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 March 31, 2014

 

¨

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

For the transition period from           to

 

Commission File No. 814-00735

 

KCAP Financial, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Delaware		20-5951150
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification Number)

 

295 Madison Avenue, 6th Floor

New York, New York 10017

(Address of principal executive offices)

 

(212) 455-8300

(Registrant's telephone number, including area code)

 

 

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

 

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

 

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

 

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

 

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

 

The number of outstanding shares of common stock of the registrant as of May 5, 2014 was 33,367,942.

 

 

 

TABLE OF CONTENTS

 

		Page
	Part I. Financial Information
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013	1
	Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2014 and 2013	2
	Consolidated Statements of Changes in Net Assets (unaudited) for the three months ended March 31, 2014 and 2013	3
	Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2014 and 2013	4
	Consolidated Schedules of Investments as of March 31, 2014  (unaudited) and December 31, 2013	5
	Consolidated Financial Highlights (unaudited) for the three months ended March 31, 2014 and 2013	29
	Notes to Consolidated Financial Statements (unaudited)	30
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	55
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	69
Item 4.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	70
Item 5.	Controls and Procedures	71
	Part II. Other Information
Item 1.	Legal Proceedings	72
Item 1A.	Risk Factors	72
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 3.	Defaults Upon Senior Securities	72
Item 4.	Mine Safety Disclosures	72
Item 5.	Other Information	72
Item 6.	Exhibits	72
Signatures		73

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

 

		As of March 31, 2014				As of December 31, 2013
		(unaudited)
ASSETS
Investments at fair value:
Money market accounts (cost: 2014 - $4,133,429; 2013 - $7,112,949)		$	4,133,429			$	7,112,949
Debt securities (cost: 2014 - $273,777,654; 2013 - $275,213,594)			264,791,172				266,830,427
CLO Fund securities managed by affiliates (cost: 2014 - $88,345,107; 2013 - $88,979,585)			73,585,796				75,100,306
CLO Fund securities managed by non-affiliates (cost: 2014 - $12,824,040; 2013 - $12,717,365)			4,161,728				4,351,914
Equity securities (cost: 2014 - $16,289,233; 2013 - $18,755,684)			8,212,286				11,006,398
Asset Manager Affiliates (cost: 2014 - $83,924,720; 2013 - $83,378,741)			74,075,000				76,148,000
Total Investments at Fair Value (cost: 2014 - $479,294,183; 2013 - $486,157,918)			428,959,411				440,549,994
Cash			3,277,748				3,433,675
Restricted cash			5,861,582				4,078,939
Interest receivable			2,192,261				2,032,559
Receivable for open trades			6,972,467				—
Accounts receivable			3,000,000				3,125,259
Other assets			6,172,901				5,951,962
Total Assets		$	456,436,370			$	459,172,388
LIABILITIES
Convertible Notes		$	49,008,000			$	49,008,000
7.375% Notes Due 2019			41,400,000				41,400,000
Notes issued by KCAP Senior Funding I, LLC (net of discount: 2014 - $2,956,750; 2013 - $3,065,627) (Note 6)			102,293,250				102,184,373
Payable for open trades			7,960,000				3,980,000
Accounts payable and accrued expenses			1,672,509				3,897,291
Shareholder distribution payable			—				8,333,031
Total Liabilities			202,333,759				208,802,695
STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 33,340,607 and 33,332,123 common shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively			333,557				333,472
Capital in excess of par value			371,185,322				370,929,615
Accumulated undistributed (excess distribution) net investment income			1,792,376				(6,102,017	)
Accumulated net realized losses			(68,353,108	)			(68,662,689	)
Net unrealized depreciation on investments			(50,855,536	)			(46,128,688	)
Total Stockholders' Equity			254,102,611				250,369,693
Total Liabilities and Stockholders' Equity		$	456,436,370			$	459,172,388
NET ASSET VALUE PER COMMON SHARE		$	7.62			$	7.51

 

See accompanying notes to consolidated financial statements.

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

		Three Months Ended
		March 31,
		2014				2013
Investment Income:
Interest from investments in debt securities		$	5,247,236			$	2,478,018
Interest from cash and time deposits			786				4,712
Dividends from investments in CLO Fund securities managed by affiliates			4,636,238				5,480,653
Dividends from investments in CLO Fund securities managed by non-affiliates			275,571				423,875
Dividends from Asset Manager Affiliates			3,000,000				3,000,000
Capital structuring service fees			227,083				6,573
Total investment income			13,386,914				11,393,831
Expenses:
Interest and amortization of debt issuance costs			2,990,166				2,260,246
Compensation			1,262,437				909,713
Professional fees			671,210				642,328
Insurance			135,961				128,717
Administrative and other			468,283				506,471
Total expenses			5,528,057				4,447,475
Net Investment Income			7,858,857				6,946,356
Realized And Unrealized Gains (Losses) On Investments:
Net realized gains (losses) from investment transactions			309,581				(82,937	)
Net change in unrealized (depreciation) appreciation on:
Debt securities			(603,315	)			2,286,526
Equity securities			(327,661	)			(65,437	)
CLO Fund securities managed by affiliates			(880,032	)			(4,579,158	)
CLO Fund securities managed by non-affiliates			(296,861	)			(367,408	)
Asset Manager Affiliates investments			(2,618,979	)			3,075,339
Total net change in unrealized (depreciation) appreciation			(4,726,848	)			349,862
Net realized and unrealized (depreciation) appreciation on investments			(4,417,267	)			266,925
Net Increase In Stockholders’ Equity Resulting From Operations		$	3,441,590			$	7,213,281
Net Increase In Stockholders' Equity Resulting from Operations per Common Share:
Basic:		$	0.10			$	0.25
Diluted:		$	0.10			$	0.24
Net Investment Income Per Common Share:
Basic:		$	0.24			$	0.24
Diluted:		$	0.24			$	0.23
Weighted Average Shares of Common Stock Outstanding—Basic			33,337,967				29,266,186
Weighted Average Shares of Common Stock Outstanding—Diluted			33,349,916				36,635,703

 

See accompanying notes to consolidated financial statements.

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

 

		Three Months Ended March 31,
		2014				2013
Operations:
Net investment income		$	7,858,857			$	6,946,356
Net realized gains (losses) from investment transactions			309,581				(82,937	)
Net change in unrealized (depreciation) appreciation on investments			(4,726,848	)			349,862
Net increase in net assets resulting from operations			3,441,590				7,213,281
Stockholder distributions:
Distributions of net investment income to common stockholders			35,535				(4,326	)
Net decrease in net assets resulting from stockholder distributions			35,535				(4,326	)
Capital transactions:
Issuance of common stock for:
Dividend reinvestment plan			68,043				237,606
Issuance of Common Stock			—				50,632,166
Offering costs of public share offering			—				(102,423	)
Stock based compensation			187,750				20,362
Net increase in net assets resulting from capital transactions			255,793				50,787,711
Net assets at beginning of period			250,369,693				207,875,659
Net assets at end of period (including undistributed net investment income of $1,792,376 in 2014 and $7,045,514 in 2013)		$	254,102,611			$	265,872,325
Net asset value per common share		$	7.62			$	8.33
Common shares outstanding at end of period			33,340,607				31,936,480

 

See accompanying notes to consolidated financial statements.

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		Three Months Ended March 31,
		2014				2013
OPERATING ACTIVITIES:
Net increase in stockholder's equity resulting from operations		$	3,441,590			$	7,213,280
Adjustments to reconcile net increase in stockholder’s equity resulting from operations to net cash provided by (used in) in operations:
Net realized (gains) losses on investment transactions			(309,581	)			82,937
Net change in unrealized depreciation (appreciation) on investments			4,726,848				(349,862	)
Net accretion of discount on debt securities			477,323				(176,559	)
Amortization of original issue discount on indebtedness			108,877				—
Amortization of debt issuance costs			275,889				184,435
Payment-in-kind interest income			152,854				—
Amortization of stock-based compensation expense			187,750				20,362
Changes in operating assets and liabilities:
Purchases of investments			(25,073,979	)			(48,671,615	)
Proceeds from sales and redemptions of investments			28,624,651				4,812,673
Increase in interest and dividends receivable			(159,703	)			(1,152,889	)
Decrease (increase) in accounts receivable			125,259				(1,015,803	)
Decrease in time deposit			—				1,942,834
Increase in other assets			(496,827	)			(266,595	)
Decrease in accounts payable and accrued expenses			(2,224,782	)			(1,650,794	)
Net cash provided by (used in) operating activities			9,856,169				(39,027,596	)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock			—				50,632,166
Offering costs of public share offering			—				(102,423	)
Distributions to stockholders			(8,229,453	)			(7,170,102	)
Increase in restricted cash			(1,782,643	)			—
Net cash (used in) provided by financing activities			(10,012,096	)			43,359,641
CHANGE IN CASH			(155,927	)			4,332,045
CASH, BEGINNING OF PERIOD			3,433,675				738,756
CASH, END OF PERIOD		$	3,277,748			$	5,070,801
Supplemental Information:
Interest paid during the period		$	3,572,753			$	3,388,313
Dividends paid during the period under the dividend reinvestment plan		$	68,043			$	237,606

 

See accompanying notes to consolidated financial statements.

