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 September 30, 2016
   
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

(I.R.S. Employer

Incorporation or organization)

Identification Number)

 

295 Madison Avenue, 6th Floor

New York, New York 10017

(Address of principal executive offices)

 

(212) 455-8300

(Registrant's telephone number, including area code)

 

 

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 ¨ Accelerated filer x
         

Non-accelerated filer

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

 

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

 

The number of outstanding shares of common stock of the registrant as of November 1, 2016 was 37,178,294.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
  Part I. Financial Information  
     
Item 1. Consolidated Financial Statements 1
     
  Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015 1
     
  Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2016 and 2015 2
     
  Consolidated Statements of Changes in Net Assets (unaudited) for the nine months ended September 30, 2016 and 2015 3
     
  Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2016 and 2015 4
     
  Consolidated Schedules of Investments as of September 30, 2016  (unaudited) and December 31, 2015 5
     
  Consolidated Financial Highlights (unaudited) for the nine months ended September 30, 2016 and 2015 27
     
  Notes to Consolidated Financial Statements (unaudited) 28
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 56
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 74
     
Item 4. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 75
     
Item 5. Controls and Procedures 75
     
  Part II. Other Information  
     
Item 1. Legal Proceedings 76
     
Item 1A. Risk Factors 76
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 76
     
Item 3. Defaults Upon Senior Securities 76
     
Item 4. Mine Safety Disclosures 76
     
Item 5. Other Information 76
     
Item 6. Exhibits 76
   
Signatures 77

 

 

 

 

KCAP FINANCIAL, INC.

 

CONSOLIDATED BALANCE SHEETS

 

   As of
September 30, 2016
   As of
December 31, 2015
 
   (unaudited)     
ASSETS          
Investments at fair value:          
Money market accounts (cost: 2016 - $15,379,713; 2015 - $2,129,381)  $15,379,713   $2,129,381 
Debt securities (cost: 2016 - $275,019,503; 2015 - $298,308,845)   263,889,236    284,639,244 
CLO Fund securities managed by affiliates (cost: 2016 - $61,430,042; 2015 - $77,764,568)   43,114,027    53,557,570 
CLO Fund securities managed by non-affiliates (cost: 2016 - $5,284,949; 2015 - $5,450,379)   2,012,892    2,314,812 
Equity securities (cost: 2016 - $10,208,846; 2015 - $10,467,786)   4,392,696    9,548,488 
Asset Manager Affiliates (cost: 2016 - $55,341,230; 2015 - $56,591,230)   43,425,000    57,381,000 
Total Investments at Fair Value (cost: 2016 - $422,664,283; 2015 - $450,712,189)   372,213,564    409,570,495 
Cash   1,804,666    - 
Restricted cash   10,909,618    7,138,272 
Interest receivable   1,158,010    1,812,624 
Due from affiliates   1,743,537    2,117,095 
Other assets   279,604    566,211 
           
Total Assets  $388,108,999   $421,204,697 
           
LIABILITIES          
7.375% Notes Due 2019 (net of offering costs of: 2016 - $599,542; 2015 - $890,344)  $33,400,808   $40,509,656 
Notes issued by KCAP Senior Funding I, LLC (net of discount and offering costs of: 2016 - $2,443,275 and $2,627,599, respectively; 2015 - $2,907,595 and $3,126,009, respectively)   142,279,126    141,316,396 
Convertible Notes (net of offering costs of: 2015 - $21,292)       19,277,709 
Payable for open trades   9,652,500     
Accounts payable and accrued expenses   1,998,478    2,218,065 
Accrued interest payable   874,624    1,228,068 
Due to affiliates   90    554,333 
           
Total Liabilities   188,205,626    205,104,227 
           
COMMITMENTS AND CONTINGENCIES (Note 8)          
           
STOCKHOLDERS' EQUITY          
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 37,264,772 issued, and 37,160,770 outstanding at September 30, 2016, and 37,136,353 issued, and 37,100,005 outstanding at December 31, 2015   371,608    371,000 
Capital in excess of par value   363,417,727    361,962,511 
Excess distribution of net investment income   (23,776,687)   (21,638,184)
Accumulated net realized losses   (88,259,512)   (82,054,107)
Net unrealized depreciation on investments   (51,849,763)   (42,540,750)
           
Total Stockholders' Equity   199,903,373    216,100,470 
           
Total Liabilities and Stockholders' Equity  $388,108,999   $421,204,697 
           
NET ASSET VALUE PER COMMON SHARE  $5.38   $5.82 

 

See accompanying notes to consolidated financial statements.

 

 1 

 

 

KCAP FINANCIAL, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2016   2015   2016   2015 
                 
Investment Income:                    
Interest from investments in debt securities  $5,186,745   $6,302,777   $16,106,654   $18,380,536 
Interest from cash and time deposits   7,168    2,726    21,521    7,084 
Investment income on CLO Fund Securities managed by affiliates   3,307,950    3,684,802    9,595,522    11,624,644 
Investment income on CLO Fund Securities managed by non-affiliates   195,182    196,965    503,358    821,042 
Dividends from Asset Manager Affiliates       1,547,069    1,400,000    4,196,483 
Capital structuring service fees   321,744    45,009    481,456    263,074 
                     
Total investment income   9,018,789    11,779,348    28,108,511    35,292,863 
                     
Expenses:                    
Interest and amortization of debt issuance costs   2,122,325    3,007,283    6,960,355    8,965,252 
Compensation   1,199,412    892,119    3,212,886    3,022,393 
Professional fees   699,607    762,357    1,913,722    2,638,931 
Insurance   102,254    107,028    315,307    326,561 
Administrative and other   372,164    469,481    1,310,424    1,459,447 
                     
Total expenses   4,495,762    5,238,268    13,712,694    16,412,584 
                     
Net Investment Income   4,523,027    6,541,080    14,395,817    18,880,279 
Realized And Unrealized Gains (Losses) On Investments:                    
Net realized gains (losses) from investment transactions   4,647,841    (6,231,759)   (6,046,199)   (6,133,352)
Net change in unrealized appreciation (depreciation) appreciation on:                    
Debt securities   456,530    (6,334,456)   2,539,345    (7,587,070)
Equity securities   (4,579,566)   (605,432)   (4,896,852)   (868,703)
CLO Fund securities managed by affiliates   (993,011)   (261,695)   5,890,984    (5,891,498)
CLO Fund securities managed by non-affiliates   (137,193)   (152,980)   (136,490)   (301,488)
Asset Manager Affiliates investments   (1,113,000)   (8,863,069)   (12,706,000)   (5,101,483)
                     
Total net change in unrealized depreciation   (6,366,240)   (16,217,632)   (9,309,013)   (19,750,242)
                     
Net realized and unrealized depreciation on investments   (1,718,399)   (22,449,391)   (15,355,212)   (25,883,594)
                     
Realized losses on extinguishments of debt   (88,015)   (142,554)   (159,206)   (142,554)
Net Increase (Decrease) In Stockholders’ Equity Resulting From Operations  $2,716,613   $(16,050,865)  $(1,118,601)  $(7,145,869)
                     
Net Increase (Decrease) In Stockholders' Equity Resulting from Operations per Common Share:                    
Basic:  $0.07   $(0.43)  $(0.03)  $(0.19)
Diluted:  $0.07   $(0.43)  $(0.03)  $(0.19)
Net Investment Income Per Common Share:                    
Basic:  $0.12   $0.18   $0.39   $0.51 
Diluted:  $0.12   $0.18   $0.39   $0.51 
Weighted Average Shares of Common Stock Outstanding—Basic   37,152,622    37,046,906    37,142,002    36,923,212 
Weighted Average Shares of Common Stock Outstanding—Diluted   37,152,622    37,046,906    37,142,002    36,923,212 

  

See accompanying notes to consolidated financial statements.

 

 2 

 

 

KCAP FINANCIAL, INC.

 

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

 

   Nine Months Ended 
September 30,
 
   2016   2015 
         
Operations:          
Net investment income  $14,395,817   $18,880,279 
Net realized losses from investment transactions   (6,046,199)   (6,133,352)
Realized losses from extinguishments of debt   (159,206)   (142,554)
Net change in unrealized depreciation on investments   (9,309,013)   (19,750,242)
Net decrease in net assets resulting from operations   (1,118,601)   (7,145,869)
           
Stockholder distributions:   (16,534,320)   (15,313,691)
           
Capital share transactions:          
(Repurchase) issuance of common stock for:          
Common stock withheld for payroll taxes upon vesting of restricted stock   (247,926)   (220,301)
Dividend reinvestment plan   549,627    811,517 
Stock based compensation   1,154,123    1,151,525 
           
Net increase in net assets resulting from capital transactions   1,455,824    1,742,741 
           
Net assets at beginning of period   216,100,470    255,316,701 
           
Net assets at end of period (including undistributed net investment income of $0 in 2016 and $0 in 2015)  $199,903,373   $234,599,882 
           
Net asset value per common share  $5.38   $6.33 
Common shares outstanding at end of period   37,160,770    37,052,575 

 

See accompanying notes to consolidated financial statements.

 

 3 

 

 

KCAP FINANCIAL, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   Nine Months Ended
September 30,
 
   2016   2015 
         
OPERATING ACTIVITIES:          
Net decrease in stockholder's equity resulting from operations  $(1,118,601)  $(7,145,869)
Adjustments to reconcile net decrease in stockholder’s equity resulting from operations to net cash provided by in operating activities:          
Net realized losses on investment transactions   6,046,199    6,133,352 
Net change in unrealized depreciation on investments   9,309,013    19,750,242 
Purchases of investments   (54,437,487)   (100,476,581)
Proceeds from sales and redemptions of investments   75,555,567    111,864,151 
Net accretion of amortization on investments   1,859,301    6,123,977 
Amortization of original issue discount on indebtedness   464,320    452,092 
Amortization of debt issuance costs   651,298    897,566 
Realized losses on extinguishments of debt   159,206    142,554 
Payment-in-kind interest income   (975,661)   (1,097,244)
Stock-based compensation   1,154,376    1,151,525 
Changes in operating assets and liabilities:          
Increase (decrease) in payable for open trades   9,652,500    (18,293,725)
Decrease (increase) in interest receivable   654,614    (480,726)
Decrease (increase) in other assets   286,607    (358,065)
Decrease in due from affiliates   373,558    392,820 
(Decrease) increase in due to affiliates   (554,243)   282,411 
Decrease in accounts payable   (219,587)   (476,264)
Decrease in accrued interest payable   (353,444)   (705,316)
           
Net cash provided by operating activities   48,507,536    18,156,900 
           
FINANCING ACTIVITIES:          
Issuance of restricted shares   60    1,920 
Forfeitures of restricted shares   (314)   (100)
Distributions to stockholders   (15,984,693)   (23,584,369)
Repayment/repurchase of Convertible Notes   (19,299,000)   (5,000,000)
Repurchase of 7.375% Notes Due 2019   (7,399,650)    
Common Stock withheld for payroll taxes upon vesting of restricted stock   (247,926)   (220,301)
Decrease (increase) in restricted cash   (3,771,347)   10,991,426 
           
Net cash used in financing activities   (46,702,870)   (17,811,424)
           
CHANGE IN CASH   1,804,666    345,476 
CASH, BEGINNING OF PERIOD   -    1,220,798 
           
CASH, END OF PERIOD  $1,804,666   $1,566,274 
           
Supplemental Information:          
Interest paid during the period  $6,173,626   $8,320,809 
Dividends paid during the period under the dividend reinvestment plan  $549,627   $811,517 

 

See accompanying notes to consolidated financial statements.

 

 4 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of September 30, 2016

(unaudited)

 

Debt Securities Portfolio

 

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal      Amortized Cost   Fair Value 
1A Smart Start LLC 9, 10
Consumer goods: Non-durable
  Senior Secured Loan — Initial Term Loan (First Lien)
5.8% Cash, 1.0% Libor Floor, Due 2/22
  $2,977,500   $2,952,690   $2,880,136 
                   
4L Technologies Inc. (fka Clover Holdings,  Inc.) 9, 10
Consumer goods: Non-durable
  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor, Due 5/20
   2,727,465    2,711,073    2,594,096 
                   
Advanced Lighting Technologies, Inc. 9, 10
Consumer goods: Durable
  First Lien Bond — 10.5% - 06/2019 - 00753CAE2
10.5% Cash, Due 6/19
   3,000,000    3,000,000    1,035,000 
                   
Advantage Sales & Marketing Inc. 9
Services: Business
  Junior Secured Loan — Term Loan (Second Lien)
7.5% Cash, 1.0% Libor Floor, Due 7/22
   1,000,000    1,001,833    970,600 
                   
Alere Inc. (fka IM US Holdings, LLC) 10
Healthcare & Pharmaceuticals
  Senior Secured Loan — B Term Loan
4.3% Cash, 1.0% Libor Floor, Due 6/22
   3,037,968    3,031,835    3,020,880 
                   
American Seafoods Group LLC 9, 10
Beverage, Food and Tobacco
  Senior Secured Loan — Term Loan (First Lien)
6.0% Cash, 1.0% Libor Floor, Due 8/21
   3,853,704    3,837,980    3,824,030 
                   
Anaren, Inc. 9, 10
Aerospace and Defense
  Senior Secured Loan — Term Loan (First Lien)
5.5% Cash, 1.0% Libor Floor, Due 2/21
   1,876,736    1,864,940    1,841,829 
                   
Apco Holdings, Inc. 9, 10
Services: Business
  Senior Secured Loan — Initial Term Loan
7.0% Cash, 1.0% Libor Floor, Due 1/22
   3,950,000    3,844,546    3,950,000 
                   
API Technologies Corp. 9, 10
High Tech Industries
  Senior Secured Loan — Initial Term Loan
7.5% Cash, 1.0% Libor Floor, Due 4/22
   3,491,250    3,426,291    3,452,148 
                   
Aristotle Corporation, The 9, 10
Consumer goods: Non-durable
  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor, Due 6/21
   3,675,164    3,660,570    3,578,875 

 

 5 

 

  

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal      Amortized Cost   Fair Value 
Asurion, LLC (fka Asurion Corporation) 9, 10
Banking, Finance, Insurance & Real Estate
  Senior Secured Loan — Incremental Tranche B-1 Term Loan
5.0% Cash, 1.3% Libor Floor, Due 5/19
  $849,252   $850,205   $853,325 
                   
Asurion, LLC (fka Asurion Corporation) 9, 10
Banking, Finance, Insurance & Real Estate
  Senior Secured Loan — Incremental Tranche B-4 Term Loan
5.0% Cash, 1.0% Libor Floor, Due 8/22
   879,162    875,482    884,877 
                   
Avalign Technologies, Inc. 9
Healthcare & Pharmaceuticals
  Junior Secured Loan — Initial Term Loan (Second Lien)
9.5% Cash, 1.0% Libor Floor, Due 7/22
   1,000,000    991,717    972,000 
                   
Avalign Technologies, Inc. 9, 10
Healthcare & Pharmaceuticals
  Senior Secured Loan — Initial Term Loan (First Lien)
5.5% Cash, 1.0% Libor Floor, Due 7/21
   2,925,000    2,913,305    2,894,873 
                   
Bankruptcy Management Solutions, Inc. 9
Services: Business
  Senior Secured Loan — Term B Loan
7.0% Cash, 1.0% Libor Floor, Due 6/18
   669,867    669,867    660,020 
                   
BarBri, Inc. (Gemini Holdings, Inc.) 9, 10
Services: Consumer
  Senior Secured Loan — Term Loan
4.5% Cash, 1.0% Libor Floor, Due 7/19
   2,619,636    2,613,502    2,553,359 
                   
BBB Industries US Holdings, Inc. 9, 10
Automotive
  Senior Secured Loan — Initial Term Loan (First Lien)
6.0% Cash, 1.0% Libor Floor, Due 11/21
   2,955,000    2,911,982    2,777,996 
                   
Bellisio Foods, Inc. 9, 10
Beverage, Food and Tobacco
  Senior Secured Loan — U.S. Term B Loans
5.0% Cash, 1.0% Libor Floor, Due 8/19
   1,876,982    1,872,338    1,876,606 
                   
Bestop, Inc. 9, 10
Automotive
  Senior Secured Loan — First Amendment Term Loan
6.3% Cash, 1.0% Libor Floor, Due 7/21
   500,000    495,031    495,000 
                   
Bestop, Inc. 9, 10
Automotive
  Senior Secured Loan — Term Loan
6.3% Cash, 1.0% Libor Floor, Due 7/21
   1,520,000    1,494,548    1,504,800 
                   
Carolina Beverage Group LLC 9
Beverage, Food and Tobacco
  Senior Secured Bond — 10.625% - 08/2018 - 143818AA0 144A
10.6% Cash, Due 8/18
   1,500,000    1,507,492    1,400,625 
                   
CCS Intermediate Holdings, LLC 9, 10
Healthcare & Pharmaceuticals
  Senior Secured Loan — Initial Term Loan (First Lien)
5.0% Cash, 1.0% Libor Floor, Due 7/21
   2,940,000    2,929,817    2,469,600 

 

  

 6 

 

    

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal      Amortized Cost   Fair Value 
Cengage Learning, Inc. 9, 10
Media: Advertising, Printing & Publishing
  Senior Secured Loan — 2016 Refinancing Term Loan
5.3% Cash, 1.0% Libor Floor, Due 6/23
  $3,803,445   $3,798,307   $3,806,849 
                   
Charter Communications Operating, LLC (aka CCO Safari LLC) 10
Media: Broadcasting & Subscription
  Senior Secured Loan — Term I Loan (2016)
3.5% Cash, 0.8% Libor Floor, Due 1/23
   995,000    996,174    1,002,666 
                   
Checkout Holding Corp. (fka Catalina Marketing) 9, 10
Media: Advertising, Printing & Publishing
  Senior Secured Loan — Term B Loan (First Lien)
4.5% Cash, 1.0% Libor Floor, Due 4/21
   977,500    974,337    891,358 
                   
CHS/Community Health Systems, Inc. 10
Healthcare & Pharmaceuticals
  Senior Secured Loan — Incremental 2021 Term H Loan
4.0% Cash, 1.0% Libor Floor, Due 1/21
   2,977,425    2,949,362    2,929,235 
                   
Consolidated Communications, Inc. 10
Telecommunications
  Senior Secured Loan — Initial Term Loan
4.3% Cash, 1.0% Libor Floor, Due 12/20
   2,939,547    2,947,290    2,939,547 
                   
CRGT Inc. 9, 10
High Tech Industries
  Senior Secured Loan — Term Loan
7.5% Cash, 1.0% Libor Floor, Due 12/20
   3,495,853    3,457,041    3,450,057 
                   
CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited) 9
Beverage, Food and Tobacco
  Junior Secured Loan — Term Loan (Second Lien)
8.8% Cash, 1.0% Libor Floor, Due 7/21
   3,000,000    3,011,961    2,935,500 
                   
CT Technologies Intermediate Holdings, Inc. (Smart Holdings Corp.) (aka HealthPort) 9, 10
Healthcare & Pharmaceuticals
  Senior Secured Loan — New Term Loan Facility
5.3% Cash, 1.0% Libor Floor, Due 12/21
   2,947,688    2,923,968    2,918,211 
                   
DJO Finance LLC 9, 10
Healthcare & Pharmaceuticals
  Senior Secured Loan — Initial Term Loan
4.3% Cash, 1.0% Libor Floor, Due 6/20
   1,488,722    1,481,222    1,463,600 
                   
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    2,496,120    2,312,500 
                   
Eastern Power, LLC (Eastern Covert Midco, LLC) (aka TPF II LC, LLC) 9, 10 
Utilities: Electric
  Senior Secured Loan — Term Loan
5.0% Cash, 1.0% Libor Floor, Due 10/21
   2,796,756    2,815,359    2,828,570 
                   
Electric Lightwave Holdings, Inc. (f.k.a. Integra Telecom Holdings, Inc.) 9, 10 
Telecommunications
  Senior Secured Loan — Term B-1 Loan
5.3% Cash, 1.0% Libor Floor, Due 8/20
   2,940,000    2,931,882    2,936,325 

  

 7 

 

 

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal      Amortized Cost   Fair Value 
ELO Touch Solutions, Inc. 9, 10
High Tech Industries
  Senior Secured Loan — Term Loan (First Lien)
8.5% Cash, 1.5% Libor Floor, Due 6/18
  $1,420,897   $1,392,794   $1,379,123 
                   
