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 June 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________________ to _______________________
Commission file number 000-51327
BlackRock Kelso Capital Corporation
-----------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 20-2725151
- -------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
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 |X| No |_|
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer as defined in Rule 12b-2
of the Exchange Act. Large accelerated filer |_| Accelerated filer |_|
Non-Accelerated filer |X|
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |_| No |X|
The number of shares of the Registrant's common stock, $.001 par value per
share, outstanding at August 10, 2006, was 36,893,977.
BLACKROCK KELSO CAPITAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2006
Table of Contents
INDEX PAGE NO.
----- --------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Assets and Liabilities as of
June 30, 2006 (unaudited) and December 31, 2005 4
Statements of Operations (unaudited) for the
three and six months ended June 30, 2006 5
Statement of Changes in Net Assets (unaudited) 6
for the six months ended June 30, 2006
Statement of Cash Flows (unaudited) for
the six months ended June 30, 2006 7
Schedules of Investments as of June 30, 2006
(unaudited) and December 31, 2005 8
Notes to Financial Statements (unaudited) 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 1A. Risk Factors 26
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits 27
SIGNATURES 28
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 investment adviser, BlackRock Kelso Capital Advisors
LLC (the "Investment Advisor");
(4) the impact of increased competition;
(5) the impact of future acquisitions and divestitures;
(6) the unfavorable resolution of legal proceedings;
(7) the extent and timing of any share repurchases;
(8) the impact, extent and timing of technological changes and the
adequacy of intellectual property protection;
(9) the impact of legislative and regulatory actions and reforms and
regulatory, supervisory or enforcement actions of government agencies
relating to the Company or the Investment Advisor;
(10) terrorist activities, which may adversely affect the general economy,
real estate, financial and capital markets, specific industries, and
the Company and the Investment Advisor;
(11) the ability of the Investment Advisor to attract and retain highly
talented professionals;
(12) fluctuations in foreign currency exchange rates; and
(13) the impact of changes to tax legislation and, generally, the tax
position of the Company.
Forward-looking statements speak only as of the date they are made. The Company
does not undertake, and specifically disclaims any obligation, to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.
3
PART I. FINANCIAL INFORMATION
In this Quarterly Report, "Company", "we", "us" and "our" refer to BlackRock
Kelso Capital Corporation unless the context states otherwise.
Item 1. Financial Statements.
BLACKROCK KELSO CAPITAL CORPORATION
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 2006
(UNAUDITED) DECEMBER 31, 2005
-------------------- ------------------------
ASSETS:
Cash and cash equivalents (amortized cost of $123,522,867 and
$288,984,387) $ 123,522,867 $ 288,972,347
Investments, at fair value (amortized cost of $451,148,550 and
$250,184,074) 453,205,721 250,436,350
Receivable for investments sold - 996,250
Interest receivable 3,710,392 1,656,131
Dividends receivable 32,378 -
Other assets 143,583 165,363
-------------------- -------------------
Total Assets $ 580,614,941 $ 542,226,441
==================== ====================
LIABILITIES:
Payable to custodian $ 17,348,239 $ -
Payable for investments purchased 6,247,500 4,198,296
Dividend distribution payable 19,832 7,073,318
Legal fees (offering costs) payable 584,453 587,080
Management fees payable 453,573 455,329
Accrued administrative services expenses 967,726 508,950
Other accrued expenses and payables 612,673 698,619
-------------------- --------------------
Total Liabilities 26,233,996 13,521,592
-------------------- --------------------
NET ASSETS:
Common stock, par value $.001 per share, 40,000,000 common shares
authorized, 36,893,977 and 35,366,589 issued and outstanding 36,894 35,367
Paid-in capital in excess of par 552,207,075 529,298,432
Undistributed (distributions in excess of) net investment income 281,509 (870,327)
Accumulated net realized (loss) gain (201,704) 1,141
Net unrealized appreciation 2,057,171 240,236
-------------------- --------------------
Total Net Assets 554,380,945 528,704,849
-------------------- --------------------
Total Liabilities and Net Assets $ 580,614,941 $ 542,226,441
==================== ====================
Net Asset Value Per Share $ 15.03 $ 14.95
==================== ====================
The accompanying notes are an integral part of these financial statements.
4
BLACKROCK KELSO CAPITAL CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED ENDED
JUNE 30, 2006 JUNE 30, 2006
-------------------- -------------------
INVESTMENT INCOME:
Interest income $ 11,963,082 $ 20,442,574
Dividend income 161,419 313,337
Other income 20,134 122,134
-------------------- ------------------
Total investment income 12,144,635 20,878,045
-------------------- ------------------
EXPENSES:
Management fees 2,734,456 5,399,334
Administrative services 291,762 580,107
Professional fees 106,082 319,999
Investment Advisor expenses 203,179 281,136
Director fees 86,873 157,061
Insurance 46,566 83,105
Other 45,651 79,687
-------------------- ------------------
Expenses before management fee waiver 3,514,569 6,900,429
Management fee waiver (1,367,361) (2,699,800)
-------------------- ------------------
Net expenses 2,147,208 4,200,629
-------------------- ------------------
NET INVESTMENT INCOME 9,997,427 16,677,416
-------------------- ------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments 202,321 (202,845)
-------------------- ------------------
Net change in unrealized appreciation (depreciation):
Investments 970,702 1,804,895
Cash equivalents - 12,040
-------------------- ------------------
Net change in unrealized appreciation 970,702 1,816,935
-------------------- ------------------
Net realized and unrealized gain 1,173,023 1,614,090
-------------------- ------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 11,170,450 $ 18,291,506
==================== ==================
Earnings Per Share $ 0.31 $ 0.51
==================== ==================
Basic and Diluted Weighted-Average Shares Outstanding 36,345,171 36,017,156
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 SIX MONTHS ENDED JUNE 30, 2006
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income $ 16,677,416
Net change in unrealized appreciation 1,816,935
Net realized loss on investments (202,845)
-------------------
Net increase in net assets resulting from operations 18,291,506
-------------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT
INCOME (15,525,485)
-------------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 810,000
Reinvestment of dividends 22,100,075
-------------------
Net increase in net assets resulting from capital share
transactions 22,910,075
-------------------
TOTAL INCREASE IN NET ASSETS 25,676,096
Net assets at beginning of period 528,704,849
-------------------
Net assets at end of period $ 554,380,945
===================
CAPITAL SHARE ACTIVITY:
Shares issued from subscriptions 54,000
Shares issued from reinvestment of dividends 1,473,388
-------------------
Total increase in shares $ 1,527,388
===================
ACCUMULATED DISTRIBUTIONS:
Undistributed net investment income $ 281,509
===================
The accompanying notes are an integral part of these financial statements.
6
BLACKROCK KELSO CAPITAL CORPORATION
STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2006
OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 18,291,506
Adjustments to reconcile net increase in net assets resulting from
operations
to net cash used in operating activities:
Proceeds from dispositions of short-term investments - net 24,990,928
Purchases of long-term investments (260,908,244)
Proceeds from principal repayments/dispositions of long-term investments 35,363,676
Net change in unrealized appreciation on investments (1,804,895)
Net realized loss on investments 202,845
Amortization of premium/discount - net (615,961)
Decrease in receivable for investments sold 996,250
Increase in interest receivable (2,054,261)
Increase in dividends receivable (32,378)
Decrease in other assets 21,780
Increase in payable for investments purchased 2,049,204
Decrease in legal fees (offering costs) payable (2,627)
Decrease in management fees payable (1,756)
Increase in accrued administrative services expenses 458,776
Decrease in other accrued expenses and payables (85,946)
------------------------
Net cash used in operating activities (183,131,103)
------------------------
FINANCING ACTIVITIES:
Increase in payable to custodian 17,348,239
Proceeds from capital subscriptions 810,000
Dividends paid - net of reinvestment (476,616)
------------------------
Net cash provided by financing activities 17,681,623
------------------------
Net decrease in cash and cash equivalents (165,449,480)
Cash and cash equivalents, beginning of period 288,972,347
------------------------
Cash and cash equivalents, end of period $ 123,522,867
========================
Supplemental disclosure of non-cash financing activities:
Dividend distributions reinvested $ 22,100,075
========================
The accompanying notes are an integral part of these financial statements.
