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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended September 30, 2010

OR

 

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

For the transition period from                      to                     

Commission file number 001-33559

 

 

BLACKROCK KELSO CAPITAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   20-2725151

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

40 East 52nd Street, New York, NY   10022
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: 212-810-5800

 

 

 

 

Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report.

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 þ    No ¨

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨    Accelerated filer þ    Non-Accelerated filer ¨    (Do not check if a smaller reporting company)

Smaller reporting company ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes ¨    No þ

The number of shares of the Registrant’s common stock, $.001 par value per share, outstanding at November 3, 2010 was 71,669,638.

 

 

 


Table of Contents

 

BLACKROCK KELSO CAPITAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2010

Table of Contents

 

   

INDEX

   PAGE NO.  

PART I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  
 

Statements of Assets and Liabilities as of September 30, 2010 and December 31, 2009 (unaudited)

     4   
 

Statements of Operations for the three and nine months ended September 30, 2010 and 2009 (unaudited)

     5   
 

Statements of Changes in Net Assets for the nine months ended September 30, 2010 and 2009 (unaudited)

     6   
 

Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited)

     7   
 

Schedules of Investments as of September 30, 2010 and December 31, 2009 (unaudited)

     8   
 

Notes to Financial Statements (unaudited)

     22   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     35   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     43   

Item 4.

 

Controls and Procedures

     44   

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     44   

Item 1A.

 

Risk Factors

     44   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     44   

Item 3.

 

Defaults Upon Senior Securities

     44   

Item 4.

 

[Reserved]

     44   

Item 5.

 

Other Information

     44   

Item 6.

 

Exhibits

     45   

SIGNATURES 

       46   

 

2


Table of Contents

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report, and other statements that we may make, may contain forward-looking statements with respect to future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “potential,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions.

Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and we assume no duty to and do not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.

In addition to factors previously identified elsewhere in the reports BlackRock Kelso Capital Corporation has filed with the Securities and Exchange Commission (the “SEC”), the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:

 

   

our future operating results;

 

   

our business prospects and the prospects of our portfolio companies;

 

   

the impact of investments that we expect to make;

 

   

our contractual arrangements and relationships with third parties;

 

   

the dependence of our future success on the general economy and its impact on the industries in which we invest;

 

   

the ability of our portfolio companies to achieve their objectives;

 

   

our expected financings and investments;

 

   

the adequacy of our cash resources and working capital, including our ability to obtain continued financing on favorable terms;

 

   

the timing of cash flows, if any, from the operations of our portfolio companies;

 

   

the impact of increased competition;

 

   

the ability of BlackRock Kelso Capital Advisors LLC, our investment advisor (the “Advisor”), to locate suitable investments for us and to monitor and administer our investments;

 

   

potential conflicts of interest in the allocation of opportunities between us and other investment funds managed by the Advisor or its affiliates;

 

   

the ability of the Advisor to attract and retain highly talented professionals;

 

   

fluctuations in foreign currency exchange rates; and

 

   

the impact of changes to tax legislation and, generally, our tax position.

 

3


Table of Contents

 

PART 1. FINANCIAL INFORMATION

In this Quarterly Report, “Company”, “we”, “us” and “our” refer to BlackRock Kelso Capital Corporation unless the context states otherwise.

 

Item 1. Financial Statements

BlackRock Kelso Capital Corporation

Statements of Assets and Liabilities (Unaudited)

 

     September 30,
2010
    December 31,
2009
 

Assets:

    

Investments at fair value:

    

Non-controlled, non-affiliated investments (amortized cost of $851,812,860 and $963,463,604)

   $ 711,657,715      $ 810,035,780   

Non-controlled, affiliated investments (amortized cost of $63,895,434 and $63,942,195)

     59,357,161        26,793,989   

Controlled investments (amortized cost of $51,118,995 and $27,414,204)

     62,732,218        9,912,276   
                

Total investments at fair value (amortized cost of $966,827,289 and $1,054,820,003)

     833,747,094        846,742,045   

Cash and cash equivalents

     53,254,453        5,048,136   

Cash denominated in foreign currency (cost of $1,282,106 and $759,760)

     1,296,782        759,765   

Unrealized appreciation on forward foreign currency contracts

     —          203,998   

Interest receivable

     12,016,427        18,441,527   

Dividends receivable

     9,102,321        6,620,903   

Prepaid expenses and other assets

     8,056,971        1,710,105   
                

Total Assets

   $ 917,474,048      $ 879,526,479   
                

Liabilities:

    

Payable for investments purchased

   $ 45,590,000      $ 557,483   

Unrealized depreciation on forward foreign currency contracts

     434,560        —     

Credit facility payable

     205,500,000        296,000,000   

Interest payable on credit facility

     148,962        959,458   

Dividend distributions payable

     20,963,513        18,072,063   

Base management fees payable

     4,049,347        4,547,129   

Incentive management fees payable

     —          16,818,602   

Accrued administrative services

     204,630        201,728   

Other accrued expenses and payables

     1,505,342        2,807,254   
                

Total Liabilities

     278,396,354        339,963,717   
                

Net Assets:

    

Common stock, par value $.001 per share, 200,000,000 and 100,000,000 common shares authorized, 66,472,657 and 57,436,875 issued and 65,510,978 and 56,475,196 outstanding

     66,473        57,437   

Paid-in capital in excess of par

     914,223,076        826,617,395   

Undistributed net investment income

     19,727,731        19,463,949   

Accumulated net realized loss

     (156,017,825     (93,279,572

Net unrealized depreciation

     (133,495,861     (207,870,547

Treasury stock at cost, 961,679 and 961,679 shares held

     (5,425,900     (5,425,900
                

Total Net Assets

     639,077,694        539,562,762   
                

Total Liabilities and Net Assets

   $ 917,474,048      $ 879,526,479   
                

Net Asset Value Per Share

   $ 9.76      $ 9.55   

The accompanying notes are an integral part of these financial statements.

 

4


Table of Contents

 

BlackRock Kelso Capital Corporation

Statements of Operations (Unaudited)

 

     Three  months
ended
September 30, 2010
    Three  months
ended
September 30, 2009
    Nine months
ended
September  30, 2010
    Nine months
ended
September  30, 2009
 

Investment Income:

        

From non-controlled, non-affiliated investments:

        

Interest

   $ 21,756,798      $ 27,636,401      $ 72,077,951      $ 90,126,212   

Dividends

     543,026        451,908        1,588,281        1,322,664   

Other income

     —          —          37,500        —     

From non-controlled, affiliated investments:

        

Interest

     1,637,598        753,690        4,722,438        1,668,208   

Dividends

     327,156        279,079        943,730        820,493   

From controlled investments:

        

Interest

     553,592        238,408        1,458,324        672,837   
                                

Total investment income

     24,818,170        29,359,486        80,828,224        94,610,414   
                                

Expenses:

        

Base management fees

     4,049,347        4,555,811        12,522,832        13,951,061   

Incentive management fees

     —          —          493,951        —     

Interest and credit facility fees

     1,748,712        1,456,369        4,570,476        5,004,980   

Amortization of debt issuance costs

     713,305        172,031        1,469,481        511,520   

Investment advisor expenses

     394,306        341,872        1,178,267        1,028,939   

Professional fees

     394,589        342,878        790,820        949,444   

Administrative services

     203,182        174,490        681,892        605,525   

Insurance

     123,409        152,181        458,020        413,406   

Director fees

     93,500        84,083        281,169        268,238   

Other

     286,568        298,190        884,162        808,935   
                                

Net expenses

     8,006,918        7,577,905        23,331,070        23,542,048   
                                

Net Investment Income

     16,811,252        21,781,581        57,497,154        71,068,366   
                                

Realized and Unrealized Gain (Loss):

        

Net realized gain (loss):

        

Non-controlled, non-affiliated investments

     400,317        (55,331,272     (26,685,901     (62,394,229

Non-controlled, affiliated investments

     —          —          (36,221,865     12,240   

Controlled investments

     —          —          2,515        —     

Foreign currency

     875,621        (981,390     166,998        (2,468,431
                                

Net realized gain (loss)

     1,275,938        (56,312,662     (62,738,253     (64,850,420
                                

Net change in unrealized appreciation or depreciation on:

        

Non-controlled, non-affiliated investments

     (9,861,152     82,569,638        9,255,775        71,526,349   

Non-controlled, affiliated investments

     259,096        (13,462,326     36,626,837        (22,434,442

Controlled investments

     9,594,214        (1,969,822     29,115,151        (4,320,733

Foreign currency translation

     (1,763,644     (1,460,443     (623,077     (88,524
                                

Net change in unrealized appreciation or depreciation

     (1,771,486     65,677,047        74,374,686        44,682,650   
                                

Net realized and unrealized gain (loss)

     (495,548     9,364,385        11,636,433        (20,167,770
                                

Net Increase in Net Assets Resulting from Operations

   $ 16,315,704      $ 31,145,966      $ 69,133,587      $ 50,900,596   
                                

Net Investment Income Per Share

   $ 0.26      $ 0.39      $ 0.96      $ 1.28   
                                

Earnings Per Share

   $ 0.25      $ 0.55      $ 1.15      $ 0.91   
                                

Basic and Diluted Weighted-Average Shares Outstanding

     65,509,414        56,338,835        59,898,128        55,738,396   

Dividends Declared Per Share

   $ 0.32      $ 0.16      $ 0.96      $ 0.48   

The accompanying notes are an integral part of these financial statements.

 

5


Table of Contents

 

BlackRock Kelso Capital Corporation

Statements of Changes in Net Assets (Unaudited)

 

     Nine months
ended
September 30, 2010
    Nine months
ended
September 30, 2009
 

Net Increase in Net Assets Resulting from Operations:

    

Net investment income

   $ 57,497,154      $ 71,068,366   

Net realized gain (loss)

     (62,738,253     (64,850,420

Net change in unrealized appreciation or depreciation

     74,374,686        44,682,650   
                

Net increase in net assets resulting from operations

     69,133,587        50,900,596   
                

Dividend Distributions to Stockholders from:

    

Net investment income

     (57,233,372     (26,749,354
                

Capital Share Transactions:

    

Proceeds from shares sold

     88,406,250        —     

Less offering costs

     (4,514,243     —     

Reinvestment of dividends

     3,722,710        8,164,444   

Purchases of treasury stock

     —          (2,234,892
                

Net increase in net assets resulting from capital share transactions

     87,614,717        5,929,552   
                

Total Increase in Net Assets

     99,514,932        30,080,794   

Net assets at beginning of period

     539,562,762        510,295,501   
                

Net assets at end of period

   $ 639,077,694      $ 540,376,295   
                

Capital Share Activity:

    

Shares issued from subscriptions

     8,625,000        —     

Shares issued from reinvestment of dividends

     410,782        1,637,585   

Purchases of treasury stock

     —          (583,572
                

Total increase in shares

     9,035,782        1,054,013   
                

Undistributed net investment income at end of period

   $ 19,727,731      $ 48,174,028   

The accompanying notes are an integral part of these financial statements.

