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 June 30, 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

Incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

295 Madison Avenue, 6th Floor

New York, New York 10017

(Address of principal executive offices)

 

(212) 455-8300

(Registrant's telephone number, including area code)

 

 

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “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 o No x

 

The number of outstanding shares of common stock of the registrant as of August 1, 2017 was 37,185,014.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
Part I. Financial Information
     
Item 1. Consolidated Financial Statements 1
     
  Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016 1
     
  Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2017 and 2016 2
     
  Consolidated Statements of Changes in Net Assets (unaudited) for the six months ended June 30, 2017 and 2016 3
     
  Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2017 and 2016 4
     
  Consolidated Schedules of Investments as of June 30, 2017 (unaudited) and December 31, 2016 5
     
  Consolidated Financial Highlights (unaudited) for the six months ended June 30, 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 57
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 75
     
Item 4. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 77
     
Item 5. Controls and Procedures 77
     
Part II. Other Information
     
Item 1. Legal Proceedings 78
     
Item 1A. Risk Factors 78
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 78
     
Item 3. Defaults Upon Senior Securities 78
     
Item 4. Mine Safety Disclosures 78
     
Item 5. Other Information 78
     
Item 6. Exhibits 78
     
Signatures 79

 

 

 

 

KCAP FINANCIAL, INC.

 CONSOLIDATED BALANCE SHEETS

 

   As of
June 30, 2017
   As of
December 31, 2016
 
   (unaudited)     
ASSETS          
Investments at fair value:          
Money market accounts (cost: 2017 - $17,307,477; 2016 - $28,699,269)  $17,307,477   $28,699,269 
Debt securities (cost: 2017 - $252,373,033; 2016 - $249,520,234)   243,609,699    238,343,330 
CLO Fund securities managed by affiliates (cost: 2017 - $71,771,166; 2016 - $71,734,809)   49,839,327    51,908,784 
CLO Fund securities managed by non-affiliates (cost: 2017 - $5,058,410; 2016 - $5,116,508)   1,913,571    2,265,566 
Equity securities (cost: 2017 - $10,389,007; 2016 - $10,389,007)   4,636,545    5,056,355 
Asset Manager Affiliates (cost: 2017 - $54,041,230; 2016 - $55,341,230)   37,457,000    40,198,000 
Total Investments at Fair Value (cost: 2017 - $410,940,323; 2016 - $420,801,057)   354,763,619    366,471,304 
Cash   2,395,844    1,307,257 
Restricted cash   4,626,678    8,528,298 
Interest receivable   1,251,137    1,033,917 
Receivable for open trades       2,950,658 
Due from affiliates   521,250    612,854 
Other assets   336,764    467,695 
           
Total Assets  $363,895,292   $381,371,983 
           
LIABILITIES          
Notes issued by KCAP Senior Funding I, LLC (net of discount and offering costs of: 2017 - $1,969,566 and $2,118,764, respectively; 2016 - $2,286,425 and $2,459,156, respectively)  $143,261,669   $142,604,419 
7.375% Notes Due 2019 (net of offering costs of: 2017 - $351,541; 2016 - $550,774)   26,648,459    32,980,151 
Payable for open trades   1,960,000    7,884,943 
Accounts payable and accrued expenses   1,413,813    2,047,405 
Accrued interest payable   998,388    930,086 
Due to affiliates   -    54 
           
Total Liabilities   174,282,329    186,447,058 
           
COMMITMENTS AND CONTINGENCIES (Note 8)          
           
STOCKHOLDERS' EQUITY          
Common stock, par value $0.01 per share, 100,000,000 common shares authorized;
37,335,051 issued, and 37,167,622 outstanding at June 30, 2017, and 37,282,296 issued, and 37,178,294 outstanding at December 31, 2016
   371,672    371,783 
Capital in excess of par value   354,052,507    353,404,155 
Excess distribution of net investment income   (17,670,890)   (14,630,319)
Accumulated net realized losses   (89,564,576)   (88,491,896)
Net unrealized depreciation on investments   (57,575,750)   (55,728,798)
           
Total Stockholders' Equity   189,612,963    194,924,925 
           
Total Liabilities and Stockholders' Equity  $363,895,292   $381,371,983 
           
NET ASSET VALUE PER COMMON SHARE  $5.10   $5.24 

 

See accompanying notes to consolidated financial statements.

 

 1 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2017   2016   2017   2016 
                 
Investment Income:                    
Interest from investments in debt securities  $4,769,853   $5,214,331   $9,325,031   $10,919,908 
Interest from cash and time deposits   14,300    6,981    30,206    14,353 
Investment income on CLO Fund Securities managed by affiliates   2,710,680    3,235,756    5,685,238    6,287,572 
Investment income on CLO Fund Securities managed by non-affiliates   111,419    155,859    229,530    308,176 
Dividends from Asset Manager Affiliates       850,000        1,400,000 
Capital structuring service fees   53,480    116,473    164,124    159,711 
                     
Total investment income   7,659,732    9,579,400    15,434,129    19,089,720 
                     
Expenses:                    
Interest and amortization of debt issuance costs   2,237,317    2,264,590    4,418,289    4,838,030 
Compensation   1,175,294    1,046,886    2,401,030    2,013,473 
Professional fees   1,193,407    562,176    1,742,688    1,214,115 
Insurance   80,644    106,830    175,680    213,053 
Administrative and other   364,301    490,898    869,534    938,260 
                     
Total expenses   5,050,963    4,471,380    9,607,221    9,216,931 
                     
Net Investment Income   2,608,769    5,108,020    5,826,908    9,872,789 
Realized And Unrealized Gains (Losses) On Investments:                    
Net realized losses from investment transactions   (1,009,342)   (2,882,152)   (965,405)   (10,694,039)
Net change in unrealized appreciation (depreciation) on:                    
Debt securities   1,211,554    3,814,803    2,413,571    2,082,813 
Equity securities   (266,249)   (1,696,700)   (419,811)   (317,286)
CLO Fund securities managed by affiliates   (852,828)   3,613,455    (2,105,814)   6,883,996 
CLO Fund securities managed by non-affiliates   (227,903)   181,248    (293,897)   703 
Asset Manager Affiliates investments   1,165,000    (5,060,000)   (1,441,000)   (11,593,000)
                     
Total net change in unrealized appreciation (depreciation)   1,029,574    852,806    (1,846,951)   (2,942,774)
                     
Net realized and unrealized appreciation (depreciation) on investments   20,232    (2,029,346)   (2,812,356)   (13,636,813)
                     
Realized losses on extinguishments of debt   (107,276)   (71,190)   (107,276)   (71,190)
Net Increase (Decrease) In Stockholders’ Equity Resulting From Operations  $2,521,725   $3,007,484   $2,907,276   $(3,835,214)
                     
Net Increase (Decrease) In Stockholders' Equity Resulting from Operations per Common Share:                    
Basic:  $0.07   $0.08   $0.08   $(0.10)
Diluted:  $0.07   $0.08   $0.08   $(0.10)
Net Investment Income Per Common Share:                    
Basic:  $0.07   $0.14   $0.16   $0.27 
Diluted:  $0.07   $0.14   $0.16   $0.27 
                     
Weighted Average Shares of Common Stock Outstanding—Basic   37,206,487    37,163,534    37,204,751    37,136,634 
Weighted Average Shares of Common Stock Outstanding—Diluted   37,206,487    37,163,534    37,204,751    37,136,634 

 

See accompanying notes to consolidated financial statements.

 

 2 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

 

  

Six Months Ended
June 30,

 
   2017   2016 
         
Operations:          
Net investment income  $5,826,908   $9,872,789 
Net realized losses from investment transactions   (965,405)   (10,694,039)
Realized losses from extinguishments of debt   (107,276)   (71,190)
Net change in unrealized depreciation on investments   (1,846,951)   (2,942,774)
           
Net increase (decrease) in net assets resulting from operations   2,907,276    (3,835,214)
           
Stockholder distributions:   (8,867,480)   (11,002,895)
           
Capital share transactions:          
(Repurchase) issuance of common stock for:          
Common stock withheld for payroll taxes upon vesting of restricted stock   (223,849)   (246,695)
Dividend reinvestment plan   224,479    448,552 
Stock based compensation   647,612    760,517 
           
Net increase in net assets resulting from capital transactions   648,242    962,374 
           
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)  $189,612,963   $202,224,735 
           
Net asset value per common share  $5.10   $5.45 
Common shares outstanding at end of period   37,167,622    37,136,898 

 

See accompanying notes to consolidated financial statements.