7
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (UNAUDITED)
JUNE 30, 2006
Principal
Amount or
Number of Fair
Portfolio Company (a) Industry Shares/Units Cost (b) Value
- --------------------- -------- ------------ -------- -----
SHORT-TERM INVESTMENTS - 14.8%
- ------------------------------
Asset-Backed Security - 2.7%
RACERS Trust, Series 2005-17-O, 5.21%
(LIBOR + 0.02%/Q), 8/21/06, acquired 8/29/05 (c) Asset-Backed Security $ 15,000,000 $ 15,000,000 $ 15,000,000
-------------------------------------------
Certificates of Deposit - 2.7%
DEFPA BANK plc, New York, 4.53%, 10/16/06 Banking 15,000,000 15,000,000 14,948,577
-------------------------------------------
Commercial Paper - 8.3%
Morgan Stanley & Co. Incorporated, 5.39%, 8/4/06 Securities Broker and Dealer 26,000,000 26,000,000 26,000,000
Natexis Banques Populaires US Finance Co. LLC,
4.56%, 7/31/06 Banking 20,000,000 19,924,083 19,924,083
-------------------------------------------
Total Commercial Paper 46,000,000 45,924,083 45,924,083
-------------------------------------------
Master Notes - 1.1%
Citigroup Global Markets Inc., 4.63%, 8/25/06 Financial Services 6,000,000 6,000,000 6,000,000
-------------------------------------------
TOTAL SHORT-TERM INVESTMENTS $ 82,000,000 $ 81,924,083 $ 81,872,660
===============----------------------------
LONG-TERM INVESTMENTS - 66.9%
- -----------------------------
Subordinated Debt / Corporate Notes - 1.6%
First Mercury Holdings, Inc., 13.17%
(LIBOR + 8.00%/Q), 8/15/12, acquired 8/12/05 (c) Insurance $ 1,800,000 1,784,239 1,854,000
U.S. Security Holdings, Inc., 13.00%, 5/8/14,
acquired 5/10/06 (c) Security Services 7,000,000 7,000,000 7,026,250
-------------------------------------------
Total Subordinated Debt / Corporate Notes $ 8,800,000 8,784,239 8,880,250
===============----------------------------
Senior Secured Loans (d) - 64.0%
AGY Holding Corp., Second Lien, 12.50%
(LIBOR + 7.00%), 4/7/13 Glass Yarns/Fibers $ 10,000,000 10,000,000 10,150,000
ALM Media, Inc., Second Lien, 11.25%
(LIBOR + 5.75%), 3/7/11 Publishing 39,750,000 39,752,286 39,978,563
Applied Tech Products Corp. et al., Tranche A,
First Lien, 9.32% (LIBOR + 4.50%), 10/24/10 Plastic Packaging 4,251,515 4,222,979 4,222,979 (e)
Applied Tech Products Corp. et al., Tranche B,
Second Lien, 13.82% (LIBOR + 9.00%), 4/24/11 Plastic Packaging 1,951,515 1,933,858 1,933,858 (e)
Applied Tech Products Corp. et al., Tranche C,
Third Lien, 17.32% (LIBOR + 6.30% cash,
6.20% PIK), 10/24/11 Plastic Packaging 715,236 625,010 625,010 (e)
The accompanying notes are an integral part of these financial statements.
8
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (UNAUDITED) (continued)
JUNE 30, 2006
Principal
Amount or
Number of Fair
Portfolio Company (a) Industry Shares/Units Cost (b) Value
- --------------------- -------- ------------ -------- -----
Bare Escentuals Beauty, Inc., Second Lien, 12.43%
(LIBOR + 7.00%), 2/18/13 Cosmetics $ 4,000,000 $ 4,000,000 $ 4,040,000
Benchmark Medical Holdings Inc., First Lien, 8.34%
(LIBOR + 3.00%), 12/27/12 Rehabilitation Centers 1,990,000 1,990,000 1,990,000
Benchmark Medical Holdings, Inc., Second Lien,
12.06% (LIBOR + 7.00%), 6/27/13 Rehabilitation Centers 9,000,000 9,000,000 9,000,000
Bushnell Performance Optics, First Lien, 8.32%
(LIBOR + 3.00%), 8/19/11 Leisure Products 995,122 995,122 1,000,512
Cambridge International, Inc., Second Lien, 12.31%
(LIBOR + 6.50%), 11/11/13 Metal Conveyor Belts 20,500,000 20,298,814 20,295,000
Cannondale Bicycle Corporation, Second Lien, 12.35%
(LIBOR + 7.00%), 6/5/10 Bicycles/Apparel 10,000,000 10,000,000 10,000,000 (e)
Champion Energy Corporation et al., First Lien, 10.50%
(LIBOR + 5.00%), 6/29/11 Heating and Oil Services 15,000,000 15,000,000 15,000,000 (e)
Champion Energy Corporation et al., Second Lien,
16.00% (12.00% cash, 4.00% PIK), 6/30/12 Heating and Oil Services 20,000,000 19,700,000 19,700,000 (e)
Clean Earth Inc., Tranche B, First Lien, 7.98%
(LIBOR + 2.75%), 10/17/11 Environmental Services 1,462,521 1,462,521 1,466,177
Data Transmission Network Corporation, Second Lien,
13.30% (LIBOR + 8.00%), 9/10/13 Information Services 4,000,000 4,000,000 4,000,000
Delta Air Lines, Inc., Term Loan B, First Lien, 10.02%
(LIBOR + 4.75%), 3/16/08 Airlines 1,000,000 1,000,000 1,020,313
Deluxe Entertainment Services Group Inc., Second Lien,
13.75% (LIBOR + 8.25%), 7/28/11 Entertainment 16,000,000 16,000,000 16,480,000
DynaVox Systems LLC, Term Loan B, First Lien, Augmentative
9.00% (LIBOR + 3.50%), 6/30/11 Communication Products 3,500,000 3,474,006 3,500,000
DynaVox Systems LLC, Term Loan C, First Lien, Augmentative
10.50% (LIBOR + 5.00%), 12/13/11 Communication Products 1,750,000 1,736,993 1,750,000
Eight O'Clock Coffee Company, First Lien, 8.13%
(LIBOR + 3.00%), 11/14/11 Coffee Distributor 2,705,357 2,705,357 2,705,357
Eight O'Clock Coffee Company, Second Lien, 12.13%
(LIBOR + 7.00%), 11/14/12 Coffee Distributor 12,000,000 12,000,000 12,180,000
Electrical Components International Holdings Company,
Second Lien, 11.78% (LIBOR + 6.50%), 5/1/14 Electronics 20,000,000 20,000,000 20,050,000
Event Rentals, Inc., First Lien, 10.80% (LIBOR +
5.25%), 11/17/11 Party Rentals 14,228,693 14,228,693 14,228,693 (e)
Event Rentals, Inc., Acquisition Loan,
First Lien, 10.74% (LIBOR + 5.25%), 11/17/11 Party Rentals 17,225,000 17,225,000 17,225,000 (e)
Haggar Clothing Co., Second Lien, 12.28%
(LIBOR + 7.00%), 11/1/11 Apparel 2,500,000 2,477,761 2,500,000
Heartland Automotive Services II Inc. et al.,
Term Loan A, First Lien, 8.96% (LIBOR + 3.75%),
2/27/12 Automobile Repair 6,864,375 6,857,437 6,898,697
The accompanying notes are an integral part of these financial statements.
