Attached files
file | filename |
---|---|
EX-32.2 - Full Circle Capital Corp | v210532_ex32-2.htm |
EX-31.2 - Full Circle Capital Corp | v210532_ex31-2.htm |
EX-31.1 - Full Circle Capital Corp | v210532_ex31-1.htm |
EX-32.1 - Full Circle Capital Corp | v210532_ex32-1.htm |
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR
THE QUARTERLY PERIOD ENDED December 31, 2010
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
COMMISSION
FILE NUMBER: 814-00809
FULL
CIRCLE CAPITAL CORPORATION
(Exact
name of registrant as specified in its charter)
MARYLAND
|
27-2411476
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
800
Westchester Ave., Suite S-620
Rye
Brook, NY 10573
(Address
of principal executive office)
(914) 220-6300
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x
No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨
No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
|
¨
|
Accelerated filer
|
¨
|
Non-accelerated
filer
|
x (do not
check if a smaller reporting company)
|
Smaller reporting company
|
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨
No x
The
number of shares of the issuer’s Common Stock, $0.01 par value, outstanding as
of February 9, 2011 was 6,219,382.
FULL
CIRCLE CAPITAL CORPORATION
TABLE
OF CONTENTS
PART
I. FINANCIAL INFORMATION
|
4
|
|
Item 1.
|
Financial
Statements (Unaudited)
|
4
|
Consolidated
Statements of Assets and Liabilities as of December 31, 2010
and June 30, 2010
|
4
|
|
Consolidated
Statements of Operations for the three and six months ended December 31,
2010
|
5
|
|
Consolidated
Statement of Changes in Net Assets for the six months ended December 31,
2010
|
6
|
|
Consolidated
Statement of Cash Flows for the six months ended December 31,
2010
|
7
|
|
Consolidated
Schedule of Investments as of December 31, 2010
|
8
|
|
Notes
to Consolidated Financial Statements as of December 31,
2010
|
11
|
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
23
|
Forward-Looking
Statements
|
23
|
|
Overview
|
23
|
|
Critical
Accounting Policies
|
24
|
|
Current
Market Conditions and Market Opportunity
|
26
|
|
Portfolio
Composition and Investment Activity
|
27
|
|
Results
of Operations
|
29
|
|
Liquidity
and Capital Resources
|
30
|
|
Recent
Developments
|
33
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
33
|
Item 4.
|
Controls
and Procedures
|
33
|
PART II.
OTHER INFORMATION
|
34
|
|
Item 1.
|
Legal
Proceedings
|
34
|
Item 1A.
|
Risk
Factors
|
34
|
2
Item 2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
47
|
Item 3.
|
Defaults
Upon Senior Securities
|
48
|
Item 4.
|
Reserved
|
48
|
Item 5.
|
Other
Information
|
48
|
Item 6.
|
Exhibits
|
48
|
|
||
SIGNATURES
|
49
|
3
PART
I—FINANCIAL INFORMATION
Item
1.
|
Financial
Statements (Unaudited)
|
FULL
CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF ASSETS AND LIABILITIES
December
31,
|
June
30,
|
||||||||
2010
(Unaudited)
|
2010
(Audited)
|
||||||||
Assets
|
|||||||||
Affiliated
Investments at Fair Value (Cost of $6,842,129 and $ -)
|
(NOTE
2, 10)
|
$
|
6,681,139
|
$
|
-
|
||||
Investments
at Fair Value (Cost of $85,572,752 and $ -)
|
(NOTE
2, 10)
|
85,403,606
|
-
|
||||||
Cash
|
1,047,805
|
1,455
|
|||||||
Deposit
with Broker
|
4,000,000
|
-
|
|||||||
Interest
Receivable
|
(NOTE
2)
|
822,975
|
-
|
||||||
Due
from Affiliate
|
(NOTE
5)
|
182,915
|
-
|
||||||
Prepaid
Expenses
|
112,066
|
-
|
|||||||
Other
Current Assets
|
175,869
|
-
|
|||||||
Deferred
Offering Expenses
|
-
|
425,463
|
|||||||
Total
Assets
|
98,426,375
|
426,918
|
|||||||
Liabilities
|
|||||||||
Current
Liabilities
|
|||||||||
Due
to Affiliate
|
(NOTE
5)
|
635,000
|
|||||||
Accounts
Payable
|
2,637
|
-
|
|||||||
Accrued
Liabilities
|
96,885
|
-
|
|||||||
Due
to Broker
|
26,997,300
|
-
|
|||||||
Dividends
Payable
|
1,393,091
|
-
|
|||||||
Interest
Payable
|
65,953
|
-
|
|||||||
Other
Current Liabilities
|
372,742
|
-
|
|||||||
Accrued
Offering Expenses
|
150,430
|
425,463
|
|||||||
Accrued
Organizational Expenses
|
26,037
|
12,500
|
|||||||
Total
Current Liabilities
|
29,740,075
|
437,963
|
|||||||
Long
Term Liabilities
|
|||||||||
Line
of Credit
|
(NOTE
8)
|
7,568,501
|
-
|
||||||
Distribution
Notes
|
(NOTE
8)
|
3,404,583
|
-
|
||||||
|
|||||||||
Total
Long Term Liabilities
|
10,973,084
|
-
|
|||||||
Total
Liabilities
|
40,713,159
|
437,963
|
|||||||
Net
Assets
|
$
|
57,713,216
|
$
|
(11,045
|
)
|
||||
Components
of Net Assets
|
|||||||||
Common
Stock, par value $0.01 per share
|
|||||||||
(100,000,000
authorized; 6,191,515 and 100 issued
|
|||||||||
and
outstanding, respectively)
|
$
|
61,915
|
$
|
1
|
|||||
Paid-in
capital in excess of par
|
57,963,082
|
1,499
|
|||||||
Overdistributed
Net Investment Income
|
(74,283
|
)
|
-
|
||||||
Accumulated
Net Realized Gains (Losses)
|
92,637
|
-
|
|||||||
Accumulated
Net Unrealized Gains (Losses)
|
(330,135
|
)
|
-
|
||||||
Deficit
accumulated during development stage
|
-
|
(12,545
|
)
|
||||||
Net
Assets
|
$
|
57,713,216
|
$
|
(11,045
|
)
|
||||
Net
Asset Value Per Share
|
$
|
9.32
|
$
|
(110.45
|
)
|
See notes
to consolidated financial statements.
4
FULL
CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
Three
months ended
|
Six
months ended
|
||||||||
December
31, 2010
|
December
31, 2010
|
||||||||
Investment
Income
|
|||||||||
Interest
Income
|
$ |
2,091,480
|
$ |
2,802,910
|
|||||
Interest
Income from affiliate
|
240,260
|
331,034
|
|||||||
Dividend
Income from affiliate
|
153,333
|
210,833
|
|||||||
Other
Income
|
(NOTE
2)
|
193,124 |
201,002
|
||||||
Total
Investment Income
|
2,678,197 |
3,545,779
|
|||||||
Operating
Expenses
|
|||||||||
Management
Fee
|
(NOTE
5)
|
304,429 |
411,413
|
||||||
Incentive
Fee
|
(NOTE
5)
|
374,776 |
487,462
|
||||||
Total
Advisory Fees
|
679,205 |
898,875
|
|||||||
Allocation
of Overhead Expenses
|
(NOTE
5)
|
90,270 |
120,360
|
||||||
Interest
Expense
|
(NOTE
8)
|
216,988 |
330,519
|
||||||
Directors’
Fees
|
26,125 |
55,232
|
|||||||
Administration
Fees
|
(NOTE
5)
|
78,114 |
104,152
|
||||||
Officers’
Compensation
|
(NOTE
5)
|
33,424 |
43,111
|
|
|||||
Professional
Services Expense
|
82,331 |
120,125
|
|||||||
Bank
Fees
|
11,880 |
16,890
|
|||||||
Other
|
76,817 |
117,316
|
|||||||
Organizational
Expenses
|
(NOTE
2)
|
34,996 |
178,979
|
||||||
Total
Gross Operating Expenses
|
1,330,150 |
1,985,559
|
|||||||
Management
Fee Waiver and Expense Reimbursement
|
(147,078
|
) |
(241,688
|
) | |||||
Total
Net Operating Expenses
|
1,183,072 |
1,743,871
|
|||||||
Net
Investment Income (Loss)
|
1,495,125 |
1,801,908
|
|||||||
Change
in Unrealized Gain (Loss)
|
(224,281
|
) |
(330,135
|
) | |||||
Realized
Gain (Loss)
|
86,574 |
92,637
|
|||||||
Net
Increase (Decrease) in Net Assets Resulting from
Operations
|
$ |
1,357,418
|
$ |
1,564,410
|
|||||
Earnings
(loss) per common share
|
(NOTE
4)
|
$ | 0.22 | $ |
0.38
|
||||
Weighted
average shares of common stock outstanding
|
6,191,515 |
4,138,926
|
See notes
to consolidated financial statements.
5
FULL
CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN NET ASSETS (Unaudited)
Six
months ended
|
||||
December
31, 2010
|
||||
Increase
(Decrease) in Net Assets from Operations:
|
||||
Net
Investment Income (Loss)
|
$ | 1,801,908 | ||
Change
in Unrealized Gain (Loss)
|
(330,135 | ) | ||
Realized
Gain (Loss)
|
92,637 | |||
Net
Increase (Decrease) in Net Assets Resulting from
Operations
|
1,564,410 | |||
Dividends
to Shareholders
|
(1,863,646 | ) | ||
Capital
Share Transactions:
|
||||
Issuance
of Common Stock
|
59,075,564 | |||
Less
Offering Costs
|
(1,052,0670 | ) | ||
Net
Increase (Decrease) in Net Assets Resulting from Capital Share
Transactions
|
58,023,497 | |||
Total
Increase (Decrease) in Net Assets
|
57,724,261 | |||
Net
Assets at Beginning of Period
|
(11,045 | ) | ||
Net
Assets at End of Period
|
$ | 57,713,216 | ||
Capital
Share Activity:
|
||||
Shares
issued
|
6,191,415 | |||
Shares
Outstanding at Beginning of Period
|
100 | |||
Shares
Outstanding at End of Period
|
6,191,515 |
See notes
to consolidated financial statements.
6
FULL
CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CASH FLOWS (Unaudited)
Six
months ended
|
|||||
December
31, 2010
|
|||||
Cash
Flows from Operations:
|
|||||
Net
Increase (Decrease) in Net Assets Resulting from Operating
Activities
|
$
|
1,564,410
|
|||
Adjustments
to reconcile Net Increase (Decrease) in Net Assets Resulting
from
|
|||||
Operations
to Net Cash Provided by Operating Activities
|
|||||
Purchases
of Investments
|
(56,158,504
|
)
|
|||
Proceeds
from Sale or Refinancing of Investments
|
36,467,272
|
||||
Realized (Gain) Loss
|
(92,637
|
)
|
|||
Change
in Unrealized (Gain) Loss
|
330,135
|
||||
Amortization
of Discount
|
(350,717
|
)
|
|||
Change
in Operating Assets and Liabilities
|
|||||
Deposit
with Broker
|
(4,000,000
|
)
|
|||
Interest
Receivable
|
(151,713
|
)
|
|||
Dividends
Purchased
|
143,750
|
||||
Due
from Affiliate
|
(182,915
|
)
|
|||
Prepaid
Expenses
|
(112,066
|
)
|
|||
Other
Current Assets
|
(93,225
|
)
|
|||
Due
to Affiliate
|
635,000
|
||||
Accounts
Payable
|
2,637
|
||||
Accrued
Liabilities
|
96,885
|
||||
Due
to Broker
|
26,997,300
|
||||
Interest
Payable
|
65,953
|
||||
Other
Current Liabilities
|
87,084
|
||||
Accrued
Organizational Expenses
|
(45,247
|
)
|
|||
Net Cash Provided by Operating Activities
|
5,203,402
|
||||
Cash
Flows from Financing Activities:
|
|||||
Borrowings
Under Credit Facility
|
17,903,642
|
||||
Payments
Under Credit Facility
|
(37,811,373
|
)
|
|||
Accrued
Offering Expenses
|
(428,766
|
)
|
|||
Dividends
Paid to Shareholders
|
(470,555
|
)
|
|||
Net
Proceeds From Shares Issued
|
16,650,000
|
||||
Net
Cash used in Financing Activities
|
(4,157,052
|
)
|
|||
Total
Increase in Cash
|
1,046,350
|
||||
Cash
Balance at Beginning of Period
|
1,455
|
||||
Cash Balance at End of Period
|
$
|
1,047,805
|
|||
Supplemental
Disclosure of Non-Cash Financing Activity:
|
|||||
Deferred
Offering Expenses
|
$
|
-
|
|||
Assets
Purchased for Shares
|
(NOTE
6)
|
$
|
73,306,379
|
||
Debt
Issued to Purchase Shares
|
(NOTE
6)
|
$
|
(30,880,815
|
)
|
|
Dividends
Declared, not yet Paid
|
$
|
1,393,091
|
|||
Supplemental
Disclosure of Cash Flow Information:
|
|||||
Cash
Paid During the Period for Interest
|
$
|
264,566
|
See notes
to consolidated financial statements.
7
FULL
CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
SCHEDULE OF INVESTMENTS (Unaudited)
December
31, 2010
Description
1,2
|
Industry
|
Par
Amount/
Quantity
|
Cost
|
Fair
Value
|
%
of Net
Asset
Value
|
||||||||||||
Attention
Transit Advertising Systems, LLC
|
Outdoor
|
||||||||||||||||
Senior
Secured Loan, 13.50%, 11/1/2012
|
Advertising
Services
|
$ | 2,279,402 | $ | 2,213,895 | $ | 2,180,248 | 3.78 | % | ||||||||
Blackstrap
Broadcasting, LLC
|
Radio
|
||||||||||||||||
Senior
Secured Loan, 5.00%, 9/25/2011
|
Broadcasting
|
$ | 3,000,000 | 2,723,645 | 2,790,000 | 4.84 | % | ||||||||||
Subordinated
Secured Loan, 16.00%, 9/25/2012
|
$ | 3,500,000 | 3,473,039 | 3,500,000 | 6.06 | % | |||||||||||
Totals
|
6,196,684 | 6,290,000 | 10.90 | % | |||||||||||||
Bloomingdale
Partners, LP
|
Consumer
|
||||||||||||||||
Senior
Secured Loan, 9.10%, 11/1/2012
|
Financing
|
$ | 1,342,096 | 1,290,145 | 1,282,373 | 2.22 | % | ||||||||||
BLSCO
Newco, Inc.
|
Oilfield
Services
|
||||||||||||||||
Senior
Secured Loan, 11.50%, 8/31/2011
|
$ | 2,418,926 | 2,418,926 | 2,418,926 | 4.19 | % | |||||||||||
Equisearch
Acquisition, Inc.
|
Asset
Recovery
|
||||||||||||||||
Senior
Secured Loan, 12.00%, 1/31/11
|
Services
|
$ | 2,410,633 | 2,410,633 | 2,410,633 | 4.18 | % | ||||||||||
Warrants
for 5.997 shares (at a $0.01 strike price), expire
01/15/14
|
5.997 | 146,345 | 41,982 | 0.07 | % | ||||||||||||
Warrants
for 6.321 shares (at a $19,372 strike price), expire
01/15/14
|
6.321 | 78,655 | 24,874 | 0.04 | % | ||||||||||||
Totals
|
2,635,633 | 2,477,489 | 4.29 | % | |||||||||||||
Exist,
Inc.
|
Apparel
|
||||||||||||||||
Senior
Secured Loan, 11.50%, 12/31/2011
|
$ | 5,513,996 | 5,513,996 | 5,513,996 | 9.95 | % | |||||||||||
Georgia
Outdoor Advertising, LLC
|
Outdoor
|
||||||||||||||||
Senior
Secured Loan, 14.50%, 7/1/2012
|
Advertising
Services
|
$ | 357,350 | 344,919 | 352,204 | 0.61 | % | ||||||||||
Icon
Groupe, LLC
|
Outdoor
|
||||||||||||||||
Senior
Secured Loan, 10.50%, 7/1/2012
|
Advertising
Services
|
$ | 3,874,415 | 3,686,311 | 3,669,072 | 6.36 | % | ||||||||||
Subordinated
Secured Loan*, 14.50%, 7/1/2012
|
$ | 832,527 | 771,199 | 798,809 | 1.38 | % | |||||||||||
Totals
|
4,457,510 | 4,467,881 | 7.74 | % | |||||||||||||
Iron
City Brewing, LLC
|
Beverages
|
||||||||||||||||
Senior
Secured Loan, 16.50%, 8/31/2011 3
|
$ | 1,700,000 | 1,700,000 | 1,700,000 | 2.95 | % | |||||||||||
Warrants
for 148 Membership Units (at a $0.01 strike price) 4,
expire 08/10/13
|
148 | - | - | 0.00 | % | ||||||||||||
Totals
|
1,700,000 | 1,700,000 | 2.95 | % |
See notes
to consolidated financial statements.
8
FULL
CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
SCHEDULE OF INVESTMENTS (Unaudited) (Continued)
December
31, 2010
Description
1,2
|
Industry
|
Par
Amount/
Quantity
|
Cost
|
Fair
Value
|
%
of Net
Asset
Value
|
||||||||||||
MDU
Communications (USA) Inc
|
CableTV
|
||||||||||||||||
Senior
Secured Loan - Tranche A, 11.85%, 6/30/2011
|
Broadband
Services
|
$ | 5,000,000 | $ | 5,000,000 | $ | 5,000,000 | 8.67 | % | ||||||||
Senior
Secured Loan - Tranche C, 9.75%, 6/30/2011
|
$ | 250,000 | 250,000 | 250,000 | 0.43 | % | |||||||||||
Senior
Secured Loan - Tranche D, 8.75%, 6/30/2011
|
$ | 1,480,000 | 1,480,000 | 1,480,000 | 2.56 | % | |||||||||||
Warrants
for 37,500 shares (at a $6.00 strike price), expire
6/30/13
|
37,500 | 298 | 1,250 | 0.00 | % | ||||||||||||
Warrants
for 30,476 shares (at a $8.20 strike price), expire
9/11/11
|
30,476 | - | - | 0.00 | % | ||||||||||||
Totals
|
6,730,298 | 6,731,250 | 11.66 | % | |||||||||||||
Miken
Sales, Inc.
|
Apparel
|
||||||||||||||||
Senior
Secured Loan, 11.50%, 10/31/2011
|
$ | 1,430,096 | 1,430,096 | 1,430,096 | 2.48 | % | |||||||||||
The
Selling Source, LLC
|
Information
and
|
||||||||||||||||
Senior
Secured Loan, 12.00%, 12/21/2012
|
Data
Services
|
$ | 6,366,597 | 6,366,597 | 6,366,597 | 11.03 | % | ||||||||||
VaultLogix,
LLC
|
Information
|
||||||||||||||||
Senior
Secured Loan, 12.00%, 9/4/2011
|
Retrieval
Services
|
$ | 5,000,000 | 4,838,161 | 4,952,500 | 8.58 | % | ||||||||||
Warrants
for 1.518% Ownership, (at a $307.855 strike price), expire
9/4/2013
|
3,439 | 56,147 | 65,442 | 0.12 | % | ||||||||||||
Totals
|
4,894,308 | 5,017,942 | 8.70 | % | |||||||||||||
Verifier
Capital LLC/Verifier Capital Limited 5
|
Security
Systems
|
||||||||||||||||
Senior
Secured Loan, 12.00%, 6/25/2011
|
Services
|
$ | 1,500,000 | 1,500,000 | 1,460,400 | 2.53 | % | ||||||||||
West
World Media, LLC 6,7
|
Information
and
|
||||||||||||||||
Senior
Secured Loan*, 15.00%, 12/31/2011
|
Data
Services
|
$ | 6,731,278 | 6,411,629 | 6,421,639 | 11.13 | % | ||||||||||
Limited
Liability Company Interests
|
84,623 | 430,500 | 259,500 | 0.45 | % | ||||||||||||
Totals
|
6,842,129 | 6,681,139 | 11.58 | % | |||||||||||||
Ygnition
Networks, Inc.
|
CableTV
|
||||||||||||||||
Senior
Secured Loan - Tranche A, 12.25%, 7/6/2011
|
Broadband
Services
|
$ | 3,750,000 | 3,722,277 | 3,684,000 | 6.39 | % | ||||||||||
Senior
Secured Loan - Tranche B, 11.75%, 7/6/2011
|
$ | 2,500,000 | 2,474,576 | 2,437,500 | 4.22 | % | |||||||||||
Senior
Secured Loan - Tranche C, 11.75%, 7/6/2011
|
$ | 2,500,000 | 2,474,576 | 2,437,500 | 4.22 | % | |||||||||||
Senior
Secured Loan - Tranche D, 11.25%, 7/6/2011
|
$ | 2,229,609 | 2,211,016 | 2,158,930 | 3.74 | % | |||||||||||
Totals
|
10,882,445 | 10,717,930 | 18.57 | % | |||||||||||||
United
States Treasury
|
|||||||||||||||||
United
States Treasury Bill** - 0.08%, 2/17/2011
|
$ | 27,000,000 | 26,997,300 | 26,996,274 | 46.78 | % | |||||||||||
Total
Investments
|
$ |
92,414,881
|
$ | 92,084,745 | 159.56 | % |
See notes
to consolidated financial statements.
