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
ADMINISTRATION AGREEMENT
AGREEMENT (this "Agreement") made as of August 4, 2005 by and between
BlackRock Kelso Capital Corporation, a Delaware corporation (hereinafter
referred to as the "Corporation"), and BlackRock Financial Management, Inc., a
Delaware corporation (hereinafter referred to as the "Administrator").
W I T N E S S E T H:
WHEREAS, the Corporation is a newly organized closed-end management
investment company that has elected to be treated as a business development
company under the Investment Company Act of 1940, as amended (hereinafter
referred to as the "Investment Company Act");
WHEREAS, the Corporation desires to retain the Administrator to
provide administrative services to the Corporation in the manner and on the
terms hereinafter set forth; and
WHEREAS, the Administrator is willing to provide administrative
services to the Corporation on the terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained and for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the Corporation and the
Administrator hereby agree as follows:
1. Duties of the Administrator.
(a) Employment of Administrator. The Corporation hereby employs the
Administrator to act as administrator of the Corporation, and to furnish,
or arrange for others to furnish, the administrative services, personnel
and facilities described below, subject to review by and the overall
control of the Board of Directors of the Corporation, for the period and
on the terms and conditions set forth in this Agreement. The
Administrator hereby accepts such employment and agrees during such
period to render, or arrange for the rendering of, such services and to
assume the obligations herein set forth subject to the reimbursement of
costs and expenses as provided for below. The Administrator and any such
other persons providing services arranged for by the Administrator shall
for all purposes herein be deemed to be independent contractors and
shall, unless otherwise expressly provided or authorized herein, have no
authority to act for or represent the Corporation in any way or otherwise
be deemed agents of the Corporation.
(b) Services. The Administrator shall perform (or oversee, or arrange
for, the performance of) the administrative services necessary for the
operation of the Corporation. Without limiting the generality of the
foregoing, the Administrator shall provide the Corporation with office
facilities, equipment, clerical, bookkeeping and record keeping services
at such office facilities and such other services as the Administrator,
subject to review by the Board of Directors of the Corporation, shall
from time to time determine to be necessary or useful to perform its
obligations under this Agreement. The Administrator shall also, on behalf
of the Corporation, arrange for the services of, and oversee, custodians,
depositories, transfer agents, dividend disbursing agents, other
stockholder servicing agents, accountants, attorneys, underwriters,
brokers and dealers, corporate fiduciaries, insurers, banks and such
other persons in any such other capacity deemed to be necessary or
desirable. The Administrator shall make reports to the Corporation's
Board of Directors of its performance of obligations hereunder and
furnish advice and recommendations with respect to such other aspects of
the business and affairs of the Corporation as it shall determine to be
desirable; provided that nothing herein shall be construed to require the
Administrator to, and the Administrator shall not, provide any advice or
recommendation relating to the securities and other assets that the
Corporation should purchase, retain or sell or any other investment
advisory services to the Corporation. The Administrator shall be
responsible for the financial and other records that the Corporation is
required to maintain and shall prepare all reports and other materials
required to be filed with the Securities and Exchange Commission (the
"SEC") or any other regulatory authority, including reports to
stockholders. At the Corporation's request, the Administrator will
provide on the Corporation's behalf significant managerial assistance to
those portfolio companies to which the Corporation is required to provide
such assistance. In addition, the Administrator will assist the
Corporation in determining and publishing the Corporation's net asset
value, overseeing the preparation and filing of the Corporation's tax
returns, and the printing and dissemination of reports to stockholders of
the Corporation, and generally overseeing the payment of the
Corporation's expenses and the performance of administrative and
professional services rendered to the Corporation by others.
2. Records. The Administrator agrees to maintain and keep all books,
accounts and other records of the Corporation that relate to activities
performed by the Administrator hereunder and, if required by the Investment
Company Act, will maintain and keep such books, accounts and records in
accordance with that act. In compliance with the requirements of Rule 31a-3
under the Investment Company Act, the Administrator agrees that all records
that it maintains for the Corporation shall at all times remain the property
of the Corporation, shall be readily accessible during normal business hours,
and shall be promptly surrendered upon the termination of this Agreement or
otherwise on written request. The Administrator further agrees that all
records which it maintains for the Corporation pursuant to Rule 31a-1 under
the Investment Company Act will be preserved for the periods prescribed by
Rule 31a-2 under the Investment Company Act unless any such records are
earlier surrendered as provided above. Records shall be surrendered in usable
machine-readable form. The Administrator shall have the right to retain copies
of such records subject to observance of its confidentiality obligations under
this Agreement.
3. Confidentiality. The parties hereto agree that each shall treat
confidentially all information provided by each party to the other regarding
its business and operations. All confidential information provided by a party
hereto, including nonpublic personal information pursuant to Regulation S-P of
the SEC, shall be used by any other party hereto solely for the purpose of
rendering services pursuant to this Agreement and, except as may be required
in carrying out this Agreement, shall not be disclosed to any third party,
without the prior consent of such providing party. The foregoing shall not be
applicable to any information that is publicly available when provided or
thereafter becomes publicly available other than through a breach of this
Agreement, or that is required to be disclosed by any regulatory authority,
any authority or legal counsel of the parties hereto, by judicial or
administrative process or otherwise by applicable law or regulation.
4. Compensation; Allocation of Costs and Expenses.
(a) In full consideration of the provision of the services of the
Administrator, the Corporation shall reimburse the Administrator for the
costs and expenses incurred by the Administrator in performing its
obligations and providing personnel and facilities hereunder.
(b) The Corporation will bear all costs and expenses that are
incurred in its operation and transactions and not specifically assumed
by the Corporation's investment adviser (the "Adviser"), pursuant to that
certain Investment Management Agreement, dated as of July 25, 2005 by and
between the Corporation and the Adviser. Costs and expenses to be borne
by the Corporation include, but are not limited to, those relating to:
organization and offering; calculating the Corporation's net asset value
(including the cost and expenses of any independent valuation firm);
expenses incurred by the Adviser payable to third parties, including
agents, consultants or other advisors, in monitoring financial and legal
affairs for the Corporation and in monitoring the Corporation's
investments and performing due diligence on its prospective portfolio
companies; interest payable on debt, if any, incurred to finance the
Corporation's investments; offerings of the Corporation's common stock
and other securities; investment advisory and management fees;
administration fees, if any, payable under this Agreement; fees payable
to third parties, including agents, consultants or other advisors,
relating to, or associated with, evaluating and making investments;
transfer agent and custodial fees; federal and state registration fees;
all costs of registration and listing the Corporation's shares on any
securities exchange; federal, state and local taxes; independent
directors' fees and expenses; costs of preparing and filing reports or
other documents required by the SEC; costs of any reports, proxy
statements or other notices to stockholders, including printing costs;
the Corporation's allocable portion of the fidelity bond, directors and
officers/errors and omissions liability insurance, and any other
insurance premiums; direct costs and expenses of administration,
including printing, mailing, long distance telephone, copying,
secretarial and other staff, independent auditors and outside legal
costs; and all other expenses incurred by the Corporation or the
Administrator in connection with administering the Corporation's
business, including payments under this Agreement based upon the
Corporation's allocable portion of the Administrator's overhead in
performing its obligations under this Agreement, including rent and the
allocable portion of the cost of the Corporation's officers and their
respective staffs.