9
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (UNAUDITED) (continued)
JUNE 30, 2006
Principal
Amount or
Number of Fair
Portfolio Company (a) Industry Shares/Units Cost (b) Value
- --------------------- -------- ------------ -------- -----
Heartland Automotive Services II Inc. et al.,
Acquisition Loan (Funded), First Lien, 9.11%,
(LIBOR + 4.00%), 2/27/12 Automobile Repair $ 1,740,000 $ 1,740,000 $ 1,740,000
Heartland Automotive Services II Inc. et al.,
Acquisition Loan (Unfunded), First Lien, 0.75%,
2/27/08 Automobile Repair 1,260,000 1,260,000 $ 1,260,000
HIT Entertainment, Inc., Second Lien, 10.58%
(LIBOR + 5.50%), 2/26/13 Entertainment 1,000,000 1,000,000 1,005,000
Houghton International Inc., First Lien, 8.40%
(LIBOR + 3.00%), 12/15/11 Specialty Chemicals 4,919,444 4,919,444 4,950,191
International Radiology Group, L.L.C. et al., First
Lien, Healthcare Management
10.00% (Base Rate + 1.75%), 6/30/11 Services 5,000,000 4,950,039 5,000,000
International Radiology Group, L.L.C. et al., Second Healthcare Management
Lien, 13.75% (Base Rate + 5.50%), 6/30/12 Services 10,000,000 9,900,046 10,000,000
MacAndrews Deluxe Holdings LLC, First
Lien, 13.00%, 7/28/11 Entertainment 14,000,000 14,000,000 14,105,000
Precision Parts International Services Corp. et al.,
First Lien, 8.81% (LIBOR + 3.75%), 9/30/11 Automotive Parts 2,985,000 2,985,000 2,977,538
Prism Business Media Holdings, Inc., Second Lien,
11.13% (LIBOR + 6.00%), 9/30/13 Information Services 11,000,000 10,990,669 10,835,000
Professional Paint, Inc., Second Lien, 11.38%
(LIBOR + 5.75%), 5/31/13 Paint and Coatings 16,000,000 16,000,000 16,160,000
QTC Acquisition Inc., Second Lien, 11.85%
(LIBOR + 6.50%), 5/10/13 Disability Evaluations 10,000,000 10,000,000 10,000,000
Robertson Aviation, L.L.C., First Lien, 9.04%
(LIBOR + 3.50%), 4/19/13 Aviation Fuel Systems 5,000,000 4,987,500 5,025,000
United Subcontractors, Inc., Second Lien, 11.95%
(LIBOR + 7.25%), 6/27/13 Building and Construction 10,000,000 10,000,000 9,950,000
US Investigations Services, Inc., Tranche B, First
Lien,
7.92% (LIBOR + 2.50%), 10/14/12 Investigative Services 1,973,197 1,973,197 1,968,264
US Investigations Services, Inc., Tranche C, First
Lien,
7.92% (LIBOR + 2.50%), 10/14/12 Investigative Services 741,803 741,803 739,949
Wastequip, Inc., Second Lien, 11.00%
(LIBOR + 5.50%), 7/15/12 Waste Treatment 500,000 500,000 500,000
Wembley, Inc., Second Lien, 8.74%
(LIBOR + 3.75%), 8/23/12 Gaming 1,000,000 1,000,000 1,005,833
Westward Dough Operating Company, LLC, Term
Loan A, First Lien, 9.51% (LIBOR + 4.00%),
3/30/11 Restaurants 8,000,000 8,000,000 8,000,000 (e)
Westward Dough Operating Company, LLC, Term
Loan B, First Lien, 12.51% (LIBOR + 7.00%),
3/30/11 Restaurants 8,000,000 8,000,000 8,000,000 (e)
------------------------------------------------
Total Senior Secured Loans $ 354,508,778 353,633,535 355,161,934
=================-------------------------------
The accompanying notes are an integral part of these financial statements.
10
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (UNAUDITED) (continued)
JUNE 30, 2006
Principal
Amount or
Number of Fair
Portfolio Company (a) Industry Shares/Units Cost (b) Value
- --------------------- -------- ------------ -------- -----
Closed-End Funds - 1.4%
Eaton Vance Floating-Rate Income Trust Closed-End Fund 175,000 $ 2,988,407 $ 3,171,000
Nuveen Floating Rate Income Fund Closed-End Fund 94,400 1,159,147 1,232,864
PIMCO Floating Rate Strategy Fund Closed-End Fund 170,000 2,997,026 3,224,900
--------------------------------
Total Closed-End Funds 7,144,580 7,628,764
--------------------------------
Equity Warrants - 0.0% (f)
ATEP Holdings, Inc., expire 10/24/15 Plastic Packaging 470 - - (e)
ATH Holdings, Inc., expire 10/24/15 Plastic Packaging 470 - - (e)
ATPP Holdings, Inc., expire 10/24/15 Plastic Packaging 470 90,112 90,112 (e)
ATPR Holdings, Inc., expire 10/24/15 Plastic Packaging 470 - - (e)
Champion Energy Corporation, expire 6/29/16 Heating and Oil Services 15,900 300,000 300,000 (e)
---------------------------------
Total Equity Warrants 390,112 390,112
---------------------------------
TOTAL LONG-TERM INVESTMENTS
INCLUDING UNEARNED INCOME 369,952,466 372,061,060
UNEARNED INCOME - (0.1)% (727,999) (727,999)
----------------------------------
TOTAL LONG-TERM INVESTMENTS 369,224,467 371,333,061
----------------------------------
TOTAL INVESTMENTS - 81.7% 451,148,550 453,205,721
==============---------------------
OTHER ASSETS & LIABILITIES (NET) - 18.3% 101,175,224
---------------
NET ASSETS - 100.0% $ 554,380,945
===============
- ----------------
(a) None of our portfolio companies are "controlled" or "affiliated" as defined in the Investment Company Act of 1940.
(b) Represents amortized cost for fixed income securities and unearned income, and cost for closed-end funds and equity
warrants.
(c) These securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may
be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the
aggregate, these securities represent 4.3% of net assets at June 30, 2006.
(d) Approximately 90% of the senior secured loans to our portfolio companies bear interest at a floating rate that may
be determined by reference to the London Interbank Offered Rate (LIBOR) or other base rate (commonly the Federal
Funds Rate or the Prime Rate), at the borrower's option. Additionally, the borrower under a senior secured loan
generally has the option to select from interest rate reset periods of one, two, three or six months and may alter
that selection at the end of any reset period. Current reset frequencies for floating rate instruments other than
senior secured loans are indicated by Q (quarterly) or S (semiannually).
(e) Fair value of this investment determined by or under the direction of our Board of Directors (see Note 2). The
aggregate fair value of these investments (net of unearned income) is $98,597,653, or 17.8% of net assets, at June
30, 2006.
(f) Equity warrants are non-income producing securities.
The accompanying notes are an integral part of these financial statements.
11
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS
DECEMBER 31, 2005
Principal
Amount or
Number of Fair
Portfolio Company (a) Industry Shares/Units Cost (b) Value
- --------------------- -------- ------------ -------- -----
SHORT-TERM INVESTMENTS - 20.1%
Asset-Backed Security - 2.8%
RACERS Trust, Series 2005-17-O, 4.39%
(LIBOR + 0.02%/Q), 8/21/06,
acquired 8/29/05 (d) Asset-Backed Security $ 15,000,000 $ 15,000,000 $ 15,006,300
-------------------------------------------------
Certificates of Deposit - 5.7%
DEFPA BANK plc, New York, 4.53%, 10/16/06 Banking 15,000,000 15,000,000 14,961,713
Washington Mutual Bank N.A., 4.46%, 3/28/06 Banking 15,000,000 15,000,000 14,999,820
-------------------------------------------------
Total Certificates of Deposit 30,000,000 30,000,000 29,961,533
-------------------------------------------------
Commercial Paper - 11.6%
Barclays US Funding Corp., 4.24%, 2/3/06 Banking 26,000,000 25,900,019 25,900,019
BNP Paribas (Canada), 3.83%, 1/24/06 Banking 1,500,000 1,496,397 1,496,397
Credit Suisse First Boston USA, Inc., Securities Broker
3.83%, 1/27/06 and Dealer 8,000,000 7,978,626 7,978,626
Morgan Stanley & Co. Incorporated, Securities Broker
4.08%, 8/4/06 and Dealer 26,000,000 26,000,000 26,003,120
------------------------------------------------
Total Commercial Paper 61,500,000 61,375,042 61,378,162
-------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS $ 106,500,000 106,375,042 106,345,995
=================--------------------------------
LONG-TERM INVESTMENTS - 27.3%
Subordinated Debt / Corporate Notes - 1.3%
First Mercury Holdings, Inc., 12.33%
(LIBOR + 8.00%/Q), 8/15/12,
acquired 8/12/05 (d) Insurance $ 1,800,000 1,782,965 1,831,500
InSight Health Services Corp., 9.17%
(LIBOR + 5.25%/Q), 11/1/11,
acquired 9/16/05 (d) Diagnostic Imaging 2,500,000 2,488,066 2,375,000
Select Medical Holdings Corporation, 9.93%
(LIBOR + 5.75%/S), 9/15/15,
acquired 9/15/05 (d) Specialty Hospitals 2,500,000 2,500,000 2,512,500
-------------------------------------------------
Total Subordinated Debt / Corporate Notes $ 6,800,000 6,771,031 6,719,000
=================
Senior Secured Loans (e) - 24.8%
Applied Tech Products Corp. et al.,
Tranche A, First Lien, 8.91%
(LIBOR + 4.50%), 10/24/10 Plastic Packaging $ 4,251,515 4,219,701 4,219,629 (f)
Applied Tech Products Corp. et al.,
Tranche B, Second Lien, 13.41%
(LIBOR + 9.00%), 4/24/11 Plastic Packaging 1,951,515 1,932,040 1,932,000 (f)
Applied Tech Products Corp. et al.,
Tranche C, Third Lien, 16.91%
(LIBOR + 6.30% cash,
6.20% PIK), 10/24/11 Plastic Packaging 696,970 598,331 598,145 (f)
Benchmark Medical Holdings Inc.,
First Lien, 9.00%
(Base Rate + 1.75%), 12/27/12 Rehabilitation Centers 2,000,000 2,000,000 2,015,000
Benchmark Medical Holdings Inc.,
Second Lien, 13.00% (Base Rate
+ 5.75%), 6/27/13 Rehabilitation Centers 9,000,000 9,000,000 9,000,000
Bushnell Performance Optics, First
Lien, 7.53% (LIBOR + 3.00%), 8/19/11 Leisure Products 1,000,000 1,000,000 1,012,469
The accompanying notes are an integral part of these financial statements.