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of March 31, 2014

 

(unaudited)

 

Debt Securities Portfolio

 

Portfolio Company / Principal Business		Investment Interest Rate¹ / Maturity		Principal				Cost				Fair Value2
Advanced Lighting Technologies, Inc.9, 11 Consumer goods: Non-durable		First Lien Bond — 10.5% Cash, Due 6/19		$	3,000,000			$	2,948,836			$	2,385,000
Alaska Communications Systems Holdings, Inc.9, 11		Senior Secured Loan — Term Loan
Telecommunications		6.3% Cash, Due 10/16			2,268,409				2,272,381				2,269,998
Anaren, Inc.9, 11		Senior Secured Loan — Term Loan (First Lien)
High Tech Industries		5.5% Cash, Due 2/21			1,995,000				1,975,301				1,975,050
ARSloane Acquisition, LLC9, 11		Senior Secured Loan — Tranche B Term Loan (First Lien)
Services: Business		7.5% Cash, Due 10/19			995,000				985,847				995,398
Asurion, LLC (fka Asurion Corporation)9, 11		Senior Secured Loan — Incremental Tranche B-1 Term Loan
Banking, Finance, Insurance & Real Estate		5.0% Cash, Due 5/19			1,941,879				1,961,935				1,949,413
Bankruptcy Management Solutions, Inc.9		Senior Secured Loan — Term B Loan
Services: Business		7.0% Cash, Due 6/18			713,636				713,636				703,860
BarBri, Inc. (Gemini Holdings, Inc.)9, 11		Senior Secured Loan — Term Loan
Services: Consumer		4.5% Cash, Due 7/19			3,000,000				2,986,675				3,000,000
BBB Industries, LLC9, 11		Senior Secured Loan — Term Loan
Automotive		5.5% Cash, Due 3/19			2,850,000				2,840,995				2,851,140
Bellisio Foods, Inc. 9, 11		Senior Secured Loan — U.S. Term B Loans
Beverage, Food and Tobacco		4.5% Cash, Due 8/19			3,764,136				3,746,591				3,764,136
											.
Big Heart Pet Brands (fka Del Monte Corporation)9, 11		Senior Secured Loan — Initial Term Loan
Beverage, Food and Tobacco		3.5% Cash, Due 3/20			2,761,483				2,755,355				2,758,045

 

 

Portfolio Company / Principal Business		Investment Interest Rate¹ / Maturity		Principal				Cost				Fair Value2
Blue Coat Systems, Inc.9, 11		Senior Secured Loan — New Term Loan
High Tech Industries		4.0% Cash, Due 5/19		$	3,980,000			$	3,993,296			$	3,998,666
Caribe Media Inc. (fka Caribe Information Investments Incorporated)9		Senior Secured Loan — Loan
Media: Advertising, Printing & Publishing		10.0% Cash, Due 11/14			351,098				351,098				350,923
Carolina Beverage Group LLC9		Senior Secured Bond — 10.625% - 08/2018 - 143818AA0 144A
Beverage, Food and Tobacco		10.6% Cash, Due 8/18			1,500,000				1,518,123				1,619,550
Catalina Marketing Corporation9, 11		Senior Secured Loan — Initial Term Loan
Media: Advertising, Printing & Publishing		5.3% Cash, Due 10/20			1,990,000				1,977,181				1,992,070
Clover Technologies Group, LLC (Clover Holdings Inc.)9, 11		Senior Secured Loan — Term Loan
Consumer goods: Non-durable		6.8% Cash, Due 5/18			2,813,276				2,844,960				2,813,838
CoActive Technologies LLC (fka CoActive Technologies, Inc.)7, 9		Junior Secured Loan — Term Loan (Second Lien)
Capital Equipment		7.0% Cash, 7.0% PIK, , Due 1/15			2,063,007				1,987,358				1,852,580
Crowley Holdings Preferred, LLC9		Preferred Stock — 12.000% - 12/2049 - Series A Income Preferred Securities
Transportation: Cargo		12.0% Cash, 2.0% PIK, , Due 12/49			10,054,444				10,054,444				10,657,711
CSM Bakery Supplies LLC9		Junior Secured Loan — Term Loan (Second Lien)
Beverage, Food and Tobacco		8.5% Cash, Due 7/21			3,000,000				3,018,252				3,003,900
CSM Bakery Supplies LLC9, 11		Senior Secured Loan — Term Loan (First Lien)
Beverage, Food and Tobacco		4.8% Cash, Due 7/20			3,648,333				3,646,883				3,665,845
DBI Holding LLC9		Senior Unsecured Bond — 13% - 09/2019 – PIK Note
Services: Business		.0% Cash, 13.0% PIK, Due 9/19			3,210,000				2,935,540				2,934,903
DBI Holding LLC9		Senior Subordinated Bond — 13% - 09/2019 - Senior Subordinated Note
Services: Business		12.0% Cash, 1.0% PIK, , Due 9/19			4,290,000				4,268,289				4,268,550
Drew Marine Group Inc.9		Junior Secured Loan — Term Loan (Second Lien)
Transportation: Cargo		8.0% Cash, Due 5/21			2,500,000				2,494,023				2,501,250

 

 

Portfolio Company / Principal Business		Investment Interest Rate¹ / Maturity		Principal				Cost				Fair Value2
ELO Touch Solutions, Inc.9, 11		Senior Secured Loan — Term Loan (First Lien)
High Tech Industries		8.0% Cash, Due 6/18		$	1,898,703			$	1,840,772			$	1,898,323
EWT Holdings III Corp. (fka WTG Holdings III Corp.)9		Junior Secured Loan — Term Loan (Second Lien)
Environmental Industries		8.5% Cash, Due 1/22			4,000,000				3,980,507				4,002,000
Fender Musical Instruments Corporation9, 11		Senior Secured Loan — Initial Loan
Hotel, Gaming & Leisure		5.8% Cash, Due 4/19			2,415,221				2,426,762				2,416,187
FHC Health Systems, Inc.9, 11		Senior Secured Loan — Term Loan
Healthcare & Pharmaceuticals		5.8% Cash, Due 1/18			3,650,000				3,619,083				3,651,095
First American Payment Systems, L.P.9		Junior Secured Loan — Term Loan (Second Lien)
Banking, Finance, Insurance & Real Estate		11% CashDue 4/19			3,000,000				2,953,454				3,001,500
First Data Corporation9, 11		Senior Secured Loan — 2018 Dollar Term Loan
Banking, Finance, Insurance & Real Estate		4.2% Cash, Due 3/18			2,000,000				1,876,985				2,008,550
Flexera Software LLC (fka Flexera Software, Inc.)9, 11		Senior Secured Loan — Term Loan Retired 04/02/2014
High Tech Industries		6.0% Cash, Due 3/19			2,715,455				2,725,685				2,724,361
Fram Group Holdings Inc./Prestone Holdings Inc.9, 11		Senior Secured Loan — Term Loan (First Lien)
Automotive		6.5% Cash, Due 7/17			965,109				969,174				961,924
Getty Images, Inc.9, 11		Senior Secured Loan — Initial Term Loan
Media: Advertising, Printing & Publishing		4.8% Cash, Due 10/19			3,701,888				3,700,841				3,557,680
Ginn LA Conduit Lender, Inc.7, 9		Senior Secured Loan — First Lien Tranche A Credit-Linked Deposit
Construction & Building		7.8% Cash, Due 2/14			1,239,975				1,200,977				46,499
Ginn LA Conduit Lender, Inc.7, 9		Senior Secured Loan — First Lien Tranche B Term Loan
Construction & Building		7.8% Cash, Due 2/14			2,658,055				2,574,458				99,677
Ginn LA Conduit Lender, Inc.7, 9		Junior Secured Loan — Loan (Second Lien)
Construction & Building		11.8% Cash, Due 6/12			3,000,000				2,715,997				30,015

