As filed with the Securities and Exchange Commission on July 8, 2005
File No.
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
BlackRock Kelso Capital Corporation
(Exact Name of Registrant as
Specified in Its Charter)
Delaware 20-2725151
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
40 East 52nd Street, Third Floor, New York, NY 10022
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number,
including area code:
212-810-5800
Copies to:
Michael B. Lazar Richard T. Prins, Esq.
BlackRock Kelso Capital Corporation Skadden, Arps, Slate, Meagher & Flom LLP
40 East 52nd Street, Third Floor Four Times Square
New York, NY 10022 New York, New York 10036
Securities to be registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of class)
==============================================================================
TABLE OF CONTENTS
Page
----
Item 1. Business.........................................................1
Item 2. Financial Information...........................................26
Item 3. Properties......................................................26
Item 4. Security Ownership of Certain Beneficial Owners and Management..26
Item 5. Directors and Executive Officers................................27
Item 6. Executive Compensation..........................................29
Item 7. Certain Relationships and Related Transactions..................29
Item 8. Legal Proceedings...............................................33
Item 9. Market Price of and Dividends on the Registrant's Common
Equity and Related Stockholder Matters..........................33
Item 10. Recent Sales of Unregistered Securities.........................35
Item 11. Description of Registrant's Securities to be Registered.........35
Item 12. Indemnification of Directors and Officers.......................37
Item 13. Financial Statements and Supplementary Data.....................37
Item 14. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................37
Item 15. Financial Statements and Exhibits...............................37
EXHIBIT INDEX................................................................40
Item 1. Business.
(a) General Development of Business
BlackRock Kelso Capital Corporation (the "Company") was incorporated
on April 13, 2005 under the laws of the State of Delaware. The Company will
file an election to be treated as a business development company under the
Investment Company Act of 1940 (the "1940 Act"). The Company intends to elect
to be treated for U.S. federal income tax purposes as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). The Company has no operating history. The Company has no
executive officers other than (i) James R. Maher, who serves as Chairman of
the Board and Chief Executive Officer of the Company, (ii) Michael B. Lazar,
who serves as Chief Operating Officer and Managing Director of the Company,
(iii) Frank D. Gordon, who serves as the Chief Financial Officer and Treasurer
of the Company and (iv) Vincent B. Tritto, who serves as the Chief Compliance
Officer and Secretary of the Company. The Company seeks a combination of
current income and capital appreciation by investing in debt and equity
securities of private U.S. middle-market companies and other securities.
Ownership of the Company
BlackRock Funding, Inc. ("BlackRock Funding"), a Delaware corporation
and an indirect wholly-owned subsidiary of BlackRock, Inc. (together with its
subsidiaries, "BlackRock"), will purchase 150 common shares of the Company at
a price of $15.00 per share as the Company's initial capital. Therefore, until
immediately following the anticipated placement of the Company's common shares
pursuant to one or more offerings (the "Offering") exempt from the
registration requirements of the Securities Act of 1933 ("1933 Act") pursuant
to Section 4(2) thereof and Regulation D ("Regulation D") thereunder,
BlackRock will be deemed to "control" the Company through its control of
BlackRock Funding.
Upon the closing of the Offering, the Company's common shares will be
owned by numerous persons that are "accredited investors," as that term is
defined in Regulation D, and a majority of such common shares will be owned by
BlackRock Kelso Capital Holding LLC, a Delaware limited liability company (the
"Holding Company"), whose shares will be owned by institutional and individual
investors.
Use of Proceeds
Immediately after the closing of the Offering, the Company expects to
have cash resources in excess of $500 million and no indebtedness other than
accounts payable incurred in the ordinary course of the Company's business.
The Company intends to invest the proceeds of the Offering primarily
in debt and equity securities of private U.S. middle-market companies. The
Company anticipates that it will take up to two years to invest substantially
all of the net proceeds received by the Company from the Offering due to the
time necessary to identify, evaluate, structure, negotiate and close suitable
investments in private U.S. middle-market companies. In the interim, the
Company will invest the net proceeds as discussed below in Item 1(c).
(b) Financial Information About Segments
Not applicable; the Company has not commenced business and has no
reserves.
(c) Narrative Description of Business
General
The Company intends to operate as a business development company. It
will seek to invest primarily in debt and equity securities of private U.S.
middle-market companies or such other investments as are described herein. The
term "middle-market" refers to companies with annual revenues typically
between $25 million and $500 million.
Although most of the Company's investments are likely to be in
long-term subordinated loans and senior secured and unsecured loans to U.S.
private middle-market companies, the Company may invest throughout the capital
structure of these companies, including common and preferred equity, options
and warrants, credit derivatives, high-yield bonds, distressed debt and other
structured securities. While the Company's focus will be to generate current
income through these investments, the Company will also seek capital
appreciation.
In order to enhance returns to its common shareholders, the Company
may also invest up to 30% of its assets as attractive opportunities arise in a
variety of other types of investments, including securities and derivatives of
public companies.
It is estimated that the Company's portfolio of fixed income
instruments generally will have an expected maturity range of three to ten
years, although there is no lower or or upper limit on maturity. It is
expected that the credit of many of the middle-market companies in which the
Company will invest will not be rated by any nationally-recognized statistical
rating agency or, if so rated, will be rated below investment grade.
The Company has no operating history.
The Investment Advisor
BlackRock Kelso Capital Advisors LLC (the "Advisor") is a newly
organized Delaware limited liability company. The Advisor is primarily owned
by its employees, BlackRock Advisors, Inc. ("BlackRock Advisors"), a
subsidiary of BlackRock, and employees and principals (the "Kelso Principals")
of Kelso & Company, L.P. ("Kelso"). In addition, certain other investors in
the Holding Company may each have a less than 5% interest in the Advisor.
While the Kelso Principals who serve on the investment committee of the
Advisor (as described below) (the "Investment Committee") will bring the
benefit of the expertise they have gained at Kelso and elsewhere, Kelso as an
organization will not participate in the activities of the Advisor or advise
the Company.
It is anticipated that the Advisor will manage the Company's
portfolio through teams of investment professionals dedicated primarily to the
Company's business. Some of the officers and employees of the Advisor,
including some of its senior officers, may be dual employees of BlackRock and
the Advisor.
In addition to the professionals dedicated to the Advisor, the
Company expects to benefit from the business and specific industry knowledge,
transaction expertise and deal-sourcing capabilities of the Investment
Committee and its connection to BlackRock and Kelso. The Advisor will have
access to investment opportunities through a broad network of contacts.
Professionals in Kelso's and BlackRock's businesses may be among the sources
of potential long-term subordinated loans, senior secured and unsecured loans,
preferred and common equity and other investment opportunities for the
Company.
BlackRock, one of the leading investment managers in the world,
manages approximately $391 billion in assets as of March 31, 2005, including
over $9 billion in non-investment grade and bank loan assets, and provides
risk management services on over $2.5 trillion in assets. BlackRock was
founded in 1988 on the belief that experienced investment professionals using
a disciplined investment process and highly sophisticated analytical tools
will consistently add value to client portfolios. BlackRock has assembled a
team of investment professionals with expertise in fixed income, liquidity,
equity and alternative asset classes, and continues to make extensive
investments in internal technology and analytics. BlackRock, with Kelso as its
advisor, has managed private investment funds since 1998 with over $3.4
billion in aggregate initial capital. These funds invest primarily in public
and private debt obligations.
The Kelso Principals have an average tenure of at least fifteen years
at Kelso. Kelso is one of the leading private equity firms and since 1980 has
invested over $3.2 billion of private equity capital, primarily in
middle-market companies across a broad range of industries. Kelso was
organized in 1971 as a private advisory firm and initially focused its
business activities on the development and implementation of employee stock
ownership plans. In 1980, Kelso formed its first investment partnership and
has made 80 private equity investments through seven investment partnerships
since that time. The firm typically makes investments in companies where key
managers make significant investments and works in partnership with management
teams to create value for investors.
Investment Decision Process
The Company's board of directors ("Board of Directors") has ultimate
authority as to the Company's investments but has delegated authority to the
Advisor to select and monitor such investments, subject to the supervision of
the Board of Directors. It is anticipated that the Advisor will manage the
Company's portfolio through teams of investment professionals dedicated
primarily to the Company's business and under the general oversight of the
Investment Committee. The Investment Committee will be comprised of senior
personnel of the Advisor, senior members of BlackRock and Kelso Principals, in
their individual capacities as members of the Advisor. The investment
professionals of the Advisor and the Investment Committee will be supported by
and have access to the investment professionals, analytical capabilities and
support personnel of BlackRock. Some of the officers and employees of the
Advisor, including some of its senior officers, may be dual employees of
BlackRock and the Advisor. At no time will Kelso Principals represent more
than one-third of the members of the Investment Committee. Some Kelso
Principals will be members of the Advisor, but will not participate in the
Advisor's advisory activities through its Investment Committee or otherwise.
BlackRock investment professionals may constitute a majority of the Investment
Committee.
Generally, the Investment Committee will be responsible for setting
investment policies and directing strategic initiatives and will be required
to approve and authorize specifically any transaction in which the Company
takes a controlling position in a portfolio company and such other
transactions or classes of transactions as it may determine from time to time.
The Investment Committee will supervise all actions taken by the Advisor with
respect to the Company and may, from time to time, designate an operating
sub-committee (the "Operating Sub-Committee") of its members to fulfill its
duties on a day-to-day basis, subject to the Investment Committee's
supervision. The Investment Committee or the Operating Sub-Committee, as
applicable, will review prospective investments identified by the Advisor's
investment team as possibly suitable for the Company's portfolio. The
Investment Committee will develop and maintain policies, procedures and
protocols with respect to its membership, the frequency, manner and location
of its meetings, the conduct of its business and such other matters as it may
from time to time determine. It is expected that the Investment Committee
typically will meet monthly, although it may meet more or less frequently in
its discretion.
The Advisor will be responsible for managing the day-to-day business
and affairs of the Company, including implementing investment policies and
strategic initiatives set by the Investment Committee and marshalling the
resources of BlackRock. The Advisor will direct and supervise teams of
investment professionals (comprised of employees of the Advisor) in
researching, selecting and monitoring investment opportunities. The Advisor
generally will determine whether to conduct due diligence on a prospective
portfolio company, review the due diligence reports in order to determine
whether to seek to negotiate an investment in the prospective portfolio
company and establish parameters for negotiation. Once an investment in a
portfolio company has been made by the Company, the Advisor will conduct the
Company's ongoing relationship with the portfolio company. All actions in
respect of the supervision and management of the business and affairs of the
Company, the investment and reinvestment of the assets of the Company, the
purchasing and selling of securities and other assets for the Company and the
voting or exercising of consents or other rights appertaining thereto will be
taken by the Advisor. The Advisor will keep the Board of Directors well
informed as to the identity and title of each member of its Investment
Committee and provide to the Board of Directors such other information with
respect to such persons and the functioning of the Investment Committee, any
Operating Sub-Committee and its investment teams as the Board of Directors may
from time to time request.
Portfolio Composition
Although the Company may invest in all segments of the capital
structure, the Company's assets will likely consist primarily of various
fixed-income securities of private U.S. middle-market companies. Such
securities are expected to include senior and junior subordinated and
unsubordinated secured and unsecured loans and preferred stock with fixed
income-like characteristics. Structurally, junior, subordinated and/or
unsecured loans usually rank subordinate in priority of payment to senior
debt, such as senior bank debt, and are often unsecured. However, such loans
rank senior to common and preferred equity in a borrower's capital structure.
Typically, such loans have elements of both debt and equity instruments,
offering the fixed returns in the form of interest payments associated with
senior debt, while providing lenders an opportunity to participate in the
capital appreciation of a borrower, if any, through an equity interest. This
equity interest typically takes the form of warrants or option. Due to its
higher risk profile and often less restrictive covenants as compared to senior
loans, such loans generally earn a higher return than senior secured loans,
athough they may have higher price volatility. The warrants associated with
such loans are typically detachable, which allows lenders to receive repayment
of their principal on an agreed amortization schedule while retaining their
equity interest in the borrower. Such loans also may include a "put" feature,
which permits the holder to sell its equity interest back to the borrower at a
price determined through an agreed formula. The Company believes that such
loans offer an attractive alternative investment opportunity based upon their
historic returns and resilience during economic downturns.
Senior secured loans will be supported by liens in favor of the
Company on all or a portion of the assets of the portfolio company or on
assets of affiliates of the portfolio company. Although the Company may seek
to dispose of such collateral in the event of default, it may be delayed in
exercising such rights or its rights may be contested by others. In addition,
the value of the collateral may deteriorate so that the collateral is
insufficient for the Company to recover its investment in the event of
default.
In addition to various fixed-income securities and senior secured
loans, the Company may also invest in other types of securities issued by
private U.S. companies, including common and preferred equity, options and
warrants, credit derivatives, high yield bonds, distressed debt and other
structured securities.
In an effort to increase returns and the number of loans made, the
Company may in the future seek to securitize a portion of its loans. To
securitize loans, the Company would contribute a pool of loans to a wholly
owned subsidiary and sell investment grade fixed income securities issued by
such subsidiary to investors willing to accept a lower interest rate to invest
in investment-grade securities of loan pools. The Company's retained interest
in the subsidiary would consequently be subject to first loss on the loans in
the pool. The Company may use the proceeds of such sales to pay down bank
debt, to fund additional investments or for other corporate purposes.
The Company may also invest up to 30% of its assets as attractive
opportunities arise in a variety of other types of investments, including
securities and derivatives of public companies.
The Company will generally seek to target companies that generate
positive cash flows in a broad variety of industries.
To the extent provided by the 1940 Act, the Company will not invest
in any private company in which BlackRock, Kelso or any of their affiliates or
any of the unregistered investment funds managed by them already has an
investment at that time.
The net asset value of, and dividends paid on, the Company's common
shares will fluctuate with and be affected by, among other things, the risks
more fully described below.
Managerial Assistance
As a business development company, the Company will offer, and must
provide upon request, managerial assistance to its portfolio companies. This
assistance could involve, among other things, participating in board and
management meetings, consulting with and advising officers of portfolio
companies and providing other organizational and financial guidance or
exercising strategic or managerial influence over such companies. The Company
may receive fees for these services. The Advisor will provide managerial
assistance on the Company's behalf to those portfolio companies that request
this assistance. Employees of the Advisor have experience providing managerial
assistance to private operating companies like the Company's anticipated
portfolio companies, and such assistance has tended to be related to board
representation and to strategic and financing transactions. BlackRock has
limited experience in providing significant managerial assistance to operating
companies, although the members of the Investment Committee include senior
operating management of BlackRock who have extensive experience managing a
global asset manager with over 1,000 employees worldwide. The Advisor will not
receive any direct compensation from the portfolio companies for providing
managerial assistance.
Ongoing Relationships with Portfolio Companies
The Advisor will monitor the Company's portfolio companies on an
ongoing basis. The Advisor will monitor the financial trends of each portfolio
company to determine if it is meeting its business plans and to assess the
appropriate course of action for each company.
The Advisor has several methods of evaluating and monitoring the
performance and fair value of the Company's investments, which may include,
but are not limited to, the following:
o Assessment of success of the portfolio company in adhering to its
business plan and compliance with covenants;
o Periodic and regular contact with portfolio company management and, if
appropriate, the financial or strategic sponsor, to discuss financial
position, requirements and accomplishments;
o Comparisons to other companies in the industry;
o Attendance at and participation in board meetings; and
o Review of monthly and quarterly financial statements and financial
projections for portfolio companies.
Other Investments
High Yield Bonds. The Company may invest in high yield bonds, i.e.,
income securities that are typically lower grade securities. The Company's
investments in high yield securities may have fixed or variable principal
payments and all types of interest rate and dividend payment and reset terms,
including fixed rate, adjustable rate, zero coupon, contingent, deferred,
payment in kind and auction rate features as well as a broad range of
maturities. The Company may invest in securities of any rating (or no rating)
and securities that are in default. The Company expects its portfolio of high
yield bonds to have a weighted average maturity of three to ten years.
However, any particular investment may have a maturity longer or shorter than
such weighted average and the Company's investments will not be subject to any
limitation on length of maturity.
Lower grade securities are securities that are rated below investment
grade, such as those rated Ba or lower by Moody's Investors Service, Inc.
("Moody's") or BB or lower by Standard & Poor's Ratings Group, a division of
The McGraw-Hill Companies ("S&P"), or securities comparably rated by other
rating agencies, or unrated securities determined by the Advisor to be of
comparable quality. Lower grade securities are commonly referred to as "junk
bonds." Securities rated Ba by Moody's are judged to have speculative
elements; their future cannot be considered as well assured and often the
protection of interest and principal payments may be very moderate. Securities
rated BB and B by S&P are regarded as having predominantly speculative
characteristics and, while such obligations have less near-term vulnerability
to default than other speculative grade debt, they face major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest and
principal payments. Securities rated C by Moody's are regarded as having
extremely poor prospects of ever attaining any real investment standing.
Securities rated D by S&P are in default and the payment of interest and/or
repayment of principal is in arrears.
Lower grade securities, though high yielding, are characterized by
high risk. They may be subject to certain risks with respect to the issuing
entity and to greater market fluctuations than certain lower yielding, higher
rated securities. The retail secondary market for lower grade securities may
be less liquid than that of higher rated securities. Adverse conditions could
make it difficult at times for the Company to sell certain securities or could
result in lower prices than those used in calculating the Company's net asset
value.
The prices of debt securities generally are inversely related to
interest rate changes; however, the price volatility caused by fluctuating
interest rates of securities also is inversely related to the coupon of such
securities. Accordingly, below investment grade securities may be relatively
less sensitive to interest rate changes than higher quality securities of
comparable maturity, because of their higher coupon. This higher coupon is
what the investor receives in return for bearing greater credit risk. The
higher credit risk associated with below investment grade securities
potentially can have a greater effect on the value of such securities than may
be the case with higher quality issues of comparable maturity, and will be a
substantial factor in the Company's relative share price volatility.
Lower grade securities may be particularly susceptible to economic
downturns. It is likely that an economic recession could severely disrupt the
market for such securities and may have an adverse impact on the value of such
securities. In addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon and increase the incidence of default for
such securities.
The ratings of Moody's, S&P and any other rating agencies represent
their opinions as to the quality of the obligations which they undertake to
rate. Ratings are relative and subjective and, although ratings may be useful
in evaluating the safety of interest and principal payments, they do not
evaluate the market value risk of such obligations. Although these ratings may
be an initial criterion for selection of the Company's portfolio investments,
the Advisor also will independently evaluate these securities and the ability
of the issuers of such securities to pay interest and principal. To the extent
that the Company invests in lower grade securities that have not been rated by
a rating agency, the Company's ability to achieve its investment objectives
will be more dependent on the Advisor's credit analysis than would be the case
when the Company invests in rated securities.
Distressed Debt. The Company may invest in debt securities and other
obligations of distressed companies. Investment in distressed debt is
speculative and involves significant risk, including possible loss of the
principal invested. Distressed debt obligations may be performing or
non-performing and generally trade at prices substantially lower than lower
grade securities of companies in similar industries. Investing in distressed
debt is not a principal investment strategy of the Company.
Equity Securities. The Company may also invest in equity securities,
including common and preferred stocks of issuers selected through the
Advisor's disciplined investment process.
Common Stock. Common stock generally represents an equity ownership
interest in an issuer. Although common stocks have historically generated
higher average total returns than fixed-income securities over the long term,
common stocks also have experienced significantly more volatility in those
returns and may under perform relative to fixed-income securities during
certain periods. An adverse event, such as an unfavorable earnings report, may
depress the value of a particular common stock held by the Company. Also,
prices of common stocks are sensitive to general movements in the stock market
and a drop in the stock market may depress the price of common stocks to which
the Company has exposure. Common stock prices fluctuate for several reasons
including changes in investors' perceptions of the financial condition of an
issuer or the general condition of the relevant stock market, or when
political or economic events affecting the issuers occur. In addition, common
stock prices may be particularly sensitive to rising interest rates, as the
cost of capital rises and borrowing costs increase.
Preferred Securities. Traditional preferred securities generally pay
fixed or adjustable rate dividends to investors and generally have a
"preference" over common stock in the payment of dividends and the liquidation
of a company's assets. This means that a company must pay dividends on
preferred stock before paying any dividends on its common stock. In order to
be payable, distributions on such preferred securities must be declared by the
issuer's board of directors. Income payments on most traditional preferred
securities currently outstanding are cumulative, causing dividends and
distributions to accumulate even if not declared by the board of directors or
otherwise made payable. In such a case all accumulated dividends must be paid
before any dividend on the common stock can be paid. However, some traditional
preferred stocks are non-cumulative, in which case dividends do not accumulate
and need not ever be paid. A portion of the Company's portfolio may include
investments in non-cumulative preferred securities, whereby the issuer does
not have an obligation to make up any arrearages to its shareholders. Should
an issuer of a non-cumulative preferred stock held by the Company determine
not to pay dividends on such stock, the Company's income would be adversely
affected. There is no assurance that dividends or distributions on the
traditional preferred securities in which the Company may invest will be
declared or paid.
The market value of preferred securities may be affected by favorable
and unfavorable changes impacting companies in the utilities and financial
services sectors, which are prominent issuers of preferred securities, and by
actual and anticipated changes in tax laws, such as changes in corporate
income tax rates or the dividends received deduction. Because the claim on an
issuer's earnings represented by traditional preferred securities may become
onerous when interest rates fall below the rate payable on such securities,
the issuer may redeem the securities. Thus, in declining interest rate
environments in particular, the Company's holdings of higher rate-paying fixed
rate preferred securities may be reduced and the Company would be unable to
acquire securities of comparable credit quality paying comparable rates with
the redemption proceeds.
Foreign Securities. The Company may invest in foreign securities,
which may include securities denominated in U.S. dollars or in foreign
currencies or multinational currency units. The Company may invest in foreign
securities of emerging market issuers, but investments in such securities are
not expected to comprise more than 5% of the Company's total assets. The
Company will consider a company to be a U.S. company and not a foreign company
if it was organized in the U.S. and its primary business office is in the U.S.
Foreign securities markets generally are not as developed or efficient as
those in the United States. Similarly, volume and liquidity in most foreign
securities markets are less than in the United States and, at times,
volatility of price can be greater than in the United States.
The Company will also be subject to additional risks if it invests in
foreign securities, including possible adverse political and economic
developments, seizure or nationalization of foreign deposits and adoption of
governmental restrictions which might adversely affect or restrict the payment
of principal and interest on the foreign securities to investors located
outside the country of the issuer, whether from currency blockage or
otherwise.
Since foreign securities may be purchased with and payable in foreign
currencies, the value of these assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in currency rates and exchange
control regulations.
Short-Term Debt Securities; Temporary Defensive Position. The Company
anticipates that it will take up to two years to invest substantially all of
the net proceeds received by the Company from the Offering due to the time
necessary to identify, evaluate, structure, negotiate and close suitable
investments in private middle-market companies. In the interim, the Company
will invest in temporary investments, such as cash and cash equivalents, U.S.
government securities and other high quality debt investments that mature in
one year or less from the date of investment. In addition, during periods in
which the Advisor determines that it is temporarily unable to follow the
Company's investment strategy or that it is impractical to do so or pending
re-investment of proceeds received in connection with the sale of a portfolio
security or the issuance of additional securities or borrowing of money by the
Company, all or any portion of the Company's assets may be invested in such
temporary investments. The Advisor's determination that it is temporarily
unable to follow the Company's investment strategy or that it is impractical
to do so will generally occur only in situations in which a market disruption
event has occurred and where trading in the securities selected through
application of the Company's investment strategy is extremely limited or
absent. In such a case, the market price of the Company's common shares may be
adversely affected and the Company may not pursue or achieve its investment
objective.
Derivatives. The Company may, but is not required to, use various
derivatives described below to facilitate portfolio management, mitigate risks
and generate total return. The use of derivatives is generally accepted under
modern portfolio management theory and occurs regularly in the portfolios of
many mutual funds, closed-end funds and other institutional investors.
Although the Advisor will seek to use the practices to further the Company's
investment objective, no assurance can be given that these practices will
achieve this result.
The Company may purchase and sell derivative instruments such as
exchange-listed and over-the-counter put and call options on securities,
financial futures, equity indices, and other financial instruments, purchase
and sell financial futures contracts and options thereon and engage in swaps.
The Company also may purchase derivative instruments that combine features of
these instruments. Collectively, all of the above are referred to as
"Derivatives." The Company will generally seek to use Derivatives as a
portfolio management or hedging technique in an effort to protect against
possible adverse changes in the market value of securities held in or to be
purchased for the Company's portfolio, protect the value of the Company's
portfolio, facilitate the sale of certain securities for investment purposes,
or establish positions in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. The Company may use
Derivatives to enhance potential gain although the Company will commit
variation margin for Derivatives that involve futures contracts only in
accordance with the rules of the Commodity Futures Trading Commission.
Derivatives have risks, including the imperfect correlation between
the value of such instruments and the underlying assets, the possible default
of the other party to the transaction or illiquidity of the derivative
instruments. Furthermore, the ability to successfully use Derivatives depends
on the Advisor's ability to predict pertinent market movements, which cannot
be assured. Thus, the use of Derivatives may result in losses greater than if
they had not been used, may require the Company to sell or purchase portfolio
securities at inopportune times or for prices other than current market
values, may limit the amount of appreciation the Company can realize on an
investment, or may cause the Company to hold a security that it might
otherwise sell. Additionally, amounts paid by the Company as premiums and cash
or other assets held in margin accounts with respect to Derivatives are not
otherwise available to the Company for investment purposes.
Revenues
The Company plans to generate revenue in the form of interest payable
on the debt it holds, dividends on its equity interests and capital gains on
warrants and other debt or equity interests that it acquires in portfolio
companies. The Company expects its portfolio of fixed income instruments to
have an expected maturity of three to ten years and typically to bear interest
at a fixed or floating rate, although there is no lower or upper limit on
maturity. Interest on debt securities will be payable generally quarterly or
semi-annually, with the amortization of principal generally being deferred for
several years from the date of the initial investment. In some cases, the
instrument may defer payments of cash interest for the first few years. The
principal amount of the debt securities and any accrued but unpaid interest
will generally become due at the maturity date. In addition, the Company may
generate revenue in the form of commitment, origination, structuring or
diligence fees, fees for providing significant managerial assistance and
possibly consulting fees. Any such fees will be generated in connection with
the Company's investments and recognized as earned, typically over the life of
the related investment.
Fees and Expenses
The Company's primary operating expenses will include the payment of
a management fee (the "Management Fee"), administration fees and the allocable
portion of overhead under the administration agreement. The Management Fee
will compensate the Advisor for work in identifying, evaluating, negotiating,
closing and monitoring the Company's investments. The Company will bear all
other costs and expenses of its operations and transactions, including those
relating to: its organization; calculating net asset value (including the cost
and expenses of any independent valuation firm); expenses incurred by the
Advisor payable to third parties in monitoring its investments and performing
due diligence on prospective portfolio companies; interest payable on debt, if
any, incurred to finance its investments; the costs of future offerings of
common shares and other securities, if any; the Management Fee; distributions
on its common shares; administration fees payable under the administration
agreement; fees payable to third parties relating to, or associated with,
making investments; transfer agent and custodial fees; registration fees;
listing fees; taxes; independent director fees and expenses; costs of
preparing and filing reports or other documents with the Securities and
Exchange Commission (the "SEC"); the costs of any reports, proxy statements or
other notices to shareholders, including printing costs; the Company's
fidelity bond, directors and officers/errors and omissions liability
insurance, and any other insurance premiums; indemnification payments; direct
costs and expenses of administration, including audit and legal costs; and all
other expenses reasonably incurred by the Company or its administrator (the
"Administrator") in connection with administering the Company's business, such
as its allocable portion of overhead under the administration agreement,
including rent and other allocable portions of the cost of its chief
compliance officer and related staff.
The Advisor has agreed to waive its rights to receive one-half of the
amount of the Management Fee the Advisor would otherwise be entitled to
receive from the Company until the Ramp-Up Date (as defined below).
Thereafter, the Advisor has agreed to waive, until such time as the Company
has completed the Public Market Event (as defined below), one-quarter of the
amount of the Management Fee the Advisor would otherwise be entitled to
receive from the Company.