12
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (continued)
DECEMBER 31, 2005
Principal
Amount or
Number of Fair
Portfolio Company (a) Industry Shares/Units Cost (b) Value
- --------------------- -------- ------------ -------- -----
Cannondale Bicycle Corporation, Second
Lien, 11.53% (LIBOR + 7.00%), 6/5/10 Bicycles/Apparel $ 10,000,000 $ 10,000,000 $ 10,000,000 (f)
Champion Energy Corporation et al.,
First Lien, 13.38% (LIBOR + 9.00%), Heating and
6/30/09 Oil Services 18,000,000 18,000,000 18,000,000 (f)
Clean Earth Inc., Tranche B, First Lien,
7.39% (LIBOR + 3.00%), 10/17/11 Environmental Services 1,500,000 1,500,000 1,515,000
Delta Air Lines, Inc., Term Loan B,
First Lien, 11.01%
(LIBOR + 6.50%), 3/16/08 Airlines 1,000,000 1,000,000 1,036,750
Eight O'Clock Coffee Company,
First Lien, 7.44%
(LIBOR + 3.00%), 11/14/11 Coffee Distributor 3,000,000 3,000,000 3,022,500
Eight O'Clock Coffee Company,
Second Lien, 11.44%
(LIBOR + 7.00%), 11/14/12 Coffee Distributor 12,000,000 12,000,000 12,000,000
Event Rentals, Inc., First Lien, 9.94%
(LIBOR + 5.25%), 11/17/11 Party Rentals 14,454,545 14,454,545 14,454,545 (f)
Event Rentals, Inc., Acquisition
Loan (Funded), First Lien, 9.92%
(LIBOR + 5.25%), 11/17/11 Party Rentals 9,847,159 9,847,159 9,847,159 (f)
Event Rentals, Inc., Acquisition Loan
(Unfunded), First Lien, 0.50%, 11/18/07 Party Rentals 2,198,295 2,198,295 2,198,295 (f)
Haggar Clothing Co., Second Lien, 11.51%
(LIBOR + 7.00%), 11/1/11 Apparel 2,500,000 2,500,000 2,500,000
The Hertz Corporation, Tranche B,
First Lien, 8.50% Automobile and
(Base Rate + 1.25%), 12/21/12 Equipment Rental 2,000,000 2,000,000 2,022,500
HIT Entertainment, Inc., Second Lien, 9.71%
(LIBOR + 5.50%), 2/26/13 Entertainment 1,000,000 1,000,000 990,000
Houghton International Inc., First Lien, 9.25%
(Base Rate + 2.00%), 12/15/11 Specialty Chemicals 5,000,000 5,000,000 5,043,750
MD Beauty, Inc., Second Lien, 11.25%
(LIBOR + 7.00%), 2/18/13 Cosmetics 3,000,000 3,000,000 3,022,500
Metaldyne Corporation et al., First Lien, 8.58%
(LIBOR + 4.50%), 12/31/09 Automotive Parts 998,741 988,476 1,001,237
NTELOS Inc., Second Lien, 9.39%
(LIBOR + 5.00%), 2/24/12 Telecommunications 2,000,000 1,984,276 2,020,000
PBI Media, Inc., Second Lien, 10.24%
(LIBOR + 6.00%), 9/30/13 Information Services 6,000,000 5,990,032 5,940,000
Precision Parts International Services
Corp. et al., First Lien, 7.98%
(LIBOR + 3.75%), 9/30/11 Automotive Parts 3,000,000 3,000,000 3,022,501
QTC Acquisition Inc., Second Lien, 10.84%
(LIBOR + 6.50%), 5/10/13 Disability Evaluations 10,000,000 10,000,000 10,075,000
US Investigations Services, Inc.,
Tranche B, First Lien,
7.00% (LIBOR + 2.50%), 10/14/12 Investigative Services 1,995,000 1,995,000 1,999,988
U.S. Security Holdings, Inc.,
First Lien, 7.27%
(LIBOR + 3.25%), 2/29/12 Security Services 983,400 983,400 990,776
Wastequip, Inc., Second Lien, 10.53%
(LIBOR + 6.00%), 7/15/12 Waste Treatment 500,000 500,000 506,250
Wembley, Inc., Second Lien, 7.83%
(LIBOR + 3.75%), 8/23/12 Gaming 1,000,000 1,000,000 1,006,250
---------------------------------------------------
Total Senior Secured Loans $ 130,877,140 130,691,255 130,992,244
=================----------------------------------
The accompanying notes are an integral part of these financial statements.
13
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (continued)
DECEMBER 31, 2005
Principal
Amount or
Number of Fair
Portfolio Company (a) Industry Shares/Units Cost (b) Value
- --------------------- -------- ------------ -------- -----
Closed-End Funds - 1.4%
Eaton Vance Floating-Rate Income Trust Closed-End Fund 175,000 $ 2,988,408 $ 2,952,250
Nuveen Floating Rate Income Fund Closed-End Fund 94,400 1,159,147 1,188,496
PIMCO Floating Rate Strategy Fund Closed-End Fund 170,000 2,997,026 3,036,200
-----------------------------------
Total Closed-End Funds 7,144,581 7,176,946
-----------------------------------
Equity Warrants - 0.0% (g)
ATEP Holdings, Inc., expire 10/24/15 Plastic Packaging 470 - - (f)
ATH Holdings, Inc., expire 10/24/15 Plastic Packaging 470 - - (f)
ATPP Holdings, Inc., expire 10/24/15 Plastic Packaging 470 90,114 90,114 (f)
ATPR Holdings, Inc., expire 10/24/15 Plastic Packaging 470 - - (f)
------------------------------------
Total Equity Warrants 90,114 90,114
------------------------------------
TOTAL LONG-TERM INVESTMENTS
INCLUDING UNEARNED INCOME 144,696,981 144,978,304
UNEARNED INCOME - (0.2)% (887,949) (887,949)
-------------------------------------
TOTAL LONG-TERM INVESTMENTS 143,809,032 144,090,355
-------------------------------------
TOTAL INVESTMENTS - 47.4% $ 250,184,074 250,436,350
=================-------------------
OTHER ASSETS & LIABILITIES (NET) - 52.6% 278,268,499
------------------
NET ASSETS - 100.0% $ 528,704,849
==================
- ----------------
(a) None of our portfolio companies are "controlled" or "affiliated" as defined in the Investment Company Act of 1940.
(b) Unaudited.
(c) Represents amortized cost for fixed income securities and unearned income, and cost for closed-end funds and equity
warrants.
(d) These securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may
be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the
aggregate, these securities represent 4.1% of net assets at December 31, 2005.
(e) Approximately 98% of the senior secured loans to our portfolio companies bear interest at a floating rate that may
be determined by reference to the London Interbank Offered Rate (LIBOR) or other base rate (commonly the Federal
Funds Rate or the Prime Rate), at the borrower's option. Additionally, the borrower under a senior secured loan
generally has the option to select from interest rate reset periods of one, two, three or six months and may alter
that selection at the end of any reset period. Current reset frequencies for floating rate instruments other than
senior secured loans are indicated by Q (quarterly) or S (semiannually).
(f) Fair value of this investment determined by or under the direction of our Board of Directors (see Note 2). The
aggregate fair value of these investments (net of unearned income) is $60,451,938, or 11.4% of net assets, at
December 31, 2005.
(g) Equity warrants are non-income producing securities.
The accompanying notes are an integral part of these financial statements.
