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 March 31, 2006
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 of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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 |X| No |_|
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer as defined in Rule 12b-2
of the Exchange Act. Large accelerated filer |_| Accelerated filer |_|
Non-Accelerated filer |X|
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |_| No |X|
The number of shares of the Registrant's common stock, $.001 par value
per share, outstanding at May 9, 2006, was 36,339,072.
BLACKROCK KELSO CAPITAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2006
Table of Contents
INDEX PAGE NO.
----- --------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Assets and Liabilities as of March 31, 2006 4
(unaudited) and December 31, 2005
Statement of Operations (unaudited) for the three months 5
ended March 31, 2006
Statement of Changes in Net Assets (unaudited) for the 6
three months ended March 31, 2006
Statement of Cash Flows (unaudited) for the three months 7
ended March 31, 2006
Schedules of Investments as of March 31, 2006 (unaudited) 8
and December 31, 2005
Notes to Financial Statements (unaudited) 15
Item 2. Management's Discussion and Analysis of Financial Condition 20
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits 25
SIGNATURES 26
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 investment adviser, BlackRock Kelso Capital Advisors
LLC (the "Investment Advisor");
(4) the impact of increased competition;
(5) the impact of future acquisitions and divestitures;
(6) the unfavorable resolution of legal proceedings;
(7) the extent and timing of any share repurchases;
(8) the impact, extent and timing of technological changes and the
adequacy of intellectual property protection;
(9) the impact of legislative and regulatory actions and reforms and
regulatory, supervisory or enforcement actions of government agencies
relating to the Company or the Investment Advisor;
(10) terrorist activities, which may adversely affect the general economy,
real estate, financial and capital markets, specific industries, and
the Company and the Investment Advisor;
(11) the ability of the Investment Advisor to attract and retain highly
talented professionals;
(12) fluctuations in foreign currency exchange rates; and
(13) 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.
PART I. FINANCIAL INFORMATION
In this Quarterly Report, "Company", "we", "us" and "our" refer to BlackRock
Kelso Capital Corporation unless the context states otherwise.
Item 1. Financial Statements.
BLACKROCK KELSO CAPITAL CORPORATION
STATEMENTS OF ASSETS AND LIABILITIES
MARCH 31, 2006
(UNAUDITED) DECEMBER 31, 2005
------------------- -------------------
ASSETS:
Cash and cash equivalents (amortized cost of $255,960,590 and $288,984,387) $ 255,960,590 $ 288,972,347
Investments, at value (amortized cost of $290,560,367 and $250,184,074) 291,646,836 250,436,350
Receivable for investments sold - 996,250
Interest receivable 2,349,695 1,656,131
Dividends receivable 30,658 -
Other assets 53,063 165,363
------------------- ------------------
Total Assets $ 550,040,842 $ 542,226,441
=================== ==================
LIABILITIES:
Payable for investments purchased 5,190,795 4,198,296
Dividend distribution payable - 7,073,318
Legal fees (offering costs) payable 584,453 587,080
Management fees payable 460,752 455,329
Accrued administrative services expenses 782,175 508,950
Other accrued expenses and payables 602,340 698,619
------------------- ------------------
Total Liabilities 7,620,515 13,521,592
------------------- ------------------
NET ASSETS:
Common stock, par value $.001 per share, 40,000,000 common shares
authorized, 36,285,072 and 35,366,589 issued and outstanding, respectively 36,285 35,367
Paid-in capital in excess of par 543,059,433 529,298,432
Distributions in excess of net investment income (1,357,835) (870,327)
Accumulated net realized (loss) gain (404,025) 1,141
Net unrealized appreciation 1,086,469 240,236
------------------ ------------------
Total Net Assets 542,420,327 528,704,849
------------------ ------------------
Total Liabilities and Net Assets $ 550,040,842 $ 542,226,441
================== ==================
Net Asset Value Per Share $ 14.95 $ 14.95
================== ==================
The accompanying notes are an integral part of these financial statements.
BLACKROCK KELSO CAPITAL CORPORATION
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2006
INVESTMENT INCOME:
Interest income $ 8,479,492
Dividend income 151,918
Other income 102,000
----------------
Total investment income 8,733,410
----------------
EXPENSES:
Management fees 2,664,878
Administrative services 246,575
Professional fees 213,917
Investment Advisor expenses 77,957
Director fees 70,188
Insurance 36,539
Other 75,806
----------------
Expenses before management fee waiver 3,385,860
Management fee waiver (1,332,439)
----------------
Net Expenses 2,053,421
----------------
NET INVESTMENT INCOME 6,679,989
----------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss on investments (405,166)
----------------
Net change in unrealized appreciation (depreciation):
Investments 834,193
Cash equivalents 12,040
----------------
Net change in unrealized appreciation 846,233
----------------
Net realized and unrealized gain 441,067
----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 7,121,056
================
Earnings Per Share $ 0.20
================
Basic and Diluted Weighted-Average Shares Outstanding 35,685,496
The accompanying notes are an integral part of these financial statements.
BLACKROCK KELSO CAPITAL CORPORATION
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2006
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income $ 6,679,989
Net change in unrealized appreciation 846,233
Net realized loss on investments (405,166)
-------------------
Net increase in net assets resulting from operations 7,121,056
-------------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT
INCOME (7,167,498)
-------------------
CAPITAL SHARE TRANSACTIONS:
Reinvestment of dividends 13,761,920
-------------------
TOTAL INCREASE IN NET ASSETS 13,715,478
Net assets at beginning of period 528,704,849
-------------------
Net assets at end of period $ 542,420,327
===================
CAPITAL SHARE ACTIVITY:
Shares issued from reinvestment of dividends 918,484
===================
ACCUMULATED DISTRIBUTIONS:
Accumulated distributions in excess of net investment income $ (1,357,835)
===================
The accompanying notes are an integral part of these financial statements.
