UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
  For the quarterly period ended June 30, 2014
   
o 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 o

 

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 o No o

 

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

 

Large accelerated filer o   Accelerated filer x

 

Non-accelerated filer

o  (Do not check if a smaller reporting company) Smaller reporting company o

 

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

 

The number of outstanding shares of common stock of the registrant as of August 4, 2014 was 33,721,488.

 

 
 

 

 
 

 

TABLE OF CONTENTS

 

      Page
     
  Part I. Financial Information    
     
Item 1. Consolidated Financial Statements   1
     
  Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013   1
     
  Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2014 and 2013   2
     
  Consolidated Statements of Changes in Net Assets (unaudited) for the six months ended June 30, 2014 and 2013   3
     
  Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2014 and 2013   4
     
  Consolidated Schedules of Investments as of June 30, 2014 (unaudited) and December 31, 2013   5
     
  Consolidated Financial Highlights (unaudited) for the six months ended June 30, 2014 and 2013   30
     
  Notes to Consolidated Financial Statements (unaudited)   31
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   54
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk   69
     
Item 4. Controls and Procedures   70
     
  Part II. Other Information    
     
Item 1. Legal Proceedings   71
     
Item 1A. Risk Factors   71
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   71
     
Item 3. Defaults Upon Senior Securities   71
     
Item 4. Mine Safety Disclosures   71
     
Item 5. Other Information   71
     
Item 6. Exhibits   71
   
Signatures   72

  

 
 

  

KCAP FINANCIAL, INC.

 

CONSOLIDATED BALANCE SHEETS

 

   As of
June 30, 2014
   As of
December 31, 2013
 
   (unaudited)     
ASSETS          
Investments at fair value:          
Money market accounts (cost: 2014 - $5,610,941; 2013 - $7,112,949)  $5,610,941   $7,112,949 
Debt securities (cost: 2014 - $263,906,927; 2013 - $275,213,594)   256,023,078    266,830,427 
CLO Fund securities managed by affiliates (cost: 2014 - $101,293,076; 2013 - $88,979,585)   87,549,239    75,100,306 
CLO Fund securities managed by non-affiliates (cost: 2014 - $12,455,827; 2013 - $12,717,365)   4,181,659    4,351,914 
Equity securities (cost: 2014 - $16,289,233; 2013 - $18,755,684)   8,758,971    11,006,398 
Asset Manager Affiliates (cost: 2014 - $83,924,720; 2013 - $83,378,741)   75,302,000    76,148,000 
Total Investments at Fair Value (cost: 2014 - $483,480,724; 2013 - $486,157,918)   437,425,888    440,549,994 
Cash   2,310,589    3,433,675 
Restricted cash   4,777,960    4,078,939 
Interest receivable   2,040,077    2,032,559 
Receivable for open trades   2,943,835     
Due from affiliates   3,218,927    3,125,259 
Other assets   5,853,972    5,951,962 
Total Assets  $458,571,248   $459,172,388 
           
LIABILITIES          
Convertible Notes  $49,008,000   $49,008,000 
7.375% Notes Due 2019   41,400,000    41,400,000 
Notes issued by KCAP Senior Funding I, LLC (net of discount: 2014 - $2,847,139; 2013 - $3,065,627)   102,402,861    102,184,373 
Payable for open trades   3,940,000    3,980,000 
Accounts payable and accrued expenses   3,306,332    3,897,291 
Shareholder distribution payable       8,333,031 
Total Liabilities   200,057,193    208,802,695 
           
STOCKHOLDERS' EQUITY          
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 33,725,223 and 33,332,123 common shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively   337,252    333,472 
Capital in excess of par value   371,640,022    370,929,615 
Accumulated undistributed (excess distribution) net investment income   1,530,282    (6,102,017)
Accumulated net realized losses   (68,417,904)   (68,662,689)
Net unrealized depreciation on investments   (46,575,597)   (46,128,688)
Total Stockholders' Equity   258,514,055    250,369,693 
Total Liabilities and Stockholders' Equity  $458,571,248   $459,172,388 
NET ASSET VALUE PER COMMON SHARE  $7.67   $7.51 

 

See accompanying notes to consolidated financial statements. 

 

1
 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2014   2013   2014   2013 
Investment Income:                    
Interest from investments in debt securities  $5,173,514   $2,997,246   $10,420,750   $5,475,265 
Interest from cash and time deposits   724    3,026    1,510    7,738 
Distributions from investments in CLO Fund securities managed by affiliates   4,451,626    4,557,531    9,087,864    10,038,183 
Distributions from investments in CLO Fund securities managed by non-affiliates   464,734    323,790    740,304    747,664 
Distributions from Asset Manager Affiliates   3,000,000    3,300,000    6,000,000    6,300,000 
Capital structuring service fees   125,116    52,753    352,199    59,326 
Total investment income   13,215,714    11,234,346    26,602,627    22,628,176 
Expenses:                    
Interest and amortization of debt issuance costs   2,893,806    2,250,063    5,883,972    4,510,309 
Compensation   1,227,651    1,110,409    2,490,088    2,020,122 
Professional fees   545,913    652,644    1,217,123    1,294,971 
Insurance   111,507    126,632    247,467    255,348 
Administrative and other   399,315    513,085    867,597    1,019,556 
Total expenses   5,178,192    4,652,833    10,706,247    9,100,306 
Net Investment Income   8,037,522    6,581,513    15,896,380    13,527,870 
Realized And Unrealized Gains (Losses) On Investments:                    
Net realized (losses) gains from investment transactions   (64,797)   (1,562,529)   244,785    (1,645,466)
Net change in unrealized (depreciation) appreciation on:                    
Debt securities   1,102,632    124,466    499,319    2,410,992 
Equity securities   546,686    1,064,379    219,023    998,942 
CLO Fund securities managed by affiliates   1,015,474    (3,768,238)   135,445    (8,347,397)
CLO Fund securities managed by non-affiliates   388,145    (820,826)   91,283    (1,188,235)
Asset Manager Affiliates investments   1,227,000    6,910,060    (1,391,979)   9,985,399 
Total net change in unrealized appreciation (depreciation)   4,279,937    3,509,841    (446,909)   3,859,701 
Net realized and unrealized appreciation (depreciation) on investments   4,215,140    1,947,312    (202,124)   2,214,235 
Net Increase In Stockholders’ Equity Resulting From Operations  $12,252,662   $8,528,825   $15,694,256   $15,742,105 
Net Increase In Stockholders' Equity Resulting from Operations per Common Share:                    
Basic:  $0.37   $0.26   $0.47   $0.51 
Diluted:  $0.34   $0.25   $0.45   $0.48 
Net Investment Income Per Common Share:                    
Basic:  $0.24   $0.20   $0.48   $0.43 
Diluted:  $0.24   $0.20   $0.46   $0.42 
Weighted Average Shares of Common Stock Outstanding—Basic   33,405,189    33,040,155    33,371,764    31,163,596 
Weighted Average Shares of Common Stock Outstanding—Diluted   39,723,264    39,395,124    39,689,884    38,022,742 

 

See accompanying notes to consolidated financial statements.

 

2
 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

 

   Six Months Ended
June 30,
 
   2014   2013 
         
Operations:          
Net investment income  $15,896,380   $13,527,870 
Net realized gains (losses) from investment transactions   244,785    (1,645,466)
Net change in unrealized (depreciation) appreciation on investments   (446,909)   3,859,701 
Net increase in net assets resulting from operations   15,694,256    15,742,105 
Stockholder distributions:          
Distribution of net investment income   (7,858,857)   (6,946,356)
Return of capital   (405,224)   (2,304,764)
Net decrease in net assets resulting from stockholder distributions   (8,264,081)   (9,251,120)
Capital transactions:          
Issuance of common stock for:          
Dividend reinvestment plan   300,813    394,275 
Conversion of Convertible Notes       8,992,000 
Issuance of Common Stock       50,404,236 
Amortization of stock based compensation   413,375    150,687 
Net increase in net assets resulting from capital transactions   714,188    59,941,198 
Net assets at beginning of period   250,369,692    207,875,656 
Net assets at end of period (including undistributed net investment income of $1,530,282 in 2014 and $4,380,234 in 2013)  $258,514,055   $274,307,839 
Net asset value per common share  $7.67   $8.24 
Common shares outstanding at end of period   33,725,223    33,298,674 

 

See accompanying notes to consolidated financial statements.

 

3
 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   Six Months Ended
June 30,
 
   2014   2013 
         
OPERATING ACTIVITIES:          
Net increase in stockholder's equity resulting from operations  $15,694,256   $15,742,105 
Adjustments to reconcile net increase in stockholder’s equity resulting from operations to net cash provided by (used in) in operating activities:          
Net realized (gains) losses on investment transactions   (244,785)   1,645,466 
Net change in unrealized depreciation (appreciation) on investments   446,909    (3,859,701)
Net accretion of discount on debt securities   12,007    496,351 
Amortization of original issue discount on indebtedness   218,488     
Amortization of debt issuance costs   555,445    402,169 
Payment-in-kind interest income   55,777     
Stock-based compensation expense   413,375    150,687 
Changes in operating assets and liabilities:          
Purchases of investments   (88,665,326)   (178,434,731)
Proceeds from sales and redemptions of investments   91,519,522    53,756,852 
(Increase) in receivable for open trades   (2,943,835)   (3,515,052)
Increase (Decrease) in payable for open trades   (40,000)   66,840,035 
(Increase) in interest and dividends receivable   (7,518)   (466,795)
Decrease in time deposit       1,942,834 
(Increase) in other assets   (457,452)   (3,902,160)
(Increase) in due from affiliates   (93,668)   (1,091,273)
Increase (Decrease) in accounts payable and accrued expenses   (590,959)   111,180 
Net cash provided by (used in) operating activities   15,872,236    (50,182,033)
FINANCING ACTIVITIES:          
Proceeds from issuance of common stock       50,404,236 
Distributions to stockholders   (16,296,300)   (16,260,229)
Proceeds from issuance of debt       101,954,525 
(Increase) in restricted cash   (699,022)   (78,985,473)
Net cash (used in) provided by financing activities   (16,995,322)   57,113,059 
CHANGE IN CASH   (1,123,086)   6,931,026 
CASH, BEGINNING OF PERIOD   3,433,675    738,756 
CASH, END OF PERIOD  $2,310,589   $7,669,782 
Supplemental Information:          
Interest paid during the period  $4,985,509   $4,193,151 
Dividends paid during the period under the dividend reinvestment plan  $300,813   $393,297 

 

See accompanying notes to consolidated financial statements.