14
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. Organization
BlackRock Kelso Capital Corporation (the "Company") was organized as a Delaware
corporation on April 13, 2005 and was initially funded on July 25, 2005. The
Company has filed an election to be treated as a business development company
("BDC") under the Investment Company Act of 1940 (the "1940 Act"). In addition,
for tax purposes the Company has qualified and has elected to be treated as a
regulated investment company, or RIC, under the Internal Revenue Code of 1986
(the "Code"). The Company's investment objective is to generate both current
income and capital appreciation through debt and equity investments. The
Company intends to invest primarily in middle-market companies in the form of
senior and junior secured and unsecured debt securities and loans, each of
which may include an equity component, and by making direct preferred, common
and other equity investments in such companies.
On July 25, 2005, the Company completed a private placement (the "Offering") of
35,366,589 shares of its common stock, par value $.001 per share (the "Common
Stock"), at a price of $15.00 per share. Net proceeds from the Offering of
$529,333,799 reflect the payment of a placement fee of $507,407 and legal fees
and other offering costs of $657,639.
The accompanying interim financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). In the opinion of management, all adjustments, consisting solely of
normal recurring accruals, considered necessary for the fair presentation of
financial statements for the interim period, have been included. The results of
operations for interim periods are not necessarily indicative of results to be
expected for the full year.
Certain financial information that is normally included in annual financial
statements, including certain financial statement footnotes, prepared in
accordance with GAAP, is not required for interim reporting purposes and has
been condensed or omitted herein. These financial statements should be read in
conjunction with the Company's financial statements and notes related thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2005, which was filed with the Securities and Exchange Commission
on March 29, 2006.
2. Significant Accounting Policies
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of income and expenses during the reported period. Changes in
the economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ and such
differences could be material.
The significant accounting policies consistently followed by the Company are:
(a) Investments for which market quotations are readily available are valued
at such market quotations, which are generally obtained from an
independent pricing service or one or more broker-dealers or market
makers. However, debt investments with remaining maturities within 60 days
are valued at cost plus accreted discount, or minus amortized premium,
which approximates fair value. Debt and equity securities for which market
quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Company's Board
of Directors. Because the Company expects that there will not be a readily
available market value for many of the investments in its portfolio, the
Company expects to value many of its portfolio investments at fair value
as determined in good faith by or under the direction of the Board of
Directors using a consistently applied valuation process in accordance
with a documented valuation policy that has been reviewed and approved by
the Board of Directors. Due to the inherent uncertainty of determining the
fair value of investments that do not have a readily available market
value, the fair value of the Company's investments may differ
significantly from the values that would have been used had a readily
available market value existed for such investments, and the differences
could be material.
15
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
With respect to the Company's investments for which market quotations are not
readily available, the Board of Directors undertakes a multi-step valuation
process each quarter, as described below:
(1) The quarterly valuation process begins with each portfolio
company or investment being initially valued by the
investment professionals of BlackRock Kelso Capital Advisors
LLC, the Company's investment adviser (the "Investment
Advisor"), responsible for the portfolio investment;
(2) Preliminary valuation conclusions are then documented and
discussed with senior management;
(3) To the extent determined by the Audit Committee of the Board
of Directors, independent valuation firms engaged by the
Board of Directors conduct independent appraisals and review
management's preliminary valuations and their own independent
assessment;
(4) The Audit Committee of the Board of Directors reviews the
preliminary valuations of the investment professionals,
senior management and independent valuation firms; and
(5) The Board of Directors discusses valuations and determines
the fair value of each investment in the ( portfolio in good
faith based on the input of the Investment Advisor, the
respective independent valuation firms and the Audit
Committee.
The types of factors that the Company may take into account in fair value
pricing its investments include, as relevant, the nature and realizable value
of any collateral, the portfolio company's ability to make payments and its
earnings and discounted cash flow, the markets in which the portfolio company
does business, comparison to publicly traded securities and other relevant
factors.
Determination of fair values involves subjective judgments and estimates.
Accordingly, these notes to the financial statements express the uncertainty
with respect to the possible effect of such valuations, and any change in such
valuations, on the financial statements.
The carrying value of the Company's financial instruments approximate fair
value. The carrying value of receivables, other assets, accounts payable and
accrued expenses approximate fair value due to their short maturity.
None of the Company's portfolio companies are controlled by or affiliated with
the Company as defined in the 1940 Act.
(b) Cash equivalents include short-term investments in money market
instruments with remaining maturities when purchased of three months or
less.
(c) Security transactions are accounted for on the trade date unless there are
substantial conditions to the purchase.
(d) Gains or losses on the sale of investments are calculated using the
specific identification method.
(e) Interest income, adjusted for amortization of premium and accretion of
discount, is recorded on an accrual basis. Interest income is not accrued
if collection is deemed doubtful or the related investment is in default.
For loans and debt securities with contractual payment-in-kind ("PIK")
interest, which represents contractual interest accrued and added to the
loan balance and which generally becomes due at maturity, PIK interest is
not accrued if the portfolio company valuation indicates that the PIK
interest is not collectible. Origination, structuring, closing, commitment
and other upfront fees and discounts and premiums on investments purchased
are accreted/amortized over the life of the respective investment.
Unamortized origination, structuring, closing, commitment and other
upfront fees are recorded as unearned income. Upon the prepayment of a
loan or debt security, any prepayment penalties and unamortized loan
origination, structuring, closing, commitment and other upfront fees are
recorded as interest income. Dividend income is recorded on the
ex-dividend date. Expenses are recorded on an accrual basis.
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(f) Organizational costs of the Company were expensed as incurred. Offering
costs were charged against paid-in capital.
(g) The Company has qualified and elected and intends to continue to qualify
for the tax treatment applicable to regulated investment companies under
Subchapter M of the Code, and, among other things, has made and intends to
continue to make the requisite distributions to its shareholders which
will relieve the Company from federal income and excise taxes. Therefore,
no provision has been recorded for federal income or excise taxes.
In order to qualify as a RIC, the Company is required to distribute
annually to its shareholders at least 90% of investment company taxable
income, as defined by the Code. To avoid federal excise taxes, the Company
must distribute annually at least 98% of its income (both ordinary income
and net capital gains).
In accordance with GAAP, book and tax basis differences relating to
distributions to shareholders and other permanent book and tax differences
are reclassified to capital in excess of par. In addition, the character
of income and gains to be distributed is determined in accordance with
income tax regulations that may differ from GAAP.
(h) Dividends and distributions to common shareholders are recorded on the
ex-date. The amount to be paid out as a dividend is determined by the
Board of Directors. Recent dividends declared by the Company were as
follows:
Dividend Amount
Per Share Outstanding Ex-Date Record Date Pay Date
--------------------- ------- ----------- --------
$0.20 December 29, 2005 December 31, 2005 January 31, 2006
$0.20 March 29, 2006 March 15, 2006 March 31, 2006
$0.23 June 28, 2006 June 15, 2006 June 30, 2006
$0.30 September 13, 2006 September 15, 2006 September 29, 2006
The Company has adopted a dividend reinvestment plan that provides for
reinvestmen f of shareholders, unless a shareholder elects to receive
cash. As a result, if thet of distributions on behal authorizes, and the
Company declares, a cash dividend, then shareholders who have Board of
Directors dividend reinvestment plan will have their cash dividends
automatically reinvestednot "opted out" of the Common Stock, rather than
receiving the cash dividends. in additional shares of
3. Agreements and Related Party Transaction
The Company has entered into an Investment Management Agreement (the
"Management Agreement") with the Investment Advisor, under which the Investment
Advisor, subject to the overall supervision of the Company's Board of
Directors, manages the day-to-day operations of, and provides investment
advisory services to, the Company. For providing these services, the Investment
Advisor receives a fee (the "Management Fee") from the Company at an annual
rate of 2.0% of the Company's total assets, including any assets acquired with
the proceeds of leverage. For services rendered under the Management Agreement
during the period commencing from July 25, 2005, the closing of the Offering
(the "Closing"), through and including the first twelve months of operations,
the Management Fee will be payable monthly in arrears. For services rendered
under the Management Agreement after that time, the Management Fee will be paid
quarterly in arrears. The Investment Advisor has contractually agreed to waive
its rights to receive one-half of the amount of the Management Fee the
Investment Advisor would otherwise be entitled to receive from the Company
until the first date on which 90% of the assets of the Company are invested in
portfolio companies in accordance with the Company's investment objective,
excluding investments in cash, cash equivalents, U.S. government securities and
other high-quality debt investments that mature in one year or less from the
date of investment, or the first anniversary of the Closing, whichever is
sooner (the "Ramp-Up Date"). Thereafter, the Investment Advisor has agreed to
waive, until such time as the Company has completed an initial public offering
of its Common Stock and listed its Common Stock on a national securities
exchange (collectively, the "Public Market Event"), one-quarter of the amount
of the Management Fee the Investment Advisor would otherwise be entitled to
receive from the Company. In addition, the Investment Advisor has agreed to (a)
waive Management Fees for any calendar year in excess of approximately $11.9
million until the earlier of (i) such time as the Company has completed the
Public Market Event or (ii) the fourth anniversary of the Company's inception
of operations and (b) waive Management Fees in excess of approximately $5.6
million during the fifth year of the Company's operations unless the Company
has completed the Public Market Event.
