UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30,
2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from _____________ to ________________
Commission file number 000-51327
BlackRock Kelso Capital Corporation
-----------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 20-2725151
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
40 East 52nd Street, New York, New York 10022
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 212-810-5800
-------------------
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since last
Report.
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined by Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the Registrant is a shell company (as
defined by Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Class Outstanding at November 11, 2005
----------------------------- --------------------------------
Common stock, $.001 par value 35,366,589
BLACKROCK KELSO CAPITAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2005
Table of Contents
INDEX PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Assets and Liabilities (unaudited) as of 4
September 30, 2005
Statement of Operations (unaudited) for the period July 5
25, 2005 (inception of operations) through September 30,
2005
Statement of Changes in Net Assets (unaudited) for the 6
period July 25, 2005 (inception of operations) through
September 30, 2005
Statement of Cash Flows (unaudited) for the period July 7
25, 2005 (inception of operations) through September 30,
2005
Schedule of Investments (unaudited) as of September 30, 8
2005
Notes to Financial Statements (unaudited) 10
Item 2. Management's Discussion and Analysis of Financial 16
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market 20
Risk
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and Use of 21
Proceeds
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits 21
SIGNATURES 22
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 with respect to future financial or business performance, strategies
or expectations. Forward-looking statements are typically identified by words
or phrases such as "trend," "opportunity," "pipeline," "believe,"
"comfortable," "expect," "anticipate," "current," "intention," "estimate,"
"position," "assume," "potential," "outlook," "continue," "remain,"
"maintain," "sustain," "seek," "achieve" and similar expressions, or future or
conditional verbs such as "will," "would," "should," "could," "may" or similar
expressions. BlackRock Kelso Capital Corporation (the "Company") cautions that
forward-looking statements are subject to numerous assumptions, risks and
uncertainties, which change over time. Forward-looking statements speak only
as of the date they are made, and the Company assumes no duty to and does not
undertake to update forward-looking statements. Actual results could differ
materially from those anticipated in forward-looking statements and future
results could differ materially from historical performance.
In addition to factors previously disclosed in the Company's
Securities and Exchange Commission (the "SEC") reports and those identified
elsewhere in this report, the following factors, among others, could cause
actual results to differ materially from forward-looking statements or
historical performance:
(1) the introduction, withdrawal, success and timing of business
initiatives and strategies;
(2) changes in political, economic or industry conditions, the
interest rate environment or financial and capital markets,
which could result in changes in the value of the Company's
assets;
(3) the relative and absolute investment performance and
operations of the Company's Advisor, BlackRock Kelso Capital
Advisors LLC (the "Advisor");
(4) the impact of increased competition;
(5) the impact of capital improvement projects;
(6) the impact of future acquisitions and divestitures;
(7) the unfavorable resolution of legal proceedings;
(8) the extent and timing of any share repurchases;
(9) the impact, extent and timing of technological changes and the
adequacy of intellectual property protection;
(10) the impact of legislative and regulatory actions and reforms
and regulatory, supervisory or enforcement actions of
government agencies relating to the Company, the Advisor or
its affiliates, BlackRock, Inc. or The PNC Financial Services
Group, Inc.;
(11) terrorist activities, which may adversely affect the general
economy, real estate, financial and capital markets, specific
industries, and the Company and the Advisor;
(12) the ability of the Advisor to attract and retain highly
talented professionals;
(13) fluctuations in foreign currency exchange rates; and
(14) the impact of changes to tax legislation and, generally, the
tax position of the Company.
Forward-looking statements speak only as of the date they are made. The
Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
BLACKROCK KELSO CAPITAL CORPORATION
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
September 30, 2005
ASSETS:
Cash and cash equivalents, at fair value (amortized cost of
$417,652,895) $ 417,605,390
Investments, at fair value (amortized cost of $123,943,288) 124,060,153
Interest receivable 187,253
Other assets 122,332
---------------
Total Assets $ 541,975,128
===============
LIABILITIES:
Payable for investments purchased $ 8,990,000
Offering costs payable 800,000
Management fees payable 436,992
Organizational expenses payable 200,000
Accrued administrative services expenses 185,484
Directors' fees payable 107,670
Other accrued expenses and payables 330,299
---------------
Total 11,050,445
Liabilities
---------------
NET ASSETS:
Common stock, par value $.001 per share, 40,000,000 common shares 35,367
authorized, 35,366,589 issued and outstanding
Paid-in capital in excess of par 529,091,071
Accumulated undistributed net investment income 1,728,885
Net unrealized appreciation 69,360
---------------
Total Net Assets 530,924,683
---------------
Total Liabilities and Net Assets $ 541,975,128
===============
Net Asset Value Per Share $ 15.01
===============
The accompanying notes are an integral part of these financial statements.
4
BLACKROCK KELSO CAPITAL CORPORATION
STATEMENT OF OPERATIONS (UNAUDITED)
For the period July 25, 2005 (inception of operations) through September 30, 2005
INVESTMENT INCOME:
Interest $ 3,599,086
---------------
EXPENSES:
Management fees 1,976,340
Organizational 200,000
Administrative services 185,484
Advisor expenses 132,616
Professional fees 126,216
Directors' fees 107,670
Insurance 45,278
Other 84,767
---------------
Total Expenses Before Management Fee Waiver 2,858,371
Management fee waiver (988,170)
---------------
Total Expenses After Management Fee Waiver 1,870,201
---------------
NET INVESTMENT INCOME 1,728,885
---------------
UNREALIZED GAIN ON INVESTMENTS AND CASH EQUIVALENTS Net change in unrealized
appreciation:
Investments 116,865
Cash equivalents (47,505)
---------------
Net change in unrealized appreciation 69,360
---------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 1,798,245
===============
Earnings Per Common Share $ 0.05
===============
Basic and Diluted Shares Outstanding 35,366,589
The accompanying notes are an integral part of these financial statements.
5
BLACKROCK KELSO CAPITAL CORPORATION
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
For the period July 25, 2005 (inception of operations) through September 30, 2005
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income $ 1,728,885
Net change in unrealized appreciation 69,360
-----------------
Net increase in net assets resulting from operations 1,798,245
-----------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 530,498,845
Less offering costs (1,372,407)
-----------------
Net increase in net assets resulting from capital share 529,126,438
transactions
-----------------
TOTAL INCREASE IN NET ASSETS 530,924,683
Net assets at beginning of period -
-----------------
Net assets at end of period $ 530,924,683
=================
The accompanying notes are an integral part of these financial statements.
