Table of Contents
Filed
Pursuant to Rule 424(b)(5)
Registration No. 333-167479
CALCULATION OF REGISTRATION FEE
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Title of each class of securities to be registered
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Amount to be
registered
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Proposed maximum
offering price
per share(1)
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Proposed Maximum
Aggregate Offering
Price(2)
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Amount of
Registration Fee(3)
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Common Shares, no par value
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1,139,128 shares
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$10.48
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$11,938,061.44
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$1,386
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(1)
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Based
upon the average of the high and low prices reported for the Registrant's common shares on the New York Stock Exchange on February 14, 2011.
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(2)
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Estimated
solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended (the
"Securities Act").
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(3)
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Payment
of the registration fee at the time of filing of the registrant's registration statement on Form S-3 filed with the Securities
and Exchange Commission on June 11, 2010 (File No. 333-167479), was deferred pursuant to Rules 456(b) and 457(r) or the Securities Act, and is paid herewith. This
"Calculation of Registration Fee" table shall be deemed to update the "Calculation of Registration Fee" table in such registration statement.
Table of Contents
PROSPECTUS SUPPLEMENT
(To Prospectus dated June 11, 2010)
1,139,128 Shares
KKR Financial Holdings LLC
Common Shares
We are offering 203,878 common shares of KKR Financial Holdings LLC. The selling shareholders identified in this prospectus supplement are
offering an additional 935,250 common shares of KKR Financial Holdings LLC. Sales of the common shares, if any, will be made by means of ordinary
brokers' transactions on the New York Stock Exchange or otherwise at market prices prevailing at the time of sale, at prices related to the prevailing market prices or at negotiated prices.
The
net proceeds that we will receive will be the gross proceeds from our sales less commissions or discounts, if any, paid by us in connection with such sales, and any other costs we
may incur in issuing the common shares. See "Plan of Distribution" in this prospectus supplement for further information. We will not receive any proceeds from the sale of common shares by the selling
shareholders. The net proceeds that the selling shareholders will receive will be the gross proceeds from their sales less commissions or discounts, if any, paid by them in connection with such sales.
Our
common shares are traded on the New York Stock Exchange, or NYSE, under the symbol "KFN." The closing price of our common shares on February 18, 2011 was $10.27 per share.
Ownership
of our shares by any person is generally limited to 9.8% in value or in number of shares, whichever is more restrictive. In addition, our operating agreement contains other
limitations on the ownership and transfer of our shares. However, pursuant to our operating agreement, our board of directors may, under certain circumstances, terminate these limitations on ownership
and transfer of our shares or grant exemptions to certain persons. For additional information on the ownership and transfer restrictions on our shares, see "Description of SharesCertain
Provisions of the Operating AgreementRestrictions on Ownership and Transfer" in the accompanying prospectus.
Investing in our common shares involves risks. See "Risk Factors" beginning on page S-4 of this prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon
the adequacy or accuracy of this prospectus supplement or the accompanying prospectus. Any representation to the contrary is a criminal offense.
The
date of this prospectus supplement is February 22, 2011.
Table of Contents
TABLE OF CONTENTS
Unless
otherwise expressly stated or the context otherwise requires, the terms "we," "our company," "us" and "our" and similar terms refer, as of dates and for periods on and after
May 4, 2007, to KKR Financial Holdings LLC and its subsidiaries and, as of dates and for periods prior to May 4, 2007, to our predecessor, KKR Financial Corp., and its
subsidiaries; "Manager" means KKR Financial Advisors LLC; "KKR" means Kohlberg Kravis Roberts & Co. L.P. and its affiliated companies (excluding portfolio companies that
are minority or majority owned or managed by funds associated with KKR); "management agreement" means the amended and restated management agreement (as heretofore amended) between KKR Financial
Holdings LLC and the Manager; "operating agreement" means the amended and restated operating agreement of KKR Financial Holdings LLC (as heretofore amended); "common shares" and
"preferred shares" mean common shares and preferred shares, respectively, representing limited liability company interests in KKR Financial Holdings LLC; references to "our shares" (and similar
references) mean common shares and preferred shares of KKR Financial Holdings LLC; and references to "$" and "dollars" mean United States dollars.
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Table of Contents
ABOUT THIS PROSPECTUS SUPPLEMENT
This document consists of two parts. The first part is this prospectus supplement, which describes the specific terms of this offering.
The second part is the accompanying prospectus, which describes more general information, some of which may not apply to this offering. You should read both this prospectus supplement and the
accompanying prospectus, together with additional information described under the headings "Where You Can Find More Information" and "Incorporation by Reference" below.
If
the description of the offering varies between this prospectus supplement and the accompanying prospectus, you should rely on the information in this prospectus supplement.
Any
statement made in this prospectus supplement or in a document incorporated or deemed to be incorporated by reference in this prospectus supplement will be deemed to be modified or
superseded for purposes of this prospectus supplement to the extent that a statement contained in this prospectus supplement or in any other subsequently filed document that is also incorporated or
deemed to be
incorporated by reference in this prospectus supplement modifies or supersedes that statement. Any statement so modified or superseded will not be deemed, except as so modified or superseded, to
constitute a part of this prospectus supplement. See "Incorporation by Reference."
We have not authorized anyone to provide any information or to make any representations other than those contained or incorporated by reference in this prospectus
supplement, the accompanying prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other
information that others may give you. This prospectus supplement, the accompanying prospectus and any such free writing prospectus is an offer to sell only the common shares offered hereby, but only
under circumstances and in jurisdictions where it is lawful to do so. You should not assume that the information in this prospectus supplement, the accompanying prospectus, any related free writing
prospectus or any document incorporated or deemed incorporated herein by reference is accurate as of any date other than the date of this prospectus supplement. Also, you should not assume that there
has been no change in the affairs of our company since the date of this prospectus supplement. Our business, financial condition, results of operations and prospects may have changed since that
date.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission (the "SEC") a registration statement on Form S-3 under the
Securities Act of 1933, as amended (the "Securities Act"), of which this prospectus supplement is a part, with respect to the securities to be sold pursuant to this prospectus supplement. This
prospectus supplement does not contain all of the information set forth in the registration statement and exhibits to the registration statement. For further information with respect to us and the
securities to be sold pursuant to this prospectus supplement, reference is made to the registration statement, including the exhibits to the registration statement. Statements contained in the
accompanying prospectus, this prospectus supplement and in the documents incorporated and deemed to be incorporated by reference herein or in any free writing prospectus as to the contents of any
contract or other document do not purport to be complete and, where that contract or document is an exhibit to the registration statement or an exhibit to a document incorporated or deemed to be
incorporated by reference in the registration statement, each statement is qualified in all respects by reference to the exhibit to which the reference relates. Copies of the registration statement,
including the exhibits to the registration statement, and other documents we file with the SEC may be examined without charge at the public reference room of the SEC, 100 F Street, N.E.,
Washington, D.C. 20549. Information about the operation of the public reference room may be obtained by calling the SEC at 1-800-SEC-0300. Copies of the
registration statement, including the exhibits, and the other documents we file with the SEC can be obtained from the public reference room of the SEC upon payment of
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prescribed
fees. Our SEC filings, including our registration statement, are also available to you for free on the SEC's website at
http://www.sec.gov.
You may also inspect information that we file with the NYSE at the offices of the NYSE at 20 Broad Street, New York, New York 10005. We are subject to
the information and reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and file periodic reports, proxy statements and other information with the SEC.
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Table of Contents
SUMMARY
This summary highlights selected information contained elsewhere or incorporated or deemed incorporated by
reference in this prospectus supplement and the accompanying prospectus and does not contain all of the information you should consider when making your investment decision. We urge you to carefully
read all of this prospectus supplement, the accompanying prospectus and the documents incorporated or deemed incorporated by reference, including our consolidated financial statements and accompanying
notes, to gain a fuller understanding of our business and the terms of our shares, as well as some of the other considerations that may be important to you, before making your investment decision. You
should pay special attention to the "Risk Factors" section of this prospectus supplement and the documents incorporated or deemed incorporated by reference to determine whether an investment in our
common shares is appropriate for you.
KKR Financial Holdings LLC
We are a specialty finance company with expertise in a range of asset classes. Our core business strategy is to leverage the
proprietary resources of our manager with the objective of generating both current income and capital appreciation. We primarily invest in financial assets such as below investment grade corporate
debt, marketable equity securities and private equity. Additionally, we have made and may make additional investments in other asset classes including natural resources and real estate. Below
investment grade corporate debt includes senior secured and unsecured loans, mezzanine loans, high yield bonds, and distressed and stressed debt securities.
The
corporate loans we invest in are primarily referred to as syndicated bank loans, or leveraged loans, and are purchased via assignment or participation in either the primary or
secondary market. The majority of our corporate debt investments are held in collateralized loan obligation ("CLO") transactions that are structured as on-balance sheet securitizations and
are used as long term financing for our corporate debt investments. The senior secured notes issued by the CLO transactions are primarily owned by unaffiliated third party investors and we own the
majority of the subordinated notes in the CLO transactions. We execute our core business strategy through majority-owned subsidiaries, including CLOs.
We
are externally managed and advised by KKR Financial Advisors LLC, our Manager and an affiliate of KKR, pursuant to the management agreement between us and our Manager. Our
Manager was formed in July 2004. All of our executive officers are employees or members of KKR or one or more of its affiliates. The executive offices of our Manager are located at 555 California
Street, 50th Floor, San Francisco, California 94104 and the telephone number of our Manager's executive offices is (415) 315-3620.
S-1
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The Offering
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Issuer
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KKR Financial Holdings LLC
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Common Shares Offered by Us
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203,878
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Common Shares Offered by the Selling Shareholders
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935,250
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Common Shares to Be Outstanding After this Offering
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After giving effect to the sale of the common shares offered by us hereunder and the application of the net proceeds as described under "Use of Proceeds," we expect that there will be approximately
178,133,525 of our common shares outstanding.
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Restrictions on Ownership
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Our operating agreement contains restrictions on the number of our shares that a person may own that are intended to assist us in maintaining the qualification of any REIT subsidiary of ours as a real
estate investment trust, or "REIT," under the Internal Revenue Code of 1986, as amended, or the "Code." Among other things, the operating agreement provides that, subject to exceptions, no person may beneficially or constructively own shares in
excess of 9.8% in value or number, whichever is more restrictive, of our outstanding shares, excluding shares not treated as outstanding for U.S. federal income tax purposes. In addition, the operating agreement, subject to exceptions, prohibits any
person from beneficially owning our shares to the extent that such ownership of shares would result in any REIT subsidiary of ours being "closely-held" under Section 856(h) of the Code (without regard to whether the ownership interest is held
during the last half of a taxable year) or would otherwise cause any REIT subsidiary of ours to fail to qualify as a REIT. For more information about these restrictions, see "Description of SharesCertain Provisions of the Operating
AgreementRestrictions on Ownership and Transfer" in the accompanying prospectus.
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Trading
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Our common shares are listed on the NYSE under the symbol "KFN."
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Material U.S. Federal Income Tax Considerations
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You should read carefully the section "Material U.S. Federal Income Tax Considerations" in the accompanying prospectus, the section "Additional U.S. Federal Income Tax Considerations" in this
prospectus supplement, as well as the tax risk factors that are incorporated or deemed incorporated by reference herein, for certain U.S. federal income tax considerations relevant to our common shares.
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S-2
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Use of Proceeds
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We expect to utilize most of the net proceeds we receive from any sale of common shares offered by this prospectus supplement to fund the purchase of common shares from certain of our executive officers
and for general corporate purposes. We will not receive any proceeds from the sale of common shares by the selling shareholders.
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Risk Factors
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You should read carefully the "Risk Factors" beginning on page S-4 of this prospectus supplement, as well as the risk factors that are described in the documents incorporated or deemed
incorporated by reference in this prospectus supplement, for certain considerations relevant to an investment in our common shares.
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The
number of common shares to be outstanding immediately after this offering is based on 178,123,525 common shares outstanding as of February 18, 2011 and
excludes:
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an aggregate of approximately 21,890,863 common shares issuable upon conversion of our outstanding 7.50% Convertible
Senior Notes due 2017 at an applicable conversion price of $7.88 per common share, which includes an adjustment to the conversion price as a result of the Company's distributions declared to its
common shareholders through the date hereof;
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an aggregate of approximately 5,825,064 common shares issuable upon conversion of our outstanding 7.00% Convertible Senior
Notes due 2012 at an applicable conversion price of $31.00 per common share;
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1,932,279 common shares issuable upon the exercise of options outstanding as of December 31, 2010, having a
weighted-average exercise price of $20.00 per share;
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1,739,432 common shares authorized, but not yet issued under our 2007 Incentive Share Plan; and
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301,267 common shares reserved, but not yet issued under our Non-Employee Directors' Deferred Compensation and
Share Award Plan.
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RISK FACTORS
Investing in our common shares involves risks. You should carefully review the risks attached as
Exhibit 99.3 to our Current Report on Form 8-K filed with the SEC on February 22, 2011, which is incorporated by reference in this prospectus supplement, or under the
caption "Risk Factors" or any similar caption in the documents that we subsequently file with the SEC that are deemed to be incorporated by reference in this prospectus supplement and the accompanying
prospectus, and in any free writing prospectus that you may be provided in connection with the offering of common shares pursuant to this prospectus supplement and the accompanying prospectus. You
should also carefully review the other risks and uncertainties discussed in this prospectus supplement and the accompanying prospectus, the documents incorporated and deemed to be incorporated by
reference in this prospectus supplement and in any free writing prospectus. The risks and uncertainties discussed in the documents referred to above, as well as other matters discussed in this
prospectus supplement and in those documents, could materially and adversely affect our business, financial condition, liquidity and results of operations and the market price of our common shares.
Moreover, the risks and uncertainties discussed in the foregoing documents are not the only risks and uncertainties that we face, and our business, financial condition, liquidity and results of
operations and the market price of our common shares could be materially adversely affected by other matters that are not known to us or that we currently do not consider to be material risks to our
business.
This prospectus supplement contains a summary of some of the terms of our operating agreement and the Management Agreement. Those summaries are not complete and
are subject to, and qualified in their entirety by reference to, all of the provisions of our operating agreement and the Management Agreement, copies of which have been included as exhibits to the
quarterly report on Form 10-Q that we filed with the SEC on August 6, 2009 and are available on the SEC website at www.sec.gov
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USE OF PROCEEDS
We expect to use the net proceeds we receive from any sale of common shares offered by this prospectus supplement to fund the purchase
of common shares from certain of our executive officers and for general corporate purposes. We will not receive any proceeds from the sale of common shares by the selling shareholders.
S-4
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SELLING SHAREHOLDERS
The following table sets forth, for each selling shareholder, the name, the number of common shares owned as of February 1,
2011, the number of common shares being offered pursuant to this prospectus supplement and the number of common shares that will be beneficially owned immediately after the offering contemplated by
this prospectus supplement.
A
person is a "beneficial owner" of a security if that person has or shares voting or investment power over the security or if he has the right to acquire beneficial ownership within
60 days as of February 1, 2011. Unless otherwise noted, to our knowledge, each of the selling shareholders has sole voting and investment power over the shares listed. Percentage
computations are based on 178,123,525 of our common shares outstanding as of February 1, 2011.
KKR
Financial Advisors LLC is our Manager. All of the other selling shareholders are currently or have been employed by our Manager, KKR or a KKR affiliate within the past three
years. None of the selling shareholders is currently or has been an executive officer of us, our Manager, KKR or any affiliate of ours during the past three years.
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Name of Selling Shareholder
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Common Shares
Beneficially Owned
Prior to this Offering
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Common Shares Being
Offered
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Percentage of
Common Shares
Beneficially Owned
Prior to this Offering
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Percentage of
Common Shares
Beneficially Owned
After this Offering
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KKR Financial Advisors LLC:
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418,308
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418,308
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*
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All other Selling Shareholders as a group:(1)
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939,795
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516,942
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*
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*
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Less
than 1%.
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(1)
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Shares
shown in the table include shares owned by the selling shareholders other than KKR Financial Advisors LLC. Such selling shareholders
beneficially own, in the aggregate, less than 1.0% of our common shares as of February 1, 2011.
S-5
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PRICE RANGE OF COMMON SHARES AND DISTRIBUTIONS
Our common shares have been listed on the NYSE under the symbol "KFN" since the time of the conversion transaction on May 4,
2007. The common stock of KKR Financial Corp., our predecessor, was traded on the NYSE from June 24, 2005 until the effectiveness of the conversion transaction. As of February 18, 2011,
we had 178,123,525 common shares outstanding. The following table sets forth, for the periods indicated, the high and low sales prices per share of the common shares as reported on the NYSE.
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Share Prices
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High
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Low
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Year Ending December 31, 2011
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First Quarter (through February 18, 2011)
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$
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10.60
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$
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9.25
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Year Ended December 31, 2010
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Fourth Quarter ended December 31, 2010
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$
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9.50
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$
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8.50
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Third Quarter ended September 30, 2010
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8.95
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7.02
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Second Quarter ended June 30, 2010
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9.49
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7.01
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First Quarter ended March 31, 2010
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8.50
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5.55
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Year Ended December 31, 2009
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Fourth Quarter ended December 31, 2009
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$
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5.95
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$
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4.10
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Third Quarter ended September 30, 2009
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5.25
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0.75
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Second Quarter ended June 30, 2009
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2.35
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0.78
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First Quarter ended March 31, 2009
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2.64
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0.40
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The
following table sets forth the cash distributions declared per common share for fiscal years 2009, 2010 and the first fiscal quarter of 2011 (through February 18, 2011). We
did not declare any cash distributions during the first three quarters of fiscal year 2009.
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Record Date
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Payment Date
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Cash Distribution Declared Per
Common Share
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December 7, 2009
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December 21, 2009
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$0.05
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February 18, 2010
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March 4, 2010
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$0.07
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May 14, 2010
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May 28, 2010
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$0.10
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August 18, 2010
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September 1, 2010
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$0.12
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November 17, 2010
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December 1, 2010
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$0.14
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February 18, 2011
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March 4, 2011
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$0.15
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DISTRIBUTION POLICY
We resumed paying quarterly dividends beginning in the fourth quarter of 2009 and we currently intend to continue paying cash
distributions to holders of our common shares on a quarterly basis. For all quarters during 2010, we have declared cumulative cash distributions on our common shares of $0.51 per share. However, we
cannot assure you that similar, or any, distributions will be made to holders of our common shares during future periods. Our ability to pay quarterly distributions will be subject to, among other
things, general business conditions, our financial results,
the impact of paying distributions on our credit ratings, and legal and contractual restrictions on the payment of distributions.
Our
board of directors has full authority and sole discretion to determine whether or not a distribution will be declared and paid, and the amount and timing of any distribution that may
be paid, to holders of our common shares and (unless otherwise provided by our board of directors if and when it establishes the terms of any new class or series of our shares) any other class or
series of shares we may issue in the future. Our board of directors may, in its sole discretion, determine to reduce or eliminate distributions on our common shares and (unless otherwise so provided
by our board of
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directors)
any other class or series of shares we may issue in the future, which may have a material adverse effect on the market price of our common shares and any such other shares. As a result,
distributions to holders of our shares will depend on a number of factors, including:
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our financial condition;
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general business conditions;
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our results of operations;
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our available capital and leverage;
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our debt service requirements;
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cash distributions to us from our subsidiaries;
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our operating expenses;
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our taxable income;
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our liquidity requirements;
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our distribution yield relative to our peers;
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restrictions under Delaware law;
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any contractual, legal and regulatory restrictions on the payment of distributions by us to holders of our shares or by
our subsidiaries to us; and
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other factors our board of directors in its discretion deems relevant.
