Filed Pursuant to Rule 497
Registration No. 333-187207
We are offering for sale 1,351,352 shares of our common stock. We are an externally managed non-diversified closed-end management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, or the 1940 Act. Our investment objective is to generate both current income and capital appreciation through debt and equity investments.
Our common stock is traded on the NASDAQ Capital Market under the symbol FULL. On June 18, 2014, the last reported sales price on the NASDAQ Capital Market for our common stock was $7.96 per share. Our net asset value per share of our common stock as of March 31, 2014 was $7.20.
As of March 31, 2014, 27% of our debt portfolio at fair value consisted of debt securities and asset-based revolving lines of credit for which issuers were not required to make principal payments until the maturity of such debt securities, which could result in a substantial loss to us if such issuers are unable to refinance or repay their debt at maturity. In addition, a substantial portion of our debt investments have variable interest rates that reset periodically based on benchmarks such as the London-Interbank Offered Rate and prime rate. As a result, significant increases in such benchmarks in the future would make it more difficult for these borrowers to service their obligations under the debt investments that we hold.
An investment in our common stock is subject to risks and involves a heightened risk of total loss of investment. In addition, the companies in which we invest are subject to special risks. For example, we invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as high yield or junk, have predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. See Risk Factors beginning on page 17 of the accompanying prospectus to read about factors you should consider, including the risk of leverage, before investing in our common stock.
Please read this prospectus supplement and the accompanying prospectus before investing in our common stock and keep each for future reference. This prospectus supplement and the accompanying prospectus contain important information about us that a prospective investor ought to know before investing in our common stock. We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. This information is available free of charge by contacting us by mail at 800 Westchester Ave., Suite S-620, Rye Brook, NY 10573, by telephone at (914) 220-6300 or on our website at http://www.fccapital.com . Information contained on our website is not incorporated by reference into this prospectus supplement or the accompanying prospectus, and you should not consider information contained on our website to be part of this prospectus supplement or the accompanying prospectus. The Securities and Exchange Commission also maintains a website at http://www.sec.gov that contains information about us.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
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Per Share | Total | |||||||
Offering Price | $ | 7.40 | $ | 10,000,005 | ||||
Proceeds to the Company (before expenses) | $ | 7.40 | $ | 10,000,005 |
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On March 12, 2013, we filed with the Securities and Exchange Commission a registration statement on Form N-2 (File No. 333-187207) utilizing a shelf registration process relating to the securities described herein, which registration statement was declared effective on December 16, 2013. This document is in two parts. The first part is the prospectus supplement, which describes the terms of this offering of common stock and also adds to and updates information contained in the accompanying prospectus. The second part is the accompanying prospectus, which gives more general information and disclosure. To the extent the information contained in this prospectus supplement differs from or is additional to the information contained in the accompanying prospectus, you should rely only on the information contained in this prospectus supplement. Please carefully read this prospectus supplement and the accompanying prospectus together with the additional information described under the headings Where You Can Find Additional Information and Risk Factors included in this prospectus supplement and in the accompanying prospectus, respectively, before investing in our common stock.
We have not authorized any dealer, salesman or other person to give any information or to make any representation other than those contained in this prospectus supplement or the accompanying prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus supplement and the accompanying prospectus do not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered securities to which they relate, nor do they constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction or to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The information contained in this prospectus supplement and the accompanying prospectus is accurate as of the dates on their respective covers. Our financial condition, results of operations and prospects may have changed since those dates. To the extent required by law, we will amend or supplement the information contained in this prospectus supplement and the accompanying prospectus to reflect any material changes subsequent to the date of this prospectus supplement and the accompanying prospectus and prior to the completion of any offering pursuant to this prospectus supplement and the accompanying prospectus.
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The following summary contains basic information about our company and the offering of shares of our common stock pursuant to this prospectus supplement and the accompanying prospectus. It is not complete and may not contain all the information that is important to you. For a more complete understanding of the offering of shares of our common stock pursuant to this prospectus supplement, we encourage you to read this entire prospectus supplement and the accompanying prospectus, and the documents to which we have referred in this prospectus supplement and the accompanying prospectus. Together, these documents describe the specific terms of the shares we are offering. You should carefully read the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements included in this prospectus supplement and the section entitled Risk Factors included in the accompanying prospectus.
Except where the context requires otherwise, the terms Full Circle Capital, the Company, or we refer to Full Circle Capital Corporation; Full Circle Advisors or our investment adviser refers to Full Circle Advisors, LLC; and Full Circle Service Company or our administrator refers to Full Circle Service Company, LLC. Except as otherwise noted, all information in this prospectus supplement and the accompanying prospectus assumes no exercise of the underwriters option to purchase additional shares.
Full Circle Capital, a Maryland corporation formed in April 2010, is an externally managed non-diversified closed-end management investment company that has elected to be treated as a business development company (BDC) under the 1940 Act. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We are managed by Full Circle Advisors and Full Circle Service Company provides the administrative services necessary for us to operate.
We invest primarily in senior secured loans and, to a lesser extent, mezzanine loans and equity securities issued by lower middle-market companies that operate in a diverse range of industries. 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. 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. Our stretch senior secured loans typically possess a greater advance rate against the borrowers assets and cash flow, and accordingly carry a higher interest rate and/or greater equity participation, than traditional senior secured loans. This stretch senior secured loan instrument can provide borrowers with a more efficient and desirable solution than a senior bank line combined with a separate second lien or mezzanine loan obtained from another source. We also may 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 most of 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 lower middle-market companies in areas that we believe have been historically under-serviced, especially during and after the 2008/2009 credit crisis. These areas can 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.
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Because we believe there are fewer banks and specialty finance companies focused on lending to these 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 and/or greater equity grants than typical of other transactions.
Our headquarters are located at 800 Westchester Ave., Suite S-620, Rye Brook, New York 10573 and our telephone number is (914) 220-6300.
We are managed by Full Circle Advisors, whose investment committee members have an average of approximately 19 years of experience financing and investing in lower middle-market companies. Full Circle Advisors is an investment adviser registered under the Investment Advisers Act of 1940, as amended (the Advisers Act). Certain members of Full Circle Advisors investment committee also presently manage Full Circle Funding, LP, a specialty lender serving smaller and lower middle-market companies. The investment committee has to date originated or underwritten approximately $350 million in loans and investments in 67 distinct borrowers since inception of Full Circle Funding, LP in 2005 and through activities at Full Circle Advisors since August 2010. The existing investment funds managed by Full Circle Funding, LP, which currently consist of the Legacy Funds, have been fully committed and are no longer making investments in new opportunities. The Legacy Funds are expected to be wound down as their remaining investments mature. Full Circle Funding, LP and other affiliates of our investment adviser may manage other funds and accounts in the future.
We benefit from the proven ability of our investment advisers investment committee to identify attractive investment opportunities, conduct diligence on and value prospective investments, negotiate terms, secure collateral against our loans and manage and monitor a diversified portfolio of those investments. Our investment advisers investment committee members have broad investment backgrounds, with prior experience at investment banks, commercial banks, unregistered investment funds and other financial services companies, and have collectively developed a broad network of contacts to provide us with our principal source of investment opportunities.
Our investment adviser is controlled and led by John E. Stuart, our Co-Chief Executive Officer and Chairman, and Gregg J. Felton, our Co-Chief Executive Officer and President. Mr. Stuart and Mr. Felton, who serves as Chief Investment Officer of Full Circle Advisors, are assisted by Lawrence Chua and Crandall Deery, who each serve as a Vice President of Full Circle Advisors. We consider Messrs. Stuart, Felton, Chua and Deery to be Full Circle Advisors investment committee. Under our investment advisory agreement with Full Circle Advisors (the Investment Advisory Agreement), we have agreed to pay Full Circle Advisors an annual base management fee based on our gross assets as well as an incentive fee based on our performance. See Investment Advisory Agreement in the accompanying prospectus.
Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We have adopted the following business strategies to achieve our investment objective:
| Deliver Flexible Financing Solutions. We believe our ability to provide a broad range of flexible debt financing solutions to lower middle-market companies sets us apart from other capital providers. We offer to our portfolio companies debt financing facilities that, combined with our ability to recognize the underlying value and security of diverse types of traditional and non-traditional asset-based collateral, we believe allows us to provide flexible facilities to fit the capital requirements of each borrower. We believe that our focus on providing senior secured and stretch senior loans provides a more efficient and less complicated capital structure and source of capital for borrowers. We also believe that it maximizes our control of and exposure to asset-based collateral coverage as security for our loans, thereby greatly reducing our risk of possible losses due to deterioration in a borrowers performance. |
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| Target Lower Middle-Market Companies. We generally provide capital to our portfolio companies for growth capital, acquisition financing and refinancing of existing debt facilities. We believe our target portfolio companies are generally involved in industries or markets that are under-followed or serviced because they are either less visible to mainstream institutions or investors, or are too small or localized for larger financial institutions or larger funds, particularly those that lack the requisite industry-specific knowledge and expertise. We believe there have historically been fewer banks and finance companies focused on lending to these types of lower middle-market companies. As a result, we believe we can negotiate terms on loans to these types of companies that generally possess better risk-adjusted return profiles than terms on loans to larger, more mainstream companies. Such favorable terms may include higher debt yields, lower leverage levels, more significant covenant protection and/or greater equity grants than typical of transactions involving larger companies. 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. |
| Focus on Senior Secured Lending and Structuring of Investments to Minimize Risk of Loss. We seek to structure our loan investments on a favorable loan-to-value (LTV) exposure based on underlying collateral or enterprise value with high cash yields, cash origination fees, low leverage levels and strong investment protections. We generally seek to protect against risk of loss on our debt investments by securing most of our loans against a significant level of tangible or intangible assets of our borrowers, obtaining a favorable LTV ratio or other financial protections or credit enhancements, rather than lending predominantly against anticipated cash flows of borrowers. We believe this provides us with more options and a greater likelihood of repayment from both cash flow and/or asset sales. |
| Structure Loans with Superior Security and Asset Protection. Our loan instruments and documentation focus on favorable lender protections with security over the collateral, financial and other covenants and rigorous reporting requirements on behalf of our borrowers. We monitor covenant and other loan compliance on a monthly and quarterly basis and personnel from our investment adviser will have periodic field exams performed at the borrower level. We utilize both term debt and revolving loan structures and, accordingly, often seek to maintain control of our borrowers cash receipts from revenues as additional security for our positions. In addition, we may seek credit enhancements, such as personal guarantees from a borrowers principal owners or make well features to provide us with additional equity in the event of underperformance. We may also seek a pledge of stock or other assets from a borrower or its operating subsidiaries. |
| Pursue Attractive Risk Adjusted Returns. As of March 31, 2014, the weighted average annualized yield of the debt investments comprising our portfolio was approximately 11.41%. A component of our interest may be in the form of payment-in-kind, or PIK, interest. PIK interest represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term and recorded as interest income on an accrual basis to the extent such amounts are expected to be collected. For additional information regarding PIK interest and related risks, see Risk Factors Risks Relating to Our Business and Structure We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income in the accompanying prospectus. As of March 31, 2014, 27% of our debt portfolio at fair value, excluding United States Treasury Bills, consisted of debt securities and asset-based revolving lines of credit for which issuers were not required to make principal payments until the maturity of such debt securities, which could result in a substantial loss to us if such issuers are unable to refinance or repay their debt at maturity. In addition, a substantial portion of our debt investments have variable interest rates that reset periodically based on benchmarks such as the London-Interbank Offered Rate and prime rate. As a result, significant increases in such benchmarks in the future would make it more difficult for these borrowers to service their obligations under the debt investments that we hold. The 29 individual debt investments, from 21 distinct borrowers, included in our portfolio averaged a LTV ratio of approximately 64% as of March 31, 2014 (i.e., each $64 of loan value outstanding is secured by $100 of collateral value). Although it is subject to |
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fluctuation, we believe this LTV ratio, which measures the aggregate amount of our loan positions against the aggregate amount of primary collateral value pledged by our borrowers as security against our loans, reflects the relative strength of the debt investments comprising our portfolio. Finally, our debt investments are designed to have strong protections beyond repayment from cash flow and asset liquidation coverage, including default penalties, information rights, and affirmative, negative and financial covenants, such as lien protection and prohibitions against change of control. We believe this level of collateral protection helps minimize against the risk of loss, even if a loan goes into default. |
| Leveraging the Skill, Experience and Resources of Full Circle Advisors Investment Committee. Full Circle Advisors investment committee members have an average of approximately 19 years of experience financing and investing in lower middle-market companies. The investment committee members have broad investment and operational backgrounds, with prior experience at specialty finance companies, investment management firms, private equity investment funds, investment banks and other financial services companies. We believe their expertise in analyzing, valuing, structuring, negotiating, closing, monitoring and restructuring transactions should provide us with a competitive advantage by allowing us to consider customized financing solutions and non-traditional and complex structures. We believe this experience should also be valuable when we have to work with stressed and distressed credits. |
| Balanced Investing Across Industries with Expertise. While we seek to maintain a portfolio of investments that is appropriately balanced among various companies, industries, geographic regions and end markets, we focus our investing activities on certain areas that we believe maintain favorable asset coverage positions, including the media, communications and business services industries. We believe that the stable, long term asset values that may be found in many of the industries in which we invest can provide us with significant collateral protection on our loans, in contrast to taking some of the risks of repayment attendant to relying exclusively on a borrowers current cash flows. Going forward, we intend to seek to maintain a balanced portfolio to mitigate the potential effects of negative economic events for particular companies, regions and industries. |
| Capitalize on Strong Transaction Sourcing Network. Our investment advisers investment committee seeks to leverage their extensive network of referral sources for investments in lower middle-market companies. We believe through their prior investment experience, the investment committee members have collectively developed a reputation in our target market and in the industries in which we invest as a responsive, efficient and reliable source of flexible financing. |
| Employ Disciplined Underwriting Policies and Rigorous Portfolio Management. We directly originate most of our investments, which, in our experience, generally allows us to pursue a more rigorous due diligence examination of the investments than if we invest as part of a lending syndicate led by others. Our investment advisers investment committee has developed an extensive underwriting due diligence process which includes a review of the prospects, competitive position, financial performance and industry dynamics of each potential portfolio company. In underwriting a potential borrower, they engage in a variety of quantitative and qualitative stress tests, and analyze our ability to successfully liquidate a favorable collateral package underlying a loan in the event of default. These processes continue during the portfolio monitoring process, when our investment adviser will, depending on the borrower, analyze monthly and/or quarterly financial statements versus the previous periods and year, review financial projections, conduct field examinations, meet with management, attend board meetings, review all compliance certificates and covenants and regularly assess the financial and business conditions and prospects of borrowers. |
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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 demand for financing from lower middle-market companies is largely outpacing the availability of lenders that have traditionally served this market. While this has traditionally been an underserved market, we believe the supply-demand imbalance of loans to smaller borrowers was exacerbated by the credit crisis in 2008/2009, and has not fully recovered. 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.
Thus we believe that the current credit markets combined with certain long term trends associated with lending to lower middle-market companies provide the ideal market environment.
| Competitive Edge and Skill Set. Our core strength of providing efficient and flexible lending solutions to lower middle-market companies requires a market approach and skill set that we believe is generally not found in larger or more localized regional lenders. We believe that many of the companies we target operate in industries that are less visible or too specialized for larger mainstream institutions or investors, or alternatively, require too little funding or are too localized for larger financial institutions to consider, particularly in cases where those institutions lack the requisite industry-specific knowledge and expertise. From 1992 through 2012, loan composition for banks sized greater than $1 billion in assets showed a decline of commercial and industrial loans from 30% of net loans to 22% of net loans, while real estate lending grew from 39% to 50%. Accordingly, we believe that many potential competitive bank lenders lack the personnel or lending experience required to address the very strong market demand for commercial and industrial lending. |
Larger domestic banks noted stronger borrower demand during the fourth quarter of 2013. In a 2014 senior loan officer survey, it was reported that a modest fraction of domestic banks reported having eased their standards across major loan categories during the fourth quarter; however, bankers' easing of standards continues to be more pronounced among their larger clients than it is with smaller ones. While 14% of respondents said they were easing terms on the maximum size of credit lines to large and middle-market firms (annual sales of $50 million or more), only 6% of respondents said that they were doing the same for small firms (defined as those with annual sales of less than $50 million) and 93% of respondents reported no change in terms offered to small firms. Regarding the maximum size of credit lines, 19% of respondents reported easing terms to large and middle-market borrowers, while only 11% of respondents reported doing the same for small firms and the remaining respondents reported no change. Finally, regarding premiums charged on riskier loans, 14% of survey respondents reported having eased standards for larger firms, while 9% reported doing the same for small firms.
Reports also state that domestic banks indicated that demand for business loans had strengthened, and they continued to report a rise in the number of inquiries from potential business borrowers, of all sizes, regarding new or increased credit lines. At the same time, U.S. branches and agencies of foreign banks, which mainly lend to businesses, reported little change in their lending standards, while demand for their loans was reportedly stronger on net. Additionally, reports state that a majority of domestic banks have recently reported strong demand for commercial and industrial loans due to increases in customers funding needs related to inventories, accounts receivable, investment in plans or equipment and mergers and acquisitions. We believe these bank lending market conditions will continue to exacerbate existing funding gaps for firms comprising our target market. Additionally, we believe our strengths include the ability to originate, underwrite and manage a more labor intensive portfolio consisting of debt investments in smaller companies, and to perform due diligence and manage portfolio activities on an ongoing basis.
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| Strong Demand For Capital Coupled with Fewer Providers. We believe there has long been a combination of demand for capital and an underserved market for capital addressing lower middle-market borrowers. Further, we believe the supply-demand imbalance of smaller borrowers to lenders serving that market was exacerbated by the credit crisis in 2008/2009, and has not fully recovered. 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 lower middle-market borrowers, combined with the significant demand for refinancing, we believe there are increased lending opportunities for us.
| More Conservative Deal Structures. As a result of, and in the aftermath of, the 2008/2009 credit crisis, we believe lenders are mandating less leverage, more equity and tighter loan covenants than what had previously been customary. We believe that lower purchase prices for assets and lower debt multiples, combined with greater equity cushions beneath loans, allows for greater cash flow for debt service, creating faster loan repayments despite overall higher debt costs to borrowers. We believe this aspect provides considerable cushion against underperformance and default of borrowers as well as faster de-risking of loan positions as credit statistics improve over the term of the loan facilities. |
| Attractive Return Profile. We believe the reduced access to, and reduced availability of, debt capital has decreased competition in lower middle-market lending which had already become less competitive and more fragmented prior to the credit crisis, resulting in a better market for loan pricing. We believe that the withdrawal of many traditional senior lenders from the market, combined with reduced advance rates and leverage levels, allows for stretch senior lenders to charge rates that typically reflect mezzanine or subordinated structures for entire facilities, while maintaining first lien senior secured positions over the loan collateral provided by the borrowers. Our investment advisers investment committee has experienced this attractive return environment since the onset of the credit crisis in the second half of 2008, when transactions originated by them saw increased returns from interest and fees charged, as well as more meaningful warrant participations. |
On May 2, 2014, the Board of Directors declared monthly dividends of $0.067, $0.067 and $0.067 per share payable on August 15, 2014 for holders of record at July 31, 2014, September 15, 2014 for holders of record at August 29, 2014 and October 15, 2014 for holders of record at September 30, 2014.
On April 7, 2014, the Board of Directors authorized a share repurchase program which provides for the purchase of up to 1 million shares of outstanding common stock to be implemented at the discretion of our management team. Under the repurchase program, we may, but are not obligated to, repurchase our outstanding common stock in the open market from time to time. The timing and number of shares to be repurchased in the open market will depend on a number of factors, including market conditions and alternative investment opportunities. In addition, any repurchases will be conducted in accordance with the 1940 Act.
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On April 30, 2014, the Company closed on approximately $4.5 million of a $150.0 million secured second lien term loan to RCS Capital Corporation, a financial services company. The secured second lien term loan is guaranteed by all existing and subsequent direct and indirect domestic subsidiaries of RCS Capital Corporation, and bears interest at LIBOR plus 9.50% with a minimum LIBOR of 1.00% per annum and has a final maturity of April 29, 2021.
On June 4, 2014, we formed Full Circle Capital Investment Partners ("FCIP"), a multiple series private fund, for which we will serve as the managing member and investment adviser. FCIP closed its first series on June 17, 2014. We expect to receive certain fees or other distributions from FCIP in connection with the services we provide to each series it may issue. In addition, we may co-invest in certain portfolio investments from time to time with one or more series issued by FCIP where we determine that the aggregate available investment opportunity exceeds what we believe would be appropriate for us to acquire directly.
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Common stock offered by us |
1,351,352 shares |
Common stock outstanding prior to this offering |
10,091,682 shares |
Common stock to be outstanding after this offering |
11,443,034 shares |
Use of proceeds |
The net proceeds from our sale of 1,351,352 shares of our common stock with an aggregate offering price of $10,000,005, after estimated expenses payable by us, will be approximately $10 million. We intend to use the net proceeds from this offering for general corporate purposes, which may include investing in new portfolio companies in accordance with our investment objective and strategies described in this prospectus supplement and accompanying prospectus, acquisitions and for other general working capital purposes. Pending these uses, we will invest such net proceeds primarily in cash, cash equivalents, and U.S. government securities or other high-quality debt investments that mature in one year or less consistent with our business development company election and our election to be taxed as a RIC, at yields significantly below those we expect to earn on our other portfolio investments. The management fee payable by us to our investment adviser will not be reduced while our assets are invested in these temporary investments. See Use of Proceeds. |
Distributions |
To the extent that we have income available, we intend to make monthly dividends to our stockholders. The amount of our dividends, if any, will be determined by our Board of Directors. Any dividends to our stockholders will be declared out of assets legally available for distribution. See Price Range of Common Stock and Distributions in the accompanying prospectus. |
Taxation |
We have elected to be treated for federal income tax purposes as a RIC under Subchapter M of the Code. As a RIC, we generally do not have to pay corporate-level federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends. To maintain our RIC tax treatment, we must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. See Price Range of Common Stock and Distributions and Material U.S. Federal Income Tax Considerations in the accompanying prospectus. |
Risk Factors |
See Risk Factors beginning on page 17 of the accompanying prospectus for a discussion of risks you should carefully consider before deciding to invest in shares of our common stock. |
NASDAQ Capital Markets symbol |
FULL |
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The following table is intended to assist you in understanding the costs and expenses that you will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus supplement and the accompanying prospectus contains a reference to fees or expenses paid by us or Full Circle Capital, or that we will pay fees or expenses, you will indirectly bear such fees or expenses as an investor in Full Circle Capital.
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Stockholder transaction expenses:
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Sales load (as a percentage of offering price) | 0.00 | % (1) | ||
Offering expenses borne by us (as a percentage of offering price) | 0.39 | % (2) | ||
Dividend reinvestment plan expenses | | (3) | ||
Total stockholder transaction expenses (as a percentage of offering price) | 0.39 | % | ||
Annual expenses (as a percentage of net assets attributable to common stock):
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Base management fee | 2.20 | % (4) | ||
Incentive fees payable under our investment advisory agreement | 2.48 | % (5) | ||
Interest payments on borrowed funds | 4.49 | % (6) | ||
Other expenses | 3.26 | % (7) | ||
Total annual expenses | 12.44 | % (8) |
The following example, required by the SEC, demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in us. In calculating the following expense amounts, we assumed we would maintain the amount of leverage set forth in footnote 6 below, that our operating expenses would remain at the levels set forth in the table above, and that we pay the transaction expenses set forth in the table above, including a sales load of 4.0%.
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1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
You would pay the following expenses on a $1,000 investment, assuming a 5% annual return | $ | 113 | $ | 312 | $ | 489 | $ | 845 |
The example and the expenses in the tables above should not be considered a representation of our future expenses, and actual expenses may be greater or less than those shown. Moreover, while the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. The incentive fee under the Investment Advisory Agreement, which, assuming a 5.0% annual return, would either not be payable or have a de minimis effect, is nonetheless included in the example for illustrative purposes based upon the estimated annual expenses relating thereto as set forth above. If we achieve sufficient returns on our investments to trigger an incentive fee of a material amount, our expenses, and returns to our investors, would be higher. In addition, while the example assumes reinvestment of all dividends and distributions at net asset value, participants in our dividend reinvestment plan may receive shares valued at the market price in effect at that time. This price may be at, above or below net asset value. See Dividend Reinvestment Plan in the accompanying prospectus for additional information regarding our dividend reinvestment plan.
(1) | We have not retained any underwriter or placement agent, and we will not pay any commission or underwriting discount (sales load) in connection with this offering. |
(2) | The expenses of this offering payable by us are estimated to be approximately $38,500. |
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(3) | The expenses of the dividend reinvestment plan are included in other expenses. |
(4) | Assumes gross assets of $91.6 million and net assets of $72.7 million, which reflects actual amounts as of March 31, 2014, plus the expected net proceeds of this offering. Our base management fee payable under the Investment Advisory Agreement is based on our gross assets, which equals the net assets of Full Circle Capital plus borrowings for investment purposes and other liabilities. Because we use borrowings for investment purposes, it has the effect of increasing our gross assets upon which our base management fee is calculated, while our net assets remain unchanged. Because the contractual base management fee of 1.75% of gross assets reflects an effective base management fee of 2.20% of net assets attributable to common stock in the table above, the fact that our base management fee is payable based upon our gross assets may encourage Full Circle Advisors to use leverage to make additional investments. See Investment Advisory Agreement in the accompanying prospectus. |
(5) | Assumes that annual incentive fees earned by Full Circle Advisors remain consistent with the incentive fees earned by Full Circle Advisors during the quarter ended March 31, 2014. Incentive fees would increase if, and to the extent that, we earn greater interest income through our investments in portfolio companies and realize additional capital gains upon the sale of warrants or other equity investments in such companies. The incentive fee consists of two parts. The first part, which is payable quarterly in arrears, equals 20.0% of the excess, if any, of our Pre-Incentive Fee Net Investment Income that exceeds a 1.75% quarterly (7.0% annualized) hurdle rate, which we refer to as the Hurdle, subject to a catch-up provision measured at the end of each calendar quarter. The first part of the incentive fee is computed and paid on income that may include interest that is accrued but not yet received in cash. The operation of the first part of the incentive fee for each quarter is as follows: |
| no incentive fee is payable to our investment adviser 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) is payable to our investment adviser. 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 20.0% of our Pre-Incentive Fee Net Investment Income, as if a Hurdle did not apply when our Pre-Incentive Fee Net Investment Income exceeds 2.1875% in any calendar quarter; and |
| 20.0% 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 our investment adviser (once the Hurdle is reached and the catch-up is achieved, 20.0% of all Pre-Incentive Fee Investment Income thereafter is paid to our investment adviser). |
The second part of the incentive fee equals 20.0% of our Incentive Fee Capital Gains, if any, which equals our realized capital gains 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. The second part of the incentive fee is payable, in arrears, at the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date). For a more detailed discussion of the calculation of this fee, see Investment Advisory Agreement in the accompanying prospectus.
(6) | Assumes we maintain our average level of outstanding borrowings for the nine months ended March 31, 2014, which consisted of an average of $13.5 million outstanding under our senior secured credit facility (the Credit Facility) with Santander Bank, N.A. (Santander Bank), f/k/a Sovereign Bank, N.A. as administrative agent, and $21.1 million principal amount of 8.25% Notes due 2020 (the Notes) outstanding. Interest payments on borrowed funds represents our expected interest expense for the next twelve months, plus underwriting discounts, fees and expenses associated with debt obligations which are amortized over the life of such obligations. Such expenses are borne directly or indirectly by our common shareholders. For the nine months ended March 31, 2014, our effective annualized average interest rate, which includes all interest and related costs, was 7.93%. We may also issue preferred stock, which may be considered a form of leverage. While we have no present intent to do so during the twelve months following the date of this prospectus, in the event we were to issue preferred stock, our borrowing costs, and correspondingly our total annual expense, including our base management fee as a percentage of our net assets, would increase. |
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(7) | Assumes that the amount of our operating expenses remains consistent with the operating expenses incurred by us during the nine months ended March 31, 2014. |
(8) | The holders of shares of our common stock (and not the holders of our debt securities, if any) indirectly bear the cost associated with our annual expenses. |
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This prospectus supplement and the accompanying prospectus 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 our company, 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. The forward-looking statements contained in this prospectus supplement and the accompanying prospectus involve risks and uncertainties, including statements as to:
| our future operating results; |
| our business prospects and the prospects of our portfolio companies; |
| the impact of investments that we expect to make; |
| our contractual arrangements and relationships with third parties; |
| the dependence of our future success on the general economy and its impact on the industries in which we invest; |
| the ability of our portfolio companies to achieve their objectives; |
| our expected financings and investments; |
| the adequacy of our cash resources and working capital; and |
| the timing of cash flows, if any, from the operations of our portfolio companies. |
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; |
| risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and |
| the risks, uncertainties and other factors we identify in Risk Factors in the accompanying prospectus and elsewhere in this prospectus supplement, the accompanying prospectus 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. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this prospectus supplement or the accompanying prospectus 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 in the accompanying prospectus and elsewhere in this prospectus supplement and the accompanying prospectus. You should not place undue reliance on these forward-looking statements, which apply only as of the respective dates of this prospectus supplement and the accompanying prospectus. However, we will update this prospectus supplement and the accompanying prospectus to reflect any material changes to the information contained herein. The forward-looking statements contained in this prospectus supplement and the accompanying prospectus are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, or the Securities Act.
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The net proceeds from our sale of 1,351,352 shares of our common stock in this offering will be approximately $10.0 million. We intend to use the net proceeds from this offering for general corporate purposes, which may include investing in new portfolio companies in accordance with our investment objective and strategies described herein, acquisitions and for other general working capital purposes.
As of March 31, 2014, we had $0.0 million of outstanding borrowings under our Credit Facility and we had approximately $6.9 million in cash. The Credit Facility matures on June 3, 2016 and bears interest based on a tiered rate structure, depending upon utilization, ranging from LIBOR (1-month, 2-month or 3-month, depending on our option) plus 3.25% to 4.00% per annum, or from our lenders prime rate plus 1.25% to 2.00% per annum, based on our election. The Credit Facility is secured by all of our assets.
We estimate that it will take to three to six months for us to substantially invest the net proceeds of this offering, depending on the availability of attractive opportunities and market conditions. However, we can offer no assurance that we will be able to achieve this goal.
Pending these uses, we will invest the net proceeds of this offering primarily in cash, cash equivalents, and U.S. government securities or other high-quality debt investments that mature in one year or less consistent with our business development company election and our election to be taxed as a RIC, at yields significantly below those we expect to earn on our other portfolio investments. The management fee payable by us to our investment adviser will not be reduced while our assets are invested in these temporary investments.
S-14
The following table sets forth:
| the actual capitalization of Full Circle Capital at March 31, 2014; and |
| the pro forma capitalization of Full Circle Capital to reflect the sale of shares of our common stock in this offering at a price of $7.40 per share and after deducting estimated offering expenses of approximately $38,500 payable by us. |
This table should be read in conjunction with Use of Proceeds included in this prospectus supplement and our Managements Discussion and Analysis of Financial Condition and Results of Operations and financial statements and notes thereto also included in this prospectus supplement.
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As of March 31, 2014 | ||||||||
Actual (unaudited) | Pro Forma (unaudited) | |||||||
(in thousands) | (in thousands) | |||||||
Assets:
|
||||||||
Cash | $ | 6,862 | $ | 16,862 | ||||
Investments at fair value | $ | 100,123 | $ | 100,123 | ||||
Other assets | $ | 4,967 | $ | 4,967 | ||||
Total assets | $ | 111,952 | $ | 121,952 | ||||
Liabilities:
|
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Notes | $ | 21,146 | $ | 21,146 | ||||
Line of Credit | $ | | $ | | ||||
Due to Broker (1) | $ | 10,000 | $ | 10,000 | ||||
Other liabilities | $ | 8,105 | $ | 8,105 | ||||
Total liabilities | $ | 39,251 | $ | 39,251 | ||||
Stockholders equity:
|
||||||||
Common stock, par value $0.01 per share; 100,000,000 shares authorized, 7,569,382 shares issued and outstanding, 9,219,382 shares issued and outstanding, as adjusted, respectively | $ | 101 | $ | 114 | ||||
Paid-in Capital in excess of par value | $ | 83,888 | $ | 93,875 | ||||
Distributions in excess of Net Investment Income | $ | (1,091 | ) | $ | (1,091 | ) | ||
Accumulated Net Realized Gains (Losses) | $ | (5,358 | ) | $ | (5,358 | ) | ||
Accumulated Net Unrealized Losses | $ | (4,839 | ) | $ | (4,839 | ) | ||
Total stockholders equity | $ | 72,701 | $ | 82,701 |
(1) | Amount reflects U.S. Treasury Securities that were purchased and temporarily held in connection with complying with RIC diversification requirements under Subchapter M of the Code. |
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We are an externally managed non-diversified closed-end management investment company formed in April 2010, and have elected to be treated as a business development company under the 1940 Act. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We are managed by Full Circle Advisors, and Full Circle Service Company provides the administrative services necessary for us to operate.
We invest primarily in senior secured loans and, to a lesser extent, second lien loans, mezzanine loans and equity securities issued by smaller and lower middle-market companies that operate in a diverse range of industries. 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. 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 to mitigate risk against loss of principal should a borrower default. Our stretch senior secured loans typically possess a greater advance rate against the borrowers assets and cash flow, and accordingly carry a higher interest rate and/or greater equity participation, than traditional senior secured loans. This stretch senior secured loan instrument can provide borrowers with a more efficient and desirable solution than a senior bank line combined with a separate second lien or mezzanine loan obtained from another source. We also may 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 investing in borrowers with cash flows to cover debt service, while frequently securing our loans against 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 and after the 2008/2009 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 and/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.
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.
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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., FC New Media Inc., TransAmerican Asset Servicing Group, Inc., FC New Specialty Foods, Inc., and FC Takoda Holdings, LLC our only wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
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 Capitals 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 Companys 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,
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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.
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. Realized gain (loss) on the sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their stated costs.
From time to time the Company may enter into a new transaction with a portfolio company as a result of the sale, merger, foreclosure, bankruptcy or other corporate event involving the portfolio company. In such cases, the Company may receive newly-issued notes, securities and/or other consideration in exchange for, or resulting from, the cancellation of the instruments previously held by the Company with regard to that portfolio company. In such cases, the Company may experience a realized loss on the instrument being sold or cancelled, and, concurrently, an elimination of any previously recognized unrealized losses on the portfolio investment. Such elimination of unrealized loss is included on the Statements of Operations as an increase in the Change in Unrealized Gain (Loss) on Investments.
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 Companys Board of Directors considers fluctuations in current interest rates, the trends in yields of debt instruments with similar credit ratings, the 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 Companys 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.
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, work performed by third party valuation agents, if applicable, and other data as may be acquired and analyzed by Management and the Companys Board of Directors.
The Companys 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. These nonpublic investments are included in Level 3 of the fair value hierarchy.
The Companys Board of Directors ascribes value to warrants based on fair value analyses that may include discounted cash flow analyses, option pricing models, comparable analyses and other techniques as deemed appropriate.
The Companys assets measured at fair value on a recurring basis subject to the requirements of ASC Topic 820 at March 31, 2014 and June 30, 2013, were as follows:
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Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets
|
||||||||||||||||
Senior and Subordinated Loans, at fair value | $ | | $ | | $ | 77,333,327 | $ | 77,333,327 | ||||||||
Investments in private companies, at fair value | | | 5,870,523 | 5,870,523 | ||||||||||||
Investments in securities, at fair value | | | 6,919,302 | 6,919,302 | ||||||||||||
US Treasury Securities, at fair value (1) | 10,000,049 | | | 10,000,049 | ||||||||||||
$ | 10,000,049 | $ | | $ | 90,123,152 | $ | 100,123,201 |
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Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets
|
||||||||||||||||
Senior and Subordinated Loans, at fair value | $ | | $ | | $ | 81,195,958 | $ | 81,195,958 | ||||||||
Investments in private companies, at fair value | | | 6,784,435 | 6,784,435 | ||||||||||||
Investments in other securities, at fair value | | | 194,108 | 194,108 | ||||||||||||
$ | | $ | | $ | 88,174,501 | $ | 88,174,501 |
(1) | U.S. Treasury Securities were purchased and temporarily held in connection with compliance with RIC diversification requirements under Subchapter M of the Code. |
During the nine months ended March 31, 2014 and the year ended June 30, 2013, there were no transfers in or out of levels.
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 unamortized loan origination, closing and/or commitment fees are recorded as interest income.
Dividend income is recorded on the ex-dividend date.
Structuring fees, board fees, excess deal deposits, prepayment fees and similar fees are recognized as Other Income as earned, usually when received. Other fee income, including annual fees and monitoring fees are included in Other Income.
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.
We believe that the current credit environment provides favorable opportunities to achieve attractive risk-adjusted returns on the types of senior secured loans and other investments we may 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
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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. 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 are 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.
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 following is a summary of our quarterly investment activity since the completion of our initial public offering. Such amounts are not inclusive of our holdings of United States Treasury Bills.
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Time Period |
Acquisitions
(1)
(dollars in millions) |
Dispositions
(2)
(dollars in millions) |
Weighted Average
Interest Rate of Portfolio at End of Period (3) |
|||||||||
Legacy Portfolio Acquisition (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 | % | ||||||||
January 1, 2011 through March 31, 2011 | 4.0 | 19.9 | 12.39 | % | ||||||||
April 1, 2011 through June 30, 2011 | 9.6 | 1.2 | 12.68 | % | ||||||||
Fiscal 2011 | 90.0 | 32.6 | N/A | |||||||||
July 1, 2011 through September 30, 2011 | 27.7 | 15.9 | 12.89 | % | ||||||||
October 1, 2011 through December 31, 2011 | 5.9 | 9.4 | 13.04 | % | ||||||||
January 1, 2012 through March 31, 2012 | 6.7 | 5.7 | 12.98 | % | ||||||||
April 1, 2012 through June 30, 2012 | 15.0 | 7.1 | 12.93 | % | ||||||||
Fiscal 2012 | 55.3 | 38.1 | N/A | |||||||||
July 1, 2012 through September 30, 2012 | 11.4 | 8.1 | 12.84 | % | ||||||||
October 1, 2012 through December 31, 2012 | 29.1 | 25.1 | 12.55 | % | ||||||||
January 1, 2013 through March 31, 2013 | 22.4 | 12.1 | 12.69 | % | ||||||||
April 1, 2013 through June 30, 2013 | 12.2 | 12.8 | 12.90 | % | ||||||||
Fiscal 2013 | 75.1 | 58.1 | N/A | |||||||||
July 1, 2013 through September 30, 2013 | 20.0 | 10.1 | 12.81 | % | ||||||||
October 1, 2013 through December 31, 2013 | 22.4 | 38.1 | 12.48 | % | ||||||||
January 1, 2014 through March 31, 2014 | 33.0 | 20.9 | 11.41 | % | ||||||||
Fiscal 2014 | 75.4 | 69.1 | N/A | |||||||||
Since inception | $ | 297.8 | $ | 197.9 | N/A |
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(1) | Includes new deals, additional fundings, refinancings (inclusive of those on revolving credit facilities) and payment in kind PIK interest. |
(2) | Includes scheduled principal payments, prepayments, sales and repayments (inclusive of those on revolving credit facilities). |
(3) | For transactions in the secondary market, the interest rate used for the weighted average interest rate reflects the effective yield on the loan at the purchase price. |
The primary investment activities for the nine months ended March 31, 2014 were fundings and repayments under the revolving credit facilities and the funding of the following loan facilities:
| On August 1, 2013, the Company funded $4,500,000 of a $9,000,000 senior secured credit facility to Infinite Aegis Group, LLC. |
| On September 4, 2013, the Company funded $1,500,000 of a $5,000,000 senior secured credit facility to Franklin Place Shops Red, LLC. |
| On September 30, 2013, the Company funded $2,500,000 of a $3,250,000 senior secured credit facility to CPX, Inc. |
| On October 17, 2013, the senior secured credit facility with CSL Operating, LLC, an industrial metal treatings company, was paid off at par value plus accrued interest and fees of $3,655,118. |
| On October 17, 2013, the senior secured credit facility with Coast Plating, Inc., an aerospace parts plating and finishing company, was paid off at par plus accrued interest and fees of $4,740,312. |
| On October 21, 2013, the senior secured credit facility with Employment Plus, Inc., a staffing services company, was paid off at par value plus accrued interest of $5,033,333. |
| On October 30, 2013, the Company purchased $5,000,000 of a $141,700,000 senior secured credit facility to Esselte Holdings, Inc./Esselte AB, a global manufacturer and distributor of office supplies. |
| On October 31, 2013, MDU Communications (USA) Inc., a cable TV/broadband services company entered into an asset purchase agreement to sell substantially all of its assets to a third party. In conjunction with this sale, the senior secured credit facility has been partially prepaid in an amount of $4,634,365. As part of this sales process, on October 22, 2013, the Company reduced the interest rate on the outstanding balance of the loan to 2.00% and realized a partial loss of $492,217 as part of the transaction. Future gains and losses related to the sales process may occur as the borrower finalizes the sales process. |
| On December 11, 2013, we received gross proceeds of $6,028,880 relating to the full repayment of our senior secured credit facility to iMedX, Inc. Of the $6,028,880 in gross proceeds, $978,488 represented early termination fees and success fees upon repayment. |
| On December 26, 2013, the senior secured loan with Franklin Place Shops-Red, LLC, a real estate investment trust, was paid off at par of $1,500,000. |
| On January 15, 2014, the senior secured revolving loan with Global Energy Efficiency Holdings, Inc., an energy efficiency company, was paid off at par value plus accrued interest and fees of $7,664,074. Of the $7,664,074 in gross proceeds, $437,337 represented early termination fees and success fees upon repayment. |
| On January 21, 2014, the Company invested $500,000 in a warrant as part of a $30 million senior secured convertible note purchase agreement with Advanced Cannabis Solutions, Inc. (ACS), a non-residential property manager. The agreement to purchase convertible notes is contingent upon ACS satisfaction of certain requirements. The convertible notes bear interest at a fixed rate of 12.00% per annum and have a final maturity of January 21, 2020. |
| On January 31, 2014, the Company purchased $7,500,000 par amount of a $256,336,139 senior secured credit facility to PEAKS Trust 2009-1 for $6,032,538. |
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| On March 4, 2014, the Company funded a $7,000,000 senior secured credit facility to Ocean Protection Services. |
| On March 12, 2014, the Company funded $5,000,000 of a $150,000,000 senior secured credit facility to Dynamic Energy Services International, LLC. |
| On March 31, 2014, the Company funded a $6,000,000 senior secured credit facility to GW Power, LLC and Greenwood Fuels IW, LLC. |
The following is a reconciliation of the investment portfolio for the nine months ended March 31, 2014, and for the year ended June 30, 2013:
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Nine Months Ended March 31, 2014 | Year Ended June 30, 2013 | |||||||
Beginning Investment Portfolio | $ | 88,174,501 | $ | 94,846,770 | ||||
Portfolio Investments Acquired | 75,390,486 | 75,145,289 | ||||||
Treasury Purchases (1) | 46,000,509 | 62,001,462 | ||||||
Amortization and Accretion of Fixed Income Premiums and Discounts | 332,615 | 368,279 | ||||||
Portfolio Investments Repaid | (69,129,987 | ) | (58,107,861 | ) | ||||
Sales and Maturities of Treasury Securities (1) | (36,000,000 | ) | (84,500,000 | ) | ||||
Net Unrealized Appreciation (Depreciation) | (3,698,474 | ) | 2,636,310 | |||||
Net Realized Losses | (946,449 | ) | (4,215,748 | ) | ||||
Ending Investment Portfolio | $ | 100,123,201 | $ | 88,174,501 |
(1) | U.S. Treasury Securities were purchased and temporarily held in connection with complying with RIC diversification requirements under Subchapter M of the Code. |
During the nine months ended March 31, 2014, we recorded net unrealized depreciation of $3,698,474. This consisted of $8,862,125 of net unrealized depreciation on debt investments and $5,163,651 of net unrealized appreciation on equity investments.
The following table shows the fair value of our portfolio of investments by asset class as of March 31, 2014, and June 30, 2013, excluding United States Treasury Bills of approximately $10.0 million and $0.0 million, respectively:
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March 31, 2014 (Unaudited) | June 30, 2013 (Audited) | |||||||||||||||
Investments at Fair Value (dollars in millions) |
Percentage
of Total Portfolio |
Investments at Fair Value (dollars in millions) |
Percentage
of Total Portfolio |
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Senior Secured Loans | $ | 77.3 | 85.8 | % | $ | 78.2 | 88.7 | % | ||||||||
Subordinated Secured Loans | | | 3.0 | 3.4 | ||||||||||||
Limited Liability Company Interests | 5.9 | 6.5 | 6.8 | 7.7 | ||||||||||||
Warrants | 6.9 | 7.7 | 0.2 | 0.2 | ||||||||||||
Total | $ | 90.1 | 100.0 | % | $ | 88.2 | 100.0 | % |
At March 31, 2014, the 21 borrowers whose debt investments are included in the table above averaged a loan to value ratio of approximately 64% (i.e., each $64 of loan value outstanding is secured by $100 of collateral value).
At June 30, 2013, the 19 borrowers whose debt investments are included in the table above averaged a loan to value ratio of approximately 60% (i.e., each $60 of loan value outstanding is secured by $100 of collateral value).
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The following table shows the fair value of our portfolio of investments by industry, as of March 31, 2014, and June 30, 2013, excluding United States Treasury Bills of approximately $10.0 million and $0.0 million, respectively:
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March 31, 2014 (Unaudited) | June 30, 2013 (Audited) | |||||||||||||||
Investments at Fair Value
(in millions) |
Percentage
of Total Portfolio |
Investments at Fair Value
(in millions) |
Percentage
of Total Portfolio |
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Consumer Finance | $ | 12.9 | 14.3 | % | $ | 6.9 | 7.8 | % | ||||||||
Cable TV/Broadband Services | 9.5 | 10.5 | 15.9 | 18.0 | ||||||||||||
Maritime Security Services | 6.9 | 7.7 | | | ||||||||||||
Non-Residential Property Owner | 6.9 | 7.6 | | | ||||||||||||
Electric Services | 5.9 | 6.6 | | | ||||||||||||
Oil and Gas Field Services | 4.9 | 5.4 | | | ||||||||||||
Healthcare Billing and Collections | 4.8 | 5.3 | | | ||||||||||||
Munitions | 4.6 | 5.1 | 6.2 | 7.0 | ||||||||||||
Food Distributors and Wholesalers | 3.9 | 4.3 | 4.0 | 4.6 | ||||||||||||
Energy Efficiency Services | 3.7 | 4.1 | 11.7 | 13.2 | ||||||||||||
Building Cleaning and Maintenance Services | 3.6 | 4.0 | 3.9 | 4.4 | ||||||||||||
Healthcare Services | 3.5 | 3.9 | 3.5 | 3.9 | ||||||||||||
Information and Data Services | 3.2 | 3.6 | 4.2 | 4.8 | ||||||||||||
Industrial Molded Products | 2.9 | 3.2 | | | ||||||||||||
Geophysical Surveying and Mapping Services | 2.4 | 2.7 | 1.5 | 1.7 | ||||||||||||
Radio Broadcasting | 2.3 | 2.6 | 5.6 | 6.4 | ||||||||||||
Outdoor Advertising Services | 2.2 | 2.4 | 2.3 | 2.6 | ||||||||||||
Asset Recovery Services | 2.1 | 2.4 | 1.5 | 1.7 | ||||||||||||
Equipment Rental Services | 2.0 | 2.2 | 2.2 | 2.6 | ||||||||||||
Stationery, Tablets, and Related Products | 1.9 | 2.1 | | | ||||||||||||
Medical Transcription Services | | | 5.2 | 5.9 | ||||||||||||
Staffing Services | | | 5.0 | 5.7 | ||||||||||||
Aerospace Parts Plating and Finishing | | | 4.8 | 5.5 | ||||||||||||
Industrial Metal Treatings | | | 3.8 | 4.2 | ||||||||||||
Total | $ | 90.1 | 100.0 | % | $ | 88.2 | 100.0 | % |
We have adopted a credit grading system to monitor the quality of our debt investment portfolio. As of March 31, 2014, our portfolio had a weighted average grade of 3.20, based upon the fair value of the debt investments in the portfolio, excluding United States Treasury Bills of approximately $10.0 million. Equity securities are not graded. This was an increase of 0.08 from the weighted average grade of 3.12 at June 30, 2013.
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At March 31, 2014, our debt investment portfolio was graded as follows:
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March 31, 2014 (Unaudited) | ||||||||||||||||
Grade | Summary Description | Fair Value |
Percentage
of Total Portfolio |
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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). | $ | | | % | |||||||||||
2 | The portfolio company is performing above expectations and the risk profile is generally favorable. | 1,904,388 | 2.11 | |||||||||||||
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. | 61,931,679 | 68.72 | |||||||||||||
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. | 9,547,740 | 10.59 | |||||||||||||
5 | The investment is performing well below expectations and is not anticipated to be repaid in full. | 3,949,520 | 4.38 | |||||||||||||
$ | 77,333,327 | 85.80 | % |
At June 30, 2013, our debt investment portfolio was graded as follows:
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June 30, 2013 (Audited) | ||||||||||||||||
Grade | Summary Description | Fair Value |
Percentage
of Total Portfolio |
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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). | $ | | | % | |||||||||||
2 | The portfolio company is performing above expectations and the risk profile is generally favorable. | 1,412,666 | 1.60 | |||||||||||||
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. | 68,397,783 | 77.58 | |||||||||||||
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. | 11,385,509 | 12.91 | |||||||||||||
5 | The investment is performing well below expectations and is not anticipated to be repaid in full. | | | |||||||||||||
$ | 81,195,958 | 92.09 | % |
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.
Total investment income includes interest and dividend income on our investments as well as other income, which is comprised entirely of fee income for the three months ended March 31, 2014. Fee income typically consists of administrative fees, prepayment fees, structuring fees and unused line fees.
Total investment income for the three months ended March 31, 2014, was $3,191,624. This amount consisted of $2,492,366 of interest income from portfolio investments (which included $21,526 of PIK interest), $80,293 of dividend income and $618,965 of fee income. Dividend income was solely earned from our equity investment in The Finance Company, LLC.
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Total investment income for the three months ended March 31, 2013, was $2,843,041. This amount consisted of $2,440,436 of interest income from portfolio investments (which included no PIK interest), $80,178 of dividend income and $322,427 of fee income. Dividend income was earned solely from our investment in The Finance Company, LLC.
The increase in investment income for the three months ended March 31, 2014 relative to the same time period in 2013 is primarily due to the increase in fee income, which can fluctuate. The increase in fee income for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, was a result of success and prepayment fees received from the full repayment of our loan to Global Energy Efficiency Holdings, Inc. Interest income also increased due to a larger investment portfolio.
Operating expenses for the three months ended March 31, 2014, were $1,785,245.
Operating expenses for the three months ended March 31, 2013, were $1,530,877.
The increase in our net operating expenses for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 is primarily due to the increase in interest expense of $243,781 from greater borrowings under our Notes (as defined below), to fund portfolio growth and an increase of $23,550 in incentive fees due to greater pre-incentive fee net investment income. These increases were partially offset by declining costs under our Administration Agreement.
Net investment income for the three months ended March 31, 2014, was $1,406,379. Net investment income per share was $0.15 for the period.
Net investment income for the three months ended March 31, 2013, was $1,312,164. Net investment income per share was $0.18 for the period.
The increase in net investment income for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 was primarily a result of success and prepayment fees received as a result of the payoff of Global Energy Efficiency Holdings, Inc. The increase in total investment income was partially offset by interest expense from greater costs associated with outstanding borrowings and greater incentive fees resulting from a higher level of pre-incentive fee net investment income during the period.
The $0.03 decrease in net investment income per share for the three months ended March 31, 2014, as compared to the three months ended March 31, 2013 was a result of having greater shares outstanding during the period, as we issued 2,522,300 shares during the three months ended March 31, 2014.
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 March 31, 2014, we recorded a realized gain of $223,414 in connection with a partial prepayment of PEAKS Trust 2009-1. Realized gain per share for the three months ended March 31, 2014 was $0.02.
During the three months ended March 31, 2013, we recorded no realized gain or 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. See Critical Accounting Policies Change in Unrealized Gain (Loss) on Investments.
Change in unrealized gain on investments was $1,751,729, or $0.18 per share, for the three months ended March 31, 2014. The change in unrealized appreciation is primarily due to the appreciation of our Advanced Cannabis Solutions, Inc. warrant of $6,368,077. This was partially offset by depreciation of $1,346,557 and $1,621,454 related to our loans to Blackstrap Broadcasting, LLC and to Modular Process Control, LLC,
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respectively. The overall change in unrealized gain consisted of $4,337,032 of net unrealized depreciation on debt investments and $6,088,761 of net unrealized appreciation on equity investments.
Change in unrealized gain on investments was $168,654, or $0.02 per share for the three months ended March 31, 2013. The change in unrealized was primarily due to the appreciation of our senior secured loan in ProGrade Ammo Group, LLC. The overall change in unrealized gain consisted of $40,717 of net unrealized appreciation on debt investments and $209,371 of net unrealized appreciation on equity investments, primarily resulting from unrealized appreciation on our holding in the Finance Company, LLC.
Total investment income includes interest and dividend income on our investments as well as other income, which is comprised entirely of fee income for the nine months ended March 31, 2014. Fee income typically consists of administrative fees, prepayment fees, structuring fees and unused line fees.
Total investment income for the nine months ended March 31, 2014, was $10,406,713. This amount consisted of $8,275,801 of interest income from portfolio investments (which included $21,526 of PIK interest), $114,704 of dividend income and $2,016,208 of fee income. Dividend income was solely earned from our equity investment in The Finance Company, LLC.
Total investment income for the nine months ended March 31, 2013, was $8,715,943. This amount consisted of $7,593,583 of interest income from portfolio investments (which included no PIK interest), $186,768 of dividend income and $935,592 of fee income.
The increase in interest income for the nine months ended March 31, 2014 relative to the same time period in 2013 is primarily due to a larger average investment portfolio. The dividend income for the nine months ended March 31, 2014 decreased as compared with the dividend income for the nine months ended March 31, 2013, reflecting lower distributions related to the Companys investment in The Finance Company, LLC. The increase in fee income, which can fluctuate, for the nine months ended March 31, 2014 as compared to the nine months ended March 31, 2013 was primarily a result of success and prepayment fees received as a result of the full repayment of our loans to iMedx, Inc. and Global Energy Efficiency Holdings, Inc.
Operating expenses for the nine months ended March 31, 2014, were $5,856,519.
Operating expenses for the nine months ended March 31, 2013, were $4,699,884.
The increase in our net operating expenses for the nine months ended March 31, 2014 as compared to the nine months ended March 31, 2013 is primarily due to the increase in interest expense of $848,178 from greater borrowings under our Notes (as defined below), to fund portfolio growth, an increase in management fees of $114,194 due to a larger average investment portfolio, and an increase in incentive fees of $139,824 due to greater pre-incentive fee net investment income. These increases were partially offset by declining costs incurred under our Administration Agreement.
Net investment income for the nine months ended March 31, 2014, was $4,550,194. Net investment income per share was $0.56 for the period.
Net investment income for the nine months ended March 31, 2013, was $4,016,059. Net investment income per share was $0.59 for the period.
The increase in net investment income for the nine months ended March 31, 2014 as compared to the nine months ended March 31, 2013 was primarily due to a larger average investment portfolio and success and prepayment fees received as a result of the full repayment of our loans to iMedx, Inc. and Global Energy Efficiency Holdings, Inc. The increase in interest income was partially offset by greater interest expense from greater costs associated with outstanding borrowings and greater management and incentive fees resulting from a larger portfolio and greater pre-incentive fee net investment income during the period.
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The $0.03 decrease in net investment income per share for the nine months ended March 31, 2014, as compared to the nine months ended March 31, 2013 was a result of having greater average shares outstanding during the period. Weighted average shares outstanding for the nine months ended March 31, 2014, were 8,177,036 compared to 6,835,258 for the nine months ended March 31, 2013.
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 nine months ended March 31, 2014, we recorded a realized loss of $947,287 primarily in connection with the continued disposition of our investment in Ygnition Networks, Inc. in an amount of $678,553 and a realized loss on our position in MDU Communications (USA), Inc. of $492,217. This was partially offset by a gain realized on the partial prepayment of PEAKS Trust 2009-1 of $224,321. Realized loss per share for the nine months ended March 31, 2014 was $0.14.
During the nine months ended March 31, 2013, we recorded a realized loss of $4,047,108, primarily from the disposition of our senior secured loan in Ygnition Networks, Inc. and the conversion of our senior secured loan in Equisearch Acquisition, Inc. to a senior secured term loan in TransAmerican Asset Servicing Group, LLC upon the finalization of Equisearch Acquisition, Inc.s bankruptcy proceedings. Realized loss per share was $0.59 for the period.
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. See Critical Accounting Policies Change in Unrealized Gain (Loss) on Investments.
Change in unrealized loss on investments was $3,698,474, or $0.53 per share, for the nine months ended March 31, 2014. The change in unrealized depreciation is primarily due to the depreciation of $3,361,464 and $1,679,697 of our loans to Blackstrap Broadcasting, LLC and to ProGrade Ammo Group, LLC, respectively, and $3,148,549 of our loans to and warrants in Modular Process Control, LLC. This was partially offset by the $6,368,077 appreciation of our warrant in Advanced Cannabis Solutions, Inc. The overall change in unrealized loss consisted of $8,862,125 of net unrealized depreciation on debt investments and $5,163,651 of net unrealized appreciation on equity investments.
Change in unrealized gain on investments was $1,978,556, or $0.29 per share for the nine months ended March 31, 2013. The change in unrealized depreciation was primarily due to $792,186 of net unrealized appreciation on debt investments, primarily in connection with the disposition of our investment in Ygnition Networks, Inc., and the conversion of our senior secured loan in Equisearch Acquisition, Inc. to a senior secured term loan in TransAmerican Asset Servicing Group, LLC upon the finalization of Equisearch Acquisition, Inc.s bankruptcy proceedings. Additionally, we recorded $1,186,370 of net unrealized appreciation on equity investments.
At March 31, 2014, we had investments in debt securities of 21 companies, totaling approximately $77.3 million in fair value, and equity investments in 12 companies, totaling approximately $12.8 million in fair value.
For the nine months ended March 31, 2014, cash provided by operating activities, consisting primarily of purchases, sales and repayments of investments and the items described in Results of Operations, was approximately $3.4 million, reflecting the purchases and repayments of investments, income resulting from operations, offset by non-cash income related to OID income, changes in working capital and accrued interest receivable. Net cash used in purchases and sales of investments was approximately $6.3 million, reflecting net additional investments in securities of $75.4 million, offset by principal repayments of $69.1 million. Such amounts are not inclusive of our purchases or sales of United States Treasury Bills.
As of March 31, 2014, we had $0 outstanding under our senior secured credit facility (the Credit Facility) with Santander Bank, N.A. f/k/a Sovereign Bank, N.A. (Santander Bank), as administrative agent, and
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$21.1 million outstanding of aggregate principal amount of 8.25% Notes due June 30, 2020 (the Notes). On November 6, 2013, the Company increased the size of the Credit Facility from $32.5 million to $45.0 million.
As a business development company, we generally have an ongoing need to raise additional capital for investment purposes. As a result, we expect, from time to time, to access the debt and equity markets when we believe it is necessary and appropriate to do so. In this regard, we continue to explore various options for obtaining additional debt or equity capital for investments. This may include expanding or extending our Credit Facility, or the issuance of additional shares of our common stock, possibly at prices below our then current net asset value per share pursuant to a proposal, approved by our stockholders at our most recent Special Meeting of Stockholders, authorizing us to sell shares of our common stock below its then current net asset value per share in one or more offerings for a period of one year or, if earlier, the date of our next Annual Meeting of Shareholders. We would need similar future approval from our stockholders to issue shares below the then current net asset value per share any time after the expiration of the current approval. If we are unable to obtain leverage or raise equity capital on terms that are acceptable to us, our ability to grow our portfolio will be substantially impacted.
On January 14, 2014, we completed a follow-on public offering of 1,650,000 shares of our common stock at $7.13 per share for gross proceeds of approximately $11.8 million. We also granted the underwriters a 30-day option to purchase up to 242,300 additional shares. On January 27, 2014, the underwriters exercised in full their option to purchase additional shares. The exercise of the over-allotment resulted in our receiving an additional $1.7 million in gross proceeds.
On February 27, 2014, we sold 630,000 shares of our common stock at $7.81 per share in a direct registered offering to certain institutional investors for total gross proceeds of $4.9 million.
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Payments Due By Period (dollars in millions) | ||||||||||||||||||||
Total |
Less than
1 year |
1 3 years | 3 5 years |
More than
5 years |
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Credit Facility (1) | $ | | $ | | $ | | $ | | $ | | ||||||||||
Notes | 21.1 | | | | 21.1 | |||||||||||||||
Total | $ | 21.1 | $ | | $ | | $ | | $ | 21.1 |
(1) | At March 31, 2014, $45.0 million remained unused under the Credit Facility. |
In addition to the contractual obligations set forth above, we have certain obligations with respect to the investment advisory and administration services we receive. See Overview. We incurred $2,297,329 for investment advisory services and $518,711 for administrative services for the nine months ended March 31, 2014.
As of March 31, 2014, we had approximately $3.0 million in unfunded loan commitments, subject to our approval in certain instances, to provide debt financing to certain of our portfolio companies.
We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.
Secured Revolving Credit Facility. On June 3, 2013, we entered into a credit agreement with Santander Bank, as administrative agent, which provided us with our $32.5 million Credit Facility, subject to borrowing base requirements. The Credit Facility replaced our prior senior secured revolving credit facility with FCC, LLC d/b/a First Capital.
The Credit Facility matures on June 3, 2016 and bears interest based on a tiered rate structure, depending upon utilization, ranging from LIBOR (1-month, 2-month or 3-month, depending on our option) plus 3.25% to 4.00% per annum, or from Santander Banks prime rate plus 1.25% to 2.00% per annum, based on our
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election. In addition, a fee of 0.50% per annum is charged on unused amounts under the Credit Facility. The Credit Facility is secured by all of our assets. Under the Credit Facility, we have made certain customary representations and warranties, and are required to comply with various covenants, reporting requirements and other customary requirements, including a minimum balance sheet leverage ratio, for similar credit facilities. The Credit Facility includes usual and customary events of default for credit facilities of this nature. On November 6, 2013, the Company increased the size of its Credit Facility with Santander Bank from $32.5 million to $45.0 million.
Notes Payable. On June 28, 2013, we issued approximately $21.1 million in aggregate principal amount of our 8.25% Notes due June 30, 2020 for net proceeds of approximately $20.0 million after deducting underwriting commissions of approximately $0.9 million and offering expenses of approximately $0.2 million.
The Notes were issued pursuant to an indenture, dated June 3, 2013, as supplemented by the first supplemental indenture, dated June 28, 2013 (collectively, the Indenture), between us and U.S. Bank National Association (the Trustee). The Notes are our unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including existing unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries or financing vehicles. Interest on the Notes is paid quarterly in arrears on March 30, June 30, September 30 and December 30, at a rate of 8.25% per annum. The Notes mature on June 30, 2020 and may be redeemed in whole or in part at any time or from time to time at our option on or after June 30, 2016. The Notes are listed on the Nasdaq Global Market under the trading symbol FULLL with a par value of $25.00 per share.
The Indenture contains certain covenants, including covenants requiring our compliance with (regardless of whether we are subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring us to provide financial information to the holders of the Notes and the Trustee if we cease to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Indenture. We may repurchase the Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any Notes repurchased by us may, at our option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by us. Any Notes surrendered for cancellation will be promptly cancelled and no longer outstanding under the Indenture. As of March 31, 2014, we had not repurchased any of the Notes in the open market.
Distribution Notes. On July 3, 2013, we repaid the $3.4 million of Distribution Notes issued in connection with our initial public offering at par plus accrued interest. As a result, the Distribution Notes are no longer outstanding.
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. To the extent our earnings fall below the total amount of our distributions for a taxable year, a portion of those distributions may be deemed a tax return of capital to our stockholders. In this regard, $1,089,055 of our distributions during the year ended June 30, 2013 constituted a return of capital to our stockholders. For tax purposes, the Company expects that dividends for the fiscal year ended June 30, 2014 will be funded primarily from net investment income. However, for the nine months ended March 31, 2014, for financial reporting purposes, the Company had net investment income of approximately $0.56 per share, compared to distributions to stockholders of $0.673 per share during the period. Management monitors available taxable earnings, including net investment income and realized capital gains, to determine if a tax return of capital may occur for the year. The tax character of distributions will be determined at the end of the taxable year. However, if the character of our distributions for the fiscal year ended June 30, 2014 were determined as of March 31, 2014, a portion of the distributions for 2014 would have been characterized as a tax return of capital to the Companys stockholders; this tax return of capital may differ from the return of capital calculated with
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reference to net investment income for financial reporting purposes. Stockholders should read any written disclosure accompanying a dividend payment carefully and should not assume that the source of any distribution is our taxable ordinary income or capital gains. The specific tax characteristics of our distributions will be reported to stockholders after the end of the taxable year.
The following table lists the cash distributions, including dividends and returns of capital, if any, per share that we have declared since our formation on April 16, 2010. The table is divided by fiscal year according to record date.
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Date Declared | Record Date | Payment Date | Amount | |||||||||
Fiscal 2011:
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July 21, 2010 | September 30, 2010 | October 15, 2010 | $ | 0.076 | (1) | |||||||
November 5, 2010 | December 31, 2010 | January 14, 2011 | 0.225 | |||||||||
February 4, 2011 | March 31, 2011 | April 15, 2011 | 0.225 | |||||||||
May 6, 2011 | June 30, 2011 | July 15, 2011 | 0.225 | |||||||||
Total (2011) | $ | 0.751 | ||||||||||
Fiscal 2012:
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June 28, 2011 | July 29, 2011 | August 15, 2011 | $ | 0.075 | (2) | |||||||
June 28, 2011 | August 31, 2011 | September 15, 2011 | 0.075 | |||||||||
June 28, 2011 | September 30, 2011 | October 14, 2011 | 0.075 | |||||||||
September 8, 2011 | October 31, 2011 | November 15, 2011 | 0.077 | |||||||||
September 8, 2011 | November 30, 2011 | December 15, 2011 | 0.077 | |||||||||
September 8, 2011 | December 30, 2011 | January 13, 2012 | 0.077 | |||||||||
November 7, 2011 | January 31, 2012 | February 15, 2012 | 0.077 | |||||||||
November 7, 2011 | February 29, 2012 | March 15, 2012 | 0.077 | |||||||||
November 7, 2011 | March 30, 2012 | April 13, 2012 | 0.077 | |||||||||
February 3, 2012 | April 30, 2012 | May 15, 2012 | 0.077 | |||||||||
February 3, 2012 | May 31, 2012 | June 15, 2012 | 0.077 | |||||||||
February 3, 2012 | June 29, 2012 | July 13, 2012 | 0.077 | |||||||||
Total (2012) | $ | 0.918 | ||||||||||
Fiscal 2013:
|
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May 7, 2012 | July 31, 2012 | August 15, 2012 | $ | 0.077 | ||||||||
May 7, 2012 | August 31, 2012 | September 14, 2012 | 0.077 | |||||||||
May 7, 2012 | September 28, 2012 | October 15, 2012 | 0.077 | |||||||||
September 10, 2012 | October 31, 2012 | November 15, 2012 | 0.077 | |||||||||
September 10, 2012 | November 30, 2012 | December 14, 2012 | 0.077 | |||||||||
September 10, 2012 | December 31, 2012 | January 15, 2013 | 0.077 | |||||||||
November 5, 2012 | January 31, 2013 | February 15, 2013 | 0.077 | |||||||||
November 5, 2012 | February 28, 2013 | March 15, 2013 | 0.077 | |||||||||
November 5, 2012 | March 29, 2013 | April 15, 2013 | 0.077 | |||||||||
February 5, 2013 | April 30, 2013 | May 15, 2013 | 0.077 | |||||||||
February 5, 2013 | May 31, 2012 | June 14, 2013 | 0.077 | |||||||||
February 5, 2013 | June 28, 2013 | July 15, 2013 | 0.077 | |||||||||
Total (2013) | $ | 0.924 |
S-30
|
|
|
|
|||||||||
Date Declared | Record Date | Payment Date | Amount | |||||||||
Fiscal 2014:
|
||||||||||||
May 3, 2013 | July 31, 2013 | August 15, 2013 | $ | 0.077 | ||||||||
May 3, 2013 | August 30, 2013 | September 13, 2013 | 0.077 | |||||||||
May 3, 2013 | September 30, 2013 | October 15, 2013 | 0.077 | |||||||||
September 9, 2013 | October 31, 2013 | November 15, 2013 | 0.077 | |||||||||
September 9, 2013 | November 29, 2013 | December 13, 2013 | 0.077 | |||||||||
September 9, 2013 | December 31, 2013 | January 15, 2014 | 0.077 | |||||||||
November 7, 2013 | January 31, 2014 | February 15, 2014 | 0.067 | |||||||||
November 7, 2013 | February 28, 2014 | March 15, 2014 | 0.067 | |||||||||
November 7, 2013 | March 31, 2014 | April 15, 2014 | 0.067 | |||||||||
February 5, 2014 | April 30, 2014 | May 15, 2014 | 0.067 | |||||||||
February 5, 2014 | May 30, 2014 | June 13, 2014 | 0.067 | |||||||||
February 5, 2014 | June 30, 2014 | July 15, 2014 | 0.067 | |||||||||
Total (2014) | $ | 0.864 | ||||||||||
Fiscal 2015:
|
||||||||||||
May 2, 2014 | July 31, 2014 | August 15, 2014 | 0.067 | |||||||||
May 2, 2014 | August 29, 2014 | September 15, 2014 | 0.067 | |||||||||
May 2, 2014 | September 30, 2014 | October 15, 2014 | 0.067 | |||||||||
Total (2015 to date) | $ | 0.201 |
(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. |
(2) | From our initial public offering through the fourth fiscal quarter of 2012, we paid quarterly dividends, but in the first fiscal quarter of 2013 we began paying, and we intend to continue paying, monthly dividends to our stockholders. Our monthly dividends, if any, are determined by our Board of Directors on a quarterly basis. |
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 Co-Chief Executive Officer and Chairman, and Gregg J. Felton, our Co-Chief Executive Officer and President, are both managing members of, and have 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 Co-Chief Executive Officer and Chairman, and Mr. Felton, our Co-Chief Executive Officer and President, are managing members of, and have 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 former Chief Financial Officer, Treasurer and Secretary, William E. Vastardis, is the President of Vastardis Fund Services LLC (Vastardis). Full Circle Service Company has engaged Vastardis to provide certain administrative services to us. For the nine months ended March 31, 2014, Vastardis earned $150,000 for services provided under the Administration Agreement. On September 30, 2013, Michael J. Sell succeeded Mr. Vastardis as our Chief Financial Officer, Treasurer, and Secretary. |
Certain members of Full Circle Advisors investment committee presently manage Full Circle Funding, LP, a specialty lender serving smaller and lower middle-market companies. Although the existing investment
S-31
funds managed by Full Circle Funding, LP, which currently consist of the Legacy Funds, are no longer making investments in new opportunities, 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. 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.
We have also adopted a Code of Ethics which applies to, among others, our senior officers, including our Co-Chief Executive Officers 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 individuals 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).
On May 2, 2014, the Board of Directors declared monthly dividends of $0.067, $0.067 and $0.067 per share payable on August 15, 2014 for holders of record at July 31, 2014, September 15, 2014 for holders of record at August 29, 2014 and October 15, 2014 for holders of record at September 30, 2014.
On April 7, 2014, the Board of Directors authorized a share repurchase program which provides for the purchase of up to 1 million shares of outstanding common stock to be implemented at the discretion of our management team. Under the repurchase program, we may, but are not obligated to, repurchase our outstanding common stock in the open market from time to time. The timing and number of shares to be repurchased in the open market will depend on a number of factors, including market conditions and alternative investment opportunities. In addition, any repurchases will be conducted in accordance with the 1940 Act.
On April 30, 2014, the Company closed on approximately $4.5 million of a $150.0 million secured second lien term loan to RCS Capital Corporation, a financial services company. The secured second lien term loan is guaranteed by all existing and subsequent direct and indirect domestic subsidiaries of RCS Capital Corporation, and bears interest at LIBOR plus 9.50% with a minimum LIBOR of 1.00% per annum and has a final maturity of April 29, 2021.
On June 4, 2014, we formed Full Circle Capital Investment Partners (FCIP), a multiple series private fund, for which we will serve as the managing member and investment adviser. FCIP closed its first series on June 17, 2014. We expect to receive certain fees or other distributions from FCIP in connection with the services we provide to each series it may issue. In addition, we may co-invest in certain portfolio investments from time to time with one or more series issued by FCIP where we determine that the aggregate available investment opportunity exceeds what we believe would be appropriate for us to acquire directly.
S-32
Certain legal matters in connection with the securities offered hereby will be passed upon for us by Sutherland Asbill & Brennan LLP, Washington, DC.
The financial statements as of June 30, 2013 and 2012 and for each of the years ended June 30, 2013, 2012 and 2011 included in the accompanying prospectus have been so included in reliance on the report of Rothstein Kass, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
We have filed with the SEC a registration statement on Form N-2 together with all amendments and related exhibits under the Securities Act. The registration statement contains additional information about us and the securities being offered by this prospectus supplement and the accompanying prospectus.
We file annual, quarterly and current reports, proxy statements and other information with the SEC under the Securities Exchange Act of 1934, as amended. You can inspect any materials we file with the SEC, without charge, at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The information we file with the SEC is available free of charge by contacting us at Full Circle Capital Corporation, 800 Westchester Ave., Suite S-620, Rye Brook, New York 10573, by telephone at (914) 220-6300, or on our website at http://www.fccapital.com . The SEC also maintains a website that contains reports, proxy statements and other information regarding registrants, including us, that file such information electronically with the SEC. The address of the SECs web site is http://www.sec.gov . Information contained on our website or on the SECs web site about us is not incorporated into this prospectus supplement or the accompanying prospectus and you should not consider information contained on our website or on the SECs website to be part of this prospectus supplement or the accompanying prospectus.
S-33
|
|
|||
Consolidated Statements of Assets and Liabilities as of March 31, 2014 and June 30, 2013 (audited) | F- 2 | |||
Consolidated Statements of Operations for the three and nine months ended March 31, 2014 and March 31, 2013 | F- 3 | |||
Consolidated Statements of Changes in Net Assets for the nine months ended March 31, 2014 and March 31, 2013 | F- 4 | |||
Consolidated Statements of Cash Flows for the nine months ended March 31, 2014 and March 31, 2013 | F- 5 | |||
Consolidated Schedule of Investments as of March 31, 2014 | F- 6 | |||
Consolidated Schedule of Investments as of June 30, 2013 (audited) | F- 11 | |||
Notes to Consolidated Financial Statements as of March 31, 2014 | F- 15 |
F-1
|
|
|
|
|||||||||
March 31, 2014 | June 30, 2013 | |||||||||||
Unaudited | Audited | |||||||||||
Assets
|
||||||||||||
Control Investments at Fair Value (Cost of $19,842,061 and $18,139,543, respectively) |
(NOTE 2, 9)
|
$ | 20,201,058 | $ | 19,115,440 | |||||||
Affiliate Investments at Fair Value (Cost of $19,427,127 and $17,954,622, respectively) |
(NOTE 2, 9)
|
19,335,138 | 16,547,903 | |||||||||
Non-Control/Non-Affiliate Investments at Fair Value
(Cost of $65,692,689 and $53,220,538, respectively) |
(NOTE 2, 9)
|
60,587,005 | 52,511,158 | |||||||||
Total Investments at Fair Value (Cost of $104,961,877 and $89,314,703, respectively) | 100,123,201 | 88,174,501 | ||||||||||
Cash | 6,861,986 | 18,029,115 | ||||||||||
Deposit with Broker | 1,050,000 | | ||||||||||
Interest Receivable |
(NOTE 2)
|
973,594 | 1,097,970 | |||||||||
Principal Receivable | 420,720 | 104,768 | ||||||||||
Dividends Receivable | 80,293 | 36,705 | ||||||||||
Due from Affiliate | 1,332 | | ||||||||||
Due from Portfolio Investment | 137,337 | 105,030 | ||||||||||
Receivable from Notes Offering | | 2,299,704 | ||||||||||
Prepaid Expenses | 107,459 | 61,198 | ||||||||||
Other Assets | 700,710 | 1,437,273 | ||||||||||
Deferred Offering Expenses | | 86,834 | ||||||||||
Deferred Debt Issuance Costs |
(NOTE 8)
|
987,344 | 1,086,895 | |||||||||
Deferred Credit Facility Fees |
(NOTE 8)
|
507,550 | 543,846 | |||||||||
Total Assets | 111,951,526 | 113,063,839 | ||||||||||
Liabilities
|
||||||||||||
Due to Affiliates |
(NOTE 5)
|
736,897 | 728,371 | |||||||||
Accounts Payable | 186,565 | 471,297 | ||||||||||
Accrued Liabilities | 28,967 | 10,172 | ||||||||||
Due to Broker | 10,000,073 | | ||||||||||
Payable for Investments Acquired | 5,940,000 | | ||||||||||
Dividends Payable | 676,143 | 582,842 | ||||||||||
Interest Payable | 31,015 | 134,167 | ||||||||||
Other Liabilities | 494,316 | 358,696 | ||||||||||
Accrued Offering Expenses | 11,000 | | ||||||||||
Line of Credit |
(NOTE 8)
|
| 25,584,147 | |||||||||
Notes Payable 8.25% due June 30, 2020 |
(NOTE 8)
|
21,145,525 | 21,145,525 | |||||||||
Distribution Notes |
(NOTE 8)
|
| 3,404,583 | |||||||||
Total Liabilities | 39,250,501 | 52,419,800 | ||||||||||
Net Assets | $ | 72,701,025 | $ | 60,644,039 | ||||||||
Components of Net Assets
|
||||||||||||
Common Stock, par value $0.01 per share (100,000,000 authorized; 10,091,682 and 7,569,382 issued and outstanding, respectively) | $ | 100,917 | $ | 75,694 | ||||||||
Paid-in Capital in Excess of Par | 83,887,972 | 66,319,579 | ||||||||||
Distributions in Excess of Net Investment Income | (1,091,069 | ) | (200,200 | ) | ||||||||
Accumulated Net Realized Losses | (5,358,119 | ) | (4,410,832 | ) | ||||||||
Accumulated Net Unrealized Losses | (4,838,676 | ) | (1,140,202 | ) | ||||||||
Net Assets | $ | 72,701,025 | $ | 60,644,039 | ||||||||
Net Asset Value Per Share | $ | 7.20 | $ | 8.01 |
See notes to consolidated financial statements.