17
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and six months ended June 30, 2006, the Investment Advisor earned
$1,367,095 and $2,699,534 in management fees, net of the waiver provision, from
the Company.
The Management Agreement provides that the Investment Advisor or its affiliates
may be entitled to an incentive fee (the "Carried Interest") under certain
circumstances. The determination of the Carried Interest, as described in more
detail below, will result in the Investment Advisor or its affiliates receiving
no Carried Interest payments if returns to Company shareholders, as described
in more detail below, do not meet an 8.0% annualized rate of return and will
result in the Investment Advisor or its affiliates receiving less than the full
amount of the Carried Interest percentage until returns to shareholders exceed
an approximate 13.3% annualized rate of return.
Commencing on the Ramp-Up Date, the Company will pay to the Investment Advisor
or its affiliates at the same time as, and not in advance of, any distributions
in respect of the Company's Common Stock, (i) 50% of the amount by which the
cumulative distributions and amounts distributable to the holders of the Common
Stock of the Company exceed an 8% annualized rate of return on net asset value
on the Ramp-Up Date until the Investment Advisor or its affiliates have
received from the Company an amount equal to 20% of the sum of the cumulative
amounts distributed pursuant to this paragraph and the cumulative amounts of
net income (including realized capital gains in excess of realized capital
losses) in excess of net unrealized capital depreciation distributed to the
holders of the Company's Common Stock, and (ii) thereafter an amount equal to
20% of the sum of the amount distributed pursuant to this paragraph and the
cumulative amounts of net income (including realized capital gains in excess of
realized capital losses) in excess of net unrealized capital depreciation
distributed to the holders of the Company's Common Stock. After the Public
Market Event, if any, the amounts above will be measured and paid quarterly on
a rolling four-quarter basis and will take into account any decrease in net
unrealized depreciation during the measurement period to the extent such
decrease did not exceed the net amount of capital depreciation at the beginning
of such period and does not exceed the excess of cumulative realized capital
gains over cumulative realized capital losses.
During the three and six months ended June 30, 2006, no Carried Interest
amounts were earned by the Investment Advisor.
The Management Agreement provides that the Company will reimburse the
Investment Advisor for costs and expenses incurred by the Investment Advisor
for office space rental, office equipment and utilities allocable to the
performance by the Investment Advisor of its duties under the Management
Agreement, as well as any costs and expenses incurred by the Investment Advisor
relating to any non-investment advisory, administrative or operating services
provided by the Investment Advisor to the Company. For the three and six months
ended June 30, 2006, the Company incurred $203,179 and $281,136, respectively,
for costs and expenses reimbursable to the Investment Advisor under the
Management Agreement.
No person who is an officer, director or employee of the Investment Advisor and
who serves as a director of the Company receives any compensation from the
Company for such services. Directors who are not affiliated with the Investment
Advisor receive compensation for their services and reimbursement of expenses
incurred to attend meetings.
The Company has also entered into an Administration Agreement with BlackRock
Financial Management, Inc. (the "Administrator"), a majority-owned subsidiary
of The PNC Financial Services Group, Inc. ("PNC"), under which the
Administrator provides administrative services to the Company. For providing
these services, facilities and personnel, the Company reimburses the
Administrator for the Company's allocable portion of overhead and other
expenses incurred by the Administrator in performing its obligations under the
Administration Agreement, including rent and the Company's allocable portion of
the cost of certain of the Company's officers and their respective staffs.
For the three and six months ended June 30, 2006, the Company incurred $249,316
and $495,891, respectively, for administrative services expenses payable to the
Administrator under the Administration Agreement.
From time to time, the Investment Advisor or the Administrator may pay amounts
owed by the Company to third party providers of goods or services. The Company
will subsequently reimburse the Investment Advisor or the Administrator, as the
case may be, for such amounts paid on its behalf. Reimbursements to the
Investment Advisor for the three and six months ended June 30, 2006 were
$282,261 and $432,253, respectively, and reimbursements to the Administrator
18
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
for the three and six months ended June 30, 2006 were $2,594 and $27,494,
respectively. An additional $1,009 in reimbursements remains payable to the
Investment Advisor at June 30, 2006.
PFPC Inc. ("PFPC"), a subsidiary of PNC, provides administrative and accounting
services to the Company pursuant to a Sub-Administration and Accounting
Services Agreement. PFPC Trust Company, another subsidiary of PNC, provides
custodian services to the Company pursuant to a Custodian Services Agreement.
Also, PFPC provides transfer agency and compliance support services to the
Company pursuant to a Transfer Agency Agreement and a Compliance Support
Services Agreement, respectively. For the services provided to the Company by
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. PFPC may charge the Company additional fees for cash
overdraft balances or for sweeping excess cash balances.
For the three months and six months ended June 30, 2006, the Company incurred
$49,935 and $105,344, respectively, for administrative, accounting, custodian
and transfer agency services fees payable to PFPC and its affiliates under the
related agreements.
On July 25, 2005, in connection with the closing of the Offering, the Company
issued approximately 33,333,333 shares of its Common Stock to BlackRock Kelso
Capital Holding LLC, an entity for which the Investment Advisor serves as
manager, in exchange for total consideration of $500,000,000 ($15.00 per
share), consisting of $80,282,060 in cash and a portfolio of short-term
investments and cash equivalents valued at $419,717,940. The transaction was
effected in accordance with the Company's valuation procedures governing
securities transactions with affiliates and was ratified by the Board of
Directors.
On March 8, 2006, the Company's Board of Directors authorized the issuance and
sale from time to time of up to $2,500,000 in aggregate net asset value of
shares of the Company's Common Stock to certain existing and future employees
of the Investment Advisor at a price per share equal to the greater of $15.00
or the Company's most recently determined net asset value per share at the time
of sale. Pursuant to this authorization, on April 1, 2006 the Company issued
and sold in a private placement 54,000 shares of Common Stock for aggregate
proceeds of $810,000 to certain employees of the Investment Advisor. On August
10, 2006, the Company's Board of Directors authorized the issuance and sale
from time to time of an unlimited number of shares of the Company's Common
Stock to the Investment Advisor at a price per share equal to the Company's
most recently determined net asset value per share at the time of sale, such
shares to be used by the Advisor for employee compensation purposes. Sales
under both of the foregoing authorizations are expected to be exempt from the
registration requirements of the Securities Act of 1933.
At June 30, 2006, the Investment Advisor beneficially owned indirectly
approximately 766,000 shares of the Company's Common Stock, representing
approximately 2.1% of the total shares outstanding. At June 30, 2006, other
entities affiliated with the Administrator and PFPC beneficially owned
indirectly approximately 2,426,000 shares of the Company's Common Stock,
representing approximately 6.6% of the total shares outstanding. These
percentages of total shares outstanding did not change appreciably from
December 31, 2005. At June 30, 2006 and December 31, 2005, an entity affiliated
with the Administrator and PFPC owned 36.5% of the members' interests of the
Investment Advisor.
4. Earnings Per Share
The following information sets forth the computation of basic and diluted net
increase in net assets per share resulting from operations for the three and
six months ended June 30, 2006.
Three Months Ended Six Months Ended
June 30, 2006 June 30, 2006
------------- -------------
Numerator for basic and diluted net increase in net assets per share $11,170,450 $18,291,506
Denominator for basic and diluted weighted average shares 36,345,171 36,017,156
Basic/diluted net increase in net assets per share resulting from
operations $0.31 $0.51
19
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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
periods because there were no common stock equivalents outstanding during such
period.
5. Purchases and Sales/Repayments of Investments
Excluding short-term investments, the Company's purchases and sales/repayments
of investments for the three months ended June 30, 2006 totaled $188,254,574
and $29,107,373, respectively, and for the six months ended June 30, 2006
totaled $260,908,244 and $35,363,676, respectively.
6. Commitments and Contingencies
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.
