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, 2015
   
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from              to

 

Commission File No. 814-00735

 

KCAP Financial, Inc.

(Exact name of Registrant as specified in its charter) 

 

  

  Delaware   20-5951150  
 

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

 

 

295 Madison Avenue, 6th Floor

New York, New York 10017

(Address of principal executive offices)

(212) 455-8300

(Registrant's telephone number, including area code)

 

 

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

 

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

 

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

 

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

 

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

 

The number of outstanding shares of common stock of the registrant as of May 4, 2015 was 36,875,942. 

 

 

 
 

  

TABLE OF CONTENTS

 

    Page
     
  Part I. Financial Information  
     
Item 1. Consolidated Financial Statements 1
     
  Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014 1
     
  Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2015 and 2014 2
     
  Consolidated Statements of Changes in Net Assets (unaudited) for the three months ended March 31, 2015 and 2014 3
     
  Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2015 and 2014 4
     
  Consolidated Schedules of Investments as of March 31, 2015  (unaudited) and December 31, 2014 5
     
  Consolidated Financial Highlights (unaudited) for the three months ended March 31, 2015 and 2014 32
     
  Notes to Consolidated Financial Statements (unaudited) 33
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 59
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 75
     
Item 4. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 76
     
Item 5. Controls and Procedures 77
     
  Part II. Other Information  
     
Item 1. Legal Proceedings 78
     
Item 1A. Risk Factors 78
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 78
     
Item 3. Defaults Upon Senior Securities 78
     
Item 4. Mine Safety Disclosures 78
     
Item 5. Other Information 78
     
Item 6. Exhibits 78
   
Signatures 79

 

 
 

 

KCAP FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

 

  

As of

March 31, 2015

  

As of

December 31, 2014

 
   (unaudited)     
ASSETS          
Investments at fair value:          
Money market accounts (cost: 2015 - $1,729,575; 2014 - $1,602,741)  $1,729,575   $1,602,741 
Debt securities (cost: 2015 - $321,962,047; 2014 - $322,884,934)   320,470,495    320,143,170 
CLO Fund Securities managed by affiliates (cost: 2015 - $94,330,773; 2014 - $85,355,897)   82,455,704    74,139,696 
CLO Fund Securities managed by non-affiliates (cost: 2015 - $5,482,114; 2014 - $5,533,293)   3,397,774    3,375,206 
Equity securities (cost: 2015 - $8,828,812; 2014 - $8,828,812)   8,063,558    8,119,681 
Asset Manager Affiliates (cost: 2015 - $59,006,651; 2014 - $60,292,677)   71,524,000    72,326,000 
Total Investments at Fair Value (cost: 2015 - $491,339,972; 2014 - $484,498,354)   487,641,106    479,706,494 
Cash   1,521,555    1,220,798 
Restricted cash   3,962,192    19,325,550 
Interest receivable   2,189,109    1,748,821 
Due from affiliates   3,985,732    3,027,409 
Other assets   5,453,839    5,417,725 
Total Assets  $504,753,533   $510,446,797 
           
LIABILITIES          
Convertible Notes  $38,647,000   $38,647,000 
7.375% Notes Due 2019   41,400,000    41,400,000 
Notes issued by KCAP Senior Funding I, LLC (net of discount: 2015 - $3,362,714; 2014 - $3,512,407)   143,987,286    143,837,593 
Payable for open trades   11,952,000    18,293,725 
Accounts payable and accrued expenses   1,606,701    2,274,150 
Accrued interest payable   850,932    1,566,255 
Due to affiliates   2,386,179    31,000 
Shareholder distribution payable       9,080,373 
Total Liabilities   240,830,098    255,130,096 
           
STOCKHOLDERS' EQUITY          
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 36,859,957 and 36,775,127 common shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively   368,600    367,751 
Capital in excess of par value   363,345,425    362,411,830 
Excess distribution of net investment income   (19,072,917)   (25,579,865)
Accumulated net realized losses   (75,439,778)   (75,512,134)
Net unrealized depreciation on investments   (5,277,895)   (6,370,881)
Total Stockholders' Equity   263,923,435    255,316,701 
Total Liabilities and Stockholders' Equity  $504,753,533   $510,446,797 
NET ASSET VALUE PER COMMON SHARE  $7.16   $6.94 

 

See accompanying notes to consolidated financial statements. 

 

1
 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three Months Ended 
   March 31, 
   2015   2014 
         
Investment Income:          
Interest from investments in debt securities  $6,197,828   $5,247,236 
Interest from cash and time deposits   701    786 
Investment income on CLO Fund Securities managed by affiliates   4,340,143    2,822,378 
Investment income on CLO Fund Securities managed by non-affiliates   227,679    319,414 
Dividends from Asset Manager Affiliates   1,413,975    1,378,466 
Capital structuring service fees   161,803    227,083 
Total investment income   12,342,129    9,995,363 
Expenses:          
Interest and amortization of debt issuance costs   2,967,187    2,990,166 
Compensation   1,072,822    1,262,437 
Professional fees   1,171,441    671,210 
Insurance   112,439    135,961 
Administrative and other   511,292    468,283 
Total expenses   5,835,181    5,528,057 
Net Investment Income   6,506,948    4,467,306 
Realized And Unrealized Gains (Losses) On Investments:          
Net realized gains from investment transactions   72,356    309,581 
Net change in unrealized (depreciation) appreciation on:          
Debt securities   1,250,211    (603,315)
Equity securities   (56,123)   (327,661)
CLO Fund Securities managed by affiliates   (658,871)   933,828 
CLO Fund Securities managed by non-affiliates   73,744    (340,705)
Asset Manager Affiliates investments   484,025    (997,444)
Total net change in unrealized (depreciation) appreciation   1,092,986    (1,335,297)
Net realized and unrealized (depreciation) appreciation on investments   1,165,342    (1,025,716)
Net Increase In Stockholders’ Equity Resulting From Operations  $7,672,290   $3,441,590 
Net Increase In Stockholders' Equity Resulting from Operations per Common Share:          
Basic:  $0.21   $0.10 
Diluted:  $0.20   $0.10 
Net Investment Income Per Common Share:          
Basic:  $0.18   $0.13 
Diluted:  $0.18   $0.13 
Weighted Average Shares of Common Stock Outstanding—Basic   36,834,266    33,337,967 
Weighted Average Shares of Common Stock Outstanding—Diluted   36,843,382    33,349,916 

 

See accompanying notes to consolidated financial statements. 

 

2
 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

 

  

Three Months Ended

March 31,

 
   2015   2014 
         
Operations:          
Net investment income  $6,506,948   $4,467,306 
Net realized gains (losses) from investment transactions   72,356    309,581 
Net change in unrealized (depreciation) appreciation on investments   1,092,986    (1,335,297)
Net increase in net assets resulting from operations   7,672,290    3,441,590 
           
Stockholder distributions:          
Distributions of ordinary income       35,535 
Net decrease in net assets resulting from stockholder distributions       35,535 
           
Capital transactions:          
Issuance of common stock for:          
Dividend reinvestment plan   579,913    68,043 
Stock based compensation   354,531    187,750 
Net increase in net assets resulting from capital transactions   934,444    255,793 
Net assets at beginning of period   255,316,701    250,369,693 
           
Net assets at end of period (including undistributed net investment income of $0 in 2015 and $0 in 2014)  $263,923,435   $254,102,611 
Net asset value per common share  $7.16   $7.62 
Common shares outstanding at end of period   36,859,957    33,340,607 

 

See accompanying notes to consolidated financial statements.

  

3
 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

  

Three Months Ended

March 31,

 
   2015   2014 
         
OPERATING ACTIVITIES:          
Net increase in stockholder's equity resulting from operations  $7,672,290   $3,441,590 
Adjustments to reconcile net increase in stockholder’s equity resulting from operations to net cash (used in) provided by in operations:          
Net realized (gains) losses on investment transactions   (72,356)   (309,581)
Net change in unrealized (appreciation) depreciation on investments   (1,092,986)   1,335,297 
Purchases of investments   (20,176,406)   (29,053,979)
Proceeds from sales and redemptions of investments   10,822,846    37,218,653 
Net accretion of discount on debt securities   2,930,687    2,247,339 
Amortization of original issue discount on indebtedness   149,693    108,877 
Amortization of debt issuance costs   295,455    275,889 
Payment-in-kind interest income   (346,395)   152,855 
Amortization of stock-based compensation expense   354,531    187,750 
Changes in operating assets and liabilities:          
Increase (decrease) in payable for open trades   (6,341,725)   3,980,000 
Increase in receivable for open trades       (6,972,467)
Increase in interest and dividends receivable   (440,288)   (159,703)
Decrease in accounts receivable       125,259 
Increase in other assets   (331,533)   (496,827)
Increase in due from affiliates   (958,341)    
Increase in due to affiliates   2,355,179     
Decrease in accounts payable and accrued expenses   (1,382,772)   (2,224,782)
Net cash (used in) provided by operating activities   (6,562,121)   9,856,170 
           
FINANCING ACTIVITIES:          
Distributions to stockholders   (8,500,480)   (8,229,454)
Increase (Decrease) in restricted cash   15,363,358    (1,782,643)
Net cash provided by (used in) financing activities   6,862,878    (10,012,097)
           
CHANGE IN CASH   300,757    (155,927)
CASH, BEGINNING OF PERIOD   1,220,798    3,433,675 
CASH, END OF PERIOD  $1,521,555   $3,277,748 
           
Supplemental Information:          
Interest paid during the period  $3,237,329   $3,572,753 
Dividends paid during the period under the dividend reinvestment plan  $579,913   $68,043 

 

See accompanying notes to consolidated financial statements. 

 

4
 

 

KCAP FINANCIAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of March 31, 2015

 

(unaudited)

Debt Securities Portfolio

 

Portfolio Company / Principal Business  

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

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

 

Consumer goods: Non-durable

  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor, Due 5/20
  $2,786,000   $2,762,266   $2,692,390 
                 

Advanced Lighting Technologies, Inc.9, 11

 

Consumer goods: Durable

  First Lien Bond — 10.5% - 06/2019 - 00753CAE2
10.5% Cash, Due 6/19
   3,000,000    2,967,369    2,580,000 
                   

Advantage Sales & Marketing Inc.9

 

Services: Business

  Junior Secured Loan — Term Loan (Second Lien)
7.5% Cash, 1.0% Libor Floor, Due 7/22
   1,000,000    1,002,307    1,003,540 
                

Alaska Communications Systems Holdings, Inc.9, 11

 

Telecommunications

  Senior Secured Loan — Term Loan
6.3% Cash, 1.5% Libor Floor, Due 10/16
   1,309,993    1,307,890    1,310,126 
                   

Alere Inc. (fka IM US Holdings, LLC)11

 

Healthcare & Pharmaceuticals

  Senior Secured Loan — B Term Loan
4.3% Cash, 1.0% Libor Floor, Due 6/17
   2,351,590    2,349,006    2,358,939 
                

AmSurg Corp.11

 

Healthcare & Pharmaceuticals

  Senior Secured Loan — Initial Term Loan
3.8% Cash, 0.8% Libor Floor, Due 7/21
   2,984,962    2,984,962    2,995,992 
                   

Anaren, Inc.9, 11

 

Aerospace and Defense

  Senior Secured Loan — Term Loan (First Lien)
5.5% Cash, 1.0% Libor Floor, Due 2/21
   1,975,000    1,958,328    1,975,000 
                

Asurion, LLC (fka Asurion Corporation)9, 11

 

Banking, Finance, Insurance & Real Estate

  Senior Secured Loan — Incremental Tranche B-1 Term Loan
5.0% Cash, 1.3% Libor Floor, Due 5/19
   1,907,705    1,920,804    1,915,784 
                   

AZ Chem US Inc.9, 11

 

Chemicals, Plastics and Rubber

  Senior Secured Loan — Initial Term Loan (First Lien)
4.5% Cash, 1.0% Libor Floor, Due 6/21
   460,274    458,230    461,745 
                

Bankruptcy Management Solutions, Inc.9

 

Services: Business

  Senior Secured Loan — Term B Loan
7.0% Cash, 1.0% Libor Floor, Due 6/18
   695,795    695,795    634,774 

 

5
 

 

Portfolio Company / Principal Business  

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

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

 

Services: Consumer

  Senior Secured Loan — Term Loan
4.5% Cash, 1.0% Libor Floor, Due 7/19
  $2,872,500   $2,862,151   $2,869,053 
                

BBB Industries US Holdings, Inc.9, 11

 

Automotive

  Senior Secured Loan — Initial Term Loan (First Lien)
6.0% Cash, 1.0% Libor Floor, Due 11/21
   3,000,000    2,943,430    3,005,625 
                   

Bellisio Foods, Inc. 9, 11

 

Beverage, Food and Tobacco

  Senior Secured Loan — U.S. Term B Loans
5.3% Cash, 1.0% Libor Floor, Due 8/19
   2,233,881    2,225,420    2,197,469 
                

Blue Coat Systems, Inc.9, 11

 

High Tech Industries

  Senior Secured Loan — New Term Loan
4.0% Cash, 1.0% Libor Floor, Due 5/19
   466,453    467,710    466,940 
                   

Carolina Beverage Group LLC9

 

Beverage, Food and Tobacco

  Senior Secured Bond — 10.625% - 08/2018 - 143818AA0 144A
10.6% Cash, Due 8/18
   1,500,000    1,513,639    1,485,000 
                

CCS Intermediate Holdings, LLC9, 11

 

Healthcare & Pharmaceuticals

  Senior Secured Loan — Initial Term Loan (First Lien)
5.0% Cash, 1.0% Libor Floor, Due 7/21
   2,985,000    2,971,429    2,947,688 
                   

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

 

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Term Loan
7.0% Cash, 1.0% Libor Floor, Due 3/20
   2,979,950    2,973,574    2,996,190 
                

Charter Communications Operating, LLC (aka CCO Safari LLC)11

 

Media: Broadcasting & Subscription

  Senior Secured Loan — Term G Loan
4.3% Cash, 0.8% Libor Floor, Due 9/21
   3,000,000    3,021,583    3,029,175 
                   

Checkout Holding Corp. (fka Catalina Marketing)9, 11

 

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Term B Loan (First Lien)
4.5% Cash, 1.0% Libor Floor, Due 4/21
   992,500    988,220    870,090 
                

Consolidated Communications, Inc.11

 

Telecommunications

  Senior Secured Loan — Initial Term Loan
4.3% Cash, 1.0% Libor Floor, Due 12/20
   2,984,887    2,995,545    3,001,214 
                   

CRGT Inc.9, 11

 

High Tech Industries

  Senior Secured Loan — Term Loan
7.5% Cash, 1.0% Libor Floor, Due 12/20
   2,981,250    2,923,930    2,978,269 
                

Crowley Holdings Preferred, LLC9

 

Transportation: Cargo

  Preferred Stock — 12.000% - 12/2049 - Series A Income Preferred Securities
10.0% Cash, 2.0% PIK, Due 12/49
   10,257,047    10,257,047    10,470,393 

 

6
 

 

Portfolio Company / Principal Business  

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

Crowne Group, LLC9, 11

 

Automotive

  Senior Secured Loan — Term Loan (First Lien)
6.0% Cash, 1.0% Libor Floor, Due 9/20
  $3,980,000   $3,925,109   $3,884,480 
                

CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)9

 

Beverage, Food and Tobacco

  Junior Secured Loan — Term Loan (Second Lien)
8.8% Cash, 1.0% Libor Floor, Due 7/21
   3,000,000    3,015,737    2,857,500 
                   

CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)9, 11

 

Beverage, Food and Tobacco

  Senior Secured Loan — Term Loan (First Lien)
5.0% Cash, 1.0% Libor Floor, Due 7/20
   2,616,742    2,615,868    2,616,742 
                

CT Technologies Intermediate Holdings, Inc. (Smart Holdings Corp.)9, 11

 

Healthcare & Pharmaceuticals

  Senior Secured Loan — Initial Term Loan
6.0% Cash, 1.0% Libor Floor, Due 12/21
   2,992,500    2,963,902    3,022,425 
                   

DBI Holding LLC9

 

Services: Business

  Senior Unsecured Bond — 09/2019 – PIK Note
0.0% Cash, 16.0% PIK, Due 9/19
   3,590,248    3,368,751    3,482,540 
                

DBI Holding LLC9

 

Services: Business

  Senior Subordinated Bond — 09/2019 - Senior Subordinated Note
12.0% Cash, 4.0% PIK, Due 9/19
   4,347,911    4,330,633    4,295,736 
                   

DJO Finance LLC (ReAble Therapeutics Fin LLC)9, 11

 

Healthcare & Pharmaceuticals

  Senior Secured Loan — New Tranche B Term Loan
4.3% Cash, 1.0% Libor Floor, Due 9/17
   2,058,377    2,058,377    2,066,610 
                

Drew Marine Group Inc.9

 

Transportation: Cargo

  Junior Secured Loan — Term Loan (Second Lien)
8.0% Cash, 1.0% Libor Floor, Due 5/21
   2,500,000    2,494,861    2,500,000 
                   

ELO Touch Solutions, Inc.9, 11

 

High Tech Industries

  Senior Secured Loan — Term Loan (First Lien)
8.0% Cash, 1.5% Libor Floor, Due 6/18
   1,726,036    1,678,577    1,670,457 
                

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

 

Environmental Industries

  Junior Secured Loan — Term Loan (Second Lien)
8.5% Cash, 1.0% Libor Floor, Due 1/22
   4,000,000    3,983,007    3,935,000 
                   

Fender Musical Instruments Corporation9, 11

 

Consumer goods: Durable

  Senior Secured Loan — Initial Loan
5.8% Cash, 1.3% Libor Floor, Due 4/19
   1,846,934    1,856,268    1,847,118 
                

FHC Health Systems, Inc.9, 11

 

Healthcare & Pharmaceuticals

  Senior Secured Loan — Initial Term Loan
5.0% Cash, 1.0% Libor Floor, Due 12/21
   3,407,143    3,374,391    3,411,231 

 

7
 

 

Portfolio Company / Principal Business  

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

First American Payment Systems, L.P.9

 

Banking, Finance, Insurance & Real Estate

  Junior Secured Loan — Term Loan (Second Lien)
10.8% Cash, 1.3% Libor Floor, Due 4/19
  $2,796,448   $2,761,682   $2,822,176 
                

First Data Corporation9, 11

 

Banking, Finance, Insurance & Real Estate

  Senior Secured Loan — 2018 New Dollar Term Loan
3.7% Cash, Due 3/18
   500,000    494,440    500,500 
                   

Getty Images, Inc.9, 11

 

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Initial Term Loan
4.8% Cash, 1.3% Libor Floor, Due 10/19
   2,179,590    2,183,139    1,845,295 
                

GK Holdings, Inc. (aka Global Knowledge)9

 

Services: Business

  Junior Secured Loan — Initial Term Loan (Second Lien)
10.5% Cash, 1.0% Libor Floor, Due 1/22
   1,500,000    1,470,638    1,470,000 
                   

GK Holdings, Inc. (aka Global Knowledge)9, 11

 

Services: Business

  Senior Secured Loan — Initial Term Loan (First Lien)
6.5% Cash, 1.0% Libor Floor, Due 1/21
   2,493,750    2,469,432    2,499,984 
                

Global Tel*Link Corporation9

 

Telecommunications

  Junior Secured Loan — Term Loan (Second Lien)
9.0% Cash, 1.3% Libor Floor, Due 11/20
   4,000,000    3,938,349    3,880,800 
                   

Grande Communications Networks LLC9, 11

 

Telecommunications

  Senior Secured Loan — Initial Term Loan
4.5% Cash, 1.0% Libor Floor, Due 5/20
   3,930,053    3,934,658    3,928,481 
                

Grifols Worldwide Operations Limited11

 

Healthcare & Pharmaceuticals

  Senior Secured Loan — U.S. Tranche B Term Loan
3.2% Cash, Due 2/21
   2,984,925    2,963,642    2,985,432 
                   

Grupo HIMA San Pablo, Inc.9

 

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term B Loan (First Lien)
8.5% Cash, 1.5% Libor Floor, Due 1/18
   2,940,000    2,906,621    2,940,000 
                

Grupo HIMA San Pablo, Inc.9

 

Healthcare & Pharmaceuticals

  Junior Secured Loan — Term Loan (Second Lien)
13.8% Cash, Due 7/18
   7,000,000    6,902,001    7,105,000 
                   

Gymboree Corporation., The9, 11

 

Retail

  Senior Secured Loan — Term Loan
5.0% Cash, 1.5% Libor Floor, Due 2/18
   1,421,105    1,394,907    1,086,463 
                

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

 

Media: Broadcasting & Subscription

  Senior Secured Loan — Initial Term Loan
5.3% Cash, 1.0% Libor Floor, Due 6/19
   2,930,662    2,909,856    2,934,179 

 

8
 

 

Portfolio Company / Principal Business  

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

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

 

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Tranche B-3 Term Loan
7.0% Cash, 1.5% Libor Floor, Due 5/18
  $3,346,875   $3,323,417   $3,377,214 
                

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

 

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Tranche B-4 Term Loan
6.0% Cash, 1.0% Libor Floor, Due 8/19
   1,453,125    1,447,375    1,462,934 
                   

Hoffmaster Group, Inc.9

 

Forest Products & Paper

  Junior Secured Loan — Initial Term Loan (Second Lien)
10.0% Cash, 1.0% Libor Floor, Due 5/21
   2,000,000    1,973,785    1,987,500 
                

Hoffmaster Group, Inc.9, 11

 

Forest Products & Paper

  Senior Secured Loan — Initial Term Loan (First Lien)
5.3% Cash, 1.0% Libor Floor, Due 5/20
   3,970,000    3,936,052    3,994,813 
                   

Hunter Defense Technologies, Inc.9, 11

 

Aerospace and Defense

  Senior Secured Loan — Term Loan (First Lien)
6.5% Cash, 1.0% Libor Floor, Due 8/19
   2,925,000    2,899,268    2,953,080 
                

Integra Telecom Holdings, Inc.9, 11

 

Telecommunications

  Senior Secured Loan — Term B Loan
5.3% Cash, 1.3% Libor Floor, Due 2/19
   2,984,772    2,973,885    2,988,503 
                   

International Architectural Products, Inc.7, 9

 

Metals & Mining

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

Kellermeyer Bergensons Services, LLC9

 

Services: Business

  Senior Secured Loan — Initial Term Loan (First Lien)
6.0% Cash, 1.0% Libor Floor, Due 10/21
   1,995,000    1,976,185    1,990,013 
                   

Key Safety Systems, Inc.9, 11

 

Automotive

  Senior Secured Loan — Initial Term Loan
4.8% Cash, 1.0% Libor Floor, Due 8/21
   1,492,500    1,485,665    1,501,365 
                

Kinetic Concepts, Inc.9, 11

 

Healthcare & Pharmaceuticals

  Senior Secured Loan — Dollar Term E-1 Loan
4.5% Cash, 1.0% Libor Floor, Due 5/18
   2,984,886    2,977,946    2,999,811 
                   

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

 

High Tech Industries

  Senior Secured Loan — New Term Loan (First Lien)
5.0% Cash, 1.0% Libor Floor, Due 2/20
   3,447,675    3,455,727    3,448,020 
                

MB Aerospace ACP Holdings III Corp.9, 11

 

Aerospace and Defense

  Senior Secured Loan — Dollar Term Loan
5.0% Cash, 1.0% Libor Floor, Due 5/19
   3,930,000    3,902,669    3,929,214 

 

9
 

 

Portfolio Company / Principal Business  

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

Media General, Inc.11

 

Media: Broadcasting & Subscription

  Senior Secured Loan — Term B Loan
4.3% Cash, 1.0% Libor Floor, Due 7/20
  $2,938,272   $2,941,805   $2,955,901 
                

Medical Specialties Distributors, LLC9, 11

 

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term Loan
6.5% Cash, 1.0% Libor Floor, Due 12/19
   3,950,000    3,919,145    3,845,325 
                   

Millennium Health, LLC (fka Millennium Laboratories, LLC)9, 11

 

Healthcare & Pharmaceuticals

  Senior Secured Loan — Tranche B Term Loan
5.3% Cash, 1.0% Libor Floor, Due 4/21
   2,984,962    2,984,962    3,011,081 
                

Nellson Nutraceutical, LLC9, 11

 

Beverage, Food and Tobacco

  Senior Secured Loan — Term A-1 Loan (First Lien)
6.0% Cash, 1.0% Libor Floor, Due 12/21
   2,083,333    2,062,834    2,062,500 
                   

Nellson Nutraceutical, LLC9, 11

 

Beverage, Food and Tobacco

  Senior Secured Loan — Term A-2 Loan (First Lien)
6.0% Cash, 1.0% Libor Floor, Due 12/21
   1,916,667    1,897,807    1,897,500 
                

Nielsen & Bainbrige, LLC9

 

Consumer goods: Durable

  Senior Secured Loan — Term Loan (First Lien)
6.0% Cash, 1.0% Libor Floor, Due 8/20
   997,500    988,426    968,373 
                   

Nielsen & Bainbrige, LLC9

 

Consumer goods: Durable

  Junior Secured Loan — Term Loan (Second Lien)
10.3% Cash, 1.0% Libor Floor, Due 8/21
   2,000,000    1,972,319    1,920,000 
                

Nielsen & Bainbrige, LLC9, 11

 

Consumer goods: Durable

  Senior Secured Loan — Term Loan (First Lien)
6.0% Cash, 1.0% Libor Floor, Due 8/20
   2,992,500    2,965,279    2,905,119 
                   

Novetta, LLC9

 

Services: Business

  Senior Secured Loan — Initial Term Loan
6.0% Cash, 1.0% Libor Floor, Due 10/20
   2,736,250    2,710,440    2,708,340 
                

Novitex Acquisition, LLC (fka ARSloane Acquisition, LLC)9, 11

 

Services: Business

  Senior Secured Loan — Tranche B-2 Term Loan (First Lien)
7.5% Cash, 1.3% Libor Floor, Due 7/20
   987,538    978,870    936,778 
                   

Onex Carestream Finance LP9

 

Healthcare & Pharmaceuticals

  Junior Secured Loan — Term Loan (Second Lien)
9.5% Cash, 1.0% Libor Floor, Due 12/19
   1,932,311    1,932,311    1,932,794 

 

10
 

 

Portfolio Company / Principal Business  

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

Onex Carestream Finance LP9, 11

 

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term Loan (First Lien 2013)
5.0% Cash, 1.0% Libor Floor, Due 6/19
  $1,935,755   $1,941,952   $1,945,163 
                   

Orbitz Worldwide, Inc.11

 

Hotel, Gaming & Leisure

  Senior Secured Loan — Tranche C Term Loan
4.5% Cash, 1.0% Libor Floor, Due 4/21
   2,819,576    2,819,576    2,827,950 
                

Otter Products, LLC (OtterBox Holdings, Inc.)9, 11

 

Consumer goods: Durable

  Senior Secured Loan — Term B Loan
5.8% Cash, 1.0% Libor Floor, Due 6/20
   2,984,962    2,962,089    2,895,712 
                   

Ozburn-Hessey Holding Company LLC9, 11

 

Transportation: Cargo

  Senior Secured Loan — Term Loan
6.8% Cash, 1.3% Libor Floor, Due 5/19
   3,503,511    3,495,769    3,537,145 
                

PGX Holdings, Inc.9, 11

 

Services: Consumer

  Senior Secured Loan — Initial Term Loan (First Lien)
6.3% Cash, 1.0% Libor Floor, Due 9/20
   3,950,000    3,913,683    3,959,875 
                   

Post Holdings, Inc.11

 

Beverage, Food and Tobacco

  Senior Secured Loan — Series A Incremental Term Loan
3.8% Cash, 0.8% Libor Floor, Due 6/21
   2,984,962    2,977,910    2,995,335 
                

PQ Corporation9, 11

 

Chemicals, Plastics and Rubber

  Senior Secured Loan — 2014 Term Loan
4.0% Cash, 1.0% Libor Floor, Due 8/17
   2,984,733    2,984,733    2,979,136 
                   

PSC Industrial Holdings Corp.9, 11

 

Environmental Industries

  Senior Secured Loan — Term Loan (First Lien)
5.8% Cash, 1.0% Libor Floor, Due 12/20
   1,995,000    1,975,993    2,011,958 
                

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

 

Media: Broadcasting & Subscription

  Senior Secured Loan — Initial Term Loan
5.5% Cash, 1.0% Libor Floor, Due 7/18
   895,364    896,481    895,364 
                   

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

 

Media: Broadcasting & Subscription

  Senior Secured Loan — Initial Term Loan
5.5% Cash, 1.0% Libor Floor, Due 7/18
   2,686,092    2,677,062    2,686,092 
                

QoL Meds, LLC9, 11

 

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor, Due 7/20
   497,500    495,307    483,023 

 

11
 

 

Portfolio Company / Principal Business  

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

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

 

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term Loan A
6.0% Cash, 1.0% Libor Floor, Due 5/20
  $3,970,000   $3,944,386   $3,837,005 
                

Restorix Health, Inc.9

 

Healthcare & Pharmaceuticals

  Senior Unsecured Loan — Delayed Draw
10.0% Cash, 1.5% PIK, Due 6/18
   2,011,110    2,011,110    2,011,110 
                   

Restorix Health, Inc.9

 

Healthcare & Pharmaceuticals

  Senior Unsecured Loan — Subordinated Term Loan
10.0% Cash, 1.5% PIK, Due 6/18
   8,093,672    8,093,672    8,093,672 
                

Reynolds Group Holdings Inc.9, 11

 

Containers, Packaging and Glass

  Senior Secured Loan — Incremental U.S. Term Loan
4.5% Cash, 1.0% Libor Floor, Due 12/18
   2,916,649    2,916,649    2,933,055 
                   

Roscoe Medical, Inc.9

 

Healthcare & Pharmaceuticals

  Junior Secured Loan — Term Loan (Second Lien)
11.3% Cash, Due 9/19
   6,700,000    6,645,367    6,569,350 
                

Rovi Solutions Corporation / Rovi Guides, Inc.11

 

High Tech Industries

  Senior Secured Loan — Term B Loan
3.8% Cash, 0.8% Libor Floor, Due 7/21
   2,984,962    2,948,543    2,984,664 
                   

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

 

Utilities: Electric

  Senior Secured Loan — Term Loan
5.0% Cash, 1.0% Libor Floor, Due 11/20
   2,837,361    2,825,948    2,832,807 
                

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

 

Beverage, Food and Tobacco

  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor, Due 3/19
   2,185,755    2,171,061    2,185,755 
                   

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

 

Beverage, Food and Tobacco

  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor, Due 3/19
   3,431,840    3,424,174    3,431,840 
                