 

 3 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

  

Six Months Ended

June 30,

 
   2017   2016 
         
OPERATING ACTIVITIES:          
Net increase (decrease) in stockholder's equity resulting from operations  $2,907,276   $(3,835,214)
Adjustments to reconcile net (decrease) in stockholder’s equity resulting from operations to net cash provided by operating activities:          
Net realized losses on investment transactions   965,405    10,694,039 
Net change in unrealized depreciation on investments   1,846,951    2,942,774 
Purchases of investments   (60,293,176)   (21,762,184)
Proceeds from sales and redemptions of investments   69,846,940    43,478,564 
Net accretion of amortization on investments   (234,621)   2,054,863 
Amortization of original issue discount on indebtedness   316,858    308,513 
Amortization of debt issuance costs   432,349    432,718 
Realized losses on extinguishments of debt   107,276    71,190 
Payment-in-kind interest income   (423,916)   (667,679)
Stock-based compensation   647,612    760,770 
Changes in operating assets and liabilities:          
Decrease (increase) in receivable for open trades   2,950,658    (2,390,625)
(Decrease) increase in payable for open trades   (5,924,943)   3,008,395 
(Increase) decrease in interest receivable   (217,220)   306,476 
Decrease in other assets   130,931    99,838 
Decrease in due from affiliates   91,604    647,282 
Decrease in due to affiliates   (54)   (554,243)
Decrease in accounts payable   (633,591)   (654,022)
Increase (decrease) in accrued interest payable   68,302    (322,012)
           
Net cash provided by operating activities   12,584,641    34,619,443 
           
FINANCING ACTIVITIES:          
Issuance (forfeitures) of restricted shares   60    (254)
Distributions to stockholders   (8,642,960)   (10,554,343)
Repayment/repurchase of Convertible Notes       (19,299,000)
Repurchase of 7.375% Notes Due 2019   (6,530,925)   (2,399,650)
Common Stock withheld for payroll taxes upon vesting of restricted stock   (223,849)   (246,695)
           
Net cash used in financing activities   (15,397,674)   (32,499,942)
           
CHANGE IN CASH AND RESTRICTED CASH   (2,813,033)   2,119,501 
CASH AND RESTRICTED CASH, BEGINNING OF PERIOD   9,835,555    7,138,272 
           
CASH AND RESTRICTED CASH, END OF PERIOD  $7,022,522   $9,257,773 
           
Supplemental Information:          
Interest paid during the period  $3,600,780   $4,394,255 
Dividends paid during the period under the dividend reinvestment plan  $224,479   $448,552 

 

See accompanying notes to consolidated financial statements.

 

 4 

 

 

KCAP FINANCIAL, INC.

 

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of June 30, 2017

(unaudited)

 

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) 6.0% Cash, 1.0% Libor Floor, Due 2/22   $ 2,955,000     $ 2,933,791     $ 2,931,656  
                             
4L Technologies Inc. (fka Clover Holdings, Inc.) (8), (9)
Consumer goods: Non-durable
  Senior Secured Loan — Term Loan 5.7% Cash, 1.0% Libor Floor, Due 5/20     2,644,279       2,631,687       2,562,840  
                             
Advanced Lighting Technologies, Inc, (5), (9)
Consumer goods: Durable
  First Lien Bond — 12.500% - 6/2019 - 00753CAG7 5.3% Cash, 7.3% PIK, Due 6/19     3,157,000       3,054,337       1,058,394  
                             
Advantage Sales & Marketing Inc. (8)
Services: Business
  Junior Secured Loan — Term Loan (Second Lien) 7.8% Cash, 1.0% Libor Floor, Due 7/22     1,000,000       1,001,597       998,100  
                             
Alere Inc. (fka IM US Holdings, LLC) (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — B Term Loan 4.5% Cash, 1.0% Libor Floor, Due 6/22     3,014,895       3,009,604       3,025,674  
                             
American Seafoods Group LLC (8), (9)
Beverage, Food and Tobacco
  Senior Secured Loan — Term Loan (First Lien) 6.3% Cash, 1.0% Libor Floor, Due 8/21     3,683,704       3,670,975       3,682,230  
                             
AMS Finco S.A.R.L. (aka Alexander Mann Solutions Corp.) (3), (9)
Services: Business
  Senior Secured Loan — Initial Term Loan 6.7% Cash, 1.0% Libor Floor, Due 5/24     3,000,000       2,970,353       2,970,000  
                             
Anaren, Inc. (8), (9)
Aerospace and Defense
  Senior Secured Loan — Term Loan (First Lien) 5.8% Cash, 1.0% Libor Floor, Due 2/21     1,857,288       1,847,604       1,857,845  
                             
AP Gaming I, LLC (aka AGS LLC) (8), (9)
Hotel, Gaming & Leisure
  Senior Secured Loan — Term B Loan (First Lien) 6.6% Cash, 1.0% Libor Floor, Due 2/24     2,000,000       1,995,045       1,995,000  
                             
Apco Holdings, Inc. (8), (9)
Services: Business
  Senior Secured Loan — Initial Term Loan 7.2% Cash, 1.0% Libor Floor, Due 1/22     3,767,162       3,680,684       3,763,395  

 

See accompanying notes to financial statements.

 

 5 

 

 

Portfolio Company / Principal
Business
  Investment
Interest Rate (1) / Maturity
  Principal     Amortized
Cost
    Fair Value (2)  
API Technologies Corp.(8), (9)
High Tech Industries
  Senior Secured Loan — Initial Term Loan 7.8% Cash, 1.0% Libor Floor, Due 4/22   $ 3,465,000     $ 3,409,204     $ 3,463,268  
                             
Aristotle Corporation, The  Consumer goods: (8), (9)
Non-durable
  Senior Secured Loan — Term Loan 5.9% Cash, 1.0% Libor Floor, Due 6/21     3,647,252       3,635,050       3,617,709  
                             
Asurion, LLC (fka Asurion Corporation) (8), (9)
Banking, Finance, Insurance & Real Estate
  Senior Secured Loan — Replacement B-5 Term Loan 4.2% Cash, Due 11/23     184,064       184,521       185,329  
                             
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       992,787       990,000  
                             
Avalign Technologies, Inc. (8), (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Initial Term Loan (First Lien) 5.7% Cash, 1.0% Libor Floor, Due 7/21     2,880,443       2,870,725       2,873,242  
                             
BarBri, Inc. (Gemini Holdings, Inc.) (8), (9)
Services: Consumer
  Senior Secured Loan — Term Loan 4.8% Cash, 1.0% Libor Floor, Due 7/19     2,342,043       2,338,028       2,324,243  
                             
BBB Industries US Holdings, Inc. (8), (9)
Automotive
  Senior Secured Loan — Initial Term Loan (First Lien) 6.2% Cash, 1.0% Libor Floor, Due 11/21     2,940,000       2,903,486       2,853,270  
                             
Bestop, Inc.(8), (9)
Automotive
  Senior Secured Loan — Delayed Draw Term Loan 6.5% Cash, 1.0% Libor Floor, Due 7/21     92,222       90,551       92,204  
                             
Bestop, Inc. (8), (9)
Automotive
  Senior Secured Loan — First Amendment Term Loan 6.5% Cash, 1.0% Libor Floor, Due 7/21     480,699       476,661       480,602  
                             
Bestop, Inc. (8), (9)
Automotive
  Senior Secured Loan — Term Loan 6.5% Cash, 1.0% Libor Floor, Due 7/21     1,416,029       1,401,591       1,415,745  
                             
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       1,504,434       1,505,250  
                             
CCS Intermediate Holdings, LLC (8), (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Initial Term Loan (First Lien) 5.3% Cash, 1.0% Libor Floor, Due 7/21     2,917,500       2,908,966       2,596,575  

 

See accompanying notes to financial statements.

 

 6 

 

  

Portfolio Company / Principal
Business
  Investment
Interest Rate (1) / Maturity
  Principal     Amortized
Cost
    Fair Value (2)  
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   $ 3,722,408     $ 3,717,942     $ 3,526,981  
                             
Checkout Holding Corp. (fka Catalina Marketing) (8), (9)
Media: Advertising, Printing & Publishing
  Senior Secured Loan — Term B Loan (First Lien) 4.7% Cash, 1.0% Libor Floor, Due 4/21     955,000       952,421       801,603  
                             
CHS/Community Health Systems, Inc. (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Incremental 2021 Term H Loan 4.2% Cash, 1.0% Libor Floor, Due 1/21     2,408,639       2,389,862       2,406,880  
                             
Consolidated Communications, Inc. (9)
Telecommunications
  Senior Secured Loan — Initial Term Loan 4.2% Cash, 1.0% Libor Floor, Due 10/23     2,057,081       2,052,476       2,066,821  
                             
CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited) (8)
Beverage, Food and Tobacco
  Junior Secured Loan — Term Loan (Second Lien) 8.9% Cash, 1.0% Libor Floor, Due 7/21     3,000,000       3,010,083       2,475,000  
                             
CT Technologies Intermediate Holdings, Inc. (Smart Holdings Corp.) (aka HealthPort) (8), (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — New Term Loan Facility 5.5% Cash, 1.0% Libor Floor, Due 12/21     2,925,300       2,905,166       2,921,643  
                             
Deliver Buyer, Inc. (aka MHS Holdings, Inc.) (8), (9)
Transportation: Cargo
  Senior Secured Loan — Term Loan 6.2% Cash, 1.0% Libor Floor, Due 4/24     3,000,000       2,970,602       2,970,000  
                             
Drew Marine Group Inc. (8)
Transportation: Cargo
  Junior Secured Loan — Term Loan (Second Lien) 8.2% Cash, 1.0% Libor Floor, Due 5/21     2,500,000       2,496,747       2,500,000  
                             
Eastern Power, LLC (Eastern Covert Midco, LLC) (aka TPF II LC, LLC) (8), (9)
Utilities: Electric
  Senior Secured Loan — Term Loan 5.2% Cash, 1.0% Libor Floor, Due 10/23     2,779,775       2,797,648       2,771,435  
                             
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     1,340,897       1,326,284       1,321,320  
                             
Empower Payments Acquisition, Inc (8), (9)
Services: Business
  Senior Secured Loan — Term Loan 6.8% Cash, 1.0% Libor Floor, Due 11/23     2,985,000       2,930,103       2,971,269  
                             
EWT Holdings III Corp. (fka WTG Holdings III Corp.) (8), (9)
Environmental Industries
  Senior Secured Loan — Term Loan (First Lien) 5.0% Cash, 1.0% Libor Floor, Due 1/21     1,736,504       1,732,830       1,725,217  

 

See accompanying notes to financial statements.