6
BLACKROCK KELSO CAPITAL CORPORATION
STATEMENT OF CASH FLOWS (UNAUDITED)
For the period July 25, 2005 (inception of operations) through September 30, 2005
OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 1,798,245
Adjustments to reconcile net increase in net assets resulting
from operations to net cash used in operating activities:
Purchases of short-term investments - net (103,196,541)
Purchases of long-term investments (20,257,000)
Change in unrealized appreciation on investments (116,865)
Amortization of premium/discount - net (489,747)
Increase in interest receivable (187,253)
Increase in other assets (122,332)
Increase in payable for investments purchased 8,990,000
Increase in offering costs payable 800,000
Increase in management fees payable 436,992
Increase in organizational expenses payable 200,000
Increase in other accrued expenses and payables 623,453
--------------------
Net cash used in operating activities (111,521,048)
--------------------
FINANCING ACTIVITIES
Net proceeds from issuance of common stock:
Cash 109,408,498
Contribution of short-term investments and cash equivalents 419,717,940
--------------------
Net cash provided by financing activities 529,126,438
--------------------
Net increase in cash and cash equivalents 417,605,390
Cash and cash equivalents, beginning of period -
--------------------
Cash and cash equivalents, end of period $ 417,605,390
====================
Accumulated Undistributed Net Investment Income $ 1,728,885
====================
The accompanying notes are an integral part of these financial statements.
7
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULE OF INVESTMENTS (UNAUDITED)
September 30, 2005
Principal Amortized
Portfolio Company Industry Amount Cost Fair Value
- ----------------- -------- ------ ---- ----------
SHORT-TERM INVESTMENTS - 19.5%
Asset-Backed Security - 2.8%
RACERS Trust, Series 2005-17-O, 3.86%
(LIBOR + 0.02%/Q), 8/21/06, acquired 8/29/05 (*) Asset-Backed Security $ 15,000,000 $ 15,000,000 $ 15,008,700
Commercial Paper - 16.7%
AIG Funding Inc., 3.65%, 12/21/05 Insurance 20,000,000 19,835,750 19,824,500
Banque et Caisse d'Epargne de L'Etat, 3.68%,
12/27/05 Sovereign Agency 20,000,000 19,822,375 19,809,334
BNP Paribas (Canada), 3.76%, 1/24/06 Banking 1,500,000 1,481,984 1,480,929
Credit Suisse First Boston USA, Inc., 3.76%, Security Broker and
1/27/06 Dealer 8,000,000 7,901,404 7,894,751
Danske Corporation, 3.69%, 12/20/05 Banking 20,000,000 19,836,000 19,824,500
Solitaire Funding LLC, 3.92%, 12/28/05 Banking 20,000,000 19,808,355 19,805,189
-------------- ------------- -------------
Total Commercial Paper 89,500,000 88,685,868 88,639,203
-------------- ------------- -------------
TOTAL SHORT TERM INVESTMENTS 104,500,000 103,685,868 103,647,903
-------------- ------------- -------------
LONG-TERM INVESTMENTS - 3.8%
Subordinated Debt / Corporate Notes - 1.3%
First Mercury Holdings, Inc., 11.80% (LIBOR +
8.00%/Q), 8/15/12, acquired 8/12/05 (*) Insurance 1,800,000 1,782,317 1,791,000
InSight Health Services Corp., 9.17% (LIBOR +
5.25%/Q), 11/1/11, acquired 9/16/05 (*) Diagnostic Imaging 2,500,000 2,487,550 2,487,500
Select Medical Holdings Corporation, 9.93%
(LIBOR + 5.75%/S), 9/15/08, acquired 9/15/05 (*) Specialty Hospitals 2,500,000 2,500,000 2,487,500
-------------- ------------- -------------
Total Subordinated Debt / Corporate Notes 6,800,000 6,769,867 6,766,000
-------------- ------------- -------------
Term Loans - 2.5%
Bushnell Performance Optics, First Lien, 6.64%
(LIBOR + 3.00%), 8/19/11 Leisure Products 1,000,000 1,000,000 1,012,500
HIT Entertainment, Inc., Second Lien, 9.33%
(LIBOR + 5.50%), 2/26/13 Entertainment 1,000,000 1,000,000 1,017,500
Metaldyne Corporation et al., First Lien, 8.58%
(LIBOR + 4.50%), 12/31/09 Motor Vehicle Parts 1,000,000 995,000 1,005,000
NTELOS Inc., Second Lien, 9.03% (LIBOR +
5.00%), 2/24/12 Telecommunications 2,000,000 1,995,000 2,020,000
PBI Media, Inc., Second Lien, 9.86% (LIBOR +
6.00%), 9/30/13 Information Services 5,000,000 5,000,000 5,050,000
Synventive Acquisition Inc., First Lien, 7.12% Injection Molding
(LIBOR + 3.25%), 7/29/12 Systems 1,000,000 997,553 1,007,500
U.S. Security Holdings, Inc., First Lien, 7.27%
(LIBOR + 3.25%), 2/29/12 Security Services 1,000,000 1,000,000 1,010,000
Wastequip, Inc., Second Lien, 10.02% (LIBOR +
6.00%), 7/12/11 Waste Treatment 500,000 500,000 505,000
Wembley, Inc., Second Lien, 7.83% (LIBOR +
3.75%), 8/23/12 Gaming 1,000,000 1,000,000 1,018,750
-------------- ------------- -------------
Total Term Loans 13,500,000 13,487,553 13,646,250
-------------- ------------- -------------
TOTAL LONG TERM INVESTMENTS 20,300,000 20,257,420 20,412,250
-------------- ------------- -------------
TOTAL INVESTMENTS 124,800,000 123,943,288 124,060,153
-------------- ------------- -------------
The accompanying notes are an integral part of these financial statements.