9
FULL
CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
SCHEDULE OF INVESTMENTS (Unaudited) (Continued)
December
31, 2010
The
following table shows the fair value of our portfolio of investments by
industry, as of December 31, 2010, excluding United States Treasury Bills of
approximately $27 million.
December
31, 2010
|
||||||||
Investment
at
|
||||||||
Fair
Value
(dollars
in millions)
|
Percentage
of
Net
Assets
|
|||||||
Cable
TV/Broadband Services
|
$
|
17.5
|
30.3
|
%
|
||||
Information
and Data Services
|
13.0
|
22.6
|
||||||
Outdoor
Advertising Services
|
7.0
|
12.1
|
||||||
Apparel
|
6.9
|
12.0
|
||||||
Radio
Broadcasting
|
6.3
|
10.9
|
||||||
Information
Retrieval Services
|
5.0
|
8.7
|
||||||
Asset
Recovery Services
|
2.5
|
4.3
|
||||||
Oilfield
Services
|
2.4
|
4.2
|
||||||
Beverages
|
1.7
|
3.0
|
||||||
Security
System Services
|
1.5
|
2.5
|
||||||
Consumer
Financing
|
1.3
|
2.2
|
||||||
Total
|
$
|
65.1
|
112.8
|
%
|
1 Our
investments are acquired in private transactions exempt from registration under
the Securities Act of 1933, therefore are generally subject to certain
limitations on resale, and may be deemed to be “restricted securities” under the
Securities Act of 1933.
2 A
majority of the variable rate debt investments bear interest at a rate that may
be determined by reference to LIBOR or the U.S. prime rate, and which is reset
daily, quarterly or semi-annually. For each debt investment we have provided the
current interest rate in effect as of December 31, 2010.
3 $200,000
of this investment currently earns an additional 2.00% in annual
interest.
4 A
portion of Full Circle Capital Corporation’s warrants in Iron City Brewing, LLC
is held through its wholly-owned subsidiary Full Circle ICB, Inc. The
remainder of the warrants are held directly by Full Circle Capital
Corporation.
5 Joint
borrowers under the loan facility, one entity is domiciled in the UK while the
other is domiciled in the United States.
6 A
portion of Full Circle Capital Corporation’s investments in West World Media,
LLC is held through its wholly-owned subsidiary Full Circle West,
Inc. The remainder of the LLC interests are held directly by Full
Circle Capital Corporation.
7 Denotes
an Affiliate Investment. “Affiliate Investments” are investments in those
companies that are “Affiliated Companies” of Full Circle Capital Corporation, as
defined in the Investment Company Act of 1940, which are not “Control
Investments.” Full Circle Capital Corporation is deemed to be an
“Affiliate” of a company in which it has invested if it owns 5% or more but less
than 25% of the voting securities of such company.
*
|
Investment
contains a partial PIK feature.
|
**
|
Interest
rate shown reflects yield to maturity at time of
purchase.
|
See notes
to consolidated financial statements.
10
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
December
31, 2010
Note
1. Organization
References
herein to “we”, “us” or “our” refer to Full Circle Capital Corporation and
Subsidiaries (“Full Circle Capital” or “Company”) unless the context
specifically requires otherwise.
We were
formed as Full Circle Capital Corporation, a Maryland corporation. We were
organized on April 16, 2010 and were funded in an initial public offering, or
IPO, completed on August 31, 2010. We are a non-diversified,
closed-end investment company that has filed an election to be treated as a
business development company, or BDC, under the Investment Company Act of 1940
(the “1940 Act”). As a BDC, we expect to qualify and elect to be
treated as a regulated investment company, or RIC, under Subchapter M of the
Internal Revenue Code. We invest primarily in senior secured term
debt issued by smaller and lower middle-market companies. Our
investment objective is to generate both current income and capital appreciation
through debt and equity investments.
Note
2. Significant Accounting Policies
Use
of Estimates and Basis of Presentation
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires our
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of income and expenses during the reporting period. Changes in the
economic environment, financial markets, creditworthiness of our portfolio
companies and any other parameters used in determining these estimates could
cause actual results to differ.
These
financial statements have been prepared in accordance with GAAP, applicable to
interim financial information and the requirements for reporting on Form 10-Q
and Article 10 of Regulation S-X under the Securities Exchange Act of 1934, as
amended. The financial results of our portfolio investments are not
consolidated in the financial statements.
In the
opinion of management, all adjustments, consisting solely of normal recurring
accruals, considered necessary for the fair presentation of the financial
statements for the period; are included herein. The current period’s
results of operations will not necessarily be indicative of results that we may
ultimately achieve for the fiscal year ending June 30, 2011.
Investment
Classification
We are a
non-diversified company within the meaning of the 1940 Act. We classify our
investments by level of control. As defined in the 1940 Act, control investments
are those where there is the ability or power to exercise a controlling
influence over the management or policies of a company. Control is generally
deemed to exist when a company or individual possesses or has the right to
acquire within 60 days or less, a beneficial ownership of 25% or more of the
voting securities of an investee company. Affiliated investments and affiliated
companies are defined by a lesser degree of influence and are deemed to exist
through the possession outright or via the right to acquire within 60 days or
less, beneficial ownership of 5% or more of the outstanding voting securities of
another company or person.
Investments
are recognized when we assume an obligation to acquire a financial instrument
and assume the risks for gains or losses related to that instrument. Investments
are derecognized when we assume an obligation to sell a financial instrument and
forego the risks for gains or losses related to that instrument. Specifically,
we record all security transactions on a trade date basis. Investments in other,
non-security financial instruments, such as a limited partnership or private
company, are recorded on the basis of subscription date or redemption date, as
applicable. Amounts for investments recognized or derecognized but not yet
settled are reported as receivables for investments sold and payables for
investments purchased, respectively, in the Consolidated Statements of Assets
and Liabilities.
Basis
of Consolidation
Under the
1940 Act rules, the regulations pursuant to Article 6 of Regulation S-X and the
American Institute of Certified Public Accountants’ Audit and Accounting Guide
for Investment Companies, we are precluded from consolidating any entity other
than another investment company or an operating company which provides
substantially all of its services and benefits to us. Our financial statements
include our accounts and the accounts of Full Circle West, Inc. and Full Circle
ICB, Inc., our only wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
11
FULL
CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
December
31, 2010
Valuation of
Investments
In
accordance with GAAP, fair value is defined as the price that would be received
to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an
orderly transaction between market participants at the measurement
date.
In
determining fair value, Full Circle Capital’s Board of Directors (the “Board”)
uses various valuation approaches. In accordance with GAAP, a fair value
hierarchy for inputs is used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by requiring that
the most observable inputs be used when available.
Observable
inputs are those that market participants would use in pricing the asset or
liability based on market data obtained from sources independent of the Board.
Unobservable inputs reflect the Board’s assumptions about the inputs market
participants would use in pricing the asset or liability developed based on the
best information available in the circumstances. The fair value hierarchy is
categorized into three levels based on the inputs as follows:
Level
1 — Valuations based on unadjusted quoted prices in active markets for
identical assets or liabilities that the Company has the ability to access.
Valuation adjustments and block discounts are not applied to Level 1 securities.
Since valuations are based on quoted prices that are readily and regularly
available in an active market, valuation of these securities does not entail a
significant degree of judgment.
Level
2 — Valuations based on quoted prices in markets that are not active
or for which all significant inputs are observable, either directly or
indirectly.
Level
3 — Valuations based on inputs that are unobservable and significant
to the overall fair value measurement.
The
availability of valuation techniques and observable inputs can vary from
security to security and is affected by a wide variety of factors including, the
type of security, whether the security is new and not yet established in the
marketplace, and other characteristics particular to the transaction. To the
extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more
judgment. Those estimated values do not necessarily represent the amounts that
may be ultimately realized due to the occurrence of future circumstances that
cannot be reasonably determined. Because of the inherent uncertainty of
valuation, those estimated values may be materially higher or lower than the
values that would have been used had a ready market for the securities existed.
Accordingly, the degree of judgment exercised by the Board in determining fair
value is greatest for securities categorized in Level 3. In certain cases, the
inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, for disclosure purposes, the level in the fair
value hierarchy within which the fair value measurement in its entirety falls,
is determined based on the lowest level input that is significant to the fair
value measurement.
Fair
value is a market-based measure considered from the perspective of a market
participant rather than an entity-specific measure. Therefore, even when market
assumptions are not readily available, the Company’s own assumptions are set to
reflect those that market participants would use in pricing the asset or
liability at the measurement date. The Company uses prices and inputs that are
current as of the measurement date, including periods of market dislocation. In
periods of market dislocation, the observability of prices and inputs may be
reduced for many securities. This condition could cause a security to be
reclassified to a lower level within the fair value hierarchy.
Valuation
Techniques
Senior
and Subordinated Secured Loans
Our
portfolio consists primarily of private debt instruments (“Level 3 debt”). The
Company considers its Level 3 debt to be performing if the borrower is not in
default, the borrower is remitting payments in a timely manner, the loan is in
covenant compliance or is otherwise not deemed to be impaired. In determining
the fair value of the performing Level 3 debt, the Board considers fluctuations
in current interest rates, the trends in yields of debt instruments with similar
credit ratings, financial condition of the borrower, economic conditions and
other relevant factors, both qualitative and quantitative. In the event that a
Level 3 debt instrument is not performing, as defined above, the Board will
evaluate the value of the collateral utilizing the same framework described
above for a performing loan to determine the value of the Level 3 debt
instrument.
This
evaluation will be updated no less than quarterly for Level 3 debt instruments,
and more frequently for time periods where there are significant changes in the
investor base or significant changes in the perceived value of the underlying
collateral. The collateral value will be analyzed on an ongoing basis using
internal metrics, appraisals, third party valuation agents and other data as may
be acquired and analyzed by management and the Board.
12
FULL
CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
December
31, 2010
Investment
in Private Company
The Board
determines the fair value of its investments in private companies by
incorporating valuations that consider the evaluation of financing and sale
transactions with third parties, expected cash flows and market-based
information, including comparable transactions, and performance multiples, among
other factors, including third party valuation agents. This nonpublic investment
is included in Level 3 of the fair value hierarchy.
Warrants
The Board
will ascribe value to warrants based on fair value analyses that can include
discounted cash flow analyses, option pricing models, comparable analyses and
other techniques as deemed appropriate.
Revenue
Recognition
Realized
gains or losses on the sale of investments are calculated using the specific
identification method.
Interest
income, adjusted for amortization of premium and accretion of discount, is
recorded on an accrual basis. Origination, closing and/or commitment fees
associated with senior and subordinated secured loans are accreted into interest
income over the respective terms of the applicable loans. Upon the prepayment of
a senior or subordinated secured loan, any prepayment penalties and unamortized
loan origination, closing and commitment fees are recorded as interest
income.
Dividend
income is recorded on the ex-dividend date.
Structuring
fees, excess deal deposits, prepayment fees and similar fees are recognized as
Other Income as earned, usually when paid. Other fee income, including annual
fees and monitoring fees are included in Other Income. Income from
such sources was $193,124 and $201,002 for the three and six months ended
December 31, 2010, respectively. Fee income consists principally of
administrative fees, prepayment fees and unused line fees.
Federal and State Income
Taxes
We expect to elect to be treated as a
regulated investment company and intend to continue to comply with the
requirements of the Internal Revenue Code of 1986 (the “Code”), applicable to
regulated investment companies. We will be required to distribute at
least 90% of our investment
company taxable income and intend to distribute (or retain through a deemed
distribution) all of our investment company taxable income and net capital gain
to stockholders; therefore, we have made no provision for income taxes. The
character of income and gains that we will distribute is determined in
accordance with income tax regulations that may differ from GAAP. Book and tax
basis differences relating to stockholder dividends and distributions and other
permanent book and tax differences are reclassified to paid-in
capital.
If we do
not distribute (or are not deemed to have distributed) at least 98% of our
annual taxable income in the year earned, we will generally be required to pay
an excise tax equal to 4% of the amount by which 98% of our annual taxable
income exceeds the distributions from such taxable income for the year. To the
extent that we determine that our estimated current year annual taxable income
will be in excess of estimated current year dividend distributions from such
taxable income, we accrue excise taxes, if any, on estimated excess taxable
income as taxable income is earned using an annual effective excise tax rate.
The annual effective excise tax rate is determined by dividing the estimated
annual excise tax by the estimated annual taxable income.
Dividends
and Distributions
Dividends
and distributions to common stockholders are recorded on the ex-dividend date.
The amount, if any, to be paid as a dividend is approved by our Board each
quarter and is generally based upon our management’s estimate of our earnings
for the quarter. Net realized capital gains, if any, are distributed
at least annually.
Guarantees
and Indemnification Agreements
We follow
ASC Topic 460, “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others”. ASC Topic 460 elaborates on the disclosure requirements of a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also requires a guarantor to
recognize, at the inception of a guarantee, for those guarantees that are
covered by ASC Topic 460, the fair value of the obligation undertaken in issuing
certain guarantees. ASC Topic 460 did not have a material effect on the
financial statements. Refer to Note 5 and Note 8 for further discussion of
guarantees and indemnification agreements.
13
FULL
CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
December
31, 2010
Per
Share Information
Basic and
diluted earnings (loss) per common share is calculated using the weighted
average number of common shares outstanding for the period presented. Basic and
diluted earnings (loss) per share are the same since there are no potentially
dilutive securities outstanding.
Organizational
Expenses and Offering Costs
A portion
of the net proceeds of the Company’s initial public offering was used for
organizational and offering expenses of approximately $191,479 and $1,052,067,
respectively. Organizational expenses were expensed as
incurred. The Company incurred $178,979 of organizational expenses
for the six months ended December 31, 2010, with an additional $12,500 being
incurred during prior periods. Offering costs were charged against
paid-in capital in excess of par. All organizational and offering
costs were borne by the Company.
Note
3. Concentration of Credit Risk and Liquidity Risk
In the
normal course of business, the Company maintains its cash balances in financial
institutions, which at times may exceed federally insured limits. The
Company is subject to credit risk to the extent any financial institution with
which it conducts business is unable to fulfill contractual obligations on its
behalf. Management monitors the financial condition of such financial
institutions and does not anticipate any losses from these
counterparties.
The
Company utilizes one financial institution to provide financing, which is
essential to its business. There are a number of other financial institutions
available that could provide the Company with financing. Management believes
that other financial institutions would be able to provide similar financing
with comparable terms. However, a change in financial institutions could cause a
delay in service provisioning or result in potential lost opportunities, which
could adversely affect operating results.
Note
4. Earnings (Loss) per Common Share
The
following information sets forth the computation of basic and diluted income
(loss) per common share for the three and six months ended December 31,
2010.
Three
months ended
December
31, 2010
|
Six
months ended
December 31, 2010 |
|||||||
Per
Share Data (1)
:
|
||||||||
Net
Increase (Decrease) in Net Assets Resulting from
Operations
|
$
|
1,357,418
|
$
|
1,564,410
|
||||
Average
weighted shares outstanding for period
|
6,191,515
|
4,138,926
|
||||||
|
||||||||
Basic
and diluted earnings (loss) per common share
|
$
|
0.22
|
$
|
0.38
|
(1)
|
Per
share data based on weighted average shares
outstanding.
|
14
FULL
CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
December
31, 2010
Note
5. Related Party Agreements and Transactions
Investment
Advisory Agreement
On July
8, 2010, we entered into an investment advisory agreement (the “Investment
Advisory Agreement”) with Full Circle Advisors, LLC (the “Adviser”) under which
the Adviser, subject to the overall supervision of our Board, manages the
day-to-day operations of, and provides investment advisory services to, us.
Under the terms of the Investment Advisory Agreement, our Adviser: (i)
determines the composition of our portfolio, the nature and timing of the
changes to our portfolio and the manner of implementing such changes, (ii)
identifies, evaluates and negotiates the structure of the investments we make
(including performing due diligence on our prospective portfolio companies); and
(iii) closes and monitors investments we make.
The
Adviser’s services under the Investment Advisory Agreement are not exclusive,
and it is free to furnish similar services to other entities so long as its
services to us are not impaired. For providing these services the Adviser
receives a fee from us, consisting of two components.
The base
management fee is calculated at an annual rate of 1.75% of our gross assets, as
adjusted. For services rendered under the Investment Advisory Agreement, the
base management fee is payable quarterly in arrears. The base
management fee is calculated based on the average value of our gross assets, as
adjusted, at the end of the two most recently completed calendar quarters, and
appropriately adjusted for any share issuances or repurchases during the current
calendar quarter. Base management fees for any partial month or quarter will be
appropriately pro-rated. In addition, our investment adviser has agreed to waive
any portion of the base management fee that exceeds 1.50% of Full Circle
Capital’s gross assets, as adjusted, until August 31, 2011.
The total
base management fees earned by the Adviser for the three and six month periods
ended December 31, 2010 were $304,429 and $411,413, respectively. After
adjusting for the waivers of $43,490 and $58,773, respectively, the total base
management fee payable to the Adviser at December 31, 2010 was $260,044, after
reflecting payment of $92,596 during the period, and is included in the
Consolidated Statement of Assets and Liabilities in Due to
Affiliate.
The incentive fee has two parts. The
first part of the incentive fee (the “Income incentive fee”) is calculated and
payable quarterly in arrears based on our pre-incentive fee net investment
income for the immediately preceding calendar quarter. For this purpose,
pre-incentive fee net investment income means interest income, dividend income
and any other income (including any other fees (other than fees for providing
managerial assistance), such as commitment, origination, structuring, diligence
and consulting fees or other fees that we receive from portfolio companies)
accrued during the calendar quarter, minus our operating expenses for the
quarter (including the base
management fee, expenses payable under the Administration Agreement to Full
Circle Service Company (the “Administrator”), and any interest expense and
dividends paid on any issued and outstanding preferred stock, but excluding the
incentive fee). Pre-incentive fee net investment income includes, in the case of
investments with a deferred interest feature (such as original issue discount,
debt instruments with pay in kind interest and zero coupon securities), accrued
income that we have not yet received in cash. Pre-incentive fee net investment
income does not include organizational costs or any realized capital gains,
computed net of all realized capital losses or unrealized capital appreciation
or depreciation. Pre-incentive fee net investment income, expressed as a rate of
return on the value of our net assets at the end of the immediately preceding
calendar quarter, is compared to a hurdle of 1.75% per quarter (7.00%
annualized). Our net investment income used to calculate this part of the
incentive fee is also included in the amount of our gross assets used to
calculate the 1.75% base management fee. We pay the Adviser an incentive fee
with respect to our pre-incentive fee net investment income in each calendar
quarter as follows:
•
|
no
incentive fee in any calendar quarter in which our pre-incentive fee net
investment income does not exceed the hurdle of
1.75%;
|
•
|
100%
of our pre-incentive fee net investment income with respect to that
portion of such pre-incentive fee net investment income, if any, that
exceeds the hurdle but is less than 2.1875% in any calendar quarter (8.75%
annualized). We refer to this portion of our pre-incentive fee net
investment income (which exceeds the hurdle but is less than 2.1875%) as
the”catch-up.” The “catch-up” is meant to provide our investment adviser
with 20% of our pre-incentive fee net investment income as if a hurdle did
not apply if this net investment income exceeds 2.1875% in any calendar
quarter; and
|
•
|
20%
of the amount of our pre-incentive fee net investment income, if any, that
exceeds 2.1875% in any calendar quarter (8.75% annualized) is payable to
the Adviser (once the hurdle is reached and the catch-up is achieved, 20%
of all pre-incentive fee investment income thereafter is allocated to the
Adviser).
|
15
FULL
CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
December
31, 2010
These
calculations are appropriately prorated for any period of less than three months
and adjusted for any share issuances or repurchases during the current
quarter.
The
second part of the incentive fee is determined and payable in arrears as of the
end of each calendar year (or upon termination of the Investment Advisory
Agreement, as of the termination date), commencing with the 2010 calendar year,
and will equal 20% of our realized capital gains, if any, on a cumulative basis
from inception through the end of each calendar year, computed net of all
realized capital losses and unrealized capital depreciation on a cumulative
basis, less the aggregate amount of any previously paid capital gain incentive
fees with respect to each of the investments in our portfolio, provided that,
the incentive fee determined as of December 31, 2010 was calculated for a
period of shorter than twelve calendar months to take into account any realized
capital gains computed net of all realized capital losses and unrealized capital
depreciation from the inception of Full Circle Capital.
Income
incentive fees of $374,776 and $487,462 were earned by the Adviser for the three
month and six month periods ended December 31, 2010 and the total income
incentive fee payable to the Adviser at December 31, 2010 was $374,956, after
reflecting payment of $112,506 during the period, and is included in the
Consolidated Statement of Assets and Liabilities in Due to
Affiliate.
The
Adviser has agreed to reimburse the Company for any operating expenses,
excluding interest expenses, investment advisory and management fees, and
organizational and offering expenses, in excess of 2% of our net assets for the
first twelve months following the completion of the initial public offering,
which occurred on August 31, 2010. This agreement is in effect
through August 31, 2011, and equates to an accrual offset against the Advisor’s
management fee of $103,588 and $182,915 for the three and six month periods
ended December 31, 2010, respectively.
