Quarterly Report


Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2009

 

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

For the transition period from            to            

Commission File No. 814-00735

 

 

Kohlberg Capital Corporation

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   20-5951150

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

295 Madison Avenue, 6th Floor

New York, New York 10017

(Address of principal executive offices)

(212) 455-8300

(Registrant’s telephone number, including area code)

 

 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   ¨     No   x

The number of outstanding shares of common stock of the registrant as of October 31, 2009 was 22,363,281 .

 

 

 


Table of Contents

EXPLANATORY NOTE

This Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2009 contains restated financial information for the year ended December 31, 2008 (as well as for the comparative periods ended September 30, 2008). Concurrent with the filing of this Form 10-Q, the Company is filing with the Securities and Exchange Commission (1) amended Quarterly Reports on Form 10-Q/A for the quarterly periods ended March 31, 2009 (the “Q1 2009 10-Q/A”) and June 30, 2009 (the “Q2 2009 10-Q/A”), (2) an Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 10-K”), and (3) a Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010 (the “Q1 2010 10-Q”). The Q1 2009 10-Q/A contains restated financial information for the three months ended March 31, 2009 (as well as for the comparative period of 2008) and for the year ended December 31, 2008. The Q2 2009 10-Q/A contains restated financial information for the three and six months ended June 30, 2009 (as well as for the comparative periods of 2008) and for the year ended December 31, 2008. The 2009 10-K contains restated financial information for the year ended December 31, 2008 (as well as restated unaudited financial information for each of the four quarters of 2008 and the first two quarters of 2009), and the Q1 2010 10-Q contains restated financial information for the three months ended March 31, 2009. The company’s previously filed Annual Report on Form 10-K for the year ended December 31, 2008 and previously filed Quarterly Reports on Form 10-Q for the quarterly periods in 2008 have not been amended for the restatement affecting 2008 and should not be relied upon.

In addition, management has concluded that the Company had material weaknesses in its internal control over financial reporting related to errors in the application of accounting for the fair value of the Company’s illiquid investments and the revenue recognition for certain non-cash payment-in-kind (“PIK”) investments as of the end of each of the years ended December 31, 2009 and December 31, 2008 and each of the quarterly periods included in such years. As described in more detail in Item 9A of the 2009 10-K, the Company is implementing measures designed to remediate the identified material weaknesses and believes that these measures will effectively remediate these material weaknesses. As of the date of filing of this Quarterly Report, the Company believes that it has corrected its accounting for the fair value of its illiquid investments and its accounting for the revenue recognition for its non-cash PIK investments to the extent necessary to prepare the restated financial statements and the other financial information contained herein.


Table of Contents

TABLE OF CONTENTS

 

          Page
Part I. Financial Information

Item 1.

  

Financial Statements

   1
  

Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008

   1
  

Statements of Operations (unaudited) for the three and nine months ended September 30, 2009 and 2008

   2
  

Statements of Changes in Net Assets (unaudited) for the nine months ended September 30, 2009 and 2008

   3
  

Statements of Cash Flows (unaudited) for the nine months ended September 30, 2009 and 2008

   4
  

Schedules of Investments as of September 30, 2009 (unaudited) and December 31, 2008

   5
  

Financial Highlights (unaudited) for the nine months ended September 30, 2009 and 2008

   28
  

Notes to Financial Statements (unaudited)

   29

Item 2.

  

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

   49

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   74

Item 4.

  

Controls and Procedures

   75
Part II. Other Information

Item 1.

  

Legal Proceedings

   76

Item 1A.

  

Risk Factors

   77

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   77

Item 3.

  

Defaults Upon Senior Securities

   77

Item 4.

  

Submission of Matters to a Vote of Security Holders

   77

Item 5.

  

Other Information

   77

Item 6.

  

Exhibits

   77

Signatures

   78


Table of Contents

KOHLBERG CAPITAL CORPORATION

BALANCE SHEETS

 

     As of
September 30, 2009
    As of
December 31, 2008
 
     (unaudited)     (as restated)  

ASSETS

    

Investments at fair value:

    

Time deposits (cost: 2009—$12,237,636; 2008—$12,185,996)

   $ 12,237,636     $ 12,185,996  

Money market account (cost: 2009—$1,939; 2008—$10)

     1,939       10  

Debt securities (cost: 2009—$377,547,089; 2008—$423,859,086)

     323,347,630       353,859,007  

CLO fund securities managed by non-affiliates (cost: 2009—$15,684,673; 2008—$15,590,951)

     3,651,000       4,400,000  

CLO fund securities managed by affiliate (cost: 2009—$52,491,910; 2008—$50,785,644)

     43,065,000       30,240,000  

Equity securities (cost: 2009—$5,214,118; 2008—$5,256,659)

     4,520,234       5,089,365  

Asset manager affiliates (cost: 2009—$40,751,511; 2008—$38,948,271)

     56,744,027       54,734,812  
                

Total Investments at fair value

     443,567,466       460,509,190  

Cash

     116,485       251,412  

Restricted cash

     537,197       2,119,991  

Interest and dividends receivable

     3,636,631       4,168,599  

Receivable for open trades

     3,129,295       —     

Due from affiliates

     1,339       390,590  

Other assets

     932,085       1,716,447  
                

Total assets

   $ 451,920,498     $ 469,156,229  
                

LIABILITIES

    

Borrowings

   $ 227,864,497     $ 261,691,148  

Payable for open trades

     —          1,955,000  

Accounts payable and accrued expenses

     3,102,588       3,064,403  

Dividend payable

     —          5,879,660  
                

Total liabilities

   $ 230,967,085     $ 272,590,211  
                

Commitments and contingencies (note 8)

    

STOCKHOLDERS’ EQUITY

    

Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 22,255,149 and 21,766,519 common shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively

   $ 219,530     $ 214,369  

Capital in excess of par value

     282,625,649        280,284,330  

Accumulated undistributed net investment income

     8,052,272        2,865,434  

Accumulated net realized losses

     (9,582,628     (680,687

Net unrealized depreciation on investments

     (60,361,410     (86,117,428
                

Total stockholders’ equity

   $ 220,953,413     $ 196,566,018  
                

Total liabilities and stockholders’ equity

   $ 451,920,498     $ 469,156,229  
                

NET ASSET VALUE PER COMMON SHARE

   $ 9.93     $ 9.03  
                

See accompanying notes to financial statements.

 

1


Table of Contents

KOHLBERG CAPITAL CORPORATION

STATEMENTS OF OPERATIONS

(unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
           (as restated)           (as restated)  

Investment Income:

        

Interest from investments in debt securities

   $ 5,855,051     $ 7,925,084     $ 18,808,447     $ 25,089,244  

Interest from cash and time deposits

     5,092       57,330       14,778       200,902  

Dividends from investments in CLO fund securities managed by non-affiliates

     355,726       962,864       1,174,026       4,712,758  

Dividends from investments in CLO fund securities managed by affiliate

     2,035,789       1,248,378       6,246,918       5,175,570  

Dividends from affiliate asset manager

     —          1,000,000       —          1,350,000  

Capital structuring service fees (expense)

     (6,814     134,897       272,401       1,398,445  
                                

Total investment income

     8,244,844       11,328,553       26,516,570       37,926,919  
                                

Expenses:

        

Interest and amortization of debt issuance costs

     3,137,425       2,430,839       6,223,077       8,176,051  

Compensation

     760,759       747,339       2,386,218       3,456,054  

Professional fees

     471,191       367,367       1,111,823       1,287,441  

Insurance

     95,662       64,766       273,136       203,181  

Administrative and other

     303,175       263,898       832,724       914,917  
                                

Total expenses

     4,768,212       3,874,209       10,826,978       14,037,644  
                                

Net Investment Income

     3,476,632       7,454,344       15,689,592       23,889,275  

Realized And Unrealized Gains (Losses) On Investments:

        

Net realized gains (losses) from investment transactions

     (3,769,049     13,365       (8,901,941     (608,628

Net change in unrealized appreciation (depreciation) on:

        

Debt securities

     8,218,083       (7,061,875     15,800,620       (15,677,407

Equity securities

     (102,710     885,968       (526,590     (313,333

CLO fund securities managed by affiliate

     4,137,840       (657,816     11,118,734       (1,885,273

CLO fund securities managed by non-affiliate

     298,886       3,132,273       (842,722     613,752  

Affiliate asset manager investments

     (1,593,871     (354,370     205,975       3,106,913  
                                

Net realized and unrealized depreciation on investments

     7,189,179       (4,042,455     16,854,076       (14,763,976
                                

Net Increase in Net Assets Resulting From Operations

   $ 10,665,811     $ 3,411,889     $ 32,543,668     $ 9,125,299  
                                

Net Increase in Net Assets Resulting from Operations per Common Share—Basic and Diluted

   $ 0.48     $ 0.16     $ 1.48     $ 0.46  

Net Investment Income Per Common Share—Basic and Diluted

   $ 0.16     $ 0.34     $ 0.71     $ 1.19  

Net Investment Income and Net Realized Gains/Losses Per Common Share—Basic and Diluted

   $ (0.01   $ 0.34     $ 0.31     $ 1.16  

Weighted Average Shares of Common Stock Outstanding—Basic and Diluted

     22,194,690        21,649,681        22,030,517        20,021,709   

See accompanying notes to financial statements.

 

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Table of Contents

KOHLBERG CAPITAL CORPORATION

STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

 

     Nine Months Ended
September 30,
 
     2009     2008  
           (as restated)  

Operations:

    

Net investment income

   $ 15,689,592     $ 23,889,275  

Net realized loss from investment transactions

     (8,901,941     (608,628

Net change in unrealized depreciation on investments

     25,756,017       (14,155,348
                

Net increase (decrease) in net assets resulting from operations

     32,543,668       9,125,299  
                

Stockholder distributions:

    

Dividends from net investment income to common stockholders

     (10,396,721     (23,589,046

Dividends from net investment income to restricted stockholders

     (106,033     —     
                

Net decrease in net assets resulting from stockholder distributions

     (10,502,754     (23,589,046
                

Capital transactions:

    

Issuance of common stock for dividend reinvestment plan

     1,656,531       2,041,838  

Issuance of common stock for rights offering

     —          26,925,213  

Vesting of restricted stock

     1,223       —     

Stock based compensation

     688,727       602,093  
                

Net increase in net assets resulting from capital transactions

     2,346,481       29,569,144  
                

Net assets at beginning of period

     196,566,018       259,068,164  
                

Net assets at end of period (including undistributed net investment income of $8,052,272 in 2009 and accumulated distributions in excess of net investment income of $1,351,756 in 2008)

   $ 220,953,413     $ 274,173,561  
                

Net asset value per common share

   $ 9.93      $ 12.65   

Common shares outstanding at end of period

     22,255,149        21,676,660   

See accompanying notes to financial statements.

 

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Table of Contents

KOHLBERG CAPITAL CORPORATION

STATEMENTS OF CASH FLOWS

(unaudited)

 

     Nine Months Ended
September 30,
 
     2009     2008  
           (as restated)  

OPERATING ACTIVITIES:

    

Net increase (decrease) in stockholders’ equity resulting from operations

   $ 32,543,668     $ 9,125,299  

Adjustments to reconcile net increase (decrease) in stockholders’ equity resulting from operations to net cash provided by (used in) operations:

    

Net realized losses on investment transactions

     8,901,941       608,628  

Net change in unrealized depreciation on investments

     (25,756,017     14,155,347  

Net accretion of discount on securities

     (1,504,703     (1,530,663

Amortization of debt issuance cost

     618,520       315,841  

Purchases of investments

     (4,597,657     (106,510,316

Capital contribution to affiliate asset manager

     (3,600,016     —     

Payment-in-kind interest

     (3,801     (1,018,922

Proceeds from sale and redemption of investments

     38,417,685       66,826,832  

Stock based compensation expense

     688,725       602,092  

Changes in operating assets and liabilities:

    

Decrease in interest and dividends receivable

     531,968       1,793,929  

(Increase) decrease in other assets

     165,840       221,448  

Decrease (increase) in due from affiliates

     389,251       (707,299

Increase (decrease) in accounts payable and accrued expenses

     38,185       (2,419,898
                

Net cash provided by (used in) operating activities

     46,833,589       (18,537,682
                

FINANCING ACTIVITIES:

    

Issuance of stock (net of offering costs)

     1,223       26,925,213  

Dividends paid in cash

     (14,725,882     (20,987,280

Proceeds from issuance of debt

     —          50,000,000  

Cash paid on repayment of debt

     (33,826,651     (35,000,000

Decrease (increase) in restricted cash

     1,582,794       (652,662
                

Net cash (used in) provided by financing activities

     (46,968,516     20,285,271  
                

CHANGE IN CASH

     (134,927     1,747,589  

CASH, BEGINNING OF PERIOD

     251,412       2,088,770  
                

CASH, END OF PERIOD

   $ 116,485     $ 3,836,359  
                

Supplemental Information:

    

Interest paid during the period

   $ 5,436,585     $ 7,005,941  

Non-cash dividends paid during the period under the dividend reinvestment plan

   $ 1,656,532     $ 2,041,838  

See accompanying notes to financial statements.