 

6


Table of Contents

 

BlackRock Kelso Capital Corporation

Statements of Cash Flows (Unaudited)

 

     Nine months
ended
September  30, 2010
    Nine months
ended
September  30, 2009
 

Operating Activities:

    

Net increase in net assets resulting from operations

   $ 69,133,587      $ 50,900,596   

Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities:

    

Proceeds from dispositions of short-term investments—net

     358,276        —     

Purchases of investments

     (321,716,307     (38,173,072

Purchases of foreign currency—net

     171,325        (3,989,829

Proceeds from sales/repayments of investments

     354,230,907        72,248,410   

Net change in unrealized appreciation or depreciation on investments

     (74,997,763     (44,771,174

Net change in unrealized appreciation or depreciation on foreign currency translation

     623,077        88,524   

Net realized loss (gain) on investments

     62,905,251        62,381,989   

Net realized loss (gain) on foreign currency

     (166,998     2,468,431   

Amortization of premium/discount—net

     (7,788,930     (4,023,105

Amortization of debt issuance costs

     1,469,481        511,520   

Decrease (increase) in interest receivable

     6,425,100        (196,192

Increase in dividends receivable

     (2,481,418     (2,012,815

Increase in prepaid expenses and other assets

     (14,949     (92,086

Increase in payable for investments purchased

     45,032,517        845,137   

Decrease in interest payable on credit facility

     (810,496     (561,814

Decrease in base management fees payable

     (497,782     (1,169,218

Decrease in incentive management fees payable

     (16,818,602     —     

Increase in accrued administrative services payable

     2,902        19,512   

Increase (decrease) in other accrued expenses and payables

     (1,301,912     9,080   
                

Net cash provided by operating activities

     113,757,266        94,483,894   
                

Financing Activities:

    

Net proceeds from issuance of common stock

     83,892,007        —     

Dividend distributions paid

     (50,619,212     (29,032,636

Borrowings under credit facility

     229,600,000        42,200,000   

Repayments under credit facility

     (320,100,000     (120,700,000

Increase in deferred debt issuance costs

     (7,801,398     —     

Purchases of treasury stock

     —          (2,234,892
                

Net cash used in financing activities

     (65,028,603     (109,767,528
                

Effect of exchange rate changes on cash and cash equivalents

     14,671        10,046   
                

Net increase (decrease) in cash

     48,743,334        (15,273,588

Cash and cash equivalents, beginning of period

     5,807,901        15,786,271   
                

Cash and cash equivalents, end of period

   $ 54,551,235      $ 512,683   
                

Supplemental disclosure of cash flow information and non-cash financing activities:

    

Cash paid during period for:

    

Interest

   $ 4,490,212      $ 5,340,869   

Taxes

   $ 1,110,381      $ 500,051   

Dividend distributions reinvested

   $ 3,722,710      $ 8,164,444   

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

 

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)

September 30, 2010

 

Portfolio Company

  

Industry

   Principal
Amount or
Number  of

Shares/Units
     Cost(a)      Fair
Value(b)
 

Senior Secured Notes—13.5%

           

AGY Holding Corp., Second Lien, 11.00%, 11/15/14

   Glass Yarns/Fibers    $ 23,500,000       $ 23,175,641       $ 20,116,000   

American Residential Services L.L.C. et al., Second Lien, 12.00%, 4/15/15, acquired 4/9/10(c)

  

HVAC/

Plumbing

Services

     40,000,000         39,829,485         40,000,000   

TriMark USA, Inc., Second Lien, 11.50% (LIBOR + 1.75% cash, 2.00% PIK), 11/30/13

   Food Service Equipment      31,818,047         31,818,047         26,377,161   
                       

Total Senior Secured Notes

           94,823,173         86,493,161   
                       

Unsecured Debt—0.7%

           

Big Dumpster Acquisition, Inc., 13.50% PIK, 7/5/15

   Waste Management Equipment      47,431,581         44,806,169         2,229,284   

Marsico Parent Holdco, LLC et al., 12.50% PIK, 7/15/16, acquired 11/28/07(c)

  

Financial

Services

     12,370,625         11,776,838         1,645,293   

Marsico Parent Superholdco, LLC et al., 14.50% PIK, 1/15/18, acquired 11/28/07(c)

  

Financial

Services

     8,669,585         7,847,363         580,862   
                       

Total Unsecured Debt

           64,430,370         4,455,439   
                       

Subordinated Debt—33.9%

           

A & A Manufacturing Co., Inc., 19.00% (12.00% cash, 7.00% PIK), 4/2/14

  

Protective

Enclosures

     21,225,382         21,225,382         18,996,717   

Aspen Marketing Holdings, Inc., 13.00%, 8/12/16

  

Marketing

Services

     50,000,000         50,000,000         50,000,000   

Conney Safety Products, LLC, 16.00%, 10/1/14(d)

  

Safety

Products

     30,582,734         29,302,905         29,359,425   

Mattress Giant Corporation, 11.00% PIK, 12/31/12(d)

  

Bedding

—Retail

     6,233,052         3,582,093         1,564,496   

MediMedia USA, Inc., 11.38%, 11/15/14, acquired multiple dates(c)

   Information Services      8,000,000         8,051,061         7,504,000   

MedQuist Inc. et al., 13.00%, 10/15/16

  

Medical

Transcription

     43,000,000         43,000,000         43,000,000   

The Pay-O-Matic Corp., 14.00% (12.00% cash, 2.00% PIK), 1/15/15

  

Financial

Services

     15,366,867         15,366,867         15,612,737   

PGA Holdings, Inc., 12.50%, 3/12/16

  

Healthcare

Services

     5,000,000         4,932,294         5,150,000   

Sarnova HC, LLC et al., 14.00% (12.00% cash, 2.00% PIK), 4/6/16

   Healthcare Products      25,246,437         25,246,437         25,246,437   

Sentry Security Systems, LLC, 16.00% (14.00% cash, 2.00% PIK), 8/7/12

  

Security

Services

     10,999,832         10,999,832         10,823,835   

U.S. Security Holdings, Inc., 13.00% (11.00% cash, 2.00% PIK), 5/8/14, acquired 5/10/06(c)

  

Security

Services

     7,000,000         7,000,000         7,000,000   

Wastequip, Inc., 12.50% (10.00% cash, 2.50% PIK), 2/5/15

   Waste Management Equipment      8,237,300         8,074,960         2,306,444   
                       

Total Subordinated Debt

           226,781,831         216,564,091   
                       

The accompanying notes are an integral part of these financial statements.

 

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BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

September 30, 2010

 

 

Portfolio Company

  

Industry

   Principal
Amount or
Number  of

Shares/Units
    Cost(a)      Fair
Value(b)
 

Senior Secured Loans—66.9%(e)

          

Alpha Media Group Inc., First Lien, 12.00% PIK, 7/15/13

   Publishing    $ 4,335,997      $ 3,171,759       $ 1,685,551   

Al Solutions, Inc., First Lien, 10.00%, 6/28/13(f)

   Metals      125,000        125,000         125,000   

American Safety Razor Company, LLC, Second Lien, 10.50% (Base Rate + 7.25%), 1/30/14(g)

   Consumer Products      10,000,000        10,000,000         2,000,000   

American SportWorks LLC, Second Lien, 13.00%, 6/16/15(f)

  

Utility

Vehicles

     8,000,000        8,000,000         6,560,000   

AmQuip Crane Rental LLC, Second Lien, 6.04% (LIBOR + 5.75%), 6/29/14

  

Construction

Equipment

     24,089,541        22,570,774         20,476,110   

Arclin US Holdings Inc., Second Lien, 7.76% (LIBOR + 6.00%), 1/15/15(h)

   Chemicals      3,568,163        2,794,099         3,421,869   

Ashton Woods USA L.L.C., Second Lien, 11.75%, 7/6/15

   Homebuilding      37,500,000        37,500,000         37,500,000   

Bankruptcy Management Solutions, Inc., Term Loan A, First Lien, 7.50% (LIBOR + 6.00%), 8/20/14

  

Financial

Services

     4,000,000        4,000,000         4,000,000   

Bankruptcy Management Solutions, Inc., Second Lien, 6.64% (LIBOR + 6.25%), 7/31/13

  

Financial

Services

     43,216,385        29,563,710         26,621,293   

The Bargain! Shop Holdings Inc., Term Loan A, First Lien, 16.00%, 6/29/12(h)

  

Discount

Stores

     12,475,941 (i)      12,161,980         12,161,564   

The Bargain! Shop Holdings Inc., Term Loan B, First Lien, 16.00%, 7/1/12(h)

  

Discount

Stores

     17,149,059 (i)      16,085,559         16,716,927   

Berlin Packaging L.L.C., Second Lien, 6.82% (LIBOR + 6.50%), 8/17/15

  

Rigid

Packaging

     24,000,000        23,560,247         24,000,000   

Electrical Components International, Inc., Tranche B, First Lien, 9.50% (LIBOR + 6.50%), 5/14/15(f)

   Electronics      1,645,843        1,645,843         1,645,843   

Event Rentals, Inc., Acquisition Loan, First Lien, 7.75% (LIBOR + 4.25% cash, 2.00% PIK), 12/19/13

  

Party

Rentals

     3,147,237        3,147,237         2,549,262   

Facet Technologies, LLC, Second Lien, 17.50% PIK, 7/26/12

   Medical Devices      39,080,685        36,668,340         7,897,000   

Facet Technologies, LLC, Guaranty(j)

  

Medical

Devices

     —          —           (175,000

Fitness Together Franchise Corporation, First Lien, 11.50% (9.50% cash, 2.00% PIK), 11/10/13(f)

   Personal Fitness      7,129,607        7,129,607         6,159,981   

Heartland Automotive Services II, Inc. et al., Term Loan A, First Lien, 7.25% (Base Rate + 4.00%), 1/30/14

   Automobile Repair      3,284,001        3,282,857         3,080,392   

Heartland Automotive Services II, Inc. et al., Term Loan B, First Lien, 9.25% (Base Rate + 4.00% cash, 2.00% PIK), 1/30/14

   Automobile Repair      2,293,349        2,293,204         2,050,254   

The accompanying notes are an integral part of these financial statements.

 

9


Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

September 30, 2010

 

 

Portfolio Company

  

Industry

   Principal
Amount or
Number of

Shares/Units
     Cost(a)      Fair
Value(b)
 

Hoffmaster Group, Inc., First Lien, 7.00% (LIBOR + 5.00%), 6/2/16

  

Consumer

Products

   $ 4,821,886       $ 4,821,886       $ 4,821,886   

Hoffmaster Group, Inc., Second Lien, 13.50%, 6/2/17

  

Consumer

Products

     33,000,000         33,000,000         33,000,000   

InterMedia Outdoors, Inc., Second Lien, 7.04% (LIBOR + 6.75%), 1/31/14

  

Printing/

Publishing

     10,000,000         10,000,000         8,350,000   

LJVH Holdings Inc., Second Lien, 5.79% (LIBOR + 5.50%), 1/19/15(h)

  

Specialty

Coffee

     25,000,000         25,000,000         25,000,000   

MCCI Group Holdings, LLC, Second Lien, 8.00% (LIBOR + 7.25%), 6/21/13

   Healthcare Services      29,000,000         28,969,644         28,855,000   

Navilyst Medical, Inc., Second Lien, 13.00%, 8/14/15

   Healthcare Services      15,000,000         14,829,164         14,850,000   

Physiotherapy Associates, Inc. et al., Second Lien, 12.00% (Base Rate + 8.75%), 12/31/13

  

Rehabilitation

Centers

     17,000,000         17,000,000         17,000,000   

Premier Yachts, Inc. et al., Term A, First Lien, 4.01% (LIBOR + 3.75%), 8/22/12

   Entertainment Cruises      5,083,162         5,075,150         5,083,162   

Premier Yachts, Inc. et al., Term B, First Lien, 7.26% (LIBOR + 7.00%), 8/22/13

   Entertainment Cruises      687,342         685,923         687,342   

Total Safety U.S., Inc., Second Lien, 6.78% (LIBOR + 6.50%), 12/8/13

   Industrial Safety Equipment      9,000,000         9,000,000         8,730,000   

United Subcontractors, Inc., First Lien, 1.79% (LIBOR + 1.50%), 6/30/15(d)

   Building and Construction      1,626,814         1,618,914         1,376,285   

Volume Services America, Inc. et al., Term Loan B, First Lien, 10.75% (LIBOR + 8.50%), 9/16/16

  

Concession

Services

     45,000,000         45,000,000         45,000,000   

Water Pik, Inc., Second Lien, 5.76% (LIBOR + 5.50%), 6/15/14

  

Consumer

Products

     30,000,000         30,000,000         30,000,000   

WBS Group LLC et al., Second Lien, 10.50% (LIBOR + 9.00%), 6/7/13

   Software      20,000,000         20,000,000         18,400,000   

Wembley, Inc., Second Lien, 8.50% (Base Rate + 5.25%), 8/22/12(g)

   Gaming      1,000,000         1,000,000         23,750   

Westward Dough Operating Company, LLC, Term Loan A, First Lien, 4.29% (LIBOR + 4.00%), 3/30/11

   Restaurants      6,850,000         6,850,000         3,144,150   

Westward Dough Operating Company, LLC, Term Loan B, First Lien, 7.29% (LIBOR + 7.00%), 3/30/11(g)

   Restaurants      8,334,656         8,334,656         4,778,156   
                       

Total Senior Secured Loans

           484,885,553         427,575,777   
                       

Preferred Stock—0.8%

           

Alpha Media Group Holdings Inc., Series A-2(k)

   Publishing      5,000         —           —     

Facet Holdings Corp., Class A, 12.00% PIK(g)

  

Medical

Devices

     900         900,000         —     

The accompanying notes are an integral part of these financial statements.

