UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

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

 

For the quarterly period ended March 31, 2017

 

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

 

For the transition period from                to

 

Commission File No. 814-00735

 

KCAP Financial, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

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

 

295 Madison Avenue, 6th Floor

New York, New York 10017

(Address of principal executive offices)

 

(212) 455-8300

(Registrant's telephone number, including area code)

 

 

 

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

 

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

 

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

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨

 

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

 

The number of outstanding shares of common stock of the registrant as of May 2, 2017 was 37,225,664.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
  Part I. Financial Information  
     
Item 1. Consolidated Financial Statements  
     
  Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016 1
     
  Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2017 and 2016 2
     
  Consolidated Statements of Changes in Net Assets (unaudited) for the three months ended March 31, 2017 and 2016 3
     
  Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2017 and 2016 4
     
  Consolidated Schedules of Investments as of March 31, 2017  (unaudited) and December 31, 2016 5
     
  Consolidated Financial Highlights (unaudited) for the three months ended March 31, 2017 and 2016 26
     
  Notes to Consolidated Financial Statements (unaudited) 27
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 54
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 71
     
Item 4. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 72
     
Item 5. Controls and Procedures 73
     
  Part II. Other Information  
     
Item 1. Legal Proceedings 74
     
Item 1A. Risk Factors 74
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 74
     
Item 3. Defaults Upon Senior Securities 74
     
Item 4. Mine Safety Disclosures 74
     
Item 5. Other Information 74
     
Item 6. Exhibits 74
     
Signatures 75

 

 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

 

  

As of

March 31, 2017

  

As of

December 31, 2016

 
   (unaudited)     
ASSETS          
Investments at fair value:          
Money market accounts (cost: 2017 - $22,674,790; 2016 - $28,699,269)  $22,674,790   $28,699,269 
Debt securities (cost: 2017 - $247,632,590; 2016 - $249,520,234)   237,657,701    238,343,330 
CLO Fund Securities managed by affiliates (cost: 2017 - $71,906,949; 2016 - $71,734,809)   50,827,938    51,908,784 
CLO Fund Securities managed by non-affiliates (cost: 2017 - $5,088,026; 2016 - $5,116,508)   2,171,090    2,265,566 
Equity securities (cost: 2017 - $10,389,008; 2016 - $10,389,007)   4,902,794    5,056,355 
Asset Manager Affiliates (cost: 2017 - $54,691,230; 2016 - $55,341,230)   36,942,000    40,198,000 
Total Investments at Fair Value (cost: 2017 - $412,382,593; 2016 - $420,801,057)   355,176,313    366,471,304 
Cash   5,178,290    1,307,257 
Restricted cash   7,986,487    8,528,298 
Interest receivable   1,143,363    1,033,917 
Receivable for open trades       2,950,658 
Due from affiliates   378,731    612,854 
Other assets   404,245    467,695 
           
Total Assets  $370,267,429   $381,371,983 
           
LIABILITIES          
Notes issued by KCAP Senior Funding I, LLC (net of discount and offering costs of: 2017 - $2,128,524 and $2,289,547, respectively; 2016 - $2,286,425 and $2,459,156, respectively)  $142,931,928   $142,604,419 
7.375% Notes Due 2019 (net of offering costs of: 2017 - $505,488; 2016 - $550,774)   33,025,437    32,980,151 
Payable for open trades   1,000,000    7,884,943 
Accounts payable and accrued expenses   932,301    2,047,405 
Accrued interest payable   947,873    930,086 
Due to affiliates   -    54 
           
Total Liabilities   178,837,539    186,447,058 
           
COMMITMENTS AND CONTINGENCIES (Note 8)          
           
STOCKHOLDERS' EQUITY          
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 37,313,651 issued, and 37,209,649 outstanding at March 31, 2017, and 37,282,296 issued, and 37,178,294 outstanding at December 31, 2016   372,096    371,783 
Capital in excess of par value   353,955,039    353,404,155 
Excess distribution of net investment income   (15,843,963)   (14,630,319)
Accumulated net realized losses   (88,447,958)   (88,491,896)
Net unrealized depreciation on investments   (58,605,324)   (55,728,798)
           
Total Stockholders' Equity   191,429,890    194,924,925 
           
Total Liabilities and Stockholders' Equity  $370,267,429   $381,371,983 
           
NET ASSET VALUE PER COMMON SHARE  $5.14   $5.24 

 

See accompanying notes to consolidated financial statements.

 

 1 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three Months Ended 
   March 31, 
   2017   2016 
         
Investment Income:          
Interest from investments in debt securities  $4,555,178   $5,705,577 
Interest from cash and time deposits   15,906    7,372 
Investment income on CLO Fund Securities managed by affiliates   2,974,558    3,051,816 
Investment income on CLO Fund Securities managed by non-affiliates   118,111    152,317 
Dividends from Asset Manager Affiliates       550,000 
Capital structuring service fees   110,644    43,239 
           
Total investment income   7,774,397    9,510,321 
           
Expenses:          
Interest and amortization of debt issuance costs   2,180,972    2,573,440 
Compensation   1,225,735    966,588 
Professional fees   549,281    651,939 
Insurance   95,036    106,223 
Administrative and other   505,234    447,361 
           
Total expenses   4,556,258    4,745,551 
           
Net Investment Income   3,218,139    4,764,770 
Realized And Unrealized Gains (Losses) On Investments:          
Net realized gains (losses) from investment transactions   43,938    (7,811,888)
Net change in unrealized appreciation (depreciation) on:          
Debt securities   1,202,017    (1,731,990)
Equity securities   (153,562)   1,379,413 
CLO Fund Securities managed by affiliates   (1,252,986)   3,270,541 
CLO Fund Securities managed by non-affiliates   (65,994)   (180,545)
Asset Manager Affiliates investments   (2,606,000)   (6,533,000)
           
Total net change in unrealized depreciation   (2,876,525)   (3,795,581)
           
Net realized and unrealized loss on investments   (2,832,587)   (11,607,469)
           
Net Increase (Decrease) In Stockholders’ Equity Resulting From Operations  $385,552   $(6,842,699)
           
Net Increase (Decrease) In Stockholders' Equity Resulting from Operations per Common Share:          
Basic:  $0.01   $(0.18)
Diluted:  $0.01   $(0.18)
Net Investment Income Per Common Share:          
Basic:  $0.09   $0.13 
Diluted:  $0.09   $0.13 
           
Weighted Average Shares of Common Stock Outstanding—Basic   37,202,996    37,109,735 
Weighted Average Shares of Common Stock Outstanding—Diluted   37,202,996    37,109,735 

 

See accompanying notes to consolidated financial statements.

 

 2 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

 

  

Three Months Ended

March 31,

 
   2017   2016 
         
Operations:          
Net investment income  $3,218,139   $4,764,770 
Net realized gains (losses) from investment transactions   43,938    (7,811,888)
Net change in unrealized depreciation on investments   (2,876,525)   (3,795,581)
           
Net increase (decrease) in stockholders’ equity resulting from operations   385,552    (6,842,699)
           
Stockholder distributions   (4,431,785)   (5,496,812)
           
Capital share transactions:          
Issuance of common stock for:          
Dividend reinvestment plan   162,384    205,796 
Stock based compensation   388,814    420,973 
           
Net increase in net assets resulting from capital share transactions   551,198    626,769 
           
Net assets at beginning of period   194,924,925    216,100,470 
           
Net assets at end of period (including undistributed net investment income of $0 in 2017 and $0 in 2016)  $191,429,890   $204,387,728 
           
Net asset value per common share  $5.14   $5.50 
Common shares outstanding at end of period   37,209,649    37,130,433 

 

See accompanying notes to consolidated financial statements.

 

 3 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

  

Three Months Ended

March 31,

 
   2017   2016 
OPERATING ACTIVITIES:          
Net increase (decrease) in stockholder's equity resulting from operations  $385,552   $(6,842,699)
Adjustments to reconcile net increase (decrease) in stockholder’s equity resulting from operations to net cash provided by operations:          
Net realized (gains) losses on investment transactions   (43,938)   7,811,888 
Net change in unrealized depreciation from investments   2,876,525    3,795,581 
Purchases of investments   (28,597,362)   (5,860,000)
Proceeds from sales and redemptions of investments   37,452,361    24,051,566 
Net accretion of investments   (243,790)   1,826,450 
Amortization of original issue discount on indebtedness   157,901    153,742 
Amortization of debt issuance costs   214,894    238,882 
Payment-in-kind interest income   (148,805)   (358,684)
Stock-based compensation   388,814    420,973 
Changes in operating assets and liabilities:          
(Decrease) in payable for open trades   (6,884,943)    
Decrease in receivable for open trades   2,950,658     
(Increase) decrease in interest and dividends receivable   (109,446)   80,111 
Decrease in other assets   63,450    60,745 
Decrease (increase) in due from affiliates   234,123    (718,554)
(Decrease) in due to affiliates   (54)   (554,243)
(Decrease) in accounts payable and accrued expenses   (1,097,317)   (1,754,022)
           
Net cash provided by operating activities   7,598,623    22,351,736 
           
FINANCING ACTIVITIES:          
Distributions to stockholders net of dividend reinvestment   (4,269,401)   (5,291,018)
Repayment/repurchase of Convertible Notes       (19,299,000)
           
Net cash (used in) financing activities   (4,269,401)   (24,590,018)
           
CHANGE IN CASH AND RESTRICTED CASH   3,329,222    (2,238,282)
CASH AND RESTRICTED CASH, BEGINNING OF PERIOD   9,835,555    7,138,272 
           
CASH AND RESTRICTED CASH, END OF PERIOD  $13,164,777   $4,899,990 
           
Supplemental Information:          
Interest paid during the period  $1,790,390   $2,567,401 
Dividends paid during the period under the dividend reinvestment plan  $162,384   $205,796 

 

See accompanying notes to consolidated financial statements.

 

 4 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of March 31, 2017

(unaudited)

 

Debt Securities Portfolio

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal  

Amortized

Cost

   Fair Value2 

1A Smart Start LLC8, 9

Consumer goods: Non-durable

 

Senior Secured Loan — Initial Term Loan (First Lien)

5.9% Cash, 1.0% Libor Floor, Due 2/22  

  $2,962,500   $2,940,096   $2,958,353 
                    

4L Technologies Inc. (fka Clover Holdings, Inc.)8, 9

Consumer goods: Non-durable

 

Senior Secured Loan — Term Loan

5.5% Cash, 1.0% Libor Floor, Due 5/20  

   2,713,465    2,699,414    2,637,217 
                     

Advanced Lighting Technologies, Inc,8, 9, 14

Consumer goods: Durable

 

First Lien Bond — 12.500% - 6/2019 - 00753CAG7

5.3% Cash, 7.3% PIK, Due 6/19  

   3,157,500    3,054,338    1,089,338 
                    

Advantage Sales & Marketing Inc.8

Services: Business

 

Junior Secured Loan — Term Loan (Second Lien)

7.5% Cash, 1.0% Libor Floor, Due 7/22  

   1,000,000    1,001,676    990,200 
                     

Alere Inc. (fka IM US Holdings, LLC)9

Healthcare & Pharmaceuticals

 

Senior Secured Loan — B Term Loan

4.3% Cash, 1.0% Libor Floor, Due 6/22  

   3,022,586    3,017,016    3,033,921 
                    

American Seafoods Group LLC8, 9

Beverage, Food and Tobacco

 

Senior Secured Loan — Term Loan (First Lien)

6.0% Cash, 1.0% Libor Floor, Due 8/21  

   3,683,704    3,670,208    3,696,597 
                     

Anaren, Inc.8, 9

Aerospace and Defense

 

Senior Secured Loan — Term Loan (First Lien)

5.6% Cash, 1.0% Libor Floor, Due 2/21  

   1,862,112    1,851,738    1,850,195 
                    

Apco Holdings, Inc.8, 9

Services: Business

 

Senior Secured Loan — Initial Term Loan

7.0% Cash, 1.0% Libor Floor, Due 1/22  

   3,792,162    3,700,381    3,788,370 
                     

API Technologies Corp.8, 9

High Tech Industries

 

Senior Secured Loan — Initial Term Loan

7.6% Cash, 1.0% Libor Floor, Due 4/22  

   3,473,750    3,414,914    3,472,013 
                    

Aristotle Corporation, The8, 9

Consumer goods: Non-durable

 

Senior Secured Loan — Term Loan

5.6% Cash, 1.0% Libor Floor, Due 6/21  

   3,656,556    3,643,560    3,648,146 

 

 5 

 

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal  

Amortized

Cost

   Fair Value2 

Asurion, LLC (fka Asurion Corporation)8, 9

Banking, Finance, Insurance & Real Estate

 

Senior Secured Loan — Replacement B-2 Term Loan

4.2% Cash, 0.8% Libor Floor, Due 7/20  

  $184,525   $184,948   $185,948 
                    

Avalign Technologies, Inc.8

Healthcare & Pharmaceuticals

 