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

 

Environmental Industries

  Senior Secured Loan — Term Loan
6.8% Cash, 1.3% Libor Floor, Due 6/19
   2,861,935    2,841,682    2,856,211 
                   

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

 

Consumer goods: Non-durable

  Senior Secured Loan — Tranche B Term Loan
5.5% Cash, 1.3% Libor Floor, Due 3/20
   3,882,654    3,860,392    3,764,718 

 

12
 

 

Portfolio Company / Principal Business  

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

Tank Partners Holdings, LLC9

 

Energy: Oil & Gas

  Senior Secured Loan — Loan
9.8% Cash, 3.5% PIK, 3.0% Libor Floor, Due 8/19
  $10,477,484   $10,314,187   $9,953,609 
                

TPF II Power, LLC (TPF II Covert Midco, LLC)9, 11

 

Utilities: Electric

  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor, Due 10/21
   2,992,500    3,018,385    3,000,879 
                   

Trimaran Advisors, L.L.C.9, 10

 

Portfolio Company Loan

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

TRSO I, Inc.9

 

Energy: Oil & Gas

  Junior Secured Loan — Term Loan (Second Lien)
11.0% Cash, 1.0% Libor Floor, Due 12/17
   1,000,000    989,084    960,000 
                   

TWCC Holding Corp.9

 

Media: Broadcasting & Subscription

  Junior Secured Loan — Term Loan (Second Lien)
7.0% Cash, 1.0% Libor Floor, Due 6/20
   1,000,000    1,003,825    888,750 
                

TWCC Holding Corp.9, 11

 

Media: Broadcasting & Subscription

  Senior Secured Loan — Term Loan
3.5% Cash, 0.8% Libor Floor, Due 2/17
   888,574    891,750    854,617 
                   

Univar Inc.9, 11

 

Chemicals, Plastics and Rubber

  Senior Secured Loan — Term B Loan
5.0% Cash, 1.5% Libor Floor, Due 6/17
   2,887,053    2,882,840    2,886,851 
                

USJ-IMECO Holding Company, LLC9, 11

 

Transportation: Cargo

  Senior Secured Loan — Term Loan
7.0% Cash, 1.0% Libor Floor, Due 4/20
   3,960,000    3,943,208    3,960,000 

 

13
 

 

Portfolio Company / Principal Business  

Investment
Interest Rate¹ / Maturity

  Principal   Amortized Cost   Value2 

Vantiv, LLC (fka Fifth Third Processing Solutions, LLC)11

 

Banking, Finance, Insurance & Real Estate

  Senior Secured Loan — Term B Loan
3.8% Cash, 0.8% Libor Floor, Due 6/21
  $1,703,545    1,707,601    1,713,127 
                

Verdesian Life Sciences, LLC9

 

Environmental Industries

  Senior Secured Loan — Initial Term Loan
6.0% Cash, 1.0% Libor Floor, Due 7/20
   962,525    949,834    937,018 
                   

Verdesian Life Sciences, LLC9, 11

 

Environmental Industries

  Senior Secured Loan — Initial Term Loan
6.0% Cash, 1.0% Libor Floor, Due 7/20
   3,179,987    3,139,235    3,095,717 
                

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

 

Retail

  Senior Secured Loan — Term Loan
5.3% Cash, 1.0% Libor Floor, Due 9/21
   3,012,690    2,993,506    3,020,222 
                   

Weiman Products, LLC9

 

Consumer goods: Non-durable

  Senior Secured Loan — Term Loan
6.3% Cash, 1.0% Libor Floor, Due 11/18
   2,964,755    2,942,630    2,964,755 
                

Weiman Products, LLC9, 11

 

Consumer goods: Non-durable

  Senior Secured Loan — Term Loan
6.3% Cash, 1.0% Libor Floor, Due 11/18
   3,953,007    3,924,193    3,953,007 
                   

WideOpenWest Finance, LLC9

 

Telecommunications

  Senior Secured Loan — Term B Loan
4.8% Cash, 1.0% Libor Floor, Due 4/19
   2,947,368    2,962,880    2,954,280 
                

WireCo WorldGroup Inc. 9

 

Capital Equipment

  Senior Unsecured Bond — 9.000% - 05/2017
9.0% Cash, Due 5/17
   5,000,000    4,996,959    5,000,000 
                   

WireCo WorldGroup Inc. 9, 11

 

Capital Equipment

  Senior Unsecured Bond — 9.000% - 05/2017
9.0% Cash, Due 5/17
   3,000,000    2,998,175    3,000,000 
                   
Total Investment in Debt Securities
(121% of net asset value at fair value)
     $323,806,894   $321,962,047   $320,470,495 

 

14
 

 

Equity Securities Portfolio

 

Portfolio Company / Principal Business   Investment 

Percentage

Interest/Shares

   Amortized 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%   250,960    659,435 
                   

Bankruptcy Management Solutions, Inc.5, 9

 

Services: Business

  Class A Warrants   1.7%   -    - 
                

Bankruptcy Management Solutions, Inc.5, 9

 

Services: Business

  Class B Warrants   1.7%   -    - 
                   

Bankruptcy Management Solutions, Inc.5, 9

 

Services: Business

  Class C Warrants   1.7%   -    - 
                   

Bankruptcy Management Solutions, Inc.5, 9

 

Services: Business

  Common Stock 2013   0.8%   314,325    540,619 
                   

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

 

Media: Advertising, Printing & Publishing

  Common   1.3%   359,765    593,555 
                   

DBI Holding LLC5, 9

 

Services: Business

  Class A Warrants   3.2%   258,940    1,008,240 
                   

eInstruction Acquisition, LLC5, 9

 

Services: Business

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

FP WRCA Coinvestment Fund VII, Ltd.3, 5

 

Capital Equipment

  Class A Shares   1,500    1,500,000    2,237,566 
                   

Perseus Holding Corp.5, 9

 

Hotel, Gaming & Leisure

  Common   0.2%   400,000    1,000 

 

Portfolio Company / Principal Business   Investment 

Percentage

Interest/Shares

   Amortized Cost   Fair Value2 

Roscoe Investors, LLC5, 9

 

Healthcare & Pharmaceuticals

  Class A Units   1.6%  $1,000,000   $891,000 
                   

Tank Partners Holdings, LLC5, 9

 

Energy: Oil & Gas

  Unit   5.8%   980,000    546,095 
                   

Tank Partners Holdings, LLC5, 9

 

Energy: Oil & Gas

  Warrants   1.3%   185,205    131,448 
                

TRSO II, Inc.5, 9

 

Energy: Oil & Gas

  Common Stock   5.4%   1,500,000    1,452,600 
                   
Total Investment in Equity Securities
(3% of net asset value at fair value)
          $8,828,812   $8,063,558 

 

15
 

 

CLO Fund Securities

 

CLO Subordinated Investments

 

Portfolio Company   Investment 

Percentage

Interest

   Amortized Cost   Fair Value2 
Grant Grove CLO, Ltd.3  Subordinated Securities   22.2%  $2,534,223   $515,049 
Katonah III, Ltd.3  Preferred Shares   23.1%   1,160,437    350,000 
Katonah VII CLO Ltd.3, 6  Subordinated Securities   16.4%   3,613,232    1,000 
Katonah VIII CLO Ltd3, 6  Subordinated Securities   10.3%   2,689,907    20,000 
Katonah IX CLO Ltd3, 6  Preferred Shares   6.9%   1,244,315    525,102 
Katonah X CLO Ltd 3, 6  Subordinated Securities   33.3%   8,887,506    4,739,933 
Katonah 2007-I CLO Ltd.3, 6  Preferred Shares   100.0%   23,553,162    25,101,770 
Trimaran CLO IV, Ltd.3, 6  Preferred Shares   19.0%   4,276    250,000 
Trimaran CLO V, Ltd.3, 6  Subordinate Notes   20.8%   1,345,117    1,802,607 
Trimaran CLO VI, Ltd.3, 6  Income Notes   16.2%   39,078    50,000 
Trimaran CLO VII, Ltd.3, 6  Income Notes   10.5%   1,353,943    2,088,764 
Catamaran CLO 2012-1 Ltd.3, 6  Subordinated Notes   24.9%   7,717,181    5,753,784 
Catamaran CLO 2013- 1 Ltd.3, 6  Subordinated Notes   23.5%   7,200,636    7,531,200 
Catamaran CLO 2014-1 Ltd.3, 6  Subordinated Notes   24.9%   10,075,468    8,545,844 
Dryden 30 Senior Loan Fund3  Subordinated Notes   7.5%   1,787,454    2,532,725 
Catamaran CLO 2014-2 Ltd.3, 6  Subordinated Notes   24.9%   9,299,928    8,543,700 
Catamaran CLO 2015-1 Ltd.3, 6  Subordinated Notes   24.0%   11,952,000    11,952,000 
                    
Total Investment in CLO Subordinated Securities   $94,457,863   $80,303,478 

 

CLO Rated-Note Investment

 

Portfolio Company   Investment 

Percentage

Interest

   Amortized Cost   Fair Value2 
Catamaran CLO 2012-1 Ltd.3, 6  Float - 12/2023 - F - 14889CAE0   42.9%  $3,935,339   $4,180,000 
Catamaran CLO 2014-1 Ltd.3, 6  Float - 04/2026 - E - 14889FAC7   15.1%   1,419,685    1,370,000 
                   
Total Investment in CLO Rated-Note       $5,355,024   $5,550,000 
                   
Total Investment in CLO Fund Securities
(33% of net asset value at fair value)
       $99,812,887   $85,853,478 

 

16
 

 

Asset Manager Affiliates

 

Portfolio Company / Principal Business   Investment 

Percentage

Interest

   Cost   Fair Value2 
Asset Manager Affiliates9  Asset Management Company   100.0%  $59,006,651   $71,524,000 
                    
Total Investment in Asset Manager Affiliates
(27% of net asset value at fair value)
       $59,006,651   $71,524,000 

 

Time Deposits and Money Market Account

 

Time Deposit and Money Market Accounts   Investment  Yield   Par /Amortized
Cost
   Fair Value2 
JP Morgan Business Money Market Account8, 9  Money Market Account   0.10%  $249,154   $249,154 
                   
US Bank Money Market Account9  Money Market Account   0.02%   1,480,421    1,480,421 
                    
Total Investment in Time Deposit and Money Market Accounts
(1% of net asset value at fair value)
   $1,729,575   $1,729,575 
                   
Total Investments
(185% of net asset value at fair value)
       $491,339,972   $487,641,106 

 

 

See accompanying notes to consolidated financial statements.

 

1

 

A majority of the variable rate loans in the Company’s investment portfolio bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly at the borrower’s option. The Borrower may also elect to have multiple interest reset periods for each loan.  For each such loan, the Company has provided the weighted average annual stated interest rate in effect at March 31, 2015.  As noted in the table above, 75% (based on par) of debt securities contain LIBOR floors which range between .75% and 3.00%.
2 Reflects the fair market value of all investments as of March 31, 2015, as determined by the Company’s Board of Directors.
3 Non-U.S. company or principal place of business outside the U.S.
4 The aggregate cost of investments for federal income tax purposes is approximately $509 million. The aggregate gross unrealized appreciation is approximately $17 million, the aggregate gross unrealized depreciation is approximately $38 million, and the net unrealized depreciation is approximately $21 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 Affiliated portfolio company.
11 As of March 31, 2015, this investment is owned by KCAP Senior Funding I, LLC and was pledged to secure KCAP Senior Funding I, LLC’s obligation.

 

17
 

 

KCAP FINANCIAL, INC.

SCHEDULE OF INVESTMENTS

As of December 31, 2014

 

Debt Securities Portfolio 

 

Portfolio Company / Principal Business  

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost    Fair Value2 
4L Technologies Inc. (fka Clover Holdings, Inc.)9, 11  Senior Secured Loan — Term Loan               
Consumer goods: Non-durable  5.5% Cash, 1.0% Libor Floor, Due 5/20  $2,793,000   $2,768,057   $2,723,175 
                   
Advanced Lighting Technologies, Inc.9, 11  First Lien Bond —               
Consumer goods: Durable  10.5% Cash, Due 6/19   3,000,000    2,962,507    2,580,000 
                   
Advantage Sales & Marketing Inc.9  Junior Secured Loan — Term Loan (Second Lien)               
Services: Business  7.5% Cash, 1.0% Libor Floor, Due 7/22   1,000,000    1,002,384    992,000 
                   
Alaska Communications Systems Holdings, Inc.9, 11  Senior Secured Loan — Term Loan               
Telecommunications  6.3% Cash, 1.5% Libor Floor, Due 10/16   5,200,227    5,193,935    5,200,227 
                   
Alere Inc. (fka IM US Holdings, LLC)11  Senior Secured Loan — B Term Loan               
Healthcare & Pharmaceuticals  4.3% Cash, 1.0% Libor Floor, Due 6/17   2,992,277    2,988,629    2,972,947 
                   
AmSurg Corp.11  Senior Secured Loan — Initial Term Loan               
Healthcare & Pharmaceuticals  3.8% Cash, 0.8% Libor Floor, Due 7/21   2,992,481    2,992,481    2,975,020 
                   
Anaren, Inc.9, 11  Senior Secured Loan — Term Loan (First Lien)               
Aerospace and Defense  5.5% Cash, 1.0% Libor Floor, Due 2/21   1,980,000    1,962,587    1,955,250 
                   
Asurion, LLC (fka Asurion Corporation)9, 11  Senior Secured Loan — Incremental Tranche B-1 Term Loan               
Banking, Finance, Insurance & Real Estate  5.0% Cash, 1.3% Libor Floor, Due 5/19   1,917,430    1,932,331    1,896,549 
                   
AZ Chem US Inc.9, 11  Senior Secured Loan — Initial Term Loan (First Lien)               
Chemicals, Plastics and Rubber  4.5% Cash, 1.0% Libor Floor, Due 6/21   467,123    464,966    457,977 
                   
Bankruptcy Management Solutions, Inc.9  Senior Secured Loan — Term B Loan               
Services: Business  7.0% Cash, 1.0% Libor Floor, Due 6/18   700,227    700,227    624,463 

 

18
 

 

Portfolio Company / Principal Business  

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost    Fair Value2 
BarBri, Inc. (Gemini Holdings, Inc.)9, 11  Senior Secured Loan — Term Loan               
Services: Consumer  4.5% Cash, 1.0% Libor Floor, Due 7/19  $2,872,500   $2,861,557   $2,835,158 
                   
BBB Industries US Holdings, Inc.9, 11  Senior Secured Loan — Initial Term Loan (First Lien)               
Automotive  6.0% Cash, 1.0% Libor Floor, Due 11/21   3,000,000    2,941,316    2,985,000 
                   
Bellisio Foods, Inc. 9, 11  Senior Secured Loan — U.S. Term B Loans               
Beverage, Food and Tobacco  5.3% Cash, 1.0% Libor Floor, Due 8/19   2,239,551    2,230,586    2,235,071 
                   
Blue Coat Systems, Inc.9, 11  Senior Secured Loan — New Term Loan               
High Tech Industries  4.0% Cash, 1.0% Libor Floor, Due 5/19   467,636    468,971    456,530 
                   
Carolina Beverage Group LLC9  Senior Secured Bond —               
Beverage, Food and Tobacco  10.6% Cash, Due 8/18   1,500,000    1,515,584    1,552,500 
                   