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    3,986,767    3,812,400 
                   
Fender Musical Instruments Corporation 9, 10
Consumer goods: Durable
  Senior Secured Loan — Initial Loan
5.8% Cash, 1.3% Libor Floor, Due 4/19
   1,346,300    1,353,247    1,345,896 
                   
FHC Health Systems, Inc. 9, 10
Healthcare & Pharmaceuticals
  Senior Secured Loan — Initial Term Loan
5.0% Cash, 1.0% Libor Floor, Due 12/21
   3,848,536    3,819,520    3,765,561 
                   
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
   1,796,448    1,782,444    1,758,902 
                   
Getty Images, Inc. 9, 10
Media: Advertising, Printing & Publishing
  Senior Secured Loan — Initial Term Loan
4.8% Cash, 1.3% Libor Floor, Due 10/19
   2,146,144    2,153,929    1,800,979 
                   
GI Advo Opco, LLC 9
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor, Due 11/21
   248,125    245,989    224,330 
                   
GI Advo Opco, LLC 9, 10
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor, Due 11/21
   2,729,375    2,705,893    2,467,628 
                   
GK Holdings, Inc. (aka Global Knowledge) 9
Services: Business
  Junior Secured Loan — Initial Term Loan (Second Lien)
10.5% Cash, 1.0% Libor Floor, Due 1/22
   1,500,000    1,477,122    1,436,700 
                   
GK Holdings, Inc. (aka Global Knowledge) 9, 10
Services: Business
  Senior Secured Loan — Initial Term Loan (First Lien)
6.5% Cash, 1.0% Libor Floor, Due 1/21
   2,456,250    2,438,497    2,415,476 
                   
Global Tel*Link Corporation 9
Telecommunications
  Junior Secured Loan — Term Loan (Second Lien)
9.0% Cash, 1.3% Libor Floor, Due 11/20
   4,000,000    3,954,755    3,808,320 
                   
Gold Standard Baking, Inc. 9, 10
Beverage, Food and Tobacco
  Senior Secured Loan — Term Loan
5.3% Cash, 1.0% Libor Floor, Due 4/21
   2,468,750    2,459,257    2,467,516 

 

 8 

 

  

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal      Amortized Cost   Fair Value 
Grande Communications Networks LLC 9, 10
Telecommunications
  Senior Secured Loan — Initial Term Loan
4.5% Cash, 1.0% Libor Floor, Due 5/20
  $3,870,132   $3,875,227   $3,843,428 
                   
Grifols Worldwide Operations Limited 10
Healthcare & Pharmaceuticals
  Senior Secured Loan — U.S. Tranche B Term Loan
3.4% Cash, Due 2/21
   989,848    987,761    1,000,365 
                   
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
   2,895,000    2,879,549    2,779,200 
                   
Grupo HIMA San Pablo, Inc. 9
Healthcare & Pharmaceuticals
  Junior Secured Loan — Term Loan (Second Lien)
13.8% Cash, Due 7/18
   7,000,000    6,946,210    6,370,000 
                   
Gymboree Corporation., The 9, 10
Retail
  Senior Secured Loan — Term Loan
5.0% Cash, 1.5% Libor Floor, Due 2/18
   1,421,105    1,414,214    1,132,088 
                   
Hargray Communications Group, Inc. (HCP Acquisition LLC) 9, 10
Media: Broadcasting & Subscription
  Senior Secured Loan — Initial Term Loan Retired 10/06/2016
5.3% Cash, 1.0% Libor Floor, Due 6/19
   2,894,511    2,881,254    2,915,018 
                   
Harland Clarke Holdings Corp. (fka Clarke American Corp.) 9, 10
Media: Advertising, Printing & Publishing
  Senior Secured Loan — Tranche B-3 Term Loan
7.0% Cash, 1.5% Libor Floor, Due 5/18
   1,743,529    1,735,560    1,727,183 
                   
Harland Clarke Holdings Corp. (fka Clarke American Corp.) 9, 10
Media: Advertising, Printing & Publishing
  Senior Secured Loan — Tranche B-4 Term Loan
7.0% Cash, 1.0% Libor Floor, Due 8/19
   1,396,875    1,393,261    1,376,502 
                   
Harland Clarke Holdings Corp. (fka Clarke American Corp.) 9, 10
Media: Advertising, Printing & Publishing
  Senior Secured Loan — Tranche B-5 Term Loan
7.0% Cash, 1.0% Libor Floor, Due 12/19
   1,421,875    1,403,928    1,397,348 
                   
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    1,980,239    1,912,600 
                   
Hoffmaster Group, Inc. 9, 10
Forest Products & Paper
  Senior Secured Loan — Initial Term Loan (First Lien)
5.3% Cash, 1.0% Libor Floor, Due 5/20
   3,910,000    3,886,407    3,837,274 
                   
Industrial Services Acquisition, LLC (aka Evergreen / NAIC) 9, 10
Ecological
  Senior Secured Loan — Term Loan
7.5% Cash, 1.0% Libor Floor, Due 6/22
   2,962,500    2,934,140    2,962,500 

 

 9 

 

 

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal      Amortized Cost   Fair Value 
International Architectural Products, Inc. 7, 9
Metals & Mining
  Senior Secured Loan — Term Loan
0.0% Cash, 3.3% PIK, 2.5% Libor Floor, Due 5/15
  $247,636   $228,563   $991 
                   
Kellermeyer Bergensons Services, LLC 9, 10
Services: Business
  Senior Secured Loan — Initial Term Loan (First Lien)
6.0% Cash, 1.0% Libor Floor, Due 10/21
   1,950,120    1,935,937    1,902,537 
                   
Key Safety Systems, Inc. 9, 10
Automotive
  Senior Secured Loan — Initial Term Loan
5.5% Cash, 1.0% Libor Floor, Due 8/21
   1,394,077    1,389,189    1,408,889 
                   
Landslide Holdings, Inc. 9, 10
High Tech Industries
  Senior Secured Loan — Term Loan (First Lien)
5.5% Cash, 1.0% Libor Floor, Due 9/22
   2,000,000    1,995,005    2,010,000 
                   
MB Aerospace ACP Holdings II Corp. 9, 10
Aerospace and Defense
  Senior Secured Loan — Initial Term Loan
6.5% Cash, 1.0% Libor Floor, Due 12/22
   1,345,890    1,334,348    1,345,621 
                   
Medical Specialties Distributors, LLC 9, 10
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan
6.5% Cash, 1.0% Libor Floor, Due 12/19
   3,890,000    3,869,392    3,818,035 
                   
Medrisk, Inc. 9, 10
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan
6.3% Cash, 1.0% Libor Floor, Due 2/23
   1,990,000    1,971,696    1,990,000 
                   
MGOC, Inc. (fka Media General, Inc.) 10
Media: Broadcasting & Subscription
  Senior Secured Loan — Term B Loan
4.0% Cash, 1.0% Libor Floor, Due 7/20
   2,611,993    2,614,249    2,611,993 
                   
Nellson Nutraceutical, LLC 9, 10
Beverage, Food and Tobacco
  Senior Secured Loan — Term A-1 Loan (First Lien)
6.0% Cash, 1.0% Libor Floor, Due 12/21
   2,356,663    2,340,980    2,356,898 
                   
Nellson Nutraceutical, LLC 9, 10
Beverage, Food and Tobacco
  Senior Secured Loan — Term A-2 Loan (First Lien)
6.0% Cash, 1.0% Libor Floor, Due 12/21
   2,071,831    2,057,440    2,072,038 
                   
Nielsen & Bainbridge, LLC 9, 10
Consumer goods: Durable
  Senior Secured Loan — Term Loan (First Lien)
6.2% Cash, 1.0% Libor Floor, Due 8/20
   5,361,360    5,323,685    5,138,864 

 

 10 

 

 

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal      Amortized Cost   Fair Value 
NM Z Parent Inc. (aka Zep, Inc.) 9, 10
Chemicals, Plastics and Rubber
  Senior Secured Loan — Initial Term Loan
5.5% Cash, 1.0% Libor Floor, Due 6/22
  $3,456,250   $3,466,419   $3,457,287 
                   
Novitex Acquisition, LLC (fka ARSloane Acquisition, LLC) 9, 10
Services: Business
  Senior Secured Loan — Tranche B-2 Term Loan (First Lien)
8.0% Cash, 1.3% Libor Floor, Due 7/20
   954,041    948,056    913,017 
                   
Onex Carestream Finance LP 9
Healthcare & Pharmaceuticals
  Junior Secured Loan — Term Loan (Second Lien)
9.5% Cash, 1.0% Libor Floor, Due 12/19
   1,932,311    1,932,311    1,803,039 
                   
Onex Carestream Finance LP 9, 10 
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan (First Lien 2013)
5.0% Cash, 1.0% Libor Floor, Due 6/19
   1,776,652    1,780,296    1,686,043 
                   
Otter Products, LLC (OtterBox Holdings, Inc.) 9, 10
Consumer goods: Durable
  Senior Secured Loan — Term B Loan
5.8% Cash, 1.0% Libor Floor, Due 6/20
   2,600,266    2,586,129    2,479,094 
                   
PGX Holdings, Inc. 9, 10
Services: Consumer
  Senior Secured Loan — Initial Term Loan (First Lien)
5.8% Cash, 1.0% Libor Floor, Due 9/20
   3,645,714    3,621,359    3,646,079 
                   
Playpower, Inc. 9, 10
Construction & Building
  Senior Secured Loan — Initial Term Loan (First Lien)
5.8% Cash, 1.0% Libor Floor, Due 6/21
   1,974,982    1,963,286    1,974,587 
                   
PrimeLine Utility Services LLC (fka FR Utility Services LLC) 9, 10
Energy: Electricity
  Senior Secured Loan — Initial Term Loan
6.5% Cash, 1.0% Libor Floor, Due 11/22
   3,945,686    3,913,044    3,946,869 
                   
PSC Industrial Holdings Corp. 9, 10
Environmental Industries
  Senior Secured Loan — Term Loan (First Lien)
5.8% Cash, 1.0% Libor Floor, Due 12/20
   2,981,888    2,959,759    2,904,955 
                   
Quad-C JH Holdings Inc. (aka Joerns Healthcare) 9, 10
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan A
6.0% Cash, 1.0% Libor Floor, Due 5/20
   3,910,066    3,892,265    3,817,789 
                   
Ravn Air Group, Inc. 9, 10
Transportation: Consumer
  Senior Secured Loan — Initial Term Loan
5.3% Cash, 1.0% Libor Floor, Due 7/21
   2,437,500    2,427,666    2,434,575 

 

 11 

 

  

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal      Amortized Cost   Fair Value 
Roscoe Medical, Inc. 9
Healthcare & Pharmaceuticals
  Junior Secured Loan — Term Loan (Second Lien)
11.3% Cash, Due 9/19
  $6,700,000   $6,663,667   $6,499,000 
                   
Rovi Solutions Corporation /  Rovi Guides, Inc. 10
High Tech Industries
  Senior Secured Loan — Term B Loan
3.8% Cash, 0.8% Libor Floor, Due 7/21
   2,939,850    2,912,602    2,948,302 
                   
Sandy Creek Energy Associates, L.P. 9, 10
Utilities: Electric
  Senior Secured Loan — Term Loan
5.0% Cash, 1.0% Libor Floor, Due 11/20
   2,636,114    2,628,351    2,139,470 
                   
Stafford Logistics, Inc.(dba Custom Ecology, Inc.) 9, 10
Environmental Industries
  Senior Secured Loan — Term Loan
7.5% Cash, 1.0% Libor Floor, Due 8/21
   2,709,639    2,693,363    2,605,589 
                   
Tank Partners Holdings, LLC 9
Energy: Oil & Gas
  Senior Secured Loan — Loan
10.0% Cash, 4.0% PIK, 3.0% Libor Floor, Due 8/19
   10,721,766    10,619,024    6,988,447 
                   
Trimaran Advisors, L.L.C. 9
Related Party Loan
  Senior Unsecured Loan — Revolving Credit Facility
9.0% Cash, Due 11/17
   23,000,000    23,000,000    23,000,000 
                   
TronAir Parent Inc. 9, 10
Aerospace and Defense
  Senior Secured Loan — Initial Term Loan (First Lien)
5.8% Cash, 1.0% Libor Floor, Due 9/23
   4,000,000    3,960,000    3,960,000 
                   
TRSO I, Inc. 9
Energy: Oil & Gas
  Junior Secured Loan — Term Loan (Second Lien)
11.0% Cash, 1.0% Libor Floor, Due 12/17
   1,000,000    995,107    886,000 
                   
U.S. Shipping Corp (fka U.S. Shipping Partners LP) 9, 10
Transportation: Cargo
  Senior Secured Loan — Tranche B-2 Term Loan
5.3% Cash, 1.0% Libor Floor, Due 6/21
   1,392,213    1,391,313    1,378,291 
                   
USJ-IMECO Holding Company, LLC 9, 10
Transportation: Cargo
  Senior Secured Loan — Term Loan
7.0% Cash, 1.0% Libor Floor, Due 4/20
   3,689,216    3,678,235    3,501,804 
                   
Vantiv, LLC (fka Fifth Third Processing Solutions, LLC) 10
Banking, Finance, Insurance & Real Estate
  Senior Secured Loan — Term B Loan
3.5% Cash, 0.8% Libor Floor, Due 6/21
   1,668,457    1,671,467    1,674,296 

 

 12 

 

 

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal      Amortized Cost   Fair Value 
Verdesian Life Sciences, LLC 9, 10
Environmental Industries
  Senior Secured Loan — Initial Term Loan
6.0% Cash, 1.0% Libor Floor, Due 7/20
  $3,820,047   $3,784,846   $3,666,481 
                   
Vestcom International, Inc. (fka Vector Investment Holdings, Inc.) 9, 10
Retail
  Senior Secured Loan — Term Loan
5.3% Cash, 1.0% Libor Floor, Due 9/21
   2,966,819    2,981,006    2,905,109 
                   
Weiman Products, LLC 9
Consumer goods: Non-durable
  Senior Secured Loan — Term Loan
5.8% Cash, 1.0% Libor Floor, Due 11/18
   918,382    914,355    918,198 
                   
Weiman Products, LLC 9, 10
Consumer goods: Non-durable
  Senior Secured Loan — Term Loan
5.8% Cash, 1.0% Libor Floor, Due 11/18
   4,579,315    4,559,562    4,578,399 
                   
WideOpenWest Finance, LLC 9, 10
Media: Broadcasting & Subscription
  Senior Secured Loan — New Term B Loan
4.5% Cash, 1.0% Libor Floor, Due 8/23
   3,000,000    3,000,000    2,991,720 
                   
WireCo WorldGroup Inc. 9
Capital Equipment
  Junior Secured Loan — Term Loan B (Second Lien)
10.0% Cash, 1.0% Libor Floor, Due 7/24
   3,000,000    2,955,000    2,955,000 
                   
WireCo WorldGroup Inc. (WireCo WorldGroup Finance LP) 9, 10
Capital Equipment
  Senior Secured Loan — Initial Term Loan (First Lien)
6.5% Cash, 1.0% Libor Floor, Due 9/23
   1,750,000    1,732,500    1,732,500 
                   
Total Investment in Debt Securities
 (132% of net asset value at fair value)
     $276,479,566   $275,019,503   $263,889,236 

 

 13 

 

 

Equity Securities Portfolio 

 

Portfolio Company / Principal Business  Investment  Percentage
Ownership/Shares
   Amortized Cost   Fair Value 
Aerostructures Holdings L.P. 5, 9
Aerospace and Defense
  Partnership Interests   1.2%  $1,000,000   $1,235,744 
                   
Aerostructures Holdings L.P. 5, 9
Aerospace and Defense
  Series A Preferred Interests   1.2%   250,961    1,000 
                   
Caribe Media Inc. (fka Caribe Information Investments Incorporated) 5, 9
Media: Advertising, Printing & Publishing
  Common   1.3%   359,763    498,375 
                   
DBI Holding LLC 5, 9
Services: Business
  Warrants   3.2%   1    1,000 
                   
eInstruction Acquisition, LLC 5, 9
Healthcare, Education and Childcare
  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    769,158 
                   
Perseus Holding Corp. 5, 9
Hotel, Gaming & Leisure
  Common   0.2%   400,000    1,000 
                   
Roscoe Investors, LLC 5, 9
Healthcare & Pharmaceuticals
  Class A Units   1.6%   1,000,000    1,169,000 
                   
Tank Partners Holdings, LLC 5, 9, 12
Energy: Oil & Gas
  Unit   5.8%   980,000    1,000 
                   
Tank Partners Holdings, LLC 5, 9
Energy: Oil & Gas
  Warrants   1.3%   185,205    1,000 
                   
TRSO II, Inc. 5, 9
Energy: Oil & Gas
  Common Stock   5.4%   1,500,000    713,419 
                   

New Millennium Holdco, Inc. (Millennium Health, LLC) 5, 9
Healthcare & Pharmaceuticals
 Common   29,699   1,953,299   1,000 
                   
Total Investment in Equity Securities
(2% of net asset value at fair value)
         $10,208,846   $4,392,696 

 

 14 

 

CLO Fund Securities

 

CLO Subordinated Investments

  

Portfolio Company  Investment 13  Percentage
Ownership
   Amortized Cost   Fair Value 
Grant Grove CLO, Ltd. 3  Subordinated Securities, effective interest 10.9%, 1/21 maturity   22.2%  $2,496,262   $1,000 
Katonah III, Ltd. 3  Preferred Shares, effective interest 1.0%, 5/15 maturity   23.1%   1,390,606    400,000 
Katonah 2007-I CLO Ltd. 3, 6  Preferred Shares, effective interest 35.5%, 4/22 maturity   100%   26,960,634    21,476,801 
Trimaran CLO VII, Ltd. 3,6  Income Notes, effective interest 50.0%, 6/21 maturity   10.5%   1,546,525    1,530,054 
Catamaran CLO 2012-1 Ltd. 3, 6  Subordinated Notes, effective interest 3.9%, 12/23 maturity   24.9%   6,049,821    2,417,941 
Catamaran CLO 2013- 1 Ltd. 3, 6  Subordinated Notes, effective interest 16.6%, 1/25 maturity   23.5%   5,480,454    4,783,491 
Catamaran CLO 2014-1 Ltd. 3, 6  Subordinated Notes, effective interest 9.4%, 4/26 maturity   24.9%   8,088,449    4,198,032 
Dryden 30 Senior Loan Fund 3  Subordinated Notes, effective interest 34.5%, 11/25 maturity   7.5%   1,398,081    1,611,892 
Catamaran CLO 2014-2 Ltd. 3, 6  Subordinated Notes, effective interest 10.2%, 10/26 maturity   24.9%   7,225,153    4,404,621 
Catamaran CLO 2015-1 Ltd. 3, 6  Subordinated Notes, effective interest 10.2%, 4/27 maturity   9.94%   4,640,665    3,043,087 
Total Investment in CLO Subordinated Securities       $65,276,650   $43,866,919 

 

CLO Rated-Note Investment

  

Portfolio Company  Investment  Percentage
Ownership
   Amortized Cost   Fair Value 
Catamaran CLO 2014-1 Ltd. 3, 6  Float - 04/2026 - E - 14889FAC7, Par Value of $1,525,000 6.4% Cash, 4/26 maturity   15.1%   1,438,341    1,260,000 
Total Investment in CLO Rated-Note          $1,438,341   $1,260,000 
Total Investment in CLO Fund Securities
(23% of net asset value at fair value)
          $66,714,991   $45,126,919 

 

 

Asset Manager Affiliates

  

Portfolio Company/Principal Business  Investment  Percentage
Ownership
   Cost   Fair Value 
Asset Manager Affiliates 9, 11  Asset Management Company   100%  $55,341,230   $43,425,000 
Total Investment in Asset Manager Affiliates
(22% of net asset value at fair value)
          $55,341,230   $43,425,000 

 

 

Time Deposits and Money Market Account

 

Time Deposit and Money Market Accounts  Investment  Yield   Par /Amortized Cost   Fair Value  
JP Morgan Business Money Market Account 8, 9  Money Market Account   0.1%  $14,268   $14,268 
US Bank Money Market Account 9  Money Market Account   0.02%   15,365,445    15,365,445 
Total Investment in Time Deposit and Money Market Accounts
(8% of net asset value at fair value)
          $15,379,713   $15,379,713 
Total Investments 4
 (186% of net asset value at fair value)
          $422,664,283   $372,213,564 

 

See accompanying notes to consolidated financial statements.