7. Financial Highlights
The following per share data and ratios have been derived from information
provided in the financial statements. The following is a schedule of financial
highlights for a common share outstanding during the six months ended June 30,
2006:
Per Share Data:
Net asset value, beginning of period $ 14.95
---------------
Net investment income 0.46
Net realized and unrealized gain 0.05
---------------
Total from investment operations 0.51
---------------
Less: Dividends to shareholders from net
investment income (0.43)
---------------
Net change in net assets 0.08
---------------
Net asset value, end of period $ 15.03
===============
Total return (1)(2) 3.42%
Ratios / Supplemental Data:
Ratio of expenses to average net assets (3)
Before management fee waiver 2.57%
After management fee waiver 1.57%
Ratio of net investment income
to average net assets (3) 6.21%
Net assets, end of period $ 554,380,945
Portfolio turnover (2) 15%
--------------
(1) Total return is based on the change in net asset value per
share during the period and takes into account dividends and
distributions, if any, reinvested in accordance with the
Company's dividend reinvestment plan.
(2) Not annualized.
(3) Annualized.
20
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information contained in this section should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this report.
Overview
We were incorporated in Delaware on April 13, 2005 and were initially funded on
July 25, 2005. Our investment objective is to provide a combination of current
income and capital appreciation. We intend to invest primarily in debt and
equity securities of private U.S. middle-market companies.
We are externally managed and have elected to be treated as a BDC under the
1940 Act. As a BDC, we are required to comply with certain regulatory
requirements. For instance, we generally have to invest at least 70% of our
total assets in "qualifying assets," including securities of private U.S.
companies, cash, cash equivalents, U.S. government securities and high-quality
debt investments that mature in one year or less.
On July 25, 2005, we completed the Offering of 35,366,589 shares of our Common
Stock at a price of $15.00 per share, less a placement fee of $507,407 and
legal fees and other offering costs of $657,639. We received approximately
$529.3 million in net proceeds from the Offering.
We have qualified and elected to be treated as a regulated investment company,
or a RIC, under Subchapter M of the Code. To continue to qualify as a RIC, we
must, among other things, continue to meet certain source-of-income and asset
diversification requirements. Pursuant to these elections, we generally have
not had and will not have to pay corporate-level taxes on any income that we
distribute to our shareholders.
Portfolio and Investment Activity
The second quarter was active. We believe this level of activity is a result of
our expansive transaction network and growing team of investment professionals,
as well as current market conditions. During the quarter ended June 30, 2006,
we invested approximately $188.3 million across eight new and six existing
portfolio companies. The new investments consisted primarily of senior loans
secured by second liens ($141.6 million) and first liens ($39.3 million), and
subordinated debt ($7.0 million). For the year-to-date period through June 30,
2006, we invested $260.9 million across 14 new and 7 existing portfolio
companies.
During the quarter, we received proceeds from principal repayments/dispositions
of approximately $29.1 million. The majority of that total represents a
refinancing we completed for an existing portfolio company in which we
restructured the terms and increased the amount of our investment, enabling the
issuer to repay higher cost debt. For the year-to-date period through June 30,
2006, we received proceeds from principal repayments/dispositions of
approximately $35.4 million.
At June 30, 2006, our net portfolio (investments plus cash and cash
equivalents) of $577 million consisted of 35 portfolio companies and was
invested 61% in senior secured loans, 2% in subordinated debt/corporate notes,
1% in publicly traded, floating rate closed-end funds, less than 1% in common
stock/warrants and 36% in short-term investments (including cash and cash
equivalents). Our average portfolio company investment by market value was
approximately $10 million. Our largest portfolio company investment by market
value was approximately $40 million and our five largest portfolio company
investments by market value comprised approximately 26% of our net assets at
June 30, 2006. At December 31, 2005, our net portfolio of $539 million
consisted of 26 portfolio companies and was invested 25% in senior secured
loans, 1% in subordinated debt/corporate notes, 1% in publicly traded, floating
rate closed-end funds, less than 1% in common stock/warrants and 73% in
short-term investments (including cash and cash equivalents).
Our weighted average yield on invested capital other than closed-end funds,
short-term investments and cash equivalents was 11.4% at June 30, 2006 versus
10.9% at March 31, 2006 and 10.7% at December 31, 2005. The weighted average
yield on our invested capital including closed-end funds, short-term
investments and cash equivalents was 9.1% at June 30, 2006, versus 7.0% and
6.0% at March 31, 2006 and December 31, 2005, respectively. Net of expenses,
such yields were 7.6% at June 30, 2006, 5.5% at March 31, 2006 and 4.4% at
December 31, 2005. The weighted average yields on our subordinated
debt/corporate notes and senior secured loans were 12.8% and 11.5%,
21
respectively, at June 30, 2006 versus 10.7% and 10.9%, respectively, at March
31, 2006, and 10.3% and 10.8%, respectively, at December 31, 2005. Yields are
computed using interest rates and dividend yields as of the purchase date and
include amortization of loan origination and commitment fees, original issue
discount and market premium or discount, weighted by the value of the
respective investment when averaged.
At June 30, 2006, 89% of our long-term investments bear interest based on
floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate, and
11% bear interest at fixed rates. At December 31, 2005, more than 98% of our
long-term investments bore interest based on floating rates.
Results of Operations
We commenced operations on July 25, 2005 and, therefore, there is no comparable
period from the prior year with which to compare the results of operations for
the three and six months ended June 30, 2006.
Operating Results for the Three Months Ended June 30, 2006
Operating Income
Investment income totaled $12,144,635 for the three months ended June 30, 2006,
of which $8,176,419 was attributable to interest and amortization of upfront
fees on senior secured loans, $3,580,213 to interest earned on short-term
investments and cash equivalents, $206,451 to interest earned on subordinated
debt/corporate notes, $161,418 to dividends received from closed-end funds and
$20,134 to other income. In connection with the successful completion of a
refinancing for an existing portfolio company, during the three months ended
June 30, 2006 we recognized $1,125,114 of unamortized upfront loan fees and
prepayment fees as interest income attributable to senior secured loans. As we
continue to invest in longer-term investments, we expect that we will generate
additional income at rates higher than those we received on our investments
since our inception of operations, although there can be no assurance that we
will achieve this objective.
Operating Expenses
Net operating expenses for the three months ended June 30, 2006 were
$2,147,208, consisting of $1,367,095 in management fees (net of management fee
waiver of $1,367,361), $291,762 in administrative services expenses, $106,082
in professional fees, $203,179 in Investment Advisor expenses, $86,873 in
director fees, $46,566 in insurance expenses, and $45,651 in other expenses.
For the three months ended June 30, 2006, no incentive fee, or Carried
Interest, amounts were paid or owed to the Investment Advisor.
Net Investment Income
Net investment income was $9,997,427 for the three months ended June 30, 2006.
Net Realized Gain
Net realized gain on investments of $202,321 for the three months ended June
30, 2006 resulted primarily from the disposition of one subordinated
debt/corporate note position and one senior secured loan position.
Net Unrealized Appreciation
For the three months ended June 30, 2006, the change in net unrealized
appreciation was $970,702, which was comprised of an increase in net unrealized
appreciation on investments.
Net Increase in Net Assets Resulting From Operations
The net increase in net assets resulting from operations for the three months
ended June 30, 2006 was $11,170,450.
22
Operating Results for the Six Months Ended June 30, 2006
Operating Income
Investment income totaled $20,878,045 for the six months ended June 30, 2006,
of which $12,386,193 was attributable to interest and amortization of upfront
fees on senior secured loans, $7,706,119 to interest earned on short-term
investments and cash equivalents, $350,262 to interest earned on subordinated
debt/corporate notes, $313,337 to dividends received from closed-end funds and
$122,134 to other income. In connection with the successful completion of a
refinancing for an existing portfolio company, during the six months ended June
30, 2006 we recognized $1,125,114 of unamortized upfront loan fees and
prepayment fees as interest income attributable to senior secured loans. As we
continue to invest in longer-term investments, we expect that we will generate
additional income at rates higher than those we received on our investments
since our inception of operations, although there can be no assurance that we
will achieve this objective.
Operating Expenses
Net operating expenses for the six months ended June 30, 2006 were $4,200,629,
consisting of $2,699,534 in management fees (net of management fee waiver of
$2,699,800), $580,107 in administrative services expenses, $319,999 in
professional fees, $281,136 in Investment Advisor expenses, $157,061 in
director fees, $83,105 in insurance expenses, and $79,687 in other expenses.
For the six months ended June 30, 2006, no incentive fee, or Carried Interest,
amounts were paid or owed to the Investment Advisor.