Administration
Agreement
On July
8, 2010, we also entered into an Administration Agreement with the Administrator
under which the Administrator, among other things, furnishes us with office
facilities, equipment and clerical, bookkeeping and record keeping services at
such facilities. Under the Administration Agreement, the Administrator also
performs, or oversees the performance of, our required administrative services,
which include, among other things, being responsible for the financial records
which we are required to maintain and preparing reports to our stockholders. In
addition, the Administrator assists us in determining and publishing our net
asset value, oversees the preparation and filing of our tax returns and the
printing and dissemination of reports to our stockholders, and generally
oversees the payment of our expenses and the performance of administrative and
professional services rendered to us by others. Payments under the
Administration Agreement are equal to an amount based upon our allocable portion
of Full Circle Service Company’s overhead in performing its obligations under
the Administration Agreement, including rent, the fees and expenses associated
with performing compliance functions and our allocable portion of the
compensation of our chief financial officer and our allocable portion of the
compensation of any administrative support staff employed by the Administrator,
directly or indirectly. Under the Administration Agreement, the Administrator
will also provide on our behalf managerial assistance to those portfolio
companies that request such assistance. The Administration Agreement may be
terminated by either party without penalty upon 60 days’ written notice to the
other party.
The
Administrator, and Vastardis Fund Services LLC (“Vastardis” or the
“Sub-Administrator”), will also provide administrative services to the Adviser.
As a result, the Adviser will also reimburse the Administrator and/or the
Sub-Administrator for its allocable portion of the Administrator’s and/or
Sub-Administrator’s overhead, including rent, the fees and expenses associated
with performing compliance functions for Full Circle Advisors, and its allocable
portion of the compensation of any administrative support staff. To the extent
the Adviser or any of its affiliates manage other investment vehicles in the
future, no portion of any administrative services provided by the Administrator
to such other investment vehicles will be charged to us.
The
Administration Agreement provides that, absent willful misfeasance, bad faith or
negligence in the performance of its duties or by reason of the reckless
disregard of its duties and obligations, the Administrator and its officers,
managers, partners, agents, employees, controlling persons, members and any
other person or entity affiliated with it are entitled to indemnification from
Full Circle Capital for any damages, liabilities, costs and expenses (including
reasonable attorneys’ fees and amounts reasonably paid in settlement) arising
from the rendering of the Administrator’s services under the Administration
Agreement or otherwise as administrator for Full Circle Capital.
Sub-Administration
Agreement
Our Chief
Financial Officer, William E. Vastardis, is the President of Vastardis. The
Administrator has engaged Vastardis to provide certain administrative services
to us and our Adviser, including the service of Mr. Vastardis as our Chief
Financial Officer, Treasurer and Secretary. In exchange for providing such
services, the Administrator will pay Vastardis an asset-based fee with a
$200,000 annual minimum as adjusted for any reimbursement of expenses. This
asset-based fee will vary depending upon our gross assets, as adjusted, as
follows:
16
FULL
CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
December
31, 2010
Gross
Assets Fee
|
||
first
$150 million of gross assets
|
20
basis points (0.20%)
|
|
next
$150 million of gross assets
|
15
basis points (0.15%)
|
|
next
$200 million of gross assets
|
10
basis points (0.10%)
|
|
in
excess of $500 million of gross assets
|
5
basis points (0.05%)
|
In
addition to the above fees, certain administrative services previously provided
by the Administrator will now be performed by Vastardis for the Administrator
for an annual fee of $112,457, paid quarterly in advance.
The
Adviser will be responsible for paying the allocable portion of the
administrative fees charged by Vastardis for administrative services provided to
both Full Circle Capital and the Adviser reflecting the proportionate share of
such administrative services that it receives. In addition, we will reimburse
the Administrator for the fees charged for the service of Mr. Vastardis as our
Chief Financial Officer, Treasurer and Secretary at an annual rate of $250,000.
Vastardis has agreed to cap its first year fees at $200,000, plus any
reimbursement of expenses, for administrative services to us and the Adviser,
and at $100,000 for the service of Mr. Vastardis as our Chief Financial Officer,
Treasurer and Secretary.
For the
three months ended December 31, 2010 the Company incurred $168,384 of expenses
under the Administration Agreement, $78,114 of which was earned by the
Sub-Administrator. The remaining $90,270 was recorded as an
Allocation of Overhead Expenses to the Administrator in the Statement of
Operations.
For the
six months ended December 31, 2010 the Company incurred $224,512 of expenses
under the Administration Agreement, $104,152 of which was earned by the
Sub-Administrator. The remaining $120,360 was recorded as an
Allocation of Overhead Expenses to the Administrator in the Statement of
Operations.
The
Administrator and Adviser did not begin charging Administration and Advisory
fees to the Company until August 31, 2010, the date of the initial public
offering and commencement of operations of the Company.
Managerial
Assistance
As a
business development company, we offer, and must provide upon request,
managerial assistance to certain of our portfolio companies. This assistance
could involve, among other things, monitoring the operations of our portfolio
companies, participating in board and management meetings, consulting with and
advising officers of portfolio companies and providing other organizational and
financial guidance. As of December 31, 2010, none of the portfolio companies had
accepted our offer for such services.
Note
6. Equity Offerings and Related Expenses
During
the six months ended December 31, 2010, we issued 6,191,415 shares of our common
stock through an initial public offering and a private placement. Offering
expenses were charged against paid-in capital in excess of par. All underwriting
fees and offering expenses were borne by us. The proceeds raised, the
related underwriting fees, the offering expenses, and the price at which common
stock was issued since inception are detailed in the following
table:
Issuances
of Common Stock
|
Number
of
Shares
Issued
|
Gross
Proceeds
Raised
|
Underwriting
Fees
|
Offering
Expenses
|
Offering
Price
|
||||||||||||
April
16, 2010
|
100
|
$
|
1,500
|
-
|
-
|
$15.00
per/share
|
|||||||||||
August
31, 2010
|
4,191,415
|
(1)
|
$
|
42,425,564
|
-
|
-
|
$10.12
per/share (2)
|
||||||||||
August
31, 2010
|
2,000,000
|
$
|
18,000,000
|
$
|
1,350,000
|
$
|
1,052,067
|
$9.00
per/share
|
|||||||||
(1) Includes
403,662 shares that were issued on September 30, 2010 upon the expiration of the
overallotment option granted to the underwriters in connection with our initial
public offering. Such shares were deemed to be outstanding at August 31,
2010.
(2) Based
on weighted average price assigned to shares.
17
FULL
CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
December
31, 2010
On April
16, 2010, we issued 100 shares of common stock to Full Circle Advisors, LLC for
$1,500 in connection with the organization of the Company. The issuance of such
shares of our common stock was deemed to be exempt from registration under the
Securities Act of 1933 in reliance on Section 4(2) of the Securities Act as
transactions by an issuer not involving a public offering. We did not engage in
any other sales of unregistered securities during the period ended June 30,
2010.
On August
31, 2010, we acquired a portfolio of investments (the “Legacy Portfolio”) from
Full Circle Partners, LP and Full Circle Fund Ltd. (the “Legacy Funds”), which
are managed by an affiliate of our investment adviser. The investments included
in the Legacy Portfolio have a collective fair value of approximately $72.3
million as of June 30, 2010, as determined by our Board of Directors. In
connection with our acquisition of the Legacy Portfolio, we issued an aggregate
of 4,191,415 shares of our common stock and approximately $3.4 million of
Distribution Notes (defined below) to certain investors in the Legacy Funds. The
issuance of such shares of our common stock and Distribution Notes was deemed to
be exempt from registration under the Securities Act of 1933 in reliance on
Section 4(2) of the Securities Act as transactions by an issuer not
involving a public offering.
In
addition, we assumed approximately $27.5 million of outstanding debt from the
Legacy Funds’ credit facilities with FCC, LLC d/b/a First Capital (“First
Capital”) in connection with the acquisition of the Legacy Portfolio and our
entry into a new secured revolving credit facility with First Capital (the
“Credit Facility”) (Note 8).
The
following schedule summarizes the assets and liabilities acquired on August 31,
2010 as part of the acquisition of the Legacy Portfolio, which are included in
the Consolidated Statement of Cash Flows as follows:
Legacy
Portfolio
|
$
|
72,280,294
|
||
Interest
Purchased
|
671,262
|
|||
Dividends
Purchased
|
143,750
|
|||
Other
Assets
|
82,644
|
|||
Other
Liabilities
|
(285,658
|
)
|
||
Offering
Costs Pre-Paid by Legacy Funds
|
355,303
|
|||
Organizational
Costs Pre-Paid by Legacy Funds
|
58,784
|
|||
Assets
Purchased for Shares
|
$
|
73,306,379
|
||
Distribution
Notes
|
$
|
3,404,583
|
||
Line
of Credit
|
27,476,232
|
|||
Debt
Issued in Connection with Share Issuance
|
$
|
30,880,815
|
On August
31, 2010 our registration statement on Form N-2 was declared effective (SEC File
No. 333-166302), and we priced our initial public offering of
2,000,000 shares of our common stock at the offering price of $9.00 per
share. The initial public offering closed on September 7, 2010, resulting in the
sale of all 2,000,000 shares and net proceeds to Full Circle Capital of
approximately $15.6 million, of which the entire amount was used to reduce
outstanding borrowings under the Credit Facility (Note 8). Ladenburg Thalmann
& Co. Inc. acted as the managing underwriter.
Note
7. Financial Highlights
For
the
three
months ended
December
31, 2010
|
For
the period from
August
31, 2010
(commencement
of
operations) to
December
31, 2010
|
|||||||
Per
Share Data (1)
:
|
||||||||
Net
asset value at beginning of period
|
$ | 9.36 | $ |
9.40
|
||||
Offering
costs
|
(0.04 | ) |
(0.04
|
) | ||||
Net
investment income
|
0.24 |
0.30
|
||||||
Change
in unrealized gain (loss)
|
(0.04 | ) |
(0.06
|
) | ||||
Realized
gain (loss)
|
0.02 |
0.02
|
||||||
Dividends
declared
|
(0.22 | ) |
(0.30
|
) | ||||
Net
asset value at end of period
|
$ | 9.32 | $ |
9.32
|
||||
Per
share market value at end of period
|
$ | 8.69 | $ |
8.69
|
||||
Total
return based on market value
|
3.54 | %(2) |
(0.10
|
)%(4) | ||||
Total
return based on net asset value
|
1.98 | %(2) |
2.35
|
%(4) | ||||
Shares
outstanding at end of period
|
6,191,515 |
6,191,515
|
||||||
Average
weighted shares outstanding for period
|
6,191,515
|
6,191,515
|
||||||
Ratio
/ Supplemental Data:
|
||||||||
Net
assets at end of period
|
$ | 57,713,216 | $ |
57,713,216
|
||||
Average
net assets
|
$ | 57,834,375 | $ |
57,899,705
|
||||
Annualized
ratio of gross operating expenses to average net assets
|
8.95 | %(3) |
9.34
|
%(5) | ||||
Annualized
ratio of net operating expenses to average net assets
|
7.94 | %(3) |
8.10
|
%(5) | ||||
Annualized
ratio of netinvestment income to average net assets
|
10.44 | %(3) |
10.07
|
%(5) |
18
FULL
CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
December
31, 2010
(1)
|
Financial
highlights are based on average weighted shares
outstanding.
|
(2)
|
Total
return based on market value is based on the change in market price per
share during the three months ending December 31, 2010. Total return based
on net asset value is based upon the change in net asset value per share
between the opening and ending net asset values per share in the period
and assumes that dividends are reinvested in accordance with our dividend
reinvestment plan. The total returns are not
annualized.
|
(3)
|
Financial
Highlights for periods of less than one year are annualized and the ratios
of operating expenses to average net assets and net investment income
(loss) to average net assets are adjusted
accordingly. Non-recurring expenses were not
annualized. For the period from October 1, 2010 to December 31,
2010 the Company incurred $34,996 of Organizational Expenses, which were
deemed to be non-recurring.
|
(4)
|
Total
return based on market value is based on the change in market price per
share assuming an investment at the initial public offering price of $9.00
per share. Total return based on net asset value is based upon the change
in net asset value per share between the opening and ending net asset
values per share in the period and assumes that dividends are reinvested
in accordance with our dividend reinvestment plan. The total returns are
not annualized.
|
(5)
|
Financial
Highlights for periods of less than one year are annualized and the ratios
of operating expenses to average net assets and net investment income
(loss) to average net assets are adjusted
accordingly. Non-recurring expenses were not
annualized. For the period from August 31, 2010 to December 31,
2010 the Company incurred $102,233 of Organizational Expenses, which were
deemed to be non-recurring.
|
Note
8. Long Term Liabilities
Line
of Credit
On August
31, 2010, the Company entered into a secured revolving credit facility (the
“Credit Facility”) with First Capital. The facility size is $35 million and will
expire in January 2012. Under the agreement, base rate borrowings bear interest
at LIBOR (0.26063% at December 31, 2010) plus 5.50%. The Credit Facility is
secured by all of the assets of the Company. Under the Credit Facility, the
Company is required to satisfy several financial covenants, including
maintaining a minimum level of stockholders’ equity, a maximum level of leverage
and minimum asset coverage and interest coverage ratios. In addition, the
Company is required to comply with other general covenants, including with
respect to indebtedness, liens, restricted payments and mergers and
consolidations. At December 31, 2010, the Company had a balance of
$7,568,501 on the Credit Facility.
Distribution
Notes
On August
31, 2010, the Company entered into multiple senior unsecured notes (the
“Distribution Notes”). The Distribution Notes consist of $3,404,583
in senior unsecured notes, which bear interest at a rate of 8% per annum,
payable quarterly in cash, and will mature in February 2014. The Distribution
Notes are callable by the Company at any time, in whole or in part, at a price
of 100% of their principal amount, plus accrued and unpaid interest. The
Distribution Notes subject Full Circle Capital to customary covenants,
including, among other things, a restriction on incurring any debt on a junior
lien basis, or any debt that is contractually subordinated in right of payment
to any other debt unless it is also subordinated to the Distribution Notes on
substantially identical terms. The agreement under which the Distribution Notes
were issued contains customary events of default.
19
FULL
CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
December
31, 2010
Note
9. Fair Value Measurements
The
Company’s assets recorded at fair value have been categorized based upon a fair
value hierarchy in accordance with ASC Topic 820. See Note 2
for a discussion of the Company’s policies.
The
following table presents information about the Company’s assets measured at fair
value as of December 31, 2010:
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
Assets
|
||||||||||||||||
Senior
and Subordinated Loans, at fair value
|
$
|
-
|
$
|
-
|
$
|
64,695,423
|
$
|
64,695,423
|
||||||||
US
Treasury Securities, at fair value
|
26,996,274
|
-
|
-
|
26,996,274
|
||||||||||||
Investment
in private company, at fair value
|
-
|
-
|
259,500
|
259,500
|
||||||||||||
Investments
in securities, at fair value
|
-
|
-
|
133,548
|
133,548
|
||||||||||||
$
|
26,996,274
|
$
|
-
|
$
|
65,088,471
|
$
|
92,084,745
|
The
following table presents additional information about Level 3 assets measured at
fair value. Both observable and unobservable inputs may be used to
determine the fair value of positions that the Company has
classified within the Level 3 category. As a
result, the unrealized gains and losses for assets within
the Level 3 category may include changes in fair value that were
attributable to both observable (e.g., changes in market interest rates) and
unobservable (e.g., changes in unobservable
long-dated volatilities) inputs.
Changes
in Level 3 assets measured at fair value for the three months ended December 31,
2010 are as follows:
LEVEL
3
|
||||||||||||||||||||
Change
in
|
||||||||||||||||||||
Unrealized
|
||||||||||||||||||||
Gains
(Losses)
|
||||||||||||||||||||
Beginning
|
Realized
&
|
Purchases
|
Ending
|
for
Investments
|
||||||||||||||||
Balance
|
Unrealized
|
Sales
|
Balance
|
still
held at
|
||||||||||||||||
October
1,
|
Gains
|
and
|
December
31,
|
December
31,
|
||||||||||||||||
2010
|
(Losses)
|
Settlements
|
2010
|
2010
|
||||||||||||||||
Assets
|
||||||||||||||||||||
Senior
and Subordinated Loans, at fair value
|
$
|
64,890,393
|
$
|
(120,493
|
) |
$
|
(74,477
|
) |
$
|
64,695,423
|
$
|
(209,016
|
)
|
|||||||
|
||||||||||||||||||||
Investments in private company, at
fair value
|
267,000
|
(7,500
|
)
|
-
|
259,500
|
(7,500
|
)
|
|||||||||||||
Investments
in private investment company, at fair value
|
6,000,000
|
-
|
(6,000,000
|
)
|
-
|
-
|
||||||||||||||
Investments in securities, at fair
value
|
141,949
|
(8,401
|
)
|
-
|
133,548
|
(8,401
|
)
|
|||||||||||||
$
|
71,299,342
|
|
$
|
(136,394
|
)
|
$
|
(6,074,477
|
)
|
$
|
65,088,471
|
$
|
(224,917
|
)
|
The
change in unrealized gains (losses) for Level 3 investments still held at
December 31, 2010 of ($224,917) is included in change in unrealized gain (loss)
in the statement of operations for the three months ended December 31,
2010.
Changes
in Level 3 assets measured at fair value for the six months ended December 31,
2010 are as follows:
20
FULL
CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
December
31, 2010
LEVEL
3
|
||||||||||||||||||||
Change
in
|
||||||||||||||||||||
Unrealized
|
||||||||||||||||||||
Gains
(Losses)
|
||||||||||||||||||||
Beginning
|
Realized
&
|
Purchases
|
Ending
|
for
Investments
|
||||||||||||||||
Balance
|
Unrealized
|
Sales
|
Balance
|
still
held at
|
||||||||||||||||
July
1,
|
Gains
|
and
|
December
31,
|
December
31,
|
||||||||||||||||
2010
|
(Losses)
|
Settlements
|
2010
|
2010
|
||||||||||||||||
Assets
|
||||||||||||||||||||
Senior
and Subordinated Loans, at fair value
|
$
|
-
|
$
|
83,102
|
$
|
64,612,321
|
$
|
64,695,423
|
$
|
(11,874
|
) | |||||||||
Investments in private company, at
fair value
|
-
|
(171,000
|
)
|
430,500
|
259,500
|
(171,000
|
)
|
|||||||||||||
Investments
in private investment company, at fair value
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
||||||||||||||||||||
Investments in securities, at fair
value
|
-
|
(147,897
|
)
|
281,445
|
133,548
|
(147,897
|
)
|
|||||||||||||
$
|
-
|
$
|
(235,795
|
)
|
$
|
65,324,266
|
$
|
65,088,471
|
$
|
(330,771
|
)
|
Realized
and unrealized gains and losses are included in realized gain (loss) and change
in unrealized gain (loss) in the consolidated statements of
operations. The change in unrealized gains (losses) for Level 3
investments still held at December 31, 2010 of ($330,771) is included in change
in unrealized gain (loss) in the statement of operations for the six months
ended December 31, 2010.
Note
10. Derivative Contracts
In the
normal course of business, the Company may utilize derivative contracts in
connection with its investment activities. Investments in derivative
contracts are subject to additional risks that can result in a loss of all or
part of an investment. The derivative activities and exposure to
derivative contracts are classified by the following primary underlying risks:
equity price risks. In addition to the primary underlying risk,
additional counterparty risk exists due to the potential inability of
counterparties to meet the terms of their contracts.
Warrants
The
warrants provide exposure and potential gains upon equity appreciation of the
investment company’s share price.
The value
of a warrant has two components: time value and intrinsic value. A
warrant has a limited life and expires on a certain date. As time to
the expiration date of a warrant approaches, the time value of a warrant will
decline. In addition, if the stock underlying the warrant declines in
price, the intrinsic value of an “in the money” warrant will
decline. Further, if the price of the stock underlying the warrant
does not exceed the strike price of the warrant on the expiration date, the
warrant will expire worthless. As a result, there is the potential
for the entire value of an investment in a warrant to be lost.
Counterparty
risk exists from the potential failure of an issuer of warrants to settle its
exercised warrants. The maximum risk of loss from counterparty risk
is the fair value of the contracts and the purchase price of the
warrants. The Company’s Board of Directors considers the effects of
counterparty risk when determining the fair value of its investments in
warrants.
Volume
of Derivative Activities
At
December 31, 2010, the notional amounts and number of warrants, categorized by
primary underlying risk, are as follows:
Long
Exposure
|
||
Notional
|
Number
of
|
|
Amounts
|
Warrants
|
|
Primary
Underlying Risk
|
||
Equity
Price
|
||
Warrants
(a)
|
$695,965
|
71,575
|
(a)
|
Notional
amounts presented for warrants are based on the fair value of the
underlying shares as if the warrants were exercised at December 31,
2010.
|
21
FULL
CIRCLE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
December
31, 2010
Note
11. Recently Issued Accounting Standards
On
January 21, 2010, the FASB issued an ASU, Fair Value Measurements and
Disclosures (ASC Topic 820): Improving Disclosures about Fair Value
Measurements, which provides guidance on how investment assets and liabilities
are to be valued and disclosed. Specifically, the amendment requires reporting
entities to disclose i) the input and valuation techniques used to measure fair
value for both recurring and nonrecurring fair value measurements, for Level 2
or Level 3 positions, ii) transfers between all levels (including Level 1 and
Level 2) will be required to be disclosed on a gross basis (i.e. transfers out
must be disclosed separately from transfers in) as well as the reason(s) for the
transfers and iii) purchases, sales, issuances and settlements must be shown on
a gross basis in the Level 3 rollforward rather than as one net number. The
effective date of the ASU is for interim and annual periods beginning after
December 15, 2009, however, the requirement to provide the Level 3 activity for
purchases, sales, issuances and settlements on a gross basis will be effective
for interim and annual periods beginning after December 15, 2010. At this time
Management is evaluating the implications of the amendment to ASC 820 and the
impact to the future Consolidated Financial Statements of Full Circle
Capital.