 

 15 

 

 

1

 

A majority of the variable rate loans in the Company’s investment portfolio bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly at the borrower’s option. The Borrower may also elect to have multiple interest reset periods for each loan.  For each such loan, the Company has provided the weighted average annual stated interest rate in effect at September 30, 2016.  As noted in the table above, 85% (based on par) of debt securities contain LIBOR floors which range between 0.75% and 3.0%.
2 Reflects the fair market value of all investments as of September 30, 2016, 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 $441 million. The aggregate gross unrealized appreciation is approximately $1.0 million, the aggregate gross unrealized depreciation is approximately $70.2 million, and the net unrealized depreciation is approximately $69.2 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 September 30, 2016, this investment is owned by KCAP Senior Funding I, LLC and was pledged to secure KCAP Senior Funding I, LLC’s obligation.
11 Other than the Asset Manager Affiliate, which we are deemed to “control”, we do not “control” and are not an “affiliate” of any of our portfolio companies, each as defined in the Investment Company Act of 1940 (the “1940 Act”). In general, under the 1940 Act, we would be presumed to “control” a portfolio company if we owned 25% or more of its voting securities and would be an “affiliate” of a portfolio company if we owned 5% or more of its voting securities.
12 Non-voting.
13 CLO Subordinated Investments are entitled to periodic distributions which are generally equal to the remaining cash flow of the payments made by the underlying fund’s investments less contractual payments to debt holders and fund expenses. The estimated annualized effective yield indicated is based upon a current projection of the amount and timing of these distributions. Such projections are updated on a quarterly basis and the estimated effective yield is adjusted prospectively.

 

 16 

 

 

KCAP FINANCIAL, INC.
 
SCHEDULE OF INVESTMENTS
As of December 31, 2015

 

Debt Securities Portfolio

 

Portfolio Company/Principal Business  Investment
Interest Rate(1) /Maturity
  Principal   Amortized
Cost
   Fair Value(2) 
1A Smart Start LLC(9), (10)
Consumer goods: Non-durable
  Senior Secured Loan — Initial
Term Loan (First Lien)
5.8% Cash, 1.0% Libor Floor,
Due 2/22
  $3,000,000   $2,971,523   $2,903,100 
4L Technologies Inc. (fka Clover Holdings, Inc.)(9), (10)
Consumer goods: Non-durable
  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor,
Due 5/20
   2,765,000    2,744,921    2,596,059 
Advanced Lighting Technologies, Inc.(9), (10)
Consumer goods: Durable
  First Lien Bond — 10.5% – 
06/2019 – 00753CAE2
10.5% Cash, Due 6/19
   3,000,000    3,000,000    2,216,700 
Advantage Sales & Marketing Inc.(9)
Services: Business
  Junior Secured Loan — Term Loan
(Second Lien)
7.5% Cash, 1.0% Libor Floor,
Due 7/22
   1,000,000    1,002,069    915,700 
Alere Inc. (fka IM US Holdings, LLC)(10)
Healthcare & Pharmaceuticals
  Senior Secured Loan — B Term Loan
4.3% Cash, 1.0% Libor Floor,
Due 6/22
   2,553,466    2,555,910    2,536,179 
American Seafoods Group LLC(9), (10)
Beverage, Food and Tobacco
  Senior Secured Loan — Term Loan
(First Lien)
6.0% Cash, 1.0% Libor Floor,
Due 8/21
   3,990,000    3,971,219    3,937,332 
Anaren, Inc.(9), (10)
Aerospace and Defense
  Senior Secured Loan — Term Loan
(First Lien)
5.5% Cash, 1.0% Libor Floor,
Due 2/21
   1,891,210    1,877,288    1,839,202 
Aristotle Corporation, The(9), (10)
Consumer goods: Non-durable
  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor,
Due 6/21
   3,980,000    3,961,696    3,870,152 
Asurion, LLC (fka Asurion Corporation)(9), (10)
Banking, Finance, Insurance & Real Estate
  Senior Secured Loan — 
Incremental Tranche B-1 Term Loan
5.0% Cash, 1.3% Libor Floor,
Due 5/19
   917,632    918,953    862,290 
Asurion, LLC (fka Asurion Corporation)(9), (10)
Banking, Finance, Insurance & Real Estate
  Senior Secured Loan — 
Incremental Tranche B-4 Term Loan
5.0% Cash, 1.0% Libor Floor,
Due 8/22
   896,048    891,815    821,676 
Avalign Technologies, Inc.(9)
Healthcare & Pharmaceuticals
  Junior Secured Loan — Initial Term
Loan (Second Lien)
9.3% Cash, 1.0% Libor Floor,
Due 7/22
   1,000,000    990,643    952,400 
Avalign Technologies, Inc.(9), (10)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Initial Term
Loan (First Lien)
5.5% Cash, 1.0% Libor Floor,
Due 7/21
   2,925,000    2,911,472    2,831,108 
Bankruptcy Management Solutions, Inc.(9)
Services: Business
  Senior Secured Loan — Term B Loan
7.0% Cash, 1.0% Libor Floor,
Due 6/18
   682,722    682,722    651,590 
BarBri, Inc. (Gemini Holdings, Inc.)(9), (10)
Services: Consumer
  Senior Secured Loan — Term Loan
4.5% Cash, 1.0% Libor Floor,
Due 7/19
   2,731,875    2,723,758    2,542,829 
BBB Industries US Holdings, Inc.(9), (10)
Automotive
  Senior Secured Loan — Initial Term
Loan (First Lien)
6.0% Cash, 1.0% Libor Floor,
Due 11/21
   2,977,500    2,927,766    2,833,985 
Bellisio Foods, Inc.(9), (10)
Beverage, Food and Tobacco
  Senior Secured Loan — U.S. Term B
Loans
5.3% Cash, 1.0% Libor Floor,
Due 8/19
   1,936,011    1,929,952    1,886,836 
Bestop, Inc.(9), (10)
Automotive
  Senior Secured Loan — Revolving
Loan
6.3% Cash, 1.0% Libor Floor,
Due 7/20
   40,000    34,509    36,984 

 

See accompanying notes to financial statements.

 

 17 

 

 

Portfolio Company/Principal Business  Investment
Interest Rate(1) /Maturity
  Principal   Amortized
Cost
   Fair Value(2) 
Bestop, Inc.(9), (10)
Automotive
  Senior Secured Loan — Term Loan
6.3% Cash, 1.0% Libor Floor,
Due 7/21
  $1,580,000   $1,557,976   $1,460,868 
Carolina Beverage Group LLC(9)
Beverage, Food and Tobacco
  Senior Secured Bond — 10.625% – 
08/2018 – 143818AA0 144A
10.6% Cash, Due 8/18
   1,500,000    1,510,560    1,503,752 
CCS Intermediate Holdings, LLC(9), (10)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Initial Term
Loan (First Lien)
5.0% Cash, 1.0% Libor Floor,
Due 7/21
   2,962,500    2,950,638    2,549,824 
Cengage Learning Acquisitions, Inc. (fka TL Acquisitions, Inc.)(9), (10)
Media: Advertising, Printing & Publishing
  Senior Secured Loan — Term Loan
7.0% Cash, 1.0% Libor Floor,
Due 3/20
   2,979,950    2,974,534    2,912,901 
Charter Communications Operating, LLC (aka CCO Safari LLC)(10)
Media: Broadcasting & Subscription
  Senior Secured Loan — Term I Loan
3.5% Cash, 0.8% Libor Floor,
Due 1/23
   1,000,000    1,001,223    1,000,420 
Checkout Holding Corp. (fka Catalina Marketing)(9), (10)
Media: Advertising, Printing & Publishing
  Senior Secured Loan — Term B Loan
(First Lien)
4.5% Cash, 1.0% Libor Floor,
Due 4/21
   985,000    981,284    792,925 
CHS/Community Health Systems, Inc.(10)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Incremental
2021 Term H Loan
4.0% Cash, 1.0% Libor Floor,
Due 1/21
   1,994,987    1,992,571    1,967,915 
Consolidated Communications, Inc.(10)
Telecommunications
  Senior Secured Loan — Initial
Term Loan
4.3% Cash, 1.0% Libor Floor,
Due 12/20
   2,962,217    2,971,404    2,947,421 
CRGT Inc.(9), (10)
High Tech Industries
  Senior Secured Loan — Term Loan
7.5% Cash, 1.0% Libor Floor,
Due 12/20
   3,912,342    3,861,177    3,750,762 
Crowley Holdings Preferred, LLC(9)
Transportation: Cargo
  Preferred Stock — 12.000% – 
12/2049 – Series A Income
Preferred Securities
10.0% Cash, 2.0% PIK, Due 12/49
   10,411,673    10,411,673    11,036,373 
Crowne Group, LLC(9), (10)
Automotive
  Senior Secured Loan — Term Loan
(First Lien)
6.0% Cash, 1.0% Libor Floor,
Due 9/20
   3,950,000    3,902,980    3,664,810 
CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)(9)
Beverage, Food and Tobacco
  Junior Secured Loan — Term Loan
(Second Lien)
8.8% Cash, 1.0% Libor Floor,
Due 7/21
   3,000,000    3,013,843    2,827,500 
CT Technologies Intermediate Holdings, Inc. (Smart Holdings Corp.) (aka HealthPort)(9), (10)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan
5.3% Cash, 1.0% Libor Floor,
Due 12/21
   2,970,075    2,942,705    2,877,260 
DBI Holding LLC(9)
Services: Business
  Senior Unsecured Bond — 09/2019 – 
PIK Note 0.0% Cash, 16.0% PIK,
Due 9/19
   4,043,719    3,859,845    4,043,722 
DBI Holding LLC(9)
Services: Business
  Senior Subordinated Bond — 09/2019
 – Senior Subordinated Note
12.0% Cash, 4.0% PIK, Due 9/19
   4,481,135    4,466,793    4,615,571 
DJO Finance LLC(9), (10)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Initial
Term Loan
4.3% Cash, 1.0% Libor Floor,
Due 6/20
   1,500,000    1,490,906    1,464,375 
Drew Marine Group Inc.(9)
Transportation: Cargo
  Junior Secured Loan — Term Loan
(Second Lien)
8.0% Cash, 1.0% Libor Floor,
Due 5/21
   2,500,000    2,495,491    2,495,000 
ELO Touch Solutions, Inc.(9), (10)
High Tech Industries
  Senior Secured Loan — Term Loan
(First Lien)
8.0% Cash, 1.5% Libor Floor,
Due 6/18
   1,552,326    1,507,787    1,546,893 
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    3,984,890    3,658,400 

 

See accompanying notes to financial statements.

 

 18 

 

 

Portfolio Company/Principal Business  Investment
Interest Rate(1) /Maturity
  Principal   Amortized
Cost
   Fair Value(2) 
Fender Musical Instruments Corporation(9), (10)
Consumer goods: Durable
  Senior Secured Loan — Initial Loan
5.8% Cash, 1.3% Libor Floor,
Due 4/19
  $1,434,249   $1,443,868   $1,421,699 
FHC Health Systems, Inc.(9), (10)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Initial
Term Loan
5.0% Cash, 1.0% Libor Floor,
Due 12/21
   3,877,839    3,844,406    3,703,336 
First American Payment Systems, L.P.(9)
Banking, Finance, Insurance & Real Estate
  Junior Secured Loan — Term Loan
(Second Lien)
10.8% Cash, 1.3% Libor Floor,
Due 4/19
   2,796,448    2,768,177    2,639,288 
Getty Images, Inc.(9), (10)
Media: Advertising, Printing & Publishing
  Senior Secured Loan — Initial
Term Loan
4.8% Cash, 1.3% Libor Floor,
Due 10/19
   2,162,867    2,172,647    1,373,421 
GI Advo Opco, LLC(9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor,
Due 11/21
   250,000    247,534    247,500 
GI Advo Opco, LLC(9), (10)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor,
Due 11/21
   2,750,000    2,722,890    2,722,500 
GK Holdings, Inc. (aka Global Knowledge)(9)
Services: Business
  Junior Secured Loan — Initial
Term Loan (Second Lien)
10.5% Cash, 1.0% Libor Floor,
Due 1/22
   1,500,000    1,473,884    1,382,550 
GK Holdings, Inc. (aka Global Knowledge)(9), (10)
Services: Business
  Senior Secured Loan — Initial
Term Loan (First Lien)
6.5% Cash, 1.0% Libor Floor,
Due 1/21
   2,475,000    2,453,994    2,345,805 
Global Tel*Link Corporation(9)
Telecommunications
  Junior Secured Loan — Term Loan
(Second Lien)
9.0% Cash, 1.3% Libor Floor,
Due 11/20
   4,000,000    3,946,567    2,760,000 
Gold Standard Baking, Inc.(9), (10)
Beverage, Food and Tobacco
  Senior Secured Loan — Term Loan
5.3% Cash, 1.0% Libor Floor,
Due 4/21
   2,487,500    2,476,361    2,408,149 
Grande Communications Networks LLC(9), (10)
Telecommunications
  Senior Secured Loan — Initial
Term Loan
4.5% Cash, 1.0% Libor Floor,
Due 5/20
   3,900,092    3,906,280    3,841,591 
Grifols Worldwide Operations Limited(10)
Healthcare & Pharmaceuticals
  Senior Secured Loan — 
U.S. Tranche B Term Loan
3.4% Cash, Due 2/21
   997,462    995,001    989,732 
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
   2,917,500    2,893,169    2,917,500 
Grupo HIMA San Pablo, Inc.(9)
Healthcare & Pharmaceuticals
  Junior Secured Loan — Term Loan
(Second Lien)
13.8% Cash, Due 7/18
   7,000,000    6,924,146    7,000,000 
Gymboree Corporation., The(9), (10)
Retail
  Senior Secured Loan — Term Loan
5.0% Cash, 1.5% Libor Floor,
Due 2/18
   1,421,105    1,410,511    734,001 
Hargray Communications Group, Inc. (HCP Acquisition LLC)(9), (10)
Media: Broadcasting & Subscription
  Senior Secured Loan — Initial
Term Loan
5.3% Cash, 1.0% Libor Floor,
Due 6/19
   2,895,294    2,878,392    2,893,267 
Harland Clarke Holdings Corp. (fka Clarke American Corp.)(9), (10)
Media: Advertising, Printing & Publishing
  Senior Secured Loan — Tranche B-3
Term Loan
7.0% Cash, 1.5% Libor Floor,
Due 5/18
   3,281,250    3,259,381    3,271,078 
Harland Clarke Holdings Corp. (fka Clarke American Corp.)(9), (10)
Media: Advertising, Printing & Publishing
  Senior Secured Loan — Tranche B-4
Term Loan
6.0% Cash, 1.0% Libor Floor,
Due 8/19
   1,425,000    1,420,339    1,421,580 
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    1,977,018    1,995,600 

 

See accompanying notes to financial statements.

 

 19 

 

 

Portfolio Company/Principal Business  Investment
Interest Rate(1) /Maturity
  Principal   Amortized
Cost
   Fair Value(2) 
Hoffmaster Group, Inc.(9), (10)
Forest Products & Paper
  Senior Secured Loan — Initial Term
Loan (First Lien)
5.3% Cash, 1.0% Libor Floor,
Due 5/20
  $3,940,000   $3,911,276   $3,887,480 
Hunter Defense Technologies, Inc.(9), (10)
Aerospace and Defense
  Senior Secured Loan — Term Loan
(First Lien)
6.5% Cash, 1.0% Libor Floor,
Due 8/19
   2,812,500    2,792,045    2,616,469 
Integra Telecom Holdings, Inc.(9), (10)
Telecommunications
  Senior Secured Loan — Term B-1
Loan 5.3% Cash, 1.0% Libor Floor,
Due 8/20
   2,962,386    2,952,620    2,876,477 
International Architectural Products, Inc.(7), (9)
Metals & Mining
  Senior Secured Loan — Term Loan
0.0% Cash, 3.3% PIK, 2.5% Libor
Floor, Due 5/15
   247,636    228,563    991 
Kellermeyer Bergensons Services, LLC(9), (10)
Services: Business
  Senior Secured Loan — Initial Term
Loan (First Lien)
6.0% Cash, 1.0% Libor Floor,
Due 10/21
   1,980,000    1,963,471    1,856,844 
Key Safety Systems, Inc.(9), (10)
Automotive
  Senior Secured Loan — Initial
Term Loan
4.8% Cash, 1.0% Libor Floor,
Due 8/21
   1,481,250    1,475,263    1,444,219 
Kinetic Concepts, Inc.(9), (10)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Dollar
Term E-1 Loan
4.5% Cash, 1.0% Libor Floor,
Due 5/18
   2,962,216    2,957,007    2,864,700 
Landslide Holdings, Inc. (Crimson Acquisition Corp.)(9), (10)
High Tech Industries
  Senior Secured Loan — New Term
Loan (First Lien)
5.0% Cash, 1.0% Libor Floor,
Due 2/20
   3,421,556    3,428,320    3,417,450 
MB Aerospace ACP Holdings II Corp.(9), (10)
Aerospace and Defense
  Senior Secured Loan — Initial
Term Loan
6.5% Cash, 1.0% Libor Floor,
Due 12/22
   1,000,000    990,055    990,000 
Medical Specialties Distributors, LLC(9), (10)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan
6.5% Cash, 1.0% Libor Floor,
Due 12/19
   3,920,000    3,894,315    3,918,040 
MGOC, Inc. (fka Media General, Inc.)(10)
Media: Broadcasting & Subscription
  Senior Secured Loan — Term B Loan
4.0% Cash, 1.0% Libor Floor,
Due 7/20
   2,717,813    2,720,620    2,690,635 
Nellson Nutraceutical, LLC(9), (10)
Beverage, Food and Tobacco
  Senior Secured Loan — Term A-1
Loan (First Lien)
6.0% Cash, 1.0% Libor Floor,
Due 12/21
   2,374,598    2,356,528    2,295,761 
Nellson Nutraceutical, LLC(9), (10)
Beverage, Food and Tobacco
  Senior Secured Loan — Term A-2
Loan (First Lien)
6.0% Cash, 1.0% Libor Floor,
Due 12/21
   2,092,907    2,076,283    2,023,422 
New Millennium Holdco, Inc. (Millennium Health, LLC)(9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Closing Date Term Loan
7.5% Cash, 1.0% Libor Floor,
Due 12/20
   1,016,626    1,016,626    889,548 
Nielsen & Bainbrige, LLC(9)
Consumer goods: Durable
  Senior Secured Loan — Term Loan
(First Lien)
6.0% Cash, 1.0% Libor Floor,
Due 8/20
   990,004    982,260    943,870 
Nielsen & Bainbrige, LLC(9)
Consumer goods: Durable
  Junior Secured Loan — Term Loan
(Second Lien)
10.3% Cash, 1.0% Libor Floor,
Due 8/21
   2,091,954    2,065,884    1,956,814 
Nielsen & Bainbrige, LLC(9), (10)
Consumer goods: Durable
  Senior Secured Loan — Term Loan
(First Lien)
6.0% Cash, 1.0% Libor Floor,
Due 8/20
   3,785,896    3,755,461    3,609,473 
NM Z Parent Inc. (aka Zep, Inc.)(9), (10)
Chemicals, Plastics and Rubber
  Senior Secured Loan — Initial
Term Loan
5.8% Cash, 1.0% Libor Floor,
Due 6/22
   3,482,500    3,494,086    3,359,916 

 

See accompanying notes to financial statements.