Net Investment Income
Net investment income was $16,677,416 for the six months ended June 30, 2006.
Net Realized Loss
Net realized loss on investments of $202,845 for the six months ended June 30,
2006 resulted primarily from realized losses on the disposition of two
subordinated debt/corporate notes positions, which were partially offset by
realized gains on the disposition of one subordinated debt/corporate note
position and one senior secured loan position.
Net Unrealized Appreciation
For the six months ended June 30, 2006, the change in net unrealized
appreciation was $1,816,935, which was comprised of an increase in net
unrealized appreciation on investments of $1,804,895 and a decrease in net
unrealized depreciation on cash equivalents of $12,040.
Net Increase in Net Assets Resulting From Operations
The net increase in net assets resulting from operations for the six months
ended June 30, 2006 was $18,291,506.
Financial Condition, Liquidity and Capital Resources
On July 25, 2005, we completed a private placement of 35,366,589 shares of our
Common Stock at a price of $15.00 per share. The net proceeds from the Offering
of $529,333,799 consisted of cash of $109,615,859 and a contribution of
short-term investments and cash equivalents of $419,717,940.
On March 8, 2006, our Board of Directors authorized the issuance and sale from
time to time of up to $2,500,000 in aggregate net asset value of shares of our
Common Stock to certain existing and future employees of the Investment Advisor
at a price per share equal to the greater of $15.00 or our most recently
determined net asset value per share at the time of sale. Pursuant to this
authorization, on April 1, 2006 we issued and sold in a private placement
54,000 shares of Common Stock for aggregate proceeds of $810,000 to certain
employees of the Investment Advisor.
During the six months ended June 30, 2006, we generated cash primarily from
cash flows from operations, including interest earned on senior secured loans
and subordinated debt/corporate notes, as well as from temporary investments in
cash equivalents and other high-quality debt investments that mature in one
year or less. In the future, we may also fund a portion of our investments
through borrowings from banks and issuances of senior securities. As a business
23
development company, we are subject to regulations governing our operations
that affect our ability to raise additional capital. In the future, we may also
securitize a portion of our investments in senior secured loans or other
assets.
At June 30, 2006, we had $123,522,867 in cash and cash equivalents and
$81,872,660 in other short-term investments that we intend to use in our
operations.
Our primary uses of funds are investments in portfolio companies, payment of
fees and other operating expenses and cash distributions to shareholders.
Our operating activities resulted in a net use of cash of $183,131,103 for the
six months ended June 30, 2006, primarily due to net purchases of investments.
Our financing activities resulted in the inflow of cash of $17,681,623 for the
six months ended June 30, 2006, primarily due to temporary borrowings from our
custodian. In addition, our non-cash financing activities consisted of
$22,100,075 of dividend distributions reinvested.
Off-Balance Sheet Financing
At June 30, 2006, we had no off-balance sheet contractual obligations or
arrangements.
Dividends
We intend to distribute quarterly dividends to our shareholders. Our quarterly
dividends, if any, will be determined by our Board of Directors. Recent
dividends declared by the Company were as follows:
Dividend Amount
Per Share Outstanding Ex-Date Record Date Pay Date
--------------------- ------- ----------- --------
$0.20 December 29, 2005 December 31, 2005 January 31, 2006
$0.20 March 29, 2006 March 15, 2006 March 31, 2006
$0.23 June 28, 2006 June 15, 2006 June 30, 2006
$0.30 September 13, 2006 September 15, 2006 September 29, 2006
We have qualified and elected to be taxed as a regulated investment company, or
RIC, under Subchapter M of the Code. To maintain our RIC status, we must
distribute annually at least 90% of our ordinary income and realized net
short-term capital gains in excess of realized net long-term capital losses, if
any, out of the assets legally available for distribution. In order to avoid
certain excise taxes imposed on RICs, we currently intend to distribute during
each calendar year an amount at least equal to the sum of (1) 98% of our
ordinary income for the calendar year, (2) 98% of our capital gains in excess
of capital losses for the one-year period ending on October 31st and (3) any
ordinary income and net capital gains for preceding years that were not
distributed during such years. In addition, although we currently intend to
distribute realized net capital gains (i.e., net long-term capital gains in
excess of short-term capital losses), if any, at least annually, out of the
assets legally available for such distributions, we may in the future decide to
retain such capital gains for investment.
We maintain an "opt out" dividend reinvestment plan for our common
shareholders. As a result, if we declare a dividend, shareholders' cash
dividends will be automatically reinvested in additional shares of our Common
Stock, unless they specifically "opt out" of the dividend reinvestment plan so
as to receive cash dividends.
We may not be able to achieve operating results that will allow us to make
dividends and distributions at a specific level or to increase the amount of
these dividends and distributions from time to time. In addition, we may be
limited in our ability to make dividends and distributions due to the asset
coverage test for borrowings when applicable to us as a business development
company under the 1940 Act and due to provisions in future credit facilities.
If we do not distribute a certain percentage of our income annually, we will
suffer adverse tax consequences, including possible loss of our status as a
regulated investment company. We cannot assure shareholders that they will
receive any dividends and distributions or dividends and distributions at a
particular level.
With respect to the dividends paid to shareholders, income from origination,
structuring, closing, commitment and other upfront fees associated with
investments in portfolio companies is treated as taxable income and
accordingly, distributed to shareholders. For the three and six months ended
June 30, 2006, these fees totaled $445,722 and $773,222, respectively.
24
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to financial market risks, including changes in interest rates.
At June 30, 2006, 89% of our long-term investments bear interest based on
floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate. The
interest rates on such investments generally reset by reference to the current
market index after one to six months. In addition, at June 30, 2006, 36% of our
net portfolio consists of high quality short-term investments and cash
equivalents.
To illustrate the potential impact of changes in interest rates, we have
performed the following analysis based on our June 30, 2006 balance sheet and
assuming no changes in our investment structure. Net asset value is analyzed
using the assumptions that interest rates, as defined by the LIBOR and U.S.
Treasury yield curves, increase or decrease and that the yield curves of the
rate shocks will be parallel to each other. Under this analysis, an
instantaneous 100 basis point increase in LIBOR and U.S. Treasury yields would
cause a decline of approximately $1,800,000 in the value of our net assets at
June 30, 2006.
While hedging activities may insulate us against adverse changes in interest
rates, they may also limit our ability to participate in the benefits of lower
interest rates with respect to our portfolio of investments. During the three
and six months ended June 30, 2006, we did not engage in any hedging
activities.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15 under the Securities Exchange Act of
1934). Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our current disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company that is required to be disclosed by us in the reports
we file or submit under the Securities Exchange Act of 1934.
There have been no changes in our internal control over financial reporting
that occurred during our most recently completed fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party in any material pending legal proceeding, and no such
proceedings are known to be contemplated.
Item 1A. Risk Factors
Not required.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On April 1, 2006, we completed a private placement of 54,000 shares of our
common stock, par value $.001 per share, for aggregate proceeds of $810,000,
which were used for general corporate purposes. The placement was exempt from
the registration requirements of the Securities Act of 1933 (the "Securities
Act") pursuant to Section 4(2) of the Securities Act and Regulation D, Rule 506
promulgated thereunder for transactions not involving a public offering and
based on the fact that the common stock was issued to accredited investors.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
26
Item 6. Exhibits.
(a) Exhibits.
31.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certification of CEO and CFO Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On August 10, 2006, we filed a current report on Form 8-K, pursuant to
Item 7.01 reporting the issuance of a press release announcing a fiscal third
quarter dividend of $0.30 per share.
On May 9, 2006, we filed a current report on Form 8-K, pursuant to
Item 7.01 reporting the issuance of a press release announcing a fiscal second
quarter dividend of $0.23 per share.
On March 8, 2006, we filed a current report on Form 8-K, pursuant to
Item 7.01 reporting the issuance of a press release announcing a fiscal first
quarter dividend of $0.20 per share.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BLACKROCK KELSO CAPITAL CORPORATION
Date: August 11, 2006 By: /s/ James R. Maher
-----------------------
James R. Maher
Chief Executive Officer
Date: August 11, 2006 By: /s/ Frank D. Gordon
-----------------------
Frank D. Gordon
Chief Financial Officer
28
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, 2007).
(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: August 11, 2006 /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, 2007).
(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: August 11, 2006 /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 June 30, 2006 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: August 11, 2006
/s/ Frank D. Gordon
- --------------------
Name: Frank D. Gordon
Title: Chief Financial Officer
Date: August 11, 2006
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.