5. Limitation of Liability of the Administrator; Indemnification. The
Administrator, its affiliates and their respective officers, managers,
partners, agents, employees, controlling persons, members, and any other
person or entity affiliated with any of them (collectively, the "Indemnified
Parties"), shall not be liable to the Corporation for any action taken or
omitted to be taken by the Administrator in connection with the performance of
any of its duties or obligations under this Agreement or otherwise as
administrator for the Corporation, and the Corporation shall indemnify, defend
and protect the Administrator (and its officers, managers, partners, agents,
employees, controlling persons, members, and any other person or entity
affiliated with the Administrator, including without limitation the
Indemnified Parties (each of whom shall be deemed a third party beneficiary
hereof) and hold them harmless from and against all damages, liabilities,
costs and expenses (including reasonable attorneys' fees and amounts
reasonably paid in settlement) incurred by the Indemnified Parties in or by
reason of any pending, threatened or completed action, suit, investigation or
other proceeding (including an action or suit by or in the right of the
Corporation or its security holders) arising out of or otherwise based upon
the performance of any of the Administrator's duties or obligations under this
Agreement or otherwise as administrator for the Corporation. Notwithstanding
the preceding sentence of this Paragraph 5 to the contrary, nothing contained
herein shall protect or be deemed to protect the Indemnified Parties against
or entitle or be deemed to entitle the Indemnified Parties to indemnification
in respect of, any liability to the Corporation or its security holders to
which the Indemnified Parties would otherwise be subject by reason of criminal
conduct, willful misfeasance, bad faith or negligence in the performance of
the Administrator's duties or by reason of the reckless disregard of the
Administrator's duties and obligations under this Agreement (to the extent
applicable, as the same shall be determined in accordance with the Investment
Company Act and any interpretations or guidance by the SEC or its staff
thereunder).
6. Activities of the Administrator. The services of the Administrator to
the Corporation are not to be deemed to be exclusive, and the Administrator
and each other person providing services as arranged by the Administrator is
free to render services to others. It is understood that directors, officers,
employees and stockholders of the Corporation are or may become interested in
the Administrator and its affiliates, as directors, officers, members,
managers, employees, partners, stockholders or otherwise, and that the
Administrator and directors, officers, members, managers, employees, partners
and stockholders of the Administrator and its affiliates are or may become
similarly interested in the Corporation as stockholders or otherwise.
7. Duration and Termination of this Agreement.
(a) This Agreement shall become effective as of the date hereof, and
shall remain in force with respect to the Corporation for two years
thereafter, and thereafter continue from year to year, but only so long
as such continuance is specifically approved at least annually by (i) the
Board of Directors of the Corporation and (ii) a majority of those
members of the Corporation's Board of Directors who are not parties to
this Agreement or "interested persons" (as defined in the Investment
Company Act) of any such party.
(b) This Agreement may be terminated at any time, without the payment
of any penalty, by vote of the Corporation's Board of Directors, or by
the Administrator, upon 60 days' written notice to the other party. This
Agreement may not be assigned by a party without the consent of the other
party.
8. Amendments of this Agreement. This Agreement may not be amended or
modified except by an instrument in writing signed by all parties hereto.
9. Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. Neither party may assign, delegate or otherwise transfer this
Agreement or any of its rights or obligations hereunder without the prior
written consent of the other party. No assignment by either party permitted
hereunder shall relieve the applicable party of its obligations under this
Agreement. Any assignment by either party in accordance with the terms of this
Agreement shall be pursuant to a written assignment agreement in which the
assignee expressly assumes the assigning party's rights and obligations
hereunder.
10. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, including without
limitation Sections 5-1401 and 5-1402 of the New York General Obligations Law
and New York Civil Practice Laws and Rules 327(b), and the applicable
provisions of the Investment Company Act, if any. To the extent that the
applicable laws of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, if any,
the latter shall control. The parties unconditionally and irrevocably consent
to the exclusive jurisdiction of the courts located in the State of New York
and waive any objection with respect thereto, for the purpose of any action,
suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
11. No Waiver. The failure of either party to enforce at any time for any
period the provisions of or any rights deriving from this Agreement shall not
be construed to be a waiver of such provisions or rights or the right of such
party thereafter to enforce such provisions, and no waiver shall be binding
unless executed in writing by all parties hereto.
12. Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any law or public policy,
all other terms and provisions of this Agreement shall nevertheless remain in
full force and effect so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner in order
that the transactions contemplated hereby are consummated as originally
contemplated to the greatest extent possible.
13. Headings. The descriptive headings contained in this Agreement are
for convenience of reference only and shall not affect in any way the meaning
or interpretation of this Agreement.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which when executed shall be deemed to be an original
instrument and all of which taken together shall constitute one and the same
agreement.
15. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by overnight courier service (with signature required), by facsimile,
or by registered or certified mail (postage prepaid, return receipt requested)
to the respective parties at their respective principal executive office
addresses.
16. Entire Agreement. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof and supersedes all prior
agreements and undertakings, both written and oral, between the parties with
respect to such subject matter.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
BLACKROCK KELSO CAPITAL CORPORATION
-------------------------
By:
Title:
BLACKROCK FINANCIAL MANAGEMENT, INC.
-------------------------
By:
Title:
Confidential and Proprietary
Not for Reproduction or Re-Distribution
TRANSFER AGENCY SERVICES AGREEMENT
----------------------------------
THIS AGREEMENT is made as of , 2005 by and between PFPC INC., a
Massachusetts corporation ("PFPC"), and BLACKROCK KELSO CAPITAL CORPORATION, a
Delaware corporation (the "Fund").
W I T N E S S E T H:
WHEREAS, the Fund wishes to retain PFPC to provide transfer agent,
registrar, dividend disbursing agent and shareholder servicing agent services
provided for herein, and PFPC wishes to furnish such services.
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Definitions. As Used in this Agreement:
---------------------------------------
(a) "Authorized Person" means any officer of the Fund and any
other person duly authorized by the Fund to give Oral
Instructions or Written Instructions on behalf of the Fund.
An Authorized Person's scope of authority may be limited by
setting forth such limitation in a written document signed
by both parties hereto.
(b) "Dividend Reinvestment Plan" means the Fund's Dividend
Reinvestment Plan, as the details of such Plan (and any
changes thereto) are provided by the Fund to PFPC from time
to time in writing.
(c) "Oral Instructions" mean oral instructions received by PFPC
from an Authorized Person or from a person reasonably
believed by PFPC to be an Authorized Person. PFPC may, in
its sole discretion in each separate instance, consider and
rely upon instructions it receives from an Authorized Person
via electronic mail as Oral Instructions.
(d) "Shares" mean the shares of beneficial interest of any
series or class of the Fund.
(e) "Written Instructions" mean (i) written instructions signed
by an Authorized Person (or a person reasonably believed by
PFPC to be an Authorized Person) and received by PFPC or
(ii) trade instructions transmitted (and received by PFPC)
by means of an electronic transaction reporting system
access to which requires use of a password or other
authorized identifier.
(f) "1940 Act" means the Investment Company Act of 1940, as
amended.
2. Appointment. The Fund hereby appoints PFPC to provide transfer agent,
registrar, dividend disbursing agent and shareholder servicing agent
services in accordance with the terms set forth in this Agreement.
PFPC accepts such appointment and agrees to furnish such services.
3. Compliance with Rules and Regulations. PFPC will comply with the
requirements of any laws, rules and regulations of governmental
authorities that are applicable to the duties to be performed by PFPC
under this Agreement. Except as specifically set forth in this
Agreement, PFPC assumes no responsibility for compliance by the Fund
with any laws, rules and regulations.