 

 7 

 

 

Portfolio Company / Principal
Business
  Investment
Interest Rate (1)/ Maturity
  Principal     Amortized
Cost
    Fair Value (2)  
Exela Technologies, Inc.
Services: Business
  Senior Secured Loan — Term Loan B 8.5% Cash, 1.0% Libor Floor, Due 6/23   $ 2,000,000     $ 1,960,000     $ 1,960,000  
                             
FHC Health Systems, Inc. (8), (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Initial Term Loan 5.2% Cash, 1.0% Libor Floor, Due 12/21     3,819,232       3,794,555       3,697,017  
                             
First American Payment Systems, L.P. (8)
Banking, Finance, Insurance & Real Estate
  Junior Secured Loan — Term Loan (Second Lien) 11.6% Cash, 1.0% Libor Floor, Due 7/24     1,500,000       1,457,803       1,413,450  
                             
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     2,129,420       2,135,249       1,968,394  
                             
GI Advo Opco, LLC (8)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan 5.8% Cash, 1.0% Libor Floor, Due 11/21     237,536       235,788       237,393  
                             
GI Advo Opco, LLC (8), (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan 5.8% Cash, 1.0% Libor Floor, Due 11/21     2,612,894       2,593,680       2,611,326  
                             
GK Holdings, Inc. (aka Global Knowledge) (8)
Services: Business
  Junior Secured Loan — Initial Term Loan (Second Lien) 11.5% Cash, 1.0% Libor Floor, Due 1/22     1,500,000       1,480,346       1,474,200  
                             
GK Holdings, Inc. (aka Global Knowledge) (8), (9)
Services: Business
  Senior Secured Loan — Initial Term Loan (First Lien) 7.3% Cash, 1.0% Libor Floor, Due 1/21     4,427,296       4,403,540       4,420,212  
                             
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       3,962,914       3,900,400  
                             
Gold Standard Baking, Inc. (8), (9)
Beverage, Food and Tobacco
  Senior Secured Loan — Term Loan 5.8% Cash, 1.0% Libor Floor, Due 4/21     2,450,000       2,442,124       2,433,830  
                             
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     2,870,000       2,863,269       2,755,200  
                             
Grupo HIMA San Pablo, Inc. (8)
Healthcare & Pharmaceuticals
  Junior Secured Loan — Term Loan (Second Lien) 13.8% Cash, Due 7/18     7,000,000       6,968,193       6,370,000  

 

See accompanying notes to financial statements.

 

 8 

 

 

Portfolio Company / Principal
Business
  Investment
Interest Rate (1)/ Maturity
  Principal     Amortized
Cost
    Fair Value (2)  
Harland Clarke Holdings Corp. (fka Clarke American Corp.) (8), (9)
Media: Advertising, Printing & Publishing
  Senior Secured Loan — Tranche B-5 Term Loan 7.3% Cash, 1.0% Libor Floor, Due 12/21   $ 1,284,596     $ 1,270,242     $ 1,293,428  
                             
Harland Clarke Holdings Corp. (fka Clarke American Corp.) (8), (9)
Media: Advertising, Printing & Publishing
  Senior Secured Loan — Tranche B-6 Term Loan 6.8% Cash, 1.0% Libor Floor, Due 2/22     3,992,492       3,960,234       4,006,466  
                             
Highland Acquisition Holdings, LLC (aka HealthSun Health Plans, Inc.) (8), (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Initial Term Loan 6.7% Cash, 1.0% Libor Floor, Due 11/22     1,950,000       1,863,405       1,950,780  
                             
Highline Aftermarket Acquisition, LLC (8), (9)
Automotive
  Senior Secured Loan — Term Loan 5.6% Cash, 1.0% Libor Floor, Due 3/24     1,496,250       1,489,048       1,496,998  
                             
Hoffmaster Group, Inc. (8)
Forest Products & Paper
  Junior Secured Loan — Initial Term Loan (Second Lien) 10.8% Cash, 1.0% Libor Floor, Due 11/24     1,600,000       1,555,525       1,600,800  
                             
Hoffmaster Group, Inc. (8), (9)
Forest Products & Paper
  Senior Secured Loan — Initial Term Loan (First Lien) 5.8% Cash, 1.0% Libor Floor, Due 11/23     2,653,333       2,629,028       2,654,660  
                             
Industrial Services Acquisition, LLC (aka Evergreen / NAIC) (8), (9)
Environmental Industries
  Senior Secured Loan — Term Loan 6.3% Cash, 1.0% Libor Floor, Due 6/22     2,804,566       2,781,233       2,804,566  
                             
Ivanti Software, Inc. (fka LANDesk Group, Inc.) (8)
High Tech Industries
  Junior Secured Loan — Loan (Second Lien) 10.2% Cash, 1.0% Libor Floor, Due 1/25     3,228,619       3,228,619       3,246,376  
                             
Kellermeyer Bergensons Services, LLC  (8), (9)
Services: Business
  Senior Secured Loan — Initial Term Loan (First Lien) 6.2% Cash, 1.0% Libor Floor, Due 10/21     3,949,877       3,928,575       3,945,927  
                             
Key Safety Systems, Inc. (8), (9)
Automotive
  Senior Secured Loan — Initial Term Loan 5.7% Cash, 1.0% Libor Floor, Due 8/21     1,394,077       1,389,933       1,402,134  
                             
KNB Holdings Corporation (8), (9)
Consumer goods: Durable
  Senior Secured Loan — Closing Date Term Loan (First Lien) 6.9% Cash, 1.0% Libor Floor, Due 4/24     5,000,000       4,902,390       4,900,000  
                             
MB Aerospace ACP Holdings II Corp. (8), (9)
Aerospace and Defense
  Senior Secured Loan — Initial Term Loan 6.8% Cash, 1.0% Libor Floor, Due 12/22     1,335,720       1,325,644       1,336,121  

 

See accompanying notes to financial statements.

  

 9 

 

 

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 6.5% Cash, 1.0% Libor Floor, Due 2/23   $ 1,975,000     $ 1,958,955     $ 1,975,000  
                             
National Home Health Care Corp. (8)
Healthcare & Pharmaceuticals
  Junior Secured Loan — Term Loan (Second Lien) 10.1% Cash, 1.0% Libor Floor, Due 12/22     1,500,728       1,480,136       1,462,909  
                             
National Home Health Care Corp. (8), (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan (First Lien) 5.7% Cash, 1.0% Libor Floor, Due 12/21     2,962,500       2,936,100       2,941,763  
                             
Nellson Nutraceutical, LLC (8), (9)
Beverage, Food and Tobacco
  Senior Secured Loan — Term A-1 Loan (First Lien) 6.3% Cash, 1.0% Libor Floor, Due 12/21     2,338,728       2,325,390       2,314,639  
                             
Nellson Nutraceutical, LLC (8), (9)
Beverage, Food and Tobacco
  Senior Secured Loan — Term A-2 Loan (First Lien) 6.3% Cash, 1.0% Libor Floor, Due 12/21     2,061,292       2,049,022       2,040,061  
                             
NM Z Parent Inc. (aka Zep, Inc.) (8), (9)
Chemicals, Plastics and Rubber
  Senior Secured Loan — 2016 Term Loan  5.2% Cash, 1.0% Libor Floor, Due 6/22     3,430,000       3,440,829       3,430,686  
                             
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     1,915,925       1,880,780       1,915,935  
                             
Onex Carestream Finance LP (8)
Healthcare & Pharmaceuticals
  Junior Secured Loan — Term Loan (Second Lien) 9.8% Cash, 1.0% Libor Floor, Due 12/19     1,932,311       1,932,311       1,908,930  
                             
Onex Carestream Finance LP (8), (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan (First Lien 2013) 5.3% Cash, 1.0% Libor Floor, Due 6/19     1,697,100       1,699,610       1,690,032  
                             
Otter Products, LLC (OtterBox Holdings, Inc.) (8), (9)
Consumer goods: Durable
  Senior Secured Loan — Term B Loan 6.0% Cash, 1.0% Libor Floor, Due 6/20     2,390,632       2,380,281       2,333,496  
                             
PGX Holdings, Inc. (8), (9)
Services: Consumer
  Senior Secured Loan — Initial Term Loan (First Lien) 6.5% Cash, 1.0% Libor Floor, Due 9/20     3,570,714       3,551,324       3,558,574  

 

See accompanying notes to financial statements.