Our
credit facility includes covenants that could restrict our ability to make distributions on our common shares and any other class or series of shares we may issue in the future,
including a prohibition on distributions on our shares if an event of default, or certain events that with notice or passage of time or both would constitute an event of default, under the applicable
credit agreement occur and a requirement that we maintain a specified minimum level of consolidated tangible net worth.
OWNERSHIP LIMITATIONS
Our operating agreement contains restrictions on the number of our shares that a person may own that are intended to assist us in
maintaining the qualification of any REIT subsidiary of ours as a REIT under the Code. Among other things, the operating agreement provides that, subject to exceptions, no person may beneficially or
constructively own shares in excess of 9.8% in value or number, whichever is more restrictive, of our outstanding shares, excluding shares not treated as outstanding for U.S. federal income tax
purposes. In addition, the operating agreement, subject to exceptions, prohibits any person from beneficially owning our shares to the extent that such ownership of shares would result in any REIT
subsidiary of ours being "closely held" under Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year) or would otherwise
cause any REIT subsidiary of ours to fail to qualify as a REIT. The operating agreement generally provides that any attempted transfer which, if effective, would result in a violation of the foregoing
restrictions will cause the number of shares causing the violation (rounded up to the nearest whole share) to be automatically transferred to a charitable trust. The operating agreement further
generally provides that, if the transfer of shares to a charitable trust would not be effective for any reason to prevent a violation of the foregoing restrictions, then, to the fullest extent
permitted by law, the transfer of that number of shares that would otherwise cause that violation shall be void ab initio. For further information about these and other related provisions of our
operating agreement, see "Description of SharesCertain Provisions of the Operating AgreementRestrictions on Ownership and Transfer" in the accompanying prospectus.
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ADDITIONAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
This summary supplements the discussion contained under the caption "Material U.S. Federal Income Tax Considerations" in the
accompanying prospectus and should be read in conjunction therewith.
Qualified Dividends and Certain Capital Gains
Congress recently extended the preferential treatment of qualified dividend income and capital gains through December 31, 2012.
See "Material U.S. Federal Income Tax ConsiderationsNature of Our Business ActivitiesQualified Dividends and Certain Capital Gains" in the accompanying prospectus. Tax
legislation enacted in 2003, 2006 and 2010 reduced the U.S. federal income tax rates on (i) "qualified dividend income" received by taxpayers taxed at individual rates from certain domestic and
foreign corporations and (ii) capital gains received by taxpayers taxed at individual rates. Subject to the discussions under "Material U.S. Federal Income Tax
ConsiderationsTaxation of Holders of Our SharesDisposition of Our
Shares" and "Material U.S. Federal Income Tax ConsiderationsMaterial U.S. Federal Income Tax Considerations Relating to Investments in REITsTaxation of Holders of REIT
SharesTaxation of Non-U.S. Holders of REIT Shares" in the accompanying prospectus, the reduced rates applicable to capital gains generally will also apply to capital gains
recognized by holders of shares who sell the shares that they have held for more than one year. The reduced rates, which do not apply to short-term capital gains, generally apply to
long-term capital gains from sales or exchanges recognized during taxable years beginning on or prior to December 31, 2012.
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CERTAIN ERISA CONSIDERATIONS
Each fiduciary of a pension, profit-sharing or other employee benefit plan subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA") (each, an "ERISA Plan"), should consider the fiduciary standards of ERISA in the context of the ERISA Plan's particular circumstances before authorizing an investment in our
common shares. Accordingly, among other factors, the fiduciary should consider whether the investment would satisfy the prudence and diversification requirements of ERISA and would be consistent with
its fiduciary responsibilities, and the documents and instruments governing the ERISA Plan.
In
addition, we and certain of our subsidiaries and affiliates may be each considered a party in interest within the meaning of ERISA, or a disqualified person within the meaning of
Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), with respect to many ERISA Plans, as well as other arrangements subject to Section 4975 of the Code, including
individual retirement accounts and Keogh plans (such arrangements and together with ERISA Plans referred to herein as "Plans"). Prohibited transactions within the meaning of ERISA or the Code would
likely arise, for example, if our common shares are acquired by or with the assets of a Plan with respect to which we or any of our subsidiaries or affiliates is a party in interest, unless the
transaction qualifies for an exemption from the prohibited transaction rules of ERISA and the Code. A violation of these prohibited transaction rules could result in an excise tax or other liabilities
under ERISA and/or Section 4975 of the Code for such persons, unless exemptive relief is available under an applicable statutory or administrative exemption.
Exemptive
relief from the prohibited transaction rules under ERISA and the Code may be available for direct or indirect prohibited transactions resulting from the purchase, holding or
disposition of our common shares. Those exemptions include Prohibited Transaction Class Exemption ("PTCE") 96-23 (for certain transactions determined by in-house asset
managers), PTCE 95-60 (for certain transactions involving insurance company general accounts),
PTCE 91-38 (for certain transactions involving bank collective investment funds), PTCE 90-1 (for certain transactions involving insurance company separate accounts), and PTCE
84-14 (for certain transactions determined by independent qualified professional asset managers). In addition, the exemption under Section 408(b)(17) of ERISA and
Section 4975(d)(20) of the Code provides exemptive relief for certain arm's-length transactions with a person (other than a fiduciary or an affiliate of a fiduciary that has or exercises
discretionary authority or control or renders investment advice with respect to the assets involved in the transaction) that is a party in interest solely by reason of providing services to Plans or
being an affiliate of such a service provider (the "Service Provider Exemption"). However, there can be no assurance that any of these class exemptions, the Service Provider Exemption or any other
exemption will be available with respect to any particular transaction involving our common shares.
Governmental
plans, certain church plans and non-United States plans (each, a "Non-ERISA Plan"), while not subject to the fiduciary responsibility or prohibited
transaction provisions of Title I of ERISA or Section 4975 of the Code, may nevertheless be subject to other federal state, local, non-U.S. or other laws or regulations that are
substantially similar to the foregoing provisions of ERISA or the Code (collectively, "Similar Laws"). Fiduciaries of any such plans should consult with their counsel before purchasing any common
shares.
Due
to the foregoing requirements, our common shares may not be purchased or held by any Plan, any entity whose underlying assets include plan assets by reason of any Plan's investment
in the entity (a "Plan Asset Entity"), or any person investing plan assets of any Plan or Non-ERISA Plan, unless such purchase and holding will not constitute a non-exempt
prohibited transaction under ERISA and Section 4975 of the Code or a similar violation of any applicable Similar Law.
Each
purchaser and subsequent transferee, including any fiduciary purchasing or holding our common shares with the assets of any Plan, Plan Asset Entity or Non-ERISA Plan,
will be deemed to
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have
represented by its purchase or holding of our common shares that either (a) it is not a Plan, a Plan Asset Entity or a Non-ERISA Plan and is not purchasing or holding such
common shares on behalf of or with the assets of any Plan, Plan Asset Entity or Non-ERISA Plan or (b) its purchase and holding will not constitute a non-exempt
prohibited transaction under ERISA or Section 4975 of the Code or a similar violation of any applicable Similar Law.
The
foregoing discussion is general in nature and is not intended to be all-inclusive. Due to the complexity of these rules and the penalties that may be imposed upon persons
involved in non-exempt prohibited transactions, it is particularly important that fiduciaries or other persons considering purchasing our common shares on behalf of or with the assets of
any Plan, Plan Asset Entity or Non-ERISA Plan consult with their counsel regarding the potential
applicability of ERISA, Section 4975 of the Code or any Similar Laws to such an investment and whether an exemption would be available for the purchase and holding of our common shares.
Purchasers
of our common shares have exclusive responsibility for ensuring that their purchase and holding of our common shares do not violate the prohibited transaction rules of ERISA
or Section 4975 of the Code or any applicable Similar Law, as described above.
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PLAN OF DISTRIBUTION
We have not entered into any written or oral agreement or understanding, directly or indirectly, with any person to distribute the
common shares offered in this prospectus supplement. Each selling shareholder has informed us that it does not have any written or oral agreement or understanding, directly or indirectly, with any
person to distribute the common shares offered in this prospectus supplement.
We,
the selling shareholders and their successors, which includes their pledgees, donees, partnership distributees and other transferees receiving the offered common shares in
non-sale transfers, may, from time to time, sell any or all of the offered common shares on the New York Stock Exchange or any other stock exchange, market or trading facility on which our
common shares are traded or in private transactions. These sales may be at fixed or negotiated prices. We and the selling shareholders may use any one or more of the following methods when selling
common shares:
-
-
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers,
-
-
block trades in which the broker-dealer will attempt to sell the common shares as agent but may position and resell a
portion of the block as principal to facilitate the transaction,
-
-
purchases by a broker-dealer as principal and resale by the broker-dealer for its account,
-
-
broker-dealers may agree with us or the selling shareholder to sell a specified number of such common shares at a
stipulated price per share,
-
-
a combination of any such methods of sale, or
-
-
any other method permitted pursuant to applicable law.
Broker-dealers
engaged by us or the selling shareholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the us or
the selling shareholders (or, if any broker-dealer acts as agent for the purchaser of common shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this
prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction a markup or
markdown in compliance with FINRA IM-2440-1.
The
selling shareholders and any broker-dealers or agents that are involved in selling the common shares may be deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the common shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. In no event shall any broker-dealer receive fees, commissions and markups which, in the aggregate, would exceed eight percent (8%).
Because
the selling shareholders may, individually, be deemed to be an "underwriter" within the meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act including Rule 172 thereunder. In addition, any securities covered by this prospectus that qualify for sale pursuant to Rule 144 under the Securities
Act may be sold under Rule 144 rather than under this prospectus.
The
common shares offered by this prospectus supplement will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In
addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
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Under
applicable rules and regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), any person, including us, engaged in the distribution of the common
shares offered by this prospectus supplement may not simultaneously engage in market making activities with respect to the common shares for the applicable restricted period, as defined in
Regulation M, prior to the commencement of the distribution. In addition, we and the selling shareholders will be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of our common shares by us, the selling shareholders or any other person. We will make copies
of this prospectus available to the selling shareholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by
compliance with Rule 172 under the Securities Act).
We
are required to pay certain fees and expenses incurred by us incident to the registration of the common shares offered hereby. The estimated offering expenses payable by us are
approximately $200,000, which includes legal, accounting and printing costs and various other fees associated with registering the common shares.
LEGAL MATTERS
Certain legal matters may be passed upon for us by Simpson Thacher & Bartlett LLP, Palo Alto, California. Richards,
Layton & Finger, P.A., our special Delaware counsel, will pass upon the validity under Delaware law of our common shares. Certain partners of Simpson Thacher & Bartlett LLP,
members of their families and related persons have an interest representing less than 1% of our common shares.
EXPERTS
The consolidated financial statements incorporated in this prospectus supplement by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2009 and the effectiveness of the Company's internal control over financial reporting have been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in their reports, which are incorporated herein by reference. Such financial statements have been so incorporated in
reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.
INCORPORATION BY REFERENCE
This prospectus supplement "incorporates by reference" certain information we file with the SEC under the Exchange Act. This means that
we are disclosing important information to you by referring you to these filings. The information we incorporate by reference is considered a part of this prospectus supplement, and subsequent
information that we file with the SEC will automatically update and supersede this information.
Any
statement contained in a document incorporated or considered to be incorporated by reference in this prospectus supplement shall be considered to be modified or superseded for
purposes of this prospectus supplement to the extent a statement contained in this prospectus supplement or in any other subsequently filed document that is or is deemed to be incorporated by
reference in this prospectus supplement modifies or supersedes such statement.
We
incorporate by reference the following documents that we have filed with the SEC:
-
-
our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 filed with the SEC on
March 1, 2010, including portions of our Proxy Statement for our 2010 annual meeting of holders of our common shares held on April 29, 2010 filed with the SEC on March 23, 2010 to
the extent specifically incorporated by reference into such Form 10-K;
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-
-
our Quarterly Reports on Form 10-Q for the three months ended March 31, 2010, June 30,
2010 and September 30, 2010 filed with the SEC on April 29, 2010, August 4, 2010 and November 4, 2010, respectively;
-
-
our Current Reports on Form 8-K filed with the SEC on January 11, 2010, January 12, 2010,
January 15, 2010, February 4, 2010, March 18, 2010, April 29, 2010, May 3, 2010, May 4, 2010, May 5, 2010, May 6, 2010, June 2, 2010,
August 4, 2010, November 4, 2010, December 10, 2010, February 4, 2011 and February 22, 2011; and
-
-
the description of our common shares included in our Registration Statement on Form 8-A filed with the
SEC on April 30, 2007, and any amendment or report filed thereafter for the purpose of updating that description.
We
are not incorporating by reference any information furnished under Item 2.02 or Item 7.01 of Form 8-K or any exhibit attached thereto into any filing
under the Securities Act or the Exchange Act or into this prospectus.
In
addition, we incorporate by reference any future filings we make with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act from the date of this prospectus
supplement until we have sold all of the common shares to which this prospectus supplement relates or the offering is otherwise terminated. We will provide free copies of any of those documents, if
you write or telephone us at:
KKR
Financial Holdings LLC
555 California Street, 50
th
Floor
San Francisco, California 94104
Attention: Investor Relations
(415) 315-3620
You
also may review a copy of the prospectus and registration statement and its exhibits at the SEC's Public Reference Room in Washington, D.C., as well as through the SEC's internet
website (See "Where You Can Find More Information" above).
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KKR Financial Holdings LLC
Common Shares
Preferred Shares
Depositary Shares
Warrants to Purchase Common Shares, Preferred Shares, Depositary Shares
or Debt Securities
Subscription Rights to Purchase Common Shares, Preferred Shares, Depositary Shares
or Debt Securities
Debt Securities
Guarantees of Debt Securities
Share Purchase Contracts
Share Purchase Units
We and any selling securityholders may offer from time to time:
-
-
our common shares;
-
-
our preferred shares;
-
-
depositary shares representing fractional interests in our preferred shares;
-
-
warrants to purchase our common shares, preferred shares, depositary shares or debt securities;
-
-
subscription rights to purchase our common shares, preferred shares, depository shares or debt securities;
-
-
our debt securities, which may or may not be guaranteed by one or more of the subsidiaries identified in this prospectus;
-
-
our share purchase contracts; and
-
-
our share purchase units.
We
will provide specific terms of any offering of these securities in a prospectus supplement or a free writing prospectus. The securities may be offered separately or together or in
units in any combination and as separate series. You should read this prospectus and any applicable prospectus supplement and free writing prospectus we may provide to you, as well as the documents
incorporated and deemed to be incorporated by reference in this prospectus, carefully before you invest.
Ownership
of our shares by any person is generally limited to 9.8% in value or in number of shares, whichever is more restrictive. In addition, our operating agreement contains other
limitations on the ownership and transfer of our shares. However, pursuant to our operating agreement, our board of directors may, under certain circumstances, terminate these limitations on ownership
and transfer of our shares or grant exemptions to certain persons. For additional information on the ownership and transfer restrictions on our shares, see "Description of SharesCertain
Provisions of the Operating AgreementRestrictions on Ownership and Transfer."
Our
common shares are traded on the New York Stock Exchange, or "NYSE," under the symbol "KFN." On June 10, 2010, the last reported sale price of our common shares on the NYSE was
$8.06 per share.
Investing in our securities involves risks. See "Risk Factors" on page 5 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
We
or any selling securityholders may sell these securities on a continuous or delayed basis directly, through agents, dealers or underwriters as designated from time to time, or through
a combination of these methods. We and any selling securityholders reserve the sole right to accept, and we and any selling securityholders and any agents, dealers and underwriters reserve the right
to reject, in whole or in part, any proposed purchase of securities. If any agents, dealers or underwriters are involved in the sale of any securities, the applicable prospectus supplement or a free
writing prospectus will set forth any applicable commissions or discounts payable to them. The names of the selling securityholders, if any, will be set forth in the applicable prospectus supplement
or free writing prospectus. Our net proceeds from the sale of the securities also will be set forth in the applicable prospectus supplement or free writing prospectus. We will not receive any proceeds
from the sale of the securities to which this prospectus relates that are offered by any selling securityholders.
The date of this prospectus is June 11, 2010
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This
prospectus is part of an automatic shelf registration statement that we filed with the Securities and Exchange Commission, or the "SEC," as a "well-known seasoned
issuer" as defined in Rule 405 under the Securities Act of 1933, as amended, or the "Securities Act," utilizing a "shelf" registration process. Under this shelf registration process, we or any
selling securityholders may sell any of the securities described in this prospectus in one or more offerings. Each time we or any selling securityholders sell securities, we will provide a supplement
to this prospectus that contains specific information about the terms of the offering and of the securities being offered and information regarding the selling securityholders, if any. The prospectus
supplement or free writing prospectus may also add, update or change information contained in this prospectus. You should read both this prospectus and any applicable prospectus supplement and free
writing prospectus together with information incorporated and deemed to be incorporated by reference herein as described under "Incorporation by Reference" and the additional information described
under "Where You Can Find More Information" before making an investment in our securities.
You should rely only on the information contained or incorporated or deemed to be incorporated by reference in this prospectus and in any prospectus supplement or
free writing prospectus that we may provide to you in connection with an offering of our securities described in this prospectus. Neither we nor any selling securityholders have authorized anyone to
provide you with different or additional information. If anyone provides you with different or additional information, you should not rely on it. This prospectus does not constitute, and any
prospectus supplement or free writing prospectus that we may provide to you in connection with an offering of our securities described in this prospectus will not constitute, an offer to sell, or a
solicitation of an offer to purchase, the offered securities in any jurisdiction to or from any person to whom or from whom it is unlawful to make such offer or solicitation in such jurisdiction. You
should not assume that the information contained in this prospectus, in any prospectus supplement or free writing prospectus that we may provide to you in connection with an offering of our securities
described in this prospectus, or in any document incorporated or deemed to be incorporated by reference in this prospectus or any prospectus supplement is accurate as of any date other than the date
of that document. Neither the delivery of this prospectus nor any prospectus supplement or free writing prospectus that we may provide to you in connection with an offering of our securities described
in this prospectus nor any distribution of securities pursuant to this prospectus or any such prospectus supplement or free writing prospectus shall, under any circumstances, create any implication
that there has been no change in the information set forth in this prospectus, any such prospectus supplement or free writing prospectus or
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any document incorporated or deemed to be incorporated by reference in this prospectus or any prospectus supplement since the date thereof.
For
investors outside the United States: neither we nor any selling securityholders have done anything that would permit this offering or possession or distribution of this prospectus or
any prospectus supplement or free writing prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to
observe any restrictions relating to an offering of our securities described in this prospectus and the distribution of this prospectus and any prospectus supplement or free writing prospectus.