 

 

Portfolio Company / Principal Business		Investment Interest Rate¹ / Maturity		Principal				Cost				Fair Value2
Global Tel*Link Corporation9		Junior Secured Loan — Term Loan (Second Lien)
Telecommunications		9.0% Cash, Due 11/20		$	4,000,000			$	3,927,441			$	3,995,200
Grande Communications Networks LLC9, 11		Senior Secured Loan — Initial Term Loan
Telecommunications		4.5% Cash, Due 5/20			3,970,000				3,974,877				3,970,397
Grupo HIMA San Pablo, Inc.9		Senior Secured Loan — Term B Loan (First Lien)
Healthcare & Pharmaceuticals		8.5% Cash, Due 1/18			2,970,000				2,924,400				2,821,500
Grupo HIMA San Pablo, Inc.9		Junior Secured Loan — Term Loan (Second Lien)
Healthcare & Pharmaceuticals		13.8% Cash, Due 7/18			7,000,000				6,872,610				6,650,000
Gymboree Corporation., The9, 11		Senior Secured Loan — Term Loan
Retail		5.0% Cash, Due 2/18			1,421,105				1,378,742				1,283,542
Hargray Communications Group, Inc. (HCP Acquisition LLC)9, 11		Senior Secured Loan — Initial Term Loan
Media: Broadcasting & Subscription		4.8% Cash, Due 6/19			2,977,500				2,951,373				2,979,286
Harland Clarke Holdings Corp. (fka Clarke American Corp.)9, 11		Senior Secured Loan — Tranche B-3 Term Loan
Media: Advertising, Printing & Publishing		7.0% Cash, Due 5/18			3,434,375				3,404,630				3,439,870
Harland Clarke Holdings Corp. (fka Clarke American Corp.)9, 11		Senior Secured Loan — Tranche B-4 Term Loan
Media: Advertising, Printing & Publishing		6.0% Cash, Due 8/19			1,490,625				1,483,369				1,491,818
Hunter Defense Technologies, Inc.9		Junior Secured Loan — Term Loan (Second Lien)
Aerospace and Defense		7.0% Cash, Due 2/15			4,074,074				4,054,871				4,004,407
International Architectural Products, Inc.7, 9		Senior Secured Loan — Term Loan
Metals & Mining		12.0% Cash, 3.3% PIK, , Due 5/15			247,636				228,563				1,000
Jones Stephens Corp.9		Senior Secured Loan — Term Loan
Consumer goods: Non-durable		7.0% Cash, Due 9/15			1,203,905				1,203,905				1,203,905
Jones Stephens Corp.9, 11		Senior Secured Loan — Term Loan
Consumer goods: Non-durable		7.0% Cash, Due 9/15			2,900,826				2,900,826				2,900,826

 

 

Portfolio Company / Principal Business		Investment Interest Rate¹ / Maturity		Principal				Cost				Fair Value2
Key Safety Systems, Inc.9, 11		Senior Secured Loan — Initial Term Loan
Automotive		4.8% Cash, Due 5/18		$	2,692,152			$	2,680,581			$	2,693,767
Landslide Holdings, Inc. (Crimson Acquisition Corp.)9, 11		Senior Secured Loan — New Term Loan (First Lien)
High Tech Industries		5.0% Cash, Due 2/20			3,482,500				3,492,291				3,483,545
LBREP/L-Suncal Master I LLC7, 9		Senior Secured Loan — Term Loan (First Lien)
Construction & Building		7.5% Cash, Due 1/10			3,034,968				3,034,968				40,669
LTS Buyer LLC (Sidera Networks, Inc.)9		Senior Secured Loan — Term B Loan (First Lien)
Telecommunications		4.0% Cash, Due 4/20			3,970,000				3,964,397				3,952,651
MB Aerospace ACP Holdings III Corp.9, 11		Senior Secured Loan — Term Loan
Aerospace and Defense		5.0% Cash, Due 5/19			3,970,000				3,935,766				3,970,794
Medical Specialties Distributors, LLC9, 11		Senior Secured Loan — Term Loan
Healthcare & Pharmaceuticals		6.5% Cash, Due 12/19			3,990,000				3,952,164				3,989,202
Michael Foods Group, Inc. (f/k/a M-Foods Holdings, Inc.)9, 11		Senior Secured Loan — Term B Facility
Beverage, Food and Tobacco		4.3% Cash, Due 2/18			1,751,716				1,760,276				1,752,592
Nellson Nutraceutical, LLC9, 11 Beverage, Food and Tobacco		Senior Secured Loan — Term Loan 5.8% Cash, Due 8/18			1,995,000				1,981,795				1,995,000
Ozburn-Hessey Holding Company LLC9, 11		Senior Secured Loan — Term Loan
Transportation: Cargo		6.8% Cash, Due 5/19			3,539,170				3,527,568				3,540,586
Puerto Rico Cable Acquisition Company Inc.9		Senior Secured Loan — Term Loan
Media: Broadcasting & Subscription		5.5% Cash, Due 7/18			958,585				960,140				958,969
Puerto Rico Cable Acquisition Company Inc.9, 11		Senior Secured Loan — Term Loan
Media: Broadcasting & Subscription		5.5% Cash, Due 7/18			2,875,756				2,863,189				2,876,907
Restorix Health, Inc.9		Senior Unsecured Loan — Subordinated Term Loan
Healthcare & Pharmaceuticals		14.0% Cash, Due 6/18			4,000,000				4,000,000				4,000,000

 

 

Portfolio Company / Principal Business		Investment Interest Rate¹ / Maturity		Principal				Cost				Fair Value2
Roscoe Medical, Inc.9		Junior Secured Loan — Term Loan (Second Lien)
Healthcare & Pharmaceuticals		11.3% Cash, Due 9/19		$	6,700,000			$	6,633,200			$	6,633,000
Safenet, Inc.9, 11		Senior Secured Loan — Term Loan (First Lien)
High Tech Industries		5.5% Cash, Due 2/20			3,000,000				2,970,000				3,015,000
Sandy Creek Energy Associates, L.P.9, 11		Senior Secured Loan — Term Loan
Utilities: Electric		5.0% Cash, Due 11/20			2,992,500				2,978,319				2,998,111
SGF Produce Holding Corp.(Frozsun, Inc.)9		Senior Secured Loan — Term Loan
Beverage, Food and Tobacco		5.0% Cash, Due 3/19			2,207,890				2,189,305				2,185,811
SGF Produce Holding Corp.(Frozsun, Inc.)9, 11		Senior Secured Loan — Term Loan
Beverage, Food and Tobacco		5.0% Cash, Due 3/19			3,466,593				3,445,324				3,431,927
Stafford Logistics, Inc.(dba Custom Ecology, Inc.)9, 11		Senior Secured Loan — Term Loan
Environmental Industries		6.8% Cash, Due 6/19			2,977,500				2,951,457				2,978,096
Steinway Musical Instruments, Inc.9		Junior Secured Loan — Loan (Second Lien)
Hotel, Gaming & Leisure		9.3% Cash, Due 9/20			1,000,000				990,755				1,001,800
Sun Products Corporation, The (fka Huish Detergents Inc.)9, 11		Senior Secured Loan — Tranche B Term  Loan
Consumer goods: Non-durable		5.5% Cash			3,960,000				3,932,735				3,776,850
TPF II LC, LLC (TPF II Rolling Hills, LLC)9, 11		Senior Secured Loan — Term Loan
Utilities: Electric		6.5% Cash, Due 8/19			2,977,500				2,937,030				2,980,180
Trico Products Corporation9		Senior Secured Loan — Term Loan
Automotive		6.3% Cash, Due 7/16			4,797,266				4,778,509				4,796,307
Trico Products Corporation9, 11		Senior Secured Loan — Term Loan
Automotive		6.3% Cash, Due 7/16			3,837,813				3,822,807				3,837,045

 

 