CCS Intermediate Holdings, LLC9, 11  Senior Secured Loan — Initial Term Loan (First Lien)               
Healthcare & Pharmaceuticals  5.0% Cash, 1.0% Libor Floor, Due 7/21   2,992,500    2,978,364    2,940,131 
                   
Cengage Learning Acquisitions, Inc. (fka TL Acquisitions, Inc.)9, 11  Senior Secured Loan — Term Loan               
Media: Advertising, Printing & Publishing  7.0% Cash, 1.0% Libor Floor, Due 3/20   2,987,475    2,980,768    2,963,829 
                   
Charter Communications Operating, LLC (aka CCO Safari LLC)11  Senior Secured Loan — Term G Loan               
Media: Broadcasting & Subscription  4.3% Cash, 0.8% Libor Floor, Due 9/21   3,000,000    3,022,408    3,022,980 
                   
Checkout Holding Corp.9, 11  Senior Secured Loan — Term B Loan (First Lien)               
Media: Advertising, Printing & Publishing  4.5% Cash, 1.0% Libor Floor, Due 4/21   995,000    990,534    951,474 
                   
Consolidated Communications, Inc.11  Senior Secured Loan — Initial Term Loan               
Telecommunications  4.3% Cash, 1.0% Libor Floor, Due 12/20   2,992,443    3,003,588    2,976,538 
                   
CRGT Inc.9, 11  Senior Secured Loan — Term Loan               
High Tech Industries  7.5% Cash, 1.0% Libor Floor, Due 12/20   3,000,000    2,940,000    2,955,000 
                   
Crowley Holdings Preferred, LLC9  Preferred Stock —               
Transportation: Cargo  10.0% Cash, 2.0% PIK, Due 12/49   10,206,016    10,206,016    10,418,302 

 

19
 

 

Portfolio Company / Principal Business  

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost    Fair Value2 
Crowne Group, LLC9, 11  Senior Secured Loan — Term Loan (First Lien)               
Automotive  6.0% Cash, 1.0% Libor Floor, Due 9/20  $3,990,000   $3,932,506   $3,838,779 
                   
CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)9  Junior Secured Loan — Term Loan (Second Lien)               
Beverage, Food and Tobacco  8.8% Cash, 1.0% Libor Floor, Due 7/21   3,000,000    3,016,357    2,910,000 
                   
CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)9, 11  Senior Secured Loan — Term Loan (First Lien)               
Beverage, Food and Tobacco  5.0% Cash, 1.0% Libor Floor, Due 7/20   2,623,371    2,622,454    2,570,903 
                   
CT Technologies Intermediate Holdings, Inc. (Smart Holdings Corp.)9, 11  Senior Secured Loan — Initial Term Loan               
Healthcare & Pharmaceuticals  6.0% Cash, 1.0% Libor Floor, Due 12/21   3,000,000    2,970,271    2,988,750 
                   
DBI Holding LLC9  Senior Unsecured Bond —               
Services: Business  13.0% PIK, Due 9/19   3,457,795    3,221,771    3,386,218 
                   
DBI Holding LLC9  Senior Subordinated Bond —               
Services: Business  12.0% Cash, 1.0% PIK, Due 9/19   4,314,949    4,295,544    4,240,301 
                   
DJO Finance LLC (ReAble Therapeutics Fin LLC)9, 11  Senior Secured Loan — New Tranche B Term Loan               
Healthcare & Pharmaceuticals  4.3% Cash, 1.0% Libor Floor, Due 9/17   2,063,574    2,063,574    2,022,303 
                   
Drew Marine Group Inc.9  Junior Secured Loan — Term Loan (Second Lien)               
Transportation: Cargo  8.0% Cash, 1.0% Libor Floor, Due 5/21   2,500,000    2,494,654    2,523,250 
                   
ELO Touch Solutions, Inc.9, 11  Senior Secured Loan — Term Loan (First Lien)               
High Tech Industries  8.0% Cash, 1.5% Libor Floor, Due 6/18   1,726,036    1,677,698    1,642,496 
                   
EWT Holdings III Corp. (fka WTG Holdings III Corp.)9  Junior Secured Loan — Term Loan (Second Lien)               
Environmental Industries  8.5% Cash, 1.0% Libor Floor, Due 1/22   4,000,000    3,982,390    4,033,200 
                   
Fender Musical Instruments Corporation9, 11  Senior Secured Loan — Initial Loan               
Consumer goods: Durable  5.8% Cash, 1.3% Libor Floor, Due 4/19   2,002,536    2,012,321    1,982,110 
                   
FHC Health Systems, Inc.9, 11  Senior Secured Loan — Initial Term Loan               
Healthcare & Pharmaceuticals  5.0% Cash, 1.0% Libor Floor, Due 12/21   3,407,143    3,373,191    3,381,589 

 

20
 

 

Portfolio Company / Principal Business  

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost    Fair Value2 
First American Payment Systems, L.P.9  Junior Secured Loan — Term Loan (Second Lien)               
Banking, Finance, Insurance & Real Estate  10.8% Cash, 1.3% Libor Floor, Due 4/19  $2,796,448   $2,759,556   $2,782,466 
                   
First Data Corporation9, 11  Senior Secured Loan — 2018 New Dollar Term Loan               
Banking, Finance, Insurance & Real Estate  3.7% Cash, Due 3/18   1,000,000    968,906    982,190 
                   
Getty Images, Inc.9, 11  Senior Secured Loan — Initial Term Loan               
Media: Advertising, Printing & Publishing  4.8% Cash, 1.3% Libor Floor, Due 10/19   2,185,164    2,187,551    2,012,165 
                   
Global Tel*Link Corporation9  Junior Secured Loan — Term Loan (Second Lien)               
Telecommunications  9.0% Cash, 1.3% Libor Floor, Due 11/20   4,000,000    3,935,659    3,889,200 
                   
Grande Communications Networks LLC9, 11  Senior Secured Loan — Initial Term Loan               
Telecommunications  4.5% Cash, 1.0% Libor Floor, Due 5/20   3,940,040    3,944,690    3,938,464 
                   
Grifols Worldwide Operations Limited11  Senior Secured Loan — U.S. Tranche B Term Loam               
Healthcare & Pharmaceuticals  3.2% Cash, Due 2/21   2,992,462    2,970,236    2,956,298 
                   
Grupo HIMA San Pablo, Inc.9  Senior Secured Loan — Term B Loan (First Lien)               
Healthcare & Pharmaceuticals  8.5% Cash, 1.5% Libor Floor, Due 1/18   2,947,500    2,911,129    2,947,500 
                   
Grupo HIMA San Pablo, Inc.9  Junior Secured Loan — Term Loan (Second Lien)               
Healthcare & Pharmaceuticals  13.8% Cash, Due 7/18   7,000,000    6,894,754    7,105,000 
                   
Gymboree Corporation., The9, 11  Senior Secured Loan — Term Loan               
Retail  5.0% Cash, 1.5% Libor Floor, Due 2/18   1,421,105    1,390,786    935,563 
                   
Hargray Communications Group, Inc. (HCP Acquisition LLC)9, 11  Senior Secured Loan — Initial Term Loan               
Media: Broadcasting & Subscription  5.3% Cash, 1.0% Libor Floor, Due 6/19   2,930,662    2,908,645    2,928,611 
                   
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, 1.5% Libor Floor, Due 5/18   3,368,750    3,343,813    3,385,594 
                   
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, 1.0% Libor Floor, Due 8/19   1,462,500    1,456,384    1,458,661 

 

21
 

 

Portfolio Company / Principal Business  

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost    Fair Value2 
Hoffmaster Group, Inc.9  Junior Secured Loan — Initial Term Loan (Second Lien)               
Forest Products & Paper  10.0% Cash, 1.0% Libor Floor, Due 5/21  $2,000,000   $1,972,727   $1,999,000 
                   
Hoffmaster Group, Inc.9, 11  Senior Secured Loan — Initial Term Loan (First Lien)               
Forest Products & Paper  5.3% Cash, 1.0% Libor Floor, Due 5/20   3,980,000    3,944,324    3,943,523 
                   
Hunter Defense Technologies, Inc.9, 11  Senior Secured Loan — Term Loan (First Lien)               
Aerospace and Defense  6.5% Cash, 1.0% Libor Floor, Due 8/19   2,962,500    2,934,961    2,988,866 
                   
Integra Telecom Holdings, Inc.9, 11  Senior Secured Loan — Term B Loan               
Telecommunications  5.3% Cash, 1.3% Libor Floor, Due 2/19   2,992,386    2,981,164    2,919,461 
                   
International Architectural Products, Inc.7, 9  Senior Secured Loan — Term Loan               
Metals & Mining  Due 5/15   247,636    228,563    1,000 
                   
Kellermeyer Bergensons Services, LLC9  Senior Secured Loan — Initial Term Loan (First Lien)               
Services: Business  6.0% Cash, 1.0% Libor Floor, Due 10/21   2,000,000    1,980,432    1,990,000 
                   
Key Safety Systems, Inc.9, 11  Senior Secured Loan — Initial Term Loan               
Automotive  4.8% Cash, 1.0% Libor Floor, Due 8/21   1,496,250    1,489,134    1,488,769 
                   
Kinetic Concepts, Inc.9, 11  Senior Secured Loan — Dollar Term E-1 Loan               
Healthcare & Pharmaceuticals  4.0% Cash, 1.0% Libor Floor, Due 5/18   2,992,443    2,984,962    2,956,279 
                   
Landslide Holdings, Inc. (Crimson Acquisition Corp.)9, 11  Senior Secured Loan — New Term Loan (First Lien)               
High Tech Industries  5.0% Cash, 1.0% Libor Floor, Due 2/20   3,456,381    3,464,859    3,451,197 
                   
MB Aerospace ACP Holdings III Corp.9, 11  Senior Secured Loan — Dollar Term Loan               
Aerospace and Defense  5.0% Cash, 1.0% Libor Floor, Due 5/19   3,940,000    3,910,979    3,939,212 
                   
Media General, Inc.11  Senior Secured Loan — Term B Loan               
Media: Broadcasting & Subscription  4.3% Cash, 1.0% Libor Floor, Due 7/20   3,000,000    3,003,750    2,972,805 
                   
Medical Specialties Distributors, LLC9, 11  Senior Secured Loan — Term Loan               
Healthcare & Pharmaceuticals  6.5% Cash, 1.0% Libor Floor, Due 12/19   3,960,000    3,927,435    3,804,372 

 

22
 

 

Portfolio Company / Principal Business  

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost    Fair Value2 
Millennium Health, LLC (fka Millennium Laboratories, LLC)9, 11  Senior Secured Loan — Tranche B Term Loan               
Healthcare & Pharmaceuticals  5.3% Cash, 1.0% Libor Floor, Due 4/21  $2,992,481   $2,992,481   $2,985,000 
                   
Nielsen & Bainbrige, LLC9  Senior Secured Loan — Term Loan (First Lien)               
Consumer goods: Durable  6.0% Cash, 1.0% Libor Floor, Due 8/20   1,000,000    990,487    963,200 
                   
Nielsen & Bainbrige, LLC9  Junior Secured Loan — Term Loan (Second Lien)               
Consumer goods: Durable  10.3% Cash, 1.0% Libor Floor, Due 8/21   2,000,000    1,971,249    1,920,000 
                   
Nielsen & Bainbrige, LLC9, 11  Senior Secured Loan — Term Loan (First Lien)               
Consumer goods: Durable  6.0% Cash, 1.0% Libor Floor, Due 8/20   3,000,000    2,971,460    2,889,600 
                   
Novetta, LLC9  Senior Secured Loan — Initial Term Loan               
Services: Business  6.0% Cash, 1.0% Libor Floor, Due 10/20   2,743,125    2,716,093    2,743,125 
                   
Novitex Acquisition, LLC (fka ARSloane Acquisition, LLC)9, 11  Senior Secured Loan — Tranche B-2 Term Loan (First Lien)               
Services: Business  7.5% Cash, 1.3% Libor Floor, Due 7/20   990,019    980,923    950,418 
                   
Onex Carestream Finance LP9  Junior Secured Loan — Term Loan (Second Lien)               
Healthcare & Pharmaceuticals  9.5% Cash, 1.0% Libor Floor, Due 12/19   2,000,000    2,000,000    1,992,920 
                   
Onex Carestream Finance LP9, 11  Senior Secured Loan — Term Loan (First Lien 2013)               
Healthcare & Pharmaceuticals  5.0% Cash, 1.0% Libor Floor, Due 6/19   1,973,333    1,980,022    1,969,219 
                   
Orbitz Worldwide, Inc.11  Senior Secured Loan — Tranche C Term Loan               
Hotel, Gaming & Leisure  4.5% Cash, 1.0% Libor Floor, Due 4/21   2,992,481    2,992,481    2,961,315 
                   
Otter Products, LLC (OtterBox Holdings, Inc.)9, 11  Senior Secured Loan — Term B Loan               
Consumer goods: Durable  5.8% Cash, 1.0% Libor Floor, Due 6/20   2,992,481    2,968,458    2,966,297 
                   
Ozburn-Hessey Holding Company LLC9, 11  Senior Secured Loan — Term Loan               
Transportation: Cargo  6.8% Cash, 1.3% Libor Floor, Due 5/19   3,512,426    3,503,687    3,544,389 

 

23
 

 

Portfolio Company / Principal Business  

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost    Fair Value2 
PGX Holdings, Inc.9, 11  Senior Secured Loan — Initial Term Loan (First Lien)               
Services: Consumer  6.3% Cash, 1.0% Libor Floor, Due 9/20  $3,975,000   $3,936,815   $3,917,363 
                   
Post Holdings, Inc.11  Senior Secured Loan — Series A Incremental Term Loan               
Beverage, Food and Tobacco  3.8% Cash, 0.8% Libor Floor, Due 6/21   2,992,481    2,985,129    2,983,130 
                   
PQ Corporation9, 11  Senior Secured Loan — 2014 Term Loan               
Chemicals, Plastics and Rubber  4.0% Cash, 1.0% Libor Floor, Due 8/17   2,992,366    2,992,366    2,943,740 
                   
PSC Industrial Holdings Corp.9, 11  Senior Secured Loan — Term Loan (First Lien)               
Environmental Industries  7.0% Cash, 1.0% Libor Floor, Due 12/20   2,000,000    1,980,119    1,980,000 
                   
Puerto Rico Cable Acquisition Company Inc. (D/B/A Choice TV)9  Senior Secured Loan — Initial Term Loan               
Media: Broadcasting & Subscription  5.5% Cash, 1.0% Libor Floor, Due 7/18   909,069    910,287    909,069 
                   
Puerto Rico Cable Acquisition Company Inc. (D/B/A Choice TV)9, 11  Senior Secured Loan — Initial Term Loan               
Media: Broadcasting & Subscription  5.5% Cash, 1.0% Libor Floor, Due 7/18   2,727,206    2,717,359    2,727,206 
                   
QoL Meds, LLC9, 11  Senior Secured Loan — Term Loan               
Healthcare & Pharmaceuticals  5.5% Cash, 1.0% Libor Floor, Due 7/20   498,750    496,449    480,296 
                   
Quad-C JH Holdings Inc. (aka Joerns Healthcare)9, 11  Senior Secured Loan — Term Loan A               
Healthcare & Pharmaceuticals  6.0% Cash, 1.0% Libor Floor, Due 5/20   3,980,000    3,953,083    3,786,174 
                   
Restorix Health, Inc.9  Senior Unsecured Loan — Delayed Draw               
Healthcare & Pharmaceuticals  10.0% Cash, 1.5% PIK, Due 6/18   2,003,587    2,003,587    2,003,587 
                   