 

10


Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

September 30, 2010

 

 

Portfolio Company

  

Industry

   Principal
Amount or
Number of

Shares/Units
     Cost(a)      Fair
Value(b)
 

Fitness Together Holdings, Inc., Series A(f)(k)

  

Personal

Fitness

     187,500       $ 173,326       $ —     

Fitness Together Holdings, Inc., Series A-1(f)(k)

  

Personal

Fitness

     49,056         49,056         —     

Fitness Together Holdings, Inc., Series B Convertible(f)(k)

  

Personal

Fitness

     13,263,524         7,600,000         238,000   

M & M Tradition Holdings Corp., Series A Convertible, 16.00% PIK(d)

  

Sheet Metal

Fabrication

     4,968         4,968,000         5,117,040   
                       

Total Preferred Stock

           13,690,382         5,355,040   
                       

Common Stock—11.2%(k)

           

Alpha Media Group Holdings Inc., Class B

   Publishing      12,500         —           —     

Arclin Cayman Holdings Ltd.(h)

   Chemicals      450,532         9,722,203         5,410,000   

BKC ARS Blocker, Inc. (American Residential)(l)

  

HVAC/ Plumbing

Services

     1,000         20,798         962,000   

BKC ASW Blocker, Inc. (American SportWorks)(f)(m)

  

Utility

Vehicles

     1,000         7,428,827         523,394   

BKC CSP Blocker, Inc. (Conney Safety)(d)(n)

   Safety Products      100         888,910         1,004,468   

BKC DVSH Blocker, Inc. (DynaVox Systems and Sunrise Medical)(o)

   Augmentative Communication Products      100         758,068         1,297,342   

BKC MTCH Blocker, Inc. (Marquette Transportation)(p)

   Transportation      1,000         5,000,000         3,095,963   

ECI Holdco, Inc., Class A-1(f)

   Electronics      18,848,836         18,848,836         47,480,000   

Facet Holdings Corp.

   Medical Devices      10,000         100,000         —     

Fitness Together Holdings, Inc.(f)

   Personal Fitness      173,547         118,500         —     

M & M Tradition Holdings Corp.(d)

  

Sheet Metal

Fabrication

     500,000         5,000,000         5,000,000   

MGHC Holding Corporation (Mattress Giant)(d)

   Bedding—Retail      2,285,815         2,285,815         —     

USI Senior Holdings, Inc. (United Subcontractors)(d)

  

Building and

Construction

     88,330         7,198,797         6,885,447   
                       

Total Common Stock

           57,370,754         71,658,614   
                       

Limited Partnership/Limited Liability Company Interests—3.7%

           

Big Dumpster Coinvestment, LLC(k)

   Waste Management Equipment      —           5,333,333         —     

Marsico Parent Superholdco, LLC, 16.75% PIK, acquired 11/28/07(c)(g)

  

Financial

Services

     1,750         1,650,005         —     

Penton Business Media Holdings LLC(d)(k)

   Information Services      —           9,050,000         9,050,000   

The accompanying notes are an integral part of these financial statements.

 

11


Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

September 30, 2010

 

 

Portfolio Company

  

Industry

   Principal
Amount or
Number of

Shares/Units
     Cost(a)     Fair
Value(b)
 

PG Holdco, LLC (Press Ganey), 15.00% PIK

   Healthcare Services      333       $ 333,333      $ 352,751   

PG Holdco, LLC (Press Ganey), Class A(k)

   Healthcare Services      16,667         166,667        200,000   

Sentry Security Systems Holdings, LLC(k)

   Security Services      147,271         147,271        2,843   

Sentry Security Systems Holdings, LLC, 8.00% PIK

   Security Services      602,729         602,729        602,729   

VSS-AHC Holdings LLC (Advanstar)(k)

  

Printing/

Publishing

     352,941         4,199,161        6,440,104   

WBS Group Holdings, LLC, Class B, 16.00% PIK

   Software      8,000         8,000,000        7,066,720   
                      

Total Limited Partnership/Limited Liability Company Interests

           29,482,499        23,715,147   
                      

Equity Warrants/Options—0.8%(k)

          

Arclin Cayman Holdings Ltd., Tranche 1, expire 1/15/14(h)

   Chemicals      230,159         403,815        996,305   

Arclin Cayman Holdings Ltd., Tranche 2, expire 1/15/15(h)

   Chemicals      230,159         323,052        1,144,162   

Arclin Cayman Holdings Ltd., Tranche 3, expire 1/15/14(h)

   Chemicals      230,159         484,578        828,490   

Arclin Cayman Holdings Ltd., Tranche 4, expire 1/15/15(h)

   Chemicals      230,159         403,815        986,094   

Kaz, Inc., expire 12/8/16

   Consumer Products      49         512,000        1,007,503   

Kaz, Inc., expire 12/8/16

   Consumer Products      16         64,000        161,112   

Kaz, Inc., expire 12/8/16

   Consumer Products      16         24,000        75,892   

Kaz, Inc., expire 12/8/16

   Consumer Products      16         9,000        36,250   

Marsico Superholdco SPV, LLC, expire 12/14/19, acquired 11/28/07(c)

  

Financial

Services

     455         444,450        —     
                      

Total Equity Warrants/Options

           2,668,710        5,235,808   
                      

TOTAL INVESTMENTS INCLUDING UNEARNED INCOME

           974,133,272        841,053,077   

UNEARNED INCOME—(1.1)%

           (7,305,983     (7,305,983
                      

TOTAL INVESTMENTS—130.5%

         $ 966,827,289        833,747,094   
                

OTHER ASSETS & LIABILITIES (NET)—(30.5)%

             (194,669,400
                

NET ASSETS—100.0%

           $ 639,077,694   
                

 

(a) Represents amortized cost for fixed income securities and unearned income and cost for preferred and common stock, limited partnership/limited liability company interests and equity warrants/options.
(b) Fair value is determined by or under the direction of the Company’s Board of Directors (see Note 2).
(c) These securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the aggregate, these securities represent 8.9% of net assets at September 30, 2010.
(d) “Non-controlled, affiliated” investments under the Investment Company Act of 1940, whereby the Company owns 5% or more (but not more than 25%) of the portfolio company’s outstanding voting securities, are as follows:

The accompanying notes are an integral part of these financial statements.

 

12


Table of Contents

 

Non-controlled,

Affiliated Investments

  Fair Value at
December 31,
2009
    Gross
Additions
(Cost)*
    Gross
Reductions
(Cost)**
    Net
Unrealized

Gain (Loss)
    Fair Value at
September 30,
2010
    Net
Realized

Gain
(Loss)***
    Interest
Income***
    Dividend
Income***
 

BKC CSP Blocker, Inc.

               

Common Stock

  $ —        $ 888,910      $ —        $ 115,558      $ 1,004,468      $ —        $ —        $ —     

Conney Safety Products, LLC

               

Subordinated Debt

    —          25,286,001        —          4,073,424        29,359,425        —          3,662,237        —     

M&M Tradition Holdings Corp.:

               

Preferred Stock

    5,117,040        —          —          —          5,117,040        —          —          943,730   

Common Stock

    5,000,000        —          —          —          5,000,000        —          —          —     

Mattress Giant Corporation

               

Subordinated Debt

    3,521,162        1,060,891        —          (3,017,557     1,564,496        —          1,061,040        —     

MGHC Holding Corporation

               

Common Stock

    —          —          —          —          —          —          —          —     

Penton Business Media Holdings LLC

               

Limited Liability Co. Interest

    515,870        9,050,000        (14,943,201     14,427,331        9,050,000        (14,426,995     —          —     

Penton Media, Inc.

               

Senior Secured Loan

    4,290,000        14,571        (25,694,870     21,390,299        —   †      (21,794,870     (25,073     —     

United Subcontractors, Inc.

               

Senior Secured Loan

    1,447,864        1,244        —          (72,823     1,376,285        —          24,234        —     

USI Senior Holdings, Inc.

               

Common Stock

    6,902,053        272,789        —          (289,395     6,885,447        —          —          —     
                                                               

Totals

  $ 26,793,989      $ 36,574,406      $ (40,638,071   $ 36,626,837      $ 59,357,161      $ (36,221,865   $ 4,722,438      $ 943,730   
                                                               

 

* Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-in-kind interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.
** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.
*** For the nine months ended September 30, 2010.
Investment no longer held at September 30, 2010.

The aggregate fair value of non-controlled, affiliated investments (net of unearned income) at September 30, 2010 represents 9.3% of net assets.

 

(e) Approximately 68% of the senior secured loans to the Company’s portfolio companies bear interest at a floating rate that may be determined by reference to the London Interbank Offered Rate (LIBOR) or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrower’s option. In addition, approximately 24% of such senior secured loans have floors of 1.50% to 3.25% on the LIBOR base rate. The borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the weighted average interest rate at September 30, 2010 of all contracts within the specified loan facility.
(f) “Controlled” investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities, are as follows:

The accompanying notes are an integral part of these financial statements.

 

13


Table of Contents

 

Controlled Investments

  Fair Value at
December 31,
2009
    Gross
Additions

(Cost)*
    Gross
Reductions

(Cost)**
    Net
Unrealized

Gain (Loss)
    Fair Value at
September 30,
2010
    Net
Realized

Gain
(Loss)***
    Interest
Income***
 

Al Solutions, Inc.

             

Senior Secured Loan

  $ 150,000      $ 221      $ (22,638   $ (2,583   $ 125,000      $ 2,362      $ 11,016   

American SportWorks LLC

             

Senior Secured Loan

    3,262,261        2,000,000        (7,178,673     8,476,412        6,560,000        153        334,440   

BKC ASW Blocker, Inc.

             

Common Stock

    163,289        7,353,826        (175,000     (6,818,721     523,394        —          —     

Electrical Components International, Inc.:

             

Senior Secured Loan

    —          1,649,968        (4,125     —          1,645,843        —          60,956   

Senior Secured Loan

    —          12,000,000        (12,000,000     —   †      —          —          218,183   

Senior Secured Loan

    —          12,000,000        (12,000,000     —   †      —          —          218,168   

ECI Holdco, Inc.

             

Common Stock

    —          18,848,836        —          28,631,164        47,480,000        —          —     

Fitness Together Franchise Corporation

             

Senior Secured Loan

    5,807,656        107,048        —          245,277        6,159,981        —          615,561   

Fitness Together Holdings, Inc.:

             

Preferred Stock Series A

    —          —          —          —          —          —          —     

Preferred Stock Series A-1

    —          —          —          —          —          —          —     

Preferred Stock Series B Convertible

    779,000        1,100,000        —          (1,641,000     238,000        —          —     

Common Stock

    —          —          —          —          —          —          —     

Less: Unearned Income

    (249,930     (332,948     358,276        224,602        —          —          —     
                                                       

Totals

  $ 9,912,276      $ 54,726,951      $ (31,022,160   $ 29,115,151      $ 62,732,218      $ 2,515      $ 1,458,324   
                                                       

 

* Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-in-kind interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.
** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.
*** For the nine months ended September 30, 2010. There was no dividend income from these securities during the period.
Investment no longer held at September 30, 2010.