Junior Secured Loan — Initial Term Loan (Second Lien)

9.6% Cash, 1.0% Libor Floor, Due 7/22  

   1,000,000    992,430    983,400 
                     

Avalign Technologies, Inc.8, 9

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Initial Term Loan (First Lien)

5.5% Cash, 1.0% Libor Floor, Due 7/21  

   2,925,000    2,916,442    2,917,386 
                    

BarBri, Inc. (Gemini Holdings, Inc.)8, 9

Services: Consumer

 

Senior Secured Loan — Term Loan

4.5% Cash, 1.0% Libor Floor, Due 7/19  

   2,465,308    2,460,567    2,434,738 
                     

BBB Industries US Holdings, Inc.8, 9

Automotive

 

Senior Secured Loan — Initial Term Loan (First Lien)

6.0% Cash, 1.0% Libor Floor, Due 11/21  

   2,947,500    2,908,792    2,831,369 
                    

Bestop, Inc.8, 9

Automotive

 

Senior Secured Loan — Delayed Draw Term Loan

6.3% Cash, 1.0% Libor Floor, Due 7/21  

   63,260    61,478    63,184 
                     

Bestop, Inc.8, 9

Automotive

 

Senior Secured Loan — First Amendment Term Loan

6.3% Cash, 1.0% Libor Floor, Due 7/21  

   493,566    489,167    492,974 
                    

Bestop, Inc.8, 9

Automotive

 

Senior Secured Loan — Term Loan

6.3% Cash, 1.0% Libor Floor, Due 7/21  

   1,480,368    1,460,358    1,478,591 
                     

Carolina Beverage Group LLC8

Beverage, Food and Tobacco

 

Senior Secured Bond — 10.625% - 08/2018 - 143818AA0 144A

10.6% Cash, Due 8/18  

   1,500,000    1,505,454    1,489,350 
                    

CCS Intermediate Holdings, LLC8, 9

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Initial Term Loan (First Lien)

5.1% Cash, 1.0% Libor Floor, Due 7/21  

   2,925,000    2,915,919    2,479,523 
                     

Cengage Learning, Inc.8, 9

Media: Advertising, Printing & Publishing

 

Senior Secured Loan — 2016 Refinancing Term Loan

5.3% Cash, 1.0% Libor Floor, Due 6/23  

   3,784,380    3,779,649    3,620,592 
                    

Checkout Holding Corp. (fka Catalina Marketing)8, 9

Media: Advertising, Printing & Publishing

 

Senior Secured Loan — Term B Loan (First Lien)

4.5% Cash, 1.0% Libor Floor, Due 4/21  

   955,000    952,250    864,275 

 

 6 

 

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal  

Amortized

Cost

   Fair Value2 

CHS/Community Health Systems, Inc.9

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Incremental 2021 Term H Loan

4.0% Cash, 1.0% Libor Floor, Due 1/21  

  $2,878,621   $2,854,616   $2,844,264 
                    

Consolidated Communications, Inc.9

Telecommunications

 

Senior Secured Loan — Initial Term Loan

4.0% Cash, 1.0% Libor Floor, Due 10/23  

   2,062,263    2,057,462    2,075,337 
                     

CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)8

Beverage, Food and Tobacco

 

Junior Secured Loan — Term Loan (Second Lien)

8.8% Cash, 1.0% Libor Floor, Due 7/21  

   3,000,000    3,010,709    2,475,000 
                    

CT Technologies Intermediate Holdings, Inc. (Smart Holdings Corp.) (aka HealthPort)8, 9

Healthcare & Pharmaceuticals

 

Senior Secured Loan — New Term Loan Facility

5.3% Cash, 1.0% Libor Floor, Due 12/21  

   2,932,763    2,911,439    2,783,778 
                     

Drew Marine Group Inc.8

Transportation: Cargo

 

Junior Secured Loan — Term Loan (Second Lien)

8.1% Cash, 1.0% Libor Floor, Due 5/21  

   2,500,000    2,496,538    2,400,000 
                    

Eastern Power, LLC (Eastern Covert Midco, LLC) (aka TPF II LC, LLC)8, 9

Utilities: Electric

 

Senior Secured Loan — Term Loan

5.0% Cash, 1.0% Libor Floor, Due 10/23  

   2,796,756    2,815,456    2,813,187 
                     

ELO Touch Solutions, Inc.8, 9

High Tech Industries

 

Senior Secured Loan — Term Loan (First Lien)

8.5% Cash, 1.5% Libor Floor, Due 6/18  

   1,398,040    1,378,666    1,364,347 
                    

Empower Payments Acquisition, Inc8, 9

Services: Business

 

Senior Secured Loan — Term Loan

6.5% Cash, 1.0% Libor Floor, Due 11/23  

   2,992,500    2,935,328    2,981,727 
                     

EWT Holdings III Corp. (fka WTG Holdings III Corp.)8, 9

Environmental Industries

 

Senior Secured Loan — Term Loan (First Lien)

4.9% Cash, 1.0% Libor Floor, Due 1/21  

   1,741,003    1,737,060    1,724,985 
                    

FHC Health Systems, Inc.8, 9

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Initial Term Loan

5.0% Cash, 1.0% Libor Floor, Due 12/21  

   3,829,000    3,802,884    3,615,208 
                     

First American Payment Systems, L.P.8

Banking, Finance, Insurance & Real Estate

 

Junior Secured Loan — Term Loan (Second Lien)

11.5% Cash, 1.0% Libor Floor, Due 7/24  

   1,500,000    1,456,303    1,408,350 
                    

Getty Images, Inc.8, 9

Media: Advertising, Printing & Publishing

 

Senior Secured Loan — Initial Term Loan

4.8% Cash, 1.3% Libor Floor, Due 10/19  

   2,134,995    2,141,472    1,875,465 

 

 7 

 

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal  

Amortized

Cost

   Fair Value2 

GI Advo Opco, LLC8

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Term Loan

5.7% Cash, 1.0% Libor Floor, Due 11/21  

  $246,875   $244,956   $223,471 
                    

GI Advo Opco, LLC8, 9

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Term Loan

5.7% Cash, 1.0% Libor Floor, Due 11/21  

   2,715,625    2,694,524    2,458,184 
                     

GK Holdings, Inc. (aka Global Knowledge)8

Services: Business

 

Junior Secured Loan — Initial Term Loan (Second Lien)

11.4% Cash, 1.0% Libor Floor, Due 1/22  

   1,500,000    1,479,272    1,474,050 
                    

GK Holdings, Inc. (aka Global Knowledge)8, 9

Services: Business

 

Senior Secured Loan — Initial Term Loan (First Lien)

7.1% Cash, 1.0% Libor Floor, Due 1/21  

   4,438,648    4,413,162    4,405,358 
                     

Global Tel*Link Corporation8

Telecommunications

 

Junior Secured Loan — Term Loan (Second Lien)

9.0% Cash, 1.3% Libor Floor, Due 11/20  

   4,000,000    3,960,194    3,911,600 
                    

Gold Standard Baking, Inc.8, 9

Beverage, Food and Tobacco

 

Senior Secured Loan — Term Loan

5.4% Cash, 1.0% Libor Floor, Due 4/21  

   2,456,250    2,447,837    2,454,531 
                     

Grupo HIMA San Pablo, Inc.8

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Term B Loan (First Lien)

8.5% Cash, 1.5% Libor Floor, Due 1/18  

   2,880,000    2,870,374    2,764,800 
                    

Grupo HIMA San Pablo, Inc.8

Healthcare & Pharmaceuticals

 

Junior Secured Loan — Term Loan (Second Lien)

13.8% Cash, Due 7/18  

   7,000,000    6,960,865    6,370,000 
                     

Gymboree Corporation., The8, 9

Retail

 

Senior Secured Loan — Term Loan

5.0% Cash, 1.5% Libor Floor, Due 2/18  

   1,420,455    1,416,024    593,445 
                    

Hargray Communications Group, Inc. (HCP Acquisition LLC)8, 9

Media: Broadcasting & Subscription

 

Senior Secured Loan — Term B-1 Loan

4.9% Cash, 1.0% Libor Floor, Due 6/19  

   2,879,638    2,855,975    2,879,638 
                     

Harland Clarke Holdings Corp. (fka Clarke American Corp.)8, 9

Media: Advertising, Printing & Publishing

 

Senior Secured Loan — Tranche B-5 Term Loan

7.1% Cash, 1.0% Libor Floor, Due 12/21  

   1,334,704    1,318,965    1,348,886 
                    

Harland Clarke Holdings Corp. (fka Clarke American Corp.)8, 9

Media: Advertising, Printing & Publishing

 

Senior Secured Loan — Tranche B-6 Term Loan

6.6% Cash, 1.0% Libor Floor, Due 2/22  

   2,917,761    2,889,214    2,944,021 

 

 8 

 

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal  

Amortized

Cost

   Fair Value2 

Highland Acquisition Holdings, LLC (aka HealthSun Health Plans, Inc.)8, 9

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Initial Term Loan

6.5% Cash, 1.0% Libor Floor, Due 11/22  

  $1,975,000   $1,883,259   $1,950,313 
                    

Highline Aftermarket Acquisition, LLC8, 9

Automotive

 

Senior Secured Loan — Term Loan

5.3% Cash, 1.0% Libor Floor, Due 3/24  

   1,500,000    1,492,512    1,492,500 
                     

Hoffmaster Group, Inc.8

Forest Products & Paper

 

Junior Secured Loan — Initial Term Loan (Second Lien)

10.5% Cash, 1.0% Libor Floor, Due 11/24  

   1,600,000    1,554,026    1,548,000 
                    

Hoffmaster Group, Inc.8, 9

Forest Products & Paper

 

Senior Secured Loan — Initial Term Loan (First Lien)

5.5% Cash, 1.0% Libor Floor, Due 11/23  

   2,660,000    2,634,684    2,661,862 
                     

Industrial Services Acquisition, LLC (aka Evergreen / NAIC)8, 9

Environmental Industries

 

Senior Secured Loan — Term Loan

6.0% Cash, 1.0% Libor Floor, Due 6/22  

   2,887,500    2,862,271    2,887,500 
                    

Ivanti Software, Inc. (fka LANDesk Group, Inc.)8

High Tech Industries

 

Junior Secured Loan — Loan (Second Lien)

10.0% Cash, 1.0% Libor Floor, Due 1/25  

   3,228,619    3,228,619    3,228,619 
                     

Kellermeyer Bergensons Services, LLC8, 9

Services: Business

 

Senior Secured Loan — Initial Term Loan (First Lien)

6.0% Cash, 1.0% Libor Floor, Due 10/21  

   3,950,120    3,927,591    3,890,868 
                    

Key Safety Systems, Inc.8, 9

Automotive

 

Senior Secured Loan — Initial Term Loan

5.5% Cash, 1.0% Libor Floor, Due 8/21  

   1,394,077    1,389,685    1,410,457 
                     

MB Aerospace ACP Holdings II Corp.8, 9

Aerospace and Defense

 

Senior Secured Loan — Initial Term Loan

6.7% Cash, 1.0% Libor Floor, Due 12/22  

   1,339,110    1,328,548    1,339,646 
                    

Medrisk, Inc.8, 9

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Term Loan

6.4% Cash, 1.0% Libor Floor, Due 2/23  

   1,980,000    1,963,205    1,980,000 
                     

National Home Health Care Corp.8

Healthcare & Pharmaceuticals

 

Junior Secured Loan — Term Loan (Second Lien)

10.0% Cash, 1.0% Libor Floor, Due 12/22  

   1,500,728    1,479,192    1,470,863 
                    

National Home Health Care Corp.8, 9

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Term Loan (First Lien)

5.5% Cash, 1.0% Libor Floor, Due 12/21  

   2,981,250    2,953,191    2,977,673 

 

 9 

 

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal  

Amortized

Cost

   Fair Value2 

Nellson Nutraceutical, LLC8, 9

Beverage, Food and Tobacco

 

Senior Secured Loan — Term A-1 Loan (First Lien)

6.1% Cash, 1.0% Libor Floor, Due 12/21  

  $2,344,706   $2,330,591   $2,344,471 
                    

Nellson Nutraceutical, LLC8, 9

Beverage, Food and Tobacco

 

Senior Secured Loan — Term A-2 Loan (First Lien)

6.1% Cash, 1.0% Libor Floor, Due 12/21  

   2,066,562    2,053,576    2,066,355 
                     

Nielsen & Bainbridge, LLC8, 9

Consumer goods: Durable

 

Senior Secured Loan — Term Loan (First Lien)

6.0% Cash, 1.0% Libor Floor, Due 8/20  

   5,361,360    5,328,534    5,361,360 
                    

NM Z Parent Inc. (aka Zep, Inc.)8, 9

Chemicals, Plastics and Rubber

 

Senior Secured Loan — 2016 Term Loan

5.0% Cash, 1.0% Libor Floor, Due 6/22  

   3,438,750    3,450,149    3,474,169 
                     

Novitex Acquisition, LLC (fka ARSloane Acquisition, LLC)8, 9

Services: Business

 