Restorix Health, Inc.9  Senior Unsecured Loan — Subordinated Term Loan               
Healthcare & Pharmaceuticals  10.0% Cash, 1.5% PIK, Due 6/18   8,063,397    8,063,397    8,063,397 
                   
Reynolds Group Holdings Inc.9, 11  Senior Secured Loan — Incremental U.S. Term Loan               
Containers, Packaging and Glass  4.0% Cash, 1.0% Libor Floor, Due 12/18   2,992,443    2,992,443    2,946,734 

 

24
 

 

Portfolio Company / Principal Business  

Investment

Interest Rate¹ / Maturity

  Principal   Amortized 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   $6,642,367   $6,499,000 
                   
Rovi Solutions Corporation / Rovi Guides, Inc.11  Senior Secured Loan — Term B Loan               
High Tech Industries  3.8% Cash, 0.8% Libor Floor, Due 7/21   2,992,481    2,954,531    2,936,387 
                   
Safenet, Inc.9, 11  Senior Secured Loan — Initial Term Loan (First Lien)               
High Tech Industries  6.8% Cash, 1.0% Libor Floor, Due 3/20   2,977,500    2,951,435    2,977,500 
                   
Sandy Creek Energy Associates, L.P.9, 11  Senior Secured Loan — Term Loan               
Utilities: Electric  5.0% Cash, 1.0% Libor Floor, Due 11/20   2,844,544    2,832,599    2,794,053 
                   
SGF Produce Holding Corp.(Frozsun, Inc.)9  Senior Secured Loan — Term Loan               
Beverage, Food and Tobacco  5.5% Cash, 1.0% Libor Floor, Due 3/19   2,191,289    2,175,642    2,191,289 
                   
SGF Produce Holding Corp.(Frozsun, Inc.)9, 11  Senior Secured Loan — Term Loan               
Beverage, Food and Tobacco  5.5% Cash, 1.0% Libor Floor, Due 3/19   3,440,528    3,429,224    3,440,528 
                   
Stafford Logistics, Inc.(dba Custom Ecology, Inc.)9, 11  Senior Secured Loan — Term Loan               
Environmental Industries  6.8% Cash, 1.3% Libor Floor, Due 6/19   2,861,935    2,840,504    2,858,501 
                   
Sun Products Corporation, The (fka Huish Detergents Inc.)9, 11  Senior Secured Loan — Tranche B Term Loan               
Consumer goods: Non-durable  5.5% Cash, 1.3% Libor Floor, Due 3/20   3,910,711    3,887,178    3,656,515 

 

25
 

 

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal   Amortized Cost    Fair Value2 
Tank Partners Holdings, LLC9  Senior Secured Loan — Loan               
Energy: Oil & Gas  9.8% Cash, 3.5% PIK, 3.0% Libor Floor, Due 8/19  $10,385,331   $10,212,907   $9,866,065 
                   
TPF II Power, LLC (TPF II Covert Midco, LLC)9, 11  Senior Secured Loan — Term Loan               
Utilities: Electric  5.5% Cash, 1.0% Libor Floor, Due 10/21   3,000,000    3,026,933    3,009,375 
                   
Trimaran Advisors, L.L.C.9, 12  Senior Unsecured Loan — Revolving Credit Facility               
Portfolio Company Loan  9.0% Cash, Due 11/17   23,000,000    23,000,000    23,000,000 
                   
TRSO I, Inc.9  Junior Secured Loan — Term Loan (Second Lien)               
Energy: Oil & Gas  11.0% Cash, 1.0% Libor Floor, Due 12/17   1,000,000    988,097    961,300 
                   
TWCC Holding Corp.9  Junior Secured Loan — Term Loan (Second Lien)               
Media: Broadcasting & Subscription  7.0% Cash, 1.0% Libor Floor, Due 6/20   1,000,000    1,004,005    961,670 
                   
TWCC Holding Corp.9, 11  Senior Secured Loan — Term Loan               
Media: Broadcasting & Subscription  3.5% Cash, 0.8% Libor Floor, Due 2/17   906,653    910,624    887,060 
                   
Univar Inc.9, 11  Senior Secured Loan — Term B Loan               
Chemicals, Plastics and Rubber  5.0% Cash, 1.5% Libor Floor, Due 6/17   2,894,577    2,890,893    2,808,536 
                   
USJ-IMECO Holding Company, LLC9, 11  Senior Secured Loan — Term Loan               
Transportation: Cargo  7.0% Cash, 1.0% Libor Floor, Due 4/20   3,970,000    3,952,343    3,970,000 

26
 

 

Portfolio Company / Principal Business  

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost    Fair Value2 
Vantiv, LLC (fka Fifth Third Processing Solutions, LLC)11  Senior Secured Loan — Term B Loan               
Banking, Finance, Insurance & Real Estate  3.8% Cash, 0.8% Libor Floor, Due 6/21  $1,994,987   $1,999,927   $1,978,160 
                   
Verdesian Life Sciences, LLC9  Senior Secured Loan — Initial Term Loan               
Environmental Industries  6.0% Cash, 1.0% Libor Floor, Due 7/20   975,012    961,553    938,547 
                   
Verdesian Life Sciences, LLC9, 11  Senior Secured Loan — Initial Term Loan               
Environmental Industries  6.0% Cash, 1.0% Libor Floor, Due 7/20   3,221,243    3,178,026    3,100,769 
                   
Vestcom International, Inc. (fka Vector Investment Holdings, Inc.)9, 11  Senior Secured Loan — Term Loan               
Retail  5.3% Cash, 1.0% Libor Floor, Due 9/21   2,866,953    2,843,300    2,838,284 
                   
Weiman Products, LLC9  Senior Secured Loan — Term Loan               
Consumer goods: Non-durable  6.3% Cash, 1.0% Libor Floor, Due 11/18   2,972,255    2,948,574    2,972,255 
                   
Weiman Products, LLC9, 11  Senior Secured Loan — Term Loan               
Consumer goods: Non-durable  6.3% Cash, 1.0% Libor Floor, Due 11/18   3,963,007    3,932,167    3,963,007 
                   
WideOpenWest Finance, LLC9  Senior Secured Loan — Term B Loan               
Telecommunications  4.8% Cash, 1.0% Libor Floor, Due 4/19   2,954,887    2,971,397    2,941,974 
                   
WireCo WorldGroup Inc. 9  Senior Unsecured Bond —               
Capital Equipment  9.0% Cash, Due 5/17   5,000,000    4,991,504    5,000,000 
                   
WireCo WorldGroup Inc. 9, 11  Senior Unsecured Bond —               
Capital Equipment  9.0% Cash, Due 5/17   3,000,000    2,994,903    3,000,000 
                   

Total Investment in Debt Securities

   (125% of net asset value at fair value)

  $324,808,055   $322,884,934   $320,143,170 

 

27
 

 

Equity Securities Portfolio

 

Portfolio Company / Principal Business   Investment  

Percentage

Interest/Shares

    Amortized 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       648,764  
                             
Bankruptcy Management Solutions, Inc.5, 9                            
Services: Business   Class A Warrants     1.7 %     -       -  
                             
Bankruptcy Management Solutions, Inc.5, 9                            
Services: Business   Class B Warrants     1.7 %     -       -  
                             
Bankruptcy Management Solutions, Inc.5, 9                            
Services: Business   Class C Warrants     1.7 %     -       -  
                             
Bankruptcy Management Solutions, Inc.5, 9                            
Services: Business   Common Stock 2013     0.8 %     314,325       391,932  
                             
Caribe Media Inc. (fka Caribe Information Investments Incorporated)5, 9                            
Media: Advertising, Printing & Publishing   Common     1.3 %     359,765       624,304  
                             
DBI Holding LLC5, 9                            
Services: Business   Class A Warrants     3.2 %     258,940       746,964  
                             
eInstruction Acquisition, LLC5, 9                            
Services: Business   Membership Units     1.1 %     1,079,617       1,000  
                             
FP WRCA Coinvestment Fund VII, Ltd.3, 5,                            
Capital Equipment   Class A Shares     1,500       1,500,000       2,351,329  
                             
Perseus Holding Corp.5, 9                            
Hotel, Gaming & Leisure   Common     0.2 %     400,000       1,000  

 

28
 

 

Portfolio Company / Principal Business   Investment 

Percentage

Interest/Shares

   Amortized Cost    Fair Value2 
Roscoe Investors, LLC5, 9                  
Healthcare & Pharmaceuticals  Class A Units   1.6%  $1,000,000   $891,000 
                   
Tank Partners Holdings, LLC5, 9                  
Energy: Oil & Gas  Unit   5.8%   980,000    573,750 
                   
Tank Partners Holdings, LLC5, 9                  
Energy: Oil & Gas  Warrants   1.3%   185,204    99,752 
                   
TRSO II, Inc.5, 9                  
Energy: Oil & Gas  Common Stock   5.4%   1,500,000    1,788,886 
                   

Total Investment in Equity Securities
(3% of net asset value at fair value)

       $8,828,812   $8,119,681 

 

CLO Fund Securities

 

CLO Subordinated Securities, Preferred Shares and Income Notes Investments

 

Portfolio Company   Investment 

Percentage

Interest

   Amortized Cost    Fair Value2 
Grant Grove CLO, Ltd.3  Subordinated Securities   22.2%  $2,254,638   $469,131 
Katonah III, Ltd.3, 10  Preferred Shares   23.1%   1,015,334    400,000 
Katonah VII CLO Ltd.3, 6  Subordinated Securities   16.4%   3,563,252    1,000 
Katonah VIII CLO Ltd3, 6  Subordinated Securities   10.3%   2,755,267    100,000 
Katonah IX CLO Ltd3, 6  Preferred Shares   6.9%   1,262,496    594,989 
Katonah X CLO Ltd 3, 6  Subordinated Securities   33.3%   8,910,471    4,863,001 
Katonah 2007-I CLO Ltd.3, 6  Preferred Shares   100.0%   23,471,779    25,191,782 
Trimaran CLO IV, Ltd.3, 6  Preferred Shares   19.0%   11,094    900,000 
Trimaran CLO V, Ltd.3, 6  Subordinate Notes   20.8%   1,292,698    1,657,020 
Trimaran CLO VI, Ltd.3, 6  Income Notes   16.2%   1,531,142    1,950,000 
Trimaran CLO VII, Ltd.3, 6  Income Notes   10.5%   1,399,074    2,084,394 
Catamaran CLO 2012-1 Ltd.3, 6  Subordinated Notes   24.9%   7,994,677    5,793,924 
Catamaran CLO 2013- 1 Ltd.3, 6  Subordinated Notes   23.5%   7,492,702    7,874,910 
Catamaran CLO 2014-1 Ltd.3, 6  Subordinated Notes   24.9%   10,473,628    8,867,176 
Dryden 30 Senior Loan Fund3  Subordinated Notes   7.5%   2,263,321    2,506,075 
Catamaran CLO 2014-2 Ltd.3, 6  Subordinated Notes   24.9%   9,862,799    8,761,500 
                   
Total Investment in CLO Subordinated Securities, Preferred Shares and Income Notes       $85,554,372   $72,014,902 

 

29
 

 

CLO Rated-Note Investments

 

Portfolio Company   Investment 

Percentage

Interest

   Amortized Cost    Fair Value2 
Catamaran CLO 2012-1 Ltd.3, 6  Class F Notes
Par Value of $4,500,000
Due 12/23
   42.9%  $3,917,442   $4,160,000 
                   
Catamaran CLO 2014-1 Ltd.3, 6  Class E Notes
Par Value of $1,525,000
Due 4/26
   15.1%   1,417,376    1,340,000 
                   
Total Investment in CLO Rated-Note       $5,334,818   $5,500,000 
                   
Total Investment in CLO Fund Securities               
(30% of net asset value at fair value)       $90,889,190   $77,514,902 

 

Asset Manager Affiliates

 

Portfolio Company / Principal Business   Investment 

Percentage

Interest

   Cost    Fair Value2 
Asset Manager Affiliates9  Asset Management Company   100.0%  $60,292,677   $72,326,000 
                   
Total Investment in Asset Manager Affiliates
(28% of net asset value at fair value)
       $60,292,677   $72,326,000 

 

Time Deposits and Money Market Account

 

Time Deposit and Money Market Accounts   Investment  Yield   Par / Amortized
Cost
   Fair Value2 
JP Morgan Business Money Market Account8, 9  Money Market Account   0.10%  $249,105   $249,105 
                   
US Bank Money Market Account9  Money Market Account   0.02%   1,353,636    1,353,636 
                   
Total Investment in Time Deposit and Money Market Accounts
(1% of net asset value at fair value)
       $1,602,741   $1,602,741 
                   
Total Investments4
(188% of net asset value at fair value)
       $484,498,354   $479,706,494 

 

See accompanying notes to financial statements.

 

30
 

  

1 A majority of the variable rate loans in the Company’s investment portfolio bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly at the borrower’s option. The Borrower may also elect to have multiple interest reset periods for each loan. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at December 31, 2014. As noted in the table above, 75% (based on par) of debt securities contain LIBOR floors which range between 0.75% and 3.00%.
2 Reflects the fair market value of all investments as of December 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 $502 million. The aggregate gross unrealized appreciation is approximately $15.7 million, the aggregate gross unrealized depreciation is approximately $37.7 million, and the net unrealized depreciation is approximately $22 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, 2014, this CLO Fund Security was not providing a taxable distribution.
11 As of December 31, 2014, this investment is owned by KCAP Senior Funding I, LLC and has been pledged to secure KCAP Senior Funding I, LLC’s obligations.

 

31
 

KCAP FINANCIAL, INC.

CONSOLIDATED FINANCIAL HIGHLIGHTS

(unaudited)

 

  

Three Months Ended

March 31,

 
   2015    2014  
         
Per Share Data:          
Net asset value, at beginning of period  $6.94   $7.51 
Net investment income1   0.18    0.13 
Net realized gains from investments1   -4   0.01 
Net change in unrealized appreciation (depreciation) on investments1   0.03    (0.04)
Net increase in net assets resulting from operations   0.21    0.10 
Net increase in net assets resulting from distributions:          
Net increase in net assets relating to stock-based transactions:          
Issuance of common stock under dividend reinvestment plan   -4   -4
Stock based compensation expense   0.01    0.01 
Net increase in net assets relating to stock-based transactions   0.01    0.01 
           
Net asset value, end of period  $7.16   $7.62 
Total net asset value return2   3.2%   1.5%
           
Ratio/Supplemental Data:          
Per share market value at beginning of period  $6.82   $8.07 
Per share market value at end of period  $6.73   $8.66 
Total market return3   (1.3)%   7.3%
Shares outstanding at end of period   36,859,957    33,340,607 
Net assets at end of period  $263,923,435   $254,102,611 
Portfolio turnover rate   2.2%   6.6%
Average par debt outstanding  $227,397,000   $195,658,000 
Asset coverage ratio   215%   228%
Ratio of net investment income to average net assets5   10.0%   7.1%
Ratio of total expenses to average net assets5   9.0%   9.2%
Ratio of interest expense to average net assets5   4.6%   5.0%
Ratio of non-interest expenses to average net assets5   4.4%   4.2%

 

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

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

3    Total market return (not annualized) equals the change in the ending market price, over the beginning of period price per share plus distributions, divided by the beginning market price. 

4    Balance rounds to less than $0.01. 

5    Annualized.

 

See accompanying notes to consolidated financial statements.

