496 

 

(1) CLO Subordinated Investments are entitled to periodic distributions which are generally equal to the remaining cash flow of the payments made by the underlying fund’s 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.

(2) Fair value of this investment was determined using significant unobservable inputs, including default rates, prepayment rates, spreads, and the discount rate by which to value the resulting cash flows.

 

   Schedule of Investments
   December 31, 2017
Portfolio Company  Investment 

Percentage

Ownership

by Joint
Venture

   Amortized Cost   Fair Value 
KCAP F3C Senior Funding, LLC(1)(2)  Subordinated Securities, effective interest 12.1%, 12/29 maturity     100.0%  $42,143,254   $37,080,000 
                   
Total Investments          $42,143,254   $37,080,000 

 

(1) CLO Subordinated Investments are entitled to periodic distributions which are generally equal to the remaining cash flow of the payments made by the underlying fund’s 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.

(2) Fair value of this investment was determined using significant unobservable inputs, including a third party broker quote.

 

Fair Value Measurements

 

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.

 

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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 Company’s 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 investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s 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 Company’s 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. The Company’s fair value determinations 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.

 

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The following table summarizes the fair value of investments by the above ASC 820: Fair Value fair value hierarchy levels as of June 30, 2018 (unaudited) and December 31, 2017, respectively:

 

   As of June 30, 2018 (unaudited) 
   Level I   Level II   Level III   Total 
Short Term investments  $   $11,454,078   $   $11,454,078 
Debt securities       44,563,587    117,575,659    162,139,246 
CLO Fund Securities           37,972,985    37,972,985 
Equity securities           4,251,111    4,251,111 
Asset Manager Affiliates           36,853,000    36,853,000 
Joint Venture           21,091,494    21,091,494 
Total  $   $56,017,665   $217,744,249   $273,761,914 

 

   As of December 31, 2017 
   Level I   Level II   Level III   Total 
Short Term investments  $25,006,750   $52,293,570   $   $77,300,320 
Debt securities       48,312,024    69,885,455    118,197,479 
CLO Fund Securities           51,678,673    51,678,673 
Equity securities           4,414,684    4,414,684 
Asset Manager Affiliates           38,849,000    38,849,000 
Joint Venture           21,516,000    21,516,000 
Total  $25,006,750   $100,605,594   $186,343,812   $311,956,156 

 

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 Company’s 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 Company’s 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 table’s respective footnotes. Certain information relating to investments measured at fair value for which the Company has used unobservable inputs to determine fair value is as follows:

 

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   Six Months Ended June 30, 2018 
   Debt Securities   CLO Fund
Securities
   Equity
Securities
   Asset Manager
Affiliate
   Joint
Venture
   Total 
Balance, December 31, 2017  $69,885,455   $51,678,673   $4,414,684   $38,849,000   $21,516,000   $186,343,812 
Transfers out of Level III1                        
Transfers into Level III2   24,921,613                    24,921,613 
Net accretion   61,525    3,151,236                3,212,761 
Purchases   29,962,022                    29,962,022 
Sales/Paydowns/Return of Capital   (6,466,548)   (16,043,968)       (1,000,000)       (23,510,516)
Total realized loss included in earnings   67,835                    67,835 
Change in unrealized gain (loss) included in earnings   (856,242)   (812,956)   (163,573)   (996,000)   (424,506)   (3,253,277)
Balance, June 30, 2018  $117,575,659   $37,972,985   $4,251,111   $36,853,000   $21,091,494   $217,744,249 
Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date  $(515,834)  $(812,956)  $(163,573)  $(996,000)  $(424,506)  $(2,912,419)

 

1Transfers out of Level III represent a transfer of $0 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were observable as of June 30, 2018.

2Transfers into Level III represent a transfer of $24,921,613 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were unobservable as of June 30, 2018.

 

   Year Ended December 31, 2017 
   Debt Securities   CLO Fund
Securities
   Equity
Securities
   Asset Manager
Affiliate
   Joint
Venture
   Total 
Balance, December 31, 2016  $153,741,745   $54,174,350   $5,056,355   $40,198,000   $   $253,170,450 
Transfers out of Level III1   (3,867,400)                   (3,867,400)
Transfers into Level III2   2,477,500                    2,477,500 
Net accretion   246,238    11,139,633                11,385,871 
Purchases   53,219,762    11,211,368    182,000        36,738,873    101,352,003 
Sales/Paydowns/Return of Capital   (136,020,685)   (25,598,497)       (2,750,000)   (11,824,015)   (176,193,197)
Total realized gain included in earnings   (2,121,907)   (1,264,789)               (3,386,696)
Total unrealized gain (loss) included in earnings   2,210,202    2,016,608    (823,671)   1,401,000    (3,398,858)   1,405,281 
Balance, December 31, 2017  $69,885,455   $51,678,673   $4,414,684   $38,849,000   $21,516,000   $186,343,812 
Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date  $(479,087)  $2,016,608   $(823,671)  $1,401,000   $(3,398,858)  $(1,284,008)

 

1Transfers out of Level III represent a transfer of $3,867,400 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were observable as of December 31, 2017.