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KKR FINANCIAL HOLDINGS LLC
This prospectus contains certain information about KKR Financial Holdings LLC and our common shares,
preferred shares, depositary shares, warrants, subscription rights, debt securities, share purchase contracts and share purchase units and about the guarantees of our debt securities by certain of our
subsidiaries. This prospectus is not complete and does not contain all of the information that you should consider before making an investment in our securities. You should read carefully the
information appearing in this prospectus and in any prospectus supplement and free writing prospectus we may provide to you in connection with an offering of our securities described in this
prospectus and in the documents incorporated and deemed to be incorporated by reference in this prospectus.
Unless otherwise expressly stated or the context otherwise requires, the terms "we," "our company," "us" and "our" and similar terms refer, as of dates and for
periods on and after May 4, 2007, to KKR Financial Holdings LLC and its subsidiaries and, as of dates and for periods prior to May 4, 2007, to our predecessor, KKR Financial
Corp., and its subsidiaries; "Manager" means KKR Financial Advisors LLC; "KKR" means Kohlberg Kravis Roberts & Co. L.P. and its affiliated companies (excluding portfolio
companies that are minority or majority owned or managed by funds associated with KKR); "management agreement" means
the amended and restated management agreement between KKR Financial Holdings LLC and the Manager; "operating agreement" means the amended and restated operating agreement of KKR Financial
Holdings LLC; "common shares" and "preferred shares" mean common shares and preferred shares, respectively, representing limited liability company interests in KKR Financial
Holdings LLC; and references to "our shares" (and similar references) mean common shares and preferred shares of KKR Financial Holdings LLC; "debt securities" means our debt securities
that we or any selling securityholders may offer pursuant to this prospectus; and references to "$" and "dollars" mean U.S. dollars.
We
are a specialty finance company with expertise in a range of asset classes. Our core business strategy is to leverage the proprietary resources of our Manager with the objective of
generating both current income and capital appreciation. We primarily invest in financial assets including below investment grade corporate debt, including senior secured and unsecured loans,
mezzanine loans, high yield corporate bonds, distressed and stressed debt securities, marketable equity securities and credit default swaps. Additionally, we have made or may make investments in other
asset classes including private equity co-investments, natural resources and real estate. The corporate loans we invest in are primarily referred to as syndicated bank loans, or leveraged loans, and
are purchased via assignment or participation in either the primary or secondary market. The majority of our corporate debt investments are held in collateralized loan obligation, or "CLO,"
subsidiaries that are structured as on-balance sheet securitizations and are used as long term financing for these investments. The senior secured notes issued by the CLO subsidiaries are
primarily owned by unaffiliated third party investors and we own the majority of the subordinated notes in the CLO subsidiaries. We execute our core business strategy through majority-owned
subsidiaries, including CLOs.
We
are externally managed and advised by KKR Financial Advisors LLC, our Manager and an affiliate of KKR, pursuant to the management agreement between us and our Manager. Our
Manager was formed in July 2004. All of our executive officers are either employees or members of our Manager or one or more of its affiliates. The executive offices of our Manager are located at
555 California Street, 50th Floor, San Francisco, California 94104 and the telephone number of our Manager's executive offices is (415) 315-3620.
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RISK FACTORS
Investing in our securities involves risks. In addition to the risks discussed below under "Cautionary Note Regarding
Forwarding-Looking Statements," you should carefully review the risks discussed under the caption "Risk Factors" in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2009, which is incorporated by reference in this prospectus, and under the caption "Risk Factors" or any similar caption in the other documents that we
have filed or subsequently file with the SEC that are incorporated or deemed to be incorporated by reference in this prospectus as described below under "Incorporation by Reference" and in any
prospectus supplement or free writing prospectus that we provide you in connection with an offering of securities pursuant to this prospectus. You should also carefully review the other risks and
uncertainties discussed in the documents incorporated and deemed to be incorporated by reference in this prospectus and in any such prospectus supplement and free writing prospectus. The risks and
uncertainties discussed below and in the documents referred to above and other matters discussed in those documents could materially and adversely affect our business, financial condition, liquidity
and results of operations and the market price of our shares and any other securities we may issue. Moreover, the risks and uncertainties discussed below and in the foregoing documents are not the
only risks and uncertainties that we face, and our business, financial condition, liquidity and results of operations and the market price of our shares and any other securities we may issue could be
materially adversely affected by other matters that are not known to us or that we currently do not consider to be material risks to our business.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated and deemed to be incorporated by reference herein contain, and any prospectus supplement
and free writing prospectus that we may provide to you in connection with an offering of our securities described in this prospectus may contain, forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the "Exchange Act." Forward-looking statements relate to expectations, beliefs,
estimates, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward
looking statements by terms such as "aim," "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "project," "should," "strive" and "would" or the negative of
these terms or other comparable terminology and similar words.
The
forward-looking statements are based on our beliefs, assumptions and expectations with respect to our future performance and future events or circumstances at the respective times
those forward-looking statements were made, taking into account information available to us at those times, and are not guarantees of future performance, events or results. These beliefs, assumptions
and expectations involve risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us or within our control. If a change occurs, our
business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make
an investment decision with respect to our securities, along with the following factors that could cause actual results to vary materially from our forward-looking
statements:
-
-
the factors referenced in this prospectus, the applicable prospectus supplement and any applicable free writing
prospectus, and the documents incorporated and deemed to be incorporated by reference herein, including those referred to above under the caption "Risk Factors";
-
-
errors in our assessment of our portfolio value;
-
-
variations of management's expectations as to factors impacting our cost structure;
-
-
accounting changes, as required by U.S. generally accepted accounting principles;
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-
-
general volatility of the capital markets and the market price of our common shares and potential volatility of the market
price of any other securities we may issue;
-
-
changes in our business strategy including the expansion into new asset classes such as natural resources, real estate and
private equity;
-
-
limitations imposed on our business by our exemption under the Investment Company Act of 1940, as amended, or the "1940
Act;"
-
-
limitations imposed on our business by the "qualifying income exception" applicable to publicly traded partnerships for
U.S. federal income tax purposes;
-
-
availability, terms and deployment of capital;
-
-
availability of qualified personnel for our Manager;
-
-
our limited ability to remove our Manager and our Manager's right to resign;
-
-
our limited liability company and organizational structure, which may limit our ability to make distributions;
-
-
our ability to service and comply with the terms of our indebtedness;
-
-
the risk that we may be unable to refinance our indebtedness, particularly short-term indebtedness, as it
comes due;
-
-
our cash flow available for distribution and our ability to make distributions in the future to holders of our shares;
-
-
our ability to pay the management fee payable to our Manager when due;
-
-
the regulatory environment in which our businesses operate;
-
-
costs and effects of legal and administrative proceedings, settlements, investigations and claims;
-
-
changes in our industry, interest rates or the general economy;
-
-
increased rates of default and/or decreased recovery rates on our investments;
-
-
material variances between the realized prepayment rates as compared to our projected prepayment rates on our residential
real estate-related investments; and
-
-
the degree and nature of our competition.
We
undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the events described by our forward-looking statements might not occur. We qualify any and all of our forward-looking statements by these cautionary factors. Please keep
this cautionary note in mind as you read this prospectus, the documents incorporated and deemed to be incorporated by reference herein and any prospectus supplement and free writing prospectus that we
may provide to you in connection with this offering.
The
documents incorporated and deemed to be incorporated by reference herein contain or may contain, and any prospectus supplement and free writing prospectus that we may provide to you
in connection with this offering may contain, market data, industry statistics and other data that have been obtained from, or compiled from, information made available by third parties. We have not
independently verified this data or these statistics.
USE OF PROCEEDS
Unless otherwise specified in a prospectus supplement or a free writing prospectus prepared in connection with an offering of
securities pursuant to this prospectus, the net proceeds from the sale of the securities to which this prospectus relates will be used for general corporate purposes. General corporate purposes may
include repayment, repurchase or redemption of debt, acquisitions, additions to working capital, capital expenditures and investments in our subsidiaries. Net proceeds may be temporarily invested or
temporarily used to repay indebtedness prior to deployment for their intended purposes.
We
will not receive any of the proceeds from the sale of securities to which this prospectus relates that are offered by any selling securityholders.
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RATIOS OF EARNINGS TO FIXED CHARGES
The following table presents the ratios of earnings to fixed charges for us and our consolidated subsidiaries for the periods
indicated. For the purposes of calculating the ratio of earnings to fixed charges, "earnings" consist of pre-tax income before equity in income of unconsolidated affiliate. "Fixed charges"
consist of interest incurred on all indebtedness and capitalized expenses relating to indebtedness. Neither we nor any of our consolidated subsidiaries had any preferred shares outstanding for any of
the periods reflected in this table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
3 months
ended
March 31,
2010
|
|
Year ended
December 31,
2009
|
|
Year ended
December 31,
2008(1)
|
|
Year ended
December 31,
2007(1)
|
|
Year ended
December 31,
2006(1)
|
|
Year ended
December 31,
2005(1)
|
|
Ratio of earnings (loss) to fixed charges
|
|
|
4.6x
|
|
|
1.3x
|
|
|
(2)
|
|
|
1.3x
|
|
|
1.3x
|
|
|
1.6x
|
|
-
(1)
-
Certain
prior period information has been reclassified to conform to the presentation for the year ended December 31, 2009.
-
(2)
-
For
the year ended December 31, 2008, our losses exceeded our fixed charges by approximately $513.0 million. The coverage deficiency for total
fixed charges for the year ended December 31, 2008 was $1,077.6 million to arrive at a one-to-one ratio.
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
Introduction
The following summary discusses the material U.S. federal income tax, and for certain non-U.S. holders (as defined below),
estate tax consequences of the ownership and disposition of our common shares and preferred shares, which we refer to collectively as shares. Any additional U.S. federal income tax consequences of the
ownership and disposition of our preferred shares, depositary shares, warrants to purchase common shares, preferred shares, depositary shares or debt securities, subscription rights to purchase common
shares, preferred shares, depositary shares or debt securities, debt securities, guarantees of debt securities, share purchase contracts or share purchase units will be addressed in an applicable
prospectus supplement or free writing prospectus we and any selling security holders may provide you. This summary is based on current law, is for general information only and is not tax advice. This
discussion is based on the Internal Revenue Code of 1986, as amended, or the "Code," applicable U.S. Treasury Regulations, judicial authority, and administrative rulings and practice, all as currently
in effect and which are subject to change or differing interpretations, possibly with retroactive effect. This summary assumes that our shares will be held as capital assets for U.S. federal income
tax purposes. This summary is not intended to be a complete description of all of the U.S. federal income tax consequences of the ownership and disposition of our shares. In addition, except as
specifically set forth below, this summary does not discuss any state or local income taxation or foreign income taxation or other tax consequences. This discussion does not address all of the aspects
of U.S. federal income taxation that may be relevant to a particular holder of our shares in light of its personal circumstances, or to holders of our shares that
are subject to special treatment under U.S. federal income tax laws, including but not limited to:
-
-
dealers in securities or foreign currencies;
-
-
financial institutions;
-
-
insurance companies;
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-
-
tax-exempt organizations (except to the extent discussed in "Taxation of Holders of Our
SharesUnrelated Business Taxable Income" and "Material U.S. Federal Income Tax Considerations Relating to Investments in REITsTaxation of Holders of REIT
SharesTax-Exempt Holders of REIT Shares");
-
-
non-U.S. individuals and foreign corporations (except to the extent discussed in "Taxation of
Non-U.S. Holders of our Shares" and "Material U.S. Federal Income Tax Considerations Relating to Investments in REITsTaxation of Holders of REIT
SharesTaxation of Non-U.S. Holders of REIT Shares");
-
-
persons who are subject to the alternative minimum tax;
-
-
traders in securities who elect to apply a mark-to-market method of accounting;
-
-
persons that hold our shares as part of a hedge, straddle, constructive sale or conversion transaction;
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persons whose functional currency is not the U.S. dollar;
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persons who are, or who hold our shares through, partnerships or other pass-through entities; or
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holders of options granted by us or persons who acquired our shares as compensation.
The
tax treatment of partners in a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) that holds our shares generally depends on both the
status of the partner (rather than the partnership) and the activities of the partnership and is not specifically addressed herein. Partners in partnerships that hold our shares should consult their
tax advisors.
As
used below, a "U.S. holder" is a beneficial holder of our shares who is, for U.S. federal income tax purposes:
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a citizen or resident of the United States;
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a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized under
the laws of the United States, any state thereof or the District of Columbia;
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an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
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a trust, if a U.S. court can exercise primary supervision over the administration of the trust and one or more U.S.
persons have the authority to control all substantial decisions of the trust, or if the trust was in existence on August 20, 1996 and has elected to continue to be treated as a U.S. person.
The
term "non-U.S. holder" means a beneficial owner of our shares that is not a U.S. holder or a partnership (or other entity treated as a partnership for U.S. federal income
tax purposes). The term "holders" includes both a U.S. holder and a non-U.S. holder.
The U.S. federal income tax laws are complex, and your circumstances may affect your tax consequences. Consequently, you are urged to consult your own tax
advisors as to the specific tax consequences to you of the ownership and disposition of our shares, including the applicability and effect of federal, state and local or foreign income and other tax
laws to your particular circumstances.
Our Tax Status
In the opinion of Hunton & Williams LLP, or "Hunton & Williams," we will be treated for U.S. federal income tax
purposes as a partnership, and not as an association or a publicly traded partnership
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taxable
as a corporation. It must be emphasized that the opinion of Hunton & Williams speaks as of the date issued and is based on various assumptions and representations relating to our
organization,
operations, assets, activities and income, including that all factual representations and statements set forth in all relevant documents, records and instruments are true and correct, and that we, at
all times, have operated and will continue to operate in accordance with the method of operation described in our organizational documents and this prospectus, and is conditioned upon factual
representations and covenants regarding our organization, assets, income, and present and future conduct of our activities and operations, and assumes that such representations and covenants are
accurate and complete. Any alteration or incorrectness of such assumptions, representations, statements or covenants could adversely affect such opinion.
There
is limited statutory, administrative and judicial authority addressing the treatment of instruments similar to our shares for U.S. federal income tax purposes. No assurance can be
given that the Internal Revenue Service, or "IRS," would not successfully assert a position contrary to any of the tax aspects set forth below. Moreover, no advance rulings have been sought from the
IRS regarding any matter discussed in this prospectus. Accordingly, you are urged to consult your tax advisors with regard to the U.S. federal income tax consequences to you of owning and disposing of
our shares, as well as the effects of state, local and non-U.S. tax laws, including potential state tax filing requirements.
While
we believe that we have been organized and have operated so that we will qualify to be treated for U.S. federal income tax purposes as a partnership, and not as an association or a
publicly traded partnership taxable as a corporation, given the highly complex nature of the rules governing partnerships, the ongoing importance of factual determinations, and the possibility of
future changes in our circumstances, no assurance can be given by Hunton & Williams or us that we will so qualify for any particular year. Hunton & Williams will have no obligation to
advise us or you of any subsequent change in the matters stated, represented or assumed, or of any subsequent change in the applicable law. Our taxation as a partnership will depend on our ability to
meet, on a continuing basis, through actual operating results, the "qualifying income exception" (as described below), the compliance with which will not be reviewed by Hunton & Williams on an
ongoing basis. Accordingly, no assurance can be given that the actual results of our operations for any taxable year will satisfy the qualifying income exception. You should be aware that opinions of
counsel are not binding on the IRS, and no assurance can be given that the IRS will not challenge the conclusions set forth in such opinions.
If,
for any reason, including our failure to meet the "qualifying income exception," we were treated as an association or publicly traded partnership taxable as a corporation for U.S.
federal income tax purposes, we would be subject to U.S. federal income tax on our taxable income at regular corporate income tax rates, without deduction for any distributions to holders of our
shares, thereby materially reducing the amount of any cash available for distribution to holders of our shares.
Under
Section 7704 of the Code, unless certain exceptions apply, a publicly traded partnership is generally treated and taxed as a corporation, and not as a partnership, for U.S.
federal income tax purposes. A partnership is a publicly traded partnership if (i) interests in the partnership are traded on an established securities market or (ii) interests in the
partnership are readily tradable on a secondary market or the substantial equivalent thereof. We believe that we are, and will continue to be, treated as a publicly traded partnership.
If
(i) a publicly traded partnership is not a business development company or registered as a management company or unit investment trust under the 1940 Act and (ii) 90% or
more of the income of the publicly traded partnership during each taxable year consists of "qualifying income," it will be treated as a partnership, and not as an association or publicly traded
partnership taxable as a corporation, for U.S. federal income tax purposes. We refer to this exception as the "qualifying income exception." Qualifying income generally includes rents, dividends,
interest, income and gains derived from certain activities relating to minerals and natural resources, and capital gains from the sale or
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other
disposition of stocks, bonds and real property. Qualifying income also includes other income derived from the business of investing in, among other things, stocks and securities. Interest is not
qualifying income if it is derived in the "conduct of a financial or insurance business" or is based, directly or indirectly, on the income or profit of any person. Our income currently consists
primarily of interest income, dividends and income and gain from interest rate, credit risk and other derivatives, all of which will generally be qualifying income for purposes of the qualifying
income exception.
We
believe we will satisfy the qualifying income exception. There can be no assurance, however, that the IRS will not challenge our compliance with the qualifying income exception
requirements and, therefore, assert that we are taxable as a corporation for U.S. federal income tax purposes. In such event, the amount of cash available for distribution to holders of our shares
would likely be reduced materially.
Certain State, Local and Non-U.S. Tax Matters
Holders of shares, as well as us (and various vehicles in which we invest), may be subject to various state, local and
non-U.S. taxes and tax filing requirements. You are urged to consult your tax advisors with respect to the state, local and non-U.S. tax consequences of owning and disposing of
your shares, including potential state tax filing requirements.
Taxation of Holders of Our Shares
As a partnership for U.S. federal income tax purposes, we are not subject to U.S. federal income tax. Rather, in computing your U.S.
federal income tax liability for a taxable year, you will be required to take into account your allocable share of our items of income, gain, loss, deduction and credit for our taxable year ending
within or with your taxable year, regardless of whether you have received any distributions. It is possible that your U.S. federal income tax liability with respect to your allocable share of our
earnings in a particular taxable year could exceed the cash distributions to you, thus requiring an out-of-pocket tax payment by you. See "Nature of Our Business
ActivitiesNon-Cash Income from Our Investments." The characterization of an item of our income, gain, loss, deduction or credit generally will be determined at the partnership
level (rather than at the shareholder level).
For each of our taxable years, items of income, gain, loss, deduction or credit recognized by us will be allocated among the holders of
our shares in accordance with their allocable shares of our items of income, gain, loss, deduction and credit. The allocable share of such items for a holder of our shares will be determined by our
operating agreement, provided such allocations either have "substantial economic effect" or are determined to be in accordance with such holder's interest in us. If the allocations provided by our
operating agreement do not have "substantial economic effect" and were successfully challenged by the IRS, the redetermination of the allocations to a particular holder for U.S. federal income tax
purposes could be less favorable than the allocations set forth in our operating agreement.