ASC Topic
860, ‘‘Transfers and Servicing,’’ removes the concept of a qualifying
special-purpose entity (‘‘QSPE’’) and removes the exception from applying to
variable interest entities that are QSPEs. This statement also clarifies the
requirements for isolation and limitations on portions of financial assets that
are eligible for sale accounting. This statement is effective for fiscal years
beginning after November 15, 2009. At this time Management believes
that ASC 860 has no impact on the Consolidated Financial Statements of Full
Circle Capital.
Note
12. Subsequent Events
Dividend
On
January 14, 2011, we issued 27,867 shares of our common stock in connection with
the dividend reinvestment plan.
On
February 4, 2011, our Board declared a quarterly dividend of $0.225 per share
for holders of record at March 31, 2011. This quarterly dividend of $0.225 per
share is payable on April 15, 2011.
Recent
Portfolio Activity
On
January 1, 2011, the Company invested an additional $125,000 in Iron City
Brewing, LLC (“Iron City”) in accordance with the loan agreement between the
Company and Iron City.
On
January 5, 2011, the Company invested an additional $125,000 in Icon Groupe, LLC
in accordance with the loan agreement between the Company and Icon Groupe,
LLC.
On
January 10, 2011 the Company’s loans to Exist, Inc., BLSCO Newco, Inc. and Miken
Sales, Inc. were paid off in full, at par, in an aggregate amount of $9,710,556,
including accrued interest.
On
January 31, 2011, Icon Groupe, LLC pre-paid, at par, its loan from the Company,
remitting a total of $5,133,525 to the Company for outstanding principal,
interest and fees.
On
January 31, 2011, Equisearch Acquisition, Inc. (“Equisearch”) extended its loan
with the Company through January 31, 2012 at a floating rate equal to 14.00% as
of February 9, 2011. Additionally, Equisearch amended its warrant
agreement with the Company, whereby the Company may purchase a 12.5% ownership
interest in Equisearch, subject to certain provisions, based on performance,
allowing for Equisearch to earn back a portion of this equity.
On
February 1, 2011, Georgia Outdoor Advertising, LLC pre-paid, at par, its loan
from the Company, remitting a total of $356,484 to the Company for outstanding
principal and interest.
Total
Investment Income
|
Net
Investment Income
|
Net
Realized and
Unrealized
Gains
(Losses)
|
Net
Increase (Decrease)
in
Net Assets from
Operations
|
|||||||||||||||||||||||||||||
Quarter
Ended
|
Total
|
Per
Share (1)
|
Total
|
Per
Share (1)
|
Total
|
Per
Share (1)
|
Total
|
Per
Share (1)
|
||||||||||||||||||||||||
September
30, 2010
|
$
|
867,582
|
$
|
0.42
|
$
|
306,783
|
$
|
0.15
|
$
|
(99,791
|
)
|
$
|
(0.05
|
)
|
$
|
206,992
|
$
|
0.10
|
||||||||||||||
December
31, 2010
|
$
|
2,678,197
|
$
|
0.43
|
$
|
1,495,125
|
$
|
0.24
|
$
|
(137,707
|
)
|
$
|
(0.02
|
)
|
$
|
1,357,418
|
$
|
0.22
|
(1)
|
|
Per
share amounts are calculated using weighted average shares during
period.
|
22
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements
The
information contained in this section should be read in conjunction with our
financial statements and related notes and schedules thereto appearing elsewhere
in this quarterly report on Form 10-Q, as well as the sections entitled
“Selected Financial Data” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the financial statements and related
notes and schedules thereto included in our Annual Report on Form 10-K for the
period ended June 30, 2010.
This
quarterly report on Form 10-Q contains forward-looking statements that involve
substantial risks and uncertainties. These forward-looking statements are not
historical facts, but rather are based on current expectations, estimates and
projections about Full Circle Capital Corporation, our current and prospective
portfolio investments, our industry, our beliefs, and our assumptions. Words
such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,”
“believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,”
“projects,” and variations of these words and similar expressions are intended
to identify forward-looking statements. These statements are not guarantees of
future performance and are subject to risks, uncertainties, and other factors,
some of which are beyond our control and difficult to predict and could cause
actual results to differ materially from those expressed or forecasted in the
forward-looking statements, including without limitation:
•
|
an
economic downturn could impair our portfolio companies’ ability to
continue to operate, which could lead to the loss of some or all of our
investments in such portfolio
companies;
|
•
|
a
contraction of available credit and/or an inability to access the equity
markets could impair our lending and investment
activities;
|
•
|
interest
rate volatility could adversely affect our results, particularly if we
elect to use leverage as part of our investment
strategy;
|
•
|
currency
fluctuations could adversely affect the results of our investments in
foreign companies, particularly to the extent that we receive payments
denominated in foreign currency rather than U.S. dollars;
and
|
•
|
the
risks, uncertainties and other factors we identify in “Risk Factors” and
elsewhere in this quarterly report on Form 10-Q and in our filings with
the SEC.
|
Although
we believe that the assumptions on which these forward-looking statements are
based are reasonable, any of those assumptions could prove to be inaccurate, and
as a result, the forward-looking statements based on those assumptions also
could be inaccurate. In light of these and other uncertainties, the inclusion of
a projection or forward-looking statement in this quarterly report on Form 10-Q
should not be regarded as a representation by us that our plans and objectives
will be achieved. These risks and uncertainties include those described or
identified in “Risk Factors” and elsewhere in this quarterly report on Form
10-Q. You should not place undue reliance on these forward-looking statements,
which apply only as of the date of this quarterly report on Form
10-Q.
Except
as otherwise specified, references to “Full Circle Capital,” “the Company,”
“we,” “us” and “our” refer to Full Circle Capital Corporation.
The
following analysis of our financial condition and results of operations should
be read in conjunction with our financial statements and the related notes
thereto contained elsewhere in this quarterly report on Form 10-Q.
Overview
We are a
newly formed, externally managed non-diversified closed-end management
investment company that has elected to be treated as a business development
company under the 1940. Our investment objective is to generate both current
income and capital appreciation through debt and equity investments. We are
managed by Full Circle Advisors, LLC (“Full Circle Advisors”). Full Circle
Service Company, LLC (“Full Circle Service Company”) provides the administrative
services necessary for us to operate.
On August
31, 2010, we priced our initial public offering of 2,000,000 shares of our
common stock at the offering price of $9.00 per share. Our shares are currently
listed on the NASDAQ Capital Market under the symbol “FULL.”
Immediately
prior to the pricing of our initial public offering, we acquired a portfolio of
investments (the “Legacy Portfolio”) from the Legacy Funds (as defined below),
which are managed by an affiliate of our investment adviser. The investments
included in the Legacy Portfolio had a collective fair value of approximately
$72.3 million as of June 30, 2010, as determined by our Board of Directors. In
connection with our acquisition of the Legacy Portfolio, we issued 3,787,753
shares of our common stock and approximately $3.4 million of senior unsecured
notes (the “Distribution Notes”) to investors in the Legacy Funds (the “Legacy
Investors”), pursuant to a Purchase and Sale Agreement (the “Asset Purchase
Agreement”). On September 30, 2010, upon expiration of the overallotment option
granted to the underwriters in connection with our initial public offering, we
issued an additional 403,662 shares of our common stock to certain Legacy
Investors pursuant to the Asset Purchase Agreement. We also incurred
approximately $27.5 million of debt upon entry into a new secured revolving
credit facility (the “New Credit Facility”) with FCC, LLC d/b/a First Capital
(“First Capital”) in connection with the assumption of outstanding amounts under
the Legacy Funds’ credit facility (the “Legacy Credit Facilities”). We refer to
these transactions, collectively, as the “Full Circle Portfolio
Acquisition.”
23
We were
formed to continue and expand the business of Full Circle Partners, LP and Full
Circle Fund, Ltd. (collectively, the “Legacy Funds”), which were formed in 2005
and 2007, respectively. As part of this continuation and expansion, we invest
primarily in asset-based senior secured loans and, to a lesser extent, mezzanine
loans and equity securities issued by smaller and lower middle-market companies
that operate in a diverse range of industries, with a specific focus on the
media, communications and business services industries where we believe we have
particular expertise. In our lending activities, we focus primarily on portfolio
companies with both (i) tangible and intangible assets available as collateral
and security against our loan to help mitigate our risk of loss, and (ii) cash
flow to cover debt service. We believe this provides us with a more attractive
risk adjusted return profile, with greater principal protection and likelihood
of repayment.
Our
investments generally range in size from $3 million to $10 million; however, we
may make larger or smaller investments from time to time on an opportunistic
basis. We focus primarily on senior secured loans and “stretch”
senior secured loans, also referred to as “unitranche” loans, which combine
characteristics of traditional first-lien senior secured loans and second-lien
or subordinated loans. Our stretch senior secured loans typically possess a
greater advance rate against the borrower’s assets and cash flow, and
accordingly carry a higher interest rate and/or greater equity participation,
than traditional senior secured loans. We believe that having a first lien,
senior secured position provides us with greater control and security in the
primary collateral of a borrower and helps mitigate risk against loss of
principal should a borrower default. We also invest in mezzanine, subordinated
or unsecured loans. In addition, we may acquire equity or equity related
interests from a borrower along with our debt investment. We attempt to protect
against risk of loss on our debt investments by securing our loans against a
significant level of tangible or intangible assets of our borrowers, which may
include accounts receivable and contracts for services, and obtaining a
favorable loan-to-value ratio, and in many cases, securing other financial
protections or credit enhancements, such as personal guarantees from the
principals of our borrowers, make well agreements and other forms of collateral,
rather than lending predominantly against anticipated cash flows of our
borrowers. We believe this allows us more options and greater likelihood of
repayment from refinancing, asset sales of our borrowers and/or
amortization.
We
generally seek to invest in smaller and lower middle-market companies in areas
that we believe have been historically under-serviced, especially during the
current credit crisis. These areas include industries that are outside the focus
of mainstream institutions or investors due to required industry-specific
knowledge or are too small to attract interest from larger investment funds or
other financial institutions. Because we believe there are fewer banks and
specialty finance companies focused on lending to these smaller and lower
middle-market companies, we believe we can negotiate more favorable terms on our
debt investments in these companies than those that would be available for debt
investments in comparable larger, more mainstream borrowers. Such favorable
terms may include higher debt yields, lower leverage levels, more significant
covenant protection or greater equity grants than typical of other transactions.
We generally seek to avoid competing directly with other capital providers with
respect to specific transactions in order to avoid the less favorable terms we
believe are typically associated with such competitive bidding
processes.
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in conformity with
generally accepted accounting principles in the United States (“GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and revenues and expenses during the periods
reported. Actual results could materially differ from those estimates. We have
identified the following items as critical accounting policies.
24
Basis
of Consolidation
Under the
1940 Act rules, the regulations pursuant to Article 6 of Regulation S-X and the
American Institute of Certified Public Accountants’ Audit and Accounting Guide
for Investment Companies, we are precluded from consolidating any entity other
than another investment company or an operating company which provides
substantially all of its services and benefits to us. Our financial statements
include our accounts and the accounts of Full Circle West, Inc. and Full Circle
ICB, Inc., our only wholly-owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
Valuation
of Investments in Securities at Fair Value — Definition and
Hierarchy
In
accordance with GAAP, fair value is defined as the price that would be received
to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an
orderly transaction between market participants at the measurement
date.
In
determining fair value, Full Circle Capital’s Board of Directors uses various
valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs
is used in measuring fair value that maximizes the use of observable inputs and
minimizes the use of unobservable inputs by requiring that the most observable
inputs be used when available.
Observable
inputs are those that market participants would use in pricing the asset or
liability based on market data obtained from sources independent of the Board of
Directors. Unobservable inputs reflect the Board of Directors’ assumptions about
the inputs market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances. The fair
value hierarchy is categorized into three levels based on the inputs as
follows:
Level
1 — Valuations based on unadjusted quoted prices in active markets for
identical assets or liabilities that the Company has the ability to access.
Valuation adjustments and block discounts are not applied to Level 1 securities.
Since valuations are based on quoted prices that are readily and regularly
available in an active market, valuation of these securities does not entail a
significant degree of judgment.
Level
2 — Valuations based on quoted prices in markets that are not active
or for which all significant inputs are observable, either directly or
indirectly.
Level
3 — Valuations based on inputs that are unobservable and significant
to the overall fair value measurement.
The
availability of valuation techniques and observable inputs can vary from
security to security and is affected by a wide variety of factors including, the
type of security, whether the security is new and not yet established in the
marketplace, and other characteristics particular to the transaction. To the
extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more
judgment. Those estimated values do not necessarily represent the amounts that
may be ultimately realized due to the occurrence of future circumstances that
cannot be reasonably determined. Because of the inherent uncertainty of
valuation, those estimated values may be materially higher or lower than the
values that would have been used had a ready market for the securities existed.
Accordingly, the degree of judgment exercised by the Board of Directors in
determining fair value is greatest for securities categorized in Level 3. In
certain cases, the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. In such cases, for disclosure purposes, the
level in the fair value hierarchy within which the fair value measurement in its
entirety falls, is determined based on the lowest level input that is
significant to the fair value measurement.
Fair
value is a market-based measure considered from the perspective of a market
participant rather than an entity-specific measure. Therefore, even when market
assumptions are not readily available, the Company’s own assumptions are set to
reflect those that market participants would use in pricing the asset or
liability at the measurement date. The Company uses prices and inputs that are
current as of the measurement date, including periods of market dislocation. In
periods of market dislocation, the observability of prices and inputs may be
reduced for many securities. This condition could cause a security to be
reclassified to a lower level within the fair value hierarchy.
Valuation
Techniques
Senior
and Subordinated Secured Loans
Our
portfolio consists primarily of private debt instruments (“Level 3 debt”). The
Company considers its Level 3 debt to be performing if the borrower is not in
default, the borrower is remitting payments in a timely manner, the loan is in
covenant compliance or is otherwise not deemed to be impaired. In determining
the fair value of the performing Level 3 debt, the Company’s Board of Directors
considers fluctuations in current interest rates, the trends in yields of debt
instruments with similar credit ratings, financial condition of the borrower,
economic conditions and other relevant factors, both qualitative and
quantitative. In the event that a Level 3 debt instrument is not performing, as
defined above, the Company’s Board of Directors will evaluate the value of the
collateral utilizing the same framework described above for a performing loan to
determine the value of the Level 3 debt instrument.
25
This
evaluation will be updated no less than quarterly for Level 3 debt instruments,
and more frequently for time periods where there are significant changes in the
investor base or significant changes in the perceived value of the underlying
collateral. The collateral value will be analyzed on an ongoing basis using
internal metrics, appraisals, third party valuation agents and other data as may
be acquired and analyzed by Management and the Company’s Board of
Directors.
Investment
in Private Company
The
Company’s Board of Directors determines the fair value of its investments in
private companies by incorporating valuations that consider the evaluation of
financing and sale transactions with third parties, expected cash flows and
market-based information, including comparable transactions, and performance
multiples, among other factors, including third party valuation agents. This
nonpublic investment is included in Level 3 of the fair value
hierarchy.
Warrants
The Company’s Board of Directors will
ascribe value to warrants based on fair value analyses that can include
discounted cash flow analyses, option pricing models, comparable analyses and
other techniques as deemed appropriate.
Fair
Value
The
Company’s assets measured at fair value on a recurring basis subject to the
disclosure requirements of ASC Topic 820 at December 31, 2010 were as
follows:
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
Assets
|
||||||||||||||||
Senior
and Subordinated Loans, at fair value
|
$
|
-
|
$
|
-
|
$
|
64,695,423
|
$
|
64,695,423
|
||||||||
US
Treasury Securities, at fair value
|
26,996,274
|
-
|
-
|
26,996,274
|
||||||||||||
Investment
in private company, at fair value
|
-
|
-
|
259,500
|
259,500
|
||||||||||||
Investments
in securities, at fair value
|
-
|
-
|
133,548
|
133,548
|
||||||||||||
$
|
26,996,274
|
$
|
-
|
$
|
65,088,471
|
$
|
92,084,745
|
Revenue
Recognition
Realized
gains or losses on the sale of investments are calculated using the specific
identification method.
Interest
income, adjusted for amortization of premium and accretion of discount, is
recorded on an accrual basis. Origination, closing and/or commitment fees
associated with senior and subordinated secured loans are accreted into interest
income over the respective terms of the applicable loans. Upon the prepayment of
a senior or subordinated secured loan, any prepayment penalties and unamortized
loan origination, closing and commitment fees are recorded as interest
income.
Dividend
income is recorded on the ex-dividend date.
Structuring
fees, excess deal deposits, prepayment fees and similar fees are recognized as
Other Income as earned, usually when paid. Other fee income, including annual
fees and monitoring fees are included in Other Income.
Use
of Estimates
The
preparation of the financial statements of Full Circle Capital in conformity
with GAAP requires the Company to make estimates and assumptions that affect the
amounts disclosed in the financial statements of Full Circle Capital. Actual
results could differ from those estimates.
Current
Market Conditions and Market Opportunity
We
believe that the current credit environment provides favorable opportunities to
achieve attractive risk-adjusted returns on the types of asset-based senior
secured loans we target. In particular, we believe that, despite an overall fall
off in loan demand due to the depressed economic conditions, demand for
financing from smaller to lower middle-market companies is largely outpacing the
availability of lenders that have traditionally served this market. We believe
that bank consolidations, the failure of a number of alternative lending
vehicles due to poor underwriting practices and an overall tightening of
underwriting standards has significantly reduced the number and activity level
of potential lenders.
26
We
believe there has long been a combination of demand for capital and an
underserved market for capital addressing smaller and lower middle-market
borrowers. We believe there is robust demand for continued growth capital as
well as demand from very significant refinancing requirements of many borrowers
as debt facilities come due, given the lack of willing and qualified capital
providers. We believe these market conditions have been further
exacerbated in the current environment due to:
o
|
larger
lenders exiting this market to focus on larger investment opportunities
which are more appropriate for their operating cost
structures;
|
o
|
the
elimination of many specialized lenders from the market due to lack of
capital as a result of, for instance, the closing off of the
securitization market or their own poor performance,
and
|
o
|
the
need for certain capital providers to reduce lending activities due to
their reduced access to capital and the overall deleveraging of the
financial market.
|
With the
decreased availability of debt capital for smaller to lower middle-market
borrowers, combined with the significant demand for refinancing, we believe
there should be increased lending opportunities for us. As always, we remain
cautious in selecting new investment opportunities, and will only deploy capital
in deals which are consistent with our disciplined philosophy of pursuing
superior risk-adjusted returns.
Portfolio
Composition and Investment Activity
Our
portfolio of investments consists primarily of senior secured loans and, to a
lesser extent, mezzanine loans and equity securities issued by smaller and lower
middle-market companies. Our investment objective is to generate both
current income and capital appreciation through debt and equity
investments.
The
primary investment activity in the six months ended December 31, 2010 was the
purchase of the Legacy Portfolio on August 31, 2010 which coincided with the
commencement of operations on that date. The investments included in the Legacy
Portfolio had a collective fair value of approximately $72.3 million as of June
30, 2010, as determined by our Board of Directors. Accordingly, the results for
the six months ended December 31, 2010 relating to portfolio activity primarily
cover four months of operations commencing on August 31, 2010. During
the second fiscal quarter, there were no new investment activities in debt
investments other than borrowers drawing on existing loan facilities in a net
amount of $3,743,038. Repayments and amortization of principal under
existing loan facilities and loan and investment realizations totaled
$10,074,375.
One
investment paid off in full during the three months ended December 31, 2010,
with the Company receiving $6,000,000 from its investment in First Capital Lotus
Asset Based Loan Fund during the period. Additionally, the Company
received a partial payoff of its debt facility to Georgia Outdoor Advertising,
LLC in the amount of $1,595,000 reducing the amount outstanding to this borrower
by approximately $1,555,000 after taking into account prepayment penalties and
other expenses. This debt facility is included in the Consolidated
Schedule of Investments at December 31, 2010 with a fair value of
$352,204.