2Transfers into Level III represent a transfer of $2,477,500 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were unobservable as of December 31, 2017.

 

As of June 30, 2018 and December 31, 2017, the Company’s 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 Company’s Level II portfolio investments was $56,017,665 and $100,605,594 as of June 30, 2018 and December 31, 2017, respectively.

 

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As of June 30, 2018, the Company’s 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 $ 15,829,929 Enterprise Value Average EBITDA Multiple / WACC

5.1x– 6.3x (5.9x)

15.2%-18.2 %( 17.2%)

 
101,745,730 Income Approach Implied Discount Rate 7.1% – 25.1% (11.7%)  
Equity Securities 4,241,111 Enterprise Value Average EBITDA Multiple / WACC

5.3x – 16.0x (9.9x)

11.8%-15.1% (13.1%)

 
10,000 Options Value Qualitative Inputs(1)    
CLO Fund Securities 37,342,705 Discounted Cash Flow Discount Rate  10.3%-12.0% (11.79%)  
Probability of Default 2.0%  
Loss Severity  25.9%  
Recovery Rate 74.1%  
Prepayment Rate 25.0%  
630,280 Liquidation Value Qualitative Inputs(2)    
Asset Manager Affiliate 36,853,000 Discounted Cash Flow Discount Rate 3.17% - 9.62% (7.01%)  
Joint Venture 21,091,494 Enterprise Value Underlying NAV of the CLO    
Total Level III Investments $ 217,744,249        

 

1 The qualitative inputs used in the fair value measurements of Equity Securities include estimates of the distressed liquidation value of the pledged collateral. In cases where KCAP’s analysis ascribes no residual value to a portfolio company’s equity, KCAP typically elects to mark its position at a nominal amount to account for the investment’s option value.

2 The qualitative inputs used in the fair value measurements include the value of the pledged collateral.

 

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As of December 31, 2017, the Company’s 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 $ 14,059,524 Enterprise Value Average EBITDA Multiple / WACC

5.1x - 6.1x (5.2x)

15.2% - 18.5% (17.4%)

 
$55,825,931 Income Approach Implied Discount Rate 6.4% - 23.5% (12.0%)  
Equity Securities $4,405,684 Enterprise Value Average EBITDA Multiple / WACC

4.5x – 15.2x (9.8x)

10.8% - 15.1% (12.2%)

 
9,000 Options Value Qualitative Inputs(1)    
CLO Fund Securities 18,922,030 Discounted Cash Flow Discount Rate  12.0%  
Probability of Default 2.0%  
Loss Severity  25.9%  
Recovery Rate 74.1%  
Prepayment Rate 25.0%  
11,150,766 Liquidation Value Qualitative Inputs(2)    
  21,605,877 Market Approach Third Party Quote 56.0%-96.5% (69.7%)  
Asset Manager Affiliate  38,849,000 Discounted Cash Flow Discount Rate 2.66% - 12.0% (6.56%)  
Joint Venture 21,516,000 Market Approach Third Party Quote 90%  
Total Level III Investments $ 186,343,812        

 

1 The qualitative inputs used in the fair value measurements of Equity Securities include estimates of the distressed liquidation value of the pledged collateral. In cases where KCAP’s analysis ascribes no residual value to a portfolio company’s equity, KCAP typically elects to mark its position at a nominal amount to account for the investment’s option value.

2 The qualitative inputs used in the fair value measurements include the value of the pledged collateral.

 

The significant unobservable inputs used in the fair value measurement of the Company’s 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 Company’s 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.

 

The significant unobservable input used in the fair value measurement of the Company’s 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 Security’s 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.

 

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The significant unobservable input 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 Company’s investment in the Joint Venture is carried at fair value based upon the fair value of the investments held by the Joint Venture.

 

5. ASSET MANAGER AFFILIATES

 

Wholly-Owned Asset Managers

 

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, 2018 and December 31, 2017, the Asset Manager Affiliates had approximately $2.8 billion and $3.0 billion of par value of assets under management, respectively, and the Company’s 100% equity interest in the Asset Manager Affiliates had a fair value of approximately $36.9 million and $38.8 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. During the first half of 2018, the Asset Manager Affiliates did not recognize any incentive fee revenue. During the first half of 2017, the Asset Manager Affiliates recognized $2.9 million of incentive fee revenue from Trimaran VII, which was called in January 2017. Currently, all CLO Funds managed by the Asset Manager Affiliates are paying both their senior and subordinated management fees on a current basis. As of June 30, 2018, none of the CLO Funds managed by the Asset Manager Affiliates were paying incentive fees.

 

Certain investments, and the future management fees of certain managed CLO Funds, have been pledged by the Asset Manager Affiliates to third-party lenders under borrowing arrangements undertaken to satisfy the U.S. risk retention rules formerly required by Section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) applicable to asset managers. In addition, certain of the Asset Manager Affiliates have provided a make-whole guaranty to these lenders in the event that the pledged assets and management fees are insufficient to satisfy the repayment of these borrowings. So long as the underlying managed CLO Funds’ rated notes are making regular quarterly distributions, the management fees are available to the Asset Manager Affiliates. A recent court ruling has vacated the application of the U.S. risk retention rules insofar as they apply to managers of “open market CLOs,” such as the Asset Manager Affiliates. Please see Note 8 – “Commitments and Contingencies” for further information regarding the U.S. risk retention rules.