4. Instructions.
-------------
(a) Unless otherwise provided in this Agreement, PFPC shall act
only upon Oral Instructions or Written Instructions.
(b) PFPC shall be entitled to rely upon any Oral Instruction or
Written Instruction it receives from an Authorized Person
(or from a person reasonably believed by PFPC to be an
Authorized Person) pursuant to this Agreement. PFPC may
assume that any Oral Instructions or Written Instructions
received hereunder are not in any way inconsistent with the
provisions of organizational documents of the Fund or of any
vote, resolution or proceeding of the Fund's board of
directors or shareholders, unless and until PFPC receives
Written Instructions to the contrary.
(c) The Fund agrees to forward to PFPC Written Instructions
confirming Oral Instructions so that PFPC receives the
Written Instructions by the close of business on the same
day that such Oral Instructions are received. The fact that
such confirming Written Instructions are not received by
PFPC or differ from the Oral Instructions shall in no way
invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions or PFPC's
ability to rely upon such Oral Instructions.
5. Right to Receive Advice.
------------------------
(a) Advice of the Fund. If PFPC is in doubt as to any action it
should or should not take, PFPC may request directions or
advice, by way of Oral Instructions or Written Instructions.
(b) Advice of Counsel. If PFPC shall be in doubt as to any
question of law pertaining to any action it should or should
not take, PFPC may request advice from counsel of its own
choosing (who may be counsel for the Fund, the Fund's
sponsor or adviser or PFPC, at the option of PFPC).
(c) Conflicting Advice. In the event of a conflict between Oral
Instructions or Written Instructions and the advice PFPC
receives from counsel, PFPC may rely upon and follow the
advice of counsel.
(d) Protection of PFPC. PFPC shall be indemnified by the Fund
and without liability for any action PFPC takes or does not
take in reliance upon Oral Instructions or Written
Instructions PFPC receives from or on behalf of the Fund or
advice from counsel and which PFPC believes, in good faith,
to be consistent with those Oral Instructions or Written
Instructions or that advice. Nothing in this section shall
be construed so as to impose an obligation upon PFPC (i) to
seek such advice or Oral Instructions or Written
Instructions, or (ii) to act in accordance with such advice
or Oral Instructions or Written Instructions. Nothing in
this subsection shall excuse PFPC from liability for its
acts or omissions in carrying out such Oral Instructions or
Written Instructions to the extent such acts or omissions
constitute willful misfeasance, bad faith, negligence or
reckless disregard by PFPC of any duties, obligations or
responsibilities set forth in this Agreement.
6. Records; Visits. The books and records pertaining to the Fund, which
are in the possession or under the control of PFPC, shall be the
property of the Fund. PFPC may house such books and records in a
third party storage facility. Such books and records shall be
prepared and maintained as required by the 1940 Act. The Fund and
Authorized Persons, and such other persons the Fund by means of
Written Instructions reasonably authorizes (including but not limited
to the Fund's independent accountants), shall have access to such
books and records at all times during PFPC's normal business hours;
provided that the Fund shall not authorize access by individuals
employed by PFPC's direct competitors. Upon the reasonable request of
the Fund, copies of any such books and records shall be provided by
PFPC to the Fund, an Authorized Person, or such other person, at the
Fund's expense.
7. Confidentiality. Each party shall keep confidential any information
it receives hereunder relating to the other party's business
("Confidential Information"). Confidential Information shall include
(a) any data or information that is competitively sensitive material,
and not generally known to the public, including, but not limited to,
information about product plans, marketing strategies, finances,
operations, customer relationships, customer profiles and
information, customer lists, sales estimates, business plans, and
internal performance results relating to the past, present or future
business activities of the Fund or PFPC; (b) any scientific or
technical information, design, process, procedure, formula, or
improvement that is commercially valuable and secret in the sense
that its confidentiality affords the Fund or PFPC a competitive
advantage over its competitors; (c) all confidential or proprietary
concepts, documentation, reports, data, specifications, computer
software, source code, object code, flow charts, databases,
inventions, know-how, and trade secrets, whether or not patentable or
copyrightable; and (d) anything designated as confidential.
Notwithstanding the foregoing, information shall not be Confidential
Information and shall not be subject to such confidentiality
obligations if it: (a) is already known to the receiving party at the
time it is obtained; (b) is or becomes publicly known or available
through no wrongful act of the receiving party; (c) is rightfully
received from a third party who, to the best of the receiving party's
knowledge, is not under a duty of confidentiality; (d) is released by
the protected party to a third party without restriction; (e) is
requested or required to be disclosed by the receiving party pursuant
to a court order, subpoena, governmental or regulatory agency request
or law (provided the receiving party will provide the other party
written notice of the same, to the extent such notice is permitted);
(f) is relevant to the defense of any claim or cause of action
asserted against the receiving party; (g) is necessary or desirable
for PFPC to release such information in connection with the provision
of services under this Agreement; or (g) has been or is independently
developed or obtained by the receiving party.
8. Cooperation with Accountants. PFPC shall cooperate with the Fund's
independent public accountants and shall take all reasonable action
in the performance of its obligations under this Agreement to ensure
that the necessary information is made available to such accountants
for the expression of their opinion, as reasonably requested by the
Fund.
9. PFPC System. PFPC shall retain title to and ownership of any and all
data bases, computer programs, screen formats, report formats,
interactive design techniques, derivative works, inventions,
discoveries, patentable or copyrightable matters, concepts,
expertise, patents, copyrights, trade secrets, and other related
legal rights utilized by PFPC in connection with the services
provided by PFPC to the Fund.
10. Disaster Recovery. PFPC shall enter into and shall maintain in effect
with appropriate parties one or more agreements making reasonable
provisions for emergency use of electronic data processing equipment
to the extent appropriate equipment is available. In the event of
equipment failures, PFPC shall, at no additional expense to the Fund,
take reasonable steps to minimize service interruptions. PFPC shall
have no liability with respect to the loss of data or service
interruptions caused by equipment failure, provided such loss or
interruption is not caused by PFPC's own willful misfeasance, bad
faith, negligence or reckless disregard of its duties or obligations
under this Agreement.
11. Compensation.
------------
(a) As compensation for services set forth herein that are
rendered by PFPC during the term of this Agreement, the Fund
will pay to PFPC a fee or fees as may be agreed to in
writing by the Fund and PFPC. In addition, the Fund agrees
to pay, and will be billed separately in arrears for,
reasonable expenses incurred by PFPC in the performance of
its duties hereunder.
(b) PFPC shall establish certain cash management accounts
("Service Accounts") required to provide services under this
Agreement. The Fund acknowledges (i) PFPC may receive
investment earnings from sweeping the funds in such Service
Accounts into investment accounts including, but not
limited, investment accounts maintained at an affiliate or
client of PFPC; (ii) balance credits earned with respect to
the amounts in such Service Accounts ("Balance Credits")
will be used to offset the banking service fees imposed by
the cash management service provider (the "Banking Service
Fees"); (iii) PFPC shall retain any excess Balance Credits
for its own use; and (iv) Balance Credits will be calculated
and applied toward the Fund's Banking Service Fees
regardless of the Service Account balance sweep described in
sub-section (i) of this Section 11 (b).