 

4
 

 

KCAP FINANCIAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of June 30, 2014

 

(unaudited)

 

Debt Securities Portfolio

 

Portfolio Company / Principal Business 

  Investment
Interest Rate¹ / Maturity
  Principal   Cost   Fair Value2 

4L Technologies Inc. (fka Clover Holdings, Inc.)9, 11

Consumer goods: Non-durable

  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor, Due 5/20
  $2,800,000   $2,772,640   $2,805,502 
                   

Advanced Lighting Technologies, Inc.9, 11

Consumer goods: Non-durable

  First Lien Bond —
10.5% Cash, Due 6/19
   3,000,000    2,952,225    2,398,501 
                   

Alaska Communications Systems Holdings, Inc.9, 11

Telecommunications

  Senior Secured Loan — Term Loan
6.3% Cash, 1.5% Libor Floor, Due 10/16
   2,234,318    2,237,467    2,235,659 
                   

Anaren, Inc.9, 11

High Tech Industries

  Senior Secured Loan — Term Loan (First Lien)
5.5% Cash, 1.0% Libor Floor, Due 2/21
   1,990,000    1,971,061    1,999,950 
                   

ARSloane Acquisition, LLC9, 11

Services: Business

  Senior Secured Loan — Tranche B Term Loan (First Lien)
7.5% Cash, 1.3% Libor Floor, Due 10/19
   992,500    983,783    982,576 
                   

Asurion, LLC (fka Asurion Corporation)9, 11

Banking, Finance, Insurance & Real Estate

  Senior Secured Loan — Incremental Tranche B-1 Term Loan
5.0% Cash, 1.3% Libor Floor, Due 5/19
   1,936,879    1,955,615    1,951,609 
                   

AZ Chem US Inc.9, 11

Chemicals, Plastics and Rubber

  Senior Secured Loan — Initial Term Loan (First Lien)
4.5% Cash, 1.0% Libor Floor, Due 6/21
   492,466    490,014    490,003 
                   

Bankruptcy Management Solutions, Inc.9

Banking, Finance, Insurance & Real Estate

  Senior Secured Loan — Term B Loan
7.0% Cash, 1.0% Libor Floor, Due 6/18
   709,091    709,091    704,340 
                   

BarBri, Inc. (Gemini Holdings, Inc.)9, 11

Services: Consumer

  Senior Secured Loan — Term Loan
4.5% Cash, 1.0% Libor Floor, Due 7/19
   2,872,500    2,860,342    2,877,671 
                   

BBB Industries, LLC9, 11

Automotive

  Senior Secured Loan — Term Loan
5.5% Cash, 1.3% Libor Floor, Due 3/19
   2,812,500    2,804,487    2,813,626 

 

5
 

 

Portfolio Company / Principal Business   Investment
Interest Rate¹ / Maturity
  Principal   Cost   Fair Value2 

Bellisio Foods, Inc. 9, 11

Beverage, Food and Tobacco

  Senior Secured Loan — U.S. Term B Loans
4.5% Cash, 1.0% Libor Floor, Due 8/19
  $3,754,678   $3,737,995   $3,754,302 
                   

Blue Coat Systems, Inc.9, 11

High Tech Industries

  Senior Secured Loan — New Term Loan
4.0% Cash, 1.0% Libor Floor, Due 5/19
   470,003    471,498    471,080 
                   

Caribe Media Inc. (fka Caribe Information Investments Incorporated)9

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Loan
10.0% Cash, 1.5% Libor Floor, Due 11/14
   316,063    316,063    315,905 
                   

Carolina Beverage Group LLC9

Beverage, Food and Tobacco

  Senior Secured Bond — 10.625% - 08/2018 - 143818AA0 144A
10.6% Cash, Due 8/18
   1,500,000    1,517,375    1,605,000 
                   

Cengage Learning Acquisitions, Inc. (fka TL Acquisitions, Inc.)9, 11

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Term Loan
7.0% Cash, 1.0% Libor Floor, Due 3/20
   997,500    1,011,940    1,010,128 
                   

Checkout Holding Corp.9, 11

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Term B Loan (First Lien)
4.5% Cash, 1.0% Libor Floor, Due 4/21
   2,000,000    1,990,302    2,004,580 
                   

CoActive Technologies LLC (fka CoActive Technologies, Inc.)7, 9

Capital Equipment

  Junior Secured Loan — Term Loan (Second Lien)
0.0% Cash, 7.0% PIK, Due 1/15
   2,063,007    1,987,358    2,063,007 
                   

Crowley Holdings Preferred, LLC9

Transportation: Cargo

  Preferred Stock — 12.000% - 12/2049 - Series A Income Preferred Securities
10.0% Cash, 2.0% PIK, Due 12/49
   10,104,717    10,104,717    10,711,000 
                   

CSM Bakery Supplies LLC9

Beverage, Food and Tobacco

  Junior Secured Loan — Term Loan (Second Lien)
8.5% Cash, 1.0% Libor Floor, Due 7/21
   3,000,000    3,017,626    3,003,300 
                   

CSM Bakery Supplies LLC9, 11

Beverage, Food and Tobacco

  Senior Secured Loan — Term Loan (First Lien)
4.8% Cash, 1.0% Libor Floor, Due 7/20
   3,639,167    3,637,778    3,643,898 
                   

DBI Holding LLC9

Services: Business

  Senior Unsecured Bond — 13% - 09/2019 – PIK Note
0.0% Cash, 13.0% PIK, Due 9/19
   3,240,138    2,980,027    3,240,138 
                   

DBI Holding LLC9

Services: Business

  Senior Subordinated Bond — 13% - 09/2019 - Senior Subordinated Note
12.0% Cash, 1.0% PIK, Due 9/19
   4,293,098    4,272,110    4,293,098 

 

6
 

 

Portfolio Company / Principal Business      Principal   Cost   Fair Value2 

Drew Marine Group Inc.9

Transportation: Cargo

  Junior Secured Loan — Term Loan (Second Lien)
8.0% Cash, 1.0% Libor Floor, Due 5/21
  $2,500,000   $2,494,232   $2,502,000 
                   

ELO Touch Solutions, Inc.9, 11

High Tech Industries

  Senior Secured Loan — Term Loan (First Lien)
8.0% Cash, 1.5% Libor Floor, Due 6/18
   1,898,703    1,843,364    1,897,944 
                   

EWT Holdings III Corp. (fka WTG Holdings III Corp.)9

Environmental Industries

  Junior Secured Loan — Term Loan (Second Lien)
8.5% Cash, 1.0% Libor Floor, Due 1/22
   4,000,000    3,981,130    4,002,800 
                   

Fender Musical Instruments Corporation9, 11

Hotel, Gaming & Leisure

  Senior Secured Loan — Initial Loan
5.8% Cash, 1.3% Libor Floor, Due 4/19
   2,408,456    2,419,674    2,409,660 
                   

FHC Health Systems, Inc.9, 11

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term Loan
5.8% Cash, 1.0% Libor Floor, Due 1/18
   3,600,000    3,571,518    3,601,080 
                   

First American Payment Systems, L.P.9

Banking, Finance, Insurance & Real Estate

  Junior Secured Loan — Term Loan (Second Lien)
10.8% Cash, 1.3% Libor Floor, Due 4/19
   3,000,000    2,955,760    3,002,400 
                   

First Data Corporation9, 11

Banking, Finance, Insurance & Real Estate

  Senior Secured Loan — 2018 Dollar Term Loan
4.2% Cash, Due 3/18
   2,000,000    1,887,486    2,005,750 
                   

Flexera Software LLC (fka Flexera Software, Inc.)9, 11

High Tech Industries

  Senior Secured Loan — Term Loan (First Lien)
4.5% Cash, 1.0% Libor Floor, Due 4/20
   1,000,000    995,190    1,001,665 
                   

Fram Group Holdings Inc./Prestone Holdings Inc.9, 11

Automotive

  Senior Secured Loan — Term Loan (First Lien)
6.5% Cash, 1.5% Libor Floor, Due 7/17
   963,752    967,174    964,619 
                   

Getty Images, Inc.9, 11

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Initial Term Loan
4.8% Cash, 1.3% Libor Floor, Due 10/19
   2,196,313    2,196,169    2,127,678 
                   

Ginn LA Conduit Lender, Inc.7, 9

Construction & Building

  Senior Secured Loan — First Lien Tranche A Credit-Linked Deposit
7.8% Cash, Due 2/14
   1,239,975    1,200,977    24,799 
                   

Ginn LA Conduit Lender, Inc.7, 9

Construction & Building

  Senior Secured Loan — First Lien Tranche B Term Loan
7.8% Cash, Due 2/14
   2,658,055    2,574,458    53,161 

 

7
 

 

Portfolio Company / Principal Business   Investment
Interest Rate¹ / Maturity
  Principal   Cost   Fair Value2 

Ginn LA Conduit Lender, Inc.7, 9

Construction & Building

  Junior Secured Loan — Loan (Second Lien)
11.8% Cash, Due 6/12
  $3,000,000   $2,715,997   $30 
                   

Global Tel*Link Corporation9

Telecommunications

  Junior Secured Loan — Term Loan (Second Lien)
9.0% Cash, 1.3% Libor Floor, Due 11/20
   4,000,000    3,930,161    4,000,000 
                   

Grande Communications Networks LLC9, 11

Telecommunications

  Senior Secured Loan — Initial Term Loan
4.5% Cash, 1.0% Libor Floor, Due 5/20
   3,960,013    3,964,740    3,960,013 
                   

Grupo HIMA San Pablo, Inc.9

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term B Loan (First Lien)
8.5% Cash, 1.5% Libor Floor, Due 1/18
   2,962,500    2,919,970    2,962,500 
                   

Grupo HIMA San Pablo, Inc.9

Healthcare & Pharmaceuticals

  Junior Secured Loan — Term Loan (Second Lien)
13.8% Cash, Due 7/18
   7,000,000    6,879,938    6,982,500 
                   

Gymboree Corporation., The9, 11

Retail

  Senior Secured Loan — Term Loan
5.0% Cash, 1.5% Libor Floor, Due 2/18
   1,421,105    1,382,030    1,222,655 
                   

Hargray Communications Group, Inc. (HCP Acquisition LLC)9, 11

Media: Broadcasting & Subscription

  Senior Secured Loan — Initial Term Loan
4.8% Cash, 1.0% Libor Floor, Due 6/19
   2,970,000    2,945,180    2,973,564 
                   

Harland Clarke Holdings Corp. (fka Clarke American Corp.)9, 11

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Tranche B-3 Term Loan
7.0% Cash, 1.5% Libor Floor, Due 5/18
   3,412,500    3,384,568    3,476,501 
                   

Harland Clarke Holdings Corp. (fka Clarke American Corp.)9, 11

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Tranche B-4 Term Loan
6.0% Cash, 1.0% Libor Floor, Due 8/19
   1,481,250    1,474,376    1,492,952 
                   

Hoffmaster Group, Inc.9

Forest Products & Paper

  Junior Secured Loan — Initial Term Loan (Second Lien)
10.0% Cash, 1.0% Libor Floor, Due 5/21
   2,000,000    1,970,564    1,970,000 
                   

Hoffmaster Group, Inc.9, 11

Forest Products & Paper

  Senior Secured Loan — Initial Term Loan (First Lien)
5.3% Cash, 1.0% Libor Floor, Due 5/20
   4,000,000    3,960,770    3,960,000 
                   

Hunter Defense Technologies, Inc.9

Aerospace and Defense

  Junior Secured Loan — Term Loan (Second Lien)
7.0% Cash, Due 2/15
   4,074,074    4,060,248    4,074,074 

 

8
 

 

Portfolio Company / Principal Business   Investment
Interest Rate¹ / Maturity
  Principal   Cost   Fair Value2 

International Architectural Products, Inc.7, 9

Metals & Mining

  Senior Secured Loan — Term Loan
12.0% Cash, 3.3% PIK, 2.5% Libor Floor, Due 5/15
  $247,636   $228,563   $1,000 
                   

Jones Stephens Corp.9

Consumer goods: Non-durable

  Senior Secured Loan — Term Loan
7.0% Cash, 2.0% Libor Floor, Due 9/15
   1,193,615    1,193,615    1,193,615 
                   

Jones Stephens Corp.9, 11

Consumer goods: Non-durable

  Senior Secured Loan — Term Loan
7.0% Cash, 2.0% Libor Floor, Due 9/15
   2,876,033    2,876,033    2,876,033 
                   