 

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For the three months ended June 30, 2018 and 2017, the Asset Manager Affiliates declared cash distributions of $800,000 and $650,000 to the Company, respectively. For the six monthsended June 30, 2018 and 2017, the Asset Manager Affiliates declared cash distributions of $1.6 million and $1.3 million to the Company, respectively. Any distributions from the Asset Manager Affiliates out of their estimated tax-basis earnings and profits are recorded as “Dividends from Asset Manager Affiliates” on the Company’s statement of operations. The Company recognized $300,000 and $0 of Dividends from Asset Manager Affiliates, as reflected in the Company’s in the statement of operations in the second quarter of 2018 and 2017, respectively. 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). For the quarters ended June 30, 2018 and 2017 the difference of $500,000 and $650,000, 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 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 Company’s valuation methodology.

  

In accordance with Rules 3-09, Rule 4-08(g) and 1-02 of Regulation S-X, additional financial information with respect to the Asset Manager Affiliates and with respect to one of the CLO Funds in which the Company has an investment, Katonah 2007-I CLO are required to be included in the Company’s SEC filings. The additional financial information regarding the Asset Manager Affiliates (pursuant to Rule 3-09) and Katonah 2007-I CLO (pursuant to Rule 4-08(g)) is set forth below. This additional financial information regarding the Asset Manager Affiliates and Katonah 2007-1 CLO does not directly impact the financial position, results of operations, or cash flows of the Company.

 

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Asset Manager Affiliates

Summarized Balance Sheet (unaudited)

 

   As of   As of 
   June 30, 2018   December 31, 2017 
Cash  $3,478,623   $4,655,662 
Investments   46,679,398    79,901,209 
Intangible Assets   22,830,000    22,830,000 
Other Assets   2,524,449    4,471,250 
Total Assets  $75,512,470   $111,858,121 
           
Borrowings  $19,685,000   $69,802,500 
Borrowings from related parties   29,777,282    12,792,218 
Other Liabilities   5,203,387    6,789,433 
Total Liabilities   54,665,669    89,384,151 
Total Equity   20,846,801    22,473,970 
Total Liabilities and Equity  $75,512,470   $111,858,121 

 

Asset Manager Affiliates

Summarized Statements of Operations Information (unaudited)

 

   For the three months ended   For the six months ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Fee Revenue  $2,890,867   $3,088,353   $5,950,527   $8,972,550 
Interest Income   1,582,005    3,735    2,268,591    5,910 
Total Income   4,472,872    3,092,088    8,219,118    8,978,460 
Operating Expenses   2,819,121    2,543,378    5,345,206    5,304,832 
Amortization of Intangibles   -    -    -    327,541 
Interest Expense   1,535,588    214,715    2,713,106    403,566 
Total Expenses   4,354,709    2,758,093    8,058,312    6,035,939 
Income before unrealized gains on investments and income taxes   118,163    333,995    160,806    2,942,521 
Net realized and unrealized gains (losses) on investments   (616,810)   -    203,461    - 
Income before income taxes   (498,647)   333,995    364,267    2,942,521 
Income Tax (Benefit) Expense   (201,612)   (280,784)   (328,566)   1,058,560 
Net (Loss) Income  $(297,035)  $614,779   $692,833   $1,883,961 

 

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Katonah 2007-I CLO Ltd.

Summarized Balance Sheet Information (unaudited)

 

   As of   As of 
   June 30, 2018   December 31, 2017 
Total Investments at Fair Value  $49,144   $778,828 
Cash   215,799    1,673,789 
Receivable for investments sold   -    8,750,934 
Total assets   264,943    11,203,551 
CLO Debt at Fair Value   -    10,770,486 
Total Liabilities   50,006    10,854,495 
Total Net Assets   214,937    349,056 

 

Katonah 2007-I CLO Ltd.

Summarized Statements of Operations Information (unaudited)

 

   For the three months ended   For the six months ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Interest Income from Investments  $-   $1,373,010   $-   $3,151,126 
Total Income   -    1,344,827    6,505    3,188,161 
Interest Expense   -    1,488,620    10,487,425    3,014,926 
Total Expenses   4,138    1,681,473    10,626,914    3,483,656 
Net Realized and Unrealized Gains (Losses)   -    (530,500)   10,504,641    (1,158,514)
Increase (Decrease) in net assets resulting from operations   (4,138)   (867,146)   (115,768)   (1,454,009)

 

On December 19, 2017, the Company, in its capacity as the holder of all of the outstanding preferred shares of Katonah 2007-1, exercised its right to cause Katonah 2007-1 to redeem all of its outstanding indebtedness through the sale of its investments and otherwise wind up its business. As of December 31, 2017, Katonah 2007-1 had paid off all of its outstanding indebtedness and had approximately $10.8 million in total assets. It is expected that Katonah 2007-1 will be fully liquidated and dissolved in 2018. The Company received approximately $11.3 million on its investment in Katonah 2007-1 during the fourth quarter of 2017 in connection with the liquidation of Katonah 2007-1, and received an additional $10.5 million in the first half of 2018. Upon receipt of the final liquidating distribution from Katonah 2007-1, the Company expects to record a realized loss of approximately $10 million on its investment in Katonah 2007-1 and a corresponding unrealized gain of the same amount, in order to reverse the previously recorded unrealized depreciation with respect to the investment.