BLACKROCK KELSO CAPITAL CORPORATION
STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2006
OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 7,121,056
Adjustments to reconcile net increase in net assets resulting from
operations to net cash used in operating activities:
Proceeds from dispositions of short-term investments - net 25,990,928
Purchases of long-term investments (72,653,669)
Proceeds from dispositions of long-term investments 6,256,303
Net change in unrealized appreciation on investments (834,193)
Net realized loss on investments 405,166
Amortization of premium/discount - net (377,301)
Decrease in receivable for investments sold 996,250
Increase in interest receivable (693,564)
Increase in dividends receivable (30,658)
Decrease in other assets 112,300
Increase in payable for investments purchased 992,499
Decrease in legal fees (offering costs) payable (2,627)
Increase in management fees payable 5,423
Increase in accrued administrative services expenses 273,225
Decrease in other accrued expenses and payables (96,279)
--------------------
Net cash used in operating activities (32,535,141)
--------------------
FINANCING ACTIVITIES:
Dividends paid (476,616)
--------------------
Net decrease in cash and cash equivalents (33,011,757)
Cash and cash equivalents, beginning of period 288,972,347
--------------------
Cash and cash equivalents, end of period $ 255,960,590
====================
Supplemental disclosure of non-cash financing activities:
Dividend distributions reinvested $ 13,761,920
====================
The accompanying notes are an integral part of these financial statements.
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (UNAUDITED)
MARCH 31, 2006
Principal
Amount or
Number of Fair
Portfolio Company (a) Industry Shares/Units Cost (b) Value
- ----------------- -------- ------------ ---- -----
SHORT-TERM INVESTMENTS - 14.9%
- ------------------------------
Asset-Backed Security - 2.8%
RACERS Trust, Series 2005-17-O, 4.79%
(LIBOR + 0.02%/Q), 8/21/06, acquired 8/29/05 (c) Asset-Backed Security $ 15,000,000 $ 15,000,000 $ 15,003,600
---------------------------------------------
Certificates of Deposit - 2.8%
DEFPA BANK plc, New York, 4.53%, 10/16/06 Banking 15,000,000 15,000,000 14,939,414
---------------------------------------------
Commercial Paper - 8.4%
Securities Broker
Morgan Stanley & Co. Incorporated, 4.96%, 8/4/06 and Dealer 26,000,000 26,000,000 26,000,780
Natexis Banques Populaires US Finance Co. LLC,
4.56%, 7/31/06 Banking 20,000,000 19,693,803 19,664,500
---------------------------------------------
Total Commercial Paper 46,000,000 45,693,803 45,665,280
---------------------------------------------
Master Notes - 0.9%
Citigroup Global Markets Inc., 4.57%, 8/25/06 Financial Services 5,000,000 5,000,000 5,000,000
---------------------------------------------
TOTAL SHORT-TERM INVESTMENTS $ 81,000,000 80,693,803 80,608,294
=================----------------------------
LONG-TERM INVESTMENTS - 39.1%
- -----------------------------
Subordinated Debt / Corporate Notes - 0.7%
First Mercury Holdings, Inc., 12.75%
(LIBOR + 8.00%/Q), 8/15/12, acquired 8/12/05 (c) Insurance $ 1,800,000 1,783,599 1,831,500
Select Medical Corporation, 7.63%, 2/1/15 Specialty Hospitals 1,950,000 1,744,012 1,759,875
---------------------------------------------
Total Subordinated Debt / Corporate Notes $ 3,750,000 3,527,611 3,591,375
=================----------------------------
Senior Secured Loans (d) - 37.0%
Applied Tech Products Corp. et al., Tranche A,
First Lien, 9.03% (LIBOR + 4.50%), 10/24/10 Plastic Packaging $ 4,251,515 4,221,331 4,221,331 (e)
Applied Tech Products Corp. et al., Tranche B,
Second Lien, 13.53% (LIBOR + 9.00%), 4/24/11 Plastic Packaging 1,951,515 1,932,944 1,932,944 (e)
Applied Tech Products Corp. et al., Tranche C,
Third Lien, 17.03% (LIBOR + 6.30% cash,
6.20% PIK), 10/24/11 Plastic Packaging 704,319 609,863 609,863 (e)
Benchmark Medical Holdings Inc., First Lien, 7.98%
(LIBOR + 3.00%), 12/27/12 Rehabilitation Centers 1,995,000 1,995,000 2,004,975
The accompanying notes are an integral part of these financial statements.
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (UNAUDITED) (continued)
MARCH 31, 2006
Principal
Amount or
Number of Fair
Portfolio Company (a) Industry Shares/Units Cost (b) Value
- ----------------- -------- ------------ ---- -----
Benchmark Medical Holdings, Inc., Second Lien,
12.06% (LIBOR + 7.00%), 6/27/13 Rehabilitation Centers $ 9,000,000 $ 9,000,000 $ 9,000,000
Bushnell Performance Optics, First Lien, 7.53%
(LIBOR + 3.00%), 8/19/11 Leisure Products 997,561 997,561 1,007,537
Cannondale Bicycle Corporation, Second Lien, 11.98%
(LIBOR + 7.00%), 6/5/10 Bicycles/Apparel 10,000,000 10,000,000 10,000,000 (e)
Champion Energy Corporation et al., First Lien, 13.77%
(LIBOR + 9.00%), 6/30/09 Heating and Oil Services 18,000,000 18,000,000 18,000,000 (e)
Clean Earth Inc., Tranche B, First Lien, 7.81%
(LIBOR + 3.00%), 10/17/11 Environmental Services 1,481,250 1,481,250 1,496,063
Data Transmission Network Corporation, Second Lien,
12.70% (LIBOR + 8.00%), 9/10/13 Information Services 4,000,000 4,000,000 4,000,000
Delta Air Lines, Inc., Term Loan B, First Lien, 9.26%
(LIBOR + 4.75%), 3/16/08 Airlines 1,000,000 1,000,000 1,027,500
Deluxe Entertainment Services Group Inc., Second Lien,
13.23% (LIBOR + 8.25%), 7/28/11 Entertainment 20,000,000 20,000,000 20,100,000
Eight O'Clock Coffee Company, First Lien, 7.69%
(LIBOR + 3.00%), 11/14/11 Coffee Distributor 2,962,500 2,962,500 2,992,125
Eight O'Clock Coffee Company, Second Lien, 11.69%
(LIBOR + 7.00%), 11/14/12 Coffee Distributor 12,000,000 12,000,000 12,120,000
Event Rentals, Inc., First Lien, 9.95%
(LIBOR + 5.25%), 11/17/11 Party Rentals 14,454,545 14,454,545 14,454,545 (e)
Event Rentals, Inc., Acquisition Loan (Funded),
First Lien, 9.92% (LIBOR + 5.25%), 11/17/11 Party Rentals 9,845,876 9,845,876 9,845,876 (e)
Event Rentals, Inc., Acquisition Loan (Unfunded),
First Lien, 0.50%, 11/18/07 Party Rentals 2,198,295 2,198,295 2,198,295 (e)
Haggar Clothing Co., Second Lien, 11.51%
(LIBOR + 7.00%), 11/1/11 Apparel 2,500,000 2,476,723 2,500,000
Heartland Automotive Services II Inc. et al.,
Term Loan A, First Lien, 8.58% (LIBOR + 3.75%),
2/27/12 Automobile Repair 7,000,000 6,992,682 7,035,000
Heartland Automotive Services II Inc. et al.,
Acquisition Loan (Unfunded), First Lien, 0.75%,
2/27/08 Automobile Repair 3,000,000 2,992,500 3,015,000
The Hertz Corporation, Tranche B, First Lien, 6.98% Automobile and Equipment
(LIBOR + 2.25%), 12/21/12 Rental 1,995,000 1,995,000 2,014,950
HIT Entertainment, Inc., Second Lien, 10.24%
(LIBOR + 5.50%), 2/26/13 Entertainment 1,000,000 1,000,000 1,010,000
The accompanying notes are an integral part of these financial statements.