Key Safety Systems, Inc.9, 11

Automotive

  Senior Secured Loan — Initial Term Loan
4.8% Cash, 1.0% Libor Floor, Due 5/18
   2,685,371    2,674,529    2,690,741 
                   

Landslide Holdings, Inc. (Crimson Acquisition Corp.)9, 11

High Tech Industries

  Senior Secured Loan — New Term Loan (First Lien)
5.0% Cash, 1.0% Libor Floor, Due 2/20
   3,473,794    3,483,148    3,479,004 
                   

LBREP/L-Suncal Master I LLC7, 9

Construction & Building

  Senior Secured Loan — Term Loan (First Lien)
7.5% Cash, Due 1/10
   3,034,968    3,034,968    40,669 
                   

MB Aerospace ACP Holdings III Corp.9, 11

Aerospace and Defense

  Senior Secured Loan — Dollar Term Loan
5.0% Cash, 1.0% Libor Floor, Due 5/19
   3,960,000    3,927,500    3,960,792 
                   

Medical Specialties Distributors, LLC9, 11

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term Loan
6.5% Cash, 1.0% Libor Floor, Due 12/19
   3,980,000    3,943,918    3,979,204 
                   

Nellson Nutraceutical, LLC9, 11

Beverage, Food and Tobacco

  Senior Secured Loan — Term Loan
5.8% Cash, 1.3% Libor Floor, Due 8/18
   1,990,000    1,977,573    1,990,000 
                   

Ozburn-Hessey Holding Company LLC9, 11

Transportation: Cargo

  Senior Secured Loan — Term Loan
6.8% Cash, 1.3% Libor Floor, Due 5/19
   3,530,255    3,519,406    3,532,373 
                   

Puerto Rico Cable Acquisition Company Inc. (D/B/A Choice TV)9

Media: Broadcasting & Subscription

  Senior Secured Loan — Initial Term Loan
5.5% Cash, 1.0% Libor Floor, Due 7/18
   942,080    943,520    942,174 
                   

Puerto Rico Cable Acquisition Company Inc. (D/B/A Choice TV)9, 11

Media: Broadcasting & Subscription

  Senior Secured Loan — Initial Term Loan
5.5% Cash, 1.0% Libor Floor, Due 7/18
   2,826,239    2,814,599    2,826,522 

 

9
 

 

Portfolio Company / Principal Business   Investment
Interest Rate¹ / Maturity
  Principal   Cost   Fair Value2 

Quad-C JH Holdings Inc. (aka Joerns Healthcare)9, 11

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term Loan A
6.0% Cash, 1.0% Libor Floor, Due 5/20
  $3,000,000   $2,970,401   $2,970,000 
                   

Restorix Health, Inc.9

Healthcare & Pharmaceuticals

  Senior Unsecured Loan — Subordinated Term Loan
12.0% Cash, 2.0% PIK, Due 6/18
   4,013,567    4,013,567    4,013,567 
                   

Roscoe Medical, Inc.9

Healthcare & Pharmaceuticals

  Junior Secured Loan — Term Loan (Second Lien)
11.3% Cash, Due 9/19
   6,700,000    6,636,233    6,700,000 
                   

Safenet, Inc.9, 11

High Tech Industries

  Senior Secured Loan — Term Loan (First Lien)
5.5% Cash, 1.0% Libor Floor, Due 2/20
   2,992,500    2,963,756    2,993,398 
                   

Sandy Creek Energy Associates, L.P.9, 11

Utilities: Electric

  Senior Secured Loan — Term Loan
5.0% Cash, 1.0% Libor Floor, Due 11/20
   2,932,317    2,918,945    2,962,652 
                   

SGF Produce Holding Corp.(Frozsun, Inc.)9

Beverage, Food and Tobacco

  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor, Due 3/19
   2,202,356    2,184,748    2,202,356 
                   

SGF Produce Holding Corp.(Frozsun, Inc.)9, 11

Beverage, Food and Tobacco

  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor, Due 3/19
   3,457,905    3,438,739    3,457,905 
                   

Stafford Logistics, Inc.(dba Custom Ecology, Inc.)9, 11

Environmental Industries

  Senior Secured Loan — Term Loan
6.8% Cash, 1.3% Libor Floor, Due 6/19
   2,970,000    2,945,259    2,970,891 
                   

Sun Products Corporation, The (fka Huish Detergents Inc.)9, 11

Consumer goods: Non-durable

  Senior Secured Loan — Tranche B Term Loan
5.5% Cash, 1.3% Libor Floor, Due 3/20
   3,910,711    3,884,908    3,842,293 
                   

TPF II LC, LLC (TPF II Rolling Hills, LLC)9, 11

Utilities: Electric

  Senior Secured Loan — Term Loan
6.5% Cash, 1.0% Libor Floor, Due 8/19
   2,931,300    2,893,300    2,934,231 
                   

Trico Products Corporation9

Automotive

  Senior Secured Loan — Term Loan
6.3% Cash, 1.5% Libor Floor, Due 7/16
   4,729,688    4,713,191    4,728,742 

 

10
 

 

Portfolio Company / Principal Business   Investment
Interest Rate¹ / Maturity
  Principal   Cost   Fair Value2 

Trico Products Corporation9, 11

Automotive

  Senior Secured Loan — Term Loan
6.3% Cash, 1.5% Libor Floor, Due 7/16
  $3,783,751   $3,770,553   $3,782,994 
                   

Trimaran Advisors, L.L.C.9

Banking, Finance, Insurance & Real Estate

  Senior Unsecured Loan — Revolving Credit Facility
9.0% Cash, Due 11/17
   23,000,000    23,000,000    23,000,000 
                

TriZetto Group, Inc. (TZ Merger Sub, Inc.)9, 11

High Tech Industries

  Senior Secured Loan — Term Loan
4.8% Cash, 1.3% Libor Floor, Due 5/18
   3,544,969    3,551,273    3,544,969 
                   

TRSO I, Inc.9

Energy: Oil & Gas

  Junior Secured Loan — Term Loan (Second Lien)
11.0% Cash, 1.0% Libor Floor, Due 12/17
   1,000,000    986,078    1,020,000 
                

TUI University, LLC9

Services: Consumer

  Senior Secured Loan — Term Loan (First Lien)
8.3% Cash, 1.3% Libor Floor, Due 10/14
   1,647,733    1,643,778    1,637,518 
                   

TWCC Holding Corp.9

Media: Broadcasting & Subscription

  Junior Secured Loan — Term Loan (Second Lien)
7.0% Cash, 1.0% Libor Floor, Due 6/20
   1,000,000    1,004,373    992,970 
                

TWCC Holding Corp.9, 11

Media: Broadcasting & Subscription

  Senior Secured Loan — Term Loan
3.5% Cash, 0.8% Libor Floor, Due 2/17
   1,906,653    1,918,987    1,891,876 
                   

Univar Inc.9, 11

Chemicals, Plastics and Rubber

  Senior Secured Loan — Term B Loan
5.0% Cash, 1.5% Libor Floor, Due 6/17
   2,909,626    2,907,252    2,925,760 
                

USJ-IMECO Holding Company, LLC9, 11

Transportation: Cargo

  Senior Secured Loan — Term Loan
7.0% Cash, 1.0% Libor Floor, Due 4/20
   3,990,000    3,970,564    3,990,000 
                   

Verdesian Life Sciences, LLC9

Environmental Industries

  Senior Secured Loan — Term Loan
6.0% Cash, 1.0% Libor Floor, Due 6/20
   1,000,000    985,000    985,000 
                

Verdesian Life Sciences, LLC9, 11

Environmental Industries

  Senior Secured Loan — Term Loan
6.0% Cash, 1.0% Libor Floor, Due 6/20
   3,000,000    2,955,000    2,955,000 

 

11
 

 

Portfolio Company / Principal Business   Investment
Interest Rate¹ / Maturity
  Principal   Cost   Fair Value2 

Vestcom International, Inc. (fka Vector Investment Holdings, Inc.)9, 11

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor, Due 12/18
  $2,866,953   $2,832,592   $2,867,814 
                

Weiman Products, LLC9

Consumer goods: Non-durable

  Senior Secured Loan — Term Loan
6.3% Cash, 1.0% Libor Floor, Due 11/18
   2,987,255    2,960,373    2,987,255 
                   

Weiman Products, LLC9, 11

Consumer goods: Non-durable

  Senior Secured Loan — Term Loan
6.3% Cash, 1.0% Libor Floor, Due 11/18
   3,983,007    3,947,998    3,983,007 
                

Wholesome Sweeteners, Inc.9

Beverage, Food and Tobacco

  Junior Secured Loan — Subordinated Note (Second Lien)
14.0% Cash, Due 10/17
   4,901,997    4,880,380    4,951,017 
                   

WideOpenWest Finance , LLC9

Telecommunications

  Senior Secured Loan — Term B Loan
4.8% Cash, 1.0% Libor Floor, Due 4/19
   2,969,925    2,988,487    2,982,918 
                

WireCo WorldGroup Inc. 9

Capital Equipment

  Senior Unsecured Bond — 11.75% - 05/2017
11.8% Cash, Due 5/17
   5,000,000    4,979,145    5,121,000 
                   

WireCo WorldGroup Inc. 9, 11

Capital Equipment

  Senior Unsecured Bond — 11.75% - 05/2017
11.8% Cash, Due 5/17
   3,000,000    2,987,487    3,072,600 
                   
Total Investment in Debt Securities                  
(99% of net asset value at fair value)     $266,037,525   $263,906,927   $256,023,078 

 

12
 

 

Equity Securities Portfolio

 

Portfolio Company / Principal Business   Investment  Percentage
Interest/Shares
   Cost   Fair Value2 

Aerostructures Holdings L.P.5, 9

Aerospace and Defense

  Partnership Interests   1.2%  $1,000,000   $1,000 
                

Aerostructures Holdings L.P.5, 9

Aerospace and Defense

  Series A Preferred Interests   1.2%   250,961    295,379 
                   

Bankruptcy Management Solutions, Inc.5, 9

Diversified/Conglomerate Service

  Class A Warrants   1.7%   -    - 
                

Bankruptcy Management Solutions, Inc.5, 9

Diversified/Conglomerate Service

  Class B Warrants   1.7%   -    - 
                   

Bankruptcy Management Solutions, Inc.5, 9

Diversified/Conglomerate Service

  Class C Warrants   1.7%   -    - 
                   

Bankruptcy Management Solutions, Inc.5, 9

Diversified/Conglomerate Service

  Common Stock 2013   0.8%   314,325    244,088 
                   

Caribe Media Inc. (fka Caribe Information Investments Incorporated)5, 9

Printing and Publishing

  Common   1.3%   359,765    546,336 
                   

Coastal Concrete Holding II, LLC5, 9

Construction & Building

  Class A Units   10.8%   8,625,626    1,000 
                   

DBI Holding LLC5, 9

Services: Business

  Class A Warrants   3.2%   258,940    354,554 
                

eInstruction Acquisition, LLC5, 9

Services: Consumer

  Membership Units   1.1%   1,079,616    1,000 
                   

FP WRCA Coinvestment Fund VII, Ltd.3, 5,

Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

  Class A Shares   1,500    1,500,000    2,135,490 

 

13
 

 

Portfolio Company / Principal Business   Investment  Percentage
Interest/Shares
   Cost   Fair Value2 