8
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULE OF INVESTMENTS (UNAUDITED) (continued)
September 30, 2005
Principal Amortized
Portfolio Company Amount Cost Fair Value
- ----------------- ------ ---- ----------
CASH EQUIVALENTS - 78.7%
- ------------------------
Commercial Paper - 73.7%
Bank of America Corporation, 3.67%, 10/24/05 $ 10,000,000 $ 9,976,553 $ 9,976,553
Blue Ridge Asset Funding Corporation, 3.75%,
10/20/05 25,000,000 24,950,521 24,950,521
CheckPoint Charlie, Inc., 3.77%, 10/17/05 5,700,000 5,690,449 5,690,449
Citigroup Funding, Inc., 3.68%, 10/25/05 20,000,000 19,950,933 19,950,933
Concord Minutemen Capital Company, LLC, 3.75%,
10/17/05 26,000,000 25,956,667 25,956,667
Countrywide Financial Corporation, 3.92%, 10/3/05 26,000,000 25,994,338 25,994,338
Eurohypo AG, New York Branch, 3.71%, 10/25/05 20,000,000 20,000,067 20,000,067
Galaxy Funding, Inc., 3.93%, 12/28/05 10,000,000 9,903,933 9,903,689
Lexington Parker Capital Corp., 3.75%, 10/17/05 23,200,000 23,161,333 23,161,333
Liberty Street Funding Corporation, 3.68%, 10/12/05 8,000,000 7,991,004 7,991,004
Liberty Street Funding Corporation, 3.70%, 11/15/05 6,256,000 6,227,066 6,211,635
Liberty Street Funding Corporation, 3.80%, 12/15/05 10,095,000 10,015,081 10,012,137
Lockhart Funding LLC, 3.65%, 10/7/05 25,000,000 24,984,792 24,984,792
Morgan Stanley & Co., 3.75%, 10/19/05 25,000,000 24,953,125 24,953,125
Rabobank USA Financial Corp., 3.88%, 10/3/05 26,000,000 25,994,396 25,994,396
Ranger Funding Co. LLC, 3.68%, 10/13/05 25,000,000 24,969,333 24,969,333
Sedna Finance, Inc., 3.60%, 10/27/05 20,000,000 19,948,000 19,919,797
Silver Tower US Funding LLC, 3.78%, 10/26/05 20,000,000 19,947,500 19,947,500
UBS Finance (Delaware) LLC, 3.80%, 10/5/05 20,000,000 19,991,556 19,991,556
Victory Receivables Corporation, 3.88%, 10/3/05 23,000,000 22,995,042 22,995,042
Wal-Mart Stores, Inc., 3.49%, 10/4/05 17,600,000 17,594,881 17,594,198
-------------- ------------- -------------
Total Commercial Paper 391,851,000 391,196,570 391,149,065
-------------- ------------- -------------
Master Notes - 4.9%
Merrill Lynch Mortgage Capital, Inc., 3.95%, 10/4/05 26,000,000 26,000,000 26,000,000
Money Market Fund - 0.1%
Galileo Money Market Fund 456,325 456,325 456,325
-------------- ------------- -------------
TOTAL CASH EQUIVALENTS 418,307,325 417,652,895 417,605,390
-------------- ------------- -------------
TOTAL INVESTMENTS AND CASH EQUIVALENTS - 102.0% $543,107,325 $541,596,183 541,665,543
============== =============
OTHER ASSETS & LIABILITIES (NET) - (2.0%) (10,740,860)
-------------
NET ASSETS - 100.0% $530,924,683
=============
(*) - These securities are exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions that
are exempt from registration, normally to qualified institutional buyers. In
the aggregate, these securities represent 4.1% of net assets as of September
30, 2005.
All of the term loans to our portfolio companies bear interest at a floating
rate that may be determined by reference to the London Interbank Offered Rate
(LIBOR) or other base rate (commonly the Federal Funds Rate or the Prime
Rate), at the borrower's option. Additionally, the borrower under a term loan
generally has the option to select from interest rate reset periods of one,
two, three or six months and may alter that selection at the end of any reset
period.
Reset frequencies for floating rate investments other than term loans are
indicated by Q (quarterly) or S (semiannually).
The accompanying notes are an integral part of these financial statements.
9
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Interim Financial Statements
BlackRock Kelso Capital Corporation (the "Company"), was organized as a
Delaware corporation on April 13, 2005 and was initially funded on July 25,
2005. The Company has filed an election to be treated as a business
development company ("BDC") under the Investment Company Act of 1940 (the
"1940 Act"). In addition, for tax purposes the Company intends to elect to be
treated as a regulated investment company, or RIC, under the Internal Revenue
Code of 1986 (the "Code"). The Company's investment objective is to generate
both current income and capital appreciation through debt and equity
investments. The Company intends to invest primarily in middle-market
companies in the form of senior and junior secured and unsecured debt
securities and loans, each of which may include an equity component, and by
making direct preferred, common and other equity investments in such
companies.
On July 25, 2005, the Company completed a private placement (the "Offering")
of 35,366,589 shares of its common stock, par value $.001 per share (the
"Common Stock"), at a price of $15.00 per share. Net proceeds from the
Offering of $529,126,438 reflect the payment of a placement fee of $507,407
and additional offering costs of $865,000. Such additional offering costs
represent management's best estimate and are subject to change.
Interim financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") for
interim financial information and pursuant to the requirements for reporting
on Form 10-Q and Articles 6 and 10 of Regulation S-X. In the opinion of
management, all adjustments, consisting solely of normal recurring accruals,
considered necessary for the fair presentation of financial statements for the
interim period, have been included. The current period's results of operations
will not necessarily be indicative of results that ultimately may be achieved
for the fiscal year ending December 31, 2005.
2. Significant Accounting Policies
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of income and expenses during the reported period. Changes in
the economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ.
The significant accounting policies consistently followed by the Company are:
(a) Investments for which market quotations are readily available are valued
at such market quotations, which are generally obtained from an
independent pricing service or one or more broker-dealers or market
makers. However, debt investments with remaining maturities within 60
days are valued at cost plus accreted discount, or minus amortized
premium, which approximates fair value. Debt and equity securities for
which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the
Company's Board of Directors.
Because the Company expects that there will not be a readily available
market value for many of the investments in its portfolio, the Company
expects to value many of its portfolio investments at fair value as
determined in good faith by or under the direction of the Board of
Directors using a consistently applied valuation process in accordance
with a documented valuation policy that has been reviewed and approved by
the Board of Directors. Due to the inherent uncertainty of determining
the fair value of investments that do not have a readily available market
value, the fair value of the Company's investments may differ
significantly from the values that would have been used had a readily
available market value existed for such investments, and the differences
could be material.