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (UNAUDITED) (continued)
MARCH 31, 2006
Principal
Amount or
Number of Fair
Portfolio Company (a) Industry Shares/Units Cost (b) Value
- ----------------- -------- ------------ ---- -----
Houghton International Inc., First Lien, 7.96%
(LIBOR + 3.00%), 12/15/11 Specialty Chemicals $ 4,931,944 $ 4,931,944 $ 4,987,429
MacAndrews Deluxe Holdings LLC, First Lien,
13.00%, 7/28/11 Entertainment 10,000,000 10,000,000 10,000,000
MD Beauty, Inc., Second Lien, 11.67%
(LIBOR + 7.00%), 2/18/13 Cosmetics 3,000,000 3,000,000 3,030,000
NTELOS Inc., Second Lien, 9.83%
(LIBOR + 5.00%), 2/24/12 Telecommunications 2,000,000 1,984,893 2,012,500
PBI Media, Inc., Second Lien, 10.67%
(LIBOR + 6.00%), 9/30/13 Information Services 6,000,000 5,990,349 5,910,000
Precision Parts International Services Corp. et al.,
First Lien, 8.31% (LIBOR + 3.75%), 9/30/11 Automotive Parts 2,992,500 2,992,500 2,999,981
QTC Acquisition Inc., Second Lien, 11.33%
(LIBOR + 6.50%), 5/10/13 Disability Evaluations 10,000,000 10,000,000 10,100,000
United Subcontractors, Inc., Second Lien, 11.95%
(LIBOR + 7.25%), 6/27/13 Building and Construction 10,000,000 10,000,000 10,000,000
US Investigations Services, Inc., Tranche B,
First Lien, 7.43% (LIBOR + 2.50%), 10/14/12 Investigative Services 1,973,197 1,973,197 1,995,395
US Investigations Services, Inc., Tranche C,
First Lien, 7.43% (LIBOR + 2.50%), 10/14/12 Investigative Services 741,803 741,803 745,513
U.S. Security Holdings, Inc., Tranche B, First Lien,
8.32% (LIBOR + 3.25%), 2/29/12 Security Services 966,700 966,700 971,534
Wastequip, Inc., Second Lien, 10.98%
(LIBOR + 6.00%), 7/15/12 Waste Treatment 500,000 500,000 506,250
Wembley, Inc., Second Lien, 8.74%
(LIBOR + 3.75%), 8/23/12 Gaming 1,000,000 1,000,000 1,015,000
Westward Dough Operating Company, LLC, Term Loan
A, First Lien, 8.96% (LIBOR + 4.00%), 3/30/11 Restaurants 8,000,000 8,000,000 8,000,000 (e)
Westward Dough Operating Company, LLC, Term Loan
B, First Lien, 11.96% (LIBOR + 7.00%), 3/30/11 Restaurants 8,000,000 8,000,000 8,000,000 (e)
-------------------------------------------------
Total Senior Secured Loans $ 200,443,520 200,237,456 200,859,606
==================-------------------------------
Closed-End Funds - 1.4%
Eaton Vance Floating-Rate Income Trust Closed-End Fund 175,000 2,988,408 3,164,000
Nuveen Floating Rate Income Fund Closed-End Fund 94,400 1,159,186 1,231,584
PIMCO Floating Rate Strategy Fund Closed-End Fund 170,000 2,997,026 3,235,100
---------------------------------
Total Closed-End Funds 7,144,620 7,630,684
---------------------------------
The accompanying notes are an integral part of these financial statements.
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (UNAUDITED) (continued)
MARCH 31, 2006
Principal
Amount or
Number of Fair
Portfolio Company (a) Industry Shares/Units Cost (b) Value
- ----------------- -------- ------------ ---- -----
Equity Warrants - 0.0%
ATEP Holdings, Inc., expire 10/24/15 Plastic Packaging 470 $ - $ - (e)
ATH Holdings, Inc., expire 10/24/15 Plastic Packaging 470 - - (e)
ATPP Holdings, Inc., expire 10/24/15 Plastic Packaging 470 90,114 90,114 (e)
ATPR Holdings, Inc., expire 10/24/15 Plastic Packaging 470 - - (e)
----------------------------------
Total Equity Warrants 90,114 90,114
----------------------------------
TOTAL LONG-TERM INVESTMENTS 210,999,801 212,171,779
INCLUDING UNEARNED INCOME
UNEARNED INCOME - (0.2)% (1,133,237) (1,133,237)
----------------------------------
TOTAL LONG-TERM INVESTMENTS 209,866,564 211,038,542
----------------------------------
TOTAL INVESTMENTS - 53.8% $ 290,560,367 291,646,836
=================-----------------
OTHER ASSETS & LIABILITIES (NET) - 46.2% 250,773,491
-----------------
NET ASSETS - 100.0% $ 542,420,327
=================
- ---------------
(a) None of our portfolio companies are "controlled" or "affiliated" as defined by the Investment Company Act of 1940.