Perseus Holding Corp.5, 9

Leisure, Amusement, Motion Pictures, Entertainment

  Common   0.2%  $400,000   $1,000 
                   

Plumbing Holdings Corporation5, 9

Home and Office Furnishings, Housewares, and Durable Consumer Products

  Common   7.8%   -    1,382,237 
                

Roscoe Investors, LLC5, 9

Healthcare & Pharmaceuticals

  Class A Units   1.6%   1,000,000    1,000,000 
                

TRSO II, Inc.5, 9

Oil and Gas

  Common Stock   5.4%   1,500,000    2,796,887 
                   
Total Investment in Equity Securities                  
(3% of net asset value at fair value)          $16,289,233   $8,758,971 

 

14
 

 

CLO Fund Securities

 

CLO Subordinated Investments

 

Portfolio Company   Investment  Percentage
Interest
   Cost   Fair Value2 
Grant Grove CLO, Ltd.3  Subordinated Securities   22.2%  $4,701,455   $738,158 
Katonah III, Ltd.3, 10  Preferred Shares   23.1%   1,398,172    550,000 
Katonah V, Ltd.3, 10  Preferred Shares   26.7%   3,320,000    1,000 
Katonah VII CLO Ltd.3, 6  Subordinated Securities   16.4%   4,484,693    1,579,404 
Katonah VIII CLO Ltd3, 6  Subordinated Securities   10.3%   3,378,005    1,387,164 
Katonah IX CLO Ltd3, 6  Preferred Shares   6.9%   2,008,087    777,822 
Katonah X CLO Ltd 3, 6  Subordinated Securities   33.3%   11,755,728    5,714,906 
Katonah 2007-I CLO Ltd.3, 6  Preferred Shares   100.0%   31,095,297    27,991,513 
Trimaran CLO IV, Ltd.3, 6  Preferred Shares   19.0%   3,524,200    2,733,495 
Trimaran CLO V, Ltd.3, 6  Subordinate Notes   20.8%   2,716,400    1,842,675 
Trimaran CLO VI, Ltd.3, 6  Income Notes   16.2%   2,761,700    1,925,496 
Trimaran CLO VII, Ltd.3, 6  Income Notes   10.5%   3,132,100    2,251,346 
Catamaran CLO 2012-1 Ltd.3, 6  Subordinated Notes   24.9%   8,987,000    6,969,478 
Catamaran CLO 2013-1 Ltd.3, 6  Subordinated Notes   23.5%   9,365,700    8,762,580 
Dryden 30 Senior Loan Fund3  Subordinated Notes   7.5%   3,036,200    2,892,500 
Catamaran CLO 2014-1 Ltd.3, 6  Subordinated Notes   24.9%   11,464,500    9,683,361 
                   
Total Investment in CLO Subordinated Securities          $107,129,237   $75,800,898 

 

CLO Rated-Note Investment

 

Portfolio Company   Investment  Percentage
Interest
   Cost   Fair Value2 
Katonah 2007-I CLO Ltd.3, 6  Floating - 04/2022 - B2L
Par Value of $10,500,000
Due 4/22
   100.0%  $1,327,169   $10,300,000 
Catamaran CLO 2012-1 Ltd.3, 6  Float - 12/2023 - F
Par Value of $4,500,000
Due 12/23
   42.9%   3,885,051    4,290,000 
Catamaran CLO 2014-1 Ltd.3, 6  Float - 04/2026 - E
Par Value of $1,525,000
Due 4/26
   15.1%   1,407,446    1,340,000 
                   
Total Investment in CLO Rated-Note          $6,619,666   $15,930,000 
                   
Total Investment in CLO Fund Securities                  
(35% of net asset value at fair value)          $113,748,903   $91,730,898 

 

15
 

 

Asset Manager Affiliates

 

Portfolio Company / Principal Business   Investment  Percentage
Interest
   Cost   Fair Value2 
Asset Manager Affiliates9  Asset Management Company   100.0%  $83,924,720   $75,302,000 
                   
Total Investment in Asset Manager Affiliates          $83,924,720   $75,302,000 
(29% of net asset value at fair value)                  

 

Time Deposits and Money Market Account

 

Time Deposit and Money Market Accounts   Investment  Yield   Par / Cost   Fair Value2 
JP Morgan Business Money Market Account8, 9  Money Market Account   0.10%  $248,980   $248,980 
US Bank Money Market Account9  Money Market Account   0.30%   5,361,961    5,361,961 
                   
Total Investment in Time Deposit and Money Market Accounts          $5,610,941   $5,610,941 
(2% of net asset value at fair value)                  
                   
Total Investments4          $483,480,724   $437,425,888 
(169% of net asset value at fair value)                  

 

See accompanying notes to consolidated financial statements.

 

1

 

A majority of the variable rate loans to 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, 2014. As noted in the table above, 65% (based on par) of debt securities contain LIBOR floors which range between 0.75% and 2.00%.
2 Reflects the fair market value of all investments as of June 30, 2014, 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 $483 million. The aggregate gross unrealized appreciation is approximately $16 million, the aggregate gross unrealized depreciation is approximately $62 million, and the net unrealized depreciation is approximately $46 million.
5 Non-income producing.
6 An affiliate CLO Fund managed by an Asset Manager Affiliate (as such term is defined in the notes to the consolidated financial statements).
7 Loan or debt security is on non-accrual status and therefore is considered non-income producing.
8 Money market account holding restricted cash and security deposits for employee benefit plans.
9 Qualified asset for purposes of section 55(a) of the Investment Company Act of 1940.
10 As of June 30, 2014, this CLO Fund Security was not providing a dividend distribution.
11 As of June 30, 2014, investment was owned by KCAP Senior Funding I, LLC and has been pledged to secure KCAP Senior Funding I, LLC’s obligation.

 

16
 

 

KCAP FINANCIAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of December 31, 2013

 

Debt Securities Portfolio    

 

Portfolio Company / Principal Business   Investment
Interest Rate¹ / Maturity
  Principal   Cost   Fair Value2 

Advanced Lighting Technologies, Inc.9, 11

Consumer goods: Non-durable

  First Lien Bond — 10.5% - 06/2019 - 00753CAE2
10.5% Cash, Due 6/19
  $3,000,000   $2,948,332   $2,546,400 
                

Advantage Sales & Marketing Inc.9

Services: Business

  Senior Secured Loan — 2013 Term Loan (First Lien)
4.3% Cash, Due 12/17
   1,989,952    1,996,642    2,001,892 
                   

Alaska Communications Systems Holdings, Inc. 9, 11

Telecommunications

  Senior Secured Loan — Term Loan
6.3% Cash, Due 10/16
   2,358,409    2,362,064    2,357,702 
                

Apria Healthcare Group Inc.9, 11

Healthcare & Pharmaceuticals

  Senior Secured Loan — Initial Term Loan
6.8% Cash, Due 4/20
   2,985,000    2,997,209    2,985,000 
                   

Aramark Corporation

Beverage, Food and Tobacco

  Senior Secured Loan — U.S. Term D Loan
4.0% Cash, Due 9/19
   850,000    856,173    856,374 
                

Aramark Corporation11

Beverage, Food and Tobacco

  Senior Secured Loan — LC-3 Facility
3.7% Cash, Due 7/16
   61,707    61,967    61,861 
                   

Aramark Corporation11

Beverage, Food and Tobacco

  Senior Secured Loan — U.S. Term C Loan
3.7% Cash, Due 7/16
   938,293    942,256    940,639 
                

Aramark Corporation11

Beverage, Food and Tobacco

  Senior Secured Loan — U.S. Term D Loan
4.0% Cash, Due 9/19
   1,150,000    1,158,352    1,158,625 
                   

ARSloane Acquisition, LLC9, 11

Services: Business

  Senior Secured Loan — Tranche B Term Loan (First Lien)
7.5% Cash, Due 10/19
   997,500    987,913    997,898 
                

Asurion, LLC (fka Asurion Corporation)9, 11

Banking, Finance, Insurance & Real Estate

  Senior Secured Loan — Incremental Tranche B-1 Term Loan
4.5% Cash, Due 5/19
   1,980,000    2,000,806    1,983,168 

 

17
 

 

Portfolio Company / Principal Business   Investment
Interest Rate¹ / Maturity
  Principal   Cost   Fair Value2 

Bankruptcy Management Solutions, Inc.9

Banking, Finance, Insurance & Real Estate

  Senior Secured Loan — Term B Loan
7.0% Cash, Due 6/18
  $718,182   $718,182   $713,514 
                

BarBri, Inc. (Gemini Holdings, Inc.)9, 11

Services: Consumer

  Senior Secured Loan — Term Loan
5.3% Cash, Due 7/19
   3,000,000    2,986,055    3,000,900 
                   

BBB Industries, LLC9, 11

Automotive

  Senior Secured Loan — Term Loan B
5.5% Cash, Due 3/19
   2,887,500    2,878,820    2,888,366 
                

Bellisio Foods, Inc. 9, 11

Beverage, Food and Tobacco

  Senior Secured Loan — Delayed Draw Term Loan
6.5% Cash, Due 8/19
   1,582,475    1,575,088    1,582,316 
                   

Bellisio Foods, Inc. 9, 11

Beverage, Food and Tobacco

  Senior Secured Loan — U.S. Term B Loans
5.3% Cash, Due 8/19
   2,191,119    2,180,891    2,190,900 
                

Blue Coat Systems, Inc.9, 11

High Tech Industries

  Senior Secured Loan — New Term Loan
4.5% Cash, Due 5/19
   3,990,000    4,003,966    3,991,995 
                   

Caribe Media Inc. (fka Caribe Information Investments Incorporated)9

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Loan
10.0% Cash, Due 11/14
   379,763    379,763    379,193 
                

Carolina Beverage Group LLC9

Beverage, Food and Tobacco

  Senior Secured Bond — 10.625% - 08/2018 - 143818AA0 144A
10.6% Cash, Due 8/18
   1,500,000    1,519,072    1,619,550 
                   

Catalina Marketing Corporation9, 11

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Initial Term Loan
5.3% Cash, Due 10/20
   1,995,000    1,983,766    2,025,553 
                

Clover Technologies Group, LLC (Clover Holdings Inc.)9, 11

Consumer goods: Non-durable

  Senior Secured Loan — Term Loan
6.8% Cash, Due 5/18
   2,850,292    2,883,914    2,850,291 
                   

CoActive Technologies LLC (fka CoActive Technologies, Inc.)7, 9

Capital Equipment

  Junior Secured Loan — Term Loan (Second Lien)
7.0% Cash, 7.0% PIK, Due 1/15
   2,063,007    1,987,358    1,863,721 
                

Crowley Holdings Preferred, LLC9

Transportation: Cargo

  Preferred Stock — 12.000% - 12/2049 - Series A Income Preferred Securities
10.0% Cash, 2.0% PIK, Due 12/49
   10,000,000    10,000,000    10,600,000 

 

18
 

 

Portfolio Company / Principal Business   Investment
Interest Rate¹ / Maturity
  Principal   Cost   Fair Value2 

CSM Bakery Supplies LLC9

Beverage, Food and Tobacco

  Junior Secured Loan — Term Loan (Second Lien)
8.5% Cash, Due 7/21
  $3,000,000   $3,018,871   $3,001,500 
                

CSM Bakery Supplies LLC9, 11

Beverage, Food and Tobacco

  Senior Secured Loan — Term Loan
4.8% Cash, Due 7/20
   3,657,500    3,655,989    3,659,329 
                   

Del Monte Foods Company9, 11

Beverage, Food and Tobacco

  Senior Secured Loan — Initial Term Loan
4.0% Cash, Due 3/18
   2,789,388    2,783,753    2,803,321 
                

Drew Marine Group Inc.9

Transportation: Cargo

  Junior Secured Loan — Term Loan (Second Lien)
8.0% Cash, Due 5/21
   2,500,000    2,493,817    2,493,750 
                   

ELO Touch Solutions, Inc.9, 11

High Tech Industries

  Senior Secured Loan — Term Loan (First Lien)
8.0% Cash, Due 6/18
   1,898,703    1,835,507    1,893,577 
                

Fender Musical Instruments Corporation9, 11

Hotel, Gaming & Leisure

  Senior Secured Loan — Initial Loan
5.8% Cash, Due 4/19
   2,421,986    2,434,723    2,463,620 
                   

FHC Health Systems, Inc.9, 11

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term Loan
5.8% Cash, Due 1/18
   3,900,000    3,864,809    3,900,000 
                

First American Payment Systems, L.P.9

Banking, Finance, Insurance & Real Estate

  Junior Secured Loan — Term Loan (Second Lien)
10.8% Cash, Due 4/19
   3,000,000    2,951,174    2,999,400 
                   

First Data Corporation9, 11

Banking, Finance, Insurance & Real Estate

  Senior Secured Loan — 2018 Dollar Term Loan
4.2% Cash, Due 3/18
   2,000,000    1,875,135    2,006,520 
                

Flexera Software LLC (fka Flexera Software, Inc.)9, 11

High Tech Industries

  Senior Secured Loan — Term Loan
5.0% Cash, Due 3/19
   2,722,955    2,734,588    2,725,133 
                   

Fram Group Holdings Inc./Prestone Holdings Inc.9, 11

Automotive

  Senior Secured Loan — Term Loan (First Lien)
6.5% Cash, Due 7/17
   966,900    970,557    966,610 
                

Freescale Semiconductor, Inc.

