UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
10-Q/A
(Amendment No. 1)
S
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended September 30,
2011
£
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from to
Commission File No. 814-00735
Kohlberg Capital Corporation
(Exact name of Registrant as specified
in its charter)
Delaware
|
|
20-5951150
|
(State or other jurisdiction of
|
|
(I.R.S. Employer
|
Incorporation or organization)
|
|
Identification Number)
|
295 Madison Avenue, 6th Floor
|
New York, New York 10017
|
(Address of principal executive offices)
|
|
(212) 455-8300
|
(Registrant's telephone number, including area code)
|
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days: Yes
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
¨
No
x
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition
of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
|
£
|
|
Accelerated filer
|
S
|
|
|
|
|
|
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 Act). Yes
¨
No
x
The number of outstanding shares of common
stock of the registrant as of November 9, 2011 was 22,886,769.
EXPLANATORY NOTE
This Quarterly Report on Form 10-Q/A of
Kohlberg Capital Corporation (the “
Company
”) for the three and nine months ended September 30, 2011 has been
amended to include separate summarized financial information of the Company’s wholly-owned portfolio company, Katonah Debt
Advisors, L.L.C. and related affiliates controlled by the Company (collectively, “
KDA
”) and related disclosures,
as required to be included in this Quarterly Report in accordance with Rules 10-01, 4-08(g) and 1-02(bb) of Regulation S-X promulgated
by the Securities and Exchange Commission (“
Regulation S-X
”) as well as to include the required certifications
and other changes described below. The Company has concluded that, in accordance with Rule 3-09 of Regulation S-X, separate
financial statements of KDA are required to be filed with respect the fiscal year ended December 31, 2010 and separate summarized
financial information of KDA is required to be filed with respect to the quarterly periods in fiscal 2011, including the quarterly
period ended September 30, 2011. However, the inclusion of such separate financial statements and summarized financial
information of KDA did not result in any restatement to the previously reported financial results of the Company, including the
financial results included in the original Quarterly Report on Form 10-Q filed on November 9, 2011 (the “
Original Filing
”).
Other than (i) the additional summarized financial information
of KDA and related disclosures, (ii) the report of the Company’s independent registered public accounting firm relating to
its review of the Company’s balance sheet as of September 30, 2011, and the related statements of operations and comprehensive
income (loss) for the three months and nine months ended September 30, 2011 and 2010, and the statements of cash flows for the
nine months ended September 30, 2011 and 2010, (iii) the information regarding the Company’s determination with respect to
separate financial statements and summarized financial information of KDA included in Item 4. Controls and Procedures of Part I
below and (iv) the certifications noted below, no other information in the Original Filing is being amended hereby. The information
contained in this Quarterly Report on Form 10-Q/A has been updated to reflect other events occurring after the Original Filing
and to modify or update those disclosures affected by subsequent events. As such, except as provided herein with respect to the
certifications noted below, this Amended Report continues to speak as of the date of the Original Filing. Accordingly, this Quarterly
Report on Form 10-Q/A should be read in conjunction with the Original Filing and the Company’s other reports filed with the
SEC subsequent to the filing of the Original Filing. Pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing
has been amended to contain currently-dated certifications from the Company’s Chief Executive Officer and Chief Financial
Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, and are attached to this Quarterly Report on Form
10-Q/A as Exhibits 31.1, 31.2, 32.1, and 32.2, respectively.
All statements included or referred to
in this Quarterly Report on Form 10-Q/A, other than statements of historical fact, are forward-looking statements. Examples of
forward-looking statements include, but are not limited to, statements regarding the Company’s expectations regarding the
filing of separate financial statements and separate summarized financial information of KDA. These forward-looking statements
are based on the Company’s current expectations, estimates and projections, and certain assumptions made by the Company,
all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,”
“expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,”
“estimates,” “may,” “will,” “should,” “would,” “could,”
“potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these
words. These statements are not guarantees of future performance and are subject to risks and uncertainties that are difficult
to predict. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q/A and the
Company undertakes no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise
required by law.
TABLE OF CONTENTS
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Page
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Part I. Financial Information
|
|
|
|
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Item 1.
|
Financial Statements
|
1
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
1
|
|
|
|
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Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010
|
2
|
|
|
|
|
Statements of Operations (unaudited) for the three and nine months ended September 30, 2011 and 2010
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3
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|
|
|
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Statements of Changes in Net Assets (unaudited) for the nine months ended September 30, 2011 and 2010
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4
|
|
|
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Statements of Cash Flows (unaudited) for the nine months ended September 30, 2011 and 2010
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5
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|
|
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Schedules of Investments as of September 30, 2011 (unaudited) and December 31, 2010
|
6
|
|
|
|
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Financial Highlights (unaudited) for the nine months ended September 30, 2011 and 2010
|
21
|
|
|
|
|
Notes to Financial Statements (unaudited)
|
22
|
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
42
|
|
|
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
|
62
|
|
|
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Item 4.
|
Controls and Procedures
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63
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|
|
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Part II. Other Information
|
|
|
|
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Item 1.
|
Legal Proceedings
|
64
|
|
|
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Item 1A.
|
Risk Factors
|
64
|
|
|
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
66
|
|
|
|
Item 3.
|
Defaults Upon Senior Securities
|
66
|
|
|
|
Item 4.
|
[Removed and Reserved]
|
66
|
|
|
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Item 5.
|
Other Information
|
66
|
|
|
|
Item 6.
|
Exhibits
|
67
|
|
|
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Signatures
|
68
|
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders
Kohlberg
Capital Corporation
We have
reviewed the accompanying balance sheet, including the schedule of investments of Kohlberg Capital Corporation and subsidiary
(the “Company”) as of September 30, 2011, and the related statements of operations, changes in net assets, cash flows
and financial highlights for the three-month and nine-month periods ended September 30, 2011 and 2010. These interim financial
statements are the responsibility of the Company's management.
We conducted
our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based
on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements for
them to be in conformity with accounting principles generally accepted in the United States of America.
We have
previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance
sheet, including the schedule of investments, of the Company as of December 31, 2010, and the related statements of operations,
changes in net assets, cash flows and financial highlights for the year then ended (not presented herein); and in our report dated
March 4, 2011, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in
the accompanying balance sheet as of December 31, 2010, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
/s/ GRANT THORNTON LLP
|
|
New York, New York
|
|
March 15, 2012
|
|
KOHLBERG CAPITAL CORPORATION
BALANCE SHEETS
|
|
As of
September 30, 2011
|
|
|
As of
December 31, 2010
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Investments at fair value:
|
|
|
|
|
|
|
|
|
Time deposits (cost: 2011 - $2,494,148; 2010 - $720,225)
|
|
$
|
2,494,148
|
|
|
$
|
720,225
|
|
Money market account (cost: 2011 - $34,265,352; 2010 - $210,311)
|
|
|
34,265,352
|
|
|
|
210,311
|
|
Debt securities (cost: 2011 - $144,158,603; 2010 - $126,545,510)
|
|
|
120,607,476
|
|
|
|
91,042,928
|
|
CLO Fund securities managed by non-affiliates (cost: 2011 - $12,543,733; 2010 - $15,690,982)
|
|
|
3,281,000
|
|
|
|
4,921,000
|
|
CLO Fund securities managed by affiliate (cost: 2011 - $52,647,488; 2010 - $52,589,218)
|
|
|
45,480,000
|
|
|
|
48,110,000
|
|
Equity securities (cost: 2011 - $16,199,845; 2010 - $13,483,227)
|
|
|
6,009,932
|
|
|
|
4,688,832
|
|
Asset manager affiliates (cost: 2011 - $44,338,439; 2010 - $44,532,329)
|
|
|
42,629,000
|
|
|
|
41,493,000
|
|
Total Investments at fair value
|
|
|
254,766,908
|
|
|
|
191,186,296
|
|
Cash
|
|
|
414,363
|
|
|
|
10,175,488
|
|
Restricted cash
|
|
|
—
|
|
|
|
67,023,170
|
|
Interest and dividends receivable
|
|
|
2,852,109
|
|
|
|
2,574,115
|
|
Receivable for open trades
|
|
|
—
|
|
|
|
7,681,536
|
|
Accounts Receivable
|
|
|
1,261,926
|
|
|
|
851,020
|
|
Other assets
|
|
|
2,377,156
|
|
|
|
331,061
|
|
Total assets
|
|
$
|
261,672,462
|
|
|
$
|
279,822,686
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Borrowings
|
|
$
|
—
|
|
|
$
|
86,746,582
|
|
Convertible Senior Notes
|
|
|
60,000,000
|
|
|
|
—
|
|
Payable for open trades
|
|
|
8,660,540
|
|
|
|
—
|
|
Accounts payable and accrued expenses
|
|
|
3,277,489
|
|
|
|
2,337,767
|
|
Dividend payable
|
|
|
—
|
|
|
|
3,812,670
|
|
Total liabilities
|
|
$
|
71,938,029
|
|
|
$
|
92,897,019
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 22,886,769 and 22,767,130 common shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
|
|
$
|
226,461
|
|
|
$
|
224,274
|
|
Capital in excess of par value
|
|
|
284,276,107
|
|
|
|
282,794,025
|
|
Accumulated undistributed net investment income
|
|
|
5,105,105
|
|
|
|
818,664
|
|
Accumulated net realized losses
|
|
|
(47,992,538
|
)
|
|
|
(34,325,792
|
)
|
Net unrealized depreciation on investments
|
|
|
(51,880,702
|
)
|
|
|
(62,585,504
|
)
|
Total stockholders' equity
|
|
$
|
189,734,433
|
|
|
$
|
186,925,667
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
261,672,462
|
|
|
$
|
279,822,686
|
|
|
|
|
|
|
|
|
|
|
NET ASSET VALUE PER COMMON SHARE
|
|
$
|
8.29
|
|
|
$
|
8.21
|
|
See accompanying notes to financial statements.
KOHLBERG CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest from investments in debt securities
|
|
$
|
2,830,422
|
|
|
$
|
3,774,475
|
|
|
$
|
6,853,370
|
|
|
$
|
12,019,584
|
|
Interest from cash and time deposits
|
|
|
4,246
|
|
|
|
3,259
|
|
|
|
17,831
|
|
|
|
15,752
|
|
Dividends from investments in CLO Fund securities managed by non-affiliates
|
|
|
474,348
|
|
|
|
472,972
|
|
|
|
1,522,272
|
|
|
|
1,273,619
|
|
Dividends from investments in CLO Fund securities managed by affiliate
|
|
|
3,415,372
|
|
|
|
2,222,806
|
|
|
|
9,291,379
|
|
|
|
5,935,478
|
|
Dividends from affiliate asset manager
|
|
|
510,000
|
|
|
|
1,500,000
|
|
|
|
1,160,000
|
|
|
|
3,000,000
|
|
Capital structuring service fees
|
|
|
25,642
|
|
|
|
117,704
|
|
|
|
55,149
|
|
|
|
193,415
|
|
Other Income
|
|
|
—
|
|
|
|
—
|
|
|
|
2,000,000
|
|
|
|
—
|
|
Total investment income
|
|
|
7,260,030
|
|
|
|
8,091,216
|
|
|
|
20,900,001
|
|
|
|
22,437,848
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and amortization of debt issuance costs
|
|
|
1,430,520
|
|
|
|
1,623,305
|
|
|
|
3,157,750
|
|
|
|
6,723,587
|
|
Compensation
|
|
|
985,023
|
|
|
|
814,584
|
|
|
|
3,161,592
|
|
|
|
2,418,567
|
|
Professional fees
|
|
|
450,156
|
|
|
|
1,373,552
|
|
|
|
1,515,247
|
|
|
|
5,325,341
|
|
Insurance
|
|
|
126,006
|
|
|
|
105,985
|
|
|
|
359,241
|
|
|
|
306,752
|
|
Administrative and other
|
|
|
220,781
|
|
|
|
342,520
|
|
|
|
751,020
|
|
|
|
956,638
|
|
Total expenses
|
|
|
3,212,486
|
|
|
|
4,259,946
|
|
|
|
8,944,850
|
|
|
|
15,730,885
|
|
Net Investment Income
|
|
|
4,047,544
|
|
|
|
3,831,270
|
|
|
|
11,955,151
|
|
|
|
6,706,963
|
|
Realized And Unrealized Gains (Losses) On Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) from investment transactions
|
|
|
93,068
|
|
|
|
(3,046,761
|
)
|
|
|
(13,666,746
|
)
|
|
|
(10,752,567
|
)
|
Net change in unrealized appreciation (depreciation) on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
(1,766,660
|
)
|
|
|
1,334,179
|
|
|
|
11,951,454
|
|
|
|
5,871,658
|
|
Equity securities
|
|
|
(710,600
|
)
|
|
|
(565,094
|
)
|
|
|
(1,395,518
|
)
|
|
|
(574,190
|
)
|
CLO Fund securities managed by affiliate
|
|
|
(3,070,465
|
)
|
|
|
550,246
|
|
|
|
(2,688,272
|
)
|
|
|
2,470,250
|
|
CLO Fund securities managed by non-affiliate
|
|
|
(550,820
|
)
|
|
|
28,720
|
|
|
|
1,507,249
|
|
|
|
1,246,142
|
|
Affiliate asset manager investments
|
|
|
472,676
|
|
|
|
(5,451,872
|
)
|
|
|
1,329,889
|
|
|
|
(12,383,575
|
)
|
Net realized and unrealized appreciation (depreciation) on investments
|
|
|
(5,532,801
|
)
|
|
|
(7,150,582
|
)
|
|
|
(2,961,944
|
)
|
|
|
(14,122,282
|
)
|
Net Increase (Decrease) In Net Assets Resulting From Operations
|
|
$
|
(1,485,257
|
)
|
|
$
|
(3,319,312
|
)
|
|
$
|
8,993,207
|
|
|
$
|
(7,415,319
|
)
|
Net Increase (Decrease) In Stockholders' Equity Resulting from Operations per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
(0.06
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
0.39
|
|
|
$
|
(0.33
|
)
|
Diluted:
|
|
$
|
(0.06
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
0.39
|
|
|
$
|
(0.33
|
)
|
Net Investment Income Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
$
|
0.18
|
|
|
$
|
0.17
|
|
|
$
|
0.52
|
|
|
$
|
0.30
|
|
Diluted:
|
|
$
|
0.18
|
|
|
$
|
0.17
|
|
|
$
|
0.52
|
|
|
$
|
0.30
|
|
Weighted Average Shares of Common Stock Outstanding—Basic
|
|
|
22,872,486
|
|
|
|
22,677,428
|
|
|
|
22,830,757
|
|
|
|
22,547,274
|
|
Weighted Average Shares of Common Stock Outstanding—Diluted
|
|
|
22,872,486
|
|
|
|
22,677,428
|
|
|
|
22,843,608
|
|
|
|
22,547,274
|
|
See accompanying notes to financial statements.
KOHLBERG CAPITAL CORPORATION
STATEMENTS OF CHANGES IN NET ASSETS
(unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
11,955,151
|
|
|
$
|
6,706,963
|
|
Net realized loss from investment transactions
|
|
|
(13,666,746
|
)
|
|
|
(10,752,567
|
)
|
Net change in unrealized appreciation (depreciation) on investments
|
|
|
10,704,802
|
|
|
|
(3,369,715
|
)
|
Net increase (decrease) in net assets resulting from operations
|
|
|
8,993,207
|
|
|
|
(7,415,319
|
)
|
|
|
|
|
|
|
|
|
|
Stockholder distributions:
|
|
|
|
|
|
|
|
|
Dividends from net investment income to common stockholders
|
|
|
(7,645,992
|
)
|
|
|
(6,706,963
|
)
|
Dividends in excess of net investment income to restricted stockholders
|
|
|
(22,718
|
)
|
|
|
(32,335
|
)
|
Common Stock Dividends in excess of net investment income
|
|
|
—
|
|
|
|
(844,488
|
)
|
Net decrease in net assets resulting from stockholder distributions
|
|
|
(7,668,710
|
)
|
|
|
(7,583,786
|
)
|
|
|
|
|
|
|
|
|
|
Capital transactions:
|
|
|
|
|
|
|
|
|
Issuance of common stock for dividend reinvestment plan
|
|
|
883,385
|
|
|
|
1,216,946
|
|
Vesting of restricted stock
|
|
|
961
|
|
|
|
647
|
|
Stock based compensation
|
|
|
599,923
|
|
|
|
687,104
|
|
Net increase in net assets resulting from capital transactions
|
|
|
1,484,269
|
|
|
|
1,904,697
|
|
|
|
|
|
|
|
|
|
|
Net assets at beginning of period
|
|
|
186,925,667
|
|
|
|
213,895,723
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of period (including undistributed net investment income of $5,105,105 in 2011 and accumulated distributions in excess of net investment income of ($449,558) in 2010)
|
|
$
|
189,734,433
|
|
|
$
|
200,801,315
|
|
|
|
|
|
|
|
|
|
|
Net asset value per common share
|
|
$
|
8.29
|
|
|
$
|
8.84
|
|
Common shares outstanding at end of period
|
|
|
22,886,769
|
|
|
|
22,708,399
|
|
See accompanying notes to financial statements.
KOHLBERG CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net increase (decrease) in stockholders’ equity resulting from operations
|
|
$
|
8,993,207
|
|
|
$
|
(7,415,319
|
)
|
Adjustments to reconcile net increase (decrease) in stockholders’ equity resulting from operations to net cash provided by (used in) operations:
|
|
|
|
|
|
|
|
|
Net realized losses on investment transactions
|
|
|
13,666,746
|
|
|
|
10,752,567
|
|
Net change in unrealized (appreciation) depreciation on investments
|
|
|
(10,704,802
|
)
|
|
|
3,369,715
|
|
Net accretion of discount on securities and loans
|
|
|
(159,797
|
)
|
|
|
(371,110
|
)
|
Amortization of debt issuance cost
|
|
|
22,908
|
|
|
|
561,251
|
|
Amortization of convertible notes offering cost
|
|
|
257,365
|
|
|
|
—
|
|
Purchases of investments
|
|
|
(106,339,832
|
)
|
|
|
(33,790,481
|
)
|
Capital distribution to (from) contribution to affiliate asset manager
|
|
|
193,889
|
|
|
|
(3,468,436
|
)
|
Payment-in-kind interest income
|
|
|
(378,336
|
)
|
|
|
(323,418
|
)
|
Proceeds from sale and redemption of investments
|
|
|
56,483,598
|
|
|
|
103,683,805
|
|
Stock based compensation expense
|
|
|
599,923
|
|
|
|
687,104
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in interest and dividends receivable
|
|
|
(277,994
|
)
|
|
|
752,324
|
|
Increase in accounts receivable
|
|
|
(410,906
|
)
|
|
|
—
|
|
Decrease in other assets
|
|
|
44,085
|
|
|
|
54,660
|
|
Decrease in due from affiliates
|
|
|
—
|
|
|
|
42,631
|
|
Increase (decrease) in accounts payable and accrued expenses
|
|
|
939,722
|
|
|
|
(1,238,012
|
)
|
Net cash provided by (used in) operating activities
|
|
|
(37,070,224
|
)
|
|
|
73,297,281
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Issuance of stock
|
|
|
—
|
|
|
|
647
|
|
Dividends paid in cash
|
|
|
(10,597,035
|
)
|
|
|
(10,778,426
|
)
|
Cash paid on repayment of debt
|
|
|
(86,746,582
|
)
|
|
|
(80,891,214
|
)
|
Convertible notes offering costs
|
|
|
(2,370,454
|
)
|
|
|
—
|
|
Issuance of Convertible Senior Notes
|
|
|
60,000,000
|
|
|
|
—
|
|
Decrease in restricted cash
|
|
|
67,023,170
|
|
|
|
16,456,420
|
|
Net cash provided by (used in) financing activities
|
|
|
27,309,099
|
|
|
|
(75,212,573
|
)
|
|
|
|
|
|
|
|
|
|
CHANGE IN CASH
|
|
|
(9,761,125
|
)
|
|
|
(1,915,292
|
)
|
CASH, BEGINNING OF PERIOD
|
|
|
10,175,488
|
|
|
|
4,140,408
|
|
CASH, END OF PERIOD
|
|
$
|
414,363
|
|
|
$
|
2,225,116
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information:
|
|
|
|
|
|
|
|
|
Interest paid during the period
|
|
$
|
2,745,968
|
|
|
$
|
6,658,492
|
|
Non-cash dividends paid during the period under the dividend reinvestment plan
|
|
$
|
884,346
|
|
|
$
|
1,216,946
|
|
See accompanying notes to financial statements.
KOHLBERG CAPITAL CORPORATION
SCHEDULE OF INVESTMENTS
As of September 30, 2011
(unaudited)
Debt Securities Portfolio
Portfolio Company / Principal Business
|
|
Investment
Interest Rate¹ / Maturity
|
|
Principal
|
|
|
Cost
|
|
|
Value
2
|
|
Advanced Lighting Technologies, Inc.
Home and Office Furnishings, Housewares, and
Durable Consumer Products
|
|
Senior Secured Loan — Revolving Loan 4.8% Cash, Due 6/13
|
|
$
|
680,000
|
|
|
$
|
677,199
|
|
|
$
|
623,036
|
|
Advanced Lighting Technologies, Inc.
Home and Office Furnishings, Housewares, and
Durable Consumer Products
|
|
Junior Secured Loan — Second Lien Term Loan Note 6.2% Cash, Due 6/14
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
4,902,000
|
|
Alaska Communications Systems Holdings, Inc.
Telecommunications
|
|
Senior Secured Loan — Term Loan 5.5% Cash, Due 10/16
|
|
|
2,977,500
|
|
|
|
2,994,541
|
|
|
|
2,871,799
|
|
Avis Budget Car Rental, LLC
Personal Transportation
|
|
Senior Secured Loan — Extended Term Loan 5.8% Cash, Due 4/14
|
|
|
2,982,892
|
|
|
|
3,003,762
|
|
|
|
2,994,078
|
|
Bankruptcy Management Solutions, Inc.
Diversified/Conglomerate Service
|
|
Junior Secured Loan — Loan (Second Lien) 1.2% Cash, 7.0% PIK, Due 8/15
|
|
|
1,268,266
|
|
|
|
1,217,438
|
|
|
|
68,702
|
|
Bankruptcy Management Solutions, Inc.
Diversified/Conglomerate Service
|
|
Senior Secured Loan — Term Loan B 6.5% Cash, 1.0% PIK, Due 8/14
|
|
|
1,438,841
|
|
|
|
1,435,250
|
|
|
|
607,910
|
|
Bicent Power LLC
Utilities
|
|
Junior Secured Loan — Advance (Second Lien) 4.4% Cash, Due 12/14
|
|
|
4,000,000
|
|
|
|
4,000,000
|
|
|
|
1,064,000
|
|
Burger King Corporation
Personal, Food and Miscellaneous Services
|
|
Senior Secured Loan — Tranche B Term Loan 4.5% Cash, Due 10/16
|
|
|
2,977,500
|
|
|
|
2,977,500
|
|
|
|
2,882,786
|
|
Caribe Media Inc. (fka Caribe Information Investments
Incorporated)
8
Printing and Publishing
|
|
Senior Secured Loan — Term Loan 6.5% Cash, Due 3/13
|
|
|
1,611,045
|
|
|
|
1,608,471
|
|
|
|
880,436
|
|
CoActive Technologies LLC (fka CoActive Technologies, Inc.)
Machinery (Non-Agriculture, Non-Construction,
Non-Electronic)
|
|
Junior Secured Loan — Term Loan (Second Lien) 7.1% Cash, Due 1/15
|
|
|
2,000,000
|
|
|
|
1,981,794
|
|
|
|
1,597,800
|
|
Portfolio Company / Principal Business
|
|
Investment
Interest Rate¹ / Maturity
|
|
Principal
|
|
|
Cost
|
|
|
Value
2
|
|
Del Monte Foods Company
Beverage, Food and Tobacco
|
|
Senior Secured Loan — Initial Term Loan 4.5% Cash, Due 3/18
|
|
$
|
2,992,500
|
|
|
$
|
2,999,477
|
|
|
$
|
2,787,304
|
|
eInstruction Corporation
Healthcare, Education and Childcare
|
|
Junior Secured Loan — Term Loan (Second Lien) 7.7% Cash, Due 7/14
|
|
|
10,000,000
|
|
|
|
10,000,000
|
|
|
|
9,808,000
|
|
Freescale Semiconductor, Inc.
Electronics
|
|
Senior Subordinated Bond — 10.3% Cash, Due 12/16
|
|
|
3,000,000
|
|
|
|
3,005,367
|
|
|
|
3,045,000
|
|
Ginn LA Conduit Lender, Inc.
8
Buildings and Real Estate
4
|
|
Senior Secured Loan — First Lien Tranche A Credit-Linked
Deposit
7.8% Cash, Due 6/11
|
|
|
1,257,143
|
|
|
|
1,224,101
|
|
|
|
97,429
|
|
Ginn LA Conduit Lender, Inc.
8
Buildings and Real Estate
4
|
|
Senior Secured Loan — First Lien Tranche B Term Loan 7.8% Cash, Due 6/11
|
|
|
2,694,857
|
|
|
|
2,624,028
|
|
|
|
208,851
|
|
Ginn LA Conduit Lender, Inc.
8
Buildings and Real Estate
4
|
|
Junior Secured Loan — Loan (Second Lien) 11.8% Cash, Due 6/12
|
|
|
3,000,000
|
|
|
|
2,715,997
|
|
|
|
15,000
|
|
HMSC Corporation (aka Swett and Crawford)
Insurance
|
|
Junior Secured Loan — Loan (Second Lien) 5.7% Cash, Due 10/14
|
|
|
5,000,000
|
|
|
|
4,912,162
|
|
|
|
3,758,500
|
|
Hunter Defense Technologies, Inc.
Aerospace and Defense
|
|
Junior Secured Loan — Term Loan (Second Lien) 7.1% Cash, Due 2/15
|
|
|
5,000,000
|
|
|
|
4,910,210
|
|
|
|
5,000,000
|
|
Hunter Fan Company
Home and Office Furnishings, Housewares, and
Durable Consumer Products
|
|
Junior Secured Loan — Loan (Second Lien) 7.0% Cash, Due 10/14
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
|
|
2,695,200
|
|
International Architectural Products, Inc.
8
Mining, Steel, Iron and Non-Precious Metals
|
|
Senior Secured Loan — Term Loan 12.0% Cash, Due 5/15
|
|
|
576,841
|
|
|
|
550,277
|
|
|
|
437,995
|
|
Intrapac Corporation/Corona Holdco
Containers, Packaging and Glass
|
|
Junior Secured Loan — Term Loans (Second Lien) 7.8% Cash, Due 5/13
|
|
|
3,000,000
|
|
|
|
3,006,637
|
|
|
|
2,970,000
|
|
Jones Stephens Corp.
Home and Office Furnishings, Housewares, and
Durable Consumer Products
|
|
Senior Secured Loan — Term Loan 7.0% Cash, Due 9/15
|
|
|
4,928,721
|
|
|
|
4,928,721
|
|
|
|
4,928,721
|
|
Portfolio Company / Principal Business
|
|
Investment
Interest Rate¹ / Maturity
|
|
Principal
|
|
|
Cost
|
|
|
Value
2
|
|
Kaseman Holdings and Sallyport Holdings
Aerospace and Defense
|
|
Mezzanine Investment — Mezzanine Notes 14.5% Cash, Due 6/17
|
|
$
|
11,250,597
|
|
|
|
10,927,553
|
|
|
|
11,588,115
|
|
KIK Custom Products Inc.
Personal and Non Durable Consumer Products (Mfg.
Only)
|
|
Junior Secured Loan — Loan (Second Lien) 5.3% Cash, Due 12/14
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
3,381,000
|
|
LBREP/L-Suncal Master I LLC
8
Buildings and Real Estate
4
|
|
Junior Secured Loan — Term Loan (Third Lien) 15.0% Cash, Due 2/12
|
|
|
2,332,868
|
|
|
|
2,332,868
|
|
|
|
933
|
|
LBREP/L-Suncal Master I LLC
8
Buildings and Real Estate
4
|
|
Senior Secured Loan — Term Loan (First Lien) 7.5% Cash, Due 1/10
|
|
|
3,875,156
|
|
|
|
3,875,156
|
|
|
|
833,159
|
|
LBREP/L-Suncal Master I LLC
8
Buildings and Real Estate
4
|
|
Junior Secured Loan — Term Loan (Second Lien) 9.5% Cash, Due 1/11
|
|
|
2,000,000
|
|
|
|
1,920,211
|
|
|
|
7,600
|
|
Legacy Cabinets, Inc.
Home and Office Furnishings, Housewares, and Durable
Consumer Products
|
|
Senior Secured Loan — Term Loan 1.0% Cash, 6.3% PIK, Due 5/14
|
|
|
485,381
|
|
|
|
463,380
|
|
|
|
72,807
|
|
Merisant Company
Beverage, Food and Tobacco
|
|
Senior Secured Loan — Loan 7.5% Cash, Due 1/14
|
|
|
5,176,018
|
|
|
|
5,154,451
|
|
|
|
5,176,018
|
|
Metropolitan Health Networks, Inc.
Healthcare, Education and Childcare
|
|
Junior Secured Loan — Term Loan (Second Lien) 13.5% Cash, Due 10/17
|
|
|
5,000,000
|
|
|
|
4,900,000
|
|
|
|
4,900,000
|
|
Michael Foods Group, Inc. (f/k/a M-Foods Holdings, Inc.)
Beverage, Food and Tobacco
|
|
Senior Secured Loan — Term B Facility 4.3% Cash, Due 2/18
|
|
|
1,994,987
|
|
|
|
1,935,138
|
|
|
|
1,934,779
|
|
Neiman Marcus Group Inc., The
Retail Stores
|
|
Senior Secured Loan — Term Loan 4.8% Cash, Due 5/18
|
|
|
2,000,000
|
|
|
|
1,880,543
|
|
|
|
1,854,720
|
|
Pegasus Solutions, Inc.
Leisure, Amusement, Motion Pictures, Entertainment
|
|
Senior Subordinated Bond — Senior Subordinated Second Lien PIK Notes 13.0% PIK, Due 4/14
|
|
|
1,399,898
|
|
|
|
1,399,898
|
|
|
|
1,399,898
|
|
Perseus Holding Corp.
6
Leisure, Amusement, Motion Pictures, Entertainment
|
|
Preferred Stock — Preferred Stock 14.0% PIK, Due 4/14
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
372,240
|
|
Portfolio Company / Principal Business
|
|
Investment
Interest Rate¹ / Maturity
|
|
Principal
|
|
|
Cost
|
|
|
Value
2
|
|
Potters Holdings, II, L.P.
Diversified/Conglomerate Manufacturing
|
|
Junior Secured Loan — Term B Loan (Second Lien) 10.3% Cash, Due 11/17
|
|
$
|
7,000,000
|
|
|
|
6,901,374
|
|
|
|
7,140,000
|
|
Styron S.A.R.L.
3
Chemicals, Plastics and Rubber
|
|
Senior Secured Loan — Term Loan 6.0% Cash, Due 8/17
|
|
|
1,994,975
|
|
|
|
1,825,402
|
|
|
|
1,804,215
|
|
TriZetto Group, Inc. (TZ Merger Sub, Inc.)
Electronics
|
|
Senior Secured Loan — Term Loan 4.8% Cash, Due 5/18
|
|
|
1,984,732
|
|
|
|
1,899,938
|
|
|
|
1,914,035
|
|
TUI University, LLC
Healthcare, Education and Childcare
|
|
Senior Secured Loan — Term Loan (First Lien) 3.5% Cash, Due 10/14
|
|
|
3,119,818
|
|
|
|
3,050,694
|
|
|
|
2,770,399
|
|
Twin-Star International, Inc.