Senior Secured Loan — Tranche B-2 Term Loan (First Lien)

8.1% Cash, 1.3% Libor Floor, Due 7/20  

   1,928,630    1,890,331    1,880,029 
                    

Onex Carestream Finance LP8

Healthcare & Pharmaceuticals

 

Junior Secured Loan — Term Loan (Second Lien)

9.6% Cash, 1.0% Libor Floor, Due 12/19  

   1,932,311    1,932,311    1,783,523 
                     

Onex Carestream Finance LP8, 9

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Term Loan (First Lien 2013)

5.1% Cash, 1.0% Libor Floor, Due 6/19  

   1,723,617    1,726,495    1,701,383 
                    

Otter Products, LLC (OtterBox Holdings, Inc.)8, 9

Consumer goods: Durable

 

Senior Secured Loan — Term B Loan

5.8% Cash, 1.0% Libor Floor, Due 6/20  

   2,600,266    2,588,047    2,544,360 
                     

PGX Holdings, Inc.8, 9

Services: Consumer

 

Senior Secured Loan — Initial Term Loan (First Lien)

6.3% Cash, 1.0% Libor Floor, Due 9/20  

   3,595,714    3,574,690    3,586,365 
                    

Playpower, Inc.8, 9

Construction & Building

 

Senior Secured Loan — Initial Term Loan (First Lien)

5.9% Cash, 1.0% Libor Floor, Due 6/21  

   1,965,000    1,954,591    1,965,196 
                     

Power Products, LLC8, 9

Capital Equipment

 

Senior Secured Loan — Initial Term Loan (First Lien)

5.5% Cash, 1.0% Libor Floor, Due 12/22  

   2,000,000    1,990,243    1,990,000 

 

 10 

 

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal  

Amortized

Cost

   Fair Value2 

PrimeLine Utility Services LLC (fka FR Utility Services LLC)8, 9

Energy: Electricity

 

Senior Secured Loan — Initial Term Loan

6.5% Cash, 1.0% Libor Floor, Due 11/22  

  $3,925,659   $3,895,827   $3,928,014 
                     

Priority Payment Systems Holdings LLC8, 9

Banking, Finance, Insurance & Real Estate

 

Senior Secured Loan — Initial Term Loan

7.0% Cash, 1.0% Libor Floor, Due 1/23  

   3,990,000    3,951,668    3,960,873 
                    

PSC Industrial Holdings Corp.8, 9

Environmental Industries

 

Senior Secured Loan — Term Loan (First Lien)

5.9% Cash, 1.0% Libor Floor, Due 12/20  

   2,966,713    2,947,322    2,953,066 
                     

Q Holding Company (fka Lexington Precision Corporation)8, 9

Chemicals, Plastics and Rubber

 

Senior Secured Loan — Term B Loan

6.1% Cash, 1.0% Libor Floor, Due 12/21  

   2,984,733    2,956,243    2,955,781 
                    

Quad-C JH Holdings Inc. (aka Joerns Healthcare)8, 9

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Term Loan A

6.2% Cash, 1.0% Libor Floor, Due 5/20  

   3,890,093    3,874,832    3,617,786 
                     

Ravn Air Group, Inc.8, 9

Transportation: Consumer

 

Senior Secured Loan — Initial Term Loan

5.4% Cash, 1.0% Libor Floor, Due 7/21  

   2,406,250    2,397,545    2,317,219 
                    

Roscoe Medical, Inc.8

Healthcare & Pharmaceuticals

 

Junior Secured Loan — Term Loan (Second Lien)

11.3% Cash, Due 9/19  

   6,700,000    6,669,733    6,499,000 
                     

Salient CRGT Inc.8, 9

High Tech Industries

 

Senior Secured Loan — Initial Term Loan

6.8% Cash, 1.0% Libor Floor, Due 2/22  

   3,000,000    2,940,954    2,955,000 
                    

Sandy Creek Energy Associates, L.P.8, 9

Utilities: Electric

 

Senior Secured Loan — Term Loan

5.1% Cash, 1.0% Libor Floor, Due 11/20  

   2,606,504    2,599,760    2,077,905 
                     

Stafford Logistics, Inc.(dba Custom Ecology, Inc.)8, 9

Environmental Industries

 

Senior Secured Loan — Term Loan

7.7% Cash, 1.0% Libor Floor, Due 8/21  

   2,709,639    2,695,021    2,439,488 
                    

Tank Partners Holdings, LLC8, 14

Energy: Oil & Gas

 

Senior Secured Loan — Loan

10.3% Cash, 4.0% PIK, 3.0% Libor Floor, Due 8/19  

   11,049,279    10,820,492    7,819,575 

 

 11 

 

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal  

Amortized

Cost

   Fair Value2 

Terra Millennium Corporation8, 9

Construction & Building

 

Senior Secured Loan — First Out Term Loan

7.3% Cash, 1.0% Libor Floor, Due 10/22  

  $3,975,000   $3,937,126   $3,975,000 
                    

Time Manufacturing Acquisition, LLC8, 9

Capital Equipment

 

Senior Secured Loan — Term Loan

6.2% Cash, 1.0% Libor Floor, Due 2/23  

   1,500,000    1,492,672    1,500,000 
                     

TronAir Parent Inc.8, 9

Aerospace and Defense

 

Senior Secured Loan — Initial Term Loan (First Lien)

5.9% Cash, 1.0% Libor Floor, Due 9/23  

   3,980,000    3,942,913    3,979,204 
                    

TRSO I, Inc.8

Energy: Oil & Gas

 

Junior Secured Loan — Term Loan (Second Lien)

14.0% Cash, 1.0% Libor Floor, Due 12/19  

   1,000,000    992,199    1,000,000 
                     

U.S. Shipping Corp (fka U.S. Shipping Partners LP)8, 9

Transportation: Cargo

 

Senior Secured Loan — Tranche B-2 Term Loan

5.3% Cash, 1.0% Libor Floor, Due 6/21  

   1,266,623    1,265,891    1,199,999 
                    

USJ-IMECO Holding Company, LLC8, 9

Transportation: Cargo

 

Senior Secured Loan — Term Loan

7.0% Cash, 1.0% Libor Floor, Due 4/20  

   3,670,376    3,660,989    3,518,790 
                     

Verdesian Life Sciences, LLC8, 9

Environmental Industries

 

Senior Secured Loan — Initial Term Loan

6.0% Cash, 1.0% Libor Floor, Due 7/20  

   3,712,558    3,682,896    3,584,846 
                    

VIP Cinema Holdings, Inc.8, 9

Hotel, Gaming & Leisure

 

Senior Secured Loan — Initial Term Loan (First Lien)

7.0% Cash, 1.0% Libor Floor, Due 3/23  

   2,000,000    1,990,110    1,990,000 
                     

Weiman Products, LLC8

Consumer goods: Non-durable

 

Senior Secured Loan — Term Loan

5.9% Cash, 1.0% Libor Floor, Due 11/18  

   832,018    829,219    819,371 
                    

Weiman Products, LLC8, 9

Consumer goods: Non-durable

 

Senior Secured Loan — Term Loan

5.9% Cash, 1.0% Libor Floor, Due 11/18  

   4,148,678    4,134,948    4,085,618 
                     

WideOpenWest Finance, LLC8, 9

Media: Broadcasting & Subscription

 

Senior Secured Loan — New Term B Loan

4.6% Cash, 1.0% Libor Floor, Due 8/23  

   2,985,000    2,985,000    3,004,477 

 

 12 

 

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal  

Amortized

Cost

   Fair Value2 

WireCo WorldGroup Inc. 8

Capital Equipment

 

Junior Secured Loan — Initial Term Loan (Second Lien)

10.0% Cash, 1.0% Libor Floor, Due 9/24  

  $3,000,000   $2,957,746   $3,002,700 
                    

WireCo WorldGroup Inc. (WireCo WorldGroup Finance LP)8, 9

Capital Equipment

 

Senior Secured Loan — Initial Term Loan (First Lien)

6.5% Cash, 1.0% Libor Floor, Due 9/23  

   1,741,250    1,725,053    1,743,165 
                     
Total Investment in Debt Securities                  
    (124% of net asset value at fair value)     $249,597,832   $247,632,590   $237,657,701 

 

 

 

 13 

 

 

Equity Securities Portfolio

 

Portfolio Company / Principal Business  Investment   

Percentage

Interest/Shares

  

Amortized

Cost

   Fair Value2 

Advanced Lighting Technologies, Inc,5, 8, 9

Consumer goods: Durable

  Preferred Stock Series C     1.8%  $1   $1,000 
                    

Aerostructures Holdings L.P.5, 8

Aerospace and Defense

  Partnership Interests     1.2%   1,000,000    13,471 
                     

Aerostructures Holdings L.P.5, 8

Aerospace and Defense

  Series A Preferred Interests     1.2%  250,961   1,091,819 
                    

Caribe Media Inc. (fka Caribe Information Investments Incorporated)5, 8

Media: Advertising, Printing & Publishing

  Common     1.3%   359,765    554,067 
                     

DBI Holding LLC5, 8

Services: Business

  Class A Warrants     3.2%  1   1,000 
                    

eInstruction Acquisition, LLC5, 8

Services: Business

  Membership Units     1.1%   1,079,615    1,000 
                     

FP WRCA Coinvestment Fund VII, Ltd.3, 5

Capital Equipment

  Class A Shares     1,500    1,500,000    707,874 
                     

Perseus Holding Corp.5, 8

Hotel, Gaming & Leisure

  Common     0.2%   400,000    1,000 
                     

Roscoe Investors, LLC5, 8

Healthcare & Pharmaceuticals

  Class A Units     1.6%   1,000,000    1,169,000 
                    

Tank Partners Holdings, LLC5, 8, 11

Energy: Oil & Gas

  Class B Units     5.8%   980,000    1,000 
                     

Tank Partners Holdings, LLC5, 8

Energy: Oil & Gas

  Warrants     1.3%   185,205    1,000 

 

 14 

 

 

Portfolio Company / Principal Business  Investment 

Percentage

Interest/Shares

  

Amortized

Cost

   Fair Value2 

TRSO II, Inc.5, 8

Energy: Oil & Gas

  Common Stock     5.4%  $1,680,161   $1,359,563 
                     

New Millennium Holdco, Inc. (Millennium Health, LLC)5, 8

Healthcare & Pharmaceuticals

  Common     0.2%   1,953,299    1,000 
                     
Total Investment in Equity Securities                  
    (3% of net asset value at fair value)          $10,389,008   $4,902,794 

 

 

CLO Fund Securities

 

CLO Subordinated Investments

 

Portfolio Company  Investment12 

Percentage

Ownership

  

Amortized

Cost

   Fair Value2 
Grant Grove CLO, Ltd.3,13 

Subordinated Securities, effective interest N/M, 1/21 maturity  

   22.2%  $2,485,886   $1,000 
Katonah III, Ltd.3,13 

Preferred Shares, effective interest N/M, 5/15 maturity  

   23.1%   1,287,155    369,000 
Katonah 2007-I CLO Ltd.3, 6 

Preferred Shares, effective interest 25.6%, 4/22 maturity  

   100.0%   29,101,810    20,847,854 
Trimaran CLO VII, Ltd.3, 6, 13 

Income Notes, effective interest N/M, 6/21 maturity  

   10.5%   934,010    565,000 
Catamaran CLO 2012-1 Ltd.3, 6 

Subordinated Notes, effective interest 8.3%, 12/23 maturity  

   24.9%   5,778,004    2,679,951 
Catamaran CLO 2013- 1 Ltd.3, 6 

Subordinated Notes, effective interest 14.6%, 1/25 maturity  

   23.5%   5,067,975    4,613,262 
Catamaran CLO 2014-1 Ltd.3, 6 

Subordinated Notes, effective interest 9.8%, 4/26 maturity  

   24.9%   7,635,476    4,376,540 
Dryden 30 Senior Loan Fund3 

Subordinated Notes, effective interest 35.2%, 11/25 maturity  

   7.5%   1,314,985    1,801,090 
Catamaran CLO 2014-2 Ltd.3, 6 

Subordinated Notes, effective interest 11.2%, 10/26 maturity  

   24.9%   6,972,176    4,879,005 
Catamaran CLO 2015-1 Ltd.3, 6 

Subordinated Notes, effective interest 9.8%, 4/27 maturity  

   9.9%   4,494,789    3,110,826 
Catamaran CLO 2016-1 Ltd.3, 6 

Subordinated Notes, effective interest 13.3%, 1/29 maturity  

   24.9%   10,478,346    8,365,500 
Total Investment in CLO Subordinated Securities          $75,550,612   $51,609,028 

 

 15 

 

 

CLO Rated-Note Investment

 

Portfolio Company  Investment 

Percentage

Ownership

  

Amortized

Cost

   Fair Value2 
Catamaran CLO 2014-1 Ltd.3, 6  Float - 04/2026 - E - 14889FAC7     15.1%  $1,444,363   $1,390,000 
Total Investment in CLO Rated-Note          $1,444,363   $1,390,000 
Total Investment in CLO Fund Securities                  
(28% of net asset value at fair value)          $76,994,975   $52,999,028 

 

 

Asset Manager Affiliates

 

Portfolio Company / Principal Business  Investment 

Percentage

Ownership

   Cost   Fair Value2 
Asset Manager Affiliates8, 10  Asset Management Company     100.0%  $54,691,230   $36,942,000 

Total Investment in Asset Manager Affiliates

(19% of net asset value at fair value)

          $54,691,230   $36,942,000 

 

 

Time Deposits and Money Market Account

 

Time Deposit and Money Market Accounts  Investment  Yield  

Amortized

Cost

   Fair Value2 
JP Morgan Business Money Market Account7, 8  Money Market Account     0.10%  $14,268   $14,268 
US Bank Money Market Account8  Money Market Account     0.02%   22,660,522    22,660,522 

Total Investment in Time Deposit and Money Market Accounts

(12% of net asset value at fair value)

          $22,674,790   $22,674,790 

Total Investments4

(186% of net asset value at fair value)

           $412,382,593   $355,176,313 

  

 16 

 

 

1A 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, 2017. As noted in the table above, 93% (based on par) of debt securities contain LIBOR floors which range between 0.75% and 3.0%.