High Tech Industries

  Senior Subordinated Bond — 10.125% - 12/2016 - 35687MAP2
10.1% Cash, Due 12/16
   1,036,000    1,037,707    1,051,540 

 

19
 

 

Portfolio Company / Principal Business   Investment
Interest Rate¹ / Maturity
  Principal   Cost   Fair Value2 

Getty Images, Inc.9, 11

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Initial Term Loan
4.8% Cash, Due 10/19
  $3,711,259   $3,711,065   $3,471,698 
                

Ginn LA Conduit Lender, Inc.7, 9

Construction & Building

  Senior Secured Loan — First Lien Tranche A Credit-Linked Deposit
7.8% Cash, Due 6/11
   1,257,143    1,224,101    37,714 
                   

Ginn LA Conduit Lender, Inc.7, 9

Construction & Building

  Senior Secured Loan — First Lien Tranche B Term Loan
7.8% Cash, Due 6/11
   2,694,857    2,624,028    80,846 
                

Ginn LA Conduit Lender, Inc.7, 9

Construction & Building

  Junior Secured Loan — Loan (Second Lien)
11.8% Cash, Due 6/12
   3,000,000    2,715,997    30,015 
                   

Global Tel*Link Corporation9

Telecommunications

  Junior Secured Loan — Term Loan (Second Lien)
9.0% Cash, Due 11/20
   4,000,000    3,924,752    3,991,600 
                

Grande Communications Networks LLC9, 11

Telecommunications

  Senior Secured Loan — Initial Term Loan
4.5% Cash, Due 5/20
   3,980,000    3,985,209    3,980,398 
                   

Grupo HIMA San Pablo, Inc.9

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term B Loan (First Lien)
8.5% PIK, Due 1/18
   2,977,500    2,928,848    2,813,738 
                

Grupo HIMA San Pablo, Inc.9

Healthcare & Pharmaceuticals

  Junior Secured Loan — Term Loan (Second Lien)
13.8% PIK, Due 7/18
   7,000,000    6,865,363    6,817,300 
                   

Gymboree Corporation., The9, 11

Retail

  Senior Secured Loan — Term Loan
5.0% Cash, Due 2/18
   1,421,105    1,377,305    1,332,286 
                

Hargray Communications Group, Inc. (HCP Acquisition LLC)9, 11

Media: Broadcasting & Subscription

  Senior Secured Loan — Initial Term Loan
4.8% Cash, Due 6/19
   2,985,000    2,957,575    2,986,194 
                   

Harland Clarke Holdings Corp. (fka Clarke American Corp.)9, 11

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Tranche B-3 Term Loan
7.0% Cash, Due 5/18
   3,456,250    3,424,170    3,488,341 
                

Hunter Defense Technologies, Inc.9

Aerospace and Defense

  Junior Secured Loan — Term Loan (Second Lien)
7.0% Cash, Due 2/15
   4,074,074    4,049,553    3,911,111 

 

20
 

 

Portfolio Company / Principal Business   Investment
Interest Rate¹ / Maturity
  Principal   Cost   Fair Value2 

Iasis Healthcare LLC9

Healthcare, Education and Childcare

  Senior Unsecured Bond — 8.375% - 05/2019 - 45072PAD4
8.4% Cash, Due 5/19
   3,000,000    2,892,521    3,187,500 
                

International Architectural Products, Inc.7, 9

Metals & Mining

  Senior Secured Loan — Term Loan
12.0% Cash, Due 5/15
   247,636    228,563    1,000 
                   

Jones Stephens Corp.9

Consumer goods: Non-durable

  Senior Secured Loan — Term Loan
7.0% Cash, Due 9/15
   1,214,195    1,214,195    1,214,195 
                

Jones Stephens Corp.9, 11

Consumer goods: Non-durable

  Senior Secured Loan — Term Loan
7.0% Cash, Due 9/15
   2,925,620    2,925,620    2,925,620 
                   

Key Safety Systems, Inc.9, 11

Automotive

  Senior Secured Loan — Initial Term Loan
4.8% Cash, Due 5/18
   2,692,152    2,679,887    2,696,459 
                

Kinetic Concepts, Inc.9

Healthcare, Education and Childcare

  Senior Secured Loan — Dollar Term D-1 Loan
4.5% Cash, Due 5/18
   1,989,979    2,003,621    2,003,661 
                   

Kinetic Concepts, Inc.9, 11

Healthcare, Education and Childcare

  Senior Secured Loan — Dollar Term D-1 Loan
4.5% Cash, Due 5/18
   1,994,979    2,012,272    2,008,695 
                

Landslide Holdings, Inc. (Crimson Acquisition Corp.)9, 11

High Tech Industries

  Senior Secured Loan — Initial Term Loan
5.3% Cash, Due 8/19
   3,482,500    3,492,130    3,483,893 
                   

LBREP/L-Suncal Master I LLC7, 9

Construction & Building

  Senior Secured Loan — Term Loan (First Lien)
7.5% Cash, Due 1/10
   3,034,968    3,034,968    40,669 
                

LTS Buyer LLC (Sidera Networks, Inc.)9

Telecommunications

  Senior Secured Loan — Term B Loan (First Lien)
4.5% Cash, Due 4/20
   3,980,000    3,974,154    4,003,024 
                   

MB Aerospace ACP Holdings III Corp.9

Aerospace and Defense

  Senior Secured Loan — Term Loan
6.0% Cash, Due 5/19
  $3,980,000   $3,944,023   $3,980,796 
                

Medical Specialties Distributors, LLC9, 11

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term Loan
6.5% Cash, Due 12/19
   4,000,000    3,960,421    3,999,200 

 

21
 

 

Portfolio Company / Principal Business   Investment
Interest Rate¹ / Maturity
  Principal   Cost   Fair Value2 

Michael Foods Group, Inc. (f/k/a M-Foods Holdings, Inc.)9, 11

Beverage, Food and Tobacco

  Senior Secured Loan — Term B Facility
4.3% Cash, Due 2/18
   1,751,716    1,761,555    1,753,116 
                

Nellson Nutraceutical, LLC9, 11

Beverage, Food and Tobacco

  Senior Secured Loan — Term Loan
6.8% Cash, Due 8/18
   1,995,000    1,981,056    1,995,000 
                   

Ozburn-Hessey Holding Company LLC9, 11

Transportation: Cargo

  Senior Secured Loan — Term Loan
6.8% Cash, Due 5/19
   3,548,085    3,536,235    3,549,504 
                

PetCo Animal Supplies, Inc.9, 11

Retail

  Senior Secured Loan — New Loans
4.0% Cash, Due 11/17
   1,979,592    1,987,274    1,992,746 
                   

Pharmaceutical Product Development, Inc. (Jaguar Holdings, LLC)9

Healthcare & Pharmaceuticals

  Senior Secured Loan — 2013 Term Loan
4.0% Cash, Due 12/18
   3,517,594    3,529,732    3,546,526 
                

Puerto Rico Cable Acquisition Company Inc.9

Media: Broadcasting & Subscription

  Senior Secured Loan — Term Loan
5.5% Cash, Due 7/18
   980,693    982,374    981,086 
                   

Puerto Rico Cable Acquisition Company Inc.9, 11

Media: Broadcasting & Subscription

  Senior Secured Loan — Term Loan
5.5% Cash, Due 7/18
   2,942,080    2,928,491    2,943,257 
                

Sandy Creek Energy Associates, L.P.9, 11

Utilities: Electric

  Senior Secured Loan — Term Loan
5.0% Cash, Due 11/20
   3,000,000    2,985,253    3,005,625 
                   

SGF Produce Holding Corp.(Frozsun, Inc.)9

Beverage, Food and Tobacco

  Senior Secured Loan — Term Loan
5.0% Cash, Due 3/19
   2,213,423    2,193,867    2,213,645 
                

SGF Produce Holding Corp.(Frozsun, Inc.)9, 11

Beverage, Food and Tobacco

  Senior Secured Loan — Term Loan
5.0% Cash, Due 3/19
   3,475,281    3,454,967    3,475,629 
                   

Spin Holdco Inc.9

Consumer goods: Durable

  Senior Secured Loan — Initial Term Loan (First Lien)
4.3% Cash, Due 11/19
   1,246,875    1,245,425    1,255,454 

 

22
 

 

Portfolio Company / Principal Business   Investment
Interest Rate¹ / Maturity
  Principal   Cost   Fair Value2 

Spin Holdco Inc.9, 11

Consumer goods: Durable

  Senior Secured Loan — Initial Term Loan (First Lien)
4.3% Cash, Due 11/19
  $2,743,125    2,742,255    2,761,998 
                   

Stafford Logistics, Inc.(dba Custom Ecology, Inc.)9, 11

Environmental Industries

  Senior Secured Loan — Term Loan
6.8% Cash, Due 6/19
   2,985,000    2,957,663    2,985,896 
                

Steinway Musical Instruments, Inc.9

Hotel, Gaming & Leisure

  Junior Secured Loan — Loan (Second Lien)
9.3% Cash, Due 9/20
   1,000,000    990,403    1,001,900 
                   

Sun Products Corporation, The (fka Huish Detergents Inc.)9, 11

Consumer goods: Non-durable

  Senior Secured Loan — Tranche B Term Loan
5.5% Cash, Due 3/20
   3,970,000    3,941,540    3,780,433 
                

TPF II LC, LLC (TPF II Rolling Hills, LLC)9, 11

Utilities: Electric

  Senior Secured Loan — Term Loan
6.5% Cash, Due 8/19
   2,985,000    2,942,573    2,987,985 
                   

Trico Products Corporation9

Automotive

  Senior Secured Loan — Term Loan
6.3% Cash, Due 7/16
   4,864,844    4,843,792    4,863,871 
                

Trico Products Corporation9, 11

Automotive

  Senior Secured Loan — Term Loan
6.3% Cash, Due 7/16
   3,891,875    3,875,033    3,891,097 
                   