 

On February 29, 2016, Katonah X CLO Ltd. was fully liquidated and all of its outstanding obligations were satisfied. The Company received approximately $1.0 million in connection therewith related to its investment in the subordinated securities issued by Katonah X CLO Ltd. Accordingly, the Company recorded a realized loss during the first quarter of 2016 of approximately $6.6 million on its investment in Katonah X CLO Ltd. and a corresponding unrealized gain of the same amount in order to reverse the approximately $6.6 million of previously recorded unrealized depreciation with respect to the investment.

 

Except for KCAP Management, LLC, which is a disregarded entity whose tax results are included with the Company’s tax results, as separately regarded entities for tax purposes, the Asset Manager Affiliates are taxed at normal corporate rates. In order to maintain the Company’s RIC status, any tax-basis dividends paid by the Asset Manager Affiliates to the Company would generally need to be distributed to the Company’s shareholders. Generally, such tax-basis dividends of the Asset Manager Affiliates’ income which was distributed to the Company’s shareholders will be considered as qualified dividends for tax purposes. The Asset Manager Affiliates’ taxable net income will differ from 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 Company’s IPO in exchange for shares of the Company’s 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.

 

Additional goodwill amortization for tax purposes was created upon the purchase of 100% of the equity interests in Trimaran Advisors by one of KCAP’s affiliates, in exchange for shares of the Company’s 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, and tax-basis intangible assets of $15.7 million, both of which are being amortized for tax purposes on a straight-line basis over 15 years.

 

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Related Party Transactions

 

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. On April 15, 2013, the Trimaran Credit Facility was amended and upsized from $20 million to $23 million. On November 17, 2017, the Trimaran Credit Facility was amended to extend the maturity date to November 17, 2022 and bears interest at an annual rate of 9.0%. At June 30, 2018 there was a $23 million loan outstanding and at December 31, 2017, there were no loans outstanding under the Trimaran Credit Facility. For the three months ended June 30, 2018 and 2017, the Company recognized interest income of approximately $524,000 and $210,000, respectively, related to the Trimaran Credit Facility. For the six months ended June 30, 2018 and 2017, the Company recognized interest income of approximately $639,000 and $390,000, respectively, related to the Trimaran Credit Facility.

 

On October 30, 2017, the Company entered into a new term loan agreement with Trimaran Advisors, one of the Asset Manager Affiliates. Trimaran Advisors borrowed $8.4 million under this agreement, which bears interest at a rate of 10.5% annually, payable quarterly. The loan matures on April 30, 2030, can be repaid at any time, and must be repaid upon the occurrence of certain events. During the second quarter of 2018, $1.6 million of the principal on this loan was repaid by Trimaran. During the three months and six months ended June 30, 2018, the Company recognized approximately $221,000 and $440,000, respectively, of interest income related to this loan.

 

On October 31, 2017, Trimaran Advisors capitalized Trimaran Risk Retention Holdings, LLC, a newly-formed wholly-owned subsidiary, with $8.4 million of equity capital. In turn, Trimaran Risk Retention Holdings capitalized Trimaran RR I, LLC, a wholly-owned subsidiary of Trimaran Risk Retention Holdings, LLC, with $8.4 million of equity capital. With this equity contribution and other borrowed funds, Trimaran RR I, LLC purchased $34.8 million notional amount of notes issued by Catamaran CLO 2014-1, Ltd. for aggregate consideration of $35.5 million. On December 21, 2017, the Company entered into another new term loan agreement with Trimaran Advisors. Trimaran Advisors borrowed $4.4 million, which also bears interest at a rate of 10.5% annually, payable quarterly. The loan matures on January 27, 2028, can be repaid at any time, and must be repaid upon the occurrence of certain events. During the second quarter of 2018, this loan was repaid in full by Trimaran. During the three months and six months ended June 30, 2018, the Company recognized approximately $113,000 and $229,000, respectively, of interest income related to this loan.

 

On December 21, 2017, Trimaran Advisors contributed $4.4 million of equity capital to Trimaran Risk Retention Holdings, LLC. In turn, Trimaran Risk Retention Holdings contributed $4.4 under this agreement million of equity capital to Trimaran RR I. With this equity contribution and other borrowed funds, Trimaran RR I, LLC purchased $27.4 million notional amount of notes issued by Catamaran CLO 2013-1, Ltd. for aggregate consideration of $27.4 million.