 

 10 

 

 

Portfolio Company / Principal
Business
  Investment
Interest Rate (1)/ Maturity
  Principal     Amortized
Cost
    Fair Value (2)  
Playpower, Inc. (8), (9)
Construction & Building
  Senior Secured Loan — Initial Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 6/21   $ 1,960,000     $ 1,950,229     $ 1,960,784  
                             
Power Products, LLC (8), (9)
Capital Equipment
  Senior Secured Loan — Initial Term Loan (First Lien) 5.7% Cash, 1.0% Libor Floor, Due 12/22     1,995,000       1,985,691       2,001,234  
                             
PrimeLine Utility Services LLC (fka FR Utility Services LLC) (8), (9)
Energy: Electricity
  Senior Secured Loan — Initial Term Loan 6.6% Cash, 1.0% Libor Floor, Due 11/22     3,915,646       3,887,209       3,914,471  
                             
Priority Payment Systems Holdings LLC (8), (9)
Banking, Finance, Insurance & Real Estate
  Senior Secured Loan — Initial Term Loan 7.2% Cash, 1.0% Libor Floor, Due 1/23     3,980,000       3,943,418       3,962,090  
                             
PSC Industrial Holdings Corp. (8), (9)
Environmental Industries
  Senior Secured Loan — Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 12/20     2,959,125       2,941,094       2,944,921  
                             
Q Holding Company (fka Lexington Precision Corporation) (8), (9)
Chemicals, Plastics and Rubber
  Senior Secured Loan — Term B Loan 6.3% Cash, 1.0% Libor Floor, Due 12/21     2,977,099       2,950,185       2,936,313  
                             
Quad-C JH Holdings Inc. (aka Joerns Healthcare) (8), (9)
Healthcare & Pharmaceuticals
  Senior Secured Loan — Term Loan A 7.7% Cash, 1.0% Libor Floor, Due 5/20     3,562,658       3,549,803       3,402,338  
                             
Ravn Air Group, Inc. (8), (9)
Transportation: Consumer
  Senior Secured Loan — Initial Term Loan 5.8% Cash, 1.0% Libor Floor, Due 7/21     2,280,816       2,273,040       2,197,339  
                             
Roscoe Medical, Inc. (8)
Healthcare & Pharmaceuticals
  Junior Secured Loan — Term Loan (Second Lien) 11.3% Cash, Due 9/19     6,700,000       6,672,767       6,432,000  
                             
Salient CRGT Inc. (8), (9)
High Tech Industries
  Senior Secured Loan — Initial Term Loan 7.0% Cash, 1.0% Libor Floor, Due 2/22     2,981,250       2,925,550       2,935,935  
                             
Sandy Creek Energy Associates, L.P. (8), (9)
Utilities: Electric
  Senior Secured Loan — Term Loan  5.3% Cash, 1.0% Libor Floor, Due 11/20     2,599,769       2,593,507       1,980,712  

 

See accompanying notes to financial statements.

 

 11 

 

 

Portfolio Company / Principal
Business
  Investment
Interest Rate (1) / Maturity
  Principal     Amortized
Cost
    Fair Value (2)  
Stafford Logistics, Inc.(dba Custom Ecology, Inc.) (8), (9)
Environmental Industries
  Senior Secured Loan — Term Loan 7.8% Cash, 1.0% Libor Floor, Due 8/21   $ 2,709,639     $ 2,695,850     $ 2,404,805  
                             
Tank Partners Holdings, LLC (8)(14)
Energy: Oil & Gas
  Senior Secured Loan — Loan 10.25% Cash, 4.0% PIK, 3.0% Libor Floor, Due 8/19     11,341,238       11,034,716       7,971,756  
                             
Terra Millennium Corporation (8), (9)
Construction & Building
  Senior Secured Loan — First Out Term Loan 7.5% Cash, 1.0% Libor Floor, Due 10/22     3,950,000       3,914,044       3,988,710  
                             
Time Manufacturing Acquisition, LLC (8), (9)
Capital Equipment
  Senior Secured Loan — Term Loan 6.3% Cash, 1.0% Libor Floor, Due 2/23     1,496,250       1,489,252       1,496,100  
                             
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     3,970,000       3,934,438       3,969,206  
                             
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       992,911       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 5.5% Cash, 1.0% Libor Floor, Due 6/21     1,266,623       1,265,934       1,126,915  
                             
USJ-IMECO Holding Company, LLC (8), (9)
Transportation: Cargo
  Senior Secured Loan — Term Loan 7.3% Cash, 1.0% Libor Floor, Due 4/20     3,516,432       3,508,175       3,379,643  
                             
Verdesian Life Sciences, LLC (8), (9)Environmental Industries   Senior Secured Loan — Initial Term Loan 6.2% Cash, 1.0% Libor Floor, Due 7/20     3,541,695       3,515,567       3,044,795  
                             
VIP Cinema Holdings, Inc. (8), (9)
Hotel, Gaming & Leisure
  Senior Secured Loan — Initial Term Loan (First Lien) 7.3% Cash, 1.0% Libor Floor, Due 3/23     1,975,000       1,965,645       1,994,948  
                             
Weiman Products, LLC (8)
Consumer goods: Non-durable
  Senior Secured Loan — Term Loan 5.7% Cash, 1.0% Libor Floor, Due 11/18     832,018       829,643       832,018  

 

See accompanying notes to financial statements.

 

 12 

 

 

Portfolio Company / Principal
Business
  Investment
Interest Rate (1)/ Maturity
  Principal     Amortized
Cost
    Fair Value (2)  
Weiman Products, LLC (8), (9)
Consumer goods: Non-durable
  Senior Secured Loan — Term Loan 5.7% Cash, 1.0% Libor Floor, Due 11/18   $ 4,858,105     $ 4,846,457     $ 4,860,195  
                             
WideOpenWest Finance, LLC (8), (9)Media: Broadcasting & Subscription   Senior Secured Loan — New Term B Loan 4.7% Cash, 1.0% Libor Floor, Due 8/23     2,977,500       2,977,500       2,978,527  
                             
WireCo WorldGroup Inc. (8)
Capital Equipment
  Junior Secured Loan — Initial Term Loan (Second Lien) 10.2% Cash, 1.0% Libor Floor, Due 9/24     3,000,000       2,959,150       3,001,500  
                             
WireCo WorldGroup Inc. (WireCo WorldGroup Finance LP) (8), (9)
Capital Equipment
  Senior Secured Loan — Initial Term Loan (First Lien) 6.7% Cash, 1.0% Libor Floor, Due 9/23     1,736,875       1,721,338       1,740,001  
                             
Total Investment in Debt Securities (128% of net asset value at fair value)
Equity Securities Portfolio
      $ 254,451,361     $ 252,373,033     $ 243,609,699  

 

See accompanying notes to financial statements.

 

 13 

 

 

Portfolio Company / Principal
Business
  Investment   Percentage
Ownership/Shares
    Amortized
Cost
    Fair Value (2)  
Advanced Lighting Technologies, Inc, (5), (8)
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       1,000  
                             
Aerostructures Holdings L.P. (5), (8)
Aerospace and Defense
  Series A Preferred Interests     1.2%       250,961       1,067,667  
                             
Caribe Media Inc. (fka Caribe Information Investments Incorporated) (5), (8)
Media: Advertising, Printing & Publishing
  Common     1.3%       359,765       595,818  
                             
DBI Holding LLC (5), (8)
Services: Business
  Class A Warrants     3.2%       1       1,000  
                             
eInstruction Acquisition, LLC (5), (8)
Services: Business
  Membership Units     1.1%       1,079,617       1,000  
                             
FP WRCA Coinvestment Fund VII, Ltd. (3), (5)
Capital Equipment
  Class A Shares     1,500       1,500,000       653,301  
                             
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       1,234,000  
                             
Tank Partners Holdings, LLC (5), (8), (11)
Energy: Oil & Gas
  Class B Units     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%       1,680,158       1,077,759  
                             
New Millennium Holdco, Inc. (Millennium Health, LLC) (5), (8)
Healthcare & Pharmaceuticals
  Common     0.2%       1,953,299       1,000  
                             
Total Investment in Equity Securities (2% of net asset value at fair value)               $ 10,389,007     $ 4,636,545  

  

See accompanying notes to financial statements.

  

 14 

 

 

CLO Fund Securities

 

CLO Subordinated Investments

 

Portfolio Company   Investment (13)   Percentage
Ownership
    Amortized
Cost
    Fair Value (2)  
Grant Grove CLO, Ltd. (3), (13)   Subordinated Securities, effective interest 0%, 1/21 maturity     22.2%     $ 2,485,886     $ 1,000  
Katonah III, Ltd. (3), (13)   Preferred Shares, effective interest 0%, 5/15 maturity     23.1%       1,287,155       369,000  
Katonah 2007-I CLO Ltd. (3), (6)   Preferred Shares, effective interest 21.8%, 4/22 maturity     100%       30,032,022       21,992,559  
Trimaran CLO VII, Ltd. (3),(6), (13)   Income Notes, effective interest 0%, 6/21 maturity     10.5%       383,021       10,000  
Catamaran CLO 2012-1 Ltd. (3), (6)   Subordinated Notes, effective interest 7.7%, 12/23 maturity     24.9%       5,685,012       2,437,426  
Catamaran CLO 2013- 1 Ltd. (3), (6)   Subordinated Notes, effective interest 13.5%, 1/25 maturity     23.5%       4,886,919       3,965,998  
Catamaran CLO 2014-1 Ltd. (3), (6)   Subordinated Notes, effective interest 9.4%, 4/26 maturity     24.9%       7,464,287       3,778,905  
Dryden 30 Senior Loan Fund (3)   Subordinated Notes, effective interest 33.9%, 11/25 maturity     7.5%       1,285,368       1,543,574  
Catamaran CLO 2014-2 Ltd. (3), (6)   Subordinated Notes, effective interest 11.5%, 10/26 maturity     24.9%       6,782,873       4,637,430  
Catamaran CLO 2015-1 Ltd. (3), (6)   Subordinated Notes, effective interest 9.2%, 4/27 maturity     9.9%       4,441,173       3,041,821  
Catamaran CLO 2016-1 Ltd. (3), (6)   Subordinated Notes, effective interest 12.6%, 1/29 maturity     24.9%       10,648,043       8,565,188  
Total Investment in CLO Subordinated Securities               $ 75,381,759     $ 50,342,901  