Trimaran Advisors, L.L.C.9

Banking, Finance, Insurance & Real Estate

  Senior Unsecured Loan — Revolving Credit Facility
9.0% Cash, Due 11/17
   23,000,000    23,000,000    23,000,000 
                

TriZetto Group, Inc. (TZ Merger Sub, Inc.)9, 11

High Tech Industries

  Senior Secured Loan — Term Loan
4.8% Cash, Due 5/18
   3,676,604    3,684,234    3,639,857 
                   

TRSO I, Inc.9

Energy: Oil & Gas

  Junior Secured Loan — Term Loan (Second Lien)
11.0% Cash, Due 12/17
   10,400,000    10,234,558    10,608,000 
                

TUI University, LLC9

Services: Business

  Senior Secured Loan — Term Loan (First Lien)
7.3% Cash, Due 10/14
   1,647,733    1,637,909    1,614,779 

 

23
 

 

Portfolio Company / Principal Business   Investment
Interest Rate¹ / Maturity
  Principal   Cost   Fair Value2 

TWCC Holding Corp.9

Media: Broadcasting & Subscription

  Junior Secured Loan — Term Loan (Second Lien)
7.0% Cash, Due 6/20
  $1,000,000    1,004,735    1,030,005 
                

TWCC Holding Corp.9, 11

Media: Broadcasting & Subscription

  Senior Secured Loan — Term Loan
3.5% Cash, Due 2/17
   1,965,101    1,980,166    1,975,379 
                   

Univar Inc.9, 11

Chemicals, Plastics and Rubber

  Senior Secured Loan — Term B Loan
5.0% Cash, Due 6/17
   2,924,675    2,921,597    2,906,601 
                

Vertafore, Inc.9, 11

High Tech Industries

  Senior Secured Loan — Term Loan (2013)
4.3% Cash, Due 10/19
   1,202,077    1,201,491    1,203,039 
                   

Vestcom International, Inc. (fka Vector Investment Holdings, Inc.)9, 11

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Term Loan
7.0% Cash, Due 12/18
   2,977,500    2,939,085    2,978,095 
                

Weiman Products, LLC9

Consumer goods: Non-durable

  Senior Secured Loan — Term Loan
6.3% Cash, Due 11/18
   1,000,000    990,219    990,000 
                   

Weiman Products, LLC9, 11

Consumer goods: Non-durable

  Senior Secured Loan — Term Loan
6.3% Cash, Due 11/18
   4,000,000    3,960,876    3,960,000 
                

Wholesome Sweeteners, Inc.9

Beverage, Food and Tobacco

  Junior Secured Loan — Subordinated Note (Second Lien)
14.0% Cash, Due 10/17
   6,648,596    6,614,827    6,715,082 

 

24
 

 

Portfolio Company / Principal Business   Investment
Interest Rate¹ / Maturity
  Principal   Cost   Fair Value2 

WideOpenWest Finance , LLC9

Telecommunications

  Senior Secured Loan — Term B Loan
4.8% Cash, Due 4/19
  $2,984,962    3,005,566    3,005,111 
                

WireCo WorldGroup Inc. 9

Capital Equipment

  Senior Unsecured Bond — 11.75% - 05/2017
11.8% Cash, Due 5/17
   5,000,000    4,977,052    5,121,000 
                   

WireCo WorldGroup Inc. 9, 11

Capital Equipment

  Senior Unsecured Bond — 11.75% - 05/2017
11.8% Cash, Due 5/17
   3,000,000    2,986,231    3,072,600 
                

WTG Holdings III Corp.9

Environmental Industries

  Junior Secured Loan — Term Loan (Second Lien)
8.5% Cash, Due 1/22
   4,000,000    3,980,000    3,980,000 
                   
Total Investment in Debt Securities                  
(107% of net asset value at fair value)     $276,978,279   $275,213,594   $266,830,427 

 

25
 

 

Equity Securities Portfolio

 

Portfolio Company / Principal Business   Investment  Percentage
Interest/Shares
   Cost   Fair Value2 

Aerostructures Holdings L.P.5, 9

Aerospace and Defense

  Partnership Interests   1.2%  $1,000,000   $1,000 
                

Aerostructures Holdings L.P.5, 9

Aerospace and Defense

  Series A Preferred Interests   1.2%   250,961    207,988 
                   

Bankruptcy Management Solutions, Inc.5, 9

Banking, Finance, Insurance & Real Estate

  Class A Warrants   1.7%   -    - 
                

Bankruptcy Management Solutions, Inc.5, 9

Banking, Finance, Insurance & Real Estate

  Class B Warrants   1.7%   -    - 
                   

Bankruptcy Management Solutions, Inc.5, 9

Banking, Finance, Insurance & Real Estate

  Class C Warrants   1.7%   -    - 
                

Bankruptcy Management Solutions, Inc.5, 9

Banking, Finance, Insurance & Real Estate

  Common Stock 2013   0.8%   314,325    309,363 
                   

Caribe Media Inc. (fka Caribe Information Investments Incorporated)5, 9

Media: Advertising, Printing & Publishing

  Common   -    359,765    692,710 
                   

Coastal Concrete Holding II, LLC5, 9

Construction & Building

  Class A Units   10.8%   8,625,626    1,000 
                   

eInstruction Acquisition, LLC5, 9

Services: Consumer

  Membership Units   1.1%   1,079,617    1,000 
                

FP WRCA Coinvestment Fund VII, Ltd.3, 5,

Capital Equipment

  Class A Shares   1,500    1,500,000    1,735,604 
                   

Perseus Holding Corp.5, 9

Hotel, Gaming & Leisure

  Common   0.2%   400,000    1,000 

 

Portfolio Company / Principal Business   Investment  Percentage
Interest/Shares
   Cost   Fair Value2 

Plumbing Holdings Corporation5, 9

Consumer goods: Durable

  Common   7.8%  $-   $1,581,481 
                   

Plumbing Holdings Corporation5, 9

Consumer goods: Durable

  Preferred   15.5%   3,725,390    4,152,689 
                   

TRSO II, Inc.5, 9

Energy: Oil & Gas

  Common Stock   5.4%   1,500,000    2,322,563 
                   
Total Investment in Equity Securities                  
(4% of net asset value at fair value)          $18,755,684   $11,006,398 

 

26
 

 

CLO Fund Securities

 

CLO Equity Investments

 

Portfolio Company   Investment  Percentage
Interest
   Cost   Fair Value2 
Grant Grove CLO, Ltd.3  Subordinated Securities   22.2%  $4,715,553   $1,052,164 
Katonah III, Ltd.3, 10  Preferred Shares   23.1%   1,618,611    325,000 
Katonah V, Ltd.3, 10  Preferred Shares   26.7%   3,320,000    1,000 
Katonah VII CLO Ltd.3, 6  Subordinated Securities   16.4%   4,499,793    1,478,978 
Katonah VIII CLO Ltd3, 6  Subordinated Securities   10.3%   3,390,005    1,230,731 
Katonah IX CLO Ltd3, 6  Preferred Shares   6.9%   2,023,287    829,739 
Katonah X CLO Ltd 3, 6  Subordinated Securities   33.3%   11,770,993    5,932,163 
Katonah 2007-I CLO Ltd.3, 6  Preferred Shares   100.0%   31,064,973    27,758,379 
Trimaran CLO IV, Ltd.3, 6  Preferred Shares   19.0%   3,542,300    2,519,210 
Trimaran CLO V, Ltd.3, 6  Subordinate Notes   20.8%   2,721,500    1,844,276 
Trimaran CLO VI, Ltd.3, 6  Income Notes   16.2%   2,784,200    1,981,948 
Trimaran CLO VII, Ltd.3, 6  Income Notes   10.5%   3,133,900    2,513,261 
Catamaran CLO 2012-1 Ltd.3, 6  Subordinated Notes   24.9%   8,943,900    6,846,520 
Catamaran CLO 2013-1 Ltd.3, 6  Subordinated Notes   23.5%   9,960,400    8,225,100 
Dryden 30 Senior Loan Fund3  Subordinated Notes   7.5%   3,063,200    2,973,750 
                   
Total Investment in CLO Equity Securities          $96,552,615   $65,512,219 

 

CLO Rated-Note Investment

 

Portfolio Company   Investment  Percentage
Interest
   Cost   Fair Value2 
Katonah 2007-I CLO Ltd.3, 6  Floating - 04/2022 - B2L - 48602NAA8
Par Value of $10,500,000
.0%, Due 4/22
   100.0%  $1,300,937   $9,740,000 
Catamaran CLO 2012-1 Ltd.3, 6  Float - 12/2023 - F - 14889CAE0
Par Value of $4,500,000
.0%, Due 12/23
   42.9%   3,843,398    4,200,001 
                   
Total Investment in CLO Rated-Note          $5,144,335   $13,940,001 
                   
Total Investment in CLO Fund Securities                  
(32% of net asset value at fair value)          $101,696,950   $79,452,220 

 

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Asset Manager Affiliates

 

Portfolio Company / Principal Business   Investment  Percentage
Interest
   Cost   Fair Value2 
Asset Manager Affiliates9  Asset Management Company   100.0%  $83,378,741   $76,148,000 
                   
Total Investment in Asset Manager Affiliates          $83,378,741   $76,148,000 
(30% of net asset value at fair value)                  

 

Time Deposits and Money Market Account

 

Time Deposit and Money Market Accounts   Investment  Yield   Par / Cost   Fair Value2 
JP Morgan Business Money Market Account8, 9  Money Market Account   0.15%   237,088    237,088 
US Bank Money Market Account9  Money Market Account   0.30%   6,875,861    6,875,861 
                   
Total Investment in Time Deposit and Money Market Accounts          $7,112,949   $7,112,949 
(3% of net asset value at fair value)                  
                   
Total Investments4          $486,157,918   $440,549,994 
(176% of net asset value at fair value)                  

 

See accompanying notes to consolidated financial statements.

 

1 A majority of the variable rate loans to the Company’s portfolio companies bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at December 31, 2013.
2 Reflects the fair market value of all investments as of December 31, 2013, as determined by the 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 $486 million. The aggregate gross unrealized appreciation is approximately $15 million, the aggregate gross unrealized depreciation is approximately $61 million, and the net unrealized depreciation is approximately $46 million.
5 Non-income producing.
6 An affiliate CLO Fund managed by an Asset Manager Affiliate (as such term is defined in the notes to the consolidated financial statements).

 

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7 Loan or debt security is on non-accrual status and therefore is considered non-income producing.
8 Money market account holding restricted cash and security deposits for employee benefit plans.
9 Qualified asset for purposes of section 55(a) of the Investment Company Act of 1940.
10 As of December 31, 2013, this CLO Fund Security was not providing a dividend distribution.
11 As of December 31, 2013, investment was owned by KCAP Senior Funding I, LLC and has been pledged to secure KCAP Senior Funding I, LLC’s obligations.

 

 

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KCAP FINANCIAL, INC.