 

 20 

 

 

Portfolio Company/Principal Business  Investment
Interest Rate(1) /Maturity
  Principal   Amortized
Cost
   Fair Value(2) 
Novitex Acquisition, LLC (fka ARSloane Acquisition, LLC)(9), (10)
Services: Business
  Senior Secured Loan — Tranche B-2
Term Loan (First Lien)
7.5% Cash, 1.3% Libor Floor,
Due 7/20
  $972,650   $965,333   $893,865 
Onex Carestream Finance LP(9)
Healthcare & Pharmaceuticals
  Junior Secured Loan — Term Loan
(Second Lien)
9.5% Cash, 1.0% Libor Floor,
Due 12/19
   1,932,311    1,932,311    1,823,329 
Onex Carestream Finance LP(9), (10)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan
(First Lien 2013)
5.0% Cash, 1.0% Libor Floor,
Due 6/19
   1,856,203    1,861,076    1,681,414 
Otter Products, LLC (OtterBox Holdings, Inc.)(9), (10)
Consumer goods: Durable
  Senior Secured Loan — Term B Loan
5.8% Cash, 1.0% Libor Floor,
Due 6/20
   2,754,168    2,736,134    2,604,892 
PGX Holdings, Inc.(9), (10)
Services: Consumer
  Senior Secured Loan — Initial Term
Loan (First Lien)
5.8% Cash, 1.0% Libor Floor,
Due 9/20
   3,818,571    3,788,271    3,813,225 
Playpower, Inc.(9), (10)
Construction & Building
  Senior Secured Loan — Initial Term
Loan (First Lien)
5.8% Cash, 1.0% Libor Floor,
Due 6/21
   1,990,000    1,976,345    1,907,614 
PrimeLine Utility Services LLC (fka FR Utility Services LLC)(9), (10)
Energy: Electricity
  Senior Secured Loan — Initial
Term Loan
6.5% Cash, 1.0% Libor Floor,
Due 11/22
   3,500,000    3,465,576    3,465,000 
PSC Industrial Holdings Corp.(9), (10)
Environmental Industries
  Senior Secured Loan — Term Loan
(First Lien)
5.8% Cash, 1.0% Libor Floor,
Due 12/20
   3,004,650    2,978,349    3,000,744 
Quad-C JH Holdings Inc. (aka Joerns Healthcare)(9), (10)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term
Loan A
6.0% Cash, 1.0% Libor Floor,
Due 5/20
   3,940,026    3,918,354    3,937,662 
Ravn Air Group, Inc.(9), (10)
Transportation: Consumer
  Senior Secured Loan — Initial
Term Loan
5.5% Cash, 1.0% Libor Floor,
Due 7/21
   2,484,375    2,472,795    2,324,381 
Roscoe Medical, Inc.(9)
Healthcare & Pharmaceuticals
  Junior Secured Loan — Term Loan
(Second Lien)
11.3% Cash, Due 9/19
   6,700,000    6,654,533    6,235,020 
Rovi Solutions Corporation/Rovi Guides, Inc.(10)
High Tech Industries
  Senior Secured Loan — Term B Loan
3.8% Cash, 0.8% Libor Floor,
Due 7/21
   2,962,406    2,930,614    2,947,890 
Sandy Creek Energy Associates, L.P.(9), (10)
Utilities: Electric
  Senior Secured Loan — Term Loan
5.0% Cash, 1.0% Libor Floor,
Due 11/20
   2,708,992    2,699,558    1,907,130 
Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(9), (10)
Environmental Industries
  Senior Secured Loan — Term Loan
7.5% Cash, 1.3% Libor Floor,
Due 8/21
   2,854,780    2,835,003    2,736,307 
Sun Products Corporation, The (fka Huish Detergents Inc.)(9), (10)
Consumer goods: Non-durable
  Senior Secured Loan — Tranche B
Term Loan
5.5% Cash, 1.3% Libor Floor,
Due 3/20
   3,882,654    3,863,759    3,657,460 
Tank Partners Holdings, LLC(9)
Energy: Oil & Gas
  Senior Secured Loan — Loan
6.6% Cash, 3.5% PIK, 3.0% Libor
Floor, Due 8/19
   10,759,919    10,624,515    8,177,538 
TPF II Power, LLC (TPF II Covert Midco, LLC)(9), (10)
Utilities: Electric
  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor,
Due 10/21
   2,950,953    2,973,524    2,899,311 
Trimaran Advisors, L.L.C.(9)
Related Party Loan
  Senior Unsecured Loan — 
Revolving Credit Facility
9.0% Cash, Due 11/17
   23,000,000    23,000,000    23,000,000 
TRSO I, Inc.(9)
Energy: Oil & Gas
  Junior Secured Loan — Term Loan
(Second Lien)
11.0% Cash, 1.0% Libor Floor,
Due 12/17
   1,000,000    992,101    950,300 

 

See accompanying notes to financial statements.

 

 21 

 

 

Portfolio Company/Principal Business  Investment
Interest Rate(1) /Maturity
  Principal   Amortized
Cost
   Fair Value(2) 
TWCC Holding Corp.(9), (10)
Media: Broadcasting & Subscription
  Senior Secured Loan — Term B-1
Loan
5.8% Cash, 0.8% Libor Floor,
Due 2/20
  $822,470   $827,875   $822,470 
U.S. Shipping Corp (fka U.S. Shipping Partners LP)(9), (10)
Transportation: Cargo
  Senior Secured Loan — Tranche B-2
Term Loan
5.3% Cash, 1.0% Libor Floor,
Due 6/21
   1,411,023    1,409,966    1,405,802 
USJ-IMECO Holding Company, LLC(9), (10)
Transportation: Cargo
  Senior Secured Loan — Term Loan
7.0% Cash, 1.0% Libor Floor,
Due 4/20
   3,930,000    3,915,823    3,928,428 
Vantiv, LLC (fka Fifth Third Processing Solutions, LLC)(10)
Banking, Finance, Insurance & Real Estate
  Senior Secured Loan — Term B Loan
3.8% Cash, 0.8% Libor Floor,
Due 6/21
   1,688,507    1,692,039    1,685,333 
Verdesian Life Sciences, LLC(9), (10)
Environmental Industries
  Senior Secured Loan — Initial
Term Loan
6.0% Cash, 1.0% Libor Floor,
Due 7/20
   3,981,279    3,937,250    3,784,206 
Vestcom International, Inc. (fka Vector Investment Holdings, Inc.)(9), (10)
Retail
  Senior Secured Loan — Term Loan
5.3% Cash, 1.0% Libor Floor,
Due 9/21
   2,989,755    3,006,198    2,860,598 
Weiman Products, LLC(9)
Consumer goods: Non-durable
  Senior Secured Loan — Term Loan
6.3% Cash, 1.0% Libor Floor,
Due 11/18
   1,106,050    1,099,501    1,105,829 
Weiman Products, LLC(9), (10)
Consumer goods: Non-durable
  Senior Secured Loan — Term Loan
6.3% Cash, 1.0% Libor Floor,
Due 11/18
   5,515,079    5,482,956    5,513,976 
WireCo WorldGroup Inc.(9)
Capital Equipment
  Senior Unsecured Bond — 
9.0% Cash, Due 5/17
   5,000,000    4,975,822    4,067,500 
WireCo WorldGroup Inc.(9), (10)
Capital Equipment
  Senior Unsecured Bond — 
9.0% Cash, Due 5/17
   3,000,000    3,043,520    2,440,500 
Total Investment in Debt Securities (132% of net asset value at fair value)     $299,940,657   $298,308,845   $284,639,244 

 

See accompanying notes to financial statements.

 

 22 

 

 

Equity Securities Portfolio

 

Portfolio Company/Principal Business  Investment  Percentage
Interest/Shares
   Amortized
Cost
   Fair Value(2) 
Aerostructures Holdings L.P.(5), (9)
Aerospace and Defense
  Partnership Interests   1.2%  $1,000,000   $1,000 
Aerostructures Holdings L.P.(5), (9)
Aerospace and Defense
  Series A Preferred Interests   1.2%   250,960    937,053 
Caribe Media Inc. (fka Caribe Information Investments Incorporated)(5), (9)
Media: Advertising, Printing & Publishing
  Common   1.3%   359,765    568,544 
DBI Holding LLC(5), (9)
Services: Business
  Class A Warrants   3.2%   258,940    4,316,159 
eInstruction Acquisition, LLC(5), (9)
Services: Business
  Membership Units   1.1%   1,079,617    1,000 
FP WRCA Coinvestment Fund VII, Ltd.(3), (5)
Capital Equipment
  Class A Shares   1,500    1,500,000    1,338,767 
Perseus Holding Corp.(5), (9)
Hotel, Gaming & Leisure
  Common   0.2%   400,000    1,000 
Roscoe Investors, LLC(5), (9)
Healthcare & Pharmaceuticals
  Class A Units   1.6%   1,000,000    863,000 
Tank Partners Holdings, LLC(5), (9), (12)
Energy: Oil & Gas
  Unit   5.8%   980,000    1,000 
Tank Partners Holdings, LLC(5), (9)
Energy: Oil & Gas
  Warrants   1.3%   185,205    1,000 
TRSO II, Inc.(5), (9)
Energy: Oil & Gas
  Common Stock   5.4%   1,500,000    1,074,480 
New Millennium Holdco, Inc. (Millennium Health, LLC)(5), (9)
Healthcare & Pharmaceuticals
  Common   0.2%  $1,953,299   $445,485 
Total Investment in Equity Securities (4% of net asset value at fair value)          $10,467,786   $9,548,488 

 

See accompanying notes to financial statements.

 

 23 

 

 

CLO Fund Securities

 

CLO Subordinated Securities, Preferred Shares and Income Notes Investments

 

Portfolio Company  Investment(13)  Percentage
Ownership
   Amortized
Cost
   Fair Value(2) 
Grant Grove CLO, Ltd.(3)  Subordinated Securities,
effective interest 9.6%,
1/21 maturity
   22.2%  $2,484,943   $280,164 
Katonah III, Ltd.(3)  Preferred Shares, effective
interest N/M, 5/15 maturity
   23.1%   1,373,132    400,000 
Katonah IX CLO Ltd(3), (6), (14)  Preferred Shares, effective
interest 2.2%, 1/19 maturity
   6.9%   1,140,057    105,000 
Katonah X CLO Ltd(3), (6), (14)  Subordinated Securities,
effective interest 12.8%,
4/20 maturity
   33.3%   7,637,499    1,000,000 
Katonah 2007-I CLO Ltd.(3), (6)  Preferred Shares, effective
interest 27.0%, 4/22 maturity
   100%   24,312,424    20,295,677 
Trimaran CLO VII, Ltd.(3), (6)  Income Notes, effective
interest 50.8%, 6/21 maturity
   10.5%   1,375,013    1,647,272 
Catamaran CLO 2012-1 Ltd.(3), (6)  Subordinated Notes, effective
interest 2.8%, 12/23 maturity
   24.9%   6,791,980    3,312,940 
Catamaran CLO 2013-1 Ltd.(3), (6)  Subordinated Notes, effective
interest 12.9%, 1/25 maturity
   23.5%   6,256,090    5,639,106 
Catamaran CLO 2014-1 Ltd.(3), (6)  Subordinated Notes, effective
interest 8.4%, 4/26 maturity
   24.9%   8,928,790    5,846,325 
Dryden 30 Senior Loan Fund(3)  Subordinated Notes, effective
interest 29.4%, 11/25 maturity
   7.5%   1,592,303    1,634,647 
Catamaran CLO 2014-2 Ltd.(3), (6)  Subordinated Notes, effective
interest 8.8%, 10/26 maturity
   24.9%   8,024,168    5,751,600 
Catamaran CLO 2015-1 Ltd.(3), (6)  Subordinated Notes, effective
interest 10.1%, 4/27 maturity
   24.0%   11,869,751    8,789,651 
Total Investment in CLO Subordinated Securities           81,786,150    54,702,382 

 

CLO Rated-Note Investments

 

Portfolio Company  Investment  Percentage
Ownership
   Amortized
Cost
   Fair Value(2) 
Catamaran CLO 2014-1 Ltd.(3), (6)  Float – 04/2026 – E – 
Par Value of
1,525,000 6.1% Cash,
4/26 maturity
   15%   1,428,797    1,170,000 
Total Investment in CLO
Rated-Note
           1,428,797    1,170,000 
Total Investment in CLO
Fund Securities (26% of net asset value at fair value)
           83,214,947    55,872,382 

 

Asset Manager Affiliates

 

Portfolio Company/Principal Business  Investment  Percentage
Ownership
   Cost   Fair Value (2) 
Asset Manager Affiliates(9), (11)  Asset Management Company   100%   56,591,230    57,381,000 
Total Investment in Asset Manager Affiliates (27% of net asset value at fair value)           56,591,230    57,381,000 

 

See accompanying notes to financial statements.

 

 24 

 

 

Time Deposits and Money Market Account

 

Time Deposit and Money Market Accounts  Investment  Yield   Amortized
Cost
   Fair Value(2) 
JP Morgan Business Money Market
Account (8), (9)
  Money Market Account   0.10%  $249,247   $249,247 
US Bank Money Market
Account(9)
  Money Market Account   0.02%   1,880,134    1,880,134 
Total Investment in Time Deposit and Money Market Accounts (1% of net asset value at fair value)           2,129,381    2,129,381 
Total Investments(4) (190% of net asset value at fair value)          $450,712,189   $409,570,495 

 

See accompanying notes to financial statements.

 

 25 

 

 

1 A majority of the variable rate loans in the Company’s investment portfolio bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly at the borrower’s option. The Borrower may also elect to have multiple interest reset periods for each loan. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at December 31, 2015. As noted in the table above, 77% (based on par) of debt securities contain LIBOR floors which range between 0.75% and 3.0%.
2 Reflects the fair market value of all investments as of December 31, 2015, 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 $471 million. The aggregate gross unrealized appreciation is approximately $7.0 million, the aggregate gross unrealized depreciation is approximately $68.2 million, and the net unrealized depreciation is approximately $61.2 million.
5 Non-income producing.
6 An affiliate CLO Fund managed by an Asset Manager Affiliate (as such term is defined in the notes to the consolidated financial statements).
7 Loan or debt security is on non-accrual status and therefore is considered non-income producing.
8 Money market account holding restricted cash and security deposits for employee benefit plans.
9 Qualified asset for purposes of section 55(a) of the Investment Company Act of 1940.
10 As of December 31, 2015, this investment is owned by KCAP Senior Funding I, LLC and was pledged to secure KCAP Senior Funding I, LLC’s obligation.
11 Other than the Asset Manager Affiliate, which we are deemed to “control”, we do not “control” and are not an “affiliate” of any of our portfolio companies, each as defined in the Investment Company Act of 1940 (the “1940 Act”). In general, under the 1940 Act, we would be presumed to “control” a portfolio company if we owned 25% or more of its voting securities and would be an “affiliate” of a portfolio company if we owned 5% or more of its voting securities.
12 Non-voting.
13 CLO Subordinated Investments are entitled to periodic distributions which are generally equal to the remaining cash flow of the payments made by the underlying fund’s investments less contractual payments to debt holders and fund expenses. The estimated annualized effective yield indicated is based upon a current projection of the amount and timing of these distributions. Such projections are updated on a quarterly basis and the estimated effective yield is adjusted prospectively.
14 Notice of redemption has been received for this transaction.

  

 26 

 

 

KCAP FINANCIAL, INC.

 

CONSOLIDATED FINANCIAL HIGHLIGHTS

(unaudited)

 

   Nine Months Ended
September 30,
 
   2016   2015 
         
Per Share Data:          
Net asset value, at beginning of period  $5.82   $6.94 
Net investment income1   0.39    0.51 
Net realized losses1   (0.17)   (0.17)
Net change in unrealized depreciation on investments1   (0.25)   (0.53)
Net decrease in net assets resulting from operations   (0.03)   (0.19)
           
Net decrease in net assets resulting from distributions:   (0.45)   (0.41)
Net (decrease) in net assets relating to stock-based transactions:          
Common stock withheld for payroll taxes upon vesting of restricted stock   0.01    - 
Dividend reinvestment plan   (0.01)   - 
Stock based compensation   0.04    (0.01)
Net increase (decrease) in net assets relating to stock-based transactions6   0.04    (0.01)
           
Net asset value, end of period  $5.38   $6.33 
Total net asset value return2   0.2%   (2.8)%
           
Ratio/Supplemental Data:          
Per share market value at beginning of period  $4.07   $6.82 
Per share market value at end of period  $4.63   $4.51 
Total market return3   24.8%   (27.8)%
Shares outstanding at end of period   37,160,770    37,052,575 
Net assets at end of period  $199,903,373   $234,599,882 
Portfolio turnover rate4   19.3%   24.0%
Average par debt outstanding  $192,692,951   $227,250,480 
Asset coverage ratio   207%   205%
Ratio of net investment income to average net assets5   9.2%   9.9%
Ratio of total expenses to average net assets5   8.8%   8.6%
Ratio of interest expense to average net assets5   4.5%   4.7%
Ratio of non-interest expenses to average net assets5   4.3%   3.9%

 

 

1Based on weighted average number of common shares outstanding-basic for the period.
2Total net asset value return (not annualized) equals the change in the ending of period 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 of period net asset value per share.
3Total market return equals the change in the ending of period market price per share over the beginning of period price per share plus distributions (including any return of capital), divided by the beginning of period market price per share.
4Not annualized. Portfolio turnover rate equals the year-to-date sales and paydowns over the average of the invested assets at fair value.
5Annualized
6Totals may not sum due to rounding.

 

See accompanying notes to consolidated financial statements.

 

 27 

 

 

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”). The Company was formed as a Delaware limited liability company on August 8, 2006 and, prior to the issuance of shares of the Company’s common stock in its initial public offering (“IPO”), converted to a corporation incorporated in Delaware on December 11, 2006. Prior to its IPO, the Company did not have material operations. The Company’s IPO of 14,462,000 shares of common stock raised net proceeds of approximately $200 million. Prior to the IPO, the Company issued 3,484,333 shares to affiliates of Kohlberg & Co., L.L.C., a leading middle market private equity firm, in exchange for the contribution to the Company of their ownership interests in Katonah Debt Advisors, L.L.C., and related affiliates (collectively, “Katonah Debt Advisors”) and in securities issued by collateralized loan obligation funds (“CLO Funds”) managed by Katonah Debt Advisors and two other asset managers.

 

On April 28, 2008, the Company completed a rights offering that resulted in the issuance of 3.1 million shares of the Company’s common stock, and net proceeds of $27 million.

 

On February 29, 2012, the Company purchased Trimaran Advisors, L.L.C. (“Trimaran Advisors”), an asset manager similar to Katonah Debt Advisors, for total consideration of $13.0 million in cash and 3,600,000 shares of the Company’s common stock. Contemporaneously with the acquisition of Trimaran Advisors, the Company acquired from Trimaran Advisors equity interests in certain CLO Funds managed by Trimaran Advisors for an aggregate purchase price of $12.0 million in cash.

 

On February 14, 2013, the Company completed a public offering of 5,232,500 shares of common stock, which included the underwriters’ full exercise of their option to purchase up to 682,500 shares of common stock, at a price of $9.75 per share, raising approximately $51.0 million in gross proceeds. In conjunction with this offering, the Company also sold 200,000 shares of common stock to a member of its Board of Directors, at a price of $9.31125 per share, raising approximately $1.9 million in gross proceeds.

 

On October 6, 2014, the Company completed a follow-on public offering of 3.0 million shares of its common stock at a price of $8.02 per share. The offering raised net proceeds of approximately $23.8 million, after deducting underwriting discounts and offering expenses.

 

As of September 30, 2016, Katonah Debt Advisors and Trimaran Advisors, as well as affiliated management companies Katonah 2007-1 Management, L.L.C., and Trimaran Advisors Management, L.L.C. (collectively the “Asset Manager Affiliates”), had approximately $2.6 billion of par value assets under management. The Asset Manager Affiliates are each managed independently from KCAP by a separate management team (however, certain of the Company’s executive officers also act in similar capacities for one or both of the Asset Manager Affiliates). The Asset Manager Affiliates provide investment management services to CLO Funds, making day-to-day investment decisions concerning the assets of the CLO Funds. The Asset Manager Affiliates do not have any investments in the CLO Funds they manage; however, KCAP holds investments in a portion of the securities issued by the CLO Funds managed by the Asset Manager Affiliates.

 

The Company has three principal areas of investment:

 

First, the Company originates, structures, and invests in senior secured term loans and mezzanine debt primarily in privately-held middle market companies (the “Debt Securities Portfolio”). In addition, from time to time the Company may invest in the equity securities of privately-held middle market companies.

 

Second, the Company has invested in the Asset Manager Affiliates, which manage CLO Funds.

 

 28 

 

 

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

 

The Company may also invest in other investments such as loans to publicly-traded companies, high-yield bonds 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 financial statements and notes thereto in the Company’s Form 10-K for the year ended December 31, 2015, as filed with the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”).