(c) The undersigned hereby represents and warrants to PFPC that
(i) the terms of this Agreement, (ii) the fees and expenses
associated with this Agreement, and (iii) any benefits
accruing to PFPC or to the adviser or sponsor to the Fund in
connection with this Agreement, including but not limited to
any fee waivers, conversion cost reimbursements, up front
payments, signing payments or periodic payments made or to
be made by PFPC to such adviser or sponsor or any affiliate
of the Fund relating to the Agreement have been fully
disclosed to the board of directors of the Fund and that, if
required by applicable law, such board of directors has
approved or will approve the terms of this Agreement, any
such fees and expenses, and any such benefits.
12. Indemnification. The Fund agrees to indemnify, defend and hold
harmless PFPC and its affiliates (other than the Fund, BlackRock
Kelso Capital Advisors LLC and BlackRock, Inc. and its subsidiaries,
to the extent any of the foregoing may be deemed to be affiliates of
PFPC) including their respective officers, directors, agents and
employees (each a "PFPC Indemnified Person"), from all taxes,
charges, expenses, assessments, claims and liabilities (including,
without limitation, reasonable attorneys' fees and disbursements and
liabilities arising under applicable securities laws and any state
and foreign securities and blue sky laws) (collectively, "Losses")
arising directly or indirectly from any action or omission to act
which PFPC takes or omits to take in connection with the provision of
services to the Fund hereunder. No PFPC Indemnified Party shall be
indemnified against any Losses caused by PFPC's or such PFPC
Indemnified Party's own willful misfeasance, bad faith, negligence or
reckless disregard in the performance of PFPC's duties under this
Agreement, provided that in the absence of a finding to the contrary
the acceptance, processing and/or negotiation of a fraudulent payment
for the purchase of Shares shall be presumed not to have been the
result of PFPC's or its affiliates own willful misfeasance, bad
faith, negligence or reckless disregard of such duties. The
provisions of this Section 12 shall survive termination of this
Agreement.
13. Responsibility of PFPC.
----------------------
(a) PFPC shall be under no duty hereunder to take any action on
behalf of the Fund except as specifically set forth herein
or as may be specifically agreed to by PFPC and the Fund in
a written amendment hereto. PFPC shall be obligated to
exercise care and diligence in the performance of its duties
hereunder and to act in good faith in performing services
provided for under this Agreement. PFPC shall be liable only
for any Losses suffered by the Fund arising out of PFPC's
performance of or failure to perform its duties under this
Agreement and only to the extent such Losses arise out of
PFPC's willful misfeasance, bad faith, negligence or
reckless disregard of such duties.
(b) Notwithstanding anything in this Agreement to the contrary,
(i) PFPC shall not be liable for losses, delays, failure,
errors, interruption or loss of data occurring directly or
indirectly by reason of circumstances beyond its reasonable
control, including without limitation acts of God; action or
inaction of civil or military authority; public enemy; war;
terrorism; riot; fire; flood; sabotage; epidemics; labor
disputes; civil commotion; interruption, loss or malfunction
of utilities, transportation, computer or communications
capabilities; insurrection; elements of nature; or
non-performance by a third party (other than employees,
officers or affiliates of PFPC (other than the Fund,
BlackRock Kelso Capital Advisors LLC and BlackRock, Inc. and
its subsidiaries, to the extent any of the foregoing may be
deemed to be affiliates of PFPC)); and (ii) PFPC shall not
be under any duty or obligation to inquire into and shall
not be liable for the validity or invalidity, authority or
lack thereof, or truthfulness or accuracy or lack thereof,
of any instruction, direction, notice, instrument or other
information which PFPC reasonably believes to be genuine.
Notwithstanding the foregoing, PFPC shall use commercially
reasonable efforts to mitigate the effect of events
enumerated in clause (i) of the preceding sentence, although
such efforts shall not impute any liability to PFPC.
(c) Notwithstanding anything in this Agreement to the contrary,
neither PFPC nor its affiliates (not including the Fund,
BlackRock Kelso Capital Advisors LLC and BlackRock, Inc. and
its subsidiaries, to the extent any of the foregoing may be
deemed to be affiliates of PFPC) shall be liable for any
consequential, special or indirect losses or damages,
whether or not the likelihood of such losses or damages was
known by PFPC or its affiliates.
(d) Each party shall have a duty to mitigate damages for which
the other party may become responsible.
(e) The provisions of this Section 13 shall survive termination
of this Agreement.
14. Description of Services.
-----------------------
(a) Services Provided on an Ongoing Basis, If Applicable.
----------------------------------------------------
(i) Maintain shareholder registrations;
(ii) Provide toll-free lines for shareholder and
broker-dealer use;
(iii) Provide periodic shareholder lists and statistics;
(iv) Mailing of year-end tax information; and
(v) Periodic mailing of shareholder Dividend Reinvestment
Plan account information and Fund financial reports.
(b) Dividends and Distributions. PFPC must receive a resolution
of the Fund's board of directors authorizing the declaration
and payment of dividends and distributions. Upon receipt of
the resolution, PFPC shall issue the dividends and
distributions in cash, or, if the resolution so provides,
pay such dividends and distributions in Shares. Such
issuance or payment shall be made after deduction and
payment of the required amount of funds to be withheld in
accordance with any applicable tax laws or other laws, rules
or regulations. PFPC shall timely send to the Fund's
shareholders tax forms and other information, or permissible
substitute notice, relating to dividends and distributions,
paid by the Fund as are required to be filed and mailed by
applicable law, rule or regulation. PFPC shall maintain and
file with the U.S. Internal Revenue Service and other
appropriate taxing authorities reports relating to all
dividends above a stipulated amount (currently $10.00
accumulated yearly dividends) paid by the Fund to its
shareholders as required by tax or other law, rule or
regulation.
In accordance with such procedures and controls as are
mutually agreed upon from time to time by and among the
Fund, PFPC and the Fund's custodian, PFPC shall process
applications from Fund shareholders relating to the Fund's
Dividend Reinvestment Plan and will effect purchases of
Shares in connection with the Dividend Reinvestment Plan. As
the dividend disbursing agent, PFPC shall, on or before the
payment date of any dividend or distribution by the Fund,
notify the Fund's accounting agent or sub-accounting agent
of the estimated amount required to pay any portion of said
dividend or distribution which is payable in cash, and on or
before the payment date of such dividend or distribution,
the Fund shall instruct the Fund's custodian to make
available to PFPC sufficient funds for the cash amount to be
paid out. If a shareholder is entitled to receive additional
Shares, by virtue of any dividend or distribution,
appropriate credits will be made to the shareholder's
account and/or certificates delivered where requested, all
in accordance with the Dividend Reinvestment Plan.
(c) Communications to Shareholders. Upon timely Written
Instructions, PFPC shall mail all communications by the Fund
to its shareholders, including:
(i) Reports to shareholders;
(ii) Monthly or quarterly (whichever is requested pursuant
to Written Instructions) Dividend Reinvestment Plan
statements;
(iii) Dividend and distribution notices;
(iv) Proxy material; and
(v) Tax form information.
PFPC will receive and tabulate the proxy cards for the
meetings of the Fund's shareholders.
(d) Records. PFPC shall maintain records of the accounts for
each shareholder showing the following information:
(i) Name, address and U.S. Tax Identification or Social
Security number;
(ii) Number and class of shares held and number and class
of Shares for which certificates, if any, have been
issued, including certificate numbers and
denominations;
(iii) Historical information regarding the account of each
shareholder, including dividends and distributions
paid and the date and price for all transactions on a
shareholder's account;
(iv) Any stop or restraining order placed against a
shareholder's account;
(v) Any correspondence relating to the current
maintenance of a shareholder's account;
(vi) Information with respect to withholdings; and
(vii) Any information required in order for PFPC to perform
any calculations contemplated or required by this
Agreement.