Home and Office Furnishings, Housewares, and Durable
Consumer Products
|
|
Senior Subordinated Bond — Senior Subordinated Note 13.0% Cash, Due 4/14
|
|
|
5,500,000
|
|
|
|
5,500,000
|
|
|
|
5,500,000
|
|
Univar Inc.
Chemicals, Plastics and Rubber
|
|
Senior Secured Loan — Term B Loan 5.0% Cash, Due 6/17
|
|
|
2,992,462
|
|
|
|
2,992,462
|
|
|
|
2,817,777
|
|
Vantiv, LLC (fka Fifth Third Processing Solutions, LLC)
Electronics
|
|
Senior Secured Loan — Term B-1 Loan (First Lien) 4.5% Cash, Due 11/16
|
|
|
1,994,987
|
|
|
|
1,997,439
|
|
|
|
1,937,272
|
|
Vertafore, Inc.
Electronics
|
|
Senior Secured Loan — Term Loan (First Lien) 5.3% Cash, Due 7/16
|
|
|
1,994,978
|
|
|
|
1,935,500
|
|
|
|
1,926,411
|
|
Walker Group Holdings LLC
Cargo Transport
|
|
Junior Secured Loan — Term Loan B 13.3% Cash, Due 12/13
|
|
|
416,737
|
|
|
|
416,737
|
|
|
|
416,737
|
|
Walker Group Holdings LLC
Cargo Transport
|
|
Junior Secured Loan — Term Loan B 13.3% Cash, Due 12/13
|
|
|
3,957,614
|
|
|
|
3,957,614
|
|
|
|
3,957,614
|
|
Portfolio Company / Principal Business
|
|
Investment
Interest Rate¹ / Maturity
|
|
Principal
|
|
|
Cost
|
|
|
Value
2
|
|
Warner Chilcott Corporation
Healthcare, Education and Childcare
|
|
Senior Secured Loan — Term B-1 Loan 4.3% Cash, Due 3/18
|
|
|
911,994
|
|
|
|
914,225
|
|
|
|
889,194
|
|
Warner Chilcott Corporation
Healthcare, Education and Childcare
|
|
Senior Secured Loan — Term B-2 Loan 4.3% Cash, Due 3/18
|
|
|
455,997
|
|
|
|
457,113
|
|
|
|
444,597
|
|
Warner Chilcott Corporation
Healthcare, Education and Childcare
|
|
Senior Secured Loan — Term B-3 Loan 4.3% Cash, Due 3/18
|
|
$
|
626,996
|
|
|
|
628,530
|
|
|
|
611,321
|
|
Wesco Aircraft Hardware Corp.
Aerospace and Defense
|
|
Senior Secured Loan — Tranche B Term Loan 4.3% Cash, Due 4/17
|
|
|
2,725,714
|
|
|
|
2,719,447
|
|
|
|
2,712,086
|
|
Total Investment in Debt Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
(64% of net asset value at fair value)
|
|
$
|
145,978,015
|
|
|
$
|
144,158,603
|
|
|
$
|
120,607,476
|
|
Equity Portfolio
Portfolio Company / Principal Business
|
|
Investment
|
|
Percentage
Interest/Shares
|
|
|
Cost
|
|
|
Value
2
|
|
Aerostructures Holdings L.P.
6
Aerospace and Defense
|
|
Partnership Interests
|
|
|
1.2
|
%
|
|
$
|
1,000,000
|
|
|
$
|
1,000
|
|
Aerostructures Holdings L.P.
6
Aerospace and Defense
|
|
Series A Preferred Interests
|
|
|
1.2
|
%
|
|
|
250,961
|
|
|
|
250,961
|
|
Bankruptcy Management Solutions, Inc.
6
Diversified/Conglomerate Service
|
|
Common Stock
|
|
|
1.2
|
%
|
|
|
218,592
|
|
|
|
1,005
|
|
Bankruptcy Management Solutions, Inc.
6
Diversified/Conglomerate Service
|
|
Warrants
|
|
|
0.1
|
%
|
|
|
-
|
|
|
|
-
|
|
Coastal Concrete Holding II, LLC
6
Buildings and Real Estate
4
|
|
Class A Units
|
|
|
10.8
|
%
|
|
|
8,625,626
|
|
|
|
250,143
|
|
eInstruction Acquisition, LLC
6
Healthcare, Education and Childcare
|
|
Membership Units
|
|
|
1.1
|
%
|
|
|
1,079,617
|
|
|
|
783,262
|
|
FP WRCA Coinvestment Fund VII, Ltd.
3, 6
Machinery (Non-Agriculture, Non-Construction,
Non-Electronic)
|
|
Class A Shares
|
|
|
1,500
|
|
|
$
|
1,500,000
|
|
|
|
2,457,000
|
|
Portfolio Company / Principal Business
|
|
Investment
|
|
Percentage
Interest/Shares
|
|
|
Cost
|
|
|
Value
2
|
|
International Architectural Products, Inc.
6
Mining, Steel, Iron and Non-Precious Metals
|
|
Common
|
|
|
2.5
|
%
|
|
|
292,851
|
|
|
|
996
|
|
Legacy Cabinets, Inc.
6
Home and Office Furnishings, Housewares, and Durable
Consumer Products
|
|
Equity
|
|
|
4.0
|
%
|
|
|
115,580
|
|
|
|
1,006
|
|
Perseus Holding Corp.
6
Leisure, Amusement, Motion Pictures, Entertainment
|
|
Common
|
|
|
0.2
|
%
|
|
|
400,000
|
|
|
|
265,400
|
|
Plumbing Holdings Corporation
6
Home and Office Furnishings, Housewares, and Durable
Consumer Products
|
|
Common
|
|
|
7.8
|
%
|
|
|
-
|
|
|
|
-
|
|
Plumbing Holdings Corporation
6
Home and Office Furnishings, Housewares, and Durable
Consumer Products
|
|
Preferred Stock
|
|
|
9.0
|
%
|
|
|
2,716,618
|
|
|
|
1,999,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment in Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
(3% of net asset value at fair value)
|
|
|
|
|
|
$
|
16,199,845
|
|
|
$
|
6,009,932
|
|
CLO Fund Securities
CLO Equity Investments
Portfolio Company
|
|
Investment
|
|
Percentage Interest
|
|
|
Cost
|
|
|
Value
2
|
|
Grant Grove CLO, Ltd.
3, 10
|
|
Subordinated Securities
|
|
|
22.2
|
%
|
|
$
|
4,723,733
|
|
|
$
|
3,050,000
|
|
Katonah III, Ltd.
3, 10
|
|
Preferred Shares
|
|
|
23.1
|
%
|
|
|
4,500,000
|
|
|
|
230,000
|
|
Katonah V, Ltd.
3, 10, 11
|
|
Preferred Shares
|
|
|
26.7
|
%
|
|
|
3,320,000
|
|
|
|
1,000
|
|
Katonah VII CLO Ltd.
3, 7, 10
|
|
Subordinated Securities
|
|
|
16.4
|
%
|
|
|
4,500,000
|
|
|
|
2,500,000
|
|
Katonah VIII CLO Ltd
3, 7, 10
|
|
Subordinated Securities
|
|
|
10.3
|
%
|
|
|
3,400,000
|
|
|
|
2,070,000
|
|
Katonah IX CLO Ltd
3, 7, 10
|
|
Preferred Shares
|
|
|
6.9
|
%
|
|
|
2,000,000
|
|
|
|
1,300,000
|
|
Katonah X CLO Ltd
3, 7, 10
|
|
Subordinated Securities
|
|
|
33.3
|
%
|
|
|
11,627,447
|
|
|
|
8,790,000
|
|
Katonah 2007-I CLO Ltd.
3, 7, 10
|
|
Preferred Shares
|
|
|
100.0
|
%
|
|
|
30,018,739
|
|
|
|
24,380,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment in CLO Equity Securities
|
|
|
|
|
|
$
|
64,089,919
|
|
|
$
|
42,321,000
|
|
CLO Rated-Note Investment
Portfolio Company
|
|
Investment
|
|
Percentage Interest
|
|
|
Cost
|
|
|
Value
2
|
|
Katonah 2007-I CLO Ltd.
3,
7, 10
|
|
Class B-2L Notes Par Value of $10,500,000 5.2%, Due 4/22
|
|
|
5.2
|
%
|
|
$
|
1,101,302
|
|
|
$
|
6,440,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment in CLO Rated-Note
|
|
|
|
|
|
$
|
1,101,302
|
|
|
$
|
6,440,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment in CLO Fund Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
(26% of net asset value at fair value)
|
|
|
|
|
|
$
|
65,191,221
|
|
|
$
|
48,761,000
|
|
Asset Manager Affiliate
Portfolio Company / Principal Business
|
|
Investment
|
|
Percentage Interest
|
|
|
Cost
|
|
|
Value
2
|
|
Katonah Debt Advisors
|
|
Asset Management Company
|
|
|
100.0
|
%
|
|
$
|
44,338,439
|
|
|
$
|
42,629,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment in Asset Manager Affiliate
|
|
|
|
|
|
$
|
44,338,439
|
|
|
$
|
42,629,000
|
|
(22% of net asset value at fair value)
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Deposits and Money Market Account
Time Deposits and Money Market Account
|
|
Investment
|
|
Yield
|
|
|
Par / Cost
|
|
|
Value
2
|
|
JP Morgan Asset Account
|
|
Time Deposit
|
|
|
0.0
|
%
|
|
$
|
2,494,148
|
|
|
$
|
2,494,148
|
|
JP Morgan Business Money Market Account
9
|
|
Money Market Account
|
|
|
0.2
|
%
|
|
|
173,162
|
|
|
|
173,162
|
|
US Bank Money Market Account
|
|
Money Market Account
|
|
|
0.1
|
%
|
|
|
34,092,190
|
|
|
|
34,092,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment in Time Deposit and Money Market Accounts
|
|
|
|
|
|
$
|
36,759,500
|
|
|
$
|
36,759,500
|
|
(19% of net asset value at fair value)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
5
|
|
|
|
|
|
$
|
306,647,608
|
|
|
$
|
254,766,908
|
|
(134% of net asset value at fair value)
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial
statements.
1
|
A majority of the variable rate loans to the Company’s portfolio companies bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly. Interest rates and floors may contain fixed rate payment-in-kind provisions. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at September 30, 2011.
|
2
|
Reflects the fair market value of all existing investments as of September 30, 2011, as determined by the Company’s board of directors (the “Board of Directors”).
|
3
|
Non-U.S. company or principal place of business outside the U.S.
|
4
|
Buildings and real estate relate to real estate ownership, builders, managers and developers and excludes mortgage debt investments and mortgage lenders or originators. As of September 30, 2011, the Company had no exposure to mortgage securities (residential mortgage bonds, commercial mortgage backed securities, or related asset backed securities), companies providing mortgage lending or emerging markets investments either directly or through the Company’s investments in CLO Funds.
|
5
|
The aggregate cost of investments for federal income tax purposes is approximately $307 million. The aggregate gross unrealized appreciation is approximately $7 million, the aggregate gross unrealized depreciation is approximately $59 million and the net unrealized depreciation is approximately $52 million.
|
6
|
Non-income producing.
|
7
|
An affiliate CLO Fund managed by Katonah Debt Advisors, L.L.C. or related affiliates controlled by the Company.
|
8
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing.
|
9
|
Money market account holding restricted cash for employee flexible spending accounts.
|
10
|
These securities were acquired in a transaction that was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Rule 144A thereunder. These securities may be resold only in transactions that are exempt from the registration requirements of the Securities Act, normally to qualified institutional buyers.
|
11
|
As of September 30, 2011, this CLO Fund security was not providing a dividend distribution.
|
KOHLBERG CAPITAL CORPORATION
SCHEDULE OF INVESTMENTS
As of December 31, 2010
Debt Securities Portfolio
Portfolio Company / Principal Business
|
|
Investment
Interest Rate¹ / Maturity
|
|
Principal
|
|
|
Cost
|
|
|
Value
2
|
|
Advanced Lighting Technologies, Inc.
Home and Office Furnishings, Housewares, and Durable
Consumer Products
|
|
Senior Secured Loan — Revolving Loan 3.7% Cash, Due 6/13
|
|
$
|
1,080,000
|
|
|
$
|
1,075,943
|
|
|
$
|
979,452
|
|
Advanced Lighting Technologies, Inc.
6
Home and Office Furnishings, Housewares, and Durable
Consumer Products
|
|
Junior Secured Loan — Second Lien Term Loan Note 6.3% Cash, Due 6/14
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
Awesome Acquisition Company (CiCi's Pizza)
6
Personal, Food and Miscellaneous Services
|
|
Junior Secured Loan — Term Loan (Second Lien) 5.3% Cash, Due 6/14
|
|
|
4,000,000
|
|
|
|
3,985,854
|
|
|
|
3,840,000
|
|
Bankruptcy Management Solutions, Inc.
6
Diversified/Conglomerate Service
|
|
Junior Secured Loan — Second Lien Facility 1.3% Cash, 7.0% PIK, Due 8/15
|
|
|
1,217,438
|
|
|
|
1,217,438
|
|
|
|
95,368
|
|
Bankruptcy Management Solutions, Inc.
6
Diversified/Conglomerate Service
|
|
Senior Secured Loan — Term Loan B 7.5% Cash, Due 8/14
|
|
|
1,438,720
|
|
|
|
1,448,006
|
|
|
|
719,360
|
|
Bicent Power LLC
6
Utilities
|
|
Junior Secured Loan — Advance (Second Lien) 4.3% Cash, Due 12/14
|
|
|
4,000,000
|
|
|
|
4,000,000
|
|
|
|
2,367,600
|
|
BP Metals, LLC (fka Constellation Enterprises)
6
Mining, Steel, Iron and Non-Precious Metals
|
|
Senior Secured Loan — Term Loan 12.0% Cash, Due 6/13
|
|
|
3,982,143
|
|
|
|
3,982,143
|
|
|
|
4,002,054
|
|
Caribe Information Investments Incorporated
6
Printing and Publishing
|
|
Senior Secured Loan — Term Loan 2.5% Cash, Due 3/13
|
|
|
1,611,045
|
|
|
|
1,608,021
|
|
|
|
1,273,692
|
|
Charlie Acquisition Corp.
9
Personal, Food and Miscellaneous Services
|
|
Mezzanine Investment — Senior Subordinated Notes 17.5% Cash, Due 6/13
|
|
|
14,261,996
|
|
|
|
10,744,496
|
|
|
|
250,000
|
|
Portfolio Company / Principal Business
|
|
Investment
Interest Rate¹ / Maturity
|
|
Principal
|
|
|
Cost
|
|
|
Value
2
|
|
CoActive Technologies LLC (fka CoActive Technologies,
Inc.)
6
Machinery (Non-Agriculture, Non-Construction,
Non-Electronic)
|
|
Junior Secured Loan — Term Loan (Second Lien) 7.1% Cash, Due 1/15
|
|
$
|
2,000,000
|
|
|
$
|
1,977,696
|
|
|
$
|
1,464,600
|
|
eInstruction Corporation
6
Healthcare, Education and Childcare
|
|
Junior Secured Loan — Term Loan (Second Lien) 7.8% Cash, Due 7/14
|
|
|
10,000,000
|
|
|
|
10,000,000
|
|
|
|
10,000,000
|
|
Freescale Semiconductor, Inc.
Electronics
|
|
Senior Subordinated Bond — 10.125% - 12/2016 - 35687MAP2 10.1% Cash, Due 12/16
|
|
|
3,000,000
|
|
|
|
3,006,137
|
|
|
|
3,176,250
|
|
Ginn LA Conduit Lender, Inc.
9
Buildings and Real Estate
4
|
|
Senior Secured Loan — First Lien Tranche A Credit-Linked Deposit 7.8% Cash, Due 6/11
|
|
|
1,257,143
|
|
|
|
1,224,101
|
|
|
|
72,286
|
|
Ginn LA Conduit Lender, Inc.
9
Buildings and Real Estate
4
|
|
Senior Secured Loan — First Lien Tranche B Term Loan 7.8% Cash, Due 6/11
|
|
|
2,694,857
|
|
|
|
2,624,028
|
|
|
|
154,954
|
|
Ginn LA Conduit Lender, Inc.
9
Buildings and Real Estate
4
|
|
Junior Secured Loan — Loan (Second Lien) 11.8% Cash, Due 6/12
|
|
|
3,000,000
|
|
|
|
2,715,997
|
|
|
|
15,000
|
|
HMSC Corporation (aka Swett and Crawford)
6
Insurance
|
|
Junior Secured Loan — Loan (Second Lien) 5.8% Cash, Due 10/14
|
|
|
5,000,000
|
|
|
|
4,890,322
|
|
|
|
4,049,000
|
|
Hunter Fan Company
6
Home and Office Furnishings, Housewares, and
Durable Consumer Products
|
|
Junior Secured Loan — Loan (Second Lien) 7.0% Cash, Due 10/14
|
|
|
3,000,000
|
|
|
|
3,000,000
|
|
|
|
2,682,900
|
|
International Architectural Products, Inc.
6,
9
Mining, Steel, Iron and Non-Precious Metals
|
|
Senior Secured Loan — Term Loan 8.8% Cash, 3.3% PIK, Due 5/15
|
|
|
967,622
|
|
|
|
948,809
|
|
|
|
929,498
|
|
Intrapac Corporation/Corona Holdco
6
Containers, Packaging and Glass
|
|
Junior Secured Loan — Term Loans (Second Lien) 7.8% Cash, Due 5/13
|
|
|
3,000,000
|
|
|
|
3,009,682
|
|
|
|
3,000,000
|
|
Jones Stephens Corp.
6, 9
Buildings and Real Estate
4
|
|
Senior Secured Loan — Term Loan (2006) 7.8% Cash, Due 9/12
|
|
|
9,541,180
|
|
|
|
9,527,522
|
|
|
|
6,364,921
|
|
Portfolio Company / Principal Business
|
|
Investment
Interest Rate¹ / Maturity
|
|
Principal
|
|
|
Cost
|
|
|
Value
2
|
|
KIK Custom Products Inc.
6
Personal and Non Durable Consumer Products (Mfg.
Only)
|
|
Junior Secured Loan — Loan (Second Lien) 5.3% Cash, Due 12/14
|
|
$
|
5,000,000
|
|
|
$
|
5,000,000
|
|
|
$
|
3,435,000
|
|
LBREP/L-Suncal Master I LLC
9
Buildings and Real Estate
4
|
|
Junior Secured Loan — Term Loan (Third Lien) 15.0% Cash, Due 2/12
|
|
|
2,332,868
|
|
|
|
2,332,868
|
|
|
|
933
|
|
LBREP/L-Suncal Master I LLC
6, 9
Buildings and Real Estate
4
|
|
Senior Secured Loan — Term Loan (First Lien) 7.5% Cash, Due 1/10
|
|
|
3,875,156
|
|
|
|
3,875,156
|
|
|
|
58,127
|
|
LBREP/L-Suncal Master I LLC
6, 9
Buildings and Real Estate
4
|
|
Junior Secured Loan — Term Loan (Second Lien) 9.5% Cash, Due 1/11
|
|
|
2,000,000
|
|
|
|
1,920,211
|
|
|
|
7,600
|
|
Legacy Cabinets, Inc.
6
Home and Office Furnishings, Housewares, and Durable
Consumer Products
|
|
Senior Secured Loan — Term Loan 7.3% Cash, Due 5/14
|
|
|
463,380
|
|
|
|
463,380
|
|
|
|
92,676
|
|
MCCI Group Holdings, LLC
6
Healthcare, Education and Childcare
|
|
Junior Secured Loan — Term Loan (Second Lien) 7.5% Cash, Due 6/13
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Pegasus Solutions, Inc.
12
Leisure, Amusement, Motion Pictures, Entertainment
|
|
Senior Subordinated Bond — Senior Subordinated Second Lien PIK Notes 13.0% Cash, Due 4/14
|
|
|
1,314,459
|
|
|
|
1,314,459
|
|
|
|
1,314,459
|
|
Perseus Holding Corp.
7
Leisure, Amusement, Motion Pictures, Entertainment
|
|
Preferred Stock — Preferred Stock 14.0% Cash
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
356,960
|
|
QA Direct Holdings, LLC
6
Printing and Publishing
|
|
Senior Secured Loan — Term Loan 8.3% Cash, Due 8/14
|
|
|
4,396,024
|
|
|
|
4,372,508
|
|
|
|
4,396,024
|
|
Resco Products, Inc.
Mining, Steel, Iron and Non-Precious Metals
|
|
Junior Secured Loan — Term Loan (Second Lien) 12.0% Cash, 8.0% PIK, Due 6/14
|
|
|
2,078,079
|
|
|
|
2,078,079
|
|
|
|
2,078,079
|
|
Resco Products, Inc.
6
Mining, Steel, Iron and Non-Precious Metals
|
|
Junior Secured Loan — Term Loan (Second Lien) 12.0% Cash, 8.0% PIK, Due 6/14
|
|
|
7,193,458
|
|
|
|
7,079,981
|
|
|
|
7,193,458
|
|
Portfolio Company / Principal Business
|
|
Investment
Interest Rate¹ / Maturity
|
|
Principal
|
|
|
Cost
|
|
|
Value
2
|
|
Specialized Technology Resources, Inc.
6
Diversified/Conglomerate Service
|
|
Junior Secured Loan — Loan (Second Lien)
7.3% Cash, Due 12/14
|
|
$
|
7,500,000
|
|
|
$
|
7,500,000
|
|
|
$
|
7,500,000
|
|
TUI University, LLC
6
Healthcare, Education and Childcare
|
|
Senior Secured Loan — Term Loan (First Lien) 3.3% Cash, Due 10/14
|
|
|
3,119,818
|
|
|
|
3,033,934
|
|
|
|
2,958,212
|
|
Walker Group Holdings LLC
Cargo Transport
|
|
Junior Secured Loan — Term Loan B
13.3% Cash, Due 12/13
|
|
|
470,643
|
|
|
|
470,643
|
|
|
|
470,643
|
|
Walker Group Holdings LLC
6
Cargo Transport
|
|
Junior Secured Loan — Term Loan B
13.3% Cash, Due 12/13
|
|
|
4,469,539
|
|
|
|
4,469,539
|
|
|
|
4,469,539
|
|
Wesco Aircraft Hardware Corp.
Aerospace and Defense
|
|
Junior Secured Loan — Loan (Second Lien)
6.0% Cash, Due 3/14
|
|
|
1,720,000
|
|
|
|
1,679,298
|
|
|
|
1,720,000
|
|
Wesco Aircraft Hardware Corp.
6
Aerospace and Defense
|
|
Junior Secured Loan — Loan (Second Lien)
6.0% Cash, Due 3/14
|
|
|
3,554,283
|
|
|
|
3,569,258
|
|
|
|
3,554,283
|
|
Total Investment in Debt Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
(49% of net asset value at fair value)
|
|
$
|
130,939,851
|
|
|
$
|
126,545,510
|
|
|
$
|
91,042,928
|
|
Equity Portfolio
Portfolio Company / Principal Business
|
|
Investment
|
|
Percentage
Interest/Shares
|
|
|
Cost
|
|
|
Value
2
|
|
Aerostructures Holdings L.P.
7
Aerospace and Defense
|
|
Partnership Interests
|
|
|
1.2
|
%
|
|
$
|
1,000,000
|
|
|
$
|
88,600
|
|
Aerostructures Holdings L.P.
7
Aerospace and Defense
|
|
Series A Preferred Interests
|
|
|
1.2
|
%
|
|
|
250,961
|
|
|
|
250,961
|
|
Bankruptcy Management Solutions, Inc.
6, 7
Diversified/Conglomerate Service
|
|
Warrants
|
|
|
0.1
|
%
|
|
|
-
|
|
|
|
-
|
|
Coastal Concrete Holding II, LLC
7
Buildings and Real Estate
4
|
|
Class A Units
|
|
|
10.8
|
%
|
|
|
8,625,626
|
|
|
|
250,143
|
|
Portfolio Company / Principal Business
|
|
Investment
|
|
Percentage
Interest/Shares
|
|
|
Cost
|
|
|
Value
2
|
|
eInstruction Acquisition, LLC
7
Healthcare, Education and Childcare
|
|
Membership Units
|
|
|
1.1
|
%
|
|
$
|
1,079,617
|
|
|
$
|
1,079,724
|
|
FP WRCA Coinvestment Fund VII, Ltd.
3, 7
Machinery (Non-Agriculture, Non-Construction,
Non-Electronic)
|
|
Class A Shares
|
|
|
1,500
|
|
|
|
1,500,000
|
|
|
|
2,400,000
|
|
International Architectural Products, Inc.
6,
7
Mining, Steel, Iron and Non-Precious Metals
|
|
Common
|
|
|
2.5
|
%
|
|
|
292,851
|
|
|
|
227,223
|
|
Legacy Cabinets, Inc.
6, 7
Home and Office Furnishings, Housewares, and Durable
Consumer Products
|
|
Equity
|
|
|
4.0
|
%
|
|
|
115,580
|
|
|
|
49,422
|
|
Perseus Holding Corp.
7
Leisure, Amusement, Motion Pictures, Entertainment
|
|
Common
|
|
|
0.2
|
%
|
|
|
400,000
|
|
|
|
312,200
|
|
Bankruptcy Management Solutions, Inc.
6, 7
Diversified/Conglomerate Service
|
|
Common Stock
|
|
|
1.2
|
%
|
|
|
218,592
|
|
|
|
30,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment in Equity Securities
(3% of net asset value at fair value)
|
|
|
|
|
|
$
|
13,483,227
|
|
|
$
|
4,688,832
|
|
CLO Fund Securities
CLO Equity Investments
Portfolio Company
|
|
Investment
|
|
Percentage Interest
|
|
|
Cost
|
|
|
Value
2
|
|
Grant Grove CLO, Ltd.
3, 12
|
|
Subordinated Securities
|
|
|
22.2
|
%
|
|
$
|
4,720,982
|
|
|
$
|
3,150,000
|
|
Katonah III, Ltd.
3, 12
|
|
Preferred Shares
|
|
|
23.1
|
%
|
|
|
4,500,000
|
|
|
|
470,000
|
|
Katonah IV, Ltd.
3, 12
|
|
Preferred Shares
|
|
|
17.1
|
%
|
|
|
3,150,000
|
|
|
|
1,300,000
|
|
Katonah V, Ltd.
3, 12, 13
|
|
Preferred Shares
|
|
|
26.7
|
%
|
|
|
3,320,000
|
|
|
|
1,000
|
|
Katonah VII CLO Ltd.
3, 8, 12
|
|
Subordinated Securities
|
|
|
16.4
|
%
|
|
|
4,500,000
|
|
|
|
2,090,000
|
|
Katonah VIII CLO Ltd
3, 8, 12
|
|
Subordinated Securities
|
|
|
10.3
|
%
|
|
|
3,400,000
|
|
|
|
1,690,000
|
|
Katonah IX CLO Ltd
3, 8, 12
|
|
Preferred Shares
|
|
|
6.9
|
%
|
|
|
2,000,000
|
|
|
|
1,300,000
|
|
Katonah X CLO Ltd
3, 8, 12
|
|
Subordinated Securities
|
|
|
33.3
|
%
|
|
|
11,612,677
|
|
|
|
8,820,000
|
|
Katonah 2007-I CLO Ltd.
3, 8, 12
|
|
Preferred Shares
|
|
|
100.0
|
%
|
|
|
29,987,959
|
|
|
|
26,200,000
|
|
Total Investment in CLO Equity Securities
|
|
|
|
|
|
$
|
67,191,618
|
|
|
$
|
45,021,000
|
|
CLO Rated-Note Investment
Portfolio Company
|
|
Investment
|
|
Percentage Interest
|
|
|
Cost
|
|
|
Value
2
|
|
Katonah 2007-I CLO Ltd.
3,
8, 12
|
|
Class B-2L Notes
Par Value of $44,674
5.2%, Due 1/00
|
|
|
100.0
|
%
|
|
$
|
1,088,582
|
|
|
$
|
8,010,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment in CLO Rated-Note
|
|
|
|
|
|
$
|
1,088,582
|
|
|
$
|
8,010,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment in CLO Fund Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
(28% of net asset value at fair value)
|
|
|
|
|
|
$
|
68,280,200
|
|
|
$
|
53,031,000
|
|
Asset Manager Affiliate
Portfolio Company / Principal Business
|
|
Investment
|
|
Percentage Interest
|
|
|
Cost
|
|
|
Value
2
|
|
Katonah Debt Advisors
|
|
Asset Management Company
|
|
|
100.0
|
%
|
|
$
|
44,532,329
|
|
|
$
|
41,493,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment in Asset Manager Affiliate
|
|
|
|
|
|
$
|
44,532,329
|
|
|
$
|
41,493,000
|
|
(22% of net asset value at fair value)
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Deposits and Money Market Account
Time Deposits and Money Market Account
|
|
Investment
|
|
Yield
|
|
|
Par / Cost
|
|
|
Value
2
|
|
JP Morgan Asset Account
|
|
Time Deposit
|
|
|
0.03
|
%
|
|
$
|
720,225
|
|
|
$
|
720,225
|
|
JP Morgan Business Money Market Account
11
|
|
Money Market Account
|
|
|
0.2
|
%
|
|
|
210,311
|
|
|
|
210,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment in Time Deposit and Money Market Accounts
|
|
|
|
|
|
$
|
930,536
|
|
|
$
|
930,536
|
|
(0% of net asset value at fair value)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
5
|
|
|
|
|
|
$
|
253,771,802
|
|
|
$
|
191,186,296
|
|
(102% of net asset value at fair value)
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial
statements.