(b) Represents amortized cost for fixed income securities and unearned income, and cost for closed-end funds and equity
warrants.
(c) 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 3.1% of net assets at March 31, 2006.
(d) Approximately 95% of the senior secured 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 senior secured 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. Current reset frequencies for floating rate instruments other than senior secured loans are
indicated by Q (quarterly) or S (semiannually).
(e) Fair value of this investment determined by or under the direction of our Board of Directors (see Note 2).
The accompanying notes are an integral part of these financial statements.
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS
DECEMBER 31, 2005
Principal
Amount or
Number of Fair
Portfolio Company (a) Industry (b) Shares/Units Cost (c) Value
- ----------------- -------- ------------ ---- -----
SHORT-TERM INVESTMENTS - 20.1%
- ------------------------------
Asset-Backed Security - 2.8%
RACERS Trust, Series 2005-17-O, 4.39%
(LIBOR + 0.02%/Q), 8/21/06,
acquired 8/29/05 (d) Asset-Backed Security $ 15,000,000 $ 15,000,000 $ 15,006,300
-----------------------------------------------
Certificates of Deposit - 5.7%
DEFPA BANK plc, New York, 4.53%, 10/16/06 Banking 15,000,000 15,000,000 14,961,713
Washington Mutual Bank N.A., 4.46%, 3/28/06 Banking 15,000,000 15,000,000 14,999,820
-----------------------------------------------
Total Certificates of Deposit 30,000,000 30,000,000 29,961,533
-----------------------------------------------
Commercial Paper - 11.6%
Barclays US Funding Corp., 4.24%, 2/3/06 Banking 26,000,000 25,900,019 25,900,019
BNP Paribas (Canada), 3.83%, 1/24/06 Banking 1,500,000 1,496,397 1,496,397
Credit Suisse First Boston USA, Inc., 3.83%, Securities Broker and
1/27/06 Dealer 8,000,000 7,978,626 7,978,626
Securities Broker and
Morgan Stanley & Co. Incorporated, 4.08%, 8/4/06 Dealer 26,000,000 26,000,000 26,003,120
-----------------------------------------------
Total Commercial Paper 61,500,000 61,375,042 61,378,162
-----------------------------------------------
TOTAL SHORT-TERM INVESTMENTS $ 106,500,000 106,375,042 106,345,995
================-------------------------------
LONG-TERM INVESTMENTS - 27.3%
- -----------------------------
Subordinated Debt / Corporate Notes - 1.3%
First Mercury Holdings, Inc., 12.33%
(LIBOR + 8.00%/Q), 8/15/12, acquired 8/12/05(d) Insurance $ 1,800,000 1,782,965 1,831,500
InSight Health Services Corp., 9.17%
(LIBOR + 5.25%/Q), 11/1/11, acquired 9/16/05(d) Diagnostic Imaging 2,500,000 2,488,066 2,375,000
Select Medical Holdings Corporation, 9.93%
(LIBOR + 5.75%/S), 9/15/15, acquired 9/15/05(d) Specialty Hospitals 2,500,000 2,500,000 2,512,500
-----------------------------------------------
Total Subordinated Debt / Corporate Notes $ 6,800,000 6,771,031 6,719,000
================-------------------------------
Senior Secured Loans (e) - 24.8%
Applied Tech Products Corp. et al., Tranche A,
First Lien, 8.91% (LIBOR + 4.50%), 10/24/10 Plastic Packaging $ 4,251,515 4,219,701 4,219,629 (f)
Applied Tech Products Corp. et al., Tranche B,
Second Lien, 13.41% (LIBOR + 9.00%), 4/24/11 Plastic Packaging 1,951,515 1,932,040 1,932,000 (f)
Applied Tech Products Corp. et al., Tranche C,
Third Lien, 16.91% (LIBOR + 6.30% cash,
6.20% PIK), 10/24/11 Plastic Packaging 696,970 598,331 598,145 (f)
Benchmark Medical Holdings Inc., First Lien, 9.00%
(Base Rate + 1.75%), 12/27/12 Rehabilitation Centers 2,000,000 2,000,000 2,015,000
Benchmark Medical Holdings Inc., Second Lien,
13.00% (Base Rate + 5.75%), 6/27/13 Rehabilitation Centers 9,000,000 9,000,000 9,000,000
Bushnell Performance Optics, First Lien, 7.53%
(LIBOR + 3.00%), 8/19/11 Leisure Products 1,000,000 1,000,000 1,012,469
The accompanying notes are an integral part of these financial statements.