Portfolio Company / Principal Business		Investment Interest Rate¹ / Maturity		Principal				Cost				Fair Value2
Trimaran Advisors, L.L.C.9		Senior Unsecured Loan — Revolving Credit Facility
Banking, Finance, Insurance & Real Estate		9.0% Cash, Due 11/17		$	23,000,000			$	23,000,000			$	23,000,000
TriZetto Group, Inc. (TZ Merger Sub, Inc.)9, 11		Senior Secured Loan — Term Loan
High Tech Industries		4.8% Cash, Due 5/18			3,667,177				3,673,840				3,630,139
TRSO I, Inc.9		Junior Secured Loan — Term Loan (Second Lien)
Energy: Oil & Gas		11.0% Cash, Due 12/17			10,400,000				10,244,827				10,608,000
TUI University, LLC9		Senior Secured Loan — Term Loan (First Lien)
Services: Consumer		7.3% Cash, Due 10/14			1,647,733				1,640,827				1,637,023
TWCC Holding Corp.9		Junior Secured Loan — Term Loan (Second Lien)
Media: Broadcasting & Subscription		7.0% Cash, Due 6/20			1,000,000				1,004,555				979,300
TWCC Holding Corp.9, 11		Senior Secured Loan — Term Loan
Media: Broadcasting & Subscription		3.5% Cash, Due 2/17			1,906,653				1,920,251				1,873,296
Univar Inc.9, 11		Senior Secured Loan — Term B Loan
Chemicals, Plastics and Rubber		5.0% Cash, Due 6/17			2,917,151				2,914,899				2,913,300
Vestcom International, Inc. (fka Vector Investment Holdings, Inc.)9, 11		Senior Secured Loan — Term Loan
Media: Advertising, Printing & Publishing		7.0% Cash, Due 12/18			2,970,000				2,931,221				2,970,297
Weiman Products, LLC9		Senior Secured Loan — Term Loan
Consumer goods: Non-durable		6.3% Cash, Due 11/18			2,994,755				2,966,277				2,994,755
Weiman Products, LLC9, 11		Senior Secured Loan — Term Loan
Consumer goods: Non-durable		6.3% Cash, Due 11/18			3,993,007				3,955,920				3,993,007
Wholesome Sweeteners, Inc.9		Junior Secured Loan — Subordinated Note (Second Lien)
Beverage, Food and Tobacco		14.0% Cash, Due 10/17			6,648,596				6,617,039				6,715,082

 

 

Portfolio Company / Principal Business		Investment Interest Rate¹ / Maturity		Principal				Cost				Fair Value2
WideOpenWest Finance , LLC9		Senior Secured Loan — Term B Loan
Telecommunications		4.8% Cash, Due 4/19		$	2,977,444			$	2,997,029			$	2,986,376
WireCo WorldGroup Inc. 9		Senior Unsecured Bond — 11.75% - 05/2017
Capital Equipment		11.8% Cash, Due 5/17			5,000,000				4,975,682				5,094,000
WireCo WorldGroup Inc. 9, 11		Senior Unsecured Bond — 11.75% - 05/2017
Capital Equipment		11.8% Cash, Due 5/17			3,000,000				2,985,409				3,056,400
Total Investment in Debt Securities
(104% of net asset value at fair value)				$	275,923,579			$	273,777,654			$	264,791,172

 

 

Equity Securities Portfolio

 

Portfolio Company / Principal Business		Investment		Percentage Interest/Shares				Cost				Fair Value2
Aerostructures Holdings L.P.5, 9 Aerospace and Defense		Partnership Interests			1.2	%		$	1,000,000			$	1,000
Aerostructures Holdings L.P.5, 9 Aerospace and Defense		Series A Preferred Interests			1.2	%			250,961				286,545
Bankruptcy Management Solutions, Inc.5, 9 Banking, Finance, Insurance & Real Estate		Class A Warrants			1.7	%			—				—
Bankruptcy Management Solutions, Inc.5, 9 Banking, Finance, Insurance & Real Estate		Class B Warrants			1.7	%			—				—
Bankruptcy Management Solutions, Inc.5, 9 Banking, Finance, Insurance & Real Estate		Class C Warrants			1.7	%			—				—
Bankruptcy Management Solutions, Inc.5, 9 Banking, Finance, Insurance & Real Estate		Common Stock 2013			0.8	%			314,325				113,912
Caribe Media Inc. (fka Caribe Information Investments Incorporated)5, 9 Media: Advertising, Printing & Publishing		Common			1.3	%			359,765				605,473
Coastal Concrete Holding II, LLC5, 9 Construction & Building		Class A Units			10.8	%			8,625,626				1,000
DBI Holding LLC5, 9 Services: Business		Class A Warrants			3.2	%			258,940				258,940
eInstruction Acquisition, LLC5, 9 Healthcare, Education and Childcare		Membership Units			1.1	%			1,079,616				1,000
FP WRCA Coinvestment Fund VII, Ltd.3, 5, Capital Equipment		Class A Shares			1,500				1,500,000				1,858,327

 

 

Portfolio Company / Principal Business		Investment		Percentage Interest/Shares				Cost				Fair Value2
Perseus Holding Corp.5, 9 Hotel, Gaming & Leisure		Common			0.2	%		$	400,000			$	1,000
Plumbing Holdings Corporation5, 9 Consumer goods: Durable		Common			7.8	%			—				1,273,772
Roscoe Investors, LLC5, 9 Healthcare & Pharmaceuticals		Class A Units			1.6	%			1,000,000				1,000,000
TRSO II, Inc.5, 9 Energy: Oil & Gas		Common Stock			5.4	%			1,500,000				2,811,317
Total Investment in Equity Securities
(3% of net asset value at fair value)								$	16,289,233			$	8,212,286

 

CLO Fund Securities

 

CLO Subordinated Investments

 

Portfolio Company		Investment		Percentage Interest				Cost				Fair Value2
Grant Grove CLO, Ltd.3		Subordinated Securities			22.2	%		$	4,717,004			$	711,978
Katonah III, Ltd.3, 10		Preferred Shares			23.1	%			1,607,836				475,000
Katonah V, Ltd.3, 10		Preferred Shares			26.7	%			3,320,000				1,000
Katonah VII CLO Ltd.3, 6		Subordinated Securities			16.4	%			4,487,193				1,442,994
Katonah VIII CLO Ltd3, 6		Subordinated Securities			10.3	%			3,384,505				1,300,072
Katonah IX CLO Ltd3, 6		Preferred Shares			6.9	%			2,014,687				745,431
Katonah X CLO Ltd 3, 6		Subordinated Securities			33.3	%			11,742,686				5,463,221
Katonah 2007-I CLO Ltd.3, 6		Preferred Shares			100.0	%			31,051,393				26,841,026
Trimaran CLO IV, Ltd.3, 6		Preferred Shares			19.0	%			3,531,200				2,674,364
Trimaran CLO V, Ltd.3, 6		Subordinate Notes			20.8	%			2,715,100				1,775,415
Trimaran CLO VI, Ltd.3, 6		Income Notes			16.2	%			2,774,800				1,889,787
Trimaran CLO VII, Ltd.3, 6		Income Notes			10.5	%			3,130,600				2,333,786
Catamaran CLO 2012-1 Ltd.3, 6		Subordinated Notes			24.9	%			8,984,300				6,749,700
Catamaran CLO 2013-1 Ltd.3, 6		Subordinated Notes			23.5	%			9,353,900				8,370,000
Dryden 30 Senior Loan Fund3		Subordinated Notes			7.5	%			3,179,200				2,973,750
Total Investment in CLO Subordinated Securities								$	95,994,404			$	63,747,524

 

 

CLO Rated-Note Investment

 

Portfolio Company		Investment		Percentage Interest				Cost				Fair Value2
Katonah 2007-I CLO Ltd.3, 6		Floating - 04/2022 - B2L - 48602NAA8   Par Value of $10,500,000   Due 4/22			100.0	%		$	1,305,288			$	9,810,000
Catamaran 2012-1 CLO Ltd.3, 6		Float - 12/2023 - F - 14889CAE0   Par Value of $4,500,000   Due 12/23			42.9	%			3,869,455				4,190,000
Total Investment in CLO Rated-Note								$	5,174,743			$	14,000,000
Total Investment in CLO Fund Securities
(31% of net asset value at fair value)								$	101,169,147			$	77,747,524

 

Asset Manager Affiliates

 

Portfolio Company / Principal Business		Investment		Percentage Interest				Cost				Fair Value2
Asset Manager Affiliates9		Asset Management Company			100.0	%		$	83,924,720			$	74,075,000
Total Investment in Asset Manager Affiliates								$	83,924,720			$	74,075,000
(29% of net asset value at fair value)

 

Time Deposits and Money Market Account

 

Time Deposit and Money Market Accounts		Investment		Yield				Par / Cost				Fair Value2
JP Morgan Business Money Market Account8, 9		Money Market Account			0.10	%		$	248,918			$	248,918
US Bank Money Market Account9		Money Market Account			0.30	%			3,884,511				3,884,511
Total Investment in Time Deposit and Money Market Accounts								$	4,133,429			$	4,133,429
(2% of net asset value at fair value)
Total Investments								$	479,294,183			$	428,959,411
(169% of net asset value at fair value)

 

See accompanying notes to consolidated financial statements.