 

Section 941 of the Dodd-Frank Act added a provision to the Exchange Act requiring the seller, sponsor or securitizer of a securitization vehicle to retain no less than five percent of the credit risk in assets it sells into a securitization and prohibiting such securitizer from directly or indirectly hedging or otherwise transferring the retained credit risk. The responsible federal agencies adopted final rules implementing these restrictions on October 22, 2014. The U.S. risk retention rules became effective with respect to CLOs two years after publication in the Federal Register. Under the final rules, the asset manager of a CLO is considered the sponsor of a securitization vehicle and is required to retain five percent of the credit risk in the CLO, which may be retained horizontally in the equity tranche of the CLO or vertically as a five percent interest in each tranche of the securities issued by the CLO.

 

On February 9, 2018, the United States Court of Appeals for the District of Columbia (the “D.C. Circuit Court”) ruled in favor of an appeal brought by the Loan Syndications and Trading Association (the “LSTA”) against the SEC and the Board of Governors of the Federal Reserve System (the “Applicable Governmental Agencies”) that managers of so-called “open market CLOs” are not “securitizers” under Section 941 of the Dodd-Frank Act and, therefore, are not subject to the requirements of the U.S. risk retention rules (the "Appellate Court Ruling"). The LSTA was appealing from a judgment entered by the United States District Court for the District of Columbia (the "D.C. District Court"), which granted summary judgment in favor of the SEC and Federal Reserve and against the LSTA with respect to its challenges.

 

On April 5, 2018, the D.C. District Court entered an order implementing the Appellate Court Ruling and thereby vacated the U.S. risk retention rules insofar as they apply to CLO managers of “open market CLOs.” In addition, the Applicable Governmental Agencies did not request that the case be heard by the United States Supreme Court. Since the Applicable Governmental Agencies have not successfully challenged the Appellate Court Ruling and the D.C. District Court has issued the above described order implementing the Appellate Court Ruling, collateral managers of open market CLOs are no longer required to comply with the U.S. risk retention rules at this time. As such, it is possible that some collateral managers of open market CLOs will decide to dispose of the notes constituting the “eligible vertical interest” or “eligible horizontal interest” they were previously required to retain, or decide to take other action with respect to such notes that is not otherwise permitted by the U.S. risk retention rules. As a result of this decision, certain CLO managers of "open market CLOs" will no longer be required to comply with the U.S. risk retention rules solely because of their roles as managers of "open market CLOs", and there may be no "sponsor" of such securitization transactions and no party may be required to acquire and retain an economic interest in the credit risk of the securitized assets of such transactions.

 

There can be no assurance or representation that any of the transactions, structures or arrangements currently under consideration by or currently used by CLO market participants will comply with the U.S. risk retention rules to the extent such rules are reinstated or otherwise become applicable to open market CLOs. The ultimate impact of the U.S. risk retention rules on the loan securitization market and the leveraged loan market generally remains uncertain, and any negative impact on secondary market liquidity for securities comprising a CLO may be experienced due to the effects of the U.S. risk retention rules on market expectations or uncertainty, the relative appeal of other investments not impacted by the U.S. risk retention rules and other factors.

 

During the second quarter of 2018, Trimaran RR I sold $31.4 million and $24.9 million, respectively of notional amount of notes issued by Catamaran CLO 2014-1, Ltd and Catamaran 2013-1, Ltd, respectively.

 

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6. BORROWINGS

 

The Company’s debt obligations consist of the following:

 

  

As of

June 30, 2018

(unaudited)

  

As of

December 31, 2017

 
         
6.125% Notes Due 2022 (net of offering costs of: 2018-$2,474,275; 2017 - $2,734,248)  $74,932,925   $74,672,952 
7.375% Notes Due 2019 (net of offering costs of: 2018 - $40,536; 2017 - $259,635)   6,959,463    26,740,365 
KCAP Funding I, LLC Revolving Credit Facility (net of offering costs of: 2018 - $1,265,107)   19,895,080    - 
   $101,787,468   $101,413,316 

 

The weighted average stated interest rate and weighted average maturity on all our debt outstanding as of June 30, 2018 were 6.1% and 3.9 years, respectively, and as of December 31, 2017 were 6.4% and 3.9 years, respectively.

 

KCAP Senior Funding I, LLC (Debt Securitization)

 

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.

 

For the three months ended June 30, 2017, interest expense, including the amortization of deferred debt issuance costs and the OID was approximately $1.6 million consisting of stated interest expense of approximately $1.3 million, accreted discount of approximately $159,000, and deferred debt issuance costs of approximately $171,000. For the six months ended June 30, 2017, interest expense, including the amortization of deferred debt issuance costs and the discount on the face amount of the notes, was approximately $3.1 million consisting of stated interest expense of approximately $2.4 million, accreted discount of approximately $317,000, and deferred debt issuance costs of approximately $340,000.

 

All of the KCAP Senior Funding I Class A, B, C and D notes were repaid in the third quarter of 2017. In connection therewith, the Company recorded a realized loss from the extinguishment of debt of approximately $4.0 million in the third quarter of 2017.