 

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Table of Contents

KOHLBERG CAPITAL CORPORATION

SCHEDULE OF INVESTMENTS

As of September 30, 2009

(unaudited)

Debt Securities Portfolio

 

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal      Cost    Value  

Advanced Lighting Technologies, Inc. 6
Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Senior Secured Loan — Deferred Draw Term Loan (First Lien)

3.0%, Due 6/13

   $ 324,418      $ 324,418    $ 317,606    

Advanced Lighting Technologies, Inc.
Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Senior Secured Loan — Revolving Loan

5.0%, Due 6/13

     240,000        233,841      234,960  

Advanced Lighting Technologies, Inc. 6
Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Junior Secured Loan — Second Lien Term Loan Note

6.3%, Due 6/14

     5,000,000          5,000,000      5,000,000    

Advanced Lighting Technologies, Inc. 6
Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Senior Secured Loan — Term Loan (First Lien)

3.1%, Due 6/13

     1,607,240        1,607,240      1,573,488    

Aero Products International, Inc. 6
Personal and Non Durable Consumer Products (Mfg. Only)

  

Senior Secured Loan — Term Loan

9.5%, Due 4/12

     3,118,560          3,118,560      1,914,796    

Aerostructures Acquisition LLC 6
Aerospace and Defense

  

Senior Secured Loan — Delayed Draw Term Loan

6.8%, Due 3/13

     412,667        412,667      412,667    

Aerostructures Acquisition LLC 6
Aerospace and Defense

  

Senior Secured Loan — Term Loan

6.8%, Due 3/13

     5,219,471        5,219,471      5,219,471    

AGA Medical Corporation 6
Healthcare, Education and Childcare

  

Senior Secured Loan — Tranche B Term Loan

2.3%, Due 4/13

     1,832,209        1,831,289      1,746,095  

AGS LLC 6
Hotels, Motels, Inns, and Gaming

  

Senior Secured Loan — Delayed Draw Term Loan

3.3%, Due 5/13

     426,149          421,973      363,505    

AGS LLC 6
Hotels, Motels, Inns, and Gaming

  

Senior Secured Loan — Initial Term Loan

3.3%, Due 5/13

     3,045,918        3,016,069      2,598,168    

AmerCable Incorporated 6
Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

  

Senior Secured Loan — Initial Term Loan

3.8%, Due 6/14

     5,855,188          5,855,188      5,661,967    

Astoria Generating Company Acquisitions, L.L.C. 6
Utilities

  

Junior Secured Loan — Term C

4.0%, Due 8/13

     4,000,000        4,034,105      3,976,000    

 

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Table of Contents

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal      Cost    Value  

Atlantic Marine Holding Company 6
Cargo Transport

  

Senior Secured Loan — Term Loan

4.6%, Due 3/14

   $ 1,685,609        $ 1,693,363    $ 1,660,325    

Aurora Diagnostics, LLC 6
Healthcare, Education and Childcare

  

Senior Secured Loan — Tranche A Term Loan (First Lien)

4.6%, Due 12/12

     4,071,697        4,045,668      4,071,697    

Awesome Acquisition Company (CiCi’s Pizza) 6
Personal, Food and Miscellaneous Services

  

Junior Secured Loan — Term Loan (Second Lien)

5.3%, Due 6/14

     4,000,000          3,980,682      3,980,000    

AZ Chem US Inc.
Chemicals, Plastics and Rubber

  

Junior Secured Loan — Second Lien Term Loan

6.0%, Due 2/14

     3,300,000        2,743,705      3,300,000    

AZ Chem US Inc. 6
Chemicals, Plastics and Rubber

  

Junior Secured Loan — Second Lien Term Loan

6.0%, Due 2/14

     4,000,000          3,968,913      4,000,000    

Bankruptcy Management Solutions, Inc. 6
Diversified/Conglomerate Service

  

Junior Secured Loan — Loan (Second Lien)

6.5%, Due 7/13

     2,425,000        2,449,882      1,665,975    

Bankruptcy Management Solutions, Inc. 6
Diversified/Conglomerate Service

  

Senior Secured Loan — Term Loan (First Lien)

4.3%, Due 7/12

     1,890,497          1,897,637      1,657,965    

Bicent Power LLC 6
Utilities

  

Junior Secured Loan — Advance (Second Lien)

4.3%, Due 12/14

     4,000,000          4,000,000      3,556,000    

BP Metals, LLC 6
Mining, Steel, Iron and Non-Precious Metals

  

Senior Secured Loan — Term Loan

10.0%, Due 6/13

     4,470,026          4,470,026      4,470,026    

Broadlane, Inc. 6
Healthcare, Education and Childcare

  

Senior Secured Loan — Term Loan

8.5%, Due 8/13

     2,955,038          2,920,638      2,955,038    

Caribe Information Investments Incorporated 6
Printing and Publishing

  

Senior Secured Loan — Term Loan

2.5%, Due 3/13

     1,681,952          1,677,036      1,570,943    

Cast & Crew Payroll, LLC (Payroll Acquisition) 6
Leisure, Amusement, Motion Pictures, Entertainment

  

Senior Secured Loan — Initial Term Loan

3.3%, Due 9/12

     8,548,100          8,567,993      8,300,205    

CEI Holdings, Inc. (Cosmetic Essence) 6, 10
Personal and Non Durable Consumer Products (Mfg. Only)

  

Senior Secured Loan — Term Loan

8.3%, Due 3/13

     1,458,107          1,407,022      972,606    

Centaur, LLC 6
Hotels, Motels, Inns, and Gaming

  

Senior Secured Loan — Term Loan (First Lien)

9.3%, Due 10/12

     2,770,010        2,747,218      2,409,908    

 

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Table of Contents

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal      Cost    Value  

Charlie Acquisition Corp. 10
Personal, Food and Miscellaneous Services

   Mezzanine Investment — Senior Subordinated Notes
15.5%, Due 6/13
   $ 10,893,401        $ 10,769,404    $ 7,347,015    

Clarke American Corp. 6
Printing and Publishing

   Senior Secured Loan — Tranche B Term Loan
2.8%, Due 6/14
     2,932,500        2,932,500      2,472,098    

CoActive Technologies, Inc. 6
Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

   Senior Secured Loan — Term Loan (First Lien)
3.3%, Due 7/14
     3,928,361          3,914,667      2,844,133    

CoActive Technologies, Inc. 6
Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

   Junior Secured Loan — Term Loan (Second Lien)
7.0%, Due 1/15
     2,000,000        1,970,837      1,062,000    

Coastal Concrete Southeast, LLC 10
Buildings and Real Estate

   Mezzanine Investment — Mezzanine Term Loan
10.0%, Due 3/13
     8,886,903          8,616,302      957,672    

Cooper-Standard Automotive Inc 6, 10
Automobile

   Senior Unsecured Bond —
8.4%, Due 12/14
     4,000,000        3,315,690      400,000    

Dealer Computer Services, Inc. (Reynolds & Reynolds) 6
Electronics

   Junior Secured Loan — Term Loan (Second Lien)
5.7%, Due 10/13
     1,000,000          1,006,674      1,000,000    

Dealer Computer Services, Inc. (Reynolds & Reynolds) 6
Electronics

   Junior Secured Loan — Term Loan (Third Lien)
7.7%, Due 4/14
     7,700,000          7,529,193      7,230,300    

Delta Educational Systems, Inc. 6
Healthcare, Education and Childcare

   Senior Secured Loan — Term Loan
6.0%, Due 6/12
     2,652,244          2,652,244      2,652,244    

Dex Media West LLC
Printing and Publishing

   Senior Secured Loan — Tranche B Term Loan
7.0%, Due 10/14
     4,708,231          4,303,293      4,049,079    

Dresser, Inc. 6
Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

   Junior Secured Loan — Term Loan (Second Lien)
6.0%, Due 5/15
     3,000,000          2,968,799      2,823,000    

DRI Holdings, Inc. 6
Healthcare, Education and Childcare

   Junior Secured Loan — US Term Loan (Second Lien)
6.5%, Due 7/15
     6,000,000          5,479,427      6,000,000    

Edgestone CD Acquisition Corp. (Custom Direct) 6
Printing and Publishing

   Junior Secured Loan — Loan (Second Lien)
6.3%, Due 12/14
     5,000,000          5,000,000      4,970,000    

Edgestone CD Acquisition Corp. (Custom Direct) 6
Printing and Publishing

   Senior Secured Loan — Term Loan (First Lien)
3.0%, Due 12/13
     4,299,591        4,303,159      4,153,405    

 

7


Table of Contents

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal      Cost    Value  

eInstruction Corporation 6
Healthcare, Education and Childcare

  

Senior Secured Loan — Initial Term Loan

4.3%, Due 7/13

   $ 4,397,844        $ 4,397,844    $ 4,327,478    

eInstruction Corporation 6
Healthcare, Education and Childcare

  

Junior Secured Loan — Term Loan (Second Lien)

7.8%, Due 7/14

     10,000,000        10,000,000      10,000,000    

Endeavor Energy Resources, L.P. 6
Oil and Gas

  

Junior Secured Loan — Initial Loan (Second Lien)

5.3%, Due 4/12

     4,000,000          4,000,000      3,916,000    

Fasteners For Retail, Inc. 6
Diversified/Conglomerate Manufacturing

  

Senior Secured Loan — Term Loan

5.0%, Due 12/12

     4,052,920        4,057,683      4,052,920    

FD Alpha Acquisition LLC (Fort Dearborn) 6
Printing and Publishing

  

Senior Secured Loan — US Term Loan

3.4%, Due 11/12

     1,542,580          1,459,551      1,542,580    

First American Payment Systems, L.P. 6
Finance

  

Senior Secured Loan — Term Loan

3.3%, Due 10/13

     3,208,000        3,208,000      3,208,000    

First Data Corporation
Finance

  

Senior Secured Loan — Initial Tranche B-2 Term Loan

3.0%, Due 9/14

     2,447,186          2,258,698      2,114,369    

Ford Motor Company 6
Automobile

  

Senior Secured Loan — Term Loan

3.5%, Due 12/13

     1,949,918          1,948,260      1,737,377    

Freescale Semiconductor, Inc.
Electronics

  

Senior Subordinated Bond —

10.1%, Due 12/16

     3,000,000        3,007,427      1,980,000    

Frontier Drilling USA, Inc. 6
Oil and Gas

  

Senior Secured Loan — Term B Advance

9.3%, Due 6/13

     2,000,000          1,998,554      1,968,000    

Ginn LA Conduit Lender, Inc. 10
Buildings and Real Estate
4

  

Senior Secured Loan — First Lien Tranche A Credit-Linked Deposit

8.5%, Due 6/11

     1,257,143        1,224,101      106,857    

Ginn LA Conduit Lender, Inc. 10
Buildings and Real Estate

  

Senior Secured Loan — First Lien Tranche B Term Loan

8.5%, Due 6/11

     2,694,857          2,624,028      229,063    

Ginn LA Conduit Lender, Inc. 10
Buildings and Real Estate
4

  

Junior Secured Loan — Loan (Second Lien)

12.5%, Due 6/12

     3,000,000        2,715,997      60,000    

HMSC Corporation (aka Swett and Crawford) 6
Insurance

  

Junior Secured Loan — Loan (Second Lien)

5.7%, Due 10/14

     5,000,000        4,853,763      4,615,000    

 

8


Table of Contents

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal      Cost    Value  

Huish Detergents Inc. 6
Personal and Non Durable Consumer Products (Mfg. Only)

  

Junior Secured Loan — Loan (Second Lien)

4.5%, Due 10/14

   $ 1,000,000        $ 1,000,000    $ 952,000    

Hunter Fan Company 6
Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Senior Secured Loan — Initial Term Loan (First Lien)

2.8%, Due 4/14

     3,723,929          3,598,563      3,429,738    

Hunter Fan Company 6
Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Junior Secured Loan — Loan (Second Lien)

7.0%, Due 10/14

     3,000,000          3,000,000      3,000,000    

Infiltrator Systems, Inc. 6
Ecological

  

Senior Secured Loan — Term Loan

8.5%, Due 9/12

     2,706,883          2,701,625      2,706,883    

Inmar, Inc. 6
Retail Stores

  

Senior Secured Loan — Term Loan

2.5%, Due 4/13

     3,547,864          3,547,864      3,441,428    

International Aluminum Corporation (IAL Acquisition Co.) 6
Mining, Steel, Iron and Non-Precious Metals

  

Senior Secured Loan — Term Loan

5.0%, Due 3/13

     2,973,711          2,973,711      1,932,912    

Intrapac Corporation/Corona Holdco 6
Containers, Packaging and Glass

  

Senior Secured Loan — 1st Lien Term Loan

3.8%, Due 5/12

     4,037,531        4,047,124      3,948,705    

Intrapac Corporation/Corona Holdco 6
Containers, Packaging and Glass

  

Junior Secured Loan — Term Loans (Second Lien)

7.8%, Due 5/13

     3,000,000          3,014,779      3,000,000    

Jones Stephens Corp. 6
Buildings and Real Estate

  

Senior Secured Loan — Term Loan

7.8%, Due 9/12

     9,541,180        9,524,748      8,606,144    

JW Aluminum Company 6
Mining, Steel, Iron and Non-Precious Metals

  

Junior Secured Loan — Term Loan (Second Lien)

7.3%, Due 12/13

     5,371,429          5,384,794      2,454,743    

KIK Custom Products Inc. 6
Personal and Non Durable Consumer Products (Mfg. Only)

  

Junior Secured Loan — Loan (Second Lien)

5.2%, Due 12/14

     5,000,000        5,000,000      3,060,000    

La Paloma Generating Company, LLC 6
Utilities

  

Junior Secured Loan — Loan (Second Lien)

3.8%, Due 8/13

     2,000,000          2,011,850      1,758,000    

LBREP/L-Suncal Master I LLC 6, 10
Buildings and Real Estate

  

Senior Secured Loan — Term Loan (First Lien)

7.5%, Due 1/10

     3,875,156        3,863,923      116,255    

LBREP/L-Suncal Master I LLC 6, 10
Buildings and Real Estate

  

Junior Secured Loan — Term Loan (Second Lien)

11.5%, Due 1/11

     2,000,000        1,920,211      7,500    

 

9


Table of Contents

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal      Cost    Value  

LBREP/L-Suncal Master I LLC 10
Buildings and Real Estate

  

Junior Secured Loan — Term Loan (Third Lien)

13.3%, Due 2/12

   $ 2,332,868        $ 2,332,868    $ 1,000    

Legacy Cabinets, Inc. 6, 10
Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Senior Secured Loan — Term Loan

8.5%, Due 8/12

     2,258,184        2,258,184      1,036,506    

Levlad, LLC & Arbonne International, LLC 6
Personal and Non Durable Consumer Products (Mfg. Only)

  

Senior Secured Loan — Term Loan

7.8%, Due 3/14

     2,660,729          2,660,729      1,351,650    

LN Acquisition Corp. (Lincoln  Industrial) 6

  

Junior Secured Loan — Initial Term Loan (Second Lien)

6.1%, Due 1/15

     2,000,000        2,000,000      1,834,000    

Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

           

MCCI Group Holdings, LLC 6
Healthcare, Education and Childcare

  

Senior Secured Loan — Term Loan (First Lien)

4.1%, Due 12/12

     5,754,849          5,742,326      5,749,094    

MCCI Group Holdings, LLC 6
Healthcare, Education and Childcare

  

Junior Secured Loan — Term Loan (Second Lien)

7.6%, Due 6/13

     1,000,000        1,000,000      984,000    

Murray Energy Corporation 6
Mining, Steel, Iron and Non-Precious Metals

  

Senior Secured Loan — Tranche B Term Loan (First Lien)

3.3%, Due 1/10

     1,847,852          1,849,301      1,810,895    

National Interest Security Company, L.L.C.
Aerospace and Defense

  

Mezzanine Investment — Mezzanine Facility

15.0%, Due 6/13

     3,000,000          3,000,000      3,000,000    

National Interest Security Company, L.L.C.
Aerospace and Defense

  

Junior Secured Loan — Second Lien Term Loan

15.0%, Due 6/13

     1,000,000          1,000,000      1,000,000    

National Interest Security Company, L.L.C. 6
Aerospace and Defense

  

Senior Secured Loan — Term Loan - 1st Lien

7.8%, Due 12/12

     7,756,250          7,756,250      7,756,250    

Northeast Biofuels, LP 6, 10
Farming and Agriculture

  

Senior Secured Loan — Construction Term Loan

8.8%, Due 6/13

     1,382,120          1,384,076      208,369    

Northeast Biofuels, LP 6, 10
Farming and Agriculture

  

Senior Secured Loan — Synthetic LC Term Loan

8.8%, Due 6/13

     57,257          57,338      8,632    

PAS Technologies Inc.
Aerospace and Defense

  

Senior Secured Loan — Incremental Term Loan Add On

4.8%, Due 6/11

     647,014          647,014      637,309    

PAS Technologies Inc. 6
Aerospace and Defense

  

Senior Secured Loan — Term Loan

4.8%, Due 6/11

     3,205,675        3,196,430      3,157,589    

 

10


Table of Contents

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal      Cost    Value  

Pegasus Solutions, Inc. 13
Leisure, Amusement, Motion Pictures, Entertainment

  

Senior Unsecured Bond —

10.5%, Due 4/15

   $ 2,000,000        $ 2,000,000    $ 1,620,000    

Pegasus Solutions, Inc. 6
Leisure, Amusement, Motion Pictures, Entertainment

  

Senior Secured Loan — Term Loan

7.8%, Due 4/13

     4,886,125          4,886,125      4,886,125    

Primus International Inc. 6
Aerospace and Defense

  

Senior Secured Loan — Term Loan

2.7%, Due 6/12

     1,237,030          1,238,546      1,152,912    

QA Direct Holdings, LLC 6
Printing and Publishing

  

Senior Secured Loan — Term Loan

8.0%, Due 8/14

     4,552,106          4,519,306      4,201,594    

Resco Products, Inc. 6
Mining, Steel, Iron and Non-Precious Metals

  

Junior Secured Loan — Term Loan (Second Lien)

8.4%, Due 6/14

     6,650,000          6,495,625      6,098,050    

Rhodes Companies, LLC, The 6, 10
Buildings and Real Estate
4

  

Senior Secured Loan — First Lien Term Loan

11.8%, Due 11/10

     1,685,674          1,636,741      237,948    

Rhodes Companies, LLC, The 6, 10
Buildings and Real Estate
4

  

Junior Secured Loan — Second Lien Term Loan

12.0%, Due 11/11

     2,013,977        2,020,128      12,114    

San Juan Cable, LLC 6
Broadcasting and Entertainment

  

Junior Secured Loan — Loan (Second Lien)

5.8%, Due 10/13

     3,000,000          2,985,299      3,000,000    

Schneller LLC 6
Aerospace and Defense

  

Senior Secured Loan — Term Loan

3.7%, Due 6/13

     4,315,210        4,287,366      4,108,080    

Seismic Micro-Technology, Inc. (SMT) 6
Electronics

  

Senior Secured Loan — Term Loan

3.2%, Due 6/12

     1,258,041          1,256,141      1,208,978    

Seismic Micro-Technology, Inc. (SMT) 6
Electronics

  

Senior Secured Loan — Term Loan

3.2%, Due 6/12

     838,694        837,427      805,985    

Specialized Technology Resources, Inc. 6
Diversified/Conglomerate Service

  

Junior Secured Loan — Loan (Second Lien)

7.2%, Due 12/14

     7,500,000          7,500,000      7,500,000    

Specialized Technology Resources, Inc. 6
Diversified/Conglomerate Service

  

Senior Secured Loan — Term Loan (First Lien)

2.7%, Due 6/14

     3,900,176        3,900,176      3,849,474    

Standard Steel, LLC 6
Cargo Transport

  

Senior Secured Loan — Delayed Draw Term Loan

8.3%, Due 7/12

     740,287        743,369      735,845    

 

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Table of Contents

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal      Cost    Value  

Standard Steel, LLC 6
Cargo Transport

  

Senior Secured Loan — Initial Term Loan

9.0%, Due 7/12

   $ 3,672,953        $ 3,688,248    $ 3,650,916    

Standard Steel, LLC 6
Cargo Transport

  

Junior Secured Loan — Loan (Second Lien)

13.8%, Due 7/13

     1,750,000          1,756,981      1,750,000    

Texas Competitive Electric Holdings Company, LLC (TXU)
Utilities

  

Senior Secured Loan — Initial Tranche B-2 Term Loan

3.8%, Due 10/14

     982,406          906,944      784,942    

TPF Generation Holdings, LLC 6
Utilities

  

Junior Secured Loan — Loan (Second Lien)

4.5%, Due 12/14

     2,000,000        2,024,770      1,862,000    

TUI University, LLC 6
Healthcare, Education and Childcare

  

Senior Secured Loan — Term Loan (First Lien)

3.2%, Due 10/14

     3,736,736          3,600,267      3,736,736    

Twin-Star International, Inc. 6
Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Senior Secured Loan — Term Loan

4.6%, Due 4/13

     4,302,894        4,302,894      3,765,032    

United Maritime Group, LLC (fka Teco Transport Corporation) 6
Cargo Transport

  

Junior Secured Loan — Term Loan (Second Lien)

7.8%, Due 12/13

     6,500,000          6,488,400      6,233,500    

Walker Group Holdings LLC
Cargo Transport

  

Junior Secured Loan — Term Loan B

12.5%, Due 12/12

     526,500          526,500      526,500    

Walker Group Holdings LLC 6
Cargo Transport

  

Junior Secured Loan — Term Loan B

12.5%, Due 12/12

     5,000,000          5,000,000      5,000,000    

Water PIK, Inc. 6
Personal and Non Durable Consumer Products (Mfg. Only)

  

Senior Secured Loan — Loan (First Lien)

3.5%, Due 6/13

     1,887,118          1,878,863      1,879,569    

Wesco Aircraft Hardware Corp.
Aerospace and Defense

  

Junior Secured Loan — Loan (Second Lien)

6.0%, Due 3/14

     2,000,000          1,934,374      1,954,000    

Wesco Aircraft Hardware Corp. 6
Aerospace and Defense

  

Junior Secured Loan — Loan (Second Lien)

6.0%, Due 3/14

     4,132,887          4,157,033      4,037,831    

WireCo WorldGroup Inc. 6, 13
Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

  

Mezzanine Investment —

11.0%, Due 2/15

     10,000,000          10,000,000      10,000,000    

WireCo WorldGroup Inc. 13
Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

  

Mezzanine Investment —

11.0%, Due 2/15

     5,000,000        4,820,616      5,000,000    

 

12


Table of Contents

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal    Cost    Value  

Wolf Hollow I, LP 6
Utilities

  

Senior Secured Loan — Acquisition Term Loan

2.5%, Due 6/12

   $ 769,358    $ 762,697    $ 738,584   

Wolf Hollow I, LP 6
Utilities

  

Senior Secured Loan — Synthetic Letter of Credit

2.5%, Due 6/12

     668,412      662,624      641,675   

Wolf Hollow I, LP 6
Utilities

  

Senior Secured Loan — Synthetic Revolver Deposit

2.5%, Due 6/12

     167,103      165,656      160,419   

Wolf Hollow I, LP 6
Utilities

  

Junior Secured Loan — Term Loan (Second Lien)

4.8%, Due 12/12

     2,683,177      2,686,773      2,626,830   

X-Rite, Incorporated 6
Electronics

  

Junior Secured Loan — Loan (Second Lien)

14.4%, Due 10/13

     649,162      649,162      649,162   

X-Rite, Incorporated 6
Electronics

  

Senior Secured Loan — Term Loan (First Lien)

8.0%, Due 10/12

     595,468      593,631      575,226  
                         

Total Investment in Debt Securities
(146% of net asset value at fair value)

   $ 382,171,510    $ 377,547,089    $ 323,347,630   
                         

Equity Portfolio

 

Portfolio Company / Principal Business

  

Investment

   Percentage
Interest/Shares
    Cost    Value  

Aerostructures Holdings L.P. 7
Aerospace and Defense

   Partnership Interests    1.2   $ 1,000,000    $ 489,476   

Aerostructures Holdings L.P. 7
Aerospace and Defense

   Series A Preferred Interests    1.2 %       160,361      192,758   

Coastal Concrete Southeast, LLC 7, 8
Buildings and Real Estate
4

   Warrants    580       474,140      —     

eInstruction Acquisition, LLC 7
Healthcare, Education and Childcare

   Membership Units    1.1     1,079,617      1,440,000   

FP WRCA Coinvestment Fund VII, Ltd. 3, 7
Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

   Class A Shares    15,000       1,500,000      2,398,000   

Park Avenue Coastal Holding, LLC 7
Buildings and Real Estate
4

   Common Interests    2.0     1,000,000      —     
                    

Total Investment in Equity Securities
(2% of net asset value at fair value)

     $ 5,214,118    $ 4,520,234   
                    

 

13


Table of Contents

CLO Fund Securities

CLO Equity Investments

 

Portfolio Company

  

Investment

   Percentage
Interest
    Cost    Value  

Grant Grove CLO, Ltd. 3, 13, 14

   Subordinated Securities, Due 1/21    22.2   $ 4,714,673    $ 2,430,000   

Katonah III, Ltd. 3, 13

   Preferred Shares, Due 5/15    23.1     4,500,000      1,000,000   

Katonah IV, Ltd. 3, 13, 14

   Preferred Shares, Due 2/15    17.1     3,150,000      220,000   

Katonah V, Ltd. 3, 13, 14

   Preferred Shares, Due 5/15    26.7     3,320,000      1,000   

Katonah VII CLO Ltd. 3, 9, 13, 14

   Subordinated Securities, Due 11/17    16.4     4,500,000      1,030,000   

Katonah VIII CLO Ltd 3, 9, 13, 14

   Subordinated Securities, Due 5/18    10.3     3,400,000      1,750,000   

Katonah IX CLO Ltd 3, 9, 13, 14

   Preferred Shares, Due 1/19    6.9     2,000,000      1,560,000   

Katonah X CLO Ltd 3, 9, 13

   Subordinated Securities, Due 4/20    33.3     11,585,051      8,210,000   

Katonah 2007-I CLO Ltd. 3, 9, 13

   Preferred Shares, Due 4/22    100.0     29,929,871      26,840,000   
                    

Total Investment in CLO Equity Securities

     $ 67,099,595    $ 43,041,000   
                    

CLO Rated-Note Investment

 

Portfolio Company

  

Investment

   Percentage
Interest
    Cost    Value  

Katonah 2007-I CLO Ltd. 3, 9, 13

  

Class B-2L Notes

Par Value of $10,500,000

5.5%, Due 4/22

   100.0   $ 1,076,989    $ 3,675,000   
                    

Total Investment in CLO Rated-Note

     $ 1,076,989    $ 3,675,000   
                    

Total Investment in CLO Fund Securities
(21% of net asset value at fair value)

     $ 68,176,584    $ 46,716,000   
                    

Asset Manager Affiliate

 

Portfolio Company / Principal Business

  

Investment

   Percentage
Interest
    Cost    Value  

Katonah Debt Advisors, L.L.C.

   Membership Interests    100   $ 40,751,511    $ 56,744,027   

Total Investment in Asset Manager Affiliate
(26% of net asset value at fair value)

     $ 40,751,511    $ 56,744,027   
                    

 

14


Table of Contents

Time Deposits and Money Market Account

 

Time Deposits and Money Market Account

  

Investment

   Yield     Par / Cost    Value  

US Bank Eurodollar Sweep CL2 3, 11

   Time Deposit    0.10   $ 11,536,593    $ 11,536,593   

JP Morgan Asset Account

   Time Deposit    0.07     701,043      701,043   

JP Morgan Business Money Market Account 12

   Money Market Account    0.15     1,939      1,939   
                    

Total Investment in Time Deposit and Money Market Accounts
(6% of net asset value at fair value)

     $ 12,239,575    $ 12,239,575   
                    

Total Investments 5
(201% of net asset value at fair value)

     $ 503,928,877    $ 443,567,466   
                    

 

1 A majority of the variable rate loans to the Company’s portfolio companies bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at September 30, 2009.
2 Reflects the fair market value of all existing investments as of September 30, 2009, as determined by the Company’s Board of Directors.
3 Non-U.S. company or principal place of business outside the U.S.
4 Buildings and real estate relate to real estate ownership, builders, managers and developers and excludes mortgage debt investments and mortgage lenders or originators. As of September 30, 2009, the Company had no exposure to mortgage securities (residential mortgage bonds, commercial mortgage backed securities, or related asset backed securities), companies providing mortgage lending or emerging markets investments either directly or through the Company’s investments in Collateralized Loan Obligation Funds (“CLO Funds”).
5 The aggregate cost of investments for federal income tax purposes is approximately $504 million. The aggregate gross unrealized appreciation is approximately $21 million and the aggregate gross unrealized depreciation is approximately $82 million.
6 Pledged as collateral for the secured revolving credit facility (see Note 6 to the financial statements).
7 Non-income producing.
8 Warrants having a strike price of $0.01 and expiration date of March 2017.
9 An affiliate CLO Fund managed by Katonah Debt Advisors, L.L.C. or its affiliate.
10 Loan or debt security is on non-accrual status and therefore is considered non-income producing.
11 Time deposit investment partially restricted under terms of the secured credit facility (see Note 6 to financial statements).
12 Money market account holding restricted cash for employee flexible spending accounts.
13 These securities were acquired in a transaction that was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Rule 144A thereunder. These securities may be resold only in transactions that are exempt from the registration requirements of the Securities Act, normally to qualified institutional buyers.
14 As of September 30, 2009, these CLO Fund securities were not providing a dividend distribution.

See accompanying notes to financial statements.

 

15


Table of Contents

KOHLBERG CAPITAL CORPORATION

SCHEDULE OF INVESTMENTS

As of December 31, 2008

Debt Securities Portfolio

 

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal    Cost    Value
(as
restated)
 

Advanced Lighting Technologies, Inc. 6
Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Senior Secured Loan — Deferred Draw Term Loan (First Lien)

6.6%, Due 6/13

   $ 356,819    $ 356,819    $ 349,683   

Advanced Lighting Technologies, Inc.
Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Senior Secured Loan — Revolving Loan

3.9%, Due 6/13

     960,000      952,585      940,800   

Advanced Lighting Technologies, Inc. 6
Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Junior Secured Loan — Second Lien Term Loan Note

8.5%, Due 6/14

     5,000,000      5,000,000      4,690,000   

Advanced Lighting Technologies, Inc. 6
Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Senior Secured Loan — Term Loan (First Lien)

4.6%, Due 6/13

     1,834,277      1,834,277      1,797,592   

Aero Products International, Inc. 6
Personal and Non Durable Consumer Products (Mfg. Only)

  

Senior Secured Loan — Term Loan

7.0%, Due 4/12

     3,118,560      3,118,560      2,987,580   

Aerostructures Acquisition LLC 6
Aerospace and Defense

  

Senior Secured Loan — Delayed Draw Term Loan

7.5%, Due 3/13

     429,397      429,397      417,803   

Aerostructures Acquisition LLC 6
Aerospace and Defense

  

Senior Secured Loan — Term Loan

7.5%, Due 3/13

     5,436,949      5,436,949      5,290,151   

AGA Medical Corporation 6
Healthcare, Education and Childcare

  

Senior Secured Loan — Tranche B Term Loan

4.2%, Due 4/13

     3,832,209      3,829,883      3,219,056   

AGS LLC 6
Hotels, Motels, Inns, and Gaming

  

Senior Secured Loan — Delayed Draw Term Loan

3.5%, Due 5/13

     442,044      436,817      390,767   

AGS LLC 6
Hotels, Motels, Inns, and Gaming

  

Senior Secured Loan — Initial Term Loan

3.5%, Due 5/13

     3,159,324      3,121,965      2,792,842   

AmerCable Incorporated 6
Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

  

Senior Secured Loan — Initial Term Loan

5.0%, Due 6/14

     5,900,113      5,900,113      5,310,102   

Astoria Generating Company Acquisitions, L.L.C. 6
Utilities

  

Junior Secured Loan — Term C

4.2%, Due 8/13

     4,000,000      4,040,652      3,520,000   

 

16


Table of Contents

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal    Cost    Value
(as
restated)
 

Atlantic Marine Holding Company 6
Cargo Transport

  

Senior Secured Loan — Term Loan

6.5%, Due 3/14

   $ 1,721,939    $ 1,731,184    $ 1,682,334   

Aurora Diagnostics, LLC 6
Healthcare, Education and Childcare

  

Senior Secured Loan — Tranche A Term Loan (First Lien)

6.7%, Due 12/12

     4,265,636      4,231,984      4,052,355   

Awesome Acquisition Company (CiCi’s Pizza) 6
Personal, Food and Miscellaneous Services

  

Junior Secured Loan — Term Loan (Second Lien)

6.5%, Due 6/14

     4,000,000      3,977,593      3,476,000   

AZ Chem US Inc.
Chemicals, Plastics and Rubber

  

Junior Secured Loan — Second Lien Term Loan

6.0%, Due 2/14

     3,300,000      2,649,436      2,682,900   

AZ Chem US Inc. 6
Chemicals, Plastics and Rubber

  

Junior Secured Loan — Second Lien Term Loan

6.0%, Due 2/14

     4,000,000      3,963,645      3,252,000   

Bankruptcy Management Solutions, Inc. 6
Diversified/Conglomerate Service

  

Junior Secured Loan — Loan (Second Lien)

8.1%, Due 7/13

     2,443,750      2,473,717      1,906,125   

Bankruptcy Management Solutions, Inc. 6
Diversified/Conglomerate Service

  

Senior Secured Loan — Term Loan (First Lien)

4.5%, Due 7/12

     1,955,000      1,964,334      1,769,275   

Bicent Power LLC 6
Utilities

  

Junior Secured Loan — Advance (Second Lien)

5.5%, Due 12/14

     4,000,000      4,000,000      3,600,000   

BP Metals, LLC 6
Mining, Steel, Iron and Non-Precious Metals

  

Senior Secured Loan — Term Loan

10.1%, Due 6/13

     4,937,500      4,937,500      4,937,500   

Broadlane, Inc. 6
Healthcare, Education and Childcare

  

Senior Secured Loan — Term Loan

8.5%, Due 8/13

     4,987,500      4,918,231      4,987,500   

Caribe Information Investments Incorporated 6
Printing and Publishing

  

Senior Secured Loan — Term Loan

3.4%, Due 3/13

     1,694,554      1,688,542      1,421,731   

Cast & Crew Payroll, LLC (Payroll Acquisition) 6
Leisure, Amusement, Motion Pictures, Entertainment

  

Senior Secured Loan — Initial Term Loan

4.4%, Due 9/12

     9,208,100      9,234,910      8,655,614   

CEI Holdings, Inc. (Cosmetic Essence) 6
Personal and Non Durable Consumer Products (Mfg. Only)

  

Senior Secured Loan — Term Loan

6.3%, Due 3/14

     1,469,323      1,403,698      1,071,136   

Centaur, LLC 6
Hotels, Motels, Inns, and Gaming

  

Senior Secured Loan — Term Loan (First Lien)

9.3%, Due 10/12

     2,792,043      2,763,495      2,512,838   

 

17


Table of Contents

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal     Cost    Value
(as  restated)
 

Charlie Acquisition Corp.
Personal, Food and Miscellaneous Services

  

Mezzanine Investment — Senior Subordinated Notes

15.5%, Due 6/13

   $ 10,893,401     $ 10,744,496    $ 7,625,381   

Clarke American Corp. 6
Printing and Publishing

  

Senior Secured Loan — Tranche B Term Loan

4.2%, Due 6/14

     2,955,000       2,955,000      2,290,125   

CoActive Technologies, Inc. 6
Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

  

Senior Secured Loan — Term Loan (First Lien)

4.5%, Due 7/14

     3,960,000        3,944,053      3,168,000   

CoActive Technologies, Inc. 6
Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

  

Junior Secured Loan — Term Loan (Second Lien)

8.2%, Due 1/15

     2,000,000       1,966,739      1,454,000   

Coastal Concrete Southeast, LLC
Buildings and Real Estate

  

Mezzanine Investment — Mezzanine Term Loan

10.0%, Due 3/13

     8,886,903       8,557,108      5,243,273   

Cooper-Standard Automotive Inc 6
Automobile

  

Senior Unsecured Bond —

8.4%, Due 12/14

     4,000,000       3,259,487      700,000  

DaimlerChrysler Financial Services Americas LLC 6
Finance

  

Senior Secured Loan — Term Loan (First Lien)

6.0%, Due 8/12

     3,959,925       3,723,431      2,111,828   

Dealer Computer Services, Inc. (Reynolds & Reynolds) 6
Electronics

  

Junior Secured Loan — Term Loan (Second Lien)

6.0%, Due 10/13

     1,000,000       1,007,900      850,000   

Dealer Computer Services, Inc. (Reynolds & Reynolds) 6
Electronics

  

Junior Secured Loan — Term Loan (Third Lien)

8.0%, Due 4/14

     7,700,000       7,501,237      6,237,000  

Delta Educational Systems, Inc. 6
Healthcare, Education and Childcare

  

Senior Secured Loan — Term Loan

7.5%, Due 6/12

     2,748,162       2,748,162      2,649,228   

Dex Media West LLC
Printing and Publishing

  

Senior Secured Loan — Tranche B Term Loan

7.1%, Due 10/14

     7,000,000       6,309,065      5,117,000  

Dresser, Inc. 6
Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

  

Junior Secured Loan — Term Loan (Second Lien)

8.0%, Due 5/15

     3,000,000       2,964,626      2,619,000   

DRI Holdings, Inc. 6
Healthcare, Education and Childcare

  

Junior Secured Loan — US Term Loan (Second Lien)

10.1%, Due 7/15

     6,000,000       5,411,785      4,860,000  

Edgestone CD Acquisition Corp. (Custom Direct) 6
Printing and Publishing

  

Junior Secured Loan — Loan (Second Lien)

7.5%, Due 12/14

     5,000,000       5,000,000      3,450,000   

 

18


Table of Contents

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal     Cost    Value (as
restated)
 

Edgestone CD Acquisition Corp. (Custom Direct) 6
Printing and Publishing

  

Senior Secured Loan — Term Loan (First Lien)

4.2%, Due 12/13

   $ 4,455,857     $ 4,460,205    $ 3,832,037   

eInstruction Corporation 6
Healthcare, Education and Childcare

  

Senior Secured Loan — Initial Term Loan

5.8%, Due 7/13

     4,781,365       4,781,365      4,637,924   

eInstruction Corporation 6
Healthcare, Education and Childcare

  

Junior Secured Loan — Term Loan (Second Lien)

9.3%, Due 7/14

     10,000,000        10,000,000      9,400,000   

Emerson Reinsurance Ltd. 3
Insurance

  

Senior Secured Loan — Series C Loan

7.3%, Due 12/11

     1,000,000       1,000,000      1,000,000   

Endeavor Energy Resources, L.P. 6
Oil and Gas

  

Junior Secured Loan — Initial Loan (Second Lien)

6.3%, Due 4/12

     4,000,000         4,000,000      3,920,000   

Fasteners For Retail, Inc. 6
Diversified/Conglomerate Manufacturing

  

Senior Secured Loan — Term Loan

6.6%, Due 12/12

     4,320,878       4,327,124      4,234,461   

FD Alpha Acquisition LLC (Fort
Dearborn)
6
Printing and Publishing

  

Senior Secured Loan — US Term Loan

6.3%, Due 11/12

     1,740,026         1,624,251      1,659,985   

First American Payment Systems, L.P. 6
Finance

  

Senior Secured Loan — Term Loan

4.3%, Due 10/13

     3,398,000         3,398,000      3,306,254   

First Data Corporation
Finance

  

Senior Secured Loan — Initial Tranche B-2 Term Loan

3.2%, Due 9/14

     4,974,811       4,534,131      3,218,703   

Flatiron Re Ltd. 3, 6
Insurance

  

Senior Secured Loan — Closing Date Term Loan

5.7%, Due 12/10

     96,855         97,333      96,855   

Flatiron Re Ltd. 3, 6
Insurance

  

Senior Secured Loan — Delayed Draw Term Loan

5.7%, Due 12/10

     46,914       47,146      46,914   

Ford Motor Company 6
Automobile

  

Senior Secured Loan — Term Loan

5.0%, Due 12/13

     1,969,849         1,967,877      807,638   

Freescale Semiconductor, Inc.
Electronics

  

Senior Subordinated Bond —

10.3%, Due 12/16

     3,000,000       3,008,197      1,305,000   

Frontier Drilling USA, Inc. 6
Oil and Gas

  

Senior Secured Loan — Term B Advance

9.3%, Due 6/13

     2,000,000       1,998,263      1,848,000   

 

19


Table of Contents

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal     Cost    Value
(as  restated)
 

Getty Images, Inc.
Printing and Publishing

  

Senior Secured Loan — Initial Term Loan

8.1%, Due 7/15

   $ 2,981,250      $ 2,981,250    $ 2,712,938   

Ginn LA Conduit Lender, Inc. 10
Buildings and Real Estate

  

Senior Secured Loan — First Lien Tranche A Credit-Linked Deposit

7.8%, Due 6/11

     1,257,143       1,224,101      150,857   

Ginn LA Conduit Lender, Inc. 10
Buildings and Real Estate

  

Senior Secured Loan — First Lien Tranche B Term Loan

7.8%, Due 6/11

     2,694,857        2,624,028      323,383   

Ginn LA Conduit Lender, Inc. 10
Buildings and Real Estate

  

Junior Secured Loan — Loan (Second Lien)

11.8%, Due 6/12

     3,000,000       2,715,997      90,000   

Gleason Works, The 6
Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

  

Senior Secured Loan — New US Term Loan

4.9%, Due 6/13

     2,437,280        2,443,443      2,071,688   

Hawkeye Renewables, LLC 6
Farming and Agriculture

  

Senior Secured Loan — Term Loan (First Lien)

6.2%, Due 6/12

     2,908,544       2,856,515      1,250,674   

HMSC Corporation (aka Swett and Crawford) 6
Insurance

  

Junior Secured Loan — Loan (Second Lien)

6.0%, Due 10/14

     5,000,000       4,831,923      3,900,000   

Huish Detergents Inc. 6
Personal and Non Durable Consumer Products (Mfg. Only)

  

Junior Secured Loan — Loan (Second Lien)

4.7%, Due 10/14

     1,000,000        1,000,000      795,000   

Hunter Fan Company 6
Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Senior Secured Loan — Initial Term Loan (First Lien)

4.7%, Due 4/14

     3,723,929       3,577,920      3,090,861   

Hunter Fan Company 6
Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Junior Secured Loan — Loan (Second Lien)

7.6%, Due 10/14

     3,000,000       3,000,000      2,460,000   

Infiltrator Systems, Inc. 6
Ecological

  

Senior Secured Loan — Term Loan

8.0%, Due 9/12

     2,727,813       2,721,193      2,605,061   

Inmar, Inc. 6
Retail Stores

  

Senior Secured Loan — Term Loan

2.7%, Due 4/13

     3,755,829        3,755,829      3,455,363   

International Aluminum Corporation (IAL Acquisition Co.) 6
Mining, Steel, Iron and Non-Precious Metals

  

Senior Secured Loan — Term Loan

4.8%, Due 3/13

     3,001,367       3,001,367      2,638,202   

Intrapac Corporation/Corona Holdco 6
Containers, Packaging and Glass

  

Senior Secured Loan — First Lien Term Loan

6.9%, Due 5/12

     4,316,295       4,329,467      4,027,104   

 

20


Table of Contents

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal     Cost    Value
(as  restated)
 

Intrapac Corporation/Corona Holdco 6
Containers, Packaging and Glass

  

Junior Secured Loan — Term Loans (Second Lien)

10.9%, Due 5/13

   $ 3,000,000     $ 3,017,825    $ 2,757,000   

Jones Stephens Corp. 6
Buildings and Real Estate

  

Senior Secured Loan — Term Loan

5.2%, Due 9/12

     10,090,295       10,068,492      9,182,168   

JW Aluminum Company 6
Mining, Steel, Iron and Non-Precious Metals

  

Junior Secured Loan — Term Loan (Second Lien)

7.2%, Due 12/13

     5,371,429       5,387,168      3,523,657   

Kepler Holdings Limited 3, 6
Insurance

  

Senior Secured Loan — Loan

7.0%, Due 6/09

     5,000,000       5,006,639      5,000,000   

KIK Custom Products Inc. 6
Personal and Non Durable Consumer Products (Mfg. Only)

  

Junior Secured Loan — Loan (Second Lien)

8.5%, Due 12/14

     5,000,000       5,000,000      2,900,000   

La Paloma Generating Company, LLC 6
Utilities

  

Junior Secured Loan — Loan (Second Lien)

5.0%, Due 8/13

     2,000,000       2,014,136      1,740,000   

LBREP/L-Suncal Master I LLC 6, 10
Buildings and Real Estate

  

Senior Secured Loan — Term Loan (First Lien)

5.5%, Due 1/10

     3,875,156        3,835,789      290,637   

LBREP/L-Suncal Master I LLC 6, 10
Buildings and Real Estate

  

Junior Secured Loan — Term Loan (Second Lien)

9.5%, Due 1/11

     2,000,000       1,920,211      8,000   

LBREP/L-Suncal Master I LLC 10
Buildings and Real Estate

  

Junior Secured Loan — Term Loan (Third Lien)

11.3%, Due 2/12

     2,332,868        2,332,868      9,331   

Lear Corporation
Automobile

  

Senior Secured Loan — Term Loan

3.7%, Due 4/12

     1,993,927       1,709,640      927,176   

Legacy Cabinets, Inc. 6
Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Senior Secured Loan — Term Loan

5.8%, Due 8/12

     2,269,824         2,269,824      1,793,161   

Levlad, LLC & Arbonne International, LLC 6
Personal and Non Durable Consumer Products (Mfg. Only)

  

Senior Secured Loan — Term Loan

4.5%, Due 3/14

     2,731,786       2,731,786      1,693,708   

LN Acquisition Corp. (Lincoln Industrial) 6
Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

  

Junior Secured Loan — Initial Term Loan (Second Lien)

6.8%, Due 1/15

     2,000,000        2,000,000      1,914,000   

LPL Holdings, Inc. 6
Finance

  

Senior Secured Loan — Tranche D Term Loan

2.8%, Due 6/13

     3,305,000       3,324,288      2,776,200   

 

21


Table of Contents

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal     Cost    Value
(as  restated)
 

Manitowoc Company Inc., The
Diversified/Conglomerate Manufacturing

  

Senior Secured Loan — Term B Loan

6.5%, Due 8/14

   $ 2,000,000      $ 1,955,000    $ 1,820,000   

MCCI Group Holdings, LLC 6
Healthcare, Education and Childcare

  

Senior Secured Loan — Term Loan (First Lien)

6.6%, Due 12/12

     5,899,925        5,884,108      5,663,928   

MCCI Group Holdings, LLC 6
Healthcare, Education and Childcare

  

Junior Secured Loan — Term Loan (Second Lien)

9.4%, Due 6/13

     1,000,000        1,000,000      940,000   

Murray Energy Corporation 6
Mining, Steel, Iron and Non-Precious Metals

  

Senior Secured Loan — Tranche B Term Loan (First Lien)

6.9%, Due 1/10

     1,949,367       1,954,403      1,920,127   

Mylan Inc.
Healthcare, Education and Childcare

  

Senior Secured Loan — U.S. Tranche B Term Loan

5.0%, Due 10/14

     1,969,849        1,912,634      1,792,563   

National Interest Security Company, L.L.C.
Aerospace and Defense

  

Mezzanine Investment — Mezzanine Facility

15.0%, Due 6/13

     3,000,000       3,000,000      2,940,000   

National Interest Security Company, L.L.C.
Aerospace and Defense

  

Junior Secured Loan — Second Lien Term Loan

15.0%, Due 6/13

     1,000,000       1,000,000      1,050,000   

National Interest Security Company, L.L.C. 6
Aerospace and Defense

  

Senior Secured Loan — Term Loan - First Lien

7.8%, Due 12/12

     8,075,000       8,075,000      7,994,250   

Northeast Biofuels, LP 6
Farming and Agriculture

  

Senior Secured Loan — Construction Term Loan

10.3%, Due 6/13

     1,382,120       1,384,467      276,424   

Northeast Biofuels, LP 6
Farming and Agriculture

  

Senior Secured Loan — Synthetic LC Term Loan

10.3%, Due 6/13

     57,257        57,354      11,451   

PAS Technologies Inc.
Aerospace and Defense

  

Senior Secured Loan — Incremental Term Loan Add On

6.8%, Due 6/11

     744,382       744,382      730,239   

PAS Technologies Inc. 6
Aerospace and Defense

  

Senior Secured Loan — Term Loan

6.8%, Due 6/11

     3,680,556        3,665,393      3,610,625   

Pegasus Solutions, Inc. 6
Leisure, Amusement, Motion Pictures, Entertainment

  

Senior Secured Loan — Term Loan

7.8%, Due 4/13

     5,695,000       5,695,000      5,467,200   

Pegasus Solutions, Inc. 13
Leisure, Amusement, Motion Pictures, Entertainment

  

Senior Unsecured Bond —

10.5%, Due 4/15

     2,000,000       2,000,000      1,540,000   

 

22


Table of Contents

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal     Cost    Value
(as
restated)
 

Primus International Inc. 6
Aerospace and Defense

  

Senior Secured Loan — Term Loan

4.3%, Due 6/12

   $ 1,246,565      $ 1,248,519    $ 1,209,168   

QA Direct Holdings, LLC 6
Printing and Publishing

  

Senior Secured Loan — Term Loan

6.8%, Due 8/14

     4,937,343        4,896,292      4,438,672   

Resco Products, Inc. 6
Mining, Steel, Iron and Non-Precious Metals

  

Junior Secured Loan — Term Loan (Second Lien)

10.2%, Due 6/14

     6,650,000        6,471,193      5,785,500   

Rhodes Companies, LLC, The 6
Buildings and Real Estate

  

Senior Secured Loan — First Lien Term Loan

9.0%, Due 11/10

     1,685,674       1,629,483      632,128   

Rhodes Companies, LLC, The 6
Buildings and Real Estate

  

Junior Secured Loan — Second Lien Term Loan

10.2%, Due 11/11

     2,013,977        2,022,278      302,096   

San Juan Cable, LLC 6
Broadcasting and Entertainment

  

Junior Secured Loan — Loan (Second Lien)

7.7%, Due 10/13

     3,000,000       2,982,607      2,559,000   

Schneller LLC 6
Aerospace and Defense

  

Senior Secured Loan — Term Loan

5.1%, Due 6/13

     4,694,560        4,658,215      4,671,088   

Seismic Micro-Technology, Inc. (SMT) 6
Electronics

  

Senior Secured Loan — Term Loan

5.8%, Due 6/12

     1,430,000        1,427,248      1,424,280   

Seismic Micro-Technology, Inc. (SMT) 6
Electronics

  

Senior Secured Loan — Term Loan

5.8%, Due 6/12

     953,333        951,498      949,520   

Specialized Technology Resources, Inc. 6
Diversified/Conglomerate Service

  

Junior Secured Loan — Loan (Second Lien)

7.5%, Due 12/14

     7,500,000        7,500,000      7,372,500   

Specialized Technology Resources, Inc. 6
Diversified/Conglomerate Service

  

Senior Secured Loan — Term Loan (First Lien)

3.0%, Due 6/14

     3,930,101        3,930,101      3,835,778   

Standard Steel, LLC 6
Cargo Transport

  

Senior Secured Loan — Delayed Draw Term Loan

3.0%, Due 7/12

     766,973        771,034      766,973   

Standard Steel, LLC 6
Cargo Transport

  

Senior Secured Loan — Initial Term Loan

4.0%, Due 7/12

     3,805,590        3,825,741      3,805,590   

Standard Steel, LLC 6
Cargo Transport

  

Junior Secured Loan — Loan (Second Lien)

7.5%, Due 7/13

     1,750,000       1,758,373      1,750,000   

 

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Table of Contents

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal      Cost    Value
(as restated) 2
 

Texas Competitive Electric Holdings Company, LLC (TXU)
Utilities

  

Senior Secured Loan — Initial Tranche B-2 Term Loan

5.6%, Due 10/14

   $ 1,989,924      $ 1,814,330    $ 1,384,987    

TPF Generation Holdings, LLC 6
Utilities

  

Junior Secured Loan — Loan (Second Lien)

5.7%, Due 12/14

     2,000,000        2,028,327      1,466,000    

TransAxle LLC
Automobile

  

Senior Secured Loan — Revolving Loan

6.0%, Due 8/11

     400,000          397,067      352,400    

TransAxle LLC
Automobile

  

Senior Secured Loan — Term Loan

5.8%, Due 9/12

     1,477,554        1,477,554      1,301,725    

TUI University, LLC 6
Healthcare, Education and Childcare

  

Senior Secured Loan — Term Loan (First Lien)

6.1%, Due 7/14

     3,736,736          3,581,708      3,557,373    

Twin-Star International, Inc. 6
Home and Office Furnishings, Housewares, and Durable Consumer Products

  

Senior Secured Loan — Term Loan

7.9%, Due 4/13

     4,339,736        4,339,736      4,031,614    

United Maritime Group, LLC (fka Teco Transport Corporation) 6
Cargo Transport

  

Junior Secured Loan — Term Loan (Second Lien)

9.0%, Due 12/13

     6,500,000        6,486,324      5,174,000    

Walker Group Holdings LLC
Cargo Transport

  

Junior Secured Loan — Term Loan B

12.6%, Due 12/12

     526,500          526,500      514,391    

Walker Group Holdings LLC 6
Cargo Transport

  

Junior Secured Loan — Term Loan B

12.5%, Due 12/12

     5,000,000        5,000,000      4,885,000    

Water PIK, Inc. 6
Personal and Non Durable Consumer Products (Mfg. Only)

  

Senior Secured Loan — Loan (First Lien)

4.2%, Due 6/13

     1,965,050          1,954,720      1,925,749    

Wesco Aircraft Hardware Corp.
Aerospace and Defense

  

Junior Secured Loan — Loan (Second Lien)

6.2%, Due 3/14

     2,000,000        1,923,443      1,784,000    

Wesco Aircraft Hardware Corp. 6
Aerospace and Defense

  

Junior Secured Loan — Loan (Second Lien)

6.2%, Due 3/14

     4,132,887          4,161,055      3,686,536    

WireCo WorldGroup Inc. 6, 13
Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

  

Mezzanine Investment —

11.0%, Due 2/15

     10,000,000        10,000,000      9,600,000    

WireCo WorldGroup Inc. 13
Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

  

Mezzanine Investment —

11.0%, Due 2/15

     5,000,000        4,795,580      4,800,000    

 

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Table of Contents

Portfolio Company / Principal Business

  

Investment

Interest Rate¹ / Maturity

   Principal     Cost    Value
(as restated) 2
 

Wolf Hollow I, LP 6
Utilities

  

Senior Secured Loan — Acquisition Term Loan

3.7%, Due 6/12

   $ 775,624     $ 767,066    $ 684,876    

Wolf Hollow I, LP 6
Utilities

  

Senior Secured Loan — Synthetic Letter of Credit

0.4%, Due 6/12

     668,413         661,032      590,205    

Wolf Hollow I, LP 6
Utilities

  

Senior Secured Loan — Synthetic Revolver Deposit

1.1%, Due 6/12

     167,103       165,259      147,552    

Wolf Hollow I, LP 6
Utilities

  

Junior Secured Loan — Term Loan (Second Lien)

6.0%, Due 12/12

     2,683,177       2,687,607      1,990,917    

X-Rite, Incorporated 6
Electronics

   Junior Secured Loan — Loan (Second Lien)
14.4%, Due 10/13
     645,361       645,361      620,837    

X-Rite, Incorporated 6
Electronics

  

Senior Secured Loan — Term Loan (First Lien)

7.3%, Due 10/12

     633,560       631,128      613,286    
                          

Total Investment in Debt Securities
(160% of net asset value at fair value)

      $ 430,366,772     $ 423,859,086    $ 353,859,007    
                          
Equity Portfolio           

Portfolio Company / Principal Business

  

Investment

   Percentage
Interest
    Cost    Value
(as restated) 2
 

Aerostructures Holdings L.P. 7
Aerospace and Defense

   Partnership Interests      1.2   $ 1,000,000    $ 750,000    

Aerostructures Holdings L.P. 7
Aerospace and Defense

   Series A Preferred Interests      1.2 %       160,360      166,512    

Allen-Vanguard Corporation 3, 7
Aerospace and Defense

   Common Shares      0.0     42,542      1,853    

Coastal Concrete Southeast, LLC 7, 8
Buildings and Real Estate

   Warrants      0.9     474,140      —     

eInstruction Acquisition, LLC 7
Healthcare, Education and Childcare

   Membership Units      1.1     1,079,617      1,773,000    

 

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Table of Contents

Portfolio Company / Principal Business

  

Investment

   Percentage
Interest
    Cost    Value
(as restated)
 

FP WRCA Coinvestment Fund VII, Ltd. 3, 7 Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

   Class A Shares    0.7   $ 1,500,000    $ 2,398,000   

Park Avenue Coastal Holding, LLC
Buildings and Real Estate

   Common Interests    2.0     1,000,000      —     
                    

Total Investment in Equity Securities
(2% of net asset value at fair value)

        $ 5,256,659    $ 5,089,365   
                    
CLO Fund Securities           

Portfolio Company / Principal Business

  

Investment

   Percentage
Interest
    Cost    Value
(as restated) 2
 

Grant Grove CLO, Ltd. 3, 13

   Subordinated Securities, Due 1/21    22.2   $ 4,620,951    $ 2,090,000   

Katonah III, Ltd. 3, 13

   Preferred Shares, Due 5/15    23.1     4,500,000      1,660,000   

Katonah IV, Ltd. 3, 13

   Preferred Shares, Due 2/15    17.1     3,150,000      590,000   

Katonah V, Ltd. 3, 13

   Preferred Shares, Due 5/15    26.7     3,320,000      60,000   

Katonah VII CLO Ltd. 3, 9, 13

   Subordinated Securities, Due 11/17    16.4     4,500,000      1,220,000   

Katonah VIII CLO Ltd. 3, 9, 13

   Subordinated Securities, Due 5/18    10.3     3,400,000      1,250,000   

Katonah IX CLO Ltd. 3, 9, 13

   Preferred Shares, Due 1/19    6.9     2,000,000      1,220,000   

Katonah X CLO Ltd. 3, 9, 13

   Subordinated Securities, Due 4/20    33.3     11,324,758      5,190,000   

Katonah 2007-I CLO Ltd. 3, 9, 13

   Preferred Shares, Due 4/22    100.0     29,560,886      21,360,000   
                    

Total Investment in CLO Fund Securities
(16% of net asset value at fair value)

     $ 66,376,595    $ 34,640,000    
                    
Asset Manager Affiliates           

Portfolio Company / Principal Business

  

Investment

   Percentage
Interest
    Cost    Value
(as restated) 2
 

Katonah Debt Advisors, LLC
Asset Management Company

   Membership Interests    100   $ 37,151,495    $ 54,731,312   

PKSIL
Asset Management Company

   Class A Shares    100     1,793,276      —     

PKSIL
Asset Management Company

   Class B Shares    35     3,500      3,500   
                    

Total Investment in Asset Manager Affiliates
(24% of net asset value at fair value)

     $ 38,948,271    $ 54,734,812   
                    

 

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Table of Contents

Time Deposits and Money Market Account

 

Time Deposits and Money Market Account

  

Investment

   Yield     Cost     Value
(as restated) 2
 

US Bank Eurodollar Sweep CL2 3, 11

   Time Deposit    0.10   $ 10,462,702     $ 10,462,702   

JP Morgan Asset Account

   Time Deposit    0.20     1,723,294        1,723,294   

JP Morgan Business Money Market Account 12

   Money Market Account    0.19     10       10   
                     

Total Investment in Time Deposit and Money Market Accounts
(6% of net asset value at fair value)

     $ 12,186,006     $ 12,186,006   
                     

Total Investments 5
(208% of net asset value at fair value)

        $ 546,626,617     $ 460,509,190   
                     

 

1 A majority of the variable rate loans to the Company’s portfolio companies bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at December 31, 2008.
2 Reflects the fair market value of all existing investments as of December 31, 2008, as determined by the Company’s Board of Directors. Subsequent to filing the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, the Company revised its valuation procedures and restated the fair value of its investments. See Note 13. “Restated Financial Statements” for more information.
3 Non-U.S. company or principal place of business outside the U.S.
4 Buildings and real estate relate to real estate ownership, builders, managers and developers and excludes mortgage debt investments and mortgage lenders or originators. As of December 31, 2008, the Company had no exposure to mortgage securities (residential mortgage bonds, commercial mortgage backed securities, or related asset-backed securities), companies providing mortgage lending or emerging markets investments either directly or through the Company’s investments in CLO Funds.
5 The aggregate cost of investments for federal income tax purposes is approximately $547 million. The aggregate gross unrealized appreciation is approximately $19 million and the aggregate gross unrealized depreciation is approximately $106 million.
6 Pledged as collateral for the secured revolving credit facility (see Note 6 to the financial statements).
7 Non-income producing.
8 Warrants having a strike price of $0.01 and expiration date of March 2017.
9 An affiliate CLO Fund managed by Katonah Debt Advisors or its affiliate.
10 Loan or debt securities on non-accrued status and therefore is non-income producing
11 Time deposit investment partially restricted under terms of the secured credit facility (see Note 6 to financial statements).
12 Money market account holding restricted cash for employee flexible spending accounts.
13 These securities were acquired in a transaction that was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Rule 144A thereunder. These securities may be resold in transactions that are exempt from the registration requirements of the Securities Act of 1933, as amended, normally to qualified institutional buyers.

See accompanying notes to financial statements.

 

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KOHLBERG CAPITAL CORPORATION

FINANCIAL HIGHLIGHTS

(unaudited)

($ per share)

 

       Nine Months Ended September 30,  
     2009     2008  
           (as restated)  

Per Share Data:

    

Net asset value, at beginning of period

   $ 9.03     $ 14.38  

Net income (loss)

    

Net investment income

     0.71       1.19  

Net realized losses

     (0.40     (0.03

Net change in unrealized appreciation/depreciation on investments 

     0.97       (3.12
                

Net loss

     1.28       (1.96

Net decrease in net assets resulting from distributions

    

From net investment income

     (0.48     (1.16
                

Net decrease in net assets resulting from distributions

     (0.48     (1.16

Net increase in net assets relating to stock-based transactions

    

Issuance of common stock (not including dividend reinvestment plan)

     —          1.26  

Issuance of common stock under dividend reinvestment plan

     0.07       0.10  

Stock based compensation expense

     0.03       0.03  
                

Net increase in net assets relating to stock-based transactions

     0.10       1.39  
                

Net asset value, end of period

   $ 9.93     $ 12.65  
                

Total net asset value return

     15.2     (3.9 ) % 

Ratio/Supplemental Data:

    

Per share market value at beginning of period

   $ 3.64     $ 12.00  

Per share market value at end of period

   $ 6.03     $ 8.59  

Total market return

     78.6     (18.7 ) % 

Shares outstanding at end of period

     22,255,149        21,676,660   

Net assets at end of period

   $ 220,953,413     $ 274,173,561  

Portfolio turnover rate

     1.0     13.3

Average debt outstanding

   $ 240,843,511     $ 242,956,204  

Asset coverage ratio

     197     202

Ratio of net investment income to average net assets

     10.0     12.0

Ratio of total expenses to average net assets

     6.9     7.1

Ratio of interest expense to average net assets

     4.0     4.1

Ratio of non-interest expenses to average net assets

     2.9     2.9

 

1 Based on weighted average number of common shares outstanding for the period.
2 Total net asset value return (not annualized) equals the change in the net asset value per share over the beginning of period net asset value per share plus dividends, divided by the beginning net asset value per share.
3 Total market return (not annualized) equals the change in the ending market price over the beginning of period price per share plus dividends, divided by the beginning price.
4

Not annualized

5

Annualized

See accompanying notes to financial statements.

 

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KOHLBERG CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

(unaudited)

1. ORGANIZATION

Kohlberg Capital Corporation (“Kohlberg Capital” or the “Company”) is an internally managed, non-diversified closed-end investment company that is regulated as a business development company (“BDC”) under the Investment Company Act of 1940. The Company originates, structures and invests in senior secured term loans, mezzanine debt and selected equity securities primarily in privately-held middle market companies. The Company defines the middle market as comprising companies with earnings before interest, taxes, depreciation and amortization (“EBITDA”), of $10 million to $50 million and/or total debt of $25 million to $150 million. The Company was formed as a Delaware LLC on August 8, 2006 and, prior to the issuance of shares of the Company’s common stock in its initial public offering (“IPO”), converted to a corporation incorporated in Delaware on December 11, 2006. Prior to its IPO, the Company did not have material operations. The Company’s IPO of 14,462,000 shares of common stock raised net proceeds of approximately $200 million. Prior to the IPO, the Company issued 3,484,333 shares to affiliates of Kohlberg & Co., LLC (“Kohlberg & Co.”), a leading middle market private equity firm, in exchange for the contribution of their ownership interests in Katonah Debt Advisors, L.L.C. (“Katonah Debt Advisors”) and in securities issued by collateralized loan obligation funds (“CLO Funds”) managed by Katonah Debt Advisors and two other asset managers to the Company. As of September 30, 2009, Katonah Debt Advisors had approximately $2.1 billion of assets under management.

The Company’s investment objective is to generate current income and capital appreciation from investments made in senior secured term loans, mezzanine debt and selected equity investments in privately-held middle market companies. The Company also expects to receive distributions of recurring fee income and to generate capital appreciation from its investment in the asset management business of Katonah Debt Advisors. Katonah Debt Advisors manages CLO Funds which invest in broadly syndicated loans, high-yield bonds and other credit instruments. The Company’s investment portfolio as well as the investment portfolios of the CLO Funds in which it has invested and the investment portfolios of the CLO Funds managed by Katonah Debt Advisors consist exclusively of credit instruments and other securities issued by corporations and do not include any asset-backed securities secured by commercial mortgages, residential mortgages or other consumer borrowings.

The Company has elected to be treated as a Regulated Investment Company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements. Pursuant to this election, the Company generally does not have to pay corporate-level taxes on any income that it distributes to its stockholders.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements include the accounts of the Company and the accounts of its special purpose financing subsidiary, Kohlberg Capital Funding LLC I (“KCAP Funding” or the “Borrower”). In accordance with Article 6 of Regulation S-X under the Securities Act of 1933 and Securities Exchange Act of 1934, the Company does not consolidate portfolio company investments, including those in which it has a controlling interest (Katonah Debt Advisors currently is the only company in which the Company has a controlling interest).

The accompanying unaudited condensed financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required for annual financial statements. The unaudited interim financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto for the fiscal year ended December 31, 2008, as restated and filed with the Securities and Exchange Commission (the “Commission” or the “SEC”) in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

The financial statements reflect all adjustments, both normal and recurring as well as restatement adjustments, and reclassifications which, in the opinion of management, are necessary for the fair presentation of the Company’s results of operations and financial condition for the periods presented. Furthermore, the preparation of the financial statements requires management to make significant estimates and assumptions including the fair value of investments that do not have a readily available market value.

 

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Table of Contents

KOHLBERG CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Actual results could differ from those estimates, and the differences could be material. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for the full year.

Accounting Standards Codification . In June 2009, the Financial Accounting Standards Board (“FASB”) issued a pronouncement establishing the FASB Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with GAAP. The ASC reorganized existing U.S. accounting and reporting standards issued by the FASB and other related private sector standard setters into a single source of authoritative accounting principles arranged by topic. The standard explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission (the “Commission” or the “SEC”) under federal securities laws as authoritative GAAP for SEC registrants. The ASC supersedes all existing U.S. accounting standards; all other accounting literature not included in the ASC (other than SEC guidance for publicly-traded companies) is considered non-authoritative. The ASC was effective on a prospective basis for interim and annual reporting periods ending after September 15, 2009. The adoption of the ASC changed the Company’s references to U.S. GAAP accounting standards but did not impact its results of operations, financial position or liquidity.

Investments

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

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

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

The Company engaged Valuation Research Corporation (“VRC”), an independent valuation firm, to provide third-party valuation estimates for approximately 40% of its portfolio at fair value as of December 31, 2008. VRC’s valuation estimates were considered as one of the relevant data inputs in the Company’s determination of fair value. The Board of Directors intends to continue to engage an independent valuation firm in the future to provide certain valuation services, including the review of certain portfolio assets, as part of the Company’s annual year end valuation process.

The Board of Directors may consider other methods of valuation than those set forth above to determine the fair value of investments as appropriate in conformity with GAAP. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may differ materially from the values that would have been used had a ready market existed for such investments, and the differences could be material. Further, such investments may be generally subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities. In addition, changes in the market environment and other events may occur over the life of the investments that may cause the value realized on such investments to be different from the currently assigned valuations.

The Company’s valuation methodology and procedures, as modified, are as follows:

 

  1) Each portfolio company or investment is cross-referenced to an independent pricing service to determine if a current market quote is available. The nature and quality of such quote is reviewed to determine reliability and relevance of the quote. Factors considered in this determination include if the quote is from a transaction or is a broker quote, the date and aging of such quote, if the transaction is arms-length, whether it is of a liquidation or distressed nature and certain other factors judged to be relevant by management within the framework of Fair Value Measurements and Disclosures .

 

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KOHLBERG CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

  2) If an investment does not have a market quotation on either a broad market exchange or from an independent pricing service, the investment is initially valued by the Company’s investment professionals responsible for the portfolio investment in conjunction with the portfolio management team.

 

  3) Preliminary valuation conclusions are discussed and documented by management.

 

  4) Katonah Debt Advisors and other illiquid junior and mezzanine securities may be selected for review by an independent valuation firm, which is engaged by the Company’s Board of Directors. Such independent valuation firm reviews management’s preliminary valuations and makes their own independent valuation assessment.

 

  5) The Valuation Committee of the Board of Directors reviews the portfolio valuations, as well as the input and report of such independent valuation firm, as applicable.

 

  6) Upon approval of the investment valuations by the Valuation Committee of the Board of Directors, the Audit Committee of the Board of Directors reviews the results for inclusion in the Company’s quarterly and annual financial statements, as applicable.

 

  7) The Board of Directors discusses the valuations and determines in good faith that the fair values of each investment in the portfolio is reasonable based upon any applicable independent pricing service, input of management, estimates from independent valuation firms (if any) and the recommendations of the Valuation Committee of the Board of Directors.

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

Loans and Debt Securities. To the extent that the Company’s investments are exchange traded and are priced or have sufficient price indications from normal course trading at or around the valuation date (financial reporting date), such pricing will determine fair value. Pricing service marks from third party pricing services may be used as an indication of fair value, depending on the volume and reliability of the marks, sufficient and reasonable correlation of bid and ask quotes, and, most importantly, the level of actual trading activity. However, most of the Company’s investments are illiquid investments with little or no trading activity. Further, the Company has been unable to identify directly comparable market indices or other market guidance that correlate directly to the types of investments the Company owns. As a result, for most of its assets, the Company determines fair value using alternative methodologies using available market data, as adjusted, to reflect the types of assets the Company owns, their structure, qualitative and credit attributes and other asset specific characteristics.

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

 

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KOHLBERG CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Equity and Equity-Related Securities . The Company’s equity and equity-related securities in portfolio companies for which there is no liquid public market are carried at fair value based on the enterprise value of the portfolio company, which is determined using various factors, including EBITDA and cash flows from operations less capital expenditures and other pertinent factors, such as recent offers to purchase a portfolio company’s securities or other liquidation events. The determined fair values are generally discounted to account for restrictions on resale and minority ownership positions. The values of the Company’s equity and equity-related securities in public companies for which market quotations are readily available are based upon the closing public market prices on the balance sheet date. Securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.

The significant inputs used to determine the fair value of equity and equity-related securities include prices, earnings, EBITDA and cash flows after capital expenditures for similar peer comparables and the investment entity itself. Equity and equity related securities are classified as Level III (as described in Note 4. “Investments” below) when there is limited activity or less transparency around inputs to the valuation given the lack of information related to such equity investments held in nonpublic companies. Significant assumptions observed for comparable companies are applied to relevant financial data for the specific investment. Such assumptions, such as model discount rates or price/earnings multiples, vary by the specific investment, equity position and industry and incorporate adjustments for risk premiums, liquidity and company specific attributes. Such adjustments require judgment and may be material to the calculation of fair value.

Affiliate Asset Manager. The Company’s investment in its wholly-owned asset management company, Katonah Debt Advisors, is carried at fair value, which is determined after taking into consideration a percentage of assets under management and a discounted cash flow model incorporating different levels of discount rates depending on the hierarchy of fees earned (including the likelihood of realization of senior, subordinate and incentive fees) and prospective modeled performance. Such valuation includes an analysis of comparable asset management companies. Katonah Debt Advisors is classified as a Level III investment (as described below). Any change in value from period to period is recognized as net change in unrealized appreciation or depreciation.

CLO Fund Securities.  The Company typically makes a minority investment in the most junior class of securities of CLO Funds raised and managed by Katonah Debt Advisors and may selectively invest in securities issued by funds managed by other asset management companies (collectively “CLO Fund securities”). The Company’s CLO Fund securities relate exclusively to credit instruments issued by corporations and do not include any asset-backed securities secured by commercial mortgages, residential mortgages, or consumer borrowings.

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

Due to the individual attributes of each CLO Fund security, they are classified as a Level III investment unless specific trading activity can be identified at or near the valuation date. When available, observable market information will be identified, evaluated and weighted accordingly in the application of such data to the present value models and fair value determination. Significant assumptions to the present value calculations include default rates, recovery rates, prepayment rates, investment/reinvestment rates and spreads and the discount rate by which to value the resulting underlying cash

 

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KOHLBERG CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

flows. Such assumptions can vary significantly, depending on market data sources which often vary in depth and level of analysis, understanding of the CLO market, detailed or broad characterization of the CLO market and the application of such data to an appropriate framework for analysis. The application of data points are based on the specific attributes of each individual CLO Fund security’s underlying assets, historic, current and prospective performance, vintage, and other quantitative and qualitative factors that would be evaluated by market participants. The Company evaluates the source of market data for reliability as an indicative market input, consistency amongst other inputs and results and also the context in which such data is presented.

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

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

Restricted Cash . Restricted cash consists mostly of cash held in an operating account pursuant to the Company’s secured credit facility agreement with its lender.

Time Deposits and Money Market Accounts.  Time deposits primarily represent overnight Eurodollar investments of cash held in non-demand deposit accounts. Such time deposits are partially restricted under terms of the secured credit facility. The money market account contains restricted cash held for employee flexible spending accounts.

Interest Income . Interest income, including amortization of premium and accretion of discount, is recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company generally places a loan or security on non-accrual status and ceases recognizing interest income on such loan or security when a loan or security becomes 90 days or more past due or if the Company otherwise does not expect the debtor to be able to service its debt obligations. Non-accrual loans remain in such status until the borrower has demonstrated the ability and intent to pay contractual amounts due or such loans become current. As of September 30, 2009, nine issuers representing approximately 3% of total investments at fair value were considered in default.

Dividends from Affiliate Asset Manager. The Company records dividend income from its affiliate asset manager on the declaration date, which represents the ex-dividend date.

Dividend Income from CLO Fund Securities . The Company generates dividend income from its investments in the most junior class of securities of CLO Funds (typically preferred shares or subordinated securities) managed by Katonah Debt Advisors and selective investments in securities issued by funds managed by other asset management companies. The Company’s CLO Fund junior class securities are subordinate to senior bond holders who typically receive a fixed rate of return on their investment. The CLO Funds are leveraged funds and any excess cash flow or “excess spread” (interest earned by the underlying securities in the fund less payments made to senior bond holders, fund expenses and management fees) is paid to the holders of the CLO Fund’s subordinated securities or preferred shares. The Company makes estimated interim accruals of such dividend income based on recent historical distributions and CLO Fund performance and adjusts such accruals on a quarterly basis to reflect actual distributions.

For non-junior class CLO Fund securities, such as the Company’s investment in the Class B-2L Notes of the Katonah 2007-1 CLO, interest is earned at a fixed spread relative to the LIBOR index.

Capital Structuring Service Fees . The Company may earn ancillary structuring and other fees related to the origination and/or investment in debt and investment securities.

Debt Issuance Costs . Debt issuance costs represent fees and other direct costs incurred in connection with the Company’s borrowings. These amounts are capitalized and amortized ratably over the contractual term of the borrowing as a component of interest expense. At September 30, 2009, there was an unamortized debt issuance cost of approximately $825,000 included in other assets in the accompanying balance sheet. Amortization expense for the nine months ended September 30, 2009 and 2008 was approximately $619,000 and $316,000, respectively.

Expenses . The Company is internally managed and expenses costs, as incurred, with regard to the running of its operations. Primary operating expenses include employee salaries and benefits, the costs of identifying, evaluating, negotiating, closing,

 

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KOHLBERG CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

monitoring and servicing the Company’s investments and related overhead charges and expenses, including rental expense, and any interest expense incurred in connection with borrowings. The Company and its asset manager affiliates share office space and certain other shared operating expenses. The Company has entered into an Overhead Allocation Agreement with its asset manager affiliates which provides for the sharing of such expenses based on an equal sharing of office lease costs and the ratable usage of other shared resources. The aggregate net payments of such expenses under the Overhead Allocation Agreement are not material.

Dividends . Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is determined by the Board of Directors each quarter and is generally based upon the earnings estimated by management for the period and year.

The Company has adopted a dividend reinvestment plan (“DRIP”) that provides for reinvestment of its distributions on behalf of its stockholders, unless a stockholder “opts out” of the plan to receive cash in lieu of having their cash dividends automatically reinvested in additional shares of the Company’s common stock.

Recent Accounting Pronouncements

Two-Class Method of Presenting Earnings Per Share. In June 2008, Accounting Standards Codification— Determining Whether Instruments Granted in Share-based Payment Transactions are Participating Securities was issued. This standard requires companies to include unvested share-based payment awards that contain non-forfeitable rights to dividends in the computation of earnings per share pursuant to the two-class method. This standard is effective for financial statements issued for years beginning after December 15, 2008, and interim periods within those years. The Company adopted this standard beginning with its financial statements ended March 31, 2009 and, as required, applied this standard retroactively to all reported periods. The adoption of this standard did not have a material impact on the Company’s calculations of earnings per share.

3. EARNINGS PER SHARE

The following information sets forth the computation of basic and diluted net increase in stockholders’ equity per share for the three and nine months ended September 30, 2009 and 2008:

 

     For the Three Months ended
September 30,
   For the Nine Months ended
September 30,
       2009    2008    2009    2008
          (as restated)         (as restated)

Net increase (decrease) in stockholders’ equity from operations

   $ 10,665,810    $ 3,411,889    $ 32,543,669    $ 9,125,299

Net income (loss) from operations allocated to non-vested share awards

     129,675      55,198      461,696      56,601
                           

Distributable earnings available to common stockholders

   $ 10,536,135    $ 3,356,691    $ 32,081,973    $ 9,068,698
                           

Weighted average number of common shares outstanding for basic EPS computation

     22,194,690      21,649,681      22,030,517      20,021,709

Effect of dilutive securities—stock options

     5      —        —        —  
                           

Weighted average number of common and common stock equivalent shares outstanding for diluted EPS computation

     22,194,695      21,649,681      22,030,517      20,021,709
                           

Basic and diluted earnings per common share:

           

Net income (loss) from operations

   $ 0.47    $ 0.16    $ 1.46    $ 0.45

Net income (loss) from operations allocated to non-vested share awards

     0.01      —        0.02      0.01
                           

Net increase (decrease) in stockholders’ equity from operations

   $ 0.48    $ 0.16    $ 1.48    $ 0.46
                           

Effective January 1, 2008, the accounting for unvested share-based payment awards included in the calculation of earnings per share changed. Share-based awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are now participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees and directors are considered participating securities and we have prepared our earnings per share calculations to include outstanding unvested restricted stock awards in the basic weighted average shares outstanding calculation. The unvested restricted shares were excluded from the calculation of diluted EPS for the year ended December 31, 2008 because their inclusion would have been anti-dilutive.

Options to purchase 40,000 and 20,000 shares were not included in the computation of diluted earnings per share for the periods ended September 30, 2009 and 2008, respectively, because the effect would be antidilutive as the exercise prices exceeded the average market price of the common shares.

 

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KOHLBERG CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

4. INVESTMENTS

The Company invests in senior secured loans, mezzanine debt and, to a lesser extent, equity of middle market companies in a variety of industries. The Company generally targets companies that generate positive cash flows because the Company looks to cash flow as the primary source for servicing debt. However, the Company may invest in industries in which it currently has little or no investment if it is presented with attractive opportunities.

The following table shows the Company’s portfolio by security type at September 30, 2009 and December 31, 2008:

 

     September 30, 2009     December 31, 2008 (as restated)  
Security Type    Cost    Fair Value        Cost    Fair Value     

Time Deposits

   $ 12,237,636    $ 12,237,636      $ 12,185,996    $ 12,185,996   

Money Market Account

     1,939      1,939    —          10      10    —     

Senior Secured Loan

     188,426,126      166,587,438    75       235,123,695      204,210,564    104  

Junior Secured Loan

     143,591,523      126,455,505    57       143,370,524      115,894,790    59  

Mezzanine Investment

     37,206,323      26,304,687    12       37,097,183      30,208,653    15  

Senior Subordinated Bond

     3,007,427      1,980,000    1       3,008,197      1,305,000    1  

Senior Unsecured Bond

     5,315,690      2,020,000    1       5,259,487      2,240,000    1  

CLO Fund Securities

     68,176,584      46,716,000    21       66,376,595      34,640,000    17  

Equity Securities

     5,214,118      4,520,234    2       5,256,659      5,089,365    3  

Affiliate Asset Managers

     40,751,511      56,744,027    26       38,948,271      54,734,812    28  
                                        

Total

   $ 503,928,877    $ 443,567,466    201    $ 546,626,617    $ 460,509,190    234 
                                        

 

1

Calculated as a percentage of NAV.

 

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KOHLBERG CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

The unaudited industry concentrations, based on the fair value of the Company’s investment portfolio as of September 30, 2009 and December 31, 2008, were as follows:

 

     September 30, 2009     December 31, 2008 (as restated)  
Industry Classification    Cost    Fair Value    %     Cost    Fair Value    %  

Aerospace and Defense

   $ 34,009,513    $ 33,118,344    15   $ 35,545,254    $ 34,302,224    17

Asset Management Companies

     40,751,511      56,744,027    26        38,948,271      54,734,812    28   

Automobile

     5,263,950      2,137,377    1        8,811,625      4,088,939    2   

Broadcasting and Entertainment

     2,985,299      3,000,000    1        2,982,607      2,559,000    1   

Buildings and Real Estate

     37,953,187      10,334,553    5        38,404,495      16,231,874    8   

Cargo Transport