The
following is a summary of our investment
activity:
|
Time
Period
|
Acquisitions
(1)
(dollars in millions)
|
Dispositions
(2)
(dollars in millions)
|
Weighted
Average Interest Rate of Portfolio at End of Period
|
|||||||||
Legacy
Portfolio Acquisition at August 31, 2010
|
$
|
72.3
|
$
|
N/A
|
12.10
|
%
|
||||||
August
31, 2010 through September 30, 2010
|
0.4
|
1.4
|
12.16
|
%
|
||||||||
October
1, 2010 through December 31, 2010
|
3.7
|
10.1
|
12.09
|
%
|
||||||||
Since
inception
|
$
|
76.4
|
$
|
11.5
|
N/A
|
(1)
|
Includes
new deals, additional fundings, refinancings and PIK
interest
|
|
(2)
|
Includes
scheduled principal payments, prepayments and
repayments
|
27
During
the three months ended December 31, 2010, we recorded net unrealized
depreciation of $224,281. This consisted of $208,380 of net unrealized
depreciation on debt investments and $15,901 of net unrealized depreciation on
equity investments.
The
following table shows the fair value of our portfolio of investments by asset
class as of December 31, 2010, excluding United States Treasury Bills of
approximately $27.0 million, and the fair value of our portfolio of investments
by asset class as of June 30, 2010, assuming the Full Circle Portfolio
Acquisition took place on such date:
December
31, 2010
|
June
30, 2010 (pro forma)
|
|||||||||||||||
Investment
at
|
Investments
at
|
|||||||||||||||
Fair
Value
(dollars
in millions)
|
Percentage
of
Total
Portfolio
|
Fair
Value
(dollars
in millions)
|
Percentage
of
Total
Portfolio
|
|||||||||||||
Senior
Secured Loans
|
$
|
60.4
|
92.8
|
%
|
$
|
52.2
|
72.1
|
%
|
||||||||
Subordinated
Secured Loans
|
4.3
|
6.6
|
4.2
|
5.8
|
||||||||||||
Limited
Liability Company Interests
|
0.3
|
0.4
|
0.4
|
0.6
|
||||||||||||
Warrants
|
0.1
|
0.2
|
0.5
|
0.7
|
||||||||||||
Private
Investment Company
|
0.0
|
0.0
|
15.0
|
20.8
|
||||||||||||
Total
|
$
|
65.1
|
100.0
|
%
|
$
|
72.3
|
100.0
|
%
|
At
December 31, 2010 the sixteen borrowers whose debt investments are included in
the table above averaged a loan to value ratio of approximately 45% (i.e., each
$45 of loan value outstanding is secured by $100 of collateral
value).
At June
30, 2010 the sixteen borrowers whose debt investments are included in the pro
forma table above averaged a loan to value ratio of approximately 51% (i.e.,
each $51 of loan value outstanding is secured by $100 of collateral
value).
The
following table shows the fair value of our portfolio of investments by
industry, as of December 31, 2010, excluding United States Treasury Bills of
approximately $27.0 million, and the fair value of our portfolio of investments
by industry as of June 30, 2010, assuming the Full Circle Portfolio Acquisition
took place on such date:
December
31, 2010
|
June
30, 2010 (pro forma)
|
|||||||||||||||
Investment
at
|
Investments
at
|
|||||||||||||||
Fair
Value
(dollars
in millions)
|
Percentage
of
Total
Portfolio
|
Fair
Value
(dollars
in millions)
|
Percentage
of
Total
Portfolio
|
|||||||||||||
Cable
TV/Broadband Services
|
$
|
17.5
|
26.8
|
%
|
$
|
17.0
|
23.5
|
%
|
||||||||
Information
and Data Services
|
13.0
|
20.0
|
13.7
|
19.0
|
||||||||||||
Outdoor
Advertising Services
|
7.0
|
10.8
|
8.4
|
11.6
|
||||||||||||
Apparel
|
6.9
|
10.7
|
0.0
|
0.0
|
||||||||||||
Radio
Broadcasting
|
6.3
|
9.7
|
6.2
|
8.5
|
||||||||||||
Information
Retrieval Services
|
5.0
|
7.7
|
5.1
|
7.0
|
||||||||||||
Asset
Recovery Services
|
2.5
|
3.8
|
2.4
|
3.3
|
||||||||||||
Oilfield
Services
|
2.4
|
3.7
|
0.0
|
0.0
|
||||||||||||
Beverages
|
1.7
|
2.6
|
1.5
|
2.1
|
||||||||||||
Security
System Services
|
1.5
|
2.2
|
1.5
|
2.1
|
||||||||||||
Consumer
Financing
|
1.3
|
2.0
|
1.5
|
2.1
|
||||||||||||
Nondepository
Credit Institutions
|
0.0
|
0.0
|
15.0
|
20.8
|
||||||||||||
Total
|
$
|
65.1
|
100.0
|
%
|
$
|
72.3
|
100.0
|
%
|
Portfolio
Grading
We have
adopted a credit grading system to monitor the quality of our debt investment
portfolio. As of December 31, 2010, our portfolio had a weighted average grade
of 3.01, based upon the fair value of the debt investments in the portfolio.
Equity securities are not graded. This was an improvement of 0.20
from the weighted average grade of 3.21 at June 30, 2010, which was based upon
the fair value of the debt investments in the portfolio, assuming the Full
Circle Portfolio Acquisition took place on such date:
28
At December 31, 2010, our debt investment portfolio was graded as
follows:
December
31, 2010
|
||||||||||
Grade
|
Summary
Description
|
Fair
Value
|
Percentage of
Total Portfolio
|
|||||||
(dollars in millions)
|
||||||||||
1
|
Involves
the least amount of risk in our portfolio, the portfolio company is
performing above expectations, and the trends and risk profile are
favorable (including a potential exit).
|
$
|
-
|
0.00
|
%
|
|||||
2
|
The
portfolio company is performing above expectations and the risk profile is
generally favorable.
|
6,366,597
|
9.78
|
%
|
||||||
3
|
Risk
that is similar to the risk at the time of origination, the portfolio
company is performing as expected, and the risk profile is generally
neutral; all new investments are initially assessed a grade of
3.
|
51,523,684
|
79.16
|
%
|
||||||
4
|
The
portfolio company is performing below expectations, requires procedures
for closer monitoring, may be out of compliance with debt covenants, and
the risk profile is generally unfavorable
|
7,198,190
|
11.06
|
%
|
||||||
5
|
The
investment is performing well below expectations and is not anticipated to
be repaid in full.
|
-
|
0.00
|
%
|
||||||
$
|
65,088,471
|
100.0
|
%
|
We expect
that a portion of our investments will be in grades 4 or 5 from time to time,
and, as such, we will be required to work with portfolio companies to improve
their business and protect our investment. The number and amount of investments
included in grades 4 or 5 may fluctuate from period to period.
Results
of Operations
Set
forth below is a discussion of our results of operations for the three months
ended December 31, 2010.
Full
Circle Capital was formed on April 16, 2010 and commenced operations on August
31, 2010, so there is no comparable period to compare results of operations for
the three months ended December 31, 2010.
Total
Investment Income
Total
investment income includes interest and dividend income on our investments and
other income, which is comprised entirely of fee income for the three months
ended December 31, 2010. Fee income consists principally of administrative fees,
prepayment fees and unused line fees.
Total
investment income for the three months ended December 31, 2010 was $2,678,197.
This amount consisted of $2,331,740 of interest income from portfolio
investments (which included $79,871 of PIK interest), $153,333 of dividend
income and $193,124 of fee income.
Expenses
Gross
Operating Expenses for the three months ended December 31, 2010 were
$1,330,150. Net Operating Expenses (offset by the waived portion
of the base management fee and the accrual for the expense reimbursement) for
the three months ended December 31, 2010 were $1,183,072.
Net
Investment Income (Loss)
Net
investment income was $1,495,125 for the three months ended December 31, 2010.
Net investment income per share was $0.24 for the three months ended December
31, 2010.
Realized
Gain (Loss)
Realized
gain (loss) on the sale of investments is the difference between the proceeds
received from dispositions of portfolio investments and their stated costs.
During the three months ended December 31, 2010, we recorded a realized gain of
$86,574. Of this gain, $66,980 was associated with the partial
repayment of the loan to Georgia Outdoor Advertising, LLC representing
approximately $1,555,000 of their outstanding loan at par on November 1, 2010
following the successful divestiture of a portion of their
assets. Realized gain (loss) per share for the three months ended
December 31, 2010 was $0.02.
29
Change
in Unrealized Gain (Loss)
Net
unrealized appreciation or depreciation recorded on investments is the net
change in the fair value of our investment portfolio during the reporting
period, including the reversal of previously recorded unrealized appreciation or
depreciation when gains or losses are realized. Change in unrealized
gain (loss) per share was ($0.04) for three months ended December 31,
2010.
During
the three months ended December 31, 2010, we recorded net unrealized
depreciation of $224,281. This consisted of $208,380 of net unrealized
depreciation on debt investments and $15,901 of net unrealized depreciation on
equity investments.
Set
forth below is a discussion of our results of operations for the six months
ended December 31, 2010.
Total
Investment Income
Total
investment income includes interest and dividend income on our investments and
other income, which is comprised entirely of fee income for the six months ended
December 31, 2010. Fee income consists principally of administrative fees,
prepayment fees and unused line fees.
Total
investment income for the six months ended December 31, 2010 was $3,545,779.
This amount consisted of $3,133,944 of interest income from portfolio
investments (which included $106,122 of PIK interest), $210,833 of dividend
income and $201,002 of fee income.
Expenses
Gross
Operating Expenses for the six months ended December 31, 2010 were
$1,985,559. Net Operating Expenses (offset by the waived portion
of the base management fee and the accrual for the expense reimbursement) for
the six months ended December 31, 2010, were $1,743,871.
As the
company commenced operations on August 31, 2010, the expenses for the six months
ended December 31, 2010 represent approximately four months of operations,
except for organizational expenses of $178,979, which were incurred over the six
months ended December 31, 2010 and operating expenses of
$18,465, which were incurred in the months of July and August.
Net
Investment Income (Loss)
As the
company commenced operations on August 31, 2010, the net investment income of
$1,801,908 for the six months ended December 31, 2010 represents approximately
four months of operations, except for organizational expenses of $178,979, which
were incurred over the six months ended December 31, 2010, and operating
expenses of $18,465, which were incurred in the months of July and
August. Organizational expenses are not expected to
reoccur. Net investment income per share was $0.30 for the period
from August 31, 2010 to December 31, 2010.
Realized
Gain (Loss)
Realized
gain (loss) on the sale of investments is the difference between the proceeds
received from dispositions of portfolio investments and their stated costs.
During the six months ended December 31, 2010, we recorded a realized gain of
$92,637. Of this gain, $66,980 was associated with the partial repayment of the
loan to Georgia Outdoor Advertising, LLC representing approximately $1,555,000
of their outstanding loan at par on November 1, 2010 following the successful
divestiture of a portion of their assets. Realized gain (loss) per
share for the period from August 31, 2010 to December 31, 2010 was
$0.02.
Change
in Unrealized Gain (Loss)
Net
unrealized appreciation or depreciation recorded on investments is the net
change in the fair value of our investment portfolio during the reporting
period, including the reversal of previously recorded unrealized appreciation or
depreciation when gains or losses are realized. Change in unrealized
gain (loss) per share was ($0.06) for the period from August 31, 2010 to
December 31, 2010.
During
the six months ended December 31, 2010, we recorded net unrealized depreciation
of $330,135. This consisted of $11,238 of net unrealized depreciation on debt
investments and $318,897 of net unrealized depreciation on equity investments
recognized between the commencement of operations on August 31, 2010 and
December 31, 2010.
Liquidity
and Capital Resources
At
December 31, 2010, we had investments in debt securities of 16 companies,
totaling approximately $64.7 million, and equity investments in 5 companies,
totaling approximately $0.4 million. The debt investment amount includes
approximately $0.11 million in accrued payment-in-kind (“PIK”) interest, which
is added to the carrying value of our investments.
30
Cash
provided by operating activities for the six months ended December 31, 2010,
consisting primarily of the items described in "Results of Operations," was
approximately $5.2 million, reflecting the income resulting from operations,
offset by non-cash income related to PIK interest and OID income, changes in
working capital and accrued interest receivable. Net cash provided by purchases
and sales of investments was approximately $7.3 million, reflecting net
additional investments in existing securities, offset by principal
repayments. Such amounts are not inclusive of our purchase of United
States Treasury Bills on September 30, 2010 and December 31, 2010.
Our
initial public offering closed on September 7, 2010, resulting in the sale of
2,000,000 shares of our common stock at $9.00 per share, and net proceeds to
Full Circle Capital of approximately $15.6 million, of which the entire amount
was used to reduce outstanding borrowings under the New Credit
Facility.
Immediately
prior to the Full Circle Portfolio Acquisition, Full Circle Capital entered into
the New Credit Facility, a secured revolving credit facility with First Capital.
The facility size is $35 million and will expire in January 2012. Under the
agreement, base rate borrowings bear interest at LIBOR plus 5.50%. As of
December 31, 2010, we had $7.6 million outstanding under the New Credit
Facility.
As of
December 31, 2010, we had Distribution Notes outstanding of approximately $3.4
million. These senior unsecured notes bear interest at a rate of 8% per annum,
are payable quarterly in cash, and mature on February 28, 2014.
Contractual
Obligations
Payments
Due By Period
(dollars
in millions)
|
||||||||||||||||||||
Total
|
Less
than 1 year
|
1-3
years
|
3-5
years
|
More
than
5
years
|
||||||||||||||||
New
Credit Facility (1)
|
$
|
7.6
|
$
|
—
|
$
|
7.6
|
$
|
—
|
$
|
—
|
||||||||||
Distribution
Notes
|
3.4
|
—
|
—
|
3.4
|
—
|
|||||||||||||||
Total
|
$
|
11.0
|
$
|
—
|
$
|
7.6
|
$
|
3.4
|
$
|
—
|
_____________________________________
(1) At
December 31, 2010, $27.4 million remained unused under the New Credit
Facility.
In
addition, we have certain obligations with respect to the investment advisory
and administration services we receive. See “Overview”. We incurred
approximately $898,875 for investment advisory services and $224,512 for
administrative services for the six months ended December 31,
2010.
Off-Balance
Sheet Arrangements
We
currently have no off-balance sheet arrangements, including any risk management
of commodity pricing or other hedging practices.
Borrowings
Secured Revolving
Credit Facility. Immediately prior to
the Full Circle Portfolio Acquisition, Full Circle Capital entered into the New
Credit Facility, a secured revolving credit facility with First Capital. The
facility size is $35 million and will expire in January 2012. Under the
agreement, base rate borrowings bear interest at LIBOR plus 5.50%. The New
Credit Facility is secured by all of our assets. Under the New Credit Facility
we are required to satisfy several financial covenants, including maintaining a
minimum level of Net Assets, a maximum level of leverage and minimum asset
coverage and interest coverage ratios. In addition, we are required to comply
with other general covenants, including with respect to indebtedness, liens,
restricted payments and mergers and consolidations.
Distribution
Notes. The Distribution Notes consist of $3.4 million in senior unsecured
notes, which bear interest at a rate of 8% per annum, payable quarterly in cash,
and mature on February 28, 2014. The Distribution Notes are callable by us at
any time, in whole or in part, at a price of 100% of their principal amount,
plus accrued and unpaid interest. In electing to exercise our call right with
respect to the Distribution Notes, our Board of Directors will consider all of
the relevant factors, including alternative uses of available capital and
whether any Distribution Notes have recently been transferred or sold at prices
below par value, and will be required to determine that such a call is in the
best interests of Full Circle Capital and our stockholders. The Distribution
Notes subject Full Circle Capital to customary covenants, including, among other
things, a restriction on incurring any debt on a junior lien basis, or any debt
that is contractually subordinated in right of payment to any other debt unless
it is also subordinated to the Distribution Notes on substantially identical
terms. The agreement under which the Distribution Notes were issued contains
customary events of default.
31
Distributions
In order
to qualify as a regulated investment company and to avoid corporate level tax on
the income we distribute to our stockholders, we are required, under Subchapter
M of the Code, to distribute at least 90% of our ordinary income and short-term
capital gains to our stockholders on an annual basis.
The
following table reflects the cash distributions, including dividends and returns
of capital, if any, per share that we have declared on our common stock to
date:
Date Declared
|
Record Date
|
Payment Date
|
Amount
|
|||||
Fiscal
2011
|
||||||||
February
4, 2011
|
March
31, 2011
|
April
15, 2011
|
$
|
0.225
|
||||
November
5, 2010
|
December
31, 2010
|
January
14, 2011
|
0.225
|
|||||
July
21, 2010
|
September
30, 2010
|
October
15, 2010
|
0.076
|
1
|
||||
Total
(2011)
|
$
|
0.526
|
1) This
quarterly dividend was prorated for the number of days remaining in the third
calendar quarter after our initial public offering. Our initial public offering
was on August 31, 2010, and the gross amount of the prorated dividend was
$0.225.
Related
Parties
We have
entered into a number of business relationships with affiliated or related
parties, including the following:
•
|
We
have entered into the Investment Advisory Agreement with Full Circle
Advisors. John E. Stuart, our Chief Executive Officer and President, is
the manager of, and has financial and controlling interests in, Full
Circle Advisors.
|
•
|
We
have entered into the Administration Agreement with Full Circle Service
Company. Pursuant to the terms of the Administration Agreement, Full
Circle Service Company provides us with the office facilities and
administrative services necessary to conduct our day-to-day operations.
Mr. Stuart, our Chief Executive Officer and President, is the managing
member of, and has financial and controlling interests in, Full Circle
Service Company.
|
•
|
We
have entered into a license agreement with Full Circle Advisors, pursuant
to which Full Circle Advisors has agreed to grant us a non-exclusive,
royalty-free license to use the name “Full
Circle.”
|
•
|
Our
Chief Financial Officer, Treasurer and Secretary, William E. Vastardis, is
the President of Vastardis Fund Services LLC. Full Circle Service Company
has engaged Vastardis Fund Services to provide certain administrative
services to us and our investment adviser, Full Circle Advisors, including
the service of Mr. Vastardis as our Chief Financial Officer, Treasurer and
Secretary.
|
•
|
The
Lotus Fund is an affiliate of First Capital, our lender under the New
Credit Facility. In December 2010, the Lotus Fund redeemed the
Company’s interest at Net Asset Value in the amount of
$6,000,000.
|
Full
Circle Advisors’ investment team presently manages Full Circle Funding, LP, a
specialty lender serving smaller and lower middle-market companies that has
originated approximately $216 million in loans and investments in 42 distinct
borrowers since its inception in 2005. Full Circle Advisors and its affiliates
may also manage other funds in the future that may have investment mandates that
are similar, in whole and in part, with ours. Full Circle Advisors and its
affiliates may determine that an investment is appropriate for us and for one or
more of those other funds. In such event, depending on the availability of such
investment and other appropriate factors, Full Circle Advisors or its affiliates
may determine that we should invest side-by-side with one or more other funds.
Any such investments will be made only to the extent permitted by applicable law
and interpretive positions of the SEC and its staff, and consistent with Full
Circle Advisors’ allocation procedures.
In
connection with our acquisition of the Legacy Portfolio, we issued an aggregate
of 4,191,415 shares of our common stock and approximately $3.4 million of
Distribution Notes to the Legacy Investors, pursuant to the Asset Purchase
Agreement.
We have
also adopted a Code of Ethics which applies to, among others, our senior
officers, including our Chief Executive Officer and Chief Financial Officer, as
well as all of our officers, directors and employees. Our Code of Ethics
requires that all employees and directors avoid any conflict, or the appearance
of a conflict, between an individual’s personal interests and our interests.
Pursuant to our Code of Ethics, each employee and director must disclose any
conflicts of interest, or actions or relationships that might give rise to a
conflict, to our Chief Compliance Officer. Our Audit Committee is charged with
approving any waivers under our Code of Ethics. As required by the NASDAQ
corporate governance listing standards, the Audit Committee of our Board of
Directors is also required to review and approve any transactions with related
parties (as such term is defined in Item 404 of Regulation S-K).
32
Recent
Developments
Dividend
On
February 4, 2011, our Board declared a quarterly dividend of $0.225 per share
for holders of record at March 31, 2011. This quarterly dividend of $0.225 per
share is payable on April 15, 2011.
On
January 14, 2011, we issued 27,867 shares of our common stock in connection with
the dividend reinvestment plan.
Recent
Portfolio Activity
On
January 1, 2011, the Company invested an additional $125,000 in Iron City
Brewing, LLC (“Iron City”) in accordance with the loan agreement between the
Company and Iron City.
On
January 5, 2011, the Company invested an additional $125,000 in Icon Groupe, LLC
in accordance with the loan agreement between the Company and Icon Groupe,
LLC.
On
January 10, 2011 the Company’s loans to Exist, Inc., BLSCO Newco, Inc. and Miken
Sales, Inc. were paid off in full, at par, in an aggregate amount of $9,710,556,
including accrued interest.
On
January 31, 2011, Icon Groupe, LLC pre-paid, at par, its loan from the Company,
remitting a total of $5,133,525 to the Company for outstanding principal,
interest and fees.
On
January 31, 2011, Equisearch Acquisition, Inc. (“Equisearch”) extended its loan
with the Company through January 31, 2012 at a floating rate equal to 14.00% as
of February 9, 2011. Additionally, Equisearch amended its warrant
agreement with the Company, whereby the Company may purchase a 12.5% ownership
interest in Equisearch, subject to certain provisions, based on performance,
allowing for Equisearch to earn back a portion of this equity.
On
February 1, 2011, Georgia Outdoor Advertising, LLC pre-paid, at par, its loan
from the Company, remitting a total of $356,484 to the Company for outstanding
principal and interest.