 

2Reflects the fair market value of all investments as of March 31, 2017, as determined by the Company’s Board of Directors.

 

3Non-U.S. company or principal place of business outside the U.S.

 

4The aggregate cost of investments for federal income tax purposes is approximately $420 million. The aggregate gross unrealized appreciation is approximately $2.2 million, the aggregate gross unrealized depreciation is approximately $67.1 million, and the net unrealized depreciation is approximately $64.9 million.

 

5Non-income producing.

 

6An affiliate CLO Fund managed by an Asset Manager Affiliate (as such term is defined in the notes to the consolidated financial statements).

 

7Money market account holding restricted cash and security deposits for employee benefit plans.

 

8Qualified asset for purposes of section 55(a) of the Investment Company Act of 1940.

 

9As of March 31, 2017, this investment is owned by KCAP Senior Funding I, LLC and was pledged to secure KCAP Senior Funding I, LLC’s debt obligation.

 

10Other than the Asset Manager Affiliate, which we are deemed to “control”, we do not “control” and are not an “affiliate” of any of our portfolio companies, each as defined in the Investment Company Act of 1940 (the “1940 Act”). In general, under the 1940 Act, we would be presumed to “control” a portfolio company if we owned 25% or more of its voting securities and would be an “affiliate” of a portfolio company if we owned 5% or more of its voting securities.

 

11Non-voting.

 

12CLO Subordinated Investments are entitled to periodic distributions which are generally equal to the remaining cash flow of the payments made by the underlying fund’s investments less contractual payments to debt holders and fund expenses. The estimated annualized effective yield indicated is based upon a current projection of the amount and timing of these distributions. Such projections are updated on a quarterly basis and the estimated effective yield is adjusted prospectively.

 

13Notice of redemption has been received for this transaction.

 

14Loan or security was on partial non-accrual status, whereby we have recognized income on a portion of contractual PIK amounts due.

 

 17 

 

 

KCAP FINANCIAL, INC.
 
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2016

 

Debt Securities Portfolio

 

Portfolio Company/Principal
Business
  Investment
Interest Rate (1) /Maturity
  Principal   Amortized
Cost
   Fair Value (2) 
1A Smart Start LLC (8) , (9)
Consumer goods: Non-durable
  Senior Secured Loan — Initial Term Loan (First Lien) 5.8% Cash, 1.0% Libor Floor, Due 2/22  $2,970,000   $2,946,408   $2,919,807 
                   
4L Technologies Inc. (fka Clover Holdings, Inc.) (8) , (9)
Consumer goods: Non-durable
  Senior Secured Loan — Term Loan 5.5% Cash, 1.0% Libor Floor, Due 5/20   2,720,465    2,705,259    2,606,194 
                   
Advanced Lighting Technologies, Inc, (8) , (9) , (14)
Consumer goods: Durable
  First Lien Bond — 12.500% – 6/2019 —  00753CAG7 5.3% Cash, 7.3% PIK, Due 6/19   3,060,919    3,060,919    1,089,338 
                   
Advantage Sales & Marketing Inc. (8)
Services: Business
  Junior Secured Loan — Term Loan (Second Lien) 7.5% Cash, 1.0% Libor Floor, Due 7/22   1,000,000    1,001,753    995,300 
                   
Alere Inc. (fka IM US Holdings, LLC) (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — B Term Loan 4.3% Cash, 1.0% Libor Floor, Due 6/22   3,030,277    3,024,429    3,034,489 
                   
American Seafoods Group LLC (8) , (9)
Beverage, Food and Tobacco
  Senior Secured Loan — Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 8/21   3,853,704    3,838,792    3,874,899 
                   
Anaren, Inc. (8) , (9)
Aerospace and Defense
  Senior Secured Loan — Term Loan (First Lien) 5.5% Cash, 1.0% Libor Floor, Due 2/21   1,871,912    1,860,822    1,864,237 
                   
Apco Holdings, Inc. (8) , (9)
Services: Business
  Senior Secured Loan — Initial Term Loan 7.0% Cash, 1.0% Libor Floor, Due 1/22   3,867,838    3,769,454    3,900,714 
                   
API Technologies Corp. (8) , (9)
High Tech Industries
  Senior Secured Loan — Initial Term Loan 7.5% Cash, 1.0% Libor Floor, Due 4/22   3,482,500    3,420,642    3,480,759 
                   
Aristotle Corporation, The (8) , (9)
Consumer goods: Non-durable
  Senior Secured Loan — Term Loan 5.5% Cash, 1.0% Libor Floor, Due 6/21   3,665,860    3,652,075    3,604,274 
                   
Asurion, LLC (fka Asurion Corporation) (8) , (9)
Banking, Finance, Insurance & Real Estate
  Senior Secured Loan — Incremental Tranche B-4 Term Loan 5.0% Cash, 1.0% Libor Floor, Due 8/22   876,911    873,399    889,736 
                   
Asurion, LLC (fka Asurion Corporation) (8) , (9)
Banking, Finance, Insurance & Real Estate
  Senior Secured Loan — Replacement B-2 Term Loan 4.0% Cash, 0.8% Libor Floor, Due 7/20   187,812    188,275    189,719 
                   
Avalign Technologies, Inc. (8)
Healthcare & Pharmaceuticals
  Junior Secured Loan — Initial Term Loan (Second Lien) 9.5% Cash, 1.0% Libor Floor, Due 7/22   1,000,000    992,078    985,000 
                   
Avalign Technologies, Inc. (8) , (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Initial Term Loan (First Lien) 5.5% Cash, 1.0% Libor Floor, Due 7/21   2,925,000    2,913,921    2,915,640 
                   
Bankruptcy Management Solutions, Inc. (8)
Services: Business
  Senior Secured Loan — Term B Loan 7.0% Cash, 1.0% Libor Floor, Due 6/18   665,654    665,654    655,935 
                   
BarBri, Inc. (Gemini Holdings, Inc.) (8) , (9)
Services: Consumer
  Senior Secured Loan — Term Loan 4.5% Cash, 1.0% Libor Floor, Due 7/19   2,619,636    2,614,056    2,578,508 
                   
BBB Industries US Holdings, Inc. (8) , (9)
Automotive
  Senior Secured Loan — Initial Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 11/21   2,947,500    2,906,715    2,800,125 
                   
Bestop, Inc. (8) , (9)
Automotive
  Senior Secured Loan — Delayed Draw Term Loan 6.3% Cash, 1.0% Libor Floor, Due 7/21   34,660    32,776    34,466 
                   
Bestop, Inc. (8) , (9)
Automotive
  Senior Secured Loan — First Amendment Term Loan 6.3% Cash, 1.0% Libor Floor, Due 7/21   500,000    495,290    497,200 

 

See accompanying notes to financial statements.

 

 18 

 

 

Portfolio Company/Principal
Business
  Investment
Interest Rate (1) /Maturity
  Principal   Amortized
Cost
   Fair Value (2) 
Bestop, Inc. (8) , (9)
Automotive
  Senior Secured Loan — Term Loan 6.3% Cash, 1.0% Libor Floor, Due 7/21  $1,520,000   $1,498,330   $1,452,512 
                   
Carolina Beverage Group LLC (8)
Beverage, Food and Tobacco
  Senior Secured Bond — 10.625% – 08/2018 –  143818AA0 144A 10.6% Cash, Due 8/18   1,500,000    1,506,461    1,487,400 
                   
CCS Intermediate Holdings, LLC (8) , (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Initial Term Loan (First Lien) 5.0% Cash, 1.0% Libor Floor, Due 7/21   2,932,500    2,922,875    2,470,338 
                   
Cengage Learning, Inc. (8) , (9)
Media: Advertising, Printing & Publishing
  Senior Secured Loan — 2016 Refinancing Term Loan 5.3% Cash, 1.0% Libor Floor, Due 6/23   3,793,913    3,788,981    3,702,043 
                   
Checkout Holding Corp. (fka Catalina Marketing) (8) , (9)
Media: Advertising, Printing & Publishing
  Senior Secured Loan — Term B Loan (First Lien) 4.5% Cash, 1.0% Libor Floor, Due 4/21   975,000    972,021    853,125 
                   
CHS/Community Health Systems, Inc. (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Incremental 2021 Term H Loan 4.0% Cash, 1.0% Libor Floor, Due 1/21   2,878,621    2,853,070    2,796,465 
                   
Consolidated Communications, Inc. (9)
Telecommunications
  Senior Secured Loan — Initial Term Loan 4.0% Cash, 1.0% Libor Floor, Due 10/23   2,067,444    2,062,450    2,067,444 
                   
CRGT Inc. (8) , (9)
High Tech Industries
  Senior Secured Loan — Term Loan 7.5% Cash, 1.0% Libor Floor, Due 12/20   3,224,017    3,190,360    3,224,339 
                   
CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited) (8)
Beverage, Food and Tobacco
  Junior Secured Loan — Term Loan (Second Lien) 8.8% Cash, 1.0% Libor Floor, Due 7/21   3,000,000    3,011,328    2,463,000 
                   
CT Technologies Intermediate Holdings, Inc. (Smart Holdings Corp.) (aka HealthPort) (8) , (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — New Term Loan Facility 5.3% Cash, 1.0% Libor Floor, Due 12/21   2,940,225    2,917,719    2,818,941 
                   
Drew Marine Group Inc. (8)
Transportation: Cargo
  Junior Secured Loan — Term Loan (Second Lien) 8.0% Cash, 1.0% Libor Floor, Due 5/21   2,500,000    2,496,331    2,380,000 
                   
Eastern Power, LLC (Eastern Covert Midco, LLC) (aka TPF II LC, LLC) (8) , (9)
Utilities: Electric
  Senior Secured Loan — Term Loan 5.0% Cash, 1.0% Libor Floor, Due 10/21   2,796,756    2,814,422    2,826,122 
                   
Electric Lightwave Holdings, Inc. (f.k.a. Integra Telecom Holdings, Inc.) (8) , (9)
Telecommunications
  Senior Secured Loan — Term B-1 Loan 5.3% Cash, 1.0% Libor Floor, Due 8/20   2,932,538    2,924,968    2,945,734 
                   
ELO Touch Solutions, Inc. (8) , (9)
High Tech Industries
  Senior Secured Loan — Term Loan (First Lien) 8.5% Cash, 1.5% Libor Floor, Due 6/18   1,420,897    1,397,046    1,380,544 
                   
Empower Payments Acquisition, Inc (8) , (9)
Services: Business
  Senior Secured Loan — Term Loan 6.5% Cash, 1.0% Libor Floor, Due 11/23   3,000,000    2,940,565    2,940,000 
                   
EWT Holdings III Corp. (fka WTG Holdings III Corp.) (8) , (9)
Ecological
  Senior Secured Loan — Term Loan (First Lien) 4.8% Cash, 1.0% Libor Floor, Due 1/21   1,745,501    1,741,292    1,760,783 
                   
Fender Musical Instruments Corporation (8) , (9)
Consumer goods: Durable
  Senior Secured Loan — Initial Loan 5.8% Cash, 1.3% Libor Floor, Due 4/19   1,339,534    1,345,751    1,322,254 
                   
FHC Health Systems, Inc. (8) , (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Initial Term Loan 5.0% Cash, 1.0% Libor Floor, Due 12/21   3,838,768    3,811,221    3,742,799 
                   
First American Payment Systems, L.P. (8)
Banking, Finance, Insurance & Real Estate
  Junior Secured Loan — Term Loan (Second Lien) 10.8% Cash, 1.3% Libor Floor, Due 4/19   1,796,448    1,783,840    1,742,555 
                   
Getty Images, Inc. (8) , (9)
Media: Advertising, Printing & Publishing
  Senior Secured Loan — Initial Term Loan 4.8% Cash, 1.3% Libor Floor, Due 10/19   2,140,569    2,147,692    1,874,775 
                   
GI Advo Opco, LLC (8)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan 5.5% Cash, 1.0% Libor Floor, Due 11/21   247,500    245,474    223,913 

 

See accompanying notes to financial statements.