F-2
|
|
|
|
|
|
|||||||||||||||
Three Months Ended
March 31, |
Nine Months Ended
March 31, |
|||||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||||
Investment Income
|
||||||||||||||||||||
Interest Income from Non-Control/Non-Affiliate Investments | $ | 1,308,432 | $ | 1,615,618 | $ | 4,839,103 | $ | 5,609,673 | ||||||||||||
Interest Income from Affiliate Investments | 673,896 | 389,518 | 1,984,549 | 950,026 | ||||||||||||||||
Interest Income from Control Investments | 510,038 | 435,300 | 1,452,149 | 1,033,884 | ||||||||||||||||
Dividend Income from Control Investments | 80,293 | 80,178 | 114,704 | 186,768 | ||||||||||||||||
Other Income from Non-Control/Non-Affiliate Investments |
(NOTE 2)
|
603,190 | 305,935 | 1,966,552 | 834,515 | |||||||||||||||
Other Income from Affiliate Investments |
(NOTE 2)
|
3,275 | 3,992 | 12,156 | 63,577 | |||||||||||||||
Other Income from Control Investments |
(NOTE 2)
|
12,500 | 12,500 | 37,500 | 37,500 | |||||||||||||||
Total Investment Income | 3,191,624 | 2,843,041 | 10,406,713 | 8,715,943 | ||||||||||||||||
Operating Expenses
|
||||||||||||||||||||
Management Fee |
(NOTE 5)
|
364,352 | 362,743 | 1,156,099 | 1,041,905 | |||||||||||||||
Incentive Fee |
(NOTE 5)
|
351,594 | 328,044 | 1,141,230 | 1,001,406 | |||||||||||||||
Total Advisory Fees | 715,946 | 690,787 | 2,297,329 | 2,043,311 | ||||||||||||||||
Allocation of Overhead Expenses |
(NOTE 5)
|
43,604 | 84,552 | 142,315 | 225,860 | |||||||||||||||
Sub-Administration Fees |
(NOTE 5)
|
50,000 | 50,000 | 150,000 | 173,429 | |||||||||||||||
Officers Compensation |
(NOTE 5)
|
75,529 | 75,160 | 226,396 | 225,514 | |||||||||||||||
Total Costs Incurred Under Administration Agreement | 169,133 | 209,712 | 518,711 | 624,803 | ||||||||||||||||
Directors Fees | 26,125 | 24,625 | 86,375 | 86,375 | ||||||||||||||||
Interest Expense |
(NOTE 8)
|
623,091 | 379,310 | 2,062,570 | 1,214,392 | |||||||||||||||
Professional Services Expense | 112,629 | 108,998 | 467,110 | 384,061 | ||||||||||||||||
Bank Fees | 9,941 | 3,975 | 45,409 | 12,295 | ||||||||||||||||
Other | 128,380 | 113,470 | 379,015 | 334,647 | ||||||||||||||||
Total Operating Expenses | 1,785,245 | 1,530,877 | 5,856,519 | 4,699,884 | ||||||||||||||||
Net Investment Income | 1,406,379 | 1,312,164 | 4,550,194 | 4,016,059 | ||||||||||||||||
Net Change in Unrealized Gain (Loss) on Investments | 1,751,729 | 168,654 | (3,698,474 | ) | 1,978,556 | |||||||||||||||
Net Realized Gain (Loss) on:
|
||||||||||||||||||||
Investments | 224,320 | | (946,449 | ) | (4,047,108 | ) | ||||||||||||||
Foreign Currency Transactions | (906 | ) | | (838 | ) | | ||||||||||||||
Net Realized Gain (Loss) | 223,414 | | (947,287 | ) | (4,047,108 | ) | ||||||||||||||
Net Increase (Decrease) in Net Assets Resulting from Operations | $ | 3,381,522 | $ | 1,480,818 | $ | (95,567 | ) | $ | 1,947,507 | |||||||||||
Earnings (Loss) per Common Share Basic and Diluted |
(NOTE 4)
|
$ | 0.36 | $ | 0.20 | $ | (0.01 | ) | $ | 0.28 | ||||||||||
Net Investment Income per Common Share Basic and Diluted | $ | 0.15 | $ | 0.18 | $ | 0.56 | $ | 0.59 | ||||||||||||
Weighted Average Shares of Common Share Outstanding Basic and Diluted | 9,419,350 | 7,569,382 | 8,177,036 | 6,835,258 |
See notes to consolidated financial statements.
F-3
|
|
|
||||||
Nine Months Ended
March 31, 2014 |
Nine Months
Ended March 31, 2013 |
|||||||
Increase (Decrease) in Net Assets Resulting from Operations:
|
||||||||
Net Investment Income | $ | 4,550,194 | $ | 4,016,059 | ||||
Net Change in Unrealized Gain (Loss) on Investments | (3,698,474 | ) | 1,978,556 | |||||
Net Realized Gain (Loss) on:
|
||||||||
Investments | (946,449 | ) | (4,047,108 | ) | ||||
Foreign Currency Transactions | (838 | ) | | |||||
Net Realized Gain (Loss) | (947,287 | ) | (4,047,108 | ) | ||||
Net Increase (Decrease) in Net Assets Resulting from Operations | (95,567 | ) | 1,947,507 | |||||
Dividends to Shareholders | (5,441,063 | ) | (4,829,782 | ) | ||||
Capital Share Transactions:
|
||||||||
Issuance of Common Stock | 18,412,399 | 10,665,000 | ||||||
Less Offering Costs and Underwriting Fees | (818,783 | ) | (686,580 | ) | ||||
Net Increase in Net Assets Resulting from Capital Share Transactions | 17,593,616 | 9,978,420 | ||||||
Total Increase (Decrease) in Net Assets | 12,056,986 | 7,096,145 | ||||||
Net Assets at Beginning of Period | 60,644,039 | 53,442,785 | ||||||
Net Assets at End of Period | $ | 72,701,025 | $ | 60,538,930 | ||||
Capital Share Activity:
|
||||||||
Shares Issued | 2,522,300 | 1,350,000 | ||||||
Shares Outstanding at Beginning of Period | 7,569,382 | 6,219,382 | ||||||
Shares Outstanding at End of Period | 10,091,682 | 7,569,382 |
See notes to consolidated financial statements.
F-4
|
|
|
||||||
Nine months
ended March 31, 2014 |
Nine months
ended March 31, 2013 |
|||||||
Cash Flows from Operating Activities:
|
||||||||
Net Increase (Decrease) in Net Assets Resulting from Operations | $ | (95,567 | ) | $ | 1,947,507 | |||
Adjustments to Reconcile Net Increase (Decrease) in Net Assets Resulting from Operations to Net Cash Provided by (Used in) Operating Activities
|
||||||||
Purchases of Investments | (121,391,833 | ) | (124,978,996 | ) | ||||
Proceeds from Sale or Refinancing of Investments | 105,129,987 | 114,855,522 | ||||||
Realized (Gain) Loss on:
|
||||||||
Investments | 946,449 | 4,047,108 | ||||||
Foreign Currency Transactions | 838 | | ||||||
Net Change in Unrealized (Gain) Loss on Investments | 3,698,474 | (1,978,556 | ) | |||||
Amortization and Accretion of Fixed Income Premiums and Discounts | (332,615 | ) | (240,175 | ) | ||||
Amortization of Deferred Debt Issuance Costs | 118,653 | | ||||||
Amortization of Deferred Credit Facility Fees | 208,028 | | ||||||
Change in Operating Assets and Liabilities
|
||||||||
Deposit with Broker | (1,050,000 | ) | 800,000 | |||||
Interest Receivable | 124,376 | (90,623 | ) | |||||
Principal Receivable | (315,952 | ) | 365,769 | |||||
Dividend Receivable | (43,588 | ) | (53,682 | ) | ||||
Due from Affiliate | (1,332 | ) | | |||||
Due from Portfolio Investment | (32,307 | ) | 3,223 | |||||
Receivable for Investments Sold | | (1,126,196 | ) | |||||
Prepaid Expenses | (46,261 | ) | (62,715 | ) | ||||
Other Assets | 736,563 | (83,921 | ) | |||||
Due to Affiliates | 8,526 | 110,431 | ||||||
Accounts Payable | (284,732 | ) | (66,770 | ) | ||||
Accrued Liabilities | 18,795 | (40,666 | ) | |||||
Due to Broker | 10,000,073 | (7,499,916 | ) | |||||
Payable for Investments Acquired | 5,940,000 | 4,155,951 | ||||||
Interest Payable | (103,152 | ) | (28,273 | ) | ||||
Other Liabilities | 135,620 | 338,900 | ||||||
Net Cash Provided by (Used in) Operating Activities | 3,369,043 | (9,626,078 | ) | |||||
Cash Flows from Financing Activities:
|
||||||||
Borrowings Under Credit Facility | 95,980,120 | 52,499,326 | ||||||
Payments Under Credit Facility | (121,564,267 | ) | (48,296,231 | ) | ||||
Dividends Paid to Shareholders | (5,347,762 | ) | (4,725,832 | ) | ||||
Proceeds from Notes Payable | 2,299,704 | | ||||||
Deferred Credit Facility Fees | (171,732 | ) | | |||||
Deferred Debt Issuance Costs | (19,102 | ) | | |||||
Payment of Distribution Notes | (3,404,583 | ) | | |||||
Payment of Offering Expenses and Underwriting Fees | (720,949 | ) | (673,771 | ) | ||||
Proceeds from Issuance of Common Stock | 18,412,399 | 10,665,000 | ||||||
Net Cash Provided by (Used in) Financing Activities | (14,536,172 | ) | 9,468,492 | |||||
Total Decrease in Cash | (11,167,129 | ) | (157,586 | ) | ||||
Cash Balance at Beginning of Period | 18,029,115 | 639,149 | ||||||
Cash Balance at End of Period | $ | 6,861,986 | $ | 481,563 | ||||
Supplemental Disclosure of Non-Cash Financing Activity:
|
||||||||
Dividends Declared, Not Yet Paid | $ | 676,143 | $ | 582,842 | ||||
Accrued Offering Expenses | $ | 11,000 | $ | | ||||
Supplemental Disclosure of Cash Flow Information:
|
||||||||
Cash Paid During the Period for Interest | $ | $1,839,041 | $ | 1,242,665 |
See notes to consolidated financial statements.
F-5
|
|
|
|
|
|
|
||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||
Description (1) | Industry | Type of Investment (2) |
Par Amount/
Quantity |
Cost | Fair Value |
% of Net
Asset Value |
||||||||||||||||||
Control Investments
(3)
|
||||||||||||||||||||||||
New Media West, LLC |
Cable TV
Broadband Services |
Senior Secured Term Loan, 9.00%,
12/31/2017 |
$ | 4,953,195 | $ | 4,953,195 | $ | 4,824,412 | 6.63 | % | ||||||||||||||
Limited Liability Company
Interests , (5) |
720 | 3,600,000 | 3,057,262 | 4.21 | % | |||||||||||||||||||
New Media West, LLC Total | 8,553,195 | 7,881,674 | 10.84 | % | ||||||||||||||||||||
Takoda Resources Inc. * |
Geophysical Surveying
and Mapping Services |
Senior Secured Term Loan, 16.00%,
4/1/2016 |
$ | 2,450,000 | 2,450,000 | 2,432,605 | 3.35 | % | ||||||||||||||||
Common Stock , (6) | 743 | | | 0.00 | % | |||||||||||||||||||
Takoda Resources Inc. Total | 2,450,000 | 2,432,605 | 3.35 | % | ||||||||||||||||||||
Texas Westchester Financial, LLC | Consumer Finance |
Limited Liability Company
Interests |
9,278 | 905,819 | 553,459 | 0.76 | % | |||||||||||||||||
The Finance Company, LLC | Consumer Finance |
Senior Secured Term Loan, 15.00%
(LIBOR plus 14.25%, 15.00% floor), 9/30/2015 |
$ | 5,163,547 | 5,108,271 | 5,258,384 | 7.23 | % | ||||||||||||||||
Limited Liability Company Interests | 50 | 140,414 | 1,956,521 | 2.69 | % | |||||||||||||||||||
The Finance Company, LLC Total | 5,248,685 | 7,214,905 | 9.92 | % | ||||||||||||||||||||
TransAmerican Asset Servicing
Group, LLC |
Asset Recovery
Services |
Senior Secured Term Loan,
14.25%, 7/25/2016 |
$ | 2,725,000 | 2,684,362 | 2,118,415 | 2.91 | % | ||||||||||||||||
Limited Liability Company
Interests , (7) |
75 | | | 0.00 | % | |||||||||||||||||||
TransAmerican Asset Servicing
Group, LLC Total |
2,684,362 | 2,118,415 | 2.91 | % | ||||||||||||||||||||
Total Control Investments | 19,842,061 | 20,201,058 | 27.78 | % | ||||||||||||||||||||
Affiliate Investments
(4)
|
||||||||||||||||||||||||
Advanced Cannabis Solutions, Inc.* |
Non-Residential
Property Owner |
Warrant for 1,000,000 shares
(at a $5.50 strike price), 1/21/2017 |
1 | 500,000 | 6,868,077 | 9.45 | % | |||||||||||||||||
Modular Process Control, LLC |
Energy Efficiency
Services |
Senior Secured Revolving Loan,
14.50% (LIBOR plus 13.50%, 14.50% floor), 3/28/17 |
$ | 996,625 | 953,345 | 958,986 | 1.32 | % | ||||||||||||||||
Senior Secured Term Loan,
15.50% (LIBOR plus 14.50%, 15.50% floor), 3/28/17 |
$ | 5,000,000 | 4,752,731 | 2,646,667 | 3.64 | % | ||||||||||||||||||
Senior Secured Term Loan
Tranche 2, 18.00%, 3/28/17 *** |
$ | 759,750 | 759,750 | 127,562 | 0.18 | % | ||||||||||||||||||
Modular Process Control, LLC
Warrants for 14.50% of the outstanding Class B LLC Interests (at a $0.01 strike price), expire 3/28/23 |
1 | 288,000 | | 0.00 | % | |||||||||||||||||||
Modular Process Control, LLC Total | 6,753,826 | 3,733,215 | 5.14 | % |
See notes to consolidated financial statements.
F-6
|
|
|
|
|
|
|
||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||
Description (1) | Industry | Type of Investment (2) |
Par Amount/
Quantity |
Cost | Fair Value |
% of Net
Asset Value |
||||||||||||||||||
Affiliate Investments (continued)
|
||||||||||||||||||||||||
ProGrade Ammo Group, LLC | Munitions |
Senior Secured Revolving Loan,
9.19% (LIBOR plus 9.00%, 9.19% floor), 8/1/2014 |
$ | 2,826,047 | $ | 2,826,047 | $ | 2,826,047 | 3.88 | % | ||||||||||||||
Senior Secured Term Loan,
16.19% (LIBOR plus 16.00%, 16.19% floor), 8/1/2014 |
$ | 4,593,750 | 4,572,233 | 1,807,488 | 2.49 | % | ||||||||||||||||||
Warrants for 9.5% of the
outstanding LLC interests (at a $10.00 strike price), expire 8/2/2018 |
181,240 | 176,770 | | 0.00 | % | |||||||||||||||||||
ProGrade Ammo Group, LLC Total | 7,575,050 | 4,633,535 | 6.37 | % | ||||||||||||||||||||
SOLEX Fine Foods, LLC; Catsmo, LLC |
Food
Distributors & Wholesalers |
Senior Secured Term Loan, 12.30%
(LIBOR plus 12.14%), 12/28/2016 |
$ | 3,900,000 | 3,819,412 | 3,781,830 | 5.21 | % | ||||||||||||||||
Limited Liability Company
Interests , (8) |
1 | 290,284 | 67,830 | 0.09 | % | |||||||||||||||||||
Warrants for 1.6% of the
outstanding LLC interests (strike price $0.01), expire 12/31/2022 , (8) |
1 | 58,055 | 15,200 | 0.02 | % | |||||||||||||||||||
SOLEX Fine Foods, LLC; Catsmo, LLC Total | 4,167,751 | 3,864,860 | 5.32 | % | ||||||||||||||||||||
West World Media, LLC |
Information and
Data Services |
Limited Liability Company
Interests , (9) |
85,210 | 430,500 | 235,451 | 0.32 | % | |||||||||||||||||
Total Affiliate Investments | 19,427,127 | 19,335,138 | 26.60 | % | ||||||||||||||||||||
Other Investments
|
||||||||||||||||||||||||
Attention Transit Advertising Systems, LLC |
Outdoor Advertising
Services |
Senior Secured Term Loan,
11.50%, 9/30/2016 |
$ | 2,205,544 | 2,205,544 | 2,185,694 | 3.01 | % | ||||||||||||||||
Background Images, Inc. |
Equipment
Rental Services |
Senior Secured Term Loan
Term A, 14.66% (LIBOR plus 14.50%), 6/28/2015 |
$ | 1,207,500 | 1,205,743 | 1,266,185 | 1.75 | % | ||||||||||||||||
Senior Secured Term
Loan Term B, 16.41% (LIBOR plus 16.25%), 6/28/2015 |
$ | 682,500 | 681,500 | 714,987 | 0.98 | % | ||||||||||||||||||
Background Images, Inc.
Total |
1,887,243 | 1,981,172 | 2.73 | % | ||||||||||||||||||||
Blackstrap Broadcasting, LLC |
Radio
Broadcasting |
Senior Secured Term Loan, 6.16%
(LIBOR plus 6.00%), 7/31/2014 (10) |
$ | 3,080,000 | 3,080,000 | 2,341,519 | 3.22 | % | ||||||||||||||||
Subordinated Secured Term Loan,
16.00% (PRIME plus 7.75%, 16.00% floor), 7/31/2014 (10) |
$ | 3,500,000 | 3,500,000 | | 0.00 | % | ||||||||||||||||||
Blackstrap Broadcasting, LLC Total | 6,580,000 | 2,341,519 | 3.22 | % | ||||||||||||||||||||
CPX, Inc. |
Industrial
Molded Products |
Senior Secured Revolving Loan,
14.19% (LIBOR plus 14.00%, 14.19% floor), 9/30/2016 |
$ | 1,800,000 | 1,783,043 | 1,800,000 | 2.47 | % | ||||||||||||||||
Senior Secured Term Loan,
14.69% (LIBOR plus 14.50%, 14.69% floor), 9/30/2016 |
$ | 1,100,000 | 1,084,812 | 1,046,100 | 1.44 | % | ||||||||||||||||||
CPX, Inc. Total | 2,867,855 | 2,846,100 | 3.91 | % | ||||||||||||||||||||
Dynamic Energy Services International, LLC |
Oil and Gas
Field Services |
Senior Secured Term Loan,
9.50%, (LIBOR plus 8.50%, 9.50% floor), 3/12/2018 |
$ | 5,000,000 | 4,900,592 | 4,900,592 | 6.74 | % | ||||||||||||||||
Esselte Holdings Inc.,
Esselte AB* |
Stationery, Tablets, and
Related Products |
Senior Secured Term Loan,
10.75% (LIBOR plus 8.75%, 10.75% floor), 2/29/2016 |
$ | 1,848,921 | 1,849,607 | 1,904,388 | 2.62 | % |
See notes to consolidated financial statements.
F-7
|
|
|
|
|
|
|
||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||
Description (1) | Industry | Type of Investment (2) |
Par Amount/
Quantity |
Cost | Fair Value |
% of Net
Asset Value |
||||||||||||||||||
Other Investments (continued)
|
||||||||||||||||||||||||
GW Power, LLC and Greenwood Fuels WI, LLC | Electric Services |
Senior Secured Term Loan, 12.16%
(LIBOR plus 12.00%), 3/31/2016 |
$ | 6,000,000 | $ | 5,940,025 | $ | 5,940,025 | 8.17 | % | ||||||||||||||
Infinite Aegis Group, LLC |
Healthcare Billing
and Collections |
Senior Secured Revolving Loan,
12.19% (LIBOR plus 12.00%, 12.19% floor), 7/31/2017 |
$ | 1,000,000 | 985,489 | 1,000,000 | 1.38 | % | ||||||||||||||||
Senior Secured Tem Loan, 12.19%
(LIBOR plus 12.00%, 12.19% floor), 7/31/2017 |
$ | 4,000,000 | 3,882,949 | 3,752,000 | 5.16 | % | ||||||||||||||||||
Warrants for 2.0% of the
outstanding LLC interests (at a $0.01 strike price), expire 8/1/2023 |
1 | 107,349 | 36,025 | 0.05 | % | |||||||||||||||||||
Infinite Aegis Group, LLC Total | 4,975,787 | 4,788,025 | 6.59 | % | ||||||||||||||||||||
MDU Communications
(USA) Inc. |
Cable TV
Broadband Services |
Senior Secured Term Loan
Tranche A, 2.00%, 3/31/2014 (10) |
$ | 2,068,170 | 2,068,170 | 1,608,001 | 2.21 | % | ||||||||||||||||
Ocean Protection Services* |
Maritime
Security Services |
Senior Secured Term Loan,
12.50%, (LIBOR plus 12.00%, 12.50% floor), 3/4/2017 |
$ | 7,000,000 | 6,930,178 | 6,930,178 | 9.53 | % | ||||||||||||||||
PEAKS Trust 2009-1 | Consumer Financing |
Senior Secured Term Loan, 7.50%,
(LIBOR plus 5.50%, 7.50% floor), 1/27/2020 |
$ | 6,320,503 | 5,113,967 | 5,113,967 | 7.03 | % | ||||||||||||||||
Pristine Environments, Inc. |
Building Cleaning and
Maintenance Services |
Senior Secured Revolving Loan,
12.70% (LIBOR plus 12.50%, 12.70% floor), 3/31/2017 |
$ | 2,280,468 | 2,280,077 | 2,432,727 | 3.35 | % | ||||||||||||||||
Senior Secured Term Loan, 12.70%
(LIBOR plus 12.50%, 12.70% floor), 3/31/2017 |
$ | 1,078,250 | 1,069,296 | 1,155,632 | 1.59 | % | ||||||||||||||||||
Pristine Environments, Inc. Total | 3,349,373 | 3,588,359 | 4.94 | % | ||||||||||||||||||||
The Selling Source, LLC |
Information and
Data Services |
Senior Secured Term Loan,
12.54%, 1/31/2017 |
$ | 3,637,572 | 3,611,392 | 2,975,170 | 4.09 | % | ||||||||||||||||
US Path Labs, LLC |
Healthcare Services
|
Senior Secured Term Loan,
14.00% (LIBOR plus 13.25%, 14.00% floor), 6/30/2014 |
$ | 3,380,000 | 3,356,760 | 3,483,766 | 4.79 | % | ||||||||||||||||
VaultLogix, LLC |
Information
Retrieval Services |
Warrants for Variable% Ownership,
(at a $307.855 strike price), expire 1/14/2019 |
3,349 | 56,147 | | 0.00 | % | |||||||||||||||||
United States Treasury |
United States Treasury Bill**
(0.09)%, 4/3/2014 |
$ | 10,000,000 | 10,000,049 | 10,000,049 | 13.76 | % | |||||||||||||||||
Total Other Investments | 65,692,689 | 60,587,005 | 83.34 | % | ||||||||||||||||||||
Total Investments | $ | 104,961,877 | $ | 100,123,201 | 137.72 | % |
See notes to consolidated financial statements.
F-8
|
|
|
||||||
March 31, 2014 | ||||||||
Investment at
Fair Value (in millions) |
Percentage of Net Assets | |||||||
Consumer Finance | $ | 12.9 | 17.71 | % | ||||
Cable TV/Broadband Services | 9.5 | 13.04 | ||||||
Maritime Security Services | 6.9 | 9.53 | ||||||
Non-Residential Property Owner | 6.9 | 9.45 | ||||||
Electric Services | 5.9 | 8.17 | ||||||
Oil and Gas Field Services | 4.9 | 6.74 | ||||||
Healthcare Billing and Collections | 4.8 | 6.59 | ||||||
Munitions | 4.6 | 6.37 | ||||||
Food Distributors and Wholesalers | 3.9 | 5.32 | ||||||
Energy Efficiency Services | 3.7 | 5.14 | ||||||
Building Cleaning and Maintenance Services | 3.6 | 4.94 | ||||||
Healthcare Services | 3.5 | 4.79 | ||||||
Information and Data Services | 3.2 | 4.42 | ||||||
Industrial Molded Products | 2.9 | 3.91 | ||||||
Geophysical Surveying and Mapping Services | 2.4 | 3.35 | ||||||
Radio Broadcasting | 2.3 | 3.22 | ||||||
Outdoor Advertising Services | 2.2 | 3.01 | ||||||
Asset Recovery Services | 2.1 | 2.91 | ||||||
Equipment Rental Services | 2.0 | 2.73 | ||||||
Stationery, Tablets, and Related Products | 1.9 | 2.62 | ||||||
Total | $ | 90.1 | 123.96 | % |
(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 Companys variable rate debt investments bear interest at a rate that is determined by reference to LIBOR or the U.S. prime rate, and which is reset daily, monthly, quarterly or semi-annually. For each debt investment, the Company has provided the interest rate in effect as of March 31, 2014. If no reference to LIBOR or the U.S. prime rate is made, the rate is fixed. |
(3) | Control Investments are investments in those companies that are Control Investments of the Company, as defined in the Investment Company Act of 1940. A company is deemed to be a Control Investment of Full Circle Capital Corporation if Full Circle Capital Corporation owns more than 25% of the voting securities of such company. |
(4) | Affiliate Investments are investments in those companies that are Affiliated Companies of the Company, as defined in the Investment Company Act of 1940, which are not Control Investments. A company is deemed to be an Affiliate of Full Circle Capital Corporation if Full Circle Capital Corporation owns 5% or more, but less than 25%, of the voting securities of such company. |
(5) | Full Circle Capital Corporations equity investment in New Media West, LLC is held through its wholly-owned subsidiary FC New Media, Inc. |
(6) | Full Circle Capital Corporations equity investment in Takoda Resources Inc. is held through its wholly-owned subsidiary FC Takoda Holdings, LLC. |
(7) | Full Circle Capital Corporations equity investment in TransAmerican Asset Servicing Group, LLC is held through its wholly-owned subsidiary TransAmerican Asset Servicing Group, Inc. |
(8) | Full Circle Capital Corporations equity investments in SOLEX Fine Foods, LLC; Catsmo, LLC are held through its wholly-owned subsidiary FC New Specialty Foods, Inc. |
See notes to consolidated financial statements.
F-9
(9) | A portion of Full Circle Capital Corporations investment 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. |
(10) | Investments were on non-accrual status as of March 31, 2014. |
* | Investment is not a qualifying asset under Section 55(a) of the 1940 Act. |
** | Interest rate shown reflects yield to maturity at time of purchase. |
*** | Security pays interest in kind. |
| Security is a non-income producing security. |
See notes to consolidated financial statements.
F-10
|
|
|
|
|
|
|
||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||
Description (1) | Industry | Type of Investment (2) |
Par Amount/
Quantity |
Cost | Fair Value |
% of Net
Asset Value |
||||||||||||||||||
Control Investments
(4)
|
||||||||||||||||||||||||
New Media West, LLC |
Cable TV
Broadband Services |
Senior Secured Term Loan,
9.00%, 12/31/2017 |
$ | 5,079,679 | $ | 5,079,679 | $ | 5,079,679 | 8.38 | % | ||||||||||||||
Limited Liability Company
Interests , (5) |
720 | 3,600,000 | 4,203,006 | 6.93 | % | |||||||||||||||||||
New Media West, LLC Total | 8,679,679 | 9,282,685 | 15.31 | % | ||||||||||||||||||||
Takoda Resources Inc. * |
Geophysical Surveying
and Mapping Services |
Senior Secured Term Loan,
16.00%, 4/1/2016 |
$ | 1,469,063 | 1,469,063 | 1,469,063 | 2.42 | % | ||||||||||||||||
Common Stock (6) | 520 | | | 0.00 | % | |||||||||||||||||||
Takoda Resources Inc. Total | 1,469,063 | 1,469,063 | 2.42 | % | ||||||||||||||||||||
Texas Westchester Financial, LLC | Consumer Finance |
Limited Liability Company
Interests |
9,278 | 905,819 | 602,154 | 0.99 | % | |||||||||||||||||
The Finance Company, LLC | Consumer Finance |
Senior Secured Term Loan,
15.00% (LIBOR plus 14.25%, 15.00% floor), 9/30/2015 |
$ | 5,163,547 | 4,585,205 | 4,698,524 | 7.75 | % | ||||||||||||||||
Limited Liability Company Interests
|
50 | 140,414 | 1,604,577 | 2.65 | % | |||||||||||||||||||
The Finance Company, LLC Total | 4,725,619 | 6,303,101 | 10.40 | % | ||||||||||||||||||||
TransAmerican Asset Servicing Group, LLC |
Asset Recovery
Services |
Senior Secured Term Loan,
14.25%, 7/25/2016 |
$ | 2,400,000 | 2,359,363 | 1,458,437 | 2.40 | % | ||||||||||||||||
Limited Liability Company
Interests , (7) |
75 | | | 0.00 | % | |||||||||||||||||||
TransAmerican Asset Servicing Group, LLC Total | 2,359,363 | 1,458,437 | 2.40 | % | ||||||||||||||||||||
Total Control Investments | 18,139,543 | 19,115,440 | 31.52 | % | ||||||||||||||||||||
Affiliate Investments
(3)
|
||||||||||||||||||||||||
Modular Process Control, LLC |
Energy Efficiency
Services |
Senior Secured Revolving Loan,
15.00% (LIBOR plus 14.00%, 15.00% floor), 3/28/17 |
$ | 3,500,000 | 3,310,894 | 3,500,000 | 5.77 | % | ||||||||||||||||
Senior Secured Term Loan,
15.00% (LIBOR plus 14.00%, 15.00% floor), 3/28/17 |
$ | 2,500,000 | 2,342,415 | 2,407,833 | 3.97 | % | ||||||||||||||||||
Modular Process Control, LLC
Warrants for 8% of the outstanding Class B LLC Interests (at a $0.01 strike price), expire 3/28/23 |
1 | 288,000 | 161,413 | 0.27 | % | |||||||||||||||||||
Modular Process Control, LLC Total | 5,941,309 | 6,069,246 | 10.01 | % | ||||||||||||||||||||
ProGrade Ammo Group, LLC | Munitions |
Senior Secured Revolving Loan,
9.20% (LIBOR plus 9.00%, 9.20% floor), 8/1/2014 |
$ | 1,907,735 | 1,907,735 | 1,907,735 | 3.14 | % | ||||||||||||||||
Senior Secured Term Loan,
15.20% (LIBOR plus 15.00%, 15.20% floor), 8/1/2014 |
$ | 5,468,750 | 5,389,137 | 4,304,089 | 7.10 | % | ||||||||||||||||||
Warrants for 9.5% of the
outstanding LLC interests (at a $10.00 strike price), expire 8/2/2018 |
181,240 | 176,770 | | 0.00 | % | |||||||||||||||||||
ProGrade Ammo Group, LLC Total | 7,473,642 | 6,211,824 | 10.24 | % |
See notes to consolidated financial statements.
F-11
|
|
|
|
|
|
|
||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||
Description (1) | Industry | Type of Investment (2) |
Par Amount/
Quantity |
Cost | Fair Value |
% of Net
Asset Value |
||||||||||||||||||
Affiliate Investments (continued)
|
||||||||||||||||||||||||
SOLEX Fine Foods, LLC; Catsmo, LLC |
Food
Distributors & Wholesalers |
Senior Secured Term Loan,
12.31% (LIBOR plus 12.14%), 12/28/2016 |
$ | 3,900,000 | $ | 3,801,116 | $ | 3,859,440 | 6.37 | % | ||||||||||||||
Limited Liability Company
Interests , (8) |
1 | 250,000 | 139,247 | 0.23 | % | |||||||||||||||||||
Warrants for 1.6% of the
outstanding LLC interests (strike price 0.01), expire 12/28/2022 , (8) |
1 | 58,055 | 32,695 | 0.05 | % | |||||||||||||||||||
SOLEX Fine Foods, LLC; Catsmo, LLC Total | 4,109,171 | 4,031,382 | 6.65 | % | ||||||||||||||||||||
West World Media, LLC |
Information and
Data Services |
Limited Liability Company
Interests , (9) |
85,210 | 430,500 | 235,451 | 0.39 | % | |||||||||||||||||
Total Affiliate Investments | 17,954,622 | 16,547,903 | 27.29 | % | ||||||||||||||||||||
Other Investments
|
||||||||||||||||||||||||
Attention Transit Advertising Systems, LLC |
Outdoor Advertising
Services |
Senior Secured Term Loan,
14.50%, 9/30/2016 |
$ | 2,321,626 | 2,321,626 | 2,321,626 | 3.83 | % | ||||||||||||||||
Background Images, Inc. |
Equipment
Rental Services |
Senior Secured Term Loan
Term A, 14.70% (LIBOR plus 14.50%), 6/28/2015 |
$ | 1,466,250 | 1,456,440 | 1,465,419 | 2.42 | % | ||||||||||||||||
Senior Secured Term Loan
Term B, 16.45% (LIBOR plus 16.25%), 6/28/2015 |
$ | 828,750 | 823,118 | 783,058 | 1.29 | % | ||||||||||||||||||
Background Images, Inc. Total | 2,279,558 | 2,248,477 | 3.71 | % | ||||||||||||||||||||
Blackstrap Broadcasting, LLC |
Radio
Broadcasting |
Senior Secured Term Loan,
5%, 7/31/2014 |
$ | 3,000,000 | 3,000,000 | 2,588,600 | 4.27 | % | ||||||||||||||||
Subordinated Secured Term Loan,
16.00%, (PRIME plus 7.75%, 16.00% floor), 7/31/2014 |
$ | 3,500,000 | 3,500,000 | 3,034,383 | 5.00 | % | ||||||||||||||||||
Blackstrap Broadcasting, LLC Total | 6,500,000 | 5,622,983 | 9.27 | % | ||||||||||||||||||||
Coast Plating, Inc. |
Aerospace
Parts Plating and Finishing |
Senior Secured Term Loan
Term A, 11.70% (LIBOR plus 11.50%, 11.70% floor), 9/13/2014 |
$ | 1,401,686 | 1,401,687 | 1,412,666 | 2.33 | % | ||||||||||||||||
Senior Secured Term Loan
Term B, 12.45% (LIBOR plus 12.25%, 12.45% floor), 9/13/2014 |
$ | 3,431,714 | 3,431,714 | 3,412,268 | 5.63 | % | ||||||||||||||||||
Coast Plating, Inc. Total | 4,833,401 | 4,824,934 | 7.96 | % | ||||||||||||||||||||
CSL Operating, LLC |
Industrial
Metal Treatings |
Senior Secured Term Loan
Term A, 11.70% (LIBOR plus 11.50%, 11.70% floor), 5/11/2014 |
$ | 1,866,720 | 1,863,691 | 1,860,435 | 3.07 | % | ||||||||||||||||
Senior Secured Term Loan
Term B, 11.70% (LIBOR plus 11.50%, 11.70% floor), 5/11/2014 |
$ | 1,866,720 | 1,863,691 | 1,856,142 | 3.06 | % | ||||||||||||||||||
CSL Operating, LLC Total | 3,727,382 | 3,716,577 | 6.13 | % | ||||||||||||||||||||
Employment Plus, Inc. | Staffing Services |
Senior Secured Term Loan,
12.00% (LIBOR plus 11.76%, 12.00% floor), 10/24/2013 |
$ | 5,000,000 | 5,000,000 | 5,000,000 | 8.24 | % |
See notes to consolidated financial statements.
F-12
|
|
|
|
|
|
|
||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||
Description (1) | Industry | Type of Investment (2) |
Par Amount/
Quantity |
Cost | Fair Value |
% of Net
Asset Value |
||||||||||||||||||
Other Investments (continued)
|
||||||||||||||||||||||||
Global Energy Efficiency Holdings, Inc. |
Energy
Efficiency Services |
Senior Secured Revolving Loan,
13.20% (LIBOR plus 13.00%), 9/7/2015 |
$ | 4,444,961 | $ | 4,439,802 | $ | 4,523,933 | 7.46 | % | ||||||||||||||
Senior Secured Term Loan,
13.20% (LIBOR plus 13.00%), 9/7/2015 |
$ | 1,000,000 | 990,088 | 1,036,900 | 1.71 | % | ||||||||||||||||||
Global Energy Efficiency Holdings, Inc. Total | 5,429,890 | 5,560,833 | 9.17 | % | ||||||||||||||||||||
iMedX, Inc. |
Medical
Transcription Services |
Senior Secured Revolving Loan,
13.75% (LIBOR plus 13.50%, 13.75% floor), 09/19/2014 |
$ | 1,578,962 | 1,578,962 | 1,685,752 | 2.78 | % | ||||||||||||||||
Senior Secured Term Loan
Term A, 13.75% (LIBOR plus 13.50%, 13.75% floor), 09/19/2014 |
$ | 2,450,686 | 2,437,028 | 2,482,790 | 4.09 | % | ||||||||||||||||||
Senior Secured Term Loan
Term B, 13.75% (LIBOR plus 13.50%, 13.75% floor), 09/19/2014 |
$ | 1,071,180 | 1,071,180 | 1,073,679 | 1.77 | % | ||||||||||||||||||
iMedX, Inc. Total | 5,087,170 | 5,242,221 | 8.64 | % | ||||||||||||||||||||
MDU Communications
(USA) Inc. |
Cable TV
Broadband Services |
Senior Secured Term
Tranche A, 12.85% (PRIME plus 4.10%, 12.85% floor), 12/31/2013 |
$ | 5,000,000 | 5,000,000 | 4,914,000 | 8.10 | % | ||||||||||||||||
Senior Secured Term
Tranche C, 10.75% (PRIME plus 2.00%, 10.75% floor), 12/31/2013 |
$ | 250,000 | 250,000 | 242,642 | 0.40 | % | ||||||||||||||||||
MDU Communications
(USA) Inc. Total |
Senior Secured Term
Tranche D, 9.75% (PRIME plus 1.00%, 9.75% floor), 12/31/2013 |
$ | 1,480,000 | 1,480,000 | 1,427,213 | 2.35 | % | |||||||||||||||||
6,730,000 | 6,583,855 | 10.85 | % | |||||||||||||||||||||
Pristine Environments, Inc. |
Building Cleaning and
Maintenance Services |
Senior Secured Revolving Loan,
12.70%, (LIBOR plus 12.50%, 12.70% floor), 3/31/2017 |
$ | 2,764,801 | 2,737,585 | 2,774,017 | 4.57 | % | ||||||||||||||||
Senior Secured Term Loan,
12.70%, (LIBOR plus 12.50%, 12.70% floor), 3/31/2017 |
$ | 1,135,000 | 1,123,828 | 1,143,437 | 1.89 | % | ||||||||||||||||||
Pristine Environments, Inc.
Total |
3,861,413 | 3,917,454 | 6.46 | % | ||||||||||||||||||||
The Selling Source, LLC |
Information and
Data Services |
Senior Secured Term Loan,
12.54%, 1/31/2017 |
$ | 4,000,000 | 3,964,978 | 4,000,000 | 6.60 | % | ||||||||||||||||
US Path Labs, LLC |
Healthcare Services
|
Senior Secured Term Loan,
14.00%, (LIBOR plus 13.25%, 14.00% floor), 3/31/2014 |
$ | 3,470,000 | 3,428,973 | 3,472,198 | 5.73 | % | ||||||||||||||||
VaultLogix, LLC |
Information
Retrieval Services |
Warrants for Variable% Ownership,
(at a $307.855 strike price), expire 1/14/2019 |
3,439 | 56,147 | | 0.00 | % | |||||||||||||||||
Total Other Investments | 53,220,538 | 52,511,158 | 86.59 | % | ||||||||||||||||||||
Total Investments | $ | 89,314,703 | $ | 88,174,501 | 145.40 | % |
See notes to consolidated financial statements.
F-13
|
|
|
||||||
June 30, 2013 | ||||||||
Investment at Fair Value
(in millions) |
Percentage of Net Assets | |||||||
Cable TV/Broadband Services | $ | 15.9 | 26.16 | % | ||||
Energy Efficiency Services | 11.6 | 19.18 | ||||||
Consumer Finance | 6.9 | 11.39 | ||||||
Munitions | 6.2 | 10.24 | ||||||
Radio Broadcasting | 5.6 | 9.28 | ||||||
Medical Transcription Services | 5.2 | 8.64 | ||||||
Staffing Services | 5.0 | 8.24 | ||||||
Aerospace Parts Plating and Finishing | 4.8 | 7.96 | ||||||
Information and Data Services | 4.2 | 6.98 | ||||||
Food Distributors and Wholesalers | 4.0 | 6.65 | ||||||
Building Cleaning and Maintenance Services | 3.9 | 6.46 | ||||||
Industrial Metal Treatings | 3.8 | 6.13 | ||||||
Healthcare Services | 3.6 | 5.73 | ||||||
Outdoor Advertising Services | 2.3 | 3.83 | ||||||
Equipment Rental Services | 2.2 | 3.71 | ||||||
Geophysical Surveying and Mapping Services | 1.5 | 2.42 | ||||||
Asset Recovery Services | 1.5 | 2.40 | ||||||
Total | $ | 88.2 | 145.40 | % |
(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 Companys variable rate debt investments bear interest at a rate that is determined by reference to LIBOR or the U.S. prime rate, and which is reset daily, monthly, quarterly or semi-annually. For each debt investment, the Company has provided the interest rate in effect as of June 30, 2013. If no reference to LIBOR or the U.S. prime rate is made, the rate is fixed. |
(3) | Affiliate Investments are investments in those companies that are Affiliated Companies of the Company, as defined in the Investment Company Act of 1940, which are not Control Investments. A company is deemed to be an Affiliate of Full Circle Capital Corporation if Full Circle Capital Corporation owns 5% or more, but less than 25%, of the voting securities of such company. |
(4) | Control Investments are investments in those companies that are Control Investments of the Company, as defined in the Investment Company Act of 1940. A company is deemed to be a Control Investment of Full Circle Capital Corporation if Full Circle Capital Corporation owns more than 25% of the voting securities of such company. |
(5) | Full Circle Capital Corporations equity investment in New Media West, LLC is held through its wholly-owned subsidiary FC New Media, Inc. |
(6) | Full Circle Capital Corporations equity investments in Takoda Resources Inc. are held through its wholly-owned subsidiary FC Takoda Holdings, LLC. |
(7) | Full Circle Capital Corporations equity investment in TransAmerican Asset Servicing Group, LLC is held through its wholly-owned subsidiary TransAmerican Asset Servicing Group, Inc. |
(8) | Full Circle Capital Corporations equity investments in SOLEX Fine Foods, LLC; Catsmo, LLC are held through its wholly-owned subsidiary FC New Specialty Foods, Inc. |
(9) | A portion of Full Circle Capital Corporations investment 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. |
* | Investment is not a qualifying asset under Section 55(a) of the 1940 Act. |
** | Interest rate shown reflects yield to maturity at time of purchase. |
| Security is a non-income producing security. |
See notes to consolidated financial statements.
F-14
References herein to we, us or our refer to Full Circle Capital Corporation and Subsidiaries (Full Circle Capital or the Company) unless the context specifically requires otherwise.
We were formed as Full Circle Capital Corporation, a Maryland corporation, 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 annually 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.
The preparation of the accompanying consolidated 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 consolidated 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.
Interim financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments, consisting solely of normal recurring accruals considered necessary for the fair presentation of financial statements for the interim period, have been included. The current periods results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending June 30, 2014.
The June 30, 2013 and March 31, 2013 Consolidated Financial Statements were reclassified in order to be consistent with the new format used for the March 31, 2014 Consolidated Financial Statements.
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 limited partnerships or private companies, 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 acquired, respectively, in the Consolidated Statements of Assets and Liabilities.
F-15
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 generally 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., FC New Media, Inc., TransAmerican Asset Servicing Group, Inc., FC New Specialty Foods, Inc., and FC Takoda Holdings, LLC, our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
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 Capitals 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 Boards assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
Securities for which reliable market quotations are not readily available or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Board or the Audit Committee of the Board (the Audit Committee), does not represent fair value, are valued as follows:
1. | The quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment; |
2. | Preliminary valuation conclusions are then documented and discussed with the Companys senior management. Independent third-party valuation firms are engaged by, or on behalf of, the Audit Committee to conduct independent appraisals or review managements preliminary valuations or make their own independent assessment, for certain assets; |
3. | The Audit Committee discusses valuations and recommends the fair value of each investment in the portfolio in good faith based on the input of the Company and, where appropriate, the independent valuation firms; and |
4. | The Board then discusses the valuations and determines in good faith the fair value of each investment in the portfolio based upon input from the Company, estimates from the independent valuation firms and the recommendations of the Audit Committee. |
GAAP establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are 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.
F-16
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 investment to investment and is affected by a wide variety of factors including, the type of investment, whether the investment 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 investments 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 Companys 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 an investment to be reclassified to a lower level within the fair value hierarchy.
The Companys 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 may 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 that are not performing, 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.
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. These nonpublic investments are included in Level 3 of the fair value hierarchy.
F-17
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.
The Company places its cash with J.P. Morgan Chase Bank N.A. and Santander Bank, N.A. f/k/a Sovereign Bank. N.A. (Santander Bank), and at times, cash held in such accounts may exceed the Federal Deposit Insurance Corporation insured limit. The Company may invest a portion of its cash in money market funds, within the limitations of the 1940 Act.
Realized gain (loss) on the sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their stated costs. 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 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 received. Other fee income, including administrative and unused line fees, is included in Other Income. Income from such sources was $618,965 and $322,427 for the three months ended March 31, 2014, and March 31, 2013, respectively and $2,016,208 and $935,592 for the nine months ended March 31, 2014, and March 31, 2013, respectively.
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.
From time to time the Company may enter into a new transaction with a portfolio company as a result of the sale, merger, foreclosure, bankruptcy or other corporate event involving the portfolio company. In such cases, the Company may receive newly-issued notes, securities and/or other consideration in exchange for, or resulting from, the cancellation of the instruments previously held by the Company with regard to that portfolio company. In such cases, the Company may experience a realized loss on the instrument being sold or cancelled, and, concurrently, an elimination of any previously recognized unrealized losses on the portfolio investment. Such elimination of unrealized loss is included on the Statements of Operations as an increase in the Change in Unrealized Gain (Loss) on Investments.
We have elected 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 gains 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.
F-18
If we do not distribute (or are not deemed to have distributed) each calendar year sum of (1) 98% of our net ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years (the Minimum Distribution Amount), we will generally be required to pay an excise tax equal to 4% of the amount by the which Minimum Distribution Amount exceeds the distributions 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 to common stockholders are recorded on the ex-dividend date. The amounts, if any, of our monthly dividends are approved by our Board each quarter and are generally based upon our managements estimate of our earnings for the quarter. Net realized capital gains, if any, are distributed at least annually.
We follow ASC Topic 460, Guarantors 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 consolidated financial statements. Refer to Note 5 and Note 8 for further discussion of guarantees and indemnification agreements.
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 for the three and nine months ended March 31, 2014, and March 31, 2013, respectively, were the same since there were no potentially dilutive securities outstanding.
The Company did not incur organizational expenses for the three or nine months ended March 31, 2014, and March 31, 2013. The Company complies with the requirements of ASC 340-10-S99-1, Expenses of Offering. Deferred offering costs consist principally of legal and audit costs incurred through the balance sheet date that are related to an offering of equity securities. Such costs are charged against the gross proceeds of the offering or will be charged to the Companys operations if the offering is not completed. Offering expenses related to the Companys January 14, 2014 and February 27, 2014 offerings were $243,684 and $35,415, respectively. Refer to Note 6.
Certain capital accounts including undistributed net investment income, accumulated net realized gain or loss, net unrealized appreciation or depreciation, and paid in capital in excess of par, are adjusted, at least annually, for permanent differences between book and tax. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP.
F-19
In January 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (ASU 2013-01). ASU 2013-01 limits the scope of the new balance sheet offsetting disclosure requirements to derivatives (including bifurcated embedded derivatives), repurchase agreements and reverse repurchase agreements, and certain securities borrowing and lending arrangements. Public companies are required to apply ASU 2013-01 prospectively for interim and annual reporting periods beginning after January 1, 2013.
In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (ASU 2013-04). ASU 2013-04 provides additional guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. Public companies are required to apply ASU 2013-04 prospectively for interim and annual reporting periods beginning after December 15, 2013.
In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2013-08, Financial Services Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements (ASU 2013-08). ASU 2013-08 amends the criteria that define an investment company, clarifies the measurement guidance and requires certain additional disclosures. Public companies are required to apply ASU 2013-08 prospectively for interim and annual reporting periods beginning after December 15, 2013.
The Company does not believe that the adoption of any recently issued accounting standards had or will have a material impact on its current financial position and results of operations.
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 two financial institutions to provide financing, which are essential to its business. There are a number of other financial institutions available that could potentially provide the Company with financing. Management believes that such other financial institutions would likely be able to provide similar financing with generally comparable terms. However, a change in financial institutions at the present time could cause a delay in service provisioning or result in potential lost opportunities, which could adversely affect operating results.
As of March 31, 2014, we had approximately $3.0 million in unfunded loan commitments, subject to our approval in certain instances, to provide debt financing to certain of our portfolio companies.
F-20
The following information sets forth the computation of basic and diluted earnings (loss) per common share for the three and nine months ended March 31, 2014, and March 31, 2013:
|
|
|
|
|
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Three months ended
March 31, |
Nine months ended
March 31, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Per Share Data
(1)
:
|
||||||||||||||||
Net Increase (Decrease) in Net Assets Resulting from Operations | $ | 3,381,522 | $ | 1,480,818 | $ | (95,567 | ) | $ | 1,947,507 | |||||||
Weighted average shares outstanding for period | 9,419,350 | 7,569,382 | 8,177,036 | 6,835,258 | ||||||||||||
Basic and diluted earnings (loss) per common share | $ | 0.36 | $ | 0.20 | $ | (0.01 | ) | $ | 0.28 |
(1) | Per share data based on weighted average shares outstanding. |
On June 24, 2013, the Board re-approved 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 Advisers 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, a base management fee and an incentive fee.
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.
The total base management fees earned by the Adviser for the three and nine months ended March 31, 2014, were $364,352 and $1,156,099, respectively. The total base management fee payable to the Adviser as of March 31, 2014 was $364,352, after reflecting payment of $1,181,692, for the nine months ended March 31, 2014, and is included in the Consolidated Statement of Assets and Liabilities in Due to Affiliates. The total base management fees earned by the Adviser for the three and nine months ended March 31, 2013, were $362,743 and $1,041,905, respectively.
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
F-21
Administration Agreement to Full Circle Service Company (the Administrator), and any interest expenses 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). |
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) 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. There were no incentive fees earned on realized capital gains for the three and nine months ended March 31, 2014, and 2013.
Income incentive fees of $351,594 and $1,141,230 were earned by the Adviser for the three and nine months ended March 31, 2014, respectively, and the total income incentive fee payable to the Adviser as of March 31, 2014, was $351,594, after reflecting payment of $1,128,062, during the nine months ended March 31, 2014, and is included in the Consolidated Statement of Assets and Liabilities in Due to Affiliates. Income incentive fees of $328,044 and $1,001,406 were earned by the Adviser for the three and nine months ended March 31, 2013.
F-22
The Adviser had 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.
On June 24, 2013, the Board re-approved 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 Companys 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), may also provide administrative services to the Adviser. As a result, the Adviser also reimburses the Administrator and/or the Sub-Administrator for its allocable portion of the Administrators and/or Sub-Administrators 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 Administrators services under the Administration Agreement or otherwise as administrator for Full Circle Capital.
F-23
The Administrator has engaged Vastardis to provide certain administrative services to us. In exchange for providing such services, the Administrator pays 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:
|
|
|
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%) |
Additionally, prior to September 30, 2013, we reimbursed the Administrator for the fees charged for the services of William E. Vastardis, our Chief Financial Officer, Treasurer and Secretary, at an annual rate of up to $250,000. On September 9, 2013, the Companys Board of Directors appointed Michael J. Sell to succeed William E. Vastardis as our Chief Financial Officer, Treasurer and Secretary effective as of September 30, 2013. Mr. Vastardis is the President of Vastardis.
For the three and nine months ended March 31, 2014, the Company incurred $169,133 and $518,711, respectively, of expenses under the Administration Agreement, $50,000 and $150,000, respectively, of which were earned by the Sub-Administrator and $75,529, and $226,396, respectively, were paid for officers compensation. The remaining $43,604 and $142,315, respectively, were recorded as an Allocation of Overhead Expenses in the Consolidated Statement of Operations.
For the three and nine months ended March 31, 2013, the Company incurred $209,712 and $624,803, respectively, of expenses under the Administration Agreement, $50,000 and $173,429, respectively, of which were earned by the Sub-Administrator and $75,160 and $225,514, respectively, were paid for officers compensation. The remaining $84,552 and $225,860, respectively, were recorded as an Allocation of Overhead Expenses to the Administrator in the Consolidated Statement of Operations.
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. With regard to the Control Investments in Texas Westchester Financial, LLC, New Media West, LLC, TransAmerican Asset Servicing Group, LLC, Takoda Resources Inc. and The Finance Company, LLC, the Company has provided managerial assistance during the period for which no fees were charged. Our Co-Chief Executive Officer and Chairman, John Stuart, currently serves as a director of The Finance Company, LLC, New Media West, LLC and Takoda Resources Inc. Lawrence Chua, a Vice President of Full Circle Advisors, serves on the board of Takoda Resources Inc. As of March 31, 2014, only Background Images, Inc., Modular Process Control, LLC, and Solex Fine Foods, LLC; Catsmo, LLC had accepted our offer for such services. No fees were charged to Background Images, Inc., Modular Process Control, LLC or Solex Fine Foods, LLC; Catsmo, LLC for such services.
F-24
Offering expenses are generally charged against paid-in capital in excess of par. 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:
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|
|||||||||||||||
Issuances of Common Stock |
Number of Shares
Issued |
Gross Proceeds Raised, Net Assets Acquired and Dividends Reinvested | Underwriting Fees | Offering Expenses |
Gross
Offering Price |
|||||||||||||||
April 16, 2010 | 100 | $ | 1,500 | | |
$15.00 per/share
|
||||||||||||||
August 31, 2010 | 4,191,415 | (1) | $ | 42,425,564 | | |
$10.13 per/share
(2)
|
|||||||||||||
August 31, 2010 | 2,000,000 | $ | 18,000,000 | $ | 1,350,000 | $ | 1,052,067 | $9.00 per/share | ||||||||||||
January 14, 2011 | 27,867 | (3) | $ | 241,608 | | | $8.67 per/share | |||||||||||||
November 27, 2012 | 1,350,000 | $ | 10,665,000 | $ | 533,250 | $ | 153,330 | $7.90 per/share | ||||||||||||
January 14, 2014 | 1,892,300 | (4) | $ | 13,492,099 | $ | 539,684 | $ | 243,684 | $7.13 per/share | |||||||||||
February 27, 2014 | 630,000 | $ | 4,920,300 | | (5) | $ | 35,415 | $7.81 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. |
(3) | Issued pursuant to the Companys dividend reinvestment plan. |
(4) | Includes 242,300 overallotment shares that were granted to the underwriters in connection with our January 14, 2014 follow-on offering. The underwriters exercised their option to purchase additional shares on January 27, 2014. Such shares were deemed to be outstanding at January 14, 2014. |
(5) | This was a private placement offering placed directly with certain institutional investors. |
F-25
|
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|
||||||
Three months ended March 31, 2014 | Three months ended March 31, 2013 | |||||||
(Unaudited) | (Unaudited) | |||||||
Per Share Data
(1)
:
|
||||||||
Net asset value at beginning of period | $ | 7.09 | $ | 8.03 | ||||
Dilution from offering | 0.00 | (8) | | |||||
Offering costs | (0.03 | ) | | |||||
Net investment income | 0.15 | 0.18 | ||||||
Change in unrealized gain (loss) | 0.18 | 0.02 | ||||||
Realized gain (loss) | 0.02 | 0.00 | ||||||
Dividends declared | (0.21 | ) | (0.23 | ) | ||||
Net asset value at end of period | $ | 7.20 | $ | 8.00 | ||||
Per share market value at end of period | $ | 7.78 | $ | 7.65 | ||||
Total return based on market value (4) | 13.34 | % | 7.11 | % | ||||
Total return based on net asset value (4) | 4.15 | % | 2.59 | % | ||||
Shares outstanding at end of period | 10,091,682 | 7,569,382 | ||||||
Weighted average shares outstanding for period | 9,419,350 | 7,569,382 | ||||||
Ratio/Supplemental Data:
|
||||||||
Net assets at end of period | $ | 72,701,025 | $ | 60,538,930 | ||||
Average net assets | $ | 66,426,646 | $ | 60,672,785 | ||||
Annualized ratio of net operating expenses to average net assets (5) | 10.90 | % | 10.23 | % | ||||
Annualized ratio of net investment income to average net assets (5) | 8.59 | % | 8.77 | % | ||||
Annualized ratio of net operating expenses excluding management fees, incentive fees, and interest expense to average net assets (5) | 2.72 | % | 3.08 | % |
|
|
|
||||||
Nine months ended March 31, 2014 | Nine months ended March 31, 2013 | |||||||
(Unaudited) | (Unaudited) | |||||||
Per Share Data
(1)
:
|
||||||||
Net asset value at beginning of period | $ | 8.01 | $ | 8.59 | ||||
Dilution from offering | 0.00 | (8) | (0.17 | ) (2) | ||||
Offering costs | (0.03 | ) | (0.01 | ) | ||||
Net investment income | 0.56 | 0.59 | ||||||
Change in unrealized gain (loss) | (0.53 | ) | 0.28 | |||||
Realized gain (loss) | (0.14 | ) | (0.59 | ) | ||||
Dividends declared | (0.67 | ) | (0.69 | ) | ||||
Net asset value at end of period | $ | 7.20 | $ | 8.00 | ||||
Per share market value at end of period | $ | 7.78 | $ | 7.65 | ||||
Total return based on market value (4) | 8.27 | % | 9.31 | % | ||||
Total return based on net asset value (4) | (2.11 | )% | 1.81 | % | ||||
Shares outstanding at end of period | 10,091,682 | 7,569,382 | ||||||
Weighted average shares outstanding for period | 8,177,036 | 6,835,258 | ||||||
Ratio/Supplemental Data:
|
||||||||
Net assets at end of period | $ | 72,701,025 | $ | 60,538,930 | ||||
Average net assets | $ | 61,217,476 | $ | 56,949,979 | ||||
Annualized ratio of net operating expenses to average net assets (5) | 12.74 | % | 10.99 | % | ||||
Annualized ratio of net investment income to average net assets (5) | 9.90 | % | 9.39 | % | ||||
Annualized ratio of net operating expenses excluding management fees, incentive fees, and interest expense to average net assets (5) | 3.26 | % | 3.37 | % |
F-26
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|
|
|
|
||||||||||||
Year Ended
June 30, 2013 |
Year Ended
June 30, 2012 |
For the
period from August 31, 2010 (commencement of operations) to June 30, 2011 |
For the
period from April 16, 2010 (date of inception) to June 30, 2010 |
|||||||||||||
(audited) | (audited) | (audited) | (audited) | |||||||||||||
Per Share Data
(1)
:
|
||||||||||||||||
Net asset value at beginning of period | $ | 8.59 | $ | 9.08 | $ | 9.40 | $ | 15.00 | (6) | |||||||
Dilution from offering | (0.18 | ) (2) | | | | |||||||||||
Offering costs | (0.02 | ) | | (0.04 | ) | | ||||||||||
Net investment income (loss) | 0.77 | 0.78 | 0.70 | (125.45 | ) | |||||||||||
Change in unrealized gain (loss) | 0.37 | (0.32 | ) | (0.29 | ) | | ||||||||||
Realized gain (loss) | (0.60 | ) | (0.03 | ) | 0.06 | | ||||||||||
Dividends declared | (0.92 | ) | (0.92 | ) | (0.75 | ) | | |||||||||
Net asset value at end of period | $ | 8.01 | $ | 8.59 | $ | 9.08 | $ | (110.45 | ) | |||||||
Per share market value at end of period | $ | 7.83 | $ | 7.65 | $ | 7.90 | $ | (110.45 | ) | |||||||
Total return based on market value | 15.12 | % (4) | 8.71 | % (4) | (4.03 | )% (3) | (836.33 | )% (7) | ||||||||
Total return based on net asset value | 4.94 | % (4) | 6.20 | % (4) | 5.62 | % (3) | (836.33 | )% (7) | ||||||||
Shares outstanding at end of period | 7,569,382 | 6,219,382 | 6,219,382 | 100 | ||||||||||||
Weighted average shares outstanding for period | 7,018,286 | 6,219,382 | 6,206,824 | 100 | ||||||||||||
Ratio/Supplemental Data:
|
||||||||||||||||
Net assets at end of period | $ | 60,644,039 | $ | 53,442,785 | $ | 56,474,006 | $ | (11,045 | ) | |||||||
Average net assets | $ | 57,842,601 | $ | 55,531,518 | $ | 57,455,987 | $ | (4,773 | ) | |||||||
Annualized ratio of gross operating expenses to average net assets (5) | 11.52 | % | 9.56 | % | 8.49 | % | 1,279.28 | % | ||||||||
Annualized ratio of net operating expenses to average net assets (5) | 11.52 | % | 8.99 | % | 7.34 | % | 1,279.28 | % | ||||||||
Annualized ratio of net investment income (loss) to average net assets (5) | 9.30 | % | 8.70 | % | 9.29 | % | (1,279.28 | )% | ||||||||
Annualized ratio of net operating expenses excluding management fees, incentive fees, and interest expense to average net assets (5) | 3.53 | % | 3.15 | % | 2.00 | % | 1,279.28 | % |
(1) | Financial highlights are based on weighted average shares outstanding. |
(2) | Dilution from offering is based on the change in net asset value from a follow on offering on November 27, 2012. |
(3) | 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 and assumes that dividends are reinvested in accordance with our dividend reinvestment plan. 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. |
F-27
(4) | Total return based on market value is based on the change in market price per share and assumes that dividends are reinvested in accordance with our dividend reinvestment plan. 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 gross and net 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 (commencement of operations) to June 30, 2011 the Company incurred $102,609 of organizational expenses, which were deemed to be non-recurring. For the period from April 16, 2010 to June 30, 2010, the Company incurred $12,500 of Organizational Expenses, which were deemed to be non-recurring. |
(6) | For the period from April 16, 2010 (date of inception) to June 30, 2010, the net asset value of the Companys common stock at issuance was $15.00. |
(7) | 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 each period and assumes that dividends are reinvested in accordance with our dividend reinvestment plan. Total return based on market value is the same as total return based on net asset value as our shares were not publicly traded from inception through June 30, 2010. The total returns are not annualized. |
(8) | Dilution from offering is based on the change in net asset value from the follow-on offerings on January 14, 2014 and February 27, 2014. |
On August 31, 2010, the Company entered into the First Capital Credit Facility with FCC, LLC d/b/a First Capital. The facility size was $35 million and was initially scheduled to expire in January 2012. The Company extended the First Capital Credit Facility various times through March 31, 2014. The Company incurred unused line, average usage and other fees related to the First Capital Credit Facility. The First Capital Credit Facility was secured by all of the assets of the Company. Under the First Capital Credit Facility, the Company was required to satisfy several financial covenants, including maintaining a minimum level of stockholders equity, a maximum level of leverage and minimum asset coverage and earnings. In addition, the Company was required to comply with other general covenants, including with respect to indebtedness, liens, restricted payments and mergers and consolidations.
On June 3, 2013, the Company entered into the Credit Facility with Santander Bank. The facility size was originally $32.5 million and replaced the Companys First Capital Credit Facility. The facility was subsequently increased to $45.0 million on November 5, 2013.
The Credit Facility matures on June 3, 2016 and bears interest based on a tiered rate structure, depending upon utilization, ranging from 1-month LIBOR to 3-month LIBOR plus 3.25% to 4.00% per annum, or from Santander Banks prime rate plus 1.25% to 2.00% per annum, based on the Companys election. As of March 31, 2014, the 1-month LIBOR to 3-month LIBOR rates respectively were: 0.15%, 0.19%, and 0.23%. As of March 31, 2014, the prime rate was 3.25%. In addition, a fee of 0.50% per annum is charged on unused amounts under the Credit Facility. The Credit Facility is secured by all of the Companys assets. Under the Credit Facility, the Company has made certain customary representations and warranties, and is required to comply with various covenants, reporting requirements and other customary requirements, including a minimum balance sheet leverage ratio, for similar credit facilities. The Credit Facility includes usual and customary events of default for credit facilities of this nature.
F-28
The expenses associated with opening and expanding the Credit Facility are being amortized over the term of the Credit Facility in accordance with ASC 470 Debt. As of March 31, 2014, of the total $728,911 incurred, $507,550 remains to be amortized and is reflected as Deferred Credit Facility Fees on the Consolidated Statement of Assets and Liabilities.
At March 31, 2014 and June 30, 2013, the Company had outstanding borrowings of $0 and $25,584,147 under the Credit Facility, respectively, which amounts are included in the Consolidated Statements of Assets and Liabilities.
On August 31, 2010, the Company entered into multiple senior unsecured notes (the Distribution Notes). The Distribution Notes consisted of $3,404,583 in senior unsecured notes, which bore interest at a fixed rate of 8% per annum, payable quarterly in cash, and were scheduled to mature on February 28, 2014. The Distribution Notes were paid off at par plus accrued interest on July 3, 2013. At March 31, 2014 and June 30, 2013, the Company had a balance of $0 and $3,404,583 on the Distribution Notes, which is included in the Consolidated Statements of Assets and Liabilities.
On June 28, 2013, the Company issued $21,145,525 in aggregate principal amount of 8.25% Notes due June 30, 2020, the Notes, (including a partial exercise of the underwriters overallotment option in July 2013) for net proceeds of $20,038,250 after deducting underwriting commissions of approximately $860,822 and offering expenses of $246,453. The offering expenses and underwriting commissions are being amortized over the term of the notes in accordance with ASC 470 Debt. As of March 31, 2014, of the total $1,107,275 incurred, $987,344 remains to be amortized and is reflected as Deferred Debt Issuance Costs on the Consolidated Statement of Assets and Liabilities .
The Notes were issued pursuant to an indenture, dated June 3, 2013, as supplemented by the first supplemental indenture, dated June 28, 2013 (collectively, the Indenture), between the Company and U.S. Bank National Association (the Trustee). The Notes are unsecured obligations of the Company and rank senior in right of payment to the Companys existing and future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to the Companys existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Companys secured indebtedness (including existing unsecured indebtedness that is later secured) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Companys subsidiaries or financing vehicles. Interest on the Notes is paid quarterly in arrears on March 30, June 30, September 30 and December 30, at a fixed rate of 8.25% per annum, beginning September 30, 2013. The Notes mature on June 30, 2020 and may be redeemed in whole or in part at any time or from time to time at the Companys option on or after June 30, 2016. The Notes are listed on the Nasdaq Global Market under the trading symbol FULLL with a par value of $25.00 per share.
The Indenture contains certain covenants, including covenants requiring compliance with (regardless of whether the Company is subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring the Company to provide financial information to the holders of the Notes and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Indenture. The Company may repurchase the Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any Notes repurchased by the Company may, at the Companys option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by the Company. Any Notes surrendered for cancellation will be promptly cancelled and no longer outstanding under the Indenture. As of March 31, 2014, the Company had not repurchased any of the Notes in the open market.
F-29
At March 31, 2014 and June 30, 2013, the Company had a balance of $21,145,525 on the Notes, which is included in the Consolidated Statements of Assets and Liabilities.
The Companys assets recorded at fair value have been categorized based upon a fair value hierarchy in accordance with Accounting Standards Codification (ASC) Topic 820 Fair Value Measurements and Disclosures (ASC 820). See Note 2 for a discussion of the Companys policies.
The following table presents information about the Companys assets measured at fair value as of March 31, 2014 and June 30, 2013, respectively:
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Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets
|
||||||||||||||||
Senior and Subordinated Loans, at fair value | $ | | $ | | $ | 77,333,327 | $ | 77,333,327 | ||||||||
Investments in private companies, at fair value | | | 5,870,523 | 5,870,523 | ||||||||||||
Investments in securities, at fair value | | | 6,919,302 | 6,919,302 | ||||||||||||
U.S. Treasury securities, at fair value (1) | 10,000,049 | | | 10,000,049 | ||||||||||||
$ | 10,000,049 | $ | | $ | 90,123,152 | $ | 100,123,201 |
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|
|
|
||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets
|
||||||||||||||||
Senior and Subordinated Loans, at fair value | $ | | $ | | $ | 81,195,958 | $ | 81,195,958 | ||||||||
Investments in private companies, at fair value | | | 6,784,435 | 6,784,435 | ||||||||||||
Investments in securities, at fair value | | | 194,108 | 194,108 | ||||||||||||
$ | | $ | | $ | 88,174,501 | $ | 88,174,501 |
(1) | U.S. Treasury Securities were purchased and temporarily held in connection with compliance with RIC diversification requirements under Subchapter M of the Code. |
During the nine months ended March 31, 2014 and for the year ended June 30, 2013, there were no transfers in or out of levels.
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 net 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.
F-30
Changes in Level 3 assets measured at fair value for the nine months ended March 31, 2014 and for the year ended June 30, 2013 are as follows:
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Nine months ended March 31, 2014 (unaudited) | ||||||||||||||||||||||||||||
Beginning
Balance July 1, 2013 |
Amortization
and Accretion of Fixed Income Premiums and Discounts |
Realized &
Unrealized Gains (Losses) |
Purchases |
Sales
And Settlements |
Ending
Balance March 31, 2014 |
Change in
Unrealized Gains (Losses) for Investments still held at March 31, 2014 |
||||||||||||||||||||||
Assets
|
||||||||||||||||||||||||||||
Senior and Subordinated Loans, at fair value | $ | 81,195,958 | $ | 333,075 | $ | (9,808,572 | ) | $ | 74,742,853 | $ | (69,129,987 | ) | $ | 77,333,327 | $ | (8,655,546 | ) | |||||||||||
Investments in private companies, at fair value | 6,784,435 | | (954,196 | ) | 40,284 | | 5,870,523 | (954,195 | ) | |||||||||||||||||||
Investments in securities, at fair value | 194,108 | | 6,117,845 | 607,349 | | 6,919,302 | 6,117,845 | |||||||||||||||||||||
$ | 88,174,501 | $ | 333,075 | $ | (4,644,923 | ) | $ | 75,390,486 | $ | (69,129,987 | ) | $ | 90,123,152 | $ | (3,491,896 | ) |
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Year ended June 30, 2013 (audited) | ||||||||||||||||||||||||||||
Beginning
Balance July 1, 2012 |
Amortization
and Accretion of Fixed Income Premiums and Discounts |
Realized &
Unrealized Gains (Losses) |
Purchases |
Sales
And Settlements |
Ending
Balance June 30, 2013 |
Change in
Unrealized Gains (Losses) for Investments still held at June 30, 2013 |
||||||||||||||||||||||
Assets
|
||||||||||||||||||||||||||||
Senior and Subordinated Loans, at fair value | $ | 70,970,152 | $ | 358,947 | $ | (2,974,512 | ) | $ | 70,949,232 | $ | (58,107,861 | ) | $ | 81,195,958 | $ | (443,443 | ) | |||||||||||
Investments in private companies, at fair value | 1,376,737 | | 1,557,697 | 3,850,001 | | 6,784,435 | 1,557,697 | |||||||||||||||||||||
Investments in securities, at fair value | | | (151,948 | ) | 346,056 | | 194,108 | (151,947 | ) | |||||||||||||||||||
$ | 72,346,889 | $ | 358,947 | $ | (1,568,763 | ) | $ | 75,145,289 | $ | (58,107,861 | ) | $ | 88,174,501 | $ | 962,307 |
Realized and unrealized gains and losses are included in net realized gain (loss) on investments and net change in unrealized gain (loss) on investments in the Consolidated Statement of Operations. The change in unrealized losses for Level 3 investments still held at March 31, 2014 of $3,491,896 is included in net change in net unrealized gain (loss) on investments in the Consolidated Statement of Operations for the nine months ended March 31, 2014.
F-31
The following table provides quantitative information regarding Level 3 fair value measurements as of March 31, 2014:
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|
|
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Description: | Fair Value | Valuation Technique | Unobservable Inputs | Range (Average) (1) | ||||||||||||
Secured debt | $ | 46,088,614 |
Discounted cash flows
(income approach) |
Discount Rate |
3.40% 50.00%
(14.28)% |
|||||||||||
Equity | 5,368,289 |
Market comparable
companies (market approach) |
EBITDA multiple | 2.00 7.00 (5.18 | ) | |||||||||||
Warrant | 6,868,077 | Option Pricing Model | Volatility | 60% 100% | ||||||||||||
Discount Rate
|
40% 60% | |||||||||||||||
Debt or Equity subject to liquidation | 8,913,410 | Liquidation Value | Asset Value | N/A | ||||||||||||
Secured Debt | 22,884,762 | Precedent Transactions | Cost Basis | N/A | ||||||||||||
Total investments | $ | 90,123,152 |
(1) | The average values were determined using the weighted average of the fair value of the investments in each investment category. |
The primary significant unobservable input used in the fair value measurement of the Companys debt securities (first lien debt, second lien debt and subordinated debt), including income-producing investments in funds, is the discount rate. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. In determining the discount rate, for the income, or yield, approach, the Company considers current market yields and multiples, portfolio company performance, leverage levels and credit quality, among other factors in its analysis. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate discount rate to use in the income approach.
The primary significant unobservable input used in the fair value measurement of the Companys equity investments is the EBITDA multiple, or the Enterprise Value. Significant increases (decreases) in the Enterprise Value in isolation would result in a significantly higher (lower) fair value measurement. To determine the Enterprise Value for the market approach, the Company considers current market trading and/or transaction multiples, portfolio company performance (financial ratios) relative to public and private peer companies and leverage levels, among other factors. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate multiple to use in the market approach.
The primary unobservable inputs used in the fair value measurement of the Companys warrant investments, when using an option pricing mode, are the discount rate and volatility. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in the volatility in isolation would result in a significantly higher (lower) fair value measurement. Changes in one or more factors can have a similar directional change on other factors in determining the appropriate discount rate or volatility to use in the valuation of a warrant using an option pricing model.
F-32
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 primarily involve 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.
The warrants provide exposure and potential gains upon equity appreciation or depreciation of the portfolio companys equity value.
As described in the chart below, 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 a warrants expiration date approaches, the time value of the 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.
The Company has written a warrant to sell within a limited time, a financial instrument at a contracted price based on differentials between specified prices. Written warrants may expose the Company to market risk of an unfavorable change in the financial instrument underlying the written warrant.
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 Companys Board of Directors considers the effects of counterparty risk when determining the fair value of its investments in warrants.
At March 31, 2014, the notional amounts and number of warrants, categorized by primary underlying risk, are as follows:
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Long Exposure | Short Exposure | |||||||||||||||
Notional Amounts | Number of Warrants | Notional Amounts | Number of Warrants | |||||||||||||
Primary Underlying Risk
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Equity Price Warrants (a),(b) | $ | 18,551,225 | 184,683 | $ | 1,528,631 | 1 |
(a) | Notional amounts presented for warrants are based on the fair value of the underlying shares as if the warrants were exercised at March 31, 2014. |
(b) | The written warrant is on 360 of the Companys 720 limited liability company interests in New Media West, LLC and has a strike price of $3,125,000, which increases over time to $3,500,000. This warrant expires on December 18, 2019. |
F-33
On May 2, 2014, the Board of Directors declared monthly dividends of $0.067, $0.067 and $0.067 per share payable on August 15, 2014 for holders of record at July 31, 2014, September 15, 2014 for holders of record at August 29, 2014 and October 15, 2014 for holders of record at September 30, 2014.
On April 30, 2014, the Company closed on approximately $4.5 million of a $150.0 million secured second lien term loan to RCS Capital Corporation, a financial services company. The secured second lien term loan is guaranteed by all existing and subsequent direct and indirect domestic subsidiaries of RCS Capital Corporation, and bears interest at LIBOR plus 9.50% with a minimum LIBOR of 1.00% per annum and has a final maturity of April 29, 2021.
On April 7, 2014, the Board of Directors authorized a share repurchase program which provides for the purchase of up to 1 million shares of outstanding common stock, to be implemented at the discretion of our management team. Under the repurchase program, we may, but are not obligated to, repurchase our outstanding common stock in the open market from time to time. The timing and number of shares to be repurchased in the open market will depend on a number of factors, including market conditions and alternative investment opportunities. In addition, any repurchases will be conducted in accordance with the 1940 Act.
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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 | ||||||||||||||||||||||
March 31, 2011 | 2,305,423 | 0.37 | 1,361,635 | 0.22 | (799,361 | ) | (0.13 | ) | 562,274 | 0.09 | ||||||||||||||||||||||
June 30, 2011 | 2,108,426 | 0.34 | 1,170,836 | 0.19 | (415,206 | ) | (0.07 | ) | 755,630 | 0.12 | ||||||||||||||||||||||
September 30, 2011 | 2,558,243 | 0.41 | 1,544,342 | 0.25 | 54,991 | 0.01 | 1,599,333 | 0.26 | ||||||||||||||||||||||||
December 31, 2011 | 2,398,665 | 0.39 | 1,098,640 | 0.18 | (846,099 | ) | (0.14 | ) | 252,541 | 0.04 | ||||||||||||||||||||||
March 31, 2012 | 2,388,960 | 0.38 | 1,118,574 | 0.18 | 405,240 | 0.07 | 1,523,814 | 0.25 | ||||||||||||||||||||||||
June 30, 2012 | 2,481,143 | 0.40 | 1,071,947 | 0.17 | (1,769,463 | ) | (0.28 | ) | (697,516 | ) | (0.11 | ) | ||||||||||||||||||||
September 30, 2012 | 2,773,303 | 0.45 | 1,238,245 | 0.20 | (343,354 | ) | (0.06 | ) | 894,891 | 0.14 | ||||||||||||||||||||||
December 31, 2012 | 3,099,599 | 0.46 | 1,465,650 | 0.22 | (1,893,852 | ) | (0.28 | ) | (428,202 | ) | (0.06 | ) | ||||||||||||||||||||
March 31, 2013 | 2,843,041 | 0.38 | 1,312,164 | 0.18 | 168,654 | 0.02 | 1,480,818 | 0.20 | ||||||||||||||||||||||||
June 30, 2013 | 3,330,080 | 0.44 | 1,364,522 | 0.18 | 489,114 | 0.06 | 1,853,636 | 0.24 | ||||||||||||||||||||||||
September 30, 2013 | 3,218,186 | 0.43 | 1,244,227 | 0.16 | (3,501,376 | ) | (0.46 | ) | (2,257,149 | ) | (0.30 | ) | ||||||||||||||||||||
December 31, 2013 | 3,996,903 | 0.53 | 1,899,588 | 0.25 | (3,119,528 | ) | (0.41 | ) | (1,219,940 | ) | (0.16 | ) | ||||||||||||||||||||
March 31, 2014 | 3,191,624 | 0.34 | 1,406,379 | 0.15 | 1,975,143 | 0.21 | 3,381,522 | 0.36 |
(1) | Per share amounts are calculated using weighted average shares outstanding during the period. |
F-34
We are an externally managed non-diversified closed-end management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940, or the 1940 Act. Our investment objective is to generate both current income and capital appreciation through debt and equity investments.
We may offer, from time to time, in one or more offerings or series, up to $75,000,000 of our common stock, preferred stock, subscription rights to purchase shares of our common stock, debt securities, and warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, which we refer to, collectively, as our securities. The preferred stock, subscription rights, warrants and debt securities offered hereby may be convertible or exchangeable into shares of our common stock. The securities may be offered at prices and on terms to be described in one or more supplements to this prospectus.
Absent approval by the majority of our common stockholders, the offering price per share of our common stock less any underwriting commissions or discounts will generally not be less than the net asset value per share of our common stock at the time we make the offering unless we issue shares in connection with a rights offering to our existing stockholders or under such other circumstances as the SEC may permit. On February 1, 2013, our common stockholders voted to allow us to issue common stock at a price below net asset value per share for a period of approximately one year ending on January 17, 2014. We are currently seeking similar approval from our common stockholders at our upcoming special stockholders meeting scheduled for January 2014, which would extend our ability to issue shares of our common stock at a price below net asset value per share for an additional year. The maximum number of shares issuable below net asset value in each offering is limited to 25% of our then outstanding common stock. In addition, we cannot issue shares of our common stock below net asset value unless our Board of Directors determines that it would be in our and our stockholders' best interests to do so. Sales of common stock at prices below net asset value per share dilute the interests of existing stockholders, have the effect of reducing our net asset value per share and may reduce our market price per share. In addition, continuous sales of common stock below net asset value may have a negative impact on total returns and could have a negative impact on the market price of our shares of common stock. See Sales of Common Stock Below Net Asset Value.