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
We are
subject to financial market risks, including changes in interest rates. As of
December, 2010, 7 debt investments in our portfolio were at a fixed rate, and
the remaining 16 debt investments were at variable rates, representing
approximately $20 million and $45 million in principal debt, respectively. The
majority of our floating rate debt instruments are currently at their floor
interest rate. The variable rates are based upon the Prime rate or
LIBOR.
To
illustrate the potential impact of a change in the underlying interest rate on
our net investment income, we have assumed a 1% increase in the underlying Prime
rate or LIBOR, and no other change in our portfolio as of December 31, 2010. We
have also assumed $11.0 million of outstanding borrowings, with $7.6 million of
outstanding borrowings having a floating rate based upon LIBOR. Under this
analysis, net investment income would decrease by approximately $0.1 million
annually. If we had instead assumed a 1% decrease in the underlying Prime rate
or LIBOR, net investment income would increase correspondingly by approximately
$0.1 million annually. Although management believes that this analysis is
indicative of our existing interest rate sensitivity at December 31, 2010, it
does not adjust for changes in the credit quality, size and composition of our
portfolio, and other business developments, including borrowing under a credit
facility, that could affect the net increase in net assets resulting from
operations. Accordingly, no assurances can be given that actual results would
not differ materially from the results under this hypothetical
analysis.
We may in
the future hedge against interest rate fluctuations by using standard hedging
instruments such as futures, options and forward contracts. While hedging
activities may insulate us against adverse changes in interest rates, they may
also limit our ability to participate in the benefits of lower interest rates
with respect to the investments in our portfolio with fixed interest
rates.
Item
4.
|
Controls
and Procedures
|
As of
December 31, 2010, we, including our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective in timely alerting management, including the Chief
Executive Officer and Chief Financial Officer, of material information about us
required to be included in periodic SEC filings.
There
have been no changes in our internal control over financial reporting (as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that
occurred during the quarter ended December 31, 2010 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
33
PART
II—OTHER INFORMATION
Item
1.
|
Legal
Proceedings
|
None of
us, our investment adviser or administrator, is currently subject to any
material legal proceedings, nor, to our knowledge, is any material legal
proceeding threatened against us, or against our investment adviser or
administrator. From time to time, we, our investment adviser or administrator,
may be a party to certain legal proceedings in the ordinary course of business,
including proceedings relating to the enforcement of our rights under contracts
with our portfolio companies. While the outcome of these legal proceedings
cannot be predicted with certainty, we do not expect that these proceedings will
have a material effect upon our financial condition or results of
operations.
Item
1A.
|
Risk
Factors
|
Investing
in our common stock involves a number of significant risks. In addition to the
other information contained in this quarterly report on Form 10-Q, you
should consider carefully the following information before making an investment
in our common stock. The risks set out below are not the only risks we face.
Additional risks and uncertainties not presently known to us or not presently
deemed material by us might also impair our operations and performance. If any
of the following events occur, our business, financial condition and results of
operations could be materially and adversely affected. In such case, our net
asset value and the trading price of our common stock could decline, and you may
lose all or part of your investment.
Risks
Relating to Our Business and Structure
Our
investment portfolio is recorded at fair value, with our Board of Directors
having final responsibility for overseeing, reviewing and approving, in good
faith, its estimate of fair value and, as a result, there is uncertainty as to
the value of our portfolio investments.
Under the
1940 Act, we are required to carry our portfolio investments at market value or,
if there is no readily available market value, at fair value as determined by us
in accordance with our written valuation policy, with our Board of Directors
having final responsibility for overseeing, reviewing and approving, in good
faith, our estimate of fair value. Typically, there will not be a public market
for the securities of the privately held companies in which we invest. As a
result, we value these securities quarterly at fair value based on input from
management, third party independent valuation firms and our audit committee,
with the oversight, review and approval of our Board of Directors.
The
determination of fair value and consequently, the amount of unrealized gains and
losses in our portfolio, are to a certain degree, subjective and dependent on a
valuation process approved by our Board of Directors. Certain factors that may
be considered in determining the fair value of our investments include external
events, such as private mergers, sales and acquisitions involving comparable
companies. 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. Our determinations of
fair value may differ materially from the values that would have been used if a
ready market for these securities existed. Due to this uncertainty, our fair
value determinations may cause our net asset value on a given date to materially
understate or overstate the value that we may ultimately realize on one or more
of our investments. As a result, investors purchasing our common stock based on
an overstated net asset value would pay a higher price than the value of our
investments might warrant. Conversely, investors selling shares during a period
in which the net asset value understates the value of our investments will
receive a lower price for their shares than the value of our investments might
warrant.
Our
financial condition and results of operations depend on our ability to
effectively manage and deploy capital.
Our
ability to achieve our investment objective depends on our ability to
effectively manage and deploy capital, which depends, in turn, on our investment
adviser’s ability to identify, evaluate and monitor, and our ability to finance
and invest in, companies that meet our investment criteria.
Accomplishing
our investment objective on a cost-effective basis is largely a function of our
investment adviser’s handling of the investment process, its ability to provide
competent, attentive and efficient services and our access to investments
offering acceptable terms. In addition to monitoring the performance of our
existing investments, our investment adviser’s investment team may also be
called upon, from time to time, to provide managerial assistance to some of our
portfolio companies. These demands on their time may distract them or slow the
rate of investment.
Even if
we are able to grow and build upon our investment operations, any failure to
manage our growth effectively could have a material adverse effect on our
business, financial condition, results of operations and prospects. The results
of our operations will depend on many factors, including the availability of
opportunities for investment, readily accessible short and long-term funding
alternatives in the financial markets and economic conditions. Furthermore, if
we cannot successfully operate our business or implement our investment policies
and strategies as described herein, it could negatively impact our ability to
pay dividends.
34
We may face increasing competition
for investment opportunities.
We
compete for investments with other business development companies and investment
funds (including private equity funds, mezzanine funds and small business
investment companies), as well as traditional financial services companies such
as commercial banks and other sources of funding. Many of our competitors are
substantially larger and have considerably greater financial, technical and
marketing resources than us. For example, some competitors have a lower cost of
capital and access to funding sources that is not available to us, including
from federal government agencies through federal rescue programs such as the
U.S. Department of Treasury’s Financial Stability Plan (formerly known as the
Troubled Asset Relief Program). In addition, some of our competitors have higher
risk tolerances or different risk assessments than we have. These
characteristics could allow our competitors to consider a wider variety of
investments, establish more relationships and offer better pricing and more
flexible structuring than we are able to offer. We may lose investment
opportunities if we do not match our competitors’ pricing, terms and structure.
If we are forced to match our competitors’ pricing, terms and structure, we may
not be able to achieve acceptable returns on our investments or may bear
substantial risk of capital loss. A significant part of our competitive
advantage stems from the fact that the market for investments in smaller and
lower middle-market companies is underserved by traditional commercial banks and
other financing sources. A significant increase in the number and/or the size of
our competitors in this target market could force us to accept less attractive
investment terms. Furthermore, many of our competitors have greater experience
operating under, or are not subject to, the regulatory restrictions that the
1940 Act impose on us as a business development company. We believe that certain
of our competitors will make first and second lien loans with interest rates and
returns that are comparable to or lower than the rates and returns that we
target. Therefore, we do not seek to compete solely on the interest rates and
returns that we offer to potential portfolio companies.
We
are dependent upon Full Circle Advisors’ key personnel for our future
success.
We depend
on the diligence, skill and network of business contacts of Mr. Stuart, who
serves as the sole member of the investment committee of Full Circle Advisors,
and who leads Full Circle Advisors’ investment team. Mr. Stuart, together with
the other dedicated senior investment professionals available to Full Circle
Advisors, evaluates, negotiates, structures, closes and monitors our
investments. Our future success depends on the continued service of Mr. Stuart
and the other senior investment professionals available to Full Circle Advisors.
We cannot assure you that unforeseen business, medical, personal or other
circumstances would not lead Mr. Stuart or any other such individual to
terminate his relationship with us. The loss of Mr. Stuart or any of the other
senior investment professionals who serve on Full Circle Advisors’ investment
team, could have a material adverse effect on our ability to achieve our
investment objective as well as on our financial condition and results of
operations. In addition, we can offer no assurance that Full Circle Advisors
will continue indefinitely as our investment adviser.
The
members of Full Circle Advisors’ investment team are and may in the future
become affiliated with entities engaged in business activities similar to those
intended to be conducted by us, and may have conflicts of interest in allocating
their time. We expect that Mr. Stuart will dedicate a significant portion of his
time to the activities of Full Circle Capital; however, he may be engaged in
other business activities which could divert his time and attention in the
future.
Our
success depends on the ability of Full Circle Advisors to attract and retain
qualified personnel in a competitive environment.
Our
growth requires that Full Circle Advisors retain and attract new investment and
administrative personnel in a competitive market. Its ability to attract and
retain personnel with the requisite credentials, experience and skills depends
on several factors including, but not limited to, its ability to offer
competitive wages, benefits and professional growth opportunities. Many of the
entities, including investment funds (such as private equity funds and mezzanine
funds) and traditional financial services companies, with which it competes for
experienced personnel have greater resources than it has.
There
are significant potential conflicts of interest which could impact our
investment returns.
Full
Circle Advisors’ investment team presently manages Full Circle Funding, LP, a
specialty lender serving smaller and lower middle-market companies that has
originated approximately $216 million in loans and investments in 42 distinct
borrowers since its inception in 2005. In addition, our executive officers and
directors, as well as the current and future members of our investment adviser,
Full Circle Advisors, may serve as officers, directors or principals of other
entities that operate in the same or a related line of business as we do.
Accordingly, they may have obligations to investors in those entities, the
fulfillment of which obligations may not be in the best interests of us or our
stockholders. Although the existing investment funds managed by Full Circle
Funding, LP, which currently consist of the Legacy Funds, are no longer making
investments, any affiliated investment vehicle formed in the future and managed
by our investment adviser or its affiliates may, notwithstanding different
stated investment objectives, have overlapping investment objectives with our
own and, accordingly, may invest in asset classes similar to those targeted by
us. As a result, Full Circle Advisors may face conflicts in allocating
investment opportunities between us and such other entities. Although Full
Circle Advisors will endeavor to allocate investment opportunities in a fair and
equitable manner, it is possible that, in the future, we may not be given the
opportunity to participate in investments made by investment funds managed by
our investment adviser or an investment manager affiliated with our investment
adviser. In any such case, when Full Circle Advisors identifies an investment,
it will be forced to choose which investment fund should make the investment.
Full Circle Advisors has implemented an allocation policy to ensure the
equitable distribution of such investment opportunities consistent with the
requirements of the 1940 Act.
If our
investment adviser forms other affiliates in the future, we may co-invest on a
concurrent basis with such other affiliates, subject to compliance with
applicable regulations and regulatory guidance and our allocation
procedures.
35
In the
course of our investing activities, we pay management and incentive fees to Full
Circle Advisors and reimburse Full Circle Advisors for certain expenses it
incurs. As a result, investors in our common stock invest on a “gross” basis and
receive distributions on a “net” basis after expenses, resulting in a lower rate
of return than an investor might achieve through direct investments.
Accordingly, there may be times when the management team of Full Circle Advisors
will have interests that differ from those of our stockholders, giving rise to a
conflict. Full Circle Advisors is not reimbursed for any performance-related
compensation for its employees.
We have
entered into a royalty-free license agreement with our investment adviser,
pursuant to which Full Circle Advisors grants us a non-exclusive royalty-free
license to use the name “Full Circle.” Under the license agreement, we have the
right to use the “Full Circle” name for so long as Full Circle Advisors or one
of its affiliates remains our investment adviser. In addition, we will pay Full
Circle Service Company, an affiliate of Full Circle Advisors, our allocable
portion of overhead and other expenses incurred by Full Circle Service Company
in performing its obligations under the Administration Agreement, including
rent, the fees and expenses associated with performing compliance functions, and
our allocable portion of the compensation of our Chief Financial Officer and any
administrative support staff. These arrangements create conflicts of interest
that our Board of Directors must monitor.
In the
ordinary course of business, we may enter into transactions with portfolio
companies that may be considered related party transactions. In order to ensure
that we do not engage in any prohibited transactions with any persons affiliated
with us, we have implemented certain written policies and procedures whereby our
executive officers screen each of our transactions for any possible affiliations
between the proposed portfolio investment, us, companies controlled by us and
our executive officers and directors. We will not enter into any agreements
unless and until we are satisfied that doing so will not raise concerns under
the 1940 Act or, if such concerns exist, we have taken appropriate actions to
seek board review and approval or exemptive relief for such transaction. Our
Board of Directors reviews these procedures on an annual basis.
We have
also adopted a Code of Ethics which applies to, among others, our senior
officers, including our Chief Executive Officer and Chief Financial Officer, as
well as all of our officers, directors and employees. Our Code of Ethics
requires that all employees and directors avoid any conflict, or the appearance
of a conflict, between an individual’s personal interests and our interests.
Pursuant to our Code of Ethics, each employee and director must disclose any
conflicts of interest, or actions or relationships that might give rise to a
conflict, to our Chief Compliance Officer. Our Audit Committee is charged with
approving any waivers under our Code of Ethics. As required by the NASDAQ
corporate governance listing standards, the Audit Committee of our Board of
Directors is also required to review and approve any transactions with related
parties (as such term is defined in Item 404 of Regulation S-K).
Our
incentive fee structure and the formula for calculating the management fee may
incentivize Full Circle Advisors to pursue speculative investments, use leverage
when it may be unwise to do so, or refrain from delevering when it would
otherwise be appropriate to do so.
The
incentive fee payable by us to Full Circle Advisors may create an incentive for
Full Circle Advisors to pursue investments on our behalf that are riskier or
more speculative than would be the case in the absence of such compensation
arrangement. The incentive fee payable to our investment adviser is calculated
based on a percentage of our return on invested capital. In addition, our base
management fee is calculated on the basis of our gross assets, including assets
acquired through the use of leverage. This may encourage our investment adviser
to use leverage to increase the aggregate amount of and the return on our
investments, even when it may not be appropriate to do so, and to refrain from
delevering when it would otherwise be appropriate to do so. Under certain
circumstances, the use of leverage may increase the likelihood of default, which
would impair the value of our common stock. In addition, the investment adviser
will receive the incentive fee based, in part, upon net capital gains realized
on our investments. Unlike that portion of the incentive fee based on income,
there will be no hurdle rate applicable to the portion of the incentive fee
based on net capital gains. As a result, the investment adviser may have a
tendency to invest more capital in investments that are likely to result in
capital gains as compared to income producing securities. 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, particularly during
economic downturns.
The
incentive fee payable by us to our investment adviser also may induce Full
Circle Advisors to invest on our behalf in instruments that have a deferred
interest feature, even if such deferred payments would not provide cash
necessary to enable us to pay current distributions to our stockholders. Under
these investments, we would accrue interest over the life of the investment but
would not receive the cash income from the investment until the end of the term.
Our net investment income used to calculate the income portion of our investment
fee, however, will include accrued interest. Thus, a portion of this incentive
fee would be based on income that we have not yet received in cash. In addition,
the “catch-up” portion of the incentive fee may encourage Full Circle Advisors
to accelerate or defer interest payable by portfolio companies from one calendar
quarter to another, potentially resulting in fluctuations in timing and dividend
amounts.
We may
invest, to the extent permitted by law, in the securities and instruments of
other investment companies, including private funds, and, to the extent we so
invest, will bear our ratable share of any such investment company’s expenses,
including management and performance fees. We will also remain obligated to pay
management and incentive fees to Full Circle Advisors with respect to the assets
invested in the securities and instruments of other investment companies. With
respect to each of these investments, each of our stockholders will bear his or
her share of the management and incentive fee of Full Circle Advisors as well as
indirectly bearing the management and performance fees and other expenses of any
investment companies in which we invest.
36
A general increase in interest rates
will likely have the effect of making it easier for our investment adviser to
receive incentive fees, without necessarily resulting in an increase in our net
earnings.
Given the
structure of our Investment Advisory Agreement with Full Circle Advisors, any
general increase in interest rates will likely have the effect of making it
easier for Full Circle Advisors to meet the quarterly hurdle rate for payment of
income incentive fees under the Investment Advisory Agreement without any
additional increase in relative performance on the part of our investment
adviser. In addition, in view of the catch-up provision applicable to income
incentive fees under the Investment Advisory Agreement, our investment adviser
could potentially receive a significant portion of the increase in our
investment income attributable to such a general increase in interest rates. If
that were to occur, our increase in net earnings, if any, would likely be
significantly smaller than the relative increase in our investment adviser’s
income incentive fee resulting from such a general increase in interest
rates.
Our
investment adviser has the right to resign on 60 days’ notice, and we may not be
able to find a suitable replacement within that time, resulting in a disruption
in our operations that could adversely affect our financial condition, business
and results of operations.
Our
investment adviser has the right, under the Investment Advisory Agreement, to
resign at any time upon not more than 60 days’ written notice, whether we have
found a replacement or not. If our investment adviser resigns, we may not be
able to find a new investment adviser or hire internal management with similar
expertise and ability to provide the same or equivalent services on acceptable
terms within 60 days, or at all. If we are unable to do so quickly, our
operations are likely to experience a disruption, our financial condition,
business and results of operations as well as our ability to pay distributions
are likely to be adversely affected and the market price of our shares may
decline. In addition, the coordination of our internal management and investment
activities is likely to suffer if we are unable to identify and reach an
agreement with a single institution or group of executives having the expertise
possessed by our investment adviser and its affiliates. Even if we are able to
retain comparable management, whether internal or external, the integration of
such management and their lack of familiarity with our investment objective may
result in additional costs and time delays that may adversely affect our
financial condition, business and results of operations.
We
have a limited operating history as a business development company.
As a
result of our limited operating history as a business development company, we
are subject to many of the business risks and uncertainties associated with
recently formed businesses, including the risk that we will not achieve our
investment objective and that the value of your investment could decline
substantially.
Our
investment adviser may not be able to achieve the same or similar returns as
those achieved by Mr. Stuart while he was employed at prior
positions.
Although
in the past Mr. Stuart held senior positions at a number of investment firms,
including Full Circle Funding, LP, his track record and achievements are not
necessarily indicative of future results that will be achieved by our investment
adviser. We cannot assure you that we will be able to achieve the results
realized by prior vehicles managed by Mr. Stuart, including the Legacy Funds.
The
Legacy Portfolio represented only a portion of the investments of the Legacy
Funds and the performance of the investments in the Legacy Portfolio may not be
indicative of our investment adviser’s future performance in managing our
overall portfolio.
The
portfolio investments that comprised the Legacy Portfolio represented only a
portion of the total portfolio investments of the Legacy Funds. As a result, you
should not place undue reliance on the fact that the investments included in the
Legacy Portfolio are currently performing. Specifically, the Legacy Funds have
historically suffered some defaults and losses on certain of their portfolio
investments, including defaults unrelated to the satisfaction of payment
obligations in certain Legacy Portfolio investments. There can be no assurance
that the investments comprising the Legacy Portfolio, as well as additional
investments we may make, will not suffer similar or more frequent defaults and
losses in the future. In addition, the investments comprising the Legacy
Portfolio were selected in part as a result of their performance and risk
characteristics, and should not be viewed as an indicator of either the overall
performance of the Legacy Funds or the prospective performance of our portfolio
in the future. You should also be aware that, because the Legacy Portfolio was
leveraged at the time we acquired it, any inaccuracies in our determination of
fair value of the Legacy Portfolio will be magnified relative to a non-leveraged
portfolio.
Any
failure on our part to maintain our status as a business development company
would reduce our operating flexibility.
We have
elected to be treated as a business development company under the 1940 Act. The
1940 Act imposes numerous constraints on the operations of business development
companies. For example, business development companies are required to invest at
least 70% of their gross assets in specified types of securities, primarily in
private companies or thinly-traded U.S. public companies, cash, cash
equivalents, U.S. government securities and other high quality debt investments
that mature in one year or less. Furthermore, any failure to comply with the
requirements imposed on business development companies by the 1940 Act could
cause the SEC to bring an enforcement action against us and/or expose us to
claims of private litigants. In addition, upon approval of a majority of our
stockholders, we may elect to withdraw our status as a business development
company. If we decide to withdraw our election, or if we otherwise fail to
qualify, or maintain our qualification, as a business development company, we
may be subject to the substantially greater regulation under the 1940 Act as a
closed-end investment company. Compliance with such regulations would
significantly decrease our operating flexibility, and could significantly
increase our costs of doing business.
37
Regulations
governing our operation as a business development company affect our ability to
raise additional capital and the way in which we do so. As a business
development company, the necessity of raising additional capital may expose us
to risks, including the typical risks associated with leverage.