(e) Shareholder Inspection of Stock Records. Upon request from a
Fund shareholder to inspect stock records, PFPC will notify
the Fund and require instructions granting or denying each
such request. Unless PFPC has acted contrary to the Fund's
instructions, the Fund agrees to release PFPC from any
liability for refusal of permission for a particular
shareholder to inspect the Fund's shareholder records.
15. Duration and Termination. This Agreement shall continue until
terminated by the Fund or by PFPC on sixty (60) days' prior written
notice to the other party. In the event the Fund gives notice of
termination, all expenses associated with movement (or duplication)
of records and materials and conversion thereof to a successor
service provider (or each successive service provider), including
expenses incurred after termination, will be borne by the Fund and
paid by the Fund to PFPC.
16. Notices. Notices shall be addressed (a) if to PFPC, at 301 Bellevue
Parkway, Wilmington, Delaware 19809, Attention: President (or such
other address as PFPC may inform the Fund in writing); (b) if to the
Fund, at c/o BlackRock Kelso Capital Advisors LLC, 40 East 52nd
Street, New York, New York 10022, Attention: Frank Gordon (or such
other address as the Fund may inform PFPC in writing) or (c) if to
neither of the foregoing, at such other address as shall have been
given by like notice to the sender of any such notice or other
communication by the other party. If notice is sent by confirming
facsimile sending device, it shall be deemed to have been given
immediately. If notice is sent by first-class mail, it shall be
deemed to have been given three days after it has been mailed. If
notice is sent by messenger, it shall be deemed to have been given on
the day it is delivered.
17. Amendments. This Agreement, or any term thereof, may be changed or
waived only by a written amendment, signed by the party against whom
enforcement of such change or waiver is sought.
18. Assignment. PFPC may assign this Agreement to any majority owned
direct or indirect subsidiary of PFPC or of The PNC Financial
Services Group, Inc. (other than BlackRock, Inc. and its
subsidiaries), provided that PFPC gives the Fund 30 days' prior
written notice of such assignment.
19. Subcontractors. PFPC may, in its sole discretion, engage
subcontractors to perform any of the obligations contained in this
Agreement to be performed by PFPC; provided, however, PFPC shall
remain responsible for the acts and omissions of any such
sub-contractors to the same extent that PFPC is responsible for its
own acts and omissions under this Agreement.
20. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
21. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the
purposes hereof.
22. Miscellaneous.
-------------
(a) Entire Agreement. This Agreement embodies the entire
agreement and understanding between the parties and
supersedes all prior agreements and understandings relating
to the subject matter hereof, provided that the parties may
embody in one or more separate documents their agreement, if
any, with respect to delegated duties and compensation of
PFPC.
(b) No Changes that Materially Affect Obligations.
Notwithstanding anything in this Agreement to the contrary,
the Fund agrees not to make any modifications to its
offering document or registration statement or adopt any
policies which would affect materially the obligations or
responsibilities of PFPC hereunder without the prior written
approval of PFPC, which approval shall not be unreasonably
withheld or delayed.
(c) Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect
their construction or effect.
(d) Information. The Fund will provide such information and
documentation as PFPC may reasonably request in connection
with services provided by PFPC to the Fund.
(e) Governing Law. This Agreement shall be deemed to be a
contract made in Delaware and governed by Delaware law,
without regard to principles of conflicts of law.
(f) Partial Invalidity. If any provision of this Agreement shall
be held or made invalid by a court decision, statute, rule
or otherwise, the remainder of this Agreement shall not be
affected thereby.
(g) Successors and Assigns. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and
their respective successors and permitted assigns.
(h) No Representations or Warranties. Except as expressly
provided in this Agreement, PFPC hereby disclaims all
representations and warranties, express or implied, made to
the Fund or any other person, including, without limitation,
any warranties regarding quality, suitability,
merchantability, fitness for a particular purpose or
otherwise (irrespective of any course of dealing, custom or
usage of trade), of any services or any goods provided
incidental to services provided under this Agreement. PFPC
disclaims any warranty of title or non-infringement except
as otherwise set forth in this Agreement.
(i) Facsimile Signatures. The facsimile signature of any party
to this Agreement shall constitute the valid and binding
execution hereof by such party.
(j) Regulation S-P. PFPC agrees that, subject to the reuse and
re-disclosure provisions of Regulation S-P, 17 CFR Part
248.11, it shall not disclose the non-public personal
information of investors in the Fund obtained under this
Agreement, except as necessary to carry out the services set
forth in this Agreement or as otherwise permitted by law or
regulation.
(k) Customer Identification Program Notice. To help the U.S.
government fight the funding of terrorism and money
laundering activities, U.S. Federal law requires each
financial institution to obtain, verify, and record certain
information that identifies each person who initially opens
an account with that financial institution on or after
October 1, 2003. Certain of PFPC's affiliates are financial
institutions, and as a matter of policy PFPC will request
(or already has requested) the Fund's name, address and
taxpayer identification number or other government-issued
identification number, and, if such party is a natural
person, that party's date of birth. PFPC may also ask (and
may have already asked) for additional identifying
information, and PFPC may take steps (and may have already
taken steps) to verify the authenticity and accuracy of
these data elements.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first above written.
PFPC INC.
By:
Title:
BLACKROCK KELSO CAPITAL
CORPORATION
By:
Title:
SUB-ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT is made as of July 18, 2005 by and among BLACKROCK
KELSO CAPITAL CORPORATION, a Delaware corporation (the "Fund"), PFPC INC., a
Massachusetts corporation ("PFPC") which is a subsidiary of The PNC Financial
Services Group, Inc., and BLACKROCK FINANCIAL MANAGEMENT, INC., a Delaware
corporation (the "Administrator") which is also a subsidiary of The PNC
Financial Services Group, Inc.
W I T N E S S E T H :
WHEREAS, the Administrator serves as administrator of the Fund; and
WHEREAS, the Fund and the Administrator wish to retain PFPC to
provide sub-administration and accounting services provided for herein with
respect to the Fund, and PFPC wishes to furnish such services with respect to
the Fund.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Definitions. As Used in this Agreement:
----------------------------------------
(a) "Authorized Person" means any officer of the Fund and any
other person duly authorized by the Fund to give Oral
Instructions or Written Instructions under this Agreement.
An Authorized Person's scope of authority may be limited by
setting forth such limitation in a written document signed
by the Fund and PFPC.
(b) "Oral Instructions" means oral instructions received by PFPC
from an Authorized Person or from a person reasonably
believed by PFPC to be an Authorized Person. PFPC may, in
its sole discretion in each separate instance, consider and
rely upon instructions it receives from an Authorized Person
via electronic mail as Oral Instructions.
(c) "Written Instructions" means (i) written instructions signed
by an Authorized Person (or a person reasonably believed by
PFPC to be an Authorized Person) and received by PFPC or
(ii) trade instructions transmitted (and received by PFPC)
by means of an electronic transaction reporting system
access to which requires use of a password or other
authorized identifier.
2. Appointment. The Fund and the Administrator hereby appoint PFPC to
provide sub-administration and accounting services with respect to
the Fund in accordance with the terms set forth in this Agreement.
PFPC accepts such appointment and agrees to furnish such services.