 

7.375% Notes Due 2019

 

On October 10, 2012, the Company issued $41.4 million in aggregate principal amount of unsecured 7.375% Notes due 2019 (the “7.375% Notes Due 2019”). The net proceeds for these Notes, after the payment of 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 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 requirement 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, 2018, the Company was in compliance with all of its debt covenants.

 

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For the three months ended June 30, 2018 and 2017, interest expense related to the 7.375% Notes Due 2019 was approximately, $129,000 and $609,000, respectively. For the six months ended June 30, 2018 and 2017, interest expense related to the 7.375% Notes Due 2019 was approximately $565,000 and $1.2 million, respectively.

 

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 expected term of the facility on an effective yield method, of which approximately $40,000 remains to be amortized, and is included on the consolidated balance sheets as a reduction in the related debt liability.

 

During the second quarter of 2016, the Company repurchased approximately $2.4 million par value of the 7.375% Notes Due 2019 at a weighted average price of $25.23 per $25.00 note, resulting in a realized loss on extinguishment of $71,190. The Company subsequently surrendered these notes to the Trustee for cancellation.

 

During the third quarter of 2016, $5.0 million par value of the 7.375% Notes Due 2019 was redeemed by the Company, resulting in a realized loss on extinguishment of $88,015. The Company subsequently surrendered these notes to the Trustee for cancellation.

 

During the fourth quarter of 2016, approximately $469,000 par value of the 7.375% Notes Due 2019 was redeemed by the Company, resulting in a realized loss on extinguishment of approximately $15,000. The Company subsequently surrendered these notes to the Trustee for cancellation.

 

During the second quarter of 2017, approximately $6.5 million par value of the 7.375% Notes Due 2019 was redeemed by the Company, resulting in a realized loss on extinguishment of approximately $107,000. The Company subsequently surrendered these notes to the Trustee for cancellation.

 

During the first quarter of 2018, approximately $20 million par value of the 7.375% Notes Due 2019 was redeemed by the Company, resulting in a realized loss on extinguishment of approximately $169,000. The Company subsequently surrendered these notes to the Trustee for cancellation

 

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. As of June 30, 2018 and December 31, 2017, the fair value of the Company’s outstanding 7.375% Notes Due 2019 was approximately $7.1 million and $27.3 million, respectively.  The fair value was determined based on the closing price on June 29, 2018 and December 29, 2017 for the 7.375% Notes Due 2019. The 7.375% Notes Due 2019 are categorized as Level I under the ASC 820 Fair Value.

 

6.125% Notes Due 2022

 

During the third quarter of 2017, the Company issued $77.4 million in aggregate principal amount of unsecured 6.125% Notes due 2022 (the “6.125% Notes Due 2022”). The net proceeds for these Notes, after the payment of underwriting expenses, were approximately $74.6 million. Interest on the 6.125% Notes Due 2022 is paid quarterly in arrears on March 30, June 30, September 30 and December 30, at a rate of 6.125%. The 6.125% Notes Due 2022 mature on September, 30, 2022 and are unsecured obligations of the Company. The 6.125% Notes Due 2022 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, 2019, 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 requirement applicable to the Company as a BDC and a covenant that the Company agreed to in connection with the issuance of the 6.125% Notes Due 2022, the Company is limited in its ability to make distributions in certain circumstances. The indenture governing the 6.125% Notes Due 2022 contains certain restrictive covenants, including compliance with certain provisions of the 1940 Act relating to borrowing and dividends. At June 30, 2018, the Company was in compliance with all of its debt covenants.

 

For the three months ended June 30, 2018 and 2017, interest expense related to the 6.125% Notes Due 2022 was approximately $1.2 million and $0, respectively. For the six months ended June 30, 2018 and 2017, interest expense related to the 6.125% Notes Due 2022 was approximately $2.4 million and $0, respectively.

 

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In connection with the issuance of the 6.125% Notes Due 2022, the Company incurred approximately $2.9 million of debt offering costs which are being amortized over the expected term of the facility on an effective yield method, of which approximately $2.5 million remains to be amortized as of June 30, 2018, and is included on the consolidated balance sheets as a reduction in the related debt liability.

 

Fair Value of 6.125% Notes Due 2022. The 6.125% Notes Due 2022 were issued via public offering during the third quarter of 2017 and are carried at cost, net of offering costs of $2.7 million at June 30, 2018. The fair value of the Company’s outstanding 6.125% Notes Due 2022 was approximately $78.3 million and $77.7 million at June 30, 2018 and December 31, 2017. The fair value was determined based on the closing price on June 29, 2018 and December 29, 2017 for the 6.125% Notes Due 2022. The 6.125% Notes Due 2022 are categorized as Level I under the ASC 820 Fair Value.

 

KCAP Funding I, LLC

 

On March 1, 2018, KCAP Funding I, LLC (“Funding”), a wholly owned subsidiary of the Company, entered into a senior secured revolving credit facility (the “Revolving Credit Facility”) with certain institutional lenders, State Bank and Trust Company, as the administrative agent, lead arranger and bookrunner, CIBC Bank USA, as documentation agent and the Company, as the servicer.