In
accordance with recently proposed Treasury Regulations, on which existing publicly traded partnerships currently may rely, we will apply a monthly convention pursuant to which our
taxable income and losses will be determined annually and will be prorated on a monthly basis. Then the income and losses will be apportioned among the holders in proportion to the shares owned by
each of them as of the first business day of the month, or the "Allocation Date." However, certain "extraordinary items," such as income or gain realized on a sale or other disposition of our assets
other than in the ordinary course of business, will be allocated among the holders owning our shares on the Allocation Date in the month in which that gain or loss is recognized. It is not entirely
clear whether
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certain
items will be treated as "extraordinary items." As a result of the monthly convention for allocating items, holders transferring our shares may be allocated items of income, gain, loss,
deduction, and credit realized after the date of transfer. In addition, as a result of such allocation method, you
may be allocated taxable income even if you do not receive any cash distributions. Moreover, you may be allocated differing amounts of our income, gain, loss, deduction and credit than other holders
of our shares as a result of Section 704(c) of the Code and the Treasury Regulations promulgated thereunder.
Section 706
of the Code generally requires that items of partnership income and deductions be allocated between transferors and transferees of partnership interests on a daily
basis, and the proposed Treasury Regulations prescribing the allocation method described in the preceding paragraph will not be effective until finalized and may be changed prior to being finalized.
Accordingly, it is possible that transfers of our shares could be considered to occur for U.S. federal income tax purposes when the transfer is completed without regard to our monthly convention for
allocating income and deductions. In that event, our allocation method might be considered a monthly convention that does not literally comply with that requirement. If our monthly convention is not
allowed by the final Treasury Regulations, the IRS may contend that our taxable income or losses must be reallocated among the holders of our shares. If such a contention were sustained, your income
or loss allocation could be adjusted, possibly to your detriment. The board of directors is authorized to revise our method of allocation between transferors and transferees (as well as among holders
whose interests otherwise could vary during a taxable period), which we may do if the final Treasury Regulations do not approve the allocation method described in the preceding paragraph.
Our distributions generally will not be taxable to you to the extent of your adjusted tax basis in our shares. In addition, you will be
allowed to deduct your allocable share of our losses (if any) only to the extent of your adjusted tax basis in your shares at the end of the taxable year in which the losses occur. Your initial tax
basis in your shares will be generally equal to the amount of cash you paid for your shares and will be generally increased by your allocable share of our profits (and items of income and gain). Your
adjusted tax basis in the shares will be generally decreased (but not below zero) by your allocable share of our losses (and items of loss, deduction and expense), the amount of cash distributed to
you and our tax basis in property (other than cash) distributed to you by us. Moreover, your adjusted tax basis will include your allocable share of our liabilities, if any. The IRS has ruled that a
partner who acquires interests in a partnership in separate transactions must combine those interests and maintain a single adjusted tax basis for all those interests.
To
the extent your allocable share of our losses is not allowed because you had insufficient adjusted tax basis in your shares, you would be able to carry over such disallowed losses to
subsequent taxable years and such losses would be allowed if and to the extent of your adjusted tax basis in your shares in subsequent taxable years.
Cash distributions by us with respect to our shares or in redemption of less than all of your shares generally will not be taxable to
you. Instead, such distributions will reduce, but not below zero, your adjusted tax basis in your shares immediately before the distribution. If such distributions exceed your adjusted tax basis in
your shares, the excess will be taxable to the holder as gain from a sale or exchange of shares (as described in "Disposition of Our Shares" below). It is possible that partial
redemptions made during the taxable year could result in taxable gain to a holder where no gain would otherwise have resulted if the same partial redemption were made at the end of the taxable year. A
reduction in a holder's allocable share of our liabilities, and certain distributions of marketable securities by us, are treated as cash distributions for U.S. federal income tax purposes.
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A sale or other taxable disposition of all or a part of your shares (including in redemption for cash of all of your shares) generally
will result in the recognition of gain or loss in an amount equal to the difference, if any, between the amount realized on the disposition (including your share of our indebtedness, if any) and your
adjusted tax basis in your shares (as described in "Adjusted Tax Basis of Shares" above). Your adjusted tax basis will be adjusted for this purpose by your allocable share of our income
or loss for the year of such sale or other disposition. Any gain or loss recognized with respect to such sale or other disposition generally will be treated as capital gain or loss and will be
long-term capital gain or loss if your holding period for your shares exceeds one year. A portion of such gain, however, will be treated as ordinary income under the Code to the extent
attributable to your allocable share of unrealized gain or loss in our assets to the extent described in Section 751 of the Code. This would include (i) ordinary income we would
recognize if we sold our debt instruments with accrued market discount and (ii) unremitted earnings of any controlled foreign corporation, or CFC, held by us, although in the case of a holder
who is an individual, the amount treated as ordinary income may be limited pursuant to Section 1248 of the Code.
If
you dispose of our shares at a time when we hold stock in a passive foreign investment company, or "PFIC," that is not a qualified electing fund, or "QEF," you would be treated as
disposing of an interest in such PFIC to the extent of your pro rata share of such PFIC stock held by us.
If
you dispose of less than all of your shares, the IRS has ruled that a portion of your aggregate adjusted tax basis in all of your shares must be allocated to the shares sold using an
"equitable apportionment" method, which generally means that the adjusted tax basis allocated to the shares sold will equal an amount that bears the same relation to your adjusted tax basis in all of
your shares as the value of the shares sold bears to the value of all of your shares. Notwithstanding the requirement set forth in the IRS ruling, if you sell fewer than all of your shares, we
generally will report to you the amount of gain treated under Section 751(a) of the Code as ordinary income based on the assumption that the first shares purchased were also the first shares
sold, which is sometimes referred to as a "first-in, first-out" method. This assumption is for administrative convenience only and is not consistent with the IRS's ruling that
a partner must maintain a single adjusted tax basis in its partnership interest. You should inform us if you use a method other than "first-in, first-out" to determine your
basis for any shares disposed.
In
addition, Treasury Regulations under Section 1223 of the Code allow a selling holder of our shares who can identify shares transferred with an ascertainable holder period to
elect to use the actual holding period of the shares transferred. Thus, although according to the IRS ruling discussed above, a holder of our shares will be unable to select high or low basis shares
to sell as would be the case with corporate stock, such holder may, according to these Treasury Regulations, designate shares sold for purposes of determining the holding period of shares transferred.
A holder electing to use the actual holding period of shares transferred must consistently use that identification method for all subsequent sales or exchanges of shares. A holder considering the
purchase of additional shares or a sale of shares purchased in separate transactions is urged to consult the holder's own tax advisor as to the possible consequences of this IRS ruling and application
of the Treasury Regulations.
If you are an individual, any capital losses generated by us (or upon a disposition of our shares) generally will be deductible only to
the extent of your capital gains for the taxable year plus up to $3,000 of ordinary income ($1,500 in the case of a married individual filing a separate return). Excess capital losses may be carried
forward by individuals indefinitely. If you are a corporation, any capital losses generated by us (or upon a disposition of shares) generally will be deductible to the extent of your capital gains for
the taxable year. Corporations may carry capital losses back three years and forward five years. You should consult your tax advisors regarding the deductibility of capital losses.
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Individuals and certain closely held subchapter C corporations will be allowed to deduct their allocable share of our losses (if
any) only to the extent of each such holder's "at risk" amount in us at the end of the taxable year in which the losses occur. The amount for which a holder is "at risk" with respect to its interest
generally is equal to its adjusted tax basis for such interest, less any amounts borrowed (i) in connection with its acquisition of such interest for which it is not personally liable and for
which it has pledged no property other than its interest; (ii) from persons who have a proprietary interest in us and from certain persons related to such persons; and (iii) for which
the holder is protected against loss through nonrecourse financing, guarantees or similar arrangements. To the extent that a holder's allocable share of our losses is not allowed because the holder
has an insufficient amount at risk in us, such disallowed losses may be carried over by the holder to subsequent taxable years and will be allowed if and to the extent of the holder's at risk amount
in subsequent years.
We
currently do not generate any material amount of income or losses from "passive activities" for purposes of Section 469 of the Code. However, to the extent that we generate any
income from "passive activities," such income will not be treated as passive activity income for purposes of Section 469 of the Code and may not be used to offset your passive activity losses
from other activities. To the extent that we generate any losses from "passive activities," such losses will be suspended and will only be allowed
as an offset to passive activity income from us in future years or allowed as a loss upon the complete disposition of a holder's interest in us. Accordingly, income allocated by us to you generally
will not be able to be offset by your other passive activity losses, and losses allocated to you generally will not be able to be used to offset your other passive activity income. You should consult
your tax advisors regarding the possible application of the limitations on the deductibility of losses from certain passive activities contained in Section 469 of the Code.
Individuals and other noncorporate holders of shares will be allowed to deduct their allocable share of our "investment interest"
(within the meaning of Section 163(d) of the Code and the Treasury Regulations promulgated thereunder) only to the extent of each such holder's net investment income for the taxable year. A
holder's net investment income generally is the excess, if any, of the holder's investment income from all sources (which is gross income from property held for investment) over investment expenses
from all sources (which are deductions allowed that are directly connected with the production of investment income). Investment income excludes net capital gain attributable to the disposition of
property held for investment, as well as "qualified dividend income" that is taxable as long-term capital gains, unless the holder elects to pay tax on such gain or income at ordinary
income rates.
To
the extent that your allocable share of our investment interest is not allowed as a deduction because you have insufficient net investment income, you may carry over such disallowed
investment interest to subsequent taxable years and such disallowed investment interest will be allowed if and to the extent of your net investment income in subsequent years. If you borrow to finance
the purchase of our shares, any interest paid or accrued on the borrowing will be allocated among our assets for purposes of determining the portion of such interest that is investment interest
subject to the foregoing limitations or passive activity interest subject to the passive activity rules under Section 469 of the Code. The portion of such interest allocated to property held
for investment (such as bonds or other securities) will be treated as investment interest. You should consult your tax advisors regarding the application to you of the allocation of such interest
among our assets. Since the amount of a holder's allocable share of our investment interest that is subject to this limitation will depend on the holder's aggregate investment interest and net
investment income from all sources for any taxable year, the extent, if any, to which our investment interest will be disallowed under this rule will depend on your particular circumstances each year.
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An individual, estate or trust may deduct so-called "miscellaneous itemized deductions," which include fees paid to our
Manager and our other expenses, only to the extent that such deductions, in the aggregate, exceed 2% of the holder's adjusted gross income. The amount of a holder's allocable share of such expenses
that is subject to this disallowance rule will depend on the holder's aggregate miscellaneous itemized deductions from all sources and adjusted gross income for any taxable year. Thus, the extent, if
any, to which such fees and expenses will be disallowed will depend on your particular circumstances each year. There are also limitations on the deductibility of itemized deductions by individuals
whose adjusted gross income exceeds a specified amount, adjusted annually for inflation. In addition, these expenses are not deductible in determining the alternative minimum tax liability of a U.S.
holder. Your share of management fees and certain other expenses attributable to us likely will constitute miscellaneous itemized deductions for these purposes. You are urged to consult your tax
advisors regarding your ability to deduct expenses incurred by us.
Our
organizational expenses are not currently deductible, but must be amortized ratably over a period of 15 years. Our syndication expenses (i.e., expenditures made in
connection with the marketing and issuance of shares) are neither deductible nor amortizable.
U.S. mutual funds that are treated as regulated investment companies, or "RICs," for U.S. federal income tax purposes are required,
among other things, to meet an annual 90% gross income and quarterly 50% and 25% asset value tests under Section 851(b) of the Code to maintain their favorable U.S. federal income tax
treatment. The treatment of an investment by a RIC in our shares for purposes of these tests will depend on whether we will be treated as a "qualified publicly traded partnership." If we are so
treated, then the shares themselves are the relevant asset for purposes of the 50% and 25% asset value tests and the net income from our shares is the relevant gross income for purposes of the 90%
gross income test. In addition, the aggregate amount that a RIC can invest in the securities of one or more "qualified publicly traded partnerships" is limited to 25% of the RIC's total assets. If,
however, we are not treated as a "qualified publicly traded partnership," then the relevant assets are the RIC's allocable share of the underlying assets held by us and the relevant gross income is
the RIC's allocable share of the underlying gross income earned by us. However, the 25% limitation on a RIC's ability to invest in the securities of "qualified publicly traded partnerships" would not
apply. We will qualify as a "qualified publicly traded partnership" if we derive less than 90% of our income from sources that are qualifying income for purposes of the RIC 90% gross income test. We
believe that we have not been treated as a "qualified publicly traded partnership" in the past. However, because such qualification will depend on the nature of our future investments, no assurance
can be provided that we will or will not be treated as a "qualified publicly traded partnership" in any particular year. RICs should consult their own tax advisors regarding an investment in the
shares.
We expect that tax-exempt holders of our shares will recognize a significant amount of "unrelated business taxable income,"
or "UBTI," as a result of our indebtedness with respect to our assets and as a result of excess inclusion income from our residual interests in real estate mortgage investment conduits, or REMICs, and
in taxable mortgage pools. A holder that is a tax-exempt organization for U.S. federal income tax purposes and, therefore, is generally exempt from U.S. federal income taxation, may
nevertheless be subject to "unrelated business income tax" to the extent, if any, that its allocable share of our income consists of UBTI. A tax-exempt partner in a partnership (or an
entity treated as partnership for U.S. federal income tax purposes) that regularly engages in a trade or business that is unrelated to the exempt function of the tax-exempt partner must
include, in computing its UBTI, its pro rata share (whether or not distributed) of such partnership's gross income derived from such
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unrelated
trade or business. Moreover, such tax-exempt partner could be treated as earning UBTI to the extent that such entity derives income from "debt-financed property," or
if the partnership interest itself is debt financed. Debt-financed property means property held to produce income with respect to which there is "acquisition indebtedness"
(i.e., indebtedness incurred in acquiring or holding property). We expect that a significant portion of our assets will be encumbered by "acquisition indebtedness."
To
the extent we recognize income in the form of dividends and interest from securities with respect to which there is "acquisition indebtedness" during a taxable year, the percentage of
the income that will be treated as UBTI generally will be equal to the amount of the income times a fraction, the numerator of which is the "average acquisition indebtedness" incurred with respect to
the securities, and the denominator of which is the "average amount of the adjusted basis" of the securities during the period such securities are held by us during the taxable year.
To
the extent we recognize gain from disposition of securities with respect to which there is "acquisition indebtedness," the portion of the gain that will be treated as UBTI will be
equal to the amount of the gain times a fraction, the numerator of which is the highest amount of the "acquisition indebtedness" with respect to the securities during the twelve-month period ending
with the date of their disposition, and the denominator of which is the "average amount of the adjusted basis" of the securities during the period such securities are held by us during the taxable
year.
In
addition, a portion of our income from a residual interest in a REMIC or a taxable mortgage pool arrangement could be treated as "excess inclusion income." See "Material
U.S. Federal Income Tax Considerations Relating to Investments in REITs" below. We own a small number of REMIC residual interests and expect to continue to own residual interests in taxable mortgage
pools
through a REIT subsidiary. Any excess inclusion income generated by a REIT subsidiary would flow through to our shareholders. Excess inclusion income is subject to tax as UBTI in the hands of most
tax-exempt shareholders.
Tax-exempt
holders are strongly urged to consult their tax advisors regarding the tax consequences of owning our shares.
In certain circumstances, individuals, corporations and other taxpayers may be subject to an alternative minimum tax in addition to
regular tax. Your potential alternative minimum tax liability may be affected by reason of an investment in the shares, including the limitation on the deductibility of "miscellaneous itemized
deductions" in determining the alternative minimum tax liability of a U.S. holder. The extent, if any, to which the alternative minimum tax applies will depend on your particular circumstances for
each taxable year.
For payments made after December 31, 2012, a U.S. federal withholding tax at a 30% rate will apply to distributions that
constitute "withholdable payments" and proceeds of sale in respect of our common shares received by U.S. holders who own their shares through foreign accounts or foreign intermediaries, if certain
disclosure requirements related to U.S. accounts are not satisfied. If we are required to withhold any U.S. federal withholding tax on distributions made to any holder of our shares, we will pay such
withheld amount to the IRS. That payment, if made, will be treated as a distribution of cash to the holder of the shares with respect to whom the payment was made and will reduce the amount of cash to
which such holder would otherwise be entitled.
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Taxation of Non-U.S. Holders of Our Shares
A non-U.S. holder will generally be subject to U.S. federal withholding taxes at the rate of 30% (or such lower rate
provided by an applicable tax treaty) on its share of our gross income from dividends, interest (other than interest that constitutes "portfolio interest" within the meaning of the Code) and certain
other income that is not treated as effectively connected with a U.S. trade or business. Although the matter is not entirely clear, income from derivative transactions may also be subject to U.S.
federal withholding taxes. Moreover, for payments made on or after September 14, 2010, dividend equivalent payments from certain derivative transactions will be subject to U.S. federal
withholding tax. We expect that most of our interest income will constitute "portfolio interest" that is not subject to the 30% withholding tax. We expect that we will earn dividend income that will
be subject to the 30% withholding tax. In certain circumstances, the amount of any withholding tax could exceed the amount of cash that would have otherwise been distributed to you.
For
payments made after December 31, 2012, a U.S. federal withholding tax at a 30% rate will apply to distributions that constitute "withholdable payments" and proceeds of sale in
respect of our common shares received by certain non-U.S. holders, if certain disclosure requirements related to U.S. ownership are not satisfied. If payment of withholding taxes is
required, non-U.S. holders that are otherwise eligible for an exemption from, or reduction of, U.S. withholding taxes with respect to such distributions and proceeds will be required to
seek a refund from the IRS to obtain the benefit or such exemption or reduction. If we are required to withhold any U.S. federal withholding tax on distributions made to any holder of our shares, we
will pay such withheld amount to the IRS. That payment, if made, will be treated as a distribution of cash to the holder of the shares with respect to whom the payment was made and will reduce the
amount of cash to which such holder would otherwise be entitled.
Non-U.S.
holders treated as engaged in a U.S. trade or business are generally subject to U.S. federal income tax at the graduated rates applicable to U.S. holders on their
net income that is considered to be effectively connected with such U.S. trade or business. Non-U.S. holders that are corporations may also be subject to a 30% branch profits tax on such
effectively connected income. The 30% rate applicable to branch profits may be reduced or eliminated under the provisions of an applicable income tax treaty between the United States and the country
in which the non-U.S. person resides or is organized.
It
is likely that the income from our investments in natural resources would be treated as effectively connected with the conduct of a U.S. trade or business with respect to
non-U.S. holders. There can be no assurance that the IRS will not successfully assert that some portion of our income from other activities is properly treated as effectively connected
income with respect to such non-U.S. holders. In addition, if any REIT subsidiary in which we own an interest, recognizes gain from the disposition of a United States real property
interest, such gain will be treated as income that is effectively connected with a U.S. trade or business. Our REIT subsidiaries have not generated material amounts of gain from the disposition of
"United States real property interests" in the past. However, no assurance can be provided that such REIT subsidiaries will not generate gain from dispositions of United States real property interests
in the future. If a holder who is a non-U.S. person were treated as being engaged in a U.S. trade or business in any year because an investment of us in such year constituted a U.S. trade
or business, such holder generally would be required to (i) file a U.S. federal income tax return for such year reporting its allocable share, if any, of our income or loss effectively
connected with such trade or business and (ii) pay U.S. federal income tax at regular U.S. tax rates on any such income. Moreover, a holder who is a corporate non-U.S. holder might
be subject to a U.S. branch profits tax on its allocable share of our effectively connected income. In addition, distributions to a non-U.S. holder would be subject to withholding at the
highest applicable tax rate to the extent of
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the
non-U.S. holder's allocable share of our effectively connected income. Any amount so withheld would be creditable against such non-U.S. holder's U.S. federal income tax
liability, and such non-U.S. holder could claim a refund to the extent that the amount withheld exceeded such non-U.S. person's U.S. federal income tax liability for the
taxable year. Finally, if we are engaged in a U.S. trade or business, a portion of any gain recognized by an investor who is a non-U.S. holder on the sale or exchange of its shares may be
treated for U.S. federal income tax purposes as effectively connected income, and hence such non-U.S. holder may be subject to U.S. federal income tax on the sale or exchange.