We may
issue debt securities or preferred stock and/or borrow money from banks or other
financial institutions, which we refer to collectively as “senior securities,”
up to the maximum amount permitted by the 1940 Act. Under the provisions of the
1940 Act, we will be permitted, as a business development company, to issue
senior securities in amounts such that our asset coverage ratio, as defined in
the 1940 Act, equals at least 200% of gross assets less all liabilities and
indebtedness not represented by senior securities, after each issuance of senior
securities. 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
indebtedness at a time when such sales may be disadvantageous. Also, any amounts
that we use to service our indebtedness would not be available for distributions
to our common stockholders. Furthermore, as a result of issuing senior
securities, we would also be exposed to typical risks associated with leverage,
including an increased risk of loss. As of December 31, 2010, we had
approximately $3.4 million of Distribution Notes outstanding, and had
approximately $7.6 million outstanding and an additional $27.4 million of
borrowing available under the New Credit Facility. If we issue preferred stock,
the preferred stock would rank “senior” to common stock in our capital
structure, preferred stockholders would have separate voting rights on certain
matters and might have other rights, preferences, or privileges more favorable
than those of our common stockholders, and the issuance of preferred stock could
have the effect of delaying, deferring or preventing a transaction or a change
of control that might involve a premium price for holders of our common stock or
otherwise be in your best interest.
We are
not generally 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 a price below the then-current net asset
value per share of our common stock if our Board of Directors determines that
such sale is in the best interests of Full Circle Capital 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 distributing commission or discount). If we raise
additional funds by issuing more common stock or senior securities convertible
into, or exchangeable for, our common stock, then the percentage ownership of
our stockholders at that time will decrease, and you may experience
dilution.
We
borrow money, which magnifies the potential for gain or loss on amounts invested
and increases the risk of investing in us.
The use
of leverage magnifies the potential for gain or loss on amounts invested and,
therefore, increases the risks associated with investing in our securities. We
borrow from and issue senior debt securities to banks, insurance companies and
other lenders. Holders of these senior securities will have fixed dollar claims
on our assets that are superior to the claims of our common stockholders, and we
would expect such lenders to seek recovery against our assets in the event of a
default. If the value of our assets decreases, leveraging would cause net asset
value to decline more sharply than it otherwise would have had we not leveraged.
Similarly, any decrease in our income would cause net income to decline more
sharply than it would have had we not borrowed. Such a decline could also
negatively affect our ability to make dividend payments on our common stock.
Leverage is generally considered a speculative investment technique. Our ability
to service any debt that we incur will depend largely on our financial
performance and will be subject to prevailing economic conditions and
competitive pressures. Moreover, as the management fee payable to our investment
adviser, Full Circle Advisors, is payable based on our gross assets, including
those assets acquired through the use of leverage, Full Circle Advisors has a
financial incentive to incur leverage which may not be consistent with our
stockholders’ interests. In addition, our common stockholders bear the burden of
any increase in our expenses as a result of leverage, including any increase in
the management fee payable to Full Circle Advisors.
As a
business development company, we are generally required to meet an asset
coverage ratio, defined under the 1940 Act as the ratio of our gross assets
(less all liabilities and indebtedness not represented by senior securities) to
our outstanding senior securities, of at least 200% after each issuance of
senior securities. If this ratio declines below 200%, we may not be able to
incur additional debt and could be required by law to sell a portion of our
investments to repay some debt when it is disadvantageous to do so, which could
have a material adverse effect on our operations, and we may not be able to make
distributions. The amount of leverage that we employ depends on our investment
adviser’s and our Board of Directors’ assessment of market and other factors at
the time of any proposed borrowing.
In
addition, the New Credit Facility and Distribution Notes impose, and any other
debt facility into which we may enter would likely impose, financial and
operating covenants that restrict our business activities, including limitations
that could hinder our ability to finance additional loans and investments or to
make the distributions required to maintain our status as a RIC under Subchapter
M of the Code.
The
material financial terms of the Distribution Notes and the New Credit Facility
are as follows:
Distribution Notes
|
New Credit Facility
|
||
Approximate
Principal Amount at December 31, 2010
|
$3.4
million (1)
|
$7.6
million (2)
|
|
Interest
Rate
|
8%
|
LIBOR
+ 5.50%
|
|
Maturity
Date
|
February
2014 (3)
|
January
2012
|
(1)
|
Reflects
approximate total principal amount of Distribution Notes outstanding as of
December 31, 2010.
|
(2)
|
Reflects
approximate total amount of borrowings outstanding as of December 31,
2010.
|
(3)
|
Subject
to redemption by us at our
election.
|
38
The
Distribution Notes contain certain terms that may be more favorable to us than
we would otherwise be able to obtain from other senior unsecured lenders. As a
result, we may be required to incur leverage equal to the amount of the
Distribution Notes on less favorable terms to us in order to repay the
Distribution Notes upon their maturity, to the extent we do not have sufficient
available cash on hand at that time.
We
may experience fluctuations in our quarterly results.
We could
experience fluctuations in our quarterly operating results due to a number of
factors, including our ability or inability to make investments in companies
that meet our investment criteria, the interest rate payable on the debt
securities we acquire, the level of portfolio dividend and fee income, 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.
Our
Board of Directors is authorized to reclassify any unissued shares of common
stock into one or more classes of preferred stock, which could convey special
rights and privileges to its owners.
Under
Maryland General Corporation Law and our charter, our Board of Directors is
authorized to classify and reclassify any authorized but unissued shares of
stock into one or more classes of stock, including preferred stock. Prior to
issuance of shares of each class or series, the Board of Directors will be
required by Maryland law and our charter to set the terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each class or series. Thus, the Board of Directors could
authorize the issuance of shares of preferred stock with terms and conditions
which could have the effect of delaying, deferring or preventing a transaction
or a change in control that might involve a premium price for holders of our
common stock or otherwise be in their best interest. The cost of any such
reclassification would be borne by our common stockholders. Certain matters
under the 1940 Act require the separate vote of the holders of any issued and
outstanding preferred stock. For example, holders of preferred stock would vote
separately from the holders of common stock on a proposal to cease operations as
a business development company. In addition, the 1940 Act provides that holders
of preferred stock are entitled to vote separately from holders of common stock
to elect two preferred stock directors. We currently have no plans to issue
preferred stock. The issuance of preferred shares convertible into shares of
common stock may also reduce the net income and net asset value per share of our
common stock upon conversion, provided, that we will only be permitted to issue
such convertible preferred stock to the extent we comply with the requirements
of Section 61 of the 1940 Act, including obtaining common stockholder approval.
These effects, among others, could have an adverse effect on your investment in
our common stock.
Our
Board of Directors may change our investment objective, operating policies and
strategies without prior notice or stockholder approval, the effects of which
may be adverse.
Our Board
of Directors has the authority to modify or waive our investment objective,
current operating policies, investment criteria and strategies without prior
notice and without stockholder approval. We cannot predict the effect any
changes to our current operating policies, investment criteria and strategies
would have on our business, net asset value, operating results and value of our
stock. However, the effects might be adverse, which could negatively impact our
ability to pay you dividends and cause you to lose all or part of your
investment.
We
will be subject to corporate-level income tax if we are unable to qualify as a
RIC under Subchapter M of the Code.
Although
we intend to elect to be treated as a RIC under Subchapter M of the Code
for the tax year ending June 30, 2011, and succeeding tax years, no
assurance can be given that we will be able to qualify for and maintain RIC
status. To obtain and maintain RIC tax treatment under the Code, we must meet
the following annual distribution, income source and asset diversification
requirements.
The
annual distribution requirement for a RIC will be satisfied if we distribute to
our stockholders on an annual basis at least 90% of our net ordinary income and
realized net short-term capital gains in excess of realized net long-term
capital losses, if any. Because we may use debt financing, we are subject to
certain asset coverage ratio requirements under the 1940 Act and financial
covenants under loan and credit agreements that could, under certain
circumstances, restrict us from making distributions necessary to satisfy the
distribution requirement. If we are unable to obtain cash from other sources, we
could fail to qualify for RIC tax treatment and thus become subject to
corporate-level income tax.
The
income source requirement will be satisfied if we obtain at least 90% of our
income for each year from dividends, interest, gains from the sale of stock or
securities or similar sources.
The asset
diversification requirement will be satisfied if we meet certain asset
diversification requirements at the end of each quarter of our taxable year.
Failure to meet those requirements may result in our having to dispose of
certain investments quickly in order to prevent the loss of RIC status. Because
most of our investments will be in private companies, and therefore will be
relatively illiquid, any such dispositions could be made at disadvantageous
prices and could result in substantial losses.
39
If we
fail to qualify for RIC tax treatment for any reason and remain or become
subject to corporate income tax, the resulting corporate taxes could
substantially reduce our net assets, the amount of income available for
distribution and the amount of our distributions.
There
is a risk that our stockholders may not receive distributions or that our
distributions may not grow over time.
We intend
to make distributions on a quarterly basis to our stockholders out of assets
legally available for distribution. We cannot assure you that we will achieve
investment results that will allow us to make a specified level of cash
distributions or year-to-year increases in cash distributions. In addition, due
to the asset coverage test applicable to us as a business development company,
we may be limited in our ability to make distributions.
We
may have difficulty paying our required distributions if we recognize income
before or without receiving cash representing such income.
For
federal income tax purposes, we include in income certain amounts that we have
not yet received in cash, such as original issue discount, which may arise if we
receive warrants in connection with the origination of a loan or possibly in
other circumstances, or contractual “payment-in-kind,” or PIK, interest, which
represents contractual interest added to the loan balance and due at the end of
the loan term. Such original issue discounts or increases in loan balances as a
result of contractual PIK arrangements will be included in income before we
receive any corresponding cash payments. We are also required to include in
income certain other amounts that we do not receive in cash.
Since, in
certain cases, we may recognize income before or without receiving cash
representing such income, we may have difficulty meeting the annual distribution
requirement necessary to maintain RIC tax treatment under the Code. In addition,
since our incentive fee is payable on our income recognized, rather than cash
received, we may be required to pay advisory fees on income before or without
receiving cash representing such income. Accordingly, we may have to
sell some of our investments at times and/or at prices we would not consider
advantageous, raise additional debt or equity capital or forgo new investment
opportunities for this purpose. If we are not able to obtain cash from other
sources, we may fail to qualify for RIC tax treatment and thus become subject to
corporate-level income tax.
We
may in the future choose to pay dividends in our own stock, in which case you
may be required to pay tax in excess of the cash you receive.
We may
distribute taxable dividends that are payable in part in our stock. Under a
recently issued IRS revenue procedure, up to 90% of any such taxable dividend
for taxable years ending prior to 2012 could be payable in our stock. Taxable
stockholders receiving such dividends will be required to include the full
amount of the dividend as ordinary income (or as long-term capital gain to the
extent such distribution is properly designated as a capital gain dividend) to
the extent of our current and accumulated earnings and profits for United States
federal income tax purposes. As a result, a U.S. stockholder may be required to
pay tax with respect to such dividends in excess of any cash received. If a U.S.
stockholder sells the stock it receives as a dividend in order to pay this tax,
the sales proceeds may be less than the amount included in income with respect
to the dividend, depending on the market price of our stock at the time of the
sale. Furthermore, with respect to non-U.S. stockholders, we may be required to
withhold U.S. tax with respect to such dividends, including in respect of all or
a portion of such dividend that is payable in stock. In addition, if a
significant number of our stockholders determine to sell shares of our stock in
order to pay taxes owed on dividends, it may put downward pressure on the
trading price of our stock.
Changes
in laws or regulations governing our operations may adversely affect our
business or cause us to alter our business strategy.
We and
our portfolio companies are subject to applicable local, state and federal laws
and regulations, including, without limitation, federal immigration laws and
regulations. 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 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 set forth herein and may result in our investment focus
shifting from the areas of expertise of our investment adviser’s investment team
to other types of investments in which the investment team 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
incur significant costs as a result of being a publicly traded
company.
As a
publicly traded company, we incur legal, accounting and other expenses,
including costs associated with the periodic reporting requirements applicable
to a company whose securities are registered under the Securities Exchange Act
of 1934, as amended, or the Exchange Act, as well as additional corporate
governance requirements, including requirements under the Sarbanes-Oxley Act of
2002, and other rules implemented by the Securities and Exchange
Commission.
40
An extended
continuation of the disruption in the capital markets and the credit markets
could impair our ability to raise capital and negatively affect our
business.
As a
business development company, we must maintain our ability to raise additional
capital for investment purposes. Without sufficient access to the capital
markets or credit markets, we may be forced to curtail our business operations
or we may not be able to pursue new business opportunities. Since the middle of
2007, the capital markets and the credit markets have been experiencing extreme
volatility and disruption and, accordingly, there has been and will continue to
be uncertainty in the financial markets in general. Ongoing disruptive
conditions in the financial industry and the impact of new legislation in
response to those conditions could restrict our business operations and could
adversely impact our results of operations and financial condition.
If the
fair value of our assets declines substantially, we may fail to maintain the
asset coverage ratios imposed upon us by the 1940 Act. Any such failure would
affect our ability to issue senior securities, including borrowings, and pay
dividends, which could materially impair our business operations. Our liquidity
could be impaired further by an inability to access the capital markets or to
draw on our credit facilities. For example, we cannot be certain that we will be
able to renew our credit facilities as they mature or to consummate new
borrowing facilities to provide capital for normal operations, including new
originations. Reflecting concern about the stability of the financial markets,
many lenders and institutional investors have reduced or ceased providing
funding to borrowers. This market turmoil and tightening of credit have led to
increased market volatility and widespread reduction of business activity
generally.
If we are
unable to renew or replace such facilities and consummate new facilities on
commercially reasonable terms, our liquidity will be reduced significantly. If
we are unable to repay amounts outstanding under such facilities and are
declared in default or are unable to renew or refinance these facilities, we
would not be able to initiate significant originations or to operate our
business in the normal course. These situations may arise due to circumstances
that we may be unable to control, such as inaccessibility to the credit markets,
a severe decline in the value of the U.S. dollar, a further economic downturn or
an operational problem that affects third parties or us, and could materially
damage our business. Moreover, we are unable to predict when economic and market
conditions may become more favorable. Even if such conditions improve broadly
and significantly over the long term, adverse conditions in particular sectors
of the financial markets could adversely impact our business.
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/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 generally
uninsurable.
Risks
Related to Our Investments
Our
investments are very risky and highly speculative, and the smaller and lower
middle-market companies we target may have difficulty accessing the capital
markets to meet their future capital needs, which may limit their ability to
grow or to repay their outstanding indebtedness upon maturity.
We invest
primarily in senior secured term loans, mezzanine debt and select equity
investments issued by leveraged companies.
Senior Secured
Loans . There is a risk that the collateral securing our loans
may decrease in value over time, may be difficult to sell in a timely manner,
may be difficult to appraise and may fluctuate in value based upon the success
of the business and market conditions, including as a result of the inability of
the portfolio company to raise additional capital, and, in some circumstances,
our lien could be subordinated to claims of other creditors. In addition,
deterioration in a portfolio company’s financial condition and prospects,
including its inability to raise additional capital, may be accompanied by
deterioration in the value of the collateral for the loan. Consequently, the
fact that a loan is secured does not guarantee that we will receive principal
and interest payments according to the loan’s terms, or at all, or that we will
be able to collect on the loan should we be forced to enforce our
remedies.
Mezzanine
Loans . Our mezzanine debt investments are generally
subordinated to senior loans and are generally unsecured. As such, other
creditors may rank senior to us in the event of an insolvency, which could
likely in many cases result in a substantial or complete loss on such investment
in the case of such insolvency. This may result in an above average amount of
risk and loss of principal.
Equity
Investments. When we invest in senior secured loans or
mezzanine loans, we may acquire equity securities as well. In addition, we may
invest directly in the equity securities of portfolio companies. The equity
interests we receive may not appreciate in value and, in fact, 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.
41
In
addition, investing in smaller and lower middle-market companies involves a
number of significant risks, including:
•
|
these
companies may have limited financial resources and may be unable to meet
their obligations under their debt securities that we hold, which may be
accompanied by a deterioration in the value of any collateral and a
reduction in the likelihood of us realizing any guarantees we may have
obtained in connection with our
investment;
|
•
|
they
typically have shorter operating histories, narrower product lines and
smaller market shares than larger businesses, which tend to render them
more vulnerable to competitors’ actions and market conditions, as well as
general economic downturns;
|
•
|
they
are more likely to depend on the management talents and efforts of a small
group of persons; therefore, the death, disability, resignation or
termination of one or more of these persons could have a material adverse
impact on our portfolio company and, in turn, on
us;
|
•
|
they
generally have less predictable operating results, may from time to time
be parties to litigation, may be engaged in rapidly changing businesses
with products subject to a substantial risk of obsolescence, and may
require substantial additional capital to support their operations,
finance expansion or maintain their competitive position. In addition, our
executive officers, directors and our investment adviser may, in the
ordinary course of business, be named as defendants in litigation arising
from our investments in the portfolio companies;
and
|
•
|
they
may have difficulty accessing the capital markets to meet future capital
needs, which may limit their ability to grow or to repay their outstanding
indebtedness upon maturity.
|
Investing
in smaller and lower middle-market companies involves a high degree of risk and
our financial results may be affected adversely if one or more of our
significant portfolio investments defaults on its loans or fails to perform as
we expect.
Our
portfolio consists primarily of debt and equity investments in privately owned
smaller and lower middle-market companies. Investing in smaller and lower
middle-market companies involves a number of significant risks. Typically, the
debt in which we invest is not initially rated by any rating agency; however, we
believe that if such investments were rated, they would be below investment
grade. Compared to larger publicly owned companies, these smaller and lower
middle-market companies may be in a weaker financial position and experience
wider variations in their operating results, which may make them more vulnerable
to economic downturns. Typically, these companies need more capital to compete;
however, their access to capital is limited and their cost of capital is often
higher than that of their competitors. Our portfolio companies face intense
competition from larger companies with greater financial, technical and
marketing resources and their success typically depends on the managerial
talents and efforts of an individual or a small group of persons. Therefore, the
loss of any of its key employees could affect a portfolio company’s ability to
compete effectively and harm its financial condition. Further, some of these
companies conduct business in regulated industries that are susceptible to
regulatory changes. These factors could impair the cash flow of our portfolio
companies and result in other events, such as bankruptcy. These events could
limit a portfolio company’s ability to repay its obligations to us, which may
have an adverse affect on the return on, or the recovery of, our investment in
these businesses. Deterioration in a borrower’s financial condition and
prospects may be accompanied by deterioration in the value of the loan’s
collateral.
Most of
the loans in which we invest are not structured to fully amortize during their
lifetime. Accordingly, if a borrower has not previously pre-paid its loan to us,
a significant portion of the principal amount due on such a loan may be due at
maturity. As of December 31, 2010, approximately 98% of the Level 3 debt
instruments in our portfolio, on a fair value basis, will not fully amortize
prior to maturity. In order to create liquidity to pay the final principal
payment, borrowers typically must raise additional capital. If they are unable
to raise sufficient funds to repay us or we have not elected to enter into a new
loan agreement providing for an extended maturity, the loan will go into
default, which will require Full Circle Capital to foreclose on the borrower’s
assets, even if the loan was otherwise performing prior to maturity. This will
deprive Full Circle Capital from immediately obtaining full recovery on the loan
and prevent or delay the reinvestment of the loan proceeds in other, more
profitable investments.
Some of
these companies cannot obtain financing from public capital markets or from
traditional credit sources, such as commercial banks. Accordingly, loans made to
these types of companies pose a higher default risk than loans made to companies
that have access to traditional credit sources.
An
investment strategy focused primarily on privately held companies presents
certain challenges, including the lack of available information about these
companies, a dependence on the talents and efforts of only a few key portfolio
company personnel and a greater vulnerability to economic
downturns.
We invest
primarily in privately held companies. Generally, little public information
exists about these companies, and we are required to rely on the ability of Full
Circle Advisors’ investment team to obtain adequate information to evaluate the
potential returns from investing in these companies. If we are unable to uncover
all material information about these companies, we may not make a fully informed
investment decision, and we may lose money on our investments. Also, privately
held companies frequently have less diverse product lines and smaller market
presence than larger competitors. These factors could adversely affect our
investment returns as compared to companies investing primarily in the
securities of public companies.
42
Our
portfolio companies may incur debt that ranks equally with, or senior to, our
investments in such companies.
We invest
primarily in senior secured term debt issued by smaller and lower middle-market
companies. Our portfolio companies may have, or may be permitted to incur, other
debt that ranks equally with, or in some cases senior to, the debt in which we
invest. By their terms, such debt instruments may entitle the holders to receive
payment of interest or principal on or before the dates on which we are entitled
to receive payments with respect to the debt instruments in which we invest.
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. After repaying such senior
creditors, such portfolio company may not have any remaining assets to use for
repaying its obligation to us. In the case of debt ranking equally with debt
instruments 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.
There
may be circumstances where our debt investments could be subordinated to claims
of other creditors or we could be subject to lender liability
claims.
Even
though we may have structured most of our investments as secured loans, if one
of our portfolio companies were to go bankrupt, depending on the facts and
circumstances, and based upon principles of equitable subordination as defined
by existing case law, a bankruptcy court could subordinate all or a portion of
our claim to that of other creditors and transfer any lien securing such
subordinated claim to the bankruptcy estate. The principles of equitable
subordination defined by case law have generally indicated that a claim may be
subordinated only if its holder is guilty of misconduct or where the senior loan
is re-characterized as an equity investment and the senior lender has actually
provided significant managerial assistance to the bankrupt debtor. We may also
be subject to lender liability claims for actions taken by us with respect to a
borrower’s business or instances where we exercise control over the borrower. It
is possible that we could become subject to a lender’s liability claim,
including as a result of actions taken in rendering significant managerial
assistance or actions to compel and collect payments from the borrower outside
the ordinary course of business.