3. Compliance with Rules and Regulations. PFPC will comply with the
requirements of any laws, rules and regulations of governmental
authorities that are applicable to the duties to be performed by PFPC
under this Agreement. Except as specifically set forth in this
Agreement, PFPC assumes no responsibility for compliance by the
Administrator, the Fund or any other entity with any laws, rules and
regulations.
4. Instructions.
------------
(a) Unless otherwise provided in this Agreement, PFPC shall act
only upon Oral Instructions or Written Instructions.
(b) PFPC shall be entitled to rely upon any Oral Instruction or
Written Instruction it receives from an Authorized Person
(or from a person reasonably believed by PFPC to be an
Authorized Person) pursuant to this Agreement. PFPC may
assume that any Oral Instructions or Written Instructions
received hereunder are not in any way inconsistent with the
Administrator's obligations to the Fund or with the
provisions of organizational documents of the Fund or with
any vote, resolution or proceeding of the Fund's board of
directors or shareholders, unless and until PFPC receives
Written Instructions to the contrary.
(c) The Fund agrees to forward to PFPC Written Instructions
confirming Oral Instructions so that PFPC receives the
Written Instructions by the close of business on the same
day that such Oral Instructions are received. The fact that
such confirming Written Instructions are not received by
PFPC or differ from the Oral Instructions shall in no way
invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions or PFPC's
ability to rely upon such Oral Instructions.
5. Right to Receive Advice.
-----------------------
(a) Oral Instructions or Written Instructions. If PFPC is in
doubt as to any action it should or should not take, PFPC
may request directions or advice, by way of Oral
Instructions or Written Instructions.
(b) Advice of Counsel. If PFPC shall be in doubt as to any
question of law pertaining to any action it should or should
not take, PFPC may request advice from counsel of its own
choosing (who may be counsel for the Administrator, the
Fund, the Fund's sponsor or adviser or PFPC, at the option
of PFPC).
(c) Conflicting Advice. In the event of a conflict between Oral
Instructions or Written Instructions and the advice PFPC
receives from counsel, PFPC may rely upon and follow the
advice of counsel.
(d) Protection of PFPC. PFPC shall be indemnified by the Fund
and without liability for any action PFPC takes or does not
take in reliance upon Oral Instructions or Written
Instructions PFPC receives regarding or relating to the Fund
or advice from counsel and which PFPC believes, in good
faith, to be consistent with those Oral Instructions or
Written Instructions or that advice. Nothing in this section
shall be construed so as to impose an obligation upon PFPC
(i) to seek such advice or Oral Instructions or Written
Instructions, or (ii) to act in accordance with such advice
or Oral Instructions or Written Instructions. Nothing in
this subsection shall excuse PFPC from liability for its
acts or omissions in carrying out such Oral Instructions or
Written Instructions to the extent such acts or omissions
constitute willful misfeasance, bad faith, negligence or
reckless disregard by PFPC of any duties, obligations or
responsibilities set forth in this Agreement.
6. Records; Visits. The books and records pertaining to the Fund, which
are in the possession or under the control of PFPC, shall be the
property of the Fund. PFPC may house such books and records in a
third party storage facility. The Fund, the Administrator and
Authorized Persons, and such other persons the Fund by means of
Written Instructions reasonably authorizes (including but not limited
to the Fund's independent accountants), shall have access to such
books and records at all times during PFPC's normal business hours;
provided that the Fund shall not authorize access by any individuals
employed by PFPC's direct competitors. Upon the reasonable request of
the Fund or the Administrator, copies of any such books and records
shall be provided by PFPC to the Fund, the Administrator, an
Authorized Person, or such other person, at the Fund's expense.
PFPC shall keep the following records:
(a) all books and records with respect to the Fund's books of
account; and
(b) records of the Fund's securities transactions.
7. Confidentiality. Each of the Fund and the Administrator shall keep
confidential any information it receives hereunder relating to PFPC's
business and PFPC shall keep confidential any information it receives
hereunder relating to the Fund's business. Confidential information
shall include (a) any data or information that is competitively
sensitive material, and not generally known to the public, including,
but not limited to, information about product plans, marketing
strategies, finances, operations, customer relationships, customer
profiles and information, customer lists, sales estimates, business
plans, and internal performance results relating to the past, present
or future business activities of the Fund or PFPC; (b) any scientific
or technical information, design, process, procedure, formula, or
improvement that is commercially valuable and secret in the sense
that its confidentiality affords the Fund or PFPC a competitive
advantage over its competitors; (c) all confidential or proprietary
concepts, documentation, reports, data, specifications, computer
software, source code, object code, flow charts, databases,
inventions, know-how, and trade secrets, whether or not patentable or
copyrightable; and (d) anything designated as confidential.
Notwithstanding the foregoing, information shall not be confidential
information and shall not be subject to the foregoing confidentiality
obligations if it: (a) is already known to the receiving party at the
time it is obtained; (b) is or becomes publicly known or available
through no wrongful act of the receiving party; (c) is rightfully
received from a third party who, to the best of the receiving party's
knowledge, is not under a duty of confidentiality; (d) is released by
the protected party to a third party without restriction; (e) is
requested or required to be disclosed by the receiving party pursuant
to a court order, subpoena, governmental or regulatory agency request
or law (provided the receiving party will provide the other party (in
the case of disclosure by the Fund or the Administrator the "other
party" will be PFPC, and in the case of disclosure by PFPC the "other
party" will be the Fund) written notice of the same, to the extent
such notice is permitted); (f) is relevant to the defense of any
claim or cause of action asserted against the receiving party; (g) is
necessary or desirable for PFPC to release such information in
connection with the provision of services under this Agreement; or
(h) has been or is independently developed or obtained by the
receiving party.
PFPC agrees that, subject to the reuse and re-disclosure
provisions of Regulation S-P, 17 CFR Part 248.11, it shall not
disclose the non-public personal information of investors in the Fund
obtained under this Agreement, except as necessary to carry out the
services set forth in this Agreement or as otherwise permitted by law
or regulation.
8. Liaison with Accountants. PFPC shall act as liaison with the Fund's
independent public accountants and shall provide account analyses,
fiscal year summaries, and other audit-related schedules with respect
to the Fund. PFPC shall take all reasonable action in the performance
of its duties under this Agreement to assure that the necessary or
appropriate information is made available to such accountants for the
expression of their opinion, as reasonably requested by the Fund.
9. PFPC System. PFPC shall retain title to and ownership of any and all
data bases, computer programs, screen formats, report formats,
interactive design techniques, derivative works, inventions,
discoveries, patentable or copyrightable matters, concepts,
expertise, patents, copyrights, trade secrets, and other related
legal rights utilized by PFPC in connection with the services
provided by PFPC with respect to the Fund.
10. Disaster Recovery. PFPC shall enter into and shall maintain in effect
with appropriate parties one or more agreements making reasonable
provisions for emergency use of electronic data processing equipment
to the extent appropriate equipment is available. In the event of
equipment failures, PFPC shall, at no additional expense to the Fund
or the Administrator, take reasonable steps to minimize service
interruptions. PFPC shall have no liability with respect to the loss
of data or service interruptions caused by equipment failure,
provided such loss or interruption is not caused by PFPC's own
willful misfeasance, bad faith, negligence or reckless disregard of
its duties or obligations under this Agreement.
11. Compensation.
(a) As compensation for services set forth herein that are
rendered by PFPC during the term of this Agreement, the Fund
will pay to PFPC a fee or fees as may be agreed to in
writing by the Fund and PFPC.