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (continued)
DECEMBER 31, 2005
Principal
Amount or
Number of Fair
Portfolio Company (a) Industry (b) Shares/Units Cost (c) Value
- ----------------- -------- ------------ ---- -----
Cannondale Bicycle Corporation, Second Lien, 11.53%
(LIBOR + 7.00%), 6/5/10 Bicycles/Apparel $ 10,000,000 $ 10,000,000 $ 10,000,000 (f)
Champion Energy Corporation et al., First Lien, 13.38% Heating and Oil
(LIBOR + 9.00%), 6/30/09 Services 18,000,000 18,000,000 18,000,000 (f)
Clean Earth Inc., Tranche B, First Lien, 7.39% Environmental Services 1,500,000 1,500,000 1,515,000
(LIBOR + 3.00%), 10/17/11
Delta Air Lines, Inc., Term Loan B, First Lien, 11.01%
(LIBOR + 6.50%), 3/16/08 Airlines 1,000,000 1,000,000 1,036,750
Eight O'Clock Coffee Company, First Lien, 7.44% Coffee Distributor 3,000,000 3,000,000 3,022,500
(LIBOR + 3.00%), 11/14/11
Eight O'Clock Coffee Company, Second Lien, 11.44% Coffee Distributor 12,000,000 12,000,000 12,000,000
(LIBOR + 7.00%), 11/14/12
Event Rentals, Inc., First Lien, 9.94% Party Rentals 14,454,545 14,454,545 14,454,545 (f)
(LIBOR + 5.25%), 11/17/11
Event Rentals, Inc., Acquisition Loan (Funded), Party Rentals 9,847,159 9,847,159 9,847,159 (f)
First Lien, 9.92% (LIBOR + 5.25%), 11/17/11
Event Rentals, Inc., Acquisition Loan (Unfunded), Party Rentals 2,198,295 2,198,295 2,198,295 (f)
First Lien, 0.50%, 11/18/07
Haggar Clothing Co., Second Lien, 11.51% Apparel 2,500,000 2,500,000 2,500,000
(LIBOR + 7.00%), 11/1/11
The Hertz Corporation, Tranche B, First Lien, 8.50% Automobile and
(Base Rate + 1.25%), 12/21/12 Equipment Rental 2,000,000 2,000,000 2,022,500
HIT Entertainment, Inc., Second Lien, 9.71% Entertainment 1,000,000 1,000,000 990,000
(LIBOR + 5.50%), 2/26/13
Houghton International Inc., First Lien, 9.25% Specialty Chemicals 5,000,000 5,000,000 5,043,750
(Base Rate + 2.00%), 12/15/11
MD Beauty, Inc., Second Lien, 11.25% Cosmetics 3,000,000 3,000,000 3,022,500
(LIBOR + 7.00%), 2/18/13
Metaldyne Corporation et al., First Lien, 8.58% Automotive Parts 998,741 988,476 1,001,237
(LIBOR + 4.50%), 12/31/09
NTELOS Inc., Second Lien, 9.39% Telecommunications 2,000,000 1,984,276 2,020,000
(LIBOR + 5.00%), 2/24/12
PBI Media, Inc., Second Lien, 10.24% Information Services 6,000,000 5,990,032 5,940,000
(LIBOR + 6.00%), 9/30/13
Precision Parts International Services Corp. et al., Automotive Parts 3,000,000 3,000,000 3,022,501
First Lien, 7.98% (LIBOR + 3.75%), 9/30/11
QTC Acquisition Inc., Second Lien, 10.84% Disability Evaluations 10,000,000 10,000,000 10,075,000
(LIBOR + 6.50%), 5/10/13
US Investigations Services, Inc., Tranche B, First
Lien, 7.00% (LIBOR + 2.50%), 10/14/12 Investigative Services 1,995,000 1,995,000 1,999,988
U.S. Security Holdings, Inc., First Lien, 7.27% Security Services 983,400 983,400 990,776
(LIBOR + 3.25%), 2/29/12
Wastequip, Inc., Second Lien, 10.53% Waste Treatment 500,000 500,000 506,250
(LIBOR + 6.00%), 7/15/12
Wembley, Inc., Second Lien, 7.83%
(LIBOR + 3.75%), 8/23/12 Gaming 1,000,000 1,000,000 1,006,250
------------------------------------------------
Total Senior Secured Loans $ 130,877,140 130,691,255 130,992,244
===============+--------------------------------
The accompanying notes are an integral part of these financial statements.
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (continued)
DECEMBER 31, 2005
Principal
Amount or
Number of Fair
Portfolio Company (a) Industry (b) Shares/Units Cost (c) Value
- ----------------- -------- ------------ ---- -----
Closed-End Funds - 1.4%
Eaton Vance Floating-Rate Income Trust Closed-End Fund 175,000 $ 2,988,408 $ 2,952,250
Nuveen Floating Rate Income Fund Closed-End Fund 94,400 1,159,147 1,188,496
PIMCO Floating Rate Strategy Fund Closed-End Fund 170,000 2,997,026 3,036,200
--------------------------------
Total Closed-End Funds 7,144,581 7,176,946
--------------------------------
Equity Warrants - 0.0%
ATEP Holdings, Inc., expire 10/24/15 Plastic Packaging 470 - - (f)
ATH Holdings, Inc., expire 10/24/15 Plastic Packaging 470 - - (f)
ATPP Holdings, Inc., expire 10/24/15 Plastic Packaging 470 90,114 90,114 (f)
ATPR Holdings, Inc., expire 10/24/15 Plastic Packaging 470 - - (f)
--------------------------------
Total Equity Warrants 90,114 90,114
--------------------------------
TOTAL LONG-TERM INVESTMENTS
INCLUDING UNEARNED INCOME 144,696,981 144,978,304
UNEARNED INCOME - (0.2)% (887,949) (887,949)
--------------------------------
TOTAL LONG-TERM INVESTMENTS 143,809,032 144,090,355
--------------------------------
TOTAL INVESTMENTS - 47.4% $ 250,184,074 250,436,350
===============-----------------
OTHER ASSETS & LIABILITIES (NET) - 52.6% 278,268,499
----------------
NET ASSETS - 100.0% $ 528,704,849
================
- --------------
(a) None of our portfolio companies are "controlled" or "affiliated" as defined by the Investment Company Act of 1940.
(b) Unaudited.
(c) Represents amortized cost for fixed income securities and unearned income, and cost for closed-end funds and equity
warrants.
(d) 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 at December 31, 2005.
(e) All of the senior secured 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 senior secured 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. Current reset frequencies for floating rate instruments other than senior secured loans are indicated
by Q (quarterly) or S (semiannually).
(f) Fair value of this investment determined by or under the direction of our Board of Directors (see Note 2).
The accompanying notes are an integral part of these financial statements.
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization
BlackRock Kelso Capital Corporation (the "Company") was organized as a Delaware
corporation on April 13, 2005 and was initially funded on July 25, 2005. The
Company has 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
$529,333,799 reflect the payment of a placement fee of $507,407 and legal fees
and other offering costs of $657,639.
The accompanying interim financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). In the opinion of management, all adjustments, consisting solely of
normal recurring accruals, considered necessary for the fair presentation of
financial statements for the interim period, have been included.
2. Significant Accounting Policies
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of income and expenses during the reported period. Changes in
the economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ and such
differences could be material.
The significant accounting policies consistently followed by the Company are:
(a) Investments for which market quotations are readily available are valued
at such market quotations, 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 by the investment professionals of
BlackRock Kelso Capital Advisors LLC, the Company's investment
adviser (the "Investment Advisor"), responsible for the portfolio
investment;
(2) Preliminary valuation conclusions are then documented and discussed
with senior management;
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(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, senior management and
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 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 receivables, other assets, accounts payable and
accrued expenses approximate fair value due to their short maturity.