Our securities may be offered directly to one or more purchasers, or through agents designated from time to time by us, or to or through underwriters or dealers. The prospectus supplement relating to an offering will identify any agents or underwriters involved in the sale of our securities, and will disclose any applicable purchase price, fee, commission or discount arrangement between us and our agents or underwriters or among our underwriters or the basis upon which such amount may be calculated. See Plan of Distribution. We may not sell any of our securities through agents, underwriters or dealers without delivery of this prospectus and a prospectus supplement describing the method and terms of the offering of such securities.
Our common stock is traded on the NASDAQ Global Market under the symbol FULL. On December 6, 2013, the last reported sales price on the NASDAQ Global Market for our common stock was $7.48 per share. We are required to determine the net asset value per share of our common stock on a quarterly basis. Our net asset value per share of our common stock as of September 30, 2013 was $7.48. As of September 30, 2013, 43% of our debt portfolio at fair value consisted of debt securities and asset-based revolving lines of credit for which issuers were not required to make principal payments until the maturity of such debt securities, which could result in a substantial loss to us if such issuers are unable to refinance or repay their debt at maturity. In addition, a substantial portion of our debt investments have variable interest rates that reset periodically based on benchmarks such as the London-Interbank Offered Rate and prime rate. As a result, significant increases in such benchmarks in the future would make it more difficult for these borrowers to service their obligations under the debt investments that we hold.
An investment in our securities is subject to risks and involves a heightened risk of total loss of investment. In addition, the companies in which we invest are subject to special risks. For example, we invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as high yield or junk, have predominantly speculative characteristics with respect to the issuers capacity to pay interest and repay principal. See Risk Factors beginning on page 17 to read about factors you should consider, including the risk of leverage, before investing in our securities.
Neither the SEC nor any state securities commission has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
This prospectus may not be used to consummate sales of securities unless accompanied by a prospectus supplement.
Please read this prospectus and any accompanying prospectus supplements before investing and keep each for future reference. This prospectus and any accompanying prospectus supplements contain important information about us that a prospective investor ought to know before investing in our securities. We file annual, quarterly and current reports, proxy statements and other information with the SEC ( http://www.sec.gov ), which is available free of charge by contacting us by mail at 800 Westchester Ave., Suite S-620, Rye Brook, NY 10573, by telephone at (914) 220-6300 or on our website at http://www.fccapital.com .
Prospectus dated December 16, 2013
We have not authorized any dealer, salesman or other person to give any information or to make any representation other than those contained in this prospectus or any prospectus supplement to this prospectus. You must not rely upon any information or representation not contained in this prospectus or any such supplements as if we had authorized it. This prospectus and any such supplements do not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered securities to which they relate, nor do they constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The information contained in this prospectus and any such supplements is accurate as of the dates on their covers; however, the prospectus and any supplements will be updated to reflect any material changes.
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This prospectus is part of a registration statement that we have filed with the SEC, using the shelf registration process. Under the shelf registration process, we may offer, from time to time, up to $75,000,000 of our common stock, preferred stock, subscription rights to purchase shares of our common stock, debt securities, and warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, on terms to be determined at the time of the offering. Our securities may be offered at prices and on terms described in one or more supplements to this prospectus. This prospectus provides you with a general description of the securities that we may offer. Each time we use this prospectus to offer securities, we will provide a prospectus supplement that will contain specific information about the terms of that offering. The prospectus supplement may also add, update or change information contained in this prospectus. Please carefully read this prospectus and the prospectus supplement together with any exhibits and the additional information described under the headings Where You Can Find Additional Information and Risk Factors before you make an investment decision.
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The following summary contains basic information about offerings pursuant to this prospectus. It may not contain all the information that is important to an investor. For a more complete understanding of offerings pursuant to this prospectus, we encourage you to read this entire prospectus and the documents to which we have referred in this prospectus, together with any accompanying prospectus supplements.
Except where the context requires otherwise, the terms Full Circle Capital, the Company, or we refer to Full Circle Capital Corporation; Full Circle Advisors or our investment adviser refers to Full Circle Advisors, LLC; and Full Circle Service Company or our administrator refers to Full Circle Service Company, LLC.
Full Circle Capital, a Maryland corporation formed in April 2010, is an externally managed non-diversified closed-end management investment company that has elected to be treated as a business development company (BDC) under the Investment Company Act of 1940 (the 1940 Act). Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We are managed by Full Circle Advisors and Full Circle Service Company provides the administrative services necessary for us to operate.
We invest primarily in 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. 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. 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. Our stretch senior secured loans typically possess a greater advance rate against the borrowers assets and cash flow, and accordingly carry a higher interest rate and/or greater equity participation, than traditional senior secured loans. This stretch senior secured loan instrument can provide borrowers with a more efficient and desirable solution than a senior bank line combined with a separate second lien or mezzanine loan obtained from another source. We also may 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 most of 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 and after the 2008/2009 credit crisis. These areas can 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 and/or greater equity grants than typical of other transactions.
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As a business development company, we are required to meet regulatory tests, including the requirement to invest at least 70% of our gross assets in qualifying assets. Qualifying assets generally include, among other things, securities of eligible portfolio companies. Eligible portfolio companies generally include U.S. companies that are not investment companies and that do not have securities listed on a national exchange. See Regulation as a Business Development Company. We may also borrow funds to make investments. In addition, we have elected to be treated for federal income tax purposes as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, which we refer to as the Code. See Material U.S. Federal Income Tax Considerations.
Our headquarters are located at 800 Westchester Ave., Suite S-620, Rye Brook, New York 10573 and our telephone number is (914) 220-6300.
We are managed by Full Circle Advisors, whose investment committee members have an average of approximately 18 years of experience financing and investing in smaller and lower middle-market companies. Full Circle Advisors is an investment adviser registered under the Investment Advisers Act of 1940, as amended (the Advisers Act). Certain members of Full Circle Advisors investment committee also presently manage Full Circle Funding, LP, a specialty lender serving smaller and lower middle-market companies. The investment committee has to date originated approximately $314 million in loans and investments in 61 distinct borrowers since inception of Full Circle Funding, LP in 2005 and through activities at Full Circle Advisors since August 2010. The existing investment funds managed by Full Circle Funding, LP, which currently consist of the Legacy Funds, have been fully committed and are no longer making investments in new opportunities. The Legacy Funds are expected to be wound down as their remaining investments mature. Full Circle Funding, LP and other affiliates of our investment adviser may manage other funds and accounts in the future.
We benefit from the proven ability of our investment advisers investment committee to identify attractive investment opportunities, conduct diligence on and value prospective investments, negotiate terms, secure collateral against our loans and manage and monitor a diversified portfolio of those investments. Our investment advisers investment committee members have broad investment backgrounds, with prior experience at investment banks, commercial banks, unregistered investment funds and other financial services companies, and have collectively developed a broad network of contacts to provide us with our principal source of investment opportunities.
Our investment adviser is controlled and led by John E. Stuart, our Co-Chief Executive Officer and Chairman, and Gregg J. Felton, our Co-Chief Executive Officer and President. Mr. Stuart and Mr. Felton, who serves as Chief Investment Officer of Full Circle Advisors, are assisted by Lawrence Chua and Crandall Deery, who each serve as a Vice President of Full Circle Advisors. We consider Messrs. Stuart, Felton, Chua and Deery to be Full Circle Advisors investment committee. Under our investment advisory agreement with Full Circle Advisors (the Investment Advisory Agreement), we have agreed to pay Full Circle Advisors an annual base management fee based on our gross assets as well as an incentive fee based on our performance. See Investment Advisory Agreement.
We have also entered into an administration agreement (the Administration Agreement), under which we have agreed to reimburse Full Circle Service Company for our allocable portion of overhead and other expenses incurred by Full Circle Service Company in performing its obligations under the Administration Agreement, including furnishing us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities, as well as providing us with other administrative services. Full Circle Service Company is controlled by Messrs. Stuart and Felton. See Administration Agreement.
Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We have adopted the following business strategies to achieve our investment objective:
| Deliver Flexible Financing Solutions . We believe our ability to provide a broad range of flexible debt financing solutions to smaller and lower middle-market companies sets us apart from other capital providers. We offer to our portfolio companies debt financing facilities that, combined with |
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our ability to recognize the underlying value and security of diverse types of traditional and non-traditional asset based collateral, we believe allows us to provide flexible facilities to fit the capital requirements of each borrower. We believe that our focus on providing senior secured and stretch senior loans provides a more efficient and less complicated capital structure and source of capital for borrowers. We also believe that it maximizes our control of and exposure to asset-based collateral coverage as security for our loans, thereby greatly reducing our risk of possible losses due to deterioration in a borrowers performance. |
| Target Smaller and Lower Middle-Market Companies . We generally provide capital to our portfolio companies for growth capital, acquisition financing and refinancing of existing debt facilities. We believe our target portfolio companies are generally involved in industries or markets that are under-followed or serviced because they are either less visible to mainstream institutions or investors, or are too small or localized for larger financial institutions or larger funds, particularly those that lack the requisite industry-specific knowledge and expertise. We believe there have historically been fewer banks and finance companies focused on lending to these types of smaller and lower middle-market companies. As a result, we believe we can negotiate terms on loans to these types of companies that generally possess better risk-adjusted return profiles than terms on loans to larger, more mainstream companies. Such favorable terms may include higher debt yields, lower leverage levels, more significant covenant protection and/or greater equity grants than typical of transactions involving larger companies. 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. |
| Focus on Senior Secured Lending and Structuring of Investments to Minimize Risk of Loss . We seek to structure our loan investments on a favorable loan-to-value (LTV) exposure based on underlying collateral or enterprise value with high cash yields, cash origination fees, low leverage levels and strong investment protections. We generally seek to protect against risk of loss on our debt investments by securing most of our loans against a significant level of tangible or intangible assets of our borrowers, obtaining a favorable LTV ratio or other financial protections or credit enhancements, rather than lending predominantly against anticipated cash flows of borrowers. We believe this provides us with more options and a greater likelihood of repayment from both cash flow and/or asset sales. |
| Structure Loans with Superior Security and Asset Protection . Our loan instruments and documentation focus on favorable lender protections with security over the collateral, financial and other covenants and rigorous reporting requirements on behalf of our borrowers. We monitor covenant and other loan compliance on a monthly and quarterly basis and personnel from our investment adviser will have periodic field exams performed at the borrower level. We utilize both term debt and revolving loan structures and, accordingly, often seek to maintain control of our borrowers cash receipts from revenues as additional security for our positions. As of September 30, 2013, we had the right to impose lockbox or dominion of cash, or account control agreements, on 93% of the borrowers in our portfolio, as calculated by principal amount and fair value. Such amounts are not inclusive of our holdings of United States Treasury Bills. In addition, we may seek credit enhancements, such as personal guarantees from a borrowers principal owners or make well features to provide us with additional equity in the event of underperformance. We may also seek a pledge of stock or other assets from a borrower or its operating subsidiaries. |
| Pursue Attractive Risk Adjusted Returns . As of September 30, 2013, the weighted average annualized yield of the debt investments comprising our portfolio was approximately 12.75%. In the future, a component of our interest may be in the form of payment-in-kind, or PIK, interest. PIK interest represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term and recorded as interest income on an accrual basis to the extent such amounts are expected to be collected. For additional information regarding PIK interest and related risks, see Risk Factors Risks Relating to Our Business and Structure We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income. As of September 30, 2013, 43% of our debt portfolio at fair value, |
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excluding United States Treasury Bills, consisted of debt securities and asset-based revolving lines of credit for which issuers were not required to make principal payments until the maturity of such debt securities, which could result in a substantial loss to us if such issuers are unable to refinance or repay their debt at maturity. In addition, a substantial portion of our debt investments have variable interest rates that reset periodically based on benchmarks such as the London-Interbank Offered Rate and prime rate. As a result, significant increases in such benchmarks in the future would make it more difficult for these borrowers to service their obligations under the debt investments that we hold. The 37 individual debt investments, from 22 distinct borrowers, included in our portfolio averaged a LTV ratio of approximately 61% as of September 30, 2013 (i.e., each $61 of loan value outstanding is secured by $100 of collateral value). Although it is subject to fluctuation, we believe this LTV ratio, which measures the aggregate amount of our loan positions against the aggregate amount of primary collateral value pledged by our borrowers as security against our loans, reflects the relative strength of the debt investments comprising our portfolio. Finally, our debt investments are designed to have strong protections beyond repayment from cash flow and asset liquidation coverage, including default penalties, information rights, and affirmative, negative and financial covenants, such as lien protection and prohibitions against change of control. We believe this level of collateral protection helps minimize against the risk of loss, even if a loan goes into default. |
| Leveraging the Skill, Experience and Resources of Full Circle Advisors Investment Committee . Full Circle Advisors investment committee members have an average of approximately 18 years of experience financing and investing in smaller and lower middle-market companies. The investment committee members have broad investment and operational backgrounds, with prior experience at specialty finance companies, investment management firms, private equity investment funds, investment banks and other financial services companies. We believe their expertise in analyzing, valuing, structuring, negotiating, closing, monitoring and restructuring transactions should provide us with a competitive advantage by allowing us to consider customized financing solutions and non-traditional and complex structures. We believe this experience should also be valuable when we have to work with stressed and distressed credits. |
| Balanced Investing Across Industries with Expertise . While we seek to maintain a portfolio of investments that is appropriately balanced among various companies, industries, geographic regions and end markets, we focus our investing activities on certain areas that we believe maintain favorable asset coverage positions, including the media, communications and business services industries. We believe that the stable, long term asset values that may be found in many of the industries in which we invest can provide us with significant collateral protection on our loans, in contrast to taking some of the risks of repayment attendant to relying exclusively on a borrowers current cash flows. Going forward, we intend to seek to maintain a balanced portfolio to mitigate the potential effects of negative economic events for particular companies, regions and industries. |
| Capitalize on Strong Transaction Sourcing Network . Our investment advisers investment committee seeks to leverage their extensive network of referral sources for investments in smaller and lower middle-market companies. We believe through their prior investment experience, the investment committee members have collectively developed a reputation in our target market and in the industries in which we invest as a responsive, efficient and reliable source of flexible financing. |
| Employ Disciplined Underwriting Policies and Rigorous Portfolio Management . We directly originate most of our investments, which, in our experience, generally allows us to pursue a more rigorous due diligence examination of the investments than if we invest as part of a lending syndicate led by others. Our investment advisers investment committee has developed an extensive underwriting due diligence process which includes a review of the prospects, competitive position, financial performance and industry dynamics of each potential portfolio company. In underwriting a potential borrower, they engage in a variety of quantitative and qualitative stress tests, and analyze our ability to successfully liquidate a favorable collateral package underlying a loan in the event of default. These processes continue during the portfolio monitoring process, when our investment adviser will, depending on the borrower, analyze monthly and/or quarterly financial statements |
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versus the previous periods and year, review financial projections, conduct field examinations, meet with management, attend board meetings, review all compliance certificates and covenants and regularly assess the financial and business conditions and prospects of borrowers. |
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 demand for financing from smaller to lower middle-market companies is largely outpacing the availability of lenders that have traditionally served this market. While this has traditionally been an underserved market, we believe the supply-demand imbalance of loans to smaller borrowers was exacerbated by the credit crisis in 2008/2009, and has not fully recovered. 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.
Thus we believe that the current credit markets combined with certain long term trends associated with lending to smaller and lower middle-market companies provide the ideal market environment for our strategy.
| Competitive Edge and Skill Set . Our core strength of providing efficient and flexible lending solutions to smaller and lower middle-market companies requires a market approach and skill set that we believe is generally not found in larger or more localized regional lenders. We believe that many of the companies we target operate in industries that are less visible or too specialized for larger mainstream institutions or investors, or alternatively, require too little funding or are too localized for larger financial institutions to consider, particularly in cases where those institutions lack the requisite industry-specific knowledge and expertise. From 1992 through 2012, loan composition for banks sized greater than $1 billion in assets showed a decline of commercial and industrial loans from 30% of net loans to 22% of net loans, while real estate lending grew from 39% to 50%. Accordingly, we believe that many potential competitive bank lenders lack the personnel or lending experience required to address the very strong market demand for commercial and industrial lending. |
Larger domestic banks noted stronger demand during the second quarter of 2013. In a July 2013 survey, it was reported that modest fractions of domestic banks reported having eased their standards across major loan categories during the second quarter. However, bankers easing of standards is more popular among their larger clients than it is with smaller ones. While 20% of respondents said they were easing terms on the maximum size of credit lines to large and middle-market firms (annual sales of $50 million or more), only 10% of respondents said they were doing the same for small firms (defined as those with annual sales of less than $50 million) and the remaining respondents reported no change. Regarding the costs of credit lines, 46% of respondents reported easing terms to borrowers, while 37% of respondents reported doing the same for small firms and the remaining respondents reported no change. Furthermore, more than 29% of respondents reported having eased covenant requirements for large clients, while just 16% reported a similar easing of standards for their smaller clients. Banks general reticence to loosen terms to smaller firms remains despite the fact that respondents answers for the outlook for asset quality revealed that moderate to large fractions of banks expect improvements in credit quality in most major loan categories.
Reports also state that domestic banks indicated that demand for business loans had strengthened, and they continued to report a rise in the number of inquiries from potential business borrowers, of all sizes, regarding new or increased credit lines. At the same time, U.S. branches and agencies of foreign banks, which mainly lend to businesses, reported little change in their lending standards, while demand for their loans was reportedly stronger on net. Additionally, reports state that a majority of domestic banks have recently reported strong demand for commercial and industrial loans due to increases in customers funding needs related to inventories, accounts receivable, investment in plans or equipment and mergers and acquisitions. We believe these bank lending market conditions will continue to exacerbate existing funding gaps for firms comprising our target market. Additionally, we believe our strengths include the ability to originate, underwrite and
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manage a more labor intensive portfolio consisting of debt investments in smaller companies, and to perform due diligence and manage portfolio activities on an ongoing basis.
| Strong Demand For Capital Coupled with Fewer Providers . 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. Further, we believe the supply-demand imbalance of smaller borrowers to lenders serving that market was exacerbated by the credit crisis in 2008/2009, and has not fully recovered. 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 are increased lending opportunities for us. |
| More Conservative Deal Structures . As a result of, and in the aftermath of, the 2008/2009 credit crisis, we believe lenders are mandating less leverage, more equity and tighter loan covenants than what had previously been customary. We believe that lower purchase prices for assets and lower debt multiples, combined with greater equity cushions beneath loans, allows for greater cash flow for debt service, creating faster loan repayments despite overall higher debt costs to borrowers. We believe this aspect provides considerable cushion against underperformance and default of borrowers as well as faster de-risking of loan positions as credit statistics improve over the term of the loan facilities. |
| Attractive Return Profile . We believe the reduced access to, and reduced availability of, debt capital has decreased competition in smaller to lower middle-market lending which had already become less competitive and more fragmented prior to the credit crisis, resulting in a better market for loan pricing. We believe that the withdrawal of many traditional senior lenders from the market, combined with reduced advance rates and leverage levels, allows for stretch senior lenders to charge rates that typically reflect mezzanine or subordinated structures for entire facilities, while maintaining first lien senior secured positions over the loan collateral provided by the borrowers. Our investment advisers investment committee has experienced this attractive return environment since the onset of the credit crisis in the second half of 2008, when transactions originated by them saw increased returns from interest and fees charged, as well as more meaningful warrant participations. |
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The value of our assets, as well as the market price of our shares, will fluctuate. Our investments may be risky, and you may lose all or part of your investment in us. Investing in us involves other risks, including the following:
| We have a limited operating history as a business development company; |
| We are dependent upon Full Circle Advisors investment committee for our future success; |
| We operate in a highly competitive market for investment opportunities. |
| 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; |
| 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; |
| 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 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; |
| 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; |
| The lack of liquidity in our investments may adversely affect our business; |
| 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; |
| 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 borrow money, which magnifies the potential for gain or loss on amounts invested and increases the risk of investing in us; |
| An inability to raise capital or access debt financing could negatively affect our business; |
| To the extent we use debt to finance our investments, changes in interest rates will affect our cost of capital and net investment income; |
| There will be uncertainty as to the value of our portfolio investments; |
| We may experience fluctuations in our quarterly results; |
| We will become subject to corporate-level income tax on all of our income if we are unable to qualify as a RIC under Subchapter M of the Code, which would have a material adverse effect on our financial performance; |
| Shares of closed-end investment companies, including business development companies, may trade at a discount to their net asset value; |
| Existing stockholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock or issue securities to subscribe to, convert to or purchase shares of our common stock; |
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| Our common stock price may be volatile and may decrease substantially, and our stockholders may lose money in connection with an investment in our shares; |
| There is a risk that our stockholders may not receive distributions or that our distributions may not grow over time; and |
| Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock. |
See Risk Factors beginning on page 17 , and the other information included in this prospectus, for additional discussion of factors you should carefully consider before deciding to invest in our securities.
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Effective November 8, 2013, the Companys Board of Directors expanded its size to include five directors and appointed Gregg J. Felton to serve as a director until the 2014 Annual Meeting of Stockholders scheduled for January 17, 2014. In addition, the Board appointed Mr. Felton to serve as the Companys Co-Chief Executive Officer and President. In connection with Mr. Feltons appointment, John Stuart resigned as the Companys President, but will continue to serve as Chairman and Co-Chief Executive Officer.
Mr. Felton, 42, is primarily responsible for overall investment strategies and portfolio management. Mr. Felton is also a Managing Member and Chief Investment Officer of Full Circle Advisors and a Managing Member of Full Circle Service Company. Prior to joining Full Circle Capital, from 2006 to 2013, Mr. Felton was a Partner and Managing Director of Goldman Sachs and the Founder and Chief Investment Officer of Liberty Harbor, Goldman Sachs Asset Managements credit alternatives platform. He oversaw various investment vehicles, including hedge funds, mutual funds and institutional managed accounts and facilitated the launch of Goldman Sachs business development company. From 2009 to 2010, Mr. Felton was Head of Credit for Goldman Sachs Asset Management, overseeing approximately $60 billion in assets. Prior to joining Goldman Sachs, Mr. Felton was a senior portfolio manager at Amaranth Advisors, a multi-strategy hedge fund located in Greenwich, Connecticut. He led Amaranths global corporate credit investment team from 2000 to 2006. Prior thereto, Mr. Felton was a Vice President at Chase Manhattan Bank, where he served as a portfolio manager and senior analyst for Chases Special Situations Fund. Mr. Felton began his career in the High Yield Finance Department of Chases Global Investment Bank. Mr. Feltons broad experience managing investment vehicles and funds provides the Board with industry expertise and a valuable perspective on a variety of credit transactions. Education B.A. Tufts University, 1992; J.D. Georgetown University Law Center, 1996; M.B.A. Georgetown University School of Business, 1996.
Effective November 8, 2013, the Board amended and restated the Companys Bylaws to permit the appointment of a Co-Chief Executive Officer and make certain other revisions related to the administration of the Company.
On November 7, 2013, the Board of Directors declared monthly dividends of $0.067, $0.067 and $0.067 per share payable on February 14, 2014 for holders of record at January 31, 2014, March 14, 2014 for holders of record at February 28, 2014 and April 15, 2014 for holders of record at March 31, 2014.
On November 6, 2013, the Company increased the size of its credit facility with Santander Bank, N.A., f/k/a Sovereign Bank, N.A. (the Credit Facility) from $32.5 million to $45.0 million.
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We may offer, from time to time, up to $75,000,000 of our common stock, preferred stock, subscription rights to purchase shares of our common stock, debt securities, and warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, on terms to be determined at the time of the offering. We will offer our securities at prices and on terms to be set forth in one or more supplements to this prospectus. The offering price per share of our common stock, less any underwriting commissions or discounts, generally will not be less than the net asset value per share of our common stock at the time of an offering. However, we may issue shares of our common stock pursuant to this prospectus at a price per share that is less than our net asset value per share (i) in connection with a rights offering to our existing stockholders, (ii) with the prior approval of the majority of our common stockholders or (iii) under such other circumstances as the SEC may permit. On February 1, 2013, our common stockholders voted to allow us to issue common stock at a price below net asset value per share for a period of approximately one year ending on January 17, 2014. The maximum number of shares issuable below net asset value in each offering is limited to 25% of our then outstanding common stock. In addition, we cannot issue shares of our common stock below net asset value unless our Board of Directors determines that it would be in our and our stockholders' best interests to do so. Any such issuance of shares of our common stock below net asset value will be dilutive to the net asset value of our common stock. See Sales of Common Stock Below Net Asset Value.
Our securities may be offered directly to one or more purchasers, or through agents designated from time to time by us, or to or through underwriters or dealers. The prospectus supplement relating to an offering will identify any agents or underwriters involved in the sale of our securities, and will disclose any applicable purchase price, fee, commission or discount arrangement between us and our agents or underwriters or among our underwriters or the basis upon which such amount may be calculated. See Plan of Distribution. We may not sell any of our securities through agents, underwriters or dealers without delivery of this prospectus and a prospectus supplement describing the method and terms of the offering of such securities.
Set forth below is additional information regarding offerings of our securities:
Use of Proceeds |
We intend to use the net proceeds from the sale of our securities pursuant to this prospectus for general corporate purposes, which may include investing in new portfolio companies in accordance with our investment objective and strategies described in this prospectus, the repayment of outstanding indebtedness, acquisitions and for other general working capital purposes. Each supplement to this prospectus relating to an offering will more fully identify the use of the proceeds from such offering. See Use of Proceeds. |
NASDAQ Global Market symbol |
FULL |
Distributions |
To the extent that we have income available, we intend to distribute monthly dividends to our stockholders. The amount of our dividends, if any, will be determined by our Board of Directors. Any dividends to our stockholders will be declared out of assets legally available for distribution. See Price Range of Common Stock and Distributions. |
Taxation |
We have elected to be treated for federal income tax purposes as a RIC under Subchapter M of the Code. As a RIC, we generally do not have to pay corporate-level federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends. To maintain our RIC tax treatment, we must meet specified source-of-income and asset diversification |
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requirements and distribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. See Price Range of Common Stock and Distributions and Material U.S. Federal Income Tax Considerations. |
Leverage |
We have historically and may in the future borrow funds to make investments. As a result, we may be exposed to the risks of leverage, which may be considered a speculative investment technique. The use of leverage magnifies the potential for gain and loss on amounts invested and therefore increases the risks associated with investing in our securities. In addition, the costs associated with our borrowings, including any increase in the management fee payable to our investment adviser will be borne by our common stockholders. |
Management Arrangements |
Full Circle Advisors serves as our investment adviser. Full Circle Service Company serves as our administrator. For a description of Full Circle Advisors and Full Circle Service Company, and our contractual arrangements with these companies, see Investment Advisory Agreement and Administration Agreement, respectively. |
Dividend Reinvestment Plan |
We have adopted an opt out dividend reinvestment plan. If your shares of common stock are registered in your own name, your distributions will automatically be reinvested under our dividend reinvestment plan in additional whole and fractional shares of common stock, unless you opt out of our dividend reinvestment plan so as to receive cash dividends by delivering a written notice to our dividend paying agent. If your shares are held in the name of a broker or other nominee, you should contact the broker or nominee for details regarding opting out of our dividend reinvestment plan. Stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. See Dividend Reinvestment Plan. |
Certain Anti-Takeover Measures |
Our charter and bylaws, as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us. These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our securities the opportunity to realize a premium over the market price for our securities. See Description of Our Capital Stock. |
Where You Can Find
Additional Information |
We have filed with the SEC a registration statement on Form N-2 together with all amendments and related exhibits under the Securities Act. The registration |
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statement contains additional information about us and the securities being offered by this prospectus. |
We file annual, quarterly and current reports, proxy statements and other information with the SEC under the Securities Exchange Act of 1934, as amended (the Exchange Act). You can inspect any materials we file with the SEC, without charge, at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The information we file with the SEC is available free of charge by contacting us at Full Circle Capital Corporation, 800 Westchester Ave., Suite S-620, Rye Brook, New York 10573, by telephone at (914) 220-6300, or on our website at http://www.fccapital.com. The SEC also maintains a website that contains reports, proxy statements and other information regarding registrants, including us, that file such information electronically with the SEC. The address of the SECs web site is http://www.sec.gov. Information contained on our website or on the SECs web site about us is not incorporated into this prospectus and you should not consider information contained on our website or on the SECs website to be part of this prospectus. |
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The following table is intended to assist you in understanding the costs and expenses that you will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by us or Full Circle Capital, or that we will pay fees or expenses, you will indirectly bear such fees or expenses as an investor in us.
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Stockholder transaction expenses:
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Sales load (as a percentage of offering price) | | % (1) | ||
Offering expenses borne by us (as a percentage of offering price) | | % (2) | ||
Dividend reinvestment plan expenses | None | (3) | ||
Total stockholder transaction expenses (as a percentage of offering price) | | % | ||
Annual expenses (as a percentage of net assets attributable to common stock):
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Base management fee | 2.97 | % (4) | ||
Incentive fees payable under our investment advisory agreement | 2.13 | % (5) | ||
Interest payments on borrowed funds | 4.88 | % (6) | ||
Other expenses (estimated) | 3.58 | % (7) | ||
Total annual expenses | 13.56% (8) |
The following example, required by the SEC, demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we assumed we would maintain our current amount of leverage and that our operating expenses would remain at the levels set forth in the table above. In the event that shares to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will restate this example to reflect the applicable sales load.
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1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||
You would pay the following expenses on a $1,000 investment, assuming a 5% annual return | $ | 124 | $ | 346 | $ | 536 | $ | 900 |
The example and the expenses in the tables above should not be considered a representation of our future expenses, and actual expenses may be greater or less than those shown . Moreover, while the example assumes, as required by the SEC, a 5.0% annual return, our performance will vary and may result in a return greater or less than 5.0%. The incentive fee under the Investment Advisory Agreement, which, assuming a 5.0% annual return, would either not be payable or have a de minimis effect, is nonetheless included in the example for illustrative purposes based upon the estimated annual expenses relating thereto as set forth above. If we achieve sufficient returns on our investments to trigger an incentive fee of a material amount, our expenses, and returns to our investors, would be higher. In addition, while the example assumes reinvestment of all dividends and distributions at net asset value, participants in our dividend reinvestment plan may receive shares valued at the market price in effect at that time. This price may be at, above or below net asset value. See Dividend Reinvestment Plan for additional information regarding our dividend reinvestment plan.
(1) | In the event that the securities to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will disclose the maximum applicable sales load and the Example will be updated accordingly. |
(2) | The prospectus supplement corresponding to each offering will disclose the maximum applicable offering expenses and maximum total stockholder transaction expenses as a percentage of the offering price. |
(3) | The expenses of the dividend reinvestment plan are included in other expenses. |
(4) | Assumes gross assets of $96.2 million and net assets of $56.6 million. Our base management fee payable under the Investment Advisory Agreement is based on our gross assets, which equals the net assets of Full Circle Capital plus borrowings for investment purposes and other liabilities. Because we use |
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borrowings for investment purposes, it has the effect of increasing our gross assets upon which our base management fee is calculated, while our net assets remain unchanged. Because the contractual base management fee of 1.75% of gross assets reflects an effective base management fee of 2.97% of net assets attributable to common stock in the table above, the fact that our base management fee is payable based upon our gross assets may encourage Full Circle Advisors to use leverage to make additional investments. See Investment Advisory Agreement. |
(5) | Assumes that annual incentive fees earned by Full Circle Advisors remain consistent with the incentive fees earned by Full Circle Advisors during the quarter ended September 30, 2013. Incentive fees would increase if, and to the extent that, we earn greater interest income through our investments in portfolio companies and realize additional capital gains upon the sale of warrants or other equity investments in such companies. The incentive fee consists of two parts. The first part, which is payable quarterly in arrears, equals 20.0% of the excess, if any, of our Pre-Incentive Fee Net Investment Income that exceeds a 1.75% quarterly (7.0% annualized) hurdle rate, which we refer to as the Hurdle, subject to a catch-up provision measured at the end of each calendar quarter. The first part of the incentive fee is computed and paid on income that may include interest that is accrued but not yet received in cash. The operation of the first part of the incentive fee for each quarter is as follows: |
| no incentive fee is payable to our investment adviser 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) is payable to our investment adviser. 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 20.0% of our Pre-Incentive Fee Net Investment Income, as if a Hurdle did not apply when our Pre-Incentive Fee Net Investment Income exceeds 2.1875% in any calendar quarter; and |
| 20.0% 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 our investment adviser (once the Hurdle is reached and the catch-up is achieved, 20.0% of all Pre-Incentive Fee Investment Income thereafter is paid to our investment adviser). |
The second part of the incentive fee equals 20.0% of our Incentive Fee Capital Gains, if any, which equals our realized capital gains 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. The second part of the incentive fee is payable, in arrears, at the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date). For a more detailed discussion of the calculation of this fee, see Investment Advisory Agreement.
(6) | Assumes we maintain our level of outstanding borrowings as of September 30, 2013, which consisted of $21.9 million outstanding under our senior secured credit facility (the Credit Facility) with Sovereign Bank, N.A. (Sovereign Bank), as administrative agent, and $21.1 million principal amount of 8.25% Notes due 2020 (the Notes) outstanding. Interest payments on borrowed funds represents our expected interest expense for the next twelve months, plus underwriting discounts, fees and expenses associated with debt obligations which are amortized over the life of such obligations. Such expenses are borne directly or indirectly by our common shareholders. For the quarter ended September 30, 2013, our effective annualized average interest rate, which includes all interest and related costs, was 6.64%. We may also issue preferred stock, which may be considered a form of leverage. While we have no present intent to do so during the twelve months following the date of this prospectus, in the event we were to issue preferred stock, our borrowing costs, and correspondingly our total annual expense, including our base management fee as a percentage of our net assets, would increase. |
(7) | Assumes that the amount of our operating expenses remains consistent with the operating expenses incurred by us during the quarter ended September 30, 2013. |
(8) | The holders of shares of our common stock (and not the holders of our debt securities, if any) indirectly bear the cost associated with our annual expenses. |
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The selected financial and other data below should be read in conjunction with our Managements Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto. Financial information at and for the fiscal years ended June 30, 2013, 2012 and 2011 and period from April 16, 2010 (inception) to June 30, 2010 has been derived from our financial statements that were audited by Rothstein Kass, an independent registered public accounting firm. The financial information at and for the three months ended September 30, 2013 and 2012 is derived from unaudited financial data, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) which are necessary to present fairly the results for such interim periods. Our results for the interim period may not be indicative of our results for the full year. The historical information below may not be indicative of our future performance. The following data should be read in conjunction with our financial statements and related notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus.
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($ in thousands, except per share data) | Quarter Ended | Year Ended | Period from April 16, 2010 (inception) to June 30, 2010 (1) | |||||||||||||||||||||||||||||
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September 30,
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(unaudited) | (unaudited) | (audited) | (audited) | (audited) | (audited) | |||||||||||||||||||||||||||
Income Statement Data:
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Total investment income | $ | 3,218 | $ | 2,773 | $ | 12,046 | $ | 9,827 | $ | 7,960 | $ | | ||||||||||||||||||||
Total expenses before
incentive fees |
1,659 | 1,227 | 5,325 | 4,109 | 3,043 | 13 | ||||||||||||||||||||||||||
Total incentive fees | 315 | 308 | 1,340 | 1,198 | 1,130 | | ||||||||||||||||||||||||||
Total gross expenses | 1,974 | 1,535 | 6,665 | 5,307 | 4,173 | 13 | ||||||||||||||||||||||||||
Net investment income | 1,244 | 1,238 | 5,381 | 4,834 | 4,334 | (13 | ) | |||||||||||||||||||||||||
Net increase (decrease) in net assets resulting from operations | (2,257 | ) | 895 | 3,801 | 2,678 | 2,882 | (13 | ) | ||||||||||||||||||||||||
Per Share Data:
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Net increase (decrease) in net assets resulting from net investment income per share | $ | 0.16 | $ | 0.20 | $ | 0.77 | $ | 0.78 | $ | 0.84 | $ | (125.45 | ) | |||||||||||||||||||
Net increase (decrease) in net assets resulting from operations
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(0.30 | ) | 0.14 | 0.54 | 0.43 | 0.56 | (125.45 | ) | ||||||||||||||||||||||||
Distributions declared per share | 0.231 | 0.231 | 0.924 | 0.918 | 0.751 | | ||||||||||||||||||||||||||
Balance Sheet Data:
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Total assets | $ | 116,456 | $ | 105,910 | $ | 113,064 | $ | 99,449 | $ | 88,495 | $ | 427 | ||||||||||||||||||||
Total net assets | 56,638 | 52,901 | 60,644 | 53,443 | 56,474 | (11 | ) | |||||||||||||||||||||||||
Other Data:
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Number of portfolio companies at period end | 25 | 20 | 22 | 19 | 13 | | ||||||||||||||||||||||||||
Purchase of loan originations | $ | 19,894 | $ | 11,438 | $ | 70,949 | $ | 55,032 | $ | 87,529 | (4) | $ | | |||||||||||||||||||
Loan repayments | $ | 10,134 | $ | 8,092 | $ | 58,108 | $ | 34,215 | $ | 32,490 | $ | | ||||||||||||||||||||
Proceeds from loan sales | $ | | $ | | $ | | $ | 3,500 | $ | | $ | | ||||||||||||||||||||
Total return (2) | 12.42 | 9.08 | 15.12 | % | 8.71 | % | (4.03 | )% | N/A | |||||||||||||||||||||||
Weighted average yield on debt investments at period end (3) | 12.75 | 12.84 | 12.90 | % | 12.93 | % | 12.68 | % | N/A |
(1) | We did not begin operations until August 31, 2010, the date of our initial public offering. |
(2) | Total return equals the increase or decrease of ending market value over beginning market value, plus distributions, divided by the beginning market value, assuming dividend reinvestment at prices obtained under our dividend reinvestment plan. |
(3) | Weighted average yield calculation includes the input of any loans on non-accrual status as of the end of each period . |
(4) | Includes portfolio investments acquired in the initial public offering. |
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The following table sets forth certain quarterly financial data for each of the quarters for the fiscal years ended June 30, 2013 and 2012, and the first quarter of the fiscal year ended June 30, 2014. This data is derived from our unaudited financial statements. Results for any quarter are not necessarily indicative of results for the full year or for any future quarter.
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Total investment income | $ | 3,218 | $ | 3,330 | $ | 2,843 | $ | 3,100 | $ | 2,773 | $ | 2,481 | $ | 2,389 | $ | 2,399 | $ | 2,558 | ||||||||||||||||||
Total expenses before incentive fee | $ | 1,659 | $ | 1,627 | $ | 1,203 | $ | 1,269 | $ | 1,227 | $ | 1.135 | $ | 992 | $ | 1,025 | $ | 956 | ||||||||||||||||||
Total incentive fee | $ | 315 | $ | 338 | $ | 328 | $ | 365 | $ | 308 | $ | 274 | $ | 278 | $ | 275 | $ | 372 | ||||||||||||||||||
Total gross expenses | $ | 1,974 | $ | 1,966 | $ | 1,531 | $ | 1,634 | $ | 1,535 | $ | 1,409 | $ | 1,270 | $ | 1,300 | $ | 1,328 | ||||||||||||||||||
Net investment income | $ | 1,244 | $ | 1,365 | $ | 1,312 | $ | 1,466 | $ | 1,238 | $ | 1,072 | $ | 1,119 | $ | 1,099 | $ | 1,544 | ||||||||||||||||||
Net increase (decrease) in net assets resulting from operations | $ | (2,257 | ) | $ | 1,854 | $ | 1,481 | $ | (428 | ) | $ | 895 | $ | (698 | ) | $ | 1,524 | $ | 253 | $ | 1,599 | |||||||||||||||
Net increase in net assets resulting from net investment income per share | $ | 0.16 | $ | 0.18 | $ | 0.18 | $ | 0.22 | $ | 0.20 | $ | 0.17 | $ | 0.18 | $ | 0.18 | $ | 0.25 | ||||||||||||||||||
Net increase (decrease) in net assets resulting from operations
per share |
$ | (0.30 | ) | $ | 0.24 | $ | 0.20 | $ | (0.06 | ) | $ | 0.14 | $ | (0.11 | ) | $ | 0.25 | $ | 0.04 | $ | 0.26 |
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Investing in our securities involves a number of significant risks. In addition to the other information contained in this prospectus and any accompanying prospectus supplement, you should consider carefully the following information before making an investment in our securities. The risk factors described below are the principal risk factors associated with an investment in our securities, as well as those factors generally associated with an investment company with investment objectives, investment policies, capital structure or trading markets similar to ours. 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 securities could decline, and you may lose all or part of your investment.
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 estimates of the collectability of the principal and interest on our debt investments and expected realization on our equity investments, as well as 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 securities based on an overstated net asset value would pay a higher price than the value of our investments might warrant. Conversely, investors selling securities during a period in which the net asset value understates the value of our investments will receive a lower price for their securities than the value of our investments might warrant.
Our ability to achieve our investment objective depends on our ability to effectively manage and deploy capital, which depends, in turn, on our investment advisers 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 advisers 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 advisers investment committee 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
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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.
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 are not available to us, including from federal government agencies through federal rescue programs such as the U.S. Department of Treasurys Financial Stability Plan (formerly known as the Troubled Asset Relief Program) or the Small Business Administration. 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 imposes 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 depend on the diligence, skill and network of business contacts of Messrs. Stuart and Felton, who serve with Messrs. Chua and Deery as members of the investment committee of Full Circle Advisors. Messrs. Stuart and Felton, together with the other dedicated senior investment professionals available to Full Circle Advisors, evaluate, negotiate, structure, close and monitor our investments. Our future success depends on the continued service of Messrs. Stuart and Felton 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 Messrs. Stuart or Felton or any other such individual to terminate his relationship with us. The loss of Mr. Stuart, Mr. Felton or any of the other senior investment professionals who serve on Full Circle Advisors investment committee, 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 committee 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 Messrs. Stuart and Felton will dedicate a significant portion of their time to the activities of Full Circle Capital; however, they may be engaged in other business activities which could divert their time and attention in the future.
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
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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.
Our executive officers and directors, as well as the current and any 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. In addition, certain members of Full Circle Advisors investment committee presently manage Full Circle Funding, LP, a specialty lender serving smaller and lower middle-market companies. Although the existing investment funds managed by Full Circle Funding, LP, which currently consist of the Legacy Funds, are no longer making new 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.
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 Co-Chief Executive Officers and Chief Financial Officer, as well as all of our officers, directors and
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employees. Our Code of Ethics requires that all employees and directors avoid any conflict, or the appearance of a conflict, between an individuals 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).
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 Companys likelihood of default, which would impair the value of our securities. 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 companys 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.
In addition, if we repurchase our debt securities that are outstanding and such repurchase results in our recording a net gain on the extinguishment of debt for financial reporting and tax purposes, such net gain will be included in our pre-incentive fee net investment income for purposes of determining the income incentive fee payable to our investment adviser under the Investment Advisory Agreement.
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
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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 advisers income incentive fee resulting from such a general increase in interest rates.
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.
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.
Although in the past Messrs. Stuart and Felton held senior positions at a number of investment firms, their 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 Messrs. Stuart or Felton
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.
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
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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 September 30, 2013, we had approximately $21.1 million principal amount of Notes outstanding and had approximately $21.9 million outstanding under our 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 its 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.
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/or 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 advisers and our Board of Directors assessment of market and other factors at the time of any proposed borrowing.
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In addition, the Credit Facility and 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. For example, the Credit Facility requires us to maintain a minimum balance sheet leverage ratio and subjects us to prepayment fees in certain circumstances.
Illustration. The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below.
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-10.0% | -5.0% | 0.0% | 5.0% | 10.0% | ||||||||||||||||
Corresponding net return to common stockholder | -21.76 | % | -13.40 | % | -5.05 | % | 3.30 | % | 11.66 | % |
(1) | Assumes $94.6 million in total portfolio assets, $43.1 million in average debt outstanding, $56.6 million in net assets, and an average cost of funds of 6.64%. Actual interest payments may be different. |
(2) | In order for us to cover our annual interest payments on indebtedness, we must achieve annual returns on our September 30, 2013 total assets of at least 3.02%. |
As a BDC, under the 1940 Act we generally are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). Recent legislation introduced in the U.S. House of Representatives, if passed, would modify this section of the 1940 Act and increase the amount of debt that BDCs may incur by modifying the asset coverage percentage from 200% to 150%. As a result, we may be able to incur additional indebtedness in the future and therefore your risk of an investment may increase.
We will need to periodically access the capital markets to raise cash to fund new investments. We have elected to be treated as a RIC and operate in a manner so as to qualify for the U.S. federal income tax treatment applicable to RICs. Among other things, in order to maintain our RIC status, we must distribute to our stockholders on a timely basis generally an amount equal to at least 90% of our investment company taxable income (as defined by the Code), and, as a result, such distributions will not be available to fund investment originations. As a result, we must continue to borrow from financial institutions and issue additional securities to fund our growth. Unfavorable economic or capital market conditions may increase our funding costs, limit our access to the capital markets or could result in a decision by lenders not to extend credit to us. Over the past several years, 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. An inability to successfully access the capital or credit markets for either equity or debt could limit our ability to grow our business and fully execute our business strategy and could decrease our earnings, if any.
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, or a tightening or general disruption of the credit markets, would affect our ability to issue senior securities, including borrowings, and pay dividends, which could materially impair our business operations.
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
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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.
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 as a separate class 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 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.
Although we have elected to be treated as a RIC under Subchapter M of the Code, no assurance can be given that we will be able to continue to qualify for and maintain RIC status. To 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 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 make the required distributions, 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
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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. Further, the illiquidity of our investments may make them difficult or impossible to dispose in a timely manner.
If we fail to qualify for RIC tax treatment for any reason and 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.
We intend to make distributions on a monthly 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. See Regulation as a Business Development Company.
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. The base management fee we pay to our adviser may also increase in the event that the accrual of non-cash income results in an increase to the fair value of our investments. 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 in order to pay advisory fees. 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. For additional discussion regarding the tax implications of a RIC, please see Material U.S. Federal Income Tax Considerations.
We may distribute taxable dividends that are payable in part in our stock. Under certain applicable provision of the Code and the Treasury regulations, distributions payable in cash or in shares of stock at the election of shareholders are treated as taxable dividends. The Internal Revenue Service has issued private rulings indicating that this rule will apply even if the total amount of cash that may be distributed is limited to no more than 20% of the total distribution. Under these rulings, if too many shareholders elect to receive their distributions in cash, each such shareholder would receive a pro rata share of the total cash to be distributed and would receive the remainder of their distribution in shares of stock. If we decide to make any distributions consistent with these rulings that are payable in part in our stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend (whether received in cash, our stock, or combination thereof) 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
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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.
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 advisers investment committee to other types of investments in which the investment committee 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.
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 provide that the Maryland Control Share Acquisition Act shall not restrict 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.
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.
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
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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.
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 companys 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 loans 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, including warrants, 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.
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; |
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| 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; and |
| a portion of our income may be non-cash income, such as contractual PIK interest, which represents interest added to the loan balance and due at the end of the loan term. Instruments bearing PIK interest typically carry higher interest rates as a result of their payment deferral and increased credit risk. When we recognize income in connection with PIK interest, there is a risk that such income may become uncollectable if the borrower defaults. |
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 and other business disruptions. 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 their key employees could affect a portfolio companys 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 companys ability to repay its obligations to us, which may have an adverse effect on the return on, or the recovery of, our investment in these businesses. Deterioration in a borrowers financial condition and prospects may be accompanied by deterioration in the value of the loans collateral and the fair market value of the loan.
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 September 30, 2013, none of the Level 3 debt instruments in our portfolio, on a fair value basis, will fully amortize prior to maturity. In order to create liquidity to pay the final principal payment, borrowers typically must raise additional capital or sell their assets, which could potentially result in the collateral being sold for less than its fair market value. 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 borrowers 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.
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 committee 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
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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.
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.
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 borrowers business or instances where we exercise control over the borrower. It is possible that we could become subject to a lenders 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.
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 lenders 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.
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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. While recent indicators suggest improvement in the capital markets, we cannot provide any assurance that these conditions will not worsen. Under current conditions, 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.
In recent years, 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 companys 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 companys 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.
Generally, 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
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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.
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 hold a limited number of portfolio companies. For example, the 5 largest investments in our portfolio as of September 30, 2013, represented 36% of the portfolio assets of the Company. 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. A downturn in any particular industry in which we are invested could significantly impact the aggregate returns we realize.
As of September 30, 2013, our investments in the business services industry (such as companies that provide services related to data and information, information retrieval, asset recovery and energy efficiency services) represented approximately 39% of the fair value of our portfolio, our investments in the communications industry (such as companies that provide digital video satellite and broadband service to multiple dwelling units) represented approximately 16% of the fair value of our portfolio and our investments in the industrial manufacturing industry represented approximately 18% 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.
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We generally do not 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.
A portfolio companys 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 companys 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.
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 companys 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.
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 our Credit 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 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/or 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.
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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.
Certain investments that we may make 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.
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 all 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.
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
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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.
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.
The 1940 Act prohibits us from selling shares of our common stock at a price below the current net asset value per share of such stock, with certain exceptions. One such exception is prior stockholder approval of issuances below net asset value provided that our Board of Directors makes certain determinations. At our most recent Annual Stockholders Meeting, our stockholders approved a proposal that authorizes us to sell shares of our common stock below the then current net asset value per share of our common stock in one or more offerings for a period of approximately one year ending on January 17, 2014. Continued access to this exception will require approval of similar proposals at future stockholder meetings. Any decision to sell shares of our common stock below the then current net asset value per share of our common stock would be subject to the determination by our Board of Directors that such issuance is in our and our stockholders' best interests.
If we were to sell shares of our common stock below net asset value per share, such sales would result in an immediate dilution to the net asset value per share held by our existing stockholders. This dilution would occur as a result of the sale of shares at a price below the then current net asset value per share of our common stock and a proportionately greater decrease in a stockholder's interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. In addition, if we issue securities to subscribe to, convert to or purchase shares of common stock, the exercise or conversion of such securities would increase the number of outstanding shares of our common stock. Any such exercise would be dilutive on the voting power of existing stockholders, and could be dilutive with regard to dividends and our net asset value, and other economic aspects of the common stock.
Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect cannot be predicted; however, the example below illustrates the effect of dilution to existing stockholders resulting from the sale of common stock at prices below the net asset value of such shares. Please see Sales of Common Stock Below Net Asset Value for a more complete discussion of the potentially dilutive impacts of an offering at a price less than net asset value, or NAV, per share.
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Illustration: Example of Dilutive Effect of the Issuance of Shares Below Net Asset Value. Assume that Company XYZ has 1,000,000 total shares outstanding, $15,000,000 in total assets and $5,000,000 in total liabilities. The net asset value per share of the common stock of Company XYZ is $10.00. The following table illustrates the reduction to net asset value, or NAV, and the dilution experienced by Stockholder A following the sale of 40,000 shares of the common stock of Company XYZ at $9.50 per share, a price below its NAV per share.
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Prior to Sale Below NAV | Following Sale Below NAV | Percentage Change | ||||||||||
Reduction to NAV
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Total Shares Outstanding | 1,000,000 | 1,040,000 | 4.0 | % | ||||||||
NAV per share | $ | 10.00 | $ | 9.98 | (0.2 | )% | ||||||
Dilution to Existing Stockholder
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Shares Held by Stockholder A | 10,000 | 10,000 | (1) | 0.0 | % | |||||||
Percentage Held by Stockholder A | 1.00 | % | 0.96 | % | (3.8 | )% | ||||||
Total Interest of Stockholder A in NAV | $ | 100,000 | $ | 99,808 | (0.2 | )% |
(1) | Assumes that Stockholder A does not purchase additional shares in the sale of shares below NAV. |
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:
| 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 event our common stock price decreases, our stockholders may lose money.
In addition, following periods of volatility in the market price of a companys securities, securities class action litigation has often been brought against that company. Due to the potential volatility of the price of our securities, we may become the target of securities litigation in the future. Securities litigation could result in substantial costs and divert managements attention and resources from our business.
We will have significant flexibility in applying the proceeds of any offering made pursuant to this prospectus. We will also pay operating expenses, and may pay other expenses such as due diligence expenses
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of potential new investments, from net proceeds. Our ability to achieve our investment objective may be limited to the extent that the net proceeds of the offering, pending full investment, are used to pay operating expenses. In addition, we can provide you no assurance that the current offering will be successful, or that by increasing the size of our available equity capital our aggregate expenses, and correspondingly, our expense ratio, will be lowered.
In the event we issue subscription rights to purchase shares of our common stock, stockholders who do not fully exercise their rights should expect that they will, at the completion of the offer, own a smaller proportional interest in us than would otherwise be the case if they fully exercised their rights. We cannot state precisely the amount of any such dilution in share ownership because we do not know at this time what proportion of the shares will be purchased as a result of the offer.
In addition, if the subscription price is less than our net asset value per share, then our stockholders would experience an immediate dilution of the aggregate net asset value of their shares as a result of the offer. The amount of any decrease in net asset value is not predictable because it is not known at this time what the subscription price and net asset value per share will be on the expiration date of the rights offering or what proportion of the shares will be purchased as a result of the offer. Such dilution could be substantial.
We cannot assure you that the issuance of preferred stock would result in a higher yield or return to the holders of the common stock. The issuance of preferred stock would likely cause the net asset value and market value of the common stock to become more volatile. If the dividend rate on the preferred stock were to approach the net rate of return on our investment portfolio, the benefit of leverage to the holders of the common stock would be reduced. If the dividend rate on the preferred stock were to exceed the net rate of return on our portfolio, the leverage would result in a lower rate of return to the holders of common stock than if we had not issued preferred stock. Any decline in the net asset value of our investments would be borne entirely by the holders of common stock. Therefore, if the market value of our portfolio were to decline, the leverage would result in a greater decrease in net asset value to the holders of common stock than if we were not leveraged through the issuance of preferred stock. This greater net asset value decrease would also tend to cause a greater decline in the market price for the common stock. We might be in danger of failing to maintain the required asset coverage of the preferred stock or of losing our ratings, if any, on the preferred stock or, in an extreme case, our current investment income might not be sufficient to meet the dividend requirements on the preferred stock. In order to counteract such an event, we might need to liquidate investments in order to fund a redemption of some or all of the preferred stock. In addition, we would pay (and the holders of common stock would bear) all costs and expenses relating to the issuance and ongoing maintenance of the preferred stock, including higher advisory fees if our total return exceeds the dividend rate on the preferred stock. Holders of preferred stock may have different interests than holders of common stock and may at times have disproportionate influence over our affairs.
Holders of any preferred stock we might issue, voting separately as a single class, would have the right to elect two members of our Board of Directors at all times and in the event dividends become two full years in arrears would have the right to elect a majority of the directors until such arrearage is completely eliminated. In addition, preferred stockholders have class voting rights on certain matters, including changes in fundamental investment restrictions and conversion to open-end status, and accordingly can veto any such changes. Restrictions imposed on the declarations and payment of dividends or other distributions to the holders of our common stock and preferred stock, both by the 1940 Act and by requirements imposed by rating agencies, if any, or the terms of our credit facilities, if any, might impair our ability to maintain our qualification as a RIC for federal income tax purposes. While we would intend to redeem our preferred stock to the extent necessary to enable us to distribute our income as required to maintain our qualification as a RIC, there can be no assurance that such actions could be effected in time to meet the tax requirements.
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Our Notes are not secured by any of our assets or any of the assets of our subsidiaries. As a result, our Notes are effectively subordinated to any secured indebtedness we or our subsidiaries have currently incurred, such as indebtedness under the Credit Facility, and may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security). In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of our Notes. As of September 30, 2013, we had $21.9 million of outstanding borrowings under the Credit Facility.
Our Notes are obligations exclusively of Full Circle Capital Corporation and not of any of our subsidiaries. None of our subsidiaries is a guarantor of our Notes and our Notes are not required to be guaranteed by any subsidiaries we may acquire or create in the future. Any assets of our subsidiaries will not be directly available to satisfy the claims of our creditors, including holders of our Notes.
Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors (including trade creditors) and holders of preferred stock, if any, of our subsidiaries will have priority over our equity interests in such subsidiaries (and therefore the claims of our creditors, including holders of our Notes) with respect to the assets of such subsidiaries. Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our claims. Consequently, our Notes are structurally subordinated to all indebtedness and other liabilities (including trade payables) of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish as financing vehicles or otherwise. As of September 30, 2013, none of our subsidiaries had outstanding borrowings to third parties. However, our subsidiaries may incur substantial additional indebtedness in the future, all of which would be structurally senior to our Notes.
The indenture under which our Notes are issued offers limited protection to holders of our Notes. The terms of the indenture and our Notes do not restrict our or any of our subsidiaries ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have a material adverse impact on investments in our Notes. In particular, the terms of the indenture and our Notes do not place any restrictions on our or our subsidiaries ability to:
| issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to our Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to our Notes, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to our Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to our Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to us by the SEC (currently, these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowings); |
| pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to our Notes; |
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| sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets); |
| enter into transactions with affiliates; |
| create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions; |
| make investments; or |
| create restrictions on the payment of dividends or other amounts to us from our subsidiaries. |
In addition, the indenture does not require us to offer to purchase our Notes in connection with a change of control or any other event.
Furthermore, the terms of the indenture and our Notes do not protect holders of our Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow or liquidity.
Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of our Notes may have important consequences for you as a holder of our Notes, including making it more difficult for us to satisfy our obligations with respect to our Notes or negatively affecting the trading value of our Notes.
Certain of our current debt instruments include more protections for their holders than the indenture and our Notes. In addition, other debt we issue or incur in the future could contain more protections for its holders than the indenture and our Notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of our Notes.
The Notes are listed on the Nasdaq Global Market under the symbol FULLL. However, we cannot provide any assurances that an active trading market for the Notes will exist in the future or that you will be able to sell your Notes. Even if an active trading market does exist, the Notes may trade at a discount from their par value depending on prevailing interest rates, the market for similar securities, our credit ratings, if any, general economic conditions, our financial condition, performance and prospects and other factors. To the extent an active trading market does not exist, the liquidity and trading price for the Notes may be harmed. Accordingly, you may be required to bear the financial risk of an investment in the Notes for an indefinite period of time.
Any default under the agreements governing our indebtedness, including a default under the Credit Facility or other indebtedness to which we may be a party that is not waived by the required lenders or holders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on our Notes and substantially decrease the market value of our Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, including our Notes, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the Credit Facility or other debt we may incur in the future could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. In addition, any such default may constitute a default under our Notes, which could further limit our ability to repay our debt, including our Notes. If our operating performance declines, we may
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in the future need to seek to obtain waivers from the lenders under the Credit Facility or other debt that we may incur in the future to avoid being in default. If we breach our covenants under the Credit Facility or other debt and seek a waiver, we may not be able to obtain a waiver from the required lenders or holders. If this occurs, we would be in default and our lenders or debt holders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations, including those under the Credit Facility, could proceed against the collateral securing the debt. Because the Credit Facility has, and any future credit facilities will likely have, customary cross-default provisions, if the indebtedness thereunder or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.
On or after June 30, 2016, we may choose to redeem our Notes from time to time, especially when prevailing interest rates are lower than the interest rate on our Notes. If prevailing rates are lower at the time of redemption, an investor in our Notes would not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the interest rate on our Notes being redeemed. Our redemption right also may adversely impact an investors ability to sell our Notes as the optional redemption date or period approaches.
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This prospectus 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, 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. The forward-looking statements contained in this prospectus involve risks and uncertainties, including statements as to:
| our future operating results; |
| our business prospects and the prospects of our portfolio companies; |
| the impact of investments that we expect to make; |
| our contractual arrangements and relationships with third parties; |
| the dependence of our future success on the general economy and its impact on the industries in which we invest; |
| the ability of our portfolio companies to achieve their objectives; |
| our expected financings and investments; |
| the adequacy of our cash resources and working capital; and |
| the timing of cash flows, if any, from the operations of our portfolio companies. |
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 when we elect to use leverage as part of our investment strategy; |
| risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and |
| the risks, uncertainties and other factors we identify in Risk Factors and elsewhere in this prospectus 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. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this prospectus 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 prospectus. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. However, we will update this prospectus to reflect any material changes to the information contained herein. The forward-looking statements in this prospectus are excluded from the safe harbor protection provided by Section 27A of the Securities Act and Section 21E of the Exchange Act.
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We intend to use the net proceeds from the sale of our securities pursuant to this prospectus for general corporate purposes, which may include investing in new portfolio companies in accordance with our investment objective and strategies described in this prospectus, the repayment of outstanding indebtedness, acquisitions and for other general working capital purposes. The supplement to this prospectus relating to an offering will more fully identify the use of the proceeds from such offering.
We estimate that it will take three to six months for us to substantially invest the net proceeds of any offering made pursuant to this prospectus, depending on the availability of attractive opportunities and market conditions. However, we can offer no assurance that we will be able to achieve this goal.
Pending these uses, we will invest such net proceeds primarily in cash, cash equivalents, and U.S. government securities or other high-quality debt investments that mature in one year or less consistent with our business development company election and our election to be taxed as a RIC, at yields significantly below those we expect to earn on our other portfolio investments. The management fee payable by us to our investment adviser may not be reduced while our assets are invested in these temporary investments.
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Our common stock is traded on the NASDAQ Global Market under the symbol FULL. The following table sets forth, for each fiscal quarter during the last two fiscal years and the current fiscal year, the net asset value (NAV) per share of our common stock, the high and low sales prices for our common stock, the premium (discount) of sales prices to NAV per share and distributions per share.
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Price Range |
Premium
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Fiscal 2014
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Second Quarter (through December 6, 2013) | * | $ | 8.60 | $ | 7.42 | * | * | $ | 0.201 | |||||||||||||||
First Quarter | 7.48 | 8.75 | 7.65 | 17 | % | 2 | % | 0.231 | ||||||||||||||||
Fiscal 2013
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Fourth Quarter | $ | 8.01 | 8.10 | 7.48 | 1 | % | (7 | %) | 0.231 | |||||||||||||||
Third Quarter | 8.00 | 8.04 | 7.30 | 1 | % | (9 | )% | 0.231 | ||||||||||||||||
Second Quarter | 8.03 | 8.50 | 6.68 | 6 | % | (17 | )% | 0.231 | ||||||||||||||||
First Quarter | 8.51 | 8.25 | 7.60 | (3 | )% | (11 | )% | 0.231 | ||||||||||||||||
Fiscal 2012
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Fourth Quarter | 8.59 | 7.76 | 7.09 | (10 | )% | (17 | )% | 0.231 | ||||||||||||||||
Third Quarter | 8.94 | 8.15 | 6.99 | (9 | )% | (22 | )% | 0.231 | ||||||||||||||||
Second Quarter | 8.92 | 7.24 | 6.55 | (19 | )% | (27 | )% | 0.231 | ||||||||||||||||
First Quarter | 9.11 | 8.15 | 6.09 | (11 | )% | (33 | )% | 0.231 |
(1) | Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low sales prices. The net asset values shown are based on outstanding shares at the end of each period. |
(2) | Calculated as the respective high or low sales price less NAV, divided by NAV. |
(3) | Represents the cash distribution declared in the specified quarter. From our initial public offering through the fourth fiscal quarter of 2011, we paid quarterly dividends, but in the first fiscal quarter of 2012 we began paying, and we intend to continue paying, monthly dividends to our stockholders. Our monthly dividends, if any, will be determined by our Board of Directors on a quarterly basis. |
* | Not determinable at the time of filing. |
On December 6, 2013, the last reported sales price of our common stock was $7.48 per share.
Shares of BDCs may trade at a market price that is less than the value of the net assets attributable to those shares. The possibility that our shares of common stock will trade at a discount from net asset value or at premiums that are unsustainable over the long term are separate and distinct from the risk that our net asset value will decrease. Since our initial public offering in September 2010, our shares of common stock have traded at both a discount and premium to the net assets attributable to those shares. As of December 6, 2013, our shares of common stock traded at a price equal to the net assets attributable to those shares based upon our net asset value as of September 30, 2013. It is not possible to predict whether the shares offered hereby will trade at, above, or below net asset value.
We currently intend to distribute a minimum of 90% of our ordinary income and net realized short-term capital gains in excess of realized net long-term capital losses, if any, to our stockholders. The amount of our distributions is determined by our Board of Directors. To the extent our taxable earnings for any fiscal year fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a tax return of capital to our stockholders. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our taxable ordinary income or capital gains. In this regard, $1,089,055 of our distributions during the year ended June 30, 2013 constituted a return of capital
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to our stockholders. Stockholders should read any written disclosure accompanying a dividend payment carefully and should not assume that the source of any distribution is our taxable ordinary income or capital gains.
There can be no assurance that we will achieve investment results or maintain a tax status that will permit any particular level of dividend payment. Our ability to make distributions is limited by the asset coverage requirements under the 1940 Act. For a more detailed discussion, see Regulation as a Business Development Company.
We have adopted a dividend reinvestment plan. If your shares of common stock are registered in your own name, your distributions will automatically be reinvested under our dividend reinvestment plan in additional whole and fractional shares of common stock, unless you opt out of our dividend reinvestment plan by delivering a written notice to our dividend paying agent. If your shares are held in the name of a broker or other nominee, you should contact the broker or nominee for details regarding opting out of our dividend reinvestment plan.
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The information contained in this section should be read in conjunction with the Selected Financial and Other Data and our Financial Statements and notes thereto appearing elsewhere in this prospectus. In addition to historical information, the following discussion and other parts of this prospectus contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under Risk Factors and Forward-Looking Statements and Projections appearing elsewhere herein.
We are an externally managed non-diversified closed-end management investment company formed in April 2010, and have elected to be treated as a business development company under the 1940 Act. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We are managed by Full Circle Advisors, and Full Circle Service Company provides the administrative services necessary for us to operate.
We invest primarily in 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. 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. 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 to mitigate risk against loss of principal should a borrower default. Our stretch senior secured loans typically possess a greater advance rate against the borrowers assets and cash flow, and accordingly carry a higher interest rate and/or greater equity participation, than traditional senior secured loans. This stretch senior secured loan instrument can provide borrowers with a more efficient and desirable solution than a senior bank line combined with a separate second lien or mezzanine loan obtained from another source. We also may 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 and after the 2008/2009 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 and/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.
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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.
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., FC New Media Inc., TransAmerican Asset Servicing Group, Inc., FC New Specialty Foods, Inc., and FC Takoda Holdings, LLC our only wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
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 Capitals 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
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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 Companys 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.
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. Realized gain (loss) on the sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their stated costs.
From time to time the Company may enter into a new transaction with a portfolio company as a result of the sale, merger, foreclosure, bankruptcy or other corporate event involving the portfolio company. In such cases, the Company may receive newly-issued notes, securities and/or other consideration in exchange for, or resulting from, the cancellation of the instruments previously held by the Company with regard to that portfolio company. In such cases, the Company may experience a realized loss on the instrument being sold or cancelled, and, concurrently, an elimination of any previously recognized unrealized losses on the portfolio investment. Such elimination of unrealized loss is included on the Statements of Operations as an increase in the Change in Unrealized Gain (Loss) on Investments.
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 Companys 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 Companys 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.
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 Companys Board of Directors.
The Companys 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. These nonpublic investments are included in Level 3 of the fair value hierarchy.
The Companys Board of Directors ascribes value to warrants based on fair value analyses that may include discounted cash flow analyses, option pricing models, comparable analyses and other techniques as deemed appropriate.
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The Companys assets measured at fair value on a recurring basis subject to the requirements of ASC Topic 820 at September 30, 2013 and June 30, 2013, were as follows:
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Senior and Subordinated Loans, at fair value | $ | | $ | | $ | 88,150,800 | $ | 88,150,800 | ||||||||
Investments in private companies, at fair value | | | 6,355,560 | 6,355,560 | ||||||||||||
Investments in securities, at fair value | | | 114,824 | 114,824 | ||||||||||||
US Treasury Securities, at fair value (1) | 15,000,120 | | | 15,000,120 | ||||||||||||
$ | 15,000,120 | $ | | $ | 94,621,184 | $ | 109,621,304 |
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Senior and Subordinated Loans, at fair value | $ | | $ | | $ | 81,195,958 | $ | 81,195,958 | ||||||||
Investments in private companies, at fair value | | | 6,784,435 | 6,784,435 | ||||||||||||
Investments in other securities, at fair value | | | 194,108 | 194,108 | ||||||||||||
$ | | $ | | $ | 88,174,501 | $ | 88,174,501 |
(1) | U.S. Treasury Securities were purchased and temporarily held in connection with compliance with RIC diversification requirements under Subchapter M of the Code. |
During the three months ended September 30, 2013 and the year ended June 30, 2013, there were no transfers in or out of levels.
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 unamortized loan origination, closing and commitment fees are recorded as interest income.
Dividend income is recorded on the ex-dividend date.
Structuring fees, board fees, excess deal deposits, prepayment fees and similar fees are recognized as Other Income as earned, usually when received. Other fee income, including annual fees and monitoring fees are included in Other Income.
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.
We believe that the current credit environment provides favorable opportunities to achieve attractive risk-adjusted returns on the types of senior secured loans and other investments we may 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.
47
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 are 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.
Our investment adviser agreed to waive the portion of the base management fee that exceeded 1.50% of Full Circle Capitals gross assets, as adjusted, until August 31, 2011 when such waiver expired (the Management Fee Waiver). In addition, our investment adviser 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 (the Expense Reimbursement Agreement). This agreement was extended through September 30, 2011 and expired on such date.
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 following is a summary of our quarterly investment activity since the completion of our initial public offering. Such amounts are not inclusive of our holdings of United States Treasury Bills.
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|||||||||
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 (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 | % | ||||||||
January 1, 2011 through March 31, 2011 | 4.0 | 19.9 | 12.39 | % | ||||||||
April 1, 2011 through June 30, 2011 | 9.6 | 1.2 | 12.68 | % | ||||||||
Fiscal 2011 | 90.0 | 32.6 | N/A | |||||||||
July 1, 2011 through September 30, 2011 | 27.7 | 15.9 | 12.89 | % | ||||||||
October 1, 2011 through December 31, 2011 | 5.9 | 9.4 | 13.04 | % | ||||||||
January 1, 2012 through March 31, 2012 | 6.7 | 5.7 | 12.98 | % | ||||||||
April 1, 2012 through June 30, 2012 | 15.0 | 7.1 | 12.93 | % | ||||||||
Fiscal 2012 | 55.3 | 38.1 | N/A |
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|
|
|||||||||
Time Period |
Acquisitions
(1)
(dollars in millions) |
Dispositions
(2)
(dollars in millions) |
Weighted Average Interest Rate
of Portfolio at End of Period |
|||||||||
July 1, 2012 through September 30, 2012 | 11.4 | 8.1 | 12.84 | % | ||||||||
October 1, 2012 through December 31, 2012 | 29.1 | 25.1 | 12.55 | % | ||||||||
January 1, 2013 through March 31, 2013 | 22.4 | 12.1 | 12.69 | % | ||||||||
April 1, 2013 through June 30, 2013 | 12.2 | 12.8 | 12.90 | % | ||||||||
Fiscal 2013 | 75.1 | 58.1 | N/A | |||||||||
July 1, 2013 through September 30, 2013 | 20.0 | 10.1 | 12.75 | % | ||||||||
Since inception | $ | 240.4 | $ | 138.9 | N/A |
(1) | Includes new deals, additional fundings, refinancings (inclusive of those on revolving credit facilities) and payment in kind PIK interest. |
(2) | Includes scheduled principal payments, prepayments, sales and repayments (inclusive of those on revolving credit facilities). |
The primary investment activities for the three months ended September 30, 2013 were fundings and repayments under the revolving credit facilities and the funding of the following loan facilities:
| On August 1, 2013, the Company funded $4.5 million of a $9.0 million senior secured credit facility to Infinite Aegis Group, LLC. |
| On September 4, 2013, the Company funded $1.5 million of a $5.0 million senior secured credit facility to Franklin Place Shops Red, LLC. |
| On September 30, 2013, the Company funded an additional $2.5 million of a $3.3 million senior secured credit facility to CPX, Inc. |
The primary investment activities for the year ended June 30, 2013, were fundings under the revolving credit facilities and the funding of the following loan facilities:
| On September 7, 2012 the Company originated a $3,250,000 credit facility, comprised of a $1,000,000 senior secured term loan and a $2,250,000 senior secured revolving credit facility, both bearing interest at LIBOR (1-month) plus 12.25% to Global Energy Efficiency Holdings Inc. (GEE). GEE provides energy efficiency products, installation and maintenance services to small and medium sized businesses in multiple food sales and service industries. |
| On September 27, 2012, the Company funded an additional $600,000 to iMedX, Inc. as part of the Companys existing senior secured term loan. |
| On December 19, 2012, Ygnition Networks, Inc. (Ygnition) entered into transactions which involved the sale of substantially all of its assets to Access Media 3, Inc. (Access Media 3) and to New Media West, LLC (New Media West), an affiliate of the Company and of Access Media 3. Pursuant to this transaction the Company, in exchange for its secured interest in the Ygnition assets, received: (i) an equity interest in New Media West, valued at $3.60 million, (ii) a $5.80 million five year note due from New Media West bearing interest at 9%, and (iii) cash consideration from Access Media 3 valued at $0.40 million. Such amounts are subject to final purchase price adjustments, which through June 30, 2013 aggregated $0.8 million resulting in an additional $0.2 million realized loss. At December 19, 2012, immediately prior to these transactions, the Company had $13.00 million of debt outstanding to Ygnition, held at approximately $12.05 million. As a result of the transaction, the Company recognized a loss of $2.20 million, comprised of a realized loss of $3.03 million on the disposition of the Ygnition debt and the reversal of a previously unrealized loss of $0.83 million. |
49
| On December 28, 2012, the Company funded $3,900,000 to SOLEX Fine Foods, LLC and Catsmo, LLC, as co-borrower, as a first out participation under a $5,600,000 senior secured term loan bearing interest of LIBOR (1-month) plus 12.25% and maturing December 28, 2016. The Company also purchased $250,000 of common equity units as part of the transaction. SOLEX Fine Foods, LLC and Catsmo, LLC are providers of specialty foods in New York City and the surrounding areas. |
| On March 28, 2013, the Company funded $5,500,000 of a $6,000,000 senior secured credit facility to Modular Process Control, LLC, an energy efficiency services firm focused on energy efficiency solutions for industrial companies. |
| On March 31, 2013, the Company entered into a $4,385,000 senior secured credit facility with Pristine Environments, Inc., which provides building cleaning and maintenance services to large commercial and government clients. |
| On April 15, 2013, the Company funded $1.4 million of a $1.7 million senior secured credit facility to Takoda Resources, Inc., a provider of seismic data acquisition services in Canada and the United States. The senior secured note bears interest at 16.00% and has a final maturity of April 1, 2016. |
Additionally, the Company received proceeds, including scheduled repayments, prepayments, and repayments under revolving credit facilities, during the year ended June 30, 2013 related to the following companies:
| On January 31, 2013, the senior secured credit facility with The Selling Source, LLC, an information and data services company was paid off at par value of $2,017,700. On February 1, 2013, the Company funded $4,000,000 in a new senior secured credit facility with The Selling Source, LLC. |
| During February 2013, the senior secured credit facility with European Evaluators, LLC, an art dealer, was paid off at par value of $615,000. |
| During May 2013, the senior secured term loan with Matt Martin Real Estate Management, LLC, was paid off at par value of $3,140,000, plus accrued interest and fees. |
The primary investment activities for the year ended June 30, 2012, were fundings under the revolving credit facilities and the funding of the following loan facilities:
| On August 3, 2011, the Company invested $1,000,000 in a revolving loan bearing interest at LIBOR (1-month) plus 9.00% and $6,250,000 in a term loan bearing interest at LIBOR (1-month) plus 13.00% to ProGrade Ammo Group, LLC as part of an $8,250,000, three year loan facility. ProGrade Ammo Group, LLC provides ammunition, accessories and components to retail outlets, ammunition manufacturers and law enforcement agencies. |
| On September 14, 2011, the Company invested $300,000 in a revolving loan bearing interest at LIBOR (1-month) plus 9.75%, $4,000,000 in a term loan bearing interest at LIBOR (1-month) plus 11.50% and $4,500,000 in a term loan bearing interest at LIBOR (1-month) plus 13.00% to Coast Plating, Inc. as part of a $10,500,000 three year loan facility. Coast Plating, Inc. provides metal processing and metal finishing services for the aerospace and defense industries. |
| On September 20, 2011, the Company invested $5,785,000 in a term loan bearing interest at LIBOR plus 14.25% (15.00% floor) and received equity interests in The Finance Company, LLC as part of a $7,000,000 four year loan facility. The Finance Company, LLC, through its subsidiaries which operate under the Cashwell trade name, provides consumer finance loan programs in South Carolina. |
| On September 20, 2011, the Company invested $500,000 in a revolving loan bearing interest at LIBOR (1-month) plus 9.85% and $2,500,000 in a term loan bearing interest at LIBOR (1-month) plus 14.75% to iMedX, Inc. as part of a $4,500,000 loan facility. iMedX, Inc. is a medical transcription services company that addresses the small physician practice and medical clinic markets. |
50
| On February 28, 2012, the Company invested an additional $400,000 in a term loan to iMedX, Inc. as part of the $4,500,000 loan facility. |
| On March 22, 2012, the Company invested $615,000 in a term loan to European Evaluators, LLC bearing interest at LIBOR (1-month) plus 11.70%. European Evaluators is a dealer in fine art. |
| On March 31, 2012, the Company invested an additional $1,000,000 in a term loan to US Path Labs, LLC and extended the maturity of the loan agreement to March 30, 2014. |
| On April 30, 2012, the Company invested $4,250,000 in a term loan bearing interest at LIBOR (1-month) plus 12.75% to Matt Martin Real Estate Management, LLC. Matt Martin Real Estate Management, LLC is a real property marketing and management company that provides services in multiple regions of the United States of America. |
| On May 7, 2012, the Company invested $5,000,000 in a full recourse accounts receivable facility with Employment Plus, Inc. Employment Plus, Inc. provides temporary staffing services for multiple industries. |
Additionally, the Company received proceeds, including sales proceeds and prepayments, and repayments under revolving credit facilities during the year ended June 30, 2012 related to the following companies:
| On August 15, 2011, VaultLogix, LLC pre-paid, at par, its loan from the Company, remitting a total of $5,023,333 to the Company for outstanding principal and interest. |
| On September 1, 2011, West World Media, LLC pre-paid, at par, its loan from the Company, remitting a total of $6,992,171 to the Company for outstanding principal, interest and fees. |
| On November 30, 2011, the Company sold participations in Coast Plating, Inc.s Term A and Term B loans to a third party for an aggregate of $3,500,000, which represented par value for the loans sold. |
| On December 31, 2011, the Company received a principal prepayment of $964,276 from The Selling Source, LLC based upon the borrowers cash flow, as defined in their loan documents. |
| On January 31, 2012, Iron City Brewing, LLC repaid, at par, its loan from the Company, remitting a total of $521,666 of outstanding principal. |
The following is a reconciliation of the investment portfolio for the three months ended September 30, 2013, and for the year ended June 30, 2013:
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|
|
||||||
Three Months Ended
September 30, 2013 |
Year Ended
June 30, 2013 |
|||||||
Beginning Investment Portfolio | $ | 88,174,501 | $ | 94,846,770 | ||||
Portfolio Investments Acquired | 20,001,948 | 75,145,289 | ||||||
Treasury Purchases (1) | 15,000,180 | 62,001,462 | ||||||
Amortization of fixed income premiums and discounts | 80,539 | 368,279 | ||||||
Portfolio Investments Repaid | (10,134,420 | ) | (58,107,861 | ) | ||||
Sales of Treasury securities (1) | | (84,500,000 | ) | |||||
Net Unrealized Appreciation (Depreciation) | (2,822,891 | ) | 2,636,310 | |||||
Net Realized Losses | (678,553 | ) | (4,215,748 | ) | ||||
Ending Investment Portfolio | $ | 109,621,304 | $ | 88,174,501 |
(1) | U.S. Treasury Securities were purchased and temporarily held in connection with complying with RIC diversification requirements under Subchapter M of the Code. |
During the three months ended September 30, 2013, we recorded net unrealized depreciation of $2,822,891. This consisted of $2,207,383 of net unrealized depreciation on debt investments and $615,508 of net unrealized depreciation on equity investments.