 

The consolidated financial statements reflect all adjustments, both normal and recurring which, in the opinion of management, are necessary for the fair presentation of the Company’s results of operations and financial condition for the periods presented. Furthermore, the preparation of the consolidated financial statements requires the Company to make significant estimates and assumptions including with respect to the fair value of investments that do not have a readily available market value. Actual results could differ from those estimates, and the differences could be material. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for the full year. Certain prior period amounts have been reclassified to conform to the current year presentation.

 

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 Company’s required disclosures relating to the Asset Manager Affiliates. The Asset Manager Affiliates qualify as a “significant subsidiary” and, as a result, the Company is required to include additional financial information regarding the Asset Manager Affiliates in its filings with the SEC. This additional financial information regarding the Asset Manager Affiliates does not directly impact the financial position or results of operations of the Company.

 

On February 18, 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2015-2 (“ASU 2015-2”), which updated consolidation standards under ASC Topic 810, “Consolidation”. Under this update, a new consolidation analysis is required for variable interest entities (“VIEs”) and will limit the circumstances in which investment managers and similar entities are required to consolidate the entities that they manage. The FASB decided to eliminate some of the criteria under which their management fees are considered a variable interest and limit the circumstances in which variable interests in a VIE held by related parties of a reporting enterprise require the reporting enterprise to consolidate the VIE. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015, early adoption is permitted. The Asset Manager Affiliates adopted ASU 2015-2 in 2016 which resulted in the deconsolidation of the CLO Funds managed by them.

 

 29 

 

 

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

 

Stockholder distributions on the Statement of Changes in Net Assets reflect the estimated allocation, between net investment income and return of capital, of distributions made during the reporting period, excluding the distribution declared in a quarter with a record date occurring after the quarter-end. The determination of the tax character of distributions is made on an annual (full calendar-year) basis at the end of the year based upon our taxable income for the full year and the distributions paid during the full year. Therefore, an estimate of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year.

 

It is the Company’s primary investment objective to generate current income and capital appreciation by lending directly to privately-held middle market companies. During the nine months ended September 30, 2016, the Company provided approximately $37.9 million to portfolio companies to support their growth objectives. As of September 30, 2016 and December 31, 2015, the Company had $600,000 and $360,000 of outstanding commitments to fund investments, respectively. See also Note 8 – Commitments and Contingencies. As of September 30, 2016, the Company held loans it made to 83 investee companies with aggregate principal amounts of $272 million. The details of such loans have been disclosed on the consolidated schedule of investments as well as in Note 4 – Investments. In addition to providing loans to investee companies, from time to time the Company assists investee companies in securing financing from other sources by introducing such investee companies to sponsors or by, among other things, leading a syndicate of lenders to provide the investee companies with financing. During the nine months ended September 30, 2016, the Company did not engage in any such or similar activities.

 

In August 2014, the FASB issued Accounting Standards Update (“ASU”) 2014- 15, “Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). The standard requires management to evaluate, at each interim and annual reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued, and provide related disclosures. ASU 2014- 15 is effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter, and early adoption is permitted. We do not expect to adopt ASU 2014-15 early, and we do not believe the standard will have a material impact on our financial statements, when adopted.

 

In April 2015, the FASB issued Accounting Standards Update 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. Under this guidance, debt issuance costs related to a recognized debt liability are to be presented as a direct deduction from the debt liability rather than as an asset on the balance sheet, consistent with debt discounts. For public business entities, the final guidance was effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption was permitted. The Company adopted the new guidance beginning the first quarter of 2016.

 

 30 

 

 

The following table presents the impact of the Accounting Standards Update 2015-03 on our Consolidated Balance Sheet at December 31, 2015:

 

CONSOLIDATED BALANCE SHEET

 

   As of December 31, 
   2015 
   As originally
reported
   Impact of
adoption
   Balance Sheet
 after adjustment
 
ASSETS               
Other assets  $4,603,855   $(4,037,644)  $566,211 
                
LIABILITIES               
7.375% Notes Due 2019  $41,400,000   $(890,344)  $40,509,656 
Notes issued by KCAP Senior Funding I, LLC  $144,442,405   $(3,126,009)  $141,316,396 
Convertible Notes  $19,299,000   $(21,291)  $19,277,709 

 

FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, which updated accounting guidance for all revenue recognition arising from contracts with customers, and also affects entities that enter into contracts to provide goods or services to their customers (unless the contracts are in the scope of other US GAAP requirements). This update provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. The FASB also issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of the standard for one year. As a result, the guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. We do not expect the adoption of ASU 2014-09 to have a material impact to the Company’s financial statements.

 

Investments

 

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

 

Valuation of Portfolio Investments. The Company’s Board of Directors is ultimately and solely responsible for making a good faith determination of the fair value of portfolio investments on a quarterly basis. Debt and equity securities for which market quotations are readily available are generally valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available are valued by the Board of Directors based on detailed analyses prepared by management and, in certain circumstances, third parties with valuation expertise. Valuations are conducted by management on 100% of the investment portfolio at the end of each quarter. The Company follows the provisions of ASC 820: Fair Value Measurements and Disclosures (“ASC 820: Fair Value”). This standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. ASC 820: Fair Value defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Subsequent to the adoption of ASC 820: Fair Value, the FASB has issued various staff positions clarifying the initial standard as noted below.

 

The FASB issued guidance that clarified and required disclosures about fair value measurements. These include requirements to disclose the amounts and reasons for significant transfers between Level I and Level II, as well as significant transfers in and out of Level III of the fair value hierarchy (see Note 4 – “Investments – Fair Value Measurements” for further information relating to Level I, Level II and Level III). The guidance also required that purchases, sales, issuances and settlements be presented gross in the Level III reconciliation.

 

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

 

The Company utilizes an independent valuation firm to provide an annual third-party review of the Company’s CLO Securities fair value model relative to its functionality, model inputs and calculations as a reasonable method to determine fair values of CLO Securities, in the absence of Level I or Level II trading activity or observable market inputs. The independent valuation firm’s 2015 annual review concluded that the Company’s model appropriately factors in all the necessary inputs required to build an equity cash flow model for CLO Securities for fair value purposes and that the inputs were being employed correctly.

 

The Company utilizes an independent valuation firm to provide third party valuation consulting services. Each quarter the independent valuation firm will perform third party valuations of the Company’s investments in material illiquid securities such that they are reviewed at least once during a trailing 12-month period. These third party valuation estimates are considered as one of the relevant data points in the Company’s determination of fair value. The Company intends to continue to engage an independent valuation firm in the future to provide certain valuation services, including the review of certain portfolio assets, as part of the quarterly and annual year-end valuation process.

 

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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 that considers multiple levels of market and asset specific inputs, which may include historical and forecasted financial and operational performance of the individual investment, projected cash flows, market multiples, comparable market transactions, the priority of the security compared with those of other securities for such issuers, credit risk, interest rates, and independent valuations and reviews.

 

Debt Securities. To the extent that the Company’s investments are exchange traded and are priced or have sufficient price indications from normal course trading at or around the valuation date (financial reporting date), such pricing will be used to determine the fair value of the investments. Valuations from third party pricing services may be used as an indication of fair value, depending on the volume and reliability of the valuation, sufficient and reasonable correlation of bid and ask quotes, and, most importantly, the level of actual trading activity. However, if the Company has been unable to identify directly comparable market indices or other market guidance that correlate directly to the types of investments the Company owns, the Company will determine fair value using alternative methodologies such as available market data, as adjusted, to reflect the types of assets the Company owns, their structure, qualitative and credit attributes and other asset-specific characteristics.

 

The Company derives fair value for its illiquid investments that do not have indicative fair values based upon active trades primarily by using a present value technique that discounts the estimated contractual cash flows for the subject assets with discount rates imputed by broad market indices, bond spreads and yields for comparable issuers relative to the subject assets (the “Income Approach”). The Company also considers, among other things, recent loan amendments or other activity specific to the subject asset. Discount rates applied to estimated contractual cash flows for an underlying asset vary by specific investment, industry, priority and nature of the debt security (such as the seniority or security interest of the debt security) and are assessed relative to two indices, a leveraged loan index and a high-yield bond index, at the valuation date. The Company has identified these two indices as benchmarks for broad market information related to its loan and debt securities. Because the Company has not identified any market index that directly correlates to the loan and debt securities held by the Company and therefore uses these benchmark indices, these market indices may require significant adjustment to better correlate such market data for the calculation of fair value of the investment under the Income Approach. Such adjustments require judgment and may be material to the calculation of fair value. Further adjustments to the discount rate may be applied to reflect other market conditions or the perceived credit risk of the borrower. When broad market indices are used as part of the valuation methodology, their use is subject to adjustment for many factors, including priority, collateral used as security, structure, performance and other quantitative and qualitative attributes of the asset being valued. The resulting present value determination is then weighted along with any quotes from observable transactions and broker/pricing quotes. If such quotes are indicative of actual transactions with reasonable trading volume at or near the valuation date that are not liquidation or distressed sales, relatively more reliance will be put on such quotes to determine fair value. If such quotes are not indicative of market transactions or are insufficient as to volume, reliability, consistency or other relevant factors, such quotes will be compared with other fair value indications and given relatively less weight based on their relevancy. Other significant assumptions, such as coupon and maturity, are asset-specific and are noted for each investment in the Schedules of Investments.

 

Equity Securities. The Company’s equity securities in portfolio companies for which there is no liquid public market are carried at fair value based on the Enterprise Value of the portfolio company, which is determined using various factors, including EBITDA (earnings before interest, taxes, depreciation and amortization) and discounted cash flows from operations, less capital expenditures and other pertinent factors, such as recent offers to purchase a portfolio company’s securities or other liquidation events. The determined fair values are generally discounted to account for restrictions on resale and minority ownership positions. In the event market quotations are readily available for the Company’s equity securities in public companies, those investments may be valued using the Market Approach (as defined below). In cases where the Company receives warrants to purchase equity securities, a market standard Black-Scholes model is utilized.

 

The significant inputs used to determine the fair value of equity securities include prices, EBITDA and cash flows after capital expenditures for similar peer comparables and the investment entity itself. Equity securities are classified as Level III, when there is limited activity or less transparency around inputs to the valuation given the lack of information related to such equity investments held in nonpublic companies. Significant assumptions observed for comparable companies are applied to relevant financial data for the specific investment. Such assumptions, such as model discount rates or price/earnings multiples, vary by the specific investment, equity position and industry and incorporate adjustments for risk premiums, liquidity and company specific attributes. Such adjustments require judgment and may be material to the calculation of fair value.

 

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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 (as defined below), which incorporates different levels of discount rates depending on the hierarchy of fees earned (including the likelihood of realization of senior, subordinate and incentive fees) and prospective modeled performance. Such valuation takes into consideration an analysis of comparable asset management companies and the amount of assets under management. The Asset Manager Affiliates are classified as a Level III investment. Any change in value from period to period is recognized as net change in unrealized appreciation or depreciation.

 

CLO Fund Securities. The Company typically makes a minority investment in the most junior class of securities of CLO Funds raised and managed by the Asset Manager Affiliates and may selectively invest in securities issued by funds managed by other asset management companies. The investments held by CLO Funds generally relate to non-investment grade credit instruments issued by corporations.

 

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.

 

Cash. The Company defines cash as demand deposits. The Company places its cash with financial institutions and, at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit.

 

Restricted Cash. Restricted cash and cash equivalents (e.g., money market funds) consists of cash held for reinvestment and quarterly interest and principal distribution (if any) to holders of notes issued by KCAP Senior Funding I, LLC.

 

Time Deposits and Money Market Accounts. Time deposits primarily represent investments of cash held in demand deposit accounts. Money market accounts primarily represent short term interest-bearing deposit accounts and also includes restricted cash held under employee benefit plans.

 

Interest Income. Interest income, including the amortization of premium and accretion of discount, is recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company generally places a loan or security on non-accrual status and ceases recognizing cash interest income on such loan or security when a loan or security becomes 90 days or more past due or if the Company otherwise does not expect the debtor to be able to service its debt obligations. Non-accrual loans remain in such status until the borrower has demonstrated the ability and intent to pay contractual amounts due or such loans become current. As of September 30, 2016, one issuer representing less than 1% of the Company’s total investments at fair value was on a non-accrual status.

 

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Distributions from Asset Manager Affiliates. The Company records distributions from our Asset Manager Affiliates on the declaration date, which represents the ex-dividend date. Distributions in excess of tax-basis earnings and profits of the distributing affiliate company are recognized as tax-basis return of capital. For interim periods, the Company estimates the tax attributes of any distributions as being either tax-basis earnings and profits (i.e., dividend income) or return of capital (i.e., adjustment to the Company’s cost basis in the Asset Manager Affiliates). The final determination of the tax attributes of distributions from our Asset Manager Affiliates is made on an annual (full calendar year) basis at the end of the year based upon taxable income and distributions for the full-year. Therefore, any estimate of tax attributes of distributions made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year.

 

Investment Income on CLO Fund Securities. The Company generates investment income from its investments in the most junior class of securities of CLO Funds (typically preferred shares or subordinated securities) managed by the Asset Manager Affiliates and select investments in securities issued by funds managed by other asset management companies. The Company’s CLO Fund junior class securities are subordinated to senior note holders who typically receive a stated interest rate of return based on a floating rate index, such as the London Interbank Offered Rate (“LIBOR”) on their investment. The CLO Funds are leveraged funds and any excess cash flow or “excess spread” (interest earned by the underlying securities in the fund less payments made to senior note holders and less fund expenses and management fees) is paid to the holders of the CLO Fund’s subordinated securities or preferred shares.

 

GAAP-basis investment income on CLO equity investments is recorded using the effective interest method in accordance with the provisions of ASC 325-40, based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated projected future cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield prospectively over the remaining life of the investment from the date the estimated yield was changed. Accordingly, investment income recognized on CLO equity securities in the GAAP statement of operations differs from both the tax–basis investment income and from the cash distributions actually received by the Company during the period.

 

For non-junior class CLO Fund securities, such as the Company’s investment in the Class E Notes of the Catamaran 2014-1 CLO, interest is earned at a fixed spread relative to the LIBOR index.

 

Capital Structuring Service Fees. The Company may earn ancillary structuring and other fees related to the origination, investment, disposition or liquidation of debt and investment securities. Generally, the Company will capitalize loan origination fees, then amortize these fees into interest income over the term of the loan using the effective interest rate method, recognize prepayment and liquidation fees upon receipt and equity structuring fees as earned, which generally occurs when an investment transaction closes.

 

Debt Issuance Costs. Debt issuance costs represent fees and other direct costs incurred in connection with the Company’s borrowings. These amounts are capitalized and amortized using the effective interest method over the expected term of the borrowing.

 

Extinguishment of debt. The Company must derecognize a liability if and only if it has been extinguished through delivery of cash, delivery of other financial assets, delivery of goods or services, or reacquisition by the Company of its outstanding debt securities whether the securities are cancelled or held. If the debt contains a cash conversion option, the Company must allocate the consideration transferred and transaction costs incurred to the extinguishment of the liability component and the reacquisition of the equity component and recognize a gain or loss in the statement of operations.

 

Expenses. The Company is internally managed and expenses costs, as incurred, with regard to the running of its operations. Primary operating expenses include employee salaries and benefits, the costs of identifying, evaluating, negotiating, closing, monitoring and servicing the Company’s investments and related overhead charges and expenses, including rental expense, and any interest expense incurred in connection with borrowings. The Company and the Asset Manager Affiliates share office space and certain other operating expenses. The Company has entered into an Overhead Allocation Agreement with the Asset Manager Affiliates which provides for the sharing of such expenses based on an allocation of office lease costs and the ratable usage of other shared resources.

 

Shareholder Distributions. Distributions to common stockholders are recorded on the ex-dividend date. The amount of distributions, if any, is determined by the Board of Directors each quarter.

 

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

 

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3. EARNINGS (LOSSES) PER SHARE

 

In accordance with the provisions of ASC 260,“Earnings per Share” (“ASC 260”), basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

 

The following information sets forth the computation of basic and diluted net increase (decrease) in stockholders’ equity per share for the three and nine months ended September 30, 2016 and 2015 (unaudited):

 

   (unaudited)   (unaudited)  
   Three Months Ended September 30,   Nine Months Ended September 30,  
   2016   2015   2016   2015  
                 
Net increase (decrease) in net assets resulting from operations  $2,716,613   $(16,050,865)  $(1,118,601)  $(7,145,869)
Net (increase) decrease in net assets allocated to unvested share awards   (30,313)   303,869    16,701    125,136 
                     
Net increase (decrease) in net assets available to common stockholders  $2,686,300   $(15,746,996)  $(1,101,900)  $(7,020,733)
Weighted average number of common shares outstanding for basic shares computation   37,152,622    37,046,906    37,142,002    36,923,212 
                     
Weighted average number of common and common stock equivalent shares outstanding for diluted shares computation   37,152,622    37,046,906    37,142,002    36,923,212 
                     
Net increase (decrease) in net assets per basic common shares:                    
Net increase (decrease) in net assets from operations  $0.07   $(0.43)  $(0.03)  $(0.19)
Net increase (decrease) in net assets per diluted shares:                    
Net increase (decrease) in net assets from operations  $0.07   $(0.43)  $(0.03)  $(0.19)

 

Share-based awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and included in the computation of both basic and diluted earnings per share. Grants of restricted stock awards to the Company’s employees and directors are considered participating securities when there are earnings in the period and the earnings per share calculations include outstanding unvested restricted stock awards in the basic weighted average shares outstanding calculation.

 

There were 50,000 options to purchase shares of common stock considered for the computation of the diluted per share information for the three months and nine months ended September 30, 2016 and 2015. Since the effects are anti-dilutive for both periods, the options were not included in the computation. For the three months and nine months ended September 30, 2016, the Company purchased 309 and 67,654 shares of common stock, respectively, in connection with the vesting of employee restricted stock, such shares are treated as treasury shares and reduce the weighted average shares outstanding in the computation of earnings per share.

 

The Company’s Convertible Notes were 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” for periods when the Convertible Notes were outstanding. Under the if-converted method, interest charges applicable to the convertible notes for the period are added to reported net increase or decrease in net assets resulting from operations and the full amount of shares (pro-rata if not outstanding for the full period) that would be issued are added to weighted average basic shares. Convertible notes are considered anti-dilutive only when its interest per share upon conversion exceeds the basic net increase or decrease in net assets resulting from operations per share. For the three and nine month periods ended September 30, 2015, the effects of the convertible notes are anti-dilutive. The Convertible Notes matured and were repaid in March 2016. 

 

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4. INVESTMENTS

 

The following table shows the Company’s portfolio by security type at September 30, 2016 and December 31, 2015:

 

   September 30, 2016 (unaudited)   December 31, 2015 
Security Type  Cost/Amortized Cost   Fair Value      Cost/Amortized
Cost
   Fair Value    
Money Market Accounts²  $15,379,713   $15,379,713    4   $2,129,381   $2,129,381    1 
Senior Secured Loan   207,336,758    200,021,049    54    203,819,074    194,123,223    46 
Junior Secured Loan   40,175,253    38,432,562    11    40,221,557    37,591,900    9 
Senior Unsecured Loan   23,000,000    23,000,000    6    23,000,000    23,000,000    6 
First Lien Bond   3,000,000    1,035,000    -    3,000,000    2,216,700    1 
Senior Subordinated Bond   -    -    -    4,466,793    4,615,569    1 
Senior Unsecured Bond   -    -    -    11,879,187    10,551,724    3 
Senior Secured Bond   1,507,492    1,400,625    -    1,510,560    1,503,755    - 
CLO Fund Securities   66,714,991    45,126,919    12    83,214,947    55,872,382    14 
Equity Securities   10,208,846    4,392,696    1    10,467,787    9,548,488    2 
Preferred Securities   -    -    -    10,411,673    11,036,373    3 
Asset Manager Affiliates³   55,341,230    43,425,000    12    56,591,230    57,381,000    14 
                               
Total  $422,664,283   $372,213,564    100%  $450,712,189   $409,570,495    100%

 

 

¹Represents percentage of total portfolio at fair value.

²Includes restricted cash held under employee benefit plans.

³Represents the equity investment in the Asset Manager Affiliates.