None of the Company's portfolio companies are controlled by or affiliated with
the Company as defined in the 1940 Act.
(b) Cash equivalents include short-term investments in money market
instruments with remaining maturities 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 payment-in-kind ("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, structuring, closing, commitment and
other upfront fees and discounts and premiums on investments purchased are
accreted/amortized over the life of the respective investment. Unamortized
origination, structuring, closing, commitment and other upfront fees are
recorded as unearned income. Upon the prepayment of a loan or debt
security, any prepayment penalties and unamortized loan origination,
structuring, closing, commitment and other upfront fees are recorded as
interest income. Dividend income is recorded on the ex-dividend date.
Expenses are recorded on an accrual basis.
(f) Organizational costs of the Company were expensed as incurred. Offering
costs were charged against paid-in capital.
(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
shareholders which will relieve the Company from federal income and excise
taxes. Therefore, no provision has been recorded for federal income or
excise taxes.
In order to qualify as a RIC, the Company is required to distribute
annually to its shareholders at least 90% of investment company taxable
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
income, as defined by the Code. To avoid federal excise taxes, the Company
must distribute annually at least 98% of its income (both ordinary income
and net capital gains).
In accordance with GAAP, book and tax basis differences relating to
distributions to shareholders 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 shareholders are recorded on the
ex-date. The amount to be paid out as a dividend is determined by the
Board of Directors. On December 22, 2005, the Company declared a dividend
of $0.20 per share, payable on January 31, 2006 to shareholders of record
at the close of business on December 31, 2005. The ex-date of this
dividend was December 29, 2005. On March 8, 2006, the Company declared a
dividend of $0.20 per share, payable on March 31, 2006 to shareholders of
record at the close of business on March 15, 2006. The ex-date of this
dividend was March 29, 2006. On May 9, 2006, the Company declared a
dividend of $0.23 per share, payable on June 30, 2006 to shareholders of
record at the close of business on June 15, 2006. The ex-date of this
dividend will be June 28, 2006.
The Company has adopted a dividend reinvestment plan that provides for
reinvestment of distributions on behalf of shareholders, unless a
shareholder elects to receive cash. As a result, if the Board of Directors
authorizes, and the Company declares, a cash dividend, then shareholders
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 the Investment Advisor, under which the Investment
Advisor, subject to the overall supervision of the Company's Board of
Directors, manages the day-to-day operations of, and provides investment
advisory services to, the Company. For providing these services, the Investment
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 July 25, 2005, 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 Investment Advisor has contractually agreed to waive
its rights to receive one-half of the amount of the Management Fee the
Investment 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 Investment 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 (collectively, the "Public Market Event"), one-quarter of the amount
of the Management Fee the Investment Advisor would otherwise be entitled to
receive from the Company. In addition, the Investment 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 operations unless the Company
has completed the Public Market Event.
For the three months ended March 31, 2006, the Investment Advisor earned
$1,332,439 in fees, net of the waiver provision, from the Company.
The Management Agreement provides that the Investment 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 Investment Advisor or its affiliates receiving
no Carried Interest payments if returns to Company shareholders, as described
in more detail below, do not meet an 8.0% annualized rate of return and will
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
result in the Investment Advisor or its affiliates receiving less than the full
amount of the Carried Interest percentage until returns to shareholders exceed
an approximate 13.3% annualized rate of return.
Commencing on the Ramp-Up Date, the Company will pay to the Investment 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
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 Investment 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 three months ended March 31, 2006, no Carried Interest amounts were
earned by the Investment Advisor.
The Management Agreement provides that the Company will reimburse the
Investment Advisor for costs and expenses incurred by the Investment Advisor
for office space rental, office equipment and utilities allocable to the
performance by the Investment Advisor of its duties under the Management
Agreement, as well as any costs and expenses incurred by the Investment Advisor
relating to any non-investment advisory, administrative or operating services
provided by the Investment Advisor to the Company. For the three months ended
March 31, 2006, the Company accrued $77,957 for costs and expenses reimbursable
to the Investment Advisor under the Management Agreement.
No person who is an officer, director or employee of the Investment 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 Investment
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. ("PNC"), under which the
Administrator provides administrative services to the Company. For providing
these services, facilities and personnel, the Company reimburses the
Administrator for the Company's allocable portion of overhead and other
expenses incurred by the Administrator in performing its obligations under the
Administration Agreement, including rent and the Company's allocable portion of
the cost of certain of the Company's officers and their respective staffs.
For the three months ended March 31, 2006, the Company accrued $246,575 for
administrative services expenses payable to the Administrator under the
Administration Agreement.
From time to time, the Investment Advisor or the Administrator may pay amounts
owed by the Company to third party providers of goods or services. The Company
will subsequently reimburse the Investment Advisor or the Administrator, as the
case may be, for such amounts paid on its behalf. For the three months ended
March 31, 2006, the Company reimbursed the Investment Advisor and Administrator
$149,992 and $24,900, respectively, for payments made on behalf of the Company
to third party providers of goods and services. At March 31, 2006, an
additional $13,076 and $434 has been accrued for and is owing to the Investment
Advisor and the Administrator, respectively, for such payments.
PFPC Inc. ("PFPC"), a subsidiary of PNC, provides administrative and accounting
services to the Company pursuant to a Sub-Administration and Accounting
Services Agreement. PFPC Trust Company, another subsidiary of PNC, 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
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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.
For the three months ended March 31, 2006, the Company accrued $55,409 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 BlackRock Kelso
Capital Holding LLC, an entity for which the Investment 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.
At March 31, 2006, the Investment Advisor beneficially owned indirectly
approximately 760,000 shares of the Company's Common Stock, representing
approximately 2.1% of the total shares outstanding. At March 31, 2006, other
entities affiliated with the Administrator and PFPC beneficially owned
indirectly approximately 2,390,000 shares of the Company's Common Stock,
representing approximately 6.6% of the total shares outstanding. These
percentages of total shares outstanding did not change appreciably from
December 31, 2005. At March 31, 2006 and December 31, 2005, an entity
affiliated with the Administrator and PFPC owned 36.5% of the members'
interests of the Investment Advisor.