In any event and assuming gross proceeds from the Offering of $500
million, the Advisor has agreed (i) to waive Management Fees for any calendar
year in excess of $11.25 million until the earlier of (A) such time as the
Company has completed the Public Market Event or (B) the fourth anniversary of
the commencement of the Company and (ii) to waive its Management Fee in excess
of $5.25 million during the fifth year of the Company's existence unless the
Company has completed the Public Market Event. If there is no Public Market
Event, the Company will begin the process of winding down its assets in the
beginning of the sixth year of the Company's existence. The Company would need
to have greater than $750 million in total assets during the initial waiver
period for the $11.25 million cap to be operative and greater than $350
million in total assets during the fifth year for the $5.25 million cap to be
operative. The foregoing amounts assume gross proceeds from the Offering of
$500 million. To the extent that such gross proceeds differ from $500 million,
the fee cap and total asset thresholds described above will change in direct
proportion to the ratio of the actual gross proceeds to $500 million. For
example, if the gross proceeds from the Offering were $520 million, the $11.25
million and $5.25 million fee caps described above would increase to $11.70
million and $5.46 million, respectively, and the total asset thresholds of
$750 million and $350 million described above would increase to $780 million
and $364 million, respectively. Although it is anticipated that the Carried
Interest (as defined below) will be paid through distributions on the Series S
Share (as defined below), the Carried Interest is also provided for in the
Investment Advisory Agreement.
To the extent that any of the Company's loans are denominated in a
currency other than U.S. dollars, it may enter into currency hedging contracts
to reduce exposure to fluctuations in currency exchange rates. The Company may
also enter into interest rate hedging agreements. Such hedging activities,
which will be subject to compliance with applicable legal requirements, may
include the use of futures, options and related forward contracts. Costs
incurred in entering into such contracts or in settling them will be borne by
the Company.
The following table shows the Company's anticipated costs and
expenses as a percentage of net assets attributable to its common stock
assuming gross proceeds from the Offering of approximately $520 million. Some
of the percentages indicated in the table below are estimates and may vary.
Except where the context suggests otherwise, whenever this Registration
Statement contains a reference to fees or expenses paid by the Company, or
that the Company will pay fees or expenses, stockholders will indirectly bear
such fees or expenses as investors in the Company.
Stockholder transaction expenses:
Sales load (as a percentage of offering price) 0.10% (1)
Offering expenses borne by the Company
(as a percentage of offering price) 0.20% (2)
Dividend reinvestment plan expenses None (3)
Total stockholder transaction expenses
(as a percentage of offering price) 0.30%
------
Estimated annual expenses (as a percentage of net assets
attributable to common stock):
Management fees 2.00% (4)
Incentive fees (carried interest) payable under
Investment Advisory Agreement 0.00% (5)
Interest payments on borrowed funds None (6)
Other expenses 0.56% (7)
-----
Total annual expenses (estimated) 2.56% (4)(5)(7)
______________
(1) The underwriting discounts and commissions with respect to shares sold in
the Offering, which is a one-time fee, is the only sales load paid in
connection with the Offering.
(2) Amount reflects estimated Offering expenses of approximately $1,600,000.
(3) The expenses of the dividend reinvestment plan are included in "other
expenses."
(4) The Management Fee under the Company's Investment Advisory Agreement with
the Advisor is based on the Company's gross assets. The Advisor has agreed to
waive its rights to receive all or some of the amount of the Management Fee
the Advisor would otherwise be entitled to receive from the Company under
certain conditions, as described herein. See Item 7(d) below.
(5) The Company anticipates that it will take up to two years to invest
substantially all of the net proceeds of the Offering due to the time
necessary to identify, evaluate, structure, negotiate and close suitable
investments in private U.S. middle-market companies. In the interim, the
Company does not expect to earn interest income and capital gains in amounts
sufficient to exceed the hurdle rate discussed below. As a result, the Company
does not anticipate paying any carried interest in the first year after the
completion of the Offering. Once fully invested, the Company expects the
carried interest it pays to the Advisor or its affiliates to increase to the
extent the Company earns greater interest income through investments in
portfolio companies and realizes capital gains upon the sale of warrants or
other equity investments in portfolio companies. The determination of the
carried interest, as described in more detail below, will result in the
Advisor or its affiliates receiving no carried interest payments if returns to
the Company's stockholders do not meet an 8.0% annualized rate of return and
will result in the Advisor or its affiliates receiving less than the full
amount of the carried interest percentage until returns to the Company's
stockholders exceed an approximate 13.3% annualized rate of return. Commencing
on the Ramp-Up Date, the Company will pay to the Advisor or its affiliates,
(i) 50% of the amount by which the cumulative distributions and amounts
distributable to the holders of the Company's common shares exceed an 8%
annualized rate of return on net asset value until the Advisor or its
affiliates have received from the Company an amount equal to 20% of the sum of
the amount distributed pursuant to this paragraph and the amount of aggregate
cumulative distributions of net income and gain to the holders of the
Company's common shares in excess of net unrealized capital depreciation, and
(ii) thereafter an amount equal to 20% of the sum of the amount distributed
pursuant to this paragraph plus the amount of incremental aggregate
distributions of net income and gain to the holders of the Company's common
shares in excess of net unrealized capital depreciation, as measured on a
rolling basis. 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 is reflected in realized losses
and does not exceed the excess of cumulative realized capital gains over
cumulative realized capital losses. See Item 7(d) below.
(6) The Company has not decided whether, and to what extent, it will finance
investments using debt. However, assuming the Company borrowed for investment
purposes an amount equal to 40% of the net proceeds from the Offering and that
the annual interest rate on the amount borrowed is 3%, the Company's total
estimated annual expenses (as a percentage of net assets attributable to
common stock) would be as follows:
Estimated annual expenses (as a percentage of net assets
attributable to common stock):
Management fees 2.80%
Incentive fees (carried interest) payable under Investment
Advisory Agreement 0.00%
Interest payments on borrowed funds 1.20%
Other expenses 0.56%
------
Total annual expenses (estimated) 4.56%
(7) Includes all other costs and expenses of the Company's operations.
The following example demonstrates the projected dollar amount of
total cumulative expenses that would be incurred over various periods with
respect to a hypothetical investment in the Company's common stock. In
calculating the following expense amounts, the Company has assumed it would
have no leverage and that annual operating expenses would remain at the levels
set forth in the table above. The example should not be considered a
representation of future expenses. Actual expenses may be greater or less than
those assumed.
1 year 3 years 5 years 10 years
Total expenses incurred on a $1,000 investment, assuming a 5% annual return $29 $82 $139 $292
While the example assumes, as required by the SEC, a 5% annual
return, the Company's performance will vary and may result in a return greater
or less than 5%. The carried interest under the Investment Advisory Agreement,
which, assuming a 5% annual return, would not be payable, is not included in
the example. If the Company achieves sufficient returns on its investments,
including through the realization of capital gains, to trigger carried
interest of a material amount, its expenses, and returns to its stockholders,
would be higher. The example assumes reinvestment of all dividends and
distributions at net asset value.
Financial Condition, Liquidity and Capital Resources
The Company will generate cash primarily from the Offering and any
future offerings of securities and cash flows from operations, including
interest earned from the temporary investment of cash in cash equivalents,
U.S. government securities and other high-quality debt investments that mature
in one year or less. In the future, the Company may also determine to fund a
portion of its investments through borrowings from banks and issuances of
senior securities, including preferred shares. The Company has not determined
the extent to which it will incur indebtedness or issue senior securities, if
at all, and does not expect to make a determination in that regard until it
has invested a substantial majority of the net proceeds of the Offering. Any
decision to incur leverage will depend on the Company's assessment of the
attractiveness of available investment opportunities in relation to the costs
and perceived risks of such leverage. In the future, the Company may also
securitize a portion of its investments in junior unsecured loans or senior
secured loans or other assets. The Company's primary use of funds will be
investments in portfolio companies and cash distributions to holders of its
common shares.
Regulation of the Company
The Company is a business development company under the 1940 Act. The
1940 Act contains prohibitions and restrictions related to transactions
between business development companies and their affiliates (including any
investment advisers or sub-advisers), principal underwriters and affiliates of
those affiliates and requires that a majority of the directors be persons
other than "interested persons," as that term is defined in the 1940 Act. In
addition, the 1940 Act provides that the Company may not change the nature of
its business so as to cease to be, or to withdraw its election as, a business
development company unless approved by a majority of its outstanding voting
securities.
The Company is required to provide and maintain a bond issued by a
reputable fidelity insurance company to protect it against larceny and
embezzlement. Furthermore, as a business development company, the Company is
prohibited from protecting any director or officer against any liability to
the Advisor or the Company's shareholders arising from willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in
the conduct of such person's office.
The Company and the Advisor will each be required to adopt and
implement written policies and procedures reasonably designed to prevent
violation of the federal securities laws, review these policies and procedures
annually for their adequacy and the effectiveness of their implementation, and
designate its chief compliance officer to be responsible for administering the
policies and procedures.
The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") imposes a
wide variety of new regulatory requirements on publicly held companies and
their insiders. Many of these requirements will affect the Company and the
Advisor. The Company and the Advisor will continue to monitor their respective
compliance with all future regulations that are adopted under the
Sarbanes-Oxley Act and will take actions necessary to ensure that they are in
compliance therewith.
Under the 1940 Act, a business development company may not acquire
any assets other than assets of the type listed in Section 55(a) of the 1940
Act, which are referred to as qualifying assets, unless, at the time the
acquisition is made, qualifying assets represent at least 70% of the company's
total assets. The principal categories of qualifying assets relevant to the
Company's proposed business are the following:
(1) Securities purchased in transactions not involving any
public offering from the issuer of such securities, which
issuer (subject to certain limited exceptions) is an
eligible portfolio company, or from any person who is, or
has been during the preceding 13 months, an affiliated
person of an eligible portfolio company, or from any other
person, subject to such rules as may be prescribed by the
SEC. An eligible portfolio company is defined in the 1940
Act as any issuer which:
(a) is organized under the laws of, and has its principal
place of business in, the United States;
(b) is not an investment company (other than a small
business investment company wholly- owned by the
business development company) or a company that
would be an investment company but for certain
exclusions under the 1940 Act; and
(c) satisfies any of the following:
A. does not have any class of securities with
respect to which a broker or dealer may
extend margin credit (the "no margin
securities test");
B. is controlled by a business development
company or a group of companies including
a business development company and the
business development company has an
affiliated person who is a director of the
eligible portfolio company; or
C. is a small and solvent company having
total assets of not more than $4 million
and capital and surplus of not less than
$2 million.
(2) Securities of any eligible portfolio company which the
Company controls.
(3) Securities purchased in a private transaction from a U.S.
issuer that is not an investment company or from an
affiliated person of the issuer or in transactions incident
thereto, if the issuer is in bankruptcy and subject to
reorganization or if the issuer, immediately prior to the
Company's purchase of the issuer's securities, was unable to
meet its obligations as they came due without material
assistance other than conventional lending or financing
arrangements.
(4) Securities of an eligible portfolio company purchased from
any person in a private transaction if there is no ready
market for such securities and the Company already owns 60%
of the outstanding equity of the eligible portfolio company.
(5) Securities received in exchange for or distributed with
respect to securities described in (1) through (4) above, or
pursuant to the exercise of warrants or rights related to
such securities.
(6) Cash, cash equivalents, U.S. government securities and other
high-quality debt securities maturing in one year or less
from the time of investment.
With regard to (1) above, an "eligible portfolio company" is defined in the
1940 Act as any company that: (a) is organized under the laws of, and has its
principal place of business in, the United States; (b) with certain
exceptions, is not an investment company or a company that would be an
investment company but for certain exclusions under the 1940 Act; and (c)
satisfies one of three additional criteria. One of the criteria is that the
company may not have any class of securities with respect to which a member of
a national securities exchange, broker or dealer may extend or maintain credit
to or for a customer pursuant to rules and regulations adopted by the Board of
Governors of the Federal Reserve System, or "Federal Reserve Board," under
Section 7 of the Securities Exchange Act of 1934 (the "1934 Act"), or "margin
securities." This provision is referred to herein as the "no margin securities
test."
The Company will invest in private companies that may have
outstanding privately-placed debt securities (in addition to the securities
that the Company acquires) and the Company intends to treat such investments
as qualifying assets. The Advisor believes that these companies will satisfy
the no margin securities test. The Advisor notes that Regulation T, the
Federal Reserve Board regulation governing the extension of credit by brokers
and dealers, identifies securities that are margin securities. When the
provisions of the 1940 Act relating to business development companies were
enacted in 1980, margin securities were limited to (i) securities that were
listed on a national securities exchange; (ii) equity securities that were
traded over the counter and listed on the Federal Reserve Board's "OTC margin
stock" list; and (iii) limited categories of non-listed debt securities that
were issued in public offerings by public companies. Under this standard, a
private company (that is, a company that had not publicly offered any
securities and did not file periodic reports under the 1934 Act) that had
outstanding privately-placed debt securities would have been an eligible
portfolio company under the no margin securities test.
In 1998, the Federal Reserve Board amended Regulation T to include
within the definition of margin securities any "non-equity security."
Non-equity securities include debt securities. If applied literally, this
change would mean that any company that has issued any debt securities would
not be an eligible portfolio company under the no margin securities test and
the Company would be severely limited in its ability to pursue its strategy.
The Advisor does not believe that this result was intended by the
Federal Reserve Board when it amended Regulation T in 1998 or contemplated by
Congress when it enacted the provisions of the 1940 Act relating to business
development companies, and the Advisor does not believe that the no margin
securities test should be interpreted as causing a private company that had
outstanding debt securities to fail the no margin securities test,
notwithstanding the literal language of the 1940 Act and Regulation T. The SEC
and the courts may have a different interpretation of this provision and,
accordingly, there can be no assurance that the Company will be able to pursue
its investment objective through privately placed securities.
Legislation currently pending in congress, H.R. 436 (the Increased
Capital Access for Growing Business Act), would, if enacted, alter the
criteria used to determine if securities can be treated as qualifying assets.
The new criteria, if enacted, would allow securities to be treated as
qualifying assets if (i) the issuer of the securities does not have any class
of equity securities listed for trading on a national securities exchange or
traded through the facilities of a national securities association or (ii) the
aggregate value of the issuer's outstanding publicly traded equity securities
is not more than $250,000,000. The enactment of this legislation would confirm
that private companies with outstanding debt securities, as well as other
types of companies, are eligible portfolio companies. There can be no
assurance that H.R. 436 or similar legislation will be enacted or, if enacted,
that it would not be materially different than the current form of legislation
that is pending.
In addition, the SEC has proposed new Rule 2a-46 that is similar in
many respects to H.R. 436. The proposed rule, however, does not contain a test
based upon market capitalization. The Advisor does not expect that either the
proposed rule or legislation, if adopted, will be adverse to the Company's
investment program.
The Company will invest in private companies that may have
outstanding privately-placed debt securities (in addition to the securities
that the Company acquires) and the Company intends to treat such investments
as qualifying assets. Unless H.R. 436 is enacted or the status of private
companies with privately-issued debt securities as eligible portfolio
companies is clarified through SEC rulemaking or other means, there is a risk
that the types of investments that the Company intends primarily to make would
not be deemed to be qualifying assets.
A decision by the SEC or a court that conflicts with the Advisor's
interpretation would have a material adverse effect on the Company's business.
For example, such a decision would make it more difficult for the Advisor to
identify investment opportunities and may require the Company to change its
investment objective or policies, or conceivably seek shareholder approval to
cease to be regulated as a business development company. The SEC may also take
such other actions against the Company as it determines to be appropriate.
Such a decision also may require that the Company dispose of
investments made based on the Advisor's interpretation. Disposing of such
investments could have a material adverse effect on the Company and the
Company's shareholders. The Company may need to dispose of such investments
quickly, which would make it difficult to dispose of such investments on
favorable terms. Because these types of investments will generally be
illiquid, the Company may have difficulty in finding a buyer for these
investments and, if it does, it may have to sell them at a substantial loss.
The 1940 Act also limits the Company's ability to borrow money or
issue debt securities or preferred stock so that the resulting leverage does
not exceed the Company's net assets attributable to common shares. Compliance
with these requirements may unfavorably limit the Company's investment
opportunities and reduce its ability in comparison to other companies to
profit from favorable spreads between the rates at which the Company can
borrow and the rates at which it can lend.
Although the Advisor and its affiliates have extensive experience
with the types of investments it is anticipated the Company will make, neither
the Advisor nor its affiliates have prior experience managing a business
development company such as the Company. The Advisor is a newly formed entity.
BlackRock has limited experience providing significant managerial assistance
to operating companies, as may be required of a business development company.
The Kelso Principals have no experience managing a registered investment
company or a business development company, although they do have experience
providing significant managerial assistance to operating companies in the form
of board representation and advice concerning financings and other strategic
matters.
Furthermore, extensions of commercial credit such as bank loans,
leases and receivables factoring are not securities for purposes of the 1934
Act, which provides the authority for the Federal Reserve Board's margin
regulations, and accordingly the many private middle-market companies that
have only such obligations outstanding should not be treated as having
outstanding any securities against which margin credit may be extended.
The Advisor has received no assurance from the SEC or its staff as to
whether or not they agree with the Advisor's interpretation that
privately-issued debt securities of private companies are qualifying assets.
Under Section 57 of the 1940 Act, the Company cannot, with minor
exceptions, sell securities to, buy securities from, or lend money to, certain
controlling or closely affiliated persons or companies; e.g., directors,
officers, employees of the Company or the Advisor, or members of the
Investment Committee, or any company that any of these people control. Any
such transactions would be subject to prior SEC approval, and the Company has
no plans to invest in these affiliates. If the Company chooses to invest in
companies that the Advisor has other associations with, such as a company in
which BlackRock or Kelso has a noncontrolling minority equity investment, or a
company to which a BlackRock or Kelso affiliate has made a loan or loans, such
decision would be subject to approval by the Board of Directors.
The Board of Directors could approve the proposed transaction only if
the directors found that the terms thereof, including the consideration to be
paid or received, were reasonable and fair to the shareholders of the Company,
and did not involve overreaching on the part of any person concerned; and that
the proposed transaction was consistent with the interests of the Company's
shareholders and consistent with the policies of the Company, as reflected in
such policies, reports filed under the 1934 Act, and reports to shareholders.
The directors are required to record in their minutes and preserve in their
records, a description of the proposed transaction, their findings, the
information or materials upon which their findings were based, and the basis
therefor. Furthermore, the approval must be granted by both a majority of the
Company's directors who have no financial interest in the transaction, and a
majority of its independent directors, i.e., directors who are not interested
persons of the Company (as defined in the 1940 Act) ("Independent Directors").
Certain U.S. Federal Income Tax Consequences
The following discussion summarizes certain U.S. federal income tax
considerations relating to the Company and an investment in the Company. This
discussion is based on the Code, Treasury Regulations promulgated thereunder,
administrative rulings and pronouncements of the Internal Revenue Service (the
"Service") and judicial decisions, all as in effect on the date hereof and
which are subject to change, possibly with retroactive effect.
The discussion does not purport to describe all of the U.S. federal
income tax consequences applicable to the Company or that may be relevant to a
particular investor in the Company (for purposes of this section, an
"Investor") in view of such Investor's particular circumstances and, except to
the extent provided below, is not directed to Investors subject to special
treatment under the U.S. federal income tax laws, such as banks, dealers in
securities, tax-exempt entities, non-U.S. persons and insurance companies. In
addition, this summary does not discuss any aspect of state, local or foreign
tax law and assumes that Investors will hold their interests in the Company as
capital assets within the meaning of Section 1221 of the Code. The tax
treatment of partners in a partnership (including an entity treated as a
partnership for U.S. federal income tax purposes) that is an Investor in the
Company generally depends on the status of the partner, rather than the
partnership, and is not specifically addressed herein.
Moreover, no advance rulings have been or will be sought from the
Service regarding any matter discussed in this Registration Statement, and
counsel to the Company has not rendered any opinion with respect to any of the
U.S. federal income tax consequences relating to the Company or an investment
therein. No assurance can be given that the Service would not assert, or that
a court would not sustain, a position contrary to any of the tax aspects set
forth below. Accordingly, prospective Investors are urged to consult their own
tax advisors to determine the U.S. federal income tax consequences to them of
acquiring, holding and disposing of interests in the Company, as well as the
effects of the state, local and non-U.S. tax laws.
For purposes of the following discussion, a "U.S. Holder" is an
Investor who is a U.S. person, defined in Section 7701(a)(30) of the Code to
mean: (i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized under the laws of the United States or any
state thereof, (iii) an estate, the income of which is subject to U.S. federal
income taxation regardless of its source or (iv) a trust (a) the
administration over which a U.S. court can exercise primary supervision and
(b) all of the substantial decisions of which one or more U.S. persons have
the authority to control. A "Non-U.S. Holder" is an Investor who is not a U.S.
Holder.
Classification of the Company. The Company intends to elect to be and
to qualify to be treated as, a regulated investment company (a "RIC") under
Subchapter M of the Code. For each taxable year that the Company so qualifies,
it will be relieved of U.S. federal income taxation on that part of its
investment company taxable income (consisting generally of net investment
income, net short-term capital gain, and net gains from certain foreign
currency transactions) and net capital gain that it distributes to the
Investors.
In order to qualify as a RIC, the Company must, among other things,
(a) derive in each taxable year at least 90% of its gross income (including
tax-exempt interest) from dividends, interest, payments with respect to
certain securities loans, and gains from the sale or other disposition of
stock, securities or foreign currencies, or other income (including but not
limited to gain from options, futures and forward contracts) derived with
respect to its business of investing in stock, securities or currencies; and
(b) diversify its holdings so that, subject to certain exceptions and cure
periods, at the end of each fiscal quarter (i) at least 50% of the market
value of its total assets is represented by cash and cash items, U.S.
government securities, the securities of other RICs and other securities, with
other securities limited, in respect of any one issuer, to an amount not
greater than 5% of the value of its total assets and not more than 10% of the
outstanding voting securities of any issuer, and (ii) not more than 25% of the
market value of its total assets is invested in the securities of any issuer
(other than U.S. government securities and the securities of other RICs) or of
any two or more issuers that it controls and that are determined to be engaged
in the same business or similar or related trades or businesses.
As a RIC, in any fiscal year with respect to which the Company
distributes at least 90% of the sum of its (i) investment company taxable
income (which includes, among other items, dividends, interest and the excess
of any net short-term capital gains over net long-term capital losses and
other taxable income other than any net capital gain reduced by deductible
expenses) determined without regard to the deduction for dividends paid and
(ii) net tax-exempt interest (the excess of its gross tax-exempt interest over
certain disallowed deductions), it (but not its shareholders) generally will
not be subject to U.S. federal income tax on investment company taxable income
and net capital gains that it distributes to shareholders. To the extent that
it retains its net capital gains for investment, the Company will be subject
to U.S. federal income tax. It may choose to retain its net capital gains for
investment and pay the associated federal corporate income tax.
Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4%
excise tax payable by the Company. To avoid this tax, it must distribute (or
be deemed to have distributed) during each calendar year an amount equal to
the sum of:
(1) at least 98% of its ordinary income (not taking into account
any capital gains or losses) for the calendar year;
(2) at least 98% of its capital gains in excess of its capital
losses (adjusted for certain ordinary losses) for a one-year
period generally ending on October 31 of the calendar year
(unless an election is made by a company with a November or
December year-end to use the company's fiscal year); and
(3) any undistributed amounts from previous years on which it
paid no U.S. federal income tax.
While the Company intends to distribute any income and capital gains
in the manner necessary to minimize imposition of the 4% excise tax,
sufficient amounts of its taxable income and capital gains may not be
distributed to avoid the imposition of the tax entirely. In that event, it
will be liable for the tax only on the amount by which it does not meet the
foregoing distribution requirement.
If in any particular taxable year, the Company does not qualify as a
RIC, all of its taxable income (including its net capital gains) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Company's current and
accumulated earnings and profits.
The Company may make certain investments which would subject it to
special provisions of the Code that, among other things, may defer the use of
certain deductions or losses and affect the holding period of securities held
by the Company and the character of the gains or losses realized by it. These
provisions may also require that the Company recognize income or gain without
receiving cash with which to make distributions. In particular, it may
recognize original issue discount if it acquires zero coupon securities,
deferred interest securities or certain other securities, or if it receives
warrants in connection with the making of a loan or possibly in other
circumstances. Such original issue discount, which could be, but is not
expected to be, significant relative to the Company's overall investment
activities, generally will be included in income in the taxable year of
accrual and before the Company receives any corresponding cash payments. The
Company may also be required to include in income certain other amounts that
it will not receive in cash.
Since in certain circumstances the Company may recognize income
before or without receiving cash representing such income, it may have
difficulty making distributions in the amounts necessary to satisfy the
requirements for maintaining RIC status and for avoiding income and excise
taxes. Accordingly, it may have to sell some investments at times it would not
otherwise consider advantageous, raise additional debt or equity capital or
reduce new investment originations to meet these distribution requirements. If
it is not able to obtain cash from other sources, the Company may fail to
qualify as a RIC and thereby be subject to corporate-level income tax.
In the event the Company invests in foreign securities, it may be
subject to withholding and other foreign taxes with respect to those
securities. The Company does not expect to satisfy the requirement to pass
through to the shareholders their share of the foreign taxes paid by the
Company.
Taxation of U.S. Holders. Distributions from the Company's investment
company taxable income (consisting generally of net investment income, net
short-term capital gain, and net gains from certain foreign currency
transactions) generally will be taxable to the Investors as ordinary income.
Such distributions that exceed the Company's earnings and profits generally
are treated as a return of capital, and to the extent such distributions
exceed the Investor's basis in its shares of the Company, will be treated as
capital gain. Distributions (or deemed distributions) of the Company's net
capital gain, when designated as such, will be taxable to the Investors as
long-term capital gain. If the Company retains any net capital gain, the
Company will be subject to a tax of 35% on the amount retained. In that event,
the Company expects to designate the retained amount as undistributed capital
gain in a notice to the Investors. In that case, (i) the Investors (x) will be
required to include in income for U.S. federal income tax purposes, as
long-term capital gain, their proportionate shares of such undistributed
amount and (y) will be entitled to credit their proportionate shares of the
35% tax paid by the Company on the undistributed amount against their U.S.
federal income tax liabilities, if any, and to claim refunds to the extent the
credit exceeds those liabilities, and (ii) the Investor will increase its tax
basis in its shares of the Company by an amount equal to the difference
between the amount of undistributed capital gain included in gross income and
the tax deemed paid by the Investor. The Investors will be notified following
the end of each calendar year of the amounts of dividends and capital gain
distributions paid (or deemed paid) that year and undistributed capital gain
designated for that year.
Dividends and other distributions declared by the Company in October,
November, or December of any year and payable to shareholders of record on a
specified date in such a month will be deemed to have been paid by the Company
on December 31st if the distributions are paid by the Company during the
following January. Accordingly, those distributions will be taxed to the
Investors for the year in which that December 31st falls.
The recently enacted Working Families Tax Relief Act of 2004
clarifies that if the Company's qualified dividend income is less than 95
percent of its gross income, a shareholder of the Company may only include as
qualifying dividend income that portion of the dividends that may be and are
so designated by the Company as qualifying dividend income.
If an Investor sells or exchanges its shares in the Company, the
Investor will recognize gain or loss equal to the difference between his
adjusted basis in the shares sold and the amount received. Any such gain or
loss will be treated as a capital gain or loss and will be long-term capital
gain or loss if the shares have been held by the Investor for more than one
year. Any loss recognized on a sale or exchange of shares that were held for
six months or less will be treated as long-term, rather than short-term,
capital loss to the extent of any capital gain distributions previously
received (or deemed to be received) thereon. A loss realized on a sale or
exchange of shares will be disallowed to the extent those shares are replaced
by other shares of the Company within a period of 61 days beginning 30 days
before and ending 30 days after the date of disposition of the shares. In that
event, the basis of the replacement shares will be adjusted to reflect the
disallowed loss.
The recently enacted American Jobs Creation Act of 2004 (the "2004
Jobs Act"), which was signed by President Bush on October 22, 2004, amends
certain rules relating to regulated investment companies. The 2004 Jobs Act
modifies the 90 percent gross income test with respect to income of a
regulated investment company to include net income derived from an interest in
certain qualified "publicly traded partnerships" and modifies the asset
diversification test of a regulated investment company to include a new
limitation on the investment by a regulated investment company in certain
qualified publicly traded partnership interests.
Limitation on Deduction for Certain Expenses. For individuals,
estates and trusts, certain miscellaneous itemized deductions are deductible
under Section 67 of the Code only to the extent that they exceed 2% of the
taxpayer's adjusted gross income for U.S. federal income tax purposes
(generally, gross income less trade or business expenses). Moreover, an
individual whose adjusted gross income exceeds specified threshold amounts is
required to further reduce the amount of allowable itemized deductions by the
lesser of (i) 3% of the excess of adjusted gross income over the threshold
amount or (ii) 80% of the total amount of otherwise allowable itemized
deductions. Organizational and other expenses will constitute miscellaneous
itemized deductions for these purposes. Investors are urged to consult their
tax advisors regarding their ability to deduct itemized expenses incurred by
the Company.