 

 

1	A majority of the variable rate loans to the Company’s investment portfolio bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly at the borrower’s option. The Borrower may also elect to have multiple interest reset periods for each loan. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at March 31, 2014.
2	Reflects the fair market value of all investments as of March 31, 2014, as determined by the Company’s Board of Directors.
3	Non-U.S. company or principal place of business outside the U.S.
4	The aggregate cost of investments for federal income tax purposes is approximately $479 million. The aggregate gross unrealized appreciation is approximately $14 million, the aggregate gross unrealized depreciation is approximately $65 million, and the net unrealized depreciation is approximately $51 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 March 31, 2014, this CLO Fund Security was not providing a dividend distribution.
11	As of March 31, 2014, investment was owned by KCAP Senior Funding I, LLC and has been pledged to secure KCAP Senior Funding I, LLC’s obligation.

 

KCAP FINANCIAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of December 31, 2013

 

Debt Securities Portfolio

 

Portfolio Company / Principal Business		Investment Interest Rate¹ / Maturity		Principal				Cost				Fair Value2
Advanced Lighting Technologies, Inc.9, 11		First Lien Bond — 10.5% - 06/2019 - 00753CAE2
Consumer goods: Non-durable		10.5% Cash, Due 6/19		$	3,000,000			$	2,948,332			$	2,546,400
Advantage Sales & Marketing Inc.9		Senior Secured Loan — 2013 Term Loan (First Lien)
Services: Business		4.3% Cash, Due 12/17			1,989,952				1,996,642				2,001,892
Alaska Communications Systems Holdings, Inc. 9, 11		Senior Secured Loan — Term Loan
Telecommunications		6.3% Cash, Due 10/16			2,358,409				2,362,064				2,357,702
Apria Healthcare Group Inc.9, 11		Senior Secured Loan — Initial Term Loan
Healthcare & Pharmaceuticals		6.8% Cash, Due 4/20			2,985,000				2,997,209				2,985,000
Aramark Corporation		Senior Secured Loan — U.S. Term D Loan
Beverage, Food and Tobacco		4.0% Cash, Due 9/19			850,000				856,173				856,374
Aramark Corporation11		Senior Secured Loan — LC-3 Facility
Beverage, Food and Tobacco		3.7% Cash, Due 7/16			61,707				61,967				61,861
Aramark Corporation11		Senior Secured Loan — U.S. Term C Loan
Beverage, Food and Tobacco		3.7% Cash, Due 7/16			938,293				942,256				940,639
Aramark Corporation11		Senior Secured Loan — U.S. Term D Loan
Beverage, Food and Tobacco		4.0% Cash, Due 9/19			1,150,000				1,158,352				1,158,625
ARSloane Acquisition, LLC9, 11		Senior Secured Loan — Tranche B Term Loan (First Lien)
Services: Business		7.5% Cash, Due 10/19			997,500				987,913				997,898
											.
Asurion, LLC (fka Asurion Corporation)9, 11		Senior Secured Loan — Incremental Tranche B-1 Term Loan
Banking, Finance, Insurance & Real Estate		4.5% Cash, Due 5/19			1,980,000				2,000,806				1,983,168

 

 

Portfolio Company / Principal Business		Investment Interest Rate¹ / Maturity		Principal				Cost				Fair Value2
Bankruptcy Management Solutions, Inc.9		Senior Secured Loan — Term B Loan
Finance		7.0% Cash, Due 6/18		$	718,182			$	718,182			$	713,514
BarBri, Inc. (Gemini Holdings, Inc.)9, 11		Senior Secured Loan — Term Loan
Services: Consumer		5.3% Cash, Due 7/19			3,000,000				2,986,055				3,000,900
BBB Industries, LLC9, 11		Senior Secured Loan — Term Loan B
Automotive		5.5% Cash, Due 3/19			2,887,500				2,878,820				2,888,366
Bellisio Foods, Inc. 9, 11		Senior Secured Loan — Delayed Draw Term Loan
Beverage, Food and Tobacco		6.5% Cash, Due 8/19			1,582,475				1,575,088				1,582,316
Bellisio Foods, Inc. 9, 11		Senior Secured Loan — U.S. Term B Loans
Beverage, Food and Tobacco		5.3% Cash, Due 8/19			2,191,119				2,180,891				2,190,900
Blue Coat Systems, Inc.9, 11		Senior Secured Loan — New Term Loan
High Tech Industries		4.5% Cash, Due 5/19			3,990,000				4,003,966				3,991,995
Caribe Media Inc. (fka Caribe Information Investments Incorporated)9		Senior Secured Loan — Loan
Media: Advertising, Printing & Publishing		10.0% Cash, Due 11/14			379,763				379,763				379,193
Carolina Beverage Group LLC9		Senior Secured Bond — 10.625% - 08/2018 - 143818AA0 144A
Beverage, Food and Tobacco		10.6% Cash, Due 8/18			1,500,000				1,519,072				1,619,550
Catalina Marketing Corporation9, 11		Senior Secured Loan — Initial Term Loan
Media: Advertising, Printing & Publishing		5.3% Cash, Due 10/20			1,995,000				1,983,766				2,025,553
Clover Technologies Group, LLC (Clover Holdings Inc.)9, 11		Senior Secured Loan — Term Loan
Consumer goods: Non-durable		6.8% Cash, Due 5/18			2,850,292				2,883,914				2,850,291
CoActive Technologies LLC (fka CoActive Technologies, Inc.)7, 9		Junior Secured Loan — Term Loan (Second Lien)
Capital Equipment		7.0% Cash, 7.0% PIK, Due 1/15			2,063,007				1,987,358				1,863,721
Crowley Holdings Preferred, LLC9		Preferred Stock — 12.000% - 12/2049 - Series A Income Preferred Securities
Transportation: Cargo		10.0% Cash, 2.0% PIK, Due 12/49			10,000,000				10,000,000				10,600,000

 

 

Portfolio Company / Principal Business		Investment Interest Rate¹ / Maturity		Principal				Cost				Fair Value2
CSM Bakery Supplies LLC9		Junior Secured Loan — Term Loan (Second Lien)
Beverage, Food and Tobacco		8.5% Cash, Due 7/21		$	3,000,000			$	3,018,871			$	3,001,500
CSM Bakery Supplies LLC9, 11		Senior Secured Loan — Term Loan
Beverage, Food and Tobacco		4.8% Cash, Due 7/20			3,657,500				3,655,989				3,659,329
Del Monte Foods Company9, 11		Senior Secured Loan — Initial Term Loan
Beverage, Food and Tobacco		4.0% Cash, Due 3/18			2,789,388				2,783,753				2,803,321
Drew Marine Group Inc.9		Junior Secured Loan — Term Loan (Second Lien)
Transportation: Cargo		8.0% Cash, Due 5/21			2,500,000				2,493,817				2,493,750
ELO Touch Solutions, Inc.9, 11		Senior Secured Loan — Term Loan (First Lien)
High Tech Industries		8.0% Cash, Due 6/18			1,898,703				1,835,507				1,893,577
Fender Musical Instruments Corporation9, 11		Senior Secured Loan — Initial Loan
Hotel, Gaming & Leisure		5.8% Cash, Due 4/19			2,421,986				2,434,723				2,463,620
FHC Health Systems, Inc.9, 11		Senior Secured Loan — Term Loan
Healthcare & Pharmaceuticals		5.8% Cash, Due 1/18			3,900,000				3,864,809				3,900,000
First American Payment Systems, L.P.9		Junior Secured Loan — Term Loan (Second Lien)
Finance		10.8% Cash, Due 4/19			3,000,000				2,951,174				2,999,400
First Data Corporation9, 11		Senior Secured Loan — 2018 Dollar Term Loan
Banking, Finance, Insurance & Real Estate		4.2% Cash, Due 3/18			2,000,000				1,875,135				2,006,520
Flexera Software LLC (fka Flexera Software, Inc.)9, 11		Senior Secured Loan — Term Loan
High Tech Industries		5.0% Cash, Due 3/19			2,722,955				2,734,588				2,725,133
Fram Group Holdings Inc./Prestone Holdings Inc.9, 11		Senior Secured Loan — Term Loan (First Lien)
Automotive		6.5% Cash, Due 7/17			966,900				970,557				966,610
Freescale Semiconductor, Inc.		Senior Subordinated Bond — 10.125% - 12/2016 - 35687MAP2
High Tech Industries		10.1% Cash, Due 12/16			1,036,000				1,037,707				1,051,540