With respect to the Company's investments for which market quotations are
not readily available, the Board of Directors undertakes a multi-step
valuation process each quarter, as described below:
(1) The quarterly valuation process begins with each portfolio
company or investment being initially valued
10
by the investment professionals responsible for the portfolio
investment;
(2) Preliminary valuation conclusions are then documented and
discussed with senior management;
(3) To the extent determined by the Audit Committee of the Board of
Directors, independent valuation firms engaged by the Board of
Directors conduct independent appraisals and review management's
preliminary valuations and their own independent assessment;
(4) The Audit Committee of the Board of Directors reviews the
preliminary valuations of the investment professionals and
senior management and that of the independent valuation firms;
and
(5) The Board of Directors discusses valuations and determines the
fair value of each investment in the portfolio in good faith
based on the input of the Company's investment advisor, the
respective independent valuation firms and the Audit Committee.
The types of factors that the Company may take into account in fair value
pricing its investments include, as relevant, the nature and realizable
value of any collateral, the portfolio company's ability to make payments
and its earnings and discounted cash flow, the markets in which the
portfolio company does business, comparison to publicly traded securities
and other relevant factors.
Determination of fair values involves subjective judgments and estimates.
Accordingly, these notes to the financial statements express the
uncertainty with respect to the possible effect of such valuations, and
any change in such valuations, on the financial statements.
The carrying value of the Company's financial instruments approximate
fair value. The carrying value of interest receivable and other assets,
accounts payable and accrued expenses, approximate fair value due to
their short maturity.
At this time, none of the Company's portfolio companies is controlled by
or affiliated with the Company as defined in the 1940 Act.
(b) Cash equivalents include short-term liquid investments in a money market
fund and money market instruments with a remaining maturity when
purchased of three months or less.
(c) Security transactions are accounted for on the trade date unless there
are substantial conditions to the purchase.
(d) Gains or losses on the sale of investments are calculated using the
specific identification method.
(e) Interest income, adjusted for amortization of premium and accretion of
discount, is recorded on an accrual basis. Interest income is not accrued
if collection is deemed doubtful or the related investment is in default.
For loans and debt securities with contractual PIK interest, which
represents contractual interest accrued and added to the loan balance that
generally becomes due at maturity, PIK interest is not accrued if the
portfolio company valuation indicates that the PIK interest is not
collectible. Origination, closing and/or commitment fees and discounts and
premiums on investments purchased are accreted/amortized over the life of
the respective investment using the effective yield method. Upon the
prepayment of a loan or debt security, any prepayment penalties and
unamortized loan origination, closing and commitment fees are recorded as
interest income.
(f) A portion of the net proceeds of the Offering was used to pay the
Company's offering costs. The offering costs were charged against the
proceeds from the Offering when received and were approximately
$1,372,407.
(g) The Company intends to qualify for the tax treatment applicable to
regulated investment companies under Subchapter M of the Code, and, among
other things, intends to make the requisite distributions to its
stockholders which will relieve the Company from Federal income and
excise taxes. Therefore, no provision has been recorded for Federal
income or excise taxes.
11
In order to qualify as a RIC, the Company is required to distribute to
its stockholders at least 90% of investment company taxable income, as
defined by the Code. To avoid Federal excise taxes, the Company must
distribute at least 98% of its income (both ordinary income and net
capital gains).
In accordance with GAAP, book and tax basis differences relating to
stockholder distributions and other permanent book and tax differences
are reclassified to capital in excess of par. In addition, the character
of income and gains to be distributed is determined in accordance with
income tax regulations that may differ from GAAP.
(h) Dividends and distributions to common stockholders are recorded on the
record date. The amount to be paid out as a dividend is determined by the
Board of Directors.
The Company has adopted a dividend reinvestment plan that provides for
reinvestment of distributions on behalf of stockholders, unless a
stockholder elects to receive cash. As a result, if the Board of
Directors authorizes, and the Company declares, a cash dividend, then
stockholders who have not "opted out" of the dividend reinvestment plan
will have their cash dividends automatically reinvested in additional
shares of Common Stock, rather than receiving the cash dividends.
3. Agreements and Related Party Transaction
The Company has entered into an Investment Management Agreement (the
"Management Agreement") with BlackRock Kelso Capital Advisors LLC (the
"Advisor"), under which the Advisor, subject to the overall supervision of the
Company's Board of Directors, will manage the day-to-day operations of, and
provide investment advisory services to, the Company. For providing these
services, the Advisor receives a fee (the "Management Fee") from the Company
at an annual rate of 2.0% of the Company's total assets, including any assets
acquired with the proceeds of leverage. For services rendered under the
Management Agreement during the period commencing from the closing of the
Offering (the "Closing") through and including the first twelve months of
operations, the Management Fee will be payable monthly in arrears. For
services rendered under the Management Agreement after that time, the
Management Fee will be paid quarterly in arrears. The Advisor has agreed to
waive its rights to receive one-half of the amount of the Management Fee the
Advisor would otherwise be entitled to receive from the Company until the
first date on which 90% of the assets of the Company are invested in portfolio
companies in accordance with the Company's investment objective, excluding
investments in cash, cash equivalents, U.S. government securities and other
high-quality debt investments that mature in one year or less from the date of
investment, or the first anniversary of the Closing, whichever is sooner (the
"Ramp-Up Date"). Thereafter, the Advisor has agreed to waive, until such time
as the Company has completed an initial public offering of its Common Stock
and listed its Common Stock on a national securities exchange ("Public Market
Event"), one-quarter of the amount of the Management Fee the Advisor would
otherwise be entitled to receive from the Company. In addition, the Advisor
has agreed to (a) waive Management Fees for any calendar year in excess of
approximately $11.9 million until the earlier of (i) such time as the Company
has completed the Public Market Event or (ii) the fourth anniversary of the
Company's inception of operations and (b) waive Management Fees in excess of
approximately $5.6 million during the fifth year of the Company's existence
unless the Company has completed the Public Market Event.
For the period July 25, 2005 (inception of operations) through September 30,
2005, the Advisor earned $988,170 in base investment advisory and management
fees, net of the waiver provision, from the Company.
The Management Agreement provides that the Advisor or its affiliates may be
entitled to an incentive fee (the "Carried Interest") under certain
circumstances. The determination of the Carried Interest, as described in more
detail below, will result in the Advisor or its affiliates receiving no
Carried Interest payments if returns to Company stockholders, as described in
more detail below, do not meet an 8.0% annualized rate of return and will
result in the Advisor or its affiliates receiving less than the full amount of
the Carried Interest percentage until returns to stockholders exceed an
approximate 13.3% annualized rate of return.