1
|
A majority of the variable rate loans to the Company’s portfolio companies bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly. Interest rates and floors may contain fixed rate payment-in-kind provisions. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at December 31, 2010.
|
2
|
Reflects the fair market value of all existing investments as of December 31, 2010, as determined by the Company’s Board of Directors.
|
3
|
Non-U.S. company or principal place of business outside the U.S.
|
4
|
Buildings and real estate relate to real estate ownership, builders, managers and developers and excludes mortgage debt investments and mortgage lenders or originators. As of December 31, 2010, the Company had no exposure to mortgage securities (residential mortgage bonds, commercial mortgage backed securities, or related asset backed securities), companies providing mortgage lending or emerging markets investments either directly or through the Company’s investments in CLO Funds.
|
5
|
The aggregate cost of investments for federal income tax purposes is approximately $254 million. The aggregate gross unrealized appreciation is approximately $8 million, the aggregate gross unrealized depreciation is approximately $71 million and the net unrealized depreciation is approximately $63 million.
|
6
|
Pledged as collateral for the secured revolving credit facility (see Note 6 to the financial statements).
|
7
|
Non-income producing.
|
8
|
An affiliate CLO Fund managed by Katonah Debt Advisors, L.L.C. or related affiliates controlled by the Company.
|
9
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing.
|
10
|
Time deposit investment partially restricted under terms of the secured credit facility (see Note 6 to financial statements).
|
11
|
Money market account holding restricted cash for employee flexible spending accounts.
|
12
|
These securities were acquired in a transaction that was exempt from the registration requirements of the Securities Act, pursuant to Rule 144A thereunder. These securities may be resold only in transactions that are exempt from the registration requirements of the Securities Act, normally to qualified institutional buyers.
|
13
|
As of December 31, 2010, this CLO Fund security was not providing a dividend distribution.
|
KOHLBERG CAPITAL CORPORATION
FINANCIAL HIGHLIGHTS
(unaudited)
($ per share)
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
Net asset value, at beginning of period
|
|
$
|
8.21
|
|
|
$
|
9.56
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
Net investment income
1
|
|
|
0.52
|
|
|
|
0.30
|
|
Net realized losses
1
|
|
|
(0.60
|
)
|
|
|
(0.48
|
)
|
Net change in unrealized appreciation/depreciation
on investments
1
|
|
|
0.43
|
|
|
|
(0.29
|
)
|
Net income (loss)
|
|
|
0.35
|
|
|
|
(0.47
|
)
|
Net decrease in net assets resulting from distributions
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(0.33
|
)
|
|
|
(0.29
|
)
|
In excess of net investment income
|
|
|
-
|
|
|
|
(0.04
|
)
|
Net decrease in net assets resulting from distributions
|
|
|
(0.33
|
)
|
|
|
(0.33
|
)
|
Net increase in net assets relating to stock-based transactions
|
|
|
|
|
|
|
|
|
Issuance of common stock (not including DRIP)
|
|
|
-
|
|
|
|
-
|
|
Issuance of common stock under dividend reinvestment plan
|
|
|
0.04
|
|
|
|
0.05
|
|
Stock based compensation expense
|
|
|
0.02
|
|
|
|
0.03
|
|
Net increase in net assets relating to stock-based transactions
|
|
|
0.06
|
|
|
|
0.08
|
|
Net asset value, end of period
|
|
$
|
8.29
|
|
|
$
|
8.84
|
|
Total net asset value return
2
|
|
|
5.1
|
%
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
Ratio/Supplemental Data:
|
|
|
|
|
|
|
|
|
Per share market value at beginning of period
|
|
$
|
6.97
|
|
|
$
|
4.56
|
|
Per share market value at end of period
|
|
$
|
5.85
|
|
|
$
|
6.69
|
|
Total market return
3
|
|
|
(11.3
|
)%
|
|
|
54.1
|
%
|
Shares outstanding at end of period
|
|
|
22,886,769
|
|
|
|
22,708,399
|
|
Net assets at end of period
|
|
$
|
189,734,433
|
|
|
$
|
200,801,315
|
|
Portfolio turnover rate
4
|
|
|
20.1
|
%
|
|
|
2.5
|
%
|
Average debt outstanding
|
|
$
|
51,943,391
|
|
|
$
|
171,738,698
|
|
Asset coverage ratio
|
|
|
416
|
%
|
|
|
246
|
%
|
Ratio of net investment income to average net assets
5
|
|
|
7.9
|
%
|
|
|
4.3
|
%
|
Ratio of total expenses to average net assets
5
|
|
|
5.9
|
%
|
|
|
10.0
|
%
|
Ratio of interest expense to average net assets
5
|
|
|
2.1
|
%
|
|
|
4.3
|
%
|
Ratio of non-interest expenses to average net assets
5
|
|
|
3.8
|
%
|
|
|
5.7
|
%
|
1
|
Based on weighted average number of common shares outstanding for the period.
|
2
|
Total net asset value return (not annualized) equals the change in the net asset value per share over the beginning of period net asset value per share plus dividends, divided by the beginning net asset value per share.
|
3
|
Total market return (not annualized) equals the change in the ending market price over the beginning of period price per share plus dividends, divided by the beginning price.
|
4
|
Not annualized
|
5
|
Annualized
|
See accompanying notes to financial statements.
KOHLBERG CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION
Kohlberg Capital Corporation (“Kohlberg
Capital” or the “Company”) is an internally managed, non-diversified closed-end investment company that is regulated
as a business development company (“BDC”) under the Investment Company Act of 1940. The Company originates, structures,
and invests in senior secured term loans, mezzanine debt and selected equity securities primarily in privately-held middle market
companies. The Company defines the middle market as comprising companies with earnings before interest, taxes, depreciation and
amortization (“EBITDA”), of $10 million to $50 million and/or total debt of $25 million to $150 million. The Company
was formed as a Delaware limited liability company on August 8, 2006 and, prior to the issuance of shares of the Company’s
common stock in its initial public offering (“IPO”), converted to a corporation incorporated in Delaware on December 11,
2006. Prior to its IPO, the Company did not have material operations. The Company’s IPO of 14,462,000 shares of common stock
raised net proceeds of approximately $200 million. Prior to the IPO, the Company issued 3,484,333 shares to affiliates of Kohlberg &
Co., L.L.C. (“Kohlberg & Co.”), a leading middle market private equity firm, in exchange for the contribution
to the Company of their ownership interests in Katonah Debt Advisors, L.L.C., and related affiliates controlled by the Company
(collectively, “Katonah Debt Advisors”) and in securities issued by collateralized loan obligation funds (“CLO
Funds”) managed by Katonah Debt Advisors and two other asset managers. As of September 30, 2011, Katonah Debt Advisors had
approximately $1.9 billion of par value assets under management.
The Company’s investment objective
is to generate current income and capital appreciation from investments made in senior secured term loans, mezzanine debt and selected
equity investments in privately-held middle market companies. The Company also expects to continue to receive distributions of
recurring fee income and to generate capital appreciation from its investment in the asset management business of Katonah Debt
Advisors. Katonah Debt Advisors manages CLO Funds which invest in broadly syndicated loans, high-yield bonds and other credit instruments.
The Company’s investment portfolio as well as the investment portfolios of the CLO Funds in which it has invested and the
investment portfolios of the CLO Funds managed by Katonah Debt Advisors consist exclusively of credit instruments and other securities
issued by corporations and do not include any asset-backed securities secured by commercial mortgages, residential mortgages or
other consumer borrowings.
The Company has elected to be treated
as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the
“Code”). To qualify as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification
requirements. As a RIC, the Company generally will not have to pay corporate-level taxes on any income that it distributes in a
timely manner to its stockholders.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial
statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in
the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the
information and footnotes required for annual financial statements. The unaudited interim financial statements and notes thereto
should be read in conjunction with the financial statements and notes thereto in the Company’s Form 10-K for the year ended
December 31, 2010, as filed with the Securities and Exchange Commission (the “Commission” or the “SEC”).
The financial statements reflect all
adjustments, both normal and recurring which, in the opinion of management, are necessary for the fair presentation of the Company’s
results of operations and financial condition for the periods presented. Furthermore, the preparation of the financial statements
requires management to make significant estimates and assumptions including the fair value of investments that do not have a readily
available market value. Actual results could differ from those estimates, and the differences could be material. The results of
operations for the interim periods presented are not necessarily indicative of the operating results to be expected for the full
year.
In
accordance with Article 6 of Regulation S-X under the Securities Act of 1933, as amended (the “Securities Act”) and
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company does not consolidate portfolio company
investments, including those in which it has a controlling interest (Katonah Debt Advisors, including related affiliates,
is currently the only company in which the Company has a controlling interest). Effective January 1, 2010, Katonah Debt Advisors
adopted guidance encompassed in Accounting Standards Codification Topic 810, “Consolidation.” Although the Company
cannot consolidate portfolio company investments, the adoption of this new guidance affected the required disclosures relating
to Katonah Debt Advisors, as it requires Katonah Debt Advisors to consolidate its managed CLO Funds that are deemed to be variable
interest entities (“VIEs”) and for which Katonah Debt Advisors is considered to be the primary beneficiary. As a result
of the consolidation of these CLOs into Katonah Debt Advisors, Katonah Debt Advisors qualifies as a “significant subsidiary”
and, as a result, the Company is required to include additional disclosures regarding Katonah Debt Advisors in its filings. The
additional disclosure is included in Note 5 - Affiliate Asset Managers of the Company’s financial statements. These additional
disclosures regarding Katonah Debt Advisors did not result in any restatement to the previously reported financial position, results
of operations or cash flows of the Company included in the original Quarterly Report on Form 10-Q.
Investments
Investment
transactions are recorded on the applicable trade date. Realized gains or losses are determined using the specific identification
method.
Valuation
of Portfolio Investments
. The Company’s board of directors (the “Board of Directors”) is ultimately and
solely responsible for making a good faith determination of the fair value of portfolio investments on a quarterly basis. Debt
and equity securities for which market quotations are readily available are generally valued at such market quotations. Debt and
equity securities that are not publicly traded or whose market price is not readily available are valued by the Board of Directors
based on detailed analyses prepared by management, the Valuation Committee of the Board of Directors, and, in certain circumstances,
third parties with valuation expertise. Valuations are conducted by management on 100% of the investment portfolio at the end
of each quarter. The Company follows the provisions of ASC Fair Value Measurements and Disclosures (“
Fair Value Measurements
and Disclosures
”). This standard defines fair value, establishes a framework for measuring fair value, and expands disclosures
about assets and liabilities measured at fair value.
Fair Value Measurements and Disclosures
defines “fair value”
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Subsequent to the adoption of
Fair Value Measurements and Disclosures
, the FASB has
issued various staff positions clarifying the initial standard as noted below.
In
January 2010, the FASB issued guidance that clarifies and requires new disclosures about fair value measurements. The clarifications
and requirement to disclose the amounts and reasons for significant transfers between Level I and Level II, as well as significant
transfers in and out of Level III of the fair value hierarchy, were adopted by the Company in the first quarter of 2010. Note
4 below reflects the amended disclosure requirements. The new guidance also requires that purchases, sales, issuances and settlements
be presented gross in the Level III reconciliation and that requirement is effective for fiscal years beginning after December 15,
2010 and for interim periods within those years. Since this new guidance only amends the disclosures requirements,
it did not impact our statements of financial position, statements of operations, or cash flow statements.
Fair
Value Measurements and Disclosures
requires the disclosure in interim and annual periods of the inputs and valuation techniques
used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period.
Beginning
with the period ended June 30, 2011, the Company has engaged an independent valuation firm to provide third party valuation consulting
services to the Company’s Board of Directors. Each quarter, the independent valuation firm will perform third
party valuations on the Company’s investments in illiquid securities such that they are reviewed at least once during a
trailing 12 month period. Third party valuations were performed on approximately 1 6% of investments at fair value
as of September 30, 2011. These third party valuation estimates were considered as one of the relevant data inputs
in the Company’s determination of fair value. The Board of Directors intends to continue to engage an independent valuation
firm in the future to provide certain valuation services, including the review of certain portfolio assets, as part of the quarterly
and annual year-end valuation process.
In
2010, the Company engaged an independent valuation firm, to provide a third-party review of the Company’s CLO fair value
model relative to its functionality, model inputs and calculations as a reasonable method to determine fair values, in the absence
of Level I or Level II trading activity or observable market inputs. The independent valuation firm concluded that the Company’s
CLO model appropriately factored in all the necessary inputs required to build a CLO equity cash flow for fair value purposes
and that the inputs were being employed correctly.
The
Board of Directors may consider other methods of valuation than those set forth above to determine the fair value of Level III
investments as appropriate in conformity with GAAP. Due to the inherent uncertainty of determining the fair value of investments
that do not have a readily available market value, the fair value of the Company’s investments may differ materially from
the values that would have been used had a ready market existed for such investments. Further, such investments may
be generally subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities. In
addition, changes in the market environment and other events may occur over the life of the investments that may cause the value
realized on such investments to be different from the currently assigned valuations.
The
Company’s valuation methodology and procedures are as follows:
|
1)
|
Each portfolio company or investment is cross-referenced to an independent pricing service to determine if a current market quote is available. The nature and quality of such quote is reviewed to determine reliability and relevance of the quote. Factors considered in this determination include whether the quote is from a transaction or is a broker quote, the date and aging of such quote, whether the transaction is arms-length, whether it is of a liquidation or distressed nature and certain other factors judged to be relevant by management within the framework of Fair Value Measurements and Disclosures.
|
|
2)
|
If an investment does not have a market quotation on either a broad market exchange or from an independent pricing service, the investment is initially valued by the Company’s investment professionals responsible for the portfolio investment in conjunction with the portfolio management team.
|
|
3)
|
Preliminary valuation conclusions are discussed and documented by management.
|
|
4)
|
Illiquid loans, junior and mezzanine securities, equity investments, CLO Fund securities and Katonah Debt Advisors may be selected for review by an independent valuation firm, which is engaged by the Company’s Board of Directors. Such independent valuation firm reviews management’s preliminary valuations and makes their own independent valuation assessment.
|
|
5)
|
The Valuation Committee of the Board of Directors reviews the portfolio valuations, as well as the input and report of such independent valuation firm, as applicable.
|
|
6)
|
Upon approval of the investment valuations by the Valuation Committee of the Board of Directors, the Audit Committee of the Board of Directors reviews the results for inclusion in the Company’s quarterly and annual financial statements, as applicable.
|
|
7)
|
The Board of Directors discusses the valuations and determines in good faith that the fair values of each investment in the portfolio is reasonable based upon any applicable independent pricing service, input of management, estimates from independent valuation firms (if any) and the recommendations of the Valuation Committee of the Board of Directors.
|
The
majority of the Company’s investment portfolio is composed of debt and equity securities with unique contract terms and
conditions and/or complexity that requires a valuation of each individual investment that considers multiple levels of market
and asset specific inputs, including historical and forecasted financial and operational performance of the individual investment,
projected cash flows, market multiples, comparable market transactions, the priority of the security compared with those of other
securities for such issuers, credit risk, interest rates, and independent valuations and reviews.
Loans
and Debt Securities.
To the extent that the Company’s investments are exchange traded and are priced or have sufficient
price indications from normal course trading at or around the valuation date (financial reporting date), such pricing will determine
fair value. Pricing service marks from third party pricing services may be used as an indication of fair value, depending on the
volume and reliability of the marks, sufficient and reasonable correlation of bid and ask quotes, and, most importantly, the level
of actual trading activity. However, most of the Company’s investments are illiquid investments with little or no trading
activity. Further, the Company has been unable to identify directly comparable market indices or other market guidance that correlate
directly to the types of investments the Company owns. As a result, for most of its assets, the Company determines fair value
using alternative methodologies using available market data, as adjusted, to reflect the types of assets the Company owns, their
structure, qualitative and credit attributes and other asset specific characteristics.
The
Company derives fair value for its illiquid investments that do not have indicative fair values based upon active trades primarily
by using a present value technique that discounts the estimated contractual cash flows for the underlying assets with discount
rates imputed by broad market indices, bond spreads and yields for comparable issuers relative to the subject assets (the “Market
Yield Approach”) and also considers recent loan amendments or other activity specific to the subject asset. Discount rates
applied to estimated contractual cash flows for an underlying asset vary by specific investment, industry, priority and nature
of the debt security (such as the seniority or security interest of the debt security) and are assessed relative to two indices,
a leveraged loan index and a high-yield bond index, at the valuation date. The Company has identified these two indices as benchmarks
for broad market information related to its loan and debt investments. Because the Company has not identified any market index
that directly correlates to the loan and debt investments held by the Company and therefore uses the two benchmark indices, these
market indices may require significant adjustment to better correlate such market data for the calculation of fair value of the
investment under the Market Yield Approach. Such adjustments require judgment and may be material to the calculation of fair value.
Further adjustments to the discount rate may be applied to reflect other market conditions or the perceived credit risk of the
borrower. When broad market indices are used as part of the valuation methodology, their use is subject to adjustment for many
factors, including priority, collateral used as security, structure, performance and other quantitative and qualitative attributes
of the asset being valued. The resulting present value determination is then weighted along with any quotes from observable transactions
and broker/pricing quotes. If such quotes are indicative of actual transactions with reasonable trading volume at or near the
valuation date that are not liquidation or distressed sales, relatively more reliance will be put on such quotes to determine
fair value. If such quotes are not indicative of market transactions or are insufficient as to volume, reliability, consistency
or other relevant factors, such quotes will be compared with other fair value indications and given relatively less weight based
on their relevancy. Other significant assumptions, such as coupon and maturity, are asset-specific and are noted for each investment
in the Schedules of Investments.
Equity
and Equity-Related Securities
. The Company’s equity and equity-related securities in portfolio companies for which
there is no liquid public market are carried at fair value based on the enterprise value of the portfolio company, which is determined
using various factors, including EBITDA and cash flows from operations less capital expenditures and other pertinent factors,
such as recent offers to purchase a portfolio company’s securities or other liquidation events. The determined fair values
are generally discounted to account for restrictions on resale and minority ownership positions. The values of the Company’s
equity and equity-related securities in public companies for which market quotations are readily available are based upon the
closing public market prices on the balance sheet date. Securities that carry certain restrictions on sale are typically valued
at a discount from the public market value of the security.
The
significant inputs used to determine the fair value of equity and equity-related securities include prices, earnings, EBITDA and
cash flows after capital expenditures for similar peer comparables and the investment entity itself. Equity and equity related
securities are classified as Level III, as described in Note 4 below, when there is limited activity or less transparency around
inputs to the valuation given the lack of information related to such equity investments held in nonpublic companies. Significant
assumptions observed for comparable companies are applied to relevant financial data for the specific investment. Such assumptions,
such as model discount rates or price/earnings multiples, vary by the specific investment, equity position and industry and incorporate
adjustments for risk premiums, liquidity and company specific attributes. Such adjustments require judgment and may be material
to the calculation of fair value.
Affiliate
Asset Manager.
The Company’s investment in its wholly-owned asset management company, Katonah Debt Advisors, is carried
at fair value, which is determined after taking into consideration a percentage of assets under management and a discounted cash
flow model incorporating different levels of discount rates depending on the hierarchy of fees earned (including the likelihood
of realization of senior, subordinate and incentive fees) and prospective modeled performance. Such valuation includes an analysis
of comparable asset management companies. Katonah Debt Advisors is classified as a Level III investment (as described below).
Any change in value from period to period is recognized as net change in unrealized appreciation or depreciation.
CLO
Fund Securities.
The Company typically makes a minority investment in the most junior class of securities of CLO Funds
raised and managed by Katonah Debt Advisors and may selectively invest in securities issued by funds managed by other asset management
companies (collectively, “CLO Fund securities”). The Company’s CLO Fund securities relate exclusively to credit
instruments issued by corporations and do not include any asset-backed securities secured by commercial mortgages, residential
mortgages, or consumer borrowings.
The
Company’s investments in CLO Fund securities are carried at fair value, which is based either on (i) the present value
of the net expected cash inflows for interest income and principal repayments from underlying assets and cash outflows for interest
expense, debt paydown and other fund costs for the CLO Funds that are approaching or past the end of their reinvestment period
and therefore are selling assets and/or using principal repayments to pay down CLO Fund debt (or will begin to do so shortly),
and for which there continue to be net cash distributions to the class of securities owned by the Company, or (ii) a discounted
cash flow model for more recent CLO Funds that utilizes prepayment and loss assumptions based on historical experience and projected
performance, economic factors, the characteristics of the underlying cash flow and comparable yields for similar securities or
preferred shares to those in which the Company has invested. The Company recognizes unrealized appreciation or depreciation on
the Company’s investments in CLO Fund securities as comparable yields in the market change and/or based on changes in net
asset values or estimated cash flows resulting from changes in prepayment or loss assumptions in the underlying collateral pool.
As each investment in CLO Fund securities ages, the expected amount of losses and the expected timing of recognition of such losses
in the underlying collateral pool are updated and the revised cash flows are used in determining the fair value of the CLO Fund
investment. The Company determines the fair value of its investments in CLO Fund securities on an individual security-by-security
basis.
Due
to the individual attributes of each CLO Fund security, they are classified as a Level III investment unless specific trading
activity can be identified at or near the valuation date. When available, observable market information will be identified, evaluated
and weighted accordingly in the application of such data to the present value models and fair value determination. Significant
assumptions to the present value calculations include default rates, recovery rates, prepayment rates, investment/reinvestment
rates and spreads and the discount rate by which to value the resulting underlying cash flows. Such assumptions can vary significantly,
depending on market data sources which often vary in depth and level of analysis, understanding of the CLO market, detailed or
broad characterization of the CLO market and the application of such data to an appropriate framework for analysis. The application
of data points are based on the specific attributes of each individual CLO Fund security’s underlying assets, historic,
current and prospective performance, vintage, and other quantitative and qualitative factors that would be evaluated by market
participants. The Company evaluates the source of market data for reliability as an indicative market input, consistency amongst
other inputs and results and also the context in which such data is presented.
For
bond rated tranches of CLO Fund securities (those above the junior class) without transactions to support a fair value for the
specific CLO Fund and tranche, fair value is based on discounting estimated bond payments at current market yields, which may
reflect the adjusted yield on the leveraged loan index for similarly rated tranches, as well as prices for similar tranches for
other CLO Funds and also other factors such as the default and recovery rates of underlying assets in the CLO Fund, as may be
applicable. Such model assumptions may vary and incorporate adjustments for risk premiums and CLO Fund specific attributes. Such
adjustments require judgment and may be material to the calculation of fair value.
Cash
.
The Company defines cash as demand deposits. The Company places its cash with financial institutions and, at times, cash held
in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit.
Restricted
Cash
. Restricted cash at December 31, 2010 consisted mostly of cash held in an operating account pursuant to the
Company’s secured credit facility agreement with its lender. As the Company paid off its secured credit facility
as of January 31, 2011, no such restricted cash balances were needed.
Time
Deposits and Money Market Accounts.
Time deposits primarily represent investments of cash held in non-demand deposit
accounts. Money market accounts primarily represent short term interest-bearing deposit accounts including an account that
contains restricted cash held for employee flexible spending accounts.
Interest
Income
. Interest income, including the amortization of premium and accretion of discount, is recorded on the accrual
basis to the extent that such amounts are expected to be collected. The Company generally places a loan or security on non-accrual
status and ceases recognizing cash interest income on such loan or security when a loan or security becomes 90 days or more past
due or if the Company otherwise does not expect the debtor to be able to service its debt obligations. Non-accrual loans remain
in such status until the borrower has demonstrated the ability and intent to pay contractual amounts due or such loans become
current. As of September 30, 2011, four issuers representing 1% of total investments at fair value were considered in default
and on non-accrual.
Dividends
from Affiliate Asset Manager.
The Company records dividend income from Katonah Debt Advisors on the declaration
date, which represents the ex-dividend date.
Dividend
Income from CLO Fund Securities
. The Company generates dividend income from its investments in the most junior class
of securities of CLO Funds (typically preferred shares or subordinated securities) managed by Katonah Debt Advisors and selective
investments in securities issued by funds managed by other asset management companies. The Company’s CLO Fund junior class
securities are subordinated to senior bond holders who typically receive a fixed rate of return on their investment. The CLO Funds
are leveraged funds and any excess cash flow or “excess spread” (interest earned by the underlying securities in the
fund less payments made to senior bond holders and less fund expenses and management fees) is paid to the holders of the CLO Fund’s
subordinated securities or preferred shares. The Company makes estimated interim accruals of such dividend income based on recent
historical distributions and CLO Fund performance and adjusts such accruals on a quarterly basis to reflect actual distributions.
For
non-junior class CLO Fund securities, such as the Company’s investment in the Class B-2L Notes of the Katonah 2007-1 CLO,
interest is earned at a fixed spread relative to the LIBOR index.
Capital
Structuring Service Fees
. The Company may earn ancillary structuring and other fees related to the origination, investment,
disposition or liquidation of debt and investment securities. Generally, the Company will capitalize loan
origination fees, then amortize these fees into interest income over the term of the loan using the effective interest rate method
, recognizes prepayment and liquidation fees upon receipt and equity structuring fees as earned, which generally occurs when an
investment transaction closes.
Debt
Issuance Costs
. Debt issuance costs represent fees and other direct costs incurred in connection with the Company’s
borrowings. These amounts are capitalized and amortized ratably over the contractual term of the borrowing. In January 31, 2011,
the Company fully repaid its outstanding secured credit borrowing facility which had a balance of $86.7 million as of December
31, 2010 and, at repayment, all related debt issuance costs were fully amortized. During March 2011, the Company issued
$60 million of convertible senior notes (the “Convertible Senior Notes”) and incurred debt issuance costs of approximately
$2.4 million which will be amortized over a five-year period. At September 30, 2011, there was an unamortized debt
issuance cost of approximately $2.1 million included in other assets in the accompanying balance sheet. Amortization
expense for the nine months ended September 30, 2011 and 2010 was approximately $257,000 and $561,000, respectively.
Expenses
.
The Company is internally managed and expenses costs, as incurred, with regard to the running of its operations. Primary operating
expenses include employee salaries and benefits, the costs of identifying, evaluating, negotiating, closing, monitoring and servicing
the Company’s investments and related overhead charges and expenses, including rental expense, and any interest expense
incurred in connection with borrowings. The Company and Katonah Debt Advisors share office space and certain other operating expenses.
The Company has entered into an Overhead Allocation Agreement with Katonah Debt Advisors which provides for the sharing of such
expenses based on an equal sharing of office lease costs and the ratable usage of other shared resources. The aggregate net payments
of such expenses under the Overhead Allocation Agreement are not material.
Dividends
.
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 each quarter and is generally based upon the earnings estimated by management for the
period and year.
The
Company has adopted a dividend reinvestment plan that provides for reinvestment of its distributions on behalf of its stockholders,
unless a stockholder “opts out” of the plan to receive cash in lieu of having their cash dividends automatically reinvested
in additional shares of the Company’s common stock.
Recent
Accounting Pronouncements
Improved
Disclosures Regarding Fair Value Measurements.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06,
Fair Value Measurements and Improving Disclosures About Fair Value Measurements (Topic 820),
which provides for improving
disclosures about fair value measurements, primarily significant transfers in and out of Levels I and II, and activity in Level
III fair value measurements. The new disclosures and clarifications of existing disclosures are effective for the interim and
annual reporting periods beginning after December 15, 2009, while the disclosures about the purchases, sales, issuances,
and settlements in the roll forward activity in Level 3 fair value measurements are effective for fiscal years beginning after
December 15, 2010 and for the interim periods within those fiscal years. Except for certain detailed Level III disclosures,
which are effective for fiscal years beginning after December 15, 2010 and interim periods within those years, the new guidance
became effective for the Company’s fiscal 2010 second quarter. The adoption of this disclosure-only guidance is included
in Note 4 “— Portfolio Investments” and did not have a material impact on the Company’s financial results.
In
May 2011, the FASB issued FASB Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820): Amendments
to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The amendments in this ASU generally
represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring
fair value or disclosing information about fair value measurements has changed. This ASU results in common principles and requirements
for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS. The
amendments in this ASU are to be applied prospectively and are effective during interim and annual periods beginning after December
15, 2011. Management currently believes that the adoption of this ASU will not have a material impact on the Company’s operating
results, financial position or cash flows.
3. EARNINGS PER SHARE
The
following information sets forth the computation of basic and diluted net increase in stockholders’ equity per share for
the three and nine months ended September 30, 2011 and 2010 (unaudited):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets from operations
|
|
$
|
(1,485,257
|
)
|
|
$
|
(3,319,312
|
)
|
|
$
|
8,993,207
|
|
|
$
|
(7,415,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets available to common stockholders
|
|
|
(1,485,257
|
)
|
|
|
(3,319,312
|
)
|
|
|
8,993,207
|
|
|
|
(7,415,319
|
)
|
Weighted average number of common shares outstanding for basic shares computation
|
|
|
22,631,952
|
|
|
|
22,677,428
|
|
|
|
22,830,757
|
|
|
|
22,547,274
|
|
Effect of dilutive securities - stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
12,851
|
|
|
|
—
|
|
Weighted average number of common and common stock equivalent shares outstanding for diluted shares computation
|
|
|
22,631,952
|
|
|
|
22,677,428
|
|
|
|
22,843,608
|
|
|
|
22,547,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets per basic common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets from operations
1
|
|
|
(0.07
|
)
|
|
|
(0.15
|
)
|
|
|
0.39
|
|
|
|
(0.33
|
)
|
¹
|
For periods with a net decrease in net assets from operations, unvested restricted shares are anti-dilutive and not included in the per share calculations.
|
Share-based
awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities
and included in the computation of both basic and diluted earnings per share. Grants of restricted stock awards to our employees
and directors are considered participating securities when there are earnings in the period and the earnings per share calculations
include outstanding unvested restricted stock awards in the basic weighted average shares outstanding calculation. Included in
the weighted average shares outstanding for the nine month period ending September 30, 2011 are 299,676 shares of unvested restricted
stock, which were deemed to be participating securities.
Options
to purchase 20,000 shares were included in the computation of diluted earnings per share for the period ended September 30, 2011. For
the period ended September 30, 2010, options to purchase 40,000 shares were not included in the computation of diluted earnings
per share because the effect would be antidilutive as the exercise prices exceeded the average market price of the common shares.
The
Company’s Convertible Senior Notes are included in the computation of the diluted net increase or decrease in net assets
resulting from operations per share in accordance with ASC 261-10-45-40-b by application of the “if-converted method.” Under
the if-converted method, interest charges applicable to the convertible debt for the period are added to the reported net increase
or decrease in net assets resulting from operations and the full amount of shares (pro-rata if not outstanding for the full period)
that would be issued are added to weighted average basic shares. Convertible debt is considered anti-dilutive only
when its interest per share upon conversion exceeds the basic net increase or decrease in net assets resulting from operations
per share. For the three and nine months ended September 30, 2011, the convertible debt is anti-dilutive.
The if-converted method of computing the
dilutive effects on convertible debt assumes a conversion even if the contracted conversion price exceeds the market value of the
shares. The Company’s Convertible Senior Notes have a conversion price of $8.44 per share which was above the
Company’s net asset value per share at the time of issuance. Upon conversion, the Company would issue the full
amount of common stock upon conversion and retire the full amount of debt outstanding.
4. INVESTMENTS
The Company invests in senior secured
loans and mezzanine debt and, to a lesser extent, equity capital of middle market companies in a variety of industries. The Company
generally targets companies that generate positive cash flows because the Company looks to cash flows as the primary source for
servicing debt. However, the Company may invest in industries in which it currently has little or no investment if it is presented
with attractive opportunities.