 

 

Portfolio Company / Principal Business		Investment Interest Rate¹ / Maturity		Principal				Cost				Fair Value2
Getty Images, Inc.9, 11		Senior Secured Loan — Initial Term Loan
Media: Advertising, Printing & Publishing		4.8% Cash, Due 10/19		$	3,711,259			$	3,711,065			$	3,471,698
Ginn LA Conduit Lender, Inc.7, 9		Senior Secured Loan — First Lien Tranche A Credit-Linked Deposit
Construction & Building		7.8% Cash, Due 6/11			1,257,143				1,224,101				37,714
Ginn LA Conduit Lender, Inc.7, 9		Senior Secured Loan — First Lien Tranche B Term Loan
Construction & Building		7.8% Cash, Due 6/11			2,694,857				2,624,028				80,846
Ginn LA Conduit Lender, Inc.7, 9		Junior Secured Loan — Loan (Second Lien)
Construction & Building		11.8% Cash, Due 6/12			3,000,000				2,715,997				30,015
Global Tel*Link Corporation9		Junior Secured Loan — Term Loan (Second Lien)
Telecommunications		9.0% Cash, Due 11/20			4,000,000				3,924,752				3,991,600
Grande Communications Networks LLC9, 11		Senior Secured Loan — Initial Term Loan
Telecommunications		4.5% Cash, Due 5/20			3,980,000				3,985,209				3,980,398
Grupo HIMA San Pablo, Inc.9		Senior Secured Loan — Term B Loan (First Lien)
Healthcare, Education and Childcare		8.5% PIK, Due 1/18			2,977,500				2,928,848				2,813,738
Grupo HIMA San Pablo, Inc.9		Junior Secured Loan — Term Loan (Second Lien)
Healthcare, Education and Childcare		13.8% PIK, Due 7/18			7,000,000				6,865,363				6,817,300
Gymboree Corporation., The9, 11		Senior Secured Loan — Term Loan
Retail		5.0% Cash, Due 2/18			1,421,105				1,377,305				1,332,286
Hargray Communications Group, Inc. (HCP Acquisition LLC)9, 11		Senior Secured Loan — Initial Term Loan
Media: Broadcasting & Subscription		4.8% Cash, Due 6/19			2,985,000				2,957,575				2,986,194
Harland Clarke Holdings Corp. (fka Clarke American Corp.)9, 11		Senior Secured Loan — Tranche B-3 Term Loan
Media: Advertising, Printing & Publishing		7.0% Cash, Due 5/18			3,456,250				3,424,170				3,488,341
Hunter Defense Technologies, Inc.9		Junior Secured Loan — Term Loan (Second Lien)
Aerospace and Defense		7.0% Cash, Due 2/15			4,074,074				4,049,553				3,911,111

 

 

Portfolio Company / Principal Business		Investment Interest Rate¹ / Maturity		Principal				Cost				Fair Value2
Iasis Healthcare LLC9		Senior Unsecured Bond — 8.375% - 05/2019 - 45072PAD4
Healthcare, Education and Childcare		8.4% Cash, Due 5/19		$	3,000,000			$	2,892,521			$	3,187,500
International Architectural Products, Inc.7, 9		Senior Secured Loan — Term Loan
Metals & Mining		12.0% Cash, Due 5/15			247,636				228,563				1,000
Jones Stephens Corp.9		Senior Secured Loan — Term Loan
Consumer goods: Non-durable		7.0% Cash, , Due 9/15			1,214,195				1,214,195				1,214,195
Jones Stephens Corp.9, 11		Senior Secured Loan — Term Loan
Consumer goods: Non-durable		7.0% Cash, Due 9/15			2,925,620				2,925,620				2,925,620
Key Safety Systems, Inc.9, 11		Senior Secured Loan — Initial Term Loan
Automotive		4.8% Cash, Due 5/18			2,692,152				2,679,887				2,696,459
Kinetic Concepts, Inc.9		Senior Secured Loan — Dollar Term D-1 Loan
Healthcare, Education and Childcare		4.5% Cash, Due 5/18			1,989,979				2,003,621				2,003,661
Kinetic Concepts, Inc.9, 11		Senior Secured Loan — Dollar Term D-1 Loan
Healthcare, Education and Childcare		4.5% Cash, Due 5/18			1,994,979				2,012,272				2,008,695
Landslide Holdings, Inc. (Crimson Acquisition Corp.)9, 11		Senior Secured Loan — Initial Term Loan
High Tech Industries		5.3% Cash, Due 8/19			3,482,500				3,492,130				3,483,893
LBREP/L-Suncal Master I LLC7, 9		Senior Secured Loan — Term Loan (First Lien)
Construction & Building		7.5% Cash, Due 1/10			3,034,968				3,034,968				40,669
LTS Buyer LLC (Sidera Networks, Inc.)9		Senior Secured Loan — Term B Loan (First Lien)
Telecommunications		4.5% Cash, Due 4/20			3,980,000				3,974,154				4,003,024
MB Aerospace ACP Holdings III Corp.9		Senior Secured Loan — Term Loan
Aerospace and Defense		6.0% Cash, Due 5/19			3,980,000				3,944,023				3,980,796
Medical Specialties Distributors, LLC9, 11		Senior Secured Loan — Term Loan
Healthcare & Pharmaceuticals		6.5% Cash, Due 12/19			4,000,000				3,960,421				3,999,200

 

 

Portfolio Company / Principal Business		Investment Interest Rate¹ / Maturity		Principal				Cost				Fair Value2
Michael Foods Group, Inc. (f/k/a M-Foods Holdings, Inc.)9, 11		Senior Secured Loan — Term B Facility
Beverage, Food and Tobacco		4.3% Cash, Due 2/18		$	1,751,716			$	1,761,555			$	1,753,116
Nellson Nutraceutical, LLC9, 11		Senior Secured Loan — Term Loan
Beverage, Food and Tobacco		6.8% Cash, Due 8/18			1,995,000				1,981,056				1,995,000
Ozburn-Hessey Holding Company LLC9, 11		Senior Secured Loan — Term Loan
Transportation: Cargo		6.8% Cash, Due 5/19			3,548,085				3,536,235				3,549,504
PetCo Animal Supplies, Inc.9, 11		Senior Secured Loan — New Loans
Retail		4.0% Cash, Due 11/17			1,979,592				1,987,274				1,992,746
Pharmaceutical Product Development, Inc. (Jaguar Holdings, LLC)9		Senior Secured Loan — 2013 Term Loan
Healthcare & Pharmaceuticals		4.0% Cash, Due 12/18			3,517,594				3,529,732				3,546,526
Puerto Rico Cable Acquisition Company Inc.9		Senior Secured Loan — Term Loan
Media: Broadcasting & Subscription		5.5% Cash, Due 7/18			980,693				982,374				981,086
Puerto Rico Cable Acquisition Company Inc.9, 11		Senior Secured Loan — Term Loan
Media: Broadcasting & Subscription		5.5% Cash, , Due 7/18			2,942,080				2,928,491				2,943,257
Sandy Creek Energy Associates, L.P.9, 11		Senior Secured Loan — Term Loan
Utilities: Electric		5.0% Cash, Due 11/20			3,000,000				2,985,253				3,005,625
SGF Produce Holding Corp.(Frozsun, Inc.)9		Senior Secured Loan — Term Loan
Beverage, Food and Tobacco		5.0% Cash, Due 3/19			2,213,423				2,193,867				2,213,645
SGF Produce Holding Corp.(Frozsun, Inc.)9, 11		Senior Secured Loan — Term Loan
Beverage, Food and Tobacco		5.0% Cash, , Due 3/19			3,475,281				3,454,967				3,475,629
Spin Holdco Inc.9		Senior Secured Loan — Initial Term Loan (First Lien)
Consumer goods: Durable		4.3% Cash, , Due 11/19			1,246,875				1,245,425				1,255,454

 

 