If a RIC that does not qualify as a "publicly offered regulated
investment company" incurs expenses, other than certain limited expenses
including directors' fees and registration fees, that would be miscellaneous
itemized deductions if incurred directly by an individual, estate or trust,
the limit on such itemized deductions generally will apply to a shareholder of
the RIC as if the shareholder had received a dividend from the RIC in the
amount of his allocable share of such expenses of the RIC and had paid such
expenses directly. A publicly offered regulated investment company is a RIC
whose shares are (1) continuously offered pursuant to a public offering, (2)
regularly traded on an established securities market or (3) held by at least
500 persons at all times during the taxable year. Because the Company expects
its shares to be held by at least 500 persons at all times during the taxable
year, it believes that it will qualify as a publicly offered regulated
investment company. As such, it does not intend to report such expenses on the
Form 1099-DIV provided by it to affected shareholders and the Service. There
can be no assurance, however, that shares of the Company will, in fact, be
treated as held by at least 500 persons or that such will be the case
indefinitely. If the Company does not qualify as a publicly offered regulated
investment company, it would be required to report on Form 1099-DIV the
"affected RIC expenses," the Investor will be treated as receiving a dividend
in the amount of its share of such Company expenses, including the Management
Fee, and as paying such expenses, and affected Investors will be required to
take into account their allocable share of such income and expenses. While any
such dividend would constitute additional gross income, the deduction for such
expense would be subject to the aforementioned 2% limitation and the other
applicable limitations of the Code, which could aggravate the situation of a
taxpayer subject to these limitations on deductions.
Taxation of U.S. Holders Exempt from U.S. Income Tax. Distributions
by the Company to a U.S. Holder that is an organization that is exempt from
U.S. income tax will not be taxable to such person and the tax on unrelated
business taxable income will not apply to such person's interest in the
Company's investments, provided, in each case, that such person's investment
in the Company is not debt-financed.
Taxation of Non-U.S. Holders. Special rules apply to an Investor that
is a Non-U.S. Holder. Non-U.S. Holders are generally subject to U.S.
withholding tax at a 30% rate on the gross amount of interest, dividends and
other fixed or determinable annual or periodical income received from sources
within the United States if such income is not treated as effectively
connected with a trade or business within the United States. The 30% rate may
be reduced or eliminated under the provisions of an applicable income tax
treaty between the United States and the country in which the Non-U.S. Holder
resides or is organized. The 30% withholding tax does not apply to interest on
certain obligations of U.S. persons allocable to certain non-U.S. persons
"portfolio interest". Moreover, Non-U.S. Holders generally are not subject to
U.S. tax on capital gains if (i) such gains are not effectively connected with
the conduct of a U.S. trade or business of such non-U.S. person, (ii) a tax
treaty is applicable and such gains are not attributable to a permanent
establishment in the United States maintained by such non-U.S. person, (iii)
such Non-U.S. Holder is an individual and is not present in the United States
for 183 or more days during the taxable year (assuming certain other
conditions are met) or (iv) such Non-U.S. Holder is not a former citizen or
resident of the United States.
The 2004 Jobs Act also provides that certain dividends designated by
the Company as "interest-related dividends" that are received by most foreign
investors (generally those that would qualify for the portfolio interest
exemptions of Section 871(h) or Section 881(c) of the Code) in the Company
will be exempt from U.S. withholding tax. Interest-related dividends are those
dividends derived from certain interest income (including bank deposit
interest and short term original issue discount that is currently exempt from
the withholding tax) earned by the Company that would not be subject to U.S.
tax if earned by a foreign person directly. The 2004 Jobs Act further provides
that certain dividends designated by the Company as "short-term capital gain
dividends" that are received by certain foreign investors (generally those not
present in the United States for 183 days or more) will be exempt from U.S.
withholding tax. In general, short-term capital gain dividends are those that
are derived from the Company's short-term capital gains over net long-term
capital losses. These provisions generally apply, with certain exceptions, to
taxable years beginning after December 31, 2004 and before January 1, 2008.
Prospective investors are urged to consult their tax advisors regarding the
specific tax consequences to them related to the 2004 Jobs Act.
Non-U.S. Holders treated as engaged in a U.S. trade or business are
generally subject to U.S. federal income tax at the graduated rates applicable
to U.S. persons on income which is considered to be effectively connected with
such U.S. trade or business. Non-U.S. Holders that are corporations may also
be subject to a 30% branch profits tax on such effectively connected income.
The 30% rate applicable to branch profits may be reduced or eliminated under
the provisions of an applicable income tax treaty between the United States
and the country in which the Non-U.S. Holder resides or is organized.
The Company does not expect to be engaged in a trade or business
within the United States, and therefore, any Non-U.S. Holder who is otherwise
not engaged in a U.S. trade or business (or, if an applicable treaty provides,
does not have a permanent establishment in the United States) should not be
subject to U.S. tax on (i) any capital gains (x) derived by the Company that
are allocable to such Non-U.S. Holder (including capital gain distributions
received from the Company, as described below) or (y) realized by such
Non-U.S. Holder upon the sale of such Non-U.S. Holder's common shares of the
Company or (ii) any "portfolio interest" earned by the Company. Such Non-U.S.
Holder, however, would be subject to the 30% withholding tax described above
on any U.S.-source dividend income of the Company (including ordinary dividend
distributions received from the Company, as described below). Generally such
withholding tax will not be reduced by any tax treaty between the United
States and the country in which the Non-U.S. Holder is resident.
Backup Withholding. The Company is required in certain circumstances
to backup withhold on taxable dividends and certain other payments paid to
non-corporate holders of the Company's common shares who do not furnish the
Company with their correct taxpayer identification number (in the case of
individuals, their social security number) and certain certifications, or who
are otherwise subject to backup withholding. Backup withholding is not an
additional tax. Any amounts withheld from payments made to an Investor may be
refunded or credited against such Investor's U.S. federal income tax
liability, if any, provided that the required information is furnished to the
Service.
Tax Shelter Regulations. In certain circumstances, an Investor who
disposes of an interest in a transaction resulting in the recognition by such
Investor of significant losses in excess of certain threshold amounts may be
obligated to disclose its participation in such transaction (a "reportable
transaction") in accordance with recently issued regulations governing tax
shelters and other potentially tax-motivated transactions (the "Tax Shelter
Regulations"). In addition, an investment in the Company may be considered a
"reportable transaction" if, for example, the Company recognizes certain
significant losses in the future. Investors should consult their tax advisors
concerning any possible disclosure obligation under the Tax Shelter
Regulations with respect to the disposition of their interest in the Company.
Risk Factors
No Operating History. The Company has no operating history. It is
subject to the business risks and uncertainties associated with any new
business, including the risk that it will not achieve its investment objective
and that its net asset value could decline substantially. The Company
anticipates that it will take up to two years to invest substantially all of
the net proceeds received by the Company from the Offering due to the time
necessary to identify, evaluate, structure, negotiate and close suitable
investments in private middle-market companies. In the interim, the Company
will invest in temporary investments, such as cash and cash equivalents, U.S.
government securities and other high quality debt investments that mature in
one year or less from the date of investment, which will earn yields
substantially lower than the interest income anticipated from investments in
senior and junior secured and unsecured debt securities and loans. The Company
will pay a Management Fee to the Advisor throughout this interim period. If
the Management Fee and other expenses of the Company exceed the return on the
temporary investments, the equity capital of the Company will be eroded.
Additionally, the Company may not be able to pay any dividends during this
period or such dividends may be substantially lower than the dividends the
Company expects to pay when its portfolio is fully invested.
Competition for Investment Opportunities. Many entities, including
public and private funds, commercial and investment banks, commercial
financing companies, business development companies and insurance companies
will compete with the Company to make the types of investments that it plans
to make in middle-market companies. Many of these competitors are
substantially larger, have considerably greater financial, technical and
marketing resources than the Company will have and offer a wider array of
financial services. For example, some competitors may have a lower cost of
funds and access to funding sources that are not available to the Company. In
addition, some competitors may have higher risk tolerances or different risk
assessments, which could allow them to consider a wider variety of investments
and establish more relationships. Many competitors are not subject to the
regulatory restrictions that the 1940 Act will impose on the Company as a
business development company or the restrictions that the Code will impose on
the Company as a regulated investment company. Some competitors may make loans
with interest rates that are lower than the rates the Company wishes to offer.
The competitive pressures the Company faces may have a material adverse effect
on its business, financial condition and results of operations. Also, as a
result of this competition, the Company may not be able to take advantage of
attractive investment opportunities from time to time, and can offer no
assurance that it will be able to identify and make investments that are
consistent with its investment objective. The Advisor has not yet identified
any potential investments for the Company's portfolio, although the Company's
competitors are likely to have identified and begun to pursue potential
investments in which the Company may be interested.
Ability to Manage the Company's Business. The Company's ability to
achieve its investment objective will depend on its ability to manage its
business, which will depend, in turn, on the ability of the Advisor to
identify, invest in and monitor companies that meet the Company's investment
criteria. Accomplishing this result largely will be a function of the
Advisor's investment process and, in conjunction with the Administrator, its
ability to provide competent, attentive and efficient services to the Company.
It is anticipated that one or more affiliates of BlackRock will serve as the
Administrator to the Company. The Administrator, on behalf of and at the
expense of the Company, may retain one or more service providers that may be
affiliates of BlackRock to serve as sub-administrator, custodian, accounting
agent, investor services agent and transfer agent for the Company. Fees and
indemnification in respect of the Administrator and such other service
providers that are BlackRock affiliates will be set at arm's length and
approved by the Independent Directors of the Company.
The members of the Investment Committee will have substantial
responsibilities to other clients of the Advisor's affiliates in addition to
their activities on behalf of the Company. The members of the Investment
Committee and the investment professionals dedicated primarily to the Company
may also be required to provide managerial assistance to the Company's
portfolio companies. These demands on their time may distract them or slow the
Company's rate of investment. Any failure to manage the Company's business
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations.
Business Development Company Limitations. Please see "Regulation of
the Company", above, for a discussion of business development company
limitations.
The Company is a different vehicle from any other investment fund
managed by either BlackRock or the Kelso Principals. The Company's investment
strategies will differ from those of other private funds that are or have been
managed by BlackRock, the Kelso Principals or their respective affiliates. The
Company will not invest in any private company in which BlackRock, Kelso or
any of their affiliates or any of the unregistered investment funds managed by
them already has an investment at that time. This may adversely affect the
pace at which the Company makes investments. The Company can provide no
assurance that it will replicate the historical or future performance of
BlackRock's or Kelso's private investment funds and cautions investors that
the Company's investment returns may be substantially lower than the returns
achieved by those private funds. As a business development company, the
Company is subject to certain investment restrictions that do not apply to
BlackRock's or Kelso's private investment funds.
Valuation Difficulties. A large percentage of the Company's portfolio
investments will be in the form of securities that are not publicly traded.
The fair value of securities and other investments that are not publicly
traded may not be readily determinable. The Company will value these
securities at least quarterly at fair value as determined in good faith by the
Board of Directors with the assistance of the Advisor and an independent
valuation firm. However, because fair valuations, and particularly fair
valuations of private securities and private companies, are inherently
uncertain, may fluctuate over short periods of time and are often based to a
large extent on estimates, comparisons and qualitative evaluations of private
information, the Company's determinations of fair value may differ materially
from the values that would have been determined if a ready market for these
securities existed. This could make it more difficult for investors to
accurately value the Company's portfolio investments and could lead to
under-valuation or over-valuation of its common shares.
Portfolio Illiquidity. The Company will generally make investments in
private companies. Substantially all of these securities will be subject to
legal and other restrictions on resale or will otherwise be less liquid than
publicly traded securities. The illiquidity of these investments may make it
difficult for the Company to sell such investments if the need arises. In
addition, if the Company is required to liquidate all or a portion of its
portfolio quickly, it may realize significantly less than the value at which
it has previously recorded such investments. In addition, the Company may face
other restrictions on its ability to liquidate an investment in a portfolio
company to the extent that it has material non-public information regarding
such portfolio company.
Leverage Risk. The Company may borrow money or issue debt securities
or preferred stock to leverage its capital structure. If the Company does so:
o The Company's common shares will be exposed to incremental risk
of loss. In these circumstances, a decrease in the value of the
Company's investments would have a greater negative impact on
the value of its common shares than if it did not use leverage.
o Adverse changes in interest rates could reduce or eliminate the
incremental income the Company expects to make with the proceeds
of any leverage.
o The Company's ability to pay dividends on its common shares will
be restricted if its asset coverage ratio is not at least 200%
and any amounts used to service indebtedness or preferred stock
would not be available for such dividends.
o It is likely that such securities will be governed by an
indenture or other instrument containing covenants restricting
the Company's operating flexibility.
o The Company, and indirectly its shareholders, will bear the cost
of issuing and paying interest or dividends on such securities.
o Any convertible or exchangeable securities that the Company
issues may have rights, preferences and privileges more
favorable than those of the Company's common shares.
Private Company Risks. Investment in private middle-market companies
involves a number of significant risks, including:
o These companies may have limited financial resources and may be
unable to meet their obligations under their debt securities
that the Company holds, which may be accompanied by a
deterioration in the value of any collateral.
o They typically have shorter operating histories, narrower
product lines and smaller market shares than larger businesses,
which tend to render them more vulnerable to competitors'
actions and market conditions, as well as general economic
downturns.
o They are more likely to depend on the management talents and
efforts of a small group of persons; therefore, the death,
disability, resignation or termination of one or more of these
persons could have a material adverse impact on the portfolio
company and, in turn, on the Company.
o They generally have less predictable operating results, may from
time to time be parties to litigation, may be engaged in rapidly
changing businesses with products subject to a substantial risk
of obsolescence, and may require substantial additional capital
to support their operations, finance expansion or maintain their
competitive position.
o They may cease to be treated as private companies for purposes
of the regulatory restrictions applicable to the Company, in
which case the Company may not be able to invest additional
amounts in them.
Little public information exists about these companies. The greater
difficulty in making a fully informed investment decision raises the risk of
misjudging the credit quality of the company, and the Company may lose money
on its investments.
Economic Recessions or Downturns. Many of the Company's portfolio
companies may be susceptible to economic slowdowns or recessions and may be
unable to repay loans during these periods. Therefore, the Company's
non-performing assets are likely to increase and the value of its portfolio is
likely to decrease during these periods. Adverse economic conditions also may
decrease the value of collateral securing some of the Company's loans and the
value of its equity investments. Economic slowdowns or recessions could lead
to financial losses in its portfolio and a decrease in revenues, net income
and assets. Unfavorable economic conditions also could increase funding costs,
limit access to the capital markets or result in a decision by lenders not to
extend credit to the Company. These events could prevent the Company from
increasing investments and harm its operating results.
A portfolio company's failure to satisfy financial or operating
covenants could lead to defaults and, potentially, termination of its loans
and foreclosure on its secured assets, which could trigger cross-defaults
under other agreements and jeopardize the portfolio company's ability to meet
its obligations under the debt securities that the Company holds. The Company
may need to incur additional expenses to seek recovery upon default or to
negotiate new terms with a defaulting portfolio company. In addition, if one
of the Company's portfolio companies were to go bankrupt, even though the
Company may have structured its interest as senior debt, depending on the
facts and circumstances, including the extent to which the Company actually
provided significant managerial assistance to that portfolio company, a
bankruptcy court might recharacterize the Company's debt holding and
subordinate all or a portion of its claim to that of other creditors.
Interest Rate Fluctuations. Because a substantial portion of the
assets of the Company will consist of loans and debt securities, the net asset
value of the common shares of the Company will fluctuate with changes in
interest rates, as well as with changes in the prices of the securities owned
by the Company caused by other factors. These fluctuations are likely to be
greater when the Company is using financial leverage.
Lower Credit Quality Obligations. Most of the Company's debt
investments are likely to be in lower grade obligations. The lower grade
investments in which the Company invests may be rated below investment grade
by one or more nationally-recognized statistical rating agencies at the time
of investment or may be unrated but determined by the Advisor to be of
comparable quality. Debt securities rated below investment grade are commonly
referred to as "junk bonds" and are considered speculative with respect to the
issuer's capacity to pay interest and repay principal.
Investment in lower grade investments involves substantial risk of
loss. Lower grade securities or comparable unrated securities are considered
predominantly speculative with respect to the issuer's ability to pay interest
and principal and are susceptible to default or decline in market value due to
adverse economic and business developments. The market values for lower grade
debt tend to be very volatile, and are less liquid than investment grade
securities. For these reasons, an investment in the Company is subject to the
following specific risks:
o increased price sensitivity to a deteriorating economic
environment;
o greater risk of loss due to default or declining credit quality;
o adverse company specific events are more likely to render the
issuer unable to make interest and/or principal payments; and
o if a negative perception of the lower grade debt market
develops, the price and liquidity of lower grade securities may
be depressed. This negative perception could last for a
significant period of time.
Adverse changes in economic conditions are more likely to lead to a
weakened capacity of a lower grade issuer to make principal payments and
interest payments than an investment grade issuer. The principal amount of
lower grade securities outstanding has proliferated in the past decade as an
increasing number of issuers have used lower grade securities for corporate
financing. An economic downturn could severely affect the ability of highly
leveraged issuers to service their debt obligations or to repay their
obligations upon maturity. Similarly, downturns in profitability in specific
industries could adversely affect the ability of lower grade issuers in that
industry to meet their obligations. The market values of lower grade debt tend
to reflect individual developments of the issuer to a greater extent than do
higher quality investments, which react primarily to fluctuations in the
general level of interest rates. Factors having an adverse impact on the
market value of lower grade debt may have an adverse effect on the Company's
net asset value and the market value of its common shares (whether before or
after the Public Market Event). In addition, the Company may incur additional
expenses to the extent it is required to seek recovery upon a default in
payment of principal of or interest on its portfolio holdings. In certain
circumstances, the Company may be required to foreclose on an issuer's assets
and take possession of its property or operations. In such circumstances, the
Company would incur additional costs in disposing of such assets and potential
liabilities from operating any business acquired.
The secondary market for lower grade debt may not be as liquid as the
secondary market for more highly rated debt, a factor which may have an
adverse effect on the Company's ability to dispose of a particular instrument.
There are fewer dealers in the market for lower grade securities than
investment grade obligations. The prices quoted by different dealers may vary
significantly and the spread between the bid and asked price is generally much
larger than higher quality instruments. Under adverse market or economic
conditions, the secondary market for lower grade debt could contract further,
independent of any specific adverse changes in the condition of a particular
issuer, and these instruments may become highly illiquid. As a result, the
Company could find it more difficult to sell these instruments or may be able
to sell the securities only at prices lower than if such instruments were
widely traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Company's net asset value.
Since investors generally perceive that there are greater risks
associated with lower grade debt of the type in which the Company may invest a
portion of its assets, the yields and prices of such debt may tend to
fluctuate more than those for higher rated instruments. In the lower quality
segments of the income securities markets, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the income securities market,
resulting in greater yield and price volatility.
Subordination Risk. The Company's portfolio companies usually will
have, or may be permitted to incur, other debt that ranks equally with, or
senior to, debt securities in which the Company will often invest. By their
terms, such debt instruments may provide that the holders are entitled to
receive payment of interest or principal on or before the dates on which the
Company is entitled to receive payments. Also, in the event of insolvency,
liquidation, dissolution, reorganization or bankruptcy of a portfolio company,
holders of debt instruments ranking senior to the Company's investment in that
portfolio company would typically be entitled to receive payment in full
before the Company receives any distribution in respect of its investment.
After repaying such senior creditors, the portfolio company may not have any
remaining assets to use for repaying its obligations to the Company. In the
case of debt ranking equally with debt securities in which the Company
invests, the Company would have to share on an equal basis any distributions
with other creditors holding such debt in the event of an insolvency,
liquidation, dissolution, reorganization or bankruptcy of the relevant
portfolio company. In addition, the Company may not be in a position to
control any portfolio company by investing in its debt securities. As a
result, the Company is subject to the risk that a portfolio company in which
it invests may make business decisions with which it disagrees and the
management of such company, as representatives of the holders of their common
equity, may take risks or otherwise act in ways that do not serve the
Company's interests as debt investors.
Distressed Debt Securities Risk. At times, distressed debt
obligations may not produce income and may require the Company to bear certain
extraordinary expenses (including legal, accounting, valuation and transaction
expenses) in order to protect and recover its investment. Therefore, to the
extent the Company invests in distressed debt, the Company's ability to
achieve current income for its shareholders may be diminished. The Company
also will be subject to significant uncertainty as to when and in what manner
and for what value the distressed debt the Company invests in will eventually
be satisfied (e.g., through a liquidation of the obligor's assets, an exchange
offer or plan of reorganization involving the distressed debt securities or a
payment of some amount in satisfaction of the obligation). In addition, even
if an exchange offer is made or plan of reorganization is adopted with respect
to distressed debt held by the Company, there can be no assurance that the
securities or other assets received by the Company in connection with such
exchange offer or plan of reorganization will not have a lower value or income
potential than may have been anticipated when the investment was made.
Moreover, any securities received by the Company upon completion of an
exchange offer or plan of reorganization may be restricted as to resale. As a
result of the Company's participation in negotiations with respect to any
exchange offer or plan of reorganization with respect to an issuer of
distressed debt, the Company may be restricted from disposing of such
securities.
Tax Risk. To maintain its qualification as a regulated investment
company under the Code, which is required in order for the Company to
distribute its income without tax at the Company level, the Company must meet
certain income source, asset diversification and annual distribution
requirements. Satisfying these requirements may require the Company to take
actions it would not otherwise take, such as selling investments at
unattractive prices to satisfy diversification, distribution or source of
income requirements. In addition, while the Company is authorized to borrow
funds in order to make distributions, under the 1940 Act it is not permitted
to make distributions to shareholders while its debt obligations and other
senior securities are outstanding unless certain "asset coverage" tests are
met. If the Company fails to qualify as a regulated investment company for any
reason and becomes or remains subject to corporate income tax, the resulting
corporate taxes could substantially reduce its net assets, the amount of
income available for distribution and the amount of its distributions. Such a
failure would have a material adverse effect on the Company and its
shareholders.
Difficulty Paying Distributions. For U.S. federal income tax
purposes, the Company will include in income certain amounts that it has not
yet received in cash, such as original issue discount, which may arise if the
Company invests in zero coupon securities, deferred interest securities or
certain other securities, or if the Company receives warrants in connection
with the making of a loan or possibly in other circumstances. Such original
issue discount, which could but is not expected to be significant relative to
the Company's overall investment activities, generally will be included in
income before the Company receives any corresponding cash payments. The
Company also may be required to include in income certain other amounts that
the Company will not receive in cash.
Since in certain cases the Company may recognize income before or
without receiving cash representing such income, it may have difficulty making
distributions in the amounts necessary to satisfy the requirements for
maintaining regulated investment company status and for avoiding income and
excise taxes. Accordingly, the Company may have to sell some of its
investments at times the Advisor would not consider advantageous, raise
additional debt or equity capital or reduce new investment originations to
meet these distribution requirements. If the Company is not able to obtain
cash from other sources, the Company may fail to qualify as a regulated
investment company and thus be subject to corporate-level income tax. Such a
failure would have a material adverse effect on the Company and its
shareholders.
Conflicts of Interest. The Advisor, its affiliates or their officers
and employees serve or may serve as officers, directors or principals of
entities that operate in the same or a related line of business or of
investment funds managed by affiliates of the Advisor. Accordingly, these
individuals may have obligations to investors in those entities or funds, the
fulfillment of which might not be in the best interests of the Company or its
shareholders. As a result, the Advisor may face conflicts in the allocation of
investment opportunities to the Company and other funds. In order to enable
such affiliates to fulfill their fiduciary duties to each of the clients for
which they have responsibility, the Advisor will endeavor to allocate
investment opportunities in a fair and equitable manner which may, subject to
applicable regulatory constraints, involve pro rata coinvestment by the
Company and such other clients or may involve a rotation of opportunities
among the Company and such other clients.
The Advisor and its affiliates have procedures and policies in place
designed to manage the potential conflicts of interest that may arise from
time to time between the Advisor's fiduciary obligations to the Company and
their similar fiduciary obligations to other clients so that, for example,
investment opportunities are allocated in a fair and equitable manner among
the Company and such other clients. An investment opportunity that is suitable
for multiple clients of the Advisor's affiliates may not be capable of being
shared among some or all of such clients due to the limited scale of the
opportunity or other factors, including regulatory restrictions imposed by the
1940 Act. There can be no assurance that the Advisor's or its affiliates'
efforts to allocate any particular investment opportunity fairly among all
clients for whom such opportunity is appropriate will result in an allocation
of all or part of such opportunity to the Company. Not all conflicts of
interest can be expected to be resolved in favor of the Company.
Some individuals may be employed both by the Advisor and by another
entity that has other clients for whom a particular investment opportunity may
be appropriate. When the Advisor can determine the capacity in which a dual
employee obtained an investment opportunity, the opportunity will be offered
first to the clients of the entity through which the opportunity arose. Where
the capacity cannot readily be determined, the Advisor will seek to allocate
the opportunity in accordance with the principles articulated above.
Limitations on Deal Flow from the Kelso Principals and BlackRock. The
Company expects that the Kelso Principals, certain of whom are affiliated with
the Advisor but have no individual contractual duty to the Advisor or to the
Company, will be a source of investment opportunities. However, investors
should be aware that the Kelso Principals are subject to the terms and
conditions of the agreements governing the private investment partnerships
managed by Kelso, which include restrictions on the non-Kelso fund activities
of Kelso and the Kelso Principals. The primary obligation of the Kelso
Principals is to manage Kelso's investment partnerships. For example, these
agreements generally require that certain of the Kelso Principals, including
Messrs. Frank T. Nickell, George E. Matelich and Michael B. Goldberg (who
serve on the Investment Committee in their individual capacities as members of
the Advisor), devote substantially all of their business time and efforts to
the private investment partnerships managed by Kelso, and each of them intends
to do so. The Advisor is not subject to these restrictions. In addition, these
agreements require that any investment opportunities presented to Kelso or the
Kelso Principals that are appropriate to such partnerships be offered to the
partnerships. Therefore, although the investment opportunities appropriate for
the Company will generally not be of the type that would be appropriate for
the private investment partnerships managed by Kelso, if the Kelso Principals
are presented with any opportunities that are appropriate for both the Company
and such partnerships, the Kelso Principals would be obligated to offer the
opportunities first to such partnerships and not to the Company, regardless of
the capacity in which they received such opportunity. This may limit the
extent to which the Kelso Principals (but not the Advisor, to the extent it is
able to identify investment opportunities independently) will be a source of
investment transactions for the Company. BlackRock is not subject to any
similar arrangements in favor of its clients other than with respect to
mezzanine real estate debt, as to which it is required to bring certain
opportunities first to a private real estate debt fund managed by BlackRock.
Carried Interest Risks. The Carried Interest (as defined below),
which may be owing to the Advisor or its affiliates may create an incentive
for the Advisor to make investments that are riskier or more speculative than
would otherwise be the case. The way in which the amount of the Carried
Interest is determined, which is calculated as a percentage of distributions
on the Company's common shares, may encourage the Advisor to use leverage in
an effort to increase the return on the Company's investments. If the Advisor
acquires poorly performing assets with such leverage, the loss to holders of
the Company's common shares could be substantial. Finally, because a portion
of the Carried Interest is likely to reflect interest and dividend income and
is calculated on an accrual basis regardless of whether the Company has
received a cash payment of such interest or dividends, the Advisor might have
an incentive to invest in zero coupon or deferred interest securities in
circumstances where it would not have done so but for the opportunity to
continue to earn Carried Interest even when the issuers thereof would not be
able to make cash payments on such securities. The foregoing risks could be
increased because the Advisor is not obligated to reimburse the Company for
any Carried Interest received even if the Company subsequently incurs losses
or never receives in cash income that was previously accrued.
The Board of Directors does not believe the Advisor is susceptible to
engaging in these practices, both because excessive risk taking will reduce
the likelihood of earning incentive fees over the long term and because of the
high standards of fiduciary conduct exhibited by BlackRock and the Kelso
Principals in the past. However, the Board of Directors will monitor the
investment activities of the Advisor and will be prepared to terminate its
services and seek restitution of any harm to the Company if it believes the
Advisor has breached its fiduciary duties in this regard.
Limited Liquidity of the Common Shares. The Company's common shares
are not freely transferrable and shareholders will not have the right to
redeem their common shares. The Company's common shares should be regarded as
a long-term investment.
Common Stock Risk. The Company may have exposure to common stocks.
Although common stocks have historically generated higher average total
returns than fixed-income securities over the long term, common stocks also
have experienced significantly more volatility in those returns and in recent
years have significantly under performed relative to fixed-income securities.
The equity securities acquired by the Company may fail to appreciate and may
decline in value or become worthless.
Preferred Stock Risk. To the extent the Company invests in preferred
securities, there are special risks associated with investing in preferred
securities, including:
Deferral. Preferred securities may include provisions that permit the
issuer, at its discretion, to defer distributions for a stated period
without any adverse consequences to the issuer. If the Company owns a
preferred security that is deferring its distributions, the Company
may be required to report income for tax purposes although it has not
yet received such income.
Subordination. Preferred securities are subordinated to bonds and
other debt instruments in a company's capital structure in terms of
priority to corporate income and liquidation payments, and therefore
will be subject to greater credit risk than more senior debt
instruments.