The aggregate fair value of controlled investments (net of unearned income) at September 30, 2010 represents 9.8% of net assets.

 

(g) Non-accrual status (in default) at September 30, 2010 and therefore non-income producing. At September 30, 2010, the aggregate fair value and amortized cost of debt investments on non-accrual status represents 0.9% and 2.2% of total debt investments at fair value and amortized cost, respectively.
(h) Non-U.S. company or principal place of business outside the U.S.
(i) Principal amount is denominated in Canadian dollars.
(j) Guaranty by the Company on behalf of portfolio company Facet Technologies, LLC. Expires December 31, 2011. Maximum potential future payments under this guaranty are $6,000,000 at September 30, 2010.
(k) Non-income producing equity securities at September 30, 2010.
(l) The Company is the sole stockholder of BKC ARS Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of American Residential Services L.L.C.
(m) The Company is the sole stockholder of BKC ASW Blocker, Inc., which is the beneficiary of more than 25% of the voting securities of American SportWorks LLC.
(n) The Company is the sole stockholder of BKC CSP Blocker, Inc., which is the beneficiary of more than 5% (but less than 25%) of the voting securities of Conney Prime Holdings, LLC.
(o) The Company is the sole stockholder of BKC DVSH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of each of DynaVox Systems LLC and Sunrise Medical Investors LLC.
(p) The Company is the sole stockholder of BKC MTCH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of Marquette Transportation Company Holdings, LLC.
PIK Payment-in-kind.

The accompanying notes are an integral part of these financial statements.

 

14


Table of Contents

 

BlackRock Kelso Capital Corporation

Schedules of Investments

December 31, 2009

 

Portfolio Company

  

Industry(a)

   Principal
Amount or
Number of

Shares/Units
     Cost(b)      Fair
Value(c)
 

Senior Secured Notes—9.0%

           

AGY Holding Corp., Second Lien, 11.00%, 11/15/14

   Glass Yarns/
Fibers
   $ 23,500,000       $ 23,131,937       $ 19,740,000   

TriMark Acquisition Corp., Second Lien, 11.50% (9.50% cash, 2.00% PIK), 11/30/13

   Food Service
Equipment
     31,503,017         31,503,017         28,667,746   
                       

Total Senior Secured Notes

           54,634,954         48,407,746   
                       

Unsecured Debt—23.5%

           

ASM Intermediate Holdings Corp. II, 12.00% PIK, 12/27/13

   Marketing
Services
     57,401,749         57,401,749         56,138,911   

Big Dumpster Acquisition, Inc., 13.50% PIK, 7/5/15

   Waste Management Equipment      42,889,344         42,889,344         14,024,815   

Marquette Transportation Company Holdings, LLC, 14.75% PIK, 3/21/14

   Transportation      52,253,576         52,253,576         51,365,265   

Marsico Parent Holdco, LLC et al., 12.50% PIK, 7/15/16, acquired 11/28/07(d)

  

Financial

Services

     11,279,758         11,279,758         3,508,005   

Marsico Parent Superholdco, LLC et al., 14.50% PIK, 1/15/18, acquired 11/28/07(d)

  

Financial

Services

     7,791,207         7,483,674         1,947,802   
                       

Total Unsecured Debt

           171,308,101         126,984,798   
                       

Subordinated Debt—24.7%

           

A & A Manufacturing Co., Inc., 16.00% (14.00% cash, 2.00% PIK), 4/2/14

  

Protective

Enclosures

     19,542,243         19,542,243         14,871,647   

Conney Safety Products, LLC, 18.00% (16.00% cash, 2.00% PIK), 10/1/14

  

Safety

Products

     30,300,750         30,300,750         25,452,630   

DynaVox Systems LLC, 15.00%, 6/23/15

  

Augmentative Communication

Products

     25,000,000         25,000,000         25,950,000   

Mattress Giant Corporation, 11.00% PIK, 12/31/12(e)

  

Bedding

—Retail

     5,744,147         2,521,202         3,521,162   

MediMedia USA, Inc., 11.38%, 11/15/14, acquired multiple
dates(d)

   Information
Services
     8,000,000         8,058,173         6,728,000   

The Pay-O-Matic Corp., 14.00% (12.00% cash, 2.00% PIK), 1/15/15

  

Financial

Services

     15,366,867         15,366,867         15,643,470   

PGA Holdings, Inc., 12.50%, 3/12/16

   Healthcare
Services
     5,000,000         4,923,000         5,100,000   

Sentry Security Systems, LLC, 16.00% (14.00% cash, 2.00% PIK), 8/7/12

   Security
Services
     10,834,674         10,834,674         10,607,146   

Tri-anim Health Services, Inc. et al., 14.00% (12.00% cash, 2.00% PIK), 6/4/15

   Healthcare
Products
     15,021,667         15,021,667         15,322,100   

U.S. Security Holdings, Inc., 13.00% (11.00% cash, 2.00% PIK), 5/8/14, acquired 5/10/06(d)

   Security
Services
     7,000,000         7,000,000         7,000,000   

Wastequip, Inc., 12.50% (10.00% cash, 2.50% PIK), 2/5/15

   Waste Management Equipment      7,947,596         7,947,596         3,035,981   
                       

Total Subordinated Debt

           146,516,172         133,232,136   
                       

The accompanying notes are an integral part of these financial statements.

 

15


Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2009

 

 

Portfolio Company

  

Industry(a)

   Principal
Amount or
Number of

Shares/Units
    Cost(b)      Fair
Value(c)
 

Senior Secured Loans—93.3%(f)

          

Alpha Media Group Inc., First Lien, 12.00% PIK, 7/15/13

   Publishing    $ 3,964,202      $ 2,669,800       $ 2,055,532   

Al Solutions, Inc., First Lien, 10.00%, 6/28/13(g)

   Metals      150,000        147,418         150,000   

American Residential Services L.L.C., Second Lien, 12.00% (10.00% cash, 2.00% PIK), 4/17/15

  

HVAC/

Plumbing

Services

     41,215,100        41,215,100         40,102,293   

American Safety Razor Company, LLC, Second Lien, 6.51% (LIBOR + 6.25%), 1/30/14

   Consumer
Products
     10,000,000        10,000,000         9,090,000   

American SportWorks LLC, Second Lien, 20.00%,
6/27/14(g)(h)

  

Utility

Vehicles

     13,403,274        13,403,274         3,262,261   

AmQuip Crane Rental LLC, Second Lien, 6.01% (LIBOR + 5.75%), 6/29/14

  

Construction

Equipment

     24,089,541        22,267,464         22,403,273   

Applied Tech Products Corp. et al., Tranche A, First Lien, 7.75% (Base Rate + 4.50%), 10/24/10(h)

   Plastic
Packaging
     731,669        730,747         275,359   

Arclin US Holdings Inc., First Lien, 7.00% (Base Rate + 3.75%), 7/10/14(h)

   Chemicals      6,423,655        3,357,410         5,607,851   

Arclin US Holdings Inc., Second Lien, 10.75% (Base Rate + 7.50%), 7/10/15(h)

   Chemicals      14,500,000        14,500,000         3,335,290   

Bankruptcy Management Solutions, Inc., Second Lien, 6.48% (LIBOR + 6.25%), 7/31/13

  

Financial

Services

     24,187,500        24,187,500         17,802,000   

The Bargain! Shop Holdings Inc., Term Loan A, First Lien, 14.50% (13.50% cash, 1.00% PIK), 6/29/12(i)

  

Discount

Stores

     13,602,460 (j)      13,211,257         12,975,113   

The Bargain! Shop Holdings Inc., Term Loan B, First Lien, 14.50% (13.50% cash, 1.00% PIK), 7/1/12(i)

  

Discount

Stores

     18,697,540 (j)      17,511,078         17,835,208   

Berlin Packaging L.L.C., Second Lien, 6.76% (LIBOR + 6.50%), 8/17/15

  

Rigid

Packaging

     24,000,000        23,492,840         22,680,000   

Champion Energy Corporation et al., First Lien, 14.50%, 5/22/11

   Heating and Oil
Services
     30,000,000        30,000,000         30,210,000   

Custom Direct, Inc. et al., Second Lien, 6.31% (LIBOR + 6.00%), 12/31/14

   Printing      10,000,000        10,000,000         7,990,000   

Deluxe Entertainment Services Group Inc., Second Lien, 11.00% (LIBOR + 9.00%), 11/11/13

   Entertainment      12,000,000        12,000,000         11,148,000   

Electrical Components International, Inc., First Lien, 9.25% (Base Rate + 6.00%), 5/1/14

   Electronics      2,974,210        2,052,126         2,562,460   

Electrical Components International, Inc., Second Lien, 11.50% (Base Rate + 8.25%), 5/1/14(h)

   Electronics      26,000,000        22,891,103         8,874,840   

Event Rentals, Inc., Acquisition Loan, First Lien, 7.75% (LIBOR + 4.25% cash, 2.00% PIK), 12/19/13

  

Party

Rentals

     3,217,840        3,217,840         2,622,540   

Facet Technologies, LLC, Second Lien, 17.50% PIK, 7/26/12

   Medical
Devices
     34,321,490        34,321,490         10,000,012   

Facet Technologies, LLC, Guaranty(k)

  

Medical

Devices

     —          —           (225,000

 

The accompanying notes are an integral part of these financial statements.

 

16


Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2009

 

 

Portfolio Company

  

Industry(a)

   Principal
Amount or
Number of

Shares/Units
     Cost(b)      Fair
Value(c)
 

Fitness Together Franchise Corporation, First Lien, 11.50% (9.50% cash, 2.00% PIK), 11/10/13(g)

   Personal
Fitness
   $ 7,022,559       $ 7,022,559       $ 5,807,656   

Heartland Automotive Services II, Inc. et al., Term Loan A, First Lien, 7.25% (Base Rate + 4.00%), 1/30/14

   Automobile
Repair
     3,325,862         3,324,445         3,026,535   

Heartland Automotive Services II, Inc. et al., Term Loan B, First Lien, 9.25% (Base Rate + 4.00% cash, 2.00% PIK), 1/30/14

   Automobile
Repair
     2,258,858         2,258,680         1,951,653   

HIT Entertainment, Inc., Second Lien, 5.78% (LIBOR + 5.50%), 2/26/13

   Entertainment      1,000,000         1,000,000         550,000   

InterMedia Outdoors, Inc., Second Lien, 7.00% (LIBOR + 6.75%), 1/31/14

  

Printing/

Publishing

     10,000,000         10,000,000         8,520,000   

Isola USA Corp., First Lien, 13.00% (Base Rate + 9.75%), 12/18/12

   Electronics      10,901,316         10,002,294         10,138,224   

Isola USA Corp., Second Lien, 17.75% (Base Rate + 14.50%), 12/18/13

   Electronics      25,000,000         25,000,000         22,050,000   

LJVH Holdings Inc., Second Lien, 5.75% (LIBOR + 5.50%),
1/19/15(i)

  

Specialty

Coffee

     25,000,000         25,000,000         22,700,000   

MCCI Group Holdings, LLC, Second Lien, 7.51% (LIBOR + 7.25%), 6/21/13

   Healthcare Services      29,000,000         28,961,307         28,710,000   

Navilyst Medical, Inc., Second Lien, 12.25%, 8/14/15

   Healthcare
Services
     15,000,000         14,802,935         14,700,000   

New Enterprise Stone & Lime Co., Inc., Second Lien, 12.50%, 7/11/14

   Mining/
Construction
     35,000,000         34,752,695         35,000,000   

Oriental Trading Company, Inc., Second Lien, 6.24% (LIBOR + 6.00%), 1/31/14

   Party Supplies and Novelties      3,000,000         3,000,000         802,500   

Penton Media, Inc. et al., Second Lien, 5.28% (LIBOR + 5.00%),
2/1/14(e)

  

Information

Services

     26,000,000         25,680,299         4,290,000   

Physiotherapy Associates, Inc. et al., Second Lien, 12.00% (Base Rate + 8.75%), 12/31/13

  

Rehabilitation

Centers

     17,000,000         17,000,000         15,759,000   

PQ Corporation, Second Lien, 6.74% (LIBOR + 6.50%), 7/30/15

  

Specialty

Chemicals

     10,000,000         8,970,517         8,520,000   

Premier Yachts, Inc. et al., Term A, First Lien, 3.98% (LIBOR + 3.75%), 8/22/12

   Entertainment
Cruises
     5,973,418         5,960,283         5,973,418   

Premier Yachts, Inc. et al., Term B, First Lien, 7.23% (LIBOR + 7.00%), 8/22/13

   Entertainment
Cruises
     1,265,983         1,263,002         1,265,983   

Sunrise Medical LTC LLC et al., Second Lien, 6.74% (LIBOR + 6.50%), 12/28/13

   Healthcare
Equipment
     14,400,000         14,400,000         14,097,600   

Total Safety U.S., Inc., Second Lien, 6.74% (LIBOR + 6.50%), 12/8/13

   Industrial Safety
Equipment
     9,000,000         9,000,000         8,514,000   

United Subcontractors, Inc., First Lien, 1.76% (LIBOR + 1.50%),
6/30/15(e)

   Building and
Construction
     1,626,814         1,617,669         1,447,864   

Water Pik, Inc., Second Lien, 5.73% (LIBOR + 5.50%), 6/15/14

  

Consumer

Products

     30,000,000         30,000,000         30,000,000   

WBS Group LLC et al., Second Lien, 6.54% (LIBOR + 6.25%), 6/7/13

   Software      20,000,000         20,000,000         17,000,000   

The accompanying notes are an integral part of these financial statements.