Commencing on the Ramp-Up Date, the Company will pay to the Advisor or its
affiliates at the same time as, and not in advance of, any distributions in
respect of the Company's Common Stock, (i) 50% of the amount by which the
12
cumulative distributions and amounts distributable to the holders of the
Common Stock of the Company exceed an 8% annualized rate of return on net
asset value until the Advisor or its affiliates have received from the Company
an amount equal to 20% of the sum of the cumulative amounts distributed
pursuant to this paragraph and the cumulative amounts of net income (including
realized capital gains in excess of realized capital losses) in excess of net
unrealized capital depreciation distributed to the holders of the Company's
Common Stock, and (ii) thereafter an amount equal to 20% of the sum of the
amount distributed pursuant to this paragraph and the cumulative amounts of
net income (including realized capital gains in excess of realized capital
losses) in excess of net unrealized capital depreciation distributed to the
holders of the Company's Common Stock. After the Public Market Event, if any,
the amounts above will be measured and paid quarterly on a rolling
four-quarter basis and will take into account any decrease in net unrealized
depreciation during the measurement period to the extent such decrease did not
exceed the net amount of capital depreciation at the beginning of such period
and does not exceed the excess of cumulative realized capital gains over
cumulative realized capital losses.
For the period July 25, 2005 (inception of operations) through September 30,
2005, no Carried Interest amounts were earned by the Advisor or its
affiliates.
The Management Agreement provides that the Company will reimburse the Advisor
for costs and expenses incurred by the Advisor for office space rental, office
equipment and utilities allocable to the performance by the Advisor of its
duties under the Management Agreement, as well as any costs and expenses
incurred by the Advisor relating to any non-investment advisory,
administrative or operating services provided by the Advisor to the Company.
For the period July 25, 2005 (inception of operations) through September 30,
2005, the Company accrued $132,616 for costs and expenses reimbursable to the
Advisor under the Management Agreement.
No person who is an officer, director or employee of the Advisor and who
serves as a director of the Company receives any compensation from the Company
for such services. Directors who are not affiliated with the Advisor receive
compensation for their services and reimbursement of expenses incurred to
attend meetings.
The Company has also entered into an Administration Agreement with BlackRock
Financial Management, Inc. (the "Administrator"), a majority-owned subsidiary
of The PNC Financial Services Group, Inc., under which the Administrator
provides administrative services to the Company. For providing these services,
facilities and personnel, the Company reimburses the Administrator for the
Company's allocable portion of overhead and other expenses incurred by the
Administrator in performing its obligations under the Administration
Agreement, including rent and the Company's allocable portion of the cost of
the Company's officers and their respective staffs. The Administrator will
also provide on the Company's behalf and at its request managerial assistance
to those portfolio companies to which the Company is required to provide such
assistance.
For the period July 25, 2005 (inception of operations) through September 30,
2005, the Company accrued $185,484 for administrative services expenses
payable to the Administrator under the Administration Agreement.
From time to time, the Administrator may pay amounts owed by the Company to
third party providers of goods or services. The Company will subsequently
reimburse the Administrator for such amounts paid on its behalf. For the
period July 25, 2005 (inception of operations) through September 30, 2005, the
Company reimbursed the Administrator $180,910 for payments made on behalf of
the Company to third party providers of goods and services. At September 30,
2005, an additional $17,965 has been accrued for and is owing to the
Administrator for such payments.
PFPC Inc. ("PFPC"), a majority-owned subsidiary of The PNC Financial Services
Group, Inc., provides administrative and accounting services to the Company
pursuant to a Sub-Administration and Accounting Services Agreement. PFPC Trust
Company provides custodian services to the Company pursuant to a Custodian
Services Agreement. Also, PFPC provides transfer agency and compliance support
services to the Company pursuant to a Transfer Agency Agreement and a
Compliance Support Services Agreement, respectively. For the services provided
to the Company by PFPC and its affiliates, PFPC is entitled to an annual fee
of 0.02% of the Company's average net assets plus reimbursement of reasonable
expenses, and a base fee, payable monthly.
13
For the period July 25, 2005 (inception of operations) through September 30,
2005, the Company accrued $33,450 for administrative, accounting, custodian
and transfer agency services fees payable to PFPC and its affiliates under the
related agreements.
On July 25, 2005, in connection with the closing of the Offering, the Company
issued approximately 33,333,333 shares of its common stock to an entity for
which the Advisor serves as manager in exchange for total consideration of
$500,000,000 ($15.00 per share), consisting of $80,282,060 in cash and a
portfolio of short-term investments and cash equivalents valued at
$419,717,940. The transaction was effected in accordance with the Company's
valuation procedures governing securities transactions with affiliates and was
ratified by the Board of Directors.
As of September 30, 2005, the Advisor beneficially owned 733,333 shares of the
Company's Common Stock, representing approximately 2.1% of the total shares
outstanding. As of September 30, 2005, other entities affiliated with the
Administrator and PFPC beneficially owned 2,309,150 shares of the Company's
Common Stock, representing approximately 6.5% of the total shares outstanding.
4. Organizational Expenses and Offering Costs
A portion of the proceeds of the Offering was used for organizational expenses
and offering costs of approximately $200,000 and $1,372,407, respectively.
Organizational expenses are expensed as incurred. Offering costs have been
charged against paid-in capital in excess of par. Such organizational expenses
and offering costs represent management's best estimate and are subject to
change.
5. Earnings Per Share
The following information sets forth the computation of basic and diluted net
increase in net assets per share resulting from operations for the period July
25, 2005 (inception of operations) through September 30, 2005.
Numerator for basic and diluted net increase in net assets per share:
$1,798,245.
Denominator for basic and diluted weighted average shares: 35,366,589.
Basic and diluted net increase in net assets per share resulting from
operations: $0.05.
Diluted net increase in net assets per share resulting from operations equals
basic net increase in net assets per share resulting from operations for the
period because there were no common stock equivalents outstanding during the
period.
6. Purchases and Sales of Investments
Excluding short-term investments, the Company's purchases of investments for
the period July 25, 2005 (inception of operations) to September 30, 2005
totaled $20,257,000. There were no sales of investments during the period.
