e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED
NOVEMBER 30, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD
FROM TO
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COMMISSION FILE NUMBER:
814-00725
KAYNE ANDERSON ENERGY
DEVELOPMENT COMPANY
(Exact name of registrant as
specified in its charter)
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Maryland
(State of Incorporation)
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20-4991752
(I.R.S. Employer
Identification Number)
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717 Texas Avenue, Suite 3100
Houston, Texas
(Address of principal executive
offices)
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77002
(Zip
Code)
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Registrants telephone number, including area code:
(713) 493-2020
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value
$0.001 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o Smaller
reporting
company o
(Do
not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act) Yes o No þ
The aggregate market value of common stock held by
non-affiliates of the Registrant on January 31, 2008 based
on the closing price on that date of $23.41 on the New York
Stock Exchange was $229,543,173. For the purposes of calculating
this amount, only the Registrants investment adviser and
all directors and executive officers of the Registrant and the
Registrants investment adviser have been treated as
affiliates. There were 10,050,446 shares of the
Registrants common stock outstanding as of
January 31, 2008.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for its 2008
Annual Meeting of Stockholders to be filed not later than
120 days after the end of the fiscal year covered by this
Annual Report on
Form 10-K
are incorporated by reference into Part III of this
Form 10-K.
PART I
About
Our Company
Kayne Anderson Energy Development Company and its subsidiaries
(we, us, and our) is a
non-diversified, closed-end management investment company
organized under the laws of the State of Maryland that has
elected to be treated as a business development
company (BDC) under the Investment Company Act
of 1940, as amended (1940 Act). Prior to
December 1, 2007, we elected to be treated as a regulated
investment company (RIC) for tax purposes under the
Internal Revenue Code of 1986, as amended (the Code).
On January 22, 2008, we announced that we no longer intend
to be treated as a RIC under the Code. As a result of this
change, we will be taxed as a corporation for our fiscal year
ended November 30, 2008 and for future fiscal years, paying
federal and applicable state corporate taxes on our taxable
income and capital gains. We will continue to be regulated as a
BDC under the 1940 Act. See Recent Developments for
more information.
We invest primarily in energy companies that are not publicly
traded (private). Our primary investment objective
is to generate both current income and capital appreciation
primarily through debt and equity investments. We will seek to
achieve this objective by investing at least 80% of our net
assets together with the proceeds of any borrowings (our
total assets) in securities of companies that derive
the majority of their revenue from activities in the energy
industry, which include Midstream Energy Companies, Upstream and
Other Energy Companies. Midstream, Upstream and Other Energy
Companies are collectively referred to herein as Energy
Companies.
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Midstream Energy Companies. Businesses that
operated assets used to gather, transport, process, treat,
terminal and store natural gas, natural gas liquids, propane,
crude oil or refined petroleum products.
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Upstream Energy Companies. Businesses engaged
in the exploration, extraction and production of natural
resources, including natural gas, natural gas liquids and crude
oil from onshore and offshore geological reservoirs.
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Other Energy Companies. Businesses engaged in
the following:
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The ownership, leasing, management, production, processing and
sale of coal and coal reserves;
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The marine transportation of crude oil, refined petroleum
products, liquefied natural gas, as well as other energy-related
natural resources using tank vessels, bulk carriers and very
large gas carriers; and
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The refining, marketing and distribution of refined energy
products, such as motor gasoline and propane to retail customers
and industrial end-users.
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We expect that a key focus area for our investments in the
energy industry will continue to be equity and debt investments
in Midstream Energy Companies structured as limited
partnerships. We also expect to evaluate equity and debt
investments in Other Energy Companies and companies engaged in
the mining of aggregates and other natural resources. We refer
to these investments as our Targeted Investments.
Under current market conditions, we expect that our Targeted
Investments will generally range in size from $10 million
to $60 million, although a few investments may be in excess
of this range.
Our common stock began trading on the New York Stock Exchange
(NYSE) on September 21, 2006 through our
initial public offering of 10,000,000 shares of common
stock at $25.00 per share. After deducting underwriting
discounts and offering costs totaling $1.68 per share, our
initial net asset value was $23.32 per share. As of
June 30, 2007, we had fully invested all of our initial
proceeds in public and private securities of Energy Companies.
As of November 30, 2007, equity and fixed income
investments represented $235.5 million or 72.1% and
$91.2 million or 27.9%, respectively, of our long-term
investments. Included in the equity securities were
$8.0 million of warrants and $5.0 million of preferred
stock. All of our fixed income investments were in private
Energy Companies.
2
Recent
Developments
On January 22, 2008, we announced that we no longer intend
to be treated as a RIC under the Code. As a result of this
change, we will be taxed as a corporation for our fiscal year
ended November 30, 2008 and for future fiscal years, paying
federal and applicable state corporate taxes on our taxable
income and capital gains. We will continue to be regulated as a
BDC under the 1940 Act.
The opportunities to invest in private MLPs are much more
abundant than had been anticipated following our IPO, with nine
private MLPs raising approximately $500 million of capital
in the last twelve months. We believe that private MLPs
currently present an attractive investment opportunity and offer
attractive risk-adjusted total returns for our shareholders.
Previously, however, compliance with certain requirements
necessary to qualify as a RIC (RIC Tests) limited
our ability to invest in additional private MLPs.
RIC Tests required that 90% of our gross income come from
qualified sources. Equity securities of private partnerships,
however, do not generate qualified income, thus forcing the
creation of taxable subsidiaries for these investments. Because
such taxable subsidiaries were wholly-owned by us, these
investments were not considered diversified investments for
purposes of the RIC Diversification Test, which
requires that at least 50% of total assets consist of
(a) investments that each constitute less than 5% of total
assets and (b) investments for which the Company has less
than 10% of voting rights in each such investment. Compliance
with RIC Tests would have become increasingly difficult to the
extent that private MLPs in our portfolio are successful and go
public, because RIC Tests limit investments in public MLPs to
25% of total assets (25% MLP Test).
Based on the pro forma portfolio after giving effect to the
election, we expect to increase the number of investments in
private MLPs and decrease our holdings in second lien debt
investments. While we will no longer be constrained by the 25%
MLP test, this allocation may decline over time as we have more
flexibility under the RIC Diversification Test.
Our decision to no longer be treated as a RIC is retroactive to
the beginning of our fiscal tax year, which began on
December 1, 2007. For the quarter ended February 29,
2008, we will record a deferred tax liability for any unrealized
gains at that time, and our net asset value will be reduced by
any such deferred tax liability.
While we no longer intend to be treated as a RIC under the Code,
we intend to maintain our status as a BDC. By electing to be
treated as a BDC, we are subject to provisions of the 1940 Act,
including the requirements that we must have at least 70% of
assets in eligible portfolio companies, generally
defined as private companies with a principal place of business
in the United States.
On January 31, 2008, we terminated our Treasury Secured
Revolving Credit Facility (the Treasury
Facility). All amounts of principal and interest were paid
in full, and we sold $14.4 million of U.S. Treasury
Bills, which were held as collateral under the Treasury
Facility. See Liquidity and Capital Resources.
Portfolio
and Investment Activity
During the twelve months ended November 30, 2007, we
completed the following significant private investments, which
were funded with the proceeds from our IPO and through
borrowings from our Senior Secured Revolving Credit Facility.
Millennium Midstream Partners, LP On
December 28, 2006, we and other institutional investors
announced the formation of Millennium Midstream Partners, LP
(Millennium), a private limited partnership.
Millennium was formed to acquire the assets of Millennium
Midstream Energy, LLC and its affiliates, which operates natural
gas gathering, treating and processing assets in Texas,
Louisiana and the Gulf of Mexico. The gathering business
consists of over 500 miles of gas gathering pipeline. In
December 2007, Millennium completed the acquisition of the
Wildhorse gas gathering system from Torch Energy. The acquired
assets include two gathering systems totaling 100 miles of
pipeline in southeastern Crockett County, Texas. In conjunction
with the formation of Millennium, we made a $47.5 million
equity investment in Millennium. As part of the initial
investment, we received 2,375,000 Class B common units,
which represent a 39% limited partnership interest, 2,375,000
Class A common warrants, and 212 incentive distribution
rights (21% of the incentive distribution rights issued).
3
ProPetro Services, Inc. On
February 15, 2007, we invested approximately
$34.3 million in a second lien term loan issued by ProPetro
Services, Inc. (ProPetro). ProPetro provides a broad
range of drilling and production related services to oil and
natural gas exploration and production companies in Texas,
Oklahoma, Utah and Colorado. Services offered by ProPetro assist
companies to drill, develop and enhance the production of
natural gas, and such services include specialty air drilling,
cementing services, flow back, well control, and frac services.
In conjunction with our investment in the term loan, we received
2,904,620 warrants to purchase shares in ProPetro, which
represents an 8.4% fully diluted interest in ProPetro.
VantaCore Partners LP On May 22,
2007, we announced the formation and funding of VantaCore
Partners LP (VantaCore), a private limited
partnership. VantaCore was formed to acquire competitively
advantaged aggregate businesses in the domestic
U.S. market. VantaCore is currently composed of an
aggregate quarry and an asphalt business, which are located in
Clarksville, Tennessee.
In conjunction with the formation of VantaCore, we invested
approximately $16.3 million as follows: $7.5 million
in a senior secured term loan; $7.0 million in a
subordinated convertible note; a $1.8 million equity
investment. As part of the investment, we received 91,250 common
units, which represents a 5% limited partnership interest, and
1,422 incentive distribution rights (14% of the incentive
distribution rights issued).
Direct Fuels Partners, L.P. On
June 8, 2007, we completed the formation of Direct Fuels
Partners, L.P. (Direct Fuels) to acquire the assets
of Insight Equity Acquisition Partners, LP and it affiliates,
which consists primarily of specialty refining, storage and
distribution assets based in North Texas. The specialty refining
assets are dedicated to refining transportation mixture or
transmix, the result of various fuels mixed at
transition points during shipment in a refined products
pipeline, into gasoline and diesel. Direct Fuels also operates a
fuel distribution and terminalling business and has recently
expanded its business lines to alternative fuels, including the
onsite production of biodiesel and the transportation of
ethanol. In conjunction with the formation of Direct Fuels, we
made a $50.2 million equity investment in Direct Fuels and
received 2,500,000 Class B common units, which represents a
38% limited partnership interest, 2,500,000 Class A common
warrants, and 200 incentive distribution rights (20% of the
incentive distribution rights issued).
International Resource Partners LP On
June 12, 2007, we announced the formation of International
Resource Partners LP (IRI), a private limited
partnership. IRI was formed to acquire International Resources,
LLC, the Central Appalachian coal subsidiary of International
Industries, Inc., with reserves of 29 million tons of
metallurgical coal and 4.9 million tons of steam coal. In
2006, IRI produced approximately 2.1 million tons of
metallurgical and steam coal from its surface and underground
miles in West Virginia and sold approximately 5.0 million
tons of coal to domestic and international customers. IRI also
owns Hampden Coal, a coal washing and coal preparation plant;
three rail loading facilities, and Logan and Kanawha, a coal
sales and marketing company. In conjunction with the formation
of IRI, we made a $30.0 million equity investment in IRI
and received 1,500,000 Class A common units, which
represents a 28% limited partnership interest, and
10 incentive distribution rights (10% of the incentive
distribution rights issued).
Quest Midstream Partners, L.P. On
October 30, 2007, we invested approximately
$7.0 million in Quest Midstream Partners, L.P.
(Quest), a private limited partnership. Quest, which
is a subsidiary of Quest Resource Corporation, owns a gas
gathering system that includes 1,800 miles in the Cherokee
Basin of Kansas and Oklahoma. This gas gathering system handles
all of the natural gas produced by Quest Resource Corporation
and also has capacity for natural gas produced by other
companies. As a result of its acquisition during 2007 of certain
assets from Enbridge Midcoast Energy, L.P., Quest also owns
1,100 miles of interstate gas transmission pipeline in the
Wichita and Kansas City area. In conjunction with our
investment, we received 350,000 common units, which represents a
2.5% limited partnership interest.
4
Our
Top Ten Portfolio Investments as of November 30,
2007
Listed below are our top ten portfolio investments as of
November 30, 2007, represented as a percentage of our total
assets(1).
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Percent
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Public/
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Amount
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of Total
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Investment
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Private
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Sector
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($ in millions)
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Assets
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1.
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Direct Fuels Partners,
L.P.(2)
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Private
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Midstream Specialty
Products and Distribution
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$
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51.3
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14.4
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2.
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Millennium Midstream Partners,
LP(3)
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Private
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Midstream Gas Gathering
and Processing
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47.5
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13.4
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3.
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ProPetro Services,
Inc.(4)
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Private
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Oilfield Services
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34.4
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9.7
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4.
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International Resource Partners
LP(5)
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Private
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Coal
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30.0
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8.4
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5.
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VantaCore Partners
LP(6)
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Private
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Aggregates and Mining
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16.8
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4.7
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6.
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Targa Resources, Inc.
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Private
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Midstream
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9.1
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2.6
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7.
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SemGroup, L.P.
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Private
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Midstream
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8.6
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2.4
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8.
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Quest Midstream Partners,
L.P.(7)
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Private
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Midstream
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7.0
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2.0
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9.
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Enterprise Products Partners L.P.
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Public
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Midstream
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6.9
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1.9
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10.
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SandRidge Energy
Inc.(8)
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Private
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Upstream
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5.7
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1.6
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TOTAL
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$
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217.3
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61.1
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%
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(1) |
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Total assets were $355.4 million as of November 30,
2007. |
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(2) |
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Our investment in Direct Fuels Partners, L.P. includes 2,500,000
Class B common units, which represents a 38% limited
partnership interest, 2,500,000 Class A warrants and 200
incentive distribution rights. |
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(3) |
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Our investment in Millennium Midstream Partners, LP includes
2,375,000 Class B common units, which represents a 39%
limited partnership interest, 2,375,000 Class A warrants
and 212 incentive distribution rights. |
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(4) |
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Our investment in ProPetro Services, Inc. includes a senior
secured second lien term loan ($34.3 million) and 2,904,620
warrants ($0.1 million). |
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(5) |
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Our investment in International Resource Partners LP includes
1,500,000 Class A common units, which represents a 28%
limited partnership interest and 10 incentive distribution
rights. |
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(6) |
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Our investment in VantaCore Partners LP includes a senior
secured second lien term loan ($7.5 million), a
subordinated convertible note ($7.4 million), 91,250 common
units ($1.9 million), which represents a 5% limited
partnership interest, and 1,422 incentive distribution rights. |
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(7) |
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Our investment in Quest Midstream Partners, L.P. includes
350,000 common units, which represents a 2.5% limited
partnership interest. |
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(8) |
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Floating rate unsecured bridge loan facility. |
About
Our Investment Adviser
KA Fund Advisors, LLC (KAFA), a subsidiary of
Kayne Anderson Capital Advisors, L.P., (KACALP) and
together with KAFA (Kayne Anderson), externally
manages and advises us pursuant to our investment management
agreement. KAFA is registered as an investment adviser under the
Investment Advisers Act of 1940. Kayne Anderson is a leading
investor in both public and private energy companies. At
November 30, 2007, Kayne Anderson managed
approximately $9.0 billion, including $7.7 billion in
securities of energy companies.
We believe that KAFAs market knowledge, experience and
industry relationships enable KAFA to identify and exploit
investment niches and opportunities which are believed to be
less understood and generally not pursued by the broader
investment community. Further, the senior professionals of KAFA
have developed a strong reputation in the energy sector and have
many long-term relationships with industry executives, which we
believe provides us an important advantage in sourcing and
structuring transactions.
5
Our portfolio is managed by two of KAFAs Senior Managing
Directors, Kevin S. McCarthy, our Chief Executive Officer
who focuses on private investments, and J. C. Frey, who focuses
on investments in publicly traded securities of MLPs and other
Energy Companies. Messrs. McCarthy and Frey draw on the
research and analytical support of David LaBonte, a Senior
Managing Director of KACALP; James C. Baker, a Senior Managing
Director of KAFA; Richard Kayne, KACALPs Chief Executive
Officer; and Robert V. Sinnott, one of our directors and
KACALPs President and Chief Investment Officer.
Mr. Sinnott has been principally responsible for executing
Kayne Andersons energy industry investments in general,
and Messrs. Kayne and Sinnott have approximately
70 years of combined investment experience.
About
the Characteristics of Energy Companies in Which We
Invest
We believe that we have a competitive advantage through our
relationship with KAFA, whose market knowledge, experience and
industry relationships contribute to our ability to seek
investments in public and private companies that possess the
following characteristics to create an attractive investment
portfolio.
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Stable Cash Flows. Specifically, our
investments in Midstream Energy Companies generate stable cash
flows, as companies in this sector have a substantial portion of
their assets in fee-based businesses with limited commodity
price risk and exposure. Our investments in Upstream Energy
Companies focus on lower-risk assets such as exploitation and
development opportunities and assets with long-lived production.
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Consistent and Predictable Demand. We believe
that Upstream Energy Companies will continue to produce oil and
gas at the maximum practicable rate for their oil and gas wells
and that production will be relatively predictable. Midstream
Energy Companies will continue to benefit from related increases
in demand for gathering, processing and transporting products.
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Increased Cash Flows for Internal
Growth. Midstream Energy Companies generate
revenues based in part on the volumes of products handed or
transported, and volume increases have a significant impact on
earnings and cash flow growth, since midstream assets generally
have a high percentage of fixed costs and low percentage of
variable costs.
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Substantial Growth for New Projects. Increased
drilling activity in basins that were previously thought to be
uneconomic in a lower commodity price environment is a result of
the substantial increase in oil and gas prices over the past two
years. This increased activity has created the need for
additional midstream infrastructure to move new production to
market, and many of our investments include expansion of
existing infrastructure or investments in new projects to meet
these production needs.
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Limited Commodity Price Risk. Our investments
have limited direct and indirect commodity price risk. Some of
our investments may have more substantial commodity price risk,
but these companies use appropriate financial risk management
products, such as commodity swaps, to mitigate exposure to
commodity price fluctuations.
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Proven Management Teams. Our investments are
in companies with management teams that have a proven track
record of success, but who have limited access to capital
markets or who seek to raise capital through private sources. In
general, these management teams will often have substantial
knowledge and focus in a particular geographic area or with
respect to certain types of assets.
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On-Going
Relationships with and Monitoring of Portfolio
Companies
We closely monitor each investment we make, and for many of our
private investments, we maintain regular dialogue with both the
management team and other stakeholders and seek specifically
tailored financial reporting from these private investments. In
addition, our senior management investment personnel may often
hold board seats for the private companies in which we invest.
In addition to covenants and other contractual rights, following
our investment, we seek to exert significant influence on our
private investments through board participation, when
appropriate, and by actively working with management on
strategic initiatives.
6
Managerial
Assistance
As a BDC, we offer, and must provide upon request, managerial
assistance to our private portfolio companies. This assistance
could involve, among other things, monitoring the operations of
our private portfolio companies, participating in board and
management meetings, consulting with and advising officers of
private portfolio companies and providing other organizational
and financial guidance. We may receive fees for these services,
and KAFA provides such managerial assistance on our behalf to
private portfolio companies that request this assistance.
Staffing
We do not currently have any employees and do not expect to have
any employees. KAFA provides services necessary for our
business, pursuant to the terms of the investment management
agreement. Our executive officers are comprised of Kevin S.
McCarthy, President and Chief Executive Officer; J.C. Frey, Vice
President, Assistant Secretary and Assistant Treasurer; Terry A.
Hart, Chief Financial Officer and Treasurer; David J.
Shladovsky, Chief Compliance Officer and Secretary; James
C. Baker, Vice President; and Ron M. Logan, Jr.,
Vice President. Messrs. McCarthy and Frey serve as our
portfolio managers.
KAFA is operated by Mr. McCarthy and other senior personnel
of KACALP. Except for Messrs. Shladovsky and Frey, our
executive officers are employees of KAFA and are located in
Houston. Some of the services necessary for the origination and
administration of our investment portfolio are provided by
investment professionals located in Los Angeles who are, and
will continue to be, employed by KACALP.
Operating
and Regulatory Structure
We are a BDC under the 1940 Act and, since inception through our
most recently completed fiscal year, have elected to be treated
as a RIC under Subchapter M of the Code. On January 22,
2008, we announced that we no longer intend to be treated as a
RIC under the Code. As a result of this change, we will be taxed
as a corporation for our fiscal year ended November 30,
2008 and for future fiscal years, paying federal and applicable
state corporate taxes on our taxable income and capital gains.
We will continue to be regulated as a BDC under the 1940 Act.
As a BDC, we will generally be prohibited from acquiring assets
other than qualifying assets unless, after giving
effect to the acquisition, at least 70% of our total assets are
qualifying assets. Qualifying assets generally include
securities of eligible portfolio companies, cash, cash
equivalents, U.S. government securities and high-quality
debt instruments maturing in one year or less from the time of
investment. The Securities and Exchange Commission
(SEC) adopted rules under the 1940 Act to expand the
definition of eligible portfolio company to include
all private companies whose securities are not listed on a
national securities exchange. The rules also permit us to
include as qualifying assets certain follow-on investments in
companies that were eligible portfolio companies at the time of
initial investment but that no longer meet the definition. These
rules became effective November 30, 2006. We are also no
longer required to determine the eligibility of a portfolio
company by reference to whether or not it has outstanding margin
securities. In addition to the adoption of the rules described
above, the SEC also reproposed for comment a rule that would
include as eligible portfolio companies certain public companies
that have listed their securities on a national securities
exchange, as long as their public float
and/or
market capitalization are below a specified level. We will
continue to monitor closely any developments with respect to the
definition of eligible portfolio company, and intend to adjust
our investment focus as needed to comply with
and/or take
advantage of the new rules as well as any other regulatory,
legislative, administrative or judicial actions in this area.
As a BDC, we must adhere to certain substantive regulatory
requirements, and the 1940 Act contains certain provisions and
restrictions relating to transactions between BDCs and their
affiliates, including KAFA, principal underwriters, and our
affiliates. The majority of our directors must be persons other
than interested persons as defined in the 1940 Act,
and under the 1940 Act, we may not change the nature of our
business so as to cease to be, or to withdraw our election as, a
BDC unless first approved by the majority of our outstanding
voting securities.
7
Codes
of Ethics
We have adopted a supplemental antifraud code of ethics which
applies to, among others, our principal and senior financial
officers, including our principal executive officer and
principal financial officer. Our supplemental antifraud code of
ethics was filed with the SEC on February 16, 2007 as
Exhibit 14.1 of the Annual Report on
Form 10-K
for the fiscal year ended November 30, 2006 and can be
accessed via the SECs Internet site at
http://www.sec.gov.
The Company will disclose any amendments to or waivers of
required provisions of this code on
Form 8-K.
We have also adopted a code of ethics pursuant to
Rule 17j-1
under the 1940 Act that establishes personal trading procedures
for employees designated as access persons. Access persons may
engage in personal securities transactions, including
transactions involving securities that are currently held by us
or, in limited circumstances, that are being considered for
purchase or sale by us, subject to certain general restrictions
and procedures set forth in our code of ethics. Our code of
ethics is filed as Exhibit 99.2(R)(1) to pre-effective
Amendment No. 5 to our Registration Statement on
Form N-2,
filed with the SEC on September 18, 2006 and can be
accessed via the SECs Internet site at
http://www.sec.gov.
Sarbanes-Oxley
Act of 2002
The Sarbanes-Oxley Act of 2002 (the Act) imposes a
wide variety of regulatory requirements for publicly-held
companies and their insiders. Under the Act, we are required to
review our policies and procedures to determine whether we
comply with the provisions of the Act. We will continue to
monitor our compliance with all future regulations that are
adopted under the Act and will take actions necessary to ensure
that we are in compliance therewith.
As of November 30, 2007, we are an accelerated filer. As an
accelerated filer for the fiscal year ended November 30,
2007, we were required to prepare and include in our annual
report to stockholders for such period a report regarding
managements assessment of our internal control over
financial reporting under the Securities Exchange Act of 1934
(the 1934 Act) and have included this report in
Item 9A of this Annual Report on
Form 10-K.
Available
Information
The Internet address for our website is
http://www.kaynefunds.com.
We make, and will make in the future, available free of charge
on our website our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
and any amendments to those reports as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the SEC. This information will be available at
the SECs Public Reference Room at 100 F Street,
NE, Washington, DC 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-202-551-8090. The SEC maintains an Internet site that contains
reports, proxy and information statements, and other information
filed by us with the SEC which are available on the SECs
Internet site at
http://www.sec.gov.
Forward-Looking
Statements
This
Form 10-K
includes statements reflecting assumptions, expectations,
projections, intentions or beliefs about future events that are
intended as forward-looking statements. All
statements included or incorporated by reference in this annual
report, other than statements of historical fact, that address
activities, events, developments that we expect, believe or
anticipate will or may occur in the future are forward-looking
statements. These statements represent our reasonable judgment
on the future based on various factors and using numerous
assumptions and are subject to known and unknown risks,
uncertainties, and other factors that could cause our actual
results to differ materially from those contemplated by the
statements. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. They
use words such as anticipate, estimate,
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project, forecast, plan,
may, will, should,
expect and other words of similar meaning. In
particular, these include, but are not limited to, statements
relating to the following:
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Our future operating results;
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Our business prospects and the prospects of our portfolio
companies and their ability to achieve their objectives;
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Our ability to make investments consistent with our investment
objective;
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The impact of investments that we hold or expect to make;
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Our contractual arrangements and relationships with third
parties;
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The dependence of our future success on the general economy and
its impact on the energy industry;
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Our debt and equity financings and investments;
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The adequacy of our cash resources and working capital; and
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The timing of cash flows, if any, from the operations of our
portfolio companies.
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We undertake no obligation to update or revise any
forward-looking statements made herein.
Risk
Factors
In addition to the other information contained in this Annual
Report on
Form 10-K,
you should carefully consider the risks described below with
respect to our common stock. If any of the following events
occur, our business, financial condition, results of operations
and prospects could be materially adversely affected. In such
case, our net asset value and the trading price of our common
stock could decline, and our ability to pay dividends could be
materially, negatively impacted.