CONSOLIDATED FINANCIAL HIGHLIGHTS

(unaudited)

 

   Six Months Ended
June 30, 
 
   2014    2013  
         
 Per Share Data:           
 Net asset value, at beginning of period  $7.51   $7.85 
 Net investment income1   0.48    0.43 
 Net realized gain (losses) from investments1   0.01    (0.05)
 Net change in unrealized depreciation on investments1   (0.02)   0.12 
 Net increase in net assets resulting from operations   0.47    0.50 
 Net (decrease) in net assets resulting from distributions:          
 Distribution of net investment income   (0.24)   (0.24)
 Return of capital   (0.01)   (0.04)
 Net decrease in net assets resulting from distributions   (0.25)   (0.28)
 Net (decrease) increase in net assets relating to stock-based transactions:          
 Offering of common stock   -    0.16 
 Issuance of common stock under dividend reinvestment plan   0.01    0.01 
 Stock based compensation   (0.07)   - 
 Net increase in net assets relating to stock-based transactions   (0.06)   0.17 
           
 Net asset value, end of period  $7.67   $8.24 
 Total net asset value return2   5.5%   8.4%
           
 Ratio/Supplemental Data:           
 Per share market value at beginning of period  $8.07   $9.19 
 Per share market value at end of period  $8.49   $11.26 
 Total market return3   8.3%   25.5%
 Shares outstanding at end of period   33,725,223    33,298,674 
 Net assets at end of period  $258,514,055   $274,307,840 
 Portfolio turnover rate4   21.2%   37.7%
 Average par debt outstanding  $195,658,000   $104,537,912 
 Average par debt outstanding per share   5.8%   7.8%
 Asset coverage ratio   231%   239%
 Ratio of net investment income to average net assets5   12.5%   10.9%
 Ratio of total expenses to average net assets5   8.4%   7.3%
 Ratio of interest expense to average net assets5   4.6%   3.6%
 Ratio of non-interest expenses to average net assets5   3.8%   3.7%

 

 

1      Based on weighted average number of common shares outstanding-basic for the period.

2      Total net asset value return (not annualized) equals the change in the net asset value per share over the beginning of period net asset value per share plus distributions (including any return of capital), divided by the beginning net asset value per share.

3      Total market return equals the change in the ending market price over the beginning of period price per share plus distributions (including any return of capital), divided by the beginning price.

4      Not annualized. Portfolio turnover rate equals the year-to-date sales and paydowns over the average of the invested assets at fair value.

5      Annualized

 

See accompanying notes to 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 (the “1940 Act”).

 

We have three principal areas of investment:

 

First, we originate, structure, and invest 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 we may invest in the equity securities of privately held middle market companies.

 

Second, we have invested in asset management companies (Katonah Debt Advisors, L.L.C. and Trimaran Advisors, L.L.C., collectively the “Asset Manager Affiliates”) which manage collateralized loan obligations (“CLOs”).

 

Third, we invest in debt and subordinated securities issued by CLOs (“CLO Fund Securities”). These CLO Fund Securities are primarily managed by our Asset Manager Affiliates, but from time-to-time we make investments in CLO Fund Securities managed by other asset managers. The CLOs typically invest in broadly syndicated loans, high-yield bonds and other credit instruments.

 

The Company may also invest in other investments such as loans to larger, publicly-traded companies, high-yield bonds and distressed debt securities. The Company may also receive warrants or options to purchase common stock in connection with its debt investments.

 

The Company has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a RIC, the Company must, among other things, meet certain source-of-income, and asset diversification and annual distribution requirements. As a RIC, the Company generally will not have to pay corporate-level U.S. federal income taxes on any income that it distributes in a timely manner to its stockholders.

 

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 accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required for annual consolidated financial statements. The unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Form 10-K for the year ended December 31, 2013, 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 management to make significant estimates and assumptions including with respect to the fair value of investments that do not have a readily available market value. Actual results could differ from those estimates, and the differences could be material. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for the full year. Certain prior period amounts have been reclassified to conform to the current year’s 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 and KCAP Senior Funding I Holdings, LLC in its consolidated financial statements as they are operated solely for investment activities of the Company. The creditors of KCAP Senior Funding I, LLC have received security interests in the assets owned by KCAP Senior Funding I, LLC and such assets are not intended to be available to the creditors of KCAP Financial, Inc., or any other affiliate.

 

In accordance with Article 6 of Regulation S-X under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company does not consolidate portfolio company investments, including those in which it has a controlling interest (e.g., the Asset Manager Affiliates), unless the portfolio company is another investment company.

 

The Asset Manager Affiliates are subject to Accounting Standards Codification Topic 810, “Consolidation” and although the Company cannot consolidate the financial statements of portfolio company investments, this guidance impacts the required disclosures relating to the Asset Manager Affiliates, as it requires the Asset Manager Affiliates to consolidate the financial statements of managed CLO Funds. As a result of the consolidation of the financial statements of the CLOs into the financial statements of the Asset Manager Affiliates, the Asset Manager Affiliates qualify as a “significant subsidiary” and, as a result, the Company is required to include additional financial information regarding the Asset Manager Affiliates in its filings with the SEC. This additional financial information regarding the Asset Manager Affiliates does not directly impact the financial position or results of operations of the Company.

 

In addition, in accordance with Rules 3-09, Rule 4-08(g) and 1-02 of Regulation S-X promulgated by the SEC, additional financial information with respect to two of the CLO Funds in which the Company has an investment, Katonah 2007-I CLO Ltd. (“Katonah 2007-I CLO”) and Katonah X CLO Ltd. (“Katonah X CLO”), are required to be included in the Company’s SEC filings. The additional financial information regarding the Asset Manager Affiliates, Katonah 2007-I CLO (pursuant to Rule 3-09) and Katonah X CLO (pursuant to Rule 4-08(g)) is set forth in Note 5 to these consolidated financial statements.

 

In June 2013, the FASB issued Accounting Standards Update 2013-08 “Financial Services-Investment Companies (Topic 946) Amendments to the Scope, Measurement, and Disclosure Requirements” (“ASU 2013-08”). ASU 2013-08 clarifies the characteristics of an investment company and requires reporting entities to disclose information about the following items: (i) the type and amount of financial support provided to investee companies, including situations in which the Company assisted an investee in obtaining financial support, (ii) the primary reasons for providing the financial support, (iii) the type and amount of financial support the Company is contractually required to provide to an investee, but has not yet provided, and (iv) the primary reasons for the contractual requirement to provide the financial support. The Company adopted ASU 2013-08 during the six months ended June 30, 2014 as the amendments in ASU 2013-08 effective January 1, 2014.

 

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 six months ended June 30, 2014, the Company invested $88 million in 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, 2014, the Company holds loans it has made to 80 investee companies with aggregate principal amounts of $236 million. The details of such loans have been disclosed on the consolidated schedule of investments as well as in Note 4 – Investments and Fair Value Measurements. In addition to providing loans to investee companies, from time to time the Company assists investee companies in securing financing from other sources by introducing such investee companies to sponsors or by leading a syndicate of lenders to provide the investee companies with financing. During the six month period ended June 30, 2014, the Company did not make any such introductions or lead any syndicates.

 

Investments

 

Investment transactions are recorded on the applicable trade date. Realized gains or losses are determined using the specific identification method.

 

Investment Income. Interest income is recorded on an accrual basis and includes the accretion of discounts and amortization of premiums. Discounts from and premiums to par value on debt securities purchased are accreted into or amortized as a reduction of interest income over the life of the respective debt security using the effective yield method. The amortized cost of debt securities represents the original cost adjusted for the accretion of discounts and amortization of premiums, if any.

 

Generally, when interest and/or principal payments on a debt security become past due, or if the Company otherwise does not expect the borrower to be able to service its debt and other obligations, the Company will place the debt security on non-accrual status and will generally cease recognizing interest income on that debt security for financial reporting purposes until all principal and interest have been brought current through payment or due to restructuring such that the interest income is deemed to be collectible.

 

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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 that have a market price not readily available are valued by the Board of Directors based on detailed analyses prepared by management, the Valuation Committee of the Board of Directors, and, in certain circumstances, third parties with valuation expertise. Valuations are conducted by management and approved by the Board of Directors on 100% of the investment portfolio at the end of each quarter. The Company follows the provisions of ASC 820: Fair Value Measurements and Disclosures (“ASC 820: Fair Value”). This standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. ASC 820: Fair Value defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Subsequent to the adoption of ASC 820: Fair Value, the FASB has issued various staff positions clarifying the initial standard, as noted below.

 

The FASB issued guidance that clarified and required disclosures about fair value measurements. These include requirements to disclose the amounts and reasons for significant transfers between Level I and Level II, as well as significant transfers in and out of Level III of the fair value hierarchy. The guidance also required that purchases, sales, issuances and settlements be presented gross in the Level III reconciliation.

 

ASC 820: Fair Value requires the disclosure in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period.

 

The Company utilizes an independent valuation firm to provide third party valuation consulting services. Each quarter the independent valuation firm performs 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 inputs 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 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 taking into account 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.

 

The Company relies on several techniques for valuing its portfolio of investments, including:

 

•   “Enterprise Value” – when there is no liquid public market, the investment is carried at fair value based on the enterprise value of the portfolio company, which is determined using (i) valuation data from publicly traded comparables, and (ii) a discounted cash flow analysis based on projected performance of an investment.

 

•   The “Income Approach” – 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 “Market Approach” – if market quotations are readily available, valuations are based upon the closing public market prices on the balance sheet date. Securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.

 

•   “Discounted Cash Flow” - a discounted cash flow model is based on the net present value of future cash flows, discounted at a rate appropriate for each cash flow.

 

33
 

 

Debt Securities. The Company values its debt securities using primarily Enterprise Value, Income Approach and Market Approach.

 

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 determine fair value. Valuations from third party pricing services may be used as an indication of fair value, depending on the volume and reliability of the valuation, sufficient and reasonable correlation of bid and ask quotes, and, most importantly, the level of actual trading activity. However, if the Company has been unable to identify directly comparable market indices or other market guidance that correlate directly to the types of investments the Company owns, the Company will determine fair value using alternative methodologies such as available market data, as adjusted, to reflect the types of assets the Company owns, their structure, qualitative and credit attributes and other asset-specific characteristics.

 

The Company 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 the two benchmark indices, these market indices may require significant adjustment to better correlate such market data for the calculation of fair value of the investment under the Income Approach. Such adjustments require judgment and may be material to the calculation of fair value. Further adjustments to the discount rate may be applied to reflect other market conditions or the perceived credit risk of the borrower. When broad market indices are used as part of the valuation methodology, their use is subject to adjustment for many factors, including priority, collateral used as security, structure, performance and other quantitative and qualitative attributes of the asset being valued. The resulting present value determination is then weighted along with any quotes from observable transactions and broker/pricing quotes. If such quotes are indicative of actual transactions with reasonable trading volume at or near the valuation date that are not liquidation or distressed sales, relatively more reliance will be put on such quotes to determine fair value. If such quotes are not indicative of market transactions or are insufficient as to volume, reliability, consistency or other relevant factors, such quotes will be compared with other fair value indications and given relatively less weight based on their relevancy. Other significant assumptions, such as coupon and maturity, are asset-specific and are noted for each investment in the Schedules of Investments.

 

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.

 

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, as described in Note 4 below, 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 a percentage of assets under management. The Asset Manager Affiliates are classified as a Level III investment (as described below). 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 credit instruments issued by corporations.

 

34
 

 

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.

 

3. EARNINGS 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, 2014 and 2013 (unaudited):

 

   (unaudited)   (unaudited)  
   Three Months Ended June 30,   Six Months Ended June 30,  
   2014   2013   2014   2013  
                 
Net increase in net assets resulting from operations   $12,252,662   $8,528,825   $15,694,256   $15,742,105 
Net decrease in net assets allocated to unvested share awards    (115,402)   (47,138)   (138,230)   (53,665)
Interest on Convertible Notes    1,072,050    1,122,357    2,144,100    2,434,857 
Amortization of Capitalized Costs on Convertible Notes    104,430    92,360    206,867    198,475 
Net increase in net assets available to common stockholders   $13,313,740   $9,696,404   $17,906,993   $18,321,772 
Weighted average number of common shares outstanding for basic shares computation    33,405,189    33,040,155    33,371,764    31,163,596 
Effect of dilutive securities - stock options    11,858    16,330    11,903    15,717 
Effect of dilutive Convertible Notes    6,306,217    6,338,639    6,306,217    6,843,429 
Weighted average number of common and common stock equivalent shares outstanding for diluted shares computation    39,723,264    39,395,124    39,689,884    38,022,742 
Net increase in net assets per basic common shares:                     
Net increase in net assets from operations   $0.37   $0.26   $0.47   $0.51 
Net increase in net assets per diluted shares:                     
Net increase in net assets from operations   $0.34   $0.25   $0.45   $0.48 

 

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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.