Liquidity. Preferred securities may be substantially less liquid than
many other securities, such as common stocks or U.S. government
securities.
Limited Voting Rights. Generally, preferred security holders (such as
the Company) have no voting rights with respect to the issuing
company unless preferred dividends have been in arrears for a
specified number of periods, at which time the preferred security
holders may elect a number of directors to the issuer's board.
Generally, once all the arrearages have been paid, the preferred
security holders no longer have voting rights.
Industry, Sector and Issuer Risk. The Company may, from time to time,
invest a substantial portion of its assets in the securities of issuers in any
single industry or sector of the economy or in only a few issuers. The Company
cannot predict the industries or sectors in which its investment strategy may
cause it to concentrate and cannot predict the level of its diversification
among issuers, although over time the Company anticipates investing in a
minimum of 15 to 20 issuers to ensure it satisfies diversification
requirements for qualification as a regulated investment company for U.S.
federal income tax purposes. Concentration of the Company's assets in an
industry or sector may present more risks than if it were broadly diversified
over numerous industries and sectors of the economy. A downturn in an industry
or sector in which the Company is concentrated would have a larger impact on
the Company than on a company that does not concentrate in industry or sector.
As a result of investing a greater portion of the Company's assets in the
securities of a smaller number of issuers, the Company is classified as a
non-diversified company under the 1940 Act. The Company may be more vulnerable
to events affecting a single issuer or industry and therefore subject to
greater volatility than a company whose investments are more broadly
diversified. Accordingly, an investment in the Company may present greater
risk than an investment in a diversified company. Furthermore, the Advisor has
not made and does not intend to make any determination as to the allocation of
assets among different classes of securities. Consequently, at any point in
time the Company may be highly concentrated in a single type of asset, such as
junior unsecured loans or distressed debt. Consequently, events which affect a
particular asset class disproportionately could have an equally
disproportionate effect on the Company.
Changes in Laws or Regulations Governing Portfolio Companies. The
Company's portfolio companies will be subject to regulation by laws at the
local, state and federal level. These laws and regulations, as well as their
interpretation, may be changed from time to time. Any change in these laws or
regulations, or any failure to comply with them by the Company's portfolio
companies, could have a material adverse affect on the Company's business.
Foreign Securities Risk. Investing in foreign securities involves
certain risks not involved in domestic investments, including, but not limited
to: (i) future foreign economic, financial, political and social developments;
(ii) different legal systems; (iii) the possible imposition of exchange
controls or other foreign governmental laws or restrictions; (iv) lower
trading volume; (v) much greater price volatility and illiquidity of certain
foreign securities markets; (vi) different trading and settlement practices;
(vii) less governmental supervision; (viii) changes in currency exchange
rates; (ix) high and volatile rates of inflation; (x) fluctuating interest
rates; (xi) less publicly available information; and (xii) different
accounting, auditing and financial recordkeeping standards and requirements.
The Company may employ hedging techniques to minimize currency
exchange rate risks or interest rate risks, but there can be no assurance that
such strategies will be effective. If the Company engages in hedging
transactions, it may be exposed to risks associated with such transactions.
Hedging against a decline in the values of the Company's portfolio positions
does not eliminate the possibility of fluctuations in the values of such
positions or prevent losses if the values of such positions decline. Moreover,
it may not be possible to hedge against an exchange rate or interest rate
fluctuation that is so generally anticipated that the Company is not able to
enter into a hedging transaction at an acceptable price.
Market Disruption and Geopolitical Risk. The war with Iraq, its
aftermath and the continuing occupation of Iraq are likely to have a
substantial impact on the U.S. and world economies and securities markets. The
nature, scope and duration of the war and occupation cannot be predicted with
any certainty. Terrorist attacks on the World Trade Center and the Pentagon on
September 11, 2001 closed some of the U.S. securities markets for a four-day
period and similar events in the future cannot be ruled out. The war and
occupation, terrorism and related geopolitical risks have led, and may in the
future lead to, increased short-term market volatility and may have adverse
long-term effects on U.S. and world economies and markets generally. Those
events could also have an acute effect on individual issuers or related groups
of issuers. These risks could also adversely affect individual issuers and
securities markets, inflation and other factors relating to the Company's
common shares and portfolio investments.
Anti-Takeover Provisions. The Certificate of Incorporation of the
Company (the "Certificate of Incorporation") includes provisions that could
limit the ability of other entities or persons to acquire control of the
Company or convert the Company to an open-end investment company. These
provisions could deprive the holders of common shares of the Company of
opportunities to sell their common shares at a premium over the then current
market price of the common shares or at net asset value.
Forward Looking Statements. Some of the statements in this
Registration Statement constitute forward-looking statements, which relate to
future events or the Company's future performance or financial condition. The
forward looking statements contained in this Registration Statement involve
risks and uncertainties, including statements as to: future operating results;
business prospects and the prospects of portfolio companies; the impact of
investments expected to be made; contractual arrangements and relationships
with third parties; the dependence of the Company's future success on the
general economy and its impact on the industries in which the Company invests;
the ability of portfolio companies to achieve their objectives; expected
financings and investments; the adequacy of the Company's cash resources and
working capital; and the timing of cash flows, if any, from the operations of
portfolio companies.
Forward looking statements are typically identified by words or
phrases such as "believe," "expect," "anticipate," "intend," "estimate,"
"position," "target," "mission," "assume," "achievable," "potential,"
"strategy," "goal," "objective," "plan," "aspiration," "outlook," "outcome,"
"continue," "remain," "maintain," "strive," "trend," and variations of such
words and similar expressions, or future or conditional verbs such as "will,"
"would," "should," "could," "may" or similar expressions. Actual results could
differ materially from those projected in the forward-looking statements for
any reason, including the factors set forth in "Risks" and elsewhere in this
Registration Statement.
The forward-looking statements included in this Registration
Statement are based on information available to the Company on the date of
this Registration Statement, and the Company assumes no obligation to update
any such forward-looking statements.
(d) Financial Information About Geographic Areas
The Company has not commenced business and has no revenues or assets.
(e) Available Information
Not Applicable.
(f) Reports to Security Holders
Not Applicable.
(g) Enforceability of Civil Liabilities Against Foreign Persons
Not Applicable.
Item 2. Financial Information.
The Company has not commenced business and has no revenues or assets.
Item 3. Properties.
The Company has not commenced business and has no revenues or assets.
It is anticipated that the Company's principal assets following commencement
of operations will be investments.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
BlackRock Funding will purchase 150 common shares of the Company at a
price of $15.00 per share as the Company's initial capital. Therefore, until
immediately following the anticipated placement of the Offering, BlackRock
will be deemed to "control" the Company through its control of BlackRock
Funding.
Upon the closing of the Offering, the common shares of the Company
will be owned by numerous persons that are "accredited investors," as that
term is defined in Regulation D, and a majority of the common shares will be
owned by the Holding Company, whose shares will be owned by institutional and
individual investors.
Item 5. Directors and Executive Officers.
The directors and executive officers of the Company are as follows:
Name Age Position
- ------------------------------------------------------------------------------------------------
Frank D. Gordon* 44 Chief Financial Officer and Treasurer
Jerrold B. Harris 62 Director
Michael B. Lazar* 36 Chief Operating Officer and Managing Director
James R. Maher* 55 Chairman of the Board and Chief Executive Officer
William E. Mayer 64 Director
France de Saint Phalle 59 Director
Vincent B. Tritto* 43 Chief Compliance Officer and Secretary
Maureen K. Usifer 45 Director
*Interested person of the Company within the meaning of the 1940 Act.
James R. Maher, Chairman of the Board and Chief Executive Officer of
the Company and Chairman of the Board and Chief Executive Officer of the
Advisor. Since June 2004 Mr. Maher has been engaged in establishing the
Company. Mr. Maher was, from 2001 until June 2004, a partner at Park Avenue
Equity Partners, L.P. ("Park Avenue"). Park Avenue is a private equity fund
specializing in middle-market management buyouts and growth capital
investments. Prior to joining Park Avenue, Mr. Maher was President of
MacAndrews & Forbes Holdings Inc., a diversified holding company with
interests primarily in consumer products and financial services companies. Mr.
Maher served as Chairman of Laboratory Corporation of America Holdings
("LabCorp"), a large clinical laboratory company, after serving as President
and Chief Executive Officer of National Health Laboratories, LabCorp's
predecessor, from 1992 to 1995. Prior to joining National Health Laboratories,
Mr. Maher was Vice Chairman and a member of the Operating Committee of The
First Boston Corporation, an international investment-banking firm. He served
on the Group Executive Committee of Credit Suisse First Boston, Inc., where he
was responsible for the global oversight and coordination of merger and
acquisition activities, as well as being a member of its investment committee.
He was also Head of the Investment Banking Group for more than four years. He
joined The First Boston Corporation in 1976 and was named a Managing Director
in 1982. Mr. Maher serves as a Director of Panavision, Inc., HCI Direct, Inc.
and the Phoenix House Foundation, a non-profit drug abuse treatment
foundation. He is also a Director of Prep for Prep, an organization based in
New York City that assists intellectually gifted public school students from
minority group backgrounds, and prepares them for placement in independent
schools. He has served as a Director of the Brearley School in New York City
and on the Boards of a number of public companies. Mr. Maher received a
Master's in Business Administration from Columbia University in 1976 and an
undergraduate degree from Boston College in 1971.
William E. Mayer, Director of the Company. Since 1999, Mr. Mayer has
been a partner at Park Avenue, which he co-founded. From 1996 until the
formation of Park Avenue, Mr. Mayer was a founding Partner of Development
Capital, which invested in private and public companies. From the fall of 1992
until December 1996, Mr. Mayer was a professor and Dean of the College of
Business and Management at the University of Maryland. From 1991 to 1992, Mr.
Mayer served as a professor and Dean of the Simon Graduate School of Business
at the University of Rochester. Mr. Mayer worked for The First Boston
Corporation (now Credit Suisse First Boston), a major investment bank, from
1967 to 1990. During his career at The First Boston Corporation, Mr. Mayer
held numerous management positions including President and Chief Executive
Officer. Mr. Mayer is currently a board member of the following public
companies: Lee Enterprises (a newspaper company owning or having stakes in
approximately 45 daily newspapers), Reader's Digest, and is a trustee of the
Columbia Group of Mutual Funds. Over the past 25 years, he has been a board
member of numerous other public and private companies. Mr. Mayer is also
Chairman of the Aspen Institute and a trustee of The University of Maryland.
Mr. Mayer was a First Lieutenant and Navigator in the U.S. Air Force. He holds
a B.S. degree and an M.B.A. degree from the University of Maryland.
Maureen K. Usifer, Director of the Company. Maureen K. Usifer has
been a senior finance director with Church & Dwight Co., Inc., a major
producer of baking soda and consumer products, from May 2004 until present.
From October 2001 until May 2004, Ms. Usifer was the Chief Financial Officer
for Armkel, LLC a joint venture with Church & Dwight and Kelso which
encompassed over $400 million in personal care sales. Ms. Usifer was Division
Controller of Church & Dwight's Armus joint venture, which encompassed $500
million in laundry sales, from May 2000 through October 2001. From 1996
through 2000, Ms. Usifer was a Senior Finance Manager of Church & Dwight
responsible for all of the Arm & Hammer's personal care businesses. Ms. Usifer
received an undergraduate degree in business from St. Michael's College and an
M.B.A. in Finance from Clarkson University.
France de Saint Phalle, Director of the Company. Mr. de Sainte Phalle
has been retired since 2001. From 1990 to 2001, Mr. de Saint Phalle was
Vice-Chairman and Chief Operating Officer of Dillon, Read & Co., Inc., an
investment bank which was acquired by Swiss Bank Corporation in 1997. From
1968 to 1990, Mr. de Saint Phalle was a Managing Director at Lehman Brothers,
Inc. and, from 1985 to 1990, Chairman of Lehman Brothers International
(Europe). Mr. de Saint Phalle is currently a director of Cornerstone
Management Solutions. Mr. de Saint Phalle earned a B.A. degree from Columbia
College in 1968.
Jerrold B. Harris, Director of the Company. Mr. Harris has been
retired since 1999. From 1990 to 1999, Mr. Harris was President and Chief
Executive Officer of VWR Scientific Products Corporation (which was acquired
by Merck KGaA in 1999). Mr. Harris is currently a director of BlackRock
Liquidity Funds and Henry Troemner LLC. Mr. Harris is a trustee of Ursinus
College. Mr. Harris earned a B.S. degree from the University of California at
Berkeley in 1964.
Michael B. Lazar, Chief Operating Officer and Managing Director of
the Company and Chief Operating Officer and Managing Director of the Advisor.
Prior to joining the Company and the Advisor, Mr. Lazar was a Managing
Director and Principal at Kelso & Company, one of the oldest and most
established firms specializing in private equity investing. Having originally
joined Kelso in 1993, Mr. Lazar has been involved in Kelso's private equity
transactions since that time. Prior to joining Kelso, Mr. Lazar worked in the
Acquisition Finance Group at Chemical Securities, Inc. (predecessor to J.P.
Morgan Securities Inc.) where his responsibilities included working with
financial sponsors on the analysis, evaluation and financing of leveraged
buyouts. Mr. Lazar began his career in the Corporate Finance and Structured
Finance Groups at Chemical Bank, where he focused on financings for leveraged
companies. He received a B.A. degree, cum laude, from Dartmouth College. Mr.
Lazar is a director of Endurance Business Media, Inc. and Waste Services, Inc.
Vincent B. Tritto, Chief Compliance Officer and Secretary of the
Company. Mr. Tritto is a Managing Director and Senior Counsel at BlackRock,
where he has worked since 2002. He also serves as the Secretary of the 54
active funds comprising the BlackRock Closed-end Funds. Prior to joining
BlackRock, Mr. Tritto was Executive Director and Counsel at Morgan Stanley
Investment Management Inc. for four years. Previously, he was Counsel (1998),
and an associate (1988 through 1997), at the New York law firm of Rogers &
Wells. During this time he also served as a foreign associate at the Tokyo law
firm of Masuda & Ejiri, from 1992-1994. Mr. Tritto earned a B.A. degree, cum
laude, from the University of Rochester in 1983 and a J.D. degree, cum laude,
from St. John's University School of Law in 1988 where he was managing editor
of the St. John's Law Review.
Frank D. Gordon, Chief Financial Officer and Treasurer of the
Company. Mr. Gordon is a Director at BlackRock, where he has worked since
1998. His primary responsibility at BlackRock was until recently the
administration of structured finance entities managed by the high yield and
bank loan teams, including compliance monitoring, legal affairs and financial
and shareholder reporting. Mr. Gordon has been involved in BlackRock's high
yield and mezzanine efforts since their inception. Prior to joining
BlackRock's high yield effort, Mr. Gordon was the Controller of Anthracite
Capital, Inc., a publicly-owned real estate investment trust managed by
BlackRock. From 1994 to 1998, Mr. Gordon was an attorney in the Structured
Finance department of Skadden, Arps, Slate, Meagher & Flom LLP. From 1987 to
1990, Mr. Gordon was a Vice President in the Fixed Income Research department
of The First Boston Corporation. From 1983 to 1986, Mr. Gordon was a senior
auditor at Deloitte Haskins & Sells. Mr. Gordon earned a B.S. degree in
economics from the Wharton School of the University of Pennsylvania in 1983
and an M.B.A. degree with honors and a J.D. degree from The University of
Chicago in 1992 and 1994, respectively. Mr. Gordon is a Certified Public
Accountant and a Chartered Financial Analyst.
The Investment Advisor
Please see Item 1 of this Registration Statement for a description of
the Advisor. Please see Item 7(d) for a description of the Investment Advisory
Agreement. The Advisor will have primary responsibility for the Company's
investment program.
Item 6. Executive Compensation.
The Company will pay no compensation to its officers who are
"interested persons" (as defined in the 1940 Act) of the Advisor or to its
directors other than its Independent Directors. The Company is authorized to
pay each Independent Director the following amounts for serving as a director:
(i) $50,000 ($75,000 after the Public Market Event) per year, (ii) $2,500 for
each meeting of the Board of Directors of the Company attended (50% for
telephonic attendance), (iii) $1,000 for each committee meeting of the Company
attended (50% for telephonic attendance), (iv) an additional fee of $7,500 per
year for the Audit Committee Chairman and (v) an additional fee of $2,500 per
year for each Chairman of any other committee of the Board of Directors.
Compensation will be payable in either cash or stock. Compensation paid in
stock will be calculated at the higher of (i) the market value of the stock or
(ii) the net asset value of the stock.
Executive Officers
The Company expects to have no executive officers other than (i)
James R. Maher, who serves as Chairman of the Board and Chief Executive
Officer of the Company, (ii) Michael B. Lazar, who serves as Chief Operating
Officer and Managing Director of the Company, (iii) Frank D. Gordon, who
serves as the Chief Financial Officer and Treasurer of the Company and (iv)
Vincent B. Tritto, who serves as the Chief Compliance Officer and Secretary of
the Company. The Company will generally rely on the Advisor and its officers
(all of whom are employed by the Advisor) to administer its affairs, subject
to the supervision of the Board of Directors. The Company may also, in its
sole discretion, delegate certain duties to a third party administrator.
Item 7. Certain Relationships and Related Transactions.
(a) Transactions With Management and Others
It is anticipated that one or more affiliates of BlackRock will serve
as the Administrator to the Company. The Administrator, on behalf of and at
the expense of the Company, may retain one or more service providers that may
be affiliates of BlackRock to serve as sub-administrator, custodian,
accounting agent, investor services agent and transfer agent for the Company.
Fees and indemnification in respect of the Administrator and such other
service providers that are BlackRock affiliates will be set at arm's length
and approved by the Independent Directors of the Company.
(b) Certain Business Relationships
Certain of the current directors and officers of the Company are
directors or officers of the Advisor. See Item 7(d) below for a description of
the Company's Investment Advisory Agreement with the Advisor ("Investment
Advisory Agreement").
(c) Indebtedness of Management
None.
(d) Transactions With Promoters
The Advisor may be deemed a promoter of the Company. The Company will
enter into the Investment Advisory Agreement with the Advisor. James R. Maher
is Chairman of the Board of Directors and Chief Executive Officer of the
Company and Chairman of the Board of Managers and Chief Executive Officer of
the Advisor. Mr. Maher will have a 14.9% equity interest in the Advisor.
Pursuant to the Investment Advisory Agreement, the Advisor will,
subject to the investment policies and guidelines established by the Board of
Directors, (i) act as investment advisor for and supervise and manage the
investment and reinvestment of the Company's assets and in connection
therewith have complete discretion in purchasing and selling securities and
other assets for the Company and in voting, exercising consents and exercising
all other rights appertaining to such securities and other assets on behalf of
the Company; (ii) supervise continuously the investment program of the Company
and the composition of its investment portfolio; (iii) arrange for the
purchase and sale of securities and other assets held in the investment
portfolio of the Company; and (iv) oversee the administration of all aspects
of the Company's business and affairs and provide, or arrange for others whom
it believes to be competent to provide, certain services
The Advisor will bear all costs and expenses of its employees and any
overhead incurred in connection with its duties hereunder and will bear the
costs of any salaries or directors' fees of any officers or directors of the
Company who are affiliated persons of the Advisor, as defined in the 1940 Act.
The Advisor will bear all costs and expenses incurred in connection with its
investment advisory duties for the Company. The Company will reimburse the
Advisor for all direct and indirect costs and expenses incurred by the Advisor
(i) for office space rental, office equipment and utilities allocable to
performance of investment advisory and non-investment advisory administrative
or operating services hereunder by the Advisor and (ii) allocable to any
non-investment advisory administrative or operating services provided by the
Advisor hereunder, including salaries, bonuses, health insurance, retirement
benefits and all similar employment costs, such as office equipment and other
overhead items. The Company will also be responsible for the payment of all
the Company's other expenses, including (i) payment of the fees payable to the
Advisor; (ii) organizational expenses; (iii) brokerage fees and commissions;
(iv) taxes; (v) interest charges on borrowings; (vi) the cost of liability
insurance or fidelity bond coverage for the Company's officers and employees,
and directors' and officers' errors and omissions insurance coverage; (vii)
legal, auditing and accounting fees and expenses; (viii) charges of the
Company's Administrator, custodian, transfer agent and dividend disbursing
agent and any other service providers; (ix) the Company's dues, fees and
charges of any trade association of which the Company is a member; (x) the
expenses of printing, preparing and mailing proxies, stock certificates,
reports, prospectuses, registration statements and other documents used by the
Company; (xi) expenses of registering and offering securities of the Company
under applicable law; (xii) the expenses of holding shareholder meetings;
(xiii) the compensation, including fees, of any of the Company's directors,
officers or employees who are not affiliated persons of the Advisor; (xiv) all
expenses of computing the Company's net asset value per share; (xv) litigation
and indemnification and other extraordinary or non-recurring expenses; and
(xvi) all other non-investment advisory expenses of the Company.
The Advisor, for its services to the Company, will be entitled to
receive the Management Fee from the Company. The Management Fee will be
calculated at an annual rate of 2.00% of the Company's total assets. During
the period commencing from the closing of the Offering through and including
the first twelve months of operations, the Management Fee will be payable
monthly in arrears based on the asset valuation for the prior month or, prior
to the Company's first valuation, its assets upon the commencement of its
business. After that time, the Management Fee will be paid quarterly in
arrears based on the asset valuation for the prior quarter.
The Advisor has agreed to waive its rights to receive one-half of the
amount of the Management Fee the Advisor would otherwise be entitled to
receive from the Company until the Ramp-Up Date. Thereafter, the Advisor has
agreed to waive, until such time as the Company has completed the Public
Market Event, one-quarter of the amount of the Management Fee the Advisor
would otherwise be entitled to receive from the Company.
In any event and assuming gross proceeds from the Offering of $500
million, the Advisor has agreed (i) to waive Management Fees for any calendar
year in excess of $11.25 million until the earlier of (A) such time as the
Company has completed the Public Market Event or (B) the fourth anniversary of
the commencement of the Company and (ii) to waive its Management Fee in excess
of $5.25 million during the fifth year of the Company's existence unless the
Company has completed the Public Market Event. If there is no Public Market
Event, the Company will begin the process of winding down its assets in the
beginning of the sixth year of the Company's existence. The Company would need
to have greater than $750 million in total assets during the initial waiver
period for the $11.25 million cap to be operative and greater than $350
million in total assets during the fifth year for the $5.25 million cap to be
operative. The foregoing amounts assume gross proceeds from the Offering of
$500 million. To the extent that such gross proceeds differ from $500 million,
the fee cap and total asset thresholds described above will change in direct
proportion to the ratio of the actual gross proceeds to $500 million. For
example, if the gross proceeds from the Offering were $520 million, the $11.25
million and $5.25 million fee caps described above would increase to $11.70
million and $5.46 million, respectively, and the total asset thresholds of
$750 million and $350 million described above would increase to $780 million
and $364 million, respectively. Although it is anticipated that the Carried
Interest will be paid through distributions on the Series S Share, the Carried
Interest is also provided for in the Investment Advisory Agreement.
The Advisor will also be entitled to receive a fee (the "Carried
Interest") in an amount equal to, (i) commencing on the Ramp-Up Date and prior
to the first day of the calendar quarter during which the Public Market Event
occurs, (A) 50% (payable at the same time as, and not in advance of, any
distributions in respect of the Company's common shares) of the amount by
which the Cumulative Adjusted Common Distributions exceed the Hurdle until the
cumulative payments that have been made in respect of the Carried Interest
pursuant to this clause (i) since the Ramp-Up Date equal 20% of the sum of the
amount paid pursuant to this clause (i) plus the amount of the Cumulative
Adjusted Common Distributions since the Ramp-Up Date, and thereafter (B) an
amount (payable at the same time as, and not in advance of, any distributions
in respect of the Company's common shares) such that, after payment thereof,
the cumulative payments that have been made in respect of the Carried Interest
pursuant to this clause (i) since the Ramp-Up Date equal 20% of the sum of the
amount paid pursuant to this clause (i) plus the amount of the Cumulative
Adjusted Common Distributions since the Ramp-Up Date and (ii) commencing on
and after the first day of the calendar quarter during which the Public Market
Event occurs, (A) 50% (payable at the same time as, and not in advance of, any
distributions in respect of the Company's common shares) of the amount by
which the cumulative distributions and amounts distributable out of net income
(including realized capital gains in excess of realized capital losses) in
respect of the Company's common shares (1) since the Public Market Event or
(2) during the four calendar quarters most recently completed prior to or
within 15 days after the date of declaration, whichever is most recent, exceed
the Hurdle until the cumulative payments that have been made in respect of the
Carried Interest pursuant to this clause (ii) equal 20% of the sum of the
amount distributed pursuant to this clause (ii) plus the amount of the
Cumulative Adjusted Common Distributions (1) since the Public Market Event or
(2) during the four calendar quarters most recently completed prior to or
within 15 days after the date of declaration, whichever is most recent, and
thereafter (B) an amount (payable at the same time as, and not in advance of,
any distributions in respect of the Company's common shares) equal to the
excess of (1) 20% of the sum of the amount distributed pursuant to this clause
(ii) plus the amount of the Measurement Period Adjusted Common Distributions
over (2) the portion of the amount in item (1) above previously distributed
during such four preceding quarters.
As used above and elsewhere herein (i) "Public Market Event" means
the completion by the Company of an initial public offering of its common
shares registered under the 1933 Act and the commencement of trading of such
common shares on a national securities exchange; (ii) "Hurdle" means the
product of 2% times the quarterly net asset value of the Company attributable
to its common shares as of the beginning of such quarter (or such measurement
period) calculated after giving effect to any distributions in respect of such
quarter (or such measurement period) times the number of quarters in the
measurement period (which, after the Public Market Event, will be four
quarters); (iii) "Cumulative Adjusted Common Distributions" means the excess
of the cumulative distributions and amounts distributable out of net income
(including realized capital gain in excess of realized capital losses) in
respect of the common shares over the net amount of capital depreciation, if
any, at the time of determination; (iv) "Measurement Period Adjusted Common
Distributions" means the aggregate distributions and amounts distributable out
of net income (including realized capital gains in excess of realized capital
losses) in respect of the common shares during the four calendar quarters most
recently completed prior to or within 15 days after the date of declaration of
any distribution according to the previous paragraph, less any increases in
net capital depreciation attributable to the common shares during such four
quarter period or plus any decrease in such net capital depreciation but only
to the extent that both (A) such decrease did not exceed the net amount of
capital depreciation at the beginning of such period and (B) such decrease did
not exceed the excess of cumulative realized capital gains over cumulative
realized capital losses since commencement of operations; and (v) "Ramp-up
Date" means 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 date on which the Company first draws
funds under accepted subscriptions for its common shares, whichever is sooner.
The Advisor will only be entitled to the Carried Interest if such
fees are not, have not, or will not be paid to the Advisor or an affiliate
through another mechanism.
The Company may, in the discretion of the Board of Directors,
indemnify the Advisor, and each of the Advisor's directors, officers,
employees, agents, associates and controlling persons and the directors,
partners, members, officers, employees and agents thereof (including any
individual who serves at the Advisor's request as director, officer, partner,
member or the like of another entity) (each such person being an "Indemnitee")
against any liabilities and expenses, including amounts paid in satisfaction
of judgments, in compromise or as fines and penalties, and counsel fees (all
as provided in accordance with applicable state law) reasonably incurred by
such Indemnitee in connection with the defense or disposition of any action,
suit or other proceeding, whether civil or criminal, before any court or
administrative or investigative body in which such Indemnitee may be or may
have been involved as a party or otherwise or with which such Indemnitee may
be or may have been threatened, while acting in any capacity set forth herein
or thereafter by reason of such Indemnitee having acted in any such capacity,
except with respect to any matter as to which such Indemnitee will have been
adjudicated not to have acted in good faith in the reasonable belief that such
Indemnitee's action was in the best interest of the Company and furthermore,
in the case of any criminal proceeding, so long as such Indemnitee had no
reasonable cause to believe that the conduct was unlawful; provided, however,
that (1) no Indemnitee will be indemnified hereunder against any liability to
the Company or its shareholders or any expense of such Indemnitee arising by
reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence or
(iv) reckless disregard of the duties involved in the conduct of such
Indemnitee's position (the conduct referred to in such clauses (i) through
(iv) being sometimes referred to herein as "disabling conduct"), (2) as to any
matter disposed of by settlement or a compromise payment by such Indemnitee,
pursuant to a consent decree or otherwise, no indemnification either for said
payment or for any other expenses will be provided unless there has been a
determination that such settlement or compromise is in the best interests of
the Company and that such Indemnitee appears to have acted in good faith in
the reasonable belief that such Indemnitee's action was in the best interest
of the Company and did not involve disabling conduct by such Indemnitee and
(3) with respect to any action, suit or other proceeding voluntarily
prosecuted by any Indemnitee as plaintiff, indemnification will be mandatory
only if the prosecution of such action, suit or other proceeding by such
Indemnitee was authorized by a majority of the full Board of Directors.
The Company may make advance payments in connection with the expenses
of defending any action with respect to which indemnification might be sought
hereunder if the Company receives a written affirmation of the Indemnitee's
good faith belief that the standard of conduct necessary for indemnification
has been met and a written undertaking to reimburse the Company unless it is
subsequently determined that such Indemnitee is entitled to such
indemnification and if the Board of Directors determines that the facts then
known to them would not preclude indemnification. In addition, at least one of
the following conditions must be met: (A) the Indemnitee must provide security
for such Indemnitee-undertaking, (B) the Company must be insured against
losses arising by reason of any unlawful advance, or (C) a majority of a
quorum consisting of directors of the Company who are neither "interested
persons" of the Company (as defined in Section 2(a)(19) of the 1940 Act) nor
parties to the proceeding ("Disinterested Non-Party Directors") or an
independent legal counsel in a written opinion, must determine, based on a
review of readily available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the Indemnitee ultimately will be found
entitled to indemnification.
All determinations with respect to the standards for indemnification
above will be made (1) by a final decision on the merits by a court or other
body before whom the proceeding was brought that such Indemnitee is not liable
or is not liable by reason of disabling conduct, or (2) in the absence of such
a decision, by (i) a majority vote of a quorum of the Disinterested Non-Party
Directors of the Company, or (ii) if such a quorum is not obtainable or, even
if obtainable, if a majority vote of such quorum so directs, independent legal
counsel in a written opinion. All determinations that advance payments in
connection with the expense of defending any proceeding will be authorized and
will be made in accordance with the immediately preceding clause (2) above.
The Advisor will not be liable for any error of judgment or mistake
of law or for any loss suffered by Advisor or by the Company in connection
with the performance of the Investment Advisory Agreement, except a loss
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its duties under the Investment Advisory
Agreement.
The Investment Advisory Agreement will continue in effect for a
period of two years. Thereafter, if not terminated, the Investment Advisory
Agreement will continue in effect with respect to the Company for successive
periods of 12 months, provided such continuance is specifically approved at
least annually by both (a) the vote of a majority of the Board of Directors or
the vote of a majority of the outstanding voting securities of the Company at
the time outstanding and entitled to vote, and (b) by the vote of a majority
of the directors who are not parties to the Investment Advisory Agreement or
interested persons of any party to the Investment Advisory Agreement, cast in
person at a meeting called for the purpose of voting on such approval.
Notwithstanding the foregoing, the Investment Advisory Agreement may be
terminated by the Company at any time, without the payment of any penalty,
upon giving the Advisor 60 days' notice (which notice may be waived by the
Advisor), provided that such termination by the Company will be directed or
approved by the vote of a majority of the directors of the Company in office
at the time or by the vote of the holders of a majority of the voting
securities of the Company at the time outstanding and entitled to vote, or by
the Advisor on 60 days' written notice (which notice may be waived by the
Company). The Investment Advisory Agreement will also immediately terminate in
the event of its assignment. (As used in the Investment Advisory Agreement,
the terms "majority of the outstanding voting securities," "interested person"
and "assignment" have the same meanings of such terms as in the 1940 Act.) If
the Investment Advisory Agreement is terminated according to this paragraph,
the Company will pay the Advisor a pro-rated portion of the Management Fee and
the Carried Interest. The Management Fee and the Carried Interest due to the
Advisor in the event of termination according to this paragraph will be
determined according to the method set forth in the following paragraph.
The Company will engage at its own expense a firm acceptable to the
Company and the Advisor to determine the maximum reasonable fair value as of
the termination date of the Company's consolidated assets (assuming each asset
is readily marketable among institutional investors without minority discount
and with an appropriate control premium for any control positions and
ascribing an appropriate net present value to unamortized organizational and
offering costs and going concern value). After review of such firm's work
papers by the Advisor and the Company and resolution of any comments
therefrom, such firm will render its report as to valuation, and the Company
will pay to the Advisor or its affiliates any Management Fees or Carried
Interest, as the case may be, payable pursuant to the paragraphs above as if
all of the consolidated assets of the Company had been sold at the values
indicated in such report and any net income and gain distributed.
A certificate of designations of the Company (the "Series S
Certificate of Designations") will create and establish one Series S Preferred
Share of the Company (the "Series S Share"). At such time that the Board of
Directors determines on the advice of counsel that use of the Series S Share
is permissible, the Carried Interest will be paid as dividends on the Series S
Share. In the absence of such determination, the Series S Share will not be
issued and the Carried Interest may be paid as a fee pursuant to the
Investment Advisory Agreement. It is expected that the holder of the Series S
Share, if issued, will be BKC Special Non-Manager Member Co. LLC, an affiliate
of the Advisor.
Item 8. Legal Proceedings.
None.
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
(a) Market Information
The offer and sale of the common shares of the Company will not be
registered under the 1933 Act. The offer and sale are exempt from such
registration requirements as they do not constitute a public offering pursuant
to Section 4(2) of and Regulation D under the 1933 Act.
Because the common shares of the Company will be acquired by
investors in one or more transactions "not involving a public offering," they
will be "restricted securities" and may be required to be held indefinitely.
The Company's common shares may not be sold, transferred, assigned, pledged or
otherwise disposed of unless (i) Company consent is granted, and (ii) the
common shares are registered under applicable securities laws or specifically
exempted from registration (in which case the shareholder may, at the option
of the Company, be required to provide the Company with a legal opinion, in
form and substance satisfactory to the Company, that registration is not
required). Accordingly, an investor must be willing to bear the economic risk
of investment in the common shares until the Company is liquidated. No sale,
transfer, assignment, pledge or other disposition, whether voluntary or
involuntary, of the common shares may be made except by registration of the
transfer on the Company's books. Each transferee will be required to execute
an instrument agreeing to be bound by these restrictions and the other
restrictions imposed on the common shares and to execute such other
instruments or certifications as are reasonably required by the Company.
(b) Holders
BlackRock Funding will purchase 150 common shares of the Company at a
price of $15.00 per share as the Company's initial capital. Therefore, until
immediately following the anticipated placement of the Offering, BlackRock
will be deemed to "control" the Company through its control of BlackRock
Funding.
Upon the closing of the Offering, the common shares of the Company
will be owned by numerous persons that are "accredited investors," as that
term is defined in Regulation D, and a majority of such common shares will be
owned by the Holding Company, whose shares will be owned by institutional and
individual investors.
(c) Dividends; Preferred Shares
The Certificate of Incorporation provides that the Board of Directors
may authorize and issue preferred shares (the "Preferred Shares") with rights
as determined by the Board of Directors, by action of the Board of Directors
without the approval of the holders of the common shares. A certificate of
designations of the Company will create and establish Series Z Preferred
Shares (the "Series Z Shares") of the Company. Holders of common shares have
no preemptive right to purchase any Preferred Shares that might be issued.
Whenever Preferred Shares are outstanding, the holders of common shares will
not be entitled to receive any distributions from the Company unless all
accumulated dividends on Preferred Shares have been paid, unless asset
coverage (as defined in the 1940 Act) with respect to the Preferred Shares
would be at least 200% after giving effect to the distributions and unless
certain other requirements imposed by any rating agencies rating the Preferred
Shares have been met.
Under the 1940 Act, the Company is not permitted to issue Preferred
Shares unless after such issuance the value of the Company's total assets,
less certain ordinary course liabilities, is at least 200% of the amount of
any debt outstanding and 200% of the sum of any debt outstanding and the
liquidation preference of any preferred stock outstanding. In addition, the
Company is not permitted to declare any cash distributions on its common
shares unless, at the time of and after giving effect to such declaration or
repurchase, the value of the Company's total assets satisfies the same tests.
The Company intends, to the extent possible, to purchase or redeem Preferred
Shares from time to time to the extent necessary in order to maintain coverage
of any Preferred Shares of at least 200%.
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of Preferred Shares will be entitled
to receive a preferential liquidating distribution, which is expected to equal
the original purchase price per Preferred Share plus accumulated and unpaid
dividends, whether or not declared, before any distribution of assets is made
to holders of common shares. After payment of the full amount of the
liquidating distribution to which they are entitled, the holders of Preferred
Shares will not be entitled to any further participation in any distribution
of assets by the Company.
If the Company has Preferred Shares outstanding, the holders of
Preferred Shares voting separately as a class will be entitled to elect two of
the Company's directors. The remaining directors of the Company will be
elected by holders of common shares and Preferred Shares voting together as a
single class. In the event the Company fails to pay dividends on Preferred
Shares for two years, holders of Preferred Shares may be entitled to elect a
majority of the directors of the Company until all arrearages are paid. The
1940 Act also requires that, in addition to any approval by shareholders that
might otherwise be required, the approval of the holders of a majority of any
outstanding Preferred Shares, voting separately as a class, would be required
to (1) adopt any plan of reorganization that would adversely affect the
Preferred Shares, and (2) take any action requiring a vote of security holders
under Section 13(a) of the 1940 Act, including, among other things, changes in
the Company's subclassification as a closed-end investment company or changes
in its fundamental investment restrictions. As a result of these voting
rights, the Company's ability to take any such actions may be impeded to the
extent that there are any Preferred Shares outstanding. The Board of Directors
presently intends that, except as otherwise indicated in the Company's
offering memorandum and except as otherwise required by applicable law,
holders of Preferred Shares will have equal voting rights with holders of
common shares (one vote per share, unless otherwise required by the 1940 Act)
and will vote together with holders of common shares as a single class on
matters affecting the common shares and the preferred shares.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a separate class, will be required to amend, alter
or repeal any of the preferences, rights or powers of holders of Preferred
Shares so as to affect materially and adversely such preferences, rights or
powers, or to increase or decrease the authorized number of Preferred Shares.
The class vote of holders of Preferred Shares described above will in each
case be in addition to any other vote required to authorize the action in
question.
The Company may also borrow money as a temporary measure for
liquidity, extraordinary or emergency purposes, including the payment of
dividends and the settlement of securities transactions which otherwise might
require untimely dispositions of Company securities.
The Company has no current intention to issue a significant amount of
Preferred Shares other than the Series Z Shares, provided, however, that the
Company may, if permitted by the SEC, pay the Advisor's Carried Interest via a
Series S Share issued to the Advisor or its affiliate.
Item 10. Recent Sales of Unregistered Securities.
See Item 9(b).
Item 11. Description of Registrant's Securities to be Registered.
Common Shares
The Company is authorized to issue 40,000,000 common shares, par
value $0.001 per share. Each common share has one vote and, when issued and
paid for in accordance with the terms of the Offering, will be fully paid and
non-assessable. All common shares are equal as to dividends, assets and voting
privileges and have no conversion, preemptive or other subscription rights.
The Company will send to all holders of its common shares such reports as are
required by the 1934 Act.
Transferability of Shares
The Company's common shares will not be registered under the 1933
Act. The common shares are exempt from registration requirements pursuant to
Section 4(2) of and Regulation D under the 1933 Act.
Because the Company's common shares will be acquired by investors in
one or more transactions "not involving a public offering," they will be
"restricted securities" and may be required to be held indefinitely. The
Company's common shares may not be sold, transferred, assigned, pledged or
otherwise disposed of unless (i) Company consent is granted and (ii) the
common shares are registered under applicable securities laws or specifically
exempted from registration (in which case the shareholder may, at the option
of the Company, be required to provide the Company with a legal opinion, in
form and substance satisfactory to the Company, that registration is not
required). Accordingly, an investor must be willing to bear the economic risk
of investment in the common shares until the Company is liquidated. No sale,
transfer, assignment, pledge or other disposition, whether voluntary or
involuntary, of the common shares may be made except by registration of the
transfer on the Company's books. Each transferee will be required to execute
an instrument agreeing to be bound by these restrictions and the other
restrictions imposed on the common shares, and to execute such other
instruments or certifications as are reasonably required by the Company.
Change of Control
Certain types of transactions will require the affirmative vote or
consent of a majority of the directors then in office followed by the
affirmative vote of the holders of not less than seventy-five percent (75%) of
the common shares of the Company of each affected class or series outstanding,
voting as separate classes or series, when a Principal Shareholder (as defined
below) is a party to the transaction. Such affirmative vote or consent will be
in addition to the vote or consent of the holders of common shares otherwise
required by law or by the terms of any class or series of Preferred Shares,
whether now or hereafter authorized, or any agreement between the Company and
any national securities exchange.
The term "Principal Shareholder" means any corporation, person (which
shall mean and include individuals, partnerships, trusts, limited liability
companies, associations, joint ventures and other entities, whether or not
legal entities, and governments and agencies and political subdivisions
thereof) or other entity which is the beneficial owner, directly or
indirectly, of twenty percent (20%) (or ten percent (10%) if there has been a
Public Market Event) or more of the Company's outstanding common shares of all
outstanding classes or series and shall include any affiliate or associate, as
such terms are defined below, of a Principal Shareholder. In addition to the
Company's common shares which a corporation, person or other entity
beneficially owns directly, (a) any corporation, person or other entity shall
be deemed to be the beneficial owner of any common shares (i) which it has the
right to acquire pursuant to any agreement or upon exercise of conversion
rights or warrants, or otherwise (but excluding share options granted by the
Company) or (ii) which are beneficially owned, directly or indirectly by any
other corporation, Person or entity with which its "affiliate" or "associate"
(as defined below) has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of common shares, or which
is its "affiliate" or "associate" as those terms are defined in Rule 12b-2 of
the General Rules and Regulations under the 1934 Act, and (b) the outstanding
common shares shall include common shares deemed owned through application of
clauses (i) and (ii) above but shall not include any other common shares which
may be issuable pursuant to any agreement, or upon exercise of conversion
rights or warrants, or otherwise.
The following transactions must conform to the rules set forth in the
two immediately preceding paragraphs:
(a) The merger or consolidation of the Company or any subsidiary of
the Company with or into any Principal Shareholder.
(b) The issuance of any securities of the Company to any Principal
Shareholder for cash (other than pursuant to any automatic
dividend reinvestment plan).
(c) The sale, lease or exchange of all or any substantial part of
the assets of the Company to any Principal Shareholder (except
assets having an aggregate fair market value of less than five
percent (5%) of the total assets of the Company, aggregating for
the purpose of such computation all assets sold, leased or
exchanged in any series of similar transactions within a
twelve-month period).
(d) The sale, lease or exchange to the Company or any subsidiary
thereof, in exchange for securities of the Company, of any
assets of any Principal Shareholder (except assets having an
aggregate fair market value of less than five percent (5%) of
the total assets of the Company, aggregating for the purposes of
such computation all assets sold, leased or exchanged in any
series of similar transactions within a twelve-month period).
The transactional guidelines will not be applicable to (i) any of the
transactions set forth above if 80% of the Board of Directors will by
resolution have approved a memorandum of understanding with such Principal
Shareholder with respect to and substantially consistent with such
transaction, in which case approval by a "majority of the outstanding voting
securities," as such term is defined in the 1940 Act, of the Company with each
class and series of common shares voting together as a single class, except to
the extent otherwise required by law, the 1940 Act or the Certificate of
Incorporation with respect to any one or more classes or series of common
shares, in which case the applicable proportion of such classes or series of
common shares voting as a separate class or series, as the case may be, also
will be required, will be the only vote of shareholders required, or (ii) any
such transaction with any entity of which a majority of the outstanding shares
of all classes and series of a stock normally entitled to vote in elections of
directors is owned of record or beneficially by the Company and its
subsidiaries.
The Board of Directors will have the power and duty to determine on
the basis of information known to the Company whether (i) a corporation,
person or entity beneficially owns any particular percentage of the Company's
outstanding common shares of any class or series, (ii) a corporation, person
or entity is an "affiliate" or "associate" (as defined above) of another,
(iii) the assets being acquired or leased to or by the Company or any
subsidiary thereof constitute a substantial part of the assets of the Company
and have an aggregate fair market value of less than five percent (5%) of the
total assets of the Company, and (iv) the memorandum of understanding referred
to above is substantially consistent with the transaction covered thereby. Any
such determination will be conclusive and binding for all purposes of the
above.
Dissolution of the Company
In the event of a dissolution, liquidation or winding up of the
affairs of the Company, holders of common shares will be entitled, unless
otherwise provided by law or the Certificate of Incorporation, to receive all
of the remaining assets of the Company of whatever kind available for
distribution to stockholders ratably in proportion to the number of common
shares held by them respectively.
In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, before any payment or distribution
of the assets of the Company will be made to or set apart for the holders of
shares of any class of stock of the Company ranking junior to the Preferred
Shares, the holders of the shares of each series of the Preferred Shares will
be entitled to receive payment of the amount per share fixed in the resolution
or resolutions adopted by the Board of Directors providing for the issuance of
the shares of such series, plus an amount equal to all dividends accrued
thereon to the date of final distribution to such holders. If, upon any
liquidation, dissolution or winding up of the Company, the assets of the
Company, or proceeds thereof, distributable among the holders of the shares of
the Preferred Shares will be insufficient to pay in full the preferential
amount aforesaid, then such assets, or the proceeds thereof, will be
distributed among such holders ratably in accordance with the respective
amounts which would be payable on such shares if all amounts payable thereon
were paid in full. For the purposes of this paragraph, the sale, conveyance,
exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Company or a consolidation or merger of the Company with one or more
corporations will not be deemed to be a dissolution, liquidation or winding
up, voluntary or involuntary.
Item 12. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors, and any corporate agents in terms
sufficiently broad to indemnify such person under certain circumstances for
liabilities, including reimbursement for expenses, incurred arising under the
1933 Act. The Certificate of Incorporation and by-laws of the Company provide
that the Company will indemnify its directors and officers to the fullest
extent authorized or permitted by law and such right to indemnification will
continue as to a person who has ceased to be a director or officer of the
Company and will inure to the benefit of his or her heirs, executors and
personal and legal representatives; provided, however, that, except for
proceedings to enforce rights to indemnification, the Company will not be
obligated to indemnify any director or officer (or his or her heirs, executors
or personal or legal representatives) in connection with a proceeding (or part
thereof) initiated by such person unless such proceeding (or part thereof) was
authorized or consented to by the Board of Directors. The right to
indemnification conferred will include the right to be paid by the Company the
expenses incurred in defending or otherwise participating in any proceeding in
advance of its final disposition.
The Company may, to the extent authorized from time to time by the
Board of Directors, provide rights to indemnification and to the advancement
of expenses to employees and agents of the Company similar to those conferred
to directors and officers of the Company. The rights to indemnification and to
the advance of expenses are subject to the requirements of the 1940 Act to the
extent applicable. Any repeal or modification of the Certificate of
Incorporation by the stockholders of the Company will not adversely affect any
rights to indemnification and to the advancement of expenses of a director or
officer of the Company existing at the time of such repeal or modification
with respect to any acts or omissions occurring prior to such repeal or
modification.
Under the Investment Advisory Agreement, the Company may, in the
discretion of the Board of Directors, indemnify the Advisor, and each of the
Advisor's directors, officers, employees, agents, associates and controlling
persons and the directors, partners, members, officers, employees and agents
thereof (including any individual who serves at the Advisor's request as
director, officer, partner, member or the like of another entity), as
described in Item 7(d).
Item 13. Financial Statements and Supplementary Data.
The Company has not commenced business and has prepared no financial
statements.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
The Company has not commenced business and has prepared no financial
statements.
Item 15. Financial Statements and Exhibits.
(a) List separately all financial statements filed
None.
(b) Exhibits
See Exhibit Index following signature page in this Registration
Statement, which Exhibit Index is incorporated herein by reference. Pursuant
to the requirements of Section 12 of the 1934 Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
BLACKROCK KELSO CAPITAL CORPORATION
By: /s/ Michael B. Lazar
-----------------------------------
Name: Michael B. Lazar
Title: Chief Operating Officer
Date: July 8, 2005
EXHIBIT INDEX
Item 601
Exhibit Exhibit
Number Number Exhibit Description
- ------------------------------------------------------------------------------
1 3(i) Certificate of Incorporation of the Company filed
with the Delaware Secretary of State on April 13,
2005
2 3(i) Certificate of Amendment to the Certificate of
Incorporation filed with the Delaware Secretary of
State on May 24, 2005
3 3(ii) By-laws of the Company
4 4 Certificate of Designations of Series Z Preferred
Shares of the Company
5 10 Form of Investment Advisory Agreement between the
Company and the Advisor
6 10 Form of Stock Purchase Agreement between the Company
and an affiliate of BlackRock
7 10 Form of Administration Agreement between the Company
and the Administrator*
8 14 Code of Ethics of the Company*
*To be filed.
Exhibit 1
---------
CERTIFICATE OF INCORPORATION
OF
BLACKROCK KELSO CAPITAL CORPORATION
ARTICLE I
Section 1.1 The name of the Corporation is BlackRock Kelso Capital
Corporation (hereinafter the "Corporation").
ARTICLE II
Section 2.1 The address of the registered office of the Corporation
in the State of Delaware is 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of its registered agent at that address is The
Corporation Trust Company.
ARTICLE III
Section 3.1 The purpose of the Corporation is to engage in any lawful
act or activity for which a corporation may be organized under the General
Corporation Law of the State of Delaware as set forth in Title 8 of the
Delaware Code (the "GCL").
ARTICLE IV
Section 4.1 The total number of shares of stock which the Corporation
shall have authority to issue is two thousand five hundred (2,500) shares of
which the Corporation shall have authority to issue two thousand (2,000) shares
of common stock (the "Common Shares"), each having a par value of one
one-thousandth of a dollar ($0.001), and five hundred (500) shares of preferred
stock (the "Preferred Shares"), each having a par value of one one-thousandth
of a dollar ($0.001).
Section 4.2 Common Shares
(a) Voting Rights. Except as otherwise required by law or this
Certificate of Incorporation, holders of record of Common Shares shall have
one vote in respect of each share of stock held by such holder of record on
the books of the Corporation for the election of directors and on all other
matters submitted to a vote of stockholders of the Corporation.
(b) Dividends. Holders of Common Shares shall be entitled to
receive, when, as and if declared by the Board of Directors, out of the assets
of the Corporation legally available therefor, dividends payable either in
cash, in property or in shares of capital stock.
(c) Liquidation, Dissolution, or Winding Up. In the event of a
dissolution, liquidation or winding up of the affairs of the Corporation
("Liquidation"), holders of Common Shares shall be entitled, unless otherwise
provided by law or this Certificate of Incorporation, to receive all of the
remaining assets of the Corporation of whatever kind available for
distribution to stockholders ratably in proportion to the number of Common
Shares held by them respectively.
Section 4.3 Preferred Shares.
(a) The Preferred Shares may be issued in one or more series as
shall from time to time be created and authorized to be issued by the Board of
Directors as hereinafter provided.
(b) The Board of Directors is expressly authorized to provide
for the issuance of all or any of the Preferred Shares in one or more classes
or series, and to fix for each such class or series such voting powers, full
or limited, or no voting powers, and such distinctive designations,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof, as shall be stated
and expressed in the resolution or resolutions adopted by the Board of
Directors providing for the issuance of such class or series and as may be
permitted by the GCL, including, without limitation, the authority to provide
that any such class or series may be (i) subject to redemption at such time or
times and at such price or prices; (ii) entitled to receive dividends (which
may be cumulative or non-cumulative) at such rates, on such conditions, and at
such times, and payable in preference to, or in such relation to, the
dividends payable on any other class or classes or any other series; (iii)
entitled to such rights upon the dissolution of, or upon any distribution of
the assets of, the Corporation; or (iv) convertible into, or exchangeable for,
shares of any other class or classes of stock, or of any other series of the
same or any other class or classes of stock, of the Corporation at such price
or prices or at such rates of exchange and with such adjustments; all as may
be stated in such resolution or resolutions. Any of the foregoing provisions
shall be consistent with the requirements of the Investment Company Act of
1940 (the "1940 Act") to the extent applicable.
(c) Each share of each series of the Preferred Shares shall
have the same relative rights and be identical in all respects with all the
other shares of the same series, except that shares of any one series issued
at different times may differ as to the dates, if any, from which dividends
thereon shall be cumulative. Except as otherwise provided by law or specified
in this Article IV, any series of the Preferred Shares may differ from any
other series with respect to any one or more of the voting powers,
designations, powers, preferences and relative, participating, optional and
other special rights, if any, and the qualifications, limitations and
restrictions thereof.
(d) Before any dividends on any class of stock of the
Corporation ranking junior to the Preferred Shares (other than dividends
payable in shares of any class of stock of the Corporation ranking junior to
the Preferred Shares) shall be declared or paid or set apart for payment, the
holders of shares of each series of the Preferred Shares shall be entitled to
such cash dividends, but only if, when and as declared by the Board of
Directors out of funds legally available therefor, as they may be entitled to
in accordance with the resolution or resolutions adopted by the Board of
Directors providing for the issuance of such series, payable on such dates as
may be fixed in such resolution or resolutions.
(e) In the event of any liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, before any payment or
distribution of the assets of the Corporation shall be made to or set apart
for the holders of shares of any class of stock of the Corporation ranking
junior to the Preferred Shares, the holders of the shares of each series of
the Preferred Shares shall be entitled to receive payment of the amount per
share fixed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of the shares of such series, plus an amount equal
to all dividends accrued thereon to the date of final distribution to such
holders. If, upon any liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation, or proceeds thereof, distributable
among the holders of the shares of the Preferred Shares shall be insufficient
to pay in full the preferential amount aforesaid, then such assets, or the
proceeds thereof, shall be distributed among such holders ratably in
accordance with the respective amounts which would be payable on such shares
if all amounts payable thereon were paid in full. For the purposes of this
paragraph (d), the sale, conveyance, exchange or transfer (for cash, shares of
stock, securities or other consideration) of all or substantially all of the
property or assets of the Corporation or a consolidation or merger of the
Corporation with one or more corporations shall not be deemed to be a
dissolution, liquidation or winding up, voluntary or involuntary.
(f) The term "junior stock," as used in relation to the
Preferred Shares, shall mean the Common Shares and any other class of stock of
the Corporation hereafter authorized which by its terms shall rank junior to
the Preferred Shares as to dividend rights and as to the distribution of
assets upon liquidation, dissolution or winding up of the Corporation.
(g) Before the Corporation shall issue any Preferred Shares of
any series authorized as hereinbefore provided, a certificate setting forth a
copy of the resolution or resolutions with respect to such series adopted by
the Board of Directors of the Corporation pursuant to the foregoing authority
vested in said Board of Directors shall be made, filed and recorded in
accordance with the then applicable requirements, if any, of the laws of the
State of Delaware, or, if no certificate is then so required, such certificate
shall be signed and acknowledged on behalf of the Corporation by its president
or a vice-president and its corporate seal shall be affixed thereto and
attested by its secretary or an assistant secretary and such certificate shall
be filed and kept on file at the registered office of the Corporation in the
State of Delaware and in such other place or places as the Board of Directors
shall designate.
(h) Shares of any series of the Preferred Shares which shall be
issued and thereafter acquired by the Corporation through purchase,
redemption, conversion or otherwise, shall return to the status of authorized
but unissued shares of the Preferred Shares of the same series unless
otherwise provided in the resolution or resolutions of the Board of Directors.
Unless otherwise provided in the resolution or resolutions of the Board of
Directors providing for the issuance thereof, the number of authorized shares
of stock of any such series may be increased or decreased (but not below the
number of shares thereof then outstanding) by resolution or resolutions of the
Board of Directors and the filing of a certificate complying with the
requirements referred to in subparagraph (g) above. In case the number of
shares of any such series of the Preferred Shares shall be decreased, the
shares representing such decrease shall, unless otherwise provided in the
resolution or resolutions of the Board of Directors providing for the issuance
thereof, resume the status of authorized but unissued shares of the Preferred
Shares, undesignated as to series.
ARTICLE V
Section 5.1 In-Kind Distributions. Section 4.2(c) notwithstanding,
the Corporation shall not make a distribution in kind of any securities to any
holder of the shares of the Corporation in connection with a Liquidation, if
such distribution would in the reasonable judgment of such holder cause such
holder to be in violation of any law applicable to such holder ("ERISA
Shareholder"); provided that the ERISA Shareholder shall notify the
Corporation to such effect not less than five days prior to such distribution.
In the event an ERISA Shareholder notifies the Corporation as provided in the
immediately preceding sentence, the Corporation shall use its reasonable best
efforts to cause the securities or other assets otherwise distributable to the
ERISA Shareholder (the "Subject Securities") to be sold to a third party, who
may be another holder of shares in the Corporation, for the best consideration
available under the circumstances, as determined by the Board of Directors in
its reasonable discretion, and, upon consummation of any such sale, the cash
proceeds from such sale shall be distributed to the ERISA Shareholder. In the
event such a sale cannot be consummated for the best consideration available
under the circumstances and within a reasonable period of time following the
time of the proposed distribution (in no case to exceed two years), the
obligation of the Corporation to the ERISA Shareholder shall be extinguished
by establishing, with an escrow agent designated by the ERISA Shareholder, an
escrow account for the benefit of the ERISA Shareholder into which the Subject
Securities shall be deposited, which account shall be liquidated at such time
as a sale can be accomplished on the terms set forth above; provided that from
and after the time of such deposit such Subject Securities shall be deemed for
all purposes of this Certificate of Incorporation to have been distributed to
the ERISA Shareholder and any income arising from the Subject Securities shall
be deposited in such account for the benefit of the ERISA Shareholder.