(b) The Fund and the Administrator hereby represent and warrant
to PFPC that (i) the terms of this Agreement, (ii) the fees
and expenses associated with this Agreement, and (iii) any
benefits accruing to PFPC or to the Administrator (or any
affiliate thereof) or to the adviser or sponsor to the Fund
in connection with this Agreement, including but not limited
to any fee waivers, conversion cost reimbursements, up front
payments, signing payments or periodic payments made or to
be made by PFPC to the Administrator (or any affiliate
thereof) or to such adviser or sponsor or to any affiliate
of the Fund relating to this Agreement have been fully
disclosed to the board of directors of the Fund and that, if
required by applicable law, such board of directors has
approved or will approve the terms of this Agreement, any
such fees and expenses, and any such benefits.
12. Indemnification. The Fund agrees to indemnify, defend and hold
harmless PFPC and its affiliates (other than the Fund, BlackRock
Kelso Capital Advisors LLC and BlackRock, Inc. and its subsidiaries,
to the extent any of the foregoing may be deemed to be affiliates of
PFPC) including their respective officers, directors, agents and
employees (each, a "PFPC Indemnified Party") from all taxes, charges,
expenses, assessments, claims and liabilities (including, without
limitation, reasonable attorneys' fees and disbursements and
liabilities arising under applicable securities laws and any state
and foreign securities and blue sky laws) (collectively, "Losses")
arising directly or indirectly from any action or omission to act
which PFPC takes or omits to take in connection with the provision of
services under this Agreement. No PFPC Indemnified Party shall be
indemnified against any Losses caused by PFPC's or such PFPC
Indemnified Party's own willful misfeasance, bad faith, negligence or
reckless disregard in the performance of PFPC's duties under this
Agreement. The provisions of this Section 12 shall survive
termination of this Agreement.
13. Responsibility of PFPC.
(a) PFPC shall be under no duty hereunder to take any action on
behalf of the Fund or the Administrator except as
specifically set forth herein or as may be specifically
agreed to by PFPC, the Fund and the Administrator in a
written amendment hereto. PFPC shall be obligated to
exercise care and diligence in the performance of its duties
hereunder and to act in good faith in performing services
provided for under this Agreement. PFPC shall be liable only
for any Losses suffered by the Fund arising out of PFPC's
performance of or failure to perform its duties under this
Agreement and only to the extent such Losses arise out of
PFPC's willful misfeasance, bad faith, negligence or
reckless disregard of such duties.
(b) Notwithstanding anything in this Agreement to the contrary,
(i) PFPC shall not be liable for losses, delays, failure,
errors, interruption or loss of data occurring directly or
indirectly by reason of circumstances beyond its reasonable
control, including without limitation acts of God; action or
inaction of civil or military authority; public enemy; war;
terrorism; riot; fire; flood; sabotage; epidemics; labor
disputes; civil commotion; interruption, loss or malfunction
of utilities, transportation, computer or communications
capabilities; insurrection; elements of nature; or
non-performance by a third party (other than employees,
officers or affiliates of PFPC (other than the Fund,
BlackRock Kelso Capital Advisors LLC and BlackRock, Inc. and
its subsidiaries, to the extent any of the foregoing may be
deemed to be affiliates of PFPC)); and (ii) PFPC shall not
be under any duty or obligation to inquire into and shall
not be liable for the validity or invalidity, authority or
lack thereof, or truthfulness or accuracy or lack thereof,
of any instruction, direction, notice, instrument or other
information which PFPC reasonably believes to be genuine.
Notwithstanding the foregoing, PFPC shall use commercially
reasonable efforts to mitigate the effect of the events
enumerated in clause (i) of the preceding sentence, although
such efforts shall not impute any liability to PFPC.
(c) Notwithstanding anything in this Agreement to the contrary,
the Fund and the Administrator hereby acknowledge and agree
that (i) PFPC, in the course of providing tax-related
services or calculating and reporting portfolio performance
hereunder, may rely upon PFPC's interpretation of tax
positions or its interpretation of relevant circumstances
(as determined by PFPC) in providing such tax services and
in determining methods of calculating portfolio performance
to be used, and that (ii) PFPC shall not be liable for
losses or damages of any kind associated with such reliance
except to the extent such loss or damage is substantially
due to PFPC's willful misfeasance, bad faith, negligence or
reckless disregard in the performance of its duties under
this Agreement.
(d) Notwithstanding anything in this Agreement to the contrary,
without limiting anything in the immediately preceding
sub-section (c), the Fund and the Administrator hereby
acknowledge and agree that PFPC shall not be found to have
been negligent or to have acted with willful misfeasance,
bad faith or reckless disregard with respect to losses or
damages associated with areas of responsibility that the
judiciary, regulators (or other governmental officials) or
members of the investment fund industry determine would
otherwise apply to PFPC (or similar service providers) and
which, as of the date hereof, have yet to be identified by
such parties as areas for which PFPC (or any similar service
provider) is (or would be) responsible.
(e) Notwithstanding anything in this Agreement to the contrary
neither PFPC nor its affiliates (not including the Fund,
BlackRock Kelso Capital Advisors LLC and BlackRock, Inc. and
its subsidiaries, to the extent any of the foregoing may be
deemed to be affiliates of PFPC) shall be liable for any
consequential, special or indirect losses or damages,
whether or not the likelihood of such losses or damages was
known by PFPC or its affiliates.
(f) Each party shall have a duty to mitigate damages for which
any other party to this Agreement may become responsible.
(g) Notwithstanding anything in this Agreement to the contrary,
the services provided by PFPC do not constitute, nor shall
they be construed as constituting, legal advice or the
provision of legal services for or on behalf of the
Administrator, the Fund or any other person.
(h) The provisions of this Section 13 shall survive termination
of this Agreement.
14. Description of Accounting Services on a Continuous Basis.
PFPC will perform the following accounting services if required with
respect to the Fund:
(i) Journalize investment, capital share and income and
expense activities;
(ii) Record investment buy/sell trade tickets when
received from the Fund's investment adviser;
(iii) Maintain individual ledgers for investment
securities;
(iv) Maintain historical tax lots for each security;
(v) Record and reconcile corporate action activity and
all other capital changes;
(vi) Reconcile cash and investment balances of the Fund
with the Fund's custodian and provide the Fund's
investment adviser with the beginning cash balance
available for investment purposes;
(vii) Calculate contractual expenses, including management
fees and incentive allocation, as applicable, in
accordance with the Fund's investment management
agreement;
(viii) Monitor the expense accruals and notify an officer of
the Fund of any proposed adjustments;
(ix) Control all disbursements and authorize such
disbursements upon Written Instructions;
(x) Calculate capital gains and losses;
(xi) Determine net income;
(xii) Determine applicable foreign exchange gains and
losses on payables and receivables;
(xiii) Obtain market quotes and currency exchange rates with
respect to the Fund's investments from independent
pricing services approved by the Fund's investment
adviser, or if such quotes are unavailable, then
obtain such prices from the Fund's investment
adviser, and in either case calculate the market
value of the Fund's investments on a monthly basis in
accordance with applicable valuation policies or
guidelines provided by the Fund to PFPC (provided
PFPC does not inform the Fund that it is unable to
comply with such policies or guidelines);
(xiv) Transmit or mail a copy of the portfolio valuation on
a monthly basis to the Fund's investment adviser as
agreed upon between the Fund and PFPC;
(xv) Arrange for the computation of the net asset value of
the Fund on a monthly basis in accordance with the
provisions of the Fund's offering memorandum; and
(xvi) As appropriate, compute yields, total return, expense
ratios, portfolio turnover rate, and if required,
portfolio average dollar-weighted maturity.