 

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The industry-related information, based on the fair value of the Company’s investment portfolio as of September 30, 2016 and December 31, 2015, for the Company’s investment portfolio was as follows:

 

   September 30, 2016 (unaudited)    December 31, 2015  
Industry Classification  Cost/ Amortized Cost   Fair Value   %1   Cost/ Amortized Cost   Fair Value   %1 
Aerospace and Defense  $8,410,248   $8,384,194    2%  $6,910,349   $6,383,724    2%
Asset Management Company2   55,341,230    43,425,000    12    56,591,230    57,381,000    14 
Related Party Loan   23,000,000    23,000,000    6    23,000,000    23,000,000    6 
Automotive   6,290,748    6,186,689    2    9,898,494    9,440,866    2 
Banking, Finance, Insurance & Real Estate   5,179,598    5,171,400    -    6,270,984    6,008,587    1 
Beverage, Food and Tobacco   17,087,448    16,933,213    5    17,334,746    16,882,750    4 
Capital Equipment   6,187,500    5,456,658    1    9,519,342    7,846,767    2 
Chemicals, Plastics and Rubber   3,466,419    3,457,287    1    3,494,086    3,359,916    1 
CLO Fund Securities   66,714,991    45,126,919    12    83,214,947    55,872,382    14 
Construction & Building   1,963,286    1,974,587    1    1,976,345    1,907,614    - 
Consumer goods: Durable   12,263,060    9,998,854    3    13,983,607    12,753,455    3 
Consumer goods: Non-durable   14,798,250    14,549,700    4    20,124,355    19,646,576    5 
Ecological   2,934,140    2,962,500    1    -    -    - 
Energy: Electricity   3,913,044    3,946,869    1    3,465,576    3,465,000    1 
Energy: Oil & Gas   14,279,336    8,589,866    2    14,281,821    10,204,318    2 
Environmental Industries   13,424,736    12,989,425    3    13,735,492    13,179,657    3 
Forest Products & Paper   5,866,646    5,749,874    2    5,888,294    5,883,080    1 
Healthcare & Pharmaceuticals   57,869,074    54,059,389    15    58,649,512    55,417,827    14 
Healthcare, Education and Childcare   1,079,617    1,000    -    -    -    - 
High Tech Industries   13,183,733    13,239,630    3    11,727,898    11,662,995    3 
Hotel, Gaming & Leisure   400,000    1,000    -    400,000    1,000    - 
Media: Advertising, Printing & Publishing   11,819,087    11,498,594    3    11,167,950    10,340,449    3 
Media: Broadcasting & Subscription   9,491,677    9,521,397    3    7,428,110    7,406,792    2 
Metals & Mining   228,563    991    -    228,563    991    - 
Retail   4,395,220    4,037,197    1    4,416,709    3,594,599    1 
Services: Business   12,315,859    12,249,350    3    18,206,668    21,022,801    5 
Services: Consumer   6,234,862    6,199,438    2    6,512,029    6,356,054    2 
Telecommunications   13,709,154    13,527,620    4    13,776,871    12,425,489    3 
Time Deposit and Money Market Accounts3   15,379,713    15,379,713    4    2,129,381    2,129,381    1 
Transportation: Cargo   7,565,668    7,192,595    2    18,232,953    18,865,603    5 
Transportation: Consumer   2,427,666    2,434,575    1    2,472,795    2,324,381    1 
Utilities: Electric   5,443,710    4,968,040    1    5,673,082    4,806,441    1 
Total  $422,664,283   $372,213,564    100%  $450,712,189   $409,570,495    100%

 

 

1 Calculated as a percentage of total portfolio at fair value.

2 Represents the equity investment in the Asset Manager Affiliates.

3 Includes restricted cash held under employee benefit plans.

 

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

 

At September 30, 2016 and December 31, 2015, the total amount of non-qualifying assets was approximately 16% and 18% of total assets, respectively. The majority of non-qualifying assets were foreign investments which were approximately 12% and 13% 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 12% and 13% of its total assets on such dates, respectively).

 

The following tables detail the ten largest portfolio investments (at fair value) as of September 30, 2016 and December 31, 2015:

 

   September 30, 2016 (unaudited) 
Investment  Cost/Amortized Cost   Fair Value   % of FMV 
Asset Manager Affiliates  $55,341,230   $43,425,000    12%
Trimaran Advisors, L.L.C.1   23,000,000    23,000,000    6 
Katonah 2007-I CLO Ltd.   26,960,634    21,476,801    6 
US Bank Money Market Account   15,365,445    15,365,445    4 
Grupo HIMA San Pablo, Inc.   9,825,759    9,149,200    2 
Tank Partners Holdings, LLC   11,784,229    6,990,447    2 
Roscoe Medical, Inc.   6,663,667    6,499,000    2 
Hoffmaster Group, Inc.   5,866,646    5,749,874    2 
Weiman Products, LLC   5,473,917    5,496,597    1 
Nielsen & Bainbridge, LLC   5,323,685    5,138,864    1 
                
Total  $165,605,212   $142,291,228    38%

 

   December 31, 2015 
Investment  Cost/Amortized Cost   Fair Value   % of FMV 
Asset Manager Affiliates  $56,591,230   $57,381,000    14%
Trimaran Advisors, L.L.C.1   23,000,000    23,000,000    6 
Katonah 2007-I CLO Ltd.   24,312,424    20,295,677    5 
DBI Holding, LLC   8,585,578    12,975,447    3 
Crowley Holdings Preferred, LLC   10,411,673    11,036,373    3 
Grupo HIMA San Pablo, Inc.   9,817,315    9,917,500    2 
Catamaran CLO 2015-1 Ltd.   11,869,751    8,789,651    2 
Tank Partners Holdings, LLC   10,624,515    8,177,538    2 
Weiman Products, LLC   6,582,457    6,619,805    2 
Nielson & Bainbrige, LLC   6,803,605    6,510,157    2 
                
Total  $168,598,548   $164,703,148    40%

 

¹Related party loan - See Note 5 to Consolidated Financial Statements.

 

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Excluding the Asset Manager Affiliates and CLO Fund securities, the Company’s ten largest portfolio companies represented approximately 18% and 19% of the total fair value of the Company’s investments at September 30, 2016 and December 31, 2015, respectively.

 

Investments in CLO Fund Securities

 

The Company typically makes a minority investment in the most junior class of securities (typically preferred shares or subordinated securities) of CLO Funds managed by the Asset Manager Affiliates and may selectively invest in securities issued by CLO funds managed by other asset management companies. These securities also are entitled to recurring distributions which generally equal the net remaining cash flow of the payments made by the underlying CLO Fund’s securities less contractual payments to senior bond holders, management fees and CLO Fund expenses. CLO Funds invest primarily in broadly syndicated non-investment grade loans, high-yield bonds and other credit instruments of corporate issuers. The underlying assets in each of the CLO Funds in which the Company has an investment are generally diversified secured or unsecured corporate debt. The CLO Funds are leveraged funds and any excess cash flow or “excess spread” (interest earned by the underlying securities in the fund less payments made to senior bond holders, fund expenses and management fees) is paid to the holders of the CLO Fund’s subordinated securities or preferred shares.

 

In June 2013, the Company purchased $9.0 million of the par value of the Subordinated Notes of Catamaran 2013-1 CLO (“Catamaran 2013-1”) managed by Trimaran Advisors.

 

In May and August 2014, the Company purchased $11.1 million and $9.9 million of the par value of the Subordinated Notes of Catamaran 2014-1 CLO (“Catamaran 2014-1”) and 2014-2 CLO (“Catamaran 2014-2”), respectively. Both are managed by Trimaran Advisors.

 

In May 2015, the Company purchased $11.9 million of the par value of the Subordinated Notes of Catamaran 2015-1 CLO (“Catamaran 2015-1”) managed by Trimaran Advisors.

 

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

 

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 Katonah III, Ltd., all third-party managed CLO Funds are making 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”).

 

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

 

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

 

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

 

Level III – Pricing inputs are unobservable for the investment and includes situations where there is little, if any, market activity for the investment. The inputs may be based on the Company’s own assumptions about how market participants would price the asset or liability or may use Level II inputs, as adjusted, to reflect specific investment attributes relative to a broader market assumption. These inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data for comparable performance or valuation measures (earnings multiples, discount rates, other financial/valuation ratios, etc.) are available, such investments are grouped as Level III if any significant data point that is not also market observable (private company earnings, cash flows, etc.) is used in the valuation methodology.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the investment. A majority of the Company’s investments are classified as Level III. The Company evaluates the source of inputs, including any markets in which its investments are trading, in determining fair value. Inputs that are highly correlated to the specific investment being valued and those derived from reliable or knowledgeable sources will tend to have a higher weighting in determining fair value. The Company’s fair value determinations may include factors such as an assessment of each underlying investment, its current and prospective operating and financial performance, consideration of financing and sale transactions with third parties, expected cash flows and market-based information, including comparable transactions, performance factors, and other investment or industry specific market data, among other factors.

 

The following table summarizes the fair value of investments by the above ASC 820: Fair Value fair value hierarchy levels as of September 30, 2016 (unaudited) and December 31, 2015, respectively:

 

   As of September 30, 2016 (unaudited) 
   Level I   Level II   Level III   Total 
Money market accounts  $   $15,379,713   $   $15,379,713 
Debt securities       94,091,930    169,797,306    263,889,236 
CLO Fund securities           45,126,919    45,126,919 
Equity securities       769,158    3,623,538    4,392,696 
Asset Manager Affiliates           43,425,000    43,425,000 
                     
Total  $   $110,240,801   $261,972,763   $372,213,564 

 

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   As of December 31, 2015 
   Level I   Level II   Level III   Total 
Money market accounts  $   $2,129,381   $   $2,129,381 
Debt securities       101,238,779    183,400,465    284,639,244 
CLO Fund securities           55,872,382    55,872,382 
Equity securities       445,485    9,103,003    9,548,488 
Asset Manager Affiliates           57,381,000    57,381,000 
                     
Total  $   $103,813,645   $305,756,850   $409,570,495 

 

As a BDC, the Company is required to invest primarily in the debt and equity of non-public companies for which there is little, if any, market-observable information. As a result, a significant portion of the Company’s investments at any given time will likely be deemed Level III investments.

 

Investment values derived by a third party pricing service are generally deemed to be Level III values. For those that have observable trades, the Company considers them to be Level II.

 

Values derived for debt and equity securities using comparable public/private companies generally utilize market-observable data from such comparables and specific, non-public and non-observable financial measures (such as earnings or cash flows) for the private, underlying company/issuer. Such non-observable company/issuer data is typically provided on a monthly or quarterly basis, is certified as correct by the management of the company/issuer and/or audited by an independent accounting firm on an annual basis. Since such private company/issuer data is not publicly available it is not deemed market-observable data and, as a result, such investment values are grouped as Level III assets.

 

Values derived for the Asset Manager Affiliates using comparable public/private companies utilize market-observable data and specific, non-public and non-observable financial measures (such as assets under management, historical and prospective earnings) for the Asset Manager Affiliates. The Company recognizes that comparable asset managers may not be fully comparable to the Asset Manager Affiliates and typically identifies a range of performance measures and/or adjustments within the comparable population with which to determine value. Since any such ranges and adjustments are entity specific they are not considered market-observable data and thus require a Level III grouping. Illiquid investments that have values derived through the use of discounted cash flow models and residual enterprise value models are grouped as Level III assets.

 

The Company’s policy for determining transfers between levels is based solely on the previously defined three-level hierarchy for fair value measurement. Transfers between the levels of the fair value hierarchy are separately noted in the tables below and the reason for such transfer described in each table’s respective footnotes. Certain information relating to investments measured at fair value for which the Company has used unobservable inputs to determine fair value is as follows:

 

  Nine Months Ended September 30, 2016 (unaudited)
  Debt Securities   CLO Fund
Securities
   Equity
Securities 
   Asset Manager
Affiliate
   Total 
Balance, December 31, 2015 $183,400,465   $55,872,382   $9,103,003   $57,381,000   $305,756,850 
Transfers out of Level III  (14,754,684)1       (1,338,767)1       (16,093,451)
Transfers into Level III  31,921,0152       445,4852       32,366,500 
Net accretion (amortization)  250,424    (2,188,397)           (1,937,973)
Purchases  16,064,193                16,064,193 
Sales/Paydowns/Return of Capital  (46,233,881)   (4,200,000)   (4,743,682)   (1,250,000)   (56,427,563)
Total realized gain (loss) included in earnings  (294,359)   (10,111,560)   4,484,742        (5,921,177)
Total unrealized gain (loss) included in earnings  (555,867)   5,754,494    (4,327,243)   (12,706,000)   (11,834,616)
Balance, September 30, 2016 $169,797,306   $45,126,919   $3,623,538   $43,425,000   $261,972,763 
Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date $(9,221,012)  $5,754,494   $(4,327,243)  $(12,706,000)  $(20,499,763)

 

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¹Transfers out of Level III represent a transfer of $16,093,451 relating to debt and equity securities for which pricing inputs, other than their quoted prices in active markets were observable as of September 30, 2016

 

²Transfers into Level III represent a transfer of $32,366,500 relating to debt and equity securities for which pricing inputs, other than their quoted prices in active markets were unobservable as of September 30, 2016

 

  Year Ended December 31, 2015
  Debt Securities   CLO Fund
Securities
   Equity
Securities 
   Asset Manager
Affiliate
   Total 
Balance, December 31, 2014 $171,018,343   $77,514,902   $8,119,681   $72,326,000   $328,978,926 
Transfers out of Level III  (30,472,595)1               (30,472,595)
Transfers into Level III  34,013,1342               34,013,134 
Net accretion (amortization)  300,255    (9,507,048)           (9,206,793)
Purchases  990,000    11,952,000            12,942,000 
Sales/Paydowns/Return of Capital      (3,872,700)   (317,340)   (3,701,446)   (7,891,486)
Total realized gain (loss) included in earnings  99,145    (6,246,883)   3,015        (6,144,723)
Total unrealized gain (loss) included in earnings  7,452,183    (13,967,889)   1,297,647    (11,243,554)   (16,461,613)
Balance, December 31, 2015 $183,400,465   $55,872,382   $9,103,003   $57,381,000   $305,756,850 
Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date $(7,109,531)  $(20,760,499)  $1,297,647   $(11,243,554)  $(23,254,223)

 

¹Transfers out of Level III represent a transfer of $30,472,595 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were observable as of December 31, 2015.

 

²Transfers into Level III represent a transfer of $34,013,134 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were unobservable as of December 31, 2015.

 

As of September 30, 2016, the Company’s Level II portfolio investments were valued by a third party pricing services for which the prices are not adjusted and for which inputs are observable or can be corroborated by observable market data for substantially the full character of the financial instrument, or by inputs that are derived principally from, or corroborated by, observable market information. The fair value of the Company’s Level II portfolio investments was $110,240,801 as of September 30, 2016.

 

As of September 30, 2016, the Company’s Level III portfolio investments had the following valuation techniques and significant inputs:

 

Type Fair Value

Primary Valuation

Methodology

Unobservable

Inputs

Range of Inputs

(Weighted Average)

Debt Securities $ 8,023,447 Enterprise Value Average EBITDA Multiple 5.4x
$ 161,772,859 Income Approach Implied Discount Rate 2.9% - 23.5% (8.2%)
$ 1,000 Options Value Qualitative Inputs1  
Equity Securities $ 3,616,538 Enterprise Value Average EBITDA Multiple/WAAC 4.8x/7.0% - 14.4x/11.2% (9.5x/9.7%)
$ 7,000 Options Value Qualitative Inputs  
CLO Fund Securities $ 45,126,919 Discounted Cash Flow Discount Rate 11.7% - 15.0% (14.9%)
Probability of Default 2.0% - 2.5% (2.1%)
Loss Severity 25.0% - 25.9% (25.8%)
Recovery Rate 74.1% - 75.0% (74.2%)
Prepayment Rate 25.0% - 29.9% (25.4%)
Asset Manager Affiliate $ 43,425,000 Discounted Cash Flow Discount Rate 2.1% - 15.0% (8.2%)
Total Level III Investments  $ 261,972,763      

 

 

 

¹ The qualitative inputs used in the fair value measurements of the Debt Securities include estimates of the distressed liquidation value of the pledged collateral.

 

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As of December 31, 2015, the Company’s Level III portfolio investments had the following valuation techniques and significant inputs:

 

Type Fair Value

Primary Valuation

Methodology

Unobservable

Inputs

Range of Inputs

(Weighted Average)

Debt Securities $ 2,216,700 Enterprise Value Average EBITDA Multiple 7.2x
$ 181,182,774 Income Approach Implied Discount Rate 4.9% - 27.1% (10.46%)
$ 991 Options Value Qualitative Inputs1  
Equity Securities $ 9,100,103 Enterprise Value Average EBITDA Multiple/WAAC 4.8x/6.9% - 12.9x/13.4% (6.8x/12.0%)
$ 3,000 Options Value Qualitative Inputs  
CLO Fund Securities $ 55,872,382 Discounted Cash Flow Discount Rate 11.3% - 15.0% (14.9%)
Probability of Default 2.0% - 2.5% (2.1%)
Loss Severity 25.0% - 25.9% (25.7%)
Recovery Rate 74.1% - 75.0% (74.3%)
Prepayment Rate 7.9% - 32.0% (25.3%)
Asset Manager Affiliate $ 57,381,000 Discounted Cash Flow Discount Rate 2.4% - 15.0% (8.6%)
Total Level III Investments  $ 305,756,850      

 

 

 

¹ The qualitative inputs used in the fair value measurements of the Debt Securities include estimates of the distressed liquidation value of the pledged collateral.

 

The significant unobservable inputs used in the fair value measurement of the Company’s debt securities may include, among other things, broad market indices, the comparable yields of similar investments in similar industries, effective discount rates, average EBITDA multiples, and weighted average cost of capital. Significant increases or decreases in such comparable yields would result in a significantly lower or higher fair value measurement.

 

The significant unobservable inputs used in the fair value measurement of the Company’s equity securities include the EBITDA multiple of similar investments in similar industries and the weighted average cost of capital. Significant increases or decreases in such inputs would result in a significantly lower or higher fair value measurement.

 

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Significant unobservable input used in the fair value measurement of the Company’s CLO Fund securities include default rates, recovery rates, prepayment rates, spreads, and the discount rate by which to value the resulting underlying cash flows. Such assumptions can vary significantly, depending on market data sources which often vary in depth and level of analysis, understanding of the CLO market, detailed or broad characterization of the CLO market and the application of such data to an appropriate framework for analysis. The application of data points are based on the specific attributes of each individual CLO Fund security’s underlying assets, historic, current and prospective performance, vintage, and other quantitative and qualitative factors that would be evaluated by market participants. The Company evaluates the source of market data for reliability as an indicative market input, consistency amongst other inputs and results and also the context in which such data is presented. Significant increases or decreases in probability of default and loss severity inputs in isolation would result in a significantly lower or higher fair value measurement. In general, a change in the assumption of the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity in an event of default. Significant increases or decreases in the discount rate in isolation would result in a significantly lower or higher fair value measurement.

 

The significant unobservable inputs used in the fair value measurement of the Asset Manager Affiliates is the discount rate used to present value prospective cash flows. Prospective revenues are generally based on a fixed percentage of the par value of CLO Fund assets under management and are recurring in nature for the term of the CLO Fund so long as the Asset Manager Affiliates manage the fund. As a result, the fees earned by the Asset Manager Affiliates are generally not subject to market value fluctuations in the underlying collateral. The discounted cash flow model incorporates different levels of discount rates depending on the hierarchy of fees earned (including the likelihood of realization of senior, subordinate and incentive fees) and prospective modeled performance. Significant increases or decreases in such discount rate would result in a significantly lower or higher fair value measurement.

 

5. ASSET MANAGER AFFILIATES

 

Wholly-Owned Asset Managers

 

The Asset Manager Affiliates are wholly-owned portfolio companies. The Asset Manager Affiliates manage CLO Funds primarily for third party investors that invest in broadly syndicated loans, high yield bonds and other credit instruments issued by corporations. At September 30, 2016 and December 31, 2015, the Asset Manager Affiliates had approximately $2.6 billion and $2.7 billion of par value of assets under management, respectively, and the Company’s 100% equity interest in the Asset Manager Affiliates had a fair value of approximately $43 million and $57 million, respectively.

 

As a manager of the CLO Funds, the Asset Manager Affiliates receive contractual and recurring management fees from the CLO Funds for their management and advisory services. The annual fees which the Asset Manager Affiliates receive are generally based on a fixed percentage of assets under management (at par value and not subject to changes in market value), and the Asset Manager Affiliates generate net income equal to the amount by which their fee income exceeds their operating expenses, including compensation of their employees and income taxes. The management fees the Asset Manager Affiliates receive have three components - a senior management fee, a subordinated management fee and an incentive fee. Currently, all CLO Funds managed by the Asset Manager Affiliates are paying both their senior and subordinated management fees on a current basis.

 

For the three months ended September 30, 2016 and 2015, the Asset Manager Affiliates declared cash distributions of $750,000 and $2.3 million to the Company, respectively. For the nine months ended September 30, 2016 and 2015, the Asset Manager Affiliates declared cash distributions of approximately $2.7 million and $7.3 million to the Company, respectively. Any distributions from the Asset Manager Affiliates out of their estimated tax-basis earnings and profits are recorded as “Dividends from Asset Manager Affiliates” on the Company’s statement of operations. The Company recognized $0 and $1.5 million, respectively, of Dividends from Asset Manager Affiliates in the Statement of Operations for the three months ended September 30, 2016 and 2015. For the nine months ended September 30, 2016 and 2015, the Company recognized $1.4 million and $4.2 million, respectively, of Dividends from Asset Manager Affiliates in the Statement of Operations. The difference between cash distributions received and the tax-basis earnings and profits of the distributing affiliate, are recorded as an adjustment to the cost basis in the Asset Manager Affiliate (i.e., tax-basis return of capital). Distributions receivable, if any, are reflected in the Due from Affiliates account on the consolidated balance sheets.

 

The tax attributes of distributions received from the Asset Manager Affiliates are determined on an annual basis. The Company makes an estimate of the tax-basis earnings and profits of the Asset Manager Affiliates on a quarterly basis, and any quarterly distributions received in excess of the estimated earnings and profits are recorded as return of capital (reduction in the cost basis of the investment in Asset Manager Affiliate).

 

The Asset Manager Affiliates’ fair value is determined quarterly. The valuation is primarily determined utilizing a discounted cash flow model. See Note 2 - “Significant Accounting Policies” and Note 4 - “Investments” for further information relating to the Company’s valuation methodology.

 

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On February 18, 2015, the FASB issued Accounting Standards Update 2015-2 (“ASU 2015-2”), which updated consolidation standards under ASC Topic 810, “Consolidation”. Under this update, a new consolidation analysis is required for VIEs and will limit the circumstances in which investment managers and similar entities are required to consolidate the entities that they manage. The FASB decided to eliminate some of the criteria under which their management fees are considered a variable interest and limit the circumstances in which variable interests in a VIE held by related parties of a reporting enterprise require the reporting enterprise to consolidate the VIE. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015, early adoption is permitted. The Asset Manager Affiliates adopted ASU 2015-2 in 2016 which resulted in the deconsolidation of the CLO Funds. Prior year amounts have been restated to reflect the retrospective adoption of ASU 2015-2. In addition, in accordance with Regulation S-X, additional financial information with respect to one of the CLO Funds in which the Company has an investment, Katonah 2007-I CLO, is required to be included in the Company’s SEC Filings.

 

Asset Manager Affiliates

Summarized Balance Sheet (unaudited)

 

   As of   As of 
   September 30,
2016
   December 31,
2015
 
Cash  $2,428,117   $4,085,464 
Residual Interest in CLO Warehouse   23,135,823    23,089,679 
Intangible Assets   23,485,082    24,467,705 
Other Assets   6,281,110    4,760,385 
Total Assets  $55,330,132   $56,403,233 
           
Debt  $23,000,000   $23,000,000 
Other Liabilities   6,471,304    5,131,814 
Total Liabilities   29,471,304    28,131,814 
Total Equity   25,858,828    28,271,419 
Total Liabilities and Equity  $55,330,132   $56,403,233 

 

Asset Manager Affiliates

Summarized Statements of Operations Information (unaudited)

 

   For the three months ended   For the nine months ended 
   September 30,   September 30, 
   2016   2015   2016   2015 
Fee Revenue  $3,148,353   $7,761,115   $9,707,075   $19,110,505 
Interest Income   570,865    397,881    1,138,483    2,091,852 
Total Income   3,719,218    8,158,996    10,845,558    21,202,357 
Operating Expenses   2,789,654    3,235,290    8,618,839    9,890,539 
Amortization of Intangibles   327,541    327,541    982,623    1,980,582 
Interest Expense   485,355    397,983    1,353,135    1,194,798 
Total Expenses   3,602,550    3,960,814    10,954,597    13,065,919 
Pre-Tax Income (Loss)   116,668    4,198,182    (109,039)   8,136,438 
Income Tax (Benefit) Expense   (100,862)   1,339,306    (346,447)   2,765,759 
Net Income  $217,530   $2,858,876   $237,408   $5,370,679 

 

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Katonah 2007-I CLO Ltd.

Summarized Balance Sheet Information (unaudited)

 

   As of   As of 
   September 30,
2016
   December 31,
2015
 
Total investments at fair value  $200,096,428   $246,766,505 
Cash   34,282,185    17,301,178 
Total Assets   234,937,609    265,389,850 
CLO Debt at fair value   233,046,152    261,433,473 
Total liabilities   234,741,148    269,163,111 
Total Net Assets   196,461    (3,773,261)

 

Katonah 2007-I CLO Ltd.

Summarized Statements of Operations Information (unaudited)

 

   For the three months ended   For the nine months ended 
   September 30,   September 30, 
   2016   2015   2016   2015 
Interest income from investments  $2,330,108   $2,567,295   $7,338,815   $7,644,426 
Total income   2,373,500    2,645,492    7,683,808    8,029,801 
Interest expense   2,184,144    2,299,222    6,724,410    6,904,401 
Total expenses   2,400,770    2,530,278    7,497,100    7,722,579 
Net realized and unrealized gains   1,397,748    529,390    3,783,015    2,121,290 
Increase in net assets resulting from operations   1,370,478    644,604    3,969,723    2,428,512 

 

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

 

As separately regarded entities for tax purposes, the Asset Manager Affiliates are taxed at normal corporate rates. In order to maintain the Company’s RIC status, any tax-basis dividends paid by the Asset Manager Affiliates to the Company would generally need to be distributed to the Company’s shareholders. Generally, such tax-basis dividends of the Asset Manager Affiliates’ income which was distributed to the Company’s shareholders will be considered as qualified dividends for tax purposes. The Asset Manager Affiliates’ taxable net income will differ from U.S. GAAP net income because of deferred tax temporary differences and permanent tax adjustments. Deferred tax temporary differences may include differences for the recognition and timing of amortization and depreciation, compensation related expenses, and net loss carryforward, among other things. Permanent differences may include adjustments, limitations or disallowances for meals and entertainment expenses, penalties, tax goodwill amortization and net operating loss carryforward.

 

Goodwill amortization for tax purposes was created upon the purchase of 100% of the equity interests in Katonah Debt Advisors prior to the Company’s IPO in exchange for shares of the Company’s stock valued at $33 million. Although this transaction was a stock transaction rather than an asset purchase and thus no goodwill was recognized for U.S. GAAP purposes, such exchange was considered an asset purchase under Section 351(a) of the Code. At the time of the transfer, Katonah Debt Advisors had equity of approximately $1 million resulting in tax goodwill of approximately $32 million which is being amortized for tax purposes on a straight-line basis over 15 years.

 

Additional goodwill amortization for tax purposes was created upon the purchase of 100% of the equity interests in Trimaran Advisors by one of KCAP’s affiliates, in exchange for shares of the Company’s stock valued at $25.5 million and cash of $13.0 million. The transaction was considered an asset purchase under Section 351(a) of the Code and resulted in tax goodwill of approximately $22.8 million which is being amortized for tax purposes on a straight-line basis over 15 years.

 

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During the second quarter of 2016, KCAP contributed 100% of its ownership interests in Katonah Debt Advisors and Trimaran Advisors Management to Commodore Holdings, a wholly-owned subsidiary of KCAP. These transactions simplify the tax structure of the AMAs and facilitate the consolidation of tax basis goodwill deductions for the AMAs, which may impact the tax character of distributions from the AMAs.

 

Related Party Transactions

 

On February 26, 2013, the Company entered into a senior credit agreement (the “Trimaran Credit Facility”) with Trimaran Advisors, pursuant to which Trimaran Advisors may borrow from time to time up to $20 million from the Company in order to provide capital necessary to support one or more of Trimaran Advisors’ warehouse lines of credit and/or working capital in connection with Trimaran Advisors’ warehouse activities. The Trimaran Credit Facility expires on November 20, 2017 and bears interest at an annual rate of 9.0%. Outstanding borrowings on the Trimaran Credit Facility are callable by the Company at any time. On April 15, 2013, the Trimaran Credit Facility was amended and upsized from $20 million to $23 million. At September 30, 2016 and December 31, 2015, the par value of the outstanding loan was $23 million. For the three months ended September 30, 2016 and 2015, the Company recognized interest income of approximately $485,000 and $398,000, respectively, related to the Trimaran Credit Facility. For the nine months ended September 30, 2016 and 2015, the Company recognized interest income of approximately $1.3 million and $1.2 million, respectively, related Trimaran Credit Facility.

 

6. BORROWINGS

 

The Company’s debt obligations consist of the following:

 

   As of
September 30, 2016
(unaudited)
   As of
December 31, 2015
 
         
7.375% Notes Due 2019 (net of offering costs of: 2016 - $599,542; 2015 - $890,344)  $33,400,808   $40,509,656 
Notes issued by KCAP Senior Funding I, LLC (net of discount and offering costs of: 2016 - $2,443,275 and $2,627,599, respectively; 2015 - $2,907,595 and $3,126,009, respectively)  $142,279,126   $141,316,396 
Convertible Notes, due March 15, 2016 (net of offering costs of: 2015 - $21,292)  $-   $19,277,709 

 

The weighted average stated interest rate and weighted average maturity on all our debt outstanding as of September 30, 2016 were 3.76% and 7.0 years, respectively, and as of December 31, 2015 were 4.08% and 6.8 years, respectively.

 

Convertible Notes

 

On March 16, 2011, the Company issued $55 million in aggregate principal amount of unsecured 8.75% convertible notes due March 2016 (“Convertible Notes”). On March 23, 2011, pursuant to an over-allotment option, the Company issued an additional $5 million of such Convertible Notes for a total of $60 million in aggregate principal amount. The net proceeds from the sale of the Convertible Notes, after the payment of underwriting expenses, were approximately $57.7 million. Interest on the Convertible Notes is due semi-annually in arrears on March 15 and September 15, at a rate of 8.75%, commencing September 15, 2011. The Convertible Notes matured and were repaid on March 15, 2016. The Convertible Notes were senior unsecured obligations of the Company.

 

In connection with the issuance of the Convertible Notes, the Company incurred approximately $2.4 million of debt offering costs, which were amortized over the term of the Convertible Notes on an effective yield method. On April 4, 2013, approximately $9 million of the Company’s 8.75% Convertible Notes were converted at a price per share of $8.159 into 1,102,093 shares of KCAP common stock. On September 4, 2013, the Company purchased $2.0 million face value of its own Convertible Notes at a price of $114.50 plus accrued interest. KCAP subsequently surrendered these notes to the Trustee for cancellation effective September 13, 2013. During 2015, the Company repurchased approximately $19.3 million face value of its own Convertible Notes at a price ranging from $101.500 to $102.375. KCAP subsequently surrendered these notes to the Trustee for cancellation. Due to the cash conversion option embedded in the Convertible Notes, the Company applied the guidance in ASC 470-20-40, Debt with Conversion and Other Options and realized a loss on the extinguishment of this debt. The indenture governing the Convertible Notes contains certain restrictive covenants, including compliance with certain provisions of the 1940 Act and conditions governing the undertaking of new debt. The Convertible Notes matured and were fully repaid on March 15, 2016.

 

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For the nine months ended September 30, 2016 and 2015, interest expense related to the Convertible Notes was approximately $378,000 and $2.5 million, respectively.

 

Fair Value of Convertible Notes. The Company carries the Convertible Notes at cost. The Convertible Notes were issued in a private placement and there was no active trading of these notes. The estimated fair value of the Company’s outstanding Convertible Notes was approximately $19.5 million at December 31, 2015. The fair value was determined based on an indicative closing price as of that date. The Convertible Notes are categorized as Level III following ASC 820: Fair Value.

 

7.375% Notes Due 2019

 

On October 10, 2012, the Company issued $41.4 million in aggregate principal amount of unsecured 7.375% Notes due 2019. The net proceeds for these Notes, after the payment of underwriting expenses, were approximately $39.9 million. Interest on the 7.375% Notes due 2019 is paid quarterly in arrears on March 30, June 30, September 30 and December 30, at a rate of 7.375%, commencing December 30, 2012. The 7.375% Notes due 2019 mature on September, 30, 2019 and are unsecured obligations of the Company. The 7.375% Notes due 2019 are subject to redemption in whole or in part at any time or from time to time, at the option of the Company, on or after September 30, 2015, at a redemption price per security equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to the date fixed for redemption. In addition, due to the asset coverage test applicable to the Company as a BDC and a covenant that the Company agreed to in connection with the issuance of the 7.375% Notes due 2019, the Company is limited in its ability to make distributions in certain circumstances. The indenture governing the 7.375% Notes due 2019 contains certain restrictive covenants, including compliance with certain provisions of the 1940 Act relating to borrowing and dividends. At September 30, 2016, the Company was in compliance with all of its debt covenants.

 

For the three months ended September 30, 2016 and 2015, interest expense related to the 7.375% Notes due 2019 was approximately $712,000 and $763,000, respectively. For the nine months ended September 30, 2016 and 2015, interest expense related to the 7.375% Notes due 2019 was approximately $2.2 million and $2.3 million, respectively.

 

In connection with the issuance of the 7.375% Notes due 2019, the Company incurred approximately $1.5 million of debt offering costs which are being amortized over the expected term of the facility on an effective yield method, of which approximately $600,000 remains to be amortized, and is included on the consolidated balance sheets as a reduction in the related debt liability.

 

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

 

During the third quarter of 2016, $5.0 million par value of the 7.375% notes due 2019 was redeemed by the Company, resulting in a realized loss on extinguishment of $88,015.

 

Fair Value of 7.375% Notes Due 2019.  The 7.375% Notes due 2019 were issued in a public offering on October 10, 2012 and are carried at cost. The fair value of the Company’s outstanding 7.375% Notes due 2019 was approximately $34.2 million at September 30, 2016. The fair value was determined based on the closing price on September 30, 2016 for the 7.375% Notes due 2019. The 7.375% Notes due 2019 are categorized as Level I under the ASC 820 Fair Value.

 

KCAP Senior Funding I, LLC (Debt Securitization)

 

On June 18, 2013, the Company completed the sale of notes in a $140,000,000 debt securitization financing transaction. The notes offered in this transaction (the “KCAP Senior Funding I Notes”) were issued by KCAP Senior Funding I, LLC, a newly formed special purpose vehicle (the “Issuer”), in which KCAP Senior Funding I Holdings, LLC, a wholly-owned subsidiary of the Company (the “Depositor”), owns all of the KCAP Senior Funding I Subordinated Notes (as defined below), and are backed by a diversified portfolio of bank loans. The indenture governing the KCAP Senior Funding I Notes contains an event of default that is triggered in the event that certain coverage tests are not met.

 

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The secured notes (the “KCAP Senior Funding I Secured Notes”) were issued as Class A senior secured floating rate notes which have an initial face amount of $77,250,000, are rated AAA (sf)/Aaa (sf) by Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc., respectively, and bear interest at the three-month LIBOR plus 1.50%, Class B senior secured floating rate notes which have an initial face amount of $9,000,000, are rated AA (sf)/Aa2 (sf) by Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc., respectively, and bear interest at three-month LIBOR plus the 3.25%, Class C secured deferrable floating rate notes which have an initial face amount of $10,000,000, are rated A (sf)/A2 (sf) by Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc., respectively, and bear interest at three-month LIBOR plus 4.25%, and Class D secured deferrable floating rate notes which have an initial face amount of $9,000,000, are rated BBB (sf)/Baa2 (sf) by Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc., respectively, and bear interest at three-month LIBOR plus 5.25%. The Depositor retained all of the subordinated notes of the Issuer (the “KCAP Senior Funding I Subordinated Notes”), which have an initial face amount of $34,750,000. The KCAP Senior Funding I Subordinated Notes do not bear interest and are not rated. Both the KCAP Senior Funding I Secured Notes and the KCAP Senior Funding I Subordinated Notes have a stated maturity on the payment date occurring in July, 2024, and are subject to a two year non-call period. The Issuer has a four year reinvestment period. The stated interest rate re-sets on a quarterly basis based upon the then-current level of the benchmark three-month LIBOR.

 

On December 8, 2014, the Company completed the sale of additional notes (“Additional Issuance Securities”) in a $56,000,000 increase to the collateralized loan obligation transaction that originally closed on June 18, 2013 (the “Original Closing Date”). The issuance of additional notes was proportional across all existing classes of notes issued on the Original Closing Date.

 

Each class of secured Additional Issuance Securities (all such classes, collectively, the “Additional Issuance Offered Securities”) was issued as a pari passu sub-class of an existing class of notes issued on the Original Closing Date. Accordingly, the ratings given by Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc. to each existing class of notes issued on the Original Closing Date will apply to each class of Additional Issuance Offered Securities that constitutes a related pari passu sub-class of such existing class of notes issued on the Original Closing Date.

 

The Additional Issuance Offered Securities were issued as Class A-2 senior secured floating rate notes which have an initial face amount of $30,900,000, have a rating of AAA (sf)/Aaa (sf) by Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc., respectively, and bear interest at the three-month LIBOR plus 1.50%, Class B-2 senior secured floating rate notes which have an initial face amount of $3,600,000, a rating of AA (sf)/Aa2 (sf) by Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc., respectively, and bear interest at three-month LIBOR plus 3.25%, Class C-2 secured deferrable floating rate notes which have an initial face amount of $4,000,000, a rating of A (sf)/A2 (sf) by Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc., respectively, and bear interest at three-month LIBOR plus 4.25%, and Class D-2 secured deferrable floating rate notes which have an initial face amount of $3,600,000, a rating of BBB (sf)/Baa2 (sf) by Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc., respectively, and bear interest at three-month LIBOR plus 5.25%. The Depositor retained all of the subordinated Additional Issuance Securities of the Issuer (the “Additional Issuance Subordinated Notes”), which have an initial face amount of $13,900,000. The Additional Issuance Subordinated Notes do not bear interest and are not rated. The Additional Issuance Securities have a stated maturity date of July 20, 2024 and are subject to a non-call period until the payment date on the Additional Issuance Securities occurring in July 2015. The Issuer has a reinvestment period to and including the payment date on the Additional Issuance Securities occurring in July 2017, or such earlier date as is provided in the indenture relating to the Additional Issuance Securities. In connection with the Additional Issuance Offered Securities, the Company incurred issuance costs and OID costs of approximately $584,000 and $896,000, respectively.

 

As part of this transaction, the Company entered into a master loan sale agreement with the Depositor and the Issuer under which the Company sold or contributed certain bank loans to the Depositor, and the Depositor sold such loans to the Issuer in exchange for a combination of cash and the issuance of the KCAP Senior Funding I Subordinated Notes to the Depositor.

 

In connection with the issuance and sale of the KCAP Senior Funding I Notes, the Company has made customary representations, warranties and covenants in the purchase agreement by and between the Company, the Depositor, the Issuer and Guggenheim Securities, LLC, which served as the initial purchaser of the KCAP Senior Funding I Secured Notes. The KCAP Senior Funding I Secured Notes are the secured obligations of the Issuer, and an indenture governing the KCAP Senior Funding I Notes includes customary covenants and events of default. The KCAP Senior Funding I Notes were sold in a private placement transaction and have not been, and will not be, registered under the Securities Act of 1933, as amended, or any state “blue sky” laws and may not be offered or sold in the United States absent registration with the Securities and Exchange Commission or an applicable exemption from registration.

 

The Company serves as collateral manager to the Issuer under a collateral management agreement, which contains customary representations, warranties and covenants. Under the collateral management agreement, the Company will perform certain investment management functions, including supervising and directing the investment and reinvestment of the Issuer’s assets, as well as perform certain administrative and advisory functions.