The following table shows the Company’s
portfolio by security type at September 30, 2011 and December 31, 2010:
|
|
September 30, 2011 (unaudited)
|
|
|
December 31, 2010
|
|
Security Type
|
|
Cost
|
|
|
Fair Value
|
|
|
%¹
|
|
|
Cost
|
|
|
Fair Value
|
|
|
%¹
|
|
Time Deposits
|
|
$
|
2,494,148
|
|
|
$
|
2,494,148
|
|
|
|
1
|
%
|
|
$
|
720,225
|
|
|
$
|
720,225
|
|
|
|
-
|
%
|
Money Market Account
|
|
|
34,265,352
|
|
|
|
34,265,352
|
|
|
|
18
|
|
|
|
210,311
|
|
|
|
210,311
|
|
|
|
-
|
|
Senior Secured Loan
|
|
|
56,752,744
|
|
|
|
47,019,136
|
|
|
|
26
|
|
|
|
34,183,551
|
|
|
|
22,001,256
|
|
|
|
12
|
|
Junior Secured Loan
|
|
|
66,173,041
|
|
|
|
51,683,087
|
|
|
|
27
|
|
|
|
76,896,867
|
|
|
|
63,944,003
|
|
|
|
34
|
|
Mezzanine Investment
|
|
|
10,927,553
|
|
|
|
11,588,115
|
|
|
|
6
|
|
|
|
10,744,496
|
|
|
|
250,000
|
|
|
|
-
|
|
Senior Subordinated Bond
|
|
|
9,905,265
|
|
|
|
9,944,898
|
|
|
|
5
|
|
|
|
4,320,596
|
|
|
|
4,490,709
|
|
|
|
3
|
|
CLO Fund Securities
|
|
|
65,191,221
|
|
|
|
48,761,000
|
|
|
|
26
|
|
|
|
68,280,200
|
|
|
|
53,031,000
|
|
|
|
28
|
|
Equity Securities
|
|
|
16,199,845
|
|
|
|
6,009,932
|
|
|
|
3
|
|
|
|
13,232,266
|
|
|
|
4,437,871
|
|
|
|
3
|
|
Preferred
|
|
|
400,000
|
|
|
|
372,240
|
|
|
|
-
|
|
|
|
650,961
|
|
|
|
607,921
|
|
|
|
-
|
|
Affiliate Asset Managers
|
|
|
44,338,439
|
|
|
|
42,629,000
|
|
|
|
22
|
|
|
|
44,532,329
|
|
|
|
41,493,000
|
|
|
|
22
|
|
Total
|
|
$
|
306,647,608
|
|
|
$
|
254,766,908
|
|
|
|
134
|
%
|
|
$
|
253,771,802
|
|
|
$
|
191,186,296
|
|
|
|
102
|
%
|
¹
|
Calculated as a percentage of net asset value.
|
The
industry concentrations, based on the fair value of the Company’s investment portfolio as of September 30, 2011 and December
31, 2010, were as follows:
|
|
September 30, 2011 (unaudited)
|
|
|
December 31, 2010
|
|
Industry Classification
|
|
Cost
|
|
|
Fair Value
|
|
|
%
1
|
|
|
Cost
|
|
|
Fair Value
|
|
|
%
1
|
|
Aerospace and Defense
|
|
$
|
19,808,172
|
|
|
$
|
19,552,162
|
|
|
|
10
|
%
|
|
$
|
6,499,518
|
|
|
$
|
5,613,844
|
|
|
|
3
|
%
|
Asset Management Companies
2
|
|
|
44,338,439
|
|
|
|
42,629,000
|
|
|
|
22
|
|
|
|
44,532,329
|
|
|
|
41,493,000
|
|
|
|
22
|
|
Beverage, Food and Tobacco
|
|
|
10,089,065
|
|
|
|
9,898,101
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Buildings and Real Estate
3
|
|
|
23,317,987
|
|
|
|
1,413,115
|
|
|
|
1
|
|
|
|
32,845,509
|
|
|
|
6,923,964
|
|
|
|
4
|
|
Cargo Transport
|
|
|
4,374,351
|
|
|
|
4,374,351
|
|
|
|
2
|
|
|
|
4,940,182
|
|
|
|
4,940,182
|
|
|
|
3
|
|
Chemicals, Plastics and Rubber
|
|
|
4,817,864
|
|
|
|
4,621,992
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
CLO Fund Securities
|
|
|
65,191,221
|
|
|
|
48,761,000
|
|
|
|
26
|
|
|
|
68,280,200
|
|
|
|
53,031,000
|
|
|
|
28
|
|
Containers, Packaging and Glass
|
|
|
3,006,637
|
|
|
|
2,970,000
|
|
|
|
2
|
|
|
|
3,009,682
|
|
|
|
3,000,000
|
|
|
|
2
|
|
Diversified/Conglomerate Manufacturing
|
|
|
6,901,374
|
|
|
|
7,140,000
|
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diversified/Conglomerate Service
|
|
|
2,871,281
|
|
|
|
677,618
|
|
|
|
-
|
|
|
|
10,384,036
|
|
|
|
8,345,287
|
|
|
|
4
|
|
Electronics
|
|
|
8,838,243
|
|
|
|
8,822,718
|
|
|
|
5
|
|
|
|
3,006,137
|
|
|
|
3,176,250
|
|
|
|
2
|
|
Healthcare, Education and Childcare
|
|
|
21,030,178
|
|
|
|
20,206,773
|
|
|
|
11
|
|
|
|
15,113,551
|
|
|
|
15,037,936
|
|
|
|
8
|
|
Home and Office Furnishings, Housewares, and Durable Consumer Products
|
|
|
22,401,498
|
|
|
|
20,721,929
|
|
|
|
11
|
|
|
|
9,654,903
|
|
|
|
8,804,450
|
|
|
|
5
|
|
Insurance
|
|
|
4,912,162
|
|
|
|
3,758,500
|
|
|
|
2
|
|
|
|
4,890,322
|
|
|
|
4,049,000
|
|
|
|
2
|
|
Leisure, Amusement, Motion Pictures, Entertainment
|
|
|
2,199,898
|
|
|
|
2,037,538
|
|
|
|
1
|
|
|
|
2,114,458
|
|
|
|
1,983,619
|
|
|
|
1
|
|
Machinery (Non-Agriculture, Non-Construction, Non-Electronic)
|
|
|
3,481,794
|
|
|
|
4,054,800
|
|
|
|
2
|
|
|
|
3,477,696
|
|
|
|
3,864,600
|
|
|
|
2
|
|
Mining, Steel, Iron and Non-Precious Metals
|
|
|
843,128
|
|
|
|
438,991
|
|
|
|
-
|
|
|
|
14,381,863
|
|
|
|
14,430,312
|
|
|
|
8
|
|
Personal and Non-Durable Consumer Products (Mfg. Only)
|
|
|
5,000,000
|
|
|
|
3,381,000
|
|
|
|
2
|
|
|
|
5,000,000
|
|
|
|
3,435,000
|
|
|
|
2
|
|
Personal, Food and Miscellaneous Services
|
|
|
2,977,500
|
|
|
|
2,882,786
|
|
|
|
1
|
|
|
|
14,730,350
|
|
|
|
4,090,000
|
|
|
|
2
|
|
Personal Transportation
|
|
|
3,003,762
|
|
|
|
2,994,078
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Printing and Publishing
|
|
|
1,608,471
|
|
|
|
880,436
|
|
|
|
-
|
|
|
|
5,980,529
|
|
|
|
5,669,716
|
|
|
|
3
|
|
Retail Stores
|
|
|
1,880,543
|
|
|
|
1,854,720
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Telecommunications
|
|
|
2,994,540
|
|
|
|
2,871,800
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Time Deposit and Money Market Accounts
|
|
|
36,759,500
|
|
|
|
36,759,500
|
|
|
|
19
|
|
|
|
930,537
|
|
|
|
930,536
|
|
|
|
-
|
|
Utilities
|
|
|
4,000,000
|
|
|
|
1,064,000
|
|
|
|
1
|
|
|
|
4,000,000
|
|
|
|
2,367,600
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
306,647,608
|
|
|
$
|
254,766,908
|
|
|
|
134
|
%
|
|
$
|
253,771,802
|
|
|
$
|
191,186,296
|
|
|
|
102
|
%
|
1
|
Calculated as a percentage of net asset value.
|
2
|
Represents Katonah Debt Advisors and related asset manager affiliates controlled by the Company.
|
3
|
Buildings and real estate relate to real estate ownership, builders, managers and developers and excludes mortgage debt investments and mortgage lenders or originators. As of September 30, 2011 and December 31, 2010, the Company had no exposure to mortgage securities (residential mortgage bonds, commercial mortgage backed securities, or related asset backed securities) or companies providing mortgage lending.
|
The
Company may invest up to 30% of the investment portfolio in opportunistic investments in high-yield bonds, debt and equity securities
of CLO Funds, distressed debt or equity securities of public companies. However, the Company’s investment strategy is to
limit the value of its investments in debt or equity securities issued by CLO Funds to not more than 15% of the value of its total
investment portfolio at the time of investment. The Company expects that these public companies generally will have debt that
is non-investment grade. The Company also may invest in debt of middle market companies located outside of the United States,
these investments (excluding the Company’s investments in CLO Funds) are generally not anticipated to be in excess of 10%
of the investment portfolio at the time such investments are made. The Company is generally prohibited from buying or selling
any security from or to any portfolio company of a private equity fund managed by Kohlberg & Co. without the prior approval
of the SEC. In addition, the Company may co-invest on a concurrent basis with Kohlberg & Co. or any of its affiliates,
subject to compliance with existing regulatory guidance, applicable regulations and its allocation procedures. Certain types of
negotiated co-investments may be made only if the Company receives an order from the SEC permitting it to do so. There can be
no assurance that any such order will be applied for or, if applied for, obtained.
At September 30, 2011 and December 31,
2010, approximately 20% and 20% of the Company’s total assets were foreign assets (including the Company’s investments
in CLO Funds, which are typically domiciled outside the U.S.) At September 30, 2011 and December 31, 2010, no foreign
assets were in U.S. dollar denominated over-night time Eurodollar deposits which revert to cash each business morning.
At September 30, 2011 and December 31,
2010, the Company’s ten largest portfolio companies represented approximately 61% and 65%, respectively, of the total fair
value of its investments. The Company’s largest investment, Katonah Debt Advisors which is its wholly-owned asset manager
affiliate, represented 16.7% and 22% of the total fair value of the Company’s investments at September 30, 2011 and December
31, 2010, respectively. Excluding Katonah Debt Advisors and CLO Fund securities, the Company’s ten largest portfolio companies
represented approximately 25% and 30% of the total fair value of the Company’s investments at September 30, 2011 and December
31, 2010, respectively.
Investment in CLO Fund Securities
The Company typically makes a minority
investment in the most junior class of securities of CLO Funds (typically preferred shares or subordinated securities) managed
by Katonah Debt Advisors and may selectively invest in securities issued by funds managed by other asset management companies.
However, as noted above, the Company’s investment strategy is to limit the value of its investments in the debt or equity
securities issued by CLO Funds to not more than 15% of the value of its total investment portfolio at the time of investment. Preferred
shares or subordinated securities issued by CLO Funds are entitled to recurring dividend distributions which generally equal the
net remaining cash flow of the payments made by the underlying CLO Fund’s securities less contractual payments to senior
bond holders and CLO Fund expenses. CLO Funds managed by Katonah Debt Advisors (“CLO Fund securities managed by affiliate”)
invest primarily in broadly syndicated non-investment grade loans, high-yield bonds and other credit instruments of corporate issuers.
The underlying assets in each of the CLO Funds in which the Company has an investment are generally diversified secured or unsecured
corporate debt and exclude mortgage pools or mortgage securities (residential mortgage bonds, commercial mortgage backed securities,
or related asset-backed securities), debt to companies providing mortgage lending and emerging markets investments. The CLO Funds
are leveraged funds and any excess cash flow or “excess spread” (interest earned by the underlying securities in the
fund less payments made to senior bond holders, fund expenses and management fees) is paid to the holders of the CLO Fund’s
subordinated securities or preferred shares.
On January 23, 2008, the Company’s
wholly-owned asset management company, Katonah Debt Advisors, closed the Katonah 2007-1 CLO, a $315 million CLO Fund. The Company
received a structuring fee upon closing and Katonah Debt Advisors earns an ongoing asset management fee based on the par amount
of the underlying investments in the CLO Fund. Securities issued by CLO Funds managed by Katonah Debt Advisors are primarily held
by third parties. The Company invested approximately $29 million to acquire all of the shares of the most junior class of securities
of this CLO Fund.
The subordinated securities and preferred
share securities are considered equity positions in the CLO Funds and, as of September 30, 2011 and December 31, 2010, the Company
had approximately $42 million and $45 million, respectively, of such CLO equity investments at fair value. The cost basis of the
Company’s investment in CLO Fund equity securities as of September 30, 2011 was approximately $64 million and aggregate
unrealized depreciation on the CLO Fund securities totaled approximately $22 million. The cost basis of the Company’s investment
in CLO Fund equity securities as of December 31, 2010, was approximately $67 million and aggregate unrealized depreciation on the
CLO Fund securities totaled approximately $22 million.
In May, 2009 the Company purchased the
class B-2L notes of the Katonah 2007-1 CLO investment managed by Katonah Debt Advisors (“Katonah 2007-1 B-2L”). The
Company purchased the Katonah 2007-1 B-2L for 10% of the par value. The fair value, cost basis, and aggregate unrealized
appreciation of the Katonah 2007-1 B-2L investment as of September 30, 2011 were approximately $6 million, $1 million, and $5 million,
respectively. At December 31, 2010, the fair value, cost basis, and aggregate unrealized appreciation of the Katonah
2007-1 B-2L investment were $8 million, $1 million, and $7 million, respectively. Both the B-2L notes and preferred shares of Katonah
2007-1 are owned 100% by the Company and are making their required quarterly distributions.
All CLO Funds managed by Katonah Debt
Advisors are currently making quarterly dividend distributions to the Company and are paying all senior and subordinate management
fees to Katonah Debt Advisors. With the exception of the Katonah V, Ltd. CLO Fund, all third-party managed CLO Funds
held as investments are making quarterly dividend distributions to the Company.
Fair
Value Measurements
The Company follows the provisions of
Fair Value Measurements and Disclosures
, which among other matters, requires enhanced disclosures about investments that
are measured and reported at fair value. This standard defines fair value and establishes a hierarchal disclosure framework which
prioritizes and ranks the level of market price observability used in measuring investments at fair value and expands disclosures
about assets and liabilities measured at fair value.
Fair Value Measurements and Disclosures
defines “fair value”
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. This fair value definition focuses on an exit price in the principal, or most advantageous market, and
prioritizes, within a measurement of fair value, the use of market-based inputs (which may be weighted or adjusted for relevance,
reliability and specific attributes relative to the subject investment) over entity-specific inputs. Market price observability
is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments
with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will
have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. Subsequent to
the adoption of
Fair Value Measurements and Disclosures
, the FASB has issued various staff positions clarifying the initial
standard (see Note 2. “Significant Accounting Policies—Investments”).
Fair
Value Measurements and Disclosures
establishes the following three-level hierarchy, based upon the transparency of inputs
to the fair value measurement of an asset or liability as of the measurement date:
Level
I – Unadjusted quoted prices are available in active markets for identical investments as of the reporting date. The type
of investments included in Level I include listed equities and listed securities. As required by
Fair Value Measurements and
Disclosures
, the Company does not adjust the quoted price for these investments, even in situations where the Company holds
a large position and a sale could reasonably affect the quoted price.
Level
II – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as
of the reporting date. Such inputs may be quoted prices for similar assets or liabilities, quoted markets that are not active,
or other inputs that are observable or can be corroborated by observable market data for substantially the full character of the
financial instrument, or inputs that are derived principally from, or corroborated by, observable market information. Investments
which are generally included in this category include illiquid corporate loans and bonds and less liquid, privately held or restricted
equity securities for which some level of recent trading activity has been observed.
Level
III – Pricing inputs are unobservable for the investment and includes situations where there is little, if any, market activity
for the investment. The inputs may be based on the Company’s own assumptions about how market participants would price the
asset or liability or may use Level II inputs, as adjusted, to reflect specific investment attributes relative to a broader market
assumption. These inputs into the determination of fair value may require significant management judgment or estimation. Even
if observable market data for comparable performance or valuation measures (earnings multiples, discount rates, other financial/valuation
ratios, etc.) are available, such investments are grouped as Level III if any significant data point that is not also market observable
(private company earnings, cash flows, etc.) is used in the valuation methodology.
In
certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases,
an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair
value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its
entirety requires judgment, and the Company considers factors specific to the investment. Substantially all of the Company’s
investments are classified as Level III. The Company evaluates the source of inputs, including any markets in which its investments
are trading, in determining fair value. Inputs that are backed by actual transactions, those that are highly correlated to the
specific investment being valued and those derived from reliable or knowledgeable sources will tend to have a higher weighting
in determining fair value. Ongoing reviews by the Company’s investment analysts, Chief Investment Officer, Valuation Committee
and independent valuation firms (if engaged) are based on an assessment of each underlying investment, its current and prospective
operating and financial performance, consideration of financing and sale transactions with third parties, expected cash flows
and market-based information, including comparable transactions, performance factors, and other investment or industry specific
market data, among other factors.
The
following table summarizes the fair value of investments by the above
Fair Value Measurements and Disclosures
fair value
hierarchy levels as of September 30, 2011 (unaudited) and December 31, 2010, respectively:
As of September 30, 2011 (unaudited)
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Time deposit and money market account
|
|
$
|
—
|
|
|
$
|
36,759,500
|
|
|
$
|
—
|
|
|
$
|
36,759,500
|
|
Debt securities
|
|
|
—
|
|
|
|
—
|
|
|
|
120,607,476
|
|
|
|
120,607,476
|
|
CLO Fund securities
|
|
|
—
|
|
|
|
—
|
|
|
|
48,761,000
|
|
|
|
48,761,000
|
|
Equity securities
|
|
|
—
|
|
|
|
—
|
|
|
|
6,009,932
|
|
|
|
6,009,932
|
|
Asset manager affiliate
|
|
|
—
|
|
|
|
—
|
|
|
|
42,629,000
|
|
|
|
42,629,000
|
|
As of December 31, 2010
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Time deposit and money market account
|
|
$
|
—
|
|
|
$
|
930,536
|
|
|
$
|
—
|
|
|
$
|
930,536
|
|
Debt securities
|
|
|
—
|
|
|
|
—
|
|
|
|
91,042,928
|
|
|
|
91,042,928
|
|
CLO Fund securities
|
|
|
—
|
|
|
|
—
|
|
|
|
53,031,000
|
|
|
|
53,031,000
|
|
Equity securities
|
|
|
—
|
|
|
|
—
|
|
|
|
4,688,832
|
|
|
|
4,688,832
|
|
Asset manager affiliate
|
|
|
—
|
|
|
|
—
|
|
|
|
41,493,000
|
|
|
|
41,493,000
|
|
As
a BDC, it is required that the Company invest primarily in the debt and equity of non-public companies for which there is little,
if any, market-observable information. As a result, most, if not all, of the Company’s investments at any given
time will likely be deemed Level III investments. The Company believes that investments classified as Level III for
Fair Value
Measurements and Disclosures
have a further hierarchal framework which prioritizes and ranks such valuations based on the
degree of independent and observable inputs, objectivity of data and models and the level of judgment required to adjust comparable
data. The hierarchy of such methodologies are presented in the above table and discussed below in descending rank.
Investment values derived by a third
party pricing service are deemed Level III values since such values are not traded on an active public exchange and may represent
a traded or broker quote on an asset that is infrequently traded.
The Company derives fair value for its
illiquid investments that do not have indicative fair values based upon active trades primarily by using the Market Yield Approach
and also considers recent loan amendments or other activity specific to the subject asset. Discount rates applied to estimated
contractual cash flows for an underlying asset vary by specific investment, industry, priority and nature of the debt security
(such as the seniority or security interest of the debt security) and are assessed relative to two indices, a leveraged loan index
and a high-yield bond index, at the valuation date. The Company has identified these two indices as benchmarks for broad market
information related to its loan and debt investments. Because the Company has not identified any market index that directly correlates
to the loan and debt investments held by the Company and therefore uses the two benchmark indices, these market indices may require
significant adjustment to better correlate such market data for the calculation of fair value of the investment under the Market
Yield Approach. Such adjustments require judgment and may be material to the calculation of fair value. Further adjustments to
the discount rate may be applied to reflect other market conditions or the perceived credit risk of the borrower. When broad market
indices are used as part of the valuation methodology, their use is subject to adjustment for many factors, including priority,
collateral used as security, structure, performance and other quantitative and qualitative attributes of the asset being valued.
The resulting present value determination is then weighted along with any quotes from observable transactions and broker/pricing
quotes. If such quotes are indicative of actual transactions with reasonable trading volume at or near the valuation date that
are not liquidation or distressed sales, relatively more reliance will be put on such quotes to determine fair value. If such quotes
are not indicative of market transactions or are insufficient as to volume, reliability, consistency or other relevant factors,
such quotes will be compared with other fair value indications and given relatively less weight based on their relevancy. The appropriateness
of specific valuation methods and techniques may change as market conditions and available data change.
In 2010, the Company engaged an independent
valuation firm to provide a third-party review of the Company’s CLO fair value model relative to its functionality, model
inputs, and calculations as a reasonable method to determine CLO fair values in the absence of Level 1 or Level 2 trading activity
or observable market inputs. The independent valuation firm concluded that the Company’s CLO model appropriately factored
in all the necessary inputs required to build a CLO equity cash flow for fair value purposes and that the inputs were being employed
correctly.
Beginning with the period ending June
30, 2011, the Company has engaged an independent valuation firm to provide third party valuation consulting services to the Company’s
Board of Directors. Each quarter, the independent valuation firm will perform third party valuations on the Company’s
investments on illiquid securities such that they are reviewed at least once during a trailing 12 month period. Third
party valuations were performed on approximately 1 6% of investments at fair value as of September 30, 2011. These third
party valuation estimates were considered as one of the relevant data inputs in the Company’s determination of fair value.
The Board of Directors intends to continue to engage an independent valuation firm in the future to provide certain valuation services,
including the review of certain portfolio assets, as part of the quarterly and annual year-end valuation process.
Values derived for debt securities using
public/private company comparables generally utilize market-observable data from such comparables and specific, non-public and
non-observable financial measures (such as earnings or cash flows) for the private, underlying company/issuer. Such non-observable
company/issuer data is typically provided on a monthly basis, is certified as correct by the management of the company/issuer and/or
audited by an independent accounting firm on an annual basis. Since such private company/issuer data is not publicly available
it is not deemed market-observable data and, as a result, such investment values are grouped as Level III assets.
Values derived for asset manager affiliates
using public/private company comparables generally utilize market-observable data from such comparables and specific, non-public
and non-observable financial measures (such as assets under management, historical and prospective earnings) for the asset manager
affiliate. The Company recognizes that comparable asset managers may not be fully comparable to its asset manager affiliates and
typically identifies a range of performance measures and/or adjustments within the comparable population with which to determine
value. Since any such ranges and adjustments are entity specific they are not considered market-observable data and thus require
a Level III grouping. Illiquid investments that have values derived through the use of discounted cash flow models and residual
enterprise value models are grouped as Level III assets.
The changes in investments measured at
fair value for which the Company has used unobservable inputs to determine fair value are as follows:
|
|
Nine Months Ended September 30, 2011 (unaudited)
|
|
|
|
Debt Securities
|
|
|
CLO Fund
Securities
|
|
|
Equity
Securities
|
|
|
Asset Manager
Affiliates
|
|
|
Total
|
|
Balance, December 31, 2010
|
|
$
|
91,042,928
|
|
|
$
|
53,031,000
|
|
|
$
|
4,688,832
|
|
|
$
|
41,493,000
|
|
|
$
|
190,255,760
|
|
Transfers in/out of Level III
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net accretion of discount
|
|
|
98,775
|
|
|
|
61,023
|
|
|
|
—
|
|
|
|
—
|
|
|
|
159,798
|
|
Purchases
|
|
|
76,691,361
|
|
|
|
—
|
|
|
|
2,858,387
|
|
|
|
—
|
|
|
|
79,549,748
|
|
Sales
|
|
|
(46,725,296
|
)
|
|
|
(1,935,000
|
)
|
|
|
(141,769
|
)
|
|
|
(193,889
|
)
|
|
|
(48,995,954
|
)
|
Total realized and unrealized gains (losses) included in earnings
|
|
|
(500,292
|
)
|
|
|
(2,396,023
|
)
|
|
|
(1,395,518
|
)
|
|
|
1,329,889
|
|
|
|
(2,961,944
|
)
|
Balance, September 30, 2011
|
|
$
|
120,607,476
|
|
|
$
|
48,761,000
|
|
|
$
|
6,009,932
|
|
|
$
|
42,629,000
|
|
|
$
|
218,007,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date
|
|
$
|
(7,849,468
|
)
|
|
$
|
(2,371,023
|
)
|
|
$
|
(684,921
|
)
|
|
$
|
1,329,889
|
|
|
$
|
(9,575,523
|
)
|
|
|
Year Ended December 31, 2010
|
|
|
|
Debt
Securities
|
|
|
CLO Fund
Securities
|
|
|
Equity
Securities
|
|
|
Asset Manager
Affiliates
|
|
|
Total
|
|
Balance, December 31, 2009
|
|
$
|
297,356,529
|
|
|
$
|
48,971,000
|
|
|
$
|
4,713,246
|
|
|
$
|
58,064,720
|
|
|
$
|
409,105,495
|
|
Transfers in/out of Level III
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net accretion of discount
|
|
|
381,677
|
|
|
|
85,149
|
|
|
|
—
|
|
|
|
—
|
|
|
|
466,826
|
|
Purchases
|
|
|
9,981,426
|
|
|
|
—
|
|
|
|
1,927,366
|
|
|
|
3,780,817
|
|
|
|
15,689,609
|
|
Sales
|
|
|
(208,820,374
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(208,820,374
|
)
|
Total realized and unrealized gains (losses) included in earnings
|
|
|
(7,856,330
|
)
|
|
|
3,974,851
|
|
|
|
(1,951,780
|
)
|
|
|
(20,352,537
|
)
|
|
|
(26,185,796
|
)
|
Balance, December 31, 2010
|
|
$
|
91,042,928
|
|
|
$
|
53,031,000
|
|
|
$
|
4,688,832
|
|
|
$
|
41,493,000
|
|
|
$
|
190,255,760
|
|
Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date
|
|
$
|
(5,623,079
|
)
|
|
$
|
3,974,851
|
|
|
$
|
(1,142,038
|
)
|
|
$
|
(20,352,537
|
)
|
|
$
|
(23,142,803
|
)
|
5. AFFILIATE ASSET MANAGERS
Wholly-Owned Asset Manager
Katonah
Debt Advisors is a wholly-owned portfolio company. Katonah Debt Advisors manages CLO Funds primarily for third party
investors that invest in broadly syndicated loans, high yield bonds and other credit instruments issued by corporations. These
CLO Funds do not invest in asset-backed securities secured by commercial mortgages, residential mortgages or other consumer borrowings.
At September 30, 2011, Katonah Debt Advisors had approximately $1.9 billion of par value of assets under management, and the Company’s
100% equity interest in Katonah Debt Advisors was valued at approximately $43 million.
As
a manager of the CLO Funds, Katonah Debt Advisors receives contractual and recurring management fees and may receive a one-time
structuring fee from the CLO Funds for its management and advisory services. The annual fees which Katonah Debt Advisors receives
are generally based on a fixed percentage of assets under management (at par value and not subject to changes in market value),
and Katonah Debt Advisors generates annual operating income equal to the amount by which its fee income exceeds it operating expenses. The
annual management fees Katonah Debt Advisors receives have two components - a senior management fee and a subordinated management
fee. Currently, all CLO Funds managed by Katonah Debt Advisors are paying both their senior and subordinated management
fees on a current basis.
During
2009, certain CLO Funds managed by Katonah Debt Advisors were restricted from currently paying their subordinated management fees
as a result of the failure by those CLO Funds to satisfy certain restrictive covenants contained in their indenture agreements.
At such time, those subordinated management fees continued to be accrued by the applicable CLO Fund to become payable to Katonah
Debt Advisors when such CLO Fund becomes compliant with the applicable covenants. During the year ended December 31,
2010, all those CLO Funds which deferred payment of their subordinated management fees regained compliance with all applicable
covenants in order to pay current subordinated management fees as well as a portion of previously accrued subordinated management
fees. During the year ended December 31, 2010, approximately $5 million of deferred subordinated management fees have
been paid.
On
January 2, 2008, the Katonah Debt Advisors platform acquired substantially all of the assets of Scott’s Cove Capital
Management LLC (“Scott’s Cove”), an asset manager focused on an event-driven credit long short investment strategy.
On February 4, 2011, Katonah Debt Advisors entered to an Asset Purchase Agreement with a third-party buyer controlled by a former
Katonah Debt Advisors employee to sell substantially all of the Scott’s Cove assets for a purchase price of $25,000. The
transaction closed on February 28, 2011. At closing, Katonah Debt Advisors and the buyer entered into a Services Agreement, pursuant
to which the buyer paid to Katonah Debt Advisors $225,000 for certain transitional services to be provided by Katonah Debt Advisors
(including access to office space, secretarial services and information technology support) and agreed to pay an additional amount
of $75,000 on each of the first and second anniversaries of the closing date (subject to, in the case of the first payment, deferment
for up to one year under certain circumstances). Katonah Debt Advisors’ obligation to provide transitional services under
the Services Agreement continued through June 30, 2011. At closing, Katonah Debt Advisors and the employees that formerly
managed the Scott’s Cove assets also entered into employee termination agreements, whereby they agreed to terminate their
employment with Katonah Debt Advisors and to relinquish all claims against Katonah Debt Advisors or its affiliates.
The
revenue that Katonah Debt Advisors generates through the fees it receives for managing CLO Funds and after paying the expenses
associated with its operations, including compensation of its employees, may be distributed to the Company. Any distributions
of Katonah Debt Advisors’ net income are recorded as dividends from affiliate asset manager. For the nine months
ended September 30, 2011, Katonah Debt Advisors made distributions of $1.2 million to the Company. For the nine months
ended September 30, 2010, Katonah Debt Advisors made distributions of $3 million to the Company; dividends are recorded as declared
(where declaration date represents ex-dividend date) by Katonah Debt Advisors as income on our statement of operations. The declared
third quarter dividend of $510,000 by Katonah Debt Advisors was recorded as a dividend receivable as of September 30, 2011.
As
with all other investments, Katonah Debt Advisors’ fair value is periodically determined. The valuation is primarily based
on an analysis of both a percentage of its assets under management and Katonah Debt Advisors’ estimated operating income.
Any change in value from period to period is recognized as unrealized gain or loss. See Note 2, “Significant Accounting
Policies” and Note 4, “Investments” for further information relating to the Company’s valuation methodology. For
the nine months ended September 30, 2011, Katonah Debt Advisors had an increase in fair value of approximately $1.1 million.
Effective
January 1, 2010, Katonah Debt Advisors adopted guidance encompassed in Accounting Standards Codification Topic 810, “Consolidation.”
The adoption of this new guidance had an impact on the disclosures relating to Katonah Debt Advisors which had previously not
been required, as its provisions require Katonah Debt Advisors to consolidate certain of its managed CLO Funds that were not previously
consolidated. As a result of the consolidation of these CLO Funds into Katonah Debt Advisors, the financial results of Katonah
Debt Advisors indicate that it has become a “significant subsidiary” of the Company requiring the following additional
disclosures. These disclosures regarding Katonah Debt Advisors do not directly impact the financial position, results of operations
or cash flows of the Company.
Katonah Debt
Advisors, L.L.C.
Summarized Balance
Sheet Information
|
|
As of September 30, 2011
|
(1)
|
|
As of
December 31, 2010
|
|
Investments of CLO Funds at fair value
|
|
$
|
1,764,462,047
|
|
|
$
|
1,741,497,876
|
|
Restricted cash of CLO Funds
|
|
|
66,737,783
|
|
|
|
137,546,770
|
|
Total assets
|
|
|
1,848,001,679
|
|
|
|
1,894,583,848
|
|
CLO Fund liabilities at fair value
|
|
|
1,710,297,322
|
|
|
|
1,717,378,071
|
|
Total liabilities
|
|
|
1,760,016,414
|
|
|
|
1,758,509,114
|
|
Appropriated retained earnings of consolidated Variable Interest Entities
|
|
|
80,193,163
|
|
|
|
129,510,566
|
|
Katonah Debt
Advisors, L.L.C.
Summarized Statements
of Operations Information
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
(1)
|
|
|
2010
(1)
|
|
|
2011
(1)
|
|
|
2010
(1)
|
|
Interest income - investments of CLO Funds
|
|
$
|
17,402,439
|
|
|
$
|
15,344,475
|
|
|
$
|
49,887,143
|
|
|
$
|
47,780,897
|
|
Total income
|
|
|
17,970,940
|
|
|
|
16,127,772
|
|
|
|
53,755,607
|
|
|
|
50,324,469
|
|
Interest expense of CLO Fund liabilities
|
|
|
14,606,712
|
|
|
|
9,928,123
|
|
|
|
40,833,809
|
|
|
|
24,752,777
|
|
Total expenses
|
|
|
16,705,841
|
|
|
|
13,247,143
|
|
|
|
47,736,201
|
|
|
|
33,271,351
|
|
Net realized and unrealized gains (loss)
|
|
|
(60,261,531
|
)
|
|
|
13,187,359
|
|
|
|
(54,669,019
|
)
|
|
|
(14,268,885
|
)
|
Net income (loss) attributable to attributable to non controlling interests
in consolidated Variable Interest Entities
|
|
|
(59,568,871
|
)
|
|
|
16,265,334
|
|
|
|
(49,317,403
|
)
|
|
|
1,852,704
|
|
Net income (loss) attributable to Katonah Debt Advisors, L.L.C.
|
|
|
864,789
|
|
|
|
(994,303
|
)
|
|
|
1,567,194
|
|
|
|
69,061
|
|
(1)
Not covered by report of Independent Registered Public Accounting Firm.