7. Risks and Uncertainties
The Company has no operating history. It is subject to the business risks and
uncertainties associated with any new business. During the period required for
the Company to identify and evaluate suitable investments in private
middle-market companies, the Company may invest in temporary investments that
earn yields that could be substantially lower than required to cover its
operating expenses or to pay dividends at all or at a particular level. Many
entities will compete with the Company to make the types of investments that
it plans to make in middle-market companies and such entities may have one or
more competitive advantages compared to the Company. As an externally-managed
BDC, the Company will be largely dependent on the efforts of the Advisor and
other service providers.
The Company is subject to financial market risks, including changes in
interest rates. Many of the investments in the Company's portfolio are
expected to have floating rates. While hedging activities may insulate the
Company against adverse changes in interest rates, they may also limit the
Company's ability to participate in the benefits of lower interest rates with
respect to its portfolio of investments.
14
The Company intends to make investments in private companies, which may be
subject to legal and other restrictions on resale or will otherwise be less
liquid than publicly traded securities. Each of these factors could cause the
Company to realize significantly less than the value at which it has
previously recorded such investments if it were necessary to liquidate all or
a portion of its portfolio quickly.
The Company's investments will primarily be rated below investment-grade or
unrated but of comparable credit quality to those rated below
investment-grade. The lower rating of such investments reflects a greater
possibility that adverse changes in the financial condition of the issuer of
such investments or in general business or economic conditions or both may
impair the ability of such issuer to make payments of principal and interest.
The debt and equity securities or obligations in which the Company will invest
may be subordinate to other securities or obligations of the issuers of such
investments. The Company may also invest in securities and obligations that
may be in covenant or payment default or are issued by companies involved in
bankruptcy or other reorganization and liquidation proceedings. The repayment
of defaulted obligations is subject to significant uncertainties.
Subject to complying with the diversification requirements to qualify as a
RIC, the Company may, from time to time, invest a substantial portion of its
assets in the securities of issuers in any single industry or sector of the
economy or in only a few issuers. As a result, the Company could be more
vulnerable to events affecting a single issuer or industry and therefore
subject to greater volatility than a company whose investments were more
broadly diversified.
8. Guarantees
In the normal course of business, the Company enters into contractual
agreements that provide general indemnifications against losses, costs, claims
and liabilities arising from the performance of individual obligations under
such agreements. The Company has had no prior claims or payments pursuant to
such agreements. The Company's individual maximum exposure under these
arrangements is unknown, as this would involve future claims that may be made
against the Company that have not yet occurred. However, based on management's
experience, the Company expects the risk of loss to be remote.
9. Financial Highlights
The following is a schedule of financial highlights for the period July 25, 2005
(inception of operations) through September 30, 2005.
Per Share Data:
Net asset value, beginning of period $ -
---------------
Gross proceeds from Offering 15.00
Offering costs (0.04)
---------------
Net proceeds from Offering 14.96
---------------
Net investment income 0.05
Net unrealized appreciation 0.00*
---------------
Net increase in net assets resulting from operations 0.05
---------------
Net asset value, end of period $15.01
===============
Total return (1) 0.07%
Shares outstanding at end of period 35,366,589
Ratio / Supplemental Data:
Ratio of expenses to average net assets (2)
Before management fee waiver 2.94%
15
After management fee waiver 1.92%
Ratio of net interest income to average net assets (2) 1.78%
* Less than $0.01.
(1) Total return is based on the change in net asset value per share assuming
an investment at the initial offering price of $15.00 per share. Total return
also takes into account dividends and distributions, if any, reinvested in
accordance with the Company's dividend reinvestment plan. Interim periods are
not annualized.
(2) Annualized.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
BlackRock Kelso Capital Corporation (the "Company," "we," "us," and "our"),
was incorporated in Delaware on April 13, 2005 and was initially funded on
July 25, 2005. Our investment objective is to provide a combination of current
income and capital appreciation. We intend to invest primarily in debt and
equity securities of private U.S. middle-market companies. The term
"middle-market" refers to companies with annual revenues typically between $25
million and $500 million.
We are externally managed and have elected to be treated as a business
development company ("BDC") under the Investment Company Act of 1940 (the
"1940 Act"). As a BDC, we are required to comply with certain regulatory
requirements. For instance, we generally have to invest at least 70% of our
total assets in "qualifying assets," including securities of private U.S.
companies, cash, cash equivalents, U.S. government securities and high-quality
debt investments that mature in one year or less.
On July 25, 2005, we completed a private placement (the "Offering") of
35,366,589 shares of our common stock, par value $.001 per share (the "Common
Stock"), at a price of $15.00 per share. Net proceeds from the offering of
$529,126,438 reflect the payment of a placement fee of $507,407 and additional
offering costs of $865,000. Such offering costs represent management's best
estimate and are subject to change.
We intend to elect to be treated as a regulated investment company, or a RIC,
under Subchapter M of the Internal Revenue Code of 1986 (the "Code"). To
qualify as a RIC, we must, among other things, meet certain source-of-income
and asset diversification requirements. Pursuant to these elections, we
generally will not have to pay corporate-level taxes on any income that we
distribute to our stockholders.
Critical Accounting Policies, Estimates and Judgments
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States of America, or GAAP. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Changes in the economic
environment, financial markets and any other parameters used in determining
such estimates could cause actual results to differ. In addition to the
discussion below, our critical accounting policies are further described in
the notes to the financial statements.
Valuation of Portfolio Investments
As a BDC, we intend to invest in illiquid securities including debt and equity
securities of middle-market companies. Under procedures established by our
Board of Directors, we value investments for which market quotations are
readily available at such market quotations, which are generally obtained from
an independent pricing service or one or more broker-dealers or market makers.
However, we value debt investments with remaining maturities within 60 days at
cost plus accreted discount, or minus amortized premium, which approximates
fair value. Debt and equity securities for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of our Board of Directors. Such determination of fair
values may involve subjective judgments and estimates. With respect to
investments for which market quotations are not readily available, our Board
of Directors, together with independent valuation advisers, values each
investment considering, among other measures, discounted cash flow
16
models, comparisons of financial ratios of peer companies that are public and
other factors.
Because we expect that there will not be a readily available market for many
of the investments in our portfolio, we expect to value many of our portfolio
investments at fair value as determined in good faith by or under the
direction of our Board of Directors using a consistently applied valuation
process in accordance with a documented valuation policy that has been
reviewed and approved by the Board of Directors. Due to the inherent
uncertainty of determining the fair value of investments that do not have a
readily available market value, the fair value of our investments may differ
significantly from the values that would have been used had a readily
available market value existed for such investments, and the differences could
be material.