51
During the year ended June 30, 2013, we recorded net unrealized appreciation of $2,636,310. This consisted of $1,005,263 of net unrealized appreciation on debt investments and $1,631,047 of net unrealized appreciation on equity investments. On December 19, 2012, Ygnition Networks, Inc. (Ygnition) entered into transactions which involved the sale of substantially all of its assets to Access Media 3, Inc. (Access Media 3) and to New Media West, LLC (New Media West), an affiliate of the Company and of Access Media 3. Pursuant to this transaction the Company, in exchange for its secured interest in the Ygnition assets, received: (i) an equity interest in New Media West, valued at, $3,600,000, (ii) a $5,800,000 five year note from New Media West bearing interest of 9% annually, and (iii) cash consideration from Access Media 3 valued at $412,483. Such amounts are subject to final purchase price adjustments, which through June 30, 2013 aggregated $0.8 million resulting in an additional $0.2 million realized loss. At December 19, 2012, immediately prior to these transactions, the Company had $13,000,000 of debt outstanding to Ygnition, held at approximately $12,050,000. As a result of the transaction, the Company recognized a loss of $2,203,806, comprised of a realized loss of $3,031,842 on the disposition of the Ygnition debt and the reversal of a previously unrealized loss of $828,036. The Company recorded unrealized appreciation of $994,164 on its equity investment in The Finance Company, LLC. The Company recorded unrealized depreciation of $900,925 on its loan to TransAmerican Asset Servicing Group, LLC.
During the year ended June 30, 2012, we recorded net unrealized depreciation of $1,979,965. This consisted of $2,535,306 of net unrealized depreciation on debt investments and $555,341 of net unrealized appreciation on equity investments. Equisearch Acquisition, Inc., (Equisearch), filed for protection under Chapter 7 of the U.S. Bankruptcy Code. At June 30, 2012, the Company had an investment in Equisearch of $2,580,201 through a first lien, senior secured loan facility, which had a fair value of $1,959,363. For the year ended June 30, 2012, the Company recognized an unrealized loss on ProGrade Ammunition Group, LLC of $1,476,339.
The following table shows the fair value of our portfolio of investments by asset class as of September 30, 2013, and June 30, 2013, excluding United States Treasury Bills of approximately $15.0 million and $0.0 million, respectively:
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|
|
|
|
||||||||||||
September 30, 2013 (Unaudited) | June 30, 2013 (Audited) | |||||||||||||||
Investments at
Fair Value (in millions) |
Percentage
of Total Portfolio |
Investments at
Fair Value (in millions) |
Percentage
of Total Portfolio |
|||||||||||||
Senior Secured Loans | $ | 86.8 | 91.7 | % | $ | 78.2 | 88.7 | % | ||||||||
Subordinated Secured Loans | 1.3 | 1.4 | 3.0 | 3.4 | ||||||||||||
Limited Liability Company Interests | 6.4 | 6.8 | 6.8 | 7.7 | ||||||||||||
Warrants | 0.1 | 0.1 | 0.2 | 0.2 | ||||||||||||
Total | $ | 94.6 | 100.0 | % | $ | 88.2 | 100.0 | % |
At September 30, 2013, the 22 borrowers whose debt investments are included in the table above averaged a loan to value ratio of approximately 61% (i.e., each $61 of loan value outstanding is secured by $100 of collateral value).
At June 30, 2013, the 19 borrowers whose debt investments are included in the table above averaged a loan to value ratio of approximately 60% (i.e., each $60 of loan value outstanding is secured by $100 of collateral value).
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The following table shows the fair value of our portfolio of investments by industry, as of September 30, 2013, and June 30, 2013, excluding United States Treasury Bills of approximately $15.0 million and $0.0 million, respectively:
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|
|
|
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September 30, 2013 (Unaudited) | June 30, 2013 (Audited) | |||||||||||||||
Investments at
Fair Value (in millions) |
Percentage of
Total Portfolio |
Investments at
Fair Value (in millions) |
Percentage of
Total Portfolio |
|||||||||||||
Cable TV/Broadband Services | $ | 15.1 | 16.0 | % | $ | 15.9 | 18.0 | % | ||||||||
Energy Efficiency Services | 11.5 | 12.2 | 11.7 | 13.2 | ||||||||||||
Consumer Financing | 7.0 | 7.4 | 6.9 | 7.8 | ||||||||||||
Munitions | 6.0 | 6.3 | 6.2 | 7.0 | ||||||||||||
Staffing Services | 5.1 | 5.4 | 5.0 | 5.7 | ||||||||||||
Medical Transcription Services | 5.1 | 5.4 | 5.2 | 5.9 | ||||||||||||
Healthcare Billing and Collections | 5.0 | 5.2 | | | ||||||||||||
Aerospace Parts Plating and Finishing | 4.7 | 5.0 | 4.8 | 5.5 | ||||||||||||
Information and Data Services | 4.2 | 4.5 | 4.2 | 4.8 | ||||||||||||
Food Distributors and Wholesalers | 3.9 | 4.1 | 4.0 | 4.6 | ||||||||||||
Building Cleaning and Maintenance Services | 3.8 | 4.0 | 3.9 | 4.4 | ||||||||||||
Radio Broadcasting | 3.8 | 4.0 | 5.6 | 6.4 | ||||||||||||
Industrial Metal Treatings | 3.7 | 3.9 | 3.8 | 4.2 | ||||||||||||
Healthcare Services | 3.4 | 3.6 | 3.5 | 3.9 | ||||||||||||
Industrial Molded Products | 2.5 | 2.6 | | | ||||||||||||
Outdoor Advertising Services | 2.3 | 2.4 | 2.3 | 2.6 | ||||||||||||
Asset Recovery Services | 2.2 | 2.3 | 1.5 | 1.7 | ||||||||||||
Equipment Rental Services | 2.1 | 2.3 | 2.2 | 2.6 | ||||||||||||
Geophysical Surveying and Mapping Services | 1.7 | 1.8 | 1.5 | 1.7 | ||||||||||||
Real Estate Investment Trust | 1.5 | 1.6 | | | ||||||||||||
Total | $ | 94.6 | 100.0 | % | $ | 88.2 | 100.0 | % |
We have adopted a credit grading system to monitor the quality of our debt investment portfolio. As of September 30, 2013, our portfolio had a weighted average grade of 3.11, based upon the fair value of the debt investments in the portfolio, excluding United States Treasury Bills of approximately $15.0 million. Equity securities are not graded. This was a change of 0.01 from the weighted average grade of 3.12 at June 30, 2013.
At September 30, 2013, our debt investment portfolio was graded as follows:
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|||||||||||||
September 30, 2013 (Unaudited) | ||||||||||||||||
Grade | Summary Description | Fair Value |
Percentage of Total
Portfolio |
|||||||||||||
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). | $ | | | % | |||||||||||
2 | The portfolio company is performing above expectations and the risk profile is generally favorable. | 8,425,349 | 8.90 | |||||||||||||
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. | 62,563,504 | 66.12 | |||||||||||||
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. | 15,885,614 | 16.79 | |||||||||||||
5 | The investment is performing well below expectations and is not anticipated to be repaid in full. | 1,276,333 | 1.35 | |||||||||||||
$ | 88,150,800 | 93.16 | % |
53
At June 30, 2013, our debt investment portfolio was graded as follows:
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|
|||||||||||||
June 30, 2013 (Audited) | ||||||||||||||||
Grade | Summary Description | Fair Value |
Percentage of Total
Portfolio |
|||||||||||||
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). | $ | | | % | |||||||||||
2 | The portfolio company is performing above expectations and the risk profile is generally favorable. | 1,412,666 | 1.60 | |||||||||||||
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. | 68,397,783 | 77.58 | |||||||||||||
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. | 11,385,509 | 12.91 | |||||||||||||
5 | The investment is performing well below expectations and is not anticipated to be repaid in full. | | | |||||||||||||
$ | 81,195,958 | 92.09 | % |
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.
Total investment income includes interest and dividend income on our investments as well as other income, which is comprised entirely of fee income for the three months ended September 30, 2013. Fee income consists principally of administrative fees, prepayment fees, structuring fees and unused line fees.
Total investment income for the three months ended September 30, 2013, was $3,218,186. This amount consisted of $2,992,760 of interest income from portfolio investments (which included no PIK interest), $34,411 of dividend income and $191,015 of fee income. Dividend income was solely earned from our equity investment in The Finance Company, LLC.
Total investment income for the three months ended September 30, 2012, was $2,773,303. This amount consisted of $2,579,098 of interest income from portfolio investments (which included no PIK interest), $34,097 of dividend income and $160,108 of fee income. Dividend income was solely earned from our equity investment in The Finance Company, LLC.
The increase in interest income for the three months ended September 30, 2013 relative to the same time period in 2012 was primarily due to growth in the size of our portfolio. The dividend income for the three months ended September 30, 2013 compared with the dividend income for the three months ended September 30, 2012, remained consistent reflecting distributions related to the Companys investment in The Finance Company, LLC. The increase in fee income, which can fluctuate, for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012 was primarily a result of structuring fees earned from the origination of new investments during the quarter.
Operating expenses for the three months ended September 30, 2013, were $1,973,959.
Operating expenses for the three months ended September 30, 2012, were $1,535,058.
The increase in our net operating expenses for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012 is primarily due to the increase in interest expense from
54
greater utilization of our Credit Facility, as well as the issuance of the Notes (as defined below), to fund portfolio growth, and an increase in management fees due to a larger investment portfolio.
Net investment income for the three months ended September 30, 2013, was $1,244,227. Net investment income per share was $0.16 for the period.
Net investment income for the three months ended September 30, 2012, was $1,238,245. Net investment income per share was $0.20 for the period.
The increase in net investment income for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012 was primarily due to increased interest income as the Company had greater portfolio assets outstanding as compared to the same period in 2012. Such amounts were offset by increased interest expense from greater outstanding borrowings and greater management fees resulting from a larger portfolio and greater pre-incentive fee net investment income during the period.
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 September 30, 2013, we recorded a realized loss of $678,485 primarily in connection with the continued disposition of our investment in Ygnition Networks, Inc. Realized loss per share for the three months ended September 30, 2013 was $0.09.
During the three months ended September 30, 2012, we recorded a realized loss of $860,667, primarily in connection with the conversion of our senior secured loan in Equisearch Acquisition, Inc. to a senior secured term loan in TransAmerican Asset Servicing Group, LLC upon the finalization of Equisearch Acquisitions, Inc.s bankruptcy proceedings. Realized loss per share was $0.14 for the period.
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. See Critical Accounting Policies Change in Unrealized Gain (Loss) on Investments.
Change in unrealized loss on investments was $2,822,891, or $0.37 per share, for the three months ended September 30, 2013. The change in unrealized depreciation is primarily due to the depreciation of our senior secured loans to Modular Process Control, LLC and MDU Communications (USA) Inc. and our second lien loan to Blackstrap Broadcasting, LLC. This was partially offset by the appreciation of our senior secured loan to TransAmerican Asset Servicing Group, LLC. The overall change in unrealized loss consisted of $2,207,383 of net unrealized depreciation on debt investments and $615,508 of net unrealized depreciation on equity investments.
Change in unrealized gain on investments was $517,313, or $0.08 per share, for the three months ended September 30, 2012. The change in unrealized appreciation was primarily the result of the conversion of our senior secured loan in Equisearch Acquisition, Inc. to a senior secured term loan in TransAmerican Asset Servicing Group, LLC upon the finalization of Equisearch Acquisition, Inc.s bankruptcy proceedings. The overall change in unrealized gain consisted of $133,634 of net unrealized appreciation on debt investments and $383,679 of net unrealized appreciation on equity investments.
Total investment income includes interest and dividend income on our investments and other income, which is comprised of fee income. Fee income consists principally of administrative fees, prepayment fees, structuring fees and unused line fees.
Total investment income for the year ended June 30, 2013 was $12,046,023. This amount consisted of $10,492,257 of interest income from portfolio investments (which included $0 of PIK interest), $223,474 of dividend income and $1,330,292 of fee income.
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Total investment income for the year ended June 30, 2012 was $9,827,011. This amount consisted of $8,980,837 of interest income from portfolio investments (which included $68,842 of PIK interest), $57,216 of dividend income and $788,958 of fee income.
The increase in interest income for the year ended June 30, 2013 relative to the year ended June 30, 2012 was due to a larger portfolio of interest earning assets. The decrease in PIK interest for the year ended June 30, 2013 as compared to the year ended June 30, 2012 was due to the fact that the Company received a prepayment from West World Media, LLC and ceased generating PIK interest from any of its portfolio investments. The increase in dividend income for the year ended June 30, 2013 as compared to the year ended June 30, 2012 was primarily due to the Company receiving regular dividend payments from its investment in The Finance Company, LLC.
Gross operating expenses for the year ended June 30, 2013 were $6,665,442.
Gross operating expenses for the year ended June 30, 2012 were $5,307,300. Net operating expenses (offset by the waived portion of the base management fee and the accrual for the expense reimbursement) for the year ended June 30, 2012, were $4,993,508.
The increase in net operating expenses for the year ended June 30, 2013 relative to the year ended June 30, 2012 was partially due to increased interest expense and increased management and incentive fees resulting from the Company having a larger portfolio and higher interest and net investment income during the period. Additionally, net operating expenses increased due to the expiration of the Expense Reimbursement Agreement and Management Fee waiver.
Net investment income was $5,380,581, or $0.77 per share for the year ended June 30, 2013.
Net investment income was $4,833,503, or $0.78 per share for the year ended June 30, 2012.
The increase in Net Investment Income for the year ended June 30, 2013 as compared to the same period in 2012 was primarily due to the increase in interest income offset by increased interest expense and management and incentive fees resulting from the Company having a larger portfolio and higher interest and pre-incentive fee net investment income during the period.
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 year ended June 30, 2013, we recorded a realized loss of $4,215,748, primarily in connection with the disposition of our investment in Ygnition Networks, Inc., and the conversion of our senior secured loan in Equisearch Acquisition, Inc. to a senior secured term loan in TransAmerican Asset Servicing Group, LLC upon the finalization of Equisearch Acquisitions, Inc.s bankruptcy proceedings. Realized loss per share for the year ended June 30, 2013 was $0.60.
During the year ended June 30, 2012, we recorded a realized loss of $175,366, primarily in connection with a realized loss on our investment in Texas Westchester Financial, LLC and a gain related to the repayment of our loan to West World Media, LLC. Realized loss per share for the year ended June 30, 2012 was $0.03.
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. See Critical Accounting Policies Change in Unrealized Gain (Loss) on Investments.
During the year ended June 30, 2013, we recorded net unrealized appreciation of $2,636,310. This consisted of $1,005,263 of net unrealized appreciation on debt investments and $1,631,047 of net unrealized appreciation on equity investments. Change in unrealized appreciation per share was $0.37 for the year ended
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June 30, 2013, and resulted primarily from appreciation of the Companys equity investment in The Finance Company, LLC, as well as the disposition of our investment in Ygnition Networks, Inc., and the conversion of our senior secured loan in Equisearch Acquisition, Inc. to a senior secured term loan in TransAmerican Asset Servicing Group, LLC upon the finalization of Equisearch Acquisitions bankruptcy proceedings.
During the year ended June 30, 2012, we recorded net unrealized depreciation of $1,979,965. This consisted of $2,535,306 of net unrealized depreciation on debt investments and $555,341 of net unrealized appreciation on equity investments. Change in unrealized depreciation per share was $0.32 for the year ended June 30, 2012. On January 19, 2012, Equisearch Acquisition, Inc. (Equisearch) filed for protection under Chapter 7 of the U.S. Bankruptcy Code. At that date, the Company had an investment in Equisearch of $2,580,201 through a first lien, senior secured loan facility. At June 30, 2012 the fair value of our investment in Equisearch was $1,959,363. For the year ended June 30, 2012, the Company recognized an unrealized loss on ProGrade Ammunition Group, LLC of $1,476,339.
Total investment income includes interest and dividend income on our investments and other income, which is comprised of fee income. Fee income consists principally of administrative fees, prepayment fees, structuring fees and unused line fees.
Total investment income for the year ended June 30, 2012 was $9,827,011. This amount consisted of $8,980,837 of interest income from portfolio investments (which included $68,842 of PIK interest), $57,216 of dividend income and $788,958 of fee income.
Total investment income for the year ended June 30, 2011 was $7,959,637. This amount consisted of $6,997,481 of interest income from portfolio investments (which included $246,566 of PIK interest), $215,260 of dividend income and $746,896 of fee income.
The increase in interest income for the year ended June 30, 2012 relative to the year ended June 30, 2011 was primarily due to the Company being in operations for the full fiscal year. The decrease in PIK interest for the year ended June 30, 2012 as compared to the year ended June 30, 2011 was primarily due to the fact that the Company received a prepayment from West World Media, LLC and ceased generating PIK interest from any of its portfolio investments. The decrease in dividend income for the year ended June 30, 2012 as compared to the year ended June 30, 2011 was primarily due to the Company redeeming its holding in First Capital Lotus Asset Based Fund.
Gross Operating Expenses for the year ended June 30, 2012 were $5,307,300. Net Operating Expenses (offset by the waived portion of the base management fee and the accrual for the expense reimbursement) for the year ended June 30, 2012, were $4,993,508.
Gross Operating Expenses for the year ended June 30, 2011 were $4,172,566. Net Operating Expenses (offset by the waived portion of the base management fee and the accrual for the expense reimbursement) for the year ended June 30, 2011, were $3,625,258.
As the Company commenced operations on August 31, 2010, the expenses for the year ended June 30, 2011 represent approximately ten months of operations, except for organizational expenses of $178,979, which were expensed as incurred over the year ended June 30, 2011 and operating expenses of $18,465, which were incurred in the months of July and August 2010. Organizational expenses are not expected to reoccur.
The increase in Gross Operating Expenses for the year ended June 30, 2012 relative to the year ended June 30, 2012 was primarily due to the Company being in operations for the full fiscal year. The increase in Net Operating Expenses was due to the Company being in operations for the full fiscal year and the management fee and expense waiver expiring during the year ended June 30, 2012.
Net investment income was $4,833,503, or $0.78 for the year ended June 30, 2012.
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As the Company commenced operations on August 31, 2010, the net investment income of $4,334,379 for the year ended June 30, 2011 represents approximately ten months of operations, except for organizational expenses of $178,979, which were expensed as incurred over the year ended June 30, 2011, 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 $0.70 for the period from August 31, 2010 to June 30, 2011.
The increase in Net Investment Income and Net Investment Income per share was primarily due to the Company being in operations for the full fiscal year.
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 year ended June 30, 2012, we recorded a realized loss of $175,366, primarily in connection with a realized loss on our investment in Texas Westchester Financial, LLC and a gain related to the repayment of our loan to West World Media, LLC. Realized loss per share for the year ended June 30, 2012 was $0.03.
During the year ended June 30, 2011, we recorded a realized gain of $344,482. Of this gain, $240,509 was associated with the full repayment of the loans to Icon Groupe, LLC on January 31, 2011. Realized gain per share for the period from August 31, 2010 to June 30, 2011 was $0.06.
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. See Critical Accounting Policies Change in realized gain (loss) and unrealized gain (loss) on investments.
During the year ended June 30, 2012, we recorded net unrealized depreciation of $1,979,965. This consisted of $2,535,306 of net unrealized depreciation on debt investments and $555,341 of net unrealized appreciation on equity investments. Change in unrealized depreciation per share was $0.32 for the year ended June 30, 2012. On January 19, 2012, Equisearch Acquisition, Inc. (Equisearch) filed for protection under Chapter 7 of the U.S. Bankruptcy Code. At that date, the Company had an investment in Equisearch of $2,580,201 through a first lien, senior secured loan facility. At June 30, 2012 the fair value of our investment in Equisearch was $1,959,363. For the year ended June 30, 2012, the Company recognized an unrealized loss on ProGrade Ammunition Group, LLC of $1,476,339.
During the year ended June 30, 2011, we recorded net unrealized depreciation of $1,796,547. This consisted of $682,995 of net unrealized depreciation on debt investments and $1,113,552 of net unrealized depreciation on equity investments recognized between the commencement of operations on August 31, 2010 and June 30, 2011. On February 17, 2011, the Company placed Bloomingdale Partners, LP in default on its loan, with the assets being transferred to Texas Westchester Financial, LLC. The Companys Board of Directors determined that the value of this investment should be written down, resulting in a $815,668 unrealized loss for the year ended June 30, 2011. Change in unrealized depreciation per share was $0.29 for the period from August 31, 2010 to June 30, 2011.
At September 30, 2013, we had investments in debt securities of 22 companies, totaling approximately $88.2 million in fair value, and equity investments in 11 companies, totaling approximately $6.5 million in fair value.
For the three months ended September 30, 2013, cash used in operating activities, consisting primarily of purchases, sales and repayments of investments and the items described in Results of Operations, was approximately $11.4 million, reflecting the purchases and repayments of investments, income resulting from operations, offset by non-cash income related to OID income, changes in working capital and accrued interest receivable. Net cash used in purchases and sales of investments was approximately $9.9 million, reflecting net
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additional investments in securities of $20.0 million, offset by principal repayments of $10.1 million. Such amounts are not inclusive of our purchases or sales of United States Treasury Bills or Money Market Funds.
As of September 30, 2013, we had $21.9 million outstanding under our senior secured credit facility (the Credit Facility) with Sovereign Bank, N.A. (Sovereign Bank), as administrative agent, and $21.1 million outstanding of aggregate principal amount of 8.25% Notes due June 30, 2020 (the Notes). On November 6, 2013, the Company increased the size of the Credit Facility from $32.5 million to $45.0 million.
At June 30, 2013, we had investments in debt securities of 19 companies, totaling approximately $81.2 million, and equity investments in 10 companies, totaling approximately $7.0 million.
As of June 30, 2013, the Company had cash of $18.0 million. Cash was temporarily high due to the issuance of notes on June 28, 2013. Refer to Note 8 Long Term Liabilities for further detail.
For the year ended June 30, 2013, cash provided by operating activities, consisting primarily of repayments of investments and the items described in Results of Operations, was approximately $4.8 million, reflecting the repayments of investments, 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 used for purchases and sales of investments was approximately $17.0 million, reflecting net additional investments in securities, offset by principal repayments. Such amounts are not inclusive of our purchase of United States Treasury Bills or Money Market Funds.
As of June 30, 2013, we had $25.6 million of outstanding borrowings under the Credit Facility and $21.1 million of aggregate principal amount of Notes Payable outstanding.
As of June 30, 2013, we had Distribution Notes outstanding of approximately $3.4 million. On July 3, 2013, we repaid the Distribution Notes at par plus accrued interest.
At June 30, 2012, we had investments in debt securities of 16 companies, totaling approximately $71.0 million, and equity investments in seven companies, totaling approximately $1.4 million.
As of June 30, 2012, the Company had cash and cash equivalents of $0.6 million.
For the year ended June 30, 2012, cash provided by operating activities, consisting primarily of repayments of investments and the items described in Results of Operations, was approximately $13.3 million, reflecting the repayments of investments, 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 used for purchases and sales of investments was approximately $17.2 million, reflecting net additional investments in securities, offset by principal repayments. Such amounts are not inclusive of our purchase of United States Treasury Bills or Money Market Funds.
As of June 30, 2012, we had $18.5 million of outstanding borrowings under our previous credit facility with FCC, LLC d/b/a First Capital.
As of June 30, 2012, we had Distribution Notes outstanding of approximately $3.4 million.
As a business development company, we generally have an ongoing need to raise additional capital for investment purposes. As a result, we expect, from time to time, to access the debt and equity markets when we believe it is necessary and appropriate to do so. In this regard, we continue to explore various options for obtaining additional debt or equity capital for investments. This may include expanding or extending our Credit Facility, or the issuance of additional shares of our common stock, possibly at prices below our then current net asset value per share pursuant to a proposal, approved by our stockholders at our most recent Annual Meeting of Stockholders, authorizing us to sell shares of our common stock below its then current net asset value per share in one or more offerings for a period of one year ending on January 17, 2014. We would need similar future approval from our stockholders to issue shares below the then current net asset value per share any time after the expiration of the current approval, and we intend to seek such approval at a Special Meeting of our Stockholders to be held on January 17, 2014. If we are unable to obtain leverage or raise equity capital on terms that are acceptable to us, our ability to grow our portfolio will be substantially impacted.
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Payments Due By Period
(millions) |
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Total |
Less than
1 year |
1 3 years | 3 5 years |
More than
5 years |
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Credit Facility (1) (2) | $ | 21.9 | $ | | $ | 21.9 | $ | | $ | | ||||||||||
Notes | 21.1 | | | | 21.1 | |||||||||||||||
Total | $ | 43.0 | $ | | $ | 21.9 | $ | | $ | 21.1 |
(1) | At September 30, 2013, $10.6 million remained unused under the Credit Facility. |
(2) | On November 6, 2013, the Company increased the size of the Credit Facility from $32.5 million to $45.0 million. |
In addition to the contractual obligations set forth above, we have certain obligations with respect to the investment advisory and administration services we receive. See Overview. We incurred $723,997 for investment advisory services and $189,168 for administrative services for the three months ended September 30, 2013.
As of September 30, 2013, we had approximately $6.0 million in unfunded loan commitments, subject to our approval in certain instances, to provide debt financing to certain of our portfolio companies.
We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.
Secured Revolving Credit Facility. On June 3, 2013, we entered into a credit agreement with Sovereign Bank, as administrative agent, which provided us with our $32.5 million Credit Facility, subject to borrowing base requirements. The Credit Facility replaced our prior senior secured revolving credit facility with FCC, LLC d/b/a First Capital.
The Credit Facility matures on June 3, 2016 and bears interest based on a tiered rate structure, depending upon utilization, ranging from LIBOR (1-month, 2-month or 3-month, depending on our option) plus 3.25% to 4.00% per annum, or from Sovereign Banks prime rate plus 1.25% to 2.00% per annum, based on our election. In addition, a fee of 0.50% per annum is charged on unused amounts under the Credit Facility. The Credit Facility is secured by all of our assets. Under the Credit Facility, we have made certain customary representations and warranties, and are required to comply with various covenants, reporting requirements and other customary requirements, including a minimum balance sheet leverage ratio, for similar credit facilities. The Credit Facility includes usual and customary events of default for credit facilities of this nature. On November 6, 2013, the Company increased the size of the Credit Facility from $32.5 million to $45.0 million.
Notes . On June 28, 2013, we issued approximately $21.1 million in aggregate principal amount of our 8.25% Notes due June 30, 2020 for net proceeds of approximately $20.0 million after deducting underwriting commissions of approximately $0.9 million and offering expenses of approximately $0.2 million.
The Notes were issued pursuant to an indenture, dated June 3, 2013, as supplemented by the first supplemental indenture, dated June 28, 2013 (collectively, the Indenture), between us and U.S. Bank National Association (the Trustee). The Notes are our unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including existing unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries or financing vehicles. Interest on the Notes is paid quarterly in arrears on March 30, June 30, September 30 and December 30, at a rate of 8.25% per annum. The Notes mature on June 30, 2020 and may
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be redeemed in whole or in part at any time or from time to time at our option on or after June 30, 2016. The Notes are listed on the Nasdaq Global Market under the trading symbol FULLL with a par value of $25.00 per share.
The Indenture contains certain covenants, including covenants requiring our compliance with (regardless of whether we are subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring us to provide financial information to the holders of the Notes and the Trustee if we cease to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Indenture. We may repurchase the Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any Notes repurchased by us may, at our option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by us. Any Notes surrendered for cancellation will be promptly cancelled and no longer outstanding under the Indenture. As of June 30, 2013, we had not repurchased any of the Notes in the open market.
Distribution Notes. On July 3, 2013, we repaid the $3.4 million of Distribution Notes issued in connection with our initial public offering at par plus accrued interest. As a result, the Distribution Notes are no longer outstanding.
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. To the extent our earnings fall below the total amount of our distributions for a taxable year, a portion of those distributions may be deemed a tax return of capital to our stockholders. In this regard, $1,089,055 of our distributions during the year ended June 30, 2013 constituted a return of capital to our stockholders. For tax purposes, the Company expects that dividends for the fiscal year ended June 30, 2014 will be funded primarily from net investment income. However, for the three months ended September 30, 2013, for financial reporting purposes, the Company had net investment income of approximately $0.16 per share, compared to distributions to stockholders of $0.231 per share during the period. Management monitors available taxable earnings, including net investment income and realized capital gains, to determine if a tax return of capital may occur for the year. The tax character of distributions will be determined at the end of the taxable year. However, if the character of our distributions for the fiscal year ended June 30, 2014 were determined as of September 30, 2013, a portion of the distributions for 2014 would have been characterized as a tax return of capital to the Companys stockholders; this tax return of capital may differ from the return of capital calculated with reference to net investment income for financial reporting purposes. Stockholders should read any written disclosure accompanying a dividend payment carefully and should not assume that the source of any distribution is our taxable ordinary income or capital gains. The specific tax characteristics of our distributions will be reported to stockholders after the end of the taxable year.
The following table lists the cash distributions, including dividends and returns of capital, if any, per share that we have declared since our formation on April 16, 2010. The table is divided by fiscal year according to record date.
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Date Declared | Record Date | Payment Date | Amount | |||||||||
Fiscal 2011:
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July 21, 2010 | September 30, 2010 | October 15, 2010 | $ | 0.076 | (1) | |||||||
November 5, 2010 | December 31, 2010 | January 14, 2011 | 0.225 | |||||||||
February 4, 2011 | March 31, 2011 | April 15, 2011 | 0.225 | |||||||||
May 6, 2011 | June 30, 2011 | July 15, 2011 | 0.225 | |||||||||
Total (2011) | $ | 0.751 |
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Date Declared | Record Date | Payment Date | Amount | |||||||||
Fiscal 2012:
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June 28, 2011 | July 29, 2011 | August 15, 2011 | $ | 0.075 | (2) | |||||||
June 28, 2011 | August 31, 2011 | September 15, 2011 | 0.075 | |||||||||
June 28, 2011 | September 30, 2011 | October 14, 2011 | 0.075 | |||||||||
September 8, 2011 | October 31, 2011 | November 15, 2011 | 0.077 | |||||||||
September 8, 2011 | November 30, 2011 | December 15, 2011 | 0.077 | |||||||||
September 8, 2011 | December 30, 2011 | January 13, 2012 | 0.077 | |||||||||
November 7, 2011 | January 31, 2012 | February 15, 2012 | 0.077 | |||||||||
November 7, 2011 | February 29, 2012 | March 15, 2012 | 0.077 | |||||||||
November 7, 2011 | March 30, 2012 | April 13, 2012 | 0.077 | |||||||||
February 3, 2012 | April 30, 2012 | May 15, 2012 | 0.077 | |||||||||
February 3, 2012 | May 31, 2012 | June 15, 2012 | 0.077 | |||||||||
February 3, 2012 | June 29, 2012 | July 13, 2012 | 0.077 | |||||||||
Total (2012) | $ | 0.918 | ||||||||||
Fiscal 2013:
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May 7, 2012 | July 31, 2012 | August 15, 2012 | $ | 0.077 | ||||||||
May 7, 2012 | August 31, 2012 | September 14, 2012 | 0.077 | |||||||||
May 7, 2012 | September 28, 2012 | October 15, 2012 | 0.077 | |||||||||
September 10, 2012 | October 31, 2012 | November 15, 2012 | 0.077 | |||||||||
September 10, 2012 | November 30, 2012 | December 14, 2012 | 0.077 | |||||||||
September 10, 2012 | December 31, 2012 | January 15, 2013 | 0.077 | |||||||||
November 5, 2012 | January 31, 2013 | February 15, 2013 | 0.077 | |||||||||
November 5, 2012 | February 28, 2013 | March 15, 2013 | 0.077 | |||||||||
November 5, 2012 | March 29, 2013 | April 15, 2013 | 0.077 | |||||||||
February 5, 2013 | April 30, 2013 | May 15, 2013 | 0.077 | |||||||||
February 5, 2013 | May 31, 2012 | June 14, 2013 | 0.077 | |||||||||
February 5, 2013 | June 28, 2013 | July 15, 2013 | 0.077 | |||||||||
Total (2013) | $ | 0.924 | ||||||||||
Fiscal 2014:
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May 3, 2013 | July 31, 2013 | August 15, 2013 | $ | 0.077 | ||||||||
May 3, 2013 | August 30, 2013 | September 13, 2013 | 0.077 | |||||||||
May 3, 2013 | September 30, 2013 | October 15, 2013 | 0.077 | |||||||||
September 9, 2013 | October 31, 2013 | November 15, 2013 | 0.077 | |||||||||
September 9, 2013 | November 29, 2013 | December 13, 2013 | 0.077 | |||||||||
September 9, 2013 | December 31, 2013 | January 15, 2014 | 0.077 | |||||||||
November 7, 2013 | January 31, 2014 | February 14, 2014 | 0.067 | |||||||||
November 7, 2013 | February 28, 2014 | March 14, 2014 | 0.067 | |||||||||
November 7, 2013 | March 31, 2014 | April 15, 2014 | 0.067 | |||||||||
Total (2014 to date) | $ | 0.663 |
(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. |
(2) | From our initial public offering through the fourth fiscal quarter of 2012, we paid quarterly dividends, but in the first fiscal quarter of 2013 we began paying, and we intend to continue paying, monthly dividends to our stockholders. Our monthly dividends, if any, are determined by our Board of Directors on a quarterly basis. |
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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 managing member 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 former Chief Financial Officer, Treasurer and Secretary, William E. Vastardis, is the President of Vastardis Fund Services LLC (Vastardis). Full Circle Service Company has engaged Vastardis to provide certain administrative services to us. For the three months ended September 30, 2013, Vastardis earned $50,000 for services provided under the Administration Agreement and $62,500 for the services of Mr. Vastardis as the Chief Financial Officer. On September 30, 2013, Michael J. Sell succeeded Mr. Vastardis as our Chief Financial Officer, Treasurer and Secretary. |
Full Circle Advisors investment committee presently manages Full Circle Funding, LP, a specialty lender serving smaller and lower middle-market companies. Although the existing investment funds managed by Full Circle Funding, LP, which currently consist of the Legacy Funds, are no longer making investments in new opportunities, 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. 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 investors in the Legacy Funds. The Distribution Notes were paid off at par plus accrued interest on July 3, 2013.
We have also adopted a Code of Ethics which applies to, among others, our senior officers, including our Co-Chief Executive Officers 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 individuals 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).
Effective November 8, 2013, the Companys Board of Directors expanded its size to include five directors and appointed Gregg J. Felton to serve as a director until the 2014 Annual Meeting of Stockholders scheduled for January 17, 2014. In addition, the Board appointed Mr. Felton to serve as the Companys Co-Chief Executive Officer and President. In connection with Mr. Feltons appointment, John Stuart resigned as the Companys President, but will continue to serve as Chairman and Co-Chief Executive Officer.
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Mr. Felton, 42, is primarily responsible for overall investment strategies and portfolio management. Mr. Felton is also a Managing Member and Chief Investment Officer of Full Circle Advisors and a Managing Member of Full Circle Service Company. Prior to joining Full Circle Capital, from 2006 to 2013, Mr. Felton was a Partner and Managing Director of Goldman Sachs and the Founder and Chief Investment Officer of Liberty Harbor, Goldman Sachs Asset Managements credit alternatives platform. He oversaw various investment vehicles, including hedge funds, mutual funds and institutional managed accounts and facilitated the launch of Goldman Sachs business development company. From 2009 to 2010, Mr. Felton was Head of Credit for Goldman Sachs Asset Management, overseeing approximately $60 billion in assets. Prior to joining Goldman Sachs, Mr. Felton was a senior portfolio manager at Amaranth Advisors, a multi-strategy hedge fund located in Greenwich, Connecticut. He led Amaranths global corporate credit investment team from 2000 to 2006. Prior thereto, Mr. Felton was a Vice President at Chase Manhattan Bank, where he served as a portfolio manager and senior analyst for Chases Special Situations Fund. Mr. Felton began his career in the High Yield Finance Department of Chases Global Investment Bank. Mr. Feltons broad experience managing investment vehicles and funds provides the Board with industry expertise and a valuable perspective on a variety of credit transactions. Education B.A. Tufts University, 1992; J.D. Georgetown University Law Center, 1996; M.B.A. Georgetown University School of Business, 1996.
Effective November 8, 2013, the Board amended and restated the Companys Bylaws to permit the appointment of a Co-Chief Executive Officer and make certain other revisions related to the administration of the Company.
On November 7, 2013, the Board of Directors declared monthly dividends of $0.067, $0.067 and $0.067 per share payable on February 14, 2014 for holders of record at January 31, 2014, March 14, 2014 for holders of record at February 28, 2014 and April 15, 2014 for holders of record at March 31, 2014.
On October 18, 2013, the senior secured credit facility with Coast Plating, Inc., an Aerospace Parts Plating and Finishing company, was paid off at par plus accrued interest and fees of $4,740,312.
On October 17, 2013, the senior secured credit facility with CSL Operating, LLC, an industrial metal treatings company, was paid off at par value plus accrued interest and fees of $3,655,118.
On October 21, 2013, the senior secured credit facility with Employment Plus, Inc., a staffing services company, was paid off at par value plus accrued interest of $5,033,333.
On October 30, 2013, the Company purchased $5.0 million of a $142.0 million senior secured credit facility to Esselte Holdings, Inc./Esselte AB, a global manufacturer and distributor of office supplies. The senior secured credit facility bears interest at LIBOR (1-month) plus 8.75%, with a minimum LIBOR of 2.00%, per annum and has a final maturity of February 29, 2016.
On October 31, 2013, the senior secured credit facility with MDU Communications (USA) Inc., a cable TV/broadband services company was partially prepaid in an amount of $1,667,183 in conjunction with the first closing related to the sale of substantially all of its assets to a third party. As part of this sales process, on October 22, 2013, the Company reduced the interest rate on the outstanding balance of the loan to 2.00% and expects to realize a partial loss of approximately $500,000 as a result of depreciation in the value of its investment. The Company may incur additional losses as MDU Communications makes future repayments.
On November 6, 2013, the Company increased the size of the Credit Facility from $32.5 million to $45.0 million.
We are subject to financial market risks, including changes in interest rates. As of September 30, 2013, 5 debt investments in our portfolio bore interest at a fixed rate, and the remaining 32 debt investments bore
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interest at variable rates, representing approximately $12.8 million and $75.4 million in principal debt, respectively. 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 September 30, 2013. We have also assumed outstanding borrowings by the Company of $43.1 million, with $21.9 million having a floating rate based upon LIBOR. Under this analysis, net investment income would increase by approximately $0.2 million annually. If we had instead assumed a 1% decrease in the underlying Prime rate or LIBOR, net investment income would remain approximately the same. Although management believes that this analysis is indicative of our existing interest rate sensitivity at September 30, 2013, 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.
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Information about our senior securities (including debt securities and other indebtedness) is shown in the following tables as of September 30, 2013 and the fiscal years ended June 30, 2013, 2012 and 2011. We had no senior securities outstanding as of June 30 of any prior fiscal years. The report of our independent registered public accounting firm, Rothstein Kass, on the senior securities table as of June 30, 2013, 2012 and 2011 is attached as an exhibit to the registration statement of which this prospectus is a part.
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Year | Total Amount Outstanding (1) |
Asset Coverage
Ratio Per Unit (2) |
Involuntary Liquidation Preference
Per Unit (3) |
Average Market Value Per Unit (4) | ||||||||||||
Credit Facility
(5)
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Fiscal 2011 | | | | n/a | ||||||||||||
Fiscal 2012 | $ | 18,544,660 | $ | 3,435 | | n/a | ||||||||||
Fiscal 2013 | 25,584,147 | 2,210 | | n/a | ||||||||||||
September 30, 2013 (unaudited) | 21,922,256 | 2,315 | | n/a | ||||||||||||
Distribution Notes
(6)
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Fiscal 2011 | $ | 3,404,583 | $ | 17,588 | | n/a | ||||||||||
Fiscal 2012 | 3,404,583 | 3,435 | | n/a | ||||||||||||
Fiscal 2013 | 3,404,583 | 2,210 | | n/a | ||||||||||||
September 30, 2013 (unaudited) | | | | n/a | ||||||||||||
Unsecured Notes
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Fiscal 2013 | $ | 21,145,525 | $ | 2,210 | | $ | 1,000 | |||||||||
September 30, 2013 (unaudited) | 21,145,525 | 2,315 | 1,004 |
(1) | Total amount of each class of senior securities outstanding at the end of the period presented. |
(2) | Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness. |
(3) | The amount to which such class of senior security would be entitled upon the voluntary liquidation of the issuer in preference to any security junior to it. The in this column indicates that the Securities and Exchange Commission expressly does not require this information to be disclosed for certain types of senior securities. |
(4) | Not applicable for senior securities that are not registered for public trading. The average market value per unit for our Unsecured Notes is based on the average daily prices of such notes and is expressed per $1,000 of indebtedness. |
(5) | In June 2013, we repaid our credit facility with FCC, LLC d/b/a First Capital and entered into the Credit Facility with Santander Bank, N.A. f/k/a Sovereign Bank, N.A. |
(6) | We repaid the Distribution Notes in full in July 2013. |
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We are an externally managed non-diversified closed-end management investment company that has elected to be treated as a BDC under the 1940 Act. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We are managed by Full Circle Advisors and Full Circle Service Company provides the administrative services necessary for us to operate.
We invest primarily in 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. 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. 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. Our stretch senior secured loans typically possess a greater advance rate against the borrowers assets and cash flow, and accordingly carry a higher interest rate and/or greater equity participation, than traditional senior secured loans. This stretch senior secured loan instrument can provide borrowers with a more efficient and desirable solution than a senior bank line combined with a separate second lien or mezzanine loan obtained from another source. We also may 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 most of 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 and after the 2008/2009 credit crisis. These areas can 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 and/or greater equity grants than typical of other transactions.
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. In connection with our initial public offering in August 2010, we acquired a portfolio of investments (the Legacy Portfolio), valued at approximately $72 million, from the Legacy Funds in exchange for shares of our common stock and senior unsecured notes (the Distribution Notes).
As a business development company, we are required to meet regulatory tests, including the requirement to invest at least 70% of our gross assets in qualifying assets. Qualifying assets generally include, among other things, securities of eligible portfolio companies. Eligible portfolio companies generally include U.S. companies that are not investment companies and that do not have securities listed on a national exchange. See Regulation as a Business Development Company. We may also borrow funds to make investments. In addition, we have elected to be treated for federal income tax purposes as a regulated
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investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, which we refer to as the Code. See Material U.S. Federal Income Tax Considerations.
Our headquarters are located at 800 Westchester Ave., Suite S-620, Rye Brook, New York 10573 and our telephone number is (914) 220-6300.
We are managed by Full Circle Advisors, whose investment committee members have approximately 18 years of experience financing and investing in smaller and lower middle-market companies. Full Circle Advisors is an investment adviser registered under the Investment Advisers Act of 1940, as amended (the Advisers Act). Certain members of Full Circle Advisors investment committee also presently manage Full Circle Funding, LP, a specialty lender serving smaller and lower middle-market companies. The investment committee has to date originated approximately $314 million in loans and investments in 61 distinct borrowers since inception of Full Circle Funding, LP in 2005 and through activities at Full Circle Advisors since August 2010. The existing investment funds managed by Full Circle Funding, LP, which currently consist of the Legacy Funds, have been fully committed and are no longer making investments in new opportunities. The Legacy Funds are expected to be wound down as their remaining investments mature. Full Circle Funding, LP and other affiliates of our investment adviser may manage other funds and accounts in the future.
We benefit from the proven ability of our investment advisers investment committee to identify attractive investment opportunities, conduct diligence on and value prospective investments, negotiate terms, secure collateral against our loans and manage and monitor a diversified portfolio of those investments. Our investment advisers investment committee members have broad investment backgrounds, with prior experience at investment banks, commercial banks, unregistered investment funds and other financial services companies, and have collectively developed a broad network of contacts to provide us with our principal source of investment opportunities.
Our investment adviser is controlled and led by John E. Stuart, our Co-Chief Executive Officer and Chairman, and Gregg J. Felton, our Co-Chief Executive Officer and President. Mr. Stuart and Mr. Felton, who serves as Chief Investment Officer of Full Circle Advisors, are assisted by Lawrence Chua and Crandall Deery, who each serve as a Vice President of Full Circle Advisors. We consider Messrs. Stuart, Felton, Chua and Deery to be Full Circle Advisors investment committee. Under the Investment Advisory Agreement with Full Circle Advisors, we have agreed to pay Full Circle Advisors an annual base management fee based on our gross assets as well as an incentive fee based on our performance. See Investment Advisory Agreement.
We have also entered into the Administration Agreement, under which we have agreed to reimburse Full Circle Service Company for our allocable portion of overhead and other expenses incurred by Full Circle Service Company in performing its obligations under the Administration Agreement, including furnishing us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities, as well as providing us with other administrative services. Full Circle Service Company is controlled by Messrs. Stuart and Felton. See Administration Agreement.
Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We have adopted the following business strategies to achieve our investment objective:
| Deliver Flexible Financing Solutions . We believe our ability to provide a broad range of flexible debt financing solutions to smaller and lower middle-market companies sets us apart from other capital providers. We offer to our portfolio companies debt financing facilities that, combined with our ability to recognize the underlying value and security of diverse types of traditional and non-traditional asset based collateral, we believe allows us to provide flexible facilities to fit the capital requirements of each borrower. We believe that our focus on providing senior secured and stretch senior loans provides a more efficient and less complicated capital structure and source of capital for borrowers. We also believe that it maximizes our control of and exposure to asset-based collateral coverage as security for our loans, thereby greatly reducing our risk of possible losses due to deterioration in a borrowers performance. |
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| Target Smaller and Lower Middle-Market Companies . We generally provide capital to our portfolio companies for growth capital, acquisition financing and refinancing of existing debt facilities. We believe our target portfolio companies are generally involved in industries or markets that are under-followed or serviced because they are either less visible to mainstream institutions or investors, or are too small or localized for larger financial institutions or larger funds, particularly those that lack the requisite industry-specific knowledge and expertise. We believe there have historically been fewer banks and finance companies focused on lending to these types of smaller and lower middle-market companies. As a result, we believe we can negotiate terms on loans to these types of companies that generally possess better risk-adjusted return profiles than terms on loans to larger, more mainstream companies. Such favorable terms may include higher debt yields, lower leverage levels, more significant covenant protection and/or greater equity grants than typical of transactions involving larger companies. 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. |
| Target Senior Secured Lending and Structuring of Investments to Minimize Risk of Loss . We seek to structure our loan investments on a favorable LTV exposure based on underlying collateral or enterprise value with high cash yields, cash origination fees, low leverage levels and strong investment protections. We generally seek to protect against risk of loss on our debt investments by securing most of our loans against a significant level of tangible or intangible assets of our borrowers, obtaining a favorable LTV ratio or other financial protections or credit enhancements, rather than lending predominantly against anticipated cash flows of borrowers. We believe this provides us with more options and a greater likelihood of repayment from both cash flow and/or asset sales. |
| Structure Loans with Superior Security and Asset Protection . Our loan instruments and documentation focus on favorable lender protections with security over the collateral, financial and other covenants and rigorous reporting requirements on behalf of our borrowers. We monitor covenant and other loan compliance on a monthly and quarterly basis and personnel from our investment adviser will have periodic field exams performed at the borrower level. We utilize both term debt and revolving loan structures and, accordingly, often seek to maintain control of our borrowers cash receipts from revenues as additional security for our positions. As of September 30, 2013, we had lockbox or dominion of cash, or account control agreements, on 93% of the borrowers in our portfolio, as calculated by principal amount and fair value. Such amounts are not inclusive of our holdings of United States Treasury Bills. In addition, we may seek credit enhancements, such as personal guarantees from a borrowers principal owners or make well features to provide us with additional equity in the event of underperformance. We may also seek a pledge of stock or other assets from a borrower or its operating subsidiaries. |
| Pursue Attractive Risk Adjusted Returns . As of September 30, 2013, the weighted average annualized yield of the debt investments comprising our portfolio was approximately 12.75%, which includes a cash interest component of approximately 100%. In the future, a component of our interest may be in the form of payment-in-kind, or PIK, interest. PIK interest represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term and recorded as interest income on an accrual basis to the extent such amounts are expected to be collected. For additional information regarding PIK interest and related risks, see Risk Factors Risks Relating to Our Business and Structure We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income. As of September 30, 2013, 43% of our debt portfolio at fair value, excluding United States Treasury Bills, consisted of debt securities and asset-based revolving lines of credit for which issuers were not required to make principal payments until the maturity of such debt securities, which could result in a substantial loss to us if such issuers are unable to refinance or repay their debt at maturity. In addition, a substantial portion of our debt investments have variable interest rates that reset periodically based on benchmarks such as the London-Interbank Offered Rate and prime rate. As a result, significant increases in such benchmarks in the future would make it more difficult for these |
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borrowers to service their obligations under the debt investments that we hold. The 37 individual debt investments, from 22 distinct borrowers, included in our portfolio, averaged a LTV ratio of approximately 61% as of September 30, 2013 (i.e., each $61 of loan value outstanding is secured by $100 of collateral value). Although it is subject to fluctuation, we believe this LTV ratio, which measures the aggregate amount of our loan positions against the aggregate amount of primary collateral value pledged by our borrowers as security against our loans, reflects the relative strength of the debt investments comprising our portfolio. Finally, our debt investments are designed to have strong protections beyond repayment from cash flow and asset liquidation coverage, including default penalties, information rights, and affirmative, negative and financial covenants, such as lien protection and prohibitions against change of control. We believe this level of collateral protection helps minimize against the risk of loss, even if a loan goes into default. |
| Leveraging the Skill, Experience and Resources of Full Circle Advisors Investment Committee . Full Circle Advisors investment committee members have an average of approximately 18 years of experience financing and investing in smaller and lower middle-market companies. The investment committee members have broad investment and operational backgrounds, with prior experience at specialty finance companies, investment management firms, private equity investment funds, investment banks and other financial services companies. We believe their expertise in analyzing, valuing, structuring, negotiating, closing, monitoring and restructuring transactions should provide us with a competitive advantage by allowing us to consider customized financing solutions and non-traditional and complex structures. We believe this experience should also be valuable when we have to work with stressed and distressed credits. |
| Balanced Investing Across Industries with Expertise . While we seek to maintain a portfolio of investments that is appropriately balanced among various companies, industries, geographic regions and end markets, we focus our investing activities on certain areas that we believe maintain favorable asset coverage positions, including the media, communications and business services industries. We believe that the stable, long term asset values that may be found in many of the industries in which we invest can provide us with significant collateral protection on our loans, in contrast to taking some of the risks of repayment attendant to relying exclusively on a borrowers current cash flows. Going forward, we intend to seek to maintain a balanced portfolio to mitigate the potential effects of negative economic events for particular companies, regions and industries. |
| Capitalize on Strong Transaction Sourcing Network . Our investment advisers investment committee seeks to leverage their extensive network of referral sources for investments in smaller and lower middle-market companies. We believe through their prior investment experience, the investment committee members have collectively developed a reputation in our target market and in the industries in which we invest as a responsive, efficient and reliable source of flexible financing. |
| Employ Disciplined Underwriting Policies and Rigorous Portfolio Management . We directly originate most of our investments, which, in our experience, generally allows us to pursue a more rigorous due diligence examination of the investments than if we invest as part of a lending syndicate led by others. Our investment advisers investment committee has developed an extensive underwriting due diligence process which includes a review of the prospects, competitive position, financial performance and industry dynamics of each potential portfolio company. In underwriting a potential borrower, they engage in a variety of quantitative and qualitative stress tests, and analyze our ability to successfully liquidate a favorable collateral package underlying a loan in the event of default. These processes continue during the portfolio monitoring process, when our investment adviser will, depending on the borrower, analyze monthly and/or quarterly financial statements versus the previous periods and year, review financial projections, conduct field examinations, meet with management, attend board meetings, review all compliance certificates and covenants and regularly assess the financial and business conditions and prospects of borrowers. |
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
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demand for financing from smaller to lower middle-market companies is largely outpacing the availability of lenders that have traditionally served this market. While this has traditionally been an underserved market, we believe the supply-demand imbalance of loans to smaller borrowers was exacerbated by the credit crisis in 2008/2009, and has not fully recovered. 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. Thus we believe that the current credit markets combined with certain long term trends associated with lending to smaller and lower middle-market companies provide the ideal market environment for our strategy.
| Competitive Edge and Skill Set . Our core strength of providing efficient and flexible lending solutions to smaller and lower middle-market companies requires a market approach and skill set that we believe is generally not found in larger or more localized regional lenders. We believe that many of the companies we target operate in industries that are less visible or too specialized for larger mainstream institutions or investors, or alternatively, require too little funding or are too localized for larger financial institutions to consider, particularly in cases where those institutions lack the requisite industry-specific knowledge and expertise. From 1992 through 2012, loan composition for banks sized greater than $1 billion in assets showed a decline of commercial and industrial loans from 30% of net loans to 22% of net loans, while real estate lending grew from 39% to 50%. Accordingly, we believe that many potential competitive bank lenders lack the personnel or lending experience required to address the very strong market demand for commercial and industrial lending. |
Larger domestic banks noted stronger demand for loans during the second quarter of 2013. In a July 2013 survey, it was reported that modest fractions of domestic banks reported having eased their standards across major loan categories during the fourth quarter. However, bankers easing of standards is more popular among their larger clients than it is with smaller ones. While 20% of respondents said they were easing terms on the maximum size of credit lines to large and middle-market firms (annual sales of $50 million or more), only 10% of respondents said they were doing the same for small firms (defined as those with annual sales of less than $50 million) and the remaining respondents reported no change. Regarding the costs of credit lines, 46% of respondents reported easing terms to borrowers, while 37% of respondents reported doing the same for small firms and the remaining respondents reported no change. Furthermore, more than 29% of respondents reported having eased covenant requirements for large clients, while just 16% reported a similar easing of standards for their smaller clients. Banks general reticence to loosen terms to smaller firms remains despite the fact that respondents answers for the outlook for asset quality revealed that moderate to large fractions of banks expect improvements in credit quality in most major loan categories.
Reports also state that domestic banks indicated that demand for business loans had strengthened, and they continued to report a rise in the number of inquiries from potential business borrowers, of all sizes, regarding new or increased credit lines. At the same time, U.S. branches and agencies of foreign banks, which mainly lend to businesses, reported little change in their lending standards, while demand for their loans was reportedly stronger on net. Additionally, reports state that a majority of domestic banks have recently reported strong demand for commercial and industrial loans due to increases in customers funding needs related to inventories, accounts receivable, investment in plans or equipment and mergers and acquisitions. We believe these bank lending market conditions will continue to exacerbate existing funding gaps for firms comprising our target market. Additionally, we believe our strengths include the ability to originate, underwrite and manage a more labor intensive portfolio consisting of debt investments in smaller companies, and to perform due diligence and manage portfolio activities on an ongoing basis.
| Strong Demand For Capital Coupled with Fewer Providers . 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. Further, we believe the supply-demand imbalance of smaller borrowers to lenders serving that market was exacerbated by the credit crisis in 2008/2009, and has not fully recovered. We believe there is robust demand for continued growth capital as well as |
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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 are increased lending opportunities for us.
| More Conservative Deal Structures . As a result of, and in the aftermath of, the 2008/2009 credit crisis, we believe lenders are mandating less leverage, more equity and tighter loan covenants than what had previously been customary. We believe that lower purchase prices for assets and lower debt multiples, combined with greater equity cushions beneath loans, allows for greater cash flow for debt service, creating faster loan repayments despite overall higher debt costs to borrowers. We believe this aspect provides considerable cushion against underperformance and default of borrowers as well as faster de-risking of loan positions as credit statistics improve over the term of the loan facilities. |
| Attractive Return Profile . We believe the reduced access to, and reduced availability of, debt capital has decreased competition in smaller to lower middle-market lending which had already become less competitive and more fragmented prior to the credit crisis, resulting in a better market for loan pricing. We believe that the withdrawal of many traditional senior lenders from the market, combined with reduced advance rates and leverage levels, allows for stretch senior lenders to charge rates that typically reflect mezzanine or subordinated structures for entire facilities, while maintaining first lien senior secured positions over the loan collateral provided by the borrowers. Our investment advisers investment committee has experienced this attractive return environment since the onset of the credit crisis in the second half of 2008, when transactions originated by them saw increased returns from interest and fees charged, as well as more meaningful warrant participations. |
We engage in various investment strategies in order to achieve our overall lending and investment objectives. The strategy we select depends upon, among other things, market opportunities, the skills and experience of our investment advisers investment committee and our overall portfolio composition. Our strategies generally seek to provide current cash yields and favorable loan-to-value ratios, or other financial guarantees or credit enhancements with respect to loan collateral. Many of our debt investments offer the opportunity to participate in a borrowers equity performance through warrant participation, equity related success fees, direct equity ownership or otherwise, and many notes that we own require the borrower to pay an early termination fee. Collectively, these attributes have been, and are expected to be, an important contributor to the returns generated by our investment advisers investment committee.
Full Circle Advisors investment committee uses a disciplined investment, portfolio monitoring and risk management process which emphasizes strict underwriting standards and guidelines, strong due diligence investigation, regular position review and analysis, and proper investment diversification. They allocate capital among different investment sectors on the basis of relative risk/reward profiles as a function of their associated downside risk, volatility, perceived fundamental risk and liquidity.
We target debt investments that yield meaningful current income and, in many cases, provide the opportunity for capital appreciation through equity securities.
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Full Circle Advisors investment committee tailors the terms of each debt investment to the facts and circumstances of the transaction and prospective portfolio company, negotiating a structure that seeks to protect our rights and manage our risk while creating incentives for the portfolio company to achieve its business plan. Our debt investments are generally secured by first, and in some cases second, priority liens on the assets of the portfolio company. Our primary source of return is the monthly cash interest we collect on our debt investments.
| First Lien Loans . Our first lien loans generally have terms of two to five years and generally provide a variable interest rate, frequently subject to a floor to protect against return compression in a falling interest rate environment. These loans generally do not have interest rate ceilings. Such facilities contain prepayment penalties and are secured by a first priority security interest in all existing and future assets of the borrower. Our first lien loans may take many forms, including revolving lines of credit, term loans, multi-draw term loans and other lines of credit. We often seek to employ a lockbox to collect payment receipts, as we believe it protects us against payment delinquencies and provides increased security and protection in the event of a default or under performance. A focus within our first lien loans is senior secured stretch loans which, along with most of the attributes of our first lien loans, include a greater advance rate against the borrower and accordingly carry a higher interest rate or greater equity participation. |
| Second Lien Loans . Our second lien loans generally have terms of five to six years, provide for a fixed or floating interest rate, contain prepayment penalties and are secured by a second priority security interest in all existing and future assets of the borrower. We generally avoid second lien exposure without also investing in the first lien loans of the portfolio company. We believe this gives us greater influence and control should any issues arise between the two instruments. Our second lien loans may to a lesser extent include payment-in-kind, or PIK, interest for a portion of the interest, which represents contractual interest accrued and added to the principal that generally becomes due at maturity. |
| Unsecured Loans . Although our portfolio does not currently have any investments in unsecured loans, we may make such investments in the future. We would expect any unsecured investments generally to have terms of five to six years and provide for a fixed interest rate. We may make unsecured investments on a stand-alone basis, or in conjunction with a senior secured loan, a junior secured loan or a one-stop financing. Our potential unsecured investments may include payment-in-kind, or PIK, interest, which represents contractual interest accrued and added to the principal that generally becomes due at maturity, and an equity component, such as warrants to purchase common stock in the portfolio company. |
Full Circle Advisors investment committee typically structures debt investments to include covenants that seek to minimize the risk of capital loss. These debt investments generally have strong protections, including default penalties, information rights, board observation rights, and affirmative, negative and financial covenants, such as lien protection and prohibitions against change of control. These debt investments also have substantial prepayment penalties designed to extend the average life of the loans, which we believe will help to grow our portfolio.
When we make a debt investment, we may be granted equity participation in the form of three to five year warrants to purchase common equity in the company in the same class of security that the owners or equity sponsors receive upon funding. In addition, we may make equity investments or structure a profit sharing arrangement in conjunction with a loan transaction with a borrower. Full Circle Advisors investment committee generally seeks to structure our equity investments, such as direct equity co-investments, to provide us with minority rights provisions and event-driven put rights. They also seek to obtain limited registration rights in connection with these investments, which may include piggyback registration rights.
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In most cases, our investment advisers investment committee attempts to protect against risk of loss on our debt investments by making senior loans secured by the assets of our borrowers, and obtaining favorable loan-to-value ratios or other financial protections or credit enhancements, rather than lending exclusively against cash flows. Loans may be backed by a variety of types of tangible and intangible assets, including, but not limited to, lease obligations, royalty interests, commercial account receivables, contractual revenue and payment rights (including contacts providing for recurring monthly revenue streams), settlements, franchise rights, licenses, permits, mortgages, easements and other real property interests, and other tangible personal property, and intangible property such as intellectual property and patents. Our debt investments typically have a first, and in some cases a second, priority senior security interest in the operative assets of the borrower and collateral assignment of rights and contracts, though we also may make mezzanine and equity investments where we believe the risk and reward, and level of security, warrants such an investment. As an asset based lender, we seek to provide working capital lines to borrowers secured by accounts receivable, inventory, machinery and equipment, real estate and in some cases, intellectual property or brand values. These facilities will typically be comprised of a borrowing base formula and include revolving loans and term loans as part of their structures.
Our investment focus may shift over time, consistent with our overall lending and investment objectives, and desire for senior secured loans with some level of collateral protection.
Our portfolio contains investments in a variety of industries where some aspect of tangible or intangible asset is available for collateral protection. Our portfolio contains a number of investments in the media and communications and business services industries, as a result of the Legacy Portfolios emphasis, and the focus and prior investing experience of our investment advisers investment committee, in those sectors. However, these industries are not our only focus, and we seek prospective investments in other commercial and industrial sectors, including industrial manufacturing. As a result, we expect that the relative portion of our portfolio invested in the media and communications and business services industries may decrease over time.
As of September 30, 2013, approximately 39% of our portfolio consists of loans to and investments in companies involved in the broader business services industry (such as companies that provide services related to data and information, information retrieval, asset recovery and energy efficiency services). Such percentage is not inclusive of our holdings of United States Treasury Bills. These companies typically provide a range of services to customers and such services are generally characterized by their non-discretionary spending nature, contracts of varying length which provide recurring monthly revenues and contracts or services that can be sold or assigned to another provider upon liquidation or sale of a business.
As of September 30, 2013, approximately 16% and 6% of our portfolio consists of loans to and investments in companies involved in the communications industry (such as companies that provide digital video satellite and broadband service to multiple dwelling units) and media industry (such as outdoor advertising and radio broadcasting companies), respectively. Such percentages are not inclusive of our holdings of United States Treasury Bills. Our investment advisers investment committee has extensive experience in the media and communication sectors. We believe that these sectors present significant investment opportunities that possess attractive loan attributes. These include, but are not limited to, long-term tangible and intangible assets, the ability to perfect our security interest in the collateral, relatively stable revenue and cash flow profile, the ability to foreclose on and transport the underlying collateral should we need to take control of it, and a broad market of participants to purchase or operate the business and assets in the event of foreclosure.
Our media and communications investments generally are secured by long-term tangible or intangible assets which include, but are not limited to, regulatory licenses, franchises or leasehold values, associated contractual revenue and cash flow streams and intellectual property, including copyrights and patents. Within these parameters, we focus on smaller and lower middle-market media and communications investments.
As of September 30, 2013, approximately 18% of our portfolio consists of loans to and investments in companies involved in industrial manufacturing. Such percentage is not inclusive of our holdings of United
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States Treasury Bills. We believe that this sector can present significant investment opportunities that possess attractive loan attributes. These include, but are not limited to, long-term tangible assets, the ability to perfect our security interest in the collateral and attractive risk exposure when viewed on a debt to EBITDA basis.
Our investment advisers investment committee is responsible for all aspects of our investment process. The current members of the investment committee are John Stuart, our Co-Chief Executive Officer and Chairman, Gregg J. Felton, our Co-Chief Executive Officer and President, and Lawrence Chua and Crandall Deery, who each serve as a Vice President of Full Circle Advisors. While the investment strategy involves a team approach, whereby potential transactions are screened by various members of the investment committee, Mr. Stuart and Mr. Felton, who serves as Chief Investment Officer of Full Circle Advisors, must approve of all investments in order for them to proceed. The stages of our investment selection process are as follows:
Deal generation and origination is maximized through long-standing and extensive relationships with industry contacts, brokers, commercial and investment bankers, entrepreneurs, services providers such as lawyers and accountants, as well as current and former clients, portfolio companies and investors. Our investment advisers investment committee supplements these lead generators by also utilizing broader marketing efforts, such as attendance at prospective borrower industry conventions, an active calling effort to smaller private equity firms and sponsors, and through web presence and search tool optimizations. They also focus their deal generation and origination efforts on smaller and lower middle-market companies. Our investment advisers investment committee has developed a reputation as a knowledgeable and reliable source of capital, providing value-added industry advice and financing assistance to borrowers businesses.
In screening potential investments, our investment advisers investment committee utilizes the same value-oriented investment philosophy they employed in their work with the Legacy Funds and commits resources to managing downside exposure.
We have identified several criteria that we believe are important in identifying and investing in prospective portfolio companies. These criteria provide general guidelines for our investment advisers investment committees decisions; however, not all of these criteria will be met by each prospective portfolio company in which they choose to invest. Generally, our investment adviser seeks to utilize its access to information generated by its investment committee to identify investment candidates and to structure investments quickly and effectively.
Established Companies . We primarily seek to invest in established companies with sound historical financial and operating performance. We typically focus on companies with an operating cash flow profile. We generally do not intend to invest in start-up companies or companies with highly speculative business plans.
Defensible and Sustainable Business or Asset Values . We seek to invest in companies with proven products and/or services and strong regional or national operations and assets that cannot be easily replicated or substituted, and generally hold value through economic downturns, industry consolidation, changing business preferences and other factors that may negatively impact their customers, suppliers and competitors.
Ability to Exert Meaningful Influence or Control Over Our Investment . We target investment opportunities in which we will be the lead or sole investor in our portion of the capital structure, and in which we can add value through active participation, often through advisory positions.
Exit Strategy . We predominantly invest in companies which provide multiple alternatives for an eventual exit. We seek companies that we believe will provide a stable underlying asset value and a steady stream of cash flow that will allow for repayment from refinancing, asset or business sales and principal amortization. We believe that such asset coverage combined with internally generated cash flow, which primarily provides for the payment of interest on, and the repayment of the principal of, our investments in portfolio companies represents a key means by which we will be able to service our loans and eventually exit from our investments over time.
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In addition, we also seek to invest in companies whose business models and expected future cash flows offer attractive exit possibilities due to strong asset values and unique or difficult to aggregate assets. These companies include candidates for strategic acquisition by other industry participants and companies that may repay our investments through an initial public offering of common stock or another capital market transaction.
Liquidation Value of Assets . The prospective liquidation value of the assets, if any, collateralizing loans in which we invest is an important factor in our credit analysis. Our analysis emphasizes both tangible assets, such as accounts receivable, inventory, equipment and real estate, and intangible assets, such as intellectual property, customer lists, networks and databases.
Experienced and Committed Management . We generally require that portfolio companies have an experienced management team. We also generally require portfolio companies have in place proper incentives to induce management to succeed and to act in concert with our interests as investors, including having significant equity interests.
In addition to the standards applied in evaluating investments in all industries, our main criteria in analyzing investments in media and communications companies include their site or market area quality, underlying leases, license or franchise terms, stability of revenue streams and asset values through economic cycles, market liquidity of their underlying assets, and our anticipated level of recovery upon foreclosure.
Due Diligence . Our investment adviser conducts diligence on prospective portfolio companies consistent with the approach its investment committee adopted in their work with the Legacy Funds. We believe that the investment committee has a reputation for conducting extensive due diligence investigations in their investment activities. In conducting due diligence, our investment adviser uses publicly available information as well as information from its relationships with former and current management teams, consultants, competitors and investment bankers.
Our investment advisers due diligence typically includes:
| review of historical and prospective financial information; |
| research relating to the companys management, industry, markets, products and services and competitors; |
| on-site visits and verification of collateral; |
| interviews with management, employees, customers and vendors of the potential portfolio company; |
| review of senior loan documents; |
| asset and business value appraisals by third party advisors; and |
| background checks. |
Upon the completion of due diligence and a decision to proceed with an investment in a company, the investment professionals leading the investment present the investment opportunity to our investment advisers investment committee, which then determines whether to pursue the potential investment. Additional due diligence with respect to any investment may be conducted on our behalf by attorneys and independent accountants prior to the closing of the investment, as well as other outside third-party advisers, as appropriate. Any fees and expenses incurred by Full Circle Advisors in connection with due diligence investigations undertaken by third parties are subject to reimbursement by Full Circle Capital, if not otherwise reimbursed by the prospective borrower, which reimbursements are in addition to any management or incentive fees payable under our Investment Advisory Agreement to Full Circle Advisors. While the investment strategy involves a team approach, Full Circle Capital may not enter into a transaction without the prior approval of Messrs. Stuart and Felton.
As a business development company, we offer, and must provide upon request, managerial assistance to our portfolio companies. This assistance could involve, among other things, monitoring the operations of our
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portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. We may also receive fees for these services. Full Circle Service Company provides such managerial assistance on our behalf to portfolio companies that request this assistance. With regard to our control investments in Texas Westchester Financial, LLC, New Media West, LLC, TransAmerican Asset Servicing Group, LLC and The Finance Company, LLC, we have provided managerial assistance for which no fees were charged. Our Co-Chief Executive Officer and Chairman, John Stuart, currently serves as a director of The Finance Company, LLC, New Media West, LLC and Takoda Resources Inc. Lawrence Chua, a Vice President of Full Circle Advisors, serves on the board of Takoda Resources Inc. During the quarter ended September 30, 2013, only Background Images, Inc. and Solex Fine Foods, LLC/Catsmo, LLC had also accepted our offer for managerial services. No fees were charged to Background Images, Inc. or Solex Fine Foods, LLC; Catsmo, LLC for such services.
Our investment adviser monitors our portfolio companies on an ongoing basis. It monitors the financial trends of each portfolio company to determine if it is meeting its business plan and to assess the appropriate course of action for each company.
Our investment adviser has several methods of evaluating and monitoring the performance and fair value of our investments, which include the following:
| Assessment of success in adhering to each portfolio companys business plan and compliance with covenants; |
| Periodic and regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor, to discuss financial position, requirements and accomplishments; |
| Comparisons to our other portfolio companies in the industry, if any; |
| Attendance at and participation in board meetings; and |
| Review of monthly and quarterly financial statements and financial projections for portfolio companies. |
In addition to various risk management and monitoring tools, our investment adviser also uses an investment rating system to characterize and monitor our expected level of return on each investment in our portfolio.
We use an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:
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Investment Rating | Summary Description | |
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) | |
2 | The portfolio company is performing above expectations and the risk profile is generally favorable | |
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 | |
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 | |
5 | The investment is performing well below expectations and is not anticipated to be repaid in full |
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Our investment adviser monitors and, when appropriate, changes the investment ratings assigned to each investment in our portfolio. As of September 30, 2013, the weighted average investment rating on the fair market value of our portfolio was 3.11. In connection with our valuation process, our investment adviser reviews these investment ratings on a quarterly basis, and our Board of Directors affirms such ratings. The investment rating of a particular investment should not, however, be deemed to be a guarantee of the investments future performance.
We conduct the valuation of our assets, pursuant to which our net asset value is determined, at all times consistent with GAAP and the 1940 Act. Our valuation procedures are set forth in more detail below:
Securities for which market quotations are readily available on an exchange shall be valued at such price as of the closing price on the day of valuation. We may also obtain quotes with respect to certain of our investments from pricing services or brokers or dealers in order to value assets. When doing so, we determine whether the quote obtained is sufficient according to GAAP to determine the fair value of the security. If determined adequate, we use the quote obtained.
Securities for which reliable market quotations are not readily available or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of our investment adviser or Board of Directors, does not represent fair value, which currently represents all of the investments in our portfolio except for our investment in United States Treasury Bills, shall each be valued as follows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminary valuation conclusions are documented and discussed with our senior management; (iii) independent third-party valuation firms engaged by, or on behalf of, the Board of Directors will conduct independent appraisals and/or review managements preliminary valuations and make their own assessment for all material assets; (iv) the Board of Directors will discuss valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the investment adviser and, where appropriate, the respective third-party valuation firms.
The recommendation of fair value is generally based on the following factors, as relevant:
| the nature and realizable value of any collateral; |
| the portfolio companys ability to make payments; |
| the portfolio companys earnings and discounted cash flow; |
| the markets in which the issuer does business; and |
| comparisons to publicly traded securities. |
Securities for which market quotations are not readily available or for which a pricing source is not sufficient may include, but are not limited to, the following:
| private placements and restricted securities that do not have an active trading market; |
| securities whose trading has been suspended or for which market quotes are no longer available; |
| debt securities that have recently gone into default and for which there is no current market; |
| securities whose prices are stale; |
| securities affected by significant events; and |
| securities that the investment adviser believes were priced incorrectly. |
Determination of fair value involves subjective judgments and estimates.
We do not currently have any employees. Mr. Stuart, our Co-Chief Executive Officer and Chairman, and Mr. Felton, our Co-Chief Executive Officer and President, each currently serve as a managing member of our investment adviser, Full Circle Advisors. The services of Mr. Sell, our Chief Financial Officer, Secretary and
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Treasurer, are provided by Full Circle Service Company in accordance with the terms of the Administration Agreement. Salvatore Faia, our Chief Compliance Officer, is the President of Vigilant Compliance Services and performs his function under the terms of an agreement between Full Circle Service Company and Vigilant Compliance Services.
Our day-to-day investment operations are managed by Full Circle Advisors. Full Circle Advisors investment committee currently consists of Messrs. Stuart, Felton, Chua and Deery, its experienced senior investment professionals. Full Circle Advisors may hire additional investment professionals, based upon its needs. See Investment Advisory Agreement.
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. Additionally, because competition for investment opportunities generally has increased among alternative investment vehicles, such as hedge funds, those entities have begun to invest in areas they have not traditionally invested in, including making investments in smaller and lower mid-sized companies. As a result of these new entrants, competition for investment opportunities in smaller and lower mid-sized companies may intensify. Many of these entities have greater financial and managerial resources than we do. We believe we are able to compete with these entities primarily on the basis of the experience and contacts of our investment adviser, our responsive and efficient investment analysis and decision-making processes, the investment terms we offer, and our willingness to make smaller investments.
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. For additional information concerning the competitive risks we face, see Risk Factors Risk Relating to Our Business and Structure We may face increasing competition for investment opportunities.
Our executive offices are located at 800 Westchester Ave., Suite S-620, Rye Brook, New York 10573, and are provided by Full Circle Service Company in accordance with the terms of the Administration Agreement. We believe that our office facilities are suitable and adequate for our business as it is contemplated to be conducted.
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.
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The following table sets forth certain information as of September 30, 2013 regarding each portfolio company in which we have a debt or equity investment. For information regarding material portfolio transactions occuring after September 30, 2013, please see Managements Discussion and Analysis of Financial Condition and Results of Operations Recent Developments Recent Portfolio Activity on page 64 of this prospectus, as well as the information included in any prospectus supplement.The general terms of our loans and other investments are described in Business Investments Types of Investments. We offer to make available significant managerial assistance to our portfolio companies. We may receive rights to observe the meetings of our portfolio companies board of directors. Other than these investments, our only relationships with our portfolio companies are the managerial assistance we may separately provide to our portfolio companies, which services would be ancillary to our investments.
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Name and Address of
Portfolio Company (1) |
Industry | Investment (2) |
Percentage
of Class Held |
Cost | Fair Value | |||||||||||||||
Control Investments
(4)
New Media West, LLC Oak Brook, IL |
Cable TV Broadband Services |
Senior Secured Term Loan, 9.00%, 12/31/2017 |
*** |
$5,079,679 |
$5,079,679 |
|||||||||||||||
Limited Liability Company
Interests, (5) |
72% | 3,600,000 | 3,869,909 | |||||||||||||||||
8,679,679 | 8,949,588 | |||||||||||||||||||
Takoda Resources Inc.*
Rye Brook, NY |
Geophysical Surveying and Mapping Services |
Senior Secured Loan Term Loan, 16.00%, 4/1/2016 Common Stock (6) |
*** |
1,683,977 |
1,683,977 |
|||||||||||||||
1,683,977 | 1,683,977 | |||||||||||||||||||
Texas Westchester Financial, LLC
Rye Brook, NY |
Consumer Financing |
Limited Liability Company Interests |
100% |
905,819 |
587,928 |
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The Finance Company, LLC
Silver Spring, MD |
Consumer Financing |
Senior Secured Loan, 15.00% (LIBOR + 14.25%, 15.00% floor), 9/30/2015 |
*** |
4,591,315 |
4,749,201 |
|||||||||||||||
Limited Liability Company Interests |
49% |
140,415 |
1,619,980 |
|||||||||||||||||
4,731,730 | 6,369,181 | |||||||||||||||||||
TransAmerican Asset Servicing Group, LLC
Elmsford, NY |
Asset Recovery Services |
Senior Secured Loan, 14.25%, 7/25/2016 |
*** |
2,409,362 |
2,216,713 |
|||||||||||||||
Limited Liability Company
Interests , (7) |
75% |
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2,409,362 | 2,216,713 | |||||||||||||||||||
Total Control Investments | 18,410,567 | 19,807,387 | ||||||||||||||||||
Affiliate Investments (3) | ||||||||||||||||||||
Modular Process Control, LLC
Chesterfield, MO |
Energy Efficiency Services |
Senior Secured Loan Revolving Loan, 15.00% (LIBOR + 14.00%, 15.00% floor), 3/28/17 |
*** |
3,319,052 |
3,489,267 |
|||||||||||||||
Senior Secured Loan Term Loan,
15.00% (LIBOR + 14.00%, 15.00% floor), 3/28/17 |
*** |
2,349,296 |
1,649,917 |
|||||||||||||||||
Modular Process Control, LLC Warrants for 8% of the outstanding Class B LLC Interests (at a $0.01 strike price), expire 3/28/13 |
8% |
288,000 |
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5,956,348 | 5,139,184 |
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Name and Address of
Portfolio Company (1) |
Industry | Investment (2) |
Percentage
of Class Held |
Cost | Fair Value | |||||||||||||||
ProGrade Ammo Group, LLC
Stevensille, MT |
Munitions |
Senior Secured Revolving Loan, 9.19% (LIBOR + 9.00%, 9.19% floor), 8/1/2014 |
*** |
$2,650,214 |
$2,650,213 |
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Senior Secured Term Loan, 16.19% (LIBOR + 16.00%, 16.19% floor), 8/1/2014 |
*** |
4,787,446 |
3,355,427 |
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Warrants for 9.5% of the outstanding LLC interests (at a $10.00 strike price), expire 8/1/2018 |
10% |
176,770 |
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7,614,430 | 6,005,640 | |||||||||||||||||||
SOLEX Fine Foods, LLC; Catsmo, LLC
New York, NY |
Food Distributors & Wholesalers |
Senior Secured Term Loan, 12.33% (LIBOR + 12.14%), 12/28/2016 |
*** |
3,805,883 |
3,867,890 |
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Limited Liability Company
Interests , (8) |
2% |
250,000 |
42,292 |
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Warrants for 1.6% of the outstanding LLC interests (strike price 0.01), expire 12/31/2022 , (8) |
15% |
58,055 |
7,475 |
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4,113,938 | 3,917,657 | |||||||||||||||||||
West World Media, LLC
(9)
Ridgefield, Connecticut |
Information and Data Services |
Limited Liability Company Interests |
15% |
430,500 |
235,451 |
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Total Affiliate Investments | 18,115,216 | 15,297,932 | ||||||||||||||||||
Other Investments
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Attention Transit Advertising
Systems, LLC Tucson, AZ |
Outdoor Advertising Services |
Senior Secured Loan, 11.50%, 9/30/2016 |
*** |
2,321,626 |
2,304,677 |
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Background Images, Inc.