 

 19 

 

 

Portfolio Company/Principal
Business
  Investment
Interest Rate (1) /Maturity
  Principal   Amortized
Cost
   Fair Value (2) 
GI Advo Opco, LLC (8) , (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan 5.5% Cash, 1.0% Libor Floor, Due 11/21  $2,722,500   $2,700,224   $2,463,046 
                   
GK Holdings, Inc. (aka Global Knowledge) (8)
Services: Business
  Junior Secured Loan — Initial Term Loan (Second Lien) 10.5% Cash, 1.0% Libor Floor, Due 1/22   1,500,000    1,478,209    1,465,650 
                   
GK Holdings, Inc. (aka Global Knowledge) (8) , (9)
Services: Business
  Senior Secured Loan — Initial Term Loan (First Lien) 6.5% Cash, 1.0% Libor Floor, Due 1/21   2,450,000    2,433,329    2,446,080 
                   
Global Tel*Link Corporation (8)
Telecommunications
  Junior Secured Loan — Term Loan (Second Lien) 9.0% Cash, 1.3% Libor Floor, Due 11/20   4,000,000    3,957,505    3,894,500 
                   
Gold Standard Baking, Inc. (8) , (9)
Beverage, Food and Tobacco
  Senior Secured Loan — Term Loan 5.3% Cash, 1.0% Libor Floor, Due 4/21   2,462,500    2,453,554    2,461,269 
                   
Grande Communications Networks LLC (8) , (9)
Telecommunications
  Senior Secured Loan — Initial Term Loan 4.5% Cash, 1.0% Libor Floor, Due 5/20   3,860,145    3,864,877    3,860,145 
                   
Grupo HIMA San Pablo, Inc. (8)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term B Loan (First Lien) 8.5% Cash, 1.5% Libor Floor, Due 1/18   2,887,500    2,875,001    2,743,125 
                   
Grupo HIMA San Pablo, Inc. (8)
Healthcare & Pharmaceuticals
  Junior Secured Loan — Term Loan (Second Lien) 13.8% Cash, Due 7/18   7,000,000    6,953,618    6,370,000 
                   
Gymboree Corporation., The (8) , (9)
Retail
  Senior Secured Loan — Term Loan 5.0% Cash, 1.5% Libor Floor, Due 2/18   1,421,105    1,415,457    759,581 
                   
Hargray Communications Group, Inc. (HCP Acquisition LLC) (8) , (9)
Media: Broadcasting & Subscription
  Senior Secured Loan — Term B-1 Loan 4.8% Cash, 1.0% Libor Floor, Due 6/19   2,887,075    2,860,733    2,926,166 
                   
Harland Clarke Holdings Corp.
(fka Clarke American Corp.) (8) , (9)
Media: Advertising, Printing & Publishing
  Senior Secured Loan — Tranche B-3 Term Loan 7.0% Cash, 1.5% Libor Floor, Due 5/18   1,697,272    1,690,708    1,703,637 
                   
Harland Clarke Holdings Corp.
(fka Clarke American Corp.) (8) , (9)
Media: Advertising, Printing & Publishing
  Senior Secured Loan — Tranche B-4 Term Loan 7.0% Cash, 1.0% Libor Floor, Due 8/19   1,387,500    1,384,229    1,391,545 
                   
Harland Clarke Holdings Corp.
(fka Clarke American Corp.) (8) , (9)
Media: Advertising, Printing & Publishing
  Senior Secured Loan — Tranche B-5 Term Loan 7.0% Cash, 1.0% Libor Floor, Due 12/19   1,385,417    1,369,287    1,395,980 
                   
Highland Acquisition Holdings, LLC (aka HealthSun Health Plans, Inc.) (8) , (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan B 6.5% Cash, 1.0% Libor Floor, Due 11/22   2,000,000    1,903,216    1,910,000 
                   
Hoffmaster Group, Inc. (8)
Forest Products & Paper
  Junior Secured Loan — Initial Term Loan (Second Lien) 10.5% Cash, 1.0% Libor Floor, Due 11/24   1,600,000    1,552,544    1,524,640 
                   
Hoffmaster Group, Inc. (8) , (9)
Forest Products & Paper
  Senior Secured Loan — Initial Term Loan (First Lien) 5.5% Cash, 1.0% Libor Floor, Due 11/23   2,666,667    2,640,345    2,668,267 
                   
Industrial Services Acquisition, LLC (aka Evergreen/NAIC) (8) , (9)
Environmental Industries
  Senior Secured Loan — Term Loan 6.0% Cash, 1.0% Libor Floor, Due 6/22   2,925,000    2,898,235    2,925,000 
                   
Kellermeyer Bergensons Services, LLC (8) , (9)
Services: Business
  Senior Secured Loan — Initial Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 10/21   1,950,120    1,936,641    1,943,100 
                   
Key Safety Systems, Inc. (8) , (9)
Automotive
  Senior Secured Loan — Initial Term Loan 5.5% Cash, 1.0% Libor Floor, Due 8/21   1,394,077    1,389,440    1,411,851 
                   
Landslide Holdings, Inc. (8) , (9)
High Tech Industries
  Senior Secured Loan — Term Loan (First Lien) 5.5% Cash, 1.0% Libor Floor, Due 9/22   1,850,467    1,846,044    1,850,467 
                   
MB Aerospace ACP Holdings II Corp. (8) , (9)
Aerospace and Defense
  Senior Secured Loan — Initial Term Loan 6.5% Cash, 1.0% Libor Floor, Due 12/22   1,342,500    1,331,454    1,342,366 

 

See accompanying notes to financial statements.

 

 20 

 

 

Portfolio Company/Principal
Business
  Investment
Interest Rate (1) /Maturity
  Principal   Amortized
Cost
   Fair Value (2) 
Medrisk, Inc. (8) , (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan 6.3% Cash, 1.0% Libor Floor, Due 2/23  $1,985,000   $1,967,461   $1,985,000 
                   
MGOC, Inc. (fka Media General, Inc.) (9)
Media: Broadcasting & Subscription
  Senior Secured Loan — Term B Loan 4.0% Cash, 1.0% Libor Floor, Due 7/20   2,417,989    2,419,940    2,417,989 
                   
National Home Health Care Corp. (8)
Healthcare & Pharmaceuticals
  Junior Secured Loan — Term Loan (Second Lien) 11.8% Cash, 1.0% Libor Floor, Due 12/22   1,500,000    1,477,675    1,477,500 
                   
National Home Health Care Corp. (8) , (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan (First Lien) 5.5% Cash, 1.0% Libor Floor, Due 12/21   3,000,000    2,970,280    2,970,000 
                   
Nellson Nutraceutical, LLC (8) , (9)
Beverage, Food and Tobacco
  Senior Secured Loan — Term A-1 Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 12/21   2,350,684    2,335,796    2,350,449 
                   
Nellson Nutraceutical, LLC (8) , (9)
Beverage, Food and Tobacco
  Senior Secured Loan — Term A-2 Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 12/21   2,066,562    2,052,899    2,066,355 
                   
Nielsen & Bainbridge, LLC (8) , (9)
Consumer goods: Durable
  Senior Secured Loan — Term Loan (First Lien) 6.2% Cash, 1.0% Libor Floor, Due 8/20   5,361,360    5,326,136    5,199,447 
                   
NM Z Parent Inc. (aka Zep, Inc.) (8) , (9)
Chemicals, Plastics and Rubber
  Senior Secured Loan — 2016 Term Loan 5.0% Cash, 1.0% Libor Floor, Due 6/22   3,447,500    3,459,466    3,481,630 
                   
Novitex Acquisition, LLC (fka ARSloane Acquisition, LLC) (8) , (9)
Services: Business
  Senior Secured Loan — Tranche B-2 Term Loan (First Lien) 8.0% Cash, 1.3% Libor Floor, Due 7/20   1,941,336    1,899,875    1,882,707 
                   
Onex Carestream Finance LP (8)
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    1,647,295 
                   
Onex Carestream Finance LP (8) , (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan (First Lien 2013) 5.0% Cash, 1.0% Libor Floor, Due 6/19   1,750,135    1,753,387    1,704,920 
                   
Otter Products, LLC (OtterBox Holdings, Inc.) (8) , (9)
Consumer goods: Durable
  Senior Secured Loan — Term B Loan 5.8% Cash, 1.0% Libor Floor, Due 6/20   2,600,266    2,587,099    2,507,697 
                   
PGX Holdings, Inc. (8) , (9)
Services: Consumer
  Senior Secured Loan — Initial Term Loan (First Lien) 6.3% Cash, 1.0% Libor Floor, Due 9/20   3,620,714    3,598,052    3,626,381 
                   
Playpower, Inc. (8) , (9)
Construction & Building
  Senior Secured Loan — Initial Term Loan (First Lien) 5.8% Cash, 1.0% Libor Floor, Due 6/21   1,970,000    1,958,956    1,969,606 
                   
PrimeLine Utility Services LLC
(fka FR Utility Services LLC) (8) , (9)
Energy: Electricity
  Senior Secured Loan — Initial Term Loan 6.5% Cash, 1.0% Libor Floor, Due 11/22   3,935,672    3,904,453    3,937,247 
                   
Priority Payment Systems Holdings, LLC (8) , (9)
Banking, Finance, Insurance & Real Estate
  Senior Secured Loan — Initial Term Loan 7.0% Cash, 1.0% Libor Floor, Due 1/23   4,000,000    3,960,000    3,960,000 
                   
PSC Industrial Holdings Corp. (8) , (9)
Environmental Industries
  Senior Secured Loan — Term Loan (First Lien) 5.8% Cash, 1.0% Libor Floor, Due 12/20   2,974,300    2,953,559    2,941,583 
                   
Q Holding Company (fka Lexington Precision Corporation) (8) , (9)
Chemicals, Plastics and Rubber
  Senior Secured Loan — Term B Loan 6.0% Cash, 1.0% Libor Floor, Due 12/21   2,992,366    2,962,443    2,962,443 
                   
Quad-C JH Holdings Inc. (aka Joerns Healthcare) (8) , (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan A 6.0% Cash, 1.0% Libor Floor, Due 5/20   3,900,079    3,883,565    3,666,075 
                   
Ravn Air Group, Inc. (8) , (9)
Transportation: Consumer
  Senior Secured Loan — Initial Term Loan 5.3% Cash, 1.0% Libor Floor, Due 7/21   2,421,875    2,412,614    2,324,516 
                   

  

See accompanying notes to financial statements.

 21 

 

 

Portfolio Company/Principal
Business
  Investment
Interest Rate (1) /Maturity
  Principal   Amortized
Cost
   Fair Value (2) 
Roscoe Medical, Inc. (8)
Healthcare & Pharmaceuticals
  Junior Secured Loan — Term Loan (Second Lien) 11.3% Cash, Due 9/19   6,700,000    6,666,733    6,499,000 
                   
Sandy Creek Energy Associates, L.P. (8) , (9)
Utilities: Electric
  Senior Secured Loan — Term Loan 5.0% Cash, 1.0% Libor Floor, Due 11/20   2,613,239    2,606,016    2,204,921 
                   
Stafford Logistics, Inc. (dba Custom Ecology, Inc.) (8) , (9)
Environmental Industries
  Senior Secured Loan — Term Loan 7.5% Cash, 1.0% Libor Floor, Due 8/21  $2,709,639   $2,694,201   $2,677,395 
                   
Tank Partners Holdings, LLC (8) , (14)
Energy: Oil & Gas
  Senior Secured Loan — Loan 10.0% Cash, 4.0% PIK, 3.0% Libor Floor, Due 8/19   10,750,808    10,656,975    6,550,311 
                   
Terra Millennium Corporation (8) , (9)
Construction & Building
  Senior Secured Loan — First Out Term Loan 7.3% Cash, 1.0% Libor Floor, Due 10/22   4,000,000    3,960,202    3,960,000 
                   
TronAir Parent Inc. (8) , (9)
Aerospace and Defense
  Senior Secured Loan — Initial Term Loan (First Lien) 5.8% Cash, 1.0% Libor Floor, Due 9/23   3,960,000    3,923,893    3,959,208 
                   
TRSO I, Inc. (8)
Energy: Oil & Gas
  Junior Secured Loan — Term Loan (Second Lien) 14.0% Cash, 1.0% Libor Floor, Due 12/19   1,000,000    991,495    1,000,000 
                   
U.S. Shipping Corp (fka U.S. Shipping Partners LP) (8) , (9)
Transportation: Cargo
  Senior Secured Loan — Tranche B-2 Term Loan 5.3% Cash, 1.0% Libor Floor, Due 6/21   1,392,213    1,391,361    1,312,857 
                   