 

CLO Rated-Note Investment

 

Portfolio Company  Investment  Percentage
Ownership
   Amortized
Cost
   Fair Value (2) 
Catamaran CLO 2014-1 Ltd. (3), (6)  Float - 04/2026 - E - 14889FAC7, Par Value of $1,525,000 6.4% Cash, 4/26 maturity   0.151   1,447,816    1,410,000 
Total Investment in CLO
Rated-Note
          $1,447,816   $1,410,000 
Total Investment in CLO Fund Securities (27% of net asset value at fair value)          $76,829,575   $51,752,901 

 

Asset Manager Affiliates

 

Portfolio Company / Principal
Business
  Investment    Percentage
Ownership
     Cost        Fair Value (2)  
Asset Manager Affiliates (8), (10)   Asset Management Company     1     $ 54,041,230     $ 37,457,000  
Total Investment in Asset Manager Affiliates (20% of net asset value at fair value)               $ 54,041,230     $ 37,457,000  

 

See accompanying notes to financial statements.

 

 15 

 

 

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     0.001     $ 14,268     $ 14,268  
US Bank Money Market Account (8)   Money Market Account     0.0002       17,293,209       17,293,209  
Total Investment in Time Deposit and Money Market Accounts (9% of net asset value at fair value)               $ 17,307,477     $ 17,307,477  
Total Investments (4) (187% of net asset value at fair value)               $ 410,940,323     $ 354,763,619  

 

See accompanying notes to consolidated financial statements.

 

 16 

 

 

 

(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 June 30, 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%.

 

(2)Reflects the fair market value of all investments as of June 30, 2017, 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 $418 million. The aggregate gross unrealized appreciation is approximately $2.3 million, the aggregate gross unrealized depreciation is approximately $65.8 million, and the net unrealized depreciation is approximately $63.5 million.

 

(5)Loan or debt security is on non-accrual status and therefore is considered non-income producing.

 

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

 

(7)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. As of June 30, 2017, 81.7% of the company’s total assets were qualified assets.

 

(9)As of June 30, 2017, 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.

  

 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.

 

 22 

 

 

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)

 

  

Six Months Ended
June 30,

 
   2017   2016 
         
Per Share Data:           
Net asset value, at beginning of period  $5.24   $5.82 
Net investment income1   0.16    0.27 
Net realized losses from investments1   (0.03)   (0.29)
Net change in unrealized depreciation on investments1   (0.05)   (0.08)
Net decrease in net assets resulting from operations   0.08    (0.10)
Distributions of ordinary income   (0.24)   (0.30)
Net increase (decrease) in net assets relating to stock-based transactions:          
Common stock withheld for payroll taxes upon vesting of restricted stock   (0.01)   - 
Dividend reinvestment plan   0.01    (0.01)
Stock based compensation   0.02    0.03 
Net increase (decrease) in net assets relating to stock-based transactions6   0.02    0.03 
           
Net asset value, end of period  $5.10   $5.45 
Total net asset value return2   1.9%   (1.2)%
           
Ratio/Supplemental Data:           
Per share market value at beginning of period  $3.98   $4.07 
Per share market value at end of period  $3.53   $3.92 
Total market return3   (5.3)%   3.7%
Weighted average interest rate on income producing debt investments(7)   7.4%   7.2%
Shares outstanding at end of period   37,167,622    37,136,898 
Net assets at end of period  $189,612,963   $202,224,735 
Portfolio turnover rate4   20.7%   11.2%
Average par debt outstanding  $180,556,183   $196,201,299 
Asset coverage ratio   206%   205%
Ratio of net investment income to average net assets5   6.1%   9.4%
Ratio of total expenses to average net assets5   10.0%   8.8%
Ratio of interest expense to average net assets5   4.6%   4.6%
Ratio of non-interest expenses to average net assets5   5.4%   4.2%

 

 

 

1Based on weighted average number of common shares outstanding-basic for the period.
2Total net asset value return (not annualized) equals the change in the ending of period net asset value per share over the beginning of period net asset value per share plus distributions (including any return of capital), divided by the beginning of period net asset value per share.
3Total market return equals the change in the ending of period market price per share over the beginning of period price per share plus distributions (including any return of capital), divided by the beginning of period market price per share.
4Not annualized. Portfolio turnover rate equals the year-to-date sales and paydowns over the average of the invested assets at fair value.
5Annualized
6Totals may not sum due to rounding.
7The weighted average interest rate on income producing debt investments is calculated as the sum of contractual annual interest income for each income producing debt investment, before the payment of all of our expenses, divided by sum of the par value of those investments. There can be no assurance that the weighted average interest rate on income producing debt investments will remain at its current level.

 

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 June 30, 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 $2.7 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 accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required for annual consolidated financial statements. The unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto in the Company’s Form 10-K for the year ended December 31, 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 KCAP Funding, Kolhberg Capital Funding LLC I, KCAP Senior Funding I, LLC and KCAP Senior Funding I Holdings, LLC in its consolidated financial statements as they are operated solely for investment activities of the Company. The creditors of KCAP Senior Funding I, LLC have received security interests in the assets owned by KCAP Senior Funding I, LLC and such assets are not intended to be available to the creditors of KCAP Financial, Inc., or any other affiliate.

 

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

 

The Asset Manager Affiliates are subject to Accounting Standards Codification Topic 810, “Consolidation” and although the Company cannot consolidate the financial statements of portfolio company investments, this guidance impacts the Company’s required disclosures relating to the Asset Manager Affiliates. The Asset Manager Affiliates qualify as a “significant subsidiary” and, as a result, the Company is required to include additional financial information regarding the Asset Manager Affiliates in its filings with the SEC. This additional financial information regarding the Asset Manager Affiliates does not directly impact the financial position or results of operations of the Company.

 

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

 

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

 

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

 

It is the Company’s primary investment objective to generate current income and capital appreciation by lending directly to privately-held middle market companies. During the six months ended June 30, 2017, the Company provided approximately $60 million to portfolio companies to support their growth objectives, none of which was contractually obligated. See also Note 8 – Commitments and Contingencies. As of June 30, 2017, the Company held loans it made to 83 investee companies with aggregate principal amounts of $254 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 six months ended June 30, 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 has concluded that the majority of its revenues associated with financial instruments are scoped out of ASC 606. Management is evaluating the impact of the standard on certain fees earned by the Company.

 

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:

 

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Consolidated Statements of Cash Flows

 

   Six Months Ended June 30, 2016 
     
Net cash (used in) financing activities as reported  $(31,782,236)
Impact of Adoption   (717,706)
      
Net cash (used in) financing activities after adoption  $(32,499,942)

 

In 2017, FASB issued an Accounting Standards Update, ASU 2017-08, Receivables— Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities (“ASU-2017-08”) which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. ASU-2017-08 does not require any accounting change for debt securities held at a discount; the discount continues to be amortized to maturity. ASU-2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. At this time, management is evaluating the implications of these changes on the financial statements.

 

Investments

 

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

 

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

 

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

 

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

 

The Company utilizes an independent valuation firm to provide an annual third-party review of the Company’s CLO Securities fair value model relative to its functionality, model inputs and calculations as a reasonable method to determine fair values of CLO Securities, in the absence of Level I or Level II trading activity or observable market inputs. The independent valuation firm’s 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 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.

 

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

 

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

 

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

 

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

 

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

 

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.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Interest Income. Interest income, including the amortization of premium and accretion of discount, is recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company generally places a loan or security on non-accrual status and ceases recognizing cash interest income on such loan or security when a loan or security becomes 90 days or more past due or if the Company otherwise does not expect the debtor to be able to service its debt obligations. Non-accrual loans remain in such status until the borrower has demonstrated the ability and intent to pay contractual amounts due or such loans become current. As of June 30, 2017, two issuers representing 1% of the Company’s total investments at fair value were on a non-accrual status, and one of our investments, representing 2% of the Company’s investments at fair value, was on partial non-accrual status, whereby we have recognized income on a portion of contractual payment-in-kind (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.

 

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

 

For non-junior class CLO Fund securities, such as the Company’s investment in the Class E Notes of the Catamaran CLO 2014-1, 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 the “DRIP” that provides for reinvestment of its distributions on behalf of its stockholders, unless a stockholder “opts out” of the DRIP to receive cash in lieu of having their cash distributions automatically reinvested in additional shares of the Company’s common stock.