Portfolio Company / Principal Business		Investment Interest Rate¹ / Maturity		Principal				Cost				Fair Value2
Spin Holdco Inc.9, 11		Senior Secured Loan — Initial Term Loan (First Lien)
Consumer goods: Durable		4.3% Cash, , Due 11/19		$	2,743,125			$	2,742,255			$	2,761,998
Stafford Logistics, Inc.(dba Custom Ecology, Inc.)9, 11		Senior Secured Loan — Term Loan
Environmental Industries		6.8% Cash, , Due 6/19			2,985,000				2,957,663				2,985,896
Steinway Musical Instruments, Inc.9		Junior Secured Loan — Loan (Second Lien)
Hotel, Gaming & Leisure		9.3% Cash, , Due 9/20			1,000,000				990,403				1,001,900
Sun Products Corporation, The (fka Huish Detergents Inc.)9, 11		Senior Secured Loan — Tranche B Term  Loan
Consumer goods: Non-durable		5.5% Cash, , Due 3/20			3,970,000				3,941,540				3,780,433
TPF II LC, LLC (TPF II Rolling Hills, LLC)9, 11		Senior Secured Loan — Term Loan
Utilities: Electric		6.5% Cash, , Due 8/19			2,985,000				2,942,573				2,987,985
Trico Products Corporation9		Senior Secured Loan — Term Loan
Automotive		6.3% Cash, , Due 7/16			4,864,844				4,843,792				4,863,871
Trico Products Corporation9, 11		Senior Secured Loan — Term Loan
Automotive		6.3% Cash, , Due 7/16			3,891,875				3,875,033				3,891,097
Trimaran Advisors, L.L.C.9		Senior Unsecured Loan — Revolving Credit Facility
Finance		9.0% Cash, , Due 11/17			23,000,000				23,000,000				23,000,000
TriZetto Group, Inc. (TZ Merger Sub, Inc.)9, 11		Senior Secured Loan — Term Loan
High Tech Industries		4.8% Cash, , Due 5/18			3,676,604				3,684,234				3,639,857
TRSO I, Inc.9		Junior Secured Loan — Term Loan (Second Lien)
Energy: Oil & Gas		11.0% Cash, , Due 12/17			10,400,000				10,234,558				10,608,000
TUI University, LLC9		Senior Secured Loan — Term Loan (First Lien)
Healthcare, Education and Childcare		7.3% Cash, , Due 10/14			1,647,733				1,637,909				1,614,779

 

 

Portfolio Company / Principal Business		Investment Interest Rate¹ / Maturity		Principal				Cost				Fair Value2
TWCC Holding Corp.9		Junior Secured Loan — Term Loan (Second Lien)
Media: Broadcasting & Subscription		7.0% Cash, , Due 6/20		$	1,000,000			$	1,004,735			$	1,030,005
TWCC Holding Corp.9, 11		Senior Secured Loan — Term Loan
Media: Broadcasting & Subscription		3.5% Cash, , Due 2/17			1,965,101				1,980,166				1,975,379
Univar Inc.9, 11		Senior Secured Loan — Term B Loan
Chemicals, Plastics and Rubber		5.0% Cash, , Due 6/17			2,924,675				2,921,597				2,906,601
Vertafore, Inc.9, 11		Senior Secured Loan — Term Loan (2013)
High Tech Industries		4.3% Cash, , Due 10/19			1,202,077				1,201,491				1,203,039
Vestcom International, Inc. (fka Vector Investment Holdings, Inc.)9, 11		Senior Secured Loan — Term Loan
Media: Advertising, Printing & Publishing		7.0% Cash, , Due 12/18			2,977,500				2,939,085				2,978,095
Weiman Products, LLC9		Senior Secured Loan — Term Loan
Consumer goods: Non-durable		6.3% Cash, , Due 11/18			1,000,000				990,219				990,000
Weiman Products, LLC9, 11		Senior Secured Loan — Term Loan
Consumer goods: Non-durable		6.3% Cash, , Due 11/18			4,000,000				3,960,876				3,960,000
Wholesome Sweeteners, Inc.9		Junior Secured Loan — Subordinated Note (Second Lien)
Beverage, Food and Tobacco		14.0% Cash, , Due 10/17			6,648,596				6,614,827				6,715,082

 

 

Portfolio Company / Principal Business		Investment Interest Rate¹ / Maturity		Principal				Cost				Fair Value2
WideOpenWest Finance , LLC9		Senior Secured Loan — Term B Loan
Telecommunications		4.8% Cash, , Due 4/19		$	2,984,962			$	3,005,566			$	3,005,111
WireCo WorldGroup Inc. 9		Senior Unsecured Bond — 11.75% - 05/2017
Capital Equipment		11.8% Cash, , Due 5/17			5,000,000				4,977,052				5,121,000
WireCo WorldGroup Inc. 9, 11		Senior Unsecured Bond — 11.75% - 05/2017
Capital Equipment		11.8% Cash, , Due 5/17			3,000,000				2,986,231				3,072,600
WTG Holdings III Corp.9		Junior Secured Loan — Term Loan (Second Lien)
Environmental Industries		8.5% Cash, , Due 1/22			4,000,000				3,980,000				3,980,000
Total Investment in Debt Securities
(107% of net asset value at fair value)				$	276,978,279			$	275,213,594			$	266,830,427

 

 

Equity Securities Portfolio

 

Portfolio Company / Principal Business		Investment		Percentage Interest/Shares				Cost				Fair Value2
Aerostructures Holdings L.P.5, 9 Aerospace and Defense		Partnership Interests			1.2	%		$	1,000,000			$	1,000
Aerostructures Holdings L.P.5, 9 Aerospace and Defense		Series A Preferred Interests			1.2	%			250,961				207,988
Bankruptcy Management Solutions, Inc.5, 9 Banking, Finance, Insurance & Real Estate		Class A Warrants			1.7	%			—				—
Bankruptcy Management Solutions, Inc.5, 9 Banking, Finance, Insurance & Real Estate		Class B Warrants			1.7	%			—				—
Bankruptcy Management Solutions, Inc.5, 9 Banking, Finance, Insurance & Real Estate		Class C Warrants			1.7	%			—				—
Bankruptcy Management Solutions, Inc.5, 9 Banking, Finance, Insurance & Real Estate		Common Stock 2013			0.8	%			314,325				309,363
Caribe Media Inc. (fka Caribe Information Investments Incorporated)5, 9 Media: Advertising, Printing & Publishing		Common			—				359,765				692,710
Coastal Concrete Holding II, LLC5, 9 Construction & Building		Class A Units			10.8	%			8,625,626				1,000
eInstruction Acquisition, LLC5, 9 Services: Consumer		Membership Units			1.1	%			1,079,617				1,000
FP WRCA Coinvestment Fund VII, Ltd.3, 5, Capital Equipment		Class A Shares			150000.0	%			1,500,000				1,735,604
Perseus Holding Corp.5, 9 Hotel, Gaming & Leisure		Common			0.2	%			400,000				1,000

 

Portfolio Company / Principal Business		Investment		Percentage Interest/Shares				Cost				Fair Value2
Plumbing Holdings Corporation5, 9 Consumer goods: Durable		Common			7.8	%		$	—			$	1,581,481
Plumbing Holdings Corporation5, 9 Consumer goods: Durable		Preferred			15.5	%			3,725,390				4,152,689
TRSO II, Inc.5, 9 Energy: Oil & Gas		Common Stock			5.4	%			1,500,000				2,322,563
Total Investment in Equity Securities
(4% of net asset value at fair value)								$	18,755,684			$	11,006,398

 

 

CLO Fund Securities

 

CLO Equity Investments

 

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

 

CLO Rated-Note Investment

 

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

 

 

Asset Manager Affiliates

 

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

 

Time Deposits and Money Market Account

 

Time Deposit and Money Market Accounts		Investment		Yield				Par / Cost				Fair Value2
JP Morgan Business Money Market Account8, 9		Money Market Account			0.15	%			237,088				237,088
US Bank Money Market Account9		Money Market Account			0.30	%			6,875,861				6,875,861
Total Investment in Time Deposit and Money Market Accounts								$	7,112,949			$	7,112,949
(3% of net asset value at fair value)
Total Investments5								$	486,157,918			$	440,549,994
(176% of net asset value at fair value)

 

See accompanying notes to consolidated financial statements.

 

1	A majority of the variable rate loans to the Company’s portfolio companies bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at December 31, 2013.
2	Reflects the fair market value of all investments as of December 31, 2013, as determined by the Company’s Board of Directors.
3	Non-U.S. company or principal place of business outside the U.S.
4	The aggregate cost of investments for federal income tax purposes is approximately $486 million. The aggregate gross unrealized appreciation is approximately $15 million, the aggregate gross unrealized depreciation is approximately $61 million, and the net unrealized depreciation is approximately $46 million.
5	Non-income producing.
6	An affiliate CLO Fund managed by an Asset Manager Affiliate (as such term is defined in the notes to the consolidated financial statements).
7	Loan or debt security is on non-accrual status and therefore is considered non-income producing.
8	Money market account holding restricted cash and security deposits for employee benefit plans.
9	Qualified asset for purposes of section 55(a) of the Investment Company Act of 1940.
10	As of December 31, 2013, this CLO Fund Security was not providing a dividend distribution.
11	As of December 31, 2013, investment was owned by KCAP Senior Funding I, LLC and has been pledged to secure KCAP Senior Funding I, LLC’s obligations.