On March 8, 2006, the Company's Board of Directors authorized the issuance and
sale from time to time of up to $2,500,000 in aggregate net asset value of
shares of the Company's Common Stock to certain existing and future employees
of the Investment Advisor at a price per share equal to the greater of $15.00
or the Company's most recently determined net asset value per share at the time
of sale. The sales are expected to be exempt from the registration requirements
of the Securities Act of 1933. Pursuant to this authorization, on April 1, 2006
the Company agreed to issue and sell 54,000 shares of Common Stock for
aggregate proceeds of $810,000 to certain employees of the Investment Advisor.
4. 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 three months
ended March 31, 2006.
Numerator for basic and diluted net increase in net assets per share: $7,121,056
Denominator for basic and diluted weighted average shares: 35,685,496
Basic/diluted net increase in net assets per share resulting from operations: $0.20
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.
5. Purchases and Sales/Repayments of Investments
Excluding short-term investments, the Company's purchases and sales/repayments
of investments for the three months ended March 31, 2006 totaled $72,653,669
and $6,256,303, respectively.
6. Commitments and Contingencies
At March 31, 2006, the Company had a $3.5 million commitment outstanding to
fund a senior secured loan.
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
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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.
7. Financial Highlights
The following per share data and ratios have been derived from information
provided in the financial statements. The following is a schedule of financial
highlights for a common share outstanding during the three months ended March
31, 2006.
Per Share Data:
Net asset value, beginning of period $ 14.95
--------------
Net investment income 0.19
Net realized and unrealized gain 0.01
--------------
Total from investment operations 0.20
--------------
Less: Dividends to shareholders from net (0.20)
investment income
--------------
Net change in net assets -
--------------
Net asset value, end of period $ 14.95
==============
Total return (1)(2) 1.34%
Ratios / Supplemental Data:
Ratio of expenses to average net assets (3)
Before management fee waiver 2.56%
After management fee waiver 1.56%
Ratio of net investment income
to average net assets (3) 5.06%
Net assets, end of period $ 542,420,327
Portfolio turnover (2) 4%
(1) Total return is based on the change in net asset value per share
during the period and takes into account dividends and
distributions, if any, reinvested in accordance with the Company's
dividend reinvestment plan.
(2) Not annualized.
(3) Annualized.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information contained in this section should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this report.
Overview
We were incorporated in Delaware on April 13, 2005 and were initially funded on
July 25, 2005. Our investment objective is to provide a combination of current
income and capital appreciation. We intend to invest primarily in debt and
equity securities of private U.S. middle-market companies.
We are externally managed and have elected to be treated as a BDC under the
1940 Act. As a BDC, we are required to comply with certain regulatory
requirements. For instance, we generally have to invest at least 70% of our
total assets in "qualifying assets," including securities of private 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 the Offering of 35,366,589 shares of our Common
Stock at a price of $15.00 per share, less a placement fee of $507,407 and
legal fees and other offering costs of $657,639. We received approximately
$529.3 million in net proceeds from the Offering.
We intend to elect to be treated as a regulated investment company, or a RIC,
under Subchapter M of 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 shareholders.
Portfolio and Investment Activity
During the quarter ended March 31, 2006, we invested approximately $72.7
million across six new portfolio companies while adding to one existing
position. The new investments were primarily senior loans secured by first or
second liens. During the quarter, we received proceeds from principal
repayments/dispositions of approximately $6.3 million. At March 31, 2006, our
net portfolio consisted of 30 portfolio companies and was invested 37% in
senior secured loans, 1% in subordinated debt/corporate notes, 1% in publicly
traded, floating rate closed-end funds, less than 1% in common stock/warrants
and 61% in short-term investments (including cash equivalents). Our average
portfolio company investment was approximately $7 million. Our largest
portfolio company investment was approximately $26.5 million, with our five
largest portfolio company investments comprising approximately 18% of our net
assets at March 31, 2006.
Our weighted average yield on invested capital other than closed-end funds,
short-term investments and cash equivalents was 10.9% at March 31, 2006 and
10.7% at December 31, 2005. The weighted average yield on our invested capital
including closed-end funds, short-term investments and cash equivalents was
7.0% and 6.0%, respectively, at March 31, 2006 and December 31, 2005 and, net
of expenses, was 5.5% and 4.4%, respectively, at March 31, 2006 and December
31, 2005. The weighted average yields on our subordinated debt/corporate notes
and senior secured loans were 10.7% and 10.9%, respectively, at March 31, 2006,
and were 10.3% and 10.8%, respectively, at December 31, 2005. Yields are
computed using interest rates and dividend yields as of the purchase date and
include amortization of loan origination and commitment fees, original issue
discount and market premium or discount, weighted by the value of the
respective investment when averaged.
At March 31, 2006, 94% of our long-term investments bear interest based on
floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate, and 6%
bear interest at fixed rates. At December 31, 2005, more than 99% of our
long-term investments bore interest based on floating rates.
Results of Operations
We commenced operations on July 25, 2005 and, therefore, there is no comparable
period from the prior year with which to compare the results of operations for
the three months ended March 31, 2006.
Operating Income
Investment income totaled $8,733,410 for the three months ended March 31, 2006,
of which $4,311,775 was attributable to interest and amortization of upfront
fees on senior secured loans, $4,125,906 to interest earned on short-term
investments and cash equivalents, $143,811 to interest earned on subordinated
debt/corporate notes, $151,918 to dividends received from closed-end funds and
$102,000 to other income, primarily consent and commitment fees. As we continue
to invest in longer-term investments, we expect that we will generate
additional income at rates higher than those we received on our investments
since our inception of operations, although there can be no assurance that we
will achieve this objective.
Operating Expenses
Operating expenses for the three months ended March 31, 2006 were $2,053,421,
consisting of $1,332,439 in management fees (net of management fee waivers of
$1,332,439), $246,575 in administrative services expenses, $213,917 in
professional fees, $77,957 in Investment Advisor expenses, $70,188 in director
fees, $36,539 in insurance expenses, and $75,806 in other expenses. For the
three months ended March 31, 2006, no incentive fee, or Carried Interest,
amounts were paid or owed to the Investment Advisor.