All
of the consolidated VIEs’ investment balances are CLO Fund-related. The assets of the CLO Funds are held solely to satisfy
the obligations of the CLO Funds. Katonah Debt Advisors has no right to the benefits from, nor does it bear the risks associated
with, the collateral assets held by the CLO Funds, beyond its minimal direct investments in, and management fees generated from,
the CLO Funds. If Katonah Debt Advisors were to liquidate, the collateral assets would not be available to the general creditors
of Katonah Debt Advisors. Additionally, the investors in the CLO Funds have no recourse to the general credit of Katonah Debt
Advisors for the securities issued by the CLO Funds.
The
consolidation of the VIEs’ investment products in Katonah Debt Advisors’ financial statements is not reflective of
the underlying financial position, results of operations or cash flows of Katonah Debt Advisors as a stand-alone entity. Furthermore,
the financial operations of Katonah Debt Advisors, whether consolidated with the CLO funds it manages or on a stand-alone basis,
are not reflective of the fair value of Katonah Debt Advisors as reported on the Company’s balance sheet and schedule of
investments as the Company is required under GAAP to report Katonah Debt Advisors as a portfolio company at fair value.
As
a separately regarded entity for tax purposes, Katonah Debt Advisors is taxed at normal corporate rates. For tax purposes, any
distributions of taxable net income earned by Katonah Debt Advisors to the Company would generally need to be distributed to the
Company’s shareholders. Generally, such distributions of Katonah Debt Advisors’ income to the Company’s shareholders
will be considered as qualified dividends for tax purposes. Katonah Debt Advisors’ taxable net income will differ from GAAP
net income because of deferred tax timing adjustments and permanent tax adjustments. Deferred tax timing adjustments may include
differences for the recognition and timing of depreciation, bonuses to employees and stock option expense. Permanent differences
may include adjustments, limitations or disallowances for meals and entertainment expenses, penalties, tax goodwill amortization
and net operating loss carryforward.
Goodwill
amortization for tax purposes was created upon the purchase of 100% of the equity interests in Katonah Debt Advisors prior to
the Company’s IPO in exchange for shares of the Company’s stock valued at $33 million. Although this transaction was
a stock transaction rather than an asset purchase and thus no goodwill was recognized for GAAP purposes, such exchange was considered
an asset purchase under Section 351(a) of the Code. At the time of the transfer, Katonah Debt Advisors had equity of approximately
$1 million resulting in tax goodwill of approximately $32 million which will be amortized for tax purposes on a straight-line
basis over 15 years, which accounts for an annual difference between GAAP income and taxable income by approximately $2 million
per year over such period.
At
September 30, 2011 and December 31, 2010 there were no intercompany balances with our affiliates.
6. BORROWINGS
The
Company’s debt obligations consist of the following:
|
|
As of
|
|
|
|
|
|
|
September 30, 2011
(unaudited)
|
|
|
As of
December 31, 2010
|
|
Convertible Senior Notes, due March 15, 2016
|
|
|
60,000,000
|
|
|
|
-
|
|
Secured credit facility, due February 28, 2011
(1)
|
|
|
-
|
|
|
|
86,746,582
|
|
|
(1)
|
February 28, 2011 was the maturity date as established by a Forbearance and Settlement Agreement dated September 20, 2010. This borrowing was fully repaid on January 31, 2011.
|
Secured
Credit Facility
At December 31, 2010, the Company had
a secured credit facility with an outstanding balance of $86,746,582.
On January 31, 2011, the Company repaid
in full the outstanding balance under this facility, resulting in the lenders’ release to the Company of approximately $73
million of collateral previously securing the facility and their payment of a $2 million cash settlement to the Company.
Convertible Senior Notes
On March 16, 2011, the Company issued
$55 million in aggregate principal amount of unsecured 8.75% convertible senior notes due 2016 (“Convertible Senior Notes”). On
March 23, 2011, pursuant to an over-allotment option, the Company issued an additional $5 million of such Convertible Senior Notes
for a total of $60 million in aggregate principal amount. The net proceeds for the Convertible Senior Notes, following
underwriting expenses, were approximately $ 57.7 million. Interest on the Convertible Senior Notes is paid semi-annually
in arrears on March 15 and September 15, at a rate of 8.75%, commencing September 15, 2011. The Notes mature on March
15, 2016 unless converted earlier. The Convertible Senior Notes are senior unsecured obligations of the Company.
The Convertible Senior Notes are convertible
into shares of Company’s common stock based on an initial conversion rate of 118.5255 shares of common stock per $1,000 principal
amount of Convertible Senior Notes, which is equivalent to an initial conversion price of approximately $8.44 per share of common
stock. The conversion rate will be subject to adjustment upon certain events.
Upon conversion, unless a holder converts
after a record date for an interest payment but prior to the corresponding interest payment date, the holder will receive a separate
cash payment with respect to the Convertible Senior Notes surrendered for conversion representing accrued and unpaid interest to,
but not including the conversion date. Any such payment will be made on the settlement date applicable to the relevant conversion
on the Convertible Senior Notes.
No holder of Convertible Senior Notes
will be entitled to receive shares of the Company’s common stock upon conversion to the extent (but only to the extent) that
such receipt would cause such converting holder to become, directly or indirectly, a beneficial owner (within the meaning of Section
13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of more than 5.0% of the shares
of the Company’s common stock outstanding at such time. The 5.0% limitation shall no longer apply following the effective
date of any fundamental change. The Company will not issue any shares in connection with the conversion or redemption of the Convertible
Senior Notes which would equal or exceed 20% of the shares outstanding at the time of the transaction in accordance with NASDAQ
rules.
Subject to certain exceptions, holders
may require us to repurchase, for cash, all or part of their Convertible Senior Notes upon a fundamental change at a price equal
to 100% of the principal amount of the Convertible Senior Notes being repurchased plus any accrued and unpaid interest up to, but
excluding, the fundamental change repurchase date. In addition, in the case of certain fundamental changes and without
duplication of the foregoing amount, the Company will also pay holders an amount in cash (or, in certain circumstances, shares
of the Company’s common stock) equal to the present value of the remaining interest payments on such notes through, and including,
the maturity date.
In connection with the issuance of the
Convertible Senior Notes, the Company incurred approximately $ 2.4 million of debt offering costs which are being amortized over
the term of the facility on a straight-line basis, which approximates the effective yield method,
of which approximately
$2.1 million remains to be amortized.
The Convertible Senior Notes have been
analyzed for any features that would require its accounting to be bifurcated. There are no features that require accounting
to be bifurcated, and as a result, they are recorded as a liability at their contractual amounts.
For the period from March 11, 2011 (the
date of issuance of the notes) to September 30, 2011, the Company recorded approximately $ 3.1 million of interest costs and amortization
of financing costs as interest expense.
Fair Value of Convertible Senior Notes.
The
Company carries the Convertible Senior Notes at cost. The Convertible Senior Notes were issued in a private placement and there
is no active trading of these notes. The fair value of the Company’s outstanding Convertible Senior Notes was
approximately $56.4 Million at September 30, 2011. The fair value was determined based on the average of indicative
bid and offer pricing for the Convertible Senior Notes.
7. DISTRIBUTABLE TAX INCOME
Effective
December 11, 2006, the Company elected to be treated as a RIC under the Code and adopted a December 31 calendar year
end. As a RIC, the Company is not subject to federal income tax on the portion of its taxable income and gains distributed currently
to its stockholders as a dividend. The Company’s quarterly dividends, if any, are determined by the Board of Directors.
The Company anticipates distributing at least 90% of its taxable income and gains, within the Subchapter M rules, and thus the
Company anticipates that it will not incur any federal or state income tax at the RIC level. As a RIC, the Company is also subject
to a federal excise tax based on distributive requirements of its taxable income on a calendar year basis (e.g., calendar year
2011). Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in
excess of current year distributions into the next tax year and pay a 4% excise tax on such income, to the extent required. The
Company anticipates timely distribution of its taxable income within the tax rules, and the Company anticipates that it will not
incur a US federal excise tax for the calendar year 2011.
The
following reconciles net increase in net assets resulting from operations to taxable income for the nine months ended September
30, 2011:
|
|
Nine Months Ended
|
|
|
|
September 30, 2011
|
|
|
|
(unaudited)
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
8,993,207
|
|
Net change in unrealized (appreciation) depreciation from investments
|
|
|
(10,704,802
|
)
|
Excess capital losses over capital gains
|
|
|
13,666,746
|
|
Income not on GAAP books currently taxable
|
|
|
107,603
|
|
Income not currently taxable
|
|
|
(50,731
|
)
|
Expenses not currently deductible
|
|
|
494,225
|
|
Expenses not on GAAP books currently deductible
|
|
|
(3,978
|
)
|
|
|
|
|
|
Taxable income before deductions for distributions
|
|
$
|
12,502,270
|
|
|
|
|
|
|
Taxable income before deductions for distributions per weighted average shares for the period
|
|
$
|
0.55
|
|
For
the three months ended September 30, 2011, the Company declared a dividend on September 15, 2011 of $0.18 per share for a total
of approximately $4.1 million. The record date was October 10, 2011 and the dividend was distributed on October 28, 2011.
Taxable
income differs from net decrease in net assets resulting from operations primarily due to: (1) unrealized appreciation (depreciation) on
investments, as investment gains and losses are not included in taxable income until they are realized; (2) amortization
of discount on CLO Fund securities; (3) amortization of organizational costs; (4) non-deductible expenses; (5) stock
compensation expense that is not currently deductible for tax purposes; (6) excess of capital losses over capital gains;
and (7) recognition of interest income on certain loans.
At
September 30, 2011, the Company had a net capital loss carryforward of $46 million to offset net capital gains, to the extent
provided by federal tax law. The capital loss carryforward will begin to expire in the tax year ending December 31, 2015.
The
Company adopted Financial Accounting Standards Board ASC Topic 740 Accounting for Uncertainty in Income Taxes (“ASC 740”)
as of January 1, 2007. ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented,
and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the
course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not”
of being sustained by the applicable tax authority. The Company recognizes the tax benefits of uncertain tax positions only where
the position is “more likely than not” to be sustained assuming examination by tax authorities. Management has analyzed
the Company’s tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related
to uncertain tax positions taken on returns filed for open tax years (the last three fiscal years) or expected to be taken in
the Company’s current year tax return. The Company identifies its major tax jurisdictions as U.S. Federal and New York State,
and the Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax
benefits will change materially in the next 12 months. The adoption of ASC 740 did not have an effect on the financial position
or results of operations of the Company as there was no liability for unrecognized tax benefits and no change to the beginning
capital of the Company. Management’s determinations regarding ASC 740 may be subject to review and adjustment at a later
date based upon factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof.
8. COMMITMENTS AND CONTINGENCIES
The
Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the
needs of the Company’s investment in portfolio companies. Such instruments include commitments to extend credit and may
involve, in varying degrees, elements of credit risk in excess of amounts recognized on the Company’s balance sheet. Prior
to extending such credit, the Company attempts to limit its credit risk by conducting extensive due diligence, obtaining collateral
where necessary and negotiating appropriate financial covenants. As of both September 30, 2011 and December 31, 2010, the Company
had committed to make a total of approximately $2 million of investments in various revolving senior secured loans, of which approximately
$680,000 had been funded as of September 30, 2011 and $1 million had been funded as of December 31, 2010.
The
Company and certain directors and officers were named as defendants in three putative class actions pending in the Southern District
of New York brought by stockholders of the Company and filed in December 2009 and January 2010. The complaints in these three
actions alleged violations of Sections 10 and 20 of the Exchange Act based on the Company’s disclosures of its year-end
2008 and first- and second-quarter 2009 financial statements. The federal court consolidated the three lawsuits and appointed
a lead plaintiff under the Private Securities Litigation Reform Act on March 21, 2011, and lead plaintiff filed a consolidated
amended complaint on May 11, 2011. The Company moved to dismiss the consolidated amended complaint. On July 28, 2011,
the Court granted that motion and dismissed the consolidated amended complaint, giving the plaintiff until August 22, 2011 to
file any further amended complaint. Lead plaintiff filed a second amended consolidated class action complaint on August
22, 2011, which defendants moved to dismiss. The Court dismissed that complaint with prejudice on October 7, 2011. Lead
plaintiff will have thirty days to appeal the dismissal once final judgment is entered.
In
addition, the Company and certain directors and officers were also named as defendants in a derivative action filed on March 2,
2010 in the Supreme Court of New York, County of New York. The complaint in this action purported to state causes of action for
breaches of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and corporate waste. On October
20, 2010, the court dismissed the complaint, and found, among other things, that the plaintiff had not alleged that any of the
Company’s directors “‘knowingly’ misrepresented or permitted others to misrepresent KCAP’s financial
condition,” or that the directors were confronted with “red flags” sufficient to put them on notice of potential
problems with KCAP’s investment valuations so as to excuse plaintiff’s requirement under Delaware law to make a demand
on KCAP’s board before filing suit. On January 12, 2011, the court entered the final judgment dismissing the
complaint and the plaintiff has subsequently filed a notice of appeal.
On January 11, 2010, the staff of the
SEC’s Division of Enforcement informed the Company that it was conducting an informal inquiry. The focus of the inquiry concerns
the valuation methodology and procedures used by the Company to value its investments. On April 30, 2010, the SEC Staff advised
the Company that a formal order of private investigation had been issued and that the informal inquiry was now a formal investigation.
A subpoena has been issued to the Company in connection with the formal investigation. The subpoena requests that the Company produce
documents that primarily relate to the valuation methodology and procedures used by the Company to value its investments. Since
January 2010, the Company has been providing documents in response to the informal inquiry and the subpoena, and the SEC Staff
has taken testimony from Company representatives. The Company is cooperating fully with the SEC Staff’s investigation. The
Company cannot predict the outcome of, or the time frame for, the conclusion of this investigation.
9. STOCKHOLDERS’ EQUITY
During
the nine months ended September 30, 2011 and the year ended December 31, 2010, the Company issued 122,641 and 301,663 shares,
respectively, of common stock under its dividend reinvestment plan. For the nine months ended September 30, 2011, 4,000
shares of restricted stock were issued, 96,122 shares were exercised, and 3,668 shares of restricted stock were forfeited. For
the year ended December 31, 2010, the Company issued 103,519 shares of restricted stock for which 4,667 shares were forfeited
and 64,667 shares were converted to common stock during the year due to vesting. The total number of shares issued and outstanding
as of September 30, 2011 and December 31, 2010 was 22,886,769 and 22,767,130, respectively.
10. EQUITY INCENTIVE PLAN
During
2006 and as amended in 2008, the Company established the 2006 Equity Incentive Plan (as amended, the “Plan”) and reserved
2,000,000 shares of common stock for issuance under the Plan. The purpose of the Plan is to provide officers and prospective employees
of the Company with additional incentives and align the interests of its employees with those of its shareholders. Options granted
under the Plan are exercisable at a price equal to the fair market value (market closing price) of the shares on the day the option
is granted. Restricted stock granted under the Plan is granted at a price equal to the fair market value (market closing price)
of the shares on the day such restricted stock is granted.
During
2008 and as amended in June 2011, the Company established a non-employee director plan (the “Amended and Restated Non-Employee
Director Plan”). Pursuant to such amendment, the Company is permitted to issue restricted stock, and is no longer permitted
to issue any options for common stock, of the Company to Non-Employee Directors. Options granted to Non-Employee Directors prior
to the effectiveness of the Amended and Restated Non-Employee Director Plan remained outstanding in accordance with the terms
of the Amended and Restated Non-Employee Director Plan as in place prior to such amendment.
Stock Options
During
the years ended, December 31, 2009, and December 31, 2010, 20,000 options per year were granted to non-employee directors as partial
annual compensation for their services as director. Each of these annual options grants have a vesting period by which 50% of
such options vest on the grant date and 50% vest on the first grant date anniversary. The exercise price of these grants and other
characteristics of these grants are as follows:
Options granted for the
year ended:
|
|
Exercise
Price
|
|
|
Exercise
Period
(years)
|
|
|
Risk Free
Rate
|
|
|
Volatility
Rate
|
|
|
Weighted
Average
Grant Date
Fair Value
per Share
|
|
December 31, 2009
|
|
$
|
4.93
|
|
|
|
10
|
|
|
|
4.3
|
%
|
|
|
41
|
%
|
|
$
|
0.90
|
|
December 31, 2010
|
|
$
|
4.83
|
|
|
|
10
|
|
|
|
3.1
|
%
|
|
|
59
|
%
|
|
$
|
1.46
|
|
On
June 10, 2011, the Company’s shareholders approved the Amended and Restated Non-Employee Director Plan. Accordingly,
the previous annual grant of 20,000 options to non-employee directors was discontinued and replaced with an annual grant of 4,000
shares of restricted stock as partial annual compensation for the services of the non-employee directors.
Information with respect to options
granted, exercised and forfeited under the Plan for the period January 1, 2010 through September 30, 2011 is as follows:
|
|
Shares
|
|
|
Weighted Average Exercise
Price per
Share
|
|
|
Weighted Average
Contractual
Remaining Term
(years)
|
|
|
Aggregate
Intrinsic
Value
1
|
|
Options outstanding at January 1, 2010
|
|
|
40,000
|
|
|
$
|
8.45
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
20,000
|
|
|
$
|
4.93
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2010
|
|
|
60,000
|
|
|
$
|
7.24
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2011
|
|
|
60,000
|
|
|
$
|
7.24
|
|
|
|
7.7
|
|
|
$
|
38,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total vested at September 30, 2011
|
|
|
60,000
|
|
|
$
|
7.24
|
|
|
|
7.7
|
|
|
|
|
|
1
|
Represents the difference between the market value of shares of the Company upon exercise of the options at September 30, 2011 and the cost for the option holders to exercise the options.
|
The
Company uses a Binary Option Pricing Model (American, call option) as its valuation model to establish the expected value of all
stock option grants. For the nine months ended September 30, 2011 and September 30, 2010, the Company recognized non-cash compensation
expense related to stock options of approximately $8,000 and $22,000, respectively. At September 30, 2011, the Company had no
remaining compensation cost related to unvested stock-based awards.
Restricted Stock
On
June 13, 2008, the Company’s shareholders approved the Plan, as amended and the Board of Directors approved the grant of
awards of 100,250 shares of restricted stock to certain executive officers of the Company. On July 22, 2010 and August 5, 2009,
the Board of Directors approved the grant of an additional 103,519 and 84,889 shares of restricted stock, respectively, to a certain
executive officer of the Company. Such awards of restricted stock will vest as to 50% of the shares on the third anniversary
of the grant date and the remaining 50% of the shares on the fourth anniversary of the grant date.
On June 13, 2008, the Company’s
Board of Directors authorized the Company to allow employees who agree to cancel options that they hold to receive shares of the
Company's common stock to receive 1 share of restricted stock for every 5 options so cancelled. The shares of restricted
stock received by employees through any such transaction will vest annually generally over the remaining vesting schedule as was
applicable to the cancelled options. Subsequently, employees holding options to purchase 1,295,000 shares individually
entered into agreements to cancel such options and to receive 259,000 shares of restricted stock. As of September 30,
2011, 233,998 of such shares were vested and converted to common shares. The remaining 25,002 shares have been forfeited.
On June 10, 2011, the Company’s
shareholders approved the Amended and Restated Non-Employee Director Plan, and the Board of Directors approved the grant of awards
of 4,000 shares of restricted stock to the non-employee directors of the Company as partial annual compensation for their services
as director. Such awards of restricted stock will vest as to 50% of the shares on the grant date and the remaining 50%
of the shares on the first anniversary of the grant date.
During the nine months ended September
30, 2011, 96,122 shares of restricted stock were vested and converted to common shares. As of September 30, 2011, after
giving effect to these option cancellations and restricted stock awards, there were options to purchase 60,000 shares of common
stock outstanding and there were 240,534 shares of restricted stock outstanding. Information with respect to restricted
stock granted, exercised and forfeited under the Plan for the period January 1, 2010 through September 30, 2011 is as follows:
|
|
Unvested
Restricted
Shares
|
|
|
Weighted Average Exercise
Price per
Share
|
|
Unvested shares outstanding at December 31, 2009
|
|
|
302,139
|
|
|
$
|
9.63
|
|
Granted
|
|
|
103,519
|
|
|
$
|
4.83
|
|
Vested
|
|
|
(64,667
|
)
|
|
$
|
10.39
|
|
Forfeited
|
|
|
(4,667
|
)
|
|
$
|
9.82
|
|
Unvested shares outstanding at December 31, 2010
|
|
|
336,324
|
|
|
$
|
8.01
|
|
Granted
|
|
|
4,000
|
|
|
$
|
7.96
|
|
Vested
|
|
|
(96,122
|
)
|
|
$
|
—
|
|
Forfeited
|
|
|
(3,668
|
)
|
|
$
|
9.67
|
|
Outstanding at September 30, 2011
|
|
|
240,534
|
|
|
$
|
6.72
|
|
|
|
|
|
|
|
|
|
|
Total unvested shares at September 30, 2011
|
|
|
240,534
|
|
|
$
|
6.72
|
|
For
the nine months ended September 30, 2011, non-cash compensation expense related to restricted stock was approximately $593,000;
of this amount approximately $508,000 was expensed at the Company and approximately $85,000 was a reimbursable expense allocated
to Katonah Debt Advisors. For the nine months ended September 30, 2010, non-cash compensation expense related to restricted
stock was approximately $665,000; of this amount approximately $475,000 was expensed at the Company and approximately $190,000
was a reimbursable expense allocated to Katonah Debt Advisors. Dividends are paid on all outstanding shares of restricted stock,
whether or not vested. In general, shares of unvested restricted stock are forfeited upon the recipient’s termination of
employment. As of September 30, 2011, there was approximately $797,000 of total unrecognized compensation cost related to unvested
share-based awards. That cost is expected to be recognized over a weighted average period of 2 years.
11. OTHER EMPLOYEE COMPENSATION
The
Company adopted a 401(k) plan (“401K Plan”) effective January 1, 2007. The 401K Plan is open to all full time
employees. The 401K Plan permits an employee to defer a portion of their total annual compensation up to the Internal Revenue
Service annual maximum based on age and eligibility. The Company makes contributions to the 401K Plan of up to 2.67% of the employee’s
first 74.9% of maximum eligible compensation, which fully vest at the time of contribution. For the nine months ended September
30, 2011 and 2010 the Company made contributions to the 401K Plan of approximately $18,000 and $24,000, respectively.
The Company has also adopted a deferred
compensation plan (“Pension Plan”) effective January 1, 2007. Employees are eligible for the Pension Plan provided
that they are employed and working with the Company for at least 100 days during the year and remain employed as of the last day
of the year. Employees do not make contributions to the Pension Plan. On behalf of the employee, the Company may contribute to
the Pension Plan 1) up to 8.0% of all compensation up to the Internal Revenue Service annual maximum and 2) up to 5.7% excess contributions
on any incremental amounts above the social security wage base limitation and up to the Internal Revenue Service annual maximum.
Employees vest 100% in the Pension Plan after five years of service. For the nine months ended September 30, 2011, the Company
made a $112,000 contribution to the Pension Plan and no contribution to the Pension Plan for the nine months ended September 30,
2010.
12. SUBSEQUENT EVENTS
On February 24, 2012, the Company
entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with Credit Suisse AG, Cayman Islands Branch
(“CS”), Credit Suisse Securities (USA) LLC, as arranger, The Bank of New York Mellon Trust Company, National Association,
as collateral administrator and collateral agent (“BNYM”), and KCAP Funding, a special-purpose bankruptcy remote wholly-owned
subsidiary of the Company (“KCAP Funding”), whereby KCAP Funding purchased a portfolio of commercial bank loans (the
“Collateral Debt Obligations”) the purchase
of which was financed by the issuance of (a) a senior note in an aggregate principal amount of $30.0 million, issued to CS in exchange
for $30.0 million in cash and (b) a junior note in an aggregate principal amount of $12.5 million, issued to the Company in exchange
for the sale by the Company to KCAP Funding of the Collateral Debt Obligations. Pursuant to the Note Purchase Agreement,
the Company has agreed to act as Portfolio Manager on behalf of KCAP Funding and CS of the Collateral Debt Obligations, and
has granted a security interest to KCAP Funding in all of the Company’s right to receive certain management fees, and KCAP
Funding granted to CS a security interest in, among other things, the Collateral Debt Obligations and its rights to receive the
management fees pledged to it by the Company. In its capacity as Portfolio Manager, the Company also entered into a Collateral
Administration Agreement, dated as of February 24, 2012, with KCAP Funding, CS and BNYM, as collateral administrator and collateral
agent, whereby BNYM will, among other things, hold the collateral on behalf of CS, as secured party, administer the Collateral
Debt Obligations and perform certain other administrative obligations.
On February 29, 2012, the Company completed
the acquisition of Trimaran Advisors, L.L.C. (“Trimaran”) through a newly-formed, wholly-owned subsidiary of the Company.
The aggregate consideration paid for all of the outstanding equity interests in Trimaran consisted of $13.0 million in cash and
3,600,000 shares of common stock, par value $0.01 per share, of the Company. Trimaran manages four CLO Funds with aggregate
assets under management of approximately $1.5 billion. Contemporaneously with the acquisition, the Company also acquired
the subordinated or preferred share interests in certain CLO Funds managed by Trimaran for an aggregate cash purchase price of
$12.0 million.
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
In
this Quarterly Report on Form 10-Q/A, “Kohlberg Capital,” “Company,” “we,” “us,”
and “our” refer to Kohlberg Capital Corporation, its subsidiaries and its wholly-owned portfolio company, Katonah
Debt Advisors, L.L.C. (collectively with related affiliates controlled by the Company, “Katonah Debt Advisors”), and
related companies, unless the context otherwise requires.
The
information contained in this section should be read in conjunction with our financial statements and notes thereto appearing
elsewhere in this Quarterly Report. In addition, some of the statements in this report constitute forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The matters discussed in this
Quarterly Report, as well as in future oral and written statements by management of Kohlberg Capital, that are forward-looking
statements are based on current management expectations that involve substantial risks and uncertainties which could cause actual
results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements
relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such
as “may,” “will,” “should,” “expects,” “plans,” “anticipates,”
“could,” “intends,” “target,” “projects,” “believes,” “estimates,”
“predicts,” “potential” or “continue” or the negative of these terms or other similar words.
Important assumptions include our ability to originate new investments, achieve certain margins and levels of profitability, the
availability of funds under our credit facility, the availability of additional capital, and the ability to maintain certain debt
to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this
Quarterly Report should not be regarded as a representation by us that our plans or objectives will be achieved. The forward-looking
statements contained in this Quarterly Report include statements as to:
|
•
|
our future operating results;
|
|
•
|
our business prospects and the prospects of our existing and prospective portfolio companies;
|
|
•
|
the return or impact of current and future investments;
|
|
•
|
our contractual arrangements and other 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 financial condition and ability of our existing and prospective portfolio companies to achieve their objectives;
|
|
•
|
our expected financings and investments;
|
|
•
|
our regulatory structure and tax treatment;
|
|
•
|
our ability to operate as a business development company and a registered investment company, including the impact of changes in laws or regulations governing our operations, the operations of KDA or the operations of our portfolio companies;
|
|
•
|
the adequacy of our cash resources and working capital;
|
|
•
|
the timing of cash flows, if any, from the operations of our portfolio companies, including Katonah Debt Advisors;
|
|
•
|
the impact of a protracted decline in the liquidity of credit markets on our business;
|
|
•
|
the impact of fluctuations in interest rates on our business;
|
|
•
|
the valuation of our investments in portfolio companies, particularly those having no liquid trading market;
|
|
•
|
our ability to recover unrealized losses;
|
|
•
|
market conditions and our ability to access additional capital; and
|
|
•
|
the timing, form and amount of any dividend distributions.
|
There
are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated
by such forward-looking statements. For a discussion of factors that could cause our actual results to differ from forward-looking
statements contained in this Quarterly Report, please see the discussion in Part II, “Item 1A. Risk Factors” below
and in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31,
2010. You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this Quarterly
Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking
statement to reflect events or circumstances occurring after the date of this Quarterly Report.
GENERAL
We
are an internally managed, non-diversified closed-end investment company that has elected to be regulated as a business development
company (“BDC”) under the 1940 Act. We originate, structure and invest in senior secured term loans, mezzanine debt
and selected equity securities primarily in privately-held middle market companies. We define the middle market as comprising
companies with earnings before interest, taxes, depreciation and amortization, which we refer to as “EBITDA,” of $10
million to $50 million and/or total debt of $25 million to $150 million. In addition to our middle market investment business,
our wholly-owned portfolio company, Katonah Debt Advisors, manages collateralized loan obligation funds (“CLO Funds”)
that invest in broadly syndicated loans, high-yield bonds and other corporate credit instruments. We acquired Katonah Debt Advisors
and certain related assets prior to our initial public offering from affiliates of Kohlberg & Co., LLC (“Kohlberg &
Co.”), a leading private equity firm focused on middle market investing. As of September 30, 2011, Katonah Debt
Advisors had approximately $1.9 billion of par value of assets under management.
Our investment objective is to generate
current income and capital appreciation from our investments. We also expect to continue to receive distributions of recurring
fee income and to generate capital appreciation from our investment in the asset management business of Katonah Debt Advisors.
Our investment portfolio as well as the investment portfolios of the CLO Funds in which we have invested and the investment portfolios
of the CLO Funds managed by Katonah Debt Advisors consist exclusively of credit instruments and other securities issued by corporations
and do not include any asset-backed securities secured by commercial mortgages, residential mortgages or other consumer borrowings.
As a Regulated Investment Company (“RIC”),
we intend to distribute to our stockholders substantially all of our net taxable income and the excess of realized net short-term
capital gains over realized net long-term capital losses. To qualify as a RIC, we must, among other things, meet certain source-of-income
and asset diversification requirements. Pursuant to these elections, we generally will not have to pay corporate-level taxes
on any income that we distribute to our stockholders.
Our common stock is traded on The NASDAQ
Global Select Market under the symbol “KCAP.” The net asset value per share of our common stock at September 30, 2011
was $8.29. On September 30, 2011, the last reported sale price of a share of our common stock on The NASDAQ Global Select Market
was $5.85.