Valencia, CA |
Equipment Rental Services |
Senior Secured Loan Term A, 14.69% (LIBOR + 14.50%), 6/28/2015 |
*** |
1,372,558 |
1,388,832 |
|||||||||||||||
Senior Secured Loan Term B,
16.44% (LIBOR + 16.25%), 6/28/2015 |
*** |
775,696 |
749,450 |
|||||||||||||||||
2,148,254 | 2,138,282 | |||||||||||||||||||
Blackstrap Broadcasting, LLC
Louisville, KY |
Radio Broadcasting |
Senior Secured Loan, 5.00%, 7/31/2014 |
*** |
3,000,000 |
2,474,200 |
|||||||||||||||
Subordinated Secured Loan, 16.00%, 7/31/2014 |
*** |
3,500,000 |
1,276,333 |
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6,500,000 | 3,750,533 | |||||||||||||||||||
Coast Plating, Inc.
Gardena, CA |
Aerospace Parts Plating and Finishing |
Senior Secured Loan Term A, 11.69% (LIBOR + 11.50%), 9/12/2014 |
*** |
1,365,451 |
1,379,105 |
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Senior Secured Loan Term B,
12.44% (LIBOR + 12.25%), 9/12/2014 |
*** |
3,342,999 |
3,376,430 |
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4,708,450 | 4,755,535 | |||||||||||||||||||
CPX, Inc.
Kentland, IN |
Industrial Molded Products |
Senior Secured Loan Term Loan, 14.19% (LIBOR + 14.00%, 14.19% floor), 9/30/2016 |
*** |
1,229,695 |
1,229,695 |
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Name and Address of
Portfolio Company (1) |
Industry | Investment (2) |
Percentage
of Class Held |
Cost | Fair Value | |||||||||||||||
Senior Secured Revolving Loan,
14.69% (LIBOR + 14.50%, 14.69% floor), 9/30/2016 |
*** |
$1,229,696 |
$1,229,696 |
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2,459,391 | 2,459,391 | |||||||||||||||||||
CSL Operating, LLC
Santa Clara, CA |
Industrial Metal Treatings |
Senior Secured Loan Term A, 11.69% (LIBOR + 11.50%), 5/11/2014 |
*** |
1,814,624 |
1,834,907 |
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Senior Secured Loan Term B,
11.69% (LIBOR + 11.50%), 5/11/2014 |
*** |
1,814,624 |
1,834,907 |
|||||||||||||||||
3,629,248 | 3,669,814 | |||||||||||||||||||
Franklin Place Shops Red,
LLC* Whitehouse, OH |
Real Estate Investment Trust |
Senior Secured Loan, 12.00%, 2/28/2014 |
*** |
1,487,267 |
1,487,267 |
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Employment Plus, Inc.
Bloomington, IN |
Staffing Services |
Senior Secured Loan, 12.00%, (LIBOR + 11.76%, 12.00% floor) 10/24/2013 |
*** |
5,000,000 |
5,100,000 |
|||||||||||||||
Global Energy Efficiency Holdings, Inc.
Bronx, NY |
Energy Efficiency Services |
Senior Secured Revolving Loan, 13.19% (LIBOR + 13.00%), 9/7/2015 |
*** |
5,347,463 |
$5,439,654 |
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Senior Secured Loan, 13.19% (LIBOR + 13.00%),
9/7/2015 |
*** |
891,783 |
938,160 |
|||||||||||||||||
6,239,246 | 6,377,814 | |||||||||||||||||||
Infinite Aegis Group, LLC
Denver, CO |
Healthcare Billing and Collections |
Senior Secured Loan Revolving Loan, 12.19% (LIBOR + 12.00%, 12.19% floor), 7/31/2017 |
*** |
983,610 |
983,610 |
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Senior Secured Loan Term Loan,
13.69% (LIBOR + 13.50%, 13.69% floor), 7/31/2017 |
*** |
3,868,686 |
3,868,686 |
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Warrants for 2.0% of the outstanding LLC interests (at a $0.01 strike price), expire 8/1/2023 |
2% |
107,349 |
107,349 |
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4,959,645 | 4,959,645 | |||||||||||||||||||
iMedX, Inc.
Shelton, CT |
Medical Transcription Services |
Senior Secured Revolving Loan, 13.75% (LIBOR + 13.50%, 13.75% floor), 09/19/2014 |
*** |
1,406,312 |
1,508,645 |
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Senior Secured Loan Term A,
13.75% (LIBOR + 13.50%, 13.75% floor), 09/19/2014 |
*** |
2,414,515 |
2,500,003 |
|||||||||||||||||
Senior Secured Loan Term B, 13.75% (LIBOR + 13.50%, 13.75% floor), 09/19/2014 |
*** |
1,060,360 |
1,082,239 |
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4,881,187 | 5,090,887 | |||||||||||||||||||
MDU Communications (USA) Inc.
Chesterfield, MO |
Cable TV Broadband Services |
Senior Secured Loan Tranche A, 11.85% (Prime + 3.10%, 11.85% floor), 12/31/2013 |
*** |
5,000,000 |
4,598,333 |
|||||||||||||||
Senior Secured Loan Tranche C,
9.75% (Prime + 1.00%, 9.75% floor), 12/31/2013 |
*** |
250,000 |
229,917 |
|||||||||||||||||
Senior Secured Loan Tranche D, 8.75% (Prime, 8.75% floor), 12/31/2013 |
*** |
1,480,000 |
1,361,107 |
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6,730,000 | 6,189,357 |
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Name and Address of
Portfolio Company (1) |
Industry | Investment (2) |
Percentage
of Class Held |
Cost | Fair Value | |||||||||||||||
Pristine Environments, Inc.
McLean, VA |
Building Cleaning and Maintenance Services |
Senior Secured Loan Revolving Loan, 12.69% (LIBOR + 12.50%, 12.69% floor), 3/31/2017 |
*** |
$2,442,869 |
$2,567,090 |
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Senior Secured Loan - Term Loan,
12.69% (LIBOR + 12.50%, 12.69% floor), 3/31/2017 |
*** |
1,124,128 |
1,225,573 |
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3,566,997 | 3,792,663 | |||||||||||||||||||
The Selling Source, LLC
Las Vegas, NV |
Information and Data Services |
Senior Secured Loan, 12.54%, 1/31/2017 |
*** |
3,966,102 |
4,000,000 |
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US Path Labs, LLC
Boca Raton, FL |
Healthcare Services |
Senior Secured Loan, 14.00% (LIBOR + 13.25%, 14.00% floor), 8/31/2014 |
*** |
3,404,934 |
3,440,000 |
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VaultLogix, LLC
Danvers, MA |
Information Retrieval Services |
Warrants for Variable % Ownership, (at a $307.855 strike price), expire 1/14/2019 |
2% |
56,147 |
|
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Total Other Investments | 62,058,494 | 59,515,865 | ||||||||||||||||||
Total Portfolio Company
Investments |
$ | 98,584,277 | $ | 94,621,184 |
(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, monthly, quarterly or semi-annually. For each debt investment we have provided the interest rate in effect as of September 30, 2013. Unless otherwise noted, all references to LIBOR refer to the one-month LIBOR rate. |
(3) | Affiliate Investments are investments in those companies that are Affiliated Companies of the Company, as defined in the Investment Company Act of 1940, which are not Control Investments. A company is deemed to be an Affiliate of Full Circle Capital Corporation if Full Circle Capital Corporation owns 5% or more, but less than 25%, of the voting securities of such company. |
(4) | Control Investments are investments in those companies that are Control Investments of the Company, as defined in the Investment Company Act of 1940. A company is deemed to be a Control Investment of Full Circle Capital Corporation if Full Circle Capital Corporation owns more than 25& of the voting securities of such company. |
(5) | Full Circle Capital Corporations equity investment in New Media West, LLC is held through its wholly-owned subsidiary FC New Media, Inc. |
(6) | Full Circle Capital Corporations equity investment in Takoda Resources Inc. are held through its wholly-owned subsidiary FC Takoda Holdings, LLC. |
(7) | Full Circle Capital Corporations equity investment in TransAmerican Asset Servicing Group, LLC is held through its wholly-owned subsidiary TransAmerican Asset Servicing Group, Inc. |
(8) | Full Circle Capital Corporations equity investments in SOLEX Fine Foods, LLC; Catsmo, LLC are held through its wholly-owned subsidiary FC New Specialty Foods, Inc. |
(9) | A portion of Full Circle Capital Corporations investment 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. |
* | Investment is not a qualifying asset under Section 55(a) of the 1940 Act. |
** | Interest rate shown reflects yield to maturity at time of purchase. |
*** | Investment is a debt investment and thus the percentage of class held does not apply. |
| Security is a non-income producing security. |
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Set forth below is a brief description of each portfolio company in which the fair value of our investment represents greater than 5% of our total assets as of September 30, 2013.
New Media West, LLC provides digital satellite television, high speed internet, voice over IP and other information and communication services, primarily to residents living in the Southwest United States. New Media West derives revenue through the sale of subscription services to owners and residents of MDUs under long-term right of entry agreements.
MDU Communications (USA) Inc. provides digital satellite television, high speed internet, voice over IP and other information and communication services, primarily to residents living in the United States. MDU Communications derives revenue through the sale of subscription services to owners and residents of MDUs under long-term right of entry agreements.
The Finance Company, LLC operates under the Cashwell trade name. It provides consumer installment loan programs in South Carolina.
ProGrade Ammo LLC and its affiliates, based in Montana, are manufacturers and distributors of small arms ammunition and components. ProGrade provides ammunition, accessories and components to retail outlets, ammunition manufacturers, and law enforcement agencies.
Global Energy Efficiency Holdings, Inc. (GEE) provides energy efficiency products, installation and maintenance services to small and medium sized businesses in multiple food sales and service industries.
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We determine the net asset value of the Company each quarter by subtracting our total liabilities from the fair value of our gross assets.
We conduct the valuation of our assets, pursuant to which our net asset value shall be determined, at all times consistent with GAAP and the 1940 Act. Our valuation procedures are set forth in more detail below:
Securities for which market quotations are readily available on an exchange shall be valued at such price as of the closing price on the day of valuation. We may also obtain quotes with respect to certain of our investments from pricing services or brokers or dealers in order to value assets. When doing so, we determine whether the quote obtained is sufficient according to GAAP to determine the fair value of the security. If determined adequate, we use the quote obtained.
Securities for which reliable market quotations are not readily available or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of our investment adviser or Board of Directors, does not represent fair value, which we expect will represent a substantial majority of the investments in our portfolio, shall each be valued as follows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminary valuation conclusions are documented and discussed with our senior management; (iii) independent third-party valuation firms engaged by, or on behalf of, the Board of Directors will conduct independent appraisals and/or review managements preliminary valuations and make their own assessment for all material assets; (iv) the Board of Directors will discuss valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the investment adviser and, where appropriate, the respective third-party valuation firms.
The recommendation of fair value will generally be based on the following factors, as relevant:
| the nature and realizable value of any collateral; |
| the portfolio companys ability to make payments; |
| the portfolio companys earnings and discounted cash flow; |
| the markets in which the issuer does business; and |
| comparisons to publicly traded securities. |
Securities for which market quotations are not readily available or for which a pricing source is not sufficient may include, but are not limited to, the following:
| private placements and restricted securities that do not have an active trading market; |
| securities whose trading has been suspended or for which market quotes are no longer available; |
| debt securities that have recently gone into default and for which there is no current market; |
| securities whose prices are stale; |
| securities affected by significant events; and |
| securities that the investment adviser believes were priced incorrectly. |
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements will express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements.
Absent the approval by a majority of our common stockholders to allow us to issue common stock at a price below net asset value (which approval we currently have until January 17, 2014), our Board of Directors or an authorized committee thereof will be required to make the determination that we are not selling shares of our common stock at a price below the then current net asset value of our common stock at the time of any
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offering of our shares. Our Board of Directors or an authorized committee thereof consider the following factors, among others, in making such determination:
| the net asset value of our common stock disclosed in the most recent periodic report that we filed with the SEC; |
| our managements assessment of whether any material change in the net asset value of our common stock has occurred (including through the realization of gains on the sale of our portfolio securities) during the period beginning on the date of the most recently disclosed net asset value of our common stock and ending two days prior to the date of the sale of our common stock; and |
| the magnitude of the difference between (i) a value that our Board of Directors or an authorized committee thereof has determined reflects the current net asset value of our common stock, which is generally based upon the net asset vale of our common stock disclosed in the most recent periodic report that we filed with the SEC, as adjusted to reflect our managements assessment of any material change in the net asset value of our common stock since the date of the most recently disclosed net asset value of our common stock, and (ii) the offering price of the shares of our common stock in the proposed offering. |
These processes and procedures are part of our compliance policies and procedures. Records will be made contemporaneously with all determinations described in this section and these records will be maintained with other records that we are required to maintain under the 1940 Act.
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Our Board of Directors oversees our management. The Board of Directors currently consists of five members, three of whom are not interested persons of Full Circle Capital as defined in Section 2(a)(19) of the 1940 Act. We refer to these individuals as our independent directors. Our Board of Directors elects our officers, who serve at the discretion of the Board of Directors. The responsibilities of each director will include, among other things, the oversight of our investment activity, the quarterly valuation of our assets, and oversight of our financing arrangements. The Board of Directors has also established an Audit Committee and a Nominating and Corporate Governance Committee, and may establish additional committees in the future.
Information regarding the Board of Directors is as follows:
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Name | Age | Position | Director Since |
Expiration
of Term (Fiscal Year) |
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Interested Directors | ||||||||
John E. Stuart | 47 | Co-Chief Executive Officer and Chairman of the Board of Directors | 2010 | 2016 | ||||
Gregg J. Felton | 42 | Co-Chief Executive Officer and President | 2013 | 2014 | ||||
Independent Directors | ||||||||
Mark C. Biderman | 67 | Director | 2010 | 2014 | ||||
Edward H. Cohen | 75 | Director | 2010 | 2015 | ||||
Thomas A. Ortwein, Jr. | 57 | Director | 2010 | 2014 |
The address for each of our directors is c/o Full Circle Capital Corporation, 800 Westchester Ave., Rye Brook, New York 10573.
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Name | Age | Position | ||
Michael J. Sell | 36 | Chief Financial Officer, Treasurer and Secretary | ||
Salvatore Faia | 50 | Chief Compliance Officer |
Our directors have been divided into two groups interested directors and independent directors. An interested director is an interested person as defined in Section 2(a)(19) of the 1940 Act.
Mr. Stuart is an interested person of Full Circle as defined in the 1940 Act due to his position as Co-Chief Executive Officer of the Company, a Managing Member of Full Circle Advisors, the Companys investment adviser, and a Managing Member of Full Circle Service Company, the Companys administrator.
John E. Stuart is our Co-Chief Executive Officer and Chairman and is primarily responsible for overall investment strategies, portfolio management, growth and capital market initiatives. In addition, Mr. Stuart is a Managing Member of Full Circle Advisors and a Managing Member of Full Circle Service Company. Mr. Stuart co-founded Full Circle Funding, LP in 2005 and is a managing partner. Prior to founding Full Circle Funding, LP, from 2002 to 2004, Mr. Stuart was Managing Member of Excess Capital LLC which provided financial advisory services and structured and funded equity and debt investments. Prior thereto he was Co-Founder and President of Titan Outdoor Holdings, a New York-based outdoor advertising company, between 1999 and 2002, and was a Director until its sale in 2005. Prior thereto, Mr. Stuart was a Managing
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Director in the Corporate Finance Department of Prudential Securities Incorporated between 1996 and 1999. Mr. Stuart began his career at Oppenheimer & Co., Inc. where he was a member of the Mergers and Acquisitions Group and Corporate Finance Department from 1988 to 1996. Mr. Stuarts depth of experience in corporate finance, capital markets and financial services, as well as his intimate knowledge of Full Circle Capitals business and operations, gives the Board of Directors valuable industry-specific knowledge and expertise on these and other matters. Education A.B. Brown University, 1988.
Mr. Felton is an interested person of Full Circle as defined in the 1940 Act due to his position as Co-Chief Executive Officer and President of the Company, a Managing Member of Full Circle Advisors, the Companys investment adviser, and a Managing Member of Full Circle Service Company, the Companys administrator.
Gregg J. Felton is our co-Chief Executive Officer and President and is primarily responsible for overall investment strategies and portfolio management. Mr. Felton is also a Managing Member and Chief Investment Officer of Full Circle Advisors and a Managing Member of Full Circle Service Company. Mr. Felton joined Full Circle Capital in November, 2013. Prior to joining Full Circle Capital, from 2006 to 2013, Mr. Felton was a Partner and Managing Director of Goldman Sachs and the Founder and Chief Investment Officer of Liberty Harbor, Goldman Sachs Asset Managements credit alternatives platform managing approximately $6 billion in assets. He oversaw various investment vehicles, including hedge funds, mutual funds and institutional managed accounts and facilitated the launch of Goldman Sachs business development company, Goldman Sachs BDC. From 2009 to 2010, Mr. Felton was Head of Credit for Goldman Sachs Asset Management, overseeing approximately $60 billion in assets. Prior to joining Goldman Sachs, Mr. Felton was a senior portfolio manager at Amaranth Advisors, a multi-strategy hedge fund located in Greenwich, Connecticut. He led Amaranths global corporate credit investment team from 2000 to 2006. Prior thereto, Mr. Felton was a Vice President at Chase Manhattan Bank, where he served as a portfolio manager and senior analyst for Chases Special Situations Fund. Mr. Felton began his career in the High Yield Finance Department of Chases Global Investment Bank. Most recently in 2013, Mr. Felton partnered with an investment management firm to form Altus Power America, an investment vehicle that focuses on solar power generation assets. In addition, Mr. Felton serves as a Director of Rye Country Day School. Mr. Feltons broad experience managing investment vehicles and funds provides the Board of Directors with industry expertise and a valuable perspective on a variety of credit transactions. EducationB.A. Tufts University, 1992; J.D. Georgetown University Law Center, 1996; M.B.A. Georgetown University School of Business, 1996.
The following directors are not interested persons of Full Circle Capital, as defined in the 1940 Act.
Edward H. Cohen serves as chairman of Full Circles nominating and corporate governance committee. He has been Counsel to the international law firm of Katten Muchin Rosenman LLP since February 2002, and before that was a partner in the firm (with which he has been affiliated since 1963). Mr. Cohen is currently a director of Gilman Ciocia, Inc., a tax and financial planning firm, and retired as a director of PVH Corp. (formerly Phillips-Van Heusen Corporation), a manufacturer and marketer of apparel and footwear, in July 2011. In the past five years, he has also served as director for Franklin Electronic Publishers, Inc., an electronic publishing company, Merrimac Industries, Inc., a manufacturer of passive RF and microwave components for industry, government and science, and Levcor International, Inc., a manufacturer of buttons and other accoutrements. Mr. Cohen provides the Board with essential legal experience and judgment, which were developed during his over 40 years of practice. Education B.A. University of Michigan, 1960; J.D. Harvard Law School, 1963.
Mark C. Biderman serves as chairman of Full Circle Capitals audit committee. Mr. Biderman currently serves as a member of the board of directors and audit committees of Apollo Commercial Real Estate Finance, Inc., a real estate investment trust, Apollo Residential Mortgage, Inc., a real estate finance company, and Atlas Energy GP, LLC, the General Partner of Atlas Energy, L.P., a midstream energy service provider. Mr. Biderman served as a member of the board of directors of Atlas Energy, Inc., an independent natural gas producer, from July 2009 through February 2011. Mr. Biderman served as Vice Chairman of National Financial Partners, Corp. (NFP), a financial services company focused on distributing financial products, from September 2008 through December 2008. From November 1999 until September 2008, Mr. Biderman
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served as NFPs Executive Vice President and Chief Financial Officer. From May 1987 to October 1999, Mr. Biderman served as Managing Director and Head of the Financial Institutions Group at CIBC World Markets, an investment banking firm, and its predecessor, Oppenheimer & Co., Inc. Prior to investment banking, he was an equity research analyst covering the commercial banking industry. Mr. Biderman was on the Institutional Investor All American Research Team from 1973 to 1985 and was First Team Bank Analyst in 1974 and 1976. Mr. Biderman chaired the Due Diligence Committee at CIBC and served on the Commitment and Credit Committees. Mr. Biderman serves on the Board of Governors and as Treasurer of Hebrew Union College-Jewish Institute of Religion and on the Advisory Council of the Program in Judaic Studies of Princeton University. Mr. Biderman is a Chartered Financial Analyst and brings extensive financial expertise to the Board of Directors as well as to the audit committee. Education B.S.E. Princeton University, 1967; M.B.A. Harvard Graduate School of Business Administration, 1969.
Thomas A. Ortwein, Jr . founded Highbrace Capital in 2003 to assist private and institutional investors construct and manage their portfolio of alternative investments. Highbrace also acts as the general partner in a diversified fund-of-funds. From 1997 to 2003 he was Managing Director and Head of Capital Markets for CIBC World Markets, where he served on the Management Committee, Corporate and Leveraged Finance Executive Board, The World Markets Executive Board, and the Children's Miracle Day Committee; he also was Chairman of the Commitment Committee and, from 1999 to 2003, Chairman of the Due Diligence Committee. Mr. Ortwein started the Capital Markets Group at Oppenheimer in 1991 to build the firms equity financing business which he managed until the firm was acquired by CIBC in 1997. From 1984 to 1991 he managed various business units at Oppenheimer & Co. Prior to that he held positions at Lehman Brothers and Merrill Lynch in wealth management and sales & trading. Mr. Ortwein currently serves as Chairman Emeritus of the Greenwich Boys and Girls Club, serves on the Boston College Parents Leadership Council, and volunteers for Swim Across America. He is also a past member of the Greenwich Roundtable, a not-for-profit research and educational organization for alternative investing and best practices in the Hedge Fund Industry. Mr. Ortweins extensive familiarity with the financial services industry, and the investment management process in particular, provide the Board of Directors with valuable insight. Education B.A., Economics, Moravian College, 1977.
Michael J. Sell has been our Chief Financial Officer, Treasurer and Secretary since September 2013. Mr. Sell initially joined Full Circle Funding, LP as a Vice President in June 2008. From August 2010 through September 2012, Mr. Sell was employed by our sub-administrator, Vastardis Fund Services, LLC, where he focused on business development company accounting and financial reporting. In September 2012, Mr. Sell rejoined Full Circle Service Company and was appointed as our Assistant Secretary in December 2012. Prior to joining Full Circle Funding, LP, from January 2007 to May 2008, Mr. Sell was employed by Sky Bell Asset Management, LLC (Sky Bell) as its Chief Investment Officer. From April 2006 through December 2006, Mr. Sell was an independent consultant, providing services to Full Circle Funding, LP, an affiliate of Full Circle Advisors, as well as to other clients, including Agile Group, LLC (Agile) and Sky Bell. From May 2004 through April 2006, Mr. Sell was employed by Agile in various roles, where he was actively involved in operational and portfolio analysis for its hedge fund of funds. Mr. Sell began his career in September 2001 at PricewaterhouseCoopers, LLP as a senior assurance associate focused on the financial services industry, until departing in April 2004. Education B.S., Accountancy and Finance, Miami University, 2000; Master of Accountancy, Miami University, 2001.
Salvatore Faia has served as our Chief Compliance Officer since we began operations in 2010. Since 2004, Mr. Faia has served as the President of Vigilant Compliance Services, a full service compliance firm serving mutual funds and the investment industry. In connection with his role as President of Vigilant Compliance Services, he currently serves as chief compliance officer for a number of closed-end funds, mutual funds and investment advisers. From 2002 to 2004, Mr. Faia served as senior legal counsel for PFPC Worldwide, and from 1997 to 2001, he was a partner with Pepper Hamilton LLP. Mr. Faia has extensive experience with mutual funds, hedge funds, investment advisers, broker dealers and the investment management industry. In addition to being an experienced 1940 Act and Advisers Act attorney, he is a Certified Public Accountant, and holds various FINRA Securities Licenses. Mr. Faia is a member of the
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Investment Company Institutes Chief Compliance Officer Committee. Education B.S., Accounting and Finance, La Salle University, 1984; J.D. University of Pennsylvania, 1988.
In accordance with rules of the NASDAQ Stock Market, our Board of Directors annually determines each directors independence. We do not consider a director independent unless the Board of Directors has determined that he or she has no material relationship with us. We monitor the relationships of our directors and officers through a questionnaire each director completes no less frequently than annually and updates periodically as information provided in the most recent questionnaire changes.
In order to evaluate the materiality of any such relationship, the Board of Directors uses the definition of director independence set forth in the rules promulgated by the NASDAQ Stock Market. Rule 5605(a)(2) provides that a director of a business development company (BDC), shall be considered to be independent if he or she is not an interested person of Full Circle, as defined in Section 2(a)(19) of the 1940 Act.
The Board of Directors has determined that each of the directors is independent and has no relationship with us, except as a director and stockholder, with the exception of Messrs. Stuart and Felton.
Our Board of Directors monitors and performs an oversight role with respect to the business and affairs of Full Circle, including with respect to investment practices and performance, compliance with regulatory requirements and the services, expenses and performance of service providers to Full Circle. Among other things, our Board of Directors approves the appointment of our investment adviser, administrator and officers, reviews and monitors the services and activities performed by our investment adviser, administrator and officers and approves the engagement, and reviews the performance of, our independent public accounting firm.
Under Full Circles bylaws, our Board of Directors may designate a chairman to preside over the meetings of the Board of Directors and meetings of the stockholders and to perform such other duties as may be assigned to him by the board. We do not have a fixed policy as to whether the chairman of the board should be an independent director and believe that we should maintain the flexibility to select the chairman and reorganize the leadership structure, from time to time, based on the criteria that is in the best interests of Full Circle Capital and its stockholders at such times.
Presently, Mr. Stuart serves as the chairman of our Board of Directors. Mr. Stuart is an interested person of Full Circle as defined in Section 2(a)(19) of the 1940 Act because he is on the investment committee of our investment adviser and is a Managing Member of our investment adviser and administrator. We believe that Mr. Stuarts history with Full Circles predecessor funds, familiarity with Full Circles investment platform, and extensive knowledge of the financial services industry and the investment valuation process in particular qualify him to serve as the chairman of our Board of Directors. We believe that Full Circle is best served through this existing leadership structure, as Mr. Stuarts relationship with Full Circles investment adviser provides an effective bridge and encourages an open dialogue between management and the Board of Directors, ensuring that both groups act with a common purpose.
Our Board of Directors does not currently have a designated lead independent director. We are aware of the potential conflicts that may arise when a non-independent director is chairman of the board, but believe these potential conflicts are offset by our strong corporate governance policies. Our corporate governance policies include regular meetings of the independent directors in executive session without the presence of interested directors and management, the establishment of audit and nominating and corporate governance committees comprised solely of independent directors and the appointment of a Chief Compliance Officer, with whom the independent directors meet regularly without the presence of interested directors and other members of management, for administering our compliance policies and procedures.
We recognize that different board leadership structures are appropriate for companies in different situations. We intend to re-examine our corporate governance policies on an ongoing basis to ensure that they continue to meet Full Circles needs.
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Our Board of Directors performs its risk oversight function primarily through (1) its two standing committees, which report to the entire Board of Directors and are comprised solely of independent directors, and (2) active monitoring of our chief compliance officer and our compliance policies and procedures.
As described below in more detail under Committees of the Board of Directors, the audit committee and the nominating and corporate governance committee assist the Board of Directors in fulfilling its risk oversight responsibilities. The audit committees risk oversight responsibilities include overseeing Full Circles accounting and financial reporting processes, Full Circles systems of internal controls regarding finance and accounting, Full Circles valuation process, and audits of Full Circles financial statements. The nominating and corporate governance committees risk oversight responsibilities include selecting, researching and nominating directors for election by our stockholders, developing and recommending to the board a set of corporate governance principles and overseeing the evaluation of the board and our management.
Our Board of Directors also performs its risk oversight responsibilities with the assistance of the chief compliance officer. The Board of Directors will annually review a written report from the chief compliance officer discussing the adequacy and effectiveness of the compliance policies and procedures of Full Circle and its service providers. The chief compliance officers annual report will address, at a minimum, (a) the operation of the compliance policies and procedures of Full Circle and its service providers since the last report; (b) any material changes to such policies and procedures since the last report; (c) any recommendations for material changes to such policies and procedures as a result of the chief compliance officers annual review; and (d) any compliance matter that has occurred since the date of the last report about which the Board of Directors would reasonably need to know to oversee our compliance activities and risks. In addition, the chief compliance officer will meet separately in executive session with the independent directors at least once each year.
We believe that our boards role in risk oversight is effective, and appropriate given the extensive regulation to which we are already subject as a business development company. As a business development company, we are required to comply with certain regulatory requirements that control the levels of risk in our business and operations. For example, our ability to incur indebtedness is limited such that our asset coverage must equal at least 200% immediately after each time we incur indebtedness, we generally have to invest at least 70% of our gross assets in qualifying assets and we are not generally permitted to invest in any portfolio company in which one of our affiliates currently has an investment.
We recognize that different board roles in risk oversight are appropriate for companies in different situations. We re-examine the manner in which the board administers its oversight function on an ongoing basis to ensure that it continues to meet Full Circles needs.
An audit committee and a nominating and corporate governance committee have been established by our Board of Directors. During the year ended June 30, 2013, our Board of Directors held nine Board meetings, eight Audit Committee meetings, and one Nominating and Corporate Governance Committee meeting. All directors attended at least 75% of the aggregate number of meetings of our Board of Directors and of the respective committees on which they served. We require each director to make a diligent effort to attend all board and committee meetings as well as each annual meeting of our stockholders.
The audit committee operates pursuant to a charter, available on our website at http://www.fccapital.com , which sets forth the responsibilities of the audit committee. The audit committees responsibilities include establishing guidelines and making recommendations to our Board of Directors regarding the valuation of our loans and investments, selecting the independent registered public accounting firm for Full Circle, reviewing with such independent registered public accounting firm the planning, scope and results of their audit of Full Circles financial statements, pre-approving the fees for services performed, reviewing with the independent registered public accounting firm the adequacy of internal control systems, reviewing Full Circles annual financial statements and periodic filings and receiving Full Circles audit reports and financial statements. The audit committee is currently composed of Messrs. Biderman, Cohen and Ortwein, all of whom are considered
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independent under the rules of the NASDAQ Capital Market and are not interested persons of Full Circle as that term is defined in Section 2(a)(19) of the 1940 Act. Mr. Biderman serves as chairman of the audit committee. Our Board of Directors has determined that Mr. Biderman is an audit committee financial expert as that term is defined under Item 407 of Regulation S-K, as promulgated under the Exchange Act. Mr. Biderman meets the current independence and experience requirements of Rule 10A-3 of the Exchange Act. Our Board of Directors has determined that Mr. Bidermans simultaneous service on the audit committees of four public companies will not impair his ability to effectively serve as the chairman of Full Circles Audit Committee.
The nominating and corporate governance committee operates pursuant to a charter, available on our website at http://www.fccapital.com . The members of the nominating and corporate governance committee are Messrs. Biderman, Cohen and Ortwein, all of whom are considered independent under the rules of the NASDAQ Capital Market and are not interested persons of Full Circle as that term is defined in Section 2(a)(19) of the 1940 Act. Mr. Cohen serves as chairman of the nominating and corporate governance committee. The nominating and corporate governance committee is responsible for selecting, researching and nominating directors for election by our stockholders, selecting nominees to fill vacancies on the Board of Directors or a committee thereof, developing and recommending to the Board of Directors a set of corporate governance principles and overseeing the evaluation of the Board of Directors and our management. The nominating and corporate governance committee currently does not consider nominees recommended by our stockholders.
The nominating and corporate governance committee seeks candidates who possess the background, skills and expertise to make a significant contribution to the Board of Directors, Full Circle and its stockholders. In considering possible candidates for election as a director, the nominating and corporate governance committee takes into account, in addition to such other factors as it deems relevant, the desirability of selecting directors who:
| are of high character and integrity; |
| are accomplished in their respective fields, with superior credentials and recognition; |
| have relevant expertise and experience upon which to be able to offer advice and guidance to management; |
| have sufficient time available to devote to the affairs of Full Circle; |
| are able to work with the other members of the Board of Directors and contribute to the success of Full Circle; |
| can represent the long-term interests of Full Circles stockholders as a whole; and |
| are selected such that the Board of Directors represents a range of backgrounds and experience. |
Other than the foregoing, there are no stated minimum criteria for director nominees, although the members of the nominating and corporate governance committee may also consider such other factors as they may deem are in the best interests of Full Circle and its stockholders. The nominating and corporate governance committee also believes it appropriate for certain key members of our management to participate as members of the Board of Directors.
The members of the nominating and corporate governance committee identify nominees by first evaluating the current members of the Board of Directors willing to continue in service. Current members of the Board of Directors with skills and experience that are relevant to our business and who are willing to continue in service are considered for re-nomination, balancing the value of continuity of service by existing members of the Board of Directors with that of obtaining a new perspective. If any member of the Board of Directors does not wish to continue in service or if the Board of Directors decides not to re-nominate a member for re-election, the independent members of the Board of Directors identify the desired skills and experience of a new nominee in light of the criteria above. The entire Board of Directors is polled for suggestions as to individuals meeting the aforementioned criteria. Research may also be performed to identify
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qualified individuals. To date, neither the Board of Directors nor the nominating and corporate governance committee has engaged third parties to identify or evaluate or assist in identifying potential nominees although each reserves the right in the future to retain a third party search firm, if necessary.
The nominating and corporate governance committee has not adopted a formal policy with regard to the consideration of diversity in identifying director nominees. In determining whether to recommend a director nominee, the nominating and corporate governance committee considers and discusses diversity, among other factors, with a view toward the needs of the Board of Directors as a whole. The nominating and corporate governance committee generally conceptualizes diversity expansively to include, without limitation, concepts such as race, gender, national origin, differences of viewpoint, professional experience, education, skill and other qualities that contribute to the Board of Directors, when identifying and recommending director nominees. The nominating and corporate governance committee believes that the inclusion of diversity as one of many factors considered in selecting director nominees is consistent with the nominating and corporate governance committees goal of creating a Board of Directors that best serves the needs of Full Circle Capital and the interests of its shareholders.
We do not have a compensation committee because our executive officers do not receive any direct compensation from us.
Stockholders with questions about the Company are encouraged to contact the Companys Investor Relations Department. However, if stockholders believe that their questions have not been addressed, they may communicate with the Companys Board of Directors by sending their communications to Full Circle Capital Corporation, John E. Stuart, Co-Chief Executive Officer, 800 Westchester Ave., Rye Brook, New York 10573. All stockholder communications received in this manner will be delivered to one or more members of the Board of Directors, as appropriate.
The Company has adopted a code of ethics which applies to, among others, its senior officers, including its Co-Chief Executive Officers and its Chief Financial Officer, as well as every officer, director and employee of the Company. The Companys code can be accessed via its website at http://www.fccapital.com . The Company intends to disclose any amendments to or waivers of required provisions of the code on the companys website.
The following table sets forth compensation of the Companys directors for the year ended June 30, 2013.
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Name | Fees Earned or Paid in Cash (1) | All Other Compensation (2) | Total | |||||||||
Interested Directors
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John E. Stuart | | | | |||||||||
Gregg J. Felton (3) | | | | |||||||||
Independent Directors
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Mark C. Biderman | $ | 48,500 | | $ | 48,500 | |||||||
Edward H. Cohen | $ | 37,500 | | $ | 37,500 | |||||||
Thomas A. Ortwein, Jr. | $ | 38,500 | | $ | 38,500 |
(1) | For a discussion of the independent directors compensation, see below. |
(2) | We do not maintain a stock or option plan, non-equity incentive plan or pension plan for our directors. |
(3) | Mr. Felton was appointed as a director effective as of November 8, 2013. |
Our independent directors receive an annual fee of $20,000. They also receive $2,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting
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in person and $1,000 for each telephonic meeting, and also receive $500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the audit committee receives an annual fee of $10,000 and each chairman of any other committee receives an annual fee of $2,500 for their additional services, if any, in these capacities. No compensation was paid to directors who are interested persons of Full Circle as defined in the 1940 Act.
None of our officers receives direct compensation from Full Circle. However, Messrs. Stuart and Felton, through their financial interests in Full Circle Advisors, will be entitled to a portion of any investment advisory fees paid by Full Circle to Full Circle Advisors under the Investment Advisory Agreement. Mr. Sell, our Chief Financial Officer, Treasurer and Secretary, and Mr. Faia, our Chief Compliance Officer, through Vigilant Compliance Services, will be paid by Full Circle Service Company, subject to reimbursement by us of our allocable portion of such compensation for services rendered by them to Full Circle under the Administration Agreement. To the extent that Full Circle Service Company outsources any of its functions we will reimburse Full Circle Service Company for the fees associated with such functions without profit or benefit to Full Circle Service Company.
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The management of our investment portfolio is the responsibility of our investment adviser, Full Circle Advisors, and its investment committee, which is currently led by Messrs. Stuart and Felton, the portfolio managers of the Company. For more information regarding the business experience of Messrs. Stuart and Felton, see Management Board of Directors and Executive Officers Interested Directors. Messrs. Stuart and Felton must approve each new investment that we make, in consultation with the investment committee. Messrs. Stuart and Felton are not employed by us, and receive no compensation from us in connection with their portfolio management activities. However, Messrs. Stuart and Felton, through their financial interests in Full Circle Advisors, are entitled to a portion of any investment advisory fees paid by Full Circle Capital to Full Circle Advisors.
Messrs. Stuart and Felton are assisted by Lawrence Chua and Crandall Deery, who serve as Vice Presidents of Full Circle Advisors and are members of our investment committee. We consider Messrs. Stuart and Felton, who lead our investment committee, to be our portfolio managers.
The table below shows the dollar range of shares of our common stock beneficially owned by our portfolio manager as of December 6, 2013.
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|
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Name of Portfolio Manager | Dollar Range of Equity Securities in Full Circle Capital | |||
John Stuart | $ | 100,000 - 500,000 | ||
Gregg J. Felton | $ | 50,001 - $100,000 |
The following information pertains to the other senior investment professionals of Full Circle Advisors:
Lawrence Chua is a Vice President of our investment adviser. Mr. Chua, joined Full Circle Funding, LP in 2006 and is responsible for underwriting, transaction execution and ongoing portfolio monitoring. He supervises a team of loan analysts who assist in the aforementioned activities. Prior to joining Full Circle, from 2004 to 2006, Mr. Chua founded and managed an internet-based services business where he remained a partner until the business was sold in 2007. From 2000 to 2004, Mr. Chua held a number of positions at GE Capital including commercial underwriting, finance and corporate strategy. Mr. Chua is a graduate of GEs highly regarded Financial Management Program (FMP), a leadership training program considered to be the training ground for future GE business unit CFOs and CEOs, and is Six Sigma Greenbelt certified. Education M.P.S. Cornell University, 2000, B.S. Cornell University, 1998.
Crandall Deery is a Vice President of our investment adviser. Mr. Deery joined Full Circle Advisors in 2012 and is responsible for transaction execution, underwriting, due diligence and loan monitoring. Mr. Deery has over 15 years of experience in the financial services sector primarily focused on lending to middle-market borrowers. Most recently, Mr. Deery served as a Vice President of Jefferies Finance LLC, a joint venture between Jefferies & Co. and Babson Capital that was formed to provide non-investment grade senior and subordinated debt to the middle market. In this role, he led a structuring and execution team in addition to managing a portfolio of outstanding loan commitments. Prior to Jefferies Finance, Mr. Deery served as an Associate within the Global Sponsor Finance group at GE Capital where he focused on providing financing to private equity firms for leveraged middle-market transactions. From 2001 to 2003, Mr. Deery worked in equity research at Sanford C. Bernstein & Co. where he was a member of the Institutional Investor-ranked Chemicals team. Mr. Deery began his career in 1997 as an Associate within the Financial Advisory Services group at PricewaterhouseCoopers LLP. Education M.B.A., Finance and Business Law, Leonard N. Stern School of Business, New York University, B.A., Economics, Vanderbilt University.
None of the members of Full Circle Advisors investment committee receive any direct compensation from us in connection with the management of our portfolio. Messrs. Stuart and Felton, through their financial interests in Full Circle Advisors, are entitled to a portion of any profits earned by Full Circle Advisors, which includes any fees payable to Full Circle Advisors under the terms of our Investment Advisory Agreement, less expenses incurred by Full Circle Advisors in performing its services under our Investment Advisory Agreement. The compensation paid by Full Circle Advisors to its other investment personnel may include: (i)
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annual base salary; (ii) annual cash bonus; (iii) portfolio-based performance award; and (iv) individual performance award and/or individual performance bonus.
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Full Circle Advisors serves as our investment adviser. Full Circle Advisors is an investment adviser that is registered as an investment adviser under the Advisers Act. Subject to the overall supervision of our Board of Directors, our investment adviser manages the day-to-day operations of, and provides investment advisory and management services to, Full Circle Capital. Under the terms of our Investment Advisory Agreement, Full Circle Advisors:
| determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes; |
| identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies); |
| closes and monitors the investments we make; and |
| provides us with other investment advisory, research and related services as we may from time to time require. |
Full Circle Advisors 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.
Pursuant to the Investment Advisory Agreement, we have agreed to pay Full Circle Advisors a fee for investment advisory and management services consisting of two components a base management fee and an incentive fee.
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. Our investment adviser waived the portion of the base management fee that exceeded 1.50% of Full Circle Capitals gross assets, as adjusted, from the time we commenced operations to August 31, 2011, when such waiver expired.
The incentive fee has two parts. The first part of the 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, 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 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 Full Circle Advisors 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%; |
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| 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 Full Circle Advisors (once the hurdle is reached and the catch-up is achieved, 20% of all pre-incentive fee investment income thereafter is allocated to Full Circle Advisors). |
The following is a graphical representation of the calculation of the income-related portion of the incentive fee:
These calculations are appropriately pro-rated for any period of less than three months and adjusted for any share issuances or repurchases during the relevant quarter. You should 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 of the amount of incentive fees payable to our investment adviser with respect to pre-incentive fee net investment income.
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), 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. For accounting purposes only, in order to reflect the theoretical capital gains incentive fee that would be payable for a given period as if all unrealized gains were realized, we will accrue a capital gains incentive fee based upon realized capital gains and losses during the current calendar year through the end of the period, plus any unrealized capital appreciation and depreciation as of the end of the period. It should be noted that a fee so calculated and accrued would not necessarily be payable under the Investment Advisory Agreement, and may never be paid based upon the computation of capital gains incentive fees in subsequent periods.
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Investment income (including interest, dividends, fees, etc.) = 1.25%
Hurdle rate
(1)
= 1.75%
Management fee
(2)
= 0.4375%
Other expenses (legal, accounting, transfer agent, etc.)
(3)
= 0.20%
Pre-incentive fee net investment income
(investment income (management fee + other expenses)) = 0.6125%
Pre-incentive net investment income does not exceed hurdle rate, therefore there is no incentive fee.
Investment income (including interest, dividends, fees, etc.) = 2.70%
Hurdle rate
(1)
= 1.75%
Management fee
(2)
=0.4375%
Other expenses (legal, accounting, transfer agent, etc.)
(3)
= 0.20%
Pre-incentive fee net investment income
(investment income (management fee + other expenses)) = 2.0625%
Incentive fee = 100% × pre-incentive fee net investment income, subject to the catch-up
(4)
= 100% × (2.0625% 1.75%)
= 0.3125%
Investment income (including interest, dividends, fees, etc.) = 3.00%
Hurdle rate
(1)
= 1.75%
Management fee
(2)
= 0.4375%
Other expenses (legal, accounting, transfer agent, etc.)
(3)
= 0.20%
Pre-incentive fee net investment income
(investment income (management fee + other expenses)) = 2.3625%
Incentive fee = 20% × pre-incentive fee net investment income, subject to catch-up
(4)
Incentive fee = 100% × catch-up + (20% × (pre-incentive fee net investment
income 2.1875%))
Catch-up = 2.1875% 1.75%
= 0.4375%
Incentive fee = (100% × 0.4375%) + (20% × (2.3625% 2.1875%))
= 0.4375% + (20% × 0. 175%)
= 0.4375% + 0.035%
= 0.4725%
* | The hypothetical amount of pre-incentive fee net investment income shown is based on a percentage of total net assets. |
(1) | Represents 7% annualized hurdle rate. |
(2) | Represents 1.75% annualized management fee. |
(3) | Excludes organizational and offering expenses. |
(4) | The catch-up provision is intended to provide the investment adviser with an incentive fee of 20% on all of Full Circle Capitals pre-incentive fee net investment income as if a hurdle rate did not apply when its net investment income exceeds 2.1875% in any calendar quarter. |
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| Year 1: $20 million investment made in Company A (Investment A), and $30 million investment made in Company B (Investment B) |
| Year 2: Investment A sold for $50 million and fair market value (FMV) of Investment B determined to be $32 million |
| Year 3: FMV of Investment B determined to be $25 million |
| Year 4: Investment B sold for $31 million |
The capital gains portion of the incentive fee would be:
| Year 1: None |
| Year 2: $6 million capital gains incentive fee ($30 million realized capital gains on sale of Investment A multiplied by 20%) |
| Year 3: None ($5 million (20% multiplied by ($30 million cumulative capital gains less $5 million cumulative capital depreciation)) less $6 million (previous capital gains fee paid in Year 2)) |
| Year 4: $200,000 capital gains incentive fee ($6.2 million ($31 million cumulative realized capital gains multiplied by 20%) less $6 million (capital gains fee taken in Year 2)) |
| Year 1: $20 million investment made in Company A (Investment A), $30 million investment made in Company B (Investment B) and $25 million investment made in Company C (Investment C) |
| Year 2: Investment A sold for $50 million, FMV of Investment B determined to be $25 million and FMV of Investment C determined to be $25 million |
| Year 3: FMV of Investment B determined to be $24 million and Investment C sold for $30 million |
| Year 4: FMV of Investment B determined to be $35 million |
| Year 5: Investment B sold for $20 million |
The capital gains incentive fee, if any, would be:
| Year 1: None |
| Year 2: $5 million capital gains incentive fee (20% multiplied by $25 million ($30 million realized capital gains on Investment A less unrealized capital depreciation on Investment B)) |
| Year 3: $1.4 million capital gains incentive fee (1) ($6.4 million (20% multiplied by $32 million ($35 million cumulative realized capital gains less $3 million unrealized capital depreciation)) less $5 million capital gains fee received in Year 2) |
| Year 4: $0.6 million capital gains incentive fee ($7.0 million (20% multiplied by $35 million ($35 million cumulative realized capital gains)) less $6.4 million cumulative capital gains fee paid in Year 2 and Year 3) |
| Year 5: None ($5 million (20% multiplied by $25 million (cumulative realized capital gains of $35 million less realized capital losses of $10 million)) less $7.0 million cumulative capital gains fee paid in Year 2, Year 3, and Year 4) |
(1) | As illustrated in Year 3 of Alternative 1 above, if the Company were to be wound up on a date other than December 31 of any year, the Company may have paid aggregate capital gain incentive fees that are more than the amount of such fees that would be payable if the Company had been wound up on December 31 of such year. |
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The investment committee of our investment adviser and their respective staffs, when and to the extent engaged in providing investment advisory and management services, and the compensation and routine overhead expenses of such personnel allocable to such services, are provided and paid for by Full Circle Advisors. We bear all other costs and expenses of our operations and transactions, including (without limitation):
| the cost of our organization and initial public offering; |
| the cost of calculating our net asset value, including the cost of any third-party valuation services; |
| the cost of effecting sales and repurchases of our shares and other securities; |
| interest payable on debt, if any, to finance our investments; |
| fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing due diligence reviews of prospective investments and third-party advisory fees; |
| transfer agent and safekeeping fees; |
| fees and expenses associated with marketing efforts; |
| federal and state registration fees, any stock exchange listing fees; |
| federal, state and local taxes; |
| independent directors fees and expenses; |
| brokerage commissions; |
| fidelity bond, directors and officers errors and omissions liability insurance and other insurance premiums; |
| direct costs and expenses of administration and sub-administration, including printing, mailing, long distance telephone and staff; |
| fees and expenses associated with independent audits and outside legal costs; |
| costs associated with our reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws; and |
| all other expenses incurred by either Full Circle Service Company or us in connection with administering our business, including payments under the Administration Agreement that will be based upon 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 costs of compensation and related expenses of our chief compliance officer and our chief financial officer and any administrative support staff. |
Our investment adviser had 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 was extended through September 30, 2011 and expired on such date.
Our Board of Directors initially approved the Investment Advisory Agreement on July 8, 2010 and most recently reapproved such agreement on June 24, 2013. Unless earlier terminated as described below, the Investment Advisory Agreement will remain in effect from year to year if approved annually by our Board of Directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not parties to such agreement or who are not
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interested persons of any such party, as such term is defined in Section 2(a)(19) of the 1940 Act. The Investment Advisory Agreement will automatically terminate in the event of its assignment. The Investment Advisory Agreement may also be terminated by either party without penalty upon not more than 60 days written notice to the other party. See Risk Factors Risks Relating to Our Business and Structure 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.
The Investment Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, Full Circle Advisors 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 Full Circle Advisors services under the Investment Advisory Agreement or otherwise as an investment adviser of Full Circle Capital.
Full Circle Advisors is a Delaware limited liability company. The principal executive offices of Full Circle Advisors are located at 800 Westchester Ave., Suite S-620, Rye Brook, New York 10573.
A discussion regarding the basis for our Board of Directors approval of our Investment Advisory Agreement was included in our annual report on Form 10-K for the period ending June 30, 2013.
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Full Circle Service Company, a Delaware limited liability company, serves as our administrator. The principal executive offices of Full Circle Service Company are located at 800 Westchester Ave., Suite S-620, Rye Brook, New York 10573. Pursuant to an Administration Agreement most recently ratified by our Board of Directors on June 24, 2013, Full Circle Service Company furnishes us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities. Under the Administration Agreement, Full Circle Service Company 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, Full Circle Service Company 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 Companys 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, Full Circle Service Company 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.
Full Circle Service Company also may provide administrative services to our investment adviser, Full Circle Advisors. As a result, Full Circle Advisors would reimburse Full Circle Service Company for its allocable portion of Full Circle Service Companys 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 Full Circle Advisors or any of its affiliates manage other investment vehicles in the future, no portion of any administrative services provided by Full Circle Service Company 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, Full Circle Service Company 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 Full Circle Service Companys services under the Administration Agreement or otherwise as administrator for Full Circle Capital.
Our former Chief Financial Officer, 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. In exchange for providing such services, Full Circle Service Company pays Vastardis Fund Services an asset-based fee with a $200,000 annual minimum. This asset-based fee varies depending upon our gross assets as follows:
|
|
|||
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%) |
Additionally, prior to September 30, 2013, we reimbursed Full Circle Service Company for the fees charged by Vastardis Fund Services for the service of Mr. Vastardis as our Chief Financial Officer, Treasurer and Secretary at an annual rate of up to $250,000. Vastardis Fund Services agreed to cap its first year fees at $200,000 for administrative services to us, and at $100,000 for the service of Mr. Vastardis as our Chief Financial Officer, Treasurer and Secretary. These caps expired on August 31, 2011. As of September 30, 2013, Michael J. Sell is our Chief Financial Officer, Treasurer and Secretary and Mr. Vastardis no longer receives fees for such services.
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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. Under this agreement, we have a right to use the Full Circle name for so long as the Investment Advisory Agreement with Full Circle Advisors is in effect. Other than with respect to this limited license, we will have no legal right to the Full Circle name.
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The following discussion is a general summary of the material U.S. federal income tax considerations applicable to us and to an investment in shares of our common stock. This summary does not purport to be a complete description of the income tax considerations applicable to such an investment. For example, we have not described tax consequences that may be relevant to certain types of holders subject to special treatment under U.S. federal income tax laws, including stockholders subject to the alternative minimum tax, tax-exempt organizations, insurance companies, dealers in securities, a trader in securities that elects to use a market-to-market method of accounting for its securities holdings, pension plans and trusts, and financial institutions. This summary assumes that investors hold our shares of common stock as capital assets (within the meaning of the Code). The discussion is based upon the Code, Treasury regulations, and administrative and judicial interpretations, each as of the date of this prospectus and all of which are subject to change, possibly retroactively, which could affect the continuing validity of this discussion. We have not sought and will not seek any ruling from the IRS regarding this offering. This summary does not discuss any aspects of U.S. estate or gift tax or foreign, state or local tax. It does not discuss the special treatment under U.S. federal income tax laws that could result if we invested in tax-exempt securities or certain other investment assets.
This summary does not discuss the consequences of an investment in our preferred stock, subscription rights to purchase shares of our common stock, debt securities or warrants representing rights to purchase shares of our common stock, preferred stock or debt securities. The U.S. federal income tax consequences of such an investment will be discussed in the relevant prospectus supplement.
A U.S. stockholder generally is a beneficial owner of shares of our common stock who is for U.S. federal income tax purposes:
| A citizen or individual resident of the U.S.; |
| A corporation or other entity treated as a corporation, for U.S. federal income tax purposes, created or organized in or under the laws of the U.S., any state thereof or the District of Columbia; |
| A trust if a court within the U.S. is asked to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantive decisions of the trust; or |
| An estate, the income of which is subject to U.S. federal income taxation regardless of its source. |
A Non-U.S. stockholder generally is a beneficial owner of shares of our common stock who is for U.S. federal income tax purposes:
| A nonresident alien individual; |
| A foreign corporation; or |
| An estate or trust that in either case is not subject to U.S. federal income tax on a net income basis on income or gain from a note. |
If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) holds shares of our common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A prospective stockholder that is a partner of a partnership holding shares of our common stock should consult his, her or its tax advisers with respect to the purchase, ownership and disposition of shares of our common stock.
Tax matters are very complicated and the tax consequences to an investor of an investment in our shares will depend on the facts of his, her or its particular situation. We encourage investors to consult their own tax advisers regarding the specific consequences of such an investment, including tax reporting requirements, the applicability of federal, state, local and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the effect of any possible changes in the tax laws.
As a business development company, we have elected to be treated, and intend to qualify annually, as a RIC under Subchapter M of the Code, beginning with our 2010 taxable year. As a RIC, we generally will not
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have to pay corporate-level U.S. federal income taxes on any income that we distribute to our stockholders as dividends. To continue to qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, to qualify for RIC tax treatment we must distribute to our stockholders, for each taxable year, at least 90% of our investment company taxable income, which is generally our ordinary income plus the excess of our realized net short-term capital gains over our realized net long-term capital losses (the Annual Distribution Requirement).
If we:
| qualify as a RIC; and |
| satisfy the Annual Distribution Requirement, |
then we will not be subject to U.S. federal income tax on the portion of our income we distribute (or are deemed to distribute) to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gains not distributed (or deemed distributed) to our stockholders.
We will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our net ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years (the Excise Tax Avoidance Requirement). We generally will endeavor in each taxable year to make sufficient distributions to our stockholders to avoid any U.S. federal excise tax on our earnings.
In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things:
| continue to qualify as a business development company under the 1940 Act at all times during each taxable year; |
| derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to loans of certain securities, gains from the sale of stock or other securities, net income from certain qualified publicly traded partnerships, or other income derived with respect to our business of investing in such stock or securities (the 90% Income Test); and |
| diversify our holdings so that at the end of each quarter of the taxable year: |
| at least 50% of the value of our assets consists of cash, cash equivalents, U.S. Government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and |
| no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain qualified publicly traded partnerships (the Diversification Tests). |
We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest or, in certain cases, increasing interest rates or issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. We may also have to include in income other amounts that we have not yet received in cash, such as PIK interest and deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount. In addition, we may be required to accrue for federal income tax purposes amounts attributable to our investment in CLOs that may differ from
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the distributions received in respect of such investments. Although we do not presently expect to do so, we are authorized to borrow funds, to sell assets and to make taxable distributions of our stock and debt securities in order to satisfy distribution requirements. Our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Annual Distribution Requirement or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous. If we are unable to obtain cash from other sources to satisfy the Annual Distribution Requirement, we may fail to qualify as a RIC and become subject to tax as an ordinary corporation.
Under the 1940 Act, we are not permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain asset coverage tests are met. If we are prohibited to make distributions, we may fail to qualify as a RIC and become subject to tax as an ordinary corporation.
We may in the future purchase residual or subordinated interests in CLOs that are treated for U.S. federal income tax purposes as shares in a PFIC. We may be subject to U.S. federal income tax on our allocable share of a portion of any excess distribution received on, or any gain from the disposition of, such shares even if our allocable share of such income is distributed as a taxable dividend to the PFICs stockholders. Additional charges in the nature of interest generally will be imposed on us in respect of deferred taxes arising from any such excess distribution or gain. If we elect to treat a PFIC as a qualified electing fund under the Code (a QEF), in lieu of the foregoing requirements, we will be required to include in income each year our proportionate share of the ordinary earnings and net capital gain of the QEF, even if such income is not distributed by the QEF. Alternatively, we may elect mark-to-market treatment for a PFIC; in this case, we will recognize as ordinary income our allocable share of any increase in the value of such shares, and as ordinary loss our allocable share of any decrease in such value to the extent that any such decrease does not exceed prior increases included in our income. Under either election, we may be required to recognize in a year income in excess of distributions from PFICs and proceeds from dispositions of PFIC shares during that year, and we must distribute such income to satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement.
If we hold more than 10% of the shares in a foreign corporation that is treated as a controlled foreign corporation (CFC) (including equity tranche investments in a CLO treated as CFC), we may be treated as receiving a deemed distribution (taxable as ordinary income) each year from such foreign corporation in an amount equal to our pro rata share of the corporations income for the tax year (including both ordinary earnings and capital gains), whether or not the corporation makes an actual distribution during such year. This deemed distribution is required to be included in the income of a U.S. Shareholder of a CFC regardless of whether the shareholder has made a QEF election with respect to such CFC. In general, a foreign corporation will be classified as a CFC if more than 50% of the shares of the corporation, measured by reference to combined voting power or value, is owned (directly, indirectly or by attribution) by U.S. Shareholders. A U.S. Shareholder, for this purpose, is any U.S. person that possesses (actually or constructively) 10% or more of the combined voting power of all classes of shares of a corporation. If we are treated as receiving a deemed distribution from a CFC, we will be required to include such distribution in our investment company taxable income regardless of whether we receive any actual distributions from such CFC, and we must distribute such income to satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement.
Although the Code generally provides that income inclusions from a QEF and subpart F income will be good income for purposes of the 90% Income Test to the extent it is distributed to a RIC in the year it is included in the RICs income, the Code does not specifically provide whether income inclusions from a QEF and subpart F income for which no distribution is received during the RICs taxable year would be good income for the 90% Income Test. The IRS has issued a series of private rulings in which it has concluded that all income inclusions from a QEF and subpart F income included in a RICs income would constitute good income for purposes of the 90% Income Test. Such rulings are not binding on the IRS except with respect to the taxpayer to whom such rulings were issued. Accordingly, although we believe that the income inclusions from a QEF and subpart F income of a CLO that we are required to include in our taxable income would be good income for purposes of the 90% Income Test, no guaranty can be made that the IRS would not assert that such income would
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not be good income for purposes of the 90% Income Test. If such income were not considered good income for purposes of the 90% Income Test, we may fail to qualify as a RIC.
The remainder of this discussion assumes that we qualify as a RIC and have satisfied the Annual Distribution Requirement.
Distributions by us generally are taxable to U.S. stockholders as ordinary income or capital gains. Distributions of our investment company taxable income (which is, generally, our net ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses) will be taxable as ordinary income to U.S. stockholders to the extent of our current or accumulated earnings and profits, whether paid in cash or reinvested in additional common stock. To the extent such distributions paid by us to stockholders taxed at individual rates are attributable to dividends from U.S. corporations and certain qualified foreign corporations, such distributions (Qualifying Dividends) may be eligible for a current maximum tax rate of 20%. In this regard, it is anticipated that distributions paid by us will generally not be attributable to dividends and, therefore, generally will not qualify for the current 20% maximum rate applicable to Qualifying Dividends. Distributions of our net capital gains (which are generally our realized net long-term capital gains in excess of realized net short-term capital losses) and properly reported by us as capital gain dividends will be taxable to a U.S. stockholder as long-term capital gains that are currently taxable at a maximum rate of 20% in the case of stockholders taxed at individual rates, regardless of the U.S. stockholders holding period for his, her or its common stock and regardless of whether paid in cash or reinvested in additional common stock. Distributions in excess of our earnings and profits first will reduce a U.S. stockholders adjusted tax basis in such stockholders common stock and, after the adjusted basis is reduced to zero, will constitute capital gains to such U.S. stockholder.
We may retain some or all of our realized net long-term capital gains in excess of realized net short-term capital losses, but designate the retained net capital gain as a deemed distribution. In that case, among other consequences, we will pay tax on the retained amount, each U.S. stockholder will be required to include his, her or its share of the deemed distribution in income as if it had been actually distributed to the U.S. stockholder, and the U.S. stockholder will be entitled to claim a credit equal to his, her or its allocable share of the tax paid thereon by us. Because we expect to pay tax on any retained capital gains at our regular corporate tax rate, and because that rate is in excess of the maximum rate currently payable by U.S. stockholders taxed at individual rates on long-term capital gains, the amount of tax that individual U.S. stockholders will be treated as having paid will exceed the tax they owe on the capital gain distribution and such excess generally may be refunded or claimed as a credit against the U.S. stockholders other U.S. federal income tax obligations. The amount of the deemed distribution net of such tax will be added to the U.S. stockholders cost basis for his, her or its common stock. In order to utilize the deemed distribution approach, we must provide written notice to our stockholders prior to the expiration of 60 days after the close of the relevant taxable year. We cannot treat any of our investment company taxable income as a deemed distribution.
For purposes of determining (1) whether the Annual Distribution Requirement is satisfied for any year and (2) the amount of capital gain dividends paid for that year, we may, under certain circumstances, elect to treat a dividend that is paid during the following taxable year as if it had been paid during the taxable year in question. If we make such an election, the U.S. stockholder will still be treated as receiving the dividend in the taxable year in which the distribution is made. However, any dividend declared by us in October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following year, will be treated as if it had been received by our U.S. stockholders on December 31 of the year in which the dividend was declared.
If an investor purchases shares of our common stock shortly before the record date of a distribution, the price of the shares will include the value of the distribution and the investor will be subject to tax on the distribution even though economically it may represent a return of his, her or its investment.
A U.S. stockholder generally will recognize taxable gain or loss if the U.S. stockholder sells or otherwise disposes of his, her or its shares of our common stock. The amount of gain or loss will be measured by the difference between such U.S. stockholders adjusted tax basis in the common stock sold and the amount of the proceeds received in exchange. Any gain arising from such sale or disposition generally will be treated as
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long-term capital gain or loss if the U.S. stockholder has held his, her or its shares for more than one year. Otherwise, it will be classified as short-term capital gain or loss. However, any capital loss arising from the sale or disposition of shares of our common stock held for six months or less will be treated as long-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain deemed received, with respect to such shares. In addition, all or a portion of any loss recognized upon a disposition of shares of our common stock may be disallowed if other shares of our common stock are purchased (whether through reinvestment of distributions or otherwise) within 30 days before or after the disposition.
In general, U.S. stockholders taxed at individual rates currently are subject to a maximum U.S. federal income tax rate of 20% on their net capital gain (i.e., the excess of realized net long-term capital gains over realized net short-term capital losses), including any long-term capital gain derived from an investment in our shares. Such rate is lower than the maximum rate on ordinary income currently payable by such U.S. stockholders. In addition, for taxable years beginning after December 31, 2012, individuals with income in excess of $200,000 ($250,000 in the case of married individuals filing jointly) and certain estates and trusts are subject to an additional 3.8% tax on their net investment income, which generally includes net income from interest, dividends, annuities, royalties, and rents, and net capital gains (other than certain amounts earned from trades or businesses). Corporate U.S. stockholders currently are subject to U.S. federal income tax on net capital gain at the maximum 35% rate also applied to ordinary income. Non-corporate U.S. stockholders with net capital losses for a year (i.e., capital losses in excess of capital gains) generally may deduct up to $3,000 of such losses against their ordinary income each year. Any net capital losses of a non-corporate U.S. stockholder in excess of $3,000 generally may be carried forward and used in subsequent years as provided in the Code. Corporate U.S. stockholders generally may not deduct any net capital losses for a year, but may carry back such losses for three years or carry forward such losses for five years.
We will send to each of our U.S. stockholders, as promptly as possible after the end of each calendar year, a notice reporting the amounts includible in such U.S. stockholders taxable income for such year as ordinary income and as long-term capital gain. In addition, the federal tax status of each years distributions generally will be reported to the IRS (including the amount of dividends, if any, eligible for the current 20% maximum rate). Dividends paid by us generally will not be eligible for the dividends-received deduction or the preferential tax rate applicable to Qualifying Dividends because our income generally will not consist of dividends. Distributions may also be subject to additional state, local and foreign taxes depending on a U.S. stockholders particular situation.
We may be required to withhold U.S. federal income tax (backup withholding) from all distributions to any U.S. stockholder (other than a corporation, a financial institution, or a stockholder that otherwise qualifies for an exemption) (1) who fails to furnish us with a correct taxpayer identification number or a certificate that such stockholder is exempt from backup withholding or (2) with respect to whom the IRS notifies us that such stockholder has failed to properly report certain interest and dividend income to the IRS and to respond to notices to that effect. An individuals taxpayer identification number is his or her social security number. Any amount withheld under backup withholding is allowed as a credit against the U.S. stockholders federal income tax liability, provided that proper information is provided to the IRS.
U.S. stockholders that hold their common stock through foreign accounts or intermediaries will be subject to U.S. withholding tax at a rate of 30% on dividends paid after June 30, 2014, and proceeds on the sale of our common stock received after December 31, 2016 if certain disclosure requirements related to U.S. accounts are not satisfied.
Whether an investment in the shares is appropriate for a Non-U.S. stockholder will depend upon that persons particular circumstances. An investment in the shares by a Non-U.S. stockholder may have adverse tax consequences. Non-U.S. stockholders should consult their tax advisers before investing in our common stock.
Distributions of our investment company taxable income to Non-U.S. stockholders (including interest income and realized net short-term capital gains in excess of realized long-term capital losses, which generally would be free of withholding if paid to Non-U.S. stockholders directly) will be subject to withholding of
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federal tax at a 30% rate (or lower rate provided by an applicable treaty) to the extent of our current and accumulated earnings and profits unless an applicable exception applies. If the distributions are effectively connected with a U.S. trade or business of the Non-U.S. stockholder, we will not be required to withhold federal tax if the Non-U.S. stockholder complies with applicable certification and disclosure requirements, although the distributions will be subject to U.S. federal income tax at the rates applicable to U.S. persons. (Special certification requirements apply to a Non-U.S. stockholder that is a foreign partnership or a foreign trust, and such entities are urged to consult their own tax advisers.)
However, for taxable years beginning before January 1, 2014, no withholding is required with respect to certain distributions if (i) the distributions are properly reported as interest-related dividends or short-term capital gain dividends, (ii) the distributions are derived from sources specified in the Code for such dividends and (iii) certain other requirements are satisfied. No assurance can be provided that this exemption will be so extended for years beginning after December 31, 2013; or whether any of our distributions will be designated as eligible for this exemption. Currently, we do not anticipate that any significant amount of our distributions would be reported as eligible for this exemption from withholding even if extended.
Actual or deemed distributions of our net capital gains to a Non-U.S. stockholder, and gains realized by a Non-U.S. stockholder upon the sale of our common stock, will not be subject to federal withholding tax and generally will not be subject to federal income tax unless the distributions or gains, as the case may be, are effectively connected with a U.S. trade or business of the Non-U.S. stockholder.
The tax consequences to Non-U.S. stockholders entitled to claim the benefits of an applicable tax treaty or that are individuals that are present in the U.S. for 183 days or more during a taxable year may be different from those described herein. Non-U.S. stockholders are urged to consult their tax advisers with respect to the procedure for claiming the benefit of a lower treaty rate and the applicability of foreign taxes.
If we distribute our net capital gains in the form of deemed rather than actual distributions, a Non-U.S. stockholder will be entitled to a U.S. federal income tax credit or tax refund equal to the stockholders allocable share of the tax we pay on the capital gains deemed to have been distributed. In order to obtain the refund, the Non-U.S. stockholder must obtain a U.S. taxpayer identification number and file a U.S. federal income tax return even if the Non-U.S. stockholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a U.S. federal income tax return. For a corporate Non-U.S. stockholder, distributions (both actual and deemed), and gains realized upon the sale of our common stock that are effectively connected to a U.S. trade or business may, under certain circumstances, be subject to an additional branch profits tax at a 30% rate (or at a lower rate if provided for by an applicable treaty). Accordingly, investment in the shares may not be appropriate for a Non-U.S. stockholder.
A Non-U.S. stockholder who is a non-resident alien individual, and who is otherwise subject to withholding of federal tax, may be subject to information reporting and backup withholding of U.S. federal income tax on dividends unless the Non-U.S. stockholder provides us or the dividend paying agent with an IRS Form W-8BEN (or an acceptable substitute form) or otherwise meets documentary evidence requirements for establishing that it is a Non-U.S. stockholder or otherwise establishes an exemption from backup withholding.
Recently enacted legislation generally imposes a 30% withholding tax on payments of certain types of income to foreign financial institutions that fail to enter into an agreement with the U.S. Treasury to report certain required information with respect to accounts held by U.S. persons (or held by foreign entities that have U.S. persons as substantial owners). The types of income subject to the tax include U.S. source interest and dividends paid after June 30, 2014 and the gross proceeds from the sale of any property that could produce U.S.-source interest or dividends received after December 31, 2016. The information required to be reported includes the identity and taxpayer identification number of each account holder that is a U.S. person and transaction activity within the holders account. In addition, subject to certain exceptions, this legislation also imposes a 30% withholding on payments to foreign entities that are not financial institutions unless the foreign entity certifies that it does not have a greater than 10% U.S. owner or provides the withholding agent with identifying information on each greater than 10% U.S. owner. When these provisions become effective, depending on the status of a Non-U.S. Holder and the status of the intermediaries through which they hold their shares, Non-U.S. Holders could be subject to this 30% withholding tax with respect to distributions on
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their shares and proceeds from the sale of their shares. Under certain circumstances, a Non-U.S. Holder might be eligible for refunds or credits of such taxes.
Non-U.S. persons should consult their own tax advisers with respect to the U.S. federal income tax and withholding tax, and state, local and foreign tax consequences of an investment in the shares.
If we were unable to qualify for treatment as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates, regardless of whether we make any distributions to our stockholders. Distributions would not be required, and any distributions made to our stockholders as ordinary dividend income that, subject to certain limitations, may be eligible for the current 20% maximum rate to the extent of our current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends-received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholders tax basis, and any remaining distributions would be treated as a capital gain.
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On February 1, 2013, subject to certain determinations required to be made by our board of directors, our stockholders approved our ability to sell or otherwise issue shares of our common stock, not exceeding 25% of our then outstanding common stock, at a price below the then current net asset value per share during a period beginning on February 1, 2013 and expiring on the date of our next Annual Stockholders Meeting on January 17, 2014 (the Stockholder Approval). We are currently seeking similar approval from our common stockholders at our upcoming special stockholders meeting scheduled for January 17, 2014, which would extend our ability to issue shares of our common stock at a price below net asset value per share for an additional year.
In order to sell shares of common stock pursuant to this authorization, no further authorization from our stockholders will need to be solicited, but a majority of our directors who have no financial interest in the sale and a majority of our independent directors will have to (a) find that the sale is in our best interests and in the best interests of our stockholders and (b) in consultation with any underwriter or underwriters of the offering, make a good faith determination as of a time either immediately prior to the first solicitation by us or on our behalf of firm commitments to purchase such shares of common stock, or immediately prior to the issuance of such common stock, that the price at which such shares of common stock are to be sold is not less than a price which closely approximates the market value of those shares of common stock, less any distributing commission or discount.
Any offering of common stock below its net asset value per share will be designed to raise capital for investment in accordance with our investment objective.
In making a determination that an offering of common stock below its net asset value per share is in our and our stockholders best interests, our board of directors will consider a variety of factors including:
| the effect that an offering below net asset value per share would have on our stockholders, including the potential dilution to the net asset value per share of our common stock our stockholders would experience as a result of the offering; |
| the amount per share by which the offering price per share and the net proceeds per share are less than our most recently determined net asset value per share; |
| the relationship of recent market prices of par common stock to net asset value per share and the potential impact of the offering on the market price per share of our common stock; |
| whether the estimated offering price would closely approximate the market value of shares of our common stock; |
| the potential market impact of being able to raise capital during the current financial market difficulties; |
| the nature of any new investors anticipated to acquire shares of our common stock in the offering; |
| the anticipated rate of return on and quality, type and availability of investments; and |
| the leverage available to us. |
Our board of directors will also consider the fact that sales of shares of common stock at a discount will benefit our investment adviser as the investment adviser will earn additional investment management fees on the proceeds of such offerings, as it would from the offering of any other of our securities or from the offering of common stock at a premium to net asset value per share.
We will not sell shares of our common stock under this prospectus or an accompanying prospectus supplement pursuant to the Stockholder Approval without first filing a new post-effective amendment to the registration statement if the cumulative dilution to our net asset value per share from offerings under the registration statement, as amended by any post-effective amendments, exceeds 15%. This would be measured separately for each offering pursuant to the registration statement, as amended by any post-effective amendments, by calculating the percentage dilution or accretion to aggregate net asset value from that offering and then summing the percentage from each offering. For example, if our most recently determined NAV per
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share at the time of the first offering is $9.00 and we have 6 million shares outstanding, the sale of 1.5 million shares at net proceeds to us of $4.50 per share (a 50% discount) would produce dilution of 10.0%. If we subsequently determined that our NAV per share increased to $10.00 on the then 7.5 million shares outstanding and then made an additional offering, we could, for example, sell approximately an additional 830,000 shares at net proceeds to us of $5.00 per share, which would produce dilution of 5.0%, before we would reach the aggregate 15% limit. If we file a new post-effective amendment, the threshold would reset.
In addition, it should be noted that under the Stockholder Approval the maximum number of shares issuable below NAV per share that could result in dilution is limited to 25% of our outstanding common stock immediately prior to each offering. As a result, the maximum amount of dilution to existing stockholders under the Stockholder Approval will be limited to no more than 20% of our then current NAV per share, assuming we were to issue the maximum number of shares at no more than par value, or $0.01 per share.
Sales by us of our common stock at a discount from net asset value per share pose potential risks for our existing stockholders whether or not they participate in the offering, as well as for new investors who participate in the offering. Any sale of common stock at a price below net asset value per share would result in an immediate dilution to existing common stockholders who do not participate in such sale on at least a pro-rata basis. See Risk Factors Risks Relating to Offerings Pursuant to this Prospectus Stockholders may incur dilution if we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock or issue securities to subscribe to, convert to or purchase shares of our common stock.
The following three headings and accompanying tables explain and provide hypothetical examples on the impact of an offering of our common stock at a price less than net asset value per share on three different types of investors:
| existing stockholders who do not purchase any shares in the offering; |
| existing stockholders who purchase a relatively small amount of shares in the offering or a relatively large amount of shares in the offering; and |
| new investors who become stockholders by purchasing shares in the offering. |
Our current stockholders who do not participate in an offering below net asset value per share or who do not buy additional shares in the secondary market at the same or lower price as we obtain in the offering (after expenses and commissions) face the greatest potential risks. These stockholders will experience an immediate dilution in the net asset value of the shares of common stock they hold and their net asset value per share. These stockholders will also experience a disproportionately greater decrease in their participation in our earnings and assets and their voting power than the increase we will experience in our assets, potential earning power and voting interests due to such offering. These stockholders may also experience a decline in the market price of their shares, which often reflects to some degree announced or potential increases and decreases in net asset value per share. This decrease could be more pronounced as the size of the offering and level of discounts increases. Further, if current stockholders do not purchase any shares to maintain their percentage interest, regardless of whether such offering is above or below the then current net asset value, their voting power will be diluted.
The following chart illustrates the level of net asset value dilution that would be experienced by a nonparticipating stockholder in three different hypothetical offerings of different sizes and levels of discount from net asset value per share. It is not possible to predict the level of market price decline that may occur.
The examples assume that the issuer has 30 million shares outstanding, $600 million in total assets and $150 million in total liabilities. The current net asset value and net asset value per share are thus $450 million and $15.00. The chart illustrates the dilutive effect on Stockholder A of (a) an offering of 1.5 million shares of common stock (5% of the outstanding shares) at $14.25 per share after offering expenses and commissions (a 5% discount from net asset value), (b) an offering of 3 million shares of common stock (10% of the outstanding shares) at $13.50 per share after offering expenses and commissions (a 10% discount from net asset value), (c) an offering of 6 million shares of common stock (20% of the outstanding shares) at
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$12.00 per share after offering expenses and commissions (a 20% discount from net asset value) and (d) an offering of 7.5 million shares of common stock (25% of the outstanding shares) at $0.01 per share, the par value of our common stock (a 100% discount from net asset value). The prospectus supplement pursuant to which any discounted offering is made will include a chart based on the actual number of shares of common stock in such offering and the actual discount to the most recently determined net asset value. It is not possible to predict the level of market price decline that may occur.