USJ-IMECO Holding Company, LLC (8) , (9)
Transportation: Cargo
  Senior Secured Loan — Term Loan 7.0% Cash, 1.0% Libor Floor, Due 4/20   3,679,796    3,669,622    3,497,278 
                   
Verdesian Life Sciences, LLC (8) , (9)
Environmental Industries
  Senior Secured Loan — Initial Term Loan 6.0% Cash, 1.0% Libor Floor, Due 7/20   3,766,302    3,733,929    3,641,261 
                   
Weiman Products, LLC (8)
Consumer goods: Non-durable
  Senior Secured Loan — Term Loan 5.8% Cash, 1.0% Libor Floor, Due 11/18   916,023    912,479    889,000 
                   
Weiman Products, LLC (8) , (9)
Consumer goods: Non-durable
  Senior Secured Loan — Term Loan 5.8% Cash, 1.0% Libor Floor, Due 11/18   4,567,552    4,550,168    4,432,809 
                   
WideOpenWest Finance, LLC (8) , (9)
Media: Broadcasting & Subscription
  Senior Secured Loan — New Term B Loan 4.5% Cash, 1.0% Libor Floor, Due 8/23   2,992,500    2,992,500    3,028,829 
                   
WireCo WorldGroup Inc. (8)
Capital Equipment
  Junior Secured Loan — Initial Term Loan (Second Lien) 10.0% Cash, 1.0% Libor Floor, Due 9/24   3,000,000    2,956,358    3,000,000 
                   
WireCo WorldGroup Inc. (WireCo WorldGroup Finance LP) (8) , (9)
Capital Equipment
  Senior Secured Loan — Initial Term Loan (First Lien) 6.5% Cash, 1.0% Libor Floor, Due 9/23   1,745,625    1,728,771    1,763,780 
                   
Total Investment in Debt Securities
(122% of net asset value at fair value)
     $251,222,570   $249,520,234   $238,343,330 

 

See accompanying notes to financial statements.

 

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Equity Securities Portfolio

 

Portfolio Company/Principal
Business
  Investment  Percentage
Interest/Shares
   Amortized
Cost
   Fair Value (2) 
Aerostructures Holdings L.P. (5) , (8)
Aerospace and Defense
  Partnership Interests   1.2%  $1,000,000   $100,549 
                   
Aerostructures Holdings L.P. (5) , (8)
Aerospace and Defense
  Series A Preferred Interests   1.2%   250,960    1,183,746 
                   
Caribe Media Inc. (fka Caribe Information Investments Incorporated) (5) , (8)
Media: Advertising, Printing & Publishing
  Common   1.3%   359,765    532,342 
                   
DBI Holding LLC (5) , (8)
Services: Business
  Class A Warrants   3.2%   1    1,000 
                   
eInstruction Acquisition, LLC (5) , (8)
Healthcare, Education and Childcare
  Membership Units   1.1%   1,079,617    1,000 
                   
FP WRCA Coinvestment Fund VII,
Ltd. (3) , (5)
Capital Equipment
  Class A Shares   1,500    1,500,000    811,268 
                   
Perseus Holding Corp. (5) , (8)
Hotel, Gaming & Leisure
  Common   0.2%   400,000    1,000 
                   
Roscoe Investors, LLC (5) , (8)
Healthcare & Pharmaceuticals
  Class A Units   1.6%   1,000,000    1,169,000 
                   
Tank Partners Holdings, LLC (5) , (8) , (11)
Energy: Oil & Gas
  Unit   5.8%   980,000    1,000 
                   
Tank Partners Holdings, LLC (5) , (8)
Energy: Oil & Gas
  Warrants   1.3%   185,205    1,000 
                   
TRSO II, Inc. (5) , (8)
Energy: Oil & Gas
  Common Stock   5.4%   1,680,161    1,253,450 
                   
New Millennium Holdco, Inc. (Millennium Health, LLC) (5) , (8)
Healthcare & Pharmaceuticals
  Common   0.2%   1,953,299    1,000 
                   
Total Investment in Equity Securities
(3% of net asset value at fair value)
          $10,389,007   $5,056,355 

 

See accompanying notes to financial statements.

 

 23 

 

 

CLO Fund Securities

 

CLO Subordinated Securities, Preferred Shares and Income Notes Investments

 

Portfolio Company  Investment (12)  Percentage
Ownership
   Amortized
Cost
   Fair Value (2) 
Grant Grove CLO, Ltd. (3) , (13)  Subordinated Securities, effective interest 0.1%, 1/21 maturity   22.2%  $2,485,886   $1,000 
Katonah III, Ltd. (3) , (13)  Preferred Shares, effective interest 0.1%, 5/15 maturity   23.1%   1,287,155    369,000 
Katonah 2007-I CLO Ltd. (3) , (6)  Preferred Shares, effective interest 30.8%, 4/22 maturity   100%   28,022,646    20,453,099 
Trimaran CLO VII, Ltd. (3) , (6) , (13)  Income Notes, effective interest 47.9%, 6/21 maturity   10.5%   1,643,920    1,195,152 
Catamaran CLO 2012-1 Ltd. (3) , (6)  Subordinated Notes, effective interest 3.1%, 12/23 maturity   24.9%   5,919,933    2,819,412 
Catamaran CLO 2013- 1 Ltd. (3) , (6)  Subordinated Notes, effective interest 14.9%, 1/25 maturity   23.5%   5,237,222    4,918,807 
Catamaran CLO 2014-1 Ltd. (3) , (6)  Subordinated Notes, effective interest 10.0%, 4/26 maturity   24.9%   7,818,484    4,546,682 
Catamaran CLO 2014-2 Ltd. (3) , (6)  Subordinated Notes, effective interest 10.9%, 10/26 maturity   24.9%   6,967,560    5,092,087 
Dryden 30 Senior Loan Fund (3)  Subordinated Notes, effective interest 36.2%, 11/25 maturity   7.5%   1,343,467    1,895,566 
Catamaran CLO 2015-1 Ltd. (3) , (6)  Subordinated Notes, effective interest 9.5%, 4/27 maturity   9.9%   4,543,317    3,223,255 
Catamaran CLO 2016-1 Ltd. (3) , (6)  Subordinated Notes, effective interest 13.9%, 1/29 maturity   24.9%   10,140,000    8,350,290 
Total Investment in CLO Subordinated Securities          $75,409,590   $52,864,350 

 

CLO Rated-Note Investments

 

Portfolio Company  Investment  Percentage
Ownership
   Amortized
Cost
   Fair Value (2) 
Catamaran CLO 2014-1 Ltd. (3) , (6)  Float – 04/2026 – E – 
14889FAC7, 6.6%, 4/26 maturity
   15.1%  $1,441,727   $1,310,000 
Total Investment in CLO
Rated-Note
          $1,441,727   $1,310,000 
Total Investment in CLO Fund Securities
(28% of net asset value at fair value)
          $76,851,317   $54,174,350 

 

Asset Manager Affiliates

 

Portfolio Company/Principal
Business
  Investment  Percentage
Ownership
   Cost   Fair Value (2) 
Asset Manager Affiliates (8) , (10)  Asset Management Company   100%  $55,341,230   $40,198,000 
Total Investment in Asset Manager Affiliates
(21% of net asset value at fair value)
          $55,341,230   $40,198,000 

 

See accompanying notes to financial statements.

 

 24 

 

 

Time Deposits and Money Market Account

 

Time Deposit and Money Market
Accounts
  Investment  Yield   Par/Amortized
Cost
   Fair Value (2) 
JP Morgan Business Money Market Account (7) , (8)  Money Market Account   0.1%  $14,268   $14,268 
US Bank Money Market Account (8)  Money Market Account   0.1%   28,685,001    28,685,001 
Total Investment in Time Deposit and Money Market Accounts
(15% of net asset value at fair value)
          $28,699,269   $28,699,269 
Total Investments (4)
(188% of net asset value at fair value)
          $420,801,057   $366,471,304 

 

(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, 2016. As noted in the table above, 93% (based on par) of debt securities contain LIBOR floors which range between 0.75% and 3.0%.

 

(2)Reflects the fair market value of all investments as of December 31, 2016, as determined by the Company’s Board of Directors.

 

(3)Non-U.S. company or principal place of business outside the U.S.

 

(4)The aggregate cost of investments for federal income tax purposes is approximately $429 million. The aggregate gross unrealized appreciation is approximately $2.1 million, the aggregate gross unrealized depreciation is approximately $65.0 million, and the net unrealized depreciation is approximately $62.9 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 financial statements).

 

(7)Money market account holding restricted cash and security deposits for employee benefit plans.

 

(8)Qualified asset for purposes of section 55(a) of the Investment Company Act of 1940.

 

(9)As of December 31, 2016, this investment is owned by KCAP Senior Funding I, LLC and was pledged to secure KCAP Senior Funding I, LLC’s obligation.

 

(10)Other than the Asset Manager Affiliate, which we are deemed to “control”, we do not “control” and are not an “affiliate” of any of our portfolio companies, each as defined in the Investment Company Act of 1940 (the “1940 Act”). In general, under the 1940 Act, we would be presumed to “control” a portfolio company if we owned 25% or more of its voting securities and would be an “affiliate” of a portfolio company if we owned 5% or more of its voting securities.

 

(11)Non-voting.

 

(12)CLO Subordinated Investments are entitled to periodic distributions which are generally equal to the remaining cash flow of the payments made by the underlying fund’s investments less contractual payments to debt holders and fund expenses. The estimated annualized effective yield indicated is based upon a current projection of the amount and timing of these distributions. Such projections are updated on a quarterly basis and the estimated effective yield is adjusted prospectively.

 

(13)Notice of redemption has been received for this transaction.

 

(14)Loan or security was on partial non-accrual status, whereby we have recognized income on a portion of contractual PIK amounts due.

 

See accompanying notes to financial statements.

 

 25 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED FINANCIAL HIGHLIGHTS

(unaudited)

 

  

Three Months Ended

March 31,

 
   2017   2016 
         
Per Share Data:          
Net asset value, at beginning of period  $5.24   $5.82 
Net investment income1   0.09    0.13 
Net realized gains from investments1   -4   (0.21)
Net change in unrealized (depreciation) on investments1   (0.08)   (0.10)
Net increase (decrease) in net assets resulting from operations   0.01    (0.18)
           
Net decrease in net assets resulting from distributions:   (0.12)   (0.15)
           
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  $5.14   $5.50 
Total net asset value return2   0.4%   (2.9)%
           
Ratio/Supplemental Data:          
Per share market value at beginning of period  $3.98   $4.07 
Per share market value at end of period  $4.07   $3.60 
Total market return3   5.3%   (7.9)%
Shares outstanding at end of period   37,209,649    37,130,433 
Net assets at end of period  $191,429,890   $204,387,728 
Portfolio turnover rate   10.4%   1.8%
Average par debt outstanding  $180,880,925   $204,443,692 
Asset coverage ratio   203%   205%
Ratio of net investment income to average net assets5   6.7%   9.1%
Ratio of total expenses to average net assets5   9.4%   9.0%
Ratio of interest expense to average net assets5   4.5%   4.9%
Ratio of non-interest expenses to average net assets5   4.9%   4.1%
           

 

 

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.

 

 26 

 

 

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

 

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

 

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

 

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

 

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

 

As of March 31, 2017, Katonah Debt Advisors and Trimaran Advisors, as well as affiliated management companies Katonah 2007-1 Management, L.L.C. and Trimaran Advisors Management, L.L.C. (collectively the “Asset Manager Affiliates”), had approximately $2.8 billion of par value assets under management. The Asset Manager Affiliates are each managed independently from KCAP by a separate management team (however, certain of the Company’s executive officers also act in similar capacities for one or both of the Asset Manager Affiliates). The Asset Manager Affiliates provide investment management services to CLO Funds, making day-to-day investment decisions concerning the assets of the CLO Funds. The Asset Manager Affiliates do not have any investments in the CLO Funds they manage; however, KCAP holds investments in a portion of the securities issued by the CLO Funds managed by the Asset Manager Affiliates.

 

The Company has three principal areas of investment:

 

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

 

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

 

 27 

 

 

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

 

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

 

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

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“U.S. 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, 2016, as filed with the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”).

 

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

 

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

 

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

 

Notwithstanding the foregoing, the Asset Manager Affiliates qualify as a “significant subsidiary” under Regulation S-X promulgated by the SEC and, as a result, the Company is required to include additional financial information regarding the Asset Manager Affiliates in its filings with the SEC. This additional financial information regarding the Asset Manager Affiliates does not directly impact the financial position or results of operations of the Company.

 

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

 

 28 

 

 

The determination of the tax character of stockholder distributions is made on an annual (full calendar-year) basis at the end of the year based upon our taxable income for the full year and the distributions paid during the full year. Therefore, an estimate of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year.