 

32
 

KCAP FINANCIAL, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. ORGANIZATION

 

KCAP Financial, Inc. (“KCAP” or the “Company”) is an internally managed, non-diversified closed-end investment company that is regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). The Company was formed as a Delaware limited liability company on August 8, 2006 and, prior to the issuance of shares of the Company’s common stock in its initial public offering (“IPO”), converted to a corporation incorporated in Delaware on December 11, 2006. Prior to its IPO, the Company did not have material operations. The Company’s IPO of 14,462,000 shares of common stock raised net proceeds of approximately $200 million. Prior to the IPO, the Company issued 3,484,333 shares to affiliates of Kohlberg & Co., L.L.C., a leading middle market private equity firm, in exchange for the contribution to the Company of their ownership interests in Katonah Debt Advisors, L.L.C., and related affiliates controlled by the Company (collectively, “Katonah Debt Advisors”) and in securities issued by collateralized loan obligation funds (“CLO Funds”) managed by Katonah Debt Advisors and two other asset managers.

 

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

 

On February 29, 2012, the Company purchased Trimaran Advisors, L.L.C. (“Trimaran Advisors”), a CLO manager similar to Katonah Debt Advisors with assets under management of approximately $1.5 billion, for total consideration of $13.0 million in cash and 3,600,000 shares of the Company’s common stock. Contemporaneously with the acquisition of Trimaran Advisors, the Company acquired from Trimaran Advisors equity interests in certain CLO Funds managed by Trimaran Advisors for an aggregate purchase price of $12.0 million in cash. As of March 31, 2015, Katonah Debt Advisors and Trimaran Advisors are wholly-owned portfolio companies (collectively, “Asset Manager Affiliates”) and have approximately $2.9 billion of par value assets under management. The Asset Manager Affiliates are registered under the Investment Advisers Act of 1940 and are managed independently from the Company by a separate portfolio management team.

 

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

 

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

 

The Company has three principal areas of investment:

 

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

 

Second, the Company has invested in Asset Manager Affiliates that manage collateralized loan obligation funds (“CLOs”).

 

Third, the Company invests 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 the Company makes 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.

 

33
 

 

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

 

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

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required for annual consolidated financial statements. The unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto in the Company’s Form 10-K for the year ended December 31, 2014, 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 presentation.

 

The Company consolidates the financial statements of its wholly-owned special purpose financing subsidiaries KCAP Funding, Kolhberg Capital Funding I LLC, 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 Rule 3-09 of Regulation S-X promulgated by the SEC, additional financial information with respect to oneof the CLO Funds in which the Company has an investment, Katonah 2007-I CLO Ltd. (“Katonah 2007-I CLO”) is required to be included in the Company’s SEC filings. The additional financial information regarding the Asset Manager Affiliates and Katonah 2007-I CLO (pursuant to Rule 3-09) is set forth in Note 5 to these consolidated financial statements.

 

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

 

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 2015, the Company provided $27 million in portfolio companies to support their growth objectives. None of this support was contractually obligated. See also Note 8 – Commitments and Contingencies. As of March 31, 2015, the Company holds loans it has made to 86 investee companies with aggregate principal amounts of $293 million. The details of such loans have been disclosed on the consolidated Schedule of Investments as well as in Note 4 – Investments. In addition to providing loans to investee companies, from time to time the Company assists investee companies in securing financing from other sources by introducing such investee companies to sponsors or by leading a syndicate of lenders to provide the investee companies with financing. During the three months month period ended March 31, 2015, the Company did not make any such introductions or lead any syndicates.

 

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

 

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

 

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

 

Investments

 

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

 

Valuation of Portfolio Investments. The Company’s Board of Directors is ultimately and solely responsible for making a good faith determination of the fair value of portfolio investments on a quarterly basis. Debt and equity securities for which market quotations are readily available are generally valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available are valued by the Board of Directors based on detailed analyses prepared by management, 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.

 

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

 

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

 

The Company utilizes an independent valuation firm to provide an annual third-party review of the Company’s CLO 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. The independent valuation firm’s 2014 annual review 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.

 

Debt Securities. To the extent that the Company’s investments are exchange traded and are priced or have sufficient price indications from normal course trading at or around the valuation date (financial reporting date), such pricing will 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.

 

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

 

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

 

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

 

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

 

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

 

The Company’s investments in CLO Fund securities are carried at fair value, which is based either on (i) the present value of the net expected cash inflows for interest income and principal repayments from underlying assets and cash outflows for interest expense, debt pay-down and other fund costs for the CLO Funds that are approaching or past the end of their reinvestment period and therefore are selling assets and/or using principal repayments to pay down CLO Fund debt (or will begin to do so shortly), and for which there continue to be net cash distributions to the class of securities owned by the Company, a Discounted Cash Flow approach, (ii) a discounted cash flow model that utilizes prepayment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow and comparable yields for similar securities or preferred shares to those in which the Company has invested, or (iii) indicative prices provided by the underwriters or brokers who arrange CLO Funds, a Market Approach. The Company recognizes unrealized appreciation or depreciation on the Company’s investments in CLO Fund securities as comparable yields in the market change and/or based on changes in net asset values or estimated cash flows resulting from changes in prepayment or loss assumptions in the underlying collateral pool. As each investment in CLO Fund securities ages, the expected amount of losses and the expected timing of recognition of such losses in the underlying collateral pool are updated and the revised cash flows are used in determining the fair value of the CLO Fund investment. The Company determines the fair value of its investments in CLO Fund securities on a security-by-security basis.

 

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Due to the individual attributes of each CLO Fund security, they are classified as a Level III investment unless specific trading activity can be identified at or near the valuation date. When available, observable market information will be identified, evaluated and weighted accordingly in the application of such data to the present value models and fair value determination. Significant assumptions to the present value calculations include default rates, recovery rates, prepayment rates, investment/reinvestment rates and spreads and the discount rate by which to value the resulting underlying cash flows. Such assumptions can vary significantly, depending on market data sources which often vary in depth and level of analysis, understanding of the CLO market, detailed or broad characterization of the CLO market and the application of such data to an appropriate framework for analysis. The application of data points are based on the specific attributes of each individual CLO Fund security’s underlying assets, historic, current and prospective performance, vintage, and other quantitative and qualitative factors that would be evaluated by market participants. The Company evaluates the source of market data for reliability as an indicative market input, consistency amongst other inputs and results and also the context in which such data is presented.

 

For rated note tranches of CLO Fund securities (those above the junior class) without transactions to support a fair value for the specific CLO Fund and tranche, fair value is based on discounting estimated bond payments at current market yields, which may reflect the adjusted yield on the leveraged loan index for similarly rated tranches, as well as prices for similar tranches for other CLO Funds and also other factors such as indicative prices provided by underwriters or brokers who arrange CLO Funds, and the default and recovery rates of underlying assets in the CLO Fund, as may be applicable. Such model assumptions may vary and incorporate adjustments for risk premiums and CLO Fund specific attributes.

 

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

 

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

 

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

 

Interest Income. Interest income, including the amortization of premium and accretion of discount, is recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company generally places a loan or security on non-accrual status and ceases recognizing cash interest income on such loan or security when a loan or security becomes 90 days or more past due or if the Company otherwise does not expect the debtor to be able to service its debt obligations. Non-accrual loans remain in such status until the borrower has demonstrated the ability and intent to pay contractual amounts due or such loans become current. As of March 31, 2015, 1 issuer representing less than 1% of the Company’s total investments at fair value was on a non-accrual status.

 

Distributions from Asset Manager Affiliates. The Company records distributions from our Asset Manager Affiliates on the declaration date, which represents the ex-dividend date. Distributions in excess of tax-basis earnings and profits of the distributing affiliate company are recognized as tax-basis return of capital.

 

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

 

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

 

For non-junior class CLO Fund securities, such as the Company’s investment in the Class F Notes of the Catamaran 2012-1 CLO and Class E Notes of the Catamaran 2014-1 CLO, interest is earned at a fixed spread relative to the LIBOR index.

 

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

 

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

 

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

 

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

 

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

 

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

  

3. EARNINGS PER SHARE

 

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

 

The following information sets forth the computation of basic and diluted net increase (decrease) in stockholders’ equity per share for the three months ended March 31, 2015 and 2014 (unaudited):

 

   (unaudited) 
   Three Months Ended March 31, 
   2015   2014 
         
Net increase in net assets resulting from operations  $7,672,290   $3,441,590 
Net decrease in net assets allocated to unvested share awards   (128,976)   (28,183)
Net increase in net assets available to common stockholders  $7,543,314   $3,413,407 
Weighted average number of common shares outstanding for basic shares computation   36,834,266    33,337,967 
Effect of dilutive securities – stock options   9,116    11,949 
Weighted average number of common and common stock equivalent shares outstanding for diluted shares computation   36,843,382    33,349,916 
Net increase in net assets per basic common shares:          
Net increase in net assets from operations  $0.21   $0.10 
Net increase in net assets per diluted shares:          
Net increase in net assets from operations  $0.20   $0.10 

 

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

 

There were 50,000 options to purchase shares of common stock for the three months ended March 31, 2015. For the three months ended March 31, 2015 and 2014, options to purchase 9,116 and 11,949 shares of common stock, respectively, were included in the computation of diluted earnings per share.

 

The Company’s Convertible Notes are included in the computation of the diluted net increase or decrease in net assets resulting from operations per share by application of the “if-converted method.” Under the if-converted method, interest charges applicable to the convertible notes for the period are added to reported net increase or decrease in net assets resulting from operations and the full amount of shares (pro-rata if not outstanding for the full period) that would be issued are added to weighted average basic shares. Convertible notes are considered anti-dilutive only when its interest per share upon conversion exceeds the basic net increase or decrease in net assets resulting from operations per share. For the three months ended March 31, 2015 and 2014, the effects of the convertible notes are anti-dilutive.

 

The if-converted method of computing the dilutive effects on convertible notes assumes a conversion even if the contracted conversion price exceeds the market value of the shares. As of March 31, 2015 the current conversion rate of the Convertible Notes is approximately 132.7726 shares of our common stock per $1,000 principal amount of the Convertible Notes, equivalent to a conversion price of approximately $7.53 per share of the Company’s common stock. Upon conversion, the Company may issue the full amount of common stock and retire the full amount of debt outstanding or, at its option, settle the conversion in cash.

 

4. INVESTMENTS

 

The following table shows the Company’s portfolio by security type at March 31, 2015 and December 31, 2014:

 

   March 31, 2015 (unaudited)   December 31, 2014 
Security Type  Cost   Fair Value      Cost   Fair Value    
Money Market Accounts³  $1,729,575   $1,729,575    1   $1,602,741   $1,602,741    1 
Senior Secured Loan   218,339,421    217,219,634    81    220,965,922    218,329,860    86 
Junior Secured Loan   40,085,271    39,832,410    15    38,664,199    38,569,006    15 
Senior Unsecured Loan   33,104,782    33,104,782    13    33,066,984    33,066,984    13 
First Lien Bond   2,967,369    2,580,000    1    2,962,507    2,580,000    1 
Senior Subordinated Bond   4,330,633    4,295,736    2    4,295,544    4,240,301    2 
Senior Unsecured Bond   11,363,885    11,482,540    4    11,208,178    11,386,218    4 
Senior Secured Bond   1,513,639    1,485,000    1    1,515,584    1,552,500    1 
CLO Fund Securities   99,812,887    85,853,478    33    90,889,190    77,514,901    30 
Equity Securities   8,828,812    8,063,558    3    8,828,812    8,119,681    3 
Preferred   10,257,047    10,470,393    4    10,206,016    10,418,302    4 
Asset Manager Affiliates²   59,006,651    71,524,000    27    60,292,677    72,326,000    28 
                               
Total  $491,339,972   $487,641,106    185%  $484,498,354   $479,706,494    188%

 

 

¹ Calculated as a percentage of Net Asset Value.

² Represents the equity investment in the Asset Manager Affiliates.

³ Includes restricted cash held under employee benefit plans.

 

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The industry concentrations based on the fair value of the Company’s investment portfolio as of March 31, 2015 and December 31, 2014, were as follows:

 

   March 31, 2015 (unaudited)    December 31, 2014  
Industry Classification  Cost   Fair Value   %1   Cost   Fair Value   %1 
Aerospace and Defense  $10,011,228   $9,517,729    4%  $10,059,487   $9,533,092    4%
Asset Management Company2   59,006,651    71,524,000    27    60,292,677    72,326,000    28 
Portfolio Company Loan   23,000,000    23,000,000    9    23,000,000    23,000,000    9 
Automotive   8,354,204    8,391,470    3    8,362,956    8,312,548    3 
Banking, Finance, Insurance & Real Estate   6,884,526    6,951,589    3    7,660,721    7,639,366    3 
Beverage, Food and Tobacco   21,904,449    21,729,641    8    17,974,974    17,883,421    7 
Capital Equipment   9,495,134    10,237,566    4    9,486,407    10,351,329    4 
Chemicals, Plastics and Rubber   6,325,803    6,327,732    2    6,348,226    6,210,253    2 
CLO Fund Securities   99,812,887    85,853,478    32    90,889,190    77,514,901    31 
Consumer goods: Durable   13,711,750    13,116,322    5    13,876,482    13,301,207    5 
Consumer goods: Non-durable   13,489,480    13,374,870    5    13,535,975    13,314,952    5 
Containers, Packaging and Glass   2,916,649    2,933,055    1    2,992,443    2,946,734    1 
Energy: Oil & Gas   13,968,476    13,043,752    5    13,866,208    13,289,753    5 
Environmental Industries   12,889,751    12,835,904    5    12,942,593    12,911,017    5 
Forest Products & Paper   5,909,837    5,982,313    2    5,917,051    5,942,523    2 
Healthcare & Pharmaceuticals   65,420,489    65,452,651    25    66,186,412    65,720,782    27 
High Tech Industries   11,474,486    11,548,350    4    14,457,495    14,419,110    6 
Hotel, Gaming & Leisure   3,219,576    2,828,950    1    3,392,481    2,962,315    1 
Media: Advertising, Printing & Publishing   11,275,490    11,145,278    4    11,318,815    11,396,027    4 
Media: Broadcasting & Subscription   14,342,363    14,244,078    5    14,477,078    14,409,401    6 
Metals & Mining   228,563    1,000    -    228,563    1,000    - 
Retail   4,388,413    4,106,685    2    4,234,086    3,773,847    1 
Services: Business   20,655,932    20,571,564    8    16,550,255    16,066,421    6 
Services: Consumer   6,775,834    6,828,928    3    6,798,372    6,752,521    3 
Telecommunications   18,113,209    18,063,402    7    22,030,434    21,865,864    9 
Time Deposit and Money Market Accounts3   1,729,575    1,729,575    1    1,602,741    1,602,741    1 
Transportation: Cargo   20,190,884    20,467,538    8    20,156,700    20,455,941    8 
Utilities: Electric   5,844,333    5,833,686    2    5,859,532    5,803,428    2 
Total  $491,339,972   $487,641,106    185%  $484,498,354   $479,706,494    188%

 

 

1   Calculated as a percentage of Net Asset Value.

2   Represents the equity investment in the Asset Manager Affiliates.

3   Includes restricted cash held under employee benefit plans.

 

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

 

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At March 31, 2015 and December 31, 2014, the total amount of non-qualifying assets was approximately 23% and 21% of total assets, respectively. The majority of non-qualifying assets were foreign investments which were approximately 17% and 16% of the Company’s total assets, respectively (primarily the Company’s investments in CLO Funds, which are typically domiciled outside the U.S. and represented approximately 17% and 16% of its total assets on such dates, respectively).