KEY QUANTITATIVE AND QUALITATIVE FINANCIAL MEASURES AND
INDICATORS
Net Asset Value
Our net asset value per share was $8.29
and $8.21 as of September 30, 2011 and December 31, 2010, respectively. As we must report our assets at fair value for each reporting
period, net asset value also represents the amount of stockholder’s equity per share for the reporting period. Our net asset
value is comprised mostly of investment assets less debt and other liabilities:
|
|
September 30, 2011 (unaudited)
|
|
|
December 31, 2010
|
|
|
|
Fair Value ¹
|
|
|
Per Share ¹
|
|
|
Fair Value ¹
|
|
|
Per Share ¹
|
|
Investments at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in time deposits
|
|
$
|
2,494,148
|
|
|
$
|
0.11
|
|
|
$
|
720,225
|
|
|
$
|
0.03
|
|
Investments in money market accounts
|
|
|
34,265,352
|
|
|
|
1.50
|
|
|
|
210,311
|
|
|
|
0.01
|
|
Investments in debt securities
|
|
|
120,607,476
|
|
|
|
5.27
|
|
|
|
91,042,928
|
|
|
|
4.00
|
|
Investments in CLO Fund securities
|
|
|
48,761,000
|
|
|
|
2.13
|
|
|
|
53,031,000
|
|
|
|
2.33
|
|
Investments in equity securities
|
|
|
6,009,932
|
|
|
|
0.26
|
|
|
|
4,688,832
|
|
|
|
0.21
|
|
Investments in asset manager affiliates
|
|
|
42,629,000
|
|
|
|
1.86
|
|
|
|
41,493,000
|
|
|
|
1.82
|
|
Cash
|
|
|
414,363
|
|
|
|
0.02
|
|
|
|
10,175,488
|
|
|
|
0.45
|
|
Restricted Cash
|
|
|
—
|
|
|
|
-
|
|
|
|
67,023,170
|
|
|
|
2.93
|
|
Other assets
|
|
|
6,491,191
|
|
|
|
0.28
|
|
|
|
11,437,732
|
|
|
|
0.50
|
|
Total Assets
|
|
$
|
261,672,462
|
|
|
$
|
11.43
|
|
|
$
|
279,822,686
|
|
|
$
|
12.28
|
|
Borrowings
|
|
$
|
—
|
|
|
$
|
-
|
|
|
$
|
86,746,582
|
|
|
$
|
3.81
|
|
Other liabilities
|
|
|
11,938,029
|
|
|
|
0.52
|
|
|
|
6,150,437
|
|
|
|
0.27
|
|
Convertible Senior Notes
|
|
|
60,000,000
|
|
|
|
2.62
|
|
|
|
—
|
|
|
|
—
|
|
Total Liabilities
|
|
$
|
71,938,029
|
|
|
$
|
3.14
|
|
|
$
|
92,897,019
|
|
|
$
|
4.08
|
|
NET ASSET VALUE
|
|
$
|
189,734,433
|
|
|
$
|
8.29
|
|
|
$
|
186,925,667
|
|
|
$
|
8.21
|
|
¹
|
Our balance sheet at fair value and resultant net asset value are calculated on a basis consistent with accounting principles generally accepted in the United States of America ("GAAP"). Our per share presentation of such amounts (other than net asset value per share) is an internally derived non-GAAP performance measure calculated by dividing the applicable balance sheet amount by outstanding shares. We believe that the per share amounts for such balance sheet items are helpful in analyzing our balance sheet both quantitatively and qualitatively in that our shares may trade based on a percentage of net asset value and individual investors may weight certain balance sheet items differently in performing an analysis of the Company.
|
Leverage
We
use borrowed funds, known as “leverage,” to make investments and to attempt to increase returns to our shareholders
by reducing our overall cost of capital. As a BDC, we are limited in the amount of leverage we can incur under the 1940 Act. We
are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% immediately
after such borrowing. As of September 30, 2011, we had approximately $60 million of outstanding borrowings and our asset coverage
ratio of total assets to total borrowings was 416%, compliant with the minimum asset coverage level of 200% generally required
for a BDC by the 1940 Act. We may also borrow amounts of up to 5% of the value of our total assets for temporary purposes.
At December 31, 2010, we had approximately
$87 million of outstanding indebtedness through a secured credit facility. On January 31, 2011, we repaid in full the
outstanding balance under this facility. As a result, approximately $73 million of collateral previously securing the facility
was released to us and we also received a $2 million cash settlement from the lenders to settle litigation previously initiated
by us against the lenders. In order to pay off this facility, we utilized proceeds received from the paydown, amortization
or sale of portfolio loan investments totaling approximately $133 million together with available cash.
On March 16, 2011, we issued $55 million
in aggregate principal amount of unsecured 8.75% convertible senior notes due 2016 (“Convertible Senior Notes”). On
March 23, 2011, pursuant to an over-allotment option, we issued an additional $5 million of such Convertible Senior Notes for a
total of $60 million in aggregate principal amount. The net proceeds for the Convertible Senior Notes, following underwriting
expenses, were approximately $57.7 million. Interest on the Convertible Senior Notes is paid semi-annually in arrears
on March 15 and September 15, at a rate of 8.75%, commencing September 15, 2011. The Notes mature on March 15, 2016
unless converted earlier. The Convertible Senior Notes are senior unsecured obligations of the Company.
The Convertible Senior Notes are convertible
into shares of Company’s common stock based on an initial conversion rate of 118.5255 shares of common stock per $1,000 principal
amount of Convertible Senior Notes, which is equivalent to an initial conversion price of approximately $8.44 per share of common
stock. The conversion rate will be subject to adjustment upon certain events.
Subject to prevailing market conditions,
we intend to grow our portfolio of assets by raising additional capital, including through the prudent use of leverage available
to us. As a result, we may seek to enter into new agreements with other lenders or into other financing arrangements
as market conditions permit.
Investment Portfolio Summary Attributes as of and for
the
Nine Months
ended
September 30, 2011
Our investment portfolio generates net
investment income which is generally used to pay principal and interest on our borrowings under the Facility and to fund our dividend.
Our investment portfolio consists of three primary components: debt securities, CLO Fund securities and our investment in our wholly
owned asset manager, Katonah Debt Advisors. We also have investments in equity securities of approximately $6 million, which comprises
approximately 2% of our investment portfolio. Below are summary attributes for each of our primary investment portfolio
components (see “—Investment Portfolio” and “—Investments and Operations” for a more detailed
description) as of and for the nine months ended September 30, 2011:
Debt Securities
|
●
|
represent approximately 46% of total assets;
|
|
●
|
represent credit instruments issued by corporate borrowers;
|
|
●
|
no asset-backed securities such as those secured by commercial mortgages or residential mortgages and no consumer borrowings;
|
|
●
|
primarily senior secured and junior secured loans (39% and 43% of debt securities, respectively);
|
|
●
|
spread across 22 different industries and 39 different entities;
|
|
●
|
average balance per investment of approximately $3 million;
|
|
●
|
all but four issuers (representing less than 1% of total investments at fair value) are current on their debt service obligations; and
|
|
●
|
weighted average interest rate of 8.0% on income producing debt investments.
|
CLO Fund Securities
(as of the last monthly trustee
report prior to September 30, 2011 unless otherwise specified)
|
●
|
represent approximately 19% of total assets at September 30, 2011 ;
|
|
●
|
87% of CLO Fund securities represent investments in subordinated securities or equity securities issued by CLO Funds and 13% of CLO Fund securities are rated notes;
|
|
●
|
all CLO Funds invest primarily in credit instruments issued by corporate borrowers;
|
|
●
|
no asset-backed securities such as those secured by commercial mortgages or residential mortgages and no consumer borrowings;
|
|
●
|
nine different CLO Fund securities; six of such CLO Fund securities are managed by Katonah Debt Advisors; and
|
|
●
|
one CLO Fund security, not managed by Katonah Debt Advisors, representing a fair value of $1,000 is not currently providing a dividend payment to the Company.
|
Katonah Debt Advisors
|
●
|
represents approximately 16% of fair value of total assets;
|
|
●
|
represents our 100% ownership of the equity interest of a profitable CLO Fund manager focused on corporate credit investing;
|
|
●
|
has approximately $1.9 billion of assets under management;
|
|
●
|
receives contractual and recurring asset management fees based on par value of managed investments;
|
|
●
|
typically receives a one-time structuring fee upon completion of a new CLO Fund;
|
|
●
|
may receive an incentive fee upon liquidation of a CLO Fund provided that the CLO Fund achieves a minimum designated return on investment;
|
|
●
|
dividends paid by Katonah Debt Advisors are recognized as dividend income from affiliate asset manager on our statement of operations and are an additional source of income to pay our dividend;
|
|
●
|
for the nine months ended September 30, 2011, Katonah Debt Advisors had pre-tax net income before net capital losses of approximately $1.4 million; and
|
|
●
|
for the nine months ended September 30, 2011, Katonah Debt Advisors made a distribution of $1,160,000 to the Company in the form of a dividend which is recognized as current earnings to the Company.
|
Revenue
Revenues
consist primarily of investment income from interest and dividends on our investment portfolio and various ancillary fees related
to our investment holdings.
Interest from Investments in Debt
Securities
. We generate interest income from our investments in debt securities which consist primarily of senior and junior
secured loans. Our debt securities portfolio is spread across multiple industries and geographic locations, and as such, we are
broadly exposed to market conditions and business environments. As a result, although our investments are exposed to market risks,
we continuously seek to limit concentration of exposure in any particular sector or issuer.
Dividends from Investments in CLO
Fund Securities
. We generate dividend income from our investments in the securities of CLO Funds (typically preferred shares
or subordinated securities) managed by Katonah Debt Advisors and selective investments in securities issued by funds managed by
other asset management companies. CLO Funds managed by Katonah Debt Advisors invest primarily in broadly syndicated non-investment
grade loans, high-yield bonds and other credit instruments of corporate issuers. The Company distinguishes CLO Funds managed by
Katonah Debt Advisors as “CLO Fund securities managed by affiliate.” The underlying assets in each of the CLO Funds
in which we have an investment are generally diversified secured or unsecured corporate debt and exclude mortgage pools or mortgage
securities (residential mortgage bonds, commercial mortgage backed securities, or related asset-backed securities), debt to companies
providing mortgage lending and emerging markets investments. Our CLO Fund securities that are subordinated securities or preferred
shares (“junior securities”) are subordinated to senior bond holders who typically receive a fixed rate of return on
their investment. The CLO Funds are leveraged funds and any excess cash flow or “excess spread” (interest earned by
the underlying securities in the fund less payments made to senior bond holders and less fund expenses and management fees) is
paid to the holders of the CLO Fund’s subordinated securities or preferred shares. The level of excess spread
from CLO Fund securities can be impacted from the timing and level of the resetting of the benchmark interest rate for the underlying
assets (which reset at various times throughout the quarter) in the CLO Fund and the related CLO Fund bond liabilities (which reset
at each quarterly distribution date); in periods of short-term and volatile changes in the benchmark interest rate, the levels
of excess spread and distributions to us can vary significantly. In addition, the failure of CLO Funds in which we invest
to comply with certain financial covenants my lead to the temporary suspension or deferral of cash distributions to us.
For non-junior class CLO Fund securities,
such as our investment in the class B-2L notes of the Katonah 2007-1 CLO, interest is earned at a fixed spread relative to the
LIBOR index.
Dividends from Affiliate Asset Manager.
We generate dividend income from our investment in Katonah Debt Advisors, an asset management company, which is a wholly-owned
portfolio company that manages CLO Funds that invest primarily in broadly syndicated non-investment grade loans, high yield bonds
and other credit instruments issued by corporations. As a manager of CLO Funds, Katonah Debt Advisors receives contractual and
recurring management fees as well as an expected one-time structuring fee from the CLO Funds for its management and advisory services.
In addition, Katonah Debt Advisors may also earn income related to net interest on assets accumulated for future CLO issuances
on which it has provided a first loss guaranty in connection with loan warehouse arrangements for its CLO Funds. Katonah Debt Advisors
generates annual operating income equal to the amount by which its fee income exceeds it operating expenses. The annual management
fees which Katonah Debt Advisors receives are generally based on a fixed percentage of the par value of assets under management
and are recurring in nature for the term of the CLO Fund so long as Katonah Debt Advisors manages the fund. As a result, the annual
management fees earned by Katonah Debt Advisors generally are not subject to market value fluctuations in the underlying collateral.
In future years, Katonah Debt Advisors may receive incentive fees upon the liquidation of CLO Funds it manages, provided such CLO
Funds have achieved a minimum investment return to holders of their subordinated securities or preferred shares.
Capital
Structuring Service Fees
. We may earn ancillary structuring and other fees related to the origination, investment, disposition
or liquidation of debt and investment securities.
Expenses
We are internally managed and directly
incur the cost of management and operations; as a result, we incur no management fees or other fees to an external advisor. Our
expenses consist primarily of interest expense on outstanding borrowings, compensation expense and general and administrative expenses,
including professional fees.
Interest and Amortization of Debt
Issuance Costs
. Interest expense is dependent on the average outstanding balance on our borrowings and the base index rate
for the period. Debt issuance costs represent fees and other direct costs incurred in connection with the Company’s borrowings.
These amounts are capitalized and amortized ratably over the contractual term of the borrowing.
Compensation Expense
. Compensation
expense includes base salaries, bonuses, stock compensation, employee benefits and employer related payroll costs. The largest
components of total compensation costs are base salaries and bonuses; generally, base salaries are expensed as incurred and annual
bonus expenses are estimated and accrued. Our compensation arrangements with our employees contain a significant profit sharing
and/or performance based bonus component. Therefore, as our net revenues increase, our compensation costs may also rise. In addition,
our compensation expenses may also increase to reflect increased investment in personnel as we grow our products and businesses.
Professional Fees and General and
Administrative Expenses
. The balance of our expenses include professional fees (primarily legal, accounting, valuation and
other professional services), occupancy costs and general administrative and other costs.
Net Change in Unrealized Depreciation on Investments
During the three and nine months ended
September 30, 2011, the Company’s investments had a net decrease in unrealized appreciation of approximately $6 million
and an increase of approximately $11 million, respectively; during three and nine months ended September 30, 2010, the Company’s
investments had a net decrease in unrealized appreciation of approximately $4 million and $3 million , respectively.
The net decrease in unrealized appreciation
of approximately $6 million for the three months ended September 30, 2011 is primarily due to (i) an approximate $2.5 million net
decrease in the market value of certain loans and equity positions as a result of credit considerations and current market
conditions; (ii) a net decrease of approximately $4 million in the net value of CLO Fund securities; and (iii) an approximate increase
of $500,000 in the value of Katonah Debt Advisors.
For the nine months ended September
30, 2011, the net increase of approximately $10.7 million in unrealized appreciation is primarily due to (i) one investment position
with a cost basis of approximately $10.7 million and fair value of $250,000 as of March 31, 2011 that was written off which resulted
in a decrease to unrealized depreciation on debt securities of approximately $10.5 million (additional fair value adjustments of
approximately $1.5 million further increased the unrealized appreciation on debt securities for the period for a total of approximately
$12 million); (ii) one CLO Fund security with a cost basis of approximately $3.2 million and a fair value of $1.9 million as of
March 31, 2011 that was sold which resulted in a decrease to unrealized depreciation on CLO Fund securities managed by non-affiliates
of approximately $1.3 million, along with a decrease in unrealized appreciation of approximately $2.4 million on the remaining
CLO Fund securities; (iii) an approximate decrease in unrealized depreciation of $1.4 million in equity securities; and (iv) a
net increase of approximately $1.3 million in the unrealized appreciation of Katonah Debt Advisors.
The reduction in unrealized depreciation
for the write off of the debt security and the sale of the CLO Fund security was offset by an increase to realized losses of approximately
$12.0 million with a net decrease in net asset value for the nine months ended September 30, 2011 of approximately $200,000.
Net Change in Stockholders’ Equity Resulting From
Operations
The net change in stockholders’
equity resulting from operations for the three months ended September 30, 2011 and 2010 was a decrease of approximately $1 million
and $3 million, respectively, or a decrease of $0.06 and $0.15 per share, respectively.
The net change in stockholders’
equity resulting from operations for the nine months ended September 30, 2011 and 2010 was an increase of approximately $9 million
and a decrease of $7 million, respectively, or an increase of $0.39 and a decrease of $0.33 per share, respectively.
Net Investment Income and Net Realized Gains (Losses)
Net investment income and net realized
gains (losses) represents the net change in stockholders’ equity before net unrealized appreciation or depreciation on investments. For
the three months ended September 30, 2011, net investment income and net realized gains were approximately $4 million, or $0.18
per share. For the nine months ended September 30, 2011, net investment income and net realized losses were approximately
$2 million, or $0. 07 per share. For the three months ended September 30, 2010, net investment income and net realized
gains were approximately $785,000 or $0.03 per share. For the nine months ended September 30, 2010, net investment income
and net realized losses were approximately $4 million, or $0.18 per share.
Dividends
For the three months ended September
30, 2011, we declared a $0.18 dividend per share. As a result, there was a dividend distribution of approximately $4.1 million
for the third quarter declaration, which was booked in the fourth quarter. We intend to continue to distribute quarterly
dividends to our stockholders. To avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar
year an amount at least equal to the sum of:
|
•
|
98% of our ordinary net taxable income for the calendar year;
|
|
•
|
98.2% of our capital gains, if any, in excess of capital losses for the one-year period ending on October 31 of the calendar year; and
|
|
•
|
any net ordinary income and net capital gains for the preceding year that were not distributed during such year.
|
The
amount of our declared dividends, as evaluated by management and approved by our Board of Directors, is based on our evaluation
of both distributable income for tax purposes and GAAP net investment income (which excludes unrealized gains and losses). Generally,
we seek to fund our dividends from GAAP current earnings, primarily from net interest and dividend income generated by our investment
portfolio and without a return of capital or a high reliance on realized capital gains. The following table sets forth the quarterly
dividends declared by us since the most recent completed calendar year, which represent an amount equal to our estimated net investment
income for the specified quarter, including income distributed from Katonah Debt Advisors received by the Company, if any, plus
a portion of any prior year undistributed amounts of net investment income distributed in subsequent years:
|
|
Dividend
|
|
Declaration Date
|
|
Record Date
|
|
Pay Date
|
2011:
|
|
|
|
|
|
|
|
|
Third quarter
|
|
$
|
0.18
|
|
9/15/2011
|
|
10/10/2011
|
|
10/28/2011
|
Second quarter
|
|
|
0.17
|
|
6/13/2011
|
|
7/8/2011
|
|
7/29/2011
|
First quarter
|
|
|
0.17
|
|
3/21/2011
|
|
4/8/2011
|
|
4/29/2011
|
Total declared for 2011
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010:
|
|
|
|
|
|
|
|
|
|
Fourth quarter
|
|
$
|
0.17
|
|
12/13/2010
|
|
12/24/2010
|
|
1/29/2011
|
Third quarter
|
|
|
0.17
|
|
9/20/2010
|
|
10/8/2010
|
|
10/29/2010
|
Second quarter
|
|
|
0.17
|
|
6/23/2010
|
|
7/7/2010
|
|
7/29/2010
|
First quarter
|
|
|
0.17
|
|
3/19/2010
|
|
4/7/2010
|
|
4/29/2010
|
Total declared for 2010
|
|
$
|
0.68
|
|
|
|
|
|
|
Due
to our ownership of Katonah Debt Advisors and certain timing, structural and tax considerations our dividend distributions may
include a return of capital for tax purposes. For the nine months ended September 30, 2011, Katonah Debt Advisors had approximately
$1.4 million of pre-tax net income before net capital losses and made distributions of $1,160,000 to us. For the nine
months ended September 30, 2010, Katonah Debt Advisors earned approximately $2 million of pre-tax net income and made distributions
of $3 million to us. Dividends are recorded as declared (where declaration date represents ex-dividend date) by Katonah
Debt Advisors as income on our statement of operations. It is anticipated that Katonah Debt Advisors may make further
dividend distributions to us during 2011.
INVESTMENT PORTFOLIO
Investment Objective
Our
investment objective is to generate current income and capital appreciation from the investments made by our middle market business
in senior secured term loans, mezzanine debt and selected equity investments in privately-held middle market companies, and from
our investment in Katonah Debt Advisors. We intend to grow our portfolio of assets by raising additional capital, including through
the prudent use of leverage available to us. We primarily invest in first and second lien term loans which, because of their priority
in a company’s capital structure, we expect will have lower default rates and higher rates of recovery of principal if there
is a default and which we expect will create a stable stream of interest income. While our primary investment focus is on making
loans to, and selected equity investments in, privately-held middle market companies, we may also invest in other investments
such as loans to larger, publicly-traded companies, high-yield bonds and distressed debt securities. We may also receive warrants
or options to purchase common stock in connection with our debt investments. In addition, we may also invest in debt and equity
securities issued by CLO Funds managed by Katonah Debt Advisors or by other asset managers. However, our investment strategy is
to limit the value of our investments in the debt or equity securities issued by CLO Funds to not more than 15% of the value of
our total investment portfolio at the time of investment. We invest almost exclusively in credit instruments issued by corporations
and do not invest in asset-backed securities such as those secured by commercial mortgages, residential mortgages or other consumer
borrowings.
The following table shows the Company’s
portfolio by security type at September 30, 2011 and December 31, 2010:
|
|
September 30, 2011 (unaudited)
|
|
|
December 31, 2010
|
|
Security Type
|
|
Cost
|
|
|
Fair Value
|
|
|
%¹
|
|
|
Cost
|
|
|
Fair Value
|
|
|
%¹
|
|
Time Deposits
|
|
$
|
2,494,148
|
|
|
$
|
2,494,148
|
|
|
|
1
|
%
|
|
$
|
720,225
|
|
|
$
|
720,225
|
|
|
|
-
|
%
|
Money Market Account
|
|
|
34,265,352
|
|
|
|
34,265,352
|
|
|
|
18
|
|
|
|
210,311
|
|
|
|
210,311
|
|
|
|
-
|
|
Senior Secured Loan
|
|
|
56,752,744
|
|
|
|
47,019,136
|
|
|
|
26
|
|
|
|
34,183,551
|
|
|
|
22,001,256
|
|
|
|
12
|
|
Junior Secured Loan
|
|
|
66,173,041
|
|
|
|
51,683,087
|
|
|
|
27
|
|
|
|
76,896,867
|
|
|
|
63,944,003
|
|
|
|
34
|
|
Mezzanine Investment
|
|
|
10,927,553
|
|
|
|
11,588,115
|
|
|
|
6
|
|
|
|
10,744,496
|
|
|
|
250,000
|
|
|
|
-
|
|
Senior Subordinated Bond
|
|
|
9,905,265
|
|
|
|
9,944,898
|
|
|
|
5
|
|
|
|
4,320,596
|
|
|
|
4,490,709
|
|
|
|
3
|
|
CLO Fund Securities
|
|
|
65,191,221
|
|
|
|
48,761,000
|
|
|
|
26
|
|
|
|
68,280,200
|
|
|
|
53,031,000
|
|
|
|
28
|
|
Equity Securities
|
|
|
16,199,845
|
|
|
|
6,009,932
|
|
|
|
3
|
|
|
|
13,232,266
|
|
|
|
4,437,871
|
|
|
|
3
|
|
Preferred
|
|
|
400,000
|
|
|
|
372,240
|
|
|
|
-
|
|
|
|
650,961
|
|
|
|
607,921
|
|
|
|
-
|
|
Affiliate Asset Managers
|
|
|
44,338,439
|
|
|
|
42,629,000
|
|
|
|
22
|
|
|
|
44,532,329
|
|
|
|
41,493,000
|
|
|
|
22
|
|
Total
|
|
$
|
306,647,608
|
|
|
$
|
254,766,908
|
|
|
|
134
|
%
|
|
$
|
253,771,802
|
|
|
$
|
191,186,296
|
|
|
|
102
|
%
|
¹
|
Calculated as a percentage of net asset value.
|
Investment Securities
We
invest in senior secured loans, mezzanine debt and, to a lesser extent, equity, of middle market companies in a variety of industries.
We generally target companies that generate positive cash flows because we look to cash flows as the primary source for servicing
debt. However, we may invest in other industries if we are presented with attractive opportunities.
We
employ a disciplined approach in the selection and monitoring of our investments. Generally, we target investments that will provide
a current return through interest income to provide for stability in our net income and place less reliance on realized capital
gains from our investments. Our investment philosophy is focused on preserving capital with an appropriate return profile relative
to risk. Our investment due diligence and selection generally focuses on an underlying issuer’s net cash flow after capital
expenditures to service its debt rather than on multiples of net income, valuations or other broad benchmarks which frequently
miss the nuances of an issuer’s business and prospective financial performance. We also generally avoid concentrations in
any one industry or issuer. We manage risk through a rigorous credit and investment underwriting process and an active portfolio
monitoring program.
Our Board of Directors is ultimately and
solely responsible for making a good faith determination of the fair value of portfolio investments on a quarterly basis. Debt
and equity securities for which market quotations are readily available are generally valued at such market quotations. Debt and
equity securities that are not publicly traded or whose market price is not readily available are valued by the Board of Directors
based on detailed analyses prepared by management, the Valuation Committee of the Board of Directors, and, in certain circumstances,
third parties with valuation expertise. Valuations are conducted by management on 100% of the investment portfolio at the end of
each quarter. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available
market value, the fair value of our investments may differ materially from the values that would have existed had a ready market
existed for such investments. Further, such investments may be generally subject to legal and other restrictions on resale or otherwise
less liquid than publicly traded securities. In addition, changes in the market environment and other events may occur over the
life of the investments that may cause the value realized on such investments to be different from the currently assigned valuations.
We derive fair value for our illiquid
investments that do not have indicative fair values based upon active trades primarily by using a present value technique that
discounts the estimated contractual cash flows for the underlying assets with discount rates imputed by broad market indices, bond
spreads and yields for comparable issuers relative to the subject assets (the “Market Yield Approach”) and also consider
recent loan amendments or other activity specific to the subject asset. Discount rates applied to estimated contractual cash flows
for an underlying asset vary by specific investment, industry, priority and nature of the debt security (such as the seniority
or security interest of the debt security) and are assessed relative to two indices, a leveraged loan index and a high-yield bond
index, at the valuation date. We have identified these two indices as benchmarks for broad market information related to our loan
and debt investments. Because we have not identified any market index that directly correlates to the loan and debt investments
held by us and therefore use the two benchmark indices, these market indices may require significant adjustment to better correlate
such market data for the calculation of fair value of the investment under the Market Yield Approach. Such adjustments require
judgment and may be material to the calculation of fair value. Further adjustments to the discount rate may be applied to reflect
other market conditions or the perceived credit risk of the borrower. When broad market indices are used as part of the valuation
methodology, their use is subject to adjustment for many factors, including priority, collateral used as security, structure, performance
and other quantitative and qualitative attributes of the asset being valued. The resulting present value determination is then
weighted along with any quotes from observable transactions and broker/pricing quotes. If such quotes are indicative of actual
transactions with reasonable trading volume at or near the valuation date that are not liquidation or distressed sales, relatively
more reliance will be put on such quotes to determine fair value. If such quotes are not indicative of market transactions or are
insufficient as to volume, reliability, consistency or other relevant factors, such quotes will be compared with other fair value
indications and given relatively less weight based on their relevancy. The appropriateness of specific valuation methods and techniques
may change as market conditions and available data change.
In January 2010, the Financial Accounting
Standards Board (“FASB”) issued guidance that clarifies and requires new disclosures about fair value measurements.
The clarifications and requirement to disclose the amounts and reasons for significant transfers between Level I and Level II,
as well as significant transfers in and out of Level III of the fair value hierarchy, were adopted by us in the first quarter of
2010. Note 4 to the financial statements reflects the amended disclosure requirements. The new guidance also requires that purchases,
sales, issuances and settlements be presented gross in the Level III reconciliation and that requirement is effective for fiscal
years beginning after December 15, 2010 and for interim periods within those years, with early adoption permitted. Since
this new guidance only amends the disclosures requirements, it did not impact our statements of financial position, statements
of operations, or cash flow statements.
Accounting Standards Codification Fair
Value Measurements and Disclosures (“
Fair Value Measurements and Disclosure
”) requires the disclosure in interim
and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques
and related inputs, if any, during the period.
The majority of our investment portfolio
is composed of debt and equity securities with unique contract terms and conditions and/or complexity that requires a valuation
of each individual investment that considers multiple levels of market and asset specific inputs, including historical and forecasted
financial and operational performance of the individual investment, projected cash flows, market multiples, comparable market transactions,
the priority of the security compared with those of other securities for such issuers, credit risk, interest rates and independent
valuations and reviews.
Loans
and Debt Securities.
To the extent that our investments are
exchange traded and are priced or have sufficient price indications from normal course trading at or around the valuation date
(financial reporting date), such pricing will determine fair value. Pricing service marks from third party pricing services may
be used as an indication of fair value, depending on the volume and reliability of the marks, sufficient and reasonable correlation
of bid and ask quotes, and, most importantly, the level of actual trading activity. However, most of our investments are illiquid
investments with little or no trading activity. Further, we have been unable to identify directly comparable market indices or
other market guidance that correlate directly to the types of investments we own. As a result, for most of our assets, we determine
fair value using alternative methodologies and models using available market data, as adjusted, to reflect the types of assets
we own, their structure, qualitative and credit attributes and other asset specific characteristics.
We derive fair value for our illiquid
investments that do not have indicative fair values based upon active trades primarily by using the Market Yield Approach and also
consider recent loan amendments or other activity specific to the subject asset. Discount rates applied to estimated contractual
cash flows for an underlying asset vary by specific investment, industry, priority and nature of the debt security (such as the
seniority or security interest of the debt security) and are assessed relative to two indices, a leveraged loan index and a high-yield
bond index, at the valuation date. We have identified these two indices as benchmarks for broad market information related to our
loan and debt investments. Because we have not identified any market index that directly correlates to the loan and debt investments
held by us and therefore use the two benchmark indices, these market indices may require significant adjustment to better correlate
such market data for the calculation of fair value of the investment under the Market Yield Approach. Such adjustments require
judgment and may be material to the calculation of fair value. Further adjustments to the discount rate may be applied to reflect
other market conditions or the perceived credit risk of the borrower. When broad market indices are used as part of the valuation
methodology, their use is subject to adjustment for many factors, including priority, collateral used as security, structure, performance
and other quantitative and qualitative attributes of the asset being valued. The resulting present value determination is then
weighted along with any quotes from observable transactions and broker/pricing quotes. If such quotes are indicative of actual
transactions with reasonable trading volume at or near the valuation date that are not liquidation or distressed sales, relatively
more reliance will be put on such quotes to determine fair value. If such quotes are not indicative of market transactions or are
insufficient as to volume, reliability, consistency or other relevant factors, such quotes will be compared with other fair value
indications and given relatively less weight based on their relevancy.
Equity and Equity-Related Securities.
Our equity and equity-related securities
in portfolio companies for which there is no liquid public market are carried at fair value based on the enterprise value of the
portfolio company, which is determined using various factors, including EBITDA, cash flows from operations less capital expenditures
and other pertinent factors, such as recent offers to purchase a portfolio company’s securities or other liquidation events.
The determined fair values are generally discounted to account for restrictions on resale and minority ownership positions. The
values of our equity and equity-related securities in public companies for which market quotations are readily available are based
upon the closing public market price on the balance sheet date. Securities that carry certain restrictions on sale are typically
valued at a discount from the public market value of the security.
The significant inputs used to determine
the fair value of equity and equity-related securities include prices, earnings, EBITDA and cash flows after capital expenditures
for similar peer comparables and the investment entity itself. Equity and equity-related securities are classified as Level III
when there is limited activity or less transparency around inputs to the valuation given the lack of information related to such
equity investments held in nonpublic companies. Significant assumptions observed for comparable companies as applied to relevant
financial data for the specific investment. Such assumptions, such as model discount rates or price/earnings multiples, vary by
the specific investment, equity position and industry and incorporate adjustments for risk premiums, liquidity and company specific
attributes. Such adjustments require judgment and may be material to the calculation of fair value.
At September 30, 2011 and September 30,
2010, our investments in income producing loans and debt securities, excluding CLO Fund securities, had a weighted average interest
rate of approximately 8.0% and 6.1%, respectively.
The investment portfolio (excluding
the Company’s investment in asset manager affiliates and CLO Funds) at September 30, 2011 was spread across 22 different
industries and 39 different entities with an average balance per entity of approximately $3 million. As of September 30, 2011,
all but four of our portfolio companies (representing less than 1% of total investments at fair value) were current on their debt
service obligations. Our portfolio, including the CLO Funds in which it invests, and the CLO Funds managed by Katonah Debt Advisors
consist almost exclusively of credit instruments issued by corporations and do not include investments in asset-backed securities,
such as those secured by commercial mortgages, residential mortgages or other consumer borrowings.
We may invest up to 30% of our investment
portfolio in opportunistic investments in high-yield bonds, debt and equity securities of CLO Funds, distressed debt or equity
securities of public companies. However, our investment strategy is to limit the value of our investments in the debt or equity
securities issued by CLO Funds to not more than 15% of the value of our total investment portfolio at the time of investment. We
expect that these public companies generally will have debt that is non-investment grade. We also may invest in debt of middle
market companies located outside of the U.S., which investments are generally not anticipated to be in excess of 10% of our investment
portfolio at the time such investments are made. At September 30, 2011, approximately 20% of our total assets were foreign assets
(including our investments in CLO Funds, which are typically domiciled outside the U.S.). We are generally prohibited from buying
or selling any security from or to any portfolio company of a private equity fund managed by Kohlberg & Co. without the
prior approval of the SEC. However, we may co-invest on a concurrent basis with Kohlberg & Co. or any of our affiliates,
subject to compliance with existing regulatory guidance, applicable regulations and our allocation procedures. Certain types of
negotiated co-investments may be made only if we receive an order from the SEC permitting us to do so. There can be no assurance
that any such order will be applied for or, if applied for, obtained.