Moreover,
our investments in natural resources could cause certain non-U.S. holders to be subject to withholding under the Foreign Investment in Real Property Tax Act, or
"FIRPTA," if we are treated in the same manner as a United States real property holding corporation. For FIRPTA purposes, a United States real property holding corporation is a corporation where the
fair market value of the corporation's United States real property interests equals or exceeds 50% of the fair market value of its total real property interests and other assets used or held for use
in its trade or business. These rules are also applicable to publicly traded partnerships. As long as the value of our investments in cash, securities and similar assets constitutes 90% or more of the
total value of our assets, our investments in cash, securities and similar assets will be deemed to be used or held for use in our trade or business and taken into account in determining whether 50%
or more of our assets constitute United States real property interests. A non-U.S. holder may be subject to FIRPTA withholding on the disposition of our shares if (1) the
non-U.S. holder owned (directly or constructively applying certain attribution rules) more than 5% of our shares at any time during the five-year period ending on the date of
such disposition (a "5% non-U.S. holder") and (2) the fair market value of our investments in United States real property interests represented more than 10% of the total fair
market value of our assets at any time during the applicable testing period. Currently, we believe we do not hold any United States real property interests, but certain of our future investments in
real estate and natural resources may be treated as United States real property interests. No assurance can be provided that our future investments in United States real property interests will not
cause us to exceed the 10% threshold
described above, in which event any 5% non-U.S. holder would be subject to 10% withholding tax on the gross proceeds from the disposition of our shares.
In
general, different rules from those described above apply in the case of non-U.S. holders subject to special treatment under U.S. federal income tax law, including a
non-U.S. holder (i) who has an office or fixed place of business in the United States or is otherwise carrying on a U.S. trade or business; (ii) who is an individual present
in the United States for 183 or more days or has a "tax home" in the United States for U.S. federal income tax purposes; or (iii) who is a former citizen or resident of the United States.
If
you are a non-U.S. holder, you are urged to consult your tax advisors with regard to the U.S. federal income tax consequences to you of owning and disposing of our shares,
as well as the effects of state, local and non-U.S. tax laws.
Non-U.S. holders who are individuals may be subject to U.S. federal estate tax on the value of U.S.-situs property owned at
the time of their death. The U.S. federal estate tax was repealed for 2010, but will be reinstated in 2011 unless Congress passes new legislation. Additionally, Congress may act to eliminate the 2010
repeal, either prospectively or retroactively. It is unclear whether partnership interests (such as the shares) will be considered to be U.S.-situs property. Accordingly, non-U.S. holders
may be subject to U.S. federal estate tax on all or a portion of the value of the shares owned at the time of their death. Prospective non-U.S. holders who are individuals are urged to
consult their tax advisors concerning the potential U.S. federal estate tax consequences with regard to our shares.
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Nature of Our Business Activities
We invest, directly or indirectly, in a variety of assets, including, but not limited to, (i) debt and equity securities of
various U.S. and foreign issuers; (ii) equity of REIT subsidiaries; (iii) securities of certain foreign collateralized loan obligation, or "CLO," issuers, all of
which have elected to be treated as a partnership or disregarded as a separate entity from us for U.S. federal income tax purposes; and (iv) interest rate, credit risk and other derivatives. We
may make certain investments in natural resources and real estate in the future. We intend generally to make any future investments in real estate through one or more REIT subsidiaries. See
"Material U.S. Federal Income Tax Considerations Relating to Investments in REITs" below. Our investments have different tax consequences, which may vary depending on their particular
terms and your particular circumstances. Certain of our business activities are subject to special and complex U.S. federal income tax provisions that may, among other things, (i) disallow,
suspend or otherwise limit the allowance of certain losses or deductions, (ii) convert lower taxed long-term capital gain or "qualified dividend income" into higher taxed
short-term capital gain or ordinary income, (iii) cause us (and thus you) to recognize income or gain without a corresponding receipt of cash, (iv) adversely affect the
timing as to when a purchase or sale of stock or securities is deemed to occur, and (v) adversely alter the tax characterization of certain financial transactions.
The
discussion below describes the U.S. federal income tax considerations that may be relevant to some, but not to all, of our investments and contemplated investments, including the
qualification of such income for purposes of the qualifying income exception. Accordingly, you are urged to consult your tax advisors with regard to the U.S. federal income tax consequences to you of
our business activities.
Interest income derived by us will generally be qualifying income for purposes of the qualifying income exception for publicly traded
partnerships provided the income is not derived from "the conduct of a financial or insurance business" and is not based, directly or indirectly, on the profits of any person. Although there is no
direct authority defining what constitutes "the conduct of a financial or insurance business," we believe that our investment activities generally will not constitute "the conduct of a financial or
insurance business" for purposes of the qualifying income exception. For example, we believe that we have not been engaged, and do not intend to engage, in the loan origination business, either
directly or indirectly through our Manager and its affiliates. Despite such measures, there can be no assurance that the IRS will not successfully contend that all or a portion of our interest income
is related to the "conduct of a financial or insurance business," in which case such interest income would not be treated as qualifying income for the qualifying income exception and we could fail to
qualify for that exception. We intend to continue to conduct our operations so that at least 90% of our gross income in each taxable year is qualifying income for purposes of the qualifying income
exception.
U.S.
holders will generally be subject to tax at ordinary income rates on their allocable share of our interest income. For a discussion of the potential withholding on interest income
allocated to non-U.S. holders, see "Taxation of Non-U.S. Holders of Our Shares."
Dividends and capital gains earned by us will generally be qualifying income for purposes of the qualifying income exception. Tax
legislation enacted in 2003 and 2006 reduced the U.S. federal income tax rates on (i) capital gains received by taxpayers taxed at individual rates and (ii) "qualified dividend income"
received by taxpayers taxed at individual rates from certain domestic and foreign corporations. Subject to the discussion under "Taxation of Holders of Our SharesDisposition
of Our Shares,"
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"Material
U.S. Federal Income Tax Considerations Relating to Investments in REITsTaxation of Holders of REIT SharesTaxation of Non-U.S. Holders of
REIT Shares," the reduced rates applicable to capital gains generally will also apply to capital gains recognized by holders of shares who sell the shares that they have held for more than one year.
The reduced rates, which do not apply to short-term capital gains, generally apply to long-term capital gains from sales or exchanges recognized during taxable years beginning
on or prior to December 31, 2010.
Ordinary
dividends attributable to our investment in KKR Financial Holdings II, LLC, or "KFH II," or any other REIT and dividends attributable to certain foreign corporate
subsidiaries will generally not constitute "qualified dividend income," and, therefore, will not qualify for the reduced rate of tax applicable to taxpayers taxed at individual rates. In addition,
certain portions of the distributions attributable to our investment in KFH II may be taxable in the hands of tax-exempt shareholders and may not qualify for reduced withholding in the
hands of non-U.S. holders. For a more detailed discussion of the tax considerations related to the dividends and capital gains attributable to our investment in KFH II, see
"Material U.S. Federal Income Tax Considerations Relating to Investments in REITs."
We currently have several foreign subsidiaries that are treated as corporations for U.S. federal income tax purposes and may we acquire
equity interests in additional foreign corporate subsidiaries in the future. We believe each of our foreign corporate subsidiaries will be treated as a CFC or PFIC for U.S. federal income tax purposes
and, in the case of a PFIC, we have elected to treat the PFIC as a QEF. Our income from a CFC or PFIC generally will be qualifying income for purpose of the qualifying income exception. However, each
holder of our shares will generally be required to include in income a portion of the income earned by the CFC or PFIC regardless of whether we receive cash distributions from the CFC or PFIC or the
holder receives a distribution from us. Moreover, such income inclusions from a CFC or PFIC will not be eligible for the
favorable tax rate applicable to "qualified dividend income," and any gain allocated to you from a disposition of stock in a CFC by us would be treated as ordinary income to the extent of your
allocable share of the current and/or accumulated earnings and profits of the CFC. Net losses (if any) of a non-U.S. entity owned by us that is treated as a CFC or PFIC will not pass
through to the holders of our shares.
Notwithstanding
these rules, any gain recognized by a foreign corporation with respect to U.S. real property is subject to U.S. tax as if the foreign corporation were a U.S. taxpayer. It
is not anticipated that any of our foreign corporate subsidiaries will hold U.S. real property. Nevertheless, gain (if any) realized on U.S. real property would be subject to U.S. tax.
Although
our foreign corporate subsidiaries are generally not expected to be subject to U.S. federal income tax on a net basis, such foreign corporate subsidiaries may receive income
that may be subject to withholding taxes imposed by the United States or other countries. To the extent that such entities are subject to U.S. federal income taxes on their income on a net basis or to
withholding taxes, our return on our investment in such entities could be materially adversely affected.
We own several domestic corporate subsidiaries, which we formed to make, from time to time, certain investments that could generate
income that would not be qualifying income if earned directly by us. Our domestic corporate subsidiaries will be subject to federal, state, and local corporate income tax on their income. To the
extent that any such domestic corporate subsidiaries pay any taxes, they will have less cash available for distribution to us, which would reduce the amount of cash available for distribution to
holders of our shares.
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We have recognized and may recognize in the future cancellation of indebtedness income upon the retirement of our debt at a discount.
Although there is no direct authority addressing the issue, we believe that our cancellation of indebtedness income will constitute
other income derived from our business of investing in stocks and securities and thus, will be qualifying income for purposes of the qualifying income exception applicable to publicly traded
partnerships.
We may make certain investments in natural resources in the future. Income and gains derived from certain activities related to
minerals and natural resources are treated as qualifying income for purposes of the qualifying income exception applicable to publicly traded partnerships. We expect that our investments in natural
resources generally would generate qualifying income for purposes of this exception. Income or loss from our investments in natural resources is expected to be treated as income or loss from passive
activities. See "Taxation of Holders of Our SharesLimitation on Deductibility of Certain of Our Losses" above. In addition, investments in natural resources may produce
unrelated business taxable income for tax-exempt holders of our shares. To the extent that such income is unrelated business taxable income, it will be subject to the rules described in
"Unrelated Business Taxable Income" above. For a discussion of issues related to investments in natural resources for non-U.S. holders, see "Taxation of
Non-U.S. Holders of Our Shares" above.
From time to time, we will enter into derivative transactions, such as interest rate swaps, caps and floors, total rate of return
swaps, options to purchase these items, and futures and forward contracts. We expect that many of our derivative transactions will be treated as "notional principal contracts" for U.S. federal income
tax purposes. For purposes of the qualifying income exception, unless we are treated as a dealer in notional principal contracts, income from notional principal contracts is treated as qualifying
income, provided (1) the property, income, or cash flow that measures the amounts to which the partnership is entitled under the contract would give rise to qualifying income if held or
received or (2) the notional principal contract is related to our business of investing in stock or securities. We expect that, in general, payments under our derivative instruments will be
measured by reference to an interest rate, interest rate index, or an index related to mineral or natural resources, with a cash flow that either would be treated as interest income or income with
respect to mineral or natural resources activities if received directly. As stated above, interest (other than interest derived from the "conduct of a financial or insurance business" or interest that
is based, directly or indirectly, on the profits of any person) and income and gain from certain mineral and natural resources activities are both treated as qualifying income for purposes of the
qualifying income exception. In addition, we expect that a significant portion of our income and gain from our notional principal contracts will be related to our business of investing in stock or
securities. Accordingly, we expect that the income and gain from such derivative transactions will be qualifying income for purposes of the qualifying income exception. However, the rules regarding
notional principal contracts are complex, and there can be no assurance that the IRS will not successfully challenge our characterization of a derivative transaction as a notional principal contract.
In addition,
we may enter into derivative transactions that do not produce qualifying income for the qualifying income exception. We intend to use our best efforts to structure any derivative transactions in a
manner that does not jeopardize our satisfaction of the qualifying income exception.
If we make an investment denominated in a currency other than the U.S. dollar, then we may recognize gain or loss attributable to
fluctuations in such currency relative to the U.S. dollar. We may
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also
recognize gain or loss on such fluctuations occurring between the time we obtain and dispose of non-U.S. currency, between the time we accrue and collect income denominated in a
non-U.S. currency, or between the time we accrue and pay liabilities denominated in a non-U.S. currency. Such gains or losses generally will be treated as ordinary income or
loss, and such gain generally will be treated as qualifying income under the qualifying income exception.
From time to time, we will make investments that will cause us (and thus you) to recognize income or gain without a corresponding
receipt of cash. This so-called "non-cash" or "phantom income" could arise for a variety of reasons, including:
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We will recognize taxable income in advance of the related cash flow if any debt security is deemed to have original issue
discount. The accrued original issue discount will be treated as interest income by us and an applicable portion will be passed-through to you, even though we will generally not receive payments
corresponding to this income until the maturity of or the disposition of the debt security.
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We may recognize taxable market discount income when we receive the proceeds from the disposition of, or principal
payments on, debt securities that have a stated redemption price at maturity that is greater than our tax basis in those debt securities, even though such proceeds will be used to make
non-deductible principal payments on related borrowings.
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We will be required to include in income on a current basis the earnings of certain foreign corporate subsidiaries as well
as the earnings of CLO issuers treated as partnerships or disregarded as a separate entity from us for U.S. federal income tax purposes, regardless of whether there has been a cash distribution of
such earnings.
You
will be required to take such "non-cash" or "phantom income" income into account in determining your taxable income, regardless of whether you receive a cash distribution
from us. Accordingly, you may not receive cash distributions equal to your tax liability attributable to your share of our taxable income.
If we were subject to the "anti-stapling" rules of Section 269B of the Code, we would incur a significant tax
liability as a result of owning (i) more than 50% of the value of both a domestic corporate subsidiary and a foreign corporate subsidiary or (ii) more than 50% of both a REIT and a
domestic or foreign corporate subsidiary. When a foreign corporate subsidiary and a domestic corporate subsidiary are treated as "stapled entities," the foreign corporation is treated as a domestic
corporation subject to U.S. federal corporate income tax. When a REIT and a domestic or foreign corporate subsidiary are treated as "stapled entities," the REIT and the domestic or foreign corporate
subsidiary are treated as one entity for purposes of the tax requirements applicable to REITs, which could result in the REIT failing to qualify as a REIT for U.S. federal income tax purposes.
Currently,
we have several subsidiaries that could be impacted if we were subject to the "anti-stapling" rules, including one subsidiary taxed as a REIT and several foreign
and domestic corporate subsidiaries. Because we intend to own a substantial proportion of our assets directly or through entities that are treated as partnerships or disregarded entities for U.S.
federal income tax purposes, we do not believe that the "anti-stapling" rules will apply. However, there can be no assurance that the IRS would not successfully assert a contrary position.
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We anticipate that certain of our majority-owned corporate and REIT subsidiaries will be treated as personal holding companies for U.S.
federal income tax purposes. A personal holding company is a "closely-held" corporation at least 60% of whose income constitutes "personal holding company income," which generally includes
dividends, interest, certain royalties, annuities and rents. We anticipate that all of our majority-owned corporate and REIT subsidiaries will be treated as "closely-held" under the
constructive ownership rules applicable to personal holding companies. In addition, substantially all of the income of certain of those subsidiaries will constitute personal holding company income. A
personal holding company generally is subject to a 15% (or 35% starting January 1, 2011) corporate tax on its personal holding company income that is not distributed, or treated as distributed,
during the year in which such income is earned. However, certain liquidating distributions are not treated as distributions for that purpose. We intend to cause our personal holding company
subsidiaries to distribute their income so as to avoid the personal holding company tax.
Certain dividend, interest and other income received by us from sources outside of the United States may be subject to withholding
taxes imposed by other countries. We may also be subject to capital gains taxes in certain other countries where we purchase and sell stocks and securities. Tax treaties between the United States and
other countries may affect, reduce or eliminate such taxes. You will be required to include such taxes in your income and generally will be entitled to claim either a credit (subject, however, to
various limitations on foreign tax credits) or a deduction (subject to the limitations generally applicable to deductions) for your share of such non-U.S. taxes in computing your U.S.
federal income taxes.
Administrative Matters
We have elected under Section 754 of the Code to adjust the tax basis in all or a portion of our assets in the event of a
distribution of property to a holder or in the event of a transfer of an interest in us, including our shares, by sale or exchange or as a result of the death of a holder. We are also required to
reduce the tax basis in our assets in connection with certain redemptions and dispositions of our shares. As a result of our election under Section 754 of the Code, each holder that purchases
our shares will have an initial tax basis in our assets that reflects the fair market value of our assets at the time of the purchase. Because our holders are treated as having differing tax bases in
our assets, a sale of an asset by us may cause holders to recognize different amounts of gain or loss or may cause some holders to recognize a gain and others to recognize a loss. Depending on when a
holder purchases our shares and the fair market value of our assets at that time, the holder may recognize gain for U.S. federal income tax purposes from the sale of certain of our assets even though
the sale would cause us to recognize a loss for financial accounting purposes. Our election under Section 754 of the Code can be revoked only with the consent of the IRS.
The
calculations under Section 754 of the Code are complex, and there is little legal authority concerning the mechanics of the calculations in the context of publicly traded
partnerships. To help reduce the complexity of those calculations and the resulting administrative costs to us, we will apply certain conventions in determining and allocating basis adjustments. For
example, we generally use a "first-in, first-out" assumption to make basis adjustments to our assets required as a result of our election under Section 754 of the Code.
It is possible that the IRS will successfully assert that the conventions we intend to use do not satisfy the technical requirements of the Code or the Treasury Regulations and, thus, will require
different basis adjustments to be made. Such different basis
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adjustments
could adversely affect the manner in which our income, gain, loss, deduction and credit is allocated to certain holders of shares.
Unless we elect to become subject to the rules for large partnership described below, which we have not done, we will be considered to
have been terminated for U.S. federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a 12-month period. Our
termination for tax purposes would result in the closing of our taxable year for all holders of shares. In the case of a holder reporting on a taxable year other than a fiscal year ending on our year
end, which is expected to continue to be the calendar year, the closing of our taxable year may result in more than 12 months of our taxable income or loss being includable in the holder's
taxable income for the year of termination. We would be required to satisfy the 90% "qualifying income" test for each tax period and to make new tax elections after a termination, including a new tax
election under Section 754 of the Code. A termination could also result in penalties if we were unable to determine that the termination had occurred. In the event that we become aware of a
termination, we will use commercially reasonable efforts to minimize any such penalties. Moreover, a termination might either accelerate the application of, or subject us to, any tax legislation
enacted before the termination. We have experienced terminations in the past, and it is likely that we will experience terminations in the future.