 

At March 31, 2015 and December 31, 2014, the Company’s ten largest portfolio companies represented approximately 38%, for both periods, of the total fair value of its investments. The Company’s largest investment, the equity of our Asset Manager Affiliates, represented 15% of the total fair value of the Company’s investments at March 31, 2015 and December 31, 2014. This does not include a temporary loan provided by the Company to Trimaran for working capital purposes, which is callable and payable on demand. This Loan was $23 million as of March 31, 2015, and was subsequently repaid on May 5, 2015 (see Subsequent Event Footnote 12). Excluding the Asset Manager Affiliates and CLO Fund securities, the Company’s ten largest portfolio companies represented approximately 17% of the total fair value of the Company’s investments at March 31, 2015 and December 31, 2014.

 

Investments in CLO Fund Securities

 

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

 

In December 2012, the Company purchased $4.5 million par value of the class F Notes and $8.9 million par value of the Subordinated Notes of Catamaran 2012-1 CLO (“Catamaran 2012-1”) managed by Trimaran Advisors.

 

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

 

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

 

In March 2015, the Company purchased approximately $12 million of the par value of the Subordinated Notes of Catamaran 2015-1 CLO (“Catamaran 2015-1”) managed by Trimaran Advisors.

 

All CLO Funds managed by the Asset Manager Affiliates are currently making quarterly distributions to the Company with respect to its interests in the CLO Funds.

 

Fair Value Measurements

 

The Company follows the provisions of ASC 820: Fair Value, which among other matters, requires enhanced disclosures about investments that are measured and reported at fair value. This standard defines fair value and establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring investments at fair value and expands disclosures about assets and liabilities measured at fair value. ASC 820: Fair Value defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This fair value definition focuses on an exit price in the principal, or most advantageous market, and prioritizes, within a measurement of fair value, the use of market-based inputs (which may be weighted or adjusted for relevance, reliability and specific attributes relative to the subject investment) over entity-specific inputs. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. Subsequent to the adoption of ASC 820: Fair Value, the FASB has issued various staff positions clarifying the initial standard (see Note 2 – “Significant Accounting Policies — Investments”).

 

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

 

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

 

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

 

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

 

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

 

The following table summarizes the fair value of investments by the above ASC 820: Fair Value fair value hierarchy levels as of March 31, 2015 (unaudited) and December 31, 2014, respectively:

 

   As of March 31, 2015 (unaudited) 
   Level I   Level II   Level III   Total 
Money market accounts  $   $1,729,575   $   $1,729,575 
Debt securities       128,925,770    191,544,725    320,470,495 
CLO Fund securities           85,853,478    85,853,478 
Equity securities           8,063,558    8,063,558 
Asset Manager Affiliates           71,524,000    71,524,000 
Total  $   $130,655,345   $356,985,761   $487,641,106 

 

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   As of December 31, 2014 
   Level I   Level II   Level III   Total 
Money market accounts  $   $1,602,741   $   $1,602,741 
Debt securities       149,124,827    171,018,343    320,143,170 
CLO Fund securities           77,514,902    77,514,902 
Equity securities           8,119,681    8,119,681 
Asset Manager Affiliates           72,326,000    72,326,000 
Total  $   $150,727,568   $328,978,926   $479,706,494 

 

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

 

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

 

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

 

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

 

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

 

 

 

  Three Months Ended March 31, 2015 (unaudited) 
   Debt Securities   CLO Fund
Securities
   Equity
Securities
   Asset Manager
Affiliate
   Total 
Balance, December 31, 2014  $171,018,343   $77,514,902   $8,119,681   $72,326,000   $328,978,926 
Transfers out of Level III¹   (7,470,702)               (7,470,702)
Transfers into Level III²   27,799,398                27,799,398 
Net accretion of discount   62,772    (3,028,297)           (2,965,525)
Purchases   4,935,000    11,952,000            16,887,000 
Sales / Paydowns   (4,355,406)           (1,286,025)   (5,641,431)
Total realized gain (loss) included in earnings   12,419                12,419 
Total unrealized gain (loss) included in earnings   (457,099)   (585,127)   (56,123)   484,025    (614,324)
Balance, March 31, 2015  $191,544,725   $85,853,478   $8,063,558   $71,524,000   $356,985,761 
Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date  $(457,099)  $(585,126)  $(56,122)  $484,026   $(614,324)

 

¹Transfers out of Level III represent a transfer of $7,470,702 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were observable as of March 31, 2015

 

²Transfers into Level III represent a transfer of $27,799,398 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were unobservable as of March 31,2015

 

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   Year Ended December 31, 2014 
   Debt Securities   CLO Fund
Securities
   Equity
Securities
   Asset Manager
Affiliate
   Total 
Balance, December 31, 2013  $198,097,374   $79,452,220   $11,006,399   $76,148,000   $364,703,993 
Transfers out of Level III¹   (38,990,152)               (38,990,152)
Transfers into Level III²   1,982,110                1,982,110 
Net accretion of discount   198,600    (11,102,015)           (10,903,415)
Purchases   132,079,152    22,421,847    2,216,847    545,979    157,263,825 
Sales/Paydowns   (121,242,093)   (10,132,500)   (5,007,311)   (6,432,086)   (142,813,990)
Total realized gain (loss) included in earnings   (9,069,550)   5,575,498    (7,136,407)       (10,630,459)
Total unrealized gain (loss) included in earnings   7,962,902    (8,700,148)   7,040,153    2,064,107    8,367,014 
Balance, December 31, 2014  $171,018,343   $77,514,902   $8,119,681   $72,326,000   $328,978,926 
Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date  $(1,448,794)  $(4,908,278)  $424,306   $2,064,107   $(3,868,659)

 

¹Transfers out of Level III represent a transfer of $38,990,152 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were observable as of December 31, 2014.  
   
²Transfers into Level III represent a transfer of $1,982,110 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were unobservable as of December 31, 2014.  

 

As of March 31, 2015, the Company’s Level II portfolio investments were valued by a third party pricing services for which the prices are not adjusted and for which inputs are observable or can be corroborated by observable market data for substantially the full character of the financial instrument, or by inputs that are derived principally from, or corroborated by, observable market information. The fair value of the Company’s Level II portfolio investments was $130,655,345 as of March 31, 2015.

 

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

 

Type Fair Value Primary Valuation
Methodology
Unobservable
Inputs
Range of Inputs
(Weighted Average)
  $2,580,000 Enterprise Value Average EBITDA Multiple  7.9x
Debt Securities $188,963,725 Income Approach Implied Discount Rate  2.2% - 17.6% (8.3%)
  $1,000 Options Value Qualitative Inputs1   
Equity Securities $8,060,558 Enterprise Value Average EBITDA
Multiple/WAAC
 4.4x/9.9% - 15.0x/15.3%
(8.3x/12.9%)
  $3,000 Options Value Qualitative Inputs1   
       Discount Rate  11% - 12% (11.5%)
       Probability of Default  2.0% - 2.5% (2.2%)
CLO Fund Securities $73,901,478 Discounted Cash Flow Loss Severity  25.0% - 25.9% (25.5%)
  Recovery Rate  74.1% - 75.0% (74.5%)
       Prepayment Rate  0% - 37.2% (25.9%)
  $11,952,000 Market Approach Third Party Quote  100 (100)
Asset Manager Affiliate $71,524,000 Discounted Cash Flow Discount Rate  1.68% - 11.00% (6.93%)
Total Level III Investments $356,985,761       

 

 

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

 

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

 

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

 

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

 

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

 

5. ASSET MANAGER AFFILIATES

 

Wholly-Owned Asset Managers

 

The Asset Manager Affiliates are wholly-owned portfolio companies. The Asset Manager Affiliates manage CLO Funds primarily for third party investors that invest in broadly syndicated loans, high yield bonds and other credit instruments issued by corporations. At March 31, 2015 and December 31, 2014, the Asset Manager Affiliates had approximately $2.9 billion and $3.0 billion, respectively, of par value of assets under management, and the Company’s 100% equity interest in the Asset Manager Affiliates had a fair value of approximately $72 million and $72 million, respectively.

 

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As a manager of the CLO Funds, the Asset Manager Affiliates receive contractual and recurring management fees from the CLO Funds for their management and advisory services. The annual fees which the Asset Manager Affiliates receive are generally based on a fixed percentage of assets under management (at par value and not subject to changes in market value), and the Asset Manager Affiliates generate net income equal to the amount by which their fee income exceeds their operating expenses, including compensation of their employees and income taxes. The management fees the Asset Manager Affiliates receive have three components - a senior management fee, a subordinated management fee and an incentive fee. Currently, all CLO Funds managed by the Asset Manager Affiliates are paying both their senior and subordinated management fees on a current basis. Additionally, three managed funds made incentive fee distributions during the quarter ended March 31, 2015.

 

For the three months ended March 31, 2015 and 2014, the Asset Manager Affiliates declared cash distributions of $2.7 million and $3.0 million to the Company, respectively. Any distributions from the Asset Manager Affiliates out of the tax-basis earnings and profits are recorded as “Dividends from Asset Manager Affiliates” on the Company’s statement of operations. The Company recognized $1.4 million of Dividends from Asset Manager Affiliates in the Statement of Operations in the first quarter of 2015 and 2014. The difference of $1.3 and $1.6 million, respectively, between cash distributions received and the tax-basis earnings and profits of the distributing affiliate, are recorded as an adjustment to the cost basis in the Asset Manager Affiliate (i.e. tax-basis return of capital), for the quarters ended March 31, 2015 and 2014, respectively. Distributions receivable, if any, are reflected in the Due from Affiliates account on the consolidated balance sheets.

 

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

 

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

 

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Effective January 1, 2010, the Asset Manager Affiliates adopted guidance encompassed in Accounting Standards Codification Topic 810, “Consolidation.” The adoption of this new guidance had an impact on the disclosures relating to the Asset Manager Affiliates which had previously not been required, as its provisions require the Asset Manager Affiliates to consolidate certain of their managed CLO Funds that were not previously consolidated. As a result of the consolidation of the CLO Funds into the Asset Manager Affiliates, the financial results of the Asset Manager Affiliates indicate that they qualify as a “significant subsidiary” of the Company requiring the following additional disclosures. In addition, Katonah 2007-I CLO and Katonah X CLO qualify as “significant subsidiaries” of the Company and the Company is also required to make the additional disclosures about them below. These disclosures regarding the Asset Manager Affiliates and Katonah 2007-I CLO and Katonah X CLO do not directly impact the financial position, results of operations, or cash flows of the Company.

 

Asset Manager Affiliates

Summarized Balance Sheet Information (unaudited)

 

   As of   As of 
   March 31, 2015   December 31, 2014 
Investments of CLO Funds, at fair value  $2,796,273,645   $2,846,659,635 
Restricted cash of CLO Funds   102,965,441    182,224,205 
Total assets   2,939,800,245    3,092,592,939 
CLO Fund liabilities at fair value   2,845,411,582    2,990,211,629 
Total liabilities   2,912,228,647    3,060,837,388 
Total Asset Manager Affiliates equity   32,112,699    34,780,345 
Appropriated retained earnings of consolidated VIEs   (4,541,101)   (3,024,793)

 

Asset Manager Affiliates

Summarized Statements of Operations Information (unaudited)

 

   For the three months ended 
   March 31, 
   2015   2014 
Interest income - investments of CLO Funds  $30,651,034   $27,684,485 
Total income   30,851,962    30,388,785 
Interest expense of CLO Fund liabilities   43,757,032    24,525,198 
Total expenses   48,088,908    30,906,163 
Net realized and unrealized gains (losses)   16,319,356    (4,718,488)
Net loss attributable to noncontrolling interests in consolidated Variable Interest Entities   (1,516,308)   (7,458,418)
Net income attributable to Asset Manager Affiliates   422,420    1,346,460 

 

Katonah 2007-I CLO Ltd.

Summarized Balance Sheet Information (unaudited)

 

   As of   As of 
   March 31, 2015   December 31, 2014 
Total investments at fair value  $255,315,453   $273,373,948 
Cash   21,296,801    14,939,994 
Total assets   277,197,785    288,945,330 
CLO Debt at fair value   276,658,081    290,699,426 
Total liabilities   283,154,883    292,730,723 
Total Net Assets   (5,957,098)   (3,785,393)

 

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Katonah 2007-I CLO Ltd.

Summarized Statements of Operations Information (unaudited)

 

   For the three months ended 
   March 31, 
   2015   2014 
Interest income from investments  $2,615,394   $2,992,131 
Total income   2,649,868    3,297,648 
Interest expense   2,375,635    2,793,908 
Total expenses   2,699,853    3,116,987 
Net realized and unrealized losses   (2,121,720)   (1,669,100)
Decrease in net assets resulting from operations   (2,171,705)   (1,488,439)

 

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

 

Goodwill amortization for tax purposes was created upon the purchase of 100% of the equity interests in Katonah Debt Advisors prior to the Company’s IPO in exchange for shares of the Company’s stock valued at $33 million. Although this transaction was a stock transaction rather than an asset purchase and thus no goodwill was recognized for U.S. GAAP purposes, such exchange was considered an asset purchase under Section 351(a) of the Code. At the time of the transfer, Katonah Debt Advisors had equity of approximately $1 million resulting in tax goodwill of approximately $32 million which is being amortized for tax purposes on a straight-line basis over 15 years, which accounts for an annual difference between U.S. GAAP income and taxable income by approximately $2.1 million per year over such period.

 

Additional goodwill amortization for tax purposes was created upon the purchase of 100% of the equity interests in Trimaran Advisors by one of KCAP’s affiliates, in exchange for shares of the Company’s stock valued at $25.5 million and cash of $13.0 million. The transaction was considered an asset purchase under Section 351(a) of the code and resulted in tax goodwill of approximately $22.8 million which is being amortized for tax purposes on a straight-line basis over 15 years, which accounts for an annual difference between GAAP income and taxable income by approximately $1.5 million per year over such period. 

 

Related Party Transactions

 

On February 26, 2013, the Company entered into a senior credit agreement (the “Trimaran Credit Facility”) with Trimaran Advisors, pursuant to which Trimaran Advisors may borrow from time to time up to $20 million from the Company for general corporate purposes and/or in order to provide capital necessary to support one or more of Trimaran Advisors’ warehouse lines of credit and/or working capital in connection with Trimaran Advisors’ warehouse activities. The Trimaran Credit Facility expires on November 20, 2017 and bears interest at an annual rate of 9.0%. Outstanding borrowings on the Trimaran Credit Facility are callable by the Company at any time. On April 15, 2013, the Trimaran Credit Facility was amended and upsized from $20 million to $23 million. At March 31, 2015, there was $23 million outstanding under the Trimaran Credit Facility, which is included in the Company’s Schedule of Investments. For the three months ended March 31, 2015, the Company recognized interest income of $517,500 related to the Trimaran Credit Facility. As of March 31, 2015, Trimaran had a $22 million investment in a CLO warehouse facility.

 

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6. BORROWINGS

 

The Company’s debt obligations consist of the following:

 

   As of
March 31, 2015
(unaudited)
   As of
December 31, 2014
 
Convertible Notes, due March 15, 2016   $38,647,000   $38,647,000 
7.375% Notes Due 2019   $41,400,000   $41,400,000 
Notes Issued by KCAP Senior Funding I, LLC (net of discount: 2015 - $3,362,714; 2014 - $3,512,407)   $143,987,286   $143,837,593 

 

The weighted average stated interest rate and weighted average maturity on all our debt outstanding as of March 31, 2015 were 4.43% and 6.99 years, respectively, and as of December 31, 2014 were 4.43% and 7.23 years, respectively.