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED FINANCIAL HIGHLIGHTS

(unaudited)

 

		Three Months Ended March 31,
		2014				2013
Per Share Data:
Net asset value, at beginning of period		$	7.51			$	7.85
Net investment income1			0.24				0.22
Net realized gain (losses) from investments1			0.01				—	4
Net change in unrealized depreciation on investments1			(0.15	)			(0.01	)
Net increase in net assets resulting from operations			0.10				0.21
Net increase in net assets resulting from distributions:
Net increase in net assets relating to stock-based transactions:
Issuance of common stock (not including dividend reinvestment plan)			—	4			0.26
Issuance of common stock under dividend reinvestment plan			—	4			0.01
Stock based compensation expense			0.01				—
Net increase in net assets relating to stock-based transactions			0.01				0.27
Net asset value, end of period		$	7.62			$	8.33
Total net asset value return2			1.5	%			2.9	%
Ratio/Supplemental Data:
Per share market value at beginning of period		$	8.07			$	9.19
Per share market value at end of period		$	8.66			$	10.77
Total market return3			7.3	%			17.2	%
Shares outstanding at end of period			33,340,607				31,936,480
Net assets at end of period		$	254,102,611			$	265,872,325
Portfolio turnover rate			8.1	%			1.6	%
Average par debt outstanding		$	195,658,000			$	101,400,000
Average par debt outstanding per share			5.9	%			8.2	%
Asset coverage ratio			228	%			362	%
Ratio of net investment income to average net assets			13.1	%			11.7	%
Ratio of total expenses to average net assets			9.2	%			7.5	%
Ratio of interest expense to average net assets			5.0	%			3.8	%
Ratio of non-interest expenses to average net assets			4.2	%			3.7	%

  

1

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

2

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

3

Total market return equals the change in the ending market price over the beginning of period price per share plus distributions, divided by the beginning price.

4

Balance rounds to less than $0.01.

 

See accompanying notes to consolidated financial statements.

 

 

KCAP FINANCIAL, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. ORGANIZATION

 

KCAP Financial, Inc. (“KCAP” or the “Company”) is an internally managed, non-diversified closed-end investment company that is regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”).

 

We have three principal areas of investment:

 

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

 

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

 

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

 

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

 

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

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required for annual consolidated financial statements. The unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Form 10-K for the year ended December 31, 2013, as filed with the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”).

 

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

 

 

The Company consolidates the financial statements of its wholly-owned special purpose financing subsidiaries KCAP Funding, Kolhberg Capital Funding LLC I, KCAP Senior Funding I, LLC and KCAP Senior Funding I Holdings, LLC in its consolidated financial statements as they are operated solely for investment activities of the Company. The creditors of KCAP Senior Funding I, LLC have received security interests in the assets owned by KCAP Senior Funding I, LLC and such assets are not intended to be available to the creditors of KCAP Financial, Inc., or any other affiliate.

 

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

 

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

 

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

 

In June 2013, the FASB issued Accounting Standards Update 2013-08 “Financial Services-Investment Companies (Topic 946) Amendments to the Scope, Measurement, and Disclosure Requirements” (“ASU 2013-08”). ASU 2013-08 clarifies the characteristics of an investment company and requires reporting entities to disclose information about the following items: (i) the type and amount of financial support provided to investee companies, including situations in which the Company assisted an investee in obtaining financial support, (ii) the primary reasons for providing the financial support, (iii) the type and amount of financial support the Company is contractually required to provide to an investee, but has not yet provided, and (iv) the primary reasons for the contractual requirement to provide the financial support. The Company adopted ASU 2013-08 during the three months ended March 31, 2014 as the amendments in ASU 2013-08 are effective for an entity’s interim and annual reporting periods in fiscal years that begin after December 15, 2013.

 

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 first quarter of 2014, the Company provided $29 million of financial support in the form of investments in securities of portfolio companies to support their growth objectives. None of this support was contractually obligated. See also note 8 – Commitments and Contingencies. As of March 31, 2014, the Company holds loans it has made to 65 investee companies with aggregate principal amounts of $246 million. The details of such loans have been disclosed on the consolidated schedule of investments as well as in Notes 4 (Investments) and (Fair Value Measurements). In addition to providing loans to investee companies, from time to time the Company assists investee companies in securing financing from other sources by introducing such investee companies to sponsors or by leading a syndicate of lenders to provide the investee companies with financing. During the three month period ended March 31, 2014, the Company did not make any such introductions or lead any syndicates.

 

Investments

 

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

 

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

 

 

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

 

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, the Valuation Committee of the Board of Directors, and, in certain circumstances, third parties with valuation expertise. Valuations are conducted by management on 100% of the investment portfolio at the end of each quarter. The Company follows the provisions of ASC 820: Fair Value Measurements and Disclosures (“ASC 820: Fair Value”). This standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. ASC 820: Fair Value defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Subsequent to the adoption of ASC 820: Fair Value, the FASB has issued various staff positions clarifying the initial standard as noted below.

 

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

 

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

 

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

 

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

 

The Board of Directors may consider other methods of valuation than those set forth below to determine the fair value of Level III investments as appropriate in conformity with GAAP. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may differ materially from the values that would have been used had a readily available market existed for such investments. Further, such investments may be generally subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities. In addition, changes in the market environment and other events may occur over the life of the investments that may cause the value realized on such investments to be different from the currently assigned valuations.

 

The majority of the Company’s investment portfolio is composed of debt and equity securities with unique contract terms and conditions and/or complexity that requires a valuation of each individual investment 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.

 

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

 

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

 

• The “Income Approach” - the Company derives fair value for its illiquid investments that do not have indicative fair values based upon active trades primarily by using a present value technique that discounts the estimated contractual cash flows for the subject assets with discount rates imputed by broad market indices, bond spreads and yields for comparable issuers relative to the subject assets.

 

 

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

 

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

 

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

 

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

 

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

 

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

 

The significant inputs used to determine the fair value of equity securities include prices, EBITDA and cash flows after capital expenditures for similar peer comparables and the investment entity itself. Equity securities are classified as Level III, as described in Note 4 below, when there is limited activity or less transparency around inputs to the valuation given the lack of information related to such equity investments held in nonpublic companies. Significant assumptions observed for comparable companies are applied to relevant financial data for the specific investment. Such assumptions, such as model discount rates or price/earnings multiples, vary by the specific investment, equity position and industry and incorporate adjustments for risk premiums, liquidity and company specific attributes. Such adjustments require judgment and may be material to the calculation of fair value.

 

Asset Manager Affiliates. The Company’s investments in its wholly-owned asset management companies, the Asset Manager Affiliates, are carried at fair value, which is primarily determined utilizing the Discounted Cash Flow approach, which incorporates different levels of discount rates depending on the hierarchy of fees earned (including the likelihood of realization of senior, subordinate and incentive fees) and prospective modeled performance. Such valuation takes into consideration an analysis of comparable asset management companies and a percentage of assets under management. The Asset Manager Affiliates are classified as a Level III investment (as described below). Any change in value from period to period is recognized as net change in unrealized appreciation or depreciation.

 

 

CLO Fund Securities. The Company typically makes a minority investment in the most junior class of securities of CLO Funds raised and managed by the Asset Manager Affiliates and may selectively invest in securities issued by funds managed by other asset management companies (collectively, “CLO Fund securities”). The investments held by CLO Funds generally relate to 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 bond rated note tranches of CLO Fund securities (those above the junior class) without transactions to support a fair value for the specific CLO Fund and tranche, fair value is based on discounting estimated bond payments at current market yields, which may reflect the adjusted yield on the leveraged loan index for similarly rated tranches, as well as prices for similar tranches for other CLO Funds and also other factors such as indicative prices provided by underwriters or brokers who arrange CLO Funds, and the default and recovery rates of underlying assets in the CLO Fund, as may be applicable. Such model assumptions may vary and incorporate adjustments for risk premiums and CLO Fund specific attributes.

 

3. EARNINGS PER SHARE

 

In accordance with the provisions of ASC 260,“Earnings per Share” (“ASC 260”), basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially di