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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended March 31, 2011

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 May 6, 2011 was 73,012,910.

 

 

 


Table of Contents

BLACKROCK KELSO CAPITAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2011

Table of Contents

 

   

INDEX

   PAGE NO.  

PART I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  
 

Statements of Assets and Liabilities as of March 31, 2011 and December 31, 2010 (unaudited)

     4   
 

Statements of Operations for the three months ended March 31, 2011 and 2010 (unaudited)

     5   
 

Statements of Changes in Net Assets for the three months ended March 31, 2011 and 2010 (unaudited)

     6   
 

Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (unaudited)

     7   
 

Schedules of Investments as of March 31, 2011 and December 31, 2010 (unaudited)

     8   
 

Notes to Financial Statements (unaudited)

     24   

Item 2.

 

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

     36   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     44   

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

     45   

Item 4.

 

[Reserved]

     45   

Item 5.

 

Other Information

     45   

Item 6.

 

Exhibits

     46   

SIGNATURES 

     47   

 

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)

 

     March 31,
2011
    December 31,
2010
 

Assets:

    

Investments at fair value:

    

Non-controlled, non-affiliated investments (amortized cost of $838,057,846 and $822,763,237)

   $ 763,796,240      $ 707,262,774   

Non-controlled, affiliated investments (amortized cost of $59,752,716 and $80,424,668)

     63,085,384        77,376,201   

Controlled investments (amortized cost of $82,679,678 and $82,489,600)

     94,306,201        95,446,691   
                

Total investments at fair value (amortized cost of $980,490,240 and $985,677,505)

     921,187,825        880,085,666   

Cash and cash equivalents

     54,379,553        1,344,159   

Cash denominated in foreign currency (cost of $1,319 and $798,560)

     1,341        816,712   

Unrealized appreciation on forward foreign currency contracts

     13,084        —     

Receivable for investments sold

     2,248,053        5,316,189   

Interest receivable

     12,463,206        10,763,333   

Dividends receivable

     10,762,399        9,849,927   

Prepaid expenses and other assets

     8,383,789        7,431,688   
                

Total Assets

   $ 1,009,439,250      $ 915,607,674   
                

Liabilities:

    

Payable for investments purchased

   $ 6,681,194      $ 2,726,437   

Unrealized depreciation on forward foreign currency contracts

     642,924        368,445   

Debt

     275,000,000        170,000,000   

Interest payable

     2,404,554        256,084   

Dividend distributions payable

     23,353,806        23,222,287   

Base management fees payable

     4,465,239        4,355,021   

Incentive management fees payable

     —          14,614,098   

Accrued administrative services

     289,550        80,164   

Other accrued expenses and payables

     1,168,882        1,505,214   
                

Total Liabilities

     314,006,149        217,127,750   
                

Net Assets:

    

Common stock, par value $.001 per share, 200,000,000 common shares authorized, 73,942,315 and 73,531,317 issued and 72,780,636 and 72,569,638 outstanding

     73,942        73,531   

Paid-in capital in excess of par

     998,495,242        994,200,522   

Distributions in excess of net investment income

     (12,506,512     (4,029,341

Accumulated net realized loss

     (223,271,528     (180,403,836

Net unrealized depreciation

     (59,929,103     (105,935,052

Treasury stock at cost, 1,161,679 and 961,679 shares held

     (7,428,940     (5,425,900
                

Total Net Assets

     695,433,101        698,479,924   
                

Total Liabilities and Net Assets

   $ 1,009,439,250      $ 915,607,674   
                

Net Asset Value Per Share

   $ 9.56      $ 9.62   

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
March 31, 2011
    Three months
ended
March 31, 2010
 

Investment Income:

    

From non-controlled, non-affiliated investments:

    

Interest

   $ 21,461,921      $ 25,313,012   

Dividends

     569,426        503,645   

From non-controlled, affiliated investments:

    

Interest

     1,517,625        1,460,708   

Dividends

     354,217        302,163   

From controlled investments:

    

Interest

     1,256,940        219,571   
                

Total investment income

     25,160,129        27,799,099   
                

Expenses:

    

Base management fees

     4,465,239        4,322,471   

Incentive management fees

     —          493,951   

Interest and credit facility fees

     3,642,219        1,122,254   

Amortization of debt issuance costs

     608,727        168,292   

Investment advisor expenses

     425,485        398,664   

Professional fees

     359,056        203,266   

Administrative services

     290,802        257,723   

Insurance

     120,725        152,408   

Director fees

     108,269        95,837   

Other

     262,972        318,968   
                

Net expenses

     10,283,494        7,533,834   
                

Net Investment Income

     14,876,635        20,265,265   
                

Realized and Unrealized Gain (Loss):

    

Net realized gain (loss):

    

Non-controlled, non-affiliated investments

     (37,298,417     (6,695,076

Non-controlled, affiliated investments

     (5,069,199     (36,221,865

Controlled investments

     —          1,881   

Foreign currency

     (500,076     551,737   
                

Net realized loss

     (42,867,692     (42,363,323
                

Net change in unrealized appreciation or depreciation on:

    

Non-controlled, non-affiliated investments

     40,655,229        15,587,411   

Non-controlled, affiliated investments

     6,964,763        37,813,494   

Controlled investments

     (1,330,568     644,132   

Foreign currency translation

     (283,475     (1,463,928
                

Net change in unrealized appreciation or depreciation

     46,005,949        52,581,109   
                

Net realized and unrealized gain

     3,138,257        10,217,786   
                

Net Increase in Net Assets Resulting from Operations

   $ 18,014,892      $ 30,483,051   
                

Net Investment Income Per Share

   $ 0.20      $ 0.36   
                

Earnings Per Share

   $ 0.25      $ 0.54   
                

Basic and Diluted Weighted-Average Shares Outstanding

     72,780,392        56,597,028   

Dividends Declared Per Share

   $ 0.32      $ 0.32   

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)

 

     Three months
ended
March 31, 2011
    Three months
ended
March 31, 2010
 

Net Increase in Net Assets Resulting from Operations:

    

Net investment income

   $ 14,876,635      $ 20,265,265   

Net realized loss

     (42,867,692     (42,363,323

Net change in unrealized appreciation or depreciation

     46,005,949        52,581,109   
                

Net increase in net assets resulting from operations

     18,014,892        30,483,051   
                

Dividend Distributions to Stockholders from:

    

Net investment income

     (23,353,806     (18,112,395
                

Capital Share Transactions:

    

Proceeds from shares sold

     2,000,000        —     

Reinvestment of dividends

     2,295,131        1,020,149   

Purchases of treasury stock

     (2,003,040     —     
                

Net increase in net assets resulting from capital share transactions

     2,292,091        1,020,149   
                

Total Increase (Decrease) in Net Assets

     (3,046,823     13,390,805   

Net assets at beginning of period

     698,479,924        539,562,762   
                

Net assets at end of period

   $ 695,433,101      $ 552,953,567   
                

Capital Share Activity:

    

Shares issued from subscriptions

     200,000        —     

Shares issued from reinvestment of dividends

     210,998        126,033   

Purchases of treasury stock

     (200,000     —     
                

Net increase in shares outstanding

     210,998        126,033   
                

Undistributed (distributions in excess of) net investment income at end of period

   $ (12,506,512   $ 21,616,819   

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

 

6


Table of Contents

BlackRock Kelso Capital Corporation

Statements of Cash Flows (Unaudited)

 

     Three months
ended
March 31, 2011
    Three months
ended
March 31, 2010
 

Operating Activities:

    

Net increase in net assets resulting from operations

   $ 18,014,892      $ 30,483,051   

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

    

Purchases of investments

     (39,551,384     (16,441,543

Sales (purchases) of foreign currency contracts—net

     (515,473     543,428   

Proceeds from sales/repayments of investments

     4,046,712        72,676,277   

Net change in unrealized appreciation or depreciation on investments

     (46,289,424     (54,045,037

Net change in unrealized appreciation or depreciation on foreign currency translation

     283,475        1,463,928   

Net realized loss (gain) on investments

     42,367,616        42,915,060   

Net realized loss (gain) on foreign currency

     500,076        (551,737

Amortization of premium/discount—net

     (1,664,232     (1,682,496

Amortization of debt issuance costs

     608,727        168,292   

Decrease in receivable for investments sold

     3,068,136        —     

Increase in interest receivable

     (1,699,873     (677,309

Increase in dividends receivable

     (912,472     (788,724

Decrease prepaid expenses and other assets

     129,752        118,447   

Increase in payable for investments purchased

     3,954,757        4,109,544   

Increase (decrease) in interest payable

     2,148,470        (792,430

Increase (decrease) in base management fees payable

     110,218        (224,658

Decrease in incentive management fees payable

     (14,614,098     (14,506,049

Increase in accrued administrative services

     209,386        69,835   

Decrease in other accrued expenses and payables

     (336,332     (1,870,111
                

Net cash provided by (used in) operating activities

     (30,141,071     60,967,798   
                

Financing Activities:

    

Net proceeds from issuance of common stock

     2,000,000        —     

Dividend distributions paid

     (20,927,156     (17,051,914

Proceeds from debt

     193,000,000        44,100,000   

Repayments of debt

     (88,000,000     (86,600,000

Deferred debt issuance costs

     (1,690,580     —     

Purchase of treasury stock

     (2,003,040     —     
                

Net cash provided by (used in) financing activities

     82,379,224        (59,551,914
                

Effect of exchange rate changes on cash and cash equivalents

     (18,130     27,842   
                

Net increase in cash

     52,220,023        1,443,726   

Cash and cash equivalents, beginning of period

     2,160,871        5,807,901   
                

Cash and cash equivalents, end of period

   $ 54,380,894      $ 7,251,627   
                

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

    

Cash paid during period for:

    

Interest

   $ 1,154,239      $ 1,773,427   

Taxes

   $ 365,051      $ 1,048,914   

Dividend distributions reinvested

   $ 2,295,131      $ 1,020,149   

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

 

7


Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)

March 31, 2011

 

Portfolio Company

   Industry      Principal
Amount or
Number of

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

Senior Secured Notes—12.7%

           

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

     Glass Yarns/Fibers       $ 23,500,000       $ 23,207,149       $ 20,962,000   

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         39,843,661         41,640,000   

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

    

 

Food Service

Equipment

  

  

     32,136,228         32,136,228         25,484,029   
                       

Total Senior Secured Notes

           95,187,038         88,086,029   
                       

Unsecured Debt—1.0%

           

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

    

 

Waste Management

Equipment

  

  

     50,797,616         45,330,696         2,235,088   

Maple Hill Acquisition LLC, 13.50%, 10/1/15

    

 

Rigid

Packaging

  

  

     5,000,000         4,859,247         4,859,247   
                       

Total Unsecured Debt

           50,189,943         7,094,335   
                       

Subordinated Debt—32.1%

           

A & A Manufacturing Co., Inc., 14.00%, 5/16/16

    

 

Protective

Enclosures

  

  

     27,403,430         27,103,068         27,103,068   

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

    

 

Marketing

Services

  

  

     50,000,000         48,882,299         49,882,299   

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

    

 

Safety

Products

  

  

     30,582,734         29,462,336         30,276,907   

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

    

 

Information

Services

  

  

     8,000,000         8,045,975         7,552,000   

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

    

 

Medical

Transcription

  

  

     43,000,000         41,809,412         42,583,412   

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

    

 

Financial

Services

  

  

     15,366,867         15,244,996         15,398,665   

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

    

 

Healthcare

Services

  

  

     5,000,000         4,938,489         5,000,000   

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

    

 

Healthcare

Products

  

  

     25,502,351         24,886,298         24,886,298   

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

    

 

Security

Services

  

  

     11,111,333         11,062,081         11,062,081   

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., 13.00% (10.00% cash, 3.00% PIK), 2/5/15

    

 

Waste Management

Equipment

  

  

     8,510,274         8,184,394         2,587,123   
                       

Total Subordinated Debt

           226,619,348         223,331,853   
                       

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

 

8


Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

March 31, 2011

 

Portfolio Company

   Industry    Principal
Amount or
Number of

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

Senior Secured Loans—69.8%(e)

          

Advantage Sales & Marketing Inc., Second Lien, 9.25% (LIBOR + 7.75%), 6/17/18

   Marketing

Services

   $ 10,000,000      $ 9,855,434       $ 10,200,000   

Airvana Network Solutions Inc., First Lien, 10.25% (Base Rate + 7.00%), 3/25/15

   Software      34,000,000        33,320,475         33,320,475   

Alpha Media Group Inc., First Lien, 12.00% (4.00% Cash, 8.00% PIK), 7/15/13

   Publishing      4,558,347        3,465,903         1,492,239   

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

   Metals      105,000        105,000         105,000   

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

   Utility

Vehicles

     8,000,000        8,000,000         7,440,000   

AmQuip Crane Rental LLC, Second Lien, 6.03% (LIBOR + 5.75%), 6/29/14

   Construction

Equipment

     24,017,329        22,720,774         20,967,128   

Arclin US Holdings Inc., Second Lien, 7.75% (LIBOR + 6.00%), 1/15/15(g)

   Chemicals      3,550,233        2,867,985         3,539,582   

Ascend Learning, LLC, Second Lien, 12.25% (Base Rate + 9.00%), 12/6/17

   Education      20,000,000        19,423,386         19,423,386   

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

   Homebuilding      37,500,000        37,180,244         37,180,244   

Attachmate Corporation et al., Second Lien, 4.00% (LIBOR + 8.00%), 8/25/17

   Software      5,000,000        4,950,000         5,010,425   

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

   Financial

Services

     2,000,000        1,466,514         1,466,514   

Bankruptcy Management Solutions, Inc., Term Loan B, First Lien, 7.50% (LIBOR + 5.00% cash, 1.00% PIK), 8/20/14(f)

   Financial

Services

     2,891,973        1,417,067         2,472,637   

Bankruptcy Management Solutions, Inc., Term Loan A, Second Lien, 8.30% (LIBOR + 1.00% cash, 7.00% PIK), 8/20/15(f)

   Financial

Services

     27,886,750        19,071,333         21,221,817   

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

   Discount

Stores

     12,286,433 (h)      12,007,767         12,630,617   

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

   Discount

Stores

     16,888,567 (h)      15,858,038         17,361,673   

Berlin Packaging L.L.C., Second Lien, 6.79% (LIBOR + 6.50%), 8/17/15

   Rigid

Packaging

     24,000,000        23,605,185         23,616,000   

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

   Party

Rentals

     3,139,998        3,139,998         2,543,398   

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

   Personal

Fitness

     6,995,854        6,995,854         5,480,629   

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

   Automobile

Repair

     3,242,139        3,241,179         3,067,063   

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

     2,316,635        2,316,512         2,103,505   

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)—(Continued)

March 31, 2011

 

Portfolio Company

   Industry      Principal
Amount or
Number of

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

Henniges Automotive Holdings, Inc., First Lien, 12.00% (LIBOR + 10.00%), 11/30/16

     Automotive       $ 39,444,444       $ 38,326,971       $ 38,326,971   

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

    

 

Consumer

Products

  

  

     4,760,849         4,596,062         4,596,062   

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

    

 

Consumer

Products

  

  

     33,000,000         32,272,761         32,602,761   

InterMedia Outdoors, Inc., Second Lien, 7.06% (LIBOR + 6.75%), 1/31/14

    

 

Printing/

Publishing

  

  

     10,000,000         10,000,000         8,770,000   

MCCI Group Holdings, LLC, Second Lien, 8.92% (LIBOR + 7.25%), 6/21/13

    
 
Healthcare
Services
  
  
     29,000,000         28,975,202         29,000,000   

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

    

 

Healthcare

Services

  

  

     15,000,000         14,846,651         15,000,000   

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   

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

    
 
 
Industrial
Safety
Equipment
  
  
  
     9,000,000         9,000,000         9,000,000   

United Subcontractors, Inc., First Lien, 1.81% (LIBOR + 1.50%), 6/30/15(d)

    
 
Building and
Construction
  
  
     1,842,354         1,781,399         1,656,276   

Volume Services America, Inc. et al., Term Loan B, First Lien, 10.50% (LIBOR + 8.50%), 9/16/16

    

 

Concession

Services

  

  

     44,775,000         43,138,990         43,138,990   

Water Pik, Inc., Second Lien, 5.75% (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         19,845,208         17,645,208   

Westward Dough Operating Company, LLC, Term Loan A, First Lien, 4.31% (LIBOR + 4.00%), 5/30/11

     Restaurants         6,850,000         6,845,716         3,030,266   

Westward Dough Operating Company, LLC, Term Loan B, First Lien, 7.31% (LIBOR + 7.00%), 5/30/11(i)

     Restaurants         8,334,656         8,329,653         4,761,456   
                       

Total Senior Secured Loans

           495,967,261         485,170,322   
                       

Preferred Stock—0.9%

           

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

     Publishing         5,000         —           —     

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

    

 

Personal

Fitness

  

  

     187,500         173,326         —     

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

    

 

Personal

Fitness

  

  

     49,056         49,056         —     

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

    

 

Personal

Fitness

  

  

     15,881,325         9,100,000         1,046,000   

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

           14,290,382         6,163,040   
                       

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)—(Continued)

March 31, 2011

 

Portfolio Company

   Industry      Principal
Amount or
Number of

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

Common Stock—11.7%(j)

           

Alpha Media Group Holdings Inc., Class B

     Publishing         12,500       $ —         $ —     

Arclin Cayman Holdings Ltd.(g)

     Chemicals         450,532         9,722,203         6,830,000   

Bankruptcy Management Solutions, Inc.(f)

    

 

Financial

Services

  

  

     264,668         9,539,783         3,455,173   

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

    

 

HVAC/ Plumbing

Services

  

  

     1,000         20,798         1,183,000   

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

    

 

Utility

Vehicles

  

  

     1,000         7,428,827         —     

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

     Safety Products         100         952,259         1,021,832   

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

    

 

 

Augmentative

Communication

Products

  

  

  

     100         758,068         807,879   

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

     Transportation         1,000         5,000,000         3,432,761   

ECI Holdco, Inc., Class A-1 (Electrical Components)(f)

     Electronics         18,848,836         18,848,836         51,550,000   

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         109,336         1,093,360         928,000   

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

    

 

Building and

Construction

  

  

     97,519         7,309,066         6,891,079   
                       

Total Common Stock

           65,791,700         81,099,724   
                       

Limited Partnership/Limited Liability Company Interests—
3.7%

           

Big Dumpster Coinvestment, LLC(j)

    

 

Waste Management

Equipment

  

  

     —           5,333,333         —     

Marsico Holdings, LLC, acquired 11/12/10(c)(j)

    

 

Financial

Services

  

  

     91,445         1,848,077         412,417   

Penton Business Media Holdings LLC(d)(j)

     Information Services         —           9,050,000         12,182,750   

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

     Healthcare Services         333         280,739         280,739   

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

     Healthcare Services         16,667         166,667         300,000   

Sentry Security Systems Holdings, LLC(j)

     Security Services         147,271         147,271         3,756   

Sentry Security Systems Holdings, LLC, 8.00% PIK

     Security Services         602,729         602,729         602,729   

VSS-AHC Holdings LLC (Advanstar)(j)

    

 

Printing/

Publishing

  

  

     352,941         4,199,161         5,845,389   

WBS Group Holdings, LLC, Class B-1, 16.00% PIK

     Software         8,000         8,000,000         5,984,116   
                       

Total Limited Partnership/Limited Liability Company Interests

           29,627,977         25,611,896   
                       

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

 

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BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

March 31, 2011

 

Portfolio Company

  

Industry

   Principal
Amount or
Number of
Shares/Units
     Cost(a)      Fair
Value(b)
 

Equity Warrants/Options—0.7%(j)

           

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

   Chemicals      230,159       $ 403,815       $ 1,112,254   

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

   Chemicals      230,159         323,052         1,285,482   

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

   Chemicals      230,159         484,578         917,210   

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

   Chemicals      230,159         403,815         1,104,549   

Bankruptcy Management Solutions, Inc., expire 10/1/17(f)

   Financial Services      23,046         365,584         68,431   

Facet Investment, Inc., expire 1/18/21

   Medical Devices      1,978         250,000         123,200   

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

   Financial Services      455         444,450         —     

MGHC Holding Corporation, expire 1/31/12(d)

   Bedding—Retail      75,928         136,297         11,500   

Twin River Worldwide Holdings, Inc., Contingent Value Rights, expire 11/5/17

   Gaming      1,000         5,000         8,000   
                       

Total Equity Warrants/Options

           2,816,591         4,630,626   
                       

TOTAL INVESTMENTS

         $ 980,490,240         921,187,825   
                 

OTHER ASSETS & LIABILITIES (NET)—(32.5)%

              (225,754,724
                 

NET ASSETS—100.0%

            $ 695,433,101   
                 

 

Note regarding change in presentation: The Company revised the Schedules of Investments from the presentation in its Annual Report on Form 10-K for the year ended December 31, 2010 to incorporate the unearned income into the cost and fair value of the associated portfolio company investments. The previously reported Schedules of Investments included a separate line item reporting total unearned income. The amount of total unearned income is $8,928,424 at March 31, 2011. This change in presentation did not impact total investment cost or fair value as reported on the Company’s Statements of Assets and Liabilities.

 

(a) Represents amortized cost for fixed income securities 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) Security is exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the aggregate, these securities represent 8.1% of the Company’s net assets at March 31, 2011.
(d) Transaction and other information for “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, is as follows:

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

 

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Table of Contents

Non-controlled,

Affiliated Investments

   Fair Value at
December 31,
2010
     Gross
Additions
(Cost)*
     Gross
Reductions
(Cost)**
    Net
Unrealized

Gain  (Loss)
    Fair Value at
March  31,
2011
    Net
Realized

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

Arclin Cayman Holdings Ltd.:

                   

Common Stock

   $ 8,370,000       $ —         $ (8,507,789   $ 137,789      $ —   †    $ —        $ —         $ —     

Warrants

     5,453,023         —           (4,419,495     (1,033,528     —   †      —          —           —     

Arclin US Holdings Inc.

                   

Senior Secured Loan

     3,459,541         44,416         (3,547,259     43,302        —   †      1,288        113,406         —     

BKC CSP Blocker, Inc.

                   

Common Stock

     1,062,247         63,349         —          (103,764     1,021,832        —          —           —     

Conney Safety Products, LLC

                   

Subordinated Debt

     29,665,252         78,840         —          532,815        30,276,907        —          1,302,149         —     

M&M Tradition Holdings Corp.:

                   

Preferred Stock

     5,117,040         —           —          —          5,117,040        —          —           354,217   

Common Stock

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

Mattress Giant Corporation

                   

Subordinated Debt

     1,229,657         102,434         (4,014,328     2,682,237        —   ††      (2,784,672     94,327         —     

MGHC Holding Corporation:

                   

Common Stock

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

Common Stock

        1,093,360         —          (165,360     928,000        —          —           —     

Warrants

        136,297         —          (124,797     11,500        —          —           —     

Penton Business Media Holdings LLC

                   

Limited Liability Co. Interest

     9,050,000         —           —          3,132,750        12,182,750        —          —           —     

United Subcontractors, Inc.

                   

Senior Secured Loan

     1,589,952         410         —          65,914        1,656,276        —          7,743         —     

USI Senior Holdings, Inc.

                   

Common Stock

     7,379,489         —           —          (488,410     6,891,079        —          —           —     
                                                                   

Totals

   $ 77,376,201       $ 1,519,106       $ (22,774,686   $ 6,964,763      $ 63,085,384      $ (5,069,199   $ 1,517,625       $ 354,217   
                                                                   

 

  * 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 three months ended March 31, 2011.
  Investment moved out of the non-controlled, affiliated category into the non-controlled, non-affiliated category during the period.
  †† Investment no longer held at March 31, 2011.

The aggregate fair value of non-controlled, affiliated investments at March 31, 2011 represents 9.1% of the Company’s net assets.

 

(e) Approximately 73% 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 33% 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 March 31, 2011 of all contracts within the specified loan facility.
(f) Transaction and other information for “controlled” investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities, is as follows:

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

 

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Table of Contents

Controlled Investments

   Fair Value at
December 31,
2010
     Gross
Additions
(Cost)*
     Gross
Reductions
(Cost)**
    Net
Unrealized

Gain  (Loss)
    Fair Value at
March  31,
2011
    Interest/Other
Income***
 

Al Solutions, Inc.

              

Senior Secured Loan

   $ 115,000       $ —         $ (10,000   $ —        $ 105,000      $ 2,872   

American SportWorks LLC

              

Senior Secured Loan

     7,200,000         —           —          240,000        7,440,000        260,000   

Bankruptcy Management Solutions, Inc.:

              

Senior Secured Loan, First Lien, A

     1,427,700         38,814         —          —          1,466,514        76,315   

Senior Secured Loan, First Lien, B

        1,417,067         —          1,055,570        2,472,637        —     

Senior Secured Loan, Second Lien

     21,342,029         555,563         —          (675,775     21,221,817        905,312   

Common Stock

     4,516,560         544         —          (1,061,931     3,455,173        —     

Warrants

     125,880         1         —          (57,450     68,431        —     

BKC ASW Blocker, Inc.

              

Common Stock

     —           —           —          —          —          —     

ECI Holdco, Inc.

              

Common Stock

     51,480,000         —           —          70,000        51,550,000        —     

Electrical Components International, Inc.:

              

Senior Secured Loan

     1,641,718         —           (1,641,718     —          —   †      14,730   

Fitness Together Franchise Corporation

              

Senior Secured Loan

     6,119,804         —           (170,193     (468,982     5,480,629        (2,289

Fitness Together Holdings, Inc.:

              

Preferred Stock Series A

     —           —           —          —          —          —     

Preferred Stock Series A-1

     —           —           —          —          —          —     

Preferred Stock Series B Convertible

     1,478,000         —           —          (432,000     1,046,000        —     

Common Stock

     —           —           —          —          —          —     
                                                  

Totals

   $ 95,446,691       $ 2,011,989       $ (1,821,911   $ (1,330,568   $ 94,306,201      $ 1,256,940   
                                                  

 

  * 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 three months ended March 31, 2011. There was no dividend income from these securities during the period.
  Investment no longer held at March 31, 2011.

The aggregate fair value of controlled investments at March 31, 2011 represents 13.6% of the Company’s net assets.

 

(g) Non-U.S. company or principal place of business outside the U.S.
(h) Principal amount is denominated in Canadian dollars.
(i) Non-accrual status (in default) at March 31, 2011 and therefore non-income producing. At March 31, 2011, the aggregate fair value and amortized cost of the Company’s debt investments on non-accrual status represents 1.3% and 1.8% of total debt investments at fair value and amortized cost, respectively.
(j) Non-income producing equity securities at March 31, 2011.
(k) 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. and thus a non-controlled, non-affiliated investment.
(l) 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 and thus a controlled investment.

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

 

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Table of Contents
(m) 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 and thus a non-controlled, affiliated investment.
(n) 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 and thus a non-controlled, non-affiliated investment.
(o) 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 and thus a non-controlled, non-affiliated investment.
PIK Payment-in-kind.

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

 

15


Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments

December 31, 2010

 

Portfolio Company

   Industry(a)      Principal
Amount or
Number of

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

Senior Secured Notes—12.6%

           

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

    
 
Glass Yarns/
Fibers
  
  
   $ 23,500,000       $ 23,191,282       $ 21,385,000   

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

    

 

 

HVAC/

Plumbing

Services

  

  

  

     40,000,000         39,836,651         40,400,000   

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

    
 
Food Service
Equipment
 
  
     32,136,228         32,136,228         26,480,252   
                       

Total Senior Secured Notes

           95,164,161         88,265,252   
                       

Unsecured Debt—1.0%

           

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

    
 
 
Waste
Management
Equipment
  
  
  
     49,067,970         44,935,199         2,046,844   

Maple Hill Acquisition LLC, 13.50%, 10/1/15

    

 

Rigid

Packaging

  

  

     5,000,000         4,851,541         4,851,541   
                       

Total Unsecured Debt

           49,786,740         6,898,385   
                       

Subordinated Debt—31.7%

           

A & A Manufacturing Co., Inc., 14.00%, 5/16/16

    

 

Protective

Enclosures

  

  

     27,403,430         27,088,627         27,088,627   

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

    

 

Marketing

Services

  

  

     50,000,000         48,830,976         48,830,976   

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

    

 

Safety

Products

  

  

     30,582,734         29,383,496         29,665,252   

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

    

 

Bedding

—Retail

  

  

     6,404,461         3,911,894         1,229,657   

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

    
 
Information
Services
 
  
     8,000,000         8,048,532         7,528,000   

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

    

 

Medical

Transcription

  

  

     43,000,000         41,756,471         41,756,471   

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

    

 

Financial

Services

  

  

     15,366,867         15,237,076         15,390,745   

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

    
 
Healthcare
Services
 
  
     5,000,000         4,935,425         5,000,000   

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

    
 
Healthcare
Products
 
  
     25,375,474         24,729,156         24,729,156   

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

    
 
Security
Services
 
  
     11,056,053         10,997,828         10,997,828   

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., 13.00% (10.00% cash, 3.00% PIK), 2/5/15

    
 
 
Waste
Management
Equipment
  
  
  
     8,510,274         8,163,533         2,153,099   
                       

Total Subordinated Debt

           230,083,014         221,369,811   
                       

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, 2010

 

Portfolio Company

   Industry(a)      Principal
Amount or
Number of

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

Senior Secured Loans—63.7%(f)

          

Advantage Sales & Marketing Inc., Second Lien, 9.25% (LIBOR + 7.75%), 6/17/18

    

 

Marketing

Services

  

  

   $ 10,000,000      $ 9,850,494       $ 10,000,000   

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

     Publishing         4,468,967        3,325,429         1,625,395   

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

     Metals         115,000        115,000         115,000   

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

    

 

Utility

Vehicles

  

  

     8,000,000        8,000,000         7,200,000   

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

    

 

Construction

Equipment

  

  

     24,017,329        22,622,302         20,871,059   

Arclin US Holdings Inc., Second Lien, 7.75% (LIBOR + 6.00%), 1/15/15(e)(h)

     Chemicals         3,559,198        2,831,246         3,459,541   

Ascend Learning, LLC, Second Lien, 12.25% (Base Rate + 9.00%), 12/6/17

     Education         20,000,000        19,402,126         19,402,126   

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

     Homebuilding         37,500,000        37,161,761         37,161,761   

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

    

 

Financial

Services

  

  

     2,000,000        1,427,700         1,427,700   

Bankruptcy Management Solutions, Inc., Second Lien, 8.26% (LIBOR + 1.00% cash, 7.00% PIK), 8/20/15(g)

    

 

Financial

Services

  

  

     27,221,976        18,515,769         21,342,029   

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

    

 

Discount

Stores

  

  

     12,381,187 (i)      12,084,951         12,460,310   

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

    

 

Discount

Stores

  

  

     17,018,813 (i)      15,971,842         17,127,573   

Berlin Packaging L.L.C., Second Lien, 6.78% (LIBOR + 6.50%), 8/17/15

    

 

Rigid

Packaging

  

  

     24,000,000        23,582,963         23,400,000   

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

     Electronics         1,641,718        1,641,718         1,641,718   

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

    

 

Party

Rentals

  

  

     3,123,427        3,123,427         2,529,976   

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

    
 
Medical
Devices
 
  
     40,828,460        36,865,344         —     

Facet Technologies, LLC, Guaranty(j)

    

 

Medical

Devices

  

  

     —          —           —     

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

    
 
Personal
Fitness
 
  
     7,166,047        7,166,047         6,119,804   

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

    
 
Automobile
Repair
 
  
     3,263,070        3,262,020         3,073,812   

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
  
  
     2,305,090        2,304,957         2,076,887   

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, 2010

 

Portfolio Company

   Industry(a)    Principal
Amount or
Number of

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

Henniges Automotive Holdings, Inc., First Lien, 12.00% (LIBOR + 10.00%), 11/30/16

   Automotive    $ 40,000,000       $ 38,817,518       $ 38,817,518   

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

   Consumer
Products
     4,791,367         4,617,622         4,617,622   

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

   Consumer
Products
     33,000,000         32,243,723         32,243,723   

InterMedia Outdoors, Inc., Second Lien, 7.05% (LIBOR + 6.75%), 1/31/14

   Printing/

Publishing

     10,000,000         10,000,000         8,630,000   

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

   Healthcare Services      29,000,000         28,972,454         29,000,000   

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

   Healthcare Services      15,000,000         14,838,003         14,865,000   

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   

Total Safety U.S., Inc., Second Lien, 6.79% (LIBOR + 6.50%), 12/8/13

   Industrial Safety
Equipment
     9,000,000         9,000,000         8,829,000   

United Subcontractors, Inc., First Lien, 1.80% (LIBOR + 1.50%), 6/30/15(e)

   Building and
Construction
     1,842,354         1,780,989         1,589,952   

Volume Services America, Inc. et al., Term Loan B, First Lien, 10.50% (LIBOR + 8.50%), 9/16/16

   Concession

Services

     44,887,500         43,173,389         43,173,389   

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         19,827,750         17,827,750   

Westward Dough Operating Company, LLC, Term Loan A, First Lien, 4.31% (LIBOR + 4.00%), 3/30/11

   Restaurants      6,850,000         6,843,398         2,822,448   

Westward Dough Operating Company, LLC, Term Loan B, First Lien, 7.31% (LIBOR + 7.00%), 3/30/11(k)

   Restaurants      8,334,656         8,326,946         4,372,183   
                       

Total Senior Secured Loans

           494,696,888         444,823,276   
                       

Preferred Stock—0.9%

           

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

   Publishing      5,000         —           —     

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

   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

     15,881,325         9,100,000         1,478,000   

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

           15,190,382         6,595,040   
                       

 

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, 2010

 

Portfolio Company

   Industry(a)    Principal
Amount or
Number of

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

Common Stock—11.9%(l)

           

Alpha Media Group Holdings Inc., Class B

   Publishing      12,500       $ —         $ —     

Arclin Cayman Holdings Ltd.(e)(h)

   Chemicals      572,553         11,399,992         8,370,000   

Bankruptcy Management Solutions, Inc.(g)

   Financial

Services

     259,229         9,539,238         4,516,560   

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

   HVAC/ Plumbing

Services

     1,000         20,798         1,118,000   

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

   Utility

Vehicles

     1,000         7,428,827         —     

BKC CSP Blocker, Inc. (Conney Safety)(e)(o)

   Safety Products      100         888,910         1,062,247   

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

   Augmentative
Communication
Products
     100         758,068         723,813   

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

   Transportation      1,000         5,000,000         3,511,963   

ECI Holdco, Inc., Class A-1 (Electrical Components)(g)

   Electronics      18,848,836         18,848,836         51,480,000   

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

     97,519         7,309,066         7,379,489   
                       

Total Common Stock

           68,698,050         83,162,072   
                       

Limited Partnership/Limited Liability Company Interests—3.3%

           

Big Dumpster Coinvestment, LLC(l)

   Waste Management
Equipment
     —           5,333,333         —     

Marsico Holdings, LLC, acquired 11/12/10(d)(l)

   Financial

Services

     91,445         1,848,077         424,305   

Penton Business Media Holdings LLC(e)(l)

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

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

   Healthcare Services      333         280,739         280,739   

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

   Healthcare Services      16,667         166,667         300,000   

Sentry Security Systems Holdings, LLC(l)

   Security Services      147,271         147,271         3,830   

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         6,390,228   

WBS Group Holdings, LLC, Class B-1, 16.00% PIK

   Software      8,000         8,000,000         6,336,096   
                       

Total Limited Partnership/Limited Liability Company Interests

           29,627,977         23,387,927   
                       

 

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

 

19


Table of Contents

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2010

 

Portfolio Company

   Industry(a)      Principal
Amount or
Number of

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

Equity Warrants/Options—0.8%(l)

           

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

     Chemicals         230,159       $ 403,815       $ 1,378,850   

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

     Chemicals         230,159         323,052         1,553,288   

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

     Chemicals         230,159         484,578         1,164,424   

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

     Chemicals         230,159         403,815         1,356,461   

Bankruptcy Management Solutions, Inc., expire 10/1/17(g)

    

 

Financial

Services

  

  

     22,544         365,583         125,880   

BLB Worldwide Holdings, Inc., Contingent Value Rights, expire 11/5/17

     Gaming         1,000         5,000         5,000   

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

    

 

Financial

Services

  

  

     455         444,450         —     
                       

Total Equity Warrants/Options

           2,430,293         5,583,903   
                       

TOTAL INVESTMENTS

         $ 985,677,505         880,085,666   
                 

OTHER ASSETS & LIABILITIES (NET)—(26.0)%

              (181,605,742
                 

NET ASSETS—100.0%

            $ 698,479,924   
                 

 

Note regarding change in presentation: The Company revised the Schedules of Investments from the presentation in its Annual Report on Form 10-K for the year ended December 31, 2010 to incorporate the unearned income into the cost and fair value of the associated portfolio company investments. The previously reported Schedules of Investments included a separate line item reporting total unearned income. The amount of total unearned income is $9,392,954 at December 31, 2010. This change in presentation did not impact total investment cost or fair value as reported on the Company’s Statements of Assets and Liabilities.

 

(a) Unaudited
(b) Represents amortized cost for fixed income securities 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) Security is exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the aggregate, these securities represent 7.9% of the Company’s net assets at December 31, 2010.
(e) Transaction and other information for “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, is as follows:

 

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

 

20


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
December 31,
2010
    Net
Realized

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

Arclin Cayman Holdings Ltd.:

                  

Common Stock

   $ —         $ 7,087,791       $ —        $ 1,282,209      $ 8,370,000      $ —        $ —        $ —     

Warrants

     —           3,955,050         —          1,497,973        5,453,023        —          —          —     

Arclin US Holdings Inc.

                  

Senior Secured Loan

     —           3,437,181         (8,298     30,658        3,459,541        667        39,137        —     

BKC CSP Blocker, Inc.

                  

Common Stock

     —           888,910         —          173,337        1,062,247        —          —          —     

Conney Safety Products, LLC

                  

Subordinated Debt

     —           25,366,592         —          4,298,660        29,665,252        —          4,966,138        —     

M&M Tradition Holdings Corp.:

                  

Preferred Stock

     5,117,040         —           —          —          5,117,040        —          —          1,284,148   

Common Stock

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

Mattress Giant Corporation

                  

Subordinated Debt

     3,521,162         1,390,692         —          (3,682,197     1,229,657        —          1,390,894        —     

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         163,319         —          (21,231     1,589,952        —          32,096     

USI Senior Holdings, Inc.

                  

Common Stock

     6,902,053         383,057         —          94,379        7,379,489        —          —       
                                                                  

Totals

   $ 26,793,989       $ 51,737,163       $ (40,646,369   $ 39,491,418      $ 77,376,201      $ (36,221,198   $ 6,403,192      $ 1,284,148   
                                                                  

 

  * 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, 2010.
  Investment no longer held at December 31, 2010.

 

       The aggregate fair value of non-controlled, affiliated investments at December 31, 2010 represents 11.1% of the Company’s net assets.

 

(f) Approximately 71% 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 35% 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, 2010 of all contracts within the specified loan facility.
(g) Transaction and other information for “controlled” investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities, is as follows:

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

 

21


Table of Contents

Controlled Investments

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

Gain (Loss)
    Fair Value at
December 31,
2010
    Net
Realized

Gain  (Loss)***
     Interest/Other
Income***
 

Al Solutions, Inc.

                 

Senior Secured Loan

   $ 150,000       $ 221       $ (32,638   $ (2,583   $ 115,000      $ 2,362       $ 14,207   

American SportWorks LLC

                 

Senior Secured Loan

     3,012,331         1,726,037         (6,879,382     9,341,014        7,200,000        153         650,218   

Bankruptcy Management Solutions, Inc.:

                 

Senior Secured Loan

     —           3,368,715         (1,941,015     —          1,427,700        —           148,011   

Senior Secured Loan

     —           18,515,769         —          2,826,260        21,342,029        —           675,666   

Common Stock

     —           9,539,238         —          (5,022,678     4,516,560        —           —     

Warrant

     —           365,583         —          (239,703     125,880        —           —     

BKC ASW Blocker, Inc.

                 

Common Stock

     163,289         7,353,826         (175,000     (7,342,115     —          —           —     

ECI Holdco, Inc.

                 

Common Stock

     —           18,848,836         —          32,631,164        51,480,000        —           —     

Electrical Components International, Inc.:

                 

Senior Secured Loan

     —           1,649,968         (8,250     —          1,641,718        —           100,913   

Senior Secured Loan

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

Senior Secured Loan

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

Fitness Together Franchise Corporation

                 

Senior Secured Loan

     5,807,656         143,488         —          168,660        6,119,804        —           825,104   

Fitness Together Holdings, Inc.:

                 

Preferred Stock Series A

     —           —           —          —          —          —           —     

Preferred Stock Series A-1

     —           —           —          —          —          —           —     

Preferred Stock Series B Convertible

     779,000         2,600,000         —          (1,901,000     1,478,000        —           —     

Common Stock

     —           —           —          —          —          —           —     
                                                           

Totals

   $ 9,912,276       $ 88,111,681       $ (33,036,285   $ 30,459,019      $ 95,446,691      $ 2,515       $ 2,850,470   
                                                           

 

  * 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, 2010. There was no dividend income from these securities during the period.
  Investment no longer held at December 31, 2010.

 

       The aggregate fair value of controlled investments at December 31, 2010 represents 13.7% of the Company’s net assets.

 

(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. This guaranty was terminated on January 17, 2011 with no payments having been made thereunder.
(k) Non-accrual status (in default) at December 31, 2010 and therefore non-income producing. At December 31, 2010, the aggregate fair value and amortized cost of the Company’s debt investments on non-accrual status represents 1.4% and 1.8% of total debt investments at fair value and amortized cost, respectively.
(l) Non-income producing equity securities at December 31, 2010.
(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. and thus a non-controlled, non-affiliated investment.
(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 and thus a controlled investment.

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

 

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o) 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 and thus a non-controlled, affiliated investment.
(p) 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 and thus a non-controlled, non-affiliated investment.
(q) 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 and thus a non-controlled, non-affiliated investment.

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.

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 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, 2010, which was filed with the Securities and Exchange Commission (“SEC”) on March 8, 2011.

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

 

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independent pricing service or one or more broker-dealers or market makers and may utilize 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, 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, 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 has approved 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 prepared by 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

 

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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.

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 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 and consistent with 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. Premiums and discounts are determined based on the cash flows expected to be collected for a particular investment. 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. The Company carries its investments in such wholly owned companies 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.

 

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(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.

 

(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 were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances 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 and January 1, 2011 of the respective additional disclosure requirements of ASU 2010-06 did not materially impact the Company’s financial statements.

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 months ended March 31, 2011 and 2010, the Advisor earned $4,465,239 and $4,322,471, respectively, in Management Fees under the Management Agreement.

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 March 31, 2011 and 2010 was determined by reference to the four quarter periods ended on March 31, 2011 and 2010, 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

 

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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.

Annual 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 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 months ended March 31, 2011 and 2010, the Advisor earned zero and $493,951, respectively, in 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 months ended March 31, 2011 and 2010, the Company incurred $425,485 and $398,664, respectively, for such investment advisor expenses under the Management Agreement.

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 months ended March 31, 2011 and 2010 were $345,520 and $1,358,769, 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 months ended March 31, 2011 and 2010, the Company incurred $241,962 and $215,786, respectively, for administrative services expenses payable to the Administrator under the administration agreement.

At March 31, 2011 and December 31, 2010, cash equivalents of $54,379,553 and $1,344,159, respectively, consisted of short term liquid investments in a money market fund managed by an affiliate of the Administrator.

In March 2011, the Company’s Board of Directors authorized the purchase in a private placement of up to 1,000,000 shares of the Company’s common stock, by the Advisor in its discretion, subject to compliance with the Company’s and the Advisor’s applicable policies and requirements of law. Pursuant to this authorization, during the three months ended March 31, 2011, the Company issued and sold to the Advisor in a private placement 200,000 shares of common stock for $2,000,000 or $10.00 per share, which was the closing price of the Company’s common stock on The NASDAQ Global Select Market on the date of sale.

 

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At March 31, 2011 and December 31, 2010, the Advisor owned and had the right to vote approximately 215,000 and 47,000 shares, respectively, of the Company’s common stock, representing less than 1.0% of the total shares outstanding. On such dates, under compensation arrangements for its officers and employees the Advisor owned of record but did not have the right to vote an additional 283,000 and 426,000 shares, respectively, of the Company’s common stock. At March 31, 2011 and December 31, 2010, other entities affiliated with the Administrator beneficially owned approximately 4,697,000 and 4,181,000 shares, respectively, of the Company’s common stock, representing approximately 6.5% and 5.8% 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 months ended March 31, 2011 and 2010.

 

     Three months
ended
March 31, 2011
     Three months
ended
March 31, 2010
 

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

   $ 18,014,892       $ 30,483,051   

Denominator for basic and diluted weighted average shares

     72,780,392         56,597,028   

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

   $ 0.25       $ 0.54   

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 March 31, 2011 and 2010 totaled $39,551,384 and $16,441,543, respectively. Sales, repayments and other exits of investments for the three months ended March 31, 2011 and 2010 totaled $4,046,712 and $72,676,277, 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 non-affiliated, 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.

At March 31, 2011, investments consisted of the following:

 

     Cost      Fair Value  

Senior secured notes

   $ 95,187,038       $ 88,086,029   

Unsecured debt

     50,189,943         7,094,335   

Subordinated debt

     226,619,348         223,331,853   

Senior secured loans:

     

First lien

     186,353,098         177,553,771   

Second/other priority lien

     309,614,163         307,616,551   
                 

Total senior secured loans

     495,967,261         485,170,322   
                 

Preferred stock

     14,290,382         6,163,040   

Common stock

     65,791,700         81,099,724   

Limited partnership/limited liability company interests

     29,627,977         25,611,896   

Equity warrants/options

     2,816,591         4,630,626   
                 

Total investments

   $ 980,490,240       $ 921,187,825   
                 

 

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At December 31, 2010, investments consisted of the following:

 

     Cost*      Fair Value*  

Senior secured notes

   $ 95,164,161       $ 88,265,252   

Unsecured debt

     49,786,740         6,898,385   

Subordinated debt

     230,083,014         221,369,811   

Senior secured loans:

     

First lien

     153,982,953         143,591,287   

Second/other priority lien

     340,713,935         301,231,989   
                 

Total senior secured loans

     494,696,888         444,823,276   
                 

Preferred stock

     15,190,382         6,595,040   

Common stock

     68,698,050         83,162,072   

Limited partnership/limited liability company interests

     29,627,977         23,387,927   

Equity warrants/options

     2,430,293         5,583,903   
                 

Total investments

   $ 985,677,505       $ 880,085,666   
                 

 

* As indicated in the accompanying schedules of investments, the Company revised its previous presentation of its schedules of investments to incorporate the unearned income into the cost and fair value of the associated portfolio company investments.

The industry composition of the portfolio at fair value at March 31, 2011 and December 31, 2010 was as follows:

 

     March 31,     December 31,  

Industry

   2011     2010  

Business Services

     15.5     11.8

Personal and Other Services

     10.3        13.8   

Healthcare

     10.1        10.6   

Distribution

     8.9        6.3   

Printing, Publishing and Media

     8.5        8.5   

Consumer Products

     7.3        7.6   

Manufacturing

     6.8        7.1   

Electronics

     5.6        6.1   

Building and Real Estate

     5.0        5.2   

Financial Services

     4.8        4.9   

Automotive

     4.2        4.5   

Chemicals

     3.9        4.4   

Retail

     3.9        4.0   

Containers and Packaging

     3.1        3.2   

Beverage, Food and Tobacco

     0.9        0.8   

Entertainment and Leisure

     0.8        0.8   

Transportation

     0.4        0.4   
                

Total

     100.0     100.0
                

The geographic composition of the portfolio at fair value at March 31, 2011 was United States 95.4% and Canada 4.6%, and at December 31, 2010 was United States 94.7%, and Canada 5.3%. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.

In the normal course of business, the Company invests in securities and enters into transactions where risks exist due to fluctuations in the market (market risk) or failure of the issuer of a security to meet all its obligations (issuer credit risk). The value of securities held by the Company may decline in response to certain events, including those directly involving the issuers whose securities are owned by the Company; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; and currency and interest rate and price fluctuations. Similar to issuer credit risk, the Company may be exposed to counterparty credit risk, or the risk that an entity with which the Company has unsettled or open transactions may fail to or be unable to perform on its commitments. The Company manages counterparty risk by entering into transactions only with counterparties that they believe have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties. Financial assets, which potentially expose the Company to market, issuer and counterparty credit risks, consist principally of investments in portfolio companies. The extent of the Company’s exposure to market, issuer and counterparty credit risks with respect to these financial assets is generally approximated by their value recorded in the statements of assets and liabilities. The Company is also exposed to credit risk related to maintaining all of its cash at a major financial institution.

 

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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. Derivatives

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 only creditworthy counterparties.

At March 31, 2011, 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
March 31, 2011
    Unrealized
Appreciation/
(Depreciation)
 

Canadian dollar

     April 14, 2011         728,000 Purchased          $ (737,189      $ (750,273      $ 13,084   

Canadian dollar

     April 14, 2011         29,175,000 Sold            29,424,668           30,067,592           (642,924
                                       

Total

            $ 28,687,479         $ 29,317,319         $ (629,840
                                       

At December 31, 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
December 31, 2010
     Unrealized
Depreciation
 

Canadian dollar

     January 19, 2011         29,400,000 Sold          $ 29,166,667          $ 29,535,112          $ (368,445

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.

The Company holds warrants and options in certain portfolio companies in an effort to achieve additional investment return. In purchasing warrants and options, the Company bears the risk of an unfavorable change in the value of the underlying equity interest. The aggregate fair value of warrants and options as of March 31, 2011 and December 31, 2010 represents 0.7% and 0.8%, respectively, of the Company’s net assets.

The Company may enter into other derivative instruments and incur other exposures with other counterparties in the future.

7. Debt

Under the terms of the Company’s amended and restated Senior Secured, Multi-Currency Credit Agreement (the “Credit Facility”), as amended on April 20, 2010, certain lenders agreed to extend credit to the Company in an aggregate principal amount not to exceed $375,000,000 outstanding, at any one time, consisting of $275,000,000 of revolving loan commitments and $100,000,000 of term loan commitments. 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 is at LIBOR plus an applicable spread of either 3.00% or 3.25%

 

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for revolving loans, based on a pricing grid using the Company’s credit rating, and LIBOR plus 3.00% for term loans. The Credit Facility does not contain a LIBOR floor requirement. At March 31, 2011, the effective LIBOR spread under the Credit Facility was 3.00%. 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 March 31, 2011, the Company had $100,000,000 drawn on the Credit Facility versus $170,000,000 at December 31, 2010. Subject to compliance with applicable covenants and borrowing base limitations, the remaining amount available under the Credit Facility was $275,000,000 at March 31, 2011.

On January 18, 2011, the Company closed a private placement issuance of $158,000,000 in aggregate principal amount of five-year, senior secured notes with a fixed interest rate of 6.50% and a maturity date of January 18, 2016 and $17,000,000 million in aggregate principal amount of seven-year, senior secured notes with a fixed interest rate of 6.60% and a maturity date of January 18, 2018 (collectively, the “Senior Secured Notes”). The Senior Secured Notes were sold to certain institutional accredited investors pursuant to an exemption from registration under the Securities Act of 1933, as amended. Interest on the Senior Secured Notes is due semi-annually on January 18 and July 18, commencing on July 18, 2011.

The Company’s average outstanding debt balance during the three months ended March 31, 2011 and 2010 was $259,711,111 and $260,746,667, respectively. The maximum amounts borrowed during the three months ended March 31, 2011 and 2010 were $363,000,000 and $314,000,000, respectively. The weighted average annual interest cost for the three months ended March 31, 2011 and 2010 was 5.16% and 1.53%, respectively, exclusive of commitment fees and of other prepaid expenses related to establishing the Credit Facility and the Senior Secured Notes. With respect to any unused portion of the commitments under the Credit Facility, the Company incurs an annual commitment fee of 0.50%. Commitment fees incurred for the three months ended March 31, 2011 and 2010 were $321,542 and $125,752, respectively.

At March 31, 2011, the Company was in compliance with all covenants required under the Credit Facility and the Senior Secured Notes.

8. Capital stock

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 2011, the repurchase plan was further extended through the earlier of June 30, 2012 or until the approved number of shares has been repurchased. During the three months ended March 31, 2011, the Company purchased a total of 200,000 shares of its common stock on the open market for $2,003,040, including brokerage commissions. There were no such purchases during the three months ended March 31, 2010. Since inception of the repurchase plan through March 31, 2011, the Company has purchased 1,161,679 shares of its common stock on the open market for $7,428,940, including brokerage commissions. At March 31, 2011, the total number of remaining shares authorized for repurchase was 1,594,971. The Company currently holds the shares it repurchased in treasury.

 

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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. The Company has no such guarantees outstanding at March 31, 2011. The Company’s only such guarantee outstanding at December 31, 2010 was terminated on January 17, 2011 with no payments having been made thereunder.

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 borrowings were $100,000,000 and $99,500,000 at March 31, 2011 and $170,000,000 and $169,150,000 at December 31, 2010, respectively. The carrying and fair values of the Company’s Secured Senior Notes were $175,000,000 and $175,875,000 at March 31, 2011. The carrying and fair values of the Company’s total debt outstanding were therefore $275,000,000 and $275,375,000 at March 31, 2011 and $170,000,000 and $169,150,000 at December 31, 2010, 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 March 31, 2011 and December 31, 2010 in determining such fair values:

 

           Fair Value Inputs at March 31, 2011  
     Fair Value at
March 31,
2011
    Price
Quotations
(Level 1)
     Significant Other
Observable Inputs

(Level 2)
    Significant
Unobservable Inputs

(Level 3)
 

Senior secured notes

   $ 88,086,029      $ —         $ —        $ 88,086,029   

Unsecured debt

     7,094,335        —           —          7,094,335   

Subordinated debt

     223,331,853        —           —          223,331,853   

Senior secured loans

     485,170,322        —           —          485,170,322   

Preferred stock

     6,163,040        —           —          6,163,040   

Common stock

     81,099,724        —           —          81,099,724   

Limited partnership/limited liability company interests

     25,611,896        —           —          25,611,896   

Equity warrants/options

     4,630,626        —           —          4,630,626   
                                 

Total investments

     921,187,825        —           —          921,187,825   

Forward foreign currency contracts

     (629,840     —           (629,840     —     

Cash and cash equivalents

     54,380,894        54,380,894         —          —     
                                 

Total

   $ 974,938,879      $ 54,380,894       $ (629,840   $ 921,187,825   
                                 
           Fair Value Inputs at December 31, 2010  
     Fair Value at
December 31,
2010
    Price
Quotations
(Level 1)
     Significant Other
Observable Inputs

(Level 2)
    Significant
Unobservable Inputs

(Level 3)
 

Senior secured notes

   $ 88,265,252      $ —         $ —        $ 88,265,252   

Unsecured debt

     6,898,385        —           —          6,898,385   

Subordinated debt

     221,369,811        —           —          221,369,811   

Senior secured loans

     444,823,276        —           —          444,823,276   

Preferred stock

     6,595,040        —           —          6,595,040   

Common stock

     83,162,072        —           —          83,162,072   

Limited partnership/limited liability company interests

     23,387,927        —           —          23,387,927   

 

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           Fair Value Inputs at December 31, 2010  
     Fair Value at
December 31,
2010
    Price
Quotations
(Level 1)
     Significant Other
Observable Inputs

(Level 2)
    Significant
Unobservable  Inputs

(Level 3)
 

Equity warrants/options

     5,583,903        —           —          5,583,903   
                                 

Total investments

     880,085,666        —           —          880,085,666   

Forward foreign currency contracts

     (368,445     —           (368,445     —     

Cash and cash equivalents

     2,160,871        2,160,871         —          —     
                                 

Total

   $ 881,878,092      $ 2,160,871       $ (368,445   $ 880,085,666   
                                 

In determining the fair values of the Company’s forward foreign currency contracts at March 31, 2011 and at December 31, 2010, the Company used unadjusted indicative price quotations for similar assets (Level 2). The following tables summarize the valuation techniques used at March 31, 2011 and December 31, 2010 in determining the fair values of the Company’s investments for which significant unobservable inputs (Level 3) were used:

 

            Valuation Techniques at
March 31, 2011
 
     Fair Value at
March 31,
2011
     Broker  Quote(s)
for
Identical or
Similar Assets
     Market Approach,
Income Approach or
Both, Utilizing 

Third-Party
Valuation Firms
 

Senior secured notes

   $ 88,086,029       $ —         $ 88,086,029   

Unsecured debt

     7,094,335         —           7,094,335   

Subordinated debt

     223,331,853         —           223,331,853   

Senior secured loans

     485,170,322         7,553,823         477,616,499   

Preferred stock

     6,163,040         —           6,163,040   

Common stock

     81,099,724         —           81,099,724   

Limited partnership/limited liability company interests

     25,611,896         —           25,611,896   

Equity warrants/options

     4,630,626         8,000         4,622,626   
                          

Total investments

   $ 921,187,825       $ 7,561,823       $ 913,626,002   
                          

 

            Valuation Techniques at
December 31, 2010
 
     Fair Value at
December 31,
2010
     Broker  Quote(s)
for
Identical or
Similar Assets
     Market Approach,
Income Approach or

Both, Utilizing
Third-Party
Valuation Firms
 

Senior secured notes

   $ 88,265,252       $ —         $ 88,265,252   

Unsecured debt

     6,898,385         —           6,898,385   

Subordinated debt

     221,369,811         —           221,369,811   

Senior secured loans

     444,823,276         2,529,976         442,293,300   

Preferred stock

     6,595,040         —           6,595,040   

Common stock

     83,162,072         —           83,162,072   

Limited partnership/limited liability company interests

     23,387,927         —           23,387,927   

Equity warrants/options

     5,583,903         5,000         5,578,903   
                          

Total investments

   $ 880,085,666       $ 2,534,976       $ 877,550,690   
                          

The following is a reconciliation for the three months ended March 31, 2011 of investments for which Level 3 inputs were used in determining fair value:

 

     Fair Value at
December 31,

2010
     Amortization of
Premium/
Discount - Net
     Net
Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation or
Depreciation
    Purchases     Sales or
Redemptions
    Net Transfers
in and/or  out of
Level 3
     Fair Value
at March 31,

2011
 

Senior secured notes

   $ 88,265,252       $ 22,877       $ —        $ (202,100   $ —        $ —        $     —         $ 88,086,029   

Unsecured debt

     6,898,385         321,911         —          (207,254     81,293        —          —           7,094,335   

Subordinated debt

     221,369,811         368,502         (2,784,672     5,425,710        182,158        (1,229,656     —           223,331,853   

Senior secured loans

     444,823,276         950,942         (36,286,000     39,076,672        40,901,828        (4,296,396     —           485,170,322   

Preferred stock

     6,595,040         —           (899,994     467,999        —          (5     —           6,163,040   

Common stock*

     83,162,072         —           (2,385,754     844,003        (520,536     (61     —           81,099,724   

Limited partnership/limited liability company interests

     23,387,927         —           —          2,223,969        —          —          —           25,611,896   

Equity warrants/options

     5,583,903         —           —          (1,339,575     386,298        —          —           4,630,626   
                                                                   
   $ 880,085,666       $ 1,664,232       $ (42,356,420   $ 46,289,424      $ 41,031,041      $ (5,526,118   $ —         $ 921,187,825   
                                                                   

 

* Negative purchase amount is primarily due to the cancellation of an unsettled prior period purchase in the current period.

 

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The following is a reconciliation for the three months ended March 31, 2010 of investments for which Level 3 inputs were used in determining fair value:

 

     Fair Value at
December 31,

2009
     Amortization of
Premium/
Discount - Net
     Net
Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation or
Depreciation
    Net
Purchases,
Sales or
Redemptions
    Net Transfers
in and/or  out of
Level 3
     Fair Value at
March 31,

2010
 

Senior secured notes

   $ 48,407,746       $ 14,094       $ —        $ (156,621   $ —        $ —         $ 48,265,219   

Unsecured debt

     126,312,042         489,537         —          (3,791,702     (48,368,667     —           74,641,210   

Subordinated debt

     131,337,094         681,810         358        4,129,389        (579,062     —           135,569,589   

Senior secured loans

     501,811,506         497,055         (28,488,423     43,489,853        (28,812,818     —           488,497,173   

Preferred stock

     5,896,040         —           —          (373,000     600,000        —           6,123,040   

Common stock

     18,870,342         —           —          (5,167,293     10,786,113        —           24,489,162   

Limited partnership/limited liability company interests

     13,082,528         —           (14,426,995     14,749,526        8,533,794        —           21,938,853   

Equity warrants/options

     1,024,747         —           —          1,164,885        1,615,260        —           3,804,892   
                                                           

Total investments

   $ 846,742,045       $ 1,682,496       $ (42,915,060   $ 54,045,037      $ (56,225,380   $ —         $ 803,329,138   
                                                           

There were no transfers between Levels during the three months ended March 31, 2011 and 2010. All realized and unrealized gains and losses are included in earnings (changes in net assets) and are reported as separate line items within the Company’s statements of operations.

The following table contains information with respect to net unrealized appreciation or depreciation on investments for which Level 3 inputs were used in determining fair value that are still held by the Company at March 31, 2011.

 

     Net Change in Unrealized
Appreciation or Depreciation

for the Three Months Ended
March 31, 2011
on Investments Held at
March 31, 2011
    Net Unrealized
Appreciation or Depreciation
on Investments
Held at
March 31, 2011
 

Senior secured notes

   $ (202,100   $ (7,101,009

Unsecured debt

     (207,253     (43,095,608

Subordinated debt

     2,743,471        (3,287,495

Senior secured loans

     2,198,111        (10,796,939

Preferred stock

     (432,000     (8,127,342

Common stock

     (1,435,808     15,308,025   

Limited partnership/limited liability company interests

     2,223,969        (4,016,081

Equity warrants/options

     (1,339,576     1,814,034   
                

Total investments

   $ 3,548,813      $ (59,302,415
                

 

The following table contains information with respect to net unrealized appreciation or depreciation on investments for which Level 3 inputs were used in determining fair value that were still held by the Company at March 31, 2010.

 

     Net Change in Unrealized
Appreciation or Depreciation

for the Three Months Ended
March 31, 2010
on Investments Held at
March 31, 2010
    Net Unrealized
Depreciation
on Investments
Held at
March 31, 2010
 

Senior secured notes

   $ (156,621   $ (6,383,830

Unsecured debt

     (4,680,013     (48,115,005

Subordinated debt

     (718,731     (9,154,646

Senior secured loans

     21,162,640        (69,734,941

Preferred stock

     (373,000     (7,067,342

Common stock

     (5,167,293     (7,169,693

Limited partnership/limited liability company interests

     322,531        (7,543,646

Equity warrants/options

     1,164,885        1,136,182   
                

Total investments

   $ 11,554,398      $ (154,032,921
                

 

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11. Financial highlights

The following per share data and ratios have been derived from information provided in the financial statements. The following is a schedule of financial highlights for a common share outstanding during the three months ended March 31, 2011 and 2010.

 

     Three months
ended
March 31, 2011
    Three months
ended
March 31, 2010
 

Per Share Data:

    

Net asset value, beginning of period

   $ 9.62      $ 9.55   
                

Net investment income

     0.20        0.36   

Net realized and unrealized gain

     0.05        0.18   
                

Total from investment operations

     0.25        0.54   

Dividend distributions to stockholders from net investment income

     (0.32     (0.32

Issuance of stock at prices above net asset value

     0.01        —     
                

Net increase (decrease) in net assets

     (0.06     0.22   
                

Net asset value, end of period

   $ 9.56      $ 9.77   
                

Market price, end of period

   $ 10.12      $ 9.96   
                

Total return(1)(2)

     (5.81 )%      21.52

Ratios / Supplemental Data:

    

Ratio of operating expenses to average net assets(3)

     3.48     4.62

Ratio of interest and other debt related expenses to average net assets(3)

     2.45     0.95
                

Ratio of total expenses to average net assets(3)

     5.93     5.57

Ratio of net investment income to average net assets(3)

     8.59     14.98

Net assets, end of period

   $ 695,433,101      $ 552,953,567   

Average debt outstanding

   $ 259,711,111      $ 260,746,667   

Weighted average shares outstanding

     72,780,392        56,597,028   

Average debt per share(4)

   $ 3.57      $ 4.61   

Portfolio turnover(2)

     *        9

 

* Less than 1%
(1) Total return is based on the change in market price per share during the respective periods. Total return calculations take into account dividends and distributions, if any, reinvested in accordance with the Company’s dividend reinvestment plan and do not reflect brokerage commissions.
(2) Not annualized.
(3) Annualized.
(4) Average debt per share is calculated as average debt outstanding divided by the weighted average shares outstanding during the applicable period.

12. Subsequent events

On May 9, 2011, the Company’s Board of Directors declared a dividend of $0.26 per share, payable on July 1, 2011 to stockholders of record at the close of business on June 17, 2011.

In addition to the subsequent events included in these notes to the financial statements, the Company conducted a review for additional subsequent events and determined that no additional subsequent events had occurred that would require accrual or additional disclosures.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information contained in this section should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.

 

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Overview

We were incorporated in Delaware on April 13, 2005 and were initially funded on July 25, 2005. Our investment objective is to provide a combination of current income and capital appreciation. We intend to invest primarily in debt and equity securities of private and certain public U.S. middle-market companies.

We are externally managed and have elected to be regulated as a BDC under the 1940 Act. As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. Government securities and high-quality debt investments that mature in one year or less.

Investments

Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.

As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million. These rules also permit us to include as qualifying assets certain follow-on investments in companies that were eligible portfolio companies at the time of initial investment but that no longer meet the definition.

Revenues

We generate revenues primarily in the form of interest on the debt we hold, dividends on our equity interests and capital gains on the sale of warrants and other debt or equity interests that we acquire in portfolio companies. Our investments in fixed income instruments generally have an expected maturity of three to ten years, although we have no lower or upper constraint on maturity, and typically bear interest at a fixed or floating rate. Interest on our debt securities is generally payable quarterly or semi-annually. Payments of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt instruments and preferred stock investments may defer payments of cash interest or dividends or pay interest or dividends in-kind. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of prepayment fees, commitment, origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees.

Expenses

Our primary operating expenses include the payment of a base management fee and, depending on our operating results, an incentive management fee, expenses reimbursable under the management agreement, administration fees and the allocable portion of overhead under the administration agreement. The base management fee and incentive management fee compensate the Advisor for work in identifying, evaluating, negotiating, closing and monitoring our investments. Our management agreement with the Advisor provides that we 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 us. We bear all other costs and expenses of our operations and transactions.

Critical accounting policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. Our critical accounting policies, including those relating to the valuation of our investment portfolio, are further described in the notes to the financial statements and in Note 2 to the financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the SEC on March 8, 2011. See Note 2 to the financial statements in this Quarterly Report for a description of recently issued accounting pronouncements.

Financial and operating highlights

At March 31, 2011:

Investment Portfolio: $975.6 million

 

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Net Assets: $695.4 million

Indebtedness (borrowings under Credit Facility and Senior Secured Notes): $275.0 million

Net Asset Value per share: $9.56

Portfolio Activity for the Three Months Ended March 31, 2011:

Cost of investments during period: $39.6 million

Sales, repayments and other exits during period: $4.0 million

Number of portfolio companies at end of period: 52

Operating Results for the Three Months Ended March 31, 2011:

Net investment income before Incentive Fees per share: $0.20

Net investment income per share: $0.20

Dividends declared per share: $0.32

Earnings per share: $0.25

Net investment income before Incentive Fees: $14.9 million

Net investment income: $14.9 million

Net realized and unrealized gains: $3.1 million

Net increase in net assets from operations: $18.0 million

Portfolio and investment activity

During the three months ended March 31, 2011, we invested approximately $39.6 million across two new and several existing portfolio companies. The new investments consisted primarily of senior loans secured by first liens ($35.9 million, or 91% of the total invested) or second liens ($5.1 million, or 13%), and unsecured or subordinated debt securities and equity securities ($(1.4) million, or (4%), representing the cancellation of an unsettled prior period equity purchase). Additionally, we received proceeds from sales/repayments and other exits of approximately $4.0 million during the three months ended March 31, 2011.

At March 31, 2011, our net portfolio of $976 million (at fair value) consisted of 52 portfolio companies and was invested 49% in senior secured loans, 24% in unsecured or subordinated debt securities, 12% in equity investments, 9% in senior secure notes and 6% in cash and cash equivalents. Our average portfolio company investment at amortized cost was approximately $18.9 million at March 31, 2011. Our largest portfolio company investment by value was approximately $51.6 million and our five largest portfolio company investments by value comprised approximately 24% of our portfolio at March 31, 2011. At December 31, 2010, our net portfolio of $882 million (at fair value) consisted of 50 portfolio companies and was invested 50% in senior secured loans, 26% in unsecured or subordinated debt securities, 14% in equity investments, 10% in senior secured notes and less than 1% in cash and cash equivalents. Our average portfolio company investment at amortized cost was approximately $19.7 million at December 31, 2010. Our largest portfolio company investment by value was approximately $53.1 million and our five largest portfolio company investments by value comprised approximately 26% of our portfolio at December 31, 2010.

The weighted average yield of the debt and income producing equity securities in our portfolio at fair value was 12.2% at March 31, 2011 and 12.4% at December 31, 2010. The weighted average yields on our senior secured loans and other debt securities at fair value were 11.0% and 14.2%, respectively, at March 31, 2011, versus 11.3% and 14.3% at December 31, 2010. The weighted average yield of the debt and income producing equity securities in our portfolio at their current cost basis was 11.4% at March 31, 2011 and 10.9% at December 31, 2010. The weighted average yields on our senior secured loans and other debt securities at their current cost basis were 10.8% and 12.2%, respectively, at March 31, 2011, versus 10.1% and 12.1% at December 31, 2010. Yields are computed using interest rates and dividend yields as of the balance sheet date and include amortization of loan origination and commitment fees, original issue discount and market premium or discount based in the expected cash flows of the respective portfolio investment. Yields exclude common equity investments, preferred equity investments with no stated dividend rate, short-term investments, cash and cash equivalents.

At March 31, 2011, 47% of our debt investments bore interest based on floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate, and 53% bore interest at fixed rates. The percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 28% at March 31, 2011. At December 31, 2010, 45% of our debt investments bore interest based on floating rates and 55% bore interest at fixed rates. The percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 25% at December 31, 2010.

The Advisor employs a grading system for our entire portfolio. The Advisor grades all loans on a scale of 1 to 4. This system is intended to reflect the performance of the borrower’s business, the collateral coverage of the loans and other factors considered relevant. Generally, the Advisor assigns only one loan grade to each portfolio company for all loan investments in that portfolio company; however, the Advisor will assign multiple ratings when appropriate for different investments in one portfolio company. The following is a description of the conditions associated with each investment rating:

 

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Grade 1: Investments in portfolio companies whose performance is substantially within the Advisor’s expectations and whose risk factors are neutral to favorable to those at the time of the original investment.

Grade 2: Investments in portfolio companies whose performance is below the Advisor’s expectations and that require closer monitoring; however, no loss of investment return (interest and/or dividends) or principal is expected.

Grade 3: Investments in portfolio companies whose performance is below the Advisor’s expectations and for which risk has increased materially since origination. Some loss of investment return is expected, but no loss of principal is expected. Companies graded 3 generally will be out of compliance with debt covenants and will be unlikely to make debt repayments on their original schedule.

Grade 4: Investments in portfolio companies whose performance is materially below the Advisor’s expectations where business trends have deteriorated and risk factors have increased substantially since the original investment. Investments graded 4 are those for which some loss of principal is expected.

The Advisor monitors and, when appropriate, changes the investment ratings assigned to each investment in our portfolio. In connection with our valuation process, the Advisor and Board of Directors review these investment ratings on a quarterly basis. Our average investment rating was 1.26 at March 31, 2011 versus 1.32 at December 31, 2010. The following is a distribution of the investment ratings of our portfolio companies at March 31, 2011 and December 31, 2010:

 

     March 31, 2011      December 31, 2010  

Grade 1

   $ 718,915,822       $ 640,463,981   

Grade 2

     179,776,035         211,899,165   

Grade 3

     8,913,389         9,631,767   

Grade 4

     13,582,579         18,090,753   
                 

Total investments

   $ 921,187,825       $ 880,085,666   
                 

Results comparisons for the three months ended March 31, 2011 and 2010.

Investment income

Investment income totaled $25,160,129 and $27,799,099, respectively, for the three months ended March 31, 2011 and 2010, of which $12,521,315 and $14,994,235 were attributable to interest and fees on senior secured loans, $11,696,393 and $11,998,827 to interest earned on other debt securities, $923,643 and $805,808 to dividends from preferred equity securities and $18,778 and $229 to interest earned on cash equivalents, respectively. The decrease in investment income for the current period was primarily due to a lower average debt portfolio yield as compared to the prior period. In addition, the impact on investment income of net new investment activity in the current quarter was nominal as such activity was concentrated near quarter-end.

Expenses

Expenses for the three months ended March 31, 2011 and 2010 were $10,283,494 and $7,533,834, respectively, which consisted of $4,465,239 and $4,322,471 in base management fees, zero and $493,951 in incentive management fees, $3,642,219 and $1,122,254 in interest expense and fees related to the Credit Facility, $608,727 and $168,292 in amortization of debt issuance costs, $425,485 and $398,664 in Advisor expenses, $359,056 and $203,266 in professional fees, $290,802 and $257,723 in administrative services, $120,725 and $152,408 in insurance expenses, $108,269 and $95,837 in director fees and $262,972 and $318,968 in other expenses, respectively. The increase in base management fees reflects an increase in the quarterly portfolio values on which the fees are paid (in arrears). The increase in interest expense and fees related to the Credit Facility primarily reflect the issuance of our Senior Secured Notes in January 2011.

Net investment income

Net investment income was $14,876,635 and $20,265,265 for the three months ended March 31, 2011 and 2010, respectively. The decrease is primarily a result of a decline in interest income, as well as an increase in interest and Credit Facility related expenses.

Net realized gain or loss

Net realized loss of $(42,867,692) for the three months ended March 31, 2011 was the result of $(42,367,616) in net losses realized from the disposition of our investments and $(500,076) in net loss realized on foreign currency

 

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transactions. Net realized loss on investments for the three months ended March 31, 2011 resulted primarily from the restructuring or disposition of our investments in Facet Technologies, LLC and Mattress Giant Corporation. Nearly the entire net realized loss on investments represents amounts that had been reflected in unrealized depreciation on investments in prior periods. Foreign currency gains and losses are attributable to forward currency contracts used to mitigate the impact that changes in foreign exchange rates would have on our investments denominated in foreign currencies. For the three months ended March 31, 2010, net realized loss was $(42,363,323), which was comprised of $(42,915,060) in net losses realized from the disposition or restructuring of our investments and $551,737 in net gains realized on foreign currency transactions.

Net unrealized appreciation or depreciation

For the three months ended March 31, 2011 and 2010, the change in net unrealized appreciation was a decrease in net unrealized appreciation of $46,005,949 and $52,581,109, respectively. The decrease in net unrealized appreciation for the three months ended March 31, 2011 was comprised of a decrease in net unrealized appreciation on investments of $46,289,424 and a net unrealized foreign currency translation loss of $(283,475). The decrease in net unrealized depreciation was a result of the investment restructurings and dispositions described above and improved capital market conditions. The valuations of our investments were favorably impacted by improved performance in certain portfolio companies and market-wide decreases in interest yields, as well as increased multiples used to estimate the fair value of some of our investments. Market-wide movements and trading multiples are not necessarily indicative of any fundamental change in the condition or prospects of our portfolio companies. The decrease in net unrealized depreciation for the three months ended March 31, 2010 was comprised of a decrease in net unrealized depreciation on investments of $54,045,037 and a net unrealized foreign currency translation loss of $(1,463,928).

Net increase or decrease in net assets resulting from operations

The net increase or decrease in net assets resulting from operations for the three months ended March 31, 2011 and 2010 was an increase of $18,014,892 and $30,483,051, respectively. The lower net increase in net assets from operations primarily reflects the decrease in net investment income and net realized and unrealized gain for the three months ended March 31, 2011.

Supplemental information

We report our financial results on a GAAP basis; however, management believes that evaluating our ongoing operating results may be enhanced if investors have additional non-GAAP basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and, for the reasons described below, considers them to be effective indicators, for both management and investors, of our financial performance over time. Management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

We record our liability for Incentive Fees as we become legally obligated to pay them, based on a hypothetical liquidation at the end of each reporting period. Our obligation to pay Incentive Fees with respect to any fiscal quarter is based on a formula that reflects our results over a trailing four-fiscal quarter period ending with the current fiscal quarter. We are legally obligated to pay the amount resulting from the formula less any cash payments of Incentive Fees during the prior three quarters. The formula’s requirement to reduce the Incentive Fees by amounts paid with respect to Incentive Fees in the prior three quarters has caused our Incentive Fees expense to become, and currently is expected to be, concentrated in the fourth quarter of each year. Management believes that reflecting Incentive Fees throughout the year, as the related investment income is earned, is an effective measure of our profitability and financial performance that facilitates comparison of current results with historical results and with those of our peers. Our “as adjusted” results reflect Incentive Fees based on the formula we utilize for each trailing four-fiscal quarter period, with the formula applied to the current quarter’s incremental earnings and without any reduction for Incentive Fees paid during the prior three quarters. The resulting amount represents an upper limit of each quarter’s incremental Incentive Fees that we may become legally obligated to pay at the end of the year. Prior year amounts are estimated in the same manner. These estimates represent upper limits because, in any calendar year, subsequent quarters’ investment underperformance could reduce the Incentive Fees payable with respect to prior quarters’ operating results. Changes in the economic environment, financial markets and other parameters used in determining such estimates could cause actual results to differ and such differences could be material. See Note 3 to the financial statements in this Quarterly Report for a more detailed description of the Company’s incentive management fee.

Computations for all periods are derived from our financial statements as follows:

 

     Three months
ended
March 31, 2011
     Three months
ended
March 31, 2010
 

GAAP Basis:

     

Net Investment Income

   $ 14,876,635       $ 20,265,265   

 

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     Three months
ended
March 31, 2011
    Three months
ended
March 31, 2010
 

Net Increase in Net Assets from Operations

   $ 18,014,892      $ 30,483,051   

Net Asset Value at end of period

     695,433,101        552,953,567   

Less: Incremental Incentive Fee expense using existing formula as applied to current period operating results

     (271,867     (3,501,086

As Adjusted:

    

Net Investment Income

   $ 14,604,768      $ 16,764,179   

Net Increase in Net Assets from Operations

     17,743,025        26,981,965   

Net Asset Value at end of period

     695,161,234        549,452,481   

Per Share Amounts, GAAP Basis:

    

Net Investment Income

   $ 0.20      $ 0.36   

Net Increase in Net Assets from Operations

     0.25        0.54   

Net Asset Value at end of period

     9.56        9.77   

Per Share Amounts, As Adjusted:

    

Net Investment Income

   $ 0.20      $ 0.30   

Net Increase in Net Assets from Operations

     0.24        0.48   

Net Asset Value at end of period

     9.55        9.71   

Financial condition, liquidity and capital resources

During the three months ended March 31, 2011, we generated operating cash flows primarily from interest earned and fees received on senior secured loans and other debt securities, as well as from sales and unsettled purchases of selected portfolio company investments or repayments of principal.

Net cash used in operating activities during the three months ended March 31, 2011 was $30,141,071. Our primary source of cash from operating activities during the period was a net increase in net assets from operations of $18,014,892, which was more than offset by purchases of investments in portfolio companies (net of sales and repayments) of $35,504,672.

Net cash provided by financing activities during the three months ended March 31, 2011 was $82,379,224. Our primary source of cash for financing activities was $175,000,000 in proceeds from the issuance of our Senior Secured Notes in January. Our primary uses of cash for financing activities were $20,927,156 of dividend distributions and $70,000,000 of net repayments under our Credit Facility.

Our senior secured, multi-currency Credit Facility provides us with $375,000,000 in total availability, consisting of $275,000,000 of revolving loan commitments and $100,000,000 of term loan commitments. The Credit Facility is secured by substantially all of the assets in our portfolio, including cash and cash equivalents. The Credit Facility has a stated maturity date of December 6, 2013 and the interest rate applicable to borrowings thereunder is generally 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. The Credit Facility does not contain a LIBOR floor requirement. At March 31, 2011, the effective LIBOR spread under the Credit Facility was 3.00%. 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 March 31, 2011, we had $100,000,000 drawn and outstanding under the Credit Facility, with $275,000,000 available to us, subject to compliance with customary affirmative and negative covenants, including the maintenance of a minimum stockholders’ equity, the maintenance of a ratio of not less than 200% of total assets (less total liabilities other than indebtedness) to total indebtedness, and restrictions on certain payments and issuance of debt. In addition, borrowings under the Credit Facility (and the incurrence of certain other permitted debt) are subject to compliance with a borrowing base that applies different advance rates to different types of assets in the Company’s portfolio.

On January 18, 2011, the Company closed a private placement issuance of $158,000,000 in aggregate principal amount of Senior Secured Notes with a fixed interest rate of 6.50% and a maturity date of January 18, 2016 and $17,000,000 million in aggregate principal amount of Senior Secured Notes with a fixed interest rate of 6.60% and a maturity date of January 18, 2018.

 

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Interest on the Senior Secured Notes is due semi-annually on January 18 and July 18, commencing on July 18, 2011. The proceeds from the issuance of the Senior Secured Notes were used to fund new portfolio investments, reduce outstanding borrowings under the Credit Facility and for general corporate purposes. The Senior Secured Notes contain customary affirmative and negative covenants substantially similar to those in our Credit Facility. At March 31, 2011, we were in compliance with all financial and operational covenants required by the Credit Facility and Senior Secured Notes.

At March 31, 2011, we had $54,380,894 in cash and cash equivalents.

The primary use of existing funds is expected to be purchases of investments in portfolio companies, cash distributions to our stockholders, repayment of indebtedness and other general corporate purposes.

Our shelf registration permits us to offer, from time to time, up to approximately $830 million of our common stock, preferred stock, debt securities, warrants representing rights to purchase shares of our common stock, preferred stock or debt securities and subscription rights. As a closed-end investment company regulated as a BDC under the 1940 Act, we are prohibited from selling shares of our common stock at a price below the current net asset value of the stock, or NAV, unless our stockholders approve such a sale and our Board of Directors makes certain determinations.

Contractual obligations

A summary of our significant contractual payment obligations for the repayment of outstanding borrowings at March 31, 2011 is as follows:

 

     Payments Due By Period (dollars in millions)  
     Total      Less than 1 year      1-3 years      3-5 years      After 5 years  

Credit Facility(1)

   $ 100.0       $ —         $ 100.0       $ —         $ —     

Senior Secured Notes

     175.0         —           —           158.0         17.0  

Interest and Credit Facility Fees Payable

     2.4         2.4         —           —           —     

 

(1) At March 31, 2011, $275.0 million remained unused under our Credit Facility.

Off-balance sheet arrangements

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. The Company has no such guarantees outstanding at March 31, 2011. The Company’s only such guarantee outstanding at December 31, 2010 was terminated on January 17, 2011 with no payments having been made thereunder.

Dividends

Our quarterly dividends, if any, are determined by our Board of Directors. Dividends are declared considering our estimate of annual taxable income available for distribution to stockholders and the amount of taxable income carried over from the prior year for distribution in the current year. We cannot assure stockholders that they will receive any dividends and distributions at all or dividends and distributions at a particular level. Dividends declared by the Company since July 25, 2005 (inception of operations) have been as follows:

 

Dividend Amount

Per Share

Outstanding

  

Record Date

  

Payment Date

$0.20    December 31, 2005    January 31, 2006
$0.20    March 15, 2006    March 31, 2006
$0.23    June 15, 2006    June 30, 2006
$0.30    September 15, 2006    September 29, 2006
$0.42    December 31, 2006    January 31, 2007
$0.42    March 15, 2007    March 30, 2007
$0.42    May 15, 2007    May 31, 2007
$0.42    September 14, 2007    September 28, 2007
$0.43    December 14, 2007    December 31, 2007

 

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Dividend Amount
Per Share

Outstanding

  

Record Date

  

Payment Date

$0.43    March 17, 2008    March 31, 2008
$0.43    June 16, 2008    June 30, 2008
$0.43    September 15, 2008    September 30, 2008
$0.43    December 15, 2008    December 31, 2008
$0.16    March 20, 2009    April 3, 2009
$0.16    June 19, 2009    July 2, 2009
$0.16    September 18, 2009    October 2, 2009
$0.32    December 21, 2009    January 4, 2010
$0.32    March 22, 2010    April 5, 2010
$0.32    May 17, 2010    July 2, 2010
$0.32    September 17, 2010    October 1, 2010
$0.32    December 20, 2010    January 3, 2011
$0.32    March 18, 2011    April 1, 2011
$0.26    June 17, 2011    July 1, 2011

Tax characteristics of all dividends are reported to stockholders on Form 1099 after the end of the calendar year.

We have qualified and elected and intend to continue to qualify for the tax treatment applicable to regulated investment companies under Subchapter M of the Code, and, among other things, have made and intend to continue to make the requisite distributions to our stockholders which will relieve us from federal income taxes. Therefore, no provision has been recorded for federal income taxes. We may, at our discretion, carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. We will accrue excise tax on estimated undistributed taxable income as required.

In order to qualify for favorable tax treatment as a RIC, we are required to distribute annually to our stockholders at least 90% of investment company taxable income, as defined by the Code. To avoid federal excise taxes, we must distribute annually at least 98% of our income (both ordinary income and net capital gains).

A portion of amounts we have paid or will pay as dividends to stockholders during 2011 may consist of taxable income carried forward from the prior year. Taxable income carried forward from the prior year to 2011 totaled approximately $8,900,000 or $0.12 per share.

We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, except as discussed below, if we declare a dividend, stockholders’ cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash dividends. With respect to our dividends and distributions paid to stockholders during the three months ended March 31, 2011 and 2010, dividends reinvested pursuant to our dividend reinvestment plan totaled $2,295,131 and $1,020,149, respectively.

Under the terms of our amended and restated dividend reinvestment plan adopted on March 4, 2009, dividends may be paid in newly issued or treasury shares of our common stock at a price equal to 95% of the market price on the dividend payment date. This feature of the plan means that, under certain circumstances, we may issue shares of our common stock at a price below net asset value per share, which could cause our stockholders to experience dilution.

Income we receive from origination, structuring, closing, commitment and other upfront fees associated with investments in portfolio companies is treated as taxable income when received and accordingly, distributed to stockholders. For the three months ended March 31, 2011 and 2010, these fees totaled zero and $27,500. For financial reporting purposes, such fees are recorded as unearned income and accreted/amortized over the life of the respective investment. We anticipate earning additional upfront fees in the future and such fees may cause our taxable income to exceed our GAAP income, although the differences are expected to be temporary in nature.

In order to satisfy the annual distribution requirement applicable to RICs, we have the ability to declare a large portion of a dividend in shares of our common stock instead of in cash. As long as a sufficient portion of such dividend is paid in cash (which portion can be as low as 10% for our taxable years ending prior to 2012) and certain requirements are met, the entire distribution would be treated as a taxable dividend for U.S. federal income tax purposes.

Recent developments

On May 9, 2011, our Board of Directors declared a dividend of $0.26 per share, payable on July 1, 2011 to stockholders of record at the close of business on June 17, 2011.

Notice is hereby given in accordance with Section 23 of the 1940 Act that from time to time we may purchase shares of our common stock in the open market at prevailing market prices.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. At March 31, 2011, 47% of our debt investments bore interest based on floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate. The interest rates on such investments generally reset by reference to the current market index after one to six months. At March 31, 2011, the percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 28%. Floating rate investments subject to a floor generally reset by reference to the current market index after one to six months only if the index exceeds the floor.

To illustrate the potential impact of changes in interest rates, we have performed the following analysis based on our March 31, 2011 balance sheet and assuming no changes in our investment structure. Net asset value is analyzed using the assumptions that interest rates, as defined by the LIBOR and U.S. Treasury yield curves, increase or decrease and that the yield curves of the rate shocks will be parallel to each other. Under this analysis, an instantaneous 100 basis point increase in LIBOR and U.S. Treasury yields would cause a decline of approximately $8,500,000, or $0.12 per share, in the value of our net assets at March 31, 2011 and a corresponding 100 basis point decrease in LIBOR and U.S. Treasury yields would cause an increase of approximately $7,900,000, or $0.11 per share, in the value of our net assets on that date.

While hedging activities may help to insulate us against adverse changes in interest rates, they also may limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. During the three months ended March 31, 2011 and 2010, we did not engage in any interest rate hedging activity.

 

Item 4. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective in timely alerting them to material information relating to us that is required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934.

There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

From time to time, we and the Advisor may be a party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. While we cannot predict the outcome of these legal proceedings with certainty, we do not expect that these proceedings will have a material effect on our financial statements.

 

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in our most recent Form 10-K filing.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Sales of unregistered securities

On March 16, 2011 we issued and sold to the Advisor in a private placement 200,000 shares of our common stock for aggregate proceeds of $2,000,000, which were used for general corporate purposes. This placement was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act.

 

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Issuer purchases of equity securities

 

The following table provides information regarding our purchases of our common stock for each month in the three month period ended March 31, 2011.

 

   

Period

   Average Price Paid
per Share
     Total Number  of
Shares Purchased
     Total Number  of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
     Maximum Number
(or Approximate
Dollar Value) of
Shares that May Yet
Be Purchased Under
the Plans or
Programs
 

January 2011

   $ —           —           —           1,594,971   

February 2011

     —           —           —           —     

March 2011

     9.98         200,000         200,000         —     
                                   

Total

   $ 9.98         200,000         200,000         1,594,971   
                                   

 

In 2008, our Board of Directors approved a share repurchase plan under which we may repurchase up to 2.5 percent of our outstanding shares of common stock from time to time in open market or privately negotiated transactions. In 2009, our Board of Directors approved an extension and increase to the share repurchase plan which authorized us to repurchase up to an additional 2.5 percent of our outstanding shares of common stock from time to time. In May 2011, the repurchase plan was further extended through the earlier of June 30, 2012 or until the approved number of shares has been repurchased. After giving effect to the Board’s most recent action, the total number of additional shares authorized for repurchase is 1,594,971. The repurchase plan does not obligate us to acquire any specific number of shares and may be discontinued at any time. We intend to fund any repurchases with available cash.

 

The following table provides information regarding purchases of our common stock by the Advisor for each month in the three month period ended March 31, 2011.

 

         

   

Period

   Average Price Paid
per Share
     Total Number  of
Shares Purchased
     Total Number  of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
     Maximum Number
(or Approximate
Dollar Value) of
Shares that May Yet
Be Purchased Under
the Plans or
Programs
 

January 2011

   $ —           —           —           —     

February 2011

     —           —           —           —     

March 2011

     10.00         200,000         —           —     
                                   

Total

   $ 10.00         200,000         —           —     
                                   

 

In March 2011, our Board of Directors authorized the purchase in a private placement of up to 1,000,000 shares of our common stock by the Advisor, in its discretion, subject to compliance with our and the Advisor’s applicable policies and requirements of law. The above purchase by the Advisor was made in accordance with such policies and Rule 10b-18 under the Exchange Act.

     

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. [Reserved]

 

Item 5. Other Information

None.

 

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Item 6. Exhibits.

 

(a) Exhibits.

 

31.1   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32   Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  BLACKROCK KELSO CAPITAL CORPORATION
Date: May 9, 2011   By:  

/s/    James R. Maher        

    James R. Maher
    Chief Executive Officer
Date: May 9, 2011   By:  

/s/    Frank D. Gordon        

    Frank D. Gordon
    Chief Financial Officer

 

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