15. Description of Sub-Administration Services on a Continuous Basis.
PFPC will perform the following sub-administration services if
required with respect to the Fund:
(i) Supply various normal and customary Fund statistical
data to the Fund as requested on an ongoing basis;
(ii) Prepare for execution and file the Fund's Federal and
state tax returns;
(iii) Coordinate the printing of the Fund's annual
shareholder reports;
(iv) Prepare monthly security transaction listings;
(v) Supply certain financial statements, schedules, notes
and related financial and supplementary data in
connection with the filing of the Fund's annual and
quarterly reports on Forms 10-K and 10-Q with the
Securities and Exchange Commission, as agreed by PFPC
from time to time; and
(vi) Monitor the Fund's status as a regulated investment
company under Sub-chapter M of the Internal Revenue
Code of 1986, as amended.
16. Duration and Termination. This Agreement shall continue until
terminated by the Fund, the Administrator or PFPC on sixty (60) days'
prior written notice to the other parties. In the event the Fund or
the Administrator gives notice of termination, all expenses
associated with movement (or duplication) of records and materials
and conversion thereof to a successor service provider (or each
successive service provider), including expenses incurred after
termination, will be borne by the Fund and paid by the Fund to PFPC.
17. Notices. Notices shall be addressed (a) if to PFPC, at 301 Bellevue
Parkway, Wilmington, Delaware 19809, Attention: President (or such
other address as PFPC may inform the other parties in writing); (b)
if to the Fund, at 40 East 52nd Street, New York, NY 10022;
Attention: Frank Gordon (or such other address as the Fund may inform
the other parties in writing); (c) if to the Administrator, at 40
East 52nd Street, New York, NY 10022; Attention: James Kong (or such
other address as the Administrator may inform the other parties in
writing); or (d) if to none of the foregoing, at such other address
as shall have been provided by like notice to the sender of any such
notice or other communication. If notice is sent by confirming
facsimile sending device, it shall be deemed to have been given
immediately. If notice is sent by first-class mail, it shall be
deemed to have been given three days after it has been mailed. If
notice is sent by messenger, it shall be deemed to have been given on
the day it is delivered.
18. Amendments. This Agreement, or any term hereof, may be changed or
waived only by written amendment, signed by the party against whom
enforcement of such change or waiver is sought.
19. Assignment. PFPC may assign this Agreement to any majority owned
direct or indirect subsidiary of PFPC or of The PNC Financial
Services Group, Inc. (other than BlackRock, Inc. and its
subsidiaries), provided that PFPC gives the Fund and the
Administrator 30 days' prior written notice of such assignment.
20. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
21. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the
purposes hereof.
22. Miscellaneous.
-------------
(a) No Changes that Materially Affect Obligations.
Notwithstanding anything in this Agreement to the contrary,
PFPC shall have no responsibility under this Agreement with
respect to any modifications made by the Fund to its
offering memorandum, registration statement or policies
which would affect materially the obligations or
responsibilities of PFPC hereunder, without the prior
written approval of PFPC (which approval shall not be
unreasonably withheld or delayed).
(b) No Representations or Warranties. Except as expressly
provided in this Agreement, PFPC hereby disclaims all
representations and warranties, express or implied, made to
the Fund, the Administrator or any other person, including,
without limitation, any warranties regarding quality,
suitability, merchantability, fitness for a particular
purpose or otherwise (irrespective of any course of dealing,
custom or usage of trade), of any services or any goods
provided incidental to services provided under this
Agreement. PFPC disclaims any warranty of title or
non-infringement except as otherwise set forth in this
Agreement.
(c) Entire Agreement. This Agreement embodies the entire
agreement and understanding among the parties relating to
the subject matter hereof and supersedes all prior
agreements and understandings relating to the subject matter
hereof, provided that the parties may embody in one or more
separate documents their agreement, if any, with respect to
delegated duties, subsequently agreed upon services, and
compensation of PFPC.
(d) Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect
their construction or effect.
(e) Information. The Fund will provide such information and
documentation as PFPC may reasonably request in connection
with services provided by PFPC with respect to the Fund.
(f) Governing Law. This Agreement shall be deemed to be a
contract made in Delaware and governed by Delaware law,
without regard to principles of conflicts of law.
(g) Partial Invalidity. If any provision of this Agreement shall
be held or made invalid by a court decision, statute, rule
or otherwise, the remainder of this Agreement shall not be
affected thereby.
(h) Successors and Assigns. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and
their respective successors and permitted assigns.
(i) Facsimile Signatures. The facsimile signature of any party
to this Agreement shall constitute the valid and binding
execution hereof by such party.
(j) Customer Identification Program Notice. To help the U.S.
government fight the funding of terrorism and money
laundering activities, U.S. Federal law requires each
financial institution to obtain, verify, and record certain
information that identifies each person who initially opens
an account with that financial institution on or after
October 1, 2003. Certain of PFPC's affiliates are financial
institutions, and as a matter of policy PFPC will request
(or already has requested) the Fund's name, address and
taxpayer identification number or other government-issued
identification number, and, if such party is a natural
person, that party's date of birth. PFPC may also ask (and
may have already asked) for additional identifying
information, and PFPC may take steps (and may have already
taken steps) to verify the authenticity and accuracy of
these data elements.
(k) No Third Party Beneficiary. Notwithstanding anything in this
Agreement to the contrary, (i) no other entity is intended
to be, nor shall it be, a third party beneficiary of this
Agreement (except as set forth in Section 12 and Section
13(e) of this Agreement) and (ii) PFPC shall have no
liability under or as a result of this Agreement to any
third party.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first above written.
PFPC INC.
By: ____________________________
Title: ______________________________
BLACKROCK KELSO CAPITAL CORPORATION
By: ____________________________
Title: ______________________________
BLACKROCK FINANCIAL MANAGEMENT, INC.
By: ____________________________
Title: ______________________________
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, James R. Maher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BlackRock Kelso
Capital Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and, for, the period presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(c)) and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Not applicable (until the first fiscal year ending after July 15,
2006).
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosures controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 14, 2005 /s/ James R. Maher
--------------------
Name: James R. Maher
Title: Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Frank D. Gordon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BlackRock Kelso
Capital Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and, for, the period presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(c)) and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Not applicable (until the first fiscal year ending after July 15,
2006).
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosures controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 14, 2005 /s/ Frank D. Gordon
-------------------
Name: Frank D. Gordon
Title: Chief Financial Officer
EXHIBIT 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
In connection with the Quarterly Report on Form 10-Q of BlackRock Kelso
Capital Corporation (the "Company") for the quarter ending September 30, 2005
as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), James R. Maher, as Chief Executive Officer of the Company, and
Frank D. Gordon, as Chief Financial Officer of the Company, each hereby
certifies, pursuant to ss.18 U.S.C. ss.1350, as adopted pursuant to ss.906 of
the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ James R Maher
- ------------------
Name: James R. Maher
Title: Chief Executive Officer
Date: November 14, 2005
/s/ Frank D. Gordon
- --------------------
Name: Frank D. Gordon
Title: Chief Financial Officer
Date: November 14, 2005
This certification accompanies the report pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
ss.18 of the Securities Exchange Act of 1934, as amended.
A signed original of this certification required by ss.906 has been provided
to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.