Net Investment Income
Net investment income was $6,679,989 for the three months ended March 31, 2006.
Net Realized Loss
Net realized loss on investments of $405,166 for the three months ended March
31, 2006 resulted primarily from the disposition of two subordinated
debt/corporate notes positions.
Net Unrealized Appreciation
For the three months ended March 31, 2006, the change in net unrealized
appreciation was $846,233, which was comprised of an increase in net unrealized
appreciation on investments of $834,193 and a decrease in net unrealized
depreciation on cash equivalents of $12,040.
Net Increase in Net Assets Resulting From Operations
The net increase in net assets resulting from operations for the three months
ended March 31, 2006 was $7,121,056.
Financial Condition, Liquidity and Capital Resources
On July 25, 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 $529,333,799 consisted of cash of $109,615,859 and a contribution of
short-term investments and cash equivalents of $419,717,940.
During the three months ended March 31, 2006, we generated cash primarily from
cash flows from operations, including interest earned on senior secured loans
and subordinated debt/corporate notes, as well as from temporary investments in
cash equivalents and other 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. As a business
development company, we are subject to regulations governing our operations
that affect our ability to raise additional capital. In the future, we may also
securitize a portion of our investments in senior secured loans or other
assets.
At March 31, 2006, we had approximately $256.0 million in cash and cash
equivalents and $80.6 million in other short-term investments that we intend to
use in our operations.
Our primary uses of funds are investments in portfolio companies, payment of
fees and other operating expenses and cash distributions to shareholders.
Our operating activities resulted in a net use of cash of $32,535,141 for the
three months ended March 31, 2006, primarily due to the purchase of investments
and the payment of management fees and other expenses.
Our financing activities resulted in the use of cash of $476,616 for the three
months ended March 31, 2006, to pay the portion of dividends declared during
the fiscal quarter that were not reinvested by shareholders. In addition, our
non-cash financing activities consisted of $13,761,920 of dividend
distributions reinvested.
On March 8, 2006, our Board of Directors authorized the issuance and sale from
time to time of up to $2,500,000 in aggregate net asset value of shares of our
Common Stock to certain existing and future employees of the Investment Advisor
at a price per share equal to the greater of $15.00 or our most recently
determined net asset value per share at the time of sale. Pursuant to this
authorization, on April 1, 2006 we agreed to issue and sell 54,000 shares of
Common Stock for aggregate proceeds of $810,000 to certain employees of the
Investment Advisor.
Off-Balance Sheet Financing
At March 31, 2006, we had a $3.5 million commitment outstanding to fund a
senior secured loan. We have no other off-balance sheet contractual obligations
or arrangements.
Dividends
We intend to distribute quarterly dividends to our shareholders. Our quarterly
dividends, if any, will be determined by our Board of Directors. On December
22, 2005, we declared an initial dividend of $0.20 per share. On March 8, 2006,
we declared a dividend of $0.20 per share for the first quarter of 2006 and, on
May 9, 2006, we declared a dividend of $0.23 per share for the second quarter
of 2006. Because of our limited operating history, these are the only dividends
to date that we have declared on our Common Stock.
We intend to elect to be taxed as a regulated investment company, or RIC, under
Subchapter M of the Code. To maintain our RIC status, we must distribute
annually at least 90% of our ordinary income and realized net short-term
capital gains in excess of realized net long-term capital losses, if any, out
of the assets legally available for distribution. In order to avoid certain
excise taxes imposed on RICs, we currently intend to distribute during each
calendar year an amount at least equal to the sum of (1) 98% of our ordinary
income for the calendar year, (2) 98% of our capital gains in excess of capital
losses for the one-year period ending on October 31st and (3) any ordinary
income and net capital gains for preceding years that were not distributed
during such years. In addition, although we currently intend to distribute
realized net capital gains (i.e., net long-term capital gains in excess of
short-term capital losses), if any, at least annually, out of the assets
legally available for such distributions, we may in the future decide to retain
such capital gains for investment.
We maintain an "opt out" dividend reinvestment plan for our common
shareholders. As a result, if we declare a dividend, shareholders' cash
dividends will be automatically reinvested in additional shares of our Common
Stock, unless they specifically "opt out" of the dividend reinvestment plan so
as to receive cash dividends.
We may not be able to achieve operating results that will allow us to make
dividends and distributions at a specific level or to increase the amount of
these dividends and distributions from time to time. In addition, we may be
limited in our ability to make dividends and distributions due to the asset
coverage test for borrowings when applicable to us as a business development
company under the 1940 Act and due to provisions in future credit facilities.
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
regulated investment company. We cannot assure shareholders that they will
receive any dividends and distributions or dividends and distributions at a
particular level.
With respect to the dividends paid to shareholders, income from origination,
structuring, closing, commitment and other upfront fees associated with
investments in portfolio companies is treated as taxable income and
accordingly, distributed to shareholders. For the three months ended March 31,
2006, these fees totaled $327,500.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to financial market risks, including changes in interest rates.
At March 31, 2006, 94% of our long-term investments bear interest based on
floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate. The
interest rates on such investments generally reset by reference to the current
market index after one to six months. In addition, at March 31, 2006, 61% of
our investment assets consist of high quality short-term investments and cash
equivalents.
To illustrate the potential impact of changes in interest rates, we have
performed the following analysis based on our March 31, 2006 balance sheet and
assuming no changes in our investment structure. Net asset value is analyzed
using the assumptions that interest rates, as defined by the LIBOR and U.S.
Treasury yield curves, increase or decrease and that the yield curves of the
rate shocks will be parallel to each other. Under this analysis, an
instantaneous 100 basis point increase in LIBOR and U.S. Treasury yields would
cause a decline of approximately $602,000 in the value of our net assets at
March 31, 2006.
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 three
months ended March 31, 2006, 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 our most recently completed fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party in any material pending legal proceeding, and no such
proceedings are known to be contemplated.
Item 1A. Risk Factors
Not required.
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.
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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BLACKROCK KELSO CAPITAL CORPORATION
Date: May 10, 2006 By: /s/ James R. Maher
-----------------------
James R. Maher
Chief Executive Officer
Date: May 10, 2006 By: /s/ Frank D. Gordon
-----------------------
Frank D. Gordon
Chief Financial Officer