Risks
Related to Our Business and Structure
We are
a relatively new company with a limited operating
history.
We were incorporated in May 2006, completed our initial public
offering in September 2006 and have a limited operating history.
We are subject to all of the business risks and uncertainties
associated with any new business, including the risk that we
will not achieve our investment objective and that the value of
your investment could decline substantially.
Our
success is dependent upon the members of our investment
advisers senior professionals, and the loss of any of them
could severely and detrimentally affect our
operations.
We continue to depend on the diligence, experience, skill and
network of business contacts of our investment advisers
senior professionals. We also depend on the information and deal
flow generated by our investment adviser in the course of its
investment and portfolio management activities. Because our
investment advisers senior professionals will evaluate,
negotiate, structure, close and monitor our investments, our
future success will depend on the continued service of our
investment advisers senior professionals. The departure of
any senior professionals of our investment adviser, or of a
significant number of the investment professionals of our
investment adviser, could have a material adverse effect on our
ability to achieve our investment objective. We have not entered
into employment agreements, nor do we have an employment
relationship, with any of these individuals. In addition, we can
offer no assurance that our investment adviser will remain our
investment adviser or that we will continue to have access to
its information and deal flow. The loss of any of our investment
advisers senior professionals could severely and
detrimentally affect our operations.
9
Our
investment advisers senior professionals have limited
experience managing a BDC, and we cannot assure you that their
past experience will be sufficient to manage our company as a
BDC.
The 1940 Act imposes numerous complex constraints on the
operations of business development companies. In order to
maintain our status as a BDC, the 1940 Act prohibits us from
acquiring any assets other than qualifying assets
unless, after giving effect to the acquisition, at least 70% of
our total assets are qualifying assets. We refer to this
requirement as the 70% Test. Qualifying assets
generally may include securities of private U.S. companies,
cash, cash equivalents, U.S. government securities and
high-quality debt instruments maturing one year or less from the
time of investment. The failure to comply with these provisions
in a timely manner could prevent us from qualifying as a BDC or
could force us to pay unexpected penalties, which could be
material. The lack of experience of our investment
advisers senior professionals in managing a portfolio of
assets under such regulatory constraints may hinder their
ability to take advantage of attractive investment opportunities
and, as a result, achieve our investment objective.
Our
ability to grow further will depend on our ability to raise
capital.
We will have a continuing need for capital to finance our
investments. We have raised some additional capital from
borrowing, but we may have continuing needs for more capital. We
may finance additional capital in part through the use of
leverage, which may include the issuance of shares of preferred
stock, commercial paper or notes and other borrowings
(collectively, Leverage Instruments). We may not be
able to obtain such additional financing on terms that we find
acceptable, if at all. Unfavorable economic conditions could
increase our funding costs, limit our access to the capital
markets or result in a decision by lenders not to extend credit
to us. The unavailability of funds from capital markets,
commercial banks or other sources on favorable terms could
inhibit the growth of our business and have a material adverse
effect on our performance.
Any
declines in the value of our investments may affect our level of
leverage.
The amount of our leverage is normally limited by the terms of
our loans (such as through the determination of a
borrowing base) and by the 1940 Act with respect to
loans and other Leverage Instruments. Declines in the value of
our investments will typically have the effect of increasing our
existing leverage as a percent of our total assets. Declines in
the value of our investments, however, also reduce the amount of
our maximum permitted leverage, and may force us to reduce our
existing leverage or prevent us from incurring further leverage.
We
operate in a highly competitive market for investment
opportunities.
We operate in a highly competitive market for investment
opportunities with competitors who may have greater resources, a
lower cost of capital and the ability to invest in Energy
Companies at interest rates and rates of return lower than those
that we will offer or at other terms more favorable than we will
offer or require. This may cause us to lose investment
opportunities or cause us to invest on less favorable terms,
and, as a result, the value of the shares you purchase or the
amount of any dividends you receive may decline.
A large number of entities compete with us to make the types of
investments that we intend to make. We compete with other
business development companies, public funds, private funds,
including private equity and hedge funds, commercial and
investment banks, and commercial financing companies. Many of
our competitors are substantially larger and have considerably
greater financial, technical and marketing resources than we do.
For example, some competitors may have a lower cost of funds and
access to funding sources that are not available to us. In
addition, some of our 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 than us. Furthermore, many of our competitors are
not subject to the regulatory restrictions that the 1940 Act
imposes on us as a BDC. We cannot assure you that the
competitive pressures that we face will not have a material
adverse effect on our business, financial condition, results of
operations and prospects. Also, as a result of this competition,
we may not be able to take advantage of attractive investment
opportunities from time to time, and we may not be able to
identify and make investments that are consistent with our
investment objective.
We do not seek to compete solely based on the interest rates and
rates of return we will offer to prospective portfolio
companies. However, we believe some of our competitors may make
investments with interest rates and
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rates of return that will be comparable to or lower than the
rates we offer or require. We may lose investment opportunities
if we do not match our competitors pricing, terms and
structures. If we match our competitors pricing, terms and
structures, we may experience decreased net investment income
and increased risk of principal loss, and the value of the
shares you purchase or the amount of any dividends you receive
may decline.
Senior
professionals of our investment adviser provide services to
other investors, which could reduce the amount of time and
effort that they devote to us, which could negatively impact our
performance.
Conflicts of interest may arise because senior professionals of
our investment adviser carry on substantial investment
activities for other clients. Senior professionals of our
investment adviser may have financial incentives to favor
certain of such clients over us. Any of their other customer
accounts may compete with us for specific investment
opportunities.
Senior
professionals of our investment adviser provide advisory
services to other investment vehicles that may have common
investment objectives with ours, and may face conflicts of
interest in allocating investments.
KAFA serves as the investment adviser to Kayne Anderson MLP
Investment Company and Kayne Anderson Energy Total Return Fund,
Inc., which are two closed-end management investment companies
registered under the 1940 Act, and KACALP serves as adviser for
other private investment funds (Affiliated Funds).
We refer to KACALP and KAFA together as Kayne
Anderson. Some of the Affiliated Funds have investment
objectives that are similar to or overlap with ours. KAFA is
operated by senior professionals of KACALP. These senior
professionals may at some time in the future, manage other
investment funds with the same investment objective as ours.
Kayne Anderson may buy or sell securities for us which differ
from securities which they may cause to be bought or sold for
their other accounts and customers, even though their investment
objectives and policies may be similar to ours.
Situations may occur when we could be disadvantaged because of
the investment activities conducted by Kayne Anderson for its
other accounts. Such situations may be based on, among other
things, regulatory restrictions on the combined size of
positions that may be taken for us and such other accounts,
thereby limiting the size of our position, or the difficulty of
liquidating an investment for us and the other accounts where
the market cannot absorb the sale of the combined position.
Our investment opportunities may be limited by investment
opportunities in Energy Companies that Kayne Anderson is
evaluating for the Affiliated Funds. To the extent a potential
investment is appropriate for us and one or more Affiliated
Funds, Kayne Anderson will need to fairly allocate that
investment to us or an Affiliated Fund, or both, depending on
its allocation procedures and applicable law related to combined
or joint transactions. There may occur an attractive investment
opportunity suitable for us in which we cannot invest under the
particular allocation method being used for that investment.
Additionally, to the extent that Kayne Anderson sources and
structures private investments in Energy Companies, certain
employees of Kayne Anderson may become aware of actions planned
by publicly traded Energy Companies, such as acquisitions, that
are not yet announced to the public. It is possible that we
could be precluded from investing in a publicly traded Energy
Company about which Kayne Anderson has material non-public
information; however, it is Kayne Andersons intention to
ensure that any material non-public information available to
certain Kayne Anderson employees not be shared with those
employees of our investment adviser responsible for the purchase
and sale of publicly traded Energy Company securities on our
behalf.
There
may be uncertainty as to the value of our portfolio
investments.
A large percentage of our portfolio investments consists of
securities of private companies. The fair value of these
securities may not be readily determinable. We will value these
securities quarterly at fair value as determined in good faith
by our board of directors based on input from our investment
adviser, a third party independent valuation firm and our
valuation committee. Valuations of portfolio holdings are
determined only quarterly and may change significantly before
the next valuation date and without any public announcement by
us. We may also be required to value any publicly traded
securities at fair value as determined in good faith by our
board of directors to
11
the extent necessary to reflect significant events affecting the
value of those securities. Our board of directors utilizes the
services of an independent valuation firm to review the fair
value of any securities prepared by our investment adviser. The
types of factors that may be considered in fair value pricing of
our investments include the nature and realizable value of any
collateral, the portfolio companys ability to make
payments, the markets in which the portfolio company does
business, comparison to publicly traded companies, discounted
cash flow and other relevant factors. Because such valuations,
and particularly valuations of private securities and private
companies, are inherently uncertain, they may fluctuate over
short periods of time and may be based on estimates. The
determination of fair value by our board of directors may differ
materially from the values that would have been used if a ready
market for these securities existed. Our net asset value could
be adversely affected if the determinations regarding the fair
value of our investments were materially higher than the values
that we ultimately realize upon the disposal of such securities.
We pay
our investment adviser a base management fee based upon our
total assets, which may create an incentive for our investment
adviser to cause us to incur more leverage than is prudent in
order to maximize its compensation.
We pay our investment adviser a quarterly base management fee
based on the value of our total assets (including assets
acquired with leverage). Accordingly, our investment adviser has
an economic incentive to increase our leverage. If our leverage
is increased, we will be exposed to increased risk of loss, bear
the increased cost of issuing and servicing such senior
indebtedness, and will be subject to any additional covenant
restrictions imposed on us in an indenture or other instrument
or by the applicable lender, which could negatively impact our
business and results of operation.
We pay
our investment adviser incentive compensation based on our
portfolios performance. This arrangement may lead our
investment adviser to recommend riskier or more speculative
investments in an effort to maximize its incentive
compensation.
In addition to its base management fee, our investment adviser
earns incentive compensation in two parts. The first part, the
Net Investment Income Fee, is payable quarterly and is equal to
20% of the excess, if any, of our Adjusted Net Investment Income
for the quarter that exceeds a quarterly hurdle rate equal to
1.875% (7.50% annualized) of our average net assets for such
quarter. Average net assets is calculated by averaging net
assets at the last day of such quarterly period and at the last
day of such prior quarterly period or commencement of operations
(net assets is defined as our total assets less total
liabilities (including liabilities associated with Leverage
Instruments) determined in accordance with generally accepted
accounting principles). The second part of the incentive fee
will be determined and payable in arrears as of the end of each
fiscal year (or upon termination of the investment management
agreement, as of the termination date) and will equal
(1) 20% of Adjusted Realized Capital Gains, less
(2) the aggregate amount of all capital gains fees paid to
our investment adviser in prior years.
The way in which the incentive fee payable to our investment
adviser is determined may encourage our investment adviser to
use leverage to increase the return on our investments. Under
certain circumstances, the use of leverage may increase the
likelihood of default, which would adversely affect our
stockholders, including our investors, because their interests
would be subordinate. In addition, our investment adviser will
receive the incentive fee based, in part, upon net capital gains
realized on our investments. Unlike the portion of the incentive
fee based on income, there is no hurdle rate applicable to the
portion of the incentive fee based on net capital gains. As a
result, our investment adviser may have a tendency to invest
more in investments that are likely to result in capital gains
as compared to income-producing securities. Other key criteria
related to determining appropriate investments and investment
strategies, including the preservation of capital, might be
under-weighted if our investment adviser focuses exclusively or
disproportionately on maximizing its income. Such a practice
could result in our investing in more speculative securities
than would otherwise be the case, which could result in higher
investment losses.
We may
be obligated to pay our investment adviser incentive
compensation even if we incur a loss or experience a decrease in
net assets.
Pursuant to the investment management agreement, our investment
adviser is entitled to receive incentive compensation for each
fiscal quarter in an amount equal to 20% of the excess, if any,
of our Adjusted Net Investment
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Income for the quarter that exceeds a quarterly hurdle rate
equal to 1.875% (7.50% annualized) of our average net assets for
such quarter. Average net assets is calculated by averaging net
assets at the last day of such quarterly period and at the last
day of such prior quarterly period or commencement of operations
(net assets is defined as our total assets less total
liabilities (including liabilities associated with Leverage
Instruments, as defined below) determined in accordance with
generally accepted accounting principles). Leverage Instruments
refer to shares of preferred stock, commercial paper, or notes
and other borrowings. The calculation of the incentive fee
includes any deferred income accrued, but not yet received. As a
result, we may pay an incentive fee on income, the receipt of
which may be uncertain or deferred.
The investment management agreement provides that our Adjusted
Net Investment Income for purposes of the Net Investment Income
Fee excludes realized and unrealized capital losses that we may
incur in the fiscal quarter, even if such capital losses result
in a net decrease in net assets for that quarter. Thus, we may
be required to pay our investment adviser incentive compensation
for a fiscal quarter even if there is a decline in the value of
our portfolio during that quarter.
Our investment adviser may also receive incentive compensation
equal to (1) 20% of (a) our adjusted net realized
capital gains (realized capital gains less realized capital
losses) on a cumulative basis from the closing date of our
initial public offering to the end of such fiscal year, less
(b) any unrealized capital losses at the end of such fiscal
year, less (2) the aggregate amount of all Capital Gains
Fees we paid to KAFA in prior fiscal years. Thus, we may be
required to pay our investment adviser incentive compensation
with respect to capital gains for a fiscal year even if we
generate a net investment loss for that year. The calculation of
the Capital Gains Fee includes any capital gains that result
from cash distributions that are treated as a return of capital.
In that regard, any such return of capital will be treated as a
decrease in our cost basis of an investment for purposes of
calculating the Capital Gains Fee.
Our
investment advisers liability is limited under the
investment management agreement, and we agree to indemnify our
investment adviser against certain liabilities, which may lead
our investment adviser to act in a riskier manner on our behalf
than it would when acting for its own account.
Our investment adviser has not assumed any responsibility to us
other than to provide the services described in the investment
management agreement, and it is not be responsible for any
action of our board of directors in declining to follow our
investment advisers advice or recommendations. Pursuant to
the investment management agreement, our investment adviser and
its members, managers, officers and employees are not liable to
us under the investment management agreement for their acts
absent willful misfeasance, bad faith, gross negligence or
reckless disregard in the performance of their duties. We have
agreed to indemnify, defend and protect our investment adviser
and its members, managers, officers and employees with respect
to all expenses, losses, damages, liabilities, demands, charges
and claims arising from acts of our investment adviser not
constituting willful misfeasance, bad faith, gross negligence or
reckless disregard in the performance of their duties. These
protections may lead our investment adviser to act in a riskier
manner when acting on our behalf than it would when acting for
its own account.
Regulations
governing our operation as a BDC will affect our ability to, and
the way in which we, raise additional capital.
Our business may benefit from raising additional capital. We may
acquire additional capital through the issuance of Leverage
Instruments and additional common stock. We are only permitted
to issue Leverage Instruments up to the maximum amount permitted
by the 1940 Act. We generally will not be able to issue and sell
our common stock at a price below net asset value per share. We
may, however, sell our common stock, or warrants, options or
rights to acquire our common stock, at prices below the current
net asset value of the common stock if our board of directors
determines that such sale is in the best interests of our
company and its stockholders, and our stockholders approve such
sale. In any such case, the price at which our securities are to
be issued and sold may not be less than a price that, in the
determination of our board of directors, closely approximates
the market value of such securities (less any underwriting
commission or discount).
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We may also make rights offerings to our stockholders at prices
per share less than the net asset value per share, subject to
applicable requirements of the 1940 Act. If we raise additional
funds by issuing more common stock or Leverage Instruments
convertible into, or exchangeable for, our common stock, the
percentage ownership of our stockholders at that time would
decrease and they may experience dilution. Moreover, we can
offer no assurance that we will be able to issue and sell
additional equity securities in the future, on favorable terms
or at all.
Our
current use of Leverage Instruments and any additional such use
will expose you to additional risks, including the risk that our
use of leverage can magnify the effect of any losses we
incur.
We seek to enhance our total returns through the use of leverage
through Leverage Instruments. Although our use of leverage
creates an opportunity for increased returns for our common
stock, it also results in additional risks and can magnify the
effect of any losses. A decrease in the value of our investments
have a greater negative impact on the value of our common stock
than if we did not use leverage. If the income and gains from
the investments purchased with leverage, net of increased
expenses associated with such leverage, do not cover the cost of
such leverage, the return to holders of our common stock will be
less than if leverage had not been used. There is no assurance
that our use of leverage, will be successful. Our continued use
of leverage involves other risks and special considerations for
common stockholders including, but not limited to, the following:
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Our ability to pay dividends on common stock would be restricted
if dividends on the preferred stock
and/or
interest on borrowings have not been paid, or set aside for
payment.
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Under the provisions of the 1940 Act, we are permitted, to issue
debt or preferred stock or other senior securities only in
amounts such that our asset coverage, as defined in the 1940
Act, equals at least 200% or 300% after each issuance of senior
securities depending on the type of security. If the value of
our assets declines, we may be unable to satisfy this test. If
that happens, we may be required to sell a portion of our
investments and, depending on the nature of our leverage, repay
a portion of our debt at a time when such sales
and/or
repayments may be disadvantageous.
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It is likely that any debt we incur will be governed by an
indenture or other instrument containing covenants that may
restrict our operating flexibility or our ability to pay
dividends and other distributions on common stock in certain
instances.
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Leverage Instruments that we issue or incur may be secured by a
lien on our assets, which, in the event of a default under the
instrument governing the debt, would subject such collateral to
liquidation by the lenders.
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We and, indirectly, our stockholders bear the cost of issuing
and servicing our Leverage Instruments.
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Leverage Instruments have rights, preferences and privileges
over our income and against our assets in liquidation that are
more favorable than those of our common stock.
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There will likely be greater volatility of net asset value and
market price of our common stock than a comparable portfolio
without leverage.
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When we use leverage, the management fee payable to our
investment adviser may be higher than if we did not use leverage.
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We may be subject to certain restrictions on investments imposed
by guidelines of one or more rating agencies, which may issue
ratings for the Leverage Instruments issued by us.
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The 1940 Act provides certain rights and protections for
preferred stockholders which may adversely affect the interests
of our common stockholders, including rights that could delay or
prevent a transaction or a change in control to the detriment of
the holders of our common stock.
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If
certain of our Targeted Investments are deemed not to be
qualifying assets, we could be precluded from investing in this
strategic manner, or deemed to be in violation of the 1940 Act,
in which case we may not qualify to be treated as a
BDC.
To maintain our status as a BDC, we must not acquire any assets
other than qualifying assets unless, at the time of
and after giving effect to such acquisition, at least 70% of our
total assets are qualifying assets, which we
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refer to as the 70% Test. Qualifying assets
generally include securities of eligible portfolio companies,
cash, cash equivalents, U.S. government securities and
high-quality debt instruments maturing in one year or less from
the time of investment. The SEC adopted new rules under the 1940
Act to expand the definition of eligible portfolio
company to include all private companies whose securities
are not listed on a national securities exchange, and,
accordingly, we are no longer required to determine the
eligibility of a portfolio company by reference to whether or
not it has outstanding margin securities. The rules also permit
us to include as qualifying assets certain follow-on investments
in companies that were eligible portfolio companies at the time
of initial investment but that no longer meet the definition.
Additionally, any failure to otherwise comply with any provision
of the 70% Test in a timely manner could prevent us from
qualifying as a BDC.
In addition to the adoption of the rules described above, the
SEC also reproposed for comment a rule that would include as
eligible portfolio companies certain public companies that have
listed their securities on a national securities exchange, as
long as their public float
and/or
market capitalization are below a specified level. We will
continue to monitor closely any developments with respect to the
definition of eligible portfolio company, and intend to adjust
our investment focus as needed to comply with
and/or take
advantage of the new rules as well as any other regulatory,
legislative, administrative or judicial actions in this area. If
adopted, the effect of these rules could also cause us to modify
our investment strategy to avail ourselves of different
investment opportunities.
Changes
in laws or regulations governing our operations and those of our
portfolio companies or our investment adviser may adversely
affect our business or cause us to alter our business
strategy.
We, our portfolio companies and our investment adviser will be
subject to regulation at the local, state and federal level. New
legislation may be enacted or new interpretations, rulings or
regulations could be adopted, including those governing the
types of investments we are permitted to make, any of which
could harm us, our investment adviser and our stockholders,
potentially with retroactive effect.
Additionally, any changes to the laws and regulations governing
our operations relating to permitted investments may cause us to
alter our investment strategy in order to avail ourselves of new
or different opportunities. Such changes could result in
material differences to the strategies and plans and may result
in our investment focus shifting from the areas of expertise of
our investment adviser to other types of investments in which
our investment adviser may have less expertise or little or no
experience. Thus, any such changes, if they occur, could have a
material adverse effect on our results of operations and the
value of your investment.
We may
experience fluctuations in our quarterly results.
We could experience fluctuations in our quarterly operating
results due to a number of factors, including changes in the
fair values of our portfolio investments, the interest rate
payable on the debt securities we acquire, the default rate on
such securities, the level of distributions (if any) on the
equity interests we acquire, the level of our expenses,
variations in and the timing of the recognition of realized and
unrealized gains or losses, the degree to which we encounter
competition in our markets and general economic conditions. As a
result of these factors, results for any period should not be
relied upon as being indicative of performance in future periods.
Inflation
may cause the real value of our investments to
decline.
Inflation risk is the risk that the value of assets or income
from an investment will be worth less in the future as inflation
decreases the value of money. As inflation increases, the real
value of our common stock and dividends can decline.
We are
exposed to risks associated with changes in interest rates
because increases in market interest rates may both reduce the
value of a portion of our portfolio investments and increase our
cost of capital.
A portion of our debt investments bears interest at fixed rates,
and the value of these investments generally will be negatively
affected by increases in market interest rates. In addition, an
increase in interest rates makes it more expensive to use debt
to finance our investments. As a result, a significant increase
in market interest rates could both reduce the value of our
portfolio investments and increase our cost of capital, which
would reduce our net
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investment income. In that regard, rising interest rates could
also cause the yield of our common stock to be less attractive
to investors.
Our
board of directors may change most of our operating policies and
strategies without prior notice or stockholder approval, the
effects of which may adversely affect your investment in our
common stock.
Our board of directors has the authority to modify or waive most
of our current operating policies and our strategies without
prior notice and without stockholder approval. We cannot predict
the effect any changes to our current operating policies and
strategies would have on our business, operating results and
value of our stock. However, the effects might be adverse, which
could adversely affect your interest in our common stock. In the
event that our board of directors determines that we cannot
economically pursue our investment objective under the 1940 Act,
they may at some future date decide to withdraw our election to
be treated as a BDC and convert us to an operating company not
subject to regulation under the 1940 Act, or cause us to
liquidate. The withdrawal of our election to be treated as a BDC
or our liquidation may not be effected without approval of a
requisite percentage of our board of directors and the holders
of our shares of common stock.
Risks
Related to Our Investments
The
energy industry is subject to many risks.
We concentrate our investments in the energy industry. The
revenues, income (or losses) and valuations of Energy Companies
can fluctuate suddenly and dramatically due to any one or more
of the following factors:
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Supply and Demand Risk. Risks relating to the
decrease in the production of natural gas, natural gas liquids,
crude oil, coal or other energy commodities, the volume of such
commodities available for transportation, mining, processing,
storage or distribution, may create a sustained decline in the
demand for such products.
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Commodity Pricing Risk. Risks relating to the
margins that Energy Companies receive from companies that
explore, develop, produce, gather, transport, process, store,
refine, distribute, mine or market natural gas, natural gas
liquids, crude oil, refined petroleum products or coal.
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Regulatory Risk. Risks relating to significant
federal, state and local government laws and regulations
throughout many aspects of Energy Company operations, including
the construction, maintenance, and controls for safety and the
environment.
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Operational Risk. Risks relating to the
disruption of operations, including the integration of newly
acquired assets, unanticipated operation and maintenance
expenses, lack of proper asset integrity, underestimated cost
projections, inability to renew or increased costs of rights of
way, failure to obtain the necessary permits to operate and
failure of third-party contractors to perform their contractual
obligations, among others.
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Competition Risk. Risks relating to the
substantial competition that exists for Energy Companies to
acquire, expand or construct assets and facilities, obtain and
retain customers and contracts, and secure trained personnel.
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Acquisition Risk. Risks relating to the
continued growth through acquisitions and increase in dividends
or distributions to equity holders.
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Interest Rate Risk. Risks relating to the
value of debt and equity values in our portfolio due to interest
rate declines.
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Catastrophe Risk. Risks relating to the many
hazards inherent to transport, process, store, mine and market
natural gas, natural gas liquids, crude oil, coal, refined
petroleum products or other hydrocarbons, including damage to
infrastructure caused by natural disasters such as hurricanes,
tornadoes, fire, or floods.
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Depletion and Exploration Risk. Risks relating
to the natural depletion of energy reserves and inability for
Energy Companies to expand their reserves through exploration,
development or acquisitions.
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Terrorism/Market Disruption Risk. Risks
relating to acts of terror on our energy infrastructure,
including changes to insurance markets, both in premium costs
and coverage allowed.
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Affiliated Party Risk. Risks related to the
inability or failure of an Energy Companys parent or
sponsors to satisfy payments and obligations on their behalf.
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Financing Risk. Risks relating to the ability
for Energy Companies to, if necessary, rely upon and access
capital markets to raise money and pay for their existing
obligations. Some of the portfolio companies in which we will
invest may rely on capital markets to raise money to pay their
existing obligations.
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Investing
in private companies may be riskier than investing in publicly
traded companies due to the lack of available public
information.
We invest in primarily private companies, which may be subject
to higher risk than investments in publicly traded companies.