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Example 1 | Example 2 | Example 3 | Example 4 | |||||||||||||||||||||||||||||||||
5% Offering at
5% Discount |
10% Offering at
10% Discount |
20% Offering at
20% Discount |
25% Offering at
100% Discount |
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to Sale |
Following
Sale |
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Sale |
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Offering Price
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Price per Share to Public | $ | 15.00 | | $ | 14.21 | | $ | 12.63 | | $ | 0.01 | | ||||||||||||||||||||||||
Net Proceeds per Share to Issuer | $ | 14.25 | | $ | 13.50 | | $ | 12.00 | | $ | 0.01 | | ||||||||||||||||||||||||
Decrease to Net Asset Value
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Total Shares Outstanding | 30,000,000 | 31,500,000 | 5.00 | % | 33,000,000 | 10.00 | % | 36,000,000 | 20.00 | % | 37,500,000 | 25.00 | % | |||||||||||||||||||||||
Net Asset Value per Share | $ | 15.00 | $ | 14.96 | (0.24 | )% | $ | 14.86 | (0.91 | )% | $ | 14.50 | (3.33 | )% | $ | 12.00 | (20.00 | )% | ||||||||||||||||||
Dilution to Nonparticipating Stockholder
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Shares Held by Stockholder A | 30,000 | 30,000 | 0.00 | % | 30,000 | 0.00 | % | 30,000 | 0.00 | % | 30,000 | 0.00 | % | |||||||||||||||||||||||
Percentage Held by Stockholder A | 0.10 | % | 0.10 | % | (4.76 | )% | 0.09 | % | (9.09 | )% | 0.08 | % | (16.67 | )% | 0.08 | % | (16.67 | )% | ||||||||||||||||||
Total Net Asset Value Held by Stockholder A | $ | 450,000 | $ | 448,929 | (0.24 | )% | $ | 445,909 | (0.91 | )% | $ | 435,000 | (3.33 | )% | $ | 360,000 | (20.00 | )% | ||||||||||||||||||
Total Investment by Stockholder A
(Assumed to Be $15.00 per Share) |
$ | 450,000 | $ | 450,000 | $ | 450,000 | $ | 450,000 | $ | 450,000 | ||||||||||||||||||||||||||
Total Dilution to Stockholder A
(Total Net Asset Value Less Total Investment) |
$ | (1,071 | ) | $ | (4,091 | ) | $ | (15,000 | ) | $ | (90,000 | ) | ||||||||||||||||||||||||
Investment per Share Held by Stockholder A
(Assumed to be $15.00 per Share on Shares Held Prior to Sale) |
$ | 15.00 | $ | 15.00 | 0.00 | % | $ | 15.00 | 0.00 | % | $ | 15.00 | 0.00 | % | $ | 15.00 | 0.00 | % | ||||||||||||||||||
Net Asset Value per Share Held by Stockholder A | $ | 14.96 | $ | 14.86 | $ | 14.50 | $ | 12.00 | ||||||||||||||||||||||||||||
Dilution per Share Held by Stockholder A (Net Asset Value per Share Less Investment per Share) | $ | (0.04 | ) | $ | (0.14 | ) | $ | (0.50 | ) | $ | (3.00 | ) | ||||||||||||||||||||||||
Percentage Dilution to Stockholder A
(Dilution per Share Divided by Investment per Share) |
(0.24 | )% | (0.91 | )% | (3.33 | )% | (20.00 | )% |
Our existing stockholders who participate in an offering below net asset value per share or who buy additional shares in the secondary market at the same or lower price as we obtain in the offering (after expenses and commissions) will experience the same types of net asset value dilution as the nonparticipating stockholders, although at a lower level, to the extent they purchase less than the same percentage of the discounted offering as their interest in shares of our common stock immediately prior to the offering. The level of net asset value dilution will decrease as the number of shares such stockholders purchase increases. Existing stockholders who buy more than such percentage will experience net asset value dilution but will, in contrast to existing stockholders who purchase less than their proportionate share of the offering, experience accretion in net asset value per share over their investment per share and will also experience a disproportionately greater increase in their participation in our earnings and assets and their voting power than our increase in assets, potential earning power and voting interests due to such offering. The level of accretion will increase as the excess number of shares such stockholder purchases increases. Even a stockholder who over-participates will, however, be subject to the risk that we may make additional discounted offerings in which such stockholder does not participate, in which case such a stockholder will experience net asset value dilution as described above in such subsequent offerings. These stockholders may also experience a decline in
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the market price of their shares, which often reflects to some degree announced or potential increases and decreases in net asset value per share. This decrease could be more pronounced as the size of the offering and level of discounts increases.
The following chart illustrates the level of dilution and accretion in the hypothetical 20% discount offering from the prior chart (Example 3) for a stockholder that acquires shares equal to (a) 50% of its proportionate share of the offering ( i.e. , 3,000 shares, which is 0.05% of an offering of 6 million shares) rather than its 0.10% proportionate share and (b) 150% of such percentage (i.e. 9,000 shares, which is 0.15% of an offering of 6 million shares rather than its 0.10% proportionate share). The prospectus supplement pursuant to which any discounted offering is made will include a chart for these examples based on the actual number of shares in such offering and the actual discount from the most recently determined net asset value per share. It is not possible to predict the level of market price decline that may occur.
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50% Participation | 150% Participation | |||||||||||||||||||
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Below NAV |
Following
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Offering Price
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Price per Share to Public | $ | 12.63 | $ | 12.63 | ||||||||||||||||
Net Proceeds per Share to Issuer | $ | 12.00 | $ | 12.00 | ||||||||||||||||
Decrease/Increase to Net Asset Value
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Total Shares Outstanding | 30,000,000 | 36,000,000 | 20 | % | 36,000,000 | 20 | % | |||||||||||||
Net Asset Value per Share | $ | 15.00 | $ | 14.50 | (3.33 | )% | $ | 14.50 | (3.33 | )% | ||||||||||
Dilution/Accretion to Participating Stockholder Shares Held by Stockholder A | 30,000 | 33,000 | 10 | % | 39,000 | 30 | % | |||||||||||||
Percentage Held by Stockholder A | 0.10 | % | 0.09 | % | (8.33 | )% | 0.11 | % | 8.33 | % | ||||||||||
Total Net Asset Value Held by Stockholder A | $ | 450,000 | $ | 478,500 | 6.33 | % | $ | 565,500 | 25.67 | % | ||||||||||
Total Investment by Stockholder A
(Assumed to be $15.00 per Share on Shares Held Prior to Sale) |
$ | 487,895 | $ | 563,684 | ||||||||||||||||
Total Dilution/Accretion to Stockholder A
(Total Net Asset Value Less Total Investment) |
$ | (9,395 | ) | $ | 1,816 | |||||||||||||||
Investment per Share Held by Stockholder A
(Assumed to Be $15.00 on Shares Held Prior to Sale) |
$ | 15.00 | $ | 14.78 | (1.44 | )% | $ | 14.45 | (3.64 | )% | ||||||||||
Net Asset Value per Share Held by Stockholder A | $ | 14.50 | $ | 14.50 | ||||||||||||||||
Dilution/Accretion per Share Held by Stockholder A
(Net Asset Value per Share Less Investment per Share) |
$ | (0.28 | ) | $ | 0.05 | 0.40 | % | |||||||||||||
Percentage Dilution/Accretion to Stockholder A
(Dilution per Share Divided by Investment per Share) |
(1.96 | )% | 0.32 | % |
Investors who are not currently stockholders and who participate in an offering of shares of our common stock below net asset value, but whose investment per share is greater than the resulting net asset value per share due to selling compensation and expenses paid by the Company, will experience an immediate decrease, although small, in the net asset value of their shares and their net asset value per share compared to the price they pay for their shares. Investors who are not currently stockholders and who participate in an offering of shares of our common stock below net asset value per share and whose investment per share is also less than the resulting net asset value per share due to selling compensation and expenses paid by the Company being significantly less than the discount per share, will experience an immediate increase in the net asset value of their shares and their net asset value per share compared to the price they pay for their shares. These investors will experience a disproportionately greater participation in our earnings and assets and their voting power
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than our increase in assets, potential earning power and voting interests due to such offering. These investors will, however, be subject to the risk that we may make additional discounted offerings in which such new stockholder does not participate, in which case such new stockholder will experience dilution as described above in such subsequent offerings. These investors may also experience a decline in the market price of their shares, which often reflects to some degree announced or potential increases and decreases in net asset value per share. This decrease could be more pronounced as the size of the offering and level of discounts increases.
The following chart illustrates the level of dilution or accretion for new investors that would be experienced by a new investor in the same hypothetical 5%, 10%, 20% and 25% discounted offerings as described in the first chart above. The illustration is for a new investor who purchases the same percentage (0.10%) of the shares in the offering as Stockholder A in the prior examples held immediately prior to the offering. The prospectus supplement pursuant to which any discounted offering is made will include a chart for these examples based on the actual number of shares in such offering and the actual discount from the most recently determined net asset value per share. It is not possible to predict the level of market price decline that may occur.
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Example 1 | Example 2 | Example 3 | Example 4 | |||||||||||||||||||||||||||||||||
5% Offering at
5% Discount |
10% Offering at
10% Discount |
20% Offering at
20% Discount |
25% Offering at
100% Discount |
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Prior to Sale |
Following
Sale |
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Change |
Following
Sale |
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Change |
Following
Sale |
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Change |
Following
Sale |
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Change |
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Offering Price
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Price per Share to Public | $ | 15.00 | $ | 14.21 | $ | 12.63 | $ | 0.01 | ||||||||||||||||||||||||||||
Net Proceeds per Share to Issuer | $ | 14.25 | $ | 13.50 | $ | 12.00 | $ | 0.01 | ||||||||||||||||||||||||||||
Decrease/Increase to Net
Asset Value |
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Total Shares Outstanding | 30,000,000 | 31,500,000 | 5 | % | 33,000,000 | 10 | % | 36,000,000 | 20 | % | 37,500,000 | 25 | % | |||||||||||||||||||||||
Net Asset Value per Share | $ | 15.00 | $ | 14.96 | (0.24 | )% | $ | 14.86 | (0.91 | )% | $ | 14.50 | (3.33 | )% | $ | 12.00 | (20.00 | )% | ||||||||||||||||||
Dilution/Accretion to New
Investor A |
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Shares Held by Investor A | 0 | 1,500 | 3,000 | 6,000 | 7,500 | |||||||||||||||||||||||||||||||
Percentage Held by Investor A | 0.00 | % | 0.00 | % | 0.01 | % | 0.02 | % | 0.02 | % | ||||||||||||||||||||||||||
Total Net Asset Value Held by Investor A | $ | 0 | $ | 22,446 | $ | 44,591 | $ | 87,000 | $ | 90,000 | ||||||||||||||||||||||||||
Total Investment by Investor A
(At Price to Public) |
$ | 22,500 | $ | 42,632 | $ | 75,789 | $ | 75 | ||||||||||||||||||||||||||||
Total Dilution/Accretion to Investor A
(Total Net Asset Value Less Total Investment) |
$ | (54 | ) | $ | 1,959 | $ | 11,211 | $ | 89,925 | |||||||||||||||||||||||||||
Investment per Share Held by Investor A | $ | 0 | $ | 15.00 | $ | 14.21 | $ | 12.63 | $ | 0.01 | ||||||||||||||||||||||||||
Net Asset Value per Share Held by Investor A | $ | 14.96 | $ | 14.86 | $ | 14.50 | $ | 12.00 | ||||||||||||||||||||||||||||
Dilution/Accretion per Share Held by Investor A
(Net Asset Value per Share Less Investment per Share) |
$ | (0.04 | ) | $ | 0.65 | $ | 1.87 | $ | 11.99 | |||||||||||||||||||||||||||
Percentage Dilution/Accretion to Investor A
(Dilution per Share Divided by Investment per Share) |
(0.24 | )% | 4.60 | % | 14.79 | % | 119,900 | % |
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A business development company is regulated by the 1940 Act. A business development company must be organized in the United States for the purpose of investing in or lending to primarily private companies and making managerial assistance available to them. A business development company may use capital provided by public stockholders and from other sources to invest in long-term, private investments in businesses. A business development company provides stockholders the ability to retain the liquidity of a publicly traded stock, while sharing in the possible benefits, if any, of investing in primarily privately owned companies.
We may not change the nature of our business so as to cease to be, or withdraw our election as, a business development company unless authorized by vote of a majority of the outstanding voting securities, as required by the 1940 Act. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (i) 67% or more of such companys voting securities present at a meeting if more than 50% of the outstanding voting securities of such company are present or represented by proxy, or (ii) more than 50% of the outstanding voting securities of such company. We do not anticipate any substantial change in the nature of our business.
As with other companies regulated by the 1940 Act, a business development company must adhere to certain substantive regulatory requirements. A majority of our directors must be persons who are not interested persons, as that term is defined in the 1940 Act. Additionally, we are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect the business development company. Furthermore, as a business development company, we are prohibited from protecting any director or officer against any liability to the company or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such persons office.
As a business development company, we are required to meet a coverage ratio of the value of total assets to total senior securities, which include all of our borrowings and any preferred stock we may issue in the future, of at least 200%. We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our directors who are not interested persons and, in some cases, prior approval by the SEC.
We are not generally able to sell our common stock at a price below net asset value per share. See Risk Factors Risks Relating to our Business and Structure 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, however, sell our common stock at a price below net asset value per share (i) in connection with a rights offering to our existing stockholders, (ii) with the consent of the majority of our common stockholders, or (iii) under such other circumstances as the SEC may permit. For example, we may sell our common stock at a price below the then current net asset value of our common stock if our Board of Directors determines that such sale is in our best interests and the best interests of our stockholders, and our stockholders approve our policy and practice of making such sales. In any such case, under such circumstances, the price at which our common stock to be issued and sold may not be less than a price which, in the determination of our Board of Directors, closely approximates the market value of such common stock. In addition, we may generally issue new shares of our common stock at a price below net asset value in rights offerings to existing stockholders, in payment of dividends and in certain other limited circumstances.
We may be examined by the SEC for compliance with the 1940 Act.
As a business development company, we are subject to certain risks and uncertainties. See Risk Factors Risks Relating to our Business and Structure.
117
As a business development company, we may not acquire any asset other than qualifying assets unless, at the time we make the acquisition, the value of our qualifying assets represent at least 70% of the value of our total assets. The principal categories of qualifying assets relevant to our business are:
| Securities purchased in transactions not involving any public offering, the issuer of which is an eligible portfolio company; |
| Securities received in exchange for or distributed with respect to securities described in the bullet above or pursuant to the exercise of options, warrants or rights relating to such securities; and |
| Cash, cash items, government securities or high quality debt securities (within the meaning of the 1940 Act), maturing in one year or less from the time of investment. |
An eligible portfolio company is generally a domestic company that is not an investment company (other than a small business investment company wholly owned by a business development company) and that:
| does not have a class of securities with respect to which a broker may extend margin credit at the time the acquisition is made; |
| is controlled by the business development company and has an affiliate of the business development company on its board of directors; |
| does not have any class of securities listed on a national securities exchange; |
| is a public company that lists its securities on a national securities exchange with a market capitalization of less than $250 million; or |
| meets such other criteria as may be established by the SEC. |
Control, as defined by the 1940 Act, is presumed to exist where a business development company beneficially owns more than 25% of the outstanding voting securities of the portfolio company.
In addition, a business development company must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in eligible portfolio companies, or in other securities that are consistent with its purpose as a business development company.
To include certain securities described above as qualifying assets for the purpose of the 70% test, a business development company must offer to the issuer of those securities managerial assistance such as providing guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company. We offer to provide managerial assistance to our portfolio companies.
Pending investment in other types of qualifying assets, as described above, our investments may consist of cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in U.S. Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our gross assets constitute repurchase agreements from a single counterparty, we would not meet the diversification tests in order to qualify as a RIC for federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. Our investment adviser will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.
118
We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any senior securities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our gross assets for temporary or emergency purposes without regard to asset coverage. We may borrow money, which would magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us.
We and Full Circle Advisors have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act and Rule 204A-1 under the Advisers Act, respectively, that establishes procedures for personal investments and restricts certain transactions by our personnel. Our codes of ethics generally do not permit investments by our employees in securities that may be purchased or held by us. You may read and copy these codes of ethics at the SECs Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090. In addition, each code of ethics is available on the EDGAR Database on the SECs Internet site at http://www.sec.gov . You may also obtain copies of the codes of ethics, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov, or by writing the SECs Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.
We and our investment adviser have adopted and implemented written policies and procedures reasonably designed to detect and prevent violation of the federal securities laws and are required to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation and designate a chief compliance officer to be responsible for administering the policies and procedures. Salvatore Faia currently serves as our Chief Compliance Officer.
The Sarbanes-Oxley Act of 2002 imposes a wide variety of new regulatory requirements on publicly-held companies and their insiders. Many of these requirements affect us. For example:
| Pursuant to Rule 13a-14 of the 1934 Act, our Chief Executive Officer and Chief Financial Officer must certify the accuracy of the financial statements contained in our periodic reports; |
| Pursuant to Item 307 of Regulation S-K, our periodic reports must disclose our conclusions about the effectiveness of our disclosure controls and procedures; |
| Pursuant to Rule 13a-15 of the 1934 Act, our management must prepare a report regarding its assessment of our internal control over financial reporting; and |
| Pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the 1934 Act, our periodic reports must disclose whether there were significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
The Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We will continue to monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.
We have delegated our proxy voting responsibility to Full Circle Advisors. The Proxy Voting Policies and Procedures of Full Circle Advisors are set forth below. The guidelines will be reviewed periodically by Full Circle Advisors and our non-interested directors, and, accordingly, are subject to change. For purposes of these Proxy Voting Policies and Procedures described below, we, our and us refers to Full Circle Advisors.
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An investment adviser registered under the Advisers Act has a fiduciary duty to act solely in the best interests of its clients. As part of this duty, we recognize that we must vote client securities in a timely manner free of conflicts of interest and in the best interests of our clients.
These policies and procedures for voting proxies for our investment advisory clients are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act.
We will vote proxies relating to our portfolio securities in what we perceive to be the best interest of our clients stockholders. We will review on a case-by-case basis each proposal submitted to a stockholder vote to determine its impact on the portfolio securities held by our clients. Although we will generally vote against proposals that may have a negative impact on our clients portfolio securities, we may vote for such a proposal if there exist compelling long-term reasons to do so.
Our proxy voting decisions will be made by the senior officers who are responsible for monitoring each of our clients investments. To ensure that our vote is not the product of a conflict of interest, we will require that: (1) anyone involved in the decision making process disclose to our manager any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (2) employees involved in the decision making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted influence from interested parties.
You may obtain information about how we voted proxies by making a written request for proxy voting information to: Full Circle Advisors, LLC, 800 Westchester Ave., Suite S-620, Rye Brook, New York 10573.
We are committed to maintaining the privacy of our stockholders and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.
Generally, we do not receive any non-public personal information relating to our stockholders, although certain non-public personal information of our stockholders may become available to us. We do not disclose any non-public personal information about our stockholders or former stockholders to anyone, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third party administrator).
We restrict access to non-public personal information about our stockholders to employees of our investment adviser and its affiliates with a legitimate business need for the information. We maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our stockholders.
We have registered our common stock under the Securities Exchange Act of 1934, and have reporting obligations thereunder, including the requirement that we file annual and quarterly reports with the SEC. In accordance with the requirements of the Securities Exchange Act of 1934, this annual report contains financial statements audited and reported on by our independent registered public accounting firm. You may obtain our annual reports on Form 10-K, our quarterly reports on Form 10-Q, and our current reports on Form 8-K on our website at http://www.fccapital.com free of charge as soon as reasonably practicable after we file such reports electronically with the SEC.
We have adopted certain policies and procedures intended to comply with the NASDAQ Capital Markets corporate governance rules. We will continue to monitor our compliance with all future listing standards that are approved by the SEC and will take actions necessary to ensure that we are in compliance therewith.
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We have adopted a dividend reinvestment plan that provides for reinvestment of our dividends and other distributions on behalf of our stockholders, unless a stockholder elects to receive cash as provided below. As a result, if our Board of Directors authorizes, and we declare, a cash distribution, our stockholders who have not opted out of our dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of our common stock, rather than receiving the cash distributions.
No action will be required on the part of a registered stockholder to have his cash distribution reinvested in shares of our common stock. A registered stockholder may elect to receive an entire distribution in cash by notifying American Stock Transfer and Trust Company, the plan administrator and our transfer agent and registrar, in writing so that such notice is received by the plan administrator no later than the record date for distributions to stockholders. The plan administrator will set up an account for shares acquired through the plan for each stockholder who has not elected to receive distributions in cash and hold such shares in non-certificated form. Upon request by a stockholder participating in the plan, received in writing not less than 10 days prior to the record date, the plan administrator will, instead of crediting shares to the participants account, issue a certificate registered in the participants name for the number of whole shares of our common stock and a check for any fractional share.
Those stockholders whose shares are held by a broker or other financial intermediary may receive distributions in cash by notifying their broker or other financial intermediary of their election.
We intend to use primarily newly issued shares to implement the plan to the extent our shares are trading at a premium to net asset value. However, we reserve the right to purchase shares in the open market in connection with our implementation of the plan. If we declare a distribution to stockholders, the plan administrator may be instructed not to credit accounts with newly-issued shares and instead to buy shares in the market if (i) the price at which newly-issued shares are to be credited does not exceed 110% of the last determined net asset value of the shares; or (ii) we have advised the plan administrator that since such net asset value was last determined, we have become aware of events that indicate the possibility of a material change in per share net asset value as a result of which the net asset value of the shares on the payment date might be higher than the price at which the plan administrator would credit newly-issued shares to stockholders. The number of shares to be issued to a stockholder is determined by dividing the total dollar amount of the distribution payable to such stockholder by the market price per share of our common stock at the close of regular trading on the valuation date for such distribution. Market price per share on that date will be the closing price for such shares on the national securities exchange on which our shares are then listed or, if no sale is reported for such day, at the average of their reported bid and asked prices. The number of shares of our common stock to be outstanding after giving effect to payment of the distribution cannot be established until the value per share at which additional shares will be issued has been determined and elections of our stockholders have been tabulated.
There will be no brokerage charges or other charges to stockholders who participate in the plan. The plan administrators fees under the plan will be paid by us. If a participant elects by written notice to the plan administrator to have the plan administrator sell part or all of the shares held by the plan administrator in the participants account and remit the proceeds to the participant, the plan administrator is authorized to deduct a transaction fee of $15 plus a per share brokerage commission from the proceeds.
Stockholders who receive distributions in the form of stock are subject to the same federal, state and local tax consequences as are stockholders who elect to receive their distributions in cash. A stockholders basis for determining gain or loss upon the sale of stock received in a distribution from us will be equal to the total dollar amount of the distribution payable to the stockholder. Any stock received in a distribution will have a new holding period for tax purposes commencing on the day following the day on which the shares are credited to the U.S. stockholders account.
The plan may be terminated by us upon notice in writing mailed to each participant at least 30 days prior to any record date for the payment of any distribution by us. All correspondence concerning the plan should be directed to the plan administrator by mail at 6201 15 th Ave., Brooklyn, New York 11219 or by phone at (866) 665-2281.
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The following table sets forth, as of December 6, 2013, the beneficial ownership of each of our directors, executive officers, each person known to us to beneficially own 5% or more of the outstanding shares of our common stock, and the executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Ownership information for those persons who beneficially own 5% or more of our shares of common stock is based upon Schedule 13G and Schedule 13D filings by such persons with the SEC and other information obtained from such persons, if available.
Unless otherwise indicated, the Company believes that each beneficial owner set forth in the table has sole voting and investment power and has the same address as the Company. Our address is 800 Westchester Ave., Rye Brook, New York 10573.
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Name of Beneficial Owner | Number of Shares Beneficially Owned (1) | Percentage of Class (2) | ||||||
Interested Directors
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John E. Stuart (3) | 42,397 | * | ||||||
Gregg J. Felton (4) | 10,305 | * | ||||||
Independent Directors
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Mark C. Biderman | 6,950 | * | ||||||
Edward H. Cohen | 12,000 | * | ||||||
Thomas A. Ortwein, Jr. (5) | 298,706 | 3.95 | % | |||||
Executive Officers
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Michael J. Sell (6) | 300 | * | ||||||
William E. Vastardis (7) | | | ||||||
Salvatore Faia | | | ||||||
Executive Officers and Directors as a Group | 370,538 | 4.90 | % |
* | Represents less than one percent |
(1) | Beneficial ownership has been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934. |
(2) | Based on a total of 7,569,382 shares of our common stock issued and outstanding on September 30, 2013. |
(3) | Includes 237 shares held by Full Circle Investments, LLC and 120 shares held by Full Circle Advisors, which may be deemed to be beneficially owned by Mr. Stuart by virtue of his position as a Managing Member thereof, as well as 1,000 shares held by immediate family members and 16,610 shares held by family trusts. |
(4) | Mr. Feltons ownership includes the 120 shares of the Company held by Full Circle Advisors, by virtue of his position as a Managing Member thereof. |
(5) | Includes 298,706 shares held by Highbrace Partners, LP, which may be deemed to be beneficially owned by Mr. Ortwein by virtue of his position as the Managing Member of its general partner. |
(6) | Mr. Sell was appointed as the Companys Chief Financial Officer, Secretary & Treasurer, effective as of September 30, 2013. |
(7) | Mr. Vastardis resigned as the Companys Chief Financial Officer, Secretary & Treasurer, effective as of September 30, 2013. |
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Set forth below is the dollar range of equity securities beneficially owned by each of our directors as of December 6, 2013. We are not part of a family of investment companies, as that term is defined in the 1940 Act.
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Equity Securities Beneficially Owned (1) (2) |
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Interested Directors
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John E. Stuart | Over $100,000 | |||
Gregg J. Felton | $ | 50,001 - $100,000 | ||
Independent Directors
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Mark C. Biderman | $ | 50,001 - $100,000 | ||
Edward H. Cohen | $ | 50,001 - $100,000 | ||
Thomas A. Ortwein, Jr. | Over $100,000 |
(1) | Dollar ranges are as follows: None, $1 $10,000, $10,001 $50,000, $50,001 $100,000, or Over $100,000. |
(2) | The dollar range of equity securities beneficially owned in us is based on the closing price for our common stock of $7.48 on December 6, 2013 on the NASDAQ Capital Market. Beneficial ownership has been determined in accordance with Rule 16a-1(a)(2) of the Exchange Act. |
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We have entered into the Investment Advisory Agreement with Full Circle Advisors. Mr. Stuart, our Co-Chief Executive Officer and Chairman, and Mr. Felton, our Co-Chief Executive Officer and President, are the Managing Members of, and have financial and controlling interests in, Full Circle Advisors.
Certain members of Full Circle Advisors investment committee presently manage Full Circle Funding, LP, a specialty lender serving smaller and lower middle-market companies. Although the existing investment funds managed by Full Circle Funding, LP, which currently consist of the Legacy Funds, are no longer making investments in new opportunities, 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. 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.
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.
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 Co-Chief Executive Officer and Chairman, and Mr. Felton, our Co-Chief Executive Officer and President, are the Managing Members of, and have financial and controlling interests in, Full Circle Service Company.
Our former Chief Financial Officer, 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. In exchange for providing such services, Full Circle Service Company pays Vastardis Fund Services an asset-based fee with a $200,000 annual minimum. This asset-based fee varies depending upon our gross assets as follows:
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Gross Assets | Fee | |||
first $150 million of gross assets |
20 basis points (0.20%)
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next $150 million of gross assets |
15 basis points (0.15%)
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next $200 million of gross assets | 10 basis points (0.10%) | |||
in excess of $500 million of gross assets | 5 basis points (0.05%) |
Additionally, prior to September 30, 2013, we reimbursed Full Circle Service Company for the fees charged by Vastardis Fund Services for the service of Mr. Vastardis as our Chief Financial Officer, Treasurer and Secretary at an annual rate of up to $250,000. Vastardis Fund Services agreed to cap its first year fees at $200,000 for administrative services to us, and at $100,000 for the service of Mr. Vastardis as our Chief Financial Officer, Treasurer and Secretary. These fee caps expired on August 31, 2011. As of September 30, 2013, Michael J. Sell is our Chief Financial Officer, Treasurer and Secretary and Mr. Vastardis no longer receives fees for such services.
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 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 employees 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.
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We and our investment adviser have also adopted Codes of Ethics which apply to, among others, our senior officers, including our Co-Chief Executive Officers and Chief Financial Officer, as well as every officer, director and employee of us and our investment adviser. These Codes of Ethics require that all employees and directors avoid any conflict, or the appearance of a conflict, between an individuals personal interests and the interests of Full Circle Capital. Pursuant to the Codes 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 the Codes of Ethics. As required by the NASDAQ Stock Market 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).
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This prospectus contains a summary of the common stock, preferred stock, subscription rights, warrants and debt securities that may be offered hereunder. These summaries are not meant to be a complete description of each security. However, this prospectus and the accompanying prospectus supplement will contain the material terms and conditions for each security.
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This prospectus contains a summary of our capital stock and is not meant to be a complete description. However, this prospectus and any accompanying prospectus supplement will contain the material terms and conditions for each security sold thereunder.
The authorized stock of Full Circle Capital Corporation consists of 100,000,000 shares of stock, par value $0.01 per share, all of which are initially designated as common stock. Our common stock is listed on the NASDAQ Capital Market under the ticker symbol FULL. There are no outstanding options or warrants to purchase our stock. No stock has been authorized for issuance under any equity compensation plans. Our fiscal year-end is June 30. Under Maryland law, our stockholders generally are not personally liable for our debts or obligations.
The following are our outstanding classes of securities as of September 30, 2013:
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(1)
Title of Class |
(2)
Amount Authorized |
(3)
Amount Held by Us or for Our Account |
(4)
Amount Outstanding Exclusive of Amounts Shown Under (3) |
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Common stock | 100,000,000 | | 7,569,382 |
Under our charter, our Board of Directors is authorized to classify and reclassify any unissued shares of stock into other classes or series of stock without obtaining stockholder approval. As permitted by the Maryland General Corporation Law, our charter provides that the Board of Directors, without any action by our stockholders, may amend the charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue.
All shares of our common stock have equal rights as to earnings, assets, voting, and dividends and, when they are issued, will be duly authorized, validly issued, fully paid and nonassessable. Distributions may be paid to the holders of our common stock if, as and when authorized by our Board of Directors and declared by us out of assets legally available therefor. Shares of our common stock have no preemptive, conversion or redemption rights and are freely transferable, except where their transfer is restricted by federal and state securities laws or by contract. In the event of our liquidation, dissolution or winding up, each share of our common stock would be entitled to share ratably in all of our assets that are legally available for distribution after we pay all debts and other liabilities and subject to any preferential rights of holders of our preferred stock, if any preferred stock is outstanding at such time. Each share of our common stock is entitled to one vote on all matters submitted to a vote of stockholders, including the election of directors. Except as provided with respect to any other class or series of stock, the holders of our common stock will possess exclusive voting power. There is no cumulative voting in the election of directors, which means that holders of a majority of the outstanding shares of common stock can elect all of our directors, and holders of less than a majority of such shares will be unable to elect any director.
Our charter authorizes our Board of Directors to classify and reclassify any unissued shares of stock into other classes or series of stock, including preferred stock. The cost of any such reclassification would be borne by our existing common stockholders. Prior to issuance of shares of each class or series, the Board of Directors is required by Maryland law and by 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. You should note, however, that any issuance of preferred stock must comply with the requirements of the 1940 Act. The 1940 Act requires, among other things, that (1) immediately after issuance and before any dividend or other distribution is made with respect to our
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common stock and before any purchase of common stock is made, such preferred stock together with all other senior securities must not exceed an amount equal to 50% of our gross assets after deducting the amount of such dividend, distribution or purchase price, as the case may be, and (2) the holders of shares of preferred stock, if any are issued, must be entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends on such preferred stock are in arrears by two full years or more. 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 as a separate class from the holders of common stock on a proposal to cease operations as a business development company. We believe that the availability for issuance of preferred stock will provide us with increased flexibility in structuring future financings and acquisitions. However, we do not currently have any plans to issue preferred stock.
Maryland law permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment and which is material to the cause of action. Our charter contains such a provision which eliminates directors and officers liability to the maximum extent permitted by Maryland law, subject to the requirements of the 1940 Act.
Our charter authorizes us, to the maximum extent permitted by Maryland law and subject to the requirements of the 1940 Act, to indemnify any present or former director or officer or any individual who, while a director and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner or trustee, from and against any claim or liability to which that person may become subject or which that person may incur by reason of his or her status as a present or former director or officer and to pay or reimburse their reasonable expenses in advance of final disposition of a proceeding. Our bylaws obligate us, to the maximum extent permitted by Maryland law and subject to the requirements of the 1940 Act, to indemnify any present or former director or officer or any individual who, while a director and at our request, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner or trustee and who is made a party to the proceeding by reason of his service in that capacity from and against any claim or liability to which that person may become subject or which that person may incur by reason of his or her status as a present or former director or officer and to pay or reimburse their reasonable expenses in advance of final disposition of a proceeding. The charter and bylaws also permit us to indemnify and advance expenses to any person who served a predecessor of us in any of the capacities described above and any of our employees or agents or any employees or agents of our predecessor. In accordance with the 1940 Act, we will not indemnify any person for any liability to which such person would be subject by reason of such persons willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office.
Maryland law requires a corporation (unless its charter provides otherwise, which our charter does not) to indemnify a director or officer who has been successful in the defense of any proceeding to which he or she is made a party by reason of his or her service in that capacity. Maryland law permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (1) was committed in bad faith or (2) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, under Maryland law, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that a personal benefit was improperly received, unless in either case a court orders indemnification, and then only for expenses. In addition, Maryland law permits a corporation to advance reasonable expenses to a director or officer upon the corporations receipt of (a) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and (b) a written
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undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.
Our insurance policy does not currently provide coverage for claims, liabilities and expenses that may arise out of activities that our present or former directors or officers have performed for another entity at our request. There is no assurance that such entities will in fact carry such insurance. However, in the event that our present or former directors or officers serve another entity as a director, officer, partner or trustee, we expect to obtain insurance providing coverage for such persons for any claims, liabilities or expenses that may arise out of their activities while serving in such capacities.
The Maryland General Corporation Law and our charter and bylaws contain provisions that could make it more difficult for a potential acquirer to acquire us by means of a tender offer, proxy contest or otherwise. These provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to negotiate first with our Board of Directors. We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals may improve their terms.
Our Board of Directors are divided into three classes of directors serving staggered three-year terms. Upon expiration of their terms, directors of each class will be elected to serve for three-year terms and until their successors are duly elected and qualify and each year one class of directors will be elected by the stockholders. A classified board may render a change in control of us or removal of our incumbent management more difficult. We believe, however, that the longer time required to elect a majority of a classified Board of Directors will help to ensure the continuity and stability of our management and policies.
Our charter and bylaws provide that the affirmative vote of the holders of a plurality of the outstanding shares of stock entitled to vote in the election of directors cast at a meeting of stockholders duly called and at which a quorum is present will be required to elect a director. Pursuant to our charter our Board of Directors may amend the bylaws to alter the vote required to elect directors.
Our charter provides that the number of directors will be set only by the Board of Directors in accordance with our bylaws. Our bylaws provide that a majority of our entire Board of Directors may at any time increase or decrease the number of directors. However, unless our bylaws are amended, the number of directors may never be less than one nor more than nine. Our charter provides that, at such time as we have at least three independent directors and our common stock is registered under the Securities Exchange Act of 1934, as amended, we elect to be subject to the provision of Subtitle 8 of Title 3 of the Maryland General Corporation Law regarding the filling of vacancies on the Board of Directors. Accordingly, at such time, except as may be provided by the Board of Directors in setting the terms of any class or series of preferred stock, any and all vacancies on the Board of Directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies, subject to any applicable requirements of the 1940 Act.
Our charter provides that a director may be removed only for cause, as defined in our charter, and then only by the affirmative vote of at least two-thirds of the votes entitled to be cast in the election of directors.
Under the Maryland General Corporation Law, stockholder action can be taken only at an annual or special meeting of stockholders or (unless the charter provides for stockholder action by less than unanimous written consent, which our charter does not) by unanimous written consent in lieu of a meeting. These
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provisions, combined with the requirements of our bylaws regarding the calling of a stockholder-requested special meeting of stockholders discussed below, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.
Our bylaws provide that with respect to an annual meeting of stockholders, nominations of persons for election to the Board of Directors and the proposal of business to be considered by stockholders may be made only (1) pursuant to our notice of the meeting, (2) by the Board of Directors or (3) by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice procedures of our bylaws. With respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of persons for election to the Board of Directors at a special meeting may be made only (1) pursuant to our notice of the meeting, (2) by the Board of Directors or (3) provided that the Board of Directors has determined that directors will be elected at the meeting, by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice provisions of the bylaws. The purpose of requiring stockholders to give us advance notice of nominations and other business is to afford our Board of Directors a meaningful opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed business and, to the extent deemed necessary or desirable by our Board of Directors, to inform stockholders and make recommendations about such qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our Board of Directors any power to disapprove stockholder nominations for the election of directors or proposals recommending certain action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if proper procedures are not followed and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to whether consideration of such nominees or proposals might be harmful or beneficial to us and our stockholders.
Our bylaws provide that special meetings of stockholders may be called by our Board of Directors and certain of our officers. Additionally, our bylaws provide that, subject to the satisfaction of certain procedural and informational requirements by the stockholders requesting the meeting, a special meeting of stockholders will be called by the Secretary of the corporation upon the written request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting.
Under Maryland law, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. However, a Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Our charter generally provides for approval of charter amendments and extraordinary transactions by the stockholders entitled to cast at least a majority of the votes entitled to be cast on the matter. Our charter also provides that certain charter amendments, any proposal for our conversion, whether by charter amendment, merger or otherwise, from a closed-end company to an open-end company and any proposal for our liquidation or dissolution requires the approval of the stockholders entitled to cast at least 80% of the votes entitled to be cast on such matter. However, if such amendment or proposal is approved by a majority of our continuing directors (in addition to approval by our Board of Directors), such amendment or proposal may be approved by a majority of the votes entitled to be cast on such a matter. In either event, in accordance with the requirements of the 1940 Act, any such amendment or proposal that would have the effect of changing the nature of our business so as to cause us to cease to be, or to withdraw our election as, a business development company would be required to be approved by a majority of our outstanding voting securities, as defined under the 1940 Act. The continuing directors are defined in our charter as (1) our current directors, (2) those directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of our current directors then on the
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Board of Directors or (3) any successor directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of continuing directors or the successor continuing directors then in office.
Our charter and bylaws provide that the Board of Directors will have the exclusive power to make, alter, amend or repeal any provision of our bylaws.
Except with respect to appraisal rights arising in connection with the Control Share Act discussed below, as permitted by the Maryland General Corporation Law, our charter provides that stockholders will not be entitled to exercise appraisal rights unless a majority of the Board of Directors shall determine such rights apply.
The Maryland General Corporation Law provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter (the Control Share Act). Shares owned by the acquirer, by officers or by directors who are employees of the corporation are excluded from shares entitled to vote on the matter. Control shares are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power:
| one-tenth or more but less than one-third; |
| one-third or more but less than a majority; or |
| a majority or more of all voting power. |
The requisite stockholder approval must be obtained each time an acquirer crosses one of the thresholds of voting power set forth above. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition may compel the Board of Directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to pay the expenses of the meeting. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then the corporation may redeem for fair value any or all of the control shares, except those for which voting rights have previously been approved. The right of the corporation to redeem control shares is subject to certain conditions and limitations, including, as provided in our bylaws compliance with the 1940 Act. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquirer or of any meeting of stockholders at which the voting rights of the shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of appraisal rights may not be less than the highest price per share paid by the acquirer in the control share acquisition.
The Control Share Act does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting from the Control Share Act any and all acquisitions by any person of our shares of stock. There can be no assurance that such provision will not be amended or eliminated at any time in the future. However, we will amend our bylaws to be subject to the
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Control Share Act only if the Board of Directors determines that it would be in our best interests and if the SEC staff does not object to our determination that our being subject to the Control Share Act does not conflict with the 1940 Act.
Under Maryland law, business combinations between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder (the Business Combination Act). These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
| any person who beneficially owns 10% or more of the voting power of the corporations outstanding voting stock; or |
| an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation. |
A person is not an interested stockholder under this statute if the Board of Directors approved in advance the transaction by which the stockholder otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
| 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and |
| two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. |
These super-majority vote requirements do not apply if the corporations common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.
The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. Our Board of Directors has adopted a resolution that any business combination between us and any other person is exempted from the provisions of the Business Combination Act, provided that the business combination is first approved by the Board of Directors, including a majority of the directors who are not interested persons as defined in the 1940 Act. This resolution may be altered or repealed in whole or in part at any time; however, our Board of Directors will adopt resolutions so as to make us subject to the provisions of the Business Combination Act only if the Board of Directors determines that it would be in our best interests and if the SEC staff does not object to our determination that our being subject to the Business Combination Act does not conflict with the 1940 Act. If this resolution is repealed, or the Board of Directors does not otherwise approve a business combination, the statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Our bylaws provide that, if and to the extent that any provision of the Maryland General Corporation Law, including the Control Share Act (if we amend our bylaws to be subject to such Act) and the Business Combination Act, or any provision of our charter or bylaws conflicts with any provision of the 1940 Act, the applicable provision of the 1940 Act will control.
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In addition to shares of common stock, our charter authorizes the issuance of preferred stock. If we offer preferred stock under this prospectus, we will issue an appropriate prospectus supplement. We may issue preferred stock from time to time in one or more classes or series, without stockholder approval. Prior to issuance of shares of each class or series, our Board of Directors is required by Maryland law and by 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. Any such an issuance must adhere to the requirements of the 1940 Act, Maryland law and any other limitations imposed by law.
The 1940 Act currently requires, among other things, that (a) immediately after issuance and before any distribution is made with respect to common stock, the liquidation preference of the preferred stock, together with all other senior securities, must not exceed an amount equal to 50% of our total assets (taking into account such distribution), (b) the holders of shares of preferred stock, if any are issued, must be entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends on the preferred stock are in arrears by two years or more and (c) such class of stock have complete priority over any other class of stock as to distribution of assets and payment of dividends, which dividends shall be cumulative.
For any series of preferred stock that we may issue, our board of directors will determine and the articles supplementary and the prospectus supplement relating to such series will describe:
| the designation and number of shares of such series; |
| the rate and time at which, and the preferences and conditions under which, any dividends will be paid on shares of such series, as well as whether such dividends are participating or non-participating; |
| any provisions relating to convertibility or exchangeability of the shares of such series, including adjustments to the conversion price of such series; |
| the rights and preferences, if any, of holders of shares of such series upon our liquidation, dissolution or winding up of our affairs; |
| the voting powers, if any, of the holders of shares of such series; |
| any provisions relating to the redemption of the shares of such series; |
| any limitations on our ability to pay dividends or make distributions on, or acquire or redeem, other securities while shares of such series are outstanding; |
| any conditions or restrictions on our ability to issue additional shares of such series or other securities; |
| if applicable, a discussion of certain U.S. federal income tax considerations; and |
| any other relative powers, preferences and participating, optional or special rights of shares of such series, and the qualifications, limitations or restrictions thereof. |
All shares of preferred stock that we may issue will be identical and of equal rank except as to the particular terms thereof that may be fixed by our board of directors, and all shares of each series of preferred stock will be identical and of equal rank except as to the dates from which dividends, if any, thereon will be cumulative.
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We may issue subscription rights to our stockholders to purchase common stock. Subscription rights may be issued independently or together with any other offered security and may or may not be transferable by the person purchasing or receiving the subscription rights. In connection with a subscription rights offering to our stockholders, we would distribute certificates evidencing the subscription rights and a prospectus supplement to our stockholders on the record date that we set for receiving subscription rights in such subscription rights offering.
The applicable prospectus supplement would describe the following terms of subscription rights in respect of which this prospectus is being delivered:
| the period of time the offering would remain open (which shall be open a minimum number of days such that all record holders would be eligible to participate in the offering and shall not be open longer than 120 days); |
| the title of such subscription rights; |
| the exercise price for such subscription rights (or method of calculation thereof); |
| the ratio of the offering (which, in the case of transferable rights, will require a minimum of three shares to be held of record before a person is entitled to purchase an additional share); |
| the number of such subscription rights issued to each stockholder; |
| the extent to which such subscription rights are transferable and the market on which they may be traded if they are transferable; |
| if applicable, a discussion of certain U.S. federal income tax considerations applicable to the issuance or exercise of such subscription rights; |
| the date on which the right to exercise such subscription rights shall commence, and the date on which such right shall expire (subject to any extension); |
| the extent to which such subscription rights include an over-subscription privilege with respect to unsubscribed securities and the terms of such over-subscription privilege; |
| any termination right we may have in connection with such subscription rights offering; and |
| any other terms of such subscription rights, including exercise, settlement and other procedures and limitations relating to the transfer and exercise of such subscription rights. |
Each subscription right would entitle the holder of the subscription right to purchase for cash such amount of shares of common stock at such exercise price as shall in each case be set forth in, or be determinable as set forth in, the prospectus supplement relating to the subscription rights offered thereby. Subscription rights may be exercised at any time up to the close of business on the expiration date for such subscription rights set forth in the prospectus supplement. After the close of business on the expiration date, all unexercised subscription rights would become void.
Subscription rights may be exercised as set forth in the prospectus supplement relating to the subscription rights offered thereby. Upon receipt of payment and the subscription rights certificate properly completed and duly executed at the corporate trust office of the subscription rights agent or any other office indicated in the prospectus supplement we will forward, as soon as practicable, the shares of common stock purchasable upon such exercise. To the extent permissible under applicable law, we may determine to offer any unsubscribed offered securities directly to persons other than stockholders, to or through agents, underwriters or dealers or through a combination of such methods, as set forth in the applicable prospectus supplement.
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Any stockholder who chooses not to participate in a rights offering should expect to own a smaller interest in us upon completion of such rights offering. Any rights offering will dilute the ownership interest and voting power of stockholders who do not fully exercise their subscription rights. Further, because the net proceeds per share from any rights offering may be lower than our then current net asset value per share, the rights offering may reduce our net asset value per share. The amount of dilution that a stockholder will experience could be substantial, particularly to the extent we engage in multiple rights offerings within a limited time period. In addition, the market price of our common stock could be adversely affected while a rights offering is ongoing as a result of the possibility that a significant number of additional shares may be issued upon completion of such rights offering. All of our stockholders will also indirectly bear the expenses associated with any rights offering we may conduct, regardless of whether they elect to exercise any rights.
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We may issue debt securities in one or more series. The specific terms of each series of debt securities will be described in the particular prospectus supplement relating to that series. The prospectus supplement may or may not modify the general terms found in this prospectus and will be filed with the SEC. For a complete description of the terms of a particular series of debt securities, you should read both this prospectus and the prospectus supplement relating to that particular series.
As required by federal law for all bonds and notes of companies that are publicly offered, the debt securities are governed by a document called an indenture. An indenture is a contract between us and the financial institution acting as trustee on your behalf, and is subject to and governed by the Trust Indenture Act of 1939, as amended. The trustee has two main roles. First, the trustee can enforce your rights against us if we default. There are some limitations on the extent to which the trustee acts on your behalf, described in the second paragraph under Events of Default Remedies if an Event of Default Occurs. Second, the trustee performs certain administrative duties for us with respect to our debt securities.
This section includes a description of the material provisions of the indenture. Because this section is a summary, however, it does not describe every aspect of the debt securities and the indenture. We urge you to read the indenture because it, and not this description, defines your rights as a holder of debt securities. A copy of the form of indenture is attached as an exhibit to the registration statement of which this prospectus is a part. We will file a supplemental indenture with the SEC in connection with any debt offering, at which time the supplemental indenture would be publicly available. See Where You Can Find Additional Information for information on how to obtain a copy of the indenture.
The prospectus supplement, which will accompany this prospectus, will describe the particular series of debt securities being offered by including:
| the designation or title of the series of debt securities; |
| the total principal amount of the series of debt securities; |
| the percentage of the principal amount at which the series of debt securities will be offered; |
| the date or dates on which principal will be payable; |
| the rate or rates (which may be either fixed or variable) and/or the method of determining such rate or rates of interest, if any; |
| the date or dates from which any interest will accrue, or the method of determining such date or dates, and the date or dates on which any interest will be payable; |
| whether any interest may be paid by issuing additional securities of the same series in lieu of cash (and the terms upon which any such interest may be paid by issuing additional securities); |
| the terms for redemption, extension or early repayment, if any; |
| the currencies in which the series of debt securities are issued and payable; |
| whether the amount of payments of principal, premium or interest, if any, on a series of debt securities will be determined with reference to an index, formula or other method (which could be based on one or more currencies, commodities, equity indices or other indices) and how these amounts will be determined; |
| the place or places, if any, other than or in addition to the Borough of Manhattan in the City of New York, of payment, transfer, conversion and/or exchange of the debt securities; |
| the denominations in which the offered debt securities will be issued (if other than $1,000 and any integral multiple thereof); |
| the provision for any sinking fund; |
| any restrictive covenants; |
| any Events of Default (as defined in Events of Default below); |
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| whether the series of debt securities are issuable in certificated form; |
| any provisions for defeasance or covenant defeasance; |
| any special federal income tax implications, including, if applicable, federal income tax considerations relating to original issue discount; |
| whether and under what circumstances we will pay additional amounts in respect of any tax, assessment or governmental charge and, if so, whether we will have the option to redeem the debt securities rather than pay the additional amounts (and the terms of this option); |
| any provisions for convertibility or exchangeability of the debt securities into or for any other securities; |
| whether the debt securities are subject to subordination and the terms of such subordination; |
| whether the debt securities are secured and the terms of any security interest; |
| the listing, if any, on a securities exchange; and |
| any other terms. |
The debt securities may be secured or unsecured obligations. Unless the prospectus supplement states otherwise, principal (and premium, if any) and interest, if any, will be paid by us in immediately available funds.
We are permitted, under specified conditions, to issue multiple classes of indebtedness if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance after giving effect to any exemptive relief granted to us by the SEC. In addition, while any indebtedness and senior securities remain outstanding, we must make provisions to prohibit the distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. For a discussion of the risks associated with leverage, see Risk Factors Risks Relating to Our Business and Structure 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.
The indenture provides that any debt securities proposed to be sold under this prospectus and the accompanying prospectus supplement (offered debt securities) and any debt securities issuable upon the exercise of warrants or upon conversion or exchange of other offered securities (underlying debt securities) may be issued under the indenture in one or more series.
For purposes of this prospectus, any reference to the payment of principal of, or premium or interest, if any, on, debt securities will include additional amounts if required by the terms of the debt securities.
The indenture does not limit the amount of debt securities that may be issued thereunder from time to time. Debt securities issued under the indenture, when a single trustee is acting for all debt securities issued under the indenture, are called the indenture securities. The indenture also provides that there may be more than one trustee thereunder, each with respect to one or more different series of indenture securities. See Resignation of Trustee below. At a time when two or more trustees are acting under the indenture, each with respect to only certain series, the term indenture securities means the one or more series of debt securities with respect to which each respective trustee is acting. In the event that there is more than one trustee under the indenture, the powers and trust obligations of each trustee described in this prospectus will extend only to the one or more series of indenture securities for which it is trustee. If two or more trustees are acting under the indenture, then the indenture securities for which each trustee is acting would be treated as if issued under separate indentures.
The indenture does not contain any provisions that give you protection in the event we issue a large amount of debt or we are acquired by another entity.
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We refer you to the prospectus supplement for information with respect to any deletions from, modifications of or additions to the Events of Default or our covenants that are described below, including any addition of a covenant or other provision providing event risk protection or similar protection.
We have the ability to issue indenture securities with terms different from those of indenture securities previously issued and, without the consent of the holders thereof, to reopen a previous issue of a series of indenture securities and issue additional indenture securities of that series unless the reopening was restricted when that series was created.
If any debt securities are convertible into or exchangeable for other securities, the prospectus supplement will explain the terms and conditions of the conversion or exchange, including the conversion price or exchange ratio (or the calculation method), the conversion or exchange period (or how the period will be determined), if conversion or exchange will be mandatory or at the option of the holder or us, provisions for adjusting the conversion price or the exchange ratio and provisions affecting conversion or exchange in the event of the redemption of the underlying debt securities. These terms may also include provisions under which the number or amount of other securities to be received by the holders of the debt securities upon conversion or exchange would be calculated according to the market price of the other securities as of a time stated in the prospectus supplement.
We may issue the debt securities in registered form, in which case we may issue them either in book-entry form only or in certificated form. Debt securities issued in book-entry form will be represented by global securities. We expect that we will usually issue debt securities in book-entry only form represented by global securities.
We will issue registered debt securities in book-entry form only, unless we specify otherwise in the applicable prospectus supplement. This means debt securities will be represented by one or more global securities registered in the name of a depositary that will hold them on behalf of financial institutions that participate in the depositarys book-entry system. These participating institutions, in turn, hold beneficial interests in the debt securities held by the depositary or its nominee. These institutions may hold these interests on behalf of themselves or customers.
Under the indenture, only the person in whose name a debt security is registered is recognized as the holder of that debt security. Consequently, for debt securities issued in book-entry form, we will recognize only the depositary as the holder of the debt securities and we will make all payments on the debt securities to the depositary. The depositary will then pass along the payments it receives to its participants, which in turn will pass the payments along to their customers who are the beneficial owners. The depositary and its participants do so under agreements they have made with one another or with their customers; they are not obligated to do so under the terms of the debt securities.
As a result, investors will not own debt securities directly. Instead, they will own beneficial interests in a global security, through a bank, broker or other financial institution that participates in the depositarys book-entry system or holds an interest through a participant. As long as the debt securities are represented by one or more global securities, investors will be indirect holders, and not holders, of the debt securities.
In the future, we may issue debt securities in certificated form or terminate a global security. In these cases, investors may choose to hold their debt securities in their own names or in street name. Debt securities held in street name are registered in the name of a bank, broker or other financial institution chosen by the investor, and the investor would hold a beneficial interest in those debt securities through the account he or she maintains at that institution.
For debt securities held in street name, we will recognize only the intermediary banks, brokers and other financial institutions in whose names the debt securities are registered as the holders of those debt securities,
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and we will make all payments on those debt securities to them. These institutions will pass along the payments they receive to their customers who are the beneficial owners, but only because they agree to do so in their customer agreements or because they are legally required to do so. Investors who hold debt securities in street name will be indirect holders, and not holders, of the debt securities.
Our obligations, as well as the obligations of the applicable trustee and those of any third parties employed by us or the applicable trustee, run only to the legal holders of the debt securities. We do not have obligations to investors who hold beneficial interests in global securities, in street name or by any other indirect means. This will be the case whether an investor chooses to be an indirect holder of a debt security or has no choice because we are issuing the debt securities only in book-entry form.
For example, once we make a payment or give a notice to the holder, we have no further responsibility for the payment or notice even if that holder is required, under agreements with depositary participants or customers or by law, to pass it along to the indirect holders but does not do so. Similarly, if we want to obtain the approval of the holders for any purpose (for example, to amend an indenture or to relieve us of the consequences of a default or of our obligation to comply with a particular provision of an indenture), we would seek the approval only from the holders, and not the indirect holders, of the debt securities. Whether and how the holders contact the indirect holders is up to the holders.
When we refer to you in this Description of Debt Securities, we mean those who invest in the debt securities being offered by this prospectus, whether they are the holders or only indirect holders of those debt securities. When we refer to your debt securities, we mean the debt securities in which you hold a direct or indirect interest.
If you hold debt securities through a bank, broker or other financial institution, either in book-entry form or in street name, we urge you to check with that institution to find out:
| how it handles securities payments and notices; |
| whether it imposes fees or charges; |
| how it would handle a request for the holders consent, if ever required; |
| whether and how you can instruct it to send you debt securities registered in your own name so you can be a holder, if that is permitted in the future for a particular series of debt securities; |
| how it would exercise rights under the debt securities if there were a default or other event triggering the need for holders to act to protect their interests; and |
| if the debt securities are in book-entry form, how the depositarys rules and procedures will affect these matters. |
As noted above, we usually will issue debt securities as registered securities in book-entry form only. A global security represents one or any other number of individual debt securities. Generally, all debt securities represented by the same global securities will have the same terms.
Each debt security issued in book-entry form will be represented by a global security that we deposit with and register in the name of a financial institution or its nominee that we select. The financial institution that we select for this purpose is called the depositary. Unless we specify otherwise in the applicable prospectus supplement, The Depository Trust Company, New York, New York, known as DTC, will be the depositary for all debt securities issued in book-entry form.
A global security may not be transferred to or registered in the name of anyone other than the depositary or its nominee, unless special termination situations arise. We describe those situations below under Termination of a Global Security. As a result of these arrangements, the depositary, or its nominee, will be the sole registered owner and holder of all debt securities represented by a global security, and investors
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will be permitted to own only beneficial interests in a global security. Beneficial interests must be held by means of an account with a broker, bank or other financial institution that in turn has an account with the depositary or with another institution that has an account with the depositary. Thus, an investor whose security is represented by a global security will not be a holder of the debt security, but only an indirect holder of a beneficial interest in the global security.
As an indirect holder, an investors rights relating to a global security will be governed by the account rules of the investors financial institution and of the depositary, as well as general laws relating to securities transfers. The depositary that holds the global security will be considered the holder of the debt securities represented by the global security.
If debt securities are issued only in the form of a global security, an investor should be aware of the following:
| an investor cannot cause the debt securities to be registered in his or her name and cannot obtain certificates for his or her interest in the debt securities, except in the special situations we describe below; |
| an investor will be an indirect holder and must look to his or her own bank or broker for payments on the debt securities and protection of his or her legal rights relating to the debt securities, as we describe under Issuance of Securities in Registered Form above; |
| an investor may not be able to sell interests in the debt securities to some insurance companies and other institutions that are required by law to own their securities in non-book-entry form; |
| an investor may not be able to pledge his or her interest in a global security in circumstances where certificates representing the debt securities must be delivered to the lender or other beneficiary of the pledge in order for the pledge to be effective; |
| the depositarys policies, which may change from time to time, will govern payments, transfers, exchanges and other matters relating to an investors interest in a global security. We and the trustee have no responsibility for any aspect of the depositarys actions or for its records of ownership interests in a global security. We and the trustee also do not supervise the depositary in any way; |
| if we redeem less than all the debt securities of a particular series being redeemed, DTCs practice is to determine by lot the amount to be redeemed from each of its participants holding that series; |
| an investor is required to give notice of exercise of any option to elect repayment of its debt securities, through its participant, to the applicable trustee and to deliver the related debt securities by causing its participant to transfer its interest in those debt securities, on DTCs records, to the applicable trustee; |
| DTC requires that those who purchase and sell interests in a global security deposited in its book-entry system use immediately available funds, your broker or bank may also require you to use immediately available funds when purchasing or selling interests in a global security; |
| financial institutions that participate in the depositarys book-entry system, and through which an investor holds its interest in a global security, may also have their own policies affecting payments, notices and other matters relating to the debt securities; there may be more than one financial intermediary in the chain of ownership for an investor, we do not monitor and are not responsible for the actions of any of those intermediaries. |
If a global security is terminated for any reason, interests in it will be exchanged for certificates in non-book-entry form (certificated securities). After that exchange, the choice of whether to hold the certificated debt securities directly or in street name will be up to the investor. Investors must consult their own banks or brokers to find out how to have their interests in a global security transferred on termination to their own names, so that they will be holders. We have described the rights of legal holders and street name investors under Issuance of Securities in Registered Form above.
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The prospectus supplement may list situations for terminating a global security that would apply only to the particular series of debt securities covered by the prospectus supplement. If a global security is terminated, only the depositary, and not we or the applicable trustee, is responsible for deciding the investors in whose names the debt securities represented by the global security will be registered and, therefore, who will be the holders of those debt securities.
We will pay interest to the person listed in the applicable trustees records as the owner of the debt security at the close of business on a particular day in advance of each due date for interest, even if that person no longer owns the debt security on the interest due date. That day, usually about two weeks in advance of the interest due date, is called the record date. Because we will pay all the interest for an interest period to the holders on the record date, holders buying and selling debt securities must work out between themselves the appropriate purchase price. The most common manner is to adjust the sales price of the debt securities to prorate interest fairly between buyer and seller based on their respective ownership periods within the particular interest period. This prorated interest amount is called accrued interest.
We will make payments on a global security in accordance with the applicable policies of the depositary as in effect from time to time. Under those policies, we will make payments directly to the depositary, or its nominee, and not to any indirect holders who own beneficial interests in the global security. An indirect holders right to those payments will be governed by the rules and practices of the depositary and its participants, as described under Special Considerations for Global Securities.
We will make payments on a certificated debt security as follows. We will pay interest that is due on an interest payment date to the holder of debt securities as shown on the trustees records as of the close of business on the regular record date at our office and/or at other offices that may be specified in the prospectus supplement. We will make all payments of principal and premium, if any, by check at the office of the applicable trustee and/or at other offices that may be specified in the prospectus supplement or in a notice to holders against surrender of the debt security.
Alternatively, at our option, we may pay any cash interest that becomes due on the debt security by mailing a check to the holder at his, her or its address shown on the trustees records as of the close of business on the regular record date or by transfer to an account at a bank in the United States, in either case, on the due date.
If any payment is due on a debt security on a day that is not a business day, we will make the payment on the next day that is a business day. Payments made on the next business day in this situation will be treated under the indenture as if they were made on the original due date, except as otherwise indicated in the attached prospectus supplement. Such payment will not result in a default under any debt security or the indenture, and no interest will accrue on the payment amount from the original due date to the next day that is a business day.
Book-entry and other indirect holders should consult their banks or brokers for information on how they will receive payments on their debt securities.
You will have rights if an Event of Default occurs in respect of the debt securities of your series and is not cured, as described later in this subsection.
The term Event of Default in respect of the debt securities of your series means any of the following:
| we do not pay the principal of, or any premium on, a debt security of the series within five days of its due date; |
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| we do not pay interest on a debt security of the series within 30 days of its due date; |
| we do not deposit any sinking fund payment in respect of debt securities of the series within five days of its due date; |
| we remain in breach of a covenant in respect of debt securities of the series for 60 days after we receive a written notice of default stating we are in breach (the notice must be sent by either the trustee or holders of at least 25% of the principal amount of the outstanding debt securities of the series); |
| we file for bankruptcy or certain other events of bankruptcy, insolvency or reorganization occur and remain undischarged or unstayed for a period of 90 days; or |
| the series of debt securities has an asset coverage, as such term is defined in the 1940 Act, of less than 100 per centum on the last business day of each of twenty-four consecutive calendar months, giving effect to any exemptive relief granted to the Company by the SEC; or |
| any other Event of Default in respect of debt securities of the series described in the prospectus supplement occurs. |
An Event of Default for a particular series of debt securities does not necessarily constitute an Event of Default for any other series of debt securities issued under the same or any other indenture. The trustee may withhold notice to the holders of debt securities of any default, except in the payment of principal, premium, interest, or sinking or purchase fund installment, if it in good faith considers the withholding of notice to be in the interest of the holders.
If an Event of Default has occurred and is continuing, the trustee or the holders of not less than 25% in principal amount of the outstanding debt securities of the affected series may (and the trustee shall at the request of such holders) declare the entire principal amount of all the debt securities of that series to be due and immediately payable. This is called a declaration of acceleration of maturity. A declaration of acceleration of maturity may be canceled by the holders of a majority in principal amount of the outstanding debt securities of the affected series if (1) we have deposited with the trustee all amounts due and owing with respect to the securities (other than principal that has become due solely by reason of such acceleration) and certain other amounts, and (2) any other Events of Default have been cured or waived.
Except in cases of default, where the trustee has some special duties, the trustee is not required to take any action under the indenture at the request of any holders unless the holders offer the trustee reasonable protection from expenses and liability (called an indemnity). If reasonable indemnity is provided, the holders of a majority in principal amount of the outstanding debt securities of the relevant series may direct the time, method and place of conducting any lawsuit or other formal legal action seeking any remedy available to the trustee. The trustee may refuse to follow those directions in certain circumstances. No delay or omission in exercising any right or remedy will be treated as a waiver of that right, remedy or Event of Default.
Before you are allowed to bypass your trustee and bring your own lawsuit or other formal legal action or take other steps to enforce your rights or protect your interests relating to the debt securities, the following must occur:
| you must give the trustee written notice that an Event of Default with respect to the relevant series of debt securities has occurred and remains uncured; |
| the holders of at least 25% in principal amount of all outstanding debt securities of the relevant series must make a written request that the trustee take action because of the default and must offer reasonable indemnity, security or both to the trustee against the costs, expenses and other liabilities of taking that action; |
| the trustee must not have taken action for 60 days after receipt of the above notice and offer of indemnity and/or security; and |
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| the holders of a majority in principal amount of the outstanding debt securities of that series must not have given the trustee a direction inconsistent with the above notice during that 60-day period. |
However, you are entitled at any time to bring a lawsuit for the payment of money due on your debt securities on or after the due date.
Book-entry and other indirect holders should consult their banks or brokers for information on how to give notice or direction to or make a request of the trustee and how to declare or cancel an acceleration of maturity.
Each year, we will furnish to each trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance with the indenture and the debt securities, or else specifying any default.
Holders of a majority in principal amount of the outstanding debt securities of the affected series may waive any past defaults other than
| the payment of principal, any premium or interest; or |
| in respect of a covenant that cannot be modified or amended without the consent of each holder. |
Under the terms of the indenture, we are generally permitted to consolidate or merge with another entity. We are also permitted to sell all or substantially all of our assets to another entity. However, we may not take any of these actions unless all the following conditions are met:
| where we merge out of existence or sell substantially all our assets, the resulting entity or transferee must agree to be legally responsible for our obligations under the debt securities; |
| the merger or sale of assets must not cause a default on the debt securities and we must not already be in default (unless the merger or sale would cure the default). For purposes of this no-default test, a default would include an Event of Default that has occurred and has not been cured, as described under Events of Default above. A default for this purpose would also include any event that would be an Event of Default if the requirements for giving us a notice of default or our default having to exist for a specific period of time were disregarded. |
| we must deliver certain certificates and documents to the trustee; and |
| we must satisfy any other requirements specified in the prospectus supplement relating to a particular series of debt securities. |
There are three types of changes we can make to the indenture and the debt securities issued thereunder.
First, there are changes that we cannot make to your debt securities without your specific approval. The following is a list of those types of changes:
| change the stated maturity of the principal of or interest on a debt security or the terms of any sinking fund with respect to any security; |
| reduce any amounts due on a debt security; |
| reduce the amount of principal payable upon acceleration of the maturity of an original issue discount or indexed security following a default or upon the redemption thereof or the amount thereof provable in a bankruptcy proceeding; |
| adversely affect any right of repayment at the holders option; |
| change the place or currency of payment on a debt security (except as otherwise described in the prospectus or prospectus supplement); |
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| impair your right to sue for payment; |
| adversely affect any right to convert or exchange a debt security in accordance with its terms; |
| modify the subordination provisions in the indenture in a manner that is adverse to outstanding holders of the debt securities; |
| reduce the percentage of holders of debt securities whose consent is needed to modify or amend the indenture; |
| reduce the percentage of holders of debt securities whose consent is needed to waive compliance with certain provisions of the indenture or to waive certain defaults; |
| modify any other aspect of the provisions of the indenture dealing with supplemental indentures with the consent of holders, waiver of past defaults, changes to the quorum or voting requirements or the waiver of certain covenants; and |
| change any obligation we have to pay additional amounts. |
The second type of change does not require any vote by the holders of the debt securities. This type is limited to clarifications, establishment of the form or terms of new securities of any series as permitted by the indenture and certain other changes that would not adversely affect holders of the outstanding debt securities in any material respect. We also do not need any approval to make any change that affects only debt securities to be issued under the indenture after the change takes effect.
Any other change to the indenture and the debt securities would require the following approval:
| if the change affects only one series of debt securities, it must be approved by the holders of a majority in principal amount of that series; and |
| if the change affects more than one series of debt securities issued under the same indenture, it must be approved by the holders of a majority in principal amount of all of the series affected by the change, with all affected series voting together as one class for this purpose. |
In each case, the required approval must be given by written consent.
The holders of a majority in principal amount of a series of debt securities issued under the indenture, voting together as one class for this purpose, may waive our compliance with some of our covenants applicable to that series of debt securities. However, we cannot obtain a waiver of a payment default or of any of the matters covered by the bullet points included above under Changes Requiring Your Approval.
When taking a vote, we will use the following rules to decide how much principal to attribute to a debt security:
| for original issue discount securities, we will use the principal amount that would be due and payable on the voting date if the maturity of these debt securities were accelerated to that date because of a default; |
| for debt securities whose principal amount is not known (for example, because it is based on an index), we will use the principal face amount at original issuance or a special rule for that debt security described in the prospectus supplement; and |
| for debt securities denominated in one or more foreign currencies, we will use the U.S. dollar equivalent. |
Debt securities will not be considered outstanding, and therefore not eligible to vote, if we have deposited or set aside in trust money for their payment or redemption or if we, any other obligor, or any affiliate of us or any obligor own such debt securities. Debt securities will also not be eligible to vote if they have been fully defeased as described later under Defeasance Full Defeasance.
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We will generally be entitled to set any day as a record date for the purpose of determining the holders of outstanding indenture securities that are entitled to vote or take other action under the indenture. However, the record date may not be more than 30 days before the date of the first solicitation of holders to vote on or take such action. If we set a record date for a vote or other action to be taken by holders of one or more series, that vote or action may be taken only by persons who are holders of outstanding indenture securities of those series on the record date and must be taken within eleven months following the record date.
Book-entry and other indirect holders should consult their banks or brokers for information on how approval may be granted or denied if we seek to change the indenture or the debt securities or request a waiver.
The following provisions will be applicable to each series of debt securities unless we state in the applicable prospectus supplement that the provisions of covenant defeasance and full defeasance will not be applicable to that series.
Under current U.S. federal tax law and the indenture, we can make the deposit described below and be released from some of the restrictive covenants in the indenture under which the particular series was issued. This is called covenant defeasance. In that event, you would lose the protection of those restrictive covenants but would gain the protection of having money and government securities set aside in trust to repay your debt securities. If we achieved covenant defeasance and your debt securities were subordinated as described under Indenture Provisions Subordination below, such subordination would not prevent the trustee under the indenture from applying the funds available to it from the deposit described in the first bullet below to the payment of amounts due in respect of such debt securities for the benefit of the subordinated debt holders. In order to achieve covenant defeasance, we must do the following:
| we must deposit in trust for the benefit of all holders of a series of debt securities a combination of cash (in such currency in which such securities are then specified as payable at stated maturity) or government obligations applicable to such securities (determined on the basis of the currency in which such securities are then specified as payable at stated maturity) that will generate enough cash to make interest, principal and any other payments on the debt securities on their various due dates and any mandatory sinking fund payments or analogous payments; and |
| we must deliver to the trustee a legal opinion of our counsel confirming that, under current U.S. federal income tax law, we may make the above deposit without causing you to be taxed on the debt securities any differently than if we did not make the deposit. |
| we must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act, as amended, and a legal opinion and officers certificate stating that all conditions precedent to covenant defeasance have been complied with. |
| defeasance must not result in a breach or violation of, or result in a default under, of the indenture or any of our other material agreements or instruments. |
| no default or event of default with respect to such debt securities shall have occurred and be continuing and no defaults or events of default related to bankruptcy, insolvency or reorganization shall occur during the next 90 days. |
| satisfy the conditions for covenant defeasance contained in any supplemental indentures. |
If we accomplish covenant defeasance, you can still look to us for repayment of the debt securities if there were a shortfall in the trust deposit or the trustee is prevented from making payment. For example, if one of the remaining Events of Default occurred (such as our bankruptcy) and the debt securities became immediately due and payable, there might be such a shortfall. However, there is no assurance that we would have sufficient funds to make payment of the shortfall.
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If there is a change in U.S. federal tax law or we obtain an IRS ruling, as described in the second bullet below, we can legally release ourselves from all payment and other obligations on the debt securities of a particular series (called full defeasance) if we put in place the following other arrangements for you to be repaid:
| we must deposit in trust for the benefit of all holders of a series of debt securities a combination of cash (in such currency in which such securities are then specified as payable at stated maturity) or government obligations applicable to such securities (determined on the basis of the currency in which such securities are then specified as payable at stated maturity) that will generate enough cash to make interest, principal and any other payments on the debt securities on their various due dates and any mandatory sinking fund payments or analogous payments. |
| we must deliver to the trustee a legal opinion confirming that there has been a change in current U.S. federal tax law or an IRS ruling that allows us to make the above deposit without causing you to be taxed on the debt securities any differently than if we did not make the deposit. Under current U.S. federal tax law, the deposit and our legal release from the debt securities would be treated as though we paid you your share of the cash and notes or bonds at the time the cash and notes or bonds were deposited in trust in exchange for your debt securities and you would recognize gain or loss on the debt securities at the time of the deposit. |
| we must deliver to the trustee a legal opinion of our counsel stating that the above deposit does not require registration by us under the 1940 Act, as amended, and a legal opinion and officers certificate stating that all conditions precedent to defeasance have been complied with. |
| defeasance must not result in a breach or violation of, or constitute a default under, of the indenture or any of our other material agreements or instruments. |
| no default or event of default with respect to such debt securities shall have occurred and be continuing and no defaults or events of default related to bankruptcy, insolvency or reorganization shall occur during the next 90 days. |
| satisfy the conditions for full defeasance contained in any supplemental indentures. |
If we ever did accomplish full defeasance, as described above, you would have to rely solely on the trust deposit for repayment of the debt securities. You could not look to us for repayment in the unlikely event of any shortfall. Conversely, the trust deposit would most likely be protected from claims of our lenders and other creditors if we ever became bankrupt or insolvent. If your debt securities were subordinated as described later under Indenture Provisions Subordination, such subordination would not prevent the trustee under the indenture from applying the funds available to it from the deposit referred to in the first bullet of the preceding paragraph to the payment of amounts due in respect of such debt securities for the benefit of the subordinated debt holders.
If registered debt securities cease to be issued in book-entry form, they will be issued:
| only in fully registered certificated form; |
| without interest coupons; and |
| unless we indicate otherwise in the prospectus supplement, in denominations of $1,000 and amounts that are multiples of $1,000. |
Holders may exchange their certificated securities for debt securities of smaller denominations or combined into fewer debt securities of larger denominations, as long as the total principal amount is not changed and as long as the denomination is greater than the minimum denomination for such securities.
Holders may exchange or transfer their certificated securities at the office of the trustee. We have appointed the trustee to act as our agent for registering debt securities in the names of holders transferring debt securities. We may appoint another entity to perform these functions or perform them ourselves.
146
Holders will not be required to pay a service charge to transfer or exchange their certificated securities, but they may be required to pay any tax or other governmental charge associated with the transfer or exchange. The transfer or exchange will be made only if our transfer agent is satisfied with the holders proof of legal ownership.
If we have designated additional transfer agents for your debt security, they will be named in the prospectus supplement. We may appoint additional transfer agents or cancel the appointment of any particular transfer agent. We may also approve a change in the office through which any transfer agent acts.
If any certificated securities of a particular series are redeemable and we redeem less than all the debt securities of that series, we may block the transfer or exchange of those debt securities during the period beginning 15 days before the day we mail the notice of redemption and ending on the day of that mailing, in order to freeze the list of holders to prepare the mailing. We may also refuse to register transfers or exchanges of any certificated securities selected for redemption, except that we will continue to permit transfers and exchanges of the unredeemed portion of any debt security that will be partially redeemed.
If a registered debt security is issued in book-entry form, only the depositary will be entitled to transfer and exchange the debt security as described in this subsection, since it will be the sole holder of the debt security.
Each trustee may resign or be removed with respect to one or more series of indenture securities provided that a successor trustee is appointed to act with respect to these series and has accepted such appointment. In the event that two or more persons are acting as trustee with respect to different series of indenture securities under the indenture, each of the trustees will be a trustee of a trust separate and apart from the trust administered by any other trustee.
Upon any distribution of our assets upon our dissolution, winding up, liquidation or reorganization, the payment of the principal of (and premium, if any) and interest, if any, on any indenture securities denominated as subordinated debt securities is to be subordinated to the extent provided in the indenture in right of payment to the prior payment in full of all Senior Indebtedness (as defined below), but our obligation to you to make payment of the principal of (and premium, if any) and interest, if any, on such subordinated debt securities will not otherwise be affected. In addition, no payment on account of principal (or premium, if any), sinking fund or interest, if any, may be made on such subordinated debt securities at any time unless full payment of all amounts due in respect of the principal (and premium, if any), sinking fund and interest on Senior Indebtedness has been made or duly provided for in money or moneys worth.
In the event that, notwithstanding the foregoing, any payment by us is received by the trustee in respect of subordinated debt securities or by the holders of any of such subordinated debt securities, upon our dissolution, winding up, liquidation or reorganization before all Senior Indebtedness is paid in full, the payment or distribution must be paid over to the holders of the Senior Indebtedness or on their behalf for application to the payment of all the Senior Indebtedness remaining unpaid until all the Senior Indebtedness has been paid in full, after giving effect to any concurrent payment or distribution to the holders of the Senior Indebtedness. Subject to the payment in full of all Senior Indebtedness upon this distribution by us, the holders of such subordinated debt securities will be subrogated to the rights of the holders of the Senior Indebtedness to the extent of payments made to the holders of the Senior Indebtedness out of the distributive share of such subordinated debt securities.
By reason of this subordination, in the event of a distribution of our assets upon our insolvency, certain of our senior creditors may recover more, ratably, than holders of any subordinated debt securities or the holders of any indenture securities that are not Senior Indebtedness. The indenture provides that these subordination provisions will not apply to money and securities held in trust under the defeasance provisions of the indenture.
147
Senior Indebtedness is defined in the indenture as the principal of (and premium, if any) and unpaid interest on:
| our indebtedness (including indebtedness of others guaranteed by us), whenever created, incurred, assumed or guaranteed, for money borrowed, that we have designated as Senior Indebtedness for purposes of the indenture and in accordance with the terms of the indenture (including any indenture securities designated as Senior Indebtedness), and |
| renewals, extensions, modifications and refinancings of any of this indebtedness. |
If this prospectus is being delivered in connection with the offering of a series of indenture securities denominated as subordinated debt securities, the accompanying prospectus supplement will set forth the approximate amount of our Senior Indebtedness and of our other Indebtedness outstanding as of a recent date.
Certain of our indebtedness, including certain series of indenture securities, may be secured. The prospectus supplement for each series of indenture securities will describe the terms of any security interest for such series and will indicate the approximate amount of our secured indebtedness as of a recent date. Any unsecured indenture securities will effectively rank junior to any secured indebtedness, including any secured indenture securities, that we incur in the future to the extent of the value of the assets securing such future secured indebtedness. The debt securities, whether secured or unsecured, of the Company will rank structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries, financing vehicles or similar facilities.
In the event of our bankruptcy, liquidation, reorganization or other winding up, any of our assets that secure secured debt will be available to pay obligations on unsecured debt securities only after all indebtedness under such secured debt has been repaid in full from such assets. We advise you that there may not be sufficient assets remaining to pay amounts due on any or all unsecured debt securities then outstanding after fulfillment of this obligation. As a result, the holders of unsecured indenture securities may recover less, ratably, than holders of any of our secured indebtedness.
U.S. Bank National Association will serve as the trustee under the indenture.
Debt securities denominated or payable in foreign currencies may entail significant risks. These risks include the possibility of significant fluctuations in the foreign currency markets, the imposition or modification of foreign exchange controls and potential illiquidity in the secondary market. These risks will vary depending upon the currency or currencies involved and will be more fully described in the applicable prospectus supplement.
148
The following is a general description of the terms of the warrants we may issue from time to time. Particular terms of any warrants we offer will be described in the prospectus supplement relating to such warrants.
We may issue warrants to purchase shares of our common stock. Such warrants may be issued independently or together with shares of common stock and may be attached or separate from such shares of common stock. We will issue each series of warrants under a separate warrant agreement to be entered into between us and a warrant agent. The warrant agent will act solely as our agent and will not assume any obligation or relationship of agency for or with holders or beneficial owners of warrants.