 

Convertible Notes

 

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

 

The Convertible Notes are convertible into shares of Company’s common stock. As of March 31, 2015 the conversion rate was 132.7726 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to a conversion price of approximately $7.53 per share of common stock. Upon conversion, the Company would issue the full amount of common stock or settle the conversion in cash, at its option, and retire the full amount of debt outstanding.

 

Upon conversion, unless a holder converts after a record date for an interest payment but prior to the corresponding interest payment date, the holder will receive a separate cash payment with respect to the Convertible Notes surrendered for conversion representing accrued and unpaid interest to, but not including the conversion date. Any such payment will be made on the settlement date applicable to the relevant conversion on the Convertible Notes.

 

No holder of Convertible Notes will be entitled to receive shares of the Company’s common stock upon conversion to the extent (but only to the extent) that such receipt would cause such converting holder to become, directly or indirectly, a beneficial owner (within the meaning of Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of more than 5.0% of the shares of the Company’s common stock outstanding at such time. The 5.0% limitation shall no longer apply following the effective date of any fundamental change.

 

Subject to certain exceptions, holders may require us to repurchase, for cash, all or part of their Convertible Notes upon a fundamental change at a price equal to 100% of the principal amount of the Convertible Notes being repurchased plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date. In addition, in the case of certain fundamental changes and without duplication of the foregoing amount, the Company will also pay holders an amount in cash (or, in certain circumstances, shares of the Company’s common stock) equal to the present value of the remaining interest payments on such notes through, and including, the maturity date.

 

In connection with the issuance of the Convertible Notes, the Company incurred approximately $2.4 million of debt offering costs, which are being amortized over the term of the facility on an effective yield method, of which approximately $332,000 remains to be amortized. On April 4, 2013, approximately $9 million of the Company’s 8.75% Convertible Notes were converted at a price basis per share of $8.159 into 1,102,093 shares of KCAP common stock. On September 4, 2013, the Company purchased $2.0 million face value of its own Convertible Notes at $114.50 plus accrued interest. KCAP subsequently surrendered these notes to the Trustee for cancellation effective September 13, 2013. On October 9, 2014, the Company purchased approximately $10.4 million face value of its own Convertible Notes at $114.875 plus accrued interest. KCAP subsequently surrendered these notes to the Trustee for cancellation. Due to the cash conversion option embedded in the Convertible Notes, the Company applied the guidance in ASC 470-40-20, Debt with Conversion and Other Options and realized a loss on the extinguishment of this debt. For the three months ended March 31, 2015 there were no realized losses on extinguishment of debt. The indenture governing the Convertible Notes contains certain restrictive covenants, including compliance with certain provisions of the 1940 Act and conditions governing the undertaking of new debt.

 

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For the three months ended March 31, 2015 and 2014, interest expense related to the Convertible Notes was approximately $845,000 and $1.1 million, respectively.

 

The Convertible Notes have been analyzed for any features that would require its accounting to be bifurcated. There are no features that require accounting to be bifurcated, and as a result, they are recorded as a liability at their contractual amounts. At March 31, 2015, the Company was in compliance with all of its debt covenants.

 

Fair Value of Convertible Notes. The Company carries the Convertible Notes at cost. The Convertible Notes were issued in a private placement and there is no active trading of these notes. The estimated fair value of the Company’s outstanding Convertible Notes was approximately $40.4 million at March 31, 2015. The fair value was determined based on an indicative closing price as of March 31, 2015. The Convertible Notes are categorized as Level III following ASC 820: Fair Value.

 

7.375% Notes Due 2019

 

On October 10, 2012, the Company issued $41.4 million in aggregate principal amount of unsecured 7.375% Notes due 2019. The net proceeds for these Notes, following underwriting expenses, were approximately $39.9 million. Interest on the 7.375% Notes Due 2019 is paid quarterly in arrears on March 30, June 30, September 30 and December 30, at a rate of 7.375%, commencing December 30, 2012. The 7.375% Notes Due 2019 mature on September, 30, 2019 and are senior unsecured obligations of the Company. The 7.375% Notes Due 2019 are subject to redemption in whole or in part at any time or from time to time, at the option of the Company, on or after September 30, 2015, at a redemption price per security equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to the date fixed for redemption. In addition, due to the asset coverage test applicable to the Company as a BDC and a covenant that the Company agreed to in connection with the issuance of the 7.375% Notes Due 2019, the Company is limited in its ability to make distributions in certain circumstances. The indenture governing the 7.375% Notes Due 2019 contains certain restrictive covenants, including compliance with certain provisions of the 1940 Act relating to borrowing and dividends. At March 31, 2015, the Company was in compliance with all of its debt covenants.

 

For both of the three month periods ended March 31, 2015 and 2014, interest expense related to the 7.375% Notes Due 2019 was approximately $763,000.

 

In connection with the issuance of the 7.375% Notes Due 2019, the Company incurred approximately $1.5 million of debt offering costs which are being amortized over the term of the facility on an effective yield method, of which approximately $1.0 million remains to be amortized, as recorded on the consolidated balance sheets in other assets.

 

Fair Value of 7.375% Notes Due 2019.  The 7.375% Notes Due 2019 were issued in a public offering on October 10, 2012 and are carried at cost. The fair value of the Company’s outstanding 7.375% Notes Due 2019 was approximately $42.5 million at March 31, 2015. The fair value was determined based on the closing price on March 31, 2015 for the 7.375% Notes Due 2019. The 7.375% Notes Due 2019 are categorized as Level I under the ASC 820: Fair Value.

 

KCAP Senior Funding I, LLC (Debt Securitization)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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As of March 31, 2015, there were 74 investments in portfolio companies with a total fair value of approximately $194 million, collateralizing the secured notes of the Issuer. At March 31, 2015, there were unamortized issuance costs of approximately $3.6 million included in other assets, and unamortized original issue discount, (“OID”) costs of approximately $3.4 million included in Notes issued by KCAP Senior Funding I, LLC liabilities in the accompanying consolidated balance sheet. The pool of loans in the securitization must meet certain requirements, including asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements.

 

For the period ended March 31, 2015, interest expense, including the amortization of deferred debt issuance costs and the discount on the face amount of the notes was approximately $1.2 million consisting of stated interest expense of approximately $913,000, accreted discount of approximately $150,000, and deferred debt issuance costs of approximately $160,000. As of March 31, 2015 the stated interest charged under the securitization was based on current three month LIBOR, which was 0.25%. The classes, stated interest rates, spread over LIBOR, and stated interest expense are as follows:

 

   Stated Interest
Rate (1)
   LIBOR Spread
(basis points)
   Interest Expense 
             
KCAP Senior Funding LLC Class A Notes    1.75%   150   $472,393 
KCAP Senior Funding LLC Class B Notes    3.50%   325    110,161 
KCAP Senior Funding LLC Class C Notes    4.50%   425    157,401 
KCAP Senior Funding LLC Class D Notes    5.50%   525    173,161 
Total             $913,116 

 

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

 

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

 

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

 

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

 

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   As of 
   March 31, 2015 
   (unaudited) 
   Principal Amount   Carrying Value   Fair Value 
KCAP Senior Funding LLC Class A Notes   $108,150,000   $105,681,880   $105,482,129 
KCAP Senior Funding LLC Class B Notes    12,600,000    12,312,452    12,463,288 
KCAP Senior Funding LLC Class C Notes    14,000,000    13,680,502    13,966,960 
KCAP Senior Funding LLC Class D Notes    12,600,000    12,312,452    12,285,000 
Total   $147,350,000   $143,987,286   $144,197,377 

 

Fair Value of KCAP Senior Funding I.   The Company carries the KCAP Senior Funding I Notes at cost, net of unamortized discount of $3,362,714. The fair value of the KCAP Senior Funding I Notes was approximately $144 million at March 31, 2015. The fair values were determined based on third party indicative values. The KCAP Senior Funding I L.L.C. Notes are categorized as Level III under ASC 820: Fair Value.

 

7. DISTRIBUTABLE TAXABLE INCOME

 

Effective December 11, 2006, the Company elected to be treated as a RIC under the Code and adopted a December 31 tax-calendar year end. As a RIC, the Company is not subject to federal income tax on the portion of its taxable income and gains distributed currently to its stockholders as a dividend. The Company’s quarterly distributions, if any, are determined by the Board of Directors. The Company anticipates distributing at least 90% of its taxable income and gains, within the Subchapter M rules, and thus the Company anticipates that it will not incur any federal or state income tax at the RIC level. As a RIC, the Company is also subject to a federal excise tax based on distributive requirements of its taxable income on a calendar year basis (e.g., calendar year 2015). Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income, to the extent required. The Company anticipates timely distribution of its taxable income within the tax rules, and the Company anticipates that it will not incur a US federal excise tax for the calendar year 2015.

 

The following reconciles net increase in net assets resulting from operations to taxable income for the three months ended March 31, 2015:

 

   Three Months Ended 
   March 31, 2015 
   (unaudited) 
Net increase in net assets resulting from operations  $7,672,290 
Net change in unrealized depreciation from investments   (1,092,986)
Excess capital gains over capital losses   (72,356)
Book/tax differences on CLO equity investments   377,933 
Other book/tax differences   159,504 
Taxable income before deductions for distributions  $7,044,385 
Taxable income before deductions for distributions per weighted average basic shares for the period  $0.19 
Taxable income before deductions for distributions per weighted average diluted shares for the period  $0.19 

 

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Tax-basis taxable income differs from net increase (decrease) in net assets resulting from operations primarily due to: (1) unrealized appreciation (depreciation) on investments, as investment gains and losses are not included in tax-basis taxable income until they are realized; (2) excess of capital losses over capital gains; (3) Book-to-tax differences on CLO equity investments; and (4) other non-deductible expenses including stock compensation expense that is not currently deductible for tax purposes.

 

Dividends from Asset Manager Affiliates are recorded based upon a quarterly estimate of tax-basis earnings and profits of each Asset Manager Affiliate. Distributions in excess of the estimated tax-basis quarterly earnings and profits of each distributing Asset Manager Affiliate are recognized as tax-basis return of capital. The actual tax-basis earnings and profits and resulting dividend and/or return of capital for the year will be determined at the end of the tax year for each distributing Asset Manager Affiliate. For the three months ended March 31, 2015 and 2014, the Asset Manager Affiliates declared cash distributions of $2.7 million and $3.0 million to the Company, respectively. The Company recognized $1.4 million of Dividends from Asset Manager Affiliates in the Statement of Operations in the first quarter of 2015 and 2014. The difference of $1.3 and $1.6 million, respectively, between cash distributions received and the tax-basis earnings and profits of the distributing affiliate, are recorded as an adjustment to the cost basis in the Asset Manager Affiliate (i.e. tax-basis return of capital), for the quarters ended March 31, 2015 and 2014, respectively.

 

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

 

At March 31, 2015, the Company had a net capital loss carryforward of $76.5 million to offset net capital gains, to the extent provided by federal tax law. Of the net capital loss carryforward, $32.0 million will begin to expire in the tax year ending December 31, 2015. Of the net capital loss carryforward, $44.5 million is not subject to expiration under the RIC Modernization Act of 2010.

 

On March 24, 2015 the Company’s Board of Directors declared a distribution to shareholders of $0.21 per share for a total of $7.7 million. The record date was April 6, 2015 and the distribution was paid on April 27, 2015.

 

At March 31, 2014, the Company had a net capital loss carryforward of $66 million to offset net capital gains, to the extent provided by federal tax law. The capital loss carryforward will begin to expire in the tax year ending December 31, 2015.

 

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

 

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8. COMMITMENTS AND CONTINGENCIES

 

From time-to-time the Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the needs of the Company’s investment in portfolio companies. Such instruments include commitments to extend credit and may involve, in varying degrees, elements of credit risk in excess of amounts recognized on the Company’s balance sheet. Prior to extending such credit, the Company attempts to limit its credit risk by conducting extensive due diligence, obtaining collateral where necessary and negotiating appropriate financial covenants. As of March 31, 2015 and 2014, the Company had no commitments. As of March 31, 2015 and 2014, the company had no outstanding commitments to make investments in delayed draw senior secured loans.

 

9. STOCKHOLDERS’ EQUITY

 

During the three months ended March 31, 2015 and 2014, the Company issued 86,684 and 8,484 shares, respectively, of common stock under its dividend reinvestment plan. As of March 31, 2015 and December 31, 2014, there were 617,931 and 619,785 shares of unvested restricted shares, respectively. There were no grants, 1,854 forfeitures, and no vesting activity during the first quarter of 2015. On February 14, 2013, the Company completed a public offering of 5,232,500 shares of common stock, which included the underwriters’ full exercise of their option to purchase up to 682,500 shares of common stock, at a price of $9.75 per share. In conjunction with this offering, the Company also sold 200,000 shares of common stock to a member of its Board of Directors, at a price of $9.31125 per share, raising approximately $1.9 million in gross proceeds. On April 4, 2013, approximately $9 million of the Company’s 8.75% Convertible Notes were converted at a price basis per share of $8.159 into 1,102,093 shares of KCAP common stock. On October 6, 2014, the Company priced a follow-on public offering of 3.0 million shares of its common stock at a price of $8.02 per share. The offering raised net proceeds were approximately $23.8 million, after deducting underwriting discounts and offering expenses. The total number of shares of the Company’s common stock issued and outstanding as of March 31, 2015 and December 31, 2014 was 36,859,957 and 36,775,127, respectively.

 

10. EQUITY INCENTIVE PLAN

 

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

 

Stock Options

 

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

 

Information with respect to options granted, exercised and forfeited under the Equity Incentive Plan for the period January 1, 2014 through March 31, 2015 is as follows:

 

   Shares   Weighted Average
Exercise Price per
Share
   Weighted Average
Contractual
Remaining Term
(years)
   Aggregate
Intrinsic Value1
 
Options outstanding at January 1, 2014   50,000   $7.72           
Granted                  
Exercised                  
Forfeited                  
Options outstanding at December 31, 2014   50,000   $7.72    4.4   $77,600 
Granted                  
Exercised                  
Forfeited                  
                     
Outstanding at March 31, 2015   50,000   $7.72    4.1   $74,000 
                     
Total vested at March 31, 2015   50,000   $7.72    4.1      

 

1 Represents the difference between the market value of shares of the Company on March 31, 2015 and the exercise price of the options.

 

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The Company uses a Binary Option Pricing Model (American, call option) to establish the expected value of all stock option grants. For the three months ended March 31, 2015 and 2014, the Company did not recognize any non-cash compensation expense related to stock options. At March 31, 2015, the Company had no remaining compensation costs related to unvested stock based awards.

 

Restricted Stock

 

On June 10, 2011, pursuant to the Non-Employee Director Plan, the Board of Directors approved the grant of 4,000 shares of restricted stock to the non-employee directors of the Company as partial annual compensation for their services as director. Awards of restricted stock granted under the Non-Employee Director Plan vest as follows: 50% of the shares vest on the grant date and the remaining 50% of the shares vest on the earlier of:

 

(i) the first anniversary of such grant, or

 

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

 

On June 15, 2012, 5,000 shares of restricted stock were awarded to the Company’s Board of Directors.