We intend to use reasonable efforts to furnish to you tax information (including IRS Schedule K-1) as promptly as
possible after the end of each taxable year, which describes your allocable share of our income, gain, loss, deduction and credit for the preceding taxable year. In preparing this information, we will
use various accounting and reporting conventions to determine your allocable share of income, gain, loss and deduction. Delivery of this information will be
subject to delay in the event of, among other reasons, the late receipt of any necessary tax information from an investment in which we hold an interest. It is therefore possible that, in any taxable
year, you will need to apply for extensions of time to file your tax returns. The IRS may successfully contend that certain of these reporting conventions are impermissible, which could result in an
adjustment to your income or loss. If you are not a U.S. person, there can be no assurance that this information will meet your jurisdiction's tax compliance requirements.
It
is possible that we may engage in transactions that subject us and, potentially, the holders of our shares to other information reporting requirements with respect to an investment in
us. You may be subject to substantial penalties if you fail to comply with such information reporting requirements. You should consult with your tax advisors regarding such information reporting
requirements.
Persons who hold our shares as nominees for another person are required to furnish to us (i) the name, address and taxpayer
identification number of the beneficial owner and the nominee; (ii) whether the beneficial owner is (1) a person that is not a U.S. person; (2) a foreign government, an
international organization or any wholly-owned agency or instrumentality of either of the foregoing; or (3) a tax-exempt entity; (iii) the amount and description of shares
held, acquired or transferred for the beneficial owner; and (iv) specific information including the dates of acquisitions and transfers, means of acquisitions and transfers, and acquisition
costs for purchases, as well as the amount of net proceeds from sales.
Brokers
and financial institutions are required to furnish additional information, including whether they are U.S. persons and specific information on shares they acquire, hold or
transfer for their own
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account.
A penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is imposed by the Code for failure to report that information to us. The nominee is required to supply the
beneficial owner of the shares with the information furnished to us.
A partnership is required to have a tax year that is the same tax year as any partner, or group of partners, that owns a majority
interest (more than 50%) in the partnership.
Our taxable year is currently the calendar year. A partnership also is required to change its tax year every time a group of partners with a different tax year end acquires a majority interest, unless
the partnership has been forced to change its tax year during the preceding two year period. In the event the majority interest in us changes to a group of holders with a different tax year and we
have not been forced to change our tax year during the preceding two year period, we would be required to change our tax year to the tax year of that group of holders.
The Code allows large partnerships to elect streamlined procedures for income tax reporting. This election, if made, would reduce the
number of items that must be separately stated on IRS Schedule K-1 that are issued to the holders of our shares, and such IRS Schedules K-1 would have to be
provided on or before March 15 following the close of each taxable year. In addition, this election would prevent us from suffering a "technical termination" (which would close our taxable
year) if, within a 12-month period, there is a sale or exchange of 50% or more of our total interests. If an election is made, IRS audit adjustments will flow through to the holders of the
shares for the year in which the adjustments take effect, rather than the holders of the shares in the year to which the adjustment relates. In addition, we, rather than the holders of the shares
individually, generally will be liable for any interest and penalties that result from an audit adjustment. We do not currently anticipate that we will elect to be subject to the large partnership
procedures.
Adjustments in tax liability with respect to our items generally will be made at the KKR Financial Holdings LLC level in a
partnership proceeding rather than in separate proceedings with each holder. KKR Financial Advisors LLC will represent us as our "tax matters partner" during any audit and in any dispute with
the IRS. If KKR Financial Advisors LLC ceases to own shares or ceases to be our Manager, our board of directors may designate a replacement tax matters partner. Each holder of our shares will
be informed of the commencement of an audit of us. In general, the tax matters partner may enter into a settlement agreement with the IRS on behalf of, and that is binding upon, the holders of shares.
In certain circumstances, a holder who disposes of our shares resulting in the recognition by such holder of significant losses in
excess of certain threshold amounts may be obligated to disclose its participation in such transaction, or a "reportable transaction," in accordance with recently issued regulations governing tax
shelters and other potentially tax-motivated transactions, or the "Tax Shelter Regulations." In addition, an investment in us may be considered a "reportable transaction" if, for example,
we recognize certain significant losses in the future. You should consult your tax advisors concerning any possible disclosure obligation under the Tax Shelter Regulations with respect to the
disposition of your shares or your allocable share of certain losses incurred by us.
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We will be required in certain circumstances to backup withhold on certain payments paid to holders of the shares who do not furnish us
with their correct taxpayer identification number (in the case of individuals, their social security number) and certain certifications, or who are otherwise subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld from payments made to you may be refunded or credited against your U.S. federal income tax liability, if any, provided that the required
information is furnished to the IRS.
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process, the IRS
and the Treasury, frequently resulting in revised interpretations of established concepts, statutory changes, revisions to regulations and other modifications and interpretations. No assurance can be
given as to whether, or in what form, any proposals affecting us or our shareholders will be enacted. The IRS pays close attention to the proper application of tax laws to partnerships. The present
U.S. federal income tax treatment of an investment in our shares may be modified by administrative, legislative or judicial interpretation at any time, and any such action may affect investments and
commitments previously made. For example, the U.S.
federal income tax rules relating to publicly traded partnerships are currently under review by Congress, and certain legislative proposals have been made that would affect the tax treatment of
publicly traded partnerships. While we believe that the current legislative proposals would not adversely affect the manner in which we will be taxed, no assurance can be given as to whether, or in
what form, such proposals will ultimately be enacted, or whether they will have an effect on us. We and holders of our shares could be adversely affected by any such change in, or any new, tax law,
regulation or interpretation. Our organizational documents and agreements permit the board of directors to modify the operating agreement from time to time, without the consent of the holders of
shares, to address certain changes in U.S. federal income tax regulations, legislation or interpretation. In some circumstances, such revisions could have a material adverse effect on some or all of
the holders of our shares.
Material U.S. Federal Income Tax Considerations Relating to Investments in REITs
We currently own one subsidiary taxed as a REIT (KFH II). We may in the future invest in other REITs. For example, we may invest in
real estate through one or more REIT subsidiaries. In light of those investments and the complexity of the REIT rules, certain aspects of such rules are discussed below.
Under the Code, a REIT itself is generally not subject to tax to the extent that it currently distributes its income to its
shareholders. To qualify as a REIT, an entity is required meet a number of technical U.S. federal income tax requirements, including various tests regarding the sources of its income, the nature and
diversification of its assets, the amounts it distributes to its shareholders and the ownership of its shares. In summary form, these technical requirements include the
following:
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a REIT must have at least 100 shareholders;
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no more than 50% in value of the REIT's outstanding capital stock may be owned, directly or indirectly, by five or fewer
individuals (defined to include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts certain entities) during the last half of any calendar year;
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a REIT generally must distribute 90% of its REIT taxable income each year to its shareholders;
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75% of a REIT's gross income must be from rents from real property, interest on mortgages and certain real estate related
income, or the "75% gross income test," and 95% of the REIT's gross income must be derived from those sources together with certain types of passive investment income, including interest and
dividends;
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-
at least 75% of the value of a REIT's total assets at the end of each calendar quarter must be represented by real estate
assets (which generally includes interest in real property, stock or other entities that qualify as REITs, interest in mortgage loans secured by real property, investments in stock or debt instruments
during the one-year period following the receipt of new capital and regular and residual interests in a REMIC), cash and cash items and government securities; and
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the amount of securities of a single issuer, other than a taxable REIT subsidiary, that a REIT holds at the end of each
calendar quarter generally must not exceed either 5% of the value of its gross assets or 10% of the vote or value of such issuer's outstanding securities.
A
portion of a REIT's income from a residual interest in a REMIC or a taxable mortgage pool arrangement may be treated as "excess inclusion income." KFH II holds residual interests in certain
securitization vehicles that may be treated as taxable mortgage pools. IRS guidance indicates that excess inclusion income will be allocated among a REIT's shareholders in proportion to its dividends
paid. A shareholder's share of excess inclusion income (i) would not be allowed to be offset by any net operating losses otherwise available to U.S. shareholders, (ii) would be subject
to tax as UBTI in the hands of most tax-exempt shareholders, and (iii) would result in the application of U.S. federal income tax withholding at the maximum rate of 30%, without
reduction for any otherwise applicable income tax treaty, to the extent allocable to most types of foreign shareholders. If at any time a "disqualified organization," as defined in
Section 860E(e)(5) of the Code, is a record holder of our shares, we would be subject to tax at the highest corporate tax rate on any excess inclusion income allocable to such disqualified
organization.
A
REIT in which we invest will generally not be subject to U.S. federal income tax on the portion of its ordinary income and capital gain it distributes currently to its shareholders.
The REIT would be subject to tax at corporate rates on any net ordinary income or capital gain not so distributed. The REIT would also be subject to a tax equal to 100% of net income from any
prohibited transaction and to alternative minimum tax liability (which could arise if it has significant items of tax preference). A "prohibited transaction" is a sale of inventory or property held
for sale to customers in the ordinary course of business. We generally do not anticipate that any REIT in which we invest will generate significant amounts of income from prohibited transactions.
If
a REIT in which we invest failed to qualify as a REIT and was not able to cure such failure under the applicable provisions of the Code, it would be subject to U.S. federal income tax
(including any applicable alternative minimum tax) on its taxable income at regular corporate rates, and it would not be permitted to deduct distributions to its shareholders. In addition, to the
extent of current and accumulated earnings and profits, all distributions would be taxable as dividend income and, subject to certain limitations under the Code, corporate distributees could be
eligible for the dividends-received deduction and individual U.S. holders could be eligible for the reduced U.S. federal income tax rate on corporate dividends. Unless entitled to relief under
specific statutory provisions, such REIT and any "successor entity" will also be disqualified from taxation as a REIT for the four taxable years following the year in which it lost its qualification.
It is not possible to state whether in all circumstances a REIT subsidiary would be entitled to this statutory relief.
In
addition, if KFH II failed to qualify as a REIT, it could result in the securitization vehicles treated as taxable mortgage pools being taxed as corporations for U.S. federal income
tax purposes.
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Generally,
when an entity, or a portion of an entity, is classified as a taxable mortgage pool, it is treated as a taxable corporation for U.S. federal income tax purposes. However, special rules
apply to a REIT, a portion of a REIT or a qualified REIT subsidiary that is a taxable mortgage pool. The portion of the REIT's assets held directly or through a qualified REIT subsidiary that
qualifies as a taxable mortgage pool is treated as a qualified REIT subsidiary that is not subject to corporate income tax, and the taxable mortgage pool classification does not affect the tax
qualification of the REIT. We expect
that KFH II will continue to be treated as a REIT and the special rules will apply to its ownership of the securitization vehicles treated as taxable mortgage pools. However, if the securitization
vehicles were not eligible for the special treatment for taxable mortgage pools owned by a REIT, the resulting corporate income tax liability of the securitization vehicles could be substantial.
You will be allocated a portion of the income that we realize with respect to our ownership of the equity of any REIT in which we
invest. You generally will be taxed with respect to this allocated income in the same manner as if you held the REIT shares directly.
U.S. Holders of REIT Shares.
Distributions made by a REIT to its taxable U.S. shareholders out of current or accumulated
earnings and profits (and
not designated as capital gain dividends) will be taken into account by them as ordinary income and will not be eligible for the dividends-received deduction for corporations or the reduced rate of
U.S. federal income tax on qualified dividend income for taxpayers taxed at individual rates (through December 31, 2010). Distributions that a REIT designates as capital gain dividends will be
taxed as long-term capital gains (to the extent they do not exceed the REIT's actual net capital gain for the taxable year) without regard to the period for which the shareholder has held
its stock. Corporate shareholders, however, may be required to treat up to 20% of certain capital gain dividends as ordinary income. Distributions in excess of current and accumulated earnings and
profits will generally not be taxable to a shareholder to the extent that they do not exceed the shareholder's adjusted basis in its shares, but rather will reduce such adjusted basis. To the extent
that such distributions exceed the adjusted basis of a shareholder's shares they will be included in income as long-term capital gain (or short-term capital gain if the shares
have been held for one year or less), assuming the shares are a capital asset in the hands of the shareholder. Any consent dividends deemed paid by a REIT will be taxable as ordinary income to the
shareholders to the extent of earnings and profits, even though no cash will be distributed by the REIT. Shareholders may not include in their income tax returns any net operating losses or capital
losses of a REIT. A U.S. shareholder's share of excess inclusion income would not be allowed to be offset by any net operating losses otherwise available to the shareholder.
A
shareholder's gain on the sale of its shares in a REIT will be taxed at long-term or short-term capital gain rates, depending on how long the shares were held,
and assuming the shares were a capital asset in the hands of the shareholder. In general, however, any loss upon a sale or exchange of shares by a shareholder that has held such shares for six months
or less (after applying certain holding period rules) will be treated as a long-term capital loss to the extent of previous distributions from a REIT to the shareholder that were required
to be treated by such shareholder as long-term capital gain.
Tax-Exempt Holders of REIT Shares.
Unless the REIT is a "pension-held REIT," distributions by a REIT to a shareholder that is
a tax-exempt entity generally will not constitute UBTI, other than any amounts that represent excess inclusion income, assuming the shares are not debt-financed or used in an
unrelated business of such holder. Although tax-exempt holders of our shares may not derive significant UBTI as a result of distributions with respect to REIT shares, such holders will
recognize a significant amount of UBTI as a result of indebtedness incurred by us with respect to our assets and as a result of excess inclusion income from the securitization vehicles that are
treated as taxable mortgage pools. See "Taxation of Holders of Our SharesUnrelated Business Taxable Income." Tax-exempt
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holders
are strongly urged to consult their tax advisors regarding the tax consequences of owning shares.
Taxation of Non-U.S. Holders of REIT Shares.
Dividends from a REIT that are not attributable to gains from the sale of "United
States
real property interests" would be subject to U.S. withholding tax at a 30% rate (subject to reduction by applicable treaty). For most types of foreign shareholders, dividends that are attributable to
excess inclusion income would be subject to withholding at the maximum rate of 30%, without reduction for any otherwise applicable income tax treaty. However, if a distribution is treated as
effectively connected with the non-U.S. shareholder's conduct of a U.S. trade or business, the non-U.S. shareholder generally will be subject to U.S. federal income tax on the
distribution at graduated rates, in the same manner as U.S. shareholders are taxed on distributions and may be subject to the 30% branch profits tax in the case of corporate non-U.S.
shareholders.
Dividends
that are attributable to gains from the sale of United States real property interests would be subject under FIRPTA to withholding tax at a rate of 35% and would be considered
income effectively connected with a U.S. trade or business (which would require the filing of U.S. federal income tax returns by non-U.S. persons and which would be subject to the branch
profits tax for corporate non-U.S. holders). For these purposes, dividends paid are first considered attributable to gains from the sale of United States real property interests, if any.
The term "United States real property interest" does not include mortgage loans or mortgage-backed securities. As a result, we do not anticipate that KFH II will generate material amounts of gain that
would be subject to FIRPTA. If we invest in real estate through one or more REIT subsidiaries, we may generate gain that is subject to FIRPTA.
If
at least 50% of the assets that a REIT holds are United States real property interests, gains from the sale of the REIT shares by a non-U.S. shareholder would be subject
to FIRPTA tax. We believe it is unlikely that gains from the sale of the equity in KFH II will be subject to the FIRPTA tax. It is possible, however, we may hold stock in another REIT that exceeds the
50% threshold. Gains on
the sale of shares in such a REIT, however, would not be subject to the FIRPTA tax, so long as the REIT was "domestically controlled." A domestically controlled REIT is a REIT in which, at all times
during a specified testing period, less than 50% in value of its shares is held directly or indirectly by non-U.S. persons.
You
should consult your tax advisors regarding the application and effect of state, local and foreign income and other tax laws on the indirect investment in stock or other securities of
any REIT in which we invest.
DESCRIPTION OF SHARES
General
The following is a summary of some of the terms of the shares representing limited liability company interests in KKR Financial
Holdings LLC. Our operating agreement provides for the issuance of our shares, as well as certain terms of our shares. The following summary of some of the terms of our shares, the operating
agreement and the Delaware Limited Liability Company Act is not complete and is subject to, and qualified in its entirety by reference to, all of the provisions of the operating agreement, a copy of
which has been incorporated by reference as an exhibit to the registration statement of which this prospectus is a part and which you may obtain as described under "Where You Can Find More
Information," and the Delaware Limited Liability Company Act.
Authorized Shares
Each of our shares represents a limited liability company interest in KKR Financial Holdings LLC. We are authorized to issue,
pursuant to action by our board of directors and without action by holders
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of
our shares, up to 500,000,000 common shares and up to 50,000,000 preferred shares. As of April 22, 2010, there were 158,359,757 common shares outstanding and no preferred shares outstanding.
The aggregate number of shares that we are authorized to issue, and the authorized number of any class of our shares, may be increased from time to time by an amendment to the operating agreement upon
the adoption of a resolution by our board of directors declaring such amendment to be advisable and approval of such amendment by the holders of at least a majority of our shares then outstanding at a
meeting of shareholders.
There is currently only one class of our common shares outstanding. All outstanding common shares of this class are duly issued.
Holders of common shares of this class, as such, are not entitled to any preemptive rights to subscribe for or purchase our shares or any other securities we may issue, and the common shares of this
class are not convertible at the option of the holders into other securities. Upon payment of the full consideration payable to us upon original issuance of any common shares of this class, as
determined by our board of directors, the holders of those shares will not be obligated to make any additional capital contributions to us with respect to those shares. All common shares of this class
are non-assessable. However, holders of common shares may be liable to us for certain distributions made to them in violation of the Delaware Limited Liability Company Act or the operating
agreement as described below under "Liability For Distributions" and "Certain Provisions of the Operating AgreementRestrictions on Ownership and Transfer" and
may also be required to make certain other payments as described under "Certain Required Payments."
Voting Rights.
Holders of outstanding common shares are entitled to one vote per common share as provided in the operating agreement.
Subject to the
voting rights, if any, of any other class or series of our shares that may be outstanding from time to time, the holders of common shares are entitled, at the annual meeting of the holders of our
shares, to vote for the election of all of our directors. Because the operating agreement does not provide for cumulative voting rights, the holders of a plurality of the voting power of the then
outstanding common shares represented at a meeting of the holders of the
common shares will effectively be able to elect all our directors standing for election by the holders of our common shares.
Distribution Rights.
We may, subject to certain restrictions, pursuant to action of our board of directors, declare and pay
distributions on the
common shares. Holders of our outstanding common shares are entitled to share ratably (based on the number of common shares held) in any distribution declared by our board of directors out of funds
legally available therefor, subject to any statutory or contractual restrictions on the payment of distributions, including those in the operating agreement and the Delaware Limited Liability Company
Act, and to any restrictions on the payment of distributions imposed by the terms of any other outstanding shares.
Dissolution Rights.
For a description of some of the provisions of our operating agreement that would be applicable to our outstanding
common shares
in the event of our dissolution, see "Certain Provisions of the Operating AgreementDissolution" below.