 

The maximum commitment amount of the Revolving Credit Facility is $50 million, subject to availability under the borrowing base. Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to (i) in the case of LIBOR rate loans, an adjusted LIBOR rate for the applicable interest period plus 3.25% or (ii) in the case of base rate loans, the prime rate plus 3.25%. Funding will pay a fee on any undrawn amounts of 0.375% per annum; provided that if 50% or less of the Revolving Credit Facility is drawn, the fee will be 0.50% per annum.

 

The Company intends to use the proceeds from borrowings under the Revolving Credit Facility for general corporate purposes, including to acquire certain qualifying loans, and such other uses as permitted under the Loan and Security Agreement (the “Revolving Credit Agreement”).

 

The maturity date is the earliest of: (a) March 1, 2022 and (b) the date upon which all loans shall become due and payable in full, whether by acceleration or otherwise, as a result of a default by the Company, as defined in the Revolving Credit Facility.

 

Borrowings under the Revolving Credit Facility are repayable by the Company at any time.

 

The Revolving Credit Facility is secured by all of the assets held by Funding, and the Company has pledged its interests in Funding as collateral to State Bank and Trust Company, as the administrative agent, to secure the obligations of Funding under the Revolving Credit Facility. The Revolving Credit Agreement includes customary affirmative and negative covenants, including certain limitations on the incurrence of additional indebtedness and liens, as well as usual and customary events of default for revolving credit facilities of this nature. At June 30, 2018, Funding was in compliance with all of its debt covenants.

 

As of June 30, 2018, $21.2 million principal amount of borrowings was outstanding under the Revolving Credit Facility.

 

Interest on borrowings under the Revolving Credit Facility is paid monthly. Borrowings under the Revolving Credit Facility are subject to redemption in whole or in part at any time or from time to time, at the option of the Funding. Concurrently with any termination of the Revolving Credit Facility before March 1, 2019, Funding will pay to agent an amount equal to 1% of the Revolver Commitments.

 

For the three months ended June 30, 2018, interest expense related to the Revolving Credit Facility was approximately $278,000. For six months ended June 30, 2018, interest expense related to the Revolving Credit Facility was approximately $350,000.

 

The Company incurred approximately $1.4 million of debt offering costs in connection with the issuance of the Revolving Credit Facility, which are being amortized over the expected term of the Revolving Credit Facility, of which approximately $1.3 million remains to be amortized as of June 30, 2018, and is included on the consolidated balance sheets as a reduction in the related debt liability.

 

Fair Value of the Revolving Credit Facility. Borrowings under the Revolving Credit Facility are carried at cost, net of unamortized debt offering costs of $1.3 million at June 30, 2018. The fair value of the Revolving Credit Facility borrowings was approximately $21.2 million at June 30, 2018. The fair value was determined based on an analysis of the value of the pledged collateral and the amount of over-collateralization supporting the repayment of these borrowings. The Revolving Credit Facility borrowings are categorized as Level III under the ASC 820 Fair Value.

 

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7. DISTRIBUTABLE TAXABLE INCOME

 

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 Company’s quarterly distributions, if any, are determined by the Board of Directors. The Company anticipates distributing substantially all 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 2018). 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 following reconciles net increase in net assets resulting from operations to taxable income for the six months ended June 30, 2018:

 

   Six Months Ended June 30, 
   2018   2017 
   (unaudited)   (unaudited) 
         
Net increase in net assets resulting from operations  $1,297,622   $2,907,276 
Net change in unrealized depreciation from investments   3,522,396    1,846,951 
Excess capital losses over capital gains   169,644    1,072,681 
Book/tax differences on CLO equity investments   (188,560)   (1,233,069)
Other book/tax differences   556,816    (2,586)
Taxable income before deductions for distributions  $5,357,918   $4,591,253 
Taxable income before deductions for distributions per weighted average basic shares for the period  $0.14   $0.12 
Taxable income before deductions for distributions per weighted average diluted shares for the period  $0.14   $0.12 

 

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, 2018 and 2017, the Asset Manager Affiliates declared cash distributions of $1.6 million and $1.3 million respectively, to the Company. The Company recognized $620,000 and $0 of dividends from the Asset Manager Affiliates, as reflected in the Company’s statement of operations in the second quarter of 2018 and 2017, respectively. For the six months ended June 30, 2018 and 2017 the differences of $1.0 million and $1.3 million, respectively, between cash distributions received and the estimated tax-basis earnings and profits of the distributing affiliate, are recorded as adjustments to the cost basis in the Asset Manager Affiliate (i.e. tax-basis return of capital).

 

Distributions to shareholders that exceed tax-basis distributable income (tax-basis 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.

 

At June 30, 2018, the Company had a net capital loss carryforward of $88.6 million to offset net capital gains, to the extent provided by federal tax law. $13.5 million of net capital loss carryforward expired in 2017. $17.9 million of net capital loss carryforward is subject to expiration in 2018. $70.8 million of the net capital loss carryforward is not subject to expiration under the RIC Modernization Act of 2010.

 

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On June 19, 2018 the Company’s Board of Directors declared a distribution to shareholders of $0.10 per share for a total of approximately $3.7 million. The record date was July 6, 2018 and the distribution was paid on July 26, 2018.