ARTICLE VI
Section 6.1 Classified Board. At such time that the Public Market
Event occurs, the Board of Directors shall be divided into three classes,
designated Class I, Class II and Class III, as nearly equal in number as
possible, and the term of office of directors of one class shall expire at
each annual meeting of stockholders, and in all cases as to each director when
such director's successor shall be elected and shall qualify or upon such
director's earlier resignation, removal from office, death or incapacity.
Additional directorships resulting from an increase in number of directors
shall be apportioned among the classes as equally as possible. If required by
law, the initial term of office of directors of Class I shall expire at the
annual meeting of stockholders in the first year after the Public Market
Event; that of Class II shall expire at the annual meeting in the second year
after the Public Market Event; and that of Class III shall expire at the
annual meeting in the third year after the Public Market Event; and in all
cases as to each director when such director's successor shall be elected and
shall qualify or upon such director's earlier resignation, removal from
office, death or incapacity. Beginning at the first annual meeting after the
Public Market Event and thereafter at each annual meeting, the number of
directors equal to the number of directors of the class whose term expires at
the time of such meeting (or, if less, the number of directors properly
nominated and qualified for election) shall be elected to hold office until
the third succeeding annual meeting of stockholders after their election.
Section 6.2 Changes. The Board of Directors, by amendment to the
Corporation's Bylaws, is expressly authorized to change the number of
directors without the consent of the stockholders to any number between two or
nine and to allocate such number of directors among the classes as evenly as
practicable.
Section 6.3 Elections. Elections of directors need not be by written
ballot unless otherwise provided in the Corporation's Bylaws.
Section 6.4 Removal of Directors. Any director may be removed for
cause from office by the action of the holders of at least seventy-five
percent (75%) of the then outstanding shares of the Corporation's capital
stock entitled to vote for the election of the respective director.
Section 6.5 Vote Required to Amend or Repeal. The affirmative vote of
the holders of at least seventy-five percent (75%) of the then outstanding
shares of the Corporation's capital stock entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
amend in any respect or repeal this ARTICLE VI.
Section 6.6 Vacancies. Subject to the rights of the holders of any
series of Preferred Shares, and unless the Board of Directors otherwise
determines, all vacancies on the Board of Directors and newly created
directorships resulting from any increase in the authorized number of
directors shall be filled exclusively by a majority of the directors then in
office, although less than a quorum, or by a sole remaining director, and
shall not be filled by the stockholders.
ARTICLE VII
Section 7.1 The name and mailing address of the Sole Incorporator is
as follows:
Name Address
---- -------
Deborah Reusch P.O. Box 636
Wilmington, DE 19899
ARTICLE VIII
Section 8.1 The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors.
Section 8.2 No director shall be personally liable to the Corporation
or any of its stockholders for monetary damages for breach of fiduciary duty
as a director, except for liability (i) for any breach of the director's duty
of loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) pursuant to Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived an
improper personal benefit. Any repeal or modification of this Section 8.2 by
the stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such
repeal or modification with respect to acts or omissions occurring prior to
such repeal or modification.
Section 8.3 In addition to the powers and authority hereinbefore or
by statute expressly conferred upon them, the directors are hereby empowered
to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation, subject, nevertheless, to the provisions
of the GCL, this Certificate of Incorporation, and any By-Laws adopted by the
stockholders.
ARTICLE IX
Section 9.1 Special Meetings of Stockholders. Special meetings of the
stockholders may be called for any purpose or purposes, unless otherwise
prescribed by statute or this Certificate of Incorporation, only by the
chairman, vice-chairman, chief executive officer or president or by a
resolution duly adopted by a majority of the members of the Board of
Directors.
Section 9.2 Vote Required to Amend or Repeal. The affirmative vote of
the holders of at least seventy-five percent (75%) of the then outstanding
shares of the Corporation's capital stock entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
amend in any respect or repeal this ARTICLE IX.
ARTICLE X
Section 10.1 Amend or Repeal By-Laws. The Board of Directors is
expressly empowered to adopt, amend or repeal the By-laws of the Corporation;
provided, however, that any adoption, amendment or repeal of the By-laws by
the Board of Directors shall require the approval of at least sixty-six and
two-thirds percent (66 2/3%) of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized
directorships at the time any resolution providing for adoption, amendment or
repeal is presented to the Board of Directors).
Section 10.2 Vote Required to Amend or Repeal. The affirmative vote
of the holders of at least seventy-five percent (75%) of the then outstanding
shares of the Corporation's capital stock entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
amend in any respect or repeal this ARTICLE X.
ARTICLE XI
Section 11.1 The conversion of the Corporation from a business
development company to an open-end investment company, the liquidation and
dissolution of the Corporation (if there has been a Public Market Event, as
defined below), the merger or consolidation of the Corporation with any entity
in a transaction as a result of which the governing documents of the surviving
entity do not contain substantially the same anti-takeover provisions as
described in this Certificate of Incorporation or the amendment of any of the
provisions discussed herein shall require the approval of (i) the holders of
at least eighty percent (80%) of the then outstanding Shares of the
Corporation's capital stock, voting together as a single class, or (ii) at
least (A) a majority of the "continuing directors" and (B) the holders of at
least seventy-five percent (75%) of the then outstanding Shares of the
Corporation's capital stock entitled to vote generally in the election of
directors, voting together as a single class. For purposes of this ARTICLE XI,
a "continuing director" is a director who (i) (A) has been a director of the
corporation for at least twelve months and (B) is not a person or an affiliate
of a person who enters into, or proposes to enter into, a business combination
with the Corporation or (ii) (A) is a successor to a continuing director, (B)
who was appointed to the Board of Directors by at least a majority of the
continuing directors and (C) is not a person or an affiliate of a person who
enters into, or proposes to enter into, a business combination with the
Corporation.
ARTICLE XII
Section 12.1 Meetings of stockholders may be held within or without
the State of Delaware, as the By-Laws may provide. The books of the
Corporation may be kept (subject to any provision contained in the GCL)
outside the State of Delaware at such place or places as may be designated
from time to time by the Board of Directors or in the By-Laws of the
Corporation.
ARTICLE XIII
Section 13.1 Certain Transactions.
(a) Notwithstanding any other provision of this Certificate of
Incorporation and subject to the exceptions provided in paragraph (d) of this
Section, the types of transactions described in paragraph (c) of this Section
shall require the affirmative vote or consent of a majority of the Directors
then in office followed by the affirmative vote of the holders of not less
than seventy-five percent (75%) of the Shares of each affected class or series
outstanding, voting as separate classes or series, when a Principal
Shareholder (as defined in paragraph (b) of this Section) is a party to the
transaction. Such affirmative vote or consent shall be in addition to the vote
or consent of the holders of Shares otherwise required by law or by the terms
of any class or series of Preferred Shares, whether now or hereafter
authorized, or any agreement between the Corporation and any national
securities exchange.
(b) The term "Principal Shareholder" shall mean any
corporation, Person (which shall mean and include individuals, partnerships,
trusts, limited liability companies, associations, joint ventures and other
entities, whether or not legal entities, and governments and agencies and
political subdivisions thereof) or other entity which is the beneficial owner,
directly or indirectly, of twenty percent (20%) (or ten percent (10%) if there
has been a Public Market Event, as defined below) or more of the outstanding
Shares of all outstanding classes or series and shall include any affiliate or
associate, as such terms are defined in clause (ii) below, of a Principal
Shareholder. For the purposes of this Section, in addition to the Shares which
a corporation, Person or other entity beneficially owns directly, (a) any
corporation, Person or other entity shall be deemed to be the beneficial owner
of any Shares (i) which it has the right to acquire pursuant to any agreement
or upon exercise of conversion rights or warrants, or otherwise (but excluding
share options granted by the Corporation) or (ii) which are beneficially
owned, directly or indirectly (including Shares deemed owned through
application of clause (i) above), by any other corporation, Person or entity
with which its "affiliate" or "associate" (as defined below) has any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of Shares, or which is its "affiliate" or "associate" as
those terms are defined in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, and (b) the outstanding Shares
shall include Shares deemed owned through application of clauses (i) and (ii)
above but shall not include any other Shares which may be issuable pursuant to
any agreement, or upon exercise of conversion rights or warrants, or
otherwise.
(c) This Section shall apply to the following transactions:
(i) The merger or consolidation of the Corporation or any
subsidiary of the Corporation with or into any Principal Shareholder.
(ii) The issuance of any securities of the Corporation to
any Principal Shareholder for cash (other than pursuant to any automatic
dividend reinvestment plan).
(iii) The sale, lease or exchange of all or any
substantial part of the assets of the Corporation to any Principal
Shareholder (except assets having an aggregate fair market value of less
than five percent (5%) of the total assets of the Corporation,
aggregating for the purpose of such computation all assets sold, leased
or exchanged in any series of similar transactions within a twelve-month
period).
(iv) The sale, lease or exchange to the Corporation or any
subsidiary thereof, in exchange for securities of the Corporation, of any
assets of any Principal Shareholder (except assets having an aggregate
fair market value of less than five percent (5%) of the total assets of
the Corporation, aggregating for the purposes of such computation all
assets sold, leased or exchanged in any series of similar transactions
within a twelve-month period).
(d) The provisions of this Section shall not be applicable to
(i) any of the transactions described in paragraph (c) of this Section if 80%
of the Directors shall by resolution have approved a memorandum of
understanding with such Principal Shareholder with respect to and
substantially consistent with such transaction, in which case approval by a
"majority of the outstanding voting securities," as such term is defined in
the 1940 Act, of the Corporation with each class and series of Shares voting
together as a single class, except to the extent otherwise required by law,
the 1940 Act or this Certificate of Incorporation with respect to any one or
more classes or series of Shares, in which case the applicable proportion of
such classes or series of Shares voting as a separate class or series, as case
may be, also will be required, shall be the only vote of Shareholders required
by this Section, or (ii) any such transaction with any entity of which a
majority of the outstanding shares of all classes and series of a stock
normally entitled to vote in elections of directors is owned of record or
beneficially by the Corporation and its subsidiaries.
(e) The Board of Directors shall have the power and duty to
determine for the purposes of this Section on the basis of information known
to the Corporation whether (i) a corporation, person or entity beneficially
owns any particular percentage of the outstanding Shares of any class or
series, (ii) a corporation, person or entity is an "affiliate" or "associate"
(as defined above) of another, (iii) the assets being acquired or leased to or
by the Corporation or any subsidiary thereof constitute a substantial part of
the assets of the Corporation and have an aggregate fair market value of less
than five percent (5%) of the total assets of the Corporation, and (iv) the
memorandum of understanding referred to in paragraph (d) hereof is
substantially consistent with the transaction covered thereby. Any such
determination shall be conclusive and binding for all purposes of this
Section.
(f) "Public Market Event" shall mean an initial public offering
of the Corporation's Common Shares registered under the Securities Act and the
listing of such Common Shares on a national securities exchange.
ARTICLE XIV
Section 14.1 The Corporation is to have perpetual existence;
PROVIDED, HOWEVER, that the Board of Directors shall liquidate and dissolve
the Corporation as promptly as practicable after the tenth anniversary of the
Corporation's existence, provided that (i) there has not been a Public Market
Event and (ii) at least a majority of the directors, including at least a
majority of the "disinterested directors," as defined in the 1940 Act,
determine such act to be in the best interests of the Corporation's
stockholders.
ARTICLE XV
Section 15.1 The Corporation reserves the right to amend, alter,
change or repeal any provision contained in this Certificate of Incorporation,
in the manner now or hereafter prescribed by statute or by this Certificate of
Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation.
ARTICLE XVI
Section 16.1 The Corporation shall indemnify its directors and
officers to the fullest extent authorized or permitted by law, as now or
hereafter in effect, and such right to indemnification shall continue as to a
person who has ceased to be a director or officer of the Corporation and shall
inure to the benefit of his or her heirs, executors and personal and legal
representatives; provided, however, that, except for proceedings to enforce
rights to indemnification, the Corporation shall not be obligated to indemnify
any director or officer (or his or her heirs, executors or personal or legal
representatives) in connection with a proceeding (or part thereof) initiated
by such person unless such proceeding (or part thereof) was authorized or
consented to by the Board of Directors. The right to indemnification conferred
by this Article XVI shall include the right to be paid by the Corporation the
expenses incurred in defending or otherwise participating in any proceeding in
advance of its final disposition.
Section 16.2 The Corporation may, to the extent authorized from time
to time by the Board of Directors, provide rights to indemnification and to
the advancement of expenses to employees and agents of the Corporation similar
to those conferred in this Article XVI to directors and officers of the
Corporation.
Section 16.3 The rights to indemnification and to the advance of
expenses conferred in this Article XVI shall not be exclusive of any other
right which any person may have or hereafter acquire under this Certificate of
Incorporation, the By-Laws of the Corporation, any statute, agreement, vote of
stockholders or disinterested directors or otherwise.
Section 16.4 The rights to indemnification and to the advance of
expenses conferred in this Article XVI shall be subject to the requirements of
the 1940 Act to the extent applicable.
Section 16.5 Any repeal or modification of this Article XVI by the
stockholders of the Corporation shall not adversely affect any rights to
indemnification and to the advancement of expenses of a director or officer of
the Corporation existing at the time of such repeal or modification with
respect to any acts or omissions occurring prior to such repeal or
modification.
I, THE UNDERSIGNED, being the Sole Incorporator hereinbefore named,
for the purpose of forming a corporation pursuant to the GCL, do make this
Certificate, hereby declaring and certifying that this is my act and deed and
the facts herein stated are true, and accordingly have hereunto set my hand
this 13th day of April, 2005.
/s/ Deborah Reusch
-----------------------------------
Deborah Reusch
Sole Incorporator
Exhibit 2
---------
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
BLACKROCK KELSO CAPITAL CORPORATION
_________________________________________
Pursuant to Section 228 and Section 242 of the General
Corporation Law of the State of Delaware
_________________________________________
BlackRock Kelso Capital Corporation, a Delaware corporation
(hereinafter called the "Corporation"), does hereby certify as follows:
FIRST: Section 4.1 of Article IV of the Corporation's Certificate of
Incorporation is hereby amended to read in its entirety as set forth below:
Section 4.1 The total number of shares of stock which the Corporation
shall have authority to issue is forty million and five hundred (40,000,500)
shares of which the Corporation shall have authority to issue forty million
(40,000,000) shares of common stock (the "Common Shares"), each having a par
value of one one-thousandth of a dollar ($0.001), and five hundred (500) shares
of preferred stock (the "Preferred Shares"), each having a par value of one
one-thousandth of a dollar ($0.001).
SECOND: The foregoing amendment was duly adopted in accordance with
Section 228 and Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, BlackRock Kelso Capital Corporation has caused
this Certificate to be duly executed in its corporate name this 24th day of
May, 2005.
BlackRock Kelso Capital Corporation
By: /s/ Michael B. Lazar
-----------------------------
Name: Michael B. Lazar
Title: Chief Operating Officer
1001446.02-New York S7A
2
Exhibit 3
---------
BY-LAWS
OF
BLACKROCK KELSO CAPITAL CORPORATION
TABLE OF CONTENTS
Page
----
ARTICLE I
Shareholder Meetings.......................................................................1
1.1 Place...............................................................1
1.2 Annual Meeting......................................................1
1.3 Notice..............................................................1
1.4 Chairman............................................................2
1.5 Proxies; Voting.....................................................2
1.6 Inspectors of Election..............................................2
1.7 Records at Shareholder Meetings.....................................2
ARTICLE II
Directors..................................................................................3
2.1 General Powers......................................................3
2.2 Number, Tenure and Qualifications...................................3
2.3 Annual and Regular Meetings.........................................3
2.4 Chairman; Records...................................................3
ARTICLE III
Officers...................................................................................4
3.1 Officers of the BDC.................................................4
3.2 Election and Tenure.................................................4
3.3 Removal of Officers.................................................4
3.4 Vacancies...........................................................4
3.5 Bonds and Surety....................................................4
3.6 Chairman, President, and Vice Presidents............................4
3.7 Secretary...........................................................5
3.8 Treasurer...........................................................5
3.9 Other Officers and Duties...........................................6
3.10 Salaries...........................................................6
ARTICLE IV
Committees.................................................................................6
4.1 Number, Tenure and Qualifications...................................6
4.2 Powers..............................................................7
4.3 Meetings............................................................7
4.4 Telephone Meetings..................................................7
4.5 Written Consent By Committees.......................................7
4.6 Vacancies...........................................................7
ARTICLE V
Miscellaneous..............................................................................7
5.1 Contracts...........................................................8
5.2 Checks and Drafts...................................................8
5.3 Deposits............................................................8
5.4 Signatures..........................................................8
5.5 Seal................................................................8
5.6 Affixing Seal.......................................................8
5.7 Accounting Year.....................................................8
5.8 Authorization of Distribution.......................................8
5.9 Contingencies.......................................................9
5.10 Investment Policy..................................................9
5.11 Indemnification and Advance of Expenses............................9
5.12 Waiver of Notice..................................................10
ARTICLE VI
Stock Transfers...........................................................................10
6.1 Certificates.......................................................10
6.2 Transfer Agents, Registrars and the Like...........................10
6.3 Transfer of Shares.................................................11
6.4 Replacement Certificate............................................11
6.5 Closing of Transfer Books or Fixing of Record Date.................11
6.6 Stock Ledger.......................................................12
6.7 Fractional Stock; Issuance of Units................................12
6.8 Registered Shareholders............................................12
ARTICLE VII
Amendment of By-Laws......................................................................13
7.1 Amendment and Repeal of By-Laws....................................13
BLACKROCK KELSO CAPITAL CORPORATION
-----------------------------------
BY-LAWS
-------
These By-Laws are made and adopted pursuant to the Certificate of
Incorporation establishing BlackRock Kelso Capital Corporation (hereinafter the
"BDC"), dated as of April 13, 2005, as from time to time amended (hereinafter
the "Certificate"). All words and terms capitalized in these By-Laws shall have
the meaning or meanings set forth for such words or terms in the Certificate.
ARTICLE I
Shareholder Meetings
--------------------
1.1 Place. All meetings of stockholders shall be held at the
principal executive office of the BDC or at such other place as shall be set by
the Board of Directors and stated in the notice of the meeting.
1.2 Annual Meeting. An annual meeting of the stockholders for the
election of directors and the transaction of any business within the powers of
the BDC shall be held on a date and at the time set by the Board of Directors.
1.3 Notice. Not less than ten nor more than 60 days before each
meeting of stockholders, the secretary shall give to each stockholder entitled
to vote at such meeting and to each stockholder not entitled to vote who is
entitled to notice of the meeting written or printed notice stating the time
and place of the meeting and, in the case of a special meeting or as otherwise
may be required by any statute, the purpose for which the meeting is called,
either by mail, by presenting it to such stockholder personally, by leaving it
at the stockholder's residence or usual place of business or by any other means
permitted by Delaware law. If mailed, such notice shall be deemed to be given
when deposited in the United States mail addressed to the stockholder at the
stockholder's address as it appears on the records of the BDC, with postage
thereon prepaid.
Any business of the BDC may be transacted at an annual meeting of
stockholders without being specifically designated in the notice, except such
business as is required by any statute to be stated in such notice. No business
shall be transacted at a special meeting of stockholders except as specifically
designated in the notice.
1.4 Chairman. The Chairman, if any, shall act as chairman at all
meetings of the Shareholders; in the Chairman's absence, the Director or
Directors present at each meeting may elect a temporary chairman for the
meeting, who may be one of themselves.
1.5 Proxies; Voting. Shareholders may vote either in person or by
duly executed proxy and each full share represented at the meeting shall have
one vote, all as provided in Article IV of the Certificate.
1.6 Inspectors of Election. In advance of any meeting of
Shareholders, the Directors may appoint Inspectors of Election to act at the
meeting or any adjournment thereof. If Inspectors of Election are not so
appointed, the Chairman, if any, of any meeting of Shareholders may, and on the
request of any Shareholder or Shareholder proxy shall, appoint Inspectors of
Election of the meeting. The number of Inspectors of Election shall be either
one or three. If appointed at the meeting on the request of one or more
Shareholders or proxies, a majority of Shares present shall determine whether
one or three Inspectors of Election are to be appointed, but failure to allow
such determination by the Shareholders shall not affect the validity of the
appointment of Inspectors of Election. In case any person appointed as
Inspector of Election fails to appear or fails or refuses to act, the vacancy
may be filled by appointment made by the Directors in advance of the convening
of the meeting or at the meeting by the person acting as chairman. The
Inspectors of Election shall determine the number of Shares outstanding, the
Shares represented at the meeting, the existence of a quorum, the authenticity,
validity and effect of proxies, shall receive votes, ballots or consents, shall
hear and determine all challenges and questions in any way arising in
connection with the right to vote, shall count and tabulate all votes or
consents, determine the results, and do such other acts as may be proper to
conduct the election or vote with fairness to all Shareholders. If there are
three Inspectors of Election, the decision, act or certificate of a majority is
effective in all respects as the decision, act or certificate of all. On
request of the Chairman, if any, of the meeting, or of any Shareholder or
Shareholder proxy, the Inspectors of Election shall make a report in writing of
any challenge or question or matter determined by them and shall execute a
certificate of any facts found by them.
1.7 Records at Shareholder Meetings. At each meeting of the
Shareholders, there shall be made available for inspection at a convenient time
and place during normal business hours, if requested by Shareholders, the
minutes of the last previous Annual or Special Meeting of Shareholders of the
BDC and a list of the Shareholders of the BDC, as of the record date of the
meeting or the date of closing of transfer books, as the case may be. Such list
of Shareholders shall contain the name and the address of each Shareholder in
alphabetical order and the number of Shares owned by such Shareholder.
Shareholders shall have such other rights and procedures of inspection of the
books and records of the BDC as are granted to shareholders of a Delaware
business corporation.
ARTICLE II
Directors
---------
2,1 General Powers. The business and affairs of the BDC shall be
managed under the direction of its Board of Directors.
2.2 Number, Tenure and Qualifications. At any regular meeting or at
any special meeting called for that purpose, a majority of the entire Board of
Directors may establish, increase or decrease the number of directors, provided
that the number thereof shall never be less than two, nor more than nine, and
further provided that the tenure of office of a director shall not be affected
by any decrease in the number of directors.
2.3 Annual and Regular Meetings. Meetings of the Directors shall be
held from time to time upon the call of the Chairman, if any, the President,
the Secretary or a majority of the Directors. Regular meetings of the Directors
may be held without call or notice and shall generally be held quarterly.
Neither the business to be transacted at, nor the purpose of, any meeting of
the Board of Directors need be stated in the notice or waiver of notice of such
meeting, and no notice need be given of action proposed to be taken by
unanimous written consent.
2.4 Chairman; Records. The Chairman, if any, shall act as chairman at
all meetings of the Directors; in absence of a chairman, the Directors present
shall elect one of their number to act as temporary chairman. The results of
all actions taken at a meeting of the Directors, or by unanimous written
consent of the Directors, shall be recorded by the person appointed by the
Board of Directors as the meeting secretary.
ARTICLE III
Officers
--------
3.1 Officers of the BDC. The officers of the BDC shall consist of a
Chairman, if any, a President, a Secretary, a Treasurer and such other officers
or assistant officers as may be elected or authorized by the Directors. Any two
or more of the offices may be held by the same Person, except that the same
person may not be both President and Secretary. The Chairman, if any, shall be
a Director, but no other officer of the BDC need be a Director.
3.2 Election and Tenure. At the initial organization meeting, the
Directors shall elect the Chairman, if any, President, Secretary, Treasurer and
such other officers as the Directors shall deem necessary or appropriate in
order to carry out the business of the BDC. Such officers shall serve at the
pleasure of the Directors or until their successors have been duly elected and
qualified. The Directors may fill any vacancy in office or add any additional
officers at any time.
3.3 Removal of Officers. Any officer may be removed at any time, with
or without cause, by action of a majority of the Directors. This provision
shall not prevent the making of a contract of employment for a definite term
with any officer and shall have no effect upon any cause of action which any
officer may have as a result of removal in breach of a contract of employment.
Any officer may resign at any time by notice in writing signed by such officer
and delivered or mailed to the Chairman, if any, President, or Secretary, and
such resignation shall take effect immediately upon receipt by the Chairman, if
any, President, or Secretary, or at a later date according to the terms of such
notice in writing.
3.4 Vacancies. A vacancy in any office may be filled by the Board of
Directors for the balance of the term.
3.5 Bonds and Surety. Any officer may be required by the Directors
to be bonded for the faithful performance of such officer's duties in such
amount and with such sureties as the Directors may determine.
3.6 Chairman, President, and Vice Presidents. The Chairman, if any,
shall, if present, preside at all meetings of the Shareholders and of the
Directors and shall exercise and perform such other powers and duties as may be
from time to time assigned to such person by the Directors. Subject to such
supervisory powers, if any, as may be given by the Directors to the Chairman,
if any, the President shall be the chief executive officer of the BDC and,
subject to the control of the Directors, shall have general supervision,
direction and control of the business of the BDC and of its employees and shall
exercise such general powers of management as are usually vested in the office
of President of a corporation. Subject to direction of the Directors, the
Chairman, if any, and the President shall each have power in the name and on
behalf of the BDC to execute any and all loans, documents, contracts,
agreements, deeds, mortgages, registration statements, applications, requests,
filings and other instruments in writing, and to employ and discharge employees
and agents of the BDC. Unless otherwise directed by the Directors, the
Chairman, if any, and the President shall each have full authority and power,
on behalf of all of the Directors, to attend and to act and to vote, on behalf
of the BDC at any meetings of business organizations in which the BDC holds an
interest, or to confer such powers upon any other persons, by executing any
proxies duly authorizing such persons. The Chairman, if any, and the President
shall have such further authorities and duties as the Directors shall from time
to time determine. In the absence or disability of the President, the
Vice-Presidents in order of their rank as fixed by the Directors or, if more
than one and not ranked, the Vice-President designated by the Directors, shall
perform all of the duties of the President, and when so acting shall have all
the powers of and be subject to all of the restrictions upon the President.
Subject to the direction of the Directors, and of the President, each
Vice-President shall have the power in the name and on behalf of the BDC to
execute any and all instruments in writing, and, in addition, shall have such
other duties and powers as shall be designated from time to time by the
Directors or by the President.
3.7 Secretary. The Secretary shall maintain the minutes of all
meetings of, and record all votes of, Shareholders, Directors and the Executive
Committee, if any. The Secretary shall be custodian of the seal of the BDC, if
any, and the Secretary (and any other person so authorized by the Directors)
shall affix the seal, or if permitted, facsimile thereof, to any instrument
executed by the BDC which would be sealed by a Delaware business corporation
and shall attest the seal and the signature or signatures of the officer or
officers executing such instrument on behalf of the BDC. The Secretary shall
also perform any other duties commonly incident to such office in a Delaware
business corporation, and shall have such other authorities and duties as the
Directors shall from time to time determine.
3.8 Treasurer. Except as otherwise directed by the Directors, the
Treasurer shall have the general supervision of the monies, funds, securities,
notes receivable and other valuable papers and documents of the BDC, and shall
have and exercise under the supervision of the Directors and of the President
all powers and duties normally incident to the office. The Treasurer may
endorse for deposit or collection all notes, checks and other instruments
payable to the BDC or to its order. The Treasurer shall deposit all funds of
the BDC in such depositories as the Directors shall designate. The Treasurer
shall be responsible for such disbursement of the funds of the BDC as may be
ordered by the Directors or the President. The Treasurer shall keep accurate
account of the books of the BDC's transactions which shall be the property of
the BDC, and which together with all other property of the BDC in the
Treasurer's possession, shall be subject at all times to the inspection and
control of the Directors. Unless the Directors shall otherwise determine, the
Treasurer shall be the principal accounting officer of the BDC and shall also
be the principal financial officer of the BDC. The Treasurer shall have such
other duties and authorities as the Directors shall from time to time
determine. Notwithstanding anything to the contrary herein contained, the
Directors may authorize any adviser, administrator, manager or transfer agent
to maintain bank accounts and deposit and disburse funds.
3.9 Other Officers and Duties. The Directors may elect such other
officers and assistant officers as they shall from time to time determine to be
necessary or desirable in order to conduct the business of the BDC. Assistant
officers shall act generally in the absence of the officer whom they assist and
shall assist that officer in the duties of the office. Each officer, employee
and agent of the BDC shall have such other duties and authority as may be
conferred upon such person by the Directors or delegated to such person by the
President.
3.10 Salaries. The salaries and other compensation of the officers
shall be fixed from time to time by the Board of Directors and no officer shall
be prevented from receiving such salary or other compensation by reason of the
fact that he is also a director.
ARTICLE IV
Committees
----------
4.1 Number, Tenure and Qualifications. The Board of Directors may
appoint from among its members an Executive Committee, an Audit Committee, a
Compensation Committee and other committees, composed of one or more directors,
to serve at the pleasure of the Board of Directors.
4.2 Powers. The Board of Directors may designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. The By-laws may provide that in the
absence or disqualification of a member of a committee, the member or members
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member
of the board of directors to act at the meeting in the place of any such absent
or disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors, or in the By-laws of the Corporation,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation, and
may authorize the seal of the Corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in
reference to the following matters: (i) approving or adopting, or recommending
to the stockholders, any action or matter expressly required by law to be
submitted to stockholders for approval or (ii) adopting, amending or repealing
any By-law of the Corporation.
4.3 Meetings. Notice of committee meetings shall be given in the same
manner as notice for special meetings of the Board of Directors. A majority of
the members of the committee shall constitute a quorum for the transaction of
business at any meeting of the committee. The act of a majority of the
committee members present at a meeting shall be the act of such committee. The
Board of Directors may designate a chairman of any committee, and such chairman
or, in the absence of a chairman, any two members of any committee (if there
are at least two members of the Committee) may fix the time and place of its
meeting unless the Board shall otherwise provide. In the absence of any member
of any such committee, the members thereof present at any meeting, whether or
not they constitute a quorum, may appoint another director to act in the place
of such absent member. Each committee shall keep minutes of its proceedings.
4.4 Telephone Meetings. Members of a committee of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting
can hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
4.5 Written Consent By Committees. Any action required or permitted
to be taken at any meeting of a committee of the Board of Directors may be
taken without a meeting, if a consent in writing to such action is signed by
each member of the committee and such written consent is filed with the minutes
of proceedings of such committee.
4.6 Vacancies. Subject to the provisions hereof, the Board of
Directors shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace any
absent or disqualified member or to dissolve any such committee.
ARTICLE V
Miscellaneous
-------------
5.1 Contracts. The Board of Directors may authorize any officer or
agent to enter into any contract or to execute and deliver any instrument in
the name of and on behalf of the BDC and such authority may be general or
confined to specific instances. Any agreement, deed, mortgage, lease or other
document shall be valid and binding upon the BDC when authorized or ratified by
action of the Board of Directors and executed by an authorized person.
5.2 Checks and Drafts. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name
of the BDC shall be signed by such officer or agent of the BDC in such manner
as shall from time to time be determined by the Board of Directors.
5.3 Deposits. All funds of the BDC not otherwise employed shall be
deposited from time to time to the credit of the BDC in such banks, trust
companies or other depositories as the Board of Directors may designate.
5.4 Signatures. All contracts and other instruments shall be
executed on behalf of the BDC by its properly authorized officers, agent or
agents, as provided in the Certificate or By-laws or as the Directors may from
time to time by resolution provide.
5.5 Seal. The Board of Directors may authorize the adoption of a
seal by the BDC. The seal shall contain the name of the BDC and the year of its
incorporation and the words "Incorporated Delaware." The Board of Directors may
authorize one or more duplicate seals and provide for the custody thereof.
5.6 Affixing Seal. Whenever the BDC is permitted or required to
affix its seal to a document, it shall be sufficient to meet the requirements
of any law, rule or regulation relating to a seal to place the word "(SEAL)"
adjacent to the signature of the person authorized to execute the document on
behalf of the BDC.
5.7 Accounting Year. The Board of Directors shall have the power,
from time to time, to fix the fiscal year of the BDC by a duly adopted
resolution.
5.8 Authorization of Distributions. Dividends and other
distributions upon the stock of the BDC may be authorized by the Board of
Directors, subject to the provisions of law and the Certificate of
Incorporation. Dividends and other distributions may be paid in cash, property
or stock of the BDC, subject to the provisions of law and the Certificate of
Incorporation.
5.9 Contingencies. Before payment of any dividends or other
distributions, there may be set aside out of any assets of the BDC available
for dividends or other distributions such sum or sums as the Board of Directors
may from time to time, in its absolute discretion, think proper as a reserve
fund for contingencies, for equalizing dividends or other distributions, for
repairing or maintaining any property of the BDC or for such other purpose as
the Board of Directors shall determine to be in the best interest of the BDC,
and the Board of Directors may modify or abolish any such reserve.
5.10 Investment Policy. Subject to applicable law and the provisions
of the Certificate of Incorporation, the Board of Directors may from time to
time adopt, amend, revise or terminate any policy or policies with respect to
investments by the BDC as it shall deem appropriate in its sole discretion.
ARTICLE VI
Stock Transfers
---------------
6.1 Certificates. In the event that the BDC issues shares of stock
represented by certificates, each stockholder shall be entitled to a
certificate or certificates which shall represent and certify the number of
shares of each class of stock held by him, her or it in the BDC. Each
certificate shall be signed by the chief executive officer, the president or a
vice president and countersigned by the secretary or an assistant secretary or
the treasurer or an assistant treasurer and may be sealed with the seal, if
any, of the BDC. The signatures may be either manual or facsimile. Certificates
shall be consecutively numbered; and if the BDC shall, from time to time, issue
several classes of shares, each class may have its own number series. A
certificate is valid and may be issued whether or not an officer who signed it
is still an officer when it is issued. Each certificate representing shares
which are restricted as to their transferability or voting powers, which are
preferred or limited as to their dividends or as to their allocable portion of
the assets upon liquidation or which are redeemable at the option of the BDC,
shall have a statement of such restriction, limitation, preference or
redemption provision, or a summary thereof, plainly stated on the certificate.
In lieu of such statement or summary, the BDC may set forth upon the face or
back of the certificate a statement that the BDC will furnish to any
stockholder, upon request and without charge, a full statement of such
information.
6.2 Transfer Agents, Registrars and the Like. The Directors shall
have authority to employ and compensate such transfer agents and registrars
with respect to the Shares of the BDC as the Directors shall deem necessary or
desirable. In addition, the Directors shall have power to employ and compensate
such dividend disbursing agents, warrant agents and agents for the reinvestment
of dividends as they shall deem necessary or desirable. Any of such agents
shall have such power and authority as is delegated to any of them by the
Directors.
6.3 Transfer of Shares. The Shares of the BDC shall be transferable
on the books of the BDC only upon delivery to the Directors or a transfer agent
of the BDC of proper documentation. The BDC, or its transfer agents, shall be
authorized to refuse any transfer unless and until presentation of such
evidence as may be reasonably required to show that the requested transfer is
proper.
6.4 Replacement Certificate. Any officer designated by the Board of
Directors may direct a new certificate to be issued in place of any certificate
previously issued by the BDC alleged to have been lost, stolen or destroyed
upon the making of an affidavit of that fact by the person claiming the
certificate to be lost, stolen or destroyed. When authorizing the issuance of a
new certificate, an officer designated by the Board of Directors may, in his or
her discretion and as a condition precedent to the issuance thereof, require
the owner of such lost, stolen or destroyed certificate or the owner's legal
representative to advertise the same in such manner as he shall require and/or
to give bond, with sufficient surety, to the BDC to indemnify it against any
loss or claim which may arise as a result of the issuance of a new certificate.
6.5 Closing of Transfer Books or Fixing of Record Date. The Board of
Directors may set, in advance, a record date for the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders or
determining stockholders entitled to receive payment of any dividend or the
allotment of any other rights, or in order to make a determination of
stockholders for any other proper purpose. Such date, in any case, shall not be
prior to the close of business on the day the record date is fixed and shall be
not more than 90 days and, in the case of a meeting of stockholders, not less
than ten days, before the date on which the meeting or particular action
requiring such determination of stockholders of record is to be held or taken.
In lieu of fixing a record date, the Board of Directors may provide
that the stock transfer books shall be closed for a stated period but not
longer than 20 days. If the stock transfer books are closed for the purpose of
determining stockholders entitled to notice of or to vote at a meeting of
stockholders, such books shall be closed for at least ten days before the date
of such meeting.
If no record date is fixed and the stock transfer books are not
closed for the determination of stockholders, (a) the record date for the
determination of stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day on which the notice
of meeting is mailed or the 30th day before the meeting, whichever is the
closer date to the meeting; and (b) the record date for the determination of
stockholders entitled to receive payment of a dividend or an allotment of any
other rights shall be the close of business on the day on which the resolution
of the directors, declaring the dividend or allotment of rights, is adopted.
When a determination of stockholders entitled to vote at any meeting
of stockholders has been made as provided in this section, such determination
shall apply to any adjournment thereof, except when (i) the determination has
been made through the closing of the transfer books and the stated period of
closing has expired or (ii) the meeting is adjourned to a date more than 120
days after the record date fixed for the original meeting, in either of which
case a new record date shall be determined as set forth herein.
6.6 Stock Ledger. The BDC shall maintain at its principal office or
at the office of its counsel, accountants or transfer agent, an original or
duplicate share ledger containing the name and address of each stockholder and
the number of shares of each class held by such stockholder.
6.7 Fractional Stock; Issuance of Units. The Board of Directors may
issue fractional stock or provide for the issuance of scrip, all on such terms
and under such conditions as they may determine. Notwithstanding any other
provision of the Certificate of Incorporation or these By-laws, the Board of
Directors may issue units consisting of different securities of the BDC. Any
security issued in a unit shall have the same characteristics as any identical
securities issued by the BDC, except that the Board of Directors may provide
that for a specified period securities of the BDC issued in such unit may be
transferred on the books of the BDC only in such unit.
6.8 Registered Shareholders. The BDC may deem and treat the holder
of record of any Shares as the absolute owner thereof for all purposes and
shall not be required to take any notice of any right or claim of right of any
other person.
ARTICLE VII
Amendment of By-Laws
--------------------
7.1 Amendment and Repeal of By-Laws. In accordance with Section 10.1
of the Certificate of Incorporation, the Directors shall have the power to
amend or repeal the By-Laws or adopt new By-Laws at any time. Action by the
Directors with respect to the By-Laws shall be taken by an affirmative vote of
a majority of the Directors. The Directors shall in no event adopt By-Laws
which are in conflict with the Certificate, and any apparent inconsistency
shall be construed in favor of the related provisions in the Certificate.
ARTICLE VIII
Notice
------
8.1 Notices. Whenever written notice is required by law, the
Certificate of Incorporation or these By-Laws (except as otherwise stated
therein or herein), to be given to any director, member of a committee or
stockholder, such notice may be given by mail, addressed to such director,
member of a committee or stockholder, at such person's address as it appears on
the records of the Corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Written notice may also be given personally or by telegram,
telex or cable.
8.2 Waiver of Notices. Whenever any notice is required by applicable
law, the Certificate of Incorporation or these By-Laws (except as stated
therein or herein), to be given to any director, member of a committee or
stockholder, a waiver thereof in writing, signed by the person or persons
entitled to notice, whether before or after the time stated therein, shall be
deemed equivalent thereto. Attendance of a person at a meeting, present in
person or represented by proxy, shall constitute a waiver of notice of such
meeting, except where the person attends the meeting for the express purpose of
objecting at the beginning of the meeting to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any annual or special meeting of
stockholders or any regular or special meeting of the directors or members of a
committee of directors need be specified in any written waiver of notice unless
so required by law, the Certificate of Incorporation or these By-Laws.
Exhibit 4
---------
CERTIFICATE OF DESIGNATIONS
OF
SERIES Z PREFERRED SHARES
OF
BLACKROCK KELSO CAPITAL CORPORATION
BlackRock Kelso Capital Corporation, a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), hereby certifies that the following resolutions were adopted by
the Board of Directors of the Corporation (the "Board of Directors") pursuant
to authority of the Board of Directors as required by Section 151 of the
Delaware General Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors in accordance with the provisions of the Certificate of
Incorporation of the Corporation, as amended (the "Certificate of
Incorporation"), the Board of Directors hereby creates a series of the
authorized preferred stock, par value $0.001 per share, and hereby states the
designation and number thereof, and fixes the voting powers, preferences and
relative, participating, optional and other special rights, and the
qualifications, limitations and restrictions thereof, as follows:
Section 1. Designation and Amount. The Corporation hereby creates and
establishes a series of preferred shares of interest and designates such shares
as "Series Z Preferred Shares" (the "Series Z Shares"). The Corporation is
authorized to issue up to 400 Series Z Shares to persons or entities to be
determined by the officers or other authorized persons of the Corporation
(collectively, the "Authorized Persons").
Section 2. Dividends.
(a) Holders of the Series Z Shares shall be entitled to
receive when, as and if declared by the Board of Directors, or a duly
authorized committee thereof, cumulative dividends in an amount equal to 8% per
year of the Liquidation Preference (as defined below) of each such Series Z
Share. Distributions in respect of the Series Z Share shall be payable on such
dates (each, a "Dividend Payment Date") not less often than annually, as the
Board of Directors, in consultation with the investment advisor to the
Corporation (the "Investment Manager"), may determine, to the holders of record
of the Series Z Shares as they appear on the stock register of the Corporation
at the close of business on the fifth Business Day preceding such Dividend
Payment Date, in preference to dividends on Common Shares and any other Shares
of the Corporation ranking junior to the Series Z Shares in payment of
dividends. Dividends on the Series Z Shares shall accumulate from the date on
which such Series Z Shares are originally issued. Each period beginning on and
including a Dividend Payment Date (or the date of original issue of the Series
Z Shares, in the case of the first dividend period after issuance of such
Series Z Shares) and ending on but excluding the next succeeding Dividend
Payment Date is referred to herein as a "Dividend Period". Dividends on account
of arrears for any past Dividend Period or in connection with the redemption of
the Series Z Shares may be declared and paid at any time, without reference to
any Dividend Payment Date, to the holder of record on such date not exceeding
30 days preceding the payment date thereof as shall be fixed by the Board of
Directors.
(b) (i) No full dividends shall be declared or paid on the
Series Z Shares for any dividend period or part thereof unless full cumulative
dividends due through the most recent Dividend Payment Dates therefor for all
series of Preferred Shares of the Corporation ranking on a parity with the
Series Z Shares as to the payment of dividends have been or contemporaneously
are declared and paid through the most recent Dividend Payment Dates therefor.
If full cumulative dividends due have not been paid on all such outstanding
Preferred Shares, any dividends being paid on such Preferred Shares (including
the Series Z Shares) will be paid as nearly pro rata as possible in proportion
to the respective amounts of dividends accumulated but unpaid on each such
series of Preferred Shares on the relevant Dividend Payment Date. No holder of
the Series Z Shares shall be entitled to any dividends, whether payable in
cash, property or shares, in excess of full cumulative dividends as provided in
this paragraph 2(b)(i) on the Series Z Shares. No interest or sum of money in
lieu of interest shall be payable in respect of any dividend payments on the
Series Z Shares that may be in arrears.
(ii) For so long as the Series Z Shares are outstanding,
the Corporation shall not pay any dividend or other distribution (other than a
dividend or distribution paid in Common Shares, or options, warrants or rights
to subscribe for or purchase Common Shares or other shares, if any, ranking
junior to the Series Z Shares as to dividends and upon liquidation) in respect
of the Common Shares or any other shares of the Corporation ranking junior to
the Series Z Shares as to the payment of dividends and the distribution of
assets upon liquidation, or call for redemption, redeem, purchase or otherwise
acquire for consideration any Common Shares or any other shares of the
Corporation ranking junior to the Series Z Shares as to the payment of
dividends and the distribution of assets upon liquidation (except by conversion
into or exchange for shares of the Corporation ranking junior to the Series Z
Shares as to dividends and upon liquidation), unless, in each case, (A) all
cumulative dividends on the Series Z Shares due on or prior to the date of such
action have been declared and paid (or shall have been declared and sufficient
funds for the payment thereof deposited with the applicable dividend-disbursing
agent) or (B) the Corporation has redeemed the Series Z Shares or set aside
liquid assets sufficient therefor.
(iii) Any dividend payment made on the Series Z Shares
shall first be credited against the dividends accumulated with respect to the
earliest dividend period for which dividends have not been paid.
(c) Not later than the Business Day immediately preceding
each Dividend Payment Date, the Corporation shall deposit with the
dividend-disbursing agent cash or cash equivalents having an initial combined
value sufficient to pay the dividends that are payable on such Dividend Payment
Date, which cash equivalents (if any) shall mature on or prior to such Dividend
Payment Date. The Corporation may direct the dividend-disbursing agent with
respect to the investment of any such cash or cash equivalents, provided that
such investment consists exclusively of cash or cash equivalents, and provided
further that the proceeds of any such investment will be available at the
opening of business on such Dividend Payment Date.
(d) Notwithstanding anything to the contrary contained herein
or in the Certificate of Incorporation, no dividends may be paid in respect of
the Series Z Shares if after giving effect to the payment of such dividend the
Corporation would not be able to pay its debts as such debts become due in the
ordinary course of business or the Corporation's total assets would be less
than the sum of its total liabilities.
Section 3. Liquidation Rights. The Series Z Shares will have a
liquidation preference equal to $500 per Series Z Share (the "Liquidation
Preference") plus accumulated and unpaid dividends and will be redeemable at
the option of the Corporation in whole or in part at any time in an amount
equal to the Liquidation Preference plus accumulated and unpaid dividends
thereon calculated as of the date of redemption.
Section 4. Asset Coverage. The Corporation shall not issue or sell any
Preferred Shares (including, without limitation, the Series Z Shares) unless
immediately thereafter the Preferred Shares (including, without limitation, the
Series Z Shares) will have an asset coverage of at least 200%, as required
under the Investment Company Act of 1940 (the "Investment Company Act").
Furthermore, the Corporation may not declare or pay any dividend or
distribution with respect to the Common Shares unless the Preferred Shares
(including, without limitation, the Series Z Shares) have, at the time of the
dividend or distribution, an asset coverage of at least 200% after deducting
the amount of the dividend or distribution.
Section 5. Voting Rights.
(a) General.
Except as otherwise provided in the Certificate of
Incorporation, the By-Laws or a resolution of the Board of Directors, or as
required by applicable law, holders of the Series Z Shares shall have no power
to vote on any matter except matters submitted to a vote of the Common Shares.
In any matter submitted to a vote of the holders of the Common Shares, each
holder of the Series Z Shares shall be entitled to one vote for each Series Z
Share held and the holders of the outstanding Preferred Shares, including the
Series Z Shares, and the Common Shares shall vote together as a single class;
provided, however, that at any meeting of the stockholders of the Corporation
held for the election of Directors, the holders of the outstanding Preferred
Shares, including the Series Z Shares, shall be entitled, as a class, to the
exclusion of the holders of all other securities and classes or series of
Shares of the Corporation, to elect a number of the Corporation's Directors,
such that following the election of Directors at the meeting of the Members,
the Corporation's Board of Directors shall contain two Directors elected by the
holders of the outstanding Preferred Shares, including the Series Z Shares.
Subject to paragraph 5(b) hereof, the holders of the outstanding Shares of the
Corporation, including the holders of outstanding Preferred Shares (including
the Series Z Shares) voting as a single class, shall elect the balance of the
Directors.
(b) Right to Elect Majority of Board of Directors.
Subject to the rights of any creditors of the Corporation,
during any period in which any one or more of the conditions described below
shall exist (such period being referred to herein as a "Voting Period"), the
number and/or composition of Directors constituting the Board of Directors
shall be adjusted as necessary to permit the holders of outstanding Preferred
Shares, including the Series Z Shares, voting separately as one class (to the
exclusion of the holders of all other securities and classes and series of
Shares of the Corporation) to elect the number of Directors that, when added to
the two Directors elected exclusively by the holders of Preferred Shares
pursuant to paragraph 5(a) above, would constitute a simple majority of the
Board of Directors as so adjusted. The Corporation and the Board of Directors
shall take all necessary actions, including effecting the removal of Directors
or amendment of the Certificate of Incorporation, to effect an adjustment of
the number and/or composition of Directors as described in the preceding
sentence. A Voting Period shall commence:
(i) if at any time accumulated dividends (whether or not
earned or declared, and whether or not funds are then legally available in an
amount sufficient therefor) on the Series Z Shares equal to at least two full
years' dividends shall be due and unpaid and sufficient cash or specified
securities shall not have been deposited with the dividend-disbursing agent for
the payment of such accumulated dividends; or
(ii) if at any time holders of any other Preferred Shares
are entitled to elect a majority of the Directors of the Corporation under the
Investment Company Act or Certificate of Designations creating such shares.
Upon the termination of a Voting Period, the voting rights
described in this paragraph 5(b) shall cease, subject always, however, to the
reverting of such voting rights in the holders of Preferred Shares upon the
further occurrence of any of the events described in this paragraph 5(b).
(c) Right to Vote with Respect to Certain Other Matters.
So long as the Series Z Shares are outstanding, the
Corporation shall not, without the affirmative vote of the holders of a
majority of the Series Z Shares outstanding at the time and present and voting
on such matter, voting separately as one class, amend, alter or repeal the
provisions of this Certificate of Designations so as to in the aggregate
adversely affect the rights and preferences set forth in this Certificate of
Designations. To the extent permitted under the Investment Company Act, in the
event that more than one series of Preferred Shares are outstanding, the
Corporation shall not effect any of the actions set forth in the preceding
sentence which in the aggregate adversely affects the rights and preferences
set forth in the Certificates of Designations for a series of Preferred Shares
differently than such rights and preferences for any other series of Preferred
Shares without the affirmative vote of the holders of at least a majority of
the Preferred Shares outstanding and present and voting on such matter of each
series adversely affected (each such adversely affected series voting
separately as a class to the extent its rights are affected differently). The
holders of the Series Z Shares shall not be entitled to vote on any matter that
affects the rights or interests of only one or more other series of Preferred
Shares. The Corporation shall notify any rating agency rating any series of
Preferred Shares at least ten Business Days prior to any such vote described
above. Unless a higher percentage is required under the Certificate of
Incorporation, By-Laws or applicable provisions of the Delaware General
Corporation Law or the Investment Company Act, the affirmative vote of the
holders of a majority of the outstanding Preferred Shares, including the Series
Z Shares, voting together as a single class, will be required to approve any
plan of reorganization adversely affecting the Preferred Shares or any action
requiring a vote of security holders under Section 13(a) of the Investment
Company Act. For purposes of this paragraph 5(c), the phrase "vote of the
holders of a majority of the outstanding Preferred Shares" (or any like phrase)
shall mean, in accordance with Section 2(a)(42) of the Investment Company Act,
the vote, at the annual or a special meeting of the stockholders of the
Corporation duly called (i) of 67 percent or more of the Preferred Shares
present at such meeting, if the holders of more than 50 percent of the
outstanding Preferred Shares are present or represented by proxy; or (ii) of
more than 50 percent of the outstanding Preferred Shares, whichever is less.
The class vote of holders of Preferred Shares described above will in each case
be in addition to a separate vote of the requisite percentage of Common Shares
and Preferred Shares, including the Series Z Shares, voting together as a
single class, necessary to authorize the action in question. An increase in the
number of authorized Preferred Shares pursuant to the Certificate of
Incorporation or the issuance of additional shares of any series of Preferred
Shares (other than the Series Z Shares) pursuant to the Certificate of
Incorporation shall not in and of itself be considered to adversely affect the
rights and preferences of the Preferred Shares.
(d) Voting Procedures.
(i) As soon as practicable after the accrual of any right
of the holders of Preferred Shares to elect additional Directors as described
in paragraph 5(b) above, the Corporation shall call a special meeting of such
holders and instruct the dividend-disbursing agent to mail a notice of such
special meeting to such holders, such meeting to be held not less than 10 nor
more than 20 days after the date of mailing of such notice. If the Corporation
fails to send such notice to the dividend-disbursing agent or if the
Corporation does not call such a special meeting, it may be called by any such
holder on like notice. The record date for determining the holders entitled to
notice of and to vote at such special meeting shall be the close of business on
the day on which such notice is mailed or such other date as the Board of
Directors shall determine. At any such special meeting and at each meeting held
during a Voting Period, such holders of Preferred Shares, voting together as a
class (to the exclusion of the holders of all other securities and classes and
series of Shares of the Corporation), shall be entitled to elect the number of
Directors prescribed in paragraph 5(b) above on a one-vote-per-share basis. At
any such meeting, or adjournment thereof in the absence of a quorum, a majority
of such holders present in person or by proxy shall have the power to adjourn
the meeting without notice, other than by an announcement at the meeting, to a
date not more than 120 days after the original record date.
(ii) The terms of office of all persons who are Directors
of the Corporation at the time of a special meeting of holders of Preferred
Shares to elect Directors and who remain Directors following such meeting shall
continue, notwithstanding the election at such meeting by such holders of the
number of Directors that they are entitled to elect, and the persons so elected
by such holders, together with the two incumbent Directors elected by the
holders of Preferred Shares, and the remaining incumbent Directors elected by
the holders of the Common Shares and Preferred Shares, shall constitute the
duly elected Directors of the Corporation.
(iii) Upon the expiration of a Voting Period, the terms
of office of the additional Directors elected by the holders of Preferred
Shares pursuant to paragraph 5(b) above shall expire at the earliest time
permitted by law, and the remaining Directors shall constitute the Directors of
the Corporation and the voting rights of such holders of Preferred Shares,
including the Series Z Shares, to elect additional Directors pursuant to
paragraph 5(b) above shall cease, subject to the provisions of the last
sentence of paragraph 5(b). Upon the expiration of the terms of the Directors
elected by the holders of Preferred Shares pursuant to paragraph 5(b) above,
the number of Directors shall be automatically reduced to the number of
Directors on the Board of Directors immediately preceding such Voting Period.
(e) Exclusive Remedy.
Unless otherwise required by law, the holders of the Series Z Shares shall not
have any rights or preferences other than those specifically set forth herein.
The holders of the Series Z Shares shall have no preemptive rights or rights to
cumulative voting. In the event that the Corporation fails to pay any dividends
on the Series Z Shares, the exclusive remedy of the holders shall be the right
to vote for Directors pursuant to the provisions of this paragraph 5.
Section 6. Put Right. If a Public Market Event occurs, the holder of a
Series Z Share may, at any time after the seventh anniversary of the issuance
of such share, require the Corporation to redeem the Series Z Shares of the
holder at a price equal to $500 per Series Z Share plus accumulated and unpaid
dividends. Any such right shall be exercised by a written request tendering
such share for redemption and payment.
Section 7. Call Right. The Corporation may, at any time, redeem any or
all Series Z Share at a price equal to the Liquidation Preference plus any
accumulated and unpaid dividends.
Section 8. Junior Securities. With respect to dividend rights and the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the Series Z Shares shall rank
on a parity with the Special Share, as created pursuant to a Certificate of
Designations dated April [ ], 2005 and prior to the Corporation's Common Stock
and all other classes and series of capital stock of the Corporation currently
outstanding or hereafter issued by the Corporation.
Section 9. Book-Entry. The Series Z Shares will be issued in book
entry form, and no holder of the Series Z Shares will be entitled to a share
certificate therefor unless the Board of Directors approves the issuance of
Series Z Shares certificates.
Section 10. Transfers of Series Z Shares. The Series Z Shares shall
not be transferred unless (i) the prior written consent of the Investment
Manager has been obtained by the proposed transferor, which consent may be
withheld for any reason or for no reason in the Investment Manager's sole
discretion, and (ii) the proposed transferee has demonstrated to the
satisfaction of the Investment Manager, in the Investment Manager's sole
discretion, that it is an "accredited investor" within the meaning given to
such term under Regulation D of the Securities Act of 1933, as amended. Any
proposed transfer in violation of this Section 7 shall be void and have no
effect.
Section 11. Regulations. The Board of Directors may make such
additional rules and regulations, not inconsistent with this Certificate of
Designations, as it may deem expedient concerning the issue, transfer and
registration of any certificates (if any such certificates are issued) for the
Series Z Shares. It may appoint, or authorize any officer or officers of the
Corporation to appoint, one or more transfer agents or one or more transfer
clerks and one or more registrars.
Section 12. Other Rights or Preferences. Unless otherwise required by
law, the Series Z Shares shall not have any rights or preferences other than
those set forth herein or in the Certificate of Incorporation.
Section 13. Business Day. Business Day shall mean any day on which
banks in New York, New York are open for business or such other day classified
as a business day according to such criteria as the Corporation may adopt from
time to time.
IN WITNESS WHEREOF, BlackRock Kelso Capital Corporation has caused
this Statement of Preferences to be signed, as of this 14th day of April, 2005.
BLACKROCK KELSO CAPITAL CORPORATION
By:
------------------------------------
Name:
Title:
Exhibit 5
---------
INVESTMENT MANAGEMENT AGREEMENT
AGREEMENT, dated April [ ], 2005, between BlackRock Kelso Capital
Corporation, a Delaware corporation, (the "BDC") and BlackRock Kelso Capital
Advisors LLC (the "Advisor"), a Delaware limited liability company.
WHEREAS, Advisor has agreed to furnish investment advisory services
to the BDC, a business development company registered under the Investment
Company Act of 1940, as amended (the "1940 Act");
WHEREAS, this Agreement has been approved in accordance with the
provisions of the 1940 Act, and the Advisor is willing to furnish such services
upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual premises and covenants
herein contained and other good and valuable consideration, the receipt of
which is hereby acknowledged, it is agreed by and between the parties hereto as
follows:
1. In General. The Advisor agrees, all as more fully set forth
herein, to act as investment advisor to the BDC with respect to the investment
of the BDC's assets and to supervise and arrange for the day-to-day operations
of the BDC and the purchase of securities for and the sale of securities held
in the investment portfolio of the BDC.
2. Duties and Obligations of the Advisor with Respect to Investment
of Assets of the BDC.
(a) Subject to the succeeding provisions of this paragraph and
subject to the direction and control of the BDC's Board of Directors, the
Advisor shall (i) act as investment advisor for and supervise and manage the
investment and reinvestment of the BDC's assets and in connection therewith
have complete discretion in purchasing and selling securities and other assets
for the BDC and in voting, exercising consents and exercising all other rights
appertaining to such securities and other assets on behalf of the BDC; (ii)
supervise continuously the investment program of the BDC and the composition of
its investment portfolio; (iii) arrange, subject to the provisions of Section
3(b) hereof, for the purchase and sale of securities and other assets held in
the investment portfolio of the BDC; and (iv) oversee the administration of all
aspects of the BDC's business and affairs and provide, or arrange for others
whom it believes to be competent to provide, certain services as specified in
paragraph (b) below. Nothing contained herein shall be construed to restrict
the BDC's right to hire its own employees or to contract for administrative
services to be performed by third parties, including but not limited to, the
calculation of the net asset value of the BDC's.
(b) Except to the extent provided for directly by the BDC, the
specific services to be provided or arranged for by the Advisor for the BDC
pursuant to paragraph (a)(iv) above are (i) maintaining the BDC's books and
records, to the extent not maintained by the BDC's custodian, transfer agent
and dividend disbursing agent in accordance with applicable laws and
regulations (ii) initiating all money transfers to the BDC's custodian and from
the BDC's custodian for the payment of the BDC's expenses, investments and
dividends; (iii) reconciling account information and balances among the BDC's
custodian, transfer agent and dividend disbursing agent; (iv) preparing all
governmental filings by the BDC and all reports by the BDC to its shareholders;
(v) supervising the calculation of the net asset value of the BDC's shares; and
(vi) preparing notices and agendas for meetings of the BDC's shareholders and
the BDC's Board of Directors as well as minutes of such meetings in all matters
required by applicable law to be acted upon by the Board of Directors.
(c) In the performance of its duties under this Agreement, the
Advisor shall at all times use all reasonable efforts to conform to, and act in
accordance with, any requirements imposed by (i) the provisions of the
Investment Company Act of 1940 (the "Act"), and of any rules or regulations in
force thereunder; (ii) any other applicable provision of law; (iii) the
provisions of the Certificate of Incorporation and the By-Laws of the BDC, as
such documents are amended from time to time; (iv) the investment objectives,
policies and restrictions applicable to the BDC as set forth in the BDC's
Private Placement Memorandum; and (v) any policies and determinations of the
Board of Directors of the BDC.
(d) The Advisor will seek to provide qualified personnel to fulfill
its duties hereunder and, except as set forth in the following sentence, will
bear all costs and expenses incurred in connection with its investment advisory
duties thereunder. The BDC shall reimburse the Advisor for all direct and
indirect cost and expenses incurred by the Advisor (i) for office space rental,
office equipment and utilities allocable to performance of investment advisory
and non investment advisory administrative or operating services hereunder by
the Advisor and (ii) allocable to any non-investment advisory administrative or
operating services provided by the Advisor hereunder, including salaries,
bonuses, health insurance, retirement benefits and all similar employment
costs, such as office equipment and other overhead items. All allocations made
pursuant to this paragraph (d) shall be made pursuant to allocation guidelines
approved from time to time by the Board of Directors. The BDC shall also be
responsible for the payment of all the BDC's other expenses, including (i)
payment of the fees payable to the Advisor under Section 8 hereof; (ii)
organizational expenses; (iii) brokerage fees and commissions; (iv) taxes; (v)
interest charges on borrowings; (vi) the cost of liability insurance or
fidelity bond coverage for the BDC's officers and employees, and directors' and
officers' errors and omissions insurance coverage; (vii) legal, auditing and
accounting fees and expenses; (viii) charges of the BDC's administrator (if
any), custodian, transfer agent and dividend disbursing agent and any other
service providers; (ix) the BDC's dues, fees and charges of any trade
association of which the BDC is a member; (x) the expenses of printing,
preparing and mailing proxies, stock certificates, reports, prospectuses,
registration statements and other documents used by the BDC; (xi) expenses of
registering and offering securities of the BDC under applicable law; (xii) the
expenses of holding shareholder meetings; (xiii) the compensation, including
fees, of any of the BDC's directors, officers or employees who are not
affiliated persons of the Advisor; (xiv) all expenses of computing the BDC's
net asset value per share; (xv) litigation and indemnification and other
extraordinary or non recurring expenses; and (xvi) all other non investment
advisory expenses of the BDC.
(e) The Advisor shall give the BDC the benefit of its professional
judgment and effort in rendering services hereunder, but neither the Advisor
nor any of its officers, directors, employees, agents or controlling persons
shall be liable for any act or omission or for any loss sustained by the BDC in
connection with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations and duties under this Agreement; provided, however, that the
foregoing shall not constitute a waiver of any rights which the BDC may have
which may not be waived under applicable law.
3. Covenants. In the performance of its duties under this Agreement,
the Advisor shall at all times conform to, and act in accordance with, any
requirements imposed by: (i) the provisions of the 1940 Act and the Investment
Advisers Act of 1940, as amended, and all applicable Rules and Regulations of
the Securities and Exchange Commission; (ii) any other applicable provision of
law; (iii) the provisions of the Certificate of Incorporation and By-Laws of
the BDC, as such documents are amended from time to time; (iv) the investment
objectives and policies of the BDC as set forth in its Private Placement
Memorandum; and (v) any policies and determinations of the Board of Directors
of the BDC.
(b) In addition, the Advisor will:
(i) place orders either directly with the issuer or with any
broker or dealer. Subject to the other provisions of this paragraph, in
placing orders with brokers and dealers, the Advisor will attempt to
obtain the best price and the most favorable execution of its orders. In
placing orders, the Advisor will consider the experience and skill of the
firm's securities traders as well as the firm's financial responsibility
and administrative efficiency. Consistent with this obligation, the
Advisor may select brokers on the basis of the research, statistical and
pricing services they provide to the BDC and other clients of the Advisor.
Information and research received from such brokers will be in addition
to, and not in lieu of, the services required to be performed by the
Advisor hereunder. A commission paid to such brokers may be higher than
that which another qualified broker would have charged for effecting the
same transaction, provided that the Advisor determines in good faith that
such commission is reasonable in terms either of the transaction or the
overall responsibility of the Advisor to the BDC and its other clients and
that the total commissions paid by the BDC will be reasonable in relation
to the benefits to the BDC over the long term. In addition, the Advisor is
authorized to take into account the sale of shares of the BDC in
allocating purchase and sale orders for portfolio securities to brokers or
dealers (including brokers and dealers that are affiliated with the
Advisor), provided that the Advisor believes that the quality of the
transaction and the commission are comparable to what they would be with
other qualified firms. In no instance, however, will the BDC's securities
be purchased from or sold to the Advisor, or any affiliated person
thereof, except to the extent permitted by the SEC or by applicable law;
(ii) maintain a policy and practice of conducting its
investment advisory services hereunder independently of the commercial
banking operations of its affiliates. When the Advisor makes investment
recommendations for the BDC, its investment advisory personnel will not
inquire or take into consideration whether the issuer of securities
proposed for purchase or sale for the BDC's account are customers of the
commercial department of its affiliates; and
(iii) treat confidentially and as proprietary information of
the BDC all records and other information relative to the BDC, and the
BDC's prior, current or potential shareholders, and will not use such
records and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification to
and approval in writing by the BDC, which approval shall not be
unreasonably withheld and may not be withheld where the Advisor may be
exposed to civil or criminal contempt proceedings for failure to comply,
when requested to divulge such information by duly constituted
authorities, or when so requested by the BDC.
4. Services Not Exclusive. Nothing in this Agreement shall prevent
the Advisor or any officer, employee or other affiliate thereof from acting as
investment advisor for any other person, firm or corporation, or from engaging
in any other lawful activity, and shall not in any way limit or restrict the
Advisor or any of its officers, employees or agents from buying, selling or
trading any securities for its or their own accounts or for the accounts of
others for whom it or they may be acting; provided, however, that the Advisor
will undertake, and will cause its employees to undertake, no activities which,
in its judgment, will adversely affect the performance of the Advisor's
obligations under this Agreement.
5. Books and Records. In compliance with the requirements of Rule
31a-3 under the 1940 Act, the Advisor hereby agrees that all records which it
maintains for the BDC are the property of the BDC and further agrees to
surrender promptly to the BDC any such records upon the BDC's request. The
Advisor further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under
the 1940 Act.
6. Agency Cross Transactions. From time to time, the Advisor or
brokers or dealers affiliated with it may find themselves in a position to buy
for certain of their brokerage clients (each an "Account") securities which the
Advisor's investment advisory clients wish to sell, and to sell for certain of
their brokerage clients securities which advisory clients wish to buy. Where
one of the parties is an advisory client, the Advisor or the affiliated broker
or dealer cannot participate in this type of transaction (known as a cross
transaction) on behalf of an advisory client and retain commissions from one or
both parties to the transaction without the advisory client's consent. This is
because in a situation where the Advisor is making the investment decision (as
opposed to a brokerage client who makes his own investment decisions), and the
Advisor or an affiliate is receiving commissions from both sides of the
transaction, there is a potential conflicting division of loyalties and
responsibilities on the Advisor's part regarding the advisory client. The SEC
has adopted a rule under the Investment Advisers Act of 1940, as amended, which
permits the Advisor or its affiliates to participate on behalf of an Account in
agency cross transactions if the advisory client has given written consent in
advance. By execution of this Agreement, the BDC authorizes the Advisor or its
affiliates to participate in agency cross transactions involving an Account.
The BDC may revoke its consent at any time by written notice to the Advisor.
7. Expenses. During the term of this Agreement, the Advisor will bear
all costs and expenses of its employees and any overhead incurred in connection
with its duties hereunder and shall bear the costs of any salaries or
Directors' fees of any officers or Directors of the BDC who are affiliated
persons (as defined in the 1940 Act) of the Advisor; provided that the Board of
Directors of the BDC may approve reimbursement to the Advisor of the pro rata
portion of the salaries, bonuses, health insurance, retirement benefits and all
similar employment costs for the time spent on BDC operations (other than the
provision of investment advice and administrative services required to be
provided hereunder) of all personnel employed by the Advisor who devote
substantial time to BDC operations or the operations of other investment
companies advised by the Advisor.
8. Compensation of the Advisor.
(a) The Advisor, for its services to the BDC, will be entitled to
receive a management fee (the "Management Fee") from the BDC. The Management
Fee will be calculated at an annual rate of 2.00% of total assets. For services
rendered under this Agreement during the period commencing from the Closing
through and including the first twelve months of operations, the Management Fee
will be payable monthly in arrears based on the asset valuation for the prior
month or, prior to the BDC's first valuation, its assets upon the commencement
of its business. For services rendered under this Agreement after that time,
the Management Fee will be paid quarterly in arrears based on the asset
valuation for the prior quarter.
(b) For purposes of this Agreement, the net assets of the BDC shall
be calculated pursuant to the procedures adopted by resolutions of the
Directors of the BDC for calculating the value of the BDC's assets or
delegating such calculations to third parties.
(c) The Advisor will be entitled to receive a fee (the "Carried
Interest") in an amount equal to, (i) commencing on the Ramp-Up Date and prior
to the first day of the calendar quarter during which the Public Market Event
occurs, (A) 50% (payable at the same time as, and not in advance of, any
distributions in respect of the BDC's common shares) of the amount by which the
Cumulative Adjusted Common Distributions exceed the Hurdle until the cumulative
payments that have been made in respect of the Carried Interest pursuant to
this clause (i) since the Ramp-Up Date equal 20% of the sum of the amount paid
pursuant to this clause (i) plus the amount of the Cumulative Adjusted Common
Distributions since the Ramp-Up Date, and thereafter (B) an amount (payable at
the same time as, and not in advance of, any distributions in respect of the
BDC's common shares) such that, after payment thereof, the cumulative payments
that have been made in respect of the Carried Interest pursuant to this clause
(i) since the Ramp-Up Date equal 20% of the sum of the amount paid pursuant to
this clause (i) plus the amount of the Cumulative Adjusted Common Distributions
since the Ramp-Up Date and (ii) commencing on and after the first day of the
calendar quarter during which the Public Market Event occurs, (A) 50% (payable
at the same time as, and not in advance of, any distributions in respect of the
BDC's common shares) of the amount by which the cumulative distributions and
amounts distributable out of net income (including realized capital gains in
excess of realized capital losses) in respect of the BDC's common shares (1)
since the Public Market Event or (2) during the four calendar quarters most
recently completed prior to or within 15 days after the date of declaration,
whichever is most recent, exceed the Hurdle until the cumulative payments that
have been made in respect of the Carried Interest pursuant to this clause (ii)
equal 20% of the sum of the amount distributed pursuant to this clause (ii)
plus the amount of the Cumulative Adjusted Common Distributions (1) since the
Public Market Event or (2) during the four calendar quarters most recently
completed prior to or within 15 days after the date of declaration, whichever
is most recent, and thereafter (B) an amount (payable at the same time as, and
not in advance of, any distributions in respect of the Common Shares) equal to
the excess of (1) 20% of the sum of the amount distributed pursuant to this
clause (ii) plus the amount of the Measurement Period Adjusted Common
Distributions (as defined below) over (2) the portion of the amount in item (1)
above previously distributed during such four preceding quarters.
(d) For purposes of Section 8(c), (i) "Public Market Event" means
the completion by the BDC of an initial public offering of its common shares
registered under the Securities Act of 1933 and the commencement of trading of
such common shares on a national securities exchange; (ii) "Hurdle" means the
product of 2% times the quarterly net asset value of the BDC attributable to
its common shares as of the beginning of such quarter (or such measurement
period) calculated after giving effect to any distributions in respect of such
quarter (or such measurement period) times the number of quarters in the
measurement period (which, after the Public Market Event, will be four
quarters); (iii) "Cumulative Adjusted Common Distributions" means the excess of
the cumulative distributions and amounts distributable out of net income
(including realized capital gain in excess of realized capital losses) in
respect of the common shares over the net amount of capital depreciation, if
any, at the time of determination; (iv) "Measurement Period Adjusted Common
Distributions" means the aggregate distributions and amounts distributable out
of net income (including realized capital gains in excess of realized capital
losses) in respect of the common shares during the four calendar quarters most
recently completed prior to or within 15 days after the date of declaration of
any distribution under Section 8(c), less any increases in net capital
depreciation attributable to the common shares during such four quarter period
or plus any decrease in such net capital depreciation but only to the extent
that both (A) such decrease did not exceed the net amount of capital
depreciation at the beginning of such period and (B) such decrease did not
exceed the excess of cumulative realized capital gains over cumulative realized
capital losses since commencement of operations; and (v) "Ramp-up Date" means
such time that 90% of the assets of the BDC are invested in portfolio companies
in accordance with the BDC'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
date on which the BDC first draws funds under accepted subscriptions for its
common shares, whichever is sooner.
(e) The Advisor shall only be entitled to the Carried Interest if
such fees are not, have not, or will not be paid to the Advisor or an affiliate
through another mechanism.
(f) Alternatively, the Carried Interest may be paid pursuant to a
dividend on a preferred share (the "Special S Share") issued by the BDC in the
form attached as Exhibit A hereto. For avoidance of doubt, if the Special S
Share is issued by the BDC the Carried Interest will not be paid pursuant to
this agreement.
9. Indemnity. (a) The BDC may, in the discretion of the Board of
Directors of the BDC, indemnify the Advisor, and each of the Advisor's
directors, officers, employees, agents, associates and controlling persons and
the directors, partners, members, officers, employees and agents thereof
(including any individual who serves at the Advisor's request as director,
officer, partner, member or the like of another entity) (each such person being
an "Indemnitee") against any liabilities and expenses, including amounts paid
in satisfaction of judgments, in compromise or as fines and penalties, and
counsel fees (all as provided in accordance with applicable state law)
reasonably incurred by such Indemnitee in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
before any court or administrative or investigative body in which such
Indemnitee may be or may have been involved as a party or otherwise or with
which such Indemnitee may be or may have been threatened, while acting in any
capacity set forth herein or thereafter by reason of such Indemnitee having
acted in any such capacity, except with respect to any matter as to which such
Indemnitee shall have been adjudicated not to have acted in good faith in the
reasonable belief that such Indemnitee's action was in the best interest of the
BDC and furthermore, in the case of any criminal proceeding, so long as such
Indemnitee had no reasonable cause to believe that the conduct was unlawful;
provided, however, that (1) no Indemnitee shall be indemnified hereunder
against any liability to the BDC or its shareholders or any expense of such
Indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith, (iii)
gross negligence or (iv) reckless disregard of the duties involved in the
conduct of such Indemnitee's position (the conduct referred to in such clauses
(i) through (iv) being sometimes referred to herein as "disabling conduct"),
(2) as to any matter disposed of by settlement or a compromise payment by such
Indemnitee, pursuant to a consent decree or otherwise, no indemnification
either for said payment or for any other expenses shall be provided unless
there has been a determination that such settlement or compromise is in the
best interests of the BDC and that such Indemnitee appears to have acted in
good faith in the reasonable belief that such Indemnitee's action was in the
best interest of the BDC and did not involve disabling conduct by such
Indemnitee and (3) with respect to any action, suit or other proceeding
voluntarily prosecuted by any Indemnitee as plaintiff, indemnification shall be
mandatory only if the prosecution of such action, suit or other proceeding by
such Indemnitee was authorized by a majority of the full Board of Directors of
the BDC.
(b) The BDC may make advance payments in connection with the
expenses of defending any action with respect to which indemnification might be
sought hereunder if the BDC receives a written affirmation of the Indemnitee's
good faith belief that the standard of conduct necessary for indemnification
has been met and a written undertaking to reimburse the BDC unless it is
subsequently determined that such Indemnitee is entitled to such
indemnification and if the Directors of the BDC determine that the facts then
known to them would not preclude indemnification. In addition, at least one of
the following conditions must be met: (A) the Indemnitee shall provide security
for such Indemnitee-undertaking, (B) the BDC shall be insured against losses
arising by reason of any unlawful advance, or (C) a majority of a quorum
consisting of Directors of the BDC who are neither "interested persons" of the
BDC (as defined in Section 2(a)(19) of the 1940 Act) nor parties to the
proceeding ("Disinterested Non-Party Directors") or an independent legal
counsel in a written opinion, shall determine, based on a review of readily
available facts (as opposed to a full trial-type inquiry), that there is reason
to believe that the Indemnitee ultimately will be found entitled to
indemnification.
(c) All determinations with respect to the standards for
indemnification hereunder shall be made (1) by a final decision on the merits
by a court or other body before whom the proceeding was brought that such
Indemnitee is not liable or is not liable by reason of disabling conduct, or
(2) in the absence of such a decision, by (i) a majority vote of a quorum of
the Disinterested Non-Party Directors of the BDC, or (ii) if such a quorum is
not obtainable or, even if obtainable, if a majority vote of such quorum so
directs, independent legal counsel in a written opinion. All determinations
that advance payments in connection with the expense of defending any
proceeding shall be authorized and shall be made in accordance with the
immediately preceding clause (2) above.
The rights accruing to any Indemnitee under these provisions shall
not exclude any other right to which such Indemnitee may be lawfully entitled.
10. Limitation on Liability. (a) The Advisor will not be liable
for any error of judgment or mistake of law or for any loss suffered by Advisor
or by the BDC in connection with the performance of this Agreement, except a
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services or a loss resulting from willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its duties under this Agreement.
(b) Notwithstanding anything to the contrary contained in this
Agreement, the parties hereto acknowledge and agree that, as provided in the
Certificate of Incorporation, this Agreement is executed by the Directors
and/or officers of the BDC, not individually but as such Directors and/or
officers of the BDC, and the obligations hereunder are not binding upon any of
the Directors or Shareholders individually but bind only the estate of the BDC.
11. Duration and Termination. This Agreement shall become
effective as of the date hereof and, unless sooner terminated with respect to
the BDC as provided herein, shall continue in effect for a period of two years.
Thereafter, if not terminated, this Agreement shall continue in effect with
respect to the BDC for successive periods of 12 months, provided such
continuance is specifically approved at least annually by both (a) the vote of
a majority of the BDC's Board of Directors or the vote of a majority of the
outstanding voting securities of the BDC at the time outstanding and entitled
to vote, and (b) by the vote of a majority of the Directors who are not parties
to this Agreement or interested persons of any party to this Agreement, cast in
person at a meeting called for the purpose of voting on such approval.
Notwithstanding the foregoing, this Agreement may be terminated by the BDC at
any time, without the payment of any penalty, upon giving the Advisor 60 days'
notice (which notice may be waived by the Advisor), provided that such
termination by the BDC shall be directed or approved by the vote of a majority
of the Directors of the BDC in office at the time or by the vote of the holders
of a majority of the voting securities of the BDC at the time outstanding and
entitled to vote, or by the Advisor on 60 days' written notice (which notice
may be waived by the BDC). This Agreement will also immediately terminate in
the event of its assignment. (As used in this Agreement, the terms "majority of
the outstanding voting securities," "interested person" and "assignment" shall
have the same meanings of such terms in the 1940 Act.) If this Agreement is
terminated pursuant to this Section, the Fund shall pay the Advisor a pro rated
portion of the Management Fee and the Carried Interest. The Management Fee and
the Carried Interest due to the Adviser in the event of termination pursuant to
this Section will be determined according to the method set forth in the
following paragraph.
The BDC will engage at its own expense a firm acceptable to the BDC
and the Advisor to determine the maximum reasonable fair value as of the
termination date of the BDC's consolidated assets (assuming each asset is
readily marketable among institutional investors without minority discount and
with an appropriate control premium for any control positions and ascribing an
appropriate net present value to unamortized organizational and offering costs
and going concern value). After review of such firm's work papers by the
Advisor and the BDC and resolution of any comments therefrom, such firm will
render its report as to valuation, and the BDC will pay to the Advisor or its
affiliates any Management Fees or Carried Interest, as the case may be, payable
pursuant to the paragraphs above as if all of the consolidated assets of the
BDC had been sold at the values indicated in such report and any net income and
gain distributed. Such report will be completed within 90 days after notice of
termination is delivered hereto.
12. Notices. Any notice under this Agreement shall be in writing to
the other party at such address as the other party may designate from time to
time for the receipt of such notice and shall be deemed to be received on the
earlier of the date actually received or on the fourth day after the postmark
if such notice is mailed first class postage prepaid.
13. Amendment of this Agreement. No provision of this Agreement may
be changed, waived, discharged or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. Any amendment of this Agreement shall be
subject to the 1940 Act.
14. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York for contracts to be
performed entirely therein without reference to choice of law principles
thereof and in accordance with the applicable provisions of the 1940 Act.
15. Use of the Name BlackRock Kelso Capital. The Advisor has
consented to the use by the BDC of the name or identifying words "BlackRock
Kelso Capital" in the name of the BDC. Such consent is conditioned upon the
employment of the Advisor as the investment advisor to the BDC. The name or
identifying words "BlackRock Kelso Capital" may be used from time to time in
other connections and for other purposes by the Advisor and any of its
affiliates. The Advisor may require the BDC to cease using "BlackRock Kelso
Capital" in the name of the BDC if the BDC ceases to employ, for any reason,
the Advisor, any successor thereto or any affiliate thereof as investment
advisor of the BDC.
16. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding on, and shall inure to the
benefit of the parties hereto and their respective successors.
17. Capitalized Terms. Capitalized terms not defined herein shall
have the respective meanings given to them in the Confidential Private
Placement Memorandum of BlackRock Kelso Capital Holding LLC or, if not
contained therein, in the documents referenced therein.
18. Counterparts. This Agreement may be executed in counterparts by
the parties hereto, each of which shall constitute an original counterpart, and
all of which, together, shall constitute one Agreement.
IN WITNESS WHEREOF, the parties hereto have caused the foregoing
instrument to be executed by their duly authorized officers, all as of the day
and the year first above written.
BLACKROCK KELSO CAPITAL CORPORATION
By:
-------------------------------------
Name:
Title:
BLACKROCK KELSO CAPITAL ADVISORS LLC
By:
-------------------------------------
Name:
Title:
Exhibit A
Exhibit 6
---------
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT is entered into as of the [ ] day
of [ ], 2005, between BlackRock Kelso Capital Corporation, a corporation
organized and existing under the laws of Delaware (the "Company"), and [an
affiliate of BlackRock, Inc.] (the "Purchaser").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF THE SHARES
1.1 SALE AND ISSUANCE OF SHARES. Subject to the terms and conditions
of this Agreement, the Company agrees to sell to the Purchaser, and the
Purchaser agrees to purchase from the Company [ ] common shares of beneficial
interest, par value $0.001, representing undivided beneficial interests in the
Company (the "Shares") at a price per Share of $[ ] for an aggregate purchase
price of $[ ].
2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER. The
Purchaser hereby represents and warrants to, and covenants for the benefit of,
the Company that:
2.1 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made by the
Company with the Purchaser in reliance upon the Purchaser's representation to
the Company, which by the Purchaser's execution of this Agreement the Purchaser
hereby confirms, that the Shares are being acquired for investment for the
Purchaser's own account, and not as a nominee or agent and not with a view to
the resale or distribution by the Purchaser of any of the Shares, and that the
Purchaser has no present intention of selling, granting any participation in,
or otherwise distributing the Shares, in either case in violation of any
securities registration requirement under applicable law, but subject
nevertheless, to any requirement of law that the disposition of its property
shall at all times be within its control. By executing this Agreement, the
Purchaser further represents that the Purchaser does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or
grant participation to such person or to any third person, with respect to any
of the Shares.
2.2 INVESTMENT EXPERIENCE. The Purchaser acknowledges that it can bear
the economic risk of the investment for an indefinite period of time and has
such knowledge and experience in financial and business matters (and
particularly in the business in which the Company operates) as to be capable of
evaluating the merits and risks of the investment in the Shares. The Purchaser
is an "accredited investor" as defined in Rule 501(a) of Regulation D under the
Securities Act of 1933 (the "1933 Act").
2.3 RESTRICTED SECURITIES. The Purchaser understands that the Shares
are characterized as "restricted securities" under the United States securities
laws inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such Shares may be resold without registration under the 1933 Act only in
certain circumstances. In this connection, the Purchaser represents that it
understands the resale limitations imposed by the 1933 Act and is generally
familiar with the existing resale limitations imposed by Rule 144.
2.4 FURTHER LIMITATIONS ON DISPOSITION. The Purchaser further agrees
not to make any disposition directly or indirectly of all or any portion of the
Shares unless and until:
(a) There is then in effect a registration statement under the 1933
Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) The Purchaser shall have furnished the Directors of the Company
with an opinion of counsel, reasonably satisfactory to the Directors, that such
disposition will not require registration of such Shares under the 1933 Act.
(c) Notwithstanding the provisions of subsections (a) and (b) above,
no such registration statement or opinion of counsel shall be necessary for a
transfer by the Purchaser to any affiliate of the Purchaser, if the transferee
agrees in writing to be subject to the terms hereof to the same extent as if it
were the original Purchaser hereunder.
2.5 LEGENDS. It is understood that the certificate, if any, evidencing
the Shares may bear either or both of the following legends:
(a) "These securities have not been registered under the Securities
Act of 1933. They may not be sold, offered for sale, pledged or hypothecated in
the absence of a registration statement in effect with respect to the Shares
under such Act or an opinion of counsel reasonably satisfactory to the
Directors of BlackRock Kelso Capital Corporation that such registration is not
required."
(b) Any legend required by the laws of any other applicable
jurisdiction.
The Purchaser and the Directors agree that the legend contained in the
paragraph (a) above shall be removed at a holder's request when they are no
longer necessary to ensure compliance with federal securities laws.
2.6 COUNTERPARTS. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
BLACKROCK KELSO CAPITAL CORPORATION
By:
-------------------------------
Name:
Title:
[AN AFFILIATE OF BLACKROCK
FINANCIAL MANAGEMENT, INC.]
By:
-------------------------------
Name: [ ___ ]
Title:[ ___ ]
May [ ___ ], 2005