Our board of directors may, without further action by the holders of our shares (unless required by the rules of any applicable stock
exchange), cause us to issue from time to time one or more other classes or series of our shares, including one or more classes of preferred shares and one or more other classes of common shares. Our
board of directors may determine, without further action by the holders
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of
our shares, the terms, designations, preferences, rights, powers and duties of any such future shares, including:
The Delaware Limited Liability Company Act imposes certain restrictions on distributions by a limited liability company to its members.
In that regard, our operating agreement defines a "member" as any holder of our shares. The Delaware Limited Liability Company Act provides that any of our members who receives a distribution from us
(including both distributions
made by us from time to time and distributions in the event of our dissolution) and who knew at the time of the distribution that the distribution was in violation of these restrictions shall be
liable to us for the amount of the distribution for three years, subject to extension under certain circumstances. Under the Delaware Limited Liability Company Act, a limited liability company may not
in general make a distribution to any of its members if, after the distribution, all liabilities of the limited liability company, other than liabilities to its members on account of their limited
liability company interests and liabilities for which the recourse of creditors is limited to specific property of the limited liability company, would exceed the fair value of the assets of the
limited liability company. For the purpose of determining the fair value of the assets of a limited liability company, the Delaware Limited Liability Company Act provides that the fair value of
property subject to liability for which recourse of creditors is limited shall be included in the assets of the limited liability company only to the extent that the fair value of that property
exceeds the nonrecourse liability. In addition, the Delaware Limited Liability Company Act and our operating agreement provide in general that, in the event of our dissolution, holders of our shares
will be entitled to share in our assets legally available for distribution only after satisfaction of or provision for our liabilities to creditors and satisfaction of liabilities for certain
distributions owing to our members and former members. See "Certain Provisions of the Operating AgreementDissolution."
In
addition, our operating agreement provides that a member may be required to repay any distributions made to such member that are inconsistent with, or in violation of, the Delaware
Limited Liability Company Act, any provision of the operating agreement or any other applicable law.
Under the Delaware Limited Liability Company Act, unless otherwise provided in the operating agreement of a limited liability company,
an assignee of limited liability company interests (such as our shares) who becomes a member of the limited liability company is liable for the obligations of the
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assignor
of those interests to make any required contributions to the limited liability company, but the assignee is not obligated for, among other things, liabilities unknown to the assignee at the
time it became a member and that could not be ascertained from the operating agreement. Under our operating agreement, a person who purchases our shares is deemed to become one of our members and is
therefore subject to the provisions described in the preceding sentence.
Under our operating agreement, holders of our shares may be required to make certain other payments under certain circumstances. For
example, a holder of our shares may be required to pay a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with a transfer of those shares. In the event
that we issue a new share certificate in place of any share certificate that has been lost, destroyed or stolen, we may require that the holder of the shares evidenced by the lost, destroyed or stolen
certificate give the transfer agent for our shares a bond sufficient to indemnify the transfer agent against any claim made against it on account of the alleged loss, theft or destruction or the
issuance of such new certificate. In addition, we may require that a holder of our shares who requests that we call a special meeting of holders of our shares pay the costs of preparing and mailing
the notice of meeting, including the proxy materials.
Grantor Trust
Pursuant to our operating agreement, in the future our board of directors may implement a reorganization, without the consent of
holders of our shares, whereby a Delaware statutory trust, which we refer to as a "Trust," would become the holder of all (or less if so provided by our board of directors) of our outstanding shares
and each holder of our shares (other than any shares excluded by our board of directors) would receive shares of the Trust (representing beneficial interests in the Trust) in exchange for its shares
in us. Our board of directors will have the power to decide in its sole discretion to implement such a trust structure subject to the limitations set forth below. We expect that we would treat the
Trust as a grantor trust for U.S. federal income tax purposes. As such, for U.S. federal income tax purposes, each holder of Trust shares would be treated as the beneficial owner of a pro rata portion
of our shares held by the Trust and holders of Trust shares would receive annual tax information relating to their investment on tax information statements similar to IRS Form 1099, rather than
on IRS Schedule K-1. Pursuant to the operating agreement, our board of directors will not implement such a trust structure if it determines, in its sole discretion, that the
reorganization would be taxable or would otherwise alter the benefits or burdens of ownership of our shares, including, without limitation, a holder's allocation of items of income, gain, loss,
deduction or credit or the treatment of such items for U.S. federal income tax purposes. Pursuant to the operating agreement, our board of directors will also be required to implement the
reorganization in such a manner that does not have a material adverse effect on the voting or economic rights of our shares.
The
IRS could challenge the Trust's manner of reporting to investors (e.g., if the IRS asserts that the Trust constitutes a partnership or is ignored for U.S. federal income tax
purposes). In addition, the Trust could be subject to penalties if it were determined that the Trust did not satisfy applicable partnership reporting requirements for U.S. federal income tax purposes.
Any of these circumstances could have an adverse effect on the market value of our shares and of any other securities we may issue.
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Certain Provisions of the Operating Agreement
Term.
The operating agreement provides that we will remain in existence until terminated in accordance with the operating agreement.
Agreement to be Bound by Operating Agreement; Power of Attorney.
By acquiring a share in KKR Financial Holdings LLC, you will be
admitted as a
member of KKR Financial Holdings LLC and shall become bound by the terms of the operating agreement. Pursuant to the operating agreement, each holder of our shares agrees to the consents and
waivers contained in the operating agreement and grants to each of our chief executive officer, our president and our secretary (and, if appointed, a liquidator) a power of attorney to, among other
things, execute and file documents required for our qualification, continuance or dissolution and to make certain amendments to the operating agreement.
Election to be Treated as an Association Taxable as a Corporation.
The operating agreement provides that our board of directors may,
without the
consent or vote of holders of our shares, cause us to elect to be treated as an association taxable as a corporation for U.S. federal income tax purposes if the board receives an opinion from a
nationally recognized financial adviser to the effect that our market valuation is expected to be significantly lower as a result of our continuing to be treated as a partnership for U.S. federal
income tax purposes than if we instead elected to be treated as a corporation for U.S. federal income tax purposes.
Dissolution.
The operating agreement provides for our dissolution and winding up upon the occurrence of:
-
-
the adoption of a resolution by a majority vote of our board of directors approving our dissolution and the approval of
such action by the affirmative vote of the holders of a majority of our outstanding shares entitled to vote thereon;
-
-
the unanimous vote of the holders of our outstanding shares to dissolve us;
-
-
the entry of a judicial decree that an event has occurred that makes it not reasonably practicable to carry on our
business as then currently operated as determined in accordance with Section 18-802 of the Delaware Limited Liability Company Act; or
-
-
the termination of the legal existence of our last remaining member or the occurrence of any other event that terminates
the continued membership of our last remaining member, unless we continue without dissolution in a manner permitted under the operating agreement or the Delaware Limited Liability Company Act.
We
refer to these events as "dissolution events."
The
operating agreement provides in general that, upon the occurrence of a dissolution event, our property shall be applied and distributed, to the extent permitted by law, in the
following order:
-
-
first, to our creditors (including our Manager and members who are creditors, to the extent permitted by law) in
satisfaction of our debts and other liabilities (whether by payment or making a provision for payment), other than liabilities referred to in the next bullet point;
-
-
second, except as provided in the operating agreement, to our members and former members in satisfaction of liabilities
for certain distributions; and
-
-
the balance, if any, to our members in accordance with positive balances in their respective tax-based capital
accounts required by the operating agreement, after giving effect to all contributions, distributions and allocations for all periods and subject, in the case of holders of our common shares, to any
preferential distributions to which the holders of any of our other shares may be entitled upon dissolution.
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The
operating agreement provides that it is intended that each common share shall receive an identical amount under the provision described in the last bullet point above.
Restrictions on Ownership and Transfer.
Because we intend to maintain the flexibility to have a REIT subsidiary, the ownership of our
shares must be
widely held so that no more than 50% of the value of our outstanding shares may be owned, directly or constructively, by five or fewer individuals (as defined in the Code to include certain entities).
The
operating agreement, subject to certain exceptions, contains restrictions on the number of our shares that a person may own. The operating agreement provides that (subject to certain
exceptions
described below) no person may beneficially or constructively own, or be deemed to beneficially or constructively own by virtue of the attribution provisions of the Code, more than 9.8% in value or in
number, whichever is more restrictive, of our shares.
The
operating agreement, subject to certain exceptions, prohibits any person from beneficially or constructively owning shares that would result in any subsidiary of ours that has
elected to be taxed as a REIT (we sometimes refer to any such subsidiary as, individually, a "REIT subsidiary"), being "closely held" under Section 856(h) of the Code or otherwise cause a REIT
subsidiary to fail to qualify as a REIT.
Any
person who acquires or attempts or intends to acquire beneficial or constructive ownership of our shares that will or may violate any of the foregoing restrictions on transferability
and ownership, or who is the intended transferee of shares which are transferred to a charitable trust (as described below), is required by the operating agreement to give written notice to us
immediately, or, in the case of such a proposed or attempted transaction, to give us at least fifteen days prior written notice, and to provide us with such other information as we may request in
order to determine the effect of such transfer on the status of any REIT subsidiary as a REIT. The foregoing restrictions on transferability and ownership may be terminated by our board of directors
if it determines that it is no longer in our best interests for any REIT subsidiary to continue to qualify as a REIT under the Code or that compliance with those restrictions is no longer required. As
a result, our board of directors may terminate those restrictions if, for example, we were to sell or cease to operate any REIT subsidiary. As of the date of this prospectus, we have one REIT
subsidiary, KFH II.
Our
board of directors, in its sole discretion, may exempt a person from the foregoing restrictions. The person seeking an exemption must provide to our board of directors such
representations, covenants and undertakings as the board of directors may deem appropriate in order to conclude that granting the exemption will not cause any REIT subsidiary to lose its status as a
REIT. Our board of directors may also require a ruling from the IRS or an opinion of counsel in order to ensure each REIT subsidiary's status as a REIT.
To
the extent permitted by applicable law, any attempted transfer which, if effective, would result in a violation of the foregoing restrictions, will cause the number of shares causing
the violation (rounded upwards to the nearest whole share) to be automatically transferred to a trust for the exclusive benefit of one or more charitable beneficiaries, and the proposed transferee
will not acquire any rights in such shares. The automatic transfer will be deemed to be effective as of the close of business on the business day prior to the date of the transfer. Shares held in the
trust will be issued and outstanding shares. The proposed transferee will not benefit economically from ownership of any shares held in the trust and will have no rights to distributions, rights to
vote or other rights attributable to the shares held in the trust. The trustee of the trust will have all voting rights and rights to distributions with respect to shares held in the trust. These
rights will be exercised for the exclusive benefit of the charitable beneficiary. Any distribution paid to the proposed transferee prior to our discovery that shares have been transferred to the trust
must be paid on demand to the trustee. Any distribution authorized but unpaid will be required to be paid to the trustee when due. Any distribution paid to the trustee will be held in trust for the
charitable beneficiary. Subject to applicable law, the
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trustee
will have the authority (i) to rescind as void any vote cast by the proposed transferee prior to our discovery that the shares have been transferred to the trustee and (ii) to
recast the vote in accordance with the desires of the trustee acting for the benefit of the charitable beneficiary. If we have already taken irreversible action, however, then the trustee will not
have the authority to rescind and recast the vote.
Within
20 days of receiving notice from us that shares have been transferred to the trust, the trustee is required to sell the shares to a person designated by the trustee, whose
ownership of the shares will not violate the above ownership limitations. Upon such sale, the interest of the charitable beneficiary in the shares sold will terminate and the trustee is required to
distribute the net proceeds of the sale to the proposed transferee and to the charitable beneficiary as follows: the proposed transferee will receive the lesser of (i) the price paid by the
proposed transferee for the shares or, if the proposed transferee did not give value for the shares in connection with the event causing the shares to be held in the trust (e.g., a gift, devise
or other similar transaction), the market price of the shares on the day of the event causing the shares to be held in the trust and (ii) the price per share received by the trustee (net of any
commissions and other expenses of sale) from the sale or other disposition of the shares. The price may be reduced, however, by the amount of any distributions paid to the proposed transferee on the
shares and owed by the proposed transferee to the trustee. Any net sales proceeds in excess of the amount payable to the proposed transferee must be paid immediately to the charitable beneficiary. If,
prior to discovery that shares have been transferred to the trustee, the shares are sold by the proposed transferee, then (i) the shares shall be deemed to have been sold on behalf of the trust
and (ii) to the extent that the proposed transferee received an amount for the shares that exceeds the amount the proposed transferee was entitled to receive, the excess must be paid to the
trustee upon demand.
In
addition, shares held in the trust will be deemed to have been offered for sale to us, or our designee, at a price per share equal to the lesser of (i) the price per share in
the transaction that resulted in the transfer to the trust (or, in the case of a devise or gift, the market price at the time of the devise or gift) and (ii) the market price on the date we, or
our designee, accepts the offer. The price may be reduced, however, by the amount of any distributions paid to the proposed transferee on the shares and owed by the proposed transferee to the trustee.
We will have the right to accept the offer until the trustee has sold the shares. Upon a sale to us, the interest of the charitable beneficiary
in the shares sold will terminate and the trustee will distribute the net proceeds of the sale to the proposed transferee.
If
the transfer of shares to a charitable trust would not be effective for any reason to prevent a violation of the foregoing restrictions then, to the fullest extent permitted by law,
the transfer of that number of shares that would otherwise cause that violation shall be void ab initio and the intended transferee will acquire no rights in those shares. In addition, if our board of
directors or any duly authorized committee thereof determines that a transfer or other event has taken place that has resulted in a violation of the foregoing restrictions or that a person intends or
has attempted to acquire ownership of our shares in violation of those restrictions, the board of directors or such committee may take such action as it deems advisable to prevent such transfer or
other event, including, without limitation, causing us to redeem shares, refusing to give effect to such transfer on our books or instituting proceedings to enjoin such transfer or other event.
All
certificates representing our shares will bear a legend referring to the restrictions described above.
Every
owner of 0.5% or more (or such higher percentage as determined by the Manager, in good faith, in order to maintain each REIT subsidiary's status as a REIT) in value of our shares,
within 30 days after the end of each taxable year, is required by our operating agreement to give written notice to us stating the name and address of such owner, the number of shares which the
owner
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beneficially
owns and a description of the manner in which the shares are held. Each such owner of our shares is also required by the operating agreement to provide to us such additional information
as we may request in order to determine the effect, if any, of such beneficial ownership on each REIT subsidiary's status as a REIT and to ensure compliance with the ownership limitations described
above. In addition, each owner of shares is required by our operating agreement to provide to us such information as we may request, in good faith, in order to determine each REIT subsidiary's status
as a REIT and to comply with the requirements of any taxing authority or governmental authority or to determine and ensure compliance with the ownership limitations described above.
These
ownership limitations could delay, defer or prevent a transaction or a change in control that might involve a premium price for the shares or might otherwise be in the best
interests of the holders of the shares.
Election of Members of Our Board of Directors; Vacancies.
The operating agreement provides that the term of each director shall be the
period from
the effective date of such director's election until such director's successor is duly elected or appointed and qualified, or until such director's earlier death, resignation or removal, and that,
except as may be provided by our board of directors in setting the
terms of any class or series of our shares, any vacancy on the board of directors shall be filled by a majority vote of the directors then in office, even if the remaining directors do not constitute
a quorum.
Removal of Members of Our Board of Directors.
Subject to the rights of holders of any class or series of our shares that may be issued
in the future,
the operating agreement provides that any director, or the entire board of directors, may be removed from office at any time, but only for cause and then only by the affirmative vote of the holders of
our shares holding at least two-thirds of the votes entitled to be cast in the election of directors. "Cause" is defined by the operating agreement to mean, with respect to any particular
director, conviction of a felony or a final judgment of a court of competent jurisdiction holding that such director caused demonstrable, material harm to us through bad faith or active and deliberate
dishonesty.
Duties of Officers and Directors.
The operating agreement provides that, except as otherwise provided therein or otherwise required by
the Delaware
Limited Liability Company Act, the fiduciary duties of our directors will generally be consistent with those of a director of a Delaware corporation. However, our operating agreement further provides
that, to the fullest extent permitted by law, none of our directors has any duties, fiduciary or otherwise, with respect to any action or inaction of our Manager and any actions or inactions of our
directors that cause us to act in compliance with or in accordance with the management agreement shall be deemed consistent and compliant with the fiduciary duties of such directors and shall not
constitute a breach of any duty under the operating agreement or existing in law, equity or otherwise. Likewise, the operating agreement provides that, to the extent permitted by law, none of our
officers owes any duty, fiduciary or otherwise, to our members or to us with respect to any action or inaction of our Manager pursuant to the management agreement.
The
operating agreement also provides that any director, officer, employee or agent of ours may engage in or possess an interest in other profit-seeking or other business ventures of any
nature or description, independently or with others, whether or not such ventures are competitive with us, and the doctrine of corporate opportunity, or any analogous doctrine, shall not apply to such
persons. Our operating agreement further provides that if any director, officer, employee or agent of ours acquires knowledge of a potential transaction, agreement, arrangement or other matter that
may be an opportunity for us, that person has no duty to communicate or offer that opportunity to us and shall not be liable to us or to our members for breach of duty, including fiduciary duty under
the operating agreement, at law, in equity or otherwise, by reason of the fact that such person pursues or acquires for or directs that opportunity to another person or does not communicate that
opportunity to us; and that neither we nor any of our members has any rights or obligations by virtue of the operating agreement
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in
or to any such independent ventures or the income or profit or losses derived therefrom, and the pursuit of such ventures, even if competitive with our activities, shall not be deemed wrongful or
improper or a breach of any duty existing under the operating agreement, at law, in equity or otherwise.
Limitation of Liability and Indemnification of Directors and Officers.
The operating agreement provides that none of our directors will
be liable to
us, or any subsidiary of ours, or any holder of our shares, for monetary damages for any acts or omissions arising from the performance of any of such director's obligations or duties in connection
with our company, including any breach of fiduciary duty, except (1) for any breach of the director's duty of loyalty to us or the holders of our shares; (2) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of law; or (3) for any transaction from which the director derived an improper benefit.
The
operating agreement further provides that, to the fullest extent permitted by law, none of our directors shall be liable to us, to any holder of our shares or to any other person for
(1) any action taken or not taken as required by the operating agreement; (2) any action taken or not taken as permitted by the operating agreement and with respect to which such
director acted on an informed basis, in good faith and with the honest belief that such action, taken or not taken, was in our best interests; or (3) our compliance with an obligation incurred
or the performance of any agreement entered into prior to that director having become one of our directors.
The
operating agreement further provides that each director shall, in the performance of such director's duties, be fully protected in relying in good faith upon our records and upon
such information, opinions, reports or statements presented to us by the Manager, or employees of the Manager, or any of our officers, or committees of our board of directors, or by any other person
as to matters the director reasonably believes are within such other person's professional or expert competence, including, without limitation, information, opinions, reports or statements as to the
value and amount of our assets, liabilities, profits or losses, or the value and amount of assets or reserves or contracts, agreements or other undertakings that would be sufficient to pay our claims
and obligations or to make reasonable provision to pay such claims or obligations, or any other facts pertinent to the existence and amount of our assets from which distributions to members might
properly be paid.