With respect to investments for which market quotations are not readily
available, our Board of Directors undertakes a multi-step valuation process
each quarter, as described below:
o Our quarterly valuation process begins with each portfolio
company or investment being initially valued by the investment
professionals responsible for the portfolio investment;
o Preliminary valuation conclusions are then documented and
discussed with senior management;
o To the extent determined by the Audit Committee of our Board of
Directors, independent valuation firms engaged by our Board of
Directors conduct independent appraisals and review management's
preliminary valuations and their own independent assessment;
o The Audit Committee of our Board of Directors reviews the
preliminary valuations of the investment professionals and senior
management and that of the independent valuation firms; and
o The Board of Directors discusses valuations and determines the
fair value of each investment in our portfolio in good faith
based on the input of our investment adviser, the respective
independent valuation firms and the Audit Committee.
Revenue Recognition
We record interest income, adjusted for amortization of premium and accretion
of discount, on an accrual basis. We do not accrue interest income if
collection is deemed doubtful or the related investment is in default. For
loans and debt securities with contractual PIK interest, which represents
contractual interest accrued and added to the loan balance that generally
becomes due at maturity, we do not accrue PIK interest if the portfolio
company valuation indicates that the PIK interest is not collectible.
Origination, closing and/or commitment fees and discounts and premiums on
investments purchased are accreted/amortized over the life of the respective
investment using the effective yield method. Upon the prepayment of a loan or
debt security, we record any prepayment penalties and unamortized loan
origination, closing and commitment fees as interest income.
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or
Depreciation
We measure realized gains or losses by the difference between the net proceeds
from the repayment or sale and the amortized cost basis of the investment,
without regard to unrealized appreciation or depreciation previously
recognized, but considering unamortized upfront fees and prepayment penalties.
Realized gains and losses are computed using the specific identification
method. Net change in unrealized appreciation or depreciation reflects the
change in portfolio investment values during the reporting period, including
the reversal of previously recorded unrealized appreciation or depreciation,
when gains or losses are realized.
Within the context of these critical accounting policies, we are not currently
aware of any reasonably likely events or circumstances that would result in
materially different amounts being reported.
Risks and Uncertainties
The Company has no operating history. It is subject to the business risks and
uncertainties associated with any new business. During the period required for
the Company to identify and evaluate suitable investments in private
middle-market companies, the Company may invest in temporary investments that
earn yields that could be substantially lower than required to cover its
operating expenses or to pay dividends at all or at a particular level. Many
entities will
17
compete with the Company to make the types of investments that it plans to make
in middle-market companies and such entities may have one or more competitive
advantages compared to the Company. As an externally-managed BDC, the Company
will be largely dependent on the efforts of its investment advisor and other
service providers.
The Company is subject to financial market risks, including changes in
interest rates. Many of the investments in the Company's portfolio are
expected to have floating rates. While hedging activities may insulate the
Company against adverse changes in interest rates, they may also limit the
Company's ability to participate in the benefits of lower interest rates with
respect to its portfolio of investments.
The Company intends to make investments in private companies, which may be
subject to legal and other restrictions on resale or will otherwise be less
liquid than publicly traded securities. Each of these factors could cause the
Company to realize significantly less than the value at which it has
previously recorded such investments if it were necessary to liquidate all or
a portion of its portfolio quickly.
The Company's investments will primarily be rated below investment-grade or
unrated but of comparable credit quality to those rated below
investment-grade. The lower rating of such investments reflects a greater
possibility that adverse changes in the financial condition of the issuer of
such investments or in general business or economic conditions or both may
impair the ability of such issuer to make payments of principal and interest.
The debt and equity securities or obligations in which the Company will invest
may be subordinate to other securities or obligations of the issuers of such
investments. The Company may also invest in securities and obligations that
may be in covenant or payment default or are issued by companies involved in
bankruptcy or other reorganization and liquidation proceedings. The repayment
of defaulted obligations is subject to significant uncertainties.
Subject to complying with the diversification requirements to qualify as a
RIC, the Company may, from time to time, invest a substantial portion of its
assets in the securities of issuers in any single industry or sector of the
economy or in only a few issuers. As a result, the Company could be more
vulnerable to events affecting a single issuer or industry and therefore
subject to greater volatility than a company whose investments were more
broadly diversified.
Other factors that may affect the Company's future results include those
described under the heading "Cautionary Statement Regarding Forward-Looking
Statements" in this quarterly report on Form 10-Q.
Portfolio and Investment Activity
We completed our first partial quarter of operations on September 30, 2005
with our portfolio invested 19.5% (as a percent of net asset value) in
short-term investments, 3.8% in long-term investments and 78.7% in cash
equivalents. Short-term investments consist of high-quality debt investments
(other than cash equivalents) that mature within one year or less from the
date of purchase. Long-term investments consist of subordinated debt/corporate
notes and term loans. All of our subordinated debt/corporate notes at
September 30, 2005 were accruing interest at floating rates based on LIBOR.
Term loans typically accrue interest at floating rates determined by reference
to LIBOR or other base rate (commonly the Federal Funds Rate or the Prime
Rate) with stated maturities at origination that range from 5 to 10 years. At
September 30, 2005, the weighted average yield of our long-term investments
was 9.3%. The weighted average yield of our subordinated debt/corporate notes
and term loans was 10.4% and 7.7%, respectively. We compute yields using
interest rates as of the purchase date and include amortization of loan
origination fees, original issue discount and market premium or discount,
weighted by their respective costs.
To maintain our status as a BDC, we must not acquire any assets other than
"qualifying assets" unless, at the time of and after giving effect to such
acquisition, at least 70% of our total assets are qualifying assets. If we
invest in an issuer that has outstanding marginable securities at the time we
make an investment, these acquired assets may not be treated as qualifying
assets. This results from the definition of "eligible portfolio company" under
the 1940 Act, which in part looks to whether a company has outstanding
marginable securities. Amendments promulgated in 1998 by the Board of
Governors of the Federal Reserve System to Regulation T under the Securities
Exchange Act of 1934 expanded the definition of marginable security to include
any non-equity security. These amendments have raised questions as to whether
a private company that has outstanding debt securities would qualify as an
eligible portfolio company. The staff of the Securities and Exchange
Commission (the "SEC") has been considering these issues but has not to our
knowledge reached a conclusion. The SEC has proposed a rule that would clarify
that "qualifying assets" could include
18
securities of companies whose equity securities are not marginable, and
legislation has been introduced in Congress that would liberalize the range of
investments that we could treat as "qualifying assets."
Results of Operations
We commenced operations on July 25, 2005 and, therefore, have no period with
which to compare results for the partial quarter ended September 30, 2005.
Operating Income
Investment income during our initial period of operations largely reflects
income generated from cash equivalents and short-term investments. Investment
income totaled $3,599,086 for the period July 25, 2005 (inception of
operations) through September 30, 2005, of which $3,542,146 was attributable
to short-term investments and cash equivalents, $34,024 to subordinated
debt/corporate notes and $22,916 to term loans. As we continue to invest the
net proceeds from the Offering in longer-term investments, we expect that we
will generate additional income at rates higher than those we received on our
investments during the initial period.
Operating Expenses
Operating expenses for the period July 25, 2005 (inception of operations)
through September 30, 2005 were approximately $1,870,201, consisting of
$988,170 in management fees (net of the management fee waiver of $988,170),
$200,000 in expenses related to the organization of the Company, $185,484 in
administrative services expenses, $132,616 in Advisor expenses, $126,216 in
professional fees, $107,670 for directors' fees, $45,278 in insurance expenses
and $84,767 in other expenses.
Net Investment Income
The Company's net investment income was $1,728,885 for the period July 25,
2005 (inception of operations) through September 30, 2005.
Net Unrealized Appreciation
For the period July 25, 2005 (inception of operations) through September 30,
2005, the Company's net unrealized appreciation was $69,360. Net unrealized
appreciation on investments totaled $116,865. The Company had net unrealized
depreciation of $47,505 on cash equivalents.
Net Increase in Net Assets Resulting From Operations
The net increase in net assets resulting from operations for the period July 25,
2005 (inception of operations) through September 30, 2005 was $1,798,245.
Financial Condition, Liquidity and Capital Resources
During the period July 25, 2005 (inception of operations) to September 30,
2005, we completed a private placement of 35,366,589 shares of our Common
Stock at a price of $15.00 per share. The net proceeds from the Offering of
$529,126,438 consisted of cash of $109,408,498 and a contribution of
short-term investments and cash equivalents of $419,717,940.
We generated cash primarily from the net proceeds of the Offering as well as
cash flows from operations, including income earned from temporary investments
in cash equivalents and high-quality debt investments that mature in one year
or less. In the future, we may also fund a portion of our investments through
borrowings from banks and issuances of senior securities. We do not expect to
incur such indebtedness until the proceeds from the Offering have been
substantially invested. In the future, we may also securitize a portion of our
investments in mezzanine or senior secured loans or other assets. Our primary
use of funds will be investments in portfolio companies and cash distributions
to stockholders.
We anticipate that it will take up to two years to invest substantially all of
the net proceeds from the Offering due to the time necessary to identify,
evaluate, structure, negotiate and close suitable investments in portfolio
companies. We can
19
offer no assurances that we will be able to invest all of our net proceeds
within this time frame, as our investment outlook will depend on the
availability of appropriate investment opportunities consistent with our
investment objectives and other market conditions.
The Company's operating activities resulted in a net use of cash of
$111,521,048 for the period July 25, 2005 (inception of operations) through
September 30, 2005, primarily due to the purchase of investments and the
payment of management fees and other expenses.
The Company's financing activities provided cash of $529,126,438 for the
period July 25, 2005 (inception of operations) through September 30, 2005,
representing the net proceeds of the Offering.
The Company had no outstanding capital commitments at September 30, 2005.
Off-Balance Sheet Financing
We have no off-balance sheet contractual obligations or arrangements.
Dividends
We intend to elect to be treated as a RIC under Subchapter M of the Code. In
order to maintain our status as a RIC, we are required to (1) distribute at
least 90% of our investment company taxable income and (2) distribute at least
98% of our income (both ordinary income and net capital gains) to avoid an
excise tax. For 2005, we anticipate declaring our first dividend in December,
which will be payable in January 2006. Thereafter, we intend to make
distributions to our stockholders on a quarterly basis of substantially all of
our net operating income. We also intend to make distributions of net realized
capital gains, if any, at least annually.
We may not be able to achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of these
distributions from time to time. In addition, we may be limited in our ability
to make distributions due to the asset coverage test for borrowings when
applicable to us as a BDC under the 1940 Act. If we do not distribute a
certain percentage of our income annually, we will suffer adverse tax
consequences, including possible loss of our status as a RIC. We cannot assure
stockholders that they will receive any distributions at all or at a
particular level.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to financial market risks, including changes in
interest rates. We expect that many of the term loans in our portfolio will
have floating rates. At September 30, 2005, all of our long-term investments
were floating rate and approximately 98% of our net assets consisted of high
quality short-term investments and cash equivalents. As such, our portfolio is
not expected to be materially impacted by market interest rate fluctuations.
While hedging activities may insulate us against adverse changes in interest
rates, they may also limit our ability to participate in the benefits of lower
interest rates with respect to our portfolio of investments. During the period
July 25, 2005 (inception of operations) through September 30, 2005, we did not
engage in any hedging activities.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls
and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of
1934). Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our current disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company that is required to be disclosed by us in the reports
we file or submit under the Securities Exchange Act of 1934.
There have been no changes in our internal control over financial reporting
that occurred during the period July 25, 2005 (inception of operations)
through September 30, 2005 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are not a party in any pending legal proceeding, and no such proceedings
are known to be contemplated.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not required.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
(a) Exhibits.
3.1 Form of Administration Agreement between Registrant and
BlackRock Financial Management, Inc.
3.2 Form of Transfer Agency Services Agreement between Registrant
and PFPC Inc.
3.3 Form of Sub-Administration and Accounting Services Agreement
between Registrant, PFPC Inc. and BlackRock Financial
Management, Inc.
31.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification of CEO and CFO Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BLACKROCK KELSO CAPITAL CORPORTATION
Date: November 14, 2005 By: /s/ James R. Maher
-----------------------
James R. Maher
Chief Executive Officer
Date: November 14, 2005 By: /s/ Frank D. Gordon
-----------------------
Frank D. Gordon
Chief Financial Officer
22