 

17


Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2009

 

 

Portfolio Company

  

Industry(a)

   Principal
Amount or
Number of

Shares/Units
     Cost(b)      Fair
Value(c)
 

Wembley, Inc., Second Lien, 8.50% (Base Rate + 5.25%), 8/22/12(h)

   Gaming    $ 1,000,000       $ 1,000,000       $ 67,500   

Westward Dough Operating Company, LLC, Term Loan A, First Lien, 4.25% (LIBOR + 4.00%), 3/30/11

   Restaurants      6,850,000         6,850,000         4,719,650   

Westward Dough Operating Company, LLC, Term Loan B, First Lien, 7.25% (LIBOR + 7.00%), 3/30/11(h)

   Restaurants      8,334,656         8,334,656         6,784,379   
                       

Total Senior Secured Loans

           616,377,788         503,152,994   
                       

Preferred Stock—1.1%

           

Alpha Media Group Holdings Inc., Series A-2(l)

   Publishing      5,000         —           —     

Facet Holdings Corp., Class A, 12.00% PIK(h)

  

Medical

Devices

     900         900,000         —     

Fitness Together Holdings, Inc., Series A(g)(l)

  

Personal

Fitness

     187,500         173,326         —     

Fitness Together Holdings, Inc., Series A-1(g)(l)

  

Personal

Fitness

     49,056         49,056         —     

Fitness Together Holdings, Inc., Series B Convertible(g)(l)

  

Personal

Fitness

     11,343,804         6,500,000         779,000   

M & M Tradition Holdings Corp., Series A Convertible, 16.00% PIK(e)

  

Sheet Metal

Fabrication

     4,968         4,968,000         5,117,040   
                       

Total Preferred Stock

           12,590,382         5,896,040   
                       

Common Stock—3.5%(l)

           

Alpha Media Group Holdings Inc., Class B

   Publishing      12,500         —           —     

BKC ARS Blocker, Inc. (American Residential)(m)

  

HVAC/ Plumbing

Services

     1,000         192,418         1,610,000   

BKC ASW Blocker, Inc. (American SportWorks)(g)(n)

  

Utility

Vehicles

     1,000         250,001         163,289   

BKC DVSH Blocker, Inc. (DynaVox Systems)(o)

   Augmentative Communication Products      100         1,000,000         2,560,000   

BKC MTCH Blocker, Inc. (Marquette Transportation)(p)

   Transportation      1,000         5,000,000         2,635,000   

Facet Holdings Corp.

   Medical Devices      10,000         100,000         —     

Fitness Together Holdings, Inc.(g)

   Personal Fitness      173,547         118,500         —     

M & M Tradition Holdings Corp.(e)

  

Sheet Metal

Fabrication

     500,000         5,000,000         5,000,000   

MGHC Holding Corporation (Mattress Giant)(e)

   Bedding—Retail      2,285,815         2,285,815         —     

USI Senior Holdings, Inc. (United Subcontractors)(e)

  

Building and

Construction

     79,237         6,926,008         6,902,053   
                       

Total Common Stock

           20,872,742         18,870,342   
                       

The accompanying notes are an integral part of these financial statements.

 

18


Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2009

 

 

Portfolio Company

  

Industry(a)

   Principal
Amount or
Number of

Shares/Units
     Cost(b)     Fair
Value(c)
 

Limited Partnership/Limited Liability Company Interests—2.4%

          

Big Dumpster Coinvestment, LLC(l)

   Waste Management Equipment      —         $ 5,333,333      $ —     

Marsico Parent Superholdco, LLC, 16.75% PIK, acquired 11/28/07(d)(h)

  

Financial

Services

     1,750         1,650,005        —     

PG Holdco, LLC (Press Ganey), 15.00% PIK

   Healthcare Services      333         333,333        346,654   

PG Holdco, LLC (Press Ganey), Class A(l)

   Healthcare Services      16,667         166,667        250,000   

Prism Business Media Holdings LLC (Penton Media)(e)(l)

  

Information

Services

     68         14,943,201        515,870   

Sentry Security Systems Holdings, LLC(l)

   Security Services      147,271         147,271        479   

Sentry Security Systems Holdings, LLC, 8.00% PIK

   Security Services      602,729         602,729        602,729   

VSS-AHC Holdings LLC (Advanstar)(l)

  

Printing/

Publishing

     352,941         4,199,161        4,198,939   

WBS Group Holdings, LLC, Class B, 16.00% PIK

   Software      8,000         8,000,000        7,167,857   
                      

Total Limited Partnership/Limited Liability Company Interests

           35,375,700        13,082,528   
                      

Equity Warrants/Options—0.2%(l)

          

Kaz, Inc., expire 12/8/16

   Consumer Products      49         512,000        770,160   

Kaz, Inc., expire 12/8/16

   Consumer Products      16         64,000        136,373   

Kaz, Inc., expire 12/8/16

   Consumer Products      16         24,000        75,141   

Kaz, Inc., expire 12/8/16

   Consumer Products      16         9,000        43,073   

Marsico Superholdco SPV, LLC, expire 12/14/19, acquired 11/28/07(d)

  

Financial

Services

     455         444,450        —     
                      

Total Equity Warrants/Options

           1,053,450        1,024,747   
                      

TOTAL INVESTMENTS INCLUDING UNEARNED INCOME

           1,058,729,289        850,651,331   

UNEARNED INCOME—(0.7)%

           (3,909,286     (3,909,286
                      

TOTAL INVESTMENTS—156.9%

         $ 1,054,820,003        846,742,045   
                

OTHER ASSETS & LIABILITIES (NET)—(56.9)%

             (307,179,283
                

NET ASSETS—100.0%

           $ 539,562,762   
                

 

(a) Unaudited.
(b) Represents amortized cost for fixed income securities and unearned income and cost for preferred and common stock, limited partnership/limited liability company interests and equity warrants/options.
(c) Fair value is determined by or under the direction of the Company’s Board of Directors (see Note 2).
(d) These securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the aggregate, these securities represent 3.6% of net assets at December 31, 2009.
(e) “Non-controlled, affiliated” investments under the Investment Company Act of 1940, whereby the Company owns 5% or more (but not more than 25%) of the portfolio company’s outstanding voting securities, are as follows:

The accompanying notes are an integral part of these financial statements.

 

19


Table of Contents

 

Non-controlled,

Affiliated Investments

  Fair Value at
December 31,

2008
    Gross
Additions
(Cost)*
    Gross
Reductions
(Cost)**
    Net
Unrealized

Gain (Loss)
    Fair Value at
December 31,
2009
    Net
Realized

Gain
(Loss) ***
    Interest
Income***
    Dividend
Income***
 

American SportWorks LLC

               

Senior Secured Loan

  $ 5,716,023      $ —        $ (3,572,448   $ (2,143,575   $ —   †    $ —        $ 27,617      $ —     

BKC ASW Blocker, Inc.

               

Common Stock

    16,399        —          (5,883     (10,516     —   †      —          —          —     

M&M Tradition Holdings Corp.:

               

Preferred Stock

    5,537,280        —          (408,000     (12,240     5,117,040        12,240        —          1,110,885   

Common Stock

    6,095,000        —          —          (1,095,000     5,000,000        —          —          —     

Mattress Giant Corporation

               

Subordinated Debt

    —          2,521,202        —          999,960        3,521,162        —          773,581        —     

MGHC Holding Corporation

               

Common Stock

    —          2,285,815        —          (2,285,815     —          —          —          —     

Penton Media, Inc.

               

Senior Secured Loan

    18,226,000        78,211        —          (14,014,211     4,290,000        —          1,437,763        —     

Prism Business Media Holdings LLC

               

Limited Liability Co. Interest

    4,730,000        —          —          (4,214,130     515,870        —          —          —     

United Subcontractors, Inc.

               

Senior Secured Loan

    —          1,617,669        —          (169,805     1,447,864        —          16,210        —     

USI Senior Holdings, Inc.

               

Common Stock

    —          6,926,008        —          (23,955     6,902,053        —          —          —     

Less: Unearned Income

    (305,622     305,622        —          —          —          —          —          —     
                                                               

Totals

  $ 40,015,080      $ 13,734,527      $ (3,986,331   $ (22,969,287   $ 26,793,989      $ 12,240      $ 2,255,171      $ 1,110,885   
                                                               

 

* Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-in-kind interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.
** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.
*** For the year ended December 31, 2009.
Investment moved out of the non-controlled, affiliated category into the controlled category during the year.

The aggregate fair value of non-controlled, affiliated investments (net of unearned income) at December 31, 2009 represents 5.0% of net assets.

 

(f) Approximately 66% of the senior secured loans to the Company’s portfolio companies bear interest at a floating rate that may be determined by reference to the London Interbank Offered Rate (LIBOR) or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrower’s option. In addition, approximately 9% of such senior secured loans have floors of 1.50% to 3.25% on the LIBOR base rate. The borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the weighted average interest rate at December 31, 2009 of all contracts within the specified loan facility.
(g) “Controlled” investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities, are as follows:

The accompanying notes are an integral part of these financial statements.

 

20


Table of Contents

 

Controlled Investments

  Fair Value at
December 31,
2008
    Gross
Additions

(Cost)*
    Net
Unrealized

Gain (Loss)
    Fair Value at
December 31,
2009
    Net
Realized
Loss**
    Interest/Other
Income**
 

Al Solutions, Inc.:

           

Senior Secured Loan

  $ —        $ 147,418      $ 2,582      $ 150,000      $ —        $ 5,821   

Subordinated Debt

    —          71,373        (71,373     —          (13,395,134     71,373   

American SportWorks LLC

           

Senior Secured Loan

    —          3,572,448        (310,187     3,262,261        —          78,075   

BKC ASW Blocker, Inc.

           

Common Stock

    —          5,883        157,406        163,289        —          —     

Fitness Together Franchise Corporation

           

Senior Secured Loan

    6,496,555        140,615        (829,514     5,807,656        —          808,583   

Fitness Together Holdings, Inc.:

           

Preferred Stock Series A

    —          —          —          —          —          —     

Preferred Stock Series A-1

    —          —          —          —          —          —     

Preferred Stock Series B Convertible

    4,700,000        —          (3,921,000     779,000        —          —     

Common Stock

    —          —          —          —          —          —     

Tygem Holdings, Inc.:

           

Preferred Stock

    —          —          —          —          (10,826,867     —     

Preferred Stock Series B Convertible

    —          —          —          —          (14,725,535     —     

Common Stock

    —          —          —          —          (3,608,956     —     

Less: Unearned Income

    —          (249,930     —          (249,930     —          —     
                                               

Totals

  $ 11,196,555      $ 3,687,807      $ (4,972,086   $ 9,912,276      $ (42,556,492   $ 963,852   
                                               

 

* Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-in-kind interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.
** For the year ended December 31, 2009. There was no dividend income from these securities during the year.

The aggregate fair value of controlled investments (net of unearned income) at December 31, 2009 represents 1.8% of net assets.

 

(h) Non-accrual status (in default) at December 31, 2009 and therefore non-income producing. At December 31, 2009, the aggregate fair value and amortized cost of debt investments on non-accrual status represents 3.5% and 6.5% of total debt investments at fair value and amortized cost, respectively.
(i) Non-U.S. company or principal place of business outside the U.S.
(j) Principal amount is denominated in Canadian dollars.
(k) Guaranty by the Company on behalf of portfolio company Facet Technologies, LLC. Expires December 31, 2011. Maximum potential future payments under this guaranty are $6,000,000 at December 31, 2009.
(l) Non-income producing equity securities at December 31, 2009.
(m) The Company is the sole stockholder of BKC ARS Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of American Residential Services L.L.C.
(n) The Company is the sole stockholder of BKC ASW Blocker, Inc., which is the beneficiary of more than 25% of the voting securities of American SportWorks LLC.
(o) The Company is the sole stockholder of BKC DVSH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of DynaVox Systems LLC.
(p) The Company is the sole stockholder of BKC MTCH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of Marquette Transportation Company Holdings, LLC.
PIK Payment-in-kind.

The accompanying notes are an integral part of these financial statements.

 

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BlackRock Kelso Capital Corporation

Notes to Financial Statements (Unaudited)

1. Organization

BlackRock Kelso Capital Corporation (the “Company”) was organized as a Delaware corporation on April 13, 2005 and was initially funded on July 25, 2005. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). In addition, for tax purposes the Company has qualified and has elected to be treated as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986 (the “Code”). The Company’s investment objective is to generate both current income and capital appreciation through debt and equity investments. The Company invests primarily in middle-market companies in the form of senior and junior secured and unsecured debt securities and loans, each of which may include an equity component, and by making direct preferred, common and other equity investments in such companies.

On July 25, 2005, the Company completed a private placement of 35,366,589 shares of its common stock at a price of $15.00 per share receiving net proceeds of approximately $529 million. On July 2, 2007, the Company completed an initial public offering through which it sold an additional 10,000,000 shares of its common stock at a price of $16.00 per share and listed its shares on The NASDAQ Global Select Market. The Company received net proceeds of approximately $150 million from this offering.

On June 22, 2010, the Company closed an add-on public offering through which it sold 7,500,000 shares of its common stock at a price of $10.25 per share receiving net proceeds of approximately $73 million. On June 28, 2010, the underwriters of the add-on offering exercised their over-allotment option under the underwriting agreement and elected to purchase an additional 1,125,000 shares of common stock at a price of $10.25 per share resulting in net proceeds of approximately $11 million.

The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods, have been included. The results of operations for interim periods are not indicative of results to be expected for the full year. Certain prior year amounts have been reclassified to conform to the current year presentation.

Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted herein. These financial statements should be read in conjunction with the Company’s financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the Securities and Exchange Commission (“SEC”) on March 12, 2010.

2. Significant accounting policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ and such differences could be material.

The significant accounting policies consistently followed by the Company are:

 

(a)

Investments for which market quotations are readily available are valued at such market quotations unless they are deemed not to represent fair value. The Company obtains market quotations, when available, from an independent pricing service or one or more broker-dealers or market makers and utilizes the average of the range of bid and ask quotations as a practical expedient for fair value. However, debt investments with remaining maturities within 60 days are valued at amortized cost, which approximates fair value. Debt and equity securities for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued at fair value as determined in good faith by or under the direction of the Company’s Board of Directors. Because the Company expects that there will not be a readily available market value for substantially all of the investments in its portfolio, the Company expects to value substantially all of its portfolio investments at fair value as determined in good faith by or under the direction of the Board of Directors using a consistently applied valuation process in accordance with a documented valuation policy that has been reviewed and approved by the Board of Directors. Due to the inherent uncertainty and subjectivity 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 significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that the Company may ultimately realize. In addition,

 

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changes in the market environment and other events may have differing impacts on the market quotations used to value some of the Company’s investments than on the fair values of the Company’s investments for which market quotations are not readily available. Market quotations may be deemed not to represent fair value in certain circumstances where BlackRock Kelso Capital Advisors LLC, the Company’s investment advisor (the “Advisor”), believes that facts and circumstances applicable to an issuer, a seller or purchaser or the market for a particular security cause current market quotations to not reflect the fair value of the security. Examples of these events could include cases where a security trades infrequently causing a quoted purchase or sale price to become stale, where there is a “forced” sale by a distressed seller, where market quotations vary substantially among market makers, or where there is a wide bid-ask spread or significant increase in the bid-ask spread.

With respect to the Company’s investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value, the Board of Directors undertakes a multi-step valuation process each quarter, as described below:

 

  (i) The quarterly valuation process begins with each portfolio company or investment being initially evaluated and rated by the investment professionals of the Advisor responsible for the portfolio investment;

 

  (ii) The investment professionals provide recent portfolio company financial statements and other reporting materials to independent valuation firms engaged by the Board of Directors, such firms conduct independent appraisals each quarter and their preliminary valuation conclusions are documented and discussed with senior management of the Advisor;

 

  (iii) The audit committee of the Board of Directors reviews the preliminary valuations of the independent valuation firms; and

 

  (iv) The Board of Directors discusses valuations and determines the fair value of each investment in the portfolio in good faith based on the input of the Advisor, the respective independent valuation firms and the audit committee.

Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that the Company may take into account in determining the fair value of its investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, the Company’s principal market (as the reporting entity) and enterprise values.

Until the end of the second calendar quarter following its acquisition, each unquoted investment in a new portfolio company generally is valued at cost, which the Advisor believes approximates fair value under the circumstances. As of that date, an independent valuation firm conducts an initial independent appraisal of the investment.

Accounting Standards Codification (“ASC”) 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), issued by the Financial Accounting Standards Board (“FASB”), defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. ASC 820-10 defines fair value as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. ASC 820-10 emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.

ASC 820-10 establishes a hierarchy that classifies these inputs into the three broad levels listed below:

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

 

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Level 2 – Valuations based on unadjusted quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data is available, such information may be the result of consensus pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence.

Transfers between levels, if any, represent the value as of the beginning of the period of any investment where a change in the pricing level occurred from the beginning to the end of the period.

The Company’s valuation policy and fair value disclosures are consistent with ASC 820-10. The Company evaluates the source of inputs, including any markets in which its investments are trading, in determining fair value and categorizes each investment within the fair value hierarchy pursuant to ASC 820-10.

 

(b) Security transactions are accounted for on the trade date unless there are substantial conditions to the purchase.

 

(c) Gains or losses on the disposition of investments are calculated using the specific identification method.

 

(d) Interest income, adjusted for amortization of premium and accretion of discount, and dividend income are recorded on an accrual basis to the extent that the Company expects to collect such amounts. For loans and securities with payment-in-kind (“PIK”) income, which represents contractual interest or dividends accrued and added to the principal balance and generally due at maturity, PIK income is accrued only to the extent that the portfolio company valuation indicates that the PIK income is likely to be collected. Origination, structuring, closing, commitment and other upfront fees and discounts and premiums on investments purchased are accreted/amortized over the life of the respective investment. Unamortized origination, structuring, closing, commitment and other upfront fees are recorded as unearned income. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, structuring, closing, commitment and other upfront fees are recorded as interest income. Expenses are recorded on an accrual basis.

 

(e) The Company has elected to be taxed as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs.

In order to qualify for favorable tax treatment as a RIC, the Company is required to distribute annually to its stockholders at least 90% of its investment company taxable income, as defined by the Code. To avoid federal excise taxes, the Company must distribute annually at least 98% of its income (both ordinary income and net capital gains). The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. If the Company chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to stockholders. The Company will accrue excise tax on estimated excess taxable income as required.

The Company holds 100% of the common stock of certain companies as indicated in the accompanying schedules of investments. These wholly owned companies are recorded at fair value in the statements of assets and liabilities, net of any applicable income tax liabilities. An income tax provision has been provided at the wholly owned company level on all income of such companies, including realized and unrealized gains. Such wholly owned companies are held in connection with the Company’s election to be taxed as a RIC. In general, these wholly owned companies earn income that, if earned directly by the Company, would not be qualifying income for purposes of the Company qualifying as a RIC. Dividends from these wholly owned companies and gains from the sale of their stock are qualifying income for this purpose. The Company makes investments in securities in accordance with its investment policies through these wholly owned companies.

 

(f) Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is determined by the Board of Directors. Net realized capital gains, if any, generally are distributed at least annually, although the Company may decide to retain such capital gains for investment.

 

(g) Loans or debt securities are placed on non-accrual status, as a general matter, when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest generally is reversed when a loan or debt security is placed on non-accrual status. Interest payments received on non-accrual loans or debt securities may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans and debt securities are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current. The Company may make exceptions to this treatment if the loan or debt security has sufficient collateral value and is in the process of collection.

 

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(h) Recently Issued Accounting Pronouncements:

In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (“ASU 2010-06”). ASU 2010-06 amends ASC 820-10 to require new disclosures with regard to transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements within the Level 3 fair value rollforward. ASU 2010-06 also clarifies existing fair value disclosures about the appropriate level of disaggregation and about inputs and valuation techniques for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales and settlements in the rollforward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption on January 1, 2010 of the applicable additional disclosure requirements of ASU 2010-06 did not materially impact the Company’s financial statements. The adoption of the additional disclosure requirements, which will be effective in 2011, is not expected to materially impact the Company’s financial statement disclosures.

3. Agreements and related party transactions

The Company has entered into an Investment Management Agreement (the “Management Agreement”) with the Advisor, under which the Advisor, subject to the overall supervision of the Company’s Board of Directors, manages the day-to-day operations of, and provides investment advisory services to, the Company. For providing these services, the Advisor receives a base management fee (the “Management Fee”) from the Company quarterly in arrears at an annual rate of 2.0% of the Company’s total assets, including any assets acquired with the proceeds of leverage.

For the three and nine months ended September 30, 2010, the Advisor earned $4,049,347 and $12,522,832, respectively, in base management fees from the Company. For the three and nine months ended September 30, 2009, the Advisor earned $4,555,811 and $13,951,061, respectively, in such fees from the Company.

The Management Agreement provides that the Advisor or its affiliates may be entitled to an incentive management fee (the “Incentive Fee”) under certain circumstances. The determination of the Incentive Fee, as described in more detail below, will result in the Advisor or its affiliates receiving no Incentive Fee payments if returns to Company stockholders do not meet an 8.0% annualized rate of return during the applicable fee measurement period and will result in the Advisor or its affiliates receiving less than the full amount of the Incentive Fee percentage until returns to stockholders exceed an approximate 13.3% annualized rate of return during such period. Annualized rate of return in this context is computed by reference to the Company’s net asset value and does not take into account changes in the market price of the Company’s common stock.

The Advisor will be entitled to receive the Incentive Fee if the Company’s performance exceeds a “hurdle rate” during different measurement periods: trailing four quarters’ periods (which applies only to the portion of the Incentive Fee based on income) and annual periods (which applies only to the portion of the Incentive Fee based on capital gains). The “trailing four quarters’ periods” for purposes of determining the income portion of the Incentive Fee payable for the three months ended September 30, 2010 and 2009 was determined by reference to the four quarter periods ended on September 30, 2010 and 2009, respectively. The term “annual period” means the period beginning on July 1 of each calendar year and ending on June 30 of the next calendar year.

The hurdle rate for each measurement period is 2.0% multiplied by the Company’s net asset values at the beginning of each calendar quarter during the measurement period, calculated after giving effect to any distributions that occurred during the measurement period. A portion of the Incentive Fee is based on the Company’s income and a portion is based on capital gains. Each portion of the Incentive Fee is described below.

Quarterly Incentive Fee Based on Income. For each trailing four quarters’ period, the Company pays the Advisor an Incentive Fee based on the amount by which (A) aggregate distributions and amounts distributable out of taxable net income (excluding any capital gain and loss) during the period less the amount, if any, by which net unrealized capital depreciation exceeds net realized capital gains during the period exceeds (B) the hurdle rate for the period. The amount of the excess of (A) over (B) described in this paragraph for each period is referred to as the excess income amount.

The portion of the Incentive Fee based on income for each period will equal 50% of the period’s excess income amount, until the cumulative Incentive Fee payments for the period equal 20% of the period’s income amount distributed or distributable to stockholders as described in clause (A) of the preceding paragraph. Thereafter, the portion of the Incentive Fee based on income for the period will equal 20% of the period’s remaining excess income amount.

Periodic Incentive Fee Based on Capital Gains. The portion of the Incentive Fee based on capital gains is calculated on an annual basis. For each annual period, the Company pays the Advisor an Incentive Fee based on the

 

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amount by which (A) net realized capital gains, if any, to the extent they exceed gross unrealized capital depreciation, if any, occurring during the period exceeds (B) the amount, if any, by which the period’s hurdle rate exceeds the amount of income used in the determination of the Incentive Fee based on income for the period. The amount of the excess of (A) over (B) described in this paragraph is referred to as the excess gain amount.

The portion of the Incentive Fee based on capital gains for each period will equal 50% of the period’s excess gain amount, until such payments equal 20% of the period’s capital gain amount distributed or distributable to stockholders. Thereafter, the portion of the Incentive Fee based on capital gains for the period equals an amount such that the portion of the Incentive Fee payments to the Advisor based on capital gains for the period equals 20% of the period’s remaining excess gain amount. The result of this formula is that, if the portion of the Incentive Fee based on income for the period exceeds the period’s hurdle, then the portion of the Incentive Fee based on capital gains will be capped at 20% of the capital gain amount.

In calculating whether the portion of the Incentive Fee based on capital gains is payable with respect to any period, the Company accounts for its assets on a security-by-security basis. In addition, the Company uses the “period-to-period” method pursuant to which the portion of the Incentive Fee based on capital gains for any period is based on realized capital gains for the period reduced by realized capital losses and gross unrealized capital depreciation for the period. Based on current interpretations of Section 205(b)(3) of the Investment Advisers Act of 1940 by the SEC and its staff, the calculation of unrealized depreciation for each portfolio security over a period is based on the fair value of the security at the end of the period compared to the fair value at the beginning of the period. Incentive Fees earned in any of the periods described above are not subject to modification or repayment based upon performance in a subsequent period.

For the three and nine months ended September 30, 2010, the Advisor earned zero and $493,951, respectively, in Incentive Fees from the Company. For the three and nine months ended September 30, 2009, the Advisor earned no incentive fees from the Company.

The Management Agreement provides that the Company will reimburse the Advisor for costs and expenses incurred by the Advisor for office space rental, office equipment and utilities allocable to the Advisor under the Management Agreement, as well as any costs and expenses incurred by the Advisor relating to any non-investment advisory, administrative or operating services provided by the Advisor to the Company. For the three and nine months ended September 30, 2010, the Company incurred $394,306 and $1,178,267, respectively, for costs and expenses reimbursable to the Advisor under the Management Agreement. Reimbursements to the Advisor for the three and nine months ended September 30, 2009 were $341,842 and $1,028,939, respectively.

From time to time, the Advisor may pay amounts owed by the Company to third party providers of goods or services. The Company will subsequently reimburse the Advisor for such amounts paid on its behalf. Reimbursements to the Advisor for the three and nine months ended September 30, 2010 were $377,773 and $2,092,971, respectively. Reimbursements to the Advisor for the three and nine months ended September 30, 2009 were $322,201 and $996,768, respectively.

No person who is an officer, director or employee of the Advisor and who serves as a director of the Company receives any compensation from the Company for such services. Directors who are not affiliated with the Advisor receive compensation for their services and reimbursement of expenses incurred to attend meetings.

The Company also has entered into an administration agreement with BlackRock Financial Management, Inc. (the “Administrator”) under which the Administrator provides administrative services to the Company. For providing these services, facilities and personnel, the Company reimburses the Administrator for the Company’s allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the administration agreement, including rent and the Company’s allocable portion of the cost of certain of the Company’s officers and their respective staffs. For the three and nine months ended September 30, 2010, the Company incurred $161,284 and $552,651, respectively, for administrative services expenses payable to the Administrator under the administration agreement. For the three and nine months ended September 30, 2009, the Company incurred $148,941 and $482,916, respectively, in such expenses.

The PNC Financial Services Group, Inc. (“PNC”) is a significant stockholder of the ultimate parent of the Administrator. BNY Mellon Investment Servicing Inc. (“BMIS”), formerly PNC Global Investment Servicing Inc. and until recently a subsidiary of PNC, provides administrative and accounting services to the Company pursuant to a Sub-Administration and Accounting Services Agreement. PFPC Trust Company, until recently another subsidiary of PNC, provides custodian services to the Company pursuant to a Custodian Services Agreement. Also, BMIS provides transfer agency and compliance support services to the Company pursuant to a Transfer Agency Agreement and a Compliance Support Services Agreement, respectively. Effective July 1, 2010, BMIS and PFPC Trust Company were acquired by subsidiaries of The Bank of New York Mellon Corporation and are no longer considered related parties of the Company as of and after that date.

 

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For the services provided to the Company by BMIS and its affiliates, BMIS is entitled to an annual fee of 0.02% of the Company’s average net assets plus reimbursement of reasonable expenses, and a base fee, payable monthly. PFPC Trust Company may charge the Company additional fees for cash overdraft balances or for sweeping excess cash balances. For the six months ended June 30, 2010, the Company incurred $109,755 for administrative, accounting, custodian and transfer agency services fees payable to BMIS and its affiliates under the related agreements. For the three and nine months ended September 30, 2009, the Company incurred $35,749 and $146,178, respectively, for such fees payable to BMIS and its affiliates.

In November 2007, the Company’s Board of Directors authorized the purchase by the Advisor from time to time in the open market of an indeterminate number of shares of the Company’s common stock, in the Advisor’s discretion, subject to compliance with the Company’s and the Advisor’s applicable policies and requirements of law. Pursuant to this authorization, during the nine months ended September 30, 2009, the Advisor purchased 80,867 shares of the Company’s common stock in the open market for $312,322, including brokerage commissions. There were no such purchases during the nine months ended September 30, 2010.

At September 30, 2010 and December 31, 2009, the Advisor owned directly approximately 471,000 and 555,000 shares, respectively, of the Company’s common stock, representing approximately 0.7% and 1.0% of the total shares outstanding. At September 30, 2010 and December 31, 2009, other entities affiliated with the Administrator beneficially owned indirectly approximately 1,762,000 and 2,611,000 shares, respectively, of the Company’s common stock, representing approximately 2.7% and 4.6% of the total shares outstanding. An entity affiliated with the Administrator has ownership and financial interests in the Advisor.

4. Earnings per share

The following information sets forth the computation of basic and diluted net increase in net assets from operations per share (earnings per share) for the three and nine months ended September 30, 2010 and 2009.

 

     Three months
ended

September 30, 2010
     Three months
ended

September 30, 2009
     Nine months
ended
September 30, 2010
     Nine months
ended
September 30, 2009
 

Numerator for basic and diluted net increase in net assets per share

   $ 16,315,704       $ 31,145,966       $ 69,133,587       $ 50,900,596   

Denominator for basic and diluted weighted average shares

     65,509,414         56,338,835         59,898,128         55,738,396   

Basic/diluted net increase in net assets per share from operations

   $ 0.25       $ 0.55       $ 1.15       $ 0.91   

Diluted net increase in net assets per share from operations equals basic net increase in net assets per share from operations for each period because there were no common stock equivalents outstanding during the above periods.

5. Investments

Purchases of investments for the three months ended September 30, 2010 and 2009 totaled $177,428,077 and $10,983,186, respectively, and for the nine months ended September 30, 2010 and 2009 totaled $321,716,307 and $38,173,072, respectively. Proceeds from sales, repayments and other exits of investments for the three months ended September 30, 2010 and 2009 totaled $100,205,621 and $28,339,844, respectively, and for the nine months ended September 30, 2010 and 2009 totaled $354,230,907 and $72,248,410, respectively.

Under the 1940 Act, the Company is required to separately identify non-controlled investments where it owns 5% or more of a portfolio company’s outstanding voting securities as investments in “affiliated” companies. In addition, under the 1940 Act, the Company is required to separately identify investments where it owns more than 25% of a portfolio company’s outstanding voting securities as investments in “controlled” companies. Detailed information with respect to the Company’s non-controlled affiliated and controlled investments is contained in the accompanying schedules of investments and other financial statements. The information in the tables below is presented on an aggregate portfolio basis, without segregating the non-controlled non-affiliated, non-controlled affiliated and controlled investment categories.

 

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At September 30, 2010, investments consisted of the following:

 

     Cost     Fair Value  

Senior secured notes

   $ 94,823,173      $ 86,493,161   

Unsecured debt

     64,430,370        4,455,439   

Subordinated debt

     226,781,831        216,564,091   

Senior secured loans:

    

First lien

     125,429,575        115,065,755   

Second/other priority lien

     359,455,978        312,510,022   
                

Total senior secured loans

     484,885,553        427,575,777   
                

Preferred stock

     13,690,382        5,355,040   

Common stock

     57,370,754        71,658,614   

Limited partnership/limited liability company interests

     29,482,499        23,715,147   

Equity warrants/options

     2,668,710        5,235,808   
                

Total investments including unearned income

     974,133,272        841,053,077   

Unearned income

     (7,305,983     (7,305,983
                

Total investments

   $ 966,827,289      $ 833,747,094   
                

At December 31, 2009, investments consisted of the following:

 

     Cost     Fair Value  

Senior secured notes

   $ 54,634,954      $ 48,407,746   

Unsecured debt

     171,308,101        126,984,798   

Subordinated debt

     146,516,172        133,232,136   

Senior secured loans:

    

First lien

     119,531,264        115,409,425   

Second/other priority lien

     496,846,524        387,743,569   
                

Total senior secured loans

     616,377,788        503,152,994   
                

Preferred stock

     12,590,382        5,896,040   

Common stock

     20,872,742        18,870,342   

Limited partnership/limited liability company interests

     35,375,700        13,082,528   

Equity warrants/options

     1,053,450        1,024,747   
                

Total investments including unearned income

     1,058,729,289        850,651,331   

Unearned income

     (3,909,286     (3,909,286
                

Total investments

   $ 1,054,820,003      $ 846,742,045   
                

The industry composition of the portfolio at fair value at September 30, 2010 and December 31, 2009 was as follows:

 

Industry

   September 30,
2010
    December 31,
2009
 

Personal and Other Services

     14.4     9.4

Business Services

     11.4        12.6   

Consumer Products

     9.4        6.0   

Printing, Publishing and Media

     9.0        3.2   

Healthcare

     8.8        10.0   

Distribution

     6.6        4.8   

Manufacturing

     6.4        7.6   

Electronics

     6.0        8.5   

Financial Services

     5.8        4.6   

Building and Real Estate

     5.4        1.0   

Retail

     4.2        4.6   

Beverage, Food and Tobacco

     3.9        4.0   

Chemicals

     3.9        4.4   

Containers and Packaging

     2.9        2.7   

 

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Industry

   September 30,
2010
    December 31,
2009
 

Entertainment and Leisure

     1.5        2.6   

Transportation

     0.4        6.3   

Metals

     —          4.1   

Utilities

     —          3.6   
                

Total

     100.0     100.0
                

The geographic composition of the portfolio at fair value at September 30, 2010 was United States 92.5% and Canada 7.5%, and at December 31, 2009 was United States 93.7%, Canada 6.3% and United Kingdom and other less than 0.1%. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.