 

It is the Company’s primary investment objective to generate current income and capital appreciation by lending directly to privately-held middle market companies. During the quarter ended March 31, 2017, the Company provided approximately $36 million to 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, 2017, the Company held loans it has made to 78 investee companies with aggregate principal amounts of approximately $244.9 million. The details of such loans have been disclosed on the consolidated schedule of investments as well as in Note 4 – Investments. In addition to providing loans to investee companies, from time to time the Company assists investee companies in securing financing from other sources by introducing such investee companies to sponsors or by, among other things, leading a syndicate of lenders to provide the investee companies with financing. During the three months month period ended March 31, 2017, the Company did not engage in any such or similar activities.

 

FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, which updated accounting guidance for all revenue recognition arising from contracts with customers, and also affects entities that enter into contracts to provide goods or services to their customers (unless the contracts are in the scope of other US GAAP requirements). This update provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. The FASB also issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of the standard for one year. As a result, the guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Management is still evaluating the effect of the new standard.

 

In March 2016, the FASB issued ASU 2016-09 Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The amendments in ASU 2016-09 affect all entities that issue share-based payment awards to their employees and involve multiple aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, ASU 2016-09 is effective for annual periods beginning after December 15 2016, and interim periods within those annual periods. Early adoption is permitted. We adopted 2016-09 during the first quarter of 2017 and there was no impact from adoption.

 

In November 2016, the FASB issued Accounting Standards Update 2016-18, Restricted Cash (“ASU 2016-18”) which requires entities to show the changes in the total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted, and entities will be required to apply the guidance retrospectively when adopted. We have early adopted ASU 2016-18 retrospectively during the first quarter of 2017 and earlier periods were restated. The following table depicts the retroactive application of ASU 2016-18:

 

 

Consolidated Statements of Cash Flows
     
   Three Months Ended 
   March 31, 2016 
Net cash (used in) financing activities as reported  $(21,725,500)
Impact of Adoption   (2,864,518)
      
Net cash (used in) financing activities after adoption  $(24,590,018)

 

 29 

 

 

Investments

 

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

 

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

 

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

 

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

 

The Company utilizes an independent valuation firm to provide an annual third-party review of the Company’s CLO Securities fair value model relative to its functionality, model inputs and calculations as a reasonable method to determine fair values of CLO Securities, in the absence of Level I or Level II trading activity or observable market inputs. The independent valuation firm’s 2016 annual review concluded that the Company’s model appropriately factors in all the necessary inputs required to build an equity cash flow model for CLO Securities for fair value purposes and that the inputs were being employed correctly.

 

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

 

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 U.S. GAAP. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may differ materially from the values that would have been used had a readily available market existed for such investments. Further, such investments may be generally subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities. In addition, changes in the market environment and other events may occur over the life of the investments that may cause the value realized on such investments to be different from the currently assigned valuations.

 

The majority of the Company’s investment portfolio is composed of debt and equity securities with unique contract terms and conditions and/or complexity that requires a valuation of each individual investment that considers multiple levels of market and asset specific inputs, which may include historical and forecasted financial and operational performance of the individual investment, projected cash flows, market multiples, comparable market transactions, the priority of the security compared with those of other securities for such issuers, credit risk, interest rates, and independent valuations and reviews.

 

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

 

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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 (as defined below). In cases where the Company receives warrants to purchase equity securities, a market standard Black-Scholes model is utilized.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Cash and Restricted Cash are comprised of:

 

   As of   As of 
   March 31, 2017   December 31, 2016 
         
Cash  $5,178,290   $1,307,257 
Restricted Cash   7,986,487    8,528,298 
           
Total Cash and Restricted Cash  $13,164,777   $9,835,555 

 

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

 

Interest Income. Interest income, including the amortization of premium and accretion of discount and accrual of payment-in-kind (“PIK”) interest, 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 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. For investments with PIK interest, which represents contractual interest accrued and added to the principal balance that generally becomes due at maturity, we will not accrue PIK interest if the portfolio company valuation indicates that the PIK interest is not collectible (i.e. via a partial or full non-accrual). Loans which are on partial or full non-accrual 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, 2017, two of our investments were on partial non-accrual status, whereby we have recognized income on a portion of contractual PIK amounts due.

 

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

 

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

 

U.S. 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 U.S. GAAP statement of operations differs from both the tax–basis investment income and from the cash distributions actually received by the Company during the period.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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3. EARNINGS (LOSSES) PER SHARE

 

In accordance with the provisions of ASC 260, “Earnings per Share”, 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, 2017 and 2016 (unaudited):

 

   (unaudited) 
   Three Months Ended March 31, 
   2017   2016 
         
Net increase (decrease) in net assets resulting from operations  $385,552   $(6,842,699) 
Net (decrease) increase in net assets allocated to unvested share awards   (4,238)   123,579 
           
Net increase (decrease) in net assets available to common stockholders  $381,314   $(6,719,120)
Weighted average number of common shares outstanding for basic shares computation   37,202,996    37,109,735 
           
Weighted average number of common and common stock equivalent shares outstanding for diluted shares computation   37,202,996    37,109,735 
           
Net increase in net assets per basic common shares:          
Net increase in net assets from operations  $0.01   $(0.18)
Net increase in net assets per diluted shares:          
Net increase in net assets from operations  $0.01   $(0.18)

 

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

 

There were 50,000 options to purchase shares of common stock considered for the computation of the diluted per share information for the three months ended March 31, 2017 and 2016. Since the effects are anti-dilutive for both periods, the options were not included in the computation.

 

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

 

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4. INVESTMENTS

 

The following table shows the Company’s portfolio by security type at March 31, 2017 and December 31, 2016:

 

   March 31, 2017 (unaudited)   December 31, 2016 
Security Type  Cost/Amortized
Cost
   Fair Value      Cost/Amortized
Cost
   Fair Value    
Money Market Accounts³  $22,674,790   $22,674,790    6   $28,699,269   $28,699,269    8 
Senior Secured Loan   202,900,985    196,533,708    56    207,701,078    200,322,152    55 
Junior Secured Loan   40,171,813    38,545,305    11    37,251,776    35,444,440    10 
First Lien Bond   3,054,338    1,089,338    -    3,060,919    1,089,338    - 
Senior Secured Bond   1,505,454    1,489,350    -    1,506,461    1,487,400    - 
CLO Fund Securities   76,994,975    52,999,028    15    76,851,317    54,174,350    15 
Equity Securities   10,389,008    4,902,794    2    10,389,007    5,056,355    1 
Asset Manager Affiliates²   54,691,230    36,942,000    10    55,341,230    40,198,000    11 
                               
Total  $412,382,593   $355,176,313    100%  $420,801,057   $366,471,304    100%

 

 

¹Represents percentage of total portfolio at fair value.
²Represents the equity investment in the Asset Manager Affiliates.
³Includes 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, 2017 and December 31, 2016, were as follows:

 

   March 31, 2017 (unaudited)   December 31, 2016 
 Industry Classification   Cost/Amortized
Cost
   Fair Value   %1   Cost/Amortized
Cost
   Fair Value   %1 
 Aerospace and Defense   $8,374,160   $8,274,335    2%  $8,394,633   $8,450,106    2%
 Asset Management Company2   54,691,230    36,942,000    10    55,341,230    40,198,000    11 
 Automotive    7,801,993    7,769,075    2    6,322,551    6,196,154    2 
 Banking, Finance, Insurance & Real Estate    5,592,918    5,555,171    2    6,805,514    6,782,010    2 
 Beverage, Food and Tobacco    15,018,374    14,526,304    4    15,198,830    14,703,372    4 
 Capital Equipment    9,665,714    8,943,739    3    6,185,129    5,575,048    2 
 Chemicals, Plastics and Rubber    6,406,392    6,429,950    2    6,421,909    6,444,073    2 
 CLO Fund Securities    76,994,975    52,999,028    15    76,851,317    54,174,350    15 
 Construction & Building    5,891,717    5,940,196    2    5,919,158    5,929,606    2 
 Consumer goods: Durable    10,970,920    8,996,058    2    12,319,905    10,118,736    3 
 Consumer goods: Non-durable    14,247,238    14,148,705    4    14,766,390    14,452,096    4 
 Ecological    -    -    -    1,741,292    1,760,783    - 
 Energy: Electricity    3,895,827    3,928,014    1    3,904,453    3,937,247    1 
 Energy: Oil & Gas    14,658,057    10,181,138    3    14,493,835    8,805,761    2 
 Environmental Industries    13,924,571    13,589,885    4    12,279,924    12,185,239    3 
 Forest Products & Paper    4,188,710    4,209,862    1    4,192,889    4,192,907    1 
 Healthcare & Pharmaceuticals    57,616,979    53,624,475    15    58,769,668    53,594,534    15 
 High Tech Industries    10,963,154    11,019,979    3    9,854,093    9,936,109    3 
 Hotel, Gaming & Leisure    2,390,110    1,991,000    1    400,000    1,000    - 
 Media: Advertising, Printing & Publishing    11,441,315    11,207,306    3    11,712,682    11,453,447    3 
 Media: Broadcasting & Subscription    5,840,975    5,884,115    2    8,273,174    8,372,984    2 
 Retail    1,416,024    593,445    -    1,415,457    759,581    - 
 Services: Business    20,427,358    19,412,602    5    16,125,481    16,230,486    4 
 Services: Consumer    6,035,256    6,021,103    2    6,212,108    6,204,889    2 
 Telecommunications    6,017,657    5,986,937    2    12,809,799    12,767,823    3 
 Time Deposit and Money Market Accounts3   22,674,790    22,674,791    6    28,699,269    28,699,269    8 
 Transportation: Cargo    7,423,418    7,118,789    2    7,557,315    7,190,135    2 
 Transportation: Consumer    2,397,545    2,317,219    1    2,412,614    2,324,516    1 
 Utilities: Electric    5,415,216    4,891,092    1    5,420,438    5,031,043    1 
                               
 Total   $412,382,593   $355,176,313    100%  $420,801,057   $366,471,304    100%

 

 

1Calculated as a percentage of total portfolio at fair value.
2Represents the equity investment in the Asset Manager Affiliates.
3Includes restricted cash held under employee benefit plans.

 

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

 

At March 31, 2017 and December 31, 2016, the total amount of non-qualifying assets was approximately 17% of total assets, for both periods. The majority of non-qualifying assets were foreign investments which were approximately 15% and 14%, respectively, of the Company’s total assets (including the Company’s investments in CLO Funds, which are typically domiciled outside the U.S. and represented approximately 14% of its total assets for both periods).

 

The following tables detail the ten largest portfolio investments (at fair value) as of March 31, 2017 and December 31, 2016, respectively:

 

   March 31, 2017 
Investment  Cost/Amortized Cost   Fair Value   % of FMV 
Asset Manager Affiliates  $54,691,230   $36,942,000    10%
US Bank Money Market Account   22,660,522    22,660,522    6 
Katonah 2007-I CLO Ltd.   29,101,810    20,847,854    6 
Grupo HIMA San Pablo, Inc.   9,831,239    9,134,800    3 
Catamaran CLO 2016-1 Ltd.   10,478,346    8,365,500    2 
Tank Partners Holdings, LLC   11,985,697    7,821,575    2 
Roscoe Medical, Inc.   6,669,733    6,499,000    2 
GK Holdings, Inc. (aka Global Knowledge)   5,892,434    5,879,408    2 
Nielsen & Bainbridge, LLC   5,328,534    5,361,360    2 
Weiman Products, LLC   4,964,167    4,904,989    1 
                
Total  $161,603,712   $128,417,008    36%

 

   December 31, 2016 
Investment  Cost/Amortized Cost   Fair Value   % of FMV 
Asset Manager Affiliates  $55,341,230   $40,198,000    11%
US Bank Money Market Account   28,685,001    28,685,001    8 
Katonah 2007-I CLO Ltd.   28,022,646    20,453,099    6 
Grupo HIMA San Pablo, Inc.   9,828,619    9,113,125    2 
Catamaran CLO 2016-1 Ltd.   10,140,000    8,350,290    2 
Tank Partners Holdings, LLC   11,822,180    6,552,311    2 
Roscoe Medical, Inc.   6,666,733    6,499,000    2 
Weiman Products, LLC   5,462,647    5,321,809    1 
Nielsen & Bainbridge, LLC   5,326,136    5,199,447    1 
Catamaran CLO 2014-2 Ltd.   6,967,560    5,092,087    1 
                
Total  $168,262,752   $135,464,169    36%

 

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Excluding the Asset Manager Affiliates, CLO Fund securities and Money Market Accounts, the Company’s ten largest portfolio companies represented approximately 16% and 13% of the total fair value of the Company’s investments at March 31, 2017 and December 31, 2016, respectively.

 

Investments in CLO Fund Securities

 

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

 

In December 2016, the Company purchased $10.1 million of the par value of the Subordinated Notes of Catamaran 2016-1 CLO (“Catamaran 2016-1”) managed by Trimaran Advisors.