 

3. EARNINGS (LOSSES) PER SHARE

 

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

 

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The following information sets forth the computation of basic and diluted net increase (decrease) in stockholders’ equity per share for the three and six months ended June 30, 2017 and 2016 (unaudited):

 

   (unaudited)   (unaudited) 
   Three Months Ended June 30,   Six Months Ended June 30, 
   2017   2016   2017   2016 
                 
Net increase (decrease) in net assets resulting from operations  $2,521,725   $3,007,484   $2,907,276   $(3,835,214)
Net (increase) decrease in net assets allocated to unvested share awards   (21,340)   (46,972)   (28,258)   64,578 
                     
Net increase (decrease) in net assets available to common stockholders  $2,500,385   $2,960,512   $2,879,018   $(3,770,636)
Weighted average number of common shares outstanding for basic shares computation   37,206,487    37,163,534    37,204,751    37,136,634 

Effect of dilutive securities – stock options

   -    -    -    - 
                     
Weighted average number of common and common stock equivalent shares outstanding for diluted shares computation   37,206,487    37,163,534    37,204,751    37,136,634 
                     
Net increase (decrease) in net assets per basic common shares:                    
Net increase (decrease) in net assets from operations  $0.07   $0.08   $0.08   $(0.10)
Net increase (decrease) in net assets per diluted shares:                    
Net increase (decrease) in net assets from operations  $0.07   $0.08   $0.08   $(0.10)

 

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

 

There were 50,000 options to purchase shares of common stock considered for the computation of the diluted per share information for the three months and six months ended June 30, 2017 and 2016. Since the effects are anti-dilutive for both periods, the options were not considered in the computation. For the six months ended June 30, 2017 and 2016, the Company purchased 63,827 and 67,345 shares of common stock, respectively, in connection with the vesting of employee restricted stock, such shares are treated as treasury shares and reduce the weighted average shares outstanding in the computation of earnings per share.

 

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

 

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4. INVESTMENTS

 

The following table shows the Company’s portfolio by security type at June 30, 2017 and December 31, 2016:

 

   June 30, 2017 (unaudited)   December 31, 2016 
Security Type  Cost/Amortized
Cost
   Fair Value      Cost/Amortized
Cost
   Fair Value    
Money Market Accounts²   17,307,477   $17,307,477    5    28,699,269   $28,699,269    8 
Senior Secured Loan   207,622,375    202,272,386    57    207,701,078    200,322,152    55 
Junior Secured Loan   40,191,888    38,773,666    11    37,251,776    35,444,440    10 
First Lien Bond   3,054,337    1,058,394    -    3,060,919    1,089,338    - 
Senior Secured Bond   1,504,434    1,505,250    -    1,506,461    1,487,400    - 
CLO Fund Securities   76,829,575    51,752,901    15    76,851,317    54,174,350    15 
Equity Securities   10,389,007    4,636,545    1    10,389,007    5,056,355    1 
Asset Manager Affiliates³   54,041,230    37,457,000    11    55,341,230    40,198,000    11 
                               
Total  $410,940,323   $354,763,619    100%  $420,801,057   $366,471,304    100%

 

 

¹ Represents percentage of total portfolio at fair value.

² Includes restricted cash held under employee benefit plans.

³ Represents the equity investment in the Asset Manager Affiliates.

 

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The industry-related information, based on the fair value of the Company’s investment portfolio as of June 30, 2017 and December 31, 2016, for the Company’s investment portfolio was as follows:

 

   June 30, 2017 (unaudited)   December 31, 2016 
Industry Classification  Cost/ Amortized Cost   Fair Value   %1   Cost/ Amortized Cost   Fair Value   %1 
Aerospace and Defense  $8,358,648   $8,231,839    2%  $8,394,633   $8,450,106    2%
Asset Management Company2   54,041,230    37,457,000    11    55,341,230    40,198,000    11 
Automotive   7,751,269    7,740,953    2    6,322,551    6,196,154    2 
Banking, Finance, Insurance & Real Estate   5,585,742    5,560,869    1    6,805,514    6,782,010    2 
Beverage, Food and Tobacco   15,002,028    14,451,010    4    15,198,830    14,703,372    4 
Capital Equipment   9,655,431    8,892,136    3    6,185,129    5,575,048    2 
Chemicals, Plastics and Rubber   6,391,014    6,366,999    2    6,421,909    6,444,073    2 
CLO Fund Securities   76,829,575    51,752,901    15    76,851,317    54,174,350    15 
Construction & Building   5,864,273    5,949,494    2    5,919,158    5,929,606    2 
Consumer goods: Durable   10,337,009    8,292,890    2    12,319,905    10,118,736    3 
Consumer goods: Non-durable   14,876,629    14,804,415    4    14,766,390    14,452,096    4 
Ecological   -    -    -    1,741,292    1,760,783    - 
Energy: Electricity   3,887,209    3,914,471    1    3,904,453    3,937,247    1 
Energy: Oil & Gas   14,872,992    10,051,515    3    14,493,835    8,805,761    2 
Environmental Industries   13,666,574    12,924,304    4    12,279,924    12,185,239    3 
Forest Products & Paper   4,184,554    4,255,460    1    4,192,889    4,192,907    1 
Healthcare & Pharmaceuticals   56,578,981    53,483,702    15    58,769,668    53,594,534    15 
High Tech Industries   10,889,657    10,966,899    2    9,854,093    9,936,109    3 
Hotel, Gaming & Leisure   4,360,690    3,990,948    1    400,000    1,000    - 
Media: Advertising, Printing & Publishing   12,395,852    12,192,690    3    11,712,682    11,453,447    3 
Media: Broadcasting & Subscription   2,977,500    2,978,527    1    8,273,174    8,372,984    2 
Retail   -    -    -    1,415,457    759,581    - 
Services: Business   25,315,597    24,421,038    7    16,125,481    16,230,486    4 
Services: Consumer   5,889,352    5,882,817    2    6,212,108    6,204,889    2 
Telecommunications   6,015,390    5,967,221    2    12,809,799    12,767,823    3 
Time Deposit and Money Market Accounts3   17,307,477    17,307,477    5    28,699,269    28,699,269    8 
Transportation: Cargo   10,241,457    9,976,558    3    7,557,315    7,190,135    2 
Transportation: Consumer   2,273,040    2,197,339    1    2,412,614    2,324,516    1 
Utilities: Electric   5,391,153    4,752,147    1    5,420,438    5,031,043    1 
                               
Total  $410,940,323   $354,763,619    100%  $420,801,057   $366,471,304    100%

 

 

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

2 Represents the equity investment in the Asset Manager Affiliates.

3 Includes restricted cash held under employee benefit plans.

 

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

 

At June 30, 2017 and December 31, 2016, the total amount of non-qualifying assets was approximately 18% and 17% of the total investment portfolio, respectively. The majority of non-qualifying assets were foreign investments which were approximately 15% and 14% of the total investment portfolio, respectively (including the Company’s investments in CLO Funds, which are typically domiciled outside the U.S. and represented approximately 14% and 14% of total assets on such dates, respectively).

 

The following tables detail the ten largest portfolio investments (at fair value) as of June 30, 2017 and December 31, 2016:

 

   June 30, 2017 (unaudited) 
Investment    Cost/Amortized Cost   Fair Value   % of FMV 
Asset Manager Affiliates    $54,041,230   $37,457,000    11%
Katonah 2007-I CLO Ltd.   30,032,022    21,992,562    6 
US Bank Money Market Account1     17,293,209    17,293,209    5 
Grupo HIMA San Pablo, Inc.   9,831,462    9,125,200    3 
Catamaran CLO 2016-1 Ltd.      10,648,044    8,565,188    2 
Tank Partners Holdings, LLC     12,199,921    7,973,756    2 
Roscoe Medical, Inc.   6,672,767    6,432,000    2 
GK Holdings, Inc. (aka Global Knowledge)     5,883,886    5,894,412    2 
Weiman Products, LLC     5,678,204    5,692,226    2 
Harland Clarke Holdings Corp.   5,230,476    5,299,893    1 
                  
Total    $157,511,211   $125,725,446    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 Account1   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 
Nielson & Bainbrige, 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%

 

Excluding the Asset Manager Affiliates and CLO Fund securities, the Company’s ten largest portfolio companies represented approximately 16% and 13% of the total fair value of the Company’s investments at June 30, 2017 and December 31, 2016, respectively.

 

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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 $10.1million 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:

 

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.

 

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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 hierarchy levels as of June 30, 2017 (unaudited) and December 31, 2016, respectively:

 

   As of June 30, 2017 (unaudited) 
   Level I   Level II   Level III   Total 
Money market accounts  $   $17,307,477   $   $17,307,477 
Debt securities       59,703,296    183,906,403    243,609,699 
CLO Fund securities           51,752,898    51,752,898 
Equity securities           4,636,545    4,636,545 
Asset Manager Affiliates           37,457,000    37,457,000 
                     
Total  $   $77,010,773   $277,752,846   $354,763,619 

 

   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 

 

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.

 

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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:

 

  Six Months Ended June 30, 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 III   (9,741,085)1               (9,741,085)
Transfers into Level III   34,204,4052               34,204,405 
Net accretion (amortization)   188,885    (21,741)           167,144 
Purchases   25,717,752        1        25,717,753 
Sales/Paydowns/Return of Capital   (16,957,069)           (1,300,000)   (18,257,069)
Total realized gain (loss) included in earnings   123,809                123,809 
Total unrealized gain (loss) included in earnings   (3,372,039)   (2,399,711)   (419,811)   (1,441,000)   (7,632,561)
Balance, June 30, 2017  $183,906,403   $51,752,898   $4,636,545   $37,457,000   $277,752,846 
Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date  $1,495,504   $(2,399,711)  $(420,812)  $(1,441,000)  $(2,766,020)

 

¹Transfers out of Level III represent a transfer of $9,741,085 relating to debt and equity securities for which pricing inputs, other than their quoted prices in active markets were observable as of June 30, 2017.

