UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 10-Q

 

 

 

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

For the quarterly period ended 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.

 

1
 

 

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.

 

2
 

 

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.

 

3
 

 

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.

 

4
 

 

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 

 

5
 

 

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 

 

6
 

 

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 

 

7
 

 

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 

 

8
 

 

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 

 

9
 

 

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 

 

10
 

 

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 

 

11
 

 

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 

 

12
 

 

Equity Securities Portfolio

 

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

Aerostructures Holdings L.P.5, 9

Aerospace and Defense

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

Aerostructures Holdings L.P.5, 9

Aerospace and Defense

  Series A Preferred Interests   1.2%   250,961    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 

 

13
 

 

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 

 

14
 

 

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.

 

15
 

 

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.
16
 

 

KCAP FINANCIAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of December 31, 2013

 

Debt Securities Portfolio

 

Portfolio Company / Principal Business   Investment
Interest Rate¹ / Maturity
  Principal   Cost   Fair Value2 
Advanced Lighting Technologies, Inc.9, 11  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 

 

17
 

 

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 

 

18
 

 

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 

 

19
 

 

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 

 

20
 

 

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 

 

21
 

 

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal   Cost   Fair Value2 
Michael Foods Group, Inc. (f/k/a M-Foods Holdings, Inc.)9, 11  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 

 

22
 

 

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 

 

23
 

 

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 

 

24
 

 

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 

 

25
 

 

Equity Securities Portfolio

 

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

Aerostructures Holdings L.P.5, 9

Aerospace and Defense

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

Aerostructures Holdings L.P.5, 9

Aerospace and Defense

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

Bankruptcy Management Solutions, Inc.5, 9

Banking, Finance, Insurance & Real Estate

  Class A Warrants   1.7%        
                

Bankruptcy Management Solutions, Inc.5, 9

Banking, Finance, Insurance & Real Estate

  Class B Warrants   1.7%        
                   

Bankruptcy Management Solutions, Inc.5, 9

Banking, Finance, Insurance & Real Estate

  Class C Warrants   1.7%        
                

Bankruptcy Management Solutions, Inc.5, 9

Banking, Finance, Insurance & Real Estate

  Common Stock 2013   0.8%   314,325    309,363 
                   

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

Media: Advertising, Printing & Publishing

  Common       359,765    692,710 
                   

Coastal Concrete Holding II, LLC5, 9

Construction & Building

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

eInstruction Acquisition, LLC5, 9

Services: Consumer

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

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

Capital Equipment

  Class A Shares   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 

 

26
 

 

CLO Fund Securities

 

CLO Equity Investments

 

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

 

CLO Rated-Note Investment

 

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

 

27
 

 

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.

 

 

28
 

 

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%

  

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 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.
3Total 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.
4Balance rounds to less than $0.01.

 

See accompanying notes to consolidated financial statements.

 

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KCAP FINANCIAL, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. ORGANIZATION

 

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

 

We have three principal areas of investment:

 

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

 

Second, we have invested in asset management companies (Katonah Debt Advisors 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.

 

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

 

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

 

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

 

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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.

 

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• 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.