 

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

 

All CLO Funds managed by the Asset Manager Affiliates are currently making quarterly distributions to the Company with respect to its interests in the CLO Funds and are paying all senior and subordinate management fees to the Asset Manager Affiliates. In January 2017, the trustees of Trimaran CLO VII, Ltd. (Trimaran VII) received notice that the holders of a majority of the income notes issued by Trimaran VII had exercised their right of optional redemption. With the exception of Katonah III, Ltd. and Grant Grove CLO, Ltd. (both of which have been called), all third-party managed CLO Funds are making distributions to the Company.

 

Fair Value Measurements

 

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

 

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:

 

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

 

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

 

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

 

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

 

The following table summarizes the fair value of investments by the above ASC 820: Fair Value fair value hierarchy levels as of March 31, 2017 (unaudited) and December 31, 2016, respectively:

 

   As of March 31, 2017 (unaudited) 
   Level I   Level II   Level III   Total 
Money market accounts  $   $22,674,790   $   $22,674,790 
Debt securities       60,373,139    177,284,562    237,657,701 
CLO Fund securities           52,999,028    52,999,028 
Equity securities           4,902,794    4,902,794 
Asset Manager Affiliates           36,942,000    36,942,000 
                     
Total  $   $83,047,929   $272,128,384   $355,176,313 

 

   As of December 31, 2016 
   Level I   Level II   Level III   Total 
Money market accounts  $   $28,699,269   $   $28,699,269 
Debt securities       84,601,585    153,741,745    238,343,330 
CLO Fund securities           54,174,350    54,174,350 
Equity securities           5,056,355    5,056,355 
Asset Manager Affiliates           40,198,000    40,198,000 
                     
Total  $   $113,300,854   $253,170,450   $366,471,304 

 

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

 

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

 

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

 

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

 

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

 

  Three Months Ended March 31, 2017 (unaudited)
   Debt Securities   CLO Fund
Securities
   Equity
Securities
   Asset Manager
Affiliate
   Total 
Balance, December 31, 2016  $153,741,745   $54,174,350   $5,056,355   $40,198,000   $253,170,450 
Transfers out of Level III¹   (9,588,627)               (9,588,627)
Transfers into Level III²   35,280,388                35,280,388 
Net accretion of discount   87,591    143,658            231,249 
Purchases   3,125,048        1        3,125,049 
Sales / Paydowns / Return of Capital   (6,742,543)           (650,000)   (7,392,543)
Total realized gain included in earnings   34,806                34,806 
Total unrealized gain (loss) included in earnings   1,346,154    (1,318,980)   (153,562)   (2,606,000)   (2,732,388)
Balance, March 31, 2017  $177,284,562   $52,999,028   $4,902,794   $36,942,000   $272,128,384 
Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date  $1,360,306   $(1,318,980)  $(154,562)  $(2,606,000)  $(2,719,236)

 

¹Transfers out of Level III represent a transfer of $9,588,627 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were observable as of March 31, 2017  
   
²Transfers into Level III represent a transfer of $35,280,388 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were unobservable as of March 31,2017  

 

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  Year Ended December 31, 2016
   Debt Securities   CLO Fund
Securities
   Equity
Securities
   Asset Manager
Affiliate
   Total 
Balance, December 31, 2015  $183,400,465   $55,872,382   $9,103,003   $57,381,000   $305,756,850 
Transfers out of Level III¹   (14,855,471)               (14,855,471)
Transfers into Level III²   22,107,141        445,485        22,552,626 
Net accretion of discount   318,999    (2,192,069)           (1,873,070)
Purchases   33,641,315    10,140,000    180,161        43,961,476 
Sales/Paydowns/ Return of Capital   (66,559,349)   (4,200,000)   (4,743,682)   (1,250,000)   (76,753,031)
Total realized gain (loss) included in earnings   (366,924)   (10,111,560)   4,484,742        (5,993,742)
Total unrealized gain (loss) included in earnings   (3,944,431)   4,665,597    (4,413,354)   (15,933,000)   (19,625,188)
Balance, December 31, 2016  $153,741,745   $54,174,350   $5,056,355   $40,198,000   $253,170,450 
Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date  $(6,969,509)  $4,665,597   $(4,413,354)  $(15,933,000)  $(22,650,266)

 

¹Transfers out of Level III represent a transfer of $14,855,471 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were observable as of December 31, 2016.  
   
²Transfers into Level III represent a transfer of $22,107,141 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were unobservable as of December 31, 2016.  

 

As of March 31, 2017 and December 31, 2016, the Company’s Level II portfolio investments were valued by a third party pricing services for which the prices are not adjusted and for which inputs are observable or can be corroborated by observable market data for substantially the full character of the financial instrument, or by inputs that are derived principally from, or corroborated by, observable market information. The fair value of the Company’s Level II portfolio investments was $83,047,929 and $113,300,854 as of March 31, 2017 and December 31, 2016, respectively.

 

As of March 31, 2017, the Company’s Level III portfolio investments had the following valuation techniques and significant inputs:

 

Type   Fair Value Primary Valuation
Methodology
Unobservable Inputs Range of Inputs
(Weighted Average)
Debt Securities $ 8,908,912 Enterprise Value Average EBITDA Multiple 5.3x
$ 168,375,650 Income Approach Implied Discount Rate 5.7% – 22.6% (9.3)%
Equity Securities $ 4,895,794 Enterprise Value Average EBITDA Multiple/WAAC 4.3x/6.7% – 15.5x/14.2% (9.5x/11.4)%
$ 7,000 Options Value Qualitative Inputs1  
CLO Fund Securities $ 44,633,528 Discounted Cash Flow Discount Rate 9.6% – 13.0% (13.0)%
Probability of Default 2.0% – 2.5% (2.0)%
Loss Severity 25.0% – 25.9% (25.9)%
Recovery Rate 74.1% – 75% (74.1)%
Prepayment Rate 25.0% – 29.1% (25.1)%
$ 8,365,500 Market Approach 3rd Party Quote 82.5% (82. 5)%
Asset Manager Affiliate $ 36,942,000 Discounted Cash Flow Discount Rate 2.5% – 13.0% (7.1)%
Total Level III Investments $ 272,128,384      

 


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.

 

As of December 31, 2016, the Company’s Level III portfolio investments had the following valuation techniques and significant inputs:

 

 

Type Fair Value Primary Valuation
Methodology
Unobservable Inputs Range of Inputs
(Weighted Average)
Debt Securities $ 7,639,648 Enterprise Value Average EBITDA Multiple 5.3x
$ 146,102,097 Income Approach Implied Discount Rate 5.6% – 21.5% (9.15)%
Equity Securities $ 5,050,355 Enterprise Value Average EBITDA Multiple/WAAC

4.8x/7.4% – 14.1x/13.9% (9.3x/12.0)%

$ 6,000 Options Value Qualitative Inputs1  
CLO Fund Securities $ 45,824,060 Discounted Cash Flow Discount Rate 11.8% – 13.0% (13.0)%
Probability of Default 2.0% – 2.5% (2.0)%
Loss Severity 25.0% – 25.9% (25.9)%
Recovery Rate 74.1% – 75% (74.2)%
Prepayment Rate 25.0% – 29.1% (25.1)%
$ 8,350,290 Market Approach 3rd Party Quote 82.35% (82.35)%
Asset Manager Affiliate $ 40,198,000 Discounted Cash Flow Discount Rate 2.5% – 13.0% (7.6)%
Total Level III Investments $ 253,170,450      

 


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

 

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

 

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

 

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

 

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

 

5. ASSET MANAGER AFFILIATES

 

Wholly-Owned Asset Managers

 

The Asset Manager Affiliates are wholly-owned portfolio companies. The Asset Manager Affiliates manage CLO Funds primarily for third party investors that invest in broadly syndicated loans, high yield bonds and other credit instruments issued by corporations. At March 31, 2017 and December 31, 2016, the Asset Manager Affiliates had approximately $2.8 billion and $3.0 billion of par value of assets under management, respectively, and the Company’s 100% equity interest in the Asset Manager Affiliates had a fair value of approximately $36.9 million and $40.2 million, respectively.

 

As a manager of the CLO Funds, the Asset Manager Affiliates receive contractual and recurring management fees from the CLO Funds for their management and advisory services. The annual fees which the Asset Manager Affiliates receive are generally based on a fixed percentage of assets under management (at par value and not subject to changes in market value), and the Asset Manager Affiliates generate net income equal to the amount by which their fee income exceeds their operating expenses, including compensation of their employees and income taxes. The management fees the Asset Manager Affiliates receive have three components - a senior management fee, a subordinated management fee and an incentive fee. During the first quarter of 2017, the Asset Manager Affiliates recognized $2.9 million of incentive fee revenue from Trimaran VII, which was called in January 2017. Currently, all CLO Funds managed by the Asset Manager Affiliates are paying both their senior and subordinated management fees on a current basis.

 

For the three months ended March 31, 2017 and 2016, the Asset Manager Affiliates declared cash distributions of $650,000 and $1.1 million to the Company, respectively. Any distributions from the Asset Manager Affiliates out of their estimated tax-basis earnings and profits are recorded as “Dividends from Asset Manager Affiliates” on the Company’s statement of operations. The Company recognized $550,000 of Dividends from Asset Manager Affiliates in the Statement of Operations in the first quarter of 2016. The difference between cash distributions received and the tax-basis earnings and profits of the distributing affiliate, are recorded as an adjustment to the cost basis in the Asset Manager Affiliate (i.e., tax-basis return of capital). For the quarters ended March 31, 2017 and 2016 the difference of $650,000 and $500,000, 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). 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).

 

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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.

 

On February 18, 2015, the FASB issued Accounting Standards Update 2015-2 (“ASU 2015-2”), which updated consolidation standards under ASC Topic 810, “Consolidation”. Under this update, a new consolidation analysis is required for VIEs and will limit the circumstances in which investment managers and similar entities are required to consolidate the entities that they manage. The FASB decided to eliminate some of the criteria under which management fees are considered a variable interest and limit the circumstances in which variable interests in a VIE held by related parties of a reporting enterprise require the reporting enterprise to consolidate the VIE. The guidance was effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015, early adoption was permitted. The Asset Manager Affiliates adopted ASU 2015-2 in 2016 which resulted in the deconsolidation of the CLO Funds. In accordance with Regulation S-X, additional financial information with respect to the Asset Manager Affiliates and one of the CLO Funds in which the Company has an investment, Katonah 2007-I CLO, is required to be included in the Company’s SEC Filings. This additional financial information regarding the Asset Manager Affiliates and Katonah 2007-1 CLO does not directly impact the financial position, results of operations, or cash flows of the Company.

 

Asset Manager Affiliates

Summarized Balance Sheet (unaudited)

 

   As of   As of 
   March 31, 2017   December 31, 2016 
Cash  $2,467,358   $3,425,709 
Intangible Assets   22,830,000    23,157,541 
Other Assets   4,717,333    5,024,174 
Total Assets  $30,014,691   $31,607,424 
           
Total Liabilities  $4,407,706   $6,619,619 
Total Equity   25,606,985    24,987,805 
Total Liabilities and Equity  $30,014,691   $31,607,424 

 

Asset Manager Affiliates

Summarized Statements of Operations Information (unaudited)

 

   For the three months ended 
   March 31, 
   2017   2016 
Fee Revenue  $5,884,196   $3,329,627 
Interest Income   2,175    153,832 
Total Income   5,886,371    3,483,459 
Operating Expenses   2,761,453    2,728,445 
Amortization of Intangibles   327,541    327,541 
Interest Expense   188,851    489,835 
Total Expenses   3,277,845    3,545,821 
Pre-Tax Income (Loss)   2,608,526    (62,362)
Income Tax Expense (Benefit)   1,339,344    (361,132)
Net Income  $1,269,182   $298,770 

 

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Katonah 2007-I CLO Ltd.

Summarized Balance Sheet Information (unaudited)

 

 

   As of   As of 
   March 31, 2017   December 31, 2016 
Total Investments at Fair Value   $129,245,053   $176,684,976 
Cash    48,913,885    34,982,770 
Total Assets    178,527,776    212,160,163 
CLO Debt at Fair Value    176,055,774    208,812,164 
Total Liabilities    177,418,430    210,463,954 
Total Net Assets    1,109,346    1,696,209 
           
           

 

Katonah 2007-I CLO Ltd.

Summarized Statements of Operations Information (unaudited)

 

 

   For the three months ended 
   March 31, 
   2017   2016 
Interest Income from Investments  $1,778,115   $2,539,074 
Total Income   1,843,333    2,565,008 
Interest Expense   1,526,307    2,122,315 
Total Expenses   1,802,182    2,426,062 
Net Realized and Unrealized (Losses) Gains   (628,014)   3,557,707 
(Decrease) Increase in net assets resulting from operations   (586,863)   3,696,652 
           

 

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

 

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

 

Goodwill amortization for tax purposes was created upon the purchase of 100% of the equity interests in Katonah Debt Advisors prior to the Company’s IPO in exch