 

ASC Topic 740 Accounting for Uncertainty in Income Taxes (“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 Company’s 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 Company’s 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 Company’s 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. Management’s 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.

 

8. COMMITMENTS AND CONTINGENCIES

 

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 Company’s 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 Company’s 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, 2018 and December 31, 2017, the Company had no outstanding commitments, respectively.

 

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9. STOCKHOLDERS’ EQUITY

 

During the six months ended June 30, 2018 and 2017, the Company issued 31,048 and 56,918 shares, respectively, of common stock under its dividend reinvestment plan. For the six months ended June 30, 2018, there were 6,000 grants of restricted stock, 7,954 shares were forfeited, and 116,126 shares vested. The total number of shares of the Company’s common stock outstanding as of June 30, 2018 and December 31, 2017 was 37,341,924 and 37,339,224, respectively. During the six months ended June 30, 2018 and 2017, the Company repurchased 26,394 and 63,827, respectively shares at an aggregate cost of approximately $86,000 and $224,000, respectively, in connection with the vesting of restricted stock awards.

 

10. EQUITY COMPENSATION PLANS

 

The Company has an equity incentive plan, established in 2006 and most recently amended, following approval by the Company’s Board of Directors and shareholders, on May 4, 2017 (the “Equity Incentive Plan”). The Company reserved 2,000,000 shares of common stock for issuance under the Equity Incentive Plan. Pursuant to the Equity Incentive Plan and in accordance with the terms of the exemptive relief granted to the Company in August 2008, the Company aims to provide officers and employees of the Company with additional incentives and align the interests of its employees with those of its shareholders. 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. 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 pursuant to the Equity Incentive Plan in 2013 vested in two equal installments of 50% on each of the third and the fourth anniversaries of the grant date. Restricted Stock granted pursuant to the Equity Incentive Plan in 2014 and 2015 vests in four equal installments of 25% on each of the first four anniversaries of the grant date. Restricted Stock granted pursuant to the Equity Incentive Plan in 2017 will vest in two equal installments of 50% on each of the third and the fourth anniversaries of the grant date.

 

Stock Options

 

The 2008 Non-Employee Director Plan was originally adopted by the Board and was approved by a vote of the Company’s shareholders at the 2008 Annual Shareholder Meeting (the “2008 Plan”). Effective June 10, 2011, the 2008 Plan was amended and restated in accordance with a resolution of the Board and approved by a vote of the Company’s shareholders at the 2011 Annual Shareholder Meeting (the “2011 Plan”). Effective May 4, 2017, the 2011 Plan was amended and restated in accordance with a resolution of the Board and approved by the Company’s shareholders at the 2017 Annual Shareholder Meeting (the “Non-Employee Director Plan”). Pursuant to the Non-Employee Director Plan, the Company’s 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 Company’s Board of Directors in accordance with the terms of exemptive relief granted by the SEC in August 2008. Since implementation of the 2011 Plan, 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. Any options outstanding as of the date of the 2011 Annual Shareholder Meeting are governed in all respects by the terms of the 2008 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.

 

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Information with respect to options granted, exercised and forfeited under the Equity Incentive Plan for the period January 1, 2017 through June 30, 2018 is as follows:

 

   Shares  

Weighted Average

Exercise Price per Share

  

Weighted Average

Contractual

Remaining Term

(years)

  

Aggregate Intrinsic

Value1

 
Options outstanding at January 1, 2017   50,000   $7.72    2.4   $- 
Granted                  
Exercised                  
Forfeited                  
Options outstanding at December 31, 2017   50,000   $7.72    1.4   $- 
Granted                  
Exercised                  
Forfeited                  
Expired Unexercised   (5,000)   11.97           
Cancelled   (15,000)   11.97           
Outstanding at June 30, 2018   30,000   $4.88    1.5   $- 
                     
Total vested at June 30, 2018   30,000   $4.88    1.5      

 

1Represents the difference between the market value of shares of the Company on June 30, 2018 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, 2018 and 2017, the Company did not recognize any non-cash compensation expense related to stock options. At June 30, 2018, the Company had no remaining compensation costs related to unvested stock option awards.

 

Restricted Stock

 

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, 2013, the Company’s 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.

 

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On June 14, 2013, 5,000 shares of restricted stock were awarded to the Company’s Board of Directors.

 

On May 5, 2014, 5,000 shares of restricted stock were awarded to the Company’s Board of Directors.

 

On June 20, 2014, the Company’s 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 Company’s Board of Directors.

 

On May 3, 2016, 6,000 shares of restricted stock were awarded to the Company’s Board of Directors.

 

On May 4, 2017, 6,000 shares of restricted stock were awarded to the Company’s Board of Directors.

 

On May 3, 2018, 6,000 shares of restricted stock were awarded to the Company’s 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 years ended December 31, 2016 and 2015, the Company repurchased 67,654 and 36,348 shares, respectively, of common stock at an aggregate cost of approximately $248,000 and $220,000, respectively, in connection with the vesting of employee’s 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 Company’s Equity Incentive Plan.