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, 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 (I.R.S. Employer Identification No.)
of Incorporation or Organization)
40 East 52nd Street, New York, New York 10022
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 212-810-5800
-------------------
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since last Report.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer or a non-accelerated filer as defined in Rule 12b-2 of the
Exchange Act. Large accelerated filer |_| Accelerated filer |_| Non-Accelerated
filer |X|
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |_| No |X|
The number of shares of the Registrant's common stock, $.001 par value per
share, outstanding at November 13, 2006, was 37,627,405.
BLACKROCK KELSO CAPITAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2006
Table of Contents
INDEX PAGE NO.
----- --------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Assets and Liabilities 4
Statements of Operations (unaudited) 5
Statements of Changes in Net Assets (unaudited) 6
Statements of Cash Flows (unaudited) 7
Schedules of Investments (unaudited) 8
Notes to Financial Statements (unaudited) 16
Item 2. Management's Discussion and Analysis of Financial Condition 23
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 1A. Risk Factors 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits 30
SIGNATURES 31
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.
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
SEPTEMBER 30, 2006
(UNAUDITED) DECEMBER 31, 2005
------------------------- ------------------------
ASSETS:
Cash and cash equivalents (amortized cost of $11,005,143 and $288,984,387) $ 11,004,790 $ 288,972,347
Investments, at fair value (amortized cost of $557,308,473 and $250,184,074) 559,518,512 250,436,350
Receivable for investments sold 2,724,328 996,250
Foreign currency, at fair value (cost of $119,714) 120,647 -
Interest receivable 6,798,358 1,656,131
Dividends receivable 12,250 -
Unrealized appreciation on forward foreign currency contract 113,698 -
Other assets 101,389 165,363
------------------------- ------------------------
Total Assets $ 580,393,972 $ 542,226,441
========================= ========================
LIABILITIES:
Payable for investments purchased $ 9,760,000 $ 4,198,296
Dividend distribution payable - 7,073,318
Legal fees (offering costs) payable - 587,080
Base management fees payable 1,541,975 455,329
Incentive management fees payable 1,309,382 -
Accrued administrative services expenses 1,249,019 508,950
Other accrued expenses and payables 781,841 698,619
------------------------- ------------------------
Total Liabilities 14,642,217 13,521,592
------------------------- ------------------------
NET ASSETS:
Common stock, par value $.001 per share, 40,000,000 common shares
authorized, 37,627,405 and 35,366,589 issued and outstanding 37,627 35,367
Paid-in capital in excess of par 563,233,775 529,298,432
Undistributed (distributions in excess of) net investment income 220,757 (870,327)
Accumulated net realized (loss) gain (61,904) 1,141
Net unrealized appreciation 2,321,500 240,236
------------------------- ------------------------
Total Net Assets 565,751,755 528,704,849
------------------------- ------------------------
Total Liabilities and Net Assets $ 580,393,972 $ 542,226,441
========================= ========================
Net Asset Value Per Share $ 15.04 $ 14.95
========================= ========================
The accompanying notes are an integral part of these financial statements.
4
BLACKROCK KELSO CAPITAL CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
JULY 25, 2005*
THREE MONTHS ENDED NINE MONTHS ENDED THROUGH
SEPTEMBER 30, 2006 SEPTEMBER 30, 2006 SEPTEMBER 30, 2005**
--------------------- --------------------- -----------------------
INVESTMENT INCOME:
Interest income $ 14,999,584 $ 35,442,158 $ 3,599,086
Dividend income 116,866 430,203 -
Other income - 122,133 -
--------------------- --------------------- -----------------------
Total investment income 15,116,450 35,994,494 3,599,086
--------------------- --------------------- -----------------------
EXPENSES:
Base management fees 2,818,865 8,218,199 1,976,340
Incentive management fees 1,309,382 1,309,382 -
Administrative services 295,260 875,367 216,708
Organizational - - 200,000
Professional fees 211,224 531,223 126,216
Investment Advisor expenses 200,994 482,130 132,616
Director fees 64,526 221,587 107,670
Insurance 42,194 125,299 45,278
Other 62,089 141,776 53,543
--------------------- --------------------- -----------------------
Expenses before management fee waiver 5,004,534 11,904,963 2,858,371
Management fee waiver (895,428) (3,595,228) (988,170)
--------------------- --------------------- -----------------------
Net expenses 4,109,106 8,309,735 1,870,201
--------------------- --------------------- -----------------------
NET INVESTMENT INCOME 11,007,344 27,684,759 1,728,885
--------------------- --------------------- -----------------------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments 430,880 228,035 -
Foreign currency (291,079) (291,079) -
--------------------- --------------------- -----------------------
Net realized gain (loss) 139,801 (63,044) -
--------------------- --------------------- -----------------------
Net change in unrealized appreciation (depreciation):
Investments 150,051 1,954,946 116,865
Foreign currency translations 114,631 114,631 -
Cash equivalents (353) 11,687 (47,505)
--------------------- --------------------- -----------------------
Net change in unrealized appreciation 264,329 2,081,264 69,360
--------------------- --------------------- -----------------------
Net realized and unrealized gain 404,130 2,018,220 69,360
--------------------- --------------------- -----------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 11,411,474 $ 29,702,979 $ 1,798,245
===================== ===================== =======================
Earnings Per Share $ 0.31 $ 0.82 $ 0.05
===================== ===================== =======================
Basic and Diluted Weighted-Average Shares Outstanding 36,901,928 36,315,321 35,366,589
* Inception of operations.
** Certain amounts have been reclassified to conform to the current
period's presentation.
The accompanying notes are an integral part of these financial statements.
5
BLACKROCK KELSO CAPITAL CORPORATION
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
NINE MONTHS JULY 25, 2005*
ENDED THROUGH
SEPTEMBER 30, 2006 SEPTEMBER 30, 2005
----------------------- -----------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income $ 27,684,759 $ 1,728,885
Net change in unrealized appreciation 2,081,264 69,360
Net realized loss (63,044) -
----------------------- -----------------------
Net increase in net assets resulting from operations 29,702,979 1,798,245
----------------------- -----------------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT
INCOME (26,593,678) -
----------------------- -----------------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 810,000 530,498,845
Less offering costs - (1,372,407)
Reinvestment of dividends 33,127,605 -
----------------------- -----------------------
Net increase in net assets resulting from capital share transactions 33,937,605 529,126,438
----------------------- -----------------------
TOTAL INCREASE IN NET ASSETS 37,046,906 530,924,683
Net assets at beginning of period 528,704,849 -
----------------------- -----------------------
Net assets at end of period $ 565,751,755 $ 530,924,683
======================= =======================
CAPITAL SHARE ACTIVITY:
Shares issued from subscriptions 54,000 35,366,589
Shares issued from reinvestment of dividends 2,206,816 -
----------------------- -----------------------
Total increase in shares 2,260,816 35,366,589
======================= =======================
ACCUMULATED DISTRIBUTIONS:
Undistributed net investment income $ 220,757 $ 1,728,885
======================= =======================
* Inception of operations.
The accompanying notes are an integral part of these financial statements.
6
BLACKROCK KELSO CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
JULY 25, 2005*
NINE MONTHS ENDED THROUGH
SEPTEMBER 30, 2006 SEPTEMBER 30, 2005
------------------------ -----------------------
OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 29,702,979 $ 1,798,245
Adjustments to reconcile net increase in net assets resulting from operations
to net cash used in operating activities:
Proceeds from dispositions (purchases) of short-term investments - net 76,990,928 (103,196,541)
Purchases of long-term investments (451,805,780) (20,257,000)
Purchases of foreign currency - net (413,610) -
Proceeds from sales/repayments of long-term investments 68,720,921 -
Net change in unrealized appreciation on investments (1,954,946) (116,865)
Net change in unrealized appreciation on foreign currency translations (114,631) -
Net realized gain on investments (228,035) -
Net realized loss on foreign currency 291,079 -
Amortization of premium/discount - net (802,433) (489,747)
Increase in receivable for investments sold (1,728,078) -
Increase in interest receivable (5,142,227) (187,253)
Increase in dividends receivable (12,250) -
Decrease (increase) in other assets 63,974 (122,332)
Increase in payable for investments purchased 5,561,704 8,990,000
(Decrease) increase in legal fees (offering costs) payable (587,080) 800,000
Increase in base management fees payable 1,086,646 436,992
Increase in incentive management fees payable 1,309,382 -
Increase in organization expenses payable - 200,000
Increase in accrued administrative services expenses 740,069 185,484
Increase in other accrued expenses and payables 83,222 437,969
------------------------ -----------------------
Net cash used in operating activities (278,238,166) (111,521,048)
------------------------ -----------------------
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock:
Cash 810,000 109,408,498
Contribution of short-term investments and cash equivalents - 419,717,940
Dividends paid - net of reinvestment (539,391) -
------------------------ -----------------------
Net cash provided by financing activities 270,609 529,126,438
------------------------ -----------------------
Net (decrease) increase in cash and cash equivalents (277,967,557) 417,605,390
Cash and cash equivalents, beginning of period 288,972,347 -
------------------------ -----------------------
Cash and cash equivalents, end of period $ 11,004,790 $ 417,605,390
======================== =======================
Supplemental disclosure of non-cash financing activities:
Dividend distributions reinvested $ 33,127,605 $ -
======================== =======================
* Inception of operations.
The accompanying notes are an integral part of these financial statements.
7
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (UNAUDITED)
SEPTEMBER 30, 2006
Principal
Amount
or
Number of Fair
Portfolio Company (a) Industry Shares/Units Cost (b) Value
- --------------------- -------- -------------- ----------------- -----------------
SHORT-TERM INVESTMENTS - 5.3%
- -----------------------------
Commercial Paper - 3.5%
Morgan Stanley & Co. Incorporated, 5.30%,
1/31/07 Securities Broker and Dealer $ 20,000,000 $ 20,000,000 $ 20,012,800
-------------- ----------------- -----------------
Master Notes - 1.8%
Citigroup Global Markets Inc., 5.45%,
8/27/07 Financial Services 10,000,000 10,000,000 10,000,000
-------------- ----------------- -----------------
$ 30,000,000 30,000,000 30,012,800
============== ----------------- -----------------
LONG-TERM INVESTMENTS - 93.6%
- -----------------------------
Subordinated Debt / Corporate Notes - 11.9%
American Residential Services L.L.C., 15.00%
(12.00% cash, 3.00% PIK), 9/28/13 HVAC/Plumbing Services $ 28,700,000 28,700,000 28,700,000 (e)
First Mercury Holdings, Inc., 13.41%
(LIBOR + 8.00%/Q), 8/15/12, acquired
8/12/05 (c) Insurance 1,800,000 1,784,888 1,840,500
Lucite International Luxembourg Finance
S.ar.l., PIK Loan, 12.11% PIK (EURIBOR
+ 9.00%/Q), 7/14/14 Chemicals 13,000,000 (d) 16,002,896 16,205,339
Mattress Giant Corporation, 13.00%
(11.00% cash, 2.00% PIK), 8/1/12 Bedding - Retail 13,667,000 13,534,135 13,667,000
U.S. Security Holdings, Inc., 13.00%
(11.00% cash, 2.00% PIK), 5/8/14,
acquired 5/10/06 (c) Security Services 7,000,000 7,000,000 7,017,500
----------------- -----------------
Total Subordinated Debt / Corporate Notes 67,021,919 67,430,339
----------------- -----------------
Senior Secured Loans - 81.3% (f)
AGY Holding Corp., Second Lien, 12.32%
(LIBOR + 7.00%), 4/7/13 Glass Yarns/Fibers $ 10,000,000 10,000,000 10,150,000
ALM Media, Inc., Second Lien, 11.12%
(LIBOR + 5.75%), 3/7/11 Publishing 39,750,000 39,752,161 39,849,375
American Safety Razor Company, LLC, Second
Lien, 11.72% (LIBOR + 6.25%), 1/30/14 Consumer Products 10,000,000 10,000,000 10,150,000
Applied Tech Products Corp. et al.,
Tranche A, First Lien, 9.72% (LIBOR +
4.50%), 10/24/10 Plastic Packaging 4,251,515 4,224,645 4,224,645 (e)
Applied Tech Products Corp. et al.,
Tranche B, Second Lien, 14.22% (LIBOR
+ 9.00%), 4/24/11 Plastic Packaging 1,951,515 1,934,782 1,934,782 (e)
Applied Tech Products Corp. et al.,
Tranche C, Third Lien, 17.72% (LIBOR +
6.30% cash, 6.20% PIK), 10/24/11 Plastic Packaging 726,445 640,496 640,496 (e)
Bankruptcy Management Solutions, Inc.,
Second Lien, 11.74% (LIBOR + 6.25%),
7/31/13 Software 25,000,000 25,000,000 25,390,625
Bare Escentuals Beauty, Inc., Second Lien,
14.25% (Base Rate + 6.00%), 2/18/13 Cosmetics 4,000,000 4,000,000 4,000,000
The accompanying notes are an integral part of these financial statements.
8
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (UNAUDITED) (continued)
SEPTEMBER 30, 2006
Principal
Amount
or
Number of Fair
Portfolio Company (a) Industry Shares/Units Cost (b) Value
- --------------------- -------- -------------- ----------------- -----------------
Benchmark Medical Holdings Inc., First Lien,
8.65% (LIBOR + 3.25%), 12/27/12 Rehabilitation Centers $ 1,990,000 $ 1,990,000 $ 1,930,300
Benchmark Medical Holdings, Inc., Second
Lien, 12.06% (LIBOR + 7.00%), 6/27/13 Rehabilitation Centers 9,000,000 9,000,000 8,730,000
Cambridge International, Inc., Second Lien,
11.87% (LIBOR + 6.50%), 11/11/13 Metal Conveyor Belts 20,500,000 20,305,770 20,295,000
Cannondale Bicycle Corporation, Second Lien,
12.37% (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, 10.37% (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 20,002,222 19,715,218 19,715,218 (e)
Data Transmission Network Corporation,
Second Lien, 13.39% (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 1,020,163
Deluxe Entertainment Services Group Inc.,
Second Lien, 13.62% (LIBOR + 8.25%),
7/28/11 Entertainment 16,000,000 16,000,000 16,460,000
DynaVox Systems LLC, Term Loan B, First Lien, Augmentative
9.00% (LIBOR + 3.50%), 6/30/11 Communication Products 3,491,250 3,466,478 3,491,250
DynaVox Systems LLC, Term Loan C, First Lien, Augmentative
10.50% (LIBOR + 5.00%), 12/13/11 Communication Products 1,750,000 1,737,594 1,750,000
Electrical Components International Holdings
Company, Second Lien, 11.78% (LIBOR +
6.50%), 5/1/14 Electronics 20,000,000 20,000,000 20,100,000
Event Rentals, Inc., First Lien, 10.77%
(LIBOR + 5.25%), 11/17/11 Party Rentals 14,115,767 14,115,767 14,115,767 (e)
Event Rentals, Inc., Acquisition Loan,
First Lien, 10.74% (LIBOR + 5.25%),
11/17/11 Party Rentals 19,423,598 19,423,598 19,423,598 (e)
Facet Technologies, LLC, Second Lien, 12.33%
LIBOR + 7.00%), 1/26/12 Medical Devices 27,000,000 27,000,000 27,000,000 (e)
Fitness Together Franchise Corporation,
First Lien, 11.75% (LIBOR + 6.25%),
7/14/12 Personal Fitness 13,900,000 13,630,573 13,630,573 (e)
Gleason Corporation, Second Lien, 10.97%
(LIBOR + 5.50%), 12/30/13 Gear Production Machinery 16,000,000 16,000,000 16,180,000
Haggar Clothing Co., Second Lien, 12.28%
(LIBOR + 7.00%), 11/1/11 Apparel 2,500,000 2,478,811 2,500,000
Heartland Automotive Services II Inc. et al.,
Term Loan A, First Lien, 9.16% (LIBOR +
3.75%), 2/27/12 Automobile Repair 6,755,662 6,749,138 6,789,441
Heartland Automotive Services II Inc. et al.,
Acquisition Loan (Funded), First Lien,
9.51%, (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
The accompanying notes are an integral part of these financial statements.
9
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (UNAUDITED) (continued)
SEPTEMBER 30, 2006
Principal
Amount
or
Number
of Fair
Portfolio Company (a) Industry Shares/Units Cost (b) Value
- ----------------- -------- ------------- ------------- --------------
HIT Entertainment, Inc., Second Lien, 10.83%
(LIBOR + 5.50%), 2/26/13 Entertainment $ 1,000,000 $ 1,000,000 $ 1,005,000
International Radiology Group, L.L.C. et al., First Healthcare Management
Lien, 8.58% (LIBOR + 3.25%), 6/30/11 Services 4,960,227 4,913,151 4,960,227
International Radiology Group, L.L.C. et al., Healthcare Management
Second Lien, 12.33% (LIBOR + 7.00%), 6/30/12 Services 10,000,000 9,904,243 10,000,000
MacAndrews Deluxe Holdings LLC, First Lien,
13.00%, 7/28/11 Entertainment 14,000,000 14,000,000 14,105,000
Oriental Trading Company, Inc., Second Lien, 11.47% Party Supplies and
(LIBOR + 6.00%), 1/31/14 Novelties 3,000,000 3,000,000 2,997,501
Precision Parts International Services Corp. et al.,
First Lien, 9.14% (LIBOR + 3.75%), 9/30/11 Automotive Parts 4,927,500 4,927,500 4,927,500
Premier Yachts, Inc. et al., Term A, First Lien
9.08% (LIBOR + 3.75%), 8/22/12 Entertainment Cruises 7,944,588 7,905,609 7,904,865
Premier Yachts, Inc. et al., Term B, First Lien,
12.33% (LIBOR + 7.00%), 8/22/13 Entertainment Cruises 1,750,000 1,741,390 1,741,250
Prism Business Media Holdings, Inc., Second Lien,
11.49% (LIBOR + 6.00%), 9/30/13 Information Services 11,000,000 10,990,237 10,972,500
Professional Paint, Inc., Second Lien, 11.38%
(LIBOR + 5.75%), 5/31/13 Paint and Coatings 16,000,000 16,000,000 16,120,000
QTC Acquisition Inc., Second Lien, 11.82%
(LIBOR + 6.50%), 5/10/13 Disability Evaluations 23,000,000 22,937,877 23,000,000
Robertson Aviation, L.L.C., First Lien, 9.14%
(LIBOR + 3.50%), 4/19/13 Aviation Fuel Systems 4,850,481 4,838,765 4,874,733
Stolle Machinery Company, LLC, Second Lien, 11.37%
(LIBOR + 6.00%), 9/29/13 Canning Machinery 8,500,000 8,500,000 8,569,063
United Subcontractors, Inc., Second Lien, 12.86%
(LIBOR + 7.25%), 6/27/13 Building and Construction 10,000,000 10,000,000 9,950,000
Wastequip, Inc., Second Lien, 10.82%
(LIBOR + 5.50%), 7/15/12 Waste Treatment 500,000 500,000 505,000
Wembley, Inc., Second Lien, 9.70%
(LIBOR + 4.25%), 8/23/12 Gaming 1,000,000 1,000,000 1,008,750
Westward Dough Operating Company, LLC, Term
Loan A, First Lien, 9.37% (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, 12.37% (LIBOR + 7.00%),
3/30/11 Restaurants 8,000,000 8,000,000 8,000,000 (e)
------------- ------------- --------------
Total Senior Secured Loans $ 459,540,770 458,323,803 460,112,622
============= ------------- --------------
Preferred Stock - 0.2%
Facet Holdings Corp., Class A, 12.00% PIK Medical Devices 900 900,000 900,000 (e)
Fitness Together Holdings, Inc., Series A, 8.00% PIK Personal Fitness 187,500 187,500 187,500 (e)
------------- --------------
Total Preferred Stock 1,087,500 1,087,500
------------- --------------
The accompanying notes are an integral part of these financial statements.
10
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (UNAUDITED) (continued)
SEPTEMBER 30, 2006
Principal
Amount
or
Number
of Fair
Portfolio Company (a) Industry Shares/Units Cost (b) Value
- ----------------- -------- ------------- ------------- --------------
Common Stock - 0.4% (g)
Facet Holdings Corp. Medical Devices 10,000 $ 100,000 $ 100,000 (e)
Fitness Together Holdings, Inc. Personal Fitness 62,500 62,500 62,500 (e)
MGHC Holding Corporation Bedding - Retail 205,000 2,050,000 2,050,000 (e)
------------- --------------
Total Common Stock 2,212,500 2,212,500
------------- --------------
Limited Partnership Interest - 0.1% (g)
ARS Co-Investors, L.P. HVAC/Plumbing Services - 324,216 324,216 (e)
------------- --------------
Equity Warrants - 0.1% (g)
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)
Fitness Together Holdings, Inc., expire 7/14/16 Personal Fitness 105,263 56,000 56,000 (e)
------------- --------------
Total Equity Warrants 446,112 446,112
------------- --------------
TOTAL LONG-TERM INVESTMENTS
INCLUDING UNEARNED INCOME 529,416,050 531,613,289
UNEARNED INCOME - (0.4)% (2,107,577) (2,107,577)
------------- --------------
TOTAL LONG-TERM INVESTMENTS 527,308,473 529,505,712
------------- --------------
TOTAL INVESTMENTS - 98.9% $ 557,308,473 559,518,512
============= --------------
OTHER ASSETS & LIABILITIES (NET) - 1.1% 6,233,243
--------------
NET ASSETS - 100.0% $ 565,751,755
==============
- -------------------
(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 preferred and common stock, limited partnership interest 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 1.6% of net assets at September 30, 2006.
(d) Denominated in Euro ((euro)).
(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 $172,347,830, or 30.5% of net assets, at September
30, 2006.
The accompanying notes are an integral part of these financial statements.
11
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (UNAUDITED) (continued)
SEPTEMBER 30, 2006
(f) Approximately 92% 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), Euro Interbank Offered Rate (EURIBOR), 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 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).
(g) Non-income producing securities.
The accompanying notes are an integral part of these financial statements.
12
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS
DECEMBER 31, 2005
Principal
Amount or
Number
of Fair
Portfolio Company (a) Industry (b) Shares/Units Cost (c) Value
- ----------------- -------- --------------- --------------- ---------------
SHORT-TERM INVESTMENTS - 20.1%
- ------------------------------
Asset-Backed Security - 2.8%
RACERS Trust, Series 2005-17-O, 4.39%
(LIBOR + 0.02%/Q), 8/21/06, acquired
8/29/05 (d) Asset-Backed Security $ 15,000,000 $ 15,000,000 $ 15,006,300
--------------- --------------- ---------------
Certificates of Deposit - 5.7%
DEFPA BANK plc, New York, 4.53%, 10/16/06 Banking 15,000,000 15,000,000 14,961,713
Washington Mutual Bank N.A., 4.46%, 3/28/06 Banking 15,000,000 15,000,000 14,999,820
--------------- --------------- ---------------
Total Certificates of Deposit 30,000,000 30,000,000 29,961,533
--------------- --------------- ---------------
Commercial Paper - 11.6%
Barclays US Funding Corp., 4.24%, 2/3/06 Banking 26,000,000 25,900,019 25,900,019
BNP Paribas (Canada), 3.83%, 1/24/06 Banking 1,500,000 1,496,397 1,496,397
Credit Suisse First Boston USA, Inc., 3.83%,
1/27/06 Securities Broker and Dealer 8,000,000 7,978,626 7,978,626
Morgan Stanley & Co. Incorporated, 4.08%,
8/4/06 Securities Broker 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 - 24.8% (e)
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.
13
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (continued)
DECEMBER 31, 2005
Principal
Amount or
Number
of Fair
Portfolio Company (a) Industry (b) Shares/Units Cost (c) Value
- ----------------- -------- --------------- --------------- ---------------
Cannondale Bicycle Corporation, Second Lien,
11.53% (LIBOR + 7.00%), 6/5/10 Bicycles/Apparel $ 10,000,000 $ 10,000,000 $ 10,000,000 (f)
Champion Energy Corporation et al., First
Lien, 13.38% (LIBOR + 9.00%), 6/30/09 Heating and 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, Automobile and
8.50% (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.
14
BLACKROCK KELSO CAPITAL CORPORATION
SCHEDULES OF INVESTMENTS (continued)
DECEMBER 31, 2005
Principal
Amount or
Number
of Fair
Portfolio Company (a) Industry (b) Shares/Units Cost (c) Value
- ----------------- -------- --------------- --------------- ---------------
Closed-End Funds - 1.4%
Eaton Vance Floating-Rate Income Trust Closed-End Fund 175,000 $ 2,988,408 $ 2,952,250
Nuveen Floating Rate Income Fund Closed-End Fund 94,400 1,159,147 1,188,496
PIMCO Floating Rate Strategy Fund Closed-End Fund 170,000 2,997,026 3,036,200
--------------- ---------------
Total Closed-End Funds 7,144,581 7,176,946
--------------- ---------------
Equity Warrants - 0.0% (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.
15
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 periods, 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.
16
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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.
17
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
$0.30 September 13, 2006 September 15, 2006 September 29, 2006
The Company has adopted a dividend reinvestment plan that provides for
reinvestment of distributions on behalf of shareholders, unless a
shareholder elects to receive cash. As a result, if the Board of Directors
authorizes, and the Company declares, a cash dividend, then shareholders
who have not "opted out" of the dividend reinvestment plan will have their
cash dividends automatically reinvested in additional shares of Common
Stock, rather than receiving the cash dividends.
(i) The Company may enter into forward foreign currency contracts from time to
time to facilitate settlement of purchases and sales of investments
denominated in foreign currencies or to help mitigate the impact that an
adverse change in foreign exchange rates would have on the value of the
Company's investments denominated in foreign currencies. A forward foreign
currency contract is a commitment to purchase or sell a foreign currency at
a future date (usually the security transaction settlement date) at a
negotiated forward rate. Risks may arise as a result of the potential
inability of the counterparties to meet the terms of their contract.
Details of the open forward foreign currency contract at September 30, 2006
were as follows.
US$ Value at
Foreign Currency Amount Purchased / US$ Value at September 30, Unrealized
Bought/Sold Settlement Date Sold Settlement Date 2006 Appreciation
----------- --------------- ---- --------------- ---- ------------
Euro January 10, 2007 12,900,000 Sold $16,572,631 $16,458,933 $113,698
There were no open forward foreign currency contracts at December 31, 2005.
(j) Foreign currency amounts are translated into United States dollars on the
following basis:
(1) market value of investment securities, other assets and liabilities --
at the spot exchange rate on the last business day of each month; and
(2) purchases and sales of investment securities, income and expenses --
at the rates of exchange prevailing on the respective dates of such
transactions.
18
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The Company isolates that portion of the results of operations arising as a
result of changes in the foreign exchange rates from the fluctuations
arising from changes in the market prices of investments held at period
end. Similarly, the Company isolates the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of portfolio investments sold during the period.
Investments denominated in foreign currencies and foreign currency
transactions may involve certain considerations and risks not typically
associated with those of domestic origin, including unanticipated movements
in the value of the foreign currency relative to the U.S. dollar.
(k) Recently Issued Accounting Pronouncements:
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions. FIN 48 requires that the
Company recognize in its financial statements the impact of a tax position,
and if that position is more likely than not of being sustained on audit,
based on the technical merits of the position. The provisions of FIN 48 are
effective for fiscal years beginning after December 15, 2006, with the
cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. The Company is currently
evaluating the impact of adopting FIN 48 on its financial statements. At
this time, the impact to the Company's financial statements has not been
determined.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements ("SFAS 157"), which defines fair
value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. The provisions of SFAS 157 are
effective for fiscal years beginning after November 15, 2007. The Company
is currently evaluating the impact of adopting SFAS 157 on its financial
statements. At this time, the impact to the Company's financial statements
has not been determined.
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 base
management 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.
19
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
For the three and nine months ended September 30, 2006 and for the period July
25, 2005 (inception of operations) to September 30, 2005, the Investment Advisor
earned $1,923,437, $4,622,971 and $988,170, respectively, in base 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 management 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. The determination of the
Carried Interest is subject to any applicable limitations under the 1940 Act and
the Investment Advisors Act of 1940.
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 in accordance with the Management Agreement 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 in accordance with the Management
Agreement 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, 2006 (Ramp-Up Date) through September 30, 2006, the
Investment Advisor earned $1,309,382 in incentive management fees, or Carried
Interest, from the Company. No incentive management fees were earned prior to
the Ramp-Up Date.
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 nine months ended September
30, 2006 and for the period July 25, 2005 (inception of operations) to September
30, 2005, the Company incurred $200,994, $482,130 and $132,616, 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") 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. The PNC Financial Services
Group, Inc. ("PNC") is a significant shareholder of the ultimate parent of the
Administrator.
For the three and nine months ended September 30, 2006 and for the period July
25, 2005 (inception of operations) to September 30, 2005, the Company incurred
$252,054, $747,945 and $185,484, respectively, for administrative services
expenses payable to the Administrator under the Administration Agreement.
20
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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 nine months ended September 30, 2006 and
for the period July 25, 2005 (inception of operations) to September 30, 2005
were $231,124, $663,377 and $0, respectively. Reimbursements to the
Administrator for the three and nine months ended September 30, 2006 and for the
period July 25, 2005 (inception of operations) to September 30, 2005, were
$3,614, $31,107 and $180,910, respectively. An additional $1,857 and $10,935 in
reimbursements were payable to the Investment Advisor at September 30, 2006 and
December 31, 2005, respectively.
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 Trust Company may charge the Company additional fees for cash
overdraft balances or for sweeping excess cash balances.
For the three months and nine months ended September 30, 2006 and for the period
July 25, 2005 (inception of operations) to September 30, 2005, the Company
incurred $52,996, $158,340 and $33,450, 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 September 30, 2006, the Investment Advisor beneficially owned indirectly
approximately 775,000 shares of the Company's Common Stock, representing
approximately 2.1% of the total shares outstanding. At September 30, 2006, other
entities affiliated with the Administrator and/or PFPC beneficially owned
indirectly approximately 2,475,000 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 September 30, 2006 and December 31, 2005, an entity affiliated with
the Administrator owned 36.5% of the members' interests of the Investment
Advisor.
On September 29, 2006, Merrill Lynch & Co., Inc. ("Merrill Lynch") contributed
its investment management business, Merrill Lynch Investment Managers ("MLIM"),
to BlackRock, Inc. ("BlackRock"), the ultimate parent of the Company's
Administrator and of a significant holder of the members' interests of the
Investment Advisor, to form a new investment management company. The new company
operates under the BlackRock name and is governed by a board of directors with a
majority of independent members. Merrill Lynch will own no more than 49.8% of
the capital stock of the new company on a fully diluted basis and no more than
45% on an undiluted basis. PNC owns approximately
21
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
34% of the new company's common stock. Prior to September 29, 2006, PNC was a
majority shareholder of BlackRock.
The Company earned $132,101 and $335,362 in interest income on investments in
money market securities issued by MLIM or its former affiliates for the three
and nine months ended September 30, 2006, respectively, and $66,670 for the
period July 25, 2005 (inception of operations) to September 30, 2005. The
Company held no investments in securities issued by MLIM or its former
affiliates at September 30, 2006. From time to time, former affiliates of MLIM
may serve as broker/dealer or agent for the Company or for portfolio companies
in which the Company invests. For the period July 25, 2005 (inception of
operations) to September 30, 2006, the Company did not make any payments to
former MLIM affiliates for such services.
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
nine months ended September 30, 2006 and for the period July 25, 2005 (inception
of operations) to September 30, 2005.
Three Months Nine Months Ended July 25, 2005*
Ended Ended Through
September 30, 2006 September 30, 2006 September 30, 2005
------------------ ------------------ ------------------
Numerator for basic and diluted net increase in net
assets per share $11,411,474 $29,702,979 $1,798,245
Denominator for basic and diluted weighted average
shares 36,901,928 36,315,321 35,366,589
Basic/diluted net increase in net assets per share
resulting from operations $0.31 $0.82 $0.05
* Inception of operations.
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
periods.
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 September 30, 2006 totaled
$190,897,536 and $33,357,245, respectively, and for the nine months ended
September 30, 2006 totaled $451,805,780 and $68,720,921, 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.
22
BLACKROCK KELSO CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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 nine months ended September
30, 2006 and during the period July 25, 2005 (inception of operations) to
September 30, 2005:
NINE MONTHS JULY 25, 2005 (1)
ENDED THROUGH
SEPTEMBER 30, 2006 SEPTEMBER 30, 2005
----------------------- ------------------------
Per Share Data:
Net asset value, beginning of period $ 14.95 $ -
----------------------- ------------------------
Gross proceeds from Offering - 15.00
Offering costs - (0.04)
----------------------- ------------------------
Net proceeds from Offering - 14.96
Net investment income 0.76 0.05
Net realized and unrealized gain 0.06 0.00 (2)
----------------------- ------------------------
Total from investment operations 0.82 0.05
----------------------- ------------------------
Less: Dividends to shareholders from net
investment income (0.73) -
----------------------- ------------------------
Net change in net assets 0.09 15.01
----------------------- ------------------------
Net asset value, end of period $ 15.04 $ 15.01
======================= ========================
Total return (3)(4) 5.55% 0.07%
Ratios / Supplemental Data:
Ratio of expenses to average net assets (5)
Before management fee waiver 2.91% 2.94%
After management fee waiver 2.03% 1.92%
Ratio of net investment income
to average net assets (5) 6.76% 1.78%
Net assets, end of period $ 565,751,755 $ 530,924,683
Portfolio turnover (4) 22% -
-----------
(1) Inception of operations.
(2) Less than $0.01.
(3) 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.
(4) Not annualized.
(5) Annualized.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in this section should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this report.
Overview
We were incorporated in Delaware on April 13, 2005 and were initially funded on
July 25, 2005. Our investment objective is to provide a combination of current
income and capital appreciation. We intend to invest primarily in debt
and equity securities of private U.S. middle-market companies.
23
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
We closed a substantial number of new and diverse investments in portfolio
companies during the third quarter of 2006, a result of our Investment Advisor's
investment platform and favorable market conditions. During the quarter, we
invested approximately $190.9 million across 11 new and 3 existing portfolio
companies. The new investments consisted primarily of senior loans secured by
second liens ($101.9 million) and first liens ($27.9 million), subordinated
debt/corporate notes ($57.4 million) and equity securities ($3.7 million). For
the year-to-date period through September 30, 2006, we invested $451.8 million
across 25 new and 10 existing portfolio companies.
During the quarter, we received proceeds from sales/repayments of approximately
$33.4 million. For the year-to-date period through September 30, 2006, we
received proceeds from sales/repayments of approximately $68.7 million.
At September 30, 2006, our net portfolio (investments plus cash and cash
equivalents) of $571 million consisted of 40 portfolio companies and was
invested 80% in senior secured loans, 12% in subordinated debt/corporate notes,
1% in equity investments and 7% in short-term investments (including cash and
cash equivalents). Our average portfolio company investment by market value was
approximately $13 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 27% of our net assets at
September 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 equity investments and 73% in short-term
investments (including cash and cash equivalents).
Our weighted average yield on invested capital excluding equity investments,
closed-end funds, short-term investments and cash equivalents was 12.0% at
September 30, 2006 versus 11.4% at June 30, 2006, 10.9% at March 31, 2006 and
10.7% at December 31, 2005. The weighted average yield on our invested capital
including equity investments, closed-end funds, short-term investments and cash
equivalents was 11.5% at September 30, 2006 versus 9.1% at June 30, 2006, 7.0%
at March 31, 2006 and 6.0% at December 31, 2005. Net of expenses, such yields
were 9.5% at September 30, 2006, compared with 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 14.1% and 11.7%,
respectively, at September 30, 2006 versus 12.8% and 11.5%, respectively, at
June 30, 2006, 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 September 30, 2006, 88% of our long-term investments bear interest based on
floating rates, such as LIBOR, EURIBOR, the Federal Funds Rate or the Prime
Rate, and 12% bear interest at fixed rates. At December 31, 2005, more than 98%
of our long-term investments bore interest based on floating rates.
24
Results of Operations
Operating Results for the Three Months Ended September 30, 2006 and the Period
Ended September 30, 2005
Operating results for the prior period July 25, 2005 (inception of operations)
to September 25, 2005 ("the period ended September 30, 2005") reflect our
initial period of operations, during which our portfolio was primarily invested
in cash equivalents and short-term investments.
Operating Income
Investment income totaled $15,116,450 and $3,599,086, respectively, for the
three months ended September 30, 2006 and the period ended September 30, 2005,
of which $12,565,057 and $22,916, respectively, were attributable to interest
and amortization of upfront fees on senior secured loans, $1,408,296 and
$3,542,146, respectively, to interest earned on short-term investments and cash
equivalents, $1,026,230 and $34,024, respectively, to interest earned on
subordinated debt/corporate notes, and $116,867 and $0, respectively, to
dividends from closed-end funds and preferred stock. 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 September 30, 2006 and the
period ended September 30, 2005 were $4,109,106 and $1,870,201, respectively,
consisting of $1,923,437 and $988,170, respectively, in base management fees
(net of management fee waiver of $895,428 and $988,170, respectively),
$1,309,382 and $0, respectively, in incentive management fees, or Carried
Interest, owed to the Investment Advisor, $295,260 and $216,708, respectively,
in administrative services expenses, $0 and $200,000, respectively, in expenses
related to the organization of the Company, $211,224 and $126,216, respectively,
in professional fees, $200,994 and $132,616, respectively, in Investment Advisor
expenses, $64,526 and $107,670, respectively, in director fees, $42,194 and
$45,278, respectively, in insurance expenses, and $62,089 and $53,543,
respectively, in other expenses.
Net Investment Income
Net investment income was $11,007,344 and $1,728,885, respectively, for the
three months ended September 30, 2006 and the period ended September 30, 2005.
Net Realized Gain
Net realized gain on investments of $139,801 for the three months ended
September 30, 2006 was the result of $430,880 in net gains realized from the
disposition of investments partially offset by $291,079 in net losses realized
on foreign currency transactions during the period. For the period ended
September 30, 2005, net realized gain on investments was $0.
Net Unrealized Appreciation
For the three months ended September 30, 2006 and the period ended September 30,
2005, the change in net unrealized appreciation was $264,329 and $69,360,
respectively, which was comprised of an increase in net unrealized appreciation
on investments of $150,051 and $116,865, respectively, an increase in net
unrealized depreciation on cash equivalents of $353 and $47,505, respectively,
and net unrealized appreciation on foreign currency translations of $114,631 and
$0, respectively.
25
Net Increase in Net Assets Resulting from Operations
The net increase in net assets resulting from operations for the three months
ended September 30, 2006 and the period ended September 30, 2005 was $11,411,474
and $1,798,245, respectively.
Operating Results for the Nine Months Ended September 30, 2006
We commenced operations on July 25, 2005 and, therefore, have no period with
which to reasonably compare results for the nine months ended September 30,
2006.
Operating Income
Investment income totaled $35,994,494 for the nine months ended September 30,
2006, of which $24,951,251 was attributable to interest and amortization of
upfront fees on senior secured loans, $9,114,415 to interest earned on
short-term investments and cash equivalents, $1,376,492 to interest earned on
subordinated debt/corporate notes, $430,203 to dividends from closed-end funds
and preferred stock and $122,133 to other income. 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 nine months ended September 30, 2006 were
$8,309,735, consisting of $4,622,971 in base management fees (net of management
fee waiver of $3,595,228), $1,309,382 in incentive management fees, or Carried
Interest, owed to the Investment Advisor, $875,367 in administrative services
expenses, $531,223 in professional fees, $482,130 in Investment Advisor
expenses, $221,587 in director fees, $125,299 in insurance expenses, and
$141,776 in other expenses.
Net Investment Income
Net investment income was $27,684,759 for the nine months ended September 30,
2006.
Net Realized Loss
Net realized loss on investments of $63,044 for the nine months ended September
30, 2006 was the result of $291,079 in net losses realized on foreign currency
transactions partially offset by $228,035 in net gains realized on the
disposition of investments during the period.
Net Unrealized Appreciation
For the nine months ended September 30, 2006, the change in net unrealized
appreciation was $2,081,264, which was comprised of an increase in net
unrealized appreciation on investments of $1,954,946, an increase in net
unrealized appreciation on cash equivalents of $11,687, and unrealized
appreciation on foreign currency translations of $114,631.
Net Increase in Net Assets Resulting from Operations
The net increase in net assets resulting from operations for the nine months
ended September 30, 2006 was $29,702,979.
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
26
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 nine months ended September 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 dividends received from closed-end fund
holdings. In the future, we may also fund a portion of our investments through
borrowings from banks and issuances of senior securities. As a business
development company, we are subject to regulations governing our operations that
affect our ability to raise additional capital. In the future, we may also
securitize a portion of our investments in senior secured loans or other assets.
At September 30, 2006, we had $11,004,790 in cash and cash equivalents and
$30,012,800 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 $278,238,166 for the
nine months ended September 30, 2006, primarily due to net purchases of
investments.
Our financing activities resulted in the inflow of cash of $270,609 for the nine
months ended September 30, 2006, primarily due to proceeds from capital
subscriptions. In addition, our non-cash financing activities consisted of
$33,127,605 of dividend distributions reinvested.
Off-Balance Sheet Financing
At September 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
27
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.
To the extent we perform substantial services in connection with investments in
portfolio companies, the associated income from origination, structuring,
closing, commitment and other upfront fees is treated as taxable income and
accordingly, distributed to shareholders as dividends. For the three and nine
months ended September 30, 2006, fees for such services totaled $1,636,982 and
$2,200,829, respectively.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to financial market risks, including changes in interest rates.
At September 30, 2006, 88% of our long-term investments bear interest based on
floating rates, such as LIBOR, EURIBOR, 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 September 30,
2006, 7% 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 September 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 $2,300,000 in the value of our net assets at
September 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 nine months ended September 30, 2006, we did not engage in any interest rate
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.
28
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
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
29
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.
30
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: November 14, 2006 By: /s/ James R. Maher
-----------------------
James R. Maher
Chief Executive Officer
Date: November 14, 2006 By: /s/ Frank D. Gordon
-----------------------
Frank D. Gordon
Chief Financial Officer
31
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: November 14, 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: November 14, 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 September 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: November 14, 2006
/s/ Frank D. Gordon
- ------------------------
Name: Frank D. Gordon
Title: Chief Financial Officer
Date: November 14, 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.