Little public information exists about many of these companies,
and we are required to rely on the ability of our investment
adviser to obtain adequate information to evaluate the potential
risks and returns involved in investing in these companies. If
we are unable to obtain all material information about these
companies, we may not make a fully informed investment decision,
and we may lose some or all of our investments in these
companies. These factors could subject us to greater risk than
investments in publicly traded companies and negatively affect
our investment returns, which could negatively impact the
dividends paid to you and the value of your investment.
The
lack of liquidity in our investments might prevent us from
disposing of them at opportune times and prices.
We primarily 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 our
investments may make it difficult for us to sell such
investments at advantageous times and prices or in a timely
manner. In addition, if we are required to liquidate all or a
portion of our portfolio quickly, we may realize significantly
less than the value at which we have previously recorded our
investments. We may also encounter other restrictions on our
ability to liquidate an investment in a publicly traded
portfolio company to the extent that we have, or one of our
affiliates has, material non-public information regarding such
portfolio company. In providing services to us, our investment
adviser is not permitted to use material non-public information
of which Kayne Anderson is in possession. If we are unable to
sell our assets at opportune times, we might suffer a loss
and/or
reduce the dividends to our stockholders.
Our
investments in thinly traded securities may be difficult to
trade and value.
Although certain of the equity securities of the Energy
Companies in which we invest will trade on major stock
exchanges, certain equity and debt securities we own may trade
less frequently, particularly those with smaller
capitalizations. Securities with limited trading volumes may
display volatile or erratic price movements. In this event, if
we are one of the largest investors in certain of these
companies, it may be more difficult for us to buy and sell
significant amounts of such securities without an unfavorable
impact on prevailing market prices. Larger purchases or sales of
these securities by us in a short period of time may cause
abnormal movements in the market price of these securities. As a
result, these securities may be difficult to dispose of at a
fair price at the times when we believe it is desirable to do
so. Investment of our capital in securities that are less
actively traded or over time experience decreased trading volume
may restrict our ability to take advantage of other market
opportunities.
Our
investments in small and developing portfolio companies may be
risky.
Our investments in small and developing companies involve a
number of significant risks, including the following:
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these companies may have limited financial resources and may be
unable to meet their obligations under the securities that we
hold, which may be accompanied by a deterioration in the value
of their assets;
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there is generally less public information readily available
about these companies, including investment research, industry
reports and news analysis, and our investigation of such
investment opportunities may require significantly higher cost,
longer time frame, and more extensive management commitment
compared to investments in companies with a greater degree of
visibility in the public markets;
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these companies typically have shorter operating histories 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;
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these companies 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 our
portfolio company and, in turn, on us; and
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these companies may have less predictable operating results, and
may require substantial additional capital to support their
operations, finance expansion or maintain their competitive
position.
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In addition, in the course of providing significant managerial
assistance to certain of our portfolio companies, including
small and developing companies, certain of our officers and
directors and senior professionals of our investment adviser may
serve as directors on the boards of such companies. To the
extent that litigation arises out of our investments in these
companies, our officers and directors, our investment adviser
and its senior professionals may be named as defendants in such
litigation, which could result in an expenditure of funds and
the diversion of management time and resources.
Our
equity and debt investments may decline in value.
The equity interests and debt securities in which we invest may
not appreciate or may decline in value. Accordingly, we may not
be able to realize gains from our equity interests, and any
gains that we do realize on the disposition of any equity
interests may not be sufficient to offset any other losses we
experience. As a result, the equity interests in which we invest
may decline in value, which may negatively impact our ability to
pay you dividends and cause you to lose all or part of your
investment.
The
debt securities in which we invest are subject to credit risk
and prepayment risk.
In addition to the other risks described elsewhere, debt
securities of Energy Companies are subject to credit risk and
prepayment risk.
Credit Risk. An issuer of a debt security may
be unable to make interest payments and repay principal. We
could lose money if the issuer of a debt obligation is, or is
perceived to be, unable or unwilling to make timely principal
and/or
interest payments, or to otherwise honor its obligations. The
downgrade of a security by rating agencies may further decrease
its value. Additionally, a portfolio company may issue to us a
debt security that has
payment-in-kind
interest, which represents contractual interest added to the
principal balance and due at the maturity date of the debt
security in which we invest. It is possible that by effectively
increasing the principal balance payable to us or deferring cash
payment of such interest until maturity, the use of
payment-in-kind
features will increase the risk that such amounts will become
uncollectible when due and payable.
Prepayment Risk. Certain debt instruments,
particularly any rated below investment grade or unrated
securities in which we invest, may contain call or redemption
provisions which would allow the issuer thereof to prepay
principal prior to the debt instruments stated maturity.
This is known as prepayment risk. Prepayment risk is greater
during a falling interest rate environment as issuers can reduce
their cost of capital by refinancing higher yielding debt
instruments with lower yielding debt instruments. An issuer may
also elect to refinance their debt instruments with lower
yielding debt instruments if the credit standing of the issuer
improves. To the extent debt securities in our portfolio are
called or redeemed, we may be forced to reinvest in lower
yielding securities or debt securities of issuers of lower
credit quality.
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High
oil and gas prices may increase alternative sources of capital
available to Energy Companies and reduce demand for our Targeted
Investments.
As a result of the current high prices for oil and natural gas
relative to historical levels, Energy Companies are generally
experiencing strong financial results and increased cash flows.
Therefore, they currently may have less financial need to raise
capital than in a lower commodity price environment.
Our
portfolio companies may incur debt or issue securities that rank
in right of payment equally with, or senior to, our investments
in such companies. As a result, the holders of such debt or
other obligations may be entitled to payments of principal and
interest or other payments prior to any payments to us,
preventing us from obtaining the full value of our investment in
the event of an insolvency, liquidation, dissolution,
reorganization or bankruptcy of the relevant portfolio
company.
We invest a portion of our assets in subordinated debt,
preferred stock and common equity issued by our portfolio
companies. The portfolio companies usually will have, or may be
permitted to incur, debt that ranks in right of payment equally
with, or senior to, our investment. 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
we are entitled to receive payments in respect of our
investment. Also, in the event of insolvency, liquidation,
dissolution, reorganization or bankruptcy of a portfolio
company, holders of debt instruments ranking senior to our
investment in that portfolio company would typically be entitled
to receive payment in full before we receive any distribution in
respect of our investment. After repaying such senior creditors,
the portfolio company may not have any remaining assets
available for repaying its obligation to us. In the case of debt
ranking equally with securities in which we invest, we 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. As a result, we may be prevented
from obtaining the full value of our investment in the event of
an insolvency, liquidation, dissolution, reorganization or
bankruptcy of the relevant portfolio company.
Second
priority liens on collateral securing loans that we make to our
portfolio companies may be subject to control by senior
creditors with first priority liens. If there is a default, the
value of the collateral may not be sufficient to repay in full
both the first priority creditors and us.
Certain loans that we make to portfolio companies, including the
second-lien or term B loans, will be secured on a
second priority basis by the same collateral securing senior
secured debt of such companies. The first priority liens on the
collateral will secure the portfolio companys obligations
under any outstanding senior debt and may secure certain other
future debt that may be permitted to be incurred by the company
under the agreements governing the loans. The holders of
obligations secured by the first priority liens on the
collateral will be entitled to receive proceeds from any
realization of the collateral to repay their obligations in full
before us. In addition, the value of the collateral in the event
of liquidation will depend on market and economic conditions,
the availability of buyers and other factors. There can be no
assurance that the proceeds, if any, from the sale or sales of
all of the collateral would be sufficient to satisfy the loan
obligations secured by the second priority liens after payment
in full of all obligations secured by the first priority liens
on the collateral. If such proceeds are not sufficient to repay
amounts outstanding under the loan obligations secured by the
second priority liens, then we, to the extent not repaid from
the proceeds of the sale of the collateral, will only have an
unsecured claim against the companys remaining assets, if
any.
The rights we may have with respect to the collateral securing
the loans we make to our portfolio companies with senior debt
outstanding may also be limited pursuant to the terms of one or
more intercreditor agreements that we enter into with the
holders of senior debt. Under such an intercreditor agreement,
at any time that obligations that have the benefit of the first
priority liens are outstanding, any of the following actions
that may be taken in respect of the collateral will be at the
direction of the holders of the obligations secured by the first
priority liens: the ability to cause the commencement of
enforcement proceedings against the collateral; the ability to
control the conduct of such proceedings; the approval of
amendments to collateral documents; releases of liens on the
collateral; and waivers of past defaults under collateral
documents. We may not have the ability to control or direct such
actions, even if our rights are adversely affected.
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Economic
downturns could harm our portfolio companies operations
and ability to satisfy their obligations to their respective
lenders and other investors, including us.
Our portfolio companies may be susceptible to economic downturns
and may be unable to repay loans or fulfill their other
financial obligations during these periods. Therefore, our
non-performing assets are likely to increase and the value of
our portfolio is likely to decrease during these periods.
Adverse economic conditions also may decrease the value of our
equity investments and the value of collateral securing some of
our loans. Economic downturns could lead to financial losses in
our portfolio and decreases in revenues, net income and assets.
A portfolio companys failure to satisfy financial or
operating covenants imposed by us or others could lead to
defaults and, potentially, acceleration of its loans and
foreclosure on the assets securing such loans, which could
trigger cross-defaults under other agreements and jeopardize our
portfolio companys ability to meet its obligations under
the investments that we hold. We may incur expenses to the
extent necessary to seek recovery upon default or to negotiate
new terms with a defaulting portfolio company. In addition, if
one of our portfolio companies were to go bankrupt, even though
we may have structured our interest as senior debt, depending on
the facts and circumstances, including the extent to which we
actually provided managerial assistance to that portfolio
company, a bankruptcy court might recharacterize our debt
holding and subordinate all or a portion of our claim to that of
other creditors. This could negatively impact our ability to pay
you dividends and cause you to lose all or part of your
investment.
When
we are a debt or non-controlling equity investor in a portfolio
company, we generally will not be in a position to control the
entity, and management of the portfolio company may make
decisions that could decrease the value of our portfolio
holdings.
We primarily make debt and non-controlling equity investments,
and will therefore be subject to the risks that a portfolio
company may make business decisions with which we disagree and
that the stockholders and management of such company may take
risks or otherwise act in ways that do not serve our interests.
Due to the lack of liquidity for our investments in private
companies, we may not be able to dispose of our interests in our
portfolio companies as readily as we would like or at an
appropriate valuation. As a result, a portfolio company may make
decisions that could decrease the value of our portfolio
holdings.
Terrorist
attacks, acts of war or natural disasters may affect any market
for our common stock, impact the businesses in which we invest
and harm our business, operating results and financial
condition.
Terrorist acts, acts of war or natural disasters may disrupt our
operations, as well as the operations of the businesses in which
we invest. Such acts have created, and continue to create,
economic and political uncertainties and have contributed to
global economic instability. Future terrorist activities,
military or security operations, or natural disasters could
further weaken the domestic and global economies and create
additional uncertainties, which may negatively impact the
businesses in which we invest directly or indirectly and, in
turn, could have a material adverse impact on our business,
operating results and financial condition. Losses from terrorist
attacks and natural disasters are often uninsurable.
Numerous
factors may reduce the distributions paid by an Energy Company
to us, which in turn may reduce the dividends we pay to our
common stockholders.
We expect that a substantial portion of the cash flow received
by us will continue to be derived from our investment in equity
securities of Energy Companies. The amount of cash that an
Energy Company has available for dividends or distributions and
the tax character of such dividends or distributions are
dependent upon the amount of cash generated by the Energy
Companys operations. Cash available for dividends or
distributions will vary from month to month and is largely
dependent on factors affecting the Energy Companys
operations and factors affecting the energy industry in general.
In addition to the risk factors described above, other factors
which may reduce the amount of cash an Energy Company has
available for dividends or distributions include increased
operating costs, maintenance capital expenditures, acquisition
costs, expansion, construction or exploration costs and
borrowing costs.
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Our
portfolio investments are concentrated in a limited number of
portfolio companies in the energy industry, which will subject
us to a risk of significant loss if any of these companies were
to suffer a significant loss.
While we intend for the investments in our portfolio to be
allocated among a substantial number of companies, we may invest
up to 25% of our assets in any one portfolio company and our
investments may initially be concentrated in a limited number of
companies. As a consequence of this concentration, the aggregate
returns we initially realize may be adversely affected if a
small number of our investments perform poorly or if we need to
write down the value of any one such investment. We do not have
fixed guidelines for diversification, and our investments could
be concentrated in relatively few portfolio companies. Financial
difficulty on the part of any single portfolio company will
expose us to a greater risk of loss than would be the case if we
were a diversified company holding numerous
investments. To the extent that we take large positions in the
securities of a small number of portfolio companies, our net
asset value and the market price of our common stock may
fluctuate as a result of changes in the financial condition or
in the markets assessment of such portfolio companies to a
greater extent than that of a diversified investment company.
These factors could negatively impact our ability to pay you
dividends and cause you to lose all or part of your investment.
In addition, our investments are concentrated in the energy
industry. Consequently, we will be exposed to the risks of
adverse developments affecting the energy industry to a greater
extent than if our investments were dispersed over a variety of
industries. See The energy industry is subject
to many risks.
We may
not have sufficient funds to make follow-on investments. Our
decision not to make a follow-on investment may have a negative
impact on a portfolio company in need of such an investment or
may result in a missed opportunity for us.
After our initial investment in a portfolio company, we may be
called upon from time to time to provide additional funds to
such company or have the opportunity to increase our investment
in a successful situation by among other things, making a
follow-on investment or exercising a warrant to purchase common
stock. There is no assurance that we will make, or will have
sufficient funds to make, follow-on investments. Any decision
not to make a follow-on investment or any inability on our part
to make such an investment may have a negative impact on a
portfolio company in need of such an investment or may result in
a missed opportunity for us to increase our participation in a
successful operation and may dilute our equity interest or
reduce the expected yield on our investment.
Our
investments in Limited Partnerships are subject to special risks
arising from conflicts of interest and tax
characterization.
An investment in Limited Partnership units involves some risks
which differ from an investment in the common shares of a
corporation. Holders of Limited Partnership units have limited
control and voting rights on matters affecting the partnership.
In addition, there are certain tax risks associated with an
investment in MLP units and conflicts of interest exist between
common unit holders and the general partner. For example,
conflicts of interest may arise from incentive distribution
payments paid to the general partner, or referral of business
opportunities by the general partner or one of its affiliates to
an entity other than the Limited Partnership.
The
publicly traded MLP securities in which we invest are subject to
price fluctuations.
The publicly traded MLP securities in which we invest may be
subject to general movements in the stock market, and a
significant drop in the stock market may depress the price of
securities to which we have exposure. MLP securities prices
fluctuate for several reasons, including changes in the
financial condition of a particular MLP, investors
perceptions of MLPs, the general condition of the relevant stock
market, or when political, catastrophic or economic events
affecting the MLPs occur. In addition, the prices of publicly
traded MLP securities may be sensitive to rising interest rates
given their yield-based nature.
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Our
use of derivatives instruments may result in losses greater than
if they had not been used and the counterparty in a derivative
transaction may default on its obligations.
We may purchase and sell derivative investments such as
exchange-listed and over-the-counter put and call options on
securities, enter into various interest rate transactions such
as swaps, floors or collars or credit transactions and enter
into total return swaps. The use of derivatives has 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 investments, any of which could materially adversely
impact the performance of our common stock. Furthermore, the
ability to successfully use these techniques depends on the
ability of our investment adviser to correctly predict pertinent
market movements, which cannot be assured. Thus, their use may
result in losses greater than if they had not been used, may
require us to sell or purchase portfolio securities at
inopportune times or for prices other than current market
values, may limit the amount of appreciation we can realize on
an investment or may cause us to hold a security that we might
otherwise sell. Additionally, amounts paid by us as premiums and
cash or other assets held in margin accounts with respect to
derivative transactions are not otherwise available to us for
investment purposes.
The use of interest rate swaps is a highly specialized activity
that involves investment techniques and risks different from
those associated with ordinary portfolio security transactions.
Depending on market conditions in general, our use of swaps
could enhance or harm the overall performance of our common
stock. For example, we may use interest rate swaps in connection
with our use of Leverage Instruments. To the extent there is a
decline in interest rates, the value of the interest rate swap
could decline, and could result in a decline in the net asset
value of our common stock. In addition, if short-term interest
rates are lower than our fixed rate of payment on the interest
rate swap, the swap will reduce the net asset value of our
common stock.
The
transaction expenses for our investments in private companies
may be higher than customary brokerage
commissions.
Unlike the publicly traded securities that we may hold, we will
generally acquire and dispose of our investments in private
companies through privately negotiated transactions. The
negotiation and documentation of such transactions will often be
complex, and the transaction costs that we incur during the
course of investing in a private company will be significantly
greater than customary brokerage commissions that we would pay
if we were investing in publicly traded securities. We
anticipate that our annual portfolio turnover rate will be
approximately 10% to 20%, but that rate may vary greatly from
year to year. Portfolio turnover rate is not considered a
limiting factor in our investment advisers execution of
investment decisions.
An
investment in our common stock will involve certain tax risks
that could negatively impact our common
stockholders.
In addition to other risk considerations, an investment in our
common stock will involve certain tax risks, including, but not
limited to, the risks summarized below. Tax matters are very
complicated, and the federal, state, local and foreign tax
consequences of an investment in and holding of our common stock
will depend on the facts of each investors situation.
Investors are encouraged to consult their own tax advisers
regarding the specific tax consequences that may affect such
investors.
We cannot assure you what percentage of the dividends paid on
our common stock, if any, will be treated as qualified dividend
income or what the tax rate on various types of income will be
in future years. The current 15% rate on qualified dividend
income is scheduled to increase for certain income received
realized for taxable years beginning after December 31,
2010.
MLP Tax Risks. Our ability to meet our
investment objective will depend on the level of taxable income
and distributions we receive from the securities in which we
invest, a factor over which we have no control. The benefit we
derive from our investment in MLPs is largely dependent on the
MLPs being treated as partnerships for federal income tax
purposes. If, as a result of a change in current law or a change
in an MLPs business, an MLP were treated as a corporation
for federal income tax purposes, such MLP would be obligated to
pay federal income tax on its income at a maximum corporate tax
rate of 35%. Therefore, if an MLP were classified as a
corporation for federal income tax purposes, the amount of cash
available for distribution from such MLP would be reduced. As a
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result, treatment of an MLP as a corporation for federal income
tax purposes would result in a reduction in the after-tax return
of our investment in such MLP, which would likely cause a
reduction in the net asset value of our common stock.
Tax Law Change Risk. Changes in tax laws or
regulations, or interpretations thereof in the future, could
adversely affect us or the Energy Companies in which we invest.
Any such changes could negatively impact our common
stockholders. For example, new legislation could negatively
impact the amount and tax characterization of dividends received
by our common stockholders.
An
investment in our shares is not intended for investors seeking
short-term profit potential.
Investing in shares of our common stock is intended for
investors seeking long-term capital growth and income and is not
meant to provide a vehicle for those who invest for short-term
profit potential. The portfolio securities we seek will
generally be illiquid. Therefore, our ability to receive
interest, dividends or cash distributions or otherwise realize
any return on illiquid investments in the short-term will be
limited, and, as a result, our financial condition and the
performance of our common stock during any short-term period may
be impaired. An investment in our shares should not be
considered a complete investment program.
Future
offerings of Leverage Instruments, which would be senior to our
common stock upon liquidation, or equity securities, could
dilute our existing stockholders and may be senior to our common
stock for the purposes of dividends and
distributions.
In the future, we may attempt to increase our capital resources
by making additional offerings of Leverage Instruments, subject
to the restrictions of the 1940 Act. Upon the liquidation of our
company, holders of our Leverage Instruments would receive a
distribution of our available assets prior to the holders of our
common stock. Additional equity offerings by us may dilute the
holdings of our existing stockholders or reduce the value of our
common stock, or both. Any preferred stock we may issue would
have a preference on dividends that could limit our ability to
pay dividends to the holders of our common stock. Because our
decision to issue securities in any future offering will depend
on market conditions and other factors which may be beyond our
control, we cannot predict or estimate the amount, timing or
nature of our future offerings. Thus, our stockholders bear the
risk of our future offerings reducing the market price of our
common stock and diluting their stock holdings in us.
Shares
of closed-end management investment companies, including
business development companies, may trade at a discount from net
asset value.
Shares of closed-end management investment companies, including
business development companies, may trade at a discount from net
asset value. This characteristic of a closed-end investment
company is a risk separate and distinct from the risk that our
net asset value will decrease. Our shares of common stock are
not subject to redemption. Investors desiring liquidity may,
subject to applicable securities laws, trade their shares of
common stock on any exchange where such shares are then trading
at current market value, which may differ from the then current
net asset value. We cannot predict whether our common stock will
trade at, above, or below net asset value.
We may
make investments with which you may not agree.
We have significant flexibility in investing and may make
investments with which you may not agree. Our goal is to
allocate investments in compliance with the 1940 Act and in
accordance with our investment objective. If such rules and
regulations change or if the energy finance market dictates that
we vary our investment approach, then we will adjust our
investment allocations and strategy accordingly.
23
Certain
provisions of Maryland law and our Charter and Bylaws could
hinder, delay or prevent a change in control of our
company.
Our charter (the Charter), Bylaws and the Maryland
General Corporation Law include provisions that could limit the
ability of other entities or persons to acquire control of us or
to change the composition of our board of directors. We are
subject to the Maryland Business Combination Act (the
Business Combination Act) to the extent such statute
is not preempted by applicable requirements of the 1940 Act.
However, our board of directors has adopted a resolution
exempting any business combination between us and any other
person from the Business Combination Act, subject to prior
approval of such business combination by our board of directors,
including a majority of our directors who are not interested
persons as defined in the 1940 Act. In addition, the Maryland
Control Share Acquisition Act (the Control Share
Act) provides that control shares of a Maryland
corporation acquired in a control share acquisition have no
voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast on the matter. Our
Bylaws contain a provision exempting from the Control Share Act
any and all acquisitions by any person of our shares of common
stock. If the applicable board resolution is repealed or our
board of directors does not otherwise approve a business
combination, the Business Combination Act and the Control Share
Act (if we amend our Bylaws to be subject to that Act) may
discourage others from trying to acquire control of us and
increase the difficulty of consummating any offer.
We have also adopted other measures that may make it difficult
for a third party to obtain control of us, including provisions
of our Charter classifying our board of directors in three
classes serving staggered three-year terms, and provisions
authorizing our board of directors to classify or reclassify
shares of our stock in one or more classes or series, to cause
the issuance of additional shares of our stock, and to amend our
Charter, without stockholder approval, to increase or decrease
the number of shares of stock that we have authority to issue.
These provisions, as well as other provisions of our Charter and
Bylaws, could have the effect of discouraging, delaying,
deferring or preventing a transaction or a change in control
that might otherwise be in the best interests of our
stockholders. As a result, these provisions may deprive our
common stockholders of opportunities to sell their common stock
at a premium over the then current market price of our common
stock.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS.
|
None.
We do not own any real estate or other physical properties for
our operations. Under our Investment Management Agreement, KAFA
is responsible for providing office space and equipment that is
reasonably necessary for our operations. Our principal executive
offices are located at 717 Texas Avenue, Suite 3100,
Houston, Texas, 77002, and certain corporate officers and other
significant investment personnel and operations are located at
1800 Avenue of the Stars, Second Floor, Los Angeles, California,
90067.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS.
|
We are not currently subject to any material pending legal
proceedings.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|
No matters were submitted to a vote of security holders during
our fiscal quarter ended November 30, 2007.
24
PART II
ITEM 5. MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Common
Stock Price Range and Net Asset Value per Share
Our common stock trades on the NYSE under the symbol
KED. We completed our initial public offering on
September 21, 2006 at a price of $25.00 per share. Prior to
such date, there was no public market for our common stock. The
closing market price of our common stock on January 31,
2008 was $23.41 per share, and we had nine shareholders of
record on this date. Since many of our shares are held by
brokers and other institutions on behalf of our stockholders, we
are unable to estimate the total number of underlying
stockholders and individual participants represented by these
nine shareholders of record as of January 31, 2008.
The following tables lists net asset value per share (NAV
per share) at the end of each of the following fiscal
quarters; the high and low sales price for our common stock
during the respective fiscal quarters and dividends declared and
paid per each share for the respective fiscal quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High Sales
|
|
|
Low Sales
|
|
|
|
|
|
|
NAV(1)
|
|
|
Price
|
|
|
Price
|
|
|
Dividends
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Fiscal Quarter (period from September 21, 2006 to
November 30, 2006)
|
|
$
|
24.19
|
|
|
$
|
24.95
|
|
|
$
|
21.56
|
|
|
$
|
0.220
|
(2)
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Fiscal Quarter (period from December 1, 2006 to
February 28, 2007)
|
|
$
|
25.01
|
|
|
$
|
25.00
|
|
|
$
|
22.05
|
|
|
$
|
0.320
|
|
Second Fiscal Quarter (period from March 1, 2007 to
May 31, 2007)
|
|
$
|
25.52
|
|
|
$
|
27.57
|
|
|
$
|
24.31
|
|
|
$
|
0.400
|
|
Third Fiscal Quarter (period from June 1, 2007 to
August 31, 2007)
|
|
$
|
24.65
|
|
|
$
|
28.56
|
|
|
$
|
22.33
|
|
|
$
|
0.405
|
|
Fourth Fiscal Quarter (period from September 1, 2007 to
November 30, 2007)
|
|
$
|
24.39
|
|
|
$
|
26.72
|
|
|
$
|
22.09
|
|
|
$
|
0.410
|
|
|
|
|
(1) |
|
NAV per share is determined as of the last day of the fiscal
quarter and therefore may not reflect the NAV per share on the
date of the high and low sales price, which may or may not fall
on the last day of the quarter. NAV per share is based on
outstanding shares at the end of each quarter. |
|
(2) |
|
Represents a partial dividend for the first 71 days in
operation from September 21, 2006 to November 30,
2006. For a full quarter, this equates to a quarterly dividend
of $0.28 per share. |
Dividends
We intend to continue to distribute quarterly dividends to our
common stockholders. Our quarterly dividends, if any, will
continue to be determined by our board of directors. During the
fiscal year ended November 30, 2007, we paid dividends
totaling $1.345 per common share, totaling $13.5 million,
of which $1.3 million was reinvested for 50,386 newly
issued shares of common stock pursuant to our dividend
reinvestment plan. The tax character of the total
$13.5 million of dividends and distributions paid to common
stockholders was $9.5 million (ordinary income),
$1.6 million (capital gains) and $2.4 million (return
of capital).