The
operating agreement further provides that a director shall not be liable to us, to any other director, to any holder of our shares or to any other person that is a party to or
otherwise bound by the operating agreement for breach of fiduciary duty for such director's good faith reliance on the provisions of the operating agreement.
The
operating agreement provides that we may indemnify, to the fullest extent permitted by law, each person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by us or in our right) by reason of the fact that the person is or was a
director, officer, employee, tax matters member (as defined in the operating agreement) or agent of ours, or is or was serving at our request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding, if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to our best interests, and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful.
The
operating agreement provides that we may, to the fullest extent permitted by law, indemnify any person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of our company to procure a judgment in our favor by reason of the fact that such person is or was a director, officer, employee, tax matters
member or agent of ours, or is or was serving at our request as a director, officer, employee or agent of another
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corporation,
partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or
settlement of that action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to our best interests and except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person has been adjudged to be liable to us unless and only to the extent that the Court of Chancery of the State of Delaware or
the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which such court shall deem proper.
The
operating agreement provides that, to the extent that a present or former director, officer or tax matters member of ours has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in either of the two preceding paragraphs, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection therewith.
The
operating agreement provides that each of the persons entitled to be indemnified for expenses and liabilities as contemplated above may, in the performance of his, her or its duties,
consult with legal counsel and accountants, and any act or omission by such person on our behalf in furtherance of our interests in good faith in reliance upon, and in accordance with, the advice of
such legal counsel or accountants will be full justification for any such act or omission, and such person will be fully protected for such acts and omissions; provided that such legal counsel or
accountants were selected with reasonable care by or on our behalf.
The
operating agreement also authorizes us, to the fullest extent permitted by law, to pay expenses (including attorneys' fees) incurred by a director, officer, employee, tax matters
member or agent of ours in defending any civil, criminal, administrative or investigative action, suit or proceeding in advance of its final disposition upon receipt of an undertaking by or on behalf
of such person to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by us as authorized in the operating agreement. The operating agreement
provides that the indemnification provisions therein are intended to comply with the requirements of and to provide
indemnification and advancement rights substantially similar to those made available to directors, officers, employees and agents of a corporation incorporated under the Delaware General Corporation
Law.
Limitation on Special Meetings and Actions by Written Consent.
The operating agreement provides that special meetings of the holders of
our shares
may only be called by the chairman of the board of directors, the president, the chief executive officer or the board of directors, or by the secretary upon the written request of the holders entitled
to cast not less than a majority of all the votes entitled to be cast at such meeting. In addition, the operating agreement provides that action may only be taken by written consent of holders of our
shares if the unanimous written consent of all of the holders of our shares entitled to vote or consent to such matter is received. The inability of holders of our shares to easily call a special
meeting or take action by written consent could render more difficult or discourage an attempt to obtain control of us.
Advance Notice Requirements for Director Nominations and Proposals by Holders of Our Shares.
The operating agreement provides that
nominations of
individuals for election to the board of directors at an annual meeting of holders of our shares and the proposal of business to be considered at an annual meeting of holders of our shares may be made
only:
(1) pursuant
to our notice of the meeting,
(2) by
or at the direction of our board of directors, or
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(3) by
a holder of our shares who was a holder of our shares of record both at the time of giving of notice by such holder of our shares as provided for in the operating
agreement and at the time of the annual meeting and who is entitled to vote at the meeting and who has complied with the advance notice procedures of the operating agreement.
With
respect to special meetings of holders of our shares, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of individuals for
election to the board of directors at a special meeting may be made only:
(1) pursuant
to our notice of the meeting,
(2) by
or at the direction of our board of directors, or
(3) provided
that the board of directors has determined that directors will be elected at the meeting, by a holder of our shares who was a holder of record both at the time
of giving of notice by such holder as provided for in the operating agreement and at the time of the special meeting and who is entitled to vote at the meeting and who has complied with the advance
notice provisions of the operating agreement.
The
operating agreement provides that holders of our shares seeking to bring business before an annual meeting of holders of our shares or to nominate candidates for election as
directors at an annual meeting of holders of our shares must generally provide notice thereof in writing to us not less than 120 days and not more than 150 days prior to the anniversary
date of the mailing of the notice of the preceding year's annual meeting of holders of our shares. The operating agreement also provides that in the event we call a special meeting of holders of our
shares for the purpose of electing one or more individuals to the board of directors, any holder of our shares seeking to nominate a candidate for election at that meeting must provide notice thereof
to us in writing not earlier than the 120th day prior to such special meeting and not later than the later of the 90th day prior to such special meeting or the tenth day following the
day on which public announcement is first made of the date of the special meeting and of the nominees for director proposed by the board of directors to be elected at such meeting.
Mergers and Sales of Assets.
Subject to the provisions described in the second paragraph under "Provisions in the Operating
Agreement
that may have an Anti-Takeover Effect" below, the operating agreement provides that we may not merge or consolidate with or into any limited liability company, corporation, statutory
trust, business trust or association, real estate investment trust, common-law trust or any other unincorporated business, including a partnership, or sell, lease or exchange all or
substantially all of our property or assets, unless, in each case, our board of directors adopts a resolution by a majority vote approving such action and unless such action is approved by the
affirmative vote of the holders of a majority of each class of our shares then outstanding and entitled to vote thereon, except that no vote by the holders of our shares is required in the case of a
transaction described above under "Grantor Trust" or, in general, any transaction involving any of our subsidiaries or their assets.
Replacement of Our Manager.
The operating agreement provides that, if our management agreement is terminated and the board of directors
determines
that a replacement manager should be retained, the affirmative vote of a majority of the outstanding shares is required to retain such replacement manager.
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Amendment of the Operating Agreement.
The operating agreement (including the distribution provisions thereof) may be amended only by a
majority vote
of our board of directors, except that amending specified provisions of the operating agreement that relate to the following matters (other than to correct administrative or ministerial errors or
omissions or for clarification) requires an affirmative vote of holders of at least a majority of the shares present in person or represented by proxy at a meeting of holders of our
shares:
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-
provisions requiring the approval by our board of directors and by the holders of at least a majority of our outstanding
shares to increase the number of our authorized shares or the authorized number of any class of our shares;
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provisions to the effect that, except as may otherwise be specified by our board of directors in establishing the terms of
any class of our shares, each of our shares is entitled to one vote on all matters submitted for the approval of our shareholders, and giving our board of directors the right to reclassify shares into
one or more classes or series;
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-
the provisions described under "Replacement of Our Manager" and "Mergers and Sales of Assets";
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-
some of the provisions described in the second paragraph under "Provisions in the Operating Agreement that
may have an Anti-Takeover Effect";
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-
the provisions described in the first two bullet points of the first paragraph under "Dissolution"; and
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-
the provision of the operating agreement governing amendments thereof.
As
a result of its broad authority to amend the operating agreement, our board of directors could, in the future, choose to amend the operating agreement to include provisions that have
the intention or effect of discouraging takeover attempts.
In
addition, the operating agreement gives our board of directors broad authority to effect amendments to the provisions of the operating agreement that can change many of the terms of
our shares without the consent of holders of our shares. As a result, our board of directors may, without the approval of holders of our shares, make changes to many of the terms of our shares that
are adverse to the holders of our shares.
Provisions in the Operating Agreement that may have an Anti-Takeover Effect
Some of the provisions in the operating agreement described above could make it more difficult for a third party to acquire, or may
discourage a third party from acquiring, control of us. These provisions include, among others:
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allowing only our board of directors to fill newly created directorships;
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-
requiring that directors may be removed only for cause (as defined in the operating agreement) and then only by the
affirmative vote of holders of our shares representing at least two-thirds of the votes entitled to be cast in the election of directors;
-
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requiring advance notice for holders of our shares to nominate candidates for election to our board of directors or to
propose business to be considered by holders of our shares at a meeting of holders of our shares;
-
-
our ability to issue additional securities, including, but not limited to, preferred shares, without approval by holders
of our shares;
-
-
a prohibition on any person directly or indirectly beneficially or constructively owning more than 9.8% in value or number
of our shares, whichever is more restrictive;
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-
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the ability of our board of directors to amend the operating agreement without the approval of the holders of our shares
except under certain specified circumstances; and
-
-
limitations on the ability of holders of our shares to call special meetings of holders of our shares or to act by written
consent.
In
addition, the operating agreement contains provisions based on Section 203 of the Delaware General Corporation Law which in general prohibit us from engaging in a "business
combination" with an "interested member" (as those terms are defined in the operating agreement), unless such business combination is approved by the affirmative vote of the holders of
66
2
/
3
% of each class of our outstanding shares, excluding shares held by the interested member or any affiliate or associate of the interested member. However, if, as described in
clause (1) of the following paragraph, a majority of our board of directors approves the transaction pursuant to which a person would have become an "interested member," such person will not be
deemed an "interested member" and the foregoing prohibition on business combinations with such person will not apply.
An
"interested member" is, in general and subject to exceptions, (1) a person who is, or was at any time within the prior three-year period immediately prior to the
date in question, the beneficial owner of 15% or more of our outstanding shares and who did not become the beneficial owner of such amount of shares pursuant to a transaction that was approved by a
majority of our board of directors or (2) a person who is an assignee of, or has otherwise succeeded to, any of our shares of which an interested member was the beneficial owner at any time
within the three-year period immediately prior to the date in question, if such assignment or succession occurred in a transaction, or series of transactions, not involving a public
offering within the meaning of the Securities Act.
A
"business combination" includes, in general and among other things,
(1) any
merger or consolidation of us or any of our subsidiaries with an interested member or any other person that is, or after that transaction would be, an affiliate or
associate of an interested member;
(2) any
sale, lease, exchange, mortgage, pledge or transfer or other disposition, in one transaction or a series of transactions, to or with, or proposed by or on behalf of,
an interested member or an affiliate or associate of an interested member, of any property or assets of us or any of our subsidiaries having an aggregate fair market value of not less than 10% of our
"net investment value;"
(3) the
issue or transfer by us or any of our subsidiaries, in one transaction or a series of transactions, of any securities issued by us or that subsidiary to, or proposed
by or on behalf of, an interested member or an affiliate or associate of an interested member in exchange for cash, securities or other property having an aggregate fair market value of not less than
10% of our "net investment value;"
(4) any
spin-off or split-up of any kind of us or any of our subsidiaries proposed by or on behalf of an interested member or any of its affiliates
or associates;
(5) any
reclassification of our shares or the securities of any of our subsidiaries or recapitalization of us or such subsidiary, or any merger or consolidation of us or
such subsidiary with another subsidiary, or any other transaction that has the effect, directly or indirectly, of increasing the proportionate share of our outstanding shares or the securities of such
subsidiary that are beneficially owned by an interested member or any of its affiliates or associates; or
(6) any
agreement, contract or other arrangement providing for any one or more of the actions specified in clauses (1) through (5) above.
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The operating agreement defines "net investment value" as, in general, the aggregate market value of our outstanding shares, plus the amount of our borrowings
(other than intercompany borrowings), plus the value of certain future investments we have committed to make, less the amount of our cash and cash equivalents, subject to certain adjustments.
Certain
provisions of the management agreement also could make it more difficult for third parties to acquire control of us by various means, including limitations on our right to
terminate the management agreement and a requirement that, under certain circumstances, we make a substantial payment to the Manager in the event of a termination.
Transfer Agent and Registrar
The transfer agent and registrar for the common shares is American Stock Transfer & Trust Company.
DESCRIPTION OF OTHER SECURITIES
We will set forth in the applicable prospectus supplement a description of any depositary shares, warrants, subscription rights, debt
securities, guarantees of debt securities, share purchase contracts or share purchase units that may be offered pursuant to this prospectus.
PLAN OF DISTRIBUTION
We or any selling securityholders may sell the securities offered by this prospectus:
-
-
through underwriters or dealers;
-
-
through agents; or
-
-
directly to purchasers.
The
securities may be sold in one or more transactions at a fixed price or prices, which may be changed, or at market prices prevailing at the time of sale, at prices relating to prevailing market
prices or at negotiated prices.
We
will describe in a prospectus supplement or a free writing prospectus the particular terms of the offering of the securities, including the following:
-
-
the method of distribution of the securities offered thereby;
-
-
the names of any underwriters or agents;
-
-
the proceeds we will receive from the sale, if any;
-
-
any discounts and other items constituting underwriters' or agents' compensation;
-
-
any initial public offering price and any discounts or concessions allowed or reallowed or paid to dealers; and
-
-
any securities exchanges on which the applicable securities may be listed.
The
securities may be offered to the public through underwriting syndicates represented by managing underwriters or by underwriters without a syndicate, and may also be offered through
standby underwriting or purchase arrangements entered into by us or any selling securityholders. We or any selling securityholders may also sell securities through agents or dealers designated by us
or any selling securityholders. We or any selling securityholders also may sell securities directly, in which case no underwriters or agents would be involved.
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Underwriters,
dealers and agents that participate in the distribution of the securities may be underwriters as defined in the Securities Act, and any discounts or commissions received by
them from
us or any selling securityholders and any profit on the resale of the securities by them may be treated as underwriting discounts and commissions under the Securities Act.
We
or any selling securityholders and, in the case of offerings of guaranteed debt securities, the applicable guarantors may have agreements with the underwriters, dealers and agents
involved in the offering of the securities to indemnify them against certain liabilities, including liabilities under the Securities Act, or to contribute with respect to payments which the
underwriters, dealers or agents may be required to make.
Underwriters,
dealers and agents involved in the offering of the securities may engage in transactions with, or perform services for, us, our subsidiaries or other affiliates (including,
without limitation, any guarantors) or any selling securityholders in the ordinary course of their businesses.
In
order to facilitate the offering of the securities, any underwriters or agents, as the case may be, involved in the offering of such securities may engage in transactions that
stabilize, maintain or otherwise affect the market price of such securities or other securities that may be issued upon conversion, exchange or exercise of such securities or the prices of which may
be used to determine payments on such securities. Specifically, the underwriters or agents, as the case may be, may over-allot in connection with the offering, creating a short position in
such securities for their own account. In addition, to cover over-allotments or to stabilize the price of the securities or of such other securities, the underwriters or agents, as the
case may be, may bid for, and purchase, such securities in the open market. Finally, in any offering of securities through a syndicate of underwriters, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for distributing such securities in the offering if the syndicate repurchases previously distributed securities in transactions to cover syndicate
short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the securities above independent market levels. The underwriters or
agents, as the case may be, are not required to engage in these activities and, if they engage in any of these activities, may end any of these activities at any time without notice.
Some
or all of the securities may be new issues of securities with no established trading market. Neither we nor any selling securityholders can give any assurances as to the liquidity
of the trading market for any of our securities.
LEGAL MATTERS
Certain federal income tax matters in connection with the securities have been passed on for us by Hunton & Williams LLP.
Richards, Layton & Finger, P.A. have passed upon the validity of the common shares and the preferred shares. Dechert LLP, our special 1940 Act counsel, have passed upon certain 1940 Act
matters. Simpson Thacher & Bartlett LLP have passed upon the
validity of the deposit agreements relating to depository shares and the warrants, subscription rights, debt securities, guarantees, share purchase contracts and share purchase units offered hereby
under the laws of the State of New York, and have provided certain other legal services to us in connection with this prospectus. Certain partners of Simpson Thacher & Bartlett LLP,
members of their families and related persons have an interest representing less than 1% of our common shares.
EXPERTS
The consolidated financial statements incorporated in this Prospectus by reference from the Company's Annual Report on
Form 10-K and the effectiveness of the Company's internal control over financial reporting have been audited by Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their reports, which are incorporated herein by reference. Such financial
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statements
have been so incorporated in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-3 under the Securities Act, of which this prospectus
is a part, with respect to the securities to be sold pursuant to this prospectus. This prospectus does not contain all of the information set forth in the registration statement and exhibits to the
registration statement. For further information with respect to us and the securities to be sold pursuant to this prospectus, reference is made to the registration statement, including the exhibits to
the registration statement. Statements contained in this prospectus and in the documents incorporated and deemed to be incorporated by reference herein or in any prospectus supplement or free writing
prospectus as to the contents of any contract or other document do not purport to be complete and, where that contract or document is an exhibit to the registration statement or an exhibit to a
document incorporated or deemed to be incorporated by reference in the registration statement, each statement is qualified in all respects by reference to the exhibit to which the reference relates.
Copies of the registration statement, including the exhibits to the registration statement, and other documents we file with the SEC may be examined without charge at the public reference room of the
SEC, 100 F Street, N.E., Washington, D.C. 20549. Information about the operation of the public reference room may be obtained by calling the SEC at
1-800-SEC-0300. Copies of the registration statement, including the exhibits, and the other documents we file with the SEC can be obtained from the public reference
room of the SEC upon payment of prescribed fees. Our SEC filings, including our registration statement, are also available to you for free on the SEC's website at
http://www.sec.gov
. You
may also inspect information that we file with the NYSE at the offices of the NYSE at 20 Broad Street, New York, New York 10005. We are subject to the information and reporting requirements of the
Exchange Act, and file periodic reports, proxy statements and other information with the SEC.
INCORPORATION BY REFERENCE
This prospectus "incorporates by reference" certain information we file with the SEC under the Exchange Act. This means that we are
disclosing important information to you by referring you to these filings. The information we incorporate by reference is considered a part of this prospectus, and subsequent information that we file
with the SEC will automatically update and supersede this information.
Any
statement contained in a document incorporated or considered to be incorporated by reference in this prospectus shall be considered to be modified or superseded for purposes of this
prospectus to the extent a statement contained in this prospectus or in any other subsequently filed document that is or is deemed to be incorporated by reference in this prospectus modifies or
supersedes such statement.
We
incorporate by reference the following documents that we have filed with the SEC:
-
-
our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, including portions
of our Proxy Statement for our 2010 annual meeting of holders of our common shares held on April 29, 2010 to the extent specifically incorporated by reference into such
Form 10-K;
-
-
our Quarterly Report on Form 10-Q for the three months ended March 31, 2010;
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-
our Current Reports on Form 8-K filed with the SEC on January 11, 2010, January 12, 2010,
January 15, 2010, February 4, 2010, March 18, 2010, April 29, 2010, May 3, 2010, May 4, 2010, May 5, 2010, May 6, 2010 and June 2, 2010;
and
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-
-
the description of our common shares included in our Registration Statement on Form 8-A filed with the
SEC on April 30, 2007, and any amendment or report filed thereafter for the purpose of updating that description.
We
are not incorporating by reference any information furnished under Item 2.02 or Item 7.01 of Form 8-K into any filing under the Securities Act or the
Exchange Act or into this prospectus.
In
addition, we incorporate by reference any future filings we make with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act from the date of this prospectus
until the termination of the offering of securities described in this prospectus; provided, however, that we are not incorporating by reference any documents, portions of documents, exhibits or other
information that is deemed to have been "furnished" to and not "filed" with the SEC. We will provide free copies of any of those documents, if you write or telephone us at:
KKR
Financial Holdings LLC
555 California Street, 50th Floor
San Francisco, California 94104
Attention: Investor Relations
(415) 315-3620
You
also may review a copy of the prospectus and registration statement and its exhibits at the SEC's Public Reference Room in Washington, D.C., as well as through the SEC's internet website (See
"Where You Can Find More Information" above).
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