A prospectus supplement will describe the particular terms of any series of warrants we may issue, including the following:
| the title of such warrants; |
| the aggregate number of such warrants; |
| the price or prices at which such warrants will be issued; |
| the currency or currencies, including composite currencies, in which the price of such warrants may be payable; |
| the number of shares of common stock issuable upon exercise of such warrants; |
| the price at which and the currency or currencies, including composite currencies, in which the shares of common stock purchasable upon exercise of such warrants may be purchased; |
| the date on which the right to exercise such warrants shall commence and the date on which such right will expire; |
| whether such warrants will be issued in registered form or bearer form; |
| if applicable, the minimum or maximum amount of such warrants which may be exercised at any one time; |
| if applicable, the number of such warrants issued with each share of common stock; |
| if applicable, the date on and after which such warrants and the related shares of common stock will be separately transferable; |
| information with respect to book-entry procedures, if any; |
| if applicable, a discussion of certain U.S. federal income tax considerations; and |
| any other terms of such warrants, including terms, procedures and limitations relating to the exchange and exercise of such warrants. |
We and the warrant agent may amend or supplement the warrant agreement for a series of warrants without the consent of the holders of the warrants issued thereunder to effect changes that are not inconsistent with the provisions of the warrants and that do not materially and adversely affect the interests of the holders of the warrants.
Under the 1940 Act, we may generally only offer warrants provided that (1) the warrants expire by their terms within ten years; (2) the exercise or conversion price is not less than the current market value at the date of issuance; (3) our stockholders authorize the issuance of such warrants, and our board of directors approves such issuance on the basis that the issuance is in the best interests of the Company and its stockholders; and (4) if the warrants are accompanied by other securities, the warrants are not separately transferable unless no class of such warrants and the securities accompanying them has been publicly distributed. The 1940 Act also provides that the amount of our voting securities that would result from the exercise of all outstanding warrants at the time of issuance may not exceed 25% of our outstanding voting securities. As of the date of this prospectus, our stockholders have not authorized any issuance of warrants beyond those that would otherwise be permitted without stockholder approval under the 1940 Act.
149
We may offer, from time to time, in more than one offerings, up to $75,000,000 of our securities in one or more underwritten public offerings, at-the-market offerings to or through a market maker or into an existing trading market for the securities, on an exchange or otherwise, negotiated transactions, block trades, best efforts or a combination of these methods. We may sell our securities through underwriters or dealers, directly to one or more purchasers, through agents or through a combination of any such methods of sale. Any underwriter or agent involved in the offer and sale of our securities will be named in the applicable prospectus supplement. A prospectus supplement or supplements will also describe the terms of the offering of securities, including: the purchase price and the proceeds we will receive from the sale; any over-allotment options under which underwriters may purchase additional securities from us; any agency fees or underwriting discounts and other items constituting agents or underwriters compensation; the public offering price; any discounts or concessions allowed or re-allowed or paid to dealers; and any securities exchange or market on which our securities may be listed. Only underwriters or agents named in the prospectus supplement will be underwriters or agents of the securities offered by the prospectus supplement.
The distribution of the securities may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, at prevailing market prices at the time of sale, at prices related to such prevailing market prices, or at negotiated prices, provided, however, that the offering price per share of our common stock, less any underwriting commissions or discounts, must equal or exceed the net asset value per share of our common stock at the time of the offering except (a) in connection with a rights offering to our existing stockholders, (b) with the consent of the majority of our common stockholders or (c) under such other circumstances as the SEC may permit. The price at which the securities may be distributed may represent a discount from prevailing market prices.
In connection with the sale of the securities, underwriters or agents may receive compensation from us or from purchasers of the securities, for whom they may act as agents, in the form of discounts, concessions or commissions. Underwriters may sell the securities to or through dealers and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agents. Underwriters, dealers and agents that participate in the distribution of the securities may be deemed to be underwriters under the Securities Act, and any discounts and commissions they receive from us and any profit realized by them on the resale of the securities may be deemed to be underwriting discounts and commissions under the Securities Act. Any such underwriter or agent will be identified and any such compensation received from us will be described in the applicable prospectus supplement. The maximum aggregate commission or discount to be received by any member of FINRA or independent broker-dealer will not be greater than 10% of the gross proceeds of the sale of the securities offered pursuant to this prospectus and any applicable prospectus supplement.
Any underwriter may engage in over-allotment, stabilizing transactions, short-covering transactions and penalty bids in accordance with Regulation M under the Exchange Act. Over-allotment involves sales in excess of the offering size, which create a short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum price. Syndicate-covering or other short-covering transactions involve purchases of the securities, either through exercise of the over-allotment option or in the open market after the distribution is completed, to cover short positions. Penalty bids permit the underwriters to reclaim a selling concession from a dealer when the securities originally sold by the dealer are purchased in a stabilizing or covering transaction to cover short positions. Those activities may cause the price of the securities to be higher than it would otherwise be. If commenced, the underwriters may discontinue any of the activities at any time.
Any underwriters that are qualified market makers on the NASDAQ Global Market may engage in passive market making transactions in our common stock on the NASDAQ Global Market in accordance with Regulation M under the Exchange Act, during the business day prior to the pricing of the offering, before the commencement of offers or sales of our common stock. Passive market makers must comply with applicable volume and price limitations and must be identified as passive market makers. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid for such security; if all independent bids are lowered below the passive market makers bid, however, the passive market makers bid must then be lowered when certain purchase limits are exceeded. Passive market making may stabilize the
150
market price of the common stock at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time.
We may sell the securities directly or through agents we designate from time to time. We will name any agent involved in the offering and sale of the securities and we will describe any commissions we will pay the agent in the prospectus supplement. Unless the prospectus supplement states otherwise, our agent will act on a best-efforts basis for the period of its appointment.
Unless otherwise specified in the applicable prospectus supplement, each class or series of securities will be a new issue with no trading market, other than our common stock, which is traded on The NASDAQ Capital Market. We may elect to list any other class or series of securities on any exchanges, but we are not obligated to do so. We cannot guarantee the liquidity of the trading markets for any securities.
Under agreements that we may enter, underwriters, dealers and agents who participate in the distribution of our securities may be entitled to indemnification by us against certain liabilities, including liabilities under the Securities Act, or contribution with respect to payments that the agents or underwriters may make with respect to these liabilities. Underwriters, dealers and agents may engage in transactions with, or perform services for, us in the ordinary course of business.
If so indicated in the applicable prospectus supplement, we will authorize underwriters or other persons acting as our agents to solicit offers by certain institutions to purchase our securities from us pursuant to contracts providing for payment and delivery on a future date. Institutions with which such contracts may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions and others, but in all cases such institutions must be approved by us. The obligations of any purchaser under any such contract will be subject to the condition that the purchase of our securities shall not at the time of delivery be prohibited under the laws of the jurisdiction to which such purchaser is subject. The underwriters and such other agents will not have any responsibility in respect of the validity or performance of such contracts. Such contracts will be subject only to those conditions set forth in the prospectus supplement, and the prospectus supplement will set forth the commission payable for solicitation of such contracts.
We may enter into derivative transactions with third parties, or sell securities not covered by this prospectus to third parties in privately negotiated transactions. If the applicable prospectus supplement indicates, in connection with those derivatives, the third parties may sell securities covered by this prospectus and the applicable prospectus supplement, including in short sale transactions. If so, the third party may use securities pledged by us or borrowed from us or others to settle those sales or to close out any related open borrowings of stock, and may use securities received from us in settlement of those derivatives to close out any related open borrowings of stock. The third parties in such sale transactions will be underwriters and, if not identified in this prospectus, will be identified in the applicable prospectus supplement.
In order to comply with the securities laws of certain states, if applicable, our securities offered hereby will be sold in such jurisdictions only through registered or licensed brokers or dealers.
151
Certain legal matters in connection with the securities offered hereby will be passed upon for us by Sutherland Asbill & Brennan LLP, Washington, DC. Certain legal matters in connection with the offering will be passed upon for the underwriters, if any, by the counsel named in the prospectus supplement.
A portion of our cash is held in safekeeping by JPMorgan Chase & Co., located at 270 Park Ave., New York, New York 10017. Santander Bank, N.A. f/k/a Sovereign Bank, N.A., located at 45 East 53rd Street, New York, New York 10022, holds our other assets as security for our Credit Facility. American Stock Transfer and Trust Company, LLC acts as our transfer agent, distribution paying agent and registrar. The principal business address of our transfer agent is 6201 15th Ave., Brooklyn, New York 11219. U.S. Bank National Association, our trustee under an indenture and the first supplemental indenture thereto relating to the Notes, is the paying agent, registrar and transfer agent relating to the Notes. The principal business address of our trustee is 214 N. Tryon St., 12th Floor, Charlotte, North Carolina 28202.
The financial statements as of June 30, 2013 and 2012 and for each of the years ended June 30, 2013, 2012 and 2011 included in this prospectus have been so included in reliance on the report of Rothstein Kass, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
Since we will generally acquire and dispose of our investments in privately negotiated transactions, we will infrequently use brokers in the normal course of our business. Subject to policies established by our Board of Directors, our investment adviser will be primarily responsible for the execution of the publicly traded securities portion of our portfolio transactions and the allocation of brokerage commissions. Our investment adviser does not expect to execute transactions through any particular broker or dealer, but will seek to obtain the best net results for Full Circle Capital, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational facilities of the firm and the firms risk and skill in positioning blocks of securities. While our investment adviser generally will seek reasonably competitive trade execution costs, Full Circle Capital will not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements, our investment adviser may select a broker based partly upon brokerage or research services provided to the investment adviser and Full Circle Capital and any other clients. In return for such services, we may pay a higher commission than other brokers would charge if the investment adviser determines in good faith that such commission is reasonable in relation to the services provided.
We have filed with the SEC a registration statement on Form N-2 together with all amendments and related exhibits under the Securities Act. The registration statement contains additional information about us and the securities being offered by this prospectus.
We file annual, quarterly and current reports, proxy statements and other information with the SEC under the Exchange Act. You can inspect any materials we file with the SEC, without charge, at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The information we file with the SEC is available free of charge by contacting us at Full Circle Capital Corporation, 800 Westchester Ave., Suite S-620, Rye Brook, New York 10573, by telephone at (914) 220-6300, or on our website at http://www.fccapital.com . The SEC also maintains a website that contains reports, proxy statements and other information regarding registrants, including us, that file such information electronically with the SEC. The address of the SECs web site is http://www.sec.gov . Information contained on our website or on the SECs web site about us is not incorporated into this prospectus and you should not consider information contained on our website or on the SECs website to be part of this prospectus.
152
F-1
|
|
|
|
|||||||||
September 30, 2013 | June 30, 2013 | |||||||||||
Unaudited | Audited | |||||||||||
Assets
|
||||||||||||
Control Investments at Fair Value (Cost of $18,410,567 and $18,139,543, respectively) |
(NOTE 2, 9)
|
$ | 19,807,387 | $ | 19,115,440 | |||||||
Affiliate Investments at Fair Value (Cost of $18,115,216 and $17,954,622, respectively) |
(NOTE 2, 9)
|
15,297,932 | 16,547,903 | |||||||||
Non-Control/Non-Affiliate Investments at Fair Value (Cost of $77,058,614 and $53,220,538, respectively) |
(NOTE 2, 9)
|
74,515,985 | 52,511,158 | |||||||||
Total Investments at Fair Value (Cost of $113,584,397 and $89,314,703, respectively) | 109,621,304 | 88,174,501 | ||||||||||
Cash | 99,147 | 18,029,115 | ||||||||||
Deposit with Broker | 2,500,000 | | ||||||||||
Interest Receivable |
(NOTE 2)
|
1,218,420 | 1,097,970 | |||||||||
Principal Receivable | 276,386 | 104,768 | ||||||||||
Dividends Receivable | 34,411 | 36,705 | ||||||||||
Due from Affiliate | 58,122 | | ||||||||||
Due from Portfolio Investment | 49,488 | 105,030 | ||||||||||
Receivable from Notes Offering | | 2,299,704 | ||||||||||
Prepaid Expenses | 175,857 | 61,198 | ||||||||||
Other Assets | 755,158 | 1,437,273 | ||||||||||
Deferred Offering Expenses | 88,182 | 86,834 | ||||||||||
Deferred Debt Issuance Costs |
(NOTE 8)
|
1,066,158 | 1,086,895 | |||||||||
Deferred Credit Facility Fees |
(NOTE 8)
|
513,546 | 543,846 | |||||||||
Total Assets | 116,456,179 | 113,063,839 | ||||||||||
Liabilities
|
||||||||||||
Due to Affiliate |
(NOTE 5)
|
725,691 | 728,371 | |||||||||
Accounts Payable | 66,781 | 471,297 | ||||||||||
Accrued Liabilities | 9,000 | 10,172 | ||||||||||
Due to Broker | 15,000,180 | | ||||||||||
Dividends Payable | 582,842 | 582,842 | ||||||||||
Interest Payable | 51,198 | 134,167 | ||||||||||
Other Liabilities | 314,343 | 358,696 | ||||||||||
Line of Credit |
(NOTE 8)
|
21,922,256 | 25,584,147 | |||||||||
Notes Payable 8.25% due June 30, 2020 |
(NOTE 8)
|
21,145,525 | 21,145,525 | |||||||||
Distribution Notes |
(NOTE 8)
|
| 3,404,583 | |||||||||
Total Liabilities | 59,817,816 | 52,419,800 | ||||||||||
Net Assets | $ | 56,638,363 | $ | 60,644,039 | ||||||||
Components of Net Assets
|
||||||||||||
Common Stock, par value $0.01 per share (100,000,000 authorized; 7,569,382 issued and outstanding) | $ | 75,694 | $ | 75,694 | ||||||||
Paid-in Capital in Excess of Par | 66,319,579 | 66,319,579 | ||||||||||
Distributions in Excess of Net Investment Income | (704,500 | ) | (200,200 | ) | ||||||||
Accumulated Net Realized Losses | (5,089,317 | ) | (4,410,832 | ) | ||||||||
Accumulated Net Unrealized Losses | (3,963,093 | ) | (1,140,202 | ) | ||||||||
Net Assets | $ | 56,638,363 | $ | 60,644,039 | ||||||||
Net Asset Value Per Share | $ | 7.48 | $ | 8.01 |
See notes to consolidated financial statements.
F-2
|
|
|
|
|||||||||
Three Months
Ended September 30, 2013 |
Three Months
Ended September 30, 2012 |
|||||||||||
Investment Income
|
||||||||||||
Interest Income from Non-Control/Non-Affiliate Investments | $ | 1,881,138 | $ | 2,019,984 | ||||||||
Interest Income from Affiliate Investments | 653,718 | 279,941 | ||||||||||
Interest Income from Control Investments | 457,904 | 279,173 | ||||||||||
Dividend Income from Control Investments | 34,411 | 34,097 | ||||||||||
Other Income from Non-Control/Non-Affiliate Investments | 173,471 | 144,027 | ||||||||||
Other Income from Affiliate Investments |
(NOTE 2)
|
5,044 | 3,581 | |||||||||
Other Income from Control Investments |
(NOTE 2)
|
12,500 | 12,500 | |||||||||
Total Investment Income |
(NOTE 2)
|
3,218,186 | 2,773,303 | |||||||||
Operating Expenses
|
||||||||||||
Management Fee |
(NOTE 5)
|
409,258 | 334,036 | |||||||||
Incentive Fee |
(NOTE 5)
|
314,739 | 307,932 | |||||||||
Total Advisory Fees | 723,997 | 641,968 | ||||||||||
Allocation of Overhead Expenses |
(NOTE 5)
|
63,830 | 56,756 | |||||||||
Sub-Administration Fees |
(NOTE 5)
|
50,000 | 73,429 | |||||||||
Officers Compensation |
(NOTE 5)
|
75,338 | 75,194 | |||||||||
Total Costs Incurred Under Administration Agreement | 189,168 | 205,379 | ||||||||||
Directors Fees | 28,625 | 28,625 | ||||||||||
Interest Expense |
(NOTE 8)
|
720,977 | 396,495 | |||||||||
Professional Services Expense | 195,861 | 165,161 | ||||||||||
Bank Fees | 13,846 | 3,090 | ||||||||||
Other | 101,485 | 94,340 | ||||||||||
Total Operating Expenses | 1,973,959 | 1,535,058 | ||||||||||
Net Investment Income | 1,244,227 | 1,238,245 | ||||||||||
Net Change in Unrealized Gain (Loss) on Investments | (2,822,891 | ) | 517,313 | |||||||||
Net Realized Gain (Loss) on:
|
||||||||||||
Investments | (678,553 | ) | (860,667 | ) | ||||||||
Foreign Currency Transactions | 68 | | ||||||||||
Net Realized Gain (Loss) | (678,485 | ) | (860,667 | ) | ||||||||
Net Increase (Decrease) in Net Assets Resulting from Operations | $ | (2,257,149 | ) | $ | 894,891 | |||||||
Earnings (loss) per Common Share Basic and Diluted |
(NOTE 4)
|
$ | (0.30 | ) | $ | 0.14 | ||||||
Net Investment Income per Common Share Basic and Diluted |
(NOTE 7)
|
$ | 0.16 | $ | 0.20 | |||||||
Weighted Average Shares of Common Share Outstanding Basic and Diluted | 7,569,382 | 6,219,382 |
See notes to consolidated financial statements.
F-3
|
|
|
||||||
Three Months
Ended September 30, 2013 |
Three Months
Ended September 30, 2012 |
|||||||
Increase (Decrease) in Net Assets Resulting from Operations:
|
||||||||
Net Investment Income | $ | 1,244,227 | $ | 1,238,245 | ||||
Net Change in Unrealized Gain (Loss) on Investments | (2,822,891 | ) | 517,313 | |||||
Net Realized Gain (Loss) on:
|
||||||||
Investments | (678,553 | ) | (860,667 | ) | ||||
Foreign Currency Transactions | 68 | | ||||||
Net Realized Gain (Loss) | (678,485 | ) | (860,667 | ) | ||||
Net Increase (Decrease) in Net Assets Resulting from Operations | (2,257,149 | ) | 894,891 | |||||
Dividends to Shareholders | (1,748,527 | ) | (1,436,677 | ) | ||||
Total Decrease in Net Assets | (4,005,676 | ) | (541,786 | ) | ||||
Net Assets at Beginning of Period | 60,644,039 | 53,442,785 | ||||||
Net Assets at End of Period | $ | 56,638,363 | $ | 52,900,999 | ||||
Capital Share Activity:
|
||||||||
Shares issued | | | ||||||
Shares Outstanding at Beginning of Period | 7,569,382 | 6,219,382 | ||||||
Shares Outstanding at End of Period
|
7,569,382 | 6,219,382 |
See notes to consolidated financial statements.
F-4
|
|
|
||||||
Three months
ended September 30, 2013 |
Three months
ended September 30, 2012 |
|||||||
Cash Flows from Operating Activities:
|
||||||||
Net Increase (Decrease) in Net Assets Resulting from Operations | $ | (2,257,149 | ) | $ | 894,891 | |||
Adjustments to Reconcile Net Increase (Decrease) in Net Assets Resulting from Operations to Net Cash Used in Operating Activities
|
||||||||
Purchases of Investments | (35,002,060 | ) | (36,438,364 | ) | ||||
Proceeds from Sale or Refinancing of Investments | 10,134,420 | 30,591,557 | ||||||
Realized (Gain) Loss on:
|
||||||||
Investments | 678,553 | 860,667 | ||||||
Foreign Currency Transactions | (68 | ) | | |||||
Net Change in Unrealized (Gain) Loss on Investments | 2,822,891 | (517,313 | ) | |||||
Amortization of Discount | (80,539 | ) | (112,444 | ) | ||||
Amortization of Deferred Debt Issuance Costs | 39,840 | | ||||||
Amortization of Deferred Credit Facility Fees | 60,614 | | ||||||
Change in Operating Assets and Liabilities
|
||||||||
Deposit with Broker | (2,500,000 | ) | (402,519 | ) | ||||
Interest Receivable | (120,450 | ) | (62,729 | ) | ||||
Principal Receivable | (171,618 | ) | (718,436 | ) | ||||
Dividends Receivable | 2,294 | (34,097 | ) | |||||
Due from Affiliate | (58,122 | ) | (37,335 | ) | ||||
Due from Portfolio Investment | 55,542 | 11,140 | ||||||
Prepaid Expenses | (114,659 | ) | (116,962 | ) | ||||
Other Assets | 682,115 | (2,055 | ) | |||||
Due to Affiliate | (2,680 | ) | 62,919 | |||||
Accounts Payable | (404,516 | ) | 77,249 | |||||
Accrued Liabilities | (1,172 | ) | (56,441 | ) | ||||
Due to Broker | 15,000,180 | 2,500,563 | ||||||
Interest Payable | (82,969 | ) | 17,148 | |||||
Other Liabilities | (44,353 | ) | (133,531 | ) | ||||
Net Cash Used in Operating Activities | (11,363,906 | ) | (3,616,092 | ) | ||||
Cash Flows from Financing Activities:
|
||||||||
Borrowings Under Credit Facility | 36,643,727 | 14,182,849 | ||||||
Payments Under Credit Facility | (40,305,618 | ) | (9,678,932 | ) | ||||
Dividends Paid to Shareholders | (1,748,527 | ) | (1,436,677 | ) | ||||
Proceeds from Notes Payable | 2,299,704 | | ||||||
Deferred Credit Facility Fees | (30,314 | ) | | |||||
Deferred Debt Issuance Costs | (19,103 | ) | | |||||
Payment of Distribution Notes | (3,404,583 | ) | | |||||
Payment of Offering Expenses | (1,348 | ) | (23,793 | ) | ||||
Net Cash (Used in) Provided by Financing Activities | (6,566,062 | ) | 3,043,447 | |||||
Total Decrease in Cash | (17,929,968 | ) | (572,645 | ) | ||||
Cash Balance at Beginning of Period | 18,029,115 | 639,149 | ||||||
Cash Balance at End of Period | $ | 99,147 | $ | 66,504 | ||||
Supplemental Disclosure of Non-Cash Financing Activity:
|
||||||||
Dividends Declared, Not Yet Paid | $ | 582,842 | $ | 478,892 | ||||
Accrued Offering Expenses | $ | | $ | (19,697 | ) | |||
Supplemental Disclosure of Cash Flow Information:
|
||||||||
Cash Paid During the Period for Interest | $ | 703,492 | $ | 379,347 |
See notes to consolidated financial statements.
F-5
|
|
|
|
|
|
|||||||||||||||
Description (1) , (2) | Industry | Par Amount/ Quantity | Cost | Fair Value | % of Net Asset Value | |||||||||||||||
Control Investments
(4)
|
||||||||||||||||||||
New Media West, LLC
|
Cable TV Broadband Services | |||||||||||||||||||
Senior Secured Term Loan, 9.00%, 12/31/2017 | $ | 5,079,679 | $ | 5,079,679 | $ | 5,079,679 | 8.97 | % | ||||||||||||
Limited Liability Company Interests , (5) | 720 | 3,600,000 | 3,869,909 | 6.83 | % | |||||||||||||||
Total | 8,679,679 | 8,949,588 | 15.80 | % | ||||||||||||||||
Takoda Resources Inc.*
|
Geophysical Surveying and
Mapping Services |
|||||||||||||||||||
Senior Secured Loan Term Loan, 16.00%, 4/1/2016 | $ | 1,683,977 | 1,683,977 | 1,683,977 | 2.97 | % | ||||||||||||||
Common Stock (6) | 520 | | | | % | |||||||||||||||
Total | 1,683,977 | 1,683,977 | 2.97 | % | ||||||||||||||||
Texas Westchester Financial, LLC
|
Consumer Financing | |||||||||||||||||||
Limited Liability Company Interests | 9,278 | 905,819 | 587,928 | 1.04 | % | |||||||||||||||
The Finance Company, LLC
|
Consumer Financing | |||||||||||||||||||
Senior Secured Loan, 15.00%, 9/30/2015 | $ | 4,663,547 | 4,591,315 | 4,749,201 | 8.39 | % | ||||||||||||||
Limited Liability Company Interests | 50 | 140,415 | 1,619,980 | 2.86 | % | |||||||||||||||
Total | 4,731,730 | 6,369,181 | 11.25 | % | ||||||||||||||||
TransAmerican Asset Servicing Group, LLC
|
Asset Recovery Services | |||||||||||||||||||
Senior Secured Loan, 14.25%, 7/25/2016 | $ | 2,450,000 | 2,409,362 | 2,216,713 | 3.91 | % | ||||||||||||||
Limited Liability Company Interests , (7) | 75 | | | | % | |||||||||||||||
Total | 2,409,362 | 2,216,713 | 3.91 | % | ||||||||||||||||
Total Control Investments | 18,410,567 | 19,807,387 | 34.97 | % | ||||||||||||||||
Affiliate Investments
(3)
|
||||||||||||||||||||
Modular Process Control, LLC
|
Energy Efficiency Services | |||||||||||||||||||
Senior Secured Loan Revolving Loan, 15.00%,
3/28/17 |
$ | 3,500,000 | 3,319,052 | 3,489,267 | 6.16 | % | ||||||||||||||
Senior Secured Loan Term Loan, 15.00%, 3/28/17 | $ | 2,500,000 | 2,349,296 | 1,649,917 | 2.91 | % | ||||||||||||||
Modular Process Control, LLC Warrants for 8% of the outstanding Class B LLC Interests (at a $0.01 strike price), expire 3/28/23 | 1 | 288,000 | | | % | |||||||||||||||
Total | 5,956,348 | 5,139,184 | 9.07 | % | ||||||||||||||||
ProGrade Ammo Group, LLC
|
Munitions | |||||||||||||||||||
Senior Secured Revolving Loan, 9.19%, 8/1/2014 | $ | 2,650,213 | 2,650,214 | 2,650,213 | 4.68 | % | ||||||||||||||
Senior Secured Term Loan, 16.19%, 8/1/2014 | $ | 4,843,750 | 4,787,446 | 3,355,427 | 5.92 | % | ||||||||||||||
Warrants for 9.5% of the outstanding LLC interests (at a $10.00 strike price), expire 8/1/2018 | 181,240 | 176,770 | | | % | |||||||||||||||
Total | 7,614,430 | 6,005,640 | 10.60 | % | ||||||||||||||||
SOLEX Fine Foods, LLC; Catsmo, LLC
|
Food Distributors & Wholesalers | |||||||||||||||||||
Senior Secured Term Loan, 12.33%, 12/28/2016 | $ | 3,900,000 | 3,805,883 | 3,867,890 | 6.84 | % | ||||||||||||||
Limited Liability Company Interests , (8) | 1 | 250,000 | 42,292 | 0.07 | % | |||||||||||||||
Warrants for 1.6% of the outstanding LLC interests (strike price 0.01), expire 12/31/2022 , (8) | 1 | 58,055 | 7,475 | 0.01 | % | |||||||||||||||
Total | 4,113,938 | 3,917,657 | 6.92 | % | ||||||||||||||||
West World Media, LLC
(9)
|
Information and Data Services | |||||||||||||||||||
Limited Liability Company Interests | 85,210 | 430,500 | 235,451 | 0.42 | % | |||||||||||||||
Total Affiliate Investments | 18,115,216 | 15,297,932 | 27.01 | % |
See notes to consolidated financial statements.
F-6
|
|
|
|
|
|
|||||||||||||||
Description (1),(2) | Industry | Par Amount/ Quantity | Cost | Fair Value |
% of Net
Asset Value |
|||||||||||||||
Other Investments
|
||||||||||||||||||||
Attention Transit Advertising Systems, LLC
|
Outdoor Advertising Services | |||||||||||||||||||
Senior Secured Loan, 11.50%, 9/30/2016 | $ | 2,321,626 | $ | 2,321,626 | $ | 2,304,677 | 4.07 | % | ||||||||||||
Background Images, Inc.
|
Equipment Rental Services | |||||||||||||||||||
Senior Secured Loan Term A, 14.69%, 6/28/2015 | $ | 1,380,000 | 1,372,558 | 1,388,832 | 2.45 | % | ||||||||||||||
Senior Secured Loan Term B, 16.44%, 6/28/2015 | $ | 780,000 | 775,696 | 749,450 | 1.33 | % | ||||||||||||||
Total | 2,148,254 | 2,138,282 | 3.78 | % | ||||||||||||||||
Blackstrap Broadcasting, LLC
|
Radio Broadcasting | |||||||||||||||||||
Senior Secured Loan, 5.00%, 7/31/2014 | $ | 3,000,000 | 3,000,000 | 2,474,200 | 4.37 | % | ||||||||||||||
Subordinated Secured Loan, 16.00%, 7/31/2014 | $ | 3,500,000 | 3,500,000 | 1,276,333 | 2.25 | % | ||||||||||||||
Total | 6,500,000 | 3,750,533 | 6.62 | % | ||||||||||||||||
Coast Plating, Inc.
|
Aerospace Parts Plating
and Finishing |
|||||||||||||||||||
Senior Secured Loan Term A, 11.69%, 9/12/2014 | $ | 1,365,451 | 1,365,451 | 1,379,105 | 2.44 | % | ||||||||||||||
Senior Secured Loan Term B, 12.44%, 9/12/2014 | $ | 3,343,000 | 3,342,999 | 3,376,430 | 5.96 | % | ||||||||||||||
Total | 4,708,450 | 4,755,535 | 8.40 | % | ||||||||||||||||
CPX, Inc.
|
Industrial Molded Products | |||||||||||||||||||
Senior Secured Loan Term Loan, 14.19%, 9/30/2016 | $ | 1,250,000 | 1,229,695 | 1,229,695 | 2.17 | % | ||||||||||||||
Senior Secured Revolving Loan, 14.69%, 9/30/2016 | $ | 1,250,000 | 1,229,696 | 1,229,696 | 2.17 | % | ||||||||||||||
Total | 2,459,391 | 2,459,391 | 4.34 | % | ||||||||||||||||
CSL Operating, LLC
|
Industrial Metal Treatings | |||||||||||||||||||
Senior Secured Loan Term A, 11.69%, 5/11/2014 | $ | 1,816,740 | 1,814,624 | 1,834,907 | 3.24 | % | ||||||||||||||
Senior Secured Loan Term B, 11.69%, 5/11/2014 | $ | 1,816,740 | 1,814,624 | 1,834,907 | 3.24 | % | ||||||||||||||
Total | 3,629,248 | 3,669,814 | 6.48 | % | ||||||||||||||||
Franklin Place Shops Red, LLC*
|
Real Estate Investment Trust | |||||||||||||||||||
Senior Secured Loan, 12.00%, 2/28/2014 | $ | 1,500,000 | 1,487,267 | 1,487,267 | 2.63 | % | ||||||||||||||
Employment Plus, Inc.
|
Staffing Services | |||||||||||||||||||
Senior Secured Loan, 12.00%, 10/24/2013 | $ | 5,000,000 | 5,000,000 | 5,100,000 | 9.00 | % | ||||||||||||||
Global Energy Efficiency Holdings, Inc.
|
Energy Efficiency Services | |||||||||||||||||||
Senior Secured Revolving Loan, 13.19%, 9/7/2015 | $ | 5,350,304 | 5,347,463 | 5,439,654 | 9.60 | % | ||||||||||||||
Senior Secured Loan, 13.19%, 9/7/2015 | $ | 900,000 | 891,783 | 938,160 | 1.66 | % | ||||||||||||||
Total | 6,239,246 | 6,377,814 | 11.26 | % | ||||||||||||||||
Infinite Aegis Group, LLC
|
Healthcare Billing and Collections | |||||||||||||||||||
Senior Secured Loan Revolving Loan, 12.19%, 7/31/2017 | $ | 1,000,000 | 983,610 | 983,610 | 1.74 | % | ||||||||||||||
Senior Secured Loan Term Loan, 12.19%, 7/31/2017 | $ | 4,000,000 | 3,868,686 | 3,868,686 | 6.83 | % | ||||||||||||||
Warrants for 2.0% of the outstanding LLC interests (at a $0.01 strike price), expire 8/1/2023 | 1 | 107,349 | 107,349 | 0.19 | % | |||||||||||||||
Total | 4,959,645 | 4,959,645 | 8.76 | % | ||||||||||||||||
iMedX, Inc.
|
Medical Transcription Services | |||||||||||||||||||
Senior Secured Revolving Loan, 13.75%, 09/19/2014 | $ | 1,406,312 | 1,406,312 | 1,508,645 | 2.67 | % | ||||||||||||||
Senior Secured Loan Term A, 13.75%, 09/19/2014 | $ | 2,425,931 | 2,414,515 | 2,500,003 | 4.41 | % | ||||||||||||||
Senior Secured Loan Term B, 13.75%, 09/19/2014 | $ | 1,060,360 | 1,060,360 | 1,082,239 | 1.91 | % | ||||||||||||||
Total | 4,881,187 | 5,090,887 | 8.99 | % |
See notes to consolidated financial statements.
F-7
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Description (1),(2) | Industry |
Par Amount/
Quantity |
Cost | Fair Value |
% of Net
Asset Value |
|||||||||||||||
MDU Communications (USA) Inc.
|
Cable TV Broadband Services | |||||||||||||||||||
Senior Secured Loan Tranche A, 11.85%,
12/31/2013 |
$ | 5,000,000 | $ | 5,000,000 | $ | 4,598,333 | 8.12 | % | ||||||||||||
Senior Secured Loan Tranche C, 11.85%,
12/31/2013 |
$ | 250,000 | 250,000 | 229,917 | 0.41 | % | ||||||||||||||
Senior Secured Loan Tranche D, 8.75%, 12/31/2013 | $ | 1,480,000 | 1,480,000 | 1,361,107 | 2.40 | % | ||||||||||||||
Total | 6,730,000 | 6,189,357 | 10.93 | % | ||||||||||||||||
Pristine Environments, Inc.
|
Building Cleaning
and Maintenance Services |
|||||||||||||||||||
Senior Secured Loan Revolving Loan, 12.69%, 3/31/2017 | $ | 2,464,801 | 2,442,869 | 2,567,090 | 4.53 | % | ||||||||||||||
Senior Secured Loan Term Loan, 12.69%, 3/31/2017 | $ | 1,135,000 | 1,124,128 | 1,225,573 | 2.17 | % | ||||||||||||||
Total | 3,566,997 | 3,792,663 | 6.70 | % | ||||||||||||||||
The Selling Source, LLC
|
Information and Data Services | |||||||||||||||||||
Senior Secured Loan, 12.54%, 1/31/2017 | $ | 4,000,000 | 3,966,102 | 4,000,000 | 7.06 | % | ||||||||||||||
US Path Labs, LLC
|
Healthcare Services | |||||||||||||||||||
Senior Secured Loan, 14.00%, 8/31/2014 | $ | 3,440,000 | 3,404,934 | 3,440,000 | 6.07 | % | ||||||||||||||
VaultLogix, LLC
|
Information Retrieval Services | |||||||||||||||||||
Warrants for Variable % Ownership,
(at a $307.855 strike price), expire 1/14/2019 |
3,439 | 56,147 | | | % | |||||||||||||||
United States Treasury
|
||||||||||||||||||||
United States Treasury Bill** (0.15)%, 4/4/2013 | $ | 15,000,000 | 15,000,120 | 15,000,120 | 26.48 | % | ||||||||||||||
Total Other Investments | 77,058,614 | 74,515,985 | 131.57 | % | ||||||||||||||||
Total Investments | $ | 113,584,397 | $ | 109,621,304 | 193.55 | % |
See notes to consolidated financial statements.
F-8
The following table shows the fair value of our portfolio of investments by industry, as of September 30, 2013.
|
|
|
||||||
September 30, 2013 | ||||||||
Investment at Fair Value (in millions) | Percentage of Net Assets | |||||||
CableTV/Broadband Services | $ | 15.1 | 26.73 | % | ||||
Energy Efficiency Services | 11.5 | 20.33 | ||||||
Consumer Financing | 7.0 | 12.28 | ||||||
Munitions | 6.0 | 10.60 | ||||||
Staffing Services | 5.1 | 9.00 | ||||||
Medical Transcription Services | 5.1 | 8.99 | ||||||
Healthcare Billing and Collections | 5.0 | 8.76 | ||||||
Aerospace Parts Plating and Finishing | 4.7 | 8.40 | ||||||
Information and Data Services | 4.2 | 7.48 | ||||||
Food Distributors and Wholesalers | 3.9 | 6.92 | ||||||
Building Cleaning and Maintenance Services | 3.8 | 6.70 | ||||||
Radio Broadcasting | 3.8 | 6.62 | ||||||
Industrial Metal Treatings | 3.7 | 6.48 | ||||||
Healthcare Services | 3.4 | 6.07 | ||||||
Industrial Molded Products | 2.5 | 4.34 | ||||||
Outdoor Advertising Services | 2.3 | 4.07 | ||||||
Asset Recovery Services | 2.2 | 3.91 | ||||||
Equipment Rental Services | 2.1 | 3.78 | ||||||
Geophysical Surveying and Mapping Services | 1.7 | 2.97 | ||||||
Real Estate Investment Trust | 1.5 | 2.63 | ||||||
Total | $ | 94.6 | 167.06 | % |
(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, monthly, quarterly or semi-annually. For each debt investment we have provided the interest rate in effect as of September 30, 2013. |
(3) | Affiliate Investments are investments in those companies that are Affiliated Companies of the Company, as defined in the Investment Company Act of 1940, which are not Control Investments. A company is deemed to be an Affiliate of Full Circle Capital Corporation if Full Circle Capital Corporation owns 5% or more, but less than 25%, of the voting securities of such company. |
(4) | Control Investments are investments in those companies that are Control Investments of the Company, as defined in the Investment Company Act of 1940. A company is deemed to be a Control Investment of Full Circle Capital Corporation if Full Circle Capital Corporation owns more than 25% of the voting securities of such company. |
(5) | Full Circle Capital Corporations equity investment in New Media West, LLC is held through its wholly-owned subsidiary FC New Media, Inc. |
(6) | Full Circle Capital Corporations equity investment in Takoda Resources Inc. are held through its wholly-owned subsidiary FC Takoda Holdings, LLC. |
(7) | Full Circle Capital Corporations equity investment in TransAmerican Asset Servicing Group, LLC is held through its wholly-owned subsidiary TransAmerican Asset Servicing Group, Inc. |
(8) | Full Circle Capital Corporations equity investments in SOLEX Fine Foods, LLC; Catsmo, LLC are held through its wholly-owned subsidiary FC New Specialty Foods, Inc. |
(9) | A portion of Full Circle Capital Corporations investment 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. |
* | Investment is not a qualifying asset under Section 55(a) of the 1940 Act. |
** | Interest rate shown reflects yield to maturity at time of purchase. |
| Security is a non-income producing security. |
See notes to consolidated financial statements.
F-9
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Description (1) , (2) | Industry | Par Amount/Quantity | Cost | Fair Value | % of Net Asset Value | |||||||||||||||
Control Investments
(4)
|
||||||||||||||||||||
New Media West, LLC
|
Cable TV Broadband Services | |||||||||||||||||||
Senior Secured Term Loan, 9.00%, 12/31/2017 | $ | 5,079,679 | $ | 5,079,679 | $ | 5,079,679 | 8.38 | % | ||||||||||||
Limited Liability Company Interests , (5) | 720 | 3,600,000 | 4,203,006 | 6.93 | % | |||||||||||||||
Total | 8,679,679 | 9,282,685 | 15.31 | % | ||||||||||||||||
Takoda Resources Inc.
|
Geophysical Surveying and
Mapping Services |
|||||||||||||||||||
Senior Secured Loan Term Loan, 16.00%, 4/01/2016 | $ | 1,469,063 | 1,469,063 | 1,469,063 | 2.42 | % | ||||||||||||||
Common Stock (6) | 520 | | | 0.00 | % | |||||||||||||||
Total | 1,469,063 | 1,469,063 | 2.42 | % | ||||||||||||||||
Texas Westchester Financial, LLC
|
Consumer Financing | |||||||||||||||||||
Limited Liability Company Interests | 9,278 | 905,819 | 602,154 | 0.99 | % | |||||||||||||||
The Finance Company, LLC
|
Consumer Financing | |||||||||||||||||||
Senior Secured Loan, 15.00%, 9/30/2015 | $ | 4,663,547 | 4,585,205 | 4,698,524 | 7.75 | % | ||||||||||||||
Limited Liability Company Interests | 50 | 140,414 | 1,604,577 | 2.65 | % | |||||||||||||||
Total | 4,725,619 | 6,303,101 | 10.40 | % | ||||||||||||||||
TransAmerican Asset Servicing Group, LLC
|
Asset Recovery Services | |||||||||||||||||||
Senior Secured Loan, 14.25%, 7/25/2016 | $ | 2,400,000 | 2,359,362 | 1,458,437 | 2.40 | % | ||||||||||||||
Limited Liability Company Interests , (7) | 75 | | | 0.00 | % | |||||||||||||||
Total | 2,359,363 | 1,458,437 | 2.40 | % | ||||||||||||||||
Total Control Investments | 18,139,543 | 19,115,440 | 31.52 | % | ||||||||||||||||
Affiliate Investments
(3)
|
||||||||||||||||||||
Modular Process Control, LLC
|
Energy Efficiency Services | |||||||||||||||||||
Senior Secured Loan Revolving Loan, 15.00%,
3/28/17 |
$ | 3,500,000 | 3,310,894 | 3,500,000 | 5.77 | % | ||||||||||||||
Senior Secured Loan Term Loan, 15.00%, 3/28/17 | $ | 2,500,000 | 2,342,415 | 2,407,833 | 3.97 | % | ||||||||||||||
Modular Process Control, LLC Warrants for 8% of the outstanding Class B LLC Interests (at a $0.01 strike price), expire 3/28/23 | 1 | 288,000 | 161,413 | 0.27 | % | |||||||||||||||
Total | 5,941,309 | 6,069,246 | 10.01 | % | ||||||||||||||||
ProGrade Ammo Group, LLC
|
Munitions | |||||||||||||||||||
Senior Secured Revolving Loan, 9.20%, 8/1/2014 | $ | 1,907,735 | 1,907,735 | 1,907,735 | 3.14 | % | ||||||||||||||
Senior Secured Term Loan, 15.20%, 8/1/2014 | $ | 5,468,750 | 5,389,137 | 4,304,089 | 7.10 | % | ||||||||||||||
Warrants for 9.5% of the outstanding LLC interests
(at a $10.00 strike price), expire 8/2/2018 |
181,240 | 176,770 | | 0.00 | % | |||||||||||||||
Total | 7,473,642 | 6,211,824 | 10.24 | % | ||||||||||||||||
SOLEX Fine Foods, LLC; Catsmo, LLC
|
Food Distributors & Wholesalers | |||||||||||||||||||
Senior Secured Term Loan, 12.45%, 12/28/2016 | $ | 3,900,000 | 3,801,116 | 3,859,440 | 6.37 | % | ||||||||||||||
Limited Liability Company Interests , (8) | 1 | 250,000 | 139,247 | 0.23 | % | |||||||||||||||
Warrants for 1.6% of the outstanding LLC interests (strike price 0.01), expire 12/28/2022 , (8) | 1 | 58,055 | 32,695 | 0.05 | % | |||||||||||||||
Total | 4,109,171 | 4,031,382 | 6.65 | % | ||||||||||||||||
West World Media, LLC
(9)
|
Information and Data Services | |||||||||||||||||||
Limited Liability Company Interests | 85,210 | 430,500 | 235,451 | 0.39 | % | |||||||||||||||
Total Affiliate Investments | 17,954,622 | 16,547,903 | 27.29 | % |
See notes to consolidated financial statements.
F-10
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Description (1) , (2) | Industry | Par Amount/Quantity | Cost | Fair Value | % of Net Asset Value | |||||||||||||||
Other Investments
|
||||||||||||||||||||
Attention Transit Advertising Systems, LLC
|
Outdoor Advertising Services | |||||||||||||||||||
Senior Secured Loan, 14.50%, 9/30/2016 | $ | 2,321,626 | $ | 2,321,626 | $ | 2,321,626 | 3.83 | % | ||||||||||||
Background Images, Inc.
|
Equipment Rental Services | |||||||||||||||||||
Senior Secured Loan Term A, 14.70%, 6/28/2015 | $ | 1,466,250 | 1,456,440 | 1,465,419 | 2.42 | % | ||||||||||||||
Senior Secured Loan Term B, 16.45%, 6/28/2015 | $ | 828,750 | 823,118 | 783,058 | 1.29 | % | ||||||||||||||
Total | 2,279,558 | 2,248,477 | 3.71 | % | ||||||||||||||||
Blackstrap Broadcasting, LLC
|
Radio Broadcasting | |||||||||||||||||||
Senior Secured Loan, 5.00%, 7/31/2014 | $ | 3,000,000 | 3,000,000 | 2,588,600 | 4.27 | % | ||||||||||||||
Subordinated Secured Loan, 16.00%, 7/31/2014 | $ | 3,500,000 | 3,500,000 | 3,034,383 | 5.00 | % | ||||||||||||||
Total | 6,500,000 | 5,622,983 | 9.27 | % | ||||||||||||||||
Coast Plating, Inc.
|
Aerospace Parts Plating
and Finishing |
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Senior Secured Loan Term A, 11.70%, 9/13/2014 | $ | 1,401,686 | 1,401,687 | 1,412,666 | 2.33 | % | ||||||||||||||
Senior Secured Loan Term B, 12.45%, 9/13/2014 | $ | 3,431,714 | 3,431,714 | 3,412,268 | 5.63 | % | ||||||||||||||
Total | 4,833,401 | 4,824,934 | 7.96 | % | ||||||||||||||||
CSL Operating, LLC
|
Industrial Metal Treatings | |||||||||||||||||||
Senior Secured Loan Term A, 11.70%, 5/11/2014 | $ | 1,866,720 | 1,863,691 | 1,860,435 | 3.07 | % | ||||||||||||||
Senior Secured Loan Term B, 11.70%, 5/11/2014 | $ | 1,866,720 | 1,863,691 | 1,856,142 | 3.06 | % | ||||||||||||||
Total | 3,727,382 | 3,716,577 | 6.13 | % | ||||||||||||||||
Employment Plus, Inc.
|
Staffing Services | |||||||||||||||||||
Senior Secured Loan, 12.00%, 10/24/2013 | $ | 5,000,000 | 5,000,000 | 5,000,000 | 8.24 | % | ||||||||||||||
Global Energy Efficiency Holdings, Inc.
|
Energy Efficiency Services | |||||||||||||||||||
Senior Secured Revolving Loan, 13.20%, 9/7/2015 | $ | 4,444,961 | 4,439,802 | 4,523,933 | 7.46 | % | ||||||||||||||
Senior Secured Loan, 13.20%, 9/7/2015 | $ | 1,000,000 | 990,088 | 1,036,900 | 1.71 | % | ||||||||||||||
Total | 5,429,890 | 5,560,833 | 9.17 | % | ||||||||||||||||
iMedX, Inc.
|
Medical Transcription Services | |||||||||||||||||||
Senior Secured Revolving Loan, 13.75%, 09/19/2014 | $ | 1,578,962 | 1,578,962 | 1,685,752 | 2.78 | % | ||||||||||||||
Senior Secured Loan Term A, 13.75%, 09/19/2014 | $ | 2,450,686 | 2,437,028 | 2,482,790 | 4.09 | % | ||||||||||||||
Senior Secured Loan Term B, 13.75%, 09/19/2014 | $ | 1,071,180 | 1,071,180 | 1,073,679 | 1.77 | % | ||||||||||||||
Total | 5,087,170 | 5,242,221 | 8.64 | % | ||||||||||||||||
MDU Communications (USA) Inc.
|
Cable TV Broadband Services | |||||||||||||||||||
Senior Secured Loan Tranche A, 12.85%,
12/31/2013 |
$ | 5,000,000 | 5,000,000 | 4,914,000 | 8.10 | % | ||||||||||||||
Senior Secured Loan Tranche C, 10.75%,
12/31/2013 |
$ | 250,000 | 250,000 | 242,642 | 0.40 | % | ||||||||||||||
Senior Secured Loan Tranche D, 9.75%,
12/31/2013 |
$ | 1,480,000 | 1,480,000 | 1,427,213 | 2.35 | % | ||||||||||||||
Total | 6,730,000 | 6,583,855 | 10.85 | % | ||||||||||||||||
Pristine Environments, Inc.
|
Building Cleaning
and Maintenance Services |
|||||||||||||||||||
Senior Secured Loan Revolving Loan, 12.70%, 3/31/2017 | $ | 2,764,801 | 2,737,585 | 2,774,017 | 4.57 | % | ||||||||||||||
Senior Secured Loan Term Loan, 12.70%, 3/31/2017 | $ | 1,135,000 | 1,123,828 | 1,143,437 | 1.89 | % | ||||||||||||||
Total | 3,861,413 | 3,917,454 | 6.46 | % |
See notes to consolidated financial statements.
F-11
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|
|
|
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|
|
|
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Description (1) , (2) | Industry | Par Amount/Quantity | Cost | Fair Value | % of Net Asset Value | |||||||||||||||
Other Investments (continued)
|
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The Selling Source, LLC
|
Information and Data Services
|
|||||||||||||||||||
Senior Secured Loan, 12.54%, 1/31/2017 | $ | 4,000,000 | $ | 3,964,978 | $ | 4,000,000 | 6.60 | % | ||||||||||||
US Path Labs, LLC
|
Healthcare Services | |||||||||||||||||||
Senior Secured Loan, 14.00%, 3/30/2014 | $ | 3,470,000 | 3,428,973 | 3,472,198 | 5.73 | % | ||||||||||||||
VaultLogix, LLC
|
Information Retrieval Services | |||||||||||||||||||
Warrants for Variable % Ownership, (at a $307.855 strike price), expire 1/14/2019 | 3,439 | 56,147 | | 0.00 | % | |||||||||||||||
Total Other Investments | 53,220,538 | 52,511,158 | 86.59 | % | ||||||||||||||||
Total Investments | $ | 89,314,703 | $ | 88,174,501 | 145.40 | % |
See notes to consolidated financial statements.
F-12
The following table shows the fair value of our portfolio of investments by industry, as of June 30, 2013.
|
|
|
||||||
June 30, 2013 | ||||||||
Investment at Fair Value (in millions) | Percentage of Net Assets | |||||||
Cable TV/Broadband Services | $ | 15.9 | 26.16 | % | ||||
Energy Efficiency Services | 11.6 | 19.18 | ||||||
Consumer Financing | 6.9 | 11.39 | ||||||
Munitions | 6.2 | 10.24 | ||||||
Radio Broadcasting | 5.6 | 9.28 | ||||||
Medical Transcription Services | 5.2 | 8.64 | ||||||
Staffing Services | 5.0 | 8.24 | ||||||
Aerospace Parts Plating and Finishing | 4.8 | 7.96 | ||||||
Information and Data Services | 4.2 | 6.98 | ||||||
Food Distributors and Wholesalers | 4.0 | 6.65 | ||||||
Building Cleaning and Maintenance Services | 3.9 | 6.46 | ||||||
Industrial Metal Treatings | 3.8 | 6.13 | ||||||
Healthcare Services | 3.6 | 5.73 | ||||||
Outdoor Advertising Services | 2.3 | 3.83 | ||||||
Equipment Rental Services | 2.2 | 3.71 | ||||||
Geophysical Surveying and Mapping Services | 1.5 | 2.42 | ||||||
Asset Recovery Services | 1.5 | 2.40 | ||||||
Total | $ | 88.2 | 145.40 | % |
(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, monthly, quarterly or semi-annually. For each debt investment we have provided the interest rate in effect as of June 30, 2013. |
(3) | Affiliate Investments are investments in those companies that are Affiliated Companies of the Company, as defined in the Investment Company Act of 1940, which are not Control Investments. A company is deemed to be an Affiliate of Full Circle Capital Corporation if Full Circle Capital Corporation owns 5% or more, but less than 25%, of the voting securities of such company. |
(4) | Control Investments are investments in those companies that are Control Investments of the Company, as defined in the Investment Company Act of 1940. A company is deemed to be a Control Investment of Full Circle Capital Corporation if Full Circle Capital Corporation owns more than 25% of the voting securities of such company. |
(5) | Full Circle Capital Corporations equity investment in New Media West, LLC is held through its wholly-owned subsidiary FC New Media, Inc. |
(6) | Full Circle Capital Corporations equity investments in Takoda Resources Inc. are held through its wholly-owned subsidiary FC Takoda Holdings, LLC. |
(7) | Full Circle Capital Corporations equity investment in TransAmerican Asset Servicing Group, LLC is held through its wholly-owned subsidiary TransAmerican Asset Servicing Group, Inc. |
(8) | Full Circle Capital Corporations equity investments in SOLEX Fine Foods, LLC; Catsmo, LLC are held through its wholly-owned subsidiary FC New Specialty Foods, Inc. |
(9) | A portion of Full Circle Capital Corporations investment 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. |
** | Interest rate shown reflects yield to maturity at time of purchase. |
| Security is a non-income producing security. |
See notes to consolidated financial statements.
F-13
References herein to we, us or our refer to Full Circle Capital Corporation and Subsidiaries (Full Circle Capital or the Company) unless the context specifically requires otherwise.
We were formed as Full Circle Capital Corporation, a Maryland corporation, 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 annually 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.
The preparation of the accompanying consolidated 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 consolidated 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.
Interim financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments, consisting solely of normal recurring accruals considered necessary for the fair presentation of financial statements for the interim period, have been included. The current periods results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending June 30, 2014.
The June 30, 2013 and September 30, 2012 Consolidated Financial Statements were reclassified in order to be consistent with the format used for the September 30, 2013 Consolidated Financial Statements.
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 acquired, respectively, in the Consolidated Statements of Assets and Liabilities.
F-14
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 generally 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., FC New Media, Inc., TransAmerican Asset Servicing Group, Inc., FC New Specialty Foods, Inc., and FC Takoda Holdings, LLC, our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
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 Capitals 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 Boards assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
Securities for which reliable market quotations are not readily available or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Board or the Audit Committee of the Board (the Audit Committee), does not represent fair value, are valued as follows:
1. | The quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment; |
2. | Preliminary valuation conclusions are then documented and discussed with the Companys senior management. Independent third-party valuation firms are engaged by, or on behalf of, the Audit Committee to conduct independent appraisals or review managements preliminary valuations or make their own independent assessment, for certain assets; |
3. | The Audit Committee discusses valuations and recommends the fair value of each investment in the portfolio in good faith based on the input of the Company and, where appropriate, the independent valuation firms; and |
4. | The Board then discusses the valuations and determines in good faith the fair value of each investment in the portfolio based upon input from the Company, estimates from the independent valuation firms and the recommendations of the Audit Committee. |
GAAP establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are 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
F-15
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 investment to investment and is affected by a wide variety of factors including, the type of investment, whether the investment 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 investments 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 Companys 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 an investment to be reclassified to a lower level within the fair value hierarchy.
The Companys 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 may 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 that are not performing, 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.
F-16
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. These nonpublic investments are included in Level 3 of the fair value hierarchy.
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.
The Company places its cash with J.P. Morgan Chase Bank N.A. and Sovereign Bank, N.A., and at times, cash held in such accounts may exceed the Federal Deposit Insurance Corporation insured limit. The Company may invest a portion of its cash in money market funds, within the limitations of the 1940 Act.
Realized gain (loss) on the sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their stated costs. 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 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 received. Other fee income, including administrative fees and unused line fees, is included in Other Income. Income from such sources was $191,015, and $160,108 for the three months ended September 30, 2013, and 2012, respectively.
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.
From time to time the Company may enter into a new transaction with a portfolio company as a result of the sale, merger, foreclosure, bankruptcy or other corporate event involving the portfolio company. In such cases, the Company may receive newly-issued notes, securities and/or other consideration in exchange for, or resulting from, the cancellation of the instruments previously held by the Company with regard to that portfolio company. In such cases, the Company may experience a realized loss on the instrument being sold or cancelled, and, concurrently, an elimination of any previously recognized unrealized losses on the portfolio investment. Such elimination of unrealized loss is included on the Statements of Operations as an increase in the Change in Unrealized Gain (Loss) on Investments.
We have elected 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
F-17
intend to distribute (or retain through a deemed distribution) all of our investment company taxable income and net capital gains 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) each calendar year sum of (1) 98% of our net ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years (the Minimum Distribution Amount), we will generally be required to pay an excise tax equal to 4% of the amount by the which Minimum Distribution Amount exceeds the distributions 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 to common stockholders are recorded on the ex-dividend date. The amount, if any, of our monthly dividends are approved by our Board each quarter and are generally based upon our managements estimate of our earnings for the quarter. Net realized capital gains, if any, are distributed at least annually.
We follow ASC Topic 460, Guarantors 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 consolidated financial statements. Refer to Note 5 and Note 8 for further discussion of guarantees and indemnification agreements.
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.
The Company did not incur organizational expenses for the three months ended September 30, 2013, and 2012. The Company complies with the requirements of ASC 340-10-S99-1, Expenses of Offering. Deferred offering costs consist principally of legal and audit costs incurred through the balance sheet date that are related to an offering of equity securities. Such costs are charged against the gross proceeds of the offering or will be charged to the Companys operations if the offering is not completed.
Certain capital accounts including undistributed net investment income, accumulated net realized gain or loss, net unrealized appreciation or depreciation, and paid in capital in excess of par, are adjusted, at least annually, for permanent differences between book and tax. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP.
F-18
In January 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (ASU 2013-01). ASU 2013-01 limits the scope of the new balance sheet offsetting disclosure requirements to derivatives (including bifurcated embedded derivatives), repurchase agreements and reverse repurchase agreements, and certain securities borrowing and lending arrangements. Public companies are required to apply ASU 2013-01 prospectively for interim and annual reporting periods beginning after January 1, 2013.
In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2013-08, Financial Services Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements (ASU 2013-08). ASU 2013-08 amends the criteria that define an investment company, clarifies the measurement guidance and requires certain additional disclosures. Public companies are required to apply ASU 2013-08 prospectively for interim and annual reporting periods beginning after December 15, 2013.
In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (ASU 2013-04). ASU 2013-04 provides additional guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. Public companies are required to apply ASU 2013-04 prospectively for interim and annual reporting periods beginning after December 15, 2013.
The Company does not believe that the adoption of any recently issued accounting standards had or will have a material impact on its current financial position and results of operations.
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 potentially provide the Company with financing. Management believes that such other financial institutions would likely be able to provide similar financing with generally comparable terms. However, a change in financial institutions at the present time could cause a delay in service provisioning or result in potential lost opportunities, which could adversely affect operating results.
As of September 30, 2013, we had approximately $6.0 million in unfunded loan commitments, subject to our approval in certain instances, to provide debt financing to certain of our portfolio companies.
The following information sets forth the computation of basic and diluted earnings (loss) per common share for the three months ended September 30, 2013 (unaudited), and September 30, 2012 (unaudited):
F-19
|
|
|
||||||
Three months ended September 30, 2013 | Three months ended September 30, 2012 | |||||||
(Unaudited) | (Unaudited) | |||||||
Per Share Data
(1)
:
|
||||||||
Net Increase (Decrease) in Net Assets Resulting from Operations | $ | (2,257,149 | ) | $ | 894,891 | |||
Average weighted shares outstanding for period | 7,569,382 | 6,219,382 | ||||||
Basic and diluted earnings (loss) per common share | $ | (0.30 | ) | $ | 0.14 |
(1) | Per share data based on weighted average shares outstanding. |
On June 24, 2013, the Board re-approved 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 Advisers 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, a base management fee and an incentive fee.
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.
The total base management fees earned by the Adviser for the three months ended September 30, 2013, and 2012, were $409,258 and $334,036, respectively. The total base management fee payable to the Adviser as of September 30, 2013, and 2012 was $409,258, and $334,036, after reflecting payment of $308,271, and $308,271, for the three months ended September 30, 2013, and 2012, 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 expenses 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),
F-20
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). |
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) 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. There were no incentive fees paid on realized capital gains for the three months ended September 30, 2013, and 2012.
Income incentive fees of $314,739, and $307,932, were earned by the Adviser for the three months ended September 30, 2013, and 2012, respectively, and the total income incentive fee payable to the Adviser as of September 30, 2013, and 2012 was $311,793, and $309,236, after reflecting payment of $275,028, and $270,778, during the three months ended September 30, 2013, and 2012, respectively, and is included in the Consolidated Statement of Assets and Liabilities in Due to Affiliate.
The Adviser had 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.
F-21
On June 24, 2013, the Board re-approved 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 Companys 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), may also provide administrative services to the Adviser. As a result, the Adviser also reimburses the Administrator and/or the Sub-Administrator for its allocable portion of the Administrators and/or Sub-Administrators 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 Administrators services under the Administration Agreement or otherwise as administrator for Full Circle Capital.
The Administrator has engaged Vastardis to provide certain administrative services to us. In exchange for providing such services, the Administrator pays 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:
|
|
|
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%) |
Additionally, prior to September 30, 2013, we reimbursed the Administrator for the fees charged for the services of William E. Vastardis, our Chief Financial Officer, Treasurer and Secretary, at an annual rate of up to $250,000. On September 9, 2013, the Companys Board of Directors appointed Michael J. Sell to succeed
F-22
William E. Vastardis as our Chief Financial Officer, Treasurer and Secretary effective as of September 30, 2013. Mr. Vastardis is the President of Vastardis.
For the three months ended September 30, 2013, and 2012, respectively, the Company incurred $189,168, and $205,379, respectively, of expenses under the Administration Agreement, $50,000, and $73,429, respectively, of which were earned by the Sub-Administrator and $75,338, and $75,194, respectively, were paid for officers compensation. The remaining $63,830, and $56,756, respectively, were recorded as an Allocation of Overhead Expenses to the Administrator in the Consolidated Statement of Operations.
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. With regard to the Control Investments in Texas Westchester Financial, LLC, Takoda Resources, Inc., New Media West, LLC, TransAmerican Asset Servicing Group, LLC and The Finance Company, LLC, the Company has provided managerial assistance during the period for which no fees were charged. Our Chief Executive Officer and President, John Stuart, currently serves as a director of The Finance Company, LLC, New Media West, LLC and Takoda Resources Inc. Lawrence Chua, a Vice President of Full Circle Advisors, serves on the board of Takoda Resources Inc. As of September 30, 2013, only Background Images, Inc. and Solex Fine Foods, LLC; Catsmo, LLC had accepted our offer for such services. No fees were charged to Background Images, Inc. or Solex Fine Foods, LLC; Catsmo, LLC for such services.
During the year ended June 30, 2011, we issued 6,219,282 shares of our common stock through an initial public offering, a private placement and our dividend reinvestment plan. On November 27, 2012, we issued 1,350,000 shares of our common stock through a follow on offering. 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, Net
Assets Acquired and Dividends Reinvested |
Underwriting Fees | Offering Expenses |
Gross
Offering Price |
|||||||||||||||
April 16, 2010 | 100 | $ | 1,500 | | | $ |
15.00 per/share
|
|||||||||||||
August 31, 2010 | 4,191,415 | (1) | $ | 42,425,564 | | | $ |
10.13 per/share
(2)
|
||||||||||||
August 31, 2010 | 2,000,000 | $ | 18,000,000 | $ | 1,350,000 | $ | 1,052,067 | $ |
9.00 per/share
|
|||||||||||
January 14, 2011 | 27,867 | (3) | $ | 241,608 | | | $ |
8.67 per/share
|
||||||||||||
November 27, 2012 | 1,350,000 | $ | 10,665,000 | $ | 533,250 | $ | 153,330 | $ |
7.90 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. |
(3) | Issued pursuant to the Companys dividend reinvestment plan. |
F-23
|
|
|
||||||
Three months
ended September 30, 2013 |
Three months
ended September 30, 2012 |
|||||||
(Unaudited) | (Unaudited) | |||||||
Per Share Data
(1)
:
|
||||||||
Net asset value at beginning of period | $ | 8.01 | $ | 8.59 | ||||
Net investment income (loss) | 0.16 | 0.20 | ||||||
Change in unrealized gain (loss) | (0.37 | ) | 0.08 | |||||
Realized gain (loss) | (0.09 | ) | (0.13 | ) | ||||
Dividends declared | (0.23 | ) | (0.23 | ) | ||||
Net asset value at end of period | $ | 7.48 | $ | 8.51 | ||||
Per share market value at end of period | $ | 8.55 | $ | 8.11 | ||||
Total return based on market value | 12.42 | % (4) | 9.08 | % (4) | ||||
Total return based on net asset value | (3.91 | )% (4) | 1.94 | % (4) | ||||
Shares outstanding at end of period | 7,569,382 | 6,219,382 | ||||||
Weighted average shares outstanding for period | 7,569,382 | 6,219,382 | ||||||
Ratio/Supplemental Data:
|
||||||||
Net assets at end of period | $ | 56,638,363 | $ | 52,900,999 | ||||
Average net assets | $ | 58,641,201 | $ | 53,171,892 | ||||
Annualized ratio of gross operating expenses to average net assets (5) | 13.35 | % | 11.58 | % | ||||
Annualized ratio of net operating expenses to average net assets (5) | 13.35 | % | 11.58 | % | ||||
Annualized ratio of net investment income to average net assets (5) | 8.42 | % | 9.34 | % | ||||
Annualized ratio of net operating expenses excluding management fees, incentive fees, and interest expense to average net assets (5) | 3.58 | % | 3.72 | % |
|
|
|
|
|
||||||||||||
Year Ended
June 30, 2013 |
Year Ended
June 30, 2012 |
For the
period from August 31, 2010 (commencement of operations) to June 30, 2011 |
For the
period from April 16, 2010 (date of inception) to June 30, 2010 |
|||||||||||||
(Audited) | (Audited) | (Audited) | (Audited) | |||||||||||||
Per Share Data
(1)
:
|
||||||||||||||||
Net asset value at beginning of period | $ | 8.59 | $ | 9.08 | $ | 9.40 | $ | 15.00 | (6) | |||||||
Dilution from offering | (0.18 | ) (2) | ||||||||||||||
Offering costs | (0.02 | ) | | (0.04 | ) | |||||||||||
Net investment income (loss) | 0.77 | 0.78 | 0.70 | (125.45 | ) | |||||||||||
Change in unrealized gain (loss) | 0.37 | (0.32 | ) | (0.29 | ) | |||||||||||
Realized gain (loss) | (0.60 | ) | (0.03 | ) | 0.06 | |||||||||||
Dividends declared | (0.92 | ) | (0.92 | ) | (0.75 | ) | ||||||||||
Net asset value at end of period | $ | 8.01 | $ | 8.59 | $ | 9.08 | $ | (110.45 | ) | |||||||
Per share market value at end of period | $ | 7.83 | $ | 7.65 | $ | 7.90 | $ | (110.45 | ) | |||||||
Total return based on market value | 15.12 | % (4) | 8.71 | % (4) | (4.03 | )% (3) | (836.33 | )% (7) | ||||||||
Total return based on net asset value | 4.94 | % (4) | 6.20 | % (4) | 5.62 | % (3) | (836.33 | )% (7) | ||||||||
Shares outstanding at end of period | 7,569,382 | 6,219,382 | 6,219,382 | 100 | ||||||||||||
Weighted average shares outstanding for period | 7,018,286 | 6,219,382 | 6,206,824 | 100 |
F-24
|
|
|
|
|
||||||||||||
Year Ended
June 30, 2013 |
Year Ended
June 30, 2012 |
For the
period from August 31, 2010 (commencement of operations) to June 30, 2011 |
For the
period from April 16, 2010 (date of inception) to June 30, 2010 |
|||||||||||||
(Audited) | (Audited) | (Audited) | (Audited) | |||||||||||||
Ratio/Supplemental Data:
|
||||||||||||||||
Net assets at end of period | $ | 60,644,039 | $ | 53,442,785 | $ | 56,474,006 | $ | (11,045 | ) | |||||||
Average net assets | $ | 57,842,601 | $ | 55,531,518 | $ | 57,455,987 | $ | (4,773 | ) | |||||||
Annualized ratio of gross operating expenses to average net assets (5) | 11.52 | % | 9.56 | % | 8.49 | % | 1,279.28 | % | ||||||||
Annualized ratio of net operating expenses to average net assets (5) | 11.52 | % | 8.99 | % | 7.34 | % | 1,279.28 | % | ||||||||
Annualized ratio of net investment income to average net assets (5) | 9.30 | % | 8.70 | % | 9.29 | % | (1,279.28 | )% | ||||||||
Annualized ratio of net operating expenses excluding management fees, incentive fees, and interest expense to average net assets (5) | 3.53 | % | 3.15 | % | 2.00 | % | 1,279.28 | % |
(1) | Financial highlights are based on weighted average shares outstanding. |
(2) | Dilution from offering is based on the change in net asset value from a follow on offering on November 27, 2012. |
(3) | 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 and assumes that dividends are reinvested in accordance with our dividend reinvestment plan. 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. |
(4) | Total return based on market value is based on the change in market price per share and assumes that dividends are reinvested in accordance with our dividend reinvestment plan. 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 (commencement of operations) to June 30, 2011 the Company incurred $102,609 of organizational expenses, which were deemed to be non-recurring. For the period from April 16, 2010 to June 30, 2010, the Company incurred $12,500 of Organizational Expenses, which were deemed to be non-recurring. |
(6) | For the period from April 16, 2010 (date of inception) to June 30, 2010, the net asset value of the Companys common stock at issuance was $15.00. |
(7) | 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 each period and assumes that dividends are reinvested in accordance with our dividend reinvestment plan. Total return based on market value is the same as total return based on net asset value as our shares were not publicly traded from inception through June 30, 2010. The total returns are not annualized. |
F-25
On August 31, 2010, the Company entered into the First Capital Credit Facility with FCC, LLC d/b/a First Capital. The facility size was $35 million and was initially scheduled to expire in January 2012. The Company extended the First Capital Credit Facility various times through December 31, 2013. The Company incurred unused line, average usage and other fees related to the First Capital Credit Facility. The First Capital Credit Facility was secured by all of the assets of the Company. Under the First Capital Credit Facility, the Company was required to satisfy several financial covenants, including maintaining a minimum level of stockholders equity, a maximum level of leverage and minimum asset coverage and earnings. In addition, the Company was required to comply with other general covenants, including with respect to indebtedness, liens, restricted payments and mergers and consolidations.
On June 3, 2013, the Company entered into the Credit Facility with Sovereign Bank, N.A. The facility size is $32.5 million and replaced the Companys First Capital Credit Facility.
The Credit Facility matures on June 3, 2016 and bears interest based on a tiered rate structure, depending upon utilization, ranging from 1-month LIBOR to 3-month LIBOR plus 3.25% to 4.00% per annum, or from Sovereign Banks prime rate plus 1.25% to 2.00% per annum, based on the Companys election. As of September 30, 2013, the 1-month LIBOR to 3-month LIBOR rates respectively were: 0.18%, 0.22%, and 0.25%. As of September 30, 2013, the prime rate was 3.25%. In addition, a fee of 0.50% per annum is charged on unused amounts under the Credit Facility. The Credit Facility is secured by all of the Companys assets. Under the Credit Facility, the Company has made certain customary representations and warranties, and is required to comply with various covenants, reporting requirements and other customary requirements, including a minimum balance sheet leverage ratio, for similar credit facilities. The Credit Facility includes usual and customary events of default for credit facilities of this nature.
At September 30, 2013 and June 30, 2013, the Company had outstanding borrowings of $21,922,256 and $25,584,147 under the Credit Facility, respectively, which amounts are included in the Consolidated Statement of Assets and Liabilities.
On August 31, 2010, the Company entered into multiple senior unsecured notes (the Distribution Notes). The Distribution Notes consisted of $3,404,583 in senior unsecured notes, which bore interest at a rate of 8% per annum, payable quarterly in cash, and were scheduled to mature on February 28, 2014. The Distribution Notes were paid off at par plus accrued interest on July 3, 2013. At September 30, 2013 and June 30, 2013, the Company had a balance of $0 and $3,404,583 on the Distribution Notes, which is included in the Consolidated Statement of Assets and Liabilities.
On June 28, 2013, the Company issued $21,145,525 in aggregate principal amount of 8.25% Notes due June 30, 2020, the Notes, (including a partial exercise of the underwriters overallotment option in July 2013) for net proceeds of $20,038,250 after deducting underwriting commissions of $860,822 and offering expenses of $246,453. The offering expenses and underwriting commissions are being amortized over the term of the notes in accordance with ASC 470 Debt. As of September 30, 2013, of the total $1,107,275 incurred, $1,066,158 remains to be amortized and is included within deferred debt issuance costs on the consolidated statements of assets and liabilities.
The Notes were issued pursuant to an indenture, dated June 3, 2013, as supplemented by the first supplemental indenture, dated June 28, 2013 (collectively, the Indenture), between the Company and U.S. Bank National Association (the Trustee). The Notes are unsecured obligations of the Company and rank senior in right of payment to the Companys existing and future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to the Companys existing and future
F-26
unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Companys secured indebtedness (including existing unsecured indebtedness that is later secured) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Companys subsidiaries or financing vehicles. Interest on the Notes is paid quarterly in arrears on March 30, June 30, September 30 and December 30, at a rate of 8.25% per annum. The Notes mature on June 30, 2020 and may be redeemed in whole or in part at any time or from time to time at the Companys option on or after June 30, 2016. The Notes are listed on the Nasdaq Global Market under the trading symbol FULLL with a par value of $25.00 per share.
The Indenture contains certain covenants, including covenants requiring compliance with (regardless of whether the Company is subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring the Company to provide financial information to the holders of the Notes and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Indenture. The Company may repurchase the Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any Notes repurchased by the Company may, at the Companys option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by the Company. Any Notes surrendered for cancellation will be promptly cancelled and no longer outstanding under the Indenture. As of September 30, 2013, the Company had not repurchased any of the Notes in the open market. At September 30, 2013 and June 30, 2013, the Company had a balance of $21,145,525 on the Notes, which is included in the Consolidated Statement of Assets and Liabilities.
The Companys assets recorded at fair value have been categorized based upon a fair value hierarchy in accordance with Accounting Standards Codification (ASC) Topic 820 Fair Value Measurements and Disclosures (ASC 820). See Note 2 for a discussion of the Companys policies.
The following table presents information about the Companys assets measured at fair value as of September 30, 2013 and June 30, 2013, respectively:
|
|
|
|
|
||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets
|
||||||||||||||||
Senior and Subordinated Loans, at fair value | $ | | $ | | $ | 88,150,800 | $ | 88,150,800 | ||||||||
Investments in private companies, at fair value | | | 6,355,560 | 6,355,560 | ||||||||||||
Investments in securities, at fair value | | | 114,824 | 114,824 | ||||||||||||
U.S. Treasury securities, at fair value (1) | 15,000,120 | | | 15,000,120 | ||||||||||||
$ | 15,000,120 | $ | | $ | 94,621,184 | $ | 109,621,304 |
F-27
|
|
|
|
|
||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets
|
||||||||||||||||
Senior and Subordinated Loans, at fair value | $ | | $ | | $ | 81,195,958 | $ | 81,195,958 | ||||||||
Investments in private companies, at fair value | | | 6,784,435 | 6,784,435 | ||||||||||||
Investments in securities, at fair value | | | 194,108 | 194,108 | ||||||||||||
$ | | $ | | $ | 88,174,501 | $ | 88,174,501 |
(1) | U.S. Treasury Securities were purchased and temporarily held in connection with compliance with RIC diversification requirements under Subchapter M of the Code. |
During the three months ended September 30, 2013 and for the year ended June 30, 2013, there were no transfers in or out of levels.
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 net 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 September 30, 2013 and for the year ended June 30, 2013 are as follows:
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Three months ended September 30, 2013 (unaudited) | ||||||||||||||||||||||||||||
Beginning Balance
July 1, 2013 |
Accretion of Original Issue Discount | Realized & Unrealized Gains (Losses) | Purchases | Sales And Settlements |
Ending
Balance September 30, 2013 |
Change in
Unrealized Gains (Losses) for Investments still held at September 30, 2013 |
||||||||||||||||||||||
Assets
|
||||||||||||||||||||||||||||
Senior and Subordinated Loans, at fair value | $ | 81,195,958 | $ | 80,599 | $ | (2,885,936 | ) | $ | 19,894,599 | $ | (10,134,420 | ) | $ | 88,150,800 | $ | (2,207,383 | ) | |||||||||||
Investments in private companies, at fair value | 6,784,435 | | (428,875 | ) | | | 6,355,560 | (428,875 | ) | |||||||||||||||||||
Investments in securities, at fair value | 194,108 | | (186,633 | ) | 107,349 | | 114,824 | (186,633 | ) | |||||||||||||||||||
$ | 88,174,501 | $ | 80,599 | $ | (3,501,444 | ) | $ | 20,001,948 | $ | (10,134,420 | ) | $ | 94,621,184 | $ | (2,822,891 | ) |
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Year ended June 30, 2013 (audited) | ||||||||||||||||||||||||||||
Beginning Balance
July 1, 2012 |
Accretion of Original Issue Discount | Realized & Unrealized Gains (Losses) | Purchases | Sales And Settlements |
Ending
Balance June 30, 2013 |
Change in
Unrealized Gains (Losses) for Investments still held at June 30, 2013 |
||||||||||||||||||||||
Assets
|
||||||||||||||||||||||||||||
Senior and Subordinated Loans, at fair value | $ | 70,970,152 | $ | 358,947 | $ | (2,974,512 | ) | $ | 70,949,232 | $ | (58,107,861 | ) | $ | 81,195,958 | $ | (443,443 | ) | |||||||||||
Investments in private companies, at fair value | 1,376,737 | | 1,557,697 | 3,850,001 | | 6,784,435 | 1,557,697 | |||||||||||||||||||||
Investments in securities, at fair value | | | (151,948 | ) | 346,056 | | 194,108 | (151,947 | ) | |||||||||||||||||||
$ | 72,346,889 | $ | 358,947 | $ | (1,568,763 | ) | $ | 75,145,289 | $ | (58,107,861 | ) | $ | 88,174,501 | $ | 962,307 |
F-28
Realized and unrealized gains and losses are included in net realized gain (loss) on investments and net change in unrealized gain (loss) on investments in the consolidated statements of operations. The change in unrealized losses for Level 3 investments still held at September 30, 2013 of $2,822,891 is included in net change in net unrealized gain (loss) on investments in the consolidated statement of operations for the three months ended September 30, 2013.
The following table provides quantitative information regarding Level 3 fair value measurements as of September 30, 2013:
|
|
|
|
|
||||||||||||
Description: | Fair Value | Valuation Technique | Unobservable Inputs | Range (Average) (1) | ||||||||||||
Secured debt | $ | 67,985,466 |
Discounted cash flows
(income approach) |
Discount Rate |
3.40% 41.84%
(11.16)% |
|||||||||||
Equity | 5,775,107 |
Market comparable
companies (market approach) |
EBITDA multiple |
3.50 7.50%
(4.32)% |
||||||||||||
Debt or Equity subject to liquidation | 10,270,331 | Liquidation Value | Asset Value | N/A | ||||||||||||
Secured Debt | 10,590,280 | Precedent Transactions | Cost Basis | N/A | ||||||||||||
Total investments | $ | 94,621,184 |
(1) | The average values were determined using the weighted average of the fair value of the investments in each investment category. |
The primary significant unobservable input used in the fair value measurement of the Companys debt securities (first lien debt, second lien debt and subordinated debt), including income-producing investments in funds, is the discount rate. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. In determining the discount rate, for the income, or yield, approach, the Company considers current market yields and multiples, portfolio company performance, leverage levels and credit quality, among other factors in its analysis. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate discount rate to use in the income approach.
The primary significant unobservable input used in the fair value measurement of the Companys equity investments is the EBITDA multiple, or the Enterprise Value. Significant increases (decreases) in the Enterprise Value in isolation would result in a significantly higher (lower) fair value measurement. To determine the Enterprise Value for the market approach, the Company considers current market trading and/or transaction multiples, portfolio company performance (financial ratios) relative to public and private peer companies and leverage levels, among other factors. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate multiple to use in the market approach.
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 primarily involve 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.
F-29
The warrants provide exposure and potential gains upon equity appreciation or depreciation of the portfolio companys equity value.
As described in the chart below, 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 a warrants expiration date approaches, the time value of the 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.
The Company has written a warrant to sell within a limited time, a financial instrument at a contracted price based on differentials between specified prices. Written warrants may expose the Company to market risk of an unfavorable change in the financial instrument underlying the written warrant.