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 are secured by a second priority security interest in the
same collateral pledged by a portfolio company to secure senior debt owed by the
portfolio company to commercial banks or other traditional lenders. Often the
senior lender has procured covenants from the portfolio company prohibiting the
incurrence of additional secured debt without the senior lender’s consent. Prior
to and as a condition of permitting the portfolio company to borrow money from
us secured by the same collateral pledged to the senior lender, the senior
lender will require assurances that it will control the disposition of any
collateral in the event of bankruptcy or other default. In many such cases, the
senior lender will require us to enter into an “intercreditor agreement” prior
to permitting the portfolio company to borrow from us. Typically the
intercreditor agreements we will be requested to execute expressly subordinate
our debt instruments to those held by the senior lender and further provide that
the senior lender shall control: (1) the commencement of foreclosure or other
proceedings to liquidate and collect on the collateral; (2) the nature, timing
and conduct of foreclosure or other collection proceedings; (3) the amendment of
any collateral document; (4) the release of the security interests in respect of
any collateral; and (5) the waiver of defaults under any security agreement.
Because of the control we may cede to senior lenders under intercreditor
agreements we may enter, we may be unable to realize the proceeds of any
collateral securing some of our loans.
Capital
markets have recently been in a period of disruption and instability. These
market conditions have materially and adversely affected debt and equity capital
markets in the United States and abroad, which had, and may in the future have,
a negative impact on our business and operations.
The
global capital markets have recently been in a period of disruption as evidenced
by a lack of liquidity in the debt capital markets, significant write-offs in
the financial services sector, the re-pricing of credit risk in the broadly
syndicated credit market and the failure of certain major financial
institutions. Despite actions of the United States federal government and
foreign governments, these events contributed to worsening general economic
conditions that materially and adversely impacted the broader financial and
credit markets and reduced the availability of debt and equity capital for the
market as a whole and financial services firms in particular. These conditions
could continue for a prolonged period of time or worsen in the future. While
these conditions persist, we and other companies in the financial services
sector may have to access, if available, alternative markets for debt and equity
capital. Equity capital may be difficult to raise because as a business
development company we are generally not able to issue additional shares of our
common stock at a price less than net asset value. In addition, our ability to
incur indebtedness (including by issuing preferred stock) is limited by
applicable regulations such that our asset coverage, as defined in the 1940 Act,
must equal at least 200% immediately after each time we incur indebtedness. The
debt capital that will be available, if at all, may be at a higher cost and on
less favorable terms and conditions in the future. Any inability to raise
capital could have a negative effect on our business, financial condition and
results of operations.
The
illiquidity of our investments may make it difficult for us to sell such
investments if required. As a result, we may realize significantly less than the
value at which we have recorded our investments. In addition, significant
changes in the capital markets, including the recent extreme volatility and
disruption, have had, and may in the future have, a negative effect on the
valuations of our investments and on the potential for liquidity events
involving our investments. An inability to raise capital, and any required sale
of our investments for liquidity purposes, could have a material adverse impact
on our business, financial condition or results of operations.
43
Economic
recessions or downturns could impair our portfolio companies and harm our
operating results.
During
portions of 2010, the economy was in the midst of a recession and in a difficult
part of a credit cycle. Many of our portfolio companies may be susceptible to
economic slowdowns or recessions and may be unable to repay our loans during
these periods. Therefore, our non-performing assets may increase and the value
of our portfolio may decrease during these periods as we are required to record
the values of our investments. Adverse economic conditions also may decrease the
value of collateral securing some of our loans and the value of our equity
investments at fair value. Economic slowdowns or recessions could lead to
financial losses in our portfolio and a decrease in revenues, net income and
assets. Unfavorable economic conditions also 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. These events could prevent us from increasing
investments and harm our operating results.
A
portfolio company’s failure to satisfy financial or operating covenants imposed
by us or other lenders could lead to defaults and, potentially, acceleration of
the time when the loans are due and foreclosure on its secured assets, which
could trigger cross-defaults under other agreements and jeopardize the portfolio
company’s ability to meet its obligations under the debt that we hold. We may
incur additional 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, depending on the facts and
circumstances, including the extent to which we actually provided significant
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.
The
lack of liquidity in our investments may adversely affect our
business.
We invest
in companies whose securities are not publicly traded, and whose securities will
be subject to legal and other restrictions on resale or will otherwise be less
liquid than publicly traded securities. The illiquidity of these investments may
make it difficult for us to sell these investments when desired. 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 had previously recorded
these investments. As a result, we do not expect to achieve liquidity in our
investments in the near-term. Our investments will usually be subject to
contractual or legal restrictions on resale or are otherwise illiquid because
there is usually no established trading market for such investments. The
illiquidity of most of our investments may make it difficult for us to dispose
of them at a favorable price, and, as a result, we may suffer
losses.
Our
failure to make follow-on investments in our portfolio companies could impair
the value of our portfolio.
Following
an initial investment in a portfolio company, we may make additional investments
in that portfolio company as “follow-on” investments, in order to: (i) increase
or maintain in whole or in part our equity ownership percentage; (ii) exercise
warrants, options or convertible securities that were acquired in the original
or a subsequent financing; or (iii) attempt to preserve or enhance the value of
our investment. We may elect not to make follow-on investments or otherwise lack
sufficient funds to make those investments. We will have the discretion to make
any follow-on investments, subject to the availability of capital resources. The
failure to make follow-on investments may, in some circumstances, jeopardize the
continued viability of a portfolio company and our initial investment, or may
result in a missed opportunity for us to increase our participation in a
successful operation. Even if we have sufficient capital to make a desired
follow-on investment, we may elect not to make a follow-on investment because we
do not want to increase our concentration of risk, we prefer other
opportunities, we are subject to business development company requirements that
would prevent such follow-on investments, or the follow-on investment would
affect our RIC tax status.
Our
portfolio may lack diversification among portfolio companies which may subject
us to a risk of significant loss if one or more of these companies defaults on
its obligations under any of its debt instruments.
Our
portfolio may hold a limited number of portfolio companies. For example, the 5
largest investments in our portfolio as of December 31, 2010 represented 57% of
the fair value of our portfolio, excluding our investment in United States
Treasury Bills. Beyond the asset diversification requirements associated with
our qualification as a RIC under the Code, we do not have fixed guidelines for
diversification, and our investments may be concentrated in relatively few
companies. As our portfolio is less diversified than the portfolios of some
larger funds, we are more susceptible to failure if a single loan fails.
Similarly, the aggregate returns we realize may be significantly adversely
affected if a small number of investments perform poorly or if we need to write
down the value of any one investment.
Our
portfolio may be concentrated in a limited number of industries, which may
subject us to a risk of significant loss if there is a downturn in a particular
industry in which a number of our investments are concentrated.
Our
portfolio may be concentrated in a limited number of industries. A downturn in
any particular industry in which we are invested could significantly impact the
aggregate returns we realize.
As of
December 31, 2010, our investments in the business services industry (such as
companies that provide services related to data and information, information
retrieval or asset recovery) represented approximately 32% of the fair value of
our portfolio, our investments in the communications industry (such as companies
that perform residential security alarm monitoring or provide digital video
satellite and broadband service to multiple dwelling units) represented
approximately 29% of the fair value of our portfolio, and our investments in the
media industry (such as outdoor advertising or radio broadcasting companies)
represented approximately 20% of the fair value of our portfolio. In addition,
we may from time to time invest a relatively significant percentage of our
portfolio in industries we do not necessarily target. If an industry in which we
have significant investments suffers from adverse business or economic
conditions, as these industries have to varying degrees, a material portion of
our investment portfolio could be affected adversely, which, in turn, could
adversely affect our financial position and results of
operations.
44
Because
we generally do not hold controlling equity interests in our portfolio
companies, we may not be in a position to exercise control over our portfolio
companies or to prevent decisions by management of our portfolio companies that
could decrease the value of our investments.
Although
we may do so in the future, we do not currently hold controlling equity
positions in our portfolio companies. As a result, we are subject to the risk
that a portfolio company may make business decisions with which we disagree, and
that the management and/or stockholders of a portfolio company may take risks or
otherwise act in ways that are adverse to our interests. Due to the lack of
liquidity of the debt and equity investments that we typically hold in our
portfolio companies, we may not be able to dispose of our investments in the
event we disagree with the actions of a portfolio company and may therefore
suffer a decrease in the value of our investments.
Defaults
by our portfolio companies will harm our operating results.
A
portfolio company’s failure to satisfy financial or operating covenants imposed
by us or other lenders could lead to defaults and, potentially, termination of
its loans and foreclosure on its secured assets, which could trigger
cross-defaults under other agreements and jeopardize a portfolio company’s
ability to meet its obligations under the debt or equity securities that we
hold. We may incur expenses to the extent necessary to seek recovery upon
default or to negotiate new terms, which may include the waiver of certain
financial covenants, with a defaulting portfolio company. If any of these occur,
it could materially and adversely affect our operating results and cash
flows.
Any
unrealized losses we experience on our loan portfolio may be an indication of
future realized losses, which could reduce our income available for
distribution.
As a
business development company, we are required to carry our investments at fair
value as determined in good faith by our Board of Directors. Decreases in the
fair values of our investments are recorded as unrealized depreciation. Any
unrealized losses in our loan portfolio could be an indication of a portfolio
company’s inability to meet its repayment obligations to us with respect to the
affected loans. This could result in realized losses in the future and
ultimately in reductions of our income available for distribution in future
periods.
Prepayments
of our debt investments by our portfolio companies could adversely impact our
results of operations and reduce our return on equity.
We are
subject to the risk that the investments we make in our portfolio companies may
be repaid prior to maturity. When this occurs, we will generally reinvest these
proceeds in temporary investments or repay the facility, depending on future
investment in new portfolio companies. These temporary investments will
typically have substantially lower yields than the debt being prepaid and we
could experience significant delays in reinvesting these amounts. Any future
investment in a new portfolio company may also be at lower yields than the debt
that was repaid. As a result, our results of operations could be materially
adversely affected if one or more of our portfolio companies elect to prepay
amounts owed to us. Additionally, prepayments could negatively impact our return
on equity, which could result in a decline in the market price of our common
stock. The investments in our portfolio have historically experienced only
limited prepayments.
Because
we use debt to finance our investments, changes in interest rates will affect
our cost of capital and net investment income.
Because
we borrow money to make investments, our net investment income will depend, in
part, upon the difference between the rate at which we borrow funds and the rate
at which we invest those funds. As a result, we can offer no assurance that a
significant change in market interest rates will not have a material adverse
effect on our net investment income in the event we use debt to finance our
investments. In periods of rising interest rates, our cost of funds would
increase, which could reduce our net investment income. We expect that our
long-term fixed-rate investments will be financed primarily with equity and
long-term debt. We may use interest rate risk management techniques in an effort
to limit our exposure to interest rate fluctuations. Such techniques may include
various interest rate hedging activities to the extent permitted by the 1940
Act. Our investment adviser does not have significant experience with utilizing
these techniques and did not implement these techniques to any significant
extent with the Legacy Portfolio. If we do not implement these techniques
properly, we could experience losses on our hedging positions, which could be
material.
You
should also be aware that a rise in the general level of interest rates can be
expected to lead to higher interest rates applicable to our debt investments.
Accordingly, an increase in interest rates would make it easier for us to meet
or exceed the incentive fee hurdle rate and may result in a substantial increase
in the amount of incentive fees payable to our investment adviser with respect
to our pre-incentive fee net investment income.
45
As of
December 31, 2010, we had approximately $3.4 million of Distribution Notes
outstanding, and had approximately $7.6 million outstanding and an additional
$27.4 million of borrowing available under the New Credit Facility.
We
may not realize gains from our equity investments.
Certain
investments that we may make in the future include warrants or other equity
securities. Investments in equity securities involve a number of significant
risks, including the risk of further dilution as a result of additional
issuances, inability to access additional capital and failure to pay current
distributions. Investments in preferred securities involve special risks, such
as the risk of deferred distributions, credit risk, illiquidity and limited
voting rights. In addition, we may from time to time make non-control, equity
investments in portfolio companies. Our goal is ultimately to realize gains upon
our disposition of such equity interests. However, the equity interests we
receive may not appreciate in value and, in fact, 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. We also may be unable to
realize any value if a portfolio company does not have a liquidity event, such
as a sale of the business, recapitalization or public offering, which would
allow us to sell the underlying equity interests. We often seek puts or similar
rights to give us the right to sell our equity securities back to the portfolio
company issuer. We may be unable to exercise these puts rights for the
consideration provided in our investment documents if the issuer is in financial
distress.
Investments
in foreign securities may involve significant risks in addition to the risks
inherent in U.S. investments.
Our
investment strategy contemplates possible investments in debt securities of
foreign companies. Our investment adviser does not have significant experience
with investments in foreign securities and did not acquire such investments to
any significant extent in connection with its management of the Legacy
Portfolio. Investing in foreign companies may expose us to additional risks not
typically associated with investing in U.S. companies. These risks include
changes in exchange control regulations, political and social instability,
expropriation, imposition of foreign taxes, less liquid markets and less
available information than is generally the case in the United States, higher
transaction costs, less government supervision of exchanges, brokers and
issuers, less developed bankruptcy laws, difficulty in enforcing contractual
obligations, lack of uniform accounting and auditing standards and greater price
volatility.
Although
most of our investments are U.S. dollar-denominated, any investments denominated
in a foreign currency will be subject to the risk that the value of a particular
currency will change in relation to one or more other currencies. Among the
factors that may affect currency values are trade balances, the level of
short-term interest rates, differences in relative values of similar assets in
different currencies, long-term opportunities for investment and capital
appreciation, and political developments. We may employ hedging techniques to
minimize these risks, but we can offer no assurance that we will, in fact, hedge
currency risk, or that if we do, such strategies will be effective.
We
may expose ourselves to risks if we engage in hedging transactions.
If we
engage in hedging transactions, we may expose ourselves to risks associated with
such transactions. We may utilize instruments such as forward contracts,
currency options and interest rate swaps, caps, collars and floors to seek to
hedge against fluctuations in the relative values of our portfolio positions
from changes in currency exchange rates and market interest rates. Hedging
against a decline in the values of our portfolio positions does not eliminate
the possibility of fluctuations in the values of such positions or prevent
losses if the values of such positions decline. However, such hedging can
establish other positions designed to gain from those same developments, thereby
offsetting the decline in the value of such portfolio positions. Such hedging
transactions may also limit the opportunity for gain if the values of the
underlying portfolio positions increase. It may not be possible to hedge against
an exchange rate or interest rate fluctuation that is so generally anticipated
that we are not able to enter into a hedging transaction at an acceptable price.
Moreover, for a variety of reasons, we may not seek to establish a perfect
correlation between such hedging instruments and the portfolio holdings being
hedged. Any such imperfect correlation may prevent us from achieving the
intended hedge and expose us to risk of loss. In addition, it may not be
possible to hedge fully or perfectly against currency fluctuations affecting the
value of securities denominated in non-U.S. currencies because the value of
those securities is likely to fluctuate as a result of factors not related to
currency fluctuations.
Risks
Relating to Our Common Stock
Shares
of closed-end investment companies, including business development companies,
may trade at a discount to their net asset value.
Shares of
closed-end investment companies, including business development companies, may
trade at a discount from net asset value. This characteristic of closed-end
investment companies and business development companies is separate and distinct
from the risk that our net asset value per share may decline. Our common stock
is currently trading below net asset value, and we cannot predict whether, in
the future, our common stock will trade at, above or below net asset
value.
Our
common stock price may be volatile and may decrease substantially.
The
trading price of our common stock may fluctuate substantially. The price of our
common stock may increase or decrease, depending on many factors, some of which
are beyond our control and may not be directly related to our operating
performance. These factors include, but are not limited to, the
following:
46
•
|
price
and volume fluctuations in the overall stock market from time to
time;
|
•
|
investor
demand for our shares;
|
•
|
significant
volatility in the market price and trading volume of securities of
business development companies or other companies in our sector, which are
not necessarily related to the operating performance of these
companies;
|
•
|
changes
in regulatory policies or tax guidelines with respect to RICs or business
development companies;
|
•
|
failure
to qualify as a RIC, or the loss of RIC
status;
|
•
|
any
shortfall in revenue or net income or any increase in losses from levels
expected by investors or securities
analysts;
|
•
|
changes,
or perceived changes, in the value of our portfolio
investments;
|
•
|
departures
of Full Circle Advisors’ key
personnel;
|
•
|
operating
performance of companies comparable to us;
or
|
•
|
general
economic conditions and trends and other external
factors.
|
In the
past, following periods of volatility in the market price of a company’s
securities, securities class action litigation has often been brought against
that company. Due to the potential volatility of our stock price once a market
for our stock is established, we may become the target of securities litigation
in the future. Securities litigation could result in substantial costs and
divert management’s attention and resources from our business.
Provisions
of the Maryland General Corporation Law and of our charter and bylaws could
deter takeover attempts and have an adverse impact on the price of our common
stock.
The
Maryland General Corporation Law and our charter and bylaws contain provisions
that may discourage, delay or make more difficult a change in control of Full
Circle Capital or the removal of our directors. We are subject to the Maryland
Business Combination Act, subject to any applicable requirements of the 1940
Act. Our Board of Directors has adopted a resolution exempting from the Business
Combination Act any business combination between us and any other person,
subject to prior approval of such business combination by our board, including
approval by a majority of our independent directors. If the resolution exempting
business combinations is repealed or our board does not approve a business
combination, the Business Combination Act may discourage third parties from
trying to acquire control of us and increase the difficulty of consummating such
an offer. Our bylaws exempt from the Maryland Control Share Acquisition Act
acquisitions of our stock by any person. If we amend our bylaws to repeal the
exemption from the Control Share Acquisition Act, the Control Share Acquisition
Act also may make it more difficult for a third party to obtain control of us
and increase the difficulty of consummating such a transaction.
We have
also adopted 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 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,
to amend our charter without stockholder approval and 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, may delay, defer or
prevent a transaction or a change in control that might otherwise be in the best
interests of our stockholders.
While we
did not engage in unregistered sales of equity securities during the three
months ended December 31, 2010, we issued a total of 27,866 shares of common
stock under our dividend reinvestment plan on January 14, 2010. These issuances
are not subject to the registration requirements of the Securities Act of 1933.
The aggregate valuation price for the shares of common stock issued under the
dividend reinvestment plan was approximately $242,000.
The
following table reflects the history of shares issued under the dividend
reinvestment plan:
Record
Date/Issuance Date
|
Shares
Issued
|
(in
‘000s)
|
%
of Dividend
|
|||||||||
December
31, 2010/January 14, 2011
|
27,866
|
$242
|
17.3%
|
47
Item
3.
|
Defaults
Upon Senior Securities
|
Not
applicable.
Item
4.
|
Reserved
|
[Intentionally
left blank]
Item
5.
|
Other
Information
|
Not
applicable.
Exhibits
|
(a)
Exhibits
The
following exhibits are filed as part of this report or hereby incorporated by
reference to exhibits previously filed with the SEC:
Exhibit
Number
|
Description
|
|
3.1
|
Articles
of Amendment and Restatement**
|
|
3.2
|
Bylaws*
|
|
4.1
|
Form
of Common Stock Certificate*
|
|
4.2
|
Form
of Note Agreement for Senior Unsecured Notes*
|
|
Form
of Senior Unsecured Note*
|
||
10.1
|
Form
of Dividend Reinvestment Plan*
|
|
10.2
|
Form
of Second Amended and Restated Loan and Security Agreement by and between
the Registrant and FCC, LLC d/b/a First Capital**
|
|
10.3
|
Investment
Advisory Agreement by and between Registrant and Full Circle Advisors,
LLC*
|
|
10.4
|
Administration
Agreement by and between Registrant and Full Circle Service Company,
LLC*
|
|
10.5
|
Form
of Indemnification Agreement by and between Registrant and each of its
directors*
|
|
10.6
|
Trademark
License Agreement by and between Registrant and Full Circle Advisors,
LLC*
|
|
10.7
|
Form
of Purchase and Sale Agreement by and between Registrant, Full Circle
Partners, LP, Full Circle Fund, Ltd., Full Circle Offshore, LLC, and FCC,
LLC d/b/a First Capital**
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934, as amended.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934, as amended.
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley
Act of 2002.
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley
Act of 2002.
|
*
|
Previously
filed in connection with Registrant’s registration statement on Form N-2
Pre-Effective Amendment No. 2 (File No. 333-166302) filed on August 5,
2010.
|
|
**
|
Previously
filed in connection with Registrant’s registration statement on Form N-2
Pre-Effective Amendment No. 3 (File No. 333-166302) filed on August 26,
2010.
|
48
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.
FULL
CIRCLE CAPITAL CORPORATION
|
|||
Date: February
9, 2011
|
By:
|
/s/
John E.
Stuart
|
|
John
E. Stuart, Chief Executive Officer, President and Chairman of the Board of
Directors (Principal Executive Officer)
|
|||
Date: February
9, 2011
|
By:
|
/s/
William E.
Vastardis
|
|
William
E. Vastardis, Chief Financial Officer, Treasurer and Secretary (Principal
Financial and Accounting Officer)
|
49