 

²Transfers into Level III represent a transfer of $34,204,405 relating to debt and equity securities for which pricing inputs, other than their quoted prices in active markets were unobservable as of June 30, 2017.

 

  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 III   (14,855,471) 1               (14,855,471)
Transfers into Level III   22,107,1412       445,485        22,552,626 
Net accretion (amortization)   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.

 

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As of June 30, 2017, 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 $77,010,773 as of June 30, 2017.

 

As of June 30, 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 $       9,030,150 Enterprise Value

Average EBITDA

Multiple / WACC

5.2x - 6.7x (5.4x)

16.5% - 16.5% (16.5%)

 
$   174,876,253 Income Approach Implied Discount Rate 5.6% - 24.1% (9.1%)  
Equity Securities $       4,628,545 Enterprise Value

Average EBITDA

Multiple / WACC

4.7x - 17.8x (10.2x)

7.1% - 13.9% (11.4%)

 
$              8,000 Options Value Qualitative Inputs    
CLO Fund Securities $    51,752,898 Discounted Cash Flow Discount Rate 9.2% - 13.0% (12.9%)  
Probability of Default 0% - 2.0% (1.9%)  
Loss Severity 25.0% - 25.9% (25.9%)  
Recovery Rate 74.1% - 75.0% (74.1%)  
Prepayment Rate 25.0% - 28.0% (25.1%)  
Asset Manager Affiliate $     37,457,000 Discounted Cash Flow Discount Rate 2.5% - 13.0% (6.5%)  
Total Level III Investments $   277,752,846        

   

 

¹ The qualitative inputs used in the fair value measurements of Equity Securities include estimates of the distressed liquidation value of the pledged collateral. In cases where KCAP’s analysis ascribes no residual value to a portfolio company’s equity, KCAP typically elects to mark its position at a nominal amount to account for the investment’s option value.

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/WACC

4.8x/7.4% - 14.1x/13.9%
(9.3x/12.0%)
 
$                6,000 Options Value

Qualitative

Inputs(1)

   
CLO Fund Securities $       45,824,060 Discounted Cash Flow Discount Rate 11.3% - 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.

 

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

 

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

 

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

 

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

 

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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 June 30, 2017 and December 31, 2016, the Asset Manager Affiliates had approximately $2.7 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 $37.5 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. 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 June 30, 2017 and 2016, the Asset Manager Affiliates declared cash distributions of $650,000 and $850,000 to the Company, respectively. For the six months ended June 30, 2017 and 2016, the Asset Manager Affiliates declared cash distributions of approximately $1.3 million and $1.9 million to the Company, respectively. All of the $1.3 million of distributions received by the Company during 2017 from the Asset Manager Affiliates are treated as a return of capital. 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 $850,000 of Dividends from Asset Manager Affiliates in the Statement of Operations for the three months ended June 30, 2016. For the six months ended June 30, 2016, the Company recognized $1.4 million of Dividends from Asset Manager Affiliates in the Statement of Operations. The difference between cash distributions received and the tax-basis earnings and profits of the distributing affiliate, are recorded as an adjustment to the cost basis in the Asset Manager Affiliate (i.e., tax-basis return of capital). Distributions receivable, if any, are reflected in the Due from Affiliates account on the consolidated balance sheets.

 

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

 

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

 

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On February 18, 2015, the FASB issued Accounting Standards Update 2015-2 (“ASU 2015-2”), which updated consolidation standards under ASC Topic 810, “Consolidation”. Under this update, a new consolidation analysis is required for VIEs and will limit the circumstances in which investment managers and similar entities are required to consolidate the entities that they manage. The FASB decided to eliminate some of the criteria under which their management fees are considered a variable interest and limit the circumstances in which variable interests in a VIE held by related parties of a reporting enterprise require the reporting enterprise to consolidate the VIE. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015, early adoption is permitted. The Asset Manager Affiliates adopted ASU 2015-2 in 2016 which resulted in the deconsolidation of the CLO Funds. Prior year amounts have been restated to reflect the retrospective adoption of ASU 2015-2. In addition, in accordance with Regulation S-X, additional financial information with respect to 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 
   June 30, 2017   December 31, 2016 
Cash  $4,464,866   $3,425,709 
Intangible Assets   22,830,000    23,157,541 
Other Assets   3,646,924    5,024,174 
Total Assets  $30,941,790   $31,607,424 
           
Total Liabilities  $5,370,026   $6,619,619 
Total Equity   25,571,764    24,987,805 
Total Liabilities and Equity  $30,941,790   $31,607,424 

 

Asset Manager Affiliates

Summarized Statements of Operations Information (unaudited)

 

   For the three months ended   For the six months ended 
   June 30,   June 30, 
   2017   2016   2017   2016 
Fee Revenue  $3,088,353   $3,229,095   $8,972,550   $6,558,722 
Interest Income   3,735    413,786    5,910    567,618 
Total Income   3,092,088    3,642,881    8,978,460    7,126,340 
Operating Expenses   2,543,378    3,100,740    5,304,832    5,829,185 
Amortization of Intangibles   -    327,541    327,541    655,082 
Interest Expense   214,715    377,945    403,566    867,780 
Total Expenses   2,758,093    3,806,226    6,035,939    7,352,047 
Pre-Tax Income (Loss)   333,995    (163,345)   2,942,521    (225,707)
Income Tax (Benefit) Expense   (280,784)   115,547    1,058,560    (245,585)
Net Income  $614,779   $(278,892)  $1,883,961   $19,878 

 

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Katonah 2007-I CLO Ltd.

Summarized Balance Sheet Information (unaudited)

 

   As of   As of 
   June 30, 2017   December 31, 2016 
Total investments at fair value  $109,536,568   $176,684,976 
Cash   14,556,607    34,982,770 
Total Assets   124,451,459    212,160,163 
CLO Debt at fair value   123,048,958    208,812,164 
Total liabilities   124,209,260    210,463,954 
Total Net Assets (deficit)   242,199    1,696,209 

 

Katonah 2007-I CLO Ltd.

Summarized Statements of Operations Information (unaudited)

 

   For the three months ended   For the six months ended 
   June 30,   June 30, 
   2017   2016   2017   2016 
Interest income from investments  $1,373,010   $2,469,633   $3,151,126   $5,008,707 
Total income   1,344,827    2,745,300    3,188,161    5,310,308 
Interest expense   1,488,620    2,417,951    3,014,926    4,540,266 
Total expenses   1,681,473    2,670,268    3,483,656    5,096,330 
Net realized and unrealized gains (losses)   (530,500)   (1,172,439)   (1,158,514)   2,385,267 
Increase in net assets resulting from operations   (867,146)   (1,097,407)   (1,454,009)   2,599,245 

 

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

 

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

 

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

 

Additional goodwill amortization for tax purposes was created upon the purchase of 100% of the equity interests in Trimaran Advisors by one of KCAP’s affiliates, in exchange for shares of the Company’s stock valued at $25.5 million and cash of $13.0 million. The transaction was considered an asset purchase under Section 351(a) of the Code and resulted in tax goodwill of approximately $22.8 million, and tax basis intangible assets of $15.7 million, of both which are being amortized for tax purposes on a straight-line basis over 15 years.

 

 45 

 

 

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

 

Related Party Transactions

 

On February 26, 2013, the Company entered into a senior credit agreement (the “Trimaran Credit Facility”) with Trimaran Advisors, pursuant to which Trimaran Advisors may borrow from time to time up to $20 million from the Company in order to provide capital necessary to support one or more of Trimaran Advisors’ warehouse lines of credit and/or working capital in connection with Trimaran Advisors’ warehouse activities. The Trimaran Credit Facility expires on November 20, 2017 and bears interest at an annual rate of 9.0%. Outstanding borrowings on the Trimaran Credit Facility are callable by the Company at any time. On April 15, 2013, the Trimaran Credit Facility was amended and upsized from $20 million to $23 million. At June 30, 2017 and December 31, 2016, there were no loans outstanding under the Trimaran Credit Facility. For the three months ended June 30, 2017 and 2016, the Company recognized interest income of approximately $210,000 and $373,000, respectively, related to the Trimaran Credit Facility. For the six months ended June 30, 2017 and 2016, the Company recognized interest income of approximately $390,000 and $855,000, respectively, related to the Trimaran Credit Facility.

 

6. BORROWINGS

 

The Company’s debt obligations consist of the following:

 

   As of
June 30, 2017
(unaudited)
   As of
December 31, 2016
 
         
Notes issued by KCAP Senior Funding I, LLC (net of discount and offering costs of: 2017 - $1,969,566 and $2,118,764, respectively; 2016 - $2,286,425 and $2,459,156, respectively)  $143,261,669   $142,604,419 
7.375% Notes Due 2019 (net of offering costs of: 2017 - $351,541; 2016 - $550,774)  $26,648,459   $32,980,151 

 

The weighted average stated interest rate and weighted average maturity on all our debt outstanding as of June 30, 2017 were 4.0% and 6.3 years, respectively, and as of December 31, 2016 were 3.9% and 6.7 years, respectively.