On December 20, 2007, we declared our quarterly dividend of
$0.41 per common share for the period September 1, 2007 to
November 30, 2007, totaling $4.1 million. The dividend
was paid on January 17, 2008 to shareholders of record on
December 31, 2007.
We have established an opt out dividend reinvestment
plan for our common stockholders. As a result, if we declare a
dividend, then stockholders cash dividends will generally
be automatically reinvested in additional shares of our common
stock, unless they specifically opt out of the
dividend reinvestment plan and elect to receive cash dividends.
Recent
Sales of Unregistered Securities
Prior to our initial public offering, we issued 60 shares
of our common stock to KAFA for an aggregate purchase price of
$1,500. Such shares were issued pursuant to an exemption from
the registration requirements of
25
the Securities Act of 1933 under Section 4(2) of the
Securities Act of 1933 as a transaction by an issuer not
involving any public offering. During the fiscal year ended
November 30, 2007, there were no additional sales or
issuances of our unregistered common stock.
Securities
Authorized for Issuance Under Equity Compensation
Plans
Not applicable.
Stock
Performance Graph
The following graph compares the return on our common stock to
the Standard & Poors 500 Stock Index
(S&P 500) and a business development company
(BDC) peer group from September 21, 2006, the
commencement of our operations and initial public offering,
through November 30, 2007. The graph compares the value
over this time period of an initial, $100 investment in our
common stock to the S&P 500 and the BDC peer group,
assuming the reinvestment of all cash dividends for our common
stock.
The comparisons in the graph below are based on historical data
and are not intended to forecast future performance of our
common stock.
Comparison
of Cumulative Total Return
Among the Kayne Anderson Energy Development Company,
the S&P 500, and a BDC Peer
Group(1)
from September 21, 2006 to November 30,
2007
|
|
(1) |
The BDC Peer Group consists of the following closed-end
investment companies that have elected to be regulated as
business development companies under the 1940 Act:
|
|
|
|
Allied Capital Corporation
|
|
American Capital Strategies, Ltd.
|
Apollo Investment Corporation
|
|
Ares Capital Corporation
|
Blackrock Kelso Capital Corporation
|
|
Capital Southwest Corporation
|
GSC Investment Corp.
|
|
Gladstone Capital Corporation
|
Gladstone Investment Corporation
|
|
Harris & Harris Group, Inc.
|
Hercules Technology Growth Capital, Inc.
|
|
Highland Distressed Opportunities, Inc.
|
Kohlberg Capital Corporation
|
|
MGC Capital Corporation
|
Medallion Financial Corp.
|
|
MVC Capital, Inc.
|
NGP Capital Resources Company
|
|
Patriot Capital Funding, Inc.
|
PennantPark Investment Corporation
|
|
Prospect Capital Corporation
|
TICC Capital Corp.
|
|
Tortoise Capital Resources Corporation
|
Triangle Capital Corporation
|
|
|
26
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA.
|
The following selected financial information and other data for
the fiscal year ended November 30, 2007 and the period
ended September 21, 2006 through November 30, 2006 is
derived from our financial statements included in this Annual
Report on
Form 10-K
which have been audited by PricewaterhouseCoopers, LLP, an
independent registered public accounting firm. This selected
financial information and other data should be read in
conjunction with our financial statements, related notes thereto
and Managements Discussion and Analysis of Financial
Condition and Results of Operations included in this
Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
As of and for the
|
|
As of and for the Period
|
|
|
Fiscal Year Ended
|
|
September 21, 2006*
|
(Amounts in 000s, except per share and other data)
|
|
November 30, 2007
|
|
through November 30, 2006
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
Total investment income
|
|
$
|
11,496
|
|
|
$
|
2,047
|
|
Total expenses
|
|
|
8,471
|
|
|
|
1,183
|
|
Net investment income
|
|
|
3,606
|
|
|
|
864
|
|
Net realized and unrealized gains
|
|
|
11,774
|
|
|
|
7,824
|
|
Net increase in net assets resulting from operations
|
|
|
15,380
|
|
|
|
8,688
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
Net asset value
|
|
$
|
24.39
|
|
|
$
|
24.19
|
|
Net increase in net assets resulting from operations
|
|
|
1.54
|
|
|
|
0.87
|
|
Statement of Assets and Liabilities Data
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
355,387
|
|
|
$
|
243,604
|
|
Total net assets
|
|
|
245,133
|
|
|
|
241,914
|
|
Other Data
|
|
|
|
|
|
|
|
|
Total return based on market value(1)
|
|
|
9.3
|
%
|
|
|
(10.7
|
)%
|
Total return based on net asset value(2)
|
|
|
6.3
|
%
|
|
|
3.7
|
%
|
Number of portfolio companies at period end public
|
|
|
43
|
|
|
|
29
|
|
Number of portfolio companies at period end private
|
|
|
16
|
|
|
|
7
|
|
|
|
|
* |
|
Commencement of operations |
|
(1) |
|
Not annualized for the period September 21, 2006 through
November 30, 2006. Total investment return is calculated
assuming a purchase of common stock at the market price on the
first day and a sale at the current market price on the last day
of the period reported. The calculation also assumes
reinvestment of dividends, if any, at actual prices pursuant to
our dividend reinvestment plan. |
|
(2) |
|
Not annualized for the period September 21, 2006 through
November 30, 2006. Total return based on net asset value is
calculated as the change in net asset value per share plus the
dividends paid during the period being measured, assuming
reinvestment in our dividend reinvestment plan. |
27
ITEM 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following information contained in this section should be
read in conjunction with the Item 6. Selected
Financial Data and our financial statements and notes
thereto appearing elsewhere in this Annual Report on
Form 10-K.
Overview
We are incorporated under the laws of the State of Maryland. We
invest primarily in Energy Companies that are not publicly
traded (private). We completed our initial public
offering of 10,000,000 shares of common stock at $25.00 per
share on September 21, 2006. We have filed an election to
be treated as a BDC under the 1940 Act, and we are classified as
a closed-end, non-diversified management investment company
under the 1940 Act. Since inception, through our most recently
completed fiscal year, we elected to be treated as a RIC for tax
purposes under the Code. On January 22, 2008, we announced
that we no longer intend to be treated as a RIC for our fiscal
year ended November 30, 2008 and for future fiscal years.
See Recent Developments for more information.
Our operations will continue to be externally managed and
advised by our investment adviser, KAFA, pursuant to an
investment management agreement. Our investment objective is to
generate both current income and capital appreciation primarily
through equity and debt investments. We will seek to achieve
this objective by investing at least 80% of our total assets in
securities of Energy Companies.
A key focus area for our investments in the energy industry will
continue to be equity and debt investments in Midstream Energy
Companies structured as limited partnerships. We also expect to
evaluate equity and debt investments in Other Energy Companies
and companies engaged in the mining of aggregates and other
natural resources. We refer to these investments as our
Targeted Investments. Under current market
conditions, we expect that our Targeted Investments will
generally range in size from $10 million to
$60 million, although a few investments may be in excess of
this range.
We seek to enhance our total returns through the use of
leverage, which may include the issuance of shares of preferred
stock, commercial paper or notes and other borrowings (each a
Leverage Instrument and collectively, the
Leverage Instruments). We expect to use leverage in
an aggregate amount equal to 30% of our total assets, which
includes assets obtained through such leverage.
Recent
Developments
On January 22, 2008, we announced that we no longer intend
to be treated as a RIC under the Code, as amended. As a result
of this change, we will be taxed as a corporation for our fiscal
year ended November 30, 2008 and for future fiscal years,
paying federal and applicable state corporate taxes on our
taxable income and capital gains. We will continue to be
regulated as a BDC under the 1940 Act.
The opportunities to invest in private MLPs are much more
abundant than had been anticipated following our IPO, with nine
private MLPs raising approximately $500 million of capital
in the last twelve months. We believe private MLPs currently
present an attractive investment opportunity and offer
attractive risk-adjusted total returns for our shareholders.
Previously, however, compliance with certain requirements
necessary to qualify as a RIC (RIC Tests) limited
our ability to invest in additional private MLPs.
RIC Tests required that 90% of our gross income come from
qualified sources. Equity securities of private partnerships,
however, do not generate qualified income, thus forcing the
creation of taxable subsidiaries for these investments. Because
such taxable subsidiaries were wholly-owned by us, these
investments were not considered diversified investments for
purposes of the RIC Diversification Test, which
requires that at least 50% of total assets consist of
(a) investments that each constitute less than 5% of total
assets and (b) investments for which the Company has less
than 10% of voting rights in each such investment. Compliance
with RIC Tests would have become increasingly difficult to the
extent that private MLPs in our portfolio are successful and go
public, because RIC Tests limit investments in public MLPs to
25% of total assets (25% MLP Test).
28
Based on the pro forma portfolio after giving effect to the
election, we expect to increase the number of investments in
private MLPs and decrease our holdings in second lien debt
investments. While we will no longer be constrained by the 25%
MLP test, this allocation may decline over time as we have more
flexibility under the RIC Diversification Test.
Our decision to no longer be treated as a RIC is retroactive to
the beginning of our fiscal tax year, which began on
December 1, 2007. For the quarter ended February 29,
2008, we will record a deferred tax liability for any unrealized
gains at that time, and our net asset value will be reduced by
any such deferred tax liability.
While we no longer intend to be treated as a RIC under the Code,
we intend to maintain our status as a BDC. By electing to be
treated as a BDC, we are subject to provisions of the 1940 Act,
including the requirements that we must have at least 70% of
assets in eligible portfolio companies, generally
defined as private companies with a principal place of business
in the United States.
On January 31, 2008, we terminated our Treasury Facility.
All amounts of principal and interest were paid in full, and we
sold $14.4 million of U.S. Treasury Bills, which were
held as collateral under the Treasury Facility. See
Liquidity and Capital Resources.
Portfolio
and Investment Activity
Our investments as of November 30, 2007 were comprised of
equity securities of $235.5 million and fixed income
investments of $91.2 million. Included in the equity
securities were $8.0 million invested in warrants and
$5.0 million of preferred stock. All of our fixed income
investments ($91.2 million) were in private Energy
Companies composed of fourteen different investments in eleven
portfolio companies.
Certain of our fixed income securities accrue interest at
variable rates determined on a basis of a benchmark, such as
LIBOR, or the prime rate, with stated maturities at origination
that typically range from 5 to 10 years. Other fixed income
investments accrue interest at fixed rates. As of
November 30, 2007, 76% or $69.0 million of our
interest-bearing portfolio is floating rate debt and 24% or
$22.2 million is fixed rate debt.
Results
of Operations For the Fiscal Year Ended
November 30, 2007
Set forth below is an explanation of our results of operations
for the fiscal year ended November 30, 2007, our first full
fiscal year in operation.
Investment Income. Investment income for the
year was $11.5 million and consisted primarily of interest
income on our short-term investments in fixed income investments
and repurchase agreements. We earned $9.2 million of cash
dividends and distributions, of which $8.7 million was
treated as a return of capital during the period.
Operating Expenses. Total operating expenses
for the year were $8.5 million, including $3.8 million
of base investment management fees (net of fee waivers);
$2.5 million for interest expense and $1.0 million for
professional fees. Base investment management fees (net of fee
waivers) were equal to an annual rate of 1.34% of average total
assets. We do not pay a management fee or any incentive fee with
respect to any investments made under the Treasury Facility.
Net Investment Income. Our net investment
income totaled $3.6 million, which consisted of
$11.5 million of investment income. This investment income
was reduced by total operating expenses of $8.5 million for
the year. Our investment income was increased by deferred income
tax benefits of $0.6 million related to our taxable
subsidiaries.
Net Realized Gains. We had net realized gains
from our investments of $5.5 million.
Net Change in Unrealized Gains. We had net
unrealized gains from our investments of $6.3 million,
which are net of deferred tax expense of $2.6 million
related to the investment activities in our taxable subsidiaries.
29
Net Increase in Net Assets Resulting from
Operations. Our net increase in net assets
resulting from operations for the year was $15.4 million.
This increase is composed primarily of the net unrealized gains
of $6.3 million; net realized gains of $5.5 million
and net investment income of $3.6 million as noted above.
Results
of Operations September 21, 2006 through
November 30, 2006
Set forth below is an explanation of our results of operations
for the period from September 21, 2006 (inception) through
November 30, 2006, our first fiscal year in operation.
Investment Income. Investment income for the
period was $2.1 million and consisted primarily of interest
income on our short-term investments in repurchase agreements
and fixed income investments. We earned $0.7 million of
cash dividends and distributions, substantially all of which
were treated as a return of capital during the period.
Operating Expenses. Total operating expenses
for the period were $1.2 million, including
$0.6 million of investment management fees (net of fee
waivers) and $0.2 million for professional fees for the
period. Investment management fees (net of fee waivers) were
equal to an annual rate of 1.25% of average total assets.
Net Investment Income. Our net investment
income totaled $0.9 million, which consisted of
$2.1 million of investment income, primarily from our
interest income on short-term investments in repurchase
agreements. This investment income was reduced by total
operating expenses of $1.2 million for the period.
Net Realized Gains. We had net realized gains
from our investments of $0.1 million.
Net Change in Unrealized Gains. We had net
unrealized gains from our investments of $7.7 million.
Net Increase in Net Assets Resulting from
Operations. Our net increase in net assets
resulting from operations for the period was $8.7 million.
This increase is composed primarily of the change in net
unrealized gains of $7.7 million and, to a lesser extent,
net investment income of $0.9 million and net realized
gains of $0.1 million as noted above.
Liquidity
and Capital Resources
As of November 30, 2007, we had approximately
$10.8 million invested in short-term repurchase agreements.
As of February 5, 2008, we had approximately
$5.9 million in repurchase agreements.
On June 4, 2007, we established two new syndicated credit
facilities the Senior Secured Revolving Credit
Facility (the Investment Facility) and the Treasury
Secured Revolving Credit Facility (the Treasury
Facility) totaling $200 million with
SunTrust Capital Markets, Inc. and Citigroup Capital Markets as
co-arrangers.
The Investment Facility has initial availability of up to
$100 million with the ability to increase credit available
under the Investment Facility to an amount not to exceed
$250 million by obtaining additional commitments from
existing lenders or new lenders. The Investment Facility has a
three year term and bears interest, at our option, at either
(i) LIBOR plus 125 basis points or (ii) the prime
rate plus 25 basis points.
The obligations under the Investment Facility are secured by
substantially all of our assets, and are guaranteed, generally,
by our existing and future subsidiaries. The Investment Facility
contains affirmative and reporting covenants and certain
financial ratios and restrictive covenants, including:
(a) maintaining an asset coverage ratio (excluding
collateral and indebtedness under the Treasury Facility) of not
less than 2.50:1.0; (b) maintaining minimum liquidity at
certain levels of outstanding borrowings; (c) maintaining a
minimum of shareholders equity and (d) other
customary restrictive covenants. The Investment Facility also
contains customary representations and warranties and events of
default. The Investment Facility allows us to supplement our
equity capital to continue to make portfolio investments.
As of November 30, 2007, we had $85.0 million of
borrowings under our Investment Facility at a weighted average
interest rate of 5.99% and $14.0 million of borrowings
under our Treasury Facility at an interest rate of 7.50%. As of
February 5, 2008, we had $85.0 million of borrowings
under our Investment Facility at a weighted average interest
rate of 4.49%.
30
On January 31, 2008, we terminated our Treasury Facility.
All amounts of principal and interest were paid in full, and we
sold $14.4 million of U.S. Treasury Bills, which were
held as collateral for our amount outstanding under the Treasury
Facility. The Treasury Facility enabled us to comply with
certain requirements necessary to qualify as a RIC. We
terminated this facility due to our decision to no longer be
treated as a RIC.
Contractual
Obligations
Investment Management Agreement. We have
entered into an investment management agreement with KAFA under
which we have material future rights and commitments. Pursuant
to the investment management agreement, KAFA has agreed to serve
as our investment adviser and provide on our behalf significant
managerial assistance to our portfolio companies to which we are
required to provide such assistance. Payments under the
investment management agreement may include (1) a base
management fee, (2) an incentive fee, and
(3) reimbursement of certain expenses. For the year ended
November 30, 2007, we paid $3.8 million in base
management fees, net of $1.1 million in fee waivers, and
accrued incentive fees of $0.1 million. We do not pay a
management fee or any incentive fee with respect to any
investments made under the Treasury Facility.
As of November 30, 2007, we did not have, or have not
entered into, any long-term debt obligations, long-term
liabilities, capital or operating lease obligations or purchase
obligations that require minimum payments or any other
contractual obligation at the present, within the next five
years or beyond other than the borrowings outstanding under our
Investment Facility and our Treasury Facility as of
November 30, 2007 described above under
Liquidity and Capital Resources.
The following table summarizes our obligations as of
November 30, 2007 over the following periods for the
Investment and Treasury Facility.
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Payments by Period ($ in millions)
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Less Than 1
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More Than 5
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Total
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Year
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1-3 years
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3-5 years
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Years
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Investment
Facility(1)
|
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$
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85.0
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$
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85.0
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Treasury
Facility(2)
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14.0
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14.0
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(1) |
|
At November 30, 2007, $15.0 million remained available
for borrowing under our Investment Facility. |
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(2) |
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At November 30, 2007, $86.0 million remained available
for borrowing under our Treasury Facility. On January 31,
2008, we terminated our Treasury Facility. All amounts of
principal and interest were paid in full. |
Dividends
We intend to continue to distribute quarterly dividends to our
common stockholders. Our quarterly dividends, if any, will
continue to be determined by our board of directors. During the
fiscal year ended November 30, 2007, we paid dividends
totaling $1.345 per common share, for a total of
$13.5 million. Of this amount, $1.3 million was
reinvested, resulting in the issuance of 50,386 shares of common
stock pursuant to our dividend reinvestment plan. The tax
character of the total $13.5 million of dividends and
distributions paid to common stockholders was $9.5 million
(ordinary income), $1.6 million (capital gains) and
$2.4 million (return of capital).
On December 20, 2007, we declared our quarterly dividend of
$0.41 per common share for the period September 1, 2007 to
November 30, 2007 for a total of $4.1 million. The
dividend was paid on January 17, 2008 to shareholders of
record on December 31, 2007.
Prior to our election to be taxed as a corporation, dividends
paid by us were generally taxable to stockholders as capital
gains, ordinary income or return of capital. After giving effect
to the election, our stockholders will no longer recognize an
allocable share of our capital gains or ordinary income.
Instead, the component of our dividend that comes from our
current or accumulated earnings and profits will be taxable to a
stockholder as corporate dividend income. This income will be
treated as qualified dividends for Federal income tax purposes
at a rate of l5%. The special tax treatment for qualified
dividends is scheduled to expire on December 31, 2010.
Distributions that exceed our current or accumulated earnings
and profits will continue to be treated as a tax-deferred return
of
31
capital to the extent of a stockholders basis. We expect
that a significant portion of future dividends to shareholders
will constitute a tax-deferred return of capital.
Off-Balance
Sheet Arrangements
At November 30, 2007, we did not have any off-balance sheet
liabilities or other contractual obligations that are reasonably
likely to have a current or future material effect on our
financial condition, other than the investment advisory and
management agreement with KAFA.
Critical
Accounting Policies
Our most significant accounting policies in accordance with GAAP
are described below. The preparation of our financial statements
in conformity with GAAP requires management to make estimates
and judgments that affect our reported amounts of assets,
liabilities, revenues and expenses. Estimates and judgments are
based on information available at the time such estimates and
judgments are made, and adjustments made to these estimates and
judgments often relate to information not previously available.
Changes in the economic environment, financial markets and any
other parameters used in determining such estimates could cause
actual results to differ. Estimates and judgments are used in,
among other things, the development of fair value assumptions,
the assessment of future tax exposure and the realization of tax
assets.
We have identified the following five critical accounting
policies that require a significant amount of estimation and
judgment and are considered to be important to the portrayal of
our assets, liabilities, revenues and expenses:
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Investment Valuation
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Calculation of Net Asset Value
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Income Taxes
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Investment Income and Return of Capital Estimates
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Dividends and Distributions to Stockholders
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Investment Valuation. Readily marketable
portfolio securities listed on any exchange other than the
NASDAQ Stock Market, Inc. (NASDAQ) are valued,
except as indicated below, at the last sale price on the
business day as of which such value is being determined. If
there has been no sale on such day, the securities are valued at
the mean of the most recent bid and asked prices on such day,
except for short sales and call option contracts written, for
which the last quoted asked price is used. Securities admitted
to trade on the NASDAQ are valued at the NASDAQ official closing
price. Portfolio securities traded on more than one securities
exchange are valued at the last sale price on the business day
as of which such value is being determined at the close of the
exchange representing the principal market for such securities.
Equity securities traded in the over-the-counter market, but
excluding securities admitted to trading on the NASDAQ, are
valued at the closing bid prices. Fixed income securities that
are considered corporate bonds are valued by using the mean of
the bid and ask prices provided by an independent pricing
service. For fixed income securities that are considered
corporate bank loans, the fair market value is determined by the
mean of the bid and ask prices provided by the syndicate bank or
principal market maker. When price quotes are not available,
fair market value will be based on prices of comparable
securities.
Our portfolio includes securities that are privately issued or
illiquid. For these securities, as well as any other portfolio
security held by us for which reliable market quotations are not
readily available, valuations are determined in good faith by
the board of directors under a valuation policy and a
consistently applied valuation process. Unless otherwise
determined by our board of directors, the following valuation
process, approved by the board of directors, is used for such
securities:
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Investment Team Valuation. The applicable
investments are initially be valued by the investment
advisers senior professionals responsible for the
portfolio investments.
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32
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Investment Team Valuation
Documentation. Preliminary valuation conclusions
are documented and discussed with senior management of KAFA, our
investment adviser. Such valuations are submitted to the
Valuation Committee (a committee of the board of directors) on a
quarterly basis. These valuations stand for intervening periods
of time unless a senior officer of KAFA determines that material
adjustments to such preliminary valuations are appropriate to
avoid valuations that are stale or do not represent fair value.
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Valuation Committee. The Valuation Committee
meets each quarter to consider new valuations presented by KAFA,
if any, which were made in accordance with the Valuation
Procedures in such quarter. The Valuation Committees
determination is subject to ratification by the board at its
next regular meeting.
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Valuation Firm. No less frequently than
quarterly, a third-party valuation firm engaged by the board of
directors reviews the valuation methodologies and calculations
employed for these securities. The independent valuation firm
provides third-party valuation consulting services to the board
of directors which consist of certain limited procedures that we
have identified and requested that they perform. Upon completion
of the limited procedures, the independent valuation firm
concludes that the fair value of those investments subjected to
the limited procedures does not appear to be unreasonable.
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|
|
|
Board of Directors Determination. The board of
directors considers the valuations provided by KAFA and the
Valuation Committee and ratifies valuations for the applicable
securities at each quarterly board meeting. The board of
directors considers the reports provided by the third-party
valuation firm in reviewing and determining in good faith the
fair value of the applicable portfolio securities.
|
During the course of such valuation process, whenever possible,
privately-issued equity and debt investments are valued using
comparisons of financial ratios of the portfolio companies that
issued such equity and debt securities to any peer companies
that are public. The value is then discounted to reflect the
illiquid nature of the investment. We also utilize comparative
information such as purchase transactions, public offerings or
subsequent equity sales to corroborate our valuations. Due to
the inherent uncertainty of determining the fair value of
investments that do not have a readily available market value,
the fair value of our investments in privately-issued securities
may differ significantly from the values that would have been
used had a ready market existed for such investments, and the
differences could be material.
Factors that we may take into account in fair value pricing our
investments include, as relevant, the portfolio companys
ability to make payments and its earnings and discounted cash
flow, the markets in which the portfolio company does business,
comparison to publicly traded securities, the nature and
realizable value of any collateral and other relevant factors.
Unless otherwise determined by the board of directors,
securities that are convertible into or otherwise will become
publicly traded (e.g., through subsequent registration or
expiration of a restriction on trading) will be valued through
the process described above, using a valuation based on the
market value of the publicly traded security less a discount.
The discount will initially be equal in amount to the discount
negotiated at the time of purchase. To the extent that such
securities are convertible or otherwise become publicly traded
within a time frame that may be reasonably determined, the
investment adviser may determine an amortization schedule for
the discount in accordance with a methodology approved by the
Valuation Committee.
Calculation of Net Asset Value. We will
determine our net asset value per share of our common stock as
of the close of regular session trading on the NYSE (normally
4:00 p.m. Eastern time) quarterly. Net asset value per
share of our common stock is computed by dividing the value of
all of our assets (including accrued interest and dividends),
less all of our liabilities (including accrued expenses,
dividends payable and any borrowings) by the total number of
common shares outstanding.
Dividend and distribution income is recorded on the ex-dividend
date for publicly traded securities and the dividend declaration
date for private companies. Interest income is recognized on the
accrual basis, including amortization of premiums and accretion
of discounts. Our expenses are accrued no less than on a
quarterly basis.
We record security transactions on the date the securities are
purchased or sold (the trade date) and realized gains and losses
are recorded on an identified cost basis.
33
Our securities are valued in accordance with the valuation
process described in our critical accounting policy
Investment Valuation above.
Income Taxes. Because federal income tax
regulations differ from GAAP, distributions in accordance with
tax regulations may differ from net investment income and
realized gains recognized for financial reporting purposes.
These differences may be permanent or temporary. We reclassify
permanent differences among capital accounts in our financial
statements to reflect the tax character of each difference.