At September 30, 2011, our ten largest
portfolio companies represented approximately 61% of the total fair value of our investments. Our largest investment, Katonah Debt
Advisors which is our wholly-owned portfolio company, represented 16.7% of the total fair value of our investments. Excluding Katonah
Debt Advisors and CLO Fund securities, our ten largest portfolio companies represent approximately 25% of the total fair value
of our investments.
CLO Fund Securities
We typically make a minority investment
in the subordinated securities or preferred stock of CLO Funds raised and managed by Katonah Debt Advisors and may selectively
invest in securities issued by CLO Funds managed by other asset management companies. As of September 30, 2011, we had approximately
$49 million invested in CLO Fund securities, including those issued by funds managed by Katonah Debt Advisors.
The CLO Funds managed by Katonah Debt
Advisors invest primarily in broadly syndicated non-investment grade loans, high-yield bonds and other credit instruments of corporate
issuers. The underlying assets in each of the CLO Funds in which we have an investment are generally diversified secured or unsecured
corporate debt. The underlying assets in our CLO Funds exclude mortgage pools or mortgage securities (residential mortgage bonds,
commercial mortgage backed securities, or related asset-backed securities), debt to companies providing mortgage lending and emerging
markets investments.
Our CLO Fund investments as of September 30,
2011 and December 31, 2010 are as follows:
|
|
|
|
|
|
|
September 30, 2011 (unaudited)
|
|
|
December 31, 2010
|
|
CLO Fund Securities
|
|
Investment
|
|
|
%
1
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
Grant Grove CLO, Ltd.
|
|
Subordinated Securities
|
|
|
22.2
|
%
|
|
$
|
4,723,733
|
|
|
$
|
3,050,000
|
|
|
$
|
4,720,982
|
|
|
$
|
3,150,000
|
|
Katonah III, Ltd.
|
|
Preferred Shares
|
|
|
23.1
|
|
|
|
4,500,000
|
|
|
|
230,000
|
|
|
|
4,500,000
|
|
|
|
470,000
|
|
Katonah IV, Ltd.
4
|
|
Preferred Shares
|
|
|
17.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,150,000
|
|
|
|
1,300,000
|
|
Katonah V, Ltd.
3
|
|
Preferred Shares
|
|
|
26.7
|
|
|
|
3,320,000
|
|
|
|
1,000
|
|
|
|
3,320,000
|
|
|
|
1,000
|
|
Katonah VII CLO Ltd.
2
|
|
Subordinated Securities
|
|
|
16.4
|
|
|
|
4,500,000
|
|
|
|
2,500,000
|
|
|
|
4,500,000
|
|
|
|
2,090,000
|
|
Katonah VIII CLO Ltd.
2
|
|
Subordinated Securities
|
|
|
10.3
|
|
|
|
3,400,000
|
|
|
|
2,070,000
|
|
|
|
3,400,000
|
|
|
|
1,690,000
|
|
Katonah IX CLO Ltd.
2
|
|
Preferred Shares
|
|
|
6.9
|
|
|
|
2,000,000
|
|
|
|
1,300,000
|
|
|
|
2,000,000
|
|
|
|
1,300,000
|
|
Katonah X CLO Ltd.
2
|
|
Subordinated Securities
|
|
|
33.3
|
|
|
|
11,627,447
|
|
|
|
8,790,000
|
|
|
|
11,612,677
|
|
|
|
8,820,000
|
|
Katonah 2007-1 CLO Ltd.
2
|
|
Preferred Shares
|
|
|
100.0
|
|
|
|
30,018,739
|
|
|
|
24,380,000
|
|
|
|
29,987,959
|
|
|
|
26,200,000
|
|
Katonah 2007-1 CLO Ltd.
2
|
|
Class B-2L Notes
|
|
|
100.0
|
|
|
|
1,101,302
|
|
|
|
6,440,000
|
|
|
|
1,088,582
|
|
|
|
8,010,000
|
|
Total
|
|
|
|
|
|
|
|
$
|
65,191,221
|
|
|
$
|
48,761,000
|
|
|
$
|
68,280,200
|
|
|
$
|
53,031,000
|
|
1
|
Represents percentage of class held.
|
2
|
An affiliate CLO Fund managed by Katonah Debt Advisors.
|
3
|
As of September 30, 2011, this CLO Fund security was not providing a dividend distribution.
|
4
|
Katonah IV, Ltd. was sold during the quarter ended June 30, 2011.
|
Our investments in CLO Fund securities
are carried at fair value, which is based either on (i) the present value of the net expected cash inflows for interest income
and principal repayments from underlying assets and cash outflows for interest expense, debt paydown and other fund costs for the
CLO Funds that are approaching or past the end of their reinvestment period and therefore are selling assets and/or using principal
repayments to pay down CLO Fund debt (or will begin to do so shortly), and for which there continue to be net cash distributions
to the class of securities owned by us, or (ii) a discounted cash flow model for more recent CLO Funds that utilizes prepayment
and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying
cash flow and comparable yields for similar securities or preferred shares to those in which we have invested. We recognize unrealized
appreciation or depreciation on our investments in CLO Fund securities as comparable yields in the market change and/or based on
changes in net asset values or estimated cash flows resulting from changes in prepayment or loss assumptions in the underlying
collateral pool. As each investment in CLO Fund securities ages, the expected amount of losses and the expected timing of recognition
of such losses in the underlying collateral pool are updated and the revised cash flows are used in determining the fair value
of the CLO Fund investments. We determine the fair value of our investments in CLO Fund securities on an individual security-by-security
basis.
Due to the individual attributes of each
CLO Fund security, they are classified as a Level III (as described in—“Critical Accounting Policies—Valuation
of Portfolio Investments” below) investment unless specific trading activity can be identified at or near the valuation date.
When available, Level II (as described in “—Critical Accounting Policies—Valuation of Portfolio Investments”
below) market information will be identified, evaluated and weighted accordingly in the application of such data to the present
value models and fair value determination. Significant assumptions to the present value calculations include default rates, recovery
rates, prepayment rates, investment/reinvestment rates and spreads and the discount rate by which to value the resulting underlying
cash flows. Such assumptions can vary significantly, depending on market data sources which often vary in depth and level of analysis,
understanding of the CLO market, detailed or broad characterizations of the CLO market and the application of such data to an appropriate
framework for analysis. The application of data points are based on the specific attributes of each individual CLO Fund security’s
underlying assets, historic, current and prospective performance, vintage, and other quantitative and qualitative factors that
would be evaluated by market participants. We evaluate the source of market data for reliability as an indicative market input,
consistency amongst other inputs and results and also the context in which such data is presented.
For bond rated tranches of CLO Fund securities
(those above the junior class) without transactions to support a fair value for the specific CLO Fund and tranche, fair value is
based on discounting estimated bond payments at current market yields, which may reflect the adjusted yield on the leveraged loan
index for similarly rated tranches, as well as prices for similar tranches for other CLO Funds, and also considers other factors
such as the default and recovery rates of underlying assets in the CLO Fund, as may be applicable. Such model assumptions may vary
and incorporate adjustments for risk premiums and CLO Fund specific attributes. Such adjustments require judgment and may be material
to the calculation of fair value.
The unaudited table below summarizes certain
attributes of each CLO Fund as per their most recent trustee reports as of September 30, 2011:
CLO Fund Securities
1
|
|
Number of
Securities
|
|
|
Number of
Issuers
|
|
|
Number of
Industries
|
|
|
Average Security Position Size
|
|
|
Average Issuer Position Size
|
|
Grant Grove CLO, Ltd.
|
|
|
294
|
|
|
|
239
|
|
|
|
32
|
|
|
$
|
1,004,797
|
|
|
$
|
1,236,027
|
|
Katonah III, Ltd.
|
|
|
142
|
|
|
|
83
|
|
|
|
26
|
|
|
|
1,399,718
|
|
|
|
2,394,698
|
|
Katonah V, Ltd.
|
|
|
152
|
|
|
|
89
|
|
|
|
28
|
|
|
|
557,060
|
|
|
|
951,384
|
|
Katonah VII CLO Ltd.
|
|
|
221
|
|
|
|
172
|
|
|
|
32
|
|
|
|
1,431,911
|
|
|
|
1,839,839
|
|
Katonah VIII CLO Ltd.
|
|
|
243
|
|
|
|
195
|
|
|
|
32
|
|
|
|
1,462,000
|
|
|
|
1,821,877
|
|
Katonah IX CLO Ltd.
|
|
|
259
|
|
|
|
206
|
|
|
|
31
|
|
|
|
1,522,294
|
|
|
|
1,913,952
|
|
Katonah X CLO Ltd.
|
|
|
254
|
|
|
|
206
|
|
|
|
30
|
|
|
|
1,820,866
|
|
|
|
2,245,146
|
|
Katonah 2007-1 CLO Ltd.
|
|
|
218
|
|
|
|
176
|
|
|
|
30
|
|
|
|
1,341,743
|
|
|
|
1,661,932
|
|
¹
|
All data from most recent Trustee reports as of September 30, 2011.
|
In
May 2009, we purchased the class B-2L notes of the Katonah 2007-1 CLO investment managed by Katonah Debt Advisors (“Katonah
2007-1 B-2L”). We purchased Katonah 2007-1 B-2L for 10% of the par value. The fair value, cost basis, and aggregate unrealized
appreciation of the Katonah 2007-1 B-2L investment as of September 30, 2011 were approximately $6 million, $1 million, and $5
million, respectively, and at December 31, 2010, the fair value, cost basis, and aggregate unrealized appreciation of the Katonah
2007-1 B-2L investment were $8 million, $1 million, and $7 million, respectively. Both the B-2L notes and preferred
shares of Katonah 2007-1 are owned 100% by us and Katonah 2007-1 is current in the payment of all quarterly distributions in respect
of the B-2L notes and the preferred shares.
All
CLO Funds managed by Katonah Debt Advisors are currently making quarterly dividend distributions to us and are paying all senior
and subordinate management fees to Katonah Debt Advisors. With the exception of the Katonah V, Ltd. CLO Fund, all third-party
managed CLO Funds held as investments are making quarterly dividend distributions to us.
Katonah Debt Advisors
Katonah Debt Advisors is our wholly-owned
asset management company that manages CLO Funds that invest in broadly syndicated loans, high yield bonds and other credit instruments.
The CLO Funds managed by Katonah Debt Advisors consist exclusively of credit instruments issued by corporations and do not invest
in asset-backed securities secured by commercial mortgages, residential mortgages or other consumer borrowings. As of September
30, 2011, Katonah Debt Advisors had approximately $1.9 billion of par value of assets under management on which it earns management
fees, and was valued at approximately $43 million.
As a manager of the CLO Funds, Katonah
Debt Advisors receives contractual and recurring management fees as well as an expected one-time structuring fee from the CLO Funds
for its management and advisory services. In addition, Katonah Debt Advisors may also earn income related to net interest on assets
accumulated for future CLO issuances on which it has provided a first loss guaranty in connection with loan warehouse arrangements
for its CLO Funds. Katonah Debt Advisors generates annual operating income equal to the amount by which its fee income exceeds
its operating expenses.
The annual management fees which Katonah
Debt Advisors receives are generally based on a fixed percentage of the par value of assets under management and are recurring
in nature for the term of the CLO Fund so long as Katonah Debt Advisors manages the fund. As a result, the annual management fees
earned by Katonah Debt Advisors are not subject to market value fluctuations in the underlying collateral. The annual management
fees Katonah Debt Advisors receives have two components - a senior management fee and a subordinated management fee. During
2009, certain CLO Funds managed by Katonah Debt Advisors were restricted from currently paying their subordinated management fees
as a result of the failure by those CLO Funds to satisfy certain restrictive covenants contained in their indenture agreements.
At such time, those subordinated management fees continued to be accrued by the applicable CLO Fund to become payable to Katonah
Debt Advisors when such CLO Fund becomes compliant with the applicable covenants. During the year ended December 31,
2010, all those CLO Funds which deferred payment of their subordinated management fees regained compliance with all applicable
covenants in order to pay current subordinated management fees as well as a portion of previously accrued subordinated management
fees. During the year ended December 31, 2010, approximately $5 million of deferred subordinated management fees have
been paid. Currently, all CLO Funds managed by Katonah Debt Advisors are paying both their senior and subordinated
management fees on a current basis.
In future years, Katonah Debt
Advisors may receive accrued incentive fees upon the liquidation of CLO Funds it manages, provided such CLO Funds have achieved
a minimum investment return to holders of their subordinated securities or preferred shares.
Subject to market conditions, we expect
to continue to make investments in CLO Funds managed by Katonah Debt Advisors, which we believe will provide us with a current
cash investment return. We believe that these investments will provide Katonah Debt Advisors with greater opportunities to access
new sources of capital which will ultimately increase Katonah Debt Advisors’ assets under management and resulting management
fee income. We also expect to receive distributions of recurring fee income and, if debt markets stabilize and recover, to generate
capital appreciation from our investment in the asset management business of Katonah Debt Advisors.
The revenue that Katonah Debt Advisors
generates through the fees it receives for managing CLO Funds and after paying the expenses pursuant to an overhead allocation
agreement with the Company associated with its operations, including compensation of its employees, may be distributed to Kohlberg
Capital. Cash distributions of Katonah Debt Advisors’ net income are recorded as dividends from an affiliate asset manager
when declared. As with all other investments, Katonah Debt Advisors’ fair value is periodically determined. Our investment
in Katonah Debt Advisors is carried at fair value, which is determined after taking into consideration a percentage of assets under
management and a discounted cash flow model incorporating different levels of discount rates depending on the hierarchy of fees
earned (including the likelihood of realization of senior, subordinate and incentive fees) and prospective modeled performance.
Such valuation includes an analysis of comparable asset management companies. Katonah Debt Advisors is classified as a Level III
investment. Any change in value from period to period is recognized as net change in unrealized appreciation or depreciation.
PORTFOLIO AND INVESTMENT ACTIVITY
Our primary business is lending to and
investing in middle-market businesses through investments in senior secured loans, junior secured loans, subordinated/mezzanine
debt investments, CLO equity investments and other equity-based investments, which may include warrants.
Total portfolio investment activity
(excluding activity in time deposit and money market investments) for the nine months ended September 30, 2011 (unaudited) and
for the year ended December 31, 2010 was as follows:
|
|
Debt
Securities
|
|
|
CLO Fund Securities
|
|
|
Equity
Securities
|
|
|
Affiliate
Asset
Managers
|
|
|
Total
Portfolio
|
|
Fair Value at December 31, 2009
|
|
$
|
297,356,529
|
|
|
$
|
48,971,000
|
|
|
$
|
4,713,246
|
|
|
$
|
58,064,720
|
|
|
$
|
409,105,495
|
|
2010 Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases / originations /draws
|
|
$
|
9,981,426
|
|
|
$
|
—
|
|
|
$
|
1,927,366
|
|
|
$
|
3,780,817
|
|
|
$
|
15,689,609
|
|
Pay-downs / pay-offs / sales
|
|
|
(208,820,375
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(208,820,375
|
)
|
Net accretion of discount
|
|
|
381,676
|
|
|
|
85,150
|
|
|
|
—
|
|
|
|
—
|
|
|
|
466,826
|
|
Net realized losses
|
|
|
(17,053,242
|
)
|
|
|
—
|
|
|
|
(809,742
|
)
|
|
|
—
|
|
|
|
(17,862,984
|
)
|
Increase (decrease) in fair value
|
|
|
9,196,912
|
|
|
|
3,974,850
|
|
|
|
(1,142,038
|
)
|
|
|
(20,352,537
|
)
|
|
|
(8,322,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2010
|
|
|
91,042,928
|
|
|
|
53,031,000
|
|
|
|
4,688,832
|
|
|
|
41,493,000
|
|
|
|
190,255,758
|
|
Year to Date 2011 Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases / originations /draws
|
|
|
76,691,361
|
|
|
|
—
|
|
|
|
2,858,387
|
|
|
|
—
|
|
|
|
79,549,748
|
|
Pay-downs / pay-offs / sales
|
|
|
(46,725,296
|
)
|
|
|
(1,935,000
|
)
|
|
|
(141,769
|
)
|
|
|
(193,889
|
)
|
|
|
(48,995,954
|
)
|
Net accretion of discount
|
|
|
98,775
|
|
|
|
61,023
|
|
|
|
—
|
|
|
|
—
|
|
|
|
159,798
|
|
Net realized losses
|
|
|
(12,451,746
|
)
|
|
|
(1,215,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(13,666,746
|
)
|
Increase (decrease) in fair value
|
|
|
11,951,454
|
|
|
|
(1,181,023
|
)
|
|
|
(1,395,518
|
)
|
|
|
1,329,889
|
|
|
|
10,704,802
|
|
Fair Value at September 30, 2011
|
|
$
|
120,607,476
|
|
|
$
|
48,761,000
|
|
|
$
|
6,009,932
|
|
|
$
|
42,629,000
|
|
|
$
|
218,007,408
|
|
The
level of investment activity for investments funded and principal repayments for our investments can vary substantially from period
to period depending on the number and size of investments that we invest in or divest of, and many other factors, including the
amount and competition for the debt and equity securities available to middle market companies, the level of merger and acquisition
activity for such companies and the general economic environment.
RESULTS OF OPERATIONS
The
principal measure of our financial performance is the net increase (decrease) in stockholders’ equity resulting from operations which
includes net investment income (loss) and net realized and unrealized appreciation (depreciation). Net investment income
(loss) is the difference between our income from interest, dividends, fees, and other investment income and our operating expenses.
Net realized gain (loss) on investments, is the difference between the proceeds received from dispositions of portfolio investments
and their amortized cost. Net change in unrealized appreciation (depreciation) on investments is the net change in the fair
value of our investment portfolio.
Set
forth below is a discussion of our results of operations for the three and nine months ended September 30, 2011 and 2010.
Investment Income
Investment income for the three months
ended September 30, 2011 and 2010 was approximately $7 million and $8 million, respectively. Of these amounts, approximately $3
million and $4 million was attributable to interest income on our loan and bond investments, respectively. The decrease
in interest income on our loan and bond portfolio is primarily due to reduced loan and bond investment balances as a result of
the sale, prepayment and amortization of such investments since March 31, 2010. Rather than reinvest such proceeds,
such proceeds were used primarily to repay fully, on January 31, 2011, the outstanding balance of our secured credit facility which
had a balance of $199 million at March 31, 2010. Since March 31, 2010 when we had approximately $88 million of debt
securities investments, we have utilized a portion of our proceeds from our $60 million convertible debt offering and other cash
to invest in additional debt securities to a total balance of $121 million as of September 30, 2011. For the three months
ended September 30, 2011 and 2010, approximately $4 million and $3 million of investment income is attributable to dividends earned
on CLO equity investments, respectively.
Investment income for the nine months
ended September 30, 2011 and 2010 was approximately $21 million and $22 million, respectively. Of these amounts, approximately
$7 million and $12 million was attributable to interest income on our loan and bond investments, respectively. The decrease
in interest income on our loan and bond portfolio is primarily due to reduced loan and bond investment balances as a result of
the sale, prepayment and amortization of such investments since March 31, 2010. For the nine months ended September
30, 2011 and 2010, approximately $11 million and $7 million, respectively, of investment income is attributable to dividends
earned on CLO equity investments. The increase in income attributable to dividends earned on CLO equity investments
is due to the enhanced financial performance of such investments and their resultant distributions to us. At September
30, 2010, approximately 6% of our total CLO Fund securities at fair value made no distributions to us as compared to nearly 100%
of total CLO Fund securities making distributions to us as of September 30, 2011.
During the three months ended March
31, 2011, we received a $2 million cash settlement to settle litigation previously initiated by us against the lenders related
to our secured credit facility which we fully repaid on January 31, 2011. Upon receipt, this settlement was recognized
as other income during the three months ended March 31, 2011.
Investment income is primarily dependent
on the composition and credit quality of our investment portfolio. Generally, our debt securities portfolio is expected to generate
predictable, recurring interest income in accordance with the contractual terms of each loan. Corporate equity securities may pay
a dividend and may increase in value for which a gain may be recognized; generally such dividend payments and gains are less predictable
than interest income on our loan portfolio.
Dividends from CLO Fund securities are
dependent on the performance of the underlying assets in each CLO Fund; interest payments, principal amortization and prepayments
of the underlying loans in each CLO Fund are primary factors which determine the level of income on our CLO Fund securities. The
level of excess spread from CLO Fund securities can be impacted by the timing and level of the resetting of the benchmark interest
rate for the underlying assets (which reset at various times throughout the quarter) in the CLO Fund and the related CLO Fund bond
liabilities (which reset at each quarterly distribution date); in periods of short-term and volatile changes in the benchmark interest
rate, the levels of excess spread and distributions to us can vary significantly.
Dividends from Affiliate Asset Manager
As of September 30, 2011, our investment
in Katonah Debt Advisors was valued at approximately $43 million. For the three months ended September 30, 2011 and 2010, Katonah
Debt Advisors had pre-tax net income before net capital losses of approximately $570,000 and $630,000, respectively. For
the nine months ended September 30, 2011 and 2010, Katonah Debt Advisors had pre-tax net income before net capital losses of approximately
$1.4 million and $2 million, respectively. For the three months ended September 30, 2011 and 2010, Katonah Debt Advisors
made distributions of net income of $510,000 and $1.5 million, respectively. For the nine months ended September 30,
2011 and 2010, Katonah Debt Advisors made distributions of net income of $1.2 million and $3.0 million, respectively. The
distributions from Katonah Debt Advisors in 2010 are higher as a result of the cash receipt of prior year subordinate management
fee accruals by Katonah Debt Advisors which in turn distributed a portion of such cash in the form of a dividend distribution to
us. The distributions from Katonah Debt Advisors in 2011 represent a portion of the expected net income for Katonah
Debt Advisors for the nine months ended September 30, 2011.
Distributions of Katonah Debt Advisors’
net income are recorded as dividends from affiliate asset manager. The Company intends to distribute the accumulated undistributed
net income of Katonah Debt Advisors in the future. For purposes of calculating distributable tax income for required quarterly
dividends as a RIC, Katonah Debt Advisors’ net income is further reduced by approximately $2 million per annum for tax goodwill
amortization resulting from its acquisition by us prior to our initial public offering. As a result, the amount of our declared
dividends, as evaluated by management and approved by our Board of Directors, is based on our evaluation of both distributable
income for tax purposes and GAAP net investment income (which excludes unrealized gains and losses).
Expenses
Total expenses for the three months
ended September 30, 2011 and 2010 were approximately $3 million and $4 million, respectively. Interest expense and amortization
on debt issuance costs for the period, which includes facility and program fees on the unused loan balance, were approximately
$1 million and $2 million, respectively, on average debt outstanding of $60 million and $141 million, respectively. Approximately
$985,000 and $815,000, respectively, of expenses were attributable to employment compensation, including salaries, bonuses and
stock option expense for the three months ended September 30, 2011 and 2010. For the three months ended September 30,
2011, other expenses included approximately $797,000 for professional fees, insurance, administrative and other. For
the three months ended September 30, 2010, other expenses included approximately $2 million for professional fees, insurance, administrative
and other. For the three months ended September 30, 2011 and 2010, administrative and other costs (including occupancy
expense, insurance, technology and other office expenses) totaled approximately $221,000 and $343,000, respectively.
Total expenses for the nine months ended
September 30, 2011 and 2010 were approximately $9 million and $16 million, respectively. Interest expense and amortization on debt
issuance costs for the period, which includes facility and program fees on the unused loan balance, were approximately $3 million
and $7 million, respectively, on average debt outstanding of $52 million and $172 million, respectively. Approximately $3 million
and $2 million, respectively, of expenses were attributable to employment compensation, including salaries, bonuses and stock option
expense for the nine months ended September 30, 2011 and 2010. For the nine months ended September 30, 2011, other expenses
included approximately $3 million for professional fees, insurance, administrative and other. For the nine months ended
September 30, 2010, other expenses included approximately $7 million for professional fees, insurance, administrative and other. For
the nine months ended September 30, 2011 and 2010, administrative and other costs (including occupancy expense, insurance, technology
and other office expenses) totaled approximately $751,000 and $957,000, respectively.
Interest and compensation expense are
generally expected to be our largest expenses each period. Interest expense is dependent on the average outstanding principal balance
on our borrowings and the related interest rate for the period. Compensation expense includes base salaries, bonuses, stock compensation,
employee benefits and employer related payroll costs. The largest components of total compensation costs are base salaries and
bonuses; generally, base salaries are expensed as incurred and bonus expenses are estimated and accrued since bonuses are generally
paid annually.
Professional fee expenses for the three
and nine months ended September 30, 2011 are lower by approximately $900,000 and $3.8 million , respectively, relative to the same
prior year period primarily due to a significant increase in professional fees during the three and nine months ended September
30, 2010 related to legal proceedings, our complaint against our lenders, and additional legal, accounting, and valuation costs
related to the restatement of our year-end 2008 and first-and second-quarter 2009 financial statements.
Net Unrealized Appreciation on Investments
During the three months ended September
30, 2011 and 2010, our total investments had a decrease in net unrealized appreciation of approximately $6 million and $4 million,
respectively. For the three months ended September 30, 2011 and 2010, Katonah Debt Advisors had an increase in net unrealized appreciation
of approximately $470,000 and a decrease of $5.5 million, respectively. For the three months ended September 30,
2011 and 2010, our middle market portfolio of debt securities, equity securities, and CLO Fund securities had a net decrease in
unrealized appreciation due to fair value adjustments of approximately $6.1 million and a net increase of approximately $1.3 million,
respectively.
During the nine months ended September
30, 2011 and 2010, our total investments had an increase in net unrealized appreciation of approximately $10.7 million,
and a decrease of $3.4 million, respectively. For the nine months ended September 30, 2011 and 2010, Katonah Debt Advisors had
an increase in net unrealized appreciation of approximately $1.3 million and a decrease of approximately $12.4 million,
respectively. For the nine months ended September 30, 2011 and 2010, our middle market portfolio of debt securities,
equity securities, and CLO Fund securities had a net increase in unrealized appreciation due to fair value adjustments of approximately
$9.4 million and a net increase of approximately $9 million, respectively.
For the nine months ended September
30, 2011, one investment position with a cost basis of approximately $10.7 million and a fair value of $250,000 as of March 31,
2011 was written off which resulted in a net decrease to unrealized depreciation on debt securities of approximately $10.5 million
(additional fair value adjustments of approximately $1.5 million further increased the net unrealized appreciation on debt securities
for the period for a total of approximately $12.0 million). For the nine months ended September 30, 2011, one CLO Fund security
with a cost basis of approximately $3.2 million and a fair value of $1.9 million as of March 31, 2011 was sold which resulted in
a decrease in net unrealized depreciation on CLO Fund securities managed by non-affiliates of approximately $1.3 million (the security
was sold for $45,000 over the fair value at March 31, 2011).
Net Increase (Decrease) in Stockholders’ Equity
Resulting From Operations
For the three and nine months ended
September 30, 2011 the net change in stockholders’ equity resulting from operations was an approximate decrease of $1 million
and an approximate increase of $9 million, respectively, or $0.06 and $0.39 per share. The net decrease in stockholders’
equity resulting from operations for the three and nine months ended September 30, 2010 was approximately $3 million and $7 million,
or $0.15 and $0.33 per share.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Liquidity is a measure of our ability
to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, pay dividends
to our stockholders and other general business needs. We recognize the need to have funds available for operating our business
and to make investments. We seek to have adequate liquidity at all times to cover normal cyclical swings in funding availability
and to allow us to meet abnormal and unexpected funding requirements. We plan to satisfy our liquidity needs through normal operations
with the goal of avoiding unplanned sales of assets or emergency borrowing of funds.
In addition to the traditional sources
of available funds (issuance of new equity, debt or undrawn warehouse facility capacity, if available), we also have the ability
to raise additional cash funds through the securitization of assets on our balance sheet through our wholly-owned asset manager,
Katonah Debt Advisors. Such a securitization would provide cash for new investments on our balance sheet as well as additional
management fee income and potentially increased value (as a result of increased assets under management) for Katonah Debt Advisors.
No new securitizations by Katonah Debt Advisors have closed since January 2008.
As a BDC, we are limited in the amount
of leverage we can incur to finance our investment portfolio. In order to incur new debt, we are required to meet a coverage ratio
of total assets to total senior securities of at least 200% immediately after such issuance. For this purpose, senior securities
include all borrowings and any preferred stock. As a result, our ability to utilize leverage as a means of financing our portfolio
of investments is limited by this asset coverage test.
As of September 30, 2011 and December
31, 2010 the fair value of investments and cash were as follows:
|
|
Investments at Fair Value
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
Security Type
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
414,363
|
|
|
$
|
10,175,488
|
|
Time Deposits
|
|
|
2,494,148
|
|
|
|
720,225
|
|
Money Market Accounts
|
|
|
34,265,352
|
|
|
|
210,311
|
|
Senior Secured Loan
|
|
|
47,019,136
|
|
|
|
22,001,256
|
|
Junior Secured Loan
|
|
|
51,683,087
|
|
|
|
63,944,003
|
|
Mezzanine Investment
|
|
|
11,588,115
|
|
|
|
250,000
|
|
Senior Subordinated Bond
|
|
|
9,944,898
|
|
|
|
4,490,709
|
|
CLO Fund Securities
|
|
|
48,761,000
|
|
|
|
53,031,000
|
|
Equity Securities
|
|
|
6,009,932
|
|
|
|
4,437,871
|
|
Preferred
|
|
|
372,240
|
|
|
|
607,921
|
|
Affiliate Asset Managers
|
|
|
42,629,000
|
|
|
|
41,493,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
255,181,271
|
|
|
$
|
201,361,784
|
|
We use borrowed funds, known as “leverage,”
to make investments and to attempt to increase returns to our shareholders by reducing our overall cost of capital. As a BDC, we
are limited in the amount of leverage we can incur under the 1940 Act. We are only allowed to borrow amounts such that our asset
coverage, as defined in the 1940 Act, equals at least 200% immediately after such borrowing. As of September 30, 2011, we had approximately
$60 million of outstanding borrowings and our asset coverage ratio of total assets to total borrowings was 416%, compliant with
the minimum asset coverage level of 200% generally required for a BDC by the 1940 Act. We may also borrow amounts of up to 5% of
the value of our total assets for temporary purposes.
At December 31, 2010, we had approximately
$87 million of outstanding indebtedness through a secured credit facility. On January 31, 2011, we repaid in full the
outstanding balance under this facility. On March 16, 2011, we issued $55 million in aggregate principal amount of unsecured 8.75%
convertible senior notes due 2016 (“Convertible Senior Notes”). On March 23, 2011, pursuant to an over-allotment
option, we issued an additional $5 million of such Convertible Senior Notes for a total of $60 million in aggregate principal amount.
As of September 30, 2011, we had total
outstanding indebtedness of $60 million at a fixed rate of interest of 8.75%. As of September 30, 2011, we had cash,
time deposits, and money market accounts of approximately $37 million which will fund future investments and operational
needs.
Subject to prevailing market conditions,
we intend to grow our portfolio of assets by raising additional capital, including through the prudent use of leverage available
to us. As a result, we may seek to enter into new agreements with other lenders or into other financing arrangements
as market conditions permit. Such financing arrangements may include a new secured and/or unsecured credit facility,
the issuance of preferred securities or debt guaranteed by the Small Business Administration. We also believe that our
current cash position, certain loan investments and cash income earned by our investment portfolio are adequate for our current
liquidity needs.
COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS
We are a party to financial instruments
with off-balance sheet risk in the normal course of business in order to meet the needs of our investment in portfolio companies.