 

For the three months ended June 30, 2014 and 2013, options to purchase 11,858 and 16,330 shares of common stock, respectively, were included in the computation of diluted earnings per share. For the six months ended June 30, 2014 and 2013, options to purchase 11,903 and 15,717 shares of common stock, respectively, were included in the computation of diluted earnings per share.

 

The Company’s Convertible Notes are included in the computation of the diluted net increase or decrease in net assets resulting from operations per share by application of the “if-converted method.” Under the if-converted method, interest charges applicable to the convertible notes for the period are added to the reported net increase or decrease in net assets resulting from operations and the full amount of shares (pro-rata if not outstanding for the full period) that would be issued are added to weighted average basic shares. Convertible notes are considered anti-dilutive only when its interest per share upon conversion exceeds the basic net increase or decrease in net assets resulting from operations per share. For the three months and six months ended June 30, 2014, the effects of the convertible notes are dilutive.

 

The if-converted method of computing the dilutive effects on convertible notes assumes a conversion even if the contracted conversion price exceeds the market value of the shares. As of June 30, 2014 the current conversion rate of the Convertible Notes is approximately 128.6773 shares of our common stock per $1,000 principal amount of the conversion rate, equivalent to a conversion price of approximately $7.77 per share of the Company’s common stock. Upon conversion, the Company may issue the full amount of common stock and retire the full amount of debt outstanding or, at its option, settle the conversion in cash.

 

4. INVESTMENTS

 

The following table shows the Company’s portfolio by security type at June 30, 2014 and December 31, 2013:

 

   June 30, 2014 (unaudited)   December 31, 2013 
Security Type  Cost   Fair Value      Cost   Fair Value    
Money Market Accounts²  $5,610,941   $5,610,941    2   $7,112,949   $7,112,949    3 
Senior Secured Loan   159,600,198    153,304,076    60    175,021,272    168,188,453    67 
Junior Secured Loan   47,500,076    45,264,099    18    50,831,407    48,443,384    19 
Senior Unsecured Loan   27,013,567    27,013,567    10    23,000,000    23,000,000    9 
First Lien Bond   2,952,225    2,398,500    1    2,948,332    2,546,400    2 
Senior Subordinated Bond   4,272,110    4,293,098    2    1,037,707    1,051,540    - 
Senior Unsecured Bond   10,946,659    11,433,738    4    10,855,804    11,381,100    5 
Senior Secured Bond   1,517,375    1,605,000    1    1,519,072    1,619,550    1 
CLO Fund Securities   113,748,903    91,730,898    35    101,696,950    79,452,220    32 
Equity Securities   16,289,233    8,758,971    3    18,755,684    11,006,398    4 
Preferred   10,104,717    10,711,000    4    10,000,000    10,600,000    4 
Asset Manager Affiliates   83,924,720    75,302,000    29    83,378,741    76,148,000    30 
Total  $483,480,724   $437,425,888    169%  $486,157,918   $440,549,994    176%

 

 

¹Calculated as a percentage of Net Asset Value.
²Includes restricted cash held under employee benefit plans.

 

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The industry concentrations based on the fair value of the Company’s investment portfolio as of June 30, 2014 and December 31, 2013, were as follows:

 

   June 30, 2014 (unaudited)    December 31, 2013³  
Industry Classification   Cost   Fair Value   %1   Cost   Fair Value   %1 
Aerospace and Defense   $9,238,709   $8,331,245    3%  $9,244,538   $8,100,895    3%
Asset Management Company2   83,924,720    75,302,000    30    83,378,741    76,148,000    30 
Automotive    14,929,935    14,980,721    6    15,248,090    15,306,403    6 
Banking, Finance, Insurance & Real Estate    30,822,276    30,908,188    12    30,859,620    31,011,964    12 
Beverage, Food and Tobacco    24,392,212    24,607,779    10    33,758,684    34,026,889    14 
Capital Equipment    11,453,990    12,392,098    5    11,450,641    11,792,925    5 
Chemicals, Plastics and Rubber    3,397,266    3,415,763    1    2,921,597    2,906,601    1 
CLO Fund Securities    113,748,903    91,730,898    36    101,696,950    79,452,220    33 
Construction & Building    18,152,025    119,659    -    18,224,720    190,244    - 
Consumer goods: Durable    -    1,382,237    1    7,713,071    9,751,622    4 
Consumer goods: Non-durable    20,587,792    20,086,205    8    18,864,695    18,266,939    7 
Energy: Oil & Gas    2,486,078    3,816,887    1    11,734,558    12,930,563    5 
Environmental Industries    10,866,389    10,913,691    4    6,937,663    6,965,896    3 
Forest Products & Paper    5,931,335    5,930,000    2    -    -    - 
Healthcare & Pharmaceuticals    31,935,545    32,208,851    12    24,146,383    24,061,764    10 
Healthcare, Education and Childcare    -    -    -    6,908,414    7,199,856    3 
High Tech Industries    15,279,291    15,388,010    6    17,989,624    17,989,034    7 
Hotel, Gaming & Leisure    2,819,674    2,410,660    1    3,825,126    3,466,520    1 
Media: Advertising, Printing & Publishing    13,565,775    13,841,894    5    12,797,615    13,035,590    5 
Media: Broadcasting & Subscription    9,626,659    9,627,106    4    9,853,341    9,915,921    4 
Metals & Mining    228,563    1,000    -    228,563    1,000    - 
Retail    1,382,030    1,222,655    -    3,364,579    3,325,032    1 
Services: Business    8,494,861    8,870,365    3    2,984,555    2,999,791    1 
Services: Consumer    5,583,736    4,516,189    2    5,703,581    4,616,678    2 
Telecommunications    13,120,855    13,178,590    5    17,251,743    17,337,834    7 
Time Deposit and Money Market Accounts4   5,610,941    5,610,941    2    7,112,949    7,112,949    3 
Transportation: Cargo    20,088,919    20,735,373    8    16,030,051    16,643,254    7 
Utilities: Electric    5,812,245    5,896,883    2    5,927,826    5,993,610    2 
Total   $483,480,724   $437,425,888    169%  $486,157,918   $440,549,994    176%

 

 

1Calculated as a percentage of Net Asset Value.
2Represents the Asset Manager Affiliates.
3Certain prior year amounts have been reclassified to conform to the current year presentation.
4Includes restricted cash held under employee benefit plans.

 

The Company may invest up to 30% of the investment portfolio in “non-qualifying” opportunistic investments in debt and equity securities of CLO Funds, distressed debt or debt and equity securities of public companies. The Company expects that these public companies generally will have debt that is non-investment grade. Within this 30% of the portfolio, the Company also may invest in debt of middle market companies located outside of the United States.

 

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At June 30, 2014 and December 31, 2013, the total amount of non-qualifying assets was approximately 20% and 19% of total assets, respectively. The majority of non-qualifying assets were foreign investments which were approximately 20% and 18% of the Company’s total assets, respectively (including the Company’s investments in CLO Funds, which are typically domiciled outside the U.S. and represented approximately 20% and 18% of its total assets as of June 30, 2014 and December 31, 2013).

 

At June 30, 2014 and December 31, 2013, the Company’s ten largest portfolio companies represented approximately 43% and 42%, respectively, of the total fair value of its investments. The Company’s largest investment, the Asset Manager Affiliates, represented 17% of the total fair value of the Company’s investments at both June 30, 2014 and December 31, 2013. Excluding the Asset Manager Affiliates and CLO Fund securities, the Company’s ten largest portfolio companies represented approximately 17% and 18% of the total fair value of the Company’s investments at June 30, 2014 and December 31, 2013, respectively.

 

All CLO Funds managed by the Asset Manager Affiliates are currently making quarterly distributions to the Company with respect to its interests in the CLO Funds and are paying all senior and subordinate management fees to the Asset Manager Affiliates. With the exception of the Katonah III, Ltd. and Katonah V, Ltd. CLO Funds, all third-party managed CLO Funds are making dividend distributions to the Company.

 

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. Subsequent to the adoption of ASC 820: Fair Value, the FASB has issued various staff positions clarifying the initial standard (see Note 2 – “Significant Accounting Policies—Investments”).

 

ASC 820: Fair Value establishes the following three-level hierarchy, based upon the transparency of inputs to the fair value measurement of an asset or liability as of the measurement date:

 

Level I – Unadjusted quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I include listed equities and listed securities. As required by ASC 820: Fair Value, the Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably affect the quoted price.

 

Level II – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. Such inputs may be quoted prices for similar assets or liabilities, quoted markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full character of the financial instrument, or inputs that are derived principally from, or corroborated by, observable market information. Investments which are generally included in this category include illiquid debt securities and less liquid, privately held or restricted equity securities for which some level of recent trading activity has been observed.

 

Level III – Pricing inputs are unobservable for the investment and includes situations where there is little, if any, market activity for the investment. The inputs may be based on the 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.

 

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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. Ongoing reviews by the Company’s investment analysts, Chief Investment Officer, Valuation Committee and independent valuation firms (if engaged) may include factors such as an assessment of each underlying investment, its current and prospective operating and financial performance, consideration of financing and sale transactions with third parties, expected cash flows and market-based information, including comparable transactions, performance factors, and other investment or industry specific market data, among other factors.

 

The following table summarizes the fair value of investments by the above ASC 820: Fair Value hierarchy levels as of June 30, 2014 (unaudited) and December 31, 2013, respectively:

 

   As of June 30, 2014 (unaudited) 
   Level I   Level II   Level III   Total 
Money market accounts  $   $5,610,941   $   $5,610,941 
Debt securities       54,140,212    201,882,866    256,023,078 
CLO Fund securities           91,730,898    91,730,898 
Equity securities           8,758,971    8,758,971 
Asset Manager Affiliates           75,302,000    75,302,000 
Total  $   $59,751,153   $377,674,735   $437,425,888 

 

   As of December 31, 2013 
   Level I   Level II   Level III   Total 
Money market accounts  $   $7,112,949   $   $7,112,949 
Debt securities       68,733,053    198,097,374    266,830,427 
CLO Fund securities           79,452,220    79,452,220 
Equity securities           11,006,398    11,006,398 
Asset Manager Affiliates           76,148,000    76,148,000 
Total  $   $75,846,002   $364,703,992   $440,549,994 

 

As a BDC, the Company is required to invest primarily in the debt and equity of non-public companies for which there is little, if any, market-observable information. As a result a significant portion of the 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 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.

 

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Values derived for the Asset Manager Affiliates using comparable public/private companies generally 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. Investments measured at fair value for which the Company has used unobservable inputs to determine fair value are as follows:

 

   Six Months Ended June 30, 2014 (unaudited) 
   Debt Securities   CLO Fund
Securities
   Equity
Securities
   Asset Manager
Affiliate
   Total 
Balance, December 31, 2013  $198,097,374   $79,452,220   $11,006,398   $76,148,000   $364,7