 

KCAP Senior Funding I, LLC (Debt Securitization)

 

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

 

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

 

 46 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of June 30, 2017, there were 74 investments in portfolio companies with a total fair value of approximately $189.6 million plus cash of $4.6 million, collateralizing the secured notes of the Issuer. At June 30, 2017, there were unamortized issuance costs of approximately $2.1 million, and unamortized original issue discount, (“OID”) of approximately $2.0 million included in Notes issued by KCAP Senior Funding I, LLC liabilities in the accompanying consolidated balance sheet. The pool of loans in the securitization must meet certain requirements, including asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements.

 

 47 

 

 

For the three months ended June 30, 2017, interest expense, including the amortization of deferred debt issuance costs and the OID was approximately $1.6 million consisting of stated interest expense of approximately $1.3 million, accreted discount of approximately $159,000, and deferred debt issuance costs of approximately $171,000. For the six months ended June 30, 2017, interest expense, including the amortization of deferred debt issuance costs and the discount on the face amount of the notes, was approximately $3.1 million consisting of stated interest expense of approximately $2.4 million, accreted discount of approximately $317,000, and deferred debt issuance costs of approximately $340,000. As of June 30, 2017, the stated interest charged under the securitization was based on current three month LIBOR at the reset date, which was 1.15%. The classes, stated interest rates, spread over LIBOR, and stated interest expense are as follows:

 

   Stated Interest
Rate (1)
   LIBOR Spread (basis
points)
   Quarterly Interest Expense(1) 
             
KCAP Senior Funding LLC Class A Notes   2.65%   150   $716,375 
KCAP Senior Funding LLC Class B Notes   4.40%   325    138,586 
KCAP Senior Funding LLC Class C Notes   5.40%   425    188,985 
KCAP Senior Funding LLC Class D Notes   6.40%   525    201,586 
Total            $1,245,532 

 

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

 

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

 

Description   Class A Notes   Class B Notes   Class C Notes   Class D Notes  
Type  

Senior Secured

Floating Rate

 

Senior Secured

Floating Rate

 

Secured Deferrable

Floating Rate

 

Secured Deferrable

Floating Rate

 
Amount Outstanding   $ 108,150,000   $ 12,600,000   $ 14,000,000   $ 12,600,000  
Moody's Rating (sf)   "Aaa"   "Aa2"   "A2"   "Baa2"  
Standard & Poor's Rating (sf)   "AAA"   "AA"   "A"   "BBB"  
Interest Rate   LIBOR + 1.50 %   LIBOR + 3.25 %   LIBOR + 4.25 %   LIBOR + 5.25 %  
Stated Maturity   July, 2024   July, 2024   July, 2024   July, 2024  
Junior Classes  

B, C, D

and Subordinated

 

C, D

and Subordinated

 

D and

Subordinated

  Subordinated  

 

 48 

 

 

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

 

   As of 
   June 30, 2017 
   (unaudited) 
   Principal Amount   Carrying Value   Fair Value 
             
KCAP Senior Funding LLC Class A Notes  $108,150,000   $105,149,301   $108,150,000 
KCAP Senior Funding LLC Class B Notes   12,600,000    12,250,404    12,615,750 
KCAP Senior Funding LLC Class C Notes   14,000,000    13,611,560    14,017,500 
KCAP Senior Funding LLC Class D Notes   12,600,000    12,250,404    12,631,500 
Total  $147,350,000   $143,261,669   $147,414,750 

 

Fair Value of KCAP Senior Funding I.   The Company carries the KCAP Senior Funding I Notes at cost, net of unamortized discount and offering costs of approximately $2.0 million and $2.1 million, respectively. The fair value of the KCAP Senior Funding I Notes was approximately $147.4 million and $146.3 million at June 30, 2017 and December 31, 2016, respectively. The fair values were determined based on third party indicative values. The KCAP Senior Funding I L.L.C. Notes are categorized as Level III under ASC 820: Fair Value.

 

7.375% Notes Due 2019

 

On October 10, 2012, the Company issued $41.4 million in aggregate principal amount of unsecured 7.375% Notes due 2019. The net proceeds for these Notes, after the payment of underwriting expenses, were approximately $39.9 million. Interest on the 7.375% Notes due 2019 is paid quarterly in arrears on March 30, June 30, September 30 and December 30, at a rate of 7.375%, commencing December 30, 2012. The 7.375% Notes due 2019 mature on September, 30, 2019 and are unsecured obligations of the Company. The 7.375% Notes due 2019 are subject to redemption in whole or in part at any time or from time to time, at the option of the Company, on or after September 30, 2015, at a redemption price per security equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to the date fixed for redemption. In addition, due to the asset coverage test applicable to the Company as a BDC and a covenant that the Company agreed to in connection with the issuance of the 7.375% Notes due 2019, the Company is limited in its ability to make distributions in certain circumstances. The indenture governing the 7.375% Notes due 2019 contains certain restrictive covenants, including compliance with certain provisions of the 1940 Act relating to borrowing and dividends. At June 30, 2017, the Company was in compliance with all of its debt covenants.

 

For the three months ended June 30, 2017 and 2016, interest expense related to the 7.375% Notes due 2019 was approximately $609,000 and $763,000, respectively. For the six months ended June 30, 2017 and 2016, interest expense related to the 7.375% Notes due 2019 was approximately $1.2 million and $1.5 million, respectively.

 

In connection with the issuance of the 7.375% Notes due 2019, the Company incurred approximately $1.5 million of debt offering costs which are being amortized over the expected term of the facility on an effective yield method, of which approximately $352,000 remains to be amortized, and is included on the consolidated balance sheets as a reduction in the related debt liability.

 

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

 

During the third quarter of 2016, $5.0 million par value of the 7.375% Notes due 2019 was redeemed by the Company, resulting in a realized loss on extinguishment of $88,015. KCAP subsequently surrendered these notes to the Trustee for cancellation.

 

 49 

 

 

During the fourth quarter of 2016, approximately $469,000 par value of the 7.375% Notes due 2019 was redeemed by the Company, resulting in a realized loss on extinguishment of $15,006. KCAP subsequently surrendered these notes to the Trustee for cancellation.

 

During the second quarter of 2017, approximately $6.5 million par value of the 7.375% Notes due 2019 was redeemed by the Company, resulting in a realized loss on extinguishment of approximately $107,000. KCAP subsequently surrendered these notes to the Trustee for cancellation.

 

Fair Value of 7.375% Notes Due 2019.  The 7.375% Notes due 2019 were issued in a public offering on October 10, 2012 and are carried at cost. The fair value of the Company’s outstanding 7.375% Notes due 2019 was approximately $27.6 million at June 30, 2017. The fair value was determined based on the closing price on June 30, 2017 for the 7.375% Notes due 2019. The 7.375% Notes due 2019 are categorized as Level I under the ASC 820 Fair Value.

 

Convertible Notes

 

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

 

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

 

The Convertible Notes matured and were fully repaid on March 15, 2016.

 

For the six months ended June 30, 2016, interest expense related to the Convertible Notes was approximately $378,000.

 

7. DISTRIBUTABLE TAXABLE INCOME

 

Effective December 11, 2006, the Company elected to be treated as a RIC under the Code and adopted a December 31 tax-calendar year end. As a RIC, the Company is not subject to federal income tax on the portion of its taxable income and gains distributed currently to its stockholders as a dividend. The Company’s quarterly distributions, if any, are determined by the Board of Directors. The Company anticipates distributing substantially all of its taxable income and gains, within the Subchapter M rules, and thus the Company anticipates that it will not incur any federal or state income tax at the RIC level. As a RIC, the Company is also subject to a federal excise tax based on distributive requirements of its taxable income on a calendar year basis (e.g., calendar year 2017). Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income, to the extent required.

 

The following reconciles net increase (decrease) in net assets resulting from operations to taxable income for the six months ended June 30, 2017 and 2016:

 

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   Six Months Ended June 30, 
   2017   2016 
   (unaudited)   (unaudited) 
         
Net increase (decrease) in net assets resulting from operations  $2,907,276   $(3,835,215)
Net change in unrealized depreciation from investments   1,846,951    2,942,776 
Excess capital gains over capital losses   1,072,681    10,765,229 
Book/tax differences on CLO equity investments   (1,233,069)   1,124,945 
Other book/tax differences   (2,586)   (735,750)
           
Taxable income before deductions for distributions  $4,591,253   $10,261,985 
           
Taxable income before deductions for distributions per weighted average basic shares for the period  $0.12   $0.28 
Taxable income before deductions for distributions per weighted average diluted shares for the period  $0.12   $0.28 

 

Dividends from Asset Manager Affiliates are recorded based upon a quarterly estimate of tax-basis earnings and profits of each Asset Manager Affiliate. Distributions in excess of the estimated tax-basis quarterly earnings and profits of each distributing Asset Manager Affiliate are recognized as tax-basis return of capital. The actual tax-basis earnings and profits and resulting dividend and/or return of capital for the year will be determined at the end of the tax year for each distributing Asset Manager Affiliate. For the six months ended June 30, 2017 and 2016, the Asset Manager Affiliates declared cash distributions of $1.3 million and $1.9 million to the Company, respectively. The Company recognized $1.4 million, respectively, of dividends from Asset Manager Affiliates in the Statement of Operations for the six months ended June 30, 2016. The difference of $1.3 million 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), for the six months ended June 30, 2017 and 2016, respectively.

 

Distributions to shareholders that exceed tax-basis distributable income (tax-basis net investment income and realized gains, if any) are reported as distributions of paid-in capital (i.e., return of capi