 

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In addition, because each of the Issuer and the Depositor are consolidated subsidiaries, the Company did not recognize any gain or loss on the transfer of any of our portfolio assets to such vehicles in connection with the issuance and sale of the KCAP Senior Funding I Notes.

 

As of September 30, 2016, there were 76 investments in portfolio companies with a total fair value of approximately $189.5 million plus cash of $10.9 million, collateralizing the secured notes of the Issuer. At September 30, 2016, there were unamortized issuance costs of approximately $2.6 million, and unamortized original issue discount, (“OID”) of approximately $2.4 million included in Notes issued by KCAP Senior Funding I, LLC liabilities in the accompanying consolidated balance sheet. The pool of loans in the securitization must meet certain requirements, including asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements.

 

For the three months ended September 30, 2016, interest expense, including the amortization of deferred debt issuance costs and the OID was approximately $1.4 million consisting of stated interest expense of approximately $1.0 million, accreted discount of approximately $156,000, and deferred debt issuance costs of approximately $167,000. For the nine months ended September 30, 2016, interest expense, including the amortization of deferred debt issuance costs and the discount on the face amount of the notes, was approximately $4.2 million consisting of stated interest expense of approximately $3.2 million, accreted discount of approximately $464,000, and deferred debt issuance costs of approximately $498,000. As of September 30, 2016, the stated interest charged under the securitization was based on current three month LIBOR at the reset date, which was 0.70%. The classes, stated interest rates, spread over LIBOR, and stated interest expense are as follows:

 

   Stated Interest
Rate (1)
   LIBOR Spread
(basis points)
   Quarterly Interest
Expense (1)
 
             
KCAP Senior Funding LLC Class A Notes   2.20%   150   $593,635 
KCAP Senior Funding LLC Class B Notes   3.95%   325    124,286 
KCAP Senior Funding LLC Class C Notes   4.95%   425    173,096 
KCAP Senior Funding LLC Class D Notes   5.95%   525    187,286 
Total            $1,078,303 

 

(1) Stated Interest Rate (and thus periodic interest expense), will vary based upon prevailing 3 month LIBOR as of the reset date.

 

The amounts, ratings and interest rates (expressed as a spread to LIBOR) of the Class A, B, C, and D are as follows:

 

Description  Class A Notes  Class B Notes  Class C Notes  Class D Notes
Type  Senior Secured Floating Rate  Senior Secured Floating Rate  Secured Deferrable Floating Rate  Secured Deferrable Floating Rate
Amount Outstanding  $108,150,000  $12,600,000  $14,000,000  $12,600,000
Moody's Rating (sf)  "Aaa"  "Aa2"  "A2"  "Baa2"
Standard & Poor's Rating (sf)  "AAA"  "AA"  "A"  "BBB"
Interest Rate  LIBOR + 1.50 %  LIBOR + 3.25 %  LIBOR + 4.25 %  LIBOR + 5.25 %
Stated Maturity  July, 2024  July, 2024  July, 2024  July, 2024
Junior Classes  B, C, D
and Subordinated
  C, D
and Subordinated
  D and
Subordinated
  Subordinated

 

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The Company’s outstanding principal amounts, carrying values and fair values of the Class A, B, C and D Notes are as follows:

 

   As of 
   September 30, 2016 
   (unaudited) 
   Principal Amount   Carrying Value   Fair Value 
             
KCAP Senior Funding LLC Class A Notes  $108,150,000   $104,428,147   $107,014,425 
KCAP Senior Funding LLC Class B Notes   12,600,000    12,166,386    12,584,250 
KCAP Senior Funding LLC Class C Notes   14,000,000    13,518,207    13,895,000 
KCAP Senior Funding LLC Class D Notes   12,600,000    12,166,386    12,080,250 
Total  $147,350,000   $142,279,126   $145,573,925 

 

Fair Value of KCAP Senior Funding I.   The Company carries the KCAP Senior Funding I Notes at cost, net of unamortized discount and offering costs of approximately $2.4 million and $2.6 million, respectively. The fair value of the KCAP Senior Funding I Notes was approximately $145.6 million and $143.8 million at September 30, 2016 and December 31, 2015, respectively. The fair values were determined based on third party indicative values. The KCAP Senior Funding I L.L.C. Notes are categorized as Level III under ASC 820: Fair Value.

 

7. DISTRIBUTABLE TAXABLE INCOME

 

Effective December 11, 2006, the Company elected to be treated as a RIC under the Code and adopted a December 31 tax-calendar year end. As a RIC, the Company is not subject to federal income tax on the portion of its taxable income and gains distributed currently to its stockholders as a dividend. The Company’s quarterly distributions, if any, are determined by the Board of Directors. The Company anticipates distributing substantially all of its taxable income and gains, within the Subchapter M rules, and thus the Company anticipates that it will not incur any federal or state income tax at the RIC level. As a RIC, the Company is also subject to a federal excise tax based on distributive requirements of its taxable income on a calendar year basis (e.g., calendar year 2016). Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income, to the extent required.

 

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The following reconciles net increase (decrease) in net assets resulting from operations to taxable income for the nine months ended September 30, 2016:

 

   Nine Months Ended September 30, 
   2016   2015 
   (unaudited)   (unaudited) 
         
Net decrease in net assets resulting from operations  $(1,118,601)  $(7,145,869)
Net change in unrealized depreciation from investments   9,309,013    19,750,242 
Excess capital gains over capital losses   6,205,405    6,275,906 
Book/tax differences on CLO equity investments   1,050,658    1,462,401 
Other book/tax differences   (673,454)   764,244 
Taxable income before deductions for distributions  $14,773,021   $21,106,924 
           
Taxable income before deductions for distributions per weighted average basic shares for the period  $0.40   $0.57 
Taxable income before deductions for distributions per weighted average diluted shares for the period  $0.40   $0.57 

 

Dividends from Asset Manager Affiliates are recorded based upon a quarterly estimate of tax-basis earnings and profits of each Asset Manager Affiliate. Distributions in excess of the estimated tax-basis quarterly earnings and profits of each distributing Asset Manager Affiliate are recognized as tax-basis return of capital. The actual tax-basis earnings and profits and resulting dividend and/or return of capital for the year will be determined at the end of the tax year for each distributing Asset Manager Affiliate. For the nine months ended September 30, 2016 and 2015, the Asset Manager Affiliates declared cash distributions of $2.7 million and $7.3 million to the Company, respectively. The Company recognized $1.4 million and $4.2 million, respectively, of dividends from Asset Manager Affiliates in the Statement of Operations for the nine months ended September 30, 2016 and 2015. The difference of $1.3 million and $3.1 million, respectively, between cash distributions received and the tax-basis earnings and profits of the distributing affiliate, are recorded as an adjustment to the cost basis in the Asset Manager Affiliate (i.e. tax-basis return of capital), for the nine months ended September 30, 2016 and 2015, respectively.

 

Distributions to shareholders that exceed tax-basis distributable income (tax-basis net investment income and realized gains, if any) are reported as distributions of paid-in capital (i.e., return of capital). The tax character of distributions is made on an annual (full calendar-year) basis. The determination of the tax attributes of our distributions is made at the end of the year based upon our taxable income for the full year and the distributions paid during the full year. Therefore, a determination of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year.

 

At September 30, 2016, the Company had a net capital loss carryforward of approximately $89.3 million to offset net capital gains, to the extent provided by federal tax law. Of the net capital loss carryforward, $57.4 million is not subject to expiration under the RIC Modernization Act of 2010.

 

On September 20, 2016, the Company’s Board of Directors declared a distribution to shareholders of $0.15 per share for a total of $5.5 million. The record date was October 14, 2016 and the distribution was paid on October 27, 2016.

 

The Company adopted Financial Accounting Standards Board ASC Topic 740 Accounting for Uncertainty in Income Taxes (“ASC 740”) as of January 1, 2007. ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the consolidated financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. The Company recognizes the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. Management has analyzed the Company’s tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on returns filed for open tax years (the last three fiscal years) or expected to be taken in the Company’s current year tax return. The Company identifies its major tax jurisdictions as U.S. Federal and New York State, and the Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months. Management’s determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof.

 

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8. COMMITMENTS AND CONTINGENCIES

 

From time-to-time the Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the needs of the Company’s investment in portfolio companies. Such instruments include commitments to extend credit and may involve, in varying degrees, elements of credit risk in excess of amounts recognized on the Company’s balance sheet. Prior to extending such credit, the Company attempts to limit its credit risk by conducting extensive due diligence, obtaining collateral where necessary and negotiating appropriate financial covenants. As of September 30, 2016 and December 31, 2015, the Company had $600,000 and $360,000 of outstanding commitments to fund investments, respectively.

 

9. STOCKHOLDERS’ EQUITY

 

During the nine months ended September 30, 2016 and 2015, the Company issued 153,792 and 127,613 shares, respectively, of common stock under its dividend reinvestment plan. For the nine months ended September 30, 2016, there were 6,000 grants, 31,373 forfeitures, and 260,607 shares vested. On February 14, 2013, the Company completed a public offering of 5,232,500 shares of common stock, which included the underwriters’ full exercise of their option to purchase up to 682,500 shares of common stock, at a price of $9.75 per share. In conjunction with this offering, the Company also sold 200,000 shares of common stock to a member of its Board of Directors, at a price of $9.31125 per share, raising approximately $1.9 million in gross proceeds. On April 4, 2013, approximately $9 million of the Company’s 8.75% Convertible Notes were converted at a price basis per share of $8.159 into 1,102,093 shares of KCAP common stock. On October 6, 2014, the Company priced a follow-on public offering of 3.0 million shares of its common stock at a price of $8.02 per share. The offering raised net proceeds were approximately $23.8 million, after deducting underwriting discounts and offering expenses. The total number of shares of the Company’s common stock outstanding as of September 30, 2016 and December 31, 2015 was 37,160,770 and 37,100,005, respectively. During the nine months ended September 30, 2016, the Company repurchased 67,654 shares at an aggregate cost of approximately $248,000 in connection with the vesting of restricted stock awards.

 

10. EQUITY INCENTIVE PLAN

 

The Company has an equity incentive plan, established in 2006 and as amended in 2008, 2014 and most recently in June 2015 (the “Equity Incentive Plan”). The Company reserved 2,000,000 shares of common stock for issuance under the Equity Incentive Plan. The purpose of the Equity Incentive Plan is to provide officers and employees of the Company with additional incentives and align the interests of its employees with those of its shareholders. Options granted under the Equity Incentive Plan are exercisable at a price equal to the fair market value (market closing price) of the shares on the day the option is granted. Restricted stock granted under the Equity Incentive Plan is granted at a price equal to the fair market value (market closing price) of the shares on the day such restricted stock is granted. Vesting of restricted stock awarded under the 2008 amendment of the Equity Incentive Plan will occur in two equal installments of 50%, on each of the third and fourth anniversaries of the grant date; vesting of restricted stock subsequent to the 2014 amendment of the Equity Incentive Plan will vest in four equal installments of 25%, on each of the first four anniversaries of the grant date.

 

Stock Options

 

On June 20, 2014, the Company’s Board of Directors approved the amended and restated the Non-Employee Director Plan (the “Non-Employee Director Plan”), which was approved by shareholders on June 10, 2011. Accordingly, the annual grant of options to non-employee directors has been discontinued and replaced with an annual grant of shares of restricted stock as partial annual compensation for the services of the non-employee directors.

 

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Information with respect to options granted, exercised and forfeited under the Equity Incentive Plan for the period January 1, 2015 through September 30, 2016 is as follows:

 

   Shares   Weighted Average
Exercise Price per
Share
   Weighted Average
Contractual
Remaining Term
(years)
   Aggregate
Intrinsic Value1
 
Options outstanding at January 1, 2015   50,000   $7.72           
Granted                  
Exercised                  
Forfeited                  
Options outstanding at December 31, 2015   50,000   $7.72    3.4   $- 
Granted                  
Exercised                  
Forfeited                  
Outstanding at September 30, 2016   50,000   $7.72    2.6   $- 
                     
Total vested at September 30, 2016   50,000   $7.72    2.6      

 

1 Represents the difference between the market value of shares of the Company and the exercise price of the options.

 

The Company uses a Binary Option Pricing Model (American, call option) to establish the expected value of all stock option grants. For the nine months ended September 30, 2016 and 2015, the Company did not recognize any non-cash compensation expense related to stock options. At September 30, 2016, the Company had no remaining compensation costs related to unvested stock based awards.

 

Restricted Stock

 

Awards of restricted stock granted under the Non-Employee Director Plan vest as follows: 50% of the shares vest on the grant date and the remaining 50% of the shares vest on the earlier of:

 

(i)the first anniversary of such grant, or

 

(ii)the date immediately preceding the next annual meeting of shareholders.

 

On May 5, 2013, the Company’s Board of Directors approved the grant of 240,741 shares of restricted stock to the employees of the Company as partial compensation for their services. 50% of such awards will vest on the third anniversary of the grant date and the remaining 50% of the shares will vest on the fourth anniversary of the grant date.

 

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

 

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

 

On June 20, 2014, the Company’s Board of Directors approved the grant of 355,289 shares of restricted stock to the employees of the Company as partial compensation for their services. 25% of such awards will vest on each of the first four anniversaries of the grant date.

 

On May 21, 2015, 6,000 shares of restricted stock were awarded to the Company’s Board of Directors.

 

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

 

On June 16, 2015, the Company received exemptive relief to repurchase shares of its common stock from its employees in connection with certain equity compensation plan arrangements. During the nine months ended September 30, 2016, the Company repurchased 67,654 shares of common stock at an aggregate cost of approximately $248,000 in connection with the vesting of employee’s restricted stock, which is reflected as Treasury Stock at cost on the Consolidated Balance Sheet. These shares are not available to be reissued under the Company’s Equity Incentive Plan.

 

On June 23, 2015, the Company’s Board of Directors approved the grant of 190,166 shares, with a fair value of approximately $1.2 million, of restricted stock to the employees of the Company as partial compensation for their services. 25% of such awards will vest on each of the first four anniversaries of the grant date.

  

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On June 23, 2015, the Company’s Board of Directors also voted to amend the Equity Incentive Plan to specify that shares repurchased by the Company to satisfy employee tax withholding requirements would not be returned to the plan reserve and could not be reissued under the Company’s Equity Incentive Plan.

 

During the nine months ended September 30, 2016, 260,607 shares of restricted stock vested and 31,373 shares of restricted stock were forfeited. As of September 30, 2016, after giving effect to these restricted stock awards, there were 414,559 shares of restricted stock outstanding. Information with respect to restricted stock granted, exercised and forfeited under the Plan for the period January 1, 2015 through September 30, 2016 is as follows:

 

   Non-vested
Restricted
Shares
 
Non-vested shares outstanding at January 1, 2015   619,785 
Granted   196,166 
Vested   (104,550)
Forfeited   (10,862)
Non-vested shares outstanding at December 31, 2015   700,539 
Granted   6,000 
Vested   (260,607)
Forfeited   (31,373)
Non-Vested Outstanding at September 30, 2016   414,559 

 

For the nine months ended September 30, 2016, non-cash compensation expense related to restricted stock was approximately $1.2 million; of this amount approximately $472,000 was expensed at the Company, and approximately $682,000 was a reimbursable expense allocated to the Asset Manager Affiliates. For the nine months ended September 30, 2015, non-cash compensation expense related to restricted stock was approximately $1.2 million; of this amount approximately $504,000 was expensed at the Company and approximately $648,000 was a reimbursable expense allocated to the Asset Manager Affiliates.

 

Distributions are paid on all outstanding shares of restricted stock, whether or not vested. In general, shares of unvested restricted stock are forfeited upon the recipient’s termination of employment. As of September 30, 2016, the Company had approximately $2.2 million of total unrecognized compensation cost related to non-vested restricted share awards. That cost is expected to be recognized over the remaining weighted average period of 1.7 years.

 

11. OTHER EMPLOYEE COMPENSATION

 

The Company adopted a 401(k) plan (“401K Plan”) effective January 1, 2007. The 401K Plan is open to all full time employees. The 401K Plan permits an employee to defer a portion of their total annual compensation up to the Internal Revenue Service annual maximum based on age and eligibility. The Company makes contributions to the 401K Plan of up to 2% of the Internal Revenue Service’s annual maximum eligible compensation, which fully vests at the time of contribution. Approximately $1,000 and $3,000 was expensed during the three months ended September 30, 2016 and 2015, respectively, related to the 401K Plan. During the nine months ended September 30, 2016 and 2015, approximately $19,000 and $25,000 was expensed related to the 401K Plan.

 

The Company has also adopted a deferred compensation plan (“Profit-Sharing Plan”) effective January 1, 2007. Employees are eligible for the Profit-Sharing Plan provided that they are employed and working with the Company to participate in at least 100 days during the year and remain employed as of the last day of the year. Employees do not make contributions to the Profit-Sharing Plan. On behalf of the employee, the Company may contribute to the Profit-Sharing Plan 1) up to 8.0% of all compensation up to the Internal Revenue Service annual maximum and 2) up to 5.7% excess contributions on any incremental amounts above the social security wage base limitation and up to the Internal Revenue Service annual maximum. Employees vest 100% in the Profit-Sharing Plan after five years of service. Approximately $46,000 and $8,000 was expensed during the three months ended September 30, 2016 and 2015, respectively, related to the Profit-Sharing Plan. During the nine months ended September 30, 2016 and 2015, approximately $138,000 and $98,000, respectively, was expensed related to the Profit-Sharing Plan.

 

12. SUBSEQUENT EVENTS

 

The Company has evaluated events and transactions occurring subsequent to September 30, 2016 for items that should potentially be recognized or disclosed in these financial statements. Management has determined that there are no material subsequent events that would require adjustment to, or disclosure in, these consolidated financial statements.

 

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

 

In this Quarterly Report on Form 10-Q, “KCAP Financial,” “Company,” “we,” “us,” and “our” refer to KCAP Financial, Inc., and its wholly-owned subsidiaries.

 

The information contained in this section should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report and in conjunction with the financial statements and notes thereto in the Company’s Form 10-K for the year ended December 31, 2015, as filed with the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”). In addition, some of the statements in this report constitute forward-looking statements. The matters discussed in this Quarterly Report, as well as in future oral and written statements by management of KCAP Financial, that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. Important assumptions include our ability to originate new investments, achieve certain margins and levels of profitability, the availability of additional capital, and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking statements contained in this Quarterly Report include statements as to:

 

    our future operating results;

 

    our business prospects and the prospects of our existing and prospective portfolio companies;

 

    the return or impact of current and future investments;

 

    our contractual arrangements and other relationships with third parties;

 

    the dependence of our future success on the general economy and its impact on the industries in which we invest;

 

    the financial condition and ability of our existing and prospective portfolio companies to achieve their objectives;

 

    our expected financings and investments;

 

    our regulatory structure and tax treatment;

 

    our ability to operate as a business development company and a registered investment company, including the impact of changes in laws or regulations governing our operations, or the operations of our portfolio companies;

 

    the adequacy of our cash resources and working capital;

 

    the timing of cash flows, if any, from the operations of our portfolio companies;

 

    the impact of a protracted decline in the liquidity of credit markets on our business;

 

    the impact of fluctuations in interest rates on our business;

 

    the valuation of our investments in portfolio companies, particularly those having no liquid trading market;

 

    our ability to recover unrealized losses;

 

    market conditions and our ability to access additional capital; and

 

    the timing, form and amount of any distributions.

 

There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements. For a discussion of factors that could cause our actual results to differ from forward-looking statements contained in this Quarterly Report, please see the discussion in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date this Quarterly Report is filed with the SEC.

 

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GENERAL

 

We are an internally managed, non-diversified closed-end investment company that is regulated as a business development company, or BDC, under the Investment Company Act of 1940 (the “1940 Act”). We have three principal areas of investments:

 

First, the Company originates, structures, and invests in senior secured term loans and mezzanine debt primarily in privately-held middle market companies (the “Debt Securities Portfolio”). In addition, from time to time the Company may invest in the equity securities of privately held middle market companies.

 

Second, the Company has invested in asset management companies (Katonah Debt Advisors and Trimaran Advisors, collectively the “Asset Manager Affiliates”) that manage collateralized loan obligation funds (“CLO Funds”).