Such instruments include commitments to extend credit and may involve, in varying degrees, elements of credit risk in excess of
amounts recognized on our balance sheet. Prior to extending such credit, we attempt to limit our credit risk by conducting extensive
due diligence, obtaining collateral where necessary and negotiating appropriate financial covenants. As of September 30, 2011 and
December 31, 2010, we had committed to make a total of approximately $2 million and $2 million, respectively, of investments in
various revolving senior secured loans, of which approximately $680,000 had been funded as of September 30, 2011 and $1 million
had been funded as of December 31, 2010. As of September 30, 2011 and December 31, 2010, we had committed to make no investments
in delayed draw senior secured loans.
CRITICAL ACCOUNTING POLICIES
The financial statements are based on
the selection and application of critical accounting policies, which require management to make significant estimates and assumptions.
Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations
and require management’s most difficult, complex, or subjective judgments. Our critical accounting policies are those applicable
to the basis of presentation, valuation of investments, and certain revenue recognition matters as discussed below.
Basis of Presentation
The accompanying unaudited financial
statements have been prepared on the accrual basis of accounting in conformity with GAAP for interim financial information. Accordingly,
they do not include all of the information and footnotes required for annual financial statements. The unaudited interim financial
statements and notes thereto should be read in conjunction with the financial statements and notes thereto in the Company’s
Form 10-K for the fiscal year ended December 31, 2010, as filed with the Commission.
Accounting Standards Codification.
In June 2009, the FASB issued a pronouncement establishing the FASB Accounting Standards Codification (“ASC”)
as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements
in conformity with GAAP. The ASC reorganized existing U.S. accounting and reporting standards issued by the FASB and other related
private sector standard setters into a single source of authoritative accounting principles arranged by topic. The standard
explicitly recognizes rules and interpretive releases of the SEC under federal securities laws as authoritative GAAP for SEC registrants.
The ASC supersedes all existing U.S. accounting standards; all other accounting literature not included in the ASC (other than
Securities and Exchange Commission guidance for publicly-traded companies) is considered non-authoritative. The ASC was effective
on a prospective basis for interim and annual reporting periods ending after September 15, 2009. The adoption of the
ASC changed our references to GAAP accounting standards but did not impact our results of operations, financial position or liquidity.
Valuation of Portfolio Investments
The most significant estimate inherent
in the preparation of our financial statements is the valuation of investments and the related amounts of unrealized appreciation
and depreciation of investments recorded.
Value, as defined in Section 2(a)(41)
of 1940 Act, is (1) the market price for those securities for which a market quotation is readily available and (2) for
all other securities and assets, fair value as determined in good faith by our Board of Directors pursuant to procedures approved
by our Board of Directors. Our valuation policy is intended to provide a consistent basis for determining the fair value of the
portfolio based on the nature of the security, the market for the security and other considerations including the financial performance
and enterprise value of the portfolio company. Because of the inherent uncertainty of valuation, the Board of Directors’
determined values may differ significantly from the values that would have been used had a ready market existed for the investments,
and the differences could be material.
We are, for GAAP purposes, an investment
company under the AICPA Audit and Accounting Guide for Investment Companies. As a result, we reflect our investments on our balance
sheet at their estimated fair value with unrealized gains and losses resulting from changes in fair value reflected as a component
of unrealized gains or losses on our statements of operations. Fair value is the amount that would be received to sell the investments
in an orderly transaction between market participants at the measurement date (i.e., the exit price). Additionally, we do not consolidate
majority or wholly-owned and controlled investments.
Effective January 1, 2008 we adopted
Fair Value Measurements and Disclosures
, which among other things, requires enhanced disclosures about financial instruments
carried at fair value. See Note 4 to the financial statements for the additional information about the level of market observability
associated with investments carried at fair value.
We have valued our investments, in the
absence of observable market prices, using the valuation methodologies described below applied on a consistent basis. For some
investments little market activity may exist; management’s determination of fair value is then based on the best information
available in the circumstances, and may incorporate management’s own assumptions and involves a significant degree of management’s
judgment.
Our investments in CLO Fund securities
are carried at fair value, which is based either on (i) the present value of the net expected cash inflows for interest income
and principal repayments from underlying assets and the cash outflows for interest expense, debt paydown and other fund costs for
the CLO Funds which are approaching or past the end of their reinvestment period and therefore begin to sell assets and/or use
principal repayments to pay-down CLO Fund debt, and for which there continue to be net cash distributions to the class of we securities
own, or (ii) the net asset value of the CLO Fund for CLO Funds which are approaching or past the end of their reinvestment
period and therefore begin to sell assets and/or use principal repayments to pay-down CLO Fund debt, and for which there are negligible
net cash distributions to the class of securities we own, or (iii) a discounted cash flow model for more recent CLO Funds that
utilizes prepayment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics
of the underlying cash flow and comparable yields for similar securities or preferred shares to those in which the Company has
invested. We recognize unrealized appreciation or depreciation on our investments in CLO Fund securities as comparable
yields in the market change and/or based on changes in net asset values or estimated cash flows resulting from changes in prepayment
or loss assumptions in the underlying collateral pool. As each investment in CLO Fund securities ages, the expected
amount of losses and the expected timing of recognition of such losses in the underlying collateral pool are updated and the revised
cash flows are used in determining the fair value of the CLO Investment. We determine the fair value of our investments
in CLO Fund securities on an individual security-by-security basis.
Our investment in Katonah Debt Advisors
is carried at fair value, which is determined after taking into consideration a percentage of assets under management and a discounted
cash flow model incorporating different levels of discount rates depending on the hierarchy of fees earned (including the likelihood
of realization of senior, subordinate and incentive fees) and prospective modeled performance. Such valuation includes an analysis
of comparable asset management companies. Katonah Debt Advisors is classified as a Level III investment (as described below). Any
change in value from period to period is recognized as net change in unrealized appreciation or depreciation.
Fair values of other investments for
which market prices are not observable are determined by reference to public market or private transactions or valuations for comparable
companies or assets in the relevant asset class and or industry when such amounts are available. Generally these valuations are
derived by multiplying a key performance metric of the investee company or asset (e.g., EBITDA) by the relevant valuation multiple
observed for comparable companies or transactions, adjusted by management for differences between the investment and the referenced
comparable. Such investments may also be valued at cost for a period of time after an acquisition as the best indicator of fair
value. If the fair value of such investments cannot be valued by reference to observable valuation measures for comparable companies,
then the primary analytical method used to estimate the fair value is a discounted cash flow method and/or cap rate analysis. A
sensitivity analysis is applied to the estimated future cash flows using various factors depending on the investment, including
assumed growth rates (in cash flows), capitalization rates (for determining terminal values) and appropriate discount rates to
determine a range of reasonable values or to compute projected return on investment.
We derive fair value for our illiquid
loan investments that do not have indicative fair values based upon active trades primarily by using the Market Yield Approach,
and also consider recent loan amendments or other activity specific to the subject asset as described above. Other significant
assumptions, such as coupon and maturity, are asset-specific and are noted for each investment in the Schedules of Investments.
Our Board of Directors may consider other methods of valuation to determine the fair value of investments as appropriate in conformity
with GAAP.
The determination of fair value using
this methodology takes into consideration a range of factors, including but not limited to the price at which the investment was
acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities,
current and projected operating performance and financing transactions subsequent to the acquisition of the investment. This valuation
methodology involves a significant degree of management’s judgment.
After our adoption of
Fair Value Measurements
and Disclosures,
investments measured and reported at fair value are classified and disclosed in one of the following categories:
|
•
|
Level I – Unadjusted quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I include listed equities and listed securities. As required by
Fair Value Measurements and Disclosures
, the Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably affect the quoted price.
|
|
•
|
Level II – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. Such inputs may be quoted prices for similar assets or liabilities, quoted markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full character of the financial instrument, or inputs that are derived principally from, or corroborated by, observable market information. Investments which are generally included in this category include illiquid corporate loans and bonds and less liquid, privately held or restricted equity securities for which some level of recent trading activity has been observed.
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|
•
|
Level III – Pricing inputs are unobservable for the investment and includes situations where there is little, if any, market activity for the investment. The inputs may be based on the Company’s own assumptions about how market participants would price the asset or liability or may use Level II inputs, as adjusted, to reflect specific investment attributes relative to a broader market assumption. These inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data for comparable performance or valuation measures (earnings multiples, discount rates, other financial/valuation ratios, etc.) are available, such investments are grouped as Level III if any significant data point that is not also market observable (private company earnings, cash flows, etc.) is used in the valuation methodology.
|
In certain cases, the inputs used to measure
fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair
value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the
significance of a particular input to the fair value measurement in its entirety requires judgment, and it considers factors specific
to the investment. Substantially all of our investments are classified as Level III.
Our Board of Directors may consider
other methods of valuation to determine the fair value of investments as appropriate in conformity with GAAP.
Interest Income
Interest income, adjusted for amortization
of premium and accretion of discount, is recorded on the accrual basis to the extent that such amounts are expected to be collected.
We generally place a loan on non-accrual status and cease recognizing interest income on such loan or security when a loan or security
becomes 90 days or more past due or if we otherwise do not expect the debtor to be able to service its debt obligations. Non-accrual
loans remain in such status until the borrower has demonstrated the ability and intent to pay contractual amounts due or such loans
become current. As of September 30, 2011, four issuers representing 1% of our total investments at fair value were on
non-accrual status. As of December 31, 2010, five issuers representing 4% of our total investments at fair value were
on non-accrual status.
Dividend Income from CLO Fund Securities
We generate dividend income from our
investments in the most junior class of securities of CLO Funds (typically preferred shares or subordinated securities) managed
by Katonah Debt Advisors and selective investments in securities issued by funds managed by other asset management companies. Our
CLO Fund securities are subordinate to senior bond holders who typically receive a fixed rate of return on their investment. The
CLO Funds are leveraged funds and any excess cash flow or “excess spread” (interest earned by the underlying securities
in the fund less payments made to senior bond holders and less fund expenses and management fees) is paid to the holders of the
CLO Fund’s subordinated securities or preferred shares. The level of excess spread from CLO Fund securities can be impacted
from the timing and level of the resetting of the benchmark interest rate for the underlying assets (which reset at various times
throughout the quarter) in the CLO Fund and the related CLO Fund bond liabilities (which reset at each quarterly distribution date);
in periods of short-term and volatile changes in the benchmark interest rate, the levels of excess spread and distributions to
us can vary significantly. In addition, the failure of CLO Funds in which we invest to comply with certain financial
covenants may lead to the temporary suspension or deferral of cash distributions to us. We make estimated interim accruals
of such dividend income based on recent historical distributions and CLO Fund performance and adjust such accruals on a quarterly
basis to reflect actual distributions.
For non-junior class CLO Fund securities,
such as our investment in the class B-2L notes of Katonah 2007-1 CLO, interest is earned at a fixed spread relative to the LIBOR
index.
Dividends from Affiliate Asset Manager
We record dividend income from our affiliate
asset manager on the declaration date, which represents the ex-dividend date.
Payment in Kind Interest
We may have loans in our portfolio that
contain a payment-in-kind (“PIK”) provision. PIK interest, computed at the contractual rate specified in each loan
agreement, is added to the principal balance of the loan and recorded as interest income. To maintain our RIC status, this non-cash
source of income must be paid out to stockholders in the form of dividends, even though we have not yet collected the cash.
Fee Income
Fee income includes fees, if any, for
due diligence, structuring, commitment and facility fees, and fees, if any, for transaction services and management services rendered
by us to portfolio companies and other third parties. Commitment and facility fees are generally recognized as income over the
life of the underlying loan, whereas due diligence, structuring, transaction service and management service fees are generally
recognized as income when the services are rendered.
Management Compensation
We may, from time to time, issue stock
options or restricted stock under the Plan to officers and employees for services rendered to us. We follow
Compensation –
Stock Compensation
, a method by which the fair value of options or restricted stock is determined and expensed. We use a Binary
Option Pricing Model (American, call option) as its valuation model to establish the expected value of all stock option grants.
We are internally managed and therefore
do not incur management fees payable to third parties.
United States Federal Income Taxes
The Company has elected and intends to
continue to qualify for the tax treatment applicable to RICs under Subchapter M of the Code and, among other things, intends to
make the required distributions to its stockholders as specified therein. In order to qualify as a RIC, the Company is required
to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year.
Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current
year distributions into the next tax year and pay a 4% excise tax on such income, to the extent required.
Dividends
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
each quarter and is generally based upon the earnings estimated by management for the period and year.
We have adopted a dividend reinvestment
plan that provides for reinvestment of our distributions on behalf of our stockholders, unless a stockholder “opts out”
of the plan to receive cash in lieu of having their cash dividends automatically reinvested in additional shares of our common
stock.
Recent Accounting Pronouncements
Improved Disclosures Regarding Fair
Value Measurements.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06,
Fair Value Measurements and Improving Disclosures About Fair Value Measurements (Topic 820),
which provides for improving
disclosures about fair value measurements, primarily significant transfers in and out of Levels I and II, and activity in Level
III fair value measurements. The new disclosures and clarifications of existing disclosures are effective for the interim and annual
reporting periods beginning after December 15, 2009, while the disclosures about the purchases, sales, issuances, and settlements
in the roll forward activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15,
2010 and for the interim periods within those fiscal years. Except for certain detailed Level III disclosures, which are effective
for fiscal years beginning after December 15, 2010 and interim periods within those years, the new guidance became effective
for the Company’s fiscal 2010 second quarter. The adoption of this disclosure-only guidance is included in Note 4 “—Investments”
and did not have a material impact on the Company’s financial results.
In May 2011, the FASB issued FASB Accounting
Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in GAAP and IFRS. The amendments in this ASU generally represent clarifications of Topic 820, but also
include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair
value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing
information about fair value measurements in accordance with GAAP and IFRS. The amendments in this ASU are to be applied prospectively
and are effective during interim and annual periods beginning after December 15, 2011. Management currently believes that the adoption
of this ASU will not have a material impact on the Company’s operating results, financial position or cash flows.
Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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Interest Rate Risk
Interest rate risk is defined as the sensitivity
of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in re-pricing
intervals between our assets and liabilities and the effect that interest rates may have on our cash flows. Changes in the general
level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest
earning assets and our interest expense incurred in connection with our interest bearing debt and liabilities. Changes in interest
rates can also affect, among other things, our ability to acquire and originate loans and securities and the value of our investment
portfolio.
Our investment income is affected by fluctuations
in various interest rates, including LIBOR and prime rates. As of September 30, 2011, approximately 76% of our loans at fair value
in our portfolio were at floating rates with a spread to an interest rate index such as LIBOR or the prime rate. We generally expect
that future portfolio investments will predominately be floating rate investments. As of September 30, 2011, we had $60 million
of borrowings outstanding at a fixed rate of 8.75%.
Because we borrow money to make investments,
our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest
the funds borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material
adverse effect on our net investment income. In periods of rising or lowering interest rates, our current cost of debt
would remain the same at 8.75% given that our debt is at a fixed rate. We would expect that an increase in the base
rate index for our floating rate investment assets would increase our net investment income and that a decrease in the base rate
index for such assets would decrease our net investment income (in either case, such increase/decrease may be limited by interest
rate floors/minimums for certain investment assets).
We have analyzed the potential impact
of changes in interest rates on interest income net of interest expense. Assuming that our balance sheet at September 30, 2011
was to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical increase of a
1% change in interest rates would correspondingly increase net interest income proportionately by approximately $800,000 over a
one-year period. Conversely, a hypothetical decrease of a 1% change in interest rates would correspondingly decrease
net interest income proportionately by approximately $800,000 over a one-year period.
Although management believes that this
measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality,
size and composition of the assets on the balance sheet and other business developments that could affect a net change in assets
resulting from operations or net income. Accordingly, no assurances can be given that actual results would not materially differ
from the potential outcome simulated by this estimate.
We did not hold any derivative financial
instruments for hedging purposes as of September 30, 2011.
Portfolio Valuation
We carry our investments at fair value,
as determined in good faith by our Board of Directors pursuant to a valuation methodology approved by our Board of Directors. Investments
for which market quotations are generally readily available are generally valued at such market quotations. Investments for which
there is not a readily available market value are valued at fair value as determined in good faith by our Board of Directors under
a valuation policy and consistently applied valuation process. However, due to the inherent uncertainty of determining the fair
value of investments that cannot be marked to market, the fair value of our investments may differ materially from the values that
would have been used had a ready market existed for such investments. In addition, changes in the market environment and other
events that may occur over the life of the investments may cause the value realized on these investments to be different than the
valuations that are assigned. The types of factors that we may take into account in fair value pricing of our investments include,
as relevant, the nature and realizable value of any collateral, third party valuations, the portfolio company’s ability to
make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to
publicly-traded securities, recent sales of or offers to buy comparable companies, and other relevant factors.
In 2010, we engaged an independent valuation
firm, to provide a third-party review of our CLO fair value model relative to its functionality, model inputs and calculations
as a reasonable method to determine CLO fair values, in the absence of Level 1 or Level 2 trading activity or observable market
inputs. The independent valuation firm concluded that our CLO model appropriately factors in all the necessary inputs required
to build a CLO equity cash flow for fair value purposes and that the inputs were being employed correctly.
Beginning with the period ending June
30, 2011, the Company has engaged an independent valuation firm to provide third party valuation consulting services to the Company’s
Board of Directors. Each quarter, the independent valuation firm will perform third party valuations on the Company’s
investments on illiquid securities such that they are reviewed at least once during a trailing 12 month period. Third
party valuations were performed on approximately 1 6% of investments at fair value as of September 30, 2011. These third
party valuation estimates were considered as one of the relevant data inputs in the Company’s determination of fair value.
The Board of Directors intends to continue to engage an independent valuation firm in the future to provide certain valuation services,
including the review of certain portfolio assets, as part of the quarterly and annual year-end valuation process.
Item 4.
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Controls and Procedures
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Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under
the Exchange Act, management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer,
the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls
and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports
we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated
and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding our required disclosure.
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management
was required to apply its judgment in evaluating and implementing possible controls and procedures.
The Company’s management, under
the supervision and with the participation of various members of management, including our CEO and our CFO, has evaluated the effectiveness
of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange
Act) as of the end of the period covered by this report. Based upon that evaluation, our CEO and CFO have concluded that our current
disclosure controls and procedures were not effective as of the end of the period covered by this report. We were not
able to determine on a timely basis whether separate summarized financial information of KDA was required to be included in this
Quarterly Report on Form 10-Q pursuant to Rules 10-01, 4-08(g) and 1-02(bb) of Regulation S-X (and, if such separate summarized
financial information was required to be so included, to prepare and include such separate summarized financial information in
this Quarterly Report on Form 10-Q on a timely basis), as required by the rules of the SEC and the Nasdaq Stock Market. Subsequent
to the filing of the original Quarterly Report on Form 10-Q on November 9, 2011, the Company’s management concluded that,
in accordance with Rule 3-09 of Regulation S-X, separate financial statements of KDA were required to be filed with respect the
fiscal year ended December 31, 2010 and separate summarized financial information of KDA was required to be filed with respect
to the quarterly periods in fiscal 2011, including the quarterly period ended September 30, 2011. We continue to strive to improve
our processes to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized
and reported within the applicable time periods.
Changes in Internal Control Over Financial
Reporting
During the quarter ended September 30,
2011, the Company had no changes in its internal control over financial reporting that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial reporting.
PART II. Other Information
Item 1.
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Legal
Proceedings
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Class Actions against the Company
and Certain Directors and Officers
The Company and certain directors and
officers were named as defendants in three putative class actions pending in the Southern District of New York brought by stockholders
of the Company and filed in December 2009 and January 2010. The complaints in these three actions alleged violations of Sections
10 and 20 of the Exchange Act based on the Company’s disclosures of its year-end 2008 and first- and second-quarter 2009
financial statements. The federal court consolidated the three lawsuits and appointed a lead plaintiff under the Private
Securities Litigation Reform Act on March 21, 2011, and lead plaintiff filed a consolidated amended complaint on May 11, 2011.
The Company moved to dismiss the consolidated amended complaint. On July 28, 2011, the Court granted that motion and
dismissed the consolidated amended complaint, giving the plaintiff until August 22, 2011 to file any further amended complaint. Lead
plaintiff filed a second amended consolidated class action complaint on August 22, 2011, which defendants moved to dismiss. The
Court dismissed that complaint with prejudice on October 7, 2011. Lead plaintiff will have thirty days to appeal the dismissal
once final judgment is entered.
SEC Investigation
On January 11, 2010, the staff of the
SEC’s Division of Enforcement informed the Company that it was conducting an informal inquiry. The focus of the inquiry concerns
the valuation methodology and procedures used by the Company to value its investments. On April 30, 2010, the SEC Staff advised
the Company that a formal order of private investigation had been issued and that the informal inquiry was now a formal investigation.
A subpoena has been issued to the Company in connection with the formal investigation. The subpoena requests that the Company produce
documents that primarily relate to the valuation methodology and procedures used by the Company to value its investments. Since
January 2010, the Company has been providing documents in response to the informal inquiry and the subpoena, and the SEC Staff
has taken testimony from Company representatives. The Company is cooperating fully with the SEC Staff’s investigation. The
Company cannot predict the outcome of, or the time frame for, the conclusion of this investigation.
Except as set forth above, neither
the Company, nor any of its subsidiaries, is currently a party to any material legal proceedings, other than routine litigation
and administrative proceedings arising in the ordinary course of business. Such proceedings are not expected to have a material
adverse effect on the business, financial condition, or results of the Company’s operations.
Investing in our common stock involves
a high degree of risk. Our Annual Report on Form 10-K for the year ended December 31, 2010 contains important risk factors
that could cause our actual results to differ materially from our historical experience or our present expectations and projections.
If any such risks (or any risks we face) occur, our business, financial condition and results of our operations could be materially
adversely affected. In such case, the net asset value and trading price of our common stock could decline, and you may
lose all or part of your investment. Other than described below, there have been no material changes from the risk factors previously
disclosed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,
2010, which should be read together with the other risk factors and information disclosed elsewhere in this Quarterly Report on
Form 10-Q/A and our other reports filed with the SEC.
The following disclosure replaces and
supplements the risk factors titled “We may be exposed to additional risks associated with leverage” and “The
debt we incur could increase the risk of investing in our Company and may contain various covenants that limit our discretion in
operating our business and also include certain financial covenants” included in our Annual Report on Form 10-K for the year
ended December 31, 2010:
We borrow money, which magnifies the potential for
gain or loss on amounts invested and may increase the risk of investing with us.
Borrowings, also known as leverage, magnify
the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities.
We have issued senior securities, and in the future may borrow from, or issue additional senior securities (such as preferred or
convertible securities or the senior debt securities) to, banks and other lenders and investors, including debt guaranteed by the
Small Business Administration (“SBA”). Subject to prevailing market conditions, we intend to grow our portfolio of
assets by raising additional capital, including through the prudent use of leverage available to us. Lenders and holders of such
senior securities have fixed dollar claims on our consolidated assets that are superior to the claims of our common stockholders
or any preferred stockholders. Leverage is generally considered a speculative investment technique. If the value of our consolidated
assets increases, then leveraging would cause the net asset value per share of our common stock to increase more sharply
than it would have had we not incurred leverage. Conversely, if the value of our consolidated assets decreases, leveraging would
cause net asset value to decline more sharply than it otherwise would have had we not incurred leverage. Similarly, any increase
in our consolidated income in excess of consolidated interest payable on our outstanding indebtedness would cause our net income
to increase more than it would had we not incurred leverage, while any decrease in our consolidated income would cause net income
to decline more sharply than it would have had we not incurred leverage. Such a decline could negatively affect our ability to
make common stock dividend payments. There can be no assurance that our leveraging strategy will be successful.
As of September 30, 2011, we had $60 million
in aggregate principal amount of our 8.75% convertible senior notes due 2016 outstanding. We may incur additional indebtedness
in the future, although there can be no assurance that we will be successful in doing so. Our ability to service our debt depends
largely on our financial performance and is subject to prevailing economic conditions and competitive pressures. The amount of
leverage that we employ at any particular time will depend on our management’s and our Board of Directors’ assessment
of market and other factors at the time of any proposed borrowing.
Our convertible senior notes impose, and
additional debt we may incur in the future will likely impose, financial and operating covenants that restrict our business activities,
including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required
to maintain our status as a RIC. A failure to add new debt facilities or issue additional debt securities or other evidences of
indebtedness in lieu of or in addition to existing indebtedness could have a material adverse effect on our business, financial
condition or results of operations.
The following table illustrates the effect
on return to a holder of our common stock of the leverage created by our use of borrowing at the convertible senior notes interest
rate of 8.75% as of September 30, 2011, together with (a) total value of our net assets of $189.7 million as of September
30, 2011, (b) $60 million of principal indebtedness outstanding as of September 30, 2011 and (c) hypothetical annual
returns on our portfolio of minus 15% to plus 15%.
Assumed Return on Portfolio (Net of Expenses)
(1)
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|
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-15
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%
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|
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-10
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%
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|
|
-5
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%
|
|
|
0
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%
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|
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5
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%
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|
|
10
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%
|
|
|
15
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%
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Corresponding Return to Common Stockholders
(2)
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|
|
-18
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%
|
|
|
-13
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%
|
|
|
-8
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%
|
|
|
-3
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%
|
|
|
2
|
%
|
|
|
7
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%
|
|
|
12
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%
|
(1)
|
The assumed portfolio return is required by SEC rules and is not a prediction of, and does not represent, our projected or actual performance. The table also assumes that we will maintain a constant level of leverage. The amount of leverage that we use will vary from time to time. Actual returns may be greater or smaller than those appearing in the table.
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(2)
|
In order to compute the “Corresponding Return to Common Stockholders,” the “Assumed Return on Portfolio” is multiplied by the total value of our assets of $261.7 million at September 30, 2011 to obtain an assumed return to us. From this amount, the interest expense (calculated by multiplying the convertible senior notes interest rate of 8.75% as of September 30, 2011 by the $60 million of principal indebtedness outstanding as of September 30, 2011) is subtracted to determine the return available to stockholders. The return available to stockholders is then divided by the total value of our net assets as of September 30, 2011 to determine the “Corresponding Return to Common Stockholders.”
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Our indebtedness could adversely affect our financial
health and our ability to respond to changes in our business
.
With certain limited exceptions, we are
only allowed to borrow amounts or issue senior securities such that our asset coverage, as defined in the 1940 Act, is at least
200% immediately after such borrowing or issuance. As of September 30, 2011, our asset coverage ratio was 416%. The amount of leverage
that we employ in the future will depend on our management’s and our Board of Directors’ assessment of market and other
factors at the time of any proposed borrowing. There is no assurance that a leveraging strategy will be successful. As a result
of the level of our leverage:
|
●
|
there is a likelihood of greater volatility of net asset value and market price of our common stock than without leverage;
|
|
●
|
our exposure to risk of loss is greater if we incur debt or issue senior securities to finance investments because a decrease in the value of our investments has a greater negative impact on our returns and, therefore, the value of our common stock than if we did not use leverage;
|
|
●
|
the decrease in our asset coverage ratio resulting from increased leverage and the covenants contained in documents governing our indebtedness (which may impose asset coverage or investment portfolio composition requirements that are more stringent than those imposed by the 1940 Act) limit our flexibility in planning for, or reacting to, changes in our business and industry, as a result of which we could be required to liquidate investments at an inopportune time;
|
|
●
|
we are required to dedicate a portion of our cash flow to interest payments, limiting the availability of cash for dividends and other purposes; and
|
|
●
|
our ability to obtain additional financing in the future may be impaired.
|
If we have to sell assets at a loss to
redeem or pay interest on our outstanding indebtedness or for other reasons, our net asset value will be reduced and may not fully
recover. We cannot be sure that our leverage will not have a material adverse effect on us. In addition, we cannot be sure that
additional financing will be available when required or, if available, will be on terms satisfactory to us. Further, even if we
are able to obtain additional financing, we may be required to use some or all of the proceeds thereof to repay our outstanding
indebtedness.
Our stockholders may experience dilution upon the conversion
of our convertible senior notes.
Our 8.75% convertible senior notes due
2016 are convertible into shares of our common stock at any time prior to the end of business on the business day preceding the
maturity date. Upon conversion, we will satisfy our conversion obligation by issuing shares of our common stock to the converting
holder and, under certain limited circumstances, may elect to deliver cash in lieu of shares otherwise deliverable upon conversion
to comply with certain listing standards of The NASDAQ Global Select Market. The current conversion price of the convertible senior
is approximately 118.5255 shares of our common stock per $1,000 principal amount of the convertible senior notes, equivalent to
a conversion price of approximately $8.437 per share of our common stock. Our stockholders will experience dilution in their ownership
percentage of common stock upon our issuance of common stock on any conversion of the convertible senior notes and any dividends
paid on our common stock will also be paid on shares issued on any conversion.
The following disclosure supplements
the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2010:
The fair value of Katonah Debt Advisors may be negatively
affected by the costs associated with preparing any separate financial statements of Katonah Debt Advisors that are required by
Rule 3-09 of Regulation S-X or any separate summarized financial information of KDA that is required by Rules 10-01, 4-08(g) and
1-02(bb) of Regulation S-X, which could adversely affect our business and financial condition, including the financial condition
of Katonah Debt Advisors and our net asset value, as well as the trading price of our common stock.
Because the fair value of Katonah Debt
Advisors is based on the cash flows of Katonah Debt Advisors available for distribution to the Company, the costs associated with
the evaluation of the requirements of Rule 3-09 of Regulation S-X in respect of separate financial statements of Katonah Debt Advisors,
the preparation of any required separate financial statements or separate summarized financial information of Katonah Debt Advisors
in accordance with Rules 3-09, 10-01, 4-08(g) and 1-02(bb) of Regulation S-X, and any additional audit or review work required
to be performed by our independent registered public accountants in respect of any such separate financial statements or separate
summarized financial information may reduce the fair value of Katonah Debt Advisors as reflected on the Company’s financial
statements, which could result in a reduction to our net asset value. Any such reduction in the fair value of Katonah
Debt Advisors could adversely affect our business and financial condition and could result in a decline in the trading price of
our common stock.
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
None.
Item 3.
|
Defaults Upon Senior Securities
|
None.
Item 4.
|
[Removed and Reserved]
|
None.
Item 5.
|
Other Information
|
None.
Exhibit
Number
|
|
Description of Document
|
|
|
|
10.1
|
|
Amended and Restated Non-Employee Director Plan (incorporated by reference to Exhibit 4.1 included in the Registration Statement on form S-8, as filed on July 28, 2011 (File No. 333-175838)).*
|
|
|
|
31.1**
|
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2**
|
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1**
|
|
Certification of Chief Executive Officer Pursuant to 18 U. S. C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2**
|
|
Certification of Chief Financial Officer Pursuant to 18 U. S. C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
*
|
Indicates a management contract or compensatory plan, contract or agreement.
|
**
|
Submitted herewith.
|
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Kohlberg Capital Corporation
|
|
|
Date: March 15, 2012
|
By
|
/s/ Dayl W. Pearson
|
|
|
Dayl W. Pearson
|
|
|
President and Chief Executive Officer
|
|
|
(Principal Executive Officer)
|
|
|
|
Date: March 15, 2012
|
By
|
/s/ Michael I. Wirth
|
|
|
Michael I. Wirth
|
|
|
Chief Financial Officer, Secretary and Treasurer
|
|
|
(Principal Financial and Accounting Officer)
|
* * * * *
Exhibit Index
Exhibit
Number
|
|
Description of Document
|
|
|
|
10.1
|
|
Amended and Restated Non-Employee Director Plan (incorporated by reference to Exhibit 4.1 included in the Registration Statement on Form S-8, as filed on July 28, 2011 (File No. 333-175838)).*
|
|
|
|
31.1**
|
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2**
|
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1**
|
|
Certification of Chief Executive Officer Pursuant to 18 U. S. C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2**
|
|
Certification of Chief Financial Officer Pursuant to 18 U. S. C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
*
|
Indicates a management contract or compensatory plan, contract or agreement.
|
**
|
Submitted herewith.
|
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