In the ordinary course of its business, the Company manages a variety of risks relating to its investments, including market risk and credit risk. Market risk is the risk of potential adverse changes to the values of investments because of changes in market conditions such as interest rate movements and volatility in investment prices. Credit risk is the risk of default or non-performance by portfolio companies equivalent to the investment’s carrying amount. The Company is also exposed to credit risk related to maintaining all of its cash and cash equivalents at a major financial institution.

The Company has investments in lower rated and comparable quality unrated senior and junior secured, unsecured and subordinated debt securities and loans, which are subject to a greater degree of credit risk than more highly rated investments. The risk of loss due to default by the issuer is significantly greater for holders of such securities and loans, particularly in cases where the investment is unsecured or subordinated to other creditors of the issuer.

6. Foreign currency transactions

The Company may enter into forward foreign currency contracts from time to time to facilitate settlement of purchases and sales of investments denominated in foreign currencies or to help mitigate the impact that an adverse change in foreign exchange rates would have on the value of the Company’s investments denominated in foreign currencies. A forward foreign currency contract is a commitment to purchase or sell a foreign currency at a future date (usually the security transaction settlement date) at a negotiated forward rate. These contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when contracts are settled. The Company’s forward foreign currency contracts generally have terms of approximately three months. The volume of open contracts at the end of each reporting period is reflective of the typical volume of transactions during each calendar quarter. Risks may arise as a result of the potential inability of the counterparties to meet the terms of their contracts. The Company attempts to limit this risk by dealing with creditworthy counterparties.

At September 30, 2010, details of open forward foreign currency contracts were as follows:

 

Foreign Currency

   Settlement Date      Amount and
Transaction
     US$ Value at
Settlement Date
     US$ Value at
September 30, 2010
     Unrealized
Depreciation
 

Canadian dollar

     October 20, 2010         30,125,000 Sold       $ 28,794,961       $ 29,229,521       $ (434,560

At December 31, 2009, details of open forward foreign currency contracts were as follows:

 

Foreign Currency

   Settlement Date      Amount and
Transaction
     US$ Value at
Settlement Date
    US$ Value at
December 31, 2009
    Unrealized
Appreciation
 

Canadian dollar

     January 27, 2010         795,444 Purchased       $ (759,501   $ (760,561   $ 1,060   

Canadian dollar

     January 27, 2010         31,500,000 Sold         30,316,883        30,118,610        198,273   

Canadian dollar

     January 27, 2010         800,000 Sold         769,582        764,917        4,665   
                              

Total

         $ 30,326,964      $ 30,122,966      $ 203,998   
                              

All realized and unrealized gains and losses on forward foreign currency contracts are included in earnings (changes in net assets) and are reported as separate line items within the Company’s statements of operations. Unrealized gains and losses on forward foreign currency contracts are also reported as separate line items within the Company’s statements of assets and liabilities.

7. Credit facility and borrowings

Under the terms of the Company’s amended and restated Senior Secured, Multi-Currency Credit Agreement (the “Credit Facility”), as amended on December 28, 2007, certain lenders agreed to extend credit to the Company in an

 

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aggregate principal amount not to exceed $545,000,000 outstanding, at any one time, consisting of $400,000,000 in revolving loan commitments and $145,000,000 in term loan commitments. On April 20, 2010, the Company amended the Credit Facility to extend through December 6, 2013 certain existing lenders’ commitments. These extended commitments, together with the addition of commitments from new lenders, total $375,000,000, consisting of $275,000,000 of revolving loan commitments and $100,000,000 of term loan commitments. Non-extending lender commitments of $245,000,000, consisting of $200,000,000 of revolving loan commitments and $45,000,000 of term loan commitments, mature on December 6, 2010 unless extended prior to such date. The Credit Facility is secured by substantially all of the assets in the Company’s portfolio, including cash and cash equivalents. Subject to certain exceptions, pricing for outstanding borrowings made by extending lenders and new lenders is at LIBOR plus an applicable spread of either 3.00% or 3.25% for revolving loans, based on a pricing grid depending on the Company’s credit rating, and LIBOR plus 3.00% for term loans. Pricing for outstanding borrowings made by non-extending lenders remains at LIBOR plus 0.875% with respect to revolving loans and LIBOR plus 1.50% with respect to term loans. The Credit Facility does not contain a LIBOR floor requirement. At September 30, 2010, the effective LIBOR spread under the Credit Facility was 2.83%. Term loan commitments under the Credit Facility have been fully drawn and, once repaid, may not be reborrowed. The Credit Facility also includes an “accordion” feature that allows the Company, under certain circumstances, to increase the size of the Credit Facility by up to an additional $275,000,000 of revolving loan commitments and $250,000,000 of term loan commitments. The Credit Facility is used to supplement the Company’s equity capital to make additional portfolio investments and for other general corporate purposes.

At September 30, 2010, the Company had $205,500,000 drawn on the Credit Facility versus $296,000,000 at December 31, 2009. Of the amount drawn at September 30, 2010, $70,473,685 matures on December 6, 2010 and $135,026,315 matures on December 6, 2013. The average debt outstanding on the Credit Facility during the three and nine months ended September 30, 2010 was $176,288,043 and $219,033,333, respectively. The maximum amounts borrowed during the three and nine months ended September 30, 2010 were $205,500,000 and $314,000,000, respectively, and during the three and nine months ended September 30, 2009 were $383,000,000 and $434,000,000. The remaining amount available under the Credit Facility was $414,500,000 at September 30, 2010, of which $245,000,000 expires December 6, 2010.

The weighted average annual interest cost under the Credit Facility for the three and nine months ended September 30, 2010 was 2.96% and 2.25%, respectively, and for the three and nine months ended September 30, 2009 was 1.44% and 1.56%, exclusive of commitment fees and of other prepaid expenses related to establishing the Credit Facility. With respect to any unused portion of the commitments under the Credit Facility, the Company incurs an annual commitment fee of 0.50% to extending lenders and new lenders and 0.17% to non-extending lenders. Commitment fees incurred for the three and nine months ended September 30, 2010 were $417,243 and $843,784, respectively, and for the three and nine months ended September 30, 2009 were $76,451 and $181,040.

The April 2010 amendment to the Credit Facility did not substantially change the financial and operational covenants required under the previous agreement. At September 30, 2010, the Company was in compliance with all such covenants.

8. Capital stock

As a closed-end investment company regulated as a BDC under the 1940 Act, the Company is prohibited from selling shares of its common stock at a price below the current net asset value of the stock, or NAV, unless the Company’s stockholders approve such a sale and its Board of Directors makes certain determinations. On February 8, 2010, subject to certain Board of Director determinations, the Company’s stockholders approved the ability to sell or otherwise issue shares of the Company’s common stock at a price below its then current net asset value per share for a twelve month period expiring on the anniversary of the date of stockholder approval. In any such case, the price at which the Company’s common stock would be issued and sold may not be less than a price that, in the determination of the Company’s Board of Directors, closely approximates the market value of such common stock. Any sale of the Company’s common stock at a price below NAV would have a dilutive effect on NAV.

In 2008, the Company’s Board of Directors approved a share repurchase plan under which the Company may repurchase up to 2.5 percent of its outstanding shares of common stock from time to time in open market or privately negotiated transactions. In 2009, the Board of Directors approved an extension and increase to the plan which authorized the Company to repurchase up to an additional 2.5 percent of its outstanding shares of common stock. In May 2010, the repurchase plan was further extended through the earlier of June 30, 2011 or until the approved number of shares has been repurchased. During the nine months ended September 30, 2009, the Company purchased a total 583,572 shares of its common stock on the open market for $2,234,892, including brokerage commissions. There were no such purchases during the nine months ended September 30, 2010. Since inception of the repurchase plan through September 30, 2010, the Company has purchased 961,679 shares of its common stock on the open market for $5,425,900, including brokerage commissions. At September 30, 2010, the total number of remaining shares authorized for repurchase was 1,794,971. The Company currently holds the shares it repurchased in treasury.

 

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On June 7, 2010, the Company’s stockholders approved an amendment to the Company’s Certificate of Incorporation to increase the number of authorized shares of the Company’s common stock from 100,000,000 to 200,000,000. The amendment was effective on that date.

9. Guarantees and commitments

In the normal course of business, the Company may enter into guarantees on behalf of portfolio companies. Under these arrangements, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. At September 30, 2010 and December 31, 2009, the maximum amount of potential future payments under such guarantees was $6,000,000, with an expiration of December 31, 2011. Guarantees made on behalf of portfolio companies are considered in determining the fair value of the Company’s investments. The potential liability under such guarantees is reflected at fair value in the Company’s schedules of investments.

In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on management’s experience, the Company expects the risk of loss to be remote.

From time to time, the Company may be a party to certain legal proceedings incidental to the normal course of its business, including the enforcement of the Company’s rights under contracts with its portfolio companies. While the Company cannot predict the outcome of these legal proceedings with certainty, it does not expect that these proceedings will have a material effect on its financial statements.

10. Fair value of financial instruments

The carrying values of the Company’s financial instruments approximate fair value. The carrying values of receivables, other assets, accounts payable and accrued expenses approximate fair value due to their short maturities. The carrying and fair values of the Company’s Credit Facility payable were $205,500,000 and $204,473,000 at September 30, 2010 and $296,000,000 and $287,120,000 at December 31, 2009, respectively.

The following tables summarize the fair values of the Company’s investments, forward foreign currency contracts and cash and cash equivalents based on the inputs used at September 30, 2010 and December 31, 2009 in determining such fair values:

 

           Fair Value Inputs at September 30, 2010  
     Fair Value at
September 30,
2010
    Price
Quotations
(Level 1)
     Significant Other
Observable Inputs

(Level 2)
    Significant
Unobservable  Inputs

(Level 3)
 

Senior secured notes

   $ 86,493,161      $ —         $ —        $ 86,493,161   

Unsecured debt

     4,285,214        —           —          4,285,214   

Subordinated debt

     213,054,395        —           —          213,054,395   

Senior secured loans

     423,949,715        —           —          423,949,715   

Preferred stock

     5,355,040        —           —          5,355,040   

Common stock

     71,658,614        —           —          71,658,614   

Limited partnership/limited liability company interests

     23,715,147        —           —          23,715,147   

Equity warrants/options

     5,235,808        —           —          5,235,808   
                                 

Total investments

     833,747,094        —           —          833,747,094   

Forward foreign currency contracts

     (434,560     —           (434,560     —     

Cash and cash equivalents

     54,551,235        54,551,235         —          —     
                                 

Total

   $ 887,863,769      $ 54,551,235       $ (434,560   $ 833,747,094   
                                 
           Fair Value Inputs at December 31, 2009  
     Fair Value at
December 31,
2009
    Price
Quotations
(Level 1)
     Significant Other
Observable Inputs

(Level 2)
    Significant
Unobservable  Inputs

(Level 3)
 

Senior secured notes

   $ 48,407,746      $ —         $ —        $ 48,407,746   

Unsecured debt

     126,312,042        —           —          126,312,042   

Subordinated debt

     131,337,094        —           —          131,337,094   

 

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            Fair Value Inputs at December 31, 2009  
     Fair Value at
December 31,
2009
     Price
Quotations
(Level 1)
     Significant Other
Observable Inputs

(Level 2)
     Significant
Unobservable  Inputs

(Level 3)
 

Senior secured loans

     501,811,506         —           —           501,811,506   

Preferred stock

     5,896,040         —           —           5,896,040   

Common stock

     18,870,342         —           —           18,870,342   

Limited partnership/limited liability company interests

     13,082,528         —           —           13,082,528   

Equity warrants/options

     1,024,747         —           —           1,024,747   
                                   

Total investments