Since inception through our most recently completed fiscal year,
we have elected to be taxed as a RIC under Subchapter M of the
Internal Revenue Code of 1986, as amended. As a RIC, we were not
required to pay federal income taxes on any ordinary income or
capital gains that we received from our portfolio investments
and our taxable subsidiaries in so far as we distributed such
amounts to our stockholders as dividends. To qualify and
maintain our RIC status, we were required to meet specific
source-of-income and asset diversification requirements and
distribute in each of our taxable years at least 90% of our
investment company taxable income (which generally
consists of ordinary income and realized net short-term capital
gains in excess of realized net long-term capital losses, if
any) and net tax-exempt interest out of the assets legally
available for distribution.
Our wholly-owned consolidated subsidiaries pay Federal and state
income tax on their taxable income. We invest our assets
primarily in MLPs, which generally are treated as partnerships
for federal income tax purposes. As a limited partner in the
MLPs, we report our allocable share of the MLPs taxable
income in computing our taxable income. Our tax expense or
benefit recorded in the Statement of Operations is based on the
component of income or gains (losses) to which such expense or
benefit relates. Deferred income taxes recorded reflect the net
tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. To the
extent we have a net deferred tax asset, a valuation allowance
will be recognized if, based on the weight of available
evidence, it is more likely than not that some portion or all of
the deferred income tax asset will not be realized. Future
realization of deferred income tax assets ultimately depends on
the existence of sufficient taxable income of the appropriate
character in either the carryback or carryforward period under
the tax law.
We may rely to some extent on information provided by the MLPs,
which may not necessarily be timely, to estimate taxable income
allocable to the MLP units held in the portfolio and to estimate
the associated deferred tax liability.
We also estimate our state income tax provision based upon
available information and estimates. Such estimates may change
in subsequent periods when tax returns are filed or examination
by state and local tax authorities.
On January 22, 2008, we announced that we no longer intend
to be treated as a RIC for our fiscal year ended
November 30, 2008 and for future fiscal years. The decision
to no longer be treated as a RIC is retroactive to the beginning
of our fiscal tax year, which began on December 1, 2007.
Investment Income and Return of Capital
Estimates. Dividends and distributions received
from our investments in MLPs generally are comprised of income
and return of capital. The return of capital portion of the
dividends and distributions is a reduction to investment income
in our Statement of Operations and results in an equivalent
reduction to the cost basis of the associated investments. The
reduction to the cost basis results in an increase to either net
realized gains or the net change in unrealized gains from
investments. We record investment income and return of capital
based on estimates made at the time when we receive such
distributions. We base these estimates on historical information
available from our MLP investments and other industry sources.
We may revise these estimates based on information received from
our MLP investments after their tax reporting periods are
concluded. Any changes to these estimates may be material.
Dividends and Distributions to
Stockholders. We pay distributions to our
stockholders and record these on the ex-dividend date. We
estimate the portion of the current dividend that represents a
return of capital. The character of these distributions declared
and paid during the year may differ from the ultimate
characterization for federal income tax purposes that we make
after the end of the calendar year. For the year ended
November 30, 2007, our dividends are comprised of return of
capital, long-term capital gains and ordinary income, which is
based on our
34
operating results. Due to the passage of time and availability
of information for when we estimate the characterization until
the final determination, there may be revisions to these
estimates. Any changes to these estimates to final determination
may be material.
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ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
We are subject to financial market risks, including changes in
interest rates and in the valuations of our investment portfolio.
Interest Rate Risk. Interest rate risk
primarily results from variable rate fixed income securities in
which we invest and from borrowings under our Investment
Facility and Treasury Facility. Fixed income investments in our
portfolio are based on floating and fixed rates. Fixed income
investments bearing a floating interest rate are usually based
on a LIBOR and, in most cases, a spread consisting of additional
basis points. The interest rates for these fixed income
instruments typically have one to six-month durations and reset
at the current market interest rates. As of November 30,
2007, the fair value of our floating rate investments totaled
approximately $69.0 million, or 76% of our total fixed
income investments of $91.2 million. Based on sensitivity
analysis of the ($70.3 million par value) floating rate
fixed income investment portfolio at November 30, 2007, we
estimate that a one percentage point interest rate movement in
the average market interest rates (either higher or lower) over
the 12 months ended November 30, 2008 would either
decrease or increase net investment income before income taxes
by approximately $0.7 million.
As of November 30, 2007, we had $85.0 million of
borrowings under our Investment Facility at a weighted average
interest rate of 5.99% and $14.0 million of borrowings
under our Treasury Facility at an interest rate of 7.50%. These
interest rates are based on a LIBOR, which can have a one to
twelve month duration. Based on sensitivity analysis of the
Investment and Treasury Facilities at November 30, 2007, we
estimate that a one percentage point interest rate movement in
the average market interest rates (either higher or lower) over
the 12 months ended November 30, 2008 would either
decrease or increase net investment income before income taxes
by approximately $1.0 million.
On January 31, 2008, we terminated our Treasury Facility.
All amounts of principal and interest were paid in full, and we
sold $14.4 million of U.S. Treasury Bills, which were
held as collateral for our amount outstanding under the Treasury
Facility. The Treasury Facility enabled us to comply with
certain requirements necessary to qualify as a RIC. We
terminated this facility due to our decision to no longer be
treated as a RIC.
We may hedge against interest rate fluctuations for these
floating rate instruments using standard hedging instruments
such as futures, options and forward contracts, subject to the
requirements of the 1940 Act. Hedging activities may mitigate
our exposure to adverse changes in interest rates.
Impact of Market Prices on Portfolio Investment
Valuation. We carry our investments at fair
value, as determined by our board of directors. Investments for
which market quotations are readily available are valued at such
market quotations and are subject to daily changes in the market
prices of these securities.
Fixed income and equity securities that are not publicly traded
or whose market price is not readily available are valued at
fair value as determined in good faith by our board of
directors. The types of factors that we may take into account in
fair value pricing of our investments include, as relevant, the
nature and realizable value of any collateral, the portfolio
companys ability to make payments and its earnings and
discounted cash flow, the markets in which the portfolio company
does business, comparison to publicly traded securities and
other relevant factors. Our investments that are not publicly
traded may be indirectly impacted (positively or negatively) by
public market prices of securities that are comparable to these
private investments. Changes in market prices related to
purchase transactions, public offerings and secondary offerings
can also impact the valuations of our investments that are not
publicly traded.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
|
Our financial statements and financial statement schedules are
set forth beginning on page F-1 in this annual report and are
incorporated herein by reference.
35
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES.
|
Evaluation
of Controls and Procedures.
The Companys officers, with the participation of the
Companys Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the Companys
disclosure controls and procedures (as defined in
Rule 13a-15(e)
of the 1934 Act) as of the end of the period covered in
this report. Based upon such evaluation, the Companys
Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective and
provided reasonable assurance that information required to be
disclosed in the reports that we file or submit under the
1934 Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and
forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. However, in designing
and evaluating our disclosures controls and procedures,
management recognized that disclosure controls and procedures,
no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the
disclosure controls and procedures are met. Additionally, in
designing disclosure controls and procedures, our management
necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions.
Managements
Annual Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
and 15d-15
of the Securities Exchange Act of 1934. Under the supervision
and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, the Company
conducted an evaluation of the effectiveness of the
Companys internal control over financial reporting. Our
internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles and include those policies and procedures
that: (1) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect our transactions
and the dispositions of our assets; (2) provide reasonable
assurance that our transactions are recorded as necessary to
permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with
appropriate authorizations; and (3) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Under the supervision and with the participation of our
management, we assessed the effectiveness of our internal
control over financial reporting as of November 30, 2007,
using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework. Based on its
assessment, management has concluded that our internal control
over financial reporting was effective as of November 30,
2007.
36
The effectiveness of our internal control over financial
reporting as of November 30, 2007 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is included
herein.
Report
of Independent Registered Public Accounting Firm
Our independent registered public accounting firm,
PricewaterhouseCoopers LLP, has reported on the effectiveness of
the Companys internal control over financial reporting
based upon their integrated audit of our financial statements,
which report is set forth under the heading Report of
Independent Registered Public Accounting Firm on
page F-2.
Change
in Internal Control Over Financial Reporting
Management has not identified any change in the Companys
internal control over financial reporting that occurred during
the fourth fiscal quarter of 2007 that has materially affected,
or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
ITEM 9B. OTHER
INFORMATION.
Not applicable.
37
|
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Exhibit
|
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Number
|
|
Description
|
|
|
3
|
.1
|
|
Charter Form of Articles of Amendment and
Restatement.*
|
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3
|
.2
|
|
Amended and Restated Bylaws.*
|
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4
|
.1
|
|
Form of Common Stock Certificate.*
|
|
10
|
.1
|
|
Form of Investment Management Agreement between Registrant and
KA Fund Advisors, LLC.*
|
|
10
|
.2
|
|
Form of Administration Agreement between Registrant and Bear
Stearns Funds Management Inc.*
|
|
10
|
.3
|
|
Form of Custody Agreement between Registrant and The Custodial
Trust Company.*
|
|
10
|
.4
|
|
Form of Dividend Reinvestment Plan.*
|
|
10
|
.5
|
|
Form of Transfer Agency Agreement between Registrant and
American Stock Transfer & Trust Company.*
|
|
10
|
.6
|
|
Form of Accounting Services Agreement between Registrant and
Ultimus Fund Solutions, LLC.*
|
|
10
|
.7
|
|
Senior Secured Revolving Credit Agreement between Registrant,
the lenders party thereto, SunTrust Bank, as administrative
agent for the lenders, and Citibank, N.A. as syndication agent,
dated June 4, 2007.**
|
|
10
|
.8
|
|
Treasury Secured Revolving Credit Agreement between Registrant,
the lenders party thereto, SunTrust Bank, as administrative
agent for the lenders, and Citibank, N.A. as syndication agent,
dated June 4, 2007.**
|
|
14
|
.1
|
|
Supplemental Antifraud Code of Ethics of Registrant.***
|
|
21
|
.1
|
|
Subsidiaries of the Registrant filed herewith.
|
|
24
|
.1
|
|
Power of Attorney filed herewith.
|
|
31
|
.1
|
|
Certification by Chief Executive Officer pursuant to Exchange
Act
Rule 13a-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 filed herewith.
|
|
31
|
.2
|
|
Certification by Chief Financial Officer pursuant to Exchange
Act
Rule 13a-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 filed herewith.
|
|
32
|
.1
|
|
Certification by Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 filed herewith.
|
|
99
|
.1
|
|
Form of Amended Dividend Reinvestment Plan.**
|
|
99
|
.2
|
|
Form of Fee Waiver Relating to Treasury Credit Investments
between Registrant and KA Fund Advisors, LLC.**
|
|
|
|
* |
|
Previously filed as an exhibit to Registrants
Pre-Effective Amendment No. 5 to its Registration Statement
on
Form N-2
(File
No. 333-134829)
as filed with the SEC on September 18, 2006 and
incorporated by reference herein. |
|
** |
|
Previously filed as an exhibit to Registrants Quarterly
Report on Form
10-Q (File
No. 814-00725)
as filed with the SEC on July 16, 2007 and incorporated by
reference herein. |
|
*** |
|
Previously filed as an exhibit to Registrants Annual
Report on
Form 10-K
(File
No. 814-00725)
as filed with the SEC on February 16, 2007 and incorporated
by reference herein. |
39
INDEX TO
FINANCIAL STATEMENTS
|
|
|
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Page
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-2
|
|
Consolidated Schedule of Investments as of November 30, 2007
|
|
|
F-3
|
|
Schedule of Investments as of November 30, 2006
|
|
|
F-8
|
|
Consolidated Statement of Assets and Liabilities as of
November 30, 2007 and November 30, 2006
|
|
|
F-11
|
|
Consolidated Statement of Operations for the year ended
November 30, 2007 and the period September 21, 2006*
through November 30, 2006
|
|
|
F-12
|
|
Consolidated Statement of Changes in Net Assets for the year
ended November 30, 2007 and for the period
September 21, 2006* through November 30, 2006
|
|
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F-13
|
|
Consolidated Statement of Cash Flows for the year ended
November 30, 2007 and for the period September 21,
2006* through November 30, 2006
|
|
|
F-14
|
|
Notes to Consolidated Financial Statements
|
|
|
F-15
|
|
EXHIBIT 21.1 |
EXHIBIT 24.1 |
EXHIBIT 31.1 |
EXHIBIT 31.2 |
EXHIBIT 32.1 |
|
|
|
* |
|
Commencement of operations |
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Kayne Anderson Energy Development Company:
In our opinion, the accompanying consolidated statements of
assets and liabilities, including the schedules of investments,
and the related consolidated statements of operations, changes
in net assets and cash flows and the financial highlights
present fairly, in all material respects, the financial position
of Kayne Anderson Energy Development Company and its
subsidiaries (the Company) as of November 30,
2007 and 2006, and the results of their operations, the changes
in their net assets, their cash flows and their financial
highlights for each of the two periods then ended in conformity
with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained,
in all material respects, effective internal control over
financial reporting as of November 30, 2007, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). The Companys management is
responsible for these financial statements, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying management
report. Our responsibility is to express opinions on these
financial statements and on the Companys internal control
over financial reporting based on our integrated audits (which
was an integrated audit for 2007 only). We conducted our audits
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of
material misstatement and whether effective internal control
over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our 2007 audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits, which included confirmation of
securities owned at November 30, 2007 and 2006 by
correspondence with the custodian and brokers, provide a
reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As discussed in Note 10 to the consolidated financial
statements, Subsequent Events, on January 22,
2008, the Company announced its intention to no longer be
treated as a regulated investment company for income tax
purposes. If carried-out, the Company will be taxed as a
U.S. corporation effective December 1, 2007. As a
result, the Company will record, in the quarter ending
February 29, 2008, additional income tax expense, primarily
related to its net unrealized appreciation on investments.
PricewaterhouseCoopers LLP
February 11, 2008
F-2
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS
AS OF NOVEMBER 30, 2007
(amounts in 000s)
|
|
|
|
|
|
|
|
|
|
|
No. of
|
|
|
|
|
Description:
|
|
Shares/Units
|
|
|
Value
|
|
|
Long-Term Investments(a) 133.3%
|
|
|
|
|
|
|
|
|
Equity Investments(b) 96.1%
|
|
|
|
|
|
|
|
|
Publicly Traded MLP and MLP Affiliate(c)(d)
37.8%
|
|
|
|
|
|
|
|
|
Atlas Energy Resources, LLC Unregistered(e)
|
|
|
131
|
|
|
$
|
3,905
|
|
Atlas Pipeline Partners, L.P.
|
|
|
46
|
|
|
|
2,083
|
|
BreitBurn Energy Partners L.P. Unregistered(e)
|
|
|
73
|
|
|
|
2,102
|
|
Buckeye Partners, L.P.
|
|
|
41
|
|
|
|
1,960
|
|
Calumet Specialty Products Partners, L.P.
|
|
|
104
|
|
|
|
3,842
|
|
Capital Product Partners L.P.(f)
|
|
|
24
|
|
|
|
593
|
|
Constellation Energy Partners LLC Unregistered(e)
|
|
|
65
|
|
|
|
2,184
|
|
Copano Energy, L.L.C.
|
|
|
8
|
|
|
|
320
|
|
Copano Energy, L.L.C. Unregistered(e)
|
|
|
72
|
|
|
|
2,590
|
|
Crosstex Energy, L.P.
|
|
|
24
|
|
|
|
815
|
|
DCP Midstream Partners, LP
|
|
|
62
|
|
|
|
2,509
|
|
Duncan Energy Partners L.P.
|
|
|
53
|
|
|
|
1,214
|
|
Eagle Rock Energy Partners, L.P.
|
|
|
24
|
|
|
|
512
|
|
El Paso Pipeline Partners, L.P(g)
|
|
|
9
|
|
|
|
218
|
|
Enbridge Energy Management, L.L.C.(f)(h)
|
|
|
66
|
|
|
|
3,404
|
|
Enbridge Energy Partners L.P.
|
|
|
17
|
|
|
|
858
|
|
Energy Transfer Equity, L.P.
|
|
|
61
|
|
|
|
2,091
|
|
Energy Transfer Partners, L.P.
|
|
|
17
|
|
|
|
896
|
|
Enterprise Products Partners L.P.
|
|
|
220
|
|
|
|
6,875
|
|
Exterran Partners, L.P.(i)
|
|
|
40
|
|
|
|
1,390
|
|
Global Partners LP
|
|
|
114
|
|
|
|
3,137
|
|
Hiland Holdings GP, LP
|
|
|
10
|
|
|
|
244
|
|
Hiland Partners, LP
|
|
|
31
|
|
|
|
1,470
|
|
Inergy, L.P.
|
|
|
64
|
|
|
|
2,051
|
|
Kinder Morgan Management, LLC(f)(h)
|
|
|
111
|
|
|
|
5,572
|
|
K-Sea Transportation Partners L.P.
|
|
|
12
|
|
|
|
429
|
|
Legacy Reserves LP
|
|
|
35
|
|
|
|
754
|
|
Magellan Midstream Partners, L.P.
|
|
|
65
|
|
|
|
2,859
|
|
MarkWest Energy Partners, L.P.
|
|
|
95
|
|
|
|
3,113
|
|
Martin Midstream Partners L.P.
|
|
|
50
|
|
|
|
1,908
|
|
NuStar Energy L.P.(j)
|
|
|
11
|
|
|
|
647
|
|
ONEOK Partners, L.P.
|
|
|
94
|
|
|
|
5,650
|
|
OSG America L.P(g)
|
|
|
1
|
|
|
|
27
|
|
Penn Virginia Resource Partners, L.P.
|
|
|
9
|
|
|
|
244
|
|
Plains All American Pipeline, L.P.
|
|
|
103
|
|
|
|
5,374
|
|
See accompanying notes to consolidated financial statements.
F-3
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS (CONTINUED)
AS OF NOVEMBER 30, 2007
(amounts in 000s)
|
|
|
|
|
|
|
|
|
|
|
No. of
|
|
|
|
|
Description:
|
|
Shares/Units
|
|
|
Value
|
|
|
Regency Energy Partners LP
|
|
|
46
|
|
|
$
|
1,419
|
|
SemGroup Energy Partners, L.P.
|
|
|
40
|
|
|
|
1,073
|
|
Spectra Energy Partners, LP
|
|
|
32
|
|
|
|
791
|
|
Targa Resources Partners LP
|
|
|
60
|
|
|
|
1,702
|
|
TC PipeLines, LP
|
|
|
84
|
|
|
|
3,086
|
|
Teekay LNG Partners L.P.
|
|
|
77
|
|
|
|
2,277
|
|
Teekay Offshore Partners L.P.(f)
|
|
|
54
|
|
|
|
1,398
|
|
TEPPCO Partners, L.P.
|
|
|
80
|
|
|
|
3,158
|
|
Williams Partners L.P.
|
|
|
95
|
|
|
|
3,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,666
|
|
|
|
|
|
|
|
|
|
|
Private MLP 56.2%
|
|
|
|
|
|
|
|
|
Direct Fuels Partners, L.P.(e)(k)
|
|
|
2,500
|
|
|
|
46,675
|
|
Direct Fuels Partners, L.P. Warrants(e)(l)
|
|
|
2,500
|
|
|
|
4,575
|
|
International Resource Partners LP(e)(m)
|
|
|
1,500
|
|
|
|
30,000
|
|
Millennium Midstream Partners, LP(e)(n)
|
|
|
2,375
|
|
|
|
44,223
|
|
Millennium Midstream Partners, LP Warrants(e)(o)
|
|
|
2,375
|
|
|
|
3,278
|
|
Quest Midstream Partners, L.P.(e)(p)
|
|
|
350
|
|
|
|
7,000
|
|
VantaCore Partners LP(e)(q)
|
|
|
91
|
|
|
|
1,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,667
|
|
|
|
|
|
|
|
|
|
|
Other Private Equity 2.1%
|
|
|
|
|
|
|
|
|
Knight, Inc. Preferred Stock(r)
|
|
|
5
|
|
|
|
4,965
|
|
ProPetro Services, Inc. Warrants(e)(s)
|
|
|
2,905
|
|
|
|
109
|
|
Trident Resources Corp. Warrants(t)
|
|
|
100
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,149
|
|
|
|
|
|
|
|
|
|
|
Total Equity Investments (Cost $220,334)
|
|
|
|
|
|
|
235,482
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS (CONTINUED)
AS OF NOVEMBER 30, 2007
(amounts in 000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
Maturity
|
|
|
Principal
|
|
|
|
|
Description:
|
|
Rate
|
|
Date
|
|
|
Amount
|
|
|
Value
|
|
|
Fixed Income Investments 37.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream 7.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SemGroup, L.P.
|
|
8.75%
|
|
|
11/15/15
|
|
|
$
|
9,000
|
|
|
$
|
8,595
|
|
Targa Resources, Inc.
|
|
8.50
|
|
|
11/01/13
|
|
|
|
4,580
|
|
|
|
4,488
|
|
Targa Resources, Inc.
|
|
(u)
|
|
|
10/31/12
|
|
|
|
1,664
|
|
|
|
1,637
|
|
Targa Resources, Inc.
|
|
(v)
|
|
|
10/31/12
|
|
|
|
2,983
|
|
|
|
2,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upstream 5.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beryl Oil and Gas LP
|
|
(w)
|
|
|
7/14/11
|
|
|
|
2,933
|
|
|
|
2,890
|
|
CDX Funding, LLC
|
|
(x)
|
|
|
3/31/13
|
|
|
|
4,550
|
|
|
|
4,345
|
|
SandRidge Energy Inc.
|
|
(y)
|
|
|
4/14/12
|
|
|
|
5,700
|
|
|
|
5,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield Services 18.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dresser, Inc.
|
|
(z)
|
|
|
5/04/15
|
|
|
|
5,000
|
|
|
|
4,800
|
|
ProPetro Services, Inc.(e)
|
|
(aa)
|
|
|
2/15/13
|
|
|
|
35,000
|
|
|
|
34,326
|
|
Seitel, Inc.
|
|
9.75
|
|
|
2/15/14
|
|
|
|
2,000
|
|
|
|
1,730
|
|
Stallion Oilfield Services Ltd.
|
|
(bb)
|
|
|
7/18/12
|
|
|
|
5,000
|
|
|
|
4,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregates and Mining 6.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VantaCore Partners LP(e)(cc)
|
|
9.00
|
|
|
5/21/27
|
|
|
|
7,000
|
|
|
|
7,350
|
|
VantaCore Partners LP(e)
|
|
(dd)
|
|
|
5/21/14
|
|
|
|
7,500
|
|
|
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Income Investments (Cost $89,779)
|
|
|
|
|
|
|
|
|
|
|
|
|
91,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Investments (Cost $310,113)
|
|
|
|
|
|
|
|
|
|
|
|
|
326,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Investments 10.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills 5.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills (Cost $14,251)
|
|
3.075
|
|
|
2/28/08
|
|
|
|
14,358
|
|
|
|
14,250
|
|
Repurchase Agreements 4.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bear, Stearns & Co. Inc. (Agreements dated 11/30/07 to
be repurchased at $10,772), collateralized by $11,105 in U.S.
Treasury Bonds (Cost $10,769)
|
|
3.15
|
|
|
12/01/07
|
|
|
|
|
|
|
|
10,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Short-Term Investments (Cost $25,020)
|
|
|
|
|
|
|
|
|
|
|
|
|
25,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments 143.5% (Cost $335,133)
|
|
|
|
|
|
|
|
|
|
|
|
|
351,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Revolving Credit Facility Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
(85,000
|
)
|
Treasury Secured Revolving Credit Facility Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,000
|
)
|
Other Liabilities in Excess of Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
$
|
245,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS (CONTINUED)
AS OF NOVEMBER 30, 2007
(amounts in 000s)
|
|
|
(a) |
|
Unless otherwise noted, security is treated as an eligible
portfolio security for purposes of BDC qualification. |
|
(b) |
|
Unless otherwise noted, equity investments are common
units/common shares. |
|
(c) |
|
Security is not treated as an eligible portfolio security for
purposes of BDC qualification. |
|
(d) |
|
Unless otherwise noted, a security is treated as a publicly
traded partnership for regulated investment company
(RIC) qualification purposes. To qualify as a RIC
for tax purposes, the Company may directly invest up to 25% of
its total assets in equity and debt securities of entities
treated as publicly traded partnerships. At November 30,
2007, the Company had 23.0% of its total assets invested in
securities treated as publicly traded partnerships. From
inception through the fiscal year ended November 30, 2007,
it was the Companys intention to be treated as a RIC for
tax purposes. On January 22, 2008, the Company announced
that it would no longer intend to be treated as a RIC under the
Code. |
|
(e) |
|
Fair valued and restricted security (see Notes 2 and 5). |
|
(f) |
|
Security is not treated as a publicly traded partnership for RIC
qualification purposes. |
|
(g) |
|
Security is currently non-income producing but is expected to
pay distributions within the next 12 months. |
|
(h) |
|
Distributions are paid in-kind. |
|
(i) |
|
Prior to August 20, 2007, security was known as Universal
Compression Partners, L.P., as disclosed on our Schedule of
Investments as of November 30, 2006. |
|
(j) |
|
Prior to April 2, 2007, security was known as Valero L.P.,
as disclosed on our Schedule of Investments as of
November 30, 2006. |
|
(k) |
|
Class B common units are owned directly and indirectly by
the Companys subsidiaries, KED DF Investment Partners, LP
and KED DF Investment GP, LLC. The Class B common units are
redeemable at the option of Direct Fuels Partners, L.P. at the
price of $20.00 per unit. |
|
(l) |
|
Warrants are non-income producing, expire on June 8, 2017
and provide the Company the right to purchase 2,500 Class A
common units at a price of $20.00 per unit. |
|
(m) |
|
Common units are owned directly and indirectly by the
Companys subsidiaries, KED LCP Investment Partners, LP and
KED LCP Investment GP, LLC. |
|
(n) |
|
Class B common units are owned directly and indirectly by
the Companys subsidiaries, KED MME Investment Partners, LP
and KED MME Investment GP, LLC. The Class B common units
are redeemable at the option of Millennium Midstream Partners,
LP at the price of $20.00 per unit. |
|
(o) |
|
Warrants are non-income producing, expire on December 28,
2016 and provide the Company the right to purchase 2,375
Class A common units at a price of $20.00 per unit. |
|
(p) |
|
Common units are owned directly and indirectly by the
Companys subsidiaries, KED MME Investment Partners, LP and
KED MME Investment GP, LLC. |
|
(q) |
|
Common units are owned directly and indirectly by the
Companys subsidiaries, KED VP Investment Partners, LP and
KED VP Investment GP, LLC. |
|
(r) |
|
Preferred stock of Knight, Inc. (f.k.a, Kinder Morgan, Inc.)
paying a fixed dividend rate of 8.33% until August 12, 2012
and LIBOR + 390 basis points thereafter. The maturity date
for this security is August 12, 2057. |
|
(s) |
|
Warrants relate to the Companys floating rate senior
secured second lien term loan facility with ProPetro Services,
Inc. These warrants are non-income producing and expire on
February 15, 2017. |
|
(t) |
|
Warrants are non-income producing and expire on
November 30, 2013. |
See accompanying notes to consolidated financial statements.
F-6
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
CONSOLIDATED SCHEDULE OF INVESTMENTS (CONCLUDED)
AS OF NOVEMBER 30, 2007
(amounts in 000s)
|
|
|
(u) |
|
Floating rate letter of credit facility. Security pays interest
at a rate of LIBOR less 12.5 basis points (5.07% as of
November 30, 2007). |
|
(v) |
|
Floating rate senior secured first lien term loan facility.
Security pays interest at a rate of LIBOR + 200 basis
points (7.20% as of November 30, 2007). |
|
(w) |
|
Floating rate senior secured first lien term loan. Security pays
interest at a rate of LIBOR + 400 basis points (9.70% as of
November 30, 2007). |
|
(x) |
|
Floating rate senior secured second lien term loan facility.
Security pays interest at a rate of LIBOR + 625 basis
points (11.39% as of November 30, 2007). |
|
(y) |
|
Floating rate unsecured bridge loan facility. Security pays
interest at a rate of LIBOR + 363 basis points (8.85% as of
November 30, 2007). |
|
(z) |
|
Floating rate senior secured second lien term loan facility.
Security pays interest at a rate of LIBOR + 575 basis
points (11.13% as of November 30, 2007). |
|
(aa) |
|
Floating rate senior secured second lien term loan facility.
Security pays interest at a rate of LIBOR + 900 basis
points (14.23% as of November 30, 2007). |
|
(bb) |
|
Floating rate senior secured second lien term loan facility.
Security pays interest at a rate of LIBOR + 450 basis
points (9.38% as of November 30, 2007). |
|
(cc) |
|
Fixed rate subordinated convertible note. Security is
convertible into 350,000 common units at a conversion price of
$20.00 per common unit. |
|
(dd) |
|
Floating rate senior secured second lien term loan facility.
Security pays interest at a rate of LIBOR + 550 basis
points (10.73% as of November 30, 2007). |
See accompanying notes to consolidated financial statements.
F-7
|
|
|
|
|
|
|
|
|
|
|
No. of
|
|
|
|
|
Description:
|
|
Shares/Units
|
|
|
Value
|
|
|
Long-Term Investments(a) 44.0%
|
|
|
|
|
|
|
|
|
Equity Investments(b) 26.4%
|
|
|
|
|
|
|
|
|
Publicly Traded MLP and MLP Affiliate(c) 26.0%
|
|
|
|
|
|
|
|
|
Atlas Pipeline Partners, L.P.
|
|
|
40
|
|
|
$
|
1,934
|
|
BreitBurn Energy Partners L.P.(d)
|
|
|
12
|
|
|
|
259
|
|
Calumet Specialty Products Partners, L.P.
|
|
|
113
|
|
|
|
4,294
|
|
Crosstex Energy, L.P.
|
|
|
9
|
|
|
|
349
|
|
DCP Midstream Partners, LP
|
|
|
64
|
|
|
|
2,141
|
|
Enbridge Energy Management, L.L.C.(e)(f)
|
|
|
34
|
|
|
|
1,663
|
|
Enbridge Energy Partners L.P.
|
|
|
30
|
|
|
|
1,494
|
|
Energy Transfer Equity, L.P.
|
|
|
220
|
|
|
|
6,389
|
|
Energy Transfer Partners, L.P.
|
|
|
3
|
|
|
|
175
|
|
Enterprise Products Partners L.P.
|
|
|
195
|
|
|
|
5,502
|
|
Global Partners LP
|
|
|
82
|
|
|
|
1,935
|
|
Hiland Holdings GP, LP(d)
|
|
|
21
|
|
|
|
508
|
|
Hiland Partners, LP
|
|
|
30
|
|
|
|
1,603
|
|
Inergy, L.P.
|
|
|
27
|
|
|
|
794
|
|
Kinder Morgan Management, LLC(e)(f)
|
|
|
212
|
|
|
|
9,746
|
|
Magellan Midstream Partners, L.P.
|
|
|
30
|
|
|
|
1,161
|
|
MarkWest Energy Partners, L.P.
|
|
|
64
|
|
|
|
3,639
|
|
MarkWest Hydrocarbon, Inc.(e)
|
|
|
14
|
|
|
|
584
|
|
Martin Midstream Partners L.P.
|
|
|
45
|
|
|
|
1,396
|
|
Natural Resources Partners L.P.
|
|
|
4
|
|
|
|
220
|
|
Natural Resources Partners L.P. Subordinated Units
|
|
|
8
|
|
|
|
439
|
|
ONEOK Partners, L.P.
|
|
|
84
|
|
|
|
5,101
|
|
Plains All American Pipeline, L.P.
|
|
|
51
|
|
|
|
2,596
|
|
Regency Energy Partners LP
|
|
|
17
|
|
|
|
469
|
|
TC PipeLines, LP
|
|
|
18
|
|
|
|
587
|
|
Teekay LNG Partners L.P.
|
|
|
47
|
|
|
|
1,490
|
|
TEPPCO Partners, L.P.
|
|
|
42
|
|
|
|
1,646
|
|
Universal Compression Partners, L.P.(d)
|
|
|
68
|
|
|
|
1,681
|
|
Valero L.P.
|
|
|
16
|
|
|
|
867
|
|
Williams Partners L.P.
|
|
|
60
|
|
|
|
2,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,983
|
|
|
|
|
|
|
|
|
|
|
Other Equity 0.4%
|
|
|
|
|
|
|
|
|
Trident Resources Corp. Warrants(g)
|
|
|
167
|
|
|
|
917
|
|
|
|
|
|
|
|
|
|
|
Total Equity Investments (Cost $57,585)
|
|
|
|
|
|
|
63,900
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-8
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS (CONTINUED)
AS OF NOVEMBER 30, 2006
(amounts in 000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
Maturity
|
|
|
Principal
|
|
|
|
|
Description:
|
|
Rate
|
|
Date
|
|
|
Amount
|
|
|
Value
|
|
|
Fixed Income Investments 17.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States 11.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midstream 6.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SemGroup, L.P.
|
|
8.750%
|
|
|
11/15/15
|
|
|
$
|
7,500
|
|
|
$
|
7,575
|
|
Targa Resources, Inc.
|
|
(h)
|
|
|
10/31/12
|
|
|
|
486
|
|
|
|
488
|
|
Targa Resources, Inc.
|
|
(i)
|
|
|
10/31/12
|
|
|
|
2,004
|
|
|
|
2,012
|
|
Targa Resources, Inc.
|
|
(j)
|
|
|
10/31/07
|
|
|
|
4,843
|
|
|
|
4,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upstream 4.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDX Funding, LLC
|
|
(k)
|
|
|
3/31/13
|
|
|
|
6,300
|
|
|
|
6,355
|
|
Coldren Resources, Inc.
|
|
(l)
|
|
|
7/14/11
|
|
|
|
416
|
|
|
|
419
|
|
Coldren Resources, Inc.
|
|
(m)
|
|
|
7/14/11
|
|
|
|
2,584
|
|
|
|
2,603
|
|
SandRidge Energy Inc.
|
|
(n)
|
|
|
11/20/07
|
|
|
|
2,500
|
|
|
|
2,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total United States (Cost $26,794)
|
|
|
|
|
|
|
|
|
|
|
|
|
26,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada 6.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upstream 6.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trident Exploration Corp.
|
|
(o)
|
|
|
4/26/11
|
|
|
|
5,500
|
|
|
|
5,638
|
|
Trident Resources Corp.
|
|
(p)
|
|
|
11/22/11
|
|
|
|
10,000
|
|
|
|
10,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Canada (Cost $14,401)
|
|
|
|
|
|
|
|
|
|
|
|
|
15,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Income Investments (Cost $41,195)
|
|
|
|
|
|
|
|
|
|
|
|
|
42,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Investments (Cost $98,780)
|
|
|
|
|
|
|
|
|
|
|
|
|
106,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term Investments 55.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Agreement 55.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bear, Stearns & Co. Inc. (Agreement dated 11/30/06 to
be repurchased at $135,154), collateralized by $139,055 in U.S.
Treasury Strips (Cost $135,134)
|
|
5.270
|
|
|
12/01/06
|
|
|
|
|
|
|
|
135,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments 99.9% (Cost $233,914)
|
|
|
|
|
|
|
|
|
|
|
|
|
241,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets in Excess of Total Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
$
|
241,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-9
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
SCHEDULE OF INVESTMENTS (CONCLUDED)
AS OF NOVEMBER 30, 2006
(amounts in 000s)
|
|
|
(a) |
|
Unless otherwise noted, security is treated as an eligible
portfolio security for purposes of BDC qualification. |
|
(b) |
|
Unless otherwise noted, equity investments are common
units/common shares. |
|
(c) |
|
Security is not treated as an eligible portfolio security for
purposes of BDC qualification. |
|
(d) |
|
As of November 30, 2006, security is currently non-income
producing but was expected to pay distributions within the next
12 months. |
|
(e) |
|
Security is not treated as a publicly traded partnership for
regulated investment company (RIC) qualification
purposes. To qualify as a RIC for tax purposes, the Company may
directly invest up to 25% of its total assets in equity and debt
securities of entities treated as publicly traded partnerships.
At November 30, 2006, the Company had 21.1% of its net
assets invested in securities treated as publicly traded
partnerships. It is the Companys intention to be treated
as a RIC for tax purposes. |
|
(f) |
|
Distributions are paid in-kind. |
|
(g) |
|
Warrants relate to our floating rate unsecured term loan
facility with Trident Resources Corp. These warrants are
non-income producing and expire on November 30, 2013. |
|
(h) |
|
Floating rate letter of credit facility. Security pays interest
at a rate of LIBOR + 225 basis points (7.62% as of
November 30, 2006). |
|
(i) |
|
Floating rate senior secured first lien term loan facility.
Security pays interest at a rate of LIBOR + 225 basis
points (7.62% as of November 30, 2006). |
|
(j) |
|
Floating rate senior secured first lien bridge loan facility.
Security pays interest at a rate of LIBOR + 225 basis
points (7.62% as of November 30, 2006). |
|
(k) |
|
Floating rate senior secured second lien term loan facility.
Security pays interest at a rate of LIBOR + 525 basis
points (10.62% as of November 30, 2006). |
|
(l) |
|
Floating rate letter of credit facility. Security pays interest
at a rate of LIBOR less 12.5 basis points (5.25% as of
November 30, 2006). |
|
(m) |
|
Floating rate senior secured first lien term loan. Security pays
interest at a rate of LIBOR + 400 basis points (9.39% as of
November 30, 2006). |
|
(n) |
|
Floating rate senior unsecured bridge loan facility. Security
pays interest at a rate of LIBOR + 450 basis points (11.00%
as of November 30, 2006). |
|
(o) |
|
Floating rate senior secured second lien term loan facility.
Security pays interest at a rate of LIBOR + 750 basis
points (12.88% as of November 30, 2006). |
|
(p) |
|
Floating rate unsecured term loan facility. Interest is
paid-in-kind
at a rate of LIBOR + 1200 basis points (17.37% as of
November 30, 2006). |
See accompanying notes to consolidated financial statements.
F-10
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Investments, at fair value:
|
|
|
|
|
|
|
|
|
Non-affiliated (Cost $305,604 and $98,780,
respectively)
|
|
$
|
321,328
|
|
|
$
|
106,545
|
|
Affiliated (Cost $4,509 and $0, respectively)
|
|
|
5,374
|
|
|
|
|
|
U.S. Treasury Bills, at fair value (Cost $14,251 and
$0, respectively)
|
|
|
14,250
|
|
|
|
|
|
Repurchase agreements (Cost $10,769 and $135,134,
respectively)
|
|
|
10,769
|
|
|
|
135,134
|
|
|
|
|
|
|
|
|
|
|
Total investments (Cost $335,133 and $233,914,
respectively)
|
|
|
351,721
|
|
|
|
241,679
|
|
Deposits with brokers
|
|
|
121
|
|
|
|
101
|
|
Receivable for securities sold
|
|
|
766
|
|
|
|
567
|
|
Interest, dividends and distributions receivable
|
|
|
1,515
|
|
|
|
931
|
|
Debt issuance costs, prepaid expenses and other assets
|
|
|
1,264
|
|
|
|
326
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
355,387
|
|
|
|
243,604
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Senior secured revolving credit facility
|
|
|
85,000
|
|
|
|
|
|
Treasury secured revolving credit facility
|
|
|
14,000
|
|
|
|
|
|
Payable for securities purchased
|
|
|
6,967
|
|
|
|
|
|
Investment management fee payable
|
|
|
1,355
|
|
|
|
571
|
|
Accrued directors fees and expenses
|
|
|
78
|
|
|
|
63
|
|
Deferred tax liability
|
|
|
1,991
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
863
|
|
|
|
1,056
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
110,254
|
|
|
|
1,690
|
|
|
|
|
|
|
|
|
|
|
NET ASSETS
|
|
$
|
245,133
|
|
|
$
|
241,914
|
|
|
|
|
|
|
|
|
|
|
NET ASSETS CONSIST OF
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value (200,000,000 shares
authorized at November 30, 2007 and November 30, 2006;
10,050,446 and 10,000,060 shares issued and outstanding at
November 30, 2007 and November 30, 2006, respectively)
|
|
$
|
10
|
|
|
$
|
10
|
|
Paid-in capital less distributions in excess of taxable income
|
|
|
231,535
|
|
|
|
233,216
|
|
Accumulated net investment income, net of income taxes, less
distributions not treated as tax return of capital
|
|
|
(409
|
)
|
|
|
864
|
|
Accumulated net realized gains less distributions not treated as
tax return of capital
|
|
|
(19
|
)
|
|
|
59
|
|
Net unrealized gains on investments, net of income taxes
|
|
|
14,016
|
|
|
|
7,765
|
|
|
|
|
|
|
|
|
|
|
NET ASSETS
|
|
$
|
245,133
|
|
|
$
|
241,914
|
|
|
|
|
|
|
|
|
|
|
NET ASSET VALUE PER SHARE
|
|
$
|
24.39
|
|
|
$
|
24.19
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-11
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
For the Year
|
|
|
September 21,
|
|
|
|
Ended
|
|
|
2006* Through
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
INVESTMENT INCOME
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
Dividends and distributions
|
|
$
|
9,185
|
|
|
$
|
709
|
|
Return of capital
|
|
|
(8,711
|
)
|
|
|
(705
|
)
|
|
|
|
|
|
|
|
|
|
Net dividends and distributions
|
|
|
474
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
11,022
|
|
|
|
2,043
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
11,496
|
|
|
|
2,047
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Base investment management fees
|
|
|
4,839
|
|
|
|
799
|
|
Incentive investment management fees
|
|
|
59
|
|
|
|
|
|
Professional fees
|
|
|
1,028
|
|
|
|
217
|
|
Directors fees
|
|
|
286
|
|
|
|
63
|
|
Administration fees
|
|
|
230
|
|
|
|
42
|
|
Insurance
|
|
|
155
|
|
|
|
30
|
|
Custodian fees
|
|
|
72
|
|
|
|
17
|
|
Other expenses
|
|
|
401
|
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
Total Expenses Before Base Investment Management Fee
Waivers and Interest Expense
|
|
|
7,070
|
|
|
|
1,411
|
|
Base investment management fee waivers
|
|
|
(1,088
|
)
|
|
|
(228
|
)
|
Interest expense
|
|
|
2,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
8,471
|
|
|
|
1,183
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income Before Income Taxes
|
|
|
3,025
|
|
|
|
864
|
|
Deferred income tax benefit
|
|
|
581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
|
3,606
|
|
|
|
864
|
|
|
|
|
|
|
|
|
|
|
REALIZED AND UNREALIZED GAINS
|
|
|
|
|
|
|
|
|
Net Realized Gains
|
|
|
|
|
|
|
|
|
Investments
|
|
|
5,523
|
|
|
|
59
|
|
Net Change in Unrealized Gains
|
|
|
|
|
|
|
|
|
Investments
|
|
|
8,823
|
|
|
|
7,765
|
|
Deferred income tax expense
|
|
|
(2,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Unrealized Gains
|
|
|
6,251
|
|
|
|
7,765
|
|
|
|
|
|
|
|
|
|
|
Net Realized and Unrealized Gains
|
|
|
11,774
|
|
|
|
7,824
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
|
|
$
|
15,380
|
|
|
$
|
8,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Commencement of operations |
See accompanying notes to consolidated financial statements.
F-12
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
Ended
|
|
|
|
For the Year
|
|
|
September 21,
|
|
|
|
Ended
|
|
|
2006* Through
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
OPERATIONS
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
3,606
|
|
|
$
|
864
|
|
Net realized gains
|
|
|
5,523
|
|
|
|
59
|
|
Net change in unrealized gains
|
|
|
6,251
|
|
|
|
7,765
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Net Assets Resulting from Operations
|
|
|
15,380
|
|
|
|
8,688
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS AND DISTRIBUTIONS(1)
|
|
|
|
|
|
|
|
|
Dividends from net investment income
|
|
|
(5,687
|
)
|
|
|
|
|
Dividends from net realized short-term capital gains
|
|
|
(3,791
|
)
|
|
|
|
|
Distributions from net realized long-term capital gains
|
|
|
(1,573
|
)
|
|
|
|
|
Distributions return of capital
|
|
|
(2,415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and Distributions
|
|
|
(13,466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL STOCK TRANSACTIONS
|
|
|
|
|
|
|
|
|
Proceeds from initial public offering of
10,000,000 shares of common stock
|
|
|
|
|
|
|
250,000
|
|
Issuance of 50,386 shares of common stock from reinvestment
of dividends
|
|
|
1,272
|
|
|
|
|
|
Underwriting discount and offering expenses
|
|
|
33
|
|
|
|
(16,775
|
)
|
|
|
|
|
|
|
|
|
|
Net Increase in Net Assets from Capital Stock Transactions
|
|
|
1,305
|
|
|
|
233,225
|
|
|
|
|
|
|
|
|
|
|
Total Increase in Net Assets
|
|
|
3,219
|
|
|
|
241,913
|
|
|
|
|
|
|
|
|
|
|
NET ASSETS
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
241,914
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
245,133
|
|
|
$
|
241,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Commencement of operations |
|
(1) |
|
The information presented in each of these items is a
characterization of a portion of the total dividends paid to
common stockholders for the fiscal year ended November 30,
2007 as either dividends (ordinary income) or distributions
(long-term capital gains or return of capital). This
characterization is based on the Companys earnings and
profits. |
See accompanying notes to consolidated financial statements.
F-13
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
September 21,
|
|
|
|
For the Year
|
|
|
2006*
|
|
|
|
Ended
|
|
|
Through
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
15,380
|
|
|
$
|
8,688
|
|
Adjustments to reconcile net increase in net assets resulting
from operations to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Purchase of long-term investments
|
|
|
(278,923
|
)
|
|
|
(102,578
|
)
|
Purchase of U.S. Treasury Bills, net
|
|
|
(14,043
|
)
|
|
|
|
|
Proceeds from sale of long-term investments
|
|
|
64,736
|
|
|
|
3,153
|
|
Sale (purchase) of short-term investments, net
|
|
|
124,365
|
|
|
|
(135,134
|
)
|
Realized gains on investments
|
|
|
(5,523
|
)
|
|
|
(59
|
)
|
Return of capital distributions
|
|
|
8,711
|
|
|
|
705
|
|
Unrealized gains on investments
|
|
|
(8,823
|
)
|
|
|
(7,765
|
)
|
Increase in deferred tax liability
|
|
|
1,991
|
|
|
|
|
|
Accretion of bond discount
|
|
|
(542
|
)
|
|
|
(1
|
)
|
Increase in deposits with brokers
|
|
|
(20
|
)
|
|
|
(101
|
)
|
Increase in receivable for securities sold
|
|
|
(199
|
)
|
|
|
(567
|
)
|
Increase in interest, dividend and distributions receivable
|
|
|
(584
|
)
|
|
|
(931
|
)
|
Decrease (increase) in prepaid expenses and other assets
|
|
|
426
|
|
|
|
(326
|
)
|
Increase in payable for securities purchased
|
|
|
6,967
|
|
|
|
|
|
Increase in investment management fee payable
|
|
|
784
|
|
|
|
571
|
|
Increase in accrued directors fees and expenses
|
|
|
15
|
|
|
|
63
|
|
Increase (decrease) in accrued expenses and other liabilities
|
|
|
(193
|
)
|
|
|
1,056
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Operating Activities
|
|
|
(85,475
|
)
|
|
|
(233,226
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of common stock
|
|
|
|
|
|
|
250,000
|
|
Borrowings from senior secured revolving credit facility, net
|
|
|
83,968
|
|
|
|
|
|
Borrowings from treasury secured revolving credit facility, net
|
|
|
13,668
|
|
|
|
|
|
Underwriting discount and offering expenses
|
|
|
33
|
|
|
|
(16,775
|
)
|
Cash distributions to shareholders
|
|
|
(12,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
|
85,475
|
|
|
|
233,225
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH
|
|
|
|
|
|
|
(1
|
)
|
CASH BEGINNING OF PERIOD
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
CASH END OF PERIOD
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Commencement of operations |
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
For the year ended November 30, 2007, non-cash financing
activities not included herein consist of reinvestment of
distributions of $1,272 pursuant to the Companys dividend
reinvestment plan.
|
|
|
|
During the year ended November 30, 2007, state taxes paid
were $1 and interest paid was $2,042. There were no federal and
state taxes paid or interest paid during the period ended
September 21, 2006 through November 30, 2006.
|
See accompanying notes to consolidated financial statements.
F-14
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
(amounts
in 000s, except share and per share amounts)
Kayne Anderson Energy Development Company (the
Company) was organized as a Maryland corporation on
May 24, 2006. The Company is an externally managed,
non-diversified closed-end management investment company that
has elected to be treated as a business development company
(BDC) under the Investment Company Act of 1940, as
amended (the 1940 Act). For fiscal year
November 30, 2007 and prior, the Company was treated as a
regulated investment company (RIC) under the
U.S. Internal Revenue Code of 1986, as amended (the
Code). The Company commenced investment operations
on September 21, 2006 and, prior to such date, had no
operations other than the sale and issuance of 60 shares of
common stock at an aggregate purchase price of $1.5 to KA
Fund Advisors, LLC (KAFA) on August 2,
2006. The Companys shares of common stock are listed on
the New York Stock Exchange, Inc. (NYSE) under the
symbol KED.
As disclosed in Note 10 Subsequent Events, on
January 22, 2008, the Company announced that it no longer
intends to be treated as a RIC under the Code. As a result of
this change, the Company will be taxed as a corporation for its
fiscal year ended November 30, 2008 and for future fiscal
years, paying federal and applicable state corporate taxes on
its taxable income and capital gains. The Company will continue
to be regulated as a BDC under the 1940 Act.
|
|
2.
|
SIGNIFICANT
ACCOUNTING POLICIES
|
A. Use of Estimates The preparation
of financial statements in conformity with accounting principles
generally accepted in the United States of America
(GAAP) requires management to make estimates and
assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenue and expenses during the period. Actual results could
differ materially from those estimates.
B. Consolidation Accounting
Policy The Companys consolidated
financial statements includes the accounts of our consolidated,
taxable wholly-owned subsidiaries for which we own certain
investments in private limited partnerships. We eliminate
intercompany accounts and transactions among the Company and
these consolidated subsidiaries, and we allocate certain
expenses to these taxable subsidiaries for which we incur
federal and state income taxes.
C. Calculation of Net Asset
Value The Company determines its net asset
value as of the close of regular session trading on the NYSE
(normally 4:00 p.m. Eastern time) no less frequently
than the last business day of each quarter. Net asset value is
computed by dividing the value of the Companys assets
(including accrued interest and dividends), less all of its
liabilities (including accrued expenses, dividends payable and
any borrowings) by the total number of common shares outstanding.
D. Investment Valuation Readily
marketable portfolio securities listed on any exchange other
than the NASDAQ Stock Market, Inc. (NASDAQ) are
valued, except as indicated below, at the last sale price on the
business day as of which such value is being determined. If
there has been no sale on such day, the securities are valued at
the mean of the most recent bid and asked prices on such day,
except for short sales and call option contracts written, for
which the last quoted asked price is used. Securities admitted
to trade on the NASDAQ are valued at the NASDAQ official closing
price. Portfolio securities traded on more than one securities
exchange are valued at the last sale price on the business day
as of which such value is being determined at the close of the
exchange representing the principal market for such securities.
Equity securities traded in the over-the-counter market, but
excluding securities admitted to trading on the NASDAQ, are
valued at the closing bid prices. Fixed income securities that
are considered corporate bonds are valued by using the mean of
the bid and ask prices provided by an independent pricing
service. For fixed income securities that are considered
corporate bank loans, the fair market value is determined by the
mean of the bid and
F-15
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(amounts
in 000s, except share and per share amounts)
ask prices provided by the syndicate bank or principal market
maker. When price quotes are not available, fair market value
will be based on prices of comparable securities.
The Companys portfolio includes securities that are
privately issued or illiquid. For these securities, as well as
any other portfolio security held by the Company for which
reliable market quotations are not readily available, valuations
will be determined in good faith by the board of directors under
a valuation policy and a consistently applied valuation process.
Unless otherwise determined by the board of directors of the
Company, the following valuation process, approved by the board
of directors, will be used for such securities:
|
|
|
|
|
Investment Team Valuation. The applicable
investments will initially be valued by the investment
advisers senior professionals responsible for the
portfolio investments.
|
|
|
|
Investment Team Valuation
Documentation. Preliminary valuation conclusions
will be documented and discussed with senior management of KAFA,
the Companys investment adviser. Such valuations will be
submitted to the Valuation Committee (a committee of the board
of directors) on a quarterly basis. These valuations will stand
for intervening periods of time unless a senior officer of KAFA
determines that material adjustments to such preliminary
valuations are appropriate to avoid valuations that are stale or
do not represent fair value.
|
|
|
|
Valuation Committee. The Valuation Committee
shall meet each quarter to consider new valuations presented by
KAFA, if any, which were made in accordance with the Valuation
Procedures in such quarter. The Valuation Committees
valuation determinations will be subject to ratification by the
board at its next regular meeting.
|
|
|
|
Valuation Firm. No less frequently than
quarterly, a third-party valuation firm engaged by the board of
directors will review the valuation methodologies and
calculations employed for these securities. The independent
valuation firm provides third-party valuation consulting
services to the board of directors which consisted of certain
limited procedures that the Company identified and requested
them to perform. For the quarter ended November 30, 2007,
the independent valuation firm provided limited procedures on
investments in nine portfolio companies comprising approximately
55.6% of the total investments at fair value as of
November 30, 2007. Upon completion of the limited
procedures, the independent valuation firm concluded that the
fair value of those investments subjected to the limited
procedures did not appear to be unreasonable.
|
|
|
|
Board of Directors Determination. The board of
directors will consider the valuations provided by KAFA and the
Valuation Committee and ratify valuations for the applicable
securities at each quarterly board meeting. The board of
directors will consider the reports provided by the third-party
valuation firm in reviewing and determining in good faith the
fair value of the applicable portfolio securities.
|
During the course of such valuation process, whenever possible,
privately-issued equity and debt investments are valued using
comparisons of financial ratios of the portfolio companies that
issued such equity and debt securities to any peer companies
that are public. The value is then discounted to reflect the
illiquid nature of the investment. The Company also utilizes
comparative information such as purchase transactions, public
offerings or subsequent equity sales to corroborate its
valuations. Due to the inherent uncertainty of determining the
fair value of investments that do not have a readily available
market value, the fair value of the Companys investments
in privately-issued securities may differ significantly from the
values that would have been used had a ready market existed for
such investments, and the differences could be material.
Factors that the Company may take into account in fair value
pricing its investments include, as relevant, the portfolio
companys ability to make payments and its earnings and
discounted cash flow, the markets in which the portfolio company
does business, comparison to publicly traded securities, the
nature and realizable value of any collateral and other relevant
factors.
F-16
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(amounts
in 000s, except share and per share amounts)
Unless otherwise determined by the board of directors,
securities that are convertible into or otherwise will become
publicly traded (e.g., through subsequent registration or
expiration of a restriction on trading) will be valued through
the process described above, using a valuation based on the
market value of the publicly traded security less a discount.
The discount will initially be equal in amount to the discount
negotiated at the time of purchase. To the extent that such
securities are convertible or otherwise become publicly traded
within a time frame that may be reasonably determined, the
investment adviser may determine an amortization schedule for
the discount in accordance with a methodology approved by the
Valuation Committee.
At November 30, 2007, the Company held 80.7% of its net
assets applicable to common stockholders (55.6% of total assets)
in securities that were fair valued pursuant to the procedures
adopted by the board of directors. The aggregate fair value of
these securities at November 30, 2007 was $197,733. At
November 30, 2006, the Company did not hold any securities
that were fair valued pursuant to the procedures adopted by the
board of directors.
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement on Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurements. This standard
establishes a single authoritative definition of fair value,
sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements
already required or permitted by existing standards.
SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. The changes to
current generally accepted accounting principles from the
application of this Statement relate to the definition of fair
value, the methods used to measure fair value, and the expanded
disclosures about fair value measurements. As of
December 1, 2007, the Company adopted
SFAS No. 157. The Company has performed an analysis of
all existing investments and derivative instruments to determine
the significance and character of all inputs to their fair value
determination. Based on this assessment, the adoption of this
standard did not have any material effect on the Companys
net asset value.
E. Repurchase Agreements The
Company has agreed to purchase securities from financial
institutions subject to the sellers agreement to
repurchase them at an
agreed-upon
time and price (repurchase agreements). The
financial institutions with whom the Company enters into
repurchase agreements are banks and broker/dealers which KAFA
considers creditworthy. The seller under a repurchase agreement
is required to maintain the value of the securities as
collateral, subject to the agreement, at not less than the
repurchase price plus accrued interest. KAFA monitors daily the
mark-to-market of the value of the collateral, and, if
necessary, requires the seller to maintain additional
securities, so that the value of the collateral is not less than
the repurchase price. Default by or bankruptcy of the seller
would, however, expose the Company to possible loss because of
adverse market action or delays in connection with the
disposition of the underlying securities.
F. Security Transactions Security
transactions are accounted for on the date the securities are
purchased or sold (trade date). Realized gains and losses are
reported on an identified cost basis. Dividend and distribution
income is recorded on the ex-dividend date.
G. Investment Income and Return of Capital
Estimates Distributions received from the
Companys investments in master limited partnerships
(MLP) generally are comprised of income and return
of capital. The Company records investment income and return of
capital based on estimates made at the time such distributions
are received. Such estimates are based on historical information
available from MLPs and other industry sources. These estimates
may subsequently be revised based on information received from
MLPs after their tax reporting periods are concluded. Interest
income is recognized on the accrual basis, including
amortization of premiums and accretion of discounts.
For the year ended November 30, 2007. The
Company estimated that 96% of the MLP distributions received
would be treated as a return of capital and recorded as return
of capital $8,711 of dividends and distributions received from
its investments. Included in this amount is a decrease of $27
attributable to distributions
F-17
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(amounts
in 000s, except share and per share amounts)
received in fiscal 2006 based on tax reporting information
received by the Company in fiscal 2007. This return of capital
resulted in an equivalent reduction in the cost basis of the
associated investments. Net Realized Gains and Net Change in
Unrealized Gains in the accompanying Statement of Operations
were increased by $516 and $8,195, respectively, attributable to
the recording of such dividends and distributions as reduction
in the cost basis of investments.
For the period ended September 21, 2006 (inception)
through November 30, 2006. The Company
estimated that 100% of the MLP distributions received would be
treated as a return of capital and recorded as return of capital
$705 of dividends and distributions received from its
investments. This return of capital, resulted in an equivalent
reduction in the cost basis of the associated investments. Net
Realized Gains and Net Change in Unrealized Gains in the
accompanying Statement of Operations were increased by $1 and
$704, respectively, attributable to the recording of such
dividends and distributions as reduction in the cost basis of
investments.
H. Dividends and Distributions to
Stockholders Dividends and distributions to
common stockholders are recorded on the ex-dividend date. The
character of dividends made during the year may differ from
their ultimate characterization for federal income tax purposes.
The Company is unable to make final determinations as to the
character of the dividend until after the end of the calendar
year. The Company informs its common stockholders in January
following the calendar year of the character of dividends deemed
paid during the fiscal year.
I. Income Taxes At
November 30, 2007, the Company qualified for the tax
treatment applicable to regulated investment companies under
Subchapter M of the Code. For the fiscal year ended
November 30, 2007, the Company was required to make the
requisite distributions to its stockholders, which will relieve
it from federal income or excise taxes for such period.
On January 22, 2008, the Company announced that it no
longer intends to be treated as a RIC under the Code. As a
result of this change, the Company will be taxed as a
corporation for its fiscal year ended November 30, 2008 and
for future fiscal years, paying federal and applicable state
corporate taxes on its taxable income and capital gains.
Our wholly-owned taxable subsidiaries record deferred income
taxes which reflect (i) taxes on unrealized gains/(losses),
which are attributable to the difference between fair market
values and tax basis, (ii) the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes and (iii) the net tax benefit
of accumulated net operating losses.
For the year ended November 30, 2007, the Company recorded
a deferred income tax benefit of $581 and deferred income tax
expense of $2,572 related to the investment activities of the
Companys taxable subsidiaries. For the period of
September 21, 2006 (inception) through November 30,
2006, the Company did not record deferred income taxes because
there were no taxable securities.
|
|
|
|
|
|
|
November 30,
|
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
(581
|
)
|
Deferred tax liabilities:
|
|
|
|
|
Net unrealized gains on investment securities
|
|
|
2,572
|
|
|
|
|
|
|
Total net deferred tax liability
|
|
$
|
1,991
|
|
|
|
|
|
|
Total income taxes have been computed by applying the federal
statutory income tax rate plus a blended state income tax rate
for each of the Companys taxable subsidiaries to the net
investment income and unrealized gains on investments before
taxes of the Companys taxable subsidiaries. Our effective
tax rate of 11.5% is less than
F-18
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(amounts
in 000s, except share and per share amounts)
the federal tax rate of 35%, since only the income from our
consolidated, wholly-owned subsidiaries is taxable. The combined
federal and state rates for each of the Companys taxable
subsidiaries range from 35% to 40.3%.
Income and capital gain distributions made by regulated
investment companies often differ from the aggregate GAAP basis
net investment income and net realized gains. For the Company,
the principal reason for these differences is the return of
capital treatment of dividends and distributions from MLPs, wash
sales and disallowed partnership losses from MLPs.
The tax basis of the components of distributable earnings can
differ from the amounts reflected in the Statement of Assets and
Liabilities due to temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At
November 30, 2007 and November 30, 2006, the
components of the distributable earnings on a tax basis for the
Company were as follows:
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Undistributed ordinary income
|
|
$
|
|
|
|
$
|
997
|
|
Undistributed long-term capital gains
|
|
|
|
|
|
|
|
|
Net unrealized gains on investments
|
|
|
16,408
|
|
|
|
7,765
|
|
|
|
|
|
|
|
|
|
|
Total distributable earnings
|
|
$
|
16,408
|
|
|
$
|
8,762
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended November 30, 2007, the tax
character of the total $13,466 of dividends and distributions
paid to common stockholders was $9,478 (ordinary income), $1,573
(capital gains) and $2,415 (return of capital). For the period
ended September 21, 2006 (inception) through
November 30, 2006, the Company did not pay any dividends or
distributions.
At November 30, 2007 and November 30, 2006, the
identified cost of investments for Federal income tax purposes
was $335,312 and $233,914, respectively. Gross unrealized
appreciation and depreciation of investments for Federal income
tax purposes were as follows:
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Gross unrealized appreciation of investments
|
|
$
|
21,716
|
|
|
$
|
7,919
|
|
Gross unrealized depreciation of investments
|
|
|
(5,308
|
)
|
|
|
(154
|
)
|
|
|
|
|
|
|
|
|
|
Net unrealized appreciation
|
|
$
|
16,408
|
|
|
$
|
7,765
|
|
|
|
|
|
|
|
|
|
|
In July 2006, the Financial Accounting Standards Board issued
FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48).
This standard defines the threshold for recognizing the benefits
of tax-return positions in the financial statements as
more likely than not to be sustained by the taxing
authority and requires measurement of a tax position meeting the
more likely than not criterion, based on the largest
benefit that is more than 50 percent likely to be realized.
At adoption, companies must adjust their financial statements to
reflect only those tax positions that are more likely than
not to be sustained as of the adoption date. The Company
adopted FIN 48 as of December 1, 2007, and the
adoption of the interpretation did not have a material effect on
the Companys net asset value.
J. Organizational and Offering
Costs The Company treats organizational
costs as an expense. Offering costs of approximately $845
incurred in connection with the sale of shares of common stock
were charged to paid-in capital when shares of the Company were
issued in September 2006. During year ended November 30,
2007, this amount was adjusted to $812 based on actual costs
incurred.
F-19
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(amounts
in 000s, except share and per share amounts)
K. Indemnifications Under the
Companys organizational documents, its officers and
directors are indemnified against certain liabilities arising
out of the performance of their duties to the Company. In
addition, in the normal course of business, the Company enters
into contracts that provide general indemnification to other
parties. The Companys maximum exposure under these
arrangements is unknown, as this would involve future claims
that may be made against the Company that have not yet occurred,
and may not occur. However, the Company has not had prior claims
or losses pursuant to these contracts and expects the risk of
loss to be remote.
|
|
3.
|
AGREEMENTS
AND AFFILIATIONS
|
A. Investment Management
Agreement The Company has entered into an
investment management agreement with KAFA under which the
Company has material future rights and commitments. Pursuant to
the investment management agreement, KAFA has agreed to serve as
investment adviser and provide significant managerial assistance
to portfolio companies to which the Company is required to
provide such assistance. Payments under the investment
management agreement include (1) a base management fee,
(2) an incentive fee, and (3) reimbursement of certain
expenses.
On July 10, 2007, the Company and KAFA entered into an
agreement wherein KAFA voluntarily agreed to waive the portion
of the management fee and any incentive fee under the investment
management agreement with respect to any investments made with
proceeds from borrowings under the Treasury Secured Revolving
Credit Facility (the Treasury Facility), which the
Company established on June 4, 2007. This agreement to
waive a portion of the management fee will terminate at the
earlier of the termination of the Treasury Facility or the
investment management agreement.
Base Management Fee. The Company pays an
amount equal on an annual basis to 1.75% of average total assets
to KAFA as compensation for services rendered. This amount is
payable each quarter after the end of the quarter. For purposes
of calculating the base management fee, the average total
assets for each quarterly period are determined by
averaging the total assets at the last day of that quarter with
the total assets at the last day of the prior quarter (or as of
the commencement of operations for the initial period if a
partial quarter). Total assets shall equal gross asset value
(which includes assets attributable to or proceeds from the use
of Leverage Instruments), minus the sum of accrued and unpaid
dividends and distributions on common stock and accrued and
unpaid dividends on preferred stock and accrued liabilities
(other than liabilities associated with leverage used by the
Company). Liabilities associated with leverage include the
principal amount of any borrowings, commercial paper or notes
that the Company may issue, the liquidation preference of
outstanding preferred stock, and other liabilities from other
forms of leverage such as short positions and put or call
options held or written by the Company.
During the first twelve months of the Companys investment
activities (from September 25, 2006 until
September 24, 2007), KAFA has contractually agreed to waive
or reimburse the Company for base management fees in an amount
equal on an annual basis to 0.50% of average total assets.
Incentive Fee. The incentive fee consists of
two parts. The first part of the incentive fee (the Net
Investment Income Fee), which is calculated and payable
quarterly in arrears, equals 20% of the excess, if any, of
Adjusted Net Investment Income for the quarter over a quarterly
hurdle rate equal to 1.875% (7.50% annualized) of average net
assets for the quarter. Average net assets is calculated by
averaging net assets at the last day of the quarter and at the
last day of such prior quarter or commencement of operations
(net assets is defined as total assets less total liabilities
(including liabilities associated with Leverage Instruments)
determined in accordance with GAAP).
For this purpose, Adjusted Net Investment Income
means interest income (including accrued interest that the
Company has not yet received in cash), dividend and distribution
income from equity investments (but excluding that portion of
cash distributions that are treated as a return of capital) and
any other income, including any other fees, such as commitment,
origination, syndication, structuring, diligence, monitoring and
consulting fees
F-20
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(amounts
in 000s, except share and per share amounts)
or other fees that the Company receives from portfolio companies
(other than fees for providing significant managerial assistance
to portfolio companies) accrued during the fiscal quarter, minus
operating expenses for the quarter (including the base
management fee, any interest expense, dividends paid on issued
and outstanding preferred stock, if any, and any accrued income
taxes related to net investment income, but excluding the
incentive fee). Adjusted Net Investment Income does not include
any realized capital gains, realized capital losses or
unrealized capital gains or losses. Accordingly, the Company
pays an incentive fee based partly on accrued interest, the
collection of which is uncertain or deferred. Adjusted Net
Investment Income includes, in the case of investments with a
deferred interest feature (such as original issue discount, debt
instruments with
payment-in-kind
interest and zero coupon securities), accrued income that the
Company has not yet received in cash. For example, accrued
interest, if any, on investments in zero coupon bonds (if any)
would be included in the calculation of the incentive fee, even
though the Company would not receive any cash interest payments
in respect of payment on the bond until its maturity date. Thus,
if the Company does not have sufficient liquid assets to pay
this incentive fee or dividends to stockholders, the Company may
be required to liquidate assets. The calculations are
appropriately pro rated for any period of less than one quarter.
The second part of the incentive fee (the Capital Gains
Fee) is determined and payable in arrears as of the end of
each fiscal year (or upon termination of the investment
management agreement, as of the termination date), and equals
(1) 20% of (a) net realized capital gains (aggregate
realized capital gains less aggregate realized capital losses)
on a cumulative basis from the closing date of this offering to
the end of such fiscal year, less (b) any unrealized
capital losses at the end of such fiscal year based on the
valuation of each investment on the applicable calculation date
compared to its adjusted cost basis (such difference,
Adjusted Realized Capital Gains), less (2) the
aggregate amount of all Capital Gains Fees paid to KAFA in prior
fiscal years. The calculation of the Capital Gains Fee includes
any capital gains that result from the cash distributions that
are treated as a return of capital. In that regard, any such
return of capital is treated as a decrease in the cost basis of
an investment for purposes of calculating the Capital Gains Fee.
Realized capital gains on an investment are calculated as the
excess of the net amount realized from the sale or other
disposition of such security over the adjusted cost basis for
the security. Realized capital losses on a security are
calculated as the amount by which the net amount realized from
the sale or other disposition of such security is less than the
adjusted cost basis of such security. Unrealized capital loss on
a security is calculated as the amount by which the adjusted
cost basis of such security exceeds the fair value of such
security at the end of a fiscal year.
For the year ended November 30, 2007, the Company paid
$3,751 in base management fees, net of $1,088 in fee waivers,
and $59 in incentive Capital Gains Fees. For the period
September 21, 2006 (inception) through November 30,
2006, the Company paid $571 in base management fees, net of $228
in fee waivers, and none in incentive fees.
The Company does not pay a management fee or any incentive fee
with respect to any investments made under the Treasury Facility.
B. Portfolio Companies From time to
time, the Company may control or may be an
affiliate of one or more portfolio companies, each
as defined in the 1940 Act. In general, under the 1940 Act, the
Company would control a portfolio company if the
Company owned 25% or more of its outstanding voting securities
and would be an affiliate of a portfolio company if
the Company owned 5% or more of its outstanding voting
securities. The 1940 Act contains prohibitions and restrictions
relating to transactions between investment companies and their
affiliates (including the Companys investment adviser),
principal underwriters and affiliates of those affiliates or
underwriters.
The Company believes that there is significant ambiguity in the
application of existing SEC staff interpretations of the term
voting security to complex structures such as
limited partnership interests of the kind in which the Company
invests. As a result, it is possible that the SEC staff may
consider that certain securities
F-21
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(amounts
in 000s, except share and per share amounts)
investments in limited partnerships are voting securities under
the staffs prevailing interpretations of this term. If
such determination is made, the Company may be regarded as a
person affiliated with and controlling the issuer(s) of those
securities for purposes of Section 17 of the 1940 Act.
In light of the ambiguity of the definition of voting
securities, the Company does not intend to treat any class of
securities that it holds as voting securities unless
the security holders of such class have the ability, under the
partnership agreement, to remove the general partner (assuming a
sufficient vote of such securities, other than securities held
by the general partner, in favor of such removal) or the Company
has an economic interest of sufficient size that otherwise gives
it the de facto power to exercise a controlling influence over
the partnership. The Company believes this treatment is
appropriate given that the general partner controls the
partnership, and without the ability to remove the general
partner or the power to otherwise exercise a controlling
influence over the partnership due to the size of an economic
interest, the security holders have no control over the
partnership.
The Company had the following portfolio investments at
November 30, 2007, among others, for which the Company
assessed its ability to control, or its status as an
affiliate of, such portfolio companies, as each term
is defined under the 1940 Act. As further described in the
following paragraphs, the Company believes that it does not
control and is not an affiliate of any
of the following portfolio companies.
Millennium Midstream Partners, LP At
November 30, 2007, the Company held approximately 39% of
the partnership interest of Millennium Midstream Partners, LP
(Millennium). One of the Companys Vice
Presidents serves as a director on the board of the general
partner for Millennium. The Company believes that it does not
control and is not an affiliate of
Millennium, each as defined in the 1940 Act. In this regard, the
Company believes that the securities of Millennium should not be
considered voting securities for purposes of the 1940 Act
because of the limited scope and character of the rights of such
securities. The Company also believes that neither the Company
nor its Vice President, acting alone as a director, has the
power to exercise a controlling influence over the management or
policies of this partnership or the general partner of
Millennium.
VantaCore Partners LP At November 30,
2007, assuming conversion of its convertible note, the Company
would hold approximately 23% of the partnership interest of
VantaCore Partners LP (VantaCore). One of the
Companys Vice Presidents serves as a director on the board
of the general partner for VantaCore. The Company believes that
it does not control and is not an
affiliate of VantaCore, each as defined in the 1940
Act. In this regard, the Company believes that the securities of
VantaCore should not be considered voting securities for
purposes of the 1940 Act because of the limited scope and
character of the rights of such securities. The Company also
believes that neither the Company nor its Vice President, acting
alone as a director, has the power to exercise a controlling
influence over the management or policies of this partnership or
the general partner of VantaCore.
Direct Fuels Partners, L.P. At
November 30, 2007, the Company held approximately 38% of
the partnership interest of Direct Fuels Partners, L.P.
(Direct Fuels). The Companys President and
Chief Executive Officer serves as a director on the board of the
general partner for Direct Fuels. The Company believes that it
does not control and is not an affiliate
of Direct Fuels, each as defined in the 1940 Act. In this
regard, the Company believes that the securities of Direct Fuels
should not be considered voting securities for purposes of the
1940 Act because of the limited scope and character of the
rights of such securities. The Company also believes that
neither the Company nor its President and Chief Executive
Officer, acting alone as a director, has the power to exercise a
controlling influence over the management or policies of this
partnership or the general partner of Direct Fuels.
International Resource Partners LP At
November 30, 2007, the Company held approximately 28% of
the partnership interest of International Resource Partners LP
(IRI). The Company currently does not have a member
of its management team serving as a director on the board of the
general partner for IRI. The Company believes that it does not
control and is not an affiliate of IRI,
each as defined in the 1940 Act. In this regard, the Company
believes that the securities of IRI should not be considered
voting securities for purposes of the 1940 Act because of the
limited scope and character of the rights of such securities.
The Company also believes that the Company does
F-22
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(amounts
in 000s, except share and per share amounts)
not have the power to exercise a controlling influence over the
management or policies of this partnership or the general
partner of IRI.
C. Other Affiliations For the year ended
November 30, 2007 and the period of September 21, 2006
(inception) through November 30, 2006, KA Associates, Inc.,
an affiliate of KAFA, earned approximately $1 and $2,
respectively, in brokerage commissions from portfolio
transactions executed on behalf of the Company.
Robert V. Sinnott is member of the Companys board of
directors and a senior executive of Kayne Anderson Capital
Advisors, L.P. (KACALP), the managing member of
KAFA. Mr. Sinnott also serves as a director on the board of
Plains All American GP LLC, the general partner of Plains All
American Pipeline, L.P. Members of senior management and various
advisory clients of KACALP and KAFA own units of Plains All
American GP LLC. Various advisory clients of KACALP and KAFA,
including the Company, own units in Plains All American
Pipeline, L.P. The Company believes that it may be an affiliate
of Plains All American, L.P. under federal securities laws.
|
|
4.
|
INVESTMENT
TRANSACTIONS
|
For the year ended November 30, 2007, the Company purchased
and sold securities in the amount of $318,423 and $90,193
(including $39,500 and $25,457 of U.S. Treasuries,
respectively, but excluding other short-term investments). For
the period September 21, 2006 (inception) through
November 30, 2006, the Company purchased and sold
securities in the amount of $102,578 and $3,153 (excluding
short-term investments), respectively.
From time to time, certain of the Companys investments may
be restricted as to resale. For instance, private investments
that are not registered under the Securities Act of 1933 and
cannot, as a result, be offered for public sale in a non-exempt
transaction without first being registered. In other cases,
certain of the Companys investments have restrictions such
as lock-up agreements that preclude the Company from offering
these securities for public sale.
F-23
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(amounts
in 000s, except share and per share amounts)
At November 30, 2007, the following restricted securities
for which reliable market quotes are not readily available are
valued in accordance with the procedures established by the
board of directors and more fully described in
Note 2 Significant Accounting Policies.
|
|
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|
|
|
|
|
|
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|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units,
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants, or
|
|
|
|
|
|
|
|
|
|
|
|
Value per
|
|
|
Percent
|
|
|
Percent
|
|
|
|
|
|
Type of
|
|
Principal ($)
|
|
|
Acquisition
|
|
|
|
|
|
Fair
|
|
|
Unit/
|
|
|
of Net
|
|
|
of Total
|
|
Investment
|
|
Security
|
|
Restriction
|
|
(in 000s)
|
|
|
Date
|
|
|
Cost Basis
|
|
|
Value
|
|
|
Warrant
|
|
|
Assets
|
|
|
Assets
|
|
|
Atlas Energy Resources, LLC
|
|
Common Units
|
|
(1)(2)(3)
|
|
|
91
|
|
|
|
6/29/2007
|
|
|
$
|
2,211
|
|
|
$
|
2,706
|
|
|
$
|
29.72
|
|
|
|
1.1
|
%
|
|
|
0.8
|
%
|
Atlas Energy Resources, LLC
|
|
Common Units
|
|
(1)(2)
|
|
|
40
|
|
|
|
6/29/2007
|
|
|
|
995
|
|
|
|
1,199
|
|
|
|
30.15
|
|
|
|
0.5
|
|
|
|
0.3
|
|
BreitBurn Energy Partners L.P.
|
|
Common Units
|
|
(2)
|
|
|
73
|
|
|
|
5/24/2007
|
|
|
|
2,271
|
|
|
|
2,102
|
|
|
|
28.89
|
|
|
|
0.9
|
|
|
|
0.6
|
|
Constellation Energy Partners LLC
|
|
Common Units
|
|
(1)(2)(4)
|
|
|
36
|
|
|
|
7/25/2007
|
|
|
|
1,236
|
|
|
|
1,217
|
|
|
|
33.40
|
|
|
|
0.5
|
|
|
|
0.3
|
|
Constellation Energy Partners LLC
|
|
Common Units
|
|
(1)(2)
|
|
|
29
|
|
|
|
7/25/2007
|
|
|
|
1,001
|
|
|
|
967
|
|
|
|
33.56
|
|
|
|
0.5
|
|
|
|
0.3
|
|
Copano Energy, L.L.C.
|
|
Common Units
|
|
(1)(2)
|
|
|
72
|
|
|
|
10/19/2007
|
|
|
|
2,500
|
|
|
|
2,590
|
|
|
|
35.91
|
|
|
|
1.1
|
|
|
|
0.7
|
|
Direct Fuels Partners, L.P.
|
|
Class B
Common Units
|
|
(5)
|
|
|
2,500
|
|
|
|
6/11/2007
|
|
|
|
44,109
|
|
|
|
46,675
|
|
|
|
18.67
|
|
|
|
19.0
|
|
|
|
13.1
|
|
Direct Fuels Partners, L.P.
|
|
Class A Warrants
|
|
(5)
|
|
|
2,500
|
|
|
|
6/11/2007
|
|
|
|
4,700
|
|
|
|
4,575
|
|
|
|
1.83
|
|
|
|
1.9
|
|
|
|
1.3
|
|
International Resource Partners LP
|
|
Class A
Common Units
|
|
(5)
|
|
|
1,500
|
|
|
|
6/12/2007
|
|
|
|
29,393
|
|
|
|
30,000
|
|
|
|
20.00
|
|
|
|
12.2
|
|
|
|
8.4
|
|
Millennium Midstream Partners, LP
|
|
Class B
Common Units
|
|
(5)
|
|
|
2,375
|
|
|
|
12/28/2006
|
|
|
|
40,635
|
|
|
|
44,223
|
|
|
|
18.62
|
|
|
|
18.0
|
|
|
|
12.4
|
|
Millennium Midstream Partners, LP
|
|
Class A Warrants
|
|
(5)
|
|
|
2,375
|
|
|
|
12/28/2006
|
|
|
|
3,919
|
|
|
|
3,278
|
|
|
|
1.38
|
|
|
|
1.3
|
|
|
|
0.9
|
|
ProPetro Services, Inc.
|
|
Warrants
|
|
(5)
|
|
|
2,905
|
|
|
|
2/15/2007
|
|
|
|
2,469
|
|
|
|
109
|
|
|
|
0.04
|
|
|
|
0.0
|
|
|
|
0.0
|
|
ProPetro Services, Inc.
|
|
Term Loan
|
|
(5)
|
|
$
|
35,000
|
|
|
|
2/15/2007
|
|
|
|
32,092
|
|
|
|
34,326
|
|
|
|
n/a
|
|
|
|
14.0
|
|
|
|
9.7
|
|
Quest Midstream Partners, L.P.
|
|
Common Units
|
|
(5)
|
|
|
350
|
|
|
|
10/16/2007
|
|
|
|
7,000
|
|
|
|
7,000
|
|
|
|
20.00
|
|
|
|
2.9
|
|
|
|
2.1
|
|
VantaCore Partners LP
|
|
Common Units
|
|
(1)(5)
|
|
|
91
|
|
|
|
5/22/2007
|
|
|
|
1,770
|
|
|
|
1,916
|
|
|
|
21.00
|
|
|
|
0.8
|
|
|
|
0.5
|
|
VantaCore Partners LP
|
|
Convertible Note
|
|
(5)
|
|
$
|
7,000
|
|
|
|
5/22/2007
|
|
|
|
7,030
|
|
|
|
7,350
|
|
|
|
n/a
|
|
|
|
3.0
|
|
|
|
2.1
|
|
VantaCore Partners LP
|
|
Term Loan
|
|
(5)
|
|
$
|
7,500
|
|
|
|
5/22/2007
|
|
|
|
7,500
|
|
|
|
7,500
|
|
|
|
n/a
|
|
|
|
3.0
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of securities valued by the board of directors
|
|
$
|
190,831
|
|
|
$
|
197,733
|
|
|
|
|
|
|
|
80.7
|
%
|
|
|
55.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At November 30, 2007, the following restricted securities
are valued using prices provided by a principal market maker,
syndicate bank or an independent pricing service and more fully
described in Note 2 Significant Accounting
Policies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units,
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants, or
|
|
|
|
|
|
|
|
|
|
|
|
Value per
|
|
|
Percent
|
|
|
Percent
|
|
|
|
|
|
Type of
|
|
Principal ($)
|
|
|
Acquisition
|
|
|
|
|
|
Fair
|
|
|
Unit/
|
|
|
of Net
|
|
|
of Total
|
|
Investment
|
|
Security
|
|
Restriction
|
|
(in 000s)
|
|
|
Date
|
|
|
Cost Basis
|
|
|
Value
|
|
|
Warrant
|
|
|
Assets
|
|
|
Assets
|
|
|
Beryl Oil and Gas LP
|
|
Term Loan
|
|
(5)(6)
|
|
$
|
2,933
|
|
|
|
(7
|
)
|
|
$
|
2,960
|
|
|
$
|
2,890
|
|
|
|
n/a
|
|
|
|
1.2
|
%
|
|
|
0.8
|
%
|
CDX Funding, LLC
|
|
Term Loan
|
|
(5)(6)
|
|
$
|
4,550
|
|
|
|
(7
|
)
|
|
|
4,645
|
|
|
|
4,345
|
|
|
|
n/a
|
|
|
|
1.8
|
|
|
|
1.2
|
|
Dresser, Inc.
|
|
Term Loan
|
|
(5)(6)
|
|
$
|
5,000
|
|
|
|
(7
|
)
|
|
|
4,775
|
|
|
|
4,800
|
|
|
|
n/a
|
|
|
|
2.0
|
|
|
|
1.4
|
|
Knight, Inc.
|
|
Preferred Stock
|
|
(5)
|
|
|
5
|
|
|
|
(7
|
)
|
|
|
5,031
|
|
|
|
4,965
|
|
|
|
n/a
|
|
|
|
2.0
|
|
|
|
1.4
|
|
SandRidge Energy Inc.
|
|
Bridge Loan
|
|
(5)(6)
|
|
$
|
5,700
|
|
|
|
(7
|
)
|
|
|
5,699
|
|
|
|
5,700
|
|
|
|
n/a
|
|
|
|
2.3
|
|
|
|
1.6
|
|
Seitel, Inc.
|
|
Corporate Bond
|
|
(5)
|
|
$
|
2,000
|
|
|
|
(7
|
)
|
|
|
1,972
|
|
|
|
1,730
|
|
|
|
n/a
|
|
|
|
0.7
|
|
|
|
0.5
|
|
SemGroup, L.P.
|
|
Corporate Bond
|
|
(5)
|
|
$
|
9,000
|
|
|
|
(7
|
)
|
|
|
8,935
|
|
|
|
8,595
|
|
|
|
n/a
|
|
|
|
3.5
|
|
|
|
2.4
|
|
Stallion Oilfield Services Ltd.
|
|
Term Loan
|
|
(5)(6)
|
|
$
|
5,000
|
|
|
|
(7
|
)
|
|
|
4,906
|
|
|
|
4,925
|
|
|
|
n/a
|
|
|
|
2.0
|
|
|
|
1.4
|
|
Targa Resources, Inc.
|
|
Corporate Bond
|
|
(5)
|
|
$
|
4,580
|
|
|
|
(7
|
)
|
|
|
4,604
|
|
|
|
4,488
|
|
|
|
n/a
|
|
|
|
1.8
|
|
|
|
1.3
|
|
Targa Resources, Inc.
|
|
Letter of Credit
|
|
(5)(6)
|
|
$
|
1,664
|
|
|
|
(7
|
)
|
|
|
1,660
|
|
|
|
1,637
|
|
|
|
n/a
|
|
|
|
0.7
|
|
|
|
0.5
|
|
Targa Resources, Inc.
|
|
Term Loan
|
|
(5)(6)
|
|
$
|
2,983
|
|
|
|
(7
|
)
|
|
|
3,001
|
|
|
|
2,934
|
|
|
|
n/a
|
|
|
|
1.2
|
|
|
|
0.8
|
|
Trident Resources Corp.
|
|
Warrants
|
|
(5)(6)
|
|
|
100
|
|
|
|
(7
|
)
|
|
|
411
|
|
|
|
75
|
|
|
$
|
0.75
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of securities valued by prices provided by market maker or
independent pricing service
|
|
$
|
48,599
|
|
|
$
|
47,084
|
|
|
|
|
|
|
|
19.2
|
%
|
|
|
13.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of all restricted securities
|
|
$
|
239,430
|
|
|
$
|
244,817
|
|
|
|
|
|
|
|
99.9
|
%
|
|
|
68.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Security subject to
lock-up
agreement. |
|
(2) |
|
Security of a publicly-traded company that is unregistered. |
|
(3) |
|
These exchange listed Common Units were converted from
Class D units on November 14, 2007. |
|
(4) |
|
These exchange listed Common Units were converted from
Class F units on November 12, 2007. |
|
(5) |
|
Unregistered security of a private company. |
F-24
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(amounts
in 000s, except share and per share amounts)
|
|
|
(6) |
|
Corporate bank loan or equity warrant with a fair market value
determined by the mean of the bid and ask prices provided by a
syndicate bank or principal market maker. These securities have
limited trading volume due to no listing on a national exchange.
The syndicate bank or principal market maker is the active
exchange for such security. |
|
(7) |
|
Acquired at various times throughout the current fiscal year
and/or prior
fiscal year in terms of shares, warrants and principal. |
As of November 30, 2006, the Company did not have any
investments that were restricted from resale.
|
|
6.
|
SENIOR
SECURED AND TREASURY SECURED REVOLVING CREDIT
FACILITIES
|
On June 4, 2007, the Company established two credit
facilities, each with a three-year term totaling $200,000. The
first facility, the Senior Secured Revolving Credit Facility
(the Investment Facility) has initial availability
of $100,000 with the ability to increase availability to
$250,000. Interest on the Investment Facility will be charged at
LIBOR plus 125 basis points or the prime rate plus
25 basis points. The second facility, the Treasury Secured
Revolving Credit Facility (the Treasury Facility)
permits the Company to borrow up to $100,000 and invest the
proceeds in U.S. government securities. Interest on the
Treasury Facility will be charged at LIBOR plus 20 basis
points or the prime rate.
Investment Facility The obligations under the
Investment Facility are collateralized by substantially all of
the Companys assets (excluding investments in
U.S. government securities), and are guaranteed by the
Companys existing and future subsidiaries, other than
special purpose subsidiaries. The Investment Facility contains
affirmative and reporting covenants and certain financial ratio
and restrictive covenants, including: (a) maintaining a
ratio, on a consolidated basis, of total assets (excluding
collateral under the Treasury Facility) less liabilities (other
than indebtedness) to aggregate indebtedness (excluding
indebtedness under the Treasury Facility and non-recourse
indebtedness of special purpose subsidiaries) of the Company and
its subsidiaries, of not less than 2.50:1.0,
(b) maintaining the value of the portion of the
Companys portfolio that can be converted into cash within
specified time periods and valuations at no less than 10% of the
principal amount outstanding under the Investment Facility (less
fully cash collateralized letters of credit) during any period
when adjusted outstanding principal amounts exceed a specified
threshold percentage of the Companys adjusted borrowing
base, (c) maintaining consolidated net assets at each
fiscal quarter end of not less than the greater of: 40% of the
consolidated total assets of the Company and its subsidiaries,
and $100,000 plus 25% of the net proceeds from any sales of
equity securities by the Company and its subsidiaries subsequent
to the closing of the Investment Facility, (d) limitations
on additional indebtedness, (e) limitations on liens,
(f) limitations on mergers and other fundamental changes,
(g) limitations on dividends and other specified restricted
payments, (h) limitations on disposition of assets,
(i) limitations on transactions with affiliates,
(j) limitations on agreements that prohibit liens on
properties of the Company and its subsidiaries,
(k) limitations on sale and leaseback transactions,
(l) limitations on specified hedging transactions,
(m) limitations on changes in accounting treatment and
reporting practices, (n) limitations on specified
amendments to the Companys investment management agreement
during the continuance of a default, (o) limitations on the
aggregate amount of unfunded commitments, and
(p) limitations on establishing deposit, securities or
similar accounts not subject to control agreements in favor of
the lenders. The Investment Facility also contains customary
representations and warranties and events of default.
As of November 30, 2007, the Company had $85,000 of
borrowings under its Investment Facility at a weighted average
interest rate of 5.99%.
Treasury Facility The obligations under the
Treasury Facility are collateralized by U.S. government
securities held in certain accounts and are guaranteed by the
Companys existing and future subsidiaries, other than
special purpose subsidiaries. The Treasury Facility contains
affirmative and reporting covenants and certain financial ratio
and restrictive covenants, including: (a) maintaining a
ratio, on a consolidated basis, of total assets (excluding cash
collateral) less liabilities (other than indebtedness) to
aggregate indebtedness (excluding indebtedness under the
Treasury Facility and non-recourse indebtedness of special
purpose subsidiaries) of the Company and its subsidiaries, of
not less than 2.50:1.0, (b) maintaining the value of the
portion of the Companys portfolio that can be converted
into cash within specified time
F-25
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(amounts
in 000s, except share and per share amounts)
periods and valuations at no less than 10% of the principal
amount outstanding under the Treasury Facility during any period
when adjusted outstanding principal amounts exceed a specified
threshold percentage of the Companys adjusted borrowing
base, (c) maintaining consolidated net assets at each
fiscal quarter end of not less than the greater of: 40% of the
consolidated total assets of the Company and its subsidiaries,
and $100,000 plus 25% of the net proceeds from any sales of
equity securities by the Company and its subsidiaries subsequent
to the closing of the Treasury Facility, (d) maintaining a
ratio, on a consolidated basis, of cash collateral to the
aggregate principal amounts outstanding under the Treasury
Facility, of not less than 1.01:1.0, (e) limitations on
additional indebtedness, (f) limitations on liens,
(g) limitations on mergers and other fundamental changes,
(h) limitations on dividends and other specified restricted
payments, (i) limitations on disposition of assets,
(j) limitations on transactions with affiliates,
(k) limitations on agreements that prohibit liens on
properties of the Company and its subsidiaries,
(l) limitations on sale and leaseback transactions,
(m) limitations on specified hedging transactions,
(n) limitations on changes in accounting treatment and
reporting practices, (o) limitations on specified
amendments to the Companys investment management agreement
during the continuance of a default, and (p) limitations on
the aggregate amount of unfunded commitments. The Treasury
Facility also contains customary representations and warranties
and events of default.
As of November 30, 2007, the Company had $14,000 of
borrowings under its Treasury Facility at an interest rate of
7.50%. On January 31, 2008, we terminated our Treasury
Facility. All amounts of principal and interest were paid in
full, and we sold $14,358 of U.S. Treasury Bills, which
were held as collateral for our amount outstanding under the
Treasury Facility.
At November 30, 2007, the Company was in compliance with
all financial and operational covenants required by the
Investment and Treasury Facilities.
F-26
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED)
(amounts
in 000s, except share and per share amounts)
The following is a schedule of financial highlights for the year
ended November 30, 2007 and the period September 21,
2006 (inception) to November 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Per Share of Common Stock
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
24.19
|
|
|
$
|
23.32
|
|
|
|
|
|
|
|
|
|
|
Income from Operations(1)
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.36
|
|
|
|
0.09
|
|
Net realized and unrealized gain on investments
|
|
|
1.18
|
|
|
|
0.78
|
|
|
|
|
|
|
|
|
|
|
Total income from investment operations
|
|
|
1.54
|
|
|
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and Distributions(2)
|
|
|
|
|
|
|
|
|
Dividends from net investment income
|
|
|
(0.57
|
)
|
|
|
|
|
Dividends from net realized short-term capital gains
|
|
|
(0.38
|
)
|
|
|
|
|
Distributions from net realized long-term capital gains
|
|
|
(0.15
|
)
|
|
|
|
|
Distributions return of capital
|
|
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Dividends and Distributions
|
|
|
(1.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
24.39
|
|
|
$
|
24.19
|
|
|
|
|
|
|
|
|
|
|
Market value per share, end of period
|
|
$
|
23.14
|
|
|
$
|
22.32
|
|
|
|
|
|
|
|
|
|
|
Total investment return based on market value(3)
|
|
|
9.3
|
%
|
|
|
(10.7
|
)%
|
|
|
|
|
|
|
|
|
|
Supplemental Data and Ratios(4)
|
|
|
|
|
|
|
|
|
Net assets, end of period
|
|
$
|
245,133
|
|
|
$
|
241,914
|
|
Ratio of expenses to average net assets, including investment
management fee waivers and deferred income taxes
|
|
|
4.2
|
%
|
|
|
2.6
|
%
|
Ratio of expenses to average net assets, excluding investment
management fee waivers and deferred income taxes
|
|
|
3.8
|
%
|
|
|
3.1
|
%
|
Ratio of expenses to average net assets, excluding investment
management fee waivers, deferred income taxes and interest
expense
|
|
|
2.8
|
%
|
|
|
3.1
|
%
|
Ratio of net investment income to average net assets
|
|
|
1.5
|
%
|
|
|
1.9
|
%
|
Net increase in net assets resulting from operations to average
net assets
|
|
|
6.2
|
%(5)
|
|
|
3.7
|
%(5)
|
Portfolio turnover rate
|
|
|
28.8
|
%(6)
|
|
|
5.6
|
%(6)
|
Average amount of borrowings outstanding under the Credit
Facilities
|
|
$
|
32,584
|
|
|
|
|
|
Average amount of borrowings outstanding per share of common
stock during the period
|
|
$
|
3.25
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on average shares of common stock of 10,014,496 for the
year ended November 30, 2007 and 10,000,060 for the period
of September 21, 2006 through November 30, 2006. |
|
(2) |
|
The information presented in each of these items is a
characterization of a portion of the total dividends paid to
common stockholders for the fiscal year ended November 30,
2007 as either dividends (ordinary income) or distributions
(long-term capital gains or return of capital). This
characterization is based on the Companys earnings and
profits. |
|
(3) |
|
Not annualized for the period September 21, 2006 through
November 30, 2006. Total investment return is calculated
assuming a purchase of common stock at the market price on the
first day and a sale at the current market price on the last day
of the period reported. The calculation also assumes
reinvestment of dividends, if any, at actual prices pursuant to
the Companys dividend reinvestment plan. |
|
(4) |
|
Unless otherwise noted, ratios are annualized. |
|
(5) |
|
Not annualized. |
|
(6) |
|
Not annualized for the period September 21, 2006 through
November 30, 2006. For the fiscal year ended
November 30, 2007 and for the period September 21,
2006 through November 30, 2006, calculated based on the
sales of long-term investments of $64,736 and $3,153,
respectively, divided by the quarterly average long-term
investment balance of $224,548 and $56,730, respectively. |
F-27
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
NOTES TO
CONSOLIDATE FINANCIAL STATEMENTS (CONCLUDED)
(amounts
in 000s, except share and per share amounts)
The Company has 200,000,000 shares of common stock
authorized. Transactions in common shares for the year ended
November 30, 2007 were as follows:
|
|
|
|
|
Shares outstanding at November 30, 2006
|
|
|
10,000,060
|
|
Shares issued through reinvestment of dividends and distributions
|
|
|
50,386
|
|
|
|
|
|
|
Shares outstanding at November 30, 2007
|
|
|
10,050,446
|
|
|
|
|
|
|
|
|
9.
|
UNAUDITED
INTERIM FINANCIAL DATA
|
Set forth below is unaudited interim consolidated financial
information for the periods covered by these consolidated
financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
Quarter Ended
|
|
|
|
February 28,
|
|
|
May 31,
|
|
|
August 31,
|
|
|
November 30,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
Net dividends and distributions
|
|
$
|
88
|
|
|
$
|
189
|
|
|
$
|
249
|
|
|
$
|
(52
|
)
|
Interest income
|
|
|
2,702
|
|
|
|
2,816
|
|
|
|
2,574
|
|
|
|
2,930
|
|
Total investment income
|
|
|
2,790
|
|
|
|
3,005
|
|
|
|
2,823
|
|
|
|
2,878
|
|
Net investment income (loss)
|
|
|
1,423
|
|
|
|
1,568
|
|
|
|
1,004
|
|
|
|
(389
|
)
|
Net realized gains
|
|
|
901
|
|
|
|
2,243
|
|
|
|
400
|
|
|
|
1,979
|
|
Net change in unrealized gains (losses)
|
|
|
8,076
|
|
|
|
4,486
|
|
|
|
(6,146
|
)
|
|
|
(165
|
)
|
Net increase (descrease) in net assets
resulting from operations
|
|
|
10,400
|
|
|
|
8,297
|
|
|
|
(4,742
|
)
|
|
|
1,425
|
|
Total income (loss) from operations, per share
|
|
$
|
1.04
|
|
|
$
|
0.83
|
|
|
$
|
(0.47
|
)
|
|
$
|
0.14
|
|
On January 17, 2008, the Company paid a dividend to its
common stockholders in the amount of $0.41 per share, for a
total of $4,121. Of this total, pursuant to the Companys
dividend reinvestment plan, $594 was used to purchase shares of
common stock in the open market to satisfy the reinvestment plan.
On January 22, 2008, the Company announced that it no
longer intends to be treated as a RIC under the Code. As a
result of this change, the Company will be taxed as a
corporation for its fiscal year ended November 30, 2008 and
for future fiscal years, paying federal and applicable state
corporate taxes on its taxable income and capital gains. As a
result of this change in tax status, at a 37% tax rate, the
Companys net asset value impact would have been
approximately $0.36 per share, or 1.5%, as of November 30,
2007. The Company will continue to be regulated as a BDC under
the 1940 Act.
On January 31, 2008, we terminated our Treasury Facility.
All amounts of principal and interest were paid in full, and we
sold $14,358 of U.S. Treasury Bills, which were held as
collateral for our amount outstanding under the Treasury
Facility.
F-28
KAYNE
ANDERSON ENERGY DEVELOPMENT COMPANY
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
KAYNE ANDERSON ENERGY DEVELOPMENT COMPANY
|
|
|
|
By:
|
/s/ Kevin
S. McCarthy
|
Kevin S. McCarthy
Chairman of the Board of Directors,
President and Chief Executive Officer
Date: February 13, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Kevin
S. McCarthy
Kevin
S. McCarthy
|
|
Chairman of the Board of Directors, President and Chief
Executive Officer (Principal Executive Officer)
|
|
February 13, 2008
|
|
|
|
|
|
/s/ Terry
A. Hart
Terry
A. Hart
|
|
Chief Financial Officer and Treasurer (Principal Financial and
Accounting Officer)
|
|
February 13, 2008
|
|
|
|
|
|
/s/ William
R. Cordes
William R. Cordes
|
|
Director
|
|
February 13, 2008
|
|
|
|
|
|
/s/ Barry
R. Pearl
Barry
R. Pearl
|
|
Director
|
|
February 13, 2008
|
|
|
|
|
|
/s/ Albert
L. Richey
Albert L. Richey
|
|
Director
|
|
February 13, 2008
|
|
|
|
|
|
/s/ Robert
V. Sinnott
Robert V. Sinnott
|
|
Director
|
|
February 13, 2008
|
|
|
|
|
|
/s/ William
L. Thacker
William L. Thacker
|
|
Director
|
|
February 13, 2008
|
|
|
|
Directors and Corporate Officers
|
|
|
Kevin S. McCarthy
|
|
Chairman of the Board of Directors, President and
Chief Executive Officer
|
William R. Cordes
|
|
Director
|
Barry R. Pearl
|
|
Director
|
Albert L. Richey
|
|
Director
|
Robert V. Sinnott
|
|
Director
|
William L. Thacker
|
|
Director
|
Terry A. Hart
|
|
Chief Financial Officer and Treasurer
|
David J. Shladovsky
|
|
Chief Compliance Officer and Secretary
|
J.C. Frey
|
|
Vice President, Assistant Secretary and Assistant Treasurer
|
James C. Baker
|
|
Vice President
|
Ron M. Logan, Jr.
|
|
Vice President
|
|
|
|
Investment Adviser
|
|
Administrator
|
KA Fund Advisors, LLC
717 Texas Avenue, Suite 3100
Houston, TX 77002
|
|
Bear Stearns Funds Management Inc.
383 Madison Avenue
New York, NY 10179
|
|
|
|
1800 Avenue of the Stars, Second Floor
Los Angeles, CA 90067
|
|
Stock Transfer Agent and Registrar
American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
|
|
|
|
Custodian
|
|
Independent Registered Public Accounting Firm
|
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540
|
|
PricewaterhouseCoopers LLP
350 South Grand Avenue
Los Angeles, CA 90071
|
|
|
|
|
|
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
55 Second Street, 24th Floor
San Francisco, CA 94105
|
For stockholder inquiries, registered stockholders should call
(800) 937-5449.
For general inquiries, please call
(888) 533-1232/KED-1BDC;
or visit us on the web at
http://www.kaynefunds.com.