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 Companys Board of Directors considers the effects of counterparty risk when determining the fair value of its investments in warrants.
At September 30, 2013, the notional amounts and number of warrants, categorized by primary underlying risk, are as follows:
|
|
|
|
|
||||||||||||
Long Exposure | Short Exposure | |||||||||||||||
Notional Amounts | Number of Warrants | Notional Amounts | Number of Warrants | |||||||||||||
Primary Underlying Risk Equity
Price Warrants (a),(b) |
$ | 114,824 | 184,682 | $ | 1,934,955 | 1 |
(a) | Notional amounts presented for warrants are based on the fair value of the underlying shares as if the warrants were exercised at September 30, 2013. |
(b) | The written warrant is on 360 of the Companys 720 limited liability company interests in New Media West, LLC and has a strike price of $3,000,000, which increases over time to $3,500,000. This warrant expires on December 18, 2019. |
On November 7, 2013, the Board of Directors declared monthly dividends of $0.067, $0.067 and $0.067 per share payable on February 14, 2014 for holders of record at January 31, 2014, March 14, 2014 for holders of record at February 28, 2014 and April 15, 2014 for holders of record at March 31, 2014.
On October 18, 2013, the senior secured credit facility with Coast Plating, Inc., an Aerospace Parts Plating and Finishing company, was paid off at par plus accrued interest and fees of $4,740,312.
On October 17, 2013, the senior secured credit facility with CSL Operating, LLC, an industrial metal treatings company, was paid off at par value plus accrued interest and fees of $3,655,118.
On October 21, 2013, the senior secured credit facility with Employment Plus, Inc., a staffing services company, was paid off at par value plus accrued interest of $5,033,333.
F-30
On October 30, 2013, the Company purchased $5.0 million of a $142.0 million senior secured credit facility to Esselte Holdings, Inc./Esselte AB, a global manufacturer and distributor of office supplies. The senior secured credit facility bears interest at LIBOR plus 8.75%, with a minimum LIBOR of 2.00%, per annum and has a final maturity of February 29, 2016.
On October 31, 2013, the senior secured credit facility with MDU Communications (USA) Inc., a cable TV/broadband services company was partially prepaid in an amount of $1,667,183 in conjunction with the first closing related to the sale of substantially all of its assets to a third party. As part of this sales process, on October 22, 2013, the Company reduced the interest rate on the outstanding balance of the loan to 2.00% and expects to realize a partial loss of approximately $500,000 as a result of depreciation in the value of its investment. The Company may incur additional losses as MDU Communications makes future repayments.
On November 6, 2013, the Company increased the size of the Credit Facility from $32.5 million to $45.0 million.
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|
||||||||||||||||||||||||
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 | ||||||||||||||||||||||
March 31, 2011 | 2,305,423 | 0.37 | 1,361,635 | 0.22 | (799,361 | ) | (0.13 | ) | 562,274 | 0.09 | ||||||||||||||||||||||
June 30, 2011 | 2,108,426 | 0.34 | 1,170,836 | 0.19 | (415,206 | ) | (0.07 | ) | 755,630 | 0.12 | ||||||||||||||||||||||
September 30, 2011 | 2,558,243 | 0.41 | 1,544,342 | 0.25 | 54,991 | 0.01 | 1,599,333 | 0.26 | ||||||||||||||||||||||||
December 31, 2011 | 2,398,665 | 0.39 | 1,098,640 | 0.18 | (846,099 | ) | (0.14 | ) | 252,541 | 0.04 | ||||||||||||||||||||||
March 31, 2012 | 2,388,960 | 0.38 | 1,118,574 | 0.18 | 405,240 | 0.07 | 1,523,814 | 0.25 | ||||||||||||||||||||||||
June 30, 2012 | 2,481,143 | 0.40 | 1,071,947 | 0.17 | (1,769,463 | ) | (0.28 | ) | (697,516 | ) | (0.11 | ) | ||||||||||||||||||||
September 30, 2012 | 2,773,303 | 0.45 | 1,238,245 | 0.20 | (343,354 | ) | (0.06 | ) | 894,891 | 0.14 | ||||||||||||||||||||||
December 31, 2012 | 3,099,599 | 0.46 | 1,465,650 | 0.22 | (1,893,852 | ) | (0.28 | ) | (428,202 | ) | (0.06 | ) | ||||||||||||||||||||
March 31, 2013 | 2,843,041 | 0.38 | 1,312,164 | 0.18 | 168,654 | 0.02 | 1,480,818 | 0.20 | ||||||||||||||||||||||||
June 30, 2013 | 3,330,080 | 0.44 | 1,364,522 | 0.18 | 489,114 | 0.06 | 1,853,636 | 0.24 | ||||||||||||||||||||||||
September 30, 2013 | 3,218,186 | 0.43 | 1,244,227 | 0.16 | (3,501,376 | ) | (0.46 | ) | (2,257,149 | ) | (0.30 | ) |
(1) | Per share amounts are calculated using weighted average shares outstanding during the period. |
F-31
To the Board of Directors and Stockholders of
Full Circle Capital Corporation
We have audited the accompanying consolidated statements of assets and liabilities of Full Circle Capital Corporation (the Company), including the consolidated schedules of investments as of June 30, 2013 and 2012, the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the period ended June 30, 2013. We have also audited the accompanying consolidated financial highlights for each of the two years in the period ended June 30, 2013, as well as for the periods from August 31, 2010 (commencement of operations) to June 30, 2011 and April 16, 2010 (date of inception) to June 30, 2010. These consolidated financial statements and financial highlights are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of June 30, 2013 and 2012, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Full Circle Capital Corporation as of June 30, 2013 and 2012, the results of their operations and their cash flows for each of the three years in the period ended June 30, 2013, and the consolidated financial highlights for each of the two years in the period ended June 30, 2013 as well as for the periods from April 16, 2010 (commencement of operations) to June 30, 2011 and April 16, 2010 (date of inception, to June 30, 2010 in conformity with accounting principles generally accepted in the United States of America.
/s/ Rothstein Kass
Roseland, New Jersey
September 12, 2013
F-32
|
|
|
|
|||||||||
June 30, 2013 | June 30, 2012 | |||||||||||
Assets
|
||||||||||||
Control Investments at Fair Value (Cost of $18,139,543 and $6,639,648, respectively) |
(NOTE 2, 9)
|
$ | 19,115,440 | $ | 6,777,511 | |||||||
Affiliate Investments at Fair Value (Cost of $17,954,622 and $6,802,017, respectively) |
(NOTE 2, 9)
|
16,547,903 | 5,112,142 | |||||||||
Non-Control/Non-Affiliate Investments at Fair Value (Cost of $53,220,538 and $85,181,617, respectively) |
(NOTE 2, 9)
|
52,511,158 | 82,957,117 | |||||||||
Total Investments at Fair Value (Cost of $89,314,703 and $98,623,282, respectively) | 88,174,501 | 94,846,770 | ||||||||||
Cash | 18,029,115 | 639,149 | ||||||||||
Deposit with Broker | | 2,350,000 | ||||||||||
Interest Receivable |
(NOTE 2)
|
1,097,970 | 902,711 | |||||||||
Principal Receivable | 104,768 | 513,372 | ||||||||||
Dividends Receivable | 36,705 | | ||||||||||
Due from Portfolio Investment | 105,030 | 11,140 | ||||||||||
Receivable from Notes Offering | 2,299,704 | | ||||||||||
Prepaid Expenses | 61,198 | 43,053 | ||||||||||
Other Assets | 1,437,273 | 25,499 | ||||||||||
Deferred Offering Expenses | 86,834 | 67,685 | ||||||||||
Deferred Debt Issuance Costs |
(NOTE 8)
|
1,086,895 | | |||||||||
Deferred Credit Facility Fees |
(NOTE 8)
|
543,846 | 50,000 | |||||||||
Total Assets | 113,063,839 | 99,449,379 | ||||||||||
Liabilities
|
||||||||||||
Due to Affiliate |
(NOTE 5)
|
728,371 | 580,353 | |||||||||
Accounts Payable | 471,297 | 115,741 | ||||||||||
Accrued Liabilities | 10,172 | 79,651 | ||||||||||
Due to Broker | | 22,500,041 | ||||||||||
Dividends Payable | 582,842 | 478,892 | ||||||||||
Interest Payable | 134,167 | 142,518 | ||||||||||
Other Liabilities | 358,696 | 140,458 | ||||||||||
Accrued Offering Expenses | | 19,697 | ||||||||||
Line of Credit |
(NOTE 8)
|
25,584,147 | 18,544,660 | |||||||||
Notes Payable 8.25% due June 30, 2020 |
(NOTE 8)
|
21,145,525 | | |||||||||
Distribution Notes |
(NOTE 8)
|
3,404,583 | 3,404,583 | |||||||||
Total Liabilities | 52,419,800 | 46,006,594 | ||||||||||
Net Assets | $ | 60,644,039 | $ | 53,442,785 | ||||||||
Components of Net Assets
|
||||||||||||
Common Stock, par value $0.01 per share (100,000,000 authorized; 7,569,382 and 6,219,382 issued and outstanding, respectively) | $ | 75,694 | $ | 62,194 | ||||||||
Paid-in Capital in Excess of Par | 66,319,579 | 57,455,232 | ||||||||||
Distributions in Excess of Net Investment Income | (200,200 | ) | (122,763 | ) | ||||||||
Accumulated Net Realized Losses | (4,410,832 | ) | (175,366 | ) | ||||||||
Accumulated Net Unrealized Losses | (1,140,202 | ) | (3,776,512 | ) | ||||||||
Net Assets | $ | 60,644,039 | $ | 53,442,785 | ||||||||
Net Asset Value Per Share | $ | 8.01 | $ | 8.59 |
See notes to consolidated financial statements.
F-33
|
|
|
|
|
||||||||||||
Year ended June 30, 2013 | Year ended June 30, 2012 | Year ended June 30, 2011 | ||||||||||||||
Investment Income
|
||||||||||||||||
Interest Income from Non-Control/Non-Affiliate Investments | $ | 7,400,633 | $ | 7,068,048 | $ | 5,872,321 | ||||||||||
Interest Income from Affiliate Investments | 1,587,281 | 1,203,935 | 1,125,160 | |||||||||||||
Interest Income from Control Investments | 1,504,343 | 708,854 | | |||||||||||||
Dividend Income from Non-Control/Non-Affiliate Investments | | | 4,427 | |||||||||||||
Dividend Income from Affiliate Investments | | | 210,833 | |||||||||||||
Dividend Income from Control Investments | 223,474 | 57,216 | | |||||||||||||
Other Income from Non-Control/Non-Affiliate Investments |
(NOTE 2)
|
1,136,661 | 489,882 | 685,823 | ||||||||||||
Other Income from Affiliate Investments |
(NOTE 2)
|
143,631 | 155,187 | 61,073 | ||||||||||||
Other Income from Control Investments |
(NOTE 2)
|
50,000 | 143,889 | | ||||||||||||
Total Investment Income | 12,046,023 | 9,827,011 | 7,959,637 | |||||||||||||
Operating Expenses
|
||||||||||||||||
Management Fee | (NOTE 5 | ) | 1,431,851 | 1,186,841 | 969,533 | |||||||||||
Incentive Fee |
(NOTE 5)
|
1,339,833 | 1,197,590 | 1,130,190 | ||||||||||||
Total Advisory Fees | 2,771,684 | 2,384,431 | 2,099,723 | |||||||||||||
Allocation of Overhead Expenses |
(NOTE 5)
|
310,412 | 316,173 | 300,900 | ||||||||||||
Sub-Administration Fees |
(NOTE 5)
|
223,429 | 312,457 | 260,381 | ||||||||||||
Officers Compensation |
(NOTE 5)
|
300,736 | 267,153 | 110,904 | ||||||||||||
Total Administration Fees | 834,577 | 895,783 | 672,185 | |||||||||||||
Directors Fees | 124,500 | 119,500 | 117,982 | |||||||||||||
Interest Expenses |
(NOTE 8)
|
1,854,495 | 889,055 | 525,982 | ||||||||||||
Professional Services Expense | 567,126 | 625,101 | 300,066 | |||||||||||||
Bank Fees | 16,429 | 12,228 | 16,135 | |||||||||||||
Tax Expenses | 4,369 | | 3,515 | |||||||||||||
Other | 492,262 | 381,202 | 257,999 | |||||||||||||
Organizational Expenses |
(NOTE 2)
|
| | 178,979 | ||||||||||||
Total Gross Operating Expenses | 6,665,442 | 5,307,300 | 4,172,566 | |||||||||||||
Management Fee Waiver and Expense Reimbursement | | (313,792 | ) | (547,308 | ) | |||||||||||
Total Net Operating Expenses | 6,665,442 | 4,993,508 | 3,625,258 | |||||||||||||
Net Investment Income | 5,380,581 | 4,833,503 | 4,334,379 | |||||||||||||
Net Change in Unrealized Gain (Loss) on Investments | 2,636,310 | (1,979,965 | ) | (1,796,547 | ) | |||||||||||
Net Realized Gain (Loss) on Investments | (4,215,748 | ) | (175,366 | ) | 344,482 | |||||||||||
Net Increase in Net Assets Resulting from Operations | $ | 3,801,143 | $ | 2,678,172 | $ | 2,882,314 | ||||||||||
Earnings per Common Share Basic and Diluted |
(NOTE 4)
|
$ | 0.54 | $ | 0.43 | $ | 0.56 | |||||||||
Net Investment Income per Common Share Basic and Diluted | $ | 0.77 | $ | 0.78 | $ | 0.84 | ||||||||||
Weighted Average Shares of Common Stock Outstanding Basic and Diluted | 7,018,286 | 6,219,382 | 5,152,573 |
See notes to consolidated financial statements.
F-34
|
|
|
|
|||||||||
Year ended June 30, 2013 | Year ended June 30, 2012 | Year ended June 30, 2011 | ||||||||||
Increase in Net Assets Resulting from Operations:
|
||||||||||||
Net Investment Income | $ | 5,380,581 | $ | 4,833,503 | $ | 4,334,379 | ||||||
Net Change in Unrealized Gain (Loss) on Investments | 2,636,310 | (1,979,965 | ) | (1,796,547 | ) | |||||||
Net Realized Gain (Loss) on Investments | (4,215,748 | ) | (175,366 | ) | 344,482 | |||||||
Net Increase in Net Assets Resulting from Operations | 3,801,143 | 2,678,172 | 2,882,314 | |||||||||
Dividends to Shareholders | (6,578,309 | ) | (5,709,393 | ) | (4,662,368 | ) | ||||||
Capital Share Transactions:
|
||||||||||||
Issuance of Common Stock | 10,665,000 | | 60,425,564 | |||||||||
Reinvested Dividends and Distributions | | | 241,608 | |||||||||
Less Offering Costs and Underwriting Fees | (686,580 | ) | | (2,402,067 | ) | |||||||
Net Increase in Net Assets Resulting from Capital Share Transactions | 9,978,420 | | 58,265,105 | |||||||||
Total Increase (Decrease) in Net Assets | 7,201,254 | (3,031,221 | ) | 56,485,051 | ||||||||
Net Assets at Beginning of Period | 53,442,785 | 56,474,006 | (11,045 | ) | ||||||||
Net Assets at End of Period | $ | 60,644,039 | $ | 53,442,785 | $ | 56,474,006 | ||||||
Capital Share Activity:
|
||||||||||||
Shares issued | 1,350,000 | | 6,219,282 | |||||||||
Shares Outstanding at Beginning of Period | 6,219,382 | 6,219,382 | 100 | |||||||||
Shares Outstanding at End of Period | 7,569,382 | 6,219,382 | 6,219,382 |
See notes to consolidated financial statements.
F-35
|
|
|
|
|
||||||||||||
Year ended June 30, 2013 | Year ended June 30, 2012 | Year ended June 30, 2011 | ||||||||||||||
Cash Flows from Operating Activities:
|
||||||||||||||||
Net Increase in Net Assets Resulting from Operations | $ | 3,801,143 | $ | 2,678,172 | $ | 2,882,314 | ||||||||||
Adjustments to reconcile Net Increase in Net Assets Resulting from Operations to Net Cash Provided by (Used in) Operating Activities
|
||||||||||||||||
Purchases of Investments | (137,146,751 | ) | (175,349,323 | ) | (138,011,185 | ) | ||||||||||
Proceeds from Sale or Refinancing of Investments | 142,607,861 | 161,664,071 | 126,881,158 | |||||||||||||
Net Realized (Gain) Loss on Investments | 4,215,748 | 175,366 | (344,482 | ) | ||||||||||||
Net Change in Unrealized Loss on Investments | (2,636,310 | ) | 1,979,965 | 1,796,547 | ||||||||||||
Amortization of Discount | (368,279 | ) | (522,732 | ) | (835,861 | ) | ||||||||||
Amortization of Deferred Debt Issuance Costs | 1,277 | | | |||||||||||||
Amortization of Deferred Credit Facility Fees | 16,950 | | | |||||||||||||
Change in Operating Assets and Liabilities
|
||||||||||||||||
Deposit with Broker | 2,350,000 | 307,859 | (2,657,859 | ) | ||||||||||||
Interest Receivable | (195,259 | ) | (222,184 | ) | (9,265 | ) | ||||||||||
Dividends Receivable | (36,705 | ) | | 143,750 | ||||||||||||
Principal Receivable | 408,604 | (513,372 | ) | | ||||||||||||
Due from Portfolio Investment | (93,890 | ) | (11,140 | ) | | |||||||||||
Prepaid Expenses | (18,145 | ) | (9,411 | ) | (33,642 | ) | ||||||||||
Other Assets | (1,411,774 | ) | 187,462 | (130,317 | ) | |||||||||||
Due to Affiliate | 148,018 | (12,065 | ) | 592,418 | ||||||||||||
Accounts Payable | 355,556 | (548 | ) | 116,289 | ||||||||||||
Accrued Liabilities | (69,479 | ) | 6,423 | 73,228 | ||||||||||||
Due to Broker | (22,500,041 | ) | (3,499,591 | ) | 25,999,632 | |||||||||||
Interest Payable | (8,351 | ) | 119,157 | 23,361 | ||||||||||||
Other Liabilities | 218,238 | (271,713 | ) | 126,513 | ||||||||||||
Accrued Organizational Expenses | | | (71,284 | ) | ||||||||||||
Net Cash Provided by (Used in) Operating Activities | (10,361,589 | ) | (13,293,604 | ) | 16,541,315 | |||||||||||
Cash Flows from Financing Activities:
|
||||||||||||||||
Borrowings Under Credit Facility | 98,538,884 | 74,148,309 | 36,061,951 | |||||||||||||
Payments Under Credit Facility | (91,499,397 | ) | (55,603,649 | ) | (63,538,183 | ) | ||||||||||
Dividends Paid to Shareholders | (6,474,359 | ) | (6,629,862 | ) | (3,021,399 | ) | ||||||||||
Deferred Credit Facility Fees | (510,796 | ) | | (50,000 | ) | |||||||||||
Payment of Offering Expenses and Underwriting Fees | (725,426 | ) | (47,988 | ) | (579,196 | ) | ||||||||||
Proceeds From Notes Payable | 17,757,649 | | | |||||||||||||
Proceeds From Shares Issued | 10,665,000 | | 16,650,000 | |||||||||||||
Net Cash Provided by (Used in) Financing Activities | 27,751,555 | 11,866,810 | (14,476,827 | ) | ||||||||||||
Total Increase (Decrease) in Cash | 17,389,966 | (1,426,794 | ) | 2,064,488 | ||||||||||||
Cash Balance at Beginning of Period | 639,149 | 2,065,943 | 1,455 | |||||||||||||
Cash Balance at End of Period | $ | 18,029,115 | $ | 639,149 | $ | 2,065,943 | ||||||||||
Supplemental Disclosure of Non-Cash Financing Activity:
|
||||||||||||||||
Assets Purchased for Shares |
(NOTE 6)
|
$ | | $ | | $ | 73,306,379 | |||||||||
Debt Issued to Purchase Shares |
(NOTE 6)
|
$ | | $ | | $ | (30,880,815 | ) | ||||||||
Dividends Declared, not yet Paid | $ | 582,842 | $ | 478,892 | $ | 1,399,361 | ||||||||||
Accrued Offering Expenses | $ | | $ | 19,697 | $ | | ||||||||||
Common Shares (0, 0 and 27,867) Issued in Connection with Dividend Reinvestment Plan | $ | | $ | | $ | 241,608 | ||||||||||
Supplemental Disclosure of Cash Flow Information:
|
||||||||||||||||
Cash Paid During the Period for Interest | $ | 1,844,619 | $ | 769,898 | $ | 475,995 |
See notes to consolidated financial statements.
F-36
|
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|
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|
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Description (1) , (2) | Industry | Par Amount/ Quantity | Cost | Fair Value | % of Net Asset Value | |||||||||||||||
Control Investments
(4)
|
||||||||||||||||||||
New Media West, LLC
|
Cable TV Broadband Services | |||||||||||||||||||
Senior Secured Term Loan, 9.00%, 12/31/2017 | $ | 5,079,679 | $ | 5,079,679 | $ | 5,079,679 | 8.38 | % | ||||||||||||
Limited Liability Company Interests , (5) | 720 | 3,600,000 | 4,203,006 | 6.93 | % | |||||||||||||||
Total | 8,679,679 | 9,282,685 | 15.31 | % | ||||||||||||||||
Takoda Resources Inc.
|
Geophysical Surveying and
Mapping Services |
|||||||||||||||||||
Senior Secured Loan Term Loan, 16.00%, 4/01/2016 | $ | 1,469,063 | 1,469,063 | 1,469,063 | 2.42 | % | ||||||||||||||
Common Stock (6) | 520 | | | 0.00 | % | |||||||||||||||
Total | 1,469,063 | 1,469,063 | 2.42 | % | ||||||||||||||||
Texas Westchester Financial, LLC
|
Consumer Financing | |||||||||||||||||||
Limited Liability Company Interests | 9,278 | 905,819 | 602,154 | 0.99 | % | |||||||||||||||
The Finance Company, LLC
|
Consumer Financing | |||||||||||||||||||
Senior Secured Loan, 15.00%, 9/30/2015 | $ | 4,663,547 | 4,585,205 | 4,698,524 | 7.75 | % | ||||||||||||||
Limited Liability Company Interests | 50 | 140,414 | 1,604,577 | 2.65 | % | |||||||||||||||
Total | 4,725,619 | 6,303,101 | 10.40 | % | ||||||||||||||||
TransAmerican Asset Servicing Group, LLC
|
Asset Recovery Services | |||||||||||||||||||
Senior Secured Loan, 14.25%, 7/25/2016 | $ | 2,400,000 | 2,359,362 | 1,458,437 | 2.40 | % | ||||||||||||||
Limited Liability Company Interests , (7) | 75 | | | 0.00 | % | |||||||||||||||
Total | 2,359,363 | 1,458,437 | 2.40 | % | ||||||||||||||||
Total Control Investments | 18,139,543 | 19,115,440 | 31.52 | % | ||||||||||||||||
Affiliate Investments
(3)
|
||||||||||||||||||||
Modular Process Control, LLC
|
Energy Efficiency Services | |||||||||||||||||||
Senior Secured Loan Revolving Loan, 15.00%,
3/28/17 |
$ | 3,500,000 | 3,310,894 | 3,500,000 | 5.77 | % | ||||||||||||||
Senior Secured Loan Term Loan, 15.00%, 3/28/17 | $ | 2,500,000 | 2,342,415 | 2,407,833 | 3.97 | % | ||||||||||||||
Modular Process Control, LLC Warrants for 8% of the outstanding Class B LLC Interests (at a $0.01 strike price), expire 3/28/23 | 1 | 288,000 | 161,413 | 0.27 | % | |||||||||||||||
Total | 5,941,309 | 6,069,246 | 10.01 | % | ||||||||||||||||
ProGrade Ammo Group, LLC
|
Munitions | |||||||||||||||||||
Senior Secured Revolving Loan, 9.20%, 8/1/2014 | $ | 1,907,735 | 1,907,735 | 1,907,735 | 3.14 | % | ||||||||||||||
Senior Secured Term Loan, 15.20%, 8/1/2014 | $ | 5,468,750 | 5,389,137 | 4,304,089 | 7.10 | % | ||||||||||||||
Warrants for 9.5% of the outstanding LLC interests
(at a $10.00 strike price), expire 8/2/2018 |
181,240 | 176,770 | | 0.00 | % | |||||||||||||||
Total | 7,473,642 | 6,211,824 | 10.24 | % | ||||||||||||||||
SOLEX Fine Foods, LLC; Catsmo, LLC
|
Food Distributors & Wholesalers | |||||||||||||||||||
Senior Secured Term Loan, 12.45%, 12/28/2016 | $ | 3,900,000 | 3,801,116 | 3,859,440 | 6.37 | % | ||||||||||||||
Limited Liability Company Interests , (8) | 1 | 250,000 | 139,247 | 0.23 | % | |||||||||||||||
Warrants for 1.6% of the outstanding LLC interests (strike price 0.01), expire 12/28/2022 , (8) | 1 | 58,055 | 32,695 | 0.05 | % | |||||||||||||||
Total | 4,109,171 | 4,031,382 | 6.65 | % | ||||||||||||||||
West World Media, LLC
(9)
|
Information and Data Services | |||||||||||||||||||
Limited Liability Company Interests | 85,210 | 430,500 | 235,451 | 0.39 | % | |||||||||||||||
Total Affiliate Investments | 17,954,622 | 16,547,903 | 27.29 | % |
See notes to consolidated financial statements.
F-37
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|
|||||||||||||||
Description (1),(2) | Industry | Par Amount/ Quantity | Cost | Fair Value |
% of Net
Asset Value |
|||||||||||||||
Other Investments
|
||||||||||||||||||||
Attention Transit Advertising Systems, LLC
|
Outdoor Advertising Services | |||||||||||||||||||
Senior Secured Loan, 14.50%, 9/30/2016 | $ | 2,321,626 | 2,321,626 | 2,321,626 | 3.83 | % | ||||||||||||||
Background Images, Inc.
|
Equipment Rental Services | |||||||||||||||||||
Senior Secured Loan Term A, 14.70%, 6/28/2015 | $ | 1,466,250 | 1,456,440 | 1,465,419 | 2.42 | % | ||||||||||||||
Senior Secured Loan Term B, 16.45%, 6/28/2015 | $ | 828,750 | 823,118 | 783,058 | 1.29 | % | ||||||||||||||
Total | 2,279,558 | 2,248,477 | 3.71 | % | ||||||||||||||||
Blackstrap Broadcasting, LLC
|
Radio Broadcasting | |||||||||||||||||||
Senior Secured Loan, 5.00%, 7/31/2014 | $ | 3,000,000 | 3,000,000 | 2,588,600 | 4.27 | % | ||||||||||||||
Subordinated Secured Loan, 16.00%, 7/31/2014 | $ | 3,500,000 | 3,500,000 | 3,034,383 | 5.00 | % | ||||||||||||||
Total | 6,500,000 | 5,622,983 | 9.27 | % | ||||||||||||||||
Coast Plating, Inc.
|
Aerospace Parts Plating
and Finishing |
|||||||||||||||||||
Senior Secured Loan Term A, 11.70%, 9/13/2014 | $ | 1,401,686 | 1,401,687 | 1,412,666 | 2.33 | % | ||||||||||||||
Senior Secured Loan Term B, 12.45%, 9/13/2014 | $ | 3,431,714 | 3,431,714 | 3,412,268 | 5.63 | % | ||||||||||||||
Total | 4,833,401 | 4,824,934 | 7.96 | % | ||||||||||||||||
CSL Operating, LLC
|
Industrial Metal Treatings | |||||||||||||||||||
Senior Secured Loan Term A, 11.70%, 5/11/2014 | $ | 1,866,720 | 1,863,691 | 1,860,435 | 3.07 | % | ||||||||||||||
Senior Secured Loan Term B, 11.70%, 5/11/2014 | $ | 1,866,720 | 1,863,691 | 1,856,142 | 3.06 | % | ||||||||||||||
Total | 3,727,382 | 3,716,577 | 6.13 | % | ||||||||||||||||
Employment Plus, Inc.
|
Staffing Services | |||||||||||||||||||
Senior Secured Loan, 12.00%, 10/24/2013 | $ | 5,000,000 | 5,000,000 | 5,000,000 | 8.24 | % | ||||||||||||||
Global Energy Efficiency Holdings, Inc.
|
Energy Efficiency Services | |||||||||||||||||||
Senior Secured Revolving Loan, 13.20%, 9/7/2015 | $ | 4,444,961 | 4,439,802 | 4,523,933 | 7.46 | % | ||||||||||||||
Senior Secured Loan, 13.20%, 9/7/2015 | $ | 1,000,000 | 990,088 | 1,036,900 | 1.71 | % | ||||||||||||||
Total | 5,429,890 | 5,560,833 | 9.17 | % | ||||||||||||||||
iMedX, Inc.
|
Medical Transcription Services | |||||||||||||||||||
Senior Secured Revolving Loan, 13.75%, 09/19/2014 | $ | 1,578,962 | 1,578,962 | 1,685,752 | 2.78 | % | ||||||||||||||
Senior Secured Loan Term A, 13.75%, 09/19/2014 | $ | 2,450,686 | 2,437,028 | 2,482,790 | 4.09 | % | ||||||||||||||
Senior Secured Loan Term B, 13.75%, 09/19/2014 | $ | 1,071,180 | 1,071,180 | 1,073,679 | 1.77 | % | ||||||||||||||
Total | 5,087,170 | 5,242,221 | 8.64 | % | ||||||||||||||||
MDU Communications (USA) Inc.
|
Cable TV Broadband Services | |||||||||||||||||||
Senior Secured Loan Tranche A, 12.85%,
12/31/2013 |
$ | 5,000,000 | 5,000,000 | 4,914,000 | 8.10 | % | ||||||||||||||
Senior Secured Loan Tranche C, 10.75%,
12/31/2013 |
$ | 250,000 | 250,000 | 242,642 | 0.40 | % | ||||||||||||||
Senior Secured Loan Tranche D, 9.75%,
12/31/2013 |
$ | 1,480,000 | 1,480,000 | 1,427,213 | 2.35 | % | ||||||||||||||
Total | 6,730,000 | 6,583,855 | 10.85 | % | ||||||||||||||||
Pristine Environments, Inc.
|
Building Cleaning
and Maintenance Services |
|||||||||||||||||||
Senior Secured Loan Revolving Loan, 12.70%, 3/31/2017 | $ | 2,764,801 | 2,737,585 | 2,774,017 | 4.57 | % | ||||||||||||||
Senior Secured Loan Term Loan, 12.70%, 3/31/2017 | $ | 1,135,000 | 1,123,828 | 1,143,437 | 1.89 | % | ||||||||||||||
Total | 3,861,413 | 3,917,454 | 6.46 | % |
See notes to consolidated financial statements.
F-38
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|||||||||||||||
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|||||||||||||||
Description (1),(2) | Industry | Par Amount/ Quantity | Cost | Fair Value |
% of Net
Asset Value |
|||||||||||||||
The Selling Source, LLC
|
Information and Data Services | |||||||||||||||||||
Senior Secured Loan, 12.54%, 1/31/2017 | $ | 4,000,000 | 3,964,978 | 4,000,000 | 6.60 | % | ||||||||||||||
US Path Labs, LLC
|
Healthcare Services | |||||||||||||||||||
Senior Secured Loan, 14.00%, 3/30/2014 | $ | 3,470,000 | 3,428,973 | 3,472,198 | 5.73 | % | ||||||||||||||
VaultLogix, LLC
|
Information Retrieval Services | |||||||||||||||||||
Warrants for Variable% Ownership, (at a $307.855 strike price), expire 1/14/2019 | 3,439 | 56,147 | | 0.00 | % | |||||||||||||||
Total Other Investments | 53,220,538 | 52,511,158 | 86.59 | % | ||||||||||||||||
Total Investments | $ | 89,314,703 | $ | 88,174,501 | 145.40 | % |
See notes to consolidated financial statements.
F-39
The following table shows the fair value of our portfolio of investments by industry, as of June 30, 2013.
|
|
|
||||||
June 30, 2013 | ||||||||
Investment at Fair Value
(dollars in millions) |
Percentage of
Net Assets |
|||||||
Cable TV/Broadband Services | $ | 15.9 | 26.16 | % | ||||
Energy Efficiency Services | 11.6 | 19.18 | ||||||
Consumer Financing | 6.9 | 11.39 | ||||||
Munitions | 6.2 | 10.24 | ||||||
Radio Broadcasting | 5.6 | 9.28 | ||||||
Medical Transcription Services | 5.2 | 8.64 | ||||||
Staffing Services | 5.0 | 8.24 | ||||||
Aerospace Parts Plating and Finishing | 4.8 | 7.96 | ||||||
Information and Data Services | 4.2 | 6.98 | ||||||
Food Distributors and Wholesalers | 4.0 | 6.65 | ||||||
Building Cleaning and Maintenance Services | 3.9 | 6.46 | ||||||
Industrial Metal Treatings | 3.8 | 6.13 | ||||||
Healthcare Services | 3.6 | 5.73 | ||||||
Outdoor Advertising Services | 2.3 | 3.83 | ||||||
Equipment Rental Services | 2.2 | 3.71 | ||||||
Geophysical Surveying and Mapping Services | 1.5 | 2.42 | ||||||
Asset Recovery Services | 1.5 | 2.40 | ||||||
Total | $ | 88.2 | 145.40 | % |
(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, monthly, quarterly or semi-annually. For each debt investment we have provided the interest rate in effect as of June 30, 2013. |
(3) | Affiliate Investments are investments in those companies that are Affiliated Companies of the Company, as defined in the Investment Company Act of 1940, which are not Control Investments. A company is deemed to be an Affiliate of Full Circle Capital Corporation if Full Circle Capital Corporation owns 5% or more, but less than 25%, of the voting securities of such company. |
(4) | Control Investments are investments in those companies that are Control Investments of the Company, as defined in the Investment Company Act of 1940. A company is deemed to be a Control Investment of Full Circle Capital Corporation if Full Circle Capital Corporation owns more than 25% of the voting securities of such company. |
(5) | Full Circle Capital Corporations equity investment in New Media West, LLC is held through its wholly-owned subsidiary FC New Media, Inc. |
(6) | Full Circle Capital Corporations equity investments in Takoda Resources Inc. are held through its wholly-owned subsidiary FC Takoda Holdings, LLC. |
(7) | Full Circle Capital Corporations equity investment in TransAmerican Asset Servicing Group, LLC is held through its wholly-owned subsidiary TransAmerican Asset Servicing Group, Inc. |
(8) | Full Circle Capital Corporations equity investments in SOLEX Fine Foods, LLC; Catsmo, LLC are held through its wholly-owned subsidiary FC New Specialty Foods, Inc. |
(9) | A portion of Full Circle Capital Corporations investment 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. |
** | Interest rate shown reflects yield to maturity at time of purchase. |
| Security is a non-income producing security. |
See notes to consolidated financial statements.
F-40
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|
|
|
|||||||||||||||
Description (1),(2) | Industry |
Par Amount/
Quantity |
Cost | Fair Value | % of Net Asset Value | |||||||||||||||
Control Investments
(4)
|
||||||||||||||||||||
Texas Westchester Financial, LLC
|
Consumer Financing | |||||||||||||||||||
Limited Liability Company Interests | 9,278 | $ | 905,819 | $ | 549,360 | 1.03 | % | |||||||||||||
The Finance Company, LLC
|
Consumer Financing | |||||||||||||||||||
Senior Secured Term Loan, 15.00%, 9/30/2015 | $ | 5,724,261 | 5,593,415 | 5,617,738 | 10.51 | % | ||||||||||||||
Limited Liability Company Interests | 50 | 140,414 | 610,413 | 1.14 | % | |||||||||||||||
Totals | 5,733,829 | 6,228,151 | 11.65 | % | ||||||||||||||||
Total Control Investments | 6,639,648 | 6,777,511 | 12.68 | % | ||||||||||||||||
Affiliate Investments
(5)
|
||||||||||||||||||||
West World Media, LLC
(6)
|
Information and Data Services | |||||||||||||||||||
Limited Liability Company Interests | 85,210 | 430,500 | 216,964 | 0.41 | % | |||||||||||||||
ProGrade Ammo Group LLC
|
Munitions | |||||||||||||||||||
Senior Secured Revolving Loan, 9.24%, 8/1/2014 | $ | 383,798 | 383,798 | 383,798 | 0.72 | % | ||||||||||||||
Senior Secured Term Loan, 15.24%, 8/1/2014 | $ | 5,968,750 | 5,810,949 | 4,511,380 | 8.44 | % | ||||||||||||||
Warrants for 9.5% of the outstanding LLC interests
(at a $10.00 strike price), expire 8/2/2018 |
181,240 | 176,770 | | | % | |||||||||||||||
Totals | 6,371,517 | 4,895,178 | 9.16 | % | ||||||||||||||||
Total Affiliate Investments | 6,802,017 | 5,112,142 | 9.57 | % | ||||||||||||||||
Other Investments
|
||||||||||||||||||||
Attention Transit Advertising Systems, LLC
|
Outdoor Advertising Services | |||||||||||||||||||
Senior Secured Loan, 14.50%, 11/1/2012 | $ | 2,060,150 | 2,048,859 | 1,900,282 | 3.56 | % | ||||||||||||||
Background Images, Inc.
|
Equipment Rental Services | |||||||||||||||||||
Senior Secured Loan Term A, 14.74%, 6/28/2014 | $ | 2,012,500 | 1,986,949 | 2,027,594 | 3.79 | % | ||||||||||||||
Senior Secured Loan Term B, 16.49%, 6/28/2014 | $ | 1,137,500 | 1,122,922 | 1,123,433 | 2.10 | % | ||||||||||||||
Totals | 3,109,871 | 3,151,027 | 5.89 | % | ||||||||||||||||
Blackstrap Broadcasting, LLC
|
Radio Broadcasting | |||||||||||||||||||
Senior Secured Loan, 5.00%, 9/25/2012 | $ | 3,000,000 | 2,959,844 | 2,850,600 | 5.33 | % | ||||||||||||||
Subordinated Secured Loan, 16.00%, 9/25/2012 | $ | 3,500,000 | 3,495,844 | 3,465,700 | 6.48 | % | ||||||||||||||
Totals | 6,455,688 | 6,316,300 | 11.81 | % | ||||||||||||||||
Coast Plating, Inc.
|
Aerospace Parts Plating and
Finishing |
|||||||||||||||||||
Senior Secured Loan Term A, 11.74%, 9/13/2014 | $ | 1,450,000 | 1,449,081 | 1,464,790 | 2.74 | % | ||||||||||||||
Senior Secured Loan Term B, 12.49%, 9/13/2014 | $ | 3,550,000 | 3,540,361 | 3,484,325 | 6.52 | % | ||||||||||||||
Totals | 4,989,442 | 4,949,115 | 9.26 | % | ||||||||||||||||
CSL Operating, LLC
|
Industrial Metal Treatings | |||||||||||||||||||
Senior Secured Loan Term A, 11.74%, 5/11/2014 | $ | 2,000,000 | 1,993,354 | 1,957,933 | 3.66 | % | ||||||||||||||
Senior Secured Loan Term B, 11.74%, 5/11/2014 | $ | 2,000,000 | 1,993,354 | 1,944,400 | 3.64 | % | ||||||||||||||
Totals | 3,986,708 | 3,902,333 | 7.30 | % | ||||||||||||||||
Employment Plus, Inc.
|
Staffing Services | |||||||||||||||||||
Senior Secured Loan, 12.00%, 10/24/2013 | $ | 5,000,000 | 5,000,000 | 5,000,000 | 9.36 | % |
See notes to consolidated financial statements.
F-41
|
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|
|||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Description (1),(2) | Industry |
Par Amount/
Quantity |
Cost | Fair Value | % of Net Asset Value | |||||||||||||||
Equisearch Acquisition, Inc.
|
Asset Recovery Services | |||||||||||||||||||
Senior Secured Loan, 14.00%, 5/31/2012 | $ | 2,580,201 | 2,580,201 | 1,959,363 | 3.67 | % | ||||||||||||||
Warrants for 47.9056 shares (at a $0.01 strike price), expire 1/31/2016 | 48 | 225,000 | | | % | |||||||||||||||
Totals | 2,805,201 | 1,959,363 | 3.67 | % | ||||||||||||||||
European Evaluators, LLC
(3)
|
Art Dealers | |||||||||||||||||||
Senior Secured Loan, 11.99%, 8/29/2012 | $ | 615,000 | 614,240 | 614,240 | 1.15 | % | ||||||||||||||
iMedX, Inc.
|
Medical Transcription Services | |||||||||||||||||||
Senior Secured Revolving Loan, 10.09%, 9/19/2014 | $ | 1,298,517 | 1,295,589 | 1,298,517 | 2.43 | % | ||||||||||||||
Senior Secured Loan Term A, 15.99%, 9/19/2014 | $ | 2,755,000 | 2,727,654 | 2,772,448 | 5.19 | % | ||||||||||||||
Totals | 4,023,243 | 4,070,965 | 7.62 | % | ||||||||||||||||
Matt Martin Real Estate Management, LLC
|
Real Estate Management Services | |||||||||||||||||||
Senior Secured Loan, 12.99%, 4/30/2015 | $ | 4,139,000 | 4,104,413 | 4,104,413 | 7.68 | % | ||||||||||||||
MDU Communications (USA) Inc.
|
Cable TV Broadband Services | |||||||||||||||||||
Senior Secured Loan Tranche A, 11.85%, 6/30/2013 | $ | 5,000,000 | 5,000,000 | 4,889,000 | 9.15 | % | ||||||||||||||
Senior Secured Loan Tranche C, 9.75%, 6/30/2013 | $ | 250,000 | 250,000 | 240,275 | 0.45 | % | ||||||||||||||
Senior Secured Loan Tranche D, 8.75%, 6/30/2013 | $ | 1,480,000 | 1,480,000 | 1,399,537 | 2.62 | % | ||||||||||||||
Warrants for 37,500 shares (at a $6.00 strike price), expire 6/30/2013 | 37,500 | 298 | | | % | |||||||||||||||
Totals | 6,730,298 | 6,528,812 | 12.22 | % | ||||||||||||||||
The Selling Source, LLC
|
Information and Data Services | |||||||||||||||||||
Senior Secured Loan, 12.00%, 12/21/2012 | $ | 3,323,508 | 3,323,508 | 3,323,508 | 6.22 | % | ||||||||||||||
US Path Labs, LLC
|
Healthcare Services | |||||||||||||||||||
Senior Secured Loan, 13.00%, 3/30/2014 | $ | 3,500,000 | 3,434,191 | 3,465,117 | 6.48 | % | ||||||||||||||
VaultLogix, LLC
|
Information Retrieval Services | |||||||||||||||||||
Warrants for Variable% Ownership, (at a $307.855 strike price), expire 1/14/2019 | 3,439 | 56,147 | | | % | |||||||||||||||
Ygnition Networks, Inc.
|
Cable TV Broadband Services | |||||||||||||||||||
Senior Secured Loan, 12.74%, 9/6/2012 | $ | 11,999,743 | 11,999,781 | 11,171,761 | 20.90 | % | ||||||||||||||
United States Treasury
|
||||||||||||||||||||
United States Treasury Bill** (0.01)%, 7/5/2012 | $ | 22,500,000 | 22,500,027 | 22,499,881 | 42.10 | % | ||||||||||||||
Total Other Investments | 85,181,617 | 82,957,117 | 155.22 | % | ||||||||||||||||
Total Investments | $ | 98,623,282 | $ | 94,846,770 | 177.47 | % |
See notes to consolidated financial statements.
F-42
The following table shows the fair value of our portfolio of investments by industry, as of June 30, 2012, excluding United States Treasury Bills of approximately $22.5 million.
|
|
|
||||||
June 30, 2012 | ||||||||
Investment at Fair Value
(dollars in millions) |
Percentage of
Net Assets |
|||||||
Cable TV/Broadband Services | $ | 17.7 | 33.12 | % | ||||
Consumer Financing | 6.8 | 12.68 | ||||||
Radio Broadcasting | 6.3 | 11.81 | ||||||
Staffing Services | 5.0 | 9.36 | ||||||
Aerospace Parts Plating and Finishing | 4.9 | 9.26 | ||||||
Munitions | 4.9 | 9.16 | ||||||
Real Estate Management Services | 4.1 | 7.68 | ||||||
Medical Transcription Services | 4.1 | 7.62 | ||||||
Industrial Metal Treatings | 3.9 | 7.30 | ||||||
Information and Data Services | 3.5 | 6.63 | ||||||
Healthcare Services | 3.5 | 6.48 | ||||||
Equipment Rental Services | 3.1 | 5.89 | ||||||
Asset Recovery Services | 2.0 | 3.67 | ||||||
Outdoor Advertising Services | 1.9 | 3.56 | ||||||
Art Dealers | 0.6 | 1.15 | ||||||
Total | $ | 72.3 | 135.37 | % |
(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 June 30, 2012. |
(3) | Full Circle Capital Corporations loan to European Evaluators, LLC is held through its wholly-owned subsidiary Art Credit Company, LLC. |
(4) | Control Investments are investments in those companies that are Control Investments of the Company, as defined in the Investment Company Act of 1940. A company is deemed to be a Control Investment of Full Circle Capital Corporation if Full Circle Capital Corporation owns more than 25% of the voting securities of such company. |
(5) | Affiliate Investments are investments in those companies that are Affiliated Companies of the Company, as defined in the Investment Company Act of 1940, which are not Control Investments. A company is deemed to be an Affiliate of Full Circle Capital Corporation if Full Circle Capital Corporation owns 5% or more but less than 25% of the voting securities of such company. |
(6) | A portion of Full Circle Capital Corporations 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) | The June 30, 2012 Consolidated Schedule of Investments was reclassified to be consistent with the new format used for the June 30, 2013 Consolidated Schedule of Investments. |
** | Interest rate shown reflects yield to maturity at time of purchase. |
| Security is a non-income producing security. |
See notes to consolidated financial statements.
F-43
References herein to we, us or our refer to Full Circle Capital Corporation and Subsidiaries (Full Circle Capital or the Company) unless the context specifically requires otherwise.
We were formed as Full Circle Capital Corporation, a Maryland corporation, 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 annually 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.
The preparation of the accompanying consolidated 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 consolidated 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.
The June 30, 2012 Consolidated Financial Statements were reclassified to be consistent with the new format used for the June 30, 2013 Consolidated Financial Statements.
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 acquired, respectively, in the Consolidated Statements of Assets and Liabilities.
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 generally 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., FC New Media, Inc., TransAmerican Asset Servicing Group, Inc., FC New Specialty Foods, Inc., and FC Takoda Holdings, LLC, our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
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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 Capitals 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 Boards assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
Securities for which reliable market quotations are not readily available or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Board or the Audit Committee of the Board (the Audit Committee), does not represent fair value, are valued as follows:
1. | The quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment; |
2. | Preliminary valuation conclusions are then documented and discussed with the Companys senior management. Independent third-party valuation firms are engaged by, or on behalf of, the Audit Committee to conduct independent appraisals or review managements preliminary valuations or make their own independent assessment, for certain assets; |
3. | The Audit Committee discusses valuations and recommends the fair value of each investment in the portfolio in good faith based on the input of the Company and, where appropriate, the independent valuation firms; and |
4. | The Board then discusses the valuations and determines in good faith the fair value of each investment in the portfolio based upon input from the Company, estimates from the independent valuation firms and the recommendations of the Audit Committee. |
GAAP establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are 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.
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The availability of valuation techniques and observable inputs can vary from investment to investment and is affected by a wide variety of factors including, the type of investment, whether the investment 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 investments 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 Companys 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 an investment to be reclassified to a lower level within the fair value hierarchy.
The Companys 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 may 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 that are not performing, 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.
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. These nonpublic investments are included in Level 3 of the fair value hierarchy.
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.
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The Company places its cash with J.P. Morgan Chase Bank N.A. and Sovereign Bank, N.A., and at times, cash held in such accounts may exceed the Federal Deposit Insurance Corporation insured limit. The Company may invest a portion of its cash in money market funds, within the limitations of the 1940 Act.
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 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 received. Other fee income, including administrative fees and unused line fees, is included in Other Income. Income from such sources was $1,330,292, $788,958, and $746,896 for the years ended June 30, 2013, 2012, and 2011, respectively.
The Company has elected to be treated as a RIC under subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements and timely distribute to its stockholders at least 90% of the sum of investment company taxable income (ICTI) including PIK, as defined by the Code, and net tax exempt interest income (which is the excess of our gross tax exempt interest income over certain disallowed deductions) for each taxable year in order to be eligible for tax treatment under subchapter M of the Code. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year dividend distributions into the next tax year. Any such carryover ICTI must be distributed before the end of that next tax year through a dividend declared prior to filing the final tax return related to the year which generated such ICTI.
Permanent differences between ICTI and net investment income for financial reporting purposes are reclassified among capital accounts in the financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. During the years ended June 30, 2013 and 2012, the Company reclassified for book purposes amounts arising from permanent book/tax differences related as follows:
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Year ended
June 30, 2013 |
Year ended
June 30, 2012 |
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Capital in excess of par value | $ | (1,100,573 | ) | $ | (749,179 | ) | ||
Accumulated undistributed net investment income (loss) | 1,120,291 | 1,093,661 | ||||||
Accumulated net realized gain (loss) from investments | $ | (19,718 | ) | $ | (344,482 | ) |
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For income tax purposes, distributions paid to stockholders are reported as ordinary income, return of capital, long term capital gains or a combination thereof. The tax character of distributions paid for the years ended June 30, 2013 and 2012 were as follows:
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Year ended
June 30, 2013 |
Year ended
June 30, 2012 |
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Ordinary income | $ | 5,489,254 | $ | 4,979,135 | ||||
Distributions of long-term capital gains | | | ||||||
Return of capital | 1,089,055 | 730,258 | ||||||
Distributions on a tax basis | $ | 6,578,309 | $ | 5,709,393 |
For federal income tax purposes, the tax cost of investments owned at June 30, 2013 and 2012 were approximately $90,254,434 and $98,623,283, respectively. The net unrealized depreciation on investments owned at June 30, 2013 and 2012 were approximately $2,079,933 and $3,776,513, respectively.
At June 30, 2013 and 2012, the components of distributable earnings on a tax basis detailed below differ from the amounts reflected in the Companys Statement of Assets and Liabilities by temporary and other book/tax differences, primarily relating to the tax treatment of certain investments in partnerships and wholly-owned subsidiary corporations, fee income and organizational expenses, as follows:
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As of
June 30, 2013 |
As of
June 30, 2012 |
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Accumulated capital gains (losses) | $ | (3,471,100 | ) | $ | (175,366 | ) | ||
Unrealized appreciation (depreciation) | (2,079,933 | ) | (3,776,512 | ) | ||||
Components of distributable earnings at year end | $ | (5,551,033 | ) | $ | (3,951,879 | ) |
For the years ended June 30, 2013 and 2012, the net capital loss carryfowards were $3,471,100 and $175,366, respectively.
The Company accounts for income taxes in conformity with ASC Topic 740 - Income Taxes (ASC 740). ASC 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Companys tax returns to determine whether the tax positions are more-likely-than-not of being sustained by the applicable tax authority. Tax positions deemed to meet a more-likely-than-not threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statement of operations. There were no material uncertain income tax positions at June 30, 2013. Although we file federal and state tax returns, our major tax jurisdiction is federal. The Company remains subject to examination by the Internal Revenue Service for the initial tax year ending June 30, 2011 and all future years.
Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount, if any, of our monthly dividends are approved by our Board each quarter and are generally based upon our managements estimate of our earnings for the quarter. Net realized capital gains, if any, are distributed at least annually.
We follow ASC Topic 460, Guarantors 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
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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 consolidated financial statements. Refer to Note 5 and Note 8 for further discussion of guarantees and indemnification agreements.
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.
The Company did not incur organizational expenses during the years ended June 30, 2013, and 2012. During the year ended June 30, 2011 the company incurred organizational expenses of $178,979. The Company complies with the requirements of ASC 340-10-S99-1, Expenses of Offering. Deferred offering costs consist principally of legal and audit costs incurred through the balance sheet date that are related to an offering of equity securities. Such costs are charged against the gross proceeds of the offering or will be charged to the Companys operations if the offering is not completed. Offering expenses related to the Companys November 27, 2012 and August 31, 2010 offerings were $153,330 and $1,052,067, respectively.
Certain capital accounts including undistributed net investment income, accumulated net realized gain or loss, net unrealized appreciation or depreciation, and paid in capital in excess of par, are adjusted, at least annually, for permanent differences between book and tax. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP.
In January 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (ASU 2013-01). ASU 2013-01 limits the scope of the new balance sheet offsetting disclosure requirements to derivatives (including bifurcated embedded derivatives), repurchase agreements and reverse repurchase agreements, and certain securities borrowing and lending arrangements. Public companies are required to apply ASU 2013-01 prospectively for interim and annual reporting periods beginning after January 1, 2013.
In June 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2013-08, Financial Services Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements (ASU 2013-08). ASU 2013-08 amends the criteria that define an investment company, clarifies the measurement guidance and requires certain additional disclosures. Public companies are required to apply ASU 2013-08 prospectively for interim and annual reporting periods beginning after December 15, 2013.
In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (ASU 2013-04). ASU 2013-04 provides additional guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. Public companies are required to apply ASU 2013-04 prospectively for interim and annual reporting periods beginning after December 15, 2013.
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The Company does not believe that the adoption of any recently issued accounting standards will have a material impact on its current financial position and results of operations.
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 potentially provide the Company with financing. Management believes that such other financial institutions would likely be able to provide similar financing with generally comparable terms. However, a change in financial institutions at the present time could cause a delay in service provisioning or result in potential lost opportunities, which could adversely affect operating results.
As of June 30, 2013, we had approximately $5.9 million in unfunded loan commitments, subject to our approval in certain instances, to provide debt financing to certain of our portfolio companies.
The following information sets forth the computation of basic and diluted earnings (loss) per common share for the years ended June 30, 2013, June 30, 2012, and June 30, 2011:
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Year ended June 30, 2013 | Year ended June 30, 2012 | Year ended June 30, 2011 | ||||||||||
Per Share Data
(1)
:
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Net Increase in Net Assets Resulting from Operations | $ | 3,801,143 | $ | 2,678,172 | $ | 2,882,314 | ||||||
Average weighted shares outstanding for period | 7,018,286 | 6,219,382 | 5,152,573 | |||||||||
Basic and diluted earnings per common share | $ | 0.54 | $ | 0.43 | $ | 0.56 |
(1) | Per share data based on weighted average shares outstanding. |
On June 24, 2013, the Board re-approved 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 Advisers 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, a base management fee and an incentive fee.
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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 agreed to waive any portion of the base management fee that exceeded 1.50% of Full Circle Capitals gross assets, as adjusted, until August 31, 2011 when such waiver expired.
The total base management fees earned by the Adviser for the years ended June 30, 2013, 2012, and 2011, respectively, were, $1,431,851, $1,186,841 and $969,533, respectively, after adjusting for the waivers of $0, $28,124 and $138,505, respectively. The total base management fee payable to the Adviser as of June 30, 2013, 2012, and 2011 was $389,945, $308,271 and $310,809 after reflecting payment of $1,350,177, $1,189,379 and $520,219 for the years ended June 30, 2013, 2012, and 2011, 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 expenses 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). |
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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) 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. There were no incentive fees paid on realized capital gains for the years ended June 30, 2013, 2012, and 2011, respectively.
Income incentive fees of $1,339,833, $1,197,590 and $1,130,190 were earned by the Adviser for the years ended June 30, 2013, 2012, and 2011, respectively, and the total income incentive fee payable to the Adviser as of June 30, 2013, 2012, and 2011 was $338,426, $272,082 and $281,609, after reflecting payment of $1,273,489, $1,207,117 and $848,581 during the years ended June 30, 2013, 2012, and 2011, respectively, and is included in the Consolidated Statement of Assets and Liabilities in Due to Affiliate.
The Adviser had 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 was extended through September 30, 2011, and equated to an accrual offset against the Advisors management fee of $285,668 and $408,803 for the years ended June 30, 2012 and 2011, respectively. There was no offset for the year ended June 30, 2013.
On June 24, 2013, the Board re-approved 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 Companys 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), may also provide administrative services to the Adviser. As a result, the Adviser also reimburses the Administrator and/or the Sub-Administrator for its allocable portion of the Administrators and/or Sub-Administrators 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
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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 Administrators services under the Administration Agreement or otherwise as administrator for Full Circle Capital.
Our Chief Financial Officer, William E. Vastardis, is the President of Vastardis. The Administrator has engaged Vastardis to provide certain administrative services to us. In exchange for providing such services, the Administrator pays 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:
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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%) |
Additionally, we 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 up to $250,000. Vastardis agreed to cap its first year fees at $200,000, plus any reimbursement of expenses, for administrative services to us, and at $100,000 for the service of Mr. Vastardis as our Chief Financial Officer, Treasurer and Secretary. Those caps expired on August 31, 2011.
For the years ended June 30, 2013, 2012, and 2011, respectively, the Company incurred $834,577, $895,783 and $672,185, respectively, of expenses under the Administration Agreement, $223,429, $312,457 and $260,381, respectively, of which were earned by the Sub-Administrator and $300,736, $267,153 and $110,904, respectively, were paid for officers compensation. The remaining $310,412, $316,173 and $300,900, respectively, were recorded as an Allocation of Overhead Expenses to the Administrator in the Consolidated Statement of Operations.
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. With regard to the Control Investments in Texas Westchester Financial, LLC, New Media West, LLC, TransAmerican Asset Servicing Group, LLC and The Finance Company, LLC, the Company has provided managerial assistance during the period for which no fees were charged. Our Chief Executive Officer and President, John Stuart, currently serves as a director of The Finance Company, LLC, New Media West, LLC and Takoda Resources Inc. Lawrence Chua, a Vice President of Full Circle Advisors, serves on the board of Takoda Resources Inc. During the year ended June 30, 2013, only Background Images, Inc. and Solex Fine Foods, LLC; Catsmo, LLC had accepted our offer for such services. No fees were charged to Background Images, Inc. or Solex Fine Foods, LLC; Catsmo, LLC for such services.
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During the year ended June 30, 2011, we issued 6,219,282 shares of our common stock through an initial public offering, a private placement and our dividend reinvestment plan. On November 27, 2012, we issued 1,350,000 shares of our common stock through a follow on offering. 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:
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Issuances of
Common Stock |
Number of Shares Issued |
Gross Proceeds Raised, Net Assets Acquired and Dividends
Reinvested |
Underwriting Fees | Offering Expenses |
Gross
Offering Price |
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April 16, 2010 | 100 | $ | 1,500 | | | $ | 15.00 per/share | |||||||||||||
August 31, 2010 | 4,191,415 | (1) | $ | 42,425,564 | | | $ | 10.13 per/share | (2) | |||||||||||
August 31, 2010 | 2,000,000 | $ | 18,000,000 | $ | 1,350,000 | $ | 1,052,067 | (3) | $ | 9.00 per/share | ||||||||||
January 14, 2011 | 27,867 | (4) | $ | 241,608 | | | $ | 8.67 per/share | ||||||||||||
November 27, 2012 | 1,350,000 | $ | 10,665,000 | $ | 533,250 | $ | 153,330 | $ | 7.90 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. |
(3) | Includes $190,894 of offering expenses that were accrued as of December 31, 2010. |
(4) | Issued pursuant to the Companys dividend reinvestment plan. |
F-54
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Year Ended
June 30, 2013 |
Year Ended
June 30, 2012 |
For the period
from August 31, 2010 (commencement of operations) to June 30, 2011 |
For the period
from April 16, 2010 (date of inception) to June 30, 2010 |
|||||||||||||
Per Share Data
(1)
:
|
||||||||||||||||
Net asset value at beginning of period | $ | 8.59 | $ | 9.08 | $ | 9.40 | $ | 15.00 | (6) | |||||||
Dilution from offering | (0.18 | ) (2) | ||||||||||||||
Offering costs | (0.02 | ) | | (0.04 | ) | |||||||||||
Net investment income (loss) | 0.77 | 0.78 | 0.70 | (125.45 | ) | |||||||||||
Change in unrealized gain (loss) | 0.37 | (0.32 | ) | (0.29 | ) | |||||||||||
Realized gain (loss) | (0.60 | ) | (0.03 | ) | 0.06 | |||||||||||
Dividends declared | (0.92 | ) | (0.92 | ) | (0.75 | ) | ||||||||||
Net asset value at end of period | $ | 8.01 | $ | 8.59 | $ | 9.08 | $ | (110.45 | ) | |||||||
Per share market value at end of period | $ | 7.83 | $ | 7.65 | $ | 7.90 | $ | (110.45 | ) | |||||||
Total return based on market value | 15.12 | % (4) | 8.71 | % (4) | (4.03 | )% (3) | (836.33 | )% (7) | ||||||||
Total return based on net asset value | 4.94 | % (4) | 6.20 | % (4) | 5.62 | % (3) | (836.33 | )% (7) | ||||||||
Shares outstanding at end of period | 7,569,382 | 6,219,382 | 6,219,382 | 100 | ||||||||||||
Weighted average shares outstanding for period | 7,018,286 | 6,219,382 | 6,206,824 | 100 | ||||||||||||
Ratio/Supplemental Data:
|
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Net assets at end of period | $ | 60,644,039 | $ | 53,442,785 | $ | 56,474,006 | $ | (11,045 | ) | |||||||
Average net assets | $ | 57,842,601 | $ | 55,531,518 | $ | 57,455,987 | $ | (4,773 | ) | |||||||
Annualized ratio of gross operating expenses to average net assets (5) | 11.52 | % | 9.56 | % | 8.49 | % | 1,279.28 | % | ||||||||
Annualized ratio of net operating expenses to average net assets (5) | 11.52 | % | 8.99 | % | 7.34 | % | 1,279.28 | % | ||||||||
Annualized ratio of net investment income to average net assets (5) | 9.30 | % | 8.70 | % | 9.29 | % | (1,279.28 | )% | ||||||||
Annualized ratio of net operating expenses excluding management fees, incentive fees, and interest expense to average net assets (5) | 3.53 | % | 3.15 | % | 2.00 | % | 1,279.28 | % |
(1) | Financial highlights are based on weighted average shares outstanding. |
(2) | Dilution from offering is based on the change in net asset value from a follow on offering on November 27, 2012. |
(3) | 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 and assumes that dividends are reinvested in accordance with our dividend reinvestment plan. 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. |
(4) | Total return based on market value is based on the change in market price per share and assumes that dividends are reinvested in accordance with our dividend reinvestment plan. 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 (commencement of |
F-55
operations) to June 30, 2011 the Company incurred $102,609 of organizational expenses, which were deemed to be non-recurring. For the period from April 16, 2010 to June 30, 2010, the Company incurred $12,500 of Organizational Expenses, which were deemed to be non-recurring. |
(6) | For the period from April 16, 2010 (date of inception) to June 30, 2010, the net asset value of the Companys common stock at issuance was $15.00. |
(7) | 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 each period and assumes that dividends are reinvested in accordance with our dividend reinvestment plan. Total return based on market value is the same as total return based on net asset value as our shares were not publicly traded from inception through June 30, 2010. The total returns are not annualized. |
On August 31, 2010, the Company entered into the First Capital Credit Facility with FCC, LLC d/b/a First Capital. The facility size was $35 million and was initially scheduled to expire in January 2012. On January 27, 2012, the Company extended the First Capital Credit Facility through July 31, 2012. On July 31, 2012, the Company extended the First Capital Credit Facility though October 31, 2012. On October 31, 2012, the Company extended the First Capital Credit Facility through December 31, 2013. Under the First Capital Credit Facility, base rate borrowings bore interest at LIBOR (0.246% at June 30, 2012) plus 5.50%, subject to a floor. The Company incurred unused line, average usage and other fees related to the First Capital Credit Facility. The First Capital Credit Facility was secured by all of the assets of the Company. Under the First Capital Credit Facility, the Company was required to satisfy several financial covenants, including maintaining a minimum level of stockholders equity, a maximum level of leverage and minimum asset coverage and earnings. In addition, the Company was required to comply with other general covenants, including with respect to indebtedness, liens, restricted payments and mergers and consolidations.
On June 3, 2013, the Company entered into the Credit Facility with Sovereign Bank, N.A. The facility size is $32.5 million and replaced the Companys First Capital Credit Facility.
The Credit Facility matures on June 3, 2016 and bears interest based on a tiered rate structure, depending upon utilization, ranging from 1-month LIBOR to 3-month LIBOR plus 3.25% to 4.00% per annum, or from Sovereign Banks prime rate plus 1.25% to 2.00% per annum, based on the Companys election. As of June 30, 2013, the 1-month LIBOR to 3-month LIBOR rates respectively were: 0.19%, 0.24%, and 0.27%. As of June 30, 2013, the prime rate was 3.25%. In addition, a fee of 0.50% per annum is charged on unused amounts under the Credit Facility. The Credit Facility is secured by all of the Companys assets. Under the Credit Facility, the Company has made certain customary representations and warranties, and is required to comply with various covenants, reporting requirements and other customary requirements, including a minimum balance sheet leverage ratio, for similar credit facilities. The Credit Facility includes usual and customary events of default for credit facilities of this nature.
At June 30, 2013 and June 30, 2012, the Company had outstanding borrowings of $25,584,147 under the Credit Facility, and $18,544,660, under the First Capital Credit Facility, respectively, which amounts are included in the Consolidated Statement of Assets and Liabilities.
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 are scheduled to mature on February 28, 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,
F-56
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. At June 30, 2013 and June 30, 2012, the Company had a balance of $3,404,583 on the Distribution Notes, which is included in the Consolidated Statement of Assets and Liabilities (See Note 11).
On June 28, 2013, the Company issued $21,145,525 in aggregate principal amount of 8.25% Notes due 2020, the Notes, (including a partial exercise of the underwriters overallotment option in July 2013) for net proceeds of $20,284,704 after deducting underwriting commissions of approximately $860,822 and offering expenses of $227,350 that are being amortized over the term of the notes in accordance with ASC 470 Debt. As of June 30, 2013, of the total $1,088,172 incurred, $1,086,895 remains to be amortized and is included within deferred debt issuance costs on the consolidated statements of assets and liabilities.
The Notes were issued pursuant to an indenture, dated June 3, 2013, as supplemented by the first supplemental indenture, dated June 28, 2013 (collectively, the Indenture), between the Company and U.S. Bank National Association (the Trustee). The Notes are unsecured obligations of the Company and rank senior in right of payment to the Companys existing and future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to the Companys existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Companys secured indebtedness (including existing unsecured indebtedness that is later secured) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Companys subsidiaries or financing vehicles. Interest on the Notes is paid quarterly in arrears on March 30, June 30, September 30 and December 30, at a rate of 8.25% per annum, beginning September 30, 2013. The Notes mature on June 30, 2020 and may be redeemed in whole or in part at any time or from time to time at the Companys option on or after June 30, 2016. The Notes are listed on the Nasdaq Global Market under the trading symbol FULLL with a par value of $25.00 per share.
The Indenture contains certain covenants, including covenants requiring compliance with (regardless of whether the Company is subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring the Company to provide financial information to the holders of the Notes and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Indenture. The Company may repurchase the Notes in accordance with the 1940 Act and the rules promulgated thereunder. Any Notes repurchased by the Company may, at the Companys option, be surrendered to the Trustee for cancellation, but may not be reissued or resold by the Company. Any Notes surrendered for cancellation will be promptly cancelled and no longer outstanding under the Indenture. As of June 30, 2013, the Company had not repurchased any of the Notes in the open market. At June 30, 2013 and June 30, 2012, the Company had a balance of $21,145,525 and $0 on the Notes, which is included in the Consolidated Statement of Assets and Liabilities.
The Companys assets recorded at fair value have been categorized based upon a fair value hierarchy in accordance with Accounting Standards Codification (ASC) Topic 820 Fair Value Measurements and Disclosures (ASC 820). See Note 2 for a discussion of the Companys policies.
F-57
The following table presents information about the Companys assets measured at fair value as of June 30, 2013 and June 30, 2012, respectively:
|
|
|
|
|
||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets
|
||||||||||||||||
Senior and Subordinated Loans, at fair value | $ | | $ | | $ | 81,195,958 | $ | 81,195,958 | ||||||||
Investments in private companies, at fair value | | | 6,784,435 | 6,784,435 | ||||||||||||
Investments in securities, at fair value | | | 194,108 | 194,108 | ||||||||||||
$ | | $ | | $ | 88,174,501 | $ | 88,174,501 |
|
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|
|
||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets
|
||||||||||||||||
Senior and Subordinated Loans, at fair value | $ | | $ | | $ | 70,970,152 | $ | 70,970,152 | ||||||||
US Treasury Securities, at fair value (1) | 22,499,881 | | | 22,499,881 | ||||||||||||
Investments in private companies, at fair value | | | 1,376,737 | 1,376,737 | ||||||||||||
$ | 22,499,881 | $ | | $ | 72,346,889 | $ | 94,846,770 |
(1) | U.S. Treasury Securities were purchased and temporarily held in connection with compliance with RIC diversification requirements under Subchapter M of the Code. |
During the year ended June 30, 2013 and the year ended June 30, 2012, there were no transfers in or out of levels.
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 net 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.
F-58
Changes in Level 3 assets measured at fair value for the year ended June 30, 2013 and for the year ended June 30, 2012 are as follows:
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Year ended June 30, 2013 | ||||||||||||||||||||||||||||
Beginning Balance
July 1, 2012 |
Accretion of Original
Issue Discount |
Realized & Unrealized Gains (Losses) | Purchases | Sales And Settlements |
Ending
Balance June 30, 2013 |
Change in Unrealized Gains (Losses) for Investments still held at June 30, 2013 | ||||||||||||||||||||||
Assets
|
||||||||||||||||||||||||||||
Senior and Subordinated Loans, at fair value | $ | 70,970,152 | $ | 358,947 | $ | (2,974,512 | ) | $ | 70,949,232 | $ | (58,107,861 | ) | $ | 81,195,958 | $ | (443,443 | ) | |||||||||||
Investments in private companies, at fair value | 1,376,737 | | 1,557,697 | 3,850,001 | | 6,784,435 | 1,557,697 | |||||||||||||||||||||
Investments in securities, at fair value | | | (151,948 | ) | 346,056 | | 194,108 | (151,947 | ) | |||||||||||||||||||
$ | 72,346,889 | $ | 358,947 | $ | (1,568,763 | ) | $ | 75,145,289 | $ | (58,107,861 | ) | $ | 88,174,501 | $ | 962,307 |
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Year ended June 30, 2012 | ||||||||||||||||||||||||||||
Beginning Balance
July 1, 2011 |
Accretion of Original
Issue Discount |
Realized & Unrealized Gains (Losses) | Purchases | Sales And Settlements |
Ending
Balance June 30, 2012 |
Change in Unrealized Gains (Losses) for Investments still held at June 30, 2012 | ||||||||||||||||||||||
Assets
|
||||||||||||||||||||||||||||
Senior and Subordinated Loans, at fair value | $ | 55,537,458 | $ | 523,307 | $ | (2,407,353 | ) | $ | 55,031,538 | $ | (37,714,798 | ) | $ | 70,970,152 | $ | (2,976,991 | ) | |||||||||||
Investments in private companies, at fair value | 1,197,384 | | 488,939 | 140,414 | (450,000 | ) | 1,376,737 | 791,672 | ||||||||||||||||||||
Investments in securities, at fair value | 59,561 | | (236,331 | ) | 176,770 | | | (236,331 | ) | |||||||||||||||||||
$ | 56,794,403 | $ | 523,307 | $ | (2,154,745 | ) | $ | 55,348,722 | $ | (38,164,798 | ) | $ | 72,346,889 | $ | (2,421,650 | ) |
Realized and unrealized gains and losses are included in net realized gain (loss) on investments and net change in unrealized gain (loss) on investments in the consolidated statements of operations. The change in unrealized gains for Level 3 investments still held at June 30, 2013 of $962,307 is included in net change in net unrealized gain on investments in the consolidated statement of operations for the year ended June 30, 2013. The change in unrealized loss for Level 3 investments still held at June 30, 2012 of $2,421,650 is included in net change in net unrealized loss on investments in the consolidated statement of operations for the year ended June 30, 2012.
F-59
The following table provides quantitative information regarding Level 3 fair value measurements as of June 30, 2013:
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Description: | Fair Value | Valuation Technique | Unobservable Inputs | Range (Average) (1) | ||||||||||||
Secured debt | $ | 78,268,458 |
Discounted cash
flows (income approach) |
Discount Rate |
2.00% 37.53%
(14.56)% |
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Equity | 6,376,389 |
Market comparable
companies (market approach) |
EBITDA multiple | 3.50 7.50 (4.95) | ||||||||||||
Debt or Equity subject to liquidation | 2,060,591 | Liquidation Value | Asset Value | N/A | ||||||||||||
Secured Debt | 1,469,063 |
Precedent
Transactions |
Cost Basis | N/A | ||||||||||||
Total investments | $ | 88,174,501 |
(1) | The average values were determined using the weighted average of the fair value of the investments in each investment category. |
The following table provides quantitative information regarding Level 3 fair value measurements as of June 30, 2012:
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Description: | Fair Value | Valuation Technique | Unobservable Inputs | Range (Average) (1) | ||||||||||||
Secured debt | $ | 69,010,789 |
Discounted cash
flows (income approach) |
Discount Rate |
3% 33% (17%)
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Equity | 827,377 |
Market comparable
companies (market approach) |
EBITDA multiple |
3.5 7.5 (4.5)
|
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Debt or Equity subject to liquidation | 2,508,723 | Liquidation Value | Asset Value | N/A | ||||||||||||
Total investments | $ | 72,346,889 |
(1) | The average values were determined using the weighted average of the fair value of the investments in each investment category. |
The primary significant unobservable input used in the fair value measurement of the Companys debt securities (first lien debt, second lien debt and subordinated debt), including income-producing investments in funds, is the discount rate. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. In determining the discount rate, for the income, or yield, approach, the Company considers current market yields and multiples, portfolio company performance, leverage levels and credit quality, among other factors in its analysis. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate discount rate to use in the income approach.
The primary significant unobservable input used in the fair value measurement of the Companys equity investments is the EBITDA multiple, or the Enterprise Value. Significant increases (decreases) in the Enterprise Value in isolation would result in a significantly higher (lower) fair value measurement. To determine the Enterprise Value for the market approach, the Company considers current market trading and/or transaction multiples, portfolio company performance (financial ratios) relative to public and private peer
F-60
companies and leverage levels, among other factors. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate multiple to use in the market approach.
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 primarily involve 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.
The warrants provide exposure and potential gains upon equity appreciation or depreciation of the portfolio companys equity value.
As described in the chart below, 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 a warrants expiration date approaches, the time value of the 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.
The Company has written a warrant to sell within a limited time, a financial instrument at a contracted price based on differentials between specified prices. Written warrants may expose the Company to market risk of an unfavorable change in the financial instrument underlying the written warrant.
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 Companys Board of Directors considers the effects of counterparty risk when determining the fair value of its investments in warrants.
At June 30, 2013, the notional amounts and number of warrants, categorized by primary underlying risk, are as follows:
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Long Exposure | Short Exposure | |||||||||||||||
Notional
Amounts |
Number of
Warrants |
Notional
Amounts |
Number of
Warrants |
|||||||||||||
Primary Underlying Risk
|
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Equity Price Warrants (a),(b) | $ | 194,108 | 184,681 | $ | 2,101,503 | 1 |
(a) | Notional amounts presented for warrants are based on the fair value of the underlying shares as if the warrants were exercised at June 30, 2013. |
(b) | The written warrant is on 360 of the Companys 720 limited liability company interests in New Media West, LLC and has a strike price of $3,000,000, which increases over time to $3,500,000. This warrant expires on December 18, 2019. |
F-61
On September 9, 2013, the Companys Board of Directors appointed Michael J. Sell to succeed William E. Vastardis as the Companys Chief Financial Officer, Secretary and Treasurer, effective September 30, 2013. Mr. Vastardis has determined to resign from such positions to focus on Vastardis Fund Services LLC, the Companys sub-administrator (the Sub-Administrator) where he serves as President and Chief Executive Officer. He will continue to serve the Company as Assistant Treasurer and Assistant Secretary.
On September 9, 2013, the Board of Directors declared monthly dividends of $0.077, $0.077 and $0.077 per share payable on November 15, 2013 for holders of record at October 31, 2013, December 13, 2013 for holders of record at November 29, 2013 and January 15, 2014 for holders of record at December 31, 2013.
On July 3, 2013, the Company repaid the entire $3.4 million of outstanding Distribution Notes at par plus accrued interest.
On August 1, 2013, the Company funded $4.5 million of a $9.0 million senior secured credit facility to Infinite Aegis Group, LLC. Infinite Aegis Group, LLC is a provider of revenue cycle management services to healthcare service providers including large hospital systems and doctor-owned clinics, and owns and operates urgent care and occupational care centers in Colorado. The senior secured credit facility bears annual interest at one-month LIBOR plus 12% and has a final maturity of July 31, 2017. Of the $9.0 million facility, $4.0 million was funded by another lender.
On September 4, 2013, the Company funded $1.5 million of a $5.0 million senior secured credit facility to Franklin Place Shops Red, LLC. Franklin Place Shops Red, LLC is a manager and owner of commercial real estate assets in northwest Ohio. The senior secured credit facility bears interest at 12% per annum and has a final maturity of March 3, 2014. Of the $5.0 million facility, $3.5 million was funded by other lenders.
On July 2, 2013, the Company repaid $18.4 million of its outstanding balance on the Credit Facility from unrestricted cash. The current balance of the Credit Facility as of September 11, 2013 is $16.5 million.
F-62
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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 | ||||||||||||||||||||||
March 31, 2011 | 2,305,423 | 0.37 | 1,361,635 | 0.22 | (799,361 | ) | (0.13 | ) | 562,274 | 0.09 | ||||||||||||||||||||||
June 30, 2011 | 2,108,426 | 0.34 | 1,170,836 | 0.19 | (415,206 | ) | (0.07 | ) | 755,630 | 0.12 | ||||||||||||||||||||||
September 30, 2011 | 2,558,243 | 0.41 | 1,544,342 | 0.25 | 54,991 | 0.01 | 1,599,333 | 0.26 | ||||||||||||||||||||||||
December 31, 2011 | 2,398,665 | 0.39 | 1,098,640 | 0.18 | (846,099 | ) | (0.14 | ) | 252,541 | 0.04 | ||||||||||||||||||||||
March 31, 2012 | 2,388,960 | 0.38 | 1,118,574 | 0.18 | 405,240 | 0.07 | 1,523,814 | 0.25 | ||||||||||||||||||||||||
June 30, 2012 | 2,481,143 | 0.40 | 1,071,947 | 0.17 | (1,769,463 | ) | (0.28 | ) | (697,516 | ) | (0.11 | ) | ||||||||||||||||||||
September 30, 2012 | 2,773,303 | 0.45 | 1,238,245 | 0.20 | (343,354 | ) | (0.06 | ) | 894,891 | 0.14 | ||||||||||||||||||||||
December 31, 2012 | 3,099,599 | 0.46 | 1,465,650 | 0.22 | (1,893,852 | ) | (0.28 | ) | (428,202 | ) | (0.06 | ) | ||||||||||||||||||||
March 31, 2013 | 2,843,041 | 0.38 | 1,312,164 | 0.18 | 168,654 | 0.02 | 1,480,818 | 0.20 | ||||||||||||||||||||||||
June 30, 2013 | 3,330,080 | 0.44 | 1,364,522 | 0.18 | 489,114 | 0.06 | 1,853,636 | 0.24 |
(1) | Per share amounts are calculated using weighted average shares outstanding during the period. |
F-